-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BQ0sz8WhhRR5/+MyECTi6c2s00Six5L1QYYKeFhWdCD94Tq/9J42mWQ27sROS6c/ j23KkCQ1BOwj7nI+BEbLCA== 0000067716-97-000046.txt : 19971114 0000067716-97-000046.hdr.sgml : 19971114 ACCESSION NUMBER: 0000067716-97-000046 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971112 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MDU RESOURCES GROUP INC CENTRAL INDEX KEY: 0000067716 STANDARD INDUSTRIAL CLASSIFICATION: GAS & OTHER SERVICES COMBINED [4932] IRS NUMBER: 410423660 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03480 FILM NUMBER: 97714213 BUSINESS ADDRESS: STREET 1: 400 N FOURTH ST CITY: BISMARCK STATE: ND ZIP: 58501 BUSINESS PHONE: 7012227900 MAIL ADDRESS: STREET 1: 400 NORTH FOURTH ST CITY: BISMARCK STATE: ND ZIP: 58501 FORMER COMPANY: FORMER CONFORMED NAME: MONTANA DAKOTA UTILITIES CO DATE OF NAME CHANGE: 19850429 10-Q 1 3RD QUARTER 10-Q 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, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from _____________ to ______________ Commission file number 1-3480 MDU Resources Group, Inc. (Exact name of registrant as specified in its charter) Delaware 41-0423660 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Schuchart Building 918 East Divide Avenue 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 7, 1997: 29,143,332 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 that are identified by the use of the words "anticipates," "estimates," "expects," "intends," "plans," "predicts" and similar expressions. MDU Resources Group, Inc. (Company) is a diversified natural resource company which was incorporated under the laws of the State of Delaware in 1924. Its principal executive offices are at Schuchart Building, 918 East Divide Avenue, Bismarck, North Dakota 58501, telephone (701) 222-7900. Montana-Dakota Utilities Co. (Montana-Dakota), the public utility division of the Company, provides electric and/or natural gas and propane distribution service at retail to 256 communities in North Dakota, eastern Montana, northern and western South Dakota and northern Wyoming, and owns and operates electric power generation and transmission facilities. The Company, through its wholly owned subsidiary, Centennial Energy Holdings, Inc. (Centennial), owns Williston Basin Interstate Pipeline Company (Williston Basin), Knife River Corporation (Knife River), 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 Oregon, California, Alaska and Hawaii. In addition, Knife River surface mines and markets low sulfur lignite coal at mines located in Montana and North Dakota. Fidelity Oil is comprised of Fidelity Oil Co. and Fidelity Oil Holdings, Inc., which own oil and natural gas interests throughout the United States, the Gulf of Mexico and Canada through investments with several oil and natural gas producers. Utility Services, through its wholly owned subsidiaries, International Line Builders, Inc. and High Line Equipment, Inc., installs and repairs electric transmission and distribution lines in the western United States and Hawaii and provides related construction supplies and equipment. INDEX Part I -- Financial Information Consolidated Statements of Income -- Three and Nine Months Ended September 30, 1997 and 1996 Consolidated Balance Sheets -- September 30, 1997 and 1996, and December 31, 1996 Consolidated Statements of Cash Flows -- Nine Months Ended September 30, 1997 and 1996 Notes to Consolidated Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Part II -- Other Information Signatures Exhibit Index Exhibits PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MDU RESOURCES GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Nine Months Ended Ended September 30, September 30, 1997 1996 1997 1996 (In thousands, except per share amounts) Operating revenues: Electric $ 48,031 $ 33,873 $117,074 $102,680 Natural gas 34,476 31,752 136,919 120,925 Construction materials and mining 65,771 51,298 123,854 96,711 Oil and natural gas production 15,421 16,836 51,044 50,185 163,699 133,759 428,891 370,501 Operating expenses: Fuel and purchased power 11,255 10,311 33,655 32,527 Purchased natural gas sold 9,870 3,670 46,988 31,013 Operation and maintenance 90,479 68,087 205,148 164,932 Depreciation, depletion and amortization 16,869 15,374 46,943 46,045 Taxes, other than income 6,202 5,596 17,928 16,980 134,675 103,038 350,662 291,497 Operating income: Electric 9,646 8,036 22,362 22,006 Natural gas distribution (2,339) (2,670) 4,706 4,525 Natural gas transmission 6,745 10,731 21,335 22,577 Construction materials and mining 9,650 8,805 10,669 12,530 Oil and natural gas production 5,322 5,819 19,157 17,366 29,024 30,721 78,229 79,004 Other income -- net 1,274 1,787 3,982 4,828 Interest expense 7,783 7,708 21,916 21,447 Costs on natural gas repurchase commitment (125) 22,517 1,010 25,356 Income before income taxes 22,640 2,283 59,285 37,029 Income taxes 8,445 (6,212) 21,753 6,799 Net income 14,195 8,495 37,532 30,230 Dividends on preferred stocks 196 196 586 591 Earnings on common stock $ 13,999 $ 8,299 $ 36,946 $ 29,639 Earnings per common share $ .48 $ .29 $ 1.28 $ 1.04 Dividends per common share $ .2875 $ .2775 $ .8425 $ .8225 Average common shares outstanding 29,051 28,477 28,796 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, 1997 1996 1996 (In thousands) ASSETS Property, plant and equipment: Electric $ 560,007 $ 543,542 $ 546,477 Natural gas distribution 169,005 163,925 164,843 Natural gas transmission 283,505 269,561 273,775 Construction materials and mining 238,742 174,224 173,663 Oil and natural gas production 232,736 207,443 211,555 1,483,995 1,358,695 1,370,313 Less accumulated depreciation, depletion and amortization 655,210 609,137 617,724 828,785 749,558 752,589 Current assets: Cash and cash equivalents 66,164 32,668 47,799 Receivables 71,229 54,175 73,187 Inventories 45,391 31,646 27,361 Deferred income taxes 22,327 24,560 26,011 Prepayments and other current assets 28,796 11,771 17,300 233,907 154,820 191,658 Natural gas available under repurchase commitment 15,674 51,682 37,233 Investments 18,537 51,987 53,501 Deferred charges and other assets 63,621 56,894 54,192 $1,160,524 $1,064,941 $1,089,173 CAPITALIZATION AND LIABILITIES Capitalization: Common stock (Shares outstanding -- 29,078,507, $3.33 par value at September 30, 1997, and 28,476,981, $3.33 par value at December 31, 1996 and September 30, 1996 $ 96,831 $ 94,828 $ 94,828 Other paid in capital 75,466 64,305 64,305 Retained earnings 204,212 184,400 191,541 376,509 343,533 350,674 Preferred stock subject to mandatory redemption requirements 1,800 1,900 1,800 Preferred stock redeemable at option of the Company 15,000 15,000 15,000 Long-term debt 322,998 269,643 280,666 716,307 630,076 648,140 Commitments and contingencies --- --- --- Current liabilities: Short-term borrowings 16,038 2,865 3,950 Accounts payable 39,106 30,704 31,580 Taxes payable 6,223 6,788 8,683 Other accrued liabilities, including reserved revenues 101,390 88,835 100,938 Dividends payable 8,555 8,099 8,099 Long-term debt and preferred stock due within one year 8,792 5,837 11,854 