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, 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 November 3, 2000: 64,434,926 shares.
INTRODUCTION
This Form 10-Q contains forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements should be read with the cautionary statements and important
factors included in this Form 10-Q at Item 2 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Safe
Harbor for Forward-looking Statements. Forward-looking statements are
all statements other than statements of historical fact, including
without limitation, those statements that are identified by the words
"anticipates," "estimates," "expects," "intends," "plans," "predicts" and
similar expressions.
MDU Resources Group, Inc. (company) is a diversified natural resource
company which was incorporated under the laws of the State of Delaware in
1924. Its principal executive offices are at the Schuchart Building, 918
East Divide Avenue, P.O. Box 5650, Bismarck, North Dakota 58506-5650,
telephone (701) 222-7900.
Montana-Dakota Utilities Co. (Montana-Dakota), a 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. Great Plains Natural Gas Co., a
public utility division of the company, distributes natural gas in
eastern North Dakota and western Minnesota.
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. On September 28,
2000, Knife River announced an agreement to sell its coal
operations subject to various closing conditions. For more
information on the above pending sale see Prospective Information
contained in Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Utility Services is a full-service engineering, design and build
company operating throughout the United States specializing in
construction and maintenance of power and natural gas
distribution and transmission systems, communication and fiber
optic facilities. Utility services also provides industrial
electrical, traffic signal and street lighting services, as well
as tool and equipment sales and rentals.
INDEX
Part I -- Financial Information
Consolidated Statements of Income --
Three and Nine Months Ended September 30, 2000 and 1999
Consolidated Balance Sheets --
September 30, 2000 and 1999, and December 31, 1999
Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 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 Nine Months
Ended Ended
September 30, September 30,
2000 1999 2000 1999
(In thousands, except per share amounts)
Operating revenues $530,834 $375,591 $1,265,802 $924,904
Operating expenses:
Fuel and purchased power 13,399 13,270 39,603 39,225
Purchased natural gas sold 123,132 85,091 389,906 247,546
Operation and maintenance 280,409 195,314 589,504 441,084
Depreciation, depletion and amortization 28,686 20,838 75,130 60,960
Taxes, other than income 9,185 7,022 25,128 20,924
454,811 321,535 1,119,271 809,739
Operating income 76,023 54,056 146,531 115,165
Other income -- net 1,947 2,200 8,624 7,033
Interest expense 13,333 9,178 34,539 26,436
Income before income taxes 64,637 47,078 120,616 95,762
Income taxes 24,645 17,980 46,133 36,147
Net income 39,992 29,098 74,483 59,615
Dividends on preferred stocks 191 193 575 579
Earnings on common stock $ 39,801 $ 28,905 $ 73,908 $ 59,036
Earnings per common share -- basic $ .63 $ .53 $ 1.23 $ 1.10
Earnings per common share -- diluted $ .63 $ .52 $ 1.23 $ 1.09
Dividends per common share $ .22 $ .21 $ .64 $ .61
Weighted average common shares
outstanding -- basic 62,975 54,995 60,015 53,845
Weighted average common shares
outstanding -- diluted 63,345 55,278 60,238 54,102
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,
2000 1999 1999
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 47,267 $ 38,837 $ 77,504
Receivables 284,491 184,181 169,560
Inventories 76,065 64,736 64,608
Deferred income taxes 7,043 14,958 15,600
Prepayments and other current assets 43,992 30,084 24,424
458,858 332,796 351,696
Investments 41,480 43,651 43,128
Property, plant and equipment 2,424,888 1,987,721 2,042,281
Less accumulated depreciation,
depletion and amortization 862,148 776,050 794,105
1,562,740 1,211,671 1,248,176
Deferred charges and other assets 182,791 98,825 123,303
$2,245,869 $1,686,943 $1,766,303
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 12,000 $ 3,479 $ 14,693
Long-term debt and preferred
stock due within one year 6,407 5,106 4,428
Accounts payable 131,003 93,968 81,262
Taxes payable 9,372 20,645 6,842
Dividends payable 14,385 12,093 12,171
Other accrued liabilities,
including reserved revenues 79,135 82,454 67,931
252,302 217,745 187,327
Long-term debt 758,170 487,953 563,545
Deferred credits and other liabilities:
Deferred income taxes 262,034 196,876 213,771
Other liabilities 119,926 117,418 115,627
381,960 314,294 329,398
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, 64,466,401
at September 30, 2000, 56,904,804
at September 30, 1999 and
57,277,915 at December 31, 1999) 64,466 56,905 57,278
Other paid-in capital 497,572 365,796 372,312
Retained earnings 278,525 231,276 243,569
Treasury stock at cost - 239,521
shares (3,626) (3,626) (3,626)
Total common stockholders' equity 836,937 650,351 669,533
Total stockholders' equity 851,937 665,351 684,533
$2,245,869 $1,686,943 $1,766,303
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,
2000 1999
(In thousands)
Operating activities:
Net income $ 74,483 $ 59,615
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion and amortization 75,130 60,960
Deferred income taxes and investment tax credit 20,627 6,754
Changes in current assets and liabilities:
Receivables (63,224) (28,789)
