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. Litigation involving certain environmental matters is described below.
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.
Entrada has obtained approval for a specific design using in situ vitrification procedure to clean up the Wasatch Chemical property and expects this process to begin before year-end. 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.
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 1993.
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 O in the Notes to Consolidated Financial Statements. As of March 21, 1994, Questar had 11,614 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 1989-1992 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 income from continuing operations was $84,464,000, or $2.10 per share, in 1993, compared with $73,771,000, or $1.85 per share, in 1992 and $66,752,000, or $1.70 per share, in 1991.
Exploration and production operations had 1993 income of $36,325,000, compared with $27,762,000 in 1992 and $20,965,000 in 1991. Natural gas production and prices increased in 1993 but were partially offset by lower oil production and prices.
Natural gas transmission operation's 1993 income was $23,275,000 compared with $22,463,000 in 1992 and $22,057,000 in 1991. Questar Pipeline began operating in accordance with Federal Energy Regulatory Commission (FERC) Order No. 636 in September 1993. The demand component of rates is now structured to recover 94% of the cost of service.
Natural gas distribution operations earned $25,069,000 in 1993 compared with $23,395,000 in 1992 and $25,074,000 in 1991. The 1993 weather was 5% colder than normal and 16% colder than 1992.
In October 1993, Questar announced that it had reached a binding agreement to sell Questar Telecom to Nextel Communications, Inc. (Nextel). The sale is expected to be completed in the first half of 1994.
Questar spent $168,388,000 for capital expenditures in 1993 and estimates 1994 capital expenditures to be $300,000,000. Cash provided from operating activities financed the majority of the 1993 expenditures. Long-term debt represented 38% of consolidated capitalization at December 31, 1993.
RESULTS OF OPERATIONS
EXPLORATION AND PRODUCTION - Celsius Energy, Universal Resources and Wexpro conduct exploration and production (E&P) operations. Following are operating income and statistics for these operations:
Noncost-of-service natural gas production increased 32% in 1993 following a 73% 1992 increase. The E&P group increased natural gas reserves over the last several years through a successful natural gas exploration, development and acquisition program. The E&P group changed its production strategy in the last half of 1992 by increasing natural gas production to near full capacity. Higher prices and lower full cost amortization rates allowed the E&P group to produce at this level.
The natural gas sales price increased 12% in 1993 after a 2% decline in 1992. The E&P group sold the majority of its 1993 and 1992 production based on spot-market or short-term contracts. The national market price of natural gas increased in 1993 because excess delivery capacity decreased. Although Rocky Mountain region natural gas is sold at a lower price than the national average, the differential decreased in 1993. Current low oil prices may limit increases in natural gas prices because many industrial energy users have the ability to switch from natural gas to fuel oil.
Oil and natural gas liquid production decreased 5% in 1993 and increased 2% in 1992. Declining production in mature fields was partially offset by oil reserve increases. The E&P group has focused most of its exploration and development efforts towards natural gas reserves in the last few years, which has lessened the significance of oil and natural gas liquid production to the Company.
Oil and natural gas liquid prices decreased 11% in 1993 and 14% in 1992 as a result of worldwide production increases. The price at the end of 1993 was lower than the average for the year, and therefore, 1994 prices may be lower than 1993. Declining oil prices reduced the oil income sharing paid by Wexpro to Mountain Fuel as required by the Wexpro settlement agreement. See Note L in the Notes to the Consolidated Financial Statements for a description of this agreement.
Natural gas marketing volumes decreased 10% in 1993 and 23% in 1992. The E&P group changed its marketing strategy from a high volume program to targeting premium markets and marketing of E&P group production (marketing volumes do not include E&P group production). The margin from gas marketing was $3,864,000 in 1993 compared with $1,292,000 in 1992 and $6,833,000 in 1991. The E&P group uses natural gas futures and options to reduce the risk associated with the marketing activity.
Wexpro's revenue from cost-of-service gas operations increased 14% in 1993 and 28% in 1992 as a result of additional investment in gas-development wells and recovery of higher costs associated with increased production. Wexpro's net investment in cost-of-service gas operations was $92,561,000, $81,261,000, and $71,936,000 at December 31, 1993, 1992 and 1991, respectively. Wexpro has increased its investment primarily through participation in infill-drilling programs in the Church Buttes, Bruff, and Birch Creek fields in southwestern Wyoming.
In the first quarter of 1994, the E&P group announced two acquisitions of oil and gas reserves, processing plants, gathering systems and leasehold acreage for a cost of $117,100,000. The E&P group obtained oil and gas reserves of approximately 115 Bcf equivalent located in the Midcontinent and San Juan Basin regions. These acquisitions increase the noncost-of-service oil and gas reserves by approximately 45%.
