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, 2002
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 7, 2002: 70,847,352
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 and distributes natural gas in the northern Great
Plains. Great Plains Natural Gas Co. (Great Plains), another public
utility division of the Company, distributes natural gas in
southeastern North Dakota and western Minnesota. These operations
also supply related value-added products and services.
The Company, through its wholly owned subsidiary, Centennial
Energy Holdings, Inc. (Centennial), owns WBI Holdings, Inc. (WBI
Holdings), Knife River Corporation (Knife River), Utility Services,
Inc. (Utility Services) and Centennial Holdings Capital Corp.
(Centennial Capital).
WBI Holdings is comprised of the pipeline and energy
services and the natural gas and oil production segments.
The pipeline and energy services segment provides natural
gas transportation, underground storage and gathering
services through regulated and nonregulated pipeline
systems primarily in the Rocky Mountain and northern Great
Plains regions of the United States and provides energy-
related marketing and management services, as well as cable
and pipeline locating services. The natural gas and oil
production segment is engaged in natural gas and oil
acquisition, exploration and production activities
primarily in the Rocky Mountain region of the United States
and in the Gulf of Mexico.
Knife River mines aggregates and markets crushed stone,
sand, gravel and other related construction materials,
including ready-mixed concrete, cement and asphalt, as well
as value-added products and services in the north central
and western United States, including Alaska and Hawaii.
Utility Services is a diversified infrastructure company
specializing in engineering, design and build capability for
electric, gas and telecommunication utility construction, as
well as industrial and commercial electrical, exterior
lighting and traffic signalization throughout most of the
United States. Utility Services also provides related
specialty equipment manufacturing, sales and rental
services.
Centennial Capital invests in new growth and synergistic
opportunities, including independent power production, which
are not directly being pursued by the existing business
units but which are consistent with the Company's philosophy
and growth strategy. These activities are reflected in the
pipeline and energy services segment.
The Company, through its wholly owned subsidiary, MDU Resources
International, Inc. (MDU International), invests in projects
outside the United States which are consistent with the Company's
philosophy, growth strategy and areas of expertise. These
activities are reflected in the pipeline and energy services
segment.
INDEX
Part I -- Financial Information
Consolidated Statements of Income --
Three Months Ended March 31, 2002 and 2001
Consolidated Balance Sheets --
March 31, 2002 and 2001, and December 31, 2001
Consolidated Statements of Cash Flows --
Three Months Ended March 31, 2002 and 2001
Consolidated Statements of Comprehensive Income --
Three Months Ended March 31, 2002 and 2001
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,
2002 2001
(In thousands, except
per share amounts)
Operating revenues $381,935 $641,248
Operating expenses:
Fuel and purchased power 13,944 13,088
Purchased natural gas sold 35,695 325,771
Operation and maintenance 235,514 192,774
Depreciation, depletion and amortization 36,103 32,096
Taxes, other than income 14,882 13,998
336,138 577,727
Operating income 45,797 63,521
Other income -- net 3,591 2,358
Interest expense 10,546 11,714
Income before income taxes 38,842 54,165
Income taxes 15,120 21,478
Net income 23,722 32,687
Dividends on preferred stocks 189 191
Earnings on common stock $ 23,533 $ 32,496
Earnings per common share -- basic $ .34 $ .50
Earnings per common share -- diluted $ .34 $ .49
Dividends per common share $ .23 $ .22
Weighted average common shares outstanding -- basic 69,469 65,405
Weighted average common shares outstanding -- diluted 70,013 65,979
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,
2002 2001 2001
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 50,082 $ 30,978 $ 41,811
Receivables, net 248,876 312,790 285,081
Inventories 73,494 65,146 95,341
Deferred income taxes 19,087 12,834 18,973
Prepayments and other current assets 51,534 27,193 40,286
443,073 448,941 481,492
Investments 38,184 42,101 38,198
Property, plant and equipment 2,812,337 2,547,024 2,738,612
Less accumulated depreciation,
depletion and amortization 979,072 918,896 946,470
1,833,265 1,628,128 1,792,142
Deferred charges and other assets
Goodwill 176,003 103,282 173,997
Other intangible assets, net 78,265 63,133 76,234
Other 64,063 42,023 61,008
318,331 208,438 311,239
$2,632,853 $2,327,608 $2,623,071
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Long-term debt and preferred
stock due within one year $ 10,732 $ 9,228 $ 11,185
Accounts payable 100,615 148,244 110,649
Taxes payable 20,545 33,127 11,826
Dividends payable 16,375 14,751 16,108
Other accrued liabilities 93,094 91,012 95,559
241,361 296,362 245,327
Long-term debt 764,544 679,094 783,709
Deferred credits and other liabilities:
Deferred income taxes 349,571 283,982 342,412
Other liabilities 129,357 123,514 125,552
478,928 407,496 467,964
Preferred stock subject to mandatory
redemption 1,300 1,400 1,300
Commitments and contingencies
Stockholders' equity:
Preferred stocks 15,000 15,000 15,000
Common stockholders' equity:
Common stock (Shares issued --
$1.00 par value, 70,616,838
at March 31, 2002, 66,441,325 at
March 31, 2001 and 70,016,851 at
December 31, 2001) 70,617 66,441 70,017
Other paid-in capital 662,613 547,859 646,521
Retained earnings 401,988 318,585 394,641
Accumulated other comprehensive
income (loss) 128 (1,003) 2,218
Treasury stock at cost - 239,521
shares (3,626) (3,626) (3,626)
Total common stockholders' equity 1,131,720 928,256 1,109,771
Total stockholders' equity 1,146,720 943,256 1,124,771
$2,632,853 $2,327,608 $2,623,071
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,
2002 2001
(In thousands)
Operating activities:
Net income $ 23,722 $ 32,687
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion and amortization 36,103 32,096
Deferred income taxes and investment tax credit 1,959 (931)
Changes in current assets and liabilities, net of
acquisitions:
Receivables 36,483 53,030
Inventories 21,847 (948)
Other current assets (14,678) 6,387
Accounts payable (9,566) (35,054)
Other current liabilities 6,276 49,714
Other noncurrent changes 1,617 (4,372)
Net cash provided by operating activities 103,763 132,609
Investing activities:
Capital expenditures (55,002) (67,224)
Acquisitions, net of cash acquired (10,413) (19,845)
Net proceeds from sale or disposition of property 1,817 4,194
Investments 14 3
Proceeds from notes receivable 4,000 4,000
Net cash used in investing activities (59,584) (78,872)
Financing activities:
Net change in short-term borrowings --- (8,000)
Issuance of long-term debt 2,200 60,000
Repayment of long-term debt (21,819) (121,971)
Proceeds from issuance of common stock, net 86 25,449
Dividends paid (16,375) (14,749)
Net cash used in financing activities (35,908) (59,271)
Increase (decrease) in cash and cash equivalents 8,271 (5,534)
Cash and cash equivalents -- beginning of year 41,811 36,512
Cash and cash equivalents -- end of period $ 50,082 $ 30,978
The accompanying notes are an integral part of these consolidated statements.
