-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MZiWKpBo32sw4mvv61mTM+VLeaYkGB9CJsikPJaNohxpGZ9GcPcKuomY8rrZSaxA h8qLMVOnuKj6gJd++FlmBQ== 0000067716-99-000017.txt : 19990305 0000067716-99-000017.hdr.sgml : 19990305 ACCESSION NUMBER: 0000067716-99-000017 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990304 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MDU RESOURCES GROUP INC CENTRAL INDEX KEY: 0000067716 STANDARD INDUSTRIAL CLASSIFICATION: GAS & OTHER SERVICES COMBINED [4932] IRS NUMBER: 410423660 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03480 FILM NUMBER: 99557294 BUSINESS ADDRESS: STREET 1: SCHUCHART BUILDING STREET 2: 918 EAST DIVIDE AVENUE CITY: BISMARCK STATE: ND ZIP: 58501 BUSINESS PHONE: 7012227900 MAIL ADDRESS: STREET 1: SCHUCHART BUILDING STREET 2: 918 EAST DIVIDE AVENUE, P.O. BOX 5650 CITY: BISMARCK STATE: ND ZIP: 58506-5650 FORMER COMPANY: FORMER CONFORMED NAME: MONTANA DAKOTA UTILITIES CO DATE OF NAME CHANGE: 19850429 10-K 1 1998 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ____________ Commission file number 1-3480 MDU Resources Group, Inc. (Exact name of registrant as specified in its charter) Delaware 41-0423660 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Schuchart Building 918 East Divide Avenue P.O. Box 5650 Bismarck, North Dakota 58506-5650 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (701) 222-7900 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange Common Stock, par value $3.33 on which registered and Preference Share Purchase Rights New York Stock Exchange Pacific Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Preferred Stock, par value $100 (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X . No __. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X State the aggregate market value of the voting stock held by nonaffiliates of the registrant as of February 26, 1999: $1,248,942,000. Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of February 26, 1999: 53,146,476 shares. DOCUMENTS INCORPORATED BY REFERENCE. 1. Pages 25 through 53 of the Annual Report to Stockholders for 1998, incorporated in Part II, Items 6 and 8 of this Report. 2. Proxy Statement, dated March 15, 1999, incorporated in Part III, Items 10, 11, 12 and 13 of this Report. CONTENTS PART I Items 1 and 2 -- Business and Properties General Montana-Dakota Utilities Co. -- Electric Generation, Transmission and Distribution Retail Natural Gas and Propane Distribution WBI Holdings, Inc. Knife River Corporation -- Construction Materials Operations Coal Operations Consolidated Construction Materials and Mining Operations Fidelity Oil Group Item 3 -- Legal Proceedings Item 4 -- Submission of Matters to a Vote of Security Holders PART II Item 5 -- Market for the Registrant's Common Stock and Related Stockholder Matters Item 6 -- Selected Financial Data Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A -- Quantitative and Qualitative Disclosures About Market Risk Item 8 -- Financial Statements and Supplementary Data Item 9 -- Change in and Disagreements with Accountants on Accounting and Financial Disclosure PART III Item 10 -- Directors and Executive Officers of the Registrant Item 11 -- Executive Compensation Item 12 -- Security Ownership of Certain Beneficial Owners and Management Item 13 -- Certain Relationships and Related Transactions PART IV Item 14 -- Exhibits, Financial Statement Schedules and Reports on Form 8-K PART I This Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements should be read with the cautionary statements and important factors included in this Form 10-K at Item 7 -- "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Safe Harbor for Forward-looking Statements." Forward-looking statements are all statements other than statements of historical fact, including without limitation, those statements that are identified by the words "anticipates," "estimates," "expects," "intends," "plans," "predicts" and similar expressions. ITEMS 1 AND 2. BUSINESS AND PROPERTIES General MDU Resources Group, Inc. (Company) is a diversified natural resource company which was incorporated under the laws of the State of Delaware in 1924. Its principal executive offices are at Schuchart Building, 918 East Divide Avenue, P.O. Box 5650, Bismarck, North Dakota 58506-5650, telephone (701) 222-7900. Montana-Dakota Utilities Co. (Montana-Dakota), the public utility division of the Company, distributes natural gas and operates electric power generation, transmission and distribution facilities, serving 256 communities in North Dakota, eastern Montana, northern and western South Dakota and northern Wyoming. The Company, through its wholly owned subsidiary, Centennial Energy Holdings, Inc. (Centennial), owns WBI Holdings, Inc.,(WBI Holdings), Knife River Corporation (Knife River), the Fidelity Oil Group (Fidelity Oil) and Utility Services, Inc. (Utility Services). WBI Holdings, through its wholly owned subsidiary, Williston Basin Interstate Pipeline Company, (Williston Basin), produces natural gas and provides underground storage, transportation and gathering services through an interstate pipeline system serving Montana, North Dakota, South Dakota and Wyoming. In addition, WBI Holdings, through its wholly owned subsidiary, WBI Energy Services, Inc. and its subsidiaries, seeks new energy markets while continuing to expand present markets for natural gas and propane in the Midwestern, Southern and Central regions of the United States. Knife River, through its wholly owned subsidiary, KRC Holdings, Inc. (KRC Holdings) and its subsidiaries, mines and markets aggregates and construction materials in Alaska, California, Hawaii and Oregon, and operates lignite coal mines in Montana and North Dakota. Fidelity Oil is comprised of Fidelity Oil Co. and Fidelity Oil Holdings, Inc., which own oil and natural gas interests throughout the United States, the Gulf of Mexico and Canada. Utility Services, through its wholly owned subsidiaries, installs and repairs electric transmission and distribution power lines, fiber optic cable and natural gas pipeline and provides related supplies, equipment and engineering services throughout the western United States and Hawaii. The significant industries within the Company's retail utility service area consist of agriculture and the related processing of agricultural products and energy-related activities such as oil and natural gas production, oil refining, coal mining and electric power generation. As of December 31, 1998, the Company had 2,882 full-time employees with 72 employed at MDU Resources Group, Inc., 900 at Montana-Dakota, 301 at WBI Holdings, 1,084 at Knife River's construction materials operations, 151 at Knife River's coal operations, 12 at Fidelity Oil and 362 at Utility Services. Approximately 434 and 84 of the Montana-Dakota and WBI Holdings employees, respectively, are represented by the International Brotherhood of Electrical Workers. Labor contracts with such employees are in effect through May 1999, for both Montana- Dakota and WBI Holdings. Knife River has a labor contract through August 1999, with the United Mine Workers of America, which represents its coal operation's hourly workforce aggregating 90 employees. In addition, Knife River has 15 labor contracts which represent 232 of its construction materials employees. Utility Services has 19 labor contracts representing the majority of its employees. The financial results and data applicable to each of the Company's business segments as well as their financing requirements are set forth in Item 7 -- "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes to Consolidated Financial Statements. Any reference to the Company's Consolidated Financial Statements and Notes thereto shall be to pages 25 through 51 in the Company's Annual Report to Stockholders for 1998 (Annual Report), which are incorporated by reference herein. ENERGY DISTRIBUTION OPERATIONS AND PROPERTY (MONTANA-DAKOTA) Electric Generation, Transmission and Distribution General -- Montana-Dakota provides electric service at retail, serving over 114,000 residential, commercial, industrial and municipal customers located in 177 communities and adjacent rural areas as of December 31, 1998. The principal properties owned by Montana- Dakota for use in its electric operations include interests in seven electric generating stations, as further described under "System Supply and System Demand," and approximately 3,100 and 3,900 miles of transmission and distribution lines, respectively. Montana-Dakota has obtained and holds valid and existing franchises authorizing it to conduct its electric operations in all of the municipalities it serves where such franchises are required. For additional information regarding Montana-Dakota's franchises, see Item 7 -- "Management's Discussion and Analysis of Financial Condition and Results of Operations." As of December 31, 1998, Montana-Dakota's net electric plant investment approximated $279.2 million. All of Montana-Dakota's electric properties, with certain exceptions, are subject to the lien of the Indenture of Mortgage dated May 1, 1939, as supplemented, amended and restated, from the Company to The Bank of New York and W. T. Cunningham, successor trustees. The electric operations of Montana-Dakota are subject to regulation by the Federal Energy Regulatory Commission (FERC) under provisions of the Federal Power Act with respect to the transmission and sale of power at wholesale in interstate commerce, interconnections with other utilities, the issuance of securities, accounting and other matters. Retail rates, service, accounting and, in certain cases, security issuances are also subject to regulation by the North Dakota Public Service Commission (NDPSC), Montana Public Service Commission (MPSC), South Dakota Public Utilities Commission (SDPUC) and Wyoming Public Service Commission (WPSC). The percentage of Montana-Dakota's 1998 electric utility operating revenues by jurisdiction is as follows: North Dakota -- 60 percent; Montana -- 22 percent; South Dakota -- 8 percent and Wyoming -- 10 percent. System Supply and System Demand -- Through an interconnected electric system, Montana-Dakota serves markets in portions of the following states and major communities -- western North Dakota, including Bismarck, Dickinson and Williston; eastern Montana, including Glendive and Miles City; and northern South Dakota, including Mobridge. The interconnected system consists of seven on-line electric generating stations which have an aggregate turbine nameplate rating attributable to Montana- Dakota's interest of 393,488 Kilowatts (kW) and a total summer net capability of 415,408 kW. Montana-Dakota's four principal generating stations are steam-turbine generating units using coal for fuel. The nameplate rating for Montana-Dakota's ownership interest in these four stations (including interests in the Big Stone Station and the Coyote Station aggregating 22.7 percent and 25.0 percent, respectively) is 327,758 kW. The balance of Montana- Dakota's interconnected system electric generating capability is supplied by three combustion turbine peaking stations. Additionally, Montana-Dakota has contracted to purchase through October 31, 2006, 66,400 kW of participation power from Basin Electric Power Cooperative (Basin) for its interconnected system. The following table sets forth details applicable to the Company's electric generating stations: 1998 Net Generation Nameplate Summer (kilowatt- Generating Rating Capability hours in Station Type (kW) (kW) thousands) North Dakota -- Coyote* Steam 103,647 106,750 676,989 Heskett Steam 86,000 102,000 445,417 Williston Combustion Turbine 7,800 8,900 (79)** South Dakota -- Big Stone* Steam 94,111 99,558 668,171 Montana -- Lewis & Clark Steam 44,000 45,200 287,591 Glendive Combustion Turbine 34,780 31,600 15,906 Miles City Combustion Turbine 23,150 21,400 9,204 393,488 415,408 2,103,199 * Reflects Montana-Dakota's ownership interest. ** Station use, to meet MAPP's accreditation requirements, exceeded generation. Virtually all of the current fuel requirements of the Coyote, Heskett and Lewis & Clark stations are met with coal supplied by Knife River under various long-term contracts. See "Construction Materials and Mining Operations and Property (Knife River) -- Coal Operations" for a discussion of a suit and arbitration filed by the Co-owners of the Coyote Station against Knife River and the Company. The majority of the Big Stone Station's fuel requirements are currently being met with coal supplied by Westmoreland Resources, Inc. under a contract which expires on December 31, 1999. During the years ended December 31, 1994, through December 31, 1998, the average cost of coal consumed, including freight, per million British thermal units (Btu) at Montana-Dakota's electric generating stations (including the Big Stone and Coyote stations) in the interconnected system and the average cost per ton, including freight, of the coal so consumed was as follows: Years Ended December 31, 1998 1997 1996 1995 1994 Average cost of coal per million Btu $.93 $.95 $.93 $.94 $.97 Average cost of coal per ton $13.67 $14.22 $13.64 $12.90 $12.88 The maximum electric peak demand experienced to date attributable to sales to retail customers on the interconnected system was 412,700 kW in August 1995. The 1998 summer peak was 402,500 kW, although assuming normal weather, the 1998 summer peak was previously forecasted to have been approximately 415,500 kW. Montana-Dakota's latest forecast for its interconnected system indicates that its annual peak will continue to occur during the summer and the peak demand growth rate through 2004 will approximate 1.5 percent annually. Montana-Dakota's latest forecast indicates that its kilowatt-hour (kWh) sales growth rate, on a normalized basis, through 2004 will approximate 0.9 percent annually. Montana-Dakota currently estimates that it has adequate capacity available through existing generating stations and long- term firm purchase contracts until the year 2000. If additional capacity is needed in 2000 or after, it will be met through the addition of combustion turbine peaking stations and purchases from the Mid-Continent Area Power Pool (MAPP) on an intermediate-term basis. Montana-Dakota has major interconnections with its neighboring utilities, all of which are MAPP members. Montana-Dakota considers these interconnections adequate for coordinated planning, emergency assistance, exchange of capacity and energy and power supply reliability. Through a separate electric system (Sheridan System), Montana- Dakota serves Sheridan, Wyoming and neighboring communities. The maximum peak demand experienced to date and attributable to Montana-Dakota sales to retail consumers on that system was approximately 46,600 kW and occurred in December 1983. Montana- Dakota estimates this annual peak will be exceeded in the winter of 1999/2000. The Sheridan System is supplied through an interconnection with Black Hills Power and Light Company under a power supply contract through December 31, 2006 which allows for the purchase of up to 55,000 kW of capacity. Regulation and Competition -- The electric utility industry can be expected to continue to become increasingly competitive due to a variety of regulatory, economic and technological changes. As a result of competition in electric generation, wholesale power markets have become increasingly competitive and evaluations are ongoing concerning retail competition. In April 1996, the FERC issued a final rule (Order No. 888) on wholesale electric transmission open access and recovery of stranded costs. Montana-Dakota filed proposed tariffs with the FERC in compliance with Order 888, which became effective in July 1996. Montana-Dakota is awaiting final approval of the proposed tariffs by the FERC. In a related matter, in March 1996, the MAPP, of which Montana- Dakota is a member, filed a restated operating agreement with the FERC. The FERC approved MAPP's restated agreement, excluding MAPP's market-based rate proposal, effective November 1996. The FERC has requested additional information from the MAPP on its market-based rate proposal before it will take further action. The Montana legislature passed an electric industry restructuring bill, effective May 2, 1997. The bill provides for full customer choice of electric supplier by July 1, 2002, stranded cost recovery and other provisions. Based on the provisions of such restructuring bill, because the Company's utility division operates in more than one state, the Company has the option of deferring its transition to full customer choice until 2006. In its 1997 legislative session, the North Dakota legislature established an Electric Industry Competition Committee to study over a six-year period the impact of competition on the generation, transmission and distribution of electric energy in the State. In 1997, the WPSC selected a consultant to perform a study on the impact of electric restructuring in Wyoming. The study found no material economic benefits. No further action is pending at this time. The SDPUC has not initiated any proceedings to date concerning retail competition or electric industry restructuring. Federal legislation addressing this issue continues to be discussed. Although Montana-Dakota is unable to predict the outcome of such regulatory proceedings or legislation, or the extent to which retail competition may occur, Montana-Dakota is continuing to take steps to effectively operate in an increasingly competitive environment. Fuel adjustment clauses contained in North Dakota and South Dakota jurisdictional electric rate schedules allow Montana-Dakota to reflect increases or decreases in fuel and purchased power costs (excluding demand charges) on a timely basis. Expedited rate filing procedures in Wyoming allow Montana-Dakota to timely reflect increases or decreases in fuel and purchased power costs. In Montana (22 percent of electric revenues), such cost changes are includible in general rate filings. Environmental Matters -- Montana-Dakota's electric operations, are subject to extensive federal, state and local laws and regulations providing for air, water and solid waste pollution control; state facility-siting regulations; zoning and planning regulations of certain state and local authorities; federal health and safety regulations and state hazard communication standards. Montana-Dakota believes it is in substantial compliance with all existing environmental regulations and permitting requirements. The United States Clean Air Act (Clean Air Act) requires electric generating facilities to reduce sulfur dioxide emissions by the year 2000 to a level not exceeding 1.2 pounds per million Btu. Montana-Dakota's baseload electric generating stations are coal fired. All of these stations, with the exception of the Big Stone Station, are either equipped with scrubbers or utilize an atmospheric fluidized bed combustion boiler, which permits them to operate with emission levels less than the 1.2 pounds per million Btu. The emissions requirement at the Big Stone Station is expected to be met by switching to competitively priced lower sulfur ("compliance") coal. In addition, the Clean Air Act limits the amount of nitrous oxide emissions. Montana-Dakota's generating stations are within the limitations set by the United States Environmental Protection Agency (EPA). Governmental regulations establishing environmental protection standards are continuously evolving and, therefore, the character, scope, cost and availability of the measures which will permit compliance with evolving laws or regulations, cannot now be accurately predicted. Montana-Dakota did not incur any significant environmental expenditures in 1998 and does not expect to incur any significant capital expenditures related to environmental compliance through 2001. Retail Natural Gas and Propane Distribution General -- Montana-Dakota sells natural gas and propane at retail, serving over 206,000 residential, commercial and industrial customers located in 141 communities and adjacent rural areas as of December 31, 1998, and provides natural gas transportation services to certain customers on its system. These services are provided through a distribution system aggregating over 4,200 miles. Montana-Dakota has obtained and holds valid and existing franchises authorizing it to conduct natural gas and propane distribution operations in all of the municipalities it serves where such franchises are required. As of December 31, 1998, Montana-Dakota's net natural gas and propane distribution plant investment approximated $79.9 million. All of Montana-Dakota's natural gas distribution properties, with certain exceptions, are subject to the lien of the Indenture of Mortgage dated May 1, 1939, as supplemented, amended and restated, from the Company to The Bank of New York and W. T. Cunningham, successor trustees. The natural gas and propane distribution operations of Montana-Dakota are subject to regulation by the NDPSC, MPSC, SDPUC and WPSC regarding retail rates, service, accounting and, in certain instances, security issuances. The percentage of Montana-Dakota's 1998 natural gas and propane utility operating revenues by jurisdiction is as follows: North Dakota -- 42 percent; Montana -- 29 percent; South Dakota -- 22 percent and Wyoming -- 7 percent. System Supply, System Demand and Competition -- Montana-Dakota serves retail natural gas markets, consisting principally of residential and firm commercial space and water heating users, in portions of the following states and major communities -- North Dakota, including Bismarck, Dickinson, Williston, Minot and Jamestown; eastern Montana, including Billings, Glendive and Miles City; western and north-central South Dakota, including Rapid City, Pierre and Mobridge; and northern Wyoming, including Sheridan. These markets are highly seasonal and sales volumes depend on the weather. The following table reflects Montana-Dakota's natural gas and propane sales, natural gas transportation volumes and degree days as a percentage of normal during the last five years: Years Ended December 31, 1998 1997 1996 1995 1994 Mdk (thousands of decatherms) Sales: Residential 18,614 20,126 22,682 20,135 19,039 Commercial 12,458 13,799 15,325 13,509 12,403 Industrial 952 395 276 295 398 Total 32,024 34,320 38,283 33,939 31,840 Transportation: Commercial 1,995 1,612 1,677 1,742 2,011 Industrial 8,329 8,455 7,746 9,349 7,267 Total 10,324 10,067 9,423 11,091 9,278 Total Throughput 42,348 44,387 47,706 45,030 41,118 Degree days (% of normal) 93.7% 99.3% 116.2% 101.6% 96.7% The restructuring of the natural gas industry, as described under "Natural Gas Transmission Operations and Property (WBI Holdings)", has resulted in additional competition in retail natural gas markets. In response to these changed market conditions Montana-Dakota has established various natural gas transportation service rates for its distribution business to retain interruptible commercial and industrial load. Certain of these services include transportation under flexible rate schedules and capacity release contracts whereby Montana-Dakota's interruptible customers can avail themselves of the advantages of open access transportation on the Williston Basin system. These services have enhanced Montana-Dakota's competitive posture with alternate fuels, although certain of Montana-Dakota's customers have the potential of bypassing Montana-Dakota's distribution system by directly accessing Williston Basin's facilities. Montana-Dakota acquires its system requirements directly from producers, processors and marketers. Such natural gas is supplied under contracts specifying market-based pricing, and is transported under firm transportation agreements by Williston Basin, Northern Gas Company, South Dakota Intrastate Pipeline Company and Northern Border Pipeline Company. Montana-Dakota has also contracted with Williston Basin to provide firm storage services which enable Montana-Dakota to purchase natural gas at more uniform daily volumes throughout the year and, thus, meet winter peak requirements as well as allow it to better manage its natural gas costs. Montana-Dakota estimates that, based on supplies of natural gas currently available through its suppliers and expected to be available, it will have adequate supplies of natural gas to meet its system requirements for the next five years. Regulatory Matters -- Montana-Dakota's retail natural gas rate schedules contain clauses permitting monthly adjustments in rates based upon changes in natural gas commodity, transportation and storage costs. Current regulatory practices allow Montana-Dakota to recover increases or refund decreases in such costs within 24 months from the time such changes occur. Environmental Matters -- Montana-Dakota's natural gas and propane distribution operations are generally subject to extensive federal, state and local environmental, facility siting, zoning and planning laws and regulations. Except as set forth below, Montana-Dakota believes it is in substantial compliance with those regulations. Montana-Dakota and Williston Basin discovered polychlorinated biphenyls (PCBs) in portions of their natural gas systems and informed the EPA in January 1991. Montana-Dakota and Williston Basin believe the PCBs entered the system from a valve sealant. In January 1994, Montana-Dakota, Williston Basin and Rockwell International Corporation (Rockwell), manufacturer of the valve sealant, reached an agreement under which Rockwell has reimbursed and will continue to reimburse Montana-Dakota and Williston Basin for a portion of certain remediation costs. On the basis of findings to date, Montana-Dakota and Williston Basin estimate future environmental assessment and remediation costs will aggregate $3 million to $15 million. Based on such estimated cost, the expected recovery from Rockwell and the ability of Montana-Dakota and Williston Basin to recover their portions of such costs from ratepayers, Montana-Dakota and Williston Basin believe that the ultimate costs related to these matters will not be material to each of their respective financial positions or results of operations. CENTENNIAL ENERGY HOLDINGS, INC. NATURAL GAS TRANSMISSION OPERATIONS AND PROPERTY (WBI HOLDINGS) General -- Williston Basin owns and operates over 3,800 miles of transmission, gathering and storage lines and 22 compressor stations located in the states of Montana, North Dakota, South Dakota and Wyoming. Through three underground storage fields located in Montana and Wyoming, storage services are provided to local distribution companies, producers, suppliers and others, and serve to enhance system deliverability. Williston Basin's system is strategically located near five natural gas producing basins making natural gas supplies available to Williston Basin's transportation and storage customers. In addition, Williston Basin produces natural gas from owned reserves which is sold to others. Williston Basin has interconnections with seven pipelines in Wyoming, Montana and North Dakota which provide for supply and market access. WBI Energy Services, Inc. and its subsidiaries seek new energy markets while continuing to expand present markets for natural gas. Its activities include buying and selling natural gas and arranging transportation services to end users, pipelines, municipals and local distribution companies. In addition, WBI Energy Services, Inc. operates two retail propane operations in north-central and southeastern North Dakota. In 1998 the Company acquired a natural gas marketing business in Kentucky which transacts the majority of its business on the Texas Gas interstate pipeline system and serves customers in the Southern and Central regions of the United States. The Texas Gas interstate pipeline system originates in the Louisiana Gulf Coast area and in East Texas. At December 31, 1998, the net natural gas transmission plant investment, inclusive of transmission, storage, gathering, production, marketing and propane facilities, was approximately $177.0 million. Under the Natural Gas Act, as amended, Williston Basin is subject to the jurisdiction of the FERC regarding certificate, rate and accounting matters. System Demand and Competition -- The natural gas transmission industry, although regulated, is very competitive. Beginning in the mid-1980s customers began switching their natural gas service from a bundled merchant service to transportation, and with the implementation of Order 636 which unbundled pipelines' services, this transition was accelerated. This change reflects most customers' willingness to purchase their natural gas supply from producers, processors or marketers rather than pipelines. Williston Basin competes with several pipelines for its customers' transportation business and at times will have to discount rates in an effort to retain market share. However, the strategic location of Williston Basin's system near five natural gas producing basins and the availability of underground storage and gathering services provided by Williston Basin along with interconnections with other pipelines serve to enhance Williston Basin's competitive position. Although a significant portion of Williston Basin's firm customers, including Montana-Dakota, have relatively secure residential and commercial end-users, virtually all have some price- sensitive end-users that could switch to alternate fuels. Williston Basin transports essentially all of Montana-Dakota's natural gas under firm transportation agreements, which in 1998, represented 90 percent of Williston Basin's currently subscribed firm transportation capacity. In November 1996, Montana-Dakota executed a new firm transportation agreement with Williston Basin for a term of five years which began in July 1997. In addition, in July 1995, Montana-Dakota entered a twenty-year contract with Williston Basin to provide firm storage services to facilitate meeting Montana-Dakota's winter peak requirements. For additional information regarding Williston Basin's transportation for 1996 through 1998, see Item 7 -- "Management's Discussion and Analysis of Financial Condition and Results of Operations." System Supply -- Williston Basin's underground storage facilities have a certificated storage capacity of approximately 353,300 million cubic feet (MMcf), including 28,900 MMcf and 46,300 MMcf of recoverable and nonrecoverable native gas, respectively. Williston Basin's storage facilities enable its customers to purchase natural gas at more uniform daily volumes throughout the year and, thus, facilitate meeting winter peak requirements. Natural gas supplies from traditional regional sources have declined during the past several years and such declines are anticipated to continue. As a result, Williston Basin anticipates that a potentially significant amount of the future supply needed to meet its customers' demands will come from non-traditional, off- system sources. Williston Basin expects to facilitate the movement of these supplies by making available its transportation and storage services. Opportunities may exist to increase transportation and storage services through system expansion or other pipeline interconnections or enhancements which could provide substantial future benefits to Williston Basin. Natural Gas Production -- Williston Basin owns in fee or holds natural gas leases and operating rights primarily applicable to the shallow rights (above 2000 feet) in the Cedar Creek Anticline in southeastern Montana and to all rights in the Bowdoin area located in north-central Montana. Information on Williston Basin's natural gas production, average sales prices and production costs per Mcf related to its natural gas interests for 1998, 1997 and 1996 is as follows: 1998 1997 1996 Production (MMcf) 7,684 7,215 6,324 Average sales price $1.37 $1.30 $1.11 Production costs, including taxes $.38 $.46 $.43 Williston Basin's gross and net productive well counts and gross and net developed and undeveloped acreage for its natural gas interests at December 31, 1998, are as follows: Gross Net Productive Wells 576 528 Developed Acreage (000's) 234 214 Undeveloped Acreage (000's) 47 41 The following table shows the results of natural gas development wells drilled and tested during 1998, 1997 and 1996: 1998 1997 1996 Productive 50 20 32 Dry Holes --- --- --- Total 50 20 32 At December 31, 1998, there was one well in the process of drilling. Williston Basin's recoverable proved developed and undeveloped natural gas reserves approximated 140.2 Bcf at December 31, 1998. These amounts are supported by a report dated January 15, 1999, prepared by Ralph E. Davis Associates, Inc., an independent firm of petroleum and natural gas engineers. Beginning in 1994, Williston Basin engaged in a long-term developmental drilling program to enhance the performance of its investment in natural gas reserves. As a result of this effort, 1998 production levels are up 91 percent since 1993. The production increases from these reserves are expected to provide additional natural gas supplies for WBI Energy Services, Inc. to enable it to enhance its marketing efforts. For additional information related to Williston Basin's natural gas interests, see Note 18 of Notes to Consolidated Financial Statements. Pending Litigation -- In November 1993, the estate of W.A. Moncrief (Moncrief), a producer from whom Williston Basin purchased a portion of its natural gas supply, filed suit in Federal District Court for the District of Wyoming (Federal District Court) against Williston Basin and the Company disputing certain price and volume issues under the contract. Through the course of this action Moncrief submitted damage calculations which totaled approximately $19 million or, under its alternative pricing theory, approximately $39 million. In June 1997, the Federal District Court issued its order awarding Moncrief damages of approximately $15.6 million. In July 1997, the Federal District Court issued an order limiting Moncrief's reimbursable costs to post-judgment interest, instead of both pre- and post-judgment interest as Moncrief had sought. In August 1997, Moncrief filed a notice of appeal with the United States Court of Appeals for the Tenth Circuit (U.S. Court of Appeals) related to the Federal District Court's orders. In September 1997, Williston Basin and the Company filed a notice of cross-appeal. Oral argument before the U.S. Court of Appeals was held September 23, 1998. Williston Basin and the Company are awaiting a decision from the U.S. Court of Appeals. Williston Basin believes that it is entitled to recover from customers virtually all of the costs which might ultimately be incurred as a result of this litigation as gas supply realignment transition costs pursuant to the provisions of the FERC's Order 636. However, the amount of costs that can ultimately be recovered is subject to approval by the FERC and market conditions. In December 1993, Apache Corporation (Apache) and Snyder Oil Corporation (Snyder) filed suit in North Dakota Northwest Judicial District Court (North Dakota District Court) against Williston Basin and the Company. Apache and Snyder are oil and natural gas producers which had processing agreements with Koch Hydrocarbon Company (Koch). Williston Basin and the Company had a natural gas purchase contract with Koch. Apache and Snyder have alleged they are entitled to damages for the breach of Williston Basin's and the Company's contract with Koch. Williston Basin and the Company believe that if Apache and Snyder have any legal claims, such claims are with Koch, not with Williston Basin or the Company as Williston Basin, the Company and Koch have settled their disputes. Apache and Snyder have submitted damage estimates under differing theories aggregating up to $4.8 million without interest. A motion to intervene in the case by several other producers, all of which had contracts with Koch but not with Williston Basin, was denied in December 1996. The trial before the North Dakota District Court was completed in November 1997. On November 25, 1998, the North Dakota District Court entered an order directing the entry of judgment in favor of Williston Basin and the Company. On December 15, 1998, Apache and Snyder filed a motion for relief asking the North Dakota District Court to reconsider its November 25, 1998 order. On February 4, 1999, the North Dakota District Court denied the motion for relief filed by Apache and Snyder. In a related matter, in March 1997, a suit was filed by nine other producers, several of which had unsuccessfully tried to intervene in the Apache and Snyder litigation, against Koch, Williston Basin and the Company. The parties to this suit are making claims similar to those in the Apache and Snyder litigation, although no specific damages have been stated. In Williston Basin's opinion, the claims of Apache and Synder are without merit and overstated and the claims of the nine other producers are without merit. If any amounts are ultimately found to be due, Williston Basin plans to file with the FERC for recovery from customers. However, the amount of costs that can ultimately be recovered is subject to approval by the FERC and market conditions. Regulatory Matters and Revenues Subject to Refund -- Williston Basin had pending with the FERC a general natural gas rate change application implemented in 1992. In October 1997, Williston Basin appealed to the United States Court of Appeals for the D.C. Circuit (D.C. Circuit Court) certain issues decided by the FERC in prior orders concerning the 1992 proceeding. On January 22, 1999, the D.C. Circuit Court issued its opinion remanding the issues of return on equity, ad valorem taxes and throughput to the FERC for further explanation and justification. Williston Basin is awaiting a decision from the FERC and believes that if the FERC decides to change its prior order in a manner consistent with the D.C. Circuit Court's suggestions, the results for the Company are expected to be positive since Williston Basin should be entitled to seek reimbursement from ratepayers for a portion of the refunds made in 1997 that were related to these issues. In June 1995, Williston Basin filed a general rate increase application with the FERC. As a result of FERC orders issued after Williston Basin's application was filed, Williston Basin filed revised base rates in December 1995 with the FERC resulting in an increase of $8.9 million or 19.1 percent over the then current effective rates. Williston Basin began collecting such increase effective January 1, 1996, subject to refund. On July 29, 1998, the FERC issued an order which addressed various issues including storage cost allocations, return on equity and throughput. On August 28, 1998, Williston Basin requested rehearing of such order. Reserves have been provided for a portion of the revenues that have been collected subject to refund with respect to pending regulatory proceedings and to reflect future resolution of certain issues with the FERC. Williston Basin believes that such reserves are adequate based on its assessment of the ultimate outcome of the various proceedings. Natural Gas Repurchase Commitment -- The Company has offered for sale since 1984 the inventoried natural gas owned by Frontier, a special purpose, nonaffiliated corporation. Through an agreement, Williston Basin is obligated to repurchase all of the natural gas at Frontier's original cost and reimburse Frontier for all of its financing and general administrative costs. Frontier has financed the purchase of the natural gas under a term loan agreement with several banks. At December 31, 1998 and 1997, borrowings totaled $14.8 million and $32.0 million, respectively, at a weighted average interest rate of 6.19 percent and 6.63 percent, respectively. At December 31, 1998 and 1997, the natural gas repurchase commitment of $14.3 million and $30.4 million, respectively, is reflected on the Company's Consolidated Balance Sheets under "Other liabilities" and $551,000 and $1.6 million, respectively, is reflected under "Other accrued liabilities." The financing costs associated with this repurchase commitment, consisting principally of interest and related financing fees, approximated $5.7 million in 1996. The costs incurred in 1998 and 1997 were not material and are included in "Other income -- net" on the Consolidated Statements of Income. The term loan agreement will terminate on October 2, 1999, subject to an option to renew this agreement upon the lenders' consent for up to five years, unless terminated earlier by the occurrence of certain events. The FERC has issued orders that have held that storage costs should be allocated to this gas, prospectively beginning May 1992, as opposed to being included in rates applicable to Williston Basin's customers. These storage costs, as initially allocated to the Frontier gas, approximated $2.1 million annually, for which Williston Basin has provided reserves. Williston Basin appealed these orders to the D.C. Circuit Court which in December 1996 issued its order ruling that the FERC's actions in allocating storage capacity costs to the Frontier gas were appropriate. On August 28, 1998, Williston Basin requested rehearing of the July 29, 1998 FERC order which addressed various issues, including a requirement that storage deliverability costs be allocated to the Frontier gas. Williston Basin sells and transports natural gas held under the repurchase commitment. In the third quarter of 1996, Williston Basin, based on a number of factors including differences in regional natural gas prices and natural gas sales occurring at that time, wrote down 43.0 MMdk of this gas to its then current value. The value of this gas was determined using the sum of discounted cash flows of expected future sales occurring at then current regional natural gas prices as adjusted for anticipated future price increases. This resulted in a write-down aggregating $18.6 million ($11.4 million after tax). In addition, Williston Basin wrote off certain other costs related to this natural gas of approximately $2.5 million ($1.5 million after tax). The amounts related to this write-down are included in "Costs on natural gas repurchase commitment" in the Consolidated Statements of Income. At December 31, 1998 and 1997, natural gas held under the repurchase commitment of $6.9 million and $14.6 million, respectively, is included in the Company's Consolidated Balance Sheets under "Deferred charges and other assets." The amount of this natural gas in storage as of December 31, 1998 was 7.0 MMdk. Environmental Matters -- Williston Basin's interstate natural gas transmission operations are generally subject to federal, state and local environmental, facility-siting, zoning and planning laws and regulations. Except as may be found with regard to the issues described below, Williston Basin believes it is in substantial compliance with those regulations. See "Environmental Matters" under "Montana-Dakota -- Retail Natural Gas and Propane