UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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 Identification No.)
incorporation or organization)
Schuchart Building
918 East Divide Avenue
P.O. Box 5650
Bismarck, North Dakota 58506-5650
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (701) 222-7900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
Common Stock, par value $3.33 on which registered
and Preference Share Purchase Rights New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock, par value $100
(Title of Class)
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, and (2) has been
subject to such filing requirements for the past 90 days.
Yes X . No __.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. X
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant as of February 26, 1999: $1,248,942,000.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of February 26, 1999: 53,146,476 shares.
DOCUMENTS INCORPORATED BY REFERENCE.
1. Pages 25 through 53 of the Annual Report to Stockholders for 1998,
incorporated in Part II, Items 6 and 8 of this Report.
2. Proxy Statement, dated March 15, 1999, incorporated in Part III,
Items 10, 11, 12 and 13 of this Report.
CONTENTS
PART I
Items 1 and 2 -- Business and Properties
General
Montana-Dakota Utilities Co. --
Electric Generation, Transmission and Distribution
Retail Natural Gas and Propane Distribution
WBI Holdings, Inc.
Knife River Corporation --
Construction Materials Operations
Coal Operations
Consolidated Construction Materials and Mining
Operations
Fidelity Oil Group
Item 3 -- Legal Proceedings
Item 4 -- Submission of Matters to a Vote of
Security Holders
PART II
Item 5 -- Market for the Registrant's Common Stock and
Related Stockholder Matters
Item 6 -- Selected Financial Data
Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of
Operations
Item 7A -- Quantitative and Qualitative Disclosures About
Market Risk
Item 8 -- Financial Statements and Supplementary Data
Item 9 -- Change in and Disagreements with Accountants
on Accounting and Financial Disclosure
PART III
Item 10 -- Directors and Executive Officers of the
Registrant
Item 11 -- Executive Compensation
Item 12 -- Security Ownership of Certain Beneficial
Owners and Management
Item 13 -- Certain Relationships and Related
Transactions
PART IV
Item 14 -- Exhibits, Financial Statement Schedules and
Reports on Form 8-K
PART I
This Form 10-K 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-K at Item
7 -- "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.
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
General
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, distributes natural gas and
operates electric power generation, transmission and distribution
facilities, serving 256 communities in North Dakota, eastern
Montana, northern and western South Dakota and northern Wyoming.
The Company, through its wholly owned subsidiary, Centennial
Energy Holdings, Inc. (Centennial), owns WBI Holdings, Inc.,(WBI
Holdings), Knife River Corporation (Knife River), the Fidelity Oil
Group (Fidelity Oil) and Utility Services, Inc. (Utility Services).
WBI Holdings, through its wholly owned subsidiary,
Williston Basin Interstate Pipeline Company,
(Williston Basin), produces natural gas and provides
underground storage, transportation and gathering
services through an interstate pipeline system serving
Montana, North Dakota, South Dakota and Wyoming. In
addition, WBI Holdings, through its wholly owned
subsidiary, WBI Energy Services, Inc. and its
subsidiaries, seeks new energy markets while
continuing to expand present markets for natural gas
and propane in the Midwestern, Southern and Central
regions of the United States.
Knife River, through its wholly owned subsidiary, KRC
Holdings, Inc. (KRC Holdings) and its subsidiaries,
mines and markets aggregates and construction
materials in Alaska, California, Hawaii and Oregon,
and operates lignite coal mines in Montana and North
Dakota.
Fidelity Oil is comprised of Fidelity Oil Co. and
Fidelity Oil Holdings, Inc., which own oil and natural
gas interests throughout the United States, the Gulf
of Mexico and Canada.
Utility Services, through its wholly owned
subsidiaries, installs and repairs electric
transmission and distribution power lines, fiber optic
cable and natural gas pipeline and provides related
supplies, equipment and engineering services
throughout the western United States and Hawaii.
The significant industries within the Company's retail utility
service area consist of agriculture and the related processing of
agricultural products and energy-related activities such as oil and
natural gas production, oil refining, coal mining and electric
power generation.
As of December 31, 1998, the Company had 2,882 full-time
employees with 72 employed at MDU Resources Group, Inc., 900 at
Montana-Dakota, 301 at WBI Holdings, 1,084 at Knife River's
construction materials operations, 151 at Knife River's coal
operations, 12 at Fidelity Oil and 362 at Utility Services.
Approximately 434 and 84 of the Montana-Dakota and WBI Holdings
employees, respectively, are represented by the International
Brotherhood of Electrical Workers. Labor contracts with
such employees are in effect through May 1999, for both Montana-
Dakota and WBI Holdings. Knife River has a labor contract through
August 1999, with the United Mine Workers of America, which
represents its coal operation's hourly workforce aggregating 90
employees. In addition, Knife River has 15 labor contracts which
represent 232 of its construction materials employees. Utility
Services has 19 labor contracts representing the majority of its
employees.
The financial results and data applicable to each of the
Company's business segments as well as their financing requirements
are set forth in Item 7 -- "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Notes to
Consolidated Financial Statements.
Any reference to the Company's Consolidated Financial
Statements and Notes thereto shall be to pages 25 through 51 in the
Company's Annual Report to Stockholders for 1998 (Annual Report),
which are incorporated by reference herein.
ENERGY DISTRIBUTION OPERATIONS AND PROPERTY (MONTANA-DAKOTA)
Electric Generation, Transmission and Distribution
General --
Montana-Dakota provides electric service at retail, serving
over 114,000 residential, commercial, industrial and municipal
customers located in 177 communities and adjacent rural areas as of
December 31, 1998. The principal properties owned by Montana-
Dakota for use in its electric operations include interests in
seven electric generating stations, as further described under
"System Supply and System Demand," and approximately 3,100 and
3,900 miles of transmission and distribution lines, respectively.
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. For
additional information regarding Montana-Dakota's franchises, see
Item 7 -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations." As of December 31, 1998,
Montana-Dakota's net electric plant investment approximated $279.2
million.
All of Montana-Dakota's electric properties, with certain
exceptions, are subject to the lien of the Indenture of Mortgage
dated May 1, 1939, as supplemented, amended and restated, from the
Company to The Bank of New York and W. T. Cunningham, successor
trustees.
The electric operations of Montana-Dakota are subject to
regulation by the Federal Energy Regulatory Commission (FERC) under
provisions of the Federal Power Act with respect to the
transmission and sale of power at wholesale in interstate commerce,
interconnections with other utilities, the issuance of securities,
accounting and other matters. Retail rates, service, accounting
and, in certain cases, security issuances are also subject to
regulation by the North Dakota Public Service Commission (NDPSC),
Montana Public Service Commission (MPSC), South Dakota Public
Utilities Commission (SDPUC) and Wyoming Public Service Commission
(WPSC). The percentage of Montana-Dakota's 1998 electric utility
operating revenues by jurisdiction is as follows: North Dakota --
60 percent; Montana -- 22 percent; South Dakota -- 8 percent and
Wyoming -- 10 percent.
System Supply and System Demand --
Through an interconnected electric system, Montana-Dakota
serves markets in portions of the following states and major
communities -- western North Dakota, including Bismarck, Dickinson
and Williston; eastern Montana, including Glendive and Miles City;
and northern South Dakota, including Mobridge. The interconnected
system consists of seven on-line electric generating stations which
have an aggregate turbine nameplate rating attributable to Montana-
Dakota's interest of 393,488 Kilowatts (kW) and a total summer net
capability of 415,408 kW. Montana-Dakota's four principal
generating stations are steam-turbine generating units using coal
for fuel. The nameplate rating for Montana-Dakota's ownership
interest in these four stations (including interests in the Big
Stone Station and the Coyote Station aggregating 22.7 percent and
25.0 percent, respectively) is 327,758 kW. The balance of Montana-
Dakota's interconnected system electric generating capability is
supplied by three combustion turbine peaking stations.
Additionally, Montana-Dakota has contracted to purchase through
October 31, 2006, 66,400 kW of participation power from Basin
Electric Power Cooperative (Basin) for its interconnected system.
The following table sets forth details applicable to the Company's
electric generating stations:
1998 Net
Generation
Nameplate Summer (kilowatt-
Generating Rating Capability hours in
Station Type (kW) (kW) thousands)
North Dakota --
Coyote* Steam 103,647 106,750 676,989
Heskett Steam 86,000 102,000 445,417
Williston Combustion
Turbine 7,800 8,900 (79)**
South Dakota --
Big Stone* Steam 94,111 99,558 668,171
Montana --
Lewis & Clark Steam 44,000 45,200 287,591
Glendive Combustion
Turbine 34,780 31,600 15,906
Miles City Combustion
Turbine 23,150 21,400 9,204
393,488 415,408 2,103,199
* Reflects Montana-Dakota's ownership interest.
** Station use, to meet MAPP's accreditation requirements, exceeded
generation.
Virtually all of the current fuel requirements of the Coyote,
Heskett and Lewis & Clark stations are met with coal supplied by
Knife River under various long-term contracts. See "Construction
Materials and Mining Operations and Property (Knife River) -- Coal
Operations" for a discussion of a suit and arbitration filed by the
Co-owners of the Coyote Station against Knife River and the
Company. The majority of the Big Stone Station's fuel requirements
are currently being met with coal supplied by Westmoreland
Resources, Inc. under a contract which expires on December 31,
1999.
During the years ended December 31, 1994, through December 31,
1998, the average cost of coal consumed, including freight, per
million British thermal units (Btu) at Montana-Dakota's electric
generating stations (including the Big Stone and Coyote stations)
in the interconnected system and the average cost per ton,
including freight, of the coal so consumed was as follows:
Years Ended December 31,
1998 1997 1996 1995 1994
Average cost of
coal per
million Btu $.93 $.95 $.93 $.94 $.97
Average cost of
coal per ton $13.67 $14.22 $13.64 $12.90 $12.88
The maximum electric peak demand experienced to date
attributable to sales to retail customers on the interconnected
system was 412,700 kW in August 1995. The 1998 summer peak was
402,500 kW, although assuming normal weather, the 1998 summer peak
was previously forecasted to have been approximately 415,500 kW.
Montana-Dakota's latest forecast for its interconnected system
indicates that its annual peak will continue to occur during the
summer and the peak demand growth rate through 2004 will
approximate 1.5 percent annually. Montana-Dakota's latest forecast
indicates that its kilowatt-hour (kWh) sales growth rate, on a
normalized basis, through 2004 will approximate 0.9 percent
annually. Montana-Dakota currently estimates that it has adequate
capacity available through existing generating stations and long-
term firm purchase contracts until the year 2000. If additional
capacity is needed in 2000 or after, it will be met through the
addition of combustion turbine peaking stations and purchases from
the Mid-Continent Area Power Pool (MAPP) on an intermediate-term
basis.
Montana-Dakota has major interconnections with its neighboring
utilities, all of which are MAPP members. Montana-Dakota considers
these interconnections adequate for coordinated planning, emergency
assistance, exchange of capacity and energy and power supply
reliability.
Through a separate electric system (Sheridan System), Montana-
Dakota serves Sheridan, Wyoming and neighboring communities. The
maximum peak demand experienced to date and attributable to
Montana-Dakota sales to retail consumers on that system was
approximately 46,600 kW and occurred in December 1983. Montana-
Dakota estimates this annual peak will be exceeded in the winter of
1999/2000.
The Sheridan System is supplied through an interconnection with
Black Hills Power and Light Company under a power supply contract
through December 31, 2006 which allows for the purchase of up to
55,000 kW of capacity.
Regulation and Competition --
The electric utility industry can be expected to continue to
become increasingly competitive due to a variety of regulatory,
economic and technological changes. As a result of competition in
electric generation, wholesale power markets have become
increasingly competitive and evaluations are ongoing concerning
retail competition.
In April 1996, the FERC issued a final rule (Order No. 888) on
wholesale electric transmission open access and recovery of
stranded costs. Montana-Dakota filed proposed tariffs with the
FERC in compliance with Order 888, which became effective in July
1996. Montana-Dakota is awaiting final approval of the proposed
tariffs by the FERC.
In a related matter, in March 1996, the MAPP, of which Montana-
Dakota is a member, filed a restated operating agreement with the
FERC. The FERC approved MAPP's restated agreement, excluding
MAPP's market-based rate proposal, effective November 1996. The
FERC has requested additional information from the MAPP on its
market-based rate proposal before it will take further action.
The Montana legislature passed an electric industry
restructuring bill, effective May 2, 1997. The bill provides for
full customer choice of electric supplier by July 1, 2002, stranded
cost recovery and other provisions. Based on the provisions of
such restructuring bill, because the Company's utility division
operates in more than one state, the Company has the option of
deferring its transition to full customer choice until 2006. In
its 1997 legislative session, the North Dakota legislature
established an Electric Industry Competition Committee to study
over a six-year period the impact of competition on the generation,
transmission and distribution of electric energy in the State. In
1997, the WPSC selected a consultant to perform a study on the
impact of electric restructuring in Wyoming. The study found no
material economic benefits. No further action is pending at this
time. The SDPUC has not initiated any proceedings to date
concerning retail competition or electric industry restructuring.
Federal legislation addressing this issue continues to be
discussed.
Although Montana-Dakota is unable to predict the outcome of
such regulatory proceedings or legislation, or the extent to which
retail competition may occur, Montana-Dakota is continuing to take
steps to effectively operate in an increasingly competitive
environment.
Fuel adjustment clauses contained in North Dakota and South
Dakota jurisdictional electric rate schedules allow Montana-Dakota
to reflect increases or decreases in fuel and purchased power costs
(excluding demand charges) on a timely basis. Expedited rate
filing procedures in Wyoming allow Montana-Dakota to timely reflect
increases or decreases in fuel and purchased power costs. In
Montana (22 percent of electric revenues), such cost changes are
includible in general rate filings.
Environmental Matters --
Montana-Dakota's electric operations, are subject to extensive
federal, state and local laws and regulations providing for air, water
and solid waste pollution control; state facility-siting regulations;
zoning and planning regulations of certain state and local
authorities; federal health and safety regulations and state hazard
communication standards. Montana-Dakota believes it is in substantial
compliance with all existing environmental regulations and permitting
requirements.
The United States Clean Air Act (Clean Air Act) requires electric
generating facilities to reduce sulfur dioxide emissions by the year
2000 to a level not exceeding 1.2 pounds per million Btu.
Montana-Dakota's baseload electric generating stations are coal fired.
All of these stations, with the exception of the Big Stone Station,
are either equipped with scrubbers or utilize an atmospheric fluidized
bed combustion boiler, which permits them to operate with emission
levels less than the 1.2 pounds per million Btu. The emissions
requirement at the Big Stone Station is expected to be met by
switching to competitively priced lower sulfur ("compliance") coal.
In addition, the Clean Air Act limits the amount of nitrous oxide
emissions. Montana-Dakota's generating stations are within the
limitations set by the United States Environmental Protection Agency
(EPA).
Governmental regulations establishing environmental protection
standards are continuously evolving and, therefore, the character,
scope, cost and availability of the measures which will permit
compliance with evolving laws or regulations, cannot now be accurately
predicted. Montana-Dakota did not incur any significant environmental
expenditures in 1998 and does not expect to incur any significant
capital expenditures related to environmental compliance through 2001.
Retail Natural Gas and Propane Distribution
General --
Montana-Dakota sells natural gas and propane at retail, serving
over 206,000 residential, commercial and industrial customers located
in 141 communities and adjacent rural areas as of December 31, 1998,
and provides natural gas transportation services to certain customers
on its system. These services are provided through a distribution
system aggregating over 4,200 miles. Montana-Dakota has obtained
and holds valid and existing franchises authorizing it to conduct
natural gas and propane distribution operations in all of the
municipalities it serves where such franchises are required. As of
December 31, 1998, Montana-Dakota's net natural gas and propane
distribution plant investment approximated $79.9 million.
All of Montana-Dakota's natural gas distribution properties, with
certain exceptions, are subject to the lien of the Indenture of
Mortgage dated May 1, 1939, as supplemented, amended and restated,
from the Company to The Bank of New York and W. T. Cunningham,
successor trustees.
The natural gas and propane distribution operations of
Montana-Dakota are subject to regulation by the NDPSC, MPSC, SDPUC and
WPSC regarding retail rates, service, accounting and, in certain
instances, security issuances. The percentage of Montana-Dakota's
1998 natural gas and propane utility operating revenues by
jurisdiction is as follows: North Dakota -- 42 percent; Montana --
29 percent; South Dakota -- 22 percent and Wyoming -- 7 percent.
System Supply, System Demand and Competition --
Montana-Dakota serves retail natural gas markets, consisting
principally of residential and firm commercial space and water heating
users, in portions of the following states and major communities --
North Dakota, including Bismarck, Dickinson, Williston, Minot and
Jamestown; eastern Montana, including Billings, Glendive and Miles
City; western and north-central South Dakota, including Rapid City,
Pierre and Mobridge; and northern Wyoming, including Sheridan. These
markets are highly seasonal and sales volumes depend on the weather.
The following table reflects Montana-Dakota's natural gas and
propane sales, natural gas transportation volumes and degree days as
a percentage of normal during the last five years:
Years Ended December 31,
1998 1997 1996 1995 1994
Mdk (thousands of decatherms)
Sales:
Residential 18,614 20,126 22,682 20,135 19,039
Commercial 12,458 13,799 15,325 13,509 12,403
Industrial 952 395 276 295 398
Total 32,024 34,320 38,283 33,939 31,840
Transportation:
Commercial 1,995 1,612 1,677 1,742 2,011
Industrial 8,329 8,455 7,746 9,349 7,267
Total 10,324 10,067 9,423 11,091 9,278
Total Throughput 42,348 44,387 47,706 45,030 41,118
Degree days
(% of normal) 93.7% 99.3% 116.2% 101.6% 96.7%
The restructuring of the natural gas industry, as described under
"Natural Gas Transmission Operations and Property (WBI Holdings)", has
resulted in additional competition in retail natural gas markets. In
response to these changed market conditions Montana-Dakota has
established various natural gas transportation service rates for its
distribution business to retain interruptible commercial and
industrial load. Certain of these services include transportation
under flexible rate schedules and capacity release contracts whereby
Montana-Dakota's interruptible customers can avail themselves of the
advantages of open access transportation on the Williston Basin
system. These services have enhanced Montana-Dakota's competitive
posture with alternate fuels, although certain of Montana-Dakota's
customers have the potential of bypassing Montana-Dakota's
distribution system by directly accessing Williston Basin's
facilities.
Montana-Dakota acquires its system requirements directly from
producers, processors and marketers. Such natural gas is supplied
under contracts specifying market-based pricing, and is transported
under firm transportation agreements by Williston Basin, Northern Gas
Company, South Dakota Intrastate Pipeline Company and Northern Border
Pipeline Company. Montana-Dakota has also contracted with Williston
Basin to provide firm storage services which enable Montana-Dakota to
purchase natural gas at more uniform daily volumes throughout the year
and, thus, meet winter peak requirements as well as allow it to better
manage its natural gas costs. Montana-Dakota estimates that, based on
supplies of natural gas currently available through its suppliers and
expected to be available, it will have adequate supplies of natural
gas to meet its system requirements for the next five years.
Regulatory Matters --
Montana-Dakota's retail natural gas rate schedules contain clauses
permitting monthly adjustments in rates based upon changes in natural
gas commodity, transportation and storage costs. Current regulatory
practices allow Montana-Dakota to recover increases or refund
decreases in such costs within 24 months from the time such changes
occur.
Environmental Matters --
Montana-Dakota's natural gas and propane distribution operations
are generally subject to extensive federal, state and local
environmental, facility siting, zoning and planning laws and
regulations. Except as set forth below, Montana-Dakota believes it
is in substantial compliance with those regulations.
Montana-Dakota and Williston Basin discovered polychlorinated
biphenyls (PCBs) in portions of their natural gas systems and
informed the EPA in January 1991. Montana-Dakota and Williston
Basin believe the PCBs entered the system from a valve sealant. In
January 1994, Montana-Dakota, Williston Basin and Rockwell
International Corporation (Rockwell), manufacturer of the valve
sealant, reached an agreement under which Rockwell has reimbursed
and will continue to reimburse Montana-Dakota and Williston Basin
for a portion of certain remediation costs. On the basis of
findings to date, Montana-Dakota and Williston Basin estimate future
environmental assessment and remediation costs will aggregate $3
million to $15 million. Based on such estimated cost, the expected
recovery from Rockwell and the ability of Montana-Dakota and
Williston Basin to recover their portions of such costs from
ratepayers, Montana-Dakota and Williston Basin believe that the
ultimate costs related to these matters will not be material to each
of their respective financial positions or results of operations.
CENTENNIAL ENERGY HOLDINGS, INC.
NATURAL GAS TRANSMISSION OPERATIONS AND PROPERTY (WBI HOLDINGS)
General --
Williston Basin owns and operates over 3,800 miles of
transmission, gathering and storage lines and 22 compressor stations
located in the states of Montana, North Dakota, South Dakota and
Wyoming. Through three underground storage fields located in
Montana and Wyoming, storage services are provided to local
distribution companies, producers, suppliers and others, and serve
to enhance system deliverability. Williston Basin's system is
strategically located near five natural gas producing basins making
natural gas supplies available to Williston Basin's transportation
and storage customers. In addition, Williston Basin produces
natural gas from owned reserves which is sold to others. Williston
Basin has interconnections with seven pipelines in Wyoming, Montana
and North Dakota which provide for supply and market access.
WBI Energy Services, Inc. and its subsidiaries seek new energy
markets while continuing to expand present markets for natural gas.
Its activities include buying and selling natural gas and arranging
transportation services to end users, pipelines, municipals and
local distribution companies. In addition, WBI Energy Services,
Inc. operates two retail propane operations in north-central and
southeastern North Dakota. In 1998 the Company acquired a natural
gas marketing business in Kentucky which transacts the majority of
its business on the Texas Gas interstate pipeline system and serves
customers in the Southern and Central regions of the United States.
The Texas Gas interstate pipeline system originates in the Louisiana
Gulf Coast area and in East Texas.
At December 31, 1998, the net natural gas transmission plant
investment, inclusive of transmission, storage, gathering,
production, marketing and propane facilities, was approximately
$177.0 million.
Under the Natural Gas Act, as amended, Williston Basin is
subject to the jurisdiction of the FERC regarding certificate, rate
and accounting matters.
System Demand and Competition --
The natural gas transmission industry, although regulated, is
very competitive. Beginning in the mid-1980s customers began
switching their natural gas service from a bundled merchant service
to transportation, and with the implementation of Order 636 which
unbundled pipelines' services, this transition was accelerated.
This change reflects most customers' willingness to purchase their
natural gas supply from producers, processors or marketers rather
than pipelines. Williston Basin competes with several pipelines for
its customers' transportation business and at times will have to
discount rates in an effort to retain market share. However, the
strategic location of Williston Basin's system near five natural gas
producing basins and the availability of underground storage and
gathering services provided by Williston Basin along with
interconnections with other pipelines serve to enhance Williston
Basin's competitive position.
Although a significant portion of Williston Basin's firm
customers, including Montana-Dakota, have relatively secure
residential and commercial end-users, virtually all have some price-
sensitive end-users that could switch to alternate fuels.
Williston Basin transports essentially all of Montana-Dakota's
natural gas under firm transportation agreements, which in 1998,
represented 90 percent of Williston Basin's currently subscribed
firm transportation capacity. In November 1996, Montana-Dakota
executed a new firm transportation agreement with Williston Basin
for a term of five years which began in July 1997. In addition, in
July 1995, Montana-Dakota entered a twenty-year contract with
Williston Basin to provide firm storage services to facilitate
meeting Montana-Dakota's winter peak requirements.
For additional information regarding Williston Basin's
transportation for 1996 through 1998, see Item 7 -- "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
System Supply --
Williston Basin's underground storage facilities have a
certificated storage capacity of approximately 353,300 million cubic
feet (MMcf), including 28,900 MMcf and 46,300 MMcf of recoverable
and nonrecoverable native gas, respectively. Williston Basin's
storage facilities enable its customers to purchase natural gas at
more uniform daily volumes throughout the year and, thus, facilitate
meeting winter peak requirements.
Natural gas supplies from traditional regional sources have
declined during the past several years and such declines are
anticipated to continue. As a result, Williston Basin anticipates
that a potentially significant amount of the future supply needed
to meet its customers' demands will come from non-traditional, off-
system sources. Williston Basin expects to facilitate the movement
of these supplies by making available its transportation and storage
services. Opportunities may exist to increase transportation and
storage services through system expansion or other pipeline
interconnections or enhancements which could provide substantial
future benefits to Williston Basin.
Natural Gas Production --
Williston Basin owns in fee or holds natural gas leases and
operating rights primarily applicable to the shallow rights (above
2000 feet) in the Cedar Creek Anticline in southeastern Montana and
to all rights in the Bowdoin area located in north-central Montana.
Information on Williston Basin's natural gas production, average
sales prices and production costs per Mcf related to its natural gas
interests for 1998, 1997 and 1996 is as follows:
1998 1997 1996
Production (MMcf) 7,684 7,215 6,324
Average sales price $1.37 $1.30 $1.11
Production costs, including taxes $.38 $.46 $.43
Williston Basin's gross and net productive well counts and gross
and net developed and undeveloped acreage for its natural gas
interests at December 31, 1998, are as follows:
Gross Net
Productive Wells 576 528
Developed Acreage (000's) 234 214
Undeveloped Acreage (000's) 47 41
The following table shows the results of natural gas development
wells drilled and tested during 1998, 1997 and 1996:
1998 1997 1996
Productive 50 20 32
Dry Holes --- --- ---
Total 50 20 32
At December 31, 1998, there was one well in the process of
drilling.
Williston Basin's recoverable proved developed and undeveloped
natural gas reserves approximated 140.2 Bcf at December 31, 1998.
These amounts are supported by a report dated January 15, 1999,
prepared by Ralph E. Davis Associates, Inc., an independent firm of
petroleum and natural gas engineers.
Beginning in 1994, Williston Basin engaged in a long-term
developmental drilling program to enhance the performance of its
investment in natural gas reserves. As a result of this effort,
1998 production levels are up 91 percent since 1993. The production
increases from these reserves are expected to provide additional
natural gas supplies for WBI Energy Services, Inc. to enable it to
enhance its marketing efforts.
For additional information related to Williston Basin's natural
gas interests, see Note 18 of Notes to Consolidated Financial
Statements.
Pending Litigation --
In November 1993, the estate of W.A. Moncrief (Moncrief), a
producer from whom Williston Basin purchased a portion of its
natural gas supply, filed suit in Federal District Court for the
District of Wyoming (Federal District Court) against Williston Basin
and the Company disputing certain price and volume issues under the
contract.
Through the course of this action Moncrief submitted damage
calculations which totaled approximately $19 million or, under its
alternative pricing theory, approximately $39 million.
In June 1997, the Federal District Court issued its order
awarding Moncrief damages of approximately $15.6 million. In July
1997, the Federal District Court issued an order limiting Moncrief's
reimbursable costs to post-judgment interest, instead of both pre-
and post-judgment interest as Moncrief had sought. In August 1997,
Moncrief filed a notice of appeal with the United States Court of
Appeals for the Tenth Circuit (U.S. Court of Appeals) related to the
Federal District Court's orders. In September 1997, Williston Basin
and the Company filed a notice of cross-appeal. Oral argument
before the U.S. Court of Appeals was held September 23, 1998.
Williston Basin and the Company are awaiting a decision from the
U.S. Court of Appeals.
Williston Basin believes that it is entitled to recover from
customers virtually all of the costs which might ultimately be
incurred as a result of this litigation as gas supply realignment
transition costs pursuant to the provisions of the FERC's Order 636.
However, the amount of costs that can ultimately be recovered is
subject to approval by the FERC and market conditions.
In December 1993, Apache Corporation (Apache) and Snyder Oil
Corporation (Snyder) filed suit in North Dakota Northwest Judicial
District Court (North Dakota District Court) against Williston
Basin and the Company. Apache and Snyder are oil and natural gas
producers which had processing agreements with Koch Hydrocarbon
Company (Koch). Williston Basin and the Company had a natural gas
purchase contract with Koch. Apache and Snyder have alleged they
are entitled to damages for the breach of Williston Basin's and the
Company's contract with Koch. Williston Basin and the Company
believe that if Apache and Snyder have any legal claims, such claims
are with Koch, not with Williston Basin or the Company as Williston
Basin, the Company and Koch have settled their disputes. Apache and
Snyder have submitted damage estimates under differing theories
aggregating up to $4.8 million without interest. A motion to
intervene in the case by several other producers, all of which had
contracts with Koch but not with Williston Basin, was denied in
December 1996. The trial before the North Dakota District Court was
completed in November 1997. On November 25, 1998, the North Dakota
District Court entered an order directing the entry of judgment in
favor of Williston Basin and the Company. On December 15, 1998,
Apache and Snyder filed a motion for relief asking the North Dakota
District Court to reconsider its November 25, 1998 order. On
February 4, 1999, the North Dakota District Court denied the motion
for relief filed by Apache and Snyder.
In a related matter, in March 1997, a suit was filed by nine
other producers, several of which had unsuccessfully tried to
intervene in the Apache and Snyder litigation, against Koch,
Williston Basin and the Company. The parties to this suit are
making claims similar to those in the Apache and Snyder litigation,
although no specific damages have been stated.
In Williston Basin's opinion, the claims of Apache and Synder
are without merit and overstated and the claims of the nine other
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.
Regulatory Matters and Revenues Subject to Refund --
Williston Basin had pending with the FERC a general natural gas
rate change application implemented in 1992. In October 1997,
Williston Basin appealed to the United States Court of Appeals for
the D.C. Circuit (D.C. Circuit Court) certain issues decided by the
FERC in prior orders concerning the 1992 proceeding. On January 22,
1999, the D.C. Circuit Court issued its opinion remanding the issues
of return on equity, ad valorem taxes and throughput to the FERC for
further explanation and justification. Williston Basin is awaiting
a decision from the FERC and believes that if the FERC decides to
change its prior order in a manner consistent with the D.C. Circuit
Court's suggestions, the results for the Company are expected to be
positive since Williston Basin should be entitled to seek
reimbursement from ratepayers for a portion of the refunds made in
1997 that were related to these issues.
In June 1995, Williston Basin filed a general rate increase
application with the 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 resulting in an
increase of $8.9 million or 19.1 percent over the then current
effective rates. Williston Basin began collecting such increase
effective January 1, 1996, subject to refund. On July 29, 1998, the
FERC issued an order which addressed various issues including
storage cost allocations, return on equity and throughput. On
August 28, 1998, Williston Basin requested rehearing of such order.
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.
Natural Gas Repurchase Commitment --
The Company has offered for sale since 1984 the inventoried
natural gas owned by Frontier, a special purpose, nonaffiliated
corporation. Through an agreement, Williston Basin is obligated to
repurchase all of the natural gas at Frontier's original cost and
reimburse Frontier for all of its financing and general
administrative costs. Frontier has financed the purchase of the
natural gas under a term loan agreement with several banks. At
December 31, 1998 and 1997, borrowings totaled $14.8 million and
$32.0 million, respectively, at a weighted average interest rate of
6.19 percent and 6.63 percent, respectively. At December 31, 1998
and 1997, the natural gas repurchase commitment of $14.3 million and
$30.4 million, respectively, is reflected on the Company's
Consolidated Balance Sheets under "Other liabilities" and $551,000
and $1.6 million, respectively, is reflected under "Other accrued
liabilities." The financing costs associated with this repurchase
commitment, consisting principally of interest and related financing
fees, approximated $5.7 million in 1996. The costs incurred in 1998
and 1997 were not material and are included in "Other income -- net"
on the Consolidated Statements of Income. The term loan agreement
will terminate on October 2, 1999, subject to an option to renew
this agreement upon the lenders' consent for up to five years,
unless terminated earlier by the occurrence of certain events.
The FERC has issued orders that have held that storage costs
should be allocated to this gas, prospectively beginning May 1992,
as opposed to being included in rates applicable to Williston
Basin's customers. These storage costs, as initially allocated to
the Frontier gas, approximated $2.1 million annually, for which
Williston Basin has provided reserves. Williston Basin appealed
these orders to the D.C. Circuit Court which in December 1996 issued
its order ruling that the FERC's actions in allocating storage
capacity costs to the Frontier gas were appropriate. On August 28,
1998, Williston Basin requested rehearing of the July 29, 1998 FERC
order which addressed various issues, including a requirement that
storage deliverability costs be allocated to the Frontier gas.
Williston Basin sells and transports natural gas held under the
repurchase commitment. In the third quarter of 1996, Williston
Basin, based on a number of factors including differences in
regional natural gas prices and natural gas sales occurring at that
time, wrote down 43.0 MMdk of this gas to its then current value.
The value of this gas was determined using the sum of discounted
cash flows of expected future sales occurring at then current
regional natural gas prices as adjusted for anticipated future price
increases. This resulted in a write-down aggregating $18.6 million
($11.4 million after tax). In addition, Williston Basin wrote off
certain other costs related to this natural gas of approximately
$2.5 million ($1.5 million after tax). The amounts related to this
write-down are included in "Costs on natural gas repurchase
commitment" in the Consolidated Statements of Income. At December
31, 1998 and 1997, natural gas held under the repurchase commitment
of $6.9 million and $14.6 million, respectively, is included in the
Company's Consolidated Balance Sheets under "Deferred charges and
other assets." The amount of this natural gas in storage as of
December 31, 1998 was 7.0 MMdk.
Environmental Matters --
Williston Basin's interstate natural gas transmission
operations are generally subject to federal, state and local
environmental, facility-siting, zoning and planning laws and
regulations. Except as may be found with regard to the issues
described below, Williston Basin believes it is in substantial
compliance with those regulations.
See "Environmental Matters" under "Montana-Dakota -- Retail
Natural Gas and Propane Distribution" for a discussion of PCBs
contained in Montana-Dakota's and Williston Basin's natural gas
systems.
CONSTRUCTION MATERIALS AND MINING OPERATIONS AND PROPERTY
(KNIFE RIVER)
Construction Materials Operations:
General --
Knife River, through KRC Holdings, operates construction
materials and mining businesses in Alaska, California, Oregon and
Hawaii. These operations mine, process and sell construction
aggregates (crushed rock, sand and gravel) and supply ready-mixed
concrete for use in most types of construction, including homes,
schools, shopping centers, office buildings and industrial parks as
well as roads, freeways and bridges.
In addition, the Alaska, California and Oregon operations
produce and sell asphalt for various commercial and roadway
applications. Although not common to all locations, other products
include the sale of cement, various finished concrete products and
other building materials and related construction services.
On March 5, 1998, the Company acquired Morse Bros., Inc. (MBI)
and S2 - F Corp., privately held construction materials companies
located in Oregon's Willamette Valley. The purchase consideration
for such companies consisted of $98.2 million of the Company's
common stock and cash. MBI sells aggregate, ready-mixed concrete,
asphaltic concrete, prestress concrete and construction services in
the Willamette Valley from Portland to Eugene. S2 - F Corp. sells
aggregate and construction services. In addition, in 1998 the
Company also acquired several smaller construction materials and
mining businesses in Oregon.
Knife River's construction materials business has continued to
grow since its first acquisition in 1992 and now comprises the
majority of Knife River's business. Knife River continues to
investigate the acquisition of other surface mining properties,
particularly those relating to sand and gravel aggregates and
related products such as ready-mixed concrete, asphalt and various
finished aggregate products.
Knife River's construction materials business should benefit
from the Transportation Equity Act for the 21st century (TEA-21),
which was signed into law in June 1998. TEA-21 represents a 44
percent average increase in federal highway construction funding
for the six fiscal years 1998 to 2003.
The construction materials business had approximately $100
million in backlog in mid-February 1999 and anticipates that a
significant amount of the backlog will be completed during the year
ending December 31, 1999.
For information regarding sales volumes and revenues for the
construction materials operations for 1996 through 1998, see Item
7 -- "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Competition --
Knife River's construction materials products are marketed
under highly competitive conditions. Since there are generally no
measurable product differences in the market areas in which Knife
River conducts its construction materials businesses, price is the
principal competitive force to which these products are subject,
with service, delivery time and proximity to the customer also
being significant factors. The number and size of competitors
varies in each of Knife River's principal market areas and product
lines.
