MDU Resources Group, Inc. - Company Profile, Information, Business Description, History, Background Information on MDU Resources Group, Inc.

918 East Divide Avenue
Bismarck, North Dakota 58506-5650

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Guiding Principles: Provide high-quality, cost-effective products and services. Produce a superior total return to our stockholders. Conduct business with integrity and respect for all. Minimize waste and maximize resources. Recognize our responsibility to be an effective corporate citizen. Develop individual potential and teamwork to maintain employees as our ongoing source of competitive advantage.

History of MDU Resources Group, Inc.

MDU Resources Group, Inc. (MDU) mines coal and aggregates, participates in oil exploration, generates and distributes electricity, and transports and delivers natural gas. The company's subsidiary Montana-Dakota Utilities Co. distributes natural gas and generates, transmits, and distributes electricity in Montana, North Dakota, South Dakota, and Wyoming, as well as holds energy leases in Canada and on the Gulf Coast. Among its other subsidiaries, the Fidelity Exploration & Production Company takes part in oil and natural gas ventures; Knife River Corporation mines aggregate and sells construction materials in the West, primarily for road building; Utility Services, Inc. is a national construction company that specializes in electric, natural gas, and telecommunication utility construction; and WBI Holdings, Inc. gathers, stores, and transports natural gas through pipeline systems.

Early History

R.M. Heskett founded Minnesota Northern Power Company, the progenitor of MDU, in 1924. Heskett was an engineer who began his career building electric streetcar systems in Wisconsin. After the automobile caused the decline of the streetcar industry, he entered the electric utility business with the financial backing of Wausau, Wisconsin investors Cyrus C. Yawkey, Aytch Woodson, and the Alexander brothers. Heskett undertook his first venture during the 1910s and early 1920s, when he built and then sold the Minnesota Utilities Company. He then retired briefly, but at the age of 53 he began the company that would become MDU Resources Group, Inc.

On March 14, 1924, he and his Wausau backers incorporated Minnesota Northern Power Company. Heskett ran the company from Minneapolis and served as vice-president and general manager. Cyrus C. Yawkey and Walter Alexander served as president and secretary, respectively, but had no operational responsibilities. Minnesota Northern began its operational life by purchasing three utilities: Minnesota Electric Light and Power Company in Bemidji, Minnesota; the Glendive Heat, Light and Power Company in Glendive, Montana; and the municipal electric utility at Sidney, Montana.

In 1926, Heskett bought 80 acres of land near Cabin Creek, in eastern Montana, and drilled for natural gas. Drillers found enough gas for Heskett to commission a site report from Hope Engineering. Hope claimed the acreage held enormous reserves, so Heskett quickly bought up the surrounding property. In 1927 Heskett hired Montana gas wildcatter Harry V. Mathews to run Gas Development Company, a subsidiary that would explore for and develop gas, and build pipelines. Gas Development set up four wells in 1927 and 18 wells in 1928. It acquired development interests in the Bowdoin Dome in northeastern Montana and the Pondera Field outside of Conrad, Montana.

Minnesota Northern sold this gas to an increasing territory of homeowners and businesses in the upper Midwest. It built pipelines to Marmarth, North Dakota, and Miles City, Montana, and it laid pipe southeast into the Black Hills of South Dakota. In 1929 the company committed $8 million for a 90-mile line to connect Glendive, Montana, with Williston, North Dakota, and a 220-mile line from the Baker Field site to Bismarck, North Dakota. In addition to this geographic expansion, the company pursued acquisitions as another method of increasing business. In January 1929 Heskett acquired the Havre Natural Gas Company, and in 1930 he bought Montana Cities Gas Company, Northern Natural Gas Development Company, and the manufactured gas properties at Sheridan, Wyoming.

Through the late 1920s, Heskett's electric business followed a similar path of acquisition and extension. In 1925 alone Minnesota Northern acquired electric plants in seven North Dakota towns and seven Montana communities. In most cases, Heskett built long transmission lines, closed inefficient isolated plants, and dropped rates. In 1926, he acquired the Terry, Montana, power plant, installed a 600-kilowatt generator at Fairview, Montana, and hung several transmission lines between Montana and North Dakota, including a line from Bainville, Montana, to Williston, North Dakota.

Such acquisitions and line extensions continued, but the most significant activity of the late 1920s was a successful battle with Montana Power Company for the Miles City, Montana, electric franchise. Both companies organized publicity campaigns that urged Miles City residents to vote for their interests. Minnesota Northern also worked to expand per-customer electrical usage by selling refrigeration equipment to businesses and appliances to homeowners. Consumers could buy an automatic washer through their electric bill for one dollar down and a dollar a month. According to the official company history, The Mondakonians—Energizers of the Prairies, Minnesota Northern promoted the offer as "a copper washer for a silver dollar."

Difficulties During the Great Depression

The Depression struck Minnesota Northern's territory in the late 1920s, when drought and depressed farm prices affected the Dakotas and eastern Montana. Following the stock market crash in 1929, conditions became even worse. Heskett committed $5 million to capital projects at the urging of President Herbert Hoover for American utility executives to continue major construction projects in an attempt to aid the ailing U.S. economy. It soon became apparent, however, that business could not spend its way out of the Depression. Credit tightened and Minnesota Northern's income fell from $4 million in 1930 to $3.2 million in 1934. Longtime employee H.N. Elvig noted in The Mondakonians that the company's financial structure "was held together by such slender financial threads as to require the founders of the company to guarantee its debts with their own assets." Heskett refinanced troublesome short-term debt, cut wages across the board, inaugurated a sales campaign led by merchandise manager W.L. "Bill" Hayes, and, perhaps most important, relied on the essential financial soundness of Minnesota Northern's Wausau-based backers.

In 1935, Minnesota Northern was faced with another type of threat when Congress passed the Public Utility Holding Company Act (PUHC), which limited utility holding companies to one operating subsidiary. The law was a reaction to the abuses of several giant electric utility holding companies who then dominated the industry, but it applied to all utility companies. Heskett opposed the bill. Nevertheless, he consolidated all Minnesota Northern's subsidiaries into one operating utility called the Montana-Dakota Utilities Co. Montana-Dakota conformed to the PUHC and was able to continue operations without interruption.

Growth returned in the later half of the 1930s. The needs of natural gas and electric customers expanded, especially around Fort Peck, where the U.S. Army Corps of Engineers was damming the Missouri River. Between 1935 and 1939 revenues fluctuated between $4.4 million and $4.6 million, finally breaking the $5 million mark in 1940. Economic conditions improved further as Europe went to war. In the spring of 1941, Heskett told shareholders that "the year 1940 was one of the most satisfactory in the history of the company. ... For the first time in its history, total operating revenues of the company exceeded $5 million and net income after all deductions exceeded $1 million," according to The Mondakonians.

Also in 1940, the company acquired the gas franchise of Crookston, Minnesota, and completed a 117-mile pipeline from Fort Peck to Glendive, which added six communities to its customer base and connected the Bowdoin Field reserves to its growing pipeline system. By year's end sales of equipment and appliances were up 25 percent and MDU had 23,757 gas customers and 18,052 electric customers.

As the nation geared up for war, many Mondakonians, as Montana-Dakota employees called themselves, joined up, were drafted, or left the region. By June 1942, close to 10 percent of the company's prewar workforce was in the service. During the war itself, labor and materials shortages made repairs difficult and expansion nearly impossible. After the war, Montana-Dakota expanded and took its modern-day shape.

Postwar Boom

On the electric side, MDU made two key acquisitions. In October 1945, it paid $7 million for the Dakota Public Service Company, an electric and mining firm whose subsidiaries provided electricity to 91 communities, including Bismarck, North Dakota, and had yearly revenues close to $2 million. Two years later, Montana-Dakota paid $1.8 million for the Sheridan County Electric Company, its first electric utility in Wyoming.

The company took a variety of steps to secure electricity for its new customers. It bought power from the federal government's Fort Peck dam and agreed to transport power to area electric cooperatives in exchange for 5,000 kilowatts of firm power from the Bureau of Reclamation's Fort Peck dam along the Missouri River. In terms of generating capacity, Montana-Dakota constructed several small diesel and coal-fired generators in the 3,400-8,500 kilowatt range and completed its first large steam generator, the 25,000-kilowatt, coal-fired R.M. Heskett Station. Overall generating capacity increased from 14,837 kilowatts to 68,270 kilowatts between 1945 and 1951. Transmission mileage was up from 973 to 2,616. Kilowatt-hour sales grew from 40.5 million to 221.6 million, and electric revenues skyrocketed from $1.5 million to $6.88 million.

In the gas business, Montana-Dakota's primary postwar aim was to firm up supplies, which had begun to run short in 1944 and 1945. In the summer of 1947, Montana-Dakota began storing gas for winter usage in Carter Oil Company's Billy Creek Field south of Buffalo, Wyoming. In 1948 it started buying gas from Pure Oil Company's Worland, Wyoming field, and in 1950 it built a 334-mile, 12-inch gas transmission pipeline from the Worland field to the gas storage field at Cabin Creek.

With established supplies, the gas business again began expanding. In May 1951, Montana-Dakota acquired Billings Gas and the Rocky Mountain Gas Company. Billings Gas owned natural gas properties in Billings, Montana, and eight other Montana towns, and Rocky Mountain owned the Big Horn Pipeline and held the gas franchises in four Wyoming communities. Billings and Rocky Mountain increased Montana-Dakota's natural gas customers by 16,000 and helped push its 1951 gas revenues to $9.1 million. Montana-Dakota's total revenues for 1951 were $16.8 million.

Montana-Dakota also explored new business areas after the war. It acquired the Knife River Coal Mining Company—which switched from underground to surface mining—in the 1945 deal for Dakota Public Service. Then in the 1950s, oil reserves in eastern Montana were tapped. Rather than exploit the oil themselves, Montana-Dakota executives signed a net proceeds agreement with Shell Western E & P. Shell Western operated the company's 90,000-acre leased properties, which by 1958 were producing more than 860,000 barrels and paying $300,000 to Montana-Dakota.

By the mid-1950s, growth in electrical usage demanded further generating capacity. On June 6, 1956, the company broke ground for the Lewis & Clark Station, a 44,000-kilowatt, lignite-fired unit on the Yellowstone River outside Sidney, Montana. Completed in 1959 for $12 million, Lewis & Clark was succeeded a scant two years later by groundbreaking on a $10.5 million, 66,000-kilowatt addition to Heskett Station.

Continued Expansion: 1960s-70s

As electrical demand continued to increase (kilowatt-hour sales would more than double in the 1960s), Montana-Dakota looked for innovative ways to increase capacity. In 1962, it proposed a seasonal swap of electricity with the Bureau of Reclamation's Pick-Sloan dams but was turned down. In January 1963 it joined the 20-member Mid-Continent Area Power Planners, an organization that worked to strengthen transmission ties in the upper Midwest. In 1965, Mid-Continent members agreed to build a 5,400-mile grid of high-voltage transmission lines across a state region, enabling members and others to buy and sell excess capacity.

In 1964, R.M. Heskett, then in his nineties, stepped down after 30 years at the head of the company. Cecil Smith was named chairman of the board, and his nephew and R.M. Heskett's son, David Heskett, was named Montana-Dakota president and CEO. David Heskett reorganized the company according to modern management practices. He delegated authority to department heads, installed a conventional chain of command, and brought in new outside directors. Two years after R.M. Heskett's death in 1966, David Heskett moved the company headquarters from Minneapolis, Minnesota, to Bismarck, North Dakota.

In the late 1960s, Montana-Dakota experienced continued customer and usage growth. To satisfy electric demand, in 1969 David Heskett and officials of Minnesota's Otter Tail Power Company and South Dakota's Northwestern Public Service Company announced a joint venture to construct a 400,000-kilowatt, lignite-powered generating station near Big Stone Lake in eastern South Dakota. Montana-Dakota would contribute $20 million to the $100 million project, which would break ground in 1971 and be completed in 1975. The plant, the construction of which marked the end of a long rivalry between Montana-Dakota and Northwestern Public Service, would be fueled by coal mined at Knife River Coal Mining Company's Gascoyne Mine in Bowman County in southwestern North Dakota.

In the early 1970s, the company expanded its natural gas distribution system in two "Progress" projects. "Progress '70" extended gas pipelines 227 miles eastward across North Dakota, bringing service to 12 new communities at a cost of $18.5 million. "Progress '72" extended the gas system north to the U.S. Army's Perimeter Acquisition Radar (PAR) site near Cavalier, North Dakota, and led the way to gas service for five North Dakota communities. To supply these new customers, Montana-Dakota explored for gas in the five sedimentary basins of the Rocky Mountain High Plains Region, and in 1974 acquired gas from the Rapelje Lake Basin northwest of Billings.