Inventories (2,563) (13,810)
Other current assets (18,584) (10,067)
Accounts payable 19,695 24,761
Other current liabilities 14,792 19,705
Other noncurrent changes 676 31
Net cash provided by operating activities 121,032 119,160
Financing activities:
Net change in short-term borrowings (3,242) (17,244)
Issuance of long-term debt 201,815 79,633
Repayment of long-term debt (20,461) (17,867)
Issuance of common stock 27,278 3,184
Retirement of natural gas repurchase commitment --- (14,296)
Dividends paid (39,527) (33,922)
Net cash provided by (used in) financing activities 165,863 (512)
Investing activities
Capital expenditures including acquisitions of businesses (323,225) (116,875)
Net proceeds from sale or disposition of property 5,092 12,447
Net capital expenditures (318,133) (104,428)
Sale of natural gas available under repurchase commitment --- 1,330
Investments 2,001 (522)
Additions to notes receivable (5,000) (15,407)
Proceeds from notes receivable 4,000 ---
Net cash used in investing activities (317,132) (119,027)
Decrease in cash and cash equivalents (30,237) (379)
Cash and cash equivalents -- beginning of year 77,504 39,216
Cash and cash equivalents -- end of period $ 47,267 $ 38,837
The accompanying notes are an integral part of these consolidated statements.
MDU RESOURCES GROUP, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 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 and nine months ended September 30, 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:
Nine Months Ended
September 30,
2000 1999
(In thousands)
Interest, net of amount capitalized $ 28,520 $18,059
Income taxes $ 25,946 $21,724
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" (SFAS No. 137), which delayed
the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000. In June 2000, the FASB issued Statement
of Financial Accounting Standards No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging
Activities -- an amendment of FASB Statement No. 133" (SFAS No.
138). The company will adopt SFAS No. 133, as amended by SFAS
No. 137 and SFAS No. 138, on January 1, 2001. The company is
continuing to evaluate the effects of adopting SFAS No. 133, as
amended, on its financial position and results of operations.
However, as discussed below, SFAS No. 133, as amended, will
impact the company's financial position and could increase
volatility in earnings and accumulated other comprehensive
income. The company plans to utilize certain derivative
financial instruments to manage a portion of the market risk
associated with fluctuations in the price of oil and natural
gas. The company intends to designate these contracts as
hedges of the underlying purchases or sales and will record
derivative assets and liabilities on its balance sheet based on
the fair value of the contracts at the adoption date. Such
amounts are expected to be substantially offset by an amount
that will be recorded in "Accumulated other comprehensive
income" on the company's Consolidated Balance Sheets. The fair
values will fluctuate over time due to changes in the
underlying commodity prices.
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 June 26, 2000, the Securities and Exchange Commission
delayed the adoption date of SAB No. 101. SAB No. 101 is
required to be adopted in the fourth quarter of 2000. SAB No.
101 is not expected to have a material effect on the company's
financial position or results of operations.
6. Derivatives
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
September 30, 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 $19.55 193 $(2,115)
Weighted
Average Notional
Fixed Price Amount Fair
(Per MMBtu) (In MMBtu's) Value
Natural gas swap
agreements maturing
in 2000 $2.32 1,987 $(4,824)
Weighted
Average
Floor/Ceiling Notional
Price Amount Fair
(Per barrel) (In barrels) Value
Oil collar agreement
maturing in 2000 $20.00/$22.33 46 $(379)
Weighted
Average
Floor/Ceiling Notional
Price Amount Fair
(Per MMBtu) (In MMBtu's) Value
Natural gas collar
agreements maturing
in 2000 $2.38/$2.71 1,122 $(2,822)
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. 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. Substantially 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. 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 throughout the United States
specializing in construction and maintenance of power and
natural gas distribution and transmission systems,
communication and fiber optic facilities. Utility services
also provides industrial electrical, traffic signal and street
lighting services, as well as tool and equipment sales and
rentals. 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:
Inter-
External segment Earnings
Operating Operating on Common
Revenues Revenues Stock
(In thousands)
Three Months
Ended September 30, 2000
Electric $ 42,078 $ --- $ 5,920
Natural gas distribution 24,912 --- (2,180)
Utility services 60,056 --- 3,860
Pipeline and energy
services 136,679 7,508 2,997
Oil and natural gas
production 25,012 10,241 10,001
Construction materials
and mining 238,647 3,450* 19,203
Intersegment eliminations --- (17,749) ---
Total $ 527,384 $ 3,450* $ 39,801
Three Months
Ended September 30, 1999
Electric $ 40,141 $ --- $ 4,743
Natural gas distribution 19,926 --- (1,730)
Utility services 25,708 --- 1,904
Pipeline and energy
services 99,406 4,750 6,519
Oil and natural gas
production 16,278 4,193 3,854
Construction materials
and mining 170,749 3,383* 13,615
Intersegment eliminations --- (8,943) ---
Total $ 372,208 $ 3,383* $ 28,905
* 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.
