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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, 1993 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. 1-8796
QUESTAR CORPORATION
(Exact name of registrant as specified in its charter)
State of Utah 87-0407509
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
180 East First South, P.O. Box 11150, Salt Lake City, Utah 84147
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (801) 534-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange on
Title of each class which registered
Common Stock, Without Par Value New York Stock Exchange
Common Stock Purchase Rights
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein and will not be
contained, to the best of registrants' knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. ____
The aggregate market value of the registrant's Common Stock, without
par value, held by nonaffiliates on March 21, 1994, was $1,361,036,878
(based on the closing price of such stock).
On March 21, 1994, 40,242,195 shares of the registrant's Common
Stock, without par value, were outstanding.
Documents Incorporated by Reference. Portions of the definitive Proxy
Statement for the 1994 Annual Meeting of Stockholders, to be dated April
4, 1994, are incorporated by reference into Part III. The sections of
the Proxy Statement labelled "Committee Report on Executive Compensation"
and "Cumulative Total Shareholder Return" are expressly not incorporated
into this document.
TABLE OF CONTENTS
Heading Page
PART I
Items 1.
and 2. BUSINESS AND PROPERTIES 1
General 1
Exploration and Production Operations 2
Natural Gas Transmission Operations 6
Natural Gas Distribution Operations 10
Other Operations 14
Discontinued Operations 14
Employees 14
Environmental Matters 15
Research and Development 15
Oil and Gas Operations 15
Item 3. LEGAL PROCEEDINGS 17
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 17
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 17
Item 6. SELECTED FINANCIAL DATA 18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATION 19
Item 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA 30
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 30
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT 30
Item 11. EXECUTIVE COMPENSATION 31
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 31
Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS 31
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K 31
SIGNATURES 65
FORM 10-K
ANNUAL REPORT, 1993
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
General
Registrant Questar Corporation (Questar or the Company) is a
holding company that is engaged, through its major affiliates, in
the exploration, production, gathering, purchase, transmission,
marketing, storage, and distribution of natural gas and in the
exploration, production, and sale of oil. The Company, through
other affiliates, provides data processing and microwave
communication services and owns and manages real estate.
The Company was organized as a Utah corporation in March of
1984. Effective October 2, 1984, it became the parent of
Mountain Fuel Supply Company (Mountain Fuel) when a corporate
reorganization was approved by Mountain Fuel's shareholders. The
Company was created to provide organizational and financial
flexibility and to achieve a more clearly-defined separation of
utility and nonutility operations. Questar is a "holding
company," as that term is defined in the Public Utility Holding
Company Act of 1935, but qualifies for and claims an exemption
from provisions of such act applicable to registered holding
companies.
Questar, as an integrated natural gas company, has three
major lines of business: exploration and production activities
conducted by Wexpro Company (Wexpro), Celsius Energy Company
(Celsius), and Universal Resources Corporation (Universal
Resources); interstate transmission activities conducted by
Questar Pipeline Company (Questar Pipeline); and retail
distribution activities conducted by Mountain Fuel. These three
complementary lines of business involve Questar in all phases of
the natural gas business from the reservoir to the end-use
customer. The Company believes that its integrated status
enhances its operating flexibility when dealing with such
problems as warmer-than-normal weather, loss of industrial sales,
take-or-pay obligations, and general industry restructurings.
Questar also maintains that its integrated status enhances its
financial strength by providing a balance between the stability
of regulated operations and the earnings growth potential of
exploration and production operations. Questar is also convinced
that the long-term outlook for natural gas, as an environmentally
preferred and abundant domestic energy source, is promising.
Consequently, the Company intends to retain and expand its three
lines of business and to renew its commitment to customer
service.
Questar is also engaged in other business activities:
commercial real estate (Questar Development Corporation); and
data processing and microwave communications (Questar Service
Corporation). The Company has agreed to sell Questar Telecom,
Inc., (Questar Telecom), which is engaged in specialized mobile
radio systems, to Nextel Communications Inc.
The following diagram shows the current corporate structure
of the Company and its primary affiliates:
Questar Corporation
Mountain Fuel Supply Company
Questar Pipeline Company
Questar WMC Corporation
Universal Resources Corporation
Questar WMC Corporation
Entrada Industries, Inc.
Wexpro Company
Celsius Energy Company
Questar Service Corporation
Questar Development Corporation
Questar Telecom, Inc.
Financial information concerning the Company's lines of
business, including information relating to the amount of total
revenues contributed by any class of similar products or services
responsible for 10 percent or more of consolidated revenues, is
presented in Note P in the Notes to Consolidated Financial
Statements.
The Company's lines of business are discussed below.
Exploration and Production Operations
The Company has been in the exploration and production (E&P)
business since its organization (as Mountain Fuel) in 1935.
Through the ensuing years, the Company's exploration and
production activities have generated substantial economic
benefits for the Company and its shareholders and customers and
have expanded in size and geographic location. The year 1993 was
another good year for the Company's exploration and production
operations despite lower wellhead prices for crude oil. The year
witnessed higher gas prices, increased gas production, and stable
amortization rates. The E&P group's 1993 efforts to find and
purchase reserves resulted in two acquisitions that will be
recorded during the first three months of 1994.
The Company has three affiliates -- Wexpro, Celsius, and
Universal Resources -- that are directly engaged in exploration
and production operations. The division of Questar's exploration
and production activities into three companies is a result of
historical developments. All three companies are managed by the
same group of officers. Together, the three companies form a
unique E&P group that conducts a blended program of low-cost
development drilling, low-risk reserve acquisition, and high-
quality exploration. The E&P group also has a geographical
balance and diversity, with Wexpro and Celsius located in the
Rocky Mountain area and Universal Resources concentrated in the
Midcontinent area.
Mountain Fuel owns cost-of-service gas reserves and the
properties from which such is produced. See "Oil and Gas
Operations," a separate section of this report, for additional
information concerning the Company's oil and gas activities on a
consolidated basis.
Natural gas is the primary focus of the Company's E&P
operations. As of year-end 1993, the Company had proved reserves
(excluding Mountain Fuel's cost-of-service reserves) of 191,328
million cubic feet (MMcf) of gas and 10,509 thousand barrels of
oil (Mbbls), compared to 197,686 MMcf of gas and 11,237 Mbbls of
oil as of the same date in 1992. (Any references to oil in this
report include natural gas liquids. The reserve numbers do not
include the reserves that Universal Resources acquired in early
1994.) Reserves, after production, decreased by four percent
between 1992 and 1993.
Gas production (excluding volumes produced from Mountain
Fuel's cost-of-service properties) increased from 24,550 MMcf in
1992 to 32,299 MMcf in 1993, as Celsius and Universal Resources
continued to take advantage of higher prices and lower
amortization rates to increase the combined average take for gas
production. (The term "take" refers to the percentage of a
well's potential production that is actually produced.) Oil
production decreased from 2,075 Mbbls in 1992 to 1,975 Mbbls in
1993. The average selling price of gas production increased from
$1.65 per thousand cubic feet (Mcf) in 1992 to $1.85 per Mcf in
1993. The combined full-cost amortization rate for the two
entities was $.80 per Mcf equivalent in 1993, compared to $.79
per Mcfe in 1992. The average price per barrel of oil continued
to decrease from $18.64 in 1992 to $16.68 per barrel in 1993.
The E&P group had capital expenditures of $57.8 million
during 1993, compared to $69.2 million during 1992. It continued
to emphasize development drilling and spent $44.2 million, or 77
percent of its total capital budget, for development drilling and
related production activities. The E&P companies participated in
a total of 206 gross wells and 76 net wells during 1993, compared
to 177 gross and 55 net wells in 1992. They achieved an overall
success rate of 86 percent with a 91 percent success rate for
development wells and a 23 percent success rate for exploration
wells.
The total 1994 capital budget for E&P operations is
projected to be $160 million. The E&P group has already spent
$22.6 million to purchase reserves from Petroleum, Inc., which
are located in Kansas, Oklahoma, and Texas and has announced an
agreement to spend $94.5 million to purchase reserves and related
facilities, including several processing plants and gathering
facilities, from Union Pacific Resources Company (Union Pacific).
Other planned expenditures include $34.6 million for development
drilling (including $15.7 million for cost-of-service gas) and
$7.1 million for exploration activities.
During 1993, the E&P group pursued a marketing strategy to
use purchased gas volumes and its own production to build a
flexible and reliable portfolio. Universal Resources, as the
marketing entity, aggregated supplies of natural gas for delivery
to large customers including industrial users, municipalities,
and other marketing entities. It has been engaged in marketing
activities throughout the western United States since 1990.
During 1993, Universal Resources concentrated its efforts in
premium markets in order to earn higher margins. It marketed a
total of 65,143,000 decatherms (Dth) of gas in 1993, compared to
72,712,000 Dth in 1992 and earned a total margin of $3,864,000,
compared to $1,292,000 in 1992. (A Dth is an amount of heat
energy equal to 10 therms or 1 million Btu. In the Company's
system, each Mcf of gas equals approximately 1.07 Dth.)
Section 29 tax credits continued to benefit the E&P group
during 1993. These tax credits are available for production from
wells that meet specified criteria, including a requirement that
drilling of the wells be commenced prior to January 1, 1993. The
properties are often referred to as "tight sands" or low
permeability formations from which it is generally more expensive
to produce gas. The basic credit is $.52 per Dth, but is
equivalent to a price increase of $.90 per Dth at the wellhead
when factoring in other taxes. During 1993, Celsius and
Universal Resources recorded $5.6 million in tax credits.
Approximately 30 percent of the combined gas production of
Celsius and Universal Resources qualified for the tax credits.
(Wexpro does not have an economic interest in the cost-of-service
gas produced from Mountain Fuel's properties. Mountain Fuel
earns the credits associated with such gas.)
The production of oil and gas is subject to regulation by
appropriate federal and state regulatory agencies. In general,
these regulatory agencies are authorized to make and enforce
regulations to prevent waste of oil and gas, to protect the
correlative rights and opportunities to produce oil and gas by
owners of a common reservoir, and to protect the environment.
Many leases held by Celsius or operated by Wexpro are federal
leases subject to additional regulatory requirements. Both
federal and state agencies are imposing more restrictions on
access to leasehold acreage, thereby increasing the planning time
to obtain drilling permits and limiting the E&P's group
flexibility to adapt quickly to circumstances.
Questar's oil and gas affiliates are separately described
below:
Wexpro Company. Wexpro was incorporated in 1976 as a
subsidiary of Mountain Fuel. Mountain Fuel's efforts to transfer
producing properties and leasehold acreage to Wexpro resulted in
protracted regulatory proceedings and legal adjudications that
ended with a court-approved settlement that was effective August
1, 1981.
Wexpro, unlike Celsius and Universal Resources, generally
does not conduct exploratory or wildcat operations and does not
acquire leasehold acreage for exploration activities. It
conducts oil and gas development and production activities on
certain producing properties located in the Rocky Mountain region
under the terms of the settlement agreement. (The terms of the
settlement agreement are described in Note L in the Notes to
Consolidated Financial Statements.) Wexpro produces gas from
specified properties for Mountain Fuel and is reimbursed for its
costs plus a return on its investment. In connection with its
successful development gas drilling, Wexpro charges Mountain Fuel
for its costs plus a specified rate of return (currently 22.6
percent and adjusted annually based on a specified formula) on
its net investment in such properties adjusted for working
capital and deferred taxes. At year-end 1993, Wexpro's net
investment in cost-of-service operations was $93 million. Under
the terms of the settlement agreement, Wexpro bears all dry hole
costs. The settlement agreement also provides for income sharing
after recovery of expenses and rates of return in connection with
Wexpro's production and successful drilling activities on
specified oil properties. The settlement agreement is monitored
by the Utah Division of Public Utilities, the staff of the Public
Service Commission of Wyoming, and retained experts.
The gas volumes produced by Wexpro for Mountain Fuel are
reflected in the latter's rates at cost-of-service prices. Cost-
of-service gas (defined to include the gas attributable to
royalty interest owners) produced by Wexpro has satisfied 28-54
percent of Mountain Fuel's requirements during the last ten
years. Costs attributable to Wexpro's operation of the
properties are reflected in Mountain Fuel's rates. Mountain Fuel
relies upon Wexpro's drilling program to develop the properties
from which the cost-of-service gas is produced. During 1993, the
delivered cost of Mountain Fuel's cost-of-service gas was $1.76
per Dth, which was significantly lower than the delivered price
of field-purchased gas. In order to avoid regulatory second
guessing and to fulfill its obligation to Mountain Fuel, Wexpro
must continue to be an efficient operator.
Wexpro participates in drilling activities in response to
the demands of other working interest owners, to protect its
rights, and to meet the needs of Mountain Fuel. During 1993,
Wexpro maintained an active drilling program and concentrated its
activities in southwestern Wyoming and western Colorado. Wexpro,
during 1993, produced 35,508 MMcf from Mountain Fuel's cost-of-
service properties, but added reserves of 64,135 MMcf (through
drilling activities and reserve estimate revisions). For the
last several years, the growth in reserves on such properties has
exceeded production.
Wexpro's oil production, on the other hand, continued to
decline during 1993. It produced 854 Mbbls in 1993 compared to
1,018 Mbbls in 1992 reflecting a normal decline in field
production. Wexpro received an average price of $17.77 per
barrel during 1993 compared to $19.41 per barrel during 1992. It
has been able to sell its oil to customers for resale or
refining. Wexpro should be able to continue selling all of the
liquids that it produces at prices that reflect current market
conditions.
Wexpro has an ownership interest in the wells and
appurtenant facilities related to its oil reservoirs
and in the facilities that have been installed to develop and
produce gas reservoirs described above since August 1, 1981 (a
date specified by the settlement agreement referred to above).
Wexpro maintains an office in Rock Springs, Wyoming, in addition
to its principal office in Salt Lake City, Utah.
Celsius Energy Company. Celsius is involved in exploration
and development activities in the Rocky Mountain area. It
endeavors to maintain extensive high-quality leaseholds that
provide significant exploration and development opportunities and
pursue such opportunities through joint venture activities.
Celsius has historically emphasized natural gas. During 1993,
Celsius was active in gas exploration and development drilling
activities in the Mulligan Draw/Dripping Rock and Bruff areas of
southwestern Wyoming and in the Dragon Trail area in western
Colorado.
Celsius's gas production increased from 14,443 MMcf in 1992
to 21,360 MMcf in 1993, as Celsius continued its strategy, begun
in late 1992, to produce at a consistently high take level. Gas
prices increased significantly between 1992 and 1993. Celsius
received an average selling price of $1.77 per Mcf in 1993,
compared to $1.53 per Mcf in 1992.
Celsius's major gas producing areas include the Dripping
Rock, Bruff, and Mulligan Draw areas in southwestern Wyoming and
the Hiawatha area in northwestern Colorado. Most of Celsius's
production is sold outside the affiliated group and is generally
sold under short-term or spot-market contracts.
The demand for Rocky Mountain production has increased,
partly in response to the open-access status of all interstate
pipelines and partly in response to the pipeline, owned by Kern
River Gas Transmission Company, running from southwestern Wyoming
to southern California. The differential between Rocky Mountain
production and Midcontinent production decreased during 1993,
although Rocky Mountain production continues to be lower-priced.
Celsius has taken advantage of improved market conditions to
increase its average take and to find new purchasers for its gas
volumes. Celsius has also taken advantage of the increased level
of competition among the pipelines and companies engaged in
gathering activities to insist on multiple connections for some
of its wells.
In addition to leasehold acreage, Celsius owns wells, field
gathering lines, tank batteries, and production camps. Celsius
maintains an office in Denver, Colorado, and field offices in
Dove Creek, Colorado, and Gillette, Wyoming, in addition to its
principal office in Salt Lake City, Utah.
Universal Resources Corporation. Acquired by Questar in
March of 1987 as a result of a merger, Universal Resources's
drilling activities and reserve acquisitions are concentrated in
the Midcontinent region of Oklahoma and Texas. It focuses on
acquisitions and development drilling, rather than exploration
drilling. Universal Resources is also engaged in gas marketing
activities throughout the western United States.
During 1993, Universal Resources produced 10,939 MMcf of
natural gas, compared to 10,107 MMcf in 1992. Universal
Resources continued to maintain takes at 80-90 percent during
1993 and received an average price of $2.02 per Mcf in 1993,
compared to $1.83 per Mcf in 1992. (The price differential
between Rocky Mountain production and Midcontinent production can
be seen by comparing Universal Resource's 1993 average price of
$2.02 per Mcf with Celsius's 1993 average price of $1.77 per
Mcf.)
Universal Resources was the named party in the E&P group's
successful reserve acquisitions. During 1993, the E&P group
followed a strategic objective of seeking out potential
acquisitions, rather than engaging in general auctions for
acreage. By following this strategy, Universal Resources
identified some reserves and producing wells owned by Petroleum
Inc., located in the Midcontinent states of Kansas, Oklahoma, and
Texas. It purchased approximately 14.5 billion cubic feet (Bcf)
of gas, 1,356 Mbbls of oil and significant undeveloped leasehold
acreage for $22.6 million. The reserves were recorded in January
of 1994.
In March of 1994, Universal Resources announced an agreement
to acquire specified oil and gas reserves from Union Pacific for
$94.5 million. The properties constitute the "northern division"
of Amax Oil and Gas Company (Amax), which is being purchased by
Union Pacific. The properties, which are located in Oklahoma,
the Texas Panhandle, and the San Juan Basin of northern New
Mexico and southwestern Colorado, include 92 Bcf equivalent of
proved reserves, approximately 1,000 wells, gathering facilities,
several gas processing plants, and undeveloped acreage.
Approximately 15.5 Bcf of gas reserves qualify for Section 29 tax
credits on coalbed methane and tight sands. The parties expect
to close the transaction on March 31, 1994.
Both reserve acquisitions are being purchased at finding
costs that are as low or lower than the 1993 combined average
finding cost for Celsius and Universal Resources ($1.01 per Mcf).
Before making any offer for reserves, the E&P group identifies
how it can "add value" by developing and exploiting them.
The E&P group will add employees and create a new regional
office in order to manage and develop the 1994 reserve
acquisitions. It plans to integrate some of the Amax assets with
its Midcontinent assets managed by Universal Resources and to
combine other Amax assets with some Celsius properties to form a
new division, Questar Energy Company.
In early 1994, Universal Resources combined with Questar
Pipeline to organize a new subsidiary, Questar WMC Corporation
(Questar WMC), that is the named partner in a new market center
at Questar Pipeline's Muddy Creek facility in southwestern
Wyoming. This new "Western Market Center," which is to be
operational by late 1994, will offer a variety of services to
customers such as local distribution companies, industrial users,
and marketing entities.
Universal Resources operates drilling and acquisition
activities from its office in Oklahoma City and marketing
activities from its office in Salt Lake City.
Natural Gas Transmission Operations
Questar Pipeline is an interstate pipeline company that
restructured its operations and activities during 1993 in
response to Order No. 636 issued by the Federal Energy Regulatory
Commission (the FERC). Questar Pipeline discontinued its gas
acquisition and sale-for-resale activities effective September 1,
1993. Questar Pipeline is currently engaged in the gathering,
processing, transportation, and storage of natural gas in the
Rocky Mountain states of Utah, Wyoming and Colorado. It is in a
transition period in which it is reshaping its focus, taking
increased advantage of its strategic location with access to
major producing areas and major pipelines, and expanding the size
of its storage reservoir at Clay Basin.
Prior to September 1, 1993, Questar Pipeline purchased gas
for resale to Mountain Fuel, its only sale-for-resale customer.
As an open-access pipeline, Questar Pipeline transports gas for
affiliated and unaffiliated customers. It also operates the Clay
Basin storage project, which is a large underground storage
project in northeastern Utah, and other underground storage
operations in Utah and Wyoming. Questar Pipeline is involved in
two partnerships, Overthrust Pipeline Company (Overthrust
Pipeline) and TransColorado Gas Transmission Company
(TransColorado). It has recently announced its participation in
a third partnership organized to construct and operate a new
market center in southwestern Wyoming.
