ITEM 3. LEGAL PROCEEDINGS
There are various legal proceedings pending against the Company and its affiliates. While it is not feasible to predict or determine the outcome of these proceedings, the Company's management believes that the outcome will not have a material adverse effect on the Company's financial position.
Questar, Entrada, and Mountain Fuel have each been named a "potentially responsible party" for contaminants on property owned by Entrada in Salt Lake City, Utah. The property, known as the Wasatch Chemical property, was the location of chemical operations conducted by Entrada's Wasatch Chemical division, which ceased operation in 1978. A portion of the property is included on the national priorities list, commonly known as the "Superfund" list.
In September of 1992, a consent order governing clean-up activities was formally entered by the federal district court judge presiding over the underlying litigation involving the property. The underlying lawsuits seek declaratory relief that the named potentially responsible parties, including the Questar affiliates and unrelated parties, are liable for the expense of the investigation and clean-up. The consent order was agreed to by Questar, Entrada, and other affiliates as well as the Utah Department of Health and the Environmental Protection Agency. Entrada has settled with the named unrelated parties and has assumed the liability of such parties.
In late 1994, Entrada began an in situ vitrification procedure to clean up the Wasatch Chemical property. The clean-up procedure may take as long as three years.
Entrada has recorded all costs spent on the matter and has accounted for all settlement proceeds, accruals, and insurance claims. It has received cash settlements, which together with accruals and insurance receivables, should be sufficient for future clean-up costs.
Mountain Fuel, as a result of acquiring Questar Pipeline's gas purchase contracts, is responsible for any judgment rendered against Questar Pipeline that resulted in an adverse jury verdict in 1994. The jury awarded an independent producer compensatory damages of approximately $6,100,000 and punitive damages of $200,000 on his claims involving take-or-pay, tax reimbursement, contract breach, and tortuous interference with a contract. The presiding judge has not issued a decision concerning the competing forms of judgment entered by the opposing parties. Consequently, Questar Pipeline and Mountain Fuel have not filed any post-judgment actions or determined whether to appeal. Mountain Fuel expects that any amounts arising from the breach of contract claims will be included in its gas balancing account and recovered in its rates for natural gas service.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of stockholders during the last quarter of 1994.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information concerning the market for the common equity of the Company and the dividends paid on such stock is located in Note N in the Notes to Consolidated Financial Statements. As of March 20, 1995, Questar had 11,545 shareholders of record and estimates that it had an additional 10,000-12,000 beneficial holders.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Note - Selected financial data for 1990-1992 has been reclassified for the reporting of discontinued operations.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
Questar Corporation's 1994 net income was $87,543,000, or $2.16 per share in compared with $81,692,000, or $2.03 per share in 1993 and $80,637,000, or $2.02 per share in 1992.
Exploration and production operations had 1994 income of $40,216,000, compared with $36,325,000 in 1993 and $27,762,000 in 1992. The positive effect of increased natural gas and oil production was diminished by lower selling prices in 1994.
Natural gas transmission operation's income was $25,829,000 in 1994 compared with $23,275,000 in 1993 and $22,463,000 in 1992. Questar Pipeline is expanding storage and gathering services while taking advantage of the terms of Federal Energy Regulatory Commission (FERC) Order No. 636. The current tariff allows recovery of about 96% of the transmission cost of service in the reservation component of rates.
Natural gas distribution operations earned $23,352,000 in 1994 compared with $25,069,000 in 1993, and $23,395,000 in 1992. Temperatures were 9% warmer than normal in 1994, compared with 5% colder than normal in 1993, and 10% warmer than normal in 1992.
Other operations reported a $38,126,000 after-tax gain from the sale of Questar Telecom to Nextel Communications in the third quarter of 1994. The Company received 3,875,950 shares of Nextel common stock in the transaction. At year end 1994, the Company wrote down its investment in Nextel by $61,743,000, which amounted to a $38,126,000 after-tax loss.
Questar spent $276,882,000 for capital expenditures in 1994 and estimates 1995 capital expenditures of $232,500,000. Capital expenditures in 1994 were financed through cash provided from operating activities plus borrowed funds. Long-term debt represented 43% of consolidated capitalization at December 31, 1994.
RESULTS OF OPERATIONS
EXPLORATION AND PRODUCTION - Celsius Energy, Universal Resources and Wexpro (E & P group) conduct exploration and production operations. Following are operating income and statistics for these operations:
Expansion of gas and oil reserves in 1994, 1993 and 1992 led to increased gas- and oil-production volumes. A successful strategy of acquisition, development and exploration employed by the E&P group resulted in a 281% replacement of noncost-of-service gas and oil reserves in 1994, following 76% measured in 1993 and 185% replacement in 1992. Noncost-of-service gas and oil reserves reached 349 Bcfe (billion cubic feet equivalent) at year-end 1994.
Natural gas production increased 17% in 1994 and 32% in 1993 when compared with the prior year's level. Average daily gas production reached 103 MMcf in 1994, 88 MMcf in 1993 and 67 MMcf in 1992. A strategy to produce natural gas wells near full capacity was adopted in the last half of 1992. Oil and natural gas liquids production increased 24% in 1994 after declining 5% in 1993. The E&P group completed three acquisitions with a total cost of $113 million, adding 127 Bcfe of natural gas and oil reserves, related equipment and facilities and liquids extraction plants. These properties, located in the Midcontinent and Southwestern areas of the United States, produced 9 Bcf of natural gas and 435,000 barrels of oil and natural gas liquids in 1994.
Gas-processing plants and gathering systems, acquired along with the reserve purchases, added $6,651,000 of revenues to 1994's performance. The plants generate revenues by extracting liquids from natural gas streams.
Nationally, energy prices declined in 1994 resulting from weak demand, especially in the last half of the year. The average selling price of natural gas dropped 4% in 1994 after increasing 12% in 1993 and declining 2% in 1992. The average selling price received for oil and natural gas liquids production fell for the fourth consecutive year. Prices were 12% lower in 1994, 11% lower in 1993, and 14% lower in 1992.
Natural gas marketing volumes increased 37% in 1994 after decreases of 10% in 1993 and 23% in 1992. Beginning in 1993, the E&P group changed its gas marketing strategy from an emphasis on a volumetric objective to one targeting premium customers and marketing of production from the Company's E&P group.
The E&P group employs price risk management strategies in response to the volatility of energy prices. The E&P group enters into swaps, futures contracts or option agreements to hedge exposure to price fluctuations in connection with marketing production of natural gas and oil, and to secure a known margin for the purchase and resale of gas in marketing activities. The activity resulted in an approximate $.20 per Mcf improvement in the average selling price received for the E&P group's natural gas production. At December 31, 1994 the E&P group held contracts hedging the price for about 45 Bcf of gas and 334,000 bbls of oil.
Revenues from Wexpro's cost-of-service gas operations continued to grow in 1994 as a result of investment and operation of gas-development properties. Activity focused in the Church Buttes, Bruff and Birch Creek areas of southwestern Wyoming. Wexpro's net investment in cost-of-service gas operations was $98,134,000 in 1994, $92,561,000 in 1993 and $81,261,000 in 1992. Wexpro's after-tax return on investment in those properties ranges from 18% and 20%.
