Pursuant to your request, we have conducted a depreciation study related to the gas plant of Questar Gas Company (QGC). The study results include annual depreciation rates and amortization amounts as of December 31, 2004. The attached report presents a description of the methods used in the estimation of depreciation, summaries of annual and accrued depreciation, and the detailed tabulations of annual and accrued depreciation by year installed for each account.

We gratefully acknowledge the assistance of Questar Gas Company personnel in the conduct of the study.

Plan of Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-2

Basis of the Study. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-2

Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-2

Service Life Estimates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-4

Net Salvage Estimates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-4

Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-2

Life Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-3

Average Service Life. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-3

Survivor Curves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-3

Iowa Type Curves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-5

Retirement Rate Method of Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-10

Schedules of Annual Transactions in Plant Records. . . . . . . . . . . . . . . . . II-11

Schedule of Plant Exposed to Retirement. . . . . . . . . . . . . . . . . . . . . . . . . II-14

Original Life Table. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-16

Smoothing the Original Survivor Curve. . . . . . . . . . . . . . . . . . . . . . . . . . . II-18

Simulated Plant Balance Method. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-19

Computed Mortality Method. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-24

Calculation of Annual and Accrued Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . II-25

Single Unit of Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-25

Group Depreciation Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-25

Calculation of Annual and Accrued Amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . II-27

Monitoring of Book Accumulated Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-28

Qualification of Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-2

Description of Depreciation Tabulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-2

Gas Plant at December 31, 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-3

Related to Gas Plant at December 31, 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . III-6

at December 31, 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-8

APPENDIX A Detailed Depreciation Calculations. . . . . . . . . . . . . . . . . . . . . . . . . . A-1

This report sets forth the results of the depreciation study for Questar Gas Company (QGC), to determine the annual depreciation accrual rates and amounts for book purposes applicable to the original cost of gas plant at December 31, 2004. Part I Introduction, contains statements with respect to the plan of the report, the basis of the study, the study and a brief summary of the study results. Part II Methods Used in the Estimation of Depreciation, presents the methods used in the estimation of average service lives, survivor curves and salvage and in the calculation of depreciation. Part III Results of Study, presents summaries by depreciable group of annual and accrued depreciation. The detailed tabulations of annual and accrued depreciation are set forth in the Appendices of the report.

For most accounts, the annual and accrued depreciation were calculated by the straight line method using the average service life procedure. For certain General Plant accounts, the annual and accrued depreciation are based on amortization accounting. Both types of calculations were based on original cost, attained ages, and estimates of service lives and salvage. Variances between the calculated accrued depreciation or amortization and the book accumulated depreciation are amortized over the composite remaining life of the assets.

A change to monitoring and maintenance of the accumulated depreciation reserve at the account level is recommended. The remaining lives of the various accounts range from a few years to over sixty-two years. Gannett Fleming has determined an amortization amount to correct the present variance with the calculated accrued depreciation, a.k.a., theoretical reserve, during the remaining life of the account. Table B presented in Part III of the report sets forth the amortization of the reserve variance at the account level. This adjustment mechanism, whether determined separately as an amortization amount or incorporated in the calculation of remaining life accruals, is widely-accepted. An explanation of the monitoring of the accumulated depreciation reserve and the calculation of the true-up provision is presented beginning on page II-28 of the report.

The straight line method, average service life procedure is a commonly used depreciation calculation procedure that has been widely accepted in jurisdictions throughout the country, including Utah. Gannett Fleming recommends its use for QGC.

The change to amortization accounting for certain accounts is recommended because of the disproportionate plant accounting effort required when compared to the minimal original cost of the large number of items in these accounts. Many gas utilities in North America have received approval to adopt amortization accounting for these accounts. In January 1997, FERC issued Accounting Release 15 which granted approval for utilities under its jurisdiction to use vintage year (a.k.a., amortization) accounting for general plant accounts. An explanation of the calculation of annual and accrued amortization is presented beginning on page II-27 of the report.

The service life and salvage estimates used in the depreciation and amortization calculations were based on informed judgment which incorporated a review of management’s plans, policies and outlook, a general knowledge of the gas utility industry, and comparisons of the service life and net salvage estimates from our studies of other gas utilities. The use of survivor curves to reflect the expected dispersion of retirement provides a consistent method of estimating depreciation for gas plant. Iowa type survivor curves were used to depict the estimated survivor curves for the plant accounts not subject to amortization accounting.

The procedure for estimating service lives consisted of compiling historical data for the plant accounts or depreciable groups, analyzing this history through the use of widely accepted techniques, and forecasting the survivor characteristics for each depreciable group on the basis of interpretations of the historical data analyses and the probable future. The combination of the historical experience and the estimated future yielded estimated survivor curves from which the average service lives were derived.

The retirement rate method of life analysis was used for the gas plant accounts included in this study. Statistically aged plant accounting data through 2003 were used in the retirement rate computations and were the primary statistical support of the service life estimates.

The estimates of net salvage were based in part on historical data compiled by account for the years 1990 through 2003 which represented all available net salvage data. Cost of removal and salvage were expressed as percents of the original cost of plant retired, both on annual and three-year moving average bases. The most recent five-year average also was calculated for consideration. The net salvage estimates are expressed as a percent of the original cost of plant retired.

The estimates of salvage were based primarily on judgment which considered a number of factors. The primary factors were the analyses of historical data; the net salvage characteristics of other gas utility properties, a knowledge of QGC’s operating policies and outlook as determined during the field trip and other discussions with management; and net salvage estimates from studies of other gas companies. The estimated service lives and net salvage percents are within the range of estimates used by other gas utilities with similar property.

Amortization accounting is used for certain General Plant accounts. Future gross salvage and removal cost for these accounts is expected to be immaterial and will be recorded as miscellaneous revenue and expense, respectively. Inasmuch as there will be no depreciation reserve entries related to salvage, the estimate of net salvage for accounts subject to amortization is zero percent.

Depreciation, as applied to depreciable gas plant, means the loss in service value not restored by current maintenance, incurred in connection with the consumption of prospective retirement of gas plant in the course of service from causes which are known to be in current operation and against which the utility is not protected by insurance. Among the causes to be given consideration are wear and tear, decay, action of the elements, inadequacy, obsolescence, changes in the art, changes in demand and requirements of public authority.

Depreciation as used in accounting is a method of distributing fixed capital costs, less net salvage, over a period of time by allocating annual amounts to expense. Each annual amount of such depreciation expense is part of that year's total cost of providing utility service. Normally, the period of time over which the fixed capital cost is allocated to the cost of service is equal to the period of time over which an item renders service, that is, the item's service life. The most prevalent method of allocation is to distribute an equal amount of cost to each year of service life. This method is known as the straight line method of depreciation.

The calculation of annual depreciation based on the straight line method requires the estimation of average life and salvage. These subjects are discussed in the sections which follow.

The use of an average service life for a property group implies that the various units in the group have different lives. Thus, the average life may be obtained by determining the separate lives of each of the units, or by constructing a survivor curve by plotting the number of units which survive at successive ages. A discussion of the general concept of survivor curves is presented. Also, the Iowa type survivor curves are reviewed.

The survivor curve graphically depicts the amount of property existing at each age throughout the life of an original group. From the survivor curve, the average life of the group, the remaining life expectancy, the probable life, and the frequency curve can be calculated. In Figure 1 a typical smooth survivor curve and the derived curves are illustrated. The average life is obtained by calculating the area under the survivor curve, from age zero to the maximum age, and dividing this area by the ordinate at age zero. The remaining life expectancy at any age can be calculated by obtaining the area under the curve, from the observation age to the maximum age, and dividing this area by the percent surviving at the observation age. For example, in Figure 1 the remaining life at age 30 years is equal to the crosshatched area under the survivor curve divided by 29.5 percent surviving at age 30. The probable life at any age is developed by adding the age and remaining life. If the probable life of the property is calculated for each year of age, the probable life curve shown in the chart can be developed. The frequency curve presents the number of units retired in each age interval and is derived by obtaining the differences between the amount of property surviving at the beginning and at the end of each interval.

Iowa Type Curves. The range of survivor characteristics usually experienced by utility and industrial properties is encompassed by a system of generalized survivor curves known as the Iowa type curves. There are four families in the Iowa system, labeled in accordance with the location of the modes of the retirements in relationship to the average life and the relative height of the modes. The left moded curves, presented in Figure 2, are

those in which the greatest frequency of retirement occurs to the left of, or prior to, average service life. The symmetrical moded curves, presented in Figure 3, are those in which the greatest frequency of retirement occurs at average service life. The right moded curves, presented in Figure 4, are those in which the greatest frequency of retirement occurs to the right of, or after, average service life. The origin moded curves, presented in Figure 5, are those in which the greatest frequency of retirement occurs at the origin, or immediately after age zero. The letter designation of each family of curves (L, S, R or O) represents the location of the mode of the associated frequency curve with respect to the average service life. The numerical subscripts represent the relative heights of the modes of the frequency curves within each family. The Iowa curves were developed at the Iowa State College Engineering Experiment Station through an extensive process of observation and classification of the ages at which industrial property had been retired. A report of the study which resulted in the classification of property survivor characteristics into 18 type curves, which constitute three of the four families, was published in 1935 in the form of the Experiment Station's Bulletin 125

. These type curves have also been presented in sub-

sequent Experiment Station bulletins and in the text, "Engineering Valuation and Depreciation

." In 1957, Frank V. B. Couch, Jr., an Iowa State College graduate student, submitted a thesis

presenting his development of the fourth family consisting of the four O type survivor curves.