MDU RESOURCES GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
March 31,
2002 2001
(In thousands)
Net income $ 23,722 $ 32,687
Other comprehensive loss:
Net unrealized loss on derivative
instruments qualifying as hedges, net of tax (2,090) (1,003)
Total comprehensive income $ 21,632 $ 31,684
The accompanying notes are an integral part of these consolidated statements.
MDU RESOURCES GROUP, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2002 and 2001
(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, 2001 (2001 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 2001 Annual Report. The information is
unaudited but includes all adjustments which are, in the
opinion of management, necessary for a fair presentation of the
accompanying consolidated interim financial statements.
2. Seasonality of operations
Some of the Company's operations are highly seasonal and
revenues from, and certain expenses for, such operations may
fluctuate significantly among quarterly periods. Accordingly,
the interim results for particular segments, and accordingly
for the Company as a whole, 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,
2002 2001
(In thousands)
Interest, net of amount capitalized $ 6,755 $ 7,168
Income taxes $ 1,824 $ 280
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 stockholders' equity as previously reported.
5. New accounting standard
In June 2001, the Financial Accounting Standards Board
(FASB) approved Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" (SFAS No.
143). SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period
in which it is incurred. When the liability is initially
recorded, the entity capitalizes a cost by increasing the
carrying amount of the related long-lived asset. Over time,
the liability is accreted to its present value each period, and
the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity
either settles the obligation for the recorded amount or incurs
a gain or loss upon settlement. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. The Company will
adopt SFAS No. 143 on January 1, 2003, but has not yet
quantified the effects of adopting SFAS No. 143 on its
financial position or results of operations.
6. Derivative instruments
The Company continues to utilize derivative instruments to
manage a portion of the market risk associated with
fluctuations in the price of natural gas and oil on the
Company's forecasted sales of natural gas and oil production as
discussed in the Company's 2001 Annual Report. The following
information should be read in conjunction with Note 3 in the
Company's Notes to Consolidated Financial Statements in the
2001 Annual Report.
For the three months ended March 31, 2002 and 2001, the
amount of hedge ineffectiveness recognized was immaterial. For
the three months ended March 31, 2002 and 2001, the Company did
not exclude any components of the derivative instruments' gain
or loss from the assessment of hedge effectiveness and there
were no reclassifications into earnings as a result of the
discontinuance of hedges.
As of March 31, 2002, the maximum length of time over
which the Company is hedging its exposure to the variability in
future cash flows for forecasted transactions is nine months.
The Company estimates that the net gains of approximately
$128,000 will be reclassified from accumulated other
comprehensive income into earnings, subject to changes in
natural gas and oil market prices, as the hedged transactions
affect earnings within the nine months between April 1, 2002
and December 31, 2002.
7. Comprehensive income
On January 1, 2001, the Company recorded a cumulative-
effect adjustment in accumulated other comprehensive loss to
recognize all derivative instruments designated as hedges at
fair value. As of March 31, 2002 and 2001, the Company has
recorded unrealized gains and losses on natural gas and oil
price swap and interest rate swap agreements which qualify for
hedge accounting. These amounts are reflected in the following
table.
The Company's comprehensive income, and the components of
other comprehensive income, net of taxes, were as follows:
Three Months Ended
March 31,
2002 2001
(In thousands)
Net income $ 23,722 $ 32,687
Other comprehensive income --
Net unrealized loss on derivative
instruments qualifying as hedges:
Unrealized loss on derivative
instruments at January 1, 2001,
due to cumulative effect of a
change in accounting principle,
net of tax of $3,970 --- (6,080)
Net unrealized gain (loss) on derivative
instruments arising during the
period, net of tax of $838 and
$1,631 in 2002 and 2001, respectively (1,283) 2,498
Less: Reclassification adjustment for
gain (loss) on derivative instruments
included in net income, net of
tax of $527 and $1,684 in
2002 and 2001, respectively 807 (2,579)
Net unrealized loss on derivative
instruments qualifying as hedges (2,090) (1,003)
Comprehensive income $ 21,632 $ 31,684
8. Goodwill and other intangible assets
In June 2001, the FASB approved Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" (SFAS No. 142). SFAS No. 142 changes the accounting
for goodwill and intangible assets and requires that goodwill
no longer be amortized but be tested for impairment at least
annually at the reporting unit level in accordance with SFAS
No. 142. Recognized intangible assets with determinable useful
lives should be amortized over their useful life and reviewed
for impairment in accordance with Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The provisions of SFAS No. 142
are effective for fiscal years beginning after December 15,
2001, except for provisions related to the nonamortization and
amortization of goodwill and intangible assets acquired after
June 30, 2001, which were subject immediately to the provisions
of SFAS No. 142. The Company adopted SFAS No. 142 on
January 1, 2002. SFAS No. 142 requires a transitional goodwill
impairment test at each reporting unit within six months of the
date of adoption of SFAS No. 142. However, the amounts used in
the transitional goodwill impairment testing shall be measured
as of January 1, 2002. The Company will complete its
transitional goodwill impairment testing by the end of the
second quarter of 2002. The Company believes that the goodwill
impairment provision of SFAS No. 142 will not have a material
effect on its financial position or results of operations.