NATURAL GAS TRANSMISSION - Questar Pipeline conducts natural gas transmission, storage, and gathering operations. Following are operating income and statistics for these operations:
1994 was the first full year of operations for Questar Pipeline under the regulations of FERC Order No. 636. In this new regulatory environment Questar Pipeline's transportation, gathering and storage services are separate activities, and sales-for resale services have been discontinued. Firm-transportation volumes do not have a significant impact on current operating results because about 96% of the cost of service is recovered equally each month in the reservation component of rates.
Most of Questar Pipeline's transportation capacity has been reserved by firm-transportation customers. Roughly 92% of firm-transportation contracts have remaining terms of at least four years. Firm-transportation customers can release that capacity to third parties when it is not required for their own needs. Mountain Fuel has reserved transportation capacity from Questar Pipeline of approximately 800,000 decatherms per day, or about 85% of the total reserved daily transportation capacity.
Throughput volumes increased 5% in 1994 reflecting increases in services provided to both firm-and interruptible-transportation customers. After $1.5 million of revenues are earned from interruptible transportation services, 90% of remaining interruptible-transportation revenues are credited back to firm-transportation customers. Throughput volumes for Mountain Fuel, which include sales for resale in 1993 and 1992, declined 15% in 1994 because of warmer weather in Mountain Fuel's service area.
Gathering revenues increased 16% in 1994 and 14% in 1993. Gathering activities were unbundled from the sales function in 1991. Volumes of gas gathered for Mountain Fuel have remained level for 1994, 1993 and 1992. However, billings for gas gathered for Mountain Fuel in 1993 and 1992 were based on imputed volumes, which were substantially higher than volumes gathered. Gas volumes gathered for other customers have increased. Questar Pipeline has expanded its gas gathering operations in the past several years in the Birch Creek, Bruff and Henry areas of southwestern Wyoming.
Questar Pipeline began a program in 1993 to expand firm-storage service offered at its Clay Basin storage facility. Working gas storage capacity was increased to 31 Bcf in 1993 and to 41.8 Bcf beginning May 1994. Planned capacity of 46.3 Bcf is projected beginning mid-year 1995. Storage capacity at year-end 1994 was 100% subscribed with contractual terms extending from seven to 30 years. Storage revenues increased $12,922,000 in 1994. Increased capacity and the associated service at Clay Basin resulted in a $3,400,000 addition to storage revenues. The remaining change in storage revenues comes from unbundling and reclassifying peaking storage service from sales-for-resale revenues. Peaking storage is designed to meet peak daily demand requirements of Mountain Fuel.
Questar Pipeline, through a partnership, is a 50% owner of a gas processing plant in southwestern Wyoming. The Blacks Fork Processing plant cost $19.7 million to build and will be operational in the first half of 1995.
NATURAL GAS DISTRIBUTION - Mountain Fuel conducts natural gas distribution operations. Following are operating income and statistics for these operations:
Natural gas deliveries to residential and commercial customers dropped 6% in 1994 after increasing 16% in 1993. These changes parallel temperatures in Mountain Fuel's service area which were 9% warmer than normal in 1994 after being 5% colder than normal in 1993. The number of customers increased by 4.0% in 1994, 3.4% in 1993 and 3.2% in 1992 reflecting record setting growth.
Gas deliveries to industrial customers improved by 1% in 1994 and 5% in 1993. Mountain Fuel's service area has experienced strong economic growth for several successive years. The Company has benefitted from a demand for gas for expanded operations and environmental concerns, especially for the generation of electricity.
Mountain Fuel's allowed return on equity for Utah operations was reduced from 12.1% to 11% effective January 1, 1994, in a general rate case order from the Public Service Commission of Utah (PSCU). In addition, the Company also changed the accounting for revenues for residential and commercial customers from an "as billed" to an "as delivered" basis. Mountain Fuel began accruing gas-distribution revenues for gas delivered to residential and commercial customers but not billed at the end of the reporting period starting in 1993. The impact of these accruals on the income statement has been deferred and is being recognized at the rate of $2,011,000 per year over a five-year period beginning in 1994, in accordance with a PSCU rate order. This rate order also reduces customer rates by $2,011,000 per year over the same five-year period. In addition Mountain Fuel recorded other income of $5,589,000 for a one-time reduction in gas costs associated with these unbilled revenues. This transaction added about $3.5 million to net income in 1994.
Mountain Fuel filed a general rate case in the State of Utah on March 3, 1995 requesting a $9.6 million increase in revenues and a 12.5% return on equity. Management believes the rate increase is necessary to secure an appropriate allowed rate of return and to recover the costs of record customer growth.
In March 1995 Mountain Fuel announced an early retirement opportunity for about 169 employees resulting from consolidation of customer service jobs. This restructuring reflects the substantial gains in efficiency the Company is starting to realize from its investment in customer service system technology. Mountain Fuel expects labor cost savings will exceed the cost of the early retirement program.
OTHER OPERATIONS - Following is a summary of the results from Questar's other operations:
In October 1993 Questar agreed to sell Questar's entire interest in Questar Telecom to Nextel Communications for 3,875,950 shares of Nextel common stock. The sale was completed August 4, 1994 resulting in a pretax gain of $61,743,000 ($38,126,000 after income taxes). Since Questar Telecom represented all of Questar's specialized mobile radio operations, these operations were disclosed as discontinued on Questar's financial statements.
The value of Nextel common stock dropped significantly between August 4, 1994 and year-end 1994. Management judged the decline in value of Nextel common stock to be other-than-temporary and wrote down its investment in Nextel Communications by $61,743,000. This amounted to $38,126,000, or $.95 per share, after income taxes.
The Company also wrote off its investment in FuelMaker in the fourth quarter of 1994. The write-off of investment and a note receivable totalled $3,368,000 and was offset by income tax benefits resulting in no effect on net income.
The Company has been named a potentially responsible party in an environmental clean-up action involving a site in Salt Lake City. The site was the location of chemical operations conducted by Entrada's Wasatch Chemical Division, which ceased operation in 1978. Entrada began remediation in 1994 under a plan approved by both the Environmental Protection Agency and the Utah Department of Health. Settlements have been reached with the other major potentially responsible parties and an accrual has been established for the remedial work costs. Management believes that current accruals of $5,680,000, recorded in deferred credits, will be sufficient for estimated clean-up costs, which are expected to be incurred over the next several years. The Company has recorded a receivable from an insurance company of $4,587,000 for expected payments related to the Wasatch Chemical clean-up. Additional amounts may be collected from the insurance company if clean-up costs are higher than anticipated.
CONSOLIDATED OPERATING RESULTS - Consolidated revenues increased 1% in 1994 as a result of higher natural gas production and gas marketing sales by the E&P group partially offset by lower gas deliveries to Mountain Fuel's residential and commercial customers. Consolidated revenues increased 12% in 1993 due to higher natural gas production from the E&P group and greater volumes sold by Mountain Fuel to residential and commercial customers.
Natural gas purchases declined 5% in 1994 because of lower gas volumes sold by Mountain Fuel after increasing 12% in 1993. Operating and maintenance expenses increased 3% in 1994 and 10% in 1993. The primary reasons for the 1994 increase were expansion of the number of producing properties by the E&P group and more customers and expanded service territory for Mountain Fuel. Higher 1994 operating costs were partially offset by $5,976,000 of gas-production credits received from gas sold from a discontinued pressure maintenance project. Depreciation and amortization expense increased 7% in 1994 and 18% in 1993, due to capital expenditure programs in all lines of business and higher natural gas production. The full cost amortization rate was $.78 per Mcfe in 1994 compared with $.80 per Mcfe in 1993, and $.79 in 1992.
