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TABLE OF CONTENTS

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission File No. 1-8796

QUESTAR CORPORATION
(Exact name of registrant as specified in its charter)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

        The aggregate market value of the registrant's common stock, without par value, held by nonaffiliates on February 28, 2003, was $2,257,946,193 (based on the closing price of such stock).

        On February 28, 2003, 82,259,784 shares of the registrant's common stock, without par value, were outstanding.

Documents Incorporated by Reference.    Portions of the definitive Proxy Statement for the 2003 Annual Meeting of Stockholders are incorporated by reference into Part III. The sections of the Proxy Statement labeled "Committee Report on Executive Compensation" and "Cumulative Total Shareholder Return" are expressly not incorporated into this document.

TABLE OF CONTENTS

FORM 10-K

ANNUAL REPORT, 2002

PART I

ITEMS 1. AND 2. BUSINESS AND PROPERTIES.

General

        Registrant Questar Corporation ("Questar" or "the Company") is an integrated natural gas company that is involved in the full spectrum of natural gas activities through two divisions—Market Resources and Regulated Services. Market Resources engages in energy development and production; gas gathering and processing; and wholesale gas and hydrocarbon liquids marketing, risk management, and storage. Regulated Services, through two primary subsidiaries, conducts interstate gas transmission and storage activities and retail gas distribution services. The Company is also involved in providing integrated information technology and communication data-hosting services.

        Questar was organized in 1984 and became a publicly held entity when the shareholders of Questar Gas Company ("Questar Gas," then known as Mountain Fuel Supply Company) approved a corporate reorganization. Questar was created to provide organizational and financial flexibility and to achieve a more clearly defined separation of utility and nonutility activities. Questar is a "holding company," as that term is defined in the Public Utility Holding Company Act of 1935, because Questar Gas is a natural gas utility. The Company, however, qualifies for and claims an exemption from provisions of such act applicable to registered holding companies.

        As is noted in the following chart, Questar's Market Resources unit includes a subholding company, Questar Market Resources, Inc. ("QMR"), which owns Wexpro Company ("Wexpro"), Questar Exploration and Production Company ("Questar E&P"), Questar Gas Management Company ("QGM"), and Questar Energy Trading Company ("QET"). Questar's Regulated Services unit also includes a subholding entity—Questar Regulated Services Company ("QRS")—in addition to Questar Gas, Questar Pipeline Company ("Questar Pipeline") and Questar Energy Services, Inc. ("QES").

        The Company's information technology and communication activities are conducted by Questar InfoComm, Inc. ("Questar InfoComm") which, in turn, currently owns approximately 89 percent of Consonus, Inc. ("Consonus").

        As a diversified provider of energy services, Questar believes that its structure enhances its operating flexibility to take advantage of the earnings growth potential of exploration and production operations, gathering and processing, and wholesale marketing as it continues to take advantage of opportunities to expand its regulated activities through customer additions, new pipeline projects, and expanding hub services. Questar's management is convinced that experience in the various activities along the natural gas value chain—production, gathering, processing, transportation, storage, and distribution—enable the Company to develop and implement strategies for taking advantage of opportunities associated with the expected demand for natural gas and for services relating to the effective use of natural gas. Questar intends to continue emphasizing the ownership of assets—reserves, pipelines, storage reservoirs, and distribution systems, and is committed to operating them efficiently.

        Financial information concerning the Company's lines of business, including information relating to the amount of total revenues contributed by any class of similar products or services responsible for 10 percent or more of consolidated revenues, is presented in Note 17 of the Notes to Consolidated Financial Statements under Item 8.

        The Company's activities are summarized below.

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Market Resources, General.

        The Market Resources unit is the primary growth area within the Company. Over the next five years, Questar expects to spend approximately 60 percent of its total capital budget in Market Resources, primarily to expand oil and gas reserves through drilling and acquisitions; enlarge an infrastructure of gathering systems, processing plants, and storage facilities; and continue risk management activities. The diversity of activities within the group enhances a basic strategy to pursue complementary growth. As Questar E&P, for example, finds and acquires new reserves, QGM will have opportunities to expand gathering and processing activities, and QET will have more physical production to support its marketing and storage programs.

Market Resources, Exploration and Production

        The Company has been in the exploration and production ("E&P") business since its organization in 1935. Through the ensuing years, the Company's E&P activities have generated substantial economic benefits for the Company and its shareholders and customers and have expanded in size and geographic location. In 2002, QMR sold non-core reserves for attractive prices and expanded production volumes, but its financial results were negatively impacted by lower-than-expected natural gas prices, particularly in the Rocky Mountain region.

        Questar E&P, in its own name and through subsidiaries, conducts a blended program of low-cost development drilling and low-risk reserve acquisition. It has a large inventory of proved undeveloped properties. It will also continue to identify promising exploration prospects and farm them out to entities that are willing to assume the initial drilling risks. (Under farm out arrangements, a party acquires an economic interest in the underlying leases in exchange for assuming the risk and financial responsibility for initial drilling.)

        Questar E&P also maintains a geographical balance and diversity, while focusing its activities in core areas where it has accumulated geological knowledge and has significant expertise. Core areas of activity are the Rocky Mountain region primarily in Wyoming, Utah, and Colorado; and the Midcontinent region primarily in Oklahoma, Texas, Louisiana and Arkansas. During 2002, QMR sold nonstrategic properties in western Canada and the San Juan Basin of northwestern New Mexico and southwestern Colorado.

        Natural gas remains the primary focus of the Company's E&P operations. As of year-end 2002, the Company had proved reserves (excluding Questar Gas's cost-of-service reserves) of 950.4 billion cubic feet ("Bcf") of gas and 27.2 million barrels ("MMbbls") of oil and natural gas liquids ("NGL"), compared to 998.0 Bcf of gas and 31.1 MMbbls of oil and NGL as of the same date in 2001. (The 2001 numbers include Canadian reserves. When Canadian reserves are excluded, the Company had 936.1 Bcf of gas and 27.7 MMbbls of oil and NGL at year-end 2001.)    On an energy-equivalent ratio of six thousand cubic feet ("Mcf") of natural gas to one barrel ("Bbl") of crude oil, natural gas comprised approximately 85.4 percent of proved reserves (excluding cost-of-service reserves) at year-end 2002. Proved developed gas reserves constituted 56.9 percent of the total non-regulated proved gas reserves reported.

        The E&P group's drilling activities occurred in two core operating areas: Midcontinent and Rocky Mountains, including the Uinta Basin in eastern Utah and Pinedale Anticline in western Wyoming. During 2002, the E&P companies and Wexpro, on a combined basis, participated in 277 gross wells (158.1 net), compared to 337 gross wells (130.3 net) in 2001. The 277 wells included 217 gas wells, 10 oil wells, 7 dry holes and 43 wells in progress (drilling, waiting on completion, or being evaluated) at year-end. The overall drilling success (on a net well count basis) in 2002 was 98 percent, compared to 95 percent in 2001.

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        QMR's Pinedale activities in 2002 continue to merit special emphasis. As of year-end 2002, Questar E&P and Wexpro reported 51 producing wells and two awaiting completion or drilling. Five wells currently producing from the Mesaverde Formation will also be completed in the Lance Formation. Drilling results and initial production tests confirmed reserve expectations of 4.8 to 8.0 Bcfe per well, depending on location and the number of formations drilled. As of December 31, 2002, the gross daily production capacity from the 51 QMR wells in Pinedale was estimated at 126 million cubic feet of gas equivalent ("MMcfe"), compared to 79 MMcfe as of year-end 2001.

        Questar E&P and Wexpro conduct drilling activities in Pinedale when government restrictions and weather conditions permit. On a combined basis, they have an approximate 60 percent average working interest in 14,800 acres in the Mesa Area of the Pinedale Anticline. The original Pinedale drilling program projected 135 to 150 locations, based on 80-acre spacing. The number of potential locations doubled when QMR determined that it was appropriate to drill on the basis of 40-acre spacing. Given the "tight" nature of the sands at Pinedale, QMR is reviewing the economic possibilities of moving to 20-acre spacing.

