UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 November 8, 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 Nine Months Ended September 30,
1996 and 1995
Consolidated Balance Sheets --
September 30, 1996 and 1995, and December 31, 1995
Consolidated Statements of Cash Flows --
Nine Months Ended September 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 Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
(In thousands, except per share amounts)
Operating revenues:
Electric $ 33,873 $ 34,780 $102,680 $100,290
Natural gas 31,752 28,083 120,925 119,129
Construction materials and mining 51,298 39,471 96,711 89,446
Oil and natural gas production 16,836 11,611 50,185 32,865
133,759 113,945 370,501 341,730
Operating expenses:
Fuel and purchased power 10,311 10,684 32,527 31,330
Purchased natural gas sold 3,670 5,088 31,013 36,119
Operation and maintenance 68,087 56,980 164,932 153,098
Depreciation, depletion and
amortization 15,374 13,609 46,045 39,768
Taxes, other than income 5,596 5,245 16,980 17,028
103,038 91,606 291,497 277,343
Operating income:
Electric 8,036 8,482 22,006 22,072
Natural gas distribution (2,670) (2,405) 4,525 2,355
Natural gas transmission 10,731 5,832 22,577 18,836
Construction materials and mining 8,805 7,332 12,530 12,404
Oil and natural gas production 5,819 3,098 17,366 8,720
30,721 22,339 79,004 64,387
Other income--net 1,787 1,095 4,828 3,228
Interest expense 7,708 6,089 21,447 18,095
Costs on natural gas repurchase
commitment (Note 5) 22,517 1,503 25,356 4,480
Income before income taxes 2,283 15,842 37,029 45,040
Income taxes (6,212) 5,370 6,799 15,634
Net income 8,495 10,472 30,230 29,406
Dividends on preferred stocks 196 197 591 594
Earnings on common stock $ 8,299 $10,275 $ 29,639 $ 28,812
Earnings per common share $ .29 $ .36 $ 1.04 $ 1.01
Dividends per common share $ .2775 $ .2725 $ .8225 $ .8058
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)
September 30, September 30, December 31,
1996 1995 1995
(In thousands)
ASSETS
Property, plant and equipment:
Electric $ 543,542 $ 530,633 $ 535,016
Natural gas distribution 163,925 163,658 161,080
Natural gas transmission 269,561 270,781 271,773
Construction materials and mining 174,224 151,408 151,751
Oil and natural gas production 207,443 180,045 167,542
1,358,695 1,296,525 1,287,162
Less accumulated depreciation,
depletion and amortization 609,137 586,488 570,855
749,558 710,037 716,307
Current assets:
Cash and cash equivalents 32,668 37,059 33,398
Receivables 54,175 44,535 61,961
Inventories 31,646 27,561 23,949
Deferred income taxes 24,560 28,611 31,663
Prepayments and other current assets 11,771 12,172 11,261
154,820 149,938 162,232
Natural gas available under
repurchase commitment 51,682 70,750 70,750
Investments 51,987 45,650 46,188
Deferred charges and other assets 56,894 60,283 61,002
$1,064,941 $1,036,658 $1,056,479
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock (Shares outstanding --
28,476,981, $3.33 par value at
September 30, 1996 and 1995, and
December 31, 1995) $ 94,828 $ 94,828 $ 94,828
Other paid in capital 64,305 64,305 64,305
Retained earnings 184,400 173,914 178,184
343,533 333,047 337,317
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 269,643 233,328 237,352
630,076 583,375 591,569
Commitments and contingencies --- --- ---
Current liabilities:
Short-term borrowings 2,865 1,335 600
Accounts payable 30,704 20,671 22,261
Taxes payable 6,788 12,872 13,566
Other accrued liabilities,
including reserved revenues 88,835 91,200 100,779
Dividends payable 8,099 7,958 7,958
Long-term debt and preferred
stock due within one year 5,837 18,080 17,087
143,128 152,116 162,251
Natural gas repurchase commitment 87,544 88,200 88,200
Deferred credits:
Deferred income taxes 112,893 116,466 118,459
Other 91,300 96,501 96,000
204,193 212,967 214,459
$1,064,941 $1,036,658 $1,056,479
The accompanying notes are an integral part of these consolidated
statements.
MDU RESOURCES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
1996 1995
(In thousands)
Operating activities:
Net income $30,230 $29,406
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation, depletion and amortization 46,045 39,768
Deferred income taxes and investment tax
credit--net 3,797 5,111
Recovery of deferred natural gas contract
litigation settlement costs, net of income taxes 4,793 5,939
Write-down of natural gas available under
repurchase commitment, net of
income taxes (Note 5) 11,364 ---
Changes in current assets and liabilities--
Receivables 7,786 10,874
Inventories (7,697) (471)
Other current assets 6,593 (1,802)
Accounts payable 8,443 449
Other current liabilities (18,581) 6,904
Other noncurrent changes 3,354 1,794
Net cash provided by operating activities 96,127 97,972
Financing activities:
Net change in short-term borrowings 2,265 655
Issuance of long-term debt 64,150 31,160
Repayment of long-term debt (43,149) (17,910)
Retirement of natural gas repurchase commitment (656) (204)
Dividends paid (24,014) (23,542)
Net cash used in financing activities (1,404) (9,841)
Investing activities:
Additions to property, plant and equipment
and acquisitions of businesses--
Electric (10,980) (12,748)
Natural gas distribution (4,692) (6,306)
Natural gas transmission (5,504) (6,833)
Construction materials and mining (23,288) (36,114)
Oil and natural gas production (45,705) (28,688)
(90,169) (90,689)
Sale of natural gas available under
repurchase commitment 515 163
Investments (5,799) 2,264
Net cash used in investing activities (95,453) (88,262)
Decrease in cash and cash equivalents (730) (131)
Cash and cash equivalents--beginning of year 33,398 37,190
Cash and cash equivalents--end of period $32,668 $37,059
The accompanying notes are an integral part of these consolidated statements.
MDU RESOURCES GROUP, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
September 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. Pending litigation
W. A. Moncrief --
In November 1993, the estate of W.A. Moncrief (Moncrief), a
producer from whom Williston Basin purchased a portion of its
natural gas supply, filed suit in Federal District Court for the
District of Wyoming (Federal District Court) against Williston
Basin and the Company disputing certain price and volume issues
under the contract.
Through the course of this action Moncrief submitted damage
calculations which totalled approximately $19 million or, under
its alternative pricing theory, approximately $39 million.
On August 16, 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, less 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 re-opened the record
until October 15, 1996, to receive additional briefs and
exhibits on this issue.
On October 15, 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,
is contending that Moncrief waived its claim for a favored-
nations price and Moncrief's damage claims have been calculated
utilizing non-comparable contracts. Williston Basin's exhibits
show Moncrief's damages should be limited to approximately
$800,000.
This matter is currently pending with the Federal District
Court. 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. On
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.
On September 12, 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 have
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. 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. 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.
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 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 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 recent natural
gas sales, wrote down the remaining balance of this gas to its
current value. The fair value of this gas was determined using
the sum of discounted cash flows of expected future sales
occurring at 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 amounts related to this write-down are included
in "Costs on natural gas repurchase commitment" in the
Consolidated Statements of Income. The recognition of the
current market value of this natural gas should allow Williston
Basin to market the remaining 42.9 MMdk on a sustained basis and
enable Williston Basin to liquidate this asset over
approximately the next five 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 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. Recently, the EPA and 17
PRPs entered into a consent decree under which the PRPs will pay
$562,000 to the United States for past and future government
response costs. Montana-Dakota's share of the settlement is
approximately $85,000.
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), and had sought damages for various claims (as
described above) of up to $20 million in the aggregate.
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.
