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 JUNE 30, 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 August 9, 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) and its subsidiaries
surface mine and market aggregates and related
construction materials in Oregon, California, Alaska
and Hawaii.
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.
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 and Six Months Ended June 30, 1996 and 1995
Consolidated Balance Sheets --
June 30, 1996 and 1995, and December 31, 1995
Consolidated Statements of Cash Flows --
Six Months Ended June 30, 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 Six Months
Ended Ended
June 30, June 30,
1996 1995 1996 1995
(In thousands, except per share amounts)
Operating revenues:
Electric $ 31,108 $ 30,384 $ 68,807 $ 65,510
Natural gas 32,141 38,462 89,173 91,046
Construction materials and mining 29,845 31,112 45,413 49,975
Oil and natural gas production 17,119 11,309 33,349 21,254
110,213 111,267 236,742 227,785
Operating expenses:
Fuel and purchased power 10,021 9,398 22,216 20,646
Purchased natural gas sold 6,069 11,101 27,343 31,031
Operation and maintenance 52,913 52,415 96,845 96,118
Depreciation, depletion and amortization 15,540 13,324 30,671 26,159
Taxes, other than income 5,469 5,452 11,384 11,783
90,012 91,690 188,459 185,737
Operating income:
Electric 5,287 5,366 13,970 13,590
Natural gas distribution (348) (676) 7,195 4,760
Natural gas transmission 6,141 7,482 11,846 13,004
Construction materials and mining 3,391 4,312 3,725 5,072
Oil and natural gas production 5,730 3,093 11,547 5,622
20,201 19,577 48,283 42,048
Other income--net 1,694 1,339 3,041 2,133
Interest expense 6,727 6,003 13,739 12,006
Carrying costs on natural gas
repurchase commitment 1,411 1,537 2,839 2,977
Income before income taxes 13,757 13,376 34,746 29,198
Income taxes 5,157 4,714 13,011 10,264
Net income 8,600 8,662 21,735 18,934
Dividends on preferred stocks 197 198 395 397
Earnings on common stock $ 8,403 $ 8,464 $ 21,340 $ 18,537
Earnings per common share $ .30 $ .30 $ .75 $ .65
Dividends per common share $ .27 $ .27 $ .55 $ .53
Average common shares outstanding 28,477 28,477 28,477 28,477
The accompanying notes are an integral part of these consolidated statements.
MDU RESOURCES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, June 30, December 31,
1996 1995 1995
(In thousands)
ASSETS
Property, plant and equipment:
Electric $ 540,322 $ 526,405 $ 535,016
Natural gas distribution 162,114 161,831 161,080
Natural gas transmission 266,914 267,757 271,773
Construction materials and mining 172,589 151,215 151,751
Oil and natural gas production 200,992 174,446 167,542
1,342,931 1,281,654 1,287,162
Less accumulated depreciation,
depletion and amortization 594,353 572,498 570,855
748,578 709,156 716,307
Current assets:
Cash and cash equivalents 27,857 26,605 33,398
Receivables 51,741 44,324 61,961
Inventories 24,118 25,330 23,949
Deferred income taxes 31,131 29,180 31,663
Prepayments and other current
assets 11,469 11,396 11,261
146,316 136,835 162,232
Natural gas available under
repurchase commitment 70,301 70,910 70,750
Investments 50,347 17,888 46,188
Deferred charges and other assets 58,754 58,564 61,002
$1,074,296 $ 993,353 $1,056,479
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock (Shares outstanding --
28,476,981, $3.33 par value at
June 30, 1996 and December 31, 1995,
18,984,654, $3.33 par value at
June 30, 1995) $ 94,828 $ 63,219 $ 94,828
Other paid in capital 64,305 95,914 64,305
Retained earnings 184,003 171,398 178,184
343,136 330,531 337,317
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 242,710 190,126 237,352
602,746 537,657 591,569
Commitments and contingencies --- --- ---
Current liabilities:
Short-term borrowings 3,637 --- 600
Accounts payable 23,327 20,056 22,261
Taxes payable 19,236 10,221 13,566
Other accrued liabilities,
including reserved revenues 100,763 99,322 100,779
Dividends payable 7,957 7,792 7,958
Long-term debt and preferred
stock due within one year 15,837 19,240 17,087
170,757 156,631 162,251
Natural gas repurchase commitment 87,640 88,401 88,200
Deferred credits:
Deferred income taxes 118,942 114,561 118,459
Other 94,211 96,103 96,000
213,153 210,664 214,459
$1,074,296 $ 993,353 $1,056,479
The accompanying notes are an integral part of these consolidated statements.
