Edgar Filing: MDU RESOURCES GROUP INC

MDU 2nd Quarter 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

X	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
	THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended June 30, 2007

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 incorporation or organization)		(I.R.S. Employer Identification No.)

1200 West Century Avenue

P.O. Box 5650

Bismarck, North Dakota 58506-5650

(Address of principal executive offices)

(Zip Code)

(701) 530-1000

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer x Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x.

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 1, 2007: 182,112,362 shares.

DEFINITIONS

The following abbreviations and acronyms used in this Form 10-Q are defined below:

Abbreviation or Acronym

2006 Annual Report	Company's Annual Report on Form 10-K for the year ended December 31, 2006
ALJ	Administrative Law Judge
Anadarko	Anadarko Petroleum Corporation
APB	Accounting Principles Board
APB Opinion No. 28	Interim Financial Reporting
Badger Hills Project	Tongue River-Badger Hills Project
Bbl	Barrel of oil or other liquid hydrocarbons
Bcf	Billion cubic feet
BER	Montana Board of Environmental Review
Big Stone Station	450-MW coal-fired electric generating facility located near Big Stone City, South Dakota (22.7 percent ownership)
Big Stone II	Proposed 600-MW coal-fired electric generating facility located near Big Stone City, South Dakota (19.33 percent ownership)
BLM	Bureau of Land Management
Brazilian Transmission Lines	Company’s equity method investment in companies owning ECTE, ENTE and ERTE
Btu	British thermal unit
Carib Power	Carib Power Management LLC
Cascade	Cascade Natural Gas Corporation
CBNG	Coalbed natural gas
CEM	Colorado Energy Management, LLC, a direct wholly owned subsidiary of Centennial Resources
Centennial	Centennial Energy Holdings, Inc., a direct wholly owned subsidiary of the Company
Centennial Capital	Centennial Holdings Capital LLC, a direct wholly owned subsidiary of Centennial
Centennial International	Centennial Energy Resources International, Inc., a direct wholly owned subsidiary of Centennial Resources
Centennial Power	Centennial Power, Inc., a direct wholly owned subsidiary of Centennial Resources
Centennial Resources	Centennial Energy Resources LLC, a direct wholly owned subsidiary of Centennial
Clean Air Act	Federal Clean Air Act
Clean Water Act	Federal Clean Water Act
Colorado Federal District Court	U.S. District Court for the District of Colorado
Company	MDU Resources Group, Inc.
D.C. Appeals Court	U.S. Court of Appeals for the District of Columbia Circuit
dk	Decatherm
DRC	Dakota Resource Council
EBSR	Elk Basin Storage Reservoir, one of Williston Basin's natural gas storage reservoirs, which is located in Montana and Wyoming
ECTE	Empresa Catarinense de Transmissão de Energia S.A.
EIS	Environmental Impact Statement
ENTE	Empresa Norte de Transmissão de Energia S.A.
EPA	U.S. Environmental Protection Agency
ERTE	Empresa Regional de Transmissão de Energia S.A.
Exchange Act	Securities Exchange Act of 1934, as amended
FASB	Financial Accounting Standards Board
FERC	Federal Energy Regulatory Commission
Fidelity	Fidelity Exploration & Production Company, a direct wholly owned subsidiary of WBI Holdings
FIN	FASB Interpretation No.
FIN 48	Accounting for Uncertainty in Income Taxes
Great Plains	Great Plains Natural Gas Co., a public utility division of the Company
Grynberg	Jack J. Grynberg
Hardin Generating Facility	116-MW coal-fired electric generating facility near Hardin, Montana
Hartwell	Hartwell Energy Limited Partnership
Howell	Howell Petroleum Corporation, a wholly owned subsidiary of Anadarko
Indenture	Indenture dated as of December 15, 2003, as supplemented, from the Company to The Bank of New York, as Trustee
Innovatum	Innovatum Inc., a former indirect wholly owned subsidiary of WBI Holdings (the stock and a portion of Innovatum’s assets were sold during the fourth quarter of 2006)
Knife River	Knife River Corporation, a direct wholly owned subsidiary of Centennial
kW	Kilowatt
kWh	Kilowatt-hour
LWG	Lower Willamette Group
MBbls	Thousand barrels of oil or other liquid hydrocarbons
MBI	Morse Bros., Inc., an indirect wholly owned subsidiary of Knife River
Mcf	Thousand cubic feet
MDU Brasil	MDU Brasil Ltda., an indirect wholly owned subsidiary of Centennial International
MDU Construction Services	MDU Construction Services Group, Inc., a direct wholly owned subsidiary of Centennial
MMBtu	Million Btu
MMcf	Million cubic feet
MMdk	Million decatherms
Montana-Dakota	Montana-Dakota Utilities Co., a public utility division of the Company
Montana DEQ	Montana State Department of Environmental Quality
Montana Federal District Court	U.S. District Court for the District of Montana
Mortgage	Indenture of Mortgage dated May 1, 1939, as supplemented, amended and restated, from the Company to The Bank of New York and Douglas J. MacInnes, successor trustees
MPX	MPX Termoceara Ltda. (49 percent ownership, sold in June 2005)
MTPSC	Montana Public Service Commission
MW	Megawatt
ND Health Department	North Dakota Department of Health
NDPSC	North Dakota Public Service Commission
NEPA	National Environmental Policy Act
NHPA	National Historic Preservation Act
Ninth Circuit	U.S. Ninth Circuit Court of Appeals
NPRC	Northern Plains Resource Council
Order on Rehearing	Order on Rehearing and Compliance and Remanding Certain Issues for Hearing
Oregon DEQ	Oregon State Department of Environmental Quality
Prairielands	Prairielands Energy Marketing, Inc., an indirect wholly owned subsidiary of WBI Holdings
SEC	U.S. Securities and Exchange Commission
SEIS	Supplemental Environmental Impact Statement
SFAS	Statement of Financial Accounting Standards
SFAS No. 87	Employers’ Accounting for Pensions
SFAS No. 109	Accounting for Income Taxes
SFAS No. 142	Goodwill and Other Intangible Assets
SFAS No. 144	Accounting for the Impairment or Disposal of Long-Lived Assets
SFAS No. 157	Fair Value Measurements
SFAS No. 159	The Fair Value Option for Financial Assets and Financial Liabilities
SIP	State Implementation Plan
TRWUA	Tongue River Water Users’ Association
WBI Holdings	WBI Holdings, Inc., a direct wholly owned subsidiary of Centennial
Williston Basin	Williston Basin Interstate Pipeline Company, an indirect wholly owned subsidiary of WBI Holdings
Wyoming Federal District Court	U.S. District Court for the District of Wyoming