Questar Pipeline is a "natural gas company" subject to the
exclusive regulation of the FERC as to rates and charges for
storage and transportation of gas in interstate commerce,
construction of new facilities, extensions or abandonments of
service and facilities, accounts and records, and depreciation
and amortization policies. Questar Pipeline holds certificates
of public convenience and necessity granted by the FERC for the
transportation and underground storage of natural gas in
interstate commerce and for the facilities required to perform
such operations.
Questar Pipeline's transmission system is strategically
located in the Rocky Mountain area near large reserves of natural
gas. It is referred to as a "hub and spoke system," rather than
a "long-line" pipeline, because it has multiple connections to
other major pipeline systems and has access to major producing
areas. Questar Pipeline's transmission system connects with the
transmission systems of Colorado Interstate Gas Company (CIG),
Northwest Pipeline Corporation (Northwest Pipeline), the middle
segment (commonly referred to as the "WIC segment") of the
Trailblazer pipeline system (Trailblazer), Williams Natural Gas
Company (Williams), and Kern River Gas Transmission Company (Kern
River). These connections provide access to markets outside
Mountain Fuel's service area and allow Questar Pipeline to
transport gas for nonaffiliated customers.
Questar Pipeline's transmission system includes 1,775 miles
of transmission lines that interconnect with other pipelines and
link producers of natural gas with Mountain Fuel's distribution
operations in Utah and Wyoming. This system includes two major
segments, often referred to as the northern and southern systems;
the northern segment, which runs from northwestern Colorado
through southwestern Wyoming into northern Utah, and a southern
segment, which runs from western Colorado to Payson in central
Utah. The two portions are linked together and have significant
connections with other pipeline systems, making it a fully
integrated system. The transmission mileage figure includes
lines at storage fields and tap lines used to serve Mountain
Fuel.
Questar Pipeline's largest transportation customer is
Mountain Fuel. During 1993, Questar Pipeline transported
65,061,000 Dth for Mountain Fuel, compared to 33,883,000 Dth in
1992. These transportation volumes include the cost-of-service
gas produced by Wexpro on properties owned by Mountain Fuel, as
well as volumes purchased by Mountain Fuel directly from field
producers after September 1, 1993. (Comparisons between 1992 and
1993 are misleading given Questar Pipeline's cessation of sale-
for-resale activities September 1, 1993.)
Mountain Fuel converted its firm sales capacity on Questar
Pipeline's transmission system to firm transportation capacity
effective September 1, 1993. Mountain Fuel has a reserved
capacity of approximately 800,000 Dth per day, or approximately
85 percent of Questar Pipeline's reserved capacity. Mountain
Fuel will pay an annual demand charge of about $49 million to
Questar Pipeline in 1994, which includes demand charges
attributable to firm transportation and "no-notice"
transportation. Mountain Fuel only needs its reserved capacity
during peak-demand situations. When it is not fully utilizing
its capacity, Mountain Fuel releases the capacity to others,
primarily industrial transportation customers and marketing
entities, and receives revenue credits from Questar Pipeline,
which are estimated to be approximately $9 million in 1994.
Questar Pipeline's total system throughput declined from
243,961,000 Dth in 1992 to 238,586,000 in 1993, with the decrease
attributable to a decrease in the volumes transported for
customers other than Mountain Fuel. These volumes decreased from
171,097,000 Dth in 1992 to 149,188,000 Dth in 1993. Questar
Pipeline lost some firm transportation customers during 1993.
Questar Pipeline recovers approximately 94 percent of its
transmission cost of service through demand charges from firm
transportation customers. In other words, these customers pay
for access to transportation capacity, rather than for the
volumes actually transported. Consequently, Questar Pipeline's
throughput volumes do not have a significant impact on its short-
term operating results. Questar Pipeline is not significantly
impacted by fluctuating demand based on the vagaries of weather
or commodity prices.
In order to comply with Order No. 636, Questar Pipeline
installed additional metering that permits "real time"
measurement of gas transported on its system and an electronic
bulletin board that allows interested parties to nominate for
capacity on such system. Questar Pipeline spent approximately $9
million on such equipment and can recover the costs associated
with this equipment upon filing a general rate case with the FERC
and establishing the prudency of such costs.
Questar Pipeline's transmission system is an open-access
system and has been since September of 1988. Order No. 636 and
Questar Pipeline's new tariff provisions continue to require it
to transport gas on a nondiscriminatory basis when it has
available transportation capacity.
Questar Pipeline will continue to develop and build new
lines and related facilities that will allow it to meet customer
needs or improve transportation services. During 1993, Questar
Pipeline completed a new 13-mile line from its Muddy Creek
facilities to PacifiCorp's Naughton power plant near Kemmerer,
Wyoming. It has recently announced a project to expand its
southern transmission system to meet market demand for
transportation of natural gas volumes from the Piceance Basin in
western Colorado. The project will involve upgrading a section
of the system as well as installing additional compression and
interconnections with CIG and Northwest Pipeline.
Questar Pipeline no longer has the only transmission system
with direct access to the major population centers in Utah. The
Kern River line, which became operational in late February of
1992, crosses portions of Mountain Fuel's service area, making it
possible for some large industrial customers to bypass both
Mountain Fuel and Questar Pipeline by buying transportation
service on the new line. At the current time, however, no
industrial customers in the Wasatch Front have taken any
deliveries from the Kern River line. The Kern River line has
diverted some transportation volumes from both Questar Pipeline
and Overthrust Pipeline. The Kern River line, on the other hand,
also provides Questar Pipeline with opportunities to make
additional connections with outside markets and increase
transportation and gathering volumes.
Questar Pipeline has an 18 percent interest in and is
operating partner of Overthrust Pipeline, a general partnership
that was organized in 1979 to construct, own, and operate the
Overthrust Pipeline segment of the Trailblazer system. The
Overthrust Pipeline segment is 88 miles in length and 36 inches
in diameter and is the first of three segments of the 800-mile
Trailblazer system that extends from Whitney Canyon in
southwestern Wyoming to Beatrice, Nebraska. As the operating
partner in the Overthrust, Questar Pipeline is working to resolve
some issues relating to its future use, which are complicated by
the bankruptcy proceedings of a major shipper, Columbia Gas
Transmission Corporation.
Questar Pipeline and its partners are continuing to pursue a
project announced in 1990 to build and operate the proposed
TransColorado Pipeline. Questar Pipeline's partners include
affiliates of Public Service Company of Colorado and KN Energy,
Inc. The proposed pipeline is 292 miles in length and would
extend from the Piceance Basin in western Colorado to
northwestern New Mexico, where it would connect with other major
pipeline systems. As designed, the pipeline could transport up
to 300 MMcf of gas per day from western Colorado and other
producing basins in Wyoming and Utah to California and midwestern
and southwestern markets. The project has received the necessary
environmental clearances; regulatory work is nearing completion.
The parties hope to begin construction of the line in 1995.
These expectations are contingent upon obtaining sufficient
expression of interest from potential qualified customers.
The new Western Market Center is a joint venture involving
Questar Pipeline and Universal Resources (through a jointly owned
subsidiary), Tenneco, Inc., and Entech, Inc. (a division of
Montana Power Company). The market center will offer a variety
of services such as wheeling, peaking, parking, balancing, and
title tracking. It will also include a new header facility that
will allow pipelines to flow gas in several different directions
and a sophisticated electronic bulletin board that will provide
customers with current information on prices (cash and futures)
and capacity alternatives.
In addition to providing transportation services, Questar
Pipeline provides gathering services for Mountain Fuel and other
customers, under rates that were unbundled from sales-for-resale
rates in late 1991. In 1993, Questar Pipeline earned revenues of
$20,386,000 from its gathering activities compared to $17,822,000
in 1992.
During 1993, Questar Pipeline spent $5,743,000 to expand its
gathering activities by installing new facilities (including
dehydration units as well as laterals) at several different areas
in southwestern Wyoming and eastern Utah. It plans to spend
$16,300,000 in 1994 to expand gathering facilities.
All gathering services performed by Questar Pipeline are
conducted on an individual contract basis although it has
included a statement of gathering rates in its tariffs. Questar
Pipeline has agreed to perform gathering services for Mountain
Fuel under a four-year agreement with a rate design that varies
from the straight fixed-variable (SFV) methodology previously
approved by the FERC. The Company has filed the agreement with
the FERC and anticipates receiving the necessary approval.
Questar Pipeline owns 759 miles of gathering lines,
compressor stations, field dehydration plants, and measuring
stations. Questar Pipeline has long-term easements for its
pipelines; its stations and plants are built on property owned in
fee or held through long-term easements.
Questar Pipeline operates a major storage facility at Clay
Basin in northeastern Utah and three other storage facilities
designed to support Mountain Fuel's peak demand requirements.
Questar Pipeline's storage facilities are certificated by the
FERC, and its rates for storage service (based on operating costs
and investment in plant plus an allowed rate of return) are
subject to the approval of the FERC. The Clay Basin storage
reservoir has been operational since 1977 and has been providing
open-access storage service since June of 1991.
In early 1993, Questar Pipeline determined to offer
additional working gas capacity of approximately 10.3 Bcf, which,
together with the necessary cushion gas, would utilize the full
certificated capacity of 100 Bcf. (Working gas is gas that is
injected and withdrawn. Cushion gas is gas in the formation that
is necessary to maintain pressure and is not withdrawn under
normal operating conditions.) The success of these efforts
motivated Questar Pipeline to request regulatory approval to
expand Clay Basin's certificated capacity to 110 Bcf and to add
the necessary compressors and storage laterals to expand the
working gas capacity from 31 Bcf to 46 Bcf. Questar Pipeline's
application was fully supported by firm service customers.
Consequently, it was granted the necessary certification in
November of 1993.
Questar Pipeline is currently installing the necessary
equipment and plans to inject the additional cushion gas to
support the increased working gas capacity as soon as the
facilities are completed. It expects to have to the expansion
completed in time for working gas to be injected prior to the
1994-95 heating season.
The storage capacity at Clay Basin is fully subscribed.
Mountain Fuel currently has 7.0 Bcf of working gas capacity at
Clay Basin and will have 12.5 Bcf after the expansion. Questar
Pipeline reserved 3.0 Bcf for maintaining system operations.
Other large customers, in addition to Mountain Fuel, include
Northwest Pipeline; Washington Natural Gas Company, a utility in
Washington; and BC Gas Inc., a utility in British Columbia.
The FERC issued Order No. 636 in February of 1992. Questar
Pipeline filed initial tariff provisions on October 1, 1992, and
eventually convinced the FERC that it was necessary to transfer
its portfolio of gas purchase contracts and working gas storage
capacity to Mountain Fuel. Questar Pipeline's tariff provisions
to effect the requirements of Order No. 636 were basically
approved by the FERC on August 2, 1993. Questar Pipeline worked
closely with its customers, including Mountain Fuel, to handle
the transition smoothly and efficiently.
To comply with Order No. 636, as amended, Questar Pipeline
restructured its tariff provisions to provide for firm and
interruptible transportation and storage service, no-notice
transportation service to former sales customers, a capacity
release mechanism for shippers and a SFV rate methodology. It
was also required to release its upstream capacity, to provide
flexibility receipt and delivery points for firm transportation
customers, and to provide an interactive electronic bulletin
board to assist with the administration of the new provisions.
When it was engaged in sales-for-resale activities and had a
purchased gas adjustment procedure, Questar Pipeline was required
to file a general rate case every three years. It is no longer
subject to this requirement. Questar Pipeline has no current
plans to file a general rate case and must weigh several
competing factors when making such decision. It cannot recover
its costs of complying with Order No. 636 or its full cost
accrual for postretirement welfare benefits in the absence of a
general rate case. Other important considerations include actual
revenue generating capability, expectations of allowed return,
and revenue crediting issues.
In a post-Order No. 636 environment, Questar Pipeline cannot
expect to receive unconditioned regulatory approvals for new
construction proposals without the support of long-term firm
service agreements. The FERC is currently imposing at-risk
conditions on projects that lack such support. In other words,
the FERC is insisting that shareholders, not customers, absorb
any underrecovery of costs if the incremental revenues obtained
from a new project do not cover the costs. Given the change that
has already occurred in the industry and given the expectation of
additional change, customers are understandably wary of providing
pipelines with long-term contracts for firm service.
Questar Pipeline opposes the FERC's exercise of jurisdiction
over gathering rates and services conducted by pipelines and
their affiliates. The FERC has opened a regulatory proceeding
and requested information from interested parties on the subject.
Questar Pipeline strongly believes that the Natural Gas Act of
1938, as amended, clearly excludes gathering activities from the
FERC's jurisdiction. It also maintains that competition
currently exists, often between unregulated entities and
pipelines, and that federal regulation is not necessary to
promote competition.
Questar Pipeline has several key assets that can contribute
to continued success. It has a strategically located and
integrated transmission system with interconnections to other
major pipelines and with access to major productive areas,
storage projects, and markets. It has Clay Basin, a
strategically located storage reservoir that has been operational
since 1977 and is being expanded in response to expressions of
interest. Questar Pipeline also has an extensive gathering
system developed to collect gas volumes from producing wells as
well as expertise in extracting hydrocarbon liquids from natural
gas and is expanding other activities. The proposed Western
Market Center is the latest example of Questar Pipeline taking
advantage of its strategic location to parlay participation in a
joint venture that will expand its activities and expertise.
Natural Gas Distribution Operations
Mountain Fuel distributes natural gas as a public utility in
Utah, southwestern Wyoming, and a small portion of southeastern
Idaho. As of December 31, 1993, Mountain Fuel was serving
550,184 sales and transportation customers, an increase from the
532,109 customers served as of the end of 1992. (Customers are
defined in terms of active meters.) Approximately 96 percent of
Mountain Fuel's customers live in Utah; Mountain Fuel distributes
gas to customers in the major populated areas of Utah, commonly
referred to as the Wasatch Front in which the Salt Lake
metropolitan area, Provo, Ogden, and Logan are located. It also
serves customers in eastern, central, and southwestern Utah with
Price, Roosevelt, Fillmore, Richfield, Cedar City, and St. George
as the primary cities. Mountain Fuel also supplies natural gas
in the southwestern Wyoming communities of Rock Springs, Green
River, and Evanston, and the southeastern Idaho community of
Preston. Mountain Fuel has the necessary regulatory approvals
granted by the Public Service Commission of Utah (the PSCU), the
Public Service Commission of Wyoming (the 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.
Within the last six years, Mountain Fuel extended service
into portions of central and southwestern Utah, and a small
portion of southeastern Idaho (the area surrounding Preston).
The most recent leg of the expansion was made possible by the
construction of a new pipeline system -- the Kern River line --
traversing Utah. The Company had 25,955 customers in its
southern region as of year-end.
Mountain Fuel's customer growth in 1993 resulted from new
housing, the addition of new customers in central and
southwestern Utah, and conversions. The population of Mountain
Fuel's service area in Utah is growing faster than the national
average, and Mountain Fuel expects to add 16,000 to 18,000
customers per year for the next several years.
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 1,150 therms per year) uses
approximately 75 percent of his total gas requirements in the
coldest six months of the year. Mountain Fuel's revenue
forecasts used to set rates are based on normal temperatures.
Consequently, Mountain Fuel's revenues and resulting net income
may be affected by temperature patterns that are below or above
normal. As measured in degree days, temperatures in Mountain
Fuel's service area were five percent colder than normal in 1993
after being 10 percent warmer than normal in 1992.
During 1993, Mountain Fuel sold 79,369,000 Dth to
residential and commercial customers, compared to 68,635,000 Dth
in 1992. The increase was attributable to colder than normal
weather and an expanded customer base. Sales to residential and
commercial customers were responsible for 90 percent of Mountain
Fuel's total revenues in 1993.
Mountain Fuel has designed its distribution system and
annual gas supply plan to handle peak-day demand requirements.
The Company periodically updates its peak-day demand, which is
the volume of gas that firm customers could use during extremely
cold weather. For the 1993-94 heating season, Mountain Fuel is
using a peak-day demand of approximately 809,000 Dth. 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 continued to
increase during 1993, expanding from 56,959,000 Dth in 1992 to
59,619,000 Dth in 1993. Sales to industrial customers increased
for the first time in several years and expanded from 5,338,000
Dth in 1992 to 6,514,000 Dth in 1993. The increase in total
industrial deliveries reflects Utah's economic revitalization and
the strength of several major industries as well as the success
of Mountain Fuel's marketing efforts.
Mountain Fuel has been providing transportation service
since 1986; the volumes of gas transported have steadily
increased each year since then. Mountain Fuel has worked
diligently to retain its transportation customers and to offer
them cost-based rates. Transportation service is attractive to
customers that can buy volumes of gas directly from producers and
have such volumes transported at aggregate prices lower than
Mountain Fuel's sales rates.
Under Mountain Fuel's current rate schedules, a typical
interruptible transportation customer pays block rates ranging
from $.12 to $.02 per Dth and uses Mountain Fuel's released
capacity on Questar Pipeline's transmission system. Mountain
Fuel receives a credit from Questar Pipeline for transportation
customers who use Mountain Fuel's released capacity and estimates
that this credit will be approximately $9 million in 1994.
On March 9, 1994, Mountain Fuel also requested regulatory
approval of a firm transportation rate schedule available to
industrial customers that transport or are obligated to pay for
the transportation of at least 120,000 Dth per year and that have
firm transportation service on an upstream pipeline. Mountain
Fuel has reached an agreement in principle with Utah Power, the
local electric utility, to take advantage of this rate schedule
once it is approved.
Mountain Fuel's largest transportation customers, as
measured by revenue contributions, are the Geneva Steel plant in
Orem, Utah; the Kennecott copper processing operations, located
in Salt Lake County; Utah Power, an electric utility that uses
gas for an electric generating plant in Salt Lake City; and the
mineral extraction operations of Magnesium Corporation of America
that are located west of Salt Lake.
In late 1993, 55 small industrial customers moved from
interruptible transportation to interruptible sales service on
Mountain Fuel's system. These customers pay rates based on the
Company's average 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. Mountain Fuel's tariff permits industrial
customers to make annual elections for interruptible sales or
transportation service.
Mountain Fuel's competitive position has been strengthened
as a result of owning natural gas producing properties. (As
defined, cost-of-service gas includes the gas attributable to
royalty interest owners.) Over the last three years, it has
satisfied 35-54 percent of its system requirements with the cost-
of-service gas produced from such properties. These properties
are operated by Wexpro, and the gas produced from such properties
is transported by Questar Pipeline. Mountain Fuel's investment
in these properties is included in its rate base. (A court-
approved settlement agreement, described in Note L in the Notes
to Consolidated Financial Statements, specifies the terms
relating to the ownership and operation of these properties.)
During 1993, 47,120,000 Dth were delivered from such properties
compared to 33,883,000 Dth in 1992. Mountain Fuel estimates that
it had reserves of 428,238 MMcf as of year-end 1993, compared to
399,611 MMcf as of year-end 1992. (The reserve numbers do not
include volumes attributable to royalty interests.) The average
delivered cost associated with Mountain Fuel's cost-of-service
reserves was $1.76 per Dth in 1993, compared to $3.43 per Dth for
volumes purchased from other supplies. During 1993, Mountain
Fuel recorded $5.4 million in Section 29 tax credits associated
with production from wells on its cost-of-service properties that
qualify for such credits. Mountain Fuel 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.
As of September 1, 1993, Mountain Fuel became directly
responsible for its gas acquisition activities. Prior to that
date, Mountain Fuel purchased its remaining gas supply
requirements from an affiliated pipeline, Questar Pipeline. As
of that date, Mountain Fuel assumed Questar Pipeline's gas
purchase contracts. Mountain Fuel has a balanced and diversified
portfolio of gas supply contracts with field producers located in
the Rocky Mountain states of Wyoming, Colorado, and Utah. It
purchases gas on the spot market and under longer-term contracts.
