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, 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 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.)
Schuchart Building
918 East Divide Avenue
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 7, 1997:
29,143,332 shares.
INTRODUCTION
This Form 10-Q contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements should be read with the cautionary
statements and important factors included in this Form 10-Q at Item
2 -- "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Safe Harbor for Forward-Looking
Statements." Forward-looking statements are all statements other
than statements of historical fact, including without limitation
those that are identified by the use of the words "anticipates,"
"estimates," "expects," "intends," "plans," "predicts" and similar
expressions.
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
Schuchart Building, 918 East Divide Avenue, 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 256 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 Corporation (Knife
River), the Fidelity Oil Group (Fidelity Oil) and Utility Services,
Inc. (Utility Services).
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 and, through its
wholly owned subsidiary, Prairielands Energy Marketing,
Inc. (Prairielands), seeks new energy markets while
continuing to expand present markets for natural gas and propane.
Knife River, through its wholly owned subsidiary, KRC
Holdings, Inc. (KRC Holdings) and its subsidiaries, surface mines
and markets aggregates and related construction materials in
Oregon, California, Alaska and Hawaii. In addition, Knife River
surface mines and markets low sulfur lignite coal at mines located
in Montana and North Dakota.
Fidelity Oil is comprised of Fidelity Oil Co. and
Fidelity Oil Holdings, Inc., which own oil and natural gas
interests throughout the United States, the Gulf of Mexico and
Canada through investments with several oil and natural gas
producers.
Utility Services, through its wholly owned subsidiaries,
International Line Builders, Inc. and High Line Equipment,
Inc., installs and repairs electric transmission and
distribution lines in the western United States and Hawaii and
provides related construction supplies and equipment.
INDEX
Part I -- Financial Information
Consolidated Statements of Income --
Three and Nine Months Ended September 30, 1997 and 1996
Consolidated Balance Sheets --
September 30, 1997 and 1996, and December 31, 1996
Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 1997 and 1996
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II -- Other Information
Signatures
Exhibit Index
Exhibits
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MDU RESOURCES GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Nine Months
Ended Ended
September 30, September 30,
1997 1996 1997 1996
(In thousands, except per share amounts)
Operating revenues:
Electric $ 48,031 $ 33,873 $117,074 $102,680
Natural gas 34,476 31,752 136,919 120,925
Construction materials and mining 65,771 51,298 123,854 96,711
Oil and natural gas production 15,421 16,836 51,044 50,185
163,699 133,759 428,891 370,501
Operating expenses:
Fuel and purchased power 11,255 10,311 33,655 32,527
Purchased natural gas sold 9,870 3,670 46,988 31,013
Operation and maintenance 90,479 68,087 205,148 164,932
Depreciation, depletion and
amortization 16,869 15,374 46,943 46,045
Taxes, other than income 6,202 5,596 17,928 16,980
134,675 103,038 350,662 291,497
Operating income:
Electric 9,646 8,036 22,362 22,006
Natural gas distribution (2,339) (2,670) 4,706 4,525
Natural gas transmission 6,745 10,731 21,335 22,577
Construction materials and mining 9,650 8,805 10,669 12,530
Oil and natural gas production 5,322 5,819 19,157 17,366
29,024 30,721 78,229 79,004
Other income -- net 1,274 1,787 3,982 4,828
Interest expense 7,783 7,708 21,916 21,447
Costs on natural gas repurchase
commitment (125) 22,517 1,010 25,356
Income before income taxes 22,640 2,283 59,285 37,029
Income taxes 8,445 (6,212) 21,753 6,799
Net income 14,195 8,495 37,532 30,230
Dividends on preferred stocks 196 196 586 591
Earnings on common stock $ 13,999 $ 8,299 $ 36,946 $ 29,639
Earnings per common share $ .48 $ .29 $ 1.28 $ 1.04
Dividends per common share $ .2875 $ .2775 $ .8425 $ .8225
Average common shares outstanding 29,051 28,477 28,796 28,477
The accompanying notes are an integral part of these consolidated statements.
MDU RESOURCES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, September 30, December 31,
1997 1996 1996
(In thousands)
ASSETS
Property, plant and equipment:
Electric $ 560,007 $ 543,542 $ 546,477
Natural gas distribution 169,005 163,925 164,843
Natural gas transmission 283,505 269,561 273,775
Construction materials and mining 238,742 174,224 173,663
Oil and natural gas production 232,736 207,443 211,555
1,483,995 1,358,695 1,370,313
Less accumulated depreciation,
depletion and amortization 655,210 609,137 617,724
828,785 749,558 752,589
Current assets:
Cash and cash equivalents 66,164 32,668 47,799
Receivables 71,229 54,175 73,187
Inventories 45,391 31,646 27,361
Deferred income taxes 22,327 24,560 26,011
Prepayments and other current
assets 28,796 11,771 17,300
233,907 154,820 191,658
Natural gas available under
repurchase commitment 15,674 51,682 37,233
Investments 18,537 51,987 53,501
Deferred charges and other assets 63,621 56,894 54,192
$1,160,524 $1,064,941 $1,089,173
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock (Shares outstanding --
29,078,507, $3.33 par value at
September 30, 1997, and 28,476,981, $3.33
par value at December 31, 1996 and
September 30, 1996 $ 96,831 $ 94,828 $ 94,828
Other paid in capital 75,466 64,305 64,305
Retained earnings 204,212 184,400 191,541
376,509 343,533 350,674
Preferred stock subject to mandatory
redemption requirements 1,800 1,900 1,800
Preferred stock redeemable at option
of the Company 15,000 15,000 15,000
Long-term debt 322,998 269,643 280,666
716,307 630,076 648,140
Commitments and contingencies --- --- ---
Current liabilities:
Short-term borrowings 16,038 2,865 3,950
Accounts payable 39,106 30,704 31,580
Taxes payable 6,223 6,788 8,683
Other accrued liabilities,
including reserved revenues 101,390 88,835 100,938
Dividends payable 8,555 8,099 8,099
Long-term debt and preferred
stock due within one year 8,792 5,837 11,854
180,104 143,128 165,104
Natural gas repurchase commitment 32,632 87,544 66,294
Deferred credits:
Deferred income taxes 121,563 112,893 116,208
Other 109,918 91,300 93,427
231,481 204,193 209,635
$1,160,524 $1,064,941 $1,089,173
The accompanying notes are an integral part of these consolidated statements.