MDU RESOURCES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
1996 1995
(In thousands)
Operating activities:
Net income $ 21,735 $ 18,934
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation, depletion and amortization 30,671 26,159
Deferred income taxes and investment tax credit--net 2,086 2,482
Recovery of deferred natural gas contract litigation
settlement costs, net of income taxes 3,305 4,387
Changes in current assets and liabilities--
Receivables 10,220 11,085
Inventories (169) 1,760
Other current assets 324 (1,595)
Accounts payable 1,066 (166)
Other current liabilities 5,653 12,209
Other noncurrent changes 5,314 4,330
Net cash provided by operating activities 80,205 79,585
Financing activities:
Net change in short-term borrowings 3,037 (680)
Issuance of long-term debt 48,600 3,600
Repayment of long-term debt (44,529) (32,387)
Retirement of natural gas repurchase commitment (560) (3)
Dividends paid (15,916) (15,586)
Net cash used in financing activities (9,368) (45,056)
Investing activities:
Additions to property, plant and equipment
and acquisitions of businesses--
Electric (7,176) (8,745)
Natural gas distribution (2,467) (4,482)
Natural gas transmission (2,618) (3,780)
Construction materials and mining (21,570) (4,058)
Oil and natural gas production (38,837) (23,078)
(72,668) (44,143)
Sale of natural gas available under repurchase commitment 449 3
Investments (4,159) (974)
Net cash used in investing activities (76,378) (45,114)
Decrease in cash and cash equivalents (5,541) (10,585)
Cash and cash equivalents--beginning of year 33,398 37,190
Cash and cash equivalents--end of period $ 27,857 $ 26,605
The accompanying notes are an integral part of these consolidated statements.
MDU RESOURCES GROUP, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
June 30, 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
In August 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. In January 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.
Environmental Litigation --
For a description of litigation filed by Unitek Environmental
Services, Inc. against Hawaiian Cement, see Note 7 --
Environmental matters.
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. On July 19, 1996, the FERC issued an order granting in
part and denying in part Williston Basin's rehearing request.
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 June 30, 1996, 17.8 MMdk of this natural gas had been
sold. Williston Basin will continue to aggressively market the
remaining 43.0 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. In March 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 in 1996.
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 payment 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 is seeking civil penalties under the Clean Air Act (as
described below), as well as damages for various claims (as
described above) of up to $20 million in the aggregate. The
Company believes that Unitek's claims for damages are materially
overstated. Cross motions for summary judgment were heard on
August 5, 1996.
On August 7, 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. Depending upon the specific
actions that the District Court enjoins, Hawaiian Cement may
have to stop its cement manufacturing facility from operating
as it currently does.
On May 7, 1996, the EPA issued a Finding and Notice of
Violation (NOV) to Hawaiian Cement. The NOV states 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. It is also possible that
the EPA could elect to join the suit filed by Unitek. Hawaiian
Cement has met with the EPA, but the EPA has yet to take any
further action regarding the NOV.
There are a number of uncertainties with respect to this
litigation. Thus, depending on the magnitude of civil penalties
and/or damages which may ultimately be assessed or settlement
costs, such amounts could have a material effect on the
Company's results of operations.
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 was
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:
Six Months Ended
June 30,
1996 1995
(In thousands)
Interest, net of amount capitalized $12,493 $12,941
Income taxes $10,754 $ 9,407
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 Six Months
Ended Ended
June 30, June 30,
Business 1996 1995 1996 1995
Electric $ 1.6 $ 1.7 $ 5.3 $ 5.2
Natural gas distribution (.5) (.9) 3.4 1.7
Natural gas transmission 1.9 3.3 3.5 4.9
Construction materials and
mining 2.5 2.8 3.0 3.7
Oil and natural gas production 2.9 1.6 6.1 3.0
Earnings on common stock $ 8.4 $ 8.5 $ 21.3 $ 18.5
Earnings per common share $ .30 $ .30 $ .75 $ .65
Return on average common
equity for the 12 months
ended 12.9% 12.4%
Earnings for the quarter ended June 30, 1996, were down $61,000
from the comparable period a year ago due to the nonrecurring
effect of an April 1995 favorable FERC order on a rehearing request
relating to a 1989 general rate proceeding at the natural gas
transmission business which allowed for the recovery of $2.2
million after-tax previously refunded to customers. 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, combined with increased purchased power demand charges at the
electric business, also contributed to the decline in earnings.
