-----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, E/ipup+Bg0lPIuvfPrr08lAHjT0DNhREBvIu0y4KehCzR2/s/RdaCUjNNU3V7Ykg ZYWXadqFaWqUV6dDVIdbAg== 0000068589-97-000013.txt : 19970723 0000068589-97-000013.hdr.sgml : 19970723 ACCESSION NUMBER: 0000068589-97-000013 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970722 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 033-55866 FILM NUMBER: 97643477 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/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (Mark One) x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ Commission File No. 1-935 MOUNTAIN FUEL SUPPLY COMPANY (Exact name of registrant as specified in its charter) State of Utah 87-0155877 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 180 East First South, P.O. Box 45360, Salt Lake City, Utah 84145-360 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (801) 324-5555 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933: Notes: Medium Term Notes, 7.19% to 8.43%, due 2007 to 2024 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No State the aggregate market value of the voting stock held by nonaffiliates of the registrant as of June 30, 1997: $0. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of June 30, 1997: 9,189,626 shares of Common Stock, $2.50 par value. (All shares are owned by Questar Regulated Services Company.) ITEM 3. LEGAL PROCEEDINGS There are various legal and regulatory proceedings pending that involve the Company and its affiliates. While it is not feasible to predict or determine the outcome of these proceedings, the Company's management believes that the outcome will not have a material adverse effect on the Company's financial position. Mountain Fuel, as a result of acquiring Questar Pipeline's gas purchase contracts, is responsible for any judgment rendered against Questar Pipeline in a lawsuit that was tried before a jury in 1994 in Wyoming's federal district court. The jury awarded an independent producer compensatory damages of approximately $6,100,000 and punitive damages of $200,000 on his claims involving take-or-pay, tax reimbursement, contract breach, and tortious interference with a contract. A judgment has not yet been entered because the presiding judge has still not issued a decision concerning the competing forms of judgment submitted by the opposing parties. The producer's counterclaims originally exceeded $57,000,000, but were reduced to less than $10,000,000, when the presiding judge dismissed with prejudice some of the claims prior to the jury trial. The Company's management believes that any payments resulting from this judgment will be included in Mountain Fuel's gas balancing account and recovered in its rates for natural gas sales service. This same producer has recently filed additional claims against the Company and its affiliates in the same court. The new lawsuit, which is currently assigned to the same judge presiding over the earlier litigation, updates the claims in the original lawsuit for the period since the trial and adds new claims of fraud and antitrust violations. The Company has informed the producer that it will make any payments for the period subsequent to the date covered by the original trial once the presiding judge enters judgment and rules on pending post-trial motions. The Company's management believes that the producer's new allegations of fraud and antitrust violation are without merit. As a result of its former ownership of Entrada and Wasatch Chemical Company, Mountain Fuel has been named as a "potentially responsible party" for contaminants located on property owned by Entrada in Salt Lake City, Utah. Questar and Entrada have also been named as potentially responsible parties. (Prior to October 2, 1984, Mountain Fuel was the parent of Entrada, which is now a direct, wholly-owned subsidiary of Questar.) The property, known as the Wasatch Chemical property, was the location of chemical operations conducted by Entrada's Wasatch Chemical division, which ceased operation in 1978. A portion of the property is included on the national priorities list, commonly known as the "Superfund" list. In September of 1992, a consent order governing clean-up activities was formally entered by the federal district court judge presiding over the underlying litigation involving the property. This consent order was agreed to by Questar, Entrada, the Company, the Utah Department of Health and the Environmental Protection Agency (the EPA). During 1996, Entrada basically completed clean-up activities at the site, but will continue to monitor the situation. Entrada has accounted for all costs spent on the environmental claims and has also accounted for all settlement proceeds, accruals and insurance claims. It has received cash settlements, which together with accruals and insurance receivables, should be sufficient for any future clean-up costs. Mountain Fuel has consistently maintained that Entrada should be responsible for any liability imposed on the Questar group as a result of actions involving Wasatch Chemical. The Company has not paid any and does not expect to pay any costs associated with the clean-up activities for the property. See "Regulation" for information concerning questions that may be raised in Mountain Fuel's regulatory proceedings. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Mountain Fuel conducts natural-gas distribution operations. Following is a summary of revenues and operating information:
Year Ended December 31, 1996 1995 1994 (Dollars In Thousands) OPERATING INCOME Revenues Residential and commercial sales $328,785 $315,458 $329,576 Industrial sales 18,357 22,479 24,395 Industrial transportation 5,898 6,127 5,665 Other 18,888 18,705 18,624 Total revenues 371,928 362,769 378,260 Natural gas purchases 182,400 190,606 210,507 Revenues less natural gas purchases 189,528 172,163 167,753 Operating expenses Operating and maintenance 97,110 93,384 94,094 Depreciation and amortization 28,309 25,469 24,749 Other taxes 8,071 9,588 9,589 Total expenses 133,490 128,441 128,432 Operating income $56,038 $43,722 $39,321 OPERATING STATISTICS Natural gas volumes (in Mdth) Residential and commercial sales 80,844 73,950 74,233 Industrial deliveries Sales 8,584 9,210 8,882 Transportation 49,499 59,569 51,382 Total industrial 58,083 68,779 60,264 Total deliveries 138,927 142,729 134,497 Natural gas revenue (per dth) Residential and commercial $4.07 $4.27 $4.44 Industrial sales 2.14 2.44 2.75 Transportation for industrial customers 0.12 0.10 0.11 System natural gas cost (per dth) $2.44 $2.16 $2.40 Heating degree days (normal 5,801) 5,307 5,047 5,290 Warmer than normal 9% 13% 9% Number of customers at end of period 618,231 592,738 572,174
Revenues, net of gas costs, increased $17,365,000 in 1996 when compared with 1995 due to higher heating demand, customer additions, cost containment and a 1995 rate case settlement. Revenues, net of gas costs, increased $4,410,000 in 1995 when compared with 1994. Colder temperatures in 1996 were responsible for an increase in demand for natural gas for heating purposes. Temperatures, as measured in degree days, were 5% colder in 1996 when compared with 1995. Temperatures were 5% warmer in 1995 when compared with 1994. In addition to colder temperatures, gas usage by a typical general-service customer increased by over two decatherms in 1996. Mountain Fuel added 25,493 customers in 1996 representing a 4.3% increase. The number of customers increased by 3.6% in 1995. Mountain Fuel expects to add about 22,000 customers in 1997. Through this rapid customer-growth period, Mountain Fuel has managed its operating expenses through cost-containment measures. Mountain Fuel and Questar Pipeline have combined functions common to gas-distribution and gas-transmission operations. These combined functions are conducted in the recently organized Questar Regulated Services. In addition, Mountain Fuel undertook a reorganization of service centers and an early-retirement program in the first half of 1995. Mountain Fuel closed five regional offices and reduced functions at five others in an effort to consolidate and restructure operations. The provisions of a 1995 rate case settlement with the Public Service Commission of Utah (PSCU) provided for a weather-normalization adjustment, a new customer connection fee and sharing of transportation capacity-release credits. The weather-normalization adjustment results in an adjustment in customer bills and company revenues for weather variations above or below normal temperatures. Under the provisions of the Utah rate settlement, the weather-normalization adjustment was extended to all residential and commercial volumes beginning October 1, 1996. Utah residential customers can choose to be exempt from this adjustment by notifying Mountain Fuel. However, less than 1 percent of Mountain Fuel's residential customers chose this exemption. Mountain Fuel received approval from the Public Service Commission of Wyoming to implement a weather-normalization adjustment for all residential and commercial customers which began September 1, 1996. The Utah rate case was intended to add about $3.7 million in annual revenues. It also authorized an increase in Mountain Fuel's allowed return on rate base from 10.08% to between 10.22% and 10.34%. On January 8, 1997, the Utah Division of Public Utilities (Division) filed a motion with the PSCU seeking an investigation into the reasonableness of Mountain Fuel's rates and requesting an interim rate decrease of $3.5 million. On January 29, 1997, the Division withdrew its petition and the PSCU accepted that action after receiving an agreed upon Mountain Fuel filing to reduce rates and charges by $2.8 million. On February 4, 1997, Mountain Fuel filed an application with the PSCU to reduce block rates, eliminate the new-premises fee for multi-family dwellings and reduce the capacity-release revenues retained by Mountain Fuel from 20% to 10%. The annual revenue decrease resulting from these changes is expected to be about $2.85 million. The PSCU approved the filing effective February 18, 1997. Gas deliveries to industrial customers decreased by 16% in 1996 when compared with 1995 because of the availability of cheap electricity from hydropower sources, reducing the use of gas for electricity generation. Deliveries to industrial customers increased by 14% in 1995 when compared with 1994 because of strong economic growth in Mountain Fuel's service area. While sales volumes have increased and system natural gas cost per dth have increased, natural gas purchases decreased by 4% in 1996 when compared with 1995. Gas costs, which are a function of rates and collected as part of the sales price per dth, were over-recovered from customers by $9,182,000 at the end of 1995 and under-recovered by $24,210,000 at year-end 1996. Natural gas purchases decreased by 9% in 1995 when compared with 1994 primarily due to lower gas costs. Operating and maintenance expenses increased 4% in 1996 when compared with 1995 as a result of the growth in the number of customers and territory served by the Company. The Regulated Services group's cost-containment efforts, including the combination of shared services, have somewhat mitigated the escalation of operating expenses. Operating and maintenance expenses decreased 1% in 1995 primarily because of productivity improvement measures, including an early-retirement program, implemented in 1995. Depreciation and amortization