On September 16, 1996, Unitek and Hawaiian Cement reached a
settlement which resolved all claims relating to the $20 million
in damages that Unitek had previously sought. However, the
settlement does not resolve the matter regarding the civil
penalties sought by Unitek relating to the alleged violations
by Hawaiian Cement of the Clean Air Act nor does it affect the
EPA's Notice of Violation (NOV) as discussed below. Based on
a joint petition filed by Unitek and Hawaiian Cement, the
District Court has stayed the proceeding and the issuance of an
injunction until January 14, 1997, while the parties negotiate
the remaining Clean Air Act claims.
On May 7, 1996, the EPA issued a 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. Depending upon the specific actions that may
ultimately be taken by either the EPA or the District Court,
Hawaiian Cement is likely to have to modify its operations at
its cement manufacturing facility. Hawaiian Cement has met with
the EPA and settlement discussions are currently ongoing.
Although no assurances can be provided, the Company does not
believe that the cost of any modifications to the facility, the
level of civil penalties which may ultimately be assessed or
settlement costs will have a material effect on the Company's
results of operations.
7. 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 reflected the effect of the
settlement in the third quarter of 1996 but no earnings effect
was realized since adequate reserves had been previously
provided.
8. Cash flow information
Cash expenditures for interest and income taxes were as
follows:
Nine Months Ended
September 30,
1996 1995
(In thousands)
Interest, net of amount capitalized $20,350 $19,773
Income taxes $23,611 $11,910
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The following table (in millions of dollars) summarizes the
contribution to consolidated earnings by each of the Company's
businesses.
Three Months Nine Months
Ended Ended
September 30, September 30,
Business 1996 1995 1996 1995
Electric $ 3.4 $ 3.9 $ 8.7 $ 9.1
Natural gas distribution (2.1) (2.0) 1.3 (.3)
Natural gas transmission (3.7) 1.7 (.2) 6.6
Construction materials and
mining 5.9 5.1 8.9 8.8
Oil and natural gas production 4.8 1.6 10.9 4.6
Earnings on common stock $ 8.3 $ 10.3 $ 29.6 $ 28.8
Earnings per common share $ .29 $ .36 $ 1.04 $ 1.01
Return on average common
equity for the 12 months
ended 12.2% 11.8%
Earnings for the quarter ended September 30, 1996, were down
$2.0 million from the comparable period a year ago due primarily to
the write-down to current market price of the natural gas available
under the repurchase commitment. The write-down, which
approximated $21.1 million, or $12.9 million after tax, was
significantly offset by the reversal of certain reserves for tax
and other contingencies at the natural gas transmission and oil and
natural gas production businesses, aggregating $7.4 million and
$1.8 million after tax, respectively. The net effect of these
items resulted in a $3.7 million, or 13 cents per common share, net
charge to earnings for the quarter. 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
decreased sales for resale revenue at the electric business, also
added to the earnings decline. Higher oil and natural gas prices
and increased production at the oil and natural gas production
businesses partially offset the earnings decline. Earnings from
Baldwin Contracting Company, Inc. (Baldwin) and a 50 percent
interest in Hawaiian Cement, construction materials businesses
acquired in April 1996, and September 1995, respectively, also
partially offset the decrease in earnings.
