UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1994
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 number 1-3480
MDU Resources Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 41-0423660
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 North Fourth Street, Bismarck, North Dakota 58501
(Address of principal executive offices)
(Zip Code)
(701) 222-7900
(Registrant's telephone number, including area code)
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 November 4, 1994:
18,984,654 shares.
<PAGE>
INTRODUCTION
MDU Resources Group, Inc. (Company) is a diversified natural
resource company which was incorporated under the laws of the State
of Delaware in 1924. Its principal executive offices are at 400
North Fourth Street, Bismarck, North Dakota 58501, telephone (701)
222-7900.
Montana-Dakota Utilities Co. (Montana-Dakota), the public
utility division of the Company, provides electric and/or natural
gas and propane distribution service at retail to 251 communities
in North Dakota, eastern Montana, northern and western South Dakota
and northern Wyoming, and owns and operates electric power
generation and transmission facilities.
The Company, through its wholly-owned subsidiary, Centennial
Energy Holdings, Inc. (Centennial), owns Williston Basin Interstate
Pipeline Company (Williston Basin), Knife River Coal Mining Company
(Knife River), the Fidelity Oil Group (Fidelity Oil) and
Prairielands Energy Marketing, Inc. (Prairielands).
Williston Basin produces natural gas and provides
underground storage, transportation and gathering services
through an interstate pipeline system serving Montana,
North Dakota, South Dakota and Wyoming.
Knife River surface mines and markets low sulfur lignite
coal at mines located in Montana and North Dakota and,
through its wholly-owned subsidiary KRC Holdings, Inc.,
surface mines and markets aggregates and related
construction materials in the Anchorage, Alaska area,
southern Oregon and north-central California.
Fidelity Oil is comprised of Fidelity Oil Co. and Fidelity
Oil Holdings, Inc., which own oil and natural gas
interests in the western United States, the Gulf Coast and
Canada through investments with several oil and natural
gas producers.
Prairielands seeks new energy markets while continuing to
expand present markets for natural gas. Its activities
include buying and selling natural gas and arranging
transportation services to end users, pipelines and local
distribution companies and, through its wholly-owned
subsidiary, Gwinner Propane, Inc., operates bulk propane
facilities in southeastern North Dakota.
<PAGE>
INDEX
Part I
Condensed Consolidated Statements of Income --
Three, Nine and Twelve Months Ended
September 30, 1994 and 1993
Condensed Consolidated Balance Sheets --
September 30, 1994 and 1993, and December 31, 1993
Condensed Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 1994 and 1993
Notes to Condensed Consolidated Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II
Signatures
<PAGE>
MDU RESOURCES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Nine Months Twelve Months
Ended Ended Ended
September 30, September 30, September 30,
1994 1993 1994 1993 1994 1993
(In thousands, except per share amounts)
Operating revenues:
Electric. . . . . . . . $ 33,007 $ 32,248 $ 99,461 $ 96,430 $134,140 $129,932
Natural gas . . . . . . 23,327 25,530 117,330 124,709 171,602 174,427
Mining and construction
materials . . . . . . 39,849 30,997 90,795 61,524 119,668 75,287
Oil and natural gas
production . . . . . 10,345 10,057 28,340 29,333 38,132 39,147
106,528 98,832 335,926 311,996 463,542 418,793
Operating expenses:
Fuel and purchased power 10,224 10,491 32,052 30,103 43,247 41,287
Purchased natural gas sold 2,468 8,980 38,751 52,883 63,989 71,157
Operation and maintenance 56,480 47,249 152,347 118,815 200,906 152,671
Depreciation, depletion
and amortization. . . . 12,414 11,784 35,986 34,044 47,104 44,431
Taxes, other than income. 6,032 5,762 18,209 17,430 24,344 23,115
87,618 84,266 277,345 253,275 379,590 332,661
Operating income (loss):
Electric. . . . . . . . 7,689 6,932 20,916 21,475 29,961 29,731
Natural gas distribution. (3,871) (3,136) 405 1,184 3,951 3,830
Natural gas transmission. 4,369 1,588 16,001 15,088 21,021 24,112
Mining and construction
materials . . . . . . 8,053 6,454 14,743 12,583 19,144 16,556
Oil and natural gas
production . . . . . 2,670 2,728 6,516 8,391 9,875 11,903
18,910 14,566 58,581 58,721 83,952 86,132
Other income -- net. . . 8,367 2,976 10,570 2,703 11,744 233
Interest expense -- net. 6,288 6,467 19,365 18,693 25,945 24,796
Carrying costs on natural gas
repurchase commitment. 1,195 1,030 3,343 2,914 4,326 4,325
Income before income taxes 19,794 10,045 46,443 39,817 65,425 57,244
Income taxes . . . . . . 7,443 3,736 16,716 13,950 22,748 16,638
Income before cumulative
effect of accounting
change . . . . . . . . 12,351 6,309 29,727 25,867 42,677 40,606
Cumulative effect of
accounting change (Note 2) --- --- --- 5,521 --- 5,521
Net income . . . . . . . 12,351 6,309 29,727 31,388 42,677 46,127
Dividends on preferred stocks 198 200 598 602 798 804
Earnings on common stock $ 12,153 $ 6,109 $ 29,129 $ 30,786 $ 41,879 $45,323
Earnings per common share:
Earnings before cumulative
effect of accounting
change. . . . . . . . $ .64 $ .32 $ 1.53 $ 1.33 $ 2.21 $ 2.10
Cumulative effect of
accounting change . . --- --- --- .29 --- .29
Earnings. . . . . . . . $ .64 $ .32 $ 1.53 $ 1.62 $ 2.21 $ 2.39
Dividends per common
share . . . . . . . . $ .40 $ .39 $ 1.18 $ 1.13 $ 1.57 $ 1.50
Average common shares
outstanding . . . . . . 18,985 18,985 18,985 18,985 18,985 18,985
Pro forma amounts assuming
retroactive application of
accounting change:
Net income. . . . . . . $ 12,351 $ 6,309 $ 29,727 $ 25,867 $ 42,677 $42,781
Earnings per common
share . . . . . . . . $ .64 $ .32 $ 1.53 $ 1.33 $ 2.21 $ 2.21
The accompanying notes are an integral part of these statements.
<PAGE>
MDU RESOURCES GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, September 30, December 31,
1994 1993 1993
(In thousands)
ASSETS
Property, plant and equipment:
Electric. . . . . . . . . . . . . $ 510,376 $ 498,347 $ 503,690
Natural gas distribution. . . . . 159,081 136,714 141,100
Natural gas transmission. . . . . 261,547 272,684 258,766
Mining and construction materials 146,401 141,500 145,014
Oil and natural gas production. . 144,120 108,810 116,833
1,221,525 1,158,055 1,165,403
Less accumulated depreciation,
depletion and amortization . . 532,599 493,704 501,451
688,926 664,351 663,952
Current assets:
Cash and cash equivalents . . . . 38,546 65,836 71,699
Receivables . . . . . . . . . . . 40,530 49,416 67,553
Inventories . . . . . . . . . . . 26,199 20,156 19,415
Deferred income taxes . . . . . . 24,043 28,259 32,243
Other prepayments and current assets . 9,488 13,817 14,262
138,806 177,484 205,172
Natural gas available under
repurchase commitment . . . . . . 73,013 81,944 79,031
Investments. . . . . . . . . . . . 15,693 14,726 16,858
Deferred charges and other assets. 67,573 76,037 76,038
$ 984,011 $1,014,542 $1,041,051
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock (Shares outstanding --
18,984,654, $3.33 par value at
September 30, 1994, and $5.00 par
value at September 30, 1993 and
December 31, 1993). . . . . . . $ 63,219 $ 94,923 $ 94,923
Other paid in capital . . . . . . 95,914 64,210 64,210
Retained earnings . . . . . . . . 165,724 153,651 158,998
324,857 312,784 318,131
Preferred stock subject to mandatory
redemption requirements . . . . 2,100 2,200 2,100
Preferred stock redeemable at option
of the Company. . . . . . . . . 15,000 15,000 15,000
Long-term debt. . . . . . . . . . 206,363 222,914 231,770
548,320 552,898 567,001
Commitments and contingencies. . . --- --- ---
Current liabilities:
Short-term borrowings . . . . . . 280 1,540 9,540
Accounts payable. . . . . . . . . 21,502 23,316 24,967
Taxes payable . . . . . . . . . . 3,867 5,189 9,204
Other accrued liabilities, including
reserved revenues . . . . . . . 80,519 102,544 107,566
Dividends payable . . . . . . . . 7,793 7,605 7,605
Long-term debt and preferred stock due
within one year . . . . . . . . 20,425 15,300 15,300
134,386 155,494 174,182
Natural gas repurchase commitment. 91,022 102,157 98,525
Deferred credits:
Deferred income taxes and unamortized
investment tax credit . . . . . 127,140 124,155 124,978
Other . . . . . . . . . . . . . . 83,143 79,838 76,365
210,283 203,993 201,343
$ 984,011 $1,014,542 $1,041,051
The accompanying notes are an integral part of these statements.