Inter-
External segment Earnings
Operating Operating on Common
Revenues Revenues Stock
(In thousands)
Nine Months
Ended September 30, 2000
Electric $ 118,799 $ --- $ 12,179
Natural gas distribution 116,370 --- (270)
Utility services 107,243 --- 5,387
Pipeline and energy
services 381,989 37,622 6,645
Oil and natural gas
production 69,861 21,985 23,499
Construction materials
and mining 461,680 9,860* 26,468
Intersegment eliminations --- (59,607) ---
Total $1,255,942 $ 9,860* $ 73,908
Nine Months
Ended September 30, 1999
Electric $ 117,322 $ --- $ 12,286
Natural gas distribution 106,931 --- 598
Utility services 67,915 --- 4,588
Pipeline and energy
services 246,785 32,135 17,686
Oil and natural gas
production 43,911 10,069 9,372
Construction materials
and mining 331,516 10,524* 14,506
Intersegment eliminations --- (42,204) ---
Total $ 914,380 $ 10,524* $ 59,036
* In accordance with the provisions of SFAS No. 71,
intercompany coal sales are not eliminated.
The company has acquired a number of businesses during the
first nine months of 2000, none of which were individually
material, including construction materials and mining
businesses with operations in Alaska, California, Montana, and
Oregon, utility services businesses based in California,
Colorado, Montana and Ohio, an energy services company based in
Texas, a coal bed natural gas development company and related
assets in Montana and Wyoming and a natural gas distribution
business serving western North Dakota and eastern Minnesota.
The total purchase consideration for these businesses,
consisting of the company's common stock, cash and the
conversion of a note receivable to purchase consideration was
$273.5 million.
8. 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, which matter is currently pending resolution. On
August 15, 2000, Williston Basin filed a stipulation and
agreement for the purpose of resolving the rate and refund
matters at issue with the FERC. Williston Basin is currently
awaiting a decision from the FERC regarding the stipulation and
agreement. 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
began 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.
9. 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
alleged they were entitled to damages for the breach of
Williston Basin's and the company's contracts with Koch
although no specific damages were 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 filed motions for summary
judgment to dismiss the claims of the 11 natural gas producers.
The motions for summary judgment were granted by the North
Dakota District Court on July 3, 2000.
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 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 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
requested damages under alternate theories of up to
approximately $11.6 million for additional royalties, excluding
interest. On September 12, 2000, the royalty interest owners
and WBI Production reached a settlement with respect to all
issues. As a result, the suit was dismissed by the Colorado
State District Court with prejudice on October 19, 2000. The
settlement did not have a material effect on the company's
financial position or results of operations.
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 and the natural gas distribution
operations of Great Plains Natural Gas Co. Utility services
includes all the operations of Utility Services, Inc. Pipeline and
energy services includes WBI Holdings' natural gas transportation,
underground storage, gathering services and energy marketing and
management services. Oil and natural gas production includes the oil
and natural gas acquisition, exploration 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 Nine Months
Ended Ended
September 30, September 30,
2000 1999 2000 1999
Electric $ 5.9 $ 4.7 $ 12.2 $12.3
Natural gas distribution (2.2) (1.7) (.3) .6
Utility services 3.9 1.9 5.4 4.6
Pipeline and energy services 3.0 6.5 6.6 17.6
Oil and natural gas production 10.0 3.9 23.5 9.4
Construction materials and mining 19.2 13.6 26.5 14.5
Earnings on common stock $39.8 $ 28.9 $ 73.9 $59.0
Earnings per common
share - basic $ .63 $ .53 $ 1.23 $1.10
Earnings per common
share - diluted $ .63 $ .52 $ 1.23 $1.09
Return on average common equity
for the 12 months ended 13.7% 10.2%*
________________________________
* Reflects the effect of a $19.9 million noncash after-tax write-
down of oil and natural gas properties in December 1998.
