UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____________ to ______________
Commission file number 1-3480
MDU Resources Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 41-0423660
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Schuchart Building
918 East Divide Avenue
P.O. Box 5650
Bismarck, North Dakota 58506-5650
(Address of principal executive offices)
(Zip Code)
(701) 222-7900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No.
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of May 8, 1998: 34,246,615
shares.
INTRODUCTION
This Form 10-Q contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements should be read with the cautionary
statements and important factors included in this Form 10-Q at Item
2 -- "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Safe Harbor for Forward-Looking
Statements." Forward-looking statements are all statements other
than statements of historical fact, including without limitation,
those statements that are identified by the words "anticipates,"
"estimates," "expects," "intends," "plans," "predicts" and similar
expressions.
MDU Resources Group, Inc. (Company) is a diversified natural
resource company which was incorporated under the laws of the State
of Delaware in 1924. Its principal executive offices are at the
Schuchart Building, 918 East Divide Avenue, P.O. Box 5650,
Bismarck, North Dakota 58506-5650, telephone (701) 222-7900.
Montana-Dakota Utilities Co. (Montana-Dakota), the public
utility division of the Company, provides electric and/or natural
gas and propane distribution service at retail to 256 communities
in North Dakota, eastern Montana, northern and western South Dakota
and northern Wyoming, and owns and operates electric power
generation and transmission facilities.
The Company, through its wholly owned subsidiary, Centennial
Energy Holdings, Inc. (Centennial), owns Williston Basin Interstate
Pipeline Company (Williston Basin), Knife River Corporation (Knife
River), the Fidelity Oil Group (Fidelity Oil) and Utility Services,
Inc. (Utility Services).
Williston Basin produces natural gas and provides
underground storage, transportation and gathering
services through an interstate pipeline system
serving Montana, North Dakota, South Dakota and
Wyoming and, through its wholly owned subsidiary,
Prairielands Energy Marketing, Inc. (Prairielands),
seeks new energy markets while continuing to expand
present markets for natural gas and propane.
Knife River, through its wholly owned subsidiary, KRC
Holdings, Inc. (KRC Holdings) and its subsidiaries,
surface mines and markets aggregates and related
construction materials in Alaska, California, Hawaii
and Oregon. In addition, Knife River surface mines
and markets low sulfur lignite coal at mines located
in Montana and North Dakota.
Fidelity Oil is comprised of Fidelity Oil Co. and
Fidelity Oil Holdings, Inc., which own oil and
natural gas interests throughout the United States,
the Gulf of Mexico and Canada through investments
with several oil and natural gas producers.
Utility Services, through its wholly owned
subsidiaries, installs and repairs electric
transmission and distribution power lines in the
western United States and Hawaii and provides
related supplies and equipment.
INDEX
Part I -- Financial Information
Consolidated Statements of Income --
Three Months Ended March 31, 1998 and 1997
Consolidated Balance Sheets --
March 31, 1998 and 1997, and December 31, 1997
Consolidated Statements of Cash Flows --
Three Months Ended March 31, 1998 and 1997
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II -- Other Information
Signatures
Exhibit Index
Exhibits
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MDU RESOURCES GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
1998 1997
(In thousands, except
per share amounts)
Operating revenues:
Electric $ 44,740 $ 37,273
Natural gas 73,543 60,062
Construction materials and mining 38,961 23,003
Oil and natural gas production 12,878 19,473
170,122 139,811
Operating expenses:
Fuel and purchased power 11,833 12,179
Purchased natural gas sold 32,175 21,027
Operation and maintenance 69,723 53,793
Depreciation, depletion and amortization 17,789 15,669
Taxes, other than income 6,393 6,387
137,913 109,055
Operating income:
Electric 8,448 8,448
Natural gas distribution 6,793 7,097
Natural gas transmission 12,895 7,414
Construction materials and mining 1,158 (689)
Oil and natural gas production 2,915 8,486
32,209 30,756
Other income -- net 2,602 (452)
Interest expense 7,135 7,093
Income before income taxes 27,676 23,211
Income taxes 9,883 8,614
Net income 17,793 14,597
Dividends on preferred stocks 194 196
Earnings on common stock $ 17,599 $ 14,401
Earnings per common share -- basic $ .58 $ .50
Earnings per common share -- diluted $ .58 $ .50
Dividends per common share $ .2875 $ .2775
Average common shares outstanding -- basic 30,250 28,596
Average common share outstanding -- diluted 30,420 28,679
The accompanying notes are an integral part of these consolidated statements.
