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, 2000
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 5, 2000: 61,148,770 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 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, through the electric and natural gas
distribution segments, generates, transmits and distributes electricity,
distributes natural gas and provides related value-added products and
services in the Northern Great Plains.
The company, through its wholly owned subsidiary, Centennial Energy
Holdings, Inc. (Centennial), owns WBI Holdings, Inc. (WBI Holdings),
Knife River Corporation (Knife River), and Utility Services, Inc.
(Utility Services).
WBI Holdings is comprised of the pipeline and energy services
and the oil and natural gas production segments. The pipeline
and energy services segment provides natural gas
transportation, underground storage and gathering services
through regulated and nonregulated pipeline systems and
provides energy marketing and management services throughout
the United States. The oil and natural gas production segment
is engaged in oil and natural gas acquisition, exploration and
production throughout the United States and in the Gulf of
Mexico.
Knife River mines and markets aggregates and related value-added
construction materials products and services in the western
United States, including Alaska and Hawaii, and also operates
lignite coal mines in Montana and North Dakota.
Utility Services is a full-service engineering, design and build
company operating in the western United States specializing in
construction and maintenance of power and natural gas
distribution and transmission systems as well as communication
and fiber optic facilities.
INDEX
Part I -- Financial Information
Consolidated Statements of Income --
Three Months Ended March 31, 2000 and 1999
Consolidated Balance Sheets --
March 31, 2000 and 1999, and December 31, 1999
Consolidated Statements of Cash Flows --
Three Months Ended March 31, 2000 and 1999
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
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,
2000 1999
(In thousands, except
per share amounts)
Operating revenues $371,989 $259,046
Operating expenses:
Fuel and purchased power 14,399 13,503
Purchased natural gas sold 171,770 90,705
Operation and maintenance 125,918 101,999
Depreciation, depletion and amortization 22,139 20,140
Taxes, other than income 8,333 7,238
342,559 233,585
Operating income 29,430 25,461
Other income -- net 2,368 3,768
Interest expense 10,281 8,806
Income before income taxes 21,517 20,423
Income taxes 8,153 7,702
Net income 13,364 12,721
Dividends on preferred stocks 192 193
Earnings on common stock $ 13,172 $ 12,528
Earnings per common share -- basic $ .23 $ .24
Earnings per common share -- diluted $ .23 $ .23
Dividends per common share $ .21 $ .20
Weighted average common shares outstanding -- basic 57,051 53,147
Weighted average common shares outstanding -- diluted 57,188 53,420
The accompanying notes are an integral part of these consolidated statements.
MDU RESOURCES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, March 31, December 31,
2000 1999 1999
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 37,622 $ 36,930 $ 77,504
Receivables 179,585 123,639 169,560
Inventories 57,468 43,176 64,608
Deferred income taxes 16,564 20,974 15,600
Prepayments and other current assets 29,452 17,849 24,424
320,691 242,568 351,696
Investments 42,907 40,550 43,128
Property, plant and equipment 2,066,881 1,837,019 2,042,281
Less accumulated depreciation,
depletion and amortization 809,568 741,392 794,105
1,257,313 1,095,627 1,248,176
Deferred charges and other assets 122,959 95,289 123,303
$1,743,870 $1,474,034 $1,766,303
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ --- $ 122 $ 14,693
Long-term debt and preferred
stock due within one year 3,841 2,502 4,428
Accounts payable 98,245 61,326 81,262
Taxes payable 13,704 20,540 6,842
Dividends payable 12,174 10,824 12,171
Other accrued liabilities,
including reserved revenues 80,412 85,756 67,931
208,376 181,070 187,327
Long-term debt 518,164 417,778 563,545
Deferred credits and other liabilities:
Deferred income taxes 215,621 173,885 213,771
Other liabilities 114,117 128,777 115,627
329,738 302,662 329,398
Preferred stock subject to mandatory
redemption 1,500 1,600 1,500
Commitments and contingencies
Stockholders' equity:
Preferred stocks 15,000 15,000 15,000
Common stockholders' equity:
Common stock (Shares issued --
$1.00 par value, 57,296,167
at March 31, 2000, 57,277,915
at December 31, 1999; $3.33 par
value, 53,395,525 at March 31, 1999 57,296 177,807 57,278
Other paid-in capital 372,661 174,264 372,312
Retained earnings 244,761 207,479 243,569
Treasury stock at cost - 239,521
shares (3,626) (3,626) (3,626)
Total common stockholders' equity 671,092 555,924 669,533
Total stockholders' equity 686,092 570,924 684,533
$1,743,870 $1,474,034 $1,766,303
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,
2000 1999
(In thousands)
Operating activities:
Net income $ 13,364 $ 12,721
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion and amortization 22,139 20,140
Deferred income taxes and investment tax credit 969 (3,352)
Changes in current assets and liabilities:
Receivables (9,938) 475
Inventories 7,250 1,689
Other current assets (5,028) 1,687
Accounts payable 16,966 1,303
Other current liabilities 19,346 25,966
Other noncurrent changes 71 (46)
Net cash provided by operating activities 65,139 60,583
Financing activities:
Net change in short-term borrowings (14,693) (14,878)
Issuance of long-term debt 25,400 25,089
Repayment of long-term debt (71,368) (21,366)
Issuance of common stock --- 3,186
Retirement of natural gas repurchase commitment --- (1,288)
Dividends paid (12,172) (10,825)
Net cash used in financing activities (72,833) (20,082)
Investing activities:
Capital expenditures including acquisitions of businesses (32,628) (37,608)
Net proceeds from sale or disposition of property 1,219 7,130
Net capital expenditures (31,409) (30,478)
Sale of natural gas available under repurchase commitment --- 619
Investments 221 2,479
Additions to notes receivable (5,000) (15,407)
Proceeds from notes receivable 4,000 ---
Net cash used in investing activities (32,188) (42,787)
Decrease in cash and cash equivalents (39,882) (2,286)
Cash and cash equivalents -- beginning of year 77,504 39,216
Cash and cash equivalents -- end of period $ 37,622 $ 36,930
The accompanying notes are an integral part of these consolidated statements.