On January 1, 2002, in accordance with SFAS No. 142, the
Company ceased amortization of its goodwill recorded in
business combinations which occurred on or before June 30,
2001. The following information is presented as if SFAS No.
142 was adopted as of January 1, 2001. The reconciliation of
previously reported earnings and earnings per share to the
amounts adjusted for the exclusion of goodwill amortization net
of the related income tax effect is as follows:
Three Months Ended
March 31,
2002 2001
(In thousands, except
per share amounts)
Reported earnings on common stock $ 23,533 $32,496
Add: Goodwill amortization, net of tax --- 880
Adjusted earnings on common stock $ 23,533 $33,376
Reported earnings per common
share -- basic $ .34 $ .50
Add: Goodwill amortization, net of tax --- .01
Adjusted earnings per common
share -- basic $ .34 $ .51
Reported earnings per common
share -- diluted $ .34 $ .49
Add: Goodwill amortization, net of tax --- .02
Adjusted earnings per common
share -- diluted $ .34 $ .51
The changes in the carrying amount of goodwill for the
three months ended March 31, 2002, by business segment are as
follows:
Goodwill
Balance Acquired Balance
as of During as of
January 1, the March 31,
2002 Year Other 2002
(In thousands)
Electric $ --- $ --- $ --- $ ---
Natural gas
distribution --- --- --- ---
Utility services 61,909 --- (652) 61,257
Pipeline and energy
services 9,336 --- --- 9,336
Natural gas and oil
production --- --- --- ---
Construction materials
and mining 102,752 2,658 --- 105,410
Total $ 173,997 $ 2,658 $ (652) $176,003
Included in other intangible assets on the Company's
Consolidated Balance Sheets are the following:
March 31, March 31, December 31,
2002 2001 2001
(In thousands)
Amortizable intangible
assets:
Leasehold rights $ 75,205 $ 59,380 $ 72,955
Accumulated amortization (1,226) (919) (1,149)
73,979 58,461 71,806
Noncompete agreements 11,509 10,214 11,509
Accumulated amortization (8,419) (6,774) (8,286)
3,090 3,440 3,223
Other 1,388 1,347 1,377
Accumulated amortization (192) (115) (172)
1,196 1,232 1,205
Total $ 78,265 $ 63,133 $ 76,234
Amortization expense for intangible assets for the three
months ended March 31, 2002, was approximately $231,000.
Estimated amortization expense for intangible assets is $2.7
million in 2002, $2.3 million in 2003, $1.8 million in 2004,
$1.9 million in 2005, $1.8 million in 2006 and $68.0 million
thereafter.
9. Common stock
At the Annual Meeting of Stockholders held on April 23,
2002, the Company's common stockholders approved an amendment
to the Certificate of Incorporation increasing the authorized
number of common shares from 150 million shares to 250 million
shares with a par value of $1.00 per share.
10. 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.
The Company's operations are conducted through six
business segments. Substantially all of the Company's
operations are located within the United States. The electric
segment generates, transmits and distributes electricity and
the natural gas distribution segment distributes natural gas.
These operations also supply related value-added products and
services in the northern Great Plains. The utility services
segment consists of a diversified infrastructure company
specializing in engineering, design and build capability for
electric, gas and telecommunication utility construction, as
well as industrial and commercial electrical, exterior lighting
and traffic signalization throughout most of the United States.
Utility services provides related specialty equipment
manufacturing sales and rental services. The pipeline and
energy services segment provides natural gas transportation,
underground storage and gathering services through regulated
and nonregulated pipeline systems primarily in the Rocky
Mountain and northern Great Plains regions of the United
States. Energy-related marketing and management services as
well as cable and pipeline locating services also are provided.
The pipeline and energy services segment includes investments
in domestic and international growth opportunities. The
natural gas and oil production segment is engaged in natural
gas and oil acquisition, exploration and production activities
primarily in the Rocky Mountain region of the United States and
in the Gulf of Mexico. The construction materials and mining
segment mines aggregates and markets crushed stone, sand,
gravel and other related construction materials, including
ready-mixed concrete, cement and asphalt, as well as value-
added products and services in the north central and western
United States, including Alaska and Hawaii.
In 2001, the Company sold its coal operations to
Westmoreland Coal Company for $28.2 million in cash, including
final settlement cost adjustments. The sale of the coal
operations was effective April 30, 2001. Included in the sale
were active coal mines in North Dakota and Montana, coal sales
agreements, reserves and mining equipment, and certain
development rights at the former Gascoyne Mine site in North
Dakota. The Company retains ownership of coal reserves and
leases at its former Gascoyne Mine site.
Segment information follows the same accounting policies
as described in Note 1 of the Company's 2001 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 March 31, 2002
Electric $ 40,070 $ --- $ 3,491
Natural gas distribution 71,713 --- 4,517
Utility services 108,287 --- 1,349
Pipeline and energy
services 19,800 22,750 2,827
Natural gas and oil
production 48,733 13,674 21,070
Construction materials
and mining 93,332 --- (9,721)
Intersegment eliminations --- (36,424) ---
Total $ 381,935 $ --- $ 23,533
Three Months
Ended March 31, 2001
Electric $ 42,953 $ --- $ 4,807
Natural gas distribution 140,855 --- 2,674
Utility services 67,319 4 2,044
Pipeline and energy
services 248,276 21,374 2,378
Natural gas and oil
production 49,215 22,417 28,032
Construction materials
and mining 88,787 3,843* (7,439)
Intersegment eliminations --- (43,795) ---
Total $ 637,405 $ 3,843* $ 32,496
* 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.
11. Acquisitions
During the first three months of 2002, the Company
acquired a construction materials and mining business in
Minnesota and an energy development company in Montana, neither
of which was individually material. The total purchase
consideration for these businesses, consisting of the Company's
common stock and cash, was $26.0 million.
The above acquisitions were accounted for under the
purchase method of accounting and accordingly, the acquired
assets and liabilities assumed have been preliminarily recorded
at their respective fair values as of the date of acquisition.
Final fair market values are pending the completion of the
review of the relevant assets, liabilities and issues
identified as of the acquisition date. The results of
operations of the acquired businesses are included in the
financial statements since the date of each acquisition. Pro
forma financial amounts reflecting the effects of the above
acquisitions are not presented as such acquisitions were not
material to the Company's financial position or results of
operations.
12. Regulatory matters and revenues subject to refund
On April 12, 2002, the natural gas distribution segment
filed with the North Dakota Public Service Commission (NDPSC)
for a natural gas rate increase. The Company is filing for a
total of $2.8 million or 4.1 percent above current rates.
The NDPSC authorized its Staff to initiate an
investigation into the earnings levels of Montana-Dakota's
North Dakota electric operations based on Montana-Dakota's 2000
Annual Report to the NDPSC. The investigation was based on a
complaint filed with the NDPSC on September 7, 2001, by the
Staff. On April 24, 2002, the NDPSC issued an Order requiring
Montana-Dakota to reduce its North Dakota electric rates by
$4.3 million, effective May 8, 2002. On April 25, 2002,
Montana-Dakota filed an appeal of the NDPSC Order in the North
Dakota South Central Judicial District Court (District Court).