Higher oil and natural gas prices and production at the oil and
natural gas production business largely offset the earnings
decline. Earnings from a 50 percent interest in Hawaiian Cement,
and earnings from Baldwin Contracting Company, Inc. (Baldwin), both
construction materials businesses acquired since the 1995 period,
also partially offset the decline in earnings. In addition, higher
average realized rates at the natural gas distribution business
offset the earnings decline.
Earnings for the six months ended June 30, 1996, were up $2.8
million from the corresponding 1995 period due to higher oil and
natural gas prices and production at the oil and natural gas
production business. Increased sales at the electric and natural
gas distribution businesses, both primarily the result of 13
percent colder weather than the comparable period a year ago,
combined with the benefits of a favorable rate change implemented
in January 1996 at the natural gas transmission business
also contributed to the earnings improvement. In addition, earnings
from the recently acquired construction materials businesses, as
previously discussed, added to the earnings increase. The
nonrecurring effect of the favorable FERC order received at the
natural gas transmission business in April 1995, as described
above, and the effects of lower coal sales to the Big Stone Station
due to the expiration of the coal contract somewhat offset the
earnings improvement.
________________________________
Reference should be made to Notes to Consolidated Financial
Statements for information pertinent to various commitments and
contingencies.
Financial and operating data
The following tables (in millions, where applicable) are key
financial and operating statistics for each of the Company's
business units.
Montana-Dakota -- Electric Operations
Three Months Six Months
Ended Ended
June 30, June 30,
1996 1995 1996 1995
Operating revenues:
Retail sales $ 29.0 $ 28.6 $ 63.4 $ 60.7
Sales for resale and other 2.1 1.8 5.4 4.8
31.1 30.4 68.8 65.5
Operating expenses:
Fuel and purchased power 10.0 9.4 22.2 20.6
Operation and maintenance 10.0 9.8 20.7 19.5
Depreciation, depletion and
amortization 4.2 4.1 8.5 8.1
Taxes, other than income 1.6 1.7 3.4 3.7
25.8 25.0 54.8 51.9
Operating income 5.3 5.4 14.0 13.6
Retail sales (kWh) 456.4 454.0 1,017.5 971.2
Sales for resale (kWh) 74.2 59.6 233.4 204.8
Cost of fuel and purchased
power per kWh $ .018 $ .017 $ .016 $ .016
Montana-Dakota -- Natural Gas Distribution Operations
Three Months Six Months
Ended Ended
June 30, June 30,
1996 1995 1996 1995
Operating revenues:
Sales $ 23.7 $ 26.5 $ 87.0 $ 83.9
Transportation and other .9 .9 1.8 1.8
24.6 27.4 88.8 85.7
Operating expenses:
Purchased natural gas sold 14.8 17.9 60.5 60.1
Operation and maintenance 7.4 7.5 15.7 15.5
Depreciation, depletion and
amortization 1.7 1.7 3.4 3.3
Taxes, other than income 1.0 1.0 2.0 2.1
24.9 28.1 81.6 81.0
Operating income (.3) (.7) 7.2 4.7
Volumes (dk):
Sales 5.6 5.7 22.0 19.3
Transportation 1.7 2.4 4.3 5.5
Total throughput 7.3 8.1 26.3 24.8
Degree days (% of normal) 120.2% 131.2% 113.6% 100.8%
Cost of natural gas, including
transportation, per dk $ 2.67 $ 3.16 $ 2.76 $ 3.12
Williston Basin -- Natural Gas Transmission Operations
Three Months Six Months
Ended Ended
June 30, June 30,
1996 1995 1996 1995
Operating revenues:
Transportation $13.3* $ 15.2* $ 27.4* $ 29.7*
Storage 2.5 2.7 5.5 6.0
Natural gas production and
other 1.6 1.1 3.2 2.5
17.4 19.0 36.1 38.2
Operating expenses:
Operation and maintenance 8.5* 8.7* 18.5* 19.6*
Depreciation, depletion and
amortization 1.7 1.8 3.4 3.5
Taxes, other than income 1.1 1.0 2.3 2.1
11.3 11.5 24.2 25.2
Operating income 6.1 7.5 11.9 13.0
Volumes (dk):
Transportation--
Montana-Dakota 9.8 7.1 23.3 19.6
Other 9.6 8.2 16.6 15.4
19.4 15.3 39.9 35.0
Produced (Mdk) 1,488 1,153 2,876 2,465
*Includes amortization and related
recovery of deferred natural gas
contract buy-out/buy-down and
gas supply realignment costs $ 2.5 $ 2.9 $ 5.3 $ 6.9
Knife River -- Construction Materials and Mining Operations
Three Months Six Months
Ended Ended
June 30, June 30,
1996** 1995 1996** 1995
Operating revenues:
Construction materials $ 22.6 $ 21.2 $ 29.0 $ 27.5
Coal 7.3 9.9 16.4 22.5
29.9 31.1 45.4 50.0
Operating expenses:
Operation and maintenance 24.0 24.0 36.8 39.2
Depreciation, depletion and
amortization 1.7 1.6 3.2 3.2
Taxes, other than income .8 1.2 1.7 2.5
26.5 26.8 41.7 44.9
Operating income 3.4 4.3 3.7 5.1
Sales (000's):
Aggregates (tons) 769 834 1,001 1,079
Asphalt (tons) 148 114 165 138
Ready-mixed concrete
(cubic yards) 88 95 131 138
Coal (tons) 646 1,096 1,473 2,492
**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 Six Months
Ended Ended
June 30, June 30,
1996 1995 1996 1995
Operating revenues:
Oil $ 10.0 $ 7.1 $18.3 $ 13.0
Natural gas 7.1 4.2 15.0 8.3
17.1 11.3 33.3 21.3
Operating expenses:
Operation and maintenance 4.1 3.4 7.7 6.3
Depreciation, depletion and
amortization 6.2 4.1 12.2 8.0
Taxes, other than income 1.1 .7 1.9 1.4
11.4 8.2 21.8 15.7
Operating income 5.7 3.1 11.5 5.6
Production (000's):
Oil (barrels) 561 440 1,070 835
Natural gas (Mcf) 3,650 2,847 7,156 5,478
Average sales price:
Oil (per barrel) $17.67 $15.82 $16.98 $15.30
Natural gas (per Mcf) 1.95 1.49 2.09 1.51
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 June 30, 1996 and 1995
Montana-Dakota -- Electric Operations
Operating income at the electric business decreased slightly
primarily due to increased fuel and purchased power costs, largely
resulting from higher purchased power demand charges. The increase
in demand charges, related to a participation power contract, is the
result of the pass-through of periodic maintenance costs as well as
the purchase of an additional five megawatts of capacity beginning in
May 1996 which brings the total level of capacity available under this
contract to 66 megawatts. Increased operation expenses, primarily the
timing of payroll-related costs, also contributed to the decrease in
operating income. Decreased maintenance expenses partially offset the
decrease in operating income. Decreased power generation maintenance
costs at the Heskett Station, somewhat offset by increased costs at
the Lewis and Clark Station, were the primary factors behind the
maintenance expense decline. Higher retail sales and sales for resale
revenue, both due to increased sales volumes and increased average
realized rates, also offset the operating income decline.
Earnings for the electric business declined due to the operating
income decrease.
Montana-Dakota -- Natural Gas Distribution Operations
Operating income at the natural gas distribution business improved
due primarily to increased sales margins resulting from higher average
realized rates. The effects of a general rate increase placed into
effect in Montana in May 1996, and changes in sales mix both
contributed to the rate improvement. The decrease in natural gas
revenues was largely the result of the pass-through of lower average
natural gas costs. Transportation volumes decreased but were offset
by higher average transportation rates.
Natural gas distribution earnings increased due to the operating
income improvement.
Williston Basin -- Natural Gas Transmission Operations
Natural gas transmission operating income declined primarily due
to lower transportation revenues resulting from the nonrecurring
effect of an April 1995 favorable FERC order on a rehearing request
relating to a 1989 general rate proceeding which allowed for the one-
time billing of customers for approximately $2.7 million ($1.7 million
after-tax) to recover a portion of an amount previously refunded in
July 1994. Also reducing transportation revenue was the decreased
recovery of deferred natural gas contract buy-out/buy-down and gas
supply realignment costs. Increased volumes transported to both off-
system markets and to storage and the benefits of a favorable rate
change implemented in January 1996 partially offset the transportation
revenue decline. Operation and maintenance expenses decreased
primarily due to reduced amortization of deferred natural gas contract
buy-out/buy-down and gas supply realignment costs somewhat offset by
higher payroll-related costs. An increase in natural gas production
revenue, largely due to higher volumes, also partially offset the
decline in operating income.