The demand for construction materials products is significantly
influenced by the cyclical nature of the construction industry in
general. In addition, construction materials activity in certain
locations may be seasonal in nature due to the effects of weather.
The key economic factors affecting product demand are changes in
the level of local, state and federal governmental spending,
general economic conditions within the market area which influence
both the commercial and private sectors, and prevailing interest
rates.
Knife River is not dependent on any single customer or group of
customers for sales of its construction materials products, the
loss of which would have a materially adverse affect on its
construction materials businesses. During 1998, 1997 and 1996, no
single customer accounted for more than 10 percent of annual
construction materials revenues.
Coal Operations:
General --
Knife River is engaged in lignite coal mining operations.
Knife River's surface mining operations are located at Beulah,
North Dakota and Savage, Montana. The average annual production
from the Beulah and Savage mines approximates 2.7 million and
300,000 tons, respectively. Reserve estimates related to these
mine locations are discussed herein. During the last five years,
Knife River mined and sold the following amounts of lignite coal:
Years Ended December 31,
1998 1997 1996 1995 1994
(In thousands)
Tons sold:
Montana-Dakota generating stations 702 530 528 453 691
Jointly-owned generating stations --
Montana-Dakota's share 583 434 565 883 1,049
Others 1,749 1,303 1,695 2,767 3,358
Industrial and other sales 79 108 111 115 108
Total 3,113 2,375 2,899 4,218 5,206
Revenues $35,949 $27,906 $32,696 $39,956 $45,634
The decrease in total tons sold in 1997 compared to 1996,
reflected in the above table, is the result of lower tons sold to
the Coyote Station due to a ten-week maintenance outage. See Item
7 -- "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for more information regarding the sales
volumes and revenues for the coal operations for 1996 through 1998.
Knife River's lignite coal operations are subjected to
competition from coal and other alternate fuel sources. In recent
years, in response to competitive pressures from other mines, Knife
River has limited its coal price increases to less than those
allowed under its contracts. Although Knife River has contracts in
place specifying the selling price of coal, these price concessions
are being made in an effort to remain competitive and maximize
sales. Effective January 1, 1998, Montana-Dakota and Knife River
agreed to a new five year coal contract for Montana-Dakota's Lewis
& Clark generating station. In 1998, Knife River supplied
approximately 280,000 tons of coal to this station.
In November 1995, a suit was filed in District Court, County of
Burleigh, State of North Dakota (State District Court) by Minnkota
Power Cooperative, Inc., Otter Tail Power Company, Northwestern
Public Service Company and Northern Municipal Power Agency (Co-
owners), the owners of an aggregate 75 percent interest in the
Coyote electric generating station (Coyote Station), against the
Company (an owner of a 25 percent interest in the Coyote Station)
and Knife River. In its complaint, the Co-owners have alleged a
breach of contract against Knife River with respect to the long-term
coal supply agreement (Agreement) between the owners of the Coyote
Station and Knife River. The Co-owners have requested a
determination by the State District Court of the pricing mechanism
to be applied to the Agreement and have further requested damages
during the term of such alleged breach on the difference between the
prices charged by Knife River and the prices that may ultimately be
determined by the State District Court. The Co-owners also alleged
a breach of fiduciary duties by the Company as operating agent of
the Coyote Station, asserting essentially that the Company was
unable to cause Knife River to reduce its coal price sufficiently
under the Agreement, and the Co-owners are seeking damages in an
unspecified amount. In May 1996, the State District Court stayed
the suit filed by the Co-owners pending arbitration, as provided for
in the Agreement.
In September 1996, the Co-owners notified the Company and Knife
River of their demand for arbitration of the pricing dispute that
had arisen under the Agreement. The demand for arbitration, filed
with the American Arbitration Association (AAA), did not make any
direct claim against the Company in its capacity as operator of the
Coyote Station. The Co-owners requested that the arbitrators make
a determination that the pricing dispute is not a proper subject for
arbitration. By an April 1997 order, the arbitration panel
concluded that the claims raised by the Co-owners are arbitrable.
The Co-owners have requested the arbitrators to make a determination
that the prices charged by Knife River were excessive and that the
Co-owners should be awarded damages, based upon the difference
between the prices that Knife River charged and a "fair and
equitable" price. Upon application by the Company and Knife River,
the AAA administratively determined that the Company was not a
proper party defendant to the arbitration, and the arbitration is
proceeding against Knife River. On October 9, 1998, a hearing
before the arbitration panel was completed. At the hearing the Co-
owners requested damages of approximately $24 million, including
interest, plus a reduction in the future price of coal under the
Agreement. The Company is currently awaiting a decision from the
arbitration panel. Although unable to predict the outcome of the
arbitration, Knife River and the Company believe that the Co-owners'
claims are without merit and intend to vigorously defend the prices
charged pursuant to the Agreement.
Consolidated Construction Materials and Mining Operations:
Environmental Matters --
Knife River's construction materials and mining operations are
subject to regulation customary for surface mining operations,
including federal, state and local environmental and reclamation
regulations. Knife River believes it is in substantial compliance
with those regulations.
Reserve Information --
As of December 31, 1998, the combined construction materials
operations had under ownership or lease approximately 655 million
tons of recoverable aggregate reserves.
As of December 31, 1998, Knife River had under ownership or
lease, reserves of approximately 190 million tons of recoverable
lignite coal, 94 million tons of which are at present mining
locations. These lignite coal reserve estimates were prepared by
Weir International Mining Consultants, independent mining engineers
and geologists, in a report dated January 1, 1999. Knife River
estimates that approximately 61 million tons of its reserves will
be needed to supply Montana-Dakota's Coyote, Heskett and Lewis &
Clark stations for the expected lives of those stations and to
fulfill the existing commitments of Knife River for sales to third
parties.
OIL AND NATURAL GAS OPERATIONS AND PROPERTY (FIDELITY OIL)
General --
Fidelity Oil is involved in the acquisition, exploration,
development and production of oil and natural gas properties.
Fidelity Oil's operations vary from the acquisition of producing
properties with potential development opportunities to exploratory
drilling and are located throughout the United States, the Gulf of
Mexico and Canada. Fidelity Oil shares revenues and expenses from
the development of specified properties in proportion to its
interests.
Fidelity's oil and natural gas activities have continued to
expand since the mid-1980's. Fidelity continues to seek additional
reserve and production opportunities through the direct acquisition
of producing properties and through exploratory drilling
opportunities, as well as routine development of its existing
properties. Future growth is dependent upon continuing success in
these endeavors.
Operating Information --
Information on Fidelity Oil's oil and natural gas production,
average sales prices and production costs per net equivalent barrel
related to its oil and natural gas interests for 1998, 1997 and
1996, are as follows:
1998 1997 1996
Oil:
Production (000's of barrels) 1,912 2,088 2,149
Average sales price $12.71 $17.50 $17.91
Natural Gas:
Production (MMcf) 13,025 13,192 14,067
Average sales price $2.07 $2.41 $2.09
Production costs, including taxes,
per net equivalent barrel $3.37 $3.65 $3.31
Well and Acreage Information --
Fidelity Oil's gross and net productive well counts and gross and
net developed and undeveloped acreage related to its interests at
December 31, 1998, are as follows:
Gross Net
Productive Wells:
Oil 2,534 172
Natural Gas 699 117
Total 3,233 289
Developed Acreage (000's) 733 74
Undeveloped Acreage (000's) 1,011 79
Exploratory and Development Wells --
The following table shows the results of oil and natural gas
wells drilled and tested during 1998, 1997 and 1996:
Net Exploratory Net Development
Productive Dry Holes Total Productive Dry Holes Total Total
1998 2 2 4 4 --- 4 8
1997 1 2 3 3 1 4 7
1996 1 2 3 4 --- 4 7
At December 31, 1998, there were three gross wells in the
process of drilling, one of which was an exploratory well and two
of which were development wells.
Reserve Information --
Fidelity Oil's recoverable proved developed and undeveloped oil
and natural gas reserves approximated 11.5 million barrels and 103.4
Bcf, respectively, at December 31, 1998.
For additional information related to Fidelity Oil's oil and
natural gas interests, see Notes 1 and 18 of Notes to Consolidated
Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
Williston Basin --
Williston Basin has been named as a defendant in a legal action
primarily related to certain natural gas price and volume issues.
Such suit was filed by W.A. Moncrief, a producer from whom Williston
Basin purchased a portion of its natural gas supply.
In addition, Williston Basin has been named as a defendant in
a legal action related to a natural gas purchase contract. Such
suit was filed by Apache Corporation and Snyder Oil Corporation.
On November 25, 1998, the North Dakota District Court entered an
order directing the entry of judgment in favor of Williston Basin
and the Company. On December 15, 1998, Apache and Snyder filed a
motion for relief asking the North Dakota District Court to
reconsider its November 25, 1998 order. On February 4, 1999, the
North Dakota District Court denied the motion for relief filed by
Apache and Snyder. In a related matter, Williston Basin has been
named in a suit filed by nine other producers.
The above legal actions are described under Items 1 and 2 --
"Business and Properties -- Natural Gas Transmission Operations and
Property (WBI Holdings)." The Company's assessment of the
proceedings are included in the descriptions of the litigation.
Knife River --
The Company and Knife River have been named as defendants in a
legal action primarily related to coal pricing issues at the Coyote
Station. On October 9, 1998, a hearing before the arbitration panel
was completed. The Company is currently awaiting a decision from
the arbitration panel. Such suit was filed by the Co-owners of the
Coyote Station.
The above legal action is described under Items 1 and 2 --
"Business and Properties -- Construction Materials and Mining
Operations and Property (Knife River)." The Company's assessment
of the proceeding is included in the respective description of the
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is listed on the New York Stock
Exchange and the Pacific Stock Exchange under the symbol "MDU". The
price range of the Company's common stock as reported by The Wall
Street Journal composite tape during 1998 and 1997 and dividends
declared thereon were as follows:
Common
Common Common Stock
Stock Price Stock Price Dividends
(High)* (Low)* Per Share*
1998
First Quarter $25.25 $18.83 $.1917
Second Quarter 25.13 21.13 .1917
Third Quarter 28.88 22.06 .2000
Fourth Quarter 27.63 24.88 .2000
$.7834
1997
First Quarter $15.33 $14.00 $.1850
Second Quarter 16.83 14.25 .1850
Third Quarter 18.46 14.83 .1917
Fourth Quarter 22.33 17.75 .1917
$.7534
* Reflects the Company's three-for-two common stock split effected
in July 1998.
As of December 31, 1998, the Company's common stock was held by
approximately 13,900 stockholders of record.
ITEM 6. SELECTED FINANCIAL DATA
Reference is made to Selected Financial Data on pages 52 and 53
of the Company's Annual Report which is incorporated herein by
reference.
ITEM 7. 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 includes the electric operations of
Montana-Dakota, as well as the operations of Utility Services.
Natural gas distribution includes Montana-Dakota's natural gas
distribution operations. Natural gas transmission includes WBI
Holdings' storage, transportation, gathering, natural gas production
and energy marketing operations. Construction materials and mining
includes the results of Knife River's operations, while oil and
natural gas production includes the operations of Fidelity Oil.
Overview
The following table (dollars in millions, where applicable)
summarizes the contribution to consolidated earnings by each of the
Company's businesses.
Years ended December 31,
1998 1997 1996
Electric $ 17.2 $13.4 $11.4
Natural gas distribution 3.5 4.5 4.9
Natural gas transmission 20.8 11.3 2.5
Construction materials and mining 24.5 10.1 11.5
Oil and natural gas production (32.7) 14.5 14.4
Earnings on common stock $ 33.3 $53.8 $44.7
Earnings per common share - basic* $ .66 $1.24 $1.05
Earnings per common share - diluted* $ .66 $1.24 $1.04
Return on average common equity 6.5% 14.6% 13.0%
* Reflects the Company's three-for-two common stock split effected
in July 1998.
1998 compared to 1997
Consolidated earnings for 1998 decreased $20.5 million from the
comparable period a year ago due to lower earnings at the oil and
natural gas production business, largely resulting from $39.9 million
in noncash after-tax write-downs of oil and natural gas properties.
Decreased earnings at the natural gas distribution business also
added to the earnings decline. Higher earnings at the construction
materials and mining, natural gas transmission and electric
businesses partially offset the earnings decrease.
1997 compared to 1996
Consolidated earnings for 1997 increased $9.1 million when
compared to 1996. This increase includes the effect of the one-time
adjustment in the third quarter of 1996 of $3.7 million or 9 cents
per common share, reflecting the write-down to market value of
natural gas being held under a repurchase commitment and certain
reserve adjustments. The improvement is attributable to increased
earnings from the natural gas transmission, electric, and oil and
natural gas production businesses, partially offset by a decrease in
construction materials and mining, and natural gas distribution
earnings.
________________________________
Reference should be made to Items 1 and 2 -- "Business and
Properties" and 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 units. Certain reclassifications have been made in the
following statistics for prior years to conform to the current
presentation. Such reclassifications had no effect on net income or
common stockholders' equity as previously reported.
Electric Operations
Years ended December 31,
1998 1997 1996
Operating revenues:
Retail sales $ 130.9 $ 130.3 $ 128.8
Sales for resale and other 16.4 11.3 10.0
Utility services 64.2 22.8 ---
211.5 164.4 138.8
Operating expenses:
Fuel and purchased power 49.8 45.6 44.0
Operation and maintenance 94.5 60.1 41.4
Depreciation, depletion and
amortization 19.8 17.8 17.1
Taxes, other than income 9.3 7.8 6.8
173.4 131.3 109.3
Operating income $ 38.1 $ 33.1 $ 29.5
Retail sales (million kWh) 2,053.9 2,041.2 2,067.9
Sales for resale (million kWh) 586.5 361.9 374.6
Average cost of fuel and
purchased power per kWh $ .017 $ .018 $ .017
Natural Gas Distribution Operations
Years ended December 31,
1998 1997 1996
Operating revenues:
Sales $ 150.6 $ 153.6 $ 151.5
Transportation and other 3.5 3.4 3.5
154.1 157.0 155.0
Operating expenses:
Purchased natural gas sold 106.5 107.2 102.7
Operation and maintenance 28.5 28.5 30.0
Depreciation, depletion and
amortization 7.1 7.0 6.9
Taxes, other than income 4.0 3.9 3.9
146.1 146.6 143.5
Operating income $ 8.0 $ 10.4 $ 11.5
Volumes (MMdk):
Sales 32.0 34.3 38.3
Transportation 10.3 10.1 9.4
Total throughput 42.3 44.4 47.7
Degree days (% of normal) 93.7% 99.3% 116.2%
Average cost of natural gas,
including transportation,
per dk $ 3.33 $ 3.12 $ 2.67
Natural Gas Transmission Operations
Years ended December 31,
1998 1997 1996
Operating revenues:
Transportation and storage $ 60.8 $ 60.1* $ 71.6*
Energy marketing and
natural gas production 119.9 33.3 7.0
180.7 93.4 78.6
Operating expenses:
Purchased natural gas sold 99.8 17.9 ---
Operation and maintenance 29.0 35.5* 37.2*
Depreciation, depletion and
amortization 8.5 5.5 6.7
Taxes, other than income 5.3 5.3 4.5
142.6 64.2 48.4
Operating income $ 38.1 $ 29.2 $ 30.2
Transportation volumes (MMdk):
Montana-Dakota 32.2 35.5 43.4
Other 56.8 50.0 38.8
89.0 85.5 82.2
Produced (Mdk) 7,412 6,949 6,073
* Includes $5.5 million and $10.6 million for 1997 and 1996 respectively, of
amortization and related recovery of deferred natural gas contract buy-
out/buy-down and gas supply realignment costs.
Construction Materials and Mining Operations**
Years ended December 31,
1998 1997 1996
Operating revenues:
Construction materials $ 310.5 $ 146.2 $ 99.5
Coal 35.9 27.9 32.7
346.4 174.1 132.2
Operating expenses:
Operation and maintenance 280.7 145.6 105.8
Depreciation, depletion and
amortization 20.6 11.0 7.0
Taxes, other than income 3.5 2.9 3.3
304.8 159.5 116.1
Operating income $ 41.6 $ 14.6 $ 16.1
Sales (000's):
Aggregates (tons) 11,054 5,113 3,374
Asphalt (tons) 1,790 758 694
Ready-mixed concrete
(cubic yards) 1,021 516 340
Coal (tons) 3,113 2,375 2,899
** Prior to August 1, 1997, financial results did not include consolidated
information related to Knife River's ownership interest in Hawaiian Cement,
50 percent of which was acquired in September 1995, and was accounted for
under the equity method. On July 31, 1997, Knife River acquired the 50
percent interest in Hawaiian Cement that it did not previously own, and
subsequent to that date financial results are consolidated into Knife
River's financial statements.
Oil and Natural Gas Production Operations
Years ended December 31,
1998 1997 1996
Operating revenues:
Oil $ 24.3 $ 36.6 $ 39.0
Natural gas 27.0 31.8 29.3
51.3 68.4 68.3
Operating expenses:
Operation and maintenance 15.6 15.8 15.6
Depreciation, depletion and
amortization 21.8 24.4 25.0
Taxes, other than income 2.8 3.9 3.5
Write-downs of oil and
natural gas properties 66.0 --- ---
106.2 44.1 44.1
Operating income (loss) $ (54.9) $ 24.3 $ 24.2
Production:
Oil (000's of barrels) 1,912 2,088 2,149
Natural gas (MMcf) 13,025 13,192 14,067
Average sales price:
Oil (per barrel) $ 12.71 $ 17.50 $ 17.91
Natural gas (per Mcf) $ 2.07 $ 2.41 $ 2.09
Amounts presented in the preceding tables for natural gas
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 Montana-Dakota's natural gas distribution business and WBI
Holdings' natural gas transmission business. The amounts relating
to the elimination of intercompany transactions for natural gas
operating revenues and purchased natural gas sold were $47.4 million
for 1998. The amounts relating to the elimination of intercompany
transactions for natural gas operating revenues, purchased natural
gas sold and operation and maintenance expenses were $49.6 million,
$48.0 million and $1.6 million, respectively, for 1997, and $58.2
million, $53.8 million and $4.4 million, respectively, for 1996.
1998 compared to 1997
Electric Operations
Electric earnings increased due to earnings at the utility
services companies acquired since mid-1997 and increased electric
utility earnings. Sales for resale revenue improved due to 62
percent higher volumes and 19 percent higher margins, both due to
favorable market conditions. Also contributing to the earnings
increase was the absence in 1998 of $1.9 million in maintenance
expenses incurred in 1997 associated with a ten-week maintenance
outage at the Coyote Station. Slightly higher retail sales and
decreased net interest expense also contributed to the earnings
improvement. Increased fuel and purchased power costs, largely
higher purchased power demand charges resulting from the pass-
through of periodic maintenance costs, and increased operations
expense due to higher payroll and benefit-related costs, partially
offset the electric utility earnings improvement. Depreciation
expense increased due to higher average depreciable plant, also
partially offsetting the increase in earnings. Utility services
contributed $3.3 million to earnings in 1998.
Natural Gas Distribution Operations
Earnings decreased at the natural gas distribution business due
to reduced weather-related sales, the result of 6 percent warmer
weather. Increased average realized rates and decreased net
interest costs somewhat offset the earnings decline.
Natural Gas Transmission Operations
Earnings at the natural gas transmission business increased due
to increases in transportation revenues resulting from a $5.0
million ($3.1 million after tax) reversal of reserves for certain
contingencies in the first quarter of 1998 relating to a FERC order
concerning a compliance filing. Higher volumes transported at
higher average transportation rates also contributed to the revenue
increase. Increased average prices and production from company-
owned natural gas reserves added to the earnings improvement. Gains
realized on the sale of natural gas held under the repurchase
commitment and lower net interest costs also added to the increase
in earnings. The increase in energy marketing revenue and the
related increase in purchased gas sold resulted from the acquisition
of a natural gas marketing business in July 1998.
Construction Materials and Mining Operations
Construction materials and mining earnings increased primarily
due to businesses acquired since mid-1997 and increased earnings at
existing construction materials operations. Increased aggregate and
asphalt sales volumes due to increased construction activity, and
lower cement and asphalt costs contributed to the increase at the
existing operations. Earnings at the coal operations increased
largely due to increased revenues resulting from higher sales,
primarily due to a 1997 ten-week maintenance outage at the Coyote
Station. Higher interest expense resulting mainly from increased
acquisition-related long-term debt partially offset the increase in
earnings.
Oil and Natural Gas Production Operations
Earnings for the oil and natural gas production business
decreased largely as a result of $66.0 million ($39.9 million after
tax) in noncash write-downs of oil and natural gas properties, as
discussed in Note 1 of Notes to Consolidated Financial Statements.
Lower oil and natural gas revenues also added to the decrease in
earnings. The decrease in revenues was due to realized oil and
natural gas prices which were 27 percent and 14 percent lower than
last year, respectively, and slightly lower production. Decreased
depreciation, depletion and amortization due to lower rates
resulting from the aforementioned write-downs and lower production
partially offset the decrease in earnings. Decreased operation and
maintenance expenses, the result of lower production and decreased
well maintenance, and decreased production taxes resulting from
lower commodity prices, also partially offset the earnings decline.
1997 compared to 1996
Electric Operations
Higher wholesale electric sales margins, increased average
realized retail rates and revenues from the July 1997 acquisition of
two utility services companies improved operating revenues.
However, decreased retail sales due to warmer fourth quarter weather
somewhat offset the improvement. Operating expenses increased due
to the above-mentioned acquisitions, costs associated with a
planned, but extended, maintenance outage at the Coyote Station and
repairs from an April blizzard. Lower payroll and benefit-related
expenses somewhat offset the operating expense increase. Higher
revenues more than offset the operating expense increase leading to
improved operating income. Earnings increased due to the operating
income increase partially offset by higher interest expense due to
higher average short-term debt balances. Utility services
contributed $1.0 million to 1997 earnings.
Natural Gas Distribution Operations
Revenues from the positive effects of a rate change implemented
in Montana in May 1996 and reduced operations expense from lower
payroll and benefit-related costs did not fully offset reduced
natural gas sales caused by 15 percent warmer weather than 1996.
The pass-through of higher average gas costs more than offset the
revenue decline resulting from the reduced sales. Increased
transportation volumes, primarily to large industrial customers,
were offset by lower average transportation rates. These factors
reduced operating income and earnings. Lower net interest expense
and increased returns on gas storage and prepaid demand balances
partially offset the earnings decline.
Natural Gas Transmission Operations
Increased transportation volumes, higher production from
company-owned wells, and increased natural gas prices and sales
volumes from the energy marketing operations, improved revenues.
The reversal of certain reserves for regulatory contingencies in
1996 of $2.6 million after tax and lower average transportation
rates partially offset the revenue improvement. Higher royalty
expenses and increased taxes other than income added to the
operating income decrease. Earnings improved $8.8 million compared
to 1996, due to the absence of the 1996 $12.9 million after-tax
write-down to the then current market price of the natural gas
available under the repurchase commitment and lower costs in 1997
associated with this natural gas. The 1996 reversal of certain
income tax reserves aggregating $4.8 million partially offset the
1997 earnings improvement.
Construction Materials and Mining Operations
Construction materials revenues improved primarily due to the
acquisition of several construction materials businesses in mid-1996
and in 1997, combined with improved aggregate and ready-mixed
concrete sales volumes, increased construction revenues and higher
asphalt prices. However, lower coal sales due to planned but
extended maintenance at the Coyote Station partially offset the
revenue improvement. Operating costs associated with the
acquisitions, higher construction materials volumes and higher
stripping costs at the coal operations reduced operating income.
These factors, combined with higher interest expense resulting
mainly from increased acquisition-related long-term debt, decreased
earnings from this business unit.
Oil and Natural Gas Production Operations
Slightly higher operating revenues due to higher natural gas
prices, largely offset by lower natural gas production and slightly
lower oil production and decreased oil prices, added to the
operating income improvement. Total operating expenses remained
unchanged as lower volume-related expenses were largely offset by
increased taxes other than income. Overall, earnings increased from
slightly higher operating income and decreased net interest expense
from lower average long-term debt balances. Increased income taxes
from the reversal of certain tax reserves aggregating $1.8 million
in 1996, somewhat offset by higher tax credits in 1997, partially
offset the earnings improvement.
Safe Harbor for Forward-looking Statements
The Company is including the following cautionary statement in
this Form 10-K 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.
Regulated Operations --
In addition to other factors and matters discussed elsewhere
herein, some important factors that could cause actual results or
outcomes for the Company and its regulated operations 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, wholesale and retail competition (including but not
limited to electric retail wheeling and transmission costs),
availability of economic supplies of natural gas, and present or
prospective natural gas distribution or transmission competition
(including but not limited to prices of alternate fuels and system
deliverability costs).
Nonregulated Operations --
Certain important factors which could cause actual results or
outcomes for the Company and all or certain of its nonregulated
operations to differ materially from those discussed in forward-
looking statements include the level of governmental expenditures on
public projects and project schedules, changes in anticipated
tourism levels, competition from other suppliers, 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.
Factors Common to Regulated and Nonregulated Operations --
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 of the Company and third parties,
including suppliers and vendors, to identify and address year 2000
issues in a timely manner.
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.
Year 2000 Compliance
The year 2000 issue is the result of computer programs having
been written using two digits rather than four digits to define the
applicable year. In 1997, the Company established a task force with
coordinators in each of its major operating units to address the
year 2000 issue. The scope of the year 2000 readiness effort
includes information technology (IT) and non-IT systems, including
computer hardware, software, networking, communications, embedded
and micro-processor controlled systems, building controls and office
equipment. The Company's year 2000 plan is based upon a six-phase
approach involving awareness, inventory, assessment, remediation,
testing and implementation.
State of Readiness --
The Company is conducting a corporate-wide awareness program,
compiling an inventory of IT and non-IT systems, and assigning
priorities to such systems. As of December 31, 1998, the awareness
and inventory phases, including assigning priorities to IT and non-
IT systems, have been substantially completed.
The assessment phase involves the review of each inventory item
for year 2000 compliance and efforts to obtain representations and
assurances from third parties, including suppliers, vendors and
major customers, that such entities are year 2000 compliant. As of
December 31, 1998, based on contacts with and representations
obtained from third parties to date, the Company is not aware of any
material third party year 2000 problems. The Company will continue
to contact third parties seeking written verification of year 2000
readiness. Thus, the Company is presently unable to determine the
potential adverse consequences, if any, that could result from each
such entities' failure to effectively address the year 2000 issue.
As of December 31, 1998, the assessment phase, as it relates to the
Company's review of its inventory items, has been substantially
completed.
The remediation, testing and implementation phases of the
Company's year 2000 plan are currently in various stages of
completion. The remediation phase includes replacements,
modifications and/or upgrades necessary for year 2000 compliance
that were identified in the assessment phase. As of December 31,
1998, the remediation phase at the oil and natural gas production
business is substantially complete; at the electric, natural gas
distribution and natural gas transmission businesses the remediation
phase is more than 75 percent complete; and at the construction
materials and mining business it is approximately 35 percent
complete. The testing phase involves testing systems to confirm
year 2000 readiness. As of December 31, 1998, the testing phase at
the oil and natural gas production business is substantially
complete; at the electric and natural gas distribution businesses
the testing phase is over 50 percent complete; at the natural gas
transmission business it is over 10 percent complete; and at the
construction materials and mining business it is approximately 20
percent complete. The implementation phase is the process of moving
a remediated item into production status. As of December 31, 1998,
the implementation phase at the oil and natural gas production business
is substantially complete; at the electric and natural gas
distribution businesses the implementation phase is more than 80
percent complete; at the natural gas transmission business it is
more than 65 percent complete; and at the construction materials and
mining business it is approximately 35 percent complete. The
Company has established a target date of October 1, 1999, to
complete the remediation, testing and implementation phases.
Costs --
The estimated total incremental cost to the Company of the year
2000 issue is approximately $1 million to $3 million during the 1998
through 2000 time periods. As of December 31, 1998, the Company has
incurred incremental costs of less than $300,000. These costs are
being funded through cash flows from operations. The Company's
current estimate of costs of the year 2000 issue is based on the
facts and circumstances existing at this time, which were derived
utilizing numerous assumptions of future events.
Risks --
The failure to correct a material year 2000 problem, including
failures on the part of third parties, could result in a temporary
interruption in, or failure of, certain critical business
operations, including electric distribution, generation and
transmission; natural gas distribution, transmission, storage and
gathering; energy marketing; mining and marketing of coal,
aggregates and related construction materials; oil and natural gas
exploration, production, and development; and utility line
construction and repair services. Although the Company believes
the project will be completed by October 1, 1999, unforeseen and
other factors could cause delays in the project, the results of
which could have a material effect on the results of operations and
the Company's ability to conduct its business.
Contingency Planning --
Due to the general uncertainty inherent in the year 2000 issue,
including the uncertainty of the year 2000 readiness of third
parties, the Company is developing contingency plans for its
mission-critical operations. As of December 31, 1998, the utility
division, which includes electric generation and transmission and
electric and natural gas distribution, has prepared preliminary
contingency plans in accordance with guidelines and schedules set
forth by the North American Electric Reliability Council working in
conjunction with the Mid-Continent Area Power Pool, the utility's
regional reliability council. Such plans are in addition to
existing business recovery and emergency plans established to
restore electric and natural gas service following an interruption
caused by weather or equipment failure. The natural gas
transmission business has adopted the guidelines used at the utility
and has materially completed plans for its administrative and
accounting systems. The contingency plans for its other business
operations are in the development stage. The oil and natural gas
production and the construction materials and mining businesses are
in various stages of their contingency planning efforts. Contingency
plans will continue to be developed and finalized and the Company
anticipates having all such contingency plans in place by October 1,
1999.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133). For
further information on SFAS No. 133, see Note 1 of Notes to
Consolidated Financial Statements.
Liquidity and Capital Commitments
The Company's capital expenditures (in millions of dollars) for
1996 through 1998 and as anticipated for 1999 through 2001 are
summarized in the following table, which also includes the Company's
capital needs for the retirement of maturing long-term debt and
preferred stock.
Actual Estimated*
1996 1997 1998 Capital Expenditures: 1999 2000 2001
$ 18.7 $ 28.0 $ 31.3 Electric $ 19.0 $ 15.3 $ 21.7
6.3 8.8 8.3 Natural gas distribution 11.1 7.0 8.3
10.9 13.2 23.7 Natural gas transmission 30.2 19.5 14.4
Construction materials
25.0 41.5 172.1 and mining 43.8 31.4 22.3
Oil and natural gas
51.8 30.6 94.5 production 55.5 52.0 102.0
112.7 122.1 329.9 159.6 125.2 168.7
Net proceeds from sale or
(11.8) (4.5) (4.3) disposition of property (6.4) (1.5) (1.7)
100.9 117.6 325.6 Net capital expenditures 153.2 123.7 167.0
Retirement of long-term
43.4 48.0 113.7 debt and preferred stock 3.3 12.5 100.4
$144.3 $165.6 $439.3 $156.5 $136.2 $267.4
* The anticipated 1999 through 2001 capital expenditures reflected in the
above table 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.
Capital expenditures for 1998 and 1997, related to acquisitions,
in the above table include the following noncash transactions:
issuance of the Company's equity securities, less treasury stock
acquired, in 1998 of $138.8 million; and assumed debt and the
issuance of the Company's equity securities in total for 1997 of
$9.9 million. In addition, natural gas transmission capital
expenditures for 1996 include $800,000 for Prairielands Energy
Marketing, Inc., which were not reflected in investing activities in
the Consolidated Statements of Cash Flows as Prairielands Energy
Marketing, Inc. was not considered a major business segment.
The 1998 electric and natural gas distribution capital
expenditures, including those for acquisitions, and retirements of
long-term debt and preferred stock, were met from internal sources,
the issuance of long-term debt and the Company's equity securities.
Electric and natural gas distribution capital expenditures for the
years 1999 through 2001, excluding those for potential acquisitions,
include those for system upgrades, routine replacements, service
extensions and routine equipment maintenance and replacements. It
is anticipated that all of the funds required for capital
expenditures and retirements of long-term debt and preferred stock
for the years 1999 through 2001 will be met from various sources.
These sources include internally generated funds, the Company's $40
million revolving credit and term loan agreement, existing short-
term lines of credit aggregating $50 million, a commercial paper
credit facility at Centennial, as described below, and through the
issuance of long-term debt, the amount and timing of which will
depend upon needs, internal cash generation and market conditions.
At December 31, 1998, $40 million under the revolving credit and
term loan agreement and $15 million of commercial paper supported by
the short-term lines of credit were outstanding. In May 1998, the
Company redeemed $20 million of its 9 1/8 percent Series first
mortgage bonds, due May 15, 2006. In September 1998, the Company
issued $15 million of its 5.83 percent Secured Medium-Term Notes due
October 1, 2008.
Capital expenditures in 1998 for the natural gas transmission
business, including those expended for acquisitions, and long-term
debt retirements were met through internally generated funds and the
issuance of the Company's equity securities. Natural gas
transmission capital expenditures for the years 1999 through 2001,
excluding potential acquisitions, include those for pipeline
expansion projects, routine system improvements and continued
development of natural gas reserves. Capital expenditures and long-
term debt retirements for the years 1999 through 2001 are expected
to be met with a combination of internally generated funds, a
commercial paper credit facility at Centennial, as described below,
and through the issuance of long-term debt, the amount and timing of
which will depend upon needs, internal cash generation and market
conditions.
The construction materials and mining 1998 capital expenditures,
including acquisitions, and long-term debt retirements were met
through funds generated from internal sources, a revolving credit
agreement, the issuance of long-term debt and the Company's equity
securities. Construction materials and mining capital expenditures
for the years 1999 through 2001, excluding potential acquisitions,
include routine equipment rebuilding and replacement and the
building of construction materials handling and transportation
facilities. It is anticipated that funds generated from internal
sources, a commercial paper credit facility at Centennial, as
described below, lines of credit aggregating $10 million, $5.2
million of which was outstanding at December 31, 1998, and the
issuance of long-term debt and the Company's equity securities will
meet the needs of this segment for 1999 through 2001. In October
1998, $55 million of notes were privately placed with the proceeds
used to replace other long-term debt.
Capital expenditures in 1998 for the oil and natural gas
production business related to its oil and natural gas acquisition,
development and exploration program were met through funds generated
from internal sources and the issuance of long-term debt and the
Company's equity securities. The capital expenditures for 1999
through 2001 for the oil and natural gas production business will be
used to further enhance production and reserve growth. It is
anticipated that capital expenditures and long-term debt retirements
will be met from internal sources, a $30 million note shelf
facility, $16 million of which was outstanding at December 31, 1998,
a commercial paper credit facility at Centennial, as described
below, and the issuance of the Company's equity securities.
During 1998, Centennial, a direct subsidiary of the Company,
entered into a revolving credit agreement with various banks on
behalf of its subsidiaries that allows for borrowings of up to $200
million. This facility supports the Centennial commercial paper
program. Under the commercial paper program, $82.9 million was
outstanding at December 31, 1998. 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 on
November 29, 2001.
In April 1998, the Company received proceeds of $30.1 million
from a public stock offering. The proceeds from the sale of this
stock were used for refunding of outstanding debt obligations, for
corporate development purposes (including the acquisitions of
businesses and/or business assets), and for other general corporate
purposes.
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 December 31, 1998, the Company could have issued approximately
$273 million of additional first mortgage bonds.
The Company's coverage of fixed charges including preferred
dividends was 2.5 and 3.4 times for 1998 and 1997, respectively.
Additionally, the Company's first mortgage bond interest coverage
was 6.1 times in 1998 compared to 6.0 times in 1997. Common
stockholders' equity as a percent of total capitalization was 56
percent and 55 percent at December 31, 1998 and 1997, respectively.
