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, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____________ to ______________
Commission file 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 10, 1996: 28,476,981
shares.
INTRODUCTION
MDU Resources Group, Inc. (Company) is a diversified natural
resource company which was incorporated under the laws of the State
of Delaware in 1924. Its principal executive offices are at 400
North Fourth Street, Bismarck, North Dakota 58501, telephone
(701) 222-7900.
Montana-Dakota Utilities Co. (Montana-Dakota), the public
utility division of the Company, provides electric and/or natural
gas and propane distribution service at retail to 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 Coal Mining Company
(Knife River), the Fidelity Oil Group (Fidelity Oil) and
Prairielands Energy Marketing, Inc. (Prairielands).
Williston Basin produces natural gas and provides
underground storage, transportation and gathering services
through an interstate pipeline system serving Montana,
North Dakota, South Dakota and Wyoming.
Knife River surface mines and markets low sulfur lignite
coal at mines located in Montana and North Dakota and,
through its wholly-owned subsidiary, KRC Holdings, Inc.
(KRC Holdings), surface mines and markets aggregates and
related construction materials in the Anchorage, Alaska
area, southern Oregon, north-central California and the
Hawaiian Islands.
Fidelity Oil is comprised of Fidelity Oil Co. and Fidelity
Oil Holdings, Inc., which own oil and natural gas
interests in the western United States, the Gulf Coast and
Canada through investments with several oil and natural
gas producers.
Prairielands seeks new energy markets while continuing to
expand present markets for natural gas. Its activities
include buying and selling natural gas and arranging
transportation services to end users, pipelines and local
distribution companies and, through its wholly-owned
subsidiary, Prairie Propane, Inc., operates bulk propane
facilities in north-central and southeastern North Dakota.
INDEX
Part I
Consolidated Statements of Income --
Three Months Ended March 31, 1996 and 1995
Consolidated Balance Sheets --
March 31, 1996 and 1995, and December 31, 1995
Consolidated Statements of Cash Flows --
Three Months Ended March 31, 1996 and 1995
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II
Signatures
Exhibit Index
Exhibit
MDU RESOURCES GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
1996 1995
(In thousands, except
per share amounts)
Operating revenues:
Electric $ 37,699 $ 35,126
Natural gas 57,032 52,584
Construction materials and mining 15,568 18,863
Oil and natural gas production 16,230 9,945
126,529 116,518
Operating expenses:
Fuel and purchased power 12,195 11,248
Purchased natural gas sold 21,274 19,930
Operation and maintenance 43,932 43,703
Depreciation, depletion and amortization 15,131 12,835
Taxes, other than income 5,915 6,331
98,447 94,047
Operating income:
Electric 8,683 8,224
Natural gas distribution 7,543 5,436
Natural gas transmission 5,705 5,522
Construction materials and mining 334 760
Oil and natural gas production 5,817 2,529
28,082 22,471
Other income--net 1,347 794
Interest expense 7,012 6,003
Carrying costs on natural gas repurchase commitment 1,428 1,440
Income before income taxes 20,989 15,822
Income taxes 7,854 5,550
Net income 13,135 10,272
Dividends on preferred stocks 198 199
Earnings on common stock $ 12,937 $ 10,073
Earnings per common share $ .45 $ .35
Dividends per common share $ .27 $ .27
Average common shares outstanding 28,477 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,
1996 1995 1995
(In thousands)
ASSETS
Property, plant and equipment:
Electric $ 536,829 $ 519,829 $ 535,016
Natural gas distribution 161,316 161,005 161,080
Natural gas transmission 272,430 265,328 271,773
Construction materials and mining 152,695 149,401 151,751
Oil and natural gas production 181,303 163,596 167,542
1,304,573 1,259,159 1,287,162
Less accumulated depreciation,
depletion and amortization 584,536 558,942 570,855
720,037 700,217 716,307
Current assets:
Cash and cash equivalents 38,319 47,310 33,398
Receivables 63,135 50,172 61,961
Inventories 16,661 21,537 23,949
Deferred income taxes 36,484 30,292 31,663
Prepayments and other current
assets 10,907 11,826 11,261