expense increased 11% in 1996 and 3% in 1995 in response to the Company's level of capital spending. Other taxes decreased in 1996 when compared with 1995 due to settlements with local taxing agencies that reduced property taxes. In 1994, Mountain Fuel recorded other income of $5,589,000 for a one-time reduction in gas costs associated with recording unbilled revenues. The effective income tax rate was 31.7% in 1996, 24.6% in 1995 and 25.3% in 1994 primarily due to income tax credits received from production of gas from certain properties. These credits amounted to $3,246,000 in 1996,$4,376,000 in 1995 and $4,670,000 in 1994. Mountain Fuel, as a result of acquiring Questar Pipeline's gas- purchase contracts, is responsible for any judgment rendered against Questar Pipeline in a lawsuit that was tried before a jury in 1994. The jury awarded an independent producer compensatory damages of approximately $6.1 million and punitive damages of $200,000 on his claims. The producer's counterclaims originally exceeded $57 million, but were reduced to less than $10 million, when the presiding judge dismissed with prejudice some of the claims prior to the jury trial. Under existing PSCU rulings, any payments resulting from this judgment will be included in Mountain Fuel's gas balancing account and recovered in its rates for natural gas service. This same producer has recently filed additional claims against the Company and its affiliates in the same court and with the same presiding judge. The new lawsuit, which is currently assigned to the same judge presiding over the earlier litigation, updates the claims in the original lawsuit for the period since the trial and adds new claims of fraud and antitrust violations. The Company has informed the producer that it will make any payments for the period subsequent to the date covered by the original trial once the presiding judge enters judgment and rules on pending post-trail motions. The Company's management believes that the producer's new allegations of fraud antitrust violation are without merit. Mountain Fuel files semiannually in Utah for gas cost pass-through treatment. A January 1996 application was approved on an interim basis effective January 1, 1996. In connection with the application and pass-through cases filed since then, the Division has raised issues about the reasonableness of gas-gathering costs for field-purchased gas gathered by Questar Gas Management. The Division has not yet formally requested the PSCU to disallow any portion of gas gathering costs, but has advised the Company that the amount in question is approximately $6 million. The Company's management believes that its gathering costs are reasonable. Mountain Fuel and the Division are engaged in discussions to resolve gathering cost issues. The Company cannot predict the resolution of this dispute or any financial impact of such resolution on its balance sheet, income statement, or cash flows at the current time. The Company's 1997 application for pass-through of gas costs was also approved on an interim basis. LIQUIDITY AND CAPITAL RESOURCES Operating Activities Net cash provided from operating activities of $50,496,000 decreased 26% in 1996 when compared to 1995 due primarily to the working capital consumed to purchase natural gas. Net cash provided from operating activities was $68,546,000 in 1995 and was 107% higher than the amount reported for 1994. The increase in 1995 was largely due to the collection of accounts receivable and lower gas purchase costs. Investing Activities Following is a summary of capital expenditures for 1996 and 1995, and a forecast of 1997 expenditures.
1997 Estimated 1996 1995 (In Thousands) New-customer service $33,400 $29,152 $24,950 Distribution system 10,200 10,594 9,981 Buildings 5,000 1,902 3,473 Computer software and hardware 8,200 7,321 5,121 General 7,200 2,688 7,888 $64,000 $51,657 $51,413
Mountain Fuel's capital spending program was primarily in response to a record increase in the number of customers served. Mountain Fuel extended its system by 658 miles of main, feeder and service lines in 1996. Financing Activities The Company was able to finance capital spending and pay dividends with the proceeds of internally generated cash plus borrowings from Questar. The Company funded 1995 capital expenditures and cash dividends with cash provided from operations and borrowings from Questar. Forecasted 1997 capital expenditures of $64 million are expected to be financed with cash provided from operations, issuance of long-term debt and borrowings from Questar. Questar makes loans to the Company under a short-term borrowing arrangement. Outstanding short-term notes payable to Questar totaled $76,200,000 at December 31, 1996 with an interest rate of 5.63% and $56,100,000 at December 31, 1995 with an interest rate of 6.01%. In 1996, the Company terminated a short-term line-of-credit arrangement with a bank under which it could have borrowed up to $500,000. There were no amounts borrowed under this arrangement at either December 31, 1996 or 1995. Mountain Fuel has a capital structure of 44% long-term debt, 1% preferred stock and 55% common equity. Moody's and Standard and Poor's have rated Mountain Fuel's long-term debt A-1 and A+, respectively. ANNUAL REPORT ON FORM 10-K/A ITEM 8. ITEM 14 (a) (1) and (2), (c) and (d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA YEAR ENDED DECEMBER 31, 1996 MOUNTAIN FUEL SUPPLY COMPANY SALT LAKE CITY, UTAH FORM 10-K/A--ITEM 14 (a) (1) and (2) MOUNTAIN FUEL SUPPLY COMPANY LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following financial statements of Mountain Fuel Supply Company are included in Item 8: Statements of income -- Years ended December 31, 1996, 1995 and 1994 Balance sheets -- December 31, 1996 and 1995 Statements of common shareholder's equity -- Years ended December 31, 1996, 1995 and 1994 Statements of cash flows -- Years ended December 31, 1996, 1995 and 1994 Notes to financial statements Financial statement schedules, for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission, are not required under the related instructions or are inapplicable, and therefore have been omitted. MOUNTAIN FUEL SUPPLY COMPANY STATEMENTS OF INCOME
