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 ENDED JUNE 30, 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 July 31, 1994 Common Stock, $2.50 par value 9,189,626 shares
<PAGE> MOUNTAIN FUEL SUPPLY COMPANY STATEMENTS OF INCOME (Unaudited)
<TABLE> <CAPTION> 3 Months Ended 6 Months Ended 12 Months Ended June 30, June 30, June 30, 1994 1993 1994 1993 1994 1993 (In Thousands) <S> <C> <C> <C> <C> <C> <C> REVENUES $54,885 $71,077 $203,900 $249,060 $357,231 $395,476 OPERATING EXPENSES Natural gas purchases 26,550 37,936 114,579 146,956 197,762 228,639 Operating and maintenance 23,985 22,366 47,726 45,656 94,556 84,039 Depreciation 6,168 5,344 12,127 10,913 24,458 21,860 Other taxes 3,177 2,991 6,687 6,361 10,339 10,004 TOTAL OPERATING EXPENSES 59,880 68,637 181,119 209,886 327,115 344,542 OPERATING INCOME (LOSS) (4,995) 2,440 22,781 39,174 30,116 50,934 INTEREST AND OTHER INCOME 643 272 1,276 501 2,467 1,539 DEBT EXPENSE (3,732) (3,764) (7,953) (7,718) (15,658) (15,069) INCOME (LOSS) BEFORE INCOME TAXES (8,084) (1,052) 16,104 31,957 16,925 37,404 INCOME TAXES (CREDIT) (4,235) (3,202) 4,855 9,342 3,222 6,721 NET INCOME (LOSS) ($3,849) $2,150 $11,249 $22,615 $13,703 $30,683 </TABLE>
<PAGE> MOUNTAIN FUEL SUPPLY COMPANY CONDENSED BALANCE SHEETS (Unaudited)
<TABLE> <CAPTION> June 30, December 31, 1994 1993 1993 (In Thousands) <S> <C> <C> <C> ASSETS Current assets Cash and short-term investments $1,347 $195 $2,312 Notes receivable from parent company 7,000 Accounts receivable 38,622 23,952 81,668 Inventories 18,249 3,910 23,972 Other current assets 4,734 5,805 4,739 Total current assets 62,952 40,862 112,691 Property, plant and equipment 727,672 679,979 710,100 Less allowances for depreciation 278,793 258,406 267,314 Net property, plant and equipment 448,879 421,573 442,786 Other assets 25,211 23,578 25,550 $537,042 $486,013 $581,027 LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities Notes payable to parent company $16,900 $57,800
Accounts payable and accrued expenses 42,833 $40,817 64,748 Purchased-gas adjustments 26,106 33,224 25,727 Total current liabilities 85,839 74,041 148,275 Long-term debt 175,000 158,000 158,000 Other liabilities and deferred credits 27,110 1,472 27,163 Deferred income taxes and investment tax credits 58,178 54,693 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 138,542 144,232 137,351 Total common shareholder's equity 183,391 189,081 182,200 $537,042 $486,013 $581,027 </TABLE>
<PAGE> MOUNTAIN FUEL SUPPLY COMPANY CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE> <CAPTION> 6 Months Ended June 30, 1994 1993 (In Thousands) <S> <C> <C> OPERATING ACTIVITIES Net income $11,249 $22,615 Depreciation 13,323 12,022 Deferred income taxes and investment tax credits 314 (5,489) 24,886 29,148 Change in operating assets and liabilities 27,524 25,455 NET CASH PROVIDED FROM OPERATING ACTIVITIES 52,410 54,603 INVESTING ACTIVITIES Capital expenditures (19,075) (14,551) Uses from disposition of property, plant and equipment (341) (433) CASH USED IN INVESTING ACTIVITIES (19,416) (14,984) FINANCING ACTIVITIES Issuance of long-term debt 17,000 91,000 Repayment of long-term debt (99,126) Redemption of preferred stock (1) Increase in notes receivable from parent company (7,000) Decrease in notes payable to parent company (40,900) (18,900) Payment of dividends (10,058) (9,360) CASH USED IN FINANCING ACTIVITIES (33,959) (43,386) DECREASE IN CASH AND SHORT-TERM INVESTMENTS ($965) ($3,767) </TABLE>
<PAGE> MOUNTAIN FUEL SUPPLY COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS June 30, 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-and six-month periods ended June 30, 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. Note C - Financing During the second quarter of 1994, Mountain Fuel issued $17,000,000 of 30-year notes with a stated interest rate of 8.12%. Mountain Fuel used proceeds from these notes for capital expenditures and operations. On July 1, 1994 Mountain Fuel received a $20,000,000 capital contribution from its parent company. Proceeds of the capital contribution were used to fund capital expenditures and to repay short-term debt.