MDU RESOURCES GROUP, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2000 and 1999
(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, 1999 (1999 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 1999 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. For
the three months ended March 31, 2000 and 1999,
comprehensive income equaled net income as reported.
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. Cash flow information
Cash expenditures for interest and income taxes were as
follows:
Three Months Ended
March 31,
2000 1999
(In thousands)
Interest, net of amount capitalized $4,728 $3,131
Income taxes $ 600 $ 130
4. 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.
5. New accounting pronouncements
In June 1998, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133). SFAS No. 133 establishes
accounting and reporting standards requiring that every
derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at
its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains
and losses to offset the related results on the hedged item
in the income statement, and requires that a company must
formally document, designate and assess the effectiveness of
transactions that receive hedge accounting treatment.
In June 1999, the FASB issued Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," which delayed the
effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000. The company will adopt SFAS No. 133 on
January 1, 2001. The company continues to evaluate the
effect of adopting SFAS No. 133 but has not yet determined
what impact this adoption will have on the company's
financial position or results of operations.
In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101,
"Revenue Recognition" (SAB No. 101), which provides guidance
on the recognition, presentation and disclosure of revenue
in financial statements. On March 24, 2000, the Securities
and Exchange Commission delayed the adoption date of SAB No.
101. SAB No. 101 is effective no later than the second
fiscal quarter of the fiscal year beginning after December
15, 1999. SAB No. 101 is not expected to have a material
effect on the company's financial position or results of
operations.
6. Derivatives
From time to time, the company utilizes derivative
financial instruments, including price swap and collar
agreements and natural gas futures, to manage a portion of
the market risk associated with fluctuations in the price of
oil and natural gas. The company's policy prohibits the use
of derivative instruments for trading purposes and the
company has procedures in place to monitor compliance with
its policies. The company is exposed to credit-related
losses in relation to financial instruments in the event of
nonperformance by counterparties, but does not expect any
counterparties to fail to meet their obligations given their
existing credit ratings.
The swap and collar 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 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, Colorado Interstate Gas Index or other various
indexes. The company believes that there is a high degree
of correlation because the timing of purchases and
production and the swap and collar agreements are closely
matched, and hedge prices are established in the areas of
operations. Amounts payable or receivable on the swap and
collar 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. Gains or losses on
futures contracts are deferred until the underlying
commodity transaction occurs, at which point they are
reported in "Purchased natural gas sold" on the Consolidated
Statements of Income.
The following table summarizes hedge agreements entered
into by certain wholly owned subsidiaries of WBI Holdings as
of March 31, 2000. These agreements call for the
subsidiaries of WBI Holdings to receive fixed prices and pay
variable prices.
(Notional amount and fair value in thousands)
Weighted
Average Notional
Fixed Price Amount Fair
(Per barrel) (In barrels) Value
Oil swap agreements
maturing in 2000 $19.55 578 $(3,962)
Weighted
Average Notional
Fixed Price Amount Fair
(Per MMBtu) (In MMBtu's) Value
Natural gas swap
agreements maturing
in 2000 $ 2.32 5,790 $(2,663)
Weighted
Average
Floor/Ceiling Notional
Price Amount Fair
(Per barrel) (In barrels) Value
Oil collar agreement
maturing in 2000 $20.00/$22.33 138 $ (588)
Weighted
Average
Floor/Ceiling Notional
Price Amount Fair
(Per MMBtu) (In MMBtu's) Value
Natural gas collar
agreements maturing
in 2000 $2.34/$2.69 2,559 $(1,017)
The following table summarizes hedge agreements entered
into by certain wholly owned subsidiaries of WBI Holdings,
as of March 31, 1999. These agreements call for the
subsidiaries of WBI Holdings to receive fixed prices and pay
variable prices.