Effects of Inflation
Inflation did not have a significant effect on the Company's
operations in 1998, 1997 or 1996.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk --
Fidelity Oil has entered into certain price collar agreements to
manage a portion of the market risk associated with fluctuations in
the price of natural gas. The collar agreements call for Fidelity Oil
to receive monthly payments from counterparties when the settlement
price is below the floor price in the collar agreement or make monthly
payments to counterparties when the settlement price is above the
ceiling price in the collar agreement. These payments are based upon
the difference between a fixed and a variable price as specified by
the agreements. The variable price is a quoted natural gas price on
the New York Mercantile Exchange. The following table presents
natural gas collar information for outstanding agreements as of
December 31, 1998. The fair value of these collar agreements 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. Favorable and unfavorable positions related to these
collar agreements are expected to be generally offset by corresponding
increases and decreases in the value of the underlying commodity
transactions.
Notional Weighted Average
Amount Fixed Price
(MMBtu's) Floor Ceiling Fair Value
(Notional amount and fair value in thousands)
Natural gas collar agreements:
Maturing in 1999 2,920 $2.10 $2.51 $597
These collar agreements are not held for trading purposes. 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 these collar agreements in the event of
nonperformance by counterparties, but does not expect any
counterparties to fail to meet their obligations given their existing
credit ratings.
Interest Rate Risk --
The Company uses fixed and variable rate long-term debt to
partially finance capital expenditures and mandatory debt retirements.
These debt agreements expose the Company to market risk related to
changes in interest rates. The Company manages this risk by taking
advantage of market conditions when timing the placement of long-term
or permanent financing. The Company also has outstanding 17,000
shares of 5.10% Series preferred stock subject to mandatory redemption
as of December 31, 1998. The Company is obligated to make annual
sinking fund contributions to retire the preferred stock and pay
cumulative preferred dividends at a fixed rate of 5.10%. The table
below shows the amount of debt, including current portion, and related
weighted average interest rates, by expected maturity dates and the
aggregate annual sinking fund amount applicable to preferred stock
subject to mandatory redemption and the related dividend rate, as of
December 31, 1998. Weighted average variable rates are based on
forward rates as of December 31, 1998.
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
(Dollars in millions)
Long-term debt:
Fixed rate $3.2 $12.4 $12.2 $49.4 $6.4 $244.8 $328.4 $343.7
Weighted average
interest rate 8.3% 7.9% 7.4% 7.0% 6.9% 7.3% 7.3% ---
Variable rate --- --- $88.1 --- --- --- $88.1 $91.4
Weighted average
interest rate --- --- 5.1% --- --- --- 5.1% ---
Preferred stock
subject to mandatory
redemption $.1 $.1 $.1 $.1 $.1 $1.2 $1.7 $1.6
Dividend rate 5.1% 5.1% 5.1% 5.1% 5.1% 5.1% 5.1% ---
For further information on derivatives and other financial
instruments, see Note 4 of Notes to Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to Pages 25 through 51 of the Annual Report.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to Pages 3 through 8 and 16 and 17 of the
Company's Proxy Statement dated March 15, 1999 (Proxy Statement)
which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to Pages 9 through 16 of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Reference is made to Page 18 of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Financial Statements, Financial Statement Schedules and
Exhibits.
Index to Financial Statements and Financial Statement
Schedules
Page
1. Financial Statements:
Report of Independent Public Accountants *
Consolidated Statements of Income for each
of the three years in the period ended
December 31, 1998 *
Consolidated Balance Sheets at December 31,
1998 and 1997 *
Consolidated Statements of Common Stockholders'
Equity for each of the three years in the
period ended December 31, 1998 *
Consolidated Statements of Cash Flows for
each of the three years in the period ended
December 31, 1998 *
Notes to Consolidated Financial Statements *
2. Financial Statement Schedules (Schedules are
omitted because of the absence of the
conditions under which they are required, or
because the information required is included
in the Company's Consolidated Financial
Statements and Notes thereto.)
____________________
* The Consolidated Financial Statements listed in the above index
which are included in the Company's Annual Report to Stockholders
for 1998 are hereby incorporated by reference. With the
exception of the pages referred to in Items 6 and 8, the
Company's Annual Report to Stockholders for 1998 is not to be
deemed filed as part of this report.
3. Exhibits:
3(a) Composite Certificate of Incorporation of
the Company, as amended to date, filed as
Exhibit 3(a) to Form 10-K for the year
ended December 31, 1994, in File No. 1-3480 *
3(b) By-laws of the Company, as amended to date,
filed as Exhibit 3(b) to Form 10-Q for the
quarterly period ended September 30, 1998,
in File No. 1-3480 *
4(a) Indenture of Mortgage, dated as of May 1,
1939, as restated in the Forty-Fifth
Supplemental Indenture, dated as of April 21,
1992, and the Forty-Sixth through Forty-Eighth
Supplements thereto between the Company and
the New York Trust Company (The Bank of New
York, successor Corporate Trustee) and A. C.
Downing (W. T. Cunningham, successor
Co-Trustee), filed as Exhibit 4(a) in
Registration No. 33-66682; and Exhibits 4(e),
4(f) and 4(g) in Registration No. 33-53896 *
4(b) Rights agreement, dated as of November 12,
1998, between the Company and Norwest Bank
Minnesota, N.A., Rights Agent, filed as
Exhibit 4.1 to Form 8-A on November 12,
1998, in File No. 1-3480 *
+ 10(a) Executive Incentive Compensation Plan,
as amended to date **
+ 10(b) Key Employee Stock Option Plan,
as amended to date **
+ 10(c) Supplemental Income Security Plan, as
amended to date, filed as Exhibit 10(d) to
Form 10-K for the year ended December 31,
1996, in File No. 1-3480 *
+ 10(d) Directors' Compensation Policy, as amended
to date **
+ 10(e) Deferred Compensation Plan for Directors,
as amended to date **
+ 10(f) Non-Employee Director Stock Compensation
Plan, as amended to date **
+ 10(g) 1997 Non-Employee Director Long-Term Incentive
Plan, as amended to date **
+ 10(h) 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 **
13 Selected financial data, financial
statements and supplementary data as
contained in the Annual Report to
Stockholders for 1998 **
21 Subsidiaries of MDU Resources Group, Inc. **
23(a) Consent of Independent Public Accountants **
23(b) Consent of Engineer **
23(c) Consent of Engineer **
27 Financial Data Schedule **
____________________
* Incorporated herein by reference as indicated.
** Filed herewith.
+ Management contract, compensatory plan or arrangement required
to be filed as an exhibit to this form pursuant to Item 14(c)
of this report.
(b) Reports on Form 8-K
Form 8-K was filed on December 1, 1998. Under Item 5--Other
Events, the Company declared a dividend distribution of one
Preference Share Purchase Right on each outstanding share of
MDU Resources' Common Stock pursuant to a newly-adopted rights
agreement. The new agreement replaced the previous rights
agreement.
Form 8-K was filed on January 13, 1999. Under Item 5--Other
Events, the Company announced recent acquisitions. It was also
reported that because of low oil and natural gas prices fourth
quarter earnings would include a non-cash after-tax charge of
approximately $20 million.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 4, 1999 By: /s/ Martin A. White
Martin A. White (President
and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.
Signature Title Date
/s/ Martin A. White Chief Executive March 4, 1999
Martin A. White Officer
(President and Chief Executive Officer) and Director
/s/ Douglas C. Kane Chief March 4, 1999
Douglas C. Kane (Executive Vice President, Administrative &
Chief Administrative & Corporate Corporate
Development Officer) Development Officer
and Director
/s/ Warren L. Robinson Chief Financial March 4, 1999
Warren L. Robinson (Vice President, Officer
Treasurer and Chief Financial Officer)
/s/ Vernon A. Raile Chief Accounting March 4, 1999
Vernon A. Raile (Vice President, Officer
Controller and Chief Accounting Officer)
/s/ John A. Schuchart Director March 4, 1999
John A. Schuchart (Chairman of the Board)
Director
San W. Orr, Jr. (Vice Chairman of the Board)
/s/ Thomas Everist Director March 4, 1999
Thomas Everist
Director
Harold J. Mellen, Jr.
/s/ Richard L. Muus Director March 4, 1999
Richard L. Muus
/s/ Robert L. Nance Director March 4, 1999
Robert L. Nance
/s/ John L. Olson Director March 4, 1999
John L. Olson
Director
Harry J. Pearce
/s/ Homer A. Scott, Jr. Director March 4, 1999
Homer A. Scott, Jr.
/s/ Joseph T. Simmons Director March 4, 1999
Joseph T. Simmons
/s/ Sister Thomas Welder Director March 4, 1999
Sister Thomas Welder
EXHIBIT INDEX
Exhibit No.
3(a) Composite Certificate of Incorporation
of the Company, as amended to date, filed as
Exhibit 3(a) to Form 10-K for the year ended
December 31, 1994, in File No. 1-3480 *
3(b) By-laws of the Company, as amended to date, filed
as Exhibit 3(b) to Form 10-Q for the quarterly
period ended September 30, 1998, in File No. 1-3480 *
4(a) Indenture of Mortgage, dated as of May 1,
1939, as restated in the Forty-Fifth
Supplemental Indenture, dated as of April 21,
1992, and the Forty-Sixth through Forty-Eighth
Supplements thereto between the Company and
the New York Trust Company (The Bank of New
York, successor Corporate Trustee) and A. C.
Downing (W. T. Cunningham, successor Co-Trustee),
filed as Exhibit 4(a) in Registration No.
33-66682; and Exhibits 4(e), 4(f) and 4(g)
in Registration No. 33-53896 *
4(b) Rights Agreement, dated as of November 12,
1998, between the Company and Norwest Bank
Minnesota, N.A., Rights Agent, filed as Exhibit
4.1 to Form 8-A on November 12, 1998, in File
No. 1-3480 *
+ 10(a) Executive Incentive Compensation Plan,
as amended to date **
+ 10(b) Key Employee Stock Option Plan,
as amended to date **
+ 10(c) Supplemental Income Security Plan, as amended to
date, filed as Exhibit 10(d) to Form 10-K for
the year ended December 31, 1996, in
File No. 1-3480 *
+ 10(d) Directors' Compensation Policy, as amended
to date **
+ 10(e) Deferred Compensation Plan for Directors,
as amended to date **
+ 10(f) Non-Employee Director Stock Compensation
Plan, as amended to date **
+ 10(g) 1997 Non-Employee Director Long-Term Incentive
Plan, as amended to date **
+ 10(h) 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 **
13 Selected financial data, financial statements
and supplementary data as contained in the
Annual Report to Stockholders for 1998 **
21 Subsidiaries of MDU Resources Group, Inc. **
23(a) Consent of Independent Public Accountants **
23(b) Consent of Engineer **
23(c) Consent of Engineer **
27 Financial Data Schedule **
____________________
* Incorporated herein by reference as indicated.
** Filed herewith.
+ Management contract, compensatory plan or arrangement required
to be filed as an exhibit to this form pursuant to Item 14(c)
of this report.
MDU RESOURCES GROUP, INC.
EXECUTIVE INCENTIVE COMPENSATION PLAN
____________________________________________________________
I. PURPOSE
The purpose of the Executive Incentive Compensation Plan
(the "Plan") is to provide an incentive for key executives of MDU
Resources Group, Inc. (the "Company") to focus their efforts on
the achievement of challenging and demanding corporate
objectives. The Plan is designed to reward successful corporate
performance as measured against specified performance goals as
well as exceptional individual performance. When corporate
performance reaches or exceeds the performance targets and
individual performance is exemplary, incentive compensation
awards, in conjunction with salaries, will provide a level of
compensation which recognizes the skills and efforts of the key
executives.
II. BASIC PLAN CONCEPT
The Plan provides an opportunity to earn annual incentive
compensation based on the achievement of specified annual
performance objectives. A target incentive award for each
individual within the Plan is established based on the
position level and assigned salary grade market value (midpoint).
The target incentive award represents the amount to be paid,
subject to the achievement of the performance objective targets
established each year. Larger incentive awards than target may
be authorized when performance exceeds targets, lesser or no
amounts may be paid when performance is below target.
It is recognized that during a Plan year major unforeseen
changes in economic and environmental conditions or other
significant factors beyond the control of management may
substantially affect the ability of the Plan participants to
achieve the specified performance goals. Therefore, in its
review of corporate performance the Compensation Committee of the
Board of Directors (the "Committee"), in consultation with the
Chief Executive Officer of MDU Resources Group, Inc., may modify
the performance targets. However, it is contemplated that such
target modifications will be necessary only in years of unusually
adverse or favorable external conditions.
III. ADMINISTRATION
The Plan shall be administered by the Committee with the
assistance of the Chief Executive Officer of the MDU Resources
Group, Inc. The Committee shall approve annually, prior to the
beginning of each Plan year, the list of eligible participants,
the Plan's performance targets, and the target incentive award
level for each position within the Plan. The Committee shall
have final discretion to determine actual award payment levels,
method of payment, and whether or not payments shall be made for
any Plan year.
IV. ELIGIBILITY
Executives who are determined by the Committee to have a key
role in both the establishment and achievement of Company
objectives shall be eligible to participate in the Plan.
V. PLAN PERFORMANCE MEASURES
Performance measures shall be established that consider
shareholder and customer interests. These measures shall be
evaluated annually based on achievement of specified goals.
The performance measure reflective of shareholder's
interest will be the percentage attainment of the earnings goal
as specified in the annual operating plan. This measure will be
applied at the corporate level for individuals, such as the Chief
Executive Officer, or at the business unit level for individuals
whose major or sole impact is on business unit results.
Individual performance will be assessed based on the
achievement of annually established individual objectives.
Threshold, target and maximum award levels will be
established annually for each performance measure and business
unit. The Committee will retain the right to make all
interpretations as to the actual attainment of the desired
results and will determine whether any circumstances beyond the
control of management need to be considered.
VI. TARGET INCENTIVE AWARDS
Target incentive awards will be expressed as a percentage of
each participant's assigned salary grade market value (midpoint).
These percentages shall vary by position and reflect larger
reward opportunity for positions having greater effect on the
establishment and accomplishment of the Company's or business
unit's objectives. An exhibit showing the target awards as a
percentage of salary grade market value (midpoint) for eligible
positions will be attached to this Plan at the beginning of each
Plan year.
VII. INCENTIVE FUND DETERMINATION
The target incentive fund is the sum of the individual
target incentive awards for all eligible participants. The
actual incentive fund may be lower, equal to, or greater than the
target fund as determined by the Committee, based on actual
performance as compared with approved performance objectives.
At the close of each Plan year, the Chief Executive
Officer of MDU Resources Group, Inc. will prepare an analysis
showing the Company's and business unit's performance in relation
to each of the performance measures employed. This will be
provided to the Committee for review and comparison to threshold,
target and maximum performance levels. In addition, any
recommendations of the Chief Executive Officer will be presented
at this time. The Committee will then determine the amount of
the target incentive fund earned.
VIII. INDIVIDUAL AWARD DETERMINATION
Each individual participant's award will be based first upon
the level of performance achieved by the Company or business unit
and secondly based upon the individual's performance. The
performance measures applicable for assessing individual
performance will be established at the beginning of each Plan
year. The assessment by the Committee, after consultation with
the Chief Executive Officer, of achievement relative to the
established performance measures, as determined by a percentage
from 0 percent to 200 percent, will be applied to the
Participant's target incentive award which has been first
adjusted for Company or business unit performance.
IX. PAYMENT OF AWARDS
In order to receive an award under the Plan, the Participant
must remain in the employment of the Company or business unit for
the entire Plan year and be an employee on the payment date. An
individual participant who transfers between the Company and
business units may receive a prorated award at the discretion of
the Committee. If employment is terminated prior to the payment
date as a result of death, disability or retirement, or due to
special circumstances as determined by the Committee, payment may
be made after termination. Payments made under this Plan will
not be considered part of compensation for pension purposes.
Payments when made will be in cash, stock, or a combination
thereof as determined appropriate by the Committee. All awards
for 151-200 percent of target will be paid in full shares of one-
year restricted company stock. Any fractional share will be paid
in cash. Incentive awards may be deferred if the appropriate
elections have been executed prior to the end of the Plan year.
Deferred amounts will accrue interest at a rate determined
annually by the Committee.
In the event of a "change in control" (as defined by the
Committee in its Rules and Regulations) then any award deferred
by each Participant shall become immediately payable to the
Participant in cash, together with accrued interest thereon to
the date of payment. In the event the Participant files suit to
collect the participant's deferred award then all of the court
costs, other expenses of litigation, and attorneys' fees shall be
paid by the Company in the event the Participant prevails upon
any of the Participant's claims for payment of a deferred award.
MDU RESOURCES GROUP, INC.
EXECUTIVE INCENTIVE COMPENSATION PLAN
RULES AND REGULATIONS
The Compensation Committee of the Board of Directors of MDU
Resources Group, Inc. (the "Company") adopted Rules and Regulations
for the administration of the Management Incentive Compensation
Plan (the "Plan") on February 9, 1983, following adoption of the
Plan by the Board of Directors of the Company on November 4, l982.
I. DEFINITIONS
The following definitions shall be used for purposes of these Rules
and Regulations and for the purposes of administering the Plan:
1. The "Committee" shall be the Compensation Committee
of the Board of Directors of the Company.
2. The "Company" shall refer to MDU Resources Group,
Inc. alone and shall not refer to its utility
division or to any of its subsidiary corporations.
3. "Participants" for any Plan Year shall be those
executives who have been approved by the Committee
as eligible for participation in the Plan for such
Plan Year.
4. "Payment Date" shall be the date set by the
Committee for payment of awards, other than those
awards deferred pursuant to section IX of the Plan
and section VII of these Rules and Regulations.
5. The "Plan" shall refer to the Executive Incentive
Compensation Plan.
6. The "Plan Year" shall be the calendar year.
7. "Change in control" shall mean the earlier of the
following to occur: (a) the public announcement by
the Company or by any person (which shall not
include the Company, any subsidiary of the Company
or any employee benefit plan of the Company or of
any subsidiary of the Company) ("Person") that such
Person, who or which, together with all Affiliates
and Associates (within the meanings ascribed to such
terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of
1934, as amended (17 C.F.R. 240.12b-2)) of such
Person, shall be the beneficial owner of twenty
percent (20%) or more of the voting stock then
outstanding; (b) the commencement of, or after the
first public announcement of any Person to commence,
a tender or exchange offer the consummation of which
would result in any Person becoming the beneficial
owner of voting stock aggregating thirty percent
(30%) or more of the then outstanding voting stock;
(c) the announcement of any transaction relating to
the Company required to be described pursuant to the
requirements of Item 6(e) of Schedule 14A of
Regulation 14A of the Securities and Exchange
Commission under the Securities Exchange Act of 1934
(17 C.F.R. 240.14a-101, item 6(e)); (d) a proposed
change in the constituency of the Board of Directors
of the Company such that, during any period of two
(2) consecutive years, individuals who at the
beginning of such period constitute the Board of
Directors of the Company cease for any reason to
constitute at least a majority thereof, unless the
election or nomination for election by the
shareholders of the Company of each new Director was
approved by a vote of at least two-thirds (2/3) of
the directors then still in office who were members
of the Board of Directors of the Company at the
beginning of the period; or (e) any other event
which shall be deemed by a majority of the
Compensation Committee of the Board of Directors of
the Company to constitute a "change in control."
8. The "Prime Rate" shall be the base rate on corporate
loans posted by at least 75 percent of the nation's
30 largest banks as reported daily in The Wall
Street Journal.
II. ADMINISTRATION
1. The Committee shall have the full power to construe
and interpret the Plan and to establish and to amend
these Rules and Regulations for its administration.
2. No member of the Committee shall participate in a
decision as to their own eligibility for, or award
of, an incentive award payment.
3. Prior to the beginning of each Plan Year, the
Committee shall approve a list of eligible
executives and notify those so approved that they
are eligible to participate in the Plan for such
Plan Year.
4. Prior to the beginning of each Plan Year, the
Committee shall draw up an Annual Operating Plan.
The Annual Operating Plan shall include the Plan's
performance measures and performance targets as well
as the target incentive award levels for each salary
grade covered by the Plan for the following Plan
Year. The Annual Operating Plan, insofar as it is
relevant to each individual Participant, shall be
made available by the Committee to each Participant
in the Plan at the beginning of each Plan Year.
5. The Committee shall have final discretion to
determine actual award payment levels, method of
payment, and whether or not payments shall be made
for any Plan Year. However, unless the Plan's
performance objectives are met for the Plan Year, no
award shall be made for that Plan Year. Performance
targets modified pursuant to section II of the Plan
will be deemed performance targets for purposes of
determining whether or not these targets have been
met.
III. PLAN PERFORMANCE MEASURES
1. The Committee shall establish the percentage
attainment of earnings measure and the percentage
attainment of individual goals measure. The
Committee may establish more or fewer performance
measures as it deems necessary.
2. The earnings measure shall be set by reference to
the earnings of the Company or the individual
business unit.
3. Individual performance will be assessed based on the
achievement of annually established individual
objectives.
4. Plan performance measures will be applied at the
corporate level for individuals such as the Chief
Executive Officer whose major or sole impact is
Company-wide, or at the business unit level for
individuals whose major or sole impact is on the
business unit results. The Annual Operating Plan
shall contain a list of individuals to whom the Plan
performance measures will be applied at the
corporate level and a list of those individuals for
whom the Plan performance measures will be applied
at the business unit level. The relevant business
unit for each individual will be identified.
5. The Committee shall set threshold, target and
maximum award levels for the performance measures,
for each business unit, and for the Company. Those
levels shall be included in the Annual Operating
Plan.
6. The Committee will retain the authority to determine
whether or not the actual attainment of these
measures has been made.
IV. TARGET INCENTIVE AWARDS
1. Target incentive awards will be a percentage of each
Participant's assigned salary grade midpoint.
2. Target incentive awards shall be set by the
Committee annually and will be included in the
Annual Operating Plan.
V. INCENTIVE FUND DETERMINATION
1. The target incentive fund is the sum of the
individual target incentive awards for all eligible
Participants.
2. The actual incentive fund will be determined by the
Committee, based on actual performance as compared
with the approved performance measures.
3. As soon as practicable following the close of each
Plan Year, the Chief Executive Officer will provide
the Committee with an analysis showing the Company's
and each relevant business unit's performance in
relation to both of the performance measures. The
Committee will review the analysis and determine, in
its sole discretion, the amount of the actual
incentive fund.
4. In determining the actual incentive fund, the
Committee may consider any recommendations of the
Chief Executive Officer.
VI. INDIVIDUAL AWARD DETERMINATION
1. The Committee shall have the sole discretion to
determine each individual Participant's award. The
Committee's decision will be based first
upon the level of performance achieved by the
Company or business unit and second upon the
individual's performance.
2. The Committee, after consultation with the Chief
Executive Officer, shall set the award as a
percentage from 0 percent to 200 percent of the
Participant's target incentive award, adjusted for
Company or business unit performance.
VII. PAYMENT OF AWARDS
1. On the date the Committee determines the awards to
be made to individual Participants, it shall also
establish the Payment Date.
2. In order to receive an award under the Plan, a
Participant must remain in the employment of the
Company for the entire Plan Year and be an employee
on the Payment Date.
3. If employment is terminated prior to Payment Date as
a result of death, disability or retirement, or due
to special circumstances as determined by the
Committee in its sole discretion, payment may be
made after termination.
4. Payments of the awards may be made in cash, stock or
a combination thereof as determined by the
Committee. All awards for 151-200 percent of target
will be paid in full shares of one-year restricted
company stock. Any fractional share will be paid in
cash. Such payments shall be made on the Payment
Date unless the Participant has deferred, in whole
or in part, the receipt of the award by making an
election on the deferral form attached hereto, prior
to the end of the Plan Year immediately preceding
the Payment Date.
5. In the event a Participant has elected to defer
receipt of all or a portion of the award, the
Company shall set up an account in their name. The
amount of their award to the extent deferred will be
credited to the participant's account on the Payment
Date.
6. The balance credited to an account of a Participant
who has elected to defer receipt of an award will be
an unsecured, unfunded obligation of the Company.
7. Interest shall accrue on the balance credited to a
Participant's account. The rate of interest shall
be the Prime Rate plus 1 percentage point as
reported on the last Friday in January of each year.
Interest on the balance in an account shall accrue
at the rate so determined from the Payment Date
immediately following the determination to the
Payment Date of the following year.
8. Interest shall be credited to the account on the day
preceding Payment Date and shall be calculated on
the balance in the Participant's account as of that
date.
9. A Participant may elect to defer any percentage, not
to exceed l00, of an annual award.
10. A Participant electing to defer any part of an award
must elect one of the following dates for payment:
(1) Retirement date;
(2) Payment Date next following termination of
employment; or
(3) Payment Date of the fifth year following the
year in which the award may be made.
11. A Participant may elect to receive the deferred
amounts accumulated in the Participant's account in
monthly installments, not to exceed 120. In the
event the Participant elects to receive the amounts
in the Participant's account in more than one
installment, interest shall continue to accrue on
the balance remaining in their account at the
applicable rate or rates determined annually by the
Committee.
12. In the event of the death of a Participant in whose
name a deferred account has been set up, the Company
shall, within six months thereafter, pay to the
Participant's estate or the designated beneficiary
the entire amount in the deferred account.
13. In the event of a "change in control" then any award
deferred by each Participant shall become
immediately payable to the Participant. In the
event the Participant files suit to collect a
deferred award then all of the Participant's court
costs, other expenses of litigation, and attorneys'
fees shall be paid by the Company in the event the
Participant prevails upon any of the Participant's
claims for payment.
MDU RESOURCES GROUP, INC.
KEY EMPLOYEE STOCK OPTION PLAN
(KESOP)
I. PURPOSE
The purpose of the MDU Resources Group, Inc. 1992 Key Employee
Stock Option Plan (the "Plan") is to motivate key employees of MDU
Resources Group, Inc. and its business units to achieve specified
long-term performance goals of MDU Resources Group, Inc. or its
business units and to encourage ownership by them of the Common
Stock of MDU Resources Group, Inc. The Plan accomplishes these
objectives through the grant of performance accelerated Stock
Options and the opportunity to earn dividend equivalents.
II. DEFINITIONS
The following definitions shall be used for purposes of
administering the Plan:
"Agreement" means a written agreement evidencing each award of
Options, which shall contain such terms and be in such form as
the Compensation Committee may determine.
"Board" means the Board of Directors of the Company.
"Cause" means the (1) continued failure by a Participant to
perform his/her duties (except as a direct result of the
Participant's Disability) after receiving notification by the
Chief Executive Officer of the Company or an individual
designated by the Chief Executive Officer (or the Board of
Directors of the Company in the case of the Chief Executive
Officer) identifying the manner in which the Participant has
failed to perform his/her duties, (2) engaging in conduct,
which, in the opinion of a majority of the Board of Directors
of the Company or a business unit, is materially injurious to
the Company, or (3) conviction of any felony.
"Change of Control" means the earlier of the following to
occur: (a) the public announcement by the Company or by any
person (which shall not include the Company, any subsidiary of
the Company, or any employee benefit plan of the Company or of
any subsidiary of the Company) ("Person") that such Person,
who or which, together with all Affiliates and Associates
(within the meanings ascribed to such terms in the Rule 12b-2
of the General Rules and Regulations under the Exchange Act)
of such Person, shall be the beneficial owner of twenty
percent (20%) or more of the voting stock of the Company
outstanding; (b) the commencement of, or after the first
public announcement of any Person to commence, a tender or
exchange offer the consummation of which would result in any
Person becoming the beneficial owner of voting stock
aggregatingthirty percent (30%) or more of the then
outstanding voting stock of the Company; (c) the announcement
of any transaction relating to the Company required to be
described pursuant to the requirements of Item 6(e) of
Schedule 14A of Regulation 14A under the Exchange Act; (d) a
proposed change in constituency of the Board such that, during
any period of two (2) consecutive years, individuals who at
the beginning of such period constitute the Board cease for
any reason to constitute at least a majority thereof, unless
the election or nomination for election by the stockholders of
the Company of each new Director was approved by a vote of at
least two-thirds (2/3) of the Directors then still in office
who were members of the Board at the beginning of the period;
or (e) any other event which shall be deemed by a majority of
the Compensation Committee to constitute a "change in
control."
"Common Stock" means the Common Stock, $3.33 par value, of the
Company.
"Company" shall refer to MDU Resources Group, Inc.
"Companies" shall refer to MDU Resources Group, Inc. and its
business units.
"Compensation Committee" or "Committee" shall be the
Compensation Committee of the Board of Directors of the
Company or any Committee of the Board performing similar
functions as appointed from time to time by the Board. The
Committee shall be constituted, to the extent required, so as
to permit the Plan to comply with Rule 16b-3.
"Disability" means the inability of a Participant to perform
each and every duty pertaining to the Participant's regular
occupation by reason of any medically determinable physical or
mental impairment which can be expected to result in death or
which has lasted or can be expected to last for a continuous
period of not less than twelve months.
"Dividend Account" is defined in Section IV.D 6.
"Effective Date" means the date as of which the Plan is
approved by the stockholders of MDU Resources Group, Inc.
"Eligible Employee" means any key employee of any of the
Companies who, in the opinion of the Compensation Committee,
has significant responsibility for the continued growth,
development and financial success of the Company or any
business unit thereof.
"Exchange" means the New York Stock Exchange.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Fair Market Value" means the average of the high and low
prices for shares of Common Stock traded on the Exchange on
the date of the grant of such Option or if no shares are
traded on that day, on the next preceding day on which Common
Stock was traded on the Exchange.
"Goals" means the separate financial and/or non-financial
objectives set by the Committee for any of the Companies.
"Option" or "Stock Option" means an option to purchase Common
Stock granted pursuant to the Plan. Options may not be
"incentive stock options" as that term is defined in Section
422 of the Internal Revenue Code of 1986, as amended.
"Participants" means those Eligible Employees selected by the
Committee for participation in the Plan and includes their
beneficiaries as applicable.
"Performance Cycle" means a time frame established by the
Committee pursuant to Section IV.D 4 for the measurement of
Goals.
"Plan" means this MDU Resources Group, Inc. 1992 Key Employee
Stock Option Plan, adopted by the Board on February 13, 1992,
and approved by the stockholders on April 28, 1992, and as
amended from time to time.
"Rule 16b-3" means Rule 16b-3 under the Exchange Act or any
successor rule.
"Termination of Service" means leaving the employ of the
Companies for any reason. Transfer between Companies is not
a Termination of Service.
"Trustee" means a trustee chosen by the Committee or any
successor trustee selected by the Committee.
III. ADMINISTRATION
Subject to and not inconsistent with the express provisions of the
Plan the Committee has the sole and complete discretion to
administer and interpret the Plan, including, but not limited to:
(a) designating the Participants to whom Options are granted
under the Plan;
(b) authorizing the Trustee to grant Options, determining the
time(s) when Options are granted and fixing the number of
shares of Common Stock underlying each Option granted
hereunder;
(c) determining the terms and conditions of an Option granted
(including, but not limited to, the exercise price, any
restriction or limitation, the vesting provisions,
acceleration of vesting or forfeiture waiver applicable to any
Option) and the terms of the related Agreement;
(d) determining the conditions of the awarding of Dividend
Equivalents;
(e) establishing performance goals and fixing and adjusting
the Goals;
(f) interpreting the terms and provisions of the Plan;
(g) adopting, amending, and rescinding rules and regulations
relating to the Plan; and
(h) making all determinations necessary or advisable for the
administration of the Plan.
All decisions made by the Committee pursuant to the provisions of
the Plan shall be final and binding on all persons, including the
Companies, the Trustee, and the Plan's Participants.
The Committee may also revise or adjust the vesting provisions
(except that the Committee may not extend vesting beyond nine
years), goals and their levels applicable to a Performance Cycle,
at any time to take into account, among other things, new
Participants, promotions, transfers, terminations, changes in law
and accounting and tax rules and to make such adjustments as the
Committee deems necessary or appropriate to reflect the Companies'
performances or the impact of extraordinary or unusual items,
events, or circumstances or in order to avoid windfalls or
hardships.
The Company and/or the Committee may consult with legal counsel,
who may be counsel for the Company or other counsel, with respect
to its obligations and duties hereunder or with respect to any
claim, action, or proceeding or any other matter.
No member or agent of the Committee shall be personally liable for
any action, determination, or interpretation made in good faith
with respect to the Plan or grants made hereunder, and all members
and agents of the Committee shall be fully protected by the Company
in respect of any such action, determination, or interpretation.
The Committee's determination under the Plan, including without
limitation, determinations as to the Participants to receive
grants, the terms and provisions of such grants and the
Agreement(s) evidencing the same, need not be uniform and may be
made by it selectively among the Eligible Employees who receive or
are eligible to receive grants under the Plan, whether or not such
Eligible Employees are similarly situated.
IV. GENERAL PLAN DESCRIPTION
A. Overview
The Plan provides for each Participant to (a) receive grant(s)
of Stock Options, (b) have the opportunity to earn dividend
equivalents, and (c) have the opportunity to achieve
accelerated vesting of Stock Options and receive additional
grants of Stock Options based upon the achievement of Goals
established by the Committee over a designated Performance
Cycle.
B. Eligibility
On or after the Effective Date, subject to the provisions of
the Plan, the Committee shall, from time to time, select
Participants from Eligible Employees and arrange with the
Trustee to grant them Stock Options. At the time of
selection, the Committee shall specify the terms and
conditions of the new Participant's initial grant of Options.
C. Authorization
The total number of shares of Common Stock as to which Options
may be granted may not exceed 800,000 shares; if any
unexercised options lapse or terminate for any reason, the
shares underlying the Options may be made subject to Options
granted to other Participants. In the event of the
declaration of a Common Stock dividend and/or Common Stock
split, reclassification or analogous change in the
capitalization or any distributions (other than regular cash
dividends) to holders of record between the date of grant and
the date of exercise of an Option, an appropriate adjustment
shall be made to the total number of shares as to which
Options may be granted, to the number of shares subject to
Options, and to the exercise price.
Shares of Common Stock, delivered under this Plan may be
authorized but unissued shares of Common Stock, or shares of
Common Stock purchased on the open market and held by the
Trustee, or shares of Common Stock from the 1983 Key
Employees' Stock Option Plan.
D. Stock Options and Dividend Equivalents
(1) Grants
Each Participant shall receive a grant of Options on the
date she or he becomes a Participant. The Committee
shall determine the size of the grant to each Participant
and authorize the Trustee to make the grant.
Participants may receive subsequent grants of Options
from the Trustee when and as directed by the Committee.
(2) Exercise Price and Term
The exercise price for an Option granted under the Plan
is the Fair Market Value of the Company's Common Stock on
the date of the Option grant. An Option granted shall
generally have a term of ten years commencing from the
date of grant, subject to the provisions of Sections V
and VI and to the general discretion of the Committee set
forth in Section III.
(3) Vesting and Accelerated Vesting Provisions
No Option may be exercised before it has vested.
Generally Option grants have a vesting period (before
accelerated vesting) of nine years subject to the
provisions of Section VI and to the general discretion of
the Committee set forth in Section III. The vesting
period for all or a portion of Options granted to a
Participant may be accelerated by the Committee subject
to the achievement of Goals for a Performance Cycle.
(4) Performance Cycle and Goals
The Committee shall fix the starting and ending dates of
each Performance Cycle. The minimum term shall be six
months; the maximum term shall be nine years. A
Performance Cycle will be the time period used in
assessing the performance of each of the Companies in
comparison to the separate Goals established by the
Committee for each of the Companies. Performance Cycles
and Goals may vary for each of the Companies.
(5) Subsequent Grants; Accelerated Vesting
Additional grants of Options may be made by the Trustee
at the direction of the Committee to Participants at any
time.
In particular, but not by way of limitation, additional
grants of Options may be made to Participants at the
beginning of a new Performance Cycle based upon the
appropriate Companies' achievement of Performance Goals
and the results of accelerated vesting of all or a
portion of previous grants. The Committee will have the
authority to determine the size and terms of any new
Option grant for each Participant.