Distribution" for a discussion of PCBs contained in Montana-Dakota's and Williston Basin's natural gas systems. CONSTRUCTION MATERIALS AND MINING OPERATIONS AND PROPERTY (KNIFE RIVER) Construction Materials Operations: General -- Knife River, through KRC Holdings, operates construction materials and mining businesses in Alaska, California, Oregon and Hawaii. These operations mine, process and sell construction aggregates (crushed rock, sand and gravel) and supply ready-mixed concrete for use in most types of construction, including homes, schools, shopping centers, office buildings and industrial parks as well as roads, freeways and bridges. In addition, the Alaska, California and Oregon operations produce and sell asphalt for various commercial and roadway applications. Although not common to all locations, other products include the sale of cement, various finished concrete products and other building materials and related construction services. On March 5, 1998, the Company acquired Morse Bros., Inc. (MBI) and S2 - F Corp., privately held construction materials companies located in Oregon's Willamette Valley. The purchase consideration for such companies consisted of $98.2 million of the Company's common stock and cash. MBI sells aggregate, ready-mixed concrete, asphaltic concrete, prestress concrete and construction services in the Willamette Valley from Portland to Eugene. S2 - F Corp. sells aggregate and construction services. In addition, in 1998 the Company also acquired several smaller construction materials and mining businesses in Oregon. Knife River's construction materials business has continued to grow since its first acquisition in 1992 and now comprises the majority of Knife River's business. Knife River continues to investigate the acquisition of other surface mining properties, particularly those relating to sand and gravel aggregates and related products such as ready-mixed concrete, asphalt and various finished aggregate products. Knife River's construction materials business should benefit from the Transportation Equity Act for the 21st century (TEA-21), which was signed into law in June 1998. TEA-21 represents a 44 percent average increase in federal highway construction funding for the six fiscal years 1998 to 2003. The construction materials business had approximately $100 million in backlog in mid-February 1999 and anticipates that a significant amount of the backlog will be completed during the year ending December 31, 1999. For information regarding sales volumes and revenues for the construction materials operations for 1996 through 1998, see Item 7 -- "Management's Discussion and Analysis of Financial Condition and Results of Operations." Competition -- Knife River's construction materials products are marketed under highly competitive conditions. Since there are generally no measurable product differences in the market areas in which Knife River conducts its construction materials businesses, price is the principal competitive force to which these products are subject, with service, delivery time and proximity to the customer also being significant factors. The number and size of competitors varies in each of Knife River's principal market areas and product lines. The demand for construction materials products is significantly influenced by the cyclical nature of the construction industry in general. In addition, construction materials activity in certain locations may be seasonal in nature due to the effects of weather. The key economic factors affecting product demand are changes in the level of local, state and federal governmental spending, general economic conditions within the market area which influence both the commercial and private sectors, and prevailing interest rates. Knife River is not dependent on any single customer or group of customers for sales of its construction materials products, the loss of which would have a materially adverse affect on its construction materials businesses. During 1998, 1997 and 1996, no single customer accounted for more than 10 percent of annual construction materials revenues. Coal Operations: General -- Knife River is engaged in lignite coal mining operations. Knife River's surface mining operations are located at Beulah, North Dakota and Savage, Montana. The average annual production from the Beulah and Savage mines approximates 2.7 million and 300,000 tons, respectively. Reserve estimates related to these mine locations are discussed herein. During the last five years, Knife River mined and sold the following amounts of lignite coal: Years Ended December 31, 1998 1997 1996 1995 1994 (In thousands) Tons sold: Montana-Dakota generating stations 702 530 528 453 691 Jointly-owned generating stations -- Montana-Dakota's share 583 434 565 883 1,049 Others 1,749 1,303 1,695 2,767 3,358 Industrial and other sales 79 108 111 115 108 Total 3,113 2,375 2,899 4,218 5,206 Revenues $35,949 $27,906 $32,696 $39,956 $45,634 The decrease in total tons sold in 1997 compared to 1996, reflected in the above table, is the result of lower tons sold to the Coyote Station due to a ten-week maintenance outage. See Item 7 -- "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information regarding the sales volumes and revenues for the coal operations for 1996 through 1998. Knife River's lignite coal operations are subjected to competition from coal and other alternate fuel sources. In recent years, in response to competitive pressures from other mines, Knife River has limited its coal price increases to less than those allowed under its contracts. Although Knife River has contracts in place specifying the selling price of coal, these price concessions are being made in an effort to remain competitive and maximize sales. Effective January 1, 1998, Montana-Dakota and Knife River agreed to a new five year coal contract for Montana-Dakota's Lewis & Clark generating station. In 1998, Knife River supplied approximately 280,000 tons of coal to this station. In November 1995, a suit was filed in District Court, County of Burleigh, State of North Dakota (State District Court) by Minnkota Power Cooperative, Inc., Otter Tail Power Company, Northwestern Public Service Company and Northern Municipal Power Agency (Co- owners), the owners of an aggregate 75 percent interest in the Coyote electric generating station (Coyote Station), against the Company (an owner of a 25 percent interest in the Coyote Station) and Knife River. In its complaint, the Co-owners have alleged a breach of contract against Knife River with respect to the long-term coal supply agreement (Agreement) between the owners of the Coyote Station and Knife River. The Co-owners have requested a determination by the State District Court of the pricing mechanism to be applied to the Agreement and have further requested damages during the term of such alleged breach on the difference between the prices charged by Knife River and the prices that may ultimately be determined by the State District Court. The Co-owners also alleged a breach of fiduciary duties by the Company as operating agent of the Coyote Station, asserting essentially that the Company was unable to cause Knife River to reduce its coal price sufficiently under the Agreement, and the Co-owners are seeking damages in an unspecified amount. In May 1996, the State District Court stayed the suit filed by the Co-owners pending arbitration, as provided for in the Agreement. In September 1996, the Co-owners notified the Company and Knife River of their demand for arbitration of the pricing dispute that had arisen under the Agreement. The demand for arbitration, filed with the American Arbitration Association (AAA), did not make any direct claim against the Company in its capacity as operator of the Coyote Station. The Co-owners requested that the arbitrators make a determination that the pricing dispute is not a proper subject for arbitration. By an April 1997 order, the arbitration panel concluded that the claims raised by the Co-owners are arbitrable. The Co-owners have requested the arbitrators to make a determination that the prices charged by Knife River were excessive and that the Co-owners should be awarded damages, based upon the difference between the prices that Knife River charged and a "fair and equitable" price. Upon application by the Company and Knife River, the AAA administratively determined that the Company was not a proper party defendant to the arbitration, and the arbitration is proceeding against Knife River. On October 9, 1998, a hearing before the arbitration panel was completed. At the hearing the Co- owners requested damages of approximately $24 million, including interest, plus a reduction in the future price of coal under the Agreement. The Company is currently awaiting a decision from the arbitration panel. Although unable to predict the outcome of the arbitration, Knife River and the Company believe that the Co-owners' claims are without merit and intend to vigorously defend the prices charged pursuant to the Agreement. Consolidated Construction Materials and Mining Operations: Environmental Matters -- Knife River's construction materials and mining operations are subject to regulation customary for surface mining operations, including federal, state and local environmental and reclamation regulations. Knife River believes it is in substantial compliance with those regulations. Reserve Information -- As of December 31, 1998, the combined construction materials operations had under ownership or lease approximately 655 million tons of recoverable aggregate reserves. As of December 31, 1998, Knife River had under ownership or lease, reserves of approximately 190 million tons of recoverable lignite coal, 94 million tons of which are at present mining locations. These lignite coal reserve estimates were prepared by Weir International Mining Consultants, independent mining engineers and geologists, in a report dated January 1, 1999. Knife River estimates that approximately 61 million tons of its reserves will be needed to supply Montana-Dakota's Coyote, Heskett and Lewis & Clark stations for the expected lives of those stations and to fulfill the existing commitments of Knife River for sales to third parties. OIL AND NATURAL GAS OPERATIONS AND PROPERTY (FIDELITY OIL) General -- Fidelity Oil is involved in the acquisition, exploration, development and production of oil and natural gas properties. Fidelity Oil's operations vary from the acquisition of producing properties with potential development opportunities to exploratory drilling and are located throughout the United States, the Gulf of Mexico and Canada. Fidelity Oil shares revenues and expenses from the development of specified properties in proportion to its interests. Fidelity's oil and natural gas activities have continued to expand since the mid-1980's. Fidelity continues to seek additional reserve and production opportunities through the direct acquisition of producing properties and through exploratory drilling opportunities, as well as routine development of its existing properties. Future growth is dependent upon continuing success in these endeavors. Operating Information -- Information on Fidelity Oil's oil and natural gas production, average sales prices and production costs per net equivalent barrel related to its oil and natural gas interests for 1998, 1997 and 1996, are as follows: 1998 1997 1996 Oil: Production (000's of barrels) 1,912 2,088 2,149 Average sales price $12.71 $17.50 $17.91 Natural Gas: Production (MMcf) 13,025 13,192 14,067 Average sales price $2.07 $2.41 $2.09 Production costs, including taxes, per net equivalent barrel $3.37 $3.65 $3.31 Well and Acreage Information -- Fidelity Oil's gross and net productive well counts and gross and net developed and undeveloped acreage related to its interests at December 31, 1998, are as follows: Gross Net Productive Wells: Oil 2,534 172 Natural Gas 699 117 Total 3,233 289 Developed Acreage (000's) 733 74 Undeveloped Acreage (000's) 1,011 79 Exploratory and Development Wells -- The following table shows the results of oil and natural gas wells drilled and tested during 1998, 1997 and 1996: Net Exploratory Net Development Productive Dry Holes Total Productive Dry Holes Total Total 1998 2 2 4 4 --- 4 8 1997 1 2 3 3 1 4 7 1996 1 2 3 4 --- 4 7 At December 31, 1998, there were three gross wells in the process of drilling, one of which was an exploratory well and two of which were development wells. Reserve Information -- Fidelity Oil's recoverable proved developed and undeveloped oil and natural gas reserves approximated 11.5 million barrels and 103.4 Bcf, respectively, at December 31, 1998. For additional information related to Fidelity Oil's oil and natural gas interests, see Notes 1 and 18 of Notes to Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS Williston Basin -- Williston Basin has been named as a defendant in a legal action primarily related to certain natural gas price and volume issues. Such suit was filed by W.A. Moncrief, a producer from whom Williston Basin purchased a portion of its natural gas supply. In addition, Williston Basin has been named as a defendant in a legal action related to a natural gas purchase contract. Such suit was filed by Apache Corporation and Snyder Oil Corporation. On November 25, 1998, the North Dakota District Court entered an order directing the entry of judgment in favor of Williston Basin and the Company. On December 15, 1998, Apache and Snyder filed a motion for relief asking the North Dakota District Court to reconsider its November 25, 1998 order. On February 4, 1999, the North Dakota District Court denied the motion for relief filed by Apache and Snyder. In a related matter, Williston Basin has been named in a suit filed by nine other producers. The above legal actions are described under Items 1 and 2 -- "Business and Properties -- Natural Gas Transmission Operations and Property (WBI Holdings)." The Company's assessment of the proceedings are included in the descriptions of the litigation. Knife River -- The Company and Knife River have been named as defendants in a legal action primarily related to coal pricing issues at the Coyote Station. On October 9, 1998, a hearing before the arbitration panel was completed. The Company is currently awaiting a decision from the arbitration panel. Such suit was filed by the Co-owners of the Coyote Station. The above legal action is described under Items 1 and 2 -- "Business and Properties -- Construction Materials and Mining Operations and Property (Knife River)." The Company's assessment of the proceeding is included in the respective description of the litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1998. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed on the New York Stock Exchange and the Pacific Stock Exchange under the symbol "MDU". The price range of the Company's common stock as reported by The Wall Street Journal composite tape during 1998 and 1997 and dividends declared thereon were as follows: Common Common Common Stock Stock Price Stock Price Dividends (High)* (Low)* Per Share* 1998 First Quarter $25.25 $18.83 $.1917 Second Quarter 25.13 21.13 .1917 Third Quarter 28.88 22.06 .2000 Fourth Quarter 27.63 24.88 .2000 $.7834 1997 First Quarter $15.33 $14.00 $.1850 Second Quarter 16.83 14.25 .1850 Third Quarter 18.46 14.83 .1917 Fourth Quarter 22.33 17.75 .1917 $.7534 * Reflects the Company's three-for-two common stock split effected in July 1998. As of December 31, 1998, the Company's common stock was held by approximately 13,900 stockholders of record. ITEM 6. SELECTED FINANCIAL DATA Reference is made to Selected Financial Data on pages 52 and 53 of the Company's Annual Report which is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For purposes of segment financial reporting and discussion of results of operations, electric includes the electric operations of Montana-Dakota, as well as the operations of Utility Services. Natural gas distribution includes Montana-Dakota's natural gas distribution operations. Natural gas transmission includes WBI Holdings' storage, transportation, gathering, natural gas production and energy marketing operations. Construction materials and mining includes the results of Knife River's operations, while oil and natural gas production includes the operations of Fidelity Oil. Overview The following table (dollars in millions, where applicable) summarizes the contribution to consolidated earnings by each of the Company's businesses. Years ended December 31, 1998 1997 1996 Electric $ 17.2 $13.4 $11.4 Natural gas distribution 3.5 4.5 4.9 Natural gas transmission 20.8 11.3 2.5 Construction materials and mining 24.5 10.1 11.5 Oil and natural gas production (32.7) 14.5 14.4 Earnings on common stock $ 33.3 $53.8 $44.7 Earnings per common share - basic* $ .66 $1.24 $1.05 Earnings per common share - diluted* $ .66 $1.24 $1.04 Return on average common equity 6.5% 14.6% 13.0% * Reflects the Company's three-for-two common stock split effected in July 1998. 1998 compared to 1997 Consolidated earnings for 1998 decreased $20.5 million from the comparable period a year ago due to lower earnings at the oil and natural gas production business, largely resulting from $39.9 million in noncash after-tax write-downs of oil and natural gas properties. Decreased earnings at the natural gas distribution business also added to the earnings decline. Higher earnings at the construction materials and mining, natural gas transmission and electric businesses partially offset the earnings decrease. 1997 compared to 1996 Consolidated earnings for 1997 increased $9.1 million when compared to 1996. This increase includes the effect of the one-time adjustment in the third quarter of 1996 of $3.7 million or 9 cents per common share, reflecting the write-down to market value of natural gas being held under a repurchase commitment and certain reserve adjustments. The improvement is attributable to increased earnings from the natural gas transmission, electric, and oil and natural gas production businesses, partially offset by a decrease in construction materials and mining, and natural gas distribution earnings. ________________________________ Reference should be made to Items 1 and 2 -- "Business and Properties" and Notes to Consolidated Financial Statements for information pertinent to various commitments and contingencies. Financial and operating data The following tables (dollars in millions, where applicable) are key financial and operating statistics for each of the Company's business units. Certain reclassifications have been made in the following statistics for prior years to conform to the current presentation. Such reclassifications had no effect on net income or common stockholders' equity as previously reported. Electric Operations Years ended December 31, 1998 1997 1996 Operating revenues: Retail sales $ 130.9 $ 130.3 $ 128.8 Sales for resale and other 16.4 11.3 10.0 Utility services 64.2 22.8 --- 211.5 164.4 138.8 Operating expenses: Fuel and purchased power 49.8 45.6 44.0 Operation and maintenance 94.5 60.1 41.4 Depreciation, depletion and amortization 19.8 17.8 17.1 Taxes, other than income 9.3 7.8 6.8 173.4 131.3 109.3 Operating income $ 38.1 $ 33.1 $ 29.5 Retail sales (million kWh) 2,053.9 2,041.2 2,067.9 Sales for resale (million kWh) 586.5 361.9 374.6 Average cost of fuel and purchased power per kWh $ .017 $ .018 $ .017 Natural Gas Distribution Operations Years ended December 31, 1998 1997 1996 Operating revenues: Sales $ 150.6 $ 153.6 $ 151.5 Transportation and other 3.5 3.4 3.5 154.1 157.0 155.0 Operating expenses: Purchased natural gas sold 106.5 107.2 102.7 Operation and maintenance 28.5 28.5 30.0 Depreciation, depletion and amortization 7.1 7.0 6.9 Taxes, other than income 4.0 3.9 3.9 146.1 146.6 143.5 Operating income $ 8.0 $ 10.4 $ 11.5 Volumes (MMdk): Sales 32.0 34.3 38.3 Transportation 10.3 10.1 9.4 Total throughput 42.3 44.4 47.7 Degree days (% of normal) 93.7% 99.3% 116.2% Average cost of natural gas, including transportation, per dk $ 3.33 $ 3.12 $ 2.67 Natural Gas Transmission Operations Years ended December 31, 1998 1997 1996 Operating revenues: Transportation and storage $ 60.8 $ 60.1* $ 71.6* Energy marketing and natural gas production 119.9 33.3 7.0 180.7 93.4 78.6 Operating expenses: Purchased natural gas sold 99.8 17.9 --- Operation and maintenance 29.0 35.5* 37.2* Depreciation, depletion and amortization 8.5 5.5 6.7 Taxes, other than income 5.3 5.3 4.5 142.6 64.2 48.4 Operating income $ 38.1 $ 29.2 $ 30.2 Transportation volumes (MMdk): Montana-Dakota 32.2 35.5 43.4 Other 56.8 50.0 38.8 89.0 85.5 82.2 Produced (Mdk) 7,412 6,949 6,073 * Includes $5.5 million and $10.6 million for 1997 and 1996 respectively, of amortization and related recovery of deferred natural gas contract buy- out/buy-down and gas supply realignment costs. Construction Materials and Mining Operations** Years ended December 31, 1998 1997 1996 Operating revenues: Construction materials $ 310.5 $ 146.2 $ 99.5 Coal 35.9 27.9 32.7 346.4 174.1 132.2 Operating expenses: Operation and maintenance 280.7 145.6 105.8 Depreciation, depletion and amortization 20.6 11.0 7.0 Taxes, other than income 3.5 2.9 3.3 304.8 159.5 116.1 Operating income $ 41.6 $ 14.6 $ 16.1 Sales (000's): Aggregates (tons) 11,054 5,113 3,374 Asphalt (tons) 1,790 758 694 Ready-mixed concrete (cubic yards) 1,021 516 340 Coal (tons) 3,113 2,375 2,899 ** Prior to August 1, 1997, financial results did not include consolidated information related to Knife River's ownership interest in Hawaiian Cement, 50 percent of which was acquired in September 1995, and was accounted for under the equity method. On July 31, 1997, Knife River acquired the 50 percent interest in Hawaiian Cement that it did not previously own, and subsequent to that date financial results are consolidated into Knife River's financial statements. Oil and Natural Gas Production Operations Years ended December 31, 1998 1997 1996 Operating revenues: Oil $ 24.3 $ 36.6 $ 39.0 Natural gas 27.0 31.8 29.3 51.3 68.4 68.3 Operating expenses: Operation and maintenance 15.6 15.8 15.6 Depreciation, depletion and amortization 21.8 24.4 25.0 Taxes, other than income 2.8 3.9 3.5 Write-downs of oil and natural gas properties 66.0 --- --- 106.2 44.1 44.1 Operating income (loss) $ (54.9) $ 24.3 $ 24.2 Production: Oil (000's of barrels) 1,912 2,088 2,149 Natural gas (MMcf) 13,025 13,192 14,067 Average sales price: Oil (per barrel) $ 12.71 $ 17.50 $ 17.91 Natural gas (per Mcf) $ 2.07 $ 2.41 $ 2.09 Amounts presented in the preceding tables for natural gas operating revenues, purchased natural gas sold and operation and maintenance expenses will not agree with the Consolidated Statements of Income due to the elimination of intercompany transactions between Montana-Dakota's natural gas distribution business and WBI Holdings' natural gas transmission business. The amounts relating to the elimination of intercompany transactions for natural gas operating revenues and purchased natural gas sold were $47.4 million for 1998. The amounts relating to the elimination of intercompany transactions for natural gas operating revenues, purchased natural gas sold and operation and maintenance expenses were $49.6 million, $48.0 million and $1.6 million, respectively, for 1997, and $58.2 million, $53.8 million and $4.4 million, respectively, for 1996. 1998 compared to 1997 Electric Operations Electric earnings increased due to earnings at the utility services companies acquired since mid-1997 and increased electric utility earnings. Sales for resale revenue improved due to 62 percent higher volumes and 19 percent higher margins, both due to favorable market conditions. Also contributing to the earnings increase was the absence in 1998 of $1.9 million in maintenance expenses incurred in 1997 associated with a ten-week maintenance outage at the Coyote Station. Slightly higher retail sales and decreased net interest expense also contributed to the earnings improvement. Increased fuel and purchased power costs, largely higher purchased power demand charges resulting from the pass- through of periodic maintenance costs, and increased operations expense due to higher payroll and benefit-related costs, partially offset the electric utility earnings improvement. Depreciation expense increased due to higher average depreciable plant, also partially offsetting the increase in earnings. Utility services contributed $3.3 million to earnings in 1998. Natural Gas Distribution Operations Earnings decreased at the natural gas distribution business due to reduced weather-related sales, the result of 6 percent warmer weather. Increased average realized rates and decreased net interest costs somewhat offset the earnings decline. Natural Gas Transmission Operations Earnings at the natural gas transmission business increased due to increases in transportation revenues resulting from a $5.0 million ($3.1 million after tax) reversal of reserves for certain contingencies in the first quarter of 1998 relating to a FERC order concerning a compliance filing. Higher volumes transported at higher average transportation rates also contributed to the revenue increase. Increased average prices and production from company- owned natural gas reserves added to the earnings improvement. Gains realized on the sale of natural gas held under the repurchase commitment and lower net interest costs also added to the increase in earnings. The increase in energy marketing revenue and the related increase in purchased gas sold resulted from the acquisition of a natural gas marketing business in July 1998. Construction Materials and Mining Operations Construction materials and mining earnings increased primarily due to businesses acquired since mid-1997 and increased earnings at existing construction materials operations. Increased aggregate and asphalt sales volumes due to increased construction activity, and lower cement and asphalt costs contributed to the increase at the existing operations. Earnings at the coal operations increased largely due to increased revenues resulting from higher sales, primarily due to a 1997 ten-week maintenance outage at the Coyote Station. Higher interest expense resulting mainly from increased acquisition-related long-term debt partially offset the increase in earnings. Oil and Natural Gas Production Operations Earnings for the oil and natural gas production business decreased largely as a result of $66.0 million ($39.9 million after tax) in noncash write-downs of oil and natural gas properties, as discussed in Note 1 of Notes to Consolidated Financial Statements. Lower oil and natural gas revenues also added to the decrease in earnings. The decrease in revenues was due to realized oil and natural gas prices which were 27 percent and 14 percent lower than last year, respectively, and slightly lower production. Decreased depreciation, depletion and amortization due to lower rates resulting from the aforementioned write-downs and lower production partially offset the decrease in earnings. Decreased operation and maintenance expenses, the result of lower production and decreased well maintenance, and decreased production taxes resulting from lower commodity prices, also partially offset the earnings decline. 1997 compared to 1996 Electric Operations Higher wholesale electric sales margins, increased average realized retail rates and revenues from the July 1997 acquisition of two utility services companies improved operating revenues. However, decreased retail sales due to warmer fourth quarter weather somewhat offset the improvement. Operating expenses increased due to the above-mentioned acquisitions, costs associated with a planned, but extended, maintenance outage at the Coyote Station and repairs from an April blizzard. Lower payroll and benefit-related expenses somewhat offset the operating expense increase. Higher revenues more than offset the operating expense increase leading to improved operating income. Earnings increased due to the operating income increase partially offset by higher interest expense due to higher average short-term debt balances. Utility services contributed $1.0 million to 1997 earnings. Natural Gas Distribution Operations Revenues from the positive effects of a rate change implemented in Montana in May 1996 and reduced operations expense from lower payroll and benefit-related costs did not fully offset reduced natural gas sales caused by 15 percent warmer weather than 1996. The pass-through of higher average gas costs more than offset the revenue decline resulting from the reduced sales. Increased transportation volumes, primarily to large industrial customers, were offset by lower average transportation rates. These factors reduced operating income and earnings. Lower net interest expense and increased returns on gas storage and prepaid demand balances partially offset the earnings decline. Natural Gas Transmission Operations Increased transportation volumes, higher production from company-owned wells, and increased natural gas prices and sales volumes from the energy marketing operations, improved revenues. The reversal of certain reserves for regulatory contingencies in 1996 of $2.6 million after tax and lower average transportation rates partially offset the revenue improvement. Higher royalty expenses and increased taxes other than income added to the operating income decrease. Earnings improved $8.8 million compared to 1996, due to the absence of the 1996 $12.9 million after-tax write-down to the then current market price of the natural gas available under the repurchase commitment and lower costs in 1997 associated with this natural gas. The 1996 reversal of certain income tax reserves aggregating $4.8 million partially offset the 1997 earnings improvement. Construction Materials and Mining Operations Construction materials revenues improved primarily due to the acquisition of several construction materials businesses in mid-1996 and in 1997, combined with improved aggregate and ready-mixed concrete sales volumes, increased construction revenues and higher asphalt prices. However, lower coal sales due to planned but extended maintenance at the Coyote Station partially offset the revenue improvement. Operating costs associated with the acquisitions, higher construction materials volumes and higher stripping costs at the coal operations reduced operating income. These factors, combined with higher interest expense resulting mainly from increased acquisition-related long-term debt, decreased earnings from this business unit. Oil and Natural Gas Production Operations Slightly higher operating revenues due to higher natural gas prices, largely offset by lower natural gas production and slightly lower oil production and decreased oil prices, added to the operating income improvement. Total operating expenses remained unchanged as lower volume-related expenses were largely offset by increased taxes other than income. Overall, earnings increased from slightly higher operating income and decreased net interest expense from lower average long-term debt balances. Increased income taxes from the reversal of certain tax reserves aggregating $1.8 million in 1996, somewhat offset by higher tax credits in 1997, partially offset the earnings improvement. Safe Harbor for Forward-looking Statements The Company is including the following cautionary statement in this Form 10-K to make applicable and to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of, the Company. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions (many of which are based, in turn, upon further assumptions) and other statements which are other than statements of historical facts. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of the Company, are also expressly qualified by these cautionary statements. Forward-looking statements involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation management's examination of historical operating trends, data contained in the Company's records and other data available from third parties, but there can be no assurance that the Company's expectations, beliefs or projections will be achieved or accomplished. Furthermore, any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances that occur after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all of such factors, nor can it assess the effect of each such factor on the Company's business or the extent to which any such factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. Regulated Operations -- In addition to other factors and matters discussed elsewhere herein, some important factors that could cause actual results or outcomes for the Company and its regulated operations to differ materially from those discussed in forward-looking statements include prevailing governmental policies and regulatory actions with respect to allowed rates of return, financings, or industry and rate structures, acquisition and disposal of assets or facilities, operation and construction of plant facilities, recovery of purchased power and purchased gas costs, present or prospective generation, wholesale and retail competition (including but not limited to electric retail wheeling and transmission costs), availability of economic supplies of natural gas, and present or prospective natural gas distribution or transmission competition (including but not limited to prices of alternate fuels and system deliverability costs). Nonregulated Operations -- Certain important factors which could cause actual results or outcomes for the Company and all or certain of its nonregulated operations to differ materially from those discussed in forward- looking statements include the level of governmental expenditures on public projects and project schedules, changes in anticipated tourism levels, competition from other suppliers, oil and natural gas commodity prices, drilling successes in oil and natural gas operations, ability to acquire oil and natural gas properties, and the availability of economic expansion or development opportunities. Factors Common to Regulated and Nonregulated Operations -- The business and profitability of the Company are also influenced by economic and geographic factors, including political and economic risks, changes in and compliance with environmental and safety laws and policies, weather conditions, population growth rates and demographic patterns, market demand for energy from plants or facilities, changes in tax rates or policies, unanticipated project delays or changes in project costs, unanticipated changes in operating expenses or capital expenditures, labor negotiations or disputes, changes in credit ratings or capital market conditions, inflation rates, inability of the various counterparties to meet their obligations with respect to the Company's financial instruments, changes in accounting principles and/or the application of such principles to the Company, changes in technology and legal proceedings, and the ability of the Company and third parties, including suppliers and vendors, to identify and address year 2000 issues in a timely manner. Prospective Information Montana-Dakota has obtained and holds valid and existing franchises authorizing it to conduct its electric operations in all of the municipalities it serves where such franchises are required. As franchises expire, Montana-Dakota may face increasing competition in its service areas, particularly its service to smaller towns, from rural electric cooperatives. Montana-Dakota intends to protect its service area and seek renewal of all expiring franchises and will continue to take steps to effectively operate in an increasingly competitive environment. Year 2000 Compliance The year 2000 issue is the result of computer programs having been written using two digits rather than four digits to define the applicable year. In 1997, the Company established a task force with coordinators in each of its major operating units to address the year 2000 issue. The scope of the year 2000 readiness effort includes information technology (IT) and non-IT systems, including computer hardware, software, networking, communications, embedded and micro-processor controlled systems, building controls and office equipment. The Company's year 2000 plan is based upon a six-phase approach involving awareness, inventory, assessment, remediation, testing and implementation. State of Readiness -- The Company is conducting a corporate-wide awareness program, compiling an inventory of IT and non-IT systems, and assigning priorities to such systems. As of December 31, 1998, the awareness and inventory phases, including assigning priorities to IT and non- IT systems, have been substantially completed. The assessment phase involves the review of each inventory item for year 2000 compliance and efforts to obtain representations and assurances from third parties, including suppliers, vendors and major customers, that such entities are year 2000 compliant. As of December 31, 1998, based on contacts with and representations obtained from third parties to date, the Company is not aware of any material third party year 2000 problems. The Company will continue to contact third parties seeking written verification of year 2000 readiness. Thus, the Company is presently unable to determine the potential adverse consequences, if any, that could result from each such entities' failure to effectively address the year 2000 issue. As of December 31, 1998, the assessment phase, as it relates to the Company's review of its inventory items, has been substantially completed. The remediation, testing and implementation phases of the Company's year 2000 plan are currently in various stages of completion. The remediation phase includes replacements, modifications and/or upgrades necessary for year 2000 compliance that were identified in the assessment phase. As of December 31, 1998, the remediation phase at the oil and natural gas production business is substantially complete; at the electric, natural gas distribution and natural gas transmission businesses the remediation phase is more than 75 percent complete; and at the construction materials and mining business it is approximately 35 percent complete. The testing phase involves testing systems to confirm year 2000 readiness. As of December 31, 1998, the testing phase at the oil and natural gas production business is substantially complete; at the electric and natural gas distribution businesses the testing phase is over 50 percent complete; at the natural gas transmission business it is over 10 percent complete; and at the construction materials and mining business it is approximately 20 percent complete. The implementation phase is the process of moving a remediated item into production status. As of December 31, 1998, the implementation phase at the oil and natural gas production business is substantially complete; at the electric and natural gas distribution businesses the implementation phase is more than 80 percent complete; at the natural gas transmission business it is more than 65 percent complete; and at the construction materials and mining business it is approximately 35 percent complete. The Company has established a target date of October 1, 1999, to complete the remediation, testing and implementation phases. Costs -- The estimated total incremental cost to the Company of the year 2000 issue is approximately $1 million to $3 million during the 1998 through 2000 time periods. As of December 31, 1998, the Company has incurred incremental costs of less than $300,000. These costs are being funded through cash flows from operations. The Company's current estimate of costs of the year 2000 issue is based on the facts and circumstances existing at this time, which were derived utilizing numerous assumptions of future events. Risks -- The failure to correct a material year 2000 problem, including failures on the part of third parties, could result in a temporary interruption in, or failure of, certain critical business operations, including electric distribution, generation and transmission; natural gas distribution, transmission, storage and gathering; energy marketing; mining and marketing of coal, aggregates and related construction materials; oil and natural gas exploration, production, and development; and utility line construction and repair services. Although the Company believes the project will be completed by October 1, 1999, unforeseen and other factors could cause delays in the project, the results of which could have a material effect on the results of operations and the Company's ability to conduct its business. Contingency Planning -- Due to the general uncertainty inherent in the year 2000 issue, including the uncertainty of the year 2000 readiness of third parties, the Company is developing contingency plans for its mission-critical operations. As of December 31, 1998, the utility division, which includes electric generation and transmission and electric and natural gas distribution, has prepared preliminary contingency plans in accordance with guidelines and schedules set forth by the North American Electric Reliability Council working in conjunction with the Mid-Continent Area Power Pool, the utility's regional reliability council. Such plans are in addition to existing business recovery and emergency plans established to restore electric and natural gas service following an interruption caused by weather or equipment failure. The natural gas transmission business has adopted the guidelines used at the utility and has materially completed plans for its administrative and accounting systems. The contingency plans for its other business operations are in the development stage. The oil and natural gas production and the construction materials and mining businesses are in various stages of their contingency planning efforts. Contingency plans will continue to be developed and finalized and the Company anticipates having all such contingency plans in place by October 1, 1999. New Accounting Standard In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). For further information on SFAS No. 133, see Note 1 of Notes to Consolidated Financial Statements. Liquidity and Capital Commitments The Company's capital expenditures (in millions of dollars) for 1996 through 1998 and as anticipated for 1999 through 2001 are summarized in the following table, which also includes the Company's capital needs for the retirement of maturing long-term debt and preferred stock. Actual Estimated* 1996 1997 1998 Capital Expenditures: 1999 2000 2001 $ 18.7 $ 28.0 $ 31.3 Electric $ 19.0 $ 15.3 $ 21.7 6.3 8.8 8.3 Natural gas distribution 11.1 7.0 8.3 10.9 13.2 23.7 Natural gas transmission 30.2 19.5 14.4 Construction materials 25.0 41.5 172.1 and mining 43.8 31.4 22.3 Oil and natural gas 51.8 30.6 94.5 production 55.5 52.0 102.0 112.7 122.1 329.9 159.6 125.2 168.7 Net proceeds from sale or (11.8) (4.5) (4.3) disposition of property (6.4) (1.5) (1.7) 100.9 117.6 325.6 Net capital expenditures 153.2 123.7 167.0 