180,104 143,128 165,104 Natural gas repurchase commitment 32,632 87,544 66,294 Deferred credits: Deferred income taxes 121,563 112,893 116,208 Other 109,918 91,300 93,427 231,481 204,193 209,635 $1,160,524 $1,064,941 $1,089,173 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, 1997 1996 (In thousands) Operating activities: Net income $37,532 $30,230 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 46,943 46,045 Deferred income taxes and investment tax credit -- net 9,282 3,797 Recovery of deferred natural gas contract litigation settlement costs, net of income taxes 3,130 4,793 Write-down of natural gas available under repurchase commitment, net of income taxes (Note 5) --- 11,364 Changes in current assets and liabilities -- Receivables 16,569 7,786 Inventories (8,352) (7,697) Other current assets (10,496) 6,593 Accounts payable 2,028 8,443 Other current liabilities 5,269 (18,581) Other noncurrent changes (111) (7,632) Net cash provided by operating activities 101,794 85,141 Financing activities: Net change in short-term borrowings 6,777 2,265 Issuance of long-term debt 53,129 64,150 Repayment of long-term debt (21,488) (43,149) Issuance of common stock 10,059 --- Retirement of natural gas repurchase commitment (49,361) (656) Dividends paid (24,861) (24,014) Net cash used in financing activities (25,745) (1,404) Investing activities: Capital expenditures including acquisitions of businesses -- Electric (11,945) (10,980) Natural gas distribution (6,155) (4,692) Natural gas transmission (7,260) (5,504) Construction materials and mining (36,005) (23,288) Oil and natural gas production (22,561) (45,705) (83,926) (90,169) Net proceeds from sale or disposition of property 2,665 10,986 Net capital expenditures (81,261) (79,183) Sale of natural gas available under repurchase commitment 25,928 515 Investments (2,351) (5,799) Net cash used in investing activities (57,684) (84,467) Increase (decrease) in cash and cash equivalents 18,365 (730) Cash and cash equivalents -- beginning of year 47,799 33,398 Cash and cash equivalents -- end of period $66,164 $32,668 The accompanying notes are an integral part of these consolidated statements. MDU RESOURCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1997 and 1996 (Unaudited) 1. Basis of presentation The accompanying consolidated interim financial statements were prepared in conformity with the basis of presentation reflected in the consolidated financial statements included in the Annual Report to Stockholders for the year ended December 31, 1996 (1996 Annual Report), and the standards of accounting measurement set forth in Accounting Principles Board Opinion No. 28 and any amendments thereto adopted by the Financial Accounting Standards Board. Interim financial statements do not include all disclosures provided in annual financial statements and, accordingly, these financial statements should be read in conjunction with those appearing in the Company's 1996 Annual Report. The information is unaudited but includes all adjustments which are, in the opinion of management, necessary for a fair presentation of the accompanying consolidated interim financial statements. 2. Seasonality of operations Some of the Company's operations are highly seasonal and revenues from, and certain expenses for, such operations may fluctuate significantly among quarterly periods. Accordingly, the interim results may not be indicative of results for the full fiscal year. 3. Pending litigation W. A. Moncrief -- In November 1993, the estate of W.A. Moncrief (Moncrief), a producer from whom Williston Basin purchased a portion of its natural gas supply, filed suit in Federal District Court for the District of Wyoming (Federal District Court) against Williston Basin and the Company disputing certain price and volume issues under the contract. Through the course of this action Moncrief submitted damage calculations which totalled approximately $19 million or, under its alternative pricing theory, approximately $39 million. On June 26, 1997, the Federal District Court issued its order awarding Moncrief damages of approximately $15.6 million. On July 25, 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. On August 25, 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. On September 2, 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 District Court, Northwest Judicial District (Court), against Williston Basin and the Company. Apache and Snyder are oil and natural gas producers who had processing agreements with Koch Hydrocarbon Company (Koch). Williston Basin and the Company had a natural gas purchase contract with Koch. Apache and Snyder have alleged they are entitled to damages for the breach of Williston Basin's and the Company's contract with Koch. Williston Basin and the Company believe that if Apache and Snyder have any legal claims, such claims are with Koch, not with Williston Basin or the Company. Williston Basin, the Company and Koch have settled their disputes. Apache and Snyder have recently provided alleged damages under differing theories ranging up to $6.2 million without interest. A motion to intervene in the case by several other producers, all of whom had contracts with Koch but not with Williston Basin, was denied in December 1996. The Trial before the Court was completed on November 6, 1997. Williston Basin and the Company are awaiting a decision from the Court. In a related matter, on March 14, 1997, a suit was filed by nine other producers, several of whom had unsuccessfully tried to intervene in the Apache and Snyder litigation, against Koch, Williston Basin and the Company. The parties to this suit are making claims similar to those in the Apache and Snyder litigation, although no specific damages have been specified. The above claims in Williston Basin's opinion, are without merit and overstated. If any amounts are ultimately found to be due the plaintiffs, Williston Basin plans to file 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 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 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 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 order dated April 25, 1997, 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 on July 21, 1997, which motion was denied on October 29, 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. 