Earnings for the nine months ended September 30, 1996, were up
$827,000 from the corresponding 1995 period due to higher oil and
natural gas prices and increased production at the oil and natural
gas production businesses. Increased sales at the electric and
natural gas distribution businesses, primarily the result of 12
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
added to the increase in earnings. In addition, earnings from
Baldwin and the 50 percent interest in Hawaiian Cement contributed
to the earnings increase. The net effect of the write-down to
current market price of the natural gas available under the
repurchase commitment and the reversal of certain reserves for tax
and other contingencies, as previously described, partially offset
the earnings increase. Also somewhat offsetting the earnings
improvement was the nonrecurring effect of a favorable FERC order
received in April 1995, on a rehearing request relating to a 1989
general rate proceeding. The order allowed for the one-time
billing of customers for $2.3 million after tax, including
interest, to recover a portion of the amount previously refunded in
July 1994. In addition, increased purchased power demand charges
at the electric business and the effects of lower coal sales to the
Big Stone Station due to the expiration of the coal contract
partially 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 Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
Operating revenues:
Retail sales $ 31.9 $ 31.9 $ 95.2 $ 92.6
Sales for resale and other 2.0 2.9 7.5 7.7
33.9 34.8 102.7 100.3
Operating expenses:
Fuel and purchased power 10.3 10.7 32.5 31.3
Operation and maintenance 9.6 9.9 30.2 29.3
Depreciation, depletion and
amortization 4.3 4.0 12.8 12.2
Taxes, other than income 1.7 1.7 5.2 5.4
25.9 26.3 80.7 78.2
Operating income 8.0 8.5 22.0 22.1
Retail sales (kWh) 509.7 507.8 1,527.2 1,479.0
Sales for resale (kWh) 56.1 98.0 289.5 302.8
Average cost of fuel and
purchased power per kWh $ .017 $ .016 $ .017 $ .016
Montana-Dakota -- Natural Gas Distribution Operations
Three Months Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
Operating revenues:
Sales $ 14.0 $ 15.7 $101.0 $ 99.7
Transportation and other .7 .8 2.5 2.6
14.7 16.5 103.5 102.3
Operating expenses:
Purchased natural gas sold 7.5 9.2 68.1 69.3
Operation and maintenance 7.1 7.0 22.7 22.5
Depreciation, depletion and
amortization 1.7 1.7 5.2 5.0
Taxes, other than income 1.0 1.0 3.0 3.1
17.3 18.9 99.0 99.9
Operating income (loss) (2.6) (2.4) 4.5 2.4
Volumes (dk):
Sales 2.7 2.9 24.6 22.2
Transportation 1.8 2.1 6.2 7.6
Total throughput 4.5 5.0 30.8 29.8
Degree days (% of normal) 122.3% 132.2% 113.9% 102.1%
Average cost of natural gas,
including transportation,
per dk $ 2.78 $ 3.18 $ 2.76 $ 3.13
Williston Basin -- Natural Gas Transmission Operations
Three Months Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
Operating revenues:
Transportation $ 17.6* $ 12.2* $ 45.0* $ 41.9*
Storage 2.6 3.1 8.0 9.0
Natural gas production and
other 1.7 .9 5.0 3.5
21.9 16.2 58.0 54.4
Operating expenses:
Operation and maintenance 8.5* 7.7* 27.0* 27.3*
Depreciation, depletion and
amortization 1.6 1.8 5.1 5.3
Taxes, other than income 1.1 .9 3.3 3.0
11.2 10.4 35.4 35.6
Operating income 10.7 5.8 22.6 18.8
Volumes (dk):
Transportation--
Montana-Dakota 10.0 7.3 33.3 26.9
Other 8.0 9.7 24.6 25.1
18.0 17.0 57.9 52.0
Produced (Mdk) 1,514 1,192 4,390 3,656
______________________________
*Includes amortization and related
recovery of deferred natural gas
contract buy-out/buy-down and
gas supply realignment costs $ 2.4 $ 2.5 $ 7.7 $ 9.4
Knife River -- Construction Materials and Mining Operations**
Three Months Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
Operating revenues:
Construction materials $ 44.3 $ 30.0 $ 73.3 $ 57.6
Coal 7.0 9.4 23.4 31.8
51.3 39.4 96.7 89.4
Operating expenses:
Operation and maintenance 39.8 29.5 76.6 68.6
Depreciation, depletion and
amortization 1.9 1.6 5.1 4.8
Taxes, other than income .8 1.0 2.5 3.6
42.5 32.1 84.2 77.0
Operating income 8.8 7.3 12.5 12.4
Sales (000's):
Aggregates (tons) 1,510 1,166 2,511 2,245
Asphalt (tons) 344 179 509 317
Ready-mixed concrete
(cubic yards) 119 99 250 237
Coal (tons) 619 977 2,092 3,469
**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 Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
Operating revenues:
Oil $ 10.0 $ 7.2 $ 28.4 $ 20.2
Natural gas 6.8 4.4 21.8 12.7
16.8 11.6 50.2 32.9
Operating expenses:
Operation and maintenance 4.1 3.4 11.9 9.8
Depreciation, depletion and
amortization 5.8 4.5 17.9 12.4
Taxes, other than income 1.1 .6 3.0 2.0
11.0 8.5 32.8 24.2
Operating income 5.8 3.1 17.4 8.7
Production (000's):
Oil (barrels) 540 472 1,610 1,307
Natural gas (Mcf) 3,426 3,088 10,582 8,566
Average sales price:
Oil (per barrel) $18.33 $14.99 $17.43 $15.19
Natural gas (per Mcf) 1.98 1.43 2.06 1.48
Amounts presented in the above tables for natural gas operating
revenues, purchased natural gas sold and operation and maintenance
expenses will not agree with the Consolidated Statements of Income due
to the elimination of intercompany transactions between Montana-
Dakota's natural gas distribution business and Williston Basin's
natural gas transmission business.
