MDU Resources Group, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. MDU is a diversified energy and infrastructure company spanning regulated electric and natural gas utilities, pipelines and energy services, oil and gas exploration and production, construction materials, and construction services.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Operating revenue | $4.075 billion | $4.050 billion |
| Operating income | $19.2 million | $406.4 million |
| Net income (loss) attributable to common stock | $(1.4) million | $212.3 million |
| Diluted EPS | $(0.01) | $1.12 |
| Operating cash flow | $584.7 million | $626.6 million |
| Capital expenditures | $872.9 million | $497.0 million |
| Cash and cash equivalents, year-end | $49.0 million | $162.8 million |
| Total long-term debt, including current maturities | $1.745 billion | $1.425 billion |
- Operating margin was approximately 0.5%, versus 10.0% in 2011, chiefly reflecting $391.8 million of pretax noncash oil and gas property write-downs ($246.8 million after tax).
- Operating cash flow less capital expenditures was approximately negative $288.2 million. Cash flow from operations fell $41.9 million, with higher working-capital requirements a major factor; investing outflows rose with increased capital spending and acquisitions.
- Total assets were $6.682 billion. Common equity was 60% of capitalization, down from 66% in 2011. The company reported $398.6 million of available capacity under outstanding credit facilities and was in compliance with applicable debt covenants at year-end.
- Common dividends declared were $0.675 per share, up from $0.655. The year-end book value per common share was $13.95, compared with $14.62.
Changes and segment performance
- Revenue increased approximately 0.6%, but earnings before discontinued operations fell to a $15.0 million loss from $225.3 million of earnings. Exploration and production reported a $177.3 million loss, compared with $80.3 million of earnings in 2011, primarily because of the impairment, lower natural gas prices and lower gas production.
- Exploration and production output declined to 10.1 million BOE from 11.1 million BOE. Oil production rose 36%, while natural gas production fell 27%; proved reserves declined to 80.5 million BOE from 97.7 million BOE, including negative revisions largely associated with lower natural gas prices.
- Natural gas distribution earnings declined 23% to $29.4 million, chiefly reflecting warmer weather and lower retail volumes. Electric earnings rose 5% to $30.6 million, and pipeline and energy services earnings rose 15% to $26.6 million, including a $15.0 million after-tax litigation-related benefit.
- Construction materials earnings increased 23% to $32.4 million; construction services earnings increased 78% to $38.4 million, supported by higher workloads and margins. Backlogs at year-end were $406 million for construction materials and $325 million for construction services.
Outlook, risks and unusual items
- Management projected 2013 diluted EPS of $1.20–$1.35 and stated a long-term annual EPS growth goal of 7%–10%. These are forward-looking estimates, not assurances of results.
- Planned 2013 capital expenditures were approximately $807 million net, including $400 million for exploration and production. Management expected oil production to increase 25%–30%, natural gas production to decrease 15%–25%, and NGL production to be flat to slightly higher.
- Major planned investments include an 88-MW natural-gas turbine estimated at $86 million, with late-2014 service targeted, and the company’s share of a Bakken diesel topping plant estimated at $280–$300 million in total project cost. Big Stone Station environmental controls were estimated to cost MDU approximately $125 million, with completion expected in 2015.
- Key risks include commodity-price and reserve-estimation sensitivity, further oil and gas ceiling-test impairments, regulatory and environmental requirements, weather, construction demand and backlog execution, access to financing, and pension and multiemployer plan obligations. Approximately 45% of the multiemployer pension plans to which the company contributes were reported in endangered, seriously endangered or critical status.
- Contingencies include the appeal risk associated with a vacated $22 million construction-contract arbitration award; claims involving a Montana gravel pit and natural gas gathering operations; and manufactured-gas-plant and other environmental matters. Accrued liabilities for litigation and environmental contingencies totaled $22.5 million at year-end. The filing says some potential outcomes and costs cannot be reliably estimated.
- Management reported effective internal control over financial reporting; Deloitte & Touche issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether 2013 EPS and production projections were achieved, and how commodity prices and hedges affected results.
- Whether oil and gas reserves, reserve revisions and future ceiling-test assumptions support the carrying value of the exploration and production assets.
- How the substantial 2013–2015 capital program was funded, and the resulting effects on debt, liquidity and shareholder returns.
- Progress, cost and regulatory recovery for the planned generation, environmental-control and diesel-plant projects.
- Developments in material litigation, environmental claims, pension funding requirