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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
_____ TO _____
Commission File No. 1-935
MOUNTAIN FUEL SUPPLY COMPANY
(Exact name of registrant as specified in its charter)
State of Utah 87-0155877
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
180 East First South, P.O. Box 45360, Salt Lake City, Utah 84145-360
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (801) 324-5555
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933:
Notes: Medium Term Notes, 7.19% to 8.43%,
due 2007 to 2024
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 X No
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant as of March 21, 1997: $0.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 21, 1997: 9,189,626 shares of
Common Stock, $2.50 par value. (All shares are owned by Questar
Regulated Services Company.)
TABLE OF CONTENTS
Heading Page
PART I
Items 1.
and 2. BUSINESS AND PROPERTIES......................................
General...................................................
Gas Distribution..........................................
Gas Supply................................................
Competition, Growth and Unbundling........................
Regulation................................................
Relationships with Affiliates.............................
Employees.................................................
Environmental Matters.....................................
Research and Development..................................
Item 3. LEGAL PROCEEDINGS............................................
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS.............................................
PART II
Item 5. MARKET FOR REGISTRANT'S EQUITY
AND RELATED STOCKHOLDER MATTERS..............................
Item 6. SELECTED FINANCIAL DATA......................................
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATION....................................................
Item 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA...........................................
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.........................................
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT............................................
Item 11. EXECUTIVE COMPENSATION.......................................
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT........................................
Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.................................................
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K......................................
SIGNATURES..............................................................
FORM 10-K
ANNUAL REPORT, 1996
PART I
ITEMS 1. and 2. BUSINESS AND PROPERTIES
General
Mountain Fuel Supply Company (Mountain Fuel or the Company)
distributes natural gas to more than 618,000 sales and transportation
customers in Utah, southwestern Wyoming, and a small section in
southeastern Idaho. During 1996, the Company was aligned with Questar
Pipeline Company (Questar Pipeline) to form the Regulated Services
segment of Questar Corporation (Questar), which is a publicly-owned
integrated provider of energy services.
The Company, through a predecessor, began distributing natural gas
in 1929 when a pipeline was built to transport natural gas from
southwestern Wyoming to Salt Lake City, Utah. Between 1929 and the
present time, Mountain Fuel gradually expanded the boundaries of its
distribution system to include over 90 percent of Utah's population and
to capture a market share of over 90 percent for furnaces and water
heaters.
The Company has traditionally capitalized on two competitive
advantages, owning natural gas reserves and offering a full-range of
services to customers at reasonable prices. Mountain Fuel intends to
maintain its competitive position in its traditional service area, even
as deregulation and unbundling may open the area to other players, and
to take advantage of opportunities to expand its range of activities.
During 1996, Mountain Fuel improved its overall efficiency by
consolidating specified "shared service" functions within the new
Regulated Services segment.
Gas Distribution
As of December 31, 1996, Mountain Fuel was serving 618,231
residential, commercial, and industrial customers, a 4.3 percent
increase from the 592,738 customers served as of the end of 1995.
(Customers are defined in terms of active meters.) Mountain Fuel
distributes gas to customers in the major populated area 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 in eastern, central, and southwestern Utah with Price,
Roosevelt, Fillmore, Richfield, Cedar City, and St. George as the
primary cities. Approximately 96 percent of Mountain Fuel's customers
are in Utah. The Company also serves the communities of Rock Springs,
Green River, and Evanston in southwestern Wyoming and the community of
Preston in southeastern Idaho. Mountain Fuel has been granted the
necessary regulatory approvals by the Public Service Commission of Utah
(PSCU), the 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.
Mountain Fuel added almost 25,500 customers in 1996, which was the
third consecutive year in which the Company added at least 20,000
customers. Most of the customer growth was attributable to new housing,
although the Company continues to add customers in its traditional and
new service areas that are converting to natural gas. The population of
Mountain Fuel's service area in Utah continues to grow faster than the
national average. The Company expects to add at least 22,000 customers
in 1997 and to add 15,000-20,000 customers per year for the remainder of
the century.
Mountain Fuel'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 decatherms (Dth) per year) uses more than 75 percent
of his total gas requirements in the coldest six months of the year.
The Company's revenue forecasts used to set rates are based on normal
temperatures. Historically, Mountain Fuel's revenues and resulting net
income have been affected by temperature patterns that are below or
above normal. As measured in degree days, temperatures in the Company's
service area were 9 percent warmer than normal; 1996 was the third
consecutive year in which temperatures have been warmer than normal.
Mountain Fuel's sensitivity to weather and temperature conditions
has been ameliorated by adopting a weather normalization mechanism for
its general service customers in Utah and Wyoming. The mechanism
adjusts the non-gas cost 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.
During 1996, Mountain Fuel sold 80,844 thousand decatherms (MDth)
of natural gas to residential and commercial customers, compared to
73,950 MDth in 1995. (A Dth is an amount of heat energy equal to 10
therms or 1 million Btu. In the Company's system, each thousand cubic
feet (Mcf) of gas equals approximately 1.07 Dth.) General service sales
to residential and commercial customers were responsible for over 88
percent of Mountain Fuel's total revenues in 1996.
Mountain Fuel has designed its distribution system and annual gas
supply plan to handle design-day demand requirements. The Company
periodically updates its design-day demand, which is the volume of gas
that firm customers could use during extremely cold weather. For the
1996-97 heating season, Mountain Fuel used a design-day demand of
911,067 Dth for firm customers. The Company is also obligated to have
pipeline capacity, but not gas supply, for firm transportation
customers. Mountain Fuel's management believes that the distribution
system is adequate to meet the demands of its firm customers.
Mountain Fuel's total industrial deliveries, including both sales
and transportation, decreased during 1996, declining from 68,779 MDth
in 1995 to 58,083 MDth in 1996. Sales to industrial users declined
after three consecutive years of increases and moved from 9,210 MDth in
1995 to 8,584 MDth in 1996. The decline in total industrial deliveries
between the two years is not an adverse reflection concerning Utah's
economic situation, which continues to be very attractive. The decline
reflects a decline in the use of gas for power generation due to the
availability of low-cost electricity from hydroelectric facilities in
the Pacific Northwest.
The majority of Mountain Fuel's interruptible sales service
customers pay rates based on the Company's weighted average cost of
purchased gas, which is periodically lower for some customers than the
cost of purchasing volumes directly from producers and paying
transportation rates. The Company also has an interruptible sales rate
utilizing a dedicated gas portfolio. Mountain Fuel's tariff permits
industrial customers to make annual elections for interruptible sales or
transportation service.
Mountain Fuel has been providing transportation service since
1986. Under the Company's current rate schedules, a typical
interruptible transportation customer pays block rates ranging from $.12
to $.02 per Dth. Mountain Fuel receives demand cost credits from
Questar Pipeline for transportation customers who use the Company's
released capacity. These credits totaled approximately $9.1 million for
1996.
Mountain Fuel's largest transportation customers, as measured by
revenue contributions, are the Geneva Steel plant in Orem, Utah; Utah
Power, an electric utility that uses gas for an electric generating
plant in Salt Lake City; the Kennecott copper processing operations,
located in Salt Lake County; and the mineral extraction operations of
Magnesium Corporation of America in Tooele County west of Salt Lake.
These transportation customers reduced their volumes during late 1995
and 1996 when the spot prices for electricity were lower than the cost
of electricity generated by using natural gas.
Mountain Fuel owns and operates distribution systems throughout
its Utah, Wyoming and Idaho service areas and has a total of 18,685
miles of street mains, service lines, and interconnecting pipelines.
The Company has consolidated many of its activities in its operations
center, warehouse and garage located in Salt Lake City, Utah. Mountain
Fuel continues to own field offices and service center facilities in
other parts of its service area. The mains and service lines are
constructed pursuant to franchise agreements or rights-of-way. The
Company has fee title to the properties on which its operation and
service centers are constructed.
Gas Supply
Mountain Fuel owns natural gas producing properties in Wyoming,
Utah and Colorado that are operated by Wexpro Company (Wexpro) and uses
the gas produced from these properties for its base-load demand. The
Company's investment in these properties is included in its utility rate
base. Mountain Fuel, as part of its 1993 Utah general rate case,
received regulatory approval to reserve "cost-of-service" gas for firm
sales customers. During 1996, approximately 54 percent of the Company's
total system requirement was satisfied with cost-of-service gas produced
from over 550 wells in more than 40 fields. (As defined,
cost-of-service gas includes related royalty gas.) The volumes produced
from such properties are transported for Mountain Fuel by Questar
Pipeline. See "Relationships with Affiliates." During 1996, 49,086
MDth of gas were delivered from such properties, compared to 53,476 MDth
in 1995. Mountain Fuel estimates that it had reserves of 359,877
million cubic feet (MMcf) of natural gas as of year-end 1996 compared to
389,440 MMcf as of year-end 1995. (These reserve numbers do not include
gas attributed to royalty interest owners. Reserve numbers are
typically reported in volumetric units, such as MMcf, that don't reflect
heating values.) The average wellhead cost associated with gas volumes
produced from Mountain Fuel's cost-of-service reserves was $1.15 per Dth
in 1996 (compared to $1.73 per Dth of purchased gas).
Some of the wells on Mountain Fuel's producing properties qualify
for special tax credits, commonly referred to as "Section 29" or "tight
sands" tax credits. During 1996, Mountain Fuel, as the party with the
economic interest in the gas produced from such wells, claimed $3.2
million in Section 29 tax credits. To qualify for the special tax
credits, production must flow from wells that meet specified tight sands
criteria and that commenced drilling prior to January 1, 1993. Only gas
volumes produced prior to January 1, 2003, are eligible for the special
tax credit.
Mountain Fuel stores up to 12.5 billion cubic feet of gas at Clay
Basin, a base-load storage facility owned and operated by Questar
Pipeline. Company-owned gas is stored at Clay Basin during the summer
and withdrawn during the heating season.
The Company has been directly responsible for all of its gas
acquisition activities since September 1, 1993. Mountain Fuel has a
balanced and diversified portfolio of approximately 58 gas supply
contracts with more than 28 suppliers located in the Rocky Mountain
states of Wyoming, Colorado, and Utah. The Company purchases gas on the
spot market and under contracts, primarily during the heating season.
Mountain Fuel's gas purchase contracts have market-based provisions and
are either of short-duration or renewable on an annual basis upon
agreement of the parties. Mountain Fuel's gas acquisition objective is
to obtain reliable, diversified sources of gas supply at competitive
prices. In the Company's last semi-annual purchased gas cost filing, it
estimated that its 1997 average wellhead cost of field purchased gas
would be $1.65 per Dth. Although Mountain Fuel has contracts with
take-or-pay provisions, it currently has no material take-or-pay
liabilities.
Competition, Growth, and Unbundling
Mountain Fuel has historically enjoyed a favorable price
comparison with all energy sources used by residential and commercial
customers except coal and occasionally fuel oil. This historic price
advantage, together with the convenience and handling advantages
associated with natural gas and with the services provided in
conjunction with natural gas, has permitted the Company to retain over
90 percent of the residential space heating 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. These competitive advantages are responsible for the Company's
ability to attract residential users of alternate energy sources to gas
in its service areas in central and southwestern Utah even though such
users are temporarily required to pay higher rates than their
counterparts in the more populated areas of Utah. (The first group of
these customers will begin paying standard rates in the fall of 1997.)
Mountain Fuel, during 1996, continued to expand the size of its
customer base in new and existing service areas as Utah's growth rate
exceeded the national average. The Company extended service to Ogden
Valley, an area east of Ogden, Utah, during 1996 and has recently sought
regulatory approval to extend service to Panguitch, in southern Utah.
The Company continues to focus marketing efforts to develop
incremental load in existing homes and new construction. Most
households in Mountain Fuel's service area already use natural gas for
space heating and water heating. The Company's market share for other
secondary appliances, e.g., ranges and dryers, has historically been
less than 20 percent, which is significantly lower than its over 90
percent market share for furnaces and water heaters.
Mountain Fuel has marketing campaigns to convince existing
customers to take advantage of natural gas's lower prices, favorable
environmental qualities, and greater efficiency by converting other
appliances to natural gas. The Company also has marketing campaigns to
convince contractors to install the necessary lines for gas fireplaces,
ranges, and dryers in new homes. Mountain Fuel estimates that about 40
percent of the new homes constructed in its service area include piping
for gas fireplaces and approximately 40-50 percent of such homes had
piping for gas dryers or ranges. As a result of its contacts with
appliance dealers, the Company receives information about the sales of
gas appliances and has been pleased with the growth of sales for
fireplaces, ranges and dryers.
The Company 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 secondary appliances to natural gas. Although Mountain
Fuel's rates for general service customers in Utah increased effective
January 1, 1997, they continue to be lower now than they were 12 years
ago. Using rates in effect as of January 1, 1997, the typical
residential customer in Utah would have an annual bill of $512.38,
compared to an annual bill of $607.07, based on rates in effect as of
January 1, 1985.
Historically, Mountain Fuel's competitive position has been
strengthened as a result of owning natural gas producing properties and
satisfying as much as approximately 50-60 percent of its system
requirements with the cost-of-service gas produced from such properties.
Mountain Fuel has developed an annual gas supply plan that provides for
a judicious balance between cost-of-service gas and purchased gas. The
Company believes that it is important to continue owning gas reserves,
producing them in a manner that will serve the best short- and long-term
interests of its customers, and satisfying a significant portion of its
supply requirements with gas produced from such properties. Mountain
Fuel reserves cost-of-service gas for firm sales customers.
No other distributor markets natural gas sales service in direct
competition with the Company in its service area, but marketing firms
are arranging direct purchase contracts between large users in the
Company's service area and producers. These customers can take
advantage of the open-access status of either Questar Pipeline's or Kern
River's open-access pipelines and can use the existence of the Kern
River line to obtain discounted transportation charges. Mountain Fuel's
sales rates are competitive when compared to other energy sources, but
are periodically higher than the delivered price of spot-market gas
volumes transported through its system to large customers.
The Kern River pipeline, which was built to transport gas from
southwestern Wyoming to Kern County, California, runs through portions
of the Company's service area and can provide an alternative delivery
source to transportation customers. As of the date of this report,
Mountain Fuel has lost no industrial load as a result of the Kern River
line. The existence of the Kern River pipeline, however, coupled with
the open-access status of Questar Pipeline's transmission system, has
changed the nature of market conditions for the Company. Large
industrial customers in Utah's Wasatch Front area could acquire taps on
Kern River's system or could take delivery of gas through a new tap that
Mountain Fuel obtained in 1994. Mountain Fuel's Hunter Park tap on Kern
River in Salt Lake County enables the Company to obtain delivery of
additional peak-day supplies to meet increasing demand. The existence
and location of the Kern River pipeline system also made it possible for
the Company to extend service into new areas in rural Utah and to
develop a second source of supply for its central and southern Utah
system.
As of September 1, 1997, Mountain Fuel's transportation customers
will no longer be required to pay a special additional charge if they
don't use the Company's upstream capacity on Questar Pipeline. The
cessation of this charge, which was approved by the PSCU for a
transitional period, may lead to increased competition, discounted
released capacity revenues, and a reduction in the revenues retained by
the Company. Mountain Fuel, for Utah rate-making purposes, currently
retains 10 percent of such revenues (reduced from 20 percent effective
February 18, 1997) and credits 90 percent of such revenues to its gas
balancing account.
Although Mountain Fuel is a public utility and has no direct
competition from other distributors of natural gas sales for residential
and commercial customers, the Company competes with other energy
sources. Mountain Fuel continues to monitor its competitive position,
in terms of commodity costs and efficiency of usage, with other energy
sources on a short-term and long-term basis. PacifiCorp (using the name
Utah Power in Utah) is the primary electric utility in the Company's
service area. Although its current rates for residential space heating
and water heating are more than twice as high on a Btu basis as Mountain
Fuel's rates for such service, PacifiCorp provides an ongoing source of
competition.
Mountain Fuel has adopted innovative and productivity-enhancing
measures to deal with competitive pressures during the last several
years. One measure of improved efficiency is the number of customers
served per employee. This ratio has improved from 388 customers per
employee for 1994 to 423 customers per employee for 1995 and to 453 in
1996.
Mountain Fuel and all local distribution companies are faced with
the challenges and opportunities posed by the unbundling and
restructuring of traditional utility services. As a local distribution
company, Mountain Fuel owns and controls the lines through which gas is
delivered, is the only supplier of natural gas to residential customers,
measures the consumption of gas used by its customers, and bills for
consumption and related services. The services provided by Mountain
Fuel are packaged and priced as a "bundle." Most "unbundling"
discussions focus on commodity unbundling for residential and commercial
customers to separate the commodity supply from the transportation
service. (Industrial customers have enjoyed the benefit of this
supplier choice for the last 10 years.)
Mountain Fuel has been reviewing the opportunities associated with
unbundling. The Company believes that it is well-positioned to succeed
in a competitive environment. It has sophisticated customer information
systems that may allow it to perform billing and dispatch services for
other companies. Mountain Fuel is an efficient natural gas company, a
statement that is supported by such statistics as an operating and
maintenance expense of $158 per customer, a customer to employee ratio
of 453 to 1, and an overall customer satisfaction rating in excess of 90
percent. In addition, the Company's operating efficiency is buttressed
by owning the reserves to meet over 50 percent of its current demand.
Mountain Fuel intends to maintain its competitive position within its
own service area and to take advantage of opportunities in new markets.
Regulation
Mountain Fuel and all retail distribution companies have been
subject to governmental regulation, as a substitute for competition.
Other regulated industries, airline, trucking, telecommunication,
financial service and interstate pipeline, have been and are being
deregulated, and competitive market forces are forcing these industries
to place more emphasis on operating efficiency. The substitution of
competition for regulation will cause Mountain Fuel and other
distribution companies to continue to review their costs and levels of
service.
Mountain Fuel currently intends to apply, during 1997, for
regulatory approval to unbundle certain services in Wyoming. Although
the details of the proposal have not been worked out, the Company
expects to offer a proposal that would allow Wyoming general service
customers to choose alternative suppliers of natural gas.
The Company intends to file this application in Wyoming for
several reasons. The PSCW has already permitted one utility, KN Energy,
Inc., to unbundle services to a portion of its customers. Nothing
comparable has been done in Utah, where the Company is the dominant
natural gas utility. Mountain Fuel has approximately 21,300 customers
in Wyoming, compared to 595,600 customers in Utah. The Company's
Wyoming customers live in areas that are close to producing fields and
several pipelines. Mountain Fuel believes that it can conduct a
small-scale project in Wyoming and gain a better understanding of the
complexities and opportunities associated with unbundling services.
The State of Utah and the PSCU are actively involved with
reviewing the restructuring and unbundling of telephone and electric
utility services. Given Mountain Fuel's attractive rates and high
customer service ratings, the Company does not believe that Utah
regulators or residential consumers will push for rapid unbundling in
Utah.
As a public utility, Mountain Fuel is subject to the jurisdiction
of the PSCU and PSCW. (The Company's customers in Idaho are served
under the provisions of its Utah tariff. Pursuant to a special contract
between the PUCI and the PSCU, Mountain Fuel's Idaho customers are
regulated by the PSCU.) Mountain Fuel's natural gas sales and
transportation services are provided under rate schedules approved by
the two regulatory commissions.
Mountain Fuel has consistently endeavored to balance the costs of
adding more than 20,000 customers each year with the cost savings
associated with reducing its labor costs and consolidating its
activities. The Company's revenues and resulting net income were
favorably affected by a settlement in its 1995 Utah general rate case
that permitted Mountain Fuel to incorporate a weather normalization
mechanism in its rates on a phased-in basis, to collect a new-customer
premises charge, and to change the method for crediting revenues when it
"releases" pipeline capacity.
On January 8, 1997, the Utah Division of Public Utilities
(Division) filed a motion with the PSCU seeking an investigation into
the reasonableness of Mountain Fuel's rates on the basis that the
Company was overearning. The Division subsequently withdrew its motion
when the Company agreed to reduce revenues by an annualized amount of
$2.8 million by modifying the new premises fee, reducing the
capacity-release revenue sharing, and reducing block rates on a uniform
percentage basis. The settlement agreement was approved by the PSCU
effective February 18, 1997.
Both the PSCU and the PSCW have authorized the Company to use a
balancing account procedure for changes in the cost of natural gas,
including supplier non-gas costs, and to reflect changes at least as
frequently as semi-annually. Mountain Fuel's latest semi-annual
balancing account applications become effective January 1, 1997. The
Company's base rates for natural gas service in both Utah and Wyoming
were increased as a result of an overall increase in the cost of gas.
In its Utah application, the Company requested regulatory approval of a
4.58 percent increase in rates; the Company's Wyoming application
reflected an increase of 2.59 percent. Mountain Fuel's gas balancing
accounts are currently undercollected, reflecting higher than expected
gas costs.
The Company's 1996 and 1997 pass-through applications have been
approved on an interim basis by the PSCU. The Division has raised some
concerns about gathering costs, particularly the cost-of-service rates
charged by Questar Gas Management Company (Questar Gas Management). The
Utah Committee of Consumer Services, another state agency, has been
requesting additional information concerning no-notice service and
transportation balancing. As of the date of this report, these issues
have not been addressed before the PSCU.
Mountain Fuel does not expect to file a general rate case
application with the PSCU or PSCW in 1997. The Company is allowed the
opportunity to earn a return on rate base of 10.22 to 10.34 percent in
Utah and 10.4 percent in Wyoming.
Mountain Fuel's responsibility for gas acquisition activities
involves inherent risks of regulatory scrutiny. In the past, the
Company has been involved in regulatory proceedings in which the
prudence of its gas supply activities has been challenged, but has
successfully defended its activities and has not incurred any
significant disallowance of gas costs.
Under Utah law, Mountain Fuel must report dividends paid on its
common stock to the PSCU and must allow at least 30 days between
declaring and paying dividends. The PSCU can investigate any dividend
declared by the Company to determine if payment of such dividend would
impair the Company's capital or service obligations. The PSCW and the
PUCI, but not the PSCU, have jurisdiction to review the issuance of
long-term securities by the Company.
The Company has significant relationships with its affiliates.
The PSCU and PSCW have jurisdiction to examine these relationships and
the costs paid by the Company for services rendered by or goods
purchased from its affiliates. A settlement agreement involving
Mountain Fuel's cost-of-service gas and defining certain contractual
obligations between Mountain Fuel and Wexpro is monitored by the
Division and its agents.
The PSCU and PSCW have adopted regulations or issued orders that
affect the Company's business practices in such areas as main
extensions, credit and collection activities, and termination of service
standards.
Relationships with Affiliates
The Company has significant business relationships with affiliated
companies, particularly Questar Pipeline, Wexpro, Questar Gas
Management, and Questar InfoComm, Inc. (Questar InfoComm). The
following diagram shows the corporate structure of the Company and its
primary affiliates:
Questar Corporation
Questar InfoComm, Inc.
Entrada Industries, Inc.
Wexpro Company
Questar Gas Management Company
Celsius Energy Company
Questar Energy Trading Company
Universal Resources Corporation
Questar Energy Services, Inc.
Questar Regulated Services Company
Mountain Fuel Supply Company
Questar Pipeline Company
The Company's relationships with its primary affiliates are
described below.
Questar Pipeline Company. Questar Pipeline owns a two-pronged
transmission system running from southwestern Wyoming into Mountain
Fuel's Utah service area. Questar Pipeline's historic function as the
Company's supplier ended September 1, 1993, when Questar Pipeline's gas
purchase contracts were transferred to Mountain Fuel and when the
Company converted its firm purchase capacity entitlements to firm
transportation service. Mountain Fuel has reserved about 800,000 Dth
per day or approximately 72 percent of Questar Pipeline's total
transmission capacity.
Mountain Fuel transports both cost-of-service gas and purchased
gas on Questar Pipeline's transmission system. (The Company also
transports gas volumes on the transmission systems owned by Northwest
Pipeline Company and Colorado Interstate Gas Company. Mountain Fuel
purchases "city gate" gas supplies from transportation customers on Kern
River's system.) The Company releases its firm transportation capacity,
pursuant to capacity release procedures adopted by the Federal Energy
Regulatory Commission (FERC), when it does not need such service for its
sales customers. Because Mountain Fuel has sufficient capacity on the
system to meet peak-demand periods, it has unused capacity for the
balance of the year.
During 1996, Questar Pipeline transported 100,161 MDth of gas for
Mountain Fuel, compared to 79,872 MDth in 1995. Under Questar
Pipeline's "straight fixed-variable" rate schedules, Mountain Fuel is
obligated to pay demand charges for firm capacity, regardless of the
volumes actually transported. The Company paid approximately $45.8
million in demand charges to Questar Pipeline in 1996 for firm
transportation capacity and "no notice" transportation. Questar
Pipeline also credits Mountain Fuel with revenues it receives from
transportation customers that use the Company's released capacity.
During 1996, Mountain Fuel received $9.1 million in revenue credits from
Questar Pipeline. (During 1996, 80 percent of this revenue, for Utah
rate making purposes, was credited to the Company's gas balancing
account. As of February 18, 1997, 90 percent of this revenue is
credited to Mountain Fuel's gas balancing account.)
Mountain Fuel purchases storage capacity at Clay Basin, a large
base-load storage facility operated by Questar Pipeline, and also has
peaking storage capacity at three additional storage reservoirs owned by
Questar Pipeline. The Company paid Questar Pipeline $13.6 million in
demand charges during 1996 in connection with storage services.
In mid-1996, Questar Pipeline and Mountain Fuel were placed under
the same management team of officers and linked to form the Regulated
Services unit of Questar. This reorganization was completed as of
January 1, 1997, when both entities became subsidiaries of Questar
Regulated Services Company (Regulated Services) and when employees
performing specified functions were transferred to Regulated Services.
Employees in all three entities share base and incentive
compensation plans and are expected to work closely together to improve
administrative efficiency and customer service. Mountain Fuel expects
that its administrative costs will be lower than otherwise experienced
as a result of this reorganization.
Questar Gas Management Company. On March 1, 1996, Questar
Pipeline's gathering facilities were transferred to Questar Gas
Management, which subsequently was moved to the Market Resources segment
of Questar. During 1996, Questar Gas Management gathered 30,199 MDth of
natural gas for Mountain Fuel, compared to 31,691 MDth in 1995. (The
1996 volume for which it was paid $14.5 million and revenue figures
include gas gathered by and monies paid to Questar Pipeline prior to the
transfer.) The Company paid $14.5 million for gathering services.
Under the terms of the gathering agreement between the parties, Questar
Gas Management will gather gas volumes produced from cost-of-service
properties for the life of such properties and charge cost-of-service
rates. The Company's contractual obligation to use Questar Gas
Management to gather field-purchased gas terminates in 1997.
Wexpro Company. Wexpro, another company within Questar's Market
Resources segment, operates certain properties owned by Mountain Fuel.
Under the terms of a settlement agreement, which was approved by the
PSCU and PSCW and upheld by the Utah Supreme Court, Mountain Fuel owns
gas produced from specified properties that were productive as of August
1, 1981 (the effective date of the settlement agreement). Such gas is
reflected in rates at cost-of-service prices based on rates of return
established by the settlement agreement. In addition, Wexpro conducts
development gas drilling for Mountain
Fuel on specified properties and is reimbursed for its costs plus a
current rate of return of 22.04 percent (adjusted annually using a
specified formula) on its net investment in such properties, adjusted
for working capital and deferred taxes, if the wells are successful.
Under the terms of the settlement agreement, the costs of unsuccessful
wells are borne by Wexpro. The settlement agreement also permits
Mountain Fuel to share income from hydrocarbon liquids produced from
certain properties operated by Wexpro after Wexpro recovers its expenses
and a specified rate of return. The income received by Mountain Fuel
from Wexpro is used to reduce natural gas costs to its customers.
Wexpro only conducts drilling activities in response to the needs
of Mountain Fuel or the demands from other working interest owners. The
significant decrease in Rocky Mountain wellhead prices resulted in the
near cessation of Wexpro's drilling activities. Only 7,177 MMcf in
proved development reserves were added to Mountain Fuel's net reserves
in 1996, compared to 36,740 MMcf of production. Higher gas prices
should result in additional drilling activities.
Other Affiliates. Other significant affiliates of Mountain Fuel
include Questar InfoComm and several additional companies within Market
Resources, the second primary business unit within Questar. Questar
InfoComm provides data processing and telecommunication services for the
Company and other affiliates. It owns and operates a network of
microwave facilities, all of which are located in Mountain Fuel's
service area or near Questar Pipeline's transmission system. Services
are priced to recover operating expenses and a return on investment.
Questar InfoComm personnel have assisted Mountain Fuel with the
development of new customer information systems that facilitated the
Company's consolidation of customer service activities. Mountain Fuel
has a long-term lease for some space in an office building located in
Salt Lake City, Utah, that is owned by another affiliate.
In addition to Questar Gas Management and Wexpro, the Market
Resources segment of Questar includes Celsius Energy Company (Celsius),
Questar Energy Trading Company (Questar Energy Trading), Questar Energy
Services, Inc. (Questar Energy Services), and Universal Resources
Corporation (Universal Resources). All of these companies are owned by
Entrada Industries, Inc. (Entrada).
Celsius conducts oil and gas exploration and related development
activities in the Rocky Mountain area and western Canada (through a
Canadian subsidiary, Celsius Energy Resources Ltd.) Questar Energy
Trading markets gas volumes, including the majority of volumes produced
by Celsius, and is responsible for some of the contracts providing gas
to the Company's transportation customers. It is also involved in the
marketing of oil and other liquid hydrocarbons and electricity. Questar
Energy Services provides nonregulated energy services and expects to be
an alternative supplier of natural gas in unbundled situations.
Mountain Fuel has recently agreed to permit Questar Energy Services to
advertise its products in the bills sent to customers, to invoice
customers for its services on the Company's bills, and to transfer its
appliance financing program to Questar Energy Services. Finally,
Universal Resources conducts oil and gas exploration and related
development activities primarily in the Midcontinent region outside the
Company's service area.
Entrada is a wholly owned subsidiary of Questar and is the direct
parent of all Market Resources entities. While Mountain Fuel and
Entrada are subject to common control by Questar, there is no direct
control of Entrada by the Company or of the Company by Entrada. See
"Legal Proceedings."
Questar, Mountain Fuel's ultimate parent, provides certain
administrative services, e.g., personnel, public and government
relations, financial, and audit, to the Company and other members of the
consolidated group. Questar also sponsors the qualified and welfare
plans in which the Company's employees participate. Mountain Fuel is
responsible for a proportionate share of the costs associated with these
services and benefit plans.
Employees
As of December 31, 1996, the Company had 1,349 employees, compared
to 1,373 at year-end 1995 and 1,486 at year-end 1994. (Approximately
300 of these employees have since been transferred to Regulated
Services.) Mountain Fuel has not replaced the 109 employees who
accepted a special early retirement offer made in the spring of 1995.
Mountain Fuel's employees are nonunion employees who are not represented
under collective bargaining agreements. Mountain Fuel participates in
Questar's comprehensive employee benefit plans and pays the share of
costs attributable to its employees covered by such plans. Employee
relations are generally deemed to be satisfactory.
Environmental Matters
The Company is subject to the National Environmental Policy Act
and other federal and state legislation regulating the environmental
aspects of its operations. Although Mountain Fuel does not believe
that environmental protection laws and regulations will have any
material effect on its competitive position, it does believe that such
provisions have added and will continue to add to the Company's
expenditures and annual maintenance and operating expenses. See "Legal
Proceedings" for a discussion of litigation concerning liability for
contamination on property owned by Entrada.
Mountain Fuel has an obligation to treat waste water and monitor
the effectiveness of an underground slurry wall that was constructed in
1988 at its operations center in Salt Lake City, Utah. The slurry wall
was built to contain contaminants from an abandoned coal gasification
plant that operated on the site from 1908 to 1929.
As previously noted, Mountain Fuel is emphasizing the
environmental advantages of natural gas. The Company's marketing
campaigns feature the clean-burning characteristics of natural gas
fireplaces. Natural gas vehicles are also being encouraged on the basis
of environmental considerations.
Research and Development
The Company conducts studies of gas conversion equipment, gas
piping, and engines using natural gas and has funded demonstration
projects using such equipment. The total dollar amount spent by the
Company on research activities is not material.
ITEM 3. LEGAL PROCEEDINGS
There are various legal and regulatory proceedings pending that
involve the Company and its affiliates. While it is not feasible to
predict or determine the outcome of these proceedings, the Company's
management believes that the outcome will not have a material adverse
effect on the Company's financial position.
Mountain Fuel, as a result of acquiring Questar Pipeline's gas
purchase contracts, is responsible for any judgment rendered against
Questar Pipeline in a lawsuit that was tried before a jury in 1994 in
Wyoming's federal district court. The jury awarded an independent
producer compensatory damages of approximately $6,100,000 and punitive
damages of $200,000 on his claims involving take-or-pay, tax
reimbursement, contract breach, and tortious interference with a
contract. A judgment has not yet been entered because the presiding
judge has still not issued a decision concerning the competing forms of
judgment submitted by the opposing parties. The producer's
counterclaims originally exceeded $57,000,000, but were reduced to less
than $10,000,000, when the presiding judge dismissed with prejudice some
of the claims prior to the jury trial. The Company's management
believes that any payments resulting from this judgment will be included
in Mountain Fuel's gas balancing account and recovered in its rates for
natural gas sales service. This same producer has recently filed
additional claims against the Company and its affiliates in the same
court. The new lawsuit, which is currently assigned to the same judge
presiding over the earlier litigation, also involves claims of fraud and
antitrust violations.
As a result of its former ownership of Entrada and Wasatch
Chemical Company, Mountain Fuel has been named as a "potentially
responsible party" for contaminants located on property owned by Entrada
in Salt Lake City, Utah. Questar and Entrada have also been named as
potentially responsible parties. (Prior to October 2, 1984, Mountain
Fuel was the parent of Entrada, which is now a direct, wholly-owned
subsidiary of Questar.) The property, known as the Wasatch Chemical
property, was the location of chemical operations conducted by Entrada's
Wasatch Chemical division, which ceased operation in 1978. A portion of
the property is included on the national priorities list, commonly known
as the "Superfund" list.
In September of 1992, a consent order governing clean-up
activities was formally entered by the federal district court judge
presiding over the underlying litigation involving the property. This
consent order was agreed to by Questar, Entrada, the Company, the Utah
Department of Health and the Environmental Protection Agency (the EPA).
During 1996, Entrada basically completed clean-up activities at
the site, but will continue to monitor the situation. Entrada has
accounted for all costs spent on the environmental claims and has also
accounted for all settlement proceeds, accruals and insurance claims.
It has received cash settlements, which together with accruals and
insurance receivables, should be sufficient for any future clean-up
costs. Mountain Fuel has consistently maintained that Entrada should be
responsible for any liability imposed on the Questar group as a result
of actions involving Wasatch Chemical. The Company has not paid any and
does not expect to pay any costs associated with the clean-up activities
for the property.
See "Regulation" for information concerning questions that may be
raised in Mountain Fuel's regulatory proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1996, Mountain Fuel did not submit
any matters to a vote of security holders.
Part II
ITEM 5. MARKET FOR REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS
As of January 1, 1997, the Company's outstanding shares of common
stock, $2.50 par value, are owned by Regulated Services. Information
concerning the dividends paid on such stock and the ability to pay
dividends is reported in the Statements of Common Shareholder's Equity
and the Notes to Financial Statements included in Item 8.
ITEM 6. SELECTED FINANCIAL DATA
1996 1995 1994 1993 1992
(In Thousands)
Revenues $371,928 $362,769 $378,260 $402,391 $373,047
Natural gas purchases 182,400 190,606 210,507 230,139 218,123
Revenues less natural gas purchases 189,528 172,163 167,753 172,252 154,924
Operating expenses 133,490 128,441 128,432 125,743 110,527
Operating income $56,038 $43,722 $39,321 $46,509 $44,397
Net income $28,988 $23,668 $23,352 $25,069 $23,395
Cash dividends paid on common stock 21,000 20,000 19,500 18,000 18,000
Total assets 631,069 600,261 590,275 581,027 490,614
Capital expenditures 51,657 51,413 53,816 50,658 55,721
Capitalization
Long-term debt $175,000 $175,000 $175,000 $158,000 $150,126
Redeemable cumulative preferred stock 4,828 4,957 6,324 7,525 8,726
Common shareholder's equity 216,242 208,645 205,461 182,200 175,826
$396,070 $388,602 $386,785 $347,725 $334,678
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Mountain Fuel conducts natural-gas distribution operations.
Following is a summary of revenues and operating information:
Year Ended December 31,
1996 1995 1994
(Dollars In Thousands)
OPERATING INCOME
Revenues
Residential and commercial sales $328,785 $315,458 $329,576
Industrial sales 18,357 22,479 24,395
Industrial transportation 5,898 6,127 5,665
Other 18,888 18,705 18,624
Total revenues 371,928 362,769 378,260
Natural gas purchases 182,400 190,606 210,507
Revenues less natural gas purchases 189,528 172,163 167,753
Operating expenses
Operating and maintenance 97,110 93,384 94,094
Depreciation and amortization 28,309 25,469 24,749
Other taxes 8,071 9,588 9,589
Total expenses 133,490 128,441 128,432
Operating income $56,038 $43,722 $39,321
OPERATING STATISTICS
Natural gas volumes (in Mdth)
Residential and commercial sales 80,844 73,950 74,233
Industrial deliveries
Sales 8,584 9,210 8,882
Transportation 49,499 59,569 51,382
Total industrial 58,083 68,779 60,264
Total deliveries 138,927 142,729 134,497
Natural gas revenue (per dth)
Residential and commercial $4.07 $4.27 $4.44
Industrial sales 2.14 2.44 2.75
Transportation for industrial customers 0.12 0.10 0.11
System natural gas cost (per dth) $2.44 $2.16 $2.40
Heating degree days (normal 5,801) 5,307 5,047 5,290
Warmer than normal 9% 13% 9%
Number of customers at end of period 618,231 592,738 572,174
Revenues, net of gas costs, increased $17,365,000 in 1996 when
compared with 1995 due to higher heating demand, customer
additions, cost containment and a 1995 rate case settlement.
Revenues, net of gas costs, increased $4,410,000 in 1995 when
compared with 1994. Colder temperatures in 1996 were responsible
for an increase in demand for natural gas for heating purposes.
Temperatures, as measured in degree days, were 5% colder in 1996
when compared with 1995. Temperatures were 5% warmer in 1995 when
compared with 1994. In addition to colder temperatures, gas
usage by a typical general-service customer increased by over two
decatherms in 1996.
Mountain Fuel added 25,493 customers in 1996 representing a 4.3%
increase. The number of customers increased by 3.6% in 1995.
Mountain Fuel expects to add about 22,000 customers in 1997.
Through this rapid customer-growth period, Mountain Fuel has
managed its operating expenses through cost-containment measures.
Mountain Fuel and Questar Pipeline have combined functions common
to gas-distribution and gas-transmission operations. These
combined functions are conducted in the recently organized
Questar Regulated Services. In addition, Mountain Fuel undertook
a reorganization of service centers and an early-retirement
program in the first half of 1995. Mountain Fuel closed five
regional offices and reduced functions at five others in an
effort to consolidate and restructure operations.
The provisions of a 1995 rate case settlement with the Public
Service Commission of Utah (PSCU) provided for a
weather-normalization adjustment, a new customer connection fee
and sharing of transportation capacity-release credits. The
weather-normalization adjustment results in an adjustment in
customer bills and company revenues for weather variations above
or below normal temperatures. Under the provisions of the Utah
rate settlement, the weather-normalization adjustment was
extended to all residential and commercial volumes beginning
October 1, 1996. Utah residential customers can choose to be
exempt from this adjustment by notifying Mountain Fuel. However,
less than 1 percent of Mountain Fuel's residential customers
chose this exemption. Mountain Fuel received approval from the
Public Service Commission of Wyoming to implement a
weather-normalization adjustment for all residential and
commercial customers which began September 1, 1996. The Utah rate
case was intended to add about $3.7 million in annual revenues.
It also authorized an increase in Mountain Fuel's allowed return
on rate base from 10.08% to between 10.22% and 10.34%.
On January 8, 1997, the Utah Division of Public Utilities
(Division) filed a motion with the PSCU seeking an investigation
into the reasonableness of Mountain Fuel's rates and requesting
an interim rate decrease of $3.5 million. On January 29, 1997,
the Division withdrew its petition and the PSCU accepted that
action after receiving an agreed upon Mountain Fuel filing to
reduce rates and charges by $2.8 million. On February 4, 1997,
Mountain Fuel filed an application with the PSCU to reduce block
rates, eliminate the new-premises fee for multi-family dwellings
and reduce the capacity-release revenues retained by Mountain
Fuel from 20% to 10%. The annual revenue decrease resulting from
these changes is expected to be about $2.85 million. The PSCU
approved the filing effective February 18, 1997.
Gas deliveries to industrial customers decreased by 16% in 1996
when compared with 1995 because of the availability of cheap
electricity from hydropower sources, reducing the use of gas for
electricity generation. Deliveries to industrial customers
increased by 14% in 1995 when compared with 1994 because of
strong economic growth in Mountain Fuel's service area.
While sales volumes have increased and system natural gas cost
per dth have increased, natural gas purchases decreased by 4% in
1996 when compared with 1995. Gas costs, which are a function of
rates and collected as part of the sales price per dth, were
over-recovered from customers by $9,182,000 at the end of 1995
and under-recovered by $24,210,000 at year-end 1996. Natural gas
purchases decreased by 9% in 1995 when compared with 1994
primarily due to lower gas costs.
Operating and maintenance expenses increased 4% in 1996 when
compared with 1995 as a result of the growth in the number of
customers and territory served by the Company. The Regulated
Services group's cost-containment efforts, including the
combination of shared services, have somewhat mitigated the
escalation of operating expenses. Operating and maintenance
expenses decreased 1% in 1995 primarily because of productivity
improvement measures, including an early-retirement program,
implemented in 1995. Depreciation and amortization expense
increased 11% in 1996 and 3% in 1995 in response to the Company's
level of capital spending. Other taxes decreased in 1996 when
compared with 1995 due to settlements with local taxing agencies
that reduced property taxes.
In 1994, Mountain Fuel recorded other income of $5,589,000 for a
one-time reduction in gas costs associated with recording
unbilled revenues.
The effective income tax rate was 31.7% in 1996, 24.6% in 1995
and 25.3% in 1994 primarily due to income tax credits received
from production of gas from certain properties. These credits
amounted to $3,246,000 in 1996,$4,376,000 in 1995 and $4,670,000
in 1994.
Mountain Fuel, as a result of acquiring Questar Pipeline's gas-
purchase contracts, is responsible for any judgment rendered
against Questar Pipeline in a lawsuit that was tried before a
jury in 1994. The jury awarded an independent producer
compensatory damages of approximately $6.1 million and punitive
damages of $200,000 on his claims. The producer's counterclaims
originally exceeded $57 million, but were reduced to less than
$10 million, when the presiding judge dismissed with prejudice
some of the claims prior to the jury trial. Under existing PSCU
rulings, any payments resulting from this judgment will be
included in Mountain Fuel's gas balancing account and recovered
in its rates for natural gas service. This same producer has
recently filed additional claims against the Company and its
affiliates in the same court and with the same presiding judge.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash provided from operating activities of $50,496,000
decreased 26% in 1996 when compared to 1995 due primarily to the
working capital consumed to purchase natural gas. Net cash
provided from operating activities was $68,546,000 in 1995 and
was 107% higher than the amount reported for 1994. The increase
in 1995 was largely due to the collection of accounts receivable
and lower gas purchase costs.
Investing Activities
Following is a summary of capital expenditures for 1996 and 1995,
and a forecast of 1997 expenditures.
1997
Estimated 1996 1995
(In Thousands)
New-customer service $33,400 $29,152 $24,950
Distribution system 10,200 10,594 9,981
Buildings 5,000 1,902 3,473
Computer software and hardware 8,200 7,321 5,121
General 7,200 2,688 7,888
$64,000 $51,657 $51,413
Mountain Fuel's capital spending program was primarily in
response to a record increase in the number of customers served.
Mountain Fuel extended its system by 658 miles of main, feeder
and service lines in 1996.
Financing Activities
The Company was able to finance capital spending and pay
dividends with the proceeds of internally generated cash plus
borrowings from Questar. The Company funded 1995 capital
expenditures and cash dividends with cash provided from
operations and borrowings from Questar. Forecasted 1997 capital
expenditures of $64 million are expected to be financed with cash
provided from operations, issuance of long-term debt and
borrowings from Questar.
Questar makes loans to the Company under a short-term borrowing
arrangement. Outstanding short-term notes payable to Questar
totaled $76,200,000 at December 31, 1996 with an interest rate of
5.63% and $56,100,000 at December 31, 1995 with an interest rate of 6.01%.
In 1996, the Company terminated a short-term line-of-credit arrangement with
a bank under which it could have borrowed up to $500,000. There were no
amounts borrowed under this arrangement at either December 31,
1996 or 1995.
Mountain Fuel has a capital structure of 44% long-term debt, 1%
preferred stock and 55% common equity. Moody's and Standard and
Poor's have rated Mountain Fuel's long-term debt A-1 and A+,
respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements are included in Part IV, Item
14, herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Mountain Fuel has not changed its independent auditors or had any
disagreements with them concerning accounting matters and financial
statement disclosures within the last 24 months.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Company's directors and executive
officers is located in the following chart:
Business Experience and Positions Held
Name Age With the Company and Affiliates
M. E. Benefield 57 Vice President, Planning and Business
Development, May 1996; Vice President, Gas
Supply, May 1992 to May 1996; Vice President,
Planning and Corporate Development, Questar
(March 1989 to May 1992.) (Mr. Benefield also
serves as Vice President, Planning and
Business Development, for Regulated Services
and Questar Pipeline.)
R. D. Cash 54 Director, May 1977; Chairman of the Board, May
1985; Director, President and Chief Executive
Officer, Questar, May 1984; Chairman of the
Board, Questar, May 1985. Director, Zions
First National Bank and Zions Bancorporation,
Energen Corporation, Associated Electric and
Gas Insurance Services Limited, and Federal
Reserve Bank (Salt Lake branch) of San
Francisco; Trustee, Salt Lake Organizing
Committee for the Olympic Winter Games of
2002; and Trustee, Southern Utah University.
G. W. DeBernardi 53 Vice President, Technical Support, May 1996;
Vice President, Engineering and Transmission
Services, Questar Pipeline, May 1985 to May
1996. (Mr. DeBernardi also serves as Vice
President, Technical Support, for Regulated
Services and Questar Pipeline.)
Susan Glasmann 49 Vice President, Business Support, May 1996;
Vice President, Marketing, February 1994 to
May 1996; General Manager, Marketing, April
1991 to February 1994; (Ms. Glasmann also
serves as Vice President, Business Support,
for Regulated Services and Questar Pipeline.)
Robert E. Kadlec 63 Director, March 1987; Director, Questar, March
1987; Founder of Bentley Capital Corp., Ltd.
(venture capital firm); President and Chief
Executive Officer, BC Gas Inc. (Vancouver,
British Columbia) to December 1995; Director,
BC Gas Inc., Trans Mountain Pipe Line Company
Ltd., British Pacific Properties Ltd., and
International Forest Products Limited, and
Advisory Director, Andersen Consulting.
Dixie L. Leavitt 67 Director, May 1987; Director, Questar, May
1987; founder and Chairman of the Board,
Leavitt Group Agency Association (a group of
approximately 54 separate insurance agencies);
President and Chairman of entities engaged in
dairy, cattle, agriculture, and real estate
operations in Utah and southern Nevada;
Director, Zions First National Bank.
Gary G. Michael 56 Director, February 1994; Director, Questar,
February 1994; Chairman and Chief Executive
Officer, Albertson's; Director, Albertson's
and of the Federal Reserve Bank of San
Francisco.
S. E. Parks 45 Vice President, Treasurer and Chief Financial
Officer, Mountain Fuel and Questar, February
1996; Treasurer, Questar and Mountain Fuel,
May 1984.
D. N. Rose 52 President and Chief Executive Officer, October
1984; Director, May 1984; Executive Vice
President, Questar, February 1996; President
and Chief Executive Officer, Regulated
Services, December 1996; President and Chief
Executive Officer, Questar Pipeline, March
1997; Director, Questar, May 1984; Trustee,
Westminster College.
G. H. Robinson 46 Vice President and Controller, April 1991;
Vice President Marketing, March 1985 to April
1991. (Mr. Robinson also serves as Vice
President and Controller for Regulated
Services and Questar Pipeline.)
H. H. Simmons 42 Director, November 1992; President and Chief
Executive Officer, Zions First National Bank
and Zions Bancorporation, December 1990;
President, Zions Bancorporation, April 1986;
Director, Zions Bancorporation; Chairman, Utah
Symphony, Economic Development Corporation of
Utah; Trustee, Salt Lake Community College.
S. C. Yeager 49 Vice President and General Manager, May 1996;
Vice President, Customer Service, April 1991
to May 1996.
Except as otherwise indicated, the executive officers and
directors have held the principal occupations described above for more
than the past five years. There are no family relationships among the
directors and executive officers of the Company. Directors of the
Company are elected to serve three-year terms. Executive officers of
the Company serve at the pleasure of the Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table lists annual and
long-term compensation earned by Mr. D. N. Rose, the Company's President
and Chief Executive Officer, and the other four most highly compensated
officers during 1994, 1995, and 1996:
Summary Compensation Table
Annual Compensation Long-Term Compensation
Name and Restricted All
Principal Base Stock Other
Position Year Salary($)1 Bonus($)2 Awards($)3 Options(#)4 Compensation($)5
D. N. Rose 1996 226,000 70,639 70,571 23,000 35,483
President and 1995 235,167 27,852 27,808 19,000 29,064
Executive Officer 1994 209,500 36,061 36,053 19,000 21,713
R. D. Cash 6 1996 144,872 56,037 56,023 35,000 26,257
Chairman of the 1995 138,597 9,682 9,670 30,000 21,516
Board 1994 138,337 38,770 38,767 30,000 17,467
M. E. Benefield 1996 122,488 25,826 25,781 9,000 15,887
Vice President, 1995 145,483 11,567 11,533 9,000 10,384
Planning and 1994 139,500 15,862 15,850 9,000 9,888
Business
Development
G. H. Robinson 1996 110,225 23,635 23,600 9,000 17,019
Vice President 1995 140,000 12,081 11,029 9,000 9,882
and Controller 1994 133,083 15,114 15,084 9,000 9,118
S. C. Yeager 1996 138,750 23,635 23,600 9,000 17,594
Vice President 1995 140,000 14,081 11,029 9,000 12,459
and General 1994 133,083 15,114 15,084 9,000 9,118
Manager
1/Base salary amounts for 1996 exclude amounts that were paid to
Messrs. Rose, Benefield, and Robinson for service as officers of Questar
Pipeline. Mr. Cash's base salary figures exclude amounts paid directly
by or allocated to companies other than Mountain Fuel. Base salary
amounts listed for Messrs. Robinson and Yeager for 1995 include lump-sum
payments that were received in lieu of base salary increases.
2/Amounts listed under this heading are cash payments earned and
discretionary bonuses awarded under the Annual Management Incentive
Plans (AMIP) for the Company and Questar (for Mr. Cash). The amounts
listed for Mr. Cash are the amounts allocated to Mountain Fuel.
3/Amounts under this heading include the value (as of the grant
date) of any restricted shares of Questar's common stock used in 1995,
1996 and 1997, in lieu of cash, as partial payment of bonuses earned
under the Company's AMIP and the Company's allocated portion of the
value of restricted shares granted to Mr. Cash under Questar's AMIP.
All shares of restricted stock vest in two equal, annual installments
occurring on the first business day in February of the first and second
years following the grant date. Dividends are paid on the restricted
shares at the same rate dividends are paid on other shares of Questar's
common stock. As of year-end 1996, Mr. Rose had 1,485 shares of
restricted stock having a market value of $54,574; Mr. Cash had 2,327
shares worth $85,517; Mr. Benefield had 632 shares worth $23,226;
Messrs. Robinson and Yeager each had 603 shares worth $22,160.
4/Mountain Fuel's executive officers are granted stock options to
purchase shares of Questar's common stock under Questar's Long-Term
Stock Incentive Plan.
5/Amounts listed under this heading include employer matching and
nonmatching contributions, matching contributions to the Deferred Share
Plan, and directors' fees paid by the Company, and, for 1995 and 1996
only, vacation buy-back pay. The figure opposite Mr. Rose's name for
1996 includes $13,106 in contributions to the Employee Investment Plan,
$15,477 in matching contributions to the Deferred Share Plan, and $6,900
in director's fees. The 1996 figure for Mr. Cash includes the Company's
allocated portion of contributions to the Employee Investment Plan of
$5,400, $6,900 in directors' fees paid by the Company, and the Company's
allocated portion of contributions to the Deferred Share Plan of
$13,957. The 1996 figure listed for Mr. Benefield includes $13,106 in
contributions to the Employee Investment Plan and $2,781 in matching
contributions to the Deferred Share Plan. The 1996 figure for Mr.
Robinson includes $13,106 in contributions to the Employee Investment
Plan, $1,629 in matching contributions to the Deferred Share Plan, and
$2,284 for unused vacation. The 1996 figure for Mr. Yeager includes
$13,106 in contributions to the Employee Investment Plan, $1,801 in
matching contributions to the Deferred Share Plan and $2,687 for unused
vacation.
6/Mr. Cash also serves as an executive officer of Questar and
other affiliated companies. The base salary shown for Mr. Cash is the
combination of the amount directly paid by the Company and the amount
allocated to the Company.
The following table lists information concerning the stock options
to purchase shares of Questar's common stock that were granted to
Mountain Fuel's five highest paid officers during 1996 under Questar's
Long-Term Stock Incentive Plan. No stock appreciation rights were
granted during 1996.
Option Grants in Last Fiscal Year
% of Total
Options Granted
Options to Employee in Exercise or Expiration Grant Date
Name Granted #1 Last Fiscal Year Base Price ($) Date Value ($)2
D. N. Rose 23,000 5.8 33.625 2/13/2006 172,500
R. D. Cash 35,000 8.8 33.625 2/13/2006 262,500
M. E. Benefield 9,000 2.3 33.625 2/13/2006 67,500
G. H. Robinson 9,000 2.3 33.625 2/13/2006 67,500
S. C. Yeager 9,000 2.3 33.625 2/13/2006 67,500
1/These stock options vest in four annual, equal installments,
with the first installment exercisable as of August 13, 1996.
Participants can use cash or previously-owned shares as consideration
for option shares. Options expire when a participant terminates his
employment, unless termination is caused by an approved retirement,
death, or disability. Options can be exercised for three months
following a participant's approved retirement and 12 months following a
participant's death or disability.
2/When calculating the present value of options as of the date
granted (February 13, 1996), Questar used the Black-Scholes option
pricing model. Questar assumed a volatility of 20.9 percent, a
risk-free interest rate of 5.73 percent, a dividend yield of 3.51
percent and an average life of 8 years. The real value of the listed
options depends upon the actual performance of Questar stock. There can
be no assurance that the values shown in this table will be achieved.
The following table lists information concerning the options to
purchase shares of Questar's common stock that were exercised by the
officers named above during 1996 and the total options and their value
held by each at year-end 1996:
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Options/SAR Values
Value of Unexercised,
Shares Number of Unexercised in-the-Money
Acquired or Value Options/SARs at Year-End Options/SARs at Year-End
Excercised Realized(1) Excercisable Unexercisable Excercisable Unexercisable
Name (#) (#) (#)2 ($)2
D. N. Rose 14,593 132,818 33,907 31,500 202,299 167,906
R. D. Cash 14,772 217,856 85,851 48,750 746,590 362,031
M. E. Benefield 0 0 24,500 13,500 210,594 75,094
G. H. Robinson 13,050 137,750 11,450 13,500 83,156 75,094
S. C. Yeager 17,237 176,332 12,013 13,500 66,196 75,094
1/The "value" is calculated by subtracting the fair market value
of the shares purchased on the date of exercise minus the option price.
The value is equal to the amount of ordinary income recognized by each
officer (nonqualified stock options) or the difference between fair
market value and option price (incentive stock options). The current
value of the shares may be higher or lower than the aggregate value
reported in the table.
2/Stock appreciation rights (SARs) have not been granted since
February of 1989. At year-end 1996, there were no SARs outstanding.
Retirement Plan
Company employees (including executive officers) participate in
the employee benefit plans of Questar. The Company has agreed to pay
its share of the costs associated with the plans that are described
below. Questar maintains a noncontributory Retirement Plan that is
funded actuarially and does not involve specific contributions for any
one individual. The following table lists the estimated annual benefits
payable under the Retirement Plan as of December 31, 1996, and, if
necessary, the Supplemental Executive Retirement Plan (the SERP). The
benefits shown are based on earnings and years of service reaching
normal retirement age of 65 in 1996 and do not include Social Security
benefits. Benefits under the Retirement Plan are not reduced or offset
by Social Security benefits.
PENSION PLAN TABLE
Highest Consecutive Years of Service
Three-Year Average
Annual Compensation 15 20 25 30 35
$150,000 40,268 53,691 67,114 70,864 74,614
175,000 47,393 63,191 78,989 83,364 87,739
200,000 54,518 72,691 90,864 95,864 100,864
225,000 61,643 82,191 102,739 108,364 113,989
250,000 68,768 91,691 114,614 120,864 127,114
275,000 75,893 101,191 126,489 133,364 140,239
300,000 83,018 110,691 138,364 145,864 153,364
325,000 90,143 120,191 150,239 158,364 166,489
Questar's Retirement Plan has a "step rate/excess" benefit
formula. The formula provides for a basic benefit that is calculated by
multiplying the employee's final average earnings by a specified base
benefit factor and by subsequently multiplying such sum by the
employee's years of service (up to a maximum of 25). This basic benefit
is increased for each year of service in excess of 25 and is reduced for
retirement prior to age 62. Employees also receive a supplemental
benefit calculated by multiplying the difference between the employee's
final average earnings and his "covered compensation" by a supplemental
factor that varies by age. (The term covered compensation refers to the
35-year average Social Security wage base tied to year of an employee's
birth.) Employees who retire prior to age 62 also receive a temporary
supplement that is tied to years of service until they are eligible to
receive Social Security benefits at age 62.
Federal tax laws impose limits on the amount of annual
compensation that can be used when calculating benefits under qualified
plans and on the amount of benefits that can be paid from such plans.
The SERP, a nonqualified plan, was adopted in 1987 to compensate
officers who are affected by these limits; it provides for retirement
benefits equal to the difference between the benefits payable under the
qualified Retirement Plan and the benefits that would be payable absent
such limits. All of the officers listed in the table earn annual
compensation in excess of the current cap of $150,000 and all of them
have vested benefits under the SERP.
The "final average earnings" (average annual earnings for the last
three years) for purposes of calculating retirement benefits for the
executive officers named above in the table as of December 31, 1996, is
as follows: $306,079 for Mr. Rose; $179,490 for Mr. Benefield; $167,381
for Mr. Robinson; and $168,048 for Mr. Yeager. (No figure is given for
Mr. Cash because his final average earnings for purposes of the
Retirement Plan and SERP would include compensation paid by the
Company's affiliates.) (Mr. Benefield was eligible to participate in
the early retirement program offered by the Company in the spring of
1995. As an eligible participant, he is eligible to receive the higher
of his frozen benefit as of April 30, 1995, under the Retirement Plan or
his benefit earned under such plan.) The officer's base salary, cash
bonus payments, and value of restricted stock (paid in lieu of cash)
reported in the Summary Compensation Table would be included in the
calculation of the officer's final average earnings. The amounts
reported in the Summary Compensation Table are somewhat different than
the final average earnings because the latter figures include cash
payments when made, not when earned, and the value of restricted stock
when granted, not distributed. Dividends on the restricted shares are
also included in the officer's final average earnings, but are not
reported in the table. The years of credited service for the
individuals listed in the compensation table are: 21 years for Mr.
Cash; 28 years for Mr. Rose; 19 years for Mr. Benefield; 23 years for
Mr. Robinson; and 21 years for Mr. Yeager.
The Company also participates in Questar's Executive Incentive
Retirement Plan (the EIRP). Under the terms of this nonqualified plan,
a participant will receive monthly payments upon retirement until death
equal to 10 percent of the highest average monthly compensation
(excluding incentive compensation) paid to the officer during any period
of 36 consecutive months of employment. The plan also provides for a
family benefit in the event of the death of an officer. Although not
required to do so, Questar and its affiliates have purchased life
insurance on the life of each participant, with Questar named as owner
and beneficiary. The covered officers have no rights under or to such
insurance policies. All of the Company's officers listed in the
compensation table have been nominated to participate in the plan, have
satisfied the 15 years of service requirement and have a vested right to
receive benefits under the EIRP. The annual benefits payable to the
named officers under this plan as of December 31, 1996, are as follows:
Mr. Rose, $23,450; Mr. Benefield, $14,555 and Messrs. Robinson and
Yeager, $13,528. (No figure is given for Mr. Cash because his
compensation for purposes of calculating benefits under the EIRP would
include compensation paid by the Company's affiliates.)
Any benefits payable under the SERP are offset against payments
from the EIRP. Consequently, an officer would not receive any benefits
for the SERP unless his benefit under the EIRP was less than the
difference between what he could be paid under Questar's Retirement Plan
at the date of retirement and what he had earned under such plan absent
federal tax limitations. Given this relationship between the two
nonqualified plans, the amounts listed in the table above do not include
benefits payable under the EIRP.
Executive Severance Compensation Plan
Questar has an Executive Severance Compensation Plan that covers
the Company's executive officers. Under this plan, participants,
following a change in control of Questar, are eligible to receive
compensation equal to up to two years' salary and miscellaneous benefits
upon a voluntary or involuntary termination of their employment,
provided that they have continued working or agree to continue working
for six months following a potential change in control of Questar. This
plan was originally adopted in 1983 by Mountain Fuel and was assumed by
Questar as of October 2, 1984. The plan also contains a provision that
limits compensation and benefits payable under the plan to amounts that
can be deducted under Section 280G of the Internal Revenue Code of 1986.
The dollar amounts payable to the Company's executive officers
(based on current salaries paid by the Company) in the event of
termination of employment following a change in control of Questar are
as follows: $551,400 to Mr. Rose; $318,400 to Mr. Benefield; $293,000
to Mr. Yeager, and $292,000 to Mr. Robinson. (The amount payable to Mr.
Cash is not given since such amount is based on each officer's total
salary.) The Company's executive officers would also receive certain
supplemental retirement benefits, welfare benefits, and cash bonuses.
Under the plan, a change in control is defined to include any
change in control of Questar required to be reported under Item 6(e) of
Schedule 14A of the Securities Exchange Act of 1934, as amended. A
change in control is also deemed to occur once any person becomes the
beneficial owner, directly or indirectly, of securities representing 15
percent or more of Questar's outstanding shares of common stock.
Directors' Fees
All directors receive an annual fee of $4,800 payable in 12
monthly installments and fees of $600 for each meeting of the Board of
Directors that they attend (increased from $500 as of September 1,
1996.)
The Company has a Deferred Compensation Plan for Directors under
which directors can elect to defer all or any portion of the fees
received for service as directors until their retirement from such
service and can choose to have the deferred amounts earn interest as if
invested in long-term certificates of deposit or be accounted for with
"phantom shares" of Questar's common stock. Upon retirement, the
phantom shares of stock are "converted" to their fair market cash
equivalent. During 1996, several directors of the Company chose to
defer receipt of all or a portion of the compensation earned by them for
their service.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of December 31,
1996, with respect to each person known or believed by Questar to be the
beneficial owner of 5 percent or more of its common stock:
Shares and
Name and Nature of
Address of Beneficial Percent
Beneficial Owner Ownership of Class
First Security Bank, N.A. 4,024,042 9.8
79 South Main Street Trustee for
Salt Lake City, Utah 84111 Company Employee
Benefit Plans
and Bank1
FMR Corporation 2,693,117 6.6
82 Devonshire Street Investment Advisor
Boston, Massachusetts 02109 Bank2
1/Of this total, First Security beneficially owns 3,925,935 shares
in its role as trustee of employee benefit plans sponsored by Questar.
Participating employees control the voting of such shares.
2/Of this total, 1,969,000 shares are held by Fidelity Management
and Research Company, an investment advisor; 720,817 shares are held by
Fidelity Management Trust Company, a bank; and 3,300 shares are held by
Fidelity International Limited. In its Schedule 13G filed on February
14, 1997, FMR indicated that it or its affiliates had sole power to
dispose of all these shares and sole power to vote 535,317 shares.
The following table sets forth information, as of March 1, 1997,
concerning the shares of Questar's common stock beneficially owned by
each of the Company's named executive officers and directors and by the
Company's executive officers and directors as a group:
Deferred
Compensation Percent of
Directors Beneficial Plans1 Total Outstanding Shares2
Robert H. Bischoff 3,729 2,820 6,549 *
R. D. Cash3,4,5,6,7 252,808 19,498 272,306 .61
W. Whitley Hawkins8 10,470 1,532 12,002 *
Robert E. Kadlec8,9 17,850 0 17,850 *
Dixie L. Leavitt7,8 22,123 10,386 32,509 *
Gary G. Michael8 5,500 2,529 8,029 *
D. N. Rose3,4,5 74,035 2,165 76,200 .18
Harris. H. Simmons8 7,600 3,441 11,041 *
Named Executive Officers
M. E. Benefield3,4,5 43,219 555 43,774 *
G. H. Robinson3,4,5 29,953 209 30,162 *
S. C. Yeager3,4,5 31,639 216 31,855 *
All directors and 637,452 43,829 681,281 1.7
executive officers
(14 individuals)10
1/Phantom stock units are held through the various deferred
compensation plans available to the Company's directors and officers.
Although these plans only permit such units to be paid in the form of
cash, investments in such units represent the same investment on the
performance of Questar's common stock as do investments in actual shares
of stock.
2/Unless otherwise listed, the percentage of shares owned is less
than .1 percent. (The percentages do not include phantom stock units.)
The percentages of beneficial ownership have been calculated in
accordance with Rule 13d-3(d)(1) under the Securities Exchange Act of
1934, as amended.
3/The Company's executive officers own shares through their
participation in Questar's Employee Investment Plan. The number of
shares owned through this plan as of December 31, 1996, is as follows
for the named officers: Mr. Benefield, 5,394; Mr. Cash, 31,254; Mr.
Robinson, 8,670; Mr. Rose, 16,814; and Mr. Yeager, 9,503.
4/The Company's executive officers have been granted nonqualified
stock options under Questar's Stock Option Plan and Long-Term Stock
Incentive Plan. The number of shares listed opposite the named officers
attributable to vested options as of March 1, 1997, is as follows: Mr.
Benefield, 24,500; Mr. Cash, 82,851; Mr. Robinson, 11,450; Mr. Rose,
33,407; and Mr. Yeager, 12,013.
5/The Company's executive officers acquired restricted shares of
Questar's common stock in partial payment of bonuses earned in the 1995
and 1996 bonus plans. The number of restricted shares beneficially
owned by each of the named officers as of March 1, 1997, is as follows:
Mr. Benefield, 845; Mr. Cash, 3,902; Mr. Robinson, 781; Mr. Rose, 2,258;
and Mr. Yeager, 781.
6/Mr. Cash is the Chairman of the Board of Trustees of the Questar
Corporation Educational Foundation and the Questar Corporation Arts
Foundation, two nonprofit corporations that own an aggregate of 47,529
shares of Questar's common stock. As the Chairman, Mr. Cash has voting
control for such shares, but disclaims any beneficial ownership of them.
7/Of the total shares reported for Mr. Cash, 3,270 shares are
owned jointly with his wife and 5,071 are controlled by him as custodian
for his son. Messrs. Leavitt and Yeager own their shares of record with
their respective wives.
8/Messrs. Hawkins, Kadlec, Leavitt, Michael, and Simmons, as
nonemployee voting directors of Questar, have been granted nonqualified
stock options to purchase shares of Questar's common stock as follows:
Mr. Hawkins, 10,250 shares; Mr. Kadlec, 11,450 shares; Mr. Leavitt,
7,000 shares, Mr. Michael, 4,200 shares, and Mr. Simmons, 7,000 shares.
These shares are included in the numbers listed opposite their
respective names.
9/Mr. Kadlec's wife owns 200 shares of common stock. Mr. Kadlec
has voting control and investment control over such shares. Such shares
are included in the shares listed opposite his name.
10/The total number of shares reported for this group includes
vested options to purchase 277,621 shares of Questar's common stock.
When options are excluded, the group of directors and executive officers
own less than 1 percent of Questar's outstanding shares.
Committee Interlocks and Insider Participation
The Company itself has no formal "Compensation Committee."
Questar's Board of Directors has a Management Performance Committee that
makes recommendations to the Company's Board of Directors concerning
base salary and bonus payments. (Questar's Board approves all stock
options.) Messrs. Cash and Rose, as directors and officers of the
Company, are formally excused from all discussions by the Company's
Board involving their compensation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no relationships or transactions involving the Company's
directors and executive officers.
As described above, there are significant business relationships
between the Company and its affiliates, particularly Wexpro and Questar
Pipeline. Questar Regulated Services, the Company's parent, provides
certain administrative services, e.g., accounting, marketing,
engineering, personnel, legal, public relations, and tax to the Company
and Questar Pipeline. Questar, the Company's ultimate parent, also
performs some services, financial, audit, benefit plan administration,
government relations, for the Company. The costs of performing such
services are allocated to the Company. Questar InfoComm, another
affiliate, provides data processing and communication services for the
Company; the charges for such services are based on cost of service plus
a specified return on assets.
See Note 8 to the financial statements for additional information
concerning transactions between the Company and its affiliates.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a)(1)(2) Financial Statements and Financial Statement Schedules.
The financial statements identified in the List of Financial Statements
are filed as part of this report.
(3) Exhibits. The following is a list of exhibits required to be
filed as a part of this report in Item 14(c).
Exhibit No. Exhibit
3.1.* Restated Consolidated Articles of Incorporation dated August
15, 1980. (Exhibit No. 4(a) to Registration Statement No.
2-70087, filed December 1, 1980.)
3.2.* Certificate of Amendment to Restated Consolidated Articles of
Incorporation dated May 13, 1982. (Exhibit No. 3(b) to Form
10-K Annual Report for 1982.)
3.3.* Certificate of Amendment to Restated Consolidated Articles of
Incorporation dated May 10, 1983. (Included in Exhibit No.
4.1. to Registration Statement No. 2-84713, filed June 23,
1983.)
3.4.* Certificate of Amendment to Restated Consolidated Articles of
Incorporation dated August 16, 1983. (Exhibit No. 3(a) to
Form 8 Report amending the Company's Form 10-Q Report for
Quarter Ended September 30, 1983.)
3.5.* Certificate of Amendment to Restated Consolidated Articles of
Incorporation dated October 26, 1984. (Exhibit No. 3.5. to
Form 10-K Annual Report for 1984.)
3.6.* Certificate of Amendment to Restated Consolidated Articles of
Incorporation dated May 13, 1985. (Exhibit No. 3.1. to Form
10-Q Report for Quarter Ended June 30, 1985.)
3.7.* Articles of Amendment to Restated Consolidated Articles of
Incorporation dated February 10, 1988. (Exhibit No. 3.7. to
Form 10-K Annual Report for 1987.)
3.8.* Bylaws (as amended effective August 11, 1992). (Exhibit No.
3.8. to Form 10-K Annual Report for 1992.)
4.* Indenture dated as of May 1, 1992, between the Company and
Citibank, as trustee, for the Company's Debt Securities.
(Exhibit No. 4. to Form 10-Q Report for Quarter Ended June
30, 1992.)
10.1.* Stipulations and Agreement, dated October 14, 1981, executed
by Mountain Fuel Supply Company; Wexpro Company; the Utah
Department of Business Regulations, Division of Public
Utilities; the Utah Committee of Consumer Services; and the
staff of the Public Service Commission of Wyoming. (Exhibit
No. 10(a) to Form 10-K Annual Report for 1981.)
10.7.* Data Processing Services Agreement effective July 1, 1985,
between Questar Service Corporation and Mountain Fuel Supply
Company. (Exhibit 10.7. to Form 10-K Annual Report for
1988.)
10.8.*1 Mountain Fuel Supply Company Annual Management Incentive Plan
as amended and restated effective February 13, 1996.
(Exhibit No. 10.8. to Form 10-K Annual Report for 1995.)
10.9.*1 Mountain Fuel Supply Company Window Period Supplemental
Executive Retirement Plan effective January 24, 1991.
(Exhibit No. 10.9. to Form 10-K Annual Report for 1990.)
10.10.*1 Mountain Fuel Supply Company Deferred Compensation Plan for
Directors as amended and restated effective February 13,
1996. (Exhibit No. 10.10. to Form 10-K Annual Report for
1995.)
10.11.* Gas Gathering Agreement between Mountain Fuel Supply Company
and Questar Pipeline Company effective September 1, 1993.
(This agreement has been transferred to Questar Gas
Management Company.) (Exhibit No. 10.11. to Form 10-K Annual
Report for 1994.)
24. Power of Attorney.
27. Financial Data Schedule.
_______________________
*Exhibits so marked have been filed with the Securities and
Exchange Commission as part of the referenced filing and are
incorporated herein by reference.
1Exhibits so marked are management contracts or compensation plans
or arrangements.
(b) Mountain Fuel did not file any Current Reports on Form 8-K
during the last quarter of 1996.
ANNUAL REPORT ON FORM 10-K
ITEM 8. ITEM 14 (a) (1) and (2), (c) and (d)
LIST OF FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YEAR ENDED DECEMBER 31, 1996
MOUNTAIN FUEL SUPPLY COMPANY
SALT LAKE CITY, UTAH
FORM 10-K--ITEM 14 (a) (1) and (2)
MOUNTAIN FUEL SUPPLY COMPANY
LIST OF FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
The following financial statements of Mountain Fuel Supply
Company are included in Item 8:
Statements of income -- Years ended December 31, 1996, 1995 and
1994
Balance sheets -- December 31, 1996 and 1995
Statements of common shareholder's equity -- Years ended December
31, 1996, 1995 and 1994
Statements of cash flows -- Years ended December 31, 1996, 1995
and 1994
Notes to financial statements
Financial statement schedules, for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission, are not required under the related instructions or
are inapplicable, and therefore have been omitted.
Report of Independent Auditors
Board of Directors
Mountain Fuel Supply Company
We have audited the balance sheets of Mountain Fuel Supply
Company as of December 31, 1996 and 1995, and the related
statements of income, common shareholder's equity, and cash
flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management,
as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Mountain Fuel Supply Company at December 31, 1996
and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting
principles.
As discussed in Note 7 to the financial statements, Mountain
Fuel Supply Company changed its method of accounting for
postemployment benefits in 1994.
ERNST & YOUNG LLP
Salt, Lake City, Utah
February 7, 1997
except for Note 6 as to which the date is February 18, 1997
MOUNTAIN FUEL SUPPLY COMPANY
STATEMENTS OF INCOME
Year Ended December 31,
1996 1995 1994
(In Thousands)
REVENUES $371,928 $362,769 $378,260
OPERATING EXPENSES
Natural gas purchases
From affiliates - Note 8 128,919 129,781 132,889
From unaffiliated parties 53,481 60,825 77,618
Total natural gas purchases 182,400 190,606 210,507
Operating and maintenance - Note 8 97,110 93,384 94,094
Depreciation and amortization 28,309 25,469 24,749
Other taxes 8,071 9,588 9,589
TOTAL OPERATING EXPENSES 315,890 319,047 338,939
OPERATING INCOME 56,038 43,722 39,321
INTEREST AND OTHER INCOME 3,033 4,232 7,820
DEBT EXPENSE (16,637) (16,580) (15,886)
INCOME BEFORE INCOME TAXES 42,434 31,374 31,255
INCOME TAXES - Note 5 13,446 7,706 7,903
NET INCOME $28,988 $23,668 $23,352
See notes to financial statements.
MOUNTAIN FUEL SUPPLY COMPANY
BALANCE SHEETS
ASSETS
December 31,
1996 1995
(In Thousands)
CURRENT ASSETS
Cash and short-term investments $1,875 $1,466
Accounts receivable 38,141 36,864
Unbilled gas accounts
receivable - Note 6 23,528 25,149
Accounts receivable from affiliates 393 1,658
Federal income taxes receivable 1,109 3,971
Inventories, at lower of
average cost or market
Gas stored underground 11,647 16,310
Materials and supplies 3,648 4,605
Total inventories 15,295 20,915
Purchased-gas adjustments 24,210 0
Prepaid expenses and deposits 4,511 3,843
TOTAL CURRENT ASSETS 109,062 93,866
PROPERTY, PLANT AND EQUIPMENT
Production - Note 8 97,870 97,870
Distribution 608,571 587,128
General 99,372 79,871
Construction in progress 19,308 19,597
825,121 784,466
Less allowances for depreciation
and amortization 325,821 302,619
NET PROPERTY, PLANT AND EQUIPMENT 499,300 481,847
OTHER ASSETS
Income taxes recoverable
from customers - Note 5 7,293 8,214
Unamortized costs of reacquired debt 9,596 10,090
Other 5,818 6,244
TOTAL OTHER ASSETS 22,707 24,548
$631,069 $600,261
LIABILITIES AND SHAREHOLDER'S EQUITY
December 31,
1996 1995
(In Thousands)
CURRENT LIABILITIES
Notes payable to Questar - Note 2 $76,200 $56,100
Accounts payable and accrued expenses
Accounts payable 37,075 21,794
Accounts payable to affiliates 17,779 16,283
Customer refund 0 11,886
Other taxes 4,161 4,762
Interest 3,676 3,676
Other 3,867 3,399
Total accounts payable and
accrued expenses 66,558 61,800
Purchased-gas adjustments 0 9,182
TOTAL CURRENT LIABILITIES 142,758 127,082
LONG-TERM DEBT - Notes 2 and 4 175,000 175,000
OTHER LIABILITIES
Unbilled gas revenues - Note 6 10,360 15,541
Other 570 488
TOTAL OTHER LIABILITIES 10,930 16,029
DEFERRED INVESTMENT TAX CREDITS 6,774 7,157
DEFERRED INCOME TAXES - Note 5 74,537 61,391
COMMITMENTS AND CONTINGENCIES - Note 6
REDEEMABLE CUMULATIVE PREFERRED STOCK
- Notes 3 and 4 4,828 4,957
COMMON SHAREHOLDER'S EQUITY
Common stock - par value $2.50
per share; authorized
50,000,000 shares; issued and
outstanding 9,189,626 shares 22,974 22,974
Additional paid-in capital 41,875 41,875
Retained earnings 151,393 143,796
TOTAL COMMON SHAREHOLDER'S EQUITY 216,242 208,645
$631,069 $600,261
See notes to financial statements.
MOUNTAIN FUEL SUPPLY COMPANY
STATEMENTS OF COMMON SHAREHOLDER'S EQUITY
Additional
Common Paid-in Retained
Stock Capital Earnings
(In Thousands)
Balances at January 1, 1994 $22,974 $21,875 $137,351
Capital contribution 20,000
1994 net income 23,352
Payment of dividends
Preferred stock (591)
Common stock (19,500)
Balances at December 31, 1994 22,974 41,875 140,612
1995 net income 23,668
Payment of dividends
Preferred stock (483)
Common stock (20,000)
Redemption cost (1)
Balances at December 31, 1995 22,974 41,875 143,796
1996 net income 28,988
Payment of dividends
Preferred stock (391)
Common stock (21,000)
Balances at December 31, 1996 $22,974 $41,875 $151,393
See notes to financial statements.
MOUNTAIN FUEL SUPPLY COMPANY
STATEMENTS OF CASH FLOWS
Year Ended December 31,
1996 1995 1994
(In Thousand)
OPERATING ACTIVITIES
Net income $28,988 $23,668 $23,352
Depreciation and amortization 31,214 28,295 27,337
Deferred income taxes 13,146 6,366 5,102
Deferred investment tax credits (383) (384) (400)
72,965 57,945 55,391
Changes in operating assets
and liabilities
Accounts receivable 1,609 10,549 7,448
Inventories 5,620 4,026 (969)
Prepaid expenses and deposits (668) (722) 460
Accounts payable and accrued expenses 4,758 14,379 (16,141)
Federal income taxes 2,862 (5,620) 463
Purchased-gas adjustments (33,392) (7,889) (8,656)
Other (3,258) (4,122) (4,853)
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 50,496 68,546 33,143
INVESTING ACTIVITIES
Capital expenditures (51,657) (51,413) (53,816)
Proceeds from disposition and transfer
of property, plant and equipment 2,990 1,054 9,482
NET CASH USED IN INVESTING
ACTIVITIES (48,667) (50,359) (44,334)
FINANCING ACTIVITIES
Capital contribution 20,000
Redemption of preferred stock (129) (1,367) (1,201)
Issuance of long-term debt 0 0 17,000
Change in notes payable to Questar 20,100 2,600 (4,300)
Payment of dividends (21,391) (20,483) (20,091)
NET CASH PROVIDED FROM (USED IN)
FINANCING ACTIVITIES (1,420) (19,250) 11,408
Change in cash and
short-term investments 409 (1,063) 217
Beginning cash and short-term investments 1,466 2,529 2,312
ENDING CASH AND SHORT-TERM
INVESTMENTS $1,875 $1,466 $2,529
See notes to financial statements.
MOUNTAIN FUEL SUPPLY COMPANY
NOTES TO FINANCIAL STATEMENTS
Note 1 - Summary of Accounting Policies
Mountain Fuel Supply Company (the Company or Mountain Fuel) is a
wholly-owned subsidiary of Questar Regulated Services Company
(Regulated Services). Regulated Services is a holding company
and wholly-owned subsidiary of Questar Corporation (Questar).
Regulated Services was organized in 1996 and provides
administrative functions for its two subsidiaries, Mountain Fuel
and Questar Pipeline Company ( Questar Pipeline). Significant
accounting policies are presented below.
Business and Regulation: The Company's business consists of
natural gas distribution operations for residential, commercial
and industrial customers. Mountain Fuel is regulated by the
Public Service Commission of Utah (PSCU) and the Public Service
Commission of Wyoming (PSCW). While Mountain Fuel also serves a
small area of southeastern Idaho, the Idaho Public Service
Commission has deferred to the PSCU for rate oversight of this
area. These regulatory agencies establish rates for the sale and
transportation of natural gas. The regulatory agencies also
regulate, among other things, the extension and enlargement or
abandonment of jurisdictional natural gas facilities. Regulation
is intended to permit the recovery, through rates, of the cost of
service including, a rate of return on investment.
The financial statements are presented in accordance with
regulatory requirements. Methods of allocating costs to time
periods, in order to match revenues and expenses, may differ from
those of nonregulated businesses because of cost-allocation
methods used in establishing rates.
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts of assets and liabilities and disclosure of contingent
liabilities reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Revenue Recognition: Revenues are recognized in the period that
services are provided or products are delivered. Mountain Fuel
accrues gas-distribution revenues for gas delivered to
residential and commercial customers but not billed at the end of
the accounting period. Mountain Fuel periodically collects
revenues subject to possible refund pending final orders from
regulatory agencies. In these situations, the Company establishes
reserves for revenues collected subject to refund.
Purchased-Gas Adjustments: Mountain Fuel accounts for
purchased-gas costs in accordance with procedures authorized by
the PSCU and PSCW whereby purchased-gas costs that are different
from those provided for in the present rates are accumulated and
recovered or credited through future rate changes.
Property, Plant and Equipment: Property, plant and equipment are
stated at cost. The provision for depreciation and amortization
is based upon rates which will systematically charge the costs of
assets over their estimated useful lives. The costs of natural
gas distribution property, plant and equipment, excluding gas
wells, are amortized using the straight-line method ranging from
3% to 33% per year and averaging 4.1% in 1996. The costs of gas
wells were amortized using the units-of-production method at $.16
per Mcf of natural gas production in 1996.
Income Taxes: Mountain Fuel records cumulative increases in
deferred taxes as income taxes recoverable from customers. The
Company has adopted procedures with its regulatory commissions to
include under-provided deferred taxes in customer rates on a
systematic basis. Mountain Fuel uses the deferral method to
account for investment-tax credits as required by regulatory
commissions. The Company's operations are consolidated with those
of Questar and its subsidiaries for income tax purposes. The
income tax arrangement between Mountain Fuel and Questar provides
that amounts paid to or received from Questar are substantially
the same as would be paid or received by the Company if it filed
a separate return. Mountain Fuel also receives payment for tax
benefits used in the consolidated tax return even if such
benefits would not have been usable had the Company filed a
separate return.
Reacquisition of Debt: Gains and losses on the reacquisition of
debt are deferred and amortized as debt expense over the life of
the replacement debt in order to match regulatory treatment.
Allowance for Funds Used During Construction: The Company
capitalizes the cost of capital during the construction period of
plant and equipment using a method required by regulatory
authorities. This amounted to $277,000 in 1996, $391,000 in 1995
and $397,000 in 1994.
Cash and Short-Term Investments: Short-term investments consist
principally of Euro-time deposits and repurchase agreements with
maturities of three months or less.
Note 2 - Debt
Questar makes loans to the Company under a short-term borrowing
arrangement. Outstanding short-term notes payable to Questar
totaled $76,200,000 at December 31, 1996 with an interest rate of
5.63% and $56,100,000 at December 31, 1995 with an interest rate of
6.01%. In 1996, the Company terminated its short-term
line-of-credit arrangement with a bank under which it could have
borrowed up to $500,000. There were no amounts borrowed under this
arrangement at either December 31, 1996 or 1995.
Mountain Fuel's long-term debt consists of medium-term notes with
interest rates ranging from 7.19% to 8.43%, due 2007 to 2024.
There are no maturities of long-term debt for the five years
following December 31, 1996 and no long-term debt provisions
restricting the payment of dividends. Cash paid for interest was
$16,346,000 in 1996, $16,458,000 in 1995 and $15,290,000 in 1994.
Note 3 - Redeemable Cumulative Preferred Stock
Mountain Fuel has authorized 4,000,000 shares of nonvoting
redeemable cumulative preferred stock with no par value, but a
stated and redemption value of $100 per share.
8% Series $8.625 Series
(In Thousands)
Balance at January 1, 1994 $5,125 $2,400
1994 redemption of stock (1) (1,200)
1995 redemption of stock (167) (1,200)
1996 redemption of stock (129)
Balance at December 31, 1996 $4,828 -
Redemption requirements for the five years following December 31,
1996, are as follows:
(In Thousands)
1997 $148
1998 180
1999 180
2000 180
2001 180
Note 4 - Financial Instruments and Credit Management Activities
The carrying amounts and estimated fair values of the Company's
financial instruments were as follows:
December 31, 1996 December 31, 1995
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In Thousands)
Financial assets
Cash and short-term investments $1,875 $1,875 $1,466 $1,466
Financial liabilities
Short-term loans 76,200 76,200 56,100 56,100
Long-term debt 175,000 190,793 175,000 184,577
Redeemable cumulative preferred stock 4,828 4,876 4,957 5,006
The Company used the following methods and assumptions in
estimating fair values: (1) Cash and short-term investments, and
short-term loans - the carrying amount approximates fair value;
(2) Long-term debt - the fair value of the medium-term notes is
based on the discounted present value of cash flows using the
Company's current borrowing rates; (3) Redeemable cumulative
preferred stock - the fair value is based on the call price at
year end. Fair value is calculated at a point in time and does
not represent what the Company would pay to retire the debt
securities.
Credit Risk: The Company's primary market area is the Rocky
Mountain region of the United States. The Company's exposure to
credit risk may be impacted by the concentration of customers in
this region due to changes in economic or other conditions. The
Company's customers include individuals and numerous industries
that may be affected differently by changing conditions.
Management believes that its credit-review procedures, loss
reserves and customer deposits have adequately provided for usual
and customary credit-related losses. The carrying amount of
trade receivables approximates fair value.
Note 5 - Income Taxes
The components of income taxes were as follows:
Year Ended December 31,
1996 1995 1994
(In Thousands)
Federal
Current ($678) ($294) $2,717
Deferred 12,906 7,099 4,527
State
Current 254 302 484
Deferred 1,347 983 575
Deferred investment tax credits (383) (384) (400)
$13,446 $7,706 $7,903
The difference between income tax expense and the tax computed by
applying the statutory federal income tax rate to income before
income taxes is explained as follows:
Year Ended December 31,
1996 1995 1994
(In Thousands)
Income before income taxes $42,434 $31,374 $31,255
Federal income taxes at statutory rate $14,852 $10,981 $10,939
State income taxes, net of federal
income tax benefit 1,512 1,179 890
Tight-sands gas production credits (3,246) (4,376) (4,670)
Investment-tax credits (383) (384) (400)
Reduction in deferred income tax rate (571)
Deferred taxes related to regulated
assets for which deferred taxes
were not provided for in prior years 921 921 921
Other (210) (44) 223
Income tax expense $13,446 $7,706 $7,903
Effective income tax rate 31.7% 24.6% 25.3%
Significant components of the Company's deferred tax liabilities
and assets were as follows:
December 31,
1996 1995
(In Thousands)
Deferred tax liabilities
Property, plant and equipment $73,979 $73,200
Purchased-gas adjustments 9,200 0
Unamortized debt reacquisition costs 3,646 3,859
Income taxes recoverable from customers 2,892 3,368
Pension costs 1,096 1,291
Other 1,046 893
Total deferred tax liabilities 91,859 82,611
Deferred tax assets
Purchased-gas adjustments 0 3,489
Alternative minimum tax and production
credit carryovers 7,546 6,562
Unbilled revenues 3,937 5,905
Deferred investment-tax credits 2,574 2,720
Other 3,265 2,544
Total deferred tax assets 17,322 21,220
Net deferred tax liabilities $74,537 $61,391
Mountain Fuel applied an overpayment of 1995 income taxes to more
than offset liability for 1996 taxes. Cash paid for income taxes
was $7,333,000 in 1995 and $6,404,000 in 1994.
Note 6 - Rate Matters, Litigation and Commitments
On January 8, 1997, the Utah Division of Public Utilities
(Division) filed a motion with the PSCU seeking an investigation
into the reasonableness of Mountain Fuel's rates and requesting
an interim rate decrease of $3.5 million. On January 29, 1997,
the Division withdrew its petition and the PSCU accepted that
action after receiving an agreed upon Mountain Fuel filing to
reduce rates and charges by $2.8 million. On February 4, 1997,
Mountain Fuel filed an application with the PSCU to reduce block
rates, eliminate the new-premises fee for multi-family dwellings,
and reduce the capacity-release revenue retained by Mountain Fuel
from 20% to 10%. The annual revenue reduction resulting from
these changes is expected to be about $2.85 million. The PSCU
approved the filing effective February 18, 1997.
In 1993, Mountain Fuel began accruing revenues for gas delivered
to residential and commercial customers but not billed at the end
of the year. The impact of these accruals on the income
statement has been deferred and is being recognized at the rate
of $2,011,000 per year over a five-year period beginning in 1994
in accordance with a rate order received from the PSCU. This
same rate order also reduces customer rates by $2,011,000 per
year over the same five-year period. In addition, Mountain Fuel
recorded other income of $5,589,000 for a one-time reduction of
gas costs associated with these unbilled revenues. This
transaction resulted in additional net income of about $3.5
million in 1994.
Mountain Fuel files semianually in Utah for gas cost pass-through
treatment. A January 1996 application was approved on an interim
basis effective January 1, 1996. In connection with the
application, the Division has raised issues about the
reasonableness of gas-gathering costs. The Company believes that
its gathering costs are reasonable. The Company's January 1997
application for pass-through of gas costs was also approved on an
interim basis. However, the Committee of Consumer Services
raised questions about the amount of no-notice service and
whether or not some of those costs should be allocated to
Mountain Fuel's transportation customers. The Company feels that
its level of no-notice service is reasonable.
Each year, Mountain Fuel purchases significant quantities of
natural gas under numerous gas-purchase contracts with varying
terms and conditions. Purchases under these agreements totalled
$67,249,000 in 1996, $44,892,000 in 1995 and $73,682,000 in 1994.
Historically, gas-purchase contracts extended over many years.
