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
SEPTEMBER 30, 1997
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 100 South, Salt Lake City, Utah 84145-0360
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 324-5555
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 September 30, 1997
Common Stock, $2.50 par value 9,189,626 shares
Registrant meets the conditions set forth in General Instruction H(a)(1)
and (b) of Form 10-Q and is filing this Form 10-Q with the reduced
disclosure format.
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
MOUNTAIN FUEL SUPPLY COMPANY
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTIION>
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
1997 1996 1997 1996 1997 1996
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
REVENUES $47,479 $42,197 $286,115 $245,027 $413,016 $359,854
OPERATING EXPENSES
Natural gas purchases 21,716 16,559 148,596 117,168 213,828 175,975
Operating and maintenance 23,103 22,600 76,309 71,767 101,652 93,818
Depreciation 7,189 6,445 22,491 20,388 30,412 27,213
Other taxes 2,085 1,434 7,374 7,285 8,160 8,504
TOTAL OPERATING EXPENSES 54,093 47,038 254,770 216,608 354,052 305,510
OPERATING INCOME (LOSS) (6,614) (4,841) 31,345 28,419 58,964 54,344
INTEREST AND OTHER INCOME 902 608 2,641 3,207 2,467 3,866
DEBT EXPENSE (4,886) (4,087) (13,693) (12,260) (18,070) (16,683)
INCOME (LOSS) BEFORE
INCOME TAXES (10,598) (8,320) 20,293 19,366 43,361 41,527
INCOME TAXES (CREDITS) (4,824) (3,873) 6,361 5,579 14,228 12,360
NET INCOME (LOSS) ($5,774) ($4,447) $13,932 $13,787 $29,133 $29,167
</TABLE>
See notes to financial statements
<PAGE>
MOUNTAIN FUEL SUPPLY COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996 1996
(In Thousands)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and short-term investments $1,875
Accounts receivable $23,112 $21,880 63,171
Inventories 19,253 17,898 15,295
Purchased-gas adjustments 59,487 13,206 24,210
Other current assets 3,644 3,889 4,511
Total current assets 105,496 56,873 109,062
Property, plant and equipment 858,741 806,363 825,121
Less allowances for depreciation 346,947 319,183 325,821
Net property, plant and equipment 511,794 487,180 499,300
Other assets 19,471 21,126 22,707
$636,761 $565,179 $631,069
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Checks outstanding in excess of
cash balances $1,174 $606
Notes payable to Questar
Corporation 73,100 54,300 $76,200
Accounts payable and accrued
expenses 37,188 30,737 66,558
Total current liabilities 111,462 85,643 142,758
Long-term debt 207,000 175,000 175,000
Other liabilities 10,756 16,072 10,930
Deferred income taxes and investment
tax credits 94,859 77,237 81,311
Redeemable cumulative preferred stock 4,840 4,828
Common shareholder's equity
Common stock 22,974 22,974 22,974
Additional paid-in capital 41,875 41,875 41,875
Retained earnings 147,835 141,538 151,393
Total common shareholder's equity 212,684 206,387 216,242
$636,761 $565,179 $631,069
</TABLE>
See notes to financial statements
<PAGE>
MOUNTAIN FUEL SUPPLY COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
9 Months Ended
September 30,
1997 1996
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $13,932 $13,787
Depreciation 24,452 22,507
Deferred income taxes and investment
tax credits 13,548 8,689
51,932 44,983
Change in operating assets and
liabilities (24,617) (1,253)
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 27,315 43,730
INVESTING ACTIVITIES
Capital expenditures (39,473) (30,908)
Proceeds from disposition of
property, plant and equipment 2,527 3,068
NET CASH USED IN INVESTING
ACTIVITIES (36,946) (27,840)
FINANCING ACTIVITIES
Checks outstanding in excess
of cash balances 1,174 606
Decrease in notes payable
to Questar Corporation (3,100) (1,800)
Redemption of preferred stock (4,876) (117)
Issuance of long-term debt 32,000
Payment of dividends (17,442) (16,045)
NET CASH PROVIDED FROM (USED
IN) FINANCING ACTIVITIES 7,756 (17,356)
DECREASE IN CASH AND
SHORT-TERM INVESTMENTS ($1,875) ($1,466)
</TABLE>
See notes to financial statements
<PAGE>
MOUNTAIN FUEL SUPPLY COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
Note 1 - Basis of Presentation
The interim financial statements 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 nine-month
periods ended September 30, 1997, are not necessarily indicative of
the results that may be expected for the year ending December 31,
1997. 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, 1996.