The retirement rate method is an actuarial method of deriving survivor curves using the average rates at which property of each age group is retired. The method relates to property groups for which aged accounting experience is available or for which aged accounting experience is developed by statistically aging unaged amounts and is the method used to develop the original stub survivor curves in this study. The method (also known as the annual rate method) is illustrated through the use of an example in the following text, and is also explained in several publications, including "Statistical Analyses of Industrial Property Retirements,"

“Engineering Valuation and Depreciation"

and "Methods of Estimating Utility Plant Life".

The average rate of retirement used in the calculation of the percent surviving for the survivor curve (life table) requires two sets of data: first, the property retired during a period of observation, identified by the property's age at retirement; and second, the property exposed to retirement at the beginning of the age intervals during the same period. The period of observation is referred to as the experience band, and the band of years which represent the installation dates of the property exposed to retirement during the experience band is referred to as the placement band. An example of the calculations used in the development of a life table based on the age at retirement in years follows. The example includes schedules of annual aged property transactions, a schedule of plant exposed to retirement, a life table and illustrations of smoothing the stub survivor curve. Schedules of Annual Transactions in Plant Records. The property group used to illustrate the retirement rate method is observed for the experience band 1995-2004 during which there were placements during the years 1990-2004. In order to illustrate the summation of the aged data by age interval, the data were compiled in the manner presented in Tables 1 and 2 on pages II-12 and II-13. In Table 1, the year of installation (year placed) and the year of retirement are shown. The age interval during which a retirement occurred is determined from this information. In the example which follows, $10,000 of the dollars invested in 1990 were retired in 1995. The $10,000 retirement occurred during the age interval between 4½ and 5½ years on the basis that approximately one-half of the amount of property was installed prior to and subsequent to July 1 of each year. That is, on the average, property installed during a year is placed in service at the midpoint of the year for the purpose of the analysis. All retirements also are stated as occurring at the midpoint of a one-year age interval of time, except the first age interval which encompasses only one-half year.

TABLE 1. RETIREMENTS FOR EACH YEAR 1995 -2004 SUMMARIZED BY AGE INTERVAL

Experience Band 1995-2004									Placement Band 1990-2004
	Retirements, Thousands of Dollars
Year Placed	During Year										Total During Age Interval	Age Interval
Year Placed	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004	Total During Age Interval	Age Interval
(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)	(11)	(12)	(13)

1990	10	11	12	13	14	16	23	24	25	26	26	13½-14½
1991	11	12	13	15	16	18	20	21	22	19	44	12½-13½
1992	11	12	13	14	16	17	19	21	22	18	64	11½-12½
II-12 1993	8	9	10	11	11	13	14	15	16	17	83	10½-11½
1994	9	10	11	12	13	14	16	17	19	20	93	9½-10½
1995	4	9	10	11	12	13	14	15	16	20	105	8½-9½
1996		5	11	12	13	14	15	16	18	20	113	7½-8½
1997			6	12	13	15	16	17	19	19	124	6½-7½
1998				6	13	15	16	17	19	19	131	5½-6½
1999					7	14	16	17	19	20	143	4½-5½
2000						8	18	20	22	23	146	3½-4½
2001							9	20	22	25	150	2½-3½
2002								11	23	25	151	1½-2½
2003									11	24	153	½-1½
2004										13	80	0-½

Total	53	68	86	106	128	157	196	231	273	308	1,606

Acquisitions, Transfers, and Sales, Thousands of Dollars
Year	During Year										Total During	Age
Placed (1)	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004	Age Interval (12)	Interval (13)
1990	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)	(11)	-	13½-14½
1991	-	-	-	-	-	-	-	-	-	-	-	12½-13½
1992	-	-	-	-	-	-	-	-	-	-	-	11½-12½
1993	-	-	-	-	-	-	-	(5)b	-	-	60	10½-11½
1994	-	-	-	-	-	-	-	6 a	-	-	-