MDU RESOURCES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
1997 1996
(In thousands)
Operating activities:
Net income $37,532 $30,230
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion and amortization 46,943 46,045
Deferred income taxes and investment tax credit -- net 9,282 3,797
Recovery of deferred natural gas contract litigation
settlement costs, net of income taxes 3,130 4,793
Write-down of natural gas available under repurchase
commitment, net of income taxes (Note 5) --- 11,364
Changes in current assets and liabilities --
Receivables 16,569 7,786
Inventories (8,352) (7,697)
Other current assets (10,496) 6,593
Accounts payable 2,028 8,443
Other current liabilities 5,269 (18,581)
Other noncurrent changes (111) (7,632)
Net cash provided by operating activities 101,794 85,141
Financing activities:
Net change in short-term borrowings 6,777 2,265
Issuance of long-term debt 53,129 64,150
Repayment of long-term debt (21,488) (43,149)
Issuance of common stock 10,059 ---
Retirement of natural gas repurchase commitment (49,361) (656)
Dividends paid (24,861) (24,014)
Net cash used in financing activities (25,745) (1,404)
Investing activities:
Capital expenditures including
acquisitions of businesses --
Electric (11,945) (10,980)
Natural gas distribution (6,155) (4,692)
Natural gas transmission (7,260) (5,504)
Construction materials and mining (36,005) (23,288)
Oil and natural gas production (22,561) (45,705)
(83,926) (90,169)
Net proceeds from sale or disposition of property 2,665 10,986
Net capital expenditures (81,261) (79,183)
Sale of natural gas available under
repurchase commitment 25,928 515
Investments (2,351) (5,799)
Net cash used in investing activities (57,684) (84,467)
Increase (decrease) in cash and cash equivalents 18,365 (730)
Cash and cash equivalents -- beginning of year 47,799 33,398
Cash and cash equivalents -- end of period $66,164 $32,668
The accompanying notes are an integral part of these consolidated statements.
MDU RESOURCES GROUP, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 1997 and 1996
(Unaudited)
1. Basis of presentation
The accompanying 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, 1996
(1996 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 1996 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
consolidated interim financial statements.
2. Seasonality of operations
Some 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.
3. 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 (Federal District Court) against Williston
Basin and the Company disputing certain price and volume issues
under the contract.
Through the course of this action Moncrief submitted damage
calculations which totalled approximately $19 million or, under its
alternative pricing theory, approximately $39 million.
On June 26, 1997, the Federal District Court issued its
order awarding Moncrief damages of approximately $15.6 million. On
July 25, 1997, the Federal District Court issued an order limiting
Moncrief's reimbursable costs to post-judgment interest, instead of
both pre- and post-judgment interest as Moncrief had sought. On
August 25, 1997, Moncrief filed a notice of appeal with the United
States Court of Appeals for the Tenth Circuit related to the
Federal District Court's orders. On September 2, 1997, Williston
Basin and the Company filed a notice of cross-appeal.
Williston Basin believes that it is entitled to recover
from ratepayers virtually all of the costs ultimately incurred, as
a result of these orders, as gas supply realignment transition
costs pursuant to the provisions of the Federal Energy Regulatory
Commission's (FERC) Order 636. However, the amount of costs that
can ultimately be recovered is subject to approval by the FERC and
market conditions.
Apache Corporation/Snyder Oil Corporation --
In December 1993, Apache Corporation (Apache) and Snyder
Oil Corporation (Snyder) filed suit in North Dakota District Court,
Northwest Judicial District (Court), against Williston Basin and
the Company. Apache and Snyder are oil and natural gas producers
who had processing agreements with Koch Hydrocarbon Company (Koch).
Williston Basin and the Company had a natural gas purchase contract
with Koch. Apache and Snyder have alleged they are entitled to
damages for the breach of Williston Basin's and the Company's
contract with Koch. Williston Basin and the Company believe that
if Apache and Snyder have any legal claims, such claims are with
Koch, not with Williston Basin or the Company. Williston Basin,
the Company and Koch have settled their disputes. Apache and
Snyder have recently provided alleged damages under differing
theories ranging up to $6.2 million without interest. A motion to
intervene in the case by several other producers, all of whom had
contracts with Koch but not with Williston Basin, was denied in
December 1996. The Trial before the Court was completed on
November 6, 1997. Williston Basin and the Company are awaiting a
decision from the Court.
In a related matter, on March 14, 1997, a suit was filed by
nine other producers, several of whom had unsuccessfully tried to
intervene in the Apache and Snyder litigation, against Koch,
Williston Basin and the Company. The parties to this suit are
making claims similar to those in the Apache and Snyder litigation,
although no specific damages have been specified.
The above claims in Williston Basin's opinion, are without
merit and overstated. If any amounts are ultimately found to be
due the plaintiffs, Williston Basin plans to file with the FERC for
recovery from ratepayers.
Coal Supply Agreement --
In November 1995, a suit was filed in District Court,
County of Burleigh, State of North Dakota (State District Court) by
Minnkota Power Cooperative, Inc., Otter Tail Power Company,
Northwestern Public Service Company and Northern Municipal Power
Agency (Co-owners), the owners of an aggregate 75 percent interest
in the Coyote Station, against the Company and Knife River. In its
complaint, the Co-owners have alleged a breach of contract against
Knife River of the long-term coal supply agreement (Agreement)
between the owners of the Coyote Station and Knife River. The Co-
owners have requested a determination by the State District Court
of the pricing mechanism to be applied to the Agreement and have
further requested damages during the term of such alleged breach on
the difference between the prices charged by Knife River and the
prices that may ultimately be determined by the State District
Court. The Co-owners also alleged a breach of fiduciary duties by
the Company as operating agent of the Coyote Station, asserting
essentially that the Company was unable to cause Knife River to
reduce its coal price sufficiently under the Agreement, and are
seeking damages in an unspecified amount. In January 1996, the
Company and Knife River filed separate motions with the State
District Court to dismiss or stay pending arbitration. In
May 1996, the State District Court granted the Company's and Knife
River's motions and stayed the suit filed by the Co-owners pending
arbitration, as provided for in the Agreement.
In September 1996, the Co-owners notified the Company and
Knife River of their demand for arbitration of the pricing dispute
that had arisen under the Agreement. The demand for arbitration,
filed with the American Arbitration Association (AAA), did not make
any direct claim against the Company in its capacity as operator of
the Coyote Station. The Co-owners requested that the arbitrators
make a determination that the pricing dispute is not a proper
subject for arbitration. By order dated April 25, 1997, the
arbitration panel concluded that the claims raised by the Co-owners
are arbitrable. The Co-owners have requested the arbitrators to
make a determination that the prices charged by Knife River were
excessive and that the Co-owners should be awarded damages, based
upon the difference between the prices that Knife River charged and
a "fair and equitable" price, of approximately $50 million or more.
Upon application by the Company and Knife River, the AAA
administratively determined that the Company was not a proper party
defendant to the arbitration, and the arbitration is proceeding
against Knife River. By letter dated May 14, 1997, Knife River
requested permission to move for summary judgment which permission
was granted by the arbitration panel over objections of the Co-
owners. Knife River filed its summary judgment motion on July 21,
1997, which motion was denied on October 29, 1997. Although unable
to predict the outcome of the arbitration, Knife River and the
Company believe that the Co-owners' claims are without merit and
intend to vigorously defend the prices charged pursuant to the
Agreement.
Environmental Litigation --
For a description of litigation filed by Unitek
Environmental Services, Inc. against Hawaiian Cement, see Note 6 --
Environmental matters.