The filing also requested a stay of the effectiveness of the
NDPSC Order while the appeal is pending. Montana-Dakota is
challenging the NDPSC's determination of the level of
electricity sales to other utilities expected to be received by
Montana-Dakota. On May 2, 2002, the District Court granted
Montana-Dakota's request for a stay of a portion of the $4.3
million rate reduction ordered by the NDPSC. Accordingly,
Montana-Dakota will implement a rate reduction of $800,000
effective with service rendered on and after May 8, 2002,
rather than the $4.3 million reduction ordered by the NDPSC.
The remaining $3.5 million is subject to refund if Montana-
Dakota does not prevail in this proceeding.
In December 1999, Williston Basin Interstate Pipeline
Company (Williston Basin), an indirect wholly owned subsidiary
of the Company, filed a general natural gas rate change
application with the Federal Energy Regulatory Commission
(FERC). Williston Basin began collecting such rates effective
June 1, 2000, subject to refund. In May 2001, the
Administrative Law Judge issued an Initial Decision on
Williston Basin's natural gas rate change application, which
matter is currently pending before and subject to revision by
the FERC.
Reserves have been provided for a portion of the revenues
that have been collected subject to refund with respect to
Williston Basin's pending regulatory proceeding. Williston
Basin believes that such reserves are adequate based on its
assessment of the ultimate outcome of the proceeding.
13. Litigation
In January 2002, Fidelity Oil Co. (FOC), one of the
Company's natural gas and oil production subsidiaries, entered
into a compromise agreement with the former operator of certain
of FOC's oil production properties in southeastern Montana.
The compromise agreement resolved litigation involving the
interpretation and application of contractual provisions
regarding net proceeds interests paid by the former operator to
FOC for a number of years prior to 1998. The terms of the
compromise agreement are confidential. As a result of the
compromise agreement, the natural gas and oil production
segment reflected a nonrecurring gain in its financial results
for the first quarter of 2002 of approximately $16.6 million
after-tax. As part of the settlement, FOC gave the former
operator a full and complete release, and FOC is not asserting
any such claim against the former operator for periods after
1997.
In March 1997, 11 natural gas producers filed suit in
North Dakota Southwest 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 Northwest Judicial District Court in
December 1993. The North Dakota Supreme Court in December 1999
affirmed the North Dakota Northwest Judicial 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 in July 2000. In March 2001, the North Dakota
District Court entered a final judgment on the July 2000 order
granting the motions for summary judgment. In May 2001, the 11
natural gas producers appealed the North Dakota District
Court's decision by filing a Notice of Appeal with the North
Dakota Supreme Court. Oral argument was held before the North
Dakota Supreme Court in December 2001. On April 16, 2002, the
North Dakota Supreme Court affirmed the summary judgment
entered by the North Dakota District Court. On April 30, 2002,
the 11 natural gas producers filed a petition for rehearing by
the North Dakota Supreme Court.
Williston Basin and the Company believe the claims of the
11 natural gas producers are without merit and intend to
continue vigorously contesting this suit. Williston Basin and
the Company believe it is not probable that the 11 natural gas
producers will ultimately succeed given the current status of
the litigation.
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 United States Court of
Appeals for the D.C. Circuit 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 in March 2000. In May 2001, the Federal
District Court denied Williston Basin's and Montana-Dakota's
motion to dismiss. The matter is currently pending.
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, (State
District Court) 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.
Upon motion of plaintiffs, the case has been remanded to State
District Court. In September 2001, the defendants in this suit
filed a motion to dismiss with the State District Court. The
matter is currently pending.
Williston Basin and Montana-Dakota believe the claims of
Grynberg and Quinque are without merit and intend to vigorously
contest these suits. Williston Basin and Montana-Dakota
believe it is not probable that Grynberg and Quinque will
ultimately succeed given the current status of the litigation.
14. Environmental matters
In December 2000, Morse Bros., Inc. (MBI), an indirect
wholly owned subsidiary of the Company, was named by the United
States Environmental Protection Agency (EPA) as a Potentially
Responsible Party in connection with the cleanup of a
commercial property site, now owned by MBI, and part of the
Portland, Oregon, Harbor Superfund Site. Sixty-eight other
parties were also named in this administrative action. The EPA
wants responsible parties to share in the cleanup of sediment
contamination in the Willamette River. Based upon a review of
the Portland Harbor sediment contamination evaluation by the
Oregon State Department of Environmental Quality and other
information available, MBI does not believe it is a Responsible
Party. In addition, MBI intends to seek indemnity for any and
all liabilities incurred in relation to the above matters from
Georgia-Pacific West, Inc., the seller of the commercial
property site to MBI, pursuant to the terms of their sale
agreement.
The Company believes it is not probable that it will incur
any material environmental remediation costs or damages in
relation to the above administrative action.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For purposes of segment financial reporting and discussion of
results of operations, electric 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, energy marketing and management services; Centennial
Capital, which invests in domestic growth opportunities; and MDU
International, which invests in international growth opportunities.
Natural gas and oil production includes the natural gas and oil
acquisition, exploration and production operations of WBI Holdings,
while construction materials and mining includes the results of
Knife River's operations.
Reference should be made to Notes to Consolidated Financial
Statements for information pertinent to various commitments and
contingencies.
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,
2002 2001
Electric $ 3.5 $ 4.8
Natural gas distribution 4.5 2.7
Utility services 1.3 2.0
Pipeline and energy services 2.8 2.4
Natural gas and oil production 21.1 28.0
Construction materials and mining (9.7) (7.4)
Earnings on common stock $ 23.5 $ 32.5
Earnings per common share - basic $ .34 $ .50
Earnings per common share - diluted $ .34 $ .49
Return on average common equity
for the 12 months ended 13.7% 15.6%
________________________________
Three Months Ended March 31, 2002 and 2001
Consolidated earnings for the quarter ended March 31, 2002,
decreased $9.0 million from the comparable period a year ago due to
lower earnings at the natural gas and oil production, construction
materials and mining, electric, and utility services businesses.
Increased earnings at the natural gas distribution and pipeline and
energy services businesses partially offset the earnings decline.
