Annual Report (Form 10-K), fiscal year 1994





ITEM 3. LEGAL PROCEEDINGS
There are various legal and regulatory proceedings pending that involve the Company and its affiliates. While it is not feasible to predict or determine the outcome of these proceedings, the Company's management believes that the outcome will not have a material adverse effect on the Company's financial position.
Mountain Fuel, as a result of acquiring Questar Pipeline's gas purchase contracts, is responsible for any judgment rendered against Questar Pipeline in a lawsuit that was tried before a jury in 1994. The jury awarded an independent producer compensatory damages of approximately $6,100,000 and punitive damages of $200,000 on his claims involving take-or-pay, tax reimbursement, contract breach, and tortious interference with a contract. A judgment has not be entered because the presiding judge has not issued a decision concerning the competing forms of judgment entered by the opposing parties. The producer's counterclaims originally exceeded $57,000,000, but were reduced to less than $10,000,000, when the presiding judge dismissed with prejudice some of the claims prior to the jury trial. 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 sales service.
As a result of its former ownership of Entrada and Wasatch Chemical Company, Mountain Fuel has been named as a "potentially responsible party" for contaminants located on property owned by Entrada in Salt Lake City, Utah. Questar and Entrada have also been named as potentially responsible parties. (Entrada and the Company are both direct, wholly owned subsidiaries of Questar; prior to October 2, 1984, Mountain Fuel was the parent of Entrada.) The property, known as the Wasatch Chemical property, was the location of chemical operations conducted by Entrada's Wasatch Chemical division, which ceased operation in 1978. A portion of the property is included on the national priorities list, commonly known as the "Superfund" list.
In September of 1992, a consent order governing clean- up activities was formally entered by the federal district court judge presiding over the underlying litigation involving the property. This consent order was agreed to by Questar, Entrada, the Company, the Utah Department of Health and the Environmental Protection Agency (the EPA).
Entrada has obtained approval for a specific design using an in situ vitrification procedure to clean up the Wasatch Chemical property and began remediation activities during 1994. The clean-up procedure may take as long as three years.
Entrada has accounted for all costs spent on the environmental claims and has also accounted for all settlement proceeds, accruals and insurance claims. It has received cash settlements, which together with accruals and insurance receivables, should be sufficient for future clean-up costs.
Mountain Fuel has consistently maintained that Entrada should be responsible for any liability imposed on the Questar group as a result of actions involving Wasatch Chemical. The Company has not paid any and does not expect to pay any costs associated with the clean-up activities for the property.
Utah Power recently filed a lawsuit against Mountain Fuel claiming that the Company is responsible for contamination located on property adjacent to Mountain Fuel's operations center in Salt Lake City. The operations center was the site of an abandoned coal gasification plant. The Company (in its own name or through a predecessor) did not own the property that is the subject of the lawsuit and does not believe that it is responsible for the coal tar found on the property. Cleanup activities on the property are monitored by the EPA, but the property is not a listed "Superfund" site.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1994, Mountain Fuel did not submit any matters to a vote of security holders.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's outstanding shares of common stock, $2.50 par value, are owned by Questar. Information concerning the dividends paid on such stock and the ability to pay dividends is reported in the Statements of Common Shareholder's Equity and the Notes to Financial Statements included in Item 8.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Following is a summary of revenues and operating information for the Company's operations:
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. Temperatures for the first two months of 1995 have been 23% warmer that normal and 8% warmer than during the same two months of 1994. 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 electricity generation.
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, a 12.5% return on equity and a weather normalization adjustment mechanism. Management believes the rate increase is necessary to secure an appropriate allowed rate of return and to recover the costs of record customer growth. Mountain Fuel believes the proposed weather adjustment mechanism would benefit customers, whose bills would be less variable, and the Company, which would have more stability in its revenues.
Mountain Fuel announced plans in early 1995 to reorganize and consolidate several functions in an effort to reduce costs. In March 1995 Mountain Fuel offered an early retirement opportunity to 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. Mountain Fuel also intends to phase out four service centers beginning in 1995, while reorganizing six others. The restructuring and consolidation is intended to improve service to customers while maintaining the Company's position as a low-cost energy provider. Consolidation of sales and marketing activities was also part of the announced restructuring.
Natural gas purchases decreased 9% in 1994 and increased 6% in 1993. These changes were consistent with changes in volumes sold to residential and commercial customers, which were primarily weather related.
Operating and maintenance expenses increased 2% in 1994 and 16% in 1993 primarily because of the costs associated with more customers and an expanded service territory. Depreciation and amortization expense increased 6% in 1994 and 12% in 1993 due to capital expenditure programs and higher levels of natural gas production.
The Company adopted SFAS No.112, Accounting for Postemployment Benefits, on January 1, 1994, by establishing a liability of $1,538,000 offset by a regulatory asset. 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 $1,538,000 to $1,039,000 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, in other income deductions.
The effective income tax rate was 25.3% in 1994, 23.5% in 1993 and 24.2% in 1992. Section 29 income tax credits received from production of gas from certain properties reduced the effective income tax rate. Credits amounted to $4,670,000 in 1994, $5,463,000 in 1993 and $4,281,000 in 1992. The three years include credits recognized for prior years' gas production of $1,742,000 in 1994, $1,174,000 in 1993 and $1,116,000 in 1992. The 1993 federal income tax rate increased to 35% and the effect of the higher tax rate on deferred income taxes was recorded 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 is responsible for a judgment in a lawsuit involving the Company, Questar Pipeline and a gas producer. In March 1994, a jury awarded the gas producer damages of approximately $6.3 million on claims involving take-or-pay, tax reimbursement and breach of contract. Mountain Fuel expects that the judgment will be included in its gas balancing account and recovered through customer rates. The judgment is not expected to have a significant impact on the Company's results of operations, financial position or liquidity.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash provided from operating activities decreased 11% in 1994. Net cash provided from operating activities was $33,143,000 in 1994, $37,139,000 in 1993 and $50,600,000 in 1992. Accounts payable and accrued expenses decreased $16,141,000 in 1994, primarily because of lower gas purchases. Mountain Fuel purchased gas for storage purposes in the last quarter of 1993 when it assumed the gas-purchase function from Questar Pipeline in response to FERC Order No. 636. Inventories increased by $20,869,000 in 1993, primarily for gas stored underground. Changes in the purchased-gas adjustment account used cash of $8,656,000 in 1994 after providing cash of $4,686,000 in 1993 and $4,586,000 in 1992.
