SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD MARCH 31, 1994 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ Commission File No. 1-935 MOUNTAIN FUEL SUPPLY COMPANY (Exact name of registrant as specified in its charter) STATE OF UTAH 87-0155877 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 45360, 180 East First South, Salt Lake City, Utah 84145-0360 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (801) 534-5555 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of April 30, 1994 Common Stock, $2.50 par value 9,189,626 shares MOUNTAIN FUEL SUPPLY COMPANY STATEMENTS OF INCOME (Unaudited)
<TABLE> <CAPTION> 3 Months Ended 12 Months Ended March 31, March 31, 1994 1993 1994 1993 (In Thousands) <S> <C> <C> <C> <C> REVENUES $149,015 $177,983 $373,423 $383,396 OPERATING EXPENSES Natural gas purchases 88,029 109,020 209,148 221,769 Operating and maintenance 23,741 23,290 92,937 81,655 Depreciation 5,959 5,569 23,634 21,077 Other taxes 3,510 3,370 10,153 9,921 TOTAL OPERATING EXPENSES 121,239 141,249 335,872 334,422 OPERATING INCOME 27,776 36,734 37,551 48,974 INTEREST AND OTHER INCOME 633 229 2,096 1,650 DEBT EXPENSE (4,221) (3,954) (15,690) (15,264) INCOME BEFORE INCOME TAXES 24,188 33,009 23,957 35,360 INCOME TAXES 9,090 12,544 4,255 8,554 NET INCOME $15,098 $20,465 $19,702 $26,806 </TABLE>
<PAGE> MOUNTAIN FUEL SUPPLY COMPANY CONDENSED BALANCE SHEETS (Unaudited)
<TABLE> <CAPTION> March 31, December 31, 1994 1993 1993 (In Thousands) <S> <C> <C> <C> ASSETS Current assets Cash and short-term investments $1,118 $2,570 $2,312 Accounts receivable 77,111 55,804 81,668 Inventories 15,738 2,961 23,972 Other current assets 4,276 5,017 4,739 Total current assets 98,243 66,352 112,691 Property, plant and equipment 716,122 672,432 710,100 Less allowances for depreciation 273,527 253,575 267,314 Net property, plant and equipment 442,595 418,857 442,786 Other assets 25,264 23,765 25,550 $566,102 $508,974 $581,027 LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities Notes payable to parent company $27,300 $2,300 $57,800
Accounts payable and accrued expenses 60,622 61,368 64,748 Purchased-gas adjustments 42,468 33,511 25,727 Total current liabilities 130,390 97,179 148,275 Long-term debt, less current portion 158,000 158,000 158,000 Other liabilities and deferred credits 26,525 17 27,163 Deferred income taxes and investment tax credits 51,394 53,441 57,864 Redeemable cumulative preferred stock 7,524 8,726 7,525 Common shareholder's equity Common stock 22,974 22,974 22,974 Additional paid-in capital 21,875 21,875 21,875 Retained earnings 147,420 146,762 137,351 Total common shareholder's equity 192,269 191,611 182,200 $566,102 $508,974 $581,027 </TABLE>
<PAGE> MOUNTAIN FUEL SUPPLY COMPANY CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE> <CAPTION> 3 Months Ended March 31, 1994 1993 (In Thousands) <S> <C> <C> OPERATING ACTIVITIES Net income $15,098 $20,465 Depreciation 6,524 6,116 Deferred income taxes and investment tax credits (6,470) (6,741) 15,152 19,840 Change in operating assets and liabilities 25,517 14,536 NET CASH PROVIDED FROM OPERATING ACTIVITIES 40,669 34,376 INVESTING ACTIVITIES Capital expenditures (6,244) (6,227) Uses from disposition of property, plant and equipment (89) (135) CASH USED IN INVESTING ACTIVITIES (6,333) (6,362) FINANCING ACTIVITIES Issuance of long-term debt 91,000 Repayment of long-term debt (99,126) Redemption of preferred stock (1) Decrease in notes payable to parent company (30,500) (16,600) Payment of dividends (5,029) (4,680) CASH USED IN FINANCING ACTIVITIES (35,530) (29,406) CHANGE IN CASH AND SHORT-TERM INVESTMENTS ($1,194) ($1,392) </TABLE>
<PAGE> MOUNTAIN FUEL SUPPLY COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS March 31, 1994 (Unaudited) Note A - Basis of Presentation The interim financial statements furnished reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. Due to the seasonal nature of the business, the results of operations for the three-month period ended March 31, 1994, are not necessarily indicative of the results that may be expected for the year ended December 31, 1994. For further information refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1993. Note B - Accounting for Postemployment Benefits Effective January 1, 1994, the Company recorded a liability for postemployment disability and health care benefits in compliance with the Statement of Financial Accounting Standards No. 112. This did not have an effect on net income since the $1,538,000 liability was offset with a regulatory asset because the Company expects to include these costs in future rates. MOUNTAIN FUEL SUPPLY COMPANY MANAGEMENT'S ANALYSIS March 31, 1994 Operating Results -- Following is a summary of operating information for the Company:
<TABLE> <CAPTION> 3 Months Ended 12 Months Ended March 31, March 31, 1994 1993 1994 1993 <S> <C> <C> <C> <C> Natural gas volumes (in thousands of decatherms) Residential and commercial sales 30,138 36,433 73,074 73,194 Industrial sales 2,217 1,738 6,993 5,440 Transportation for industrial customers 13,271 17,014 49,362 53,694 Total deliveries 45,626 55,185 129,429 132,328 Natural gas revenue (per decatherm) Residential and commercial $4.54 $4.56 $4.53 $4.67 Industrial sales 3.23 4.08 3.11 3.64 Transportation for industrial customers 0.12 0.10 0.12 0.11 Heating degree days Actual 2,307 3,167 5,213 5,649 Normal 2,743 2,963 5,583 5,803 Number of customers at end of period 553,507 533,881 </TABLE>