Retirement of long-term 43.4 48.0 113.7 debt and preferred stock 3.3 12.5 100.4 $144.3 $165.6 $439.3 $156.5 $136.2 $267.4 * The anticipated 1999 through 2001 capital expenditures reflected in the above table do not include potential future acquisitions. The Company continues to seek additional growth opportunities, including investing in the development of related lines of business. To the extent that acquisitions occur, the Company anticipates that such acquisitions would be financed with existing credit facilities and the issuance of long-term debt and the Company's equity securities. Capital expenditures for 1998 and 1997, related to acquisitions, in the above table include the following noncash transactions: issuance of the Company's equity securities, less treasury stock acquired, in 1998 of $138.8 million; and assumed debt and the issuance of the Company's equity securities in total for 1997 of $9.9 million. In addition, natural gas transmission capital expenditures for 1996 include $800,000 for Prairielands Energy Marketing, Inc., which were not reflected in investing activities in the Consolidated Statements of Cash Flows as Prairielands Energy Marketing, Inc. was not considered a major business segment. The 1998 electric and natural gas distribution capital expenditures, including those for acquisitions, and retirements of long-term debt and preferred stock, were met from internal sources, the issuance of long-term debt and the Company's equity securities. Electric and natural gas distribution capital expenditures for the years 1999 through 2001, excluding those for potential acquisitions, include those for system upgrades, routine replacements, service extensions and routine equipment maintenance and replacements. It is anticipated that all of the funds required for capital expenditures and retirements of long-term debt and preferred stock for the years 1999 through 2001 will be met from various sources. These sources include internally generated funds, the Company's $40 million revolving credit and term loan agreement, existing short- term lines of credit aggregating $50 million, a commercial paper credit facility at Centennial, as described below, and through the issuance of long-term debt, the amount and timing of which will depend upon needs, internal cash generation and market conditions. At December 31, 1998, $40 million under the revolving credit and term loan agreement and $15 million of commercial paper supported by the short-term lines of credit were outstanding. In May 1998, the Company redeemed $20 million of its 9 1/8 percent Series first mortgage bonds, due May 15, 2006. In September 1998, the Company issued $15 million of its 5.83 percent Secured Medium-Term Notes due October 1, 2008. Capital expenditures in 1998 for the natural gas transmission business, including those expended for acquisitions, and long-term debt retirements were met through internally generated funds and the issuance of the Company's equity securities. Natural gas transmission capital expenditures for the years 1999 through 2001, excluding potential acquisitions, include those for pipeline expansion projects, routine system improvements and continued development of natural gas reserves. Capital expenditures and long- term debt retirements for the years 1999 through 2001 are expected to be met with a combination of internally generated funds, a commercial paper credit facility at Centennial, as described below, and through the issuance of long-term debt, the amount and timing of which will depend upon needs, internal cash generation and market conditions. The construction materials and mining 1998 capital expenditures, including acquisitions, and long-term debt retirements were met through funds generated from internal sources, a revolving credit agreement, the issuance of long-term debt and the Company's equity securities. Construction materials and mining capital expenditures for the years 1999 through 2001, excluding potential acquisitions, include routine equipment rebuilding and replacement and the building of construction materials handling and transportation facilities. It is anticipated that funds generated from internal sources, a commercial paper credit facility at Centennial, as described below, lines of credit aggregating $10 million, $5.2 million of which was outstanding at December 31, 1998, and the issuance of long-term debt and the Company's equity securities will meet the needs of this segment for 1999 through 2001. In October 1998, $55 million of notes were privately placed with the proceeds used to replace other long-term debt. Capital expenditures in 1998 for the oil and natural gas production business related to its oil and natural gas acquisition, development and exploration program were met through funds generated from internal sources and the issuance of long-term debt and the Company's equity securities. The capital expenditures for 1999 through 2001 for the oil and natural gas production business will be used to further enhance production and reserve growth. It is anticipated that capital expenditures and long-term debt retirements will be met from internal sources, a $30 million note shelf facility, $16 million of which was outstanding at December 31, 1998, a commercial paper credit facility at Centennial, as described below, and the issuance of the Company's equity securities. During 1998, Centennial, a direct subsidiary of the Company, entered into a revolving credit agreement with various banks on behalf of its subsidiaries that allows for borrowings of up to $200 million. This facility supports the Centennial commercial paper program. Under the commercial paper program, $82.9 million was outstanding at December 31, 1998. The commercial paper borrowings are classified as long term as the Company intends to refinance these borrowings on a long term basis through continued commercial paper borrowings supported by the revolving credit agreement due on November 29, 2001. In April 1998, the Company received proceeds of $30.1 million from a public stock offering. The proceeds from the sale of this stock were used for refunding of outstanding debt obligations, for corporate development purposes (including the acquisitions of businesses and/or business assets), and for other general corporate purposes. The Company's issuance of first mortgage debt is subject to certain restrictions imposed under the terms and conditions of its Indenture of Mortgage. Generally, those restrictions require the Company to pledge $1.43 of unfunded property to the Trustee for each dollar of indebtedness incurred under the Indenture and that annual earnings (pretax and before interest charges), as defined in the Indenture, equal at least two times its annualized first mortgage bond interest costs. Under the more restrictive of the two tests, as of December 31, 1998, the Company could have issued approximately $273 million of additional first mortgage bonds. The Company's coverage of fixed charges including preferred dividends was 2.5 and 3.4 times for 1998 and 1997, respectively. Additionally, the Company's first mortgage bond interest coverage was 6.1 times in 1998 compared to 6.0 times in 1997. Common stockholders' equity as a percent of total capitalization was 56 percent and 55 percent at December 31, 1998 and 1997, respectively. Effects of Inflation Inflation did not have a significant effect on the Company's operations in 1998, 1997 or 1996. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Commodity Price Risk -- Fidelity Oil has entered into certain price collar agreements to manage a portion of the market risk associated with fluctuations in the price of natural gas. The collar agreements call for Fidelity Oil to receive monthly payments from counterparties when the settlement price is below the floor price in the collar agreement or make monthly payments to counterparties when the settlement price is above the ceiling price in the collar agreement. These payments are based upon the difference between a fixed and a variable price as specified by the agreements. The variable price is a quoted natural gas price on the New York Mercantile Exchange. The following table presents natural gas collar information for outstanding agreements as of December 31, 1998. The fair value of these collar agreements reflects the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date, thereby taking into account the current favorable or unfavorable position on open contracts. Favorable and unfavorable positions related to these collar agreements are expected to be generally offset by corresponding increases and decreases in the value of the underlying commodity transactions. Notional Weighted Average Amount Fixed Price (MMBtu's) Floor Ceiling Fair Value (Notional amount and fair value in thousands) Natural gas collar agreements: Maturing in 1999 2,920 $2.10 $2.51 $597 These collar agreements are not held for trading purposes. The Company's policy prohibits the use of derivative instruments for trading purposes and the Company has procedures in place to monitor compliance with its policies. The Company is exposed to credit- related losses in relation to these collar agreements in the event of nonperformance by counterparties, but does not expect any counterparties to fail to meet their obligations given their existing credit ratings. Interest Rate Risk -- The Company uses fixed and variable rate long-term debt to partially finance capital expenditures and mandatory debt retirements. These debt agreements expose the Company to market risk related to changes in interest rates. The Company manages this risk by taking advantage of market conditions when timing the placement of long-term or permanent financing. The Company also has outstanding 17,000 shares of 5.10% Series preferred stock subject to mandatory redemption as of December 31, 1998. The Company is obligated to make annual sinking fund contributions to retire the preferred stock and pay cumulative preferred dividends at a fixed rate of 5.10%. The table below shows the amount of debt, including current portion, and related weighted average interest rates, by expected maturity dates and the aggregate annual sinking fund amount applicable to preferred stock subject to mandatory redemption and the related dividend rate, as of December 31, 1998. Weighted average variable rates are based on forward rates as of December 31, 1998. Fair 1999 2000 2001 2002 2003 Thereafter Total Value (Dollars in millions) Long-term debt: Fixed rate $3.2 $12.4 $12.2 $49.4 $6.4 $244.8 $328.4 $343.7 Weighted average interest rate 8.3% 7.9% 7.4% 7.0% 6.9% 7.3% 7.3% --- Variable rate --- --- $88.1 --- --- --- $88.1 $91.4 Weighted average interest rate --- --- 5.1% --- --- --- 5.1% --- Preferred stock subject to mandatory redemption $.1 $.1 $.1 $.1 $.1 $1.2 $1.7 $1.6 Dividend rate 5.1% 5.1% 5.1% 5.1% 5.1% 5.1% 5.1% --- For further information on derivatives and other financial instruments, see Note 4 of Notes to Consolidated Financial Statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to Pages 25 through 51 of the Annual Report. ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Reference is made to Pages 3 through 8 and 16 and 17 of the Company's Proxy Statement dated March 15, 1999 (Proxy Statement) which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Reference is made to Pages 9 through 16 of the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is made to Page 18 of the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements, Financial Statement Schedules and Exhibits. Index to Financial Statements and Financial Statement Schedules Page 1. Financial Statements: Report of Independent Public Accountants * Consolidated Statements of Income for each of the three years in the period ended December 31, 1998 * Consolidated Balance Sheets at December 31, 1998 and 1997 * Consolidated Statements of Common Stockholders' Equity for each of the three years in the period ended December 31, 1998 * Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1998 * Notes to Consolidated Financial Statements * 2. Financial Statement Schedules (Schedules are omitted because of the absence of the conditions under which they are required, or because the information required is included in the Company's Consolidated Financial Statements and Notes thereto.) ____________________ * The Consolidated Financial Statements listed in the above index which are included in the Company's Annual Report to Stockholders for 1998 are hereby incorporated by reference. With the exception of the pages referred to in Items 6 and 8, the Company's Annual Report to Stockholders for 1998 is not to be deemed filed as part of this report. 3. Exhibits: 3(a) Composite Certificate of Incorporation of the Company, as amended to date, filed as Exhibit 3(a) to Form 10-K for the year ended December 31, 1994, in File No. 1-3480 * 3(b) By-laws of the Company, as amended to date, filed as Exhibit 3(b) to Form 10-Q for the quarterly period ended September 30, 1998, in File No. 1-3480 * 4(a) Indenture of Mortgage, dated as of May 1, 1939, as restated in the Forty-Fifth Supplemental Indenture, dated as of April 21, 1992, and the Forty-Sixth through Forty-Eighth Supplements thereto between the Company and the New York Trust Company (The Bank of New York, successor Corporate Trustee) and A. C. Downing (W. T. Cunningham, successor Co-Trustee), filed as Exhibit 4(a) in Registration No. 33-66682; and Exhibits 4(e), 4(f) and 4(g) in Registration No. 33-53896 * 4(b) Rights agreement, dated as of November 12, 1998, between the Company and Norwest Bank Minnesota, N.A., Rights Agent, filed as Exhibit 4.1 to Form 8-A on November 12, 1998, in File No. 1-3480 * + 10(a) Executive Incentive Compensation Plan, as amended to date ** + 10(b) Key Employee Stock Option Plan, as amended to date ** + 10(c) Supplemental Income Security Plan, as amended to date, filed as Exhibit 10(d) to Form 10-K for the year ended December 31, 1996, in File No. 1-3480 * + 10(d) Directors' Compensation Policy, as amended to date ** + 10(e) Deferred Compensation Plan for Directors, as amended to date ** + 10(f) Non-Employee Director Stock Compensation Plan, as amended to date ** + 10(g) 1997 Non-Employee Director Long-Term Incentive Plan, as amended to date ** + 10(h) 1997 Executive Long-Term Incentive Plan, as amended to date ** 12 Computation of Ratio of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Stock Dividends ** 13 Selected financial data, financial statements and supplementary data as contained in the Annual Report to Stockholders for 1998 ** 21 Subsidiaries of MDU Resources Group, Inc. ** 23(a) Consent of Independent Public Accountants ** 23(b) Consent of Engineer ** 23(c) Consent of Engineer ** 27 Financial Data Schedule ** ____________________ * Incorporated herein by reference as indicated. ** Filed herewith. + Management contract, compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. (b) Reports on Form 8-K Form 8-K was filed on December 1, 1998. Under Item 5--Other Events, the Company declared a dividend distribution of one Preference Share Purchase Right on each outstanding share of MDU Resources' Common Stock pursuant to a newly-adopted rights agreement. The new agreement replaced the previous rights agreement. Form 8-K was filed on January 13, 1999. Under Item 5--Other Events, the Company announced recent acquisitions. It was also reported that because of low oil and natural gas prices fourth quarter earnings would include a non-cash after-tax charge of approximately $20 million. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MDU RESOURCES GROUP, INC. Date: March 4, 1999 By: /s/ Martin A. White Martin A. White (President and Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the date indicated. Signature Title Date /s/ Martin A. White Chief Executive March 4, 1999 Martin A. White Officer (President and Chief Executive Officer) and Director /s/ Douglas C. Kane Chief March 4, 1999 Douglas C. Kane (Executive Vice President, Administrative & Chief Administrative & Corporate Corporate Development Officer) Development Officer and Director /s/ Warren L. Robinson Chief Financial March 4, 1999 Warren L. Robinson (Vice President, Officer Treasurer and Chief Financial Officer) /s/ Vernon A. Raile Chief Accounting March 4, 1999 Vernon A. Raile (Vice President, Officer Controller and Chief Accounting Officer) /s/ John A. Schuchart Director March 4, 1999 John A. Schuchart (Chairman of the Board) Director San W. Orr, Jr. (Vice Chairman of the Board) /s/ Thomas Everist Director March 4, 1999 Thomas Everist Director Harold J. Mellen, Jr. /s/ Richard L. Muus Director March 4, 1999 Richard L. Muus /s/ Robert L. Nance Director March 4, 1999 Robert L. Nance /s/ John L. Olson Director March 4, 1999 John L. Olson Director Harry J. Pearce /s/ Homer A. Scott, Jr. Director March 4, 1999 Homer A. Scott, Jr. /s/ Joseph T. Simmons Director March 4, 1999 Joseph T. Simmons /s/ Sister Thomas Welder Director March 4, 1999 Sister Thomas Welder EXHIBIT INDEX Exhibit No. 3(a) Composite Certificate of Incorporation of the Company, as amended to date, filed as Exhibit 3(a) to Form 10-K for the year ended December 31, 1994, in File No. 1-3480 * 3(b) By-laws of the Company, as amended to date, filed as Exhibit 3(b) to Form 10-Q for the quarterly period ended September 30, 1998, in File No. 1-3480 * 4(a) Indenture of Mortgage, dated as of May 1, 1939, as restated in the Forty-Fifth Supplemental Indenture, dated as of April 21, 1992, and the Forty-Sixth through Forty-Eighth Supplements thereto between the Company and the New York Trust Company (The Bank of New York, successor Corporate Trustee) and A. C. Downing (W. T. Cunningham, successor Co-Trustee), filed as Exhibit 4(a) in Registration No. 33-66682; and Exhibits 4(e), 4(f) and 4(g) in Registration No. 33-53896 * 4(b) Rights Agreement, dated as of November 12, 1998, between the Company and Norwest Bank Minnesota, N.A., Rights Agent, filed as Exhibit 4.1 to Form 8-A on November 12, 1998, in File No. 1-3480 * + 10(a) Executive Incentive Compensation Plan, as amended to date ** + 10(b) Key Employee Stock Option Plan, as amended to date ** + 10(c) Supplemental Income Security Plan, as amended to date, filed as Exhibit 10(d) to Form 10-K for the year ended December 31, 1996, in File No. 1-3480 * + 10(d) Directors' Compensation Policy, as amended to date ** + 10(e) Deferred Compensation Plan for Directors, as amended to date ** + 10(f) Non-Employee Director Stock Compensation Plan, as amended to date ** + 10(g) 1997 Non-Employee Director Long-Term Incentive Plan, as amended to date ** + 10(h) 1997 Executive Long-Term Incentive Plan, as amended to date ** 12 Computation of Ratio of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Stock Dividends ** 13 Selected financial data, financial statements and supplementary data as contained in the Annual Report to Stockholders for 1998 ** 21 Subsidiaries of MDU Resources Group, Inc. ** 23(a) Consent of Independent Public Accountants ** 23(b) Consent of Engineer ** 23(c) Consent of Engineer ** 27 Financial Data Schedule ** ____________________ * Incorporated herein by reference as indicated. ** Filed herewith. + Management contract, compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. EX-10.A 2 EXECUTIVE INCENTIVE COMPENSATION PLAN MDU RESOURCES GROUP, INC. EXECUTIVE INCENTIVE COMPENSATION PLAN ____________________________________________________________ I. PURPOSE The purpose of the Executive Incentive Compensation Plan (the "Plan") is to provide an incentive for key executives of MDU Resources Group, Inc. (the "Company") to focus their efforts on the achievement of challenging and demanding corporate objectives. The Plan is designed to reward successful corporate performance as measured against specified performance goals as well as exceptional individual performance. When corporate performance reaches or exceeds the performance targets and individual performance is exemplary, incentive compensation awards, in conjunction with salaries, will provide a level of compensation which recognizes the skills and efforts of the key executives. II. BASIC PLAN CONCEPT The Plan provides an opportunity to earn annual incentive compensation based on the achievement of specified annual performance objectives. A target incentive award for each individual within the Plan is established based on the position level and assigned salary grade market value (midpoint). The target incentive award represents the amount to be paid, subject to the achievement of the performance objective targets established each year. Larger incentive awards than target may be authorized when performance exceeds targets, lesser or no amounts may be paid when performance is below target. It is recognized that during a Plan year major unforeseen changes in economic and environmental conditions or other significant factors beyond the control of management may substantially affect the ability of the Plan participants to achieve the specified performance goals. Therefore, in its review of corporate performance the Compensation Committee of the Board of Directors (the "Committee"), in consultation with the Chief Executive Officer of MDU Resources Group, Inc., may modify the performance targets. However, it is contemplated that such target modifications will be necessary only in years of unusually adverse or favorable external conditions. III. ADMINISTRATION The Plan shall be administered by the Committee with the assistance of the Chief Executive Officer of the MDU Resources Group, Inc. The Committee shall approve annually, prior to the beginning of each Plan year, the list of eligible participants, the Plan's performance targets, and the target incentive award level for each position within the Plan. The Committee shall have final discretion to determine actual award payment levels, method of payment, and whether or not payments shall be made for any Plan year. IV. ELIGIBILITY Executives who are determined by the Committee to have a key role in both the establishment and achievement of Company objectives shall be eligible to participate in the Plan. V. PLAN PERFORMANCE MEASURES Performance measures shall be established that consider shareholder and customer interests. These measures shall be evaluated annually based on achievement of specified goals. The performance measure reflective of shareholder's interest will be the percentage attainment of the earnings goal as specified in the annual operating plan. This measure will be applied at the corporate level for individuals, such as the Chief Executive Officer, or at the business unit level for individuals whose major or sole impact is on business unit results. Individual performance will be assessed based on the achievement of annually established individual objectives. Threshold, target and maximum award levels will be established annually for each performance measure and business unit. The Committee will retain the right to make all interpretations as to the actual attainment of the desired results and will determine whether any circumstances beyond the control of management need to be considered. VI. TARGET INCENTIVE AWARDS Target incentive awards will be expressed as a percentage of each participant's assigned salary grade market value (midpoint). These percentages shall vary by position and reflect larger reward opportunity for positions having greater effect on the establishment and accomplishment of the Company's or business unit's objectives. An exhibit showing the target awards as a percentage of salary grade market value (midpoint) for eligible positions will be attached to this Plan at the beginning of each Plan year. VII. INCENTIVE FUND DETERMINATION The target incentive fund is the sum of the individual target incentive awards for all eligible participants. The actual incentive fund may be lower, equal to, or greater than the target fund as determined by the Committee, based on actual performance as compared with approved performance objectives. At the close of each Plan year, the Chief Executive Officer of MDU Resources Group, Inc. will prepare an analysis showing the Company's and business unit's performance in relation to each of the performance measures employed. This will be provided to the Committee for review and comparison to threshold, target and maximum performance levels. In addition, any recommendations of the Chief Executive Officer will be presented at this time. The Committee will then determine the amount of the target incentive fund earned. VIII. INDIVIDUAL AWARD DETERMINATION Each individual participant's award will be based first upon the level of performance achieved by the Company or business unit and secondly based upon the individual's performance. The performance measures applicable for assessing individual performance will be established at the beginning of each Plan year. The assessment by the Committee, after consultation with the Chief Executive Officer, of achievement relative to the established performance measures, as determined by a percentage from 0 percent to 200 percent, will be applied to the Participant's target incentive award which has been first adjusted for Company or business unit performance. IX. PAYMENT OF AWARDS In order to receive an award under the Plan, the Participant must remain in the employment of the Company or business unit for the entire Plan year and be an employee on the payment date. An individual participant who transfers between the Company and business units may receive a prorated award at the discretion of the Committee. If employment is terminated prior to the payment date as a result of death, disability or retirement, or due to special circumstances as determined by the Committee, payment may be made after termination. Payments made under this Plan will not be considered part of compensation for pension purposes. Payments when made will be in cash, stock, or a combination thereof as determined appropriate by the Committee. All awards for 151-200 percent of target will be paid in full shares of one- year restricted company stock. Any fractional share will be paid in cash. Incentive awards may be deferred if the appropriate elections have been executed prior to the end of the Plan year. Deferred amounts will accrue interest at a rate determined annually by the Committee. In the event of a "change in control" (as defined by the Committee in its Rules and Regulations) then any award deferred by each Participant shall become immediately payable to the Participant in cash, together with accrued interest thereon to the date of payment. In the event the Participant files suit to collect the participant's deferred award then all of the court costs, other expenses of litigation, and attorneys' fees shall be paid by the Company in the event the Participant prevails upon any of the Participant's claims for payment of a deferred award. MDU RESOURCES GROUP, INC. EXECUTIVE INCENTIVE COMPENSATION PLAN RULES AND REGULATIONS The Compensation Committee of the Board of Directors of MDU Resources Group, Inc. (the "Company") adopted Rules and Regulations for the administration of the Management Incentive Compensation Plan (the "Plan") on February 9, 1983, following adoption of the Plan by the Board of Directors of the Company on November 4, l982. I. DEFINITIONS The following definitions shall be used for purposes of these Rules and Regulations and for the purposes of administering the Plan: 1. The "Committee" shall be the Compensation Committee of the Board of Directors of the Company. 2. The "Company" shall refer to MDU Resources Group, Inc. alone and shall not refer to its utility division or to any of its subsidiary corporations. 3. "Participants" for any Plan Year shall be those executives who have been approved by the Committee as eligible for participation in the Plan for such Plan Year. 4. "Payment Date" shall be the date set by the Committee for payment of awards, other than those awards deferred pursuant to section IX of the Plan and section VII of these Rules and Regulations. 5. The "Plan" shall refer to the Executive Incentive Compensation Plan. 6. The "Plan Year" shall be the calendar year. 7. "Change in control" shall mean the earlier of the following to occur: (a) the public announcement by the Company or by any person (which shall not include the Company, any subsidiary of the Company or any employee benefit plan of the Company or of any subsidiary of the Company) ("Person") that such Person, who or which, together with all Affiliates and Associates (within the meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (17 C.F.R. 240.12b-2)) of such Person, shall be the beneficial owner of twenty percent (20%) or more of the voting stock then outstanding; (b) the commencement of, or after the first public announcement of any Person to commence, a tender or exchange offer the consummation of which would result in any Person becoming the beneficial owner of voting stock aggregating thirty percent (30%) or more of the then outstanding voting stock; (c) the announcement of any transaction relating to the Company required to be described pursuant to the requirements of Item 6(e) of Schedule 14A of Regulation 14A of the Securities and Exchange Commission under the Securities Exchange Act of 1934 (17 C.F.R. 240.14a-101, item 6(e)); (d) a proposed change in the constituency of the Board of Directors of the Company such that, during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company cease for any reason to constitute at least a majority thereof, unless the election or nomination for election by the shareholders of the Company of each new Director was approved by a vote of at least two-thirds (2/3) of the directors then still in office who were members of the Board of Directors of the Company at the beginning of the period; or (e) any other event which shall be deemed by a majority of the Compensation Committee of the Board of Directors of the Company to constitute a "change in control." 8. The "Prime Rate" shall be the base rate on corporate loans posted by at least 75 percent of the nation's 30 largest banks as reported daily in The Wall Street Journal. II. ADMINISTRATION 1. The Committee shall have the full power to construe and interpret the Plan and to establish and to amend these Rules and Regulations for its administration. 2. No member of the Committee shall participate in a decision as to their own eligibility for, or award of, an incentive award payment. 3. Prior to the beginning of each Plan Year, the Committee shall approve a list of eligible executives and notify those so approved that they are eligible to participate in the Plan for such Plan Year. 4. Prior to the beginning of each Plan Year, the Committee shall draw up an Annual Operating Plan. The Annual Operating Plan shall include the Plan's performance measures and performance targets as well as the target incentive award levels for each salary grade covered by the Plan for the following Plan Year. The Annual Operating Plan, insofar as it is relevant to each individual Participant, shall be made available by the Committee to each Participant in the Plan at the beginning of each Plan Year. 5. The Committee shall have final discretion to determine actual award payment levels, method of payment, and whether or not payments shall be made for any Plan Year. However, unless the Plan's performance objectives are met for the Plan Year, no award shall be made for that Plan Year. Performance targets modified pursuant to section II of the Plan will be deemed performance targets for purposes of determining whether or not these targets have been met. III. PLAN PERFORMANCE MEASURES 1. The Committee shall establish the percentage attainment of earnings measure and the percentage attainment of individual goals measure. The Committee may establish more or fewer performance measures as it deems necessary. 2. The earnings measure shall be set by reference to the earnings of the Company or the individual business unit. 3. Individual performance will be assessed based on the achievement of annually established individual objectives. 4. Plan performance measures will be applied at the corporate level for individuals such as the Chief Executive Officer whose major or sole impact is Company-wide, or at the business unit level for individuals whose major or sole impact is on the business unit results. The Annual Operating Plan shall contain a list of individuals to whom the Plan performance measures will be applied at the corporate level and a list of those individuals for whom the Plan performance measures will be applied at the business unit level. The relevant business unit for each individual will be identified. 5. The Committee shall set threshold, target and maximum award levels for the performance measures, for each business unit, and for the Company. Those levels shall be included in the Annual Operating Plan. 6. The Committee will retain the authority to determine whether or not the actual attainment of these measures has been made. IV. TARGET INCENTIVE AWARDS 1. Target incentive awards will be a percentage of each Participant's assigned salary grade midpoint. 2. Target incentive awards shall be set by the Committee annually and will be included in the Annual Operating Plan. V. INCENTIVE FUND DETERMINATION 1. The target incentive fund is the sum of the individual target incentive awards for all eligible Participants. 2. The actual incentive fund will be determined by the Committee, based on actual performance as compared with the approved performance measures. 3. As soon as practicable following the close of each Plan Year, the Chief Executive Officer will provide the Committee with an analysis showing the Company's and each relevant business unit's performance in relation to both of the performance measures. The Committee will review the analysis and determine, in its sole discretion, the amount of the actual incentive fund. 4. In determining the actual incentive fund, the Committee may consider any recommendations of the Chief Executive Officer. VI. INDIVIDUAL AWARD DETERMINATION 1. The Committee shall have the sole discretion to determine each individual Participant's award. The Committee's decision will be based first upon the level of performance achieved by the Company or business unit and second upon the individual's performance. 2. The Committee, after consultation with the Chief Executive Officer, shall set the award as a percentage from 0 percent to 200 percent of the Participant's target incentive award, adjusted for Company or business unit performance. VII. PAYMENT OF AWARDS 1. On the date the Committee determines the awards to be made to individual Participants, it shall also establish the Payment Date. 2. In order to receive an award under the Plan, a Participant must remain in the employment of the Company for the entire Plan Year and be an employee on the Payment Date. 3. If employment is terminated prior to Payment Date as a result of death, disability or retirement, or due to special circumstances as determined by the Committee in its sole discretion, payment may be made after termination. 4. Payments of the awards may be made in cash, stock or a combination thereof as determined by the Committee. All awards for 151-200 percent of target will be paid in full shares of one-year restricted company stock. Any fractional share will be paid in cash. Such payments shall be made on the Payment Date unless the Participant has deferred, in whole or in part, the receipt of the award by making an election on the deferral form attached hereto, prior to the end of the Plan Year immediately preceding the Payment Date. 5. In the event a Participant has elected to defer receipt of all or a portion of the award, the Company shall set up an account in their name. The amount of their award to the extent deferred will be credited to the participant's account on the Payment Date. 6. The balance credited to an account of a Participant who has elected to defer receipt of an award will be an unsecured, unfunded obligation of the Company. 7. Interest shall accrue on the balance credited to a Participant's account. The rate of interest shall be the Prime Rate plus 1 percentage point as reported on the last Friday in January of each year. Interest on the balance in an account shall accrue at the rate so determined from the Payment Date immediately following the determination to the Payment Date of the following year. 8. Interest shall be credited to the account on the day preceding Payment Date and shall be calculated on the balance in the Participant's account as of that date. 9. A Participant may elect to defer any percentage, not to exceed l00, of an annual award. 10. A Participant electing to defer any part of an award must elect one of the following dates for payment: (1) Retirement date; (2) Payment Date next following termination of employment; or (3) Payment Date of the fifth year following the year in which the award may be made. 11. A Participant may elect to receive the deferred amounts accumulated in the Participant's account in monthly installments, not to exceed 120. In the event the Participant elects to receive the amounts in the Participant's account in more than one installment, interest shall continue to accrue on the balance remaining in their account at the applicable rate or rates determined annually by the Committee. 12. In the event of the death of a Participant in whose name a deferred account has been set up, the Company shall, within six months thereafter, pay to the Participant's estate or the designated beneficiary the entire amount in the deferred account. 13. In the event of a "change in control" then any award deferred by each Participant shall become immediately payable to the Participant. In the event the Participant files suit to collect a deferred award then all of the Participant's court costs, other expenses of litigation, and attorneys' fees shall be paid by the Company in the event the Participant prevails upon any of the Participant's claims for payment. EX-10.B 3 KEY EMPLOYEE STOCK OPTION PLAN MDU RESOURCES GROUP, INC. KEY EMPLOYEE STOCK OPTION PLAN (KESOP) I. PURPOSE The purpose of the MDU Resources Group, Inc. 1992 Key Employee Stock Option Plan (the "Plan") is to motivate key employees of MDU Resources Group, Inc. and its business units to achieve specified long-term performance goals of MDU Resources Group, Inc. or its business units and to encourage ownership by them of the Common Stock of MDU Resources Group, Inc. The Plan accomplishes these objectives through the grant of performance accelerated Stock Options and the opportunity to earn dividend equivalents. II. DEFINITIONS The following definitions shall be used for purposes of administering the Plan: "Agreement" means a written agreement evidencing each award of Options, which shall contain such terms and be in such form as the Compensation Committee may determine. "Board" means the Board of Directors of the Company. "Cause" means the (1) continued failure by a Participant to perform his/her duties (except as a direct result of the Participant's Disability) after receiving notification by the Chief Executive Officer of the Company or an individual designated by the Chief Executive Officer (or the Board of Directors of the Company in the case of the Chief Executive Officer) identifying the manner in which the Participant has failed to perform his/her duties, (2) engaging in conduct, which, in the opinion of a majority of the Board of Directors of the Company or a business unit, is materially injurious to the Company, or (3) conviction of any felony. "Change of Control" means the earlier of the following to occur: (a) the public announcement by the Company or by any person (which shall not include the Company, any subsidiary of the Company, or any employee benefit plan of the Company or of any subsidiary of the Company) ("Person") that such Person, who or which, together with all Affiliates and Associates (within the meanings ascribed to such terms in the Rule 12b-2 of the General Rules and Regulations under the Exchange Act) of such Person, shall be the beneficial owner of twenty percent (20%) or more of the voting stock of the Company outstanding; (b) the commencement of, or after the first public announcement of any Person to commence, a tender or exchange offer the consummation of which would result in any Person becoming the beneficial owner of voting stock aggregatingthirty percent (30%) or more of the then outstanding voting stock of the Company; (c) the announcement of any transaction relating to the Company required to be described pursuant to the requirements of Item 6(e) of Schedule 14A of Regulation 14A under the Exchange Act; (d) a proposed change in constituency of the Board such that, during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election or nomination for election by the stockholders of the Company of each new Director was approved by a vote of at least two-thirds (2/3) of the Directors then still in office who were members of the Board at the beginning of the period; or (e) any other event which shall be deemed by a majority of the Compensation Committee to constitute a "change in control." "Common Stock" means the Common Stock, $3.33 par value, of the Company. "Company" shall refer to MDU Resources Group, Inc. "Companies" shall refer to MDU Resources Group, Inc. and its business units. "Compensation Committee" or "Committee" shall be the Compensation Committee of the Board of Directors of the Company or any Committee of the Board performing similar functions as appointed from time to time by the Board. The Committee shall be constituted, to the extent required, so as to permit the Plan to comply with Rule 16b-3. "Disability" means the inability of a Participant to perform each and every duty pertaining to the Participant's regular occupation by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve months. "Dividend Account" is defined in Section IV.D 6. "Effective Date" means the date as of which the Plan is approved by the stockholders of MDU Resources Group, Inc. "Eligible Employee" means any key employee of any of the Companies who, in the opinion of the Compensation Committee, has significant responsibility for the continued growth, development and financial success of the Company or any business unit thereof. "Exchange" means the New York Stock Exchange. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fair Market Value" means the average of the high and low prices for shares of Common Stock traded on the Exchange on the date of the grant of such Option or if no shares are traded on that day, on the next preceding day on which Common Stock was traded on the Exchange. "Goals" means the separate financial and/or non-financial objectives set by the Committee for any of the Companies. "Option" or "Stock Option" means an option to purchase Common Stock granted pursuant to the Plan. Options may not be "incentive stock options" as that term is defined in Section 422 of the Internal Revenue Code of 1986, as amended. "Participants" means those Eligible Employees selected by the Committee for participation in the Plan and includes their beneficiaries as applicable. "Performance Cycle" means a time frame established by the Committee pursuant to Section IV.D 4 for the measurement of Goals. "Plan" means this MDU Resources Group, Inc. 1992 Key Employee Stock Option Plan, adopted by the Board on February 13, 1992, and approved by the stockholders on April 28, 1992, and as amended from time to time. "Rule 16b-3" means Rule 16b-3 under the Exchange Act or any successor rule. "Termination of Service" means leaving the employ of the Companies for any reason. Transfer between Companies is not a Termination of Service. "Trustee" means a trustee chosen by the Committee or any successor trustee selected by the Committee. III. ADMINISTRATION Subject to and not inconsistent with the express provisions of the Plan the Committee has the sole and complete discretion to administer and interpret the Plan, including, but not limited to: (a) designating the Participants to whom Options are granted under the Plan; (b) authorizing the Trustee to grant Options, determining the time(s) when Options are granted and fixing the number of shares of Common Stock underlying each Option granted hereunder; (c) determining the terms and conditions of an Option granted (including, but not limited to, the exercise price, any restriction or limitation, the vesting provisions, acceleration of vesting or forfeiture waiver applicable to any Option) and the terms of the related Agreement; (d) determining the conditions of the awarding of Dividend Equivalents; (e) establishing performance goals and fixing and adjusting the Goals; (f) interpreting the terms and provisions of the Plan; (g) adopting, amending, and rescinding rules and regulations relating to the Plan; and (h) making all determinations necessary or advisable for the administration of the Plan. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Companies, the Trustee, and the Plan's Participants. The Committee may also revise or adjust the vesting provisions (except that the Committee may not extend vesting beyond nine years), goals and their levels applicable to a Performance Cycle, at any time to take into account, among other things, new Participants, promotions, transfers, terminations, changes in law and accounting and tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the Companies' performances or the impact of extraordinary or unusual items, events, or circumstances or in order to avoid windfalls or hardships. The Company and/or the Committee may consult with legal counsel, who may be counsel for the Company or other counsel, with respect to its obligations and duties hereunder or with respect to any claim, action, or proceeding or any other matter. No member or agent of the Committee shall be personally liable for any action, determination, or interpretation made in good faith with respect to the Plan or grants made hereunder, and all members and agents of the Committee shall be fully protected by the Company in respect of any such action, determination, or interpretation. The Committee's determination under the Plan, including without limitation, determinations as to the Participants to receive grants, the terms and provisions of such grants and the Agreement(s) evidencing the same, need not be uniform and may be made by it selectively among the Eligible Employees who receive or are eligible to receive grants under the Plan, whether or not such Eligible Employees are similarly situated. IV. GENERAL PLAN DESCRIPTION A. Overview The Plan provides for each Participant to (a) receive grant(s) of Stock Options, (b) have the opportunity to earn dividend equivalents, and (c) have the opportunity to achieve accelerated vesting of Stock Options and receive additional grants of Stock Options based upon the achievement of Goals established by the Committee over a designated Performance Cycle. B. Eligibility On or after the Effective Date, subject to the provisions of the Plan, the Committee shall, from time to time, select Participants from Eligible Employees and arrange with the Trustee to grant them Stock Options. At the time of selection, the Committee shall specify the terms and conditions of the new Participant's initial grant of Options. C. Authorization The total number of shares of Common Stock as to which Options may be granted may not exceed 800,000 shares; if any unexercised options lapse or terminate for any reason, the shares underlying the Options may be made subject to Options granted to other Participants. In the event of the declaration of a Common Stock dividend and/or Common Stock split, reclassification or analogous change in the capitalization or any distributions (other than regular cash dividends) to holders of record between the date of grant and the date of exercise of an Option, an appropriate adjustment shall be made to the total number of shares as to which Options may be granted, to the number of shares subject to Options, and to the exercise price. Shares of Common Stock, delivered under this Plan may be authorized but unissued shares of Common Stock, or shares of Common Stock purchased on the open market and held by the Trustee, or shares of Common Stock from the 1983 Key Employees' Stock Option Plan. D. Stock Options and Dividend Equivalents (1) Grants Each Participant shall receive a grant of Options on the date she or he becomes a Participant. The Committee shall determine the size of the grant to each Participant and authorize the Trustee to make the grant. Participants may receive subsequent grants of Options from the Trustee when and as directed by the Committee. (2) Exercise Price and Term The exercise price for an Option granted under the Plan is the Fair Market Value of the Company's Common Stock on the date of the Option grant. An Option granted shall generally have a term of ten years commencing from the date of grant, subject to the provisions of Sections V and VI and to the general discretion of the Committee set forth in Section III. (3) Vesting and Accelerated Vesting Provisions No Option may be exercised before it has vested. Generally Option grants have a vesting period (before accelerated vesting) of nine years subject to the provisions of Section VI and to the general discretion of the Committee set forth in Section III. The vesting period for all or a portion of Options granted to a Participant may be accelerated by the Committee subject to the achievement of Goals for a Performance Cycle. (4) Performance Cycle and Goals The Committee shall fix the starting and ending dates of each Performance Cycle. The minimum term shall be six months; the maximum term shall be nine years. A Performance Cycle will be the time period used in assessing the performance of each of the Companies in comparison to the separate Goals established by the Committee for each of the Companies. Performance Cycles and Goals may vary for each of the Companies. (5) Subsequent Grants; Accelerated Vesting Additional grants of Options may be made by the Trustee at the direction of the Committee to Participants at any time. In particular, but not by way of limitation, additional grants of Options may be made to Participants at the beginning of a new Performance Cycle based upon the appropriate Companies' achievement of Performance Goals and the results of accelerated vesting of all or a portion of previous grants. The Committee will have the authority to determine the size and terms of any new Option grant for each Participant. (6) Dividend Equivalents At the beginning of each Performance Cycle, a Dividend Account (the "Dividend Account") shall be established for each Participant. If a dividend is declared by the Board on the Common Stock of the Company an equivalent amount shall be accrued in the Dividend Account of each Participant for each share of Common Stock underlying all unvested Options held by the Participant. At the end of each Performance Cycle the Committee in its sole discretion may award an amount between 0% and 150% of a Participant's Dividend Account based on whether the Goals established for that Performance Cycle were achieved. Any earned portion of a Participant's Dividend Account is paid in cash to that Participant at the end of each Performance Cycle at a date and time determined by the Committee. Any portion of a Participant's Dividend Account not awarded to the Participant by the Committee is forfeited. However, shares of Common Stock underlying unvested Options retain a dividend equivalent and a Participant can earn the value of these dividend equivalents in subsequent Performance Cycles. (7) Exercise of Options As provided in paragraph (3) of this section, generally all Options granted to a Participant under the Plan shall vest on the ninth anniversary of the date of grant; provided, however, that if and to the extent the vesting of an Option is accelerated at the end of a Performance Cycle, the Option may thereafter be exercised to the extent that the Option has vested. Any vested Option may be exercised from time to time in part or as a whole, at the discretion of the Participant, from the date of vesting until termination of the Option; no Option shall be exercisable after its expiration date; subject in either case to the provisions set forth in Section V and to the general discretion of the Committee set forth in Section III. Options may be exercised by giving written notice of exercise to the Trustee specifying the number of shares to be purchased. The notice shall be accompanied by the exercise price. Payment may also be made in part or in full by tendering shares of Common Stock already owned by the Participant, based upon the Fair Market Value of the Common Stock on the date the Option is exercised, or through share withholding. Participants may also simultaneously exercise Options and sell the shares of Common Stock thereby acquired and use the proceeds from the sale as payment for the purchase price of the shares. Such transactions, to the extent required, shall be effected in accordance with Section 16 of the Exchange Act and the rules thereunder. (8) Nonassignability of Options Options granted may not be assigned, transferred, or pledged by the Participant other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Internal Revenue Code or Title 1 of the Employee Retirement Income Security Act, or the rules thereunder. V. Termination of Service A. Upon any Termination of Service, unvested Options and any amounts accrued in a Participant's Dividend Account shall be forfeited unless the Committee decides otherwise pursuant to Section III. B. Death If the Participant dies while still employed, then any vested Options, to the extent that they are then exercisable, may be fully exercised at any time within one (1) year (even if this extends the term of the Options) after the date of the Participant's death by the person designated in the Participant's last will and testament or by the personal representative of the Participant's estate. C. Disability If the Participant suffers Disability, then any vested Options, to the extent that they are then exercisable, may be fully exercised by the Participant at any time within one (1) year (even if this extends the terms of the Options) after the date of Disability or by a person qualified or authorized to act on behalf of the Participant. D. Cause If a Participant's Termination of Service is for Cause, the right to exercise any vested Option shall terminate with such termination of employment. For this purpose, the determination of the Committee as to whether employment was terminated for Cause shall be final. E. Other Termination of Service In the event of the Participant's Termination of Service for reasons other than Death, Disability, or Cause, to the extent that any vested Options are then exercisable, the Participant shall be entitled to exercise the Options for the three (3) month period following such Termination of service (even if this extends the term of the Options). VI. Change of Control Upon a Change of Control of the Company, all Options previously granted under the Plan shall become immediately vested and available for exercise. The value of the amounts accrued in the Participant's Dividend Account shall be paid in full at 100% of the amount thereof to the Participant in cash upon the Change of Control. VII. Miscellaneous Provisions A. Unsecured General Creditor Participants and their beneficiaries, heirs, successors, and assigns shall have no legal or equitable rights, interests, or other claims in any property or assets of the Company, nor shall they be beneficiaries of, or have any rights, claims, or interests in any specified assets of the Company. Any and all of the Company's assets shall be and remain general, unpledged, unrestricted assets of the Company. The Company's obligation under the Plan shall be that of an unfunded and unsecured promise of the Company to cause shares of Common Stock to be available or to pay benefits in the future. B. No Contract of Employment Nothing contained in this Plan nor any related Agreement nor any action taken in the administration of the Plan shall be construed as a contract of employment or as giving a Participant any right to be retained in the service of the Company. C. Withholding Taxes No later than the date on which a Participant receives Common Stock with respect to any Option exercised or cash with respect to Dividend Equivalents awarded under the Plan, the Participant shall pay in cash to the Company or its delegate or make arrangements satisfactory to the Company regarding the payment of any federal, state, or local taxes required by law to be withheld with respect to any such amounts. The Participant may also make payment (i) by tendering shares of the Common Stock already owned by the Participant, based on the fair market value of the Common Stock on the date the tax is owed or (ii) by having such amounts withheld from the shares of the Common Stock otherwise distributable to him/her upon exercise of his/her Options. Any such withholding on behalf of a Participant shall be done in accordance with Section 16 of the Exchange Act and the rules thereunder to the extent required. The obligations of the Company under the Plan shall be conditioned on such payment or arrangements. The Company or its delegate may deduct any taxes from any payment due to the Participant from the Company to the extent allowed by law. D. Ten Percent Limitation No Option shall be granted under this Plan to a Participant if at the time the Option is granted the Participant shall own stock representing more than 10% of the combined voting power of all classes of voting stock of the Company. E. Severability In the event that any provision of the Plan or any related Agreement is held invalid, void or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of the Plan or any related Agreement. F. Inurement of Rights and Obligations The rights and obligations under the Plan shall inure to the benefit of, and shall be binding upon the Company, its successors and assigns, and the Participants and their beneficiaries consistent with the terms of the Plan. G. Amendments The Board may at any time amend, suspend, or terminate the Plan including, without limitation, modifications to take into account and comply with any changes in applicable securities or federal income tax laws and regulations, or other applicable laws and regulations; provided, that no modification to the Plan shall increase the number of shares available under the Plan by more than 10 percent without approval of the holders of the Common Stock, except as otherwise permitted under Section IV.C; and provided further, that any such amendment, suspension, or termination must be prospective in that it may not deprive Participants of any Options or rights previously granted under the Plan whether vested or not, without consent of the Participant, except if required by statute or rules or regulations promulgated thereunder. H. Restrictions Shares of Common Stock acquired by Participants pursuant to the exercise of Options granted under the Plan shall be subject to such restrictions on transferability and disposition as are required by federal and state security laws and such Participants shall not sell or transfer any shares acquired except in accordance with such laws. I. Legal and Other Requirements. The obligation of the Company to cause Common Stock to be available under the Plan shall be subject to all applicable laws, regulations, rules and approvals, including, but not limited to the receipt of any necessary approvals by state or federal regulatory bodies, and the effectiveness of a registration statement under the Securities Act of 1933 if deemed necessary or appropriate by the Company. Certificates for shares of Common Stock issued hereunder may be legended as the Committee shall deem appropriate. J. Agreements. Each grant of Options by the Trustee shall be evidenced by an Agreement between the Trustee and the Participant which shall contain such restrictions, terms and conditions as the Committee may require. Notwithstanding anything to the contrary contained in the Plan, the Company shall not be under any obligation to honor any grants under the Plan to any Participant hereunder unless such Participant shall execute all appropriate Agreements with respect to such Options in such form as the Committee may determine from time to time. K. Applicable Law The Plan and any related Agreements shall be governed in accordance with the laws of the State of North Dakota. VIII. Establishment of Trust The Company shall establish with the Trustee a trust consisting of such sums of money or other property acceptable to the Trustee as shall from time to time be paid or delivered to the Trustee, all investments made therewith and proceeds thereof and all earnings and profits thereon. The Trustee shall invest funds, if any, advanced by the Company in shares of Common Stock. Upon the exercise of an Option by a Participant, the Trustee shall take Common Stock from the trust or shall purchase Common Stock on the open market or from the Company and deliver certificates for such shares to the Participant. The Company shall have the right at any time to terminate the trust but such termination shall not affect the rights of any Participant to whom an Option has been granted under the Plan. After effecting all purchases and transfers of Common Stock as are required by the Plan pursuant to the exercise of Options by Participants, the Trustee shall be relieved of all further liability. Termination of the trust shall take effect as of the date the last such transfer is made. Upon such termination any assets remaining in the trust shall be returned to the Company unless other directions are given to the Trustee by the Company. EX-10.D 4 DIRECTORS' COMPENSATION POLICY MDU RESOURCES GROUP, INC. DIRECTORS' COMPENSATION POLICY Each Director who is not a full-time employee of the Company shall receive compensation made up of annual cash retainers, common stock, meeting fees and post-retirement income: Annual Retainers The Board service annual cash retainer shall be $13,000. That of the Chairman of the Board shall be four times that of the other Directors. The annual retainer for service as Chairman of the Audit or Nominating Committee shall be $2,500 and of the Compensation or Finance Committee, $4,000. Such retainers shall be paid in monthly installments. A minimum of $1,000 of the annual cash retainer shall be deferred under the Amended and Restated Deferred Compensation Plan for Directors adopted on February 13, 1992 and effective January 1, 1992. If the Chairman of the Board is a retired employee such deferral need not be made and this Plan shall not apply. The Plan permits a Director to defer all or any portion of the annual cash retainer above the mandatory $1,000 deferral. The amount deferred is recorded in each participant's deferred compensation account and credited with income in the manner prescribed in the Plan. For further details, reference is made to the Plan, a copy of which is attached. Each Director shall receive 450 shares of Common Stock on or about the 15th business day following the annual meeting of stockholders. A Director may decline a stock payment for any plan year, in writing in advance of the plan year to which stock payment relates. No cash compensation shall be paid in lieu thereof. By written election a Director may reduce the cash portion of the annual retainer and have that amount applied to the purchase of additional shares. The election must be made on a form provided by the administrative committee and returned to the committee at least six months prior to the applicable annual meeting of stockholders. The election remains in effect until changed or revoked. No election may be changed or revoked for the current year, but may be changed for a subsequent year. For further details, reference is made to the Non-Employee Director Stock Compensation Plan, a copy of which is attached. Board and Committee Meeting Fee The fee for each Board meeting attended shall be $1,000 and for each meeting attended of each Committee of which the Director is a member, and for attendance at Planning and Pension meetings, shall be $1,000, payable only to Directors who are not full-time employees of the Company. Post-Retirement Income After retirement from the Board, each Director who does not receive a pension benefit from the Company is entitled to receive annual compensation in an amount equal to the sum of all annual retainers being received by the Director at the time of the Director's retirement. "Annual compensation" shall include the value of the 450 shares of Common Stock at the time of retirement. The dollar value included in the calculation of the amount of annual compensation shall be the average of the high price and the low price of the Common Stock as traded on the New York Stock Exchange on the day of the annual meeting or, if no stock is traded on that day, then the average on the day next preceding the annual meeting date on which Common Stock was traded. The annual compensation will be paid to the Director (or to the Director's named beneficiary in the event the Director dies after retirement and while the Director is still being paid the annual compensation) in equal monthly installments over a period of time equal to the period of service of the Director on the Board. Should a Director die while in office, annual compensation will be paid to the Director's named beneficiary in an amount equal to the sum of all annual retainers being received by the Director at the time of the Director's death. The annual compensation will be paid in equal monthly installments over a period of time equal to the period of service of the deceased on the Board. If there is a "change in control" (as hereinafter defined) then within 14 days thereafter the following actions shall be taken: (1) The Post-Retirement Income of each Director currently serving on the Board and entitled to receive such Income shall be calculated as if the Director had retired immediately prior to the change in control. (2) The entire amount of the Post-Retirement Income (as calculated under the preceding paragraph) to which each Director is entitled shall be paid to each Director in a lump sum. (3) Each retired Director who, at the time the change in control occurs, is retired and is receiving, or is entitled to receive, Post-Retirement Income, shall receive all remaining Post-Retirement Income which has not been paid to the retired Director (or the retired Director's beneficiary) in a lump sum and not in installments. "Change in control" shall mean the earlier of the following to occur: (a) the public announcement by the Company or by any person (which shall not include the Company, any subsidiary of the Company or any employee benefit plan of the Company or of any subsidiary of the Company) ("Person") that such Person, who or which, together with all Affiliates and Associates (within the meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (17 C.F.R. 240.12b-2)) of such Person, shall be the beneficial owner of twenty percent (20%) or more of the voting stock then outstanding; (b) the commencement of, or after the first public announcement of any Person to commence, a tender or exchange offer the consummation of which would result in any Person becoming the beneficial owner of voting stock aggregating thirty percent (30%) or more of the then outstanding voting stock; (c) the announcement of any transaction relating to the Company required to be described pursuant to the requirements of Item 6(e) of Schedule 14A of Regulation 14A of the Securities and Exchange Commission under the Securities Exchange Act of 1934 (17 C.F.R. 240.14a-101, item 6(e)); (d) a proposed change in the constituency of the Board of Directors of the Company such that, during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company cease for any reason to constitute at least a majority thereof, unless the election or nomination for election by the shareholders of the Company of each new director was approved by a vote of at least two-thirds (2/3) of the directors then still in office who were members of the Board of Directors of the Company at the beginning of the period; or (e) any other event which shall be deemed by a majority of the Compensation Committee of the Board of Directors of the Company to constitute a "change in control." Directors Emeritus The Board of Directors may elect from those persons who have been members of the Board of Directors, Directors Emeritus. Those elected shall have served as a Director for at least ten years. The designation as a Director Emeritus may be renewed annually by the Board of Directors, but not beyond the fifth year following the Director's retirement from the Board of Directors. Each person so designated may, from time to time, be invited by the Chairman of the Board to participate as a nonvoting member of the Company's Board of Directors. A Director Emeritus so participating shall receive no meeting fee although reimbursement for reasonable travel expenses in connection with attendance at the meeting will be provided. Travel Expense Reimbursement All Directors will be reimbursed for reasonable travel expenses including spouse's expenses (providing the spouse participates in ALL business, community, spouse-specific and social events), in connection with attendance at meetings of the Company's Board of Directors and its committees. If the travel expense is related to the reimbursement of commercial airfare, such reimbursement will not exceed full-coach rate. If the travel expense is related to reimbursement of non-commercial airfare, such reimbursement will not exceed the rate for comparable travel by means of commercial airline at the first-class rate. Directors' Liability Article Seventeenth of the Company's Certificate of Incorporation provides that no Director of the Company shall be liable to the Company or its stockholders for breach of fiduciary duty as a Director. Section 7.07 of the Company's Bylaws requires the Company to indemnify fully a Director against expenses, attorneys fees, judgments, fines and amounts paid in settlement of any suit, action or proceeding, whether civil or criminal, arising from an action of a Director by reason of the fact that the Director was a Director of Montana-Dakota Utilities Co. or MDU Resources Group, Inc. There are exceptions to these protections: breaches of the Directors' duty of loyalty to the Company or its stockholders, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, violation of Section 174 of the Delaware General Corporation Law (relating to unlawful declaration of dividends and unlawful purchase of the company's stock), and transactions from which the Director derived an improper personal benefit (including short-swing profits under Section 16(b) of the Securities Exchange Act of 1934). The Company has and does maintain Directors' and Officers' liability insurance coverage with a $75,000,000 limit. Insurance Coverages The Company maintains the following insurance for protection of its Directors as they carry out the business of MDU Resources Group, Inc. 1. General liability and automobile liability insurance: The Directors are afforded coverage under the general liability and automobile liability insurance of the Company. The policy limitation is $75,000,000 in excess of the $500,000 per occurrence retention for general liability and $250,000 per occurrence retention for automobile liability which the Company has elected to self insure. 2. Fiduciary and employee benefit liability insurance: The Directors are afforded coverage under the fiduciary and employee benefits liability insurance of the Company. The policy has a $35,000,000 limit with no deductible applicable to the Director. 3. Aircraft liability insurance: The Company's existing aircraft liability insurance policy extends coverage while a non-owned aircraft is used by a Director in traveling to and from Director or Board committee meetings. This insurance coverage constitutes excess liability coverage in the amount of $200,000,000. In the case of aircraft owned by a Director, this coverage is excess over and above primary insurance which must be carried personally by a Director on the owned aircraft. Before coverage over and above primary insurance will be provided, a Certificate of Insurance from the Director must be received, submitted to the Company's insurance carrier and approved. The Company's insurance carrier shall have the right to determine the amount and limits of coverage. 3. Travel and Sojourn insurance: All Directors are protected by a group insurance policy with coverage of $250,000 that provides 24-hour accident protection while traveling on Company business. Coverage in all instances begins at the actual start of a business trip and ends when the Director returns to his/her home or regular place of employment. The beneficiary of the insurance will be that beneficiary recorded on a beneficiary designation card provided by the Company. 4. Group Life Insurance: All outside Directors are protected by a non-contributory group life insurance policy with coverage of $100,000. The coverage begins the day the Director is elected to the Board of Directors and terminates when the Director ceases to be an outside Director. A Certificate of Insurance shall be provided to the Director and the beneficiary of the insurance will be that beneficiary recorded on a beneficiary designation card provided by the Company. This protection is considered taxable compensation under current tax laws. Consequently, the Company will provide each Director annually on Form 1099 the amount of taxable income related to this coverage. EX-10.E 5 DEFERRED COMPENSATION PLAN FOR DIRECTORS MDU RESOURCES GROUP, INC. Amended and Restated DEFERRED COMPENSATION PLAN FOR DIRECTORS Effective January 1, 1992 I. PURPOSE The Board of Directors of MDU Resources Group, Inc. (the "Company") established the Deferred Compensation Plan for Directors (the "Plan") effective as of September l, 1988. The Plan is hereby amended and restated effective January 1, 1992, and is substituted for the Restated Plan established by the Company on August 1, 1991. The Plan shall continue until terminated by the Board of Directors of the Company, subject to the provisions of Article XII, below. The purpose of this Plan is to aid the Company in attracting and retaining as Directors persons whose abilities, experience and judgment can contribute to the continued progress of the Company. The Plan will provide a method of deferring compensation to the Directors. II. DEFINITIONS A. Beneficiary. "Beneficiary" means the person or persons designated as such in accordance with Article XI. B. Compensation and Deferral Amount. "Compensation" means any cash retainer, meeting fees and any other cash compensation payable to Eligible Directors by the Company for services as a Director. This Deferred Compensation Plan for Directors governs any or all of that Compensation which the Participant elects to credit to his Deferred Compensation Account, which is hereafter referred to as the "Deferral Amount." C. Deferred Compensation Account. "Deferred Compensation Account" means the account maintained on the books of account of the Company for each Participant pursuant to Article VI. D. Effective Date. "Effective Date" means January 1, 1992, the date on which the restated and amended Plan became effective. E. Eligible Director. "Eligible Director" means those Directors of the Company who are not employees of the Company. F. Investment Units. This term shall have the meaning defined in Article VI.B. G. Market Price. "Market Price" means the average of the highest and lowest transaction prices for the Company's common stock on the New York Stock Exchange for a given day. H. Participant. "Participant" means an Eligible Director participating in the Plan in accordance with the provisions of Article IV. I. Plan Year. "Plan Year" means the calendar year. III. ADMINISTRATION OF THE PLAN The Board of Directors shall be the sole administrator of the Plan. The Board of Directors may from time to time establish rules and regulations for the administration of the Plan. All determinations of the Board of Directors, irrespective of their character or nature, including, but not limited to, all questions of construction and interpretation, shall be final, binding and conclusive upon all parties. Without limiting the generality of the foregoing, the determination of the Board of Directors as to whether a Participant has terminated his services and the date thereof shall be final, binding and conclusive upon all persons. The Company and/or the Board of Directors may consult with legal counsel, who may be counsel for the Company or other counsel, with respect to its obligations and duties hereunder or with respect to any claim, action or proceeding or any other matter, and shall not be liable for any action taken or not taken by it in good faith pursuant to the advice of such counsel. The Chairman, at the direction of the Board of Directors shall be responsible for maintaining books and records for the Plan and adopting standard forms for such matters as beneficiary designations and applications for benefits, provided such rules and forms are not inconsistent with the provisions of the Plan. Such books and records shall only be open for examination by a Participant or his duly designated beneficiary to the extent that they specifically involve the Deferred Compensation Account created for his benefit or any payments which are to be made to him or his beneficiary hereunder. Each Participant or his duly designated beneficiary shall be notified no less frequently than annually of the balance in his account. Neither the Board of Directors nor any member of the Board of Directors nor the Company nor any other person who is acting on behalf of the Board of Directors or the Company shall be liable for any act or failure to act hereunder except for gross negligence or fraud. IV. PARTICIPATION All Eligible Directors, including any person who becomes a Director after the effective date hereof, shall be Participants in the Plan. Each Participant in the Plan shall have the right to elect to defer the payment of all or any part of his Compensation, with such Deferral Amount to be payable at the time or times and in the manner hereinafter stated. A Participant must defer at least $1,000 per year. Each Participant who elects to defer the payment of all or any part of his Compensation shall execute and deliver to the Board of Directors a "Notice of Election." Such Notice will provide the percentage of his Compensation to be deferred, the date such deferral is to commence and the beneficiary designations of the Director. Such deferral election shall be applicable only to Compensation earned by reason of services rendered after the date of such Notice. An election to defer Compensation shall continue in effect until revoked or modified by a subsequent "Notice of Election," provided however, (1) that every election to defer shall be irrevocable as to Compensation earned prior to the date of revocation and (2) that such election may be changed no more often than annually. Revocation or modification shall be made in writing to the Board of Directors and shall be effective upon the date stated therein. V. VESTING OF DEFERRED COMPENSATION ACCOUNT A Participant's interest in his Deferred Compensation Account shall vest immediately with regard to Deferral Amounts and earnings thereon. VI. ACCOUNTS AND VALUATIONS A. Deferred Compensation Accounts. The Board of Directors shall establish and maintain a separate Deferred Compensation Account for each Participant. The Participant's Deferral Amount shall be credited to the Participant's Deferred Compensation Account quarterly on the first day of March, June, September and December in amounts as nearly equal as possible. B. Conversion to Investment Units. At the time a Deferral Amount is credited to the Deferred Compensation Account, it shall be converted to Investment Units, by dividing the amount deferred by the Market Price of the Company's stock on the first trading day immediately preceding the deferral. Fractional share Investment Units will be maintained in the Account. VII. DIVIDEND EQUIVALENTS If a dividend is declared on the common stock of the Company, an equivalent amount shall be credited to the Participant's Deferred Compensation Account for each Investment Unit. Such amounts shall be converted to additional Investment Units, pursuant to Article VI.B. VIII. DISTRIBUTION A. Conversion of Investment Units to Dollars. When a Participant leaves the Board of Directors, dies, or becomes disabled, the number of Investment Units in his Deferred Compensation Account shall be multiplied by the Market Price of the Company's common stock on the day that is six full calendar months after the date of his leaving, death, or disability. If the New York Stock Exchange is not open that day then it shall be the Market Price on the next day the New York Stock Exchange is open. During this six month period, if a dividend is declared on common stock of the Company, an equivalent amount shall be credited to the Participant's Deferred Compensation Account for each Investment Unit. Such amounts shall be credited in cash and shall not be converted to additional Investment Units. B. Payment. The dollar value of the Investment Units contained in the Participant's Deferred Compensation Account shall be paid to him in substantially equal monthly payments over five years, with interest at a fixed rate over the five-year period. The fixed rate shall be the prime rate plus 1 percentage point on the day the value of the Investment Units is determined according to this Article VIII. The "prime rate," for purposes of this paragraph, shall be the base rate on corporate loans posted by at least 75 percent of the nation's 30 largest banks as reported daily in The Wall Street Journal. IX. TAX WITHHOLDING UPON DISTRIBUTION To the extent required by law, the Company shall withhold from payments made hereunder any taxes required to be withheld by the federal or any state or local government. X. COMMENCEMENT OF PAYMENTS Except as otherwise provided in this Plan, commencement of payments under this Plan shall begin as soon as administratively feasible after the value of the Investment Units is determined according to Article VIII. XI. BENEFICIARY DESIGNATION Each Participant shall have the right at any time to designate any person or persons as Beneficiary or Beneficiaries (both principal and contingent) to whom payment under this Plan shall be paid in the event of death prior to complete distribution of the deferred amounts under the Plan. Each beneficiary designation shall become effective only when filed in writing with the Board of Directors during the Participant's lifetime on a form provided by the Board of Directors. The filing of a new beneficiary designation form will cancel all beneficiary designations previously filed. Any finalized divorce of a Participant subsequent to the date of filing of a beneficiary designation form shall revoke such designation. The spouse of a married Participant domiciled in a community property jurisdiction shall join in any designation of Beneficiary or Beneficiaries other than the spouse. If a Participant fails to designate a Beneficiary as provided above or if the beneficiary designation is revoked by divorce, or otherwise, without execution of a new designation, or if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant's benefits, then the distribution of such benefits shall be made to the Participant's estate. If any distribution to a Beneficiary is to be made in installments, and the primary Beneficiary dies before receiving all installments, the remaining installments, if any, shall be paid to the estate of the primary Beneficiary in a lump sum. XII. AMENDMENT AND TERMINATION OF PLAN A. Amendment. The Company may at any time amend the Plan in whole or in part, provided, however, that except as provided in Article XII.B., no amendment shall act to reduce the benefits under the Plan payable to any Participant with respect to any Deferral Amount credited to the Participant's Deferred Compensation Account prior to the date of the amendment. Written notice of any amendments shall be given to each Participant. B. Termination of Plan 1. Company's Right to Terminate. The Board of Directors may at any time terminate the Plan. 2. Payments Upon Termination. Upon any termination of the Plan under this section no additional Deferral Amounts will be credited to the Participant's Deferred Compensation Account. The Investment Units recorded in such Account shall be converted into dollars pursuant to Article VIII.A. and paid in a lump sum to the Participant or the Participant's Beneficiary. XIII. MISCELLANEOUS A. Unsecured General Creditor. Participants and their beneficiaries, heirs, successors, and assigns shall have no legal or equitable rights, interests, or other claims in any property or assets of the Company, nor shall they be beneficiaries of, or have any rights, claims, or interests in any specified assets of the Company. Any and all of the Company's assets shall be and remain general, unpledged, unrestricted assets of the Company. The Company's obligation under the Plan shall be that of an unfunded and unsecured promise of Company to pay money in the future. B. Obligations to the Company. If a Participant becomes entitled to a distribution of benefits under the Plan, and if at such time the Participant has outstanding any debt, obligation, or other liability representing an amount owed to the Company, then the Company may offset such amounts owing it or an affiliate against the amount of benefits otherwise distributable. Such determination shall be made by the Board of Directors. Establishment of this Plan and the participation by any person shall not be construed to confer any right on the part of such person to be nominated for reelection, or to be reelected, to the Board of Directors of the Company. C. Nonassignability. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage, or otherwise encumber, transfer, hypothecate, or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and nontransfer- able. No part of the amounts payable shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency. D. Protective Provisions. A Participant will cooperate with the Company by furnishing any and all information requested by the Company in order to facilitate the payment of any amounts hereunder. If a Participant refuses to cooperate, the Company shall have no further obligation to the Participant under the Plan. E. Gender, Singular and Plural. Wherever the context so requires, words in the masculine include the feminine and words in the feminine include the masculine and the definition of any term in the singular may include the plural. F. Captions. The captions to the articles, sections, and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. G. Applicable Law. This Plan shall be construed, administered and governed in accordance with the laws of the State of North Dakota. H. Validity. In the event any provision of this Plan is held invalid, void, or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of this Plan. I. Notice. Any notice or filing required or permitted to be given to the Board of Directors shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to the principal office of the Company, directed to the attention of the Secretary of the Company. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. EX-10.F 6 NON-EMPLOYEE DIRECTOR STOCK COMPENSATION PLAN MDU RESOURCES GROUP, INC. NON-EMPLOYEE DIRECTOR STOCK COMPENSATION PLAN I. Purpose The purpose of the MDU Resources Group, Inc. Non-Employee Director Stock Compensation Plan is to provide ownership of the Company's stock to non-employee members of the Board of Directors in order to improve the Company's ability to attract and retain highly qualified individuals to serve as directors of the Company and to strengthen the commonality of interest between directors and stockholders. II. Definitions When used herein, the following terms shall have the respective meanings set forth below: "Agent" means a securities broker-dealer selected by the Company and registered under the Exchange Act. "Annual Retainer" means the annual retainer payable by the Company to Non-Employee Directors and shall include, for purposes of this Plan, meeting fees, cash retainers and any other cash compensation payable to Non-Employee Directors by the Company for services as a Director. "Annual Meeting of Stockholders" means the annual meeting of stockholders of the Company at which directors of the Company are elected. "Board" or "Board of Directors" means the Board of Directors of the Company. "Committee" means a committee whose members meet the requirements of Section IV(A) hereof, and who are appointed from time to time by the Board to administer the Plan. "Common Stock" means the common stock, $3.33 par value, of the Company. "Company" means MDU Resources Group, Inc., a Delaware corporation, and any successor corporation. "Effective Date" means the date as of which the Plan is approved by the stockholders of the Company. "Employee" means any officer or other common law employee of the Company or of any of its business units or divisions or of any Subsidiary. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Non-Employee Director" or "Participant" means any person who is elected or appointed to the Board of Directors of the Company and who is not an Employee. "Plan" means the Company's Non-Employee Director Stock Compensation Plan, adopted by the Board on February 9, 1995, and approved by the stockholders on April 25, 1995, as it may be amended from time to time. "Plan Year" means the period commencing on the Effective Date of the Plan and ending the next following December 31 and, thereafter, the calendar year. "Stock Payment" means that portion of the Annual Retainer to be paid to Non-Employee Directors in shares of Common Stock rather than cash for services rendered as a director of the Company, as provided in Section V hereof, including that portion of the Stock Payment resulting from any election specified in Section VI hereof. "Subsidiary" means any corporation that is a "subsidiary corporation" of the Company, as that term is defined in Section 424(f) of the Internal Revenue Code of 1986, as amended. III. Shares of Common Stock Subject to the Plan Subject to Section VII below, the maximum aggregate number of shares of Common Stock that may be delivered under the Plan is 112,500 shares. The Common Stock to be delivered under the Plan will be made available from authorized but unissued shares of Common Stock, treasury stock or shares of Common Stock purchased on the open market. Shares of Common Stock purchased on the open market shall be purchased by the Agent in compliance with Rule 10b-6 and Rule 10b-18 under the Exchange Act to the extent compliance shall be required. Shares of Common Stock purchased on the open market by the Agent shall be purchased and held in such manner that such shares are not returned to the status of treasury stock or authorized but unissued shares of Common Stock. IV. Administration A. The Plan will be administered by a committee appointed by the Board, consisting of two or more persons who are not eligible to participate in the Plan. Members of the Committee need not be members of the Board. The Company shall pay all costs of administration of the Plan. B. Subject to and not inconsistent with the express provisions of the Plan, the Committee has and may exercise such powers and authority of the Board as may be necessary or appropriate for the Committee to carry out its functions under the Plan. Without limiting the generality of the foregoing, the Committee shall have full power and authority (i) to determine all questions of fact that may arise under the Plan, (ii) to interpret the Plan and to make all other determinations necessary or advisable for the administration of the Plan and (iii) to prescribe, amend and rescind rules and regulations relating to the Plan, including, without limitation, any rules which the Committee determines are necessary or appropriate to ensure that the Company and the Plan will be able to comply with all applicable provisions of any federal, state or local law. All interpretations, determinations and actions by the Committee will be final and binding upon all persons, including the Company and the Participants. V. Determination of Annual Retainer and Stock Payments A. The Board shall determine the Annual Retainer payable to all Non-Employee Directors of the Company. B. Each director who is a Non-Employee Director immediately following the date of the Company's Annual Meeting of Stockholders shall receive on the fifteenth business day following the Annual Meeting a Stock Payment of 450 shares of Common Stock as a portion of the Annual Retainer payable to such director for the Plan Year in which such date occurs. Certificates evidencing the shares of Common Stock constituting Stock Payments shall be registered in the respective names of the Participants and shall be issued to each Participant. The cash portion of the Annual Retainer shall be paid to Non-Employee Directors at such times and in such manner as may be determined by the Board of Directors. C. Any director may decline a Stock Payment for any Plan Year; provided, however, that no cash compensation shall be paid in lieu thereof. Any director who declines a Stock Payment must do so in writing prior to the performance of any services as a Non-Employee Director for the Plan Year to which such Stock Payment relates. D. No Non-Employee Director shall be required to forfeit or otherwise return any shares of Common Stock issued as a Stock Payment pursuant to the Plan (including any shares of Common Stock received as a result of an election under Section VI) notwithstanding any change in status of such Non-Employee Director which renders him ineligible to continue as a Participant in the Plan. Any person who is a Non-Employee Director immediately following the Company's Annual Meeting of Stockholders shall be entitled to receive a Stock Payment as a portion of the applicable Annual Retainer. VI. Election to Increase Amount of Stock Payment In lieu of receiving the cash portion of the Annual Retainer for any Plan Year, a Participant may make a written election to reduce the cash portion of such Annual Retainer by a specified dollar amount and have such amount applied to purchase additional shares of Common Stock of the Company. The election shall be made on a form provided by the Committee and must be returned to the Committee on or before the last business day of the year prior to the year in which the election is to be effective. The election form shall state the amount by which the Participant desires to reduce the cash portion of the Annual Retainer, which shall be applied toward the purchase of Common Stock; provided, however, that no fractional shares may be purchased. Stock to be delivered to Participants pursuant to this election shall be delivered in December of each year. Cash in lieu of any fractional share shall be paid to the Participant. An election shall continue in effect until changed or revoked by the Participant. No Participant shall be allowed to change or revoke any election for the then current year, but may change an election for any subsequent Plan Year. All shares of Common Stock received pursuant to an election under this Article VI must be held by a Participant for six months after receipt thereof. VII. Adjustment For Changes in Capitalization If the outstanding shares of Common Stock of the Company are increased, decreased or exchanged for a different number or kind of shares or other securities, or if additional shares or new or different shares or other securities are distributed with respect to such shares of Common Stock or other securities, through merger, consolidation, sale of all or substantially all of the property of the Company, reorganization or recapitalization, reclassification, stock dividend, stock split, reverse stock split, combinations of shares, rights offering, distribution of assets or other distribution with respect to such shares of Common Stock or other securities or other change in the corporate structure or shares of Common Stock, the number of shares to be granted annually, the maximum number of shares and/or the kind of shares that may be issued under the Plan shall be appropriately adjusted by the Committee. Any determination by the Committee as to any such adjustment will be final, binding and conclusive. The maximum number of shares issuable under the Plan as a result of any such adjustment shall be rounded down to the nearest whole share. VIII. Amendment and Termination of Plan A. The Board will have the power, in its discretion, to amend, suspend or terminate the Plan at any time; provided, however, that no amendment which requires stockholder approval in order for the Plan to continue to comply with Rule 16b-3 under the Exchange Act, including any successor to such Rule, shall be effective unless such amendment shall be approved by the requisite vote of the stockholders of the Company entitled to vote thereon. B. Notwithstanding the foregoing, any provision of the Plan that either states the amount and price of securities to be issued under the Plan and specifies the price and timing of such issuances, or sets forth a formula that determines the amount, price and timing of such issuances, shall not be amended more than once every six months, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act, or the rules thereunder. IX. Effective Date and Duration of the Plan The Plan will become effective upon the Effective Date, and shall remain in effect, subject to the right of the Board of Directors to terminate the Plan at any time pursuant to Section VIII, until all shares subject to the Plan have been purchased or acquired according to the Plan's provisions. X. Miscellaneous Provisions A. Continuation of Directors in Same Status Nothing in the Plan or any action taken pursuant to the Plan shall be construed as creating or constituting evidence of any agreement or understanding, express or implied, that the Company will retain a Non-Employee Director as a director or in any other capacity for any period of time or at a particular retainer or other rate of compensation, as conferring upon any Participant any legal or other right to continue as a director or in any other capacity, or as limiting, interfering with or otherwise affecting the right of the Company to terminate a Participant in his capacity as a director or otherwise at any time for any reason, with or without cause, and without regard to the effect that such termination might have upon him as a Participant under the Plan. B. Compliance with Government Regulations Neither the Plan nor the Company shall be obligated to issue any shares of Common Stock pursuant to the Plan at any time unless and until all applicable requirements imposed by any federal and state securities and other laws, rules and regulations, by any regulatory agencies or by any stock exchanges upon which the Common Stock may be listed have been fully met. As a condition precedent to any issuance of shares of Common Stock and delivery of certificates evidencing such shares pursuant to the Plan, the Board or the Committee may require a Participant to take any such action and to make any such covenants, agreements and representations as the Board or the Committee, as the case may be, in its discretion deems necessary or advisable to ensure compliance with such requirements. The Company shall in no event be obligated to register the shares of Common Stock deliverable under the Plan pursuant to the Securities Act of 1933, as amended, or to qualify or register such shares under any securities laws of any state upon their issuance under the Plan or at any time thereafter, or to take any other action in order to cause the issuance and delivery of such shares under the Plan or any subsequent offer, sale or other transfer of such shares to comply with any such law, regulation or requirement. Participants are responsible for complying with all applicable federal and state securities and other laws, rules and regulations in connection with any offer, sale or other transfer of the shares of Common Stock issued under the Plan or any interest therein including, without limitation, compliance with the registration requirements of the Securities Act of 1933, as amended (unless an exemption therefrom is available), or with the provisions of Rule 144 promulgated thereunder, if applicable, or any successor provisions. Certificates for shares of Common Stock may be legended as the Committee shall deem appropriate. C. Nontransferability of Rights No Participant shall have the right to assign the right to receive any Stock Payment or any other right or interest under the Plan, contingent or otherwise, or to cause or permit any encumbrance, pledge or charge of any nature to be imposed on any such Stock Payment (prior to the issuance of stock certificates evidencing such Stock Payment) or any such right or interest. D. Severability In the event that any provision of the Plan is held invalid, void or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of the Plan. E. Governing Law To the extent not preempted by Federal law, the Plan shall be governed by the laws of the State of North Dakota. EX-10.G 7 1997 NON-EMPLOYEE DIRECTOR LONG-TERM INCENTIVE PLAN MDU RESOURCES GROUP, INC. 1997 NON-EMPLOYEE DIRECTOR LONG-TERM INCENTIVE PLAN Article 1. Establishment, Purpose and Duration 1.1 Establishment of the Plan. MDU Resources Group, Inc., a Delaware corporation (hereinafter referred to as the "Company"), hereby establishes an incentive plan to be known as the "MDU Resources Group, Inc. 1997 Non-Employee Director Long-Term Incentive Plan" (hereinafter referred to as the "Plan"), as set forth in this document. The Plan permits the grant of Nonqualified Stock Options (NQSO), Stock Appreciation Rights (SAR), Restricted Stock, Performance Units, Performance Shares and other awards. The Plan shall become effective when approved by the stockholders at the annual meeting on April 22, 1997, (the "Effective Date"), and shall remain in effect as provided in Section 1.3 herein. 1.2 Purpose of the Plan. The purpose of the Plan is to promote the success and enhance the value of the Company by linking the personal interests of Participants to those of Company stockholders and customers. The Plan is further intended to assist the Company in its ability to motivate, attract and retain highly qualified individuals to serve as directors of the Company. 1.3 Duration of the Plan. The Plan shall commence on the Effective Date, as described in Section 1.1 herein, and shall remain in effect, subject to the right of the Board of Directors to terminate the Plan at any time pursuant to Article 14 herein, until all Shares subject to it shall have been purchased or acquired according to the Plan's provisions. Article 2. Definitions Whenever used in the Plan, the following terms shall have the meanings set forth below and, when such meaning is intended, the initial letter of the word is capitalized: 2.1 "Award" means, individually or collectively, a grant under the Plan of NQSOs, SARs, Restricted Stock, Performance Units, Performance Shares or any other type of award permitted under Article 10 of the Plan. 2.2 "Award Agreement" means an agreement entered into by each Participant and the Company, setting forth the terms and provisions applicable to an Award granted to a Participant under the Plan. 2.3 "Base Value" of an SAR shall have the meaning set forth in Section 7.1 herein. 2.4 "Board" or "Board of Directors" means the Board of Directors of the Company. 2.5 "Change in Control" means the earliest of the following to occur: (a) the public announcement by the Company or by any person (which shall not include the Company, any subsidiary of the Company, or any employee benefit plan of the Company or of any subsidiary of the Company) ("Person") that such Person, who or which, together with all Affiliates and Associates (within the meanings ascribed to such terms in the Rule 12b-2 of the General Rules and Regulations under the Exchange Act) of such Person, shall be the beneficial owner of twenty percent (20%) or more of the voting stock of the Company outstanding; (b) the commencement of, or after the first public announcement of any Person to commence, a tender or exchange offer the consummation of which would result in any Person becoming the beneficial owner of voting stock aggregating thirty percent (30%) or more of the then outstanding voting stock of the Company; (c) the announcement of any transaction relating to the Company required to be described pursuant to the requirements of Item 6(e) of Schedule 14A of Regulation 14A under the Exchange Act; (d) a proposed change in constituency of the Board such that, during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election or nomination for election by the stockholders of the Company of each new Director was approved by a vote of at least two-thirds (2/3) of the Directors then still in office who were members of the Board at the beginning of the period; (e) the sale or other disposition of all or substantially all of the assets of Montana-Dakota Utilities Co., other than to a subsidiary of the Company; or (f) any other event which shall be deemed by a majority of the Committee to constitute a "change in control". 2.6 "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.7 "Committee" means the Committee, as specified in Article 3, appointed by the Board to administer the Plan with respect to Awards. 2.8 "Company" means MDU Resources Group, Inc., a Delaware corporation, or any successor thereto as provided in Article 15 herein. 2.9 "Director" means any individual who is a member of the Board of Directors of the Company. 2.10 "Dividend Equivalent" means, with respect to Shares subject to an Award, a right to be paid an amount equal to dividends declared on an equal number of outstanding Shares. 2.11 "Employee" means any full-time or regularly-scheduled part-time employee of the Company or of the Company's Subsidiaries, who is not covered by any collective bargaining agreement to which the Company or any of its Subsidiaries is a party. 2.12 "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto. 2.13 "Exercise Period" means the period during which an SAR or Option is exercisable, as set forth in the related Award Agreement. 2.14 "Fair Market Value" shall mean the average of the high and low sale prices as reported in the consolidated transaction reporting system or, if there is no such sale on the relevant date, then on the last previous day on which a sale was reported. 2.15 "Freestanding SAR" means an SAR that is granted independently of any Option. 2.16 "Non-Employee Director" means any person who is elected or appointed to the Board and who is not an Employee. 2.17 "Nonqualified Stock Option" or "NQSO" means an option to purchase Shares, granted under Article 6 herein, which is not intended to be an Incentive Stock Option under Section 422 of the Code. 2.18 "Option" means a Nonqualified Stock Option. 2.19 "Option Price" means the price at which a Share may be purchased by a Participant pursuant to an Option, as determined by the Committee and set forth in the Option Award Agreement. 2.20 "Participant" means a Non-Employee Director who has outstanding an Award granted under the Plan. 2.21 "Performance Unit" means an Award granted to a Participant, as described in Article 9 herein. 2.22 "Performance Share" means an Award granted to a Participant, as described in Article 9 herein. 2.23 "Period of Restriction" means the period during which the transfer of Restricted Stock is limited in some way, as provided in Article 8 herein. 2.24 "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act, as used in Sections 13(d) and 14(d) thereof, including usage in the definition of a "group" in Section 13(d) thereof. 2.25 "Restricted Stock" means an Award of Shares granted to a Participant pursuant to Article 8 herein. 2.26 "Shares" means the shares of common stock of the Company. 2.27 "Stock Appreciation Right" or "SAR" means a right, granted alone or in connection with a related Option, designated as an SAR, to receive a payment on the day the right is exercised, pursuant to the terms of Article 7 herein. Each SAR shall be denominated in terms of one Share. 2.28 "Subsidiary" means any corporation that is a "subsidiary corporation" of the Company as that term is defined in Section 424(f) of the Code. 2.29 "Tandem SAR" means an SAR that is granted in connection with a related Option, the exercise of which shall require forfeiture of the right to purchase a Share under the related Option (and when a Share is purchased under the Option, the Tandem SAR shall be similarly canceled). Article 3. Administration 3.1 The Committee. The Plan shall be administered by any committee appointed by the Board or by the Board of Directors (the "Committee"). 3.2 Authority of the Committee. The Committee shall have full power except as limited by law, the Articles of Incorporation and the Bylaws of the Company, subject to such other restricting limitations or directions as may be imposed by the Board and subject to the provisions herein, to determine the size and types of Awards; to determine the terms and conditions of such Awards in a manner consistent with the Plan; to construe and interpret the Plan and any agreement or instrument entered into under the Plan; to establish, amend or waive rules and regulations for the Plan's administration; and (subject to the provisions of Article 14 herein) to amend the terms and conditions of any outstanding Award. Further, the Committee shall make all other determinations which may be necessary or advisable for the administration of the Plan. As permitted by law, the Committee may delegate its authorities as identified hereunder. 3.3 Restrictions on Share Transferability. The Committee may impose such restrictions on any Shares acquired pursuant to Awards under the Plan as it may deem advisable, including, without limitation, restrictions to comply with applicable Federal securities laws, with the requirements of any stock exchange or market upon which such Shares are then listed and/or traded and with any blue sky or state securities laws applicable to such Shares. 3.4 Approval. The Committee or the Board shall approve all Awards made under the Plan and all elections made by Participants, prior to their effective date, to the extent necessary to comply with Rule 16b-3 under the Exchange Act. 3.5 Decisions Binding. All determinations and decisions made by the Committee pursuant to the provisions of the Plan and all related orders or resolutions of the Board shall be final, conclusive and binding on all persons, including the Company, its stockholders, Participants and their estates and beneficiaries. 3.6 Costs. The Company shall pay all costs of administration of the Plan. Article 4. Shares Subject to the Plan 4.1 Number of Shares. Subject to Section 4.2 herein, the maximum number of Shares available for grant under the Plan shall be 300,000. Shares underlying lapsed or forfeited Awards, or Awards that are not paid in Shares, may be reused for other Awards. Shares granted pursuant to the Plan may be (i) authorized but unissued Shares of Common Stock, (ii) treasury shares, or (iii) shares purchased on the open market. 4.2 Adjustments in Authorized Shares. In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, split-up, share combination or other change in the corporate structure of the Company affecting the Shares, such adjustment shall be made in the number and class of Shares which may be delivered under the Plan, and in the number and class of and/or price of Shares subject to outstanding Awards granted under the Plan, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights; provided, however, that the number of Shares subject to any Award shall always be a whole number. Article 5. Eligibility and Participation 5.1 Eligibility. Persons eligible to participate in the Plan are any persons elected or appointed to the Board who are not Employees. 5.2 Actual Participation. Subject to the provisions of the Plan, the Committee may, from time to time, select from all eligible Non-Employee Directors those to whom Awards shall be granted and shall determine the nature and amount of each Award. Article 6. Stock Options 6.1 Grant of Options. Subject to the terms and conditions of the Plan, Options may be granted to a Non-Employee Director at any time and from time to time, as shall be determined by the Committee. The Committee shall have complete discretion in determining the number of Shares subject to Options granted to each Participant (subject to Article 4 herein) and, consistent with the provisions of the Plan, in determining the terms and conditions pertaining to such Options. 6.2 Option Award Agreement. Each Option grant shall be evidenced by an Option Award Agreement that shall specify the Option Price, the term of the Option, the number of Shares to which the Option pertains, the Exercise Period and such other provisions as the Committee shall determine, including but not limited to any rights to Dividend Equivalents. 6.3 Exercise of and Payment for Options. Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve. A Participant may exercise an Option at any time during the Exercise Period. Options shall be exercised by the delivery of a written notice of exercise to the Company or its designee, setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by provisions for full payment for the Shares. The Option Price upon exercise of any Option shall be payable either: (a) in cash or its equivalent, (b) by tendering previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the total Option Price (provided that the Shares which are tendered must have been held by the Participant for at least six (6) months prior to their tender to satisfy the Option Price), (c) by Share withholding, (d) by cashless exercise or (e) by a combination of (a),(b),(c), and/or (d). As soon as practicable after receipt of a written notification of exercise of an Option and provisions for full payment therefor, there shall be delivered to the Participant, in the Participant's name, Share certificates in an appropriate amount based upon the number of Shares purchased under the Option(s). 6.4 Termination of Director Status. Each Option Award Agreement shall set forth the extent to which the Participant shall have the right to exercise the Option following termination of the Participant's position on the Board of the Company. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Option Award Agreement entered into with Participants, need not be uniform among all Options granted pursuant to the Plan or among Participants and may reflect distinctions based on the reasons for termination of director status. 6.5 Transferability of Options. Except as otherwise determined by the Committee and set forth in the Option Award Agreement, no Option granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution, and all Options granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant or his or her legal representative. Article 7. Stock Appreciation Rights 7.1 Grant of SARs. Subject to the terms and conditions of the Plan, an SAR may be granted to a Non-Employee Director at any time and from time to time as shall be determined by the Committee. The Committee may grant Freestanding SARs, Tandem SARs or any combination of these forms of SAR. The Committee shall have complete discretion in determining the number of SARs granted to each Participant (subject to Article 4 herein) and, consistent with the provisions of the Plan, in determining the terms and conditions pertaining to such SARs. The Base Value of a Freestanding SAR shall equal the Fair Market Value of a Share on the date of grant of the SAR. The Base Value of Tandem SARs shall equal the Option Price of the related Option. 7.2 SAR Award Agreement. Each SAR grant shall be evidenced by an SAR Award Agreement that shall specify the number of SARs granted, the Base Value, the term of the SAR, the Exercise Period and such other provisions as the Committee shall determine. 7.3 Exercise and Payment of SARs. Tandem SARs may be exercised for all or part of the Shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option. A Tandem SAR may be exercised only with respect to the Shares for which its related Option is then exercisable. Freestanding SARs may be exercised upon whatever terms and conditions the Committee, in its sole discretion, imposes upon them. A Participant may exercise an SAR at any time during the Exercise Period. SARs shall be exercised by the delivery of a written notice of exercise to the Company, setting forth the number of SARs being exercised. Upon exercise of an SAR, a Participant shall be entitled to receive payment from the Company in an amount equal to the product of: (a) the excess of (i) the Fair Market Value of a Share on the date of exercise over (ii) the Base Value multiplied by (b) the number of Shares with respect to which the SAR is exercised. At the sole discretion of the Committee, the payment to the Participant upon SAR exercise may be in cash, in Shares of equivalent value, or in some combination thereof. 7.4 Termination of Director Status. Each SAR Award Agreement shall set forth the extent to which the Participant shall have the right to exercise the SAR following termination of the Participant's position on the Board of the Company. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the SAR Award Agreement entered into with Participants, need not be uniform among all SARs granted pursuant to the Plan or among Participants and may reflect distinctions based on the reasons for termination of director status. 7.5 Transferability of SARs. Except as otherwise determined by the Committee and set forth in the SAR Award Agreement, no SAR granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution, and all SARs granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant or his or her legal representative. Article 8. Restricted Stock 8.1 Grant of Restricted Stock. Subject to the terms and conditions of the Plan, Restricted Stock may be granted to a Non- Employee Director at any time and from time to time, as shall be determined by the Committee. The Committee shall have complete discretion in determining the number of shares of Restricted Stock granted to each Participant (subject to Article 4 herein) and, consistent with the provisions of the Plan, in determining the terms and conditions pertaining to such Restricted Stock. 8.2 Restricted Stock Award Agreement. Each Restricted Stock grant shall be evidenced by a Restricted Stock Award Agreement that shall specify the Period or Periods of Restriction, the number of Restricted Stock Shares granted and such other provisions as the Committee shall determine. 8.3 Transferability. Restricted Stock granted hereunder may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction established by the Committee and specified in the Restricted Stock Award Agreement. All rights with respect to the Restricted Stock granted to a Participant under the Plan shall be available during his or her lifetime only to such Participant or his or her legal representative. 8.4 Certificate Legend. Each certificate representing Restricted Stock granted pursuant to the Plan may bear a legend substantially as follows: "The sale or other transfer of the shares of stock represented by this certificate, whether voluntary, involuntary or by operation of law, is subject to certain restrictions on transfer as set forth in MDU Resources Group, Inc. 1997 Non-Employee Director Long-Term Incentive Plan, and in a Restricted Stock Award Agreement. A copy of such Plan and such Agreement may be obtained from MDU Resources Group, Inc." The Company shall have the right to retain the certificates representing Restricted Stock in the Company's possession until such time as all restrictions applicable to such Shares have been satisfied. 8.5 Removal of Restrictions. Restricted Stock shall become freely transferable by the Participant after the last day of the Period of Restriction applicable thereto. Once Restricted Stock is released from the restrictions, the Participant shall be entitled to have the legend referred to in Section 8.4 removed from his or her stock certificate. 8.6 Voting Rights. During the Period of Restriction, Participants holding Restricted Stock may exercise full voting rights with respect to those Shares. 8.7 Dividends and Other Distributions. Subject to the Committee's right to determine otherwise at the time of grant, during the Period of Restriction, Participants holding Restricted Stock shall receive all regular cash dividends paid with respect to all Shares while they are so held. All other distributions paid with respect to such Restricted Stock shall be credited to Participants subject to the same restrictions on transferability and forfeitability as the Restricted Stock with respect to which they were paid and shall be paid to the Participant within forty- five (45) days following the full vesting of the Restricted Stock with respect to which such distributions were made. 8.8 Termination of Director Status. Each Restricted Stock Award Agreement shall set forth the extent to which the Participant shall have the right to receive unvested Restricted Stock following termination of the Participant's position on the Board of the Company. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Restricted Stock Award Agreement entered into with Participants, need not be uniform among all grants of Restricted Stock or among Participants and may reflect distinctions based on the reasons for termination of director status. Article 9. Performance Units and Performance Shares 9.1 Grant of Performance Units and Performance Shares. Subject to the terms and conditions of the Plan, Performance Units and/or Performance Shares may be granted to a Non-Employee Director at any time and from time to time, as shall be determined by the Committee. The Committee shall have complete discretion in determining the number of Performance Units and/or Performance Shares granted to each Participant (subject to Article 4 herein) and, consistent with the provisions of the Plan, in determining the terms and conditions pertaining to such Awards. 9.2 Performance Unit/Performance Share Award Agreement. Each grant of Performance Units and/or Performance Shares shall be evidenced by a Performance Unit and/or Performance Share Award Agreement that shall specify the number of Performance Units and/or Performance Shares granted, the initial value (if applicable), the Performance Period, the performance goals and such other provisions as the Committee shall determine, including but not limited to any rights to Dividend Equivalents. 9.3 Value of Performance Units/Performance Shares. Each Performance Unit shall have an initial value that is established by the Committee at the time of grant. The value of a Performance Share shall be equal to the Fair Market Value of a Share. The Committee shall set performance goals in its discretion which, depending on the extent to which they are met, will determine the number and/or value of Performance Units/Performance Shares that will be paid out to the Participants. The time period during which the performance goals must be met shall be called a "Performance Period." 9.4 Earning of Performance Units/Performance Shares. After the applicable Performance Period has ended, the holder of Performance Units/Performance Shares shall be entitled to receive a payout with respect to the Performance Units/Performance Shares earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding performance goals have been achieved. 9.5 Form and Timing of Payment of Performance Units/Performance Shares. Payment of earned Performance Units/Performance Shares shall be made following the close of the applicable Performance Period. The Committee, in its sole discretion, may pay earned Performance Units/Performance Shares in cash or in Shares (or in a combination thereof), which have an aggregate Fair Market Value equal to the value of the earned Performance Units/Performance Shares at the close of the applicable Performance Period. Such Shares may be granted subject to any restrictions deemed appropriate by the Committee. 9.6 Termination of Director Status. Each Performance Unit/Performance Share Award Agreement shall set forth the extent to which the Participant shall have the right to receive a Performance Unit/Performance Share payment following termination of the Participant's position on the Board of the Company during a Performance Period. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreement entered into with Participants, need not be uniform among all grants of Performance Units/Performance Shares or among Participants and may reflect distinctions based on reasons for termination of director status. 9.7 Transferability. Except as otherwise determined by the Committee and set forth in the Performance Unit/Performance Share Award Agreement, Performance Units/Performance Shares may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution, and a Participant's rights with respect to Performance Units/Performance Shares granted under the Plan shall be available during the Participant's lifetime only to such Participant or the Participant's legal representative. Article 10. Other Awards The Committee shall have the right to grant other Awards which may include, without limitation, the grant of Shares based on certain conditions and the payment of Shares in lieu of cash, or cash based on performance criteria established by the Committee. Payment under or settlement of any such Awards shall be made in such manner and at such times as the Committee may determine. Article 11. Beneficiary Designation Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his or her death before he or she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the Company during the Participant's lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. The spouse of a married Participant domiciled in a community property jurisdiction shall join in any designation of beneficiary or beneficiaries other than the spouse. Article 12. Deferrals The Committee may permit a Participant to defer the Participant's receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant under the Plan. If any such deferral election is permitted, the Committee shall, in its sole discretion, establish rules and procedures for such payment deferrals. Article 13. Change in Control The terms of this Article 13 shall immediately become operative, without further action or consent by any person or entity, upon a Change in Control, and once operative shall supersede and take control over any other provisions of this Plan. Upon a Change in Control (a) Any and all Options and SARs granted hereunder shall become immediately exercisable; (b) Any restriction periods and restrictions imposed on Restricted Shares shall be deemed to have expired and such Restricted Shares shall become immediately vested in full; and (c) The target payout opportunity attainable under all outstanding Awards of Performance Units, Performance Shares and other Awards shall be deemed to have been fully earned for the entire Performance Period(s) as of the effective date of the Change in Control. The vesting of all Awards denominated in Shares shall be accelerated as of the effective date of the Change in Control, and there shall be paid out in cash to Participants immediately following the effective date of the Change in Control the full amount of the targeted cash payout opportunities associated with outstanding cash-based Awards. Article 14. Amendment, Modification and Termination 14.1 Amendment, Modification and Termination. The Board may, at any time and from time to time, alter, amend, suspend or terminate the Plan in whole or in part. 14.2 Awards Previously Granted. No termination, amendment or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant holding such Award, unless such termination, modification or amendment is required by applicable law. Article 15. Successors All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation or otherwise, of all or substantially all of the business and/or assets of the Company. Article 16. Legal Construction 16.1 Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine, the plural shall include the singular and the singular shall include the plural. 