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