UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from _____________ to ______________ Commission file number 1-3480 MDU Resources Group, Inc. (Exact name of registrant as specified in its charter) Delaware 41-0423660 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Schuchart Building 918 East Divide Avenue P.O. Box 5650 Bismarck, North Dakota 58506-5650 (Address of principal executive offices) (Zip Code) (701) 222-7900 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X. No. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of May 5, 2000: 61,148,770 shares. INTRODUCTION This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward- looking statements should be read with the cautionary statements and important factors included in this Form 10-Q at Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations - -- Safe Harbor for Forward-looking Statements. Forward-looking statements are all statements other than statements of historical fact, including without limitation, those statements that are identified by the words "anticipates," "estimates," "expects," "intends," "plans," "predicts" and similar expressions. MDU Resources Group, Inc. (company) is a diversified natural resource company which was incorporated under the laws of the State of Delaware in 1924. Its principal executive offices are at Schuchart Building, 918 East Divide Avenue, P.O. Box 5650, Bismarck, North Dakota 58506-5650, telephone (701) 222-7900. Montana-Dakota Utilities Co. (Montana-Dakota), the public utility division of the company, through the electric and natural gas distribution segments, generates, transmits and distributes electricity, distributes natural gas and provides related value-added products and services in the Northern Great Plains. The company, through its wholly owned subsidiary, Centennial Energy Holdings, Inc. (Centennial), owns WBI Holdings, Inc. (WBI Holdings), Knife River Corporation (Knife River), and Utility Services, Inc. (Utility Services). WBI Holdings is comprised of the pipeline and energy services and the oil and natural gas production segments. The pipeline and energy services segment provides natural gas transportation, underground storage and gathering services through regulated and nonregulated pipeline systems and provides energy marketing and management services throughout the United States. The oil and natural gas production segment is engaged in oil and natural gas acquisition, exploration and production throughout the United States and in the Gulf of Mexico. Knife River mines and markets aggregates and related value-added construction materials products and services in the western United States, including Alaska and Hawaii, and also operates lignite coal mines in Montana and North Dakota. Utility Services is a full-service engineering, design and build company operating in the western United States specializing in construction and maintenance of power and natural gas distribution and transmission systems as well as communication and fiber optic facilities. INDEX Part I -- Financial Information Consolidated Statements of Income -- Three Months Ended March 31, 2000 and 1999 Consolidated Balance Sheets -- March 31, 2000 and 1999, and December 31, 1999 Consolidated Statements of Cash Flows -- Three Months Ended March 31, 2000 and 1999 Notes to Consolidated Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Part II -- Other Information Signatures Exhibit Index Exhibits PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MDU RESOURCES GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended March 31, 2000 1999 (In thousands, except per share amounts) Operating revenues $371,989 $259,046 Operating expenses: Fuel and purchased power 14,399 13,503 Purchased natural gas sold 171,770 90,705 Operation and maintenance 125,918 101,999 Depreciation, depletion and amortization 22,139 20,140 Taxes, other than income 8,333 7,238 342,559 233,585 Operating income 29,430 25,461 Other income -- net 2,368 3,768 Interest expense 10,281 8,806 Income before income taxes 21,517 20,423 Income taxes 8,153 7,702 Net income 13,364 12,721 Dividends on preferred stocks 192 193 Earnings on common stock $ 13,172 $ 12,528 Earnings per common share -- basic $ .23 $ .24 Earnings per common share -- diluted $ .23 $ .23 Dividends per common share $ .21 $ .20 Weighted average common shares outstanding -- basic 57,051 53,147 Weighted average common shares outstanding -- diluted 57,188 53,420 The accompanying notes are an integral part of these consolidated statements. MDU RESOURCES GROUP, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) March 31, March 31, December 31, 2000 1999 1999 (In thousands) ASSETS Current assets: Cash and cash equivalents $ 37,622 $ 36,930 $ 77,504 Receivables 179,585 123,639 169,560 Inventories 57,468 43,176 64,608 Deferred income taxes 16,564 20,974 15,600 Prepayments and other current assets 29,452 17,849 24,424 320,691 242,568 351,696 Investments 42,907 40,550 43,128 Property, plant and equipment 2,066,881 1,837,019 2,042,281 Less accumulated depreciation, depletion and amortization 809,568 741,392 794,105 1,257,313 1,095,627 1,248,176 Deferred charges and other assets 122,959 95,289 123,303 $1,743,870 $1,474,034 $1,766,303 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings $ --- $ 122 $ 14,693 Long-term debt and preferred stock due within one year 3,841 2,502 4,428 Accounts payable 98,245 61,326 81,262 Taxes payable 13,704 20,540 6,842 Dividends payable 12,174 10,824 12,171 Other accrued liabilities, including reserved revenues 80,412 85,756 67,931 208,376 181,070 187,327 Long-term debt 518,164 417,778 563,545 Deferred credits and other liabilities: Deferred income taxes 215,621 173,885 213,771 Other liabilities 114,117 128,777 115,627 329,738 302,662 329,398 Preferred stock subject to mandatory redemption 1,500 1,600 1,500 Commitments and contingencies Stockholders' equity: Preferred stocks 15,000 15,000 15,000 Common stockholders' equity: Common stock (Shares issued -- $1.00 par value, 57,296,167 at March 31, 2000, 57,277,915 at December 31, 1999; $3.33 par value, 53,395,525 at March 31, 1999 57,296 177,807 57,278 Other paid-in capital 372,661 174,264 372,312 Retained earnings 244,761 207,479 243,569 Treasury stock at cost - 239,521 shares (3,626) (3,626) (3,626) Total common stockholders' equity 671,092 555,924 669,533 Total stockholders' equity 686,092 570,924 684,533 $1,743,870 $1,474,034 $1,766,303 The accompanying notes are an integral part of these