The assumption of gas-purchase contracts and the gas-supply purchase activity resulted in several changes to Mountain Fuel's working capital. Mountain Fuel acquired an inventory of gas stored underground to meet customer requirements. Accounts payable to unaffiliated parties increased while accounts payable to affiliates decreased because of direct purchases from gas producers.
Investing Activities
Following is a summary of capital expenditures for 1994 and 1993, and a forecast of 1995 expenditures.
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.
Mountain Fuel transferred a building with a net book value of $8,915,000 to an affiliate in the third quarter of 1994.
Financing Activities
The Company funded 1994 capital expenditures with cash provided from operations, a capital contribution and borrowings under a medium-term note program. The 1995 capital expenditures are expected to be financed with cash provided from operations and borrowings from Questar.
The Company has a short-term line-of-credit arrangement with a bank under which it may borrow up to $500,000, below the prime interest rate. The arrangement is renewable on an annual basis. At December 31, 1994, no amounts were borrowed under this arrangement. Questar loans funds to the Company under a short-term borrowing arrangement. Outstanding short-term notes payable to Questar totaled $53,500,000 with an interest rate of 6.11% at December 31, 1994.
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.
On July 1, 1994, Mountain Fuel received a $20,000,000 capital contribution from Questar.
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.
Mountain Fuel has a capital structure of 45% long-term debt, 2% preferred stock and 53% common equity. Moody's and Standard and Poors have rated Mountain Fuel's long-term debt A1 and A+.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements are included in Part IV, Item 14, herein.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Mountain Fuel has not changed its independent auditors or had any disagreements with them concerning accounting matters and financial statement disclosures within the last 24 months.
PART III
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Company's directors and executive officers is located in the following chart:
Business Experience and Positions Held Name Age With the Company and Affiliates
M. E. Benefield 55 Vice President, Gas Supply, May 1992; Vice President, Planning and Corporate Development, Questar (March 1989 to May 1992.)
R. D. Cash 52 Director, May 1977; Chairman of the Board, May 1985; Director, President and Chief Executive Officer, Questar, May 1984; Chairman of the Board, Questar, May 1985. Director, Zions First National Bank and Zions Bancorporation and Associated Electric and Gas Insurance Servicing Limited; Trustee, Southern Utah University.
W. F. Edwards 49 Vice President and Chief Financial Officer, May 1984; Senior Vice President and Chief Financial Officer, Questar, February 1989; Vice President and Chief Financial Officer, Questar, May 1984 to February 1989.
Susan Glasmann 47 Vice President, Marketing, February 1994; General Manager, Marketing, April 1991 to February 1994; Manager, Corporate Communications, Questar, October 1989 to April 1991.
Robert E. Kadlec 61 Director, March 1987; Director, Questar, March 1987; President and Chief Executive Officer, BC Gas Inc. (Vancouver, British Columbia); Director, BC Gas Inc., Trans Mountain Pipe Line Company Ltd., Bank of Montreal, British Pacific Properties Ltd.; and International Forest Products Limited.
Dixie L. Leavitt 65 Director, May 1987; Director, Questar, May 1987; Chairman of the Board, Leavitt Group Agency Association (a group of approximately 45 separate insurance agencies); President and Chairman of entities engaged in dairy, cattle, agriculture, and real estate operations in Utah and southern Nevada; Director, Zions First National Bank.
Gary G. Michael 54 Director, February 1994; Director, Questar, February 1994; Chairman and Chief Executive Officer, Albertson's; Director, Albertson's and member of Board of Directors of the Federal Reserve Bank of San Francisco.
D. N. Rose 50 President and Chief Executive Officer, October 1984; Director, May 1984; Director, Questar, May 1984; Director, Key Bank of Utah; Trustee, Westminster College.
G. H. Robinson 44 Vice President and Controller, April 1991; Vice President, Marketing, March 1985 to April 1991.
Roy W. Simmons 79 Director, May 1968; Senior Director, Questar, May 1992; Director, Questar, May 1984 to May 1992; Chairman, Zions Bancorporation (commercial bank holding company) and Chairman, Zions First National Bank (commercial bank); Chief Executive Officer, Zions First National Bank to January 1989; Chief Executive Officer, Zions Bancorporation to January 1991; Director, Beneficial Life Insurance Company and Ellison Ranching Company.
S. C. Yeager 47 Vice President, Customer Service, April 1991; Vice President, Retail Operations, March 1985 to April 1991.
Except as otherwise indicated, the executive officers and directors have held the principal occupations described above for more than the past five years. There are no family relationships among the directors and executive officers of the Company. Directors of the Company are elected to serve three-year terms. Executive officers of the Company serve at the pleasure of the Board of Directors.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table lists annual and long-term compensation earned by Mr. D. N. Rose, the Company's President and Chief Executive Officer, and the other four most highly compensated officers during 1992, 1993, and 1994:
Summary Compensation Table
1/Amounts listed under this heading are cash payments earned under the Annual Management Incentive Plans (AMIPs) for the Company and Questar (for Mr. Cash). The amounts listed for Mr. Cash are the amounts allocated to Mountain Fuel.
