MDU Resources Reports Third Quarter 2004 Consolidated Earnings
BISMARCK, N.D. - Oct. 19, 2004 - MDU Resources Group, Inc.
(NYSE:MDU) announced financial results for the third quarter of
2004, showing consolidated earnings of $71.5 million, compared to
$65.3 million for 2003. Earnings per common share, diluted, were
$0.60, compared to $0.58 for 2003.
Highlights for Third Quarter 2004
(Ended Sept. 30, 2004)
- Earnings per common share increased to $0.60 from $0.58
- Consolidated earnings total $71.5 million
- Lowered 2004 earnings per share guidance slightly to a range
of $1.70 to $1.85
Earnings for the nine months ended Sept. 30, 2004, totaled $153.4
million or $1.31 per common share, diluted, compared to $128.6
million or $1.15 per common share, diluted, for the first nine
months of 2003. Earnings for 2003 included a $7.6 million after-
tax noncash transition charge, reflecting the cumulative effect
of a change in accounting for asset retirement obligations as
required by the adoption of Statement of Financial Accounting
Standards No. 143.
"We continue to demonstrate earnings per share growth," said
Martin A. White, chairman of the board, president and chief
executive officer of MDU Resources. "The benefit of our
diversification strategy was apparent in the increased earnings
per share this quarter. We saw very positive results at our
natural gas and oil production and independent power production
businesses; however, consolidated quarterly results were
negatively affected by noncash asset impairments totaling $5.3
million (after tax) at our pipeline and energy services segment,
losses at our utility services business and weather-related
effects at several businesses.
"We expect that 2004 will be a good year for MDU Resources, and
we will continue to leverage our diverse operations to deliver
earnings growth," White continued. "However, based on the asset
impairments, losses at our utility services business and weather-
related challenges, we are lowering our earnings per share
guidance for 2004. Projected earnings per share for 2004 are
expected to be in the range of $1.70 to $1.85, a slight decrease
from prior guidance," said White.
In August, the MDU Resources Board of Directors increased the
common stock dividend to 18 cents per share, a 5.9 percent
increase from the previously stated quarterly dividend of
17 cents. This results in a 4 cents per share annualized
increase. The increased dividend was payable on Oct. 1, 2004, to
stockholders of record Sept. 9, 2004. The dividend has been
increased every year since 1990, and the company has an unbroken
record of consecutive dividend payments since 1937.
QUARTERLY PERFORMANCE SUMMARY AND FUTURE OUTLOOK
The following information highlights the key growth strategies,
projections and certain assumptions for the company and its
subsidiaries and other matters for each of the company's
businesses. Many of these highlighted points are "forward-looking
statements." There is no assurance that the company's
projections, including estimates for growth and increases in
revenues and earnings, will in fact be achieved. Please refer to
assumptions contained in this section as well as the various
important factors listed at the end of this document under the
heading "Risk Factors and Cautionary Statements that May Affect
Future Results." Changes in such assumptions and factors could
cause actual future results to differ materially from the
company's targeted growth, revenue and earnings projections.
Earnings Third Earnings Third
Quarter 2004 Quarter 2003
Business Line (In Millions) (In Millions)
Construction materials and mining $ 34.9 $ 36.1
Natural gas and oil production 27.4 16.5
Independent power production & other 9.0 2.6
Electric 5.6 6.3
Utility services (.6) 1.7
Pipeline and energy services (1.6) 4.6
Natural gas distribution (3.2) (2.5)
Total $ 71.5 $ 65.3
On a consolidated basis, the following information highlights the
key growth strategies, projections and certain assumptions for
the company:
- Earnings per common share for 2004, diluted, are projected
in the range of $1.70 to $1.85.
- The company's long-term compound annual growth goals on
earnings per share from operations are in the range of 6 percent
to 9 percent.
- The company anticipates investing approximately $410 million
in capital expenditures during 2004.
- The company will consider issuing equity from time to time
to keep debt at the nonregulated businesses at no more than 40
percent of total capitalization.