<PAGE>
MDU RESOURCES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
1994 1993
(In thousands)
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . $29,727 $31,388
Cumulative effect of accounting change . . . . . . --- (5,521)
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation, depletion and amortization. . . . . 35,986 34,044
Deferred income taxes and investment tax credit -- net 4,694 11,676
Recovery of deferred natural gas contract litigation
settlement costs, net of income taxes. . . . . 4,001 2,356
Changes in current assets and liabilities --
Receivables. . . . . . . . . . . . . . . . . . 27,023 17,362
Inventories. . . . . . . . . . . . . . . . . . (6,784) (1,942)
Other current assets . . . . . . . . . . . . . 12,974 17,383
Accounts payable . . . . . . . . . . . . . . . (3,465) (2,081)
Other current liabilities. . . . . . . . . . . (32,196) (17,197)
Other noncurrent changes . . . . . . . . . . . . 9,992 (11,389)
Net cash provided by operating activities. . . . . 81,952 76,079
Financing activities:
Net change in short-term borrowings. . . . . . . . (9,260) (6,235)
Issuance of long-term debt . . . . . . . . . . . . 50,150 11,000
Repayment of long-term debt. . . . . . . . . . . . (70,450) (22,950)
Retirement of natural gas repurchase commitment. . (7,503) (12,780)
Dividends paid . . . . . . . . . . . . . . . . . . (23,001) (22,056)
Net cash used in financing activities. . . . . . . (60,064) (53,021)
Investing activities:
Additions of property, plant and equipment
and acquisitions of businesses --
Electric . . . . . . . . . . . . . . . . . . . (8,218) (9,744)
Natural gas distribution . . . . . . . . . . . (19,363) (10,553)
Natural gas transmission . . . . . . . . . . . (3,341) (4,709)
Mining and construction materials. . . . . . . (2,670) (39,570)
Oil and natural gas production . . . . . . . . (28,632) (16,786)
(62,224) (81,362)
Sale of natural gas available under repurchase
commitment . . . . . . . . . . . . . . . . . . . 6,018 10,094
Investments. . . . . . . . . . . . . . . . . . . . 1,165 47,208
Net cash used in investment activities . . . . . . (55,041) (24,060)
Decrease in cash and cash equivalents. . . . . . . (33,153) (1,002)
Cash and cash equivalents -- beginning of year . . 71,699 66,838
Cash and cash equivalents -- end of period . . . . $ 38,546 $ 65,836
The accompanying notes are an integral part of these statements.
<PAGE>
MDU RESOURCES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 1994 and 1993
(Unaudited)
1. Basis of presentation
The accompanying condensed consolidated interim financial
statements were prepared in conformity with the basis of
presentation reflected in the consolidated financial statements
included in the Annual Report to Stockholders for the year ended
December 31, 1993 (1993 Annual Report), and the standards of
accounting measurement set forth in Accounting Principles Board
Opinion No. 28 and any amendments thereto adopted by the
Financial Accounting Standards Board. Interim financial
statements do not include all disclosures provided in annual
financial statements and, accordingly, these financial
statements should be read in conjunction with those appearing
in the Company's 1993 Annual Report. The information is
unaudited but includes all adjustments which are, in the opinion
of management, necessary for a fair presentation of the
accompanying condensed consolidated interim financial
statements.
2. Accounting change
On January 1, 1993, Montana-Dakota changed its revenue
recognition method to include the accrual of estimated unbilled
revenues for electric and natural gas service. This change
results in a better matching of revenues and expenses and is
consistent with predominant industry practice. Prior to this
change, Montana-Dakota, for both its electric and natural gas
businesses, recognized revenues on a monthly cycle billing basis
which recorded revenues when customers were billed. The
cumulative effect on net income for the nine and twelve months
ended September 30, 1993, is presented net of applicable income
taxes of $3,355,000.
3. Seasonality of operations
Most of the Company's operations are highly seasonal and
revenues from, and certain expenses for, such operations may
fluctuate significantly among quarterly periods. Accordingly,
the interim results may not be indicative of results for the
full fiscal year. Therefore, the accompanying quarterly
financial information is supplemented by information for the
twelve months ended September 30, 1994 and 1993.
4. Pending litigation
W.A. Moncrief --
In November 1993, the estate of W.A. Moncrief (Moncrief), a
producer from whom Williston Basin purchased a portion of its
natural gas supply, filed suit in Federal District Court for the
District of Wyoming against Williston Basin and the Company
disputing certain price and volume issues under the contract.
In its complaint, Moncrief alleged that, for the period
January 1, 1985, through December 31, 1992, it had suffered
damages ranging from $1.2 million to $5.0 million, without
interest, on the price paid by Williston Basin for natural gas
purchased. Moncrief requested that the Court award it such
amount and further requested that Williston Basin be obligated
for damages for additional volumes not purchased for the period
November 1, 1993, (the date when Williston Basin implemented
FERC Order 636 and abandoned its natural gas sales merchant
function, see "Regulatory Matters and Revenues Subject to Refund
-- Order 636" for a further discussion of Williston Basin's
implementation of Order 636) to mid-1996, the remaining period
of the contract.
On June 9, 1994, Moncrief filed a motion to amend its complaint
whereby it alleged a new pricing theory under Section 105 of the
Natural Gas Policy Act for natural gas purchased in the past and
for future volumes which Williston Basin refused to purchase
effective November 1, 1993. On July 5, 1994, in the course of
discovery, Moncrief submitted its damage calculation which
totalled approximately $18 million or, under its alternative new
pricing theory, $38 million. On July 13, 1994, the Court denied
Moncrief's motion to amend its complaint.
However, on July 15, 1994, the Court, as part of addressing the
proper litigants in this matter, allowed Moncrief to amend its
complaint to assert its new pricing theory under the contract.
Trial is now scheduled for April 3, 1995.
These damage claims in Williston Basin's opinion, are grossly
overstated. Williston Basin further believes it has meritorious
defenses and intends to vigorously defend such suit. Williston
Basin plans to file for recovery from ratepayers of amounts
which may be ultimately due to Moncrief, if any.
5. Regulatory matters and revenues subject to refund
General Rate Proceedings --
Williston Basin had pending with the FERC two general natural
gas rate change applications implemented in 1989 and 1992. On
May 3, 1994, the FERC issued an order relating to the 1989 rate
change. Williston Basin requested rehearing of certain issues
addressed in the order and a stay of compliance and refund
pending issuance of a final order by the FERC. The requested
stay was denied by the FERC and on July 20, 1994, Williston
Basin refunded $47.8 million to its customers, including $33.4
million to Montana-Dakota. Williston Basin's request for
rehearing is currently pending as is the issuance of an initial
order by the FERC with respect to the 1992 rate change
application.
Reserves have been provided for a portion of the revenues
collected subject to refund with respect to pending regulatory
proceedings and for the recovery of certain producer settlement
buy-out/buy-down costs, as discussed below, to reflect future
resolution of certain issues with the FERC. Williston Basin
believes that such reserves are adequate based on its assessment
of the ultimate outcome of the various proceedings.
