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| MDU > SEC Filings for MDU > Form 10-Q on 6-May-2008 | All Recent SEC Filings |
6-May-2008
Quarterly Report
OVERVIEW
The Company's strategy is to apply its expertise in energy and transportation
infrastructure industries to increase market share, increase profitability and
enhance shareholder value through:
· Organic growth as well as a continued disciplined approach to the acquisition of well-managed companies and properties
· The elimination of system-wide cost redundancies through increased focus on integration of operations and standardization and consolidation of various support services and functions across companies within the organization
· The development of projects that are accretive to earnings per share and return on invested capital
The Company has capabilities to fund its growth and operations through various sources, including internally generated funds, commercial paper facilities and the issuance from time to time of debt securities and the Company's equity securities. For more information on the Company's net capital expenditures, see Liquidity and Capital Commitments.
The key strategies for each of the Company's business segments, and certain related business challenges, are summarized below. For a summary of the Company's business segments, see Note 15.
Key Strategies and Challenges
Electric and Natural Gas Distribution
Strategy Provide competitively priced energy to customers while working with
them to ensure efficient usage. Both the electric and natural gas distribution
segments continually seek opportunities for growth and expansion of their
customer base through extensions of existing operations and through selected
acquisitions of companies and properties at prices that will provide stable cash
flows and an opportunity for the Company to earn a competitive return on
investment. The natural gas distribution segment also continues to pursue growth
by expanding its level of energy-related services.
Challenges Both segments are subject to extensive regulation in the state jurisdictions where they conduct operations with respect to costs and permitted returns on investment as well as subject to certain operational regulations at the federal level. The ability of these segments to grow through acquisitions is subject to significant competition from other energy providers. In addition, as to the electric business, the ability of this segment to grow its service territory and customer base is affected by significant competition from other energy providers, including rural electric cooperatives.
Construction Services
Strategy Provide a competitive return on investment while operating in a
competitive industry by: building new and strengthening existing customer
relationships; effectively controlling costs; retaining, developing and
recruiting talented employees; focusing business development efforts on project
areas that will permit higher margins; and properly managing risk. This segment
continuously seeks opportunities to expand through strategic acquisitions.
Challenges This segment operates in highly competitive markets with many jobs subject to competitive bidding. Maintenance of effective operational and cost controls, retention of key personnel and managing through down turns in the economy are ongoing challenges.
Pipeline and Energy Services
Strategy Leverage the segment's existing expertise in energy infrastructure and
related services to increase market share and profitability through optimization
of existing operations, internal growth, and acquisitions of energy-related
assets and companies. Incremental and new growth opportunities include: access
to new sources of natural gas for storage, gathering and transportation
services; expansion of existing gathering and transmission facilities; and
incremental expansion of pipeline capacity to allow customers access to more
liquid and higher-priced markets.
Challenges Energy price volatility; natural gas basis differentials; regulatory requirements; ongoing litigation; recruitment and retention of a skilled workforce; and increased competition from other natural gas pipeline and gathering companies.
Natural Gas and Oil Production
Strategy Apply technology and leverage existing exploration and production
expertise, with a focus on operated properties, to increase production and
reserves from existing leaseholds, and to seek additional reserves and
production opportunities in new areas to further diversify the segment's asset
base. By optimizing existing operations and taking advantage of new and
incremental growth opportunities, this segment's goal is to increase both
production and reserves over the long term so as to generate competitive returns
on investment.
Challenges Fluctuations in natural gas and oil prices; ongoing environmental litigation and administrative proceedings; timely receipt of necessary permits and approvals; recruitment and retention of a skilled workforce; availability of drilling rigs, auxiliary equipment and industry-related field services; inflationary pressure on development and operating costs; and increased competition from other natural gas and oil companies.
Construction Materials and Contracting
Strategy Focus on high-growth strategic markets located near major
transportation corridors and desirable mid-sized metropolitan areas; strengthen
long-term, strategic aggregate reserve position through purchase and/or lease
opportunities; enhance profitability through cost containment, margin discipline
and vertical integration of the segment's operations; and continue growth
through organic and acquisition opportunities. Ongoing efforts to increase
margin are being pursued through the implementation of a variety of continuous
improvement programs, including corporate purchasing of equipment, parts and
commodities (liquid asphalt, diesel fuel, cement and other materials), and
negotiation of contract price escalation provisions. Vertical integration allows
the segment to manage operations from aggregate mining to final lay-down of
concrete and asphalt, with control of and access to adequate quantities of
permitted aggregate reserves being significant. A key element of the Company's
long-term strategy for this business is to further expand its presence, through
acquisition, in the higher-margin materials business (rock, sand, gravel, liquid
asphalt, ready-mixed concrete and related products), complementing and expanding
on the Company's expertise.
Challenges The economic slow-down has adversely impacted operations, particularly in the private market. This business unit expects to continue cost containment efforts and a greater emphasis on industrial, energy and public works projects. The Company is experiencing price volatility in petroleum products such as diesel, gasoline and liquid asphalt. Increased competition in certain markets has lowered margins. Recruitment and retention of a skilled workforce is also an ongoing challenge.
For further information on the risks and challenges the Company faces as it
pursues its growth strategies and other factors that should be considered for a
better understanding of the Company's financial condition, see Part II, Item 1A
- Risk Factors, as well as Part I, Item 1A - Risk Factors in the 2007 Annual
Report. For further information on each segment's key growth strategies,
projections and certain assumptions, see Prospective Information. For
information pertinent to various commitments and contingencies, see Notes to
Consolidated Financial Statements.
Earnings Overview
The following table summarizes the contribution to consolidated earnings by each
of the Company's businesses.
Three Months Ended
March 31,
2008 2007
(Dollars in millions, where applicable)
Electric $ 5.5 $ 3.8
Natural gas distribution 16.4 6.2
Construction services 10.8 7.2
Pipeline and energy services 7.2 5.7
Natural gas and oil production 50.6 30.6
Construction materials and contracting (21.1 ) (9.8 )
Other 1.5 (2.5 )
Earnings before discontinued operations 70.9 41.2
Income from discontinued operations, net of tax --- 5.3
Earnings on common stock $ 70.9 $ 46.5
Earnings per common share - basic:
Earnings before discontinued operations $ .39 $ .23
Discontinued operations, net of tax --- .03
Earnings per common share - basic $ .39 $ .26
Earnings per common share - diluted:
Earnings before discontinued operations $ .39 $ .23
Discontinued operations, net of tax --- .02
Earnings per common share - diluted $ .39 $ .25
Return on average common equity for the 12 months ended 18.9 % 14.8 %
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Three Months Ended March 31, 2008 and 2007 Consolidated earnings for the quarter ended March 31, 2008, increased $24.4 million from the comparable prior period largely due to:
· Higher average realized oil and natural gas prices of 89 and 17 percent, respectively, and increased natural gas and oil production of 7 percent and 12 percent, respectively, partially offset by higher depreciation, depletion and amortization expense at the natural gas and oil production business
· Increased earnings at the natural gas distribution business largely due to the acquisition of Cascade
· Increased workloads and equipment sales and rentals at the construction services business
Partially offsetting the increase was a higher seasonal loss at the construction materials and contracting business, primarily related to construction workloads and margins as well as product volumes which were significantly lower as a result of the economic slowdown.
FINANCIAL AND OPERATING DATA
Below are key financial and operating data for each of the Company's businesses.
Electric
Three Months Ended
March 31,
2008 2007
(Dollars in millions, where applicable)
Operating revenues $ 52.3 $ 47.1
Operating expenses:
Fuel and purchased power 18.8 17.1
Operation and maintenance 15.0 15.1
Depreciation, depletion and amortization 6.0 5.6
Taxes, other than income 2.3 2.2
42.1 40.0
Operating income 10.2 7.1
Earnings $ 5.5 $ 3.8
Retail sales (million kWh) 707.8 645.8
Sales for resale (million kWh) 48.4 44.1
Average cost of fuel and purchased power per kWh $ .023 $ .024
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Three Months Ended March 31, 2008 and 2007 Electric earnings increased $1.7 million, primarily due to higher retail sales volumes and margins, partially offset by increased depreciation, depletion and amortization expense of $300,000 (after tax) related to higher asset balances.
Natural Gas Distribution
Three Months Ended
March 31,
2008 2007
(Dollars in millions, where applicable)
Operating revenues $ 362.1 $ 136.0
Operating expenses:
Purchased natural gas sold 282.6 106.2
Operation and maintenance 27.0 15.5
Depreciation, depletion and amortization 7.2 2.5
Taxes, other than income 14.5 1.7
331.3 125.9
Operating income 30.8 10.1
Earnings $ 16.4 $ 6.2
Volumes (MMdk):
Sales 31.1 15.9
Transportation 26.6 3.4
Total throughput 57.7 19.3
Degree days (% of normal)*
Montana-Dakota 101 % 94 %
Cascade 107 % ---
Average cost of natural gas, including transportation, per
dk**
Montana-Dakota $ 7.70 $ 6.70
Cascade $ 7.74 ---
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Three Months Ended March 31, 2008 and 2007 Earnings at the natural gas distribution business increased $10.2 million due to:
· Earnings of $9.9 million at Cascade, which was acquired on July 2, 2007
· Increased retail sales volumes resulting from 9 percent colder weather than last year and higher retail sales margins, both excluding Cascade
Partially offsetting these increases was increased operation and maintenance expense (excluding Cascade) of $600,000 (after tax), primarily payroll and benefit related costs.