2/Amounts under this heading include the value (as of the grant date) of any restricted shares of Questar's common stock used in 1993, 1994 and 1995, in lieu of cash, as partial payment of bonuses earned under the Company's Annual Management Incentive Plans and the Company's allocated portion of the value of restricted shares granted to Mr. Cash under Questar's AMIP. All shares of restricted stock vest in two equal, annual installments with the first installment occurring on the first anniversary of the grant date. Dividends are paid on the restricted shares at the same rate dividends are paid on other shares of Questar's common stock. As of year-end 1994, Mr. Rose had 1,766 shares of restricted stock having a market value of $48,565; Mr. Cash had 4,279 shares worth $117,673; Mr. Benefield had 845 shares worth $23,238; Messrs. Robinson and Yeager each had 738 shares worth $20,295.
3/Mountain Fuel's executive officers are granted nonqualified stock options to purchase shares of Questar's common stock under Questar's Long-Term Stock Incentive Plan.
4/Amounts listed under this heading include employer matching and nonmatching contributions, matching "contributions" to the Deferred Share Plan, and directors' fees paid by the Company. The figures opposite Mr. Rose's name include $8,435 in contributions to the Employee Investment Plan for 1994, $12,228 in contributions to the Employee Stock Purchase Plan for 1993, and $10,499 for 1992. They also include directors' fees amounting to $6,100 for 1994, $5,200 for 1993, and $5,600 for 1992, and "contributions" to the Deferred Share Plan of $7,268 for 1994, $1,358 for 1993, and $903 for 1992. The figures opposite Mr. Cash's name include the Company's allocated portion of the matching and nonmatching contributions to the Employee Investment Plan of $3,057 for 1994, $4,334 for 1993, and $3,728 for 1992. They also include directors' fees amounting to $6,200 for 1994, $5,200 for 1993, and $5,600 for 1992, and the Company's allocated portion of "contributions" to the Deferred Share Plan of $8,310 for 1994, $5,412 for 1993, and $4,259 for 1992. The 1994 figure listed opposite Mr. Benefield includes $8,345 in contributions to the Employee Investment Plan and matching "contributions" of $1,543 to the Deferred Share Plan. The 1994 figures for Messrs. Robinson and Yeager include $8,345 in contributions to the Employee Investment Plan and $773 in "matching" contributions to the Deferred Share Plan. The 1992 and 1993 figures opposite the names of Messrs. Benefield, Robinson and Yeager include only the contributions made by (or allocated to) the Company to the Employee Investment Plan (formerly the Employee Stock Purchase Plan) for their respective accounts.
5/Mr. Cash also serves as an executive officer of Questar and other affiliated companies. The base salary shown for Mr. Cash is the combination of the amount directly paid by the Company and the amount allocated to the Company.
6/Mr. Benefield did not become an executive officer of the Company until May 19, 1992. The base salary and the "other compensation" information reported for him for 1992 include the amount that the Company paid directly and the amount allocated to the Company when Mr. Benefield served as an officer of Questar.
The following table lists information concerning the incentive stock options to purchase shares of Questar's common stock that were granted to Mountain Fuel's five highest paid officers during 1994 under Questar's Long-Term Stock Incentive Plan. No stock appreciation rights were granted during 1994.
Option Grants in Last Fiscal Year
1/These incentive stock options vest in four annual, equal installments, with the first installment exercisable as of August 8, 1994. Participants can use cash or previously-owned shares as consideration for option shares. Options expire when a participant terminates his employment, unless termination is caused by an approved retirement, death, or disability. Options can be exercised for three months following a participant's approved retirement and 12 months following a participant's death or disability.
2/When calculating the present value of options granted in 1994, Questar used the Black-Scholes option pricing model. Questar assumed a volatility of 22.27 percent, a risk free interest rate of 6.5 percent, a dividend yield of 4.4 percent and a vesting discount of 5.7 percent. The real value of the listed options depends upon the actual performance of Questar stock. There can be no assurance that the values shown in this table will be achieved.
The following table lists information concerning the incentive stock options to purchase shares of Questar's common stock that were exercised by the officers named above during 1994 and the total options and their value held by each at year-end 1994:
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Options/SAR Values
1/The "value" is calculated by subtracting the fair market value of the shares purchased on the date of exercise minus the option price. The value is equal to the amount of ordinary income recognized by each officer. The current value of the shares may be higher or lower than the aggregate value reported in the table.
2/Stock appreciation rights (SARs) have not been granted since February of 1989. At year-end 1994, there were no SARs outstanding.
Retirement Plan
Company employees (including executive officers) participate in the employee benefit plans of Questar. The Company has agreed to pay its share of the costs associated with the plans that are described below. Questar maintains a noncontributory Retirement Plan that is funded actuarially and does not involve specific contributions for any one individual. The following table lists the estimated annual benefits payable under the Retirement Plan as of December 31, 1994, and, if necessary, the Supplemental Executive Retirement Plan (described below). The benefits shown are based on earnings and years of service reaching normal retirement age of 65 in 1994 and do not include Social Security benefits. Benefits under the Retirement Plan are not reduced or offset by Social Security benefits.
PENSION PLAN TABLE
Questar's Retirement Plan, as of January 1, 1989, has a "step rate/excess" benefit formula. The formula provides for a basic benefit that is calculated by multiplying the employee's final average earnings by a specified base benefit factor and by subsequently multiplying such sum by the employee's years of service (up to a maximum of 25). This basic benefit is increased for each year of service in excess of 25 and is reduced for retirement prior to age 62. Employees also receive a supplemental benefit calculated by multiplying the difference between the employee's final average earnings and his "covered compensation" by a supplemental factor that varies by age. (The term covered compensation refers to the 35-year average Social Security wage base tied to year of an employee's birth.) Employees who retire prior to age 62 also receive a temporary supplement that is tied to years of service until they are eligible to receive Social Security benefits.
