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 March 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____________ to ______________
Commission file 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 May 9, 1997: 28,729,983
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
7 -- "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 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 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) and the Fidelity Oil Group (Fidelity Oil).
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.
INDEX
Part I -- Financial Information
Consolidated Statements of Income --
Three Months Ended March 31, 1997 and 1996
Consolidated Balance Sheets --
March 31, 1997 and 1996, and December 31, 1996
Consolidated Statements of Cash Flows --
Three Months Ended March 31, 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 Ended
March 31,
1997 1996
(In thousands, except
per share amounts)
Operating revenues:
Electric $37,273 $37,699
Natural gas 60,062 57,032
Construction materials and mining 23,003 15,568
Oil and natural gas production 19,473 16,230
139,811 126,529
Operating expenses:
Fuel and purchased power 12,179 12,195
Purchased natural gas sold 21,027 21,274
Operation and maintenance 53,793 43,932
Depreciation, depletion and amortization 15,669 15,131
Taxes, other than income 6,387 5,915
109,055 98,447
Operating income:
Electric 8,448 8,683
Natural gas distribution 7,097 7,543
Natural gas transmission 7,414 5,705
Construction materials and mining (689) 334
Oil and natural gas production 8,486 5,817
30,756 28,082
Other income -- net 662 1,347
Interest expense 7,093 7,012
Costs on natural gas repurchase commitment 1,114 1,428
Income before income taxes 23,211 20,989
Income taxes 8,614 7,854
Net income 14,597 13,135
Dividends on preferred stocks 196 198
Earnings on common stock $14,401 $12,937
Earnings per common share $ .50 $ .45
Dividends per common share $ .2775 $ .2725
Average common shares outstanding 28,596 28,477
The accompanying notes are an integral part of these consolidated statements.
MDU RESOURCES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, March 31, December 31,
1997 1996 1996
(In thousands)
ASSETS
Property, plant and equipment:
Electric $ 548,829 $536,829 $546,477
Natural gas distribution 166,705 161,316 164,843
Natural gas transmission 280,603 272,430 273,775
Construction materials and mining 177,043 152,695 173,663
Oil and natural gas production 218,647 181,303 211,555
1,391,827 1,304,573 1,370,313
Less accumulated depreciation,
depletion and amortization 633,829 584,536 617,724
757,998 720,037 752,589
Current assets:
Cash and cash equivalents 44,541 38,319 47,799
Receivables 61,212 63,135 73,187
Inventories 22,048 16,661 27,361
Deferred income taxes 23,825 36,484 26,011
Prepayments and other current
assets 27,008 10,907 17,300
178,634 165,506 191,658
Natural gas available under
repurchase commitment 25,582 70,622 37,233
Investments 53,495 45,343 53,501
Deferred charges and other assets 47,031 57,991 54,192
$1,062,740 $1,059,499 $1,089,173
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock (Shares outstanding --
28,606,128, $3.33 par value at
March 31, 1997, and 28,476,981,
$3.33 par value at December 31,
1996 and March 31, 1996 $ 95,258 $ 94,828 $ 94,828
Other paid in capital 66,790 64,305 64,305
Retained earnings 198,005 183,360 191,541
360,053 342,493 350,674
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 261,287 215,709 280,666
638,140 575,102 648,140
Commitments and contingencies --- --- ---
Current liabilities:
Short-term borrowings 1,435 225 3,950
Accounts payable 25,677 18,962 31,580
Taxes payable 12,221 25,783 8,683
Other accrued liabilities,
including reserved revenues 102,222 114,025 100,938
Dividends payable 8,133 7,957 8,099
Long-term debt and preferred
stock due within one year 11,854 15,837 11,854
161,542 182,789 165,104
Natural gas repurchase commitment 49,412 88,041 66,294
Deferred credits:
Deferred income taxes 118,593 117,038 116,208
Other 95,053 96,529 93,427
213,646 213,567 209,635
$1,062,740 $1,059,499 $1,089,173
The accompanying notes are an integral part of these consolidated statements.
