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 MARCH 31, 1995 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, 1995 Common Stock, $2.50 par value 9,189,626 shares MOUNTAIN FUEL SUPPLY COMPANY STATEMENTS OF INCOME (Unaudited) 3 Months Ended 12 Months Ended March 31, March 31, 1995 1994 1995 1994 (In Thousands) REVENUES $140,815 $149,015 $370,060 $373,423 OPERATING EXPENSES Natural gas purchases 81,345 88,029 203,823 209,148 Operating and maintenance 24,763 23,741 95,116 92,937 Depreciation 6,873 5,959 25,663 23,634 Other taxes 3,357 3,510 9,436 10,153 TOTAL OPERATING EXPENSES 116,338 121,239 334,038 335,872 OPERATING INCOME 24,477 27,776 36,022 37,551 INTEREST AND OTHER INCOME 701 633 7,888 2,096 DEBT EXPENSE (4,167) (4,221) (15,832) (15,690) INCOME BEFORE INCOME TAXES 21,011 24,188 28,078 23,957 INCOME TAXES 7,950 9,090 6,763 4,255 NET INCOME $13,061 $15,098 $21,315 $19,702 MOUNTAIN FUEL SUPPLY COMPANY CONDENSED BALANCE SHEETS (Unaudited) March 31, December 31, 1995 1994 1994 (In Thousands) ASSETS Current assets Cash and short-term investments $1,118 $2,529 Accounts receivable $69,993 77,111 74,220 Inventories 21,769 15,738 24,941 Other current assets 4,463 4,276 4,279 Total current assets 96,225 98,243 105,969 Property, plant and equipment 745,361 716,122 739,945 Less allowances for depreciation 287,332 273,527 280,162 Net property, plant and equipment 458,029 442,595 459,783 Other assets 22,327 25,264 24,523 $576,581 $566,102 $590,275 LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities Checks outstanding in excess of cash balances $1,539 Notes payable to Questar Corporation 12,300 $27,300 $53,500 Accounts payable and accrued expenses 54,892 60,622 49,070 Purchased-gas adjustments 37,082 42,468 17,071 Total current liabilities 105,813 130,390 119,641 Long-term debt 175,000 158,000 175,000 Other liabilities and deferred credits 21,296 26,525 21,283 Deferred income taxes and investment tax credits 54,754 51,394 62,566 Redeemable cumulative preferred stock 6,324 7,524 6,324 Common shareholder's equity Common stock 22,974 22,974 22,974 Additional paid-in capital 41,875 21,875 41,875 Retained earnings 148,545 147,420 140,612 Total common shareholder's equity 213,394 192,269 205,461 $576,581 $566,102 $590,275 MOUNTAIN FUEL SUPPLY COMPANY CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) 3 Months Ended March 31, 1995 1994 (In Thousands) OPERATING ACTIVITIES Net income $13,061 $15,098 Depreciation 7,504 6,524 Deferred income taxes and investment investment tax credits (7,812) (6,470) 12,753 15,152 Change in operating assets and liabilities 35,257 25,517 NET CASH PROVIDED FROM OPERATING ACTIVITIES 48,010 40,669 INVESTING ACTIVITIES Capital expenditures (6,843) (6,244) Proceeds from (costs of) disposition of property, plant and equipment 1,093 (89) CASH USED IN INVESTING ACTIVITIES (5,750) (6,333) FINANCING ACTIVITIES Redemption of preferred stock (1) Decrease in notes payable to Questar Corporation (41,200) (30,500) Checks outstanding in excess of cash balances 1,539 Payment of dividends (5,128) (5,029) CASH USED IN FINANCING ACTIVITIES (44,789) (35,530) CHANGE IN CASH AND SHORT-TERM INVESTMENTS ($2,529) ($1,194) MOUNTAIN FUEL SUPPLY COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS March 31, 1995 (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, 1995, are not necessarily indicative of the results that may be expected for the year ending December 31, 1995. 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, 1994. MOUNTAIN FUEL SUPPLY COMPANY MANAGEMENT'S ANALYSIS March 31, 1995 Operating Results -- Following is a summary of operating information for the Company: 3 Months Ended 12 Months Ended March 31, March 31, 1995 1994 1995 1994 Natural gas volumes (in thousands of decatherms) Residential and commercial sales 29,578 30,138 73,673 73,074 Industrial sales 3,185 2,217 9,850 6,993 Transportation for industrial customers 17,609 13,271 55,720 49,362 Total deliveries 50,372 45,626 139,243 129,429 Natural gas revenue (per decatherm) Residential and commercial $4.31 $4.54 $4.35 $4.53 Industrial sales 2.59 3.23 2.59 3.11 Transportation for industrial customers 0.10 0.12 0.10 0.12 Heating degree days Actual 2,217 2,307 5,200 5,213 Normal 2,743 2,743 5,801 5,583 Warmer than normal 19% 16% 10% 7% Number of customers at end of period 575,424 553,507 Temperatures were 19% warmer than normal in the first quarter of 1995 and 4% warmer than temperatures reported in the first quarter of 1994. This resulted in a 2% decrease in natural gas volumes sold to residential and commercial customers. The effect of warmer weather was partially offset by a 4.0% increase in the number of customers. Revenue from the sale of natural gas to residential and commercial customers was $9,344,000 lower in the 1995 quarter. Volumes delivered to industrial customers increased 34% in the first quarter of 1995 compared with the same quarter of 1994 resulting in $1,189,000 more revenues. Natural gas demand was higher for customers in the metals, electric generation and chemical industries. Margins from gas delivered to industrial customers are substantially lower than from gas sold to residential and commercial customers. Mountain Fuel filed a general rate case in the state of Utah on March 3, 1995 requesting a $9.6 million increase in revenues and a 12.5% return on equity based on a $372 million rate base and a future test year. Management believes the rate increase is necessary to