Year Ended December 31, 1996 1995 1994 (In Thousands) REVENUES $371,928 $362,769 $378,260 OPERATING EXPENSES Natural gas purchases From affiliates - Note 8 128,919 129,781 132,889 From unaffiliated parties 53,481 60,825 77,618 Total natural gas purchases 182,400 190,606 210,507 Operating and maintenance - Note 8 97,110 93,384 94,094 Depreciation and amortization 28,309 25,469 24,749 Other taxes 8,071 9,588 9,589 TOTAL OPERATING EXPENSES 315,890 319,047 338,939 OPERATING INCOME 56,038 43,722 39,321 INTEREST AND OTHER INCOME 3,033 4,232 7,820 DEBT EXPENSE (16,637) (16,580) (15,886) INCOME BEFORE INCOME TAXES 42,434 31,374 31,255 INCOME TAXES - Note 5 13,446 7,706 7,903 NET INCOME $28,988 $23,668 $23,352
See notes to financial statements. MOUNTAIN FUEL SUPPLY COMPANY BALANCE SHEETS
ASSETS December 31, 1996 1995 (In Thousands) CURRENT ASSETS Cash and short-term investments $1,875 $1,466 Accounts receivable 38,141 36,864 Unbilled gas accounts receivable - Note 6 23,528 25,149 Accounts receivable from affiliates 393 1,658 Federal income taxes receivable 1,109 3,971 Inventories, at lower of average cost or market Gas stored underground 11,647 16,310 Materials and supplies 3,648 4,605 Total inventories 15,295 20,915 Purchased-gas adjustments 24,210 0 Prepaid expenses and deposits 4,511 3,843 TOTAL CURRENT ASSETS 109,062 93,866 PROPERTY, PLANT AND EQUIPMENT Production - Note 8 97,870 97,870 Distribution 608,571 587,128 General 99,372 79,871 Construction in progress 19,308 19,597 825,121 784,466 Less allowances for depreciation and amortization 325,821 302,619 NET PROPERTY, PLANT AND EQUIPMENT 499,300 481,847 OTHER ASSETS Income taxes recoverable from customers - Note 5 7,293 8,214 Unamortized costs of reacquired debt 9,596 10,090 Other 5,818 6,244 TOTAL OTHER ASSETS 22,707 24,548 $631,069 $600,261
LIABILITIES AND SHAREHOLDER'S EQUITY
December 31, 1996 1995 (In Thousands) CURRENT LIABILITIES Notes payable to Questar - Note 2 $76,200 $56,100 Accounts payable and accrued expenses Accounts payable 37,075 21,794 Accounts payable to affiliates 17,779 16,283 Customer refund 0 11,886 Other taxes 4,161 4,762 Interest 3,676 3,676 Other 3,867 3,399 Total accounts payable and accrued expenses 66,558 61,800 Purchased-gas adjustments 0 9,182 TOTAL CURRENT LIABILITIES 142,758 127,082 LONG-TERM DEBT - Notes 2 and 4 175,000 175,000 OTHER LIABILITIES Unbilled gas revenues - Note 6 10,360 15,541 Other 570 488 TOTAL OTHER LIABILITIES 10,930 16,029 DEFERRED INVESTMENT TAX CREDITS 6,774 7,157 DEFERRED INCOME TAXES - Note 5 74,537 61,391 COMMITMENTS AND CONTINGENCIES - Note 6 REDEEMABLE CUMULATIVE PREFERRED STOCK - Notes 3 and 4 4,828 4,957 COMMON SHAREHOLDER'S EQUITY Common stock - par value $2.50 per share; authorized 50,000,000 shares; issued and outstanding 9,189,626 shares 22,974 22,974 Additional paid-in capital 41,875 41,875 Retained earnings 151,393 143,796 TOTAL COMMON SHAREHOLDER'S EQUITY 216,242 208,645 $631,069 $600,261
See notes to financial statements. MOUNTAIN FUEL SUPPLY COMPANY STATEMENTS OF COMMON SHAREHOLDER'S EQUITY
Additional Common Paid-in Retained Stock Capital Earnings (In Thousands) Balances at January 1, 1994 $22,974 $21,875 $137,351 Capital contribution 20,000 1994 net income 23,352 Payment of dividends Preferred stock (591) Common stock (19,500) Balances at December 31, 1994 22,974 41,875 140,612 1995 net income 23,668 Payment of dividends Preferred stock (483) Common stock (20,000) Redemption cost (1) Balances at December 31, 1995 22,974 41,875 143,796 1996 net income 28,988 Payment of dividends Preferred stock (391) Common stock (21,000) Balances at December 31, 1996 $22,974 $41,875 $151,393
See notes to financial statements. MOUNTAIN FUEL SUPPLY COMPANY STATEMENTS OF CASH FLOWS
Year Ended December 31, 1996 1995 1994 (In Thousand) OPERATING ACTIVITIES Net income $28,988 $23,668 $23,352 Depreciation and amortization 31,214 28,295 27,337 Deferred income taxes 13,146 6,366 5,102 Deferred investment tax credits (383) (384) (400) 72,965 57,945 55,391 Changes in operating assets and liabilities Accounts receivable 1,609 10,549 7,448 Inventories 5,620 4,026 (969) Prepaid expenses and deposits (668) (722) 460 Accounts payable and accrued expenses 4,758 14,379 (16,141) Federal income taxes 2,862 (5,620) 463 Purchased-gas adjustments (33,392) (7,889) (8,656) Other (3,258) (4,122) (4,853) NET CASH PROVIDED FROM OPERATING ACTIVITIES 50,496 68,546 33,143 INVESTING ACTIVITIES Capital expenditures (51,657) (51,413) (53,816) Proceeds from disposition and transfer of property, plant and equipment 2,990 1,054 9,482 NET CASH USED IN INVESTING ACTIVITIES (48,667) (50,359) (44,334) FINANCING ACTIVITIES Capital contribution 20,000 Redemption of preferred stock (129) (1,367) (1,201) Issuance of long-term debt 0 0 17,000 Change in notes payable to Questar 20,100 2,600 (4,300) Payment of dividends (21,391) (20,483) (20,091) NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES (1,420) (19,250) 11,408 Change in cash and short-term investments 409 (1,063) 217 Beginning cash and short-term investments 1,466 2,529 2,312 ENDING CASH AND SHORT-TERM INVESTMENTS $1,875 $1,466 $2,529