Three Months Ended September 30, 2000 and 1999
Consolidated earnings for the quarter ended September 30, 2000,
increased $10.9 million from the comparable period a year ago
due to higher earnings at the oil and natural gas production,
construction materials and mining, utility services and electric
businesses, partially offset by lower earnings at the other
business segments.
Nine Months Ended September 30, 2000 and 1999
Consolidated earnings for the nine months ended September 30,
2000, increased $14.9 million from the comparable period a year ago
due to higher earnings at the oil and natural gas production,
construction materials and mining, and utility services businesses,
partially offset by lower earnings at the 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 Nine Months
Ended Ended
September 30, September 30,
2000 1999 2000 1999
Operating revenues:
Retail sales $ 34.4 $ 33.9 $ 98.9 $ 98.4
Sales for resale and other 7.7 6.3 19.9 18.9
42.1 40.2 118.8 117.3
Operating expenses:
Fuel and purchased power 13.4 13.3 39.6 39.2
Operation and maintenance 10.0 10.4 31.9 31.5
Depreciation, depletion and
amortization 4.8 4.6 14.3 13.7
Taxes, other than income 1.7 1.8 5.6 5.6
29.9 30.1 91.4 90.0
Operating income $ 12.2 $ 10.1 $ 27.4 $ 27.3
Retail sales (million kWh) 561.7 537.1 1,592.1 1,554.7
Sales for resale (million kWh) 222.4 187.2 680.6 704.5
Average cost of fuel and
purchased power per kWh $ .016 $ .017 $ .016 $ .016
Natural Gas Distribution
Three Months Nine Months
Ended Ended
September 30, September 30,
2000 1999 2000 1999
Operating revenues:
Sales $ 24.1 $ 19.1 $ 113.7 $ 104.3
Transportation and other .8 .8 2.7 2.6
24.9 19.9 116.4 106.9
Operating expenses:
Purchased natural gas sold 16.8 12.1 82.2 73.4
Operation and maintenance 7.7 7.2 23.6 22.1
Depreciation, depletion and
amortization 2.3 1.8 6.1 5.5
Taxes, other than income 1.1 1.0 3.5 3.2
27.9 22.1 115.4 104.2
Operating income (loss) $ (3.0) $ (2.2) $ 1.0 $ 2.7
Volumes (MMdk):
Sales 3.2 3.1 21.2 21.3
Transportation 3.1 2.6 9.0 7.9
Total throughput 6.3 5.7 30.2 29.2
Degree days (% of normal) 118% 169% 92% 95%
Average cost of natural gas,
including transportation
thereon, per dk $ 5.28 $ 3.87 $ 3.88 $ 3.44
Utility Services
Three Months Nine Months
Ended Ended
September 30, September 30,
2000 1999 2000 1999
Operating revenues $ 60.1 $ 25.7 $ 107.2 $ 67.9
Operating expenses:
Operation and maintenance 49.5 21.0 89.9 55.9
Depreciation, depletion
and amortization 1.4 .6 3.3 1.8
Taxes, other than income 1.9 .8 3.5 2.0
52.8 22.4 96.7 59.7
Operating income $ 7.3 $ 3.3 $ 10.5 $ 8.2
Pipeline and Energy Services
Three Months Nine Months
Ended Ended
September 30, September 30,
2000 1999 2000 1999
Operating revenues:
Pipeline $ 19.2 $ 19.6 $ 48.6 $ 55.0
Energy services 125.0 84.6 371.0 224.0
144.2 104.2 419.6 279.0
Operating expenses:
Purchased natural gas sold 123.3 81.6 363.6 215.3
Operation and maintenance 9.0 6.7 26.6 20.6
Depreciation, depletion
and amortization 3.2 2.2 7.9 6.1
Taxes, other than income 1.4 1.1 3.7 3.5
136.9 91.6 401.8 245.5
Operating income $ 7.3 $ 12.6 $ 17.8 $ 33.5
Transportation volumes (MMdk):
Montana-Dakota 6.7 7.6 22.4 22.9
Other 15.5 11.6 42.3 33.2
22.2 19.2 64.7 56.1
Oil and Natural Gas Production
Three Months Nine Months
Ended Ended
September 30, September 30,
2000 1999 2000 1999
Operating revenues:
Oil $ 11.6 $ 7.3 $ 32.5 $ 19.0
Natural gas 21.3 12.6 51.0 33.4
Other 2.3 .6 8.4 1.6
35.2 20.5 91.9 54.0
Operating expenses:
Purchased natural gas sold .6 .2 3.0 .6
Operation and maintenance 8.5 7.2 23.4 18.6
Depreciation, depletion
and amortization 6.5 4.9 17.7 15.7
Taxes, other than income 2.1 1.4 6.1 4.0
17.7 13.7 50.2 38.9
Operating income $ 17.5 $ 6.8 $ 41.7 $ 15.1
Production:
Oil (000's of barrels) 486 414 1,428 1,332
Natural gas (MMcf) 7,361 5,761 20,198 18,006
Average prices:
Oil (per barrel) $ 23.86 $ 17.54 $ 22.79 $ 14.25
Natural gas (per Mcf) $ 2.90 $ 2.19 $ 2.52 $ 1.86
Construction Materials and Mining
Three Months Nine Months
Ended Ended
September 30, September 30,
2000 1999 2000 1999
Operating revenues:
Construction materials $ 233.2 $ 165.8 $ 447.7 $ 315.8
Coal 8.9 8.3 23.8 26.2