4. Regulatory matters and revenues subject to refund
Williston Basin has pending with the FERC a general natural
gas rate change application implemented in 1992. In July 1995, the
FERC issued an order relating to Williston Basin's 1992 rate change
application. In August 1995, Williston Basin filed, under protest,
tariff sheets in compliance with the FERC's order, with rates which
went into effect on September 1, 1995. Williston Basin requested
rehearing of certain issues addressed in the order. In July 1996,
the FERC issued an order granting in part and denying in part
Williston Basin's rehearing request. The FERC also remanded the
issue of return on equity for further hearings. A hearing on this
matter was held in August 1996. Williston Basin also appealed
certain issues contained in the FERC's orders to the U. S. Court of
Appeals for the D. C. Circuit (D. C. Circuit Court). On May 9,
1997, the D. C. Circuit Court dismissed Williston Basin's petition
for rehearing without prejudice to refiling the petition at the
completion of the rehearing process before the FERC. On June 11,
1997, the FERC issued an order on the issue of return on equity.
In its order, the FERC changed its prior position and used the
long-term growth rate for the economy as a whole as measured by the
gross domestic product in determining return on equity. As a
result, the FERC found Williston Basin's allowed return on equity
should be 11.73 percent instead of the 12.20 percent previously
authorized. On July 11, 1997, Williston Basin requested rehearing
of the FERC's determination relative to return on equity. A
compliance filing was made on July 25, 1997, pursuant to the FERC's
June 11, 1997 order. On October 16, 1997, the FERC issued an order
denying Williston Basin's July 11, 1997 rehearing request. On
October 20, 1997, Williston Basin appealed the FERC's October 16,
1997 order to the D.C. Circuit Court.
Reserves have been provided for a portion of the revenues
that have been collected subject to refund with respect to pending
regulatory proceedings and for the recovery of certain producer
settlement buy-out/buy-down costs 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.
5. Natural gas repurchase commitment
The Company has offered for sale since 1984 the inventoried
natural gas available under a repurchase commitment with Frontier
Gas Storage Company, as described in Note 3 of its 1996 Annual
Report. As part of the corporate realignment effected January 1,
1985, the Company agreed, pursuant to the Settlement approved by
the FERC, to remove from rates the financing costs associated with
this natural gas.
The FERC has issued orders that have held that storage
costs should be allocated to this gas, prospectively beginning
May 1992, as opposed to being included in rates applicable to
Williston Basin's customers. These storage costs, as initially
allocated to the Frontier gas, approximated $2.1 million annually,
for which Williston Basin has provided reserves. Williston Basin
appealed these orders to the D.C. Circuit Court. In December 1996,
the D.C. Circuit Court issued its order ruling that the FERC's
actions in allocating costs to the Frontier gas were appropriate.
Williston Basin is awaiting a final order from the FERC.
Beginning in October 1992, as a result of prevailing
natural gas prices, Williston Basin began to sell and transport a
portion of the natural gas held under the repurchase commitment.
Through the second quarter of 1996, 17.8 MMdk of this natural gas
had been sold. However, in the third quarter of 1996, Williston
Basin, based on a number of factors including differences in
regional natural gas prices and natural gas sales occurring at that
time, wrote down the remaining 43.0 MMdk of this gas to its then
current market value. The value of this gas was determined using
the sum of discounted cash flows of expected future sales occurring
at then current regional natural gas prices as adjusted for
anticipated future price increases. This resulted in a write-down
aggregating $18.6 million ($11.4 million after tax). In addition,
Williston Basin wrote off certain other costs related to this
natural gas of approximately $2.5 million ($1.5 million after tax).
The recognition of the then current market value of this natural
gas facilitated the sale by Williston Basin of 27.0 MMdk from the
date of the write-down through September 30, 1997, and should allow
Williston Basin to market the remaining 16.0 MMdk on a sustained
basis enabling Williston Basin to liquidate this asset over
approximately the next four years.
6. 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. In
January 1994, Montana-Dakota, Williston Basin and Rockwell
International Corporation (Rockwell), manufacturer of the valve
sealant, reached an agreement under which Rockwell has and will
continue to reimburse Montana-Dakota and Williston Basin for a
portion of certain remediation costs. On the basis of findings to
date, Montana-Dakota and Williston Basin estimate future
environmental assessment and remediation costs will aggregate $3
million to $15 million. Based on such estimated cost, the expected
recovery from Rockwell and the ability of Montana-Dakota and
Williston Basin to recover their portions of such costs from
ratepayers, Montana-Dakota and Williston Basin believe that the
ultimate costs related to these matters will not be material to
each of their respective financial positions or results of
operations.
In September 1995, Unitek Environmental Services, Inc. and
Unitek Solvent Services, Inc. (Unitek) filed a complaint against
Hawaiian Cement in the United States District Court for the
District of Hawaii (District Court) alleging that dust emissions
from Hawaiian Cement's cement manufacturing plant at Kapolei,
Hawaii (Plant) violated the Hawaii State Implementation Plan (SIP)
of the U.S. Clean Air Act (Clean Air Act), constituted a continual
nuisance and trespass on the plaintiff's property, and that
Hawaiian Cement's conduct warranted the award of punitive damages.
Hawaiian Cement is a Hawaiian general partnership whose general
partners are Knife River Hawaii, Inc. and Knife River Dakota, Inc.,
indirect wholly owned subsidiaries of the Company. Knife River
Dakota, Inc. purchased its partnership interest from Adelaide
Brighton Cement (Hawaii), Inc. on July 31, 1997. Unitek sought
civil penalties under the Clean Air Act (as described below), and
up to $20 million in damages for various claims (as described
above).
In August 1996, the District Court issued an order granting
Plaintiffs' motion for partial summary judgment relating to the
Clean Air Act, indicating that it would issue an injunction
shortly. The issue of civil penalties under the Clean Air Act was
reserved for further hearing at a later date, and Unitek's claims
for damages were not addressed by the District Court at such time.
In September 1996, Unitek and Hawaiian Cement reached a
settlement which resolved all claims except as to Clean Air Act
penalties. Based on a joint petition filed by Unitek and Hawaiian
Cement, the District Court stayed the proceeding and the issuance
of an injunction while the parties continued to negotiate the
remaining Clean Air Act claims.
In May 1996, the EPA issued a Notice of Violation (NOV) to
Hawaiian Cement. The NOV stated that dust emissions from the Plant
violated the SIP. Under the Clean Air Act, the EPA has the
authority to issue an order requiring compliance with the SIP,
issue an administrative order requiring the payment of penalties of
up to $25,000 per day per violation (not to exceed $200,000), or
bring a civil action for penalties of not more than $25,000 per day
per violation and/or bring a civil action for injunctive relief.
On April 7, 1997, a settlement resolving the remaining
Clean Air Act claims and the EPA's NOV issued in May 1996, was
reached by Hawaiian Cement, the EPA and Unitek. This settlement is
subject to public comment and the approval of the District Court.
If the District Court approves the April 1997 settlement,
the total costs relating to both the September 1996 and April 1997
settlements are not expected to have a material effect on the
Company's results of operations.
7. Cash flow information
Cash expenditures for interest and income taxes were as
follows:
Nine Months Ended
September 30,
1997 1996
(In thousands)
Interest, net of amount capitalized $16,865 $20,350
Income taxes $18,235 $23,611
8. Derivatives
The Company, in connection with the operations of Montana-
Dakota, Williston Basin and Fidelity Oil, has entered into
certain price swap and collar agreements (hedge agreements) to
manage a portion of the market risk associated with fluctuations in
the price of oil and natural gas. These hedge agreements are not
held for trading purposes. The hedge agreements call for the
Company to receive monthly payments from or make payments to
counterparties based upon the difference between a fixed and a
variable price as specified by the hedge agreements. The variable
price is either an oil price quoted on the New York Mercantile
Exchange (NYMEX) or a quoted natural gas price on the NYMEX or
Colorado Interstate Gas Index. The Company believes that there is
a high degree of correlation because the timing of purchases and
production and the hedge agreements are closely matched, and hedge
prices are established in the areas of the Company's operations.