consolidated statements. MDU RESOURCES GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 31, 2000 1999 (In thousands) Operating activities: Net income $ 13,364 $ 12,721 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 22,139 20,140 Deferred income taxes and investment tax credit 969 (3,352) Changes in current assets and liabilities: Receivables (9,938) 475 Inventories 7,250 1,689 Other current assets (5,028) 1,687 Accounts payable 16,966 1,303 Other current liabilities 19,346 25,966 Other noncurrent changes 71 (46) Net cash provided by operating activities 65,139 60,583 Financing activities: Net change in short-term borrowings (14,693) (14,878) Issuance of long-term debt 25,400 25,089 Repayment of long-term debt (71,368) (21,366) Issuance of common stock --- 3,186 Retirement of natural gas repurchase commitment --- (1,288) Dividends paid (12,172) (10,825) Net cash used in financing activities (72,833) (20,082) Investing activities: Capital expenditures including acquisitions of businesses (32,628) (37,608) Net proceeds from sale or disposition of property 1,219 7,130 Net capital expenditures (31,409) (30,478) Sale of natural gas available under repurchase commitment --- 619 Investments 221 2,479 Additions to notes receivable (5,000) (15,407) Proceeds from notes receivable 4,000 --- Net cash used in investing activities (32,188) (42,787) Decrease in cash and cash equivalents (39,882) (2,286) Cash and cash equivalents -- beginning of year 77,504 39,216 Cash and cash equivalents -- end of period $ 37,622 $ 36,930 The accompanying notes are an integral part of these consolidated statements. MDU RESOURCES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 and 1999 (Unaudited) 1. Basis of presentation The accompanying consolidated interim financial statements were prepared in conformity with the basis of presentation reflected in the consolidated financial statements included in the Annual Report to Stockholders for the year ended December 31, 1999 (1999 Annual Report), and the standards of accounting measurement set forth in Accounting Principles Board Opinion No. 28 and any amendments thereto adopted by the Financial Accounting Standards Board. Interim financial statements do not include all disclosures provided in annual financial statements and, accordingly, these financial statements should be read in conjunction with those appearing in the company's 1999 Annual Report. The information is unaudited but includes all adjustments which are, in the opinion of management, necessary for a fair presentation of the accompanying consolidated interim financial statements. For the three months ended March 31, 2000 and 1999, comprehensive income equaled net income as reported. 2. Seasonality of operations Some of the company's operations are highly seasonal and revenues from, and certain expenses for, such operations may fluctuate significantly among quarterly periods. Accordingly, the interim results may not be indicative of results for the full fiscal year. 3. Cash flow information Cash expenditures for interest and income taxes were as follows: Three Months Ended March 31, 2000 1999 (In thousands) Interest, net of amount capitalized $4,728 $3,131 Income taxes $ 600 $ 130 4. Reclassifications Certain reclassifications have been made in the financial statements for the prior period to conform to the current presentation. Such reclassifications had no effect on net income or common stockholders' equity as previously reported. 5. New accounting pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset the related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133," which delayed the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The company will adopt SFAS No. 133 on January 1, 2001. The company continues to evaluate the effect of adopting SFAS No. 133 but has not yet determined what impact this adoption will have on the company's financial position or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition" (SAB No. 101), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. On March 24, 2000, the Securities and Exchange Commission delayed the adoption date of SAB No. 101. SAB No. 101 is effective no later than the second fiscal quarter of the fiscal year beginning after December 15, 1999. SAB No. 101 is not expected to have a material effect on the company's financial position or results of operations. 6. Derivatives From time to time, the company utilizes derivative financial instruments, including price swap and collar agreements and natural gas futures, to manage a portion of the market risk associated with fluctuations in the price of oil and natural gas. The company's policy prohibits the use of derivative instruments for trading purposes and the company has procedures in place to monitor compliance with its policies. The company is exposed to credit-related losses in relation to financial instruments in the event of nonperformance by counterparties, but does not expect any counterparties to fail to meet their obligations given their existing credit ratings. The swap and collar agreements call for the company to receive monthly payments from or make payments to counterparties based upon the difference between a fixed and a variable price as specified by the agreements. The variable price is either an oil price quoted on the New York Mercantile Exchange (NYMEX) or a quoted natural gas price on the NYMEX, Colorado Interstate Gas Index or other various indexes. The company believes that there is a high degree of correlation because the timing of purchases and production and the swap and collar agreements are closely matched, and hedge prices are established in the areas of operations. Amounts payable or receivable on the swap and collar agreements are matched and reported in operating revenues on the Consolidated Statements of Income as a component of the related commodity transaction at the time of settlement with the counterparty. Gains or losses on futures contracts are deferred until the underlying commodity transaction occurs, at which point they are reported in "Purchased natural gas sold" on the Consolidated Statements of Income. The following table summarizes hedge agreements entered into by certain wholly owned subsidiaries of WBI Holdings as of March 31, 2000. These agreements call for the subsidiaries of WBI Holdings to receive fixed prices and pay variable prices. (Notional amount and fair value in thousands) Weighted Average Notional Fixed Price Amount Fair (Per barrel) (In