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, 1996 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) 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 July 31, 1996 Common Stock, $2.50 par value 9,189,626 shares MOUNTAIN FUEL SUPPLY COMPANY STATEMENTS OF INCOME (Unaudited) 3 Months Ended 6 Months Ended 12 Months Ended June 30, June 30, June 30, 1996 1995 1996 1995 1996 1995 (In Thousands) REVENUES $57,927 $67,296 $202,830 $208,111 $357,488 $382,471 OPERATING EXPENSES Natural gas purchases 25,144 33,930 100,609 115,275 175,940 211,203 Operating and maintenance 23,746 23,807 49,167 48,570 93,981 94,938 Depreciation 6,842 5,924 13,943 12,797 26,615 25,419 Other taxes 2,732 2,821 5,851 6,178 9,261 9,080 TOTAL OPERATING EXPENSES 58,464 66,482 169,570 182,820 305,797 340,640 OPERATING INCOME (LOSS) (537) 814 33,260 25,291 51,691 41,831 INTEREST AND OTHER INCOME 1,890 1,019 2,599 1,720 5,111 8,264 DEBT EXPENSE (3,901) (3,992) (8,173) (8,159) (16,594) (16,092) INCOME BEFORE INCOME TAXES (2,548) (2,159) 27,686 18,852 40,208 34,003 INCOME TAXES (CREDITS) (1,931) (2,311) 9,452 5,639 11,519 8,687 NET INCOME (LOSS) ($617) $152 $18,234 $13,213 $28,689 $25,316 MOUNTAIN FUEL SUPPLY COMPANY CONDENSED BALANCE SHEETS (Unaudited) June 30, December 31, 1996 1995 1995 (In Thousands) ASSETS Current assets Cash and short-term investments $1,466 Accounts receivable $34,841 $40,315 67,642 Inventories 12,299 19,590 20,915 Other current assets 4,124 5,026 3,843 Total current assets 51,264 64,931 93,866 Property, plant and equipment 792,134 755,633 784,466 Less allowances for depreciation 312,921 293,512 302,619 Net property, plant and equipment 479,213 462,121 481,847 Other assets 21,389 22,375 24,548 $551,866 $549,427 $600,261 LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities Checks outstanding in excess of cash balances $1,638 $2,406 Notes payable to Questar Corporation 28,500 8,400 $56,100 Accounts payable and accrued expenses 36,390 38,052 61,800 Purchased-gas adjustments 1,559 32,372 9,182 Total current liabilities 68,087 81,230 127,082 Long-term debt 175,000 175,000 175,000 Other liabilities and deferred credits 16,056 21,126 16,029 Deferred income taxes and investment tax credits 71,588 57,436 68,548 Redeemable cumulative preferred stock 4,954 6,218 4,957 Common shareholder's equity Common stock 22,974 22,974 22,974 Additional paid-in capital 41,875 41,875 41,875 Retained earnings 151,332 143,568 143,796 Total common shareholder's equity 216,181 208,417 208,645 $551,866 $549,427 $600,261 MOUNTAIN FUEL SUPPLY COMPANY CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) 6 Months Ended June 30, 1996 1995 (In Thousands) OPERATING ACTIVITIES Net income $18,234 $13,213 Depreciation 15,312 14,132 Deferred income taxes and investment tax credits 3,040 (5,130) 36,586 22,215 Change in operating assets and liabilities 11,289 44,783 NET CASH PROVIDED FROM OPERATING ACTIVITIES 47,875 66,998 INVESTING ACTIVITIES Capital expenditures (15,969) (16,952) Proceeds from disposition of property, plant and equipment 3,291 482 NET CASH USED IN INVESTING ACTIVITIES (12,678) (16,470) FINANCING ACTIVITIES Decrease in notes payable to Questar Corporation (27,600) (45,100) Checks outstanding in excess of cash balances 1,638 2,406 Redemption of preferred stock (3) (106) Dividends paid (10,698) (10,257) NET CASH USED IN FINANCING ACTIVITIES (36,663) (53,057) DECREASE IN CASH AND SHORT-TERM INVESTMENTS ($1,466) ($2,529) MOUNTAIN FUEL SUPPLY COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS June 30, 1996 (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, 1996, are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. 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, 1995. MOUNTAIN FUEL SUPPLY COMPANY MANAGEMENT'S ANALYSIS June 30, 1996 Operating Results -- Following is a summary of financial and operating information for the Company: 3 Months Ended 6 Months Ended 12 Months Ended June 30, June 30, June 30, 1996 1995 1996 1995 1996 1995 (Dollars in Thousands) FINANCIAL RESULTS Revenues From unaffiliated customers $57,064 $65,984 $201,631 $205,807 $354,582 $378,347 From affiliates 863 1,312 1,199 2,304 2,906 4,124 Total revenues $57,927 $67,296 $202,830 $208,111 $357,488 $382,471 Operating income (loss) ($537) $814 $33,260 $25,291 $51,691 $41,831 Net income (loss) (617) 152 18,234 13,213 28,689 25,316 OPERATING STATISTICS Natural gas volumes (in thousands of decatherms) Residential and commercial sales 11,991 13,935 46,408 43,513 76,845 77,840 Industrial sales 1,858 2,068 4,352 5,253 8,309 10,226 Transportation for industrial customers 11,046 13,952 24,775 31,561 52,783 59,652 Total deliveries 24,895 29,955 75,535 80,327 137,937 147,718 Natural gas revenue (per decatherm) Residential and commercial $3.93 $3.97 $3.93 $4.20 $4.10 $4.25 Industrial sales 2.14 2.49 2.14 2.55 2.21 2.56 Transportation for industrial customers 0.13 0.10 0.12 0.10 