Three Months Ended September 30, 1996 and 1995
Montana-Dakota -- Electric Operations
Operating income at the electric business decreased primarily due
to decreased sales for resale revenue, largely resulting from lower
volumes caused by weak market conditions, primarily weather, and line
capacity restrictions within the regional power pool. Increased
depreciation expense due to an increase in average depreciable plant
further decreased operating income. Decreased fuel and purchased
power costs, largely resulting from lower sales for resale volumes as
previously described, partially offset by higher purchased power
demand charges, somewhat offset the operating income decline. 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 1996 which brings the total level of
capacity available under this contract to 66 megawatts. Decreased
operation expenses, primarily the timing of payroll-related costs,
also somewhat offset the decrease in operating income.
Earnings for the electric business declined largely due to the
operating income decrease.
Montana-Dakota -- Natural Gas Distribution Operations
Operating income at the natural gas distribution business decreased
slightly due to a decline in sales revenue, resulting primarily from
the pass-through of lower average natural gas costs and reduced sales.
The effects of a general rate increase placed into effect in Montana
in May 1996, partially offset the revenue decline. Lower volumes
transported, largely due to the closing of an agricultural processing
facility, also contributed to the decrease in operating income.
Natural gas distribution earnings decreased due to the operating
income decline.
Williston Basin -- Natural Gas Transmission Operations
Natural gas transmission operating income improved primarily due
to higher transportation revenues resulting from the reversal of
certain reserves for regulatory contingencies of $4.2 million ($2.6
million after tax) and the benefits of a favorable rate change
implemented in January 1996. An increase in natural gas production
revenue, due to both higher volumes and higher average realized rates,
also added to the increase in operating income. Decreased storage
revenues, due to the implementation of lower rates in January 1996,
and increased operation and maintenance expenses, primarily payroll-
related costs, partially offset the operating income improvement.
Earnings for this business decreased primarily due to the write-
down to current market price of the natural gas available under the
repurchase commitment. The effect of the write-down, which was $21.1
million, or $12.9 million after tax, was significantly reduced by the
reversal of certain income tax reserves aggregating $4.8 million. The
earnings decrease was partially offset by the improvement in operating
income.
Knife River -- Construction Materials and Mining Operations
Construction Materials Operations --
Construction materials operating income increased $2.6 million
primarily due to higher revenues. The revenue improvement is largely
due to revenues realized as a result of the acquisition of Baldwin
(aggregates, asphalt and construction services) in April 1996 and
Medford Ready Mix, Inc. (Medford) (ready-mixed concrete) in June 1996.
Revenues at other construction materials operations decreased as a
result of lower cement and asphalt sales, due to the type of work
being performed this year compared to a year ago, offset in part by
increased construction services revenue. Operation and maintenance
expenses increased due to the above acquisitions but were somewhat
offset by a reduction at other construction materials operations
resulting from lower volumes sold and changes in sales mix within
product lines.