barrels) Value Oil swap agreements maturing in 2000 $19.55 578 $(3,962) Weighted Average Notional Fixed Price Amount Fair (Per MMBtu) (In MMBtu's) Value Natural gas swap agreements maturing in 2000 $ 2.32 5,790 $(2,663) Weighted Average Floor/Ceiling Notional Price Amount Fair (Per barrel) (In barrels) Value Oil collar agreement maturing in 2000 $20.00/$22.33 138 $ (588) Weighted Average Floor/Ceiling Notional Price Amount Fair (Per MMBtu) (In MMBtu's) Value Natural gas collar agreements maturing in 2000 $2.34/$2.69 2,559 $(1,017) The following table summarizes hedge agreements entered into by certain wholly owned subsidiaries of WBI Holdings, as of March 31, 1999. These agreements call for the subsidiaries of WBI Holdings to receive fixed prices and pay variable prices. (Notional amount and fair value in thousands) Weighted Average Floor/Ceiling Notional Price Amount Fair (Per MMBtu) (In MMBtu's) Value Natural gas collar agreements maturing in 1999 $2.10/$2.51 2,200 $ 322 Weighted Average Notional Fixed Price Amount Fair (Per MMBtu) (In MMBtu's) Value Natural gas futures contracts maturing in 2000 $2.38 1,000 $ 135 The fair value of these derivative financial instruments reflects the estimated amounts that the company would receive or pay to terminate the contracts at the reporting date, thereby taking into account the current favorable or unfavorable position on open contracts. The favorable or unfavorable position is currently not recorded on the company's financial statements. Favorable and unfavorable positions related to commodity hedge agreements are expected to be generally offset by corresponding increases and decreases in the value of the underlying commodity transactions. In the event a derivative financial instrument does not qualify for hedge accounting or when the underlying commodity transaction matures, is sold, is extinguished, or is terminated, the current favorable or unfavorable position on the open contract would be included in results of operations. The company's policy requires approval to terminate a hedge agreement prior to its original maturity. In the event a hedge agreement is terminated, the realized gain or loss at the time of termination would be deferred until the underlying commodity transaction is sold or matures and is expected to generally offset the corresponding increases or decreases in the value of the underlying commodity transaction. 7. Common stock At the Annual Meeting of Stockholders held on April 27, 1999, the company's common stockholders approved an amendment to the Certificate of Incorporation increasing the authorized number of common shares from 75 million shares to 150 million shares and reducing the par value of the common stock from $3.33 per share to $1.00 per share. 8. Business segment data The company's reportable segments are those that are based on the company's method of internal reporting, which generally segregates the strategic business units due to differences in products, services and regulation. Prior to the fourth quarter of 1999, the company reported five operating segments consisting of electric, natural gas distribution, natural gas transmission, construction materials and mining, and oil and natural gas production. During the fourth quarter of 1999, the company revised the components of the segments reported based on organizational changes and the significance of current segments. As a result, a utility services segment was separated from the electric segment; gas production activities previously included in the natural gas transmission segment are now reflected in the oil and natural gas production segment; and the remaining operations of the natural gas transmission business were renamed pipeline and energy services. The company's operations are now conducted through six business segments and all prior period information has been restated to reflect this change. As of March 31, 2000, all of the company's operations are located within the United States. The electric business generates, transmits and distributes electricity and the natural gas distribution business distributes natural gas, and these operations also supply related value-added products and services in the Northern Great Plains. The utility services business is a full-service engineering, design and build company operating in the western United States specializing in construction and maintenance of power and natural gas distribution and transmission systems as well as communication and fiber optic facilities. The pipeline and energy services business provides natural gas transportation, underground storage and gathering services through regulated and nonregulated pipeline systems and provides energy marketing and management services throughout the United States. The oil and natural gas production business is engaged in oil and natural gas acquisition, exploration and production throughout the United States and in the Gulf of Mexico. The construction materials and mining business mines and markets aggregates and related value-added construction materials products and services in the western United States, including Alaska and Hawaii. It also operates lignite coal mines in Montana and North Dakota. Segment information follows the same accounting policies as described in Note 1 of the company's 1999 Annual Report. Segment information included in the accompanying Consolidated Statements of Income is as follows: Operating Operating Revenues Earnings Revenues Inter- on Common External segment Stock Three Months (In thousands) Ended March 31, 2000 Electric $ 40,320 $ --- $ 3,223 Natural gas distribution 62,417 --- 2,580 Utility services 22,836 --- 453 Pipeline and energy services 147,738 20,497 2,729 Oil and natural gas production 23,043 4,190 6,409 Construction materials and mining 72,050 3,585* (2,222) Intersegment eliminations --- (24,687) --- Total $ 368,404 $ 3,585* $13,172 Three Months Ended March 31, 1999 Electric $ 40,232 $ --- $ 4,266 Natural gas distribution 61,126 --- 2,878 Utility services 18,742 --- 897 Pipeline and energy services 66,635 20,721 4,264 Oil and natural gas production 12,273 2,711 1,596 Construction materials and mining 55,976 4,062* (1,373) Intersegment eliminations --- (23,432) --- Total $ 254,984 $ 4,062* $12,528 * In accordance with the provisions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Regulation" (SFAS No. 71), intercompany coal sales are not eliminated. 