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, 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 June 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>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
1997 1996 1997 1996 1997 1996
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
REVENUES $63,323 $57,927 $238,636 $202,830 $407,734 $357,488
OPERATING EXPENSES
Natural gas purchases 29,669 25,144 126,880 100,609 208,671 175,940
Operating and maintenance 25,802 23,746 53,206 49,167 101,149 93,981
Depreciation 7,369 6,842 15,302 13,943 29,668 26,615
Other taxes 2,546 2,732 5,289 5,851 7,509 9,261
TOTAL OPERATING EXPENSES 65,386 58,464 200,677 169,570 346,997 305,797
OPERATING INCOME (LOSS) (2,063) (537) 37,959 33,260 60,737 51,691
INTEREST AND OTHER INCOME 1,016 1,890 1,739 2,599 2,173 5,111
DEBT EXPENSE (4,465) (3,901) (8,807) (8,173) (17,271) (16,594)
INCOME (LOSS) BEFORE
INCOME TAXES (5,512) (2,548) 30,891 27,686 45,639 40,208
INCOME TAXES (CREDITS) (2,909) (1,931) 11,185 9,452 15,179 11,519
NET INCOME (LOSS) ($2,603) ($617) $19,706 $18,234 $30,460 $28,689
</TABLE>
See notes to financial statements
<PAGE>
MOUNTAIN FUEL SUPPLY COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996 1996
(In Thousands)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and short-term investments $1,875
Accounts receivable $32,626 $34,841 63,171
Inventories 10,745 12,299 15,295
Purchased-gas adjustments 48,866 24,210
Other current assets 2,975 4,124 4,511
Total current assets 95,212 51,264 109,062
Property, plant and equipment 840,247 792,134 825,121
Less allowances for depreciation 339,133 312,921 325,821
Net property, plant and equipment 501,114 479,213 499,300
Other assets 19,514 21,389 22,707
$615,840 $551,866 $631,069
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Checks outstanding in excess of
cash balances $2,517 $1,638
Notes payable to Questar
Corporation 69,900 28,500 $76,200
Accounts payable and accrued
expenses 38,625 36,390 66,558
Purchased-gas adjustments 1,559
Total current liabilities 111,042 68,087 142,758
Long-term debt 175,000 175,000 175,000
Other liabilities 11,083 16,056 10,930
Deferred income taxes and investment
tax credits 89,901 71,588 81,311
Redeemable cumulative preferred stock 4,808 4,954 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 159,157 151,332 151,393
Total common shareholder's equity 224,006 216,181 216,242
$615,840 $551,866 $631,069
</TABLE>
See notes to financial statements
<PAGE>
MOUNTAIN FUEL SUPPLY COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
6 Months Ended
June 30,
1997 1996
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $19,706 $18,234
Depreciation 16,637 15,312
Deferred income taxes and investment
tax credits 8,590 3,040
44,933 36,586
Change in operating assets and
liabilities (12,612) 11,289
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 32,321 47,875
INVESTING ACTIVITIES
Capital expenditures (20,985) (15,969)
Proceeds from disposition of
property, plant and equipment 2,534 3,291
NET CASH USED IN INVESTING
ACTIVITIES (18,451) (12,678)
FINANCING ACTIVITIES
Decrease in notes payable
to Questar Corporation (6,300) (27,600)
Checks outstanding in excess
of cash balances 2,517 1,638
Redemption of preferred stock (20) (3)
Payment of dividends (11,942) (10,698)
NET CASH USED IN FINANCING
ACTIVITIES (15,745) (36,663)
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
June 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 six-month
periods ended June 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. In August, Mountain Fuel issued $25 million of notes
maturing August 6, 2012 with an average coupon rate of 6.91%. 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
June 30, 1997
(Unaudited)
Operating Results
Following is a summary of financial and operating information for the
Company:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
1997 1996 1997 1996 1997 1996
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL RESULTS
Revenues
From unaffiliated customers $62,632 $57,064 $236,854 $201,631 $404,128 $354,582
From affiliates 691 863 1,782 1,199 3,606 2,906
Total revenues 63,323 57,927 238,636 202,830 407,734 357,488
Natural gas purchases 29,669 25,144 126,880 100,609 208,671 175,940
Revenues less natural gas
purchases $33,654 $32,783 $111,756 $102,221 $199,063 $181,548
Operating income (loss) ($2,063) ($537) $37,959 $33,260 $60,737 $51,691
Net income (loss) ($2,603) ($617) $19,706 $18,234 $30,460 $28,689
OPERATING STATISTICS
Natural gas volumes (in thousands of
decatherms)