        QMR's activities in Pinedale illustrate its long-term approach. The underlying leasehold acreage was held by production as a result of three wells drilled much earlier. Pinedale gas reserves are contained in tight sands with a low permeability. While Questar E&P and Wexpro recognized the presence of gas at Pinedale, they did not drill additional wells on the leases until other companies developed new well completion techniques that hydraulically fractured tight sandstone formations over multiple intervals and successfully used such techniques to complete wells in similar tight reservoirs in a nearby field.

        Recently, Questar E&P and Wexpro have established production in the Mesaverde Formation that is geologically similar and immediately beneath the Lance Formation. It is expensive to drill wells in Pinedale; the cost reflects the completion depth of the wells, the need for special handling and multiple stimulations, and governmental orders that impose surface-use limitations and restrict drilling activities to the period between May and December.

        During 2002, QMR aggressively developed the Uinta Basin properties in eastern Utah obtained with the mid-2001 acquisition of Shenandoah Energy, Inc. ("SEI"). QMR drilled or participated in 150 wells in this region during 2002 and increased gross operated production capacity to 107 MMcfe per day by year-end 2002. Financial results were negatively affected by low prices that forced curtailment of production during part of the year. Questar E&P plans to continue drilling activities to maintain current production volumes and will pursue additional drilling to target unrecovered oil volumes from the Green River Formation in addition to gas volumes from the deeper Wasatch Formation.

        Questar E&P's gas production increased from 70.6 Bcf in 2001 to 79.7 Bcf in 2002, despite self-imposed curtailments in response to low Rockies prices. The increase in production was attributable to expanded development activities that more than offset the natural decline in some producing areas and the sale of producing reserves. Questar E&P received an average realized selling price of $2.58 per Mcf in 2002, compared to $3.21 per Mcf in 2001. (Realized prices reflect hedging activities.)

        Gas volumes are produced from two primary regions—the Midcontinent area and the Rocky Mountain area. Production from each of these areas is generally priced below the Henry Hub pricing center in Louisiana, reflecting demand and access to transportation, but prices were significantly higher in the Midcontinent area than in the Rocky Mountains.

        Prices for Rocky Mountain gas volumes declined significantly, reflecting a basis differential of more than $2 per Mcf during some months in 2002, compared to the normal basis differential of $.40-$.60 per Mcf. Prices fell to as low as $.72 per Mcf net-to-the-well for gas volumes, causing Questar E&P to shut in production. The increase in basis differential resulted from an increase in production volumes

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in the Rocky Mountain area with no expansion of transportation capacity to markets outside the region. Kern River Gas Transmission Company ("Kern River") is currently expanding its pipeline system that transports gas from southwestern Wyoming to the California markets. This expansion is scheduled to be in service by mid-2003 and should relieve the problem for the next several years.

        QMR, through QET, is committed to hedging production volumes to remove some volatility from realized prices and resulting net income. For 2003, QMR (excluding cost-of-service volumes) has hedged over 90 percent of production from proved developed producing reserves in the Rocky Mountain area for an average price of $3.04 per Mcf. See Item 7 and Notes 1 and 11 of the Notes to Consolidated Financial Statements in Item 8.

        During 2002, the E&P companies produced 2.8 MMbbls of oil and NGL, compared to 2.5 MMbbls in 2001. The production was sold at an average net realized price of $20.39 per barrel in 2002, compared to $19.22 per barrel in 2001. These prices reflect hedges; unhedged prices for crude oil were higher than hedged prices in 2002 ($22.93 per barrel compared to $20.39 per barrel.)

        Questar E&P continued to generate Section 29 tax credits during 2002, which is the last year that such credits were available under current law. These tax credits are available for production from wells that meet specified criteria, including a requirement that drilling of the wells was commenced prior to January 1, 1993. Eligible properties are often referred to as "tight sands," "coal seams," or "low permeability formations" from which it is generally less economic to produce gas. During 2002, Questar E&P recorded $4.9 million in Section 29 credits, compared to $5.0 million in 2001

        The production of oil and gas is subject to regulation by appropriate federal and state agencies in the United States. In general, these regulatory agencies are authorized to make and enforce regulations to prevent waste of oil and gas, protect the correlative rights and opportunities to produce oil and gas by owners of a common reservoir, and protect the environment. Many leases held or operated by the E&P group are federal leases subject to additional regulatory requirements. As illustrated by the actions taken by the Bureau of Land Management for Pinedale, agencies are generally imposing more restrictions on access to leasehold acreage, thereby increasing the planning time to obtain drilling permits and limiting the E&P group's flexibility to adapt quickly to increase drilling activity.

        Questar E&P maintains regional offices in Denver, Colorado; Tulsa, Oklahoma; and Oklahoma City, Oklahoma.

        Wexpro Company.    Wexpro was incorporated in 1976 as a subsidiary of Questar Gas. Questar Gas's efforts to transfer producing properties and leasehold acreage to Wexpro resulted in protracted regulatory proceedings and legal adjudications that ended with a court-approved settlement agreement that was effective August 1, 1981.

        Wexpro, unlike Questar E&P, does not acquire leasehold acreage for exploration activities. It conducts gas and oil development and production activities on certain producing properties located in the Rocky Mountain region under the terms of the settlement agreement. (The terms of the settlement agreement are described in Note 16 of the Notes to Consolidated Financial Statements under Item 8.) Wexpro produces gas from specified properties for Questar Gas and is reimbursed for its costs plus a return on its successful investment. The after-tax return, which is calculated on net investment adjusted for working capital and deferral taxes, averaged 20.5 percent in 2002. Wexpro's allowed return is adjusted annually based on a specified formula in the settlement agreement. At year-end 2002, Wexpro's net investment base adjusted for working capital and deferred taxes was $164.5 million compared to $161.3 million at year-end 2001. Under the terms of the settlement agreement, Wexpro bears all dry hole costs. The settlement agreement is monitored by the Utah Division of Public Utilities, the staff of the Public Service Commission of Wyoming and experts retained by these agencies.

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        The gas volumes produced by Wexpro for Questar Gas are reflected in the latter's rates at cost-of-service prices. Cost-of-service gas, plus the gas attributable to royalty interest owners, satisfied 45 percent of Questar Gas's system requirements during 2002. Questar Gas relies upon Wexpro's drilling program to develop the properties from which the cost-of-service gas is produced. During 2002, the average wellhead cost (net of revenue credits) of Questar Gas's cost-of-service gas was $2.28 per decatherm ("Dth"), which was lower than Questar Gas's average price for field-purchased gas.

        Wexpro participates in drilling activities in response to the demands of other working interest owners, to protect its rights, and to meet the needs of Questar Gas. Wexpro, in 2002, produced 44.2 Bcfe of natural gas and hydrocarbon liquids from Questar Gas's cost-of-service properties and added reserves of 58.7 Bcfe through drilling activities and reserve estimate revisions.

        Wexpro, under the terms of the Wexpro agreement, owns oil-producing properties. The revenues from the sale of crude oil produced from such properties are used to recover operating expenses and provide Wexpro with a return on its investment. In addition, Wexpro receives 46 percent of any residual income. The remaining income is received by Questar Gas and is used to reduce natural gas costs reflected in customer rates.

        Wexpro has an ownership interest in the wells and facilities related to its oil properties and in the wells and facilities that have been installed to develop and produce gas properties described above since August 1, 1981 (a date specified by the settlement agreement referred to above). Wexpro maintains an office in Rock Springs, Wyoming, in addition to its principal office in Salt Lake City, Utah.

Properties

        Reserves.    The following table sets forth Questar E&P's estimated proved reserves, the estimated future net revenues from the reserves and the standardized measure of discounted net cash flows as of December 31, 2002. These proved reserve volumes do not include cost-of-service reserves managed and developed by Wexpro for Questar Gas. The reserves were collectively estimated by Ryder Scott Company; H. J. Gruy and Associates, Inc.; Netherland, Sewell & Associates, Inc.; and Malkewicz Hueni Associates, Inc., independent petroleum engineers. QMR does not have any long-term supply contracts with foreign governments, or reserves of equity investees or of subsidiaries with a significant minority interest. All properties are located in the United States due to the sale of Canadian properties in the last half of 2002.

(1)

Estimated future net revenue represents estimated future gross revenue to be generated from the production of proved reserves, using average year-end 2002 prices of $3.34 per Mcf for natural gas and $28.46 per barrel for oil and NGL, net of estimated production and development costs (but excluding the effects of general and administrative expenses; debt service; depreciation, depletion and amortization; and income tax expense).