165,506 161,137 162,232
Natural gas available under
repurchase commitment 70,622 70,910 70,750
Investments 45,343 19,869 46,188
Deferred charges and other assets 57,991 61,417 61,002
$1,059,499 $1,013,550 $1,056,479
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock (Shares outstanding --
28,476,981, $3.33 par value at
March 31, 1996 and December 31,
1995, 18,984,654, $3.33 par
value at March 31, 1995 $ 94,828 $ 63,219 $ 94,828
Other paid in capital 64,305 95,914 64,305
Retained earnings 183,360 170,529 178,184
342,493 329,662 337,317
Preferred stock subject to mandatory
redemption requirements 1,900 2,000 1,900
Preferred stock redeemable at option
of the Company 15,000 15,000 15,000
Long-term debt 215,709 206,343 237,352
575,102 553,005 591,569
Commitments and contingencies --- --- ---
Current liabilities:
Short-term borrowings 225 --- 600
Accounts payable 18,962 17,916 22,261
Taxes payable 25,783 17,152 13,566
Other accrued liabilities,
including reserved revenues 114,025 100,322 100,779
Dividends payable 7,957 7,792 7,958
Long-term debt and preferred
stock due within one year 15,837 20,541 17,087
182,789 163,723 162,251
Natural gas repurchase commitment 88,041 88,401 88,200
Deferred credits:
Deferred income taxes 117,038 114,082 118,459
Other 96,529 94,339 96,000
213,567 208,421 214,459
$1,059,499 $1,013,550 $1,056,479
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,
1996 1995
(In thousands)
Operating activities:
Net income $ 13,135 $ 10,272
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation, depletion and amortization 15,131 12,835
Deferred income taxes and investment tax credit--net (538) 1,097
Recovery of deferred natural gas contract litigation
settlement costs, net of income taxes 1,780 2,549
Changes in current assets and liabilities--
Receivables (1,174) 5,237
Inventories 7,288 5,553
Other current assets (4,467) (3,137)
Accounts payable (3,299) (2,306)
Other current liabilities 25,462 20,140
Other noncurrent changes 5,064 2,192
Net cash provided by operating activities 58,382 54,432
Financing activities:
Net change in short-term borrowings (375) (680)
Issuance of long-term debt 1,500 8,550
Repayment of long-term debt (24,398) (19,815)
Retirement of natural gas repurchase commitment (159) (3)
Dividends paid (7,959) (7,793)
Net cash used in financing activities (31,391) (19,741)
Investing activities:
Additions to property, plant and equipment--
Electric (2,896) (4,009)
Natural gas distribution (1,126) (1,970)
Natural gas transmission (659) (1,349)
Construction materials and mining (1,182) (2,133)
Oil and natural gas production (17,180) (12,158)
(23,043) (21,619)
Sale of natural gas available under repurchase commitment 128 3
Investments 845 (2,955)
Net cash used in investing activities (22,070) (24,571)
Increase in cash and cash equivalents 4,921 10,120
Cash and cash equivalents--beginning of year 33,398 37,190
Cash and cash equivalents--end of period $ 38,319 $ 47,310
The accompanying notes are an integral part of these consolidated statements.
MDU RESOURCES GROUP, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1996 and 1995
(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, 1995 (1995 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 1995 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. Common stock split
On August 17, 1995, the Company's Board of Directors approved
a three-for-two common stock split to be effected in the form
of a 50 percent common stock dividend. The additional shares
of common stock were distributed on October 13, 1995, to common
stockholders of record on September 27, 1995. All common stock
information appearing in the accompanying consolidated financial
statements has been restated to give retroactive effect to the
stock split. Additionally, preference share purchase rights
have been appropriately adjusted to reflect the effects of the
split.
4. Pending litigation
W. A. Moncrief --
In November 1993, the estate of W.A. Moncrief (Moncrief), a
producer from whom Williston Basin purchased a portion of its
natural gas supply, filed suit in Federal District Court for the
District of Wyoming (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 has submitted
damage calculations which total approximately $19 million or,
under its alternative pricing theory, approximately $39 million.