Construction Services
Three Months Ended
March 31,
2008 2007
(In millions)
Operating revenues $ 307.4 $ 236.8
Operating expenses:
Operation and maintenance 274.0 211.7
Depreciation, depletion and amortization 3.4 3.5
Taxes, other than income 11.8 8.8
289.2 224.0
Operating income 18.2 12.8
Earnings $ 10.8 $ 7.2
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Three Months Ended March 31, 2008 and 2007 Construction services earnings increased $3.6 million due to:
· Higher construction workloads of $3.2 million (after tax), largely in the Southwest region
· Increased equipment sales and rentals
Pipeline and Energy Services
Three Months Ended
March 31,
2008 2007
(Dollars in millions)
Operating revenues $ 133.8 $ 113.1
Operating expenses:
Purchased natural gas sold 94.1 79.6
Operation and maintenance 17.6 14.1
Depreciation, depletion and amortization 5.6 5.4
Taxes, other than income 2.8 2.7
120.1 101.8
Operating income 13.7 11.3
Earnings $ 7.2 $ 5.7
Transportation volumes (MMdk):
Montana-Dakota 8.3 8.0
Other 21.4 20.6
29.7 28.6
Gathering volumes (MMdk) 24.0 22.1
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Three Months Ended March 31, 2008 and 2007 Pipeline and energy services experienced an increase in earnings of $1.5 million due to:
· Increased transportation (largely the result of an expansion to the Grasslands system) and gathering volumes totaling $1.6 million (after tax)
· Higher storage services revenue of $500,000 (after tax)
· Higher gathering rates of $300,000 (after tax)
Partially offsetting this increase was higher operation and maintenance expense related to the natural gas storage litigation and higher material costs and rentals. For more information regarding the natural gas storage litigation, see Note 19.
Natural Gas and Oil Production
Three Months Ended
March 31,
2008 2007
(Dollars in millions, where applicable)
Operating revenues:
Natural gas $ 117.5 $ 94.0
Oil 52.1 24.6
169.6 118.6
Operating expenses:
Purchased natural gas sold --- .3
Operation and maintenance:
Lease operating costs 18.3 15.5
Gathering and transportation 5.7 4.5
Other 8.8 8.4
Depreciation, depletion and amortization 39.3 29.8
Taxes, other than income:
Production and property taxes 13.7 8.9
Other .2 .2
86.0 67.6
Operating income 83.6 51.0
Earnings $ 50.6 $ 30.6
Production:
Natural gas (MMcf) 16,561 15,440
Oil (MBbls) 621 556
Total production (MMcf equivalent) 20,288 18,773
Average realized prices (including hedges):
Natural gas (per Mcf) $ 7.10 $ 6.08
Oil (per Bbl) $ 83.79 $ 44.34
Average realized prices (excluding hedges):
Natural gas (per Mcf) $ 6.91 $ 5.74
Oil (per Bbl) $ 84.35 $ 44.34
Average depreciation, depletion and amortization rate, per
equivalent Mcf $ 1.88 $ 1.52
Production costs, including taxes, per equivalent Mcf:
Lease operating costs $ .90 $ .83
Gathering and transportation .28 .24
Production and property taxes .67 .47
$ 1.85 $ 1.54
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Three Months Ended March 31, 2008 and 2007 The natural gas and oil production business earnings increased $20.0 million due to:
· Higher average realized oil prices of 89 percent and higher average realized natural gas prices of 17 percent
· Increased natural gas and oil production of 7 percent and 12 percent, respectively, largely the result of the East Texas property acquisition in January 2008 and additional drilling activity
Partially offsetting these increases were:
· Higher depreciation, depletion and amortization expense of $5.9 million (after tax) due to higher depletion rates and increased production
· Higher production taxes of $3.0 million (after tax) associated with higher revenue
· Higher lease operating expense of $1.7 million (after tax)
Construction Materials and Contracting
Three Months Ended
March 31,
2008 2007
(Dollars in millions)
Operating revenues $ 201.3 $ 227.6
Operating expenses:
Operation and maintenance 195.2 208.9
Depreciation, depletion and amortization 25.4 22.6
Taxes, other than income 9.1 7.7
229.7 239.2
Operating loss (28.4 ) (11.6 )
Loss $ (21.1 ) $ (9.8 )
Sales (000's):
Aggregates (tons) 4,241 5,557
Asphalt (tons) 196 336
Ready-mixed concrete (cubic yards) 611 626
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Three Months Ended March 31, 2008 and 2007 Construction materials and contracting experienced a seasonal first quarter loss of $21.1 million. The loss increased by $11.3 million from $9.8 million in 2007. The increased loss was due to:
· Lower margins from existing operations of $9.7 million, largely
o Construction workloads and margins as well as product volumes which were significantly lower as a result of the economic slowdown