Mountain Fuel's gas acquisition objective is to obtain reliable,
diversified sources of gas supply at competitive prices. In
Mountain Fuel's latest semi-annual purchased gas cost filing,
Mountain Fuel estimated that its average wellhead cost of field-
purchased gas would be $1.93 per Dth for the first six months of
1994.
Mountain Fuel's gas costs and gas supply planning activities
have been the subject of regulatory scrutiny and proceedings.
One long-standing case was finally resolved in September of 1993
when the PSCU issued a full order, complete with findings of
fact, in the case involving allegations that Mountain Fuel acted
imprudently in purchasing gas supplies from an affiliated
pipeline supplier and should refund $80 million to its customers.
The PSCU concluded that Mountain Fuel did not act imprudently,
under the circumstances, when acquiring gas supplies and denied
claims that it should be required to make refunds.
Mountain Fuel is currently involved in regulatory
proceedings in which its costs associated with the settlement of
a gas imbalance problem at the Bruff Unit have been challenged.
Mountain Fuel's responsibility for gas acquisition activities
involves inherent risks of regulatory scrutiny. In a post-Order
No. 636 environment, the PSCU and PSCW may become more involved
in questioning the prudence of the Company's gas supply
activities.
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, has permitted
Mountain Fuel to retain 85-95 percent of the residential space
and water heating markets in its service area and to distribute
more energy, in terms of Btu content, than any other energy
supplier to residential and commercial markets in Utah. These
competitive advantages are responsible for Mountain Fuel's
ability to attract residential users of alternate energy sources
to gas in its new service areas in central and southwestern Utah
even though such users are required to pay higher rates than
their counterparts in the more populated areas of Utah.
Although Mountain Fuel is a public utility and has no direct
competition from other distributors of natural gas for
residential and commercial customers, it 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. Utah Power and Pacific Power, which are both part of
PacifiCorp, are the primary electric utilities in Utah and
portions of southwestern Wyoming, respectively. Although their
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, Utah Power and Pacific Power provide an ongoing
source of competition, particularly as Mountain Fuel attempts to
secure incremental load.
Mountain Fuel is continuing to expand the size of its
customer base by entering new service areas. Mountain Fuel is
also interested in Utah's economic development in order to
enhance market growth and is encouraging the use of natural gas
in additional appliances. Most households in Mountain Fuel's
service area already use natural gas for space and water heating.
Mountain Fuel's market share for other appliances, e.g., ranges
and dryers, less than 20 percent, which is significantly lower
than its 85-95 percent market share for furnaces and water
heaters. Mountain Fuel has commenced marketing campaigns to
convince existing customers to take advantage of natural gas's
lower prices and greater efficiency by converting other
appliances to natural gas. Mountain Fuel also has marketing
campaigns to motivate contractors to install the necessary lines
for gas fireplaces, ranges, and dryers in new homes.
Mountain Fuel believes that it must maintain a competitive
price advantage in order to retain its residential and commercial
customers and to build incremental load by convincing current
customers to convert additional appliances to natural gas.
Consequently, Mountain Fuel has worked to develop and follow an
annual gas supply plan that provides for a judicious balance
between cost-of-service gas and purchased gas.
Mountain Fuel's rates for general service customers in Utah
continue to be lower than they were ten years ago. Using rates
in effect as of January 1, 1994, the typical residential customer
in Utah would have an annual bill of $533.30, compared to an
annual bill of $607.07, using rates in effect as of January 1,
1985.
The Kern River pipeline, which was built to transport gas
from southwestern Wyoming to Kern County, California, runs
through portions of Mountain Fuel's service area and provides an
alternative delivery source to Mountain Fuel's transportation
customers. As of the date of this report, Mountain Fuel has lost
no industrial load as a result of Kern River. The existence of
this interstate pipeline system has made it possible for Mountain
Fuel to extend service into a new area in Utah and to develop a
second source of supply for its southern system. Mountain Fuel
also plans to obtain a tap on Kern River's line in the Wasatch
Front in order to obtain an additional source for peak-day gas
supply.
Within the last several years, Mountain Fuel has increased
its activities to encourage the use of natural gas as a fuel in
automobiles, trucks, and buses. Mountain Fuel has expanded the
number of its service vehicles using natural gas and has helped
convert fleet vehicles owned by several state agencies,
commercial businesses, municipalities, and others. Within the
next three months, Mountain Fuel will have a total of 30 natural
gas refueling stations within its service area; the majority of
these stations are open to the public. Mountain Fuel is actively
promoting the environmental advantages of natural gas. Portions
of Mountain Fuel's service area do not satisfy the ambient air
quality standards set by the federal Environmental Protection
Agency.
As a public utility, Mountain Fuel is subject to the
jurisdiction of the PSCU and PSCW. (Mountain Fuel'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
made under rate schedules approved by the two regulatory
commissions.
Mountain Fuel filed general rate case applications with the
PSCW and the PSCU in the spring of 1993. In Wyoming, Mountain
Fuel negotiated a stipulation that was approved by the PSCW on
July 12, 1993. Under the terms of this stipulation, Mountain
Fuel was permitted to reflect an increase of $601,000 (compared
to a requested deficiency of $819,000) in its rates effective
August 1, 1993, and was also permitted to later increase its
rates by an additional $120,000 per year to reflect higher tax
rates and costs associated with direct responsibility for gas
supply. The stipulation included a 10.4 percent return on rate
base, but did not specify an authorized return on equity.
Mountain Fuel's Utah general rate case involved protracted
proceedings and hearings. Mountain Fuel was permitted to use an
historic test year ending October 1, 1993, and decreased its
revenue deficiency from $18.0 million in April of 1993 to $10.3
million in October of 1993, as actual test-year data replaced
forecast information. Mountain Fuel originally requested a
return on equity of 12.5 percent, but lowered this request to
12.1 percent in response to lower interest rates.
On January 10, 1994, the PSCU issued an order authorizing a
return on equity of 11.0 percent and specified an annualized
decrease of $1.6 million in Mountain Fuel's rates. The PSCU, in
its order, also approved stipulations on purchased gas,
gathering, transportation, working gas and storage costs; the
treatment of revenue credits generated by Mountain Fuel as a
result of temporarily releasing firm capacity of Questar
Pipeline's system; and the handling of working gas costs in
Mountain Fuel's gas balancing account. As a result of this
stipulation on working gas costs, $2.1 million of costs reflected
in Mountain Fuel's general rate case application were added to
its gas balancing account. The PSCU, in its order, also required
Mountain Fuel to recognize unbilled revenues for ratemaking
purposes on a five-year phase-in basis. The order does permit
Mountain Fuel to accrue for postretirement welfare benefits
(medical coverage and life insurance).
The PSCU, on February 22, 1994, granted Mountain Fuel's
petition for rehearing of its order with respect to the issues of
return on equity and unbilled revenues. It requested Mountain
Fuel and other interested parties to file additional testimony on
unbilled revenues and set a hearing date of April 18, 1994.
Mountain Fuel is concerned about its financial ability to
add 16,000-18,000 customers per year when the PSCU insists on
using an historic test year and refuses to adjust the test year
data for known future changes. Mountain Fuel believes that its
risks of operating in a post-Order No. 636 environment are
greater than prior to the industry restructuring and is convinced
that the PSCU's order fails to recognize the impact of such
changes.
Mountain Fuel currently plans to file another general rate
case with the PSCU during late 1994 or early 1995. This plan may
change as a result of any action taken by the PSCU on rehearing.
Mountain Fuel owns and operates distribution systems
throughout its Utah, Wyoming and Idaho service areas and has a
total of 16,946 miles of street mains, service lines, and
interconnecting pipelines. Mountain Fuel currently owns an
office building in downtown Salt Lake City, Utah and is
constructing a new office building adjacent to a warehouse,
garage, and operations center in Salt Lake City, Utah. It also
owns operations centers, field offices, and service center
facilities throughout other parts of its service area. The mains
and lines are constructed pursuant to franchise agreements or
rights-of-way. Mountain Fuel has fee title to the properties on
which its office building and operation and service centers are
constructed.
Other Operations
In addition to the three major lines of business, Questar
has other operations that are discussed in detail below.
Questar Development Corporation. Questar Development has
been functioning since 1984 to handle business development
investments and real estate projects. A subsidiary, Interstate
Land Corporation (Interstate Land), owns and manages real estate
properties in Utah, Idaho, and Wyoming. Since 1989, Questar
Development has been a one-third owner in FuelMaker Corporation,
a Canadian corporation that develops, manufactures, and markets
small compressors to be used when refueling natural gas vehicles
in remote locations or residences. In addition to its investment
in FuelMaker, Questar Development has an equity investment in
several Utah-based companies engaged in research and development
activities.
Questar Service Corporation. Questar Service operates data
processing facilities and provides data processing services for
other members of the Questar group of companies. It also
operates a network of microwave facilities, all of which are
located in Mountain Fuel's service area or near Questar
Pipeline's transmission lines, for members of the affiliated
group. Services are priced to recover operating expenses and a
return on investment. During 1993, Questar Service expanded
services for nonaffiliated parties and expects to expand the
scope and level of such services. It is also engaged in
marketing efforts to sell software developed by its employees.
Discontinued Operations
On October 15, 1993, the Company and Advanced MobileCom,
Inc. (AMI) agreed to sell their specialized mobile radio (SMR)
subsidiaries to Nextel Communication Inc. Questar Telecom had
previously announced an agreement to form a new entity with the
AMI subsidiary to consolidate SMR assets and to build out
enhanced SMR systems in Las Vegas, Nevada, and other selected
locations. Pursuant to the terms of the agreement with Nextel,
the Company will exchange 100 percent of Questar Telecom's stock
for 3,886,000 shares of Nextel's common stock in a transaction
that was designed to be nontaxable.
The parties to the transaction have each received a request
from the Department of Justice for data relating to the effect of
the proposed transaction on competition within the SMR markets.
The parties expect to close the transaction after complying with
this request and obtaining the necessary approval from the
Federal Communications Commission to transfer the licenses.
Nextel has constructed an enhanced SMR system in Los Angeles
and is designing and building such systems in other locations.
It is positioned to be the first national operator of SMR and
enhanced SMR systems. The Company believes that it increased
shareholder value by agreeing to sell Questar Telecom to Nextel.
Employees
As of December 31, 1993, Questar and its affiliates had
2,596 employees compared to 2,545 at year-end 1992. (Both
numbers exclude Questar Telecom employees.) None of these
employees is represented under collective bargaining agreements.
Questar has comprehensive benefit plans for its employees.
Employee relations are generally deemed to be satisfactory.
Environmental Matters
Questar and its affiliates are subject to the National
Environmental Policy Act and other federal and state legislation
regulating the environmental aspects of their businesses. During
1993, Questar and its affiliates continued to be involved in
actions involving local and federal environmental enforcement
agencies and allegations of "hazardous waste" problems.
Entrada's liability for contamination is described in "Legal
Proceedings" and in Note I in the Notes to Consolidated Financial
Statements. The Company does not believe that environmental
protection provisions will have any significant effect on its
competitive position; it does believe, however, that such
provisions have added and will continue to add to it's capital
expenditures and operating costs.
As noted earlier, Questar is actively promoting the
environmental advantages of natural gas in comparison to other
fuels. It has actively participated in various clean air
committees and has promoted the use of natural gas in
automobiles. Questar's management believes that increasing
concerns about environmental pollution will result in an
increased demand for natural gas.
Research and Development
Mountain Fuel has the primary responsibility for the
Company's research and development activities. It evaluates gas
conversion equipment, gas piping, and engines using natural gas
and also evaluates technological developments with electrical
appliances and was involved in a special project to field test
two gas engine heat pumps. In addition to conducting research
activities and funding research activities of entities in which
the Company has an equity position, Questar and its affiliates
also contribute to research and development projects of industry
associations, e. g., the Gas Research Institute. The total
dollar amount spent by Questar on research and development
activities either directly or through contributions is not
material.
Oil and Gas Operations
Oil and gas operations are material to the business
functions and financial condition of Questar. (All information
set forth below relates to the Company on a consolidated basis.)
Certain information concerning the Company's oil and gas
operations is presented in Note N in the Notes to Consolidated
Financial Statements. The Company does not have any long-term
supply contracts with foreign governments or reserves of equity
investees.
Reserve Reports. The following is a reconciliation of
reserve quantities reported in Note N in the Notes to
Consolidated Financial Statements and reserve quantities reported
to other regulatory agencies:
Questar is reporting 620 Bcf of natural gas reserves at
year-end 1993. This total represents the net revenue interest of
all owned reserves and includes quantities attributable to
cost-of-service properties.
Mountain Fuel files information using a Form 2 format with
the PSCU and PSCW and lists gas reserves of 505 Bcf (working
interest) at December 31, 1993, which include reserves
attributable to royalty interests. The 428 Bcf (net revenue
interest) reported as cost-of-service reserves in Note N exclude
reserves attributable to royalty interests.
Questar Pipeline files a Form 2 (Annual Report) with the
FERC. The Form 2 discloses Questar Pipeline's cushion gas of 47
Bcf at December 31, 1993. This gas is not included in the total
reserve number.
Oil and Gas Production.1
1993 1992 1991
Natural gas (MMcf) 67,807 54,249 41,845
Oil (Mbbl) 2,056 2,175 2,148
1 Production quantities from all properties, including cost-
of-service properties.
Average Sales Price. 2
1993 1992 1991
Natural gas per Mcf $1.85 $1.65 $1.68
Oil per Bbl 16.68 18.64 21.56
2 Average sales price is calculated on production excluding
cost-of-service volumes.
Average Production (Lifting) Cost. The average production
cost per energy equivalent Mcf (Mcfe) excludes costs and volumes
associated with production of cost-of-service reserves. One
barrel of oil equals the energy content of 6,000 cubic feet of
gas.
1993 1992 1991
Production cost per Mcfe $ .60 $ .68 $ .91
Producing Wells at December 31, 1993.
Gas Oil
Gross wells 2,238 917
Net wells 633 146
The number for gross wells includes 15 wells with multiple
completions.
Leasehold Acreage at December 31, 1993. Questar can retain
its interest in undeveloped acreage by either drilling activity
that establishes commercial production or by the payment of delay
rentals. A portion of the unproved acreage may be allowed to
lapse prior to the primary terms of the lease. All leasehold
acreage is located in the United States. Approximately 85
percent of the unproved acreage consists of federal and state
leases that generally have ten-year terms. The remaining 15
percent is attributable to fee leases that generally have three-
five year terms. About 53 percent of the unproved acreage is
scheduled to expire within the next five years if no drilling or
development activity is undertaken.
The following chart lists the Company's productive and
unproved acreage by state:
State Productive Unproved
Gross Net Gross Net
Arkansas 956 499 587 389
Colorado 92,517 69,719 239,550 189,471
Indiana 269 235
Kansas 160 65
Michigan 169 28 79
Montana 11,042 5,532 19,910 12,703
Nebraska 2,800 1,435 2,880 721
Nevada 520 520 19,851 19,851
New Mexico 47,780 43,768 17,533 16,154
North Dakota 480 181
Oklahoma 149,073 53,044 24,041 10,257
Texas 51,547 9,022 7,160 3,075
Utah 61,684 40,311 81,006 58,127
Wyoming 217,680 152,452 323,227 223,600
Total 635,768 376,330 736,654 534,908
Net Productive and Dry Wells Drilled.
Exploratory Wells Development Wells
1993 1992 1991 1993 1992 1991
Productive 1 4 2 63 44 19
Dry 5 2 6 7 5 3
Total 6 6 8 70 49 22
Present Activities. At year-end 1993, Questar affiliates
had a working interest in 19 wells waiting on completion and 8
wells being drilled.
Delivery Commitments. Mountain Fuel is obligated to deliver
natural gas to about 550,000 customers in Utah, Wyoming and
Idaho, but future quantities associated with such service are
neither fixed nor determinable.
The three E&P companies sell a majority of their noncost-of-
service oil and gas production on the spot-market or under short-
term contracts that provide for price readjustments.
ITEM 3. LEGAL PROCEEDINGS
There are various legal proceedings pending against 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. Litigation
involving certain environmental matters is described below.
Questar, Entrada, and Mountain Fuel have each been named a
"potentially responsible party" for contaminants on property
owned by Entrada in Salt Lake City, Utah. 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. The underlying lawsuits seek declaratory relief that
the named potentially responsible parties, including the Questar
affiliates and unrelated parties, are liable for the expense of
the investigation and clean-up. The consent order was agreed to
by Questar, Entrada, and other affiliates as well as the Utah
Department of Health and the Environmental Protection Agency.
Entrada has settled with the named unrelated parties and has
assumed the liability of such parties.
Entrada has obtained approval for a specific design using in
situ vitrification procedure to clean up the Wasatch Chemical
property and expects this process to begin before year-end. The
clean-up procedure may take as long as three years.
Entrada has recorded all costs spent on the matter and has
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
future clean-up costs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of
stockholders during the last quarter of 1993.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Information concerning the market for the common equity of
the Company and the dividends paid on such stock is located in
Note O in the Notes to Consolidated Financial Statements. As of
March 21, 1994, Questar had 11,614 shareholders of record and
estimates that it had an additional 10,000 -- 12,000 beneficial
holders.
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
1993 1992 1991 1990 1989
(In Thousands)
Revenues $660,430 $591,346 $624,263 $532,035 $508,836
Operating expenses
Natural gas purchases 224,500 201,018 247,762 174,539 157,554
Other expenses 287,636 252,792 243,197 239,279 244,804
Total operating expenses 512,136 453,810 490,959 413,818 402,358
Operating income $148,294 $137,536 $133,304 $118,217 $106,478
Income from continuing operations $84,464 $73,771 $66,752 $59,221 $51,500
Loss from discontinued operations (2,772) (2,437) (2,719) (1,701) (743)
Cumulative effect of change in
accounting for income taxes 9,303
Net income $81,692 $80,637 $64,033 $57,520 $50,757
Earnings per common share
Income from continuing operations $2.10 $1.85 $1.70 $1.49 $1.30
Loss from discontinued operations (0.07) (0.06) (0.07) (0.04) (0.02)
Cumulative effect 0.23
Net income $2.03 $2.02 $1.63 $1.45 $1.28
Dividends per common share $1.09 $1.04 $1.01 $0.97 $0.945
Book value per common share 14.99 13.92 12.78 11.96 11.54
Total assets 1,417,687 1,320,358 1,212,519 1,148,340 1,079,912
Net cash provided from operating
activities 194,982 160,179 156,029 123,328 116,768
Capital expenditures 168,388 180,061 142,250 149,086 97,768
Capitalization
Long-term debt $371,713 $364,594 $354,327 $328,012 $275,371
Redeemable cumulative preferred
stock 7,525 8,726 9,955 11,155 12,396
Common stock 601,942 553,810 501,968 460,473 455,823
Total capitalization $981,180 $927,130 $866,250 $799,640 $743,590
Note - Selected financial data for 1989-1992 has been reclassified for the
reporting of discontinued operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SUMMARY
Questar Corporation's income from continuing operations was $84,464,000, or
$2.10 per share, in 1993, compared with $73,771,000, or $1.85 per share, in
1992 and $66,752,000, or $1.70 per share, in 1991.
Exploration and production operations had 1993 income of $36,325,000,
compared with $27,762,000 in 1992 and $20,965,000 in 1991. Natural gas
production and prices increased in 1993 but were partially offset by lower
oil production and prices.
Natural gas transmission operation's 1993 income was $23,275,000 compared
with $22,463,000 in 1992 and $22,057,000 in 1991. Questar Pipeline began
operating in accordance with Federal Energy Regulatory Commission (FERC)
Order No. 636 in September 1993. The demand component of rates is now
structured to recover 94% of the cost of service.