secure an appropriate allowed rate of return and to recover the costs of record customer growth. The Public Service Commission of Utah subsequently ruled that a future test year was inappropriate and ordered Mountain Fuel to adjust its rate case accordingly. On April 13, 1995, Mountain Fuel submitted a compliance filing showing an $11.4 million increase in revenues based on a 1994 historical test year with a $354 million rate base and a 12.5% return on equity. Mountain Fuel's plans to consolidate and restructure operations continue. Of the 169 eligible employees 109 accepted the Company's offer of an early retirement effective April 30, 1995. The labor savings are expected to exceed the costs of the early retirement program. Mountain Fuel is proceeding with plans to close four regional offices and reduce functions at six other offices. Mountain Fuel predicts that its investment in customer information system technology will enable it to increase its efficiency in serving customers with fewer employees and offices. Mountain Fuel's natural gas purchases were lower in the 3- and 12-month periods of 1995 compared with the same periods of 1994 primarily due to lower natural gas purchase prices. The lower gas purchase prices were reflected in semiannual gas cost adjustments filed in February each year, which included gas costs of $2.46 per decatherm in 1995 compared with $2.69 in 1994. Operating and maintenance expenses were slightly higher in the 1995 periods because of the costs of serving more customers and inflation. Depreciation expense was 15% higher in the first quarter of 1995 and 9% higher in the 12-month period ended March 31, 1995 when compared to the same periods in the prior year as a result of increased production of cost-of-service gas reserves, a 6% increase in the unit-of-production depreciation rate and capital spending. Interest and other income for the 12-month period ended March 31, 1995 includes a $5,589,000 one-time reduction of gas costs recorded in the fourth quarter of 1994. The effective income tax rate was 37.8% in the first quarter of 1995, compared with 37.6% in the first quarter of 1994. The Company recognized $902,000 of tight-sands gas-production credits in the first quarter of 1995 and $999,000 in the first quarter of 1994. Liquidity and Capital Resources - Operating Activities: Net cash provided from operating activities was $48,010,000 in the first three months of 1995 compared with $40,669,000 for the same period of 1994. The increase was due to lower gas costs partially offset by lower net income. Investing Activities: Capital expenditures were $6,843,000 in the first three months of 1995, compared with $6,244,000 in the corresponding 1994 period. Capital expenditures for calendar year 1995 are estimated at $50,000,000. Financing Activities: Financing activities in the first quarters of 1995 and 1994 largely included repayment of loans to Questar Corporation from net cash provided from operations. 1995 capital expenditures will be financed from cash flow from operations and borrowings from Questar Corporation. The Company has 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 March 31, Mountain Fuel had loans outstanding of $12,300,000 in 1995 and $27,300,000 in 1994 payable to Questar Corporation. No amounts were borrowed under the short-term line-of-credit arrangement at March 31, 1995. PART II OTHER INFORMATION Item 1. Legal Proceedings. On April 13, 1995, Mountain Fuel Supply Company (Mountain Fuel or the Company) made a "compliance" filing in its general rate case application before the Public Service Commission of Utah (the PSCU). The Company made this filing in response to the PSCU's order issued April 10, 1995, requiring Mountain Fuel to use a historic, rather than a future, test year. The compliance filing reflects an annualized revenue deficiency of $11,389,000, compared to $9,559,000 in the original application, and a 1994 average rate base of $354,006,000, compared to the 1995 average rate base of $372,134,000. (The increase in the revenue deficiency reflected in Mountain Fuel's compliance filing is primarily attributable to the labor cost savings to be realized in 1995 as a result of the Company's organizational restructuring and early retirement program, which were reflected in Mountain Fuel's original application.) The Company, in its compliance filing, did not modify its earlier requests for a return on equity of 12.5 percent and regulatory approval of a new weather normalization adjustment mechanism. Public hearings to consider Mountain Fuel's general rate case application are scheduled to begin on August 9, 1995. Item 5. Other Information. Mountain Fuel's enhanced retirement offer was accepted by 109 employees who retired on or before April 30, 1995. The Company does not expect to hire new employees to replace the employees who elected to take advantage of the offer and does expect its total workforce to decrease from 1486 (at year end 1994) to approximately 1375. The Company is consolidating some customer service functions such as dispatching, telephone service, sales, and engineering and currently plans to phase out or significantly reduce the size of 10 customer service offices in Utah and Wyoming. 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 12, 1995 /s/ D. N. Rose (Date) D. N. Rose President and Chief Executive Officer May 12, 1995 /s/ W. F. Edwards (Date) W. F. Edwards Vice President and Chief Financial Officer