Note 2 - Redemption of Preferred Stock
Mountain Fuel redeemed its 8% series of preferred stock July 1, 1997,
at a redemption price equal to 101% of the principal amount. The
Company had 48,081 shares outstanding with a par value of $4,808,000
at the time of the transaction.
Note 3 - Financing
Mountain Fuel filed a registration statement with the Securities and
Exchange Commission for the issuance of up to $75 million in
medium-term notes. The registration statement became effective July
23, 1997. Mountain Fuel issued $32 million of medium-term notes in
the third quarter of 1997 and an additional $18 million in October
1997. The notes have a weighted average coupon rate of 6.88% and a
weighted average maturity of 16.5 years. Mountain Fuel intends to use
the net proceeds from the sale of the notes to finance a portion of
its capital expenditures and repay a portion of its short-term debt.
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations
MOUNTAIN FUEL SUPPLY COMPANY
September 30, 1997
(Unaudited)
Operating Results
Following is a summary of financial and operating information for the
Company:
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
1997 1996 1997 1996 1997 1996
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL RESULTS
Revenues
From unaffiliated customers $47,027 $41,451 $283,881 $243,082 $409,704 $357,191
From affiliates 452 746 2,234 1,945 3,312 2,663
Total revenues 47,479 42,197 286,115 245,027 413,016 359,854
Natural gas purchases 21,716 16,559 148,596 117,168 213,828 175,975
Revenues less natural gas
purchases $25,763 $25,638 $137,519 $127,859 $199,188 $183,879
Operating income (loss) ($6,614) ($4,841) $31,345 $28,419 $58,964 $54,344
Net income (loss) ($5,774) ($4,447) $13,932 $13,787 $29,133 $29,167
OPERATING STATISTICS
Natural gas volumes (in thousands of
decatherms)
Residential and commercial sales 6,799 7,575 55,361 53,983 82,222 77,594
Industrial sales 1,743 1,569 6,749 5,921 9,412 8,142
Transportation for industrial
customers 12,390 12,391 36,967 37,166 49,300 51,589
Total deliveries 20,932 21,535 99,077 97,070 140,934 137,325
Natural gas revenue (per decatherm)
Residential and commercial $5.24 $4.29 $4.53 $3.98 $4.44 $4.08
Industrial sales 2.69 2.14 2.43 2.14 2.35 2.19
Transportation for industrial
customers 0.13 0.12 0.13 0.12 0.13 0.11
Heating degree days
Actual 82 144 3,215 3,357 5,165 5,215
Normal 110 110 3,594 3,594 5,801 5,801
Colder (warmer) than normal (25%) 31% (11%) (7%) (11%) (10%)
Number of customers at
September 30, 626,653 603,647
</TABLE>
Revenues, less natural gas purchases, were $125,000 higher in the
third quarter of 1997 and $9,660,000 higher in the nine-month period
ended September 30, 1997 when compared with the respective periods in
1996. The higher net revenues resulted from the effect of a
weather-normalization adjustment mechanism and an increase in the
number of customers served and were partially offset by a 1997 rate
reduction.
Mountain Fuel's rates include a weather-normalization adjustment that
normalizes the revenue impact of weather fluctuations. Virtually all
of Mountain Fuel's residential and commercial volumes were covered
under the weather-normalization adjustment in the first nine months of
1997 compared with about 50% of these volumes in the first nine months
of 1996.
The number of customers served by the Company reached 626,653 at
September 30, 1997, representing a 3.8 % increase from a year earlier.
The Company agreed to a negotiated annual rate reduction of $2.85
million of revenues in Utah that went into effect February 18, 1997.
The rate reduction decreased block rates, eliminated the new-premises
fee for multifamily dwellings and reduced the capacity-release
revenues retained by Mountain Fuel from 20% to 10%.
In other rate matters, the Company currently intends to file a
gas-merchant unbundling proposal in Wyoming during the fourth quarter
of 1997. Under this proposal, a transportation service option would
be extended to residential and commercial customers as well as
industrial customers. Customers choosing transportation service would
be allowed to secure gas supplies directly from producers and
marketers and pay the Company a fee for transportation services.
Mountain Fuel will continue to offer a traditional bundled service as
well. The Company expects that the option of unbundled service in
Wyoming, in its anticipated form, will not have a material effect on
earnings. Mountain Fuel does not anticipate changes to its current
structure in Utah until competition or opportunities require change.
At September 30, 1997, the Company served 21,309 customers in the
state of Wyoming amounting to 3% of the total number of customers
served by Mountain Fuel.
Volumes delivered to industrial customers were slightly higher in the
first nine months of 1997 when compared with the same period of 1996.
