UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
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X ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE
SECURITIES EXCHANGE ACT OF 1934
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OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
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THE
SECURITIES EXCHANGE ACT OF 1934
For
the transition period from _____________ to ______________
MDU
Resources Group, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
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41-0423660
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(State
or other jurisdiction of incorporation
or organization)
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(I.R.S.
Employer Identification No.)
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1200
West
Century Avenue
P.O.
Box
5650
(Address
of principal executive offices)
(Zip
Code)
(701)
530-1000
(Registrant's
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
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Name
of each exchange on which registered
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Common
Stock, par value $1.00
and
Preference Share Purchase Rights
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New
York Stock Exchange
Pacific
Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
Preferred
Stock, par value $100
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes x
No
o.
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Exchange Act. Yes o
No
x.
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x No
o.
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
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check
one):
Large
accelerated filer x Accelerated
filer o
Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o
No
x.
State
the
aggregate market value of the voting stock held by nonaffiliates of the
registrant as of June 30, 2005: $3,371,397,000.
CONTENTS
PART
I
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Items
1 and 2
Business and Properties
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General
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Electric
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Natural
Gas Distribution
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Construction
Services
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Pipeline
and Energy Services
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Natural
Gas and Oil Production
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Construction
Materials and Mining
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Independent
Power Production
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Item
1B Unresolved
Comments
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Item
4 Submission
of Matters to a Vote of Security Holders
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PART
II
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Item
5 Market
for the Registrant's Common Equity, Related Stockholder Matters
and Issuer
Purchase of Equity Securities
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Item
6 Selected
Financial Data
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Item
7 Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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Item
7A Quantitative
and Qualitative Disclosures About Market Risk
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Item
8 Financial
Statements and Supplementary Data
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Item
9 Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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Item
9A Controls
and Procedures
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Item
9B Other
Information
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PART
III
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Item
11 Executive
Compensation
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Item
12 Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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Item
13 Certain
Relationships and Related Transactions
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Item
14 Principal
Accountant Fees and Services
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PART
IV
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Item
15 Exhibits
and Financial Statement Schedules
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Signatures
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Exhibits
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DEFINITIONS
The
following abbreviations and acronyms used in this Form 10-K are defined
below:
Abbreviation
or Acronym
2003
Medicare Act
|
Medicare
Prescription Drug, Improvement and Modernization Act of
2003
|
AFUDC
|
Allowance
for funds used during construction
|
ALJ
|
Administrative
Law Judge
|
Anadarko
|
Anadarko
Petroleum Corporation
|
APB
|
Accounting
Principles Board
|
APB
Opinion No. 25
|
Accounting
for Stock-Based Compensation
|
Arch
|
Arch
Coal Sales Company
|
Army
Corps
|
U.S.
Army Corps of Engineers
|
Badger
Hills Project
|
Tongue
River-Badger Hills Project
|
Bbl
|
Barrel
|
Bcf
|
Billion
cubic feet
|
BER
|
Montana
Board of Environmental Review
|
Bitter
Creek
|
Bitter
Creek Pipelines, LLC, an indirect wholly owned subsidiary of
WBI
Holdings
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BIV
|
BIV
Generation Company, L.L.C., an indirect wholly owned subsidiary
of
Centennial Power
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Black
Hills Power
|
Black
Hills Power and Light Company
|
BLM
|
Bureau
of Land Management
|
Brush
Generating Facility
|
213
MW of natural gas-fired electric generating facilities located
near Brush,
Colorado
|
Btu
|
British
thermal units
|
Carib
Power
|
Carib
Power Management LLC
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CDPHE
|
Colorado
Department of Public Health and Environment
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CEM
|
Colorado
Energy Management, LLC, a direct wholly owned subsidiary of Centennial
Resources
|
Centennial
|
Centennial
Energy Holdings, Inc., a direct wholly owned subsidiary of the
Company
|
Centennial
Capital
|
Centennial
Holdings Capital LLC, a direct wholly owned subsidiary of
Centennial
|
Centennial
International
|
Centennial
Energy Resources International, Inc., a direct wholly owned subsidiary
of
Centennial Resources
|
Centennial
Power
|
Centennial
Power, Inc., a direct wholly owned subsidiary of Centennial
Resources
|
Centennial
Resources
|
Centennial
Energy Resources LLC, a direct wholly owned subsidiary of
Centennial
|
CERCLA
|
Comprehensive
Environmental Response, Compensation and Liability Act
|
Clean
Air Act
|
Federal
Clean Air Act
|
Clean
Water Act
|
Federal
Clean Water Act
|
Company
|
MDU
Resources Group, Inc.
|
CPP
|
Colorado
Power Partners, an indirect wholly owned subsidiary of Centennial
Power
|
D.C.
Appeals Court
|
U.S.
Court of Appeals for the District of Columbia Circuit
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DEQ
|
Oregon
State Department of Environmental Quality
|
dk
|
Decatherm
|
EITF
|
Emerging
Issues Task Force
|
EITF
No. 04-6
|
Accounting
for Stripping Costs in the Mining Industry
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EITF
No. 91-6
|
Revenue
Recognition of Long-Term Power Sales Contracts
|
EPA
|
U.S.
Environmental Protection Agency
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ESA
|
Endangered
Species Act
|
Exchange
Act
|
Securities
Exchange Act of 1934
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FASB
|
Financial
Accounting Standards Board
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FERC
|
Federal
Energy Regulatory Commission
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Fidelity
|
Fidelity
Exploration & Production Company, a direct wholly owned subsidiary of
WBI Holdings
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FIN
|
FASB
Interpretation No.
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FIN
47
|
Accounting
for Conditional Asset Retirement Obligations - An Interpretation
of FASB
Statement No. 143
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Great
Plains
|
Great
Plains Natural Gas Co., a public utility division of the
Company
|
Grynberg
|
Jack
J. Grynberg
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Hardin
Generating Facility
|
116-MW
coal-fired electric generating facility near Hardin,
Montana
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Hartwell
|
Hartwell
Energy Limited Partnership
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Hartwell
Generating Facility
|
310-MW
natural gas-fired electric generating facility near Hartwell,
Georgia (50
percent ownership)
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Howell
|
Howell
Petroleum Corporation
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IBEW
|
International
Brotherhood of Electrical Workers
|
Innovatum
|
Innovatum,
Inc., an indirect wholly owned subsidiary of WBI
Holdings
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K-Plan
|
Company’s
401(k) Retirement Plan
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Kennecott
|
Kennecott
Coal Sales Company
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Knife
River
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Knife
River Corporation, a direct wholly owned subsidiary of
Centennial
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kW
|
Kilowatts
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kWh
|
Kilowatt-hour
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LWG
|
Lower
Willamette Group
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MAPP
|
Mid-Continent
Area Power Pool
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MBbls
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Thousands
of barrels of oil or other liquid hydrocarbons
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MBI
|
Morse
Bros., Inc., an indirect wholly owned subsidiary of Knife
River
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Mcf
|
Thousand
cubic feet
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MD&A
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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Mdk
|
Thousand
decatherms
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MDU
Brasil
|
MDU
Brasil Ltda., an indirect wholly owned subsidiary of Centennial
International
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MDU
Construction Services
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MDU
Construction Services Group, Inc., formerly Utility Services,
Inc. (name
change was effective December 23, 2005), a direct wholly owned
subsidiary
of Centennial
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Midwest
ISO
|
Midwest
Independent Transmission System Operator, Inc.
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MMBtu
|
Million
Btu
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MMcf
|
Million
cubic feet
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MMcfe
|
Million
cubic feet equivalent
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MMdk
|
Million
decatherms
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Montana-Dakota
|
Montana-Dakota
Utilities Co., a public utility division of the Company
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Montana
Federal District Court
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U.S.
District Court for the District of Montana
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MPUC
|
Minnesota
Public Utilities Commission
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MPX
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MPX
Termoceara Ltda.
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MTPSC
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Montana
Public Service Commission
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MW
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Megawatt
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Nance
Petroleum
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Nance
Petroleum Corporation
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ND
Health Department
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North
Dakota Department of Health
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NDPSC
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North
Dakota Public Service Commission
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NEO
|
Named
Executive Officers
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NEPA
|
National
Environmental Policy Act
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NHPA
|
National
Historic Preservation Act
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Ninth
Circuit
|
U.S.
Ninth Circuit Court of Appeals
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NPRC
|
Northern
Plains Resource Council
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Oglethorpe
|
Oglethorpe
Power Corporation
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Order
on Rehearing
|
Order
on Rehearing and Compliance and Remanding Certain Issues for
Hearing
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PCBs
|
Polychlorinated
biphenyls
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Prairielands
|
Prairielands
Energy Marketing, Inc., an indirect wholly owned subsidiary of
WBI
Holdings
|
Proxy
Statement
|
Company’s
2006 Proxy Statement
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PSCo
|
Public
Service Company of Colorado
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RCRA
|
Resource
Conservation and Recovery Act
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SAB
|
Staff
Accounting Bulletin
|
SAB
No. 106
|
Interpretation
regarding the application of SFAS No. 143 by oil and gas producing
companies following the full-cost accounting method
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SAFETEA-LU
|
Safe,
Accountable, Flexible and Efficient Transportation Equity Act
- A Legacy
for Users
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SDPUC
|
South
Dakota Public Utilities Commission
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SEC
|
U.S.
Securities and Exchange Commission
|
SEIS
|
Supplemental
Environmental Impact Statement
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SFAS
|
Statement
of Financial Accounting Standards
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SFAS
No. 71
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Accounting
for the Effects of Certain Types of Regulation
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SFAS
No. 87
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Employers’
Accounting for Pensions
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SFAS
No. 109
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Accounting
for Income Taxes
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SFAS
No. 123
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Accounting
for Stock-Based Compensation
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SFAS
No. 123 (revised)
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Share-Based
Payment (revised 2004)
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SFAS
No. 142
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Goodwill
and Other Intangible Assets
|
SFAS
No. 143
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Accounting
for Asset Retirement Obligations
|
SFAS
No. 148
|
Accounting
for Stock-Based Compensation - Transition and Disclosure - an
amendment of
SFAS No. 123
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Sheridan
System
|
A
separate electric system owned by Montana-Dakota
|
SMCRA
|
Surface
Mining Control and Reclamation Act
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St.
Mary
|
St.
Mary Land & Exploration Company
|
Stock
Purchase Plan
|
Company’s
Dividend Reinvestment and Direct Stock Purchase Plan
|
Termoceara
Generating Facility
|
220-MW
natural gas-fired electric generating facility in the Brazilian
state of
Ceara (49 percent ownership)
|
Trinity
Generating Facility
|
225-MW
natural gas-fired electric generating facility in Trinidad and
Tobago
(49.99 percent ownership)
|
T&TEC
|
Trinidad
and Tobago Electric Commission
|
WAPA
|
Western
Area Power Administration
|
WBI
Holdings
|
WBI
Holdings, Inc., a direct wholly owned subsidiary of
Centennial
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Westmoreland
|
Westmoreland
Coal Company
|
Williston
Basin
|
Williston
Basin Interstate Pipeline Company, an indirect wholly owned subsidiary
of
WBI Holdings
|
Wyoming
Federal District Court
|
U.S.
District Court for the District of Wyoming
|
WYPSC
|
Wyoming
Public Service Commission
|
PART
I
ITEMS
1 AND 2. BUSINESS AND PROPERTIES
GENERAL
The
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 1200 West Century Avenue, P.O. Box 5650, Bismarck, North Dakota 58506-5650,
telephone (701) 530-1000.
Montana-Dakota,
through the electric and natural gas distribution segments,
generates, transmits and distributes electricity and distributes natural
gas in
Montana, North Dakota, South Dakota and Wyoming. Great Plains distributes
natural gas in western Minnesota and southeastern North Dakota. These operations
also supply related value-added products and services.
The
Company, through its wholly owned subsidiary, Centennial, owns WBI Holdings,
Knife River, MDU Construction Services, Centennial Resources and Centennial
Capital.
WBI
Holdings is comprised of the pipeline and energy services and the natural
gas
and oil production segments. The pipeline and energy services segment provides
natural gas transportation, underground storage and gathering services through
regulated and nonregulated pipeline systems primarily in the Rocky Mountain
and
northern Great Plains regions of the United States. The pipeline and energy
services segment also provides energy-related management services, including
cable and pipeline magnetization and locating. The natural gas and oil
production segment is engaged in natural gas and oil acquisition, exploration,
development and production activities primarily in the Rocky Mountain and
Mid-Continent regions of the United States and in and around the Gulf of
Mexico.
Knife
River mines aggregates and markets crushed stone, sand, gravel and related
construction materials, including ready-mixed concrete, cement, asphalt and
other value-added products, as well as performs integrated construction
services, in the central and western United States and in Alaska and
Hawaii.
MDU
Construction Services specializes in electrical line construction, pipeline
construction, inside electrical wiring and cabling and the manufacture and
distribution of specialty equipment.
Centennial
Resources owns, builds and operates electric generating facilities in the
United
States and has investments in domestic and international natural resource-based
projects. Electric capacity and energy produced at its power plants primarily
are sold under mid- and long-term contracts to nonaffiliated
entities.
Centennial
Capital insures various types of risks as a captive insurer for certain of
the
Company’s subsidiaries. The function of the captive is to fund the deductible
layers of the insured companies’ general liability and automobile liability
coverages. Centennial Capital also owns certain real and personal property.
These activities are reflected in the Other category.
As
of
December 31, 2005, the Company had 10,030 full-time employees with 120
employed at MDU Resources Group, Inc., 881 at Montana-Dakota, 52 at Great
Plains, 514 at WBI Holdings, 4,438 at Knife River, 3,893 at MDU Construction
Services and 132 at Centennial Resources. The number of employees at certain
Company operations fluctuates during the year depending upon the number and
size
of construction projects. The Company considers its relations with employees
to
be satisfactory.
At
Montana-Dakota and Williston Basin, 429 and 76 employees, respectively, are
represented by the IBEW. Labor contracts with such employees are in effect
through April 30, 2007, and March 31, 2008, for Montana-Dakota and
Williston Basin, respectively.
Knife
River has 43 labor contracts that represent approximately 800 of its
construction materials employees. Knife River is currently in negotiations
on
seven of its labor contracts.
MDU
Construction Services has 86 labor contracts representing the majority of
its
employees. The majority of the labor contracts contain provisions that prohibit
work stoppages or strikes and provide for binding arbitration dispute resolution
in the event of an extended disagreement.
The
Company’s principal properties, which are of varying ages and are of different
construction types, are believed to be generally in good condition, are well
maintained and are generally suitable and adequate for the purposes for which
they are used.
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 - MD&A and
Item 8 - Financial Statements and Supplementary Data - Note 13 and Supplementary
Financial Information.
The
operations of the Company and certain of its subsidiaries are subject to
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. The Company believes
that
it is in substantial compliance with these regulations, except as to what
may be
ultimately determined with regard to the Portland, Oregon, Harbor Superfund
Site, which is discussed under Items 1 and 2 - Business and Properties -
Construction Materials and Mining - Environmental Matters, Item 3 - Legal
Proceedings and in Item 8 - Financial Statements and Supplementary Data -
Note
18 and also the coalbed natural gas development, which is discussed under
Item 3
- Legal Proceedings and in Item 8 - Financial Statements and Supplementary
Data
- Note 18. There are no pending CERCLA actions for any of the Company's
properties, other than the Portland, Oregon, Harbor Superfund Site.
Governmental
regulations establishing environmental protection standards are continuously
evolving and, therefore, the character, scope, cost and availability of the
measures that will permit compliance with these laws or regulations cannot
be
accurately predicted. Disclosure regarding specific environmental matters
applicable to each of the Company's businesses is set forth under each business
description below.
This
annual report on Form 10-K, the Company’s quarterly reports on Form 10-Q, the
Company’s current reports on Form 8-K and any amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act
of 1934 are available free of charge through the Company’s Web site as soon as
reasonably practicable after the Company has electronically filed such reports
with, or furnished such reports to, the SEC. The Company’s Web site address is
www.mdu.com. The information available on the Company’s Web site is not part of
this annual report on Form 10-K.
ELECTRIC
General
Montana-Dakota
provides electric service at retail, serving over 118,000 residential,
commercial, industrial and municipal customers located in 177 communities
and
adjacent rural areas as of December 31, 2005. 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 4,400 miles of transmission and
distribution lines, respectively. Montana-Dakota has obtained and holds,
or is
in the process of renewing, 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 - MD&A - Prospective Information -
Electric. As of December 31, 2005, Montana-Dakota's net electric plant
investment approximated $296.5 million.
Substantially
all of Montana-Dakota's electric properties 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 Douglas J. MacInnes, successor
trustees, and are subject to the junior lien of the Indenture dated as of
December 15, 2003, as supplemented, from the Company to The Bank of New York,
as
trustee.
The
percentage of Montana-Dakota's 2005 retail electric utility operating revenues
by jurisdiction is as follows: North Dakota - 59 percent; Montana -
24 percent; South Dakota - 7 percent and Wyoming - 10 percent. Retail
electric rates, service, accounting and certain security issuances are subject
to regulation by the NDPSC, MTPSC, SDPUC and WYPSC. The interstate transmission
and wholesale electric power operations of Montana-Dakota are also subject
to
regulation by the FERC under provisions
of the
Federal Power Act, as are interconnections with other utilities and power
generators, the issuance of securities, accounting and other matters.
Montana-Dakota markets wholesale power into the Midwest ISO market.
System
Supply and System Demand Through
an interconnected electric system, Montana-Dakota serves markets in portions
of
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 electric generating
stations, which have an aggregate turbine nameplate rating attributable to
Montana-Dakota's interest of 436,055 kW and a total summer net capability
of
476,870 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. Three combustion turbine peaking
stations supply the balance of Montana-Dakota's interconnected system electric
generating capability. Additionally, Montana-Dakota has contracted to purchase
66,400 kW of participation power annually from Basin Electric Power Cooperative
for its interconnected system, through October 31, 2006. Montana-Dakota also
has
an agreement through December 31, 2020, with WAPA to provide federal
hydroelectric power to eligible Native American customers on the Fort Peck
Indian Reservation. The program provides a credit to the customers for the
portion of their power received from the federal hydroelectric system. The
associated summer monthly capability from the WAPA agreement is 2,815
kW.
In
July
2004, Montana-Dakota entered into a firm capacity contract to purchase 25
MW of
capacity and associated energy for the summer of 2006 from a neighboring
utility. In September 2005, Montana-Dakota entered into a contract for seasonal
capacity from a neighboring utility, starting at 85 MW in 2007, increasing
to
105 MW in 2011, with an option for capacity in 2012. Energy will also be
purchased as needed from the Midwest ISO market.
The
following table sets forth details applicable to the Company's electric
generating stations:
|
|
|
|
|
|
|
|
2005
Net
|
|
|
|
|
|
|
|
|
|
|
|
Generation
|
|
|
|
|
|
|
|
Nameplate
|
|
Summer
|
|
(kilowatt-
|
|
|
|
|
|
|
|
Rating
|
|
Capability
|
|
hours
in
|
|
|
|
Generating
Station
|
|
Type
|
|
(kW)
|
|
(kW)
|
|
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
Dakota:
|
|
|
|
|
|
|
|
|
|
|
|
Coyote*
|
|
|
Steam
|
|
|
103,647
|
|
|
106,750
|
|
|
765,044
|
|
|
|
|
Heskett
|
|
|
Steam
|
|
|
86,000
|
|
|
103,070
|
|
|
604,887
|
|
|
|
|
Williston
|
|
|
Combustion
Turbine
|
|
|
7,800
|
|
|
9,600
|
|
|
(72
|
)
|
|
**
|
|
South
Dakota:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Big
Stone*
|
|
|
Steam
|
|
|
94,111
|
|
|
104,550
|
|
|
662,836
|
|
|
|
|
Montana:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lewis
& Clark
|
|
|
Steam
|
|
|
44,000
|
|
|
52,300
|
|
|
283,984
|
|
|
|
|
Glendive
|
|
|
Combustion
Turbine
|
|
|
77,347
|
|
|
77,800
|
|
|
8,634
|
|
|
|
|
Miles
City
|
|
|
Combustion
Turbine
|
|
|
23,150
|
|
|
22,800
|
|
|
1,915
|
|
|
|
|
|
|
|
|
|
|
436,055
|
|
|
476,870
|
|
|
2,327,228
|
|
|
|
|
*
Reflects Montana-Dakota's ownership interest.
**
Station use, to meet MAPP’s accreditation requirements, exceeded
generation.
On
December 9, 2005, Montana-Dakota signed a power purchase agreement with a
wind
developer to purchase the production from a 31.5-MW wind-powered electric
generating facility to be constructed in South Dakota by the end of 2007.
This
agreement is dependent upon the developer obtaining transmission and financing
arrangements. If built, this plant is projected to produce about 124,000
MW
hours annually.
Virtually
all of the current fuel requirements of the Coyote, Heskett and Lewis &
Clark stations are met with coal supplied by subsidiaries of Westmoreland.
Contracts with Westmoreland
for the
Coyote and Lewis & Clark stations expire in May 2016 and December 2007,
respectively. The contract with Westmoreland for the Heskett Station expired
in
December 2005 and Montana-Dakota is currently in negotiations regarding a
replacement for this contract. In July 2004, Montana-Dakota entered into
separate three-year coal supply agreements with each of Kennecott and Arch
to
meet the majority of the Big Stone Station’s fuel requirements for the years
2005 to 2007 at contracted pricing. The Kennecott agreement provides for
the
purchase during 2006 and 2007 of 1.5 million and 1.3 million tons of coal,
respectively. The Arch agreement provides for the purchase of 500,000 tons
of
coal in both 2006 and 2007.
The
Coyote coal supply agreement provides for the purchase of coal necessary
to
supply the coal requirements of the Coyote Station or 30,000 tons per week,
whichever may be the greater quantity at contracted pricing. The maximum
quantity of coal during the term of the agreement, and any extension, is
75
million tons. The Lewis & Clark coal supply agreement provides for the
purchase of coal necessary to supply the coal requirements of the Lewis &
Clark Station at contracted pricing. Montana-Dakota estimates the coal
requirement to be in the range of 250,000 to 325,000 tons per contract year.
During
the years ended December 31, 2001, through December 31, 2005, the average
cost of coal purchased, including freight at Montana-Dakota's electric
generating stations (including the Big Stone and Coyote stations) was as
follows:
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
Average
cost of coal per million Btu
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
cost of coal per ton
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
maximum electric peak demand experienced to date attributable to sales to
retail
customers on the interconnected system was 470,000 kW in August 2003.
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 2011 will approximate 1.3 percent annually.
Montana-Dakota
has major interconnections with its neighboring utilities, and considers
these
interconnections adequate for coordinated planning, emergency assistance,
exchange of capacity and energy and power supply reliability.
Through
the 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
54,900
kW and occurred in July 2005.
The
Sheridan System is supplied through an interconnection with the PacifiCorp
transmission system, under an agreement with Black Hills Power, as part of
a
power supply contract through December 31, 2006, which allows for the purchase
of up to 55,000 kW of capacity annually. In December 2004, Montana-Dakota
entered into a power supply contract with Black Hills Power to purchase up
to
74,000 kW of capacity annually during the period from January 1, 2007, to
December 31, 2016. This contract also provides an option for Montana-Dakota
to purchase 25-MW
of
an existing or future baseload coal-fired electric generating facility from
Black Hills Corporation to serve the Sheridan load.
The
Midwest ISO is a regional transmission organization responsible for operational
control of the transmission systems of its members. The Midwest ISO provides
security center operations, tariff administration and operates a day-ahead
and
real-time energy market. Montana-Dakota sells energy unneeded for retail
load at
wholesale into, and will also purchase any needed energy from, this market.
Regulation
and Competition Montana-Dakota
is subject to competition in varying degrees, in certain areas, from rural
electric cooperatives, on-site generators, co-generators and municipally
owned
systems. In addition, competition in varying degrees exists between electricity
and alternative forms of energy such as natural gas.
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,
which in 2005 accounted for 24 percent of retail electric revenues, such
cost
changes are includable in general rate filings.
Environmental
Matters Montana-Dakota's
electric operations are subject to 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 these regulations.
The
EPA
may authorize a state to manage federal programs, such as the Clean Air Act
and
Clean Water Act, under approved state programs. This is the case in all the
states where Montana-Dakota operates.
Montana-Dakota's
electric generating facilities have Title V Operating Permits, under the
Clean
Air Act, issued by the states in which it operates. Each of these permits
has a
five-year life. Near the expiration of these permits, renewal applications
are
submitted. Permits continue in force beyond the expiration date, provided
the
application for renewal is submitted by the required date, usually six months
prior to expiration. Three permits were renewed in 2005. The next permit
will
expire in 2009. One facility operates under a minor source permit, which
expires
in 2006. A timely application for renewal will be submitted. State water
discharge permits issued under the requirements of the Clean Water Act are
maintained for power production facilities located on the Yellowstone and
Missouri Rivers. These permits also have five-year lives. Montana-Dakota
renews
these permits as necessary prior to expiration. One permit expired on November
30, 2005, and a timely renewal application was submitted, so the permit
continues in force. Other permits held by these facilities may include an
initial siting permit, which is typically a one-time, preconstruction permit
issued by the state; state permits to dispose of combustion by-products;
state
authorizations to withdraw water for operations; and Army Corps permits to
construct water intake structures. Montana-Dakota's Army Corps permits grant
one-time permission to construct and do not require renewal. Other permit
terms
vary, and the permits are renewed as necessary.
Montana-Dakota's
electric operations are conditionally exempt small-quantity hazardous waste
generators and subject only to minimum regulation under the RCRA. Montana-Dakota
routinely handles PCBs from its electric operations in accordance with federal
requirements. PCB storage areas are registered with the EPA as
required.
Montana-Dakota
did not incur any material environmental expenditures in 2005. Expenditures
are
estimated to be $2.1 million, $2.6 million and $1.8 million in 2006, 2007
and
2008, respectively, to maintain environmental compliance as new emission
controls are required. Projects will include nitrogen-oxide, sulfur-dioxide
and
mercury control equipment installation at the power plants. For
matters involving Montana-Dakota and the ND Health Department, see Item 3 -
Legal Proceedings.
NATURAL
GAS DISTRIBUTION
General
Montana-Dakota
sells natural gas at retail, serving over 228,000 residential, commercial
and
industrial customers located in 144 communities and adjacent rural areas
as of
December 31, 2005, and provides natural gas transportation services to
certain customers on its system. Great Plains sells natural gas at retail,
serving over 22,000 residential, commercial and industrial customers located
in
19 communities and adjacent rural areas as of December 31, 2005, and
provides natural gas transportation services to certain customers on its
system.
These services for the two public utility divisions are provided through
distribution systems aggregating approximately 5,500 miles. Montana-Dakota
and
Great Plains have obtained and hold, or are in the process of renewing, valid
and existing franchises authorizing them to conduct their natural gas operations
in all of the municipalities they serve where such franchises are required.
For
additional information regarding Montana-Dakota’s and Great Plains’ franchises,
see Item 7 - MD&A - Prospective Information - Natural gas distribution.
As of December 31, 2005, Montana-Dakota's and Great Plains' net natural gas
distribution plant investment approximated $158.7 million.
Substantially
all of Montana-Dakota's natural gas distribution properties 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 Douglas J. MacInnes,
successor trustees, and are subject to the junior lien of the Indenture dated
as
of December 15, 2003, as supplemented, from the Company to The Bank of New
York,
as trustee.
The
percentage of Montana-Dakota's and Great Plains' 2005 natural gas utility
operating revenues by jurisdiction is as follows: North Dakota -
39
percent; Minnesota -
11
percent;
Montana -
25 percent;
South Dakota -
19
percent and Wyoming -
6
percent. The natural gas distribution operations of Montana-Dakota are subject
to regulation by the NDPSC, MTPSC, SDPUC and WYPSC regarding retail rates,
service, accounting and certain security issuances. The natural gas distribution
operations of Great Plains are subject to regulation by the NDPSC and MPUC
regarding retail rates, service, accounting and certain security issuances.
System
Supply, System Demand and Competition Montana-Dakota
and Great Plains serve retail natural gas markets, consisting principally
of
residential and firm commercial space and water heating users, in portions
of
North Dakota, including Bismarck, Dickinson, Wahpeton, Williston, Minot and
Jamestown; western Minnesota, including Fergus Falls, Marshall and Crookston;
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 largely on the weather, the effects of which are mitigated
in certain jurisdictions by a weather normalization mechanism discussed in
Regulatory Matters.
The
following table reflects this segment's natural gas sales, natural gas
transportation volumes and degree days as a percentage of normal during the
last
five years:
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
(Mdk)
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
20,086
|
|
|
20,303
|
|
|
21,498
|
|
|
21,893
|
|
|
20,087
|
|
Commercial
|
|
|
14,457
|
|
|
14,598
|
|
|
15,537
|
|
|
16,044
|
|
|
14,661
|
|
Industrial
|
|
|
1,688
|
|
|
1,706
|
|
|
1,537
|
|
|
1,621
|
|
|
1,731
|
|
Total
|
|
|
36,231
|
|
|
36,607
|
|
|
38,572
|
|
|
39,558
|
|
|
36,479
|
|
Transportation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,637
|
|
|
1,702
|
|
|
1,528
|
|
|
1,849
|
|
|
1,847
|
|
Industrial
|
|
|
12,928
|
|
|
12,154
|
|
|
12,375
|
|
|
11,872
|
|
|
12,491
|
|
Total
|
|
|
14,565
|
|
|
13,856
|
|
|
13,903
|
|
|
13,721
|
|
|
14,338
|
|
Total
throughput
|
|
|
50,796
|
|
|
50,463
|
|
|
52,475
|
|
|
53,279
|
|
|
50,817
|
|
Degree
days * (% of normal)
|
|
|
90.9
|
%
|
|
90.7
|
%
|
|
97.3
|
%
|
|
101.1
|
%
|
|
94.5
|
%
|
*
Degree
days are a measure of daily temperature-related demand for energy for
heating.
Competition
in varying degrees exists between natural gas and other fuels and forms of
energy. Montana-Dakota and Great Plains have established various natural
gas
transportation service rates for their distribution businesses to retain
interruptible commercial and industrial loads. Certain of these services
include
transportation under flexible rate schedules whereby Montana-Dakota's and
Great
Plains' interruptible customers can avail themselves of the advantages of
open
access transportation on regional transmission pipelines, including the system
of Williston Basin, Northern Natural Gas Company and Viking Gas Transmission
Company. These services have enhanced Montana-Dakota's and Great Plains'
competitive posture with alternate fuels, although certain of Montana-Dakota's
customers have bypassed the respective distribution systems by directly
accessing transmission pipelines located within close proximity. These bypasses
did not have a material effect on results of operations.
Montana-Dakota
and Great Plains obtain their system requirements directly from producers,
processors and marketers. Such natural gas is supplied by a portfolio of
contracts specifying market-based pricing, and is transported under
transportation agreements by Williston Basin, Kinder Morgan, Inc., South
Dakota
Intrastate Pipeline Company, Northern Border Pipeline Company, Viking Gas
Transmission Company and Northern Natural Gas Company to provide firm service
to
their customers. Montana-Dakota has also contracted with Williston Basin
and
Great Plains has contracted with Northern Natural Gas Company to provide
firm
storage services that enable both divisions to meet winter peak requirements
as
well as allow them to better manage their natural gas costs by purchasing
natural gas at more uniform daily volumes throughout the year. Demand for
natural gas, which is a widely traded commodity, is sensitive to seasonal
heating and industrial load requirements as well as changes in market price.
Montana-Dakota and Great Plains believe that, based on regional supplies
of
natural gas and the pipeline transmission network currently available through
its suppliers and pipeline service providers, supplies are adequate to meet
their system natural gas requirements for the next five years.
Regulatory
Matters On
September 30, 2005, Montana-Dakota filed an application with the MTPSC for
a
natural gas rate increase. On January 26, 2006, this application was withdrawn
as a result of Montana-Dakota’s implementation of cost-reduction measures. In
September 2004, Great Plains filed an application with the MPUC for a natural
gas rate increase. For additional information regarding Montana-Dakota’s and
Great Plains' natural gas rate increase filings, see Item
8 -
Financial Statements and Supplementary Data - Note 17.
Montana-Dakota's
and Great Plains' 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 and Great Plains to recover increases or refund decreases
in such
costs within a period ranging from 24 to 28 months from the time such costs
are
paid. At December 31, 2005, the MTPSC has not issued a final order relative
to
the last three years of monthly gas cost changes that were implemented on
an
interim basis. A proceeding is under way and a final ruling is expected by
mid-2006.
Montana-Dakota’s
North Dakota, South Dakota-Black Hills and South Dakota-East River area natural
gas tariffs contain a weather normalization mechanism applicable to firm
customers that adjusts the distribution delivery charge revenues to reflect
weather fluctuations during the billing period from November 1 through May
1.
Environmental
Matters Montana-Dakota's
and
Great Plains' natural gas distribution operations are subject to federal,
state
and local environmental, facility-siting, zoning and planning laws and
regulations. Montana-Dakota and Great Plains believe they are in substantial
compliance with those regulations.
Montana-Dakota's
and Great Plains' operations are conditionally exempt small-quantity hazardous
waste generators and subject only to minimum regulation under the RCRA.
Montana-Dakota and Great Plains routinely handle PCBs from their natural
gas
operations in accordance with federal requirements. PCB storage areas are
registered with the EPA as required.
Montana-Dakota
and Great Plains did not incur any material environmental expenditures in
2005
and do not expect to incur any material capital expenditures related to
environmental compliance with current laws and regulations in relation to
the
natural gas distribution operations through 2008.
CONSTRUCTION
SERVICES
General MDU
Construction Services specializes
in electrical line construction, pipeline construction, inside electrical
wiring
and cabling, and the manufacture and distribution of specialty equipment.
These
services are provided to utilities and large manufacturing, commercial,
government and institutional customers.
During
2005, the Company acquired construction services businesses in Nevada. None
of
these acquisitions was material to the Company.
Construction
and maintenance crews are active year round. However, activity
in certain locations may be seasonal in nature due to the effects of
weather.
MDU
Construction Services operates a fleet of owned and leased trucks and trailers,
support vehicles and specialty construction equipment, such as backhoes,
excavators, trenchers, generators, boring machines and cranes. In addition,
as
of December 31, 2005, MDU Construction Services owned or leased offices in
15
states. This space is used for offices, equipment yards, warehousing, storage
and vehicle shops. At December 31, 2005, MDU Construction Services’ net plant
investment was approximately $44.3 million.
MDU
Construction Services’ backlog is comprised of the uncompleted portion of
services to be performed under job-specific contracts and the estimated value
of
future services that it expects to provide under other master agreements.
The
backlog at December 31, 2005, was approximately $403 million compared to
$238
million at December 31, 2004. MDU Construction Services expects to complete
a
significant amount of this backlog during the year ending December 31, 2006.
Due
to the nature of its contractual arrangements, in many instances MDU
Construction Services’ customers are not committed to the specific volumes of
services to be purchased under a contract, but rather MDU Construction Services
is committed to perform these services if and to the extent requested by
the
customer. The customer is, however, obligated to obtain these services from
MDU
Construction Services if they are not performed by the customer’s employees.
Therefore, there can be no assurance as to the customer’s requirements during a
particular period or that such estimates at any point in time are predictive
of
future revenues.
This
industry is experiencing a shortage of lineworkers in certain areas. MDU
Construction Services works with the National Electrical Contractors Association
and the IBEW on hiring and recruiting qualified lineworkers.
Competition MDU
Construction Services operates in a highly competitive business environment.
Most of MDU Construction Services' work is obtained on the basis of competitive
bids or by negotiation of either cost plus or fixed price contracts. The
workforce and equipment are highly mobile, providing greater flexibility
in the
size and location of MDU Construction Services' market area. Competition
is
based primarily on price and reputation for quality, safety and reliability.
The
size and area location of the services provided as well as the state of the
economy will be factors in the number of competitors that MDU Construction
Services will encounter on any particular project. MDU Construction Services
believes that the diversification of the services it provides, the market
it
serves throughout the United States and the management of its workforce will
enable it to effectively operate in this competitive environment.
Utilities
and independent contractors represent the largest customer base for this
segment. Accordingly, utility and sub-contract work accounts for a significant
portion of the work performed by MDU Construction Services and the amount
of
construction contracts is dependent to a certain extent on the level and
timing
of maintenance and construction programs undertaken by customers. MDU
Construction Services relies on repeat customers and strives to maintain
successful long-term relationships with these customers.
Environmental
Matters MDU
Construction Services’ operations are subject to regulation customary for the
industry, including federal, state and local environmental compliance. MDU
Construction Services believes it is in substantial compliance with these
regulations.
The
nature of MDU Construction Services' operations is such that few, if any,
environmental permits are required. Operational convenience supports the
use of
petroleum storage tanks in several locations, which are permitted under state
programs authorized by the EPA. MDU Construction Services currently has no
ongoing remediation related to releases from petroleum storage tanks. MDU
Construction Services’ operations are conditionally exempt small-quantity waste
generators, subject to minimal regulation under the RCRA. Federal permits
for
specific construction and maintenance jobs that may require these permits
are
typically obtained by the hiring entity, and not by MDU Construction
Services.
MDU
Construction Services did not incur any material environmental expenditures
in
2005 and does not expect to incur any material capital expenditures related
to
environmental compliance with current laws and regulations through
2008.
PIPELINE
AND ENERGY SERVICES
General Williston
Basin, the principal regulated business of WBI Holdings, owns and operates
over
3,700 miles of transmission, gathering and storage lines and owns or leases
and
operates 27 compressor stations located in the states of Montana, North Dakota,
South Dakota and Wyoming. Three underground storage fields located in Montana
and Wyoming provide storage services to local distribution companies, producers,
natural gas marketers 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. The system has 11 interconnecting points
with other pipeline facilities allowing for the receipt and/or delivery of
natural gas to and from other regions of the country and from Canada. At
December 31, 2005, Williston Basin’s net plant investment was approximately
$232.8 million. Under the Natural Gas Act, as amended, Williston Basin is
subject to the jurisdiction of the FERC regarding certificate, rate, service
and
accounting matters.
WBI
Holdings, through its nonregulated pipeline business, owns and operates
gathering facilities in Colorado, Kansas, Montana and Wyoming. A one-sixth
interest in the assets of various offshore gathering pipelines and associated
onshore pipeline and related processing facilities also is owned by WBI
Holdings. These facilities include over 1,800 miles of field gathering lines
and
80 owned or leased compression facilities, some of which interconnect with
Williston Basin’s system. In addition, WBI Holdings provides installation sales
and/or leasing of alternate energy delivery systems, primarily propane air
facilities, as well as provides energy efficiency product sales and installation
services to large end users.
WBI
Holdings, through its energy services businesses, provides natural gas purchase
and sales services to local distribution companies, producers, other marketers
and a limited number of large end users, primarily using natural gas produced
by
the Company’s natural gas and oil production segment. Certain of the services
are provided based on contracts that call for a determinable quantity of
natural
gas. WBI Holdings currently estimates that it can adequately meet the
requirements of these contracts. WBI Holdings transacts a significant portion
of
its pipeline and energy services business in the northern Great Plains and
Rocky
Mountain regions of the United States.
Another
energy services business owned by WBI Holdings is Innovatum, a cable and
pipeline magnetization and locating company. Innovatum provides products
and
services that assist the natural gas and oil and telecommunication industries
with accurate location and tracking of buried pipelines and cables on a
worldwide basis. Additionally, Innovatum manufactures and sells a line of
terrestrial, hand-held locators that are used for locating and identifying
underground objects. Innovatum has developed a hand-held locating device
that
can detect both magnetic and plastic materials. One of the possible uses
for
this product would be in the detection of unexploded ordnance. For additional
information regarding Innovatum, see Item 8 - Financial Statements and
Supplementary Data - Note 3.
System
Demand and Competition
Williston Basin competes with several pipelines for its customers'
transportation, storage and gathering business and at times may 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 and affiliates along with interconnections with other pipelines serve
to
enhance Williston Basin's competitive position.
Although
a significant portion of Williston Basin's firm customers, which include
Montana-Dakota, serve relatively secure residential and commercial end users,
virtually all have some price-sensitive end users that could switch to alternate
fuels.
Williston
Basin transports substantially all of Montana-Dakota's natural gas, utilizing
firm transportation agreements, which at December 31, 2005, represented
68 percent of Williston Basin's currently subscribed firm transportation
capacity. Montana-Dakota has a firm transportation agreement with Williston
Basin for a term of five years expiring in June 2007. In addition,
Montana-Dakota has a contract with Williston Basin to provide firm storage
services to facilitate meeting Montana-Dakota's winter peak requirements
for a
term of 20 years expiring in July 2015.
System
Supply Williston
Basin's underground natural gas storage facilities have a certificated storage
capacity of approximately 353 Bcf, including 193 Bcf of working gas capacity,
85
Bcf of cushion gas and 75 Bcf of native gas. The native gas includes an
estimated 29 Bcf of recoverable gas. 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 certain 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 nontraditional
and
off-system sources. The Company’s coalbed natural gas assets in the Powder River
Basin are expected to meet some of these supply needs. For additional
information regarding coalbed natural gas legal proceedings, see Item 1A
- Risk
Factors - Environmental and Regulatory Risks and Item 3 - Legal Proceedings.
Williston Basin expects to facilitate the movement of these supplies by making
available its transportation and storage services. Williston Basin will continue
to look for opportunities to increase transportation, gathering and storage
services through system expansion and/or other pipeline interconnections
or
enhancements that could provide substantial future benefits.
Regulatory
Matters and Revenues Subject to Refund In
December 1999, Williston Basin filed a general natural gas rate change
application with the FERC. For additional information regarding Williston
Basin’s general natural gas rate change application, see Item
8 -
Financial Statements and Supplementary Data - Note 17.
Environmental
Matters WBI
Holdings' pipeline and energy services operations are generally subject to
federal, state and local environmental, facility-siting, zoning and planning
laws and regulations. WBI Holdings believes it is in substantial compliance
with
those regulations.
The
ongoing operations of Williston Basin and Bitter Creek are subject to the
Clean
Air Act and the Clean Water Act. Administration of many provisions of these
laws
has been delegated to the states where Williston Basin and Bitter Creek operate,
and permit terms vary. Some permits require annual renewal, some have terms
ranging from one to five years and others have no expiration date. Permits
are
renewed as necessary.
Detailed
environmental assessments are included in the FERC’s permitting processes for
both the construction and abandonment of Williston Basin's natural gas
transmission pipelines and storage facilities.
WBI
Holdings' pipeline and energy services operations did not incur any material
environmental expenditures in 2005 and do not expect to incur any material
capital expenditures related to environmental compliance with current laws
and
regulations through 2008.