Construction Materials and Mining
Earnings for the third quarter of 2004 for this business segment
totaled $34.9 million, a decrease of $1.2 million from the same
period last year. Earnings were off slightly from last year's
record level. Strong performance at several of this segment's
operating markets was more than offset by the effects of wet
weather, decreased benefits realized from the substantially
complete harbor deepening project in southern California and
higher operating costs in Minnesota. The wet weather
significantly affected Texas and the upper Midwest and when
combined with the other previously mentioned factors, resulted in
lower aggregate margins. Lower construction revenues and slightly
lower asphalt volumes and margins were realized. Operations were
also affected by higher fuel costs. Earnings from new
acquisitions and higher ready-mixed concrete volumes and margins
partially offset the decreases.
In early August, the company acquired the assets of Becker Gravel
Company Inc., a privately held construction materials company
with headquarters in Stratford, Iowa. It is a leading
construction materials provider in central and northwestern Iowa,
with annual revenues of about $5 million. Also, on Oct. 18, 2004,
the company announced the acquisition of the Pohakulepo Quarry on
the island of Maui, Hawaii. Pohakulepo is a privately held quarry
operation and is an important aggregate reserve on Maui. The
operation has annual revenues of about $2 million.
The following information highlights the key growth strategies,
projections and certain assumptions for this segment:
- Aggregate volumes in 2004 are expected to be slightly higher
than 2003 levels. Ready-mixed concrete volumes are expected to
increase by 17 percent to 22 percent, while asphalt volumes are
expected to increase 10 percent to 15 percent over 2003.
- Revenues in 2004 are expected to increase by approximately
13 percent to 18 percent over 2003 levels.
- The company expects that the replacement funding legislation
for the Transportation Equity Act for the 21st Century (TEA-21)
will be equal to or higher than previous funding levels.
- Work backlog as of mid-October 2004 was approximately $501
million, compared to $425 million at mid-October 2003.
Natural Gas and Oil Production
Earnings at this segment were $27.4 million for the third quarter
of 2004, compared to $16.5 million for the same period last year.
The increase reflects realized natural gas prices that were 16
percent higher and realized oil prices that were 33 percent
higher than a year ago, as well as increased natural gas
production volumes. On a combined basis, natural gas and oil
production was 10 percent higher for the quarter compared to the
same period last year. The realized natural gas price increase
was due in part to the company's ability to access higher-priced
markets for much of its operated natural gas production through
the Grasslands Pipeline, completed late last year. These positive
variances were partially offset by higher depreciation, depletion
and amortization expense and general and administrative expenses.
The following information highlights the key growth strategies,
projections and certain assumptions for this segment:
- In 2004, the company expects a combined natural gas and oil
production increase of approximately 8 percent over 2003 levels.
The decrease from the previously disclosed estimated increase in
production of 10 percent is largely due to delays in the receipt
of various regulatory approvals, which is affecting producers
throughout the Rocky Mountain region. The company is confident
that it will receive such regulatory approvals, but forecasting
the timing of such receipt is difficult. Also affecting the
forecasted production increase to a lesser extent is the recent
hurricane activity in the Gulf of Mexico.
- Due to regulatory approval delays encountered and the
potential for further delays, the company is now expecting to
drill between 200 and 300 wells in 2004.
- Natural gas prices in the Rocky Mountain region for November
through December 2004, reflected in the company's 2004 earnings
guidance, are in the range of $4.75 to $5.25 per Mcf. The
company's estimates for natural gas prices on the NYMEX for
November through December 2004, reflected in the company's 2004
earnings guidance, are in the range of $5.50 to $6.00 per Mcf.
For 2004, the company expects that more than two-thirds of its
natural gas production will be priced using Rocky Mountain or
other non-NYMEX prices.
- NYMEX crude oil prices for October through December 2004,
reflected in the company's 2004 earnings guidance, are in the
range of $45 to $50 per barrel.
- The company has hedged a portion of its 2004 natural gas
production. The company has entered into agreements
representing approximately 35 percent to 40 percent of 2004
estimated annual natural gas production. The agreements are
at various indices and range from a low CIG index of $3.75
to a high CIG index of $6.14 per Mcf. CIG is an index
pricing point related to Colorado Interstate Gas Co.'s
system.
- This segment has hedged a portion of its 2004 oil
production. The company has entered into agreements at NYMEX
prices with a low of $28.84 and a high of $30.28, representing
approximately 25 percent to 30 percent of 2004 estimated annual
oil production.