(Notional amount and fair value in thousands)
Weighted
Average
Floor/Ceiling Notional
Price Amount Fair
(Per MMBtu) (In MMBtu's) Value
Natural gas collar
agreements maturing
in 1999 $2.10/$2.51 2,200 $ 322
Weighted
Average Notional
Fixed Price Amount Fair
(Per MMBtu) (In MMBtu's) Value
Natural gas futures
contracts maturing
in 2000 $2.38 1,000 $ 135
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 commodity hedge agreements
are expected to be generally offset by corresponding
increases and decreases in the value of the underlying
commodity transactions.
In the event a derivative financial instrument does not
qualify for hedge accounting or when the underlying
commodity transaction 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 is sold or
matures and is expected to generally offset the
corresponding increases or decreases in the value of the
underlying commodity transaction.
7. Common stock
At the Annual Meeting of Stockholders held on April 27,
1999, the company's common stockholders approved an
amendment to the Certificate of Incorporation increasing the
authorized number of common shares from 75 million shares to
150 million shares and reducing the par value of the common
stock from $3.33 per share to $1.00 per share.
8. Business segment data
The company's reportable segments are those that are
based on the company's method of internal reporting, which
generally segregates the strategic business units due to
differences in products, services and regulation. Prior to
the fourth quarter of 1999, the company reported five
operating segments consisting of electric, natural gas
distribution, natural gas transmission, construction
materials and mining, and oil and natural gas production.
During the fourth quarter of 1999, the company revised the
components of the segments reported based on organizational
changes and the significance of current segments. As a
result, a utility services segment was separated from the
electric segment; gas production activities previously
included in the natural gas transmission segment are now
reflected in the oil and natural gas production segment; and
the remaining operations of the natural gas transmission
business were renamed pipeline and energy services.
The company's operations are now conducted through six
business segments and all prior period information has been
restated to reflect this change. As of March 31, 2000, all
of the company's operations are located within the United
States. The electric business generates, transmits and
distributes electricity and the natural gas distribution
business distributes natural gas, and these operations also
supply related value-added products and services in the
Northern Great Plains. The utility services business is a
full-service engineering, design and build company operating
in the western United States specializing in construction
and maintenance of power and natural gas distribution and
transmission systems as well as communication and fiber
optic facilities. The pipeline and energy services business
provides natural gas transportation, underground storage and
gathering services through regulated and nonregulated
pipeline systems and provides energy marketing and
management services throughout the United States. The oil
and natural gas production business is engaged in oil and
natural gas acquisition, exploration and production
throughout the United States and in the Gulf of Mexico. The
construction materials and mining business mines and markets
aggregates and related value-added construction materials
products and services in the western United States,
including Alaska and Hawaii. It also operates lignite coal
mines in Montana and North Dakota.
Segment information follows the same accounting policies
as described in Note 1 of the company's 1999 Annual Report.
Segment information included in the accompanying
Consolidated Statements of Income is as follows:
Operating
Operating Revenues Earnings
Revenues Inter- on Common
External segment Stock
Three Months (In thousands)
Ended March 31, 2000
Electric $ 40,320 $ --- $ 3,223
Natural gas distribution 62,417 --- 2,580
Utility services 22,836 --- 453
Pipeline and energy
services 147,738 20,497 2,729
Oil and natural gas
production 23,043 4,190 6,409
Construction materials
and mining 72,050 3,585* (2,222)
Intersegment eliminations --- (24,687) ---
Total $ 368,404 $ 3,585* $13,172
Three Months
Ended March 31, 1999
Electric $ 40,232 $ --- $ 4,266
Natural gas distribution 61,126 --- 2,878
Utility services 18,742 --- 897
Pipeline and energy
services 66,635 20,721 4,264
Oil and natural gas
production 12,273 2,711 1,596
Construction materials
and mining 55,976 4,062* (1,373)
Intersegment eliminations --- (23,432) ---
Total $ 254,984 $ 4,062* $12,528
* In accordance with the provisions of Statement of
Financial Accounting Standards No. 71, "Accounting for
the Effects of Regulation" (SFAS No. 71), intercompany
coal sales are not eliminated.