Natural gas distribution operations earned $25,069,000 in 1993 compared
with $23,395,000 in 1992 and $25,074,000 in 1991. The 1993 weather was 5%
colder than normal and 16% colder than 1992.
In October 1993, Questar announced that it had reached a binding agreement
to sell Questar Telecom to Nextel Communications, Inc. (Nextel). The sale
is expected to be completed in the first half of 1994.
Questar spent $168,388,000 for capital expenditures in 1993 and estimates
1994 capital expenditures to be $300,000,000. Cash provided from operating
activities financed the majority of the 1993 expenditures. Long-term debt
represented 38% of consolidated capitalization at December 31, 1993.
RESULTS OF OPERATIONS
EXPLORATION AND PRODUCTION - Celsius Energy, Universal Resources and
Wexpro conduct exploration and production (E&P) operations. Following are
operating income and statistics for these operations:
Year Ended December 31,
1993 1992 1991
(Dollars In Thousands)
OPERATING INCOME
Revenues
Natural gas production $59,911 $40,611 $23,867
Oil and natural gas liquid
production 32,965 38,669 43,922
Natural gas marketing 131,176 114,819 129,822
Cost-of-service gas operations 49,595 43,324 33,783
Other 2,800 4,144 3,095
Total revenues 276,447 241,567 234,489
Operating expenses
Natural gas purchases 127,312 113,527 122,989
Operating and maintenance 36,769 35,289 33,054
Depreciation and amortization 44,614 35,517 28,142
Oil-income sharing 1,028 3,389 4,190
Other taxes 17,337 11,604 12,879
227,060 199,326 201,254
Operating income $49,387 $42,241 $33,235
OPERATING STATISTICS
Production volumes
Natural gas (in MMcf) 32,299 24,550 14,193
Oil and natural gas liquids
(in Mbbls) 1,975 2,075 2,038
Production revenue
Natural gas (per Mcf) $1.85 $1.65 $1.68
Oil (per bbl) 16.68 18.64 21.56
Gas marketing volumes (in Mdth) 65,143 72,712 93,967
Noncost-of-service natural gas production increased 32% in 1993 following a
73% 1992 increase. The E&P group increased natural gas reserves over the
last several years through a successful natural gas exploration,
development and acquisition program. The E&P group changed its production
strategy in the last half of 1992 by increasing natural gas production to
near full capacity. Higher prices and lower full cost amortization rates
allowed the E&P group to produce at this level.
The natural gas sales price increased 12% in 1993 after a 2% decline in
1992. The E&P group sold the majority of its 1993 and 1992 production
based on spot-market or short-term contracts. The national market price of
natural gas increased in 1993 because excess delivery capacity decreased.
Although Rocky Mountain region natural gas is sold at a lower price than
the national average, the differential decreased in 1993. Current low oil
prices may limit increases in natural gas prices because many industrial
energy users have the ability to switch from natural gas to fuel oil.
Oil and natural gas liquid production decreased 5% in 1993 and increased 2%
in 1992. Declining production in mature fields was partially offset by oil
reserve increases. The E&P group has focused most of its exploration and
development efforts towards natural gas reserves in the last few years,
which has lessened the significance of oil and natural gas liquid
production to the Company.
Oil and natural gas liquid prices decreased 11% in 1993 and 14% in 1992 as
a result of worldwide production increases. The price at the end of 1993
was lower than the average for the year, and therefore, 1994 prices may be
lower than 1993. Declining oil prices reduced the oil income sharing paid
by Wexpro to Mountain Fuel as required by the Wexpro settlement agreement.
See Note L in the Notes to the Consolidated Financial Statements for a
description of this agreement.
Natural gas marketing volumes decreased 10% in 1993 and 23% in 1992. The
E&P group changed its marketing strategy from a high volume program to
targeting premium markets and marketing of E&P group production (marketing
volumes do not include E&P group production). The margin from gas
marketing was $3,864,000 in 1993 compared with $1,292,000 in 1992 and
$6,833,000 in 1991. The E&P group uses natural gas futures and options to
reduce the risk associated with the marketing activity.
Wexpro's revenue from cost-of-service gas operations increased 14% in 1993
and 28% in 1992 as a result of additional investment in gas-development
wells and recovery of higher costs associated with increased production.
Wexpro's net investment in cost-of-service gas operations was $92,561,000,
$81,261,000, and $71,936,000 at December 31, 1993, 1992 and 1991,
respectively. Wexpro has increased its investment primarily through
participation in infill-drilling programs in the Church Buttes, Bruff, and
Birch Creek fields in southwestern Wyoming.
In the first quarter of 1994, the E&P group announced two acquisitions of
oil and gas reserves, processing plants, gathering systems and leasehold
acreage for a cost of $117,100,000. The E&P group obtained oil and gas
reserves of approximately 115 Bcf equivalent located in the Midcontinent
and San Juan Basin regions. These acquisitions increase the
noncost-of-service oil and gas reserves by approximately 45%.
NATURAL GAS TRANSMISSION - Questar Pipeline conducts natural gas
transmission, storage, and gathering operations. Following are operating
income and statistics for these operations:
Year Ended December 31,
1993 1992 1991
(Dollars In Thousands)
OPERATING INCOME
Revenues
Sales for resale $81,813 $133,059 $172,631
Transportation 51,590 43,912 41,122
Gathering 20,386 17,822 6,926
Storage 14,698 7,798 6,572
Other 3,141 1,995 3,049
Total revenues 171,628 204,586 230,300
Operating expenses
Natural gas purchases 56,022 93,024 124,069
Operating and maintenance 48,356 46,601 46,699
Depreciation and amortization 14,084 13,699 13,187
Other taxes 3,915 3,842 3,630
122,377 157,166 187,585
Operating income $49,251 $47,420 $42,715
OPERATING STATISTICS
Natural gas volumes (in Mdth)
Sales for resale to Mountain
Fuel 24,337 38,981 47,634
Transportation
For Mountain Fuel 65,061 33,883 34,581
For other customers 149,188 171,097 164,989
Total transportation 214,249 204,980 199,570
Total system throughput 238,586 243,961 247,204
Gathering
For Mountain Fuel 44,432 48,164 20,110
For other customers 48,336 25,901 13,641
Total gathering 92,768 74,065 33,751
Natural gas revenues (per dth)
Sales for resale $3.36 $3.41 $3.62
Transportation 0.24 0.21 0.21
Gathering 0.22 0.24 0.21
Natural gas purchase cost (per dth) $2.28 $2.53 $2.36
Effective September 1, 1993, Questar Pipeline began operating in accordance
with FERC Order No. 636, which restructured the operations of natural gas
transmission companies. The order unbundled the sales-for-resale service
from the transportation, gathering and storage services. Questar Pipeline
eliminated its merchant function. That activity was assumed by Mountain
Fuel along with the gas-purchase contracts.
Order No. 636 requires a greater percentage of the cost of service to be
collected through demand charges. The percentage of costs included in the
demand component of rates increased from 66% prior to implementation to
about 94% after implementation. Substantially all of Questar Pipeline's
transportation capacity has been reserved by firm-transportation customers.
The customers can release that capacity to third parties when it is not
required for their own needs. Mountain Fuel has reserved transportation
capacity from Questar Pipeline of approximately 800,000 decatherms per day,
or approximately 85% of the total transportation capacity.
As a result of these changes in the rate structure, Questar Pipeline's
transportation throughput volumes do not have a significant impact on
short-term operating results. Firm-transportation customers continue to
pay the same demand charges regardless of actual volumes transported. After
$1.5 million in revenues are received from interruptible transportation
customers, 90% of the remaining revenues from the transportation of gas for
interruptible customers is credited back to firm customers. Questar
Pipeline is allowed to retain all interruptible-transportation revenues
from projects that have not been included in the transportation rate case.
Total transmission system throughput decreased 2% in 1993 and 1% in 1992.
Throughput for Mountain Fuel (including sales for resale and
transportation) increased 23% in 1993 and decreased 11% in 1992. The 1993
increase was primarily due to colder weather in Mountain Fuel's service
area. Expiring contracts resulted in deceased throughput for other
customers.
Reported gathering volumes increased 25% in 1993 and more than doubled in
1992. The 1993 increase was due to higher gas production in the Company's
operating areas, including production from affiliates. The 1992 increase
was mostly due to a change in rate structure that unbundled gathering from
sales for resale. Questar Pipeline began billing separately for gas
gathering service provided on sales-for-resale volumes in November 1991.
Storage revenues increased 88% in 1993 and 19% in 1992. Customers have
subscribed to all available working natural gas storage at Questar
Pipeline's Clay Basin storage field. A portion of the 1993 increase was
due to unbundling of storage services for Mountain Fuel that were included
with the sales for resale prior to the implementation of Order No. 636.
Order No. 636 allows pipelines to receive rate coverage for all prudently
incurred transition costs associated with the restructuring. Questar
Pipeline incurred capital costs of approximately $9 million in conjunction
with Order No. 636 implementation. Most of these costs were for electronic
metering and a bulletin board system and are expected to be included in the
next general rate case.
NATURAL GAS DISTRIBUTION - Mountain Fuel conducts natural gas distribution
operations. Following are operating income and statistics for these
operations:
Year Ended December 31,
1993 1992 1991
(Dollars In Thousands)
OPERATING INCOME
Revenues
Residential and commercial sales $360,210 $330,920 $368,266
Industrial sales 21,678 19,878 25,496
Industrial transportation 5,898 6,252 5,375
Other 14,605 15,997 17,622
Total revenues 402,391 373,047 416,759
Operating expenses
Natural gas purchases 230,139 218,123 253,111
Operating and maintenance 92,486 79,975 80,824
Depreciation and amortization 23,244 20,713 19,231
Other taxes 10,013 9,839 8,706
355,882 328,650 361,872
Operating income $46,509 $44,397 $54,887
OPERATING STATISTICS
Natural gas volumes (in Mdth)
Residential and commercial sales 79,369 68,635 76,324
Industrial deliveries
Sales 6,514 5,338 7,263
Transportation 53,105 51,621 45,977
Total industrial 59,619 56,959 53,240
Total deliveries 138,988 125,594 129,564
Natural gas revenue (per dth)
Residential and commercial $4.54 $4.82 $4.83
Industrial sales 3.33 3.72 3.51
Transportation for industrial
customers 0.11 0.12 0.12
Natural gas purchase price (per dth) $2.52 $2.83 $2.80
Heating degree days (normal 5,803) 6,073 5,235 6,084
Number of customers at end of period 550,184 532,109 515,825
Natural gas volumes sold to residential and commercial customers increased
16% in 1993 following a 10% decrease in 1992. Temperatures were 5% colder
than normal in 1993 and 10% warmer than normal in 1992. The number of
customers increased 3.4% in 1993 and 3.2% in 1992 because of expanding
population and construction in Mountain Fuel's service area.
Natural gas deliveries to industrial customers increased 5% in 1993 and 7%
in 1992, due to increased usage by metals, mining and petroleum customers.
These customers are using more natural gas because of expanded operations
and environmental concerns. The Company's industrial customers have not
switched to residual fuel oil with the decline in oil prices because gas
prices have been competitive and sufficient fuel oil is not readily
available.
Mountain Fuel assumed the responsibility for purchasing its own gas
supplies on September 1, 1993, when Questar Pipeline began operating in
accordance with FERC Order No. 636. Questar Pipeline transferred its gas
purchase contracts to Mountain Fuel. The majority of these contracts are
priced using a current natural gas market value. Mountain Fuel also
acquired an inventory of working gas to meet customer requirements.
Mountain Fuel has reserved transportation capacity on Questar Pipeline's
system of approximately 800,000 decatherms per day and pays an annual
demand charge of $49.2 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 majority of Questar
Pipeline's interruptible-transportation revenues.
Mountain Fuel reached a settlement of its Wyoming general rate case in July
1993, with the new rates effective August 1, 1993. The settlement approved
an annualized increase in rates of $721,000, including recovery of costs
attributable to FERC Order No. 636 and higher federal income tax rates.
In April 1993, Mountain Fuel filed a general rate case with the Public
Service Commission of Utah (PSCU). The original rate increase request was
revised to $10.3 million based on September 30, 1993 results and included a
12.1% rate of return on equity. Hearings on the case were held in November
1993 and a rate order was received in January 1994. The PSCU rate order
granted Mountain Fuel a $1.6 million decrease in general rates and a $2.1
million increase in costs allowed through the purchased-gas adjustment
account for a net increase in rates of $500,000. The PSCU allowed a return
on equity of 11%, required Mountain Fuel to reduce rates over a five-year
period for unbilled revenues, and disallowed rate coverage for certain
incentive compensation and advertising costs. Mountain Fuel requested a
rehearing of the PSCU order for the allowed return on equity and the
treatment of unbilled revenues, and the PSCU granted a rehearing on these
issues.
OTHER OPERATIONS - Following is a summary of the results from Questar's
other operations:
Year Ended December 31,
1993 1992 1991
(In Thousands)
INCOME (LOSS) FROM CONTINUING
OPERATIONS
FuelMaker ($1,710) ($1,429) ($1,242)
Corporate and other 1,505 1,580 (102)
($205) $151 ($1,344)
Questar owns a one-third interest in FuelMaker Corp., a Canadian company
that is developing a natural gas vehicle refueling appliance for commercial
or home use. Losses continued in 1993 as FuelMaker completed the design
and began production of a new model. FuelMaker plans to begin full-scale
production of the new model in 1994.
Corporate and other operations generated positive income in 1993 and 1992
due to lower interest and operating expenses compared with a loss in 1991.
The Company's subsidiary, Entrada Industries, Inc., has been named as a
potentially responsible party in an environmental clean-up action involving
a site in Salt Lake City. The site was the location of chemical operations
conducted by Entrada's Wasatch Chemical Division, which ceased operation in
1978. Entrada has proposed a remediation that has received approval from
the Environmental Protection Agency and the Utah Department of Health. The
Company has reached settlements with the other major potentially
responsible parties and has established an accrual for the remedial work
costs. Management believes that current accruals of $7,239,000 will be
sufficient for estimated future clean-up costs, which are expected to be
incurred over the next several years. The Company has recorded a receivable
from an insurance company of $3,500,000 for expected payments related to
the Wasatch Chemical clean-up. Additional amounts may be collected from
the insurance company if clean-up costs are higher than anticipated.
DISCONTINUED OPERATIONS - In October 1993, the Company announced that it
had reached a binding agreement to sell Questar Telecom to Nextel. The
Company will receive 3,886,000 shares of Nextel common stock in exchange
for all of the common stock of Questar Telecom. The operating results for
Questar Telecom have been reported as discontinued operations since Questar
Telecom represented all of Questar's investment in the specialized mobile
radio business.
The sale of Questar Telecom is expected to be completed in the first half
of 1994, at which time Questar expects to recognize a gain on the
transaction based on the Nextel stock price. Questar's net investment in
Questar Telecom is anticipated to be approximately $40 million at the time
of the sale, including the acquisition of approximately $11 million of
additional channels as required by the sale agreement. Nextel common stock
was $37 1/4 per share at December 31, 1993. Net losses from Questar
Telecom subsequent to the sale agreement have been deferred until the sale
is recorded. Questar has agreed to continue operating the Questar Telecom
business and provide any working capital requirements until the sale is
completed.
CONSOLIDATED OPERATING RESULTS - Consolidated revenues increased 12% in
1993 due to higher natural gas production from the E&P group and greater
volumes sold by Mountain Fuel to residential and commercial customers.
Consolidated revenues decreased 5% in 1992 because of lower gas marketing
volumes and reduced sales to residential and commercial customers.
Natural gas purchases increased 12% in 1993 after decreasing 19% in 1992
because of greater volumes sold by Mountain Fuel. Operating and
maintenance expenses increased 10% in 1993 and 1% in 1992. Major reasons
for the 1993 increase were: more customers and expanded service territory
for Mountain Fuel, recording of postretirement medical and life insurance
benefits on an accrual basis, increased natural gas production and
restructuring of Questar Pipeline operations in accordance with FERC Order
No. 636. Depreciation and amortization expense increased 18% in 1993 and
13% in 1992 due to capital expenditure programs in all lines of business
and higher natural gas production. The full cost amortization rate was
$.80 per Mcfe in 1993 compared with $.79 in 1992 and $.99 in 1991.
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 106 on Employer's Accounting for Postretirement
Benefits Other than Pensions effective January 1, 1993. This statement
requires the Company to expense the costs of postretirement benefits,
principally health-care benefits, over the service life of employees using
an accrual method. The Company is amortizing the transition obligation
over a 20-year period. Total cost of postretirement benefits other than
pensions under SFAS No. 106 was $5,918,000 in 1993 compared with the costs
based on cash payments to retirees plus the prefunding of some benefits
totaling $1,553,000 in 1992 and $1,740,000 in 1991.
Mountain Fuel and Questar Pipeline account for approximately 57% and 18% of
the postretirement benefit costs, respectively. The impact of SFAS No. 106
on Questar's future net income will be mitigated by recovery of these costs
from customers. Both the PSCU and the Public Service Commission of Wyoming
(PSCW) allowed Mountain Fuel to recover future SFAS No. 106 costs in the
1993 rate cases if the amounts are funded in an external trust. The FERC
issued an order granting rate recovery methodology for SFAS No. 106 costs
to the extent that pipeline companies contribute the amounts to an external
trust. Questar Pipeline expects to receive coverage of future SFAS No. 106
costs in its next general rate case and recovery of costs in excess of the
amounts currently included in rates for the period from 1993 to the rate
case filing if the rate case is filed prior to January 1, 1996.
Debt expense decreased 5% in 1993 because of lower rates and the
refinancing of higher cost debt in 1993 and 1992.
The effective income tax rate was 28.4% in 1993, 32.0% in 1992, and 36.8%
in 1991. The 1993 and 1992 rates were lower because of tight-sands gas
production credits of $11,026,000 in 1993 and $5,722,000 in 1992. The
higher production credits in 1993 were partially offset by an increase in
the federal income tax rate to 35% effective January 1, 1993. Mountain
Fuel and Questar Pipeline recorded the change in deferred income taxes
resulting from the increase in the federal tax rate as an increase to
income taxes recoverable from customers since the regulatory commissions
have adopted procedures to include underprovided deferred taxes in rates on
a systematic basis.
The Financial Accounting Standards Board (FASB) has issued SFAS No. 112,
Accounting for Postemployment Benefits. This statement requires the
Company to recognize the liability for postemployment benefits 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's principal liability under SFAS
No. 112 is a long-term disability program. The Company is required to
adopt SFAS No. 112 in the first quarter of 1994 and recognize a cumulative
effect of a change in accounting method amounting to approximately
$3,300,000. Some of this amount may be recovered from Mountain Fuel's and
Questar Pipeline's customers through subsequent rate changes. The effect
on ongoing net income is not expected to be significant.
The FASB has issued SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities, to be effective beginning in 1994. This
statement requires companies to adjust the value of the majority of
investments to fair value. The statement would not have a significant
impact on current operations, but will require Questar to carry the
investment in Nextel stock to be received from the sale of Questar Telecom
at fair value.
LIQUIDITY AND CAPITAL RESOURCES
The Company has met the majority of its cash needs for capital expenditures
and dividend payments with cash from operations for the last three years.
Net cash from operating activities was $194,982,000 in 1993, $160,179,000
in 1992, and $156,029,000 in 1991. Higher income from continuing
operations, and increased depreciation and amortization contributed to the
higher 1993 amount. Reduced gas storage inventory and increased accounts
payable and accrued expenses also provided a source of cash in 1993.
Following is a summary of capital expenditures for 1993, and a forecast of
projected 1994 expenditures, which is subject to board of director
approval.