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 FERC a general natural gas rate change application implemented in 1992. In July 1995, the FERC issued an order relating to Williston Basin's 1992 rate change application. In August 1995, Williston Basin filed, under protest, tariff sheets in compliance with the FERC's order, with rates which went into effect on September 1, 1995. Williston Basin requested rehearing of certain issues addressed in the order. In July 1996, the FERC issued an order granting in part and denying in part Williston Basin's rehearing request. The FERC also remanded the issue of return on equity for further hearings. A hearing on this matter was held in August 1996. Williston Basin also appealed certain issues contained in the FERC's orders to the U. S. Court of Appeals for the D. C. Circuit (D. C. Circuit Court). On May 9, 1997, the D. C. Circuit Court dismissed Williston Basin's petition for rehearing without prejudice to refiling the petition at the completion of the rehearing process before the FERC. On June 11, 1997, the FERC issued an order on the issue of return on equity. In its order, the FERC changed its prior position and used the long-term growth rate for the economy as a whole as measured by the gross domestic product in determining return on equity. As a result, the FERC found Williston Basin's allowed return on equity should be 11.73 percent instead of the 12.20 percent previously authorized. On July 11, 1997, Williston Basin requested rehearing of the FERC's determination relative to return on equity. A compliance filing was made on July 25, 1997, pursuant to the FERC's June 11, 1997 order. On October 16, 1997, the FERC issued an order denying Williston Basin's July 11, 1997 rehearing request. On October 20, 1997, Williston Basin appealed the FERC's October 16, 1997 order to the D.C. Circuit Court. Reserves have been provided for a portion of the revenues that have been collected subject to refund with respect to pending regulatory proceedings and for the recovery of certain producer settlement buy-out/buy-down costs to reflect future resolution of certain issues with the FERC. Williston Basin believes that such reserves are adequate based on its assessment of the ultimate outcome of the various proceedings. 5. Natural gas repurchase commitment The Company has offered for sale since 1984 the inventoried natural gas available under a repurchase commitment with Frontier Gas Storage Company, as described in Note 3 of its 1996 Annual Report. As part of the corporate realignment effected January 1, 1985, the Company agreed, pursuant to the Settlement approved by the FERC, to remove from rates the financing costs associated with this natural gas. The FERC has issued orders that have held that storage costs should be allocated to this gas, prospectively beginning May 1992, as opposed to being included in rates applicable to Williston Basin's customers. These storage costs, as initially allocated to the Frontier gas, approximated $2.1 million annually, for which Williston Basin has provided reserves. Williston Basin appealed these orders to the D.C. Circuit Court. In December 1996, the D.C. Circuit Court issued its order ruling that the FERC's actions in allocating costs to the Frontier gas were appropriate. Williston Basin is awaiting a final order from the FERC. Beginning in October 1992, as a result of prevailing natural gas prices, Williston Basin began to sell and transport a portion of the natural gas held under the repurchase commitment. Through the second quarter of 1996, 17.8 MMdk of this natural gas had been sold. However, in the third quarter of 1996, Williston Basin, based on a number of factors including differences in regional natural gas prices and natural gas sales occurring at that time, wrote down the remaining 43.0 MMdk of this gas to its then current market value. The value of this gas was determined using the sum of discounted cash flows of expected future sales occurring at then current regional natural gas prices as adjusted for anticipated future price increases. This resulted in a write-down aggregating $18.6 million ($11.4 million after tax). In addition, Williston Basin wrote off certain other costs related to this natural gas of approximately $2.5 million ($1.5 million after tax). The recognition of the then current market value of this natural gas facilitated the sale by Williston Basin of 27.0 MMdk from the date of the write-down through September 30, 1997, and should allow Williston Basin to market the remaining 16.0 MMdk on a sustained basis enabling Williston Basin to liquidate this asset over approximately the next four years. 6. Environmental matters Montana-Dakota and Williston Basin discovered polychlorinated biphenyls (PCBs) in portions of their natural gas systems and informed the United States Environmental Protection Agency (EPA) in January 1991. Montana-Dakota and Williston Basin believe the PCBs entered the system from a valve sealant. In January 1994, Montana-Dakota, Williston Basin and Rockwell International Corporation (Rockwell), manufacturer of the valve sealant, reached an agreement under which Rockwell has and will continue to reimburse Montana-Dakota and Williston Basin for a portion of certain remediation costs. On the basis of findings to date, Montana-Dakota and Williston Basin estimate future environmental assessment and remediation costs will aggregate $3 million to $15 million. Based on such estimated cost, the expected recovery from Rockwell and the ability of Montana-Dakota and Williston Basin to recover their portions of such costs from ratepayers, Montana-Dakota and Williston Basin believe that the ultimate costs related to these matters will not be material to each of their respective financial positions or results of operations. In September 1995, Unitek Environmental Services, Inc. and Unitek Solvent Services, Inc. (Unitek) filed a complaint against Hawaiian Cement in the United States District Court for the District of Hawaii (District Court) alleging that dust emissions from Hawaiian Cement's cement manufacturing plant at Kapolei, Hawaii (Plant) violated the Hawaii State Implementation Plan (SIP) of the U.S. Clean Air Act (Clean Air Act), constituted a continual nuisance and trespass on the plaintiff's property, and that Hawaiian Cement's conduct warranted the award of punitive damages. Hawaiian Cement is a Hawaiian general partnership whose general partners are Knife River Hawaii, Inc. and Knife River Dakota, Inc., indirect wholly owned subsidiaries of the Company. Knife River Dakota, Inc. purchased its partnership interest from Adelaide Brighton Cement (Hawaii), Inc. on July 31, 1997. Unitek sought civil penalties under the Clean Air Act (as described below), and up to $20 million in damages for various claims (as described above). In August 1996, the District Court issued an order granting Plaintiffs' motion for partial summary judgment relating to the Clean Air Act, indicating that it would issue an injunction shortly. The issue of civil penalties under the Clean Air Act was reserved for further hearing at a later date, and Unitek's claims for damages were not addressed by the District Court at such time. In September 1996, Unitek and Hawaiian Cement reached a settlement which resolved all claims except as to Clean Air Act penalties. Based on a joint petition filed by Unitek and Hawaiian Cement, the District Court stayed the proceeding and the issuance of an injunction while the parties continued to negotiate the remaining Clean Air Act claims. In May 1996, the EPA issued a Notice of Violation (NOV) to Hawaiian Cement. The NOV stated that dust emissions from the Plant violated the SIP. Under the Clean Air Act, the EPA has the authority to issue an order requiring compliance with the SIP, issue an administrative order requiring the payment of penalties of up to $25,000 per day per violation (not to exceed $200,000), or bring a civil action for penalties of not more than $25,000 per day per violation and/or bring a civil action for injunctive relief. On April 7, 1997, a settlement resolving the remaining Clean Air Act claims and the EPA's NOV issued in May 1996, was reached by Hawaiian Cement, the EPA and Unitek. This settlement is subject to public comment and the approval of the District Court. If the District Court approves the April 1997 settlement, the total costs relating to both the September 1996 and April 1997 settlements are not expected to have a material effect on the Company's results of operations. 