- The company has hedged a portion of its 2005 estimated
natural gas production. The company has entered into agreements
representing approximately 30 percent to 35 percent of its 2005
estimated annual natural gas production. The agreements are at
various indices and range from a low Ventura index of $4.75 and a
high Ventura index of $6.80 per Mcf. Ventura is an index pricing
point related to Northern Natural Gas Co.'s system.
- This segment has hedged a portion of its 2005 oil
production. The company has entered into agreements at NYMEX
prices with a low of $30.70 and a high of $52.05 representing
approximately 30 percent to 35 percent of its 2005 estimated
annual oil production.
Independent Power Production and Other
Earnings at this business were $9.0 million, compared to $2.6
million during the same period last year. Higher earnings were
primarily attributable to the effects of changes in foreign
currency rates and the value of the embedded derivative in the
Brazilian electric power sales contract, lower financing costs
and acquisitions made since the comparable period last year.
Domestic operations contributed to higher earnings despite
reduced demand at the Colorado electric generating facility
related to cool summer weather.
In September, this business finalized its acquisition from Dynegy
Inc. of a 50-percent ownership interest in the Hartwell
Generating Facility, a 310-megawatt natural gas-fired electric
generating facility located in Hartwell, Ga. American National
Power, a wholly owned subsidiary of International Power of the
United Kingdom, holds the remaining 50-percent ownership
interest. All of the Hartwell Generating Facility's output is
sold to Oglethorpe Power under a long-term power purchase
contract.
The following information highlights the key growth strategies,
projections and certain assumptions for this business:
- Earnings projections for independent power production and
other operations are expected to be in the range of $22 million
to $25 million in 2004.
- The company is constructing a 116-megawatt (MW) coal-fired
electric generating project near Hardin, Mont. A power sales
agreement with Powerex Corp., a subsidiary of BC Hydro, has been
secured for the entire output of the plant for a term expiring
Oct. 31, 2008, with an option for a two-year extension. The
projected on-line date for this plant is late 2005.
Electric
Earnings for this segment totaled $5.6 million, compared to third
quarter earnings of $6.3 million last year. Retail sales were
lower due to significantly cooler weather in July and August,
which resulted in a 15 percent decrease in residential sales
compared to 2003. Higher operation and maintenance expenses,
including payroll and benefit-related costs contributed to the
decrease. The seasonal effects of a new rate design for retail
customers in North Dakota combined with higher sales to large
industrial customers partially offset the decreases.
The following information highlights the key growth strategies,
projections and certain assumptions for this segment:
- The expected return for this segment in 2004 is anticipated
to be generally consistent with overall authorized levels.
- As part of the North Dakota Industrial Commission's Lignite
Vision 21 project, the company submitted an air quality permit
application in May 2004 to construct a 175-MW coal-fired plant at
Gascoyne, N.D. The air permit application is now under review at
the North Dakota Department of Health. This segment is also
involved in the review of other potential projects to replace
capacity associated with expiring contracts, and to provide for
future growth. The costs of building and/or acquiring the
additional generating capacity needed by the utility are expected
to be recovered in rates.
Utility Services
This segment reported a loss of $568,000 for the third quarter of
2004, compared to earnings of $1.7 million for the same period in
2003. Decreased inside electrical margins in the Central region
were partially offset by increased line construction margins in
the Southwest, Northwest and Central regions. Also negatively
affecting results were severance-related expenses.
On Sept. 29, 2004, John Harp became president and chief executive
officer of Utility Services, Inc. Harp is the former president of
Harp Line Constructors and Harp Engineering, subsidiaries
acquired by MDU Resources in 1998. He has worked in and owned
utility construction businesses his entire career and will use
his expertise to help refocus this segment's strategies.
The following information highlights the key growth strategies,
projections and certain assumptions for this segment:
- Revenues for this segment are expected to be in the range of
$380 million to $430 million in 2004.
- The company anticipates margins for 2004 to be significantly
lower than 2003 levels.
- Work backlog as of Sept. 30, 2004 was approximately $220
million, compared to $158 million at Sept. 30, 2003.
Pipeline and Energy Services
This segment experienced a $1.6 million loss for the third
quarter of 2004, compared to $4.6 million in earnings last year.