0.11 0.10 Heating degree days Actual 617 895 3,213 3,112 5,148 5,572 Normal 741 741 3,484 3,484 5,801 5,801 Colder (warmer) than normal (17%) 21% (8%) (11%) (11%) (4%) Number of customers at end of period 597,143 575,450 Revenues, net of gas costs, decreased $583,000 or 2% in the second quarter as a result of lower sales volumes caused by warmer weather that more than offset the affects of a rate case settlement. Temperatures, as measured in degree days, were 17% warmer than normal for the second quarter of 1996 compared with 21% colder than normal for the same quarter in 1995. Revenues, net of gas costs, were $9,385,000 or 10% higher for the first half of 1996 when compared with the first half of 1995 due to colder temperatures in the first quarter of 1996, the benefits of a rate case settlement and a 3.8% annual rate of growth in the number of customers. Temperatures in the first quarter of 1996 were 5% warmer than normal compared with 19% warmer than normal reported in the first quarter of 1995. The effect of the warmer-than-normal weather in 1996 was partially offset by the provisions of the 1995 rate settlement that provides for a weather-normalization adjustment, new-premises fee and sharing of capacity release revenues. About 40 to 50% of Mountain Fuel's residential and commercial sales volumes were subjected to temperature-adjusted rates. Under the provisions of the Utah rate settlement, the weather-normalization adjustment will be extended to all residential and commercial volumes beginning October 1 unless customers inform the Company that they desire to be treated otherwise. The terms of the Utah rate case are expected to add about $3.7 million in annual revenues from a new-premises fee and the sharing of capacity-release credits. In addition to the other rate case items, Mountain Fuel's allowed return on rate base increased from 10.08% to between 10.22% and 10.34%. The Company also received approval from the Public Service Commission of Wyoming to implement a weather-normalization adjustment for all residential and commercial customers beginning September 1. Volumes delivered to industrial customers were 19% less in the second quarter of 1996 and 21% less in the first half of 1996 when compared with the same periods of 1995 due to a continued abundance of low-cost hydroelectric power. Margins from gas delivered to industrial customers are substantially lower than from gas sold to residential and commercial customers. Mountain Fuel's natural gas purchase expenses were lower in the 1996 periods primarily due to lower natural gas purchase costs allowed in rates. The lower gas purchase prices were reflected in semi-annual gas cost adjustments filed in February each year, which included gas costs of $1.04 per decatherm in 1996 compared with $1.43 in 1995. Operating and maintenance expenses were 1% higher in the first half of 1996 when compared with the same period of 1995 because of the costs of serving more customers and inflation partially offset by the benefits of consolidation of operations and early retirement programs. Operating and maintenance expenses decreased by 1% in the 12-month period of 1996 compared with the same period in 1995. Depreciation expenses were higher in the 1996 periods as a result of increased investment in property, plant and equipment. Surplus properties were sold in the second quarter of 1996 resulting in a $1.2 million pretax gain recorded in other income. The effective income tax rate was 34.1% for the first half of 1996 compared with 29.9% for the first half of 1995. The Company recognized $1,898,000 of tight-sands gas-production credits in the first half of 1996 and $2,258,000 in the first half of 1995. Mountain Fuel and affiliated company, Questar Pipeline, have consolidated various financial, technical, administrative and other support functions in an ongoing effort to improve efficiency and coordination. Questar Pipeline and Mountain Fuel comprise the Regulated Services group within Questar Corporation. Liquidity and Capital Resources - Operating Activities: Net cash provided from operating activities was $47,875,000 in the first half of 1996 compared with $66,998,000 for the same period of 1995. Lower gas cost collected in rates and a first quarter refund of gas costs were the primary reasons for a reduction in net cash flow from operating activities in 1996. Investing Activities: Capital expenditures were $15,969,000 in the first six months of 1996 compared with $16,952,000 in the corresponding 1995 period. Capital expenditures for calendar year 1996 are estimated at $55,000,000. Construction has begun on a $4.8 million extension of service to the 1,000 residents of the Ogden Valley. The area is about 45 miles north of Salt Lake City and the site of several 2002 Winter Olympics venues. Financing Activities: The Company has short-term line-of-credit arrangements with banks totaling $500,000. In addition, its parent company, Questar Corporation, loans funds to the Company under a short-term borrowing arrangement. At of June 30, Mountain Fuel had loans outstanding of $28,500,000 in 1996 and $8,400,000 in 1995 payable to Questar. No amounts were borrowed under the short-term line-of-credit arrangements at June 30, 1996. Mountain Fuel's net cash provided from operating activities for the first six months of 1996 and 1995 funded capital expenditures, cash dividends and repayment of debt. Funding of 1996 capital expenditures is expected to be supplied from net cash flow provided from operations and borrowings from Questar Corporation. PART II OTHER INFORMATION Item 1. Legal Proceedings. a. On June 1, 1996, 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 $7,971,571 of costs in its Wyoming rates, reflecting an annualized revenue decrease of approximately $548,000 to customers. Mountain Fuel noted that its rates for natural gas service, under the proposed rate schedules, were the lowest they had been since August of 1986. The PSCW authorized the Company to reflect the decreased costs in its rates to core customers as of July 1, 1996. b. The Company filed a comparable application with the Public Service Commission of Utah (the PSCU) on June 12, 1996. In this application, Mountain Fuel requested authorization to reflect $208,924,241 of costs in its Utah rates, reflecting an annualized revenue decrease of approximately $469,000. The PSCU authorized the Company to reflect the requested decrease in its rates effective July 1, 1996. c. On July 10, 1996, the PSCW approved Mountain Fuel's application to implement a weather normalization adjustment for Wyoming general service customers. The new mechanism, which will be effective for service as of September 1, 1996, adjusts the non-gas cost portion of a customer's monthly bill as the actual degree days in the billing cycle are warmer or colder than normal. d. The PSCU has not issued a final order in the Company's semi-annual portion of the balancing account application that became effective January 1, 1996. Other parties to the proceedings have raised questions about gathering costs and a gas imbalance situation. See the Company's Form 10-K Report for 1995, Items 1. and 2. Business and Properties, "Regulation and Deregulation." e. Mountain Fuel and 69 other domestic companies have been named as defendants in a federal "false claims" lawsuit brought by Jack J. Grynberg on behalf of the federal government. The suit, which was filed in a federal district court in Washington, D.C., claims that pipelines and other companies have systematically reported less than the actual heating content of natural gas entering their systems, ultimately resulting in an underpayment of royalties to the federal government. The complaint does not allege any specific undermeasurements for individual defendants or for the group of defendants. The Company believes that the lawsuit, which the Department of Justice determined not to prosecute, has no merit. Item 5. Other Information. Effective June 1, 1996, Mountain Fuel reorganized some administrative functions. Four of the Company's executive officers have responsibilities for both the Company and Questar Pipeline Company (Questar Pipeline), an affiliated transmission entity. Mr. Michael E. Benefield, age 57, was named to the new position as Vice President, Planning and Business Development and has responsibility for strategic planning, pricing, packaging, marketing, supply, alliances, acquisitions and new ventures. (Mr. Benefield had been serving as Vice President, Gas Supply.) Mr. Gary W. DeBernardi, age 53, was appointed to serve as Vice President, Technical Support and has responsibility for engineering, gas control, and codes and standards. (Mr. DeBernardi had been serving as Questar Pipeline's Vice President, Engineering and Transmission Services.) Ms. Susan Glasmann, age 48, formerly Vice President, Marketing, was named to serve as Vice President, Business Support, and has responsibility for administration, employee and public communication, continuous improvement, and marketing support. Mr. Glenn H. Robinson, age 46, was appointed to serve as Vice President of Questar Pipeline, in addition to his responsibilities as Vice President and Controller for the Company, and has responsibility for accounting, budgeting, load forecasting, and financial planning. Mr. S. C. Yeager, age 49, formerly Vice President, Customer Service, was named to the new position of Vice President and General Manager for the Company. He has responsibility for Mountain Fuel's distribution operations, customer service, and state regulatory affairs. 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, 1996 /s/D. N. Rose (Date) D. N. Rose President and Chief Executive Officer August 13, 1996 /s/S. E. Parks (Date) S. E. Parks Vice President, Treasurer and Chief Financial Officer