242.1 174.1 471.5 342.0
Operating expenses:
Operation and maintenance 195.9 143.0 394.8 292.8
Depreciation, depletion
and amortization 10.5 6.7 25.9 18.2
Taxes, other than income 1.0 .9 2.7 2.6
207.4 150.6 423.4 313.6
Operating income $ 34.7 $ 23.5 $ 48.1 $ 28.4
Sales (000's):
Aggregates (tons) 6,700 5,208 13,510 9,778
Asphalt (tons) 1,627 1,415 2,583 2,326
Ready-mixed concrete
(cubic yards) 516 354 1,223 861
Coal (tons) 818 789 2,190 2,430
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: $17.8 million, $17.6
million and $.2 million for the three months ended September 30,
2000; $9.0 million, $8.8 million and $.2 million for the three
months ended September 30, 1999; $59.6 million, $58.9 million and
$.7 million for the nine months ended September 30, 2000; and $42.2
million, $41.8 million and $.4 million for the nine months ended
September 30, 1999, respectively.
Three Months Ended September 30, 2000 and 1999
Electric
Electric earnings increased due to higher retail sales volumes,
due largely to a higher summer cooling load, and increased demand-
related sales for resale at higher average realized rates. Lower
operation and maintenance expense, mainly due to decreased employee
benefit costs, also added to the earnings improvement. Higher sales
for resale fuel and purchased power costs because an electric
generating station was down for repairs during July and part of
August and increased depreciation, depletion and amortization
expense, due to higher depreciable property, plant and equipment
balances, partially offset the earnings increase.
Natural Gas Distribution
Normal seasonal losses increased at the natural gas
distribution business as a result of a July 2000 acquisition.
At existing operations, lower operation and maintenance
expenses, resulting primarily from lower employee benefit costs,
and higher service and repair margins partially offset the
normal seasonal losses. The pass-through of higher average
natural gas costs added to the revenue increase.
Utility Services
Utility services earnings increased as a result of earnings from
businesses acquired since the comparable period last year, higher
line construction margins in the Rocky Mountain Region due, in part,
from fiber optic installation projects, and increases from
engineering services. This increase was partially offset by
decreased construction activity in the Pacific Northwest Region due
to decreased workloads, largely the result of utility merger
activity.
Pipeline and Energy Services
Earnings at the pipeline and energy services business decreased
largely from a 1999 reversal of contingency reserves totaling $3.9
million after-tax relating to the resolution of certain production
tax and other state tax matters. Increased operation and maintenance
expense at the pipeline due primarily to higher compressor related
expenses, also added to the earnings decrease. Earnings from
businesses acquired since the comparable period last year and higher
volumes of natural gas transported at the pipeline partially offset
the earnings decrease.
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 36
percent and 32 percent higher than last year, respectively.
Higher oil and natural gas production due largely to
acquisitions since the comparable period last year, along with
increased other revenue due to higher sales of inventoried
natural gas, added to the earnings increase. Partially
offsetting the earnings improvement were increased lease
operating expenses, largely due to acquisitions, and higher
depreciation, depletion and amortization expense, mainly related
to increased volumes. Increased interest expense due to higher
average borrowings and higher average interest rates also
partially offset the earnings increase. Hedging activities for
oil production in the third quarter of 2000 and 1999 resulted in
realized prices that were 81 and 93 percent, respectively, of
what otherwise would have been received. In addition, hedging
activities for natural gas production in the third quarter of
2000 and 1999 resulted in realized prices that were 86 and 99
percent, respectively, of what otherwise would have been
received.