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(2)

The standardized measure of discounted net cash flows prepared by the Company represent the present value of estimated future net revenues after income taxes, discounted at 10 percent.

        Estimates of the Company's proved reserves and future net revenues are made using sales prices estimated to be in effect as of the date of such reserve estimates and are held constant throughout the life of the properties (except to the extent a contract specifically provides for escalation). Estimated quantities of proved reserves and future net revenues are affected by natural gas and oil prices, which have fluctuated widely in recent years. There are numerous uncertainties inherent in estimating natural gas and oil reserves and their estimated values, including many factors beyond the control of the producer. The reserve data set forth in this document are estimates.

        Reference should be made to Note 19 of the Notes to Consolidated Financial Statements included in Item 8 of this report for additional information pertaining to the Company's proved natural gas and oil reserves as of the end of each of the last three years.

        QMR will file estimated reserves as of December 31, 2002, with the Energy Information Administration in the Department of Energy on Form EIA-23. Although QMR uses the same technical and economic assumptions when it prepares the EIA-23, it is obligated to report reserves for wells it operates, not for all wells in which it has an interest, and to include the reserves attributable to other owners in such wells.

        The following charts illustrate QMR's reserve statistics for the years ended December 31, 1998 through 2002:

Gas and Oil Reserves (Bcfe)*

*

Does not include cost-of-service reserves managed and developed by Wexpro for Questar Gas.

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Proportion of Proved Developed to Proved Reserves
and Proportion of Gas Reserves (Bcfe)*

*

Does not include cost-of-service reserves managed and developed by Wexpro for Questar Gas.

Geographic Diversity of Producing Properties

        The following table summarizes proved reserves by the Company's major operating areas at December 31, 2002:

*

Does not include cost-of-service reserves managed and developed by Wexpro for Questar Gas.

        Production.    The following table sets forth the Company's net production volumes, the average sales prices per Mcf of gas, per barrel of oil and per barrel of NGL produced, and the production cost per Mcfe for the years ended December 31, 2002, 2001, and 2000, respectively. Production costs include direct lifting costs (labor, repairs and maintenance, materials, supplies and workovers), and the costs of administration of production offices, insurance and property and severance taxes, but is exclusive of

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depreciation and depletion applicable to capitalized lease acquisitions, exploration and development expenditures.

(1)

In United States dollars.

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        Productive Wells.    The following table summarizes QMR's productive wells as of December 31, 2002.(1)(2) All of these wells are located in the United States.

(1)

Although many of QMR's wells produce both gas and oil, a well is categorized as either a gas well or an oil well based upon the ratio of gas to oil production volumes.

(2)

Each well completed to more than one producing zone is counted as a single well. There were 55 gross wells with multiple completions.

        QMR also holds numerous overriding royalty interests in gas and oil wells, a portion of which are convertible to working interests after recovery of certain costs by third parties. After converting to working interests, these overriding royalty interests will be included in QMR's gross and net well count.

        Leasehold Acreage.    The following table summarizes developed and undeveloped leasehold acreage in which the Company owns a working interest as of December 31, 2002. "Undeveloped Acreage" includes (i) leasehold interests that already may have been classified as containing proved undeveloped reserves; and (ii) unleased mineral interest acreage owned by the Company. Excluded from the table is

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acreage in which the Company's interest is limited to royalty, overriding royalty, and other similar interests.

Leasehold Acreage—December 31, 2002

(1)

Developed acres are acres assignable to productive wells.

(2)

Undeveloped acreage is leased acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of natural gas and oil regardless of whether such acreage contains proved reserves

        Substantially all the leases summarized in the preceding table will expire at the end of their respective primary terms unless the existing leases are renewed or production has been obtained from the acreage subject to the lease prior to that date, in which event the lease will remain in effect until

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the cessation of production. The following table sets forth the gross and net acres subject to leases summarized in the preceding table that will expire during the periods indicated:

        Drilling Activity.    The following table summarizes the number of development and exploratory wells drilled by the QMR, including the cost-of-service wells drilled by Wexpro, during the years indicated.

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        Operation of Properties.    The day-to-day operations of gas and oil properties are the responsibility of an operator designated under pooling or operating agreements. The operator supervises production, maintains production records, employs field personnel and performs other functions. The charges under operating agreements customarily vary with the depth and location of the well being operated.

        When operating wells, Questar E&P and Wexpro receive reimbursement for direct expenses incurred in the performance of duties as well as monthly per-well producing and drilling overhead reimbursement at rates customarily charged in the area to or by unaffiliated third parties. In presenting its financial data, Questar E&P records the monthly overhead reimbursement as a reduction of general and administrative expense, which is a common industry practice. Wexpro records the reimbursement as a reduction of operating and maintenance expenses subject to the settlement agreement.

        Title to Properties.    Title to properties is subject to royalty, overriding royalty, carried, net profits, working and other similar interests and contractual arrangements customary in the gas and oil industry, liens for current taxes not yet due and, in some instances, other encumbrances. The Company believes that such burdens do not materially detract from the value of such properties or from the respective interests therein or materially interfere with their use in the operation of the business.

        As is customary in the industry in the case of undeveloped properties, little investigation of record title is made at the time of acquisition (other than a preliminary review of local records). Investigations, generally including a title opinion by outside counsel, are made prior to the consummation of an acquisition of producing properties and before commencement of drilling operations on undeveloped properties.

Market Resources, Gathering, Processing, Marketing, and Risk Management

        QGM conducts gathering and processing activities in the Rocky Mountain and Midcontinent areas. Its activities are not subject to regulation by the Federal Energy Regulatory Commission (the "FERC") because the Natural Gas Act of 1938 specifically provides that the FERC's jurisdiction does not extend to facilities involved in the production or gathering of natural gas.

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        The year 2002 was the first full year of operation for Rendezvous Gas Services ("Rendezvous"), which is a joint venture that was developed by QGM and Western Gas Resources, Inc. ("Western Gas") to build and operate new gathering and compression facilities in the Green River Basin of southwestern Wyoming. This basin includes the Pinedale Anticline area in which Questar E&P and Wexpro have developed reserves as well as the Jonah field and other producing areas south of Pinedale. Rendezvous delivers gas volumes from this area for processing and blending to the Blacks Fork plant owned by QGM and to the nearby Granger plant owned by an affiliate of Western Gas.

        In late 2002, QGM purchased the remaining 50 percent interest in the Blacks Fork processing plant that has a daily capacity of 84 MMcf and could be expanded to handle additional volumes gathered by Rendezvous. A processing plant strips NGL such as ethane, propane and butane from natural gas volumes to enable the producers to meet pipeline specifications for their gas volumes and to capitalize on historically higher prices for NGL when compared to equivalent volumes of natural gas. QGM recovered 23.4 million gallons (MMgal) of product in 2002 compared to 18.2 MMgal in 2001. QGM and Wexpro jointly own a processing facility located in the Canyon Creek area of southwestern Wyoming that has processing capacity of 43 MMcf per day. QGM also owns interests in several other processing plants in the Rocky Mountain and Midcontinent areas. As a consequence of a 2002 merger with an affiliate, QGM currently is responsible for the gathering and processing operations in the Uinta Basin of eastern Utah.

        A majority of QGM's gathering systems were originally built as part of a regulated enterprise. They consist of 1,411 miles of gathering lines, compressor stations, field dehydration plants and measuring stations and was largely built to gather production from Questar Gas's cost-of-service properties. Under a contract with Questar Gas, QGM is obligated to gather the cost-of-service production for the life of the properties. During 2002, QGM gathered 40.7 million decatherms ("MMdth") of cost-of-service gas for Questar Gas, compared to 37.2 MMdth in 2001.

        QGM also gathers gas for affiliates within QMR and for nonaffiliated customers. During 2002, QGM gathered 38.1 MMdth for QMR affiliates, compared to 27.0 MMdth in 2001, and gathered 112.2 MMdth for nonaffiliated customers, compared to 91.7 MMdth in 2001. (These numbers do not include any gas volumes for Rendezvous.)