(6) Dividend Equivalents
At the beginning of each Performance Cycle, a Dividend
Account (the "Dividend Account") shall be established for
each Participant. If a dividend is declared by the Board
on the Common Stock of the Company an equivalent amount
shall be accrued in the Dividend Account of each
Participant for each share of Common Stock underlying all
unvested Options held by the Participant. At the end of
each Performance Cycle the Committee in its sole
discretion may award an amount between 0% and 150% of a
Participant's Dividend Account based on whether the Goals
established for that Performance Cycle were achieved.
Any earned portion of a Participant's Dividend Account is
paid in cash to that Participant at the end of each
Performance Cycle at a date and time determined by the
Committee. Any portion of a Participant's Dividend
Account not awarded to the Participant by the Committee
is forfeited. However, shares of Common Stock underlying
unvested Options retain a dividend equivalent and a
Participant can earn the value of these dividend
equivalents in subsequent Performance Cycles.
(7) Exercise of Options
As provided in paragraph (3) of this section, generally
all Options granted to a Participant under the Plan shall
vest on the ninth anniversary of the date of grant;
provided, however, that if and to the extent the vesting
of an Option is accelerated at the end of a Performance
Cycle, the Option may thereafter be exercised to the
extent that the Option has vested. Any vested Option may
be exercised from time to time in part or as a whole, at
the discretion of the Participant, from the date of
vesting until termination of the Option; no Option shall
be exercisable after its expiration date; subject in
either case to the provisions set forth in Section V and
to the general discretion of the Committee set forth in
Section III.
Options may be exercised by giving written notice of
exercise to the Trustee specifying the number of shares
to be purchased. The notice shall be accompanied by the
exercise price. Payment may also be made in part or in
full by tendering shares of Common Stock already owned by
the Participant, based upon the Fair Market Value of the
Common Stock on the date the Option is exercised, or
through share withholding. Participants may also
simultaneously exercise Options and sell the shares of
Common Stock thereby acquired and use the proceeds from
the sale as payment for the purchase price of the shares.
Such transactions, to the extent required, shall be
effected in accordance with Section 16 of the Exchange
Act and the rules thereunder.
(8) Nonassignability of Options
Options granted may not be assigned, transferred, or
pledged by the Participant other than by will or the laws
of descent and distribution or pursuant to a qualified
domestic relations order as defined by the Internal
Revenue Code or Title 1 of the Employee Retirement Income
Security Act, or the rules thereunder.
V. Termination of Service
A. Upon any Termination of Service, unvested Options and any
amounts accrued in a Participant's Dividend Account shall be
forfeited unless the Committee decides otherwise pursuant to
Section III.
B. Death
If the Participant dies while still employed, then any vested
Options, to the extent that they are then exercisable, may be
fully exercised at any time within one (1) year (even if this
extends the term of the Options) after the date of the
Participant's death by the person designated in the
Participant's last will and testament or by the personal
representative of the Participant's estate.
C. Disability
If the Participant suffers Disability, then any vested
Options, to the extent that they are then exercisable, may be
fully exercised by the Participant at any time within one (1)
year (even if this extends the terms of the Options) after the
date of Disability or by a person qualified or authorized to
act on behalf of the Participant.
D. Cause
If a Participant's Termination of Service is for Cause, the
right to exercise any vested Option shall terminate with such
termination of employment. For this purpose, the
determination of the Committee as to whether employment was
terminated for Cause shall be final.
E. Other Termination of Service
In the event of the Participant's Termination of Service for
reasons other than Death, Disability, or Cause, to the extent
that any vested Options are then exercisable, the Participant
shall be entitled to exercise the Options for the three (3)
month period following such Termination of service (even if
this extends the term of the Options).
VI. Change of Control
Upon a Change of Control of the Company, all Options previously
granted under the Plan shall become immediately vested and
available for exercise. The value of the amounts accrued in the
Participant's Dividend Account shall be paid in full at 100% of the
amount thereof to the Participant in cash upon the Change of
Control.
VII. Miscellaneous Provisions
A. Unsecured General Creditor
Participants and their beneficiaries, heirs, successors,
and assigns shall have no legal or equitable rights,
interests, or other claims in any property or assets of
the Company, nor shall they be beneficiaries of, or have
any rights, claims, or interests in any specified assets
of the Company. Any and all of the Company's assets
shall be and remain general, unpledged, unrestricted
assets of the Company. The Company's obligation under
the Plan shall be that of an unfunded and unsecured
promise of the Company to cause shares of Common Stock to
be available or to pay benefits in the future.
B. No Contract of Employment
Nothing contained in this Plan nor any related Agreement
nor any action taken in the administration of the Plan
shall be construed as a contract of employment or as
giving a Participant any right to be retained in the
service of the Company.
C. Withholding Taxes
No later than the date on which a Participant receives
Common Stock with respect to any Option exercised or cash
with respect to Dividend Equivalents awarded under the
Plan, the Participant shall pay in cash to the Company or
its delegate or make arrangements satisfactory to the
Company regarding the payment of any federal, state, or
local taxes required by law to be withheld with respect
to any such amounts. The Participant may also make
payment (i) by tendering shares of the Common Stock
already owned by the Participant, based on the fair
market value of the Common Stock on the date the tax is
owed or (ii) by having such amounts withheld from the
shares of the Common Stock otherwise distributable to
him/her upon exercise of his/her Options. Any such
withholding on behalf of a Participant shall be done in
accordance with Section 16 of the Exchange Act and the
rules thereunder to the extent required. The obligations
of the Company under the Plan shall be conditioned on
such payment or arrangements. The Company or its
delegate may deduct any taxes from any payment due to the
Participant from the Company to the extent allowed by
law.
D. Ten Percent Limitation
No Option shall be granted under this Plan to a
Participant if at the time the Option is granted the
Participant shall own stock representing more than 10% of
the combined voting power of all classes of voting stock
of the Company.
E. Severability
In the event that any provision of the Plan or any
related Agreement is held invalid, void or unenforceable,
the same shall not affect, in any respect whatsoever, the
validity of any other provision of the Plan or any
related Agreement.
F. Inurement of Rights and Obligations
The rights and obligations under the Plan shall inure to
the benefit of, and shall be binding upon the Company,
its successors and assigns, and the Participants and
their beneficiaries consistent with the terms of the
Plan.
G. Amendments
The Board may at any time amend, suspend, or terminate
the Plan including, without limitation, modifications to
take into account and comply with any changes in
applicable securities or federal income tax laws and
regulations, or other applicable laws and regulations;
provided, that no modification to the Plan shall increase
the number of shares available under the Plan by more
than 10 percent without approval of the holders of the
Common Stock, except as otherwise permitted under Section
IV.C; and provided further, that any such amendment,
suspension, or termination must be prospective in that it
may not deprive Participants of any Options or rights
previously granted under the Plan whether vested or not,
without consent of the Participant, except if required by
statute or rules or regulations promulgated thereunder.
H. Restrictions
Shares of Common Stock acquired by Participants pursuant
to the exercise of Options granted under the Plan shall
be subject to such restrictions on transferability and
disposition as are required by federal and state security
laws and such Participants shall not sell or transfer any
shares acquired except in accordance with such laws.
I. Legal and Other Requirements.
The obligation of the Company to cause Common Stock to be
available under the Plan shall be subject to all
applicable laws, regulations, rules and approvals,
including, but not limited to the receipt of any
necessary approvals by state or federal regulatory
bodies, and the effectiveness of a registration statement
under the Securities Act of 1933 if deemed necessary or
appropriate by the Company. Certificates for shares of
Common Stock issued hereunder may be legended as the
Committee shall deem appropriate.
J. Agreements.
Each grant of Options by the Trustee shall be evidenced
by an Agreement between the Trustee and the Participant
which shall contain such restrictions, terms and
conditions as the Committee may require. Notwithstanding
anything to the contrary contained in the Plan, the
Company shall not be under any obligation to honor any
grants under the Plan to any Participant hereunder unless
such Participant shall execute all appropriate Agreements
with respect to such Options in such form as the
Committee may determine from time to time.
K. Applicable Law
The Plan and any related Agreements shall be governed in
accordance with the laws of the State of North Dakota.
VIII. Establishment of Trust
The Company shall establish with the Trustee a trust
consisting of such sums of money or other property acceptable
to the Trustee as shall from time to time be paid or delivered
to the Trustee, all investments made therewith and proceeds
thereof and all earnings and profits thereon. The Trustee
shall invest funds, if any, advanced by the Company in shares
of Common Stock. Upon the exercise of an Option by a
Participant, the Trustee shall take Common Stock from the
trust or shall purchase Common Stock on the open market or
from the Company and deliver certificates for such shares to
the Participant.
The Company shall have the right at any time to terminate the
trust but such termination shall not affect the rights of any
Participant to whom an Option has been granted under the Plan.
After effecting all purchases and transfers of Common Stock as
are required by the Plan pursuant to the exercise of Options
by Participants, the Trustee shall be relieved of all further
liability. Termination of the trust shall take effect as of
the date the last such transfer is made. Upon such
termination any assets remaining in the trust shall be
returned to the Company unless other directions are given to
the Trustee by the Company.
MDU RESOURCES GROUP, INC.
DIRECTORS' COMPENSATION POLICY
Each Director who is not a full-time employee of the Company shall
receive compensation made up of annual cash retainers, common
stock, meeting fees and post-retirement income:
Annual Retainers
The Board service annual cash retainer shall be $13,000. That
of the Chairman of the Board shall be four times that of the other
Directors. The annual retainer for service as Chairman of the
Audit or Nominating Committee shall be $2,500 and of the
Compensation or Finance Committee, $4,000. Such retainers shall be
paid in monthly installments.
A minimum of $1,000 of the annual cash retainer shall be
deferred under the Amended and Restated Deferred Compensation Plan
for Directors adopted on February 13, 1992 and effective January 1,
1992. If the Chairman of the Board is a retired employee such
deferral need not be made and this Plan shall not apply. The Plan
permits a Director to defer all or any portion of the annual cash
retainer above the mandatory $1,000 deferral. The amount deferred
is recorded in each participant's deferred compensation account and
credited with income in the manner prescribed in the Plan. For
further details, reference is made to the Plan, a copy of which is
attached.
Each Director shall receive 450 shares of Common Stock on or
about the 15th business day following the annual meeting of
stockholders. A Director may decline a stock payment for any plan
year, in writing in advance of the plan year to which stock payment
relates. No cash compensation shall be paid in lieu thereof. By
written election a Director may reduce the cash portion of the
annual retainer and have that amount applied to the purchase of
additional shares. The election must be made on a form provided by
the administrative committee and returned to the committee at least
six months prior to the applicable annual meeting of stockholders.
The election remains in effect until changed or revoked. No
election may be changed or revoked for the current year, but may be
changed for a subsequent year. For further details, reference is
made to the Non-Employee Director Stock Compensation Plan, a copy
of which is attached.
Board and Committee Meeting Fee
The fee for each Board meeting attended shall be $1,000 and
for each meeting attended of each Committee of which the Director
is a member, and for attendance at Planning and Pension meetings,
shall be $1,000, payable only to Directors who are not full-time
employees of the Company.
Post-Retirement Income
After retirement from the Board, each Director who does not
receive a pension benefit from the Company is entitled to receive
annual compensation in an amount equal to the sum of all annual
retainers being received by the Director at the time of the
Director's retirement. "Annual compensation" shall include the
value of the 450 shares of Common Stock at the time of retirement.
The dollar value included in the calculation of the amount of
annual compensation shall be the average of the high price and the
low price of the Common Stock as traded on the New York Stock
Exchange on the day of the annual meeting or, if no stock is traded
on that day, then the average on the day next preceding the annual
meeting date on which Common Stock was traded. The annual
compensation will be paid to the Director (or to the Director's
named beneficiary in the event the Director dies after retirement
and while the Director is still being paid the annual compensation)
in equal monthly installments over a period of time equal to the
period of service of the Director on the Board. Should a Director
die while in office, annual compensation will be paid to the
Director's named beneficiary in an amount equal to the sum of all
annual retainers being received by the Director at the time of the
Director's death. The annual compensation will be paid in equal
monthly installments over a period of time equal to the period of
service of the deceased on the Board.
If there is a "change in control" (as hereinafter defined)
then within 14 days thereafter the following actions shall be
taken:
(1) The Post-Retirement Income of each Director
currently serving on the Board and entitled to
receive such Income shall be calculated as if the
Director had retired immediately prior to the
change in control.
(2) The entire amount of the Post-Retirement Income (as
calculated under the preceding paragraph) to which
each Director is entitled shall be paid to each
Director in a lump sum.
(3) Each retired Director who, at the time the change
in control occurs, is retired and is receiving, or
is entitled to receive, Post-Retirement Income,
shall receive all remaining Post-Retirement Income
which has not been paid to the retired Director
(or the retired Director's beneficiary) in a lump
sum and not in installments.
"Change in control" shall mean the earlier of the following to
occur: (a) the public announcement by the Company or by any person
(which shall not include the Company, any subsidiary of the Company
or any employee benefit plan of the Company or of any subsidiary of
the Company) ("Person") that such Person, who or which, together
with all Affiliates and Associates (within the meanings ascribed to
such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended (17 C.F.R.
240.12b-2)) of such Person, shall be the beneficial owner of twenty
percent (20%) or more of the voting stock then outstanding; (b) the
commencement of, or after the first public announcement of any
Person to commence, a tender or exchange offer the consummation of
which would result in any Person becoming the beneficial owner of
voting stock aggregating thirty percent (30%) or more of the then
outstanding voting stock; (c) the announcement of any transaction
relating to the Company required to be described pursuant to the
requirements of Item 6(e) of Schedule 14A of Regulation 14A of the
Securities and Exchange Commission under the Securities Exchange
Act of 1934 (17 C.F.R. 240.14a-101, item 6(e)); (d) a proposed
change in the constituency of the Board of Directors of the Company
such that, during any period of two (2) consecutive years,
individuals who at the beginning of such period constitute the
Board of Directors of the Company cease for any reason to
constitute at least a majority thereof, unless the election or
nomination for election by the shareholders of the Company of each
new director was approved by a vote of at least two-thirds (2/3) of
the directors then still in office who were members of the Board of
Directors of the Company at the beginning of the period; or (e) any
other event which shall be deemed by a majority of the Compensation
Committee of the Board of Directors of the Company to constitute a
"change in control."
Directors Emeritus
The Board of Directors may elect from those persons who have
been members of the Board of Directors, Directors Emeritus. Those
elected shall have served as a Director for at least ten years. The
designation as a Director Emeritus may be renewed annually by the
Board of Directors, but not beyond the fifth year following the
Director's retirement from the Board of Directors.
Each person so designated may, from time to time, be invited
by the Chairman of the Board to participate as a nonvoting member
of the Company's Board of Directors. A Director Emeritus so
participating shall receive no meeting fee although reimbursement
for reasonable travel expenses in connection with attendance at the
meeting will be provided.
Travel Expense Reimbursement
All Directors will be reimbursed for reasonable travel
expenses including spouse's expenses (providing the spouse
participates in ALL business, community, spouse-specific and social
events), in connection with attendance at meetings of the Company's
Board of Directors and its committees. If the travel expense is
related to the reimbursement of commercial airfare, such
reimbursement will not exceed full-coach rate. If the travel
expense is related to reimbursement of non-commercial airfare, such
reimbursement will not exceed the rate for comparable travel by
means of commercial airline at the first-class rate.
Directors' Liability
Article Seventeenth of the Company's Certificate of
Incorporation provides that no Director of the Company shall be
liable to the Company or its stockholders for breach of fiduciary
duty as a Director. Section 7.07 of the Company's Bylaws requires
the Company to indemnify fully a Director against expenses,
attorneys fees, judgments, fines and amounts paid in settlement of
any suit, action or proceeding, whether civil or criminal, arising
from an action of a Director by reason of the fact that the
Director was a Director of Montana-Dakota Utilities Co. or MDU
Resources Group, Inc.
There are exceptions to these protections: breaches of the
Directors' duty of loyalty to the Company or its stockholders, acts
or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law, violation of
Section 174 of the Delaware General Corporation Law (relating to
unlawful declaration of dividends and unlawful purchase of the
company's stock), and transactions from which the Director derived
an improper personal benefit (including short-swing profits under
Section 16(b) of the Securities Exchange Act of 1934).
The Company has and does maintain Directors' and Officers'
liability insurance coverage with a $75,000,000 limit.
Insurance Coverages
The Company maintains the following insurance for protection
of its Directors as they carry out the business of MDU Resources
Group, Inc.
1. General liability and automobile liability
insurance:
The Directors are afforded coverage under the
general liability and automobile liability
insurance of the Company. The policy limitation is
$75,000,000 in excess of the $500,000 per
occurrence retention for general liability and
$250,000 per occurrence retention for automobile
liability which the Company has elected to self
insure.
2. Fiduciary and employee benefit liability insurance:
The Directors are afforded coverage under the
fiduciary and employee benefits liability
insurance of the Company. The policy has a
$35,000,000 limit with no deductible
applicable to the Director.
3. Aircraft liability insurance:
The Company's existing aircraft liability insurance
policy extends coverage while a non-owned aircraft
is used by a Director in traveling to and from
Director or Board committee meetings. This
insurance coverage constitutes excess liability
coverage in the amount of $200,000,000.
In the case of aircraft owned by a Director, this coverage is
excess over and above primary insurance which must be carried
personally by a Director on the owned aircraft. Before coverage
over and above primary insurance will be provided, a Certificate of
Insurance from the Director must be received, submitted to the
Company's insurance carrier and approved. The Company's insurance
carrier shall have the right to determine the amount and limits of
coverage.
3. Travel and Sojourn insurance:
All Directors are protected by a group insurance
policy with coverage of $250,000 that provides
24-hour accident protection while traveling on
Company business.
Coverage in all instances begins at the actual
start of a business trip and ends when the Director
returns to his/her home or regular place of
employment.
The beneficiary of the insurance will be that
beneficiary recorded on a beneficiary designation
card provided by the Company.
4. Group Life Insurance:
All outside Directors are protected by a
non-contributory group life insurance policy with
coverage of $100,000.
The coverage begins the day the Director is elected
to the Board of Directors and terminates when the
Director ceases to be an outside Director.
A Certificate of Insurance shall be provided to the
Director and the beneficiary of the insurance will
be that beneficiary recorded on a beneficiary
designation card provided by the Company.
This protection is considered taxable compensation
under current tax laws. Consequently, the Company
will provide each Director annually on Form 1099
the amount of taxable income related to this
coverage.
MDU RESOURCES GROUP, INC.
Amended and Restated
DEFERRED COMPENSATION PLAN FOR DIRECTORS
Effective January 1, 1992
I. PURPOSE
The Board of Directors of MDU Resources Group, Inc. (the
"Company") established the Deferred Compensation Plan for Directors
(the "Plan") effective as of September l, 1988. The Plan is hereby
amended and restated effective January 1, 1992, and is substituted
for the Restated Plan established by the Company on August 1, 1991.
The Plan shall continue until terminated by the Board of Directors
of the Company, subject to the provisions of Article XII, below.
The purpose of this Plan is to aid the Company in attracting
and retaining as Directors persons whose abilities, experience and
judgment can contribute to the continued progress of the Company.
The Plan will provide a method of deferring compensation to the
Directors.
II. DEFINITIONS
A. Beneficiary. "Beneficiary" means the person or persons
designated as such in accordance with Article XI.
B. Compensation and Deferral Amount. "Compensation" means
any cash retainer, meeting fees and any other cash
compensation payable to Eligible Directors by the Company
for services as a Director. This Deferred Compensation
Plan for Directors governs any or all of that
Compensation which the Participant elects to credit to
his Deferred Compensation Account, which is hereafter
referred to as the "Deferral Amount."
C. Deferred Compensation Account. "Deferred Compensation
Account" means the account maintained on the books of
account of the Company for each Participant pursuant to
Article VI.
D. Effective Date. "Effective Date" means January 1, 1992,
the date on which the restated and amended Plan became
effective.
E. Eligible Director. "Eligible Director" means those
Directors of the Company who are not employees of the
Company.
F. Investment Units. This term shall have the meaning
defined in Article VI.B.
G. Market Price. "Market Price" means the average of the
highest and lowest transaction prices for the Company's
common stock on the New York Stock Exchange for a given
day.
H. Participant. "Participant" means an Eligible Director
participating in the Plan in accordance with the
provisions of Article IV.
I. Plan Year. "Plan Year" means the calendar year.
III. ADMINISTRATION OF THE PLAN
The Board of Directors shall be the sole administrator of the
Plan.
The Board of Directors may from time to time establish rules
and regulations for the administration of the Plan.
All determinations of the Board of Directors, irrespective of
their character or nature, including, but not limited to, all
questions of construction and interpretation, shall be final,
binding and conclusive upon all parties. Without limiting the
generality of the foregoing, the determination of the Board of
Directors as to whether a Participant has terminated his services
and the date thereof shall be final, binding and conclusive upon
all persons.
The Company and/or the Board of Directors may consult with
legal counsel, who may be counsel for the Company or other counsel,
with respect to its obligations and duties hereunder or with
respect to any claim, action or proceeding or any other matter, and
shall not be liable for any action taken or not taken by it in good
faith pursuant to the advice of such counsel.
The Chairman, at the direction of the Board of Directors
shall be responsible for maintaining books and records for the Plan
and adopting standard forms for such matters as beneficiary
designations and applications for benefits, provided such rules and
forms are not inconsistent with the provisions of the Plan. Such
books and records shall only be open for examination by a
Participant or his duly designated beneficiary to the extent that
they specifically involve the Deferred Compensation Account created
for his benefit or any payments which are to be made to him or his
beneficiary hereunder. Each Participant or his duly designated
beneficiary shall be notified no less frequently than annually of
the balance in his account.
Neither the Board of Directors nor any member of the Board
of Directors nor the Company nor any other person who is acting on
behalf of the Board of Directors or the Company shall be liable
for any act or failure to act hereunder except for gross negligence
or fraud.
IV. PARTICIPATION
All Eligible Directors, including any person who becomes a
Director after the effective date hereof, shall be Participants in
the Plan.
Each Participant in the Plan shall have the right to elect to
defer the payment of all or any part of his Compensation, with such
Deferral Amount to be payable at the time or times and in the
manner hereinafter stated. A Participant must defer at least
$1,000 per year.
Each Participant who elects to defer the payment of all or any
part of his Compensation shall execute and deliver to the Board of
Directors a "Notice of Election." Such Notice will provide the
percentage of his Compensation to be deferred, the date such
deferral is to commence and the beneficiary designations of the
Director. Such deferral election shall be applicable only to
Compensation earned by reason of services rendered after the date
of such Notice.
An election to defer Compensation shall continue in effect
until revoked or modified by a subsequent "Notice of Election,"
provided however, (1) that every election to defer shall be
irrevocable as to Compensation earned prior to the date of
revocation and (2) that such election may be changed no more often
than annually. Revocation or modification shall be made in writing
to the Board of Directors and shall be effective upon the date
stated therein.
V. VESTING OF DEFERRED COMPENSATION ACCOUNT
A Participant's interest in his Deferred Compensation Account
shall vest immediately with regard to Deferral Amounts and earnings
thereon.
VI. ACCOUNTS AND VALUATIONS
A. Deferred Compensation Accounts. The Board of Directors
shall establish and maintain a separate Deferred
Compensation Account for each Participant. The
Participant's Deferral Amount shall be credited to the
Participant's Deferred Compensation Account quarterly on
the first day of March, June, September and December in
amounts as nearly equal as possible.
B. Conversion to Investment Units. At the time a Deferral
Amount is credited to the Deferred Compensation Account,
it shall be converted to Investment Units, by dividing
the amount deferred by the Market Price of the Company's
stock on the first trading day immediately preceding the
deferral. Fractional share Investment Units will be
maintained in the Account.
VII. DIVIDEND EQUIVALENTS
If a dividend is declared on the common stock of the Company,
an equivalent amount shall be credited to the Participant's
Deferred Compensation Account for each Investment Unit. Such
amounts shall be converted to additional Investment Units, pursuant
to Article VI.B.
VIII. DISTRIBUTION
A. Conversion of Investment Units to Dollars. When a
Participant leaves the Board of Directors, dies, or
becomes disabled, the number of Investment Units in his
Deferred Compensation Account shall be multiplied by the
Market Price of the Company's common stock on the day
that is six full calendar months after the date of his
leaving, death, or disability. If the New York Stock
Exchange is not open that day then it shall be the Market
Price on the next day the New York Stock Exchange is
open. During this six month period, if a dividend is
declared on common stock of the Company, an equivalent
amount shall be credited to the Participant's Deferred
Compensation Account for each Investment Unit. Such
amounts shall be credited in cash and shall not be
converted to additional Investment Units.
B. Payment. The dollar value of the Investment Units
contained in the Participant's Deferred Compensation
Account shall be paid to him in substantially equal
monthly payments over five years, with interest at a
fixed rate over the five-year period. The fixed rate
shall be the prime rate plus 1 percentage point on the
day the value of the Investment Units is determined
according to this Article VIII. The "prime rate," for
purposes of this paragraph, shall be the base rate on
corporate loans posted by at least 75 percent of the
nation's 30 largest banks as reported daily in The Wall
Street Journal.
IX. TAX WITHHOLDING UPON DISTRIBUTION
To the extent required by law, the Company shall withhold from
payments made hereunder any taxes required to be withheld by the
federal or any state or local government.
X. COMMENCEMENT OF PAYMENTS
Except as otherwise provided in this Plan, commencement of
payments under this Plan shall begin as soon as administratively
feasible after the value of the Investment Units is determined
according to Article VIII.
XI. BENEFICIARY DESIGNATION
Each Participant shall have the right at any time to designate
any person or persons as Beneficiary or Beneficiaries (both
principal and contingent) to whom payment under this Plan shall be
paid in the event of death prior to complete distribution of the
deferred amounts under the Plan. Each beneficiary designation
shall become effective only when filed in writing with the Board of
Directors during the Participant's lifetime on a form provided by
the Board of Directors.
The filing of a new beneficiary designation form will cancel
all beneficiary designations previously filed. Any finalized
divorce of a Participant subsequent to the date of filing of a
beneficiary designation form shall revoke such designation. The
spouse of a married Participant domiciled in a community property
jurisdiction shall join in any designation of Beneficiary or
Beneficiaries other than the spouse.
If a Participant fails to designate a Beneficiary as provided
above or if the beneficiary designation is revoked by divorce, or
otherwise, without execution of a new designation, or if all
designated Beneficiaries predecease the Participant or die prior to
complete distribution of the Participant's benefits, then the
distribution of such benefits shall be made to the Participant's
estate.
If any distribution to a Beneficiary is to be made in
installments, and the primary Beneficiary dies before receiving all
installments, the remaining installments, if any, shall be paid to
the estate of the primary Beneficiary in a lump sum.
XII. AMENDMENT AND TERMINATION OF PLAN
A. Amendment. The Company may at any time amend the Plan in
whole or in part, provided, however, that except as
provided in Article XII.B., no amendment shall act to
reduce the benefits under the Plan payable to any
Participant with respect to any Deferral Amount credited
to the Participant's Deferred Compensation Account prior
to the date of the amendment. Written notice of any
amendments shall be given to each Participant.
B. Termination of Plan
1. Company's Right to Terminate. The Board of
Directors may at any time terminate the Plan.
2. Payments Upon Termination. Upon any termination of
the Plan under this section no additional Deferral
Amounts will be credited to the Participant's
Deferred Compensation Account. The Investment
Units recorded in such Account shall be converted
into dollars pursuant to Article VIII.A. and paid
in a lump sum to the Participant or the
Participant's Beneficiary.
XIII. MISCELLANEOUS
A. Unsecured General Creditor. Participants and their
beneficiaries, heirs, successors, and assigns shall have
no legal or equitable rights, interests, or other claims
in any property or assets of the Company, nor shall they
be beneficiaries of, or have any rights, claims, or
interests in any specified assets of the Company. Any
and all of the Company's assets shall be and remain
general, unpledged, unrestricted assets of the Company.
The Company's obligation under the Plan shall be that of
an unfunded and unsecured promise of Company to pay money
in the future.
B. Obligations to the Company. If a Participant becomes
entitled to a distribution of benefits under the Plan,
and if at such time the Participant has outstanding any
debt, obligation, or other liability representing an
amount owed to the Company, then the Company may offset
such amounts owing it or an affiliate against the amount
of benefits otherwise distributable. Such determination
shall be made by the Board of Directors.
Establishment of this Plan and the participation by any
person shall not be construed to confer any right on the
part of such person to be nominated for reelection, or to
be reelected, to the Board of Directors of the Company.
C. Nonassignability. Neither a Participant nor any other
person shall have any right to commute, sell, assign,
transfer, pledge, anticipate, mortgage, or otherwise
encumber, transfer, hypothecate, or convey in advance of
actual receipt the amounts, if any, payable hereunder, or
any part thereof, which are, and all rights to which are,
expressly declared to be unassignable and nontransfer-
able. No part of the amounts payable shall, prior to
actual payment, be subject to seizure or sequestration
for the payment of any debts, judgments, alimony or
separate maintenance owed by a Participant or any other
person, nor be transferable by operation of law in the
event of a Participant's or any other person's bankruptcy
or insolvency.
D. Protective Provisions. A Participant will cooperate with
the Company by furnishing any and all information
requested by the Company in order to facilitate the
payment of any amounts hereunder. If a Participant
refuses to cooperate, the Company shall have no further
obligation to the Participant under the Plan.
E. Gender, Singular and Plural. Wherever the context so
requires, words in the masculine include the feminine and
words in the feminine include the masculine and the
definition of any term in the singular may include the
plural.
F. Captions. The captions to the articles, sections, and
paragraphs of this Plan are for convenience only and
shall not control or affect the meaning or construction
of any of its provisions.
G. Applicable Law. This Plan shall be construed,
administered and governed in accordance with the laws of
the State of North Dakota.
H. Validity. In the event any provision of this Plan is
held invalid, void, or unenforceable, the same shall not
affect, in any respect whatsoever, the validity of any
other provision of this Plan.
I. Notice. Any notice or filing required or permitted to be
given to the Board of Directors shall be sufficient if
in writing and hand delivered, or sent by registered or
certified mail, to the principal office of the Company,
directed to the attention of the Secretary of the
Company. Such notice shall be deemed given as of the
date of delivery or, if delivery is made by mail, as of
the date shown on the postmark on the receipt for
registration or certification.
MDU RESOURCES GROUP, INC.
NON-EMPLOYEE DIRECTOR STOCK COMPENSATION PLAN
I. Purpose
The purpose of the MDU Resources Group, Inc. Non-Employee
Director Stock Compensation Plan is to provide ownership of the
Company's stock to non-employee members of the Board of Directors
in order to improve the Company's ability to attract and retain
highly qualified individuals to serve as directors of the Company
and to strengthen the commonality of interest between directors and
stockholders.
II. Definitions
When used herein, the following terms shall have the
respective meanings set forth below:
"Agent" means a securities broker-dealer selected by the
Company and registered under the Exchange Act.
"Annual Retainer" means the annual retainer payable by the
Company to Non-Employee Directors and shall include, for
purposes of this Plan, meeting fees, cash retainers and any
other cash compensation payable to Non-Employee Directors by
the Company for services as a Director.
"Annual Meeting of Stockholders" means the annual meeting of
stockholders of the Company at which directors of the Company
are elected.
"Board" or "Board of Directors" means the Board of Directors
of the Company.
"Committee" means a committee whose members meet the
requirements of Section IV(A) hereof, and who are appointed
from time to time by the Board to administer the Plan.
"Common Stock" means the common stock, $3.33 par value, of the
Company.
"Company" means MDU Resources Group, Inc., a Delaware
corporation, and any successor corporation.
"Effective Date" means the date as of which the Plan is
approved by the stockholders of the Company.
"Employee" means any officer or other common law employee of
the Company or of any of its business units or divisions or of
any Subsidiary.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Non-Employee Director" or "Participant" means any person who
is elected or appointed to the Board of Directors of the
Company and who is not an Employee.
"Plan" means the Company's Non-Employee Director Stock
Compensation Plan, adopted by the Board on February 9, 1995,
and approved by the stockholders on April 25, 1995, as it may
be amended from time to time.
"Plan Year" means the period commencing on the Effective Date
of the Plan and ending the next following December 31 and,
thereafter, the calendar year.
"Stock Payment" means that portion of the Annual Retainer to
be paid to Non-Employee Directors in shares of Common Stock
rather than cash for services rendered as a director of the
Company, as provided in Section V hereof, including that
portion of the Stock Payment resulting from any election
specified in Section VI hereof.
"Subsidiary" means any corporation that is a "subsidiary
corporation" of the Company, as that term is defined in
Section 424(f) of the Internal Revenue Code of 1986, as
amended.
III. Shares of Common Stock Subject to the Plan
Subject to Section VII below, the maximum aggregate number of
shares of Common Stock that may be delivered under the Plan is
112,500 shares. The Common Stock to be delivered under the Plan
will be made available from authorized but unissued shares of
Common Stock, treasury stock or shares of Common Stock purchased on
the open market. Shares of Common Stock purchased on the open
market shall be purchased by the Agent in compliance with Rule 10b-6 and
Rule 10b-18 under the Exchange Act to the extent compliance
shall be required. Shares of Common Stock purchased on the open
market by the Agent shall be purchased and held in such manner that
such shares are not returned to the status of treasury stock or
authorized but unissued shares of Common Stock.
IV. Administration
A. The Plan will be administered by a committee appointed by
the Board, consisting of two or more persons who are not eligible
to participate in the Plan. Members of the Committee need not be
members of the Board. The Company shall pay all costs of
administration of the Plan.
B. Subject to and not inconsistent with the express
provisions of the Plan, the Committee has and may exercise such
powers and authority of the Board as may be necessary or
appropriate for the Committee to carry out its functions under the
Plan. Without limiting the generality of the foregoing, the
Committee shall have full power and authority (i) to determine all
questions of fact that may arise under the Plan, (ii) to interpret
the Plan and to make all other determinations necessary or
advisable for the administration of the Plan and (iii) to
prescribe, amend and rescind rules and regulations relating to the
Plan, including, without limitation, any rules which the Committee
determines are necessary or appropriate to ensure that the Company
and the Plan will be able to comply with all applicable provisions
of any federal, state or local law. All interpretations,
determinations and actions by the Committee will be final and
binding upon all persons, including the Company and the
Participants.
V. Determination of Annual Retainer and Stock Payments
A. The Board shall determine the Annual Retainer payable to
all Non-Employee Directors of the Company.
B. Each director who is a Non-Employee Director immediately
following the date of the Company's Annual Meeting of Stockholders
shall receive on the fifteenth business day following the Annual
Meeting a Stock Payment of 450 shares of Common Stock as a portion
of the Annual Retainer payable to such director for the Plan Year
in which such date occurs. Certificates evidencing the shares of
Common Stock constituting Stock Payments shall be registered in the
respective names of the Participants and shall be issued to each
Participant. The cash portion of the Annual Retainer shall be paid
to Non-Employee Directors at such times and in such manner as may
be determined by the Board of Directors.
C. Any director may decline a Stock Payment for any Plan
Year; provided, however, that no cash compensation shall be paid in
lieu thereof. Any director who declines a Stock Payment must do so
in writing prior to the performance of any services as a
Non-Employee Director for the Plan Year to which such Stock Payment
relates.
D. No Non-Employee Director shall be required to forfeit or
otherwise return any shares of Common Stock issued as a Stock
Payment pursuant to the Plan (including any shares of Common Stock
received as a result of an election under Section VI)
notwithstanding any change in status of such Non-Employee Director
which renders him ineligible to continue as a Participant in the
Plan. Any person who is a Non-Employee Director immediately
following the Company's Annual Meeting of Stockholders shall be
entitled to receive a Stock Payment as a portion of the applicable
Annual Retainer.