7. Cash flow information Cash expenditures for interest and income taxes were as follows: Nine Months Ended September 30, 1997 1996 (In thousands) Interest, net of amount capitalized $16,865 $20,350 Income taxes $18,235 $23,611 8. Derivatives The Company, in connection with the operations of Montana- Dakota, 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. Williston Basin and Knife River have entered into interest rate swap agreements to manage a portion of their interest rate exposure on a natural gas repurchase commitment and long-term debt, respectively. These interest rate swap agreements are not held for trading purposes. The interest rate swap agreements call 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 agreements. The variable prices are based on the three-month floating London Interbank Offered Rate. Settlement amounts payable or receivable under these interest rate swap agreements are recorded in "Interest expense" for Knife River and "Costs on natural gas repurchase commitment" for Williston Basin 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 instruments. 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 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. Favorable and unfavorable positions on interest rate swap agreements will be offset by interest on the related debt instruments. 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. 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 1997 1996 1997 1996 Electric $ 4.4 $ 3.4 $ 8.7 $ 8.7 Natural gas distribution (2.0) (2.1) 1.3 1.3 Natural gas transmission 3.0 (3.7) 8.9 (.2) Construction materials and mining 5.6 5.9 6.8 8.9 Oil and natural gas production 3.0 4.8 11.2 10.9 Earnings on common stock $ 14.0 $ 8.3 $ 36.9 $ 29.6 Earnings per common share $ .48 $ .29 $ 1.28 $ 1.04 Return on average common equity for the 12 months ended 14.4% 12.2% Earnings for the quarter ended September 30, 1997, were up $5.7 million from the comparable period a year ago due, in large part, to the 1996 write-down to the then 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 1996 items resulted in a $3.7 million, or 13 cents per common share, net charge to earnings for the quarter ended September 30, 1996. Earnings from International Line Builders, Inc. and High Line Equipment, Inc., line construction services companies acquired on July 1, 1997, and increased retail sales at the electric business contributed to the earnings increase. Increased volumes transported, gains realized on the sale of natural gas held under the repurchase commitment with Frontier Gas Storage Company and decreased carrying costs associated with the repurchase commitment, all at the natural gas transmission business, also added to the earnings improvement. Decreased earnings at the construction materials and mining business somewhat offset the earnings increase. The decrease in earnings at the construction materials and mining business was due to increased operation expenses resulting from higher stripping costs at the Beulah Mine, somewhat offset by higher aggregate and ready-mixed concrete sales and increased construction revenues. A decline in average oil prices, somewhat offset by higher average natural gas prices, at the oil and natural gas production business also partially offset the earnings increase. In addition, increased operating expenses at the natural gas transmission business due to timing-related increases in well maintenance and higher production royalties due to a royalty settlement with the United States Mineral Management Service (MMS) somewhat offset the earnings improvement. Earnings for the nine months ended September 30, 1997, were up $7.3 million from the comparable period a year ago due, in large part, to the net effect of the 1996 write-down to the then 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. Increased volumes transported, increased natural gas production and prices, gains realized on the sale of natural gas held under the repurchase commitment and decreased carrying costs associated with the repurchase commitment, all at the natural gas transmission business, also contributed to the increase in earnings. Higher average natural gas prices, somewhat offset by lower natural gas production, at the oil and natural gas production business added to the earnings improvement. In addition, earnings from International Line Builders, Inc. and High Line Equipment, Inc. added to the increase in earnings. Increased maintenance expenses at the electric business, due to a ten-week maintenance outage at the Coyote Station and repair costs associated with an April blizzard which occurred primarily in North Dakota, partially offset the increase in earnings. Lower sales at the natural gas distribution business due to 8 percent warmer weather than the comparable period a year ago, offset in part by decreased operation expenses due to lower payroll-related costs, somewhat offset the earnings increase. Decreased earnings at the construction materials and mining business also partially offset the earnings improvement. The earnings decline at the construction materials and mining business was due to reduced coal sales to the Coyote Station relating to the previously mentioned Coyote maintenance outage and increased acquisition-related interest expense, offset in part by increased aggregate and ready-mixed concrete sales and increased construction revenues. In addition, increased operating expenses at the natural gas transmission business resulting from higher production royalties due to the MMS royalty settlement and increased production and prices, somewhat offset the earnings improvement. ________________________________ Reference should be made to Notes to Consolidated Financial Statements for information pertinent to various commitments and contingencies. Financial and operating data The following tables (in millions, where applicable) are key financial and operating statistics for each of the Company's business units. Electric Operations Three Months Nine Months Ended Ended September 30, September 30, 1997 1996 1997 1996 Operating revenues: Retail sales $ 33.2 $ 31.9 $ 97.5 $ 95.2 Sales for resale and other 2.7 2.0 7.5 7.5 Line construction services 12.1 --- 12.1 --- 48.0 33.9 117.1 102.7 Operating expenses: Fuel and purchased power 11.3 10.3 33.7 32.5 Operation and maintenance 20.3 9.6 42.0 30.2 Depreciation, depletion and amortization 4.4 4.3 13.1 12.8 Taxes, other than income 2.3 1.7 5.9 5.2 38.3 25.9 94.7 80.7 Operating