Coal Operations --
Operating income for the coal operations decreased $1.1 million
primarily due to decreased coal revenues, a 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 sales from the
Beulah Mine, the result of reduced demand by electric generating
station customers, also contributed to the decline in coal revenues.
Higher average sales prices, due to price increases at the Beulah
Mine, partially offset the decreased coal revenues. Lower operation
and maintenance expenses and taxes other than income, both due
primarily to the mine closure, partially offset the decline in
operating income. Higher stripping costs at the Beulah Mine somewhat
offset the decline in operation and maintenance expenses.
Consolidated --
Earnings increased due primarily to the increase in construction
materials operating income and income from the 50 percent interest in
Hawaiian Cement (included in Other income--net) acquired in September
1995. Lower coal operating income and higher interest expense, a
result of increased long-term debt due to the acquisition of Hawaiian
Cement, Baldwin and Medford, partially offset the earnings increase.
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 $1.6 million increase due to higher
average prices and a $1.2 million increase due to increased
production. The increase in natural gas revenue was due to a $1.7
million increase resulting from higher average prices and a $670,000
increase arising from higher production. Increased operation and
maintenance expenses, depreciation, depletion and amortization expense
and taxes other than income, all largely due to higher production
levels, partially offset the operating income improvement.
Earnings for this business unit increased due to the operating
income improvement and decreased income taxes. The decrease in income
taxes resulted from the reversal of certain tax reserves aggregating
$1.8 million.
Nine Months Ended September 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, primarily
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.
Higher operation expenses, primarily increased payroll-related costs,
and higher depreciation expense, due to an increase in average
depreciable plant, also contributed to the operating income decline.
Increased retail sales to residential and commercial customers, due
primarily to higher weather-related demand in the first quarter,
largely 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 at the natural gas distribution business improved
largely as a result of increased sales revenue. The sales revenue
improvement resulted primarily from a 1.9 million decatherm increase
in volumes sold due to 12% colder weather and increased sales
resulting from the addition of nearly 3,600 customers. Also
contributing to the sales revenue improvement were the effects of a
general rate increase placed into effect in Montana in May 1996.
However, the pass-through of lower average natural gas costs partially
offset the sales revenue improvement. The effects of lower volumes
transported, primarily to large industrial customers, were somewhat
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 increased
primarily due to an increase in transportation revenues resulting from
the reversal of certain reserves for regulatory contingencies as
previously described in the three months discussion and the benefits
derived from a favorable rate change implemented in January 1996.
Increased volumes transported to both off-system markets and to
storage also added to the revenue improvement. The benefits of a
favorable FERC order received in April 1995, on a rehearing request
relating to a 1989 general rate proceeding partially offset the
transportation revenue improvement. The order allowed for the one-
time billing of customers for approximately $2.7 million ($1.7 million
after tax) to recover a portion of the amount previously refunded in
July 1994. In addition, reduced recovery of deferred natural gas
contract buy-out/buy-down and gas supply realignment costs partially
offset the increase in transportation revenue. An increase in natural
gas production revenue, due to both higher volumes and prices, also
contributed to the operating income improvement. Decreased storage
revenues due to the implementation of lower rates in January 1996,
partially offset the increase in operating income. Operation and
maintenance expenses decreased primarily due to reduced amortization
of deferred natural gas contract buy-out/buy-down costs but were
slightly offset by higher payroll-related costs.
Earnings for this business decreased due to the write-down to
current market price of the natural gas available under the repurchase
commitment as previously described in the three months discussion and
lower interest income. The decrease in interest income was largely
related to $952,000 ($583,000 after tax) of interest on the previously
discussed 1995 refund recovery. The earnings decrease was largely
offset by the reversal of certain income tax reserves as previously
discussed in the three months section and the increase in operating
income.
Knife River -- Construction Materials and Mining Operations
Construction Materials Operations --
Construction materials operating income increased $3.0 million due
to higher revenues. The revenue improvement is largely due to
revenues realized as a result of the Baldwin and Medford acquisitions.