In March 1995, the Federal District Court issued a summary
judgment dismissing Moncrief's pricing theories and
substantially reducing Moncrief's claims. Trial was held in
January 1996, and Williston Basin is awaiting the Federal
District Court's decision.
Moncrief's damage claims, in Williston Basin's opinion, are
grossly overstated. Williston Basin plans to file for recovery
from ratepayers of amounts which may be ultimately due to
Moncrief, if any.
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 are also alleging 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 such contract, and are
seeking damages in an unspecified amount. On January 8, 1996,
the Company and Knife River filed separate motions with the
State District Court to dismiss or stay pending arbitration.
In an order dated May 6, 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 contracts.
5. 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. The rehearing is pending before the FERC.
Reserves have been provided for a portion of the revenues
collected subject to refund with respect to pending regulatory
proceedings and for the recovery of certain producer settlement
buy-out/buy-down costs 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.
6. 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 1995
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 and represent costs which Williston Basin may not
recover. This matter is currently on appeal. The issue
regarding the applicability of assessing storage charges to the
gas creates additional uncertainty as to the costs associated
with holding the gas.
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 March 31, 1996, 17.6 MMdk of this natural gas had been
sold by Williston Basin for use by both on- and off-system
markets. Williston Basin will continue to aggressively market
the remaining 43.2 MMdk of this natural gas whenever market
conditions are favorable. In addition, it will continue to seek
long-term sales contracts.
7. 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 June 1990, Montana-Dakota was notified by the EPA that it
and several others were named as Potentially Responsible Parties
(PRPs) in connection with the cleanup of pollution at a landfill
site located in Minot, North Dakota. In June 1993, the EPA
issued its decision on the selected remediation to be performed
at the site. Based on the EPA's proposed remediation plan,
estimates of the total cleanup costs, including federal
oversight costs, at this site range from approximately $3.7
million to $4.8 million. In October 1995, the EPA and the City
of Minot entered into a consent decree which requires the city
to implement as well as assume liability for all cleanup costs
associated with the remediation plan. On March 25, 1996, the
EPA and the PRPs reached a tentative agreement under which the
PRPs would pay a total of approximately $562,000 in past and
future federal oversight costs to the EPA. Montana-Dakota's
share of the settlement is estimated to be approximately
$85,000. Final resolution of this matter is expected by the
third quarter of 1996.
8. Federal tax matters
The Company's consolidated federal income tax returns were
under examination by the Internal Revenue Service (IRS) for the
tax years 1983 through 1991. In 1991, the Company received a
notice of proposed deficiency from the IRS for the tax years
1983 through 1985 which proposed substantial additional income
taxes, plus interest. In an alternative position contained in
the notice of proposed deficiency, the IRS had claimed a lower
level of taxes due, plus interest as well as penalties. In 1992
and 1995, similar notices of proposed deficiency were received
for the years 1986 through 1988 and 1989 through 1991,
respectively. Although the notices of proposed deficiency
encompass a number of separate issues, the principal issue is
related to the tax treatment of deductions claimed in connection
with certain investments made by Knife River and Fidelity Oil.
The Company timely filed protests for the 1983 through 1991
tax years contesting the treatment proposed in the notices of
proposed deficiency. In April 1996, the Company and the IRS
reached a settlement for the tax years 1983 through 1988, which
should also result in settlement of related issues for the years
1989 through 1991. The Company is currently evaluating the
allocation of the tax obligation among its subsidiaries but
anticipates no earnings effect on a consolidated basis since
adequate consolidated reserves have been provided. Adjustments
to the separate business segments will be reflected in the 1996
year-end financial statements.
9. Cash flow information
Cash expenditures for interest and income taxes were as
follows:
Three Months Ended
March 31,
1996 1995
(In thousands)
Interest, net of amount capitalized $7,221 $6,898
Income taxes $1,645 $ 592
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The following table (in millions, where applicable) summarizes
the contribution to consolidated earnings by each of the Company's
businesses.
