-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KNbWYQu73bbC4SFoQOc6sxAZrq5SQvGfTa/nYiSLNq1yGOfUF5uROxPy90jj/QXD 04WVeJs/gF42wxPYImRRRQ== 0000068589-96-000004.txt : 19960329 0000068589-96-000004.hdr.sgml : 19960329 ACCESSION NUMBER: 0000068589-96-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOUNTAIN FUEL SUPPLY CO CENTRAL INDEX KEY: 0000068589 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 870155877 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-55866 FILM NUMBER: 96539801 BUSINESS ADDRESS: STREET 1: 180 E FIRST SOUTH STREET 2: PO BOX 11368 CITY: SALT LAKE CITY STATE: UT ZIP: 84147 BUSINESS PHONE: 8015345555 MAIL ADDRESS: STREET 1: 180 EAST FIRST SOUTH ST STREET 2: P O BOX 11150 CITY: SALT LAKE CITY STATE: UT ZIP: 84147 10-K 1 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, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ Commission File No. 1-935 MOUNTAIN FUEL SUPPLY COMPANY (Exact name of registrant as specified in its charter) State of Utah 87-0155877 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 180 East First South, P.O. Box 45360, Salt Lake City, Utah 84145-360 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (801) 534-5555 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933: Notes: Medium Term Notes, 7.19% to 8.43%, due 2007 to 2024 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No State the aggregate market value of the voting stock held by nonaffiliates of the registrant as of March 22, 1996: $0. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of March 22, 1996: 9,189,626 shares of Common Stock, $2.50 par value. (All shares are owned by Questar Corporation.) TABLE OF CONTENTS Heading Page PART I Items 1. and 2. BUSINESS AND PROPERTIES.................................... General................................................. Gas Distribution........................................ Gas Supply.............................................. Competition, Growth and Unbundling...................... Regulation and Deregulation............................. Relationships with Affiliates........................... Employees................................................. Environmental Matters..................................... Research and Development.................................. Item 3. LEGAL PROCEEDINGS............................................ Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................. PART II Item 5. MARKET FOR REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS.............................. Item 6. SELECTED FINANCIAL DATA...................................... Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.................................................... Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................... Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE......................................... PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................ Item 11. EXECUTIVE COMPENSATION....................................... Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................................ Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...................................... SIGNATURES FORM 10-K ANNUAL REPORT, 1995 PART I ITEMS 1. and 2. BUSINESS AND PROPERTIES General Mountain Fuel Supply Company (Mountain Fuel or the Company) is a wholly owned subsidiary of Questar Corporation (Questar), with headquarters in Salt Lake City, Utah, that distributes natural gas to more than 592,700 sales and transportation customers in Utah, southwestern Wyoming, and a small section in southeastern Idaho. The Company, through a predecessor, began distributing natural gas in 1929 when a pipeline was built to transport natural gas from southwestern Wyoming to Salt Lake City, Utah. Between 1929 and the present time, Mountain Fuel gradually expanded the boundaries of its distribution system to include over 90 percent of Utah's population and to capture a market share of 85-95 percent for furnaces and water heaters. During 1995, Mountain Fuel added over 20,500 customers while it consolidated its operations, reduced labor costs, and improved its customer service ratings. Mountain Fuel has traditionally capitalized on two competitive advantages, owning natural gas reserves and offering a full-range of services to customers at reasonable prices. The Company intends to maintain its competitive position in its traditional service area and to take advantage of opportunities created by the unbundling of retail distribution activities in other areas. Gas Distribution As of December 31, 1995, Mountain Fuel was serving 592,738 residential, commercial, and industrial customers, a 3.6 percent increase from the 572,174 customers served as of the end of 1994. (Customers are defined in terms of active meters.) Mountain Fuel distributes gas to customers in the major populated area of Utah, commonly referred to as the Wasatch Front, in which the Salt Lake metropolitan area, Provo, Ogden, and Logan are located. It also serves customers in eastern, central, and southwestern Utah with Price, Roosevelt, Fillmore, Richfield, Cedar City, and St. George as the primary cities. Approximately 96 percent of Mountain Fuel's customers are in Utah. The Company also serves the communities of Rock Springs, Green River, and Evanston in southwestern Wyoming and the community of Preston in southeastern Idaho. Mountain Fuel has been granted the necessary regulatory approvals by the Public Service Commission of Utah (PSCU), the Public Service Commission of Wyoming (PSCW), and the Public Utilities Commission of Idaho (PUCI) to serve these areas. It also has long-term franchises granted by communities and counties within its service area. Mountain Fuel added almost 20,600 customers in 1995, almost equalling its record growth of 22,000 customers in 1994. Most of the customer growth was attributable to new housing, although the Company continues to add customers in its traditional and new service areas that are converting to natural gas. The population of Mountain Fuel's service area in Utah continues to grow faster than the national average. The Company expects to add 19,000-20,000 customers in 1996 and to add 15,000-18,000 customers per year for the remainder of the century. Mountain Fuel's sales to residential and commercial customers are seasonal, with a substantial portion of such sales made during the heating season. The typical residential customer in Utah (defined as a customer using 115 decatherms (Dth) per year) uses more than 75 percent of his total gas requirements in the coldest six months of the year. The Company's revenue forecasts used to set rates are based on normal temperatures. 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 the Company's service area were 13 percent warmer than normal in 1995, after being 9 percent warmer than normal in 1994. (See "Regulation" for a discussion of the Company's "weather normalization adjustment" approved during 1995 that will ameliorate the effect of temperature variations.) During 1995, Mountain Fuel sold 73,950 thousand decatherms (Mdth) of natural gas to residential and commercial customers, compared to 74,233 Mdth in 1994. (A Dth is an amount of heat energy equal to 10 therms or 1 million Btu. In the Company's system, each thousand cubic feet (Mcf) of gas equals approximately 1.07 Dth.) The effect of 1995's warmer weather was almost completely offset by an expanded customer base. General service sales to residential and commercial customers were responsible for 87 percent of Mountain Fuel's total revenues in 1995. Mountain Fuel has designed its distribution system and annual gas supply plan to handle design-day demand requirements. The Company periodically updates its design-day demand, which is the volume of gas that firm customers could use during extremely cold weather. For the 1995-96 heating season, Mountain Fuel is using a design-day demand of 851,906 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, including both sales and transportation, continued to increase during 1995, expanding from 60,264 Mdth in 1994 to 68,779 Mdth in 1995. Sales to industrial users increased for the third consecutive year and expanded from 8,882 Mdth in 1994 to 9,210 Mdth in 1995. The increase in total industrial deliveries reflects Utah's economic prosperity and the strength of several major industries as well as the success of the Company's marketing efforts. The Company's industrial sales increased as some smaller industrial customers continued to move from interruptible transportation to interruptible sales service on Mountain Fuel's system. The majority of these interruptible sales service customers pay rates based on the Company's weighted average cost of purchased gas, which is periodically lower for some customers than the cost of purchasing volumes directly from producers and paying transportation rates. The Company also has an interruptible sales rate utilizing a dedicated gas portfolio. Mountain Fuel's tariff permits industrial customers to make annual elections for interruptible sales or transportation service. Mountain Fuel has been providing transportation service since 1986. Under Mountain Fuel's current rate schedules, a typical interruptible transportation customer pays block rates ranging from $.12 to $.02 per Dth. Mountain Fuel receives demand cost credits from Questar Pipeline Company (Questar Pipeline) for transportation customers who use the Company's released capacity. These credits totaled approximately $13.0 million for the 12-month period ending August 31, 1995. Mountain Fuel's largest transportation customers, as measured by revenue contributions, are the Geneva Steel plant in Orem, Utah; Utah Power, an electric utility that uses gas for an electric generating plant in Salt Lake City; the Kennecott copper processing operations, located in Salt Lake County; and the mineral extraction operations of Magnesium Corporation of America in Tooele County west of Salt Lake. Some transportation customers significantly reduced their volumes during late-1995 when the spot prices for electricity were lower than the cost of electricity generated by using natural gas. Mountain Fuel owns and operates distribution systems throughout its Utah, Wyoming and Idaho service areas and has a total of 18,027 miles of street mains, service lines, and interconnecting pipelines. The Company owns an office building adjacent to its warehouse, garage, and operations center in Salt Lake City, Utah. Mountain Fuel, during 1995, closed two large operation centers in Sandy and Layton, Utah, and two smaller offices in Brigham City and Tooele, Utah. The Company continues to own field offices and service center facilities in other parts of its service area. The mains and lines are constructed pursuant to franchise agreements or rights-of-way. The Company has fee title to the properties on which its office building and operation and service centers are constructed. Gas Supply Mountain Fuel owns natural gas producing properties in Wyoming, Utah and Colorado that are operated by Wexpro Company (Wexpro) and uses the gas produced from these properties for its base-load demand. The Company's investment in these properties is included in its rate base. Mountain Fuel, as part of its 1993 general rate case, received regulatory approval to reserve "cost-of-service" gas for firm sales customers. During 1995, approximately 64 percent of the Company's total system requirement was satisfied with cost-of-service gas produced from over 550 wells in more than 40 fields. (As defined, cost-of-service gas includes related royalty gas.) The volumes produced from such properties are transported for Mountain Fuel by Questar Pipeline. See "Relationships with Affiliates." During 1995, 53,476 Mdth of storage gas were delivered from such properties, compared to 44,413 Mdth in 1994. Mountain Fuel estimates that it had reserves of 389,440 million cubic feet (MMcf) of natural gas as of year-end 1995 compared to 416,312 MMcf as of year-end 1994. (These reserve numbers do not include gas attributed to royalty interest owners. Reserve numbers are typically reported in volumetric units, such as MMcf, that don't reflect heating values.) The average wellhead cost associated with gas volumes produced from Mountain Fuel's cost-of-service reserves was $1.25 per Dth in 1995. Some of the wells on Mountain Fuel's producing properties qualify for special tax credits, commonly referred to as "Section 29" or "tight sands" tax credits. During 1995, Mountain Fuel, as the party with the economic interest in the gas produced from such wells, earned $4.4 million in Section 29 tax credits. To qualify for the special tax credits, production must flow from wells that meet specified tight sands criteria and that commenced drilling prior to January 1, 1993. Only gas volumes produced prior to January 1, 2003, qualify for the special tax credit. Mountain Fuel stores up to 12.5 billion cubic feet of gas at Clay Basin, a base-load storage facility owned and operated by Questar Pipeline. Company-owned gas is stored at Clay Basin during the summer and withdrawn during the heating season. The Company has been directly responsible for its gas acquisition activities since September 1, 1993. Mountain Fuel has a balanced and diversified portfolio of approximately 45 gas supply contracts with more than 35 suppliers located in the Rocky Mountain states of Wyoming, Colorado, and Utah. The Company purchases gas on the spot market and under contracts, primarily during the heating season. Mountain Fuel's gas purchase contracts have market-based provisions and are either of short-duration or renewable on an annual basis upon agreement of the parties. Mountain Fuel's gas acquisition objective is to obtain reliable, diversified sources of gas supply at competitive prices. In the Company's last semi-annual purchased gas cost filing, it estimated that its 1996 average wellhead cost of field purchased gas would be $1.34 per Dth. Although Mountain Fuel has contracts with take-or-pay provisions, it currently has no material take-or-pay liabilities. Competition, Growth, and Unbundling Mountain Fuel has historically enjoyed a favorable price comparison with all energy sources used by residential and commercial customers except coal and occasionally fuel oil. This historic price advantage, together with the convenience and handling advantages associated with natural gas, has permitted the Company to retain 85-95 percent of the residential space heating and water heating markets in its service area and to distribute more energy, in terms of Btu content, than any other energy supplier to residential and commercial markets in Utah. These competitive advantages are responsible for the Company's ability to attract residential users of alternate energy sources to gas in its service areas in central and southwestern Utah even though such users are temporarily required to pay higher rates than their counterparts in the more populated areas of Utah. (The first group of these customers will begin paying standard rates in 1997.) Mountain Fuel, during 1995, continued to expand the size of its customer base in new and existing service areas as Utah's growth rate exceeded the national average. The Company plans to extend service to Ogden Valley, an area east of Ogden, Utah, during 1996. The Company is also focusing marketing efforts to develop incremental load in existing homes and new construction. Most households in Mountain Fuel's service area already use natural gas for space heating and water heating. The Company's market share for other secondary appliances, e.g., ranges and dryers, has historically been less than 20 percent, which is significantly lower than its 85-95 percent market share for furnaces and water heaters. Mountain Fuel has marketing campaigns to convince existing customers to take advantage of natural gas's lower prices, favorable environmental qualities, and greater efficiency by converting other appliances to natural gas. The Company also has marketing campaigns to convince contractors to install the necessary lines for gas fireplaces, ranges, and dryers in new homes. Mountain Fuel estimates that approximately 40 percent of the new homes constructed in its service area during 1995 included piping for gas fireplaces and approximately 40-50 percent of such homes had piping for gas dryers or ranges. As a result of its contacts with appliance dealers, the Company receives information about the sales of gas appliances and has been pleased with the growth of sales for fireplaces, ranges and dryers. The Company believes that it must maintain a competitive price advantage in order to retain its residential and commercial customers and to build incremental load by convincing current customers to convert additional secondary appliances to natural gas. Mountain Fuel's rates for general service customers in Utah continue to be lower now than they were 10-11 years ago. Using rates in effect as of January 1, 1996, the typical residential customer in Utah would have an annual bill of $490.42, compared to an annual bill of $607.07, using rates in effect as of January 1, 1985. Historically, Mountain Fuel's competitive position has been strengthened as a result of owning natural gas producing properties and satisfying as much as approximately 64 percent of its system requirements with the cost-of-service gas produced from such properties. Mountain Fuel has developed an annual gas supply plan that provides for a judicious balance between cost-of-service gas and purchased gas. The Company believes that it is