NATURAL GAS TRANSMISSION - Questar Pipeline conducts natural gas transmission, storage, and gathering operations. Following are operating income and statistics for these operations:
Effective September 1, 1993, Questar Pipeline began operating in accordance with FERC Order No. 636, which restructured the operations of natural gas transmission companies. The order unbundled the sales-for-resale service from the transportation, gathering and storage services. Questar Pipeline eliminated its merchant function. That activity was assumed by Mountain Fuel along with the gas-purchase contracts.
Order No. 636 requires a greater percentage of the cost of service to be collected through demand charges. The percentage of costs included in the demand component of rates increased from 66% prior to implementation to about 94% after implementation. Substantially all of Questar Pipeline's transportation capacity has been reserved by firm-transportation customers. The 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 approximately 85% of the total transportation capacity.
As a result of these changes in the rate structure, Questar Pipeline's transportation throughput volumes do not have a significant impact on short-term operating results. Firm-transportation customers continue to pay the same demand charges regardless of actual volumes transported. After $1.5 million in revenues are received from interruptible transportation customers, 90% of the remaining revenues from the transportation of gas for interruptible customers is credited back to firm customers. Questar Pipeline is allowed to retain all interruptible-transportation revenues from projects that have not been included in the transportation rate case.
Total transmission system throughput decreased 2% in 1993 and 1% in 1992. Throughput for Mountain Fuel (including sales for resale and transportation) increased 23% in 1993 and decreased 11% in 1992. The 1993 increase was primarily due to colder weather in Mountain Fuel's service area. Expiring contracts resulted in deceased throughput for other customers.
Reported gathering volumes increased 25% in 1993 and more than doubled in 1992. The 1993 increase was due to higher gas production in the Company's operating areas, including production from affiliates. The 1992 increase was mostly due to a change in rate structure that unbundled gathering from sales for resale. Questar Pipeline began billing separately for gas gathering service provided on sales-for-resale volumes in November 1991.
Storage revenues increased 88% in 1993 and 19% in 1992. Customers have subscribed to all available working natural gas storage at Questar Pipeline's Clay Basin storage field. A portion of the 1993 increase was due to unbundling of storage services for Mountain Fuel that were included with the sales for resale prior to the implementation of Order No. 636.
Order No. 636 allows pipelines to receive rate coverage for all prudently incurred transition costs associated with the restructuring. Questar Pipeline incurred capital costs of approximately $9 million in conjunction with Order No. 636 implementation. Most of these costs were for electronic metering and a bulletin board system and are expected to be included in the next general rate case.
NATURAL GAS DISTRIBUTION - Mountain Fuel conducts natural gas distribution operations. Following are operating income and statistics for these operations:
Natural gas volumes sold to residential and commercial customers increased 16% in 1993 following a 10% decrease in 1992. Temperatures were 5% colder than normal in 1993 and 10% warmer than normal in 1992. The number of customers increased 3.4% in 1993 and 3.2% in 1992 because of expanding population and construction in Mountain Fuel's service area.
Natural gas deliveries to industrial customers increased 5% in 1993 and 7% in 1992, due to increased usage by metals, mining and petroleum customers. These customers are using more natural gas because of expanded operations and environmental concerns. The Company's industrial customers have not switched to residual fuel oil with the decline in oil prices because gas prices have been competitive and sufficient fuel oil is not readily available.
Mountain Fuel assumed the responsibility for purchasing its own gas supplies on September 1, 1993, when Questar Pipeline began operating in accordance with FERC Order No. 636. Questar Pipeline transferred its gas purchase contracts to Mountain Fuel. The majority of these contracts are priced using a current natural gas market value. Mountain Fuel also acquired an inventory of working gas to meet customer requirements.
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 $49.2 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 majority of Questar Pipeline's interruptible-transportation revenues.
Mountain Fuel reached a settlement of its Wyoming general rate case in July 1993, with the new rates effective August 1, 1993. The settlement approved an annualized increase in rates of $721,000, including recovery of costs attributable to FERC Order No. 636 and higher federal income tax rates.
In April 1993, Mountain Fuel filed a general rate case with the Public Service Commission of Utah (PSCU). The original rate increase request was revised to $10.3 million based on September 30, 1993 results and included a 12.1% rate of return on equity. Hearings on the case were held in November 1993 and a rate order was received in January 1994. The PSCU rate order granted Mountain Fuel a $1.6 million decrease in general rates and a $2.1 million increase in costs allowed through the purchased-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 a rehearing of the PSCU order for the allowed return on equity and the treatment of unbilled revenues, and the PSCU granted a rehearing on these issues.
OTHER OPERATIONS - Following is a summary of the results from Questar's other operations:
Questar owns a one-third interest in FuelMaker Corp., a Canadian company that is developing a natural gas vehicle refueling appliance for commercial or home use. Losses continued in 1993 as FuelMaker completed the design and began production of a new model. FuelMaker plans to begin full-scale production of the new model in 1994.