INTRODUCTION

The Company is a diversified natural resource company, which was incorporated under the laws of the state of Delaware in 1924. Its principal executive offices are at 1200 West Century Avenue, P.O. Box 5650, Bismarck, North Dakota 58506-5650, telephone (701) 530-1000.

Montana-Dakota, through the electric and natural gas distribution segments, generates, transmits and distributes electricity and distributes natural gas in Montana, North Dakota, South Dakota and Wyoming. Great Plains distributes natural gas in western Minnesota and southeastern North Dakota. These operations also supply related value-added products and services.

On July 2, 2007, the Company acquired Cascade. For further information, see Note 20.

The Company, through its wholly owned subsidiary, Centennial, owns WBI Holdings (comprised of the pipeline and energy services and the natural gas and oil production segments), Knife River (construction materials and mining segment), MDU Construction Services (construction services segment), Centennial Resources (independent power production segment) and Centennial Capital (reflected in the Other category). For more information on the Company’s business segments, see Note 16.

INDEX

Part I -- Financial Information

Consolidated Statements of Income --

Three and Six Months Ended June 30, 2007 and 2006

Consolidated Balance Sheets --

June 30, 2007 and 2006, and December 31, 2006

Consolidated Statements of Cash Flows --

Six Months Ended June 30, 2007 and 2006

Notes to Consolidated Financial Statements

Management's Discussion and Analysis of Financial

Condition and Results of Operations

Quantitative and Qualitative Disclosures About Market Risk

Controls and Procedures

Part II -- Other Information

Legal Proceedings

Risk Factors

Unregistered Sales of Equity Securities and Use of Proceeds

Exhibits

Signatures

Exhibit Index

Exhibits

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MDU RESOURCES GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
	(In thousands, except per share amounts)
Operating revenues:
Electric, natural gas distribution and pipeline and energy services	$	195,488	$	170,589	$	463,500	$	461,640
Construction services, natural gas and oil production, construction materials and mining, and other		786,877		790,846		1,306,356		1,303,313
		982,365		961,435		1,769,856		1,764,953
Operating expenses:
Fuel and purchased power		15,489		15,940		32,607		32,075
Purchased natural gas sold		40,294		39,361		139,129		166,321
Operation and maintenance:
Electric, natural gas distribution and pipeline and energy services		46,659		42,816		91,315		80,102
Construction services, natural gas and oil production, construction materials and mining, independent power production and other		629,782		644,272		1,075,631		1,083,121
Depreciation, depletion and amortization		70,044		64,840		139,846		125,821
Taxes, other than income		37,312		31,976		69,574		64,216
		839,580		839,205		1,548,102		1,551,656

Operating income		142,785		122,230		221,754		213,297

Earnings from equity method investments		4,030		2,900		6,084		6,102

Other income		883		2,881		2,215		5,263

Interest expense		17,478		19,110		34,854		33,162

Income before income taxes		130,220		108,901		195,199		191,500

Income taxes		48,184		40,450		71,756		70,603

Income from continuing operations		82,036		68,451		123,443		120,897

Income from discontinued operations, net of tax (Note 3)		7,439		2,991		12,694		3,792

Net income		89,475		71,442		136,137		124,689

Dividends on preferred stocks		171		171		343		343

Earnings on common stock	$	89,304	$	71,271	$	135,794	$	124,346

Earnings per common share -- basic
Earnings before discontinued operations	$	.45	$	.38	$	.68	$	.67
Discontinued operations, net of tax		.04		.02		.07		.02
Earnings per common share -- basic	$	.49	$	.40	$	.75	$	.69
Earnings per common share -- diluted
Earnings before discontinued operations	$	.45	$	.38	$	.67	$	.67
Discontinued operations, net of tax		.04		.01		.07		.02
Earnings per common share -- diluted	$	.49	$	.39	$	.74	$	.69
Dividends per common share	$	.1350	$	.1267	$	.2700	$	.2534
Weighted average common shares outstanding -- basic		181,847		179,911		181,595		179,867
Weighted average common shares outstanding -- diluted		182,746		181,107		182,469		181,050

The accompanying notes are an integral part of these consolidated financial statements.