Three Months
Ended
March 31,
Business 1996 1995
Electric $ 3.7 $ 3.5
Natural gas distribution 3.9 2.7
Natural gas transmission 1.6 1.6
Construction materials and mining .5 .9
Oil and natural gas production 3.2 1.4
Earnings on common stock $ 12.9 $ 10.1
Earnings per common share $ .45 $ .35
Return on average common equity for the
12 months ended 13.1% 11.6%
Earnings for the quarter ended March 31, 1996, were up $2.8
million from the comparable period a year ago. Higher oil and
natural gas prices and increased production at the oil and natural
gas production business contributed to the earnings increase.
Improved retail sales at the electric business and increased
throughput at the natural gas distribution business, primarily the
result of 20 percent colder weather than the comparable period a
year ago, further improved earnings. Lower coal sales to the Big
Stone Station due to the expiration of a coal contract in August
1995 and the resulting closure of the Gascoyne Mine partially
offset the earnings increase. Also reducing earnings were
increased operation and maintenance expenses at the electric and
natural gas transmission businesses.
________________________________
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.
Montana-Dakota -- Electric Operations
Three Months
Ended
March 31,
1996 1995
Operating revenues:
Retail sales $ 34.3 $ 32.1
Sales for resale and other 3.4 3.0
37.7 35.1
Operating expenses:
Fuel and purchased power 12.2 11.3
Operation and maintenance 10.8 9.6
Depreciation, depletion and amortization 4.2 4.0
Taxes, other than income 1.8 2.0
29.0 26.9
Operating income 8.7 8.2
Retail sales (kWh) 561.1 517.3
Sales for resale (kWh) 159.2 145.1
Cost of fuel and purchased power per kWh $ .016 $ .016
Montana-Dakota -- Natural Gas Distribution Operations
Three Months
Ended
March 31,
1996 1995
Operating revenues:
Sales $ 63.3 $ 57.4
Transportation and other 1.0 1.0
64.3 58.4
Operating expenses:
Purchased natural gas sold 45.7 42.2
Operation and maintenance 8.3 7.9
Depreciation, depletion and amortization 1.8 1.7
Taxes, other than income 1.0 1.1
56.8 52.9
Operating income 7.5 5.5
Volumes (dk):
Sales 16.4 13.6
Transportation 2.6 3.0
Total throughput 19.0 16.6
Degree days (% of normal) 112% 93.0%
Cost of natural gas, including
transportation, per dk $ 2.79 $ 3.11
Williston Basin -- Natural Gas Transmission Operations
Three Months
Ended
March 31,
1996 1995
Operating revenues:
Transportation $ 14.1* $ 14.5*
Storage 2.9 3.3
Natural gas production and other 1.6 1.4
18.6 19.2
Operating expenses:
Operation and maintenance 10.0* 10.8*
Depreciation, depletion and amortization 1.7 1.8
Taxes, other than income 1.2 1.1
12.9 13.7
Operating income 5.7 5.5
Volumes (dk):
Transportation--
Montana-Dakota 13.4 12.5
Other 7.1 7.2
20.5 19.7
Produced (Mdk) 1,387 1,312
*Includes amortization and related recovery
of deferred natural gas contract
buy-out/buy-down and gas supply
realignment costs $ 2.8 $ 4.0
Knife River -- Construction Materials and Mining Operations
Three Months
Ended
March 31,
1996** 1995
Operating revenues:
Construction materials $ 6.4 $ 6.3
Coal 9.2 12.6
15.6 18.9
Operating expenses:
Operation and maintenance 12.7 15.1
Depreciation, depletion and amortization 1.5 1.6
Taxes, other than income 1.0 1.4
15.2 18.1
Operating income .4 .8
Sales (000's):
Aggregates (tons) 231 245
Asphalt (tons) 17 24
Ready-mixed concrete (cubic yards) 43 43
Coal (tons) 826 1,397
** 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,
1996 1995
Operating revenues:
Oil $ 8.2 $ 5.8
Natural gas 8.0 4.1
16.2 9.9
Operating expenses:
Operation and maintenance 3.6 2.9
Depreciation, depletion and amortization 6.0 3.8
Taxes, other than income .8 .7
10.4 7.4
Operating income 5.8 2.5
Production (000's):
Oil (barrels) 509 395
Natural gas (Mcf) 3,506 2,631
Average sales price:
Oil (per barrel) $ 16.22 $14.72
Natural gas (per Mcf) 2.25 1.53
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. The amounts relating to the
elimination of intercompany transactions for natural gas operating
revenues, purchased natural gas sold and operation and maintenance
expenses were $25.9 million, $24.4 million and $1.5 million,
respectively, for the three months ended March 31, 1996, and $25.0
million, $22.3 million and $2.7 million, respectively, for the three
months ended March 31, 1995.