However, now it is common practice to contract for anywhere from
one day up to one year. As of April 1, 1997, all but two
long-term contracts will have terminated. One of the remaining
contracts has a ten-year duration to supply gas to seven small,
isolated southern Utah towns. It obligates Mountain Fuel to
purchase up to 5,000 dth of gas per day at prices related to a
market index. The other contract requires Mountain Fuel to
purchase 50 dth per day at prices currently below market.
The Company has received notice that it may be partially liable
in several environmental clean-up actions on sites that involve
numerous other parties. Management believes that the Company's
responsibility for remediation will be minor and that any
potential liability will not be significant to its results of
operations, financial position or liquidity.
Mountain Fuel, as a result of acquiring Questar Pipeline's gas-
purchase contracts, is responsible for any judgment rendered
against Questar Pipeline in a lawsuit that was tried before a
jury in 1994. The jury awarded an independent producer
compensatory damages of approximately $6.1 million and punitive
damages of $200,000 on his claims. The producer's counterclaims
originally exceeded $57 million, but were reduced to less than
$10 million, when the presiding judge dismissed with prejudice
some of the claims prior to the jury trial. Under existing PSCU
rulings, any payments resulting from this judgment will be
included in Mountain Fuel's gas balancing account and recovered in
its rates for natural gas service. This same producer has
recently filed additional claims against the Company and its
affiliates in the same court and with the same presiding judge.
There are various legal proceedings against the Company. While
it is not currently possible to predict or determine the outcome
of these proceedings, it is the opinion of management that the
outcome will not have a material adverse effect on the Company's
results of operations, financial position or liquidity.
Note 7 - Employee Benefits
Pension Plan: Substantially all Company employees are covered by
Questar's defined benefit pension plan. Benefits are generally
based on years of service and the employee's 36-month period of
highest earnings during the 10 years preceding retirement. It is
Questar's policy to make contributions to the plan at least
sufficient to meet the minimum funding requirements of applicable
laws and regulations. Plan assets consist principally of equity
securities and corporate and U.S. government debt obligations.
Pension cost was $2,820,000 in 1996, $3,352,000 in 1995, and
$2,962,000 in 1994.
Mountain Fuel's portion of plan assets and benefit obligations is
not determinable because the plan assets are not segregated or
restricted to meet the Company's pension obligations. If the
Company were to withdraw from the pension plan, the pension
obligation for the Company's employees would be retained by the
pension plan. At December 31, 1996, Questar's fair value of plan
assets exceeded the accumulated benefit obligation.
Postretirement Benefits Other Than Pensions: The Company pays a
portion of health-care costs and life insurance costs for
employees who retired prior to January 1, 1993. The plan changed
for employees hired after January 1, 1993, to link the
health-care benefits to years of service and to limit Questar's
monthly health care contribution per individual to 170% of the
1992 contribution. Employees hired after December 31, 1996, do
not qualify for benefits under this plan. The Company's policy
is to fund amounts allowable for tax deduction under the Internal
Revenue Code. Plan assets consist of equity securities,
corporate and U.S. government debt obligations, and insurance
company general accounts. The Company is amortizing the
transition obligation over a 20-year period, which began in
1992. Costs of postretirement benefits other than pensions were
$2,424,000 in 1996, $3,183,000 in 1995 and $3,584,000 in 1994.
Both the PSCU and the PSCW allowed Mountain Fuel to recover
future costs if the amounts are funded in an external trust.
The Company's portion of plan assets and benefit obligations
related to postretirement medical and life insurance benefits is
not determinable because the plan assets are not segregated or
restricted to meet the Company's obligations.
Postemployment Benefits: The Company recognizes the net present
value of the liability for postemployment benefits, such as
long-term disability benefits and health-care and life-insurance
costs, when employees become eligible for such benefits.
Postemployment benefits are paid to former employees after
employment has been terminated but before retirement benefits are
paid. The Company accrues both current and future costs. The PSCU
and the PSCW have allowed Mountain Fuel to recover postemployment
costs through December 31, 1994 in future rates. At December 31,
1996, the Company had a $831,000 regulatory asset that it is
amortizing over the next eight years.
Employee Investment Plan: The Company participates in Questar's
Employee Investment Plan (ESOP), which allows eligible employees
to purchase Questar common stock or other investments through
payroll deduction. The Company makes contributions of Questar
common stock to the ESOP of approximately 75% of the employees'
purchases and contributes an additional $200 of common stock in
the name of each eligible employee. The Company's expense and
contribution to the plan was $1,893,000 in 1996, $1,622,000 in
1995, and $1,542,000 in 1994.
Note 8 - Related Party Transactions
Questar Regulated Services was organized in 1996 and provides
shared services for its two subsidiaries, Mountain Fuel and
Questar Pipeline. These include business, technical and financial
support, as well as planning and business development. Services
and the subsequent billings began in 1997.
Wexpro, an affiliated company, operates certain properties owned
by Mountain Fuel under the terms of the Wexpro Settlement
Agreement. The Company receives a portion of Wexpro's income
from oil operations after recovery of Wexpro's operating expenses
and a return on investment. This amount, which is included in
revenues, was $2,768,000 in 1996, $3,400,000 in 1995 and
$3,391,000 in 1994. The Company paid Wexpro for the operation of
Company-owned gas properties. These costs are included in
natural gas purchases and amounted to $53,119,000 in 1996,
$59,831,000 in 1995 and $57,870,000 in 1994.
Mountain Fuel purchased transportation and storage services from
Questar Pipeline amounting to $61,078,000 in 1996, $54,083,000 in
1995 and $56,179,000 in 1994. The costs of these services were
included in natural gas purchases. Also included in natural gas
purchases are amounts paid to Questar Gas Management for
gathering of Company-owned gas and purchased gas. These costs
amounted to $14,515,000 in 1996, $15,867,000 in 1995 and
$14,766,000 in 1994. Gas-gathering activities were transferred
to Questar Gas Management from Questar Pipeline in March 1996.
Financial statements for prior years were reclassified to reflect
the transfer.
Mountain Fuel has reserved transportation capacity on Questar
Pipeline's system of approximately 800,000 decatherms per day and
paid an annual demand charge of approximately $45.8 million for
this reservation. Mountain Fuel releases excess capacity to its
industrial transportation or other customers and receives a
credit from Questar Pipeline for the released-capacity revenues
and a portion of Questar Pipeline's interruptible-transportation
revenues.
Mountain Fuel has a 15-year lease for some space in an office
building located in Salt Lake City, Utah, that is owned by an
affiliated company, Interstate Land. The lease begins in the
fourth quarter of 1997 when remodeling of the building is scheduled
for completion. The annual lease payment for each of the five
years, beginning in 1998, is $1,155,000.
Questar InfoComm Inc. is an affiliated company that provides data
processing and communication services to Mountain Fuel. The
Company paid Questar InfoComm $16,343,000 in 1996, $15,781,000 in
1995 and $15,996,000 in 1994.
Questar charges Mountain Fuel for certain administrative
functions amounting to $5,746,000 in 1996, $5,283,000 in 1995,
and $5,814,000 in 1994. These costs are included in operating
and maintenance expenses and are allocated based on each
affiliated company's proportional share of revenues less gas
costs; property, plant and equipment; and labor costs.
Management believes that the allocation method is reasonable.
The Company received interest income from affiliated companies of
$10,000 in 1995 and $225,000 in 1994. The Company incurred debt
expense to Questar of $1,906,000 in 1996, $1,273,000 in 1995 and
$134,000 in 1994.
Note 9 - Oil and Gas Producing Activities (Unaudited)
The following information discusses the Company's oil and gas
producing activities. All of the properties are cost-of-service
properties with the return on investment established by state
regulatory agencies. Mountain Fuel has not incurred any costs for
oil and gas producing activities for the three years ended
December 31, 1996. Wexpro develops and produces gas reserves
owned by the Company. See Note 8 for the amounts paid by
Mountain Fuel to Wexpro.
Estimated Quantities of Proved Oil and Gas Reserves: The
following estimates were made by Questar's reservoir engineers.
Reserve estimates are based on a complex and highly interpretive
process which is subject to continuous revision as additional
production and development drilling information becomes
available. The quantities are based on existing economic and
operating conditions using current prices and operating costs.
All oil and gas reserves reported are located in the United
States. Mountain Fuel does not have any long-term supply
contracts with foreign governments or reserves of equity
investees. No estimates are available for proved undeveloped
reserves that may exist.
Natural Gas Oil
(In Million (In Thousands
Cubic Feet) of Barrels)
Proved Developed Reserves
Balance at January 1, 1994 428,238 772
Revisions of estimates (576) (13)
Extensions and discoveries 26,085 13
Production (37,435) (65)
Balance at December 31, 1994 416,312 707
Revisions of estimates (831) 10
Extensions and discoveries 10,591 2
Production (36,632) (57)
Balance at December 31, 1995 389,440 662
Revisions of estimates 4,365 (44)
Extensions and discoveries 2,812 2
Production (36,740) (56)
Balance at December 31, 1996 359,877 564
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 26th day of March, 1997.
MOUNTAIN FUEL SUPPLY COMPANY
(Registrant)
By /s/ D. N. Rose
D. N. Rose
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the date
indicated.
/s/ D. N. Rose President and Chief Executive
D. N. Rose Officer; Director (Principal
Executive Officer)
/s/ S. E. Parks Vice President, Treasurer and Chief Financial
S. E. Parks Officer (Principal Financial Officer)
/s/ G. H. Robinson Vice President and Controller
G. H. Robinson (Principal Accounting Officer)
*R. D. Cash Chairman of the Board
*R. H. Bischoff Director
*W. Whitley Hawkins Director
*Robert E. Kadlec Director
*Dixie L. Leavitt Director
*Gary G. Michael Director
*D. N. Rose Director
*Harris H. Simmons Director
March 26, 1997 *By /s/ D. N. Rose
Date D. N. Rose, Attorney in Fact
EXHIBIT INDEX
Exhibit
Number Exhibit
3.1.* Restated Consolidated Articles of Incorporation dated August
15, 1980. (Exhibit No. 4(a) to Registration Statement No.
2-70087, filed December 1, 1980.)
3.2.* Certificate of Amendment to Restated Consolidated Articles
of Incorporation dated May 13, 1982. (Exhibit No. 3(b) to
Form 10-K Annual Report for 1982.)
3.3.* Certificate of Amendment to Restated Consolidated Articles
of Incorporation dated May 10, 1983. (Included in Exhibit
No. 4.1. to Registration Statement No. 2-84713, filed June
23, 1983.)
3.4.* Certificate of Amendment to Restated Consolidated Articles
of Incorporation dated August 16, 1983. (Exhibit No. 3(a)
to Form 8 Report amending the Company's Form 10-Q Report for
Quarter Ended September 30, 1983.)
3.5.* Certificate of Amendment to Restated Consolidated Articles
of Incorporation dated October 26, 1984. (Exhibit No. 3.5.
to Form 10-K Annual Report for 1984.)
3.6.* Certificate of Amendment to Restated Consolidated Articles
of Incorporation dated May 13, 1985. (Exhibit No. 3.1. to
Form 10-Q Report for Quarter Ended June 30, 1985.)
3.7.* Articles of Amendment to Restated Consolidated Articles of
Incorporation dated February 10, 1988. (Exhibit No. 3.7. to
Form 10-K Annual Report for 1987.)
3.8.* Bylaws (as amended effective August 11, 1992). (Exhibit No.
3.8. to Form 10-K Annual Report for 1992.)
4.* Indenture dated as of May 1, 1992, between the Company and
Citibank, as trustee, for the Company's Debt Securities.
(Exhibit No. 4. to Form 10-Q Report for Quarter Ended June
30, 1992.)
10.1.* Stipulations and Agreement, dated October 14, 1981, executed
by Mountain Fuel Supply Company; Wexpro Company; the Utah
Department of Business Regulations, Division of Public
Utilities; the Utah Committee of Consumer Services; and the
staff of the Public Service Commission of Wyoming. (Exhibit
No. 10(a) to Form 10-K Annual Report for 1981.)
10.7.* Data Processing Services Agreement effective July 1, 1985,
between Questar Service Corporation and Mountain Fuel Supply
Company. (Exhibit 10.7. to Form 10-K Annual Report for
1988.)
10.8.*1 Mountain Fuel Supply Company Annual Management Incentive
Plan as amended and restated effective February 13, 1996.
(Exhibit No. 10.8. to Form 10-K Annual Report for 1995.)
10.9.*1 Mountain Fuel Supply Company Window Period Supplemental
Executive Retirement Plan effective January 24, 1991.
(Exhibit No. 10.9. to Form 10-K Annual Report for 1990.)
10.10.*1 Mountain Fuel Supply Company Deferred Compensation Plan for
Directors as amended and restated effective February 13,
1996. (Exhibit No. 10.10. to Form 10-K Annual Report for
1995.)
10.11.* Gas Gathering Agreement between Mountain Fuel Supply Company
and Questar Pipeline Company effective September 1, 1993.
(This agreement has been transferred to Questar Gas
Management Company.) (Exhibit No. 10.11. to Form 10-K
Annual Report for 1994.)
24. Power of Attorney.
27. Financial Data Schedule.
_______________________
*Exhibits so marked have been filed with the Securities and
Exchange Commission as part of the referenced filing and are
incorporated herein by reference.
1Exhibits so marked are management contracts or compensation plans
or arrangements.
(b) Mountain Fuel did not file any Current Reports on Form 8-K
during the last quarter of 1996.