9. Regulatory matters and revenues subject to refund
In June 1995, Williston Basin Interstate Pipeline
Company (Williston Basin), an indirect wholly owned
subsidiary of the company, filed a general rate increase
application with the Federal Energy Regulatory Commission
(FERC). As a result of FERC orders issued after Williston
Basin's application was filed, Williston Basin filed revised
base rates in December 1995 with the FERC. Williston Basin
began collecting such increase effective January 1, 1996,
subject to refund. In July 1998, the FERC issued an order
which addressed various issues including storage cost
allocations, return on equity and throughput. In August
1998, Williston Basin requested rehearing of such order. In
June 1999, the FERC issued an order approving and denying
various issues addressed in Williston Basin's rehearing
request, and also remanding the return on equity issue to an
Administrative Law Judge for further proceedings. In July
1999, Williston Basin requested rehearing of certain issues
which were contained in the June 1999 FERC order. In
September 1999, the FERC granted Williston Basin's request
for rehearing with respect to the return on equity issue but
also ordered Williston Basin to issue interim refunds prior
to the final determination in this proceeding. As a result,
in October 1999, Williston Basin issued refunds to its
customers totaling $11.3 million, all from amounts which had
previously been reserved. In December 1999, a hearing was
held before the FERC regarding the return on equity issue.
In April 2000, the Administrative Law Judge issued an
Initial Decision regarding the remanded return on equity
issue and Williston Basin is currently evaluating its
options regarding this decision. In addition, in July 1999,
Williston Basin appealed to the United States Court of
Appeals for the D.C. Circuit (D.C. Circuit Court) certain
issues concerning storage cost allocations as decided by the
FERC in its June 1999 order. In October 1999, the D.C.
Circuit Court issued an order which dismissed Williston
Basin's appeal but permitted Williston Basin to again appeal
such previously contested issues upon final determination of
all issues by the FERC in this proceeding.
In December 1999, Williston Basin filed a general
natural gas rate change application with the FERC.
Williston Basin will begin collecting such rates effective
June 1, 2000, subject to refund.
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.
10. Litigation
In March 1997, 11 natural gas producers filed suit in
North Dakota Northwest Judicial District Court (North Dakota
District Court) against Williston Basin and the company.
The natural gas producers had processing agreements with
Koch Hydrocarbon Company (Koch). Williston Basin and the
company had natural gas purchase contracts with Koch. The
natural gas producers allege they are entitled to damages
for the breach of Williston Basin's and the company's
contracts with Koch although no specific damages have been
stated. A similar suit was filed by Apache Corporation
(Apache) and Snyder Oil Corporation (Snyder) in North Dakota
District Court in December 1993. The North Dakota Supreme
Court in December 1999 affirmed the North Dakota District
Court decision dismissing Apache's and Snyder's claims
against Williston Basin and the company. Based in part upon
the decision of the North Dakota Supreme Court affirming the
dismissal of the claims brought by Apache and Snyder,
Williston Basin and the company have filed motions for
summary judgment to dismiss the claims of the 11 natural gas
producers. Oral argument on those motions was held May 8,
2000. Williston Basin and the company are awaiting a
decision from the North Dakota District Court. A trial on
the claims of the natural gas producers has been set to
commence on October 23, 2000.
In Williston Basin's opinion, the claims of the 11
natural gas producers are without merit. If any amounts are
ultimately found to be due, Williston Basin plans to file
with the FERC for recovery from customers. However, the
amount of costs that can ultimately be recovered is subject
to approval by the FERC and market conditions.
In June 1999, several oil and gas royalty interest
owners filed suit in Colorado State District Court, in the
City and County of Denver, against WBI Production, Inc. (WBI
Production), an indirect wholly owned subsidiary of the
company, and several former producers of natural gas with
respect to certain gas production properties in the state of
Colorado. The complaint arose as a result of the purchase
by WBI Production, effective January 1, 1999, of certain
natural gas producing leaseholds from the former producers.
Prior to February 1, 1999, the natural gas produced from the
leaseholds was sold at above market prices pursuant to a
natural gas contract. Pursuant to the contract, the royalty
interest owners were paid royalties based upon the above
market prices. The royalty interest owners have alleged that
WBI Production took assignment of the rights to the natural
gas contract from the former owner of the contract and, with
respect to natural gas produced from such leases and sold at
market prices thereafter, wrongly ceased paying the higher
royalties on such gas.
In their complaint, the royalty interest owners have
alleged, in part, breach of oil and gas lease obligations
and unjust enrichment on the part of WBI Production and the
other former producers with respect to the amount of
royalties being paid to the royalty interest owners. The
royalty interest owners have requested damages under
alternate theories of up to approximately $11.6 million for
additional royalties, excluding interest. Motions for
summary judgment are pending. Trial before the Colorado
State District Court had been scheduled to be held during
the week of April 24, 2000, but was rescheduled for the week
of October 2, 2000. WBI Production is vigorously contesting
the suit.