NATURAL
GAS AND OIL PRODUCTION
General Fidelity
is involved in the acquisition, exploration, development and production of
natural gas and oil resources. Fidelity's activities include the acquisition
of
producing properties with potential development opportunities, exploratory
drilling and the operation and development of natural gas and oil production
properties. Fidelity shares revenues and expenses from the development of
specified properties in proportion to its ownership interests. Fidelity’s
business is focused in three core regions: Rocky Mountain, Offshore Gulf
of
Mexico, and Mid-Continent/Gulf States.
Rocky
Mountain
Fidelity’s
properties in this region are primarily located in the states of Colorado,
Montana, North Dakota and Wyoming. Fidelity owns in fee or holds natural
gas and
oil leases for the properties it operates that are in the Bonny Field located
in
eastern Colorado, the Cedar Creek Anticline in southeastern Montana and
southwestern North Dakota, the Bowdoin area located in north-central Montana
and
the Powder River Basin of Montana and Wyoming. Fidelity also owns nonoperated
natural gas and oil interests in this region.
Offshore
Gulf of Mexico
Fidelity
has nonoperated interests throughout the Offshore Gulf of Mexico. These
interests are primarily located in the shallow waters off the coasts of Texas
and Louisiana.
Mid-Continent/Gulf
States
This
region includes properties in Alabama, Louisiana, New Mexico, Oklahoma and
Texas. In 2005, Fidelity acquired natural gas and oil production properties
in
southern Texas. The acquisition was not material to the Company. Fidelity
owns
in fee or holds natural gas and oil leases for the properties it operates
that
are in the Tabasco and Texan Gardens fields of Texas. In addition, Fidelity
owns
several nonoperated interests in this region.
Fidelity
continues to seek additional reserve and production growth opportunities
through
the direct acquisition of producing properties, through the acquisition of
exploration and development leaseholds and acreage and through exploratory
drilling opportunities, as well as development of its existing properties.
Future growth is dependent upon its success in these endeavors.
Operating
Information
Information on natural gas and oil production, average realized prices and
production costs per net equivalent Mcf for 2005, 2004 and 2003, are as
follows:
|
|
2005
|
|
2004
|
|
2003
|
|
Natural
gas:
|
|
|
|
|
|
|
|
Production
(MMcf)
|
|
|
|
|
|
|
|
|
|
|
Average
realized price per Mcf (including hedges)
|
|
|
|
|
|
|
|
|
|
|
Average
realized price per Mcf (excluding hedges)
|
|
|
|
|
|
|
|
|
|
|
Oil:
|
|
|
|
|
|
|
|
|
|
|
Production
(MBbls)
|
|
|
|
|
|
|
|
|
|
|
Average
realized price per barrel (including hedges)
|
|
|
|
|
|
|
|
|
|
|
Average
realized price per barrel (excluding hedges)
|
|
|
|
|
|
|
|
|
|
|
Production
costs, including taxes, per
net equivalent Mcf:
|
|
|
|
|
|
|
|
|
|
|
Lease operating costs
|
|
|
|
|
|
|
|
|
|
|
Gathering and transportation
|
|
|
|
|
|
|
|
|
|
|
Production and property taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
annual net production by region is as follows:
|
|
Natural
|
|
|
|
|
|
|
|
|
|
Gas
|
|
Oil
|
|
Total
|
|
Percent
of
|
|
Region
|
|
|
(MMcf
|
)
|
|
(MBbls
|
)
|
|
(MMcfe
|
)
|
|
Total
|
|
Rocky
Mountain
|
|
|
45,768
|
|
|
1,009
|
|
|
51,819
|
|
|
74
|
%
|
Offshore
Gulf of Mexico
|
|
|
7,189
|
|
|
296
|
|
|
8,967
|
|
|
13
|
|
Mid-Continent/Gulf
States
|
|
|
6,421
|
|
|
402
|
|
|
8,836
|
|
|
13
|
|
Total
|
|
|
59,378
|
|
|
1,707
|
|
|
69,622
|
|
|
100
|
%
|
Well
and Acreage Information Gross
and
net productive well counts and gross and net developed and undeveloped
acreage
related to interests at December 31, 2005, are as follows:
|
|
Gross*
|
|
Net**
|
|
Productive
wells:
|
|
|
|
|
|
Natural
gas
|
|
|
3,444
|
|
|
2,758
|
|
Oil
|
|
|
2,251
|
|
|
135
|
|
Total
|
|
|
5,695
|
|
|
2,893
|
|
Developed
acreage (000's)
|
|
|
790
|
|
|
364
|
|
Undeveloped
acreage (000's)
|
|
|
926
|
|
|
416
|
|
*
Reflects well or acreage in which an interest is owned.
**
Reflects Fidelity’s percentage ownership.
Exploratory
and Development Wells The
following table reflects activities relating to Fidelity’s natural gas and oil
wells drilled and/or tested during 2005, 2004 and 2003:
|
|
Net
Exploratory
|
|
Net
Development
|
|
|
|
|
|
Productive
|
|
Dry
Holes
|
|
Total
|
|
Productive
|
|
Dry
Holes
|
|
Total
|
|
Total
|
|
2005
|
|
|
2
|
|
|
3
|
|
|
5
|
|
|
312
|
|
|
25
|
|
|
337
|
|
|
342
|
|
2004
|
|
|
1
|
|
|
4
|
|
|
5
|
|
|
230
|
|
|
20
|
|
|
250
|
|
|
255
|
|
2003
|
|
|
10
|
|
|
2
|
|
|
12
|
|
|
274
|
|
|
2
|
|
|
276
|
|
|
288
|
|
At
December
31,
2005, there were 239 gross wells in the process of drilling or under evaluation,
224 of which were development wells and 15 of which were exploratory wells.
These wells are not included in the previous table. Fidelity expects to complete
drilling and testing the majority of these wells within the next 12
months.
The
information in the table above should not be considered indicative of future
performance nor should it be assumed that there is necessarily any correlation
between the number of productive wells drilled and quantities of reserves
found
or economic value. Productive wells are those that produce commercial quantities
of hydrocarbons whether or not they produce a reasonable rate of
return.
Competition
The
natural gas and oil industry is highly competitive. Fidelity competes with
a
substantial number of major and independent natural gas and oil companies
in
acquiring producing properties and new leases for future exploration and
development, and in securing the equipment and expertise necessary to explore,
develop and operate its properties. Some of Fidelity’s competitors have greater
financial and operational resources than Fidelity.
Environmental
Matters Fidelity’s
natural gas and oil production operations are generally subject
to
federal, state and local environmental, facility-siting, zoning and planning
laws and regulations. Fidelity believes it is in substantial compliance with
these regulations.
The
ongoing operations of Fidelity are subject to the Clean Water Act and other
federal and state environmental regulations. Administration of many provisions
of the federal laws has been delegated to the states where Fidelity operates,
and permit terms vary. Some permits have terms ranging from one to five years
and others have no expiration date.
Some
of
Fidelity's operations are subject to Section 404 of the Clean Water Act as
administered by the Army Corps. Section 404 permits are required for operations
that may affect waters of the United States, including operations in wetlands.
The expiration dates of these permits also vary, with five years generally
being
the longest term.
Detailed
environmental assessments and/or environmental impact statements under federal
and state laws are required as part of the permitting process incidental
to
commencement of drilling and production operations as well as in abandonment
proceedings.
In
connection with the development of coalbed natural gas properties, certain
capital expenditures were incurred related to water handling. For 2005, capital
expenditures for water handling in compliance with current laws and regulations
were approximately $110,000 and are estimated to be approximately
$2.0 million, $1.2 million and $1.0 million in 2006, 2007 and 2008,
respectively. For
information regarding coalbed natural gas legal proceedings, see Item 1A
- Risk
Factors, Item 3 -
Legal
Proceedings and
Item
8 - Financial Statements and Supplementary Data - Note 18.
Reserve
Information Fidelity's
recoverable proved developed and undeveloped natural gas and oil reserves
by
region at December 31, 2005, are as follows:
Region
|
|
Natural
Gas
(MMcf)
|
|
Oil
(MBbls)
|
|
Total
(MMcfe)
|
|
Percent
of
Total
|
|
PV-10
Value
*
(in
millions)
|
|
Rocky
Mountain
|
|
|
385,800
|
|
|
15,000
|
|
|
475,600
|
|
|
77%
|
|
$
|
1,597.5
|
|
Offshore
Gulf of Mexico
|
|
|
14,700
|
|
|
800
|
|
|
19,400
|
|
|
3
|
|
|
136.4
|
|
Mid-Continent/Gulf
States
|
|
|
88,600
|
|
|
5,400
|
|
|
121,400
|
|
|
20
|
|
|
415.7
|
|
Total
reserves
|
|
|
489,100
|
|
|
21,200
|
|
|
616,400
|
|
|
100%
|
|
$
|
2,149.6
|
|
*
PV - 10
value represents the discounted future net cash flows attributable to proved
natural gas and oil reserves before income taxes, discounted at 10 percent.
The
standardized measure of discounted future net cash flows at Item 8 - Financial
Statements and Supplementary Data - Supplementary Financial Information
represents the present value of future cash flows attributable to proved
natural
gas and oil reserves after income taxes, discounted at 10 percent.
For
additional information related to natural gas and oil interests, see Item
8 -
Financial Statements and Supplementary Data - Note 1 and Supplementary Financial
Information.
CONSTRUCTION
MATERIALS AND MINING
General
Knife
River operates construction materials and mining businesses headquartered
in
Alaska, California, Hawaii, Idaho, Iowa, Minnesota, Montana, North Dakota,
Oregon, Texas and Wyoming. These operations mine, process and sell construction
aggregates (crushed stone, 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, most 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.
During
2005, the Company acquired several construction materials and mining businesses
with operations in Idaho, Iowa and Oregon. None of these acquisitions were
material to the Company.
Knife
River continues to investigate the acquisition of other construction materials
properties, particularly those relating to construction aggregates and related
products such as ready-mixed concrete, asphalt and related construction
services.
On
August
10, 2005, a new transportation bill called the SAFETEA-LU was signed into
law.
SAFETEA-LU represents a 31 percent increase over previous funding levels.
SAFETEA-LU will provide funding through September 2009. Knife River expects
to
see average annual funding increases in each of its states of operation ranging
from a high of 46 percent in Minnesota to a low of 19 percent in Hawaii.
Alaska,
Idaho, Montana, North Dakota, Oregon and Wyoming will each see average annual
funding increases of slightly more than 30 percent. California will receive
a
34 percent average annual increase while Iowa will receive a 25 percent
increase and Texas will receive a 37 percent increase.
Competition Knife
River's construction materials products are marketed under highly competitive
conditions. Price is the principal competitive force to which these products
are
subject, with service, quality, 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 that 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 effect on its construction materials businesses.
Reserve
Information Reserve
estimates are calculated based on the best available data. These data are
collected from drill holes and other subsurface investigations, as well as
investigations of surface features like mine highwalls and other exposures
of
the aggregate reserves. Mine plans, production history and geologic data
also
are utilized to estimate reserve quantities.
Most
acquisitions are made of mature businesses with established reserves, as
distinguished from exploratory type properties.
Estimates
are based on analyses of the data described above by experienced mining
engineers, operating personnel and geologists. Property setbacks and other
regulatory restrictions and limitations are identified to determine the total
area available for mining. Data described above are used to calculate the
thickness of aggregate materials to be recovered. Topography associated with
alluvial sand and gravel deposits is typically flat and volumes of these
materials are calculated by simply applying the thickness of the resource
over
the areas available for mining. Volumes are then converted to tons by using
an
appropriate conversion factor. Typically, 1.5 tons per cubic yard in the
ground
is used for sand and gravel deposits.
Topography
associated with the hard rock reserves is typically much more diverse.
Therefore, using available data, a final topography map is created and computer
software is utilized to compute the volumes between the existing and final
topographies. Volumes are then converted to tons by using an appropriate
conversion factor. Typically, 2 tons per cubic yard in the ground is used
for
hard rock quarries.
Estimated
reserves are probable reserves as defined in Securities Act Industry Guide
7.
Remaining reserves are based on estimates of volumes that can be economically
extracted and sold to meet current market and product applications. The reserve
estimates include only salable tonnage and thus exclude waste materials that
are
generated in the crushing and processing phases of the operation. Approximately
1.2 billion tons of the 1.3 billion tons of aggregate reserves are permitted
reserves. The remaining reserves are on properties that we expect will be
permitted for mining under current regulatory requirements. Some sites have
leases that expire prior to the exhaustion of the estimated reserves. The
estimated reserve life (years remaining) anticipates, based on Knife River’s
experience, that leases will be renewed to allow sufficient time to fully
recover these reserves. The data used to calculate the remaining reserves
may
require revisions in the future to account for changes in customer requirements
and unknown geological occurrences. The years remaining were calculated by
dividing remaining reserves by current year sales. Actual useful lives of
these
reserves will be subject to, among other things, fluctuations in customer
demand, customer specifications, geological conditions and changes in mining
plans.
|
|
Number
of Sites
|
|
Number
of Sites
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
(Crushed
Stone)
|
|
(Sand
& Gravel)
|
|
Tons
Sold (000's)
|
|
Reserves
|
|
|
|
|
|
Production
Area
|
|
owned
|
|
leased
|
|
owned
|
|
leased
|
|
2005
|
|
2004
|
|
2003
|
|
(000’s
tons)
|
|
Lease
Expiration
|
|
|
|
Central
MN
|
|
|
---
|
|
|
1
|
|
|
52
|
|
|
70
|
|
|
4,608
|
|
|
6,429
|
|
|
6,265
|
|
|
111,156
|
|
|
2006-2028
|
|
|
24
|
|
Portland,
OR
|
|
|
1
|
|
|
4
|
|
|
5
|
|
|
3
|
|
|
5,559
|
|
|
5,821
|
|
|
4,610
|
|
|
266,267
|
|
|
2006-2055
|
|
|
48
|
|
Northern
CA
|
|
|
1
|
|
|
---
|
|
|
7
|
|
|
1
|
|
|
4,180
|
|
|
3,699
|
|
|
3,907
|
|
|
54,089
|
|
|
2046
|
|
|
13
|
|
Southwest
OR
|
|
|
4
|
|
|
8
|
|
|
12
|
|
|
5
|
|
|
3,892
|
|
|
3,405
|
|
|
3,360
|
|
|
123,340
|
|
|
2006-2031
|
|
|
32
|
|
Eugene,
OR
|
|
|
3
|
|
|
3
|
|
|
4
|
|
|
2
|
|
|
2,009
|
|
|
2,003
|
|
|
1,442
|
|
|
183,642
|
|
|
2006-2046
|
|
|
91
|
|
Hawaii
|
|
|
---
|
|
|
6
|
|
|
---
|
|
|
---
|
|
|
2,891
|
|
|
2,460
|
|
|
2,134
|
|
|
74,279
|
|
|
2011-2037
|
|
|
26
|
|
Central
MT
|
|
|
---
|
|
|
---
|
|
|
5
|
|
|
1
|
|
|
2,408
|
|
|
2,555
|
|
|
2,667
|
|
|
35,112
|
|
|
2023
|
|
|
15
|
|
Anchorage,
AK
|
|
|
---
|
|
|
---
|
|
|
1
|
|
|
---
|
|
|
1,307
|
|
|
1,473
|
|
|
1,610
|
|
|
21,973
|
|
|
N/A
|
|
|
17
|
|
Northwest
MT
|
|
|
---
|
|
|
---
|
|
|
8
|
|
|
5
|
|
|
1,679
|
|
|
1,810
|
|
|
1,413
|
|
|
28,349
|
|
|
2006-2020
|
|
|
17
|
|
Southern
CA
|
|
|
---
|
|
|
2
|
|
|
---
|
|
|
---
|
|
|
166
|
|
|
518
|
|
|
1,945
|
|
|
95,644
|
|
|
2035
|
|
|
Over
100
|
|
Bend,
OR/Boise, ID
|
|
|
1
|
|
|
2
|
|
|
5
|
|
|
2
|
|
|
1,731
|
|
|
1,678
|
|
|
857
|
|
|
104,673
|
|
|
2010-2012
|
|
|
60
|
|
Northern
MN
|
|
|
2
|
|
|
---
|
|
|
21
|
|
|
20
|
|
|
968
|
|
|
853
|
|
|
873
|
|
|
32,886
|
|
|
2006-2016
|
|
|
34
|
|
Northern
IA/ Southern MN
|
|
|
18
|
|
|
10
|
|
|
8
|
|
|
26
|
|
|
2,063
|
|
|
1,370
|
|
|
---
|
|
|
68,739
|
|
|
2006-2017
|
|
|
33
|
|
North/South
Dakota
|
|
|
---
|
|
|
---
|
|
|
2
|
|
|
59
|
|
|
1,205
|
|
|
965
|
|
|
704
|
|
|
55,604
|
|
|
2006-2031
|
|
|
46
|
|
Eastern
TX
|
|
|
1
|
|
|
2
|
|
|
---
|
|
|
3
|
|
|
1,255
|
|
|
1,067
|
|
|
449
|
|
|
16,960
|
|
|
2006-2012
|
|
|
14
|
|
Casper,
WY
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
1
|
|
|
2
|
|
|
291
|
|
|
172
|
|
|
983
|
|
|
2006
|
|
|
Over
100
|
|
Sales
from other sources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,281
|
|
|
7,047
|
|
|
6,030
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,204
|
|
|
43,444
|
|
|
38,438
|
|
|
1,273,696
|
|
|
|
|
|
|
|
The
1.3
billion tons of estimated aggregate reserves at December 31, 2005, is
comprised of 554 million tons that are owned and 720 million tons that are
leased. The leases have various expiration dates ranging from 2006 to 2055.
Approximately 54 percent of the tons under lease have lease expiration dates
of
20 years or more. The weighted average years remaining on all leases
containing estimated probable aggregate reserves is approximately 21 years,
including options for renewal that are at Knife River’s discretion. Based on
2005 sales from leased reserves, the average time necessary to produce remaining
aggregate reserves from such leases is approximately 47 years.
The
following table summarizes Knife River’s aggregate reserves at December 31,
2005, 2004 and 2003, and reconciles the changes between these
dates:
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(000’s
of tons)
|
|
Aggregate
reserves:
|
|
|
|
|
|
|
|
Beginning
of year
|
|
|
1,257,498
|
|
|
1,181,413
|
|
|
1,110,020
|
|
Acquisitions
|
|
|
53,495
|
|
|
115,965
|
|
|
109,362
|
|
Sales
volumes*
|
|
|
(35,923
|
)
|
|
(36,397
|
)
|
|
(32,408
|
)
|
Other
|
|
|
(1,374
|
)
|
|
(3,483
|
)
|
|
(5,561
|
)
|
End
of year
|
|
|
1,273,696
|
|
|
1,257,498
|
|
|
1,181,413
|
|
*
Excludes sales from other sources.
|
|
|
|
|
|
|
|
|
|
|
Lignite
Deposits The
Company has lignite deposits and leases at its former Gascoyne Mine site
in
North Dakota. These lignite deposits are currently not being mined and are
not
associated with an operating mine. The lignite deposits are of a high moisture
content and it is not economical to mine and ship the lignite to other distant
markets. However, should a power plant be constructed near the area, the
Company
may have the opportunity to participate in supplying lignite to fuel a plant.
As
of
December
31, 2005, Knife River had under ownership or lease, deposits of approximately
11.4 million tons of recoverable lignite coal.
Environmental
Matters Knife
River's construction materials and mining operations are subject to regulation
customary for such operations, including federal, state and local environmental
compliance and reclamation regulations. Except as to what may be ultimately
determined with regard to the Portland, Oregon, Harbor Superfund Site issue
described later, Knife River believes it is in substantial compliance with
these
regulations.
Knife
River’s asphalt and ready-mixed concrete manufacturing plants and aggregate
processing plants are subject to Clean Air Act and Clean Water Act requirements
for controlling air emissions and water discharges. Some mining and construction
activities also are subject to these laws. In most of the states where Knife
River operates, these regulatory programs have been delegated to state and
local
regulatory authorities. Knife River's facilities also are subject to RCRA
as it
applies to underground storage tanks and the management of petroleum hydrocarbon
products and wastes. These programs also have generally been delegated to
the
state and local authorities in the states where Knife River operates. No
specific permits are required but Knife River's facilities must comply with
requirements for managing petroleum hydrocarbon products and
wastes.
Some
Knife River activities are directly regulated by federal agencies. For example,
gravel bar skimming and deep water dredging operations are subject to provisions
of the Clean Water Act that are administered by the Army Corps. Knife River
operates nine gravel bar skimming operations and one deep water dredging
operation in Oregon, all of which are subject to Army Corps permits as well
as
state permits. The expiration dates of these permits vary, with five years
generally being the longest term. None of these in-water mining operations
are
included in Knife River’s aggregate reserve numbers.
Knife
River's operations also are occasionally subject to the ESA. For example,
land
use regulations often require environmental studies, including wildlife studies,
before a permit may be granted for a new or expanded mining facility or an
asphalt or concrete plant. If endangered species or their habitats are
identified, ESA requirements for protection, mitigation or avoidance apply.
Endangered species protection requirements are usually included as part of
land
use permit conditions. Typical conditions include avoidance, setbacks,
restrictions on operations during certain times of the breeding or rearing
season, and construction or purchase of mitigation habitat. Knife River's
operations also are subject to state and federal cultural resources protection
laws when new areas are disturbed for plants or mining operations. Land use
permit applications generally require that areas proposed for mining or other
surface disturbances be surveyed for cultural resources. If any are identified,
they must be protected or managed in accordance with regulatory agency
requirements.
The
most
challenging environmental permit requirements are usually associated with
new
mining operations, although requirements vary widely from state to state
and
even within states. In some areas, land use regulations and associated
permitting requirements are minimal. However, some states and local
jurisdictions have very demanding requirements for permitting new mines.
Environmental impact reports are sometimes required before a mining permit
application can even be considered for approval. These reports can take up
to
several years to complete. The report can include projected impacts of the
proposed project on air and water quality, wildlife, noise levels, traffic,
scenic vistas and other environmental factors. The reports generally include
suggested actions to mitigate the projected adverse impacts.
Provisions
for public hearings and public comments are usually included in land use
permit
application review procedures in the counties where Knife River operates.
After
taking into account environmental, mine plan and reclamation information
provided by the permittee as well as comments from the public and other
regulatory agencies, the local authority approves or denies the permit
application. Denial is rare but land use permits often include conditions
that
must be addressed by the permittee. Conditions may include property line
setbacks, reclamation requirements, environmental monitoring and reporting,
operating hour restrictions, financial guarantees for reclamation, and other
requirements intended to protect the environment or address concerns submitted
by the public or other regulatory agencies.
Despite
the challenges, Knife River has been successful in obtaining mining and other
land use permit approvals so that sufficient permitted reserves are available
to
support its operations. For mining operations, this often requires considerable
advanced planning to ensure sufficient time is available to complete the
permitting process before the newly permitted aggregate reserve is needed
to
support Knife River’s operations.
Knife
River's Gascoyne surface coal mine last produced coal in 1995 but continues
to
be subject to reclamation requirements of the SMCRA, as well as the North
Dakota
Surface Mining Act. Portions of the Gascoyne mine remain under reclamation
bond
until the 10-year revegetation liability period has expired. A portion of
the
original permit has been released from bond and additional areas are currently
in the process of having the bond released. Knife River’s intention is to
request bond release as soon as it is deemed possible with all final bond
release applications being filed by 2013.
Knife
River did not incur any material environmental expenditures in 2005 and,
except
as to what may be ultimately determined with regard to the issue described
below, Knife River does not expect to incur any material expenditures related
to
environmental compliance with current laws and regulations through
2008.
In
December 2000, MBI was named by the EPA as a Potentially Responsible Party
in
connection with the cleanup of a commercial property site, acquired by MBI
in
1999, and part of the Portland, Oregon, Harbor Superfund Site. For additional
information regarding cleanup of the property site, see Item 3 - Legal
Proceedings.
INDEPENDENT
POWER PRODUCTION
General
Centennial Resources owns, builds and operates electric generating facilities
in
the United States and has investments in domestic and international natural
resource-based projects. Electric capacity and energy produced at its power
plants primarily are sold under mid- and long-term contracts to nonaffiliated
entities.
Competition Centennial
Resources encounters competition in the development of new electric generating
plants and the acquisition of existing generating facilities, as well as
operation and maintenance services. Competitors include nonutility generators,
regulated utilities,
nonregulated subsidiaries of regulated utilities and other energy service
companies as well as financial investors. Competition for power sales agreements
may reduce power prices in certain markets. Factors for competing in the
power
production industry may include having a balanced portfolio of generating
assets, fuel types, customers and power sales agreements and maintaining
low
production costs.
Domestic
Centennial
Power owns 213 MW of natural gas-fired electric generating facilities near
Brush, Colorado. The Brush Generating Facility was purchased in November
2002.
Substantially all of the Brush Generating Facility’s output is sold to PSCo, a
wholly owned subsidiary of Xcel Energy. A power purchase agreement with PSCo
for
138 MW expires in September 2012. In December 2005, Centennial Power entered
into two successive purchase power agreements with PSCo for the sale of 75
MW of
capacity and energy. One purchase power agreement expires in April 2007 followed
by a 10-year agreement expiring in April 2017. The Brush Generating Facility
is
operated by CEM. PSCo is under contract to supply natural gas to the Brush
Generating Facility during the terms of the power purchase
agreements.
Centennial
Power owns a 66.6-MW wind-powered electric generating facility in the San
Gorgonio Pass, northwest of Palm Springs, California. This facility was
purchased in January 2003. The facility sells all of its output under an
agreement with the California Department of Water Resources, which expires
in
September 2011. AES SeaWest, Inc. is under a contract to operate the facility.
The contract with AES SeaWest, Inc. expires in October 2013.
Centennial
Resources, through indirect wholly owned subsidiaries, has a 50-percent
ownership interest in Hartwell, which owns a 310-MW natural gas-fired electric
generating facility near Hartwell, Georgia. This ownership interest was
purchased in September 2004. The Hartwell Generating Facility sells its output
under a power purchase agreement with Oglethorpe that expires in May 2019.
Oglethorpe reimburses the Hartwell Generating Facility for actual costs of
fuel
required to operate the plant. American National Power, a wholly owned
subsidiary of International Power of the United Kingdom, holds the remaining
50-percent ownership interest and is the operating partner for the
facility.
Centennial
Power constructed a 116-MW coal-fired electric generating facility near Hardin,
Montana. The Hardin Generating Facility is projected to be on line in early
2006. A power sales agreement with Powerex Corp., a subsidiary of BC Hydro,
has
been secured for the entire output of the plant for a term expiring October
31,
2008, with the purchaser having an option for a two-year extension. Coal
for the
Hardin Generating Facility is supplied by Westmoreland, at contracted pricing,
through a coal sales agreement that expires in December 2008, with the Company
having an option of a two-year extension.
The
Hardin
Generating
Facility is operated by CEM.
CEM
provides analysis, design, construction, refurbishment, and operation and
maintenance services to independent power producers. CEM is headquartered
in
Lafayette, Colorado, and was acquired in April 2004. In addition to operating
the Brush and Hardin facilities, CEM provides operation and maintenance services
for third-party customers owning approximately 510 MW of generating capacity
at
December 31, 2005. The operation and maintenance contracts have expirations
ranging from January 2007 to June 2009.
Environmental
Matters Centennial
Power has several operations that require federal and state environmental
permits. The Brush Generating Facility, Hartwell Generating Facility and
Hardin
Generating Facility are subject to 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. Centennial Power believes it is in
substantial compliance with these regulations.
The
Brush
Generating Facility has a Title V Operating Permit issued by the state for
a
period of five years under a program approved by the EPA. The facility also
has
a water discharge agreement to release process water to the city of Brush.
This
agreement has no specific termination date as long as the Brush Generating
Facility is operating in compliance with the agreement.
The
Hartwell and Hardin Generating Facilities have Title V Operating Permits
issued
by the applicable state for a period of five years under a program approved
by
the EPA. Centennial Power believes it is in substantial compliance with these
regulations.
The
Mountain View wind-powered electric generating facility has obtained necessary
siting authority and land leases for its operations. It has minor requirements
related to water management and spill control under the Clean Water Act
administered by the state.
In
August
2004, CPP and BIV were each issued a draft Compliance Order on Consent by
the
CDPHE. The Compliance Orders on Consents were issued in connection with excess
emission periods of nitrogen oxides and carbon monoxide at the Company’s
electric generating facilities in Brush, Colorado, occurring mainly during
start-up and shut-down periods. In June 2005, CPP, BIV and the CDPHE agreed
upon
the Compliance Orders on Consents. The terms of the Compliance Orders on
Consents for CPP and BIV include administrative penalties of $9,900 and $10,600,
and noncompliance/economic benefit penalties of $7,700 and $8,300, respectively.
In addition, the terms of the Compliance Orders on Consents include an agreement
by CPP and BIV to make nontax-deductible donations for Supplemental
Environmental Projects in Morgan County, Colorado, with total expenditures
of
not less than $39,600 and $42,400, respectively. In October 2005, CPP, BIV
and
the CDPHE agreed upon three Supplemental Environmental Projects to be
funded.
Centennial
Power does not expect to incur any material capital expenditures related
to
environmental compliance with current laws and regulations through 2008 in
connection with its existing operations.
International
MDU
Brasil was a party to a joint venture agreement with
a
Brazilian firm under which the parties agreed to develop electric generation
and
transmission, steam generation and coal mining projects in Brazil. The Company’s
49 percent interest in MPX was sold in June 2005. For information regarding
the
sale of MPX, see Item
8 -
Financial Statements and Supplementary Data - Note 2. In
November 2005, the joint venture relationship was terminated.
Centennial
International owns 49.99 percent of Carib Power. Carib Power was acquired
in
February 2004. Carib Power, through a wholly owned subsidiary, owns a 225-MW
natural gas-fired electric generating facility in Trinidad and Tobago. The
Trinity Generating Facility sells its output to the T&TEC, the governmental
entity responsible for the transmission, distribution and administration
of
electrical power to the national electrical grid of Trinidad and Tobago.
The
power purchase agreement expires in September 2029. T&TEC also
is under
contract to supply natural gas to the Trinity Generating Facility during
the
term of the power purchase agreement.
For
additional information regarding international operations, see Item 1A -
Risk
Factors - Risks Relating to Foreign Operations.
Environmental
Matters The
Trinity Generating Facility has been designed to comply with Trinidad and
Tobago
environmental requirements. The facility operates in documented conformance
with
these applicable environmental regulations and permit requirements. Trinity
Generating Facility is
in
material compliance with all applicable environmental regulations and permit
requirements.
This
business segment’s international operations did not incur any material
environmental expenditures in 2005 and does not expect to incur any material
capital expenditures related to environmental compliance with current laws
and
regulations through 2008.
ITEM
1A. RISK FACTORS
This
Form
10-K contains forward-looking statements within the meaning of Section 21E
of
the Securities Exchange Act of 1934. 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.
The
Company is including the following factors and cautionary statements 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 that are other than
statements of historical facts. From time to time, the Company may publish
or
otherwise make available forward-looking statements of this nature, including
statements contained within Item 7 - MD&A - Prospective Information. All
these subsequent forward-looking statements, whether written or oral and
whether
made by or on behalf of the Company, also are expressly qualified by these
factors and 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. Nonetheless, the Company's
expectations, beliefs or projections may not be achieved or accomplished.
Any
forward-looking statement contained in this document speaks only as of the
date
on which the 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 the 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 the factors,
nor
can it assess the effect of each factor on the Company's business or the
extent
to which any factor, or combination of factors, may cause actual results
to
differ materially from those contained in any forward-looking
statement.
Following
are some specific factors that should be considered for a better understanding
of the Company’s financial condition. These factors and the other matters
discussed herein are important factors that could cause actual results or
outcomes for the Company to differ materially from those discussed in the
forward-looking statements included elsewhere in this document.
Economic
Risks
The
Company’s natural gas and oil production and pipeline and energy services
businesses are dependent on factors, including commodity prices and commodity
price basis differentials, that cannot be predicted or
controlled.
These
factors include: fluctuations in natural gas and crude oil prices; fluctuations
in commodity price basis differentials; availability of economic supplies
of
natural gas; drilling successes in natural gas and oil operations; the timely
receipt of necessary permits and approvals; the ability to contract for or
to
secure necessary drilling rig contracts and to retain employees to drill
for and
develop reserves; the ability to acquire natural gas and oil properties;
and
other risks incidental to the operations of natural gas and oil wells.
Significant changes in these factors could negatively affect the results
of
operations and financial condition of the Company’s natural gas and oil
production and pipeline and energy services businesses.
The
construction, startup and operation of power generation facilities may involve
unanticipated changes or delays that could negatively impact the Company’s
business and its results of operations.
The
construction, startup and operation of power generation facilities involves
many
risks, including delays; breakdown or failure of equipment; competition;
inability to obtain required governmental permits and approvals; inability
to
negotiate acceptable acquisition, construction, fuel supply, off-take,
transmission or other material agreements; changes in market price for power;
cost increases; as well as the risk of performance below expected levels
of
output or efficiency. Such unanticipated events could negatively impact the
Company’s business and its results of operations.
The
Company’s 116-MW coal-fired electric generating facility near Hardin, Montana,
is projected to be on line in early 2006. Increases in the cost of construction,
startup or operational expenses could negatively affect the independent power
production business and its results of operations.
Economic
volatility affects the Company’s operations, as well as the demand for its
products and services and, as a result, may have a negative impact on the
Company’s future revenues.
The
global demand for natural resources, interest rates, governmental budget
constraints and the ongoing threat of terrorism can create volatility in
the
financial markets. A soft economy could negatively affect the level of public
and private expenditures on projects and the timing of these projects which,
in
turn, would negatively affect the demand for the Company’s products and
services.
The
Company relies on financing sources and capital markets. If the Company is
unable to obtain economic financing in the future, the Company’s ability to
execute its business plans, make capital expenditures or pursue acquisitions
that the Company may otherwise rely on for future growth could be
impaired.
The
Company relies on access to both short-term borrowings, including the issuance
of commercial paper, and long-term capital markets as sources of liquidity
for
capital requirements not satisfied by its cash flow from operations. If the
Company is not able to access capital at competitive rates, the ability to
implement its business plans may be adversely affected. Market disruptions
or a
downgrade of the Company’s credit ratings may increase the cost of borrowing or
adversely affect its ability to access one or more financial markets. Such
disruptions could include:
· |
A
severe prolonged economic downturn
|
· |
The
bankruptcy of unrelated industry leaders in the same line of
business
|
· |
A
deterioration in capital market conditions
|
· |
Volatility
in commodity prices
|
Environmental
and Regulatory Risks
Some
of the Company’s operations are subject to extensive environmental laws and
regulations that may increase costs of operations, impact or limit business
plans, or expose the Company to environmental liabilities.
The
Company is subject to extensive environmental laws and regulations affecting
many aspects of its present and future operations including air quality,
water
quality, waste management and other environmental considerations. These laws
and
regulations can result in increased capital, operating and other costs, and
delays as a result of ongoing litigation and administrative proceedings and
compliance, remediation, containment and monitoring obligations, particularly
with regard to laws relating to power plant emissions and coalbed natural
gas
development. These laws and regulations generally require the Company to
obtain
and comply with a wide variety of environmental licenses, permits, inspections
and other approvals. Public officials and entities, as well as private
individuals and organizations, may seek injunctive relief or other remedies
to
enforce applicable environmental laws and regulations. The Company cannot
predict the outcome (financial or operational) of any related litigation
or
administrative proceedings that may arise. Existing environmental regulations
may be revised and new regulations seeking to protect the environment may
be
adopted or become applicable to the Company. Revised or additional regulations,
which result in increased compliance costs or additional operating restrictions,
particularly if those costs are not fully recoverable from customers, could
have
a material effect on the Company’s results of operations.
One
of the Company’s subsidiaries is subject to ongoing litigation and
administrative proceedings in connection with its coalbed natural gas
development activities. These proceedings have caused delays in coalbed natural
gas drilling activity, and the ultimate outcome of the actions could have
a
material effect on existing coalbed natural gas operations and/or the future
development of its coalbed natural gas properties.
Fidelity
has been named as a defendant in, and/or certain of its operations are or
have
been the subject of, more than a dozen lawsuits filed in connection with
its
coalbed natural gas development in the Powder River Basin in Montana and
Wyoming. If the plaintiffs are successful in these lawsuits, the ultimate
outcome of the actions could have a material effect on Fidelity's existing
coalbed natural gas operations and/or the future development of its coalbed
natural gas properties.
Rulemaking
proceedings to create rules related to the re-injection of water and water
treatment and to amend the nondegradation policy in connection with coalbed
natural gas development have been initiated by the BER. If the rules are
adopted
as proposed, they could have a material effect on Fidelity’s existing coalbed
natural gas operations.
The
Company is subject to extensive government regulations that may delay and/or
have a negative impact on its business and its results of
operations.
The
Company is subject to regulation by federal, state and local regulatory agencies
with respect to, among other things, allowed rates of return, financings,
industry rate structures, and recovery of purchased power and purchased gas
costs. These governmental regulations significantly influence the Company’s
operating environment and may affect its ability to recover costs from its
customers. The Company is unable to predict the impact on operating results
from
the future regulatory activities of any of these agencies.
Changes
in regulations or the imposition of additional regulations could have an
adverse
impact on the Company’s results of operations.
Risks
Relating to Foreign Operations
The
value of the Company’s investments in operations may diminish because of
political, regulatory and economic conditions in countries where the Company
does business.
The
Company is subject to political, regulatory and economic conditions in foreign
countries where the Company does business. Significant changes in the political,
regulatory or economic environment in these countries could negatively affect
the value of the Company’s investments located in these countries.
Other
Risks
Weather
conditions can adversely affect the Company’s operations and revenues, as
evidenced by the hurricanes in the Gulf Coast region in 2005 causing some
reduction in natural gas and oil production.
The
Company’s results of operations can be affected by changes in the weather.
Weather conditions directly influence the demand for electricity and natural
gas, affect the wind-powered operation at the independent power production
business, affect the price of energy commodities, affect the ability to perform
services at the construction services and construction materials and mining
businesses and affect ongoing operation and maintenance and construction
and
drilling activities for the pipeline and energy services and natural gas
and oil
production businesses. In addition, severe weather can be destructive, causing
outages, reduced natural gas and oil production, and/or property damage,
which
could require additional costs to be incurred. As a result, adverse weather
conditions could negatively affect the Company’s results of operations and
financial condition.
Competition
is increasing in all of the Company’s businesses.
All
of
the Company’s businesses are subject to increased competition. The independent
power production industry has many competitors in the operation, acquisition
and
development of power generation facilities. Construction services’ competition
is based primarily on price and reputation for quality, safety and reliability.
The construction materials products are marketed under highly competitive
conditions and are subject to such competitive forces as price, service,
delivery time and proximity to the customer. The electric utility and natural
gas industries are also experiencing increased competitive pressures as a
result
of consumer demands, technological advances, increased natural gas prices
and
other factors. Pipeline and energy services competes with several pipelines
for
access to natural gas supplies and gathering, transportation and storage
business. The natural gas and oil production business is subject to competition
in the acquisition and development of natural gas and oil properties. The
increase in competition could negatively affect the Company’s results of
operations and financial condition.
Other
factors that could impact the Company’s businesses.
The
following are other factors that should be considered for a better understanding
of the financial condition of the Company. These other factors may impact
the
Company’s financial results in future periods.
|
·
|
Acquisition,
disposal and impairments of assets or
facilities
|
|
·
|
Changes
in operation, performance and construction of plant facilities
or other
assets
|
|
·
|
Changes
in present or prospective
generation
|
|
·
|
The
availability of economic expansion or development
opportunities
|
|
·
|
Population
growth rates and demographic
patterns
|
|
·
|
Market
demand for, and/or available supplies of, energy- and construction-related
products and services
|
|
·
|
Cyclical
nature of large construction projects at certain
operations
|
|
·
|
Changes
in tax rates or policies
|
|
·
|
Unanticipated
project delays or changes in project costs (including related energy
costs)
|
|
·
|
Unanticipated
changes in operating expenses or capital
expenditures
|
|
·
|
Labor
negotiations or disputes
|
|
·
|
Inability
of the various contract counterparties to meet their contractual
obligations
|
|
·
|
Changes
in accounting principles and/or the application of such principles
to the
Company
|
|
·
|
Changes
in legal or regulatory proceedings
|
|
·
|
The
ability to effectively integrate the operations and the internal
controls
of acquired companies
|
|
·
|
The
ability to attract and retain skilled labor and key
personnel
|
ITEM
1B. UNRESOLVED COMMENTS
The
Company has no unresolved comments with the SEC.
ITEM
3. LEGAL
PROCEEDINGS
Litigation
Royalties
Case In
June
1997, Grynberg filed suit under the Federal False Claims Act against Williston
Basin and Montana-Dakota. Grynberg also filed more than 70 similar suits
against
natural gas transmission companies and producers, gatherers and processors
of
natural gas. Grynberg, acting on behalf of the United States under the Federal
False Claims Act, alleged improper measurement of the heating content and
volume
of natural gas purchased by the defendants resulting in the underpayment
of
royalties to the United States. All cases were consolidated in the Wyoming
Federal District Court.
In
June
2004, following preliminary discovery, Williston Basin and Montana-Dakota
joined
with other defendants and filed a Motion to Dismiss on the ground that the
information upon which Grynberg based his complaint was publicly disclosed
prior
to the filing of his complaint and further, that he is not the original source
of such information. The Motion to Dismiss was heard on March 17 and 18,
2005,
by the Special Master appointed by the Wyoming Federal District Court. The
Special Master, in his Written Report dated May 13, 2005, recommended that
the
lawsuit be dismissed against certain defendants, including Williston Basin
and
Montana-Dakota. A hearing on the adoption of the Written Report was held
on
December 9, 2005, before the Wyoming Federal District Court.
In
the
event the Motion to Dismiss is not granted, it is expected that further
discovery will follow. Williston Basin and Montana-Dakota believe Grynberg
will
not prevail in the suit or recover damages from Williston Basin and/or
Montana-Dakota because insufficient facts exist to support the allegations.
Williston Basin and Montana-Dakota believe Grynberg’s claims are without merit
and intend to vigorously contest this suit.
Grynberg
has not specified the amount he seeks to recover. Williston Basin and
Montana-Dakota are unable to estimate their potential exposure and will be
unable to do so until discovery is completed.
Coalbed
Natural Gas Operations Fidelity
has been named as a defendant in, and/or certain of its operations are or
have
been the subject of, more than a dozen lawsuits filed in connection with
its
coalbed natural gas development in the Powder River Basin in Montana and
Wyoming. These lawsuits were filed in federal and state courts in Montana
between June 2000 and November 2004 by a number of environmental organizations,
including the NPRC and the Montana Environmental Information Center, as well
as
the Tongue River Water Users' Association and the Northern Cheyenne Tribe.