Amounts payable or receivable on hedge agreements are matched and
reported in operating revenues on the Consolidated Statements of
Income as a component of the related commodity transaction at the
time of settlement with the counterparty. The amounts payable or
receivable are offset by corresponding increases and decreases in
the value of the underlying commodity transactions.
Williston Basin and Knife River have entered into interest
rate swap agreements to manage a portion of their interest rate
exposure on a natural gas repurchase commitment and long-term debt,
respectively. These interest rate swap agreements are not held for
trading purposes. The interest rate swap agreements call for the
Company to receive quarterly payments from or make payments to
counterparties based upon the difference between fixed and variable
rates as specified by the interest rate swap agreements. The
variable prices are based on the three-month floating London
Interbank Offered Rate. Settlement amounts payable or receivable
under these interest rate swap agreements are recorded in "Interest
expense" for Knife River and "Costs on natural gas repurchase
commitment" for Williston Basin on the Consolidated Statements of
Income in the accounting period they are incurred. The amounts
payable or receivable are offset by interest on the related debt
instruments.
The Company's policy prohibits the use of derivative
instruments for trading purposes and the Company has procedures in
place to monitor their use. The Company is exposed to credit-
related losses in the event of nonperformance by counterparties to
these financial instruments, but does not expect any counterparties
to fail to meet their obligations given their existing credit
ratings.
The fair value of these derivative financial instruments
reflects the estimated amounts that the Company would receive or
pay to terminate the contracts at the reporting date, thereby
taking into account the current favorable or unfavorable position
on open contracts. The favorable or unfavorable position is
currently not recorded on the Company's financial statements.
Favorable and unfavorable positions related to oil and natural gas
hedge agreements will be offset by corresponding increases and
decreases in the value of the underlying commodity transactions.
Favorable and unfavorable positions on interest rate swap
agreements will be offset by interest on the related debt
instruments. In the event a hedge agreement does not qualify for
hedge accounting or when the underlying commodity transaction or
related debt instrument matures, is sold, is extinguished, or is
terminated, the current favorable or unfavorable position on the
open contract would be included in results of operations. The
Company's policy requires approval to terminate a hedge agreement
prior to its original maturity. In the event a hedge agreement is
terminated, the realized gain or loss at the time of termination
would be deferred until the underlying commodity transaction or
related debt instrument is sold or matures and would be offset by
corresponding increases or decreases in the value of the underlying
commodity transaction.
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
Ended Ended
September 30, September 30,
Business 1997 1996 1997 1996
Electric $ 4.4 $ 3.4 $ 8.7 $ 8.7
Natural gas distribution (2.0) (2.1) 1.3 1.3
Natural gas transmission 3.0 (3.7) 8.9 (.2)
Construction materials and
mining 5.6 5.9 6.8 8.9
Oil and natural gas production 3.0 4.8 11.2 10.9
Earnings on common stock $ 14.0 $ 8.3 $ 36.9 $ 29.6
Earnings per common share $ .48 $ .29 $ 1.28 $ 1.04
Return on average common
equity for the 12 months
ended 14.4% 12.2%
Earnings for the quarter ended September 30, 1997, were up $5.7
million from the comparable period a year ago due, in large part,
to the 1996 write-down to the then current market price of the
natural gas available under the repurchase commitment. The write-
down, which approximated $21.1 million, or $12.9 million after tax,
was significantly offset by the reversal of certain reserves for
tax and other contingencies at the natural gas transmission and oil
and natural gas production businesses, aggregating $7.4 million and
$1.8 million after tax, respectively. The net effect of these 1996
items resulted in a $3.7 million, or 13 cents per common share, net
charge to earnings for the quarter ended September 30, 1996.
Earnings from International Line Builders, Inc. and High Line
Equipment, Inc., line construction services companies acquired on
July 1, 1997, and increased retail sales at the electric business
contributed to the earnings increase. Increased volumes
transported, gains realized on the sale of natural gas held under
the repurchase commitment with Frontier Gas Storage Company and
decreased carrying costs associated with the repurchase commitment,
all at the natural gas transmission business, also added to the
earnings improvement. Decreased earnings at the construction
materials and mining business somewhat offset the earnings
increase. The decrease in earnings at the construction materials
and mining business was due to increased operation expenses
resulting from higher stripping costs at the Beulah Mine, somewhat
offset by higher aggregate and ready-mixed concrete sales and
increased construction revenues. A decline in average oil prices,
somewhat offset by higher average natural gas prices, at the oil
and natural gas production business also partially offset the
earnings increase. In addition, increased operating expenses at
the natural gas transmission business due to timing-related
increases in well maintenance and higher production royalties due
to a royalty settlement with the United States Mineral Management
Service (MMS) somewhat offset the earnings improvement.
Earnings for the nine months ended September 30, 1997, were up
$7.3 million from the comparable period a year ago due, in large
part, to the net effect of the 1996 write-down to the then current
market price of the natural gas available under the repurchase
commitment and the reversal of certain reserves for tax and other
contingencies, as previously described. Increased volumes
transported, increased natural gas production and prices, gains
realized on the sale of natural gas held under the repurchase
commitment and decreased carrying costs associated with the
repurchase commitment, all at the natural gas transmission
business, also contributed to the increase in earnings. Higher
average natural gas prices, somewhat offset by lower natural gas
production, at the oil and natural gas production business added to
the earnings improvement. In addition, earnings from International
Line Builders, Inc. and High Line Equipment, Inc. added to the
increase in earnings. Increased maintenance expenses at the
electric business, due to a ten-week maintenance outage at the
Coyote Station and repair costs associated with an April blizzard
which occurred primarily in North Dakota, partially offset the
increase in earnings. Lower sales at the natural gas distribution
business due to 8 percent warmer weather than the comparable period
a year ago, offset in part by decreased operation expenses due to
lower payroll-related costs, somewhat offset the earnings increase.
Decreased earnings at the construction materials and mining
business also partially offset the earnings improvement. The
earnings decline at the construction materials and mining business
was due to reduced coal sales to the Coyote Station relating to the
previously mentioned Coyote maintenance outage and increased
acquisition-related interest expense, offset in part by increased
aggregate and ready-mixed concrete sales and increased construction
revenues. In addition, increased operating expenses at the natural
gas transmission business resulting from higher production
royalties due to the MMS royalty settlement and increased
production and prices, somewhat offset the earnings improvement.
________________________________
Reference should be made to Notes to Consolidated Financial
Statements for information pertinent to various commitments and
contingencies.
Financial and operating data
The following tables (in millions, where applicable) are key
financial and operating statistics for each of the Company's
business units.