income 9.7 8.0 22.4 22.0 Retail sales (kWh) 517.6 509.7 1526.3 1,527.2 Sales for resale (kWh) 70.6 56.1 231.3 289.5 Cost of fuel and purchased power per kWh $ .018 $ .017 $ .018 $ .017 Natural Gas Distribution Operations Three Months Nine Months Ended Ended September 30, September 30, 1997 1996 1997 1996 Operating revenues: Sales $ 16.1 $ 14.0 $ 97.5 $ 101.0 Transportation and other .7 .7 2.5 2.5 16.8 14.7 100.0 103.5 Operating expenses: Purchased natural gas sold 9.6 7.5 65.0 68.1 Operation and maintenance 6.8 7.1 22.0 22.7 Depreciation, depletion and amortization 1.8 1.7 5.3 5.2 Taxes, other than income .9 1.0 3.0 3.0 19.1 17.3 95.3 99.0 Operating income (2.3) (2.6) 4.7 4.5 Volumes (dk): Sales 2.7 2.7 23.4 24.6 Transportation 2.1 1.8 6.8 6.2 Total throughput 4.8 4.5 30.2 30.8 Degree days (% of normal) 91.0% 122.3% 104.4% 113.9% Average cost of natural gas, including transportation, per dk $ 3.57 $ 2.78 $ 2.77 $ 2.76 Natural Gas Transmission Operations Three Months Nine Months Ended Ended September 30, September 30, 1997* 1996 1997* 1996 Operating revenues: Transportation $ 12.2** $ 17.6** $ 39.0** $ 45.0** Storage 2.7 2.6 7.8 8.0 Energy marketing 5.9 --- 18.7 --- Natural gas production and other 1.3 1.7 5.3 5.0 22.1 21.9 70.8 58.0 Operating expenses: Purchased gas sold 4.4 --- 14.4 --- Operation and maintenance 7.8** 8.5** 27.4** 27.0** Depreciation, depletion and amortization 1.9 1.6 3.7 5.1 Taxes, other than income 1.3 1.1 4.0 3.3 15.4 11.2 49.5 35.4 Operating income 6.7 10.7 21.3 22.6 Volumes (dk): Transportation-- Montana-Dakota 9.0 10.0 26.6 33.3 Other 15.3 8.0 39.0 24.6 24.3 18.0 65.6 57.9 Produced (Mdk) 1,709 1,514 5,120 4,390 * Effective January 1, 1997, Prairielands became a wholly owned subsidiary of Williston Basin. Consolidated financial results are presented for 1997. In 1996, Prairielands' financial results were included with the natural gas distribution business. ** Includes amortization and related recovery of deferred natural gas contract buy-out/buy-down and gas supply realignment costs. $ .4 $ 2.4 $ 5.1 $ 7.7 Construction Materials and Mining Operations*** Three Months Nine Months Ended Ended September 30, September 30, 1997 1996 1997 1996 Operating revenues: Construction materials $ 58.8 $ 44.3 $ 105.7 $ 73.3 Coal 7.0 7.0 18.2 23.4 65.8 51.3 123.9 96.7 Operating expenses: Operation and maintenance 52.3 39.8 103.3 76.6 Depreciation, depletion and amortization 3.1 1.9 7.8 5.1 Taxes, other than income .8 .8 2.1 2.5 56.2 42.5 113.2 84.2 Operating income 9.6 8.8 10.7 12.5 Sales (000's): Aggregates (tons) 2,057 1,510 3,752 2,511 Asphalt (tons) 362 344 612 509 Ready-mixed concrete (cubic yards) 177 119 358 250 Coal (tons) 593 619 1,571 2,092 *** 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 remaining 50 percent interest and subsequent to that date financial results include 100 percent of Hawaiian Cement's operating results. Oil and Natural Gas Production Operations Three Months Nine Months Ended Ended September 30, September 30, 1997 1996 1997 1996 Operating revenues: Oil $ 8.3 $ 10.0 $ 27.4 $ 28.4 Natural gas 7.1 6.8 23.6 21.8 15.4 16.8 51.0 50.2 Operating expenses: Operation and maintenance 3.5 4.1 11.9 11.9 Depreciation, depletion and amortization 5.7 5.8 17.1 17.9 Taxes, other than income .9 1.1 2.9 3.0 10.1 11.0 31.9 32.8 Operating income 5.3 5.8 19.1 17.4 Production (000's): Oil (barrels) 523 540 1,568 1,610 Natural gas (Mcf) 3,236 3,426 10,002 10,582 Average sales price: Oil (per barrel) $ 15.98 $18.33 $ 17.48 $ 17.43 Natural gas (per Mcf) 2.19 1.98 2.36 2.06 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, 1997 and 1996 Electric Operations Operating income at the electric business increased primarily due to higher retail sales and sales for resale revenue. Retail sales revenue increased due to higher sales to residential and commercial customers resulting from both increased customers and warmer weather than a year ago. Increased rates in Wyoming reflecting recovery of costs associated with the new power supply contract with Black Hills Power and Light Company beginning January 1, 1997, also added to the operating revenue increase. Increased sales for resale volumes at higher rates due to improved market conditions contributed to the sales for resale revenue improvement. The increase in line construction services revenue and the related increases in operation and maintenance expense and taxes other than income result from International Line Builders, Inc. and High Line Equipment, Inc., line construction services companies acquired on July 1, 1997. Maintenance expense also increased due to the timing of costs associated with a ten-week maintenance outage at the Coyote Station which occurred in the second quarter of 1997 and was offset in part by 1996 costs resulting from maintenance work at the Lewis and Clark Station. Increased fuel and purchased power costs, resulting from increased purchased power demand charges and changes in generation mix between higher cost versus lower cost generating stations, also partially offset the operating income improvement. The increase in demand charges was related to the previously discussed new power supply contract. Earnings for the electric business increased due to the operating income improvement. Increased income taxes partially offset the increase in operating income. Earnings attributable to the line construction services companies were $458,000. Natural Gas Distribution Operations Operating income improved at the natural gas distribution business as a result of decreased operations expense, primarily due to lower payroll-related costs. The increase in sales revenue resulted from the pass-through of higher average natural gas costs. Natural gas distribution earnings improved due to the increase in operating income and lower income taxes. Natural Gas Transmission Operations Operating income at the natural gas transmission business decreased primarily due to a decline in transportation revenues. Transportation revenues decreased due to the September 1996 reversal of certain reserves for regulatory contingencies of $4.2 million ($2.6 million after tax). Also reducing transportation revenue were decreased recovery of deferred natural gas contract buy-out/buy-down and gas supply realignment costs and lower average transportation rates. Increased volumes transported to both on- and off-system markets and to storage partially offset the transportation revenue decline. Sales of natural gas held under the repurchase commitment were 3.9 MMdk, primarily volumes sold in place and to off-system markets. Higher taxes other than income, primarily property taxes, also added to the decrease in operating income. The increases in energy marketing revenue, purchased natural gas sold and depreciation, depletion and amortization result from Prairielands becoming a wholly owned subsidiary effective January 1, 1997. Natural gas production revenues for 1997 excluding the effect of intercompany eliminations of $632,000 improved as a result of both higher volumes produced and increased prices partially offsetting the operating income decline. Lower operation expenses, primarily reduced amortization of deferred natural gas contract buy-out/buy-down and gas supply realignment costs, partially offset by timing-related increases in well maintenance and higher production royalties due to the MMS royalty settlement, somewhat offset the operating income decline. Earnings for this business increased due to the September 1996 $21.1 million ($12.9 million after tax) write-down to the then current market price of the natural gas available under the repurchase commitment. 