In July 1996, Jack J. Grynberg (Grynberg) filed suit in
United States District Court for the District of Columbia
(U.S. District Court) against Williston Basin and over 70
other natural gas pipeline companies. Grynberg, acting on
behalf of the United States under the Federal False Claims
Act, alleged improper measurement of the heating content or
volume of natural gas purchased by the defendants resulting
in the underpayment of royalties to the United States. In
March 1997, the U.S. District Court dismissed the suit
without prejudice and the dismissal was affirmed by the D.C.
Circuit Court in October 1998. In June 1997, Grynberg filed
a similar Federal False Claims Act suit against Williston
Basin and Montana-Dakota and filed over 70 other separate
similar suits against natural gas transmission companies and
producers, gatherers, and processors of natural gas. In
April 1999, the United States Department of Justice decided
not to intervene in these cases. In response to a motion
filed by Grynberg, the Judicial Panel on Multidistrict
Litigation consolidated all of these cases in the Federal
District Court of Wyoming (Federal District Court). Oral
argument on motions to dismiss was held before the Federal
District Court on March 17, 2000. Williston Basin and
Montana-Dakota are awaiting a decision from the Federal
District Court.
The Quinque Operating Company (Quinque), on behalf of
itself and subclasses of gas producers, royalty owners and
state taxing authorities, instituted a legal proceeding in
State District Court for Stevens County, Kansas, against
over 200 natural gas transmission companies and producers,
gatherers, and processors of natural gas, including
Williston Basin and Montana-Dakota. The complaint, which
was served on Williston Basin and Montana-Dakota in
September 1999, contains allegations of improper measurement
of the heating content and volume of all natural gas
measured by the defendants other than natural gas produced
from federal lands. In response to a motion filed by the
defendants in this suit, the Judicial Panel on Multidistrict
Litigation transferred the suit to the Federal District
Court for inclusion in the pretrial proceedings of the
Grynberg suit.
Williston Basin and Montana-Dakota believe the claims
of Grynberg and Quinque are without merit and intend to
vigorously contest these suits.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Prior to the fourth quarter of 1999, the company reported
five operating segments consisting of electric, natural gas
distribution, natural gas transmission, construction materials
and mining, and oil and natural gas production. During the
fourth quarter of 1999, the company revised the components of the
segments reported based on organizational changes and the
significance of current segments. As a result, a utility
services segment was separated from the electric segment; gas
production activities previously included in the natural gas
transmission segment are now reflected in the oil and natural gas
production segment; and the remaining operations of the natural
gas transmission business were renamed pipeline and energy
services.
The company's operations are now conducted through six
business segments and all prior period information has been
restated to reflect this change. For purposes of segment
financial reporting and discussion of results of operations,
electric and natural gas distribution include the electric and
natural gas distribution operations of Montana-Dakota. Utility
services includes all the operations of Utility Services, Inc.
Pipeline and energy services includes WBI Holdings'
transportation, storage, gathering and energy marketing and
management services. Oil and natural gas production includes the
oil and natural gas acquisition, exploration, development and
production operations of WBI Holdings, while construction
materials and mining includes the results of Knife River's
operations.
Overview
The following table (dollars in millions, where
applicable) summarizes the contribution to consolidated
earnings by each of the company's business segments.
Three Months
Ended
March 31,
2000 1999
Electric $ 3.2 $ 4.3
Natural gas distribution 2.6 2.9
Utility services .5 .9
Pipeline and energy services 2.7 4.2
Oil and natural gas production 6.4 1.6
Construction materials and mining (2.2) (1.4)
Earnings on common stock $ 13.2 $ 12.5
Earnings per common share - basic $ .23 $ .24
Earnings per common share - diluted $ .23 $ .23
Return on average common equity
for the 12 months ended 13.4% 5.1%*
________________________________
* Reflects $39.9 million in noncash after-tax write-downs of oil
and natural gas properties in 1998.
Three Months Ended March 31, 2000 and 1999
Consolidated earnings for the quarter ended March 31, 2000,
increased $700,000 from the comparable period a year ago due
to higher earnings at the oil and natural gas production
business, largely offset by lower earnings at all other
business segments.
________________________________
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 (dollars in millions, where applicable)
are key financial and operating statistics for each of the
company's business segments.