Construction Materials and Mining
Construction materials and mining earnings increased largely due
to higher earnings at the construction materials operations as a
result of earnings from businesses acquired since the comparable
period last year and higher ready-mixed concrete, aggregate and
cement volumes at existing operations. Higher energy costs, and
increased interest expense resulting from higher acquisition-related
borrowings, and higher depreciation, depletion and amortization
expense, largely resulting from increased volumes, partially offset
the earnings improvement at the construction materials operations.
Earnings increased at the coal operations largely as a result of a
1999 $1.9 million after-tax charge to earnings, the result of the
resolution of the coal arbitration proceeding, and lower 2000
operation and maintenance expense, largely due to lower stripping
costs.
Nine Months Ended September 30, 2000 and 1999
Electric
Electric earnings decreased slightly due to increased coal costs,
higher purchased power costs and increased natural gas generation-
related costs. Increased maintenance expense at certain of the
company's electric generating stations, and increased depreciation,
depletion and amortization expense, resulting from higher property,
plant and equipment balances, also contributed to the earnings
decline. Increased retail sales and higher average realized rates,
largely offset the decline in earnings.
Natural Gas Distribution
Earnings decreased at the natural gas distribution business,
largely due to normal seasonal losses incurred as a result of a July
2000 acquisition. Lower weather-related sales volumes, and
increased depreciation, depletion and amortization expense due to
higher property, plant and equipment balances, also added to the
earnings decrease. The pass-through of higher average natural gas
costs more than offset the decline in sales revenue resulting from
lower sales volumes. Increased service and repair margins and
increased transportation volumes partially offset the earnings
decline.
Utility Services
Utility services earnings increased as a result of earnings from
businesses acquired since the comparable period last year, higher
line construction margins in the Rocky Mountain Region, as
previously discussed, and increases from engineering services. This
increase was partially offset by decreased construction activity in
the Pacific Northwest Region, also as previously discussed.
Pipeline and Energy Services
Earnings at the pipeline and energy services business decreased
primarily due to a 1999 $4.4 million after-tax reserve revenue
adjustment and resulting increase to income associated with FERC
orders received in the 1992 and 1995 rate proceedings and the
recognition in 1999 of the previously discussed $3.9 million after-
tax reserve adjustment. The recognition in income in 1999 of $1.7
million resulting from a favorable order received from the D.C.
Circuit Court relating to the 1992 rate proceeding also contributed
to the decline in earnings. Lower natural gas margins from energy
services, and higher operating expenses at the pipeline also added
to the earnings decrease. Higher volumes of natural gas transported
at the pipeline combined with higher average transportation rates
and earnings from businesses acquired since the comparable period
last year partially offset the earnings decline.
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 60
percent and 35 percent higher than last year, respectively.
Higher oil and natural gas production due to acquisitions since
the comparable period last year and ongoing development of
existing properties, along with increased other revenue due to
higher sales of inventoried natural gas, added to the earnings
increase. Partially offsetting the earnings improvement were
higher operation and maintenance expense, largely resulting from
increased lease operating expenses due primarily to acquisitions
and higher maintenance on existing properties, and increased
general and administrative costs as a result of acquisitions.
Higher interest expense due to higher average borrowings and
higher average interest rates, and an increase in depreciation,
depletion and amortization expense, largely volume-related, also
partially offset the earnings increase. Hedging activities for
oil production for the first nine months of 2000 and 1999
resulted in realized prices that were 83 and 97 percent,
respectively, of what otherwise would have been received. In
addition, hedging activities for natural gas production for the
first nine months of 2000 and 1999 resulted in realized prices
that were 89 and 101 percent, respectively, of what otherwise
would have been received.
Construction Materials and Mining
Construction materials and mining earnings increased largely due
to higher earnings at the construction materials operations as a
result of earnings from businesses acquired since the comparable
period last year and higher ready-mixed concrete, aggregate and
cement volumes at existing operations and a gain of $1.2 million
after-tax on the sale of a nonstrategic property. Increased energy
costs, higher selling, general and administrative costs and
increased interest expense due to higher average borrowings and
higher average interest rates, partially offset the earnings
improvement. Earnings at the coal operations improved largely as a
result of $5.6 million in after-tax charges to earnings in 1999, the
result of the resolution of the coal arbitration proceeding, and
lower 2000 operating costs, as previously discussed.
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, including statements contained within Prospective
Information. 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 the
timing of such projects, 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
The following information includes highlights of the key growth
strategies and projections for the company over the next few years
and other matters for each of its six major business segments. Many
of these highlighted points are forward-looking statements. There
is no assurance that the company's projections, including estimates
for growth and increases in revenues and earnings, will in fact be
achieved. Reference should be made to the various important factors
listed under the heading Safe Harbor for Forward-looking Statements
that could cause actual future results to differ materially from the
company's targeted growth, revenue and earnings projections.