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,
2002 2001
Operating revenues:
Retail sales $ 34.9 $ 34.5
Sales for resale and other 5.2 8.5
40.1 43.0
Operating expenses:
Fuel and purchased power 13.9 13.1
Operation and maintenance 11.5 12.6
Depreciation, depletion and amortization 4.9 4.9
Taxes, other than income 2.0 2.0
32.3 32.6
Operating income $ 7.8 $ 10.4
Retail sales (million kWh) 558.8 549.7
Sales for resale (million kWh) 226.6 267.6
Average cost of fuel and purchased
power per kWh $ .017 $ .015
Natural Gas Distribution
Three Months
Ended
March 31,
2002 2001
Operating revenues:
Sales $ 70.6 $ 139.7
Transportation and other 1.1 1.2
71.7 140.9
Operating expenses:
Purchased natural gas sold 51.2 120.9
Operation and maintenance 9.5 10.8
Depreciation, depletion and amortization 2.4 2.3
Taxes, other than income 1.3 1.4
64.4 135.4
Operating income $ 7.3 $ 5.5
Volumes (MMdk):
Sales 16.6 16.2
Transportation 3.6 4.2
Total throughput 20.2 20.4
Degree days (% of normal) 99% 98%
Average cost of natural gas, including
transportation thereon, per dk $ 3.09 $ 7.46
Utility Services
Three Months
Ended
March 31,
2002 2001
Operating revenues $ 108.3 $ 67.3
Operating expenses:
Operation and maintenance 98.9 59.1
Depreciation, depletion and amortization 2.1 1.9
Taxes, other than income 4.2 1.8
105.2 62.8
Operating income $ 3.1 $ 4.5
Pipeline and Energy Services
Three Months
Ended
March 31,
2002 2001
Operating revenues:
Pipeline $ 21.2 $ 21.0
Energy services and other 21.3 248.6
42.5 269.6
Operating expenses:
Purchased natural gas sold 17.3 247.0
Operation and maintenance 13.9 11.6
Depreciation, depletion and amortization 3.7 3.4
Taxes, other than income 1.8 1.5
36.7 263.5
Operating income $ 5.8 $ 6.1
Transportation volumes (MMdk):
Montana-Dakota 7.8 8.5
Other 10.6 10.4
18.4 18.9
Gathering volumes (MMdk) 16.9 14.6
Natural Gas and Oil Production
Three Months
Ended
March 31,
2002 2001
Operating revenues:
Natural gas $ 25.4 $ 54.4
Oil 9.6 13.5
Other 27.4* 3.7
62.4 71.6
Operating expenses:
Purchased natural gas sold --- .7
Operation and maintenance 13.5 11.0
Depreciation, depletion and amortization 11.6 9.5
Taxes, other than income 2.5 3.8
27.6 25.0
Operating income $ 34.8 $ 46.6
Production:
Natural gas (MMcf) 11,403 9,689
Oil (000's of barrels) 481 494
Average realized prices:
Natural gas (per Mcf) $ 2.23 $ 5.62
Oil (per barrel) $ 19.92 $ 27.33
_____________________
* Includes the effects of a nonrecurring compromise agreement.
Construction Materials and Mining
Three Months
Ended
March 31,
2002 2001
Operating revenues:
Construction materials $ 93.3 $ 83.2
Coal ---** 9.4
93.3 92.6
Operating expenses:
Operation and maintenance 91.8 88.6
Depreciation, depletion and amortization 11.4 10.1
Taxes, other than income 3.1 3.5
106.3 102.2
Operating loss $ (13.0) $ (9.6)
Sales (000's):
Aggregates (tons) 3,576 2,689
Asphalt (tons) 167 124
Ready-mixed concrete (cubic yards) 401 391
Coal (tons) ---** 904
_____________________
** Coal operations were sold effective April 30, 2001.
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, utility services, construction materials and mining
and natural gas and oil 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: $36.4 million, $32.8 million and $3.6
million for the three months ended March 31, 2002; and $43.8
million, $42.9 million and $.9 million for the three months ended
March 31, 2001, respectively.
Three Months Ended March 31, 2002 and 2001
Electric
Electric earnings decreased as a result of significantly lower
average realized sales for resale prices due to weaker demand in the
sales for resale markets, combined with higher fuel and purchased
power costs due largely to the absence in 2002 of 2001 insurance
recovery proceeds related to a 2000 outage at an electric generating
station. Partially offsetting the earnings decline were decreased
operation and maintenance expense, largely lower payroll costs, and
lower interest expense due to lower average interest rates.
Natural Gas Distribution
Earnings at the natural gas distribution business increased as
a result of slightly higher retail sales volumes, largely the result
of weather that was 2 percent colder than last year, increased
return on natural gas storage, demand and prepaid commodity
balances, higher service and repair margins, and decreased operation
and maintenance expense due primarily to lower payroll costs and
decreased bad debt expense. The pass-through of lower natural gas
prices resulted in the decrease in sales revenues and purchased
natural gas sold.
Utility Services
Utility services earnings decreased as a result of lower line
construction margins in the Rocky Mountain region related primarily
to decreased fiber optic construction work. Partially offsetting
the decline in earnings were increased storm-related repair work in
the central United States, decreased interest expense due to lower
average interest rates, and earnings from businesses acquired since
the comparable period last year. The increase in revenues and the
related increase in operation and maintenance expense resulted
largely from businesses acquired since the comparable period last
year.
Pipeline and Energy Services
Earnings at the pipeline and energy services business increased
due to higher gathering volumes at higher average rates and
increased storage revenues at the pipeline. Partially offsetting
the earnings increase were higher operation and maintenance expense
largely related to the expansion of the gathering system to
accommodate increasing natural gas volumes, and higher depreciation,
depletion and amortization expense resulting from increased
property, plant and equipment balances. The decrease in energy
services revenue and the related decrease in purchased natural gas
sold were due primarily to decreased energy marketing volumes
resulting from the sale of the vast majority of the Company's low-
margin energy marketing operations in the third quarter of 2001.
Natural Gas and Oil Production
Natural gas and oil production earnings decreased largely due to
lower realized natural gas and oil prices which were 60 percent and
27 percent lower than last year, respectively, partially offset by
higher natural gas production of 18 percent, largely from production
in the Rocky Mountain area. Also adding to the earnings decline
were lower sales volumes of inventoried natural gas, increased
operation and maintenance expense, mainly higher lease operating
expenses, and increased depreciation, depletion and amortization
expense due to higher production volumes and higher rates.