Electric
Three Months
Ended
March 31,
2000 1999
Operating revenues:
Retail sales $ 34.0 $ 34.0
Sales for resale and other 6.3 6.2
40.3 40.2
Operating expenses:
Fuel and purchased power 14.4 13.5
Operation and maintenance 11.3 10.7
Depreciation, depletion and amortization 4.7 4.5
Taxes, other than income 2.1 1.9
32.5 30.6
Operating income $ 7.8 $ 9.6
Retail sales (million kWh) 546.5 536.1
Sales for resale (million kWh) 256.8 268.6
Average cost of fuel and purchased
power per kWh $ .017 $ .016
Natural Gas Distribution
Three Months
Ended
March 31,
2000 1999
Operating revenues:
Sales $ 61.4 $ 60.1
Transportation and other 1.0 1.0
62.4 61.1
Operating expenses:
Purchased natural gas sold 45.8 44.9
Operation and maintenance 8.5 7.8
Depreciation, depletion and amortization 1.9 1.8
Taxes, other than income 1.3 1.1
57.5 55.6
Operating income $ 4.9 $ 5.5
Volumes (MMdk):
Sales 13.3 13.2
Transportation 3.4 3.1
Total throughput 16.7 16.3
Degree days (% of normal) 87% 87%
Average cost of natural gas, including
transportation thereon, per dk $ 3.45 $ 3.40
Utility Services
Three Months
Ended
March 31,
2000 1999
Operating revenues $ 22.8 $ 18.8
Operating expenses:
Operation and maintenance 20.0 15.9
Depreciation, depletion and amortization .9 .6
Taxes, other than income .8 .7
21.7 17.2
Operating income $ 1.1 $ 1.6
Pipeline and Energy Services
Three Months
Ended
March 31,
2000 1999
Operating revenues:
Pipeline $ 15.1 $ 15.2
Energy services 153.2 72.1
168.3 87.3
Operating expenses:
Purchased natural gas sold 149.1 69.1
Operation and maintenance 8.9 7.3
Depreciation, depletion and amortization 2.2 1.9
Taxes, other than income 1.4 1.2
161.6 79.5
Operating income $ 6.7 $ 7.8
Transportation volumes (MMdk):
Montana-Dakota 8.7 8.3
Other 11.3 8.8
20.0 17.1
Oil and Natural Gas Production
Three Months
Ended
March 31,
2000 1999
Operating revenues:
Oil $ 10.4 $ 5.0
Natural gas 14.0 9.8
Other 2.8 .2
27.2 15.0
Operating expenses:
Purchased natural gas sold 1.3 ---
Operation and maintenance 6.9 5.7
Depreciation, depletion and amortization 5.6 5.7
Taxes, other than income 2.0 1.4
15.8 12.8
Operating income $ 11.4 $ 2.2
Production:
Oil (000's of barrels) 471 481
Natural gas (MMcf) 6,466 6,238
Average prices:
Oil (per barrel) $ 21.97 $ 10.35
Natural gas (per Mcf) 2.17 1.57
Construction Materials and Mining
Three Months
Ended
March 31,
2000 1999
Operating revenues:
Construction materials $ 68.4 $ 50.1
Coal 7.2 10.0
75.6 60.1
Operating expenses:
Operation and maintenance 70.5 54.7
Depreciation, depletion and amortization 6.8 5.7
Taxes, other than income .8 .9
78.1 61.3
Operating loss $ (2.5)$ (1.2)
Sales (000's):
Aggregates (tons) 2,126 1,538
Asphalt (tons) 93 104
Ready-mixed concrete (cubic yards) 288 217
Coal (tons) 678 879
Amounts presented in the preceding tables for 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 the pipeline and energy services segment
and the natural gas distribution and oil and natural gas
production segments. The amounts relating to the elimination of
intercompany transactions for operating revenues, purchased
natural gas sold and operation and maintenance expenses are as
follows: $24.6 million, $24.4 million and $.2 million for the
three months ended March 31, 2000; and $23.4 million, $23.3
million and $.1 million for the three months ended March 31,
1999, respectively.
Three Months Ended March 31, 2000 and 1999
Electric
Electric earnings decreased due to higher retail fuel and
purchased power costs largely due to increased generation at
higher cost versus lower cost generating stations and increased
purchases from outside suppliers, both resulting from outages at
a large electric generating station. Also contributing to the
earnings decline were higher operation and maintenance expenses
resulting from increased payroll expense, and higher maintenance
costs at a large electric generating station, partially offset by
lower employee benefit-related costs. Higher average realized
rates on sales for resale slightly offset the earnings decline.
Natural Gas Distribution
Earnings decreased at the natural gas distribution
business due to increased operation and maintenance expenses,
primarily higher payroll expense and increased subcontractor
costs partially offset by lower employee benefit-related
costs. The natural gas distribution business continued to
experience lower than normal volumes resulting from weather
that was 13 percent warmer than normal. Higher service and
repair income partially offset the earnings decrease.
Utility Services
Utility services earnings declined due to decreased workload
at some of the existing operations that have been affected by
utility merger activity in the Pacific Northwest, partially
offset by earnings from companies acquired since the comparable
period last year.
Pipeline and Energy Services
Earnings at the pipeline and energy services business
decreased due to the recognition in 1999 of $1.7 million
resulting from a favorable order received from the D.C. Circuit
Court relating to a 1992 general rate proceeding. Increased
operating costs, primarily higher payroll expense, depreciation
expense and other taxes also added to the earnings decrease.