Producer Settlement Cost Recovery --
In August 1993, Williston Basin filed to recover 75 percent of
$28.7 million ($21.5 million) in buy-out/buy-down costs paid to
Koch Hydrocarbon Company as part of a lawsuit settlement under
the alternate take-or-pay cost recovery mechanism embodied in
Order 500. As permitted under Order 500, Williston Basin
elected to recover 25 percent or $7.2 million of such costs
through a direct surcharge to sales customers, substantially all
of which has been received. In addition, through reserves
previously provided, Williston Basin has absorbed an equal
amount. Williston Basin elected to recover the remaining 50
percent ($14.3 million) through a throughput surcharge
applicable to both sales and transportation. Williston Basin
began collecting these costs, subject to refund, on October 1,
1993, pending final approval by the FERC. On August 17, 1994,
the FERC issued an order granting Williston Basin's request to
collect such costs.
Order 636 --
As more fully described in the 1993 Annual Report on Form 10-K
(1993 Form 10-K), Williston Basin, in October 1992, filed a
revised tariff with the FERC designed to comply with Order 636.
The revised tariff reflected the cost allocation and rate design
necessary to the unbundling of Williston Basin's current
services. The FERC issued an order in February 1993, in which
it accepted Williston Basin's filing subject to certain
conditions.
In March 1993, Williston Basin filed further tariff revisions
with the FERC in compliance with the FERC's February 1993 order,
and also in March 1993, filed for rehearing and/or clarification
of other matters raised in the February 1993 order. In
May 1993, the FERC issued an order addressing both Williston
Basin's rehearing request and its March tariff filing. A
significant issue addressed by the FERC's order was a
determination that certain natural gas in underground storage
which was determined to be excess upon the future implementation
of Order 636 must be sold at market prices. The order further
required that the profit from such sale be used to offset any
transition costs. Williston Basin requested rehearing of this
and other issues by the FERC.
An appeal was filed by Williston Basin in June 1993, with the
U.S. Court of Appeals for the D.C. Circuit related to, among
other things, the FERC allowing firm transportation customers
flexible receipt and delivery points anywhere on Williston
Basin's pipeline system upon implementation of Order 636.
In September 1993, the FERC issued its order authorizing
Williston Basin's implementation of Order 636 tariffs effective
November 1, 1993. As a part of this order, the FERC reversed
its May 1993 determination related to the sale of certain
natural gas in underground storage and ordered that this storage
gas be offered for sale to Williston Basin's customers at its
original cost. As a result, any profits which would have been
realized on the sale at market prices of this storage gas will
not reduce Williston Basin's Order 636 transition costs.
Williston Basin requested rehearing of this issue by the FERC
on the grounds that requiring the sale of this storage gas at
cost results in a confiscation of its assets, which the FERC
denied in December 1993. Williston Basin has appealed the
FERC's decisions to the U.S. Court of Appeals for the D.C.
Circuit.
In November 1993, Williston Basin filed with the FERC, pursuant
to the provisions of Order 636, revised tariff sheets requesting
the recovery of $13.4 million of gas supply realignment
transition costs (GSR costs) effective December 1, 1993. As a
result of a December 1993 FERC order, Williston Basin began
collecting these costs subject to refund on December 1, 1993.
The GSR cost recovery reflects costs paid to Koch as part of a
lawsuit settlement and does not include other GSR costs, if any,
which may be incurred, and future recovery sought, by Williston
Basin.
Montana-Dakota has also filed revised gas cost tariffs with each
of its four state regulatory commissions reflecting the effects
of Williston Basin's November 1, 1993 implementation of
Order 636. In October 1993, all four state regulatory
commissions approved the revised tariffs.
Although no assurances can be provided, the Company believes
that Order 636 will not have a significant effect on its
financial position or results of operations.
6. Natural gas repurchase commitment
As more fully described in the 1993 Form 10-K and Note 5 of its
1993 Annual Report, the Company in 1981, entered into a series
of agreements for the purpose of financing the acquisition and
storage of natural gas through Frontier Gas Storage Company
(Frontier), a special purpose, non-affiliated corporation.
Through an agreement, an obligation exists to repurchase all of
the natural gas at Frontier's original cost and reimburse
Frontier for all of its financing and general administrative
costs.
As also described in the 1993 Form 10-K, the FERC issued an
order in July 1989, ruling on several cost-of-service issues
reserved as a part of the 1985 corporate realignment. Addressed
as a part of this order were certain rate design issues related
to the permissible rates for the transportation of the natural
gas held under the repurchase commitment. The issue relating
to the cost of storing this gas was not decided by that order.
As a part of orders issued in August 1990 and May 1991 related
to a general rate increase application, the FERC held that
storage costs should be allocated to this gas. Williston
Basin's July 1991 refund related to a general rate increase
application, reflected implementation of the above finding on
a prospective basis only. The public service commissions of
Montana and South Dakota and the Montana Consumer Counsel
protested whether such storage costs should be allocated to the
gas prospectively rather than retroactively to May 2, 1986. In
October 1991, the FERC issued an order rejecting Williston
Basin's compliance filing on the basis that, among other things,
Williston Basin is required to allocate storage costs to this
gas retroactive to May 2, 1986. Williston Basin requested
rehearing of the FERC's order on this issue in November 1991.
In February 1992, the FERC issued an order which reversed its
October 1991 order and held that such storage costs be allocated
to this gas on a prospective basis only, commencing March 6,
1992. A compliance filing was made with the FERC in March 1992,
which the FERC approved on and with an effective date beginning
May 20, 1992. These storage costs, as initially allocated to
the Frontier gas, approximated $2.1 million annually and
represent costs which Williston Basin may not recover. The
issue regarding the applicability of assessing storage charges
to the gas, which was appealed by Williston Basin to the U.S.
Court of Appeals for the D.C. Circuit in July 1991, creates
additional uncertainty as to the costs associated with holding
this gas. In July 1992, the Court, at the FERC's request,
returned the proceeding to the FERC for its further
consideration. On September 22, 1994, the FERC issued an order
on this matter reaffirming its February 1992 order that storage
costs be allocated to this gas beginning May 20, 1992.
Williston Basin requested rehearing of this order on October 21,
1994.
Beginning in October 1992, as a result of increases in natural
gas prices, Williston Basin began to sell and transport a
portion of the natural gas held under the repurchase commitment.
Through September 30, 1994, 16.2 MMdk of this natural gas had
been sold and transported by Williston Basin, primarily to off-
system markets. Williston Basin will continue to aggressively
market the remaining 44.6 MMdk of this natural gas as long as
market conditions remain favorable. In addition, it will
continue to seek long-term sales contracts.
7. Production taxes
In December 1993, Williston Basin received from the Montana
Department of Revenue (MDR) an assessment claiming additional
production taxes due of $3.7 million, plus interest, for 1988
through 1991 production. These claimed taxes result from the
MDR's belief that certain natural gas production during the
period at issue was not properly valued. Williston Basin does
not agree with the MDR and has reached an agreement with the MDR
that the appeal process be held in abeyance pending further
review.
8. Environmental matters
Montana-Dakota and Williston Basin discovered polychlorinated
biphenyls (PCBs) in portions of their natural gas systems and
informed the United States Environmental Protection Agency (EPA)
in January 1991. Montana-Dakota and Williston Basin believe the
PCBs entered the system from a valve sealant. Both Montana-
Dakota and Williston Basin have initiated testing, monitoring
and remediation procedures, in accordance with applicable
regulations and the work plan submitted to the EPA and the
appropriate state agencies. Costs incurred by Montana-Dakota
and Williston Basin through September 30, 1994, to address this
situation aggregated approximately $815,000. These costs are
related to the testing being performed, and the costs to remove,
dispose of and replace certain property found to be
contaminated. On the basis of findings to date, Montana-Dakota
and Williston Basin estimate that future environmental
assessment and remediation costs that will be incurred range
from $3 million to $15 million. This estimate depends upon a
number of assumptions concerning the scope of remediation that
will be required at certain locations, the cost of remedial
measures to be undertaken and the time period over which the
remedial measures are implemented. In a separate action,
Montana-Dakota and Williston Basin filed suit in Montana State
Court, Yellowstone County, in January 1991, against Rockwell
International Corporation, manufacturer of the valve sealant,
to recover any costs which may be associated with the presence
of PCBs in the system, including a remediation program. On
January 31, 1994, Montana-Dakota, Williston Basin and Rockwell
reached a settlement which terminated this litigation. Pursuant
to the terms of the settlement, Rockwell will reimburse Montana-
Dakota and Williston Basin for a portion of certain remediation
costs incurred or expected to be incurred. In addition, both
Montana-Dakota and Williston Basin consider unreimbursed
environmental remediation costs and costs associated with
compliance with environmental standards to be recoverable
through rates, since they are prudent costs incurred in the
ordinary course of business and, accordingly, have sought and
will continue to seek recovery of such costs through rate
filings. Although no assurances can be given, based on the
estimated cost of the remediation program and the expected
recovery of most of these costs from third parties or
ratepayers, Montana-Dakota and Williston Basin believe that the
ultimate costs related to these matters will not be material to
Montana-Dakota's or Williston Basin's financial position or
results of operations.