important to continue owning gas reserves, producing them in a manner that will serve the best short- and long-term interests of its customers, and satisfying a significant portion of its supply requirements with gas produced from such properties. Mountain Fuel reserves cost-of-service gas for firm sales customers. No other distributor markets natural gas sales service in direct competition with the Company in its service area, but marketing firms are arranging direct purchase contracts between large users in the Company's service area and producers. These customers can take advantage of the open-access status of either Questar Pipeline's or Kern River's open-access pipelines and can use the existence of the Kern River line to obtain discounted transportation charges. Mountain Fuel's sales rates are competitive when compared to other energy sources, but are periodically higher than the delivered price of spot-market gas volumes transported through its system to large customers. The Kern River pipeline, which was built to transport gas from southwestern Wyoming to Kern County, California, runs through portions of the Company's service area and can provide an alternative delivery source to transportation customers. As of the date of this report, Mountain Fuel has lost no industrial load as a result of the Kern River line. The existence of the Kern River pipeline, however, coupled with the open-access status of Questar Pipeline's transmission system, have changed the nature of market conditions for the Company. Large industrial customers in Utah's Wasatch Front area can acquire taps on Kern River's system or can take delivery of gas through a new tap that Mountain Fuel obtained in 1994. This Hunter Park tap in Salt Lake County enables the Company to obtain delivery of additional peak-day supplies to meet increasing demand. The existence and location of the Kern River pipeline system also made it possible for the Company to extend service into new areas in rural Utah and to develop a second source of supply for its central and southern Utah system. Within the last several years, the Company has increased its activities to encourage the use of natural gas as a fuel in automobiles, trucks, buses, and forklifts. Mountain Fuel has expanded the number of its service vehicles using natural gas and has helped convert fleet vehicles owned by several state agencies, municipalities, commercial businesses and others. There are nearly 1,800 natural gas vehicles in the Company's service territory and there are a total of 86 natural gas refueling stations within the Company's service area, including 23 that are open to the public. Vehicles using natural gas emit less carbon monoxide and other harmful pollutants. Consequently, the Company actively supports federal and state legislation promoting the use of natural gas in vehicles. Mountain Fuel is actively promoting the environmental advantages of natural gas, particularly in the portions of its service area that do not satisfy the ambient air quality standards set by the Environmental Protection Agency. Although Mountain Fuel is a public utility and has no direct competition from other distributors of natural gas sales for residential and commercial customers, the Company competes with other energy sources. Mountain Fuel continues to monitor its competitive position, in terms of commodity costs and efficiency of usage, with other energy sources on a short-term and long-term basis. PacifiCorp (using the name Utah Power in Utah) is the primary electric utility in the Company's service area. Although its current rates for residential space heating and water heating are more than twice as high on a Btu basis as Mountain Fuel's rates for such service, PacifiCorp provides an ongoing source of competition. Mountain Fuel has adopted innovative and productivity-enhancing measures to deal with competitive pressures during the last several years. One measure of improved efficiency is the number of customers served per employee. This ratio has improved from 388 customers per employee for 1994 to 423 customers per employee for 1995. Mountain Fuel intends to increase this ratio to greater than 440 customers per employee in 1996. The significant improvement in this ratio resulted from the Company's 1995 consolidation activities. Mountain Fuel closed four offices and reduced the size of six additional offices as it consolidated customer service functions such as dispatching, telephone service and engineering. The productivity of service technicians was increased as new computer technology and paging equipment eliminated the need for them to personally obtain service orders from a central location. The Company's workforce decreased from 1,486 employees at year-end 1994 to 1,373 employees at year-end 1995. A special retirement program was accepted by 109 of the 169 eligible employees and became effective April 30, 1995. Mountain Fuel and all local distribution companies are faced with the challenges and opportunities posed by the unbundling and restructuring of traditional utility services. As a local distribution company, Mountain Fuel owns and controls the lines through which gas is delivered, is the only supplier of natural gas to residential customers, measures the consumption of gas used by its customers, and bills for consumption and related services. The services provided by Mountain Fuel are packaged and priced as a "bundle." Most "unbundling" discussions focus on extending to residential and commercial customers the same choices provided to industrial customers, i.e., allowing them to separate the commodity supply from the transportation service. Mountain Fuel has been reviewing the opportunities associated with unbundling. The Company believes that it is well-positioned to succeed in a competitive environment. It has extensive gas-supply and marketing experience that may allow the Company to secure and manage gas supplies for groups of customers and sophisticated customer information systems that may allow it to perform billing and dispatch services for other companies. Mountain Fuel is an efficient natural gas company, a statement that is supported by such statistics as an operating and maintenance expense of $158 per customer, a customer to employee ratio of 423 to 1, and an overall customer satisfaction rating of 91.3 percent. In addition, the Company's operating efficiency is buttressed by owning the reserves to meet over 60 percent of its current demand. Mountain Fuel intends to maintain its competitive position within its own service area and to take advantage of opportunities in new markets. Regulation and Deregulation Mountain Fuel and all retail distribution companies have been subject to governmental regulation, as a substitute for competition. Other regulated industries; airline, trucking, telecommunication, financial service and interstate pipeline, have been and are being deregulated, and competitive market forces are forcing these industries to place more emphasis on operating efficiency. The substitution of competition for regulation will cause Mountain Fuel and other distribution companies to review their costs and levels of service. The PSCW asked Mountain Fuel and other Wyoming gas utilities to review the unbundling of transportation and commodity services. One Wyoming utility, KN Energy, Inc., recently obtained regulatory approval to unbundle sales service to a portion of its Wyoming customers. Mountain Fuel was involved in the regulatory proceedings involving KN Energy and is currently reviewing the advisability of offering unbundled services in Wyoming. The PSCU recently opened an informal docket to review the restructuring of electric utility services, but has not taken a similar action with gas utilities. As a public utility, Mountain Fuel is subject to the jurisdiction of the PSCU and PSCW. (The Company's customers in Idaho are served under the provisions of its Utah tariff. Pursuant to a special contract between the PUCI and the PSCU, Mountain Fuel's Idaho customers are regulated by the PSCU.) Mountain Fuel's natural gas sales and transportation services are provided under rate schedules approved by the two regulatory commissions. During 1995, Mountain Fuel filed and settled a general rate case in Utah. Under the terms of the settlement, which was the Company's first Utah general rate case settlement in more than a decade and which became effective September 1, 1995, Mountain Fuel's approved revenue deficiency was $3.7 million, compared to the requested revenue deficiency of $11.4 million. Approximately $2 million of the $3.7 million will be recovered through new premise charges, with the remaining $1.7 million recovered through a change in the method for crediting revenues collected when the Company "releases" pipeline capacity. The settlement agreement also permitted Mountain Fuel to incorporate a weather normalization mechanism on a phased-in basis. During the 1995-96 heating season, the mechanism is being used with the Company's commercial customers and equal payment residential customers, or approximately 40-45 percent of its general service load. The mechanism adjusts the non-gas cost portion of a customer's monthly bill as the actual degree days in the billing cycle are warmer or colder than normal. Mountain Fuel can apply the mechanism to the remainder of its residential customers as early as the fall of 1996, but these customers can choose, on an individual basis, to opt-out of the program. The settlement did not specify an authorized return on equity, but increased Mountain Fuel's allowed return on rate base from 10.08 percent to a range of 10.22 to 10.34 percent. As a result of the PSCU's use of an historic test year, Mountain Fuel was also permitted to retain the cost savings associated with reducing its labor force and consolidating its operations. These cost savings amounted to approximately $3.5 million in 1995 and will amount to about $5 million on an annualized basis in 1996. Both the PSCU and the PSCW have authorized the Company to use a balancing account procedure for changes in the cost of natural gas, including supplier non-gas costs, and to reflect changes on a semi-annual basis. Mountain Fuel's latest semi-annual balancing account applications become effective January 1, 1996. The Company's base rates for natural gas service in both Utah and Wyoming were decreased as a result of an overall decrease in the cost of gas and an adjustment to offset the overcollection in its gas balancing account. Mountain Fuel also received regulatory approval in both states to implement a one-time credit on its customers' February 1996 gas bills to return a portion of the overcollected balance. Mountain Fuel's Utah pass-through application was approved on an interim basis. In connection with the application, the Utah Division of Public Utilities has raised issues about the continued propriety of treating gathering costs as pass-through costs and about the reasonableness of such costs. The Company believes that its gathering costs are reasonable. The Committee of Consumer Services has requested additional information concerning a gas imbalance and may decide to raise the issue in the proceedings. Mountain Fuel does not expect to file a general rate case application with the PSCU or PSCW in 1996. It did not file a general rate case application with the PSCW in 1995. Under a 1993 order issued by the PSCW, the Company is allowed to earn a return on rate base of 10.4 percent. Mountain Fuel's responsibility for gas acquisition activities involves inherent risks of regulatory scrutiny. In the past, the Company has been involved in regulatory proceedings in which the prudence of its gas supply activities has been challenged, but Mountain Fuel has successfully defended its activities and has not incurred any significant disallowance of gas costs. Under Utah law, Mountain Fuel must report its common stock dividends to the PSCU and must allow at least 30 days between declaring and paying dividends. The PSCU can investigate any dividend declared by the Company to determine if payment of such dividend would impair the Company's capital or service obligations. The PSCW and the PUCI, but not the PSCU, have jurisdiction to review the issuance of long-term securities by the Company. The Company has significant relationships with its affiliates. The PSCU and PSCW have jurisdiction to examine these relationships and the costs paid by the Company for services rendered by or goods purchased from its affiliates. A settlement agreement involving Mountain Fuel's cost-of-service gas and defining certain contractual obligations between Mountain Fuel and Wexpro is monitored by the Utah Division of Public Utilities. The PSCU and PSCW have adopted regulations or issued orders that affect the Company's business practices in such areas as main extensions, credit and collection activities, and termination of service standards. Relationships with Affiliates The Company has significant business relationships with affiliated companies, particularly Questar Pipeline and Wexpro. The following diagram shows the corporate structure of the Company and its primary affiliates: Questar Corporation Questar Energy Services, Inc. Universal Resources Corporation Entrada Industries Inc. Wexpro Company Celsius Energy Company Mountain Fuel Supply Company Questar InfoComm Inc. Questar Pipeline Company Questar Gas Management Company Questar Development Corporation The Company's relationships with its primary affiliates are described below. Questar Pipeline Company. Questar Pipeline owns a two-pronged transmission system running from southwestern Wyoming into Mountain Fuel's Utah service area. Questar Pipeline's historic function as the Company's supplier ended September 1, 1993, when Questar Pipeline's gas purchase contracts were transferred to Mountain Fuel and when the Company converted its firm capacity entitlements to firm transportation service. Mountain Fuel has reserved about 800,000 Dth per day or approximately 79 percent of Questar Pipeline's total transmission capacity. Mountain Fuel transports both cost-of-service gas and purchased gas on Questar Pipeline's transmission system. (The Company also transports gas volumes on the transmission systems owned by Northwest Pipeline Company and Colorado Interstate Gas Company. Mountain Fuel purchases "city gate" gas supplies from transportation customers on Kern River's system.) The Company releases its firm transportation capacity, pursuant to capacity release procedures adopted by the Federal Energy Regulatory Commission (FERC), when it does not need such service for its sales customers. Because Mountain Fuel has sufficient capacity on the system to meet peak-demand periods, it has unused capacity for the balance of the year. During the 12-month period ending August 31, 1995, Mountain Fuel released an average of 632,867 Dth per day. When the released capacity is coupled with the Company's average sales volume of 270,337 Dth during this same period, Mountain Fuel "used" approximately 72 percent of its reserved capacity on Questar Pipeline's system. During 1995, Questar Pipeline transported 79,872 Mdth of gas for Mountain Fuel, compared to 75,941 Mdth in 1994. Under Questar Pipeline's "straight fixed-variable" rate schedules, Mountain Fuel is obligated to pay demand charges for firm capacity, regardless of the volumes actually transported. The Company paid approximately $49.4 million in demand charges to Questar Pipeline in 1995 for firm transportation capacity and "no notice" transportation. Questar Pipeline also credits Mountain Fuel with revenues it receives from transportation customers that use the Company's released capacity. During the 12-month period ending August 31, 1995, Mountain Fuel received $13.0 million in revenue credits from Questar Pipeline. Mountain Fuel purchases storage capacity at Clay Basin, a large base-load storage facility operated by Questar Pipeline, and also has peaking storage capacity at three additional storage reservoirs owned by Questar Pipeline. The Company paid Questar Pipeline $13.5 million in demand charges during 1995 in connection with storage services. Prior to March 1, 1996, Questar Pipeline provided the Company with gathering services under a gathering agreement that became effective on September 1, 1993, when the FERC approved a joint settlement filed by the parties. Questar Pipeline gathered 31,691 Mdth for Mountain Fuel during 1995, compared to 32,098 Mdth in 1994. This agreement was transferred to Questar Gas Management as of March 1, 1996. Under the terms of the agreement, Questar Gas Management will gather gas volumes produced from cost-of-service properties for the life of such properties. The Company's obligation to use Questar Gas Management to gather purchased gas terminates in 1997. Wexpro Company. Wexpro operates certain properties owned by Mountain Fuel. Under the terms of a settlement agreement, which was approved by the PSCU and PSCW and upheld by the Utah Supreme Court, Mountain Fuel owns gas produced from specified properties that were productive as of August 1, 1981 (the effective date of the settlement agreement). Such gas is reflected in rates at cost-of-service prices based on rates of return established by the settlement agreement. In addition, Wexpro conducts development gas drilling for Mountain Fuel on specified properties and is reimbursed for its costs plus a current rate of return of 22.03 percent (adjusted annually using a specified formula) on its net investment in such properties, adjusted for working capital and deferred taxes, if the