Effective March 1, 1995, the Retirement Plan was amended to provide an enhanced retirement benefit for Company employees who were at least 52 years of age and had at least five years of service as of April 30, 1995. The enhanced benefits were calculated by adding five years of service and five years of age and increasing the basic benefit factor from 1.30 percent to 1.35 percent. Employees who elect to retire during the window period will also receive a benefit that is not reduced from age 62 for early retirement and have an option to receive the benefits in a lump sum. Mr. Benefield was in the group of eligible employees, but has elected not to retire.
The "final average earnings" (average annual earnings for the last three years) for purposes of calculating retirement benefits for the executive officers named above in the table as of December 31, 1994, is as follows: $265,082 for Mr. Rose; $165,910 for Mr. Benefield; $155,270 for Mr. Robinson; and $154,770 for Mr. Yeager. (No figure is given for Mr. Cash because his final average earnings for purposes of the Retirement Plan would include compensation paid by the Company's affiliates.) The officer's base salary, cash bonus payments, and value of restricted stock (paid in lieu of cash) reported in the Summary Compensation Table would be included in the calculation of the officer's final average earnings. The amounts reported in the Summary Compensation Table are somewhat different than the final average earnings because the latter figures include cash payments when made, not when earned, and the value of restricted stock when granted, not distributed. Dividends on the restricted shares are also included in the officer's final average earnings, but are not reported in the table. The years of credited service for the individuals listed in the compensation table are: 19 years for Mr. Cash; 26 years for Mr. Rose; 17 years for Mr. Benefield; 21 years for Mr. Robinson; and 19 years for Mr. Yeager.
The Company also participates in Questar's Executive Incentive Retirement Plan (the EIRP). Under the terms of this nonqualified plan, a participant will receive monthly payments upon retirement until death equal to 10 percent of the highest average monthly compensation (excluding incentive compensation) paid to the officer during any period of 36 consecutive months of employment. The plan also provides for a family benefit in the event of the death of an officer. Although not required to do so, Questar and its affiliates have purchased life insurance on the life of each participant, with Questar named as owner and beneficiary. The covered officers have no rights under or to such insurance policies. All of the Company's officers listed in the compensation table have been nominated to participate in the plan, have satisfied the 15 years of service requirement and have a vested right to receive benefits under the EIRP. The annual benefits payable to the named officers under this plan as of December 31, 1994, are as follows: Mr. Rose, $20,025; Mr. Benefield, $13,396 and Messrs. Robinson and Yeager, $12,743. (No figure is given for Mr. Cash because his compensation for purposes of calculating benefits under the EIRP would include compensation paid by the Company's affiliates.)
Any benefits payable under the SERP are offset against payments for the EIRP. Consequently, an officer would not receive any benefits for the SERP unless his benefit under the EIRP was less than the difference between what he could be paid under Questar's Retirement Plan at the date of retirement and what he had earned under such plan absent federal tax limitations. Given this relationship between the two nonqualified plans, the amounts listed in the table above do not include benefits payable under the EIRP.
Executive Severance Compensation Plan
Questar has an Executive Severance Compensation Plan that covers the Company's executive officers. Under this plan, participants, following a change in control of Questar, are eligible to receive compensation equal to up to two years' salary and miscellaneous benefits upon a voluntary or involuntary termination of their employment, provided that they have continued working or agree to continue working for six months following a potential change in control of Questar. This plan was adopted in 1983 by Mountain Fuel, was assumed by Questar as of October 2, 1984, and was amended and restated effective January 1, 1986. The amended plan also contains a provision that limits compensation and benefits payable under the plan to amounts that can be deducted under Section 280G of the Internal Revenue Code of 1986.
The dollar amounts payable to the Company's executive officers (based on current salaries paid by the Company) in the event of termination of employment following a change in control of Questar are as follows: $480,000 to Mr. Rose; $293,000 to Mr. Benefield; and $268,000 each to Messrs. Yeager and Robinson. (The amount payable to Mr. Cash is not given since such amount is based on each officer's total salary.) The Company's executive officers would also receive certain supplemental retirement benefits, welfare benefits, and cash bonuses.
Under the plan, a change in control is defined to include any change in control required to be reported under Item 6(e) of Schedule 14A of the Securities Exchange Act of 1934, as amended. A change in control is also deemed to occur once any person becomes the beneficial owner, directly or indirectly, of securities representing 20 percent or more of Questar's outstanding shares of common stock.
Directors' Fees
All directors receive an annual fee of $4,800 payable in 12 monthly installments and fees of $500 for each meeting of the Board of Directors that they attend. (The annual fee paid to directors was increased from $3,600 as of June 1, 1994, and the meeting fee was increased from $400 per meeting as of the same date.)
The Company has a Deferred Compensation Plan for Directors under which directors can elect to defer all or any portion of the fees received for service as directors until their retirement from such service and can choose to have the deferred amounts earn interest as if invested in long-term certificates of deposit or be accounted for with "phantom shares" of Questar's common stock. Upon retirement, the phantom shares of stock are "converted" to their fair market cash equivalent. During 1994, several directors of the Company chose to defer receipt of all or a portion of the compensation earned by them for their service. (Any shares of phantom stock credited to directors are not included in the number of shares listed opposite their names below.)
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company is a direct, wholly owned subsidiary of Questar. The following table sets forth information, as of December 31, 1994, with respect to each person known or believed by Questar to be the beneficial owner of 5 percent or more of its common stock:
Shares and Name and Nature of Address of Beneficial Percent Beneficial Owner Ownership of Class
First Security Bank of Utah 4,232,694 10.5 N.A., 79 South Main Street Trustee for Salt Lake City, Utah 84111 Company Employee Benefit Plans and Bank/1
Delaware Management Company, Inc. 2,441,300 6.0 1818 Market Street Investment Advisor/2 Philadelphia, Pennsylvania 19103
1/Of this total, First Security beneficially owns 4,122,159 shares in its role as trustee of employee benefit plans sponsored by Questar. Participating employees control the voting of such shares.