MDU RESOURCES GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30, 2007			June 30, 2006			December 31, 2006
(In thousands, except shares and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	68,134		$	114,787			$	73,078
Receivables, net		642,559			643,439				622,478
Inventories		221,179			206,682				204,440
Deferred income taxes		---			11,637				---
Prepayments and other current assets		95,235			90,898				81,083
Current assets held for sale and related to discontinued operations		69,662			13,033				12,656
		1,096,769			1,080,476				993,735
Investments		136,585			106,226				155,111
Property, plant and equipment		4,953,171			4,502,534				4,727,725
Less accumulated depreciation, depletion and amortization		1,851,825			1,627,887				1,735,302
		3,101,346			2,874,647				2,992,423
Deferred charges and other assets:
Goodwill		227,029			227,483				224,298
Other intangible assets, net		17,150			17,787				22,802
Other		113,193			100,785				103,840
Noncurrent assets held for sale and related to discontinued operations		410,662			422,025				411,265
		768,034			768,080				762,205
	$	5,102,734		$	4,829,429			$	4,903,474
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Long-term debt due within one year	$	131,661		$	159,168			$	84,034
Accounts payable		284,208			290,166				289,836
Taxes payable		38,769			31,248				54,290
Deferred income taxes		1,396			---				5,969
Dividends payable		24,725			22,967				24,606
Other accrued liabilities		155,890			154,908				180,327
Current liabilities held for sale and related to discontinued operations		14,156			7,986				14,900
		650,805			666,443				653,962
Long-term debt		1,224,286			1,299,175				1,170,548
Deferred credits and other liabilities:
Deferred income taxes		570,590			543,278				546,602
Other liabilities		349,895			279,617				336,916
Noncurrent liabilities held for sale and related to discontinued operations		35,488			30,466				30,533
		955,973			853,361				914,051
Commitments and contingencies
Stockholders’ equity:
Preferred stocks		15,000			15,000				15,000
Common stockholders’ equity:
Common stock
Shares issued -- $1.00 par value, 182,416,029 at June 30, 2007, 180,515,943 at June 30, 2006 and 181,557,543 at December 31, 2006		182,416			180,516				181,558
Other paid-in capital		895,838			856,366				874,253
Retained earnings		1,190,935			963,194				1,104,210
Accumulated other comprehensive loss		(8,893	)		(1,000	)			(6,482	)
Treasury stock at cost - 538,921 shares at June 30, 2007, June 30, 2006 and December 31, 2006		(3,626	)		(3,626	)			(3,626	)
Total common stockholders’ equity		2,256,670			1,995,450				2,149,913
Total stockholders’ equity		2,271,670			2,010,450				2,164,913
	$	5,102,734		$	4,829,429			$	4,903,474

The accompanying notes are an integral part of these consolidated financial statements.

MDU RESOURCES GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2007			2006
	(In thousands)
Operating activities:
Net income	$	136,137		$	124,689
Income from discontinued operations, net of tax		12,694			3,792
Income from continuing operations		123,443			120,897
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization		139,846			125,821
Earnings, net of distributions, from equity method investments		(722	)		(3,107	)
Deferred income taxes		24,756			15,942
Changes in current assets and liabilities, net of acquisitions:
Receivables		(14,083	)		(31,563	)
Inventories		(16,690	)		(33,173	)
Other current assets		(25,259	)		(37,513	)
Accounts payable		(11,644	)		29,003
Other current liabilities		(38,040	)		(10,866	)
Other noncurrent changes		(1,107	)		5,792
Net cash provided by continuing operations		180,500			181,233
Net cash provided by (used in) discontinued operations		(41,884	)		10,234
Net cash provided by operating activities		138,616			191,467

Investing activities:
Capital expenditures		(242,729	)		(240,606	)
Acquisitions, net of cash acquired		(329	)		(109,250	)
Net proceeds from sale or disposition of property		10,848			14,878
Investments		17,309			(5,184	)
Net cash used in continuing operations		(214,901	)		(340,162	)
Net cash used in discontinued operations		(1,379	)		(38,119	)
Net cash used in investing activities		(216,280	)		(378,281	)

Financing activities:
Issuance of long-term debt		186,578			335,653
Repayment of long-term debt		(85,028	)		(97,158	)
Proceeds from issuance of common stock		15,775			2,709
Dividends paid		(49,300	)		(45,914	)
Tax benefit on stock-based compensation		4,505			3,167
Net cash provided by continuing operations		72,530			198,457
Net cash provided by discontinued operations		---			---
Net cash provided by financing activities		72,530			198,457
Effect of exchange rate changes on cash and cash equivalents		190			(2,354	)
Increase (decrease) in cash and cash equivalents		(4,944	)		9,289
Cash and cash equivalents -- beginning of year		73,078			105,498
Cash and cash equivalents -- end of period	$	68,134		$	114,787

The accompanying notes are an integral part of these consolidated financial statements.

MDU RESOURCES GROUP, INC.