Section 29 income tax credits received from production of gas from certain properties reduced the effective income tax rate. Credits of $10,289,000 in 1994, $11,026,000 in 1993 and $5,722,000 in 1992 increased net income by reducing income tax expenses.
The Company adopted SFAS No.112, Accounting for Postemployment Benefits, on January 1, 1994, by establishing a liability of $3,268,000 offset by a $2,794,000 regulatory asset and expense of $474,000. This statement requires the Company to recognize 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. SFAS No.112 requires the Company to accrue both current and future costs which formerly had been recorded when cash was paid. By December 1994 the total liability had dropped from $3,268,000 to $1,872,000 as a result of designating Medicare as the primary health care provider and increasing the discount rate from 7% to 8.5%. At year-end 1994, Mountain Fuel expensed SFAS No. 112 costs previously recorded as a regulatory asset. The Company expects $450,000 to be recovered in subsequent rate filings by Questar Pipeline.
The Company adopted SFAS No.115, Accounting for Certain Investments in Debt and Equity Securities, in 1994. Investment in securities available for sale, primarily Nextel Communications common stock, is carried at approximate fair value at the balance sheet date. The Company records unrealized gains or losses, net of income taxes, as a separate component of shareholders' equity at the end of each quarter based on the market value of Nextel. Upon sale of the securities, gains or losses will be reported in the determination of income.
The Company adopted SFAS No.119, Accounting for Disclosure of Derivative Financial Instruments and Fair Value of Financial Instruments in 1994. The E&P group enters into swaps, futures contracts or option agreements to hedge exposure to price fluctuations in connection with marketing production of natural gas and oil, and to secure a known margin for the purchase and resale of gas in marketing activities. There is a high degree of correlation of such contracts because timing of production and the hedge contracts are closely matched, and hedge prices are established in the areas of the E&P group's operations. Recognized gains and losses on hedge transactions are matched and reported during the same time period as the related physical transactions. Cash flows from the hedge contracts are reported in the same category as cash flows from the hedged assets.
LIQUIDITY AND CAPITAL RESOURCES
Spending for capital projects rose 64% in 1994 to $276,882,000, while net cash provided from operating activities declined 16% to $163,375,000 resulting in a greater share of funding being supplied from external sources. Short- and long-term debt, net of repayments, increased $139,571,000, in 1994 after a $581,000 reduction in 1993 and a $46,492,000, increase in 1992.
Operating Activities:
Higher net income and higher depreciation and amortization resulting from increased natural gas production were more than offset by reductions in working-capital accounts resulting in less cash provided from operating activities in 1994. The gain from the sale of Questar Telecom and the write-down of investment in Nextel were noncash transactions.
Investing Activities:
Capital expenditures reached a record level in 1994 largely driven by the acquisition of gas and oil properties by the E&P group. Following is a summary of capital expenditures for 1994 and 1993 plus a forecast of 1995 expenditures.
Exploration and Production The E&P group completed three acquisitions with a total cost of $113 million including $3.5 million of assumed liabilities in 1994. The acquisitions added 127 Bcfe of natural gas and oil reserves, related equipment and facilities, and liquids extraction plants. These properties are located in the Southwestern and Midcontinent regions of the United States. The asset purchases were financed through an expansion of an existing production-based credit facility, which was expanded to $135 million.
The exploration and production operations participated in 149 wells in 1994 of which 97 were completed as gas wells, 7 were oil wells, 18 were dry holes and 27 were in progress at year end. The 1994 drilling program had an overall success rate of 85%.
Natural Gas Transmission Questar Pipeline is expanding the capacity of its Clay Basin underground gas storage facility, which involves building compression facilities and injecting cushion gas into the reservoir. After expansion, the storage field will have a total capacity of 110 Bcf, including 46.3 Bcf of working-gas storage. The first phase of the project was completed in May 1994 with an increase in working-gas capacity to 41.8 Bcf. The final phase is scheduled for completion by mid 1995.
Capital projects also added 14 miles of transmission lines and 42 miles of gathering lines in 1994. A major increase in gathering lines will enable Questar Pipeline to provide service to gas producers in the Birch Creek are of southwestern Wyoming.
Natural Gas Distribution Mountain Fuel's capital spending is primarily in response to a record increase in the number of customers, amounting to 21,990 in 1994, 18,075 in 1993 and 16,284 in 1992 due to population growth and construction activity in its service area. Mountain Fuel extended its system by 539 miles of main, feeder and service lines in 1994. The 1995 capital expenditures anticipate a slightly lower level of customer growth.
Other Operations Questar invested an additional $8,080,000 into the operations of Questar Telecom in 1994 according to the sales agreement with Nextel for the purchase of FCC licenses and working capital requirements. Other expenditures were for computers and communications equipment for corporate use. A $30 million amount has been reserved for unspecified projects that may be accepted during 1995.
Financing Activities:
The Company funded its 1994 capital expenditures with cash generated internally plus short- and long-term borrowings. 1995 capital expenditures will be funded through cash generated internally, borrowings and possible monetization of Nextel stock.
The Company has short-term line-of-credit arrangements with several banks under which it may borrow up to $170,700,000. These lines are generally below the prime interest rate and are renewable annually. At December 31, 1994 short-term bank loans amounted to $9,600,000 and commercial-paper borrowings amounted to $85,300,000. Commercial-paper borrowings are backed by the short-term line-of-credit arrangements. Moody's and Standard and Poors have rated Questar's commercial paper P-1 and A-1.
Questar Corporation, the parent company, entered into an long-term agreement with a bank in December 1994 to borrow up to $50 million at variable interest rates. The proceeds were used to refinance commercial-paper borrowings.
In August 1994, the exploration and production group expanded its variable interest rate production-based credit facility from $65 million ($15 million short-term and $50 million long-term), to $135 million ($35 million short-term and $100 million long-term). Part of the proceeds of this revolving-credit term loan were used to repay a bridge loan used to finance the E&P group's 1994 property acquisitions. The remainder will provide financing for future capital expenditures.
During the second quarter of 1994, Mountain Fuel issued $17 million of 30-year notes at an 8.12% interest rate. Mountain Fuel used proceeds from these notes for capital expenditures and operations.
The Company typically has negative net working capital at the end of the year because of short-term borrowings. These borrowings are seasonal and generally peak at the end of December because of cold-weather gas purchases.
Questar has a consolidated capital structure of 43% long-term debt and 57% common shareholders' equity. Moody's and Standard and Poors have rated Mountain Fuel's and Questar Pipeline's long-term debt A1 and A+.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item are submitted in a separate section of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has not changed its independent auditors or had any disagreements with them concerning accounting matters and financial statement disclosures within the last 24 months.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information requested in this item concerning Questar's directors is presented in the Company's definitive Proxy Statement dated April 3, 1995, under the section entitled "Election of Directors" and is incorporated herein by reference. A copy of the definitive Proxy Statement will be filed with the Securities and Exchange Commission on or about April 3, 1995.