Earnings for this business decreased primarily due to the operating
income decline and lower interest income. The decrease in interest
income was largely related to $952,000 ($583,000 after-tax) of
interest on the previously described 1995 refund recovery.
Knife River -- Construction Materials and Mining Operations
Construction Materials Operations --
Construction materials operating income was essentially unchanged
due to operating income realized since the acquisition of Baldwin in
April 1996 being offset by lower operating income at other
construction materials operations. The operating income decrease at
the other construction materials operations resulted primarily from
lower revenues. Decreased aggregate and asphalt sales and
construction revenue, due to both delays in construction starts and
reduced demand from a year ago, partially offset by increased
aggregate and ready-mixed concrete prices, were the primary factors
contributing to the revenue decline. Operation and maintenance
expenses, excluding those related to Baldwin, decreased principally
as a result of lower sales.
Coal Operations --
Operating income for the coal operations decreased $878,000
primarily due to decreased coal revenues, the result of the expiration
of the coal contract with the Big Stone Station in August 1995 and the
resulting closure of the Gascoyne Mine. Decreased operation and
maintenance expenses, depreciation expense and taxes other than
income, all due primarily to the mine closure, partially offset the
decline in operating income.
Consolidated --
Earnings decreased due primarily to the decline in coal operating
income and higher interest expense. Increased long-term debt due to
the acquisition of Hawaiian Cement and Baldwin was the primary factor
contributing to the increase in interest expense. Income from the 50
percent interest in Hawaiian Cement (included in Other income--net)
acquired in September 1995, somewhat offset the earnings decline.
Fidelity Oil -- Oil and Natural Gas Production Operations
Operating income for the oil and natural gas production business
increased largely as a result of higher oil and natural gas revenues.
Higher oil revenue resulted from a $2.1 million increase due to higher
production and a $802,000 increase due to higher average prices. The
increase in natural gas revenue was due to a $1.6 million increase
resulting from higher production and $1.3 million increase arising
from higher average prices. Increased operation and maintenance
expenses, depreciation, depletion and amortization expense and taxes
other than income, largely due to higher production, partially offset
the operating income improvement.
Earnings for this business unit increased due to the operating
income improvement.
Six Months Ended June 30, 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, both due
primarily to higher weather-related demand in the first quarter.
Increased fuel and purchased power costs, primarily higher purchased
power demand charges as more fully described in the three months
discussion, partially offset the increase in operating income. Higher
operation 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 primarily from a 2.0 million decatherm increase
in volumes sold due to 13% colder weather and increased sales
resulting from the addition of over 3,600 customers. However, the
pass-through of lower average natural gas costs partially offset the
sales revenue improvement. The effects of lower volumes transported
were offset by higher average transportation rates.
Natural gas distribution earnings increased due to the operating
income improvement.
Williston Basin -- Natural Gas Transmission Operations
Operating income at the natural gas transmission business decreased
primarily due to lower transportation revenues resulting from an April
1995 FERC order, as previously described in the three month's
discussion. Reduced recovery of deferred natural gas contract buy-
out/buy-down and gas supply realignment costs also contributed to the
decrease in transportation revenue. Benefits from a favorable rate
change implemented in January 1996 and increased volumes transported
to both off-system markets and to storage partially offset the
transportation revenue decline. Also decreasing operating income was
reduced storage revenues due to the implementation of lower rates in
January 1996. However, higher storage withdrawal revenues, due to
increased volumes, and lower revenues being reserved, both somewhat
offset the storage revenue decline. Operation and maintenance
expenses decreased primarily due to reduced amortization of deferred
natural gas contract buy-out/buy-down and gas supply realignment costs
but were slightly offset by higher payroll-related costs. An increase
in natural gas production revenue, due to both higher volumes and
prices, also somewhat offset the decline in operating income.
Earnings for this business decreased due to the decline in
operating income and lower interest income, largely relating to the
previously described refund recovery.