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

June 30, 2007 and 2006

(Unaudited)

1. Basis of presentation

The accompanying consolidated interim financial statements were prepared in conformity with the basis of presentation reflected in the consolidated financial statements included in the Company's 2006 Annual Report, and the standards of accounting measurement set forth in APB Opinion No. 28 and any amendments thereto adopted by the FASB. Interim financial statements do not include all disclosures provided in annual financial statements and, accordingly, these financial statements should be read in conjunction with those appearing in the 2006 Annual Report. The information is unaudited but includes all adjustments that are, in the opinion of management, necessary for a fair presentation of the accompanying consolidated interim financial statements.

2. Seasonality of operations

Some of the Company's operations are highly seasonal and revenues from, and certain expenses for, such operations may fluctuate significantly among quarterly periods. Accordingly, the interim results for particular businesses, and for the Company as a whole, may not be indicative of results for the full fiscal year.

3. Discontinued operations

During the third quarter of 2006, the Company initiated a plan to sell Innovatum because the Company determined that Innovatum is a non-strategic asset. Innovatum, a component of the pipeline and energy services segment, specialized in cable and pipeline magnetization and location. During the fourth quarter of 2006, the stock and a portion of the assets of Innovatum were sold and the Company expects to sell the remaining assets of Innovatum within one year of the initial plan to sell. The loss on disposal on the portion of Innovatum that has been sold was not material. The Company does not expect to have any involvement in the operations of Innovatum after the sale.

During the fourth quarter of 2006, the Company initiated a plan to sell certain of the domestic assets of Centennial Resources, which largely comprise the independent power production segment. The plan to sell was based on the increased market demand for independent power production assets, combined with the Company’s desire to efficiently fund future capital needs. The results of operations of these assets were shown in continuing operations in the Company’s financial statements in the 2006 Annual Report as the Company intended to have significant continuing involvement with these assets in the form of continuing existing operation and maintenance agreements between CEM and these assets after the sale.

The Company subsequently committed to a plan to sell CEM due to strong interest in the operations of CEM during the bidding process for the domestic independent power production assets in the first quarter of 2007. As a result of the Company’s commitment to a plan to sell CEM, the Company will no longer have significant continuing involvement in the operations of the other domestic independent power production assets after the sale. Therefore, in accordance with SFAS No. 144, the results of operations of all of the domestic independent power production assets, including CEM, are presented as discontinued operations. For more information on the sale of the domestic independent power production assets, see Note 20.

In accordance with SFAS No. 144, the Company’s consolidated financial statements and accompanying notes for prior periods have been restated to present the results of operations of Innovatum and the domestic independent power production assets as discontinued operations. In addition, the assets and liabilities of these operations are treated as held for sale, and as a result, no depreciation, depletion and amortization expense was recorded from the time each of the assets was classified as held for sale, respectively.

In accordance with SFAS No. 142, at the time the Company committed to the plan to sell each of the assets, the Company was required to test the respective assets for goodwill impairment. The fair value of Innovatum, a reporting unit for goodwill impairment testing, was estimated using the expected proceeds from the sale, which was estimated to be the current book value of the assets of Innovatum other than its goodwill. As a result, a goodwill impairment loss of $4.3 million (before tax) was recognized and recorded as part of discontinued operations, net of tax, in the Consolidated Statements of Income in the third quarter of 2006. There were no goodwill impairments associated with the other assets held for sale.

Operating results related to Innovatum were as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
	2007		2006			2007			2006
	(In thousands)
Operating revenues	$	439	$	632		$	689		$	1,142
Income (loss) from discontinued operations before income tax expense (benefit)		104		(389	)		28			(862	)
Income tax expense (benefit)		15		(116	)		(29	)		(265	)
Income (loss) from discontinued operations, net of tax	$	89	$	(273	)	$	57		$	(597	)

Operating results related to the domestic independent power production assets were as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
	2007		2006			2007		2006
	(In thousands)
Operating revenues	$	64,291	$	11,716		$	98,887	$	22,982
Income from discontinued operations before income tax expense (benefit)		9,532		2,540			16,923		3,031
Income tax expense (benefit)		2,182		(724	)		4,286		(1,358	)
Income from discontinued operations, net of tax	$	7,350	$	3,264		$	12,637	$	4,389

The carrying amounts of the major assets and liabilities related to the domestic independent power production assets held for sale, as well as the major assets and liabilities related to Innovatum, were as follows:

	June 30, 2007		June 30, 2006		December 31, 2006
	(In thousands)
Cash and cash equivalents	$	1,575	$	1,911	$	1,878
Receivables, net		7,878		7,753		8,307
Inventories		555		1,064		490
Prepayments and other current assets		59,654		2,305		1,981
Total current assets held for sale and related to discontinued operations	$	69,662	$	13,033	$	12,656
Net property, plant and equipment	$	391,708	$	396,434	$	390,679
Goodwill		11,167		15,472		11,167
Other intangible assets, net		7,241		7,763		7,162
Other		546		2,356		2,257
Total noncurrent assets held for sale and related to discontinued operations	$	410,662	$	422,025	$	411,265
Accounts payable	$	7,264	$	4,785	$	11,557
Other accrued liabilities		6,892		3,201		3,343
Total current liabilities held for sale and related to discontinued operations	$	14,156	$	7,986	$	14,900
Deferred income taxes	$	32,888	$	28,149	$	27,956
Other liabilities		2,600		2,317		2,577
Total noncurrent liabilities held for sale and related to discontinued operations	$	35,488	$	30,466	$	30,533

4. Common stock

At the Annual Meeting of Stockholders held on April 24, 2007, the Company’s common stockholders approved an amendment to the Restated Certificate of Incorporation that increased the authorized number of common shares from 250 million shares to 500 million shares with a par value of $1.00 per share.

