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, 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 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 March 31, 1997 Common Stock, $2.50 par value 9,189,626 shares PART I FINANCIAL INFORMATION Item 1. Financial Statements MOUNTAIN FUEL SUPPLY COMPANY STATEMENTS OF INCOME (Unaudited) 3 Months Ended 12 Months Ended March 31, March 31, 1997 1996 1997 1996 (In Thousands) REVENUES $175,313 $144,903 $402,338 $366,857 OPERATING EXPENSES Natural gas purchases 97,211 75,465 204,146 184,726 Operating and maintenance 27,404 25,421 99,093 94,042 Depreciation 7,933 7,101 29,141 25,697 Other taxes 2,743 3,119 7,695 9,350 TOTAL OPERATING EXPENSES 135,291 111,106 340,075 313,815 OPERATING INCOME 40,022 33,797 62,263 53,042 INTEREST AND OTHER INCOME 723 709 3,047 4,240 DEBT EXPENSE (4,342) (4,272) (16,707) (16,685) INCOME BEFORE INCOME TAXES 36,403 30,234 48,603 40,597 INCOME TAXES 14,094 11,383 16,157 11,139 NET INCOME $22,309 $18,851 $32,446 $29,458 See note to financial statements MOUNTAIN FUEL SUPPLY COMPANY CONDENSED BALANCE SHEETS (Unaudited) March 31, December 31, 1997 1996 1996 (In Thousands) ASSETS Current assets Cash and short-term investments $1,875 Accounts receivable $79,441 $76,251 63,171 Inventories 8,154 7,129 15,295 Purchased-gas adjustments 29,331 24,210 Other current assets 3,653 3,520 4,511 Total current assets 120,579 86,900 109,062 Property, plant and equipment 827,208 787,646 825,121 Less allowances for depreciation 333,171 309,748 325,821 Net property, plant and equipment 494,037 477,898 499,300 Other assets 20,736 22,079 22,707 $635,352 $586,877 $631,069 LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities Checks outstanding in excess of cash balances $2,924 $3,613 Notes payable to Questar Corporation 58,700 27,100 $76,200 Accounts payable and accrued expenses 68,559 52,742 66,558 Purchased-gas adjustments 21,792 Total current liabilities 130,183 105,247 142,758 Long-term debt 175,000 175,000 175,000 Other liabilities 10,922 16,053 10,930 Deferred income taxes and investment tax credits 82,234 63,473 81,311 Redeemable cumulative preferred stock 4,808 4,957 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 167,356 157,298 151,393 Total common shareholder's equity 232,205 222,147 216,242 $635,352 $586,877 $631,069 See note to financial statements MOUNTAIN FUEL SUPPLY COMPANY CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) 3 Months Ended March 31, 1997 1996 (In Thousands) OPERATING ACTIVITIES Net income $22,309 $18,851 Depreciation 8,641 7,790 Deferred income taxes and investment tax credits 923 (5,075) 31,873 21,566 Change in operating assets and liabilities (9,428) 11,545 NET CASH PROVIDED FROM OPERATING ACTIVITIES 22,445 33,111 INVESTING ACTIVITIES Capital expenditures (3,974) (3,837) Proceeds from (costs of) disposition of property, plant and equipment 596 (4) NET CASH USED IN INVESTING ACTIVITIES (3,378) (3,841) FINANCING ACTIVITIES Decrease in notes payable to Questar Corporation (17,500) (29,000) Redemption of preferred stock (20) Checks outstanding in excess of cash balances 2,924 3,613 Payment of dividends (6,346) (5,349) NET CASH USED IN FINANCING ACTIVITIES (20,942) (30,736) DECREASE IN CASH AND SHORT-TERM INVESTMENTS ($1,875) ($1,466) See note to financial statements MOUNTAIN FUEL SUPPLY COMPANY NOTE TO CONDENSED FINANCIAL STATEMENTS March 31, 1997 (Unaudited) Note 1 - 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, 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. Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations MOUNTAIN FUEL SUPPLY COMPANY March 31, 1997 (Unaudited) Operating Results Following is a summary of financial and operating information for the Company: 3 Months Ended 12 Months Ended March 31, March 31, 1997 1996 1997 1996 (Dollars In Thousands) FINANCIAL RESULTS Revenues From unaffiliated customers $174,222 $144,567 $398,560 $363,502 From affiliates 1,091 336 3,778 3,355 Total revenues 175,313 144,903 402,338 366,857 Natural gas purchases 97,211 75,465 204,146 184,726 Revenues less natural gas purchases $78,102 $69,438 $198,192 $182,131 Operating income $40,022 $33,797 $62,263 $53,042 Net income 22,309 18,851 32,446 29,458 OPERATING STATISTICS Natural gas volumes (in thousands of decatherms) Residential and commercial sales 36,405 34,417 82,832 78,789 Industrial sales 2,902 2,494 8,992 8,519 Transportation for industrial customers 12,952 13,729 48,722 55,689 Total deliveries 52,259 50,640 140,546 142,997 Natural gas revenue (per decatherm) Residential and commercial $4.47 $3.93 $4.30 $4.11 Industrial sales 2.37 2.14 2.21 2.30 Transportation for industrial customers 0.14 0.11 0.13 0.11 Heating degree days Actual 2,455 2,596 5,166 5,426 Normal 2,743 2,743 5,801 5,801 Warmer than normal 10% 5% 11% 6% Number of customers at end of period 623,184 597,234 Revenues, less natural gas purchases, were $8,664,000 higher in the first quarter of 1997 and $16,061,000 higher in the 12-month period ended March 31, 1997 when compared with the respective periods in 1996. The higher net revenues resulted from an increase in customers served and in usage per customer, and the effect of a weather-normalization adjustment mechanism. The number of customers served