VI. Election to Increase Amount of Stock Payment
In lieu of receiving the cash portion of the Annual Retainer
for any Plan Year, a Participant may make a written election to
reduce the cash portion of such Annual Retainer by a specified
dollar amount and have such amount applied to purchase additional
shares of Common Stock of the Company. The election shall be made
on a form provided by the Committee and must be returned to the
Committee on or before the last business day of the year prior to
the year in which the election is to be effective. The election
form shall state the amount by which the Participant desires to
reduce the cash portion of the Annual Retainer, which shall be
applied toward the purchase of Common Stock; provided, however,
that no fractional shares may be purchased. Stock to be delivered
to Participants pursuant to this election shall be delivered in
December of each year. Cash in lieu of any fractional share shall
be paid to the Participant. An election shall continue in effect
until changed or revoked by the Participant. No Participant shall
be allowed to change or revoke any election for the then current
year, but may change an election for any subsequent Plan Year. All
shares of Common Stock received pursuant to an election under this
Article VI must be held by a Participant for six months after
receipt thereof.
VII. Adjustment For Changes in Capitalization
If the outstanding shares of Common Stock of the Company are
increased, decreased or exchanged for a different number or kind of
shares or other securities, or if additional shares or new or
different shares or other securities are distributed with respect
to such shares of Common Stock or other securities, through merger,
consolidation, sale of all or substantially all of the property of
the Company, reorganization or recapitalization, reclassification,
stock dividend, stock split, reverse stock split, combinations of
shares, rights offering, distribution of assets or other
distribution with respect to such shares of Common Stock or other
securities or other change in the corporate structure or shares of
Common Stock, the number of shares to be granted annually, the
maximum number of shares and/or the kind of shares that may be
issued under the Plan shall be appropriately adjusted by the
Committee. Any determination by the Committee as to any such
adjustment will be final, binding and conclusive. The maximum
number of shares issuable under the Plan as a result of any such
adjustment shall be rounded down to the nearest whole share.
VIII. Amendment and Termination of Plan
A. The Board will have the power, in its discretion, to
amend, suspend or terminate the Plan at any time; provided,
however, that no amendment which requires stockholder approval in
order for the Plan to continue to comply with Rule 16b-3 under the
Exchange Act, including any successor to such Rule, shall be
effective unless such amendment shall be approved by the requisite
vote of the stockholders of the Company entitled to vote thereon.
B. Notwithstanding the foregoing, any provision of the Plan
that either states the amount and price of securities to be issued
under the Plan and specifies the price and timing of such
issuances, or sets forth a formula that determines the amount,
price and timing of such issuances, shall not be amended more than
once every six months, other than to comport with changes in the
Internal Revenue Code, the Employee Retirement Income Security Act,
or the rules thereunder.
IX. Effective Date and Duration of the Plan
The Plan will become effective upon the Effective Date, and
shall remain in effect, subject to the right of the Board of
Directors to terminate the Plan at any time pursuant to Section
VIII, until all shares subject to the Plan have been purchased or
acquired according to the Plan's provisions.
X. Miscellaneous Provisions
A. Continuation of Directors in Same Status
Nothing in the Plan or any action taken pursuant to the Plan
shall be construed as creating or constituting evidence of any
agreement or understanding, express or implied, that the Company
will retain a Non-Employee Director as a director or in any other
capacity for any period of time or at a particular retainer or
other rate of compensation, as conferring upon any Participant any
legal or other right to continue as a director or in any other
capacity, or as limiting, interfering with or otherwise affecting
the right of the Company to terminate a Participant in his capacity
as a director or otherwise at any time for any reason, with or
without cause, and without regard to the effect that such
termination might have upon him as a Participant under the Plan.
B. Compliance with Government Regulations
Neither the Plan nor the Company shall be obligated to issue
any shares of Common Stock pursuant to the Plan at any time unless
and until all applicable requirements imposed by any federal and
state securities and other laws, rules and regulations, by any
regulatory agencies or by any stock exchanges upon which the Common
Stock may be listed have been fully met. As a condition precedent
to any issuance of shares of Common Stock and delivery of
certificates evidencing such shares pursuant to the Plan, the Board
or the Committee may require a Participant to take any such action
and to make any such covenants, agreements and representations as
the Board or the Committee, as the case may be, in its discretion
deems necessary or advisable to ensure compliance with such
requirements. The Company shall in no event be obligated to
register the shares of Common Stock deliverable under the Plan
pursuant to the Securities Act of 1933, as amended, or to qualify
or register such shares under any securities laws of any state upon
their issuance under the Plan or at any time thereafter, or to take
any other action in order to cause the issuance and delivery of
such shares under the Plan or any subsequent offer, sale or other
transfer of such shares to comply with any such law, regulation or
requirement. Participants are responsible for complying with all
applicable federal and state securities and other laws, rules and
regulations in connection with any offer, sale or other transfer of
the shares of Common Stock issued under the Plan or any interest
therein including, without limitation, compliance with the
registration requirements of the Securities Act of 1933, as amended
(unless an exemption therefrom is available), or with the
provisions of Rule 144 promulgated thereunder, if applicable, or
any successor provisions. Certificates for shares of Common Stock
may be legended as the Committee shall deem appropriate.
C. Nontransferability of Rights
No Participant shall have the right to assign the right to
receive any Stock Payment or any other right or interest under the
Plan, contingent or otherwise, or to cause or permit any
encumbrance, pledge or charge of any nature to be imposed on any
such Stock Payment (prior to the issuance of stock certificates
evidencing such Stock Payment) or any such right or interest.
D. Severability
In the event that any provision of the Plan is held invalid,
void or unenforceable, the same shall not affect, in any respect
whatsoever, the validity of any other provision of the Plan.
E. Governing Law
To the extent not preempted by Federal law, the Plan shall be
governed by the laws of the State of North Dakota.
MDU RESOURCES GROUP, INC.
1997 NON-EMPLOYEE DIRECTOR LONG-TERM INCENTIVE PLAN
Article 1. Establishment, Purpose and Duration
1.1 Establishment of the Plan. MDU Resources Group, Inc., a
Delaware corporation (hereinafter referred to as the "Company"),
hereby establishes an incentive plan to be known as the "MDU
Resources Group, Inc. 1997 Non-Employee Director Long-Term
Incentive Plan" (hereinafter referred to as the "Plan"), as set
forth in this document. The Plan permits the grant of Nonqualified
Stock Options (NQSO), Stock Appreciation Rights (SAR), Restricted
Stock, Performance Units, Performance Shares and other awards.
The Plan shall become effective when approved by the
stockholders at the annual meeting on April 22, 1997, (the
"Effective Date"), and shall remain in effect as provided in
Section 1.3 herein.
1.2 Purpose of the Plan. The purpose of the Plan is to
promote the success and enhance the value of the Company by linking
the personal interests of Participants to those of Company
stockholders and customers. The Plan is further intended to assist
the Company in its ability to motivate, attract and retain highly
qualified individuals to serve as directors of the Company.
1.3 Duration of the Plan. The Plan shall commence on the
Effective Date, as described in Section 1.1 herein, and shall
remain in effect, subject to the right of the Board of Directors to
terminate the Plan at any time pursuant to Article 14 herein, until
all Shares subject to it shall have been purchased or acquired
according to the Plan's provisions.
Article 2. Definitions
Whenever used in the Plan, the following terms shall have the
meanings set forth below and, when such meaning is intended, the
initial letter of the word is capitalized:
2.1 "Award" means, individually or collectively, a grant
under the Plan of NQSOs, SARs, Restricted Stock, Performance Units,
Performance Shares or any other type of award permitted under
Article 10 of the Plan.
2.2 "Award Agreement" means an agreement entered into by each
Participant and the Company, setting forth the terms and provisions
applicable to an Award granted to a Participant under the Plan.
2.3 "Base Value" of an SAR shall have the meaning set forth
in Section 7.1 herein.
2.4 "Board" or "Board of Directors" means the Board of
Directors of the Company.
2.5 "Change in Control" means the earliest of the following
to occur: (a) the public announcement by the Company or by any
person (which shall not include the Company, any subsidiary of the
Company, or any employee benefit plan of the Company or of any
subsidiary of the Company) ("Person") that such Person, who or
which, together with all Affiliates and Associates (within the
meanings ascribed to such terms in the Rule 12b-2 of the General
Rules and Regulations under the Exchange Act) of such Person, shall
be the beneficial owner of twenty percent (20%) or more of the
voting stock of the Company outstanding; (b) the commencement of,
or after the first public announcement of any Person to commence,
a tender or exchange offer the consummation of which would result
in any Person becoming the beneficial owner of voting stock
aggregating thirty percent (30%) or more of the then outstanding
voting stock of the Company; (c) the announcement of any
transaction relating to the Company required to be described
pursuant to the requirements of Item 6(e) of Schedule 14A of
Regulation 14A under the Exchange Act; (d) a proposed change in
constituency of the Board such that, during any period of two (2)
consecutive years, individuals who at the beginning of such period
constitute the Board cease for any reason to constitute at least a
majority thereof, unless the election or nomination for election by
the stockholders of the Company of each new Director was approved
by a vote of at least two-thirds (2/3) of the Directors then still
in office who were members of the Board at the beginning of the
period; (e) the sale or other disposition of all or substantially
all of the assets of Montana-Dakota Utilities Co., other than to a
subsidiary of the Company; or (f) any other event which shall be
deemed by a majority of the Committee to constitute a "change in
control".
2.6 "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
2.7 "Committee" means the Committee, as specified in
Article 3, appointed by the Board to administer the Plan with
respect to Awards.
2.8 "Company" means MDU Resources Group, Inc., a Delaware
corporation, or any successor thereto as provided in Article 15
herein.
2.9 "Director" means any individual who is a member of the
Board of Directors of the Company.
2.10 "Dividend Equivalent" means, with respect to Shares
subject to an Award, a right to be paid an amount equal to
dividends declared on an equal number of outstanding Shares.
2.11 "Employee" means any full-time or regularly-scheduled
part-time employee of the Company or of the Company's Subsidiaries,
who is not covered by any collective bargaining agreement to which
the Company or any of its Subsidiaries is a party.
2.12 "Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time, or any successor act thereto.
2.13 "Exercise Period" means the period during which an SAR or
Option is exercisable, as set forth in the related Award Agreement.
2.14 "Fair Market Value" shall mean the average of the high
and low sale prices as reported in the consolidated transaction
reporting system or, if there is no such sale on the relevant date,
then on the last previous day on which a sale was reported.
2.15 "Freestanding SAR" means an SAR that is granted
independently of any Option.
2.16 "Non-Employee Director" means any person who is elected
or appointed to the Board and who is not an Employee.
2.17 "Nonqualified Stock Option" or "NQSO" means an option to
purchase Shares, granted under Article 6 herein, which is not
intended to be an Incentive Stock Option under Section 422 of the
Code.
2.18 "Option" means a Nonqualified Stock Option.
2.19 "Option Price" means the price at which a Share may be
purchased by a Participant pursuant to an Option, as determined by
the Committee and set forth in the Option Award Agreement.
2.20 "Participant" means a Non-Employee Director who has
outstanding an Award granted under the Plan.
2.21 "Performance Unit" means an Award granted to a
Participant, as described in Article 9 herein.
2.22 "Performance Share" means an Award granted to a
Participant, as described in Article 9 herein.
2.23 "Period of Restriction" means the period during which the
transfer of Restricted Stock is limited in some way, as provided in
Article 8 herein.
2.24 "Person" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Exchange Act, as used in Sections 13(d) and
14(d) thereof, including usage in the definition of a "group" in
Section 13(d) thereof.
2.25 "Restricted Stock" means an Award of Shares granted to a
Participant pursuant to Article 8 herein.
2.26 "Shares" means the shares of common stock of the Company.
2.27 "Stock Appreciation Right" or "SAR" means a right,
granted alone or in connection with a related Option, designated as
an SAR, to receive a payment on the day the right is exercised,
pursuant to the terms of Article 7 herein. Each SAR shall be
denominated in terms of one Share.
2.28 "Subsidiary" means any corporation that is a "subsidiary
corporation" of the Company as that term is defined in
Section 424(f) of the Code.
2.29 "Tandem SAR" means an SAR that is granted in connection
with a related Option, the exercise of which shall require
forfeiture of the right to purchase a Share under the related
Option (and when a Share is purchased under the Option, the Tandem
SAR shall be similarly canceled).
Article 3. Administration
3.1 The Committee. The Plan shall be administered by any
committee appointed by the Board or by the Board of Directors (the
"Committee").
3.2 Authority of the Committee. The Committee shall have
full power except as limited by law, the Articles of Incorporation
and the Bylaws of the Company, subject to such other restricting
limitations or directions as may be imposed by the Board and
subject to the provisions herein, to determine the size and types
of Awards; to determine the terms and conditions of such Awards in
a manner consistent with the Plan; to construe and interpret the
Plan and any agreement or instrument entered into under the Plan;
to establish, amend or waive rules and regulations for the Plan's
administration; and (subject to the provisions of Article 14
herein) to amend the terms and conditions of any outstanding Award.
Further, the Committee shall make all other determinations which
may be necessary or advisable for the administration of the Plan.
As permitted by law, the Committee may delegate its authorities as
identified hereunder.
3.3 Restrictions on Share Transferability. The Committee may
impose such restrictions on any Shares acquired pursuant to Awards
under the Plan as it may deem advisable, including, without
limitation, restrictions to comply with applicable Federal
securities laws, with the requirements of any stock exchange or
market upon which such Shares are then listed and/or traded and
with any blue sky or state securities laws applicable to such
Shares.
3.4 Approval. The Committee or the Board shall approve all
Awards made under the Plan and all elections made by Participants,
prior to their effective date, to the extent necessary to comply
with Rule 16b-3 under the Exchange Act.
3.5 Decisions Binding. All determinations and decisions made
by the Committee pursuant to the provisions of the Plan and all
related orders or resolutions of the Board shall be final,
conclusive and binding on all persons, including the Company, its
stockholders, Participants and their estates and beneficiaries.
3.6 Costs. The Company shall pay all costs of administration
of the Plan.
Article 4. Shares Subject to the Plan
4.1 Number of Shares. Subject to Section 4.2 herein, the
maximum number of Shares available for grant under the Plan shall
be 300,000. Shares underlying lapsed or forfeited Awards, or
Awards that are not paid in Shares, may be reused for other Awards.
Shares granted pursuant to the Plan may be (i) authorized but
unissued Shares of Common Stock, (ii) treasury shares, or (iii)
shares purchased on the open market.
4.2 Adjustments in Authorized Shares. In the event of any
merger, reorganization, consolidation, recapitalization,
separation, liquidation, stock dividend, split-up, share
combination or other change in the corporate structure of the
Company affecting the Shares, such adjustment shall be made in the
number and class of Shares which may be delivered under the Plan,
and in the number and class of and/or price of Shares subject to
outstanding Awards granted under the Plan, as may be determined to
be appropriate and equitable by the Committee, in its sole
discretion, to prevent dilution or enlargement of rights; provided,
however, that the number of Shares subject to any Award shall
always be a whole number.
Article 5. Eligibility and Participation
5.1 Eligibility. Persons eligible to participate in the Plan
are any persons elected or appointed to the Board who are not
Employees.
5.2 Actual Participation. Subject to the provisions of the
Plan, the Committee may, from time to time, select from all
eligible Non-Employee Directors those to whom Awards shall be
granted and shall determine the nature and amount of each Award.
Article 6. Stock Options
6.1 Grant of Options. Subject to the terms and conditions of
the Plan, Options may be granted to a Non-Employee Director at any
time and from time to time, as shall be determined by the
Committee.
The Committee shall have complete discretion in determining
the number of Shares subject to Options granted to each Participant
(subject to Article 4 herein) and, consistent with the provisions
of the Plan, in determining the terms and conditions pertaining to
such Options.
6.2 Option Award Agreement. Each Option grant shall be
evidenced by an Option Award Agreement that shall specify the
Option Price, the term of the Option, the number of Shares to which
the Option pertains, the Exercise Period and such other provisions
as the Committee shall determine, including but not limited to any
rights to Dividend Equivalents.
6.3 Exercise of and Payment for Options. Options granted
under the Plan shall be exercisable at such times and be subject to
such restrictions and conditions as the Committee shall in each
instance approve.
A Participant may exercise an Option at any time during the
Exercise Period. Options shall be exercised by the delivery of a
written notice of exercise to the Company or its designee, setting
forth the number of Shares with respect to which the Option is to
be exercised, accompanied by provisions for full payment for the
Shares.
The Option Price upon exercise of any Option shall be payable
either: (a) in cash or its equivalent, (b) by tendering previously
acquired Shares having an aggregate Fair Market Value at the time
of exercise equal to the total Option Price (provided that the
Shares which are tendered must have been held by the Participant
for at least six (6) months prior to their tender to satisfy the
Option Price), (c) by Share withholding, (d) by cashless exercise
or (e) by a combination of (a),(b),(c), and/or (d).
As soon as practicable after receipt of a written notification
of exercise of an Option and provisions for full payment therefor,
there shall be delivered to the Participant, in the Participant's
name, Share certificates in an appropriate amount based upon the
number of Shares purchased under the Option(s).
6.4 Termination of Director Status. Each Option Award
Agreement shall set forth the extent to which the Participant shall
have the right to exercise the Option following termination of the
Participant's position on the Board of the Company. Such
provisions shall be determined in the sole discretion of the
Committee, shall be included in the Option Award Agreement entered
into with Participants, need not be uniform among all Options
granted pursuant to the Plan or among Participants and may reflect
distinctions based on the reasons for termination of director
status.
6.5 Transferability of Options. Except as otherwise
determined by the Committee and set forth in the Option Award
Agreement, no Option granted under the Plan may be sold,
transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and
distribution, and all Options granted to a Participant under the
Plan shall be exercisable during his or her lifetime only by such
Participant or his or her legal representative.
Article 7. Stock Appreciation Rights
7.1 Grant of SARs. Subject to the terms and conditions of
the Plan, an SAR may be granted to a Non-Employee Director at any
time and from time to time as shall be determined by the Committee.
The Committee may grant Freestanding SARs, Tandem SARs or any
combination of these forms of SAR.
The Committee shall have complete discretion in determining
the number of SARs granted to each Participant (subject to
Article 4 herein) and, consistent with the provisions of the Plan,
in determining the terms and conditions pertaining to such SARs.
The Base Value of a Freestanding SAR shall equal the Fair
Market Value of a Share on the date of grant of the SAR. The Base
Value of Tandem SARs shall equal the Option Price of the related
Option.
7.2 SAR Award Agreement. Each SAR grant shall be evidenced
by an SAR Award Agreement that shall specify the number of SARs
granted, the Base Value, the term of the SAR, the Exercise Period
and such other provisions as the Committee shall determine.
7.3 Exercise and Payment of SARs. Tandem SARs may be
exercised for all or part of the Shares subject to the related
Option upon the surrender of the right to exercise the equivalent
portion of the related Option. A Tandem SAR may be exercised only
with respect to the Shares for which its related Option is then
exercisable.
Freestanding SARs may be exercised upon whatever terms and
conditions the Committee, in its sole discretion, imposes upon
them.
A Participant may exercise an SAR at any time during the
Exercise Period. SARs shall be exercised by the delivery of a
written notice of exercise to the Company, setting forth the number
of SARs being exercised. Upon exercise of an SAR, a Participant
shall be entitled to receive payment from the Company in an amount
equal to the product of:
(a) the excess of (i) the Fair Market Value of a Share on the
date of exercise over (ii) the Base Value multiplied by
(b) the number of Shares with respect to which the SAR is
exercised.
At the sole discretion of the Committee, the payment to the
Participant upon SAR exercise may be in cash, in Shares of
equivalent value, or in some combination thereof.
7.4 Termination of Director Status. Each SAR Award Agreement
shall set forth the extent to which the Participant shall have the
right to exercise the SAR following termination of the
Participant's position on the Board of the Company. Such
provisions shall be determined in the sole discretion of the
Committee, shall be included in the SAR Award Agreement entered
into with Participants, need not be uniform among all SARs granted
pursuant to the Plan or among Participants and may reflect
distinctions based on the reasons for termination of director
status.
7.5 Transferability of SARs. Except as otherwise determined
by the Committee and set forth in the SAR Award Agreement, no SAR
granted under the Plan may be sold, transferred, pledged, assigned,
or otherwise alienated or hypothecated, other than by will or by
the laws of descent and distribution, and all SARs granted to a
Participant under the Plan shall be exercisable during his or her
lifetime only by such Participant or his or her legal
representative.
Article 8. Restricted Stock
8.1 Grant of Restricted Stock. Subject to the terms and
conditions of the Plan, Restricted Stock may be granted to a Non-
Employee Director at any time and from time to time, as shall be
determined by the Committee.
The Committee shall have complete discretion in determining
the number of shares of Restricted Stock granted to each
Participant (subject to Article 4 herein) and, consistent with the
provisions of the Plan, in determining the terms and conditions
pertaining to such Restricted Stock.
8.2 Restricted Stock Award Agreement. Each Restricted Stock
grant shall be evidenced by a Restricted Stock Award Agreement that
shall specify the Period or Periods of Restriction, the number of
Restricted Stock Shares granted and such other provisions as the
Committee shall determine.
8.3 Transferability. Restricted Stock granted hereunder may
not be sold, transferred, pledged, assigned, or otherwise alienated
or hypothecated until the end of the applicable Period of
Restriction established by the Committee and specified in the
Restricted Stock Award Agreement. All rights with respect to the
Restricted Stock granted to a Participant under the Plan shall be
available during his or her lifetime only to such Participant or
his or her legal representative.
8.4 Certificate Legend. Each certificate representing
Restricted Stock granted pursuant to the Plan may bear
a legend substantially as follows:
"The sale or other transfer of the shares of stock
represented by this certificate, whether voluntary,
involuntary or by operation of law, is subject to certain
restrictions on transfer as set forth in MDU Resources
Group, Inc. 1997 Non-Employee Director Long-Term
Incentive Plan, and in a Restricted Stock Award
Agreement. A copy of such Plan and such Agreement may be
obtained from MDU Resources Group, Inc."
The Company shall have the right to retain the certificates
representing Restricted Stock in the Company's possession until
such time as all restrictions applicable to such Shares have been
satisfied.
8.5 Removal of Restrictions. Restricted Stock shall become
freely transferable by the Participant after the last day of the
Period of Restriction applicable thereto. Once Restricted Stock is
released from the restrictions, the Participant shall be entitled
to have the legend referred to in Section 8.4 removed from his or
her stock certificate.
8.6 Voting Rights. During the Period of Restriction,
Participants holding Restricted Stock may exercise full voting
rights with respect to those Shares.
8.7 Dividends and Other Distributions. Subject to the
Committee's right to determine otherwise at the time of grant,
during the Period of Restriction, Participants holding Restricted
Stock shall receive all regular cash dividends paid with respect to
all Shares while they are so held. All other distributions paid
with respect to such Restricted Stock shall be credited to
Participants subject to the same restrictions on transferability
and forfeitability as the Restricted Stock with respect to which
they were paid and shall be paid to the Participant within forty-
five (45) days following the full vesting of the Restricted Stock
with respect to which such distributions were made.
8.8 Termination of Director Status. Each Restricted Stock
Award Agreement shall set forth the extent to which the Participant
shall have the right to receive unvested Restricted Stock following
termination of the Participant's position on the Board of the
Company. Such provisions shall be determined in the sole
discretion of the Committee, shall be included in the Restricted
Stock Award Agreement entered into with Participants, need not be
uniform among all grants of Restricted Stock or among Participants
and may reflect distinctions based on the reasons for termination
of director status.
Article 9. Performance Units and Performance Shares
9.1 Grant of Performance Units and Performance Shares.
Subject to the terms and conditions of the Plan, Performance Units
and/or Performance Shares may be granted to a Non-Employee Director
at any time and from time to time, as shall be determined by the
Committee.
The Committee shall have complete discretion in determining
the number of Performance Units and/or Performance Shares granted
to each Participant (subject to Article 4 herein) and, consistent
with the provisions of the Plan, in determining the terms and
conditions pertaining to such Awards.
9.2 Performance Unit/Performance Share Award Agreement. Each
grant of Performance Units and/or Performance Shares shall be
evidenced by a Performance Unit and/or Performance Share Award
Agreement that shall specify the number of Performance Units and/or
Performance Shares granted, the initial value (if applicable), the
Performance Period, the performance goals and such other provisions
as the Committee shall determine, including but not limited to any
rights to Dividend Equivalents.
9.3 Value of Performance Units/Performance Shares. Each
Performance Unit shall have an initial value that is established by
the Committee at the time of grant. The value of a Performance
Share shall be equal to the Fair Market Value of a Share. The
Committee shall set performance goals in its discretion which,
depending on the extent to which they are met, will determine the
number and/or value of Performance Units/Performance Shares that
will be paid out to the Participants. The time period during which
the performance goals must be met shall be called a "Performance
Period."
9.4 Earning of Performance Units/Performance Shares. After
the applicable Performance Period has ended, the holder of
Performance Units/Performance Shares shall be entitled to receive
a payout with respect to the Performance Units/Performance Shares
earned by the Participant over the Performance Period, to be
determined as a function of the extent to which the corresponding
performance goals have been achieved.
9.5 Form and Timing of Payment of Performance
Units/Performance Shares. Payment of earned Performance
Units/Performance Shares shall be made following the close of the
applicable Performance Period. The Committee, in its sole
discretion, may pay earned Performance Units/Performance Shares in
cash or in Shares (or in a combination thereof), which have an
aggregate Fair Market Value equal to the value of the earned
Performance Units/Performance Shares at the close of the applicable
Performance Period. Such Shares may be granted subject to any
restrictions deemed appropriate by the Committee.
9.6 Termination of Director Status. Each Performance
Unit/Performance Share Award Agreement shall set forth the extent
to which the Participant shall have the right to receive a
Performance Unit/Performance Share payment following termination of
the Participant's position on the Board of the Company during a
Performance Period. Such provisions shall be determined in the
sole discretion of the Committee, shall be included in the Award
Agreement entered into with Participants, need not be uniform among
all grants of Performance Units/Performance Shares or among
Participants and may reflect distinctions based on reasons for
termination of director status.
9.7 Transferability. Except as otherwise determined by the
Committee and set forth in the Performance Unit/Performance Share
Award Agreement, Performance Units/Performance Shares may not be
sold, transferred, pledged, assigned or otherwise alienated or
hypothecated, other than by will or by the laws of descent and
distribution, and a Participant's rights with respect to
Performance Units/Performance Shares granted under the Plan shall
be available during the Participant's lifetime only to such
Participant or the Participant's legal representative.
Article 10. Other Awards
The Committee shall have the right to grant other Awards which
may include, without limitation, the grant of Shares based on
certain conditions and the payment of Shares in lieu of cash, or
cash based on performance criteria established by the Committee.
Payment under or settlement of any such Awards shall be made in
such manner and at such times as the Committee may determine.
Article 11. Beneficiary Designation
Each Participant under the Plan may, from time to time, name
any beneficiary or beneficiaries (who may be named contingently or
successively) to whom any benefit under the Plan is to be paid in
case of his or her death before he or she receives any or all of
such benefit. Each such designation shall revoke all prior
designations by the same Participant, shall be in a form prescribed
by the Company, and will be effective only when filed by the
Participant in writing with the Company during the Participant's
lifetime. In the absence of any such designation, benefits
remaining unpaid at the Participant's death shall be paid to the
Participant's estate.
The spouse of a married Participant domiciled in a community
property jurisdiction shall join in any designation of beneficiary
or beneficiaries other than the spouse.
Article 12. Deferrals
The Committee may permit a Participant to defer the
Participant's receipt of the payment of cash or the delivery of
Shares that would otherwise be due to such Participant under the
Plan. If any such deferral election is permitted, the Committee
shall, in its sole discretion, establish rules and procedures for
such payment deferrals.
Article 13. Change in Control
The terms of this Article 13 shall immediately become
operative, without further action or consent by any person or
entity, upon a Change in Control, and once operative shall
supersede and take control over any other provisions of this Plan.
Upon a Change in Control
(a) Any and all Options and SARs granted hereunder shall
become immediately exercisable;
(b) Any restriction periods and restrictions imposed on
Restricted Shares shall be deemed to have expired and
such Restricted Shares shall become immediately vested in
full; and
(c) The target payout opportunity attainable under all
outstanding Awards of Performance Units, Performance
Shares and other Awards shall be deemed to have been
fully earned for the entire Performance Period(s) as of
the effective date of the Change in Control. The vesting
of all Awards denominated in Shares shall be accelerated
as of the effective date of the Change in Control, and
there shall be paid out in cash to Participants
immediately following the effective date of the Change in
Control the full amount of the targeted cash payout
opportunities associated with outstanding cash-based
Awards.
Article 14. Amendment, Modification and Termination
14.1 Amendment, Modification and Termination. The Board may,
at any time and from time to time, alter, amend, suspend or
terminate the Plan in whole or in part.
14.2 Awards Previously Granted. No termination, amendment or
modification of the Plan shall adversely affect in any material way
any Award previously granted under the Plan, without the written
consent of the Participant holding such Award, unless such
termination, modification or amendment is required by applicable
law.
Article 15. Successors
All obligations of the Company under the Plan, with respect to
Awards granted hereunder, shall be binding on any successor to the
Company, whether the existence of such successor is the result of
a direct or indirect purchase, merger, consolidation or otherwise,
of all or substantially all of the business and/or assets of the
Company.
Article 16. Legal Construction
16.1 Gender and Number. Except where otherwise indicated by
the context, any masculine term used herein also shall include the
feminine, the plural shall include the singular and the singular
shall include the plural.
16.2 Severability. In the event any provision of the Plan
shall be held illegal or invalid for any reason, the illegality or
invalidity shall not affect the remaining parts of the Plan, and
the Plan shall be construed and enforced as if the illegal or
invalid provision had not been included.
16.3 Requirements of Law. The granting of Awards and the
issuance of Shares under the Plan shall be subject to all
applicable laws, rules and regulations, and to such approvals by
any governmental agencies or national securities exchanges as may
be required.
16.4 Governing Law. To the extent not preempted by Federal
law, the Plan, and all agreements hereunder, shall be construed in
accordance with, and governed by, the laws of the State of
Delaware.
MDU RESOURCES GROUP, INC.
1997 EXECUTIVE LONG-TERM INCENTIVE PLAN
Article 1. Establishment, Purpose and Duration
1.1 Establishment of the Plan. MDU Resources Group, Inc., a
Delaware corporation (hereinafter referred to as the "Company"),
hereby establishes an incentive compensation plan to be known as
the "MDU Resources Group, Inc. 1997 Executive Long-Term Incentive
Plan" (hereinafter referred to as the "Plan"), as set forth in this
document. The Plan permits the grant of Nonqualified Stock Options
(NQSO), Incentive Stock Options (ISO), Stock Appreciation Rights
(SAR), Restricted Stock, Performance Units, Performance Shares and
other awards.
The Plan shall become effective when approved by the
stockholders at the annual meeting on April 22, 1997 (the
"Effective Date"), and shall remain in effect as provided in
Section 1.3 herein.
1.2 Purpose of the Plan. The purpose of the Plan is to
promote the success and enhance the value of the Company by linking
the personal interests of Participants to those of Company
stockholders and customers.
The Plan is further intended to provide flexibility to the
Company in its ability to motivate, attract and retain the services
of Participants upon whose judgment, interest and special effort
the successful conduct of its operations is largely dependent.
1.3 Duration of the Plan. The Plan shall commence on the
Effective Date, as described in Section 1.1 herein, and shall
remain in effect, subject to the right of the Board of Directors to
terminate the Plan at any time pursuant to Article 15 herein, until
all Shares subject to it shall have been purchased or acquired
according to the Plan's provisions. However, in no event may an
Award be made under the Plan on or after the day immediately
preceding the tenth anniversary of the Effective Date.
Article 2. Definitions
Whenever used in the Plan, the following terms shall have the
meanings set forth below and, when such meaning is intended, the
initial letter of the word is capitalized:
2.1 "Award" means, individually or collectively, a grant
under the Plan of NQSOs, ISOs, SARs, Restricted Stock, Performance
Units, Performance Shares or any other type of award permitted
under Article 10 of the Plan.
2.2 "Award Agreement" means an agreement entered into by each
Participant and the Company, setting forth the terms and provisions
applicable to an Award granted to a Participant under the Plan.
2.3 "Base Value" of an SAR shall have the meaning set forth
in Section 7.1 herein.
2.4 "Board" or "Board of Directors" means the Board of
Directors of the Company.
2.5 "Change in Control" means the earliest of the following
to occur: (a) the public announcement by the Company or by any
person (which shall not include the Company, any subsidiary of the
Company, or any employee benefit plan of the Company or of any
subsidiary of the Company) ("Person") that such Person, who or
which, together with all Affiliates and Associates (within the
meanings ascribed to such terms in the Rule 12b-2 of the General
Rules and Regulations under the Exchange Act) of such Person, shall
be the beneficial owner of twenty percent (20%) or more of the
voting stock of the Company outstanding; (b) the commencement of,
or after the first public announcement of any Person to commence,
a tender or exchange offer the consummation of which would result
in any Person becoming the beneficial owner of voting stock
aggregating thirty percent (30%) or more of the then outstanding
voting stock of the Company; (c) the announcement of any
transaction relating to the Company required to be described
pursuant to the requirements of Item 6(e) of Schedule 14A of
Regulation 14A under the Exchange Act; (d) a proposed change in
constituency of the Board such that, during any period of two (2)
consecutive years, individuals who at the beginning of such period
constitute the Board cease for any reason to constitute at least a
majority thereof, unless the election or nomination for election by
the stockholders of the Company of each new Director was approved
by a vote of at least two-thirds (2/3) of the Directors then still
in office who were members of the Board at the beginning of the
period; (e) the sale or other disposition of all or substantially
all of the assets of Montana-Dakota Utilities Co., other than to a
subsidiary of the Company; or (f) any other event which shall be
deemed by a majority of the Compensation Committee to constitute a
"change in control".
2.6 "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
2.7 "Committee" means the Committee, as specified in
Article 3, appointed by the Board to administer the Plan with
respect to Awards.
2.8 "Company" means MDU Resources Group, Inc., a Delaware
corporation, or any successor thereto as provided in Article 17
herein.
2.9 "Director" means any individual who is a member of the
Board of Directors of the Company.
2.10 "Disability" means "permanent and total disability" as
defined under Section 22(e)(3)of the Code.
2.11 "Dividend Equivalent" means, with respect to Shares
subject to an Award, a right to be paid an amount equal to
dividends declared on an equal number of outstanding Shares.
2.12 "Eligible Employee" means an Employee who is eligible to
participate in the Plan, as set forth in Section 5.1 herein.
2.13 "Employee" means any full-time or regularly-scheduled
part-time employee of the Company or of the Company's Subsidiaries,
who is not covered by any collective bargaining agreement to which
the Company or any of its Subsidiaries is a party. Directors who
are not otherwise employed by the Company shall not be considered
Employees for purposes of the Plan. For purposes of the Plan,
transfer of employment of a Participant between the Company and any
one of its Subsidiaries (or between Subsidiaries) shall not be
deemed a termination of employment.
2.14 "Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time, or any successor act thereto.
2.15 "Exercise Period" means the period during which an SAR or
Option is exercisable, as set forth in the related Award Agreement.
2.16 "Fair Market Value" shall mean the average of the high
and low sale prices as reported in the consolidated transaction
reporting system or, if there is no such sale on the relevant date,
then on the last previous day on which a sale was reported.
2.17 "Freestanding SAR" means an SAR that is granted
independently of any Option.
2.18 "Incentive Stock Option" or "ISO" means an option to
purchase Shares, granted under Article 6 herein, which is
designated as an Incentive Stock Option and satisfies the
requirements of Section 422 of the Code.
2.19 "Nonqualified Stock Option" or "NQSO" means an option to
purchase Shares, granted under Article 6 herein, which is not
intended to be an Incentive Stock Option under Section 422 of the
Code.
2.20 "Option" means an Incentive Stock Option or a
Nonqualified Stock Option.
2.21 "Option Price" means the price at which a Share may be
purchased by a Participant pursuant to an Option, as determined by
the Committee and set forth in the Option Award Agreement.