9. Regulatory matters and revenues subject to refund In June 1995, Williston Basin Interstate Pipeline Company (Williston Basin), an indirect wholly owned subsidiary of the company, filed a general rate increase application with the Federal Energy Regulatory Commission (FERC). As a result of FERC orders issued after Williston Basin's application was filed, Williston Basin filed revised base rates in December 1995 with the FERC. Williston Basin began collecting such increase effective January 1, 1996, subject to refund. In July 1998, the FERC issued an order which addressed various issues including storage cost allocations, return on equity and throughput. In August 1998, Williston Basin requested rehearing of such order. In June 1999, the FERC issued an order approving and denying various issues addressed in Williston Basin's rehearing request, and also remanding the return on equity issue to an Administrative Law Judge for further proceedings. In July 1999, Williston Basin requested rehearing of certain issues which were contained in the June 1999 FERC order. In September 1999, the FERC granted Williston Basin's request for rehearing with respect to the return on equity issue but also ordered Williston Basin to issue interim refunds prior to the final determination in this proceeding. As a result, in October 1999, Williston Basin issued refunds to its customers totaling $11.3 million, all from amounts which had previously been reserved. In December 1999, a hearing was held before the FERC regarding the return on equity issue. In April 2000, the Administrative Law Judge issued an Initial Decision regarding the remanded return on equity issue and Williston Basin is currently evaluating its options regarding this decision. In addition, in July 1999, Williston Basin appealed to the United States Court of Appeals for the D.C. Circuit (D.C. Circuit Court) certain issues concerning storage cost allocations as decided by the FERC in its June 1999 order. In October 1999, the D.C. Circuit Court issued an order which dismissed Williston Basin's appeal but permitted Williston Basin to again appeal such previously contested issues upon final determination of all issues by the FERC in this proceeding. In December 1999, Williston Basin filed a general natural gas rate change application with the FERC. Williston Basin will begin collecting such rates effective June 1, 2000, subject to refund. Reserves have been provided for a portion of the revenues that have been collected subject to refund with respect to pending regulatory proceedings and to reflect future resolution of certain issues with the FERC. Williston Basin believes that such reserves are adequate based on its assessment of the ultimate outcome of the various proceedings. 10. Litigation In March 1997, 11 natural gas producers filed suit in North Dakota Northwest Judicial District Court (North Dakota District Court) against Williston Basin and the company. The natural gas producers had processing agreements with Koch Hydrocarbon Company (Koch). Williston Basin and the company had natural gas purchase contracts with Koch. The natural gas producers allege they are entitled to damages for the breach of Williston Basin's and the company's contracts with Koch although no specific damages have been stated. A similar suit was filed by Apache Corporation (Apache) and Snyder Oil Corporation (Snyder) in North Dakota District Court in December 1993. The North Dakota Supreme Court in December 1999 affirmed the North Dakota District Court decision dismissing Apache's and Snyder's claims against Williston Basin and the company. Based in part upon the decision of the North Dakota Supreme Court affirming the dismissal of the claims brought by Apache and Snyder, Williston Basin and the company have filed motions for summary judgment to dismiss the claims of the 11 natural gas producers. Oral argument on those motions was held May 8, 2000. Williston Basin and the company are awaiting a decision from the North Dakota District Court. A trial on the claims of the natural gas producers has been set to commence on October 23, 2000. In Williston Basin's opinion, the claims of the 11 natural gas producers are without merit. If any amounts are ultimately found to be due, Williston Basin plans to file with the FERC for recovery from customers. However, the amount of costs that can ultimately be recovered is subject to approval by the FERC and market conditions. In June 1999, several oil and gas royalty interest owners filed suit in Colorado State District Court, in the City and County of Denver, against WBI Production, Inc. (WBI Production), an indirect wholly owned subsidiary of the company, and several former producers of natural gas with respect to certain gas production properties in the state of Colorado. The complaint arose as a result of the purchase by WBI Production, effective January 1, 1999, of certain natural gas producing leaseholds from the former producers. Prior to February 1, 1999, the natural gas produced from the leaseholds was sold at above market prices pursuant to a natural gas contract. Pursuant to the contract, the royalty interest owners were paid royalties based upon the above market prices. The royalty interest owners have alleged that WBI Production took assignment of the rights to the natural gas contract from the former owner of the contract and, with respect to natural gas produced from such leases and sold at market prices thereafter, wrongly ceased paying the higher royalties on such gas. In their complaint, the royalty interest owners have alleged, in part, breach of oil and gas lease obligations and unjust enrichment on the part of WBI Production and the other former producers with respect to the amount of royalties being paid to the royalty interest owners. The royalty interest owners have requested damages under alternate theories of up to approximately $11.6 million for additional royalties, excluding interest. Motions for summary judgment are pending. Trial before the Colorado State District Court had been scheduled to be held during the week of April 24, 2000, but was rescheduled for the week of October 2, 2000. WBI Production is vigorously contesting the suit. In July 1996, Jack J. Grynberg (Grynberg) filed suit in United States District Court for the District of Columbia (U.S. District Court) against Williston Basin and over 70 other natural gas pipeline companies. Grynberg, acting on behalf of the United States under the Federal False Claims Act, alleged improper measurement of the heating