16.2 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 16.3 Requirements of Law. The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 16.4 Governing Law. To the extent not preempted by Federal law, the Plan, and all agreements hereunder, shall be construed in accordance with, and governed by, the laws of the State of Delaware. EX-10.H 8 1997 EXECUTIVE LONG-TERM INCENTIVE PLAN MDU RESOURCES GROUP, INC. 1997 EXECUTIVE LONG-TERM INCENTIVE PLAN Article 1. Establishment, Purpose and Duration 1.1 Establishment of the Plan. MDU Resources Group, Inc., a Delaware corporation (hereinafter referred to as the "Company"), hereby establishes an incentive compensation plan to be known as the "MDU Resources Group, Inc. 1997 Executive Long-Term Incentive Plan" (hereinafter referred to as the "Plan"), as set forth in this document. The Plan permits the grant of Nonqualified Stock Options (NQSO), Incentive Stock Options (ISO), Stock Appreciation Rights (SAR), Restricted Stock, Performance Units, Performance Shares and other awards. The Plan shall become effective when approved by the stockholders at the annual meeting on April 22, 1997 (the "Effective Date"), and shall remain in effect as provided in Section 1.3 herein. 1.2 Purpose of the Plan. The purpose of the Plan is to promote the success and enhance the value of the Company by linking the personal interests of Participants to those of Company stockholders and customers. The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract and retain the services of Participants upon whose judgment, interest and special effort the successful conduct of its operations is largely dependent. 1.3 Duration of the Plan. The Plan shall commence on the Effective Date, as described in Section 1.1 herein, and shall remain in effect, subject to the right of the Board of Directors to terminate the Plan at any time pursuant to Article 15 herein, until all Shares subject to it shall have been purchased or acquired according to the Plan's provisions. However, in no event may an Award be made under the Plan on or after the day immediately preceding the tenth anniversary of the Effective Date. Article 2. Definitions Whenever used in the Plan, the following terms shall have the meanings set forth below and, when such meaning is intended, the initial letter of the word is capitalized: 2.1 "Award" means, individually or collectively, a grant under the Plan of NQSOs, ISOs, SARs, Restricted Stock, Performance Units, Performance Shares or any other type of award permitted under Article 10 of the Plan. 2.2 "Award Agreement" means an agreement entered into by each Participant and the Company, setting forth the terms and provisions applicable to an Award granted to a Participant under the Plan. 2.3 "Base Value" of an SAR shall have the meaning set forth in Section 7.1 herein. 2.4 "Board" or "Board of Directors" means the Board of Directors of the Company. 2.5 "Change in Control" means the earliest of the following to occur: (a) the public announcement by the Company or by any person (which shall not include the Company, any subsidiary of the Company, or any employee benefit plan of the Company or of any subsidiary of the Company) ("Person") that such Person, who or which, together with all Affiliates and Associates (within the meanings ascribed to such terms in the Rule 12b-2 of the General Rules and Regulations under the Exchange Act) of such Person, shall be the beneficial owner of twenty percent (20%) or more of the voting stock of the Company outstanding; (b) the commencement of, or after the first public announcement of any Person to commence, a tender or exchange offer the consummation of which would result in any Person becoming the beneficial owner of voting stock aggregating thirty percent (30%) or more of the then outstanding voting stock of the Company; (c) the announcement of any transaction relating to the Company required to be described pursuant to the requirements of Item 6(e) of Schedule 14A of Regulation 14A under the Exchange Act; (d) a proposed change in constituency of the Board such that, during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election or nomination for election by the stockholders of the Company of each new Director was approved by a vote of at least two-thirds (2/3) of the Directors then still in office who were members of the Board at the beginning of the period; (e) the sale or other disposition of all or substantially all of the assets of Montana-Dakota Utilities Co., other than to a subsidiary of the Company; or (f) any other event which shall be deemed by a majority of the Compensation Committee to constitute a "change in control". 2.6 "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.7 "Committee" means the Committee, as specified in Article 3, appointed by the Board to administer the Plan with respect to Awards. 2.8 "Company" means MDU Resources Group, Inc., a Delaware corporation, or any successor thereto as provided in Article 17 herein. 2.9 "Director" means any individual who is a member of the Board of Directors of the Company. 2.10 "Disability" means "permanent and total disability" as defined under Section 22(e)(3)of the Code. 2.11 "Dividend Equivalent" means, with respect to Shares subject to an Award, a right to be paid an amount equal to dividends declared on an equal number of outstanding Shares. 2.12 "Eligible Employee" means an Employee who is eligible to participate in the Plan, as set forth in Section 5.1 herein. 2.13 "Employee" means any full-time or regularly-scheduled part-time employee of the Company or of the Company's Subsidiaries, who is not covered by any collective bargaining agreement to which the Company or any of its Subsidiaries is a party. Directors who are not otherwise employed by the Company shall not be considered Employees for purposes of the Plan. For purposes of the Plan, transfer of employment of a Participant between the Company and any one of its Subsidiaries (or between Subsidiaries) shall not be deemed a termination of employment. 2.14 "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto. 2.15 "Exercise Period" means the period during which an SAR or Option is exercisable, as set forth in the related Award Agreement. 2.16 "Fair Market Value" shall mean the average of the high and low sale prices as reported in the consolidated transaction reporting system or, if there is no such sale on the relevant date, then on the last previous day on which a sale was reported. 2.17 "Freestanding SAR" means an SAR that is granted independently of any Option. 2.18 "Incentive Stock Option" or "ISO" means an option to purchase Shares, granted under Article 6 herein, which is designated as an Incentive Stock Option and satisfies the requirements of Section 422 of the Code. 2.19 "Nonqualified Stock Option" or "NQSO" means an option to purchase Shares, granted under Article 6 herein, which is not intended to be an Incentive Stock Option under Section 422 of the Code. 2.20 "Option" means an Incentive Stock Option or a Nonqualified Stock Option. 2.21 "Option Price" means the price at which a Share may be purchased by a Participant pursuant to an Option, as determined by the Committee and set forth in the Option Award Agreement. 2.22 "Participant" means an Employee of the Company who has outstanding an Award granted under the Plan. 2.23 "Performance Unit" means an Award granted to an Employee, as described in Article 9 herein. 2.24 "Performance Share" means an Award granted to an Employee, as described in Article 9 herein. 2.25 "Period of Restriction" means the period during which the transfer of Restricted Stock is limited in some way, as provided in Article 8 herein. 2.26 "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act, as used in Sections 13(d) and 14(d) thereof, including usage in the definition of a "group" in Section 13(d) thereof. 2.27 "Restricted Stock" means an Award of Shares granted to a Participant pursuant to Article 8 herein. 2.28 "Shares" means the shares of common stock of the Company. 2.29 "Stock Appreciation Right" or "SAR" means a right, granted alone or in connection with a related Option, designated as an SAR, to receive a payment on the day the right is exercised, pursuant to the terms of Article 7 herein. Each SAR shall be denominated in terms of one Share. 2.30 "Subsidiary" means any corporation that is a "subsidiary corporation" of the Company as that term is defined in Section 424(f) of the Code. 2.31 "Tandem SAR" means an SAR that is granted in connection with a related Option, the exercise of which shall require forfeiture of the right to purchase a Share under the related Option (and when a Share is purchased under the Option, the Tandem SAR shall be similarly canceled). Article 3. Administration 3.1 The Committee. The Plan shall be administered by the Compensation Committee of the Board, or by any other Committee appointed by the Board. The members of the Committee shall be appointed from time to time by, and shall serve at the discretion of, the Board of Directors. 3.2 Authority of the Committee. The Committee shall have full power except as limited by law, the Articles of Incorporation and the Bylaws of the Company, subject to such other restricting limitations or directions as may be imposed by the Board and subject to the provisions herein, to determine the size and types of Awards; to determine the terms and conditions of such Awards in a manner consistent with the Plan; to construe and interpret the Plan and any agreement or instrument entered into under the Plan; to establish, amend or waive rules and regulations for the Plan's administration; and (subject to the provisions of Article 15 herein) to amend the terms and conditions of any outstanding Award. Further, the Committee shall make all other determinations which may be necessary or advisable for the administration of the Plan. As permitted by law, the Committee may delegate its authorities as identified hereunder. 3.3 Restrictions on Share Transferability. The Committee may impose such restrictions on any Shares acquired pursuant to Awards under the Plan as it may deem advisable, including, without limitation, restrictions to comply with applicable Federal securities laws, with the requirements of any stock exchange or market upon which such Shares are then listed and/or traded and with any blue sky or state securities laws applicable to such Shares. 3.4 Approval. The Board or the Committee shall approve all Awards made under the Plan and all elections made by Participants, prior to their effective date, to the extent necessary to comply with Rule 16b-3 under the Exchange Act. 3.5 Decisions Binding. All determinations and decisions made by the Committee pursuant to the provisions of the Plan and all related orders or resolutions of the Board shall be final, conclusive and binding on all persons, including the Company, its stockholders, Employees, Participants and their estates and beneficiaries. 3.6 Costs. The Company shall pay all costs of administration of the Plan. Article 4. Shares Subject to the Plan 4.1 Number of Shares. Subject to Section 4.2 herein, the maximum number of Shares available for grant under the Plan shall be 1,800,000. Shares underlying lapsed or forfeited Awards, or Awards that are not paid in Shares, may be reused for other Awards. Shares granted pursuant to the Plan may be (i) authorized but unissued Shares of Common Stock, (ii) treasury shares, or (iii) shares purchased on the open market. 4.2 Adjustments in Authorized Shares. In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, split-up, share combination or other change in the corporate structure of the Company affecting the Shares, such adjustment shall be made in the number and class of Shares which may be delivered under the Plan, and in the number and class of and/or price of Shares subject to outstanding Awards granted under the Plan, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights; provided, however, that the number of Shares subject to any Award shall always be a whole number. Notwithstanding the foregoing, (i) each such adjustment with respect to an Incentive Stock Option shall comply with the rules of Section 424(a) of the Code and (ii) in no event shall any adjustment be made which would render any Incentive Stock Option granted hereunder to be other than an incentive stock option for purposes of Section 422 of the Code. Article 5. Eligibility and Participation 5.1 Eligibility. Persons eligible to participate in the Plan include all officers and key employees of the Company and its Subsidiaries, as determined by the Committee, including Employees who are members of the Board, but excluding Directors who are not Employees. 5.2 Actual Participation. Subject to the provisions of the Plan, the Committee may, from time to time, select from all eligible Employees those to whom Awards shall be granted and shall determine the nature and amount of each Award. Article 6. Stock Options 6.1 Grant of Options. Subject to the terms and conditions of the Plan, Options may be granted to an Eligible Employee at any time and from time to time, as shall be determined by the Committee. The Committee shall have complete discretion in determining the number of Shares subject to Options granted to each Participant (subject to Article 4 herein) and, consistent with the provisions of the Plan, in determining the terms and conditions pertaining to such Options. The Committee may grant ISOs, NQSOs, or a combination thereof. 6.2 Option Award Agreement. Each Option grant shall be evidenced by an Option Award Agreement that shall specify the Option Price, the term of the Option, the number of Shares to which the Option pertains, the Exercise Period and such other provisions as the Committee shall determine, including but not limited to any rights to Dividend Equivalents. The Option Award Agreement shall also specify whether the Option is intended to be an ISO or an NQSO. The Option Price for each Share purchasable under any Incentive Stock Option granted hereunder shall be not less than one hundred percent (100%) of the Fair Market Value per Share at the date the Option is granted; and provided, further, that in the case of an Incentive Stock Option granted to a person who, at the time such Incentive Stock Option is granted, owns shares of stock of the Company or of any Subsidiary which possess more than ten percent (10%) of the total combined voting power of all classes of shares of stock of the Company or of any Subsidiary, the Option Price for each Share shall be not less than one hundred ten percent (110%) of the Fair Market Value per Share at the date the Option is granted. The Option Price will be subject to adjustment in accordance with the provisions of Section 4.2 of the Plan. No Incentive Stock Option by its terms shall be exercisable after the expiration of ten (10) years from the date of grant of the Option; provided, however, in the case of an Incentive Stock Option granted to a person who, at the time such Option is granted, owns shares of stock of the Company or of any Subsidiary possessing more than ten percent (10%) of the total combined voting power of all classes of shares of stock of the Company or of any Subsidiary, such Option shall not be exercisable after the expiration of five (5) years from the date such Option is granted. 6.3 Exercise of and Payment for Options. Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve. A Participant may exercise an Option at any time during the Exercise Period. Options shall be exercised by the delivery of a written notice of exercise to the Company or its designee, setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by provisions for full payment for the Shares. The Option Price upon exercise of any Option shall be payable either: (a) in cash or its equivalent, (b) by tendering previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the total Option Price (provided that the Shares which are tendered must have been held by the Participant for at least six (6) months prior to their tender to satisfy the Option Price), (c) by share withholding, (d) by cashless exercise or (e) by a combination of (a),(b),(c), and/or (d). As soon as practicable after receipt of a written notification of exercise of an Option and provisions for full payment therefor, there shall be delivered to the Participant, in the Participant's name, Share certificates in an appropriate amount based upon the number of Shares purchased under the Option(s). 6.4 Termination of Employment. Each Option Award Agreement shall set forth the extent to which the Participant shall have the right to exercise the Option following termination of the Participant's employment with the Company and its Subsidiaries. Such provisions shall be determined in the sole discretion of the Committee (subject to applicable law), shall be included in the Option Award Agreement entered into with Participants, need not be uniform among all Options granted pursuant to the Plan or among Participants and may reflect distinctions based on the reasons for termination of employment. If the employment of a Participant by the Company or by any Subsidiary is terminated for any reason other than death, any Incentive Stock Option granted to such Participant may not be exercised later than three (3) months (one (1) year in the case of termination due to Disability) after the date of such termination of employment. 6.5 Transferability of Options. Except as otherwise determined by the Committee and set forth in the Option Award Agreement, no Option granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution, and all Incentive Stock Options granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant. Article 7. Stock Appreciation Rights 7.1 Grant of SARs. Subject to the terms and conditions of the Plan, an SAR may be granted to an Eligible Employee at any time and from time to time as shall be determined by the Committee. The Committee may grant Freestanding SARs, Tandem SARs or any combination of these forms of SAR. The Committee shall have complete discretion in determining the number of SARs granted to each Participant (subject to Article 4 herein) and, consistent with the provisions of the Plan, in determining the terms and conditions pertaining to such SARs. The Base Value of a Freestanding SAR shall equal the Fair Market Value of a Share on the date of grant of the SAR. The Base Value of Tandem SARs shall equal the Option Price of the related Option. 7.2 SAR Award Agreement. Each SAR grant shall be evidenced by an SAR Award Agreement that shall specify the number of SARs granted, the Base Value, the term of the SAR, the Exercise Period and such other provisions as the Committee shall determine. 7.3 Exercise and Payment of SARs. Tandem SARs may be exercised for all or part of the Shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option. A Tandem SAR may be exercised only with respect to the Shares for which its related Option is then exercisable. Notwithstanding any other provision of the Plan to the contrary, with respect to a Tandem SAR granted in connection with an ISO: (i) the Tandem SAR will expire no later than the expiration of the underlying ISO; (ii) the value of the payout with respect to the Tandem SAR may be for no more than one hundred percent (100%) of the difference between the Option Price of the underlying ISO and the Fair Market Value of the Shares subject to the underlying ISO at the time the Tandem SAR is exercised; and (iii) the Tandem SAR may be exercised only when the Fair Market Value of the Shares subject to the ISO exceeds the Option Price of the ISO. Freestanding SARs may be exercised upon whatever terms and conditions the Committee, in its sole discretion, imposes upon them. A Participant may exercise an SAR at any time during the Exercise Period. SARs shall be exercised by the delivery of a written notice of exercise to the Company, setting forth the number of SARs being exercised. Upon exercise of an SAR, a Participant shall be entitled to receive payment from the Company in an amount equal to the product of: (a) the excess of (i) the Fair Market Value of a Share on the date of exercise over (ii) the Base Value multiplied by (b) the number of Shares with respect to which the SAR is exercised. At the sole discretion of the Committee, the payment to the Participant upon SAR exercise may be in cash, in Shares of equivalent value, or in some combination thereof. 7.4 Termination of Employment. Each SAR Award Agreement shall set forth the extent to which the Participant shall have the right to exercise the SAR following termination of the Participant's employment with the Company and its Subsidiaries. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the SAR Award Agreement entered into with Participants, need not be uniform among all SARs granted pursuant to the Plan or among Participants and may reflect distinctions based on the reasons for termination of employment. 7.5 Transferability of SARs. Except as otherwise determined by the Committee and set forth in the SAR Award Agreement, no SAR granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution, and all SARs granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant or his or her legal representative. Article 8. Restricted Stock 8.1 Grant of Restricted Stock. Subject to the terms and conditions of the Plan, Restricted Stock may be granted to Eligible Employees at any time and from time to time, as shall be determined by the Committee. The Committee shall have complete discretion in determining the number of shares of Restricted Stock granted to each Participant (subject to Article 4 herein) and, consistent with the provisions of the Plan, in determining the terms and conditions pertaining to such Restricted Stock. 8.2 Restricted Stock Award Agreement. Each Restricted Stock grant shall be evidenced by a Restricted Stock Award Agreement that shall specify the Period or Periods of Restriction, the number of Restricted Stock Shares granted and such other provisions as the Committee shall determine. 8.3 Transferability. Restricted Stock granted hereunder may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction established by the Committee and specified in the Restricted Stock Award Agreement. All rights with respect to the Restricted Stock granted to a Participant under the Plan shall be available during his or her lifetime only to such Participant or his or her legal representative. 8.4 Certificate Legend. Each certificate representing Restricted Stock granted pursuant to the Plan may bear a legend substantially as follows: "The sale or other transfer of the shares of stock represented by this certificate, whether voluntary, involuntary or by operation of law, is subject to certain restrictions on transfer as set forth in MDU Resources Group, Inc. 1997 Executive Long-Term Incentive Plan, and in a Restricted Stock Award Agreement. A copy of such Plan and such Agreement may be obtained from MDU Resources Group, Inc." The Company shall have the right to retain the certificates representing Restricted Stock in the Company's possession until such time as all restrictions applicable to such Shares have been satisfied. 8.5 Removal of Restrictions. Restricted Stock shall become freely transferable by the Participant after the last day of the Period of Restriction applicable thereto. Once Restricted Stock is released from the restrictions, the Participant shall be entitled to have the legend referred to in Section 8.4 removed from his or her stock certificate. 8.6 Voting Rights. During the Period of Restriction, Participants holding Restricted Stock may exercise full voting rights with respect to those Shares. 8.7 Dividends and Other Distributions. Subject to the Committee's right to determine otherwise at the time of grant, during the Period of Restriction, Participants holding Restricted Stock shall receive all regular cash dividends paid with respect to all Shares while they are so held. All other distributions paid with respect to such Restricted Stock shall be credited to Participants subject to the same restrictions on transferability and forfeitability as the Restricted Stock with respect to which they were paid and shall be paid to the Participant within forty- five (45) days following the full vesting of the Restricted Stock with respect to which such distributions were made. 8.8 Termination of Employment. Each Restricted Stock Award Agreement shall set forth the extent to which the Participant shall have the right to receive unvested Restricted Stock following termination of the Participant's employment with the Company and its Subsidiaries. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Restricted Stock Award Agreement entered into with Participants, need not be uniform among all grants of Restricted Stock or among Participants and may reflect distinctions based on the reasons for termination of employment. Article 9. Performance Units and Performance Shares 9.1 Grant of Performance Units and Performance Shares. Subject to the terms and conditions of the Plan, Performance Units and/or Performance Shares may be granted to an Eligible Employee at any time and from time to time, as shall be determined by the Committee. The Committee shall have complete discretion in determining the number of Performance Units and/or Performance Shares granted to each Participant (subject to Article 4 herein) and, consistent with the provisions of the Plan, in determining the terms and conditions pertaining to such Awards. 9.2 Performance Unit/Performance Share Award Agreement. Each grant of Performance Units and/or Performance Shares shall be evidenced by a Performance Unit and/or Performance Share Award Agreement that shall specify the number of Performance Units and/or Performance Shares granted, the initial value (if applicable), the Performance Period, the performance goals and such other provisions as the Committee shall determine, including but not limited to any rights to Dividend Equivalents. 9.3 Value of Performance Units/Performance Shares. Each Performance Unit shall have an initial value that is established by the Committee at the time of grant. The value of a Performance Share shall be equal to the Fair Market Value of a Share. The Committee shall set performance goals in its discretion which, depending on the extent to which they are met, will determine the number and/or value of Performance Units/Performance Shares that will be paid out to the Participants. The time period during which the performance goals must be met shall be called a "Performance Period." 9.4 Earning of Performance Units/Performance Shares. After the applicable Performance Period has ended, the holder of Performance Units/Performance Shares shall be entitled to receive a payout with respect to the Performance Units/Performance Shares earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding performance goals have been achieved. 9.5 Form and Timing of Payment of Performance Units/Performance Shares. Payment of earned Performance Units/Performance Shares shall be made following the close of the applicable Performance Period. The Committee, in its sole discretion, may pay earned Performance Units/Performance Shares in cash or in Shares (or in a combination thereof), which have an aggregate Fair Market Value equal to the value of the earned Performance Units/Performance Shares at the close of the applicable Performance Period. Such Shares may be granted subject to any restrictions deemed appropriate by the Committee. 9.6 Termination of Employment. Each Performance Unit/Performance Share Award Agreement shall set forth the extent to which the Participant shall have the right to receive a Performance Unit/Performance Share payment following termination of the Participant's employment with the Company and its Subsidiaries during a Performance Period. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreement entered into with Participants, need not be uniform among all grants of Performance Units/Performance Shares or among Participants and may reflect distinctions based on reasons for termination of employment. 9.7 Transferability. Except as otherwise determined by the Committee and set forth in the Performance Unit/Performance Share Award Agreement, Performance Units/Performance Shares may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution, and a Participant's rights with respect to Performance Units/Performance Shares granted under the Plan shall be available during the Participant's lifetime only to such Participant or the Participant's legal representative. Article 10. Other Awards The Committee shall have the right to grant other Awards which may include, without limitation, the grant of Shares based on certain conditions, the payment of Shares in lieu of cash, or cash based on performance criteria established by the Committee, and the payment of Shares in lieu of cash under other Company incentive bonus programs. Payment under or settlement of any such Awards shall be made in such manner and at such times as the Committee may determine. Article 11. Beneficiary Designation Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his or her death before he or she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the Company during the Participant's lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. The spouse of a married Participant domiciled in a community property jurisdiction shall join in any designation of beneficiary or beneficiaries other than the spouse. Article 12. Deferrals The Committee may permit a Participant to defer the Participant's receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant under the Plan. If any such deferral election is permitted, the Committee shall, in its sole discretion, establish rules and procedures for such payment deferrals. Article 13. Rights of Employees 13.1 Employment. Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any Participant's employment at any time, for any reason or no reason in the Company's sole discretion, nor confer upon any Participant any right to continue in the employ of the Company. 13.2 Participation. No Employee shall have the right to be selected to receive an Award under the Plan, or, having been so selected, to be selected to receive a future Award. Article 14. Change in Control The terms of this Article 14 shall immediately become operative, without further action or consent by any person or entity, upon a Change in Control, and once operative shall supersede and take control over any other provisions of this Plan. Upon a Change in Control (a) Any and all Options and SARs granted hereunder shall become immediately exercisable; (b) Any restriction periods and restrictions imposed on Restricted Shares shall be deemed to have expired and such Restricted Shares shall become immediately vested in full; and (c) The target payout opportunity attainable under all outstanding Awards of Performance Units, Performance Shares and other Awards shall be deemed to have been fully earned for the entire Performance Period(s) as of the effective date of the Change in Control. The vesting of all Awards denominated in Shares shall be accelerated as of the effective date of the Change in Control, and there shall be paid out in cash to Participants immediately following the effective date of the Change in Control the full amount of the targeted cash payout opportunities associated with outstanding cash-based Awards. Article 15. Amendment, Modification and Termination 15.1 Amendment, Modification and Termination. The Board may, at any time and from time to time, alter, amend, suspend or terminate the Plan in whole or in part, provided that no amendment shall be made which shall increase the total number of Shares which may be issued and sold pursuant to Incentive Stock Options, reduce the minimum exercise price in the case of an Incentive Stock Option or modify the provisions of the Plan relating to eligibility with respect to Incentive Stock Options unless such amendment is made by or with the approval of the stockholders within 12 months of the effective date of such amendment, but only if such approval is required by any applicable provision of law. The Board of Directors of the Company is also authorized to amend the Plan and the Options granted hereunder to maintain qualification as "incentive stock options" within the meaning of Section 422 of the Code, if applicable. 15.2 Awards Previously Granted. No termination, amendment or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant holding such Award, unless such termination, modification or amendment is required by applicable law and except as otherwise provided herein. Article 16. Withholding 16.1 Tax Withholding. The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state and local taxes (including the Participant's FICA obligation) required by law to be withheld with respect to an Award made under the Plan. 16.2 Share Withholding. With respect to withholding required upon the exercise of Options or SARs, upon the lapse of restrictions on Restricted Stock, or upon any other taxable event arising out of or as a result of Awards granted hereunder, Participants may elect to satisfy the withholding requirement, in whole or in part, by tendering previously-owned Shares or by having the Company withhold Shares having a Fair Market Value on the date the tax is to be determined equal to the statutory total tax which could be imposed on the transaction. All elections shall be irrevocable, made in writing and signed by the Participant. Article 17. Successors All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation or otherwise, of all or substantially all of the business and/or assets of the Company. Article 18. Legal Construction 18.1 Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine, the plural shall include the singular and the singular shall include the plural. 18.2 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 18.3 Requirements of Law. The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 18.4 Governing Law. To the extent not preempted by Federal law, the Plan, and all agreements hereunder, shall be construed in accordance with, and governed by, the laws of the State of Delaware. EX-12 9 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES MDU RESOURCES GROUP, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Years Ended December 31, 1998 1997 1996 1995 1994 (In thousands of dollars) Earnings Available for Fixed Charges: Net Income per Consolidated Statements of Income $34,107 $ 54,617 $45,470 $41,633 $39,845 Income Taxes 17,485 30,743 16,087 23,057 18,833 51,592 85,360 61,557 64,690 58,678 Rents (a) 1,749 1,249 1,031 894 878 Interest (b) 31,587 33,047 34,101 29,924 29,173 Total Earnings Available for Fixed Charges $84,928 $119,656 $96,689 $95,508 $88,729 Preferred Dividend Requirements $ 777 $ 782 $ 787 $ 792 $ 797 Ratio of Income Before Income Taxes to Net Income 151% 156% 135% 155% 147% Preferred Dividend Factor on Pretax Basis 1,173 1,220 1,062 1,228 1,172 Fixed Charges (c) 33,336 34,296 35,132 30,818 30,051 Combined Fixed Charges and Preferred Stock Dividends $34,509 $ 35,516 $36,194 $32,046 $31,223 Ratio of Earnings to Fixed Charges 2.5x 3.5x 2.8x 3.1x 3.0x Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 2.5x 3.4x 2.7x 3.0x 2.8x (a) Represents portion (33 1/3%) of rents which is estimated to approximately constitute the return to the lessors on their investment in leased premises. (b) Represents interest and amortization of debt discount and expense on all indebtedness and excludes amortization of gains or losses on reacquired debt which, under the Uniform System of Accounts, is classified as a reduction of, or increase in, interest expense in the Consolidated Statements of Income. Also includes carrying costs associated with natural gas available under a repurchase agreement with Frontier Gas Storage Company as more fully described in Notes to Consolidated Financial Statements. (c) Represents rents and interest, both as defined above. EX-13 10 1998 ANNUAL REPORT MDU RESOURCES GROUP, INC. 1998 FINANCIAL REPORT REPORT OF MANAGEMENT The management of MDU Resources Group, Inc. is responsible for the preparation, integrity and objectivity of the financial information contained in the consolidated financial statements and elsewhere in this Annual Report. The financial statements have been prepared in conformity with generally accepted accounting principles as applied to the company's regulated and nonregulated businesses and necessarily include some amounts that are based on informed judgments and estimates of management. To meet its responsibilities with respect to financial information, management maintains and enforces a system of internal accounting controls designed to provide assurance, on a cost-effective basis, that transactions are carried out in accordance with management's authorizations and that assets are safeguarded against loss from unauthorized use or disposition. The system includes an organizational structure which provides an appropriate segregation of responsibilities, effective selection and training of personnel, written policies and procedures and periodic reviews by the Internal Audit Department. In addition, the company has a policy which requires all employees to acknowledge their responsibility for ethical conduct. Management believes that these measures provide for a system that is effective and reasonably assures that all transactions are properly recorded for the preparation of financial statements. Management modifies and improves its system of internal accounting controls in response to changes in business conditions. The company's Internal Audit Department is charged with the responsibility for determining compliance with company procedures. The Board of Directors, through its audit committee which is comprised entirely of outside directors, oversees management's responsibilities for financial reporting. The audit committee meets regularly with management, the internal auditors and Arthur Andersen LLP, independent public accountants, to discuss auditing and financial matters and to assure that each is carrying out its responsibilities. The internal auditors and Arthur Andersen LLP have full and free access to the audit committee, without management present, to discuss auditing, internal accounting control and financial reporting matters. Arthur Andersen LLP is engaged to express an opinion on the financial statements. Their audit is conducted in accordance with generally accepted auditing standards and includes examining, on a test basis, supporting evidence, assessing the company's accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation to the extent necessary to allow them to report on the fairness, in all material respects, of the financial condition and operating results of the company. Martin A. White Warren L. Robinson President and Chief Vice President, Treasurer Executive Officer and Chief Financial Officer REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To MDU Resources Group, Inc. We have audited the accompanying consolidated balance sheets of MDU Resources Group, Inc. (a Delaware corporation) and Subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, common stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MDU Resources Group, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Minneapolis, Minnesota January 21, 1999 CONSOLIDATED STATEMENTS OF INCOME MDU RESOURCES GROUP, INC. Years ended December 31, 1998 1997 1996 (In thousands, except per share amounts) Operating revenues: Electric $ 211,453 $ 164,351 $ 138,761 Natural gas 287,426 200,789 175,408 Construction materials and mining 346,451 174,147 132,222 Oil and natural gas production 51,297 68,387 68,310 896,627 607,674 514,701 Operating expenses: Fuel and purchased power 49,829 45,604 43,983 Purchased natural gas sold 158,908 77,082 48,886 Operation and maintenance 448,290 283,894 225,682 Depreciation, depletion and amortization 77,786 65,767 62,651 Taxes, other than income 24,871 23,766 21,974 Write-downs of oil and natural gas properties (Note 1) 66,000 --- --- 825,684 496,113 403,176 Operating income: Electric 38,099 33,089 29,476 Natural gas distribution 8,028 10,410 11,504 Natural gas transmission 38,114 29,169 30,231 Construction materials and mining 41,609 14,602 16,062 Oil and natural gas production (54,907) 24,291 24,252 70,943 111,561 111,525 Other income -- net 10,922 4,008 5,617 Interest expense 30,273 30,209 28,832 Costs on natural gas repurchase commitment (Note 15) --- --- 26,753 Income before income taxes 51,592 85,360 61,557 Income taxes 17,485 30,743 16,087 Net income 34,107 54,617 45,470 Dividends on preferred stocks 777 782 787 Earnings on common stock $ 33,330 $ 53,835 $ 44,683 Earnings per common share -- basic $ .66 $ 1.24 $ 1.05 Earnings per common share -- diluted $ .66 $ 1.24 $ 1.04 Dividends per common share $ .7834 $ .7534 $ .7333 Weighted average common shares outstanding -- basic 50,536 43,315 42,715 Weighted average common shares outstanding -- diluted 50,837 43,478 42,824 The accompanying notes are an integral part of these consolidated statements. CONSOLIDATED BALANCE SHEETS MDU RESOURCES GROUP, INC. December 31, 1998 1997 (In thousands) ASSETS Current assets: Cash and cash equivalents $ 39,216 $ 28,174 Receivables 124,114 80,585 Inventories 44,865 41,322 Deferred income taxes 16,918 17,356 Prepayments and other current assets 15,536 12,479 240,649 179,916 Investments 43,029 18,935 Property, plant and equipment: Electric 583,047 566,247 Natural gas distribution 178,522 172,086 Natural gas transmission 304,054 288,709 Construction materials and mining 484,419 243,110 Oil and natural gas production 260,758 240,193 1,810,800 1,510,345 Less accumulated depreciation, depletion and amortization 726,123 670,809 1,084,677 839,536 Deferred charges and other assets 84,420 75,505 $1,452,775 $1,113,892 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 15,000 $ 3,347 Long-term debt and preferred stock due within one year 3,292 7,902 Accounts payable 60,023 31,571 Taxes payable 9,226 9,057 Dividends payable 10,799 8,574 Other accrued liabilities, including reserved revenues 71,129 88,563 169,469 149,014 Long-term debt (Note 6) 413,264 298,561 Deferred credits and other liabilities: Deferred income taxes 173,094 119,747 Other liabilities (Note 15) 129,506 143,574 302,600 263,321 Preferred stock subject to mandatory redemption (Note 7) 1,600 1,700 Commitments and contingencies (Notes 11, 14, 15 and 16) Stockholders' Equity: Preferred stocks (Note 7) 15,000 15,000 Common stockholders' equity: Common stock (Note 8) Authorized -- 75,000,000 shares, $3.33 par value Issued -- 53,272,951 and 29,143,332 shares in 1998 and 1997, respectively 177,399 97,047 Other paid-in capital 171,486 76,526 Retained earnings 205,583 212,723 Treasury stock at cost - 239,521 shares (3,626) --- Total common stockholders' equity 550,842 386,296 Total stockholders' equity 565,842 401,296 $1,452,775 $1,113,892 The accompanying notes are an integral part of these consolidated statements. CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY MDU RESOURCES GROUP, INC.