<PAGE> MOUNTAIN FUEL SUPPLY COMPANY MANAGEMENT'S ANALYSIS June 30, 1994 Operating Results -- Following is a summary of operating information for the Company:
<TABLE> <CAPTION> 3 Months Ended 6 Months Ended 12 Months Ended June 30, June 30, June 30, 1994 1993 1994 1993 1994 1993 <S> <C> <C> <C> <C> <C> <C> Natural gas volumes (in thousands of decatherms) Residential and commercial sales 9,768 14,002 39,906 50,435 68,840 76,976 Industrial sales 1,692 1,364 3,909 3,102 7,321 5,730 Transportation for industrial customers 10,020 11,824 23,291 28,838 47,558 54,085 Total deliveries 21,480 27,190 67,106 82,375 123,719 136,791 Natural gas revenue (per decatherm) Residential and commercial $4.55 $4.42 $4.54 $4.52 $4.55 $4.60 Industrial sales 2.65 3.08 2.98 3.64 3.01 3.54 Transportation for industrial customers 0.12 0.12 0.12 0.11 0.11 0.11 Heating degree days Actual 523 950 2,830 4,117 4,786 6,047 Normal 741 1,040 3,484 4,003 5,282 5,803 Number of customers at end of period 553,350 532,402 </TABLE>
Natural gas volumes sold to residential and commercial customers decreased in the 3-, 6- and 12-month periods of 1994 as a result of unseasonably warm weather and a change in the method of recording revenues from the retail sale of natural gas. These two factors were also largely responsible for the significantly lower earnings reported in the second quarter and first half of 1994. Temperatures in the first half of 1994 were 19% warmer than normal compared with 3% colder than normal weather in the first half of 1993. The effects of warmer weather and the change in recording revenues was partially offset by a 3.9% increase in the number of customers. 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 (PSCU) in a general rate case order. Also as a result of actions taken by the PSCU, the Company 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 shifting approximately $5 million of net income from the first half of 1994 to the second half, primarily the fourth quarter. Volumes delivered to industrial customers decreased 15% in the first half of 1994 compared with the same period of 1993. Natural gas demand for electric generation and for use by several major metal and chemical customers was lower during the first half of 1994. Mountain Fuel's natural gas purchases were lower in the 3-, 6- and 12-month periods of 1994 compared with the same periods of 1993 due to reduced volumes sold to residential and commercial customers. Operating and maintenance expenses were higher in the 1994 periods because of additional customers and expanded service territory. Interest and other income was higher in the 1994 periods largely due to a working-gas carrying charge earned by the Company as allowed by the PSCU in the last general rate case. The effective income tax rate was 30.1% in the first half of 1994, compared with 29.2% in the first half of 1993. The Company recognized $2,049,000 of tight-sands gas-production credits in the first six months of 1994 compared with $3,299,000 in the 1993 period. The federal income tax rate increased 1% to 35% beginning in the third quarter of 1993. 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. Liquidity and Capital Resources - Operating Activities: Net cash provided from operating activities was $52,410,000 in the first half of 1994 compared with $54,603,000 for the same period of 1993. The decrease was due to lower net income and was partially offset by increased cash flow from deferred income taxes. Investing Activities: Capital expenditures were $19,075,000 in the first six months of 1994, compared with $14,551,000 in the corresponding 1993 period. Capital expenditures for calendar year 1994 are estimated at $51,400,000. Financing Activities: During the second quarter of 1994, Mountain Fuel borrowed $17,000,000 of 30-year notes with an interest rate of 8.12%. The proceeds were used to fund capital expenditures and operations. On July 1, 1994 Mountain Fuel received a $20,000,000 capital contribution from its parent company. The Company used the capital contribution to fund capital expenditures and repay short-term debt borrowed from its parent company. The Company had short-term line-of-credit arrangements with banks totaling $500,000. In addition, its parent company loans funds to the Company under a short-term borrowing arrangement. As of June 30, 1994, Mountain Fuel had loans outstanding of $16,900,000 payable to its parent company.
PART II OTHER INFORMATION
Item 1. Legal Proceedings. a. On June 1, 1994, Mountain Fuel Supply Company (Mountain Fuel or the Company) filed a semi-annual application with the Public Service Commission of Wyoming (the PSCW) under the purchased gas adjustment provisions of the Company's Wyoming tariff. In the application, Mountain Fuel requested authorization to reflect an annualized revenue decrease of $572,000 in its rates effective July 1, 1994. The PSCW order authorized the Company to reflect the decrease in its rates as of July 1, 1994. The Company cited its growing use of its own production, with cost-of-service prices that are lower than the cost of field-purchased gas, as the primary reason for the decrease. b. The Company filed a comparable application with the Public Service Commission of Utah (the PSCU) on June 9, 1994. In this application, Mountain Fuel requested authorization to reflect a revenue decrease of $12,917,000 in its rates effective July 1, 1994. The PSCU, by an interim order, authorized Mountain Fuel to reflect the decrease in its rates as of July 1, 1994, but specified that the case would be held open pending further review of minor issues. A public hearing has been scheduled for August 30, 1994. c. As of the date of this report, the PSCU has not issued an order with respect to the issues that were raised by Mountain Fuel on rehearing of the PSCU's decision in the Company's 1993 general rate case. The issues under review by the PSCU are the 11.0 percent return on equity authorized for Mountain Fuel and the proper handling of unbilled revenues for ratemaking purposes.
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) August 11, 1994 /s/ D. N. Rose (Date) D. N. Rose President and Chief Executive Officer August 11, 1994 /s/ W. F. Edwards (Date) W. F. Edwards Vice President and Chief Financial Officer