The loss is due to a noncash goodwill impairment of $4.0 million
relating to the company's cable and pipeline magnetization and
location business, as well as a $1.3 million adjustment
reflecting the reduction in value of certain gathering facilities
in the Gulf Coast region. Also contributing to the unfavorable
variance were higher operating expenses, which were partially the
result of increased costs associated with the expansion of
pipeline and gathering operations, and lower transportation
rates. Higher natural gas volumes transported into storage, as
well as increased natural gas transportation volumes on the
Grasslands Pipeline, partially offset the decreases.
The following information highlights the key growth strategies,
projections and certain assumptions for this segment:
- In 2004, total natural gas throughput is expected to
increase approximately 15 percent to 20 percent over 2003 levels
largely due to the Grasslands Pipeline, which began providing
natural gas transmission service on Dec. 23, 2003.
- Firm capacity for the Grasslands Pipeline is currently 90
million cubic feet per day with expansion possible to 200 million
cubic feet per day.
- Transportation rates are expected to decline in 2004 from
2003 levels due to the effects of a Federal Energy Regulatory
Commission rate order received in July 2003 and rehearing order
received in May 2004.
Natural Gas Distribution
This segment experienced a seasonal loss of $3.2 million for the
quarter. This compares to a loss of $2.5 million in the third
quarter of 2003. Rate relief approved by various public service
commissions was more than offset by higher operation and
maintenance costs, including payroll and benefit-related costs.
In March 2004, a natural gas rate case was filed with the North
Dakota Public Service Commission requesting an increase of $3.3
million annually, or 2.8 percent. Interim rate relief of $1.7
million was implemented with service rendered on or after May 3,
2004, subject to refund. In September 2004, the Commission
approved a settlement agreement which included an increase of
$2.5 million annually, or 2.1 percent, effective Oct. 1, 2004.
The following information highlights the key growth strategies,
projections and certain assumptions for this segment:
- Annual natural gas throughput for 2004 is expected to be
approximately 52 million decatherms.
- In April 2004, a natural gas rate case was filed with the
Montana Public Service Commission requesting an increase of $1.5
million annually, or 1.8 percent. The Commission has not acted
on the company's request for an interim increase of $500,000 on
an annual basis. A final order on this case is expected in early
2005.
- In June 2004, a natural gas rate case for the Black Hills
service area was filed with the South Dakota Public Utilities
Commission requesting an increase of $1.3 million annually, or
2.2 percent. A final order is expected in late 2004.
- In September 2004, a natural gas rate case was filed with
the Minnesota Public Utilities Commission requesting an increase
of $1.4 million annually, or 4.0 percent. The company requested
an interim increase of $1.4 million annually to be effective
Nov. 7, 2004. A final order is expected in mid-2005.
The company will host a webcast Oct. 19, 2004, beginning at 1:00
p.m. EDT to discuss third quarter earnings results and earnings
guidance for 2004. The event can be accessed at www.mdu.com. The
replay will be available beginning at 4:00 p.m. EDT on Oct. 19.
An audio replay will also be available by calling (877) 519-4471;
confirmation code 5240175.
In addition, on Tuesday, Oct. 26, 2004, the company will webcast
its presentation at the EEI Financial Conference. This webcast
begins at 1:30 p.m. EDT and can also be accessed at www.mdu.com.
The replay will be available beginning at 4:30 p.m. EDT on Oct. 26.
Risk Factors and Cautionary Statements that May Affect Future
Results
The information in this release includes certain forward-looking
statements, including earnings per share guidance and statements
by the chairman of the board, president and chief executive
officer of MDU Resources, within the meaning of Section 21E of
the Securities Exchange Act of 1934. Although the company
believes that its expectations are based on reasonable
assumptions, actual results may differ materially. Following are
important factors which could cause actual results or outcomes
for the company to differ materially from those discussed in
forward-looking statements.
- The company's natural gas and oil production business is
dependent on factors, including commodity prices, which cannot be
predicted or controlled.
- The construction and operation of power generation
facilities may involve unanticipated changes or delays which
could negatively impact the company's business and its results of
operations.
- The uncertain economic environment may have a general
negative impact on the company's future revenues.