Increased transportation to off-system and on-system markets
partially offset by decreased transportation to storage, and
earnings from acquisitions since the comparable period last year
partially offset the earnings decrease. The increase in energy
services revenue and the related increase in purchased natural
gas sold resulted from increased energy marketing volumes.
Oil and Natural Gas Production
Earnings for the oil and natural gas production business
increased primarily as a result of increased operating
revenues resulting from realized oil and natural gas prices
which were 112 percent and 38 percent higher than last year,
respectively. Higher natural gas production due to both a new
acquisition and ongoing development of existing properties
also added to the earnings increase. Partially offsetting
the earnings improvement were higher production taxes,
largely the result of higher commodity prices.
Construction Materials and Mining
Construction materials and mining earnings decreased due to
normal seasonal losses realized in the first quarter of 2000 by
construction materials businesses acquired since the comparable
period last year, partially offset by increased construction
activity at existing construction materials operations. Higher
aggregate, ready-mixed concrete and construction volumes, were
partially offset by higher selling, general and administrative
costs at the existing construction materials operations.
Decreased coal volumes sold resulting from outages at a large
electric generating station also added to the earnings decline.
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.
In addition to other factors and matters discussed elsewhere
herein, some important factors that could cause actual results or
outcomes for the company 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 and availability of economic supplies of natural gas.
Other important factors include the level of governmental
expenditures on public projects and project schedules, changes in
anticipated tourism levels, the effects of competition (including
but not limited to electric retail wheeling and transmission
costs and prices of alternate fuels and system deliverability
costs), 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.
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 to effectively integrate the operations of acquired
companies.
Prospective Information
Montana-Dakota has obtained and holds valid and existing
franchises authorizing it to conduct its electric operations in
all of the municipalities it serves where such franchises are
required. As franchises expire, Montana-Dakota may face
increasing competition in its service areas, particularly its
service to smaller towns, from rural electric cooperatives.
Montana-Dakota intends to protect its service area and seek
renewal of all expiring franchises and will continue to take
steps to effectively operate in an increasingly competitive
environment.
In January 2000, the company announced an agreement to
acquire Great Plains Natural Gas Company (Great Plains). Great
Plains is a natural gas distribution company serving 19
communities in western Minnesota and southeastern North Dakota.
The North Dakota Public Service Commission has approved the
acquisition and approval is currently pending with the Minnesota
Public Utilities Commission.
Also in January 2000, the company announced that the Board
of Directors had approved the acquisition of Connolly-Pacific
Co., a southern California aggregate mining and marine
construction company. Thomas Everist, a member of the company's
Board of Directors, has an interest in L.G. Everist,
Incorporated, which has owned Connolly-Pacific Co. since 1977.
At the company's Annual Meeting of Stockholders held on April 25,
2000, in accordance with New York Stock Exchange rules, the
acquisition was approved by the stockholders of the company.
In addition, in April 2000, the company acquired ready-mixed
concrete companies in Montana and a pipeline and cable locating
technology company based in Texas. Substantially all of the
assets of a natural gas exploration and production company
headquartered in Colorado, specializing in the development of
coal bed methane reserves on over 187,000 net acres under lease
in the Powder River Basin of Wyoming and Montana were also
acquired. None of the above acquisitions were individually
material.
Liquidity and Capital Commitments
Net capital expenditures for the year 2000 are estimated at
$355.3 million, including those for acquisitions to date, system
upgrades, routine replacements, service extensions, routine
equipment maintenance and replacements, pipeline expansion
projects, the building of construction materials handling and
transportation facilities, and the further enhancement of oil and
natural gas production and reserve growth. It is anticipated that
all of the funds required for capital expenditures will be met
from various sources. These sources include internally generated
funds, the company's $40 million revolving credit and term loan
agreement, existing lines of credit aggregating $7.2 million, a
commercial paper credit facility at Centennial, as described
below, and through the issuance of long-term debt and the
company's equity securities. At March 31, 2000, $24 million
under the revolving credit and term loan agreement and $6.3
million under the lines of credit were outstanding.
Centennial, a direct wholly owned subsidiary of the company,
has a revolving credit agreement with various banks on behalf of
its subsidiaries that supports the $250 million Centennial
commercial paper program. Under the commercial paper program,
$172.3 million was outstanding at March 31, 2000. The commercial
paper borrowings are classified as long term as the company
intends to refinance these borrowings on a long term basis
through continued commercial paper borrowings supported by the
revolving credit agreement due September 1, 2002. The company
intends to renew this existing credit agreement on an annual
basis.
Centennial entered into an uncommitted long-term master
shelf agreement on behalf of its subsidiaries that allows for
borrowings of up to $200 million. Under the master shelf
agreement, $25 million was outstanding at March 31, 2000.