        QET conducts energy marketing activities. It combines gas volumes purchased from third parties and equity production (production that is owned by affiliates) to build a flexible and reliable portfolio. QET aggregates supplies of natural gas for delivery to large customers, including industrial users, municipalities, and other marketing entities. During 2002, QET marketed a total of 83.8 equivalent MMdth ("EMMdth") of third party natural gas, compared to 91.8 EMMdth in 2001 and earned a margin of $0.199 per equivalent Dth, compared to $0.149 per equivalent Dth in 2001.

        QET uses derivatives as a risk management tool to provide price protection for physical transactions involving equity production and marketing transactions. It executed hedges for equity production on behalf of the Questar E&P group with a variety of contracts for different periods of time. QET does not engage in speculative hedging transactions. (See Notes 1 and 11 of the Notes to Consolidated Financial Statements included in Item 8 of this report for additional information relating to hedging activities.)

        As a wholesale marketing entity, QET concentrates on markets in the Pacific Northwest, Rocky Mountains, and Midwest that are close to reserves owned by affiliates or accessible by major pipelines. It has contracted for firm-transportation capacity on pipelines and firm-storage capacity at Clay Basin.

        QET, through a limited liability company in which it has a 75 percent interest, operates the Clear Creek storage facility located in southwestern Wyoming. This facility has 3 Bcf of working capacity and is connected with pipelines owned by Questar Pipeline, Overthrust Pipeline Company, The Williams Companies, and Kern River.

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Market Resources, Regulation

        QMR's operations are subject to various levels of government controls and regulation in the United States at the federal, state, and local levels. Such regulation includes requiring permits for the drilling and production of wells; maintaining bonding requirements in order to drill or operate wells; submitting and implementing spill prevention plans; filing notices relating to the presence, use and release of specified contaminants incidental to oil and gas production; and regulating the location of wells, the method of drilling and casing wells, surface usage and restoration of properties upon which wells have been drilled, the plugging and abandoning of wells and the transportation of production. QMR's operations are also subject to various conservation matters, including the regulation of the size of drilling and spacing units or proration units, the number of wells that may be drilled in a unit, and the unitization or pooling of oil and gas properties. State conservation laws establish the maximum rates of production from wells, generally prohibit the venting or flaring of gas and impose requirements for the ratable purchase of production.

        Some of QMR's leases, including many of its leases in the Rocky Mountain area, are granted by the federal government and administered by federal agencies. These leases require compliance with detailed regulations on such things as drilling and operations and the calculation and payment of royalties.

        Various federal, state and local environmental laws and regulations affect the Company's operations and costs. These laws and regulations concern the generation, storage, transportation, disposal or discharge of contaminants into the environment and the general protection of public health, natural resources, wildlife, and the environment. They also impose substantial liabilities for any failure on the part of the Company to comply with them.

Market Resources, Competition and Customers

        QMR faces competition in all aspects of its business including the acquisition of reserves and leases; obtaining goods, services, and labor; and marketing its production. Its competitors include multinational energy companies and other independent producers, many of which have greater financial resources than QMR.

        QMR's business activities can be subject to seasonal variations. Historically, the demand for natural gas decreases during the summer months and increases during the winter months. Weather (both in terms of temperatures and moisture) can have dramatic impacts on natural gas prices and QMR's operations.

        Transportation capacity can also have a significant impact on gas prices. The Rocky Mountain region produces more gas volumes than it can use, making it necessary to transport such volumes to markets outside the region. The lack of pipeline capacity or bottlenecks in pipeline systems can depress prices, as evidenced by the basis differential problems in the second and third quarters of 2002.

        Questar E&P sells natural gas production to a variety of customers including pipelines, gas marketing firms, industrial users, and local distribution companies. QMR rigorously evaluates counterparty credit and may require financial guarantees from parties that fail to meet its credit criteria. Crude volumes are sold to refiners, remarketers and other companies, some of which have pipeline facilities near the producing properties. In the event pipeline facilities are not available, crude oil is trucked to storage, refining, or pipeline facilities.

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Regulated Services, Introduction

        Questar's Regulated Services segment includes Questar Gas, a retail distribution utility; Questar Pipeline, an interstate pipeline and storage entity; QES, an entity engaged in retail energy services, particularly energy management services; and QRS, a subholding company that is the direct parent of such entities and provides services to them. All members of the Regulated Services group have common officers and share service functions, e.g., marketing, planning, business development, engineering, legal, regulatory affairs, accounting, and budgeting. All Regulated Services employees share base and incentive compensation programs and are expected to work together to improve customer service and operating efficiency. The integration of the entities has resulted in lower operating and maintenance costs and better coordination of activities and projects.

Regulated Services, Retail Distribution

        Customers and Deliveries.    Questar Gas distributes natural gas as a public utility in Utah, southwestern Wyoming, and a small portion of southeastern Idaho. As of December 31, 2002, it was serving 750,128 sales and transportation customers, a 2.5 percent increase from the 731,900 customers as of year-end 2001. (Customers are defined in terms of active meters.)

        Over 96 percent of Questar Gas's customers live in Utah. As of mid-2001, Questar Gas is the only gas distribution public utility in Utah. Questar Gas distributes gas to customers in the major populated areas of Utah, commonly referred to as the Wasatch Front in which the Salt Lake metropolitan area, Provo, Ogden, and Logan are located. It also serves customers throughout the state with Price, Roosevelt, Vernal, Moab, Monticello, Fillmore, Richfield, Cedar City, and St. George as the primary cities. Questar Gas supplies natural gas in the southwestern Wyoming communities of Rock Springs, Green River, Evanston, Kemmerer and Diamondville, and the southeastern Idaho community of Preston.

        Questar Gas added 18,228 customers in 2002, compared to 27,271 new customers added in 2001. (The 2001 figure includes 10,500 customers acquired as a result of purchasing two smaller utilities.) Utah's population is still growing faster than the national average, although the rate of growth is slowing down.

        Questar Gas has the necessary regulatory approvals granted by the Public Service Commission of Utah ("PSCU"), Public Service Commission of Wyoming ("PSCW"), and the Public Utilities Commission of Idaho ("PUCI") to serve these areas. It also has long-term franchises granted by communities and counties within its service area.

        Questar Gas's sales to residential and commercial customers are seasonal, with a substantial portion of such sales made during the heating season. The typical residential customer in Utah (defined as a customer using 115 Dth per year) consumes over 77 percent of his total gas requirements in the coldest six months of the year. Questar Gas's revenue forecasts used to set rates are based on normal temperatures. As measured in degree days, temperatures in Questar Gas's service area were 8 percent colder than normal in 2002, which followed eight consecutive years of warmer than normal weather.

        Questar Gas has a weather normalization mechanism for its general service customers in Utah and Wyoming. The mechanism, which has been in effect since 1997, adjusts the non-gas portion of a customer's monthly bill as the actual degree-days in the billing cycle are warmer or colder than normal. This mechanism reduces the sometimes dramatic fluctuations in any given customer's monthly bill from year to year. Consequently, the mechanism also reduces fluctuations in Questar Gas's revenues.

        During 2002, Questar Gas sold 90.8 MMdth to residential and commercial customers, compared to 83.7 MMdth in 2001. General service sales to residential and commercial customers were responsible for 87.6 percent of Questar Gas's total revenues in 2002. The increase in sales volumes reflects colder weather and increased customers. Customers, however, are continuing to decrease their usage on a

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temperature-adjusted basis as they use more efficient gas-burning appliances and respond to higher commodity prices with conservation measures. Usage per customer has decreased by an average of three percent over the last several years.

        Questar Gas has designed its distribution system and annual gas supply plan to handle design-day demand requirements. It periodically updates its design-day demand, which is the volume of gas that firm customers could use during extremely cold weather. For the 2002-03 heating season, Questar Gas used a design-day demand of 1.084 Bcf for firm sales customers. Questar Gas is also obligated to have pipeline capacity, but not gas supply, for firm-transportation customers. Questar Gas's management believes that the distribution system is adequate to meet the demands of its firm customers, but will continue to contract for new long-term pipeline capacity in response to anticipated customer growth.

        Questar Gas also provides transportation service. Transportation service is attractive to customers that can buy volumes of gas directly from producers and have such volumes transported at aggregate prices lower than Questar Gas's sales rates.