Partially offsetting the earnings decline were the effects of the
nonrecurring compromise agreement of $27.4 million ($16.6 million
after-tax), included in operating revenue, as discussed in Note 13
of Notes to Consolidated Financial Statements, and lower interest
expense resulting from lower average interest rates. Hedging
activities for natural gas for the first quarter of 2002 and 2001
resulted in realized prices that were 104 and 93 percent,
respectively, of what otherwise would have been received. In
addition, hedging activities for oil for the first quarter of 2002
and 2001 resulted in realized prices that were 105 and 102 percent,
respectively, of what otherwise would have been received.
Construction Materials and Mining
The construction materials and mining business experienced
higher seasonal losses due largely to seasonal losses realized in
the first quarter of 2002 by construction materials businesses
acquired since the comparable period last year. Decreased
construction activity and lower ready-mixed concrete margins at
existing operations, higher depreciation, depletion and amortization
expense due to higher property, plant and equipment balances, and
increased selling, general and administrative costs added to the
losses. The absence of earnings from the Company's coal operations
that were sold in April 2001, as previously discussed in Note 10 of
Notes to Consolidated Financial Statements, also added to the
losses. Increased aggregate and asphalt margins at existing
construction materials operations partially offset the losses.
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 natural gas and oil commodity
prices, 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), drilling successes in natural gas and oil
operations, the ability to contract for or to secure necessary
drilling rig contracts and to retain employees to drill for and
develop reserves, ability to acquire natural gas and oil properties,
the availability of economic expansion or development opportunities,
and political, regulatory and economic conditions and changes in
currency rates in foreign countries where the Company does business.
The business and profitability of the Company are also
influenced by economic and geographic factors, including political
and economic risks, economic disruptions caused by terrorist
activities, 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 contractual obligations, 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, projections and certain assumptions for the Company over
the next few years and other matters for each of its six 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
assumptions contained in this section as well as the various
important factors listed under the heading Safe Harbor for Forward-
looking Statements. Changes in such assumptions and factors could
cause actual future results to differ materially from the Company's
targeted growth, revenue and earnings projections.
MDU Resources Group, Inc.
* Earnings per share, diluted, for 2002 are projected in the
$2.05 to $2.30 range. Excluding the benefit of the compromise
agreement discussed in Note 13 of Notes to Consolidated Financial
Statements, earnings per share from operations are projected to be
in the approximate range of $1.85 to $2.10.
* Weighted average diluted common shares outstanding for the
twelve months ended December 31, 2001, were 67.9 million. The
Company anticipates a 5 percent to 10 percent increase in weighted
average diluted shares outstanding for 2002.
* The Company expects the percentage of 2002 earnings per share
from operations, excluding the benefit of the compromise agreement,
by quarter to be in the following approximate ranges:
- Second Quarter - 19 percent to 24 percent
- Third Quarter - 39 percent to 44 percent
- Fourth Quarter - 29 percent to 34 percent
* The Company's long-term growth goals on compound annual
earnings per share from operations are in the range of 10 percent to
12 percent. However, the current state of the economy has added
uncertainty in the ability of the Company to achieve this goal
particularly in the early years of the planning cycle.
* The Company expects to issue and sell equity from time to time
to keep its debt at the nonregulated businesses at no more than 40
percent of total capitalization.
* The Company estimates that the benefit resulting solely from
the discontinuance of goodwill amortization would be 5 to 6 cents
per common share in 2002.
Electric
* Montana-Dakota has obtained and holds valid and existing
franchises authorizing it to conduct its electric and natural gas
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.
* On May 2, 2002, the District Court granted Montana-Dakota's
request for a stay of a portion of the $4.3 million rate reduction
ordered by the NDPSC. Accordingly, Montana-Dakota will implement a
rate reduction of $800,000 effective with service rendered on and
after May 8, 2002, rather than the $4.3 million reduction ordered by
the NDPSC. The remaining $3.5 million is subject to refund if
Montana-Dakota does not prevail in this proceeding. For more
information on this proceeding see Note 12 of Notes to Consolidated
Financial Statements.
* Due to growing electric demand, a 40-megawatt natural gas
turbine power plant may be added in the three to five year planning
horizon.
* Currently, the Company is working with the state of North
Dakota to determine the feasibility of constructing a 500-megawatt
lignite-fired power plant in western North Dakota. The first
preliminary decision is expected in December 2002.
Natural gas distribution
* Annual natural gas throughput for 2002 is expected to be
approximately 56 million decatherms, with about 39 million
decatherms from sales and 17 million decatherms from transportation.
* On April 12, 2002, the natural gas distribution segment filed
with the NDPSC for a natural gas rate increase. The Company is
filing for a total of $2.8 million or 4.1 percent above current
rates.
Utility services
* Revenues for this segment are expected to exceed $500 million
in 2002.
* As of mid-April, the utility services segment had approximately
$167 million in backlog.
* Earnings for 2002 are expected to increase by over 50 percent
compared to 2001 earnings.
* Over the next five years, this segment expects to reach $1
billion in revenues and $50 million in earnings.
* This segment's goal is to achieve compound annual revenue and
earnings growth rates of approximately 20 percent to 25 percent over
the next five years.
Pipeline and energy services
* In 2002, natural gas throughput from this segment, including
both transportation and gathering, is expected to increase by
approximately 5 percent.
* A 247-mile pipeline to transport additional natural gas to
market and enhance the use of the Company's storage facilities is
currently under regulatory review. Depending upon the timing of the
receipt of the necessary regulatory approval, construction
completion could occur as early as late 2003.
* The Company continues to pursue electric generation
opportunities in Brazil. These projects are targeted toward a niche
market where we will provide energy on a contract basis in order to
reduce risk. The first phase of the generating facility is on
schedule to begin production during the second quarter of 2002.
Natural gas and oil production
* Combined natural gas and oil production at this segment is
expected to be approximately 30 percent higher in 2002 than in 2001.
* This segment expects to drill approximately 500 wells in 2002,
300 of which are expected to be drilled in the Powder River Basin.
* Natural gas prices in the Rocky Mountain Region for May through
December 2002 reflected in the Company's 2002 earnings estimates are
in the range of $2.25 to $2.75 per Mcf. The Company's estimates for
natural gas prices on the NYMEX for May through December 2002
reflected in the Company's 2002 earnings estimates are in the range
of $2.75 to $3.25 per Mcf. During 2001, more than half of this
segment's natural gas production was priced using Rocky Mountain
prices.