wells are successful. Under the terms of the settlement agreement, the costs of unsuccessful wells are borne by Wexpro. The settlement agreement also permits Mountain Fuel to share income from hydrocarbon liquids produced from certain properties operated by Wexpro after Wexpro recovers its expenses and a specified rate of return. The income received by Mountain Fuel from Wexpro is used to reduce natural gas costs to its customers. Wexpro only conducts drilling activities in response to the needs of Mountain Fuel or the demands from other working interest owners. The significant decrease in Rocky Mountain wellhead prices resulted in the near cessation of Wexpro's drilling activities. Only 9,760 MMcf in proved development reserves were added to Mountain Fuel's net reserves in 1995, compared to 36,632 MMcf in production. Other Affiliates. Other significant affiliates of Mountain Fuel include Questar InfoComm, Inc., Questar Development Corporation (Questar Development), Celsius Energy Company (Celsius), and Universal Resources Corporation (Universal Resources). Questar InfoComm provides data processing and telecommunication services for the Company and other affiliates. It owns and operates a network of microwave facilities, all of which are located in Mountain Fuel's service area or near Questar Pipeline's transmission system. Services are priced to recover operating expenses and a return on investment. Questar InfoComm personnel have assisted Mountain Fuel with the development of new customer information systems that facilitated the Company's consolidation of customer service activities. Mountain Fuel leases some space in an office building located in Salt Lake City, that is owned by Interstate Land Corporation (a subsidiary of Questar Development). Mountain Fuel expects to continue leasing space in this building, which is currently being enlarged and remodeled. Celsius conducts oil and gas exploration and related development activities in the Rocky Mountain area. Universal Resources conducts oil and gas exploration and related development activities primarily in the Midcontinent region outside the Company's service area. It also markets gas volumes, including the majority of volumes produced by Celsius, and is responsible for some of the contracts providing gas to the Company's transportation customers. Entrada Industries, Inc. (Entrada), is a wholly owned subsidiary of Questar and is the direct parent of Celsius and Wexpro. While Mountain Fuel and Entrada are subject to common control by Questar, there is no direct control of Entrada by the Company or of the Company by Entrada. See "Legal Proceedings." Questar, Mountain Fuel's parent, provides certain administrative services, e.g., personnel, legal, public relations, financial, tax, and audit, to the Company and other members of the consolidated group. Questar also sponsors the qualified and welfare plans in which the Company's employees participate. Mountain Fuel is responsible for a proportionate share of the costs associated with these services and benefit plans. Employees As of December 31, 1995, the Company had 1,373 employees, compared to 1,486 at year-end 1994. A special early retirement offer was accepted by 109 employees (of 169 eligible employees) in the spring of 1995. None of these employees was replaced. Mountain Fuel's employees are nonunion employees who are not represented under collective bargaining agreements. Mountain Fuel participates in Questar's comprehensive employee benefit plans and pays the share of costs attributable to its employees covered by such plans. Employee relations are generally deemed to be satisfactory. Environmental Matters The Company is subject to the National Environmental Policy Act and other federal and state legislation regulating the environmental aspects of its operations. Although Mountain Fuel does not believe that environmental protection laws and regulations will have any material effect on its competitive position, it does believe that such provisions have added and will continue to add to the Company's expenditures and annual maintenance and operating expenses. See "Legal Proceedings" for a discussion of litigation concerning liability for contamination on property owned by a former subsidiary of the Company. Mountain Fuel has an obligation to treat waste water and monitor the effectiveness of an underground slurry wall that was constructed in 1988 at its operations center in Salt Lake City, Utah. The slurry wall was built to contain contaminants from an abandoned coal gasification plant that operated on the site from 1908 to 1929. As previously noted, Mountain Fuel is emphasizing the environmental advantages of natural gas. Several industrial customers have converted to natural gas or plan to increase their use of natural gas in order to lower emissions. The Company's marketing campaigns feature the clean-burning characteristics of natural gas fireplaces. Natural gas vehicles are also being encouraged on the basis of environmental considerations. Research and Development The Company conducts studies of gas conversion equipment, gas piping, and engines using natural gas and has funded demonstration projects using such equipment. The total dollar amount spent by the Company on research activities is not material. ITEM 3. LEGAL PROCEEDINGS There are various legal and regulatory proceedings pending that involve the Company and its affiliates. While it is not feasible to predict or determine the outcome of these proceedings, the Company's management believes that the outcome will not have a material adverse effect on the Company's financial position. Mountain Fuel, as a result of acquiring Questar Pipeline's gas purchase contracts, is responsible for any judgment rendered against Questar Pipeline in a lawsuit that was tried before a jury in 1994. The jury awarded an independent producer compensatory damages of approximately $6,100,000 and punitive damages of $200,000 on his claims involving take-or-pay, tax reimbursement, contract breach, and tortious interference with a contract. A judgment has not been entered because the presiding judge has still not issued a decision concerning the competing forms of judgment entered by the opposing parties. The producer's counterclaims originally exceeded $57,000,000, but were reduced to less than $10,000,000, when the presiding judge dismissed with prejudice some of the claims prior to the jury trial. Under existing PSCU rulings, any payments resulting from this judgment will be included in Mountain Fuel's gas balancing account and recovered in its rates for natural gas sales service. As a result of its former ownership of Entrada and Wasatch Chemical Company, Mountain Fuel has been named as a "potentially responsible party" for contaminants located on property owned by Entrada in Salt Lake City, Utah. Questar and Entrada have also been named as potentially responsible parties. (Entrada and the Company are both direct, wholly owned subsidiaries of Questar; prior to October 2, 1984, Mountain Fuel was the parent of Entrada.) The property, known as the Wasatch Chemical property, was the location of chemical operations conducted by Entrada's Wasatch Chemical division, which ceased operation in 1978. A portion of the property is included on the national priorities list, commonly known as the "Superfund" list. In September of 1992, a consent order governing clean-up activities was formally entered by the federal district court judge presiding over the underlying litigation involving the property. This consent order was agreed to by Questar, Entrada, the Company, the Utah Department of Health and the Environmental Protection Agency (the EPA). During 1995, Entrada completed soil remediation activities on the property, using an in situ vitrification procedure. It is continuing to conduct ground water remediation activities. Entrada has accounted for all costs spent on the environmental claims and has also accounted for all settlement proceeds, accruals and insurance claims. It has received cash settlements, which together with accruals and insurance receivables, should be sufficient for future clean-up costs. Mountain Fuel has consistently maintained that Entrada should be responsible for any liability imposed on the Questar group as a result of actions involving Wasatch Chemical. The Company has not paid any and does not expect to pay any costs associated with the clean-up activities for the property. Mountain Fuel recently settled a lawsuit in which Utah Power claimed that the Company was responsible for contamination located on property that is next to Mountain Fuel's operations center in Salt Lake City. The operations center was the site of an abandoned coal gasification plant. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1995, Mountain Fuel did not submit any matters to a vote of security holders. Part II ITEM 5. MARKET FOR REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS The Company's outstanding shares of common stock, $2.50 par value, are owned by Questar. Information concerning the dividends paid on such stock and the ability to pay dividends is reported in the Statements of Common Shareholder's Equity and the Notes to Financial Statements included in Item 8. ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31, 1995 1994 1993 1992 1991 (In Thousands) Revenues $362,769 $378,260 $402,391 $373,047 $416,759 Operating expenses Natural gas purchases 190,606 210,507 230,139 218,123 253,111 Other expenses 128,441 128,432 125,743 110,527 108,761 Total operating expenses 319,047 338,939 355,882 328,650 361,872 Operating income $43,722 $39,321 $46,509 $44,397 $54,887 Net income $23,668 $23,352 $25,069 $23,395 $25,074 Cash dividends paid on common stock 20,000 19,500 18,000 18,000 19,000 Total assets 600,261 590,275 581,027 490,614 452,139 Capital expenditures 51,413 53,816 50,658 55,721 36,984 Capitalization Long-term debt $175,000 $175,000 $158,000 $150,126 $148,953 Redeemable cumulative preferred stock 4,957 6,324 7,525 8,726 9,955 Common shareholder's equity 208,645 205,461 182,200 175,826 171,231 $388,602 $386,785 $347,725 $334,678 $330,139
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Following is a summary of revenues and operating information for the Company's operations:
Year Ended December 31, 1995 1994 1993 (Dollars In Thousands) OPERATING INCOME Revenues Residential and commercial sales $315,458 $329,576 $360,210 Industrial sales 22,479 24,395 21,678 Industrial transportation 6,127 5,665 5,898 Other 18,705 18,624 14,605 Total revenues 362,769 378,260 402,391 Operating expenses Natural gas purchases 190,606 210,507 230,139 Operating and maintenance 93,384 94,094 92,486 Depreciation and amortization 25,469 24,749 23,244 Other taxes 9,588 9,589 10,013 Total expenses 319,047 338,939 355,882 Operating income $43,722 $39,321 $46,509 OPERATING STATISTICS Natural gas volumes (in Mdth) Residential and commercial sales 73,950 74,233 79,369 Industrial deliveries Sales 9,210 8,882 6,514 Transportation 59,569 51,382 53,105 Total industrial 68,779 60,264 59,619 Total deliveries 142,729 134,497 138,988 Natural gas revenue (per dth) Residential and commercial $4.27 $4.44 $4.54 Industrial sales 2.44 2.75 3.33 Transportation for industrial customers 0.10 0.11 0.11 Natural gas purchase price (per dth) $2.16 $2.40 $2.52 Heating degree days (normal 5,801) 5,047 5,290 6,073 Colder (warmer) than normal (13%) (9%) 5% Number of customers at end of period 592,738 572,174 550,184
Revenues, net of gas costs, increased $4,410,000 in 1995 when compared with 1994 after decreasing $4,499,000 in 1994 when compared with 1993. The positive influences derived from a general rate case settlement, a 3.6% increase in the number of customers, an increase in transportation volumes for industrial customers and productivity improvement measures offset the effect of temperatures that were 5% warmer than were experienced in 1994. On August 11, 1995, the Public Service Commission of Utah (PSCU) approved a settlement of Mountain Fuel's general rate case filed April 13, 1995. Mountain Fuel received a $3.7 million increase in revenues. The settlement allowed the Company to implement a weather normalization adjustment, provided about $2 million in additional revenues through a new-premises fee and added about $1.7 million from sharing capacity-release revenues. The settlement did not specify an authorized return on equity, but Mountain Fuel's allowed return on rate base increased from 10.08% to between 10.22% and 10.34%. A weather-normalization adjustment applied to about 40% of Mountain Fuel's weather sensitive volumes for the last quarter of 1995 and reduced the net income effect caused by warmer-than-normal temperatures by about $1.3 million. Mountain Fuel pays for firm-transportation capacity and sells unused firm-transportation capacity as capacity-release service. Under the rate settlement, Mountain Fuel is allowed to credit 20% of capacity-release revenues, which amounted to $676,000 in 1995, to earnings. Natural gas deliveries to residential and commercial customers were largely unchanged in 1995 when compared with 1994. Both years experienced warmer-than-normal temperatures and a near 4% increase in the number of customers. Sales volumes dropped 6% in 1994 after increasing 16% in 1993 due to 1994 being 13% warmer than 1993. The number of customers increased by 3.6% in 1995, 4.0% in 1994 and 3.4% in 1993. Gas deliveries to industrial customers increased by 14% in 1995 and 1% in 1994. Mountain Fuel's service area has experienced strong economic growth for several successive years. The Company has benefitted from a higher gas demand for expanded operations and environmental reasons. Mountain Fuel closed four regional offices and reduced functions at six other offices in an effort to consolidate and restructure operations. In addition, the Company's offer of early retirement was accepted by 109 employees effective April 30, 1995. The cost reductions associated with these changes averaged $400,000 per month or about $3.2 million for 1995. The early retirement program did not cause a material increase in pension expense. Mountain Fuel is depending on its investment in customer information system technology to provide increased efficiency in serving customers. Mountain Fuel's customers satisfaction rating continued to increase reaching a record 91.3% in 1995. Starting 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 reporting period. The impact of these accruals on the income statement has been deferred and is being recognized at the rate of $2,011,000 per year over a five-year period beginning in 1994, in accordance with a PSCU rate order. This rate order also reduces customer rates by $2,011,000 per year over the same five-year period. In addition in 1994, Mountain Fuel recorded other income of $5,589,000 for a one-time reduction in gas costs associated with these unbilled revenues. This transaction added about $3.5 million to net income in 1994. Natural gas purchases decreased 4% in 1995 when compared with 1994 primarily due to lower prices for natural gas. Natural gas purchases decreased 9% in 1994 when compared with 1993 largely the result of a reduction in volumes sold. Operating and maintenance expenses decreased 1% in 1995 primarily because of productivity improvement measures implemented in 1995. Operating and maintenance expenses were 2% higher in 1994 when compared to 1993 because of the costs associated with more customers and an expanded service territory. Depreciation and amortization expense increased 3% in 1995 and 6% in 1994 as a result of capital expenditures. The effective income tax rate was 24.6% in 1995, 25.3% in 1994 and 23.5% in 1993 primarily due to income tax credits received from production of gas from certain properties. These credits amounted to $4,376,000 in 1995, $4,670,000 in 1994 and $5,463,000 in 1993. Mountain Fuel, as a result of acquiring Questar Pipeline's gas purchase contracts, is responsible for any judgment rendered against Questar Pipeline in a lawsuit that was tried before a jury in 1994. The jury awarded an independent producer compensatory damages of approximately $6.1 million and punitive damages of $200,000 on his claims. The producer's counterclaims originally exceeded $57 million, but were reduced to less than $10 million, when the presiding judge dismissed with prejudice some of the claims prior to the jury trial. Under existing PSCU rulings, any payments resulting from this judgment will be included in Mountain Fuel's gas balancing account an recovered in its rates for natural gas service. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, that becomes effective for the Company January 1, 1996. Statement No. 121 requires the Company to review for impairment, assets that are held and used whenever events or changes in circumstances indicate that an asset's carrying value may not be recoverable. If impairment is indicated, the Company must reduce the carrying value of the asset in question. The Company will adopt Statement No. 121 in 1996 and does not expect a significant effect to either operating results or financial position. LIQUIDITY AND CAPITAL RESOURCES Operating Activities Net cash provided from operating activities increased 107% in 1995. Net cash provided from operating activities was $68,546,000 in 1995, $33,143,000 in 1994 and $37,139,000 in 1993. The increase in 1995 was largely due to the collection of accounts receivable and lower gas purchase costs. Investing Activities Following is a summary of capital expenditures for 1995 and 1994, and a forecast of 1996 expenditures.
