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Questar Company Risk Analysis

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INTEROFFICE REPORT

Questar Corporation: Energy Company

October 6, 2004

Prepared for: S.E. Parks, Senior Vice President and Chief Financial Officer

Prepared by: Cathy Caton, Accountant

Three segments of Questar operations cover resources and regulated services. Follows is the risk assessment for Questar: Resources, Lack of internal control in estimating reserve(s) revenue, Financial analysis and the market, New land developments, and the Environment.

Most of the company's operations are located in the Rocky Mountain region of Wyoming, Utah, Colorado, Texas, Oklahoma, and Louisiana (5). Distribution is throughout the United States.

QUESTAR OPERATIONS

A multi-faceted holding company formed through reorganization in 1984 into an energy company to distinguish non-utility services (5). Crude resources from fossil fuels (oil, natural gas) are developed through drilling for interstate transmission, storage and distribution. The resource division involves gas, oil, natural gas for marketing, cost analysis of gas development, risk management, and distribution for the wholesale/retail industry (5).

1. Market Resources is the major producer of income driving segments of the business. Natural gas (nonregulated) is 86% of its focal point on evaluating crude resources for process through "gas management" (5).

2. Questar Pipeline (regulated) is responsible for transportation and storage. This includes the development of pipeline. Business is dependent on acquiring leases and the use of land. Operations at well sites can have a life of 20-40 years.

3. Questar Gas (regulated) involves retail distribution. Sales are based on seasonal usage and economic factors such as the market's going rate (5).

RISK ASSESSMENT

Resources: Price Risk and Land Opportunity

Ð'* Crude resources are a distinct global market. Questar is a profitable and reliable enterprise with all three segments highly revenue driven, secured by federal and state government regulations. Wholesale figures fluctuate within the industry by a minimal amount for distribution nationwide, but this type of commodity requires prices to be set by the market nationwide and not the company.

Ð'* Competition in this industry is the ability to secure land rights for drilling. Government regulations have restricted areas containing crude resources for development by 40% (7). 90% of natural gas used by the lower 48 states is produced in the United States (11).

Accounting: Reliance on Company Engineers for Accounting Figures

Ð'* From an accountants' perspective it is very difficult to depend on the reliability of energy reserves. There is a value at risk created by the enormous amount of data analyzed on

tangible assets for this and many other industries. Accountants depend on company engineers for energy reserve information; creating a loss of internal control for number crunchers in this billion dollar industry. In response to the $150 million overstatement of energy reserves by Royal Dutch/Shell group, the Securities and Exchange Commission is evaluating energy companies. This could create a new standardization for accountants in reviewing financials (9).

Ð'* Restatements for improper revenue recognition result in larger drops in market capitalization than any other type of restatement...the leading three [companies] lost 20 billion in market value in just three days following disclosure of revenue recognition problems. Reporting of higher revenue amounts may affect stock valuations (10).

Financial Analysis:

Ð'* The fluctuation of the economic market sets the price for energy companies nationwide. Price fluctuations become target for legal and financial analysis. In 2003 the Attorney General's office investigated the natural gas market because of a 180% increase over a two day period over national spot market prices. They concluded that individual and institutional traders, who operate in the natural gas markets, were reacting to information and perceptions about market conditions, see attachment (11).

Ð'* No financial data is available on the international sale of crude resources.

Land: New developments

Ð'* Opening remote areas to drilling creates new land-use patterns (7). This is detrimental to the environment with additional waste management issues (land, water, air). Developing communities generates jobs and housing projects. Conversely, environmental concerns by individuals and conservation organizations will limit energy companies, or impede progress, possibly through litigation (6). Energy companies can shut down unexpectedly.

Environment: Separate set of standards

Ð'* Environment regulations can monitor energy companies in areas of clean air and water, and environmental impact assessment (4). This is done before, during, and after drilling, and is regulated at the national level. To avoid excessive exploitation of land, Questar uses multiple drills at one site. This endeavor helps to keep the harmony of the natural wilderness (5).

INDUSTRY POSITION

Questar's primary NAICS code is 211111, Oil and Gas extraction (mining). According to Business Rankings Annual 2004, Questar is 6th in the industry of largest natural gas companies by net income based on latest filings for 2001 at $158 million.

COMPANY OUTLOOK

Standard & Poor's analysis is optimistic about the future of energy companies predicting a bull market (13). Based on the value of goods and services increasing (GDP), post 9/11, energy demands will increase. S&P predicted U.S. Henry Hub natural gas prices to be $4.70/MMBtu in 2004. Below are actual figures for the week ending 6 October 2004 (2).

30-Sep 1-Oct 4-Oct 5-Oct 6-Oct

Henry Hub 6.43 5.42 5.72 6.07 6.0

GROWTH STRATEGY:

Current to 2025: The Alaskan

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