MDU RESOURCES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
March 31, March 31, December 31,
1998 1997 1997
(Unaudited) (Unaudited)
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 50,857 $ 44,541 $ 28,174
Receivables 89,131 61,212 80,585
Inventories 34,549 22,048 41,322
Deferred income taxes 17,896 23,825 17,356
Prepayments and other current assets 18,896 27,008 12,479
211,329 178,634 179,916
Investments 18,131 53,495 18,935
Property, plant and equipment:
Electric 567,416 548,829 566,247
Natural gas distribution 173,468 166,705 172,086
Natural gas transmission 289,781 280,603 288,709
Construction materials and mining 414,520 177,043 243,110
Oil and natural gas production 250,341 218,647 240,193
1,695,526 1,391,827 1,510,345
Less accumulated depreciation,
depletion and amortization 686,642 633,829 670,809
1,008,884 757,998 839,536
Deferred charges and other assets 72,933 72,613 75,505
$1,311,277 $1,062,740 $1,113,892
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 1,625 $ 1,435 $ 3,347
Long-term debt and preferred
stock due within one year 10,436 11,854 7,902
Accounts payable 31,128 25,677 31,571
Taxes payable 16,508 12,221 9,057
Dividends payable 9,633 8,133 8,574
Other accrued liabilities,
including reserved revenues 79,701 102,222 88,563
149,031 161,542 149,014
Long-term debt 338,073 261,287 298,561
Deferred credits and other liabilities:
Deferred income taxes 178,899 118,593 119,747
Other liabilities 140,664 144,465 143,574
319,563 263,058 263,321
Commitments and contingencies
Stockholders' equity:
Preferred stock subject to mandatory
redemption requirements 1,700 1,800 1,700
Preferred stock redeemable at option
of the Company 15,000 15,000 15,000
16,700 16,800 16,700
Common stockholders' equity:
Common stock (Shares outstanding --
32,832,002, $3.33 par value at
March 31, 1998, 29,143,332, $3.33 par
value at December 31, 1997 and
28,606,128, $3.33 par value at
March 31, 1997) 109,862 95,258 97,047
Other paid-in capital 160,792 66,790 76,526
Retained earnings 220,882 198,005 212,723
Treasury stock at cost (159,681 shares) (3,626) --- ---
Total common stockholders' equity 487,910 360,053 386,296
Total stockholders' equity 504,610 376,853 402,996
$1,311,277 $1,062,740 $1,113,892
The accompanying notes are an integral part of these consolidated statements.
MDU RESOURCES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
1998 1997
(In thousands)
Operating activities:
Net income $ 17,793 $ 14,597
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion and amortization 17,789 15,669
Deferred income taxes and investment tax credit -- net 1,889 3,135
Recovery of deferred natural gas contract litigation
settlement costs, net of income taxes --- 1,559
Changes in current assets and liabilities --
Receivables 7,785 11,975
Inventories 10,577 5,313
Other current assets (3,295) (10,713)
Accounts payable (3,368) (5,903)
Other current liabilities (7,564) 15,181
Other noncurrent changes (4,387) 2,755
Net cash provided by operating activities 37,219 53,568
Financing activities:
Net change in short-term borrowings (7,722) (2,515)
Issuance of long-term debt 37,301 3,000
Repayment of long-term debt (6,670) (22,382)
Issuance of common stock --- 2,916
Retirement of natural gas repurchase commitment (4,786) (27,332)
Dividends paid (9,634) (8,134)
Net cash provided by (used in) financing activities 8,489 (54,447)
Investing activities:
Capital expenditures including acquisitions of businesses --
Electric (2,779) (2,861)
Natural gas distribution (1,617) (2,236)
Natural gas transmission (1,117) (1,506)
Construction materials and mining (11,054) (4,944)
Oil and natural gas production (10,935) (8,184)
(27,502) (19,731)
Net proceeds from sale or disposition of property 946 2,504
Net capital expenditures (26,556) (17,227)
Sale of natural gas available under repurchase commitment 2,727 14,842
Investments 804 6
Net cash used in investing activities (23,025) (2,379)
Increase (decrease) in cash and cash equivalents 22,683 (3,258)
Cash and cash equivalents -- beginning of year 28,174 47,799
Cash and cash equivalents -- end of period $ 50,857 $ 44,541
The accompanying notes are an integral part of these consolidated statements.
MDU RESOURCES GROUP, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1998 and 1997
(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, 1997
(1997 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 1997 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. Reclassifications
Certain reclassifications have been made in the financial
statements for the prior period to conform to the current
presentation. Such reclassifications had no effect on net income
or common stockholders' equity as previously reported.
3. 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.
4. Accounting change
On January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS No. 130). SFAS No. 130 provides authoritative
guidance on the reporting and display of comprehensive income
and its components. For the period ended March 31, 1998
comprehensive income equaled net income as reported.
5. 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 totaled approximately $19 million or, under its
alternative pricing theory, approximately $39 million.
In June 1997, the Federal District Court issued its order
awarding Moncrief damages of approximately $15.6 million. In July
1997, the Federal District Court issued an order limiting
Moncrief's reimbursable costs to post-judgment interest, instead of
both pre- and post-judgment interest as Moncrief had sought. In
August 1997, Moncrief filed a notice of appeal with the United
States Court of Appeals for the Tenth Circuit related to the
Federal District Court's orders. In September 1997, Williston
Basin and the Company filed a notice of cross-appeal.
Williston Basin believes that it is entitled to recover
from ratepayers virtually all of the costs ultimately incurred as
a result of these orders as gas supply realignment transition costs
pursuant to the provisions of the Federal Energy Regulatory
Commission's (FERC) Order 636. However, the amount of costs that
can ultimately be recovered is subject to approval by the FERC and
market conditions.
Apache Corporation/Snyder Oil Corporation --
In December 1993, Apache Corporation (Apache) and Snyder
Oil Corporation (Snyder) filed suit in North Dakota Northwest
Judicial District Court (North Dakota District Court), against
Williston Basin and the Company. Apache and Snyder are oil and
natural gas producers which had processing agreements with Koch
Hydrocarbon Company (Koch). Williston Basin and the Company had a
natural gas purchase contract with Koch. Apache and Snyder have
alleged they are entitled to damages for the breach of Williston
Basin's and the Company's contract with Koch. Williston Basin and
the Company believe that if Apache and Snyder have any legal
claims, such claims are with Koch, not with Williston Basin or the
Company as Williston Basin, the Company and Koch have settled their
disputes. Apache and Snyder have recently provided alleged damages
under differing theories ranging up to $4.8 million without
interest. A motion to intervene in the case by several other
producers, all of which had contracts with Koch but not with
Williston Basin, was denied in December 1996. The trial before the
North Dakota District Court was completed in November 1997.