Years ended December 31, Other 1998, 1997 and 1996 Common Stock Paid-In Retained Treasury Stock Shares Amount Capital Earnings Shares Amount Total (In thousands, except shares) Balance at December 31, 1995 28,476,981 $ 94,828 $ 64,305 $178,184 --- $ --- $337,317 Net income --- --- --- 45,470 --- --- 45,470 Dividends on preferred stocks --- --- --- (787) --- --- (787) Dividends on common stock --- --- --- (31,326) --- --- (31,326) Balance at December 31, 1996 28,476,981 94,828 64,305 191,541 --- --- 350,674 Net income --- --- --- 54,617 --- --- 54,617 Dividends on preferred stocks --- --- --- (782) --- --- (782) Dividends on common stock --- --- --- (32,653) --- --- (32,653) Issuance of common stock: Acquisitions 225,629 751 3,622 --- --- --- 4,373 Other 440,722 1,468 8,599 --- --- --- 10,067 Balance at December 31, 1997 29,143,332 97,047 76,526 212,723 --- --- 386,296 Net income --- --- --- 34,107 --- --- 34,107 Dividends on preferred stocks --- --- --- (777) --- --- (777) Dividends on common stock --- --- --- (40,470) --- --- (40,470) Issuance of common stock: Acquisitions (pre-split) 4,973,629 16,562 112,353 --- --- --- 128,915 Other (pre-split) 869,068 2,894 26,900 --- --- --- 29,794 Treasury stock acquired --- --- --- --- (159,681) (3,626) (3,626) Three-for-two common stock split (Note 8) 17,493,014 58,252 (58,252) --- (79,840) --- --- Issuance of common stock: Acquisitions (post-split) 672,863 2,241 11,234 --- --- --- 13,475 Other (post-split) 121,045 403 2,725 --- --- --- 3,128 Balance at December 31, 1998 53,272,951 $177,399 $171,486 $205,583 (239,521) $(3,626) $550,842 The accompanying notes are an integral part of these consolidated statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS MDU RESOURCES GROUP, INC. Years ended December 31, 1998 1997 1996 (In thousands) Operating activities: Net income $ 34,107 $ 54,617 $ 45,470 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 77,786 65,767 62,651 Deferred income taxes and investment tax credit (17,256) 12,894 138 Recovery of deferred natural gas contract litigation settlement costs --- 5,486 10,743 Write-down of natural gas available under repurchase commitment (Note 15) --- --- 18,553 Write-downs of oil and natural gas properties (Note 1) 66,000 --- --- Changes in current assets and liabilities: Receivables (10,464) 6,951 (9,346) Inventories 1,718 (4,214) (1,218) Other current assets (547) 2,026 (1,467) Accounts payable 14,094 (5,605) 7,584 Other current liabilities (19,805) (6,087) (22,434) Other noncurrent changes (7,187) 6,794 (4,436) Net cash provided by operating activities 138,446 138,629 106,238 Financing activities: Net change in short-term borrowings 3,933 (5,919) 3,350 Issuance of long-term debt 209,890 54,064 81,300 Repayment of long-term debt (113,600) (47,899) (43,262) Retirement of preferred stocks (100) (100) (100) Issuance of common stock 32,922 10,067 --- Retirement of natural gas repurchase commitment (17,105) (52,090) (4,157) Dividends paid (41,247) (33,435) (32,113) Net cash provided by (used in) financing activities 74,693 (75,312) 5,018 Investing activities: Capital expenditures including acquisitions of businesses: Electric (10,897) (18,713) (18,674) Natural gas distribution (8,256) (8,858) (6,255) Natural gas transmission (17,522) (13,205) (10,127) Construction materials and mining (60,014) (40,797) (25,063) Oil and natural gas production (94,465) (30,651) (51,821) (191,154) (112,224) (111,940) Net proceeds from sale or disposition of property 4,275 4,522 11,803 Net capital expenditures (186,879) (107,702) (100,137) Sale of natural gas available under repurchase commitment 7,727 27,008 10,595 Investments (22,945) (2,248) (7,313) Net cash used in investing activities (202,097) (82,942) (96,855) Increase (decrease) in cash and cash equivalents 11,042 (19,625) 14,401 Cash and cash equivalents -- beginning of year 28,174 47,799 33,398 Cash and cash equivalents -- end of year $ 39,216 $ 28,174 $ 47,799 The accompanying notes are an integral part of these consolidated statements. NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The consolidated financial statements of MDU Resources Group, Inc. (company) include the accounts of two regulated businesses -- retail and wholesale sales of electricity and retail sales and/or transportation of natural gas and propane, and natural gas transmission and storage -- and two nonregulated businesses -- construction materials and mining operations, and oil and natural gas production. The statements also include the ownership interests in the assets, liabilities and expenses of two jointly owned electric generating stations. The company's regulated businesses are subject to various state and federal agency regulation. The accounting policies followed by these businesses are generally subject to the Uniform System of Accounts of the Federal Energy Regulatory Commission (FERC). These accounting policies differ in some respects from those used by the company's nonregulated businesses. The company's regulated businesses account for certain income and expense items under the provisions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Regulation" (SFAS No. 71). SFAS No. 71 allows these businesses to defer as regulatory assets or liabilities certain items that would have otherwise been reflected as expense or income, respectively, based on the expected regulatory treatment in future rates. The expected recovery or flowback of these deferred items are generally based on specific ratemaking decisions or precedent for each item. Regulatory assets and liabilities are being amortized consistently with the regulatory treatment established by the FERC and the applicable state public service commissions. See Note 3 for more information regarding the nature and amounts of these regulatory deferrals. In accordance with the provisions of SFAS No. 71, intercompany coal sales, which are made at prices approximately the same as those charged to others, and the related utility fuel purchases are not eliminated. All other significant intercompany balances and transactions have been eliminated. Property, plant and equipment Additions to property, plant and equipment are recorded at cost when first placed in service. When regulated assets are retired, or otherwise disposed of in the ordinary course of business, the original cost and cost of removal, less salvage, is charged to accumulated depreciation. With respect to the retirement or disposal of all other assets, except for oil and natural gas production properties as described below, the resulting gains or losses are recognized as a component of income. The company is permitted to capitalize an allowance for funds used during construction (AFUDC) on regulated construction projects and to include such amounts in rate base when the related facilities are placed in service. In addition, the company capitalizes interest, when applicable, on certain construction projects associated with its other operations. The amounts of AFUDC and interest capitalized were not material in 1998, 1997 and 1996. Property, plant and equipment are depreciated on a straight-line basis over the average useful lives of the assets, except for oil and natural gas production properties as described below. Oil and natural gas The company uses the full-cost method of accounting for its oil and natural gas production activities. Under this method, all costs incurred in the acquisition, exploration and development of oil and natural gas properties are capitalized and amortized on the units of production method based on total proved reserves. Any conveyances of properties, including gains or losses on abandonments of properties, are treated as adjustments to the cost of the properties with no gain or loss recognized. Capitalized costs are subject to a "ceiling test" that limits such costs to the aggregate of the present value of future net revenues of proved reserves and the lower of cost or fair value of unproved properties. Future net revenue is estimated based on end-of-quarter prices adjusted for contracted price changes. If capitalized costs exceed the full-cost ceiling at the end of any quarter, a permanent noncash write-down is required to be charged to earnings in that quarter. Due to low oil and natural gas prices, the company's capitalized costs under the full-cost method of accounting exceeded the full-cost ceiling at June 30, 1998 and December 31, 1998. Accordingly, the company was required to write down its oil and natural gas producing properties. These noncash write-downs amounted to $33.1 million ($20.0 million after tax) and $32.9 million ($19.9 million after tax) for the quarters ended June 30, 1998 and December 31, 1998, respectively. Natural gas in underground storage and available under repurchase commitment Natural gas in underground storage is carried at cost using the last-in, first-out (LIFO) method. The portion of the cost of natural gas in underground storage expected to be used within one year is included in inventories. Natural gas available under a repurchase commitment with Frontier Gas Storage Company (Frontier) is carried at Frontier's cost of purchased natural gas, less an allowance to reflect changed market conditions, and is reflected on the company's Consolidated Balance Sheets in "Deferred charges and other assets." See Note 15 for discussion on the write-down which occurred in 1996 of the natural gas available under the repurchase commitment with Frontier. Inventories Inventories, other than natural gas in underground storage, consist primarily of materials and supplies and inventories held for resale. These inventories are stated at the lower of average cost or market. Revenue recognition The company recognizes utility revenue each month based on the services provided to all utility customers during the month. For its construction businesses, the company recognizes construction contract revenue on the percentage of completion method. The company generally recognizes all other revenues when services are rendered or goods are delivered. Natural gas costs recoverable through rate adjustments Under the terms of certain orders of the applicable state public service commissions, the company is deferring natural gas commodity, transportation and storage costs which are greater or less than amounts presently being recovered through its existing rate schedules. Such orders generally provide that these amounts are recoverable or refundable through rate adjustments within 24 months from the time such costs are paid. Income taxes The company provides deferred federal and state income taxes on all temporary differences. Excess deferred income tax balances associated with Montana-Dakota's and Williston Basin's rate-regulated activities resulting from the company's adoption of SFAS No. 109, "Accounting for Income Taxes", have been recorded as a regulatory liability and are included in "Other liabilities" in the company's Consolidated Balance Sheets. These regulatory liabilities are expected to be reflected as a reduction in future rates charged customers in accordance with applicable regulatory procedures. The company uses the deferral method of accounting for investment tax credits and amortizes the credits on electric and natural gas distribution plant over various periods which conform to the ratemaking treatment prescribed by the applicable state public service commissions. Earnings per common share Basic earnings per common share were computed by dividing earnings on common stock by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share were computed by dividing earnings on common stock by the total of the weighted average number of shares of common stock outstanding during the year, plus the effect of outstanding stock options. Common stock outstanding includes issued shares less shares held in treasury. Earnings per share have been restated to reflect the three-for-two common stock split effected in July 1998 as discussed in Note 8. Comprehensive income On January 1, 1998, the company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 provides authoritative guidance on the reporting and display of comprehensive income and its components. For the years ended December 31, 1998, 1997 and 1996, comprehensive income equaled net income as reported. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used for such items as plant depreciable lives, tax provisions, uncollectible accounts, environmental and other loss contingencies, accumulated provision for revenues subject to refund, unbilled revenues and actuarially determined benefit costs. As better information becomes available, or actual amounts are determinable, the recorded estimates are revised. Consequently, operating results can be affected by revisions to prior accounting estimates. Cash flow information Cash expenditures for interest and income taxes were as follows: Years ended December 31, 1998 1997 1996 (In thousands) Interest, net of amount capitalized $26,394 $25,626 $25,449 Income taxes $34,498 $18,171 $28,163 The company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Reclassifications Certain reclassifications have been made in the financial statements for prior years to conform to the current presentation. Such reclassifications had no effect on net income or common stockholders' equity as previously reported. New accounting standard In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset the related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. SFAS No. 133 must be applied to derivative instruments and certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997. The company will adopt SFAS No. 133 on January 1, 2000, and has not yet quantified the impacts of adopting SFAS No. 133 on the company's financial position or results of operations. NOTE 2 NATURAL GAS IN UNDERGROUND STORAGE Natural gas in underground storage included in natural gas transmission and natural gas distribution property, plant and equipment amounted to $43.7 million at December 31, 1998, and $43.1 million at December 31, 1997. In addition, $11.5 million and $11.4 million at December 31, 1998 and 1997, respectively, of natural gas in underground storage is included in inventories. NOTE 3 REGULATORY ASSETS AND LIABILITIES The following table summarizes the individual components of unamortized regulatory assets and liabilities included in the accompanying Consolidated Balance Sheets as of December 31: 1998 1997 (In thousands) Regulatory assets: Long-term debt refinancing costs $ 10,995 $ 11,466 Postretirement benefit costs 2,036 2,940 Plant costs 3,003 3,173 Other 11,647 10,899 Total regulatory assets 27,681 28,478 Regulatory liabilities: Reserves for regulatory matters 39,981 39,193 Taxes refundable to customers 14,129 13,933 Plant decommissioning costs 6,413 5,843 Natural gas costs refundable through rate adjustments 274 21,721 Other 1,351 1,393 Total regulatory liabilities 62,148 82,083 Net regulatory position $(34,467) $(53,605) As of December 31, 1998, substantially all of the company's regulatory assets are being reflected in rates charged to customers and are being recovered over the next 1 to 18 years. If, for any reason, the company's regulated businesses cease to meet the criteria for application of SFAS No. 71 for all or part of their operations, the regulatory assets and liabilities relating to those portions ceasing to meet such criteria would be removed from the balance sheet and included in the statement of income as an extraordinary item in the period in which the discontinuance of SFAS No. 71 occurs. NOTE 4 FINANCIAL INSTRUMENTS Derivatives Williston Basin Interstate Pipeline Company and Fidelity Oil Group have entered into certain price swap and collar agreements to manage a portion of the market risk associated with fluctuations in the price of oil and natural gas. These swap and collar agreements are not held for trading purposes. The swap and collar agreements call for Williston Basin and Fidelity to receive monthly payments from or make payments to counterparties based upon the difference between a fixed and a variable price as specified by the agreements. The variable price is either an oil price quoted on the New York Mercantile Exchange (NYMEX) or a quoted natural gas price on the NYMEX or Colorado Interstate Gas Index. The company believes that there is a high degree of correlation because the timing of purchases and production and the swap and collar agreements are closely matched, and hedge prices are established in the areas of operations. Amounts payable or receivable on the swap and collar agreements are matched and reported in operating revenues on the Consolidated Statements of Income as a component of the related commodity transaction at the time of settlement with the counterparty. The amounts payable or receivable are generally offset by corresponding increases and decreases in the value of the underlying commodity transactions. Innovative Gas Services, Incorporated participates in the natural gas futures market to hedge a portion of the price risk associated with natural gas purchase and sale commitments. These futures are not held for trading purposes. Gains or losses on the futures contracts are deferred until the transaction occurs, at which point they are reported in "Purchased natural gas sold" on the Consolidated Statements of Income. The gains or losses on the futures contracts are generally offset by corresponding increases and decreases in the value of the underlying commodity transactions. Williston Basin and Knife River Corporation entered into interest rate swap agreements to manage a portion of their interest rate exposure on the natural gas repurchase commitment and long-term debt, respectively. These interest rate swap agreements, which expired in August 1997 and August 1998, respectively, were not held for trading purposes. The interest rate swap agreements called for Williston Basin and Knife River to receive quarterly payments from or make payments to counterparties based upon the difference between fixed and variable rates as specified by the interest rate swap agreements. The variable prices were based on the three-month floating London Interbank Offered Rate. Settlement amounts payable or receivable under these interest rate swap agreements were recorded in "Interest expense" for Knife River and "Costs on natural gas repurchase commitment" for Williston Basin on the Consolidated Statements of Income in the accounting period they were incurred. The amounts payable or receivable were generally offset by interest on the related debt instruments. The company's policy prohibits the use of derivative instruments for trading purposes and the company has procedures in place to monitor compliance with its policies. The company is exposed to credit-related losses in relation to financial instruments in the event of nonperformance by counterparties, but does not expect any counterparties to fail to meet their obligations given their existing credit ratings. The following table summarizes the company's hedging activity: Years ended December 31, 1998 1997 1996 (Notional amounts in thousands) Oil swap agreements:* Range of fixed prices per barrel $20.92 $19.77-$21.36 $18.74-$19.07 Notional amount (in barrels) 219 730 635 Natural gas swap/collar agreements:* Range of fixed prices per MMBtu $1.54-$2.67 $1.30-$2.395 $1.40-$2.05 Notional amount (in MMBtu's) 6,082 8,039 5,331 Natural gas futures contracts:* Range of fixed prices per MMBtu $1.96-$2.50 --- --- Notional amount (in MMBtu's) 650 --- --- Natural gas collar agreement:** Range of fixed prices per MMBtu --- --- $1.22-$1.52 Notional amount (in MMBtu's) --- --- 910 Interest rate swap agreements:** Range of fixed interest rates 5.50%-6.50% 5.50%-6.50% 5.50%-6.50% Notional amount (in dollars) $10,000 $30,000 $30,000 * Receive fixed -- pay variable ** Receive variable -- pay fixed At December 31, 1998, the company has natural gas collar agreements outstanding for 2.9 million MMBtu's of natural gas which call for the company, in 1999, to receive monthly payments from counterparties when the settlement price is below the floor price in the collar agreement or make monthly payments to counterparties when the settlement price is above the ceiling price in the collar agreement. The weighted average floor price and ceiling price is $2.10 and $2.51, respectively. The fair value of these derivative financial instruments reflects the estimated amounts that the company would receive or pay to terminate the contracts at the reporting date, thereby taking into account the current favorable or unfavorable position on open contracts. The favorable or unfavorable position is currently not recorded on the company's financial statements. Favorable and unfavorable positions related to commodity hedge agreements are expected to be generally offset by corresponding increases and decreases in the value of the underlying commodity transactions. The company's net favorable position on all hedge agreements outstanding at December 31, 1998, was $597,000. In the event a hedge agreement does not qualify for hedge accounting or when the underlying commodity transaction or related debt instrument matures, is sold, is extinguished, or is terminated, the current favorable or unfavorable position on the open contract would be included in results of operations. The company's policy requires approval to terminate a hedge agreement prior to its original maturity. In the event a hedge agreement is terminated, the realized gain or loss at the time of termination would be deferred until the underlying commodity transaction or related debt instrument is sold or matures and is expected to generally offset the corresponding increases or decreases in the value of the underlying commodity transaction or interest on the related debt instrument. Fair value of other financial instruments The estimated fair value of the company's long-term debt and preferred stock subject to mandatory redemption are based on quoted market prices of the same or similar issues. The estimated fair values of the company's long-term debt and preferred stock subject to mandatory redemption at December 31 are as follows: 1998 1997 Carrying Fair Carrying Fair Amount Value Amount Value (In thousands) Long-term debt $416,456 $435,078 $306,363 $319,367 Preferred stock subject to mandatory redemption $ 1,700 $ 1,592 $ 1,800 $ 1,584 The fair value of other financial instruments for which estimated fair values have not been presented is not materially different than the related carrying amount. NOTE 5 SHORT-TERM BORROWINGS The company and its subsidiaries had unsecured short-term lines of credit from a number of banks totaling $60 million at December 31, 1998. These line of credit agreements provide for bank borrowings against the lines and/or support for commercial paper issues. The agreements provide for commitment fees at varying rates. Commercial paper amounts outstanding supported by the lines of credit were $15 million at December 31, 1998, and $3.3 million at December 31, 1997. The weighted average interest rate for borrowings outstanding at December 31, 1998 and 1997, was 5.45 percent and 8.50 percent, respectively. The unused portions of the lines of credit are subject to withdrawal based on the occurrence of certain events. NOTE 6 LONG-TERM DEBT AND INDENTURE PROVISIONS Long-term debt outstanding at December 31 is as follows: 1998 1997 (In thousands) First mortgage bonds and notes: 9 1/8% Series, paid in 1998 $ --- $ 20,000 Pollution Control Refunding Revenue Bonds, Series 1992 -- Mercer County, North Dakota, 6.65%, due June 1, 2022 15,000 15,000 Morton County, North Dakota, 6.65%, due June 1, 2022 2,600 2,600 Richland County, Montana, 6.65%, due June 1, 2022 3,250 3,250 Secured Medium-Term Notes, Series A -- 6.52%, due October 1, 2004 15,000 15,000 8.25%, due April 1, 2007 30,000 30,000 5.83%, due October 1, 2008 15,000 --- 6.71%, due October 1, 2009 15,000 15,000 8.60%, due April 1, 2012 35,000 35,000 Total first mortgage bonds and notes 130,850 135,850 Pollution control note obligation, 6.20%, due March 1, 2004 3,400 3,700 Senior notes: 8.70%, paid in 1998 --- 6,500 8.43%, due December 31, 2000 9,000 12,000 7.35%, due July 31, 2002 4,000 5,000 7.51%, due October 9, 2003 3,000 3,000 6.86%, due October 30, 2004 12,500 12,500 6.43%, due October 30, 2005 10,000 --- 7.45%, due May 31, 2006 20,000 20,000 6.68%, due October 30, 2006 15,000 --- 7.60%, due November 3, 2008 15,000 15,000 7.10%, due October 30, 2009 12,500 12,500 6.73%, due October 30, 2010 10,000 --- 7.28%, due October 30, 2012 10,000 10,000 6.87%, due October 30, 2013 5,000 --- 7.05%, due October 30, 2018 15,000 --- Commercial paper at a weighted average rate of 6.49%, supported by a revolving credit agreement due on November 29, 2001 82,921 --- Revolving lines of credit at a weighted average rate of 6.96%, due on dates ranging from January 5, 2001 through December 31, 2002 45,200 64,000 Term credit agreements at a weighted average rate of 7.84%, due on dates ranging from January 28, 2000 through November 25, 2012 13,211 6,398 Other (126) (85) Total long-term debt 416,456 306,363 Less current maturities 3,192 7,802 Net long-term debt $ 413,264 $ 298,561 During 1998, Centennial Energy Holdings, Inc., a direct subsidiary of the company, entered into a revolving credit agreement with various banks on behalf of its subsidiaries that allows for borrowings of up to $200 million. This facility supports the Centennial commercial paper program. Under the Centennial commercial paper program, $82.9 million was outstanding at December 31, 1998. The commercial paper borrowings are classified as long term as the company intends to refinance these borrowings on a long term basis through continued commercial paper borrowings supported by the revolving credit agreement. Under the revolving lines of credit, the company and a subsidiary have $50 million available, $45.2 million of which was outstanding at December 31, 1998. The amounts of scheduled long-term debt maturities for the five years following December 31, 1998 aggregate $3.2 million in 1999; $12.4 million in 2000; $100.3 million in 2001; $49.4 million in 2002 and $6.4 million in 2003. Substantially all of the company's electric and natural gas distribution properties, with certain exceptions, are subject to the lien of its Indenture of Mortgage. Under the terms and conditions of such Indenture, the company could have issued approximately $273 million of additional first mortgage bonds at December 31, 1998. Certain of the company's other debt instruments contain restrictive covenants all of which the company is in compliance with at December 31, 1998. NOTE 7 PREFERRED STOCKS Preferred stocks at December 31 are as follows: 1998 1997 (Dollars in thousands) Authorized: Preferred -- 500,000 shares, cumulative, par value $100, issuable in series Preferred stock A -- 1,000,000 shares, cumulative, without par value, issuable in series (none outstanding) Preference -- 500,000 shares, cumulative, without par value, issuable in series (none outstanding) Outstanding: Subject to mandatory redemption -- Preferred -- 5.10% Series -- 17,000 and 18,000 shares in 1998 and 1997, respectively $ 1,700 $ 1,800 Other preferred stock -- 4.50% Series -- 100,000 shares 10,000 10,000 4.70% Series -- 50,000 shares 5,000 5,000 15,000 15,000 Total preferred stocks 16,700 16,800 Less current maturities and sinking fund requirements 100 100 Net preferred stocks $16,600 $16,700 The preferred stocks outstanding are subject to redemption, in whole or in part, at the option of the company with certain limitations on 30 days notice on any quarterly dividend date. The company is obligated to make annual sinking fund contributions to retire the 5.10% Series preferred stock. The redemption prices and sinking fund requirements, where applicable, are summarized below: Redemption Sinking Fund Series Price (a) Shares Price (a) Preferred stocks: 4.50% $105 (b) --- --- 4.70% $102 (b) --- --- 5.10% $102 1,000 (c) $100 (a) Plus accrued dividends. (b) These series are redeemable at the sole discretion of the company. (c) Annually on December 1, if tendered. In the event of a voluntary or involuntary liquidation, all preferred stock series holders are entitled to $100 per share, plus accrued dividends. The aggregate annual sinking fund amount applicable to preferred stock subject to mandatory redemption for each of the five years following December 31, 1998, is $100,000. NOTE 8 COMMON STOCK On May 14, 1998, the company's Board of Directors approved a three-for-two common stock split effected in the form of a 50 percent common stock dividend. The additional shares of common stock were distributed on July 13, 1998, to common stockholders of record on July 3, 1998. Common stock information appearing in the accompanying Consolidated Statements of Income and Notes to Consolidated Financial Statements has been restated to give retroactive effect to the stock split. The company's Automatic Dividend Reinvestment and Stock Purchase Plan (DRIP) provides participants in the DRIP the opportunity to invest all or a portion of their cash dividends in shares of the company's common stock and/or to make optional cash payments of up to $5,000 per month for the same purpose. Holders of all classes of the company's capital stock, legal residents in any of the 50 states and beneficial owners, whose shares are held by brokers or other nominees, through participation by their brokers or nominees are eligible to participate in the DRIP. The company's Tax Deferred Compensation Savings Plans (K-Plans) pursuant to Section 401(k) of the Internal Revenue Code are funded with the company's common stock. From January 1, 1989, through September 30, 1998, the DRIP and K-Plans have been funded primarily by the purchase of shares of common stock on the open market, except for a portion of 1997 where shares of authorized but unissued common stock were used to fund the DRIP and K- Plans. Beginning October 1, 1998, shares of authorized but unissued common stock were used to fund the DRIP, while the K-Plans continued to be funded by the purchase of shares of common stock on the open market. At December 31, 1998, there were 8.2 million shares of common stock reserved for issuance under the DRIP and K-Plans. On November 12, 1998, the company's Board of Directors declared, pursuant to a stockholders' rights plan, a dividend of one preference share purchase right (right) for each outstanding share of the company's common stock. Each right becomes exercisable, upon the occurrence of certain events, for one one-thousandth of a share of Series B Preference Stock of the company, without par value, at an exercise price of $125 per one one- thousandth, subject to certain adjustments. The rights are currently not exercisable and will be exercisable only if a person or group (acquiring person) either acquires ownership of 15 percent or more of the company's common stock or commences a tender or exchange offer that would result in ownership of 15 percent or more. In the event the company is acquired in a merger or other business combination transaction or 50 percent or more of its consolidated assets or earnings power are sold, each right entitles the holder to receive, upon the exercise thereof at the then current exercise price of the right multiplied by the number of one one-thousandth of a Series B Preference Stock for which a right is then exercisable, in accordance with the terms of the rights agreement, such number of shares of common stock of the acquiring person having a market value of twice the then current exercise price of the right. The rights, which expire on December 31, 2008, are redeemable in whole, but not in part, for a price of $.01 per right, at the company's option at any time until any acquiring person has acquired 15 percent or more of the company's common stock. NOTE 9 INCOME TAXES Income tax expense is summarized as follows: Years ended December 31, 1998 1997 1996 (In thousands) Current: Federal $ 28,256 $15,427 $12,617 State 5,880 2,362 3,272 Foreign 605 60 60 34,741 17,849 15,949 Deferred: Investment tax credit (975) (1,150) (1,099) Income taxes -- Federal (14,214) 11,844 1,139 State (2,067) 2,200 120 Foreign --- --- (22) (17,256) 12,894 138 Total income tax expense $ 17,485 $30,743 $16,087 Components of deferred tax assets and deferred tax liabilities recognized in the company's Consolidated Balance Sheets at December 31 are as follows: 1998 1997 (In thousands) Deferred tax assets: Reserves for regulatory matters $ 35,703 $ 32,789 Natural gas available under repurchase commitment 2,268 4,821 Accrued pension costs 9,274 8,445 Deferred investment tax credits 2,336 2,714 Accrued land reclamation 2,907 3,184 Other 13,266 12,851 Total deferred tax assets 65,754 64,804 Deferred tax liabilities: Depreciation and basis differences on property, plant and equipment 192,166 123,629 Basis differences on oil and natural gas producing properties 9,604 30,726 Long-term debt refinancing costs 4,491 4,672 Other 15,669 8,168 Total deferred tax liabilities 221,930 167,195 Net deferred income tax liability $(156,176) $(102,391) The following table reconciles the change in the net deferred income tax liability from December 31, 1997, to December 31, 1998, to the deferred income tax expense included in the Consolidated Statements of Income: 1998 (In thousands) Net change in deferred income tax liability from the preceding table $ 53,785 Change in tax effects of income tax-related regulatory assets and liabilities 323 Deferred taxes associated with acquisitions (70,389) Deferred income tax expense for the period $(16,281) Total income tax expense differs from the amount computed by applying the statutory federal income tax rate to income before taxes. The reasons for this difference are as follows: Years ended December 31, 1998 1997 1996 Amount % Amount % Amount % (Dollars in thousands) Computed tax at federal statutory rate $18,057 35.0 $29,876 35.0 $21,545 35.0 Increases (reductions) resulting from: Depletion allowance (1,571) (3.0) (828) (1.0) (1,070) (1.7) State income taxes -- net of federal income tax benefit 2,312 4.5 3,473 4.1 2,770 4.5 Investment tax credit amortization (975) (1.9) (1,150) (1.4) (1,099) (1.8) Tax reserve adjustment --- --- --- --- (6,600) (10.7) Other items (338) (.7) (628) (.7) 541 .8 Total income tax expense $17,485 33.9 $30,743 36.0 $16,087 26.1 In 1996, the company reached a settlement with the Internal Revenue Service concerning notices of deficiency issued in connection with disputed items for the 1983 through 1988 tax years and, in 1997, reached a similar settlement for the tax years 1989 through 1991. In 1996, the company reflected the effects of the 1996 settlement and the 1997 anticipated settlement in the consolidated financial statements and, in addition, reversed reserves which had previously been provided and were deemed to be no longer required. NOTE 10 BUSINESS SEGMENT DATA In 1998, the company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 requires the disclosure of certain information about operating segments in financial statements. The company's operations are conducted through five business segments. The company's reportable segments are those that are based on the company's method of internal reporting, which generally segregates the strategic business units due to differences in products, services and regulation. The electric, natural gas distribution, natural gas transmission, construction materials and mining, and oil and natural gas production businesses are substantially all located within the United States. The electric business operates electric power generation, transmission and distribution facilities in North Dakota, South Dakota, Montana and Wyoming and installs and repairs electric transmission and distribution power lines and provides related supplies, equipment and engineering services throughout the western United States and Hawaii. The natural gas distribution business provides natural gas distribution services in North Dakota, South Dakota, Montana and Wyoming. The natural gas transmission business serves the Midwestern, Southern and Central regions of the United States providing natural gas transmission and related services including storage and production along with energy marketing and management, wholesale/retail propane and energy facility construction. The construction materials and mining business produces and markets aggregates and construction materials in Alaska, California, Hawaii and Oregon, and operates lignite coal mines in Montana and North Dakota. The oil and natural gas production business is engaged in oil and natural gas acquisition, exploration and production activities throughout the United States, the Gulf of Mexico and Canada. Segment information follows the same accounting policies as described in the Summary of Significant Accounting Policies. Segment information included in the accompanying Consolidated Balance Sheets as of December 31 and included in the Consolidated Statements of Income for the years then ended is as follows:
Oil and Natural Natural Construction Natural Gas Gas Materials Gas Eliminations Electric Distribution Transmission and Mining Production and Adjustments Total (In thousands) 1998 Operating revenues: External $211,453 $154,147 $133,279 $338,702 (a) $ 51,297 $ --- $ 888,878 Intersegment --- --- 47,420 7,749 --- (47,420) (b) 7,749 Depreciation, depletion and amortization 19,798 7,150 8,463 20,562 21,813 --- 77,786 Interest expense 10,304 3,728 6,426 7,402 2,413 --- 30,273 Income taxes 10,204 2,681 13,977 15,155 (24,532) --- 17,485 Earnings on common stock 17,180 3,501 20,823 24,499 (32,673) --- 33,330 Other significant noncash items: Write-downs of oil and natural gas properties (Note 1) --- --- --- --- 66,000 --- 66,000 Identifiable assets (d) 344,304 129,654 260,942 500,720 171,207 45,948 (c) 1,452,775 Capital expenditures 31,378 8,256 23,710 172,108 94,465 (4,275) (e) 325,642 1997 Operating revenues: External $164,351 $157,005 $ 43,784 $168,067 (a) $ 68,387 $ --- $ 601,594 Intersegment --- --- 49,622 6,080 --- (49,622) (b) 6,080 Depreciation, depletion and amortization 17,771 7,013 5,550 10,999 24,434 --- 65,767 Interest expense 10,949 3,698 8,605 4,503 2,454 --- 30,209 Income taxes 7,642 2,987 8,429 4,392 7,293 --- 30,743 Earnings on common stock 13,388 4,514 11,317 10,111 14,505 --- 53,835 Identifiable assets (d) 326,615 128,517 227,030 235,221 162,785 33,724 (c) 1,113,892 Capital expenditures 27,970 8,858 13,205 41,472 30,651 (4,522) (e) 117,634 1996 Operating revenues: External $138,761 $155,012 $ 20,396 $126,275 (a) $ 68,310 $ --- $ 508,754 Intersegment --- --- 58,224 5,947 --- (58,224) (b) 5,947 Depreciation, depletion and amortization 17,053 6,880 6,748 6,974 24,996 --- 62,651 Interest expense 11,269 4,422 7,799 3,277 3,111 (1,046) (b) 28,832 Income taxes 5,859 3,507 (5,962) 5,985 6,698 --- 16,087 Earnings on common stock 11,436 4,892 2,459 11,521 14,375 --- 44,683 Other significant noncash items: Write-down of natural gas available under repurchase commitment (Note 15) --- --- 18,553 --- --- --- 18,553 Identifiable assets (d) 313,815 120,645 276,843 171,283 161,647 44,940 (c) 1,089,173 Capital expenditures 18,674 6,255 10,890 25,063 51,821 (11,803) (e) 100,900 (a) Includes sales, for use at the Coyote Station, an electric generating station jointly owned by the company and other utilities, of (in thousands) $6,714, $5,061 and $6,358 for 1998, 1997 and 1996, respectively. (b) Intersegment eliminations. (c) Corporate assets consist of assets not directly assignable to a business segment (i.e., cash and cash equivalents, certain accounts receivable and other miscellaneous current and deferred assets). (d) Includes, in the case of electric and natural gas distribution property, allocations of common utility property. Natural gas stored or available under repurchase commitment, as applicable, is included in natural gas distribution and transmission identifiable assets. (e) Net proceeds from sale or disposition of property.