content or volume of natural gas purchased by the defendants resulting in the underpayment of royalties to the United States. In March 1997, the U.S. District Court dismissed the suit without prejudice and the dismissal was affirmed by the D.C. Circuit Court in October 1998. In June 1997, Grynberg filed a similar Federal False Claims Act suit against Williston Basin and Montana-Dakota and filed over 70 other separate similar suits against natural gas transmission companies and producers, gatherers, and processors of natural gas. In April 1999, the United States Department of Justice decided not to intervene in these cases. In response to a motion filed by Grynberg, the Judicial Panel on Multidistrict Litigation consolidated all of these cases in the Federal District Court of Wyoming (Federal District Court). Oral argument on motions to dismiss was held before the Federal District Court on March 17, 2000. Williston Basin and Montana-Dakota are awaiting a decision from the Federal District Court. The Quinque Operating Company (Quinque), on behalf of itself and subclasses of gas producers, royalty owners and state taxing authorities, instituted a legal proceeding in State District Court for Stevens County, Kansas, against over 200 natural gas transmission companies and producers, gatherers, and processors of natural gas, including Williston Basin and Montana-Dakota. The complaint, which was served on Williston Basin and Montana-Dakota in September 1999, contains allegations of improper measurement of the heating content and volume of all natural gas measured by the defendants other than natural gas produced from federal lands. In response to a motion filed by the defendants in this suit, the Judicial Panel on Multidistrict Litigation transferred the suit to the Federal District Court for inclusion in the pretrial proceedings of the Grynberg suit. Williston Basin and Montana-Dakota believe the claims of Grynberg and Quinque are without merit and intend to vigorously contest these suits. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Prior to the fourth quarter of 1999, the company reported five operating segments consisting of electric, natural gas distribution, natural gas transmission, construction materials and mining, and oil and natural gas production. During the fourth quarter of 1999, the company revised the components of the segments reported based on organizational changes and the significance of current segments. As a result, a utility services segment was separated from the electric segment; gas production activities previously included in the natural gas transmission segment are now reflected in the oil and natural gas production segment; and the remaining operations of the natural gas transmission business were renamed pipeline and energy services. The company's operations are now conducted through six business segments and all prior period information has been restated to reflect this change. For purposes of segment financial reporting and discussion of results of operations, electric and natural gas distribution include the electric and natural gas distribution operations of Montana-Dakota. Utility services includes all the operations of Utility Services, Inc. Pipeline and energy services includes WBI Holdings' transportation, storage, gathering and energy marketing and management services. Oil and natural gas production includes the oil and natural gas acquisition, exploration, development and production operations of WBI Holdings, while construction materials and mining includes the results of Knife River's operations. Overview The following table (dollars in millions, where applicable) summarizes the contribution to consolidated earnings by each of the company's business segments. Three Months Ended March 31, 2000 1999 Electric $ 3.2 $ 4.3 Natural gas distribution 2.6 2.9 Utility services .5 .9 Pipeline and energy services 2.7 4.2 Oil and natural gas production 6.4 1.6 Construction materials and mining (2.2) (1.4) Earnings on common stock $ 13.2 $ 12.5 Earnings per common share - basic $ .23 $ .24 Earnings per common share - diluted $ .23 $ .23 Return on average common equity for the 12 months ended 13.4% 5.1%* ________________________________ * Reflects $39.9 million in noncash after-tax write-downs of oil and natural gas properties in 1998. Three Months Ended March 31, 2000 and 1999 Consolidated earnings for the quarter ended March 31, 2000, increased $700,000 from the comparable period a year ago due to higher earnings at the oil and natural gas production business, largely offset by lower earnings at all other business segments. ________________________________ Reference should be made to Notes to Consolidated Financial Statements for information pertinent to various commitments and contingencies. Financial and operating data The following tables (dollars in millions, where applicable) are key financial and operating statistics for each of the company's business segments. Electric Three Months Ended March 31, 2000 1999 Operating revenues: Retail sales $ 34.0 $ 34.0 Sales for resale and other 6.3 6.2 40.3 40.2 Operating expenses: Fuel and purchased power 14.4 13.5 Operation and maintenance 11.3 10.7 Depreciation, depletion and amortization 4.7 4.5 Taxes, other than income 2.1 1.9 32.5 30.6 Operating income $ 7.8 $ 9.6 Retail sales (million kWh) 546.5 536.1 Sales for resale (million kWh) 256.8 268.6 Average cost of fuel and purchased power per kWh $ .017 $ .016 Natural Gas Distribution Three Months Ended March 31, 2000 1999 Operating revenues: Sales $ 61.4 $ 60.1 Transportation and other 1.0 1.0 62.4 61.1 Operating expenses: Purchased natural gas sold 45.8 44.9 Operation and maintenance 8.5 7.8 Depreciation, depletion and amortization 1.9 1.8 Taxes, other than income 1.3 1.1 57.5 55.6 Operating income $ 4.9 $ 5.5 Volumes (MMdk): Sales 13.3 13.2 Transportation 3.4 3.1 Total throughput 16.7 16.3 Degree days (% of normal) 87% 87% Average cost of natural gas, including transportation thereon, per dk $ 3.45 $ 3.40 Utility Services Three Months Ended March 31, 2000 1999 Operating revenues $ 22.8 $ 18.8 Operating expenses: Operation and maintenance 20.0 15.9 Depreciation, depletion and amortization .9 .6 Taxes, other than income .8 .7 21.7 17.2 Operating income $ 1.1 $ 1.6 Pipeline and Energy Services Three Months Ended March 31, 2000 1999 Operating revenues: Pipeline $ 15.1 $ 15.2 Energy services 153.2 72.1 168.3 87.3 Operating expenses: Purchased natural gas sold 149.1 69.1 