2.22 "Participant" means an Employee of the Company who has
outstanding an Award granted under the Plan.
2.23 "Performance Unit" means an Award granted to an Employee,
as described in Article 9 herein.
2.24 "Performance Share" means an Award granted to an
Employee, as described in Article 9 herein.
2.25 "Period of Restriction" means the period during which the
transfer of Restricted Stock is limited in some way, as provided in
Article 8 herein.
2.26 "Person" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Exchange Act, as used in Sections 13(d) and
14(d) thereof, including usage in the definition of a "group" in
Section 13(d) thereof.
2.27 "Restricted Stock" means an Award of Shares granted to a
Participant pursuant to Article 8 herein.
2.28 "Shares" means the shares of common stock of the Company.
2.29 "Stock Appreciation Right" or "SAR" means a right,
granted alone or in connection with a related Option, designated as
an SAR, to receive a payment on the day the right is exercised,
pursuant to the terms of Article 7 herein. Each SAR shall be
denominated in terms of one Share.
2.30 "Subsidiary" means any corporation that is a "subsidiary
corporation" of the Company as that term is defined in
Section 424(f) of the Code.
2.31 "Tandem SAR" means an SAR that is granted in connection
with a related Option, the exercise of which shall require
forfeiture of the right to purchase a Share under the related
Option (and when a Share is purchased under the Option, the Tandem
SAR shall be similarly canceled).
Article 3. Administration
3.1 The Committee. The Plan shall be administered by the
Compensation Committee of the Board, or by any other Committee
appointed by the Board. The members of the Committee shall be
appointed from time to time by, and shall serve at the discretion
of, the Board of Directors.
3.2 Authority of the Committee. The Committee shall have
full power except as limited by law, the Articles of Incorporation
and the Bylaws of the Company, subject to such other restricting
limitations or directions as may be imposed by the Board and
subject to the provisions herein, to determine the size and types
of Awards; to determine the terms and conditions of such Awards in
a manner consistent with the Plan; to construe and interpret the
Plan and any agreement or instrument entered into under the Plan;
to establish, amend or waive rules and regulations for the Plan's
administration; and (subject to the provisions of Article 15
herein) to amend the terms and conditions of any outstanding Award.
Further, the Committee shall make all other determinations which
may be necessary or advisable for the administration of the Plan.
As permitted by law, the Committee may delegate its authorities as
identified hereunder.
3.3 Restrictions on Share Transferability. The Committee may
impose such restrictions on any Shares acquired pursuant to Awards
under the Plan as it may deem advisable, including, without
limitation, restrictions to comply with applicable Federal
securities laws, with the requirements of any stock exchange or
market upon which such Shares are then listed and/or traded and
with any blue sky or state securities laws applicable to such
Shares.
3.4 Approval. The Board or the Committee shall approve all
Awards made under the Plan and all elections made by Participants,
prior to their effective date, to the extent necessary to comply
with Rule 16b-3 under the Exchange Act.
3.5 Decisions Binding. All determinations and decisions made
by the Committee pursuant to the provisions of the Plan and all
related orders or resolutions of the Board shall be final,
conclusive and binding on all persons, including the Company, its
stockholders, Employees, Participants and their estates and
beneficiaries.
3.6 Costs. The Company shall pay all costs of administration
of the Plan.
Article 4. Shares Subject to the Plan
4.1 Number of Shares. Subject to Section 4.2 herein, the
maximum number of Shares available for grant under the Plan shall
be 1,800,000. Shares underlying lapsed or forfeited Awards, or
Awards that are not paid in Shares, may be reused for other Awards.
Shares granted pursuant to the Plan may be (i) authorized but
unissued Shares of Common Stock, (ii) treasury shares, or (iii)
shares purchased on the open market.
4.2 Adjustments in Authorized Shares. In the event of any
merger, reorganization, consolidation, recapitalization,
separation, liquidation, stock dividend, split-up, share
combination or other change in the corporate structure of the
Company affecting the Shares, such adjustment shall be made in the
number and class of Shares which may be delivered under the Plan,
and in the number and class of and/or price of Shares subject to
outstanding Awards granted under the Plan, as may be determined to
be appropriate and equitable by the Committee, in its sole
discretion, to prevent dilution or enlargement of rights; provided,
however, that the number of Shares subject to any Award shall
always be a whole number. Notwithstanding the foregoing, (i) each
such adjustment with respect to an Incentive Stock Option shall
comply with the rules of Section 424(a) of the Code and (ii) in no
event shall any adjustment be made which would render any Incentive
Stock Option granted hereunder to be other than an incentive stock
option for purposes of Section 422 of the Code.
Article 5. Eligibility and Participation
5.1 Eligibility. Persons eligible to participate in the Plan
include all officers and key employees of the Company and its
Subsidiaries, as determined by the Committee, including Employees
who are members of the Board, but excluding Directors who are not
Employees.
5.2 Actual Participation. Subject to the provisions of the
Plan, the Committee may, from time to time, select from all
eligible Employees those to whom Awards shall be granted and shall
determine the nature and amount of each Award.
Article 6. Stock Options
6.1 Grant of Options. Subject to the terms and conditions of
the Plan, Options may be granted to an Eligible Employee at any
time and from time to time, as shall be determined by the
Committee.
The Committee shall have complete discretion in determining
the number of Shares subject to Options granted to each Participant
(subject to Article 4 herein) and, consistent with the provisions
of the Plan, in determining the terms and conditions pertaining to
such Options. The Committee may grant ISOs, NQSOs, or a
combination thereof.
6.2 Option Award Agreement. Each Option grant shall be
evidenced by an Option Award Agreement that shall specify the
Option Price, the term of the Option, the number of Shares to which
the Option pertains, the Exercise Period and such other provisions
as the Committee shall determine, including but not limited to any
rights to Dividend Equivalents. The Option Award Agreement shall
also specify whether the Option is intended to be an ISO or an
NQSO.
The Option Price for each Share purchasable under any
Incentive Stock Option granted hereunder shall be not less than one
hundred percent (100%) of the Fair Market Value per Share at the
date the Option is granted; and provided, further, that in the case
of an Incentive Stock Option granted to a person who, at the time
such Incentive Stock Option is granted, owns shares of stock of the
Company or of any Subsidiary which possess more than ten percent
(10%) of the total combined voting power of all classes of shares
of stock of the Company or of any Subsidiary, the Option Price for
each Share shall be not less than one hundred ten percent (110%) of
the Fair Market Value per Share at the date the Option is granted.
The Option Price will be subject to adjustment in accordance with
the provisions of Section 4.2 of the Plan.
No Incentive Stock Option by its terms shall be exercisable
after the expiration of ten (10) years from the date of grant of
the Option; provided, however, in the case of an Incentive Stock
Option granted to a person who, at the time such Option is granted,
owns shares of stock of the Company or of any Subsidiary possessing
more than ten percent (10%) of the total combined voting power of
all classes of shares of stock of the Company or of any Subsidiary,
such Option shall not be exercisable after the expiration of five
(5) years from the date such Option is granted.
6.3 Exercise of and Payment for Options. Options granted
under the Plan shall be exercisable at such times and be subject to
such restrictions and conditions as the Committee shall in each
instance approve.
A Participant may exercise an Option at any time during the
Exercise Period. Options shall be exercised by the delivery of a
written notice of exercise to the Company or its designee, setting
forth the number of Shares with respect to which the Option is to
be exercised, accompanied by provisions for full payment for the
Shares.
The Option Price upon exercise of any Option shall be payable
either: (a) in cash or its equivalent, (b) by tendering previously
acquired Shares having an aggregate Fair Market Value at the time
of exercise equal to the total Option Price (provided that the
Shares which are tendered must have been held by the Participant
for at least six (6) months prior to their tender to satisfy the
Option Price), (c) by share withholding, (d) by cashless exercise
or (e) by a combination of (a),(b),(c), and/or (d).
As soon as practicable after receipt of a written notification
of exercise of an Option and provisions for full payment therefor,
there shall be delivered to the Participant, in the Participant's
name, Share certificates in an appropriate amount based upon the
number of Shares purchased under the Option(s).
6.4 Termination of Employment. Each Option Award Agreement
shall set forth the extent to which the Participant shall have the
right to exercise the Option following termination of the
Participant's employment with the Company and its Subsidiaries.
Such provisions shall be determined in the sole discretion of the
Committee (subject to applicable law), shall be included in the
Option Award Agreement entered into with Participants, need not be
uniform among all Options granted pursuant to the Plan or among
Participants and may reflect distinctions based on the reasons for
termination of employment. If the employment of a Participant by
the Company or by any Subsidiary is terminated for any reason other
than death, any Incentive Stock Option granted to such Participant
may not be exercised later than three (3) months (one (1) year in
the case of termination due to Disability) after the date of such
termination of employment.
6.5 Transferability of Options. Except as otherwise
determined by the Committee and set forth in the Option Award
Agreement, no Option granted under the Plan may be sold,
transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and
distribution, and all Incentive Stock Options granted to a
Participant under the Plan shall be exercisable during his or her
lifetime only by such Participant.
Article 7. Stock Appreciation Rights
7.1 Grant of SARs. Subject to the terms and conditions of
the Plan, an SAR may be granted to an Eligible Employee at any time
and from time to time as shall be determined by the Committee. The
Committee may grant Freestanding SARs, Tandem SARs or any
combination of these forms of SAR.
The Committee shall have complete discretion in determining
the number of SARs granted to each Participant (subject to
Article 4 herein) and, consistent with the provisions of the Plan,
in determining the terms and conditions pertaining to such SARs.
The Base Value of a Freestanding SAR shall equal the Fair
Market Value of a Share on the date of grant of the SAR. The Base
Value of Tandem SARs shall equal the Option Price of the related
Option.
7.2 SAR Award Agreement. Each SAR grant shall be evidenced
by an SAR Award Agreement that shall specify the number of SARs
granted, the Base Value, the term of the SAR, the Exercise Period
and such other provisions as the Committee shall determine.
7.3 Exercise and Payment of SARs. Tandem SARs may be
exercised for all or part of the Shares subject to the related
Option upon the surrender of the right to exercise the equivalent
portion of the related Option. A Tandem SAR may be exercised only
with respect to the Shares for which its related Option is then
exercisable.
Notwithstanding any other provision of the Plan to the
contrary, with respect to a Tandem SAR granted in connection with
an ISO: (i) the Tandem SAR will expire no later than the expiration
of the underlying ISO; (ii) the value of the payout with respect to
the Tandem SAR may be for no more than one hundred percent (100%)
of the difference between the Option Price of the underlying ISO
and the Fair Market Value of the Shares subject to the underlying
ISO at the time the Tandem SAR is exercised; and (iii) the Tandem
SAR may be exercised only when the Fair Market Value of the Shares
subject to the ISO exceeds the Option Price of the ISO.
Freestanding SARs may be exercised upon whatever terms and
conditions the Committee, in its sole discretion, imposes upon
them.
A Participant may exercise an SAR at any time during the
Exercise Period. SARs shall be exercised by the delivery of a
written notice of exercise to the Company, setting forth the number
of SARs being exercised. Upon exercise of an SAR, a Participant
shall be entitled to receive payment from the Company in an amount
equal to the product of:
(a) the excess of (i) the Fair Market Value of a Share on the
date of exercise over (ii) the Base Value multiplied by
(b) the number of Shares with respect to which the SAR is
exercised.
At the sole discretion of the Committee, the payment to the
Participant upon SAR exercise may be in cash, in Shares of
equivalent value, or in some combination thereof.
7.4 Termination of Employment. Each SAR Award Agreement
shall set forth the extent to which the Participant shall have the
right to exercise the SAR following termination of the
Participant's employment with the Company and its Subsidiaries.
Such provisions shall be determined in the sole discretion of the
Committee, shall be included in the SAR Award Agreement entered
into with Participants, need not be uniform among all SARs granted
pursuant to the Plan or among Participants and may reflect
distinctions based on the reasons for termination of employment.
7.5 Transferability of SARs. Except as otherwise determined
by the Committee and set forth in the SAR Award Agreement, no SAR
granted under the Plan may be sold, transferred, pledged, assigned,
or otherwise alienated or hypothecated, other than by will or by
the laws of descent and distribution, and all SARs granted to a
Participant under the Plan shall be exercisable during his or her
lifetime only by such Participant or his or her legal
representative.
Article 8. Restricted Stock
8.1 Grant of Restricted Stock. Subject to the terms and
conditions of the Plan, Restricted Stock may be granted to Eligible
Employees at any time and from time to time, as shall be determined
by the Committee.
The Committee shall have complete discretion in determining
the number of shares of Restricted Stock granted to each
Participant (subject to Article 4 herein) and, consistent with the
provisions of the Plan, in determining the terms and conditions
pertaining to such Restricted Stock.
8.2 Restricted Stock Award Agreement. Each Restricted Stock
grant shall be evidenced by a Restricted Stock Award Agreement that
shall specify the Period or Periods of Restriction, the number of
Restricted Stock Shares granted and such other provisions as the
Committee shall determine.
8.3 Transferability. Restricted Stock granted hereunder may
not be sold, transferred, pledged, assigned, or otherwise alienated
or hypothecated until the end of the applicable Period of
Restriction established by the Committee and specified in the
Restricted Stock Award Agreement. All rights with respect to the
Restricted Stock granted to a Participant under the Plan shall be
available during his or her lifetime only to such Participant or
his or her legal representative.
8.4 Certificate Legend. Each certificate representing
Restricted Stock granted pursuant to the Plan may bear a legend
substantially as follows:
"The sale or other transfer of the shares of stock
represented by this certificate, whether voluntary,
involuntary or by operation of law, is subject to certain
restrictions on transfer as set forth in MDU Resources
Group, Inc. 1997 Executive Long-Term Incentive Plan, and
in a Restricted Stock Award Agreement. A copy of such
Plan and such Agreement may be obtained from MDU
Resources Group, Inc."
The Company shall have the right to retain the certificates
representing Restricted Stock in the Company's possession until
such time as all restrictions applicable to such Shares have been
satisfied.
8.5 Removal of Restrictions. Restricted Stock shall become
freely transferable by the Participant after the last day of the
Period of Restriction applicable thereto. Once Restricted Stock is
released from the restrictions, the Participant shall be entitled
to have the legend referred to in Section 8.4 removed from his or
her stock certificate.
8.6 Voting Rights. During the Period of Restriction,
Participants holding Restricted Stock may exercise full voting
rights with respect to those Shares.
8.7 Dividends and Other Distributions. Subject to the
Committee's right to determine otherwise at the time of grant,
during the Period of Restriction, Participants holding Restricted
Stock shall receive all regular cash dividends paid with respect to
all Shares while they are so held. All other distributions paid
with respect to such Restricted Stock shall be credited to
Participants subject to the same restrictions on transferability
and forfeitability as the Restricted Stock with respect to which
they were paid and shall be paid to the Participant within forty-
five (45) days following the full vesting of the Restricted Stock
with respect to which such distributions were made.
8.8 Termination of Employment. Each Restricted Stock Award
Agreement shall set forth the extent to which the Participant shall
have the right to receive unvested Restricted Stock following
termination of the Participant's employment with the Company and
its Subsidiaries. Such provisions shall be determined in the sole
discretion of the Committee, shall be included in the Restricted
Stock Award Agreement entered into with Participants, need not be
uniform among all grants of Restricted Stock or among Participants
and may reflect distinctions based on the reasons for termination
of employment.
Article 9. Performance Units and Performance Shares
9.1 Grant of Performance Units and Performance Shares.
Subject to the terms and conditions of the Plan, Performance Units
and/or Performance Shares may be granted to an Eligible Employee at
any time and from time to time, as shall be determined by the
Committee.
The Committee shall have complete discretion in determining
the number of Performance Units and/or Performance Shares granted
to each Participant (subject to Article 4 herein) and, consistent
with the provisions of the Plan, in determining the terms and
conditions pertaining to such Awards.
9.2 Performance Unit/Performance Share Award Agreement. Each
grant of Performance Units and/or Performance Shares shall be
evidenced by a Performance Unit and/or Performance Share Award
Agreement that shall specify the number of Performance Units and/or
Performance Shares granted, the initial value (if applicable), the
Performance Period, the performance goals and such other provisions
as the Committee shall determine, including but not limited to any
rights to Dividend Equivalents.
9.3 Value of Performance Units/Performance Shares. Each
Performance Unit shall have an initial value that is established by
the Committee at the time of grant. The value of a Performance
Share shall be equal to the Fair Market Value of a Share. The
Committee shall set performance goals in its discretion which,
depending on the extent to which they are met, will determine the
number and/or value of Performance Units/Performance Shares that
will be paid out to the Participants. The time period during which
the performance goals must be met shall be called a "Performance
Period."
9.4 Earning of Performance Units/Performance Shares. After
the applicable Performance Period has ended, the holder of
Performance Units/Performance Shares shall be entitled to receive
a payout with respect to the Performance Units/Performance Shares
earned by the Participant over the Performance Period, to be
determined as a function of the extent to which the corresponding
performance goals have been achieved.
9.5 Form and Timing of Payment of Performance
Units/Performance Shares. Payment of earned Performance
Units/Performance Shares shall be made following the close of the
applicable Performance Period. The Committee, in its sole
discretion, may pay earned Performance Units/Performance Shares in
cash or in Shares (or in a combination thereof), which have an
aggregate Fair Market Value equal to the value of the earned
Performance Units/Performance Shares at the close of the applicable
Performance Period. Such Shares may be granted subject to any
restrictions deemed appropriate by the Committee.
9.6 Termination of Employment. Each Performance
Unit/Performance Share Award Agreement shall set forth the extent
to which the Participant shall have the right to receive a
Performance Unit/Performance Share payment following termination of
the Participant's employment with the Company and its Subsidiaries
during a Performance Period. Such provisions shall be determined
in the sole discretion of the Committee, shall be included in the
Award Agreement entered into with Participants, need not be uniform
among all grants of Performance Units/Performance Shares or among
Participants and may reflect distinctions based on reasons for
termination of employment.
9.7 Transferability. Except as otherwise determined by the
Committee and set forth in the Performance Unit/Performance Share
Award Agreement, Performance Units/Performance Shares may not be
sold, transferred, pledged, assigned or otherwise alienated or
hypothecated, other than by will or by the laws of descent and
distribution, and a Participant's rights with respect to
Performance Units/Performance Shares granted under the Plan shall
be available during the Participant's lifetime only to such
Participant or the Participant's legal representative.
Article 10. Other Awards
The Committee shall have the right to grant other Awards which
may include, without limitation, the grant of Shares based on
certain conditions, the payment of Shares in lieu of cash, or cash
based on performance criteria established by the Committee, and the
payment of Shares in lieu of cash under other Company incentive
bonus programs. Payment under or settlement of any such Awards
shall be made in such manner and at such times as the Committee may
determine.
Article 11. Beneficiary Designation
Each Participant under the Plan may, from time to time, name
any beneficiary or beneficiaries (who may be named contingently or
successively) to whom any benefit under the Plan is to be paid in
case of his or her death before he or she receives any or all of
such benefit. Each such designation shall revoke all prior
designations by the same Participant, shall be in a form prescribed
by the Company, and will be effective only when filed by the
Participant in writing with the Company during the Participant's
lifetime. In the absence of any such designation, benefits
remaining unpaid at the Participant's death shall be paid to the
Participant's estate.
The spouse of a married Participant domiciled in a community
property jurisdiction shall join in any designation of beneficiary
or beneficiaries other than the spouse.
Article 12. Deferrals
The Committee may permit a Participant to defer the
Participant's receipt of the payment of cash or the delivery of
Shares that would otherwise be due to such Participant under the
Plan. If any such deferral election is permitted, the Committee
shall, in its sole discretion, establish rules and procedures for
such payment deferrals.
Article 13. Rights of Employees
13.1 Employment. Nothing in the Plan shall interfere with or
limit in any way the right of the Company to terminate any
Participant's employment at any time, for any reason or no reason
in the Company's sole discretion, nor confer upon any Participant
any right to continue in the employ of the Company.
13.2 Participation. No Employee shall have the right to be
selected to receive an Award under the Plan, or, having been so
selected, to be selected to receive a future Award.
Article 14. Change in Control
The terms of this Article 14 shall immediately become
operative, without further action or consent by any person or
entity, upon a Change in Control, and once operative shall
supersede and take control over any other provisions of this Plan.
Upon a Change in Control
(a) Any and all Options and SARs granted hereunder shall
become immediately exercisable;
(b) Any restriction periods and restrictions imposed on
Restricted Shares shall be deemed to have expired and
such Restricted Shares shall become immediately vested in
full; and
(c) The target payout opportunity attainable under all
outstanding Awards of Performance Units, Performance
Shares and other Awards shall be deemed to have been
fully earned for the entire Performance Period(s) as of
the effective date of the Change in Control. The vesting
of all Awards denominated in Shares shall be accelerated
as of the effective date of the Change in Control, and
there shall be paid out in cash to Participants
immediately following the effective date of the Change in
Control the full amount of the targeted cash payout
opportunities associated with outstanding cash-based
Awards.
Article 15. Amendment, Modification and Termination
15.1 Amendment, Modification and Termination. The Board may,
at any time and from time to time, alter, amend, suspend or
terminate the Plan in whole or in part, provided that no amendment
shall be made which shall increase the total number of Shares which
may be issued and sold pursuant to Incentive Stock Options, reduce
the minimum exercise price in the case of an Incentive Stock Option
or modify the provisions of the Plan relating to eligibility with
respect to Incentive Stock Options unless such amendment is made by
or with the approval of the stockholders within 12 months of the
effective date of such amendment, but only if such approval is
required by any applicable provision of law. The Board of
Directors of the Company is also authorized to amend the Plan and
the Options granted hereunder to maintain qualification as
"incentive stock options" within the meaning of Section 422 of the
Code, if applicable.
15.2 Awards Previously Granted. No termination, amendment or
modification of the Plan shall adversely affect in any material way
any Award previously granted under the Plan, without the written
consent of the Participant holding such Award, unless such
termination, modification or amendment is required by applicable
law and except as otherwise provided herein.
Article 16. Withholding
16.1 Tax Withholding. The Company shall have the power and
the right to deduct or withhold, or require a Participant to remit
to the Company, an amount sufficient to satisfy Federal, state and
local taxes (including the Participant's FICA obligation) required
by law to be withheld with respect to an Award made under the Plan.
16.2 Share Withholding. With respect to withholding required
upon the exercise of Options or SARs, upon the lapse of
restrictions on Restricted Stock, or upon any other taxable event
arising out of or as a result of Awards granted hereunder,
Participants may elect to satisfy the withholding requirement, in
whole or in part, by tendering previously-owned Shares or by having
the Company withhold Shares having a Fair Market Value on the date
the tax is to be determined equal to the statutory total tax which
could be imposed on the transaction. All elections shall be
irrevocable, made in writing and signed by the Participant.
Article 17. Successors
All obligations of the Company under the Plan, with respect to
Awards granted hereunder, shall be binding on any successor to the
Company, whether the existence of such successor is the result of
a direct or indirect purchase, merger, consolidation or otherwise,
of all or substantially all of the business and/or assets of the
Company.
Article 18. Legal Construction
18.1 Gender and Number. Except where otherwise indicated by
the context, any masculine term used herein also shall include the
feminine, the plural shall include the singular and the singular
shall include the plural.
18.2 Severability. In the event any provision of the Plan
shall be held illegal or invalid for any reason, the illegality or
invalidity shall not affect the remaining parts of the Plan, and
the Plan shall be construed and enforced as if the illegal or
invalid provision had not been included.
18.3 Requirements of Law. The granting of Awards and the
issuance of Shares under the Plan shall be subject to all
applicable laws, rules and regulations, and to such approvals by
any governmental agencies or national securities exchanges as may
be required.
18.4 Governing Law. To the extent not preempted by Federal
law, the Plan, and all agreements hereunder, shall be construed in
accordance with, and governed by, the laws of the State of
Delaware.
MDU RESOURCES GROUP, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Years Ended December 31,
1998 1997 1996 1995 1994
(In thousands of dollars)
Earnings Available for
Fixed Charges:
Net Income per
Consolidated
Statements of
Income $34,107 $ 54,617 $45,470 $41,633 $39,845
Income Taxes 17,485 30,743 16,087 23,057 18,833
51,592 85,360 61,557 64,690 58,678
Rents (a) 1,749 1,249 1,031 894 878
Interest (b) 31,587 33,047 34,101 29,924 29,173
Total Earnings
Available for
Fixed Charges $84,928 $119,656 $96,689 $95,508 $88,729
Preferred Dividend
Requirements $ 777 $ 782 $ 787 $ 792 $ 797
Ratio of Income
Before Income
Taxes to Net
Income 151% 156% 135% 155% 147%
Preferred Dividend
Factor on Pretax
Basis 1,173 1,220 1,062 1,228 1,172
Fixed Charges (c) 33,336 34,296 35,132 30,818 30,051
Combined Fixed
Charges and
Preferred Stock
Dividends $34,509 $ 35,516 $36,194 $32,046 $31,223
Ratio of Earnings
to Fixed Charges 2.5x 3.5x 2.8x 3.1x 3.0x
Ratio of Earnings
to Combined
Fixed Charges
and Preferred
Stock Dividends 2.5x 3.4x 2.7x 3.0x 2.8x
(a) Represents portion (33 1/3%) of rents which is estimated to
approximately constitute the return to the lessors on their
investment in leased premises.
(b) Represents interest and amortization of debt discount and expense
on all indebtedness and excludes amortization of gains or losses
on reacquired debt which, under the Uniform System of Accounts, is
classified as a reduction of, or increase in, interest expense in
the Consolidated Statements of Income. Also includes carrying
costs associated with natural gas available under a repurchase
agreement with Frontier Gas Storage Company as more fully
described in Notes to Consolidated Financial Statements.
(c) Represents rents and interest, both as defined above.
MDU RESOURCES GROUP, INC.
1998 FINANCIAL REPORT
REPORT OF MANAGEMENT
The management of MDU Resources Group, Inc. is responsible for the
preparation, integrity and objectivity of the financial information
contained in the consolidated financial statements and elsewhere in
this Annual Report. The financial statements have been prepared in
conformity with generally accepted accounting principles as applied to
the company's regulated and nonregulated businesses and necessarily
include some amounts that are based on informed judgments and
estimates of management.
To meet its responsibilities with respect to financial information,
management maintains and enforces a system of internal accounting
controls designed to provide assurance, on a cost-effective basis,
that transactions are carried out in accordance with management's
authorizations and that assets are safeguarded against loss from
unauthorized use or disposition. The system includes an
organizational structure which provides an appropriate segregation of
responsibilities, effective selection and training of personnel,
written policies and procedures and periodic reviews by the Internal
Audit Department. In addition, the company has a policy which
requires all employees to acknowledge their responsibility for ethical
conduct. Management believes that these measures provide for a system
that is effective and reasonably assures that all transactions are
properly recorded for the preparation of financial statements.
Management modifies and improves its system of internal accounting
controls in response to changes in business conditions. The company's
Internal Audit Department is charged with the responsibility for
determining compliance with company procedures.
The Board of Directors, through its audit committee which is comprised
entirely of outside directors, oversees management's responsibilities
for financial reporting. The audit committee meets regularly with
management, the internal auditors and Arthur Andersen LLP, independent
public accountants, to discuss auditing and financial matters and to
assure that each is carrying out its responsibilities. The internal
auditors and Arthur Andersen LLP have full and free access to the
audit committee, without management present, to discuss auditing,
internal accounting control and financial reporting matters.
Arthur Andersen LLP is engaged to express an opinion on the financial
statements. Their audit is conducted in accordance with generally
accepted auditing standards and includes examining, on a test basis,
supporting evidence, assessing the company's accounting principles
used and significant estimates made by management and evaluating the
overall financial statement presentation to the extent necessary to
allow them to report on the fairness, in all material respects, of the
financial condition and operating results of the company.
Martin A. White Warren L. Robinson
President and Chief Vice President, Treasurer
Executive Officer and Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MDU Resources Group, Inc.
We have audited the accompanying consolidated balance sheets of MDU
Resources Group, Inc. (a Delaware corporation) and Subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
income, common stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of MDU
Resources Group, Inc. and Subsidiaries as of December 31, 1998 and
1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
January 21, 1999
CONSOLIDATED STATEMENTS OF INCOME
MDU RESOURCES GROUP, INC.
Years ended December 31, 1998 1997 1996
(In thousands, except per share amounts)
Operating revenues:
Electric $ 211,453 $ 164,351 $ 138,761
Natural gas 287,426 200,789 175,408
Construction materials and mining 346,451 174,147 132,222
Oil and natural gas production 51,297 68,387 68,310
896,627 607,674 514,701
Operating expenses:
Fuel and purchased power 49,829 45,604 43,983
Purchased natural gas sold 158,908 77,082 48,886
Operation and maintenance 448,290 283,894 225,682
Depreciation, depletion and
amortization 77,786 65,767 62,651
Taxes, other than income 24,871 23,766 21,974
Write-downs of oil and natural gas
properties (Note 1) 66,000 --- ---
825,684 496,113 403,176
Operating income:
Electric 38,099 33,089 29,476
Natural gas distribution 8,028 10,410 11,504
Natural gas transmission 38,114 29,169 30,231
Construction materials and mining 41,609 14,602 16,062
Oil and natural gas production (54,907) 24,291 24,252
70,943 111,561 111,525
Other income -- net 10,922 4,008 5,617
Interest expense 30,273 30,209 28,832
Costs on natural gas
repurchase commitment (Note 15) --- --- 26,753
Income before income taxes 51,592 85,360 61,557
Income taxes 17,485 30,743 16,087
Net income 34,107 54,617 45,470
Dividends on preferred stocks 777 782 787
Earnings on common stock $ 33,330 $ 53,835 $ 44,683
Earnings per common share -- basic $ .66 $ 1.24 $ 1.05
Earnings per common share -- diluted $ .66 $ 1.24 $ 1.04
Dividends per common share $ .7834 $ .7534 $ .7333
Weighted average common shares
outstanding -- basic 50,536 43,315 42,715
Weighted average common shares
outstanding -- diluted 50,837 43,478 42,824
The accompanying notes are an integral part of these consolidated statements.
CONSOLIDATED BALANCE SHEETS
MDU RESOURCES GROUP, INC.
December 31, 1998 1997
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 39,216 $ 28,174
Receivables 124,114 80,585
Inventories 44,865 41,322
Deferred income taxes 16,918 17,356
Prepayments and other current assets 15,536 12,479
240,649 179,916
Investments 43,029 18,935
Property, plant and equipment:
Electric 583,047 566,247
Natural gas distribution 178,522 172,086
Natural gas transmission 304,054 288,709
Construction materials and mining 484,419 243,110
Oil and natural gas production 260,758 240,193
1,810,800 1,510,345
Less accumulated depreciation,
depletion and amortization 726,123 670,809
1,084,677 839,536
Deferred charges and other assets 84,420 75,505
$1,452,775 $1,113,892
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 15,000 $ 3,347
Long-term debt and preferred
stock due within one year 3,292 7,902
Accounts payable 60,023 31,571
Taxes payable 9,226 9,057
Dividends payable 10,799 8,574
Other accrued liabilities,
including reserved revenues 71,129 88,563
169,469 149,014
Long-term debt (Note 6) 413,264 298,561
Deferred credits and other liabilities:
Deferred income taxes 173,094 119,747
Other liabilities (Note 15) 129,506 143,574
302,600 263,321
Preferred stock subject to mandatory
redemption (Note 7) 1,600 1,700
Commitments and contingencies
(Notes 11, 14, 15 and 16)
Stockholders' Equity:
Preferred stocks (Note 7) 15,000 15,000
Common stockholders' equity:
Common stock (Note 8)
Authorized -- 75,000,000 shares,
$3.33 par value
Issued -- 53,272,951 and 29,143,332
shares in 1998 and
1997, respectively 177,399 97,047
Other paid-in capital 171,486 76,526
Retained earnings 205,583 212,723
Treasury stock at cost - 239,521 shares (3,626) ---
Total common stockholders' equity 550,842 386,296
Total stockholders' equity 565,842 401,296
$1,452,775 $1,113,892
The accompanying notes are an integral part of these consolidated statements.
<TABLE>
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
MDU RESOURCES GROUP, INC.
<CAPTION>
Years ended
December 31, Other
1998, 1997 and 1996 Common Stock Paid-In Retained Treasury Stock
Shares Amount Capital Earnings Shares Amount Total
(In thousands, except shares)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 28,476,981 $ 94,828 $ 64,305 $178,184 --- $ --- $337,317
Net income --- --- --- 45,470 --- --- 45,470
Dividends on
preferred stocks --- --- --- (787) --- --- (787)
Dividends on common stock --- --- --- (31,326) --- --- (31,326)
Balance at
December 31, 1996 28,476,981 94,828 64,305 191,541 --- --- 350,674
Net income --- --- --- 54,617 --- --- 54,617
Dividends on
preferred stocks --- --- --- (782) --- --- (782)
Dividends on common stock --- --- --- (32,653) --- --- (32,653)
Issuance of common stock:
Acquisitions 225,629 751 3,622 --- --- --- 4,373
Other 440,722 1,468 8,599 --- --- --- 10,067
Balance at
December 31, 1997 29,143,332 97,047 76,526 212,723 --- --- 386,296
Net income --- --- --- 34,107 --- --- 34,107
Dividends on
preferred stocks --- --- --- (777) --- --- (777)
Dividends on common stock --- --- --- (40,470) --- --- (40,470)
Issuance of common stock:
Acquisitions (pre-split) 4,973,629 16,562 112,353 --- --- --- 128,915
Other (pre-split) 869,068 2,894 26,900 --- --- --- 29,794
Treasury stock
acquired --- --- --- --- (159,681) (3,626) (3,626)
Three-for-two
common stock
split (Note 8) 17,493,014 58,252 (58,252) --- (79,840) --- ---
Issuance of
common stock:
Acquisitions (post-split) 672,863 2,241 11,234 --- --- --- 13,475
Other (post-split) 121,045 403 2,725 --- --- --- 3,128
Balance at
December 31, 1998 53,272,951 $177,399 $171,486 $205,583 (239,521) $(3,626) $550,842
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
MDU RESOURCES GROUP, INC.
Years ended December 31, 1998 1997 1996
(In thousands)
Operating activities:
Net income $ 34,107 $ 54,617 $ 45,470
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation, depletion and
amortization 77,786 65,767 62,651
Deferred income taxes and
investment tax credit (17,256) 12,894 138
Recovery of deferred natural gas
contract litigation settlement
costs --- 5,486 10,743
Write-down of natural gas
available under repurchase
commitment (Note 15) --- --- 18,553
Write-downs of oil and natural gas
properties (Note 1) 66,000 --- ---
Changes in current assets and
liabilities:
Receivables (10,464) 6,951 (9,346)
Inventories 1,718 (4,214) (1,218)
Other current assets (547) 2,026 (1,467)
Accounts payable 14,094 (5,605) 7,584
Other current liabilities (19,805) (6,087) (22,434)
Other noncurrent changes (7,187) 6,794 (4,436)
Net cash provided by operating
activities 138,446 138,629 106,238
Financing activities:
Net change in short-term borrowings 3,933 (5,919) 3,350
Issuance of long-term debt 209,890 54,064 81,300
Repayment of long-term debt (113,600) (47,899) (43,262)
Retirement of preferred stocks (100) (100) (100)
Issuance of common stock 32,922 10,067 ---
Retirement of natural gas
repurchase commitment (17,105) (52,090) (4,157)
Dividends paid (41,247) (33,435) (32,113)
Net cash provided by (used in)
financing activities 74,693 (75,312) 5,018
Investing activities:
Capital expenditures including
acquisitions of businesses:
Electric (10,897) (18,713) (18,674)
Natural gas distribution (8,256) (8,858) (6,255)
Natural gas transmission (17,522) (13,205) (10,127)
Construction materials and mining (60,014) (40,797) (25,063)
Oil and natural gas production (94,465) (30,651) (51,821)
(191,154) (112,224) (111,940)
Net proceeds from sale or
disposition of property 4,275 4,522 11,803
Net capital expenditures (186,879) (107,702) (100,137)
Sale of natural gas available
under repurchase commitment 7,727 27,008 10,595
Investments (22,945) (2,248) (7,313)
Net cash used in investing
activities (202,097) (82,942) (96,855)
Increase (decrease) in cash
and cash equivalents 11,042 (19,625) 14,401
Cash and cash equivalents --
beginning of year 28,174 47,799 33,398
Cash and cash equivalents --
end of year $ 39,216 $ 28,174 $ 47,799
The accompanying notes are an integral part of these consolidated statements.