Williston Basin and the Company are awaiting a decision from the
North Dakota District Court.
In a related matter, in March 1997, a suit was filed by
nine other producers, several of which had unsuccessfully tried to
intervene in the Apache and Snyder litigation, against Koch,
Williston Basin and the Company. The parties to this suit are
making claims similar to those in the Apache and Snyder litigation,
although no specific damages have been specified.
In Williston Basin's opinion, the claims of Apache and
Snyder are without merit and overstated and the claims of the nine
other producers are without merit. If any amounts are ultimately
found to be due, Williston Basin plans to file with the FERC for
recovery from ratepayers.
Coal Supply Agreement --
In November 1995, a suit was filed in District Court,
County of Burleigh, State of North Dakota (State District Court) by
Minnkota Power Cooperative, Inc., Otter Tail Power Company,
Northwestern Public Service Company and Northern Municipal Power
Agency (Co-owners), the owners of an aggregate 75 percent interest
in the Coyote electrical generating station (Coyote Station),
against the Company (an owner of a 25 percent interest in the
Coyote Station) and Knife River. In its complaint, the Co-owners
have alleged a breach of contract against Knife River of the long-
term coal supply agreement (Agreement) between the owners of the
Coyote Station and Knife River. The Co-owners have requested a
determination by the State District Court of the pricing mechanism
to be applied to the Agreement and have further requested damages
during the term of such alleged breach on the difference between
the prices charged by Knife River and the prices that may
ultimately be determined by the State District Court. The Co-owners
also alleged a breach of fiduciary duties by the Company as
operating agent of the Coyote Station, asserting essentially that
the Company was unable to cause Knife River to reduce its coal
price sufficiently under the Agreement, and the Co-owners are
seeking damages in an unspecified amount. In January 1996, the
Company and Knife River filed separate motions with the State
District Court to dismiss or stay, pending arbitration. In
May 1996, the State District Court granted the Company's and Knife
River's motions and stayed the suit filed by the Co-owners pending
arbitration, as provided for in the Agreement.
In September 1996, the Co-owners notified the Company and
Knife River of their demand for arbitration of the pricing dispute
that had arisen under the Agreement. The demand for arbitration,
filed with the American Arbitration Association (AAA), did not make
any direct claim against the Company in its capacity as operator of
the Coyote Station. The Co-owners requested that the arbitrators
make a determination that the pricing dispute is not a proper
subject for arbitration. By an April 1997 order, the arbitration
panel concluded that the claims raised by the Co-owners are
arbitrable. The Co-owners have requested the arbitrators to make
a determination that the prices charged by Knife River were
excessive and that the Co-owners should be awarded damages, based
upon the difference between the prices that Knife River charged and
a "fair and equitable" price, of approximately $50 million or more.
Upon application by the Company and Knife River, the AAA
administratively determined that the Company was not a proper party
defendant to the arbitration, and the arbitration is proceeding
against Knife River. By letter dated May 14, 1997, Knife River
requested permission to move for summary judgment which permission
was granted by the arbitration panel over objections of the Co-owners.
Knife River filed its summary judgment motion in July 1997,
which motion was denied in October 1997. Although unable to
predict the outcome of the arbitration, Knife River and the Company
believe that the Co-owners' claims are without merit and intend to
vigorously defend the prices charged pursuant to the Agreement.
6. Regulatory matters and revenues subject to refund
Williston Basin had pending with the FERC a general natural
gas rate change application implemented in 1992. In October 1997,
Williston Basin appealed to the U.S. Court of Appeals for the D.C.
Circuit (D.C. Circuit Court) certain issues decided by the FERC in
prior orders concerning the 1992 proceeding. In December 1997, the
FERC issued an order accepting, subject to certain conditions,
Williston Basin's July 1997 compliance filing. In December 1997,
Williston Basin submitted a compliance filing pursuant to the
FERC's December 1997 order and refunded $33.8 million to its
customers, including $30.8 million to Montana-Dakota, in addition
to the $6.1 million interim refund that it had previously made in
November 1996. All such amounts had been previously reserved. On
March 25, 1998, the FERC issued an order accepting Williston
Basin's December 1997 compliance filing.
Reserves have been provided for a portion of the revenues
that have been collected subject to refund with respect to pending
regulatory proceedings and 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.
7. 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 1997 Annual
Report. As a part of the corporate realignment effected January 1,
1985, the Company agreed, pursuant to the settlement approved by
the FERC, to remove from rates the financing costs associated with
this natural gas.
The FERC has issued orders that have held that storage
costs should be allocated to this gas, prospectively beginning
May 1992, as opposed to being included in rates applicable to
Williston Basin's customers. These storage costs, as initially
allocated to the Frontier gas, approximated $2.1 million annually,
for which Williston Basin has provided reserves. Williston Basin
appealed these orders to the D.C. Circuit Court which in December
1996 issued its order ruling that the FERC's actions in allocating
costs to the Frontier gas were appropriate. Williston Basin is
awaiting a final order from the FERC as to the appropriate costs to
be allocated.
8. 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.