Three Months Ended March 31, 1996 and 1995
Montana-Dakota -- Electric Operations
Operating income at the electric business increased primarily due
to higher retail sales and sales for resale revenue. Increased
retail sales volumes to all customer classes and increased sales for
resale, both due primarily to higher weather-related demand,
contributed to the revenue improvement. Increased fuel and
purchased power costs, largely resulting from higher purchased power
demand charges, partially offset the increase in operating income.
The increase in demand charges, related to a participation power
contract, is the result of the purchase of an additional five
megawatts of capacity beginning in May 1995. Higher operation and
maintenance expenses, primarily increased payroll-related costs and
higher power generation expenses, also somewhat reduced the
operating income improvement.
Earnings for the electric business improved due to the operating
income increase.
Montana-Dakota -- Natural Gas Distribution Operations
Operating income at the natural gas distribution business
improved largely as a result of increased sales revenue. The sales
revenue improvement resulted from a 2.2 million decatherm increase
in volumes sold due to 20% colder weather and increased sales
resulting from the addition of over 3,800 customers. However, the
pass-through of lower average natural gas costs partially offset the
sales revenue increase. The effects of lower volumes transported
were offset by higher average transportation rates. Higher
operation expenses, due primarily to increased payroll-related
costs, partially offset the operating income improvement.
Natural gas distribution earnings increased due to the operating
income improvement.
Williston Basin -- Natural Gas Transmission Operations
The slight improvement in operating income was primarily due to
increased transportation revenues, the result of increased volumes
transported to both on- and off-system markets and the benefits of
a favorable rate change implemented in January 1996. However,
reduced recovery of deferred natural gas contract buy-out/buy-down
and gas supply realignment costs more than offset the transportation
revenue increase. Higher operation expenses, primarily the timing
of pipeline safety user fee payments and increased payroll-related
costs, were more than offset by reduced amortizations of deferred
natural gas contract buy-out/buy-down and gas supply realignment
costs.
Earnings for this business were unchanged due to the increase in
operating income being offset by increased interest expense,
primarily the result of higher reserved revenue balances.
Knife River -- Construction Materials and Mining Operations
Construction Materials Operations --
Construction materials operating income increased $466,000 due
to lower operation and maintenance expenses. The expense decrease
was primarily due to the timing of maintenance expenses incurred
at the Oregon operations this period compared to the same period a
year ago.
Coal Operations --
Operating income for the coal operations decreased $887,000
primarily due to decreased coal revenues, due to the expiration of
the coal contract with the Big Stone Station in August 1995 and the
resulting closure of the Gascoyne Mine. Decreased operation
expenses, depreciation expense and taxes other than income, all due
primarily to the closure of the Gascoyne Mine, partially offset the
decline in operating income.
Consolidated --
Earnings decreased due to the decline in coal operating income
and higher interest expense. Increased long-term debt due to the
acquisition of Hawaiian Cement was the primary factor contributing
to the increase in interest expense. Increased construction
materials operating income and income from the 50 percent interest
in Hawaiian Cement (included in Other income--net) acquired in
September 1995, partially offset the decline in earnings.