See notes to financial statements. MOUNTAIN FUEL SUPPLY COMPANY NOTES TO FINANCIAL STATEMENTS Note 1 - Summary of Accounting Policies Mountain Fuel Supply Company (the Company or Mountain Fuel) is a wholly-owned subsidiary of Questar Regulated Services Company (Regulated Services). Regulated Services is a holding company and wholly-owned subsidiary of Questar Corporation (Questar). Regulated Services was organized in 1996 and provides administrative functions for its two subsidiaries, Mountain Fuel and Questar Pipeline Company ( Questar Pipeline). Significant accounting policies are presented below. Business and Regulation: The Company's business consists of natural gas distribution operations for residential, commercial and industrial customers. Mountain Fuel is regulated by the Public Service Commission of Utah (PSCU) and the Public Service Commission of Wyoming (PSCW). While Mountain Fuel also serves a small area of southeastern Idaho, the Idaho Public Service Commission has deferred to the PSCU for rate oversight of this area. These regulatory agencies establish rates for the sale and transportation of natural gas. The regulatory agencies also regulate, among other things, the extension and enlargement or abandonment of jurisdictional natural gas facilities. Regulation is intended to permit the recovery, through rates, of the cost of service including, a rate of return on investment. The financial statements are presented in accordance with regulatory requirements. Methods of allocating costs to time periods, in order to match revenues and expenses, may differ from those of nonregulated businesses because of cost-allocation methods used in establishing rates. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent liabilities reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition: Revenues are recognized in the period that services are provided or products are delivered. Mountain Fuel accrues gas-distribution revenues for gas delivered to residential and commercial customers but not billed at the end of the accounting period. Mountain Fuel periodically collects revenues subject to possible refund pending final orders from regulatory agencies. In these situations, the Company establishes reserves for revenues collected subject to refund. Purchased-Gas Adjustments: Mountain Fuel accounts for purchased-gas costs in accordance with procedures authorized by the PSCU and PSCW whereby purchased-gas costs that are different from those provided for in the present rates are accumulated and recovered or credited through future rate changes. Property, Plant and Equipment: Property, plant and equipment are stated at cost. The provision for depreciation and amortization is based upon rates which will systematically charge the costs of assets over their estimated useful lives. The costs of natural gas distribution property, plant and equipment, excluding gas wells, are amortized using the straight-line method ranging from 3% to 33% per year and averaging 4.1% in 1996. The costs of gas wells were amortized using the units-of-production method at $.16 per Mcf of natural gas production in 1996. Income Taxes: Mountain Fuel records cumulative increases in deferred taxes as income taxes recoverable from customers. The Company has adopted procedures with its regulatory commissions to include under-provided deferred taxes in customer rates on a systematic basis. Mountain Fuel uses the deferral method to account for investment-tax credits as required by regulatory commissions. The Company's operations are consolidated with those of Questar and its subsidiaries for income tax purposes. The income tax arrangement between Mountain Fuel and Questar provides that amounts paid to or received from Questar are substantially the same as would be paid or received by the Company if it filed a separate return. Mountain Fuel also receives payment for tax benefits used in the consolidated tax return even if such benefits would not have been usable had the Company filed a separate return. The Company's historical income tax is not materially different from what it would be if calculated on a separate return basis. Reacquisition of Debt: Gains and losses on the reacquisition of debt are deferred and amortized as debt expense over the life of the replacement debt in order to match regulatory treatment. Allowance for Funds Used During Construction: The Company capitalizes the cost of capital during the construction period of plant and equipment using a method required by regulatory authorities. This amounted to $277,000 in 1996, $391,000 in 1995 and $397,000 in 1994. Cash and Short-Term Investments: Short-term investments consist principally of Euro-time deposits and repurchase agreements with maturities of three months or less. Note 2 - Debt Questar makes loans to the Company under a short-term borrowing arrangement. Outstanding short-term notes payable to Questar totaled $76,200,000 at December 31, 1996 with an interest rate of 5.63% and $56,100,000 at December 31, 1995 with an interest rate of 6.01%. In 1996, the Company terminated its short-term line-of-credit arrangement with a bank under which it could have borrowed up to $500,000. There were no amounts borrowed under this arrangement at either December 31, 1996 or 1995. Mountain Fuel's long-term debt consists of medium-term notes with interest rates ranging from 7.19% to 8.43%, due 2007 to 2024. There are no maturities of long-term debt for the five years following December 31, 1996 and no long-term debt provisions restricting the payment of dividends. Cash paid for interest was $16,346,000 in 1996, $16,458,000 in 1995 and $15,290,000 in 1994. Note 3 - Redeemable Cumulative Preferred Stock Mountain Fuel has authorized 4,000,000 shares of nonvoting redeemable cumulative preferred stock with no par value, but a stated and redemption value of $100 per share.