The estimated 2000 capital expenditures set forth above for
electric, natural gas distribution, utility services, pipeline
and energy services and construction materials and mining
operations do not include potential future acquisitions. The
company continues to seek additional growth opportunities,
including investing in the development of related lines of
business. To the extent that acquisitions occur, the company
anticipates that such acquisitions would be financed with
existing credit facilities and the issuance of long-term debt and
the company's equity securities.
In January 2000, the company announced that its Board of
Directors approved a stock repurchase program, authorizing the
purchase of up to 1 million shares of the company's outstanding
common stock. The amount and timing of purchases will depend on
market conditions. It is anticipated that the funds required for
this program will be met from internally generated funds, the
issuance of long-term or short-term debt or other sources that
become available from time to time. Unless extended, the stock
repurchase program will be terminated on or prior to December 31,
2001. As of March 31, 2000, no shares have been repurchased
under the program.
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, 2000, the company could have
issued approximately $285 million of additional first mortgage
bonds.
The company's coverage of fixed charges including preferred
dividends was 4.2 times and 4.3 times for the twelve months ended
March 31, 2000, and December 31, 1999, respectively.
Additionally, the company's first mortgage bond interest coverage
was 6.9 times and 7.1 times for the twelve months ended March 31,
2000, and December 31, 1999, respectively. Common stockholders'
equity as a percent of total capitalization was 56 percent and 54
percent at March 31, 2000, and December 31, 1999, respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes in market risk faced by the
company from those reported in the company's Annual Report on
Form 10-K for the year ended December 31, 1999. For more
information on market risk, see Part II, Item 7A in the company's
Annual Report on Form 10-K for the year ended December 31, 1999,
and Notes to Consolidated Financial Statements in this Form 10-Q.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Oral argument on motions for summary judgment to dismiss the
claims of the 11 natural gas producers before the North Dakota
District Court was held May 8, 2000. Williston Basin and the
company are awaiting a decision from the North Dakota District
Court. Trial has been set to commence on October 23, 2000.
Trial before the Colorado State District Court had been
scheduled to be held during the week of April 24, 2000, but was
rescheduled for the week of October 2, 2000 in the oil and gas
royalty interest owners legal proceeding.
Oral argument on motions to dismiss was held before the
Federal District Court on March 17, 2000 in the Grynberg legal
proceeding. Williston Basin and Montana-Dakota are awaiting a
decision from the Federal District Court.
In response to a motion filed by the defendants in the
Quinque legal proceeding, the Judicial Panel on Multidistrict
Litigation transferred the Quinque suit to the Federal District
Court for inclusion in the pretrial proceedings of the Grynberg
suit.
For more information on the above legal actions see Note 10
of Notes to Consolidated Financial Statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 28, 2000, the company issued 18,252 shares of
Common Stock, $1.00 par value, as part of a final adjustment with
respect to an acquisition of a business in a prior period. The
Common Stock issued by the company in this transaction was issued
in a private sale exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933. The former owners of
the business acquired, and now shareholders of the company, are
accredited investors and have acknowledged that they would hold
the company's Common Stock as an investment and not with a view
to distribution.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company's Annual Meeting of Stockholders was held on
April 25, 2000. Four proposals were submitted to stockholders as
described in the company's Proxy Statement dated March 10, 2000,
and were voted upon and approved by stockholders at the meeting.
The table below briefly describes the proposals and the results
of the stockholder votes.
Shares
Shares Against or Broker
For Withheld Abstentions Non-Votes
Proposal to approve the
acquisition of Connolly-
Pacific Co. and the issuance
of common stock in connection
therewith 37,353,207 1,296,776 667,489 5,017,756
Proposal to amend the 1992 Key
Employee Stock Option Plan 40,264,025 2,716,449 1,354,754 ---
Proposal to amend the 1997
Executive Long-Term Incentive
Plan 39,547,863 3,310,752 1,476,613 ---
Proposal to elect four directors:
For terms expiring in 2003 --
San W. Orr, Jr. 43,353,150 982,078 --- ---
Harry J. Pearce 42,546,679 1,788,549 --- ---
Homer A. Scott, Jr. 43,411,731 923,497 --- ---
Sister Thomas Welder, O.S.B. 43,291,355 1,043,873 --- ---
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10(a) 1992 Key Employee Stock Option Plan, as amended to date
10(b) 1997 Executive Long-Term Incentive Plan, as amended to
date
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
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
MDU RESOURCES GROUP, INC.
DATE May 11, 2000 BY /s/ Warren L. Robinson
Warren L. Robinson
Executive 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.
10(a) 1992 Key Employee Stock Option Plan, as amended to date
10(b) 1997 Executive Long-Term Incentive Plan, as amended to date
12 Computation of Ratio of Earnings to Fixed Charges
and Combined Fixed Charges and Preferred Stock
Dividends
27 Financial Data Schedule