Corporate and other operations generated positive income in 1993 and 1992 due to lower interest and operating expenses compared with a loss in 1991.
The Company's subsidiary, Entrada Industries, Inc., has been named as 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 has proposed a remediation that has received approval from the Environmental Protection Agency and the Utah Department of Health. The Company has reached settlements with the other major potentially responsible parties and has established an accrual for the remedial work costs. Management believes that current accruals of $7,239,000 will be sufficient for estimated future 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 $3,500,000 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.
DISCONTINUED OPERATIONS - In October 1993, the Company announced that it had reached a binding agreement to sell Questar Telecom to Nextel. The Company will receive 3,886,000 shares of Nextel common stock in exchange for all of the common stock of Questar Telecom. The operating results for Questar Telecom have been reported as discontinued operations since Questar Telecom represented all of Questar's investment in the specialized mobile radio business.
The sale of Questar Telecom is expected to be completed in the first half of 1994, at which time Questar expects to recognize a gain on the transaction based on the Nextel stock price. Questar's net investment in Questar Telecom is anticipated to be approximately $40 million at the time of the sale, including the acquisition of approximately $11 million of additional channels as required by the sale agreement. Nextel common stock was $37 1/4 per share at December 31, 1993. Net losses from Questar Telecom subsequent to the sale agreement have been deferred until the sale is recorded. Questar has agreed to continue operating the Questar Telecom business and provide any working capital requirements until the sale is completed.
CONSOLIDATED OPERATING RESULTS - 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. Consolidated revenues decreased 5% in 1992 because of lower gas marketing volumes and reduced sales to residential and commercial customers.
Natural gas purchases increased 12% in 1993 after decreasing 19% in 1992 because of greater volumes sold by Mountain Fuel. Operating and maintenance expenses increased 10% in 1993 and 1% in 1992. Major reasons for the 1993 increase were: more customers and expanded service territory for Mountain Fuel, recording of postretirement medical and life insurance benefits on an accrual basis, increased natural gas production and restructuring of Questar Pipeline operations in accordance with FERC Order No. 636. Depreciation and amortization expense increased 18% in 1993 and 13% in 1992 due to capital expenditure programs in all lines of business and higher natural gas production. The full cost amortization rate was $.80 per Mcfe in 1993 compared with $.79 in 1992 and $.99 in 1991.
The Company adopted the provisions of Statement of Financial Accounting Standards (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 $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 and $1,740,000 in 1991.
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 Public Service Commission of Wyoming (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.
Debt expense decreased 5% in 1993 because of lower rates and the refinancing of higher cost debt in 1993 and 1992.
The effective income tax rate was 28.4% in 1993, 32.0% in 1992, and 36.8% in 1991. The 1993 and 1992 rates were lower because of tight-sands gas production credits of $11,026,000 in 1993 and $5,722,000 in 1992. The higher production credits in 1993 were partially offset by an increase in the federal income tax rate to 35% effective January 1, 1993. Mountain Fuel and Questar Pipeline recorded the change in deferred income taxes resulting from the increase in the federal tax rate as an increase to income taxes recoverable from customers since the regulatory commissions have adopted procedures to include underprovided deferred taxes in rates on a systematic basis.
The Financial Accounting Standards Board (FASB) has issued SFAS No. 112, Accounting for Postemployment Benefits. This statement requires the Company to recognize the liability for postemployment benefits when employees become eligible for such benefits. Postemployment benefits are paid to former employees after employment has been terminated, but before retirement benefits are paid. The Company's principal liability under SFAS No. 112 is a long-term disability program. The Company is required to adopt SFAS No. 112 in the first quarter of 1994 and recognize a cumulative effect of a change in accounting method amounting to approximately $3,300,000. Some of this amount may be recovered from Mountain Fuel's and Questar Pipeline's customers through subsequent rate changes. The effect on ongoing net income is not expected to be significant.
The FASB has issued SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, to be effective beginning in 1994. This statement requires companies to adjust the value of the majority of investments to fair value. The statement would not have a significant impact on current operations, but will require Questar to carry the investment in Nextel stock to be received from the sale of Questar Telecom at fair value.
LIQUIDITY AND CAPITAL RESOURCES
The Company has met the majority of its cash needs for capital expenditures and dividend payments with cash from operations for the last three years. Net cash from operating activities was $194,982,000 in 1993, $160,179,000 in 1992, and $156,029,000 in 1991. Higher income from continuing operations, and increased depreciation and amortization contributed to the higher 1993 amount. Reduced gas storage inventory and increased accounts payable and accrued expenses also provided a source of cash in 1993.
Following is a summary of capital expenditures for 1993, and a forecast of projected 1994 expenditures, which is subject to board of director approval.