MDU RESOURCES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
1997 1996
(In thousands)
Operating activities:
Net income $14,597 $13,135
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 15,669 15,131
Deferred income taxes and investment
tax credit -- net 3,135 (538)
Recovery of deferred natural gas contract
litigation settlement costs, net of income taxes 1,559 1,780
Changes in current assets and liabilities --
Receivables 11,975 (1,174)
Inventories 5,313 7,288
Other current assets (10,713) (4,467)
Accounts payable (5,903) (3,299)
Other current liabilities 15,181 25,462
Other noncurrent changes 2,755 871
Net cash provided by operating activities 53,568 54,189
Financing activities:
Net change in short-term borrowings (2,515) (375)
Issuance of long-term debt 3,000 1,500
Repayment of long-term debt (22,382) (24,398)
Issuance of common stock 2,916 ---
Retirement of natural gas repurchase commitment (27,332) (159)
Dividends paid (8,134) (7,959)
Net cash used in financing activities (54,447) (31,391)
Investing activities:
Capital expenditures including acquisition
of business --
Electric (2,861) (2,896)
Natural gas distribution (2,236) (1,126)
Natural gas transmission (1,506) (659)
Construction materials and mining (4,944) (1,182)
Oil and natural gas production (8,184) (17,180)
(19,731) (23,043)
Net proceeds from sale or disposition of property 2,504 4,193
Net capital expenditures (17,227) (18,850)
Sale of natural gas available under repurchase
commitment 14,842 128
Investments 6 845
Net cash used in investing activities (2,379) (17,877)
Increase (decrease) in cash and cash equivalents (3,258) 4,921
Cash and cash equivalents -- beginning of year 47,799 33,398
Cash and cash equivalents -- end of period $44,541 $38,319
The accompanying notes are an integral part of these consolidated statements.
MDU RESOURCES GROUP, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 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.
In August 1996, the Federal District Court issued its decision
finding that Moncrief is entitled to damages for the difference between
the price Moncrief would have received under the geographic favored-
nations price clause of the contract for the period August 13, 1993,
through July 7, 1996, and the actual price received for the gas. The
favored-nations price is the highest price paid from time to time under
contracts in the same geographic region for natural gas of similar
quantity and quality. The Federal District Court reopened the record
until October 15, 1996, to receive additional briefs and exhibits on
this issue.
In October 1996, Moncrief submitted its brief claiming damages
ranging as high as $22 million under the geographic favored-nations
price theory. Williston Basin, in its brief, contended that Moncrief
waived its claim for a favored-nations price under an agreement with
Williston Basin, and Moncrief's damage claims were calculated utilizing
non-comparable contracts. Williston Basin's exhibits show Moncrief's
damages should be limited to approximately $800,000 under the
geographic favored-nations price theory.
A hearing on these matters was held on April 7, 1997, and the
parties are awaiting the Federal District Court's decision. Williston
Basin plans to file for recovery from ratepayers of amounts which may
be ultimately due to Moncrief, if any.
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, 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 $7.3 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. Trial on this matter is scheduled for September 8,
1997.
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 for recovery from ratepayers.
Jack J. Grynberg --
In July 1996, Jack J. Grynberg (Grynberg) filed suit in United
States District Court for the District of Columbia (U.S. District
Court) against Williston Basin and over 70 other natural gas pipeline
companies. Grynberg, acting on behalf of the United States under the
False Claims Act, alleged improper measurement of the heating content
or volume of natural gas purchased by the defendants resulting in the
underpayment of royalties to the United States. The United States
government, particularly officials from the Departments of Justice and
Interior, reviewed the complaint and the evidence presented by Grynberg
and declined to intervene in the action, permitting Grynberg to proceed
on his own. On March 27, 1997, the U.S. District Court dismissed the
suit without prejudice against 53 of the defendants, including
Williston Basin, on the grounds that the parties were improperly joined
in the suit and that Grynberg's claim of fraud was not specific enough
as it related to any individual party to the suit.
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 as 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. In the
alternative, 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, 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. 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 Federal Energy Regulatory
Commission (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. A hearing was
held in August 1996, and this matter is currently pending before the
FERC. In addition, Williston Basin has 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 February 3, 1997, Williston Basin filed briefs with the D.C.
Circuit Court related to its appeal of orders which had been received
from the FERC beginning in May 1993, regarding the appropriate selling
price of certain natural gas in underground storage which was
determined to be excess upon Williston Basin's implementation of Order
636. The FERC ordered that the gas be offered for sale to Williston
Basin's customers at its original cost. Williston Basin requested
rehearing of this matter on the grounds that the FERC's order
constituted a confiscation of its assets, which request was
subsequently denied by the FERC. Williston Basin believes that it
should be allowed to sell this natural gas at its fair value and retain
any profits resulting from such sales since its ratepayers had never
paid for the natural gas. Oral arguments on this matter before the
D.C. Circuit Court were held on May 9, 1997.