Capital expenditures for 1998 and 1997, related to acquisitions, in the preceeding table include the following noncash transactions: issuance of the company's equity securities, less treasury stock acquired, in 1998 of $138.8 million; and assumed debt and the issuance of the company's equity securities in total for 1997 of $9.9 million. In addition, natural gas transmission capital expenditures for 1996 include $763,000 for Prairielands Energy Marketing, Inc. which were not reflected in investing activities in the Consolidated Statements of Cash Flows as Prairielands was not considered a major business segment. On March 5, 1998, the company acquired Morse Bros., Inc. and S2 - F Corp., privately held construction materials companies located in Oregon's Willamette Valley. The purchase consideration for such companies consisted of $98.2 million of the company's common stock and cash. Morse Bros., Inc. sells aggregate, ready-mixed concrete, asphaltic concrete, prestress concrete and construction services in the Willamette Valley from Portland to Eugene. S2 - F Corp. sells aggregate and construction services. The company also acquired a number of businesses in 1998, none of which were individually material, including construction materials and mining businesses in Oregon, utility services construction and engineering businesses in California and Montana and a natural gas marketing business in Kentucky. The total purchase consideration, consisting of the company's common stock and cash, for these businesses was $62.7 million. In 1997, the company acquired several businesses, none of which were individually material, including the remaining 50 percent interest in Hawaiian Cement (See Note 12) and utility services construction and construction supplies and equipment businesses in Oregon. The total purchase consideration, consisting of the company's common stock and cash, for these businesses was $35.2 million. The above acquisitions were accounted for under the purchase method of accounting. The results of operations of the acquired businesses are included in the financial statements since the date of each acquisition. Pro forma financial amounts reflecting the effects of the above acquisitions are not presented as such acquisitions were not material to the company's financial position or results of operations. NOTE 11 EMPLOYEE BENEFIT PLANS In 1998, the company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" (SFAS No. 132). SFAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans but does not change the measurement or recognition of amounts related to these benefit plans. For comparative purposes, prior year amounts have been restated. The company has noncontributory defined benefit pension plans and other postretirement benefit plans. There were no additional minimum pension liabilities required to be recognized as of December 31, 1998 and 1997. Changes in benefit obligation and plan assets for the years ended December 31 are as follows: Other Pension Postretirement Benefits Benefits 1998 1997 1998 1997 (In thousands) Change in benefit obligation: Benefit obligation at beginning of year $178,199 $150,829 $ 73,838 $ 65,608 Service cost 4,509 3,889 1,502 1,272 Interest cost 12,248 11,651 4,848 4,691 Plan participants' contributions --- --- 475 379 Amendments 437 --- (4,810) --- Actuarial (gain) loss 5,971 12,263 (1,695) (888) Acquisition --- 9,463 --- 6,394 Benefits paid (13,699) (9,896) (3,820) (3,618) Benefit obligation at end of year $187,665 $178,199 $ 70,338 $ 73,838 Change in plan assets: Fair value of plan assets at beginning of year $225,201 $185,872 $ 30,595 $ 21,712 Actual return on plan assets 39,604 38,272 6,226 5,621 Employer contribution 88 265 6,067 6,501 Plan participants' contributions --- --- 475 379 Acquisition --- 10,688 --- --- Benefits paid (13,699) (9,896) (3,820) (3,618) Fair value of plan assets at end of year 251,194 225,201 39,543 30,595 Funded status 63,529 47,002 (30,795) (43,243) Unrecognized actuarial gain (73,963) (56,844) (8,036) (2,679) Unrecognized prior service cost 7,645 8,056 (1,433) --- Unrecognized net transition obligation (5,340) (6,333) 31,029 36,864 Accrued benefit cost $ (8,129) $ (8,119) $ (9,235) $(9,058) Weighted average assumptions for the company's pension and other postretirement benefit plans as of December 31 are as follows: Other Pension Postretirement Benefits Benefits 1998 1997 1998 1997 Discount rate 6.75% 7.00% 6.75% 7.00% Expected return on plan assets 8.50% 8.50% 7.50% 7.50% Rate of compensation increase 4.50% 4.50% 4.50% 4.50% Health care rate assumptions for the company's other postretirement benefit plans as of December 31 are as follows: 1998 1997 Health care trend rate 6.50%-8.50% 7.00%-9.00% Health care cost trend rate - ultimate 5.00%-6.00% 5.00%-6.00% Year in which ultimate trend rate achieved 1999-2004 1999-2004 Components of net periodic benefit cost for the company's pension and other postretirement benefit plans are as follows: Other Pension Postretirement Benefits Benefits Years ended December 31, 1998 1997 1996 1998 1997 1996 (In thousands) Components of net periodic benefit cost: Service cost $ 4,509 $ 3,889 $ 3,852 $ 1,502 $ 1,272 $ 1,333 Interest cost 12,248 11,651 10,823 4,848 4,691 4,701 Expected return on assets (15,892) (14,321) (13,145) (2,395) (1,748) (1,279) Amortization of prior service cost 848 811 755 --- --- --- Recognized net actuarial (gain) loss (621) (666) (98) (169) (105) 48 Amortization of net transition obligation (994) (988) (990) 2,458 2,458 2,458 Net periodic benefit cost 98 376 1,197 6,244 6,568 7,261 Less amount capitalized 79 70 131 628 625 735 Net periodic benefit expense $ 19 $ 306 $ 1,066 $ 5,616 $ 5,943 $ 6,526 The company has other postretirement benefit plans including health care and life insurance. The plans underlying these benefits may require contributions by the employee depending on such employee's age and years of service at retirement or the date of retirement. The accounting for the health care plan anticipates future cost-sharing changes that are consistent with the company's expressed intent to generally increase retiree contributions each year by the excess of the expected health care cost trend rate over 6 percent. Assumed health care cost trend rates may have a significant effect on the amounts reported for the health care plans. A 1 percentage point change in the assumed health care cost trend rates would have the following effects at December 31, 1998: 1 Percentage 1 Percentage Point Increase Point Decrease (In thousands) Effect on total of service and interest cost components $ 243 $ (294) Effect on postretirement benefit obligation $3,671 $(4,546) The company has an unfunded, nonqualified benefit plan for executive officers and certain key management employees that provides for defined benefit payments upon the employee's retirement or to their beneficiaries upon death for a 15-year period. Investments consist of life insurance carried on plan participants which is payable to the company upon the employee's death. The cost of these benefits was $2.7 million in 1998 and $2.2 million in both 1997 and 1996. The company has stock option plans for directors, key employees and employees, which grant options to purchase shares of the company's stock. The company accounts for these option plans in accordance with APB Opinion No. 25 under which no compensation expense has been recognized. The option exercise price is the market value of the stock on the date of grant. Options granted to the key employees automatically vest after nine years, but the plan provides for accelerated vesting based on the attainment of certain performance goals or upon a change in control of the company. Options granted to directors and employees vest at date of grant and three years after date of grant, respectively, and expire ten years after the date of grant. Under the stock option plans, the company is authorized to grant options for up to 4.3 million shares of common stock and has granted options on 1.9 million shares through December 31, 1998. Had the company recorded compensation expense for the fair value of options granted consistent with SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), net income would have been reduced on a pro forma basis by $820,000 in 1998, $51,400 in 1997 and $48,000 in 1996. On a pro forma basis, basic and diluted earnings per share for 1998 would have been reduced by $.02 and there would have been no effect for 1997 and 1996. Since SFAS No. 123 does not require this accounting to be applied to options granted prior to January 1, 1995, the resulting pro forma compensation costs may not be representative of those to be expected in future years. A summary of the status of the stock option plans at December 31, 1998, 1997 and 1996, and changes during the years then ended are as follows: 1998 1997 1996 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Balance at beginning of year 594,180 $12.07 635,965 $11.77 703,105 $11.65 Granted 1,225,920 21.12 22,500 16.37 --- --- Forfeited (37,875) 21.05 (13,600) 11.41 --- --- Exercised (265,417) 11.98 (50,685) 10.50 (67,140) 10.50 Balance at end of year 1,516,808 19.17 594,180 12.07 635,965 11.77 Exercisable at end of year 333,261 $12.94 112,461 $11.67 140,646 $10.50 Exercise prices on options outstanding at December 31, 1998, range from $10.50 to $23.84 with a weighted average remaining contractual life of approximately 8 years. The weighted average fair value of each option granted in 1998 and 1997 is $2.40 and $2.09, respectively. The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used to estimate the fair value of options granted in 1998 and 1997 were a weighted average risk-free interest rate of 4.78 percent and 6.60 percent, respectively, a weighted average expected dividend yield of 5.13 percent and 5.48 percent, respectively, an expected life of 7 years and a weighted average expected volatility 16.27 percent and 14.51 percent, respectively. The company sponsors various defined contribution plans for eligible employees. Costs incurred by the company under these plans were $3.1 million in 1998, $2.1 million in 1997 and $1.9 million in 1996. The costs incurred in each year reflect additional participants as a result of business acquisitions. NOTE 12 PARTNERSHIP INVESTMENT In September 1995, KRC Holdings, Inc., through its wholly owned subsidiary, Knife River Hawaii, Inc., acquired a 50 percent interest in Hawaiian Cement, which was previously owned by Lone Star Industries, Inc. Knife River Dakota, Inc., a wholly owned subsidiary of KRC Holdings, Inc. acquired the remaining 50 percent interest in Hawaiian Cement from the previous owner, Adelaide Brighton Cement (Hawaii), Inc. of Adelaide, Australia, in July 1997. In August 1997, the company began consolidating Hawaiian Cement into its financial statements. Prior to August 1997, the company's net investment in Hawaiian Cement was not consolidated and was accounted for by the equity method. The company's share of operating results for the seven months ended July 31, 1997, and the year ended December 31, 1996, is included in "Other income -- net" in the accompanying Consolidated Statements of Income for the years ended December 31, 1997 and 1996, respectively. Summarized operating results for Hawaiian Cement for the seven months ended July 31, 1997, and for the year ended December 31, 1996, when accounted for by the equity method, are as follows: net sales of $33.5 million and $70.1 million; operating margin of $4.7 million and $9.9 million; and income before income taxes of $2.0 million and $5.4 million, respectively. NOTE 13 JOINTLY OWNED FACILITIES The consolidated financial statements include the company's 22.7 percent and 25.0 percent ownership interests in the assets, liabilities and expenses of the Big Stone Station and the Coyote Station, respectively. Each owner of the Big Stone and Coyote stations is responsible for financing its investment in the jointly owned facilities. The company's share of the Big Stone Station and Coyote Station operating expenses is reflected in the appropriate categories of operating expenses in the Consolidated Statements of Income. At December 31, the company's share of the cost of utility plant in service and related accumulated depreciation for the stations was as follows: 1998 1997 (In thousands) Big Stone Station: Utility plant in service $ 49,762 $ 49,467 Less accumulated depreciation 28,781 27,971 $ 20,981 $ 21,496 Coyote Station: Utility plant in service $121,726 $121,604 Less accumulated depreciation 56,770 53,107 $ 64,956 $ 68,497 NOTE 14 REGULATORY MATTERS AND REVENUES SUBJECT TO REFUND General rate proceedings Williston Basin had pending with the FERC a general natural gas rate change application implemented in 1992. In October 1997, Williston Basin appealed to the United States Court of Appeals for the D.C. Circuit (D.C. Circuit Court) certain issues decided by the FERC in prior orders concerning the 1992 proceeding. Williston Basin is awaiting a decision from the D.C. Circuit Court. In June 1995, Williston Basin filed a general rate increase application with the FERC. As a result of FERC orders issued after Williston Basin's application was filed, Williston Basin filed revised base rates in December 1995 with the FERC resulting in an increase of $8.9 million or 19.1 percent over the then current effective rates. Williston Basin began collecting such increase effective January 1, 1996, subject to refund. On July 29, 1998, the FERC issued an order which addressed various issues including storage cost allocations, return on equity and throughput. On August 28, 1998, Williston Basin requested rehearing of such order. Reserves have been provided for a portion of the revenues that have been collected subject to refund with respect to pending regulatory proceedings and to reflect future resolution of certain issues with the FERC. Williston Basin believes that such reserves are adequate based on its assessment of the ultimate outcome of the various proceedings. NOTE 15 NATURAL GAS REPURCHASE COMMITMENT The company has offered for sale since 1984 the inventoried natural gas owned by Frontier, a special purpose, nonaffiliated corporation. Through an agreement, Williston Basin is obligated to repurchase all of the natural gas at Frontier's original cost and reimburse Frontier for all of its financing and general administrative costs. Frontier has financed the purchase of the natural gas under a term loan agreement with several banks. At December 31, 1998 and 1997, borrowings totaled $14.8 million and $32.0 million, respectively, at a weighted average interest rate of 6.19 percent and 6.63 percent, respectively. At December 31, 1998 and 1997, the natural gas repurchase commitment of $14.3 million and $30.4 million, respectively, is reflected on the company's Consolidated Balance Sheets under "Other liabilities" and $551,000 and $1.6 million, respectively, is reflected under "Other accrued liabilities." The financing costs associated with this repurchase commitment, consisting principally of interest and related financing fees, approximated $5.7 million in 1996. The costs incurred in 1998 and 1997 were not material and are included in "Other income -- net" on the Consolidated Statements of Income. The term loan agreement will terminate on October 2, 1999, subject to an option to renew this agreement upon the lenders' consent for up to five years, unless terminated earlier by the occurrence of certain events. The FERC has issued orders that have held that storage costs should be allocated to this gas, prospectively beginning May 1992, as opposed to being included in rates applicable to Williston Basin's customers. These storage costs, as initially allocated to the Frontier gas, approximated $2.1 million annually, for which Williston Basin has provided reserves. Williston Basin appealed these orders to the D.C. Circuit Court which in December 1996 issued its order ruling that the FERC's actions in allocating storage capacity costs to the Frontier gas were appropriate. On August 28, 1998, Williston Basin requested rehearing of the July 29, 1998 FERC order which addressed various issues, including a requirement that storage deliverability costs be allocated to the Frontier gas. Williston Basin sells and transports natural gas held under the repurchase commitment. In the third quarter of 1996, Williston Basin, based on a number of factors including differences in regional natural gas prices and natural gas sales occurring at that time, wrote down 43.0 MMdk of this gas to its then current value. The value of this gas was determined using the sum of discounted cash flows of expected future sales occurring at then current regional natural gas prices as adjusted for anticipated future price increases. This resulted in a write-down aggregating $18.6 million ($11.4 million after tax). In addition, Williston Basin wrote off certain other costs related to this natural gas of approximately $2.5 million ($1.5 million after tax). The amounts related to this write-down are included in "Costs on natural gas repurchase commitment" in the Consolidated Statements of Income. At December 31, 1998 and 1997, natural gas held under the repurchase commitment of $6.9 million and $14.6 million, respectively, is included in the company's Consolidated Balance Sheets under "Deferred charges and other assets." The amount of this natural gas in storage as of December 31, 1998 was 7.0 MMdk. NOTE 16 COMMITMENTS AND CONTINGENCIES Pending litigation In November 1993, the estate of W.A. Moncrief (Moncrief), a producer from whom Williston Basin purchased a portion of its natural gas supply, filed suit in Federal District Court for the District of Wyoming (Federal District Court) against Williston Basin and the company disputing certain price and volume issues under the contract. Through the course of this action Moncrief submitted damage calculations which totaled approximately $19 million or, under its alternative pricing theory, approximately $39 million. In June 1997, the Federal District Court issued its order awarding Moncrief damages of approximately $15.6 million. In July 1997, the Federal District Court issued an order limiting Moncrief's reimbursable costs to post-judgment interest, instead of both pre- and post-judgment interest as Moncrief had sought. In August 1997, Moncrief filed a notice of appeal with the United States Court of Appeals for the Tenth Circuit (U.S. Court of Appeals) related to the Federal District Court's orders. In September 1997, Williston Basin and the company filed a notice of cross-appeal. Oral argument before the U.S. Court of Appeals was held September 23, 1998. Williston Basin and the company are awaiting a decision from the U.S. Court of Appeals. Williston Basin believes that it is entitled to recover from customers virtually all of the costs which might ultimately be incurred as a result of this litigation as gas supply realignment transition costs pursuant to the provisions of the FERC's Order 636. However, the amount of costs that can ultimately be recovered is subject to approval by the FERC and market conditions. In December 1993, Apache Corporation (Apache) and Snyder Oil Corporation (Snyder) filed suit in North Dakota Northwest Judicial District Court (North Dakota District Court) against Williston Basin and the company. Apache and Snyder are oil and natural gas producers which had processing agreements with Koch Hydrocarbon Company (Koch). Williston Basin and the company had a natural gas purchase contract with Koch. Apache and Snyder have alleged they are entitled to damages for the breach of Williston Basin's and the company's contract with Koch. Williston Basin and the company believe that if Apache and Snyder have any legal claims, such claims are with Koch, not with Williston Basin or the company as Williston Basin, the company and Koch have settled their disputes. Apache and Snyder have submitted damage estimates under differing theories aggregating up to $4.8 million without interest. A motion to intervene in the case by several other producers, all of which had contracts with Koch but not with Williston Basin, was denied in December 1996. The trial before the North Dakota District Court was completed in November 1997. On November 25, 1998, the North Dakota District Court entered an order directing the entry of judgment in favor of Williston Basin and the company. On December 15, 1998, Apache and Snyder filed a motion for relief asking the North Dakota District Court to reconsider its November 25, 1998 order. In a related matter, in March 1997, a suit was filed by nine other producers, several of which had unsuccessfully tried to intervene in the Apache and Snyder litigation, against Koch, Williston Basin and the company. The parties to this suit are making claims similar to those in the Apache and Snyder litigation, although no specific damages have been stated. In Williston Basin's opinion, the claims of Apache and Synder are without merit and overstated and the claims of the nine other producers are without merit. If any amounts are ultimately found to be due, Williston Basin plans to file with the FERC for recovery from customers. However, the amount of costs that can ultimately be recovered is subject to approval by the FERC and market conditions. In November 1995, a suit was filed in District Court, County of Burleigh, State of North Dakota (State District Court) by Minnkota Power Cooperative, Inc., Otter Tail Power Company, Northwestern Public Service Company and Northern Municipal Power Agency (Co-owners), the owners of an aggregate 75 percent interest in the Coyote electric generating station (Coyote Station), against the company (an owner of a 25 percent interest in the Coyote Station) and Knife River. In its complaint, the Co-owners have alleged a breach of contract against Knife River with respect to the long-term coal supply agreement (Agreement) between the owners of the Coyote Station and Knife River. The Co-owners have requested a determination by the State District Court of the pricing mechanism to be applied to the Agreement and have further requested damages during the term of such alleged breach on the difference between the prices charged by Knife River and the prices that may ultimately be determined by the State District Court. The Co-owners also alleged a breach of fiduciary duties by the company as operating agent of the Coyote Station, asserting essentially that the company was unable to cause Knife River to reduce its coal price sufficiently under the Agreement, and the Co-owners are seeking damages in an unspecified amount. In May 1996, the State District Court stayed the suit filed by the Co-owners pending arbitration, as provided for in the Agreement. In September 1996, the Co-owners notified the company and Knife River of their demand for arbitration of the pricing dispute that had arisen under the Agreement. The demand for arbitration, filed with the American Arbitration Association (AAA), did not make any direct claim against the company in its capacity as operator of the Coyote Station. The Co-owners requested that the arbitrators make a determination that the pricing dispute is not a proper subject for arbitration. By an April 1997 order, the arbitration panel concluded that the claims raised by the Co-owners are arbitrable. The Co-owners have requested the arbitrators to make a determination that the prices charged by Knife River were excessive and that the Co-owners should be awarded damages, based upon the difference between the prices that Knife River charged and a "fair and equitable" price. Upon application by the company and Knife River, the AAA administratively determined that the company was not a proper party defendant to the arbitration, and the arbitration is proceeding against Knife River. On October 9, 1998, a hearing before the arbitration panel was completed. At the hearing the Co-owners requested damages of approximately $24 million, including interest, plus a reduction in the future price of coal under the Agreement. The company is currently awaiting a decision from the arbitration panel. Although unable to predict the outcome of the arbitration, Knife River and the company believe that the Co-owners' claims are without merit and intend to vigorously defend the prices charged pursuant to the Agreement. The company is also involved in other legal actions in the ordinary course of its business. Although the outcomes of any such legal actions cannot be predicted, management believes that there is no pending legal proceeding against or involving the company, except those discussed above, for which the outcome is likely to have a material adverse effect upon the company's financial position or results of operations. Environmental matters Montana-Dakota and Williston Basin discovered polychlorinated biphenyls (PCBs) in portions of their natural gas systems and informed the United States Environmental Protection Agency (EPA) in January 1991. Montana- Dakota and Williston Basin believe the PCBs entered the system from a valve sealant. In January 1994, Montana-Dakota, Williston Basin and Rockwell International Corporation (Rockwell), manufacturer of the valve sealant, reached an agreement under which Rockwell has reimbursed and will continue to reimburse Montana-Dakota and Williston Basin for a portion of certain remediation costs. On the basis of findings to date, Montana- Dakota and Williston Basin estimate future environmental assessment and remediation costs will aggregate $3 million to $15 million. Based on such estimated cost, the expected recovery from Rockwell and the ability of Montana-Dakota and Williston Basin to recover their portions of such costs from ratepayers, Montana-Dakota and Williston Basin believe that the ultimate costs related to these matters will not be material to each of their respective financial positions or results of operations. Electric purchased power commitments Through October 31, 2006, Montana-Dakota has contracted to purchase 66,400 kW of participation power from Basin Electric Power Cooperative. In addition, Montana-Dakota, under a power supply contract through December 31, 2006, is purchasing up to 55,000 kW of capacity from Black Hills Power and Light Company. NOTE 17 QUARTERLY DATA (UNAUDITED) The following unaudited information shows selected items by quarter for the years 1998 and 1997: First Second Third Fourth Quarter Quarter* Quarter Quarter* (In thousands, except per share amounts) 1998 Operating revenues $170,122 $179,715 $269,978 $276,812 Operating expenses 137,913 186,310 227,283 274,178 Operating income (loss) 32,209 (6,595) 42,695 2,634 Net income (loss) 17,793 (5,785) 22,538 (439) Earnings (loss) per common share: Basic .39 (.12) .42 (.01) Diluted .39 (.12) .42 (.01) Weighted average common shares outstanding: Basic 45,375 50,936 52,703 53,021 Diluted 45,629 50,936 53,062 53,021 1997 Operating revenues $139,811 $125,380 $163,699 $178,784 Operating expenses 109,055 106,932 134,675 145,451 Operating income 30,756 18,448 29,024 33,333 Net income 14,597 8,741 14,195 17,084 Earnings per common share: Basic .34 .20 .32 .39 Diluted .33 .20 .32 .39 Weighted average common shares outstanding: Basic 42,894 43,104 43,577 43,676 Diluted 43,019 43,247 43,733 43,901 * Reflects $20.0 million and $19.9 million in noncash after-tax write- downs of oil and natural gas properties for the second quarter and fourth quarter of 1998, respectively. Certain company operations are highly seasonal and revenues from and certain expenses for such operations may fluctuate significantly among quarterly periods. Accordingly, quarterly financial information may not be indicative of results for a full year. NOTE 18 OIL AND NATURAL GAS ACTIVITIES (UNAUDITED) Fidelity Oil Group is involved in the acquisition, exploration, development and production of oil and natural gas properties. Fidelity's operations vary from the acquisition of producing properties with potential development opportunities to exploration and are located throughout the United States, the Gulf of Mexico and Canada. Fidelity shares revenues and expenses from the development of specified properties in proportion to its interests. Williston Basin Interstate Pipeline Company owns in fee or holds natural gas leases and operating rights primarily applicable to the shallow rights (above 2,000 feet) in the Cedar Creek Anticline in southeastern Montana and to all rights in the Bowdoin area located in north-central Montana. The following information includes the company's proportionate share of all its oil and natural gas interests held by both Fidelity and Williston Basin. The following table sets forth capitalized costs and accumulated depreciation, depletion and amortization related to oil and natural gas producing activities at December 31: 1998 1997 1996 (In thousands) Subject to amortization $266,301 $252,291 $223,409 Not subject to amortization 22,153 9,408 6,792 Total capitalized costs 288,454 261,699 230,201 Accumulated depreciation, depletion and amortization 111,472 95,611 71,554 Net capitalized costs $176,982 $166,088 $158,647 NOTE: Net capitalized costs as of December 31, 1998 reflect noncash write-downs of the company's oil and natural gas properties as discussed in Note 1. Capital expenditures, including those not subject to amortization, related to oil and natural gas producing activities are as follows: Years ended December 31, 1998 1997 1996 (In thousands) Acquisitions $ 63,419 $ 59 $23,284 Exploration 15,976 13,344 8,101 Development 21,545 18,874 19,979 Total capital expenditures $100,940 $32,277 $51,364 The following summary reflects income resulting from the company's operations of oil and natural gas producing activities, excluding corporate overhead and financing costs: Years ended December 31, 1998 1997 1996 (In thousands) Revenues* $ 61,831 $77,756 $75,335 Production costs 19,419 23,251 21,296 Depreciation, depletion and amortization 23,050 24,864 25,629 Write-downs of oil and natural gas properties (Note 1) 66,000 --- --- Pretax income (46,638) 29,641 28,410 Income tax expense (benefit) (19,268) 10,968 10,875 Results of operations for producing activities $(27,370) $18,673 $17,535 * Includes $10.5 million, $9.4 million and $7.0 million of revenues for 1998, 1997 and 1996, respectively, related to Williston Basin's natural gas production activities which are included in "Natural gas" operating revenues in the Consolidated Statements of Income. The following table summarizes the company's estimated quantities of proved oil and natural gas reserves at December 31, 1998, 1997 and 1996, and reconciles the changes between these dates. Estimates of economically recoverable oil and natural gas reserves and future net revenues therefrom are based upon a number of variable factors and assumptions. For these reasons, estimates of economically recoverable reserves and future net revenues may vary from actual results. 1998 1997 1996 Natural Natural Natural Oil Gas Oil Gas Oil Gas (In thousands of barrels/Mcf) Proved developed and undeveloped reserves: Balance at beginning of year 14,900 184,900 16,100 200,200 14,200 179,000 Production (1,900) (20,700) (2,100) (20,400) (2,100) (20,400) Extensions and discoveries 200 21,300 600 12,100 600 27,000 Purchases of proved reserves 2,000 56,600 --- 200 2,900 9,900 Sales of reserves in place --- (100) (200) (2,300) (700) (3,700) Revisions to previous estimates due to improved secondary recovery techniques and/or changed economic conditions (3,700) 1,600 500 (4,900) 1,200 8,400 Balance at end of year 11,500 243,600 14,900 184,900 16,100 200,200 Proved developed reserves: January 1, 1996 13,600 156,400 December 31, 1996 15,400 168,200 December 31, 1997 14,500 163,800 December 31, 1998 10,700 193,000 Virtually all of the company's interests in oil and natural gas reserves are located in the continental United States. Reserve interests at December 31, 1998, applicable to the company's $411,000 net investment in oil and natural gas properties located in Canada comprise approximately 2 percent of the total reserves. The standardized measure of the company's estimated discounted future net cash flows of total proved reserves associated with its various oil and natural gas interests at December 31 is as follows: 1998 1997 1996 (In thousands) Future net cash flows before income taxes $246,700 $306,600 $580,300 Future income tax expenses 40,500 86,600 194,200 Future net cash flows 206,200 220,000 386,100 10% annual discount for estimated timing of cash flows 81,100 81,000 152,100 Discounted future net cash flows relating to proved oil and natural gas reserves $125,100 $139,000 $234,000 The following are the sources of change in the standardized measure of discounted future net cash flows by year: 1998 1997 1996 (In thousands) Beginning of year $139,000 $ 234,000 $120,900 Net revenues from production (42,400) (54,500) (54,000) Change in net realization (70,500) (158,400) 125,800 Extensions, discoveries and improved recovery, net of future production-related costs 18,200 19,400 43,500 Purchases of proved reserves 51,000 200 49,600 Sales of reserves in place (100) (2,800) (6,700) Changes in estimated future development costs, net of those incurred during the year (16,600) 7,700 (2,400) Accretion of discount 18,600 32,800 16,900 Net change in income taxes 30,100 62,100 (69,200) Revisions of previous quantity estimates (1,600) (1,300) 8,700 Other (600) (200) 900 Net change (13,900) (95,000) 113,100 End of year $125,100 $ 139,000 $234,000 The estimated discounted future cash inflows from estimated future production of proved reserves were computed using year-end oil and natural gas prices. Future development and production costs attributable to proved reserves were computed by applying year-end costs to be incurred in producing and further developing the proved reserves. Future income tax expenses were computed by applying statutory tax rates (adjusted for permanent differences and tax credits) to estimated net future pretax cash flows.
1998* 1997 1996 1995 1994 1993 1988 Selected Financial Data Operating revenues: (000's) Electric $ 211,453 $ 164,351 $ 138,761 $ 134,609 $ 133,953 $ 131,109 $126,128 Natural gas 287,426 200,789 175,408 167,787 160,970 178,981 168,125 Construction materials and mining 346,451 174,147 132,222 113,066 116,646 90,397 42,388 Oil and natural gas production 51,297 68,387 68,310 48,784 37,959 39,125 20,918 $ 896,627 $ 607,674 $ 514,701 $ 464,246 $ 449,528 $ 439,612 $357,559 Operating income: (000's) Electric $ 38,099 $ 33,089 $ 29,476 $ 29,898 $ 27,596 $ 30,520 $ 33,505 Natural gas distribution 8,028 10,410 11,504 6,917 3,948 4,730 5,368 Natural gas transmission 38,114 29,169 30,231 25,427 21,281 20,108 21,189 Construction materials and mining 41,609 14,602 16,062 14,463 16,593 16,984 9,841 Oil and natural gas production (54,907) 24,291 24,252 13,871 8,757 11,750 7,352 $ 70,943 $ 111,561 $ 111,525 $ 90,576 $ 78,175 $ 84,092 $ 77,255 Earnings on common stock: (000's) Electric $ 17,180 $ 13,388 $ 11,436 $ 12,000 $ 11,719 $ 12,652** $ 13,444 Natural gas distribution 3,501 4,514 4,892 1,604 285 1,182** 1,474 Natural gas transmission 20,823 11,317 2,459 8,416 6,155 4,713 2,320 Construction materials and mining 24,499 10,111 11,521 10,819 11,622 12,359 11,493 Oil and natural gas production (32,673) 14,505 14,375 8,002 9,267 7,109 5,115 Earnings on common stock before cumulative effect of accounting change 33,330 53,835 44,683 40,841 39,048 38,015** 33,846 Cumulative effect of accounting change --- --- --- --- --- 5,521 --- $ 33,330 $ 53,835 $ 44,683 $ 40,841 $ 39,048 $ 43,536 $ 33,846 Earnings per common share before cumulative effect of accounting change -- diluted $ .66 $ 1.24 $ 1.04 $ .95 $ .91 $ .89** $ .80 Cumulative effect of accounting change --- --- --- --- --- .13 --- $ .66 $ 1.24 $ 1.04 $ .95 $ .91 $ 1.02 $ .80 Pro forma amounts assuming retroactive application of accounting change: Net income (000's) $ 34,107 $ 54,617 $ 45,470 $ 41,633 $ 39,845 $ 38,817 $ 34,957 Earnings per common share -- diluted $ .66 $ 1.24 $ 1.04 $ .95 $ .91 $ .89 $ .80 Common Stock Statistics Weighted average common shares outstanding -- diluted (000's) 50,837 43,478 42,824 42,789 42,763 42,801 42,116 Dividends per common share $ .7834 $ .7534 $ .7333 $ .7188 $ .7022 $ .6755 $ .6311 Book value per common share $ 10.39 $ 8.84 $ 8.21 $ 7.90 $ 7.66 $ 7.45 $ 6.55 Market price per common share (year-end) $ 26.31 $ 21.08 $ 15.33 $ 13.25 $ 12.06 $ 14.00 $ 8.45 Market price ratios: Dividend payout 119% 61% 70% 76% 77% 76%** 78% Yield 3.0% 3.6% 4.8% 5.5% 5.9% 5.0% 7.5% Price/earnings ratio 39.9x 17.0x 14.6x 13.9x 13.2x 15.8x** 10.5x Market value as a percent of book value 253.2% 238.5% 186.8% 167.7% 157.4% 188.0% 128.8% Profitability Indicators Return on average common equity 6.5% 14.6% 13.0% 12.3% 12.1% 12.3%** 12.4% Return on average invested capital 5.5% 10.3% 9.5% 9.2% 9.1% 9.4%** 9.0% Interest coverage 6.1x 6.0x 5.4x 3.9x 3.3x 3.4x** 2.7x Fixed charges coverage, including preferred dividends 2.5x 3.4x 2.7x 3.0x 2.8x 2.9x** 2.2x General Total assets (000's) $ 1,452,775 $ 1,113,892 $ 1,089,173 $ 1,056,479 $ 1,004,718 $ 1,041,051 $949,509 Net long-term debt (000's) $ 413,264 $ 298,561 $ 280,666 $ 237,352 $ 217,693 $ 231,770 $242,593 Redeemable preferred stock (000's) $ 1,700 $ 1,800 $ 1,900 $ 2,000 $ 2,100 $ 2,200 $ 3,100 Capitalization ratios: Common stockholders' equity 56% 55% 54% 57% 58% 56% 52% Preferred stocks 2 2 3 3 3 3 3 Long-term debt 42 43 43 40 39 41 45 100% 100% 100% 100% 100% 100% 100% *Reflects $39.9 million or 78 cents per common share in noncash after-tax write-downs of oil and natural gas properties. **Before cumulative effect of an accounting change reflecting the accrual of estimated unbilled revenues. NOTE: Common stock share amounts reflect the company's three-for-two common stock splits effected in October 1995 and July 1998.
1998 1997 1996 1995 1994 1993 1988 Electric Operations Sales to ultimate consumers (thousand kWh) 2,053,862 2,041,191 2,067,926 1,993,693 1,955,136 1,893,713 1,843,982 Sales for resale (thousand kWh) 586,540 361,954 374,535 408,011 444,492 510,987 246,425 Electric system generating and firm purchase capability -- kW (Interconnected system) 489,100 487,500 481,800 472,400 470,900 465,200 451,600 Demand peak -- kW (Interconnected system) 402,500 404,600 393,300 412,700 369,800 350,300 386,700 Electricity produced (thousand kWh) 2,103,199 1,826,770 1,829,669 1,718,077 1,901,119 1,870,740 1,691,778 Electricity purchased (thousand kWh) 730,949 769,679 809,261 867,524 700,912 701,736 598,443 Average cost of fuel and purchased power per kWh $.017 $.018 $.017 $.016 $.017 $.016 $.017 Natural Gas Distribution Operations Sales (Mdk) 32,024 34,320 38,283 33,939 31,840 31,147 32,557 Transportation (Mdk) 10,324 10,067 9,423 11,091 9,278 12,704 3,314 Weighted average degree days -- % of previous year's actual 94% 85% 114% 105% 92% 115% 113% Natural Gas Transmission Operations Natural gas transmission: Sales for resale (Mdk) --- --- --- --- --- 13,201 33,515 Transportation (Mdk) 88,974 85,464 82,169 68,015 63,870 59,416 33,892 Produced (Mdk) 7,412 6,949 6,073 4,981 4,732 3,876 1,744 Net recoverable reserves (MMcf) 140,200 127,300 133,400 113,000 99,300 --- --- Energy marketing: Natural gas volumes (Mdk) 58,495 14,971 4,670 3,556 7,301 6,827 --- Propane (thousand gallons) 7,037 10,005 9,689 7,471 6,462 2,210 --- Construction Materials and Mining Operations Construction materials: (000's) Aggregates (tons sold) 11,054 5,113 3,374 2,904 2,688 2,391 --- Asphalt (tons sold) 1,790 758 694 373 391 141 --- Ready-mixed concrete (cubic yards sold) 1,021 516 340 307 315 157 --- Recoverable aggregate reserves (tons) 654,670 169,375 119,800 68,000 71,000 74,200 --- Coal: (000's) Sales (tons) 3,113 2,375 2,899 4,218 5,206 5,066 4,759 Recoverable reserves (tons) 190,152 226,560 228,900 231,900 236,100 230,600 270,800 Oil and Natural Gas Production Operations Production: Oil (000's of barrels) 1,912 2,088 2,149 1,973 1,565 1,497 1,358 Natural gas (MMcf) 13,025 13,192 14,067 12,319 9,228 8,817 1,464 Average sales prices: Oil (per barrel) $ 12.71 $ 17.50 $ 17.91 $ 15.07 $ 13.14 $ 14.84 $ 13.43 Natural gas (per Mcf) $ 2.07 $ 2.41 $ 2.09 $ 1.51 $ 1.84 $ 1.86 $ 2.14 Net recoverable reserves: Oil (000's of barrels) 11,500 14,900 16,100 14,200 12,500 11,200 11,500 Natural gas (MMcf) 103,400 57,600 66,800 66,000 54,900 50,300 9,400
EX-21 11 SUBSIDIARIES OF MDU RESOURCES GROUP, INC. MDU RESOURCES GROUP, INC. List of Subsidiaries State or Other Jurisdiction in Which Incorporated Alaska Basic Industries, Inc. Alaska Anchorage Sand and Gravel Company, Inc. Alaska Baldwin Contracting Company, Inc. California Centennial Energy Holdings, Inc. Delaware Concrete, Inc. California Fidelity Oil Co. Delaware Fidelity Oil Holdings, Inc. Delaware Hap Taylor & Sons, Inc. Oregon Harp Engineering, Inc. Montana Harp Line Constructors Co. Montana High Line Equipment, Inc. Delaware ILB Hawaii, Inc. Hawaii Innovative Gas Services, Incorporated Kentucky International Line Builders, Inc. Delaware Knife River Corporation Delaware Knife River Dakota, Inc. Delaware Knife River Hawaii, Inc. Delaware Knife River Marine, Inc. Delaware KRC Aggregate, Inc. Delaware KRC Holdings, Inc. Delaware LTM, Incorporated Oregon Marcon Energy Corporation Kentucky Medford Ready Mix, Inc. Delaware Morse Bros., Inc. Oregon Pouk & Steinle, Inc. California Prairie Propane, Inc. Delaware Prairielands Energy Marketing, Inc. Delaware Prairielands Energy Technology, Inc. Delaware Rogue Aggregates, Inc. Oregon S2 - F Corp. Oregon Utility Services, Inc. Delaware WBI Canadian Pipeline, Ltd. Canada WBI Energy Services, Inc. Delaware WBI Holdings, Inc. Delaware WBI Production, Inc. Delaware WBI Southern, Inc. Delaware Williston Basin Interstate Pipeline Company Delaware EX-23.A 12 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of our report dated January 21, 1999 included in the MDU Resources Group, Inc. Annual Report to Stockholders for 1998. We also consent to the incorporation of our report incorporated by reference in this Form 10-K into the Company's previously filed Registration Statements on Form S-3, No. 333-06127 and No. 333-48647, and on Form S-8, No. 33-54486, No. 333-06103, No. 333-06105, No. 333- 27879, No. 333-27877 and No. 333-72595. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Minneapolis, Minnesota March 4, 1999 EX-23.B 13 CONSENT OF ENGINEER CONSENT OF ENGINEER We hereby consent to the reference to our report dated January 15, 1999, appearing in this Annual Report on Form 10-K. We also consent to the incorporation by reference in the Registration Statements on Form S-3, No. 333-06127, and No. 333- 48647, and on Form S-8, No. 33-54486, No. 333-06103, No. 333- 06105, No. 333-27879, No. 333-27877 and No. 333-72595 of MDU Resources Group, Inc. and in the related Prospectuses of the reference to such report appearing in this Annual Report on Form 10-K. /s/ RALPH E. DAVIS ASSOCIATES, INC. RALPH E. DAVIS ASSOCIATES, INC. Houston, Texas March 4, 1999 EX-23.C 14 CONSENT OF ENGINEER CONSENT OF ENGINEER We hereby consent to the reference to our report dated January 1, 1999, appearing in this Annual Report on Form 10-K. We also consent to the incorporation by reference in the Registration Statements on Form S-3, No. 333-06127, and No. 333- 48647 and on Form S-8, No. 33-54486, No. 333-06103, No. 333- 06105, No. 333-27879, No. 333-27877 and No. 333-72595 of MDU Resources Group, Inc. and in the related Prospectuses of the reference to such report appearing in this Annual Report on Form 10-K. /s/ WEIR INTERNATIONAL MINING CONSULTANTS WEIR INTERNATIONAL MINING CONSULTANTS Des Plaines, Illinois March 4, 1999 EX-27 15 FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF INCOME, CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000067716 MDU RESOURCES GROUP, INC. 1000 US 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1 PER-BOOK 536,081 591,625 240,649 84,420 0 1,452,775 176,601 168,658 205,583 550,842 1,600 15,000 413,264 0 0 15,000 3,192 100 0 0 453,777 1,452,775 896,627 17,485 825,684 843,169 53,458 10,922 64,380 30,273 34,107 777 33,330 40,470 9,791 138,446 .66 .66
-----END PRIVACY-ENHANCED MESSAGE-----