The following individuals served as executive officers of the Company during 1994:
Primary Positions Held with Name the Company and Affiliates
R. D. Cash 52 Chairman of the Board of Directors (May 1985); President and Chief Executive Officer, Director (May 1984); Chairman of the Boards of Directors, all affiliates.
D. N. Rose 50 President and Chief Executive Officer, Mountain Fuel (October 1984); Director (May 1984); Director, Mountain Fuel (May 1984); Senior Vice President, Questar (May 1985).
Clyde M. Heiner 56 Senior Vice President, Questar (May 1988); President and Chief Executive Officer, Questar InfoComm (February 1993); President and Chief Executive Officer, Questar Development (May 1984); Director, Entrada (May 1984), Questar Development (May 1984), and Questar InfoComm (February 1993).
A. J. Marushack 59 President and Chief Executive Officer, Questar Pipeline (June 1984); Senior Vice President, Questar (May 1985); Director, Questar Pipeline (May 1984) and Wexpro (May 1985).
Gary L. Nordloh 47 President and Chief Executive Officer, Wexpro, Celsius, and Universal Resources (March 1991); Senior Vice President, Questar (March 1991); Executive Vice President and Chief Operating Officer, Wexpro, Celsius, and Universal Resources (June 1989 to March 1991); Director, Celsius and Wexpro (June 1989); Director, Universal Resources (May 1989); Senior Vice President, Celsius and Wexpro (May 1988 to June 1989).
W. F. Edwards 49 Senior Vice President and Chief Financial Officer, Questar (February 1989); Vice President and Chief Financial Officer, affiliates (at various dates beginning in May 1984); Vice President and Chief Financial Officer, Questar (May 1984 to February 1989); Director, Questar Pipeline (May 1985), Celsius (May 1988), and Universal Resources (May 1988).
R. G. Groussman 59 Vice President and General Counsel (October 1984); Director, Wexpro (November 1976) and Celsius (May 1988).
Connie C. Holbrook 48 Vice President and Corporate Secretary (October 1984); Corporate Secretary, Mountain Fuel and other affiliates (at various dates beginning in March 1982); Director, Celsius (May 1985), Wexpro (May 1988), and Universal Resources (June 1987).
There is no "family relationship" between any of the listed officers or between any of them and the Company's directors. The executive officers serve at the pleasure of the Board of Directors. There is no arrangement or understanding under which the officers were selected. Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is presented in the Company's definitive Proxy Statement dated April 3, 1995, under the section entitled "Section 16(a) Compliance" and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information requested in this item is presented in Questar's definitive Proxy Statement dated April 3, 1995, under the sections entitled "Executive Compensation" and "Election of Directors" and is incorporated herein by reference. The sections of the Proxy Statement labelled "Committee Report on Executive Compensation" and "Cumulative Total Shareholder Return" are expressly not incorporated into this document.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information requested in this item for certain beneficial owners is presented in Questar's definitive Proxy Statement dated April 3, 1995, under the section entitled "Security Ownership, Principal Holders" and is incorporated herein by reference. Similar information concerning the securities ownership of directors and executive officers is presented in the definitive Proxy Statement dated April 3, 1995, under the section entitled "Security Ownership, Directors and Executive Officers" and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information requested in this item for related transactions involving the Company's directors and executive officers is presented in the definitive Proxy Statement dated April 3, 1995, under the section entitled "Election of Directors."
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1)(2) Financial Statements and Financial Statement Schedules. The financial statements identified in the List of Financial Statements are filed as part of this report.
(a)(3) Exhibits. The following is a list of exhibits required to be filed as a part of this report in Item 14(c).
Exhibit No. Exhibit
2.* Plan and Agreement of Merger dated as of December 16, 1986, by and among the Company, Questar Systems Corporation, and Universal Resources Corporation. (Exhibit No. (2) to Current Report on Form 8-K dated December 16, 1986.)
3.1.* Restated Articles of Incorporation effective May 28, 1991. (Exhibit No. 3.2. to Form 10-Q Report for Quarter ended June 30, 1991.)
3.2.* Bylaws (as amended effective August 11, 1992). (Exhibit No. 3. to Form 10-Q Report for Quarter ended June 30, 1992.)
4.1.* Rights Agreement, dated as of March 14, 1986, between the Company and Morgan Guaranty Trust Company of New York pertaining to the Company's Shareholder Rights Plan. (Exhibit No. 4. to Current Report on Form 8-K dated March 14, 1986.)
4.2.* First Amendment to the Rights Agreement, dated as of May 15, 1989, between the Company and Morgan Shareholder Service Trust Company pertaining to the Company's Shareholder Rights Plan. (Exhibit No. 28(a) to Current Report on Form 8-K dated May 15, 1989.)
10.1.* Stipulation and Agreement, dated October 14, 1981, executed by Mountain Fuel; Wexpro; the Utah Department of Business Regulations, Division of Public Utilities; the Utah Committee of Consumer Services; and the staff of the Public Service Commission of Wyoming. (Exhibit No. 10(a) to Mountain Fuel Supply Company's Form 10-K Annual Report for 1981.)
10.2. 1 Questar Corporation Annual Management Incentive Plan, as amended effective February 14, 1995.
10.3.* 1 Questar Corporation Executive Incentive Retirement Plan, as amended effective November 1, 1993. (Exhibit No. 10.3. to Form 10-Q Report for Quarter ended September 30, 1993.)
10.4.* 1 Questar Corporation Stock Option Plan, as amended effective February 13, 1990. (Exhibit No. 10.4. to Form 10-K Annual Report for 1989.)
10.5.* 1 Questar Corporation Long Term Stock Incentive Plan effective March 1, 1991. (Exhibit No. 10.5. to Form 10-K Annual Report for 1990.)
10.6.* 1 Questar Corporation Executive Severance Compensation Plan, as amended effective January 1, 1990. (Exhibit No. 10.5. to Form 10-K Annual Report for 1989.)
10.7.* 1 Questar Corporation Deferred Compensation Plan for Directors, as amended April 30, 1991. (Exhibit No. 10.7. to Form 10-K Annual Report for 1991.)
10.8. 1 Questar Corporation Supplemental Executive Retirement Plan, as amended and restated effective February 14, 1995.
10.9. 1 Questar Corporation Equalization Benefit Plan, as amended and restated effective February 14, 1995.
10.10.* 1 Questar Corporation Stock Option Plan for Directors, as amended effective February 9, 1993. (Exhibit No. 10.10. to Form 10-K Annual Report for 1992.)
10.11.* 1 Form of Individual Indemnification Agreement dated February 9, 1993 between Questar Corporation and Directors. (Exhibit No. 10.11. to Form 10-K Annual Report for 1992.)
10.12.* 1 Questar Corporation Deferred Share Plan, as amended and restated November 1, 1993. (Exhibit No. 10.12. to Form 10-Q Report for Quarter ended September 30, 1993.)
10.13.* 1 Questar Corporation Deferred Compensation Plan as adopted effective November 1, 1993. (Exhibit No. 10.13. to Form 10-Q Report for Quarter ended September 30, 1993.)
10.14.* Agreement and Plan of Reorganization dated April 29, 1994, by and between Nextel Communications, Inc.; Questar Corporation; Advance MobilComm, Inc.; Robert C. Mearns and Francis G. Fuson. (Exhibit No. 10.14 to Form 10-Q Report for Quarter ended June 30, 1994.)