1996 Estimated 1995 1994 (In Thousands) New-customer service equipment $27,700 $24,950 $22,343 Distribution system 11,300 9,981 7,085 Buildings 1,500 3,473 7,193 Computer software and hardware 6,600 5,121 5,849 General and other 7,900 7,888 11,346 $55,000 $51,413 $53,816
Mountain Fuel's capital spending is primarily in response to a rapid increase in the number of customers, amounting to 20,564 in 1995, 21,990 in 1994 and 18,075 in 1993 due to population growth and construction activity in its service area. Mountain Fuel extended its system by 559 miles of main, feeder and service lines in 1995. Mountain Fuel transferred a building with a net book value of $8,915,000 to an affiliate in the third quarter of 1994. Financing Activities The Company funded 1995 capital expenditures and cash dividends with cash provided from operations and borrowings from Questar. Forecasted 1996 capital expenditures of $55 million are expected to be financed with cash provided from operations and borrowings from Questar. The Company has a short-term line-of-credit arrangement with a bank under which it may borrow up to $500,000. The line has interest rates generally below the prime interest rate and is renewable on an annual basis. No amount was borrowed under this arrangement at either December 31, 1995 or 1994. Questar loans funds to the Company under a short-term borrowing arrangement. Outstanding short-term notes payable to Questar totaled $56,100,000 with an interest rate of 6.01% at December 31, 1995 and $53,500,000 with an interest rate of 6.11% at December 31, 1994. Mountain Fuel has a capital structure of 45% long-term debt, 1% preferred stock and 54% common equity. Moody's and Standard and Poor's have rated Mountain Fuel's long-term debt A-1 and A+. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's financial statements are included in Part IV, Item 14, herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Mountain Fuel has not changed its independent auditors or had any disagreements with them concerning accounting matters and financial statement disclosures within the last 24 months. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the Company's directors and executive officers is located in the following chart: Business Experience and Positions Held Name Age With the Company and Affiliates M. E. Benefield 56 Vice President, Gas Supply, May 1992; Vice President, Planning and Corporate Development, Questar (March 1989 to May 1992.) R. D. Cash 53 Director, May 1977; Chairman of the Board, May 1985; Director, President and Chief Executive Officer, Questar, May 1984; Chairman of the Board, Questar, May 1985. Director, Zions First National Bank and Zions Bancorporation, Associated Electric and Gas Insurance Services Limited, and a member of the Board of Directors of the Federal Reserve Bank (Salt Lake branch) of San Francisco; Trustee, Southern Utah University. Susan Glasmann 48 Vice President, Marketing, February 1994; General Manager, Marketing, April 1991 to February 1994; Manager, Corporate Communications, Questar, October 1989 to April 1991. Robert E. Kadlec 62 Director, March 1987; Director, Questar, March 1987; President and Chief Executive Officer, BC Gas Inc. (Vancouver, British Columbia) to December 1995; founder of Kadlec Holdings (investment and consulting firm); Director, BC Gas Inc., Trans Mountain Pipe Line Company Ltd., British Pacific Properties Ltd., and International Forest Products Limited, and Advisory Director, Andersen Consulting. Dixie L. Leavitt 66 Director, May 1987; Director, Questar, May 1987; founder and Chairman of the Board, Leavitt Group Agency Association (a group of approximately 54 separate insurance agencies); President and Chairman of entities engaged in dairy, cattle, agriculture, and real estate operations in Utah and southern Nevada; Director, Zions First National Bank. Gary G. Michael 55 Director, February 1994; Director, Questar, February 1994; Chairman and Chief Executive Officer, Albertson's; Director, Albertson's and of the Federal Reserve Bank of San Francisco. S. E. Parks 44 Vice President, Treasurer and Chief Financial Officer, Mountain Fuel and Questar, February 1996; Treasurer, Questar and Mountain Fuel, May 1984. D. N. Rose 51 President and Chief Executive Officer, October 1984; Director, May 1984; Executive Vice President, Questar, February 1996; Director, Questar, May 1984; Director, Key Bank of Utah; Trustee, Westminster College. G. H. Robinson 45 Vice President and Controller, April 1991; Vice President, Marketing, March 1985 to April 1991. S. C. Yeager 48 Vice President, Customer Service, April 1991; Vice President, Retail Operations, March 1985 to April 1991. Except as otherwise indicated, the executive officers and directors have held the principal occupations described above for more than the past five years. There are no family relationships among the directors and executive officers of the Company. Directors of the Company are elected to serve three-year terms. Executive officers of the Company serve at the pleasure of the Board of Directors. ITEM 11. EXECUTIVE COMPENSATION The following Summary Compensation Table lists annual and long-term compensation earned by Mr. D. N. Rose, the Company's President and Chief Executive Officer, and the other four most highly compensated officers during 1993, 1994, and 1995: Summary Compensation Table
Annual Compensation Long-Term Compensation Name and Restricted All Other Base Stock Other Principal Year Salary($)1 Bonus($)2 Awards($)3 Options(#) 4 Compensation($) 5 D. N. Rose 1995 235,167 27,852 27,808 19,000 29,064 President and Chief 1994 209,500 36,061 36,053 19,000 21,713 Executive Officer 1993 200,417 38,572 38,525 19,000 18,786 R. D. Cash 6 1995 138,597 9,682 9,670 30,000 21,516 Chairman of the 1994 138,337 38,770 38,767 30,000 17,467 Board 1993 128,835 37,406 37,406 30,000 14,946 M. E. Benefield 1995 145,483 11,567 11,533 9,000 10,384 Vice President, 1994 139,500 15,862 15,850 9,000 9,888 Gas Supply 1993 134,050 20,163 17,136 9,000 8,743 G. H. Robinson 1995 140,000 12,081 11,029 9,000 9,882 Vice President and 1994 133,083 15,114 15,084 9,000 9,118 Controller 1993 127,533 16,223 16,223 9,000 8,107 S. C. Yeager 1995 140,000 14,081 11,029 9,000 12,459 Vice President, 1994 133,083 15,114 15,084 9,000 9,118 Customer Service 1993 127,533 16,223 16,223 9,000 8,031
1/ Base salary amounts listed for Messrs. Robinson and Yeager for 1995 include lump-sum merit payouts that were received in lieu of base salary increases. 2/ Amounts listed under this heading are cash payments earned and discretionary bonuses awarded under the Annual Management Incentive Plans (AMIP) for the Company and Questar (for Mr. Cash). The amounts listed for Mr. Cash are the amounts allocated to Mountain Fuel. 3/ Amounts under this heading include the value (as of the grant date) of any restricted shares of Questar's common stock used in 1994, 1995 and 1996, in lieu of cash, as partial payment of bonuses earned under the Company's AMIP and the Company's allocated portion of the value of restricted shares granted to Mr. Cash under Questar's AMIP. All shares of restricted stock vest in two equal, annual installments occurring on the first business day in February of the first and second years following the grant date. Dividends are paid on the restricted shares at the same rate dividends are paid on other shares of Questar's common stock. As of year-end 1995, Mr. Rose had 1,928 shares of restricted stock having a market value of $64,558; Mr. Cash had 4,683 shares worth $156,881; Mr. Benefield had 851 shares worth $28,509; Messrs. Robinson and Yeager each had 808 shares worth $27,608. 4/ Mountain Fuel's executive officers are granted stock options to purchase shares of Questar's common stock under Questar's Long-Term Stock Incentive Plan. 5/ Amounts listed under this heading include employer matching and nonmatching contributions, matching contributions to the Deferred Share Plan, and directors' fees paid by the Company, and, for 1995 only, vacation buy-back pay. The figure opposite Mr. Rose's name for 1995 include $8,795 in contributions to the Employee Investment Plan, $8,853 in matching contributions to the Deferred Share Plan, $6,800 in director's fees, and $4,616 for unused vacation. The 1995 figure for Mr. Cash includes the Company's allocated portion of contributions to the Employee Investment Plan of $3,882, $6,800 in directors' fees paid by the Company, and the Company's allocated portion of contributions to the Deferred Share Plan of $10,834. The 1995 figure listed for Mr. Benefield includes $8,795 in contributions to the Employee Investment Plan and $1,589 in matching contributions to the Deferred Share Plan. The 1995 figure for Mr. Robinson includes $8,795 in contributions to the Employee Investment Plan and $1,087 in matching contributions to the Deferred Share Plan. The 1995 figure for Mr. Yeager includes $8,795 in contributions to the Employee Investment Plan, $1,087 in matching contributions to the Deferred Share Plan and $2,577 for unused vacation. 6/ Mr. Cash also serves as an executive officer of Questar and other affiliated companies. The base salary shown for Mr. Cash is the combination of the amount directly paid by the Company and the amount allocated to the Company. The following table lists information concerning the stock options to purchase shares of Questar's common stock that were granted to Mountain Fuel's five highest paid officers during 1995 under Questar's Long-Term Stock Incentive Plan. No stock appreciation rights were granted during 1995. Option Grants in Last Fiscal Year
% of Total Options Granted Options to Employee in Exercise or Expiration Grant Date Name Granted #1/ Last Fiscal Year Base Price ($) Date Value ($)2/ D. N. Rose 19,000 5.0 27.375 2/14/2005 134,710 R. D. Cash 30,000 7.8 27.375 2/14/2005 212,700 M. E. Benefield 9,000 2.3 27.375 2/14/2005 63,810 G. H. Robinson 9,000 2.3 27.375 2/14/2005 63,810 S. C. Yeager 9,000 2.3 27.375 2/14/2005 63,810
1/ These stock options vest in four annual, equal installments, with the first installment exercisable as of August 14, 1995. Participants can use cash or previously-owned shares as consideration for option shares. Options expire when a participant terminates his employment, unless termination is caused by an approved retirement, death, or disability. Options can be exercised for three months following a participant's approved retirement and 12 months following a participant's death or disability. 2/ When calculating the present value of options as of the date granted (February 14, 1995), Questar used the Black-Scholes option pricing model. Questar assumed a volatility of 20.81 percent, a risk free interest rate of 7.7 percent, a dividend yield of 4.16 percent and a vesting discount of 5.7 percent. The real value of the listed options depends upon the actual performance of Questar stock. There can be no assurance that the values shown in this table will be achieved. The following table lists information concerning the options to purchase shares of Questar's common stock that were exercised by the officers named above during 1995 and the total options and their value held by each at year-end 1995: Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Options/SAR Values
Value of Unexercisable Shares Number of Unexercisable in-the-Money Acquired Value Options/SARs at Year-End Options/SARs at Year-End Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable D. N. Rose 17,450 195,342 28,500 28,500 114,000 128,250 R. D. Cash 0 0 69,373 45,000 518,175 202,500 M. E. Benefield 0 0 15,500 13,500 102,563 60,750 G. H. Robinson 0 0 15,500 13,500 102,563 60,750 S. C. Yeager 0 0 20,250 13,500 147,656 60,750
1/ The "value" is calculated by subtracting the fair market value of the shares purchased on the date of exercise minus the option price. The value is equal to the amount of ordinary income recognized by each officer. The current value of the shares may be higher or lower than the aggregate value reported in the table. 2/ Stock appreciation rights (SARs) have not been granted since February of 1989. At year-end 1995, there were no SARs outstanding. Retirement Plan Company employees (including executive officers) participate in the employee benefit plans of Questar. The Company has agreed to pay its share of the costs associated with the plans that are described below. Questar maintains a noncontributory Retirement Plan that is funded actuarially and does not involve specific contributions for any one individual. The following table lists the estimated annual benefits payable under the Retirement Plan as of December 31, 1995, and, if necessary, the Supplemental Executive Retirement Plan (the SERP). The benefits shown are based on earnings and years of service reaching normal retirement age of 65 in 1995 and do not include Social Security benefits. Benefits under the Retirement Plan are not reduced or offset by Social Security benefits. PENSION PLAN TABLE
Highest Consecutive Years of Service Three-Year Average Annual Compensation 15 20 25 30 35 $150,000 $40,417 $53,890 $67,362 $71,112 $74,862 175,000 47,542 63,390 79,237 83,612 87,987 200,000 54,667 72,890 91,112 96,112 101,112 225,000 61,792 82,390 102,987 108,612 114,237 250,000 68,917 91,890 114,862 112,112 127,362 275,000 76,042 101,390 126,737 133,612 140,487 300,000 83,167 110,890 138,612 146,112 153,612
Questar's Retirement Plan has a "step rate/excess" benefit formula. The formula provides for a basic benefit that is calculated by multiplying the employee's final average earnings by a specified base benefit factor and by subsequently multiplying such sum by the employee's years of service (up to a maximum of 25). This basic benefit is increased for each year of service in excess of 25 and is reduced for retirement prior to age 62. Employees also receive a supplemental benefit calculated by multiplying the difference between the employee's final average earnings and his "covered compensation" by a supplemental factor that varies by age. (The term covered compensation refers to the 35-year average Social Security wage base tied to year of an employee's birth.) Employees who retire prior to age 62 also receive a temporary supplement that is tied to years of service until they are eligible to receive Social Security benefits at age 62. Federal tax laws impose limits on the amount of annual compensation that can be used when calculating benefits under qualified plans and on the amount of benefits that can be paid from such plans. The SERP, a nonqualified plan, was adopted in 1987 to compensate officers who are affected by these limits; it provides for retirement benefits equal to the difference between the benefits payable under the qualified Retirement Plan and the benefits that would be payable absent such limits. All of the officers listed in the table earn annual compensation in excess of the current cap of $150,000 and all of them have vested benefits under the SERP. The "final average earnings" (average annual earnings for the last three years) for purposes of calculating retirement benefits for the executive officers named above in the table as of December 31, 1995, is as follows: $283,605 for Mr. Rose; $174,552 for Mr. Benefield; $162,750 for Mr. Robinson; and $162,250 for Mr. Yeager. (No figure is given for Mr. Cash because his final average earnings for purposes of the Retirement Plan and SERP would include compensation paid by the Company's affiliates.) (Mr. Benefield was eligible to participate in the early retirement program offered by the Company in the spring of 1995. As an eligible participant, he is eligible to receive the higher of his frozen benefit as of April 30, 1995, or his benefit earned under the Retirement Plan and SERP, when he does retire.) The officer's base salary, cash bonus payments, and value of restricted stock (paid in lieu of cash) reported in the Summary Compensation Table would be included in the calculation of the officer's final average earnings. The amounts reported in the Summary Compensation Table are somewhat different than the final average earnings because the latter figures include cash payments when made, not when earned, and the value of restricted stock when granted, not distributed. Dividends on the restricted shares are also included in the officer's final average earnings, but are not reported in the table. The years of credited service for the individuals listed in the compensation table are: 20 years for Mr. Cash; 27 years for Mr. Rose; 18 years for Mr. Benefield; 22 years for Mr. Robinson; and 20 years for Mr. Yeager. The Company also participates in Questar's Executive Incentive Retirement Plan (the EIRP). Under the terms of this nonqualified plan, a participant will receive monthly payments upon retirement until death equal to 10 percent of the highest average monthly compensation (excluding incentive compensation) paid to the officer during any period of 36 consecutive months of employment. The plan also provides for a family benefit in the event of the death of an officer. Although not required to do so, Questar