Knife River -- Construction Materials and Mining Operations
Construction Materials Operations --
Construction materials operating income increased $423,000 due to
operating income from the Baldwin acquisition, as previously
discussed, partially offset by decreased operating income at other
construction materials operations. Lower revenues were the primary
factor contributing to the operating income decrease at the other
construction materials operations. Decreased aggregate and asphalt
sales and construction revenue, due to both delays in construction
starts and reduced demand from a year ago, offset in part by increased
aggregate and ready-mixed concrete prices, were the primary factors
contributing to lower revenues. Operation and maintenance expenses,
excluding those related to Baldwin, decreased principally as a result
of lower sales.
Coal Operations --
Operating income for the coal operations decreased $1.8 million
primarily due to decreased revenues, largely the result of lower sales
to the Big Stone Station due to the expiration of the coal contract
in August 1995 and the resulting closure of the Gascoyne Mine.
Decreased operation and maintenance expenses, depreciation expense and
taxes other than income, largely due to the mine closure, partially
offset the decline in operating income.
Consolidated --
Earnings decreased due primarily to the decline in coal operating
income and increased interest expense. Increased long-term debt due
to the acquisition of Hawaiian Cement and Baldwin 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), 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 primarily as a result of higher oil and natural gas
revenues. Higher oil revenue resulted from a $4.0 million increase
due to higher production and a $1.4 million increase due to higher
average prices. The increase in natural gas revenue was due to a $3.5
million increase resulting from higher production and a $3.2 million
increase arising from higher prices. Increased operation and
maintenance expenses 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, somewhat offset by increased interest expense and
higher income taxes. The increase in interest expense resulted from
higher average borrowings.
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.
In June 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, in December 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 June 1996, KRC Holdings, Inc. purchased the assets of Medford
Ready-Mix Concrete, Inc. (Medford) located in Medford, Oregon. The
newly acquired company serves the residential and small commercial
construction market with ready-mixed concrete and aggregates.
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.
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. On July 8, 1996, Montana-Dakota filed proposed
tariffs with the FERC in compliance with Order 888. Under the
proposed tariffs, which became effective on July 9, 1996, eligible
transmission service customers can choose to purchase transmission
services from a variety of options ranging from full use of the
transmission network on a firm long-term basis to a fully
interruptible service available on an hourly basis. The proposed
tariffs also include a full range of ancillary services necessary to
support the transmission of energy while maintaining reliable
operation of Montana-Dakota's transmission system. Montana-Dakota is
awaiting final approval on the proposed tariffs by the FERC.
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, $15 million of which was outstanding
at June 30, 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 June 1996, the
Company redeemed $25 million of its 9 1/8 Series first mortgage bonds,
due May 15, 2006. The funds required to retire the 9 1/8 Series first
mortgage bonds were provided 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 $11.3 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 June 30,
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. In May 1996, Williston Basin
privately placed $20 million of notes with the proceeds and cash on
hand used to repay the $27.5 million of intercompany debt payable to
the Company.
Knife River's capital needs for 1996 are estimated at $29.7
million, including those required for the acquisition of Baldwin and
Medford, 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, $3.5
million of which was outstanding at June 30, 1996, and a long-term
revolving credit agreement of $55 million, $47 million of which was
outstanding at June 30, 1996. It is anticipated that funds required
for future acquisitions will be met primarily through the issuance of
a combination of long-term debt and the Company's equity securities.
Fidelity Oil's 1996 capital needs related to its oil and natural
gas acquisition, development and exploration program are estimated at
$50 million. These capital needs are expected to be met through funds
generated from internal sources and long-term lines of credit
aggregating $35 million, $8.6 million of which was outstanding at
June 30, 1996.
Prairielands' 1996 capital needs are estimated at $1.3 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, $100,000 of which was outstanding at June 30, 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 June 30, 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 June 30,
1996, the Company could have issued approximately $240 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 June 30,
1996, and December 31, 1995, respectively. Additionally, the
Company's first mortgage bond interest coverage was 5.3 and 3.9 times
for the twelve months ended June 30, 1996, and December 31, 1995,
respectively. Stockholders' equity as a percent of total
capitalization was 57% at both June 30, 1996, and December 31, 1995.
PART II - OTHER INFORMATION
1. Legal Proceedings
See Notes 4 and 7 for a discussion regarding a complaint filed
and partial summary judgment order issued relating to an action
initiated by Unitek Environmental Services, Inc. against
Hawaiian Cement in the United States District Court for the
District of Hawaii.
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 August 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