11. Statement concerning computation of earnings per share.
22. Subsidiary Information.
24. Consent of Independent Auditors.
25. Power of Attorney.
27. Financial Data Schedule.
99.1. Form 11-K Annual Report for the Questar Corporation Employee Investment Plan.
99.2. Undertakings for Registration Statements on Form S-3 (No. 33- 48168) and on Form S-8 (Nos. 33-4436, 33-15148, 33-15149, 33- 40800, 33-40801, and 33-48169). ________________________
*Exhibits so marked have been filed with the Securities and Exchange Commission as part of the indicated filing and are incorporated herein by reference.
1 Exhibit so marked is management contract or compensation plan or arrangement.
(b) The Company did not file a Current Report on Form 8-K during the last quarter of 1994.
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14 (a) (1) and (2), (c) and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YEAR ENDED DECEMBER 31, 1994
QUESTAR CORPORATION
SALT LAKE CITY, UTAH
FORM 10-K -- ITEM 14 (a) (1) and (2)
QUESTAR CORPORATION AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Questar Corporation and subsidiaries are included in Item 8:
Consolidated statements of income -- Years ended December 31, 1994, 1993 and 1992
Consolidated balance sheets -- December 31, 1994 and 1993
Consolidated statements of common shareholders' equity -- Years ended December 31, 1994, 1993 and 1992
Consolidated statements of cash flows -- Years ended December 31, 1994, 1993 and 1992
Notes to consolidated financial statements
Financial Schedules, for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission, are not required under the related instructions or are inapplicable, and therefore have been omitted.
Report of Independent Auditors
Shareholders and Board of Directors Questar Corporation
We have audited the accompanying consolidated balance sheets of Questar Corporation and subsidiaries as of December 31, 1994 and 1993 and the related consolidated statements of income, common shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Questar Corporation and subsidiaries at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
As noted in Notes A and J to the financial statements, in 1994 Questar Corporation changed its method of accounting for certain equity securities and postemployment benefits.
ERNST & YOUNG LLP
Salt Lake City, Utah February 10, 1995, except for Note I as to which the date is March 5, 1995
QUESTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
See notes to consolidated financial statements.
QUESTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
See notes to consolidated financial statements.
QUESTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
See notes to consolidated financial statements.
QUESTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
QUESTAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Accounting Policies
Principles of Consolidation: The consolidated financial statements contain the accounts of Questar Corporation and subsidiaries (Questar or the Company). Questar is engaged in three principal lines of business. Oil and gas exploration and production operations (E&P group) are conducted by Celsius Energy Company (Celsius Energy), Universal Resources Corporation and its Questar Energy Division (Universal Resources) and Wexpro Company (Wexpro). Natural gas transmission operations are conducted by Questar Pipeline Company (Questar Pipeline). Natural gas distribution operations are conducted by Mountain Fuel Supply Company (Mountain Fuel). All significant intercompany accounts and transactions have been eliminated in consolidation.
Regulation: Mountain Fuel is regulated by the Public Service Commission of Utah (PSCU) and the Public Service Commission of Wyoming (PSCW). Questar Pipeline is regulated by the Federal Energy Regulatory Commission (FERC). These regulatory agencies establish rates for the storage, transportation and sale of natural gas. The regulatory agencies also regulate, among other things, the extension and enlargement or abandonment of jurisdictional natural gas facilities. Regulation is intended to permit the recovery, through rates, of the cost of service, including a rate of return on investment.
The financial statements of rate-regulated businesses are presented in accordance with regulatory requirements. Methods of allocating costs to time periods, in order to match revenues and expenses, may differ from those of nonregulated businesses because of cost-allocation methods used in establishing rates.
Revenue Recognition: Revenues are recognized in the period that services are provided or products are delivered. In 1993, Mountain Fuel began accruing gas distribution revenues for gas delivered to residential and commercial customers but not billed at the end of the accounting period. Rate-regulated affiliates periodically collect revenues subject to possible refunds pending final orders from regulatory agencies. These companies establish 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.
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. The Company believes that it has adequately reserved for expected credit-related losses and that the carrying amount of trade receivables approximates fair value.
Property, Plant and Equipment: Property, plant and equipment are stated at cost. Celsius Energy and Universal Resources account for exploration and development activities using the full-cost accounting method. Under the full-cost method, all costs associated with acquisition, exploration and development of oil and gas reserves are capitalized. If net capitalized costs exceed the present value of estimated future net revenues from proved oil and gas reserves plus the fair market value of unproved properties, the excess is expensed. Wexpro uses the successful-efforts accounting method to account for its production and development activities under the terms of the Wexpro settlement agreement (See Note K).
The provision for depreciation and amortization is based upon rates that will amortize costs of assets over their estimated useful lives. The costs of natural gas distribution and natural gas transmission property, plant and equipment, excluding gas wells, are amortized using the straight-line method. The costs of oil and gas wells, production plants and leaseholds are amortized using the unit-of-production method. Average depreciation and amortization rates used were as follows:
Price Risk Management: The E&P group enters into swaps, futures contracts or option agreements to hedge exposure to price fluctuations in connection with marketing production of natural gas and oil, and to secure a known margin for the purchase and resale of gas in marketing activities. There is a high degree of correlation of such contracts because timing of production and the hedge contracts are closely matched, and hedge prices are established in the areas of the E&P group's operations. Recognized gains and losses on hedge transactions are matched and reported during the same time period as the related physical transactions. Cash flows from the hedge contracts are reported in the same category as cash flows from the hedged assets. Some hedge contracts are designed to be settled through the delivery of natural gas or oil.
Securities Available for Sale: Available-for-sale securities consist of 3,875,950 shares of Nextel Communications' common stock carried at approximate fair value at the balance sheet date. The Company records unrealized gains or losses, net of income taxes, as a separate component of shareholders' equity at the end of each quarter based on the market value of Nextel. Upon sale of the securities, gains or losses will be included in the determination of income. At December 31, 1994, Questar Corporation wrote-down its investment in Nextel to reflect an other-than-temporary decline in value.
Investment in Unconsolidated Affiliates: The Company uses the equity method to account for investments in affiliates in which it does not own a controlling interest. Principal affiliates include: Overthrust Pipeline Company, TransColorado Gas Transmission Company, Canyon Creek Compression Company and Western Market Center. The Company's investment in these affiliates equals the underlying equity in net assets.
Income Taxes: Effective January 1, 1992 the Company adopted Statement of Financial Accounting Standard (SFAS) No. 109 by recording a cumulative effect of the change in accounting related to prior years. The deferred tax balance represents the temporary differences between book and taxable income multiplied by the effective tax rates. These temporary differences relate primarily to depreciation, intangible drilling costs, unbilled revenues, leasehold costs, purchased-gas adjustments and net operating loss carryforwards. Mountain Fuel and Questar Pipeline use the deferral method to account for investment tax credits as required by regulatory commissions. The Company allocates income taxes to subsidiaries on a separate return basis except that subsidiaries are paid for all tax benefits utilized in the consolidated tax return.
Reacquisition of Debt: Gains and losses on the reacquisition of debt by Mountain Fuel and Questar Pipeline are deferred and amortized as debt expense over the remaining life of the issue or the life of the replacement debt in order to match regulatory treatment.