5. Allowance for doubtful accounts

The Company's allowance for doubtful accounts as of June 30, 2007 and 2006, and December 31, 2006, was $7.7 million, $7.2 million and $7.7 million, respectively.

6. Natural gas in underground storage

Natural gas in underground storage for the Company's regulated operations is carried at cost using the last-in, first-out method. The portion of the cost of natural gas in underground storage expected to be used within one year was included in inventories and was $9.7 million, $19.4 million and $32.6 million at June 30, 2007 and 2006, and December 31, 2006, respectively. The remainder of natural gas in underground storage was included in other assets and was $44.2 million, $43.2 million, and $44.2 million at June 30, 2007 and 2006, and December 31, 2006, respectively.

7. Inventories

Inventories, other than natural gas in underground storage for the Company’s regulated operations, consisted primarily of aggregates held for resale of $100.6 million, $93.1 million and $88.1 million; materials and supplies of $75.0 million, $70.3 million and $54.1 million; and other inventories of $35.9 million, $23.9 million and $29.6 million, as of June 30, 2007 and 2006, and December 31, 2006, respectively. These inventories were stated at the lower of average cost or market value.

8. 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 applicable period. 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 applicable period, plus the effect of outstanding stock options, restricted stock grants and performance share awards. For the three and six months ended June 30, 2007 and 2006, there were no shares excluded from the calculation of diluted earnings per share. Common stock outstanding includes issued shares less shares held in treasury.

9. Cash flow information

Cash expenditures for interest and income taxes were as follows:

		Six Months Ended June 30,
	2007		2006
		(In thousands)
Interest, net of amount capitalized	$	35,028	$	27,988
Income taxes	$	113,919	$	78,382

Income taxes paid for the six months ended June 30, 2007, increased from the amount paid for the six months ended June 30, 2006, primarily due to estimated quarterly income tax payments on the estimated gain on the sale of the domestic independent power production assets as discussed in Note 20.

10. New accounting standards

FIN 48 In July 2006, the FASB issued FIN 48. FIN 48 clarifies the application of SFAS No. 109 by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements. The criterion allows for recognition in the financial statements of a tax position when it is more likely than not that the position will be sustained upon examination. FIN 48 was effective for the Company on January 1, 2007. The adoption of FIN 48 did not have a material effect on the Company’s financial position or results of operations. For more information on the implementation of FIN 48, see Note 15.

SFAS No. 157 In September 2006, the FASB issued SFAS No. 157. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The standard applies under other accounting pronouncements that require or permit fair value measurements with certain exceptions. SFAS No. 157 is effective for the Company on January 1, 2008. The Company is evaluating the effects of the adoption of SFAS No. 157.

SFAS No. 159 In February 2007, the FASB issued SFAS No. 159. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The standard also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for the Company on January 1, 2008. The Company is evaluating the effects of the adoption of SFAS No. 159.

11. Comprehensive income

Comprehensive income is the sum of net income as reported and other comprehensive income (loss). The Company's other comprehensive income (loss) resulted from gains (losses) on derivative instruments qualifying as hedges and foreign currency translation adjustments. For more information on derivative instruments, see Note 14.

Comprehensive income, and the components of other comprehensive income (loss) and related tax effects, were as follows:

	Three Months Ended June 30,
	2007		2006
	(In thousands)
Net income	$	89,475	$	71,442
Other comprehensive income:
Net unrealized gain on derivative instruments qualifying as hedges:
Net unrealized gain on derivative instruments arising during the period, net of tax of $6,096 and $4,051 in 2007 and 2006, respectively		9,739		6,471
Less: Reclassification adjustment for gain on derivative instruments included in net income, net of tax of $1,509 and $1,033 in 2007 and 2006, respectively		2,411		1,650
Net unrealized gain on derivative instruments qualifying as hedges		7,328		4,821
Foreign currency translation adjustment		3,576		(2,176	)
		10,904		2,645
Comprehensive income	$	100,379	$	74,087

	Six Months Ended June 30,
	2007			2006
	(In thousands)
Net income	$	136,137		$	124,689
Other comprehensive income (loss):
Net unrealized gain (loss) on derivative instruments qualifying as hedges:
Net unrealized gain on derivative instruments arising during the period, net of tax of $1,204 and $17,652 in 2007 and 2006, respectively		1,923			28,197
Less: Reclassification adjustment for gain (loss) on derivative instruments included in net income, net of tax of $6,272 and $4,254 in 2007 and 2006, respectively		10,018			(6,796	)
Net unrealized gain (loss) on derivative instruments qualifying as hedges		(8,095	)		34,993
Foreign currency translation adjustment		5,684			(2,177	)
		(2,411	)		32,816
Comprehensive income	$	133,726		$	157,505

12. Equity method investments

The Company’s equity method investments at June 30, 2007, include Hartwell and the Brazilian Transmission Lines.