MDU Resources Group, Inc.
- - The company is comfortable with the analysts' current range of
estimates on earnings per share from operations of $1.65 to $1.75
for 2000 as reported by Zacks Investor Relations Services as
of October 25, 2000.
- - Earnings per share from operations for 2001 are projected in the
$1.90 to $2.00 range.
- - Based on current expectations, the company anticipates that its
three to five year average annual earnings per share growth rate
from operations will be in the general range of 10 to 12 percent.
- - The company expects to issue and sell equity from time-to-time to
keep its targeted debt at the nonregulated businesses at
approximately 40 percent of total capitalization.
Electric
- - 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.
- - Due to growing electric demand, a gas-fired 40-megawatt electric
plant may be added in the three to five year planning horizon.
Natural Gas Distribution
- - Annual natural gas throughput for 2001 is expected to be
approximately 55 million decatherms, with about 39 million
decatherms from sales and 16 million from transportation.
- - The number of natural gas retail customers at existing operations
is expected to grow by approximately 1.5 to 2 percent on an annual
basis over the next three to five years.
- - Earnings are expected to increase from the growth in sales of new
value-added products and services such as appliance repair
contracts and home security systems.
Utility Services
- - This segment is pursuing growth through the acquisition of utility
services companies that are well managed, have excellent
reputations and are growth-driven.
- - Future acquisitions should continue to broaden this business
segment's markets throughout the United States.
- - This business segment's goal is to exceed $500 million in annual
revenue within the next five years.
Pipeline and Energy Services
- - Two large pipeline projects, currently under construction by this
segment, are related to the company's coal bed natural gas
drilling program in the Powder River Basin. The two projects
should be completed by the end of the year, providing the pipeline
company the ability to move approximately 40 percent more of this
gas through its system than is currently being transported, as
well as enabling additional deliveries to other pipeline systems.
The largest project involves building a 75-mile, nonregulated
pipeline through the heart of the basin, to move gas produced from
throughout the Powder River Basin to interconnecting pipeline
systems, including the company's own transmission system.
- - In 2001, Williston Basin's natural gas throughput is expected to
increase by approximately 6 percent.
Oil and Natural Gas Production
- - The 2001 drilling program is projected to include over 500 wells.
- - During the nine months ended September 30, 2000, the company-
operated portion of this segment's oil and natural gas production
business drilled 209 developmental wells in the Powder River Basin
and 75 developmental wells in other company-operated properties
located in Montana. During the same time frame, the company's
nonoperated portion of this segment's oil and natural gas
production business participated in drilling a total of 68 wells,
of which 55 were successful.
- - The company anticipates that combined oil and gas production at
year-end 2000 should be in the range of 130 to 140 million cubic
feet equivalents of natural gas per day, up approximately 30
percent from the beginning of the year.
- - Approximately 30 percent of the company's anticipated natural gas
production for 2000 has been hedged through the end of this year
at prices ranging from $2.05 to $2.45 per Mcf based on Rocky
Mountain gas sales and $2.30 to $2.80 per Mcf based on NYMEX.
- - Approximately 50 percent of the company's anticipated oil
production for 2000 has been hedged through the end of this year
at prices ranging from $18.78 to $22.33 per barrel based on NYMEX.
- - This business segment is on target to increase its oil and natural
gas production by a combined 15 to 20 percent for 2000 over 1999.
- - The company's estimates for natural gas prices in the Rocky
Mountain region are in the range of $2.50 to $3.00 per Mcf during
2001. The company's estimates for natural gas prices on the NYMEX
are in the range of $3 to $4 per Mcf.
- - The company's 2001 estimates for NYMEX crude oil prices are in the
range of $23 to $26 per barrel.
- - The company has entered into swaps representing approximately 15
percent of estimated production in 2001 on an Mcf equivalent
basis. Thus far, the oil swap prices range from $28.65 to $29.22
per barrel based on NYMEX and the natural gas swap prices range
from $4.57 to $4.60 per Mcf based on NYMEX and $4.04 to $4.44 per
Mcf for Rocky Mountain gas sales.
- - Combined oil and natural gas production at this business segment
is expected to be 20 to 40 percent higher in 2001 than in 2000.