Electric Operations
Three Months Nine Months
Ended Ended
September 30, September 30,
1997 1996 1997 1996
Operating revenues:
Retail sales $ 33.2 $ 31.9 $ 97.5 $ 95.2
Sales for resale and other 2.7 2.0 7.5 7.5
Line construction services 12.1 --- 12.1 ---
48.0 33.9 117.1 102.7
Operating expenses:
Fuel and purchased power 11.3 10.3 33.7 32.5
Operation and maintenance 20.3 9.6 42.0 30.2
Depreciation, depletion and
amortization 4.4 4.3 13.1 12.8
Taxes, other than income 2.3 1.7 5.9 5.2
38.3 25.9 94.7 80.7
Operating income 9.7 8.0 22.4 22.0
Retail sales (kWh) 517.6 509.7 1526.3 1,527.2
Sales for resale (kWh) 70.6 56.1 231.3 289.5
Cost of fuel and purchased
power per kWh $ .018 $ .017 $ .018 $ .017
Natural Gas Distribution Operations
Three Months Nine Months
Ended Ended
September 30, September 30,
1997 1996 1997 1996
Operating revenues:
Sales $ 16.1 $ 14.0 $ 97.5 $ 101.0
Transportation and other .7 .7 2.5 2.5
16.8 14.7 100.0 103.5
Operating expenses:
Purchased natural gas sold 9.6 7.5 65.0 68.1
Operation and maintenance 6.8 7.1 22.0 22.7
Depreciation, depletion and
amortization 1.8 1.7 5.3 5.2
Taxes, other than income .9 1.0 3.0 3.0
19.1 17.3 95.3 99.0
Operating income (2.3) (2.6) 4.7 4.5
Volumes (dk):
Sales 2.7 2.7 23.4 24.6
Transportation 2.1 1.8 6.8 6.2
Total throughput 4.8 4.5 30.2 30.8
Degree days (% of normal) 91.0% 122.3% 104.4% 113.9%
Average cost of natural gas,
including transportation,
per dk $ 3.57 $ 2.78 $ 2.77 $ 2.76
Natural Gas Transmission Operations
Three Months Nine Months
Ended Ended
September 30, September 30,
1997* 1996 1997* 1996
Operating revenues:
Transportation $ 12.2** $ 17.6** $ 39.0** $ 45.0**
Storage 2.7 2.6 7.8 8.0
Energy marketing 5.9 --- 18.7 ---
Natural gas production and
other 1.3 1.7 5.3 5.0
22.1 21.9 70.8 58.0
Operating expenses:
Purchased gas sold 4.4 --- 14.4 ---
Operation and maintenance 7.8** 8.5** 27.4** 27.0**
Depreciation, depletion and
amortization 1.9 1.6 3.7 5.1
Taxes, other than income 1.3 1.1 4.0 3.3
15.4 11.2 49.5 35.4
Operating income 6.7 10.7 21.3 22.6
Volumes (dk):
Transportation--
Montana-Dakota 9.0 10.0 26.6 33.3
Other 15.3 8.0 39.0 24.6
24.3 18.0 65.6 57.9
Produced (Mdk) 1,709 1,514 5,120 4,390
* Effective January 1, 1997, Prairielands became a wholly owned subsidiary
of Williston Basin. Consolidated financial results are presented for 1997.
In 1996, Prairielands' financial results were included with the natural
gas distribution business.
** Includes amortization and
related recovery of deferred
natural gas contract
buy-out/buy-down and gas
supply realignment costs. $ .4 $ 2.4 $ 5.1 $ 7.7
Construction Materials and Mining Operations***
Three Months Nine Months
Ended Ended
September 30, September 30,
1997 1996 1997 1996
Operating revenues:
Construction materials $ 58.8 $ 44.3 $ 105.7 $ 73.3
Coal 7.0 7.0 18.2 23.4
65.8 51.3 123.9 96.7
Operating expenses:
Operation and maintenance 52.3 39.8 103.3 76.6
Depreciation, depletion and
amortization 3.1 1.9 7.8 5.1
Taxes, other than income .8 .8 2.1 2.5
56.2 42.5 113.2 84.2
Operating income 9.6 8.8 10.7 12.5
Sales (000's):
Aggregates (tons) 2,057 1,510 3,752 2,511
Asphalt (tons) 362 344 612 509
Ready-mixed concrete
(cubic yards) 177 119 358 250
Coal (tons) 593 619 1,571 2,092
*** Prior to August 1, 1997, financial results did not include information
related to Knife River's ownership interest in Hawaiian Cement, 50 percent
of which was acquired in September 1995, and was accounted for under the
equity method. On July 31, 1997, Knife River acquired the remaining 50
percent interest and subsequent to that date financial results include 100
percent of Hawaiian Cement's operating results.
Oil and Natural Gas Production Operations
Three Months Nine Months
Ended Ended
September 30, September 30,
1997 1996 1997 1996
Operating revenues:
Oil $ 8.3 $ 10.0 $ 27.4 $ 28.4
Natural gas 7.1 6.8 23.6 21.8
15.4 16.8 51.0 50.2
Operating expenses:
Operation and maintenance 3.5 4.1 11.9 11.9
Depreciation, depletion and
amortization 5.7 5.8 17.1 17.9
Taxes, other than income .9 1.1 2.9 3.0
10.1 11.0 31.9 32.8
Operating income 5.3 5.8 19.1 17.4
Production (000's):
Oil (barrels) 523 540 1,568 1,610
Natural gas (Mcf) 3,236 3,426 10,002 10,582
Average sales price:
Oil (per barrel) $ 15.98 $18.33 $ 17.48 $ 17.43
Natural gas (per Mcf) 2.19 1.98 2.36 2.06
Amounts presented in the above tables for natural gas operating
revenues, purchased natural gas sold and operation and maintenance
expenses will not agree with the Consolidated Statements of Income
due to the elimination of intercompany transactions between
Montana-Dakota's natural gas distribution business and Williston
Basin's natural gas transmission business.
Three Months Ended September 30, 1997 and 1996
Electric Operations
Operating income at the electric business increased primarily
due to higher retail sales and sales for resale revenue. Retail
sales revenue increased due to higher sales to residential and
commercial customers resulting from both increased customers and
warmer weather than a year ago. Increased rates in Wyoming
reflecting recovery of costs associated with the new power supply
contract with Black Hills Power and Light Company beginning January
1, 1997, also added to the operating revenue increase. Increased
sales for resale volumes at higher rates due to improved market
conditions contributed to the sales for resale revenue improvement.
The increase in line construction services revenue and the related
increases in operation and maintenance expense and taxes other than
income result from International Line Builders, Inc. and High Line
Equipment, Inc., line construction services companies acquired on
July 1, 1997. Maintenance expense also increased due to the timing
of costs associated with a ten-week maintenance outage at the
Coyote Station which occurred in the second quarter of 1997 and was
offset in part by 1996 costs resulting from maintenance work at the
Lewis and Clark Station. Increased fuel and purchased power costs,
resulting from increased purchased power demand charges and changes
in generation mix between higher cost versus lower cost generating
stations, also partially offset the operating income improvement.
The increase in demand charges was related to the previously
discussed new power supply contract.
Earnings for the electric business increased due to the
operating income improvement. Increased income taxes partially
offset the increase in operating income. Earnings attributable to
the line construction services companies were $458,000.