        Questar Gas's largest transportation customers, as measured by revenue contributions in 2002, are the Gadsby plant operated by Scottish Power (electric utility) in Salt Lake City; the mineral extraction operations of Magnesium Corporation of America in Tooele County, west of Salt Lake City; and the Kennecott copper processing operations, located in Salt Lake County. These customers contributed $2.5 million, or approximately 35 percent, of the $7.2 million in revenue Questar Gas received for industrial transportation. During 2002, Questar Gas's total industrial deliveries, including both sales and transportation, declined from 65.3 MMdth in 2001 to 57.2 MMdth, reflecting the economic recession and the loss of a customer (Geneva Steel) that filed for bankruptcy and suspended operations.

        Gas Supply.    Questar Gas's competitive position has been strengthened as a result of owning natural gas producing properties. During 2002, it satisfied 45 percent of its system requirements with the cost-of-service gas produced from such properties. These properties are operated by Wexpro, and the gas produced from such properties is transported by Questar Pipeline. Questar Gas's investment in these properties is included in its utility rate base.

        Questar Gas had estimated reserves of 442.3 Bcfe as of year-end 2002, compared to 427.8 Bcfe as of year-end 2001. The average wellhead cost associated with Questar Gas's cost-of-service reserves was below the cost of field-purchased gas. During 2002, Questar Gas recorded $1.7 million in Section 29 tax credits associated with production from wells on its cost-of-service properties that qualify for such credits. (These tax credits are not available after 2002.) Questar Gas believes that it is important to continue owning gas reserves, producing them in a manner that will serve the best interests of its customers, and satisfying a significant portion of its supply requirements with gas produced from such properties.

        Questar Gas uses storage capacity at Clay Basin (a base-load storage facility owned and operated by Questar Pipeline) to provide flexibility for handling gas volumes produced from cost-of-service properties. It stores gas at Clay Basin during the summer and withdraws it during the heating season.

        Questar Gas has a balanced and diversified portfolio of gas supply contracts with suppliers located in the Rocky Mountain states of Wyoming, Colorado, and Utah. Questar Gas has regulatory approval to include costs associated with hedging activities in its balancing account for pass-through treatment. When filing its most recent pass-through application with the PSCU, Questar Gas reported using a blend of fixed-price contracts, price-indexed contracts, and price-capped contracts as well as spot purchases to fulfill its purchased-gas supply requirements. In this same application, Questar Gas estimated that its average cost of purchased gas for 2003 would be $2.99 per Dth for gas delivered to the upstream pipeline, compared to the $2.94 price it was quoting a year earlier.

        Competition.    Questar Gas has historically enjoyed a favorable price comparison with all energy sources used by residential and commercial customers except coal and occasionally fuel oil. This

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historic price advantage, together with the convenience and handling advantages associated with natural gas, has permitted Questar Gas to retain approximately 90 percent of the residential space and water heating markets in its service area and to distribute more energy, in terms of Btu content, than any other energy supplier to residential and commercial markets in Utah. Questar Gas has close to 100 percent of the space heating and water heating offered in new homes within its service area that are connected to its system.

        Questar Gas is a public utility and currently has no direct competition from other distributors of natural gas for residential and commercial customers. It does compete with other energy sources. It continues to monitor its competitive position, in terms of commodity costs and efficiency of usage, with other energy sources.

        Questar Gas is also interested in Utah's economic development in order to enhance market growth and is encouraging the use of natural gas in additional appliances. Its market share for other gas appliances, e.g., ranges and dryers, has historically been less than 35 percent, which is significantly lower than its 90 percent market share for furnaces and water heaters. Questar Gas continues to focus marketing efforts to develop incremental load in existing homes and new construction.

        Questar Gas believes that it must maintain a competitive price advantage in order to retain its residential and commercial customers and to build incremental load by convincing current customers to convert additional appliances to natural gas. Consequently, Questar Gas follows an annual gas supply plan that provides for a judicious balance between cost-of-service gas and purchased gas and that allows it to increase operating efficiency.

        The Kern River pipeline, which was built to transport gas from southwestern Wyoming to Kern County, California, runs through portions of Questar Gas's service area and provides an alternative delivery source for transportation customers. The existence of this interstate pipeline system has made it possible for Questar Gas to take delivery of additional supplies to meet increasing demand.

        Regulation.    As a public utility, Questar Gas is subject to the jurisdiction of the PSCU and PSCW. (Questar Gas's customers in Idaho are served under the provisions of its Utah tariff. Pursuant to a special contract between the PUCI and the PSCU, rates for Questar Gas's Idaho customers are regulated by the PSCU.) Questar Gas's natural gas sales and transportation services are made under rate schedules approved by the two regulatory commissions. It is authorized to earn a return on equity of 11.2 percent in Utah (recently increased from 11.0 percent) and 11.83 percent in Wyoming.

        On December 30, 2002, the PSCU issued an order in Questar Gas's general rate case that was originally filed in May of 2002. The order authorized Questar Gas to increase its annual rates by $11,162,550, which reflects an allowed rate of return on equity of 11.2 percent. The PSCU also approved a stipulation that had been reached earlier in the case dealing with all revenue issues except the cost of common equity and capital structure and reflecting a test year primarily based on calendar year 2002. In addition to resolving revenue issues, the approved stipulation changes Questar Gas's accounting for contributions in aid of construction, and provides for the establishment of special groups to review cost allocation/rate-design issues, including a mechanism to deal with declining usage per customer, and demand side management issues. In its order, the PSCU also approved Questar Gas's capital structure.

        The PSCU on August 14, 2002, also authorized Questar Gas to recover $3.76 million, plus interest, for costs associated with removing carbon dioxide from natural gas volumes for the period from June 1, 1999 to August 10, 2002. The PSCU's order was issued after the Utah Supreme Court, in a decision issued on October 23, 2001, determined that the PSCU was not precluded from considering Questar Gas's 1999 request for pass-through treatment of such costs according to previously approved balancing account procedures and remanded the case to the PSCU for a decision on the merits of the case.

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        Questar Gas is still involved in another appeal concerning its processing costs. After the PSCU granted permission for it to recover a portion of such costs on a prospective basis in its 2002 general rate case, the Committee of Consumer Services filed an appeal from such order. This case has not been heard.

        Both the PSCU and the PSCW have authorized Questar Gas to use a balancing account procedure for changes in the cost of natural gas, including supplier non-gas costs, and to reflect changes on at least a semi-annual basis. In the last pass-through applications that became effective January 1, 2003, Questar Gas was allowed to reflect annualized gas costs of $336,707,257 in its Utah rates and $13,072,563 in its Wyoming rates. The typical residential customer in Utah will have an annual bill of $673.89, using rates in effect as of January 1, 2003, compared to an annual bill of $681.02, using rates in effect as of January 1, 2002. The PSCW and PSCU have allowed Questar Gas to reflect the decreases.

        Questar Gas continues to be concerned about the effect of its declining use per customer and its return on equity authorized by the PSCU. Consequently, Questar Gas may determine to file another general rate case in Utah during 2003.

        During its 2003 session, the Utah state legislature adopted statutory provisions that should benefit Questar Gas and other utilities serving Utah customers. These provisions require the PSCU to use a "test year" that is most representative of conditions when new rates become effective, allowing the use of a test year that extends 20 months from the date of filing; encourage settlements by strengthening and simplifying settlement negotiation procedures; and limit the binding effect of regulatory orders to the utility specifically involved in such orders.

        The Pipeline Safety Improvement Act of 2002 imposes new requirements on Questar Gas and Questar Pipeline. The new act tightens federal inspections and safety requirements and increases civil penalties that may be assessed by the Department of Transportation. The new safety requirements include integrity assessments of all interstate and intrastate pipelines located in high-density population areas.

        Miscellaneous.    Questar Gas owns and operates distribution systems throughout its Utah, Wyoming and Idaho service areas and has a total of 22,815 miles of street mains, service lines, and interconnecting pipelines. Questar Gas has a major operations center located in Salt Lake City, Utah. It also owns operations centers, field offices, and service center facilities throughout other parts of its service area. The mains and service lines are constructed pursuant to franchise agreements or rights-of-way. Questar Gas has fee title to the properties on which its operation and service centers are constructed.