o Significantly higher diesel fuel costs
· Higher depreciation, depletion and amortization expense, largely the result of higher property, plant and equipment balances from ongoing operations and acquisitions
Other and Intersegment Transactions
Amounts presented in the preceding tables will not agree with the Consolidated
Statements of Income due to the Company's other operations and the elimination
of intersegment transactions. The amounts relating to these items are as
follows:
Three Months Ended
March 31,
2008 2007
(In millions)
Other:
Operating revenues $ 2.6 $ 2.4
Operation and maintenance 2.7 3.6
Depreciation, depletion and amortization .3 .4
Taxes, other than income .1 .1
Intersegment transactions:
Operating revenues $ 107.2 $ 94.1
Purchased natural gas sold 100.1 87.3
Operation and maintenance 7.1 6.8
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For further information on intersegment eliminations, see Note 15.
PROSPECTIVE INFORMATION
The following information highlights the key growth strategies, projections and
certain assumptions for the Company and its subsidiaries and other matters for
each of the Company's businesses. Many of these highlighted points are
"forward-looking statements." There is no assurance that the Company's
projections, including estimates for growth and changes in earnings and
revenues, will in fact be achieved. Please refer to assumptions contained in
this section as well as the various important factors listed in Part II, Item 1A
- Risk Factors, as well as Part I, Item 1A - Risk Factors in the 2007 Annual
Report. Changes in such assumptions and factors could cause actual future
results to differ materially from the Company's growth, earnings and revenue
projections.
MDU Resources Group, Inc.
· Earnings per common share for 2008 are projected in the range of $1.85 to
$2.10. The Company expects the percentage of 2008 earnings per common share by
quarter to be in the following approximate ranges:
o Second quarter - 25 percent to 30 percent
o Third quarter - 30 percent to 35 percent
o Fourth quarter - 25 percent to 30 percent
· Long-term compound annual growth goals on earnings per share from operations are in the range of 7 percent to 10 percent.
Electric
††† The Company is analyzing potential projects for accommodating load growth and
replacing an expired purchased power contract with company-owned generation,
which will add to base-load capacity and rate base. A final decision on the
Big Stone Station II project will be made when conclusions are reached on the
issuance of major permits and certain regulatory approvals, which is expected
by mid- to late 2008. If the decision is to proceed with construction of the
plant, it is projected to be completed in 2013. The Company anticipates it
would own at least 116 MW of this plant or other generation sources. For
further information, see Note 18.
· This business continues to pursue expansion of energy-related services.
Natural gas distribution
· This business continues to pursue expansion of energy-related services and
expects continued strong customer growth in Washington and Oregon.
Construction services
· The Company anticipates margins in 2008 to be slightly lower than 2007.
· The Company continues to focus on costs and efficiencies to enhance margins.
· Work backlog as of March 31, 2008, was approximately $752 million, compared to $747 million at March 31, 2007.
· This business continuously seeks opportunities to expand through strategic acquisitions.
Pipeline and energy services
· Based on anticipated demand, incremental expansions to the Grasslands Pipeline
are forecasted over the next few years. Through additional compression, the
pipeline firm capacity could ultimately reach 200,000 Mcf per day, an increase
from the current firm capacity of 138,000 Mcf per day.
· In 2008, total gathering and transportation throughput is expected to be slightly higher than 2007 record levels.
· The Company continues to pursue expansion of facilities and services offered to customers.
· The labor contract that Williston Basin was negotiating, as reported in Items 1 and 2 - Business and Properties - General in the 2007 Annual Report, has been ratified.
Natural gas and oil production
· The Company expects a combined natural gas and oil production increase in 2008
in the range of 12 percent to 16 percent over 2007 levels, including the
effects of the acquisition of natural gas production assets in East Texas.
Meeting these targets will depend on the success of exploration activities and
the timely receipt of regulatory approvals.
. . .
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