Portions of two of the lawsuits have been transferred to the Wyoming Federal
District Court. The lawsuits involve allegations that Fidelity and/or various
government agencies are in violation of state and/or federal law, including
the
Clean Water Act, the NEPA, the Federal Land Management Policy Act, the NHPA
and
the Montana Environmental Policy Act. The cases involving alleged violations
of
the Clean Water Act have been resolved without a finding that Fidelity is
in
violation of the Clean Water Act. There presently are no claims pending for
penalties, fines or damages under the Clean Water Act. The suits that remain
extant include a variety of claims that state and federal government agencies
violated various environmental laws that impose procedural requirements and
the
lawsuits seek injunctive relief, invalidation of various permits and unspecified
damages.
In
suits
filed in the Montana Federal District Court, the NPRC and the Northern Cheyenne
Tribe asserted that further development by Fidelity and others of coalbed
natural gas in Montana should be enjoined until the BLM completes a SEIS.
The
Montana Federal District Court, in February 2005, entered a ruling requiring
the
BLM to complete a SEIS. The Montana Federal District Court later entered
an
order that would have allowed limited coalbed natural gas development in
the
Powder River Basin in Montana pending the BLM's preparation of the SEIS.
The
plaintiffs appealed the decision to the Ninth Circuit. The Montana Federal
District Court declined to enter an injunction requested by the NPRC and
the
Northern Cheyenne Tribe that would have enjoined development pending the
appeal.
In late May 2005, the Ninth Circuit granted the request of the NPRC and the
Northern Cheyenne Tribe and, pending further order from the Ninth Circuit,
enjoined the BLM from approving any new coalbed natural gas development projects
in the Powder River Basin in Montana. That court also enjoined Fidelity from
drilling any additional federally permitted wells in its Montana Coal Creek
Project and from constructing infrastructure to produce and transport coalbed
natural gas from the Coal Creek Project's existing federal wells. The matter
has
been fully briefed and argued before the Ninth Circuit and the parties are
awaiting a decision of the court.
In
related actions in the Montana Federal District Court, the NPRC and the Northern
Cheyenne Tribe asserted, among other things, that the actions of the BLM
in
approving Fidelity's applications for permits and the plan of development
for
the Badger Hills Project in Montana did not comply with applicable Federal
laws,
including the NHPA and the NEPA. The NPRC also asserted that the Environmental
Assessment that supported the BLM's prior approval of the Badger Hills Project
was invalid. On June 6, 2005, the Montana Federal District Court issued orders
in these cases enjoining operations on Fidelity's Badger Hills Project pending
the BLM's consultation with the Northern Cheyenne Tribe as to satisfaction
of
the applicable requirements of NHPA and a further environmental analysis
under
NEPA. Fidelity has sought and obtained stays of the injunctive relief from
the
Montana Federal District Court and production from Fidelity’s Badger Hills
Project continues. On September 2, 2005, the Montana Federal District Court
entered an Order based on a stipulation between the parties to the NPRC action
that production from existing wells in Fidelity’s Badger Hills Project may
continue pending preparation of a revised environmental analysis. On November
1,
2005, the Montana Federal District Court entered an Order based on a stipulation
between the parties to the Northern Cheyenne Tribe action that production
from
existing wells in Fidelity’s Badger Hills Project may continue pending
preparation of a revised environmental analysis. On December 16, 2005, Fidelity
filed a Notice of Appeal to the Ninth Circuit.
The
NPRC
has filed a petition with the BER and the BER has initiated related rulemaking
proceedings to create rules that would, if promulgated, require re-injection
of
water produced in connection with coalbed natural gas operations and treatment
of such water in the event re-injection is not feasible and amend the
nondegradation policy in connection with coalbed natural gas development.
If the
rules are adopted as proposed, it is possible that an adverse impact on
Fidelity’s operations could result. At this point, the Company cannot predict
the outcome of the rulemaking process before the BER or its impact on the
Company’s operations.
Fidelity
is vigorously defending its interests in all coalbed-related lawsuits and
related actions in which it is involved, including the Ninth Circuit injunction.
In those cases where damage claims have been asserted, Fidelity is unable
to
quantify the damages sought and will be unable to do so until after the
completion of discovery. If the plaintiffs are successful in these lawsuits,
the
ultimate outcome of the actions could have a material effect on Fidelity’s
existing coalbed natural gas operations and/or the future development of
this
resource in the affected regions.
Electric
Operations Montana-Dakota
has joined with two electric generators in appealing a finding by the ND
Health
Department in September 2003 that the ND Health Department may unilaterally
revise operating permits previously issued to electric generating plants.
Although it is doubtful that any revision of Montana-Dakota's operating permits
by the ND Health Department would reduce the amount of electricity its plants
could generate, the finding, if allowed to stand, could increase costs for
sulfur dioxide removal and/or limit Montana-Dakota's ability to modify or
expand
operations at its North Dakota generation sites. Montana-Dakota and the other
electric generators filed their appeal of the order in October 2003 in the
Burleigh County District Court in Bismarck, North Dakota. Proceedings have
been
stayed pending discussions with the EPA, the ND Health Department and the
other
electric generators. The Company cannot predict the outcome of the ND Health
Department matter or its ultimate impact on its operations.
Natural
Gas Storage Williston
Basin filed suit on January 27, 2006, seeking to recover unspecified damages
from Anadarko and its wholly owned subsidiary, Howell, and to enjoin Anadarko’s
and Howell’s present and future operations in and near Williston Basin’s Elk
Basin Storage Reservoir located in Wyoming and Montana. Based on relevant
information, including reservoir and well pressure data, it appears that
reservoir pressure has decreased and that quantities of gas may have been
diverted by Anadarko’s and Howell’s drilling and production activities in areas
within and near the boundaries of Williston Basin’s Elk Basin Storage Reservoir.
Williston Basin is seeking not only to recover damages for the gas that has
been
diverted, but to prevent further drainage of its storage
reservoir. Williston Basin is also assessing further avenues for recovery
through the regulatory process at the FERC. Because
of
the very preliminary stage of the legal proceedings, Williston Basin cannot
estimate the size of any potential loss or recovery, or the likelihood of
obtaining injunctive relief or recovery through the regulatory
process.
Environmental
matters
Portland
Harbor Site In
December 2000, MBI was named by the EPA as a Potentially Responsible Party
in
connection with the cleanup of a commercial property site, acquired by MBI
in
1999, and part of the Portland, Oregon, Harbor Superfund Site. Sixty-eight
other
parties were also named in this administrative action. The EPA wants responsible
parties to share in the cleanup of sediment contamination in the Willamette
River. To date, costs of the overall remedial investigation of the harbor
site
for both the EPA and the DEQ are being recorded and initially paid, through
an
administrative consent order, by the LWG, a group of 10 entities which does
not
include MBI. The LWG estimates the overall remedial investigation and
feasibility study will cost approximately $10 million. It is not possible
to estimate the cost of a corrective action plan until the remedial
investigation and feasibility study has been completed, the EPA has decided
on a
strategy, and a record of decision has been published. While the remedial
investigation and feasibility study for the harbor site has commenced, it
is
expected to take several years to complete. The development of a proposed
plan
and record of decision on the harbor site is not anticipated to occur until
later in 2006, after which a cleanup plan will be undertaken.
Based
upon a review of the Portland Harbor sediment contamination evaluation by
the
DEQ and other information available, MBI does not believe it is a Responsible
Party. In addition, MBI has notified Georgia-Pacific West, Inc., the seller
of
the commercial property site to MBI, that it intends to seek indemnity for
any
and all liabilities incurred in relation to the above matters, pursuant to
the
terms of the sale agreement under which MBI acquired the property.
The
Company believes it is not probable that it will incur any material
environmental remediation costs or damages in relation to the above
administrative action.
ITEM
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 2005.
PART
II
ITEM
5.
|
MARKET
FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER
PURCHASE OF EQUITY
SECURITIES
|
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 2005 and
2004
and dividends declared thereon were as follows:
|
|
|
|
|
|
Common
|
|
|
|
Common
|
|
Common
|
|
Stock
|
|
|
|
Stock
Price
|
|
Stock
Price
|
|
Dividends
|
|
|
|
(High)
|
|
(Low)
|
|
Per
Share
|
|
2005
|
|
|
|
|
|
|
|
First
quarter
|
|
$
|
28.50
|
|
$
|
25.48
|
|
$
|
.18
|
|
Second
quarter
|
|
|
29.34
|
|
|
26.35
|
|
|
.18
|
|
Third
quarter
|
|
|
36.07
|
|
|
28.08
|
|
|
.19
|
|
Fourth
quarter
|
|
|
37.13
|
|
|
30.85
|
|
|
.19
|
|
|
|
|
|
|
|
|
|
$
|
.74
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
$
|
24.35
|
|
$
|
22.67
|
|
$
|
.17
|
|
Second
quarter
|
|
|
24.03
|
|
|
21.85
|
|
|
.17
|
|
Third
quarter
|
|
|
26.43
|
|
|
23.72
|
|
|
.18
|
|
Fourth
quarter
|
|
|
27.70
|
|
|
25.20
|
|
|
.18
|
|
|
|
|
|
|
|
|
|
$
|
.70
|
|
Between
October 1, 2005, and December 31, 2005, the Company issued 2,860 shares of
Common Stock, $1.00 par value, and the Preference Share Purchase Rights
appurtenant thereto, as part of the consideration paid by the Company in
the
acquisition of a business in a prior period. The Common Stock and Rights
issued
by the Company in this transaction were issued in a private transaction exempt
from registration under the Securities Act of 1933 pursuant to Section 4(2)
thereof, Rule 506 promulgated thereunder, or both. The classes of persons
to
whom these securities were sold were either accredited investors or other
persons to whom such securities were permitted to be offered under the
applicable exemption.
ITEM
6. SELECTED FINANCIAL DATA
Operating
Statistics
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues (000's):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipeline
and energy services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas and oil production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
materials and mining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent
power production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment
eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (000's):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution
|
|
|
7,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
services
|
|
|
28,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipeline
and energy services
|
|
|
42,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas and oil production
|
|
|
230,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
materials and mining
|
|
|
105,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent
power production
|
|
|
4,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
on common stock (000's):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution
|
|
|
3,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
services
|
|
|
14,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipeline
and energy services
|
|
|
22,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas and oil production
|
|
|
141,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
materials and mining
|
|
|
55,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent
power production
|
|
|
22,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
on common stock before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cumulative
effect of accounting
change
|
|
|
274,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of accounting
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cumulative
effect of accounting change - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma amounts assuming retroactive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
application
of accounting change:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (000's)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
- diluted (000's)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
value per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
price per common share (year end)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
price ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
payout
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price/earnings
ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
value as a percent of book
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profitability
Indicators
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average common equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average invested capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
coverage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
charges coverage, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
preferred
dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets (000's)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current maturities (000's)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
preferred stock (000's)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization
ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stocks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Before cumulative effect of the change in accounting for asset retirement
obligations required by the adoption of SFAS No. 143, “Accounting for Asset
Retirement Obligations,” as discussed in Item 8 - Financial Statements and
Supplementary Data - Notes 1 and 8.
NOTE:
Common stock share amounts reflect the Company’s three-for-two common stock
split effected in October 2003.
Electric
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
sales (thousand kWh)
|
|
|
2,413,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
for resale (thousand kWh)
|
|
|
615,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric
system summer generating and firm purchase capability - kW (Interconnected
system)
|
|
|
546,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
peak - kW
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Interconnected
system)
|
|
|
470,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity
produced (thousand kWh)
|
|
|
2,327,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity
purchased (thousand kWh)
|
|
|
892,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
cost of fuel and purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
power
per kWh
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
(Mdk)
|
|
|
36,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation
(Mdk)
|
|
|
14,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average degree days -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
of previous year's actual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipeline
and Energy Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation
(Mdk)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering
(Mdk)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas and Oil Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas (MMcf)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
(MBbls)
|
|
|
1,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
realized prices (including hedges):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas (per Mcf)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
(per barrel)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved
reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas (MMcf)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
(MBbls)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
Materials and Mining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
materials (000's):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregates
(tons sold)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asphalt
(tons sold)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ready-mixed
concrete (cubic yards sold)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoverable
aggregate reserves (tons)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal
(000's):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
(tons)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lignite
deposits (tons)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent
Power Production**
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
generation capacity - kW
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity
produced and sold (thousand kWh)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
_____________________________________________
**
Excludes equity method investments.
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The
Company’s strategy is to apply its expertise in energy and transportation
infrastructure industries to increase market share, increase profitability
and
enhance shareholder value through organic
growth as well as a continued disciplined approach to the acquisition of
well-managed companies and properties; the
creation and enhancement of meaningful synergies and elimination of system-wide
cost redundancies through increased focus on integration of operations
and
standardization and consolidation of various support services and functions
across companies within the organization; and the development of projects
that
are accretive to earnings and returns on invested capital.
The
Company has capabilities to fund its growth and operations through various
sources, including internally generated funds, commercial paper facilities
and the
issuance from time to time of debt securities and the Company’s equity
securities. The Company’s net capital expenditures for 2005 were $730.4
million.
Net
capital expenditures are comprised of (A) capital expenditures plus (B)
acquisitions (including the issuance of the Company’s equity securities, less
cash acquired) less (C) net proceeds from the sale or disposition of property.
Net capital expenditures are
estimated to be approximately $502.3 million for 2006.
The
key
strategies for each of the Company’s business segments, and certain related
business challenges, are summarized below.
Key
Strategies and Challenges
Electric
and Natural Gas Distribution
Strategy
Provide
competitively priced energy to customers while working with them to ensure
efficient usage. Both the electric and natural gas distribution segments
continually seek opportunities for growth and expansion of their customer
base
through extensions of existing operations and through selected acquisitions
of
companies and properties at prices that will provide an opportunity for
the
Company to earn a competitive return on investment. The natural gas distribution
segment also continues to pursue growth
by
expanding its level of energy-related services.
Challenges Both
segments are subject to extensive regulation in the state jurisdictions
where
they conduct operations with respect to costs and permitted returns on
investment as well as subject to certain operational regulations at the
federal
level. The ability of these segments to grow through acquisitions is subject
to
significant competition from other energy providers. In addition, as to
the
electric business, the ability of this segment to grow its service territory
and
customer base is affected by significant competition from other energy
providers, including rural electric cooperatives.
Construction
Services
Strategy
Provide
a competitive return on investment while operating in a competitive industry
by:
building new and strengthening existing customer relationships;
effectively controlling costs including taking advantage of synergies;
recruiting,
developing and retaining talented employees; focusing business development
efforts on project areas that will permit higher margins; and properly
managing
risk. This segment continuously seeks opportunities to expand through strategic
acquisitions.
Challenges
This
segment operates in highly competitive markets, with many jobs subject
to
competitive bidding. Maintenance of effective cost controls and retention
of key
personnel are ongoing challenges.
Pipeline
and Energy Services
Strategy
Leverage
the segment’s existing expertise in energy infrastructure, services and
technologies to increase market share and profitability through optimization
of
existing operations, internal growth, and acquisitions of energy-related
assets
and companies. Incremental and new growth opportunities include: access
to new
sources of natural gas for storage, gathering and transportation services;
expansion
of existing gathering and transmission facilities;
incremental
expansion of the capacity of the Grasslands Pipeline to allow customers
access
to more liquid and potentially higher price markets; and pursuit of new
markets
for the segment’s locating and tracking technology business.
Challenges
Energy
price volatility; natural gas basis differentials; regulatory requirements;
recruitment and retention of a skilled and reliable workforce; increased
competition from other natural
gas pipeline
and
gathering companies;
and
establishing and enhancing customer relationships at the location and tracking
technology business.
Natural
Gas and Oil Production
Strategy
Apply
new technology and leverage existing exploration and production expertise,
with
a focus on operated properties, to increase production and reserves from
existing leaseholds, and to seek additional reserves and production
opportunities in new areas to diversify the segment’s asset base. By optimizing
existing operations and taking advantage of new and incremental growth
opportunities, this segment’s goal is to increase both production and reserves
over the long term so as to generate competitive returns on
investment.
Challenges
Fluctuations in natural gas and oil prices; ongoing environmental litigation
and
administrative proceedings; timely receipt of necessary permits and approvals;
recruitment and retention of a skilled and reliable workforce; and increased
competition from many of the larger natural
gas and oil companies.
Construction
Materials and Mining
Strategy
Focus on
high growth regional markets located near major transportation corridors
and
metropolitan areas; achieve economic synergies and enhance profitability
through
vertical integration of the segment’s operations; and continue growth through
acquisitions. Vertical integration allows the segment to manage operations
from
aggregate mining to final lay-down of concrete and asphalt, with control
of and
access to adequate quantities of permitted aggregate reserves being significant.
The segment’s key operating focus is on increasing margins and profitability
through continuous implementation of a variety of improvement programs
and
operational synergies to generate targeted cost savings.
Challenges
Price
volatility with respect to, and availability of, raw materials such as
steel and
cement; petroleum price volatility; recruitment and retention of a skilled
and
reliable workforce; and increased competition from national and international
construction materials companies. In particular, increases in energy prices
can
affect the profitability of construction jobs.
The
segment’s strategy is to mitigate this risk through centralized purchasing and
negotiation of contract price escalation
provisions.
Similarly, the segment
seeks to
minimize its exposure to regional shortages of raw materials through utilization
of national purchasing accounts.
Independent
Power Production
Strategy
Achieve
growth through the acquisition, construction and operation of domestic
nonregulated electric generation facilities and through international
investments in the energy and natural resources sectors. The segment continues
to seek projects with mid- to long-term agreements with financially stable
customers, while maintaining diversity in customers, geographic markets
and fuel
source.
Challenges
Overall
business challenges for this segment include: the risks and uncertainties
associated with the ongoing construction, startup and operation of power
plant
facilities; changes in energy market pricing; increased competition from
other
independent power producers;
and
fluctuations in the value of foreign currency and political risk in the
countries where this segment does business.
For
further information on the risks and challenges the Company faces as it
pursues
its growth strategies and other factors that should be considered for a
better
understanding of the Company’s financial condition, see Item 1A - Risk Factors.
For further information on each segment’s key growth strategies, projections and
certain assumptions, see Prospective Information.
For
information pertinent to various commitments and contingencies, see Item 3
- Legal Proceedings and Item 8 - Financial Statements and Supplementary
Data -
Notes to Consolidated Financial Statements.
Earnings
Overview
The
following table summarizes the contribution to consolidated earnings by
each of
the Company's businesses.
|
|
|
|
2004
|
|
2003
|
|
|
|
(Dollars
in millions, where applicable)
|
|
Electric
|
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution
|
|
|
|
|
|
|
|
|
|
|
Construction
services
|
|
|
|
|
|
|
|
|
|
|
Pipeline
and energy services
|
|
|
|
|
|
|
|
|
|
|
Natural
gas and oil production
|
|
|
|
|
|
|
|
|
|
|
Construction
materials and mining
|
|
|
|
|
|
|
|
|
|
|
Independent
power production
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
Earnings
on common stock
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share - basic
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share - diluted
|
|
|
|
|
|
|
|
|
|
|
Return
on average common equity
|
|
|
|
|
|
|
|
|
|
|
2005
compared to 2004
Consolidated earnings for 2005 increased $68.0 million from the comparable
period largely due to:
· |
Higher
average realized natural gas prices of 30 percent and higher
average
realized oil prices of 25 percent at the natural gas and oil
production
business
|
· |
Increased
outside and inside electrical workloads and margins, as well
as earnings
from acquisitions made in the second quarter of 2005 at the construction
services business
|
· |
The
benefit from the resolution of a rate proceeding of $5.0 million
(after
tax), which included a reduction to depreciation, depletion and
amortization expense; and the absence in 2005 of the 2004 $4.0
million
(before and after tax) noncash goodwill impairment relating to
the
Company’s cable and pipeline magnetization and location business, as
well
as the 2004 $1.3 million (after tax) adjustment reflecting the
reduction
in value of certain gathering facilities in the Gulf Coast
region
|
Partially
offsetting the increase in earnings was the absence in 2005 of the favorable
resolution of federal and related state income tax matters realized in
2004,
which resulted in a benefit of $8.3 million (after tax), including
interest.
2004
compared to 2003
Consolidated earnings for 2004 increased $31.8 million from the comparable
prior
period. The earnings increase was largely the result of:
|
·
|
Higher
average realized natural gas prices of 20 percent and higher
average
realized oil prices of 25 percent at the natural gas and oil
production
business
|
|
·
|
Increased
natural gas production of 9 percent at the natural gas and oil
production
business
|
|
·
|
Higher
net income of $14.8 million from the Company’s share of its equity method
investment in Brazil
|
|
·
|
Favorable
resolution of federal and related state income tax matters of
$8.3 million
(after tax), including interest
|
|
·
|
The
absence in 2004 of a noncash transition charge in 2003 of $7.6
million
(after tax), reflecting the cumulative effect of an accounting
change, as
discussed in Item 8 - Financial Statements and Supplementary
Data - Notes
1 and 8
|
Partially
offsetting the increase were:
|
·
|
Higher
operation and maintenance expense including payroll, severance-related
expenses, pension costs, higher fuel costs of which a significant
portion
was not recovered through higher prices at the construction materials
and
mining business, as well as costs associated with adverse weather
at the
Texas construction materials and mining
business
|
|
·
|
Lower
inside electrical margins at the construction services business,
including
the effect of losses on a few large jobs of $5.8 million (after
tax)
|
|
·
|
A
$4.0 million (before and after tax) noncash goodwill impairment
relating
to the Company’s cable and pipeline magnetization and location business,
as well as a $1.3 million (after tax) adjustment reflecting the
reduction
in value of certain gathering facilities in the Gulf Coast
region
|
Excluding
the asset impairments at pipeline and energy services of $5.3 million (after
tax) in 2004, earnings (loss) from electric, natural gas distribution and
pipeline and energy services are substantially all from regulated operations.
Earnings (loss) from construction services, natural gas and oil production,
construction materials and mining, independent power production, and other
are
all from nonregulated operations.
FINANCIAL
AND OPERATING DATA
Below
are
key financial and operating data for each of the Company's
businesses.
Electric
|
|
|
|
2004
|
|
2003
|
|
|
|
(Dollars
in millions, where applicable)
|
|
Operating
revenues
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Fuel
and purchased power
|
|
|
|
|
|
|
|
|
|
|
Operation
and maintenance
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
depletion and amortization
|
|
|
|
|
|
|
|
|
|
|
Taxes,
other than income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
Retail
sales (million kWh)
|
|
|
|
|
|
|
|
|
|
|
Sales
for resale (million kWh)
|
|
|
|
|
|
|
|
|
|
|
Average
cost of fuel and purchased
|
|
|
|
|
|
|
|
|
|
|
power
per kWh
|
|
|
|
|
|
|
|
|
|
|
2005
compared to 2004 Electric
earnings increased $1.1 million (9 percent) compared to the prior year
due
to:
· |
Higher
retail sales margins, largely due to 5 percent higher volumes,
primarily
residential, commercial and industrial, partially offset by increased
fuel
and purchased power costs
|
· |
Higher
sales for resale margins, primarily the result of higher average
realized
prices of 22 percent and lower fuel and purchased power-related
costs,
offset in part by decreased sales for resale volumes of 25
percent
|
· |
Lower
net interest expense of $900,000 (after
tax)
|
Partially
offsetting the increase in earnings was the absence in 2005 of the favorable
resolution of federal and related state income tax matters realized in
2004 of
$1.7 million (after tax), including interest.
2004
compared to 2003 Electric
earnings decreased $4.1 million (25 percent) compared to the prior year,
largely
as a result of the following:
|
·
|
An
increase in operation and maintenance expense of $3.7 million (after
tax) due primarily to increased payroll, severance-related and
pension
expenses
|
|
·
|
Lower
retail sales margins largely the result of decreased retail sales
volumes
of 2.4 percent, primarily the result of lower residential sales
volumes
due to cooler summer weather
|
Partially
offsetting the decrease in earnings was a favorable resolution of federal
and
related state income tax matters of $1.7 million (after tax), including
interest.
Natural
Gas Distribution
|
(Dollars
in millions, where applicable)
|
Operating
revenues:
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
Transportation
and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Purchased
natural gas sold
|
|
|
|
|
|
|
|
|
|
|
Operation
and maintenance
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
depletion and amortization
|
|
|
|
|
|
|
|
|
|
|
Taxes,
other than income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
Volumes
(MMdk):
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
Transportation
|
|
|
|
|
|
|
|
|
|
|
Total
throughput
|
|
|
|
|
|
|
|
|
|
|
Degree
days (% of normal)*
|
|
|
|
|
|
|
|
|
|
|
Average
cost of natural gas,
|
|
|
|
|
|
|
|
|
|
|
including
transportation, per dk
|
|
|
|
|
|
|
|
|
|
|
*
Degree days are a measure of the daily temperature-related
demand for
energy for heating.
|
2005
compared to 2004
The
natural gas distribution business experienced an increase in earnings of
$1.3
million (61 percent) compared to the prior year due to:
· |
Higher
average realized rates of $2.0 million (after tax), largely the
result of
rate increases approved by various state public service
commissions
|
· |
Decreased
operation and maintenance expenses, largely payroll-related costs
|
The
increase was partially offset by the absence in 2005 of the favorable resolution
of federal and related state income tax matters realized in 2004 of $3.0
million
(after tax), including interest.
The
pass-through of higher natural gas prices is reflected in the increase
in both
sales revenues and purchased natural gas sold.
2004
compared to 2003 The
natural gas distribution business experienced a decrease in earnings of
$1.7
million (44 percent) compared to the prior year. The earnings decrease
largely
resulted from:
|
·
|
Higher
payroll, severance-related expenses, pension and other operational
expenses of $5.2 million (after
tax)
|
|
·
|
Decreased
retail sales volumes of 5.1 percent, primarily lower residential
and
commercial sales volumes as a result of 6 percent warmer
weather compared to last year
|
Partially
offsetting the decrease in earnings were:
|
·
|
A
favorable resolution of federal and related state income tax
matters of
$3.0 million (after tax), including
interest
|
|
·
|
Higher
retail sales prices, the result of rate increases effective in
South
Dakota, North Dakota and Minnesota
|
The
pass-through of higher natural gas prices is reflected in the increase
in both
sales revenues and purchased natural gas sold.
Construction
Services
Operating
revenues
|
|
$687.1
|
|
$426.8
|
|
$434.2
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Operation
and maintenance
|
|
|
625.1
|
|
|
|
|
|
|
|
Depreciation,
depletion and amortization
|
|
|
13.4
|
|
|
|
|
|
|
|
Taxes,
other than income
|
|
|
20.4
|
|
|
|
|
|
|
|
|
|
|
658.9
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
28.2
|
|
|
|
|
|
|
|
Earnings
(loss)
|
|
|
|
|
|
|
|
|
|
|
2005
compared to 2004
Construction services realized $14.6 million in earnings compared to a
$5.6
million loss for the prior year. The $20.2 million increase in earnings
is due
to:
· |
Higher
outside and inside electrical workloads and margins of $12.8
million
(after tax)
|
· |
Earnings
from businesses acquired during the second quarter of 2005, which
contributed approximately 19 percent of the earnings
increase
|
· |
Higher
equipment sales and rentals
|
· |
Lower
general and administrative expenses of $1.4 million (after tax),
largely
lower severance-related expenses
|
2004
compared to 2003 Construction
services experienced a $5.6 million loss compared to $6.2 million in earnings
for the prior year. The earnings decrease was attributable to:
|
·
|
Decreased
inside electrical margins, including the effect of losses on
a few large
jobs of $5.8 million (after tax)
|
|
·
|
Increased
severance and other general and administrative expenses of $3.6
million
(after tax), including higher consulting and legal fees as well
as other
outside service costs
|
The
decrease in earnings was partially offset by increased line construction
margins.
Pipeline
and Energy Services
|
|
|
|
2004
|
|
2003
|
|
|
|
(Dollars
in millions)
|
|
Operating
revenues:
|
|
|
|
|
|
|
|
Pipeline
|
|
|
|
|
|
|
|
|
|
|
Energy
services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Purchased
natural gas sold
|
|
|
|
|
|
|
|
|
|
|
Operation
and maintenance
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
depletion and amortization
|
|
|
|
|
|
|
|
|
|
|
Taxes,
other than income
|
|
|
|
|
|
|
|
|
|
|
Asset
impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
Transportation
volumes (MMdk):
|
|
|
|
|
|
|
|
|
|
|
Montana-Dakota
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering
volumes (MMdk)
|
|
|
|
|
|
|
|
|
|
|
2005
compared to 2004
Pipeline
and energy services earnings increased $13.2 million (147 percent) due
largely
to:
· |
The
benefit from the resolution of a rate proceeding of $5.0 million
(after
tax), as previously discussed. For further information see Item
8 -
Financial Statements and Supplementary Data - Note
17
|
· |
The
absence in 2005 of the 2004 $4.0 million (before and after tax)
noncash
goodwill impairment and the 2004 $1.3 million (after tax) asset
valuation
adjustment, as previously discussed
|
· |
Higher
gathering rates of $4.4 million (after
tax)
|
· |
Lower
net interest expense of $700,000 (after tax)
|
Partially
offsetting the increase in earnings were:
· |
The
absence in 2005 of the favorable resolution of federal and related
state
income tax matters realized in 2004 of $1.6 million (after tax),
including
interest
|
· |
Lower
transportation and storage rates in 2005 of $1.5 million (after
tax),
largely the result of a FERC rate order received in July 2003
and a
rehearing order received in May 2004, which resulted in lower
rates
effective July 1, 2004
|
The
increase in energy services revenues and the related increase in purchased
natural gas sold includes the effect of higher natural gas prices and volumes
since the comparable prior period.
2004
compared to 2003 Earnings
at the pipeline and energy services business decreased $9.3 million (51
percent)
due largely to:
|
·
|
A
$4.0 million (before and after tax) noncash goodwill impairment
and a $1.3
million (after tax) asset valuation adjustment, as previously
discussed
|
|
·
|
Increased
operating costs of $5.3 million (after tax) including costs associated
with the 2003 expansion of pipeline and gathering operations,
as well as
higher payroll-related costs
|
|
·
|
Higher
financing-related costs of $2.2 million (after
tax)
|
|
·
|
Lower
average rates of $1.5 million (after tax), due in part to the
estimated
effects of a FERC rate order received in July 2003 and rehearing
order
received in May 2004, which resulted in lower rates effective
July 1,
2004
|
Partially
offsetting the decrease in earnings were:
|
·
|
Increased
natural gas transportation volumes of $3.5 million (after tax),
including:
|
|
-
|
Higher
volumes transported on the Grasslands Pipeline (which began providing
natural gas transmission service late in
2003)
|
|
-
|
Higher
natural gas volumes transported into storage, which were largely
commodity
price related
|
|
·
|
A
favorable resolution of federal and related state income tax
matters of
$1.6 million (after tax), including
interest
|
The
increase in energy services revenues and the related increase in purchased
natural gas sold includes the effect of higher natural gas prices and volumes
since the comparable prior period.
Natural
Gas and Oil Production
|
|
|
|
2004
|
|
2003
|
|
|
|
(Dollars
in millions, where applicable)
|
|
Operating
revenues:
|
|
|
|
|
|
|
|
Natural
gas
|
|
|
|
|
|
|
|
|
|
|
Oil
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Purchased
natural gas sold
|
|
|
|
|
|
|
|
|
|
|
Operation
and maintenance:
|
|
|
|
|
|
|
|
|
|
|
Lease
operating costs
|
|
|
|
|
|
|
|
|
|
|
Gathering
and transportation
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
depletion and amortization
|
|
|
|
|
|
|
|
|
|
|
Taxes,
other than income:
|
|
|
|
|
|
|
|
|
|
|
Production
and property taxes
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
Production:
|
|
|
|
|
|
|
|
|
|
|
Natural
gas (MMcf)
|
|
|
|
|
|
|
|
|
|
|
Oil
(MBbls)
|
|
|
|
|
|
|
|
|
|
|
Average
realized prices (including hedges):
|
|
|
|
|
|
|
|
|
|
|
Natural
gas (per Mcf)
|
|
|
|
|
|
|
|
|
|
|
Oil
(per barrel)
|
|
|
|
|
|
|
|
|
|
|
Average
realized prices (excluding hedges):
|
|
|
|
|
|
|
|
|
|
|
Natural
gas (per Mcf)
|
|
|
|
|
|
|
|
|
|
|
Oil
(per barrel)
|
|
|
|
|
|
|
|
|
|
|
Production
costs, including taxes, per net
|
|
|
|
|
|
|
|
|
|
|
equivalent
Mcf:
|
|
|
|
|
|
|
|
|
|
|
Lease
operating costs
|
|
|
|
|
|
|
|
|
|
|
Gathering
and transportation
|
|
|
|
|
|
|
|
|
|
|
Production
and property taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
compared to 2004
The
natural gas and oil production business experienced an increase in earnings
of
$30.8 million (28 percent) due to:
· |
Higher
average realized natural gas prices of 30
percent
|
· |
Higher
average realized oil prices of 25 percent
|
Partially
offsetting the increase were:
· |
Higher
depreciation, depletion and amortization expense of $8.6 million
(after
tax) due to higher rates, largely the result of the South Texas
acquisition in the second quarter of
2005
|
· |
Higher
lease operating costs of $5.4 million (after tax), including
costs related
to the South Texas acquisition, and increased general and administrative
expenses of $5.3 million (after tax), including payroll-related
costs
|
· |
A
slight decrease in natural gas and oil production volumes as
a result of
the effects of hurricanes and normal production declines. Largely
offsetting these declines were increases in production from other
existing
properties due to drilling activity and the South Texas
acquisition
|
2004
compared to 2003 Natural
gas and oil production earnings increased $47.8 million (76 percent) due
to:
|
·
|
Higher
average realized natural gas prices of 20 percent due in part
to the
Company’s ability to access higher and more stable-priced markets for
much
of its operated natural gas production through the Grasslands
Pipeline
|
|
·
|
Higher
natural gas production of 9 percent, largely the result of drilling
activity
|
|
·
|
The
absence in 2004 of a $12.7 million ($7.7 million after tax) noncash
transition charge in 2003, reflecting the cumulative effect of
an
accounting change, as previously
discussed
|
|
·
|
Higher
average realized oil prices of 25
percent
|
Partially
offsetting the increase in earnings were:
|
·
|
Higher
depreciation, depletion and amortization expense of $6.0 million
(after
tax) due to higher rates and higher natural gas production
volumes
|
|
·
|
Higher
general and administrative costs of $3.5 million (after tax)
due primarily
to increased payroll-related expenses and outside
services
|
Construction
Materials and Mining
|
|
|
|
2004
|
|
2003
|
|
|
|
(Dollars
in millions)
|
|
Operating
revenues
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Operation
and maintenance
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
depletion and amortization
|
|
|
|
|
|
|
|
|
|
|
Taxes,
other than income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
Sales
(000's):
|
|
|
|
|
|
|
|
|
|
|
Aggregates
(tons)
|
|
|
|
|
|
|
|
|
|
|
Asphalt
(tons)
|
|
|
|
|
|
|
|
|
|
|
Ready-mixed
concrete (cubic yards)
|
|
|
|
|
|
|
|
|
|
|
2005
compared to 2004
Earnings
at the construction materials and mining business increased $4.4
million (9 percent) due to:
· |
Increased
ready-mixed concrete margins of $4.7 million (after tax), largely
in the
Pacific and Northwest regions
|
· |
Earnings
from companies acquired since the comparable prior period, which
contributed less than 5 percent of
earnings
|
Partially
offsetting the increase were:
· |
Higher
depreciation, depletion and amortization expense of $3.2 million
(after
tax), due in part to higher property, plant and equipment balances
from
existing operations
|
· |
The
absence in 2005 of the 2004 favorable resolution of federal and
related
tax matters of $1.2 million (after tax), including
interest
|
Construction
and aggregate margin increases in most regions were largely offset by
significantly lower margins in Texas, which included the effects of higher
fuel,
maintenance and repair costs.
2004
compared to 2003 Construction
materials and mining earnings decreased $3.7 million (7 percent) due to:
|
·
|
Lower
aggregate and construction margins of $10.5 million (after tax)
from
existing operations largely as a result
of:
|
-
The
absence of certain large projects reflected in 2003 results
|
-
|
Wet
weather which severely impacted operations in
Texas
|
|
-
|
Increased
fuel costs of which a significant portion was not recovered through
higher
prices
|
|
·
|
Higher
general and administrative expenses of $5.3 million (after tax),
including
payroll-related costs, insurance and professional
services
|
Partially
offsetting the decrease in earnings were:
|
·
|
Increased
ready-mixed concrete margins of $2.7 million (after tax), largely
as a
result of higher sales volumes from existing
operations
|
|
·
|
Earnings
from companies acquired since the comparable prior period contributed
approximately 5 percent of earnings
|
Independent
Power Production
Operating
revenues
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Operation
and maintenance
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
depletion and amortization
|
|
|
|
|
|
|
|
|
|
|
Taxes,
other than income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
Net
generation capacity - kW*
|
|
|
279,600
|
|
|
279,600
|
|
|
279,600
|
|
Electricity
produced and sold (thousand kWh)*
|
|
|
254,618
|
|
|
204,425
|
|
|
270,044
|
|
*
Excludes equity method
investments.
|
2005
compared to 2004
Independent power production experienced a decrease in earnings of $3.4
million
(13 percent), largely due to:
· |
The
absence in 2005 of 2004 operating income from the Termoceara
Generating
Facility, benefits received in 2004 related to foreign currency
gains and
the effects of the embedded derivative in the Brazilian electric
power
sales contract were partially offset by a gain from the sale
of the
company’s equity interest in the Termoceara Generating Facility in June
2005
|
· |
Higher
general and administrative expense of $1.7 million (after tax),
largely
consulting and payroll-related
costs
|
· |
Lower
earnings of $900,000 related to a domestic electric generating
facility,
largely lower capacity revenues and higher gas transportation
fees
|
Partially
offsetting the earnings decrease were:
· |
Earnings
from equity method investments acquired since the comparable
prior period,
which contributed less than 5 percent of
earnings
|
· |
Lower
interest expense of $1.2 million (after
tax)
|
· |
Increased
earnings from wind generation of $1.2 million, largely due to
benefits
related to higher production
|
For
additional information regarding equity method investments, see Item 8
-
Financial Statements and Supplementary Data - Note 2.
2004
compared to 2003 Earnings
for the independent power production business were $26.3 million compared
to $11.4 million in 2003. This increase is largely due to:
|
·
|
Higher
net income of $14.8 million from the Company’s share of its equity method
investment in Brazil due primarily
to:
|
|
-
|
Changes
in value of the embedded derivative in the Brazilian electric
power sales
contract, net of lower operating margins resulting from the contract
annual revenue reset provision, as well as other foreign currency
changes,
totaling $8.5 million (after tax)
|
|
-
|
Lower
financing costs of $4.8 million (after tax), largely the result
of
obtaining low-cost, long-term financing for the operation in
mid-2003
|
|
·
|
Earnings
from acquisitions and equity method investments acquired since
the
comparable prior period contributed approximately 7 percent of
earnings
|
For
additional information regarding equity method investments, see Item 8
-
Financial Statements and Supplementary Data - Note 2.
Other
and Intersegment Transactions
Amounts
presented in the preceding tables will not agree with the Consolidated
Statements of Income due to the Company’s other operations and the elimination
of intersegment transactions. The amounts relating to these items are as
follows:
|
|
|
|
2004
|
|
2003
|
|
|
|
(In
millions)
|
|
Other:
|
|
|
|
|
|
|
|
Operating
revenues
|
|
|
|
|
|
|
|
|
|
|
Operation
and maintenance
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
depletion and amortization
|
|
|
|
|
|
|
|
|
|
|
Taxes,
other than income
|
|
|
|
|
|
---
|
|
|
---
|
|
Intersegment
transactions:
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
|
|
|
|
|
|
|
|
|
Purchased
natural gas sold
|
|
|
|
|
|
|
|
|
|
|
Operation
and maintenance
|
|
|
|
|
|
|
|
|
|
|
For
further information on intersegment eliminations, see Item 8 - Financial
Statements and Supplementary Data - Note 13.
PROSPECTIVE
INFORMATION
The
following information highlights the key growth strategies, projections
and
certain assumptions for the Company and its subsidiaries and other matters
for
each of the Company’s businesses. Many of these highlighted points are
“forward-looking statements.” There is no assurance that the Company’s
projections, including estimates for growth and increases in revenues and
earnings, will in fact be achieved. Please refer to assumptions contained
in
this section as well as the various important factors listed in Item 1A
- Risk
Factors. Changes in such assumptions and factors could cause actual future
results to differ materially from the Company’s targeted growth, revenue and
earnings projections.
MDU
Resources Group, Inc.
· |
Earnings
per common share for 2006, diluted, are projected in the range
of $2.00 to
$2.20.
|
· |
The
Company expects the percentage of 2006 earnings per common share,
diluted,
by quarter to be in the following approximate
ranges:
|
- |
First
quarter - 10 percent to 15 percent
|
- |
Second
quarter - 20 percent to 25 percent
|
- |
Third
quarter - 35 percent to 40 percent
|
- |
Fourth
quarter - 25 percent to 30 percent
|
· |
The
Company’s long-term compound annual growth goals on earnings per share
from operations are in the range of 7 percent to 10
percent.
|
Electric
· |
This
segment is involved in the review of potential power projects
to replace
capacity associated with expiring purchased power contracts and
to provide
for future growth. The projects under consideration include a
proposed
600-MW coal-fired facility to be located in northeastern South
Dakota or
construction of a 175-MW lignite coal-fired facility (Vision
21) to be
located in southwestern North Dakota. A decision on which of
these
facilities Montana-Dakota will participate in is expected in
early 2007.
In addition, for its power generation capacity needs beyond 2011,
this
segment is evaluating additional alternatives, including the
potential of
participating in a separate coal-fired facility to be located
in the upper
Midwest. This segment also is considering participation in a
base-load
sub-bituminous electric generating facility in Wyoming. The costs
of
building and/or acquiring the additional generating capacity
needed by the
utility are expected to be recovered in rates.
|
· |
Montana-Dakota
has obtained and holds, or is in the process of renewing, valid
and
existing franchises authorizing it to conduct its electric operations
in
all of the municipalities it serves where such franchises are
required.