and its affiliates have purchased life insurance on the life of each participant, with Questar named as owner and beneficiary. The covered officers have no rights under or to such insurance policies. All of the Company's officers listed in the compensation table have been nominated to participate in the plan, have satisfied the 15 years of service requirement and have a vested right to receive benefits under the EIRP. The annual benefits payable to the named officers under this plan as of December 31, 1995, are as follows: Mr. Rose, $21,503; Mr. Benefield, $13,968 and Messrs. Robinson and Yeager, $13,154. (No figure is given for Mr. Cash because his compensation for purposes of calculating benefits under the EIRP would include compensation paid by the Company's affiliates.) Any benefits payable under the SERP are offset against payments from the EIRP. Consequently, an officer would not receive any benefits for the SERP unless his benefit under the EIRP was less than the difference between what he could be paid under Questar's Retirement Plan at the date of retirement and what he had earned under such plan absent federal tax limitations. Given this relationship between the two nonqualified plans, the amounts listed in the table above do not include benefits payable under the EIRP. Executive Severance Compensation Plan Questar has an Executive Severance Compensation Plan that covers the Company's executive officers. Under this plan, participants, following a change in control of Questar, are eligible to receive compensation equal to up to two years' salary and miscellaneous benefits upon a voluntary or involuntary termination of their employment, provided that they have continued working or agree to continue working for six months following a potential change in control of Questar. This plan was originally adopted in 1983 by Mountain Fuel and was assumed by Questar as of October 2, 1984. The plan also contains a provision that limits compensation and benefits payable under the plan to amounts that can be deducted under Section 280G of the Internal Revenue Code of 1986. The dollar amounts payable to the Company's executive officers (based on current salaries paid by the Company) in the event of termination of employment following a change in control of Questar are as follows: $525,200 to Mr. Rose; $305,400 to Mr. Benefield; and $279,400 each to Messrs. Yeager and Robinson. (The amount payable to Mr. Cash is not given since such amount is based on each officer's total salary.) The Company's executive officers would also receive certain supplemental retirement benefits, welfare benefits, and cash bonuses. Under the plan, a change in control is defined to include any change in control of Questar required to be reported under Item 6(e) of Schedule 14A of the Securities Exchange Act of 1934, as amended. A change in control is also deemed to occur once any person becomes the beneficial owner, directly or indirectly, of securities representing 15 percent or more of Questar's outstanding shares of common stock. Directors' Fees All directors receive an annual fee of $4,800 payable in 12 monthly installments and fees of $500 for each meeting of the Board of Directors that they attend. The Company has a Deferred Compensation Plan for Directors under which directors can elect to defer all or any portion of the fees received for service as directors until their retirement from such service and can choose to have the deferred amounts earn interest as if invested in long-term certificates of deposit or be accounted for with "phantom shares" of Questar's common stock. Upon retirement, the phantom shares of stock are "converted" to their fair market cash equivalent. During 1995, several directors of the Company chose to defer receipt of all or a portion of the compensation earned by them for their service. (Any shares of phantom stock credited to directors are not included in the number of shares listed opposite their names below.) ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Company is a direct, wholly owned subsidiary of Questar. The following table sets forth information, as of December 31, 1995, with respect to each person known or believed by Questar to be the beneficial owner of 5 percent or more of its common stock: Shares and Name and Nature of Address of Beneficial Percent Beneficial Owner Ownership of Class First Security Bank of Utah 4,072,485 10.0 N.A., 79 South Main Street Trustee for Salt Lake City, Utah 84111 Company Employee Benefit Plans and Bank1 1/ Of this total, First Security beneficially owns 3,971,820 shares in its role as trustee of employee benefit plans sponsored by Questar. Participating employees control the voting of such shares. The following table sets forth information, as of March 1, 1996, concerning the shares of Questar's common stock beneficially owned by each of the Company's named executive officers and directors and by the Company's executive officers and directors as a group: Shares Owned Percent of Name of Beneficial Owner Beneficially Outstanding Shares1 Directors Robert H. Bischoff 3,279 * R. D. Cash2,3,4,5,6 223,211 .55% W. Whitley Hawkins7 7,370 * Robert E. Kadlec7,8 14,750 * Dixie L. Leavitt6,7 18,863 * Gary G. Michael7 3,400 * D. N. Rose2,3,4 65,886 .16% Named Executive Officers M. E. Benefield2,3,4 33,977 *1 G. H. Robinson2,3,4 30,339 *1 S. C. Yeager2,3,4 30,655 *1 All directors and executive503,645 1.2%1 officers (12 individuals)9 1/ Unless otherwise listed, the percentage of shares owned is less than .1 percent. The percentages of beneficial ownership have been calculated in accordance with Rule 13d-3(d)(1) under the Securities Exchange Act of 1934, as amended. 2/ The Company's executive officers own shares through their participation in Questar's Employee Investment Plan. The number of shares owned through this plan as of December 31, 1995, is as follows for the named officers: Mr. Benefield, 4,631; Mr. Cash, 29,550; Mr. Robinson, 7,747; Mr. Rose, 15,814; and Mr. Yeager, 8,551. 3/ The Company's executive officers have been granted nonqualified stock options under Questar's Stock Option Plan and Long-Term Stock Incentive Plan. The number of shares listed opposite the named officers attributable to vested options as of March 1, 1996, is as follows: Mr. Benefield, 15,500; Mr. Cash, 69,373; Mr. Robinson, 15,500; Mr. Rose, 28,500; and Mr. Yeager, 13,500. 4/ The Company's executive officers acquired restricted shares of Questar's common stock in partial payment of bonuses earned in the 1994 and 1995 bonus plans. The number of restricted shares beneficially owned by each of the named officers as of March 1, 1996, is as follows: Mr. Benefield, 632; Mr. Cash, 2,327; Mr. Robinson, 603; Mr. Rose, 1,485; and Mr. Yeager, 603. 5/ Mr. Cash is the Chairman of the Board of Trustees of the Questar Corporation Educational Foundation and the Questar Corporation Arts Foundation, two nonprofit corporations that own an aggregate of 42,596 shares of Questar's common stock. As the Chairman, Mr. Cash has voting control for such shares, but disclaims any beneficial ownership of them. 6/ Of the total shares reported for Mr. Cash, 3,270 shares are owned jointly with his wife and 4,899 are controlled by him as custodian for his son. Messrs. Leavitt and Yeager own their shares of record with their respective wives. 7/ Messrs. Hawkins, Kadlec, Leavitt, and Michael, as nonemployee voting directors of Questar, have been granted nonqualified stock options to purchase shares of Questar's common stock as follows: Mr. Hawkins, 7,150 shares; Mr. Kadlec, 11,150 shares; Mr. Leavitt, 7,000 shares, and Mr. Michael, 2,100 shares. These shares are included in the numbers listed opposite their respective names. 8/ Mr. Kadlec's wife owns 200 shares of common stock. Mr. Kadlec has voting control and investment control over such shares. Such shares are included in the shares listed opposite his name. 9/ The total number of shares reported for this group includes vested options to purchase 207,648 shares of Questar's common stock. Committee Interlocks and Insider Participation The Company itself has no formal "Compensation Committee." Questar's Board of Directors has a Management Performance Committee that makes recommendations to the Company's Board of Directors concerning base salary and bonus payments. (Questar's Board approves all stock options.) Messrs. Cash and Rose, as directors and officers of the Company, are formally excused from all discussions by the Company's Board involving their compensation. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There are no relationships or transactions involving the Company's directors and executive officers. As described above, there are significant business relationships between the Company and its affiliates, particularly Wexpro and Questar Pipeline. Questar, the Company's parent, also provides certain administrative services, e.g., personnel, legal, public relations, financial, tax, and audit to the Company and other members of the consolidated group. The costs of performing such services are allocated to the Company. Questar InfoComm, another affiliate, provides data processing and communication services for the Company; the charges for such services are based on cost of service plus a specified return on assets. See Note H to the financial statements for additional information concerning transactions between the Company and its affiliates. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1)(2) Financial Statements and Financial Statement Schedules. The financial statements identified in the List of Financial Statements are filed as part of this report. (3) Exhibits. The following is a list of exhibits required to be filed as a part of this report in Item 14(c). Exhibit No. Exhibit 3.1.* Restated Consolidated Articles of Incorporation dated August 15, 1980. (Exhibit No. 4(a) to Registration Statement No. 2-70087, filed December 1, 1980.) 3.2.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 13, 1982. (Exhibit No. 3(b) to Form 10-K Annual Report for 1982.) 3.3.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 10, 1983. (Included in Exhibit No. 4.1. to Registration Statement No. 2-84713, filed June 23, 1983.) 3.4.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated August 16, 1983. (Exhibit No. 3(a) to Form 8 Report amending the Company's Form 10-Q Report for Quarter Ended September 30, 1983.) 3.5.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated October 26, 1984. (Exhibit No. 3.5. to Form 10-K Annual Report for 1984.) 3.6.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 13, 1985. (Exhibit No. 3.1. to Form 10-Q Report for Quarter Ended June 30, 1985.) 3.7.* Articles of Amendment to Restated Consolidated Articles of Incorporation dated February 10, 1988. (Exhibit No. 3.7. to Form 10-K Annual Report for 1987.) 3.8.* Bylaws (as amended effective August 11, 1992). (Exhibit No. 3.8. to Form 10-K Annual Report for 1992.) 4.* Indenture dated as of May 1, 1992, between the Company and Citibank, as trustee, for the Company's Debt Securities. (Exhibit No. 4. to Form 10-Q Report for Quarter Ended June 30, 1992.) 10.1.* Stipulations and Agreement, dated October 14, 1981, executed by Mountain Fuel Supply Company; Wexpro Company; the Utah Department of Business Regulations, Division of Public Utilities; the Utah Committee of Consumer Services; and the staff of the Public Service Commission of Wyoming. (Exhibit No. 10(a) to Form 10-K Annual Report for 1981.) 10.7.* Data Processing Services Agreement effective July 1, 1985, between Questar Service Corporation and Mountain Fuel Supply Company. (Exhibit 10.7. to Form 10-K Annual Report for 1988.) 10.8.1 Mountain Fuel Supply Company Annual Management Incentive Plan as amended and restated effective February 13, 1996. 10.9.*1 Mountain Fuel Supply Company Window Period Supplemental Executive Retirement Plan effective January 24, 1991. (Exhibit No. 10.9. to Form 10-K Annual Report for 1990.) 10.10.1 Mountain Fuel Supply Company Deferred Compensation Plan for Directors as amended and restated effective February 13, 1996. 10.11.* Gas Gathering Agreement between Mountain Fuel Supply Company and Questar Pipeline Company effective September 1, 1993. 25. Power of Attorney. 27. Financial Data Schedule. _______________________ *Exhibits so marked have been filed with the Securities and Exchange Commission as part of the referenced filing and are incorporated herein by reference. 1 Exhibits so marked are management contracts or compensation plans or arrangements. (b) Mountain Fuel did not file any Current Reports on Form 8-K during the last quarter of 1995. ANNUAL REPORT ON FORM 10-K ITEM 8. ITEM 14 (a) (1) and (2), (c) and (d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA YEAR ENDED DECEMBER 31, 1995 MOUNTAIN FUEL SUPPLY COMPANY SALT LAKE CITY, UTAH FORM 10-K--ITEM 14 (a) (1) and (2) MOUNTAIN FUEL SUPPLY COMPANY LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following financial statements of Mountain Fuel Supply Company are included in Item 8: Statements of income -- Years ended December 31, 1995, 1994 and 1993 Balance sheets -- December 31, 1995 and 1994 Statements of common shareholder's equity -- Years ended December 31, 1995, 1994 and 1993 Statements of cash flows -- Years ended December 31, 1995, 1994 and 1993 Notes to financial statements Financial statement schedules, for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission, are not required under the related instructions or are inapplicable, and therefore have been omitted. Report of Independent Auditors Board of Directors Mountain Fuel Supply Company We have audited the balance sheets of Mountain Fuel Supply Company as of December 31, 1995 and 1994, and the related statements of income, common shareholder's equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mountain Fuel Supply Company at December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note G to the financial statements, Mountain Fuel Supply Company changed its method of accounting for postemployment benefits in 1994. ERNST & YOUNG LLP Salt Lake City, Utah February 9, 1996 MOUNTAIN FUEL SUPPLY COMPANY STATEMENTS OF INCOME
Year Ended December 31, 1995 1994 1993 (In Thousands) REVENUES - Note H $362,769 $378,260 $402,391 OPERATING EXPENSES Natural gas purchases From affiliates - Note H 129,781 132,889 174,401 From unaffiliated parties 60,825 77,618 55,738 Total natural gas purchases 190,606 210,507 230,139 Operating and maintenance - Note H 93,384 94,094 92,486 Depreciation and amortization 25,469 24,749 23,244 Other taxes 9,588 9,589 10,013 TOTAL OPERATING EXPENSES 319,047 338,939 355,882 OPERATING INCOME 43,722 39,321 46,509 INTEREST AND OTHER INCOME 4,232 7,820 1,692 DEBT EXPENSE (16,580) (15,886) (15,423) INCOME BEFORE INCOME TAXES 31,374 31,255 32,778 INCOME TAXES - Note E 7,706 7,903 7,709 NET INCOME $23,668 $23,352 $25,069
See notes to financial statements. MOUNTAIN FUEL SUPPLY COMPANY BALANCE SHEETS ASSETS
December 31, 1995 1994 (In Thousands) CURRENT ASSETS Cash and short-term investments - Note D $1,466 $2,529 Accounts receivable 36,864 47,146 Unbilled gas accounts receivable - Note F 25,149 26,456 Accounts receivable from affiliates 1,658 618 Federal income taxes receivable 3,971 Inventories, at lower of average cost or market Gas stored underground 16,310 21,439 Materials and supplies 4,605 3,502 Total inventories 20,915 24,941 Prepaid expenses and deposits 3,843 4,279 TOTAL CURRENT ASSETS 93,866 105,969 PROPERTY, PLANT AND EQUIPMENT Production - Note H 97,870 97,380 Distribution 587,128 551,461 General 79,871 75,153 Construction in progress 19,597 15,951 784,466 739,945 Less allowances for depreciation and amortization 302,619 280,162 NET PROPERTY, PLANT AND EQUIPMENT 481,847 459,783 OTHER ASSETS Income taxes recoverable from customers - Note E 8,214 10,578 Unamortized costs of reacquired debt 10,090 10,584 Other 6,244 3,361 TOTAL OTHER ASSETS 24,548 24,523 $600,261 $590,275
LIABILITIES AND SHAREHOLDER'S EQUITY
December 31, 1995 1994 (In Thousands) CURRENT LIABILITIES Notes payable to Questar - Notes B and D $56,100 $53,500 Accounts payable and accrued expenses Accounts payable 21,794 22,566 Accounts payable to affiliates 16,283 11,677 Customer refund - Note F 11,886 Federal income taxes payable 1,649 Other taxes 4,762 36 Accrued interest 3,676 3,730 Other 3,399 9,412 Total accounts payable and accrued expenses 61,800 49,070 Purchased-gas adjustments 9,182 17,071 TOTAL CURRENT LIABILITIES 127,082 119,641 LONG-TERM DEBT - Notes B and D 175,000 175,000 OTHER LIABILITIES Unbilled gas revenues - Note F 15,541 20,721 Other 488 562 TOTAL OTHER LIABILITIES 16,029 21,283 DEFERRED INVESTMENT TAX CREDITS 7,157 7,541 DEFERRED INCOME TAXES - Note E 61,391 55,025 COMMITMENTS AND CONTINGENCIES - Note F REDEEMABLE CUMULATIVE PREFERRED STOCK - Notes C and D 4,957 6,324 COMMON SHAREHOLDER'S EQUITY Common stock - par value $2.50 per share; authorized 50,000,000 shares; issued and outstanding 9,189,626 shares 22,974 22,974 Additional paid-in capital 41,875 41,875 Retained earnings 143,796 140,612 TOTAL COMMON SHAREHOLDER'S EQUITY 208,645 205,461 $600,261 $590,275