9. Cash Flow Information
Cash expenditures for interest and income taxes were as
follows:
Three Months Ended
March 31,
1998 1997
(In thousands)
Interest, net of amount capitalized $ 3,033 $ 3,918
Income taxes $ 437 $ 429
The Company's Consolidated Statements of Cash Flows include
the effects from acquisitions.
10. Derivatives
The Company, in connection with the operations of Williston
Basin and Fidelity Oil, has entered into certain price swap and
collar agreements (hedge agreements) to manage a portion of the
market risk associated with fluctuations in the price of oil and
natural gas. These hedge agreements are not held for trading
purposes. The hedge agreements call for the Company to receive
monthly payments from or make payments to counterparties based upon
the difference between a fixed and a variable price as specified by
the hedge agreements. The variable price is either an oil price
quoted on the New York Mercantile Exchange (NYMEX) or a quoted
natural gas price on the NYMEX or Colorado Interstate Gas Index.
The Company believes that there is a high degree of correlation
because the timing of purchases and production and the hedge
agreements are closely matched, and hedge prices are established in
the areas of the Company's operations. Amounts payable or
receivable on hedge agreements are matched and reported in operating
revenues on the Consolidated Statements of Income as a component of
the related commodity transaction at the time of settlement with the
counterparty. The amounts payable or receivable are offset by
corresponding increases and decreases in the value of the underlying
commodity transactions.
Knife River has entered into an interest rate swap
agreement to manage a portion of their interest rate exposure on
long-term debt. This interest rate swap agreement is not held for
trading purposes. The interest rate swap agreement calls for the
Company to receive quarterly payments from or make payments to
counterparties based upon the difference between fixed and variable
rates as specified by the interest rate swap agreement. The
variable prices are based on the three-month floating London
Interbank Offered Rate. Settlement amounts payable or receivable
under this interest rate swap agreement are recorded in "Interest
expense" on the Consolidated Statements of Income in the accounting
period they are incurred. The amounts payable or receivable are
offset by interest on the related debt instrument.
The Company's policy prohibits the use of derivative
instruments for trading purposes and the Company has procedures
in place to monitor their use. The Company is exposed to credit-related
losses in the event of nonperformance by counterparties to
these financial instruments, but does not expect any counterparties
to fail to meet their obligations given their existing credit
ratings.
The following table summarizes the Company's hedging
activity (notional amounts in thousands):
Three Months Ended
March 31,
1998 1997
Oil swap/collar agreements:*
Range of fixed prices per barrel $20.92 $19.78-$21.36
Notional amount (in barrels) 54 180
Natural gas swap/collar agreements:*
Range of fixed prices per MMBtu $2.10-$2.67 $1.40-$2.25
Notional amount (in MMBtu's) 1,620 2,682
Interest rate swap agreements:**
Range of fixed interest rates 5.50%-6.50% 5.50%-6.50%
Notional amount (in dollars) $10,000 $30,000
* Receive fixed -- pay variable
** Receive variable -- pay fixed
The following table summarizes swap agreements outstanding
at March 31, 1998 (notional amounts in thousands):
Notional
Fixed Price Amount
Year (Per barrel) (In barrels)
Oil swap agreement* 1998 $20.92 165
Range of Notional
Fixed Prices Amount
Year (Per MMBtu) (In MMBtu's)
Natural gas swap/collar
agreements* 1998 $1.54-$2.67 4,462
Notional
Range of Fixed Amount
Year Interest Rates (In dollars)
Interest rate swap
agreement** 1998 5.50%-6.50% $10,000
* Receive fixed -- pay variable
** Receive variable -- pay fixed
The fair value of these derivative financial instruments
reflects the estimated amounts that the Company would receive or pay
to terminate the contracts at the reporting date, thereby taking
into account the current favorable or unfavorable position on open
contracts. The favorable or unfavorable position is currently not
recorded on the Company's financial statements. Favorable and
unfavorable positions related to oil and natural gas hedge
agreements will be offset by corresponding increases and decreases
in the value of the underlying commodity transactions. A favorable
or unfavorable position on the interest rate swap agreement will be
offset by interest on the related debt instrument. The Company's
net unfavorable position on all swap and collar agreements
outstanding at March 31, 1998, was $710,000. In the event a hedge
agreement does not qualify for hedge accounting or when the
underlying commodity transaction or related debt instrument matures,
is sold, is extinguished, or is terminated, the current favorable
or unfavorable position on the open contract would be included in
results of operations. The Company's policy requires approval to
terminate a hedge agreement prior to its original maturity. In the
event a hedge agreement is terminated, the realized gain or loss at
the time of termination would be deferred until the underlying
commodity transaction or related debt instrument is sold or matures
and would be offset by corresponding increases or decreases in the
value of the underlying commodity transaction or interest on the
related debt instrument.
11. Acquisitions
On March 5, 1998, the Company acquired Morse Bros., Inc.
(MBI), and S2 - F Corp. (S2-F), privately-held construction
materials companies located in Oregon's Willamette Valley. The
purchase consideration for such companies consisted of approximately
$96 million of the Company's common stock and cash, the assumption
of certain liabilities and an adjustment based on working capital.
The Company issued 3,688,670 shares of common stock, excluding
159,681 shares of treasury stock acquired, which was unregistered
and is subject to certain restrictions in exchange for all of the
issued and outstanding stock of MBI and S2-F. The acquisition was
accounted for under the purchase method of accounting. Under this
method, the consideration for the stock of MBI and S2-F was
allocated to the underlying assets acquired and liabilities assumed,
based on their estimated fair market values.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For purposes of segment financial reporting and discussion of
results of operations, Electric includes the electric operations of
Montana-Dakota, as well as the operations of Utility Services.