Montana-Dakota intends to protect its service area and seek renewal
of all
expiring franchises.
|
Natural
gas distribution
· |
In
September 2004, a natural gas rate case was filed with the MPUC
requesting
an increase of $1.4 million annually, or 4.0 percent. An interim
increase
of $1.4 million annually was approved by the MPUC effective January
10,
2005, subject to refund. A final order on this case is expected
in early
2006.
|
· |
Montana-Dakota
and Great Plains have obtained and hold, or are in the process
of
renewing, valid and existing franchises authorizing them to conduct
their
natural gas operations in all of the municipalities they serve
where such
franchises are required. Montana-Dakota and Great Plains intend
to protect
their service areas and seek renewal of all expiring
franchises.
|
Construction
services
· |
Revenues
in 2006 are expected to be higher than 2005 record
levels.
|
· |
The
Company anticipates margins to strengthen in 2006 as compared
to 2005
levels.
|
Pipeline
and energy services
· |
In
2006, total gathering and transportation throughput is expected
to
increase approximately 5 percent over 2005
levels.
|
· |
Firm
capacity for the Grasslands Pipeline is 90,000 Mcf per day with
expansion
possible to 200,000 Mcf per day. Based on anticipated demand,
incremental
expansions are forecasted over the next few years beginning as
early as
2007.
|
Natural
gas and oil production
· |
The
Company’s long-term compound annual growth goals for production are in
the
range of 7 percent to 10 percent. In 2006, the Company expects a
combined natural gas and oil production increase to be at least
in that
range, with the possibility of exceeding the upper end of the
range. In
late January 2006, the net combined natural gas and oil production
was
approximately 200,000 Mcf equivalent to 210,000 Mcf equivalent
per
day.
|
· |
The
Company is expecting to drill more than 300 wells in
2006.
|
· |
Estimates
of natural gas prices in the Rocky Mountain region for February
through
December 2006 reflected in the Company’s 2006 earnings guidance are in the
range of $5.50 to $6.00 per Mcf. The Company’s estimates for natural gas
prices on the NYMEX for February through December 2006, reflected
in the
Company’s 2006 earnings guidance, are in the range of $6.75 to $7.25
per Mcf. During 2005, more than three-fourths of this segment’s natural
gas production was priced using Rocky Mountain or other non-NYMEX
prices.
|
· |
Estimates
of NYMEX crude oil prices for February through December 2006,
reflected in
the Company’s 2006 earnings guidance, are projected in the range of $50 to
$55 per barrel.
|
· |
For
2006, the Company has hedged approximately 30 percent to 35 percent
of its
estimated natural gas production and approximately 20 percent
to 25
percent of its estimated oil production. For 2007, the Company
has hedged
approximately 5 percent of its estimated natural gas production.
The
hedges that are in place as of January 26, 2006, for 2006 and
2007 are
summarized below:
|
Commodity
|
Index*
|
Period
Outstanding
|
Forward
Notional Volume
(MMBtu)/(Bbl)
|
Price
Swap or
Costless
Collar
Floor-Ceiling
(Per
MMBtu/Bbl)
|
Natural
Gas
|
Ventura
|
1/06
- 12/06
|
1,825,000
|
$6.00-$7.60
|
Natural
Gas
|
Ventura
|
1/06
- 12/06
|
3,650,000
|
$6.655
|
Natural
Gas
|
CIG
|
1/06
- 3/06
|
900,000
|
$7.16
|
Natural
Gas
|
CIG
|
1/06
- 3/06
|
810,000
|
$7.05
|
Natural
Gas
|
Ventura
|
1/06
- 12/06
|
1,825,000
|
$6.75-$7.71
|
Natural
Gas
|
Ventura
|
1/06
- 12/06
|
1,825,000
|
$6.75-$7.77
|
Natural
Gas
|
Ventura
|
1/06
- 12/06
|
1,825,000
|
$7.00-$8.85
|
Natural
Gas
|
NYMEX
|
1/06
- 12/06
|
1,825,000
|
$7.75-$8.50
|
Natural
Gas
|
Ventura
|
1/06
- 12/06
|
1,825,000
|
$7.76
|
Natural
Gas
|
CIG
|
4/06
- 12/06
|
1,375,000
|
$6.50-$6.98
|
Natural
Gas
|
CIG
|
4/06
- 12/06
|
1,375,000
|
$7.00-$8.87
|
Natural
Gas
|
Ventura
|
1/06
- 12/06
|
912,500
|
$8.50-$10.00
|
Natural
Gas
|
Ventura
|
1/06
- 12/06
|
912,500
|
$8.50-$10.15
|
Natural
Gas
|
Ventura
|
1/06
- 3/06
|
540,000
|
$12.00-$17.25
|
Natural
Gas
|
Ventura
|
4/06
- 10/06
|
1,070,000
|
$9.25-$12.88
|
Natural
Gas
|
Ventura
|
4/06
- 10/06
|
1,070,000
|
$9.25-$12.80
|
Natural
Gas
|
Ventura
|
1/07
- 12/07
|
1,825,000
|
$8.00-$11.91
|
Natural
Gas
|
Ventura
|
1/07
- 12/07
|
912,500
|
$8.00-$11.80
|
Natural
Gas
|
Ventura
|
1/07
- 12/07
|
912,500
|
$8.00-$11.75
|
Crude
Oil
|
NYMEX
|
1/06
- 12/06
|
182,500
|
$43.00-$54.15
|
Crude
Oil
|
NYMEX
|
1/06
- 12/06
|
146,000
|
$60.00-$69.20
|
Crude
Oil
|
NYMEX
|
2/06
- 12/06
|
83,500
|
$60.00-$76.80
|
*
Ventura is an index pricing point related to Northern Natural
Gas Co.’s
system; CIG is an
index pricing point related to Colorado
Interstate Gas Co.’s system.
|
Construction
materials and mining
· |
The
Company anticipates margins to improve significantly in 2006
compared to
2005 levels largely because of higher expected aggregate and
construction
margins in Texas.
|
· |
Ready-mixed
concrete volumes for 2006 are expected to be slightly higher
than levels
achieved in 2005; aggregate and asphalt volumes are expected
to be
comparable to 2005 levels.
|
Independent
power production
· |
This
segment is expected to experience minimal earnings for 2006 because
of the
sale of the Company’s equity investment in the Termoceara Generating
Facility in June 2005, significantly higher interest expense
related to
the construction of the Hardin Generating Facility and lower
revenues
because of the bridge contract renewal at the Brush Generating
Facility.
|
· |
This
segment is focused on redeploying the funds from the sale of
the
Termoceara Generating Facility into strategic assets using its
disciplined
approach for acquisitions.
|
NEW
ACCOUNTING STANDARDS
SAB
No. 106
In
September 2004, the SEC issued SAB No. 106, which is an interpretation
regarding
the application of SFAS No. 143 by oil and gas producing companies following
the
full-cost accounting method. SAB No. 106 was effective for the Company
as of
January 1, 2005. The adoption of SAB No. 106 did not have a material effect
on
the Company's financial position or results of operations.
SFAS
No. 123 (revised)
In
December 2004, the FASB issued SFAS No. 123 (revised). This accounting
standard
revises SFAS No. 123 and requires entities to recognize compensation expense
in
an amount equal to the grant-date fair value of share-based payments granted
to
employees. SFAS No. 123 (revised) requires a company to record compensation
expense for all awards granted after the date of adoption of SFAS No. 123
(revised) and for the unvested portion of previously granted awards that
remain
outstanding at the date of adoption. SFAS No. 123 (revised) is effective
for the
Company on January 1, 2006. The Company estimates the adoption of SFAS
No. 123
(revised) will result in less than $300,000 (after tax) in additional
stock-based compensation expense for the year ended December 31,
2006.
FIN
47
In
March
2005, the FASB issued FIN 47. FIN 47 addresses the diverse accounting practices
that developed with respect to the timing of liability recognition for
legal
obligations associated with the retirement of a tangible long-lived asset
when
the timing and/or method of settlement of the obligation are conditional
on a
future event. FIN 47 is effective for the Company at the end of the fiscal
year
ending December 31, 2005. The adoption of FIN 47 did not have a material
effect
on the Company's financial position or results of operations.
EITF
No. 04-6
In
March
2005, the FASB ratified EITF No. 04-6. EITF No. 04-6 requires that
post-production stripping costs be treated as a variable inventory production
cost. EITF No. 04-6 is effective for the Company on January 1, 2006. The
adoption of EITF No. 04-6 is not expected to have a material effect on
the
Company’s financial position or results of operations.
For
further information on SAB No. 106, SFAS No. 123 (revised), FIN 47 and
EITF No.
04-6, see Item 8 - Financial Statements and Supplementary Data - Note
1.
CRITICAL
ACCOUNTING POLICIES INVOLVING SIGNIFICANT ESTIMATES
The
Company has prepared its financial statements in conformity with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires management 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 as well as the reported amounts of revenues and expenses during
the
reporting period. The Company’s significant accounting policies are discussed in
Item 8 - Financial Statements and Supplementary Data - Note 1.
Estimates
are used for items such as impairment testing of long-lived assets, goodwill
and
natural gas and oil properties; fair values of acquired assets and liabilities
under the purchase method of accounting; natural gas and oil reserves;
property
depreciable lives; tax provisions; uncollectible accounts; environmental
and
other loss contingencies; accumulated provision for revenues subject to
refund;
costs on construction contracts; unbilled revenues; actuarially determined
benefit costs; asset retirement obligations; the valuation of stock-based
compensation; and the fair value of derivative instruments. The Company's
critical accounting policies are subject to judgments and uncertainties
that
affect the application of such policies. As discussed below, the Company's
financial position or results of operations may be materially different
when
reported under different conditions or when using different assumptions
in the
application of such policies.
As
additional 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. The following critical
accounting policies involve significant judgments and estimates.
Impairment
of long-lived assets and intangibles
The
Company reviews the carrying values of its long-lived assets and intangibles,
excluding natural gas and oil properties, whenever events or changes in
circumstances indicate that such carrying values may not be recoverable
and
annually for goodwill. Unforeseen events and changes in circumstances and
market
conditions and material differences in the value of long-lived assets and
intangibles due to changes in estimates of future cash flows could negatively
affect the fair value of the Company's assets and result in an impairment
charge. If an impairment indicator exists for tangible and intangible assets,
excluding goodwill, the asset group held and used is tested for recoverability
by comparing the carrying value to its fair value, based on an estimate
of
undiscounted future cash flows attributable to the assets. In the case
of
goodwill, the first step, used to identify a potential impairment, compares
the
fair value of the reporting unit using discounted cash flows, with its
carrying
amount, including goodwill. The second step, used to measure the amount
of the
impairment loss if step one indicates a potential impairment, compares
the
implied fair value of the reporting unit goodwill with the carrying amount
of
goodwill.
Fair
value is the amount at which the asset could be bought or sold in a current
transaction between willing parties. The Company uses critical estimates
and
assumptions when testing assets for impairment, including present value
techniques based on estimates of cash flows, quoted market prices or valuations
by third parties, or multiples of earnings or revenue performance measures.
The
fair value of the asset could be different using different estimates and
assumptions in these valuation techniques.
There
is
risk involved when determining the fair value of assets, tangible and
intangible, as there may be unforeseen events and changes in circumstances
and
market conditions and changes in estimates of future cash flows.
The
Company believes its estimates used in calculating the fair value of long-lived
assets, including goodwill and identifiable intangibles, are reasonable
based on
the information that is known when the estimates are made.
Natural
gas and oil properties
The
Company uses the full-cost method of accounting for its natural gas and
oil
production activities. 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 based on single point-in-time spot market prices, as
mandated
under the rules of the SEC, plus the cost of unproved properties. Judgments
and
assumptions are made when estimating and valuing reserves. There is risk
that
sustained downward movements in natural gas and oil prices and changes
in
estimates of reserve quantities could result in a future noncash write-down
of
the Company’s natural gas and oil properties.
Estimates
of reserves are arrived at using actual historical wellhead production
trends
and/or standard reservoir engineering methods utilizing available engineering
and geologic data derived from well tests. Other factors used in the reserve
estimates are current natural gas and oil prices, current estimates of
well
operating and future development costs, and the interest owned by the Company
in
the well. These estimates are refined as new information becomes
available.
Historically,
the Company has not had any material revisions to its reserve estimates.
As a
result, the Company has not changed its practice in estimating reserves
and does
not anticipate changing its methodologies in the future.
Revenue
recognition
Revenue
is recognized when the earnings process is complete, as evidenced by an
agreement between the customer and the Company, when delivery has occurred
or
services have been rendered, when the fee is fixed or determinable and
when
collection is probable. The recognition of revenue in conformity with accounting
principles generally accepted in the United States of America requires
the
Company to make estimates and assumptions that affect the reported amounts
of
revenue. Critical estimates related to the recognition of revenue include
the
accumulated provision for revenues subject to refund and costs on construction
contracts under the percentage-of-completion method.
Estimates
for revenues subject to refund are established initially for each regulatory
rate proceeding and are subject to change depending on the applicable regulatory
agency’s (Agency) approval of final rates. These estimates are based on the
Company’s analysis of its as-filed application compared to previous Agency
decisions in prior rate filings by the Company and other regulated companies.
The Company periodically reviews the status of its outstanding regulatory
proceedings and liability assumptions and may from time to time change
its
liability estimates subject to known developments as the regulatory proceedings
move through the regulatory review process. The accuracy of the estimates
is
ultimately determined when the Agency issues its final ruling on each regulatory
proceeding for which revenues were subject to refund. Estimates have changed
from time to time as additional information has become available as to
what the
ultimate outcome may be and will likely continue to change in the future
as new
information becomes available on each outstanding regulatory proceeding
that is
subject to refund.
The
Company recognizes construction contract revenue from fixed price and modified
fixed price construction contracts at its construction businesses using
the
percentage-of-completion method, measured by the percentage of costs incurred
to
date to estimated total costs for each contract. This method depends largely
on
the ability to make reasonably dependable estimates related to the extent
of
progress toward completion of the contract, contract revenues and contract
costs. Inasmuch as contract prices are generally set before the work is
performed, the estimates pertaining to every project could contain significant
unknown risks such as volatile labor, material and fuel costs, weather
delays,
adverse project site conditions, unforeseen actions by regulatory agencies,
performance by subcontractors, job management and relations with project
owners.
Several
factors are evaluated in determining the bid price for contract work. These
include, but are not limited to, the complexities of the job, past history
performing similar types of work, seasonal weather patterns, competition
and
market conditions, job site conditions, work force safety, reputation of
the
project owner, availability of labor, materials and fuel, project location
and
project completion dates. As a project commences, estimates are continually
monitored and revised as information becomes available and actual costs
and
conditions surrounding the job become known.
The
Company believes its estimates surrounding percentage-of-completion accounting
are reasonable based on the information that is known when the estimates
are
made. The Company has contract administration, accounting and management
control
systems in place that allow its estimates to be updated and monitored on
a
regular basis. Because of the many factors that are evaluated in determining
bid
prices, it is inherent that the Company’s estimates have changed in the past and
will continually change in the future as new information becomes available
for
each job.
Purchase
accounting
The
Company accounts for its acquisitions under the purchase method of accounting
and, accordingly, the acquired assets and liabilities assumed are recorded
at
their respective fair values. The excess of the purchase price over the
fair
value of the assets acquired and liabilities assumed is recorded as goodwill.
The recorded values of assets and liabilities are based on third-party
estimates
and valuations when available. The remaining values are based on management’s
judgments and estimates, and, accordingly, the Company’s financial position or
results of operations may be affected by changes in estimates and
judgments.
Acquired
assets and liabilities assumed by the Company that are subject to critical
estimates include property, plant and equipment and intangibles.
The
fair
value of owned recoverable aggregate reserve deposits is determined using
qualified internal personnel as well as geologists. Reserve estimates are
calculated based on the best available data. This data is collected from
drill
holes and other subsurface investigations as well as investigations of
surface
features such as mine highwalls and other exposures of the aggregate reserves.
Mine plans, production history and geologic data are also used to estimate
reserve quantities. Value is assigned to the aggregate reserves based on
a
review of market royalty rates, expected cash flows and the number of years
of
recoverable aggregate reserves at owned aggregate sites.
The
fair
value of property, plant and equipment is based on a valuation performed
either
by qualified internal personnel and/or outside appraisers. Fair values
assigned
to plant and equipment are based on several factors including the age and
condition of the equipment, maintenance records of the equipment and auction
values for equipment with similar characteristics at the time of
purchase.
The
fair
value of leasehold rights is based on estimates including royalty rates,
lease
terms and other discernible factors for acquired leasehold rights, and
estimated
cash flows.
While
the
allocation of the purchase price of an acquisition is subject to a considerable
degree of judgment and uncertainty, the Company does not expect the estimates
to
vary significantly once an acquisition has been completed. The Company
believes
its estimates have been reasonable in the past as there have been no significant
valuation adjustments subsequent to the final allocation of the purchase
price
to the acquired assets and liabilities. In addition, goodwill impairment
testing
is performed annually in accordance with SFAS No. 142.
Asset
retirement obligations
Entities
are required to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. The Company has recorded
obligations related to the plugging and abandonment of natural gas and
oil
wells, decommissioning of certain electric generating facilities, reclamation
of
certain aggregate properties, special handling and disposal of hazardous
materials at certain electric generating facilities, natural gas distribution
and transmission facilities and buildings and certain other obligations
associated with leased properties.
The
liability for future asset retirement obligations bears the risk of change
as
many factors go into the development of the estimate of these obligations
and
the likelihood that over time these factors can and will change. Factors
used in
the estimation of future asset retirement obligations include estimates
of
current retirement costs, future inflation factors, life of the asset and
discount rates. These factors determine both a present value of the retirement
liability and the accretion to the retirement liability in subsequent
years.
Long-lived
assets are reviewed to determine if a legal retirement obligation exists.
If a
legal retirement obligation exists, a determination of the liability is
made if
a reasonable estimate of the present value of the obligation can be made.
The
present value of the retirement obligation is calculated by inflating current
estimated retirement costs of the long-lived asset over its expected life
to
determine the expected future cost and then discounting the expected future
cost
back to the present value using a discount rate equal to the credit-adjusted
risk-free interest rate in effect when the liability was initially
recognized.
These
estimates and assumptions are subject to a number of variables and are
expected
to change in the future. Estimates and assumptions will change as the estimated
useful lives of the assets change, the current estimated retirement costs
change, new legal retirement obligations occur and/or as existing legal
asset
retirement obligations, for which a reasonable estimate of fair value could
not
initially be made because of the range of time over which the Company may
settle
the obligation is unknown or cannot be estimated, become less uncertain
and a
reasonable estimate of the future liability can be made.
Pension
and other postretirement benefits
The
Company has noncontributory defined benefit pension plans and other
postretirement benefit plans for certain eligible employees. Various actuarial
assumptions are used in calculating the benefit expense (income) and liability
(asset) related to these plans. Costs of providing pension and other
postretirement benefits bear the risk of change, as they are dependent
upon
numerous factors based on assumptions of future conditions.
The
Company makes various assumptions when determining plan costs, including
the
current discount rates and the expected long-term return on plan assets,
the
rate of compensation increases and healthcare cost trend rates. In selecting
the
expected long-term return on plan assets, which is considered to be one
of the
key variables in determining benefit expense or income, the Company considers
both current market conditions and expected future market trends, including
changes in interest rates and equity and bond market performance. Another
key
variable in determining benefit expense or income is the discount rate.
In
selecting the discount rate, the Company uses the yield of a fixed-income
debt
security, which has a rating of "Aa" or higher published by a recognized
rating
agency, as well as other factors, as a basis. The Company’s pension and other
postretirement benefit plan assets are primarily made up of equity and
fixed
income investments. Fluctuations in actual equity and bond market returns
as
well as changes in general interest rates may result in increased or decreased
pension and other postretirement benefit costs in the future. Management
estimates the rate of compensation increase based on long-term assumed
wage
increases and the healthcare cost trend rates are determined by historical
and
future trends.
The
Company believes the estimates made for its pension and other postretirement
benefits are reasonable based on the information that is known when the
estimates are made. These estimates and assumptions are subject to a number
of
variables and are expected to change in the future. Estimates and assumptions
will be affected by changes in the discount rate, the expected long-term
return
on plan assets, the rate of compensation increase and healthcare cost trend
rates. The Company plans to continue to use its current methodologies to
determine plan costs.
LIQUIDITY
AND CAPITAL COMMITMENTS
Cash
flows
Operating
activities
Net
income before depreciation, depletion and amortization is a significant
contributor to cash flows from operating activities. The changes in cash
flows
from operating activities generally follow the results of operations as
discussed in Financial and Operating Data and also are affected by changes
in
working capital. Cash flows provided by operating activities in 2005 increased
$50.2 million from the comparable 2004 period, the result of:
· |
Increased
net income of $68.0 million, largely increased earnings at the
natural gas
and oil production, construction services and pipeline and energy
services
businesses (Net income in 2004 includes noncash asset impairments
of $6.1
million.)
|
· |
Higher
depreciation, depletion and amortization expense of $19.9 million
largely at the natural gas and oil production and construction
materials and mining businesses, as previously
discussed
|
· |
Decreased
earnings, net of distributions, from equity method investments
of $7.9
million, primarily the result of the sale of the Termoceara Generating
Facility
|
Partially
offsetting the increase in cash flows from operating activities
were:
· |
Higher
working capital requirements of $54.0 million due in part
to:
|
- |
Higher
receivables, largely increased workloads and acquisition-related
increases
at the construction services business
|
- |
Higher
income tax payments due to lower tax depreciation and higher
net
income
|
- |
Partially
offset by higher accounts payable due to increased workloads
and
acquisition-related increases at the construction services business,
higher natural gas costs at the natural gas distribution business
and
increased drilling costs due to increased drilling activity at
the natural
gas and oil production business
|
Cash
flows provided by operating activities in 2004 increased $14.7 million
from the
comparable 2003 period, the result of:
· |
An
increase in net income of $31.7 million (Net income in 2004 includes
noncash asset impairments of $6.1 million. Net income in 2003
includes the
noncash cumulative effect of an accounting change of $7.6
million.)
|
· |
Higher
depreciation, depletion and amortization expense of $20.4 million
largely
due to higher rates and higher natural gas production volumes
at the
natural gas and oil production business and higher property,
plant and
equipment due to acquisitions at the construction materials and
mining
business
|
· |
Changes
in working capital of $19.1 million
|
Partially
offsetting the increase in cash flows from operating activities
were:
· |
Decreased
deferred income taxes of $31.4 million, which reflects the effects
of
higher depreciation, depletion and amortization expense, as previously
discussed, as well as lower tax depreciation in 2004 on the Grasslands
Pipeline
|
· |
Increased
earnings, net of distributions, from equity method investments
of $18.2
million
|
Investing
activities Cash
flows used in investing activities in 2005 increased $257.3 million compared
to
the comparable 2004 period, the result of:
· |
An
increase in net capital expenditures of $329.6 million, due largely
to
acquisitions (including the acquisition of natural gas and oil
production
properties in southern Texas), the construction of the Hardin
Generating
Facility and higher ongoing capital
expenditures
|
· |
The
absence in 2005 of the $22.0 million proceeds from notes receivable
in
2004
|
Partially
offsetting the increase in cash flows used in investing activities
were:
· |
Lower
investments of $56.1 million, including the absence in 2005 of
the 2004
investments in the Hartwell and Trinity Generating
Facilities
|
· |
Proceeds
of $38.2 million from the sale of the Termoceara Generating
Facility
|
Cash
flows used in investing activities in 2004 decreased $34.4 million compared
to the comparable 2003 period, the result of:
· |
A
decrease in net capital expenditures of $77.0 million
|
· |
An
increase in proceeds from notes receivable of $14.2
million
|
An
increase in investments of $56.8 million, including equity method investments,
partially offset the decrease in cash flows used in investing
activities.
Financing
activities Cash
flows provided by financing activities in 2005 increased $202.2 million
compared
to the comparable 2004 period, primarily the result of an increase in the
issuance of long-term debt of $338.5 million due in part to acquisitions
and the
construction of the Hardin Generating Facility.
The
increase in cash flows from financing activities was partially offset
by:
· |
Increased
repayment of long-term debt of $68.8 million, including the redemption
of
$20.9 million of Pollution Control Refunding Revenue bonds and
certain
scheduled debt repayments
|
· |
A
decrease in proceeds from the issuance of common stock of $61.0
million
reflecting the absence in 2005 of the 2004 proceeds received
from an
underwritten public offering
|
Cash
flows provided by financing activities in 2004 decreased $54.8 million
compared
to the comparable 2003 period, primarily the result of a decrease in proceeds
from the issuance of long-term debt of $204.4 million.
Partially
offsetting the decrease in cash provided by financing activities
were:
· |
A
decrease in repayment of long-term debt of $67.7 million
|
· |
An
increase in proceeds from the issuance of common stock of $69.6
million,
primarily due to net proceeds received from an underwritten public
offering
|
Defined
benefit pension plans
The
Company has qualified noncontributory defined benefit pension plans (Pension
Plans) for certain employees. Plan assets consist of investments in equity
and
fixed income securities. Various actuarial assumptions are used in calculating
the benefit expense (income) and liability (asset) related to the Pension
Plans.
Actuarial assumptions include assumptions about the discount rate, expected
return on plan assets and rate of future compensation increases as determined
by
the Company within certain guidelines. At December 31, 2005, certain Pension
Plans’ accumulated benefit obligations exceeded these plans’ assets by
approximately $12.3 million. Pretax pension expense reflected in the years
ended December 31, 2005, 2004 and 2003, was $6.6 million, $4.1 million and
$153,000, respectively. The Company’s pension expense is currently projected to
be approximately $8.0 million to $9.0 million in 2006. A reduction in the
Company’s assumed discount rate for Pension Plans along with lower than expected
asset returns have combined to largely produce the increase in these costs.
Funding for the Pension Plans is actuarially determined. The minimum required
contributions for 2005, 2004 and 2003 were approximately $1.6 million,
$1.2 million and $1.6 million, respectively. For further information on the
Company’s Pension Plans, see Item 8 - Financial Statements and Supplementary
Data - Note 15.
Capital
expenditures
The
Company's capital expenditures for 2003 through 2005 and as anticipated
for 2006
through 2008 are summarized in the following table, which also includes
the
Company's capital needs for the retirement of maturing long-term
debt.
|
|
Actual
|
|
Estimated*
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27.0
|
|
$
|
57.5
|
|
$
|
68.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipeline
and energy services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas and oil production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
materials and
mining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent
power production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
proceeds from sale or disposition
of
property
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
of long-term
debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
837.2
|
|
$
|
604.1
|
|
$
|
570.1
|
|
|
|
|
* The
estimated 2006 through 2008 capital expenditures reflected in
the above
table include potential future acquisitions
and other
growth opportunities; however, they are dependent upon the
availability of economic opportunities
and, as a result, capital
expenditures may vary significantly from the above
estimates.
|
Capital
expenditures for 2005, 2004 and 2003, in the preceding table include noncash
transactions, including the issuance of the Company’s equity securities in
connection with acquisitions. The noncash transactions were $46.5 million
in
2005, $33.1 million in 2004 and $42.4 million in 2003.
In
2005,
the Company acquired construction services businesses in Nevada, natural
gas and
oil production properties in southern Texas and construction materials
and
mining businesses in Idaho, Iowa and Oregon, none of which was material.
The
total purchase consideration for these businesses and properties and purchase
price adjustments with respect to certain other acquisitions acquired prior
to
2005, consisting of the Company's common stock and cash, was $245.2 million.
The
2005
capital expenditures, including those for the previously mentioned acquisitions
and retirements of long-term debt, were met from internal sources, the
issuance
of long-term debt and the Company’s equity securities. Estimated capital
expenditures for the years 2006 through 2008 include those for:
· |
Potential
future acquisitions
|
· |
Routine
equipment maintenance and
replacements
|
· |
Buildings,
land and building improvements
|
· |
Pipeline
and gathering projects
|
· |
Further
enhancement of natural gas and oil production and reserve
growth
|
· |
Power
generation opportunities, including certain costs for additional
electric
generating capacity
|
· |
Other
growth opportunities
|
The
Company continues to evaluate potential future acquisitions and other growth
opportunities; however, they are dependent upon the availability of economic
opportunities and, as a result, capital expenditures may vary significantly
from
the estimates in the preceding table. It is anticipated that all of the
funds
required for capital expenditures and retirements of long-term debt for
the
years 2006 through 2008 will be met from various sources, including internally
generated funds; commercial paper credit facilities at Centennial and MDU
Resources Group, Inc., as described below; and through the issuance of
long-term
debt and the Company’s equity securities.
Capital
resources
MDU
Resources Group, Inc. The
Company has a revolving credit agreement with various banks totaling $100
million (with provision for an increase, at the option of the Company on
stated
conditions, up to a maximum of $125 million). There were no amounts outstanding
under the credit agreement at December 31, 2005. The credit agreement supports
the Company’s $100 million (previously $75 million) commercial paper
program. Under the Company’s commercial paper program, $60.0 million was
outstanding at December 31, 2005. The commercial paper borrowings are classified
as long-term debt as they are intended to be refinanced on a long-term
basis
through continued commercial paper borrowings (supported by the credit
agreement, which expires in June 2010).
The
Company’s objective is to maintain acceptable credit ratings in order to access
the capital markets through the issuance of commercial paper. If the Company
were to experience a minor downgrade of its credit ratings, it would not
anticipate any change in its ability to access the capital markets. However,
in
such an event, the Company would expect a nominal basis point increase
in
overall interest rates with respect to its cost of borrowings. If the Company
were to experience a significant downgrade of its credit ratings, it may
need to
borrow under its credit agreement.
To
the
extent the Company needs to borrow under its credit agreement, it would
be
expected to incur increased annualized interest expense on its variable
rate
debt of approximately $90,000 (after tax) based on December 31, 2005, variable
rate borrowings.
Prior
to
the maturity of the credit agreement, the Company expects that it will
negotiate
the extension or replacement of this agreement. If the Company is unable
to
successfully negotiate an extension of, or replacement for, the credit
agreement, or if the fees on this facility became too expensive, which
the
Company does not currently anticipate, the Company would seek alternative
funding. One source of alternative funding might involve the securitization
of
certain Company assets.
In
order
to borrow under the Company’s credit agreement, the Company must be in
compliance with the applicable covenants and certain other conditions,
including
covenants not to permit, as of the end of any fiscal quarter, (A) the ratio
of
funded debt to total capitalization (determined on a consolidated basis)
to be
greater than 65 percent or (B) the ratio of funded debt to capitalization
(determined with respect to the Company alone, excluding its subsidiaries)
to be
greater than 65 percent. Also included is a covenant that does not permit
the ratio of the Company's earnings before interest, taxes, depreciation
and
amortization to interest expense (determined with respect to the Company
alone,
excluding its subsidiaries), for the 12-month period ended each fiscal
quarter,
to be less than 2.5 to 1. Other covenants include restrictions on the sale
of
certain assets and on the making of certain investments. The Company was
in
compliance with these covenants and met the required conditions at December
31,
2005. In the event the Company does not comply with the applicable covenants
and
other conditions, alternative sources of funding may need to be pursued,
as
previously described.
There
are
no credit facilities that contain cross-default provisions between the
Company
and any of its subsidiaries.
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 fund $1.43 of unfunded property
or use
$1.00 of refunded bonds for each dollar of indebtedness incurred under
the
Indenture and, in some cases, to certify to the trustee 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 tests, as of December 31, 2005, the Company could
have
issued approximately $364 million of additional first mortgage
bonds.
The
Company's coverage of fixed charges including preferred dividends was 6.1
times
and 4.7 times for the 12 months ended December 31, 2005 and 2004,
respectively. Additionally, the Company's first mortgage bond interest
coverage
was 10.2 times and 7.1 times for the 12 months ended December 31, 2005
and 2004,
respectively. Common stockholders' equity as a percent of total capitalization
(net of long-term debt due within one year) was 63 percent and 65 percent
at December 31, 2005 and 2004, respectively.
The
Company has repurchased, and may from time to time seek to repurchase,
outstanding first mortgage bonds through open market purchases or privately
negotiated transactions. The Company will evaluate any such transactions
in
light of then existing market conditions, taking into account its liquidity
and
prospects for future access to capital. As of February 14, 2006, the Company
had
$57.0 million of first mortgage bonds outstanding (and had repurchased
$68.0 million of first mortgage bonds between January 1 and February 14,
2006). At such time as the aggregate principal amount of the Company’s
outstanding first mortgage bonds, other than those held by the Indenture
trustee, is $20 million or less, the Company would have the ability, subject
to
satisfying certain specified conditions, to require that any debt issued
under
its Indenture, dated as of December 15, 2003, as supplemented, from the
Company
to The Bank of New York, as trustee, become unsecured and rank equally
with all
of the Company’s other unsecured and unsubordinated debt (as of February 14,
2006, the only such debt outstanding under the Indenture was $30.0 million
in
aggregate principal amount of the Company’s 5.98% Senior Notes due in
2033).
Centennial
Energy Holdings, Inc.
Centennial has three revolving credit agreements with various banks and
institutions totaling $441.4 million with certain provisions allowing for
increased borrowings. These credit agreements support Centennial’s
$350 million commercial paper program. There were no outstanding borrowings
under the Centennial credit agreements at December 31, 2005. Under the
Centennial commercial paper program, $200.0 million was outstanding at
December
31, 2005. The Centennial commercial paper borrowings are classified as
long-term
debt as Centennial intends to refinance these borrowings on a long-term
basis
through continued Centennial commercial paper borrowings (supported by
Centennial credit agreements). One of these credit agreements is for $400
million, which includes a provision for an increase, at the option of Centennial
on stated conditions, up to a maximum of $450 million and expires on
August 26, 2010. Another agreement is for $21.4 million and expires on
April 30, 2007. Pursuant to this credit agreement, on the last business
day of
April 2006, the line of credit will be reduced by $3.6 million. Centennial
intends to negotiate the extension or replacement of these agreements prior
to
their maturities. The third agreement is an uncommitted line for $20 million,
which was effective on January 27, 2006, and may be terminated by the bank
at
any time. As of December 31, 2005, $32.3 million of letters of credit were
outstanding, as discussed in Item 8 - Financial Statements and Supplementary
Data - Note 18, of which $14.9 million were outstanding under the above
credit
agreements that reduced amounts available under these agreements.
Centennial
has an uncommitted long-term master shelf agreement that allows for borrowings
of up to $450 million. Under the terms of the master shelf agreement, $447.5
million was outstanding at December 31, 2005. The ability to request additional
borrowings under this master shelf agreement expires in April 2008. To
meet
potential future financing needs, Centennial may pursue other financing
arrangements, including private and/or public financing.
Centennial’s
objective is to maintain acceptable credit ratings in order to access the
capital markets through the issuance of commercial paper. If Centennial
were to
experience a minor downgrade of its credit ratings, it would not anticipate
any
change in its ability to access the capital markets. However, in such an
event,
Centennial would expect a nominal basis point increase in overall interest
rates
with respect to its cost of borrowings. If Centennial were to experience
a
significant downgrade of its credit ratings, it may need to borrow under
its
committed bank lines.
To
the
extent Centennial needs to borrow under its committed bank lines, it would
be
expected to incur increased annualized interest expense on its variable
rate
debt of approximately $300,000 (after tax) based on December 31, 2005,
variable
rate borrowings. Based on Centennial’s overall interest rate exposure at
December 31, 2005, this change would not have a material effect on the
Company’s
results of operations or cash flows.
Prior
to
the maturity of the Centennial credit agreements, Centennial expects that
it
will negotiate the extension or replacement of these agreements, which
provide
credit support to access the capital markets. In the event Centennial was
unable
to successfully negotiate these agreements, or in the event the fees on
such
facilities became too expensive, which Centennial does not currently anticipate,
it would seek alternative funding. One source of alternative funding might
involve the securitization of certain Centennial assets.
In
order
to borrow under Centennial’s credit agreements and the Centennial uncommitted
long-term master shelf agreement, Centennial and certain of its subsidiaries
must be in compliance with the applicable covenants and certain other
conditions, including covenants not to permit, as of the end of any fiscal
quarter, the ratio of total debt to total capitalization to be greater
than 65
percent (for the $400 million credit agreement) and 60 percent (for the
$21.4
million credit agreement and the master shelf agreement). Also included
is a
covenant that does not permit the ratio of the Company's earnings before
interest, taxes, depreciation and amortization to interest expense, for
the
12-month period ended each fiscal quarter, to be less than 2.5 to 1 (for
the
$400 million credit agreement), 2.25 to 1 (for the $21.4 million credit
agreement) and 1.75 to 1 (for the master shelf agreement). Other covenants
include minimum consolidated net worth, limitation on priority debt and
restrictions on the sale of certain assets and on the making of certain
loans
and investments. Centennial and such subsidiaries were in compliance with
these
covenants and met the required conditions at December 31, 2005. In the
event
Centennial or such subsidiaries do not comply with the applicable covenants
and
other conditions, alternative sources of funding may need to be pursued
as
previously described.
Certain
of Centennial’s financing agreements contain cross-default provisions. These
provisions state that if Centennial or any subsidiary of Centennial fails
to
make any payment with respect to any indebtedness or contingent obligation,
in
excess of a specified amount, under any agreement that causes such indebtedness
to be due prior to its stated maturity or the contingent obligation to
become
payable, the applicable agreements will be in default. Certain of Centennial’s
financing agreements and Centennial’s practice limit the amount of subsidiary
indebtedness.
Williston
Basin Interstate Pipeline Company Williston
Basin has an uncommitted long-term master shelf agreement that allows for
borrowings of up to $100 million. Under the terms of the master shelf agreement,
$55.0 million was outstanding at December 31, 2005. The ability to request
additional borrowings under this master shelf agreement expires on December
20,
2007.
In
order
to borrow under its uncommitted long-term master shelf agreement, Williston
Basin must be in compliance with the applicable covenants and certain other
conditions, including covenants not to permit, as of the end of any fiscal
quarter, the ratio of total debt to total capitalization to be greater
than 55
percent. Other covenants include limitation on priority debt and some
restrictions on the sale of certain assets and the making of certain
investments. Williston Basin was in compliance with these covenants and
met the
required conditions at December 31, 2005. In the event Williston Basin
does not
comply with the applicable covenants and other conditions, alternative
sources
of funding may need to be pursued.
Off
balance sheet arrangements
In
connection with the sale of MPX in June 2005 to Petrobras, an indirect
wholly
owned subsidiary of the Company has agreed to indemnify Petrobras for 49
percent
of any losses that Petrobras may incur from certain contingent liabilities
specified in the purchase agreement. Centennial has agreed to unconditionally
guarantee payment of the indemnity obligations to Petrobras for periods
ranging
from approximately two to five and a half years from the date of sale.
The
guarantee was required by Petrobras as a condition to closing the sale
of
MPX.
As
of
December 31, 2005, Centennial was contingently liable for the performance
of
certain of its subsidiaries under approximately $454 million of surety
bonds.
These bonds are principally for construction contracts and reclamation
obligations of these subsidiaries entered into in the normal course of
business.
Centennial indemnifies the respective surety bond companies against any
exposure
under the bonds. The purpose of Centennial’s indemnification is to allow the
subsidiaries to obtain bonding at competitive rates. In the event a subsidiary
of the Company does not fulfill its obligations in relation to its bonded
contract or obligation, Centennial may be required to make payments under
its
indemnification. A large portion of these contingent commitments is expected
to
expire within the next 12 months; however, Centennial will likely continue
to
enter into surety bonds for its subsidiaries in the future. The surety
bonds
were not reflected on the Consolidated Balance Sheets.
Contractual
obligations and commercial commitments
For
more
information on the Company’s contractual obligations on long-term debt,
operating leases and purchase commitments, see Item 8 - Financial Statements
and
Supplementary Data - Notes 7 and 18. At December 31, 2005, the Company’s
commitments under these obligations were as follows:
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Thereafter
|
|
Total
|
|
|
|
(In
millions)
|
|
Long-term
debt
|
|
$
|
101.8
|
|
$
|
106.9
|
|
$
|
161.3
|
|
$
|
86.9
|
|
$
|
266.8
|
|
$
|
482.8
|
|
$
|
1,206.5
|
|
Estimated
interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
payments*
|
|
|
66.1
|
|
|
56.6
|
|
|
50.4
|
|
|
43.2
|
|
|
36.0
|
|
|
115.8
|
|
|
368.1
|
|
Operating
leases
|
|
|
13.2
|
|
|
8.6
|
|
|
6.5
|
|
|
4.2
|
|
|
2.8
|
|
|
24.1
|
|
|
59.4
|
|
Purchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
commitments
|
|
|
303.6
|
|
|
131.3
|
|
|
79.5
|
|
|
63.5
|
|
|
62.7
|
|
|
294.4
|
|
|
935.0
|
|
|
|
$
|
484.7
|
|
$
|
303.4
|
|
$
|
297.7
|
|
$
|
197.8
|
|
$
|
368.3
|
|
$
|
917.1
|
|
$
|
2,569.0
|
|
* Estimated
interest payments are calculated based on the applicable rates
and payment
dates.
|
In
addition to the above obligations, the Company has certain purchase obligations
for natural gas connected to its gathering system. These purchases and
the
resale of the natural gas are at market-based prices. These obligations
continue
as long as natural gas is produced. However, if the purchase and resale
of
natural gas becomes uneconomical, the purchase commitments can be canceled
by
the Company with 60 days notice. These purchase obligations are estimated
at
approximately $10 million annually.
EFFECTS
OF INFLATION
Inflation
did not have a significant effect on the Company's operations in 2005,
2004 or
2003.
ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The
Company is exposed to the impact of market fluctuations associated with
commodity prices, interest rates and foreign currency. The Company has
policies
and procedures to assist in controlling these market risks and utilizes
derivatives to manage a portion of its risk.
The
Company’s policy allows the use of derivative instruments as part of an overall
energy price, foreign currency and interest rate risk management program
to
efficiently manage and minimize commodity price, foreign currency and interest
rate risk. The Company’s policy prohibits the use of derivative instruments for
speculating to take advantage of market trends and conditions and the Company
has procedures in place to monitor compliance with its policies. The Company
is
exposed to credit-related losses in relation to derivative instruments
in the
event of nonperformance by counterparties. The Company’s policy requires that
natural gas and oil price derivative instruments and interest rate derivative
instruments not exceed a period of 24 months and foreign currency derivative
instruments not exceed a 12-month period. The Company’s policy requires
settlement of natural gas and oil price derivative instruments monthly
and all
interest rate derivative transactions must be settled over a period that
will
not exceed 90 days, and any foreign currency derivative transaction settlement
periods may not exceed a 12-month period. The Company has policies and
procedures that management believes minimize credit-risk exposure. These
policies and procedures include an evaluation of potential counterparties’
credit ratings and credit exposure limitations. Accordingly, the Company
does
not anticipate any material effect on its financial position or results
of
operations as a result of nonperformance by counterparties.