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements of MDU Resources Group, Inc.
(company) include the accounts of two regulated businesses -- retail and
wholesale sales of electricity and retail sales and/or transportation of
natural gas and propane, and natural gas transmission and storage -- and
two nonregulated businesses -- construction materials and mining
operations, and oil and natural gas production. The statements also
include the ownership interests in the assets, liabilities and expenses of
two jointly owned electric generating stations.
The company's regulated businesses are subject to various state and
federal agency regulation. The accounting policies followed by these
businesses are generally subject to the Uniform System of Accounts of the
Federal Energy Regulatory Commission (FERC). These accounting policies
differ in some respects from those used by the company's nonregulated
businesses.
The company's regulated businesses account for certain income and expense
items under the provisions of Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of Regulation" (SFAS No. 71). SFAS
No. 71 allows these businesses to defer as regulatory assets or
liabilities certain items that would have otherwise been reflected as
expense or income, respectively, based on the expected regulatory
treatment in future rates. The expected recovery or flowback of these
deferred items are generally based on specific ratemaking decisions or
precedent for each item. Regulatory assets and liabilities are being
amortized consistently with the regulatory treatment established by the
FERC and the applicable state public service commissions. See Note 3 for
more information regarding the nature and amounts of these regulatory
deferrals.
In accordance with the provisions of SFAS No. 71, intercompany coal sales,
which are made at prices approximately the same as those charged to
others, and the related utility fuel purchases are not eliminated. All
other significant intercompany balances and transactions have been
eliminated.
Property, plant and equipment
Additions to property, plant and equipment are recorded at cost when first
placed in service. When regulated assets are retired, or otherwise
disposed of in the ordinary course of business, the original cost and cost
of removal, less salvage, is charged to accumulated depreciation. With
respect to the retirement or disposal of all other assets, except for oil
and natural gas production properties as described below, the resulting
gains or losses are recognized as a component of income. The company is
permitted to capitalize an allowance for funds used during construction
(AFUDC) on regulated construction projects and to include such amounts in
rate base when the related facilities are placed in service. In addition,
the company capitalizes interest, when applicable, on certain construction
projects associated with its other operations. The amounts of AFUDC and
interest capitalized were not material in 1998, 1997 and 1996. Property,
plant and equipment are depreciated on a straight-line basis over the
average useful lives of the assets, except for oil and natural gas
production properties as described below.
Oil and natural gas
The company uses the full-cost method of accounting for its oil and
natural gas production activities. Under this method, all costs incurred
in the acquisition, exploration and development of oil and natural gas
properties are capitalized and amortized on the units of production method
based on total proved reserves. Any conveyances of properties, including
gains or losses on abandonments of properties, are treated as adjustments
to the cost of the properties with no gain or loss recognized.
Capitalized costs are subject to a "ceiling test" that limits such costs
to the aggregate of the present value of future net revenues of proved
reserves and the lower of cost or fair value of unproved properties.
Future net revenue is estimated based on end-of-quarter prices adjusted
for contracted price changes. If capitalized costs exceed the full-cost
ceiling at the end of any quarter, a permanent noncash write-down is
required to be charged to earnings in that quarter.
Due to low oil and natural gas prices, the company's capitalized costs
under the full-cost method of accounting exceeded the full-cost ceiling at
June 30, 1998 and December 31, 1998. Accordingly, the company was
required to write down its oil and natural gas producing properties.
These noncash write-downs amounted to $33.1 million ($20.0 million after
tax) and $32.9 million ($19.9 million after tax) for the quarters ended
June 30, 1998 and December 31, 1998, respectively.
Natural gas in underground storage and available under repurchase
commitment
Natural gas in underground storage is carried at cost using the last-in,
first-out (LIFO) method. The portion of the cost of natural gas in
underground storage expected to be used within one year is included in
inventories.
Natural gas available under a repurchase commitment with Frontier Gas
Storage Company (Frontier) is carried at Frontier's cost of purchased
natural gas, less an allowance to reflect changed market conditions, and
is reflected on the company's Consolidated Balance Sheets in "Deferred
charges and other assets." See Note 15 for discussion on the write-down
which occurred in 1996 of the natural gas available under the repurchase
commitment with Frontier.
Inventories
Inventories, other than natural gas in underground storage, consist
primarily of materials and supplies and inventories held for resale.
These inventories are stated at the lower of average cost or market.
Revenue recognition
The company recognizes utility revenue each month based on the services
provided to all utility customers during the month. For its construction
businesses, the company recognizes construction contract revenue on the
percentage of completion method. The company generally recognizes all
other revenues when services are rendered or goods are delivered.
Natural gas costs recoverable through rate adjustments
Under the terms of certain orders of the applicable state public service
commissions, the company is deferring natural gas commodity,
transportation and storage costs which are greater or less than amounts
presently being recovered through its existing rate schedules. Such
orders generally provide that these amounts are recoverable or refundable
through rate adjustments within 24 months from the time such costs are
paid.
Income taxes
The company provides deferred federal and state income taxes on all
temporary differences. Excess deferred income tax balances associated
with Montana-Dakota's and Williston Basin's rate-regulated activities
resulting from the company's adoption of SFAS No. 109, "Accounting for
Income Taxes", have been recorded as a regulatory liability and are
included in "Other liabilities" in the company's Consolidated Balance
Sheets. These regulatory liabilities are expected to be reflected as a
reduction in future rates charged customers in accordance with applicable
regulatory procedures.
The company uses the deferral method of accounting for investment tax
credits and amortizes the credits on electric and natural gas distribution
plant over various periods which conform to the ratemaking treatment
prescribed by the applicable state public service commissions.
Earnings per common share
Basic earnings per common share were computed by dividing earnings on
common stock by the weighted average number of shares of common stock
outstanding during the year. Diluted earnings per common share were
computed by dividing earnings on common stock by the total of the weighted
average number of shares of common stock outstanding during the year, plus
the effect of outstanding stock options. Common stock outstanding
includes issued shares less shares held in treasury. Earnings per share
have been restated to reflect the three-for-two common stock split
effected in July 1998 as discussed in Note 8.
Comprehensive income
On January 1, 1998, the company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS
No. 130 provides authoritative guidance on the reporting and display of
comprehensive income and its components. For the years ended December 31,
1998, 1997 and 1996, comprehensive income equaled net income as reported.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates are used for such items as plant
depreciable lives, tax provisions, uncollectible accounts, environmental
and other loss contingencies, accumulated provision for revenues subject
to refund, unbilled revenues and actuarially determined benefit costs. As
better information becomes available, or actual amounts are determinable,
the recorded estimates are revised. Consequently, operating results can
be affected by revisions to prior accounting estimates.
Cash flow information
Cash expenditures for interest and income taxes were as follows:
Years ended December 31, 1998 1997 1996
(In thousands)
Interest, net of amount capitalized $26,394 $25,626 $25,449
Income taxes $34,498 $18,171 $28,163
The company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Reclassifications
Certain reclassifications have been made in the financial statements for
prior years to conform to the current presentation. Such
reclassifications had no effect on net income or common stockholders'
equity as previously reported.
New accounting standard
In June 1998, the Financial Accounting Standards Board 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.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
SFAS No. 133 must be applied to derivative instruments and certain
derivative instruments embedded in hybrid contracts that were issued,
acquired, or substantively modified after December 31, 1997. The company
will adopt SFAS No. 133 on January 1, 2000, and has not yet quantified the
impacts of adopting SFAS No. 133 on the company's financial position or
results of operations.
NOTE 2
NATURAL GAS IN UNDERGROUND STORAGE
Natural gas in underground storage included in natural gas transmission
and natural gas distribution property, plant and equipment amounted to
$43.7 million at December 31, 1998, and $43.1 million at December 31,
1997. In addition, $11.5 million and $11.4 million at December 31, 1998
and 1997, respectively, of natural gas in underground storage is included
in inventories.
NOTE 3
REGULATORY ASSETS AND LIABILITIES
The following table summarizes the individual components of unamortized
regulatory assets and liabilities included in the accompanying
Consolidated Balance Sheets as of December 31:
1998 1997
(In thousands)
Regulatory assets:
Long-term debt refinancing costs $ 10,995 $ 11,466
Postretirement benefit costs 2,036 2,940
Plant costs 3,003 3,173
Other 11,647 10,899
Total regulatory assets 27,681 28,478
Regulatory liabilities:
Reserves for regulatory matters 39,981 39,193
Taxes refundable to customers 14,129 13,933
Plant decommissioning costs 6,413 5,843
Natural gas costs refundable
through rate adjustments 274 21,721
Other 1,351 1,393
Total regulatory liabilities 62,148 82,083
Net regulatory position $(34,467) $(53,605)
As of December 31, 1998, substantially all of the company's regulatory
assets are being reflected in rates charged to customers and are being
recovered over the next 1 to 18 years.
If, for any reason, the company's regulated businesses cease to meet the
criteria for application of SFAS No. 71 for all or part of their
operations, the regulatory assets and liabilities relating to those
portions ceasing to meet such criteria would be removed from the balance
sheet and included in the statement of income as an extraordinary item in
the period in which the discontinuance of SFAS No. 71 occurs.
NOTE 4
FINANCIAL INSTRUMENTS
Derivatives
Williston Basin Interstate Pipeline Company and Fidelity Oil Group have
entered into certain price swap and collar agreements to manage a portion
of the market risk associated with fluctuations in the price of oil and
natural gas. These swap and collar agreements are not held for trading
purposes. The swap and collar agreements call for Williston Basin and
Fidelity 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 or Colorado Interstate Gas Index. 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. The amounts
payable or receivable are generally offset by corresponding increases and
decreases in the value of the underlying commodity transactions.
Innovative Gas Services, Incorporated participates in the natural gas
futures market to hedge a portion of the price risk associated with
natural gas purchase and sale commitments. These futures are not held for
trading purposes. Gains or losses on the futures contracts are deferred
until the transaction occurs, at which point they are reported in
"Purchased natural gas sold" on the Consolidated Statements of Income.
The gains or losses on the futures contracts are generally offset by
corresponding increases and decreases in the value of the underlying
commodity transactions.
Williston Basin and Knife River Corporation entered into interest rate
swap agreements to manage a portion of their interest rate exposure on the
natural gas repurchase commitment and long-term debt, respectively. These
interest rate swap agreements, which expired in August 1997 and August
1998, respectively, were not held for trading purposes. The interest rate
swap agreements called for Williston Basin and Knife River to receive
quarterly payments from or make payments to counterparties based upon the
difference between fixed and variable rates as specified by the interest
rate swap agreements. The variable prices were based on the three-month
floating London Interbank Offered Rate. Settlement amounts payable or
receivable under these interest rate swap agreements were recorded in
"Interest expense" for Knife River and "Costs on natural gas repurchase
commitment" for Williston Basin on the Consolidated Statements of Income
in the accounting period they were incurred. The amounts payable or
receivable were generally offset by interest on the related debt
instruments.
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 following table summarizes the company's hedging activity:
Years ended December 31, 1998 1997 1996
(Notional amounts in thousands)
Oil swap agreements:*
Range of fixed prices per barrel $20.92 $19.77-$21.36 $18.74-$19.07
Notional amount (in barrels) 219 730 635
Natural gas swap/collar agreements:*
Range of fixed prices per MMBtu $1.54-$2.67 $1.30-$2.395 $1.40-$2.05
Notional amount (in MMBtu's) 6,082 8,039 5,331
Natural gas futures contracts:*
Range of fixed prices per MMBtu $1.96-$2.50 --- ---
Notional amount (in MMBtu's) 650 --- ---
Natural gas collar agreement:**
Range of fixed prices per MMBtu --- --- $1.22-$1.52
Notional amount (in MMBtu's) --- --- 910
Interest rate swap agreements:**
Range of fixed interest rates 5.50%-6.50% 5.50%-6.50% 5.50%-6.50%
Notional amount (in dollars) $10,000 $30,000 $30,000
* Receive fixed -- pay variable
** Receive variable -- pay fixed
At December 31, 1998, the company has natural gas collar agreements
outstanding for 2.9 million MMBtu's of natural gas which call for the
company, in 1999, to receive monthly payments from counterparties when the
settlement price is below the floor price in the collar agreement or make
monthly payments to counterparties when the settlement price is above the
ceiling price in the collar agreement. The weighted average floor price
and ceiling price is $2.10 and $2.51, respectively.
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. The company's net favorable position on all hedge
agreements outstanding at December 31, 1998, was $597,000.
In the event a hedge agreement does not qualify for hedge accounting or
when the underlying commodity transaction or related debt instrument
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
or related debt instrument is sold or matures and is expected to generally
offset the corresponding increases or decreases in the value of the
underlying commodity transaction or interest on the related debt
instrument.
Fair value of other financial instruments
The estimated fair value of the company's long-term debt and preferred
stock subject to mandatory redemption are based on quoted market prices of
the same or similar issues. The estimated fair values of the company's
long-term debt and preferred stock subject to mandatory redemption at
December 31 are as follows:
1998 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
(In thousands)
Long-term debt $416,456 $435,078 $306,363 $319,367
Preferred stock
subject to mandatory
redemption $ 1,700 $ 1,592 $ 1,800 $ 1,584
The fair value of other financial instruments for which estimated fair
values have not been presented is not materially different than the
related carrying amount.
NOTE 5
SHORT-TERM BORROWINGS
The company and its subsidiaries had unsecured short-term lines of credit
from a number of banks totaling $60 million at December 31, 1998. These
line of credit agreements provide for bank borrowings against the lines
and/or support for commercial paper issues. The agreements provide for
commitment fees at varying rates. Commercial paper amounts outstanding
supported by the lines of credit were $15 million at December 31, 1998,
and $3.3 million at December 31, 1997. The weighted average interest rate
for borrowings outstanding at December 31, 1998 and 1997, was 5.45 percent
and 8.50 percent, respectively. The unused portions of the lines of
credit are subject to withdrawal based on the occurrence of certain
events.
NOTE 6
LONG-TERM DEBT AND INDENTURE PROVISIONS
Long-term debt outstanding at December 31 is as follows:
1998 1997
(In thousands)
First mortgage bonds and notes:
9 1/8% Series, paid in 1998 $ --- $ 20,000
Pollution Control Refunding Revenue
Bonds, Series 1992 --
Mercer County, North Dakota,
6.65%, due June 1, 2022 15,000 15,000
Morton County, North Dakota,
6.65%, due June 1, 2022 2,600 2,600
Richland County, Montana,
6.65%, due June 1, 2022 3,250 3,250
Secured Medium-Term Notes,
Series A --
6.52%, due October 1, 2004 15,000 15,000
8.25%, due April 1, 2007 30,000 30,000
5.83%, due October 1, 2008 15,000 ---
6.71%, due October 1, 2009 15,000 15,000
8.60%, due April 1, 2012 35,000 35,000
Total first mortgage bonds and notes 130,850 135,850
Pollution control
note obligation, 6.20%, due
March 1, 2004 3,400 3,700
Senior notes:
8.70%, paid in 1998 --- 6,500
8.43%, due December 31, 2000 9,000 12,000
7.35%, due July 31, 2002 4,000 5,000
7.51%, due October 9, 2003 3,000 3,000
6.86%, due October 30, 2004 12,500 12,500
6.43%, due October 30, 2005 10,000 ---
7.45%, due May 31, 2006 20,000 20,000
6.68%, due October 30, 2006 15,000 ---
7.60%, due November 3, 2008 15,000 15,000
7.10%, due October 30, 2009 12,500 12,500
6.73%, due October 30, 2010 10,000 ---
7.28%, due October 30, 2012 10,000 10,000
6.87%, due October 30, 2013 5,000 ---
7.05%, due October 30, 2018 15,000 ---
Commercial paper at a weighted average
rate of 6.49%, supported by a revolving
credit agreement due on November 29, 2001 82,921 ---
Revolving lines of credit at a
weighted average rate of 6.96%,
due on dates ranging from
January 5, 2001 through December 31, 2002 45,200 64,000
Term credit agreements at a weighted
average rate of 7.84%, due on dates
ranging from January 28, 2000
through November 25, 2012 13,211 6,398
Other (126) (85)
Total long-term debt 416,456 306,363
Less current maturities 3,192 7,802
Net long-term debt $ 413,264 $ 298,561
During 1998, Centennial Energy Holdings, Inc., a direct subsidiary of the
company, entered into a revolving credit agreement with various banks on
behalf of its subsidiaries that allows for borrowings of up to $200
million. This facility supports the Centennial commercial paper program.
Under the Centennial commercial paper program, $82.9 million was
outstanding at December 31, 1998. 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.
Under the revolving lines of credit, the company and a subsidiary have
$50 million available, $45.2 million of which was outstanding at December
31, 1998. The amounts of scheduled long-term debt maturities for the five
years following December 31, 1998 aggregate $3.2 million in 1999;
$12.4 million in 2000; $100.3 million in 2001; $49.4 million in 2002 and
$6.4 million in 2003. Substantially all of the company's electric and
natural gas distribution properties, with certain exceptions, are subject
to the lien of its Indenture of Mortgage. Under the terms and conditions
of such Indenture, the company could have issued approximately
$273 million of additional first mortgage bonds at December 31, 1998.
Certain of the company's other debt instruments contain restrictive
covenants all of which the company is in compliance with at December 31,
1998.
NOTE 7
PREFERRED STOCKS
Preferred stocks at December 31 are as follows:
1998 1997
(Dollars in thousands)
Authorized:
Preferred --
500,000 shares, cumulative,
par value $100, issuable in series
Preferred stock A --
1,000,000 shares, cumulative, without par
value, issuable in series (none outstanding)
Preference --
500,000 shares, cumulative, without par
value, issuable in series (none outstanding)
Outstanding:
Subject to mandatory redemption --
Preferred --
5.10% Series -- 17,000 and 18,000 shares
in 1998 and 1997, respectively $ 1,700 $ 1,800
Other preferred stock --
4.50% Series -- 100,000 shares 10,000 10,000
4.70% Series -- 50,000 shares 5,000 5,000
15,000 15,000
Total preferred stocks 16,700 16,800
Less current maturities and
sinking fund requirements 100 100
Net preferred stocks $16,600 $16,700
The preferred stocks outstanding are subject to redemption, in whole or in
part, at the option of the company with certain limitations on 30 days
notice on any quarterly dividend date.
The company is obligated to make annual sinking fund contributions to
retire the 5.10% Series preferred stock. The redemption prices and
sinking fund requirements, where applicable, are summarized below:
Redemption Sinking Fund
Series Price (a) Shares Price (a)
Preferred stocks:
4.50% $105 (b) --- ---
4.70% $102 (b) --- ---
5.10% $102 1,000 (c) $100
(a) Plus accrued dividends.
(b) These series are redeemable at the sole discretion of the company.
(c) Annually on December 1, if tendered.
In the event of a voluntary or involuntary liquidation, all preferred
stock series holders are entitled to $100 per share, plus accrued
dividends.
The aggregate annual sinking fund amount applicable to preferred stock
subject to mandatory redemption for each of the five years following
December 31, 1998, is $100,000.
NOTE 8
COMMON STOCK
On May 14, 1998, the company's Board of Directors approved a three-for-two
common stock split effected in the form of a 50 percent common stock
dividend. The additional shares of common stock were distributed on
July 13, 1998, to common stockholders of record on July 3, 1998. Common
stock information appearing in the accompanying Consolidated Statements
of Income and Notes to Consolidated Financial Statements has been
restated to give retroactive effect to the stock split.
The company's Automatic Dividend Reinvestment and Stock Purchase Plan
(DRIP) provides participants in the DRIP the opportunity to invest all or
a portion of their cash dividends in shares of the company's common stock
and/or to make optional cash payments of up to $5,000 per month for the
same purpose. Holders of all classes of the company's capital stock,
legal residents in any of the 50 states and beneficial owners, whose
shares are held by brokers or other nominees, through participation by
their brokers or nominees are eligible to participate in the DRIP. The
company's Tax Deferred Compensation Savings Plans (K-Plans) pursuant to
Section 401(k) of the Internal Revenue Code are funded with the company's
common stock. From January 1, 1989, through September 30, 1998, the DRIP
and K-Plans have been funded primarily by the purchase of shares of common
stock on the open market, except for a portion of 1997 where shares of
authorized but unissued common stock were used to fund the DRIP and K-
Plans. Beginning October 1, 1998, shares of authorized but unissued
common stock were used to fund the DRIP, while the K-Plans continued to be
funded by the purchase of shares of common stock on the open market. At
December 31, 1998, there were 8.2 million shares of common stock reserved
for issuance under the DRIP and K-Plans.
On November 12, 1998, the company's Board of Directors declared, pursuant
to a stockholders' rights plan, a dividend of one preference share
purchase right (right) for each outstanding share of the company's common
stock. Each right becomes exercisable, upon the occurrence of certain
events, for one one-thousandth of a share of Series B Preference Stock of
the company, without par value, at an exercise price of $125 per one one-
thousandth, subject to certain adjustments. The rights are currently not
exercisable and will be exercisable only if a person or group (acquiring
person) either acquires ownership of 15 percent or more of the company's
common stock or commences a tender or exchange offer that would result in
ownership of 15 percent or more. In the event the company is acquired in
a merger or other business combination transaction or 50 percent or more
of its consolidated assets or earnings power are sold, each right entitles
the holder to receive, upon the exercise thereof at the then current
exercise price of the right multiplied by the number of one one-thousandth
of a Series B Preference Stock for which a right is then exercisable, in
accordance with the terms of the rights agreement, such number of shares
of common stock of the acquiring person having a market value of twice the
then current exercise price of the right. The rights, which expire on
December 31, 2008, are redeemable in whole, but not in part, for a price
of $.01 per right, at the company's option at any time until any acquiring
person has acquired 15 percent or more of the company's common stock.
NOTE 9
INCOME TAXES
Income tax expense is summarized as follows:
Years ended December 31, 1998 1997 1996
(In thousands)
Current:
Federal $ 28,256 $15,427 $12,617
State 5,880 2,362 3,272
Foreign 605 60 60
34,741 17,849 15,949
Deferred:
Investment tax credit (975) (1,150) (1,099)
Income taxes --
Federal (14,214) 11,844 1,139
State (2,067) 2,200 120
Foreign --- --- (22)
(17,256) 12,894 138
Total income tax expense $ 17,485 $30,743 $16,087
Components of deferred tax assets and deferred tax liabilities recognized
in the company's Consolidated Balance Sheets at December 31 are as
follows:
1998 1997
(In thousands)
Deferred tax assets:
Reserves for regulatory matters $ 35,703 $ 32,789
Natural gas available under
repurchase commitment 2,268 4,821
Accrued pension costs 9,274 8,445
Deferred investment tax credits 2,336 2,714
Accrued land reclamation 2,907 3,184
Other 13,266 12,851
Total deferred tax assets 65,754 64,804
Deferred tax liabilities:
Depreciation and basis differences
on property, plant and equipment 192,166 123,629
Basis differences on oil and
natural gas producing properties 9,604 30,726
Long-term debt refinancing costs 4,491 4,672
Other 15,669 8,168
Total deferred tax liabilities 221,930 167,195
Net deferred income tax liability $(156,176) $(102,391)
The following table reconciles the change in the net deferred income tax
liability from December 31, 1997, to December 31, 1998, to the deferred
income tax expense included in the Consolidated Statements of Income:
1998
(In thousands)
Net change in deferred income tax
liability from the preceding table $ 53,785
Change in tax effects of income tax-related
regulatory assets and liabilities 323
Deferred taxes associated with acquisitions (70,389)
Deferred income tax expense for the period $(16,281)
Total income tax expense differs from the amount computed by applying the
statutory federal income tax rate to income before taxes. The reasons for
this difference are as follows:
Years ended December 31, 1998 1997 1996
Amount % Amount % Amount %
(Dollars in thousands)
Computed tax at federal
statutory rate $18,057 35.0 $29,876 35.0 $21,545 35.0
Increases (reductions)
resulting from:
Depletion allowance (1,571) (3.0) (828) (1.0) (1,070) (1.7)
State income
taxes -- net of
federal income tax
benefit 2,312 4.5 3,473 4.1 2,770 4.5
Investment tax credit
amortization (975) (1.9) (1,150) (1.4) (1,099) (1.8)
Tax reserve adjustment --- --- --- --- (6,600) (10.7)
Other items (338) (.7) (628) (.7) 541 .8
Total income tax expense $17,485 33.9 $30,743 36.0 $16,087 26.1
In 1996, the company reached a settlement with the Internal Revenue
Service concerning notices of deficiency issued in connection with
disputed items for the 1983 through 1988 tax years and, in 1997, reached a
similar settlement for the tax years 1989 through 1991. In 1996, the
company reflected the effects of the 1996 settlement and the 1997
anticipated settlement in the consolidated financial statements and, in
addition, reversed reserves which had previously been provided and were
deemed to be no longer required.
NOTE 10
BUSINESS SEGMENT DATA
In 1998, the company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131
requires the disclosure of certain information about operating segments in
financial statements. The company's operations are conducted through five
business segments. 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 electric, natural gas distribution, natural
gas transmission, construction materials and mining, and oil and natural
gas production businesses are substantially all located within the United
States. The electric business operates electric power generation,
transmission and distribution facilities in North Dakota, South Dakota,
Montana and Wyoming and installs and repairs electric transmission and
distribution power lines and provides related supplies, equipment and
engineering services throughout the western United States and Hawaii. The
natural gas distribution business provides natural gas distribution
services in North Dakota, South Dakota, Montana and Wyoming. The natural
gas transmission business serves the Midwestern, Southern and Central
regions of the United States providing natural gas transmission and
related services including storage and production along with energy
marketing and management, wholesale/retail propane and energy facility
construction. The construction materials and mining business produces and
markets aggregates and construction materials in Alaska, California,
Hawaii and Oregon, and operates lignite coal mines in Montana and North
Dakota. The oil and natural gas production business is engaged in oil and
natural gas acquisition, exploration and production activities throughout
the United States, the Gulf of Mexico and Canada.
Segment information follows the same accounting policies as described in
the Summary of Significant Accounting Policies. Segment information
included in the accompanying Consolidated Balance Sheets as of December 31
and included in the Consolidated Statements of Income for the years then
ended is as follows:
<TABLE>
<CAPTION> Oil and
Natural Natural Construction Natural
Gas Gas Materials Gas Eliminations
Electric Distribution Transmission and Mining Production and Adjustments Total
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
1998
Operating revenues:
External $211,453 $154,147 $133,279 $338,702 (a) $ 51,297 $ --- $ 888,878
Intersegment --- --- 47,420 7,749 --- (47,420) (b) 7,749
Depreciation, depletion
and amortization 19,798 7,150 8,463 20,562 21,813 --- 77,786
Interest expense 10,304 3,728 6,426 7,402 2,413 --- 30,273
Income taxes 10,204 2,681 13,977 15,155 (24,532) --- 17,485
Earnings on common stock 17,180 3,501 20,823 24,499 (32,673) --- 33,330
Other significant
noncash items:
Write-downs of oil and
natural gas properties
(Note 1) --- --- --- --- 66,000 --- 66,000
Identifiable assets (d) 344,304 129,654 260,942 500,720 171,207 45,948 (c) 1,452,775
Capital expenditures 31,378 8,256 23,710 172,108 94,465 (4,275) (e) 325,642
1997
Operating revenues:
External $164,351 $157,005 $ 43,784 $168,067 (a) $ 68,387 $ --- $ 601,594
Intersegment --- --- 49,622 6,080 --- (49,622) (b) 6,080
Depreciation, depletion
and amortization 17,771 7,013 5,550 10,999 24,434 --- 65,767
Interest expense 10,949 3,698 8,605 4,503 2,454 --- 30,209
Income taxes 7,642 2,987 8,429 4,392 7,293 --- 30,743
Earnings on common stock 13,388 4,514 11,317 10,111 14,505 --- 53,835
Identifiable assets (d) 326,615 128,517 227,030 235,221 162,785 33,724 (c) 1,113,892
Capital expenditures 27,970 8,858 13,205 41,472 30,651 (4,522) (e) 117,634
1996
Operating revenues:
External $138,761 $155,012 $ 20,396 $126,275 (a) $ 68,310 $ --- $ 508,754
Intersegment --- --- 58,224 5,947 --- (58,224) (b) 5,947
Depreciation, depletion
and amortization 17,053 6,880 6,748 6,974 24,996 --- 62,651
Interest expense 11,269 4,422 7,799 3,277 3,111 (1,046) (b) 28,832
Income taxes 5,859 3,507 (5,962) 5,985 6,698 --- 16,087
Earnings on common stock 11,436 4,892 2,459 11,521 14,375 --- 44,683
Other significant
noncash items:
Write-down of natural
gas available under
repurchase commitment
(Note 15) --- --- 18,553 --- --- --- 18,553
Identifiable assets (d) 313,815 120,645 276,843 171,283 161,647 44,940 (c) 1,089,173
Capital expenditures 18,674 6,255 10,890 25,063 51,821 (11,803) (e) 100,900
<FN>
(a) Includes sales, for use at the Coyote Station, an electric generating
station jointly owned by the company and other utilities, of (in thousands)
$6,714, $5,061 and $6,358 for 1998, 1997 and 1996, respectively.
(b) Intersegment eliminations.
(c) Corporate assets consist of assets not directly assignable to a business
segment (i.e., cash and cash equivalents, certain accounts receivable and
other miscellaneous current and deferred assets).
(d) Includes, in the case of electric and natural gas distribution property,
allocations of common utility property. Natural gas stored or available
under repurchase commitment, as applicable, is included in natural gas
distribution and transmission identifiable assets.
(e) Net proceeds from sale or disposition of property.
</FN>
</TABLE>
Capital expenditures for 1998 and 1997, related to acquisitions, in the
preceeding table include the following noncash transactions: issuance of
the company's equity securities, less treasury stock acquired, in 1998 of
$138.8 million; and assumed debt and the issuance of the company's equity
securities in total for 1997 of $9.9 million. In addition, natural gas
transmission capital expenditures for 1996 include $763,000 for
Prairielands Energy Marketing, Inc. which were not reflected in investing
activities in the Consolidated Statements of Cash Flows as Prairielands
was not considered a major business segment.
On March 5, 1998, the company acquired Morse Bros., Inc. and S2 - F Corp.,
privately held construction materials companies located in Oregon's
Willamette Valley. The purchase consideration for such companies
consisted of $98.2 million of the company's common stock and cash. Morse
Bros., Inc. sells aggregate, ready-mixed concrete, asphaltic concrete,
prestress concrete and construction services in the Willamette Valley from
Portland to Eugene. S2 - F Corp. sells aggregate and construction
services.
The company also acquired a number of businesses in 1998, none of which
were individually material, including construction materials and mining
businesses in Oregon, utility services construction and engineering
businesses in California and Montana and a natural gas marketing business
in Kentucky. The total purchase consideration, consisting of the
company's common stock and cash, for these businesses was $62.7 million.
In 1997, the company acquired several businesses, none of which were
individually material, including the remaining 50 percent interest in
Hawaiian Cement (See Note 12) and utility services construction and
construction supplies and equipment businesses in Oregon. The total
purchase consideration, consisting of the company's common stock and cash,
for these businesses was $35.2 million.
The above acquisitions were accounted for under the purchase method of
accounting. 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.
NOTE 11
EMPLOYEE BENEFIT PLANS
In 1998, the company adopted SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" (SFAS No. 132). SFAS No. 132
revises employers' disclosures about pension and other postretirement
benefit plans but does not change the measurement or recognition of
amounts related to these benefit plans. For comparative purposes, prior
year amounts have been restated.
The company has noncontributory defined benefit pension plans and other
postretirement benefit plans. There were no additional minimum pension
liabilities required to be recognized as of December 31, 1998 and 1997.
Changes in benefit obligation and plan assets for the years ended December
31 are as follows:
Other
Pension Postretirement
Benefits Benefits
1998 1997 1998 1997
(In thousands)
Change in benefit obligation:
Benefit obligation at
beginning of year $178,199 $150,829 $ 73,838 $ 65,608
Service cost 4,509 3,889 1,502 1,272
Interest cost 12,248 11,651 4,848 4,691
Plan participants' contributions --- --- 475 379
Amendments 437 --- (4,810) ---
Actuarial (gain) loss 5,971 12,263 (1,695) (888)
Acquisition --- 9,463 --- 6,394
Benefits paid (13,699) (9,896) (3,820) (3,618)
Benefit obligation at
end of year $187,665 $178,199 $ 70,338 $ 73,838
Change in plan assets:
Fair value of plan assets at
beginning of year $225,201 $185,872 $ 30,595 $ 21,712
Actual return on plan assets 39,604 38,272 6,226 5,621
Employer contribution 88 265 6,067 6,501
Plan participants' contributions --- --- 475 379
Acquisition --- 10,688 --- ---
Benefits paid (13,699) (9,896) (3,820) (3,618)
Fair value of plan assets at end
of year 251,194 225,201 39,543 30,595
Funded status 63,529 47,002 (30,795) (43,243)
Unrecognized actuarial gain (73,963) (56,844) (8,036) (2,679)
Unrecognized prior service cost 7,645 8,056 (1,433) ---
Unrecognized net transition
obligation (5,340) (6,333) 31,029 36,864
Accrued benefit cost $ (8,129) $ (8,119) $ (9,235) $(9,058)
Weighted average assumptions for the company's pension and other
postretirement benefit plans as of December 31 are as follows:
Other
Pension Postretirement
Benefits Benefits
1998 1997 1998 1997
Discount rate 6.75% 7.00% 6.75% 7.00%
Expected return on plan assets 8.50% 8.50% 7.50% 7.50%
Rate of compensation increase 4.50% 4.50% 4.50% 4.50%
Health care rate assumptions for the company's other postretirement
benefit plans as of December 31 are as follows:
1998 1997
Health care trend rate 6.50%-8.50% 7.00%-9.00%
Health care cost trend
rate - ultimate 5.00%-6.00% 5.00%-6.00%
Year in which ultimate
trend rate achieved 1999-2004 1999-2004
Components of net periodic benefit cost for the company's pension and
other postretirement benefit plans are as follows:
Other
Pension Postretirement
Benefits Benefits
Years ended December 31, 1998 1997 1996 1998 1997 1996
(In thousands)
Components of net periodic
benefit cost:
Service cost $ 4,509 $ 3,889 $ 3,852 $ 1,502 $ 1,272 $ 1,333
Interest cost 12,248 11,651 10,823 4,848 4,691 4,701
Expected return on assets (15,892) (14,321) (13,145) (2,395) (1,748) (1,279)
Amortization of prior
service cost 848 811 755 --- --- ---
Recognized net actuarial
(gain) loss (621) (666) (98) (169) (105) 48
Amortization of net
transition obligation (994) (988) (990) 2,458 2,458 2,458
Net periodic benefit cost 98 376 1,197 6,244 6,568 7,261
Less amount capitalized 79 70 131 628 625 735
Net periodic benefit
expense $ 19 $ 306 $ 1,066 $ 5,616 $ 5,943 $ 6,526
The company has other postretirement benefit plans including health care
and life insurance. The plans underlying these benefits may require
contributions by the employee depending on such employee's age and years
of service at retirement or the date of retirement. The accounting for
the health care plan anticipates future cost-sharing changes that are
consistent with the company's expressed intent to generally increase
retiree contributions each year by the excess of the expected health care
cost trend rate over 6 percent.