Fidelity Oil -- Oil and Natural Gas Production Operations
Operating income for the oil and natural gas production business
increased as a result of higher oil and natural gas revenues.
Higher oil revenue resulted from a $1.8 million increase due to
higher production and a $596,000 increase due to higher average
prices. The increase in natural gas revenue was due to a $2.0
million increase resulting from higher production and $1.9 million
increase arising from higher prices. Increased operation expense
and depreciation, depletion and amortization expense, both largely
due to higher production, partially offset the operating income
improvement.
Earnings for this business unit increased due to the operating
income improvement.
Prospective Information
Each of the Company's businesses is subject to competition,
varying in both type and degree. See Items 1 and 2 in the 1995
Annual Report on Form 10-K (1995 Form 10-K) for a further discussion
of the effects these competitive forces have on each of the
Company's businesses.
The operating results of the Company's electric, natural gas
distribution, natural gas transmission, and construction materials
and mining businesses are, in varying degrees, influenced by the
weather as well as by the general economic conditions within their
respective market areas. Additionally, the ability to recover costs
through the regulatory process affects the operating results of the
Company's electric, natural gas distribution and natural gas
transmission businesses.
On June 30, 1995, Montana-Dakota filed a general natural gas rate
increase application with the Montana Public Service Commission
(MPSC) requesting an increase of $2.1 million or 4.4%. On April 17,
1996, the MPSC issued an order in this proceeding authorizing
additional annual revenues of $1.0 million, or 49% of the original
amount requested. The rate increase became effective May 1, 1996.
On June 30, 1995, Williston Basin filed a general rate increase
application with the FERC. As a result of FERC orders issued after
Williston Basin's application was filed, on December 29, 1995,
Williston Basin filed revised base rates with the FERC resulting in
an increase of $8.9 million or 19.1% over the currently effective
rates. Williston Basin began collecting such increase effective
January 1, 1996, subject to refund.
In April 1996, KRC Holdings, Inc. purchased Baldwin Contracting
Company, Inc. (Baldwin) of Chico, California. Baldwin is a major
supplier of aggregate, asphalt and construction services in the
northern Sacramento Valley and adjacent Sierra Nevada Mountains of
northern California. Baldwin also provides a variety of construction
services, primarily earth moving, grading, road and highway
construction and maintenance services.
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 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" (SFAS No. 121). SFAS No. 121 imposes stricter criteria
for assets, including regulatory assets, by requiring that such
assets be probable of future recovery at each balance sheet date.
The Company adopted SFAS No. 121 on January 1, 1996, and the
adoption did not have a material affect on the Company's financial
position or results of operations.
FERC Order No. 888
On April 24, 1996, the FERC issued its final rule (Order No. 888)
on wholesale electric transmission open access and recovery of
stranded costs. Montana-Dakota is presently evaluating Order
No. 888 to determine what effects the order will have on its
operations.
In a related matter, on March 29, 1996, the Mid-Continent Area
Power Pool (MAPP), of which Montana-Dakota is a member, filed a
restated operating agreement with the FERC to provide for wholesale
open access transmission on its members' systems on a non-
discriminatory basis. The MAPP is awaiting approval of the restated
agreement by the FERC.
Liquidity and Capital Commitments
Montana-Dakota's capital needs for 1996 are estimated at $26.0
million for construction costs and $35.4 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 capital needs
from internal sources and through the use of its $30 million
revolving credit and term loan agreement, none of which was
outstanding at March 31, 1996, 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 April
1996, the Company notified the holders of its 9 1/8 Series first
mortgage bonds, due May 15, 2006, that the Company intends to call
$25 million of these bonds on June 1, 1996. The funds required to
retire the 9 1/8 Series first mortgage bonds will be provided for
by Williston Basin's repayment of $27.5 million of intercompany debt
payable to the Company.
Williston Basin's 1996 capital needs are estimated at $11.6
million for construction costs and $6.3 million for the retirement
of long-term debt, excluding the $27.5 million of intercompany debt
discussed below. These capital needs are expected to be met with
a combination of internally generated funds and short-term lines of
credit aggregating $35 million, none of which is outstanding at
March 31, 1996, 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. Williston Basin
presently intends to privately place in the second quarter of 1996
$20 million of notes with the proceeds to be used to repay the $27.5
million of intercompany debt payable to the Company.