In
the
event a derivative instrument being accounted for as a cash flow hedge
does not
qualify for hedge accounting because it is no longer highly effective in
offsetting changes in cash flows of a hedged item; if the derivative instrument
expires or is sold, terminated or exercised; or if management determines
that
designation of the derivative instrument as a hedge instrument is no longer
appropriate, hedge accounting would be discontinued and the derivative
instrument would continue to be carried at fair value with changes in its
fair
value recognized in earnings. In these circumstances, the net gain or loss
at
the time of discontinuance of hedge accounting would remain in accumulated
other
comprehensive income (loss) until the period or periods during which the
hedged
forecasted transaction affects earnings, at which time the net gain or
loss
would be reclassified into earnings. In the event a cash flow hedge is
discontinued because it is unlikely that a forecasted transaction will
occur,
the derivative instrument would continue to be carried on the balance sheet
at
its fair value, and gains and losses that had accumulated in other comprehensive
income (loss) would be recognized immediately in earnings. In the event
of a
sale, termination or extinguishment of a foreign currency derivative, the
resulting gain or loss would be recognized immediately in earnings. The
Company’s policy requires approval to terminate a derivative instrument prior to
its original maturity.
Commodity
price risk
Fidelity
utilizes natural gas and oil price swap and collar agreements to manage
a
portion of the market risk associated with fluctuations in the price of
natural
gas and oil on its forecasted sales of natural gas and oil production.
Each of
the natural gas and oil price swap and collar agreements was designated
as a
hedge of the forecasted sale of natural gas and oil production.
The
fair
value of the hedging instruments must be estimated as of the end of each
reporting period and is recorded on the Consolidated Balance Sheets as
an asset
or liability. Changes in the fair value attributable to the effective portion
of
hedging instruments, net of tax, are recorded in stockholders' equity as
a
component of accumulated other comprehensive income (loss). At the date
the
natural gas or oil production quantities are settled, the amounts accumulated
in
other comprehensive income (loss) are reported in the Consolidated Statements
of
Income. To the extent that the hedges are not effective, the ineffective
portion
of the changes in fair market value is recorded directly in earnings. Based
on
the recent rise in market prices of natural gas and oil, the fair value
of the
Company’s derivative liability has increased significantly since December 31,
2004. The proceeds the Company receives for its natural gas and oil production
also are generally based on market prices.
The
following table summarizes hedge agreements entered into by Fidelity as
of
December 31, 2005. These agreements call for Fidelity to receive fixed
prices and pay variable prices.
|
|
(Notional
amount and fair value in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
Notional
|
|
|
|
|
|
Fixed
Price
|
|
Amount
|
|
|
|
|
|
(Per
MMBtu)
|
|
(In
MMBtu's)
|
|
Fair
Value
|
|
Natural
gas swap agreements maturing in 2006
|
|
$
|
7.04
|
|
|
7,185
|
|
$
|
(18,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Floor/Ceiling
|
|
|
Notional
|
|
|
|
|
|
|
|
Price
|
|
|
Amount
|
|
|
|
|
|
|
|
(Per
MBtu)
|
|
|
(In
MMBtu’s
|
)
|
|
Fair
Value
|
|
Natural
gas collar agreements maturing in 2006
|
|
$
|
7.50/$9.20
|
|
|
16,380
|
|
$
|
(21,874
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Floor/Ceiling
|
|
|
Notional
|
|
|
|
|
|
|
|
Price
|
|
|
Amount
|
|
|
|
|
|
|
|
(Per
barrel)
|
|
|
(In
barrels
|
)
|
|
Fair
Value
|
|
Oil
collar agreements maturing in 2006
|
|
$
|
50.56/$60.84
|
|
|
329
|
|
$
|
(1,834
|
)
|
The
following table summarizes hedge agreements entered into by Fidelity as
of
December 31, 2004. These agreements call for Fidelity to receive fixed
prices and pay variable prices.
|
|
(Notional
amount and fair value in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
Notional
|
|
|
|
|
|
Fixed
Price
|
|
Amount
|
|
|
|
|
|
(Per
MMBtu)
|
|
(In
MMBtu's)
|
|
Fair
Value
|
|
Natural
gas swap agreements maturing in 2005
|
|
$
|
5.39
|
|
|
8,020
|
|
$
|
(4,187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Floor/Ceiling
|
|
|
Notional
|
|
|
|
|
|
|
|
Price
|
|
|
Amount
|
|
|
|
|
|
|
|
(Per
MBtu)
|
|
|
(In
MMBtu’s
|
)
|
|
Fair
Value
|
|
Natural
gas collar agreements maturing in 2005
|
|
$
|
5.42/$6.64
|
|
|
15,050
|
|
$
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Notional
|
|
|
|
|
|
|
|
Fixed
Price
|
|
|
Amount
|
|
|
|
|
|
|
|
(Per
barrel)
|
|
|
(In
barrels
|
)
|
|
Fair
Value
|
|
Oil
swap agreement maturing in 2005
|
|
$
|
30.70
|
|
|
183
|
|
$
|
(2,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Floor/Ceiling
|
|
|
Notional
|
|
|
|
|
|
|
|
Price
|
|
|
Amount
|
|
|
|
|
|
|
|
(Per
barrel)
|
|
|
(In
barrels
|
)
|
|
Fair
Value
|
|
Oil
collar agreements maturing in 2005
|
|
$
|
37.79/$44.68
|
|
|
347
|
|
$
|
(608
|
)
|
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 historically used
interest rate swap agreements to manage a portion of the Company’s interest rate
risk and may take advantage of such agreements in the future to minimize
such
risk.
The
following table shows the amount of debt, including current portion, and
related
weighted average interest rates, both by expected maturity dates, as of
December
31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Thereafter
|
|
Total
|
|
Value
|
|
|
|
(Dollars
in millions)
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rate
|
|
$
|
101.8
|
|
$
|
106.9
|
|
$
|
161.3
|
|
$
|
86.9
|
|
|
|
|
$
|
482.8
|
|
$
|
946.5
|
|
$
|
960.1
|
|
Weighted
average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
rate
|
|
|
6.5
|
%
|
|
8.1
|
%
|
|
4.5
|
%
|
|
6.2
|
%
|
|
6.8
|
%
|
|
6.0
|
%
|
|
6.0
|
%
|
|
---
|
|
Variable
rate
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
|
|
|
---
|
|
$
|
260.0
|
|
$
|
259.2
|
|
Weighted
average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
rate
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
4.3
|
%
|
|
---
|
|
|
4.3
|
%
|
|
---
|
|
For
further information on derivative instruments and fair value of other financial
instruments, see Item 8 - Financial Statements and Supplementary Data -
Notes 5
and 6.
Foreign
currency risk
The
Company’s investment in the Termoceara Generating Facility was sold in June 2005
as discussed in Item 8 - Financial Statements and Supplementary Data -
Note 2
and,
as a
result, the Company no longer has any material exposure to foreign currency
exchange risk.
ITEM
8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
management of MDU Resources Group, Inc. is responsible for establishing
and
maintaining adequate internal control over financial reporting as defined
in
Rules 13a-15(f) under the Securities Exchange Act of 1934. The Company’s
internal control system was designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles.
All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements.
Also,
projections of any evaluation of effectiveness to future periods are subject
to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2005. In making this assessment, management
used
the criteria set forth by the Committee of Sponsoring Organizations of
the
Treadway Commission (COSO) in Internal
Control-Integrated Framework.
Based
on
our evaluation under the framework in Internal
Control-Integrated Framework,
management concluded that the Company’s internal control over financial
reporting was effective as of December 31, 2005.
Management’s
assessment of the Company’s internal control over financial reporting as of
December 31, 2005, has been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report.
|
|
Martin
A. White
|
Vernon
A. Raile
|
Chairman
of the Board
|
Executive
Vice President and
|
and
Chief Executive Officer
|
Chief
Financial Officer
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF MDU RESOURCES GROUP,
INC.:
We
have
audited the accompanying consolidated balance sheets of MDU Resources Group,
Inc. and subsidiaries (the “Company”) as of December 31, 2005 and 2004, 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, 2005.
Our
audits also included the financial statement schedule for each of the three
years in the period ended December 31, 2005, listed in the Index at Item
15.
These consolidated financial statements and the financial statement schedule
are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An
audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for
our
opinion.
In
our
opinion, such consolidated financial statements present fairly, in all
material
respects, the financial position of the Company as of December 31, 2005
and
2004, and the results of its operations and its cash flows for each of
the three
years in the period ended December 31, 2005, in conformity with accounting
principles generally accepted in the United States of America. Also, in
our
opinion, the financial statement schedule for each of the three years in
the
period ended December 31, 2005, when considered in relation to the consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2005, based on the
criteria
established in Internal
Control-Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
and our
report dated February 22, 2006, expressed an unqualified opinion on management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
/s/
Deloitte & Touche LLP
DELOITTE
& TOUCHE LLP
Minneapolis,
Minnesota
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF MDU RESOURCES GROUP,
INC.:
We
have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control over Financial Reporting, that MDU Resources
Group,
Inc. and subsidiaries (the “Company”) maintained effective internal control over
financial reporting as of December 31, 2005, based on criteria established
in
Internal
Control-Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission. The
Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of
internal
control over financial reporting. Our responsibility is to express an opinion
on
management’s assessment and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected
by the
company’s board of directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and
the
preparation of financial statements for external purposes in accordance
with
generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention
or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override
of
controls, material misstatements due to error or fraud may not be prevented
or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future
periods
are subject to the risk that the controls may become inadequate because
of
changes in conditions, or that the degree of compliance with the policies
or
procedures may deteriorate.
In
our
opinion, management’s assessment that the Company maintained effective internal
control over financial reporting as of December 31, 2005, is fairly stated,
in
all material respects, based on the criteria established in Internal
Control-Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission. Also
in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2005, based
on the
criteria established in Internal
Control-Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway
Commission.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements
and
financial statement schedule of the Company as of and for the year ended
December 31, 2005, and our report dated February 22, 2006, expressed an
unqualified opinion on those financial statements and financial statement
schedule.
/s/
Deloitte & Touche LLP
DELOITTE
& TOUCHE LLP
Minneapolis,
Minnesota
MDU
RESOURCES GROUP, INC.
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
2004
|
|
2003
|
|
|
|
(In
thousands, except per share amounts)
|
|
Operating
revenues:
|
|
|
|
|
|
|
|
Electric,
natural gas distribution and pipeline
|
|
|
|
|
|
|
|
|
|
|
and
energy services
|
|
$
|
953,307
|
|
$
|
776,836
|
|
$
|
641,062
|
|
Construction
services, natural gas and oil production,
|
|
|
|
|
|
|
|
|
|
|
construction
materials and mining, independent
|
|
|
|
|
|
|
|
|
|
|
power
production and other
|
|
|
2,502,107
|
|
|
1,942,421
|
|
|
1,711,127
|
|
|
|
|
3,455,414
|
|
|
2,719,257
|
|
|
2,352,189
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Fuel
and purchased power
|
|
|
63,591
|
|
|
64,618
|
|
|
62,037
|
|
Purchased
natural gas sold
|
|
|
329,190
|
|
|
249,924
|
|
|
184,171
|
|
Operation
and maintenance:
|
|
|
|
|
|
|
|
|
|
|
Electric,
natural gas distribution and pipeline and
|
|
|
|
|
|
|
|
|
|
|
energy
services
|
|
|
159,072
|
|
|
158,387
|
|
|
141,307
|
|
Construction
services, natural gas and oil production,
|
|
|
|
|
|
|
|
|
|
|
construction
materials and
mining, independent
|
|
|
|
|
|
|
|
|
|
|
power
production and other
|
|
|
2,106,855
|
|
|
1,614,053
|
|
|
1,384,015
|
|
Depreciation,
depletion and amortization
|
|
|
228,657
|
|
|
208,770
|
|
|
188,337
|
|
Taxes,
other than income
|
|
|
120,023
|
|
|
96,681
|
|
|
80,250
|
|
Asset
impairments (Notes 1 and 3)
|
|
|
---
|
|
|
6,106
|
|
|
---
|
|
|
|
|
3,007,388
|
|
|
2,398,539
|
|
|
2,040,117
|
|
Operating
income
|
|
|
448,026
|
|
|
320,718
|
|
|
312,072
|
|
Earnings
from equity method investments
|
|
|
20,192
|
|
|
25,053
|
|
|
5,968
|
|
Other
income
|
|
|
7,394
|
|
|
12,707
|
|
|
16,239
|
|
Interest
expense
|
|
|
54,750
|
|
|
57,437
|
|
|
52,794
|
|
Income
before income taxes
|
|
|
420,862
|
|
|
301,041
|
|
|
281,485
|
|
Income
taxes
|
|
|
145,779
|
|
|
93,974
|
|
|
98,572
|
|
Income
before cumulative effect of accounting change
|
|
|
275,083
|
|
|
207,067
|
|
|
182,913
|
|
Cumulative
effect of accounting change (Note 8)
|
|
|
---
|
|
|
---
|
|
|
(7,589
|
)
|
Net
income
|
|
|
275,083
|
|
|
207,067
|
|
|
175,324
|
|
Dividends
on preferred stocks
|
|
|
685
|
|
|
685
|
|
|
717
|
|
Earnings
on common stock
|
|
$
|
274,398
|
|
$
|
206,382
|
|
$
|
174,607
|
|
Earnings
per common share - basic:
|
|
|
|
|
|
|
|
|
|
|
Earnings
before cumulative effect of accounting change
|
|
$
|
2.31
|
|
$
|
1.77
|
|
$
|
1.64
|
|
Cumulative
effect of accounting change
|
|
|
---
|
|
|
---
|
|
|
(.07
|
)
|
Earnings
per common share -
basic
|
|
$
|
2.31
|
|
$
|
1.77
|
|
$
|
1.57
|
|
Earnings
per common share - diluted:
|
|
|
|
|
|
|
|
|
|
|
Earnings
before cumulative effect of accounting change
|
|
$
|
2.29
|
|
$
|
1.76
|
|
$
|
1.62
|
|
Cumulative
effect of accounting change
|
|
|
---
|
|
|
---
|
|
|
(.07
|
)
|
Earnings
per common share -
diluted
|
|
$
|
2.29
|
|
$
|
1.76
|
|
$
|
1.55
|
|
Dividends
per common share
|
|
$
|
.74
|
|
$
|
.70
|
|
$
|
.66
|
|
Weighted
average common shares outstanding - basic
|
|
|
118,910
|
|
|
116,482
|
|
|
111,483
|
|
Weighted
average common shares outstanding - diluted
|
|
|
119,660
|
|
|
117,411
|
|
|
112,460
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
MDU
RESOURCES GROUP, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
2004
|
|
(In
thousands, except shares and per share amounts)
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
107,435
|
|
|
|
|
Receivables,
net
|
|
|
603,959
|
|
|
440,903
|
|
Inventories
|
|
|
172,201
|
|
|
143,880
|
|
Deferred
income taxes
|
|
|
9,062
|
|
|
2,874
|
|
Prepayments
and other current assets
|
|
|
40,539
|
|
|
41,144
|
|
|
|
|
933,196
|
|
|
728,178
|
|
Investments
|
|
|
98,217
|
|
|
120,555
|
|
Property,
plant and equipment (Note 1)
|
|
|
4,594,355
|
|
|
3,931,428
|
|
Less
accumulated depreciation, depletion and amortization
|
|
|
1,544,462
|
|
|
1,358,723
|
|
|
|
|
3,049,893
|
|
|
2,572,705
|
|
Deferred
charges and other assets:
|
|
|
|
|
|
|
|
Goodwill
(Note 3)
|
|
|
230,865
|
|
|
199,743
|
|
Other
intangible assets, net (Note 3)
|
|
|
19,059
|
|
|
22,269
|
|
Other
|
|
|
92,332
|
|
|
90,071
|
|
|
|
|
342,256
|
|
|
312,083
|
|
|
|
$
|
4,423,562
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Long-term
debt due within one year
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
269,021
|
|
|
184,993
|
|
Taxes
payable
|
|
|
50,533
|
|
|
28,372
|
|
Dividends
payable
|
|
|
22,951
|
|
|
21,449
|
|
Other
accrued liabilities
|
|
|
184,665
|
|
|
142,233
|
|
|
|
|
628,928
|
|
|
449,093
|
|
Long-term
debt (Note 7)
|
|
|
1,104,752
|
|
|
873,441
|
|
Deferred
credits and other liabilities:
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
526,176
|
|
|
494,589
|
|
Other
liabilities
|
|
|
272,084
|
|
|
235,385
|
|
|
|
|
798,260
|
|
|
729,974
|
|
Commitments
and contingencies (Notes 15, 17 and 18)
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Preferred
stocks (Note 9)
|
|
|
15,000
|
|
|
15,000
|
|
Common
stockholders’ equity:
|
|
|
|
|
|
|
|
Common
stock (Note 10)
|
|
|
|
|
|
|
|
Authorized
- 250,000,000 shares, $1.00 par value
|
|
|
|
|
|
|
|
Issued
- 120,262,786 shares in 2005 and 118,586,065 shares in
2004
|
|
|
120,263
|
|
|
118,586
|
|
Other
paid-in capital
|
|
|
909,006
|
|
|
863,449
|
|
Retained
earnings
|
|
|
884,795
|
|
|
699,095
|
|
Accumulated
other comprehensive loss
|
|
|
(33,816
|
)
|
|
(11,491
|
)
|
Treasury
stock at cost - 359,281 shares
|
|
|
(3,626
|
)
|
|
(3,626
|
)
|
Total
common stockholders’ equity
|
|
|
1,876,622
|
|
|
1,666,013
|
|
Total
stockholders’ equity
|
|
|
1,891,622
|
|
|
1,681,013
|
|
|
|
$
|
4,423,562
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
MDU
RESOURCES GROUP, INC.
CONSOLIDATED
STATEMENTS OF COMMON STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Paid-in
|
|
Retained
|
|
Comprehensive
|
|
Treasury
Stock
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Loss
|
|
Shares
|
|
Amount
|
|
Total
|
|
|
|
(In
thousands, except shares)
|
|
Balance
at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,282,038
|
|
|
|
|
$
|
748,095
|
|
$
|
474,798
|
|
|
|
|
|
(239,521
|
)
|
$
|
(3,626
|
)
|
$
|
1,283,745
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
175,324
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
175,324
|
|
Other
comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income,
net of tax -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
derivative
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
qualifying
as hedges
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
1,206
|
|
|
---
|
|
|
---
|
|
|
1,206
|
|
Minimum
pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
21
|
|
|
---
|
|
|
---
|
|
|
21
|
|
Foreign
currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
translation
adjustment
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
1,048
|
|
|
---
|
|
|
---
|
|
|
1,048
|
|
Total
comprehensive income
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
177,599
|
|
Dividends
on preferred stocks
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
(717
|
)
|
|
---
|
|
|
---
|
|
|
---
|
|
|
(717
|
)
|
Dividends
on common stock
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
(74,118
|
)
|
|
---
|
|
|
---
|
|
|
---
|
|
|
(74,118
|
)
|
Tax
benefit on stock-based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation
|
|
|
---
|
|
|
---
|
|
|
2,472
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
2,472
|
|
Issuance
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(pre-split)
|
|
|
1,442,220
|
|
|
1,442
|
|
|
42,788
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
44,230
|
|
Three-for-two
common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
split (Note 10)
|
|
|
37,862,129
|
|
|
37,862
|
|
|
(37,862
|
)
|
|
---
|
|
|
---
|
|
|
(119,760
|
)
|
|
---
|
|
|
---
|
|
Issuance
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(post-split)
|
|
|
130,245
|
|
|
131
|
|
|
2,294
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
2,425
|
|
Balance
at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,716,632
|
|
|
113,717
|
|
|
757,787
|
|
|
575,287
|
|
|
(7,529
|
)
|
|
(359,281
|
)
|
|
(3,626
|
)
|
|
1,435,636
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
207,067
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
207,067
|
|
Other
comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
(loss), net of tax -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized loss on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
derivative
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
qualifying
as hedges
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
(1,032
|
)
|
|
---
|
|
|
---
|
|
|
(1,032
|
)
|
Minimum
pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
(3,782
|
)
|
|
---
|
|
|
---
|
|
|
(3,782
|
)
|
Foreign
currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
translation
adjustment
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
852
|
|
|
---
|
|
|
---
|
|
|
852
|
|
Total
comprehensive income
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
203,105
|
|
Dividends
on preferred stocks
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
(685
|
)
|
|
---
|
|
|
---
|
|
|
---
|
|
|
(685
|
)
|
Dividends
on common stock
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
(82,574
|
)
|
|
---
|
|
|
---
|
|
|
---
|
|
|
(82,574
|
)
|
Tax
benefit on stock-based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation
|
|
|
---
|
|
|
---
|
|
|
6,222
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
6,222
|
|
Issuance
of common stock
|
|
|
4,869,433
|
|
|
4,869
|
|
|
99,440
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
104,309
|
|
Balance
at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118,586,065
|
|
|
118,586
|
|
|
863,449
|
|
|
699,095
|
|
|
(11,491
|
)
|
|
(359,281
|
)
|
|
(3,626
|
)
|
|
1,666,013
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
275,083
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
275,083
|
|
Other
comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
(loss), net of tax -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized loss on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
derivative
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
qualifying
as hedges
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
(21,800
|
)
|
|
---
|
|
|
---
|
|
|
(21,800
|
)
|
Minimum
pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
574
|
|
|
---
|
|
|
---
|
|
|
574
|
|
Foreign
currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
translation
adjustment
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
(1,099
|
)
|
|
---
|
|
|
---
|
|
|
(1,099
|
)
|
Total
comprehensive income
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
252,758
|
|
Dividends
on preferred stocks
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
(685
|
)
|
|
---
|
|
|
---
|
|
|
---
|
|
|
(685
|
)
|
Dividends
on common stock
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
(88,698
|
)
|
|
---
|
|
|
---
|
|
|
---
|
|
|
(88,698
|
)
|
Tax
benefit on stock-based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation
|
|
|
---
|
|
|
---
|
|
|
5,487
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
5,487
|
|
Issuance
of common stock
|
|
|
1,676,721
|
|
|
1,677
|
|
|
40,070
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
41,747
|
|
Balance
at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,262,786
|
|
$
|
120,263
|
|
$
|
909,006
|
|
$
|
884,795
|
|
|
|
|
|
(359,281
|
)
|
$
|
(3,626
|
)
|
$
|
1,876,622
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
MDU
RESOURCES GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
2004
|
|
2003
|
|
|
|
(In
thousands)
|
|
Operating
activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
275,083
|
|
$
|
207,067
|
|
$
|
175,324
|
|
Cumulative
effect of accounting change
|
|
|
---
|
|
|
---
|
|
|
7,589
|
|
Adjustments
to reconcile net income
|
|
|
|
|
|
|
|
|
|
|
to
net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
depletion and amortization
|
|
|
228,657
|
|
|
208,770
|
|
|
188,337
|
|
Earnings,
net of distributions, from equity
|
|
|
|
|
|
|
|
|
|
|
method
investments
|
|
|
(14,385
|
)
|
|
(22,261
|
)
|
|
(4,020
|
)
|
Deferred
income taxes
|
|
|
30,240
|
|
|
33,163
|
|
|
64,587
|
|
Asset
impairments
|
|
|
---
|
|
|
6,106
|
|
|
---
|
|
Changes
in current assets and liabilities, net of
|
|
|
|
|
|
|
|
|
|
|
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(115,252
|
)
|
|
(64,168
|
)
|
|
(9,698
|
)
|
Inventories
|
|
|
(20,225
|
)
|
|
(23,799
|
)
|
|
(13,023
|
)
|
Other
current assets
|
|
|
427
|
|
|
9,659
|
|
|
(13,383
|
)
|
Accounts
payable
|
|
|
51,197
|
|
|
30,319
|
|
|
2,748
|
|
Other
current liabilities
|
|
|
25,995
|
|
|
44,172
|
|
|
10,486
|
|
Other
noncurrent changes
|
|
|
21,502
|
|
|
4,043
|
|
|
9,450
|
|
Net
cash provided by operating activities
|
|
|
483,239
|
|
|
433,071
|
|
|
418,397
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(510,906
|
)
|
|
(337,688
|
)
|
|
(313,053
|
)
|
Acquisitions,
net of cash acquired
|
|
|
(213,557
|
)
|
|
(37,138
|
)
|
|
(132,653
|
)
|
Net
proceeds from sale or disposition of property
|
|
|
40,554
|
|
|
20,518
|
|
|
14,439
|
|
Investments
|
|
|
1,833
|
|
|
(54,265
|
)
|
|
2,491
|
|
Proceeds
from sale of equity method investment
|
|
|
38,166
|
|
|
---
|
|
|
---
|
|
Proceeds
from notes receivable
|
|
|
---
|
|
|
22,000
|
|
|
7,812
|
|
Net
cash used in investing activities
|
|
|
(643,910
|
)
|
|
(386,573
|
)
|
|
(420,964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
|
|
Net
change in short-term borrowings
|
|
|
---
|
|
|
---
|
|
|
(20,000
|
)
|
Issuance
of long-term debt
|
|
|
353,937
|
|
|
15,449
|
|
|
219,895
|
|
Repayment
of long-term debt
|
|
|
(106,822
|
)
|
|
(38,021
|
)
|
|
(105,740
|
)
|
Proceeds
from issuance of common stock
|
|
|
9,165
|
|
|
70,129
|
|
|
568
|
|
Dividends
paid
|
|
|
(87,551
|
)
|
|
(81,019
|
)
|
|
(73,371
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
168,729
|
|
|
(33,462
|
)
|
|
21,352
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
|
8,058
|
|
|
13,036
|
|
|
18,785
|
|
Cash
and cash equivalents - beginning of year
|
|
|
99,377
|
|
|
86,341
|
|
|
67,556
|
|
Cash
and cash equivalents - end of year
|
|
$
|
107,435
|
|
$
|
99,377
|
|
$
|
86,341
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation
The
consolidated financial statements of the Company include the accounts of
the
following businesses: electric, natural gas distribution, construction
services,
pipeline and energy services, natural gas and oil production, construction
materials and mining, independent power production, and other. The
electric, natural gas distribution, and pipeline and energy services businesses
are substantially all regulated. Construction services, natural gas and
oil
production, construction materials and mining, independent power production,
and
other are nonregulated. For further descriptions of the Company’s businesses,
see Note 13. The statements also include the ownership interests in the
assets,
liabilities and expenses of two jointly owned electric generating
facilities.
The
Company uses the equity method of accounting for certain investments. For
more
information on the Company's equity method investments, see Note 2.
The
Company's regulated businesses are subject to various state and federal
agency
regulations. The accounting policies followed by these businesses are generally
subject to the Uniform System of Accounts of the 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 SFAS No. 71. SFAS No. 71 requires 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 generally is 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 4 for more
information regarding the nature and amounts of these regulatory
deferrals.
Cash
and cash equivalents
The
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Allowance
for doubtful accounts
The
Company’s allowance for doubtful accounts as of December 31, 2005 and 2004, was
$8.0 million and $6.8 million, respectively.
Natural
gas in underground storage
Natural
gas in underground storage for the Company's regulated operations is carried
at
cost using the last-in, first-out method. The portion of the cost of natural
gas
in underground storage expected to be used within one year was included
in
inventories and was $24.7 million and $24.9 million at December 31, 2005
and 2004, respectively. The remainder of natural gas in underground storage
was
included in other assets and was $43.2 million and $43.3 million at December
31,
2005 and 2004, respectively.
Inventories
Inventories,
other than natural gas in underground storage for the Company’s regulated
operations, consisted primarily of aggregates held for resale of $78.1
million
and $71.0 million, materials and supplies of $48.7 million and $31.0 million,
and other inventories of $20.7 million and $17.0 million, as of December
31,
2005 and 2004, respectively. These inventories were stated at the lower
of cost
or market.
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 of the asset is charged
to
accumulated depreciation. With respect to the retirement or disposal of
all
other assets, except for natural gas and oil production properties as described
in natural gas and oil properties in this note, the resulting gains or
losses
are recognized as a component of income. The Company is permitted to capitalize
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 amount of AFUDC and interest
capitalized was $11.5 million, $6.2 million and $7.4 million in 2005, 2004
and
2003, respectively. Generally, property, plant and equipment are depreciated
on
a straight-line basis over the average useful lives of the assets, except
for
depletable reserves, which are depleted based on the units-of-production
method
based on recoverable aggregate reserves, and natural gas and oil production
properties, which are amortized on the units-of-production method based
on total
reserves.
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
Depreciable
|
|
|
|
|
|
|
|
Life
|
|
|
|
2005
|
|
2004
|
|
in
Years
|
|
|
|
(Dollars
in thousands, as applicable)
|
|
Regulated:
|
|
|
|
|
|
|
|
Electric:
|
|
|
|
|
|
|
|
Electric
generation, distribution and
|
|
|
|
|
|
|
|
|
|
|
transmission
plant
|
|
|
|
|
|
|
|
|
4-50
|
|
Natural
gas distribution:
|
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution plant
|
|
|
277,288
|
|
|
264,496
|
|
|
4-45
|
|
Pipeline
and energy services:
|
|
|
|
|
|
|
|
|
|
|
Natural
gas transmission, gathering
|
|
|
|
|
|
|
|
|
|
|
and
storage facilities
|
|
|
374,646
|
|
|
358,853
|
|
|
8-104
|
|
Nonregulated:
|
|
|
|
|
|
|
|
|
|
|
Construction
services:
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
2,533
|
|
|
2,533
|
|
|
---
|
|
Buildings
and improvements
|
|
|
12,063
|
|
|
10,257
|
|
|
3-40
|
|
Machinery,
vehicles and equipment
|
|
|
67,439
|
|
|
63,586
|
|
|
2-10
|
|
Other
|
|
|
8,075
|
|
|
6,224
|
|
|
3-10
|
|
Pipeline
and energy services:
|
|
|
|
|
|
|
|
|
|
|
Natural
gas gathering
|
|
|
|
|
|
|
|
|
|
|
and
other facilities
|
|
|
146,662
|
|
|
132,067
|
|
|
3-20
|
|
Energy
services
|
|
|
1,488
|
|
|
1,480
|
|
|
3-7
|
|
Natural
gas and oil production:
|
|
|
|
|
|
|
|
|
|
|
Natural gas and oil properties
|
|
|
1,280,960
|
|
|
973,604
|
|
|
*
|
|
Other
|
|
|
22,487
|
|
|
9,021
|
|
|
3-15
|
|
Construction
materials and mining:
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
91,613
|
|
|
91,610
|
|
|
---
|
|
Buildings
and improvements
|
|
|
87,550
|
|
|
51,309
|
|
|
|
|
Machinery,
vehicles and equipment
|
|
|
738,568
|
|
|
658,355
|
|
|
1-20
|
|
Construction
in progress
|
|
|
15,687
|
|
|
16,545
|
|
|
---
|
|
Aggregate
reserves
|
|
|
377,008
|
|
|
372,649
|
|
|
**
|
|
Independent
power production:
|
|
|
|
|
|
|
|
|
|
|
Electric
generation
|
|
|
154,880
|
|
|
154,631
|
|
|
10-30
|
|
Construction
in progress
|
|
|
234,279
|
|
|
93,953
|
|
|
---
|
|
Land
|
|
|
375
|
|
|
375
|
|
|
---
|
|
Other
|
|
|
2,077
|
|
|
1,643
|
|
|
3-7
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
2,919
|
|
|
3,044
|
|
|
---
|
|
Other
|
|
|
24,987
|
|
|
14,291
|
|
|
3-40
|
|
Less
accumulated depreciation,
|
|
|
|
|
|
|
|
|
|
|
depletion
and amortization
|
|
|
1,544,462
|
|
|
1,358,723
|
|
|
|
|
Net
property, plant and equipment
|
|
$
|
3,049,893
|
|
$
|
2,572,705
|
|
|
|
|
* Amortized
on the units-of-production method based on total proved reserves at an
Mcf
equivalent average rate of $1.19, $.98 and
accounted for under the full-cost method, of which $82.3 million and $69.0
million were excluded from amortization at December
** Depleted
on the units-of-production method based on recoverable aggregate reserves.
Impairment
of long-lived assets
The
Company reviews the carrying values of its long-lived assets, excluding
goodwill
and natural gas and oil properties, whenever events or changes in circumstances
indicate that such carrying values may not be recoverable. The determination
of
whether an impairment has occurred is based on an estimate of undiscounted
future cash flows attributable to the assets, compared to the carrying
value of
the assets. If impairment has occurred, the amount of the impairment recognized
is determined by estimating the fair value of the assets and recording
a loss if
the carrying value is greater than the fair value. In the third quarter
of 2004,
the Company recognized a $2.1 million ($1.3 million after tax) adjustment
reflecting the reduction in value of certain gathering facilities in the
Gulf
Coast region at the pipeline and energy services segment. No impairment
losses
were recorded in 2005 and 2003. Unforeseen events and changes in circumstances
could require the recognition of other impairment losses at some future
date.
Goodwill
Goodwill
represents the excess of the purchase price over the fair value of identifiable
net tangible and intangible assets acquired in a business combination.
Goodwill
is required to be tested for impairment annually, or more frequently if
events
or changes in circumstances indicate that goodwill may be impaired. In
the third
quarter of 2004, the Company recognized a goodwill impairment at the pipeline
and energy services segment. No goodwill impairment losses were recorded
in 2005
and 2003. For more information on the goodwill impairment and goodwill,
see Note
3.
Natural
gas and oil properties
The
Company uses the full-cost method of accounting for its natural gas and
oil
production activities. Under this method, all costs incurred in the acquisition,
exploration and development of natural gas and oil 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 based on single point-in-time spot market prices, as
mandated
under the rules of the SEC, plus the cost of unproved properties. Future
net
revenue is estimated based on end-of-quarter spot market 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 unless subsequent price changes eliminate or
reduce
an indicated write-down.
The
following table summarizes the Company’s natural gas and oil properties not
subject to amortization at December 31, 2005, in total and by the year
in which
such costs were incurred:
|
|
|
|
Year
Costs Incurred
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
|
Total
|
|
2005
|
|
2004
|
|
2003
|
|
and
prior
|
|
|
|
(In
thousands)
|
|
Acquisition
|
|
$
|
38,971
|
|
$
|
13,723
|
|
|
|
|
|
|
|
$
|
21,587
|
|
Development
|
|
|
25,586
|
|
|
15,805
|
|
|
7,567
|
|
|
450
|
|
|
1,764
|
|
Exploration
|
|
|
10,124
|
|
|
9,899
|
|
|
225
|
|
|
---
|
|
|
---
|
|
Capitalized
interest
|
|
|
7,610
|
|
|
2,556
|
|
|
2,039
|
|
|
687
|
|
|
2,328
|
|
Total
costs not subject
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
amortization
|
|
$
|
82,291
|
|
$
|
41,983
|
|
|
|
|
|
|
|
$
|
25,679
|
|
Costs
not
subject to amortization as of December 31, 2005, consisted primarily of
unevaluated leaseholds, drilling costs and seismic costs; and capitalized
interest associated primarily with coalbed development in the Powder River
Basin
of Montana and Wyoming, an exploration project in southern Texas, an enhanced
recovery development project in the Cedar Creek Anticline in southeastern
Montana, the Bakken Play in western North Dakota, and a Red River B prospect
in
western South Dakota. The Company expects that the majority of these costs
will
be evaluated within the next five years and included in the amortization
base as
the properties are developed and evaluated and proved reserves are established
or impairment is determined.
Revenue
recognition
Revenue
is recognized when the earnings process is complete, as evidenced by an
agreement between the customer and the Company, when delivery has occurred
or
services have been rendered, when the fee is fixed or determinable and
when
collection is probable. The Company recognizes utility revenue each month
based
on the services provided to all utility customers during the month. The
Company
recognizes construction contract revenue at its construction businesses
using
the percentage-of-completion method as discussed later. The Company recognizes
revenue from natural gas and oil production properties only on that portion
of
production sold and allocable to the Company's ownership interest in the
related
well. Revenues at the independent power production operations are recognized
based on electricity delivered and capacity provided, pursuant to contractual
commitments and, where applicable, revenues are recognized under EITF No.
91-6
ratably over the terms of the related contract. The Company recognizes
all other
revenues when services are rendered or goods are delivered.
Percentage-of-completion
method
The
Company recognizes construction contract revenue from fixed-price and modified
fixed-price construction contracts at its construction businesses using
the
percentage-of-completion method, measured by the percentage of costs incurred
to
date to estimated total costs for each contract. If a loss is anticipated
on a
contract, the loss is immediately recognized. Costs in excess of billings
on
uncompleted contracts of $52.3 million and $31.9 million at December 31,
2005
and 2004, respectively, represent revenues recognized in excess of amounts
billed and were included in receivables, net. Billings in excess of costs
on
uncompleted contracts of $50.7 million and $32.2 million at December 31,
2005 and 2004, respectively, represent billings in excess of revenues recognized
and were included in accounts payable. Also included in receivables, net,
were
amounts representing balances billed but not paid by customers under retainage
provisions in contracts that amounted to $59.5 million and $40.9 million at
December 31, 2005 and 2004, respectively, which are expected to be paid
within one year or less.
Derivative
instruments
The
Company’s policy allows the use of derivative instruments as part of an overall
energy price, foreign currency and interest rate risk management program
to
efficiently manage and minimize commodity price, foreign currency and interest
rate risk. The Company’s policy prohibits the use of derivative instruments for
speculating to take advantage of market trends and conditions, and the
Company
has procedures in place to monitor compliance with its policies. The Company
is
exposed to credit-related losses in relation to derivative instruments
in the
event of nonperformance by counterparties. The Company’s policy requires that
natural gas and oil price derivative instruments and interest rate derivative
instruments not exceed a period of 24 months and foreign currency derivative
instruments not exceed a 12-month period. The Company’s policy requires
settlement of natural gas and oil price derivative instruments monthly
and all
interest rate derivative transactions must be settled over a period that
will
not exceed 90 days, and any foreign currency derivative transaction settlement
periods may not exceed a 12-month period. The Company has policies and
procedures that management believes minimize credit-risk exposure. These
policies and procedures include an evaluation of potential counterparties’
credit ratings and credit exposure limitations. Accordingly, the Company
does
not anticipate any material effect on its financial position or results
of
operations as a result of nonperformance by counterparties. For more information
on derivative instruments, see Note 5.
Asset
retirement obligations
The
Company records the fair value of a liability for an asset retirement obligation
in the period in which it is incurred. When the liability is initially
recorded,
the Company capitalizes a cost by increasing the carrying amount of the
related
long-lived asset. Over time, the liability is accreted to its present value
each
period, and the capitalized cost is depreciated over the useful life of
the
related asset. Upon settlement of the liability, the Company either settles
the
obligation for the recorded amount or incurs a gain or loss. For more
information on asset retirement obligations, see Note 8.
Natural
gas costs recoverable or refundable 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
that 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 a period ranging
from
24 to 28 months from the time such costs are paid. Natural gas costs recoverable
through rate adjustments amounted to $691,000 and $15.5 million at
December 31, 2005 and 2004, respectively, which is included in prepayments
and other current assets.
Insurance
Certain
subsidiaries of the Company are insured for workers’ compensation losses,
subject to deductibles ranging up to $750,000 per occurrence. Automobile
liability and general liability losses are insured, subject to deductibles
ranging up to $500,000 per accident or occurrence. These subsidiaries have
excess coverage above the primary automobile and general liability policies
on a
claims first-made basis beyond the deductible levels. The subsidiaries
of the
Company are retaining losses up to the deductible amounts accrued on the
basis
of estimates of liability for claims incurred and for claims incurred but
not
reported.
Income
taxes
The
Company provides deferred federal and state income taxes on all temporary
differences between the book and tax basis of the Company’s assets and
liabilities. Excess deferred income tax balances associated with the Company’s
rate-regulated activities resulting from the Company's adoption of SFAS
No. 109 have been recorded as a regulatory liability and are included in
other liabilities. These regulatory liabilities are expected to be reflected
as
a reduction in future rates charged to 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 that conform to the ratemaking treatment prescribed by
the
applicable state public service commissions.
Foreign
currency translation adjustment
The
functional currency of the Company’s investment in a 220-MW natural gas-fired
electric generating facility in Brazil, as further discussed in Note 2, was
the Brazilian Real. Translation from the Brazilian Real to the U.S. dollar
for
assets and liabilities was performed using the exchange rate in effect
at the
balance sheet date. Revenues and expenses had been translated using the
weighted
average exchange rate for each month prevailing during the period reported.
Adjustments resulting from such translations were reported as a separate
component of other comprehensive income (loss) in common stockholders’
equity.
Transaction
gains and losses resulting from the effect of exchange rate changes on
transactions denominated in a currency other than the functional currency
of the
reporting entity were recorded in income.
Common
stock split
On
August
14, 2003, the Company's Board of Directors approved a three-for-two common
stock
split. For more information on the common stock split, see Note 10.
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,
restricted stock grants and performance share awards. For the years ended
December 31, 2004 and 2003, 36,000 shares and 209,805 shares, respectively,
with
an average exercise price of $25.70 and $24.56, respectively, attributable
to
the exercise of outstanding options, were excluded from the calculation
of
diluted earnings per share because their effect was antidilutive. In 2005,
there
were no shares excluded from the calculation of diluted earnings per share.
Common stock outstanding includes issued shares less shares held in
treasury.
Stock-based
compensation
The
Company has stock option plans for directors, key employees and employees.
In
2003, the Company adopted the fair value recognition provisions of SFAS
No. 123
and began expensing the fair market value of stock options for all awards
granted on or after January 1, 2003. Compensation expense recognized for
awards
granted on or after January 1, 2003, for the years ended December 31, 2005,
2004
and 2003, was $2,000, $18,000 and $41,000 respectively (after tax).
As
permitted by SFAS No. 148, the Company accounts for stock options granted
prior
to January 1, 2003, under APB Opinion No. 25. No compensation expense has
been recognized for stock options granted prior to January 1, 2003, as
the
options granted had an exercise price equal to the market value of the
underlying common stock on the date of the grant.