In mid-1992, Williston Basin discovered that several of its
natural gas compressor stations had been operating without air
quality permits. As a result, in late 1992, applications for
permits were filed with the Montana Air Quality Bureau (Bureau).
In March 1993, the Bureau cited Williston Basin for operating
the compressors without the requisite air quality permits and
further alleged excessive emissions by the compressor engines
of certain air pollutants, primarily oxides of nitrogen and
carbon monoxide. Williston Basin is currently engaged in
further testing these air emissions but is currently unable to
determine the costs that will be incurred to remedy the
situation although such costs are not expected to be material
to its financial position or results of operations.
In June 1990, Montana-Dakota was notified by the EPA that it and
several others were named as Potentially Responsible Parties
(PRPs) in connection with the cleanup of pollution at a landfill
site located in Minot, North Dakota. An informational meeting
was held in January 1993, between the EPA and the PRPs outlining
the EPA's proposed remedy and the settlement process. In June
1993, the EPA issued its decision on the selected remediation
to be performed at the site. Based on the EPA's proposed
remediation plan, current estimates of the total cleanup costs
for all parties, including oversight costs, at this site range
from approximately $3.7 million to $4.8 million. Montana-Dakota
believes that it was not a material contributor to this
contamination and, therefore, further believes that its share
of the liability for such cleanup will not have a material
effect on its results of operations.
9. Federal tax matters
The Company's consolidated federal income tax returns were under
examination by the Internal Revenue Service (IRS) for the tax
years 1983 through 1988. In September 1991, the Company
received a notice of proposed deficiency from the IRS for the
tax years 1983 through 1985 which proposed substantial
additional income taxes, plus interest. In an alternative
position contained in the notice of proposed deficiency, the IRS
is claiming a lower level of taxes due, plus interest as well
as penalties. In May 1992, a similar notice of proposed
deficiency was received for the years 1986 through 1988.
Although the notices of proposed deficiency encompass a number
of separate issues, the principal issue is related to the tax
treatment of deductions claimed in connection with certain
investments made by Knife River and Fidelity Oil.
The Company's tax counsel has issued opinions related to the
principal issue discussed above, stating that it is more likely
than not that the Company would prevail in this matter. Thus,
the Company intends to contest vigorously the deficiencies
proposed by the IRS and, in that regard, has timely filed
protests for the 1983 through 1988 tax years contesting the
treatment proposed in the notices of proposed deficiency. If
the IRS position were upheld, the resulting deficiencies would
have a material effect on results of operations.
10. Cash flow information
Cash expenditures for interest and income taxes were as follows:
Nine Months Ended
September 30,
1994 1993
(In thousands)
Interest, net of amount capitalized $18,748 $18,184
Income taxes $12,763 $17,138
The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents.
During the nine month period ended September 30, 1994, the
Company's natural gas transmission business sold $8.3 million
of natural gas in underground storage to the natural gas
distribution business. The cash flow effects of this
intercompany sale and purchase shown under "Investing
activities" were not eliminated.<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The following table (in millions of dollars) summarizes the
contribution to consolidated earnings by each of the Company's
businesses.
Three Months Nine Months Twelve Months
Ended Ended Ended
September 30, September 30, September 30,
1994 1993 Business 1994 1993 1994 1993
Utility --
$ 3.3 $ 2.6 Electric $ 8.2 $ 8.5 $12.4 $ 12.5
(3.0) (2.4) Natural gas (1.3) (.9) .8 .4
.3 .2 6.9 7.6 13.2 12.9
.9 (.8) Natural gas transmission 4.6 3.5 5.8 7.0
Mining and construction
5.1 4.5 materials 9.8 9.2 13.0 12.7
Oil and natural gas
5.9 2.2 production 7.8 5.0 9.9 7.2
$ 12.2 $ 6.1 Earnings on common stock $29.1 $ 25.3 $ 41.9 $ 39.8
$ .64 $ .32 Earnings per common share $1.53 $ 1.33 $ 2.21 $ 2.10
Return on average common equity 13.1% 13.0%
Earnings information presented in this table and in the following
discussion is before the $8.9 million ($5.5 million after-tax)
cumulative effect of an accounting change. See Note 2 of Notes to
Condensed Consolidated Financial Statements for a further
discussion of this accounting change.
Three Months Ended September 30, 1994 and 1993
Consolidated earnings for the three months ended September 30,
1994, increased $6.1 million when compared to the corresponding
period a year ago. Improvements in electric, natural gas
transmission, mining and construction materials, and oil and
natural gas production earnings were partially offset by decreased
earnings at the natural gas distribution business. The discussion
of the three month period for each of the Company's businesses
includes the reasons for such changes.
Nine Months Ended September 30, 1994 and 1993
Consolidated earnings for the nine months ended September 30,
1994, were $29.1 million, up $3.8 million from the same period in
1993. The increase in earnings was a result of increased natural
gas transmission, mining and construction materials, and oil and
natural gas production earnings, offset in part by decreased
utility earnings, all as described in the year-to-date analysis.
Twelve Months Ended September 30, 1994 and 1993
For the twelve month period ended September 30, 1994,
consolidated earnings increased $2.1 million from the same period
last year. An earnings improvement at the natural gas
distribution, mining and construction materials, and oil and
natural gas production businesses was partially offset by decreased
earnings at the electric and natural gas transmission businesses.
The reasons for such changes are discussed in the twelve month
section.
Reference should be made to Notes to Condensed Consolidated
Financial Statements for information pertinent to various
commitments and contingencies.
Financial and operating data
The following tables (in millions, where applicable) contain key
financial and operating statistics for each of the Company's
business units.