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 also added to the earnings increase. Increased income taxes due to the reversal of certain income tax reserves aggregating $4.8 million in September 1996 and decreased operating income both partially offset the earnings improvement. Construction Materials and Mining Operations Construction Materials Operations -- Construction materials operating income increased $1.6 million largely due to higher revenues. The revenue improvement is due to revenues realized as a result of the acquisitions of Orland Asphalt in February 1997 and the remaining 50% interest in Hawaiian Cement on July 31, 1997. Revenues at most other construction materials operations increased as a result of higher aggregate and ready- mixed concrete sales and increased construction revenues, all due to increased demand, and increased average asphalt and aggregate prices due to changes in sales mix. The increase in operation and maintenance and depreciation expenses was due in part to expenses associated with the above acquisitions. Operation and maintenance expenses also increased at the other construction materials operations due to the higher aggregate and ready-mixed concrete volumes sold and increased asphalt costs. Coal Operations -- Operating income for the coal operations decreased $810,000 due to higher operation expenses. The operation expense increase results from higher stripping and reclamation costs at the Beulah Mine. Coal revenues remained unchanged from last year as a decline in tons sold to the Coyote Station, resulting from limitations on power deliveries due to off-system storm-damaged transmission lines, was offset by higher average sales prices due to price increases at the Beulah Mine. Consolidated -- Earnings declined largely due to the decrease in coal operating income and Other income -- net. The decrease in Other income -- net was due to the purchase of the remaining 50% interest in Hawaiian Cement. Prior to August 1, 1997, Knife River's 50 percent ownership interest in Hawaiian Cement was accounted for under the equity method. However, on July 31, 1997, Knife River acquired the remaining 50 percent interest in Hawaiian Cement and Hawaiian Cement's operating results are now included in the consolidated financial results. The increase in construction materials operating income somewhat offset the earnings decline. Oil and Natural Gas Production Operations Operating income for the oil and natural gas production business decreased primarily as a result of lower oil revenues. Oil revenue decreased as a result of a $1.4 million decline due to lower average prices combined with a $271,000 decrease due to lower production. Increased natural gas revenues partially offset the oil revenue decline. Higher average natural gas prices resulted in a $696,000 revenue improvement but were somewhat offset by a $416,000 decline due to lower natural gas production. Decreased operation and maintenance expenses, primarily lower administrative costs associated with a working interest agreement and decreased well maintenance, partially offset the operating income decline. Decreased taxes other than income, mainly decreased production taxes resulting from lower oil prices, also somewhat offset the decrease in operating income. Earnings for this business unit decreased due to increased income taxes and lower operating income. The increase in income taxes resulted primarily from the reversal of certain tax reserves aggregating $1.8 million in September 1996. Nine Months Ended September 30, 1997 and 1996 Electric Operations Operating income at the electric business increased primarily due to increased retail sales revenue resulting from increased rates in Wyoming reflecting recovery of costs associated with the new power supply contract with Black Hills Power and Light Company beginning January 1, 1997. Sales for resale and other revenues were unchanged from last year. Increased wheeling revenue was offset by a decline in sales for resale revenue. Sales for resale revenue decreased due to lower sales resulting from reduced generating station availability caused by the Coyote Station maintenance outage combined with weak market conditions and limitations on power deliveries due to off-system storm-damaged transmission lines. Higher average realized rates somewhat offset the decline in sales for resale revenues. Increases in line construction services revenue and related increases in operation and maintenance expense and taxes other than income resulted from International Line Builders, Inc. and High Line Equipment, Inc., which were acquired on July 1, 1997. Power generation maintenance expense increased due to $1.9 million in costs resulting from a ten-week maintenance outage at the Coyote Station in 1997 and was somewhat offset by 1996 costs resulting from maintenance work at the Lewis and Clark Station. Higher transmission and distribution maintenance expense, due to the repair of damages associated with the April 1997 blizzard, also added to the increase in maintenance expense. Increased fuel and purchased power costs, largely increased purchase power demand charges and changes in generation mix between higher cost versus lower cost generating stations, partially offset the operating income increase. The increase in demand charges is related to the aforementioned new power supply contract. Earnings for the electric business were unchanged from last year. The operating income increase was offset by increased interest expense due to higher average short-term debt balances. Earnings attributable to the line construction services companies acquired on July 1, 1997, were $458,000. Natural Gas Distribution Operations Operating income increased at the natural gas distribution business as a result of decreased operations expense due to lower payroll-related costs. A decrease in sales revenue partially offset the operating income improvement. Reduced weather-related sales of 1.2 million decatherms, primarily the result of warmer winter weather in the first quarter, was the principal factor contributing to the sales revenue decline. A general rate increase placed into effect in Montana in May 1996, partially offset the decrease in sales revenue. The effects of higher volumes transported, primarily to large industrial customers, were offset by lower average transportation rates. Natural gas distribution earnings were unchanged from last year. The operating income improvement and decreased interest expense and increased return on gas in storage and prepaid demand balances (included in Other income -- net) were