Allowance for Funds Used During Construction: The Company's rate regulated subsidiaries capitalize the cost of capital during the construction period of plant and equipment. This amounted to $1,759,000 in 1994, $1,725,000 in 1993, and $1,153,000 in 1992.
Earnings Per Common Share: Earnings per common share are computed by dividing net income less preferred stock dividends by the weighted average number of common shares outstanding during the year. Common stock equivalents in the form of stock options do not have a material dilutive effect on the earnings-per-share calculations and are excluded from the computation.
Cash and Short-Term Investments: Short-term investments consist principally of Euro-time deposits and repurchase agreements with maturities of three months or less.
Note B - Discontinued Operations
In October 1993, Questar reached an agreement with Nextel Communications (NASD:CALL) to sell Questar's entire interest in Questar Telecom for 3,875,950 unregistered shares of Nextel common stock. The sale was completed August 4, 1994, resulting in a pretax gain of $61,743,000 ($38,126,000 after income taxes) based on the closing price of Nextel's common stock. Since Questar Telecom represented all of Questar's specialized mobile radio operations, these operations were disclosed as discontinued on Questar's financial statements. Net losses from Questar Telecom subsequent to the sales agreement were deferred until the sale was recorded. The Company expects to receive registered shares when Motorola's merger with Nextel is finalized, about mid-year 1995.
Questar Telecom's operating results prior to the sale were as follows:
Questar's net investment in discontinued operations was as follows:
Note C - Debt
The Company has short-term line-of-credit arrangements with several banks under which it may borrow up to $170,700,000. These lines have interest rates generally below the prime interest rate and are renewable annually. At December 31, 1994, outstanding short-term bank loans were $9,600,000 at an average interest rate of 5.95% and commercial-paper borrowings were $85,300,000 at an average interest rate of 5.96%. At December 31, 1993, outstanding short-term bank loans were $12,300,000 at an average interest rate of 3.49% and commercial-paper borrowings were $66,000,000 at an average interest rate of 3.45%. Commercial-paper borrowings are backed by the short-term line-of-credit arrangements.
The details of long-term debt at December 31, were as follows:
Maturities of long-term debt for the five years following December 31, 1994, are as follows:
Questar Corporation, the parent company, entered into an agreement with a bank in December 1994 to borrow up to $50 million at variable interest rates. The proceeds were used to refinance commercial paper borrowings.
In August 1994 the exploration and production group expanded its variable interest rate production-based credit facility from $65 million ($15 million short-term and $50 million long-term), to $135 million ($35 million short-term and $100 million long-term). Part ot the proceeds of this revolving-credit term loan were used to repay a bridge loan used to finance the E&P group's 1994 property acquisitions. The remainder will provide financing for future capital expenditures.
During the second quarter of 1994 Mountain Fuel issued $17 million of 30-year notes at an 8.12% interest rate. Mountain Fuel used proceeds from these notes for capital expenditures and operations.
Cash paid for interest was $38,110,000 in 1994, $33,414,000 in 1993, and $36,115,000 in 1992.
Note D - Redeemable Cumulative Preferred Stock
Mountain Fuel has authorized 4,000,000 shares of nonvoting redeemable cumulative preferred stock with no par value. The two current outstanding issues of stock have a stated and redemption value of $100 per share.
Redemption requirements for the five years following December 31, 1994, are as follows:
Note E - Financial Instruments and Hedging Activities
The carrying amounts and estimated fair values of the Company's financial instruments were as follows:
The Company used the following methods and assumptions in estimating fair values: (1) Cash and short-term investments - the carrying amount approximates fair value; (2) Short-term loans - the carrying amount approximates fair value; (3) Long-term debt - the carrying amount of variable- rate debt approximates fair value, the fair value of marketable debt is based on quoted market prices, and the fair value of other debt is based on the discounted present value of cash flows using the Company's current borrowing rates; (4) Redeemable cumulative preferred stock - the fair value is based on the discounted present value of cash flows using current preferred stock rates. Fair value is calculated at a point in time and does not represent what the Company would pay to retire the debt securities.
Price Risk Management: The E&P group periodically enters into swaps, futures contracts or options agreements to hedge its exposure to price fluctuations in connection with marketing production of natural gas and oil, and to secure a known margin for the purchase and resale of gas in marketing activities. Recognized gains and losses on hedge transactions are reported as a component of the related physical transaction. A majority of the contracts and agreements terminate in 12 months or less; however, some contracts and agreements extend beyond a year.
The E&P group bears some risk of loss if counterparties fail to perform according to the terms of the contracts. Management believes that credit-review procedures and bad-debt reserves have adequately compensated for usual and customary losses.
While it is a primary objective of the E&P group to protect product sales against market loss, hedging transactions give rise to market risk, which represents the potential loss caused by changes in market value. The loss is reported along with any gains as a factor in determining revenues when products are sold.
At December 31, 1994, the E&P group held contracts covering prices for about 45 million dth of natural gas, primarily for gas marketing activities, and 334,000 barrels of oil. The contracts, which primarily were swaps, have terms extending through February 1997; however, approximately 87% terminate in 1995. Face value of these contracts was about $97 million. Market value of hedging contracts at December 31, 1994, was $6.4 million less than face value. However, this calculation of market value assumes that the E&P group closed its position on that date and does not recognize the physical side of these transactions. Deferred losses on anticipated transactions are not material.
Note F - Common Stock
Employee Investment Plan: An Employee Investment Plan (ESOP) allows the majority of employees to purchase Company stock or other investments through payroll deductions. The Company makes contributions to the ESOP of approximately 75% of the employee's purchases. In June 1989, the Company sold 1,992,884 shares of its common stock (LESOP shares) to the trustee of the ESOP. The ESOP trustee financed the purchase of stock by borrowing $35 million from the Company. The note receivable from the ESOP was recorded as a reduction of common shareholders' equity. At the same time, the Company borrowed $35 million from a group of insurance companies. Interest expense on these notes to the insurance companies totaled $2,892,000 in 1994 and $2,918,000 in 1993 and 1992.
The ESOP is repaying the loan to the Company over ten years using Company contributions and dividends on the LESOP shares. The Company's expense and contribution to the ESOP, dividends paid by the Company to the ESOP on the LESOP shares, and income tax benefits for dividends paid on ESOP shares and dividends paid directly to ESOP are summarized below:
Dividend Reinvestment and Stock Purchase Plan: A Dividend Reinvestment and Stock Purchase Plan (Reinvestment Plan) allows shareholders to reinvest dividends or invest additional funds in common stock. The Reinvestment Plan purchased common stock from the Company amounting to 164,124 shares in 1994, 148,708 shares in 1993 and 241,322 shares in 1992. At December 31, 1994, 895,741 shares were reserved for future issuance.
Stock Plans: The Company has a Long-term Stock Incentive Plan for officers and key employees and a Stock Option Plan for nonemployee directors (Stock Plans). The Long-term Stock Incentive Plan was approved by shareholders in 1991 and replaces a previous stock option plan for officers and key employees. The number of shares available for options or other stock awards under the Long-term Stock Incentive Plan is increased each year by 1% of the outstanding shares of common stock on the first day of the calendar year. No awards may be granted under the Long-term Stock Incentive Plan after May 2001. The Stock Option Plan for nonemployee directors was amended in 1991 and the term extended to May 1996.