Montana-Dakota -- Electric Operations
Three Months Nine Months Twelve Months
Ended Ended Ended
September 30, September 30, September 30,
1994 1993 1994 1993 1994 1993
$ 33.0 $ 32.2 Operating revenues $ 99.5 $ 96.4 $134.1 $129.9
10.2 10.5 Fuel and purchased power 32.1 30.1 43.2 41.3
Operation and
9.5 9.3 maintenance expenses 29.5 28.3 38.6 37.2
7.7 6.9 Operating income 20.9 21.4 30.0 29.7
484.5 457.7 Retail sales (kWh) 1,457.3 1,398.9 1,952.0 1,874.2
Power deliveries to
85.0 145.2 MAPP (kWh) 296.3 344.4 462.9 556.7
Cost of fuel and
$ .016 $ .016 purchased power per kWh $.017 $ .016 $ .017 $ .016
Montana-Dakota -- Gas Distribution Operations
Three Months Nine Months Twelve Months
Ended Ended Ended
September 30, September 30, September 30,
1994 1993 1994 1993 1994 1993
Operating revenues:
$ 13.7 $ 15.7 Sales $105.7 $ 99.3 $158.1 $137.2
.7 .8 Transportation & other 2.6 3.1 3.7 4.7
8.2 10.4 Purchased natural gas sold 78.0 73.7 118.3 101.7
Operation and
7.6 7.1 maintenance expenses 22.4 21.0 30.0 27.8
(3.9) (3.1) Operating income .4 1.2 4.0 3.8
Volumes (dk):
2.3 2.7 Sales 21.2 20.4 32.0 28.7
1.6 2.5 Transportation 6.2 9.0 9.9 14.0
3.9 5.2 Total throughput 27.4 29.4 41.9 42.7
83.7% 223.5% Degree days (% of normal) 99.0% 109.2% 98.6% 107.1%
$ 3.50 $ 3.82 Cost of natural gas per dk $ 3.67 $ 3.62 $ 3.69 $ 3.54
<PAGE>
Williston Basin
Three Months Nine Months Twelve Months
Ended Ended Ended
September 30, September 30, September 30,
1994 1993 1994 1993 1994 1993
Operating revenues:
$ --- $ 5.9* Sales for resale $ --- $ 40.2* $ 11.1* $ 61.3*
15.1* 6.3* Transportation & other 52.9* 24.5* 68.4* 35.9*
--- 1.4 Purchased natural gas sold --- 19.0 1.6 30.3
Operation and
8.1** 6.3** maintenance expenses 28.7** 21.8** 45.8** 31.3**
4.4 1.6 Operating income 16.0 15.1 21.0 24.1
Volumes (dk):
Sales for resale--
--- 1.0 Montana-Dakota --- 11.6 1.3 18.3
--- --- Other --- .2 --- .3
Transportation--
5.0 1.7 Montana-Dakota 25.4 8.9 35.0 13.1
7.4 6.1 Other 23.6 30.4 35.0 49.5
12.4 8.8 Total throughput 49.0 51.1 71.3 81.2
*Includes recovery in millions as follows:
Deferred natural gas contract
$ 1.3 $(1.3) buy-out/buy-down costs $ 6.4 $ 1.3 $ 16.2 $ 3.3
**Includes amortization in millions as follows:
Deferred natural gas contract
$ 1.3 $(1.7) buy-out/buy-down costs $ 6.4 $ 1.2 $ 17.0 $ 3.4
Knife River
Three Months Nine Months Twelve Months
Ended Ended Ended
September 30, September 30, September 30,
1994 1993 1994 1993 1994 1993
Operating revenues:
$ 11.1 $ 10.8 Coal $ 33.4 $ 31.5 $ 46.2 $ 44.9
28.7 20.2 Construction materials 57.4 30.0 73.5 30.4
Operation and
28.1 21.2 maintenance expenses 65.0 39.6 85.0 45.4
.7 .6 Reclamation expense 2.3 2.0 3.3 3.1
1.1 1.0 Severance taxes 3.3 3.1 4.6 4.5
8.0 6.4 Operating income 14.8 12.6 19.1 16.6
Sales (000's):
1,220 1,193 Coal (tons) 3,823 3,596 5,293 5,135
938 1,042 Aggregates (tons) 2,155 1,530 3,026 1,596
Ready-mixed concrete
117 58 (cubic yards) 254 82 328 82
189 54 Asphalt (tons) 314 71 383 71
<PAGE>
Fidelity Oil
Three Months Nine Months Twelve Months
Ended Ended Ended
September 30, September 30, September 30,
1994 1993 1994 1993 1994 1993
$ 10.4 $ 10.1 Operating revenues $ 28.3 $ 29.4 $ 38.1 $ 39.2
Operation and
3.0 3.0 maintenance expenses 9.1 8.7 12.0 11.7
Depreciation, depletion
3.7 3.4 and amortization 9.9 9.5 12.5 11.8
2.7 2.7 Operating income 6.5 8.4 9.9 11.9
Production (000's):
404 381 Oil (barrels) 1,160 1,114 1,543 1,504
2,365 2,406 Natural gas (Mcf) 6,704 6,520 9,001 8,110
Average sales price:
$14.83 $14.35 Oil (per barrel) $12.76 $15.37 $12.90 $15.93
1.79 1.86 Natural gas (per Mcf) 1.98 1.82 1.98 1.82
Three Months Ended September 30, 1994 and 1993
Montana-Dakota--Electric Operations
Operating income improved due to increased residential and
commercial sales, primarily the result of more normal summer
weather than a year ago, offset in part by decreased industrial
sales to a major oil producer. Partially offsetting the operating
income improvement were decreased deliveries into the Mid-Continent
Area Power Pool (MAPP), the result of a temporary shutdown in 1993
of a nuclear generating station by an Iowa utility.
Earnings from this business unit improved due to the
aforementioned changes in operating income and decreased income
taxes. Increased long-term debt interest, the result of lower
interest received from Williston Basin due to the retirement of
intercompany debt, partially offset by the retirement of $15.0
million of 5.8 percent medium-term notes on April 1, 1994, somewhat
reduced earnings for this business.
Montana-Dakota--Natural Gas Distribution Operations
Operating income decreased during the period as a result of a
weather-related sales decline, increased operation expenses,
primarily increased benefit-related costs, and higher depreciation
expense. The benefits of general rate increases placed into effect
in December 1993, and January 1994, in North Dakota, South Dakota
and Wyoming and the addition of over 4,900 customers somewhat
mitigated the operating income decline.
Gas distribution earnings declined due to the aforementioned
operating income decrease and increased interest expense, the
result of the previously described intercompany debt retirement and
interest accrued on refundable gas cost balances due to a refund
received from Williston Basin.
Williston Basin
The improvement in operating income reflects increased margins
realized due to the timing of revenues now being realized under the
Order 636 rate structure implemented in November 1993. The new
rate methodology, which shifts a greater portion of revenues to a
fixed monthly demand which in the past had been primarily commodity
based, results in lower natural gas transmission earnings during
the higher volume winter heating season than have been realized in
the past, but produce higher earnings during the lower volume
summer months. See Note 5 for more information on the
implementation of Order 636. Revenue recognized as a result of 4.6
million decatherms (MMdk) of natural gas transported to storage
increased operating income. However, since prior to 1994 such
revenue was not recognized until the natural gas was withdrawn from
storage during the winter months, operating income will be
similarly reduced during the 1994-95 heating season. Also
contributing to the operating income increase was a decline in
operation and maintenance expenses and depreciation expense,
primarily due to the sale or transfer of unneeded facilities.
Reduced volumes transported to both on and off-system markets and
a 1993 out-of-period credit adjustment to take-or-pay surcharge
amortizations somewhat offset the operating income improvement.
Natural gas transmission earnings increased due to the
aforementioned changes in operating income and decreased long-term
debt interest, the result of debt refinancing in April 1994.
Increased carrying costs associated with the natural gas repurchase
commitment, due to higher average rates, and increased income taxes
somewhat reduced Williston Basin's earnings.
Knife River
The operating income increase for this business was due to sales
attributable to the September 1993 acquisition of an Oregon
construction materials business. Increased coal sales at all mines
also added to the improvement in operating income.
Earnings increased due to the improvement in operating income
offset in part by reduced investment income.
Fidelity Oil
Operating income for the oil and natural gas production business
was essentially unchanged from the corresponding period in 1993.
Increased oil production and prices were offset by a decline in
natural gas production and prices and increased depreciation,
depletion and amortization.
Earnings for this business improved due to the realization of
investment gains related to the sale of an equity investment in
General Atlantic Resources, Inc. (GARI), which were $3.3 million
(after-tax) more than corresponding gains realized in the third
quarter of 1993, and decreased income taxes.
Nine Months Ended September 30, 1994 and 1993
Montana-Dakota--Electric Operations
The decline in operating income reflects increased fuel and
purchased power costs, principally higher demand charges associated
with the pass-through of periodic maintenance costs and the
purchase of an additional five megawatts of firm capacity through
a participation power contract. Increased operation expenses,
primarily higher payroll and benefit-related costs, and increased
depreciation expense also negatively affected operating income. In
addition, decreased deliveries to the MAPP, the result of a
temporary shutdown in 1993 of a nuclear generating station by an
Iowa utility, reduced operating income. Partially mitigating the
operating income decline were increased sales to all major markets,
the result of increased demand.
Earnings for the electric business decreased due to the operating
income decline and increased long-term debt interest, resulting
from lower interest received from Williston Basin due to the
retirement of intercompany debt, partially offset by the retirement
of $15.0 million of 5.8 percent medium-term notes on April 1, 1994.
Decreased income taxes somewhat offset the earnings decline.