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 18.8 MMdk from the date
of the write-down through March 31, 1997, and should allow Williston
Basin to market the remaining 24.2 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 (with joint and several liability)
are Knife River Hawaii, Inc., an indirect wholly owned subsidiary of
the Company, and Adelaide Brighton Cement (Hawaii), Inc. 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:
Three Months Ended
March 31,
1997 1996
(In thousands)
Interest, net of amount capitalized $3,918 $7,221
Income taxes $ 429 $1,645
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
Ended
March 31,
Business 1997 1996
Electric $3.4 $3.7
Natural gas distribution 3.8 3.9
Natural gas transmission 2.5 1.6
Construction materials and mining (.2) .5
Oil and natural gas production 4.9 3.2
Earnings on common stock $14.4 $12.9
Earnings per common share $ .50 $ .45
Return on average common equity for the
12 months ended 13.2% 13.1%
Earnings for the quarter ended March 31, 1997, were up $1.5 million
from the comparable period a year ago due primarily to higher oil and natural
gas prices at the oil and natural gas production businesses. Increased
volumes transported at higher average rates and increased natural gas
production and prices at the natural gas transmission business further
improved earnings. Decreased retail sales at the electric and natural gas
distribution businesses, primarily the result of 9 percent warmer weather
than the comparable period a year ago, partially offset the increase in
earnings. In addition, increased operating costs at the natural gas
transmission and oil and natural gas production businesses somewhat offset
the earnings improvement. The effects of normal seasonal slowdowns
experienced at Baldwin Contracting Company, Inc. (Baldwin), acquired in April
1996, decreased income at Hawaiian Cement and higher acquisition-related
interest expense at the construction materials and mining business also
somewhat offset the earnings increase.
________________________________
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. Certain
reclassifications have been made in the following statistics for 1996 to
conform to the 1997 presentation. Such reclassifications had no effect on
net income or common stockholder's investment as previously reported.
Montana-Dakota -- Electric Operations
Three Months
Ended
March 31,
1997 1996
Operating revenues:
Retail sales 34.2 $ 34.3
Sales for resale and other 3.1 3.4
37.3 37.7
Operating expenses:
Fuel and purchased power 12.2 12.2
Operation and maintenance 10.4 10.8
Depreciation, depletion and amortization 4.4 4.2
Taxes, other than income 1.8 1.8
28.8 29.0
Operating income 8.5 8.7
Retail sales (kWh) 543.6 561.1
Sales for resale (kWh) 114.9 159.2
Average cost of fuel and
purchased power per kWh $ .017 $ .016
Montana-Dakota -- Natural Gas Distribution Operations
Three Months
Ended
March 31,
1997 1996
Operating revenues:
Sales $55.5 $63.3
Transportation and other 1.1 1.0
56.6 64.3
Operating expenses:
Purchased natural gas sold 38.5 45.7
Operation and maintenance 8.1 8.3
Depreciation, depletion and amortization 1.8 1.8
Taxes, other than income 1.1 1.0
49.5 56.8
Operating income 7.1 7.5
Volumes (dk):
Sales 15.1 16.4
Transportation 2.9 2.6
Total throughput 18.0 19.0
Degree days (% of normal) 101% 112%
Average cost of natural gas, including
transportation, per dk $ 2.53 $ 2.79
Williston Basin -- Natural Gas Transmission Operations
Three Months
Ended
March 31,
1997* 1996
Operating revenues:
Transportation $ 15.1** $ 14.1**
Storage 2.6 2.9
Energy marketing 5.6 ---
Natural gas production and other 2.4 1.6
25.7 18.6
Operating expenses:
Purchased gas sold 4.1 ---
Operation and maintenance 10.9** 10.0**
Depreciation, depletion and amortization 1.8 1.7
Taxes, other than income 1.5 1.2
18.3 12.9
Operating income 7.4 5.7
Volumes (dk):
Transportation--
Montana-Dakota 8.8 13.4
Other 12.4 7.1
21.2 20.5
Produced (Mdk) 1,757 1,387
* 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 $ 2.5 $ 2.8
Knife River -- Construction Materials and Mining Operations***
Three Months
Ended
March 31,
1997 1996
Operating revenues:
Construction materials $ 14.2 $ 6.4
Coal 8.8 9.2
23.0 15.6
Operating expenses:
Operation and maintenance 20.8 12.7
Depreciation, depletion and amortization 2.0 1.5
Taxes, other than income .9 1.0
23.7 15.2
Operating income (.7) .4
Sales (000's):
Aggregates (tons) 584 231
Asphalt (tons) 54 17
Ready-mixed concrete (cubic yards) 68 43
Coal (tons) 774 826
*** Does not include information related to Knife River's 50 percent
ownership interest in Hawaiian Cement which was acquired in
September 1995, and is accounted for under the equity method.