Natural Gas Distribution Operations
Operating income improved at the natural gas distribution
business as a result of decreased operations expense, primarily due
to lower payroll-related costs. The increase in sales revenue
resulted from the pass-through of higher average natural gas costs.
Natural gas distribution earnings improved due to the increase
in operating income and lower income taxes.
Natural Gas Transmission Operations
Operating income at the natural gas transmission business
decreased primarily due to a decline in transportation revenues.
Transportation revenues decreased due to the September 1996
reversal of certain reserves for regulatory contingencies of $4.2
million ($2.6 million after tax). Also reducing transportation
revenue were decreased recovery of deferred natural gas contract
buy-out/buy-down and gas supply realignment costs and lower average
transportation rates. Increased volumes transported to both on-
and off-system markets and to storage partially offset the
transportation revenue decline. Sales of natural gas held under
the repurchase commitment were 3.9 MMdk, primarily volumes sold in
place and to off-system markets. Higher taxes other than income,
primarily property taxes, also added to the decrease in operating
income. The increases in energy marketing revenue, purchased
natural gas sold and depreciation, depletion and amortization
result from Prairielands becoming a wholly owned subsidiary
effective January 1, 1997. Natural gas production revenues for
1997 excluding the effect of intercompany eliminations of $632,000
improved as a result of both higher volumes produced and increased
prices partially offsetting the operating income decline. Lower
operation expenses, primarily reduced amortization of deferred
natural gas contract buy-out/buy-down and gas supply realignment
costs, partially offset by timing-related increases in well
maintenance and higher production royalties due to the MMS royalty
settlement, somewhat offset the operating income decline.
Earnings for this business increased due to the September 1996
$21.1 million ($12.9 million after tax) write-down to the then
current market price of the natural gas available under the
repurchase commitment. Gains realized on the sale of natural gas
held under the repurchase commitment and decreased carrying costs
on this gas stemming from lower average borrowings also added to
the earnings increase. Increased income taxes due to the reversal
of certain income tax reserves aggregating $4.8 million in
September 1996 and decreased operating income both partially offset
the earnings improvement.
Construction Materials and Mining Operations
Construction Materials Operations --
Construction materials operating income increased $1.6 million
largely due to higher revenues. The revenue improvement is due to
revenues realized as a result of the acquisitions of Orland Asphalt
in February 1997 and the remaining 50% interest in Hawaiian Cement
on July 31, 1997. Revenues at most other construction materials
operations increased as a result of higher aggregate and ready-
mixed concrete sales and increased construction revenues, all due
to increased demand, and increased average asphalt and aggregate
prices due to changes in sales mix. The increase in operation and
maintenance and depreciation expenses was due in part to expenses
associated with the above acquisitions. Operation and maintenance
expenses also increased at the other construction materials
operations due to the higher aggregate and ready-mixed concrete
volumes sold and increased asphalt costs.
Coal Operations --
Operating income for the coal operations decreased $810,000
due to higher operation expenses. The operation expense increase
results from higher stripping and reclamation costs at the Beulah
Mine. Coal revenues remained unchanged from last year as a decline
in tons sold to the Coyote Station, resulting from limitations on
power deliveries due to off-system storm-damaged transmission
lines, was offset by higher average sales prices due to price
increases at the Beulah Mine.
Consolidated --
Earnings declined largely due to the decrease in coal operating
income and Other income -- net. The decrease in Other income --
net was due to the purchase of the remaining 50% interest in
Hawaiian Cement. Prior to August 1, 1997, Knife River's 50 percent
ownership interest in Hawaiian Cement was accounted for under the
equity method. However, on July 31, 1997, Knife River acquired the
remaining 50 percent interest in Hawaiian Cement and Hawaiian
Cement's operating results are now included in the consolidated
financial results. The increase in construction materials
operating income somewhat offset the earnings decline.
Oil and Natural Gas Production Operations
Operating income for the oil and natural gas production
business decreased primarily as a result of lower oil revenues.
Oil revenue decreased as a result of a $1.4 million decline due to
lower average prices combined with a $271,000 decrease due to lower
production. Increased natural gas revenues partially offset the
oil revenue decline. Higher average natural gas prices resulted in
a $696,000 revenue improvement but were somewhat offset by a
$416,000 decline due to lower natural gas production. Decreased
operation and maintenance expenses, primarily lower administrative
costs associated with a working interest agreement and decreased
well maintenance, partially offset the operating income decline.
Decreased taxes other than income, mainly decreased production
taxes resulting from lower oil prices, also somewhat offset the
decrease in operating income.
Earnings for this business unit decreased due to increased
income taxes and lower operating income. The increase in income
taxes resulted primarily from the reversal of certain tax reserves
aggregating $1.8 million in September 1996.
Nine Months Ended September 30, 1997 and 1996
Electric Operations
Operating income at the electric business increased primarily
due to increased retail sales revenue resulting from increased
rates in Wyoming reflecting recovery of costs associated with the
new power supply contract with Black Hills Power and Light Company
beginning January 1, 1997. Sales for resale and other revenues
were unchanged from last year. Increased wheeling revenue was
offset by a decline in sales for resale revenue. Sales for resale
revenue decreased due to lower sales resulting from reduced
generating station availability caused by the Coyote Station
maintenance outage combined with weak market conditions and
limitations on power deliveries due to off-system storm-damaged
transmission lines. Higher average realized rates somewhat offset
the decline in sales for resale revenues. Increases in line
construction services revenue and related increases in operation
and maintenance expense and taxes other than income resulted from
International Line Builders, Inc. and High Line Equipment, Inc.,
which were acquired on July 1, 1997. Power generation maintenance
expense increased due to $1.9 million in costs resulting from a
ten-week maintenance outage at the Coyote Station in 1997 and was
somewhat offset by 1996 costs resulting from maintenance work at
the Lewis and Clark Station. Higher transmission and distribution
maintenance expense, due to the repair of damages associated with
the April 1997 blizzard, also added to the increase in maintenance
expense. Increased fuel and purchased power costs, largely
increased purchase power demand charges and changes in generation
mix between higher cost versus lower cost generating stations,
partially offset the operating income increase. The increase in
demand charges is related to the aforementioned new power supply
contract.
Earnings for the electric business were unchanged from last
year. The operating income increase was offset by increased
interest expense due to higher average short-term debt balances.
Earnings attributable to the line construction services companies
acquired on July 1, 1997, were $458,000.
Natural Gas Distribution Operations
Operating income increased at the natural gas distribution
business as a result of decreased operations expense due to lower
payroll-related costs. A decrease in sales revenue partially
offset the operating income improvement. Reduced weather-related
sales of 1.2 million decatherms, primarily the result of warmer
winter weather in the first quarter, was the principal factor
contributing to the sales revenue decline. A general rate increase
placed into effect in Montana in May 1996, partially offset the
decrease in sales revenue. The effects of higher volumes
transported, primarily to large industrial customers, were offset
by lower average transportation rates.
Natural gas distribution earnings were unchanged from last
year. The operating income improvement and decreased interest
expense and increased return on gas in storage and prepaid demand
balances (included in Other income -- net) were largely offset by
increased income taxes and gains realized in 1996 on the disposal
of property. The decrease in net interest expense resulted from
reduced carrying costs on natural gas costs refundable through rate
adjustments due to lower refundable balances.