Operation and maintenance 8.9 7.3 Depreciation, depletion and amortization 2.2 1.9 Taxes, other than income 1.4 1.2 161.6 79.5 Operating income $ 6.7 $ 7.8 Transportation volumes (MMdk): Montana-Dakota 8.7 8.3 Other 11.3 8.8 20.0 17.1 Oil and Natural Gas Production Three Months Ended March 31, 2000 1999 Operating revenues: Oil $ 10.4 $ 5.0 Natural gas 14.0 9.8 Other 2.8 .2 27.2 15.0 Operating expenses: Purchased natural gas sold 1.3 --- Operation and maintenance 6.9 5.7 Depreciation, depletion and amortization 5.6 5.7 Taxes, other than income 2.0 1.4 15.8 12.8 Operating income $ 11.4 $ 2.2 Production: Oil (000's of barrels) 471 481 Natural gas (MMcf) 6,466 6,238 Average prices: Oil (per barrel) $ 21.97 $ 10.35 Natural gas (per Mcf) 2.17 1.57 Construction Materials and Mining Three Months Ended March 31, 2000 1999 Operating revenues: Construction materials $ 68.4 $ 50.1 Coal 7.2 10.0 75.6 60.1 Operating expenses: Operation and maintenance 70.5 54.7 Depreciation, depletion and amortization 6.8 5.7 Taxes, other than income .8 .9 78.1 61.3 Operating loss $ (2.5)$ (1.2) Sales (000's): Aggregates (tons) 2,126 1,538 Asphalt (tons) 93 104 Ready-mixed concrete (cubic yards) 288 217 Coal (tons) 678 879 Amounts presented in the preceding tables for operating revenues, purchased natural gas sold and operation and maintenance expenses will not agree with the Consolidated Statements of Income due to the elimination of intercompany transactions between the pipeline and energy services segment and the natural gas distribution and oil and natural gas production segments. The amounts relating to the elimination of intercompany transactions for operating revenues, purchased natural gas sold and operation and maintenance expenses are as follows: $24.6 million, $24.4 million and $.2 million for the three months ended March 31, 2000; and $23.4 million, $23.3 million and $.1 million for the three months ended March 31, 1999, respectively. Three Months Ended March 31, 2000 and 1999 Electric Electric earnings decreased due to higher retail fuel and purchased power costs largely due to increased generation at higher cost versus lower cost generating stations and increased purchases from outside suppliers, both resulting from outages at a large electric generating station. Also contributing to the earnings decline were higher operation and maintenance expenses resulting from increased payroll expense, and higher maintenance costs at a large electric generating station, partially offset by lower employee benefit-related costs. Higher average realized rates on sales for resale slightly offset the earnings decline. Natural Gas Distribution Earnings decreased at the natural gas distribution business due to increased operation and maintenance expenses, primarily higher payroll expense and increased subcontractor costs partially offset by lower employee benefit-related costs. The natural gas distribution business continued to experience lower than normal volumes resulting from weather that was 13 percent warmer than normal. Higher service and repair income partially offset the earnings decrease. Utility Services Utility services earnings declined due to decreased workload at some of the existing operations that have been affected by utility merger activity in the Pacific Northwest, partially offset by earnings from companies acquired since the comparable period last year. Pipeline and Energy Services Earnings at the pipeline and energy services business decreased due to the recognition in 1999 of $1.7 million resulting from a favorable order received from the D.C. Circuit Court relating to a 1992 general rate proceeding. Increased operating costs, primarily higher payroll expense, depreciation expense and other taxes also added to the earnings decrease. Increased transportation to off-system and on-system markets partially offset by decreased transportation to storage, and earnings from acquisitions since the comparable period last year partially offset the earnings decrease. The increase in energy services revenue and the related increase in purchased natural gas sold resulted from increased energy marketing volumes. Oil and Natural Gas Production Earnings for the oil and natural gas production business increased primarily as a result of increased operating revenues resulting from realized oil and natural gas prices which were 112 percent and 38 percent higher than last year, respectively. Higher natural gas production due to both a new acquisition and ongoing development of existing properties also added to the earnings increase. Partially offsetting the earnings improvement were higher production taxes, largely the result of higher commodity prices. Construction Materials and Mining Construction materials and mining earnings decreased due to normal seasonal losses realized in the first quarter of 2000 by construction materials businesses acquired since the comparable period last year, partially offset by increased construction activity at existing construction materials operations. Higher aggregate, ready-mixed concrete and construction volumes, were partially offset by higher selling, general and administrative costs at the existing construction materials operations. Decreased coal volumes sold resulting from outages at a large electric generating station also added to the earnings decline. Safe Harbor for Forward-looking Statements The company is including the following cautionary statement in this Form 10-Q to make applicable and to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of, the company. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions (many of which are based, in turn, upon further assumptions) and other statements which are other than statements of historical facts. From time to time, the company may publish or otherwise make available forward-looking statements of this nature. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of the company, are also expressly qualified by these cautionary statements. Forward-looking statements involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed. The company's expectations, beliefs and projections are expressed in good faith and are believed by the company to have a reasonable basis, including without limitation management's examination of historical operating trends, data contained in the company's records and other data available from third parties, but there can be no assurance that the company's expectations, beliefs or projections will be achieved or accomplished. Furthermore, any forward-looking statement speaks only as of the date on which such statement is made, and the company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances that occur after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all of such factors, nor can it assess the effect of each such factor on the company's business or the extent to which any such factor, or combination of factors, may cause actual results to differ materially from those contained in any forward- looking statement. In addition to other factors and matters discussed elsewhere herein, some important factors that could cause actual results or outcomes for the company to differ materially from those discussed in forward-looking statements include prevailing governmental policies and regulatory actions with respect to allowed rates of return, financings, or industry and rate structures, acquisition and disposal of assets or facilities, operation and construction of plant facilities, recovery of purchased power and purchased gas costs, present or prospective generation and availability of economic supplies of natural gas. Other important factors include the level of governmental expenditures on public projects and project schedules, changes in anticipated tourism levels, the effects of competition (including but not limited to electric retail wheeling and transmission costs and prices of alternate fuels and system deliverability costs), oil and natural gas commodity prices, drilling successes in oil and natural gas operations, ability to acquire oil and natural gas properties, and the availability of economic expansion or development opportunities. The business and profitability of the company are also influenced by economic and geographic factors, including political and economic risks, changes in and compliance with environmental and safety laws and policies, weather conditions, population growth rates and demographic patterns, market demand for energy from plants or facilities, changes in tax rates or policies, unanticipated project delays or changes in project costs, unanticipated changes in operating expenses or capital expenditures, labor negotiations or disputes, changes in credit ratings or capital market conditions, inflation rates, inability of the various counterparties to meet their obligations with respect to the company's financial instruments, changes in accounting principles and/or the application of such principles to the company, changes in technology and legal proceedings, and the ability to effectively integrate the operations of acquired companies. Prospective Information Montana-Dakota has obtained and holds valid and existing franchises authorizing it to conduct its electric operations in all of the municipalities it serves where such franchises are required. As franchises expire, Montana-Dakota may face increasing competition in its service areas, particularly its service to smaller towns, from rural electric cooperatives. Montana-Dakota intends to protect its service area and seek renewal of all expiring franchises and will continue to take steps to effectively operate in an increasingly competitive environment. In January 2000, the company announced an agreement to acquire Great Plains Natural Gas Company (Great Plains). Great Plains is a natural gas distribution company serving 19 communities in western Minnesota and southeastern North Dakota. The North Dakota Public Service Commission has approved the acquisition and approval is currently pending with the Minnesota Public Utilities Commission. Also in January 2000, the company announced that the Board of Directors had approved the acquisition of Connolly-Pacific Co., a southern California aggregate mining and marine construction company. Thomas Everist, a member of the company's Board of Directors, has an interest in L.G. Everist, Incorporated, which has owned Connolly-Pacific Co. since 1977. At the company's Annual Meeting of Stockholders held on April 25, 2000, in accordance with New York Stock Exchange rules, the acquisition was approved by the stockholders of the company. In addition, in April 2000, the company acquired ready-mixed concrete companies in Montana and a pipeline and cable locating technology company based in Texas. Substantially all of the assets of a natural gas exploration and production company headquartered in Colorado, specializing in the development of coal bed methane reserves on over 187,000 net acres under lease in the Powder River Basin of Wyoming and Montana were also acquired. None of the above acquisitions were individually material. Liquidity and Capital Commitments Net capital expenditures for the year 2000 are estimated at $355.3 million, including those for acquisitions to date, system upgrades, routine replacements, service extensions, routine equipment maintenance and replacements, pipeline expansion projects, the building of construction materials handling and transportation facilities, and the further enhancement of oil and natural gas production and reserve growth. It is anticipated that all of the funds required for capital expenditures will be met from various sources. These sources include internally generated funds, the company's $40 million revolving credit and term loan agreement, existing lines of credit aggregating $7.2 million, a commercial paper credit facility at Centennial, as described below, and through the issuance of long-term debt and the company's equity securities. At March 31, 2000, $24 million under the revolving credit and term loan agreement and $6.3 million under the lines of credit were outstanding. Centennial, a direct wholly owned subsidiary of the company, has a revolving credit agreement with various banks on behalf of its subsidiaries that supports the $250 million Centennial commercial paper program. Under the commercial paper program, $172.3 million was outstanding at March 31, 2000. The commercial paper borrowings are classified as long term as the company intends to refinance these borrowings on a long term basis through continued commercial paper borrowings supported by the revolving credit agreement due September 1, 2002. The company intends to renew this existing credit agreement on an annual basis. Centennial entered into an uncommitted long-term master shelf agreement on behalf of its subsidiaries that allows for borrowings of up to $200 million. Under the master shelf agreement, $25 million was outstanding at March 31, 2000. The