See notes to financial statements. MOUNTAIN FUEL SUPPLY COMPANY STATEMENTS OF COMMON SHAREHOLDER'S EQUITY
Additional Common Paid-in Retained Stock Capital Earnings (In Thousands) Balances at January 1, 1993 $22,974 $21,875 $130,977 1993 net income 25,069 Payment of dividends Preferred stock (695) Common stock (18,000) Balances at December 31, 1993 22,974 21,875 137,351 Capital contribution 20,000 1994 net income 23,352 Payment of dividends Preferred stock (591) Common stock (19,500) Balances at December 31, 1994 22,974 41,875 140,612 1995 net income 23,668 Payment of dividends Preferred stock (483) Common stock (20,000) Redemption cost (1) Balances at December 31, 1995 $22,974 $41,875 $143,796
See notes to financial statements. MOUNTAIN FUEL SUPPLY COMPANY STATEMENTS OF CASH FLOWS
Year Ended December 31, 1995 1994 1993 (In Thousand) OPERATING ACTIVITIES Net income $23,668 $23,352 $25,069 Depreciation and amortization 28,295 27,337 25,492 Deferred income taxes 6,366 5,102 (1,906) Deferred investment tax credits (384) (400) (412) 57,945 55,391 48,243 Changes in operating assets and liabilities Accounts receivable 10,549 7,448 38 Inventories 4,026 (969) (20,869) Prepaid expenses and deposits (722) 460 336 Accounts payable and accrued expenses 14,379 (16,141) 10,668 Federal income taxes (5,620) 463 1,706 Purchased-gas adjustments (7,889) (8,656) 4,686 Other (4,122) (4,853) (7,669) NET CASH PROVIDED FROM OPERATING ACTIVITIES 68,546 33,143 37,139 INVESTING ACTIVITIES Capital expenditures (51,413) (53,816) (50,658) Proceeds from disposition and transfer of property, plant and equipment 1,054 9,482 991 CASH USED IN INVESTING ACTIVITIES (50,359) (44,334) (49,667) FINANCING ACTIVITIES Capital contribution 20,000 Redemption of preferred stock (1,367) (1,201) (1,201) Issuance of long-term debt 17,000 91,000 Redemption of long-term debt (99,126) Change in notes payable to Questar 2,600 (4,300) 38,900 Payment of dividends (20,483) (20,091) (18,695) CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES (19,250) 11,408 10,878 Change in cash and short-term investments (1,063) 217 (1,650) Beginning cash and short-term investments 2,529 2,312 3,962 ENDING CASH AND SHORT-TERM INVESTMENTS $1,466 $2,529 $2,312 NONCASH TRANSACTION Recording of unbilled revenues $27,313
See notes to financial statements. MOUNTAIN FUEL SUPPLY COMPANY NOTES TO FINANCIAL STATEMENTS Note A - Summary of Accounting Policies Mountain Fuel Supply Company (the Company or Mountain Fuel) is a wholly-owned subsidiary of Questar Corporation (Questar). Business and Regulation: The Company's business consists of natural gas distribution operations for residential, commercial and industrial customers. Mountain Fuel is regulated by the Public Service Commission of Utah (PSCU) and the Public Service Commission of Wyoming (PSCW). While Mountain Fuel also serves a small area of southeastern Idaho, the Idaho Public Service Commission has deferred to the PSCU for rate oversight of this area. These regulatory agencies establish rates for the sale and transportation of natural gas. The regulatory agencies also regulate, among other things, the extension and enlargement or abandonment of jurisdictional natural gas facilities. Regulation is intended to permit the recovery, through rates, of the cost of service including, a rate of return on investment. The financial statements are presented in accordance with regulatory requirements. Methods of allocating costs to time periods, in order to match revenues and expenses, may differ from those of nonregulated businesses because of cost-allocation methods used in establishing rates. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent liabilities reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition: Revenues are recognized in the period that services are provided or products are delivered. Mountain Fuel accrues gas distribution revenues for gas delivered to residential and commercial customers but not billed at the end of the accounting period. Mountain Fuel periodically collects revenues subject to possible refund pending final orders from regulatory agencies. In these situations the Company establishes reserves for revenues collected subject to refund. Purchased-Gas Adjustments: Mountain Fuel accounts for purchased-gas costs in accordance with procedures authorized by the PSCU and PSCW whereby purchased-gas costs that are different from those provided for in the present rates are accumulated and recovered or credited through future rate changes. Property, Plant and Equipment: Property, plant and equipment are stated at cost. The provision for depreciation and amortization is based upon rates which will amortize costs of assets over their estimated useful lives. The costs of natural gas distribution property, plant and equipment, excluding gas wells, are amortized using the straight-line method ranging from 3% to 33% per year and averaging 3.9% in 1995. The costs of gas wells were amortized using the units-of-production method at $.17 per Mcf of natural gas production during 1995. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. The Company will adopt Statement No. 121 in 1996 and does not expect a significant effect to either operating results or financial postion. Credit Risk: The Company's primary market area is the Rocky Mountain region of the United States. The Company's exposure to credit risk may be impacted by the concentration of customers in this region due to changes in economic or other conditions. The Company's customers include individuals and numerous industries that may be affected differently by changing conditions. Management believes that its credit-review procedures, loss reserves and customer deposits have adequately provided for usual and customary credit-related losses. The carrying amount of trade receivables approximates fair value. Income Taxes: Mountain Fuel records cumulative increases in deferred taxes as income taxes recoverable from customers. The Company has adopted procedures with its regulatory commissions to include under-provided deferred taxes in customer rates on a systematic basis. Mountain Fuel uses the deferral method to account for investment tax credits as required by regulatory commissions. The Company's operations are consolidated with those of Questar and its subsidiaries for income tax purposes. The income tax arrangement between Mountain Fuel and Questar provides that amounts paid to or received from Questar are substantially the same as would be paid or received by the Company if it filed a separate return. Mountain Fuel also receives payment for tax benefits used in the consolidated tax return even if such benefits would not have been usable had the Company filed a separate return. Reacquisition of Debt: Gains and losses on the reacquisition of debt are deferred and amortized as debt expense over the life of the replacement debt in order to match regulatory treatment. Allowance for Funds Used During Construction: The Company capitalizes the cost of capital during the construction period of plant and equipment using a method required by regulatory authorities. This amounted to $391,000 in 1995, $397,000 in 1994 and $528,000 in 1993. Cash and Short-Term Investments: Short-term investments consist principally of Euro-time deposits and repurchase agreements with maturities of three months or less. Note B - Debt The Company has a short-term line-of-credit arrangement with a bank under which it may borrow up to $500,000. The line has interest rates generally below the prime interest rate and is renewable on an annual basis. No amount was borrowed under this arrangement at either December 31, 1995 or 1994. Questar loans funds to the Company under a short-term borrowing arrangement. Outstanding short-term notes payable to Questar totaled $56,100,000 with an interest rate of 6.01% at December 31, 1995 and $53,500,000 with an interest rate of 6.11% at December 31, 1994. Mountain Fuel's long-term debt consists of medium-term notes with interest rates ranging from 7.19% to 8.43%, due 2007 to 2024. There are no maturities of long-term debt for the five years following December 31, 1995 and no long-term debt provisions restricting the payment of dividends. Cash paid for interest was $16,458,000 in 1995, $15,290,000 in 1994 and $14,698,000 in 1993. Note C - Redeemable Cumulative Preferred Stock Mountain Fuel has authorized 4,000,000 shares of nonvoting redeemable cumulative preferred stock with no par value, but a stated and redemption value of $100 per share. During 1995, the remaining shares of the $8.625 series were fully redeemed.
8% Series $8.625 Series (In Thousands) Balance at January 1, 1993 $5,126 $3,600 1993 redemption of stock (1) (1,200) 1994 redemption of stock (1) (1,200) 1995 redemption of stock (167) (1,200) Balance at December 31, 1995 $4,957 -
Redemption requirements for the five years following December 31, 1995, are as follows: (In Thousands) 1996 $97 1997 180 1998 180 1999 180 2000 180 Note D - Financial Instruments The carrying amounts and estimated fair values of the Company's financial instruments were as follows:
December 31, 1995 December 31, 1994 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value (In Thousands) Financial assets Cash and short-term investments $1,466 $1,466 $2,529 $2,529 Financial liabilities Short-term loans 56,100 56,100 53,500 53,500 Long-term debt 175,000 184,577 175,000 163,952 Redeemable cumulative preferred stock 4,957 5,006 6,324 6,377
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 fair value of the medium-term notes 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. Fair value is calculated at a point in time and does not represent what the Company would pay to retire the debt securities. Note E - Income Taxes The components of income taxes were as follows:
Year Ended December 31, 1995 1994 1993 (In Thousands) Federal Current ($294) $2,717 $9,301 Deferred 7,099 4,527 (2,739) State Current 302 484 1,428 Deferred 983 575 131 Deferred investment tax credits (384) (400) (412) $7,706 $7,903 $7,709
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, 1995 1994 1993 (In Thousands) Income before income taxes $31,374 $31,255 $32,778 Federal income taxes at statutory rate $10,981 $10,939 $11,472 State income taxes, net of federal income tax benefit 1,179 890 1,059 Tight-sands gas production credits (4,376) (4,670) (5,463) Investment tax credits (384) (400) (412) Reduction in deferred income tax rate (571) Deferred taxes related to regulated assets for which deferred taxes were not provided in prior years 921 921 921 Other (44) 223 132 Income tax expense $7,706 $7,903 $7,709 Effective income tax rate 24.6% 25.3% 23.5%
Significant components of the Company's deferred tax liabilities and assets were as follows:
December 31, 1995 1994 (In Thousands) Deferred tax liabilities Property, plant and equipment $73,200 $70,496 Unamortized debt reacquisition costs 3,859 4,022 Income taxes recoverable from customers 3,368 3,430 Pension costs 1,291 360 Other 893 3,023 Total deferred tax liabilities 82,611 81,331 Deferred tax assets Purchased-gas adjustments 3,489 8,486 Alternative minimum tax and production credit carryovers 6,562 5,701 Unbilled revenues 5,905 7,574 Deferred investment tax credits 2,720 2,874 Other 2,544 1,671 Total deferred tax assets 21,220 26,306 Net deferred tax liabilities $61,391 $55,025
Cash paid for income taxes was $7,333,000 in 1995, $6,404,000 in 1994 and $8,631,000 in 1993. Note F - Rate Matters, Litigation and Commitments On August 11, 1995, the PSCU approved a settlement of Mountain Fuel's general rate case filed April 13, 1995. Mountain Fuel received a $3.7 million increase in revenues. The settlement, which became effective September 1, allowed the Company to implement a weather normalization adjustment, provided about $2 million in additional revenues through a new-premises fee and added about $1.7 million from sharing capacity-release revenues. The settlement did not specify an authorized return on equity, but Mountain Fuel's allowed return on rate base increased from 10.08% to between 10.22% and 10.34%. In December 1995, Mountain Fuel requested approval from the PSCU to make a lump sum refund of gas costs to Utah customers. The PSCU agreed with the procedure and the refund appeared as a credit on customers' February 1996 gas bills. A surplus of gas costs collected in 1995 led to the refund. The lump-sum refund was chosen as a mechanism to more quickly credit customers' accounts. Normally, amortization of either over-or under-collected gas costs requires about 12 months. Mountain Fuel's Utah gas cost pass-through application was approved on an interim basis effective January 1, 1996. In connection with the application, the Utah Division of Public Utilities has raised issues about continuing to treat gathering costs as pass-through costs and about the reasonableness of such costs. The Company believes that its gathering costs are reasonable. The Committee of Consumer Services has requested additional information concerning a gas imbalance and may decide to raise the issue in the proceedings. In 1993, Mountain Fuel began accruing revenues for gas delivered to residential and commercial customers but not billed at the end of the year. The impact of these accruals on the income statement has been deferred and is being recognized at the rate of $2,011,000 per year over a five-year period beginning in 1994 in accordance with a rate order received from the PSCU. This rate order also reduces customer rates by $2,011,000 per year over the same five-year period. In addition, Mountain Fuel recorded other income of $5,589,000 for a one-time reduction of gas costs associated with these unbilled revenues. This transaction resulted in additional net income of about $3.5 million in 1994. Each year, Mountain Fuel purchases significant quantities of natural gas under numerous gas- purchase contracts with varying terms and conditions. Purchases under these agreements totalled $44,892,000 in 1995, $73,682,000 in 1994 and $85,909,000 in 1993. Some of the agreements have terms that obligate Mountain Fuel to purchase specific quantities on a periodic basis into the future, while a few contracts have take-or-pay provisions that obligate Mountain Fuel to take delivery of a minimum amount of gas on an annual basis. Projected natural gas purchase commitments for the next five years are reported in the table below. These commitments are based upon current market conditions. Future changes will occur as a result of negotiations with suppliers and changes in market conditions. (In Millions) 1996 $17.0 1997 2.0 1998 2.0 1999 2.1 2000 2.2 The Company has received notice that it may be partially liable in several environmental clean-up actions on sites that involve numerous other parties. Management believes that the Company's responsibility for remediation will be minor and that any potential liability will not be significant to its results of operations, financial position or liquidity. Mountain Fuel, as a result of acquiring Questar Pipeline's gas purchase contracts, is responsible for any judgment rendered against Questar Pipeline in a lawsuit that was tried before a jury in 1994. The jury awarded an independent producer compensatory damages of approximately $6.1 million and punitive damages of $200,000 on his claims. The producer's counterclaims originally exceeded $57 million, but were reduced to less than $10 million, when the presiding judge dismissed with prejudice some of the claims prior to the jury trial. Under existing PSCU rulings, any payments resulting from this judgment will be included in Mountain Fuel's gas balancing account an recovered in its rates for natural gas service. There are various legal proceedings against the Company. While it is not currently possible to predict or determine the outcome of these proceedings, it is the opinion of management that the outcome will not have a material adverse effect on the Company's results of operations, financial position or liquidity. Note G - Employee Benefits Pension Plan: Substantially all Company employees are covered by Questar's defined benefit pension plan. Benefits are generally based on years of service and the employee's 36-month period of highest earnings during the ten years preceding retirement. It is Questar's policy to make contributions to the plan at least sufficient to meet the minimum funding requirements of applicable laws and regulations. Plan assets consist principally of equity securities and corporate and U.S. government debt obligations. Pension cost was $3,352,000 in 1995, $2,962,000 in 1994 and $3,251,000 in 1993. Mountain Fuel's portion of plan assets and benefit obligations is not determinable because the plan assets are not segregated or restricted to meet the Company's pension obligations. If the Company were to withdraw from the pension plan, the pension obligation for the Company's employees would be retained by the pension plan. At December 31, 1995, Questar's fair value of plan assets exceeded the accumulated benefit