Transactions involving option shares in the Stock Plans are summarized as follows:
Assumptions used to calculate cost at January 1, were as follows:
The Company used a discount rate of 8.5% and a rate of increase in compensation of 6.35% to measure the actuarial present value of benefits at December 31, 1994. The status of the plan at December 31 was as follows:
The Company pays a portion of the health-care costs and all the life insurance costs for retired employees. Effective January 1, 1992, this program was changed for employees retiring after January 1, 1993, to link the health-care benefit to years of service and to limit the Company's monthly health-care contribution per individual to 170% of the 1992 contribution. The Company's policy is to fund amounts allowable for tax deduction under the Internal Revenue Code. Plan assets consist of equity securities, corporate and U.S. government debt obligations, and insurance company general accounts.
The Company adopted the provisions of SFAS No. 106 on Employer's Accounting for Postretirement Benefits Other than Pensions effective January 1, 1993. This statement requires the Company to expense the costs of postretirement benefits, principally health-care benefits, over the service life of employees using an accrual method. The Company is amortizing the transition obligation over a 20-year period. Total cost of postretirement benefits other than pensions under SFAS No. 106 was $6,279,000 in 1994 and $5,918,000 in 1993 compared with the costs based on cash payments to retirees plus the prefunding of some benefits totaling $1,553,000 in 1992.
Components of the postretirement benefit cost for 1994 and 1993 were as follows:
Assumptions used to calculate cost at January 1, were as follows:
1994 1993 Discount rate 7.00% 7.00% Long-term return on assets 8.50% 8.50% Health-care inflation rate 13.50% 13.50% grading to grading to 5.50% 6.50% at .50% per year
A 1% increase in the health-care inflation rate would increase the service cost by $9,000, the interest cost by $248,000 and the accumulated benefit obligation by $3,333,000.
The Company used a discount rate of 8.5% to measure the actuarial present value of benefits at December 31, 1994. The status of the postretirement benefit programs at December 31, was as follows:
Mountain Fuel and Questar Pipeline account for approximately 57% and 18% of the postretirement benefit costs, respectively. The impact of SFAS No. 106 on Questar's future net income will be mitigated by recovery of these costs from customers. Both the PSCU and the PSCW allowed Mountain Fuel to recover future SFAS No. 106 costs in the 1993 rate cases if the amounts are funded in an external trust. The FERC issued an order granting rate-recovery methodology for SFAS No. 106 costs to the extent that pipeline companies contribute the amounts to an external trust. Questar Pipeline expects to receive coverage of future SFAS No. 106 costs in its next general rate case and recovery of costs in excess of the amounts currently included in rates for the period from 1993 to the rate case filing if the rate case is filed prior to January 1, 1996.
The Company adopted SFAS No.112, Accounting for Postemployment Benefits, on January 1, 1994, by establishing a liability of $3,268,000 offset by a $2,794,000 regulatory asset and expense of $474,000. This statement requires the Company to recognize 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. SFAS No.112 requires the Company to accrue both current and future costs which formerly had been recorded when cash was paid. By December 1994 the total liability had dropped from $3,268,000 to $1,872,000 as a result of designating Medicare as the primary health care provider and increasing the discount rate from 7% to 8.5%. At year-end 1994, Mountain Fuel expensed SFAS No. 112 costs, previously recorded as a regulatory asset. The Company expects $450,000 to be recovered in subsequent rate filings by Questar Pipeline.
Note K - Wexpro Settlement Agreement
Wexpro's operations are subject to the terms of the Wexpro settlement agreement. The agreement was effective August 1, 1981, and sets forth the rights of Mountain Fuel's utility operations to share in the results of Wexpro's operations. The agreement was approved by the PSCU and PSCW in 1981 and affirmed by the Supreme Court of Utah in 1983. Major provisions of the settlement agreement are as follows:
a. Wexpro continues to hold and operate all oil-producing properties previously transferred from Mountain Fuel's nonutility accounts. The oil production from these properties is sold at market prices, with the revenues used to recover operating expenses and to give Wexpro a return on its investment. The rate of return is adjusted annually and is currently 14.0%. Any net income remaining after recovery of expenses and Wexpro's return on investment is divided between Wexpro and Mountain Fuel, with Wexpro retaining 46%.
b. Wexpro conducts developmental oil drilling on productive oil properties and bears any costs of dry holes. Oil discovered from these properties is sold at market prices, with the revenues used to recover operating expenses and to give Wexpro a return on its investment in successful wells. The rate of return is adjusted annually and is currently 19.0%. Any net income remaining after recovery of expenses and Wexpro's return on investment is divided between Wexpro and Mountain Fuel, with Wexpro retaining 46%.
c. Amounts received by Mountain Fuel from the sharing of Wexpro's oil income are used to reduce natural gas costs to utility customers.
d. Wexpro conducts developmental gas drilling on productive gas properties and bears any costs of dry holes. Natural gas produced from successful drilling is owned by Mountain Fuel. Wexpro is reimbursed for the costs of producing the gas plus a return on its investment in successful wells. The return allowed Wexpro is currently 22.0%.
e. Wexpro operates natural gas properties owned by Mountain Fuel. Wexpro is reimbursed for its costs of operating these properties, including a rate of return on any investment it makes. This rate of return is currently 14.0%.
Note L - Oil and Gas Producing Activities (Unaudited)
The following information discusses the Company's oil and gas producing activities. Separate disclosures are presented for cost-of-service and noncost-of-service activities.
Cost-of-service properties are those for which the operations and return on investment are governed by state regulatory agencies or the Wexpro settlement agreement (see Note K). Production from gas properties owned or operated by Wexpro is delivered to Mountain Fuel at cost of service. Noncost-of-service properties are properties from which production is sold at market prices. These properties include all Celsius Energy and Universal Resources properties and Wexpro oil properties. Production from Wexpro oil properties is sold at market prices and the income is shared with Mountain Fuel after a specified return on investment is earned.
Information on the results of operations and standardized measure of future net cash flows has not been included for cost-of-service activities because operating results and the value of the related properties is dependent upon returns established by state regulatory agencies based on historical costs or the terms of the Wexpro settlement agreement.
NONCOST-OF-SERVICE ACTIVITIES
Capitalized Costs: The aggregate amounts of costs capitalized for noncost-of-service oil- and gas-producing activities and the related amounts of accumulated depreciation and amortization follow:
Full-Cost Amortization: Unproved properties held by Celsius Energy and Universal Resources are excluded from amortization until evaluation. A summary of costs excluded from amortization at December 31, 1994, and the year in which these costs were incurred is as follows:
Costs Incurred: The following costs were incurred in noncost-of-service oil- and gas-producing activities.
Results of Operations: Following are the results of operations of noncost-of-service oil- and gas-producing activities before corporate overhead and interest expenses.
Note 1 - Income tax expense has been reduced by tight-sands gas production credits of $5,619,000 in 1994, $5,563,000 in 1993 and $1,441,000 in 1992.