estimated 2000 capital expenditures set forth above for electric, natural gas distribution, utility services, pipeline and energy services and construction materials and mining operations do not include potential future acquisitions. The company continues to seek additional growth opportunities, including investing in the development of related lines of business. To the extent that acquisitions occur, the company anticipates that such acquisitions would be financed with existing credit facilities and the issuance of long-term debt and the company's equity securities. In January 2000, the company announced that its Board of Directors approved a stock repurchase program, authorizing the purchase of up to 1 million shares of the company's outstanding common stock. The amount and timing of purchases will depend on market conditions. It is anticipated that the funds required for this program will be met from internally generated funds, the issuance of long-term or short-term debt or other sources that become available from time to time. Unless extended, the stock repurchase program will be terminated on or prior to December 31, 2001. As of March 31, 2000, no shares have been repurchased under the program. The company's issuance of first mortgage debt is subject to certain restrictions imposed under the terms and conditions of its Indenture of Mortgage. Generally, those restrictions require the company to pledge $1.43 of unfunded property to the Trustee for each dollar of indebtedness incurred under the Indenture and that annual earnings (pretax and before interest charges), as defined in the Indenture, equal at least two times its annualized first mortgage bond interest costs. Under the more restrictive of the two tests, as of March 31, 2000, the company could have issued approximately $285 million of additional first mortgage bonds. The company's coverage of fixed charges including preferred dividends was 4.2 times and 4.3 times for the twelve months ended March 31, 2000, and December 31, 1999, respectively. Additionally, the company's first mortgage bond interest coverage was 6.9 times and 7.1 times for the twelve months ended March 31, 2000, and December 31, 1999, respectively. Common stockholders' equity as a percent of total capitalization was 56 percent and 54 percent at March 31, 2000, and December 31, 1999, respectively. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There are no material changes in market risk faced by the company from those reported in the company's Annual Report on Form 10-K for the year ended December 31, 1999. For more information on market risk, see Part II, Item 7A in the company's Annual Report on Form 10-K for the year ended December 31, 1999, and Notes to Consolidated Financial Statements in this Form 10-Q. PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Oral argument on motions for summary judgment to dismiss the claims of the 11 natural gas producers before the North Dakota District Court was held May 8, 2000. Williston Basin and the company are awaiting a decision from the North Dakota District Court. Trial has been set to commence on October 23, 2000. Trial before the Colorado State District Court had been scheduled to be held during the week of April 24, 2000, but was rescheduled for the week of October 2, 2000 in the oil and gas royalty interest owners legal proceeding. Oral argument on motions to dismiss was held before the Federal District Court on March 17, 2000 in the Grynberg legal proceeding. Williston Basin and Montana-Dakota are awaiting a decision from the Federal District Court. In response to a motion filed by the defendants in the Quinque legal proceeding, the Judicial Panel on Multidistrict Litigation transferred the Quinque suit to the Federal District Court for inclusion in the pretrial proceedings of the Grynberg suit. For more information on the above legal actions see Note 10 of Notes to Consolidated Financial Statements. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On January 28, 2000, the company issued 18,252 shares of Common Stock, $1.00 par value, as part of a final adjustment with respect to an acquisition of a business in a prior period. The Common Stock issued by the company in this transaction was issued in a private sale exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. The former owners of the business acquired, and now shareholders of the company, are accredited investors and have acknowledged that they would hold the company's Common Stock as an investment and not with a view to distribution. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The company's Annual Meeting of Stockholders was held on April 25, 2000. Four proposals were submitted to stockholders as described in the company's Proxy Statement dated March 10, 2000, and were voted upon and approved by stockholders at the meeting. The table below briefly describes the proposals and the results of the stockholder votes. Shares Shares Against or Broker For Withheld Abstentions Non-Votes Proposal to approve the acquisition of Connolly- Pacific Co. and the issuance of common stock in connection therewith 37,353,207 1,296,776 667,489 5,017,756 Proposal to amend the 1992 Key Employee Stock Option Plan 40,264,025 2,716,449 1,354,754 --- Proposal to amend the 1997 Executive Long-Term Incentive Plan 39,547,863 3,310,752 1,476,613 --- Proposal to elect four directors: For terms expiring in 2003 -- San W. Orr, Jr. 43,353,150 982,078 --- --- Harry J. Pearce 42,546,679 1,788,549 --- --- Homer A. Scott, Jr. 43,411,731 923,497 --- --- Sister Thomas Welder, O.S.B. 43,291,355 1,043,873 --- --- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits 10(a) 1992 Key Employee Stock Option Plan, as amended to date 10(b) 1997 Executive Long-Term Incentive Plan, as amended to date 12 Computation of Ratio of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Stock Dividends 27 Financial Data Schedule b) Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MDU RESOURCES GROUP, INC. DATE May 11, 2000 BY /s/ Warren L. Robinson Warren L. Robinson Executive Vice President, Treasurer and Chief Financial Officer BY /s/ Vernon A. Raile Vernon A. Raile Vice President, Controller and Chief Accounting Officer EXHIBIT INDEX Exhibit No. 10(a) 1992 Key Employee Stock Option Plan, as amended to date 10(b) 1997 Executive Long-Term Incentive Plan, as amended to date 12 Computation of Ratio of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Stock Dividends 27 Financial Data Schedule