Margins from gas delivered to industrial customers are substantially
lower than from gas sold to residential and commercial customers.
Mountain Fuel's natural gas purchases were higher in the 3-, 9- and
12-month periods of 1997 when compared with the same periods of 1996
due to a higher natural gas-cost component allowed in rates and an
increase in volumes sold. The gas-cost component of Mountain Fuel's
Utah rates increased to $1.90 per decatherm (dth) July 1, 1997
compared with $1.08 per dth in 1996. These higher rates resulted from
sharply increased natural gas prices during the 1996-1997 heating
season.
In addition to the gas-cost rate increase approved in July 1997, the
Public Service Commission of Utah (PSCU) approved on an interim basis,
a $34 million annual increase in Utah natural gas rates effective
October 22, 1997. The rate increase is to allow recovery of
purchased-gas costs. The gas-cost component in rates after this
filing was increased to $2.27 per dth. The Public Service Commission
of Wyoming approved a $1.8 million annual increase effective July 1,
1997 and a $1.4 million increase effective October 27, 1997. The
Company has a purchased-gas cost adjustment mechanism whereby
purchased-gas costs that are different from those provided for in
present rates are accumulated and recovered or credited through future
rate changes. The Company routinely files for adjustment of
purchased-gas costs with Utah and Wyoming on a semiannual basis.
The PSCU approved a purchased gas-cost recovery application on an
interim basis, effective January 1, 1996. In connection with the
application and pass-through cases filed since then, the Utah Division
of Public Utilities (Division) has raised issues about the
reasonableness of gas-gathering costs for Mountain Fuel-owned gas
gathered by Questar Gas Management. After extensive discussions with
the Division, it appears that the gathering costs issues have been
resolved prospectively. The key issue remaining is whether the
reduction in gathering costs should be applied retroactively to March
1996, the costs in question could amount to approximately $6 million.
The Division has not formally requested the PSCU to disallow any
portion of gas-gathering costs. The Company's management believes
that its gathering costs are reasonable and in compliance with
contract terms and applicable laws. The Company cannot predict the
resolution of this dispute or any financial impact of such resolution
on its balance sheet, income statement, or cash flows at the current
time. The Company's subsequent applications for pass through of gas
costs were also approved on an interim basis.
Operating and maintenance expenses were higher in the 3-, 9- and
12-month periods ended September 30, 1997 when compared with the same
periods in 1996 because of increased costs associated with serving
more customers, inflation and operating and enhancing new information
technology systems. The escalation of operating costs was somewhat
mitigated by cost-containment effects of consolidating certain
administrative, marketing, financial, technical and related services
under Questar Regulated Services Co., which wholly owns Mountain Fuel.
These services were previously staffed and performed separately by
Mountain Fuel and its affiliated company, Questar Pipeline.
Depreciation expense was higher in the 1997 periods primarily as a
result of increased investment in property, plant and equipment and
estimated shorter useful lives for computer software and equipment.
Interest and other income was lower in the 9- and 12-month periods of
1997 when compared with the same periods of 1996 primarily due to a
sale of facilities in the second quarter of 1996 that netted a $1.2
million gain before income taxes. Debt expense was higher in the 1997
periods due primarily to an increase in debt balances, including the
recent issues of medium-term notes.
The effective income tax rate was 31.3% in the first nine months of
1997 compared with 28.8% in the same time period of 1996. The Company
recognized $2,007,000 of tight-sands gas-production credits in the
1997 period down from $2,456,000 in the 1996 period.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities of $27,315,000 was
$16,415,000 less than was generated in the same period of 1996. An
increase in cash flow from higher earnings and non-cash deferred
income tax expense was more than offset by an under-collection of gas
costs in rates and timing differences in the withdrawal of gas from
underground storage.
Investing Activities
Capital expenditures amounted to $39,473,000 in the first nine months
of 1997 compared with $30,908,000 in the corresponding 1996 period.
Capital expenditures for calendar year 1997 are estimated at
$61,700,000.
Financing Activities
The Company has a short-term borrowing arrangement with Questar
Corporation. As of September 30, Mountain Fuel had loan balances
outstanding of $73,100,000 in 1997 and $54,300,000 in 1996 payable to
Questar. Financing activities in the first nine months of 1997 and
1996 included payment of dividends and a partial repayment of loans
from Questar using net cash provided from operations. Also in the
third quarter of 1997, the Company issued $32 million of medium-term
notes and redeemed $4.8 million of preferred stock. The Company
issued an additional $18 million of notes in October of 1997.
Capital expenditures for 1997 will be financed with net cash flow
provided from operating activities, the issuance of medium-term debt
and borrowings from Questar.