Estimated Quantities of Proved Oil and Gas Reserves for Noncost-of-Service Properties: The majority of the following estimates were made by Ryder Scott Company, H. J. Gruy and Company and Netherland, Sewell & Associates, independent reservoir engineers, and the remainder by the Company's reservoir engineers. Reserve estimates are based on a complex and highly interpretive process that is subject to continuous revision as additional production and development-drilling information becomes available. The quantities reported below are based on existing economic and operating conditions using current prices and operating costs. All oil and gas reserves reported are located in the United States. The Company does not have any long-term supply contracts with foreign governments or reserves of equity investees.
Standardized Measure of Future Net Cash Flows Relating to Proved Reserves for Noncost-of-Service Activities: Future net cash flows were calculated using December 31, 1994, prices and known contract price changes. Year-end production, development costs and income tax rates were used to compute the future net cash flows. All cash flows were discounted at 10% to reflect the time value of cash flows, without regard to the risk of specific properties.
The assumptions used to derive the standardized measure of future net cash flows are those required by the FASB and do not necessarily reflect the Company's expectations. The usefulness of the standardized measure of future net cash flows is impaired because of the reliance on reserve estimates and production schedules that are inherently imprecise, and because the costs of oil-income sharing under the Wexpro settlement agreement were not included.
The principal sources of change in the standardized measure of discounted future net cash flows were:
COST-OF-SERVICE ACTIVITIES
Capitalized Costs: Capitalized costs for cost-of-service oil- and gas-producing activities net of the related accumulated depreciation and amortization were as follows:
Costs Incurred: Costs incurred by Wexpro for cost-of-service gas-producing activities were $15,636,000 in 1994, $21,829,000 in 1993, and $18,348,000 in 1992.
Estimated Quantities of Proved Oil and Gas Reserves for Cost-of-Service Properties: The following estimates were made by the Company's reservoir engineers. No estimates are available for cost-of-service proved undeveloped reserves that may exist.
Note M - Quarterly Financial and Stock Price Data (Unaudited)
Following is a summary of quarterly financial and stock price data. The quarterly results have been reclassified for the discontinued operations.
Note N - Operations by Line of Business
Following is a summary of operations by line of business:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 24th day of March, 1995.
QUESTAR CORPORATION (Registrant)
By /s/ R. D. Cash R. D. Cash Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
/s/ R. D. Cash Chairman, President and Chief R. D. Cash Executive Officer (Principal Executive Officer)
/s/ W. F. Edwards Senior Vice President and W. F. Edwards Chief Financial Officer (Principal Financial and Accounting Officer)
*R. D. Cash Director *U. Edwin Garrison Director *James A. Harmon Director *W. W. Hawkins Director *W. N. Jones Director *Robert E. Kadlec Director *Dixie L. Leavitt Director *Neal A. Maxwell Director *Gary G. Michael Director *Mary Mead Director *D. N. Rose Director *Harris H. Simmons Director
March 24, 1995 *By /s/ R. D. Cash Date R. D. Cash, Attorney in Fact
EXHIBIT INDEX
Exhibit Number Exhibit
2.* Plan and Agreement of Merger dated as of December 16, 1986, by and among the Company, Questar Systems Corporation, and Universal Resources Corporation. (Exhibit No. (2) to Current Report on Form 8-K dated December 16, 1986.)
3.1.* Restated Articles of Incorporation effective May 28, 1991. (Exhibit No. 3.2. to Form 10-Q Report for Quarter ended June 30, 1991.)
3.2.* Bylaws (as amended effective August 11, 1992). (Exhibit No. 3. to Form 10-Q Report for Quarter ended June 30, 1992.)
4.1.* Rights Agreement, dated as of March 14, 1986, between the Company and Morgan Guaranty Trust Company of New York pertaining to the Company's Shareholder Rights Plan. (Exhibit No. 4. to Current Report on Form 8-K dated March 14, 1986.)
4.2.* First Amendment to the Rights Agreement, dated as of May 15, 1989, between the Company and Morgan Shareholder Service Trust Company pertaining to the Company's Shareholder Rights Plan. (Exhibit No. 28(a) to Current Report on Form 8-K dated May 15, 1989.)
10.1.* Stipulation and Agreement, dated October 14, 1981, executed by Mountain Fuel; Wexpro; the Utah Department of Business Regulations, Division of Public Utilities; the Utah Committee of Consumer Services; and the staff of the Public Service Commission of Wyoming. (Exhibit No. 10(a) to Mountain Fuel Supply Company's Form 10-K Annual Report for 1981.)
10.2. 1 Questar Corporation Annual Management Incentive Plan, as amended effective February 14, 1995.
10.3.* 1 Questar Corporation Executive Incentive Retirement Plan, as amended effective November 1, 1993. (Exhibit No. 10.3. to Form 10-Q Report for Quarter ended September 30, 1993.)
10.4.* 1 Questar Corporation Stock Option Plan, as amended effective February 13, 1990. (Exhibit No. 10.4. to Form 10-K Annual Report for 1989.)
10.5.* 1 Questar Corporation Long Term Stock Incentive Plan effective March 1, 1991. (Exhibit No. 10.5. to Form 10-K Annual Report for 1990.)
10.6.* 1 Questar Corporation Executive Severance Compensation Plan, as amended effective January 1, 1990. (Exhibit No. 10.5. to Form 10-K Annual Report for 1989.)
10.7.* 1 Questar Corporation Deferred Compensation Plan for Directors, as amended April 30, 1991. (Exhibit No. 10.7. to Form 10-K Annual Report for 1991.)
10.8. 1 Questar Corporation Supplemental Executive Retirement Plan, as amended and restated effective February 14, 1995.
10.9. 1 Questar Corporation Equalization Benefit Plan, as amended and restated effective February 14, 1995.
10.10.* 1 Questar Corporation Stock Option Plan for Directors, as amended effective February 9, 1993. (Exhibit No. 10.10. to Form 10-K Annual Report for 1992.)
10.11.* 1 Form of Individual Indemnification Agreement dated February 9, 1993 between Questar Corporation and Directors. (Exhibit No. 10.11. to Form 10-K Annual Report for 1992.)
10.12.* 1 Questar Corporation Deferred Share Plan, as amended and restated November 1, 1993. (Exhibit No. 10.12. to Form 10-Q Report for Quarter ended September 30, 1993.)
10.13.* 1 Questar Corporation Deferred Compensation Plan as adopted effective November 1, 1993. (Exhibit No. 10.13. to Form 10-Q Report for Quarter ended September 30, 1993.)
10.14.* Agreement and Plan of Reorganization dated April 29, 1994, by and between Nextel Communications, Inc.; Questar Corporation; Advance MobilComm, Inc.; Robert C. Mearns and Francis G. Fuson. (Exhibit No. 10.14 to Form 10-Q Report for Quarter ended June 30, 1994.)
11. Statement concerning computation of earnings per share.
22. Subsidiary Information.
24. Consent of Independent Auditors.
25. Power of Attorney.
27. Financial Data Schedule.
99.1. Form 11-K Annual Report for the Questar Corporation Employee Stock Purchase Plan.
99.2. Undertakings for Registration Statements on Form S-3 (No. 33-48168) and on Form S-8 (Nos. 33-4436, 33- 15148, 33-15149, 33-40800, 33-40801, and 33-48169). ________________________
*Exhibits so marked have been filed with the Securities and Exchange Commission as part of the indicated filing and are incorporated herein by reference.
1 Exhibit so marked is management contract or compensation plan or arrangement.