Regulated Services, Transmission and Storage

        Questar Pipeline is an interstate pipeline company that transports natural gas in the Rocky Mountain states of Utah, Wyoming and Colorado and stores gas volumes in Utah and Wyoming. As a "natural gas company" under the Natural Gas Act of 1938, Questar Pipeline is subject to regulation by the FERC as to rates and charges for storage and transportation of gas in interstate commerce, construction of new facilities, extensions or abandonments of service and facilities, accounts and records, and depreciation and amortization policies. Questar Pipeline holds certificates of public convenience and necessity granted by the FERC for the transportation and underground storage of natural gas in interstate commerce and for the facilities required to perform such operations.

        Transmission System.    Questar Pipeline, as an open-access pipeline, transports gas for affiliated and unaffiliated customers. It also owns and operates the Clay Basin storage facility, which is a large underground storage project in northeastern Utah, and other underground storage operations in Utah

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and Wyoming. In late 2002, Questar Pipeline, through a subsidiary, acquired the final 10 percent partnership interest and now owns 100 percent of Overthrust Pipeline Company ("Overthrust").

        Questar Pipeline's transmission system is strategically located in the Rocky Mountain area near large reserves of natural gas. It is referred to as a "hub and spoke" system, rather than a "long-line" pipeline, because of its physical configuration, multiple connections to other major pipeline systems and access to major producing areas. Questar Pipeline's transmission system connects with the transmission systems of Colorado Interstate Gas Company ("CIG"), the middle segment (commonly referred to as "WIC") of the Trailblazer pipeline system, The Williams Companies, Inc. ("Williams"), Kern River, and the TransColorado pipeline owned by Kinder Morgan, Inc. These connections provide access to markets outside Questar Gas's service area and allow Questar Pipeline to transport gas for nonaffiliated customers.

        Questar Pipeline's transmission system includes 2,466 miles of transmission lines that interconnect with other pipelines and link producers of natural gas with Questar Gas's distribution operations in Utah and Wyoming. (The transmission mileage figure includes lines at storage fields and tap lines used to serve Questar Gas and the 488 miles of the Southern Trails system in service.) Its core system includes two major segments, often referred to as the northern and southern systems; the northern system segment extends from northwestern Colorado through southwestern Wyoming into northern Utah, and the southern system segment extends from western Colorado to Payson in central Utah. The two portions are linked together and have significant connections with other pipeline systems, making it a fully integrated system.

        Questar Pipeline's Main Line 104 was operational throughout 2002. This 24-inch line extends from Price, Utah, near the Ferron area of coalbed methane gas, to Questar Gas's system at Payson, Utah and to Kern River near Elberta, Utah. Capacity on this line was fully subscribed.

        Questar Pipeline's largest single transportation customer is Questar Gas. During 2002, Questar Pipeline transported 111.7 MMdth for Questar Gas, compared to 110.3 MMdth in 2001. These transportation volumes include cost-of-service gas produced by Wexpro on properties owned by Questar Gas as well as some volumes purchased by Questar Gas directly from field producers.

        Questar Gas has reserved firm transportation capacity of about 898,902 Dth per day on an ongoing basis, or about 58 percent of Questar Pipeline's reserved capacity, during the three coldest months of the year. Questar Pipeline's primary transportation agreement with Questar Gas expires on June 30, 2017. Questar Gas paid reservation charges of $52.4 million to Questar Pipeline in 2002; these charges include reservation charges attributable to firm and "no-notice" transportation. Questar Gas only needs its total reserved capacity during peak-demand situations. When it is not fully utilizing such capacity, Questar Gas releases it to others, primarily industrial transportation customers and marketing entities.

        Questar Pipeline recovers approximately 96 percent of its transmission cost of service through demand charges from firm transportation customers. In other words, these customers pay primarily for access to transportation capacity. Consequently, Questar Pipeline's throughput volumes do not have a significant effect on its short-term operating results. Questar Pipeline's transportation revenues are not significantly impacted by fluctuating demand based on the vagaries of weather or natural gas prices. Its revenues would vary with throughput if the FERC changes its basic regulatory scheme of "straight fixed-variable" rates.

        Questar Pipeline's total system throughput increased from 312.8 MMdth in 2001 to 362.9 MMdth in 2002. Questar Pipeline increased the volumes it transports for nonaffiliated customers from 195.6 MMdth in 2001 to 245.1 MMdth in 2002.

        Questar Pipeline owns and operates a major compressor complex near Rock Springs, Wyoming, that compresses volumes of gas from the transmission system for delivery to the WIC segment of the Trailblazer system and to CIG. The complex has become a major delivery point on Questar Pipeline's

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system, with five of its major natural gas lines connected to the system at the complex. In addition, both of CIG's Wyoming pipelines and the WIC segment are connected to the complex.

        In addition to the transmission system described above, Questar Pipeline, through subsidiaries, has a 100 percent interest in and is the operating partner of Overthrust, a general partnership that owns and operates the Overthrust segment of Trailblazer. Trailblazer, in turn, is a major 800-mile line that transports gas from producing areas in the Rocky Mountains to the Midwest. The 88-mile Overthrust segment is the western-most of Trailblazer's three segments.

        The Kern River pipeline transports gas from Wyoming to the enhanced oil recovery projects in Kern County, California. It runs through Utah's Wasatch Front, making it possible for some large industrial customers to bypass both Questar Gas and Questar Pipeline by buying transportation service on Kern River. The connection between Main Line 104 and Kern River permits additional opportunities for producers and marketers to move gas to Kern River. The Kern River line has diverted some transportation volumes from both Questar Pipeline and Overthrust. The Kern River line, on the other hand, has also provided Questar Pipeline with opportunities to make additional connections with outside markets.

        Effective October 1, 2002, Questar Pipeline sold Questar TransColorado, Inc. ("QTC"), which was a wholly-owned subsidiary that had a 50 percent interest in the TransColorado pipeline project. The entity was sold to Kinder Morgan, Inc. and its affiliates ("collectively "Kinder Morgan") for $105.5 million, after a lengthy and complex litigation between the partners. The parties negotiated the transaction after the trial court issued an order dated August 26, 2002, affirming QTC's contractual right to exercise its put to Kinder Morgan. The TransColorado pipeline is 292 miles in length, originates at a point on Questar Pipeline's system 25 miles east of Rangely in northwestern Colorado and ends at the Blanco hub in northwestern New Mexico.

        During 2002, the TransColorado pipeline had positive income for the first time in its four years of operation because the basis differentials for Rocky Mountain volumes were sufficient to motivate producers and marketing companies to incur additional transportation costs in order to move such volumes to pipeline connections in the San Juan Basin.

        Questar Pipeline, during 2002, also put the eastern segment of the Southern Trails pipeline system service. This 488-mile segment runs from the Blanco hub area in San Juan Basin to multiple delivery points inside the California state line. Questar Pipeline completed the project of reconditioning the line, which was originally used as a liquids line, adding compressor stations, installing additional delivery and receipt points, and building a connection to the TransColorado pipeline. The segment's daily capacity of 80,000 Dth is fully subscribed under transportation contracts that will expire in 2007.

        New Projects.    Questar Pipeline has announced plans to build a 16-mile, 24-inch line that extends west from the Overthrust line to interconnect with its system during 2003. The new pipeline will enhance the reliability of Questar Pipeline's northern system and will provide additional flexibility to move volumes on Overthurst. Questar Pipeline also plans to provide additional delivery capacity to the Kern River line through new and expanded connections in southwestern Wyoming.

        Marketing constraints and California regulators continue to prevent Questar Pipeline from developing the western segment of Southern Trails that runs from the California border to Long Beach. While redoubling efforts to pursue natural gas markets on the California portion of Southern Trails, Questar Pipeline is exploring other options, including sale or alternative uses, for the western segment.

        Storage and Processing.    Questar Pipeline's Clay Basin storage facility in northeastern Utah is the largest underground storage reservoir in the Rocky Mountains. The facility has a capacity of 117.5 Bcf including 51.4 Bcf of working gas capacity. Clay Basin has been operational since 1977 and has been successfully expanded several times. Storage service is important to parties that need to balance purchases with fluctuating customer demand, improve service reliability, and avoid imbalance penalties.