Knife River's capital needs for 1996 are estimated at $20.9
million, including those required for the acquisition of Baldwin
Contracting Company, Inc., as previously discussed. It is
anticipated that these capital needs will be met through funds
generated from internal sources, short-term lines of credit
aggregating $8 million, none of which is outstanding at March 31,
1996, and a long-term revolving credit agreement of $55 million, $25
million of which was outstanding on March 31, 1996. On April 15,
1996, amounts available under the long-term revolving credit
agreement were increased from $40 million to $55 million. In
addition, on April 22, 1996, amounts available under the short-term
lines of credit were increased from $6 million to $8 million. It
is anticipated that funds required for future acquisitions will be
met primarily through the issuance of a combination of long-term
debt and equity securities.
Fidelity Oil's 1996 capital needs related to its oil and
natural gas acquisition, development and exploration program are
estimated at $40 million. These capital needs are expected to be
met through funds generated from internal sources and long-term
lines of credit aggregating $35 million. On April 15, 1996, amounts
available under the lines of credit were increased from $25 to $35
million. At March 31, 1996, $3.5 million was outstanding under the
lines of credit.
See Note 8 for a further discussion of a settlement reached
between the Company and the IRS on claimed tax deficiencies. The
level of funds required as a result of this settlement were not
material to the Company's consolidated financial position.
Prairielands' 1996 capital needs are estimated at $1.5 million
for construction costs and $437,000 for long-term debt retirement.
It is anticipated that these capital needs will be met through funds
generated internally and short-term lines of credit aggregating $5.4
million, $225,000 of which was outstanding at March 31, 1996.
The Company utilizes its short-term lines of credit aggregating
$40 million and its $30 million revolving credit and term loan
agreement to meet its short-term financing needs and to take
advantage of market conditions when timing the placement of long-
term or permanent financing. There were no borrowings outstanding
at March 31, 1996, under the short-term lines of credit.
The Company's issuance of first mortgage debt is subject to
certain restrictions imposed under the terms and conditions of its
Indenture of Mortgage. Generally, those restrictions require the
Company to pledge $1.43 of unfunded property to the Trustee for each
dollar of indebtedness incurred under the Indenture and that annual
earnings (pretax and before interest charges), as defined in the
Indenture, equal at least two times its annualized first mortgage
bond interest costs. Under the more restrictive of the two tests,
as of March 31, 1996, the Company could have issued approximately
$202 million of additional first mortgage bonds.
The Company's coverage of fixed charges including preferred
dividends was 3.1 and 3.0 times for the twelve months ended
March 31, 1996, and December 31, 1995, respectively. Additionally,
the Company's first mortgage bond interest coverage was 4.2 and 3.9
times for the twelve months ended March 31, 1996, and December 31,
1995, respectively. Stockholders' equity as a percent of total
capitalization was 60% and 57% at March 31, 1996, and December 31,
1995, respectively.
PART II - OTHER INFORMATION
1. Legal Proceedings
In an order dated May 6, 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 contracts.
4. Results of Votes of Security Holders
The Company's Annual Meeting of Stockholders was held on
April 23, 1996. One proposal was submitted to stockholders as
described in the Company's Proxy Statement dated March 4, 1996,
and was voted upon and approved by stockholders at the meeting.
The table below briefly describes the proposal and the results
of the stockholder votes.
Shares
Against
Shares or Broker
For Withheld Abstentions Non-Votes
Proposal to elect three
directors for terms
expiring in 1999:
Thomas Everist 24,868,819 462,288 --- ---
Harold J. Mellen, Jr. 24,830,603 500,504 --- ---
Robert L. Nance 24,907,417 423,690 --- ---
6. Exhibits and Reports on Form 8-K
a) Exhibits
(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 13, 1996 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.
(27) Financial Data Schedule