This 10-Q contains forward-looking statements about the future
operations and expectations of Mountain Fuel. According to
management, these statements are made in good faith and are reasonable
representations of the Company's expected performance at the time.
Actual results may vary from management's stated expectations and
projections due to a variety of factors.
PART II
OTHER INFORMATION
Item 5. Other Information.
a. On October 8, 1997, Mountain Fuel Supply Company (Mountain
Fuel or the Company) filed an application with the Public Service
Commission of Utah (PSCU), seeking an interim adjustment to the
commodity portion of its natural gas rates. The Company, in its
application, noted that the cost of purchased gas supplies was projected
to be higher than expected when it made its semi-annual application in
June of 1997 and requested approval to reflect annualized gas costs of
$259,153,092 in its rates. The gas costs represent a revenue increase
of approximately $34 million and result in approximately 7.75 percent
higher rates for residential customers. By an interim order dated
October 24, 1997, the PSCU authorized Mountain Fuel to collect the
requested increase.
b. The Company filed a similar application with the Public
Service Commission of Wyoming (PSCW) on October 15, 1997. In this
application, Mountain Fuel sought approval to reflect $10,101,400 in
annualized gas costs, representing a revenue increase of approximately
$1.4 million. The PSCW authorized the Company to collect the requested
increase in rates effective October 27, 1997.
c. On November 4, 1997, the PSCU held a prehearing in
conjunction with some issues from the Company's pending pass-through
cases. The primary issue involves the treatment of Mountain Fuel's
costs for gathering services provided by Questar Gas Management Company
(Questar Gas Management), an affiliate.
Questar Gas Management provides gathering services for the Company
under a 1993 agreement that was transferred to it from Questar Pipeline
Company, an affiliated interstate pipeline. This agreement specified
that contract rates would be redetermined as of September 1, 1997. The
new rates for gathering services are lower than the rates charged prior
to September 1997. The Division of Public Utilities, a state agency,
claims that the reduction should be extended retroactively to March of
1996, when Questar Pipeline transferred the gathering assets and
agreement to Questar Gas Management.
Mountain Fuel's management believes that its gathering costs are
reasonable and intends to vigorously defend its position that the
contract rates should not be retroactively reduced. The Company
anticipates that the issue will go to public hearings.
d. The Company still intends to file an unbundling proposal with
the PSCW prior to the end of the year, seeking permission to offer a
transportation option to residential and commercial customers.
Customers choosing transportation service would be allowed to secure gas
supplies directly from producers and marketers and pay Mountain Fuel for
transportation service. (Transportation service is already available to
Mountain Fuel's industrial customers.) The Company would continue to
offer bundled sales service to its residential and commercial customers
and expects that a majority of its 21,309 core customers in southwestern
Wyoming would continue to choose sales service.
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. Ratio of Earnings to Fixed Charges.
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)
November 13, 1997 /s/S. E. Parks
(Date) S. E. Parks
Vice President, Treasurer and
Chief Financial Officer (Duly
authorized officer and principal
financial officer.)
Exhibit No. 12.
Mountain Fuel Supply Company
Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
12 Months Ended
September 30,
1996 1997
(Dollars in Thousands)
<S> <C> <C>
Earnings
Income before income taxes $41,527 $43,361
Plus debt expense 16,683 18,070
Plus allowance for borrowed
funds used during construction 251 303
Plus interest portion of rental expense 224 156
$58,685 $61,890
Fixed Charges
Debt expense $16,683 $18,070
Plus allowance for borrowed
funds used during construction 251 303
Plus interest portion of rental expense 224 156
$17,158 $18,529
Ratio of Earnings to Fixed Charges 3.42 3.34
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The following schedule contains summarized financial information extracted
from the Mountain Fuel Supply Company Statements of Income and Balance Sheet
for the period ended September 30, 1997, and is qualified in its entirety
by reference to such unaudited statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 23,112
<ALLOWANCES> 0
<INVENTORY> 19,253
<CURRENT-ASSETS> 105,496
<PP&E> 858,741
<DEPRECIATION> 346,947
<TOTAL-ASSETS> 636,761
<CURRENT-LIABILITIES> 111,462
<BONDS> 207,000
0
0
<COMMON> 22,974
<OTHER-SE> 189,710
<TOTAL-LIABILITY-AND-EQUITY> 636,761
<SALES> 0
<TOTAL-REVENUES> 286,115
<CGS> 0
<TOTAL-COSTS> 224,905
<OTHER-EXPENSES> 29,865
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,693
<INCOME-PRETAX> 20,293
<INCOME-TAX> 6,361
<INCOME-CONTINUING> 13,932
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,932
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