The exploration and production operations participated in 206 wells in 1993, of which 143 were completed as gas wells, 11 were oil wells, 25 were dry holes and 27 were in progress at year end. The 1993 drilling program had an overall success rate of 86% and included the completion of tight-sands gas credit wells that were spudded in 1992.
In the first quarter of 1994, the E&P group announced two acquisitions of oil and gas reserves, processing plants, gathering systems and leasehold acreage for a cost of $117,100,000. The E&P group obtained oil and gas reserves of approximately 115 Bcf equivalent located in the Midcontinent and San Juan Basin regions. The first acquisition was for properties from Petroleum, Inc. and was completed in January 1994 at a cost of $22,600,000. This purchase was financed with short-term debt. In the second acquisition, the E&P group acquired the properties of Amax Oil & Gas's northern division at a cost of $94,500,000 through an alliance with Union Pacific Resources Corporation. This transaction is expected to be closed in the first half of 1994 and will be financed with short-term debt and an expansion of the production-based long-term credit facility.
Questar Pipeline is expanding the capacity of its Clay Basin underground gas storage facility. After expansion, the storage field will have a total capacity of 110 Bcf, including 46 Bcf of working gas storage. Capital expenditures include the purchase of cushion gas. The first phase of the expansion project is expected to be completed in mid-1994.
Questar Pipeline is a one-third partner in the TransColorado pipeline project. The Company estimates the total cost of this project at $184 million, with Questar Pipeline's equity investment approximately $18 million. Construction of the pipeline has been delayed pending receipt of final regulatory approvals and completion of contracts with shippers.
Mountain Fuel's number of customers increased 18,075 during 1993 and 16,284 in 1992 due to population growth and building construction activity in its service area. The 1994 capital expenditures anticipate a similar level of customer growth.
Questar estimates that it will invest an additional $11 million in Questar Telecom for the purchase of FCC licenses and working capital requirements prior to the completion of the sale of Questar Telecom to Nextel.
The Company funded its 1993 capital expenditures primarily with cash provided from operations. The Company expects to finance the 1994 capital expenditure program with: cash provided from operations, an expansion of the E&P production-based credit facility, the issuance of an additional $17 million in medium-term notes by Mountain Fuel, and increased borrowing under short-term line-of-credit arrangements. In addition, the Company may issue common stock, or sell or monetize a portion of its investment in Nextel common stock to fund capital expenditures.
The Company has short-term line-of-credit arrangements with several banks under which it may borrow up to $150,700,000. These lines are generally below the prime interest rate and are renewable annually. At December 31, 1993, outstanding short-term bank loans were $12,300,000 and commercial paper borrowings were $66,000,000. Commercial paper borrowings are backed by the short-term line-of-credit arrangements. Two national debt-rating agencies have rated Questar's commercial paper P-1 and A-1.
The exploration and production operations have a long-term revolving-credit arrangement with a bank to borrow up to $50,000,000. Borrowings under this arrangement were $44,000,000 at December 31, 1993.
During 1993, Mountain Fuel issued $91,000,000 of 15-year and 30-year medium-term notes at interest rates of 7.19% to 8.28%. Proceeds from these notes and $16,000,000 remaining from the 1992 issuances were used to redeem Mountain Fuel's $100,000,000 9 3/8% debentures and pay the associated refinancing costs. At December 31, 1993, Mountain Fuel had a registration statement filed with the Securities and Exchange Commission to issue an additional $17,000,000 of medium-term notes.
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 38% long-term debt, 1% preferred stock and 61% common shareholders' equity. Two national debt-rating agencies 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 and financial statement schedules 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 4, 1994, 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 4, 1994.
The following individuals served as executive officers of the Company during 1993:
Primary Positions Held with Name the Company and Affiliates
R. D. Cash 51 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 49 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 55 Senior Vice President, Questar (May 1988);President and Chief Executive Officer, Questar Service Corporation (February 1993); President and Chief Executive Officer, Questar Development (May 1984); Director, Entrada (May 1984), Questar Development (May 1984), and Questar Service (February 1993).
A. J. Marushack 58 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 46 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 48 Senior Vice President and Chief Fi- nancial 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).
R. G. Groussman 58 Vice President and General Counsel (October 1984); Director, Wexpro (November 1976) and Celsius (May 1988).
N. R. Potter 51 President and Chief Executive Officer, Questar Telecom (February 1989); President and Chief Executive Officer, Questar Service (January 1985 to February 1993); Vice President, Information Services and Telecommunications (February 1989 to February 1993). (Mr. Potter does not currently function as an executive officer.)
Connie C. Holbrook 47 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 4, 1994, 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 4, 1994, 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 4, 1994, 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 4, 1994, 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 4, 1994, 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 and schedules identified in the List of Financial Statements and Financial Statement Schedules are filed as part of this report.