Residential and commercial sales 12,157 11,991 48,562 46,408 82,998 76,845
Industrial sales 2,104 1,858 5,006 4,352 9,238 8,309
Transportation for industrial
customers 11,625 11,046 24,577 24,775 49,301 52,783
Total deliveries 25,886 24,895 78,145 75,535 141,537 137,937
Natural gas revenue (per decatherm)
Residential and commercial $4.31 $3.93 $4.43 $3.93 $4.36 $4.10
Industrial sales 2.30 2.14 2.34 2.14 2.25 2.21
Transportation for industrial
customers 0.12 0.13 0.13 0.12 0.12 0.11
Heating degree days
Actual 678 617 3,133 3,213 5,227 5,148
Normal 741 741 3,484 3,484 5,801 5,801
Warmer than normal 9% 17% 10% 8% 10% 11%
Number of customers at June 30, 621,647 597,143
</TABLE>
Mountain Fuel reported a $2,603,000 net loss in the second quarter of
1997, an increase from a $617,000 loss in the second quarter of 1996.
The 1996 second quarter loss was reduced by a $1.2 million before-tax
gain from the sale of facilities. Mountain Fuel's net income for the
first half of 1997 was 8% higher than was reported for the first half
of 1996.
Revenues, less natural gas purchases, were $871,000 higher in the
second quarter of 1997 and $9,535,000 higher in the 6-month period
ended June 30, 1997 when compared with the respective periods in 1996.
The higher net revenues resulted from an increase in the number of
customers served and the effect of a weather-normalization adjustment
mechanism.
The number of customers served reached 621,647 at June 30, 1997. This
represents a 4.1% increase from a year earlier. Temperature adjusted
usage per customer was slightly higher in the 12-month period ended
June 30, 1997 when compared with the same period a year ago.
Temperatures, as measured in degree days, were warmer than normal in
the 1997 periods. However, Mountain Fuel's rates include a
weather-normalization adjustment that reduces 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 half of 1997 compared with about 50% of these
volumes in the first half of 1996.
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 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 will
maintain its current structure in Utah until competition or
opportunities require change. At June 30, 1997, the Company served
21,147 customers in the state of Wyoming representing 3% of the total
number of customers served by Mountain Fuel.
Volumes delivered to industrial customers increased 6% in the second
quarter of 1997 and were 2% higher in the first half of 1997 when
compared with the same periods of 1996 due to increased deliveries for
electric generation and metals refining. 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-, 6- and
12-month periods of 1997 when compared with the same periods of 1996
due to the increase in volumes sold and a higher natural gas purchase
cost allowed in rates. Mountain Fuel's Utah rates include the
recovery of gas cost which amounted to $1.54 per decatherm (dth) in
1997 compared with $1.04 per dth in 1996. The higher gas purchase
cost reflects a combination of events. Natural gas prices increased
sharply during the 1996-1997 winter heating season and the Company is
projecting that less low-cost gas will be supplied from Company-owned
reserves in the future.
The Public Service Commission of Utah (PSCU) approved on an interim
basis a $35.2 million annual increase in Utah natural gas rates to be
effective July 1, 1997 to allow recovery of purchased-gas costs. The
Public Service Commission of Wyoming approved a $1.8 million annual
increase also effective July 1, 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 field-purchased gas gathered
by Questar Gas Management. The Division has not yet formally
requested the PSCU to disallow any portion of gas gathering costs, but
has advised the Company that the amount in question is approximately
$6 million. The Company's management believes that its gathering costs
are reasonable and in compliance with contract terms and applicable
laws. Mountain Fuel and the Division are engaged in discussions to
resolve gathering cost issues. 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 January 1997 application for pass through of gas
costs was also approved on an interim basis.
Operating and maintenance expenses were higher in the 3-, 6- and
12-month periods ended June 30, 1997 when compared with the same
periods in 1996 because of increased costs associated with serving
more customers, inflation and write-off obsolete inventory. The
Company has experienced a 4% increase in labor costs, which is in line
with management's expectations. 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.