Construction Materials and Mining
- - In May 2000, Knife River and Westmoreland Coal Company
(Westmoreland) confirmed that they had entered into negotiations
on an exclusive basis for the sale of Knife River's coal
operations, including active coal mines in North Dakota and
Montana, coal sales agreements, reserves and mining equipment, to
Westmoreland. On September 28, 2000, the company announced an
agreement to sell its coal operations to Westmoreland for $28.8
million cash, excluding final settlement cost adjustments. The
agreement is subject to various closing conditions and therefore
will not be finalized unless and until the parties are satisfied
that those conditions are met. Earnings from coal operations
would normally be expected to contribute less than 10 percent of
annual earnings of the construction materials and mining segment.
- - As of September 30, 2000, the construction materials and mining
business has 880 million tons of economically recoverable
aggregate reserves. These reserves are strategically located and
represent more than a 40-year supply at current consumption
levels.
- - This segment's goal is to reach $1 billion in annual revenues
within the next five years.
- - Earnings are expected to increase from a combination of
acquisitions and by optimizing both synergies and improvements at
existing operations.
Liquidity and Capital Commitments
Net capital expenditures for the year 2000 are estimated at
$546.2 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 internally
generated funds, the company's $40 million revolving credit and term
loan agreement, 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 September 30, 2000, $40 million
under the revolving credit and term loan agreement was 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 $315 million of Centennial's $325 million
commercial paper program. Under the commercial paper program,
$272.8 million was outstanding at September 30, 2000. The
commercial paper borrowings are classified as long term as
Centennial intends to refinance these borrowings on a long-term
basis through continued commercial paper borrowings supported by the
revolving credit agreement due September 29, 2003. Centennial
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, $150
million was outstanding at September 30, 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.
On October 4, 2000, the company filed an application with the
FERC seeking authorization to issue a combination of certain
securities, as the company determines to be necessary, not to exceed
a total of $750 million.
On August 8, September 11, and October 20, 2000, the company
reported sales that together totaled 654,819 shares of the company's
Common Stock to Acqua Wellington North American Equities Fund Ltd.
(Acqua Wellington), pursuant to purchase agreements by and between
the company and Acqua Wellington. The company received total
proceeds from these sales of $16.1 million. These proceeds were
used for refunding outstanding debt obligations and for other
general corporate purposes.
On September 6, 2000, the company reported the sale of 500,000
shares of the company's Common Stock to Nomura Securities
International, Inc. (Nomura), pursuant to a purchase agreement by
and between the company and Nomura. The company received proceeds
from this sale of $11.9 million. These proceeds were used for
refunding outstanding debt obligations and for other general
corporate purposes.
The company's issuance of first mortgage bond 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, 2000, the company could have issued
approximately $292 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
September 30, 2000, and December 31, 1999, respectively.
Additionally, the company's first mortgage bond interest coverage
was 7.3 times and 7.1 times for the twelve months ended
September 30, 2000, and December 31, 1999, respectively. Common
stockholders' equity as a percent of total capitalization was 52
percent and 54 percent at September 30, 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
On September 12, 2000, the royalty interest owners and WBI
Production reached a settlement in the oil and gas royalty interest
owners legal proceeding, with respect to all issues. For more
information on this legal action see Note 9 of Notes to Consolidated
Financial Statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Between July 1, 2000 and September 30, 2000, the company issued
1,767,675 shares of Common Stock, $1.00 par value, as part of the
consideration for all of the issued and outstanding capital stock
with respect to businesses acquired during this period and as final
adjustments with respect to acquisitions in prior periods. The
Common Stock issued by the company in these transactions was issued
in private sales exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933. The former owners of the businesses
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 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
12 Computation of Ratio of Earnings to Fixed Charges and
Combined Fixed Charges and Preferred Stock Dividends
27 Financial Data Schedule
b) Reports on Form 8-K
Form 8-K was filed on August 10, 2000. Under Item 5 -- Other
Events, the company reported the sale of 242,822 shares of
company Common Stock to Acqua Wellington North American Equities
Fund, Ltd.
Form 8-K was filed on September 8, 2000. Under Item 5 -- Other
Events, the company reported the sale of 500,000 shares of
company Common Stock to Nomura Securities International, Inc.
Form 8-K was filed on September 12, 2000. Under Item 5 -- Other
Events, the company reported the sale of 214,378 shares of
company Common Stock to Acqua Wellington North American Equities
Fund, Ltd.
Form 8-K was filed on October 20, 2000. Under Item 5 -- Other
Events, the company reported the sale of 197,619 shares of
company Common Stock to Acqua Wellington North American Equities
Fund, Ltd.
Form 8-K was filed on October 27, 2000. Under Item 5 -- Other
Events, the company reported the press release issued October 25,
2000 regarding earnings for the third quarter.
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 13, 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.
12 Computation of Ratio of Earnings to Fixed Charges
and Combined Fixed Charges and Preferred Stock
Dividends
27 Financial Data Schedule