The following consolidated financial statement schedules of the Company are included in Item 14(d):
Schedule V - Property, plant and equipment. Schedule VI - Accumulated depreciation, depletion and amortization of property, plant and equipment. Schedule IX - Short-term borrowing. Schedule X - Supplemental income statement information.
(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 11, 1992. (Exhibit No. 10.2. to Form 10-K Annual Report for 1991.)
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 Retire- ment Plan, as amended and restated effective November 1, 1993. (Exhibit No. 10.8. to Form 10-Q Report for Quarter ended September 30, 1993.)
10.9.* 1 Questar Corporation Equalization Benefit Plan, as amended and restated effective November 1, 1993. (Exhibit No. 10.9. to Form 10-Q Report for Quarter ended September 30, 1993.)
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.)
11. Statement concerning computation of earnings per share.
22. Subsidiary Information.
24. Consent of Independent Auditors.
25. Power of Attorney.
28.1.* Press Release dated October 18, 1993, announcing the agreement with Nextel Communications, Inc. (Exhibit No. 28.1. to Form 10-Q Report for Quarter ended September 30, 1993.)
28.2. Form 11-K Annual Report for the Questar Corporation Employee Stock Purchase Plan.
28.3. 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 1993.
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
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1993
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, 1993, 1992 and
Consolidated balance sheets -- December 31, 1993 and 1992
Consolidated statements of common shareholders' equity -- Years ended December 31, 1993, 1992 and 1991
Consolidated statements of cash flows -- Years ended December 31, 1993, 1992 and 1991
Notes to consolidated financial statements
The following consolidated financial statement schedules of Questar Corporation and subsidiaries are included in Item 14(d):
Schedule V -- Property, plant and equipment
Schedule VI -- Accumulated depreciation, depletion and amortization of property, plant and equipment
Schedule IX -- Short-term borrowings
Schedule X -- Supplementary income statement information
All other 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, 1993 and 1992, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules 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, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As noted in Note K to the financial statements, in 1993 Questar Corporation changed its method of accounting for postretirement benefits other than pensions.
ERNST & YOUNG
Salt Lake City, Utah February 11, 1994, except for Note M as to which the date is March 1, 1994
QUESTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
See notes to consolidated financial statements.
QUESTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS
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 are conducted by Celsius Energy Company (Celsius Energy), Universal Resources Corporation (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). Questar discontinued the consolidation of its specialized mobile radio telecommunication operations in October 1993 with the announced sale of Questar Telecom Inc. (Questar Telecom) discussed in Note B. 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. See Note J on rate matters.
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.
Purchased-Gas Adjustments: The Company 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 impacted differently by changing conditions. The Company believes that it has adequately reserved for expected credit-related losses.
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 L.
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 in 1993 were as follows:
Exploration and production, per Mcf equivalent Full-cost amortization rate $0.80 Wexpro amortization rate 0.48 Natural gas transmission 3.6% Natural gas distribution Distribution plant 3.9% Gas wells, per Mcf $0.18 Other operations 12.4%
Investment in Unconsolidated Affiliates: The Company uses the equity method to account for affiliates in which it does not own a controlling interest. Principal affiliates include: Overthrust Pipeline Company, FuelMaker Corporation, TransColorado Gas Transmission Company and Canyon Creek Compression Company. The Company's investment in these affiliates equals the underlying equity in net assets.
Futures Contracts and Options: The Company periodically enters into futures contracts or option agreements to hedge its exposure to price fluctuations on marketing of natural gas. Recognized gains and losses on hedge transactions are reported as a component of the related transaction.
Income Taxes: On December 31, 1992, the Company adopted Statement of Financial Accounting Standards (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 seperate return basis except that subsidiaries are paid for all tax benefits utilized in the consolidated tax return. See Note H.
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 regulated subsidiaries capitalize the cost of capital during the construction period of plant and equipment. This amounted to $1,725,000 in 1993, $1,153,000 in 1992, and $1,040,000 in 1991.
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.
Reclassifications: Certain reclassifications were made to the 1992 and 1991 financial statements to conform with the 1993 presentation.
Note B - Discontinued Operations
In October 1993, the Company announced that it had reached a binding agreement to sell its Questar Telecom to Nextel Communications, Inc. (Nextel). The Company will receive 3,886,000 shares of Nextel common stock in exchange for all of the common stock of Questar Telecom. The operating results for Questar Telecom have been reported as discontinued operations since Questar Telecom represented all of Questar's investment in the specialized mobile radio business.
The sale of Questar Telecom is expected to be completed in the first half of 1994, at which time, Questar expects to recognize a gain on the transaction based on the Nextel stock price. Questar's net investment in Questar Telecom is anticipated to be approximately $40 million at the time of the sale, including the acquisition of additional channels as required by the sale agreement. Nextel common stock traded in a range of $17 7/8 to $54 7/8 during 1993 and was $37 1/4 per share at December 31, 1993. Net losses from Questar Telecom subsequent to the sale agreement have been deferred until the sale is recorded.