8% Series $8.625 Series (In Thousands) Balance at January 1, 1994 $5,125 $2,400 1994 redemption of stock (1) (1,200) 1995 redemption of stock (167) (1,200) 1996 redemption of stock (129) Balance at December 31, 1996 $4,828 -
Redemption requirements for the five years following December 31, 1996, are as follows: (In Thousands) 1997 $148 1998 180 1999 180 2000 180 2001 180 Note 4 - Financial Instruments and Credit Management Activities The carrying amounts and estimated fair values of the Company's financial instruments were as follows:
December 31, 1996 December 31, 1995 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value (In Thousands) Financial assets Cash and short-term investments $1,875 $1,875 $1,466 $1,466 Financial liabilities Short-term loans 76,200 76,200 56,100 56,100 Long-term debt 175,000 190,793 175,000 184,577 Redeemable cumulative preferred stock 4,828 4,876 4,957 5,006
The Company used the following methods and assumptions in estimating fair values: (1) Cash and short-term investments, and short-term loans - the carrying amount approximates fair value; (2) Long-term debt - the fair value of the medium-term notes is based on the discounted present value of cash flows using the Company's current borrowing rates; (3) Redeemable cumulative preferred stock - the fair value is based on the call price at year end. Fair value is calculated at a point in time and does not represent what the Company would pay to retire the debt securities. Credit Risk: The Company's primary market area is the Rocky Mountain region of the United States. The Company's exposure to credit risk may be impacted by the concentration of customers in this region due to changes in economic or other conditions. The Company's customers include individuals and numerous industries that may be affected differently by changing conditions. Management believes that its credit-review procedures, loss reserves and customer deposits have adequately provided for usual and customary credit-related losses. The carrying amount of trade receivables approximates fair value. Note 5 - Income Taxes The components of income taxes were as follows:
Year Ended December 31, 1996 1995 1994 (In Thousands) Federal Current ($678) ($294) $2,717 Deferred 12,906 7,099 4,527 State Current 254 302 484 Deferred 1,347 983 575 Deferred investment tax credits (383) (384) (400) $13,446 $7,706 $7,903
The difference between income tax expense and the tax computed by applying the statutory federal income tax rate to income before income taxes is explained as follows:
Year Ended December 31, 1996 1995 1994 (In Thousands) Income before income taxes $42,434 $31,374 $31,255 Federal income taxes at statutory rate $14,852 $10,981 $10,939 State income taxes, net of federal income tax benefit 1,512 1,179 890 Tight-sands gas production credits (3,246) (4,376) (4,670) Investment-tax credits (383) (384) (400) Reduction in deferred income tax rate (571) Deferred taxes related to regulated assets for which deferred taxes were not provided for in prior years 921 921 921 Other (210) (44) 223 Income tax expense $13,446 $7,706 $7,903 Effective income tax rate 31.7% 24.6% 25.3%
Significant components of the Company's deferred tax liabilities and assets were as follows:
December 31, 1996 1995 (In Thousands) Deferred tax liabilities Property, plant and equipment $73,979 $73,200 Purchased-gas adjustments 9,200 0 Unamortized debt reacquisition costs 3,646 3,859 Income taxes recoverable from customers 2,892 3,368 Pension costs 1,096 1,291 Other 1,046 893 Total deferred tax liabilities 91,859 82,611 Deferred tax assets Purchased-gas adjustments 0 3,489 Alternative minimum tax and production credit carryovers 7,546 6,562 Unbilled revenues 3,937 5,905 Deferred investment-tax credits 2,574 2,720 Other 3,265 2,544 Total deferred tax assets 17,322 21,220 Net deferred tax liabilities $74,537 $61,391
Mountain Fuel applied an overpayment of 1995 income taxes to more than offset liability for 1996 taxes. Cash paid for income taxes was $7,333,000 in 1995 and $6,404,000 in 1994. Note 6 - Rate Matters, Litigation and Commitments On January 8, 1997, the Utah Division of Public Utilities (Division) filed a motion with the PSCU seeking an investigation into the reasonableness of Mountain Fuel's rates and requesting an interim rate decrease of $3.5 million. On January 29, 1997, the Division withdrew its petition and the PSCU accepted that action after receiving an agreed upon Mountain Fuel filing to reduce rates and charges by $2.8 million. On February 4, 1997, Mountain Fuel filed an application with the PSCU to reduce block rates, eliminate the new-premises fee for multi-family dwellings, and reduce the capacity-release revenue retained by Mountain Fuel from 20% to 10%. The annual revenue reduction resulting from these changes is expected to be about $2.85 million. The PSCU approved the filing effective February 18, 1997. In 1993, Mountain Fuel began accruing revenues for gas delivered to residential and commercial customers but not billed at the end of the year. The impact of these accruals on the income statement has been deferred and is being recognized at the rate of $2,011,000 per year over a five-year period beginning in 1994 in accordance with a rate order received from the PSCU. This same rate order also reduces customer rates by $2,011,000 per year over the same five-year period. In addition, Mountain Fuel recorded other income of $5,589,000 for a one-time reduction of gas costs associated with these unbilled revenues. This transaction resulted in additional net income of about $3.5 million in 1994. Mountain Fuel files semianually in Utah for gas cost pass-through treatment. A January 1996 application was approved on an interim basis effective January 1, 1996. In connection with the application and pass-through cases filed since then, the Division raised issues about the reasonableness of gas-gathering costs for field-purchased gas gathered by Questar Gas Management. The Division has not yet formally requested the PSCU to disallow any portion of gas gathering costs but has advised the Company that the amount in question is approximately $6 million. The Company's management believes that the gathering costs are reasonable. Mountain Fuel and the Division are engaged in discussions to resolve gathering cost issues. The Company cannot predict the resolution of this dispute or any financial impact of such resolution on its balance sheet, income statement, or its cash flows at the current time. The Company's January 1997 application for pass-through of gas costs was also approved on an interim basis. Each year, Mountain Fuel purchases significant quantities of natural gas