The
Company adopted SFAS No. 123 effective January 1, 2003, for newly granted
options only. The following table illustrates the effect on earnings and
earnings per common share for the years ended December 31, 2005, 2004 and
2003, as if the Company had applied SFAS No. 123 and recognized compensation
expense for all outstanding and unvested stock options based on the fair
value
at the date of grant:
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(In
thousands, except per share amounts)
|
|
Earnings
on common stock, as reported
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
included
in reported earnings,
|
|
|
|
|
|
|
|
|
|
|
net
of related tax effects
|
|
|
|
|
|
|
|
|
|
|
Total
stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
determined
under fair value method for
|
|
|
|
|
|
|
|
|
|
|
all
awards, net of related tax effects
|
|
|
|
|
|
|
|
|
|
|
Pro
forma earnings on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share - basic -
|
|
|
|
|
|
|
|
|
|
|
as
reported:
|
|
|
|
|
|
|
|
|
|
|
Earnings
before cumulative effect
|
|
|
|
|
|
|
|
|
|
|
of
accounting change
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share - basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share - basic -
|
|
|
|
|
|
|
|
|
|
|
pro
forma:
|
|
|
|
|
|
|
|
|
|
|
Earnings
before cumulative effect
|
|
|
|
|
|
|
|
|
|
|
of
accounting change
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share - basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share - diluted
|
|
|
|
|
|
|
|
|
|
|
-
as reported:
|
|
|
|
|
|
|
|
|
|
|
Earnings
before cumulative effect
|
|
|
|
|
|
|
|
|
|
|
of
accounting change
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share - diluted
|
|
|
|
|
|
|
|
|
|
|
-
pro forma:
|
|
|
|
|
|
|
|
|
|
|
Earnings
before cumulative effect
|
|
|
|
|
|
|
|
|
|
|
of
accounting change
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share - diluted
|
|
|
|
|
|
|
|
|
|
|
For
more
information on the Company's stock-based compensation, see
Note 11.
Use
of estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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, as well as the reported amounts of revenues and
expenses during the reporting period. Estimates are used for items such
as
impairment testing of long-lived assets, goodwill and natural gas and oil
properties; fair values of acquired assets and liabilities under the purchase
method of accounting; natural gas and oil reserves; property depreciable
lives;
tax provisions; uncollectible accounts; environmental and other loss
contingencies; accumulated provision for revenues subject to refund; costs
on
construction contracts; unbilled revenues; actuarially determined benefit
costs;
asset retirement obligations; the valuation of stock-based compensation;
and the
fair value of derivative instruments. As additional 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:
|
|
|
|
2004
|
|
2003
|
|
|
|
(In
thousands)
|
|
Interest,
net of amount capitalized
|
|
|
|
|
$
|
50,236
|
|
$
|
47,474
|
|
Income
taxes
|
|
|
|
|
$
|
50,487
|
|
$
|
31,737
|
|
New
accounting standards
SAB
No. 106 In
September 2004, the SEC issued SAB No. 106, which is an interpretation
regarding
the application of SFAS No. 143 by oil and gas producing companies following
the
full-cost accounting method. SAB No. 106 clarifies that the future cash
outflows
associated with settling asset retirement obligations that have been accrued
on
the balance sheet should be excluded from the computation of the present
value
of estimated future net revenues for purposes of the full-cost ceiling
calculation. SAB No. 106 also states that a company is expected to disclose
in
the financial statement footnotes and MD&A how the company’s calculation of
the ceiling test and depreciation, depletion and amortization are affected
by
the adoption of SFAS No. 143. SAB No. 106 was effective for the Company
as of
January 1, 2005. The adoption of SAB No. 106 did not have a material effect
on
the Company's financial position or results of operations. The effects
of the
adoption of SFAS No. 143 and SAB No. 106 as they relate to the Company’s natural
gas and oil production properties are described below.
Ceiling
Test Calculation
As
discussed in this note, the Company’s natural gas and oil production properties
are subject to a “ceiling test” that limits capitalized costs to the aggregate
of the present value of future net revenues of proved reserves based on
single
point-in-time spot market prices, as mandated under the rules of the SEC,
and
the cost of unproved properties. Prior to the adoption of SFAS No. 143,
the
Company calculated the full-cost ceiling by reducing its expected future
revenues from proved natural gas and oil reserves by the estimated future
expenditures to be incurred in developing and producing such reserves,
including
future retirements, discounted using a factor mandated by the rules of
the SEC.
While expected future cash flows related to the asset retirement obligations
were included in the calculation of the ceiling test, no associated asset
retirement obligation was recognized on the balance sheet.
Upon
the
adoption of SFAS No. 143 but prior to the effective date of SAB No. 106,
the
Company continued to calculate the full-cost ceiling as previously described.
In
addition, the Company recorded the fair value of a liability for the asset
retirement obligation and capitalized the cost by increasing the carrying
amount
of the related long-lived asset.
Upon
the
adoption of SAB No. 106, the future capitalized discounted cash outflows
associated with settling asset retirement obligations that are accrued
on the
consolidated balance sheet are excluded from the computation of the present
value of estimated future net revenues for purposes of the full-cost ceiling
calculation in accordance with SAB No. 106.
Depreciation,
Depletion and Amortization
Costs
subject to amortization include: (A) all capitalized costs, less accumulated
amortization, other than the cost of acquiring and evaluating unproved
property;
(B) the estimated future expenditures (based on current costs) to be incurred
in
developing proved reserves; and (C) estimated dismantlement and abandonment
costs, net of estimated salvage values.
Subsequent
to the adoption of SFAS No. 143, the estimated future dismantlement and
abandonment costs described in (C) above are included in the capitalized
costs
described in (A) above at the expected future cost discounted to the present
value, to the extent that a legal obligation exists. Under SFAS No. 143,
the
recognition of the asset retirement obligation does not take into account
estimated salvage values. The liability associated with the recognition
of an
asset retirement obligation is accreted over time with accretion expense
recorded in depreciation, depletion and amortization expense on the Consolidated
Statements of Income. The Company’s estimated dismantlement and abandonment
costs as described in (C) above were adjusted to account for asset retirement
obligations accrued on the Consolidated Balance Sheets when calculating
the
depreciation, depletion and amortization rates. In addition, estimated
salvage
values were included in the Company’s depreciation, depletion and amortization
calculation. The Company’s estimate of future dismantlement and abandonment
costs that will be incurred as a result of future development activities
on
proved reserves continues to be included in the calculation of costs to
be
amortized.
Any
gains
or losses on the settlement of an asset retirement obligation, if applicable,
are treated as adjustments to the capitalized costs, consistent with the
full-cost accounting method.
SFAS
No. 123 (revised) In
December 2004, the FASB issued SFAS No. 123 (revised). This accounting
standard
revises SFAS No. 123 and requires entities to recognize compensation expense
in
an amount equal to the grant-date fair value of share-based payments granted
to
employees. SFAS No. 123 (revised) is effective for the Company on January
1,
2006. As of the required effective date, the Company will apply SFAS No.
123
(revised) using the modified prospective method, recognizing compensation
expense for all awards granted after the date of adoption of SFAS No. 123
(revised) and for the unvested portion of previously granted awards that
remain
outstanding at the date of adoption. The Company used the Black-Scholes
option-pricing model to calculate the fair value of stock options. The
Company
estimates the adoption of SFAS No. 123 (revised) will result in less than
$300,000 (after tax) in additional stock-based compensation expense for
the year
ended December 31, 2006.
FIN
47
In March
2005, the FASB issued FIN 47. FIN 47 addresses the diverse accounting practices
that developed with respect to the timing of liability recognition for
legal
obligations associated with the retirement of a tangible long-lived asset
when
the timing and/or method of settlement of the obligation are conditional
on a
future event. FIN 47 concludes that an entity is required to recognize
a
liability for the fair value of a conditional asset retirement obligation
when
incurred if the liability’s fair value can be reasonably estimated. FIN 47 is
effective for the Company at the end of the fiscal year ending December
31,
2005. The adoption of FIN 47 did not have a material effect on the Company's
financial position or results of operations.
EITF
No. 04-6
In March
2005, the FASB ratified EITF No. 04-6. EITF No. 04-6 requires that
post-production stripping costs be treated as a variable inventory production
cost. As a result, such costs will be subject to inventory costing procedures
in
the period they are incurred. EITF No. 04-6 is effective for the Company
on
January 1, 2006. The adoption of EITF No. 04-6 is not expected to have
a
material effect on the Company’s financial position or results of
operations.
Comprehensive
income
Comprehensive
income is the sum of net income as reported and other comprehensive income
(loss). The Company's other comprehensive income (loss) resulted from gains
(losses) on derivative instruments qualifying as hedges, minimum pension
liability adjustments and foreign currency translation adjustments. For
more
information on derivative instruments, see Note 5.
The
components of other comprehensive income (loss), and their related tax
effects
for the years ended December 31, 2005, 2004 and 2003, were as
follows:
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(In
thousands)
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
Net
unrealized gain (loss) on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
qualifying
as hedges:
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized loss on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
arising
during the period, net of tax of
|
|
|
|
|
|
|
|
|
|
|
$16,391,
$2,734 and $2,132 in 2005,
|
|
|
|
|
|
|
|
|
|
|
2004
and 2003, respectively
|
|
$
|
(26,167
|
)
|
$
|
(4,367
|
)
|
|
|
|
Less:
Reclassification adjustment for loss
|
|
|
|
|
|
|
|
|
|
|
on
derivative instruments included in net
|
|
|
|
|
|
|
|
|
|
|
income,
net of tax of $2,734, $2,132 and
|
|
|
|
|
|
|
|
|
|
|
$2,903
in 2005, 2004 and 2003, respectively
|
|
|
(4,367
|
)
|
|
(3,335
|
)
|
|
(4,541
|
)
|
Net
unrealized gain (loss) on derivative
|
|
|
|
|
|
|
|
|
|
|
instruments
qualifying as hedges
|
|
|
(21,800
|
)
|
|
(1,032
|
)
|
|
1,206
|
|
Minimum
pension liability adjustment, net
|
|
|
|
|
|
|
|
|
|
|
of
tax of $353, $2,406 and $38 in 2005,
|
|
|
|
|
|
|
|
|
|
|
2004
and 2003, respectively
|
|
|
574
|
|
|
(3,782
|
)
|
|
21
|
|
Foreign
currency translation adjustment
|
|
|
(1,099
|
)
|
|
852
|
|
|
1,048
|
|
Total
other comprehensive income (loss)
|
|
$
|
(22,325
|
)
|
$
|
(3,962
|
)
|
|
|
|
The
after-tax components of accumulated other comprehensive loss as of December
31,
2005, 2004 and 2003, were as follows:
|
|
Net
Unrealized
Loss
on
Derivative
Instruments
Qualifying
as
Hedges
|
|
Minimum
Pension
Liability
Adjustment
|
|
Foreign
Currency
Translation
Adjustment
|
|
Total
Accumulated
Other
Comprehensive
Loss
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
$
|
(4,443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(8,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(7,651
|
)
|
|
|
|
$
|
(33,816
|
)
|
NOTE
2 - EQUITY METHOD INVESTMENTS
The
Company has a number of equity method investments including Carib Power
and
Hartwell. The Company assesses its equity method investments for impairment
whenever events or changes in circumstances indicate that the related carrying
values may not be recoverable. None of the Company’s equity method investments
have been impaired and, accordingly, no impairment losses have been recorded
in
the accompanying consolidated financial statements or related equity method
investment balances.
In
February 2004, Centennial International acquired 49.99 percent of Carib
Power.
Carib Power, through a wholly owned subsidiary, owns a 225-MW natural gas-fired
electric generating facility in Trinidad and Tobago. The Trinity Generating
Facility sells its output to the T&TEC, the governmental entity responsible
for the transmission, distribution and administration of electrical power
to the
national electrical grid of Trinidad and Tobago. The power purchase agreement
expires in September 2029. T&TEC also is under contract to supply natural
gas to the Trinity Generating Facility during the term of the power purchase
agreement. The functional currency for the Trinity Generating Facility
is the
U.S. dollar.
In
September 2004, Centennial Resources, through indirect wholly owned
subsidiaries, acquired a 50-percent ownership interest in Hartwell, which
owns a
310-MW natural gas-fired electric generating facility near Hartwell, Georgia.
The Hartwell Generating Facility sells its output under a power purchase
agreement with Oglethorpe that expires in May 2019. Oglethorpe reimburses
the
Hartwell Generating Facility for actual costs of fuel required to operate
the
plant. American National Power, a wholly owned subsidiary of International
Power
of the United Kingdom, holds the remaining 50-percent ownership interest
and is
the operating partner for the facility.
In
June
2005, the Company completed the sale of its 49 percent interest in MPX
to
Petrobras, the Brazilian state-controlled energy company. The Company realized
a
gain of $15.6 million from the sale in the second quarter of 2005. MPX
owns and
operates the Termoceara Generating Facility in the Brazilian state of Ceara.
Petrobras had entered into a contract to purchase all of the capacity and
market
all of the energy from the Termoceara Generating Facility. The electric
power
sales contract with Petrobras was scheduled to expire in mid-2008.
The
functional currency for the Termoceara Generating Facility was the Brazilian
Real. The electric power sales contract with Petrobras contained an embedded
derivative, which derived its value from an annual adjustment factor, which
largely indexed the contract capacity payments to the U.S. dollar. The
Company's
49 percent share of the gain from the change in fair value of the embedded
derivative in the electric power sales contract for the year ended December
31,
2004, was $2.5 million (after tax). The Company's 49 percent share of the
loss
from the change in fair value of the embedded derivative in the electric
power
sales contract for the year ended December 31, 2003, was $11.3 million
(after tax). The Company's 49 percent share of the foreign currency gain
resulting from an increase in value of the Brazilian Real versus the U.S.
dollar
for the years ended December 31, 2004 and 2003, was $1.9 million (after
tax) and
$2.8 million (after tax), respectively.
In
2005,
the Termoceara Generating Facility was accounted for as an asset held for
sale
and, as a result, no depreciation, depletion and amortization expense was
recorded in 2005.
At
December 31, 2005, the Company’s equity method investments, including Carib
Power and Hartwell, had total assets of $231.9 million and long-term debt
of
$154.8 million. At December 31, 2004, the Company’s equity method
investments, including MPX, Carib Power and Hartwell, had total assets
of $334.2
million and long-term debt of $224.9 million. The Company’s investment in its
equity method investments, including the Trinity and Hartwell Generating
Facilities, was approximately $41.8 million, including undistributed earnings
of
$3.5 million, at December 31, 2005. The Company’s investment in the Termoceara,
Trinity and Hartwell Generating Facilities was approximately $65.7 million,
including undistributed earnings of $26.6 million, at December 31, 2004.
NOTE
3 - GOODWILL AND OTHER INTANGIBLE ASSETS
The
changes in the carrying amount of goodwill for the year ended December
31, 2005,
were as follows:
|
|
Balance
|
|
Goodwill
|
|
Balance
|
|
|
|
as
of
|
|
Acquired
|
|
as
of
|
|
|
|
January
1,
|
|
During
|
|
|
|
|
|
|
|
the
Year*
|
|
2005
|
|
|
|
(In
thousands)
|
|
Electric
|
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution
|
|
|
---
|
|
|
---
|
|
|
---
|
|
Construction
services
|
|
|
62,632
|
|
|
18,338
|
|
|
80,970
|
|
Pipeline
and energy services
|
|
|
5,464
|
|
|
---
|
|
|
5,464
|
|
Natural
gas and oil production
|
|
|
---
|
|
|
---
|
|
|
---
|
|
Construction
materials and mining
|
|
|
120,452
|
|
|
12,812
|
|
|
133,264
|
|
Independent
power production
|
|
|
11,195
|
|
|
(28
|
)
|
|
11,167
|
|
Other
|
|
|
---
|
|
|
---
|
|
|
---
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
*
|
Includes
purchase price adjustments that were not material related to
acquisitions
in a prior period.
|
The
changes in the carrying amount of goodwill for the year ended December
31, 2004,
were as follows:
|
|
Balance
|
|
Goodwill
|
|
Goodwill
|
|
Balance
|
|
|
|
as
of
|
|
Acquired
|
|
Impaired
|
|
as
of
|
|
|
|
January
1,
|
|
During
|
|
During
|
|
|
|
|
|
|
|
the
Year*
|
|
the
Year
|
|
2004
|
|
|
|
(In
thousands)
|
|
Electric
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution
|
|
|
---
|
|
|
---
|
|
|
|
|
|
|
|
Construction
services
|
|
|
62,604
|
|
|
28
|
|
|
|
|
|
|
|
Pipeline
and energy services
|
|
|
9,494
|
|
|
---
|
|
|
|
|
|
|
|
Natural
gas and oil production
|
|
|
---
|
|
|
---
|
|
|
|
|
|
|
|
Construction
materials and mining
|
|
|
120,198
|
|
|
254
|
|
|
|
|
|
|
|
Independent
power production
|
|
|
7,131
|
|
|
4,064
|
|
|
|
|
|
|
|
Other
|
|
|
---
|
|
|
---
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Includes
purchase price adjustments that were not material related to acquisitions
in a prior period.
Innovatum,
which specializes in cable and pipeline magnetization and location, developed
a
hand-held locating device that can detect both magnetic and plastic materials,
including unexploded ordnance. Innovatum was working with, and had demonstrated
the device to, a Department of Defense contractor and had also met with
individuals from the Department of Defense to discuss the possibility of
using
the hand-held locating device in their operations. In the third quarter
of 2004,
after communications with the Department of Defense and delays in further
testing resulting from a Department of Defense request to enhance the hand-held
locating device, Innovatum decreased its expected future cash flows from
the
hand-held locating device. This decrease, coupled with the downturn in
the
telecommunications and energy industries, resulted in a revised earnings
forecast for Innovatum and, as a result, a goodwill impairment loss of
$4.0
million (before and after tax), which was included in asset impairments,
was
recognized in the third quarter of 2004. Innovatum, a reporting unit for
goodwill impairment testing, is part of the pipeline and energy services
segment. The fair value of Innovatum was estimated using the expected present
value of future cash flows.
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Amortizable
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
amortization
|
|
|
(9,458
|
)
|
|
(5,013
|
)
|
|
|
|
8,607
|
|
|
10,028
|
|
Noncompete
agreements
|
|
|
11,784
|
|
|
10,575
|
|
Accumulated
amortization
|
|
|
(8,557
|
)
|
|
(8,186
|
)
|
|
|
|
3,227
|
|
|
2,389
|
|
Other
|
|
|
7,914
|
|
|
9,535
|
|
Accumulated
amortization
|
|
|
(1,213
|
)
|
|
(534
|
)
|
|
|
|
6,701
|
|
|
9,001
|
|
Unamortizable
intangible assets
|
|
|
524
|
|
|
851
|
|
Total
|
|
|
|
|
|
|
|
The
unamortizable intangible assets were recognized in accordance with SFAS
No. 87,
which requires that if an additional minimum liability is recognized, an
equal
amount shall be recognized as an intangible asset provided that the asset
recognized shall not exceed the amount of unrecognized prior service cost.
The
unamortizable intangible asset will be eliminated or adjusted as necessary
upon
a new determination of the amount of additional liability.
Amortization
expense for amortizable intangible assets for the years ended December 31,
2005, 2004 and 2003, was $5.5 million, $3.8 million and $2.2 million,
respectively. Estimated amortization expense for amortizable intangible
assets
is $3.5 million in 2006, $2.7 million in 2007, $2.6 million in 2008, $2.6
million in 2009, $2.2 million in 2010 and $4.9 million
thereafter.
NOTE
4 - REGULATORY ASSETS AND LIABILITIES
The
following table summarizes the individual components of unamortized regulatory
assets and liabilities as of December 31:
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Regulatory
assets:
|
|
|
|
|
|
Deferred
income taxes
|
|
|
|
|
|
|
|
Plant
costs
|
|
|
13,122
|
|
|
12,838
|
|
Long-term
debt refinancing costs
|
|
|
3,160
|
|
|
3,531
|
|
Natural
gas costs recoverable through rate adjustments
|
|
|
691
|
|
|
15,534
|
|
Other
|
|
|
6,519
|
|
|
7,732
|
|
Total
regulatory assets
|
|
|
62,249
|
|
|
78,847
|
|
Regulatory
liabilities:
|
|
|
|
|
|
|
|
Plant
removal and decommissioning costs
|
|
|
78,280
|
|
|
78,525
|
|
Taxes
refundable to customers
|
|
|
14,966
|
|
|
15,660
|
|
Deferred
income taxes
|
|
|
10,298
|
|
|
15,192
|
|
Liabilities
for regulatory matters
|
|
|
7,405
|
|
|
18,853
|
|
Other
|
|
|
4,830
|
|
|
3,676
|
|
Total
regulatory liabilities
|
|
|
115,779
|
|
|
131,906
|
|
Net
regulatory position
|
|
|
|
|
|
|
|
As
of
December 31, 2005, a large portion of the Company's regulatory assets,
other than certain deferred income taxes, was being reflected in rates
charged
to customers and is being recovered over the next one to 17
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
5 - DERIVATIVE INSTRUMENTS
Derivative
instruments, including certain derivative instruments embedded in other
contracts, are required to be recorded on the balance sheet as either an
asset
or liability measured at its fair value. Changes in the derivative instrument’s
fair value are recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows derivative
gains and losses to offset the related results on the hedged item in the
income
statement and requires that a company must formally document, designate
and
assess the effectiveness of transactions that receive hedge accounting
treatment.
In
the
event a derivative instrument being accounted for as a cash flow hedge
does not
qualify for hedge accounting because it is no longer highly effective in
offsetting changes in cash flows of a hedged item; if the derivative instrument
expires or is sold, terminated or exercised; or if management determines
that
designation of the derivative instrument as a hedge instrument is no longer
appropriate, hedge accounting would be discontinued and the derivative
instrument would continue to be carried at fair value with changes in its
fair
value recognized in earnings. In these circumstances, the net gain or loss
at
the time of discontinuance of hedge accounting would remain in accumulated
other
comprehensive income (loss) until the period or periods during which the
hedged
forecasted transaction affects earnings, at which time the net gain or
loss
would be reclassified into earnings. In the event a cash flow hedge is
discontinued because it is unlikely that a forecasted transaction will
occur,
the derivative instrument would continue to be carried on the balance sheet
at
its fair value, and gains and losses that had accumulated in other comprehensive
income (loss) would be recognized immediately in earnings. In the event
of a
sale, termination or extinguishment of a foreign currency derivative, the
resulting gain or loss would be recognized immediately in earnings. The
Company’s policy requires approval to terminate a derivative instrument prior to
its original maturity.
As
of
December 31, 2005, Fidelity held derivative instruments designated as cash
flow
hedging instruments.
Hedging
activities
Fidelity
utilizes natural gas and oil price swap and collar agreements to manage
a
portion of the market risk associated with fluctuations in the price of
natural
gas and oil on its forecasted sales of natural gas and oil production.
Each of
the natural gas and oil price swap and collar agreements was designated
as a
hedge of the forecasted sale of natural gas and oil production.
The
fair
value of the hedging instruments must be estimated as of the end of each
reporting period and is recorded on the Consolidated Balance Sheets as
an asset
or liability. Changes in the fair value attributable to the effective portion
of
hedging instruments, net of tax, are recorded in stockholders' equity as
a
component of accumulated other comprehensive income (loss). At the date
the
natural gas or oil production quantities are settled, the amounts accumulated
in
other comprehensive income (loss) are reported in the Consolidated Statements
of
Income. To the extent that the hedges are not effective, the ineffective
portion
of the changes in fair market value is recorded directly in earnings. Based
on
the recent rise in market prices of natural gas and oil, the fair value
of the
Company’s derivative liability has increased significantly since December 31,
2004. The proceeds the Company receives for its natural gas and oil production
are also generally based on market prices.
For
the
years ended December 31, 2005, 2004 and 2003, the amount of hedge
ineffectiveness, which was included in operating revenues, was immaterial.
For
the years ended December 31, 2005, 2004 and 2003, Fidelity did not exclude
any components of the derivative instruments’ gain or loss from the assessment
of hedge effectiveness and there were no reclassifications into earnings
as a
result of the discontinuance of hedges.
Gains
and
losses on derivative instruments that are reclassified from accumulated
other
comprehensive income (loss) to current-period earnings are included in
the line
item in which the hedged item is recorded. As of December 31, 2005, the
maximum term of Fidelity’s swap and collar agreements, in which Fidelity is
hedging its exposure to the variability in future cash flows for forecasted
transactions, is 12 months. The Company estimates that over the next 12
months,
net losses of approximately $25.8 million will be reclassified from accumulated
other comprehensive loss into earnings, subject to changes in natural gas
and
oil market prices, as the hedged transactions affect earnings.
NOTE
6 - FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
The
estimated fair value of the Company's long-term debt is based on quoted
market
prices of the same or similar issues. The estimated fair values of the
Company's
natural gas and oil price swap and collar agreements were included in current
liabilities at December 31, 2005 and 2004. The estimated fair values of
the
Company's natural gas and oil price swap and collar agreements reflect
the
estimated amounts the Company would receive or pay to terminate the contracts
at
the reporting date based upon quoted market prices of comparable
contracts.
The
estimated fair value of the Company's long-term debt and natural gas and
oil
price swap and collar agreement obligations at December 31 was as
follows:
|
|
2005
|
|
2004
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
|
|
(In
thousands)
|
|
Long-term
debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas and oil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
price
swap and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
collar
agreement obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
carrying amounts of the Company's remaining financial instruments included
in
current assets and current liabilities, excluding unsettled derivative
instruments, approximate their fair values because of their short-term
nature.
NOTE
7 - LONG-TERM DEBT AND INDENTURE PROVISIONS
Long-term
debt outstanding at December 31 was as follows:
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
First
mortgage bonds and notes:
|
|
|
|
|
|
Pollution
Control Refunding Revenue Bonds, Series 1992,
|
|
|
|
|
|
6.65%,
redeemed in 2005
|
|
$
|
---
|
|
|
|
|
Secured
Medium-Term Notes, Series A, at a weighted
|
|
|
|
|
|
|
|
average
rate of 7.75%, due on dates ranging from
|
|
|
|
|
|
|
|
|
|
|
95,000
|
|
|
95,000
|
|
|
|
|
30,000
|
|
|
30,000
|
|
Total
first mortgage bonds and notes
|
|
|
125,000
|
|
|
145,850
|
|
Senior
notes at a weighted average rate of 5.83%,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
815,000
|
|
|
728,500
|
|
Commercial
paper at a weighted average rate of 4.33%,
|
|
|
|
|
|
|
|
supported
by revolving credit agreements
|
|
|
260,000
|
|
|
63,000
|
|
Term
credit agreements at a weighted average rate of 6.60%,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,623
|
|
|
8,172
|
|
Discount
|
|
|
(113
|
)
|
|
(35
|
)
|
Total
long-term debt
|
|
|
1,206,510
|
|
|
945,487
|
|
Less
current maturities
|
|
|
101,758
|
|
|
72,046
|
|
Net
long-term debt
|
|
$
|
1,104,752
|
|
|
|
|
The
amounts of scheduled long-term debt maturities for the five years and thereafter
following December 31, 2005, aggregate $101.8 million in 2006; $106.9 million
in
2007; $161.3 million in 2008; $86.9 million in 2009; $266.8 million in
2010 and
$482.8 million thereafter.
MDU
Resources Group, Inc.
The
Company has a revolving credit agreement with various banks totaling $100
million (with provision for an increase, at the option of the Company on
stated
conditions, up to a maximum of $125 million). There were no amounts outstanding
under the credit agreement at December 31, 2005 and 2004. The credit
agreement supports the Company’s $100 million (previously $75 million)
commercial paper program. Under the Company’s commercial paper program, $60.0
million and $37.0 million were outstanding at December 31, 2005 and 2004,
respectively, which was classified as long-term debt. The commercial paper
borrowings are classified as long-term debt as they are intended to be
refinanced on a long-term basis through continued commercial paper borrowings
(supported by the credit agreement, which expires in June 2010).
In
order
to borrow under the Company’s credit agreement, the Company must be in
compliance with the applicable covenants and certain other conditions,
including
covenants not to permit, as of the end of any fiscal quarter, (A) the ratio
of
funded debt to total capitalization (determined on a consolidated basis)
to be
greater than 65 percent or (B) the ratio of funded debt to capitalization
(determined with respect to the Company alone, excluding its subsidiaries)
to be
greater than 65 percent. Also included is a covenant that does not permit
the
ratio of the Company's earnings before interest, taxes, depreciation and
amortization to interest expense (determined with respect to the Company
alone,
excluding its subsidiaries), for the 12-month period ended each fiscal
quarter,
to be less than 2.5 to 1. Other covenants include restrictions on the sale
of
certain assets and on the making of certain investments. The Company was
in
compliance with these covenants and met the required conditions at December
31,
2005. In the event the Company does not comply with the applicable covenants
and
other conditions, alternative sources of funding may need to be pursued,
as
previously described.
There
are
no credit facilities that contain cross-default provisions between the
Company
and any of its subsidiaries.
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 fund $1.43 of unfunded property
or use
$1.00 of refunded bonds for each dollar of indebtedness incurred under
the
Indenture and, in some cases, to certify to the trustee 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 tests, as of December 31, 2005, the Company could
have
issued approximately $364 million of additional first mortgage
bonds.
Approximately
$430.7 million in net book value of the Company’s net electric and natural
gas distribution properties at December 31, 2005, 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
Douglas J. MacInnes, successor trustee, and are subject to the junior lien
of the Indenture dated as of December 15, 2003, as supplemented, from the
Company to The Bank of New York, as trustee.
Centennial
Energy Holdings, Inc.
Centennial
has three revolving credit agreements with various banks and institutions
totaling $441.4 million with certain provisions allowing for increased
borrowings. These credit agreements support Centennial’s $350 million commercial
paper program. There were no outstanding borrowings under the Centennial
credit
agreements at December 31, 2005 or 2004. Under the Centennial commercial
paper
program, $200.0 million and $26.0 million were outstanding at December 31,
2005 and 2004, respectively. The Centennial commercial paper borrowings
are
classified as long-term debt as Centennial intends to refinance these borrowings
on a long-term basis through continued Centennial commercial paper borrowings
(supported by Centennial credit agreements). One of these credit agreements
is
for $400 million, which includes a provision for an increase, at the option
of
Centennial on stated conditions, up to a maximum of $450 million and expires
on
August 26, 2010. Another agreement is for $21.4 million and expires on
April 30, 2007. Pursuant to this credit agreement, on the last business day
of April 2006, the line of credit will be reduced by $3.6 million. Centennial
intends to negotiate the extension or replacement of these agreements prior
to
their maturities. The third agreement is an uncommitted line for $20 million,
which was effective on January 27, 2006, and may be terminated by the bank
at
any time. As
of
December 31, 2005, $32.3 million of letters of credit were outstanding,
as
discussed in Note 18, of which $14.9 million were outstanding under the
above
credit agreements that reduced amounts available under these
agreements.
Centennial
has an uncommitted long-term master shelf agreement that allows for borrowings
of up to $450 million. Under the terms of the master shelf agreement, $447.5
million and $384.0 million were outstanding at December 31, 2005 and 2004,
respectively. The ability to request additional borrowings under this master
shelf agreement expires in April 2008. To meet potential future financing
needs,
Centennial may pursue other financing arrangements, including private and/or
public financing.
In
order
to borrow under Centennial’s credit agreements and the Centennial uncommitted
long-term master shelf agreement, Centennial and certain of its subsidiaries
must be in compliance with the applicable covenants and certain other
conditions, including covenants not to permit, as of the end of any fiscal
quarter, the ratio of total debt to total capitalization to be greater
than 65
percent (for the $400 million credit agreement) and 60 percent (for the
$21.4
million credit agreement and the master shelf agreement). Also included
is a
covenant that does not permit the ratio of the Company's earnings before
interest, taxes, depreciation and amortization to interest expense, for
the
12-month period ended each fiscal quarter, to be less than 2.5 to 1 (for
the
$400 million credit agreement), 2.25 to 1 (for the $21.4 million credit
agreement) and 1.75 to 1 (for the master shelf agreement). Other covenants
include minimum consolidated net worth, limitation on priority debt and
restrictions on the sale of certain assets and on the making of certain
loans
and investments. Centennial and such subsidiaries were in compliance with
these
covenants and met the required conditions at December 31, 2005. In the
event
Centennial or such subsidiaries do not comply with the applicable covenants
and
other conditions, alternative sources of funding may need to be pursued
as
previously described.
Certain
of Centennial's financing agreements contain cross-default provisions.
These
provisions state that if Centennial or any subsidiary of Centennial fails
to
make any payment with respect to any indebtedness or contingent obligation,
in
excess of a specified amount, under any agreement that causes such indebtedness
to be due prior to its stated maturity or the contingent obligation to
become
payable, the applicable agreements will be in default. Certain of Centennial's
financing agreements and Centennial’s practice limit the amount of subsidiary
indebtedness.
Williston
Basin Interstate Pipeline Company
Williston
Basin has an uncommitted long-term master shelf agreement that allows for
borrowings of up to $100 million. Under the terms of the master shelf agreement,
$55.0 million was outstanding at December 31, 2005 and 2004. The ability
to
request additional borrowings under this master shelf agreement expires
on
December 20, 2007.
In
order
to borrow under its uncommitted long-term master shelf agreement, Williston
Basin must be in compliance with the applicable covenants and certain other
conditions, including covenants not to permit, as of the end of any fiscal
quarter, the ratio of total debt to total capitalization to be greater
than 55
percent. Other covenants include limitation on priority debt and some
restrictions on the sale of certain assets and the making of certain
investments. Williston Basin was in compliance with these covenants and
met the
required conditions at December 31, 2005. In the event Williston Basin
does not
comply with the applicable covenants and other conditions, alternative
sources
of funding may need to be pursued.
NOTE
8 - ASSET RETIREMENT OBLIGATIONS
The
Company adopted SFAS No. 143 on January 1, 2003. The Company recorded
obligations related to the plugging and abandonment of natural gas and
oil
wells, decommissioning of certain electric generating facilities, reclamation
of
certain aggregate properties and certain other obligations associated with
leased properties. Upon adoption of SFAS No. 143, the Company recorded
an
additional discounted liability of $22.5 million and a regulatory asset
of
$493,000, increased net property, plant and equipment by $9.6 million and
recognized a one-time cumulative effect charge of $7.6 million (net of
deferred
income tax benefits of $4.8 million).
The
Company adopted FIN 47 on December 31, 2005, as discussed in Note 1. The
Company
recorded obligations related to special handling and disposal of hazardous
materials at certain electric generating and distribution facilities, natural
gas distribution and transmission facilities, and buildings. Upon adoption
of
FIN 47, the Company recorded an additional discounted liability of $1.7
million
and a regulatory asset of $1.5 million and increased net property, plant
and
equipment by $151,000. There was no impact on net income; therefore pro
forma
presentation amounts assuming retroactive application of the accounting
change
on net income are not necessary.
A
reconciliation of the Company's liability, which is included in other
liabilities, for the years ended December 31 was as follows:
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Balance
at beginning of year
|
|
|
|
|
|
|
|
Liabilities
incurred
|
|
|
3,786
|
|
|
3,718
|
|
Liabilities
acquired
|
|
|
1,138
|
|
|
178
|
|
Liabilities
settled
|
|
|
(3,328
|
)
|
|
(2,286
|
)
|
Accretion
expense
|
|
|
2,241
|
|
|
1,931
|
|
Revisions
in estimates
|
|
|
740
|
|
|
(824
|
)
|
Liabilities
recorded upon adoption of FIN 47
|
|
|
1,663
|
|
|
---
|
|
Other
|
|
|
47
|
|
|
---
|
|
Balance
at end of year
|
|
|
|
|
|
|
|
The
following reconciliation of the Company’s liability for the years ended December
31 includes the pro forma effects of the adoption of FIN 47 for all years
presented.
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Balance
at beginning of year
|
|
|
|
|
|
|
|
Liabilities
incurred
|
|
|
3,786
|
|
|
3,718
|
|
Liabilities
acquired
|
|
|
1,138
|
|
|
178
|
|
Liabilities
settled
|
|
|
(3,328
|
)
|
|
(2,286
|
)
|
Accretion
expense
|
|
|
2,241
|
|
|
1,931
|
|
Revisions
in estimates
|
|
|
740
|
|
|
(824
|
)
|
Other
|
|
|
136
|
|
|
85
|
|
Balance
at end of year
|
|
|
|
|
|
|
|
The
Company believes that any expenses under SFAS No. 143 and FIN 47 as they
relate
to regulated operations will be recovered in rates over time and, accordingly,
deferred such expenses as a regulatory asset upon adoption. The Company
will
continue to defer those expenses that it believes will be recovered in
rates
over time.
The
fair
value of assets that are legally restricted for purposes of settling asset
retirement obligations at December 31, 2005 and 2004, was $5.1 million and
$5.2 million, respectively.
NOTE
9 - PREFERRED STOCKS
Preferred
stocks at December 31 were as follows:
|
|
2005
|
|
2004
|
|
|
|
(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:
|
|
|
|
|
|
|
|
4.50%
Series - 100,000 shares
|
|
$
|
10,000
|
|
$
|
10,000
|
|
4.70%
Series - 50,000 shares
|
|
|
5,000
|
|
|
5,000
|
|
Total
preferred stocks
|
|
$
|
15,000
|
|
$
|
15,000
|
|
The
4.50%
Series and 4.70% Series 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 at a redemption price, plus
accrued
dividends, of $105 per share and $102 per share, respectively.
In
the
event of a voluntary or involuntary liquidation, all preferred stock series
holders are entitled to $100 per share, plus accrued dividends.
The
affirmative vote of two-thirds of a series of the Company’s outstanding
preferred stock is necessary for amendments to the Company’s charter or bylaws
that adversely affect that series; creation of or increase in the amount
of
authorized stock ranking senior to that series (or an affirmative majority
vote
where the authorization relates to a new class of stock that ranks on parity
with such series); a voluntary liquidation or sale of substantially all
of the
Company’s assets; a merger or consolidation, with certain exceptions; or the
partial retirement of that series of preferred stock when all dividends
on that
series of preferred stock have not been paid. The consent of the holders
of a
particular series is not required for such corporate actions if the equivalent
vote of all outstanding series of preferred stock voting together has consented
to the given action and no particular series is affected differently than
any
other series.
Subject
to the foregoing, the holders of common stock exclusively possess all voting
power. However, if cumulative dividends on preferred stock are in arrears,
in
whole or in part, for one year, the holders of preferred stock would obtain
the
right to one vote per share until all dividends in arrears have been paid
and
current dividends have been declared and set aside.
NOTE
10 - COMMON STOCK
On
August
14, 2003, the Company's Board of Directors approved a three-for-two common
stock
split to be effected in the form of a 50 percent common stock dividend.
The
additional shares of common stock were distributed on October 29, 2003,
to
common stockholders of record on October 10, 2003. Common stock information
appearing in the accompanying consolidated financial statements has been
restated to give retroactive effect to the stock split. Additionally, preference
share purchase rights have been appropriately adjusted to reflect the effects
of
the split.
In
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 two-thirds of one one-thousandth
of a
share of Series B Preference Stock of the Company, without par value, at
an
exercise price of $125, 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 two-thirds of one one-thousandth of a
share of
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 $.00667 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.
The
Stock
Purchase Plan provides interested investors the opportunity to make optional
cash investments and to reinvest all or a percentage of their cash dividends
in
shares of the Company's common stock. The K-Plan is partially funded with
the
Company's common stock. Since January 1, 2003, the Stock Purchase Plan and
K-Plan, with respect to Company stock, have been funded by the purchase
of
shares of common stock on the open market. At December 31, 2005, there were
12.1 million shares of common stock reserved for original issuance under
the
Stock Purchase Plan and K-Plan.
NOTE
11 - STOCK-BASED COMPENSATION
The
Company has stock option plans for directors, key employees and employees.
In
2003, the Company adopted the fair value recognition provisions of SFAS
No. 123
and began expensing the fair market value of stock options for all awards
granted on or after January 1, 2003. As permitted by SFAS No. 148, the
Company
accounts for stock options granted prior to January 1, 2003, under APB
Opinion
No. 25.
For
a
discussion of the adoption of SFAS No. 123 and the effect on earnings and
earnings per common share for the years ended December 31, 2005, 2004 and
2003,
as if the Company had applied SFAS No. 123 and recognized compensation
expense
for all outstanding and unvested stock options based on the fair value
at the
date of grant, see Note 1.
Options
granted to 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, and expire 10 years after
the
date of grant. Options granted to directors and employees vest at date
of grant
and three years after date of grant, respectively, and expire 10 years
after the
date of grant.
A
summary
of the status of the stock option plans at December 31, 2005, 2004 and
2003, and changes during the years then ended were as follows:
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Balance
at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
beginning
of year
|
|
|
2,561,684
|
|
$
|
19.29
|
|
|
4,182,456
|
|
$
|
19.09
|
|
|
4,861,268
|
|
$
|
18.58
|
|
Granted
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
27,015
|
|
|
17.29
|
|
Forfeited
|
|
|
(114,552
|
)
|
|
20.30
|
|
|
(382,942
|
)
|
|
19.64
|
|
|
(188,486
|
)
|
|
20.05
|
|
Exercised
|
|
|
|
|
|
18.48
|
|
|
(1,237,830
|
)
|
|
18.49
|
|
|
(517,341
|
)
|
|
13.88
|
|
Balance
at end
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
year
|
|
|
1,857,982
|
|
|
19.48
|
|
|
2,561,684
|
|
|
19.29
|
|
|
4,182,456
|
|
|
19.09
|
|
Exercisable
at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
end
of year
|
|
|
1,093,523
|
|
$
|
18.86
|
|
|
1,700,223
|
|
$
|
18.73
|
|
|
611,404
|
|
$
|
15.06
|
|
Summarized
information about stock options outstanding and exercisable as of December
31,
2005, was as follows:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
|
|
Remaining
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
Contractual
|
|
Average
|
|
|
|
Average
|
|
Range
of
|
|
Number
|
|
Life
|
|
Exercise
|
|
Number
|
|
Exercise
|
|
Exercisable
Prices
|
|
Outstanding
|
|
in
Years
|
|
Price
|
|
Exercisable
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
8.22 - 13.00
|
|
|
10,125
|
|
|
1.5
|
|
$
|
10.92
|
|
|
10,125
|
|
$
|
10.92
|
|
13.01
- 17.00
|
|
|
234,535
|
|
|
2.5
|
|
|
14.39
|
|
|
231,889
|
|
|
14.38
|
|
17.01
- 21.00
|
|
|
1,438,992
|
|
|
5.2
|
|
|
19.76
|
|
|
785,874
|
|
|
19.78
|
|
21.01
- 25.70
|
|
|
|
|
|
5.2
|
|
|
24.51
|
|
|
|
|
|
24.87
|
|
Balance
at end of year
|
|
|
1,857,982
|
|
|
4.8
|
|
|
19.48
|
|
|
1,093,523
|
|
|
18.86
|
|
The
fair
value of each option is estimated on the date of grant using the Black-Scholes
option pricing model. The weighted average fair value of the options granted
and
the assumptions used to estimate the fair value of options were as
follows:
|
|
2005
|
|
2004
|
|
2003
|
|
Weighted
average fair value of options at grant date
|
|
|
---
|
|
|
---
|
|
$
|
4.67
|
|
Weighted
average risk-free interest rate
|
|
|
---
|
|
|
---
|
|
|
3.91
|
%
|
Weighted
average expected price volatility
|
|
|
---
|
|
|
---
|
|
|
32.28
|
%
|
Weighted
average expected dividend yield
|
|
|
---
|
|
|
---
|
|
|
3.43
|
%
|
Expected
life in years
|
|
|
---
|
|
|
---
|
|
|
7
|
|
In
addition, prior to 2002 the Company granted restricted stock awards under
a
long-term incentive plan and deferred compensation agreements. The restricted
stock awards granted vest to the participants at various times ranging
from
one year to nine years from date of issuance, but certain grants may vest
early based upon the attainment of certain performance goals or upon a
change in
control of the Company. The Company also has granted stock awards totaling
28,586 shares, 35,205 shares and 31,855 shares in 2005, 2004 and 2003,
respectively, under a nonemployee director stock compensation plan. The
weighted
average grant date fair value of the stock grants was $28.32, $23.61 and
$21.40
in 2005, 2004 and 2003, respectively. Nonemployee directors may receive
shares
of common stock instead of cash in payment for directors' fees under the
nonemployee director stock compensation plan. Compensation expense recognized
for restricted stock grants and stock grants was $1.8 million, $3.4 million
and
$4.8 million in 2005, 2004 and 2003, respectively.