obligation. Postretirement Benefits Other Than Pensions: The Company pays a portion of the health-care costs and all the life insurance costs for employees who retired prior to January 1, 1993. The plan 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. Employees hired after December 31, 1996, will not qualify for benefits under this plan. The Company's policy is to fund amounts allowable for tax deduction under the Internal Revenue Code. Plan assets consist of equity securities, corporate and U.S. government debt obligations, and insurance company general accounts. The Company is amortizing the transition obligation over a 20-year period. Total costs of postretirement benefits other than pensions were $3,183,000 in 1995, $3,584,000 in 1994 and $3,350,000 in 1993. Both the PSCU and the PSCW allowed Mountain Fuel to recover future costs if the amounts are funded in an external trust. The Company's portion of plan assets and benefit obligations related to postretirement medical and life insurance benefits is not determinable because the plan assets are not segregated or restricted to meet the Company's obligations. Postemployment Benefits: The Company recognizes the net present value of the liability for postemployment benefits, such as long-term disability benefits and health care and life insurance costs, when employees become eligible for such benefits. Postemployment benefits are paid to former employees after employment has been terminated but before retirement benefits are paid. The Company accrues both current and future costs. The PSCU and the PSCW have allowed Mountain Fuel to recover postemployment costs through December 31, 1994 in future rates. At December 31, 1995, the Company had a $935,000 regulatory asset that it is amortizing over the next nine years. Employee Investment Plan: The Company participates in Questar's Employee Investment Plan (ESOP), which allows eligible employees to purchase Questar Corporation common stock or other investments through payroll deduction. The Company makes contributions of Questar Corporation common stock to the ESOP of approximately 75% of the employees' purchases and contributes an additional $200 of common stock in the name of each eligible employee. The Company's expense and contribution to the plan was $1,622,000 in 1995, $1,542,000 in 1994 and $1,435,000 in 1993. Note H - Related Party Transactions Wexpro, an affiliated company, operates certain properties owned by Mountain Fuel under the terms of the Wexpro Settlement Agreement. The Company receives a portion of Wexpro's income from oil operations after recovery of Wexpro's operating expenses and a return on investment. This amount, which is included in revenues, was $3,400,000 in 1995, $3,391,000 in 1994 and $1,028,000 in 1993. The Company paid Wexpro for the operation of Company-owned gas properties. These costs are included in natural gas purchases and amounted to $59,831,000 in 1995, $57,870,000 in 1994 and $49,595,000 in 1993. Mountain Fuel purchased gas from Questar Pipeline amounting to $81,813,000 in 1993. The Company did not purchase gas from Questar Pipeline subsequent to September 1, 1993 when Questar Pipeline began operating in accordance with FERC Order No. 636. Also included in natural gas purchases are amounts paid to Questar Pipeline for the transportation, storage and gathering of Company-owned gas and purchased gas. These costs were $69,950,000 in 1995, $70,945,000 in 1994 and $38,862,000 in 1993. 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 approximately $49.4 million for this reservation. Mountain Fuel releases excess capacity to its industrial transportation or other customers and receives a credit from Questar Pipeline for the released-capacity revenues and a portion of Questar Pipeline's interruptible-transportation revenues. Questar InfoComm Inc. is an affiliated company that provides data processing and communication services to Mountain Fuel. The Company paid Questar InfoComm $15,781,000 in 1995, $15,996,000 in 1994 and $14,847,000 in 1993. Questar charges Mountain Fuel for certain administrative functions amounting to $5,283,000 in 1995, $5,814,000 in 1994 and $5,609,000 in 1993. These costs are included in operating and maintenance expenses and are allocated based on each affiliated company's proportional share of revenues less gas costs; property, plant and equipment; and labor costs. Management believes that the allocation method is reasonable. The Company received interest income from affiliated companies of $10,000 in 1995, $225,000 in 1994 and $327,000 in 1993. The Company had debt expense to affiliated companies of $1,273,000 in 1995, $134,000 in 1994, and $21,000 in 1993. Note I - Oil and Gas Producing Activities (Unaudited) The following information discusses the Company's oil and gas producing activities. All of the properties are cost-of-service properties with the return on investment established by state regulatory agencies. Mountain Fuel has not incurred any costs for oil and gas producing activities for the three years ended December 31, 1995. Wexpro develops and produces gas reserves owned by the Company. See Note I for the amounts paid by Mountain Fuel to Wexpro. Estimated Quantities of Proved Oil and Gas Reserves: The following estimates were made by Questar's reservoir engineers. Reserve estimates are based on a complex and highly interpretive process which is subject to continuous revision as additional production and development drilling information becomes available. The quantities are based on existing economic and operating conditions using current prices and operating costs. All oil and gas reserves reported are located in the United States. Mountain Fuel does not have any long-term supply contracts with foreign governments or reserves of equity investees. No estimates are available for proved undeveloped reserves that may exist.
Natural Gas Oil (In Million (In Thousands Cubic Feet) of Barrels) Proved Developed Reserves Balance at January 1, 1993 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 Revisions of estimates (576) 13 Extensions and discoveries 26,085 (13) Production (37,435) (65) Balance at December 31, 1994 416,312 707 Revisions of estimates (831) 10 Extensions and discoveries 10,591 2 Production (36,632) (57) Balance at December 31, 1995 389,440 662
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 27th day of March, 1996. MOUNTAIN FUEL SUPPLY COMPANY (Registrant) By /s/ D. N. Rose D. N. Rose President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. /s/ D. N. Rose President and Chief Executive D. N. Rose Officer; Director (Principal Executive Officer) /s/ S. E. Parks Vice President, Treasurer and Chief S. E. Parks Financial Officer (Principal Financial Officer) /s/ G. H. Robinson Vice President and Controller G. H. Robinson (Principal Accounting Officer) *Robert H. Bischoff Director *R. D. Cash Chairman of the Board *W. Whitley Hawkins Director *Robert E. Kadlec Director *Dixie L. Leavitt Director *Gary G. Michael Director *D. N. Rose Director March 27, 1996 *By /s/ D. N. Rose Date D. N. Rose, Attorney in Fact EXHIBIT INDEX Exhibit Number Exhibit 3.1.* Restated Consolidated Articles of Incorporation dated August 15, 1980. (Exhibit No. 4(a) to Registration Statement No. 2-70087, filed December 1, 1980.) 3.2.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 13, 1982. (Exhibit No. 3(b) to Form 10-K Annual Report for 1982.) 3.3.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 10, 1983. (Included in Exhibit No. 4.1. to Registration Statement No. 2-84713, filed June 23, 1983.) 3.4.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated August 16, 1983. (Exhibit No. 3(a) to Form 8 Report amending the Company's Form 10-Q Report for Quarter Ended September 30, 1983.) 3.5.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated October 26, 1984. (Exhibit No. 3.5. to Form 10-K Annual Report for 1984.) 3.6.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 13, 1985. (Exhibit No. 3.1. to Form 10-Q Report for Quarter Ended June 30, 1985.) 3.7.* Articles of Amendment to Restated Consolidated Articles of Incorporation dated February 10, 1988. (Exhibit No. 3.7. to Form 10-K Annual Report for 1987.) 3.8.* Bylaws (as amended effective August 11, 1992). (Exhibit No. 3.8. to Form 10-K Annual Report for 1992.) 4.* Indenture dated as of May 1, 1992, between the Company and Citibank, as trustee, for the Company's Debt Securities. (Exhibit No. 4. to Form 10-Q Report for Quarter Ended June 30, 1992.) 10.1.* Stipulations and Agreement, dated October 14, 1981, executed by Mountain Fuel Supply Company; Wexpro Company; the Utah Department of Business Regulations, Division of Public Utilities; the Utah Committee of Consumer Services; and the staff of the Public Service Commission of Wyoming. (Exhibit No. 10(a) to Form 10-K Annual Report for 1981.) 10.7.* Data Processing Services Agreement effective July 1, 1985, between Questar Service Corporation and Mountain Fuel Supply Company. (Exhibit 10.7. to Form 10-K Annual Report for 1988.) 10.8.1 Mountain Fuel Supply Company Annual Management Incentive Plan as amended and restated effective February 13, 1996. 10.9.*1 Mountain Fuel Supply Company Window Period Supplemental Executive Retirement Plan effective January 24, 1991. (Exhibit No. 10.9. to Form 10-K Annual Report for 1990.) 10.10.1 Mountain Fuel Supply Company Deferred Compensation Plan for Directors as amended and restated effective February 13, 1996. 10.11.* Gas Gathering Agreement between Mountain Fuel Supply Company and Questar Pipeline Company effective September 1, 1993. 25. Power of Attorney. 27. Financial Data Schedule. _______________________ *Exhibits so marked have been filed with the Securities and Exchange Commission as part of the referenced filing and are incorporated herein by reference. 1 Exhibits so marked are management contracts or compensation plans or arrangements. EX-10.8 2 MOUNTAIN FUEL SUPPLY COMPANY ANNUAL MANAGEMENT INCENTIVE PLAN (As amended and restated effective February 13, 1996) Paragraph 1. Name. The name of this Plan is the Mountain Fuel Supply Company Annual Management Incentive Plan (the Plan). Paragraph 2. Purpose. The purpose of the Plan is to provide an incentive to officers and key employees of Mountain Fuel Supply Company (the Company) for the accomplishment of major organizational and individual objectives designed to further the efficiency, profitability, and growth of the Company. Paragraph 3. Administration. The Management Performance Committee (Committee) of the Board of Directors of Questar Corporation (Questar) shall have full power and authority to interpret and administer the Plan. Such Committee shall consist of no less than three disinterested members of the Board of Directors. Recommendations made by the Committee shall be reviewed by the Company's Board of Directors. Paragraph 4. Participation. Within 60 days after the beginning of each year, the Committee shall nominate Participants from the officers and key employees for such year. The Committee shall also establish a target bonus for the year for each Participant expressed as a percentage of base salary or specified portion of base salary. Participants shall be notified of their selection and their target bonus as soon as practicable. Paragraph 5. Determination of Performance Objectives. Within 60 days after the beginning of each year, the Committee shall establish target, minimum, and maximum performance objectives for the Company and for its affiliates and shall determine the manner in which the target bonus is allocated among the performance objectives. The Committee shall also recommend a dollar maximum for payments to Participants for any Plan year. The Board of Directors shall take action concerning the recommended dollar maximum within 60 days after the beginning of the Plan year. Participants shall be notified of the performance objectives as soon as practicable once such objectives have been established. Paragraph 6. Determination and Distribution of Awards. As soon as practicable, but in no event more than 90 days after the close of each year during which the Plan is in effect, the Committee shall compute incentive awards for eligible participants in such amounts as the members deem fair and equitable, giving consideration to the degree to which the Participant's performance has contributed to the performance of the Company and its affiliated companies and using the target bonuses and performance objectives previously specified. Aggregate awards calculated under the Plan shall not exceed the maximum limits approved by the Board of Directors for the year involved. To be eligible to receive a payment, the Participant must be actively employed by the Company or an affiliate as of the date of distribution except as provided in Paragraph 8. Amounts shall be paid (less appropriate withholding taxes and FICA deductions) according to the following schedule: Award Distribution Schedule Percent of Award Date Initial Award 75% As soon as possible after initial award is (First Year of determined Participation) 25 One year after initial award is determined 100% Subsequent Awards 50% As soon as possible after award is determined 25 One year after award is determined 25 Two years after award is determined 100% Paragraph 7. Restricted Stock in Lieu of Cash. For 1992 and subsequent years, participants who have a target bonus of $10,000 or higher shall be paid all deferred portions of such bonus with restricted shares of Questar's common stock under Questar's Long-Term Stock Incentive Plan. Such stock shall be granted to the participant when the initial award is determined, but shall vest free of restrictions according to the schedule specified above in Paragraph 6. Paragraph 8. Termination of Employment. (a) In the event a Participant ceases to be an employee during a year by reason of death, disability or approved retirement, an award, if any, determined in accordance with Paragraph 6 for the year of such event, shall be reduced to reflect partial participation by multiplying the award by a fraction equal to the months of participation during the applicable year through the date of termination rounded up to whole months divided by 12. For the purpose of this Plan, approved retirement shall mean any termination of service on or after age 60, or, with approval of the Board of Directors, early retirement under Questar's qualified retirement plan. For the purpose of this Plan, disability shall mean any termination of service that results in payments under Questar's long-term disability plan. The entire amount of any award that is determined after the death of a Participant shall be paid in accordance with the terms of Paragraph 11. In the event of termination of employment due to disability or approved retirement, a Participant shall be paid the undistributed portion of any prior awards in his final paycheck or in accordance with the terms of elections to voluntarily defer receipt of awards earned prior to February 12, 1991, or deferred under the terms of Questar's Deferred Compensation Plan. In the event of termination due to disability or approved retirement, any shares of common stock previously credited to a Participant shall be distributed free of restrictions during the last month of employment. The current market value (defined as the closing price for the stock on the New York Stock Exchange on the date in question) of such shares shall be included in the Participant's final paycheck. Such Participant shall be paid the full amount of any award (adjusted for partial participation) declared subsequent to the date of such termination within 30 days of the date of declaration. Any partial payments shall be made in cash. (b) In the event a Participant ceases to be an employee during a year by reason of a change in control, he shall be entitled to receive all amounts deferred by him prior to February 12, 1991, and all undistributed portions for prior Plan years. He shall also be entitled to an award for the year of such event as if he had been an employee throughout such year. The entire amount of any award for such year shall be paid in a lump sum within 60 days after the end of the year in question. Such amounts shall be paid in cash. For the purpose of this Plan, a "change in control" shall be deemed to have occurred if (i) any "Acquiring Person" (as that term is used in the Rights Agreement dated February 13, 1996, between Questar and Chemical Mellon Shareholder Services, L.L.C. ("Rights Agreement")) is or becomes the beneficial owner (as such term is used in Rule 13d-3 under the Securities Exchange Act of 1934) of securities of Questar representing 15 percent or more of the combined voting power of Questar, or (ii) the stockholders of Questar approve (A) a plan of merger or consolidation of Questar (unless, immediately following consummation of such merger or consolidation, the persons who held Questar's voting securities immediately prior to consummation thereof will hold at least a majority of the total voting power of the surviving or new company), or (B) a sale or