Fidelity Oil -- Oil and Natural Gas Production Operations
Three Months
Ended
March 31,
1997 1996
Operating revenues:
Oil $10.0 $ 8.3
Natural gas 9.5 7.9
19.5 16.2
Operating expenses:
Operation and maintenance 4.1 3.6
Depreciation, depletion and amortization 5.7 6.0
Taxes, other than income 1.2 .8
11.0 10.4
Operating income 8.5 5.8
Production (000's):
Oil (barrels) 520 509
Natural gas (Mcf) 3,421 3,506
Average sales price:
Oil (per barrel) $19.24 $16.22
Natural gas (per Mcf) 2.77 2.25
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 March 31, 1997 and 1996
Montana-Dakota -- Electric Operations
Operating income at the electric business decreased primarily
due to lower operating revenue resulting from decreased sales to both
retail and wholesale markets. Retail sales to all customers declined
due to warmer winter weather than a year ago. Sales for resale
volumes decreased due to weak market conditions combined with reduced
generating station availability but were largely offset by higher
average realized rates. Increased rates in Wyoming reflecting
recovery of costs associated with a new power supply contract with
Black Hills Power and Light beginning January 1, 1997, partially
offset the decrease in operating revenue. The lower volumes sold
resulted in decreased fuel and purchased power costs, however, higher
purchased power demand charges offset the decline. The increase in
demand charges is related to the aforementioned new power supply
contract and the purchase of an additional five megawatts of capacity
under an existing participation power contract beginning in May 1996.
Lower operation expenses, primarily resulting from lower distribution
and payroll-related costs, partially offset by higher depreciation
expense due to an increase in depreciable plant, somewhat offset the
operating income decline.
Earnings for the electric business decreased due to the
operating income decline.
Montana-Dakota -- Natural Gas Distribution Operations
Operating income decreased at the natural gas distribution
business due to a decline in sales revenue. Reduced weather-related
sales of 1.2 million decatherms, the result of warmer weather, and the
pass-through of lower average natural gas costs were the principal
factors contributing to the sales revenue decline. A general rate
increase placed into effect in Montana in May 1996, partially offset
the sales revenue decline. Decreased operations expense due to lower
payroll-related costs partially offset the operating income decline.
Natural gas distribution earnings decreased slightly due to the
aforementioned decrease in operating income. Decreased interest
expense and increased return on gas in storage and prepaid demand
balances (included in Other income -- net) partially offset the
earning decline. The decrease in interest expense resulted from lower
average long-term debt balances due to 1996 debt retirements and
reduced carrying costs on natural gas costs refundable through rate
adjustments, due to lower refundable balances.
Williston Basin -- Natural Gas Transmission Operations
Operating income at the natural gas transmission business
increased primarily due to improvements in both transportation and
natural gas production revenues. The transportation revenue gain
resulted largely from higher average rates due to changes in
transportation mix and increased volumes transported. Higher
transportation to off-system markets, primarily resulting from sales
of natural gas held under the repurchase commitment, somewhat offset
by decreased on-system transportation, was largely responsible for the
transportation volume improvement. Increased discounting of certain
transportation services somewhat offset the transportation revenue
increase. The increase in energy marketing revenue, and the related
increase in purchased natural gas sold, results from the acquisition
of Prairielands effective January 1, 1997. The increase in natural
gas production revenue resulted from both higher volumes produced and
increased prices. Decreased storage revenues due to lower withdrawals
by interruptible storage customers partially offset the increase in
operating income. Operation expenses increased primarily due to
higher production royalties while taxes other than income increased
due to increased production taxes both somewhat offsetting the
operating income improvement.
Earnings for this business increased due to the operating income
improvement and decreased carrying costs on natural gas held under the
repurchase commitment stemming from lower borrowings. Higher company
production refund accruals (included in Other income -- net) partially
offset the earnings improvement.
Knife River -- Construction Materials and Mining Operations
Construction Materials Operations --
Construction materials operating income decreased $583,000
largely due to normal seasonal losses realized in 1997 by Baldwin
which was first acquired in April 1996. The increase in operation and
maintenance and depreciation expenses was due to expenses associated
with the Baldwin acquisition, and the Medford Ready Mix, Inc.