Questar Telecom's operating results prior to the sale agreement were as follows:
Questar's investment in discontinued operations at September 30, 1993, including liabilities to be assumed by the purchaser, was as follows:
Note C - Cash and Short-Term Investments
Short-term investments at December 31, 1993, and 1992, valued at cost (approximates market), amounted to $11,917,000 and $14,958,000, respectively. Short-term investments consisted principally of Euro-time deposits and repurchase agreements with maturities of three months or less.
Note D - Debt
The Company has short-term line-of-credit arrangements with several banks under which it may borrow up to $150,700,000. These lines have interest rates generally below the prime interest rate and are renewable annually. At December 31, 1993, outstanding short-term bank loans were $12,300,000 at an average interest rate of 3.5% and commercial paper borrowings were $66,000,000 at an average interest rate of 3.5%. 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, 1993, are as follows (no amounts are due in 1994):
The exploration and production operations have a production-based long-term credit facility with a bank to borrow up to $50,000,000.
During 1993, Mountain Fuel issued $91,000,000 of 15-year and 30-year medium-term notes at interest rates of 7.19% to 8.28%. Proceeds from these notes and $16,000,000 remaining from the 1992 issuances were used to redeem Mountain Fuel's $100,000,000 9 3/8% debentures and pay the associated refinancing costs. At December 31, 1993, Mountain Fuel had a registration statement filed with the Securities and Exchange Commission to issue an additional $17,000,000 of medium-term notes.
Cash paid for interest was $33,414,000 in 1993, $36,115,000 in 1992, and $37,374,000 in 1991.
Note E - 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, 1993, are as follows:
Note F - Estimated Fair Values of 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 carrying amounts 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.
Note G - Common Stock
Employee Investment Plan: An Employee Investment Plan (ESOP) allows the majority of employees to purchase Company stock or other investments with 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 $35,000,000 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 $35,000,000 from a group of insurance companies. Interest expense on these notes to the insurance companies totaled $2,918,000 in 1993, 1992 and 1991.
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 was $2,368,000 in 1993, $2,477,000 in 1992 and $2,884,000 in 1991. Dividends paid by the Company to the ESOP on the LESOP shares totaled $2,112,000 in 1993, $2,033,000 in 1992 and $1,989,000 in 1991. The Company received an income tax benefit for dividends paid on ESOP shares and dividends paid directly to ESOP participants of $911,000 in 1993, $858,000 in 1992 and $835,000 in 1991. Income tax benefits of $351,000 in 1993 and $278,000 in 1992 were recorded as a reduction of income tax expense as required by SFAS No. 109. The remaining tax benefits were recorded as an increase to retained earnings.
The American Institute of Certified Public Accountants issued a Statement of Position in 1993 on accounting for ESOPs, which changes the recognition of expense on company contributions. The new rules will not impact expense on the current LESOP shares.
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 148,708 shares in 1993, 241,322 shares in 1992 and 498,483 shares in 1991. At December 31, 1993, 1,059,865 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:
Shareholder Rights: In 1986, Questar issued one common share purchase right for each outstanding share of stock. The rights expire in March 1996. The rights become exercisable if a person acquires 20% or more of the Company's common stock or announces an offer for 20% or more of the common stock. Each right initially represents the right to buy one share of the Company's common stock for $50. Once any person acquires 20% or more of the Company's common stock, the rights are automatically modified. Each right not owned by the 20% owner becomes exercisable for the number of shares of Questar's stock that have a market value equal to two times the exercise price of the right. This same result occurs if a 20% owner acquires the Company through a reverse merger when Questar and its stock survive. If the Company is involved in a merger or other business combination at any time after the rights become exercisable, rights holders will be entitled to buy shares of common stock in the acquiring company having a market value equal to twice the exercise price of each right. The rights may be redeemed by the Company at a price of $.025 per right until 15 days after a person acquires 20% ownership of the common stock.
Note H - Income Taxes
Effective January 1, 1992, the Company changed its method of accounting for income taxes from the deferred method to the liability method required by SFAS No. 109, Accounting for Income Taxes. The Company did not restate prior years' financial statements. The cumulative effect of adopting SFAS No. 109 as of January 1, 1992, increased net income by $9,303,000, or $.23 per share. The application of the rules did not have a significant impact on the 1992 income before cumulative effect.
Regulated operations recorded cumulative increases in deferred taxes as income taxes recoverable from customers. Mountain Fuel and Questar Pipeline have adopted procedures with their regulatory commissions to include under-provided deferred taxes in customer rates on a systematic basis. The amounts of income taxes recoverable from customers was higher in 1993 due to an increase in the federal income tax rate.