under numerous gas-purchase contracts with varying terms and conditions. Purchases under these agreements totalled $67,249,000 in 1996, $44,892,000 in 1995 and $73,682,000 in 1994. Historically, gas-purchase contracts extended over many years. However, now it is common practice to contract for anywhere from one day up to one year. As of April 1, 1997, all but two long-term contracts will have terminated. One of the remaining contracts has a ten-year duration to supply gas to seven small, isolated southern Utah towns. It obligates Mountain Fuel to purchase up to 5,000 dth of gas per day at prices related to a market index. The other contract requires Mountain Fuel to purchase 50 dth per day at prices currently below market. The Company has received notice that it may be partially liable in several environmental clean-up actions on sites that involve numerous other parties. Management believes that the Company's responsibility for remediation will be minor and that any potential liability will not be significant to its results of operations, financial position or liquidity. Mountain Fuel, as a result of acquiring Questar Pipeline's gas- purchase contracts, is responsible for any judgment rendered against Questar Pipeline in a lawsuit that was tried before a jury in 1994. The jury awarded an independent producer compensatory damages of approximately $6.1 million and punitive damages of $200,000 on his claims. The producer's counterclaims originally exceeded $57 million, but were reduced to less than $10 million, when the presiding judge dismissed with prejudice some of the claims prior to the jury trial. Under existing PSCU rulings, any payments resulting from this judgment will be included in Mountain Fuel's gas balancing account and recovered in its rates for natural gas service. This same producer has recently filed additional claims against the Company and its affiliates in the same court and with the same presiding judge. The lawsuit, which is currently assigned to the same judge presiding over the earlier litigation, updates the claims in the original lawsuit for the period since the trial and adds new claims of fraud and antitrust violations. The Company has informed the producer that it will make any payments for the period subsequent to the date covered by the original trial once the presiding judge enters judgment and rules on pending post-trial motions. The Company's management believes that the producer's new allegations of fraud and antitrust violation are without merit. There are various legal proceedings against the Company. While it is not currently possible to predict or determine the outcome of these proceedings, it is the opinion of management that the outcome will not have a material adverse effect on the Company's results of operations, financial position or liquidity. Note 7 - Employee Benefits Pension Plan: Substantially all Company employees are covered by Questar's defined benefit pension plan. Benefits are generally based on years of service and the employee's 36-month period of highest earnings during the 10 years preceding retirement. It is Questar's policy to make contributions to the plan at least sufficient to meet the minimum funding requirements of applicable laws and regulations. Plan assets consist principally of equity securities and corporate and U.S. government debt obligations. Pension cost was $2,820,000 in 1996, $3,352,000 in 1995, and $2,962,000 in 1994. Mountain Fuel's portion of plan assets and benefit obligations is not determinable because the plan assets are not segregated or restricted to meet the Company's pension obligations. If the Company were to withdraw from the pension plan, the pension obligation for the Company's employees would be retained by the pension plan. At December 31, 1996, Questar's fair value of plan assets exceeded the accumulated benefit obligation. Postretirement Benefits Other Than Pensions: The Company pays a portion of health-care costs and life insurance costs for employees who retired prior to January 1, 1993. The plan changed for employees hired after January 1, 1993, to link the health-care benefits to years of service and to limit Questar's monthly health care contribution per individual to 170% of the 1992 contribution. Employees hired after December 31, 1996, do not qualify for benefits under this plan. The Company's policy is to fund amounts allowable for tax deduction under the Internal Revenue Code. Plan assets consist of equity securities, corporate and U.S. government debt obligations, and insurance company general accounts. The Company is amortizing the transition obligation over a 20-year period, which began in 1992. Costs of postretirement benefits other than pensions were $2,424,000 in 1996, $3,183,000 in 1995 and $3,584,000 in 1994. Both the PSCU and the PSCW allowed Mountain Fuel to recover future costs if the amounts are funded in an external trust. The Company's portion of plan assets and benefit obligations related to postretirement medical and life insurance benefits is not determinable because the plan assets are not segregated or restricted to meet the Company's obligations. Postemployment Benefits: The Company recognizes the net present value of the liability for postemployment benefits, such as long-term disability benefits and health-care and life-insurance costs, when employees become eligible for such benefits. Postemployment benefits are paid to former employees after employment has been terminated but before retirement benefits are paid. The Company accrues both current and future costs. The PSCU and the PSCW have allowed Mountain Fuel to recover postemployment costs through December 31, 1994 in future rates. At December 31, 1996, the Company had a $831,000 regulatory asset that it is amortizing over the next eight years. Employee Investment Plan: The Company participates in Questar's Employee Investment Plan (ESOP), which allows eligible employees to purchase Questar common stock or other investments through payroll deduction. The Company makes contributions of Questar common stock to the ESOP of approximately 75% of the employees' purchases and contributes an additional $200 of common stock in the name of each eligible employee. The Company's expense and contribution to the plan was $1,893,000 in 1996, $1,622,000 in 1995, and $1,542,000 in 1994. Note 8 - Related Party Transactions The Company has material transactions with related parties, which are subject to periodic review by the PSCU and PSCW in the Company's rate proceedings. Mountain Fuel believes that the terms of the transactions with its affiliates described in this note, with the possible exception of the unique Wexpro