Natural Gas Transmission Operations
Operating income at the natural gas transmission business
decreased primarily due to lower transportation revenues.
Transportation revenues decreased due to the September 1996
reversal of certain reserves for regulatory contingencies of $4.2
million ($2.6 million after tax). In addition, reduced recovery of
deferred natural gas contract buy-out/buy-down and gas supply
realignment costs and lower average transportation rates
contributed to the decrease in transportation revenue.
Transportation revenues also decreased due to additional reserved
revenues provided, with a corresponding reduction in depreciation
expense, as a result of FERC orders relating to a 1992 general rate
proceeding. The FERC required a reduction in average depreciation
rates which had been reflected in the average transportation rates
charged to customers. Increased volumes transported to off-system
markets, due to sales of natural gas held under the repurchase
commitment, and to storage, were partially offset by lower on-
system transportation, somewhat reducing the transportation revenue
decline. Sales of natural gas held under the repurchase commitment
were 16.8 MMdk, primarily volumes sold to off-system markets and in
place. Taxes other than income increased due to increased
production taxes also contributing to the operating income decline.
Increased natural gas production revenues resulting from both
higher volumes produced and increased prices partially offset the
decrease in operating income. The increases in energy marketing
revenue, purchased natural gas sold and operation and maintenance
expense result from Prairielands becoming a wholly owned subsidiary
effective January 1, 1997. Operation expenses, excluding
Prairielands, decreased due to reduced amortization of deferred
natural gas contract buy-out/buy-down and gas supply realignment
costs offset in part by higher royalties due to both the MMS
royalty settlement and increased production and prices.
Earnings for this business increased due to the September 1996
$21.1 million ($12.9 million after tax) write-down to the then
current market price of the natural gas available under the
repurchase commitment. Gains realized on the sale of natural gas
held under the repurchase commitment and decreased carrying costs
on this gas stemming from lower average borrowings also added to
the earnings increase. Increased income taxes due to the reversal
of certain income tax reserves aggregating $4.8 million in
September 1996 and decreased operating income both partially offset
the earnings improvement.
Construction Materials and Mining Operations
Construction Materials Operations --
Construction materials operating income increased $1.9 million
due to higher revenues primarily resulting from the acquisitions of
Baldwin Contracting Company, Inc. in April 1996, Medford Ready Mix,
Inc. in June 1996, Orland Asphalt in February 1997, and the
remaining 50% interest in Hawaiian Cement acquired in July 1997.
Revenues at other construction materials operations increased as a
result of higher aggregate and ready-mixed concrete sales,
increased construction revenues, and higher asphalt prices. The
increase in operation and maintenance and depreciation expenses was
largely due to expenses associated with the previously mentioned
acquisitions. Operation and maintenance expenses also increased at
the other construction materials operations due to higher aggregate
and ready-mixed concrete volumes sold.
Coal Operations --
Operating income for the coal operations decreased $3.7 million
primarily due to decreased revenues resulting from lower sales of
539,000 tons to the Coyote Station largely due to the ten-week
maintenance outage. Higher average sales prices due to price
increases at the Beulah Mine partially offset the reduced coal
revenues. Decreased operation and maintenance and reclamation
expenses, and taxes other than income, all primarily due to the
decrease in volumes sold, somewhat offset the operating income
decline. An increase in stripping costs at the Beulah Mine
partially offset the operation expense decline.
Consolidated --
Earnings declined due to decreased operating income at the coal
business. Decreased Other income -- net resulting from the
purchase of the remaining 50 percent interest in Hawaiian Cement
acquired in July 1997, as previously described in the three months
discussion, also added to the earnings decline. In addition,
higher interest expense resulting mainly from increased long-term
debt due to the aforementioned acquisitions also added to the
decrease in earnings. Increased construction materials operating
income and an insurance settlement received related to the Unitek
litigation, partially offset the earnings decline.
Oil and Natural Gas Production Operations
Operating income for the oil and natural gas production
business increased primarily as a result of higher natural gas
revenues. The increase in natural gas revenue resulted from a $3.2
million improvement due to higher average prices somewhat offset by
a $1.4 million decrease due to lower production. Decreased oil
revenue somewhat offset the natural gas revenue increase. The
decline in oil revenue was due to a $734,000 decrease resulting
from lower production and a $262,000 decline due to lower average
oil prices. Decreased depreciation, depletion and amortization,
largely the result of lower production, also added to the increase
in operating income.
Earnings for this business unit increased due to the operating
income improvement and decreased interest expense due to lower
average long-term debt balances. Increased income taxes largely
offset the earnings improvement. The increase in income taxes
resulted from the reversal of certain tax reserves aggregating $1.8
million in September 1996 somewhat offset by higher tax credits in
1997.
Safe Harbor for Forward-Looking Statements
The Company is including the following cautionary statement in
this Form 10-Q to make applicable and to take advantage of the safe
harbor provisions of the Private Securities Litigation Reform Act
of 1995 for any forward-looking statements made by, or on behalf
of, the Company. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or
performance, and underlying assumptions (many of which are based,
in turn, upon further assumptions) and other statements which are
other than statements of historical facts. From time to time, the
Company may publish or otherwise make available forward-looking
statements of this nature. All such subsequent forward-looking
statements, whether written or oral and whether made by or on
behalf of the Company, are also expressly qualified by these
cautionary statements.
Forward-looking statements involve risks and uncertainties
which could cause actual results or outcomes to differ materially
from those expressed. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the
Company to have a reasonable basis, including without limitation
management's examination of historical operating trends, data
contained in the Company's records and other data available from
third parties, but there can be no assurance that the Company's
expectations, beliefs or projections will be achieved or
accomplished. Furthermore, any forward-looking statement speaks
only as of the date on which such statement is made, and the
Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances that
occur after the date on which such statement is made or to reflect
the occurrence of unanticipated events. New factors emerge from
time to time, and it is not possible for management to predict all
of such factors, nor can it assess the effect of each such factor
on the Company's business or the extent to which any such factor,
or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statement.
Regulated Operations --
In addition to other factors and matters discussed elsewhere
herein, some important factors that could cause actual results or
outcomes for the Company and its regulated operations to differ
materially from those discussed in forward-looking statements
include prevailing governmental policies and regulatory actions
with respect to allowed rates of return, financings, or industry
and rate structures, weather conditions, acquisition and disposal
of assets or facilities, operation and construction of plant
facilities, recovery of purchased power and purchased gas costs,
present or prospective generation, wholesale and retail competition
(including but not limited to electric retail wheeling and
transmission costs), availability of economic supplies of natural
gas, and present or prospective natural gas distribution or
transmission competition (including but not limited to prices of
alternate fuels and system deliverability costs).
Non-regulated Operations --
Certain important factors which could cause actual results or
outcomes for the Company and all or certain of its non-regulated
operations to differ materially from those discussed in forward-
looking statements include the level of governmental expenditures
on public projects and project schedules, changes in anticipated
tourism levels, competition from other suppliers, oil and natural
gas commodity prices, drilling successes in oil and natural gas
operations, ability to acquire oil and natural gas properties, and
the availability of economic expansion or development opportunities.