In February 2004, Centennial International acquired 49.99 percent of Carib Power. Carib Power, through a wholly owned subsidiary, owns a 225-MW natural gas-fired electric generating facility in Trinidad and Tobago. On February 26, 2007, the Company sold its interest in Carib Power. The sale did not have a significant effect on the Company’s results of operations.

In September 2004, Centennial Resources, through indirect wholly owned subsidiaries, acquired a 50-percent ownership interest in Hartwell, which owns a 310-MW natural gas-fired electric generating facility near Hartwell, Georgia. On July 10, 2007, the Company sold its ownership interest in Hartwell. For more information, see Note 20.

In August 2006, MDU Brasil acquired ownership interests in companies owning three electric transmission lines. The interests involve the ENTE (13.3-percent ownership interest), ERTE (13.3-percent ownership interest) and ECTE (25-percent ownership interest) electric transmission lines, which are primarily in northeastern and southern Brazil.

At June 30, 2007 and 2006, and December 31, 2006, the Company's equity method investments had total assets of $469.2 million, $228.9 million and $583.6 million, respectively, and long-term debt of $277.2 million, $149.5 million and $321.5 million, respectively. The Company's investment in its equity method investments was approximately $80.6 million, $50.1 million and $102.0 million, including undistributed earnings of $7.6 million, $6.5 million and $8.5 million, at June 30, 2007 and 2006, and December 31, 2006, respectively.

13. Goodwill and other intangible assets

The changes in the carrying amount of goodwill were as follows:

		Balance			Goodwill			Balance
		as of			Acquired			as of
Six Months Ended		January 1,			During			June 30,
June 30, 2007		2007			the Year*			2007
		(In thousands)
Electric	$	---		$	---		$	---
Natural gas distribution		---			---			---
Construction services		86,942			3,596			90,538
Pipeline and energy services		1,159			---			1,159
Natural gas and oil production		---			---			---
Construction materials and mining		136,197			(865)			135,332
Independent power production		---			---			---
Other		---			---			---
Total	$	224,298		$	2,731		$	227,029
* Includes purchase price adjustments that were not material related to acquisitions in a prior period.

		Balance			Goodwill			Balance
		as of			Acquired			as of
Six Months Ended		January 1,			During			June 30,
June 30, 2006		2006			the Year*			2006
		(In thousands)
Electric		$	---		$	---		$	---
Natural gas distribution			---			---			---
Construction services			80,970			5,981			86,951
Pipeline and energy services			1,159			---			1,159
Natural gas and oil production			---			---			---
Construction materials and mining			133,264			6,109			139,373
Independent power production			---			---			---
Other			---			---			---
Total		$	215,393		$	12,090		$	227,483
* Includes purchase price adjustments that were not material related to acquisitions in a prior period.

Year Ended December 31, 2006	Balance as of January 1, 2006		Goodwill Acquired During the Year*		Balance as of December 31, 2006
	(In thousands)
Electric	$	---	$	---	$	---
Natural gas distribution		---		---		---
Construction services		80,970		5,972		86,942
Pipeline and energy services		1,159		---		1,159
Natural gas and oil production		---		---		---
Construction materials and mining		133,264		2,933		136,197
Independent power production		---		---		---
Other		---		---		---
Total	$	215,393	$	8,905	$	224,298

Includes purchase price adjustments that were not material related to acquisitions in a prior period.

Other intangible assets were as follows:

	June 30, 2007				June 30, 2006			December 31, 2006
	(In thousands)
Amortizable intangible assets:
Customer relationships		$	13,959		$	6,900		$	13,030
Accumulated amortization			(3,234	)		(855	)		(1,890	)
			10,725			6,045			11,140
Noncompete agreements			7,434			11,984			12,886
Accumulated amortization			(2,926	)		(8,900	)		(8,540	)
			4,508			3,084			4,346
Acquired contracts			1,186			8,164			8,307
Accumulated amortization			(1,156	)		(3,802	)		(4,646	)
			30			4,362			3,661
Other			2,559			4,662			5,062
Accumulated amortization			(672	)		(890	)		(1,407	)
			1,887			3,772			3,655
Unamortizable intangible assets			---			524			---
Total		$	17,150		$	17,787		$	22,802

The unamortizable intangible assets at June 30, 2006, were recognized in accordance with SFAS No. 87, which requires that if an additional minimum liability is recognized, an equal amount shall be recognized as an intangible asset provided that the asset recognized shall not exceed the amount of unrecognized prior service cost.

Amortization expense for amortizable intangible assets for the three and six months ended June 30, 2007, was $900,000 and $1.9 million, respectively. Amortization expense for the three and six months ended June 30, 2006, and for the year ended December 31, 2006, was $1.3 million, $2.1 million and $4.3 million, respectively. Estimated amortization expense for amortizable intangible assets is $3.7 million in 2007, $2.8 million in 2008, $2.4 million in 2009, $1.9 million in 2010, $1.5 million in 2011 and $6.8 million thereafter.

14. Derivative instruments

From time to time, the Company utilizes derivative instruments as part of an overall energy price, foreign currency and interest rate risk management program to efficiently manage and minimize commodity price, foreign currency and interest rate risk. As of June 30, 2007, the Company had no outstanding foreign currency or interest rate hedges. The following information should be read in conjunction with Notes 1 and 7 in the Company's Notes to Consolidated Financial Statements in the 2006 Annual Report.