(Medford) and Orland Asphalt acquisitions in June 1996 and February
1997, respectively. Operation and maintenance expenses also increased
at the other construction materials operations due to higher aggregate
and ready-mixed concrete volumes sold and the timing of equipment
maintenance this period compared to the same period a year ago.
Revenues increased due to the above acquisitions and higher aggregate
and ready-mixed concrete sales, somewhat offset by lower construction
revenues due to weather-related delays.
Coal Operations --
Operating income for the coal operations decreased $440,000
primarily due to decreased revenues resulting from lower sales. The
sales decline stems from reduced demand by electric generating
stations at the Beulah Mine. Higher average sales prices due to price
increases at the Beulah Mine partially offset the decreased coal
revenues. Operation expenses increased due to higher general and
administrative costs but were largely offset by volume-related cost
decreases, also adding to the operating income decline.
Consolidated --
Earnings declined due to decreased operating income at both the
construction materials and coal businesses. Decreased income from
Hawaiian Cement (included in Other income -- net) due to above normal
rainfall which slowed construction activity also added to the earnings
decline. In addition, higher interest expense resulting mainly from
increased long-term debt due to the acquisition of Baldwin, Medford
and Orland Asphalt also added to the decrease in earnings.
Fidelity Oil -- Oil and Natural Gas Production Operations
Operating income for the oil and natural gas production business
increased primarily as a result of higher oil and natural gas
revenues. Increased oil revenue resulted from a $1.4 million
improvement due to higher average prices and a $209,000 increase due
to greater production. The increase in natural gas revenue was due to
a $1.8 million increase arising from higher prices partially offset by
a $235,000 decline due to lower production. Decreased depreciation,
depletion and amortization, the result of lower average rates, also
added to the increase in operating income. Increased operation and
maintenance expenses, primarily higher average costs associated with
onshore properties, and higher taxes other than income, mainly
increased production taxes resulting from higher commodity prices,
both partially offset the operating income improvement.
Earnings for this business unit increased due to the operating
income improvement.
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
impact 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 forwardlooking
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.
Prospective Information
In February 1997, Baldwin, a subsidiary of KRC Holdings
purchased the physical assets of Orland Asphalt located in Orland,
California, including a hot-mix plant and aggregate reserves. Orland
Asphalt will be combined with and operated as part of Baldwin.
Knife River continues to seek additional growth opportunities.
These include 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 March 1997, the Financial Accounting Standards Board issued
SFAS No. 128, "Earnings Per Share" (SFAS No. 128). SFAS No. 128 is
effective for years ending after December 15, 1997. The Company will
adopt SFAS No. 128 for 1997 annual reporting, and the adoption is not
expected to have a material affect on the Company's financial position
or results of operations.
In April 1997, the Montana legislature passed an electric
industry restructuring bill and a natural gas industry restructuring
bill. The electric bill provides for full customer choice by July 1,
2002, stranded cost recovery and other provisions. Based on the
provisions of the electric bill, because the Company's utility
division operates in more than one state, it has the option of
deferring transition to full customer choice until 2006. However,
Montana-Dakota will be required to develop a Universal System Benefits
Program to begin in 1999. The Universal System Benefits Programs are
established to ensure continued funding of and new expenditures for
energy conservation, renewable resource projects and low-income energy
assistance. The costs of the Universal System Benefits Program will
be fully recoverable from Montana-Dakota's customers. In addition,
Montana-Dakota will be required to enter into service area agreements
with rural electric cooperatives that identify the geographical areas
to be exclusively served by each utility in communities with
populations greater than 3,500 people. Three communities currently
served by Montana-Dakota fall into this category. While the natural
gas bill is voluntary as to full customer choice, Montana-Dakota is
required to develop a Universal System Benefits Program and, as in the
electric bill, the costs of this program are fully recoverable from
customers. Montana-Dakota believes this legislation will have no
immediate effect on operations. Nevertheless, Montana-Dakota is
continuing to take steps to effectively operate in an increasingly
competitive environment. See Items 1 and 2 in the 1996 Annual Report
on Form 10-K for a further discussion on the effects of retail
competition.
Liquidity and Capital Commitments
Montana-Dakota's net capital needs for 1997 are estimated at
$26.1 million for net capital expenditures and $11.4 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, $20 million of which was outstanding at March 31, 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.