1994
Estimated 1993
(In Thousands)
Exploration and production
Exploration $7,100 $8,780
Development 18,900 22,385
Leasehold acquisitions 1,200 1,262
Reserve acquisitions 117,100 1,228
Cost-of-service gas development 15,700 21,829
Other 2,306
160,000 57,790
Natural gas transmission
Clay Basin cushion gas and expansion 39,000 30,070
Transmission lines 7,700 4,856
Gathering facilities 16,300 5,743
Order 636 transition costs 4,313
TransColorado pipeline 2,300 354
General and other 5,600 2,244
70,900 47,580
Natural gas distribution
New-customer service equipment 16,700 16,749
Distribution system 8,900 9,295
Buildings 8,900 10,993
Computer software and hardware 6,400 4,702
General and other 10,500 8,919
51,400 50,658
Other operations
Investment in Questar Telecom 11,000 5,300
Other 6,700 7,060
17,700 12,360
$300,000 $168,388
The exploration and production operations participated in 206 wells in
1993, of which 143 were completed as gas wells, 11 were oil wells, 25 were
dry holes and 27 were in progress at year end. The 1993 drilling program
had an overall success rate of 86% and included the completion of
tight-sands gas credit wells that were spudded in 1992.
In the first quarter of 1994, the E&P group announced two acquisitions of
oil and gas reserves, processing plants, gathering systems and leasehold
acreage for a cost of $117,100,000. The E&P group obtained oil and gas
reserves of approximately 115 Bcf equivalent located in the Midcontinent
and San Juan Basin regions. The first acquisition was for properties from
Petroleum, Inc. and was completed in January 1994 at a cost of $22,600,000.
This purchase was financed with short-term debt. In the second
acquisition, the E&P group acquired the properties of Amax Oil & Gas's
northern division at a cost of $94,500,000 through an alliance with Union
Pacific Resources Corporation. This transaction is expected to be closed
in the first half of 1994 and will be financed with short-term debt and an
expansion of the production-based long-term credit facility.
Questar Pipeline is expanding the capacity of its Clay Basin underground
gas storage facility. After expansion, the storage field will have a total
capacity of 110 Bcf, including 46 Bcf of working gas storage. Capital
expenditures include the purchase of cushion gas. The first phase of the
expansion project is expected to be completed in mid-1994.
Questar Pipeline is a one-third partner in the TransColorado pipeline
project. The Company estimates the total cost of this project at $184
million, with Questar Pipeline's equity investment approximately $18
million. Construction of the pipeline has been delayed pending receipt of
final regulatory approvals and completion of contracts with shippers.
Mountain Fuel's number of customers increased 18,075 during 1993 and 16,284
in 1992 due to population growth and building construction activity in its
service area. The 1994 capital expenditures anticipate a similar level of
customer growth.
Questar estimates that it will invest an additional $11 million in Questar
Telecom for the purchase of FCC licenses and working capital requirements
prior to the completion of the sale of Questar Telecom to Nextel.
The Company funded its 1993 capital expenditures primarily with cash
provided from operations. The Company expects to finance the 1994 capital
expenditure program with: cash provided from operations, an expansion of
the E&P production-based credit facility, the issuance of an additional $17
million in medium-term notes by Mountain Fuel, and increased borrowing
under short-term line-of-credit arrangements. In addition, the Company may
issue common stock, or sell or monetize a portion of its investment in
Nextel common stock to fund capital expenditures.
The Company has short-term line-of-credit arrangements with several banks
under which it may borrow up to $150,700,000. These lines are generally
below the prime interest rate and are renewable annually. At December 31,
1993, outstanding short-term bank loans were $12,300,000 and commercial
paper borrowings were $66,000,000. Commercial paper borrowings are backed
by the short-term line-of-credit arrangements. Two national debt-rating
agencies have rated Questar's commercial paper P-1 and A-1.
The exploration and production operations have a long-term revolving-credit
arrangement with a bank to borrow up to $50,000,000. Borrowings under this
arrangement were $44,000,000 at December 31, 1993.
During 1993, Mountain Fuel issued $91,000,000 of 15-year and 30-year
medium-term notes at interest rates of 7.19% to 8.28%. Proceeds from these
notes and $16,000,000 remaining from the 1992 issuances were used to redeem
Mountain Fuel's $100,000,000 9 3/8% debentures and pay the associated
refinancing costs. At December 31, 1993, Mountain Fuel had a registration
statement filed with the Securities and Exchange Commission to issue an
additional $17,000,000 of medium-term notes.
The Company typically has negative net working capital at the end of the
year because of short-term borrowings. These borrowings are seasonal and
generally peak at the end of December because of cold-weather gas
purchases.
Questar has a consolidated capital structure of 38% long-term debt, 1%
preferred stock and 61% common shareholders' equity. Two national
debt-rating agencies have rated Mountain Fuel's and Questar Pipeline's
long-term debt A1 and A+.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedules
required by this Item are submitted in a separate section of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company 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
The information requested in this item concerning Questar's
directors is presented in the Company's definitive Proxy
Statement dated April 4, 1994, under the section entitled
"Election of Directors" and is incorporated herein by reference.
A copy of the definitive Proxy Statement will be filed with the
Securities and Exchange Commission on or about April 4, 1994.
The following individuals served as executive officers of
the Company during 1993:
Primary Positions Held with
Name the Company and Affiliates
R. D. Cash 51 Chairman of the Board of Directors (May
1985); President and Chief Executive
Officer, Director (May 1984); Chairman
of the Boards of Directors, all
affiliates.
D. N. Rose 49 President and Chief Executive Officer,
Mountain Fuel (October 1984); Director
(May 1984); Director, Mountain Fuel (May
1984); Senior Vice President, Questar
(May 1985).
Clyde M. Heiner 55 Senior Vice President, Questar (May
1988);President and Chief Executive
Officer, Questar Service Corporation
(February 1993); President and Chief
Executive Officer, Questar Development
(May 1984); Director, Entrada (May
1984), Questar Development (May 1984),
and Questar Service (February 1993).
A. J. Marushack 58 President and Chief Executive Officer,
Questar Pipeline (June 1984); Senior
Vice President, Questar (May 1985);
Director, Questar Pipeline (May 1984)
and Wexpro (May 1985).
Gary L. Nordloh 46 President and Chief Executive Officer,
Wexpro, Celsius, and Universal Resources
(March 1991); Senior Vice President,
Questar (March 1991); Executive Vice
President and Chief Operating Officer,
Wexpro, Celsius, and Universal Resources
(June 1989 to March 1991); Director,
Celsius and Wexpro (June 1989);
Director, Universal Resources (May
1989); Senior Vice President, Celsius
and Wexpro (May 1988 to June 1989).
W. F. Edwards 48 Senior Vice President and Chief Fi-
nancial Officer, Questar (February
1989); Vice President and Chief
Financial Officer, affiliates (at
various dates beginning in May 1984);
Vice President and Chief Financial
Officer, Questar (May 1984 to February
1989); Director, Questar Pipeline (May
1985).
R. G. Groussman 58 Vice President and General Counsel
(October 1984); Director, Wexpro
(November 1976) and Celsius (May 1988).
N. R. Potter 51 President and Chief Executive Officer,
Questar Telecom (February 1989);
President and Chief Executive Officer,
Questar Service (January 1985 to
February 1993); Vice President,
Information Services and
Telecommunications (February 1989 to
February 1993). (Mr. Potter does not
currently function as an executive
officer.)
Connie C.
Holbrook 47 Vice President and Corporate Secretary
(October 1984); Corporate Secretary,
Mountain Fuel and other affiliates (at
various dates beginning in March 1982);
Director, Celsius (May 1985), Wexpro
(May 1988), and Universal Resources
(June 1987).
There is no "family relationship" between any of the listed
officers or between any of them and the Company's directors. The
executive officers serve at the pleasure of the Board of
Directors. There is no arrangement or understanding under which
the officers were selected. Information concerning compliance
with Section 16(a) of the Securities Exchange Act of 1934, as
amended, is presented in the Company's definitive Proxy Statement
dated April 4, 1994, under the section entitled "Section 16(a)
Compliance" and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information requested in this item is presented in
Questar's definitive Proxy Statement dated April 4, 1994, under
the sections entitled "Executive Compensation" and "Election of
Directors" and is incorporated herein by reference. The sections
of the Proxy Statement labelled "Committee Report on Executive
Compensation" and "Cumulative Total Shareholder Return" are
expressly not incorporated into this document.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information requested in this item for certain
beneficial owners is presented in Questar's definitive Proxy
Statement dated April 4, 1994, under the section entitled
"Security Ownership, Principal Holders" and is incorporated
herein by reference. Similar information concerning the
securities ownership of directors and executive officers is
presented in the definitive Proxy Statement dated April 4, 1994,
under the section entitled "Security Ownership, Directors and
Executive Officers" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information requested in this item for related
transactions involving the Company's directors and executive
officers is presented in the definitive Proxy Statement dated
April 4, 1994, under the section entitled "Election of
Directors."
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 and schedules identified in
the List of Financial Statements and Financial Statement
Schedules are filed as part of this report.
The following consolidated financial statement schedules of
the Company are included in Item 14(d):
Schedule V - Property, plant and equipment.
Schedule VI - Accumulated depreciation, depletion
and amortization of property, plant
and equipment.
Schedule IX - Short-term borrowing.
Schedule X - Supplemental income statement
information.
(a)(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
2.* Plan and Agreement of Merger dated as of December
16, 1986, by and among the Company, Questar Systems
Corporation, and Universal Resources Corporation.
(Exhibit No. (2) to Current Report on Form 8-K
dated December 16, 1986.)
3.1.* Restated Articles of Incorporation effective May
28, 1991. (Exhibit No. 3.2. to Form 10-Q Report
for Quarter ended June 30, 1991.)
3.2.* Bylaws (as amended effective August 11, 1992).
(Exhibit No. 3. to Form 10-Q Report for Quarter
ended June 30, 1992.)
4.1.* Rights Agreement, dated as of March 14, 1986, between
the Company and Morgan Guaranty Trust Company
of New York pertaining to the Company's Shareholder
Rights Plan. (Exhibit No. 4. to Current Report on
Form 8-K dated March 14, 1986.)
4.2.* First Amendment to the Rights Agreement, dated as
of May 15, 1989, between the Company and Morgan
Shareholder Service Trust Company pertaining to the
Company's Shareholder Rights Plan. (Exhibit No.
28(a) to Current Report on Form 8-K dated May 15,
1989.)
10.1.* Stipulation and Agreement, dated October 14, 1981,
executed by Mountain Fuel; Wexpro; 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
Mountain Fuel Supply Company's Form 10-K Annual
Report for 1981.)
10.2.* 1 Questar Corporation Annual Management Incentive
Plan, as amended effective February 11, 1992.
(Exhibit No. 10.2. to Form 10-K Annual Report for
1991.)
10.3.* 1 Questar Corporation Executive Incentive Retirement
Plan, as amended effective November 1, 1993.
(Exhibit No. 10.3. to Form 10-Q Report for Quarter
ended September 30, 1993.)
10.4.* 1 Questar Corporation Stock Option Plan, as amended
effective February 13, 1990. (Exhibit No. 10.4. to
Form 10-K Annual Report for 1989.)
10.5.* 1 Questar Corporation Long Term Stock Incentive Plan
effective March 1, 1991. (Exhibit No. 10.5. to
Form 10-K Annual Report for 1990.)
10.6.* 1 Questar Corporation Executive Severance
Compensation Plan, as amended effective January 1,
1990. (Exhibit No. 10.5. to Form 10-K Annual
Report for 1989.)
10.7.* 1 Questar Corporation Deferred Compensation Plan for
Directors, as amended April 30, 1991. (Exhibit No.
10.7. to Form 10-K Annual Report for 1991.)
10.8.* 1 Questar Corporation Supplemental Executive Retire-
ment Plan, as amended and restated effective
November 1, 1993. (Exhibit No. 10.8. to Form 10-Q
Report for Quarter ended September 30, 1993.)
10.9.* 1 Questar Corporation Equalization Benefit Plan, as
amended and restated effective November 1, 1993.
(Exhibit No. 10.9. to Form 10-Q Report for Quarter
ended September 30, 1993.)
10.10.* 1 Questar Corporation Stock Option Plan for
Directors, as amended effective February 9, 1993.
(Exhibit No. 10.10. to Form 10-K Annual Report for
1992.)
10.11.* 1 Form of Individual Indemnification Agreement dated
February 9, 1993 between Questar Corporation and
Directors. (Exhibit No. 10.11. to Form 10-K Annual
Report for 1992.)
10.12.* 1 Questar Corporation Deferred Share Plan, as amended
and restated November 1, 1993. (Exhibit No. 10.12.
to Form 10-Q Report for Quarter ended September 30,
1993.)
10.13.* 1 Questar Corporation Deferred Compensation Plan as
adopted effective November 1, 1993. (Exhibit No.
10.13. to Form 10-Q Report for Quarter ended
September 30, 1993.)
11. Statement concerning computation of earnings per
share.
22. Subsidiary Information.
24. Consent of Independent Auditors.
25. Power of Attorney.
28.1.* Press Release dated October 18, 1993, announcing
the agreement with Nextel Communications, Inc.
(Exhibit No. 28.1. to Form 10-Q Report for Quarter
ended September 30, 1993.)
28.2. Form 11-K Annual Report for the Questar Corporation
Employee Stock Purchase Plan.
28.3. Undertakings for Registration Statements on Form S-
3 (No. 33-48168) and on Form S-8 (Nos. 33-4436, 33-
15148, 33-15149, 33-40800, 33-40801, and 33-48169).
* Exhibits so marked have been filed with the Securities and
Exchange Commission as part of the indicated filing and are
incorporated herein by reference.
1 Exhibit so marked is management contract or compensation
plan or arrangement
(b) The Company did not file a Current Report on Form 8-K
during the last quarter of 1993.
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
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1993
QUESTAR CORPORATION
SALT LAKE CITY, UTAH
FORM 10-K -- ITEM 14 (a) (1) and (2)
QUESTAR CORPORATION AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Questar Corporation and
subsidiaries are included in Item 8:
Consolidated statements of income -- Years ended December 31, 1993, 1992 and
1991
Consolidated balance sheets -- December 31, 1993 and 1992
Consolidated statements of common shareholders' equity -- Years ended
December 31, 1993, 1992 and 1991
Consolidated statements of cash flows -- Years ended December 31, 1993, 1992
and 1991
Notes to consolidated financial statements
The following consolidated financial statement schedules of Questar
Corporation and subsidiaries are included in Item 14(d):
Schedule V -- Property, plant and equipment
Schedule VI -- Accumulated depreciation, depletion
and amortization of property, plant
and equipment
Schedule IX -- Short-term borrowings
Schedule X -- Supplementary income statement
information
All other schedules, for which provision is made in the applicable accounting
regulation 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
Shareholders and Board of Directors
Questar Corporation
We have audited the accompanying consolidated balance sheets
of Questar Corporation and subsidiaries as of December 31,
1993 and 1992, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1993. Our
audits also included the financial statement schedules
listed in the Index at Item 14(a). These financial
statements and schedules 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 consolidated financial statements
referred to above present fairly, in all material respects,
the consolidated financial position of Questar Corporation
and subsidiaries at December 31, 1993 and 1992, and the
consolidated results of their operations and their cash
flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted
accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present
fairly in all material respects the information set forth
therein.
As noted in Note K to the financial statements, in 1993
Questar Corporation changed its method of accounting for
postretirement benefits other than pensions.
ERNST & YOUNG
Salt Lake City, Utah
February 11, 1994, except for Note M as to
which the date is March 1, 1994
QUESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
1993 1992 1991
(In Thousands, Except Per Share
Amounts)
REVENUES $660,430 $591,346 $624,263
OPERATING EXPENSES
Natural gas purchases 224,500 201,018 247,762
Operating and maintenance 168,835 153,198 151,976
Depreciation and amortization 86,758 73,553 65,240
Other taxes 32,043 26,041 25,981
TOTAL OPERATING EXPENSES 512,136 453,810 490,959
OPERATING INCOME 148,294 137,536 133,304
INTEREST AND OTHER INCOME 3,632 6,675 8,286
DEBT EXPENSE (33,984) (35,768) (35,953)
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 117,942 108,443 105,637
INCOME TAXES - Note H 33,478 34,672 38,885
INCOME FROM CONTINUING OPERATIONS 84,464 73,771 66,752
LOSS FROM DISCONTINUED OPERATIONS - Note (2,772) (2,437) (2,719)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME TAXES - Note H 9,303
NET INCOME $81,692 $80,637 $64,033
EARNINGS PER COMMON SHARE
Income from continuing operations $2.10 $1.85 $1.70
Loss from discontinued operations (0.07) (0.06) (0.07)
Cumulative effect 0.23
Net income $2.03 $2.02 $1.63
Average common shares outstanding 39,995 39,492 38,715
See notes to consolidated financial statements.
QUESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
1993 1992
(In Thousands)
CURRENT ASSETS
Cash and short-term investments - Notes C and F $6,365 $6,988
Accounts receivable 111,553 113,245
Unbilled gas accounts receivable - Note J 27,313
Inventories, at lower of average cost or market
Materials and supplies 8,183 6,731
Gas stored underground 21,745 32,603
Total inventories 29,928 39,334
Prepaid expenses and deposits 11,384 12,112
TOTAL CURRENT ASSETS 186,543 171,679
PROPERTY, PLANT AND EQUIPMENT
Exploration and production 706,852 661,835
Natural gas transmission 561,108 511,923
Natural gas distribution 710,100 667,667
Other operations 46,334 43,960
2,024,394 1,885,385
LESS ALLOWANCES FOR DEPRECIATION
AND AMORTIZATION
Exploration and production 389,559 350,405
Natural gas transmission 189,279 175,387
Natural gas distribution 267,314 249,056
Other operations 25,582 22,989
871,734 797,837
NET PROPERTY, PLANT AND EQUIPMENT 1,152,660 1,087,548
OTHER ASSETS
Investment in and advances to unconsolidated
affiliates 13,224 8,051
Investment in discontinued operations - Note B 29,498 26,970
Income taxes recoverable from customers - Note H 14,250 11,411
Unamortized costs of reacquired debt 14,797 8,088
Other 6,715 6,611
TOTAL OTHER ASSETS 78,484 61,131
$1,417,687 $1,320,358
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31,
1993 1992
(In Thousands)
CURRENT LIABILITIES
Short-term loans - Notes D and F $78,300 $70,000
Accounts payable and accrued expenses
Accounts payable 89,971 82,728
Federal income taxes 1,867 1,209
Other taxes 12,980 5,810
Interest payable 5,938 5,835
Other 8,308 6,561
Total accounts payable and accrued expenses 119,064 102,143
Purchased-gas adjustments 25,727 24,482
Current portion of long-term debt 16,000
TOTAL CURRENT LIABILITIES 223,091 212,625
LONG-TERM DEBT, less current portion
- Notes D and F 371,713 364,594
OTHER LIABILITIES
Unbilled gas revenues - Note J 26,489
Other 19,143 13,359
TOTAL OTHER LIABILITIES 45,632 13,359
DEFERRED INVESTMENT TAX CREDITS 8,089 8,518
DEFERRED INCOME TAXES - Note H 159,695 158,726
COMMITMENTS AND CONTINGENCIES - Note I
REDEEMABLE CUMULATIVE PREFERRED
STOCK - Notes E and F 7,525 8,726
COMMON SHAREHOLDERS' EQUITY - Note G
Common stock - without par value;
authorized 175,000,000 shares 303,503 293,855
Retained earnings 359,637 321,690
Treasury stock, at cost (34,396) (33,316)
Note receivable from employee investment plan
(ESOP) (26,802) (28,419)
TOTAL COMMON SHAREHOLDERS' EQUITY 601,942 553,810
$1,417,687 $1,320,358
See notes to consolidated financial statements.
QUESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
Note
Common Stock Retained Treasury Stock Receivable
Shares Amount Earnings Shares Amount from ESOP
(Dollars in Thousands)
Balances at January 1, 1991 40,475,892 $269,014 $257,495 (1,960,548) ($33,376) ($32,660)
Issuance of common stock 755,087 14,492 19,064 306
1991 net income 64,033
Payment of dividends
Preferred stock (904)
Common stock - $1.01 per share (39,098)
Income tax benefit of dividends paid
to ESOP 835
Purchase of treasury stock (12,994) (294)
Collection of note receivable from
ESOP 2,125
Balances at December 31, 1991 41,230,979 283,506 282,361 (1,954,478) (33,364) (30,535)
Issuance of common stock 503,139 10,349 41,333 707
1992 net income 80,637
Payment of dividends
Preferred stock (800)
Common stock - $1.04 per share (41,088)
Income tax benefit of dividends paid
to ESOP 580
Purchase of treasury stock (26,060) (659)
Collection of note receivable from
ESOP 2,116
Balances at December 31, 1992 41,734,118 293,855 321,690 (1,939,205) (33,316) (28,419)
Issuance of common stock 379,217 9,648 51,864 899
1993 net income 81,692
Payment of dividends
Preferred stock (695)
Common stock - $1.09 per share (43,610)
Income tax benefit of dividends paid
to ESOP 560
Purchase of treasury stock (56,595) (1,979)
Collection of note receivable from
ESOP 1,617
Balances at December 31, 1993 42,113,335 $303,503 $359,637 (1,943,936) ($34,396) ($26,802)
See notes to consolidated financial statements.
QUESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1993 1992 1991
(In Thousands)
OPERATING ACTIVITIES
Net income $81,692 $80,637 $64,033
Depreciation and amortization 91,196 77,985 69,350
Deferred income taxes (1,870) 8,094 1,692
Deferred investment tax credits (429) (471) (308)
Loss from discontinued operations 2,772 2,437 2,719
Cumulative effect of change in
accounting for income taxes (9,303)
173,361 159,379 137,486
Changes in operating assets and
liabilities
Accounts receivable 705 (7,065) (11,745)
Federal income taxes 658 1,233 63
Inventories 5,532 23 (5,850)
Prepaid expenses and deposits 728 (2,960) 755
Purchased-gas adjustments 1,245 13,216 25,540
Accounts payable and accrued
expenses 16,263 (4,531) 13,557
Other (3,510) 884 (3,777)
NET CASH PROVIDED FROM OPERATING
ACTIVITIES 194,982 160,179 156,029
INVESTING ACTIVITIES
Capital expenditures
Purchase of property, plant and
equipment (160,559) (166,445) (132,460)
Investment in discontinued
operations (5,300) (12,170) (7,700)
Other investments (2,529) (1,446) (2,090)
Total capital expenditures (168,388) (180,061) (142,250)
Proceeds from disposition of property,
plant and equipment, and investments 8,125 4,528 5,356
CASH USED IN INVESTING ACTIVITIES (160,263) (175,533) (136,894)
FINANCING ACTIVITIES
Issuance of common stock 10,547 11,056 14,798
Purchase of treasury stock (1,979) (659) (294)
Collection of note receivable from
ESOP 1,617 2,116 2,125
Redemption of preferred stock (1,201) (1,229) (1,200)
Issuance of long-term debt 129,227 148,000 121,694
Repayment of long-term debt (138,108) (124,808) (97,804)
Change in short-term loans 8,300 23,300 (24,300)
Payment of dividends (44,305) (41,888) (40,002)
Income tax benefit of dividends paid
to ESOP 560 580 835
CASH PROVIDED FROM (USED IN)
FINANCING ACTIVITIES (35,342) 16,468 (24,148)
CHANGE IN CASH AND SHORT-TERM
INVESTMENTS (623) 1,114 (5,013)
BEGINNING CASH AND SHORT-TERM
INVESTMENTS 6,988 5,874 10,887
ENDING CASH AND SHORT-TERM
INVESTMENTS $6,365 $6,988 $5,874
See notes to consolidated financial statements.
QUESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Accounting Policies
Principles of Consolidation: The consolidated financial statements contain
the accounts of Questar Corporation and subsidiaries (Questar or the Company).
Questar is engaged in three principal lines of business. Oil and gas
exploration and production operations are conducted by Celsius Energy Company
(Celsius Energy), Universal Resources Corporation (Universal Resources) and
Wexpro Company (Wexpro). Natural gas transmission operations are conducted by
Questar Pipeline Company (Questar Pipeline). Natural gas distribution
operations are conducted by Mountain Fuel Supply Company (Mountain Fuel).
Questar discontinued the consolidation of its specialized mobile radio
telecommunication operations in October 1993 with the announced sale of
Questar Telecom Inc. (Questar Telecom) discussed in Note B. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Regulation: Mountain Fuel is regulated by the Public Service Commission of
Utah (PSCU) and the Public Service Commission of Wyoming (PSCW). Questar
Pipeline is regulated by the Federal Energy Regulatory Commission (FERC).
These regulatory agencies establish rates for the storage, transportation and
sale 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. See Note J
on rate matters.
The financial statements of rate regulated businesses 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.
Purchased-Gas Adjustments: The Company 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.
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 impacted differently by changing conditions. The
Company believes that it has adequately reserved for expected credit-related
losses.
Property, Plant and Equipment: Property, plant and equipment are stated at
cost. Celsius Energy and Universal Resources account for exploration and
development activities using the full-cost accounting method. Under the
full-cost method, all costs associated with acquisition, exploration and
development of oil and gas reserves are capitalized. If net capitalized costs
exceed the present value of estimated future net revenues from proved oil and
gas reserves plus the fair market value of unproved properties, the excess is
expensed. Wexpro uses the successful-efforts accounting method to account for
its production and development activities under the terms of the Wexpro
settlement agreement. See Note L.
The provision for depreciation and amortization is based upon rates that will
amortize costs of assets over their estimated useful lives. The costs of
natural gas distribution and natural gas transmission property, plant and
equipment, excluding gas wells, are amortized using the straight-line method.
The costs of oil and gas wells, production plants and leaseholds are amortized
using the unit-of-production method. Average depreciation and amortization
rates used in 1993 were as follows:
Exploration and production, per
Mcf equivalent
Full-cost amortization rate $0.80
Wexpro amortization rate 0.48
Natural gas transmission 3.6%
Natural gas distribution
Distribution plant 3.9%
Gas wells, per Mcf $0.18
Other operations 12.4%
Investment in Unconsolidated Affiliates: The Company uses the equity method
to account for affiliates in which it does not own a controlling interest.
Principal affiliates include: Overthrust Pipeline Company, FuelMaker
Corporation, TransColorado Gas Transmission Company and Canyon Creek
Compression Company. The Company's investment in these affiliates equals the
underlying equity in net assets.
Futures Contracts and Options: The Company periodically enters into futures
contracts or option agreements to hedge its exposure to price fluctuations on
marketing of natural gas. Recognized gains and losses on hedge transactions
are reported as a component of the related transaction.
Income Taxes: On December 31, 1992, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 109 by recording a cumulative effect
of the change in accounting related to prior years. The deferred tax balance
represents the temporary differences between book and taxable income
multiplied by the effective tax rates. These temporary differences relate
primarily to depreciation, intangible drilling costs, unbilled revenues,
leasehold costs, purchased-gas adjustments and net operating loss
carryforwards. Mountain Fuel and Questar Pipeline use the deferral method to
account for investment tax credits as required by regulatory commissions. The
Company allocates income taxes to subsidiaries on a seperate return basis
except that subsidiaries are paid for all tax benefits utilized in the
consolidated tax return. See Note H.
Reacquisition of Debt: Gains and losses on the reacquisition of debt by
Mountain Fuel and Questar Pipeline are deferred and amortized as debt expense
over the remaining life of the issue or the life of the replacement debt in
order to match regulatory treatment.
Allowance for Funds Used During Construction: The Company's regulated
subsidiaries capitalize the cost of capital during the construction period of
plant and equipment. This amounted to $1,725,000 in 1993, $1,153,000 in 1992,
and $1,040,000 in 1991.
Earnings Per Common Share: Earnings per common share are computed by dividing
net income less preferred stock dividends by the weighted average number of
common shares outstanding during the year. Common stock equivalents in the
form of stock options do not have a material dilutive effect on the
earnings-per-share calculations and are excluded from the computation.
Reclassifications: Certain reclassifications were made to the 1992 and 1991
financial statements to conform with the 1993 presentation.
Note B - Discontinued Operations
In October 1993, the Company announced that it had reached a binding agreement
to sell its Questar Telecom to Nextel Communications, Inc. (Nextel). The
Company will receive 3,886,000 shares of Nextel common stock in exchange for
all of the common stock of Questar Telecom. The operating results for Questar
Telecom have been reported as discontinued operations since Questar Telecom
represented all of Questar's investment in the specialized mobile radio
business.
The sale of Questar Telecom is expected to be completed in the first half of
1994, at which time, Questar expects to recognize a gain on the transaction
based on the Nextel stock price. Questar's net investment in Questar Telecom
is anticipated to be approximately $40 million at the time of the sale,
including the acquisition of additional channels as required by the sale
agreement. Nextel common stock traded in a range of $17 7/8 to $54 7/8 during
1993 and was $37 1/4 per share at December 31, 1993. Net losses from Questar
Telecom subsequent to the sale agreement have been deferred until the sale is
recorded.
Questar Telecom's operating results prior to the sale agreement were as
follows:
Nine Months
Ended
September 30Year Ended December 31,
1993 1992 1991
(In Thousands)
Revenues $14,517 $13,500 $8,081
Expenses (18,944) (17,352) (12,386)
Income tax credit 1,655 1,415 1,586
Net loss ($2,772) ($2,437) ($2,719)
Questar's investment in discontinued operations at September 30, 1993,
including liabilities to be assumed by the purchaser, was as follows:
(In Thousands)
Current assets $6,622
Net property, plant and equipment 10,841
Net intangible assets 13,908
Current liabilities (1,162)
Long-term debt (171)
Deferred income taxes (540)
$29,498
Note C - Cash and Short-Term Investments
Short-term investments at December 31, 1993, and 1992, valued at cost
(approximates market), amounted to $11,917,000 and $14,958,000, respectively.
Short-term investments consisted principally of Euro-time deposits and
repurchase agreements with maturities of three months or less.
Note D - Debt
The Company has short-term line-of-credit arrangements with several banks
under which it may borrow up to $150,700,000. These lines have interest rates
generally below the prime interest rate and are renewable annually. At
December 31, 1993, outstanding short-term bank loans were $12,300,000 at an
average interest rate of 3.5% and commercial paper borrowings were $66,000,000
at an average interest rate of 3.5%. Commercial paper borrowings are backed
by the short-term line-of-credit arrangements.
The details of long-term debt at December 31, were as follows:
1993 1992
(In Thousands)
Exploration and production
Notes payable due 1997 at variable
interest rates (3.9% at
December 31, 1993) $44,000 $45,000
Questar Pipeline
9 3/8% debentures due 2021 85,000 85,000
9 7/8% debentures due 2020 50,000 50,000
Mountain Fuel
Medium-term notes 7.19% to 8.43%,
due 2007 to 2023 158,000 67,000
9 3/8% debentures due 2016 100,000
Questar
8.32% ESOP notes due 1996 19,000 19,000
8.36% ESOP notes due 1999 16,000 16,000
Other 226
Total long-term debt outstanding 372,226 382,000
Less current portion 16,000
Less unamortized debt discount 513 1,406
$371,713 $364,594
Maturities of long-term debt for the five years following December 31, 1993,
are as follows (no amounts are due in 1994):
(In Thousands)
1995 $5,500
1996 41,000
1997 21,200
1998 5,300
The exploration and production operations have a production-based long-term
credit facility with a bank to borrow up to $50,000,000.
During 1993, Mountain Fuel issued $91,000,000 of 15-year and 30-year
medium-term notes at interest rates of 7.19% to 8.28%. Proceeds from these
notes and $16,000,000 remaining from the 1992 issuances were used to redeem
Mountain Fuel's $100,000,000 9 3/8% debentures and pay the associated
refinancing costs. At December 31, 1993, Mountain Fuel had a registration
statement filed with the Securities and Exchange Commission to issue an
additional $17,000,000 of medium-term notes.
Cash paid for interest was $33,414,000 in 1993, $36,115,000 in 1992, and
$37,374,000 in 1991.
Note E - Redeemable Cumulative Preferred Stock
Mountain Fuel has authorized 4,000,000 shares of nonvoting redeemable
cumulative preferred stock with no par value. The two current outstanding
issues of stock have a stated and redemption value of $100 per share.
$8.625 Serie 8% Series
(In Thousands)
Balance at January 1, 1991 $6,000 $5,155
1991 redemption of stock (1,200)
1992 redemption of stock (1,200) (29)
1993 redemption of stock (1,200) (1)
Balance at December 31, 1993 $2,400 $5,125
Redemption requirements for the five years following December 31, 1993, are as
follows:
(In Thousands)
1994 $600
1995 685
1996 780
1997 780
1998 180
Note F - Estimated Fair Values of Financial Instruments
The carrying amounts and estimated fair values of the Company's financial
instruments were as follows:
December 31, 1993 December 31, 1992
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In Thousands)
Financial assets
Cash and short-term investments $6,365 $6,365 $6,988 $6,988
Financial liabilities
Short-term loans 78,300 78,300 70,000 70,000
Long-term-debt 371,713 424,195 380,594 403,752
Redeemable cumulative preferred
stock 7,525 7,654 8,726 8,857
The Company used the following methods and assumptions in estimating fair
values: (1) Cash and short-term investments - the carrying amount
approximates fair value; (2) Short-term loans - the carrying amount
approximates fair value; (3) Long-term debt - the carrying amounts of variable
rate debt approximates fair value, the fair value of marketable debt is based
on quoted market prices, and the fair value of other debt is based on the
discounted present value of cash flows using the Company's current borrowing
rates; (4) Redeemable cumulative preferred stock - the fair value is based on
the discounted present value of cash flows using current preferred stock
rates.
Note G - Common Stock
Employee Investment Plan: An Employee Investment Plan (ESOP) allows the
majority of employees to purchase Company stock or other investments with
payroll deductions. The Company makes contributions to the ESOP of
approximately 75% of the employee's purchases. In June 1989, the Company sold
1,992,884 shares of its common stock (LESOP shares) to the trustee of the
ESOP. The ESOP trustee financed the purchase of stock by borrowing $35,000,000
from the Company. The note receivable from the ESOP was recorded as a
reduction of common shareholders' equity. At the same time, the Company
borrowed $35,000,000 from a group of insurance companies. Interest expense on
these notes to the insurance companies totaled $2,918,000 in 1993, 1992 and
1991.
The ESOP is repaying the loan to the Company over ten years using Company
contributions and dividends on the LESOP shares. The Company's expense and
contribution to the ESOP was $2,368,000 in 1993, $2,477,000 in 1992 and
$2,884,000 in 1991. Dividends paid by the Company to the ESOP on the LESOP
shares totaled $2,112,000 in 1993, $2,033,000 in 1992 and $1,989,000 in 1991.
The Company received an income tax benefit for dividends paid on ESOP shares
and dividends paid directly to ESOP participants of $911,000 in 1993, $858,000
in 1992 and $835,000 in 1991. Income tax benefits of $351,000 in 1993 and
$278,000 in 1992 were recorded as a reduction of income tax expense as
required by SFAS No. 109. The remaining tax benefits were recorded as an
increase to retained earnings.
The American Institute of Certified Public Accountants issued a Statement of
Position in 1993 on accounting for ESOPs, which changes the recognition of
expense on company contributions. The new rules will not impact expense on
the current LESOP shares.
Dividend Reinvestment and Stock Purchase Plan: A Dividend Reinvestment and
Stock Purchase Plan (Reinvestment Plan) allows shareholders to reinvest
dividends or invest additional funds in common stock. The Reinvestment Plan
purchased common stock from the Company amounting to 148,708 shares in 1993,
241,322 shares in 1992 and 498,483 shares in 1991. At December 31, 1993,
1,059,865 shares were reserved for future issuance.
Stock Plans: The Company has a Long-term Stock Incentive Plan for officers
and key employees and a Stock Option Plan for nonemployee directors (Stock
Plans). The Long-term Stock Incentive Plan was approved by shareholders in
1991 and replaces a previous stock option plan for officers and key employees.
The number of shares available for options or other stock awards under the
Long-term Stock Incentive Plan is increased each year by 1% of the outstanding
shares of common stock on the first day of the calendar year. No awards may
be granted under the Long-term Stock Incentive Plan after May 2001. The Stock
Option Plan for nonemployee directors was amended in 1991 and the term
extended to May 1996.
Transactions involving option shares in the Stock Plans are summarized as
follows:
Price
Shares Range
Balance at January 1, 1991 1,272,150 $14.38 - $19.63
Granted 347,000 17.69
Cancelled (67,574) 14.38 - 19.63
Exercised (521,948) 14.38 - 19.63
Balance at December 31, 1991 1,029,628 16.50 - 19.63
Granted 410,700 19.63
Cancelled (54,944) 16.50 - 19.63
Exercised (482,777) 16.50 - 19.63
Balance at December 31, 1992 902,607 16.50 - 19.63
Granted 415,800 28.88
Cancelled (11,738) 16.82
Exercised (407,133) 16.50 - 28.88
Balance at December 31, 1993 899,536 $16.50 - $28.88
Exercisable at December 31, 1993 424,786
Reserved for future grant at December 31 542,427
Shareholder Rights: In 1986, Questar issued one common share purchase right
for each outstanding share of stock. The rights expire in March 1996. The
rights become exercisable if a person acquires 20% or more of the Company's
common stock or announces an offer for 20% or more of the common stock. Each
right initially represents the right to buy one share of the Company's common
stock for $50. Once any person acquires 20% or more of the Company's common
stock, the rights are automatically modified. Each right not owned by the 20%
owner becomes exercisable for the number of shares of Questar's stock that
have a market value equal to two times the exercise price of the right. This
same result occurs if a 20% owner acquires the Company through a reverse
merger when Questar and its stock survive. If the Company is involved in a
merger or other business combination at any time after the rights become
exercisable, rights holders will be entitled to buy shares of common stock in
the acquiring company having a market value equal to twice the exercise price
of each right. The rights may be redeemed by the Company at a price of $.025
per right until 15 days after a person acquires 20% ownership of the common
stock.
Note H - Income Taxes
Effective January 1, 1992, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by SFAS
No. 109, Accounting for Income Taxes. The Company did not restate prior
years' financial statements. The cumulative effect of adopting SFAS No. 109
as of January 1, 1992, increased net income by $9,303,000, or $.23 per share.
The application of the rules did not have a significant impact on the 1992
income before cumulative effect.
Regulated operations recorded cumulative increases in deferred taxes as income
taxes recoverable from customers. Mountain Fuel and Questar Pipeline have
adopted procedures with their regulatory commissions to include under-provided
deferred taxes in customer rates on a systematic basis. The amounts of income
taxes recoverable from customers was higher in 1993 due to an increase in the
federal income tax rate.
As of January 1, 1992, Universal Resources recorded a cumulative decrease in
deferred taxes of $8,626,000 as a reduction of property, plant and equipment.
This cumulative effect was a result of net operating loss carryforwards
acquired by Questar in the 1987 purchase of Universal Resources. At December
31, 1993, the Company had net operating loss carryforwards of $44,778,000
which expire from 1995 through 2001. These carryforwards can be used to
offset Universal Resources' future taxable income. The tax benefit of these
carryforwards is $15,672,000. For financial reporting purposes, the Company
has recorded a valuation allowance of $6,414,000 to offset a portion of the
deferred tax asset relating to these carryforwards. Future changes in this
valuation allowance will be recorded as an adjustment to property, plant and
equipment.