Natural Gas Distribution includes Montana-Dakota's natural gas
distribution operations. Natural Gas Transmission includes
Williston Basin's storage, transportation, gathering and natural
gas production operations, and the energy marketing operations of
its subsidiary, Prairielands. Construction Materials and Mining
includes the results of Knife River's operations, while Oil and
Natural Gas Production includes the operations of Fidelity Oil.
Overview
The following table (in millions of dollars) summarizes the
contribution to consolidated earnings by each of the Company's
businesses.
Three Months
Ended
March 31,
Business 1998 1997
Electric $ 3.6 $ 3.4
Natural gas distribution 3.6 3.8
Natural gas transmission 8.1 2.5
Construction materials and mining .3 (.2)
Oil and natural gas production 2.0 4.9
Earnings on common stock $17.6 $14.4
Earnings per common share -- basic $ .58 $ .50
Earnings per common share -- diluted $ .58 $ .50
Return on average common equity for the
12 months ended 14.8% 13.2%
Three Months Ended March 31, 1998 and 1997
Consolidated earnings for the quarter ended March 31, 1998,
were up $3.2 million from the comparable period a year ago. The
improvement is attributable to increased earnings from the natural
gas transmission, construction materials and mining and electric
businesses, partially offset by a decrease in oil and natural gas
production and natural gas distribution earnings.
________________________________
Reference should be made to Notes to Consolidated Financial
Statements for information pertinent to various commitments and
contingencies.
Financial and operating data
The following tables (in millions, where applicable) are key
financial and operating statistics for each of the Company's
business units. Certain reclassifications have been made in the
following statistics for the prior period to conform to the current
presentation. Such reclassifications had no effect on net income
or common stockholders' equity as previously reported.
Electric Operations
Three Months
Ended
March 31,
1998* 1997
Operating revenues:
Retail sales $ 33.0 $ 34.2
Sales for resale and other 3.3 3.1
Utility services 8.4 ---
44.7 37.3
Operating expenses:
Fuel and purchased power 11.8 12.2
Operation and maintenance 17.6 10.4
Depreciation, depletion and amortization 4.7 4.4
Taxes, other than income 2.1 1.8
36.2 28.8
Operating income 8.5 8.5
Retail sales (kWh) 523.2 543.6
Sales for resale (kWh) 129.4 114.9
Cost of fuel and purchased power per kWh $ .017 $ .017
* Includes International Line Builders, Inc. and High Line Equipment, Inc.
which were acquired on July 1, 1997.
Natural Gas Distribution Operations
Three Months
Ended
March 31,
1998 1997
Operating revenues:
Sales $ 61.5 $ 55.5
Transportation and other 1.1 1.1
62.6 56.6
Operating expenses:
Purchased natural gas sold 45.4 38.5
Operation and maintenance 7.5 8.1
Depreciation, depletion and amortization 1.8 1.8
Taxes, other than income 1.1 1.1
55.8 49.5
Operating income 6.8 7.1
Volumes (dk):
Sales 14.0 15.1
Transportation 3.2 2.9
Total throughput 17.2 18.0
Degree days (% of normal) 94% 101%
Average cost of natural gas, including
transportation, per dk $ 3.24 $ 2.53
Natural Gas Transmission Operations
Three Months
Ended
March 31,
1998 1997
Operating revenues:
Transportation and storage $ 19.0 $ 17.2*
Energy marketing and natural
gas production 10.7 8.5
29.7 25.7
Operating expenses:
Purchased gas sold 5.6 4.1
Operation and maintenance 7.7 10.9*
Depreciation, depletion and amortization 2.0 1.8
Taxes, other than income 1.5 1.5
16.8 18.3
Operating income 12.9 7.4
Volumes (dk):
Transportation --
Montana-Dakota 8.4 8.8
Other 14.4 12.4
22.8 21.2
Produced (000's of dk) 1,751 1,757
* Includes $2.5 million of amortization and related recovery of deferred
natural gas contract buy-out/buy-down and gas supply realignment costs.
Construction Materials and Mining Operations
Three Months
Ended
March 31,
1998 1997**
Operating revenues:
Construction materials $ 29.7 $ 14.2
Coal 9.3 8.8
39.0 23.0
Operating expenses:
Operation and maintenance 33.1 20.8
Depreciation, depletion and amortization 3.9 2.0
Taxes, other than income .9 .9
37.9 23.7
Operating income 1.1 (.7)
Sales (000's):
Aggregates (tons) 863 584
Asphalt (tons) 30 54
Ready-mixed concrete (cubic yards) 139 68
Coal (tons) 788 774
** Prior to August 1, 1997, financial results did not include
information related to Knife River's ownership interest in Hawaiian
Cement, 50 percent of which was acquired in September 1995, and was
accounted for under the equity method. On July 31, 1997, Knife
River acquired the 50 percent interest in Hawaiian Cement that it
did not previously own, and subsequent to that date financial
results are consolidated into Knife River's financial statements.