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The storage capacity at Clay Basin is fully subscribed by customers under long-term agreements. Questar Gas currently has 13.4 MMdth of working gas capacity at Clay Basin. Other large customers, in addition to Questar Gas, include Williams; Puget Sound Energy Company, which is a utility in the state of Washington; and Duke Energy Trading and Marketing L.L.C. Questar Pipeline also offers interruptible storage service at Clay Basin and allows firm storage service customers the right to transfer their injection and withdrawal rights to other parties.

        Questar Pipeline began offering specified hub services such as "parking" and "loaning" at Clay Basin during 2002. Questar Pipeline's central location, connections to multiple lines, and the accessibility of storage capacity enabled it to increase the load factor of its lines and increase its revenues by offering such services.

        During 2002, Questar Pipeline stopped developing a salt-cavern storage project located near Evanston, Wyoming, when it did not obtain sufficient market support in a low-price environment. It is continuing to evaluate the technical feasibility of the project.

        Through a subsidiary, Questar Pipeline also owns gathering lines and a processing plant near Price, Utah, that removes carbon dioxide from coalbed methane gas in order to raise the Btu content of the gas to be safely and efficiently used for appliances in Questar Gas's service area. This plant began operations in June of 1999.

        Regulation.    Questar Pipeline does not currently plan to file a general rate case in 2003. It, however, will continue to review its revenues and costs as it adds new facilities that are not included in its rate base and makes expenditures to comply with regulatory mandates.

        Some of Questar Pipeline's customers have experienced credit problems as their ratings have been downgraded. Questar Pipeline has required these customers to provide additional security consistent with the terms of existing tariff provisions.

        Questar Pipeline and its affiliates in the Regulated Services group have actively opposed the FERC's efforts to broaden the scope of its regulations that are currently limited to "marketing affiliates." The FERC issued a Notice of Proposed Rulemaking in September of 2001, in which it proposed rules that would require pipelines to comply with certain "nondiscriminatory" standards when dealing with energy company affiliates, including local distribution companies. At the current time, local distribution companies such as Questar Gas that do not engage in unregulated gas sales are exempt from the FERC's marketing affiliate regulations. Questar Pipeline believes that the current exemption should be continued. If adopted, the FERC's proposed rules would diminish Questar Pipeline's operational efficiencies and increase its costs because QRS provides administrative, engineering, gas control, technical, accounting, legal, and regulatory services to both Questar Pipeline and Questar Gas.

        Under the Natural Gas Pipeline Safety Act of 1968, as amended, Questar Pipeline is subject to the jurisdiction of the Department of Transportation ("DOT") with respect to safety requirements in the design, construction, and operation of its transmission and storage facilities. The new Pipeline Safety Improvement Act of 2002 imposes additional requirements on Questar Pipeline, in addition to Questar Gas.

        Competition.    Questar Pipeline intends to continue a strategy of concentrating on projects within its core area of operations in the Rocky Mountains. As noted earlier, the Rocky Mountain area produces more gas volumes that it can use and lacks sufficient pipeline capacity to move such volumes outside the area. The Kern River expansion provides opportunities for Questar Pipeline to build additional lines and install additional delivery points for gas volumes to move to Kern River. Questar Pipeline has faced significant market risks, partner disputes, and regulatory complications when it has tried to extend its footprint to other areas, as illustrated with its involvement in the TransColorado pipeline project and the Southern Trails pipeline into California.

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        Competition for Questar Pipeline's transportation and storage services has intensified in recent years. Regulatory changes have significantly increased customer flexibility and increased the risks associated with new projects. Questar Pipeline has two key assets that contribute to its continued success. It has a strategically located and integrated transmission system with interconnections to major pipeline systems and with access to major producing areas and markets and it has significant storage capacity with Clay Basin

Regulated Services, Other Services

        QES offers a variety of non-regulated products and services that include gas measurement, automation and laboratory services and support for natural gas vehicles and equipment.

Other Operations

        In addition to the two primary segments of Market Resources and Regulated Services, Questar has "other operations." This group includes Questar InfoComm, which is a full-service provider of integrated information technology and communication services to affiliates and external businesses; Consonus; and limited real estate operations

        Questar InfoComm provides information and communication services. It operates a regional microwave system that covers much of Utah and southwestern Wyoming. This digital system was originally built to satisfy the needs of Questar's operations, but also carries data for alternative telephone providers and other external customers. Questar InfoComm installs and maintains telephone-switching equipment and voice-mail systems. It built and leases a fiber optic telephone network in parts of Salt Lake City for an alternative telephone provider.

        In 1999, Questar InfoComm launched Consonus which offers managed hosting and operations services and critical data center support. Consonus owns three ultra-secure data centers in the Salt Lake metropolitan area. These centers are designed to protect critical systems and data from natural or man-made disasters. Consonus' operations and expansion opportunities have been negatively affected by the economic recession in the high tech industry.

        Questar no longer owns the office building in downtown Salt Lake City that serves as its headquarters facility. It does have a long-term lease for the building and has approximately 750 employees in it. In early 2002, the Company's affiliates sold property close to the building. Through an affiliate, Questar also owns 14.5 acres of commercial real estate in Salt Lake County that was formerly known as the Wasatch Chemical property.

Employees

        As of December 31, 2002, Questar and its affiliates had 2,225 employees compared to 2,221 employees at year-end 2001. Of this total, 1,360 worked for the Regulated Services segment, 578 worked for Market Resources entities, and 287 worked for corporate, Questar InfoComm and Consonus. None of these employees is represented under collective bargaining agreements. Questar sponsors comprehensive benefit plans for most employees. Employee relations are generally deemed to be satisfactory.

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Environmental Matters

        Questar and its affiliates are subject to the National Environmental Policy Act and other federal and state legislation regulating the environmental aspects of their businesses. During 2001, Questar continued to be involved in actions involving local and federal environmental enforcement agencies and allegations of "hazardous waste" problems. The Company does not believe that environmental protection provisions will have any significant effect on its competitive position; it does believe, however, that such provisions have added and will continue to add to capital expenditures and operating costs.

        Questar is actively promoting the environmental advantages of natural gas in comparison to other fuels. It has actively participated in various clean air committees and has promoted the use of natural gas in vehicles. Questar's management believes that increasing concerns about environmental pollution will result in an increased demand for natural gas.

Research and Development

        Questar Gas has the primary responsibility for the Company's research and development activities. It has evaluated gas conversion equipment, gas piping and operating technology, and engines using natural gas and also evaluated technological developments with electrical appliances. The total amount spent by Questar on research and development activities either directly or through contributions is not significant.

ITEM 3. LEGAL PROCEEDINGS.

        There are various legal proceedings pending against the Company and its affiliates. Management believes that the outcome of these cases will not have a material adverse effect on the Company's financial position, operating results or liquidity. Significant cases are discussed below.

        Grynberg.    Questar defendants are involved in three separate lawsuits filed by Jack Grynberg, an independent producer. One case, United States ex rel. Grynberg v. Questar Corp., involves claims filed by Grynberg under the Federal False Claims Act and is substantially similar to other cases filed against pipelines and their affiliates that have all been consolidated for discovery and pre-trial motions in Wyoming's federal district court. The cases involve allegations of industry-wide mismeasurement of natural gas volumes on which royalty payments are due the federal government. Grynberg has filed an appeal from the order issued by the trial judge dismissing his valuation claims from the lawsuits. To sustain claims under the False Claims Act, Grynberg must demonstrate that he is the original source of information concerning the allegations and that he has "direct and independent knowledge" of the claimed mismeasurement practices. The Questar defendants participate in a joint defense group that is attacking Grynberg's eligibility to bring such claims.

        On March 21, 2003, the Utah Supreme Court substantially upheld the trial court's order granting summary judgment to the Questar defendants in Grynberg v. Questar Pipeline. This cased involved claims that several Questar defendants mismeasured the heating content of gas volumes attributable to Gynberg's working interest in specified wells located in southwestern Wyoming, committed fraud, and breached fiduciary responsibilities. Specifically, the Court ruled Grynberg's contract claims were time-barred, the economic loss doctrine precludes him from bringing tort claims based on contractual responsibilities, he is not a third party beneficiary of his operator's contracts, Questar defendants do not owe him fiduciary responsibilities, and there was no equitable tolling of the applicable statutes of limitations. The Utah Supreme Court did rule that Grynberg was not collaterally estopped from presenting a contract termination issue that had previously been ruled on by a Wyoming federal district court judge and remanded the case to the trial court to determine whether any contractual claims remain.