Factors Common to Regulated and Non-Regulated Operations --
The business and profitability of the Company are also
influenced by economic and geographic factors, including political
and economic risks, changes in and compliance with environmental
and safety laws and policies, weather conditions, population growth
rates and demographic patterns, market demand for energy from
plants or facilities, changes in tax rates or policies,
unanticipated project delays or changes in project costs,
unanticipated changes in operating expenses or capital
expenditures, labor negotiations or disputes, changes in credit
ratings or capital market conditions, inflation rates, inability of
the various counterparties to meet their obligations with respect
to the Company's financial instruments, changes in accounting
principles and/or the application of such principles to the
Company, changes in technology and legal proceedings.
Liquidity and Capital Commitments
Montana-Dakota's net capital needs for 1997 are estimated at
$26 million for net capital expenditures and $30.4 million for the
retirement of long-term securities. It is anticipated that
Montana-Dakota will continue to provide all of the funds required
for its net capital expenditures and securities retirements from
internal sources, through the use of its $30 million revolving
credit and term loan agreement, $30 million of which was
outstanding at September 30, 1997, 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.
In October 1997, the Company redeemed $20 million of its 9 1/8%
Series first mortgage bonds, due October 1, 2016. The funds
required to retire the 9 1/8% Series first mortgage bonds were
provided by the issuance of $30 million in Secured Medium-Term
Notes on September 30, 1997.
Williston Basin's 1997 net capital needs are estimated at $11.7
million for net capital expenditures and $454,000 for the
retirement of long-term securities. Williston Basin expects to
meet its net capital expenditures and securities retirements for
1997 with a combination of internally generated funds, short-term
lines of credit aggregating $40.6 million, $250,000 of which was
outstanding at September 30, 1997, and through the issuance of
long-term debt, the amount and timing of which will depend upon
Williston Basin's needs, internal cash generation and market
conditions.
Knife River's 1997 net capital expenditures are estimated at
$40.4 million, including those expended for the acquisition of
Orland Asphalt and the remaining 50 percent interest in Hawaiian
Cement. It is anticipated that these net capital expenditures will
be met through funds generated from internal sources, short-term
lines of credit aggregating $26 million, $3.6 million of which was
outstanding at September 30, 1997, a revolving credit agreement of
$85 million, $74.2 million of which was outstanding at September
30, 1997, and the issuance of long-term debt and the Company's
equity securities. On July 31, 1997, amounts available under the
short-term lines of credit increased from $11 million to $26
million.
Fidelity Oil's 1997 net capital expenditures related to its oil
and natural gas acquisition, development and exploration program
are estimated at $35 million. It is anticipated that Fidelity's
1997 net capital expenditures will be met from internal sources and
existing long-term credit facilities. Fidelity's borrowing base,
which is based on total proved reserves, is currently $65 million.
This consists of $20 million of issued notes, $10 million in an
uncommitted note shelf facility, and a $35 million revolving line
of credit, $2.0 million of which was outstanding at September 30,
1997.
Other corporate net capital expenditures for 1997 are estimated
at $11.9 million, including those expended for the acquisitions of
International Line Builders, Inc. and High Line Equipment, Inc.
These capital expenditures are anticipated to be met through the
issuance of long-term debt, short-term lines of credit aggregating
$2.8 million, $2.2 million of which was outstanding at September
30, 1997, and the Company's equity securities.
The Company utilizes its short-term lines of credit aggregating
$50 million, $10 million of which was outstanding on September 30,
1997, and its $30 million revolving credit and term loan agreement,
$30 million of which was outstanding at September 30, 1997, as
previously described, to meet its short-term financing needs and to
take advantage of market conditions when timing the placement of
long-term or permanent financing. On July 31, 1997, amounts
available under the short-term lines of credit were increased from
$40 million to $50 million.
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, 1997, the Company could have issued
approximately $230 million of additional first mortgage bonds.
The Company's coverage of combined fixed charges and preferred
dividends was 3.33 and 2.67 times for the twelve months ended
September 30, 1997, and December 31, 1996, respectively.
Additionally, the Company's first mortgage bond interest coverage
was 4.8 and 5.4 times for the twelve months ended September 30,
1997, and December 31, 1996, respectively. Common stockholders'
investment as a percent of total capitalization was 53% and 54% at
September 30, 1997, and December 31, 1996, respectively.
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On July 1, 1997 and November 7, 1997, the Company issued
to Mr. Marley D. Martin 160,804 shares and 64,825 shares,
respectively, of Common Stock, $3.33 par value, to
acquire all of the issued and outstanding capital stock
of International Line Builders, Inc. (ILB) and High Line
Equipment, Inc. (HLE) held by Marley D. Martin, the sole
stockholder of ILB and HLE capital stock. The Common
Stock, issued by the Company was issued in a private sale
exempt from registration pursuant to Section 4 (2) of the
Securities Act of 1933. Mr. Martin represented to the
Company that he is an accredited investor and that he is
holding the Company's Common Stock as an investment and
not with a view to distribution.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
12 Computation of Ratio of Earnings to Fixed
Charges and Combined Fixed Charges and
Preferred Dividends
27 Financial Data Schedule
b) Reports on Form 8-K
None.
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 12, 1997 BY /s/ Warren L. Robinson
Warren L. Robinson
Vice President, Treasurer
and Chief Financial Officer
BY /s/ Vernon A. Raile
Vernon A. Raile
Vice President, Controller and
Chief Accounting Officer
EXHIBIT INDEX
Exhibit No.
12 Computation of Ratio of Earnings to Fixed
Charges and Combined Fixed Charges and
Preferred Dividends
27 Financial Data Schedule
Exhibit 12
MDU RESOURCES GROUP, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS
Twelve Months Year
Ended Ended
September 30, 1997 December 31, 1996
(In thousands of dollars)
Earnings Available for
Fixed Charges:
Net Income per Consolidated
Statements of Income $ 52,773 $45,470
Income Taxes 31,041 16,087
83,814 61,557
Rents (a) 1,130 1,031
Interest (b) 33,034 34,101
Total Earnings Available
for Fixed Charges $117,978 $96,689
Preferred Dividend Requirements $ 784 $ 787
Ratio of Income Before Income
Taxes to Net Income 159% 135%
Preferred Dividend Factor on
Pretax Basis 1,247 1,062
Fixed Charges (c) 34,164 35,132
Combined Fixed Charges and
Preferred Dividends $ 35,411 $36,194
Ratio of Earnings to Fixed
Charges 3.45x 2.75x
Ratio of Earnings to
Combined Fixed Charges
and Preferred Dividends 3.33x 2.67x
(a) Represents portion (33 1/3%) of rents which is estimated to
approximately constitute the return to the lessors on their
investment in leased premises.
(b) Represents interest and amortization of debt discount and
expense on all indebtedness and excludes amortization of gains
or losses on reacquired debt which, under the Uniform System
of Accounts, is classified as a reduction of, or increase in,
interest expense in the Consolidated Statements of Income.
Also includes carrying costs associated with natural gas
available under a repurchase agreement with Frontier Gas
Storage Company as more fully described in Notes to
Consolidated Financial Statements.
(c) Represents rents and interest, both as defined above.
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME, CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED
STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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<NAME> MDU RESOURCES GROUP, INC.
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