Interest and other income was lower in the 3- and 6-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.
The effective income tax rate was 36.2% in the first half of 1997
compared with 34.1% in the first half of 1996. The Company recognized
$1,296,000 of tight-sands gas-production credits in the 1997 period
down from $1,810,000 in the 1996 period.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities of $32,321,000 was
$15,554,000 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 a use of cash flow in
operating assets and liabilities. Gas purchase costs were
under-collected in the first half of 1997 in contrast to an
over-collection in the 1996 period. Timing differences in the
withdrawal of gas from storage and the payment of current income taxes
accounted for the remainder of the change in cash flow in 1997
compared with 1996.
Investing Activities
Capital expenditures amounted to $20,985,000 in the first half of 1997
compared with $15,969,000 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 June 30, Mountain Fuel had loan balances
outstanding of $69,900,000 in 1997 and $28,500,000 in 1996 payable to
Questar. Financing activities in the first half of 1997 and 1996
included payment of dividends and a partial repayment of loans from
Questar using net cash provided from operations. Capital expenditures
for 1997 will be financed with net cash flow provided from operating
activities, the issuance of long-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 1. Legal Proceedings.
a. On June 1, 1997, 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
provision of its tariff. In its application, the Company requested
regulatory permission to reflect annualized gas costs of $8,708,559 in
its Wyoming rates for natural gas service, effective July 1, 1997 and to
assess and to revise the rate structure for low-load-factor industrial
sales customers. The gas costs result in rates that are approximately 9
percent higher for the Company's residential customers. The PSCW
authorized the Company to reflect the increased costs in its rates as of
July 1, 1997 on an interim basis, but set the matter involving
industrial customers for hearing.
b. The Company filed a pass-through application with the Public
Service Commission of Utah (PSCU) on June 24, 1997. In this
application, Mountain Fuel requested authorization to reflect
$225,124,508 in its Utah rates, representing an annualized revenue
increase of approximately $35,200,000 and resulting in approximately 8
percent higher rates for residential customers. The PSCU issued an
interim order on July 8, 1997, authorizing the Company to reflect the
requested increase in rates effective July 1, 1997.
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
b. On July 29, 1997, Mountain Fuel filed a Current Report on
Form 8-K dated as of July 28, 1997. The report included, as exhibits, a
copy of the earnings release issued by Questar Corporation (the
Company's parent), a balance sheet and income statement for the periods
ending June 30, 1997.
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 13, 1997 /s/D. N. Rose
(Date) D. N. Rose
President and Chief
Executive Officer
August 13, 1997 /s/S. E. Parks
(Date) S. E. Parks
Vice President, Treasurer and
Chief Financial Officer
Exhibit No. 12.
Mountain Fuel Supply Company
Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
12 Months Ended
June 30,
1996 1997
(Dollars in Thousands)
<S> <C> <C>
Earnings
Income before income taxes $40,208 $45,639
Plus debt expense 16,594 17,271
Plus allowance for borrowed
funds used during construction 349 257
Plus interest portion of rental expense 296 170
$57,447 $63,337
Fixed Charges
Debt expense $16,594 $17,271
Plus allowance for borrowed
funds used during construction 349 257
Plus interest portion of rental expense 296 170
$17,239 $17,698
Ratio of Earnings to Fixed Charges 3.33 3.58
</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 June 30, 1997, and is qualified in its entirety by
reference to such unaudited financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 32,626
<ALLOWANCES> 0
<INVENTORY> 10,745
<CURRENT-ASSETS> 95,212
<PP&E> 840,247
<DEPRECIATION> 339,133
<TOTAL-ASSETS> 615,840
<CURRENT-LIABILITIES> 111,042
<BONDS> 175,000
4,808
0
<COMMON> 22,974
<OTHER-SE> 201,032
<TOTAL-LIABILITY-AND-EQUITY> 615,840
<SALES> 0
<TOTAL-REVENUES> 238,636
<CGS> 0
<TOTAL-COSTS> 180,086
<OTHER-EXPENSES> 20,591
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,807
<INCOME-PRETAX> 30,891
<INCOME-TAX> 11,185
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,706
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