2/In an initial Schedule 13G dated as of December 31, 1994, Delaware Management Company reported sole voting power for 2,322,500 shares, shared voting power for 30,800 shares, and sole dispositive power for 2,341,300 shares and shared dispositive power for 100,000 shares.
The following table sets forth information, as of March 1, 1995, concerning the shares of Questar's common stock beneficially owned by each of the Company's named executive officers and directors and by the Company's executive officers and directors as a group:
Shares Owned Percent of Name of Beneficial Owner Beneficially Outstanding Shares
Directors
Robert H. Bischoff 8,729 *1 R. D. Cash2,3,4,5,6 205,279 .51% W. Whitley Hawkins7 5,120 *1 Robert E. Kadlec7,8 15,350 *1 Dixie L. Leavitt6,7 16,503 *1 Gary G. Michael7 1,400 *1 D. N. Rose2,3,4 60,865 .15% Roy W. Simmons 14,800 *1
Nondirector Executive Officers M. E. Benefield2,3,4 31,307 *1 G. H. Robinson2,3,4 21,331 *1 S. C. Yeager2,3,4 23,965 *1
All directors and executive 487,904 1.2%1 officers (13 individuals)/9
1/Unless otherwise listed, the percentage of shares owned is less than .1 percent. The percentages of beneficial ownership have been calculated in accordance with Rule 13d-3(d)(1) under the Securities Exchange Act of 1934, as amended.
2/The Company's executive officers own shares through their participation in Questar's Employee Investment Plan. The number of shares owned through this plan as of December 31, 1994, is as follows for the named officers: Mr. Benefield, 3,916 shares; Mr. Cash, 27,855 shares; Mr. Robinson, 6,887 shares; Mr. Rose, 14,850 shares; and Mr. Yeager, 7,649 shares.
3/The Company's executive officers have been granted nonqualified stock options under Questar's Stock Option Plan and Long-Term Stock Incentive Plan. The number of shares listed opposite the named officers attributable to vested options as of March 1, 1995, is as follows: Mr. Benefield, 6,625; Mr. Cash, 39,373 shares; Mr. Robinson, 6,625; Mr. Rose, 26,950 shares; and Mr. Yeager, 9,000 shares.
4/The Company's executive officers acquired restricted shares of Questar's common stock in partial payment of bonuses earned in the 1993 and 1994 bonus plans. The number of restricted shares beneficially owned by each of the named officers as of March 1, 1995, is as follows: Mr. Benefield, 851 shares; Mr. Cash, 4,683 shares; Mr. Robinson, 808 shares; Mr. Rose, 1,928 shares; and Mr. Yeager, 808 shares.
5/Mr. Cash is the Chairman of the Board of Trustees of the Questar Corporation Educational Foundation and the Questar Corporation Arts Foundation, two nonprofit corporations that own an aggregate of 55,776 shares of Questar's common stock. As the Chairman, Mr. Cash has voting control for such shares, but disclaims any beneficial ownership of them.
6/Of the total shares reported for Mr. Cash, 3,270 shares are owned jointly with his wife and 4,720 are controlled by him as custodian for his son. Messrs. Leavitt and Yeager own their shares of record with their respective wives.
7/Messrs. Hawkins, Kadlec, Leavitt, and Michael, as nonemployee voting directors of Questar, have been granted nonqualified stock options to purchase shares of Questar's common stock as follows: Mr. Hawkins, 4,900 shares; Mr. Kadlec, 11,550 shares; Mr. Leavitt, 10,500 shares, and Mr. Michael, 700 shares. These shares are included in the numbers listed opposite their respective names.
8/Mr. Kadlec's wife owns 200 shares of common stock. Mr. Kadlec has voting control and investment control over such shares. Such shares are included in the shares listed opposite his name.
9/The total number of shares reported for this group includes vested options to purchase 171,473 shares of Questar's common stock.
Committee Interlocks and Insider Participation
The Company itself has no formal "Compensation Committee." Questar's Board of Directors has a Management Performance Committee that makes recommendations to the Company's Board of Directors concerning base salary and bonus payments. (Questar's Board approves all stock options.) Messrs. Cash and Rose, as directors and officers of the Company, are formally excused from all discussions by the Company's Board involving their compensation.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no relationships or transactions involving the Company's directors and executive officers.
As described above, there are significant business relationships between the Company and its affiliates, particularly Wexpro and Questar Pipeline. Questar, the Company's parent, also provides certain administrative services, e.g., personnel, legal, public relations, financial, tax, and audit to the Company and other members of the consolidated group. The costs of performing such services are allocated to the Company. Questar InfoComm, another affiliate, provides data processing and communication services for the Company; the charges for such services are based on cost of service plus a specified return on assets.
See Note I to the financial statements for additional information concerning transactions between the Company and its affiliates.
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.
(3) Exhibits. The following is a list of exhibits required to be filed as a part of this report in Item 14(c).
Exhibit No. Exhibit
3.1.* Restated Consolidated Articles of Incorporation dated August 15, 1980. (Exhibit No. 4(a) to Registration Statement No. 2-70087, filed December 1, 1980.)
3.2.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 13, 1982. (Exhibit No. 3(b) to Form 10-K Annual Report for 1982.)
3.3.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 10, 1983. (Included in Exhibit No. 4.1. to Registration Statement No. 2-84713, filed June 23, 1983.)
3.4.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated August 16, 1983. (Exhibit No. 3(a) to Form 8 Report amending the Company's Form 10-Q Report for Quarter Ended September 30, 1983.)
3.5.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated October 26, 1984. (Exhibit No. 3.5. to Form 10-K Annual Report for 1984.)
3.6.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 13, 1985. (Exhibit No. 3.1. to Form 10-Q Report for Quarter Ended June 30, 1985.)
3.7.* Articles of Amendment to Restated Consolidated Articles of Incorporation dated February 10, 1988. (Exhibit No. 3.7. to Form 10-K Annual Report for 1987.)