The components of income taxes were as follows:
Year Ended December 31,
1993 1992 1991
(In Thousands)
Federal
Current $30,878 $23,615 $33,673
Deferred (2,044) 6,901 2,050
State
Current 4,899 3,404 3,828
Deferred 174 1,223 (358)
Deferred investment tax credits (429) (471) (308)
$33,478 $34,672 $38,885
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,
1993 1992 1991
(In Thousands)
Income before income taxes $117,942 $108,443 $105,637
Federal income taxes at statutory rate $41,280 $36,871 $35,917
State income taxes, net of federal
income tax benefit 3,358 3,054 2,170
Tight-sands gas production credits (11,026) (5,722)
Investment tax credits (429) (471) (308)
Increase in federal income tax rate 1,027
Adjustment to deferred tax rates (1,268)
Deferred taxes related to regulated
assets for which deferred taxes
were not provided in prior years 744 768 921
Other (208) 172 185
Income tax expense $33,478 $34,672 $38,885
Effective income tax rate 28.4% 32.0% 36.8%
Significant components of the Company's deferred tax liabilities and assets
were as follows:
December 31,
1993 1992
(In Thousands)
Deferred tax liabilities
Property, plant and equipment $189,495 $178,958
Unamortized debt reacquisition costs 5,587 2,977
Pension costs 1,811 2,518
Income taxes recoverable from
customers 5,350 4,249
Other 8,875 7,275
Total deferred tax liabilities 211,118 195,977
Deferred tax assets
Net operating loss carryforwards 15,672 18,792
Alternative minimum tax and production
credit carryforwards 7,504
Purchased-gas adjustments 11,477 3,302
Unbilled revenues 9,780 10,312
Deferred investment tax credits 3,327 3,175
Other 10,077 7,783
Total deferred tax assets 57,837 43,364
Valuation allowance for deferred tax
assets (6,414) (6,113)
Net deferred tax assets 51,423 37,251
Net deferred tax liabilities $159,695 $158,726
Cash paid for income taxes was $25,588,000 in 1993, $25,028,000 in 1992 and
$33,523,000 in 1991.
Note I - Litigation, Environmental Matters and Commitments
The Company's subsidiary, Entrada Industries, Inc., has been named as a
potentially responsible party in an environmental clean-up action involving a
site in Salt Lake City. The site was the location of chemical operations
conducted by Entrada's Wasatch Chemical Division, which ceased operation in
1978. Entrada has proposed a remediation that has received approval from the
Environmental Protection Agency and the Utah Department of Health.
Settlements have been reached with the other major potentially responsible
parties and an accrual has been established for the remedial work costs.
Management believes that current accruals of $7,239,000 will be sufficient
for estimated future clean-up costs, which are expected to be incurred over
the next several years. The Company has recorded a receivable from an
insurance company of $3,500,000 for expected payments related to the Wasatch
Chemical clean-up. Additional amounts may be collected from the insurance
company if clean-up costs are higher than anticipated.
The Company and its subsidiaries have received notice that they may be
partially liable in several additional 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 the results of operations or its financial
position.
There are various other legal proceedings against Questar and its
subsidiaries. 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.
Many of Mountain Fuel's gas-purchase contracts include take-or-pay provisions
that obligate it, on an annual basis, to take delivery of at least a specified
percentage of volumes producible from wells or pay for such volumes. The
contracts allow for the subsequent delivery of the gas within a specified
period. Other gas-purchase contracts include provisions that obligate
Mountain Fuel to schedule a specific volume for delivery on a daily or monthly
basis. All gas-purchase contracts were transferred from Questar Pipeline to
Mountain Fuel in 1993.
Purchases of natural gas under gas-purchase contracts totalled $85,909,000 in
1993, $104,032,000 in 1992 and $123,319,000 in 1991. Following is a summary
of projected purchase commitments under gas-purchase contracts with terms of
one year or more. Prices under these contracts are based on the current
market price. These commitments will change as a result of future
negotiations with sellers.
(In Millions)
1994 $25.4
1995 11.2
1996 9.3
1997 8.4
1998 0.9
Note J - Rate Matters
On September 1, 1993, Questar Pipeline began operating in compliance with FERC
Order No. 636. The order unbundled the sale-for-resale service from the
transportation, gathering and storage services provided by natural gas
pipelines. Questar Pipeline eliminated its merchant function. That activity
was assumed by Mountain Fuel along with the gas-purchase contracts. In its
order approving Questar Pipeline's Order No. 636 implementation plan, the
FERC accepted Questar Pipeline's plan for the assignment of gas-purchase
contracts to Mountain Fuel.
Order No. 636 requires a greater percentage of the cost of service to be
collected through demand charges. The percentage of costs included in the
demand component of rates increased from 66% prior to implementation to about
94% after implementation. The majority of Questar Pipeline's transportation
capacity has been reserved by firm transportation customers, which, under
Order No. 636, can release that capacity to third parties when it is not
required for their own needs. After $1.5 million of revenues are received
from interruptible transportation customers, 90% of the remaining revenues
from the transportation of gas for interruptible customers is credited back to
firm customers. Questar Pipeline is allowed to retain all interruptible
transportation revenues on projects that have not been included in the
transportation rate case.
Mountain Fuel filed a general rate case for its Utah operations in April 1993.
The revised amount of deficiency requested in the case was $10.3 million,
including a 12.1% return on equity. In January 1994, the PSCU issued a rate
order granting Mountain Fuel a $1.6 million decrease in general rates and a
$2.1 million increase in costs allowed through the purchase-gas adjustment
account for a net increase in rates of $500,000. The PSCU allowed a return on
equity of 11%, required Mountain Fuel to reduce rates over a five-year period
for unbilled revenues, and disallowed rate coverage for certain incentive
compensation and advertising costs. Mountain Fuel requested a rehearing of
the PSCU order for the allowed return on equity and the treatment of unbilled
revenues and the PSCU granted a rehearing on these issues.
In 1993, Mountain Fuel began accruing gas distribution 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 in accordance with a rate order received from the PSCU. This rate
order reduces customer rates by $2,011,000 per year over the five-year period
from 1994 through 1998. Mountain Fuel will recognize the unbilled revenues
and the associated gas costs over this same five-year period to offset the
reduction in rates.
In July 1993, the PSCW issued an order in Mountain Fuel's general rate case
for Wyoming operations. The order approved a stipulation that had been
negotiated by the Company and the PSCW's staff which allowed for an increase
in general rates of $721,000 including recovery of costs attributable to FERC
Order No. 636 and higher federal income tax rates.
Note K - Employee Benefits
The Company and its subsidiaries have a defined-benefit pension plan covering
the majority of its employees. Benefits are generally based on years of
service and the employee's 36-month period of highest earnings during the ten
years preceding retirement. The Company's policy is to make contributions to
the plan at least sufficient to meet the minimum funding requirements of of
the Internal Revenue Code. Plan assets consist principally of equity
securities and corporate and U.S. government debt obligations. A summary of
pension cost is as follows:
Year Ended December 31,
1993 1992 1991
(In Thousands)
Service cost $6,190 $5,892 $5,007
Interest cost 15,315 14,442 13,363
Actual gain on plan assets (22,027) (9,173) (33,320)
Net amortization and deferral 7,116 (5,106) 20,497
Pension cost $6,594 $6,055 $5,547
Assumptions used to calculate cost at January 1, were as follows:
1993 1992 1991
Discount rate 8.00% 8.00% 8.50%
Rate of increase in compensation 6.35% 6.35% 6.35%
Long-term return on assets 8.50% 8.50% 8.50%
The status of the plan at December 31, was as follows:
1993 1992 1991
(In Thousands)
Actuarial present value of benefits
Vested benefits $138,650 $121,062 $115,634
Nonvested benefits 18,951 16,547 15,351
Accumulated benefit obligation 157,601 137,609 130,985
Effect of projected future salary
increases 59,798 52,213 46,093
Projected benefit obligation 217,399 189,822 177,078
Fair value of plan assets 203,053 182,421 175,426
Projected benefit obligation in
excess of plan assets (14,346) (7,401) (1,652)
Unrecognized net losses (gains) 15,707 7,678 (89)
Unrecognized transition obligation 1,069 1,212 1,356
Unrecognized prior service cost 4,385 4,779 5,173
Prepaid pension cost $6,815 $6,268 $4,788
The Company used a discount rate of 7% and a rate of increase in compensation
of 5.35% to measure the actuarial present value of benefits at December 31,
1993.
The Company pays a portion of the health-care costs and all the life insurance
costs for retired employees. Effective January 1, 1992, this program was
changed for employees retiring after January 1, 1993, to link the health-care
benefit to years of service and to limit the Company's monthly health-care
contribution per individual to 170% of the 1992 contribution. 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 obligation, and insurance company general accounts.
The Company adopted the provisions of SFAS No. 106 on Employer's Accounting
for Postretirement Benefits Other than Pensions effective January 1, 1993.
This statement requires the Company to expense the costs of postretirement
benefits, principally health-care benefits, over the service life of employees
using an accrual method. The Company is amortizing the transition obligation
over a 20-year period. Total cost of postretirement benefits other than
pensions under SFAS No. 106 was $5,918,000 in 1993 compared with the costs
based on cash payments to retirees plus the prefunding of some benefits
totaling $1,553,000 in 1992 and $1,740,000 in 1991.
Components of the postretirement benefit cost for 1993 were as follows:
(In Thousands)
Service cost $874
Interest cost 3,573
Actual return on plan assets (636)
Amortization of transition obligation 1,971
Net amortization and deferral 136
$5,918
The status of the postretirement benefit programs at December 31, 1993 was as
follows:
(In Thousands)
Accumulated postretirement benefit obligation
Retired employees and beneficiaries $35,409
Active employees 19,193
54,602
Plan assets 8,581
Accumulated benefit obligation in excess
of plan assets (46,021)
Unrecognized transition obligation 37,458
Unrecognized gains and losses 6,788
Accrued postretirement benefit cost ($1,775)
Significant assumptions used to measure postretirement benefits at December
31, 1993 were as follows:
Discount rate 7.00%
Long-term return on assets 8.50%
Health-care inflation rate 13.50%
grading to
6.50% at
.50% per year
A 1% increase in the health-care inflation rate would increase the service
cost by $4,000, the interest cost by $232,000 and the accumulated benefit
obligation by $2,898,000.
Mountain Fuel and Questar Pipeline account for approximately 57% and 18% of
the postretirement benefit costs, respectively. The impact of SFAS No. 106 on
Questar's future net income will be mitigated by recovery of these costs from
customers. Both the PSCU and the PSCW allowed Mountain Fuel to recover future
SFAS No. 106 costs in the 1993 rate cases if the amounts are funded in an
external trust. The FERC issued an order granting rate recovery methodology
for SFAS No. 106 costs to the extent that pipeline companies contribute the
amounts to an external trust. Questar Pipeline expects to receive coverage of
future SFAS No. 106 costs in its next general rate case and recovery of costs
in excess of the amounts currently included in rates for the period from 1993
to the rate case filing if the rate case is filed prior to January 1, 1996.
The Financial Accounting Standards Board (FASB) has issued SFAS No. 112,
Accounting for Postemployment Benefits. This statement requires the Company
to recognize the liability for postemployment benefits 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's principal liability under SFAS No. 112 is a long-term
disability program. The Company is required to adopt SFAS No. 112 in the
first quarter of 1994 and recognize a cumulative effect of a change in
accounting method amounting to approximately $3,300,000. Some of this amount
may be recovered from Mountain Fuel's and Questar Pipeline's customers through
subsequent rate changes. The effect on ongoing net income is not expected to
be significant.
Note L - Wexpro Settlement Agreement
Wexpro's operations are subject to the terms of the Wexpro settlement
agreement. The agreement was effective August 1, 1981, and sets forth the
rights of Mountain Fuel's utility operations to share in the results of
Wexpro's operations. The agreement was approved by the PSCU and PSCW in 1981
and affirmed by the Supreme Court of Utah in 1983. Major provisions of the
settlement agreement are as follows:
a. Wexpro continues to hold and operate all oil-producing properties
previously transferred from Mountain Fuel's nonutility accounts. The oil
production from these properties is sold at market prices, with the revenues
used to recover operating expenses and to give Wexpro a return on its
investment. The rate of return is adjusted annually and is currently 14.6%.
Any net income remaining after recovery of expenses and Wexpro's return on
investment is divided between Wexpro and Mountain Fuel, with Wexpro retaining
46%.
b. Wexpro conducts developmental oil drilling on productive oil properties
and bears any costs of dry holes. Oil discovered from these properties is
sold at market prices, with the revenues used to recover operating expenses
and to give Wexpro a return on its investment in successful wells. The rate
of return is adjusted annually and is currently 19.6%. Any net income
remaining after recovery of expenses and Wexpro's return on investment is
divided between Wexpro and Mountain Fuel, with Wexpro retaining 46%.
c. Amounts received by Mountain Fuel from the sharing of Wexpro's oil income
are used to reduce natural gas costs to utility customers.
d. Wexpro conducts developmental gas drilling on productive gas properties
and bears any costs of dry holes. Natural gas produced from successful
drilling is owned by Mountain Fuel. Wexpro is reimbursed for the costs of
producing the gas plus a return on its investment in successful wells. The
return allowed Wexpro is currently 22.6%.
e. Wexpro operates natural gas properties owned by Mountain Fuel. Wexpro is
reimbursed for its costs of operating these properties, including a rate of
return on any investment it makes. This rate of return is currently 14.6%.
Note M - Subsequent Events
In the first quarter of 1994, the E&P group announced two acquisitions of oil
and gas reserves, processing plants, gathering systems and leasehold acreage
for a cost of $117,100,000. The E&P group obtained oil and gas reserves of
approximately 115 Bcf equivalent located in the Midcontinent and San Juan
Basin regions. The first acquisition was for properties from Petroleum, Inc.
and was completed in January 1994 at a cost of $22,600,000. This purchase was
financed with short-term debt. In the second acquisition, the E&P group
acquired the properties of Amax Oil & Gas's northern division at a cost of
$94,500,000 through an alliance with Union Pacific Resources Corporation.
This transaction is expected to be closed in the first half of 1994 and will
be financed with short-term debt and an expansion of the production-based
long-term credit facility.
Note N - Oil and Gas Producing Activities (Unaudited)
The following information discusses the Company's oil and gas producing
activities. Separate disclosures are presented for cost-of-service and
noncost-of-service activities.
Cost-of-service properties are those for which the operations and return on
investment are governed by state regulatory agencies or the Wexpro settlement
agreement (see Note L). Production from gas properties owned or operated by
Wexpro is delivered to Mountain Fuel at cost of service. Noncost-of-service
properties are properties from which production is sold at market prices.
These properties include all Celsius Energy and Universal Resources properties
and Wexpro oil properties. Production from Wexpro oil properties is sold at
market prices and the income is shared with Mountain Fuel after a specified
return on investment is earned.
Information on the results of operations and standardized measure of future
net cash flows has not been included for cost-of-service activities because
operating results and the value of the related properties is dependent upon
returns established by state regulatory agencies based on historical costs or
the terms of the Wexpro settlement agreement (see Note L).
NONCOST-OF-SERVICE ACTIVITIES
Capitalized Costs: The aggregate amounts of costs capitalized for
noncost-of-service oil and gas-producing activities and the related amounts of
accumulated depreciation and amortization follow:
December 31,
1993 1992 1991
(In Thousands)
Proved properties $530,591 $502,754 $463,113
Unproved properties 14,613 21,100 22,393
545,204 523,854 485,506
Accumulated depreciation and
amortization 333,656 305,585 279,752
$211,548 $218,269 $205,754
Full-Cost Amortization: Unproved properties held by Celsius Energy and
Universal Resources are currently excluded from amortization until evaluation.
A summary of costs excluded from amortization at December 31, 1993, and the
year in which these costs were incurred is as follows:
Year Costs Incurred
1990 and
Total 1993 1992 1991 Prior
(In Thousands)
Leaseholds $7,229 $903 $917 $2,025 $3,384
Exploration 7,384 1,929 1,611 906 2,938
$14,613 $2,832 $2,528 $2,931 $6,322
Costs Incurred: The following costs were incurred in noncost-of-service oil
and gas-producing activities.
Year Ended December 31,
1993 1992 1991
(In Thousands)
Property acquisition
Unproved $1,262 $1,257 $2,457
Proved 1,228 3,462 6,520
Exploration 8,141 7,940 8,235
Development 22,385 36,301 13,569
$33,016 $48,960 $30,781
Results of Operations: Following are the results of operations of
noncost-of-service oil and gas-producing activities before corporate overhead
and interest expenses.
Year Ended December 31,
1993 1992 1991
(In Thousands)
Revenues
From unaffiliated customers $94,621 $79,994 $63,511
From affiliates 1,055 3,430 6,743
Total revenues 95,676 83,424 70,254
Production expenses 26,282 24,996 23,914
Oil-income sharing under Wexpro
settlement agreement - Note L 1,028 3,389 4,190
Depreciation and amortization 33,386 26,657 22,456
Total expenses 60,696 55,042 50,560
34,980 28,382 19,694
Income tax expense - Note 1 7,101 8,812 6,989
Results of operations before
corporate overhead and
interest expenses $27,879 $19,570 $12,705
Note 1 - Income tax expense has been reduced by tight-sands gas production
credits of $5,563,000 in 1993 and $1,441,000 in 1992.
Estimated Quantities of Proved Oil and Gas Reserves for Noncost-of-Service
Properties: The majority of the following estimates were made by Ryder Scott
Company and H. J. Gruy and Company, independent reservoir engineers, and the
remainder by the Company's reservoir engineers. Reserve estimates are based
on a complex and highly interpretive process that is subject to continuous
revision as additional production and development-drilling information becomes
available. The quantities reported below 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. The Company does not
have any long-term supply contracts with foreign governments or reserves of
equity investees.
Natural Gas Oil
(In Million (In Thousands
Cubic Feet) of Barrels)
Proved Reserves
Balance at January 1, 1991 139,715 11,727
Revisions of estimates 16,007 297
Extensions and discoveries 19,632 589
Purchase of reserves in place 9,107 134
Sale of reserves in place (637) (38)
Production (14,193) (2,038)
Balance at December 31, 1991 169,631 10,671
Revisions of estimates (2,508) 1,157
Extensions and discoveries 51,691 1,343
Purchase of reserves in place 4,294 228
Sale of reserves in place (872) (87)
Production (24,550) (2,075)
Balance at December 31, 1992 197,686 11,237
Revisions of estimates 6,262 1,135
Extensions and discoveries 19,308 555
Purchase of reserves in place 2,102 22
Sale of reserves in place (1,731) (465)
Production (32,299) (1,975)
Balance at December 31, 1993 191,328 10,509
Proved Developed Reserves
Balance at January 1, 1991 121,069 10,858
Balance at December 31, 1991 148,078 9,991
Balance at December 31, 1992 182,278 10,558
Balance at December 31, 1993 183,494 9,743
Standardized Measure of Future Net Cash Flows Relating to Proved Reserves for
Noncost-of-Service Activities: Future net cash flows were calculated using
December 31, 1993, prices and known contract price changes. Year-end
production, development costs and income tax rates were used to compute the
future net cash flows. All cash flows were discounted at 10% to reflect the
time value of cash flows, without regard to the risk of specific properties.
The assumptions used to derive the standardized measure of future net cash
flows are those required by the FASB and do not necessarily reflect the
Company's expectations. The usefulness of the standardized measure of future
net cash flows is impaired because of the reliance on reserve estimates and
production schedules that are inherently imprecise, and because the costs of
oil-income sharing under the Wexpro settlement agreement were not included.