The major event of 1972 was the Rapid City, South Dakota flood. On June 9, Rapid Creek overflowed, killing 238 people and damaging or destroying more than 2,000 dwellings. Montana-Dakota crews worked through the night for the next two weeks restoring service to the Black Hills and rebuilding much of the devastated gas transmission system.

The Big Stone Plant was finished on time in 1975, but at a higher cost than anticipated. A major component in its $160 million price tag was $30 million for pollution abatement. Pollution control was becoming a major cost throughout the Montana-Dakota system. Between 1973 and 1975, the company spent $8.7 million on electrostatic precipitators, scrubbers, and new smokestacks at existing generators. At Knife River, surface mining was subject to increasingly stringent North Dakota reclamation laws. Pollution control was not the only area where costs rose in the middle and late 1970s. Inflation, high interest rates, and increasingly expensive natural gas squeezed finances and forced the company to repeatedly seek rate relief.

Despite these pressures, Montana-Dakota again needed new generating capacity by the mid-1970s. In 1977, Montana-Dakota and four regional partners announced that they would build a 410,000-kilowatt, lignite-powered generating station at Beulah, North Dakota. Situated adjacent to the Beulah Mine of the Knife River Coal Mining Company, Coyote Station would be a mine-mouth plant, cooled by piped-in Missouri River water.

Montana-Dakota also needed new gas. In the late 1970s, a nationwide natural gas shortage exacerbated the problems the company faced in the cold winter of 1977–78. Because it stored gas in underground formations, Montana-Dakota survived the winter without any major mishaps. It did, however, interrupt service to industrial customers.

On January 1, 1978, David Heskett retired, and Montana-Dakota's chief financial officer, John A. Schuchart, became president. Schuchart aimed to reorganize Montana-Dakota in ways that would exploit its technical knowhow. In the early 1980s, however, the company faced natural gas supply problems brought about by changing policies. To meet a growing demand for gas, Montana-Dakota contracted for supplies of deregulated gas. Deregulated gas proved too pricey for customers, however. Consumers conserved and industrial customers switched to cheaper alternate fuels, leaving Montana-Dakota with multimillion-dollar contracts for gas it could not use.

Reorganization in the 1980s

On the electric side, Schuchart spent the 1980s rearranging Montana-Dakota's supply structure. He retired several older plants and in 1985 acquired further shares of the Big Stone and Coyote generating stations. In June 1986 he bought capacity at Basin Electric Power Cooperative's Antelope Valley II plant.

By the mid-1980s, Schuchart was able to institute his reorganization plan. In 1985, he created MDU Resources Group, Inc., structured as a holding company under which he grouped the individual lines of business, though still operating within the bounds of the PUHC. Schuchart explained in The Mondakonians that the reason for the restructuring, begun in 1985, "was to better enable us to develop the individual assets which prior to that time had really been embedded and lost in the Montana-Dakota Utilities Co. structure."

Among the new subsidiaries, Williston Basin Interstate Pipeline Company faced a difficult time in the gas supply, production, and transmission business. Under deregulation, the role of the pipeline company changed from merchant to transporter. Rates fell, which was good news for the consumer but bad news for MDU, whose overall gas business suffered as deregulation and warmer than normal winters caused a downward spiral in prices.

The Fidelity Oil Group took proceeds from the Shell-run Cedar Creek Anticline property and invested them in oil and gas operations in the western half of the United States and Canada. From the beginning of the program in 1986, when reserves totaled 12 million barrels, Fidelity increased reserves to 17 million barrels by the end of 1991.

Shifting Focus in the 1990s

At Knife River Coal Mining Company, the late 1980s saw business suffer for two reasons: coal was in oversupply, and sales volume dropped sharply in 1987 after a crack in the rotor shaft caused a shutdown of the Big Stone Plant. After the reorganization, Knife River executives began looking at mineral and aggregate mining and clean coal technology as new ways to exploit their expertise. This effort intensified during the early 1990s, when clean air legislation put the future of the lignite coal business in doubt. In June 1992 it acquired KRC Aggregate, Inc., a sand and gravel mining company based in Lodi, California.

The last element in Schuchart's reorganization was Prairielands Energy Marketing, which expanded markets for the corporation's energy products. In 1991, Prairielands signed a 17-year capacity agreement with the Northern Border Pipeline system. The agreement provided a link between regional natural gas reserves and major national markets. In 1992, Prairielands began using the natural gas futures market.