Oil and Natural Gas Production Operations
Three Months
Ended
March 31,
1998 1997
Operating revenues:
Oil $ 6.8 $ 10.0
Natural gas 6.1 9.5
12.9 19.5
Operating expenses:
Operation and maintenance 3.8 4.1
Depreciation, depletion and amortization 5.4 5.7
Taxes, other than income .8 1.2
10.0 11.0
Operating income 2.9 8.5
Production (000's):
Oil (barrels) 483 520
Natural gas (Mcf) 2,808 3,421
Average sales price:
Oil (per barrel) $14.05 $19.24
Natural gas (per Mcf) 2.17 2.77
Amounts presented in the above tables for natural gas operating
revenues and purchased natural gas sold for the three months ended
March 31, 1998 and 1997, respectively, and operation and maintenance
expenses for the three months ended March 31, 1997, will not agree
with the Consolidated Statements of Income due to the elimination
of intercompany transactions between Montana-Dakota's natural gas
distribution business and Williston Basin's natural gas transmission
business.
Three Months Ended March 31, 1998 and 1997
Electric Operations
Operating income at the electric business was unchanged. Retail
sales decreased to all major customer classes resulting from warmer
winter weather. Sales for resale volumes increased due to favorable
market conditions and short-term contracts. Utility services
revenue and related operation and maintenance expense, depreciation,
depletion and amortization and taxes other than income resulted from
the acquisition of International Line Builders, Inc. (ILB) and High
Line Equipment, Inc. (HLE) on July 1, 1997. Exclusive of the above-
mentioned acquisition, depreciation expense increased due to an
increase in depreciable electric utility plant.
Earnings for the electric business increased due to $352,000 in
earnings attributable to ILB and HLE, and decreased net interest
expense due largely to lower average long-term interest rates.
Natural Gas Distribution Operations
Operating income decreased at the natural gas distribution
business due to reduced weather-related sales of 1.0 million
decatherms, the result of 7 percent warmer weather. The pass-
through of higher average natural gas costs more than offset the
revenue decline that resulted from reduced sales volumes. Decreased
operation and maintenance expense partially offset the operating
income decline.
Natural gas distribution earnings decreased due to the
previously discussed decrease in operating income.
Natural Gas Transmission Operations
Operating income at the natural gas transmission business
increased primarily due to increases in transportation revenues.
The increase in transportation revenue resulted from a $5.0 million
($3.1 million after tax) reversal of reserves for certain
contingencies relating to a FERC order concerning a compliance
filing. Higher average transportation rates and increased
transportation to off-system markets, somewhat offset by decreased
on-system transportation, also added to the revenue improvement.
The revenue increase was partially offset by the completion of the
recovery of deferred natural gas contract buy-out/buy-down and gas
supply realignment costs in 1997, with a corresponding reduction in
operation expense. Operation expense also declined due to the
timing of pipeline safety user fees and lower production royalties
due to lower prices. Increased energy marketing revenues, due to
higher natural gas volumes sold, also added to the operating income
improvement.
Earnings for this business increased due to the operating income
improvement, gains realized on the sale of natural gas held under
the repurchase commitment and decreased carrying costs on this gas
stemming from lower average borrowings.
Construction Materials and Mining Operations
Construction Materials Operations --
Construction materials operating income increased $1.6 million
primarily due to the acquisitions of the 50 percent interest in
Hawaiian Cement that Knife River did not previously own in July 1997
and MBI and S2-F in March 1998. Prior to August 1997, Knife River's
original 50 percent ownership interest in Hawaiian Cement was
accounted for under the equity method. However, with the
acquisition mentioned above, Knife River began consolidating
Hawaiian Cement into its financial statements. Operating income at
the other construction materials operations improved due to
increased ready-mixed concrete prices and increased construction
activity in Oregon and higher cement margins in Hawaii. Lower
aggregate and asphalt sales volumes and decreased construction
revenues, all primarily due to the absence of the 1997 flood repair
work at the northern California operations, partially offset the
increase in operating income at the other construction materials
operations.
Coal Operations --
Operating income for the coal operations increased $202,000
primarily due to increased volumes sold in 1998 as compared to 1997
due to maintenance work at the Coyote Station. Higher average sales
prices due to price increases at the Beulah Mine also added to the
improvement in coal revenues. Operation expenses increased due to
volume-related cost increases, partially offsetting the increase in
operating income.
Consolidated --
Earnings increased due to increased operating income at both the
construction materials and coal operations. Higher interest expense
resulting mainly from increased long-term debt due to the recent
acquisitions and 1997 gains realized from the sale of equipment,
partially offset the increase in earnings.
Oil and Natural Gas Production Operations
Operating income for the oil and natural gas production business
decreased primarily as a result of lower oil and natural gas
revenues. Decreased oil revenue resulted from a $2.7 million
decline due to lower average prices and a $520,000 decrease due to
lower production. The decrease in natural gas revenue was due to
a $2.1 million decline arising from lower average prices and a $1.3
million reduction due to lower production. Decreased operation and
maintenance expenses and depreciation, depletion and amortization,
both the result of lower production, partially offset the decrease
in operating income. Taxes other than income decreased mainly due
to lower production taxes resulting from lower commodity prices,
also partially offsetting the operating income decline.
Earnings for this business unit decreased due to the decrease
in operating income. Decreased interest expense due to lower
average long-term debt balances partially offset the decline in
earnings.
Safe Harbor for Forward-Looking Statements
The Company is including the following cautionary statement in
this Form 10-Q to make applicable and to take advantage of the safe
harbor provisions of the Private Securities Litigation Reform Act
of 1995 for any forward-looking statements made by, or on behalf of,
the Company. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or
performance, and underlying assumptions (many of which are based,
in turn, upon further assumptions) and other statements which are
other than statements of historical facts. From time to time, the
Company may publish or otherwise make available forward-looking
statements of this nature. All such subsequent forward-looking
statements, whether written or oral and whether made by or on behalf
of the Company, are also expressly qualified by these cautionary
statements.