In
2005,
2004 and 2003, key employees of the Company were awarded performance share
awards. Entitlement to performance shares is based on the Company's total
shareholder return over designated performance periods as measured against
a
selected peer group. Target grants of performance shares were made for
the
following performance periods:
|
|
|
|
|
|
Grant
Date
|
|
Performance Period
|
|
|
|
February
2003
|
|
|
2003-2005
|
|
|
54,180
|
|
February
2004
|
|
|
2004-2006
|
|
|
185,743
|
|
February
2005
|
|
|
2005-2007
|
|
|
182,927
|
|
Participants
may earn additional performance shares if the Company's total shareholder
return
exceeds that of the selected peer group. The final value of the performance
units may vary according to the number of shares of Company stock that
are
ultimately granted based on the performance criteria. Compensation expense
recognized for the performance share awards for the years ended December
31,
2005, 2004 and 2003, was $3.6 million, $2.5 million and $879,000,
respectively.
The
Company is authorized to grant options, restricted stock and stock for
up to
12.7 million shares of common stock and has granted options, restricted
stock
and stock on 5.8 million shares through December 31, 2005.
The
components of income before income taxes for each of the years ended December
31
were as follows:
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
(In
thousands)
|
|
United
States
|
|
$
|
407,118
|
|
$
|
280,764
|
|
$
|
278,143
|
|
Foreign
|
|
|
13,744
|
|
|
20,277
|
|
|
3,342
|
|
Income
before income taxes
|
|
$
|
420,862
|
|
$
|
301,041
|
|
$
|
281,485
|
|
Income
tax expense for the years ended December 31 was as follows:
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(In
thousands)
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
$
|
47,625
|
|
$
|
26,313
|
|
State
|
|
|
|
|
|
12,231
|
|
|
7,408
|
|
Foreign
|
|
|
|
|
|
955
|
|
|
264
|
|
|
|
|
|
|
|
60,811
|
|
|
33,985
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Income
taxes -
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
28,556
|
|
|
55,660
|
|
State
|
|
|
|
|
|
5,422
|
|
|
9,861
|
|
Foreign
|
|
|
|
|
|
(223
|
)
|
|
(338
|
)
|
Investment
tax credit
|
|
|
|
|
|
(592
|
)
|
|
(596
|
)
|
|
|
|
|
|
|
33,163
|
|
|
64,587
|
|
Total
income tax expense
|
|
|
|
|
$
|
93,974
|
|
$
|
98,572
|
|
Components
of deferred tax assets and deferred tax liabilities recognized at
December 31 were as follows:
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Deferred
tax assets:
|
|
|
|
|
|
Regulatory
matters
|
|
|
|
|
|
|
|
Accrued
pension costs
|
|
|
|
|
|
|
|
Natural
gas and oil price swap and collar agreements
|
|
|
|
|
|
|
|
Deferred
compensation
|
|
|
|
|
|
|
|
Asset
retirement obligations
|
|
|
|
|
|
|
|
Bad
debts
|
|
|
|
|
|
|
|
Deferred
investment tax credit
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
Total
deferred tax assets
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Depreciation
and basis differences on property,
|
|
|
|
|
|
|
|
plant
and equipment
|
|
|
|
|
|
|
|
Basis
differences on natural gas and oil
|
|
|
|
|
|
|
|
producing
properties
|
|
|
|
|
|
|
|
Regulatory
matters
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
Total
deferred tax liabilities
|
|
|
|
|
|
|
|
Net
deferred income tax liability
|
|
|
|
|
|
|
|
As
of
December 31, 2005 and 2004, no valuation allowance has been recorded associated
with the above deferred tax assets.
|
|
2005
|
|
|
|
(In
thousands)
|
|
Change
in net deferred income tax
|
|
|
|
liability
from the preceding table
|
|
|
|
|
Deferred
taxes associated with other comprehensive income
|
|
|
|
|
Deferred
taxes associated with acquisitions
|
|
|
|
|
Other
|
|
|
|
|
Deferred
income tax expense for the period
|
|
|
|
|
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
were as follows:
|
|
|
|
2004
|
|
2003
|
|
|
|
Amount
|
|
%
|
|
Amount
|
|
% |
|
Amount
|
|
%
|
|
|
|
(Dollars
in thousands)
|
|
Computed
tax at federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
statutory
rate
|
|
$
|
147,302
|
|
|
35.0
|
|
$
|
105,364
|
|
|
35.0
|
|
|
|
|
|
35.0
|
|
Increases
(reductions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
resulting
from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
income taxes,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
tax benefit
|
|
|
15,459
|
|
|
3.7
|
|
|
11,468
|
|
|
3.8
|
|
|
|
|
|
4.2
|
|
Depletion
allowance
|
|
|
(4,381
|
)
|
|
(1.1
|
)
|
|
(3,418
|
)
|
|
(1.2
|
)
|
|
|
|
|
(1.1
|
)
|
Foreign
operations
|
|
|
(4,209
|
)
|
|
(1.0
|
)
|
|
(5,648
|
)
|
|
(1.9
|
)
|
|
|
|
|
(.3
|
)
|
Renewable
electricity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
production
credit
|
|
|
(4,087
|
)
|
|
(1.0
|
)
|
|
(3,404
|
)
|
|
(1.1
|
)
|
|
|
|
|
(1.2
|
)
|
Audit
resolution
|
|
|
---
|
|
|
---
|
|
|
(8,818
|
)
|
|
(2.9
|
)
|
|
|
|
|
---
|
|
Other
items
|
|
|
(4,305
|
)
|
|
(1.0
|
)
|
|
(1,570
|
)
|
|
(.5
|
)
|
|
|
|
|
(1.6
|
)
|
Total
income tax expense
|
|
$
|
145,779
|
|
|
34.6
|
|
$
|
93,974
|
|
|
31.2
|
|
|
|
|
|
35.0
|
|
In
2004,
the Company resolved federal and related state income tax matters for the
1998
through 2000 tax years. The Company reflected the effects of this tax resolution
and, in addition, reversed liabilities that had previously been provided
and
were deemed to be no longer required, which resulted in a benefit of $8.3
million (after tax), including interest.
The
Company considers earnings (including the gain from the sale of its foreign
equity method investment in a natural gas-fired electric generating facility
in
Brazil) to be reinvested indefinitely outside of the United States and,
accordingly, no U.S. deferred income taxes are recorded with respect to
such
earnings. Should the earnings be remitted as dividends, the Company may
be
subject to additional U.S. taxes, net of allowable foreign tax credits.
The
cumulative undistributed earnings at December 31, 2005, were approximately
$36
million. The amount of unrecognized deferred tax liability associated with
the
undistributed earnings was approximately $9.5 million.
NOTE
13 - BUSINESS SEGMENT DATA
The
Company's reportable segments are those that are based on the Company's
method
of internal reporting, which generally segregates the strategic business
units
due to differences in products, services and regulation. The vast majority
of
the Company's operations are located within the United States. The Company
also
has investments in foreign countries, which largely consist of investments
in
natural resource-based projects.
The
electric segment generates, transmits and distributes electricity in Montana,
North Dakota, South Dakota and Wyoming. The natural gas distribution segment
distributes natural gas in those states as well as in western Minnesota.
These
operations also supply related value-added products and services.
The
construction services segment specializes in electrical line construction,
pipeline construction, inside electrical wiring and cabling and the manufacture
and distribution of specialty equipment.
The
pipeline and energy services segment provides natural gas transportation,
underground storage and gathering services through regulated and nonregulated
pipeline systems primarily in the Rocky Mountain and northern Great Plains
regions of the United States. The pipeline and energy services segment
also
provides energy-related management services, including cable and pipeline
magnetization and locating.
The
natural gas and oil production segment is engaged in natural gas and oil
acquisition, exploration, development and production activities primarily
in the
Rocky Mountain and Mid-Continent regions of the United States and in and
around
the Gulf of Mexico.
The
construction materials and mining segment mines aggregates and markets
crushed
stone, sand, gravel and related construction materials, including ready-mixed
concrete, cement, asphalt and other value-added products, as well as performs
integrated construction services, in the central and western United States
and
in Alaska and Hawaii.
The
independent power production segment owns, builds and operates electric
generating facilities in the United States and has investments in domestic
and
international natural resource-based projects. Electric capacity and energy
produced at its power plants primarily are sold under mid-and long-term
contracts to nonaffiliated entities.
The
information below follows the same accounting policies as described in
the
Summary of Significant Accounting Policies. Information on the Company's
businesses as of December 31 and for the years then ended was as
follows:
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(In
thousands)
|
|
External
operating revenues:
|
|
|
|
|
|
|
|
Electric
|
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution
|
|
|
384,199
|
|
|
316,120
|
|
|
274,608
|
|
Pipeline
and energy services
|
|
|
387,870
|
|
|
281,913
|
|
|
187,892
|
|
|
|
|
953,307
|
|
|
776,836
|
|
|
641,062
|
|
Construction
services
|
|
|
686,734
|
|
|
425,250
|
|
|
434,177
|
|
Natural
gas and oil production
|
|
|
163,539
|
|
|
152,486
|
|
|
140,281
|
|
Construction
materials and mining
|
|
|
1,603,326
|
|
|
1,321,626
|
|
|
1,104,408
|
|
Independent
power production
|
|
|
48,508
|
|
|
43,059
|
|
|
32,261
|
|
Other
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
|
|
2,502,107
|
|
|
1,942,421
|
|
|
1,711,127
|
|
Total
external operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment
operating revenues:
|
|
|
|
|
|
|
|
|
|
|
Electric
|
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution
|
|
|
---
|
|
|
---
|
|
|
---
|
|
Construction
services
|
|
|
391
|
|
|
1,571
|
|
|
---
|
|
Pipeline
and energy services
|
|
|
92,424
|
|
|
75,316
|
|
|
64,300
|
|
Natural
gas and oil production
|
|
|
275,828
|
|
|
190,354
|
|
|
124,077
|
|
Construction
materials and mining
|
|
|
1,284
|
|
|
535
|
|
|
---
|
|
Independent
power production
|
|
|
---
|
|
|
---
|
|
|
---
|
|
Other
|
|
|
6,038
|
|
|
4,423
|
|
|
2,728
|
|
Intersegment
eliminations
|
|
|
(375,965
|
)
|
|
(272,199
|
)
|
|
(191,105
|
)
|
Total
intersegment
|
|
|
|
|
|
|
|
|
|
|
operating
revenues
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
depletion and
|
|
|
|
|
|
|
|
amortization:
|
|
|
|
|
|
|
|
Electric
|
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution
|
|
|
9,534
|
|
|
9,329
|
|
|
10,044
|
|
Construction
services
|
|
|
13,459
|
|
|
11,113
|
|
|
10,353
|
|
Pipeline
and energy services
|
|
|
12,784
|
|
|
17,804
|
|
|
15,016
|
|
Natural
gas and oil production
|
|
|
84,754
|
|
|
70,823
|
|
|
61,019
|
|
Construction
materials and mining
|
|
|
77,988
|
|
|
69,644
|
|
|
63,601
|
|
Independent
power production
|
|
|
8,990
|
|
|
9,587
|
|
|
7,860
|
|
Other
|
|
|
330
|
|
|
271
|
|
|
294
|
|
Total
depreciation, depletion
|
|
|
|
|
|
|
|
|
|
|
and
amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
Electric
|
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution
|
|
|
3,973
|
|
|
4,292
|
|
|
3,936
|
|
Construction
services
|
|
|
4,177
|
|
|
3,442
|
|
|
3,668
|
|
Pipeline
and energy services
|
|
|
8,498
|
|
|
9,262
|
|
|
7,952
|
|
Natural
gas and oil production
|
|
|
7,550
|
|
|
7,552
|
|
|
4,767
|
|
Construction
materials and mining
|
|
|
21,365
|
|
|
20,646
|
|
|
18,747
|
|
Independent
power production
|
|
|
2,260
|
|
|
4,354
|
|
|
5,850
|
|
Other
|
|
|
(399
|
)
|
|
(70
|
)
|
|
15
|
|
Intersegment
eliminations
|
|
|
(227
|
)
|
|
(1,157
|
)
|
|
(154
|
)
|
Total
interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes:
|
|
|
|
|
|
|
|
|
|
|
Electric
|
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution
|
|
|
2,240
|
|
|
(3,883
|
)
|
|
1,823
|
|
Construction
services
|
|
|
9,693
|
|
|
(3,345
|
)
|
|
3,905
|
|
Pipeline
and energy services
|
|
|
13,004
|
|
|
7,445
|
|
|
11,188
|
|
Natural
gas and oil production
|
|
|
82,428
|
|
|
61,261
|
|
|
42,993
|
|
Construction
materials and mining
|
|
|
29,244
|
|
|
26,674
|
|
|
28,168
|
|
Independent
power production
|
|
|
483
|
|
|
1,249
|
|
|
257
|
|
Other
|
|
|
379
|
|
|
270
|
|
|
376
|
|
Total
income taxes
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of accounting
|
|
|
|
|
|
|
|
change
(Note 8):
|
|
|
|
|
|
|
|
Electric
|
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution
|
|
|
---
|
|
|
---
|
|
|
---
|
|
Construction
services
|
|
|
---
|
|
|
---
|
|
|
---
|
|
Pipeline
and energy services
|
|
|
---
|
|
|
---
|
|
|
---
|
|
Natural
gas and oil production
|
|
|
---
|
|
|
---
|
|
|
(7,740
|
)
|
Construction
materials and mining
|
|
|
---
|
|
|
---
|
|
|
151
|
|
Independent
power production
|
|
|
---
|
|
|
---
|
|
|
---
|
|
Other
|
|
|
---
|
|
|
---
|
|
|
---
|
|
Total
cumulative effect of
|
|
|
|
|
|
|
|
|
|
|
accounting
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
on common stock:
|
|
|
|
|
|
|
|
|
|
|
Electric
|
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution
|
|
|
3,515
|
|
|
2,182
|
|
|
3,869
|
|
Construction
services
|
|
|
14,558
|
|
|
(5,650
|
)
|
|
6,170
|
|
Pipeline
and energy services
|
|
|
22,092
|
|
|
8,944
|
|
|
18,158
|
|
Natural
gas and oil production
|
|
|
141,625
|
|
|
110,779
|
|
|
63,027
|
|
Construction
materials and mining
|
|
|
55,040
|
|
|
50,707
|
|
|
54,412
|
|
Independent
power production
|
|
|
22,921
|
|
|
26,309
|
|
|
11,415
|
|
Other
|
|
|
707
|
|
|
321
|
|
|
606
|
|
Total
earnings on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
|
|
Electric
|
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution
|
|
|
17,224
|
|
|
17,384
|
|
|
15,672
|
|
Construction
services
|
|
|
50,900
|
|
|
8,470
|
|
|
7,820
|
|
Pipeline
and energy services
|
|
|
36,399
|
|
|
38,282
|
|
|
93,004
|
|
Natural
gas and oil production
|
|
|
329,773
|
|
|
111,506
|
|
|
101,698
|
|
Construction
materials and mining
|
|
|
161,977
|
|
|
133,080
|
|
|
128,487
|
|
Independent
power production
|
|
|
135,778
|
|
|
76,246
|
|
|
110,963
|
|
Other
|
|
|
11,913
|
|
|
4,215
|
|
|
1,895
|
|
Net
proceeds from sale or
|
|
|
|
|
|
|
|
|
|
|
disposition
of property
|
|
|
(40,554
|
)
|
|
(20,518
|
)
|
|
(14,439
|
)
|
Total
net capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets:
|
|
|
|
|
|
|
|
|
|
|
Electric*
|
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution*
|
|
|
271,653
|
|
|
252,582
|
|
|
234,948
|
|
Construction
services
|
|
|
351,654
|
|
|
230,955
|
|
|
221,824
|
|
Pipeline
and energy services
|
|
|
466,961
|
|
|
447,302
|
|
|
405,904
|
|
Natural
gas and oil production
|
|
|
898,883
|
|
|
685,610
|
|
|
602,389
|
|
Construction
materials and mining
|
|
|
1,498,338
|
|
|
1,345,547
|
|
|
1,248,607
|
|
Independent
power production
|
|
|
483,900
|
|
|
349,752
|
|
|
241,918
|
|
Other**
|
|
|
121,846
|
|
|
97,954
|
|
|
97,103
|
|
Total
identifiable assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment:
|
|
|
|
|
|
|
|
|
|
|
Electric*
|
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution*
|
|
|
277,288
|
|
|
264,496
|
|
|
252,591
|
|
Construction
services
|
|
|
90,110
|
|
|
82,600
|
|
|
76,871
|
|
Pipeline
and energy services
|
|
|
522,796
|
|
|
492,400
|
|
|
461,793
|
|
Natural
gas and oil production
|
|
|
1,303,447
|
|
|
982,625
|
|
|
871,357
|
|
Construction
materials and mining
|
|
|
1,310,426
|
|
|
1,190,468
|
|
|
1,080,399
|
|
Independent
power production
|
|
|
391,611
|
|
|
250,602
|
|
|
184,127
|
|
Other
|
|
|
27,906
|
|
|
17,335
|
|
|
17,007
|
|
Less
accumulated depreciation,
|
|
|
|
|
|
|
|
|
|
|
depletion
and amortization
|
|
|
1,544,462
|
|
|
1,358,723
|
|
|
1,187,105
|
|
Net
property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
* Includes
allocations of common utility property.
**
|
Includes
assets not directly assignable to a business (i.e. cash and cash
equivalents, certain accounts receivable, certain investments
and
other miscellaneous current and deferred
assets).
|
Excluding
the asset impairments at pipeline and energy services of $5.3 million (after
tax) in 2004, earnings (loss) from electric, natural gas distribution and
pipeline and energy services are substantially all from regulated operations.
Earnings from construction services, natural gas and oil production,
construction materials and mining, independent power production, and other
are
all from nonregulated operations. Capital expenditures for 2005, 2004 and
2003
include noncash transactions, including the issuance of the Company's equity
securities in connection with acquisitions. The noncash transactions were
$46.5
million, $33.1 million and $42.4 million in 2005, 2004 and 2003,
respectively.
NOTE
14 - ACQUISITIONS
In
2005,
the Company acquired construction services businesses in Nevada, natural
gas and
oil production properties in southern Texas and construction materials
and
mining businesses in Idaho, Iowa and Oregon, none of which was material.
The
total purchase consideration for these businesses and properties and purchase
price adjustments with respect to certain other acquisitions acquired prior
to
2005, consisting of the Company's common stock and cash, was $245.2
million.
In
2004,
the Company acquired a number of businesses including construction materials
and
mining businesses in Hawaii, Idaho, Iowa and Minnesota and an independent
power
production operating and development company in Colorado, none of which
was
material. The total purchase consideration for these businesses and purchase
price adjustments with respect to certain other acquisitions acquired prior
to
2004, consisting of the Company's common stock and cash, was $70.3
million.
In
2003,
the Company acquired a number of businesses including construction materials
and
mining businesses in Montana, North Dakota and Texas and a wind-powered
electric
generating facility in California, none of which was material. The total
purchase consideration for these businesses and purchase price adjustments
with
respect to certain other acquisitions acquired in 2002, consisting of the
Company's common stock and cash, was $175.0 million.
The
above
acquisitions were accounted for under the purchase method of accounting
and,
accordingly, the acquired assets and liabilities assumed have been preliminarily
recorded at their respective fair values as of the date of acquisition.
On
certain of the above acquisitions made in 2005, final fair market values
are
pending the completion of the review of the relevant assets, liabilities
and
issues identified as of the acquisition date. The results of operations
of the
acquired businesses and properties 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
15 - EMPLOYEE BENEFIT PLANS
The
Company has noncontributory defined benefit pension plans and other
postretirement benefit plans for certain eligible employees. Effective
January
1, 2006, the Company discontinued defined pension plan benefits to all
nonunion
and certain union employees hired after December 31, 2005. These employees
that
would have been eligible for defined pension plan benefits are eligible
to
receive additional defined contribution plan benefits. The Company uses
a
measurement date of December 31 for all of its pension and postretirement
benefit plans. The Company recognized the effects of the 2003 Medicare
Act
during the second quarter of 2004. The net periodic benefit cost for 2004
reflects the effects of the 2003 Medicare Act. Changes in benefit obligation
and
plan assets for the years ended December 31 and amounts recognized in the
Consolidated Balance Sheets at December 31 were as follows:
|
|
|
|
|
|
Other
|
|
|
|
Pension
|
|
Postretirement
|
|
|
|
Benefits
|
|
Benefits
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Change
in benefit obligation:
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning
|
|
|
|
|
|
|
|
|
|
of
year
|
|
$
|
284,756
|
|
|
|
|
$
|
75,491
|
|
|
|
|
Service
cost
|
|
|
8,336
|
|
|
7,667
|
|
|
1,719
|
|
|
1,826
|
|
Interest
cost
|
|
|
16,617
|
|
|
15,903
|
|
|
3,784
|
|
|
4,312
|
|
Plan
participants’ contributions
|
|
|
---
|
|
|
---
|
|
|
1,386
|
|
|
1,133
|
|
Amendments
|
|
|
451
|
|
|
---
|
|
|
743
|
|
|
(773
|
)
|
Actuarial
(gain) loss
|
|
|
7,046
|
|
|
12,240
|
|
|
(8,924
|
)
|
|
(14,951
|
)
|
Benefits
paid
|
|
|
(13,813
|
)
|
|
(12,389
|
)
|
|
(4,388
|
)
|
|
(4,437
|
)
|
Benefit
obligation at end of year
|
|
|
303,393
|
|
|
284,756
|
|
|
69,811
|
|
|
75,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
beginning
of year
|
|
|
239,522
|
|
|
223,043
|
|
|
50,978
|
|
|
47,234
|
|
Actual
gain on plan assets
|
|
|
16,805
|
|
|
27,264
|
|
|
1,419
|
|
|
2,920
|
|
Employer
contribution
|
|
|
2,814
|
|
|
1,604
|
|
|
3,053
|
|
|
4,127
|
|
Plan
participants’ contributions
|
|
|
---
|
|
|
---
|
|
|
1,386
|
|
|
1,134
|
|
Benefits
paid
|
|
|
(13,813
|
)
|
|
(12,389
|
)
|
|
(4,388
|
)
|
|
(4,437
|
)
|
Fair
value of plan assets at end
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
year
|
|
|
245,328
|
|
|
239,522
|
|
|
52,448
|
|
|
50,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status - under
|
|
|
(58,065
|
)
|
|
(45,234
|
)
|
|
(17,363
|
)
|
|
(24,513
|
)
|
Unrecognized
actuarial (gain) loss
|
|
|
55,097
|
|
|
46,293
|
|
|
(7,621
|
)
|
|
(1,832
|
)
|
Unrecognized
prior service cost
|
|
|
6,861
|
|
|
7,435
|
|
|
694
|
|
|
---
|
|
Unrecognized
net transition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
obligation
(asset)
|
|
|
(3
|
)
|
|
(47
|
)
|
|
14,878
|
|
|
16,999
|
|
Prepaid
(accrued) benefit cost
|
|
$
|
3,890
|
|
|
|
|
|
(9,412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
recognized in the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
benefit cost
|
|
$
|
18,690
|
|
|
|
|
$
|
787
|
|
|
|
|
Accrued
benefit liability
|
|
|
(14,800
|
)
|
|
(10,573
|
)
|
|
(10,199
|
)
|
|
(9,918
|
)
|
Additional
minimum liability
|
|
|
(1,434
|
)
|
|
---
|
|
|
---
|
|
|
---
|
|
Intangible
asset
|
|
|
524
|
|
|
---
|
|
|
---
|
|
|
---
|
|
Accumulated
other comprehensive income
|
|
|
910
|
|
|
---
|
|
|
---
|
|
|
---
|
|
Net
amount recognized
|
|
$
|
3,890
|
|
|
|
|
$
|
(9,412
|
)
|
|
|
|
Employer
contributions and benefits paid in the above table include only those amounts
contributed directly to, or paid directly from, plan assets.
Unrecognized
pension actuarial losses in excess of 10 percent of the greater of the
projected
benefit obligation or the market-related value of assets is amortized on
a
straight-line basis over the expected average remaining service lives of
active
participants. Unrecognized postretirement net transition obligation is
amortized
over a 20-year period ending 2012.
The
accumulated benefit obligation for the defined benefit pension plans reflected
above was $244.3 million and $227.3 million at December 31, 2005 and 2004,
respectively.
The
projected benefit obligation, accumulated benefit obligation and fair value
of
plan assets for the pension plans with accumulated benefit obligations
in excess
of plan assets at December 31, 2005 and 2004, were as follows:
|
|
2005
|
|
2004
|
|
|
|
|
|
Projected
benefit obligation
|
|
$
|
190,877
|
|
$
|
174,983
|
|
Accumulated
benefit obligation
|
|
$
|
151,399
|
|
$
|
136,012
|
|
Fair
value of plan assets
|
|
$
|
139,108
|
|
$
|
132,280
|
|
Components
of net periodic benefit cost for the Company’s pension and other postretirement
benefit plans were as follows:
|
|
|
|
Other
|
|
|
|
Pension
|
|
Postretirement
|
|
|
|
Benefits
|
|
Benefits
|
|
|
|
|
|
2004
|
|
2003
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(In
thousands)
|
|
Components
of net periodic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit
cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
8,336
|
|
|
|
|
|
|
|
$
|
1,719
|
|
|
|
|
|
|
|
Interest
cost
|
|
|
16,617
|
|
|
15,903
|
|
|
15,211
|
|
|
3,784
|
|
|
4,312
|
|
|
5,281
|
|
Expected
return on assets
|
|
|
(19,947
|
)
|
|
(20,375
|
)
|
|
(20,730
|
)
|
|
(4,005
|
)
|
|
(3,943
|
)
|
|
(3,933
|
)
|
Amortization
of prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
service
cost
|
|
|
1,025
|
|
|
1,121
|
|
|
1,156
|
|
|
45
|
|
|
144
|
|
|
48
|
|
Recognized
net actuarial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(gain)
loss
|
|
|
1,385
|
|
|
480
|
|
|
(417
|
)
|
|
(549
|
)
|
|
(233
|
)
|
|
(255
|
)
|
Amortization
of net transition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
obligation
(asset)
|
|
|
(45
|
)
|
|
(250
|
)
|
|
(950
|
)
|
|
2,126
|
|
|
2,151
|
|
|
2,151
|
|
Net
periodic benefit cost
|
|
|
7,371
|
|
|
4,546
|
|
|
167
|
|
|
3,120
|
|
|
4,257
|
|
|
5,149
|
|
Less
amount capitalized
|
|
|
730
|
|
|
409
|
|
|
14
|
|
|
313
|
|
|
440
|
|
|
601
|
|
Net
periodic benefit cost
|
|
$
|
6,641
|
|
|
|
|
|
|
|
$
|
2,807
|
|
|
|
|
|
|
|
Weighted
average assumptions used to determine benefit obligations at December 31
were as
follows:
|
|
|
Postretirement
Benefits
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
5.50
|
%
|
|
5.75
|
%
|
|
5.50
|
%
|
|
5.75
|
%
|
Rate
of compensation increase
|
|
|
4.30
|
%
|
|
4.70
|
%
|
|
4.50
|
%
|
|
4.50
|
%
|
Weighted
average assumptions used to determine net periodic benefit cost for the
years
ended December 31 were as follows:
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
5.75
|
%
|
|
6.00
|
%
|
|
5.75
|
%
|
|
6.00
|
%
|
Expected
return on plan assets
|
|
|
8.50
|
%
|
|
8.50
|
%
|
|
7.50
|
%
|
|
7.50
|
%
|
Rate
of compensation increase
|
|
|
4.70
|
%
|
|
4.70
|
%
|
|
4.50
|
%
|
|
4.50
|
%
|
The
expected rate of return on plan assets is based on the targeted asset allocation
of 70 percent equity securities and 30 percent fixed income securities
and the
expected rate of return from these asset categories. The expected return
on plan
assets for other postretirement benefits reflects insurance-related investment
costs.
Health
care rate assumptions for the Company’s other postretirement benefit plans as of
December 31 were as follows:
|
|
2005
|
|
2004
|
|
Health
care trend rate assumed for next year
|
|
|
6.0%-9.5
|
%
|
|
6.0%-9.5
|
%
|
Health
care cost trend rate - ultimate
|
|
|
5.0%-6.0
|
%
|
|
5.0%-6.0
|
%
|
Year
in which ultimate trend rate achieved
|
|
|
1999-2014
|
|
|
1999-2013
|
|
The
Company’s other postretirement benefit plans include health care and life
insurance benefits for certain employees. 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 plans 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 one percentage point change in the
assumed
health care cost trend rates would have had the following effects at December
31, 2005:
|
|
1
Percentage
|
|
1
Percentage
|
|
|
|
Point
Increase
|
|
Point
Decrease
|
|
|
|
(In
thousands)
|
|
Effect
on total of service
|
|
|
|
|
|
|
|
and
interest cost components
|
|
|
|
|
|
|
|
Effect
on postretirement
|
|
|
|
|
|
|
|
benefit
obligation
|
|
|
|
|
|
|
|
The
Company's defined benefit pension plans’ asset allocation at December 31,
2005 and 2004, and weighted average targeted asset allocations at December
31,
2005, were as follows:
|
|
|
|
Weighted
Average
|
|
|
|
Percentage
|
|
Targeted
Asset
|
|
|
|
of
Plan
|
|
Allocation
|
|
|
|
Assets
|
|
Percentage
|
|
Asset
Category
|
|
2005
|
|
2004
|
|
2005
|
|
Equity
securities
|
|
|
74
|
%
|
|
74
|
%
|
|
70
|
%
|
Fixed
income securities
|
|
|
21
|
|
|
24
|
|
|
30
|
* |
Other
|
|
|
5
|
|
|
2
|
|
|
---
|
|
Total
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
*
Includes target for both fixed income securities and other.
The
Company's pension assets are managed by 10 outside investment managers.
The
Company's other postretirement assets are managed by one outside investment
manager. The Company's investment policy with respect to pension and other
postretirement assets is to make investments solely in the interest of
the
participants and beneficiaries of the plans and for the exclusive purpose
of
providing benefits accrued and defraying the reasonable expenses of
administration. The Company strives to maintain investment diversification
to
assist in minimizing the risk of large losses. The Company's policy guidelines
allow for investment of funds in cash equivalents, fixed income securities
and
equity securities. The guidelines prohibit investment in commodities and
future
contracts, equity private placement, employer securities, leveraged or
derivative securities, options, direct real estate investments, precious
metals,
venture capital and limited partnerships. The guidelines also prohibit
short
selling and margin transactions. The Company's practice is to periodically
review and rebalance asset categories based on its targeted asset allocation
percentage policy.
The
Company's other postretirement benefit plans’ asset allocation at December 31,
2005 and 2004, and weighted average targeted asset allocation at December
31,
2005, were as follows:
|
|
|
|
|
|
Weighted
Average
|
|
|
|
Percentage
|
|
Targeted
Asset
|
|
|
|
of
Plan
|
|
Allocation
|
|
|
|
Assets
|
|
Percentage
|
|
Asset
Category
|
|
2005
|
|
2004
|
|
2005
|
|
Equity
securities
|
|
|
70
|
%
|
|
70
|
%
|
|
70
|
%
|
Fixed
income securities
|
|
|
28
|
|
|
28
|
|
|
30
|
* |
Other
|
|
|
2
|
|
|
2
|
|
|
---
|
|
Total
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
*
Includes target for both fixed income securities and other.
The
Company expects to contribute approximately $1.2 million to its defined
benefit
pension plans and approximately $3.3 million to its postretirement benefit
plans
in 2006.
The
following benefit payments, which reflect future service, as appropriate,
are
expected to be paid:
|
|
|
|
Other
|
|
|
|
Pension
|
|
Postretirement
|
|
Years
|
|
Benefits
|
|
Benefits
|
|
|
|
(In
thousands)
|
|
2006
|
|
$
|
13,118
|
|
$
|
4,172
|
|
2007
|
|
|
13,554
|
|
|
4,344
|
|
2008
|
|
|
14,130
|
|
|
4,478
|
|
2009
|
|
|
14,915
|
|
|
4,675
|
|
2010
|
|
|
15,899
|
|
|
4,897
|
|
2011-2015
|
|
|
95,429
|
|
|
27,848
|
|
The
following Medicare Part D subsidies are expected: $288,000 in 2006; $589,000
in
2007; $620,000 in 2008; $650,000 in 2009; $682,000 in 2010; and $4.0 million
during the years 2011 through 2015.
In
addition to company-sponsored plans, certain employees are covered under
multi-employer defined benefit plans administered by a union. Amounts
contributed to the multi-employer plans were $39.6 million, $28.2 million
and
$27.2 million in 2005, 2004 and 2003, respectively.
In
addition to the qualified plan defined pension benefits reflected in the
table
at the beginning of this note, the Company also has an unfunded, nonqualified
benefit plan for executive officers and certain key management employees
that
generally provides for defined benefit payments at age 65 following the
employee's retirement or to their beneficiaries upon death for a 15-year
period.
Investments, at December 31, 2005, consisted of cash equivalents, fixed
income
securities, equity securities, and life insurance carried on plan participants,
which is payable to the Company upon the employee's death. The Company's
net
periodic benefit cost for this plan was $7.4 million, $7.5 million and
$5.3 million in 2005, 2004 and 2003, respectively. The total projected
obligation for this plan was $64.9 million and $65.3 million at December
31, 2005 and 2004, respectively. The accumulated benefit obligation for
this
plan was $55.0 million and $52.3 million at December 31, 2005 and 2004,
respectively. The additional minimum liability relating to this plan was
$11.6 million and $14.3 million at December 31, 2005 and 2004,
respectively. The Company had no related intangible asset as of December
31,
2005, and had a related intangible asset recognized as of December 31,
2004, of $851,000. A discount rate of 5.50 percent and 5.75 percent at
December
31, 2005 and 2004, respectively, and a rate of compensation increase of
4.25
percent and 4.75 percent at December 31, 2005 and 2004, respectively, were
used to determine benefit obligations.
A
discount rate of 5.75 percent and 6.00 percent at December 31, 2005 and
2004,
respectively, and a rate of compensation increase of 4.75 percent at both
December 31, 2005 and 2004, were used to determine net periodic benefit
cost.
The decrease in minimum liability included in other comprehensive income
was
$1.1 million in 2005 and the increase in minimum liability in other
comprehensive income was $3.8 million in 2004.
The
amount of benefit payments for the unfunded, nonqualified benefit plan,
as
appropriate, are expected to aggregate $2.6 million in 2006; $2.9 million
in
2007; $3.1 million in 2008; $3.3 million in 2009; $3.5 million in 2010; and
$21.4 million for the years 2011 through 2015.
The
Company sponsors various defined contribution pension plans for eligible
employees. Costs incurred by the Company under these plans were
$17.0 million in 2005, $13.8 million in 2004 and $9.8 million in
2003. The costs incurred in each year reflect additional participants as
a
result of business acquisitions.
NOTE
16 - 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
was 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:
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Big
Stone Station:
|
|
|
|
|
|
Utility
plant in service
|
|
|
|
|
|
|
|
Less
accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coyote
Station:
|
|
|
|
|
|
|
|
Utility
plant in service
|
|
|
|
|
|
|
|
Less
accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
17 - REGULATORY MATTERS AND REVENUES SUBJECT TO REFUND
On
September 30, 2005, Montana-Dakota filed an application with the MTPSC
for a
natural gas rate increase. Montana-Dakota requested a total increase of
$1.1
million annually or 1.3 percent above current rates. On January 26, 2006,
this
application was withdrawn as a result of Montana-Dakota’s implementation of
cost-reduction measures.
In
September 2004, Great Plains filed an application with the MPUC for a natural
gas rate increase. Great Plains had requested a total increase of $1.4
million
annually or approximately 4.0 percent above current rates. Great Plains
also
requested an interim increase of $1.4 million annually. In November 2004,
the
MPUC issued an Order authorizing an interim increase of $1.4 million annually
effective with service rendered on or after January 10, 2005, subject to
refund.
A final order from the MPUC is expected in early 2006.
A
liability has been provided for a portion of the revenues that have been
collected subject to refund with respect to Great Plains’ pending regulatory
proceeding. Great Plains believes that the liability is adequate based
on its
assessment of the ultimate outcome of the proceeding.
In
December 1999, Williston Basin filed a general natural gas rate change
application with the FERC. Williston Basin began collecting such rates
effective
June 1, 2000, subject to refund. On April 19, 2005, the FERC issued its
Order on
Compliance Filing and Motion for Refunds. In this Order, the FERC approved
Williston Basin’s refund rates and established rates to be effective April 19,
2005. Williston Basin filed its compliance filing complying with the
requirements of this Order regarding rates and issued refunds totaling
approximately $18.5 million to its customers on May 19, 2005. As a result
of the
Order, Williston Basin recorded a $5.0 million (after tax) benefit from
the
resolution of the rate proceeding which included the reversal of a portion
of
the liability it had previously established for this regulatory proceeding.
On
June 16, 2005, Williston Basin appealed to the D.C. Appeals Court certain
issues
addressed by the FERC’s Order on Initial Decision dated July 2003 and its Order
on Rehearing dated May 2004 concerning determinations associated with cost
of
service and volumes used in allocating costs and designing rates. Those
matters
are pending resolution by the D.C. Appeals Court. A provision has been
established for certain issues pending before the D.C. Appeals Court. The
Company believes that the provision is adequate based on its assessment
of the
ultimate outcome of the proceeding.
In
May
2004, the FERC remanded issues regarding certain service and annual demand
quantity restrictions to an ALJ for resolution. Williston Basin participated
in
a hearing before the ALJ in early January 2005, regarding those service
and
annual demand quantity restrictions. On April 8, 2005, the ALJ issued an
Initial
Decision on the matters remanded by the FERC. In the Initial Decision,
the ALJ
decided that Williston Basin had not supported its position regarding the
service and annual demand quantity restrictions. Williston Basin filed
its Brief
on Exceptions regarding these issues with the FERC on May 9, 2005, and
its Brief
Opposing Exceptions to issues raised by a certain party to the proceeding
on May
31, 2005. On November 22, 2005, the FERC issued an Order on Initial Decision
affirming the ALJ’s Initial Decision regarding the service and annual demand
quantity restrictions. On December 22, 2005, Williston Basin filed its
Request
for Rehearing of the FERC’s Order on Initial Decision. This matter is awaiting
resolution by the FERC.
NOTE
18 - COMMITMENTS AND CONTINGENCIES
Litigation
Royalties
Case In
June
1997, Grynberg filed suit under the Federal False Claims Act against Williston
Basin and Montana-Dakota. Grynberg also filed more than 70 similar suits
against
natural gas transmission companies and producers, gatherers and processors
of
natural gas. Grynberg, acting on behalf of the United States under the
Federal
False Claims Act, alleged improper measurement of the heating content and
volume
of natural gas purchased by the defendants resulting in the underpayment
of
royalties to the United States. All cases were consolidated in the Wyoming
Federal District Court.
In
June
2004, following preliminary discovery, Williston Basin and Montana-Dakota
joined
with other defendants and filed a Motion to Dismiss on the ground that
the
information upon which Grynberg based his complaint was publicly disclosed
prior
to the filing of his complaint and further, that he is not the original
source
of such information. The Motion to Dismiss was heard on March 17 and 18,
2005,
by the Special Master appointed by the Wyoming Federal District Court.
The
Special Master, in his Written Report dated May 13, 2005, recommended that
the
lawsuit be dismissed against certain defendants, including Williston Basin
and
Montana-Dakota. A hearing on the adoption of the Written Report was held
on
December 9, 2005, before the Wyoming Federal District Court.
In
the
event the Motion to Dismiss is not granted, it is expected that further
discovery will follow. Williston Basin and Montana-Dakota believe Grynberg
will
not prevail in the suit or recover damages from Williston Basin and/or
Montana-Dakota because insufficient facts exist to support the allegations.
Williston Basin and Montana-Dakota believe Grynberg’s claims are without merit
and intend to vigorously contest this suit.
Grynberg
has not specified the amount he seeks to recover. Williston Basin and
Montana-Dakota are unable to estimate their potential exposure and will
be
unable to do so until discovery is completed.
Coalbed
Natural Gas Operations Fidelity
has been named as a defendant in, and/or certain of its operations are
or have
been the subject of, more than a dozen lawsuits filed in connection with
its
coalbed natural gas development in the Powder River Basin in Montana and
Wyoming. These lawsuits were filed in federal and state courts in Montana
between June 2000 and November 2004 by a number of environmental organizations,
including the NPRC and the Montana Environmental Information Center, as
well as
the Tongue River Water Users' Association and the Northern Cheyenne Tribe.
Portions of two of the lawsuits have been transferred to the Wyoming Federal
District Court. The lawsuits involve allegations that Fidelity and/or various
government agencies are in violation of state and/or federal law, including
the
Clean Water Act, the NEPA, the Federal Land Management Policy Act, the
NHPA and
the Montana Environmental Policy Act. The cases involving alleged violations
of
the Clean Water Act have been resolved without a finding that Fidelity
is in
violation of the Clean Water Act. There presently are no claims pending
for
penalties, fines or damages under the Clean Water Act. The suits that remain
extant include a variety of claims that state and federal government agencies
violated various environmental laws that impose procedural requirements
and the
lawsuits seek injunctive relief, invalidation of various permits and unspecified
damages.
In
suits
filed in the Montana Federal District Court, the NPRC and the Northern
Cheyenne
Tribe asserted that further development by Fidelity and others of coalbed
natural gas in Montana should be enjoined until the BLM completes a SEIS.