- The company relies on financing sources and capital markets.
If the company is unable to obtain financing in the future, the
company's ability to execute its business plans, make capital
expenditures or pursue acquisitions that the company may
otherwise rely on for future growth could be impaired.
- Some of the company's operations are subject to extensive
environmental laws and regulations that may increase costs of
operations, impact or limit business plans, or expose the company
to environmental liabilities. One of the company's subsidiaries
is subject to litigation in connection with its coalbed natural
gas development activities.
- The company is subject to extensive government regulations
that may have a negative impact on its business and its results
of operations.
- The value of the company's investments in foreign operations
may diminish due to political, regulatory and economic conditions
and changes in currency exchange rates in countries where the
company does business.
- Competition is increasing in all of the company's businesses.
- Weather conditions can adversely affect the company's
operations and revenues.
- Other factors that could cause actual results or outcomes
for the company to differ materially from those discussed in
forward-looking statements include:
- Acquisition, disposal and impairment of assets or facilities
- Changes in operation, performance and construction of plant
facilities or other assets
- Changes in present or prospective generation
- Changes in anticipated tourism levels
- The availability of economic expansion or development opportunities
- Population growth rates and demographic patterns
- Market demand for, and/or available supplies of, energy products
and services
- Changes in tax rates or policies
- Unanticipated project delays or changes in project costs
- Unanticipated changes in operating expenses or capital expenditures
- Labor negotiations or disputes
- Inability of the various contract counterparties to meet
their contractual obligations
- Changes in accounting principles and/or the application of
such principles to the company
- Changes in technology
- Changes in legal proceedings
- The ability to effectively integrate the operations of
acquired companies
- Volatility of commodity price basis differentials
For a further discussion of these risk factors and cautionary
statements, refer to the Introduction and to Item 2 -
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Factors and Cautionary Statements
that May Affect Future Results of the company's most recent Form
10-Q.
MDU Resources Group Inc., a member of Standard & Poor's MidCap
400 index, provides value-added natural resource products and
related services that are essential to our country's energy and
transportation infrastructure. MDU Resources includes electric
and natural gas utilities, natural gas pipelines and energy
services, utility services, natural gas and oil production,
construction materials and mining, and domestic and international
independent power production. For more information about MDU
Resources, see the company's Web site at www.mdu.com or contact
the investor relations department at investor@mduresources.com.
* * * * * * * *
Contacts:
Vernon A. Raile - Senior Vice President and Chief Accounting Officer
(701) 222-7623 or
Cathi Christopherson - Vice President, Corporate Communications
(701) 222-7959
MDU Resources Group, Inc.
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
(In millions, where applicable)
(Unaudited)
Consolidated Statements of Income
Operating revenues:
Electric $ 47.9 $ 47.9 $ 134.7 $ 131.7
Natural gas distribution 32.4 27.7 208.2 181.1
Utility services 112.9 116.1 310.4 328.7
Pipeline and energy services 87.0 61.4 256.6 178.8
Natural gas and oil production 85.6 64.9 250.8 198.6
Construction materials and mining 486.9 426.5 973.6 811.3
Independent power production and
other 17.4 10.1 36.3 28.1
Intersegment eliminations (65.5) (38.5) (197.2) (126.2)
804.6 716.1 1,973.4 1,732.1
Operating expenses:
Fuel and purchased power 16.0 16.1 49.1 44.8
Purchased natural gas sold 24.3 19.9 158.6 123.6
Operation and maintenance 565.0 494.5 1,289.0 1,120.4
Depreciation, depletion and
amortization 59.2 47.7 160.5 138.7
Taxes, other than income 25.5 22.2 72.9 61.3
690.0 600.4 1,730.1 1,488.8
Operating income:
Electric 10.9 12.2 20.8 27.2
Natural gas distribution (4.7) (3.8) (2.6) 1.6
Utility services .1 3.4 (5.0) 9.2
Pipeline and energy services 2.4 8.7 16.5 27.2
Natural gas and oil production 43.3 28.0 128.3 91.0
Construction materials and mining 57.7 63.3 75.4 76.3
Independent power production and
other 4.9 3.9 9.9 10.8
114.6 115.7 243.3 243.3
Other income - net 10.9 2.5 25.3 11.1
Interest expense 14.3 13.6 43.8 39.3
Income before income taxes 111.2 104.6 224.8 215.1
Income taxes 39.5 39.1 70.9 78.4
Income before cumulative effect of
accounting change 71.7 65.5 153.9 136.7
Cumulative effect of accounting
change --- --- --- (7.6)
Net income 71.7 65.5 153.9 129.1
Dividends on preferred stocks .2 .2 .5 .5
Earnings on common stock:
Electric 5.6 6.3 9.7 12.9
Natural gas distribution (3.2) (2.5) (2.0) .4
Utility services (.6) 1.7 (4.8) 4.3
Pipeline and energy services (1.6) 4.6 5.5 14.1
Natural gas and oil production 27.4 16.5 78.8 46.1
Construction materials and mining 34.9 36.1 43.4 41.5
Independent power production and
other 9.0 2.6 22.8 9.3
$ 71.5 $ 65.3 $ 153.4 $ 128.6
Earnings per common share - basic:
Earnings before cumulative effect
of accounting change $ .61 $ .58 $ 1.32 $ 1.23
Cumulative effect of accounting
change --- --- --- (.07)
Earnings per common share - basic $ .61 $ .58 $ 1.32 $ 1.16
Earnings per common share - diluted:
Earnings before cumulative effect
of accounting change $ .60 $ .58 $ 1.31 $ 1.22
Cumulative effect of accounting
change --- --- --- (.07)
Earnings per common share -
diluted $ .60 $ .58 $ 1.31 $ 1.15
Dividends per common share $ .18 $ .17 $ .52 $ .49
Weighted average common shares
outstanding:
Basic 117.1 112.4 116.1 111.1
Diluted 118.3 113.4 117.2 111.9
Pro forma amounts assuming
retroactive application of
accounting change:
Net income $ 71.7 $ 65.5 $ 153.9 $ 136.7
Earnings per common share - basic $ .61 $ .58 $ 1.32 $ 1.23
Earnings per common share -
diluted $ .60 $ .58 $ 1.31 $ 1.22
Operating Statistics
Electric (thousand kWh):
Retail sales 595,473 630,208 1,721,927 1,760,045
Sales for resale 190,803 212,738 588,041 587,055
Natural gas distribution (Mdk):
Sales 3,120 3,110 24,842 25,915
Transportation 2,692 2,761 9,122 8,808
Pipeline and energy services (Mdk):
Transportation 34,579 22,914 85,013 69,893
Gathering 20,334 18,844 59,649 56,379
Natural gas and oil production:
Natural gas (MMcf) 15,074 13,470 44,376 40,367
Oil (000's of barrels) 455 453 1,362 1,380
Average realized natural gas
price $ 4.52 $ 3.91 $ 4.58 $ 3.98
Average realized oil price $ 35.74 $ 26.86 $ 33.33 $ 27.48
Construction materials and
mining (000's):
Aggregates (tons sold) 15,653 14,119 31,647 28,738
Asphalt (tons sold) 3,938 3,647 6,586 5,510
Ready-mixed concrete (cubic
yards sold) 1,426 1,161 3,239 2,588
Independent power production
and other:*
Net generation capacity - kW 279,600 279,600 279,600 279,600
Electricity produced and sold
(thousand kWh) 61,877 103,816 177,380 242,410
Other Financial Data**
Book value per common share $ 13.66 $ 12.40
Dividend yield (indicated annual
rate) 2.7% 3.0%
Price/earnings ratio*** 15.4x 14.4x
Market value as a percent of book
value 192.8% 181.6%
Return on average common equity*** 13.2% 13.4%
Fixed charges coverage, including
preferred dividends*** 4.7x 4.9x
Total assets $ 3,754.5 $ 3,398.3
Total equity $ 1,626.9 $ 1,418.7
Long-term debt (net of current
maturities) $ 912.4 $ 988.8
Capitalization ratios:
Common equity 63% 58%
Preferred stocks 1 1
Long-term debt (net of current
maturities) 36 41
100% 100%
*Excludes equity method investments
**Reported on a year-to-date basis only
***Represents 12 months ended
Note: Common stock share amounts reflect the company's three-for-two common
stock split effected in October 2003.