Montana-Dakota--Natural Gas Distribution Operations
Operating income decreased at the natural gas distribution
business from the corresponding period in 1993 due to a weather-
related decline in sales and decreased transportation volumes,
primarily due to two oil refineries bypassing Montana-Dakota's
distribution facilities. In addition, higher operation and
maintenance expenses, primarily increased payroll and benefit-
related costs and increased distribution and sales expenses due to
the system expansion into north-central South Dakota, and increased
depreciation expense reduced operating income. The benefits of
general rate increases placed into effect in December 1993, and
January 1994, in North Dakota, South Dakota and Wyoming and the
addition of over 4,900 customers, improved operating income. Also
increasing operating income was a Wyoming Supreme Court order
granting recovery of a prior refund.
Gas distribution earnings decreased due to the operating income
decline and increased interest expense, primarily carrying costs
being accrued on natural gas costs refundable through rate
adjustments, higher financing costs related to increased capital
expenditures and the previously described intercompany debt
retirement. The return earned on the natural gas storage inventory
(included in Other Income -- Net) and decreased income taxes
somewhat mitigated the decline in earnings.
Williston Basin
The increase in operating income reflects a January 1994 rate
change due to a rate stipulation agreement with the FERC and the
realization of revenue related to 7.9 million decatherms (MMdk) of
natural gas transported to storage, as described in the three
months discussion. In addition, improved company production
volumes and decreased maintenance expenses and depreciation
expense, due to the sale or transfer of unneeded facilities,
further improved operating income. Decreased margins realized due
to the timing of revenues being realized under the Order 636 rate
structure implemented in November 1993 and decreased net
throughput, primarily to off-system markets, partially offset the
operating income increase. See Note 5 and the three months
discussion above for more information on the implementation of
Order 636. A 1993 out-of-period credit adjustment to take-or-pay
surcharge amortizations also partially offset the operating income
increase.
Earnings for this business increased due to the operating income
improvement, decreased long-term debt interest, the result of debt
retirements and debt refinancing in July 1993, and April 1994,
respectively, and increased interest being accrued on gas supply
realignment transition costs (included in Other Income -- Net).
Partially offsetting the earnings improvement were increased
carrying costs associated with the natural gas repurchase
commitment due to higher average rates.
Knife River
Operating income increased due to sales at the newly acquired
Oregon construction materials business and an improvement in coal
sales at all mines, mainly the result of increased demand by
electric generation customers. The operating income improvement
was partially offset by a seasonal first quarter loss experienced
at the Alaska construction materials business which was acquired in
April 1993. Operations of the construction materials businesses
are highly seasonal whereby operating losses are generally incurred
during the winter months with significantly higher revenues being
realized during the spring and summer construction season.
Earnings increased due to the increase in operating income offset
in part by reduced investment income, primarily lower investable
funds due to the aforementioned acquisitions.
Fidelity Oil
Operating income for the oil and natural gas production business
declined as a result of lower average oil prices and an increase in
operation expenses and depreciation, depletion and amortization,
primarily due to increased volumes. Partially offsetting the
operating income decline were higher average natural gas prices and
an improvement in oil and natural gas production.
Earnings from this business improved due to the realization of
investment gains related to the sale of an equity investment in
GARI, as previously discussed, and decreased income taxes. The
decline in operating income partially offset the earnings increase.
Twelve Months Ended September 30, 1994 and 1993
Montana-Dakota--Electric Operations
Operating income for the electric business improved slightly due
to increased retail sales, primarily due to increased demand.
Largely offsetting the operating income improvement were increased
operation expenses, primarily higher payroll and benefit-related
costs, increased depreciation expense and increased fuel and
purchased power costs. Higher demand charges associated with the
pass-through of periodic maintenance costs and the purchase of an
additional five megawatts of firm capacity through a participation
power contract were the primary factors behind the increase in fuel
and purchased power costs. A decrease of deliveries into the MAPP,
the result of a temporary shutdown in 1993 of a nuclear generating
station by an Iowa utility, also reduced operating income.
Earnings from this business unit decreased slightly due to
increased long-term debt interest resulting from lower interest
received from Williston Basin due to the retirement of intercompany
debt, partially offset by the retirement of $15.0 million of 5.8
percent medium-term notes on April 1, 1994.
Montana-Dakota--Natural Gas Distribution Operations
Operating income for the natural gas distribution business
increased slightly due to improved sales, primarily from the
addition of over 4,700 customers, combined with general rate
increases in North Dakota, South Dakota and Wyoming. Partially
offsetting the operating income improvement were decreased weather-
related sales and lower volumes transported to commercial and
industrial customers, primarily due to two oil refineries bypassing
Montana-Dakota's distribution facilities. In addition, increased
operation expenses, primarily employee benefit-related costs and
distribution and sales expenses related to the system expansion
into north-central South Dakota, and increased depreciation expense
reduced operating income for the natural gas distribution business.
Gas distribution earnings increased due to the increase in
operating income and the return being earned on the natural gas
storage inventory (included in Other Income -- Net), partially
offset by higher financing costs related to increased capital
expenditures and carrying charges being accrued on natural gas
costs refundable through rate adjustments.
Williston Basin
Operating income declined at the natural gas transmission
business as a result of decreased net throughput, primarily lower
transportation to off-system markets, and revenue timing
differences resulting from the implementation of Order 636. See
Note 5 and the three months discussion above for more information
on the implementation of Order 636. A 1993 out-of-period credit
adjustment to take-or-pay surcharge amortizations also contributed
to the operating income decline. Increased general rates
implemented in November 1992 and a January 1994 rate change due to
a rate stipulation agreement with the FERC, partially offset the
operating income decline. Revenue associated with natural gas
transported to storage, as described in the three months
discussion, increased company production, due to both increased
production and higher average prices, and decreased maintenance
expenses and depreciation expense, resulting from the sale or
transfer of unneeded facilities, also partially offset the
operating income decline.
Earnings for this business unit decreased due to the
aforementioned operating income decline, offset in part by reduced
interest on long-term debt, the result of debt retirements and debt
refinancing in July 1993, and April 1994.
Knife River
Operating income improved due to sales at the newly acquired
Oregon construction materials business and an improvement in coal
tons sold at all mines, mainly the result of increased demand by
electric generation customers.
Earnings increased due to the above-described operating income
improvement, offset in part by reduced investment income, primarily
resulting from lower investable funds due to the 1993 acquisitions.
Fidelity Oil
Operating income for the oil and natural gas production business
decreased as a result of a decline in oil prices and a volume-
related increase in operating expenses and depreciation, depletion
and amortization. Partially offsetting the operating income
decline were higher oil and natural gas production and average
natural gas prices.
Earnings from this business improved due to the realization of
investment gains related to the sale of an equity investment in
GARI, as previously discussed. The decline in operating income and
increased interest expense, stemming from higher average
borrowings, somewhat reduced earnings.
Prospective Information
The operating results of the Company's utility and pipeline
businesses are significantly influenced by the weather, the general
economy of their respective service territories, and the ability to
recover costs through the regulatory process.
Montana-Dakota is generally allowed to recover through general
rates the costs of providing utility services which include fuel
and purchased power costs and the cost of natural gas purchased.
The electric business utilizes either fuel adjustment clauses or
expedited rate filings to recover changes in fuel and purchased
power costs in the interim periods. The natural gas business has
similar mechanisms in place to pass through the changes in natural
gas commodity, transportation and storage costs (including carrying
costs). These recovery mechanisms reduce the effect the changes in
these costs have on Montana-Dakota's results. See Items 1 and 2 of
the 1993 Form 10-K for a further discussion of these items as they
apply to Montana-Dakota's operations.
See Items 1 and 2 of the 1993 Form 10-K under Montana-Dakota for
a discussion of general rate increase applications filed and
settlements reached with the NDPSC, SDPUC and WPSC, respectively.
On April 1, 1994, Montana-Dakota filed a general natural gas rate
increase application with the MPSC requesting an increase of $2.6
million or 5.29%, with 25% requested on an interim basis to be
effective within 30 days. On October 20, 1994, Montana-Dakota and
the MPSC reached a settlement of this proceeding which will provide
for additional revenues of $900,000, or 35 percent of the original
amount requested. Also included as a part of the settlement was
the favorable resolution of outstanding purchased gas cost
adjustment filings dating back to December 1989 as well as
proceedings concerning the prudency of Montana-Dakota's natural gas
purchase practices, all as further described in the 1993 Form 10-K.