Forward-looking statements involve risks and uncertainties which
could cause actual results or outcomes to differ materially from
those expressed. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the
Company to have a reasonable basis, including without limitation
management's examination of historical operating trends, data
contained in the Company's records and other data available from
third parties, but there can be no assurance that the Company's
expectations, beliefs or projections will be achieved or
accomplished. Furthermore, any forward-looking statement speaks
only as of the date on which such statement is made, and the Company
undertakes no obligation to update any forward-looking statement or
statements to reflect events or circumstances that occur after the
date on which such statement is made or to reflect the occurrence
of unanticipated events. New factors emerge from time to time, and
it is not possible for management to predict all of such factors,
nor can it assess the effect of each such factor on the Company's
business or the extent to which any such factor, or combination of
factors, may cause actual results to differ materially from those
contained in any forward-looking statement.
Regulated Operations --
In addition to other factors and matters discussed elsewhere
herein, some important factors that could cause actual results or
outcomes for the Company and its regulated operations to differ
materially from those discussed in forward-looking statements
include prevailing governmental policies and regulatory actions with
respect to allowed rates of return, financings, or industry and rate
structures, acquisition and disposal of assets or facilities,
operation and construction of plant facilities, recovery of
purchased power and purchased gas costs, present or prospective
generation, wholesale and retail competition (including but not
limited to electric retail wheeling and transmission costs),
availability of economic supplies of natural gas, and present or
prospective natural gas distribution or transmission competition
(including but not limited to prices of alternate fuels and system
deliverability costs).
Non-Regulated Operations --
Certain important factors which could cause actual results or
outcomes for the Company and all or certain of its non-regulated
operations to differ materially from those discussed in forward-
looking statements include the level of governmental expenditures
on public projects and project schedules, changes in anticipated
tourism levels, competition from other suppliers, oil and natural
gas commodity prices, drilling successes in oil and natural gas
operations, ability to acquire oil and natural gas properties, and
the availability of economic expansion or development opportunities.
Factors Common to Regulated and Non-Regulated Operations --
The business and profitability of the Company are also
influenced by economic and geographic factors, including political
and economic risks, changes in and compliance with environmental and
safety laws and policies, weather conditions, population growth
rates and demographic patterns, market demand for energy from plants
or facilities, changes in tax rates or policies, unanticipated
project delays or changes in project costs, unanticipated changes
in operating expenses or capital expenditures, labor negotiations
or disputes, changes in credit ratings or capital market conditions,
inflation rates, inability of the various counterparties to meet
their obligations with respect to the Company's financial
instruments, changes in accounting principles and/or the application
of such principles to the Company, changes in technology and legal
proceedings, and the ability of the Company and others to address
year 2000 issues.
Prospective Information
On April 1, 1998, the Company acquired Angell Bros., Inc., a
construction materials company in Portland, Oregon. Angell Bros.,
Inc. sells crushed rock to customers in the greater Portland
metropolitan area. The Angell Bros., Inc. assets are being operated
as part of MBI, a subsidiary of KRC Holdings.
On April 17, 1998, the Company acquired Pouk & Steinle, Inc.,
an electrical construction company based in Riverside, California.
Pouk & Steinle, Inc. performs services for some of the larger
California utilities along with providing high voltage electric
construction services to large industrial and commercial customers
in the Los Angeles area. Pouk & Steinle, Inc. is being operated as
a wholly owned subsidiary of Utility Services.
On April 27, 1998, the Company received proceeds of $30.1
million from a public stock offering. The proceeds from the sale
of this stock may be used for refunding of outstanding debt
obligations, for corporate development purposes (including the
potential acquisitions of businesses and/or business assets), and
for other general corporate purposes.
The Company continues to seek additional growth opportunities
including investing in the development of related lines of business.
Liquidity and Capital Commitments
Montana-Dakota's net capital needs for 1998 are estimated at
$19.9 million for net capital expenditures and $20.4 million for the
retirement of long-term securities. On April 14, 1998, the Company
gave notice of its intention to call, on May 15, 1998, its remaining
$20 million 9 1/8 percent Series first mortgage bonds, due May 15,
2006. Estimated capital expenditures include those for system
upgrades, routine replacements and service extensions. It is
anticipated that Montana-Dakota will continue to provide all of the
funds required for its net capital expenditures and securities
retirements from internal sources, through the use of the Company's
$40 million revolving credit and term loan agreement, $14 million
of which was outstanding at March 31, 1998, and through the issuance
of long-term debt, the amount and timing of which will depend upon
Montana-Dakota's needs, internal cash generation and market
conditions.
Williston Basin's 1998 net capital expenditures are estimated
at $20.1 million for routine system improvements and continued
development of natural gas reserves. Williston Basin expects to
meet its net capital expenditures for 1998 with a combination of
internally generated funds, short-term lines of credit aggregating
$40.6 million, $350,000 of which was outstanding at March 31, 1998,
and through the issuance of long-term debt, the amount and timing
of which will depend upon Williston Basin's needs, internal cash
generation and market conditions.
Knife River's 1998 net capital expenditures are estimated at
$164.1 million, including those expenditures for the acquisitions
of MBI, S2-F and Angell Bros., Inc. Knife River's 1998 estimated
net capital expenditures also include routine equipment upgrades and
replacements and the building of construction materials handling
facilities. It is anticipated that these net capital expenditures
will be met through funds generated from internal sources, short-
term lines of credit aggregating $32.4 million, $1.2 million of
which was outstanding at March 31, 1998, a revolving credit
agreement of $85 million, $69 million of which was outstanding at
March 31, 1998, and the issuance of the Company's equity securities.