The
Montana Federal District Court, in February 2005, entered a ruling requiring
the
BLM to complete a SEIS. The Montana Federal District Court later entered
an
order that would have allowed limited coalbed natural gas development in
the
Powder River Basin in Montana pending the BLM's preparation of the SEIS.
The
plaintiffs appealed the decision to the Ninth Circuit. The Montana Federal
District Court declined to enter an injunction requested by the NPRC and
the
Northern Cheyenne Tribe that would have enjoined development pending the
appeal.
In late May 2005, the Ninth Circuit granted the request of the NPRC and
the
Northern Cheyenne Tribe and, pending further order from the Ninth Circuit,
enjoined the BLM from approving any new coalbed natural gas development
projects
in the Powder River Basin in Montana. That court also enjoined Fidelity
from
drilling any additional federally permitted wells in its Montana Coal Creek
Project and from constructing infrastructure to produce and transport coalbed
natural gas from the Coal Creek Project's existing federal wells. The matter
has
been fully briefed and argued before the Ninth Circuit and the parties
are
awaiting a decision of the court.
In
related actions in the Montana Federal District Court, the NPRC and the
Northern
Cheyenne Tribe asserted, among other things, that the actions of the BLM
in
approving Fidelity's applications for permits and the plan of development
for
the Badger Hills Project in Montana did not comply with applicable Federal
laws,
including the NHPA and the NEPA. The NPRC also asserted that the Environmental
Assessment that supported the BLM's prior approval of the Badger Hills
Project
was invalid. On June 6, 2005, the Montana Federal District Court issued
orders
in these cases enjoining operations on Fidelity's Badger Hills Project
pending
the BLM's consultation with the Northern Cheyenne Tribe as to satisfaction
of
the applicable requirements of NHPA and a further environmental analysis
under
NEPA. Fidelity has sought and obtained stays of the injunctive relief from
the
Montana Federal District Court and production from Fidelity’s Badger Hills
Project continues. On September 2, 2005, the Montana Federal District Court
entered an Order based on a stipulation between the parties to the NPRC
action
that production from existing wells in Fidelity’s Badger Hills Project may
continue pending preparation of a revised environmental analysis. On November
1,
2005, the Montana Federal District Court entered an Order based on a stipulation
between the parties to the Northern Cheyenne Tribe action that production
from
existing wells in Fidelity’s Badger Hills Project may continue pending
preparation of a revised environmental analysis. On December 16, 2005,
Fidelity
filed a Notice of Appeal to the Ninth Circuit.
The
NPRC
has filed a petition with the BER and the BER has initiated related rulemaking
proceedings to create rules that would, if promulgated, require re-injection
of
water produced in connection with coalbed natural gas operations and treatment
of such water in the event re-injection is not feasible and amend the
nondegradation policy in connection with coalbed natural gas development.
If the
rules are adopted as proposed, it is possible that an adverse impact on
Fidelity’s operations could result. At this point, the Company cannot predict
the outcome of the rulemaking process before the BER or its impact on the
Company’s operations.
Fidelity
is vigorously defending its interests in all coalbed-related lawsuits and
related actions in which it is involved, including the Ninth Circuit injunction.
In those cases where damage claims have been asserted, Fidelity is unable
to
quantify the damages sought and will be unable to do so until after the
completion of discovery. If the plaintiffs are successful in these lawsuits,
the
ultimate outcome of the actions could have a material effect on Fidelity’s
existing coalbed natural gas operations and/or the future development of
this
resource in the affected regions.
Electric
Operations Montana-Dakota
has joined with two electric generators in appealing a finding by the ND
Health
Department in September 2003 that the ND Health Department may unilaterally
revise operating permits previously issued to electric generating plants.
Although it is doubtful that any revision of Montana-Dakota's operating
permits
by the ND Health Department would reduce the amount of electricity its
plants
could generate, the finding, if allowed to stand, could increase costs
for
sulfur dioxide removal and/or limit Montana-Dakota's ability to modify
or expand
operations at its North Dakota generation sites. Montana-Dakota and the
other
electric generators filed their appeal of the order in October 2003 in
the
Burleigh County District Court in Bismarck, North Dakota. Proceedings have
been
stayed pending discussions with the EPA, the ND Health Department and the
other
electric generators. The Company cannot predict the outcome of the ND Health
Department matter or its ultimate impact on its operations.
Natural
Gas Storage Williston
Basin filed suit on January 27, 2006, seeking to recover unspecified damages
from Anadarko and its wholly owned subsidiary, Howell, and to enjoin Anadarko’s
and Howell’s present and future operations in and near Williston Basin’s Elk
Basin Storage Reservoir located in Wyoming and Montana. Based on relevant
information, including reservoir and well pressure data, it appears that
reservoir pressure has decreased and that quantities of gas may have been
diverted by Anadarko’s and Howell’s drilling and production activities in areas
within and near the boundaries of Williston Basin’s Elk Basin Storage Reservoir.
Williston Basin is seeking not only to recover damages for the gas that
has been
diverted, but to prevent further drainage of its storage
reservoir. Williston Basin is also assessing further avenues for recovery
through the regulatory process at the FERC. Because
of
the very preliminary stage of the legal proceedings, Williston Basin cannot
estimate the size of any potential loss or recovery, or the likelihood
of
obtaining injunctive relief or recovery through the regulatory
process.
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 the outcomes with respect to these other legal
proceedings will not have a material adverse effect upon the Company's
financial
position or results of operations.
Environmental
matters
Portland
Harbor Site In
December 2000, MBI was named by the EPA as a Potentially Responsible Party
in
connection with the cleanup of a commercial property site, acquired by
MBI in
1999, and part of the Portland, Oregon, Harbor Superfund Site. Sixty-eight
other
parties were also named in this administrative action. The EPA wants responsible
parties to share in the cleanup of sediment contamination in the Willamette
River. To date, costs of the overall remedial investigation of the harbor
site
for both the EPA and the DEQ are being recorded and initially paid, through
an
administrative consent order, by the LWG, a group of 10 entities which
does not
include MBI. The LWG estimates the overall remedial investigation and
feasibility study will cost approximately $10 million. It is not possible
to estimate the cost of a corrective action plan until the remedial
investigation and feasibility study has been completed, the EPA has decided
on a
strategy, and a record of decision has been published. While the remedial
investigation and feasibility study for the harbor site has commenced,
it is
expected to take several years to complete. The development of a proposed
plan
and record of decision on the harbor site is not anticipated to occur until
later in 2006, after which a cleanup plan will be undertaken.
Based
upon a review of the Portland Harbor sediment contamination evaluation
by the
DEQ and other information available, MBI does not believe it is a Responsible
Party. In addition, MBI has notified Georgia-Pacific West, Inc., the seller
of
the commercial property site to MBI, that it intends to seek indemnity
for any
and all liabilities incurred in relation to the above matters, pursuant
to the
terms of the sale agreement under which MBI acquired the property.
The
Company believes it is not probable that it will incur any material
environmental remediation costs or damages in relation to the above
administrative action.
Operating
leases
The
Company leases certain equipment, facilities and land under operating lease
agreements. The amounts of annual minimum lease payments due under these
leases
as of December 31, 2005, were $13.2 million in 2006, $8.6 million in 2007,
$6.5 million in 2008, $4.2 million in 2009, $2.8 million in 2010 and $24.1
million thereafter. Rent expense was $34.0 million, $30.6 million and $27.2
million for the years ended December 31, 2005, 2004 and 2003,
respectively.
Purchase
commitments
The
Company has entered into various commitments, largely natural gas and coal
supply, purchased power, natural gas transportation, construction materials
supply and electric generation construction contracts. These commitments
range
from one to 21 years. The commitments under these contracts as of
December 31, 2005, were $303.6 million in 2006, $131.3 million in
2007, $79.5 million in 2008, $63.5 million in 2009, $62.7 million in 2010
and
$294.4 million thereafter. Amounts purchased under various commitments
for the
years ended December 31, 2005, 2004 and 2003, were approximately $443.9
million,
$318.3 million and $204.6 million, respectively. These commitments are
not
reflected in the Company’s consolidated financial statements.
In
addition to the above obligations, the Company has certain purchase obligations
for natural gas connected to its gathering system. These purchases and
the
resale of the natural gas are at market-based prices. These obligations
continue
as long as natural gas is produced. However, if the purchase and resale
of
natural gas become uneconomical, the purchase commitments can be canceled
by the
Company with 60 days notice. These purchase obligations are estimated at
approximately $10 million annually.
Guarantees
In
connection with the sale of MPX in June 2005 to Petrobras, an indirect
wholly
owned subsidiary of the Company has agreed to indemnify Petrobras for 49
percent
of any losses that Petrobras may incur from certain contingent liabilities
specified in the purchase agreement. Centennial has agreed to unconditionally
guarantee payment of the indemnity obligations to Petrobras for periods
ranging
from approximately two to five and a half years from the date of sale.
The
guarantee was required by Petrobras as a condition to closing the sale
of
MPX.
In
addition, WBI Holdings has guaranteed certain of Fidelity's natural gas
and oil
price swap and collar agreement obligations. Fidelity's obligations at
December
31, 2005, were $16.3 million. There is no fixed maximum amount guaranteed
in
relation to the natural gas and oil price swap and collar agreements, as
the
amount of the obligation is dependent upon natural gas and oil commodity
prices.
The amount of hedging activity entered into by the subsidiary is limited
by
corporate policy. The guarantees of the natural gas and oil price swap
and
collar agreements at December 31, 2005, expire in 2006; however, Fidelity
continues to enter into additional hedging activities and, as a result,
WBI
Holdings from time to time may issue additional guarantees on these hedging
obligations. The amount outstanding by Fidelity was reflected on the
Consolidated Balance Sheets at December 31, 2005. In the event Fidelity
defaults
under its obligations, WBI Holdings would be required to make payments
under its
guarantees.
Certain
subsidiaries of the Company have outstanding guarantees to third parties
that
guarantee the performance of other subsidiaries of the Company. These guarantees
are related to natural gas transportation and sales agreements, electric
power
supply agreements and certain other guarantees. At December 31, 2005, the
fixed
maximum amounts guaranteed under these agreements aggregated $73.6 million.
The
amounts of scheduled expiration of the maximum amounts guaranteed under
these
agreements aggregate $8.5 million in 2006; $10.3 million in 2007; $400,000
in
2008; $900,000 in 2009; $30.0 million in 2010; $12.0 million in 2012; $2.0
million in 2028; $500,000, which is subject to expiration 30 days after
the
receipt of written notice; and $9.0 million, which has no scheduled maturity
date. A guarantee for an unfixed amount estimated at $250,000 at December
31,
2005, has no scheduled maturity date. The amount outstanding by subsidiaries
of
the Company under the above guarantees was $532,000 and was reflected on
the
Consolidated Balance Sheets at December 31, 2005. In the event of default
under these guarantee obligations, the subsidiary issuing the guarantee
for that
particular obligation would be required to make payments under its guarantee.
Centennial
has outstanding letters of credit to third parties related to insurance
policies
and other agreements that guarantee the performance of other subsidiaries
of the
Company. At December 31, 2005, the fixed maximum amounts guaranteed under
these letters of credit aggregated $32.3 million. The letters of credit
are
scheduled to expire in 2006. There were no amounts outstanding under the
above
letters of credit at December 31, 2005.
Fidelity
and WBI Holdings have outstanding guarantees to Williston Basin. These
guarantees are related to natural gas transportation and storage agreements
that
guarantee the performance of Prairielands. At December 31, 2005, the fixed
maximum amounts guaranteed under these agreements aggregated $22.9 million.
Scheduled expiration of the maximum amounts guaranteed under these agreements
aggregate $2.9 million in 2008 and $20.0 million in 2009. In the event
of
Prairielands’ default in its payment obligations, the subsidiary issuing the
guarantee for that particular obligation would be required to make payments
under its guarantee. The amount outstanding by Prairielands under the above
guarantees was $1.7 million, which was not reflected on the Consolidated
Balance
Sheets at December 31, 2005, because these intercompany transactions are
eliminated in consolidation.
In
addition, Centennial has issued guarantees to third parties related to
the
Company’s routine purchase of maintenance items and lease obligations for which
no fixed maximum amounts have been specified. These guarantees have no
scheduled
maturity date. In the event a subsidiary of the Company defaults under
its
obligation in relation to the purchase of certain maintenance items or
lease
obligations, Centennial would be required to make payments under these
guarantees. Any amounts outstanding by subsidiaries of the Company for
these
maintenance items and lease obligations were reflected on the Consolidated
Balance Sheets at December 31, 2005.
As
of
December 31, 2005, Centennial was contingently liable for the performance
of
certain of its subsidiaries under approximately $454 million of surety
bonds.
These bonds are principally for construction contracts and reclamation
obligations of these subsidiaries entered into in the normal course of
business.
Centennial indemnifies the respective surety bond companies against any
exposure
under the bonds. The purpose of Centennial's indemnification is to allow
the
subsidiaries to obtain bonding at competitive rates. In the event a subsidiary
of the Company does not fulfill its obligations in relation to its bonded
contract or obligation, Centennial may be required to make payments under
its
indemnification. A large portion of these contingent commitments is expected
to
expire within the next 12 months; however, Centennial will likely continue
to
enter into surety bonds for its subsidiaries in the future. The surety
bonds
were not reflected on the Consolidated Balance Sheets.
NOTE
19 - RELATED PARTY TRANSACTIONS
In
2004,
Bitter Creek entered into two natural gas gathering agreements with Nance
Petroleum. Robert L. Nance, an executive officer and shareholder of St.
Mary,
also is a member of the Board of Directors of the Company. The natural
gas
gathering agreements with Nance Petroleum were effective upon completion
of
certain high and low pressure gathering facilities, which occurred in
mid-December 2004. Bitter Creek's capital expenditures related to the completion
of the gathering lines and the expansion of its gathering facilities to
accommodate the natural gas gathering agreements were $2.5 million and
$7.6
million in 2005 and 2004, respectively, and are estimated for the next
three
years to be $2.2 million in 2006, $3.3 million in 2007 and $500,000 in
2008. The
natural gas gathering agreements are each for a term of 15 years and
month-to-month thereafter. Bitter Creek's revenues from these contracts
were
$1.2 million and $37,000 in 2005 and 2004, respectively, and estimated
revenues
from these contracts for the next three years are $2.8 million in 2006,
$3.5
million in 2007 and $5.4 million in 2008. The amount due from Nance Petroleum
at
December 31, 2005, was $118,000.
In
2005,
Montana-Dakota entered into agreements to purchase natural gas from Nance
Petroleum through March 31, 2006. Montana-Dakota’s expenses under these
agreements were $4.2 million in 2005. Montana-Dakota estimates that it
will
purchase approximately $2.2 million of natural gas from Nance Petroleum
in 2006.
The amount due to Nance Petroleum at December 31, 2005, was
$686,000.
In
2005,
Fidelity
entered into an agreement for the purchase of an ownership interest in
a natural
gas and oil property with a third party whereunder it became a party to
a joint
operating agreement in which St. Mary is the operator of the property.
St. Mary
receives an overhead fee as operator of this property. The Company recorded
its
proportionate share of capital costs allocable to its ownership interest
in the
related property, which were not material to Fidelity.
SUPPLEMENTARY
FINANCIAL INFORMATION
Quarterly
Data (Unaudited)
The
following unaudited information shows selected items by quarter for the
years
2005 and 2004:
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
|
(In
thousands, except per share amounts)
|
|
2005
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
604,295
|
|
$
|
770,172
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
539,182
|
|
|
656,648
|
|
|
|
|
|
|
|
Operating
income
|
|
|
65,113
|
|
|
113,524
|
|
|
|
|
|
|
|
Net
income
|
|
|
34,420
|
|
|
80,173
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
.29
|
|
|
.68
|
|
|
.73
|
|
|
.61
|
|
Diluted
|
|
|
.29
|
|
|
.67
|
|
|
.72
|
|
|
.61
|
|
Weighted
average common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
117,827
|
|
|
118,348
|
|
|
|
|
|
|
|
Diluted
|
|
|
118,773
|
|
|
119,037
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
515,459
|
|
$
|
653,301
|
|
$
|
804,598
|
|
$
|
745,899
|
|
Operating
expenses
|
|
|
471,436
|
|
|
568,570
|
|
|
690,022
|
|
|
668,511
|
|
Operating
income
|
|
|
44,023
|
|
|
84,731
|
|
|
114,576
|
|
|
77,388
|
|
Net
income
|
|
|
23,580
|
|
|
58,630
|
|
|
71,719
|
|
|
53,138
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
.20
|
|
|
.50
|
|
|
.61
|
|
|
.45
|
|
Diluted
|
|
|
.20
|
|
|
.50
|
|
|
.60
|
|
|
.45
|
|
Weighted
average common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
114,658
|
|
|
116,559
|
|
|
117,109
|
|
|
117,582
|
|
Diluted
|
|
|
115,709
|
|
|
117,567
|
|
|
118,278
|
|
|
118,596
|
|
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.
Natural
Gas and Oil Activities (Unaudited)
Fidelity
is involved in the acquisition, exploration, development and production
of
natural gas and oil resources. Fidelity's activities include the acquisition
of
producing properties with potential development opportunities, exploratory
drilling and the operation and development of natural gas production properties.
Fidelity shares revenues and expenses from the development of specified
properties located primarily in the Rocky Mountain and Mid-Continent regions
of
the United States and in and around the Gulf of Mexico in proportion to
its
ownership interests.
Fidelity
owns in fee or holds natural gas leases for the properties it operates
in
Colorado, Montana, North Dakota, Texas and Wyoming. These rights are in
the
Bonny Field located in eastern Colorado, the Cedar Creek Anticline in
southeastern Montana and southwestern North Dakota, the Bowdoin area located
in
north-central Montana, the Powder River Basin of Montana and Wyoming, and
the
Tabasco and Texan Gardens fields in Texas.
The
information that follows includes Fidelity's proportionate share of all
its
natural gas and oil interests.
The
following table sets forth capitalized costs and accumulated depreciation,
depletion and amortization related to natural gas and oil producing activities
at December 31:
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(In
thousands)
|
|
Subject
to amortization
|
|
|
|
|
$
|
904,620
|
|
$
|
758,500
|
|
Not
subject to amortization
|
|
|
82,291
|
|
|
68,984
|
|
|
104,339
|
|
Total
capitalized costs
|
|
|
1,280,960
|
|
|
973,604
|
|
|
862,839
|
|
Less
accumulated depreciation,
|
|
|
|
|
|
|
|
|
|
|
depletion
and amortization
|
|
|
456,554
|
|
|
373,932
|
|
|
305,349
|
|
Net
capitalized costs
|
|
|
|
|
$
|
599,672
|
|
$
|
557,490
|
|
Capital
expenditures, including those not subject to amortization, related to natural
gas and oil producing activities were as follows:
|
|
|
|
2004*
|
|
2003*
|
|
|
|
(In
thousands)
|
|
Acquisitions:
|
|
|
|
|
|
|
|
Proved
properties
|
|
$
|
149,253
|
|
|
|
|
|
|
|
Unproved properties
|
|
|
16,920
|
|
|
11,031
|
|
|
1,363
|
|
Exploration
|
|
|
24,385
|
|
|
21,781
|
|
|
19,193
|
|
Development**
|
|
|
125,633
|
|
|
77,940
|
|
|
77,583
|
|
Total
capital expenditures
|
|
$
|
316,191
|
|
|
|
|
|
|
|
*
Excludes
net additions to property, plant and equipment related to the recognition
of
future liabilities associated with the plugging and abandonment of natural
gas
and oil wells in accordance with SFAS No. 143, as discussed in Note 8,
of $2.5
million, $100,000 and $14.7 million for the years ended December 31, 2005,
2004
and 2003, respectively.
**
Includes expenditures for proved undeveloped reserves of $37.0 million,
$30.3
million and $23.3 million for the years ended December 31, 2005, 2004 and
2003,
respectively.
The
following summary reflects income resulting from the Company's operations
of
natural gas and oil producing activities, excluding corporate overhead
and
financing costs:
|
|
|
|
2004
|
|
2003
|
|
|
|
(In
thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
Sales
to affiliates
|
|
$
|
275,828
|
|
$
|
190,354
|
|
$
|
124,077
|
|
Sales
to external customers
|
|
|
159,390
|
|
|
149,660
|
|
|
140,034
|
|
Production
costs
|
|
|
88,068
|
|
|
67,125
|
|
|
67,292
|
|
Depreciation,
depletion and
|
|
|
|
|
|
|
|
|
|
|
amortization*
|
|
|
84,099
|
|
|
69,946
|
|
|
60,072
|
|
Pretax
income
|
|
|
263,051
|
|
|
202,943
|
|
|
136,747
|
|
Income
tax expense
|
|
|
99,071
|
|
|
73,137
|
|
|
51,925
|
|
Results
of operations for
|
|
|
|
|
|
|
|
|
|
|
producing
activities before
|
|
|
|
|
|
|
|
|
|
|
cumulative
effect of accounting
|
|
|
|
|
|
|
|
|
|
|
change
|
|
|
163,980
|
|
|
129,806
|
|
|
84,822
|
|
Cumulative
effect of accounting
|
|
|
|
|
|
|
|
|
|
|
change
|
|
|
---
|
|
|
---
|
|
|
(7,740
|
)
|
Results
of operations for
|
|
|
|
|
|
|
|
|
|
|
producing
activities
|
|
$
|
163,980
|
|
$
|
129,806
|
|
$
|
77,082
|
|
*
Includes accretion of discount for asset retirement obligations of $1.5
million
for the year ended December 31, 2005, and $1.4
million for each of the years ended December 31, 2004 and 2003, in accordance
with SFAS No. 143, as discussed in Note 8.
The
following table summarizes the Company's estimated quantities of proved
natural
gas and oil reserves at December 31, 2005, 2004 and 2003, and reconciles
the changes between these dates. Estimates of economically recoverable
natural
gas and oil 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.
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
Natural
|
|
|
|
Natural
|
|
|
|
Natural
|
|
|
|
|
|
Gas
|
|
Oil
|
|
Gas
|
|
Oil
|
|
Gas
|
|
Oil
|
|
|
|
|
|
(MMcf/MBbls)
|
|
Proved
developed and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
undeveloped
reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
453,200
|
|
|
17,100
|
|
|
411,700
|
|
|
18,900
|
|
|
372,500
|
|
|
17,500
|
|
Production
|
|
|
(59,400
|
)
|
|
(1,700
|
)
|
|
(59,700
|
)
|
|
(1,800
|
)
|
|
(54,700
|
)
|
|
(1,900
|
)
|
Extensions
and discoveries
|
|
|
74,400
|
|
|
500
|
|
|
100,700
|
|
|
500
|
|
|
113,300
|
|
|
3,300
|
|
Improved
recovery
|
|
|
---
|
|
|
2,600
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
Purchases
of proved reserves
|
|
|
57,400
|
|
|
3,700
|
|
|
100
|
|
|
---
|
|
|
900
|
|
|
---
|
|
Sales
of reserves in place
|
|
|
(1,300
|
)
|
|
(100
|
)
|
|
---
|
|
|
---
|
|
|
---
|
|
|
(100
|
)
|
Revisions
of previous
|
|
|
(35,200
|
)
|
|
(900
|
)
|
|
400
|
|
|
(500
|
)
|
|
(20,300
|
)
|
|
100
|
|
Balance
at end of year
|
|
|
489,100
|
|
|
21,200
|
|
|
453,200
|
|
|
17,100
|
|
|
411,700
|
|
|
18,900
|
|
Proved
developed reserves:
|
|
|
331,300
|
|
|
14,800
|
|
|
|
|
342,800
|
|
|
15,000
|
|
|
|
|
376,400
|
|
|
16,400
|
|
|
|
|
416,700
|
|
|
20,400
|
|
The
Company's interests in natural gas and oil reserves are located primarily
in the
United States and in and around the Gulf of Mexico.
The
standardized measure of the Company's estimated discounted future net cash
flows
of total proved reserves associated with its various natural gas and oil
interests at December 31 was as follows:
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(In
thousands)
|
|
Future
cash inflows
|
|
$
|
4,778,700
|
|
|
|
|
|
|
|
Future
production costs
|
|
|
1,095,400
|
|
|
803,600
|
|
|
651,300
|
|
Future
development costs
|
|
|
106,400
|
|
|
62,800
|
|
|
67,100
|
|
Future
net cash flows before income taxes
|
|
|
3,576,900
|
|
|
1,982,400
|
|
|
1,829,000
|
|
Future
income tax expense
|
|
|
1,205,700
|
|
|
645,300
|
|
|
601,000
|
|
Future
net cash flows
|
|
|
2,371,200
|
|
|
1,337,100
|
|
|
1,228,000
|
|
10%
annual discount for estimated timing of
|
|
|
|
|
|
|
|
|
|
|
cash
flows
|
|
|
950,400
|
|
|
515,600
|
|
|
491,200
|
|
Discounted
future net cash flows relating to
|
|
|
|
|
|
|
|
|
|
|
proved
natural gas and oil reserves
|
|
$
|
1,420,800
|
|
|
|
|
|
|
|
The
following are the sources of change in the standardized measure of discounted
future net cash flows by year:
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(In
thousands)
|
|
Beginning
of year
|
|
|
|
|
$
|
736,800
|
|
$
|
506,300
|
|
Net
revenues from production
|
|
|
(402,900
|
)
|
|
(291,600
|
)
|
|
(220,000
|
)
|
Change
in net realization
|
|
|
777,700
|
|
|
32,800
|
|
|
318,600
|
|
Extensions
and discoveries, net of future
|
|
|
|
|
|
|
|
|
|
|
production-related
costs
|
|
|
294,800
|
|
|
240,200
|
|
|
245,800
|
|
Improved
recovery, net of future production-related costs
|
|
|
91,600
|
|
|
---
|
|
|
---
|
|
Purchases
of proved reserves, net of future production-related costs
|
|
|
258,300
|
|
|
300
|
|
|
2,800
|
|
Sales
of reserves in place
|
|
|
(12,500
|
)
|
|
---
|
|
|
(600
|
)
|
Changes
in estimated future development costs
|
|
|
(13,400
|
)
|
|
(5,300
|
)
|
|
(4,000
|
)
|
Development
costs incurred during the current year
|
|
|
40,900
|
|
|
39,800
|
|
|
35,300
|
|
Accretion
of discount
|
|
|
106,900
|
|
|
97,100
|
|
|
62,400
|
|
Net
change in income taxes
|
|
|
(339,700
|
)
|
|
(36,400
|
)
|
|
(172,000
|
)
|
Revisions
of previous estimates
|
|
|
(200,500
|
)
|
|
9,600
|
|
|
(35,500
|
)
|
Other
|
|
|
(1,900
|
)
|
|
(1,800
|
)
|
|
(2,300
|
)
|
Net
change
|
|
|
599,300
|
|
|
84,700
|
|
|
230,500
|
|
End
of year
|
|
|
|
|
$
|
821,500
|
|
$
|
736,800
|
|
The
estimated discounted future cash inflows from estimated future production
of
proved reserves were computed using year-end natural gas and oil 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 development costs estimated to be spent in
each of
the next three years to develop proved undeveloped reserves as of December
31,
2005, are $70.7 million in 2006, $6.0 million in 2007 and none in 2008.
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.
The
standardized measure of discounted future net cash flows does not purport
to
represent the fair market value of natural gas and oil properties. There
are
significant uncertainties inherent in estimating quantities of proved reserves
and in projecting rates of production and the timing and amount of future
costs.
In addition, future realization of natural gas and oil prices over the
remaining
reserve lives may vary significantly from current prices.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM
9A. CONTROLS AND PROCEDURES
The
following information includes the evaluation of disclosure controls
and
procedures by the Company’s chief executive officer and the chief financial
officer, along with any significant changes in internal controls of the
Company.
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
The
term
"disclosure controls and procedures" is defined in Rules 13a-15(e) and
15d-15(e)
of the Exchange Act. These rules refer to the controls and other procedures
of a
company that are designed to ensure that information required to be disclosed
by
a company in the reports that it files under the Exchange Act is recorded,
processed, summarized and reported within required time periods. The
Company’s
chief executive officer and chief financial officer have evaluated the
effectiveness of the Company’s disclosure controls and procedures and they have
concluded that, as of the end of the period covered by this report, such
controls and procedures were effective.
CHANGES
IN INTERNAL CONTROLS
The
Company maintains a system of internal accounting controls that is designed
to
provide reasonable assurance that the Company’s transactions are properly
authorized, the Company’s assets are safeguarded against unauthorized or
improper use, and the Company’s transactions are properly recorded and reported
to permit preparation of the Company’s financial statements in conformity with
generally accepted accounting principles in the United States of America.
There
were no changes in the Company’s internal control over financial reporting that
occurred during the period covered by this report that have materially
affected,
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
information required by this item is included in this Form 10-K at Item
8 -
Financial Statements and Supplementary Data - Management’s Report on Internal
Control over Financial Reporting.
ATTESTATION
REPORT OF THE REGISTERED PUBLIC ACCOUNTING FIRM
The
information required by this item is included in this Form 10-K at Item
8 -
Financial Statements and Supplementary Data - Report of Independent Registered
Public Accounting Firm.
ITEM
9B. OTHER INFORMATION
None.
PART
III
The
information required by this item is included under the captions "Election
of
Directors," "Continuing Incumbent Directors," "Information Concerning
Executive
Officers," "Section 16(a) Beneficial Ownership Reporting Compliance,"
"Board and
Board Committees" and "Nominating and Governance Committee" in the Proxy
Statement, which is incorporated herein by reference.
ITEM
11. EXECUTIVE COMPENSATION
The
information required by this item is included under the captions "Directors’
Compensation" and "Executive Compensation" of the Proxy Statement, which
is
incorporated herein by reference with the exception of the compensation
committee report on executive compensation and the performance
graph.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The
information required by this item is included under the captions "Security
Ownership" and "Approval of the Amended and Restated 1997 Executive Long-Term
Incentive Plan" of the Proxy Statement, which is incorporated herein
by
reference.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
information required by this item is included under the caption "Accounting
and
Auditing Matters" of the Proxy Statement, which is incorporated herein
by
reference.
PART
IV
ITEM
15. EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
(a)
|
FINANCIAL
STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
EXHIBITS
|
Index
to Financial Statements and Financial Statement Schedules
1.
Financial Statements
The
following consolidated financial statements required under this item
are
included under Item 8 - Financial Statements and Supplementary
Data.
Consolidated
Statements of Income for each of the three years in the period ended
December 31, 2005
Consolidated
Statements of Common Stockholders’ Equity for each of the three years in the
period ended December 31, 2005
Consolidated
Statements of Cash Flows for each of the three years in the period
ended
December 31, 2005
Notes
to
Consolidated Financial Statements
2.
Financial Statement Schedules
MDU
Resources Group, Inc.
|
|
Schedule
II - Consolidated Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
Balance
at
|
|
Charged
to
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
Costs
and
|
|
|
|
|
|
at
End
|
|
Description
|
|
of
Year
|
|
Expenses
|
|
Other*
|
|
Deductions**
|
|
of
Year
|
|
|
|
(In
thousands)
|
|
Allowance
for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
6,801
|
|
$
|
4,870
|
|
$
|
1,675
|
|
$
|
5,315
|
|
$
|
8,031
|
|
2004
|
|
|
8,146
|
|
|
2,663
|
|
|
703
|
|
|
4,711
|
|
|
6,801
|
|
2003
|
|
|
8,237
|
|
|
3,185
|
|
|
1,123
|
|
|
4,399
|
|
|
8,146
|
|
*
Allowance for doubtful accounts for companies acquired
and
recoveries.
|
**
Uncollectible accounts written
off.
|
All
other
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.
3.
Exhibits
3(a)
|
|
|
|
3(b)
|
|
|
|
3(c)
|
Certificate
of Designations of Series B Preference Stock of the Company,
as amended,
filed as Exhibit 3(a) to Form 10-Q for the quarter ended
September 30,
2002, 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-Ninth Supplements thereto between
the Company
and the New York Trust Company (The Bank of New York, successor
Corporate
Trustee) and A. C. Downing (Douglas J. MacInnes, 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; and
Exhibit 4(c)(i) in Registration No. 333-49472*
|
|
|
4(b)
|
|
|
|
4(c)
|
|
|
|
4(d)
|
|
|
|
4(e)
|
|
|
|
4(f)
|
Centennial
Energy Holdings, Inc. Master Shelf Agreement, dated April
29, 2005, among
Centennial Energy Holdings, Inc. and The Prudential Insurance
Company of
America, filed as Exhibit 4(a) to Form 10-Q for the quarter
ended June 30,
2005, in File No. 1-3480*
|
|
|
4(g)
|
MDU
Resources Group, Inc. Credit Agreement, dated June 21,
2005, among MDU
Resources Group, Inc., Wells Fargo Bank, National Association,
as
Administrative Agent, and The Other Financial Institutions
Party thereto,
filed as Exhibit 4(b) to Form 10-Q for the quarter ended
June 30, 2005, in
File No. 1-3480*
|
|
|
4(h)
|
Centennial
Energy Holdings, Inc. Credit Agreement, dated August 26,
2005, among
Centennial Energy Holdings, Inc., U.S. Bank National Association,
as
Administrative Agent, and The Other Financial Institutions
party thereto,
filed as Exhibit 4(a) to Form 10-Q for the quarter ended
September 30,
2005, in File No. 1-3480*
|
|
|
+10(a)
|
1992
Key Employee Stock Option Plan, as amended, filed as Exhibit
10(b) to Form
10-K for the year ended December 31, 2002, in File No.
1-3480*
|
+10(b)
|
Supplemental
Income Security Plan, as amended and restated February
17, 2005, filed as
Exhibit 10(a) to Form 10-Q for the
|
|
|
+10(c)
|
|
|
|
+10(d)
|
Deferred
Compensation Plan for Directors, as amended, filed as Exhibit
10(e) to
Form 10-K for the year ended December 31, 2002, in File
No.
1-3480*
|
|
|
+10(e)
|
Non-Employee
Director Stock Compensation Plan, as amended, filed as
Exhibit 10(h) to
Form 10-Q for the quarter ended June 30, 2004, in File
No.
1-3480*
|
|
|
+10(f)
|
1997
Non-Employee Director Long-Term Incentive Plan, as amended,
filed as
Exhibit 10(d) to Form 10-Q for the quarter ended June 30,
2000, in File
No. 1-3480*
|
|
|
+10(g)
|
Change
of Control Employment Agreement between the Company and
John K.
Castleberry, filed as Exhibit 10(a) to Form 10-Q for the
quarter ended
September 30, 2002, in File No. 1-3480*
|
|
|
+10(h)
|
Change
of Control Employment Agreement between the Company and
Paul Gatzemeier,
filed as Exhibit 10(a) to Form 10-Q for the quarter ended
June 30, 2004,
in File No. 1-3480*
|
|
|
+10(i)
|
Change
of Control Employment Agreement between the Company and
Terry D.
Hildestad, filed as Exhibit 10(d) to Form 10-Q for the
quarter ended
September 30, 2002, in File No. 1-3480*
|
|
|
+10(j)
|
Change
of Control Employment Agreement between the Company and
Bruce T. Imsdahl,
filed as Exhibit 10(c) to Form 10-Q for the quarter ended
June 30, 2004,
in File No. 1-3480*
|
|
|
+10(k)
|
Change
of Control Employment Agreement between the Company and
Vernon A. Raile,
filed as Exhibit 10(f) to Form 10-Q for the quarter ended
September 30,
2002, in File No. 1-3480*
|
|
|
+10(l)
|
Change
of Control Employment Agreement between the Company and
Cindy C. Redding,
filed as Exhibit 10(d) to Form 10-Q for the quarter ended
June 30, 2004,
in File No. 1-3480*
|
|
|
+10(m)
|
Change
of Control Employment Agreement between the Company and
Paul K. Sandness,
filed as Exhibit 10(e) to Form 10-Q for the quarter ended
June 30, 2004,
in File No. 1-3480*
|
|
|
+10(n)
|
Change
of Control Employment Agreement between the Company and
William E.
Schneider, filed as Exhibit 10(h) to Form 10-Q for the
quarter ended
September 30, 2002, in File No. 1-3480*
|
|
|
+10(o)
|
Change
of Control Employment Agreement between the Company and
Daryl A. Splichal,
filed as Exhibit 10(f) to Form 10-Q for the quarter ended
June 30, 2004,
in File No. 1-3480*
|
|
|
+10(p)
|
Change
of Control Employment Agreement between the Company and
Martin A. White,
filed as Exhibit 10(j) to Form 10-Q for the quarter ended
September 30,
2002, in File No. 1-3480*
|
|
|
+10(q)
|
Change
of Control Employment Agreement between the Company and
Robert E. Wood,
filed as Exhibit 10(k) to Form 10-Q for the quarter ended
September 30,
2002, in File No. 1-3480*
|
|
|
+10(r)
|
1998
Option Award Program, filed as Exhibit 10(u) to Form 10-K
for the year
ended December 31, 2002, in File No. 1-3480*
|
|
|
+10(s)
|
Group
Genius Innovation Plan, filed as Exhibit 10(v) to Form
10-K for the year
ended December 31, 2002, in File No. 1-3480*
|
|
|
+10(t)
|
The
Wagner-Smith Company Deferred Compensation Plan, filed
as Exhibit 10(w) to
Form 10-K for the year ended December 31, 2003, in File
No.
1-3480*
|
|
|
+10(u)
|
Wagner-Smith
Equipment Co. Deferred Compensation Plan, filed as Exhibit
10(x) to Form
10-K for the year ended December 31, 2003, in File No.
1-3480*
|
|
|
+10(v)
|
The
Bauerly Brothers, Inc. Deferred Compensation Plan, filed
as Exhibit 10(aa)
to Form 10-K for the year ended December 31, 2003, in File
No.
1-3480*
|
|
|
+10(w)
|
The
Oregon Electric Construction, Inc. Deferred Compensation
Plan, filed as
Exhibit 10(ab) to Form 10-K for the year ended December
31, 2003, in File
No. 1-3480*
|
|
|
10(x)
|
Purchase
and Sale Agreement between Fidelity and Smith Production
Inc., dated April
19, 2005 (Flores), filed as Exhibit 10(a) to Form 10-Q
for the quarter
ended June 30, 2005, in File No. 1-3480*
|
|
|
10(y)
|
Purchase
and Sale Agreement between Fidelity and Smith Production
Inc., dated April
19, 2005 (Tabasco and Texan Gardens), filed as Exhibit
10(b) to Form 10-Q
for the quarter ended June 30, 2005, in File No.
1-3480*
|
|
|
10(z)
|
First
Amendment to the Purchase and Sale Agreements between Fidelity
and Smith
Production Inc., dated April 19, 2005, filed as Exhibit
10(c) to Form 10-Q
for the quarter ended June 30, 2005, in File No.
1-3480*
|
|
|
10(aa)
|
Second
Amendment to the Purchase and Sale Agreement between Fidelity
and Smith
Production Inc., dated April 19, 2005, filed as Exhibit
10(d) to Form 10-Q
for the quarter ended June 30, 2005, in File No.
1-3480*
|
|
|
+10(ab)
|
MDU
Resources Group, Inc. 2006 NEO Base Compensation Table,
filed as Exhibit
10.1 to Form 8-K dated November 17, 2005, in File No.
1-3480*
|
|
|
+10(ac)
|
WBI
Holdings, Inc. Executive Incentive Compensation Plan, filed
as Exhibit
10.4 to Form 8-K dated February 17, 2005, in File No.
1-3480*
|
|
|
+10(ad)
|
Knife
River Corporation Executive Incentive Compensation Plan,
filed as Exhibit
10.5 to Form 8-K dated February 17, 2005, in File No.
1-3480*
|
|
|
+10(ae)
|
|
|
|
+10(af)
|
MDU
Resources Group, Inc. Executive Incentive Compensation
Plan, as amended
November 17, 2005**
|
|
|
+10(ag)
|
Montana-Dakota
Utilities Co. Executive Incentive Compensation Plan, as
amended November
17, 2005**
|
|
|
+10(ah)
|
|
|
|
+10(ai)
|
Change
of Control Employment Agreement between the Company and
Steven L.
Bietz**
|
|
|
+10(aj)
|
Change
of Control Employment Agreement between the Company and
Nicole A.
Kivisto**
|
|
|
+10(ak)
|
Change
of Control Employment Agreement between the Company and
Doran N.
Schwartz**
|
|
|
12
|
Computation
of Ratio of Earnings to Fixed Charges and Combined Fixed
Charges and
Preferred Stock Dividends**
|
|
|
21
|
|
|
|
23
|
Consent
of Independent Registered Public Accounting Firm**
|
|
|
31(a)
|
Certification
of Chief Executive Officer filed pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002**
|
|
|
31(b)
|
Certification
of Chief Financial Officer filed pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002**
|
|
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer
furnished pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the
Sarbanes-Oxley Act of 2002**
|
|
|
————————————————————————
* Incorporated
herein by reference as indicated.
+ Management contract, compensatory plan or arrangement required
to be
filed as an exhibit to this form pursuant to Item 15(c) of this
report.
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:
|
|
By:
|
|
|
|
|
Martin
A. White
(Chairman
of the Board 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 Officer and Director
|
|
Martin
A. White
(Chairman
of the Board and Chief Executive Officer)
|
|
|
|
|
|
/s/
Terry D. Hildestad
|
President
and Chief Operating Officer
|
|
Terry
D. Hildestad
(President
and Chief Operating Officer)
|
|
|
|
|
|
/s/
Vernon A. Raile
|
Chief
Financial Officer
|
|
Vernon
A. Raile
(Executive
Vice President and Chief Financial Officer)
|
|
|
|
|
|
/s/
Daniel B. Moylan
|
Chief
Accounting Officer
|
|
Daniel
B. Moylan
(Chief
Accounting Officer)
|
|
|
|
|
|
/s/
Harry J. Pearce
|
Lead
Director
|
|
Harry
J. Pearce
|
|
|
|
|
|
/s/
Thomas Everist
|
Director
|
|
Thomas
Everist
|
|
|
|
|
|
/s/
Karen B. Fagg
|
Director
|
|
Karen
B. Fagg
|
|
|
|
|
|
/s/
Dennis W. Johnson
|
Director
|
|
Dennis
W. Johnson
|
|
|
|
|
|
/s/
Richard H. Lewis
|
Director
|
|
Richard
H. Lewis
|
|
|
|
|
|
/s/
Patricia L. Moss
|
Director
|
|
Patricia
L. Moss
|
|
|
|
|
|
/s/
Robert L. Nance
|
Director
|
|
Robert
L. Nance
|
|
|
|
|
|
/s/
John L. Olson
|
Director
|
|
John
L. Olson
|
|
|
|
|
|
/s/
Sister Thomas Welder
|
Director
|
|
Sister
Thomas Welder
|
|
|
|
|
|
/s/
John K. Wilson
|
Director
|
|
John
K. Wilson
|
|
|