settlement agreement, are as good as could have been negotiated with unaffiliated third parties at the time the underlying agreements were negotiated. See Note 6 for a discussion of the dispute involving the Company's charges for the volumes gathered by Questar Gas Management. Questar Regulated Services was organized in 1996 and provides shared services for its two subsidiaries, Mountain Fuel and Questar Pipeline. These include business, technical and financial support, as well as planning and business development. Services and the subsequent billings began in 1997. Wexpro, an affiliated company, operates certain properties owned by Mountain Fuel under the terms of the Wexpro settlement agreement, which is a long-standing court-approved agreement that ended several years of regulatory proceedings and litigation and is monitored by the Division, the PSCU and the PSCW. The Company is not aware of any comparable arrangements. Generally, the Company's average price of cost-of- service gas has been lower than the price of gas volumes purchased from unaffiliated producers. The Company receives a portion of Wexpro's income from oil operations after recovery of Wexpro's operating expenses and a return on investment. This amount, which is included in revenues, was $2,768,000 in 1996, $3,400,000 in 1995 and $3,391,000 in 1994. The Company paid Wexpro for the operation of Company-owned gas properties. These costs are included in natural gas purchases and amounted to $53,119,000 in 1996, $59,831,000 in 1995 and $57,870,000 in 1994. Mountain Fuel purchased transportation and storage services from Questar Pipeline amounting to $61,078,000 in 1996, $54,083,000 in 1995 and $56,179,000 in 1994. The costs of these services were included in natural gas purchases. Also included in natural gas purchases are amounts paid to Questar Gas Management for gathering of Company-owned gas and purchased gas. These costs amounted to $14,515,000 in 1996, $15,867,000 in 1995 and $14,766,000 in 1994. Gas-gathering activities were transferred to Questar Gas Management from Questar Pipeline in March 1996. Financial statements for prior years were reclassified to reflect the transfer. Mountain Fuel has reserved transportation capacity on Questar Pipeline's system of approximately 800,000 decatherms per day and paid an annual demand charge of approximately $45.8 million for this reservation. Mountain Fuel releases excess capacity to its industrial transportation or other customers and receives a credit from Questar Pipeline for the released-capacity revenues and a portion of Questar Pipeline's interruptible-transportation revenues. Mountain Fuel has a 15-year lease for some space in an office building located in Salt Lake City, Utah, that is owned by an affiliated company, Interstate Land. The lease begins in the fourth quarter of 1997 when remodeling of the building is scheduled for completion. The annual lease payment for each of the five years, beginning in 1998, is $1,155,000. Questar InfoComm Inc. is an affiliated company that provides data processing and communication services to Mountain Fuel. The Company paid Questar InfoComm $16,343,000 in 1996, $15,781,000 in 1995 and $15,996,000 in 1994. Questar charges Mountain Fuel for certain administrative functions amounting to $5,746,000 in 1996, $5,283,000 in 1995, and $5,814,000 in 1994. These costs are included in operating and maintenance expenses and are allocated based on each affiliated company's proportional share of revenues less gas costs; property, plant and equipment; and labor costs. Management believes that the allocation method is reasonable. The Company received interest income from affiliated companies of $10,000 in 1995 and $225,000 in 1994. The Company incurred debt expense to Questar of $1,906,000 in 1996, $1,273,000 in 1995 and $134,000 in 1994. Note 9 - Oil and Gas Producing Activities (Unaudited) The following information discusses the Company's oil and gas producing activities. Certain disclosure normally required for oil and gas producing activities has been omitted for the following reasons: all of the properties are cost-of-service properties with the return on investment established by state regulatory agencies; Mountain Fuel has not incurred any costs for oil and gas producing activities for the three years ended December 31, 1996; Wexpro incurs the costs to develop and produce gas reserves owned by the Company, for which Mountain Fuel pays Wexpro the cost of services; and the Company is not acquiring any additional properties. See Note 8 for the amounts paid by Mountain Fuel to Wexpro. Estimated Quantities of Proved Oil and Gas Reserves: The following estimates were made by Questar's reservoir engineers. Reserve estimates are based on a complex and highly interpretive process which is subject to continuous revision as additional production and development drilling information becomes available. The quantities are based on existing economic and operating conditions using current prices and operating costs. All oil and gas reserves reported are located in the United States. Mountain Fuel does not have any long-term supply contracts with foreign governments or reserves of equity investees. No estimate of proved undeveloped reserves has been obtained because any development of such reserves will be undertaken by Wexpro.
Natural Gas Oil (In Million (In Thousands Cubic Feet) of Barrels) Proved Developed Reserves Balance at January 1, 1994 428,238 772 Revisions of estimates (576) (13) Extensions and discoveries 26,085 13 Production (37,435) (65) Balance at December 31, 1994 416,312 707 Revisions of estimates (831) 10 Extensions and discoveries 10,591 2 Production (36,632) (57) Balance at December 31, 1995 389,440 662 Revisions of estimates 4,365 (44) Extensions and discoveries 2,812 2 Production (36,740) (56) Balance at December 31, 1996 359,877 564
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 22th day of July, 1997. MOUNTAIN FUEL SUPPLY COMPANY (Registrant) By /s/ D. N. Rose D. N. Rose President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. /s/ D. N. Rose President and Chief Executive D. N. Rose Officer; Director (Principal Executive Officer) /s/ S. E. Parks Vice President, Treasurer and Chief Financial S. E. Parks Officer (Principal Financial Officer) /s/ G. H. Robinson Vice President and Controller G. H. Robinson (Principal Accounting Officer) *R. D. Cash Chairman of the Board *W. Whitley Hawkins Director *Robert E. Kadlec Director *Dixie L. Leavitt Director *Gary G. Michael Director *D. N. Rose Director *Harris H. Simmons Director July 22, 1997 *By /s/ D. N. Rose Date D. N. Rose, Attorney in Fact -----END PRIVACY-ENHANCED MESSAGE-----