Fidelity Oil's 1998 net capital expenditures related to its oil
and natural gas program are estimated at $37 million. It is
anticipated that Fidelity's 1998 net capital expenditures will be
used to further enhance production and reserve growth and will be
met from internal sources and existing long-term credit facilities.
Fidelity's borrowing base, which is based on total proved reserves,
is currently $65 million. This consists of $17 million of issued
notes, $13 million in an uncommitted note shelf facility, and a $35
million revolving line of credit, $16.8 million of which was
outstanding at March 31, 1998.
Other corporate net capital expenditures for 1998 are estimated
at $8.0 million, including expenditures for the acquisition of Pouk
& Steinle, Inc., as previously discussed, and for routine equipment
maintenance and replacements. These capital expenditures are
anticipated to be met through internal sources, short-term lines of
credit aggregating $3.8 million, $125,000 of which was outstanding
at March 31, 1998, and the issuance of the Company's equity
securities.
The estimated 1998 net capital expenditures set forth above do
not include potential future acquisitions. To the extent that
acquisitions occur, such acquisitions would be financed with
existing credit facilities and the issuance of long-term debt and
the Company's equity securities.
The Company utilizes its short-term lines of credit aggregating
$50 million, none of which was outstanding on March 31, 1998, and
its $40 million revolving credit and term loan agreement, $14
million of which was outstanding at March 31, 1998, as previously
described, to meet its short-term financing needs and to take
advantage of market conditions when timing the placement of long-
term or permanent financing.
The Company's issuance of first mortgage debt is subject to
certain restrictions imposed under the terms and conditions of its
Indenture of Mortgage. Generally, those restrictions require the
Company to pledge $1.43 of unfunded property to the Trustee for each
dollar of indebtedness incurred under the Indenture and that annual
earnings (pretax and before interest charges), as defined in the
Indenture, equal at least two times its annualized first mortgage
bond interest costs. Under the more restrictive of the two tests,
as of March 31, 1998, the Company could have issued approximately
$260 million of additional first mortgage bonds.
The Company's coverage of combined fixed charges and preferred
stock dividends was 3.5 and 3.4 times for the twelve months ended
March 31, 1998, and December 31, 1997, respectively. Additionally,
the Company's first mortgage bond interest coverage was 5.9 and 6.0
times for the twelve months ended March 31, 1998, and December 31,
1997, respectively. Common stockholders' equity as a percent of
total capitalization was 58 percent and 55 percent at March 31,
1998, and December 31, 1997, respectively.
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 5, 1998, the Company issued to the shareholders
of MBI and S2-F an aggregate of 3,848,351 shares of Common
Stock, $3.33 par value, to acquire all of the issued and
outstanding capital stock of MBI and S2-F. The aggregate
amount of shares issued included 159,681 shares which were
issued to MBI as consideration for MBI's fifty percent
ownership of the outstanding common stock of S2-F. As a
result of MBI receiving MDU Resources Common Stock for the
Company's acquisition of S2-F, the 159,681 shares of Common
Stock are presently being held by MBI. These shares of
Common Stock held by MBI are neither entitled to vote nor
be counted for quorum or financial reporting purposes as
outstanding shares. The Common Stock issued by the
Company was issued in a private sale exempt from
registration pursuant to Section 4 (2) of the Securities
Act of 1933. The shareholders have acknowledged that
they are holding the Company's Common Stock as an
investment and not with a view to distribution. On April
27, 1998, certain shareholders of MBI and S2-F sold
1,230,932 shares of the Company's common stock in a
registered public offering.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on
April 28, 1998. One proposal was submitted to
stockholders as described in the Company's Proxy Statement
dated March 9, 1998, and was voted upon and approved by
stockholders at the meeting. The table below briefly
describes the proposal and the results of the stockholder
votes.
Shares
Against
Shares or Broker
For Withheld Abstentions Non-Votes
Proposal to elect five directors:
For terms expiring in 2001 --
Douglas C. Kane 25,466,264 267,333 --- ---
Richard L. Muus 25,453,857 279,740 --- ---
John L. Olson 25,344,121 389,476 --- ---
Joseph T. Simmons 25,461,171 272,426 --- ---
Martin A. White 25,463,082 270,515 --- ---
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
(12) Computation of Ratio of Earnings to Fixed Charges
and Combined Fixed Charges and Preferred Stock
Dividends
(27) Financial Data Schedule
b) Reports on Form 8-K
Form 8-K was filed on April 16, 1998. Under Item 5--Other
Events, the Company reported first quarter
earnings.
Form 8-K was filed on April 21, 1998. Under Item 7--
Financial Statements and Exhibits, the Company filed
a Purchase Agreement relating to a public offering of
the Company's Common Stock.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
MDU RESOURCES GROUP, INC.
DATE May 12, 1998 BY /s/ Warren L. Robinson
Warren L. Robinson
Vice President, Treasurer
and Chief Financial Officer
BY /s/ Vernon A. Raile
Vernon A. Raile
Vice President, Controller and
Chief Accounting Officer
EXHIBIT INDEX
Exhibit No.
(12) Computation of Ratio of Earnings to Fixed Charges
and Combined Fixed Charges and Preferred Stock
Dividends
(27) Financial Data Schedule