3.8.* Bylaws (as amended effective August 11, 1992). (Exhibit No. 3.8. to Form 10-K Annual Report for 1992.)
4.* Indenture dated as of May 1, 1992, between the Company and Citibank, as trustee, for the Company's Debt Securities. (Exhibit No. 4. to Form 10-Q Report for Quarter Ended June 30, 1992.)
10.1.* Stipulations and Agreement, dated October 14, 1981, executed by Mountain Fuel Supply Company; Wexpro Company; the Utah Department of Business Regulations, Division of Public Utilities; the Utah Committee of Consumer Services; and the staff of the Public Service Commission of Wyoming. (Exhibit No. 10(a) to Form 10-K Annual Report for 1981.)
10.7.* Data Processing Services Agreement effective July 1, 1985, between Questar Service Corporation and Mountain Fuel Supply Company. (Exhibit 10.7. to Form 10-K Annual Report for 1988.)
10.8. 1 Mountain Fuel Supply Company Annual Management Incentive Plan as amended and restated effective February 14, 1995.
10.9.*1 Mountain Fuel Supply Company Window Period Supplemental Executive Retirement Plan effective January 24, 1991. (Exhibit No. 10.9. to Form 10-K Annual Report for 1990.)
10.10.1 Mountain Fuel Supply Company Deferred Compensation Plan for Directors as amended and restated effective April 30, 1991.
10.11. Gas Gathering Agreement between Mountain Fuel Supply Company and Questar Pipeline Company effective September 1, 1993.
25. Power of Attorney.
27. Financial Data Schedule.
*Exhibits so marked have been filed with the Securities and Exchange Commission as part of the referenced filing and are incorporated herein by reference.
1 Exhibits so marked are management contracts or compensation plans or arrangements.
(b) Mountain Fuel did not file any Current Reports on Form 8-K during the last quarter of 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
MOUNTAIN FUEL SUPPLY COMPANY
SALT LAKE CITY, UTAH
FORM 10-K--ITEM 14 (a) (1) and (2)
MOUNTAIN FUEL SUPPLY COMPANY
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following financial statements of Mountain Fuel Supply Company are included in Item 8:
Statements of income -- Years ended December 31, 1994, 1993 and
Balance sheets -- December 31, 1994 and 1993
Statements of common shareholder's equity -- Years ended December 31, 1994, 1993 and 1992
Statements of cash flows -- Years ended December 31, 1994, 1993 and
Notes to financial statements
Financial schedules, for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission, are not required under the related instructions or are inapplicable, and therefore have been omitted.
Report of Independent Auditors
Board of Directors Mountain Fuel Supply Company
We have audited the accompanying balance sheets of Mountain Fuel Supply Company as of December 31, 1994 and 1993, and the related statements of income, common shareholder's equity, and cash flows for each of the three years in the period ended December 31, 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 financial statements referred to above present fairly, in all material respects, the financial position of Mountain Fuel Supply Company at December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in Note H to the financial statements, Mountain Fuel Supply Company changed its method of accounting for postemployment benefits.
ERNST & YOUNG LLP
Salt Lake City, Utah February 10, 1995, except for Note G as to which the date is March 5, 1995
MOUNTAIN FUEL SUPPLY COMPANY STATEMENTS OF INCOME
See notes to financial statements.
MOUNTAIN FUEL SUPPLY COMPANY BALANCE SHEETS
ASSETS
LIABILITIES AND SHAREHOLDER'S EQUITY
See notes to financial statements.
MOUNTAIN FUEL SUPPLY COMPANY STATEMENTS OF COMMON SHAREHOLDER'S EQUITY
See notes to financial statements.
MOUNTAIN FUEL SUPPLY COMPANY STATEMENTS OF CASH FLOWS
See notes to financial statements.
MOUNTAIN FUEL SUPPLY COMPANY NOTES TO FINANCIAL STATEMENTS
Note A - Summary of Accounting Policies
Mountain Fuel Supply Company (the Company or Mountain Fuel) is a wholly-owned subsidiary of Questar Corporation (Questar).
Business and Regulation: The Company's business consists of natural gas distribution operations for industrial, residential and commercial customers. Mountain Fuel is regulated by the Public Service Commission of Utah (PSCU) and the Public Service Commission of Wyoming (PSCW). 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.
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. Mountain Fuel periodically collect revenues subject to possible refunds 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.
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. The provision for depreciation and amortization is based upon rates which will amortize costs of assets over their estimated useful lives. The costs of natural gas distribution property, plant and equipment, excluding gas wells, are amortized using the straight-line method. The costs of gas wells were amortized using the unit-of-production method at $.17 per Mcf of natural gas production during 1994.
Income Taxes: On January 1, 1992, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109. The deferred tax balances represent the temporary differences between book and taxable income multiplied by the effective income tax rates. These temporary differences relate primarily to depreciation, unbilled revenues and purchased-gas adjustments. The Company uses the deferral method to account for investment tax credits as required by regulatory commissions.
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 $397,000 in 1994, $528,000 in 1993 and $588,000 in 1992.
Cash and Short-Term Investments: Short-term investments consist principally of Euro-time deposits and repurchase agreements with maturities of three months or less.
Note B - Debt
The Company has a short-term line-of-credit arrangement with a bank under which it may borrow up to $500,000, below the prime interest rate. The arrangements are renewable on an annual basis. At December 31, 1994, no amounts were borrowed under this arrangement. Questar loans funds to the Company under a short-term borrowing arrangement. Outstanding short-term notes payable to Questar totaled $53,500,000 with an interest rate of 6.11% at December 31, 1994. Outstanding short-term notes payable to Questar totaled $57,800,000 with an interest rate of 3.59% at December 31, 1993.
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. The balances at December 31 were $175 million in 1994 and $158 million in 1993. 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.
There are no maturities of long-term debt for the five years following December 31, 1994 nor long-term debt provisions restricting the payment of dividends. Cash paid for interest was $15,290,000 in 1994, $14,698,000 in 1993 and $15,970,000 in 1992.