At June 30, 2007, Fidelity held natural gas swap and collar derivative instruments designated as cash flow hedging instruments and had no outstanding oil derivative instruments.

Hedging activities

Fidelity utilizes natural gas and oil price swap and collar agreements to manage a portion of the market risk associated with fluctuations in the price of natural gas and oil on its forecasted sales of natural gas and oil production. Each of the price swap and collar agreements was designated as a hedge of the forecasted sale of the related production.

The fair value of the hedging instruments must be estimated as of the end of each reporting period and is recorded on the Consolidated Balance Sheets as an asset or a liability. Changes in the fair value attributable to the effective portion of hedging instruments, net of tax, are recorded in stockholders' equity as a component of accumulated other comprehensive income (loss). At the date the natural gas or oil production quantities are settled, the amounts accumulated in other comprehensive income (loss) are reported in the Consolidated Statements of Income. To the extent that the hedges are not effective, the ineffective portion of the changes in fair market value is recorded directly in earnings. The proceeds the Company receives for its natural gas and oil production are also generally based on market prices.

For the three and six months ended June 30, 2007, the amount of hedge ineffectiveness was immaterial. In the second quarter of 2006, Fidelity had oil collar agreements that became ineffective and no longer qualified for hedge accounting. The amount of ineffectiveness for the three and six months ended June 30, 2006, related to these collar agreements was approximately $979,000 (before tax) and was recorded in operation and maintenance expense. The amount of hedge ineffectiveness on Fidelity’s remaining hedges was immaterial for the three and six months ended June 30, 2006. For the three and six months ended June 30, 2007 and 2006, Fidelity did not exclude any components of the derivative instruments’ gain or loss from the assessment of hedge effectiveness. Gains and losses must be reclassified into earnings as a result of the discontinuance of cash flow hedges if it is probable that the original forecasted transactions will not occur. There were no such reclassifications into earnings as a result of the discontinuance of hedges.

Gains and losses on derivative instruments that are reclassified from accumulated other comprehensive income (loss) to current-period earnings are included in the line item in which the hedged item is recorded. As of June 30, 2007, the maximum term of Fidelity’s swap and collar agreements, in which Fidelity is hedging its exposure to the variability in future cash flows for forecasted transactions, is 18 months. The Company estimates that over the next 12 months net gains of approximately $11.6 million (after tax) will be reclassified from accumulated other comprehensive income into earnings, subject to changes in natural gas market prices, as the hedged transactions affect earnings.

15.	Uncertainty in income taxes

On January 1, 2007, the Company adopted FIN 48 as discussed in Note 10.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years ending prior to 2003.

Upon the adoption of FIN 48, the Company recognized a decrease in the liability for unrecognized tax benefits, which was not material and was accounted for as an increase to the January 1, 2007, balance of retained earnings. At the date of adoption, the amount of unrecognized tax benefits was $4.5 million.

Included in the balance of unrecognized tax benefits at the date of adoption are $3.0 million of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. The amount of unrecognized tax benefits at the date of adoption that, if recognized, would affect the effective tax rate was $1.5 million, including $304,000 for the payment of interest and penalties. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income taxes.

16. Business segment data

The Company’s reportable segments are those that are based on the Company’s method of internal reporting, which generally segregates the strategic business units due to differences in products, services and regulation. The vast majority of the Company’s operations are located within the United States. The Company also has investments in foreign countries, which largely consist of investments in companies owning electric transmission lines.

The electric segment generates, transmits and distributes electricity in Montana, North Dakota, South Dakota and Wyoming. The natural gas distribution segment distributes natural gas in those states as well as in western Minnesota. These operations also supply related value-added products and services.

The construction services segment specializes in electric line construction, pipeline construction, inside electrical wiring, cabling and mechanical work, fire protection and the manufacture and distribution of specialty equipment.

The pipeline and energy services segment provides natural gas transportation, underground storage and gathering services through regulated and nonregulated pipeline systems primarily in the Rocky Mountain and northern Great Plains regions of the United States. The pipeline and energy services segment also provides energy-related management services.

The natural gas and oil production segment is engaged in natural gas and oil acquisition, exploration, development and production activities primarily in the Rocky Mountain and Mid-Continent regions of the United States and in and around the Gulf of Mexico.

The construction materials and mining segment mines aggregates and markets crushed stone, sand, gravel and related construction materials, including ready-mixed concrete, cement, asphalt, liquid asphalt and other value-added products. It also performs integrated construction services. The construction materials and mining segment operates in the central, southern and western United States and Alaska and Hawaii.

The independent power production segment’s international operation has investments in companies that own electric transmission lines. This segment’s domestic operations owned, built and operated electric generating facilities in the United States and had investments in natural resource-based projects. Electric capacity and energy produced at its power plants primarily were sold under mid- and long-term contracts to nonaffiliated entities. For more information regarding the discontinued operations of the domestic operations of this segment and the sale of these assets, see Notes 3 and 20.

The Other category includes the activities of Centennial Capital, which insures various types of risks as a captive insurer for certain of the Company’s subsidiaries. The function of the captive insurer is to fund the deductible layers of the insured companies’ general liability and automobile liability coverages. Centennial Capital also owns certain real and personal property.