The rate increase will become effective November 1, 1994. Montana-
Dakota has also filed general natural gas rate cases in North
Dakota and South Dakota requesting increases of 1.3 percent and 3.7
percent, respectively. These filings were made on May 13, 1994, in
North Dakota and June 29, 1994, in South Dakota, representing a
combined $2.1 million increase in revenues.
On September 9, 1994, Montana-Dakota entered into a ten-year
power supply contract with Black Hills Corporation, which operates
its electric utility as Black Hills Power and Light Company.
Beginning January 1, 1997, Black Hills Power and Light Company will
supply the electric power and energy for Montana-Dakota's electric
service requirements for its Sheridan, Wyoming service territory.
The contract is subject to the approval of the FERC. The existing
electric power supply contract expires on December 31, 1996.
On October 1, 1992, as a result of increases in natural gas
prices, Williston Basin began to sell and transport a portion of
the natural gas held under the repurchase commitment. Williston
Basin will continue to aggressively market this natural gas as long
as market conditions remain favorable. In addition, it will
continue to seek long-term sales contracts. See Note 6 and Items
1 and 2 of the 1993 Form 10-K under Williston Basin for additional
information on the natural gas held under this repurchase
agreement.
In June 1994, Knife River was notified by the owners of the Big
Stone Station that its contract for supplying approximately 2.1
million tons of lignite annually would not be renewed. The current
contract expires in mid-1995 and Knife River anticipates closing
the Gascoyne Mine upon the expiration of the contract. The costs
of closing the Gascoyne Mine are not expected to have a significant
effect on Knife River's results of operations.
Knife River continues to seek out growth opportunities. These
include not only identifying possibilities for alternate uses of
lignite coal but also investigating the acquisition of other
surface mining properties, particularly those relating to sand and
gravel aggregates and related products such as ready-mixed
concrete, asphalt and various finished aggregate products. In
1993, Knife River acquired two construction materials operations,
one in Anchorage, Alaska, and the other with locations in Medford,
Oregon and Stockton, California. See Items 1 and 2 of the 1993
Form 10-K under Knife River for a further discussion of these
acquisitions.
See Notes 2 and 15 of Notes to Consolidated Financial
Statements contained in the 1993 Annual Report for a further
discussion on the Company's 1993 adoption of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other than
Pensions" (SFAS No. 106) and the Company's efforts regarding
regulatory recovery, including the NDPSC's January 19, 1994, order
which requires the expensing, commencing January 1, 1994, of the
ongoing SFAS No. 106 incremental expense estimated at $1.0 million
annually. A hearing was held by the SDPUC on March 24, 1994, on
the recovery of SFAS No. 106 costs. On July 21, 1994, the
Commission issued an order rejecting the Company's request,
determining that the pay-as-you-go method must be used for
ratemaking purposes. The 1994 SFAS No. 106 incremental expense is
estimated to be approximately $250,000 annually. The October 20,
1994 settlement with the MPSC discussed earlier includes the
expensing and recovery of current and previously deferred SFAS No.
106 costs, effective November 1, 1994.
Liquidity and Capital Commitments
The Company's regulated businesses operated by Montana-Dakota
and Williston Basin estimate construction costs of approximately
$46.6 million for the year 1994. The Company's 1994 capital needs
to retire maturing long-term corporate securities are estimated at
$15.3 million.
It is anticipated that Montana-Dakota will continue to provide
all of the funds required for its construction requirements from
internal sources and through the use of its $30 million revolving
credit and term loan agreement, $4 million of which is outstanding
at September 30, 1994, and through the issuance of long-term debt,
the amount and timing of which will depend upon the Company's
needs, internal cash generation and market conditions.
Williston Basin expects to meet its construction requirements
and financing needs with a combination of internally generated
funds and a $35 million line of credit currently available, none of
which is outstanding at September 30, 1994, and through the
issuance of long-term debt, the amount and timing of which will
depend upon the Company's needs, internal cash generation and
market conditions. On April 1, 1994, Williston Basin borrowed $25
million under a term loan agreement, with the proceeds used solely
for the purpose of refinancing purchase money mortgages payable to
the Company, as further described in Note 12 of Notes to
Consolidated Financial Statements contained in the 1993 Annual
Report. At September 30, 1994, $20 million is outstanding under
the term loan agreement.
As further described in Items 1 and 2 of the 1993 Form 10-K
under Williston Basin, in August 1993, Koch and Williston Basin
reached a settlement that terminated the litigation with respect to
all parties. The Company believes that it is entitled to recover
from ratepayers most of the costs that were incurred as a result of
this settlement, although the amount of the costs which can
ultimately be recovered is subject to market uncertainties. See
Items 1 and 2 of the 1993 Form 10-K under Williston Basin for a
further discussion of this settlement.
Knife River's capital needs of $4.6 million, excluding those
required for potential mining acquisitions, will be met through
funds on hand and funds generated from internal sources. In
addition, effective April 20, 1994, Knife River has available
$5 million under a revolving credit and term loan agreement. It is
anticipated that funds on hand, funds generated from internal
sources and the revolving credit and term loan agreement will
continue to meet the needs of this business unit.
Fidelity Oil's 1994 capital needs related to its oil and
natural gas acquisition, development and exploration program,
estimated at $40.0 million, will be met through funds generated
from internal sources, and a $20 million secured line of credit and
other additional long-term financing arrangements. There was $2.2
million outstanding at September 30, 1994, under the secured line
of credit.
See Note 9 for a discussion of notices of proposed deficiency
received from the IRS proposing substantial additional income
taxes. The level of funds which could be required as a result of
the proposed deficiencies could be significant if the IRS position
were upheld.
Prairielands' capital needs of $1.2 million are anticipated to
be met through funds generated internally and its $5.4 million
lines of credit, $280,000 of which is outstanding at September 30,
1994.
The Company utilizes its $40 million lines of credit and its
$30 million revolving credit and term loan agreement to meet its
short-term financing needs and to take advantage of market
conditions when timing the placement of long-term or permanent
financing. There were no borrowings outstanding at September 30,
1994, under the lines of credit.
The Company's issuance of first mortgage debt is subject to
certain restrictions imposed under the terms and conditions of its
Indenture of Mortgage. Generally, those restrictions require the
Company to pledge $1.43 of unfunded property to the Trustee for
each dollar of indebtedness incurred under the Indenture and that
annual earnings (pretax and before interest charges), as defined in
the Indenture, equal at least two times its annualized first
mortgage bond interest costs. Under the more restrictive of the
two tests, as of September 30, 1994, the Company could have issued
approximately $135 million of additional first mortgage bonds.
The Company's coverage of fixed charges including preferred
dividends was 3.1 times for twelve months ended September 30, 1994,
and 3.0 times for the year 1993. Additionally, the Company's first
mortgage bond interest coverage was 3.6 times for the twelve months
ended September 30, 1994, compared to 3.4 times for the year 1993.
Stockholders' equity as a percent of total capitalization was 59%
and 56% at September 30, 1994, and December 31, 1993, respectively.<PAGE>
PART II - OTHER INFORMATION
6. Exhibits and Reports on Form 8-K
a) Exhibits
(3) Amendment to Composite Certificate of
Incorporation of MDU Resources Group, Inc.
(27) Financial Data Schedule
b) Reports on Form 8-K
None.<PAGE>
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.
MDU RESOURCES GROUP, INC.
DATE November 9, 1994 BY /s/ Warren L. Robinson
Warren L. Robinson
Vice President, Treasurer
and Chief Financial Officer
/s/ Vernon A. Raile
Vernon A. Raile
Vice President, Controller and
Chief Accounting Officer
MDU RESOURCES GROUP, INC.