December 31,
1993 1992 1991
(In Thousands)
Future cash inflows $513,015 $610,015 $464,885
Future production and development
costs (161,969) (185,395) (151,264)
Future income tax expenses (67,060) (79,910) (59,453)
Future net cash flows 283,986 344,710 254,168
10% annual discount for estimated
timing of net cash flows (103,514) (124,636) (91,018)
Standardized measure of discounted
future net cash flows $180,472 $220,074 $163,150
The principal sources of change in the standardized measure of discounted
future net cash flows were:
Year Ended December 31,
1993 1992 1991
(In Thousands)
Beginning balance $220,074 $163,150 $203,335
Sales of oil and gas produced, net
of production costs (69,394) (58,428) (46,340)
Net changes in prices and
production costs (34,401) 41,281 (69,526)
Extensions and discoveries, less
related costs 19,688 60,629 19,731
Revisions of quantity estimates 11,370 4,499 15,152
Purchase of reserves in place 1,228 3,462 6,520
Sale of reserves in place (6,043) (1,168) (681)
Accretion of discount 22,007 16,315 20,334
Net change in income taxes 13,639 (9,107) 19,261
Change in production rate (1,433) (684) (3,699)
Other 3,737 125 (937)
Net change (39,602) 56,924 (40,185)
Ending balance $180,472 $220,074 $163,150
COST-OF-SERVICE ACTIVITIES
Capitalized Costs: Capitalized costs for cost-of-service oil and
gas-producing activities net of the related accumulated depreciation and
amortization were as follows:
December 31,
1993 1992 1991
(In Thousands)
Mountain Fuel $44,708 $48,222 $51,575
Wexpro 92,561 81,261 71,936
$137,269 $129,483 $123,511
Costs Incurred: Costs incurred by Wexpro for cost-of-service gas-producing
activities were $21,829,000 in 1993, $18,348,000 in 1992 and $19,771,000 in
1991.
Estimated Quantities of Proved Oil and Gas Reserves for Cost-of-Service
Properties: The following estimates were made by the Company's reservoir
engineers. No estimates are available for cost-of-service proved undeveloped
reserves that may exist.
Natural Gas Oil
(In Million (In Thousands
Cubic Feet) of Barrels)
Proved Developed Reserves
Balance at January 1, 1991 375,300 858
Revisions of estimates 2,604 64
Extensions and discoveries 29,519 2
Production (27,652) (110)
Balance at December 31, 1991 379,771 814
Revisions of estimates 5,891 68
Extensions and discoveries 43,682 5
Sale of reserves in place (34)
Production (29,699) (100)
Balance at December 31, 1992 399,611 787
Revisions of estimates (1,158) 57
Extensions and discoveries 65,293 9
Production (35,508) (81)
Balance at December 31, 1993 428,238 772
Note O - Quarterly Financial and Stock Price Data (Unaudited)
Following is a summary of quarterly financial and stock price data. The
quarterly results have been reclassified for the discontinued operations.
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
(In Thousands, Except Per Share Amounts)
1993
Revenues $245,537 $131,656 $100,240 $182,997 $660,430
Operating income 63,574 26,192 14,713 43,815 148,294
Income from continuing operations 36,021 16,029 6,970 25,444 84,464
Loss from discontinued operations (898) (764) (1,110) (2,772)
Net income 35,123 15,265 5,860 25,444 81,692
Earnings per common share
Income from continuing operations 0.90 0.39 0.17 0.64 2.10
Loss from discontinued operations (0.02) (0.02) (0.03) (0.07)
Net income 0.88 0.37 0.14 0.64 2.03
Dividends per common share 0.265 0.275 0.275 0.275 1.09
Market price per common share
High 31.38 34.75 42.75 44.00 44.00
Low 25.38 30.25 33.00 31.50 25.38
Close 31.38 34.50 42.50 33.00 33.00
1992
Revenues $223,131 $106,112 $87,217 $174,886 $591,346
Operating income 56,713 17,167 13,968 49,688 137,536
Income from continuing operations 30,863 6,612 6,857 29,439 73,771
Loss from discontinued operations (709) (595) (633) (500) (2,437)
Cumulative effect 9,303 9,303
Net income 39,457 6,017 6,224 28,939 80,637
Earnings per common share
Income from continuing operations 0.78 0.16 0.17 0.74 1.85
Loss from discontinued operations (0.02) (0.01) (0.02) (0.01) (0.06)
Cumulative effect 0.23 0.23
Net income 0.99 0.15 0.15 0.73 2.02
Dividends per common share 0.255 0.255 0.265 0.265 1.04
Market price per common share
High 21.50 23.38 27.38 27.50 27.50
Low 18.50 19.50 22.38 25.00 18.50
Close 19.88 22.75 25.13 26.25 26.25
1991
Revenues $234,764 $130,984 $87,921 $170,594 $624,263
Operating income 62,400 20,811 9,537 40,556 133,304
Income from continuing operations 33,784 9,537 2,497 20,934 66,752
Loss from discontinued operations (734) (701) (710) (574) (2,719)
Net income 33,050 8,836 1,787 20,360 64,033
Earnings per common share
Income from continuing operations 0.87 0.24 0.06 0.53 1.70
Loss from discontinued operations (0.02) (0.02) (0.02) (0.01) (0.07)
Net income 0.85 0.22 0.04 0.52 1.63
Dividends per common share 0.245 0.255 0.255 0.255 1.01
Market price per common share
High 19.19 19.69 22.75 24.75 24.75
Low 16.63 18.13 17.88 19.75 16.63
Close 18.44 19.13 22.75 21.38 21.38
Note P - Operations by Line of Business
Following is a summary of operations by line of business:
Exploration Natural Natural Intercompany
and Gas Trans- Gas Dist- Other Trans- Questar
Production mission ribution Operations actions Consolidated
(In Thousands)
1993
Revenues
From unaffiliated customers $217,669 $41,354 $400,225 $1,182 $660,430
From affiliates 58,778 130,274 2,166 26,961 ($218,179)
276,447 171,628 402,391 28,143 (218,179) 660,430
Operating expenses
Natural gas purchases 127,312 56,022 230,139 (188,973) 224,500
Operating and maintenance 36,769 48,356 92,486 19,402 (28,178) 168,835
Depreciation and amortization 44,614 14,084 23,244 4,816 86,758
Other expenses 18,365 3,915 10,013 778 (1,028) 32,043
227,060 122,377 355,882 24,996 (218,179) 512,136
Operating income 49,387 49,251 46,509 3,147 148,294
Interest and other income (expense) 679 (11) 1,692 3,478 (2,206) 3,632
Debt expense (2,090) (13,114) (15,423) (5,563) 2,206 (33,984)
Income tax expense (11,651) (12,851) (7,709) (1,267) (33,478)
Income (loss) from continuing
operations $36,325 $23,275 $25,069 ($205) $84,464
Identifiable assets $370,726 $397,356 $521,416 $128,189 $1,417,687
Capital expenditures 57,790 47,580 50,658 12,360 168,388
1992
Revenues
From unaffiliated customers $186,323 $34,991 $369,122 $910 $591,346
From affiliates 55,244 169,595 3,925 24,021 ($252,785)
241,567 204,586 373,047 24,931 (252,785) 591,346
Operating expenses
Natural gas purchases 113,527 93,024 218,123 (223,656) 201,018
Operating and maintenance 35,289 46,601 79,975 17,073 (25,740) 153,198
Depreciation and amortization 35,517 13,699 20,713 3,624 73,553
Other expenses 14,993 3,842 9,839 756 (3,389) 26,041
199,326 157,166 328,650 21,453 (252,785) 453,810
Operating income 42,241 47,420 44,397 3,478 137,536
Interest and other income 2,251 1,170 1,703 4,558 (3,007) 6,675
Debt expense (3,457) (13,829) (15,254) (6,235) 3,007 (35,768)
Income tax expense (13,273) (12,298) (7,451) (1,650) (34,672)
Income from continuing operations $27,762 $22,463 $23,395 $151 $73,771
Identifiable assets $347,956 $400,336 $470,863 $101,203 $1,320,358
Capital expenditures 69,216 37,938 55,721 17,186 180,061
1991
Revenues
From unaffiliated customers $182,681 $28,408 $412,049 $1,125 $624,263
From affiliates 51,808 201,892 4,710 25,669 ($284,079)
234,489 230,300 416,759 26,794 (284,079) 624,263
Operating expenses
Natural gas purchases 122,989 124,069 253,111 (252,407) 247,762
Operating and maintenance 33,054 46,699 80,824 18,881 (27,482) 151,976
Depreciation and amortization 28,142 13,187 19,231 4,680 65,240
Other expenses 17,069 3,630 8,706 766 (4,190) 25,981
201,254 187,585 361,872 24,327 (284,079) 490,959
Operating income 33,235 42,715 54,887 2,467 133,304
Interest and other income 2,561 3,908 1,625 4,420 (4,228) 8,286
Debt expense (3,341) (13,737) (15,163) (7,940) 4,228 (35,953)
Income tax expense (11,490) (10,829) (16,275) (291) (38,885)
Income (loss) from continuing
operations $20,965 $22,057 $25,074 ($1,344) $66,752
Identifiable assets $337,144 $378,563 $438,768 $58,044 $1,212,519
Capital expenditures 51,006 40,091 36,984 14,169 142,250
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
QUESTAR CORPORATION AND SUBSIDIARIES
COL. A COL. B COL. C COL. D COL. E COL. F
Balance at Other Balance at
Beginning Additions Changes- End of
Classification of Period At Cost Retirements Add (Deduct) Period
- Note A
(In Thousands)
Year Ended December 31, 1993
Natural gas distribution $667,667 $50,658 $8,378 $153 $710,100
Natural gas transmission 511,923 47,216 2,602 4,571 561,108
Exploration and production 661,835 57,790 12,281 (492) 706,852
Other 43,960 4,895 2,163 (358) 46,334
$1,885,385 $160,559 $25,424 $3,874 $2,024,394
Year Ended December 31, 1992
Natural gas distribution $615,989 $55,721 $4,089 $46 $667,667
Natural gas transportation 477,373 36,555 1,987 (18) 511,923
Exploration and production 605,879 69,216 4,629 (8,631) 661,835
Other 40,353 4,953 1,323 (23) 43,960
$1,739,594 $166,445 $12,028 ($8,626) $1,885,385
Year Ended December 31, 1991
Natural gas distribution $583,137 $36,984 $7,475 $3,343 $615,989
Natural gas transmission 440,267 38,001 2,670 1,775 477,373
Exploration and production 558,727 51,006 2,794 (1,060) 605,879
Other 49,721 6,469 9,911 (5,926) 40,353
$1,631,852 $132,460 $22,850 ($1,868) $1,739,594
Note A - Other changes consist of the following: 1993 - Transfer of a portion
of Questar Pipeline's current gas stored underground to cushion gas stored
underground of $3,874,000; 1992 - Reduction of Universal Resource's property,
plant and equipment for the adoption of SFAS No. 109 of $8,626,000; and 1991 -
Reduction of Universal Resource's property, plant and equipment for the effect
of preacquisition net operating loss carryforwards of $1,868,000.
SCHEDULE VI- ACCUMULATED DEPRECIATION, DEPLETION AND
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
QUESTAR CORPORATION AND SUBSIDIARIES
COL. A COL. B COL. C COL. D COL. E COL. F
Additions
Balance at Charged to Other Balance at
Beginning Costs and Changes- End of
Classification of Period Expenses Retirements Add (Deduct) Period
(In Thousands)
Year Ended December 31, 1993
Natural gas distribution $249,056 $25,492 $7,329 $95 $267,314
Natural gas transmission 175,387 15,979 2,416 329 189,279
Exploration and production 350,405 44,907 5,472 (281) 389,559
Other 22,989 4,818 2,082 (143) 25,582
$797,837 $91,196 $17,299 $0 $871,734
Year Ended December 31, 1992
Natural gas distribution $229,262 $22,922 $3,149 $21 $249,056
Natural gas transmission 161,749 15,562 1,926 2 175,387
Exploration and production 315,927 35,752 1,269 (5) 350,405
Other 20,414 3,749 1,156 (18) 22,989
$727,352 $77,985 $7,500 $0 $797,837
Year Ended December 31, 1991
Natural gas distribution $212,458 $21,340 $6,768 $2,232 $229,262
Natural gas transmission 147,395 14,900 1,667 1,121 161,749
Exploration and production 288,337 28,336 1,352 606 315,927
Other 27,306 4,774 7,707 (3,959) 20,414
$675,496 $69,350 $17,494 $0 $727,352
SCHEDULE IX - SHORT-TERM BORROWINGS
QUESTAR CORPORATION AND SUBSIDIARIES
COL. A COL. B COL. C COL. D COL. E COL. F
Weighted
Maximum Average Average
Weighted Amount Amount Interest
Balance at Average Outstanding Outstanding Rate
Category of Aggregate End Interest During During During
Short-term Borrowing of Period Rate the Period the Period the Period
- Note A - Note B - Note C
(In Thousands)
Year Ended December 31, 1993
Notes payable to banks $12,300 3.49% $21,500 $7,460 3.42%
Commercial paper 66,000 3.45% 66,000 18,226 3.35%
Year Ended December 31, 1992
Notes payable to banks $21,500 4.01% $23,500 $6,314 3.59%
Commercial paper 48,500 3.68% 54,000 16,609 3.67%
Year Ended December 31, 1991
Notes payable to banks $5,000 5.78% $11,000 $5,020 6.61%
Commercial paper 41,700 5.08% 60,000 10,739 6.45%
Note A - Notes payable to banks represent borrowings under line-of-credit
arrangements that have no termination date but are subject to negotiation.
Commercial paper matures 30 to 90 days from the date of issue with no
provision for the extension of maturity.
Note B - The average amount outstanding during the period was computed by
averaging the daily principal balances.
Note C - The weighted average interest rate during the period was computed by
dividing the actual interest expense by the average short-term debt
outstanding during the period.
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
QUESTAR CORPORATION AND SUBSIDIARIES
COL. A COL. B
Item Charged to Costs and Expenses
(In Thousands)
Year Ended December 31,
1993 1992 1991
Maintenance and repairs $18,616 $17,726 $18,900
Real estate and personal property taxes 17,986 14,090 14,618
Severance and conservation taxes 9,235 6,988 5,891
Royalties 12,503 7,852 7,752
Advertising costs, which are less than 1% of total revenues, are not presented
separately. Royalty costs for exploration and production operations have not
been disclosed since production revenues are reported net of royalties. The
Company does not have any depreciation and amortization of intangible assets.
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 24th day of March, 1994.
QUESTAR CORPORATION
(Registrant)
By /s/ R. D. Cash
R. D. Cash
Chairman, 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/ R. D. Cash Chairman, President and Chief
R. D. Cash Executive Officer (Principal
Executive Officer)
/s/ W. F. Edwards Senior Vice President and Chief
W. F. Edwards Financial Officer (Principal Financial
and Accounting Officer)
*Robert H. Bischoff Director
*R. D. Cash Director
*U. Edwin Garrison Director
*James A. Harmon Director
*W. W. Hawkins Director
*W. N. Jones Director
*Robert E. Kadlec Director
*Dixie L. Leavitt Director
*Neal A. Maxwell Director
*Gary G. Michael Director
*Mary Mead Director
*D. N. Rose Director
*Harris H. Simmons Director
March 24, 1994 *By /s/ R. D. Cash
Date R. D. Cash, Attorney in Fact
EXHIBIT INDEX
Sequential
Page Exhibit
Number Number Exhibit
2.* Plan and Agreement of Merger dated as of December 16,
1986, by and among the Company, Questar Systems
Corporation, and Universal Resources Corporation.
(Exhibit No. (2) to Current Report on Form 8-K dated
December 16, 1986.)
3.1.* Restated Articles of Incorporation effective May 28,
1991. (Exhibit No. 3.2. to Form 10-Q Report for
Quarter ended June 30, 1991.)
3.2.* Bylaws (as amended effective August 11, 1992).
(Exhibit No. 3. to Form 10-Q Report for Quarter ended
June 30, 1992.)
4.1.* Rights Agreement, dated as of March 14, 1986, between
the Company and Morgan Guaranty Trust Company of New
York pertaining to the Company's Shareholder Rights
Plan. (Exhibit No. 4. to Current Report on Form 8-K
dated March 14, 1986.)
4.2.* First Amendment to the Rights Agreement, dated as of
May 15, 1989, between the Company and Morgan
Shareholder Service Trust Company pertaining to the
Company's Shareholder Rights Plan. (Exhibit No.
28(a) to Current Report on Form 8-K dated May 15,
1989.)
10.1.* Stipulation and Agreement, dated October 14, 1981,
executed by Mountain Fuel; Wexpro; 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
Mountain Fuel Supply Company's Form 10-K Annual
Report for 1981.)
10.2.* 1 Questar Corporation Annual Management Incentive Plan,
as amended effective February 11, 1992. (Exhibit No.
10.2. to Form 10-K Annual Report for 1991.)
10.3.* 1 Questar Corporation Executive Incentive Retirement
Plan, as amended effective November 1, 1993.
(Exhibit No. 10.3. to Form 10-Q Report for Quarter
ended September 30, 1993.)
10.4.* 1 Questar Corporation Stock Option Plan, as amended
effective February 13, 1990. (Exhibit No. 10.4. to
Form 10-K Annual Report for 1989.)
10.5.* 1 Questar Corporation Long Term Stock Incentive Plan
effective March 1, 1991. (Exhibit No. 10.5. to Form
10-K Annual Report for 1990.)
10.6.* 1 Questar Corporation Executive Severance Compensation
Plan, as amended effective January 1, 1990. (Exhibit
No. 10.5. to Form 10-K Annual Report for 1989.)
10.7.* 1 Questar Corporation Deferred Compensation Plan for
Directors, as amended April 30, 1991. (Exhibit No.
10.7. to Form 10-K Annual Report for 1991.)
10.8.* 1 Questar Corporation Supplemental Executive Retirement
Plan, as amended and restated effective November 1,
1993. (Exhibit No. 10.8. to Form 10-Q Report for
Quarter ended September 30, 1993.)
10.9.* 1 Questar Corporation Equalization Benefit Plan, as
amended and restated effective November 1, 1993.
(Exhibit No. 10.9. to Form 10-Q Report for Quarter
ended September 30, 1993.)
10.10.*1 Questar Corporation Stock Option Plan for Directors,
as amended effective February 9, 1993. (Exhibit No.
10.10. to Form 10-K Annual Report for 1992.)
10.11.*1 Form of Individual Indemnification Agreement dated
February 9, 1993 between Questar Corporation and
Directors. (Exhibit No. 10.11. to Form 10-K Annual
Report for 1992.)
10.12.*1 Questar Corporation Deferred Share Plan, as amended
and restated November 1, 1993. (Exhibit No. 10.12.
to Form 10-Q Report for Quarter ended September 30,
1993.)
10.13.*1 Questar Corporation Deferred Compensation Plan as
adopted effective November 1, 1993. (Exhibit No.
10.13. to Form 10-Q Report for Quarter ended
September 30, 1993.)
11. Statement concerning computation of earnings per
share.
22. Subsidiary Information.
24. Consent of Independent Auditors.
25. Power of Attorney.
28.1.* Press Release dated October 18, 1993, announcing the
agreement with Nextel Communications, Inc. (Exhibit
No. 28.1. to Form 10-Q Report for Quarter ended
September 30, 1993.)
28.2. Form 11-K Annual Report for the Questar Corporation
Employee Stock Purchase Plan.
28.3. Undertakings for Registration Statements on Form S-3
(No. 33-48168) and on Form S-8 (Nos. 33-4436, 33-
15148, 33-15149, 33-40800, 33-40801, and 33-48169).
*Exhibits so marked have been filed with the Securities and Exchange
Commission as part of the indicated filing and are incorporated herein by
reference.
1 Exhibit so marked is management contract or compensation plan or
arrangement
(b) The Company did not file a Current Report on Form 8-K during the
last quarter of 1993.