Williston Basin's 1997 net capital needs are estimated at $12.7
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 $40.4 million, $875,000 of which was outstanding at
March 31, 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
$34.2 million, including those expended for the acquisition of Orland
Asphalt, as previously discussed. It is anticipated that these net
capital expenditures will be met through funds generated from internal
sources, short-term lines of credit aggregating $11 million, $560,000
of which was outstanding at March 31, 1997, a revolving credit
agreement of $55 million, $50 million of which was outstanding at
March 31, 1997, and the issuance of long-term debt and the Company's
equity securities.
Fidelity Oil's 1997 net capital expenditures related to its oil
and natural gas acquisition, development and exploration program are
estimated at $50 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, $5.8 million of
which was outstanding at March 31, 1997.
The Company utilizes its short-term lines of credit aggregating
$40 million, none of which was outstanding on March 31, 1997, and its
$30 million revolving credit and term loan agreement, $20 million of
which was outstanding at March 31, 1997, to meet its short-term
financing needs and to take advantage of market conditions when timing
the placement of long-term or permanent financing.
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
March 31, 1997, the Company could have issued approximately $250
million of additional first mortgage bonds.
The Company's coverage of combined fixed charges and preferred
dividends was 2.74 and 2.67 times for the twelve months ended March
31, 1997, and December 31, 1996, respectively. Additionally, the
Company's first mortgage bond interest coverage was 5.4 times for both
the twelve months ended March 31, 1997, and December 31, 1996. Common
stockholders' investment as a percent of total capitalization was 56%
and 54% at March 31, 1997, and December 31, 1996, respectively.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 14, 1997, a suit was filed by nine oil and
natural gas producers against Koch, Williston Basin and
the Company claiming they are entitled to damages for
the breach of Williston Basin's and the Company's
natural gas purchase contract with Koch. For more
information on this legal action, see Note 3 of Notes to
Consolidated Financial Statements.
On March 27, 1997, the U.S. District Court dismissed
Grynberg's suit without prejudice against 53 of the
defendants, including Williston Basin, on the grounds
that the parties were improperly joined in the suit and
that Grynberg's claim of fraud was not specific enough
as it related to any individual party to the suit. For
more information on this legal action, see Note 3 of
Notes to Consolidated Financial Statements.
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. For more
information on this legal action, see Note 6 of Notes to
Consolidated Financial Statements.
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on
April 22, 1997. Three proposals were submitted to
stockholders as described in the Company's Proxy Statement
dated March 3, 1997, and were voted upon and approved by
stockholders at the meeting. The table below briefly
describes the proposals and the results of the stockholder
votes.
Shares
Against
Shares or Broker
For Withheld Abstentions Non-Votes
Proposal to elect five directors:
For a term expiring in 1999--
John A. Schuchart 24,679,847 732,907 --- ---
For terms expiring in 2000--
San W. Orr, Jr. 24,732,221 680,533 --- ---
Harry J. Pearce 24,684,037 728,717 --- ---
Homer A. Scott, Jr. 24,600,460 812,294 --- ---
Sister Thomas Welder, O.S.B. 24,580,908 831,846 --- ---
Proposal to approve 1997
Non-Employee Director
Long-Term Incentive Plan 20,197,068 4,279,030 936,656 ---
Proposal to approve 1997
Executive Long-Term
Incentive Plan 20,241,896 4,219,107 951,751 ---
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
(12) Computation of Ratio of Earnings to 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 May 15, 1997 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
EXHIBIT INDEX
Exhibit No.
(12) Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends
(27) Financial Data Schedule
Exhibit 12
MDU RESOURCES GROUP, INC.
COMPUTATION OF RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS
Twelve Months Year
Ended Ended
March 31, 1997 December 31, 1996
(In thousands of dollars)
Earnings Available for
Fixed Charges:
Net Income per Consolidated
Statements of Income $46,933 $45,470
Income Taxes 16,848 16,087
63,781 61,557
Rents (a) 1,044 1,031
Interest (b) 33,831 34,101
Total Earnings Available
for Fixed Charges $98,656 $96,689
Preferred Dividend Requirements $ 786 $ 787
Ratio of Income Before Income
Taxes to Net Income 136% 135%
Preferred Dividend Factor on
Pretax Basis 1,069 1,062
Fixed Charges (c) 34,875 35,132
$35,944 $36,194
Ratio of Earnings to
Combined Fixed Charges
and Preferred Dividends 2.74x 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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