Note C - 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:
(In Thousands)
1995 $685 1996 780 1997 180 1998 180 1999 180
Note D - Financial Instruments
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 fair value of the medium-term notes is based on the discounted present value of cash flows using the Company's current borrowing rates; (4) Redeemable cumulative preferred stock - the fair value is based on the discounted present value of cash flows using current preferred stock rates. Fair value is calculated at a point in time and does not represent what the Company would pay to retire the debt securities.
Note E - Income Taxes
The 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.
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.
The components of income taxes were as follows:
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:
Significant components of the Company's deferred tax liabilities and assets were as follows:
Cash paid for income taxes was $6,404,000 in 1994, $8,631,000 in 1993 and $6,805,000 in 1992.
Note F - Rate Matters, Litigation and Commitments
The PSCU issued a rate order in January 1994 granting Mountain Fuel a $1.6 million decrease in general rates and a $2.1 million increase in costs allowed through the purchase-gas adjustment account for a net increase in rates of $500,000. The PSCU allowed a return on equity of 11%, required Mountain Fuel to reduce rates over a five-year period for unbilled revenues, and disallowed rate coverage for certain incentive compensation and advertising costs. Mountain Fuel requested rehearing of the PSCU's decision regarding return on equity and unbilled revenues. In a ruling issued December 1, 1994, the PSCU reaffirmed its position on the allowed return on equity and the treatment of unbilled revenues.
In 1993 Mountain Fuel began accruing revenues for gas delivered to residential and commercial customers but not billed at the end of the year. The impact of these accruals on the income statement has been deferred and is being recognized at the rate of $2,011,000 per year over a five-year period beginning in 1994 in accordance with a rate order received from the PSCU. This rate order also reduces customer rates by $2,011,000 per year over the same five-year period. In addition, Mountain Fuel recorded other income of $5,589,000 for a one-time reduction of gas costs associated with these unbilled revenues. This transaction added about $3.5 million to net income in 1994.
Each year Mountain Fuel purchases significant quantities of natural gas under numerous gas- purchase contracts with varying terms and conditions. Purchases under these agreements totalled $73,682,000 in 1994, $85,909,000 in 1993 and $104,032,000 in 1992. Some of the agreements have terms that obligate Mountain Fuel to purchase specific quantities on a periodic basis into the future, while a few contracts have take-or-pay provisions that obligate Mountain Fuel to take delivery of a minimum amount of gas on an annual basis.
Projected natural gas purchase commitments for the next five years are reported in the table below. These commitments are based upon current market conditions. Future changes will occur as a result of negotiations with suppliers and changes in market conditions.
(In Millions)
1995 $24.4 1996 9.6 1997 5.4 1998 3.3 1999 3.1
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 the results of operations or its financial position.
Mountain Fuel is responsible for a judgment in a lawsuit involving the Company, Questar Pipeline and a gas producer. In March 1994, a jury awarded the gas producer damages of approximately $6.3 million on claims involving take-or-pay, tax reimbursement and breach of contract. Mountain Fuel expects that the judgment will be included in its gas balancing account and recovered through customer rates. The judgment is not expected to have a significant impact on the Company's results of operations, financial position or liquidity.
There are various legal proceedings against the Company. While it is not currently possible to predict or determine the outcome of these proceedings, it is the opinion of management that the outcome will not have a material adverse effect on the Company's results of operations, financial position or liquidity.
Note G - Subsequent Event
Mountain Fuel filed a general rate case in the State of Utah on March 3, 1995 requesting a $9.6 million increase in revenues, a 12.5% return on equity and a weather normalization adjustment mechanism. Management believes the rate increase is necessary to secure an appropriate allowed rate of return and to recover the costs of record customer growth. Mountain Fuel believes the proposed weather adjustment mechanism would benefit customers, whose bills would be less variable, and the Company, which would have more stability in its revenues.
Note H - Employee Benefits
Substantially all Company employees are covered by Questar's defined benefit pension plan. Benefits are generally based on years of service and the employee's 36-month period of highest earnings during the ten years preceding retirement. It is Questar's policy to make contributions to the plan at least sufficient to meet the minimum funding requirements of applicable laws and regulations. Plan assets consist principally of equity securities and corporate and U.S. government debt obligations. Pension cost was $2,962,000 in 1994, $3,251,000 in 1993 and $2,991,000 in 1992.
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, 1994, Questar's fair value of plan assets exceeded the accumulated benefit obligation.
The Company participates in Questar's Employee Investment Plan, which allows the majority of employees to purchase Questar stock or other investments with payroll deductions. The Company makes contributions to the plan of approximately 75% of the employee's purchases. The Company's expense and contribution to the plan was $1,274,000 in 1994, $1,167,000 in 1993 and $1,194,000 in 1992.
The Company participates in a Questar program that pays a portion of the health-care costs and all the life insurance costs for retired employees. Questar'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. Questar is amortizing the transition obligation over a 20-year period. Total costs of postretirement benefits other than pensions under SFAS No. 106 was $3,584,000 in 1994 and $3,350,000 in 1993 compared with the cost based on cash payments to retirees totaling $876,000 in 1992.
The impact of SFAS No. 106 on the Company'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 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.
The Company adopted SFAS No.112, Accounting for Postemployment Benefits, on January 1, 1994, by establishing a liability of $1,538,000 offset by a regulatory asset. 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 $1,538,000 to $1,039,000 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.
Note I - Related Party Transactions
The Company receives a portion of Wexpro's income from oil operations after recovery of Wexpro's operating expenses and a return on investment. This amount, which is included in revenues, was $3,391,000 in 1994, $1,028,000 in 1993 and $3,389,000 in 1992.
The Company paid Wexpro for the operation of Company-owned gas properties. These costs are included in natural gas purchases and amounted to $57,870,000 in 1994, $49,595,000 in 1993 and $43,324,000 in 1992.