* NYMEX crude oil prices reflected in the Company's 2002 earnings
estimates are in the range of $20 to $24 per barrel for 2002.
* This segment has hedged a portion of its 2002 production. The
Company has entered into swap agreements and fixed price forward
sales representing approximately 25 percent to 30 percent of 2002
estimated annual natural gas production. These natural gas swaps
are at various indices and range from a low CIG index of $2.73 to a
high NYMEX price of $4.34. The Company has also entered into oil
swap agreements at average NYMEX prices in the range of $24.80 to
$25.90 per barrel, representing approximately 30 percent to 35
percent of the Company's 2002 estimated annual oil production.
* In addition to these 2002 hedges, the Company has hedged a
portion of its 2003 production. The Company has entered into
costless collars and fixed price forward sales, representing
approximately 5 percent to 10 percent of 2003 estimated annual
natural gas production. The costless collars range from
approximately $3.15 to $4.25 per Mcf NYMEX.
Construction materials and mining
* Excluding the effects of potential future acquisitions,
aggregate volumes are expected to increase by approximately 15
percent to 20 percent in 2002 and asphalt and ready-mixed concrete
volumes are expected to increase by 5 percent to 10 percent in 2002,
in each case as compared to 2001.
* Revenues for this segment are expected to exceed $900 million
in 2002.
* As of mid-April 2002, the construction materials and mining
unit had nearly $200 million in backlog.
* This segment's goal is to achieve compound annual revenue and
earnings growth rates of approximately 10 percent to 20 percent over
the next five years. However, the current state of the economy has
added uncertainty in the ability of the Company to achieve this goal
particularly in the early years of the planning cycle.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB)
approved Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" (SFAS No. 143). For
further information on SFAS No. 143, see Note 5 of Notes to
Consolidated Financial Statements.
In June 2001, the FASB approved Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS No. 142). Under SFAS No. 142 goodwill and other intangible
assets with indefinite lives are no longer amortized but are
reviewed annually, or more frequently if impairment issues arise,
for impairment. As of December 31, 2001, the Company has
unamortized goodwill of $174.0 million that will be subject to the
provisions of SFAS No. 142. Had SFAS No. 142 been in effect for
2001, earnings would have been $4.2 million higher.
In August 2001, the FASB approved Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144). The adoption of SFAS
No. 144 is effective for the Company beginning on January 1, 2002.
The adoption of SFAS No. 144 did not have a material affect on the
Company's financial position or results of operations.
Critical Accounting Policies
The Company's critical accounting policies include impairment of
long-lived assets and intangibles, impairment testing of natural gas
and oil production properties, revenue recognition, derivatives,
purchase accounting and accounting for the effects of regulation.
There are no material changes in the Company's critical accounting
policies from those reported in the Company's Annual Report on Form
10-K for the year ended December 31, 2001. For more information on
critical accounting policies, see Part II, Item 7 in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
Liquidity and Capital Commitments
Cash flows
Operating activities --
Cash flows from operating activities in the first quarter of
2002 decreased $28.9 million from the comparable 2001 period,
primarily due to a decrease in net income of $9.0 million and the
decrease in cash from changes in working capital items of $32.8
million. This decrease was primarily due to lower natural gas
prices in the first quarter of 2002 compared to the same period of
2001. Higher depreciation, depletion and amortization expense of
$4.0 million resulting from increased property, plant and equipment
balances partially offset the decrease in cash flows from operating
activities.
Investing activities --
Cash flows used in investing activities in the first quarter of
2002 decreased $19.3 million compared to the comparable period in
2001, the result of a decrease in net capital expenditures. Net
capital expenditures exclude the following noncash transactions
related to acquisitions: issuance of the Company's equity securities
in the first quarter of 2002 and 2001.
Financing activities --
Financing activities resulted in an increase in cash flows for
the first quarter of 2002 of $23.4 million compared to the
comparable 2001 period. This increase was largely due to the
decrease in the repayment of long-term debt of $100.2 million. This
increase was partially offset by a decrease in the issuance of long-
term debt of $57.8 million and a decrease in proceeds from issuance
of common stock of $25.4 million.
Capital Expenditures
Net capital expenditures for the year 2002 are estimated at
$542.0 million, including those for acquisitions, system upgrades,
routine replacements, service extensions, routine equipment
maintenance and replacements, land and building improvements,
pipeline and gathering expansion projects, the further enhancement
of natural gas and oil production and reserve growth, power
generation opportunities and for potential future acquisitions and
other growth opportunities. The company continues to evaluate
potential future acquisitions and other growth opportunities;
however, they are dependent upon the availability of economic
opportunities and, as a result, actual acquisitions and capital
expenditures may vary significantly from the estimated 2002 capital
expenditures referred to above. It is anticipated that all of the
funds required for capital expenditures will be met from various
sources. These sources include internally generated funds, a
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.
The estimated 2002 capital expenditures referred to above
include completed 2002 acquisitions including construction materials
and mining businesses in Minnesota; a utility services business in
California; and an energy development company in Montana. Pro forma
financial amounts reflecting the effects of the above acquisitions
are not presented as such acquisitions were not material to the
Company's financial position or results of operations.
Capital resources
The Company has a revolving credit and term loan agreement with
various banks that allows for borrowings of up to $40 million.
Under this agreement, $5 million was outstanding at March 31, 2002.
The borrowings under this agreement, which allows for subsequent
borrowings up to a term of one year, are classified as long term as
the Company intends to refinance these borrowings on a long-term
basis. The Company intends to renew this agreement, which expires
on December 31, 2002.
Centennial has a revolving credit agreement (Centennial credit
agreement) with various banks that supports Centennial's $350
million commercial paper program (Centennial commercial paper
program). There were no outstanding borrowings under the Centennial
credit agreement at March 31, 2002. Under the Centennial commercial
paper program, $221.8 million was outstanding at March 31, 2002.
The Centennial commercial paper borrowings are classified as long
term as Centennial intends to refinance these borrowings on a long-
term basis through continued Centennial commercial paper borrowings
and as further supported by the Centennial credit agreement, which
allows for subsequent borrowings up to a term of one year.
Centennial intends to renew the Centennial credit agreement, which
expires September 27, 2002, on an annual basis.
Centennial has an uncommitted long-term master shelf agreement
that allows for borrowings of up to $300 million. Under the master
shelf agreement, $210 million was outstanding at March 31, 2002.