largely offset by increased income taxes and gains realized in 1996 on the disposal of property. The decrease in net interest expense resulted from reduced carrying costs on natural gas costs refundable through rate adjustments due to lower refundable balances. Natural Gas Transmission Operations Operating income at the natural gas transmission business decreased primarily due to lower transportation revenues. Transportation revenues decreased due to the September 1996 reversal of certain reserves for regulatory contingencies of $4.2 million ($2.6 million after tax). In addition, reduced recovery of deferred natural gas contract buy-out/buy-down and gas supply realignment costs and lower average transportation rates contributed to the decrease in transportation revenue. Transportation revenues also decreased due to additional reserved revenues provided, with a corresponding reduction in depreciation expense, as a result of FERC orders relating to a 1992 general rate proceeding. The FERC required a reduction in average depreciation rates which had been reflected in the average transportation rates charged to customers. Increased volumes transported to off-system markets, due to sales of natural gas held under the repurchase commitment, and to storage, were partially offset by lower on- system transportation, somewhat reducing the transportation revenue decline. Sales of natural gas held under the repurchase commitment were 16.8 MMdk, primarily volumes sold to off-system markets and in place. Taxes other than income increased due to increased production taxes also contributing to the operating income decline. Increased natural gas production revenues resulting from both higher volumes produced and increased prices partially offset the decrease in operating income. The increases in energy marketing revenue, purchased natural gas sold and operation and maintenance expense result from Prairielands becoming a wholly owned subsidiary effective January 1, 1997. Operation expenses, excluding Prairielands, decreased due to reduced amortization of deferred natural gas contract buy-out/buy-down and gas supply realignment costs offset in part by higher royalties due to both the MMS royalty settlement and increased production and prices. Earnings for this business increased due to the September 1996 $21.1 million ($12.9 million after tax) write-down to the then current market price of the natural gas available under the repurchase commitment. 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 also added to the earnings increase. Increased income taxes due to the reversal of certain income tax reserves aggregating $4.8 million in September 1996 and decreased operating income both partially offset the earnings improvement. Construction Materials and Mining Operations Construction Materials Operations -- Construction materials operating income increased $1.9 million due to higher revenues primarily resulting from the acquisitions of Baldwin Contracting Company, Inc. in April 1996, Medford Ready Mix, Inc. in June 1996, Orland Asphalt in February 1997, and the remaining 50% interest in Hawaiian Cement acquired in July 1997. Revenues at other construction materials operations increased as a result of higher aggregate and ready-mixed concrete sales, increased construction revenues, and higher asphalt prices. The increase in operation and maintenance and depreciation expenses was largely due to expenses associated with the previously mentioned acquisitions. Operation and maintenance expenses also increased at the other construction materials operations due to higher aggregate and ready-mixed concrete volumes sold. Coal Operations -- Operating income for the coal operations decreased $3.7 million primarily due to decreased revenues resulting from lower sales of 539,000 tons to the Coyote Station largely due to the ten-week maintenance outage. Higher average sales prices due to price increases at the Beulah Mine partially offset the reduced coal revenues. Decreased operation and maintenance and reclamation expenses, and taxes other than income, all primarily due to the decrease in volumes sold, somewhat offset the operating income decline. An increase in stripping costs at the Beulah Mine partially offset the operation expense decline. Consolidated -- Earnings declined due to decreased operating income at the coal business. Decreased Other income -- net resulting from the purchase of the remaining 50 percent interest in Hawaiian Cement acquired in July 1997, as previously described in the three months discussion, also added to the earnings decline. In addition, higher interest expense resulting mainly from increased long-term debt due to the aforementioned acquisitions also added to the decrease in earnings. Increased construction materials operating income and an insurance settlement received related to the Unitek litigation, partially offset the earnings decline. Oil and Natural Gas Production Operations Operating income for the oil and natural gas production business increased primarily as a result of higher natural gas revenues. The increase in natural gas revenue resulted from a $3.2 million improvement due to higher average prices somewhat offset by a $1.4 million decrease due to lower production. Decreased oil revenue somewhat offset the natural gas revenue increase. The decline in oil revenue was due to a $734,000 decrease resulting from lower production and a $262,000 decline due to lower average oil prices. Decreased depreciation, depletion and amortization, largely the result of lower production, also added to the increase in operating income. Earnings for this business unit increased due to the operating income improvement and decreased interest expense due to lower average long-term debt balances. Increased income taxes largely offset the earnings improvement. The increase in income taxes resulted from the reversal of certain tax reserves aggregating $1.8 million in September 1996 somewhat offset by higher tax credits in 1997. 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, weather conditions, acquisition and disposal of assets or facilities, operation and construction of plant facilities, recovery of purchased power and purchased gas costs, present or prospective generation, wholesale and retail competition (including but not limited to electric retail wheeling and transmission costs), availability of economic supplies of natural gas, and present or prospective natural gas distribution or transmission competition (including but not limited to prices of alternate fuels and system deliverability costs). Non-regulated Operations -- Certain important factors which could cause actual results or outcomes for the Company and all or certain of its non-regulated operations to differ materially from those discussed in 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. Liquidity and Capital Commitments Montana-Dakota's net capital needs for 1997 are estimated at $26 million for net capital expenditures and $30.4 million for the retirement of long-term securities. It is anticipated that Montana-Dakota will continue to provide