Revenues at other construction materials operations decreased as a
result of lower aggregate and asphalt sales, due to lower demand,
offset in part by increased cement and ready-mixed concrete prices.
Operation and maintenance expenses increased due to the above
acquisitions but were somewhat offset by a reduction at other
construction materials operations resulting from lower volumes sold
and less work involving the use of subcontractors.
Coal Operations --
Operating income for the coal operations decreased $2.9 million
primarily due to decreased revenues, largely the result of lower sales
to the Big Stone Station as previously described in the three months
discussion. Higher average sales prices due to price increases at the
Beulah mine, partially offset the decreased coal revenues. 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 increased due to the increase in construction materials
operating income and income from the 50 percent interest in Hawaiian
Cement (included in Other income--net). Increased interest expense,
resulting from increased long-term debt due to the acquisition of
Hawaiian Cement, Baldwin and Medford, and the decline in coal
operating income largely offset the increase 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 $5.3 million increase
due to higher production and a $2.9 million increase due to higher
average prices. The increase in natural gas revenue was due to a $4.9
million increase arising from higher prices and a $4.2 million
increase resulting from higher production. Increased operation and
maintenance expenses, depreciation, depletion and amortization expense
and taxes other than income, all largely due to higher production,
partially offset the operating income improvement.
Earnings for this business unit increased due to the operating
income improvement and lower income taxes due to the reversal of
certain tax reserves, as previously described in the three months
discussion. Increased interest expense, resulting from higher average
borrowings, somewhat offset the earning 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.
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.
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 FERC approved MAPP's restated agreement,
excluding MAPP's market-based rate proposal, effective November 1,
1996. The FERC has requested additional information from the MAPP on
its market-based rate proposal before it will take further action.
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, $22.5 million of which was outstanding
at September 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 $10.6 million
for construction costs and $7.5 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 September 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. In addition, on November 1, 1996, Williston Basin
privately placed $15 million of notes with the proceeds used to
replace other maturing long-term debt.
Knife River's capital needs for 1996 are estimated at $25.3
million, including those required for the acquisition of Baldwin and
Medford. It is anticipated that these capital needs will be met
through funds generated from internal sources, short-term lines of
credit aggregating $11 million, $2.5 million of which was outstanding
at September 30, 1996, a revolving credit agreement of $55 million,
$47 million of which was outstanding at September 30, 1996 and through
the issuance of long-term debt, the amount and timing of which will
depend on Knife River's needs, internal cash generation and market
conditions. On August 28, 1996, amounts available under the short-
term lines of credit were increased from $8 million to $11 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 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 credit facilities
aggregating $35 million, $23.2 million of which was outstanding at
September 30, 1996.
Prairielands' 1996 capital needs are estimated at $1.2 million for
construction costs and $461,000 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, $360,000 of which was outstanding at September 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 September 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
September 30, 1996, the Company could have issued approximately $238
million of additional first mortgage bonds.
The Company's coverage of fixed charges including preferred
dividends was 2.6 and 3.0 times for the twelve months ended September
30, 1996, and December 31, 1995, respectively. Additionally, the
Company's first mortgage bond interest coverage was 5.2 and 3.9 times
for the twelve months ended September 30, 1996, and December 31, 1995,
respectively. Stockholders' equity as a percent of total
capitalization was 54% and 57% at both September 30, 1996, and
December 31, 1995, respectively.
PART II - OTHER INFORMATION
6. Exhibits and Reports on Form 8-K
a) Exhibits
(27) Financial Data Schedule
b) Reports on Form 8-K
Form 8-K was filed on October 2, 1996. Under Item 5--Other
Events, it was reported that third quarter earnings would
include a write-down to current market price of the natural
gas available under a repurchase commitment and the reversal
of certain reserves for tax and other contingencies. The
net effect of these items resulted in a $3.7 million or
13 cents per common share net charge to third quarter
earnings.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
MDU RESOURCES GROUP, INC.
DATE November 12, 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