MDU International has a credit agreement, which expires on
June 30, 2002, that allows for borrowings up to $50 million. There
were no outstanding borrowings under this credit agreement at
March 31, 2002. The Company intends to renew this credit agreement.
The Company has unsecured short-term lines of credit from a
number of banks totaling $60 million that allow the Company to
borrow under the lines and/or provide credit support for the
Company's commercial paper program. There were no outstanding
borrowings under the Company's lines of credit or the Company's
commercial paper program at March 31, 2002. The Company intends to
renew these lines of credit on an annual basis.
The Company's goal is to maintain acceptable credit ratings
under its credit agreements and individual bank lines of credit in
order to access the capital markets through the issuance of
commercial paper. If the Company were to experience a minor
downgrade of its credit rating, the Company would not anticipate any
change in its ability to access the capital markets. However, in
such event, the Company would expect a nominal basis point increase
in overall interest rates with respect to its cost of borrowings.
If the Company were to experience a significant downgrade of its
credit ratings, which the Company does not currently anticipate, it
may need to borrow under its committed bank lines.
Borrowing under its committed bank lines would be expected to
increase annualized interest expense on its variable rate debt by
approximately $333,000 (after-tax) for the calendar year 2002 based
on March 31, 2002 variable rate borrowings. Based on the Company's
overall interest rate exposure at March 31, 2002, this change would
not have a material affect on the Company's results of operations.
On an annual basis, the Company negotiates the placement of the
Centennial credit agreement and its individual bank lines of credit
that provide credit support to access the capital markets. In the
event the Company were unable to successfully negotiate the bank
credit facilities, or in the event the fees on such facilities
became too expensive, which the Company does not currently
anticipate, the Company would seek alternative funding. One source
of alternative funding might involve the securitization of certain
Company assets.
In order to borrow under the Company's credit facilities, the
Company must be in compliance with the applicable covenants and
certain other conditions. The Company is in compliance with these
covenants and meets the required conditions at March 31, 2002. In
the event the Company does not comply with the applicable covenants
and other conditions, the Company may need to pursue alternative
sources of funding as previously discussed.
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, 2002, the Company could have issued approximately
$308 million of additional first mortgage bonds.
The Company's coverage of fixed charges including preferred
dividends was 5.1 times and 5.3 times for the twelve months ended
March 31, 2002 and December 31, 2001, respectively. Additionally,
the Company's first mortgage bond interest coverage was 8.3 times
and 8.5 times for the twelve months ended March 31, 2002 and
December 31, 2001, respectively. Common stockholders' equity as a
percent of total capitalization was 59 percent and 58 percent at
March 31, 2002 and December 31, 2001, respectively.
Contractual obligations and commercial commitments
There are no material changes in the Company's contractual
obligations on long-term debt, operating leases and purchase
commitments from those reported in the Company's Annual Report on
Form 10-K for the year ended December 31, 2001. For more
information on contractual obligations and commercial commitments,
see Item 7 in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001.
The Company has certain financial guarantees outstanding at
March 31, 2002. These consisted largely of guarantees on
obligations and loans on the natural gas-fired power plant project
in the Brazilian state of Ceara. For more information on these
guarantees, see Notes 10 and 15 of Notes to Consolidated Financial
Statements in the 2001 Annual Report. These guarantees as of
March 31, 2002, are approximately $29.2 million for 2002. As of
March 31, 2002, there were no guarantees outstanding for 2003 and
thereafter.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes in market risks faced by the
Company from those reported in the Company's Annual Report on Form
10-K for the year ended December 31, 2001. 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, 2001, and Notes to
Consolidated Financial Statements in this Form 10-Q.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 2002, Fidelity Oil Co. (FOC), one of the Company's
natural gas and oil production subsidiaries, entered into a
compromise agreement with the former operator of certain of FOC's
oil production properties in southeastern Montana.
On April 16, 2002, the North Dakota Supreme Court affirmed the
March 2001 summary judgment entered by the North Dakota District
Court to dismiss the claims of the 11 natural gas producers. On
April 30, 2002, the 11 natural gas producers filed a petition for
rehearing by the North Dakota Supreme Court.
For more information on the above legal actions see Note 13 of
Notes to Consolidated Financial Statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Between January 1, 2002 and March 31, 2002, the Company issued
595,830 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. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on
April 23, 2002. Two proposals were submitted to stockholders as
described in the Company's Proxy Statement dated March 8, 2002, 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 increase authorized
shares of common stock from
150,000,000 to 250,000,000
with a par value of $1.00 53,252,462 3,342,127 792,934 ---
Proposal to elect four directors:
For terms expiring in 2005 --
Bruce R. Albertson 56,194,062 1,193,461 --- ---
Thomas Everist 56,852,032 535,491 --- ---
Douglas C. Kane 56,776,304 611,219 --- ---
Robert L. Nance 56,818,753 568,770 --- ---
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
3(a(1)) Composite Certificate of Incorporation of the Company, as
amended to date, filed as Exhibit 3(a) to Form 10-Q for
the quarter ended June 30, 1999, in File No. 1-3480
3(a(2)) Amendment to Article FOURTH of the Certificate of
Incorporation
10(a) Directors' Compensation Policy, as amended to date
12 Computation of Ratio of Earnings to Fixed Charges and
Combined Fixed Charges and Preferred Stock Dividends
b) Reports on Form 8-K
Form 8-K was filed on March 28, 2002. Under Item 4 -- Changes in
Registrant's Certifying Accountant, the Company reported the
selection of Deloitte & Touche LLP as the Company's independent
auditors for the 2002 fiscal year.
Form 8-K was filed on April 29, 2002. Under Item 5 -- Other
Events, the Company reported the press release issued April 23,
2002, regarding earnings for the quarter ended March 31, 2002,
and information regarding an Order issued by the North Dakota
Public Service Commission, as disclosed in a public conference
call on April 24, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, 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 14, 2002 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.
3(a(1)) Composite Certificate of Incorporation of the Company, as
amended to date, filed as Exhibit 3(a) to Form 10-Q for the
quarter ended June 30, 1999, in File No. 1-3480
3(a(2)) Amendment to Article FOURTH of the Certificate of Incorporation
10(a) Directors' Compensation Policy, as amended to date
12 Computation of Ratio of Earnings to Fixed Charges
and Combined Fixed Charges and Preferred Stock
Dividends