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.)
<PAGE>
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.
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
(Dollars In Thousands)
<S> <C> <C> <C>
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
</TABLE>
<PAGE>
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.
<TABLE>
<CAPTION>
1997
Estimated 1996 1995
(In Thousands)
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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.
<PAGE>
MOUNTAIN FUEL SUPPLY COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
(In Thousands)
<S> <C> <C> <C>
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
</TABLE>
See notes to financial statements.
<PAGE>
MOUNTAIN FUEL SUPPLY COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31,
1996 1995
(In Thousands)
<S> <C> <C>
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
</TABLE>
<PAGE>
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
December 31,
1996 1995
(In Thousands)
<S> <C> <C>
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
</TABLE>
See notes to financial statements.
<PAGE>
MOUNTAIN FUEL SUPPLY COMPANY
STATEMENTS OF COMMON SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Earnings
(In Thousands)
<S> <C> <C> <C>
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
</TABLE>
See notes to financial statements.
<PAGE>
MOUNTAIN FUEL SUPPLY COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
(In Thousand)
<S> <C> <C> <C>
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
</TABLE>
See notes to financial statements.
<PAGE>
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.
<TABLE>
<CAPTION>
8% Series $8.625 Series
(In Thousands)
<S> <C> <C>
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 -
</TABLE>
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:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In Thousands)
<S> <C> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
(In Thousands)
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
(In Thousands)
<S> <C> <C> <C>
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%
</TABLE>
Significant components of the Company's deferred tax liabilities
and assets were as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
(In Thousands)
<S> <C> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
Natural Gas Oil
(In Million (In Thousands
Cubic Feet) of Barrels)
<S> <C> <C>
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
</TABLE>
<PAGE>
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