Through a series of acquisitions in the 1990s, the Knife River Coal Mining Company changed its focus from lignite coal mining to aggregate mining and sales of construction materials. In 1993 the company acquired three aggregate operations in California and Oregon and the assets of an aggregate and construction materials company in Alaska. In 1995 it gained a 50 percent ownership in Hawaiian Cement, one of the largest construction suppliers in Hawaii, then acquired the remaining 50 percent two years later. To better express its broadened business concerns, the subsidiary dropped the reference to coal mining in its name in 1997, becoming Knife River Corporation.

Knife River continued its expansion in aggregate mining and construction materials sales, a lucrative area given the boom in road building in the Pacific Northwest. The Transportation Equity Act of 1998 dedicated some $150 billion to road building, mainly in the West, between 1998 and 2004, and Knife River had more business than it could keep up with. Its backlog in early 2001 hit $126 million. The company stepped up its acquisitions. By the end of 1999, it had acquired four more construction materials businesses, including Oregon-based Morse Bros. and JTL Group, which expanded Knife River's operations into Montana and Wyoming. In 2000, it purchased nine additional companies in California, Oregon, Montana, and Alaska. By mid-2000, the company's aggregate reserves had grown to 880 million tons, giving the company supplies for the next 40 years at current consumption levels.

More important, the growth of Knife River's aggregate business offset the decline of its coal mining operations. In May 2001 the company made the transformation complete by selling its coal mining operations to Westmoreland Coal Company. "Knife River's coal mining operations have been a part of MDU Resources since 1945, so making the decision to exit the coal mining business was not easy," said Terry D. Hildestad, president and CEO of Knife River, in a company press release. "However, with Knife River's growing construction materials operations providing over 90 percent of Knife River's revenues, it is prudent to concentrate on that business and take advantage of Westmoreland's interest in our coal operations."

MDU created Utility Services, Inc., in 1997, contributing to its increasing diversity. As a full-service engineering, design, and build company, the new subsidiary specialized in the construction and maintenance of electric lines and natural gas distribution and transmission systems. By 2000, the company had $169 million in annual sales and was expected to bring in almost $300 million in 2001. Its rate of growth looked promising as utility companies struggled to replace aging lines.

MDU continued its program of expansion for Fidelity Oil with great success in the 1990s. Reserves reached 22 million barrels in 1994, and production passed three million barrels. In 1996 the subsidiary acquired two new companies, with properties in Texas, New Mexico, and Alabama. The next year, its operating revenues exceeded $68 million. A significant purchase, the Willow Springs gas field in east Texas was completed in 1998.

Williston Basin Interstate Pipeline Company changed its name to WBI Holdings, Inc., in 1998 to acknowledge its growing lines of business in energy marketing and to prepare for the consolidation of all the corporation's oil and natural gas production and reserve assets. The following year Fidelity Oil Group was renamed Fidelity Exploration & Production Company and became a subsidiary of WBI Holdings. WBI made further acquisitions in the next few years, including a Wyoming pipeline, a gas storage field in western Kentucky, a large coalbed natural gas producer, and an energy technology firm specializing in pipeline and cable location and tracking.

Early in the new millennium, MDU had reduced its emphasis on its utility business. Utility services accounted for less than 10 percent of sales in 2000. Its growth in other areas, fueled in large part by acquisitions (70 between 1993 and 2001), was disciplined rather than haphazard: It only purchased in areas of expertise or closely related enterprises, and the strategy seemed very effective. The company's revenues, which were $464 million in 1995, reached $1.9 billion in 2000.

Principal Subsidiaries: Fidelity Exploration and Production Company; Fidelity Oil Co.; Fidelity Oil Holdings, Inc.; Knife River Corporation; Montana-Dakota Utilities Co.; Prairielands Energy Marketing, Inc.; Utility Services, Inc.; WBI Holdings, Inc.

Principal Competitors: Black Hills Power, Inc.; NorthWestern Corporation; Vulcan Materials Company.


Additional Details

Further Reference

Beck, Bill, The Mondakonians: Energizers of the Prairie, Duluth, Minn.: MDU Resources Group, Inc., 1992."MDU Resources Group, Inc.," On Wall Street, October 2000, p. 6.Shinkle, Kirk, "Erstwhile Utility Player Eyes Growth Elsewhere," Investor's Business Daily, April 17, 2001.

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