Mountain Fuel purchased gas from Questar Pipeline amounting to $81,813,000 in 1993 and $135,779,000 in 1992. The Company did not purchase gas from Questar Pipeline subsequent to September 1, 1993 when Questar Pipeline began operating in accordance with FERC Order No. 636. Also included in natural gas purchases are amounts paid to Questar Pipeline for the transportation, storage and gathering of Company-owned gas and purchased gas. These costs were $70,945,000 in 1994, $38,862,000 in 1993 and $31,808,000 in 1992. Mountain Fuel began paying for storage as a separate service subsequent to the implementation of FERC Order No. 636.
Mountain Fuel has reserved transportation capacity on Questar Pipeline's system of approximately 800,000 decatherms per day and pays an annual demand charge of approximately $46.3 million for this reservation. Mountain Fuel releases excess capacity to its industrial transportation or other customers and receives a credit from Questar Pipeline for the released-capacity revenues and a portion of Questar Pipeline's interruptible-transportation revenues.
Questar InfoComm Inc. is an affiliated company that provides data processing and communication services to Mountain Fuel. The Company paid Questar InfoComm $15,996,000 in 1994, $14,847,000 in 1993 and $12,437,000 in 1992.
Questar charges Mountain Fuel for certain administrative functions amounting to $5,814,000 in 1994, $5,609,000 in 1993 and $5,517,000 in 1992. 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 $225,000 in 1994, $327,000 in 1993, and $740,000 in 1992. The Company had debt expense to affiliated companies of $134,000 in 1994, $21,000 in 1993, and $39,000 in 1992.
Note J - Oil and Gas Producing Activities (Unaudited)
The following information discusses the Company's oil and gas producing activities. All of the properties are cost-of-service properties with the return on investment established by state regulatory agencies. Mountain Fuel has not incurred any costs for oil and gas producing activities for the three years ended December 31, 1993. Wexpro develops and produces gas reserves owned by the Company. See Note I for the amounts paid by Mountain Fuel to Wexpro.
Estimated Quantities of Proved Oil and Gas Reserves: The following estimates were made by Questar's reservoir engineers. Reserve estimates are based on a complex and highly interpretive process which is subject to continuous revision as additional production and development drilling information becomes available. The quantities are based on existing economic and operating conditions using current prices and operating costs. All oil and gas reserves reported are located in the United States. Mountain Fuel does not have any long-term supply contracts with foreign governments or reserves of equity investees. No estimates are available for proved undeveloped reserves that may exist.
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 28th day of March, 1995.
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/ W. F. Edwards Vice President and Chief W. F. Edwards Financial Officer (Principal Financial Officer)
/s/ G. H. Robinson Vice President and Controller G. H. Robinson (Principal Accounting Officer)
*Robert H. Bischoff Director *R. D. Cash Chairman of the Board *W. Whitley Hawkins Director *Robert E. Kadlec Director *Dixie L. Leavitt Director *Gary G. Michael Director *D. N. Rose Director
March 28, 1995 *By /s/ D. N. Rose Date D. N. Rose, Attorney in Fact
EXHIBIT INDEX
Exhibit Number Exhibit
3.1.* Restated Consolidated Articles of Incorporation dated August 15, 1980. (Exhibit No. 4(a) to Registration Statement No. 2-70087, filed December 1, 1980.)
3.2.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 13, 1982. (Exhibit No. 3(b) to Form 10-K Annual Report for 1982.)
3.3.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 10, 1983. (Included in Exhibit No. 4.1. to Registration Statement No. 2-84713, filed June 23, 1983.)
3.4.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated August 16, 1983. (Exhibit No. 3(a) to Form 8 Report amending the Company's Form 10-Q Report for Quarter Ended September 30, 1983.)
3.5.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated October 26, 1984. (Exhibit No. 3.5. to Form 10-K Annual Report for 1984.)
3.6.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 13, 1985. (Exhibit No. 3.1. to Form 10-Q Report for Quarter Ended June 30, 1985.)
3.7.* Articles of Amendment to Restated Consolidated Articles of Incorporation dated February 10, 1988. (Exhibit No. 3.7. to Form 10-K Annual Report for 1987.)
3.8.* Bylaws (as amended effective August 11, 1992). (Exhibit No. 3.8. to Form 10-K Annual Report for 1992.)
4.* Indenture dated as of May 1, 1992, between the Company and Citibank, as trustee, for the Company's Debt Securities. (Exhibit No. 4. to Form 10-Q Report for Quarter Ended June 30, 1992.)
10.1.* Stipulations and Agreement, dated October 14, 1981, executed by Mountain Fuel Supply Company; Wexpro Company; the Utah Department of Business Regulations, Division of Public Utilities; the Utah Committee of Consumer Services; and the staff of the Public Service Commission of Wyoming. (Exhibit No. 10(a) to Form 10-K Annual Report for 1981.)
10.7.* Data Processing Services Agreement effective July 1, 1985, between Questar Service Corporation and Mountain Fuel Supply Company. (Exhibit 10.7. to Form 10-K Annual Report for 1988.)
10.8. 1 Mountain Fuel Supply Company Annual Management Incentive Plan as amended and restated effective February 14, 1995.
10.9.* 1 Mountain Fuel Supply Company Window Period Supplemental Executive Retirement Plan effective January 24, 1991. (Exhibit No. 10.9. to Form 10-K Annual Report for 1990.)
10.10. 1 Mountain Fuel Supply Company Deferred Compensation Plan for Directors as amended and restated effective April 30, 1991.
10.11. Gas Gathering Agreement between Mountain Fuel Supply Company and Questar Pipeline Company effective September 1, 1993.
25. Power of Attorney.
27. Financial Data Schedule.
*Exhibits so marked have been filed with the Securities and Exchange Commission as part of the referenced filing and are incorporated herein by reference.
1 Exhibits so marked are management contracts or compensation plans or arrangements.