The information below follows the same accounting policies as described in Note 1 of the Company’s Notes to Consolidated Financial Statements in the 2006 Annual Report. Information on the Company’s businesses was as follows:

			Inter-
Three Months	External Operating		segment Operating			Earnings on Common
Ended June 30, 2007	Revenues		Revenues			Stock
	(In thousands)
Electric	$	44,591	$	---		$	3,568
Natural gas distribution		53,403		---			(559	)
Pipeline and energy services		97,494		14,660			6,228
		195,488		14,660			9,237
Construction services		263,483		349			13,026
Natural gas and oil production		67,924		59,471			35,166
Construction materials and mining		455,470		---			25,541
Independent power production		---		---			5,971
Other		---		2,440			363
		786,877		62,260			80,067
Intersegment eliminations		---		(76,920	)		---
Total	$	982,365	$	---		$	89,304

			Inter-
	External		segment			Earnings
Three Months	Operating		Operating			on Common
Ended June 30, 2006	Revenues		Revenues			Stock
	(In thousands)
Electric	$	40,875	$	---		$	509
Natural gas distribution		45,845		---			(2,530	)
Pipeline and energy services		83,869		18,568			5,580
		170,589		18,568			3,559
Construction services		243,062		136			9,679
Natural gas and oil production		62,906		51,206			30,979
Construction materials and mining		484,878		---			25,311
Independent power production		---		---			1,504
Other		---		2,318			239
		790,846		53,660			67,712
Intersegment eliminations		---		(72,228	)		---
Total	$	961,435	$	---		$	71,271

			Inter-
Six Months	External Operating		segment Operating			Earnings on Common
Ended June 30, 2007	Revenues		Revenues			Stock
	(In thousands)
Electric	$	91,695	$	---		$	7,353
Natural gas distribution		189,465		---			5,584
Pipeline and energy services		182,340		42,952			11,938
		463,500		42,952			24,875
Construction services		500,120		474			20,260
Natural gas and oil production		123,193		122,781			65,787
Construction materials and mining		683,043		---			15,745
Independent power production		---		---			8,488
Other		---		4,880			639
		1,306,356		128,135			110,919
Intersegment eliminations		---		(171,087	)		---
Total	$	1,769,856	$	---		$	135,794

			Inter-
	External		segment			Earnings
Six Months	Operating		Operating			on Common
Ended June 30, 2006	Revenues		Revenues			Stock
	(In thousands)
Electric	$	85,905	$	---		$	4,305
Natural gas distribution		198,124		---			2,793
Pipeline and energy services		177,611		51,374			10,149
		461,640		51,374			17,247
Construction services		466,747		246			15,077
Natural gas and oil production		118,004		124,498			72,237
Construction materials and mining		718,562		---			16,437
Independent power production		---		---			2,846
Other		---		4,087			502
		1,303,313		128,831			107,099
Intersegment eliminations		---		(180,205	)		---
Total	$	1,764,953	$	---		$	124,346

The pipeline and energy services segment recognized income from discontinued operations, net of tax, of $89,000 and $57,000 for the three and six months ended June 30, 2007, respectively, and a loss from discontinued operations, net of tax of $273,000 and $597,000 for the three and six months ended June 30, 2006, respectively. The independent power production segment recognized income from discontinued operations, net of tax, of $7.4 million and $12.6 million for the three and six months ended June 30, 2007, respectively, and $3.3 million and $4.4 million for the three and six months ended June 30, 2006, respectively. Excluding the income (loss) from discontinued operations at pipeline and energy services, earnings (loss) from electric, natural gas distribution and pipeline and energy services are substantially all from regulated operations. Earnings from construction services, natural gas and oil production, construction materials and mining, independent power production, and other are all from nonregulated operations.

17. Employee benefit plans

The Company has noncontributory defined benefit pension plans and other postretirement benefit plans for certain eligible employees. Components of net periodic benefit cost for the Company's pension and other postretirement benefit plans were as follows:

Three Months	Pension Benefits							Other Postretirement Benefits
Ended June 30,	2007			2006				2007				2006
	(In thousands)
Components of net periodic benefit cost:
Service cost	$	2,011			$	2,301			$	447			$	472
Interest cost		4,222				4,074				1,180				928
Expected return on assets		(5,094	)			(4,718	)			(1,279	)			(926	)
Amortization of prior service cost		207				257				14				12
Recognized net actuarial (gain) loss		426				509				164				(85	)
Amortization of net transition obligation (asset)		---				(1	)			635				531
Net periodic benefit cost, including amount capitalized		1,772				2,422				1,161				932
Less amount capitalized		217				225				90				79
Net periodic benefit cost	$	1,555			$	2,197			$	1,071			$	853

Six Months	Pension Benefits						Other Postretirement Benefits
Ended June 30,	2007			2006			2007			2006
	(In thousands)
Components of net periodic benefit cost:
Service cost	$	4,261		$	4,602		$	980		$	943
Interest cost		8,363			8,148			2,118			1,857
Expected return on assets		(10,164	)		(9,436	)		(2,372	)		(1,851	)
Amortization of prior service cost		416			513			25			23
Recognized net actuarial (gain) loss		500			1,018			(149	)		(169	)
Amortization of net transition obligation (asset)		---			(2	)		1,166			1,062
Net periodic benefit cost, including amount capitalized		3,376			4,843			1,768			1,865
Less amount capitalized		368			381