Certificate of Amendment
of
Certificate of Incorporation
MDU Resources Group, Inc., a corporation duly organized and
existing under the laws of the State of Delaware, hereby certifies
as follows:
1. That the Board of Directors of said Corporation, at a
meeting duly convened and held on the 4th day of November, 1993,
proposed two separate amendments to the Certificate of
Incorporation of the Corporation, as heretofore amended, and at
said meeting adopted resolutions setting forth the proposed
amendments, declaring their advisability, and directing that the
proposed amendments be considered at the next annual meeting of
said Corporation by the stockholders entitled to vote in respect
thereof, such amendments being set forth in the Corporation's
Proxy Statement for the 1994 Annual Stockholders Meeting as
follows:
RESOLVED, that the Board of Directors of MDU
Resources Group, Inc., (the "Corporation") hereby
declares it advisable:
(a) that, as permitted by law, the purpose of the
Corporation be amended to include any lawful act or
activity for which corporations may be organized under
the General Corporation Law of Delaware to reflect the
fact that the Corporation is a multidimensional natural
resource company; and
(b) that, in order to effect the foregoing the
Certificate of Incorporation of the Corporation, as
heretofore amended, be further amended by deleting
Article THIRD in its entirety, and by inserting in place
thereof a new Article THIRD to read as follows:
THIRD. The purpose of the Corporation is to
engage in any lawful act or activity for which
corporations may be organized under the
General Corporation Law of Delaware. Included
within this purpose, without limiting the
generality of the foregoing sentence is (1) to
own and operate electric and gas public
utility systems and (2) to transact business
as a multidimensional natural resource
company.
The Corporation shall have and exercise all
the powers conferred upon corporations by the
General Corporation Law of Delaware.
FURTHER RESOLVED, that the Board of Directors hereby
directs that the proposed amendment be attached as an
exhibit to the proxy statement for the Company's Annual
Meeting of Stockholders to be held on April 26, 1994, for
consideration by the Stockholders entitled to vote in
respect thereof.
* * * * * * * * * * * * *
RESOLVED, that the Board of Directors of MDU
Resources Group, Inc. hereby declares it advisable:
(A) That the number of shares of Common Stock which
the Company is authorized to issue be increased from
50,000,000 shares of Common Stock with the par value of
$5.00, to 75,000,000 shares with the par value of $3.33,
effective at the close of business on the date on which
the appropriate Certificate of Amendment to the Company's
Certificate of Incorporation is filed in the office of
the Secretary of State of the State of Delaware;
(B) That, in order to effect the foregoing, the
Certificate of Incorporation of the Company, as
heretofore amended, be further amended by deleting the
first paragraph of Article FOURTH, and by inserting in
place thereof a new first paragraph of said Article
FOURTH to read as follows:
FOURTH. The total number of shares of stock
which the corporation shall have authority to
issue is Seventy-seven Million (77,000,000)
divided into four classes, namely, Preferred
Stock, Preferred Stock A, Preference Stock,
and Common Stock. The total number of shares
of such Preferred Stock authorized is Five
Hundred Thousand (500,000) shares of the par
value of One Hundred Dollars ($100) per share
(hereinafter called the "Preferred Stock")
amounting in the aggregate to Fifty Million
Dollars ($50,000,000). The total number of
shares of such Preferred Stock A authorized is
One Million (1,000,000) shares without par
value (hereinafter called the "Preferred Stock
A"). The total number of shares of such
Preference Stock authorized is Five Hundred
Thousand (500,000) shares without par value
(hereinafter called the "Preference Stock").
The total number of shares of such Common
Stock authorized is Seventy-five Million
(75,000,000) of the par value of Three and
33/100 Dollars ($3.33) per share (hereinafter
called the "Common Stock"), amounting in the
aggregate to Two Hundred Forty-nine Million
Seven Hundred Fifty Thousand Dollars
($249,750,000).
FURTHER RESOLVED, that the Board of Directors hereby
directs that the proposed amendment be attached as an
exhibit to the proxy statement for the Company's Annual
Meeting of Stockholders to be held on April 26, 1994 for
consideration by the Stockholders entitled to vote in
respect thereof.
A copy of the resolutions was attached as Exhibit A and Exhibit B
to the Corporation's Proxy Statement for the 1994 Annual
Stockholders Meeting, and the body of the Proxy Statement contained
a discussion of the proposed amendments.
2. That thereafter, on the 26th day of April, 1994, at
11:00 a.m., in accordance with the Bylaws of the Corporation, and
upon notice given in accordance with the laws of the State of
Delaware and said Bylaws, the Annual Meeting of Stockholders of the
Corporation was held, and there were present at such meeting, in
person or by proxy, the holders of more than a majority of the
shares of Common Stock of the Corporation outstanding and entitled
to vote, constituting a quorum of said stockholders.
3. That at said Annual Meeting of Stockholders, the proposals
to amend the Certificate of Incorporation (i) to modify the
corporate purposes of the Corporation and (ii) to increase the
number of authorized shares of Common Stock from 50,000,000 shares to
75,000,000 shares and decrease the par value of such shares from
$5.00 per share to $3.33 per share were presented for
consideration, and a vote of the holders of the Common Stock voting
in person or by proxy was taken for and against said proposal.
4. That a majority of the outstanding stock of the
Corporation entitled to vote and present at the Annual Meeting in
person or by proxy voted in favor of the proposal to amend Article
THIRD to the Certificate of Incorporation as indicated in the
following table:
Shares Shares
Shares Shares Voted Voted
Out- Repre- For Against
standing sented Proposal Proposal
Common Stock 18,984,654 16,477,036 15,791,694 685,342*
*Includes 393,492 abstentions
5. That a majority of the outstanding stock of the
Corporation entitled to vote and present at the Annual Meeting in
person or by proxy voted in favor of the proposal to amend Article
FOURTH to the Certificate of Incorporation as indicated in the
following table:
Shares Shares
Shares Shares Voted Voted
Out- Repre- For Against
standing sented Proposal Proposal
Common Stock 18,984,654 16,477,036 14,894,495 1,582,541*
*Includes 391,087 abstentions
6. That said amendments to the Certificate of Incorporation
of MDU Resources Group, Inc. as hereinbefore set forth have been
therefore duly adopted in accordance with the provisions of Section
242 of the General Corporation Laws of the State of Delaware.
IN WITNESS WHEREOF, MDU Resources Group, Inc. has caused its
corporate seal to be hereunto affixed, and this Certificate to be
signed by John A. Schuchart, its Chairman of the Board and Chief
Executive Officer, and Lester H. Loble, II, its Secretary, this
27th day of April, 1994.
MDU RESOURCES GROUP, INC.
ATTEST:
/s/ Lester H. Loble, II, Secretary By: /s/ John A. Schuchart
Lester H. Loble, II, Secretary John A. Schuchart
Chairman of the Board and
Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000067716
<NAME> MDU RESOURCES GROUP INC
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 518,245
<OTHER-PROPERTY-AND-INVEST> 186,374
<TOTAL-CURRENT-ASSETS> 138,806
<TOTAL-DEFERRED-CHARGES> 67,573
<OTHER-ASSETS> 73,013
<TOTAL-ASSETS> 984,011
<COMMON> 63,219
<CAPITAL-SURPLUS-PAID-IN> 95,914
<RETAINED-EARNINGS> 165,724
<TOTAL-COMMON-STOCKHOLDERS-EQ> 324,857
2,100
15,000
<LONG-TERM-DEBT-NET> 297,385
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 280
<LONG-TERM-DEBT-CURRENT-PORT> 20,325
100
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 323,964
<TOT-CAPITALIZATION-AND-LIAB> 984,011
<GROSS-OPERATING-REVENUE> 335,926
<INCOME-TAX-EXPENSE> 16,716
<OTHER-OPERATING-EXPENSES> 277,345
<TOTAL-OPERATING-EXPENSES> 294,061
<OPERATING-INCOME-LOSS> 41,865
<OTHER-INCOME-NET> 10,570
<INCOME-BEFORE-INTEREST-EXPEN> 52,435
<TOTAL-INTEREST-EXPENSE> 22,708
<NET-INCOME> 29,727
598
<EARNINGS-AVAILABLE-FOR-COMM> 29,129
<COMMON-STOCK-DIVIDENDS> 22,403
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 81,952
<EPS-PRIMARY> 1.53
<EPS-DILUTED> 1.53
</TABLE>