all of the funds required for its net capital expenditures and securities retirements from internal sources, through the use of its $30 million revolving credit and term loan agreement, $30 million of which was outstanding at September 30, 1997, and through the issuance of long-term debt, the amount and timing of which will depend upon the Company's needs, internal cash generation and market conditions. In October 1997, the Company redeemed $20 million of its 9 1/8% Series first mortgage bonds, due October 1, 2016. The funds required to retire the 9 1/8% Series first mortgage bonds were provided by the issuance of $30 million in Secured Medium-Term Notes on September 30, 1997. Williston Basin's 1997 net capital needs are estimated at $11.7 million for net capital expenditures and $454,000 for the retirement of long-term securities. Williston Basin expects to meet its net capital expenditures and securities retirements for 1997 with a combination of internally generated funds, short-term lines of credit aggregating $40.6 million, $250,000 of which was outstanding at September 30, 1997, and through the issuance of long-term debt, the amount and timing of which will depend upon Williston Basin's needs, internal cash generation and market conditions. Knife River's 1997 net capital expenditures are estimated at $40.4 million, including those expended for the acquisition of Orland Asphalt and the remaining 50 percent interest in Hawaiian Cement. It is anticipated that these net capital expenditures will be met through funds generated from internal sources, short-term lines of credit aggregating $26 million, $3.6 million of which was outstanding at September 30, 1997, a revolving credit agreement of $85 million, $74.2 million of which was outstanding at September 30, 1997, and the issuance of long-term debt and the Company's equity securities. On July 31, 1997, amounts available under the short-term lines of credit increased from $11 million to $26 million. Fidelity Oil's 1997 net capital expenditures related to its oil and natural gas acquisition, development and exploration program are estimated at $35 million. It is anticipated that Fidelity's 1997 net capital expenditures will be met from internal sources and existing long-term credit facilities. Fidelity's borrowing base, which is based on total proved reserves, is currently $65 million. This consists of $20 million of issued notes, $10 million in an uncommitted note shelf facility, and a $35 million revolving line of credit, $2.0 million of which was outstanding at September 30, 1997. Other corporate net capital expenditures for 1997 are estimated at $11.9 million, including those expended for the acquisitions of International Line Builders, Inc. and High Line Equipment, Inc. These capital expenditures are anticipated to be met through the issuance of long-term debt, short-term lines of credit aggregating $2.8 million, $2.2 million of which was outstanding at September 30, 1997, and the Company's equity securities. The Company utilizes its short-term lines of credit aggregating $50 million, $10 million of which was outstanding on September 30, 1997, and its $30 million revolving credit and term loan agreement, $30 million of which was outstanding at September 30, 1997, 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. On July 31, 1997, amounts available under the short-term lines of credit were increased from $40 million to $50 million. 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, 1997, the Company could have issued approximately $230 million of additional first mortgage bonds. The Company's coverage of combined fixed charges and preferred dividends was 3.33 and 2.67 times for the twelve months ended September 30, 1997, and December 31, 1996, respectively. Additionally, the Company's first mortgage bond interest coverage was 4.8 and 5.4 times for the twelve months ended September 30, 1997, and December 31, 1996, respectively. Common stockholders' investment as a percent of total capitalization was 53% and 54% at September 30, 1997, and December 31, 1996, respectively. PART II -- OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES On July 1, 1997 and November 7, 1997, the Company issued to Mr. Marley D. Martin 160,804 shares and 64,825 shares, respectively, of Common Stock, $3.33 par value, to acquire all of the issued and outstanding capital stock of International Line Builders, Inc. (ILB) and High Line Equipment, Inc. (HLE) held by Marley D. Martin, the sole stockholder of ILB and HLE capital stock. 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. Mr. Martin represented to the Company that he is an accredited investor and that he is holding the Company's Common Stock as an investment and not with a view to distribution. 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 Dividends 27 Financial Data Schedule b) Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MDU RESOURCES GROUP, INC. DATE November 12, 1997 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 Dividends 27 Financial Data Schedule EX-12 2 Exhibit 12 MDU RESOURCES GROUP, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS Twelve Months Year Ended Ended September 30, 1997 December 31, 1996 (In thousands of dollars) Earnings Available for Fixed Charges: Net Income per Consolidated Statements of Income $ 52,773 $45,470 Income Taxes 31,041 16,087 83,814 61,557 Rents (a) 1,130 1,031 Interest (b) 33,034 34,101 Total Earnings Available for Fixed Charges $117,978 $96,689 Preferred Dividend Requirements $ 784 $ 787 Ratio of Income Before Income Taxes to Net Income 159% 135% Preferred Dividend Factor on Pretax Basis 1,247 1,062 Fixed Charges (c) 34,164 35,132 Combined Fixed Charges and Preferred Dividends $ 35,411 $36,194 Ratio of Earnings to Fixed Charges 3.45x 2.75x Ratio of Earnings to Combined Fixed Charges and Preferred Dividends 3.33x 2.67x (a) Represents portion (33 1/3%) of rents which is estimated to approximately constitute the return to the lessors on their investment in leased premises. (b) Represents interest and amortization of debt discount and expense on all indebtedness and excludes amortization of gains or losses on reacquired debt which, under the Uniform System of Accounts, is classified as a reduction of, or increase in, interest expense in the Consolidated Statements of Income. Also includes carrying costs associated with natural gas available under a repurchase agreement with Frontier Gas Storage Company as more fully described in Notes to Consolidated Financial Statements. (c) Represents rents and interest, both as defined above. EX-27 3
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF INCOME, CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000067716 MDU RESOURCES GROUP, INC. 1000 US 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 1 PER-BOOK 525,638 321,684 233,907 63,621 15,674 1,160,524 96,831 75,466 204,212 376,509 1,800 15,000 355,630 6,038 0 10,000 8,692 100 0 0 386,755 1,160,524 428,891 21,753 350,662 372,415 56,476 5,637 62,113 24,581 37,532 586 36,946 24,275 0 101,794 1.28 0
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