Assumed health care cost trend rates may have a significant effect on the
amounts reported for the health care plans. A 1 percentage point change
in the assumed health care cost trend rates would have the following
effects at December 31, 1998:
1 Percentage 1 Percentage
Point Increase Point Decrease
(In thousands)
Effect on total of service
and interest cost components $ 243 $ (294)
Effect on postretirement benefit
obligation $3,671 $(4,546)
The company has an unfunded, nonqualified benefit plan for executive
officers and certain key management employees that provides for defined
benefit payments upon the employee's retirement or to their
beneficiaries upon death for a 15-year period. Investments consist of
life insurance carried on plan participants which is payable to the
company upon the employee's death. The cost of these benefits was
$2.7 million in 1998 and $2.2 million in both 1997 and 1996.
The company has stock option plans for directors, key employees and
employees, which grant options to purchase shares of the company's stock.
The company accounts for these option plans in accordance with APB Opinion
No. 25 under which no compensation expense has been recognized. The
option exercise price is the market value of the stock on the date of
grant. Options granted to the key employees automatically vest after nine
years, but the plan provides for accelerated vesting based on the
attainment of certain performance goals or upon a change in control of the
company. Options granted to directors and employees vest at date of grant
and three years after date of grant, respectively, and expire ten years
after the date of grant. Under the stock option plans, the company is
authorized to grant options for up to 4.3 million shares of common stock
and has granted options on 1.9 million shares through December 31, 1998.
Had the company recorded compensation expense for the fair value of
options granted consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), net income would have been reduced on a pro
forma basis by $820,000 in 1998, $51,400 in 1997 and $48,000 in 1996. On
a pro forma basis, basic and diluted earnings per share for 1998 would
have been reduced by $.02 and there would have been no effect for 1997 and
1996. Since SFAS No. 123 does not require this accounting to be applied
to options granted prior to January 1, 1995, the resulting pro forma
compensation costs may not be representative of those to be expected in
future years.
A summary of the status of the stock option plans at December 31, 1998,
1997 and 1996, and changes during the years then ended are as follows:
1998 1997 1996
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Balance at
beginning of year 594,180 $12.07 635,965 $11.77 703,105 $11.65
Granted 1,225,920 21.12 22,500 16.37 --- ---
Forfeited (37,875) 21.05 (13,600) 11.41 --- ---
Exercised (265,417) 11.98 (50,685) 10.50 (67,140) 10.50
Balance at end
of year 1,516,808 19.17 594,180 12.07 635,965 11.77
Exercisable at
end of year 333,261 $12.94 112,461 $11.67 140,646 $10.50
Exercise prices on options outstanding at December 31, 1998, range from
$10.50 to $23.84 with a weighted average remaining contractual life of
approximately 8 years.
The weighted average fair value of each option granted in 1998 and 1997 is
$2.40 and $2.09, respectively. The fair value of each option is estimated
on the date of grant using the Black-Scholes option pricing model. The
assumptions used to estimate the fair value of options granted in 1998 and
1997 were a weighted average risk-free interest rate of 4.78 percent and
6.60 percent, respectively, a weighted average expected dividend yield of
5.13 percent and 5.48 percent, respectively, an expected life of 7 years
and a weighted average expected volatility 16.27 percent and 14.51
percent, respectively.
The company sponsors various defined contribution plans for eligible
employees. Costs incurred by the company under these plans were
$3.1 million in 1998, $2.1 million in 1997 and $1.9 million in 1996. The
costs incurred in each year reflect additional participants as a result of
business acquisitions.
NOTE 12
PARTNERSHIP INVESTMENT
In September 1995, KRC Holdings, Inc., through its wholly owned
subsidiary, Knife River Hawaii, Inc., acquired a 50 percent interest in
Hawaiian Cement, which was previously owned by Lone Star Industries, Inc.
Knife River Dakota, Inc., a wholly owned subsidiary of KRC Holdings, Inc.
acquired the remaining 50 percent interest in Hawaiian Cement from the
previous owner, Adelaide Brighton Cement (Hawaii), Inc. of Adelaide,
Australia, in July 1997.
In August 1997, the company began consolidating Hawaiian Cement into its
financial statements. Prior to August 1997, the company's net investment
in Hawaiian Cement was not consolidated and was accounted for by the
equity method. The company's share of operating results for the seven
months ended July 31, 1997, and the year ended December 31, 1996, is
included in "Other income -- net" in the accompanying Consolidated
Statements of Income for the years ended December 31, 1997 and 1996,
respectively. Summarized operating results for Hawaiian Cement for the
seven months ended July 31, 1997, and for the year ended December 31,
1996, when accounted for by the equity method, are as follows: net sales
of $33.5 million and $70.1 million; operating margin of $4.7 million and
$9.9 million; and income before income taxes of $2.0 million and $5.4
million, respectively.
NOTE 13
JOINTLY OWNED FACILITIES
The consolidated financial statements include the company's 22.7 percent
and 25.0 percent ownership interests in the assets, liabilities and
expenses of the Big Stone Station and the Coyote Station, respectively.
Each owner of the Big Stone and Coyote stations is responsible for
financing its investment in the jointly owned facilities.
The company's share of the Big Stone Station and Coyote Station operating
expenses is reflected in the appropriate categories of operating expenses
in the Consolidated Statements of Income.
At December 31, the company's share of the cost of utility plant in
service and related accumulated depreciation for the stations was as
follows:
1998 1997
(In thousands)
Big Stone Station:
Utility plant in service $ 49,762 $ 49,467
Less accumulated depreciation 28,781 27,971
$ 20,981 $ 21,496
Coyote Station:
Utility plant in service $121,726 $121,604
Less accumulated depreciation 56,770 53,107
$ 64,956 $ 68,497
NOTE 14
REGULATORY MATTERS AND REVENUES SUBJECT TO REFUND
General rate proceedings
Williston Basin had pending with the FERC a general natural gas rate
change application implemented in 1992. In October 1997, Williston Basin
appealed to the United States Court of Appeals for the D.C. Circuit (D.C.
Circuit Court) certain issues decided by the FERC in prior orders
concerning the 1992 proceeding. Williston Basin is awaiting a decision
from the D.C. Circuit Court.
In June 1995, Williston Basin filed a general rate increase application
with the 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 resulting in an increase of $8.9 million or
19.1 percent over the then current effective rates. Williston Basin began
collecting such increase effective January 1, 1996, subject to refund. On
July 29, 1998, the FERC issued an order which addressed various issues
including storage cost allocations, return on equity and throughput. On
August 28, 1998, Williston Basin requested rehearing of such order.
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.
NOTE 15
NATURAL GAS REPURCHASE COMMITMENT
The company has offered for sale since 1984 the inventoried natural gas
owned by Frontier, a special purpose, nonaffiliated corporation. Through
an agreement, Williston Basin is obligated to repurchase all of the
natural gas at Frontier's original cost and reimburse Frontier for all of
its financing and general administrative costs. Frontier has financed the
purchase of the natural gas under a term loan agreement with several
banks. At December 31, 1998 and 1997, borrowings totaled $14.8 million
and $32.0 million, respectively, at a weighted average interest rate of
6.19 percent and 6.63 percent, respectively. At December 31, 1998 and
1997, the natural gas repurchase commitment of $14.3 million and
$30.4 million, respectively, is reflected on the company's Consolidated
Balance Sheets under "Other liabilities" and $551,000 and $1.6 million,
respectively, is reflected under "Other accrued liabilities." The
financing costs associated with this repurchase commitment, consisting
principally of interest and related financing fees, approximated $5.7
million in 1996. The costs incurred in 1998 and 1997 were not material
and are included in "Other income -- net" on the Consolidated Statements
of Income. The term loan agreement will terminate on October 2, 1999,
subject to an option to renew this agreement upon the lenders' consent for
up to five years, unless terminated earlier by the occurrence of certain
events.
The FERC has issued orders that have held that storage costs should be
allocated to this gas, prospectively beginning May 1992, as opposed to
being included in rates applicable to Williston Basin's customers. These
storage costs, as initially allocated to the Frontier gas, approximated
$2.1 million annually, for which Williston Basin has provided reserves.
Williston Basin appealed these orders to the D.C. Circuit Court which in
December 1996 issued its order ruling that the FERC's actions in
allocating storage capacity costs to the Frontier gas were appropriate.
On August 28, 1998, Williston Basin requested rehearing of the July 29,
1998 FERC order which addressed various issues, including a requirement
that storage deliverability costs be allocated to the Frontier gas.
Williston Basin sells and transports natural gas held under the repurchase
commitment. In the third quarter of 1996, Williston Basin, based on a
number of factors including differences in regional natural gas prices and
natural gas sales occurring at that time, wrote down 43.0 MMdk of this gas
to its then current value. The value of this gas was determined using the
sum of discounted cash flows of expected future sales occurring at then
current regional natural gas prices as adjusted for anticipated future
price increases. This resulted in a write-down aggregating $18.6 million
($11.4 million after tax). In addition, Williston Basin wrote off certain
other costs related to this natural gas of approximately $2.5 million
($1.5 million after tax). The amounts related to this write-down are
included in "Costs on natural gas repurchase commitment" in the
Consolidated Statements of Income. At December 31, 1998 and 1997, natural
gas held under the repurchase commitment of $6.9 million and
$14.6 million, respectively, is included in the company's Consolidated
Balance Sheets under "Deferred charges and other assets." The amount of
this natural gas in storage as of December 31, 1998 was 7.0 MMdk.
NOTE 16
COMMITMENTS AND CONTINGENCIES
Pending litigation
In November 1993, the estate of W.A. Moncrief (Moncrief), a producer from
whom Williston Basin purchased a portion of its natural gas supply, filed
suit in Federal District Court for the District of Wyoming (Federal
District Court) against Williston Basin and the company disputing certain
price and volume issues under the contract.
Through the course of this action Moncrief submitted damage calculations
which totaled approximately $19 million or, under its alternative pricing
theory, approximately $39 million.
In June 1997, the Federal District Court issued its order awarding
Moncrief damages of approximately $15.6 million. In July 1997, the
Federal District Court issued an order limiting Moncrief's reimbursable
costs to post-judgment interest, instead of both pre- and post-judgment
interest as Moncrief had sought. In August 1997, Moncrief filed a notice
of appeal with the United States Court of Appeals for the Tenth Circuit
(U.S. Court of Appeals) related to the Federal District Court's orders.
In September 1997, Williston Basin and the company filed a notice of
cross-appeal. Oral argument before the U.S. Court of Appeals was held
September 23, 1998. Williston Basin and the company are awaiting a
decision from the U.S. Court of Appeals.
Williston Basin believes that it is entitled to recover from customers
virtually all of the costs which might ultimately be incurred as a result
of this litigation as gas supply realignment transition costs pursuant to
the provisions of the FERC's Order 636. However, the amount of costs that
can ultimately be recovered is subject to approval by the FERC and market
conditions.
In December 1993, Apache Corporation (Apache) and Snyder Oil Corporation
(Snyder) filed suit in North Dakota Northwest Judicial District Court
(North Dakota District Court) against Williston Basin and the company.
Apache and Snyder are oil and natural gas producers which had processing
agreements with Koch Hydrocarbon Company (Koch). Williston Basin and the
company had a natural gas purchase contract with Koch. Apache and Snyder
have alleged they are entitled to damages for the breach of Williston
Basin's and the company's contract with Koch. Williston Basin and the
company believe that if Apache and Snyder have any legal claims, such
claims are with Koch, not with Williston Basin or the company as Williston
Basin, the company and Koch have settled their disputes. Apache and
Snyder have submitted damage estimates under differing theories
aggregating up to $4.8 million without interest. A motion to intervene in
the case by several other producers, all of which had contracts with Koch
but not with Williston Basin, was denied in December 1996. The trial
before the North Dakota District Court was completed in November 1997. On
November 25, 1998, the North Dakota District Court entered an order
directing the entry of judgment in favor of Williston Basin and the
company. On December 15, 1998, Apache and Snyder filed a motion for
relief asking the North Dakota District Court to reconsider its November
25, 1998 order.
In a related matter, in March 1997, a suit was filed by nine other
producers, several of which had unsuccessfully tried to intervene in the
Apache and Snyder litigation, against Koch, Williston Basin and the
company. The parties to this suit are making claims similar to those in
the Apache and Snyder litigation, although no specific damages have been
stated.
In Williston Basin's opinion, the claims of Apache and Synder are without
merit and overstated and the claims of the nine other 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 November 1995, a suit was filed in District Court, County of Burleigh,
State of North Dakota (State District Court) by Minnkota Power
Cooperative, Inc., Otter Tail Power Company, Northwestern Public Service
Company and Northern Municipal Power Agency (Co-owners), the owners of an
aggregate 75 percent interest in the Coyote electric generating station
(Coyote Station), against the company (an owner of a 25 percent interest
in the Coyote Station) and Knife River. In its complaint, the Co-owners
have alleged a breach of contract against Knife River with respect to the
long-term coal supply agreement (Agreement) between the owners of the
Coyote Station and Knife River. The Co-owners have requested a
determination by the State District Court of the pricing mechanism to be
applied to the Agreement and have further requested damages during the
term of such alleged breach on the difference between the prices charged
by Knife River and the prices that may ultimately be determined by the
State District Court. The Co-owners also alleged a breach of fiduciary
duties by the company as operating agent of the Coyote Station, asserting
essentially that the company was unable to cause Knife River to reduce its
coal price sufficiently under the Agreement, and the Co-owners are seeking
damages in an unspecified amount. In May 1996, the State District Court
stayed the suit filed by the Co-owners pending arbitration, as provided
for in the Agreement.
In September 1996, the Co-owners notified the company and Knife River of
their demand for arbitration of the pricing dispute that had arisen under
the Agreement. The demand for arbitration, filed with the American
Arbitration Association (AAA), did not make any direct claim against the
company in its capacity as operator of the Coyote Station. The Co-owners
requested that the arbitrators make a determination that the pricing
dispute is not a proper subject for arbitration. By an April 1997 order,
the arbitration panel concluded that the claims raised by the Co-owners
are arbitrable. The Co-owners have requested the arbitrators to make a
determination that the prices charged by Knife River were excessive and
that the Co-owners should be awarded damages, based upon the difference
between the prices that Knife River charged and a "fair and equitable"
price. Upon application by the company and Knife River, the AAA
administratively determined that the company was not a proper party
defendant to the arbitration, and the arbitration is proceeding against
Knife River. On October 9, 1998, a hearing before the arbitration panel
was completed. At the hearing the Co-owners requested damages of
approximately $24 million, including interest, plus a reduction in the
future price of coal under the Agreement. The company is currently
awaiting a decision from the arbitration panel. Although unable to
predict the outcome of the arbitration, Knife River and the company
believe that the Co-owners' claims are without merit and intend to
vigorously defend the prices charged pursuant to the Agreement.
The company is also involved in other legal actions in the ordinary course
of its business. Although the outcomes of any such legal actions cannot
be predicted, management believes that there is no pending legal
proceeding against or involving the company, except those discussed above,
for which the outcome is likely to have a material adverse effect upon the
company's financial position or results of operations.
Environmental matters
Montana-Dakota and Williston Basin discovered polychlorinated biphenyls
(PCBs) in portions of their natural gas systems and informed the United
States Environmental Protection Agency (EPA) in January 1991. Montana-
Dakota and Williston Basin believe the PCBs entered the system from a
valve sealant. In January 1994, Montana-Dakota, Williston Basin and
Rockwell International Corporation (Rockwell), manufacturer of the valve
sealant, reached an agreement under which Rockwell has reimbursed and will
continue to reimburse Montana-Dakota and Williston Basin for a portion of
certain remediation costs. On the basis of findings to date, Montana-
Dakota and Williston Basin estimate future environmental assessment and
remediation costs will aggregate $3 million to $15 million. Based on such
estimated cost, the expected recovery from Rockwell and the ability of
Montana-Dakota and Williston Basin to recover their portions of such costs
from ratepayers, Montana-Dakota and Williston Basin believe that the
ultimate costs related to these matters will not be material to each of
their respective financial positions or results of operations.
Electric purchased power commitments
Through October 31, 2006, Montana-Dakota has contracted to purchase 66,400
kW of participation power from Basin Electric Power Cooperative. In
addition, Montana-Dakota, under a power supply contract through December
31, 2006, is purchasing up to 55,000 kW of capacity from Black Hills Power
and Light Company.
NOTE 17
QUARTERLY DATA (UNAUDITED)
The following unaudited information shows selected items by quarter for
the years 1998 and 1997:
First Second Third Fourth
Quarter Quarter* Quarter Quarter*
(In thousands, except per share amounts)
1998
Operating revenues $170,122 $179,715 $269,978 $276,812
Operating expenses 137,913 186,310 227,283 274,178
Operating income (loss) 32,209 (6,595) 42,695 2,634
Net income (loss) 17,793 (5,785) 22,538 (439)
Earnings (loss) per common share:
Basic .39 (.12) .42 (.01)
Diluted .39 (.12) .42 (.01)
Weighted average common shares
outstanding:
Basic 45,375 50,936 52,703 53,021
Diluted 45,629 50,936 53,062 53,021
1997
Operating revenues $139,811 $125,380 $163,699 $178,784
Operating expenses 109,055 106,932 134,675 145,451
Operating income 30,756 18,448 29,024 33,333
Net income 14,597 8,741 14,195 17,084
Earnings per common share:
Basic .34 .20 .32 .39
Diluted .33 .20 .32 .39
Weighted average common shares
outstanding:
Basic 42,894 43,104 43,577 43,676
Diluted 43,019 43,247 43,733 43,901
* Reflects $20.0 million and $19.9 million in noncash after-tax write-
downs of oil and natural gas properties for the second quarter and
fourth quarter of 1998, respectively.
Certain company operations are highly seasonal and revenues from and
certain expenses for such operations may fluctuate significantly among
quarterly periods. Accordingly, quarterly financial information may not
be indicative of results for a full year.
NOTE 18
OIL AND NATURAL GAS ACTIVITIES (UNAUDITED)
Fidelity Oil Group is involved in the acquisition, exploration,
development and production of oil and natural gas properties. Fidelity's
operations vary from the acquisition of producing properties with
potential development opportunities to exploration and are located
throughout the United States, the Gulf of Mexico and Canada. Fidelity
shares revenues and expenses from the development of specified properties
in proportion to its interests.
Williston Basin Interstate Pipeline Company owns in fee or holds natural
gas leases and operating rights primarily applicable to the shallow rights
(above 2,000 feet) in the Cedar Creek Anticline in southeastern Montana
and to all rights in the Bowdoin area located in north-central Montana.
The following information includes the company's proportionate share of
all its oil and natural gas interests held by both Fidelity and Williston
Basin.
The following table sets forth capitalized costs and accumulated
depreciation, depletion and amortization related to oil and natural gas
producing activities at December 31:
1998 1997 1996
(In thousands)
Subject to amortization $266,301 $252,291 $223,409
Not subject to amortization 22,153 9,408 6,792
Total capitalized costs 288,454 261,699 230,201
Accumulated depreciation, depletion
and amortization 111,472 95,611 71,554
Net capitalized costs $176,982 $166,088 $158,647
NOTE: Net capitalized costs as of December 31, 1998 reflect noncash
write-downs of the company's oil and natural gas properties as
discussed in Note 1.
Capital expenditures, including those not subject to amortization,
related to oil and natural gas producing activities are as follows:
Years ended December 31, 1998 1997 1996
(In thousands)
Acquisitions $ 63,419 $ 59 $23,284
Exploration 15,976 13,344 8,101
Development 21,545 18,874 19,979
Total capital expenditures $100,940 $32,277 $51,364
The following summary reflects income resulting from the company's
operations of oil and natural gas producing activities, excluding
corporate overhead and financing costs:
Years ended December 31, 1998 1997 1996
(In thousands)
Revenues* $ 61,831 $77,756 $75,335
Production costs 19,419 23,251 21,296
Depreciation, depletion and
amortization 23,050 24,864 25,629
Write-downs of oil and natural gas
properties (Note 1) 66,000 --- ---
Pretax income (46,638) 29,641 28,410
Income tax expense (benefit) (19,268) 10,968 10,875
Results of operations for
producing activities $(27,370) $18,673 $17,535
* Includes $10.5 million, $9.4 million and $7.0 million of revenues
for 1998, 1997 and 1996, respectively, related to Williston Basin's
natural gas production activities which are included in "Natural
gas" operating revenues in the Consolidated Statements of Income.
The following table summarizes the company's estimated quantities of
proved oil and natural gas reserves at December 31, 1998, 1997 and
1996, and reconciles the changes between these dates. Estimates of
economically recoverable oil and natural gas reserves and future net
revenues therefrom are based upon a number of variable factors and
assumptions. For these reasons, estimates of economically recoverable
reserves and future net revenues may vary from actual results.
1998 1997 1996
Natural Natural Natural
Oil Gas Oil Gas Oil Gas
(In thousands of barrels/Mcf)
Proved developed and
undeveloped reserves:
Balance at beginning
of year 14,900 184,900 16,100 200,200 14,200 179,000
Production (1,900) (20,700) (2,100) (20,400) (2,100) (20,400)
Extensions and
discoveries 200 21,300 600 12,100 600 27,000
Purchases of proved
reserves 2,000 56,600 --- 200 2,900 9,900
Sales of reserves
in place --- (100) (200) (2,300) (700) (3,700)
Revisions to previous
estimates due to
improved secondary
recovery techniques
and/or changed
economic conditions (3,700) 1,600 500 (4,900) 1,200 8,400
Balance at end
of year 11,500 243,600 14,900 184,900 16,100 200,200
Proved developed reserves:
January 1, 1996 13,600 156,400
December 31, 1996 15,400 168,200
December 31, 1997 14,500 163,800
December 31, 1998 10,700 193,000
Virtually all of the company's interests in oil and natural gas
reserves are located in the continental United States. Reserve
interests at December 31, 1998, applicable to the company's $411,000
net investment in oil and natural gas properties located in Canada
comprise approximately 2 percent of the total reserves.
The standardized measure of the company's estimated discounted future
net cash flows of total proved reserves associated with its various oil
and natural gas interests at December 31 is as follows:
1998 1997 1996
(In thousands)
Future net cash flows before
income taxes $246,700 $306,600 $580,300
Future income tax expenses 40,500 86,600 194,200
Future net cash flows 206,200 220,000 386,100
10% annual discount for estimated
timing of cash flows 81,100 81,000 152,100
Discounted future net cash flows
relating to proved oil and natural
gas reserves $125,100 $139,000 $234,000
The following are the sources of change in the standardized measure
of discounted future net cash flows by year:
1998 1997 1996
(In thousands)
Beginning of year $139,000 $ 234,000 $120,900
Net revenues from production (42,400) (54,500) (54,000)
Change in net realization (70,500) (158,400) 125,800
Extensions, discoveries and improved
recovery, net of future
production-related costs 18,200 19,400 43,500
Purchases of proved reserves 51,000 200 49,600
Sales of reserves in place (100) (2,800) (6,700)
Changes in estimated future
development costs, net of those
incurred during the year (16,600) 7,700 (2,400)
Accretion of discount 18,600 32,800 16,900
Net change in income taxes 30,100 62,100 (69,200)
Revisions of previous quantity
estimates (1,600) (1,300) 8,700
Other (600) (200) 900
Net change (13,900) (95,000) 113,100
End of year $125,100 $ 139,000 $234,000
The estimated discounted future cash inflows from estimated future
production of proved reserves were computed using year-end oil and
natural gas prices. Future development and production costs
attributable to proved reserves were computed by applying year-end
costs to be incurred in producing and further developing the proved
reserves. Future income tax expenses were computed by applying
statutory tax rates (adjusted for permanent differences and tax
credits) to estimated net future pretax cash flows.
<TABLE>
<CAPTION>
1998* 1997 1996 1995 1994 1993 1988
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Data
Operating revenues: (000's)
Electric $ 211,453 $ 164,351 $ 138,761 $ 134,609 $ 133,953 $ 131,109 $126,128
Natural gas 287,426 200,789 175,408 167,787 160,970 178,981 168,125
Construction materials and mining 346,451 174,147 132,222 113,066 116,646 90,397 42,388
Oil and natural gas production 51,297 68,387 68,310 48,784 37,959 39,125 20,918
$ 896,627 $ 607,674 $ 514,701 $ 464,246 $ 449,528 $ 439,612 $357,559
Operating income: (000's)
Electric $ 38,099 $ 33,089 $ 29,476 $ 29,898 $ 27,596 $ 30,520 $ 33,505
Natural gas distribution 8,028 10,410 11,504 6,917 3,948 4,730 5,368
Natural gas transmission 38,114 29,169 30,231 25,427 21,281 20,108 21,189
Construction materials and mining 41,609 14,602 16,062 14,463 16,593 16,984 9,841
Oil and natural gas production (54,907) 24,291 24,252 13,871 8,757 11,750 7,352
$ 70,943 $ 111,561 $ 111,525 $ 90,576 $ 78,175 $ 84,092 $ 77,255
Earnings on common stock: (000's)
Electric $ 17,180 $ 13,388 $ 11,436 $ 12,000 $ 11,719 $ 12,652** $ 13,444
Natural gas distribution 3,501 4,514 4,892 1,604 285 1,182** 1,474
Natural gas transmission 20,823 11,317 2,459 8,416 6,155 4,713 2,320
Construction materials and mining 24,499 10,111 11,521 10,819 11,622 12,359 11,493
Oil and natural gas production (32,673) 14,505 14,375 8,002 9,267 7,109 5,115
Earnings on common stock
before cumulative effect of
accounting change 33,330 53,835 44,683 40,841 39,048 38,015** 33,846
Cumulative effect of
accounting change --- --- --- --- --- 5,521 ---
$ 33,330 $ 53,835 $ 44,683 $ 40,841 $ 39,048 $ 43,536 $ 33,846
Earnings per common share before
cumulative effect of accounting
change -- diluted $ .66 $ 1.24 $ 1.04 $ .95 $ .91 $ .89** $ .80
Cumulative effect of accounting change --- --- --- --- --- .13 ---
$ .66 $ 1.24 $ 1.04 $ .95 $ .91 $ 1.02 $ .80
Pro forma amounts assuming retroactive
application of accounting change:
Net income (000's) $ 34,107 $ 54,617 $ 45,470 $ 41,633 $ 39,845 $ 38,817 $ 34,957
Earnings per common
share -- diluted $ .66 $ 1.24 $ 1.04 $ .95 $ .91 $ .89 $ .80
Common Stock Statistics
Weighted average common shares
outstanding -- diluted (000's) 50,837 43,478 42,824 42,789 42,763 42,801 42,116
Dividends per common share $ .7834 $ .7534 $ .7333 $ .7188 $ .7022 $ .6755 $ .6311
Book value per common share $ 10.39 $ 8.84 $ 8.21 $ 7.90 $ 7.66 $ 7.45 $ 6.55
Market price per common
share (year-end) $ 26.31 $ 21.08 $ 15.33 $ 13.25 $ 12.06 $ 14.00 $ 8.45
Market price ratios:
Dividend payout 119% 61% 70% 76% 77% 76%** 78%
Yield 3.0% 3.6% 4.8% 5.5% 5.9% 5.0% 7.5%
Price/earnings ratio 39.9x 17.0x 14.6x 13.9x 13.2x 15.8x** 10.5x
Market value as a
percent of book value 253.2% 238.5% 186.8% 167.7% 157.4% 188.0% 128.8%
Profitability Indicators
Return on average common equity 6.5% 14.6% 13.0% 12.3% 12.1% 12.3%** 12.4%
Return on average invested capital 5.5% 10.3% 9.5% 9.2% 9.1% 9.4%** 9.0%
Interest coverage 6.1x 6.0x 5.4x 3.9x 3.3x 3.4x** 2.7x
Fixed charges coverage, including
preferred dividends 2.5x 3.4x 2.7x 3.0x 2.8x 2.9x** 2.2x
General
Total assets (000's) $ 1,452,775 $ 1,113,892 $ 1,089,173 $ 1,056,479 $ 1,004,718 $ 1,041,051 $949,509
Net long-term debt (000's) $ 413,264 $ 298,561 $ 280,666 $ 237,352 $ 217,693 $ 231,770 $242,593
Redeemable preferred stock (000's) $ 1,700 $ 1,800 $ 1,900 $ 2,000 $ 2,100 $ 2,200 $ 3,100
Capitalization ratios:
Common stockholders' equity 56% 55% 54% 57% 58% 56% 52%
Preferred stocks 2 2 3 3 3 3 3
Long-term debt 42 43 43 40 39 41 45
100% 100% 100% 100% 100% 100% 100%
<FN>
*Reflects $39.9 million or 78 cents per common share in noncash after-tax write-downs of oil and natural gas properties.
**Before cumulative effect of an accounting change reflecting the accrual of estimated unbilled revenues.
NOTE: Common stock share amounts reflect the company's three-for-two common stock splits effected in October 1995 and July 1998.
</FN>
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993 1988
<S> <C> <C> <C> <C> <C> <C> <C>
Electric Operations
Sales to ultimate consumers (thousand kWh) 2,053,862 2,041,191 2,067,926 1,993,693 1,955,136 1,893,713 1,843,982
Sales for resale (thousand kWh) 586,540 361,954 374,535 408,011 444,492 510,987 246,425
Electric system generating and firm purchase
capability -- kW (Interconnected system) 489,100 487,500 481,800 472,400 470,900 465,200 451,600
Demand peak -- kW (Interconnected system) 402,500 404,600 393,300 412,700 369,800 350,300 386,700
Electricity produced (thousand kWh) 2,103,199 1,826,770 1,829,669 1,718,077 1,901,119 1,870,740 1,691,778
Electricity purchased (thousand kWh) 730,949 769,679 809,261 867,524 700,912 701,736 598,443
Average cost of fuel and purchased
power per kWh $.017 $.018 $.017 $.016 $.017 $.016 $.017
Natural Gas Distribution Operations
Sales (Mdk) 32,024 34,320 38,283 33,939 31,840 31,147 32,557
Transportation (Mdk) 10,324 10,067 9,423 11,091 9,278 12,704 3,314
Weighted average degree days -- % of
previous year's actual 94% 85% 114% 105% 92% 115% 113%
Natural Gas Transmission Operations
Natural gas transmission:
Sales for resale (Mdk) --- --- --- --- --- 13,201 33,515
Transportation (Mdk) 88,974 85,464 82,169 68,015 63,870 59,416 33,892
Produced (Mdk) 7,412 6,949 6,073 4,981 4,732 3,876 1,744
Net recoverable reserves (MMcf) 140,200 127,300 133,400 113,000 99,300 --- ---
Energy marketing:
Natural gas volumes (Mdk) 58,495 14,971 4,670 3,556 7,301 6,827 ---
Propane (thousand gallons) 7,037 10,005 9,689 7,471 6,462 2,210 ---
Construction Materials and Mining Operations
Construction materials: (000's)
Aggregates (tons sold) 11,054 5,113 3,374 2,904 2,688 2,391 ---
Asphalt (tons sold) 1,790 758 694 373 391 141 ---
Ready-mixed concrete (cubic yards sold) 1,021 516 340 307 315 157 ---
Recoverable aggregate reserves (tons) 654,670 169,375 119,800 68,000 71,000 74,200 ---
Coal: (000's)
Sales (tons) 3,113 2,375 2,899 4,218 5,206 5,066 4,759
Recoverable reserves (tons) 190,152 226,560 228,900 231,900 236,100 230,600 270,800
Oil and Natural Gas Production Operations
Production:
Oil (000's of barrels) 1,912 2,088 2,149 1,973 1,565 1,497 1,358
Natural gas (MMcf) 13,025 13,192 14,067 12,319 9,228 8,817 1,464
Average sales prices:
Oil (per barrel) $ 12.71 $ 17.50 $ 17.91 $ 15.07 $ 13.14 $ 14.84 $ 13.43
Natural gas (per Mcf) $ 2.07 $ 2.41 $ 2.09 $ 1.51 $ 1.84 $ 1.86 $ 2.14
Net recoverable reserves:
Oil (000's of barrels) 11,500 14,900 16,100 14,200 12,500 11,200 11,500
Natural gas (MMcf) 103,400 57,600 66,800 66,000 54,900 50,300 9,400
</TABLE>
MDU RESOURCES GROUP, INC.
List of Subsidiaries
State or Other
Jurisdiction
in Which
Incorporated
Alaska Basic Industries, Inc. Alaska
Anchorage Sand and Gravel Company, Inc. Alaska
Baldwin Contracting Company, Inc. California
Centennial Energy Holdings, Inc. Delaware
Concrete, Inc. California
Fidelity Oil Co. Delaware
Fidelity Oil Holdings, Inc. Delaware
Hap Taylor & Sons, Inc. Oregon
Harp Engineering, Inc. Montana
Harp Line Constructors Co. Montana
High Line Equipment, Inc. Delaware
ILB Hawaii, Inc. Hawaii
Innovative Gas Services, Incorporated Kentucky
International Line Builders, Inc. Delaware
Knife River Corporation Delaware
Knife River Dakota, Inc. Delaware
Knife River Hawaii, Inc. Delaware
Knife River Marine, Inc. Delaware
KRC Aggregate, Inc. Delaware
KRC Holdings, Inc. Delaware
LTM, Incorporated Oregon
Marcon Energy Corporation Kentucky
Medford Ready Mix, Inc. Delaware
Morse Bros., Inc. Oregon
Pouk & Steinle, Inc. California
Prairie Propane, Inc. Delaware
Prairielands Energy Marketing, Inc. Delaware
Prairielands Energy Technology, Inc. Delaware
Rogue Aggregates, Inc. Oregon
S2 - F Corp. Oregon
Utility Services, Inc. Delaware
WBI Canadian Pipeline, Ltd. Canada
WBI Energy Services, Inc. Delaware
WBI Holdings, Inc. Delaware
WBI Production, Inc. Delaware
WBI Southern, Inc. Delaware
Williston Basin Interstate Pipeline Company Delaware
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in this Form 10-K of our report dated
January 21, 1999 included in the MDU Resources Group, Inc. Annual
Report to Stockholders for 1998. We also consent to the
incorporation of our report incorporated by reference in this
Form 10-K into the Company's previously filed Registration
Statements on Form S-3, No. 333-06127 and No. 333-48647, and on
Form S-8, No. 33-54486, No. 333-06103, No. 333-06105, No. 333-
27879, No. 333-27877 and No. 333-72595.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
March 4, 1999
CONSENT OF ENGINEER
We hereby consent to the reference to our report dated
January 15, 1999, appearing in this Annual Report on Form 10-K.
We also consent to the incorporation by reference in the
Registration Statements on Form S-3, No. 333-06127, and No. 333-
48647, and on Form S-8, No. 33-54486, No. 333-06103, No. 333-
06105, No. 333-27879, No. 333-27877 and No. 333-72595 of MDU
Resources Group, Inc. and in the related Prospectuses of the
reference to such report appearing in this Annual Report on Form
10-K.
/s/ RALPH E. DAVIS ASSOCIATES, INC.
RALPH E. DAVIS ASSOCIATES, INC.
Houston, Texas
March 4, 1999
CONSENT OF ENGINEER
We hereby consent to the reference to our report dated
January 1, 1999, appearing in this Annual Report on Form 10-K.
We also consent to the incorporation by reference in the
Registration Statements on Form S-3, No. 333-06127, and No. 333-
48647 and on Form S-8, No. 33-54486, No. 333-06103, No. 333-
06105, No. 333-27879, No. 333-27877 and No. 333-72595 of MDU
Resources Group, Inc. and in the related Prospectuses of the
reference to such report appearing in this Annual Report on Form
10-K.
/s/ WEIR INTERNATIONAL MINING CONSULTANTS
WEIR INTERNATIONAL MINING CONSULTANTS
Des Plaines, Illinois
March 4, 1999
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME, CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED
STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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<NAME> MDU RESOURCES GROUP, INC.
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<TOTAL-ASSETS> 1,452,775
<COMMON> 176,601
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<OTHER-OPERATING-EXPENSES> 825,684
<TOTAL-OPERATING-EXPENSES> 843,169
<OPERATING-INCOME-LOSS> 53,458
<OTHER-INCOME-NET> 10,922
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<EARNINGS-AVAILABLE-FOR-COMM> 33,330
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