As of January 1, 1992, Universal Resources recorded a cumulative decrease in deferred taxes of $8,626,000 as a reduction of property, plant and equipment. This cumulative effect was a result of net operating loss carryforwards acquired by Questar in the 1987 purchase of Universal Resources. At December 31, 1993, the Company had net operating loss carryforwards of $44,778,000 which expire from 1995 through 2001. These carryforwards can be used to offset Universal Resources' future taxable income. The tax benefit of these carryforwards is $15,672,000. For financial reporting purposes, the Company has recorded a valuation allowance of $6,414,000 to offset a portion of the deferred tax asset relating to these carryforwards. Future changes in this valuation allowance will be recorded as an adjustment to property, plant and equipment.
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 $25,588,000 in 1993, $25,028,000 in 1992 and $33,523,000 in 1991.
Note I - Litigation, Environmental Matters and Commitments
The Company's subsidiary, Entrada Industries, Inc., has been named as 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 has proposed a remediation that has received approval from 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 $7,239,000 will be sufficient for estimated future 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 $3,500,000 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.
The Company and its subsidiaries have received notice that they may be partially liable in several additional 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.
There are various other legal proceedings against Questar and its subsidiaries. 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.
Many of Mountain Fuel's gas-purchase contracts include take-or-pay provisions that obligate it, on an annual basis, to take delivery of at least a specified percentage of volumes producible from wells or pay for such volumes. The contracts allow for the subsequent delivery of the gas within a specified period. Other gas-purchase contracts include provisions that obligate Mountain Fuel to schedule a specific volume for delivery on a daily or monthly basis. All gas-purchase contracts were transferred from Questar Pipeline to Mountain Fuel in 1993.
Purchases of natural gas under gas-purchase contracts totalled $85,909,000 in 1993, $104,032,000 in 1992 and $123,319,000 in 1991. Following is a summary of projected purchase commitments under gas-purchase contracts with terms of one year or more. Prices under these contracts are based on the current market price. These commitments will change as a result of future negotiations with sellers.
Note J - Rate Matters
On September 1, 1993, Questar Pipeline began operating in compliance with FERC Order No. 636. The order unbundled the sale-for-resale service from the transportation, gathering and storage services provided by natural gas pipelines. Questar Pipeline eliminated its merchant function. That activity was assumed by Mountain Fuel along with the gas-purchase contracts. In its order approving Questar Pipeline's Order No. 636 implementation plan, the FERC accepted Questar Pipeline's plan for the assignment of gas-purchase contracts to Mountain Fuel.
Order No. 636 requires a greater percentage of the cost of service to be collected through demand charges. The percentage of costs included in the demand component of rates increased from 66% prior to implementation to about 94% after implementation. The majority of Questar Pipeline's transportation capacity has been reserved by firm transportation customers, which, under Order No. 636, can release that capacity to third parties when it is not required for their own needs. After $1.5 million of revenues are received from interruptible transportation customers, 90% of the remaining revenues from the transportation of gas for interruptible customers is credited back to firm customers. Questar Pipeline is allowed to retain all interruptible transportation revenues on projects that have not been included in the transportation rate case.
Mountain Fuel filed a general rate case for its Utah operations in April 1993. The revised amount of deficiency requested in the case was $10.3 million, including a 12.1% return on equity. In January 1994, the PSCU issued a rate order 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 a rehearing of the PSCU order for the allowed return on equity and the treatment of unbilled revenues and the PSCU granted a rehearing on these issues.
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 year. The impact of these accruals on the income statement has been deferred in accordance with a rate order received from the PSCU. This rate order reduces customer rates by $2,011,000 per year over the five-year period from 1994 through 1998. Mountain Fuel will recognize the unbilled revenues and the associated gas costs over this same five-year period to offset the reduction in rates.
In July 1993, the PSCW issued an order in Mountain Fuel's general rate case for Wyoming operations. The order approved a stipulation that had been negotiated by the Company and the PSCW's staff which allowed for an increase in general rates of $721,000 including recovery of costs attributable to FERC Order No. 636 and higher federal income tax rates.
Note K - Employee Benefits
The Company and its subsidiaries have a defined-benefit pension plan covering the majority of its employees. Benefits are generally based on years of service and the employee's 36-month period of highest earnings during the ten years preceding retirement. The Company's policy is to make contributions to the plan at least sufficient to meet the minimum funding requirements of of the Internal Revenue Code. Plan assets consist principally of equity securities and corporate and U.S. government debt obligations. A summary of pension cost is as follows:
Assumptions used to calculate cost at January 1, were as follows:
The status of the plan at December 31, was as follows:
The Company used a discount rate of 7% and a rate of increase in compensation of 5.35% to measure the actuarial present value of benefits at December 31, 1993.
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 obligation, 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 $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 and $1,740,000 in 1991.