disposition of all or substantially all assets of Questar, or (C) a plan of liquidation or dissolution of Questar. A change of control shall also include any act or event that, with the passage of time, would result in a Distribution Date, within the meaning of the Rights Agreement. Paragraph 9. Interest on Previously Deferred Amounts. Amounts voluntarily deferred prior to February 12, 1991, shall be credited with interest from the date the payment was first available in cash to the date of actual payment. Such interest shall be calculated at a monthly rate using the typical rates paid by major banks on new issues of negotiable Certificates of Deposit in the amounts of $1,000,000 or more for one year as quoted in The Wall Street Journal on the first day of the relevant calendar month or the next preceding business day if the first day of the month is a non-business day. Paragraph 10. Coordination with Deferred Compensation Plan. Some Participants are entitled to defer the receipt of their cash bonuses under the terms of Questar's Deferred Compensation Plan, which became effective November 1, 1993. Any cash bonuses deferred pursuant to the Deferred Compensation Plan shall be accounted for and distributed according to the terms of such plan and the choices made by the Participant. Paragraph 11. Death and Beneficiary Designation. In the event of the death of a Participant, any undistributed portions of prior awards shall become payable. Amounts previously deferred by the Participant, together with credited interest to the date of death, shall also become payable. Each Participant shall designate a beneficiary to receive any amounts that become payable after death under this Paragraph or Paragraph 8. In the event that no valid beneficiary designation exists at death, all amounts due shall be paid as a lump sum to the estate of the Participant. Any shares of restricted stock previously credited to the Participant shall be distributed to the Participant's beneficiary or, in the absence of a valid beneficiary designation, to the Participant's estate, at the same time any cash is paid. Paragraph 12. Amendment of Plan. The Company's Board of Directors, at any time, may amend, modify, suspend, or terminate the Plan, but such action shall not affect the awards and the payment of such awards for any prior years. The Company's Board of Directors cannot terminate the Plan in any year in which a change of control has occurred without the written consent of the Participants. The Plan shall be deemed suspended for any year for which the Board of Directors has not fixed a maximum dollar amount available for award. Paragraph 13. Nonassignability. No right or interest of any Participant under this Plan shall be assignable or transferable in whole or in part, either directly or by operation of law or otherwise, including, but not by way of limitation, execution, levy, garnishment, attachment, pledge, bankruptcy, or in any other manner, and no right or interest of any Participant under the Plan shall be liable for, or subject to, any obligation or liability of such Participant. Any assignment, transfer, or other act in violation of this provision shall be void. Paragraph 14. Effective Date of the Plan. The Plan shall be effective with respect to the fiscal year beginning January 1, 1984, and shall remain in effect until it is suspended or terminated as provided by Paragraph 12. EX-10.10 3 MOUNTAIN FUEL SUPPLY COMPANY DEFERRED COMPENSATION PLAN FOR DIRECTORS (As Amended and Restated February 13, 1996) 1. Purpose of Plan. The purpose of the Deferred Compensation Plan for Directors ("Plan") is to provide Directors of Mountain Fuel Supply Company (the "Company") with an opportunity to defer compensation paid to them for their services as Directors of the Company and to maintain a Deferred Account Balance until they cease to serve as Directors of the Company or its affiliates. 2. Eligibility. Subject to the conditions specified in this Plan or otherwise set by the Company's Board of Directors, all voting Directors of the Company who receive compensation for their service as Directors are eligible to participate in the Plan. Eligible Directors are referred to as "Directors." Directors who elect to defer receipt of fees or who have account balances are referred to as "Participants" in this Plan. 3. Administration. The Company's Board of Directors shall administer the Plan and shall have full authority to make such rules and regulations deemed necessary or desirable to administer the Plan and to interpret its provisions. 4. Election to Defer Compensation. (a) Time of Election. A Director can elect to defer future compensation or to change the nature of his election for future compensation by submitting a notice prior to the beginning of the calendar year. A newly elected Director is entitled to make a choice within five days of the date of his election or appointment to serve as a Director to defer payment of compensation for future service. An election shall continue in effect until the termination of the Participant's service as a Director or until the end of the calendar year during which the Director serves written notice of the discontinuance of his election. All notices of election, change of election, or discontinuance of election shall be made on forms prepared by the Corporate Secretary and shall be dated, signed, and filed with the Corporate Secretary. A notice of change of election or discontinuance of election shall operate prospectively from the beginning of the calendar year, but any compensation deferred shall continue to be held and shall be paid in accordance with the notice of election under which it was withheld. (b) Amount of Deferral. A Participant may elect to defer receipt of all or a specified portion of the compensation payable to him for serving as a Director and attending Board and Committee Meetings as a Director. For purposes of this Plan, compensation does not include any funds paid to a Director to reimburse him for expenses. (c) Period of Deferral. When making an election to defer all or a specified percentage of his compensation, a Participant shall elect to receive the deferred compensation in a lump sum payment within 45 days following the end of his service as a Director or in a number of annual installments (not to exceed four), the first of which would be payable within 45 days following the end of his service as a Director with each subsequent payment payable one year thereafter. Under an installment payout, the Participant's first installment shall be equal to a fraction of the balance in his Deferred Compensation Account as of the last day of the calendar month preceding such payment, the numerator of which is one and the denominator of which is the total number of installments selected. The amount of each subsequent payment shall be a fraction of the balance in the Participant's Account as of the last day of the calendar month preceding each subsequent payment, the numerator of which is one and the denominator of which is the total number of installments elected minus the number of installments previously paid. The term "balance," as used herein, refers to the amount credited to a Participant's Account or to the Fair Market Value (as defined in Section 5 (a)) of the Phantom Shares of Questar Corporation's common stock ("Common Stock") credited to his Account. (d) Phantom Stock Option and Certificates of Deposit Option. When making an election to defer all or a specified percentage of his compensation, a Participant shall choose between two methods of determining earnings on the deferred compensation. He may choose to have such earnings calculated as if the deferred compensation had been invested in Common Stock at the Fair Market Value (as defined in Section 5 (a)) of such stock as of the date such compensation amount would have otherwise been payable to him ("Phantom Stock Option"). Or he may choose to have earnings calculated as if the deferred compensation had been invested in negotiable certificates of deposit at the time such compensation would otherwise be payable to him ("Certificates of Deposit Option"). The Participant must choose between the two options for all of the compensation he elects to defer in any given year. He may change the option for future compensation by filing the appropriate notice with the Corporate Secretary before the first day of each calendar year, but such change shall not affect the method of determining earnings for any compensation deferred in a prior year. 5. Deferred Compensation Account. A Deferred Compensation Account ("Account") shall be established for each Participant. (a) Phantom Stock Option Account. If a Participant elects the Phantom Stock Option, his Account will include the number of shares and partial shares of Common Stock (to four decimals) that could have been purchased on the date such compensation would have otherwise been payable to him. The purchase price for such stock is the Fair Market Value of such stock, i.e., the closing price of such stock as reported on the Composite Tape of the New York Stock Exchange for such date or the next preceding day on which sales took place if no sales occurred on the actual payable date. The Participant's Account shall also include the dividends that would have become payable during the deferral period if actual purchases of Common Stock had been made, with such dividends treated as if invested in Common Stock as of the payable date for such dividends. (b) Certificates of Deposit Option Account. If a Participant elects the Certificates of Deposit Option, his Account will be credited with any compensation deferred by the Participant at the time such compensation would otherwise be payable and with interest calculated at a monthly rate using the typical rates paid by major banks on new issues of negotiable Certificates of Deposit on amounts of $1,000,000 or more for one year as quoted in The Wall Street Journal under "Money Rates" on the first day of the relevant calendar month or the next preceding business day if the first day of the month is a non-business day. The interest credited to each Account shall be based on the amount held in the Account at the beginning of each particular month. 6. Statement of Deferred Compensation Account. Within 45 days after the end of the calendar year, a statement will be sent to each Participant listing the balance in his Account as of the end of the year. 7. Retirement Upon retirement or resignation as a Director from the Board of Directors, a Participant shall receive payment of the balance in his Account in accordance with the terms of his prior instructions and the terms of the Plan unless he is still serving as a voting director of Questar Corporation ("Questar"). Upon retirement or resignation as a Director of Questar or upon appointment as a non-voting Senior Director of Questar, a Participant shall receive payment of the balance in his Account in accordance with the terms of his prior instructions and the terms of the Plan unless he is currently serving as a Director of the Company. 8. Payment of Deferred Compensation. (a) Phantom Stock Option. The amount payable to the Participant choosing the Phantom Stock Option shall be the cash equivalent of the stock using the Fair Market Value of such stock on the date of withdrawal. (b) Certificates of Deposit Option. The amount payable to the Participant choosing the Certificate of Deposit Option shall include the interest on all sums credited to the Account, with such interest credited to the date of withdrawal. (c) The date of withdrawal for both the Phantom Stock Option Account and the Certificates of Deposit Option Account shall be the last day of the calendar month preceding payment or if payment is made because of death, the date of death. (d) The payment shall be made in the manner (lump sum or installment) chosen by the Participant. In the event of a Participant's death, payment shall be made within 45 days of the Participant's death to the beneficiary designated by the Participant or, in the absence of such designation, to the Participant's estate. 9. Payment, Change in Control. Notwithstanding any other provisions of this Plan or deferred elections made pursuant to Section 4 of this Plan, a Director, in the event of a Change in Control of Questar, shall be entitled to elect a distribution of his account balance within 60 days following the date upon which Questar obtained actual knowledge of a Change in Control. As used herein, a Change in Control of Questar shall be deemed to have occurred if (i) any "Acquiring Person" (as that term is used in the Rights Agreement dated as of February 13, 1996, between Questar and Chemical Mellon Shareholder Services, L.L.C. ("Rights Agreement")) is or becomes the beneficial owner (as such term is used in Rule 13d-3 under the Securities Exchange Act of 1934) of securities of Questar representing 15 percent or more of the combined voting power of Questar, or (ii) the stockholders of Questar approve (A) a plan of merger or consolidation of Questar (unless immediately following consummation of such merger or consolidation, the persons who held Questar's voting securities immediately prior to consummation thereof will hold at least a majority of the total voting power of the surviving or new company, or (B) a sale or disposition of all or substantially all assets of Questar, or (C) a plan of liquidation or dissolution of Questar. A Change in Control shall also include any act or event that, with the passage of time, would result in a Distribution Date, within the meaning of the Rights Agreement. 10. Hardship Withdrawal. Upon petition to and approval by the Company's Board of Directors, a Participant may withdraw all or a portion of the balance in his Account in the case of financial hardship in the nature of an emergency, provided that the amount of such withdrawal cannot exceed the amount reasonable necessary to meet the financial hardship. The Board of Directors shall have sole discretion to determine the circumstances under which such withdrawals are permitted. 11. Amendment and Termination of Plan The Plan may be amended, modified or terminated by the Company's Board of Directors. No amendment, modification, or termination shall adversely affect a Participant's rights with respect to amounts accrued in his Account. In the event that the Plan is terminated, the Board of Directors has the right to make lump-sum payments of all Account balances on such date as it may determine. 12. Nonassignability of Plan. The right of a Participant to receive any unpaid portion of his Account shall not be assigned, transferred, pledged or encumbered or be subject in any manner to alienation or attachment. 13. No Creation of Rights. Nothing in this Plan shall confer upon any Participant the right to continue as a Director. The right of a Participant to receive any unpaid portion of his Account shall be an unsecured claim against the general assets and will be subordinated to the general obligations of the Company. 14. Effective Date. The Plan was effective on June 1, 1982, and shall remain in effect until it is discontinued by action of the Company's Board of Directors. The effective date of the amendment to the Plan establishing a Phantom Stock Option is January 1, 1983. The Plan was amended and restated effective April 30, 1991, and was further amended and restated effective February 13, 1996. EX-25 4 POWER OF ATTORNEY We, the undersigned directors of Mountain Fuel Supply Company, hereby severally constitute D. N. Rose and S. E. Parks, and each of them acting alone, our true and lawful attorneys, with full power to them and each of them to sign for us, and in our names in the capacities indicated below, the Annual Report on Form 10-K for 1995 and any and all amendments to be filed with the Securities and Exchange Commission by Mountain Fuel Supply Company, hereby ratifying and confirming our signatures as they may be signed by the attorneys appointed herein to the Annual Report on Form 10-K for 1995 and any and all amendments to such Report. Witness our hands on the respective dates set forth below. Signature Title Date /s/ R. D. Cash Chairman of the Board 2-13-96 R. D. Cash /s/ D. N. Rose President & Chief 2-13-96 D. N. Rose Executive Officer Director /s/ R. H. Bischoff Director 2-13-96 R. H. Bischoff /s/ W. W. Hawkins Director 2-13-96 W. W. Hawkins /s/ R. E. Kadlec Director 2-13-96 R. E. Kadlec /s/ Dixie L. Leavitt Director 2-13-96 Dixie L. Leavitt /s/ Gary G. Michael Director 2-13-96 Gary G. Michael EX-27 5
5 The schedule contains summarized financial information extracted from the Mountain Fuel Supply Company Statement of Income and Balance Sheet for the year ended December 31, 1995, and is qualified in its entirety by reference to such audited financial statements. 1,000 12-MOS DEC-31-1995 DEC-31-1995 1,466 0 67,642 0 20,915 93,866 784,466 302,619 600,261 127,082 175,000 4,957 0 22,974 185,671 600,261 0 362,769 0 283,990 35,057 0 16,580 31,374 7,706 23,668 0 0 0 23,668 0 0
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