reached 623,184 at March 31, 1997. This represents a 4.3% increase from a year earlier. Temperature adjusted usage per customer was 4% higher in the 12-month period ended March 31, 1997 when compared with the same period a year ago. Temperatures, as measured in degree days, were warmer than normal in the 1997 periods and warmer than the 1996 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 quarter of 1997 compared with about half of these volumes in the 1996 first quarter. The Company agreed to a negotiated annual rate reduction of $2.8 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, transportation 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 service. The Company expects that the opportunity to provide 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 March 31, 1997, the Company served 21,348 customers in the state of Wyoming representing 3% of the total number of customers served by Mountain Fuel. Volumes delivered to industrial customers decreased 2% in the first quarter of 1997 when compared with the same quarter of 1996 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 purchases were higher in the 3- and 12-month periods of 1997 compared with the same periods of 1996 due to the increase in volumes sold and a higher natural gas purchase cost allowed in rates. The higher gas purchase cost reflects natural gas prices which increased sharply during the 1996-1997 winter heating season. Mountain Fuel's 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. Mountain Fuel intends to file gas-cost pass-through requests in Wyoming and Utah during the last half of May and the first half of June with an effective date of July 1, 1997. The Company routinely files for adjustment of purchased-gas costs with both states on a semiannual basis. Operating and maintenance expenses were 8% higher in the first quarter of 1997 and 5% higher in the 12-month period ended March 31, 1997 when compared with the same periods in 1996 because of costs associated with serving more customers, inflation and writing-off obsolete inventory. 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. These services were previously staffed and performed within each of Mountain Fuel and its affiliated company, Questar Pipeline. Depreciation expense was higher in the 3- and 12-month periods of 1997 when compared to the same periods in the prior year primarily as a result of increased investment in property, plant and equipment. The effective income tax rate was 38.7% in the first quarter of 1997 compared with 37.6% in the first quarter of 1996. The Company recognized $608,000 of tight-sands gas-production credits in the 1997 period and $937,000 in the 1996 period. Liquidity and Capital Resources Operating Activities: Net cash provided from operating activities of $22,445,000 was $10,666,000 less than was generated in the same period of 1996. An increase in cash flow from higher earnings and non-cash deferred income taxes was more than offset by a use of cash flow in operating assets and liabilities. Gas purchase costs were under-collected in the 1997 quarter in contrast to an over-collection in the 1996 quarter resulting in a decrease in year-to-year cash flow of $17,731,000. Timing differences in the collection of receivables, withdrawal of gas from storage and the payment of current liabilities account for the remainder of the changes in cash flow in 1997 compared with 1996. Investing Activities: Capital expenditures were $3,974,000 in the first three months of 1997 compared with $3,837,000 in the corresponding 1996 period. Capital expenditures for calendar year 1997 are estimated at $64,000,000. Financing Activities: The Company has a short-term borrowing arrangement with its parent company, Questar Corporation. As of March 31, Mountain Fuel had loan balances outstanding of $58,700,000 at 1997 and $27,100,000 in 1996 payable to Questar. Financing activities in the first quarters 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. PART II OTHER INFORMATION Item 5. Other Information. Mountain Fuel Supply Company (Mountain Fuel or the Company) currently intends to file an application with the Public Service Commission of Wyoming (the PSCW) during 1997, seeking permission to offer transportation service to residential and commercial customers. Customers choosing transportation service would be allowed to secure gas supplies directly from producers or marketers and pay the Company for transportation service. (Transportation service is already available to Mountain Fuel's industrial customers.) The Company currently has approximately 21,350 residential and commercial customers in southwestern Wyoming. KN Energy, Inc., has already offered unbundled services to some of its residential and commercial customers in Wyoming. Consequently, Mountain Fuel expects that the PSCW will grant the necessary regulatory approvals. The Company also expects that extending transportation service to residential and commercial customers will not have a material impact on its earnings. 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, 1997 /s/D. N. Rose (Date) D. N. Rose President and Chief Executive Officer May 12, 1997 /s/S. E. Parks (Date) S. E. Parks Vice President, Treasurer and Chief Financial Officer