Heating degree days were 16% warmer than normal in the first quarter of 1994 compared with 7% colder than normal in the first quarter of 1993. This resulted in a 17% decrease in natural gas volumes sold to residential and commercial customers. The effect of warmer weather was partially offset by a 3.7% increase in the number of customers. Volumes delivered to industrial customers decreased 17% in the first quarter of 1994 compared with the same quarter of 1993. Natural gas demand for electric generation and some other customers was lower because of the warmer weather. Usage by several major metal and chemical customers was also lower during the quarter. Mountain Fuel's allowed return on equity for Utah operations was reduced from 12.1% to 11% effective January 1, 1994, by the Public Service Commission of Utah in a general rate case order. The Company also changed the way that revenues for residential and commercial customers are recorded from an "as-billed" to an "as-delivered" basis. This had the effect of decreasing earnings in the first quarter of 1994 by approximately $2 million, and is expected to increase earnings for the remainder of the year. Mountain Fuel's natural gas purchases were lower in the first quarter of 1994 compared with the first quarter of 1993 due to reduced volumes sold to residential and commercial customers. Natural gas purchases were lower in the 12 months ended March 31, 1994, compared with the year-earlier period due to reduced cost per decatherm of purchased and produced gas. Operating and maintenance expenses were level in the first quarter of 1994 compared with the first quarter of 1993; however, these expenses increased 14% in the 12 months ended March 31, 1994, over the 1993 period because of additional customers, expanded service territory and recording of postretirement medical expenses on an accrual basis. The effective income tax rate was 37.6% in the first quarter of 1994, compared with 38.0% in the first quarter of 1993. The Company recognized $999,000 of tight-sands gas-production credits in the first quarter of 1994 and $589,000 in the first quarter of 1993. The increased credits were partially offset by an increase in the federal income tax rate to 35%. Effective January 1, 1994, the Company recorded a liability for postemployment disability and health care benefits in compliance with the Statement of Financial Accounting Standards No. 112. This did not have an effect on net income since the $1,538,000 liability was offset with a regulatory asset because the Company expects to include these costs in future rates. Another utility has requested authorization from the Public Service Commission of Utah to amortize the liability over a five-year period. That docket is pending before the Commission. Mountain Fuel anticipates requesting similar regulatory treatment. Liquidity and Capital Resources - Net cash provided from operating activities was $40,669,000 in the first quarter of 1994 compared with $34,376,000 for the same period of 1993. The increase was due to changes in operating assets and liabilities, primarily gas stored underground. Increases in cash flow from changes in operating assets and liabilities were partially offset by reduced net income. Capital expenditures were $6,244,000 in the first quarter of 1994, compared with $6,227,000 in the corresponding 1993 period. Capital expenditures for the calendar year 1994 are estimated at $51,400,000. These capital expenditures will be financed with funds from operations, borrowings under the medium-term note program, equity investment from Questar, and short-term borrowings from banks or Questar. The Company had short-term line-of-credit arrangements with banks totaling $500,000. As of March 31, 1994, $27,300,000 was borrowed from Questar Corporation.
PART II OTHER INFORMATION
Item 1. Legal Proceedings. On April 18, 1994, the Public Service Commission of Utah (the PSCU) held a public hearing to consider issues raised by Mountain Fuel Supply Company (Mountain Fuel or the Company) concerning the PSCU's order in the Company's general rate case. See the Company's Current Report on Form 8-K dated January 10, 1994 for details concerning the PSCU's order that authorized a return on equity of 11.0 percent and specified an annual decrease in the Company's rates of $1.6 million. As a result of an approved stipulation, approximately $2.1 million of costs reflected in Mountain Fuel's general rate case were added to its gas balancing account. Consequently, the net effect of the order and the transfer of general rate case costs was an annualized rate increase of $500,000. The PSCU's order required the Company to recognize $2,011,000 in unbilled revenues each year for five years for ratemaking purposes. The PSCU did not allow any testimony on return on equity, but agreed to review the record on that issue. As of the date of this report, the PSCU has not issued a decision with respect to the issues raised by Mountain Fuel on rehearing.
Item 6. Exhibits and Reports on Form 8-K. (a) The following exhibit has been filed as part of this report. Exhibit No. Exhibit 12.01. Ratio of Earnings to Fixed Charges (b) The Company filed a Current Report on Form 8-K dated January 10, 1994, disclosing the PSCU's order. No financial statements were filed with this Form 8-K.
SIGNATURES Pursuant to the requirements 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. MOUNTAIN FUEL SUPPLY COMPANY (Registrant) May 11, 1994 /s/ D. N. Rose D. N. Rose President and Chief Executive Officer May 11, 1994 /s/ W. F. Edwards W. F. Edwards Vice President and Chief Financial Officer
Exhibit 12.01 MOUNTAIN FUEL SUPPLY COMPANY RATIO OF EARNINGS TO FIXED CHARGES 12 Months Ended March 31, 1994 1993 (Dollars in Thousands) EARNINGS Income before income taxes $23,957 $35,360 Plus debt expense 15,690 15,264 Plus allowance for borrowed funds used during construction 189 281 Plus interest portion of rental expense 121 99 $39,957 $51,004 FIXED CHARGES Debt expense $15,690 $15,264 Plus allowance for borrowed funds used during construction 189 281 Plus interest portion of rental expense 121 99 $16,000 $15,644 RATIO OF EARNINGS TO FIXED CHARGES 2.50 3.26