Components of the postretirement benefit cost for 1993 were as follows:
The status of the postretirement benefit programs at December 31, 1993 was as follows:
Significant assumptions used to measure postretirement benefits at December 31, 1993 were as follows:
A 1% increase in the health-care inflation rate would increase the service cost by $4,000, the interest cost by $232,000 and the accumulated benefit obligation by $2,898,000.
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 Financial Accounting Standards Board (FASB) has issued SFAS No. 112, Accounting for Postemployment Benefits. This statement requires the Company to recognize the liability for postemployment benefits when employees become eligible for such benefits. Postemployment benefits are paid to former employees after employment has been terminated but before retirement benefits are paid. The Company's principal liability under SFAS No. 112 is a long-term disability program. The Company is required to adopt SFAS No. 112 in the first quarter of 1994 and recognize a cumulative effect of a change in accounting method amounting to approximately $3,300,000. Some of this amount may be recovered from Mountain Fuel's and Questar Pipeline's customers through subsequent rate changes. The effect on ongoing net income is not expected to be significant.
Note L - 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 14.6%. 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 19.6%. 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 22.6%.
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 14.6%.
Note M - Subsequent Events
In the first quarter of 1994, the E&P group announced two acquisitions of oil and gas reserves, processing plants, gathering systems and leasehold acreage for a cost of $117,100,000. The E&P group obtained oil and gas reserves of approximately 115 Bcf equivalent located in the Midcontinent and San Juan Basin regions. The first acquisition was for properties from Petroleum, Inc. and was completed in January 1994 at a cost of $22,600,000. This purchase was financed with short-term debt. In the second acquisition, the E&P group acquired the properties of Amax Oil & Gas's northern division at a cost of $94,500,000 through an alliance with Union Pacific Resources Corporation. This transaction is expected to be closed in the first half of 1994 and will be financed with short-term debt and an expansion of the production-based long-term credit facility.
Note N - 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 L). 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 (see Note L).
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 currently excluded from amortization until evaluation. A summary of costs excluded from amortization at December 31, 1993, 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.
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, 1993, 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 $21,829,000 in 1993, $18,348,000 in 1992 and $19,771,000 in 1991.
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 O - 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 P - Operations by Line of Business
Following is a summary of operations by line of business:
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
QUESTAR CORPORATION AND SUBSIDIARIES
Note A - Other changes consist of the following: 1993 - Transfer of a portion of Questar Pipeline's current gas stored underground to cushion gas stored underground of $3,874,000; 1992 - Reduction of Universal Resource's property, plant and equipment for the adoption of SFAS No. 109 of $8,626,000; and 1991 - Reduction of Universal Resource's property, plant and equipment for the effect of preacquisition net operating loss carryforwards of $1,868,000.
SCHEDULE VI- ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
QUESTAR CORPORATION AND SUBSIDIARIES
SCHEDULE IX - SHORT-TERM BORROWINGS
QUESTAR CORPORATION AND SUBSIDIARIES
Note A - Notes payable to banks represent borrowings under line-of-credit arrangements that have no termination date but are subject to negotiation. Commercial paper matures 30 to 90 days from the date of issue with no provision for the extension of maturity.
Note B - The average amount outstanding during the period was computed by averaging the daily principal balances.
Note C - The weighted average interest rate during the period was computed by dividing the actual interest expense by the average short-term debt outstanding during the period.
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
QUESTAR CORPORATION AND SUBSIDIARIES
Advertising costs, which are less than 1% of total revenues, are not presented separately. Royalty costs for exploration and production operations have not been disclosed since production revenues are reported net of royalties. The Company does not have any depreciation and amortization of intangible assets.
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, 1994.
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 Chief W. F. Edwards Financial Officer (Principal Financial and Accounting Officer)
*Robert H. Bischoff Director *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, 1994 *By /s/ R. D. Cash Date R. D. Cash, Attorney in Fact
EXHIBIT INDEX
Sequential Page Exhibit Number 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 11, 1992. (Exhibit No. 10.2. to Form 10-K Annual Report for 1991.)
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 November 1, 1993. (Exhibit No. 10.8. to Form 10-Q Report for Quarter ended September 30, 1993.)
10.9.* 1 Questar Corporation Equalization Benefit Plan, as amended and restated effective November 1, 1993. (Exhibit No. 10.9. to Form 10-Q Report for Quarter ended September 30, 1993.)
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.)
11. Statement concerning computation of earnings per share.
22. Subsidiary Information.
24. Consent of Independent Auditors.
25. Power of Attorney.
28.1.* Press Release dated October 18, 1993, announcing the agreement with Nextel Communications, Inc. (Exhibit No. 28.1. to Form 10-Q Report for Quarter ended September 30, 1993.)
28.2. Form 11-K Annual Report for the Questar Corporation Employee Stock Purchase Plan.
28.3. 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 1993.