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        The third case, Grynberg and L & R Exploration Venture v. Questar Pipeline Co., is pending in a Wyoming federal district court against several Questar defendants, including Questar Gas, involving the partner. This case involves some of the same allegations that were heard in an earlier case between the parties, e.g., breach of contract, intentional interference with a contract, but Grynberg added claims of antitrust and fraud. In June of 2001, the judge entered an order granting the motion for partial summary judgment filed by the Questar defendants dismissing the antitrust claims from the case, but has not ruled on other motions for summary judgment dealing with ratable take and fraud.

        Gas Pipelines.    Questar E&P, QGM, Wexpro, Questar Gas, and Questar Pipeline are among the numerous defendants in this case, which is currently known as Price v. Gas Pipelines, that has been filed against the pipeline industry. Pending in a Kansas state district court, this case is similar to the cases filed by Grynberg, but the allegations of a conspiracy by the pipeline industry to set standards that result in the systematic mismeasurement of natural gas volumes and resulting underpayment of royalties are made on behalf of private and state lessors, rather than on behalf of the federal government. The numerous defendants are opposing class certification and requesting dismissal for lack of personal jurisdiction for any defendants, including most of the named Questar parties, that do not conduct business activities in Kansas.

        Data Center Losses.    Safeway, Inc., a tenant in a data center owned and operated by Consonus, has recently filed suit alleging that it suffered irreparable damage when its computer system was tendered unfit as a result of an accident that occurred at the center in February of 2002. The case, Safeway, Inc. v. Consonus, Inc., is pending in a Utah federal district court. Safeway claims that Consonus breached its contract to provide a secure facility and was negligent with respect to hiring and monitoring the activities of other named parties responsible for designing, building, and performing some operations at the facility. Consonus subsequently filed a cross claim against the other named defendants including the architectural firm and the primary contractor. Another tenant has also filed a demand letter alleging it sustained damages as a result of the incident. The total amount of the claimed damages is in excess of $12.5 million.

        QMR Class Action Cases.    Royalty class actions are being asserted by landowners against entities involved in the oil and gas production and marketing businesses. The QMR group of companies has been involved in several class actions involving royalty owners and believes it will continue to be the subject of additional class action cases involving similar claims.

        Environmental Compliance.    An Oklahoma agency has advised QGM that it may be violating state air pollution laws in conjunction with its operation of processing facilities in the state by failing to obtain necessary permits, submit proper notices, and pay specified emissions fees.

        Wasatch Chemical.    The Company continues to monitor the Wasatch Chemical property in Salt Lake City, which is still included on the national priorities list, commonly known as the "Superfund" list. The Wasatch Chemical property was the location of chemical mixing operations and is the subject of a 1992 consent order. Questar has conducted the necessary soil remediation and groundwater remediation activities.

        Questar subsidiaries are listed as "responsible parties" at other sites involving hazardous wastes. They have also received notices of violation from state environmental agencies. None of these sites is significant to the Questar entity involved. With the possible exception of the Oklahoma situation described above, no pending proceeding involving notices of violation involves a penalty of $100,000 or more.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

        The Company did not submit any matters to a vote of stockholders during the last quarter of 2002.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

        Information concerning the market for the common equity of the Company and the dividends paid on such stock is located in Note 17 of the Notes to Consolidated Financial Statements under Item 8. As of March 14, 2003, Questar had 10,826 shareholders of record and estimates that it had an additional 30,000-35,000 beneficial holders.

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ITEM 6. SELECTED FINANCIAL DATA

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ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

SUMMARY

        Questar Corporation reported earnings of $155.6 million for 2002, down 2% compared with earnings for 2001. Following is a year-to-year comparison of net income by line of business:

        Questar Market Resources' net income declined 3% in 2002 compared with 2001 due to 20% lower realized gas prices that more than offset an increase in after-tax net gains of $26.8 million from selling assets.

        Questar Regulated Services reported a 12% increase in earnings for 2002 compared with the prior year due to increased nongas margin (revenues less gas costs), expansion of the gas-transmission system and increased volumes transported for firm-transportation customers.

        Corporate and Other Operations reported higher income before a change in the method of accounting for goodwill. The increase was primarily due to cost-reduction efforts at a data-hosting business. The goodwill, related to the data-hosting business, was determined to be impaired and written off based on a new accounting rule adopted in the first quarter of 2002.

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RESULTS OF OPERATIONS

Questar Market Resources

        Questar Market Resources (QMR or Market Resources) through its subsidiaries conducts gas and oil exploration, development and production, gas gathering and processing, and energy-marketing operations. Primary objectives of energy-marketing operations are to support the company's earnings targets and to protect the company's earnings from adverse commodity-price changes. The company does not enter into energy-hedging contracts for speculative purposes. Wexpro, a subsidiary of QMR, develops gas and oil reserves owned by an affiliate, Questar Gas. Following is a summary of QMR's financial results and operating information:

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Exploration and Production Activities

        In 2002, QMR grew its nonregulated production by 12% to 96.3 bcfe compared to the previous year's production of 85.6 bcfe. This 12% increase was achieved despite QMR's sale of producing properties and deliberate curtailment of approximately 3.3 bcfe of production due to low prices. However, revenues were lower in 2002. Low prices, primarily for natural gas produced in the Rocky Mountains, plagued QMR for much of 2002. Rockies prices, net to the well, were below $1.50 per Mcf for much of 2002. Approximately 60% of QMR's production comes from the Rockies.

        QMR acquired producing properties in the Uinta Basin of Utah in July 2001, which provided a significant portion of the year-to-year production growth. Also, development of the Uinta Basin properties and the Pinedale Anticline in southwestern Wyoming was the prime contributor to production increases in 2002 and 2001.

        The basis differential between daily prices in the Rockies and the Henry Hub (Louisiana) at times exceeded $2 per MMBtu, far greater than the historic average of $.40 to $.60. Gas prices in the Rockies have been impacted because transportation capacity out of the region has not kept pace with the region's growing production rate. While this imbalance should be partially remedied with an expansion of the Kern River pipeline, scheduled to begin operation in mid-2003, it may persist for some time. Prices received on production from Midcontinent properties have been much higher. To protect against the possibility that the Rockies basis will again widen in the second and third quarters of 2003, QMR has hedged a substantial portion of its proved-developed production in the Rockies.

        QMR's energy hedges partially mitigated poor Rockies gas prices in 2002. QMR hedged or presold approximately 56% of its nonregulated natural gas production and 78% of its nonregulated oil production. As a result, the average realized selling price for natural gas amounted to $2.58 per Mcf and exceeded unhedged prices by $.41 per Mcf. Oil-production hedges reduced the average realized selling price for oil and natural gas liquids (NGL) by $2.54 per barrel. In 2002, hedging activities increased gas revenues by $32.9 million and decreased oil revenues by $7 million. In 2001, hedging activities reduced gas revenues by $44.7 million and oil revenues by $9.8 million. QMR does not hedge its NGL production. A summary of QMR's energy-price hedging positions for nonregulated production as of the fourth-quarter earnings release dated February 12, 2003 follows:

        Lifting cost per Mcfe rose in 2001 due to higher production taxes, which are based on the value of production. The average realized selling price of gas per Mcf decreased 20% in 2002 compared with 2001, and increased 15% in 2001 compared with 2000. The total amount of lease-operating expenses increased 6% in 2002 compared with 2001 and 28% in 2001 compared with 2000 reflecting an increase in the number of producing properties. However, on an Mcfe basis, lease-operating expenses were

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down 5% in 2002 versus 2001 and up 26% in 2001 versus 2000, Lease-operating expenses primarily include labor, maintenance, repairs and well workovers.

        Depreciation, depletion and amortization expense (DD&A) increased 27% in 2002 and 9% in 2001 due to increased gas and oil production and higher average rates per Mcfe. The average DD&A rate per Mcfe is a function of the finding cost of adding reserves and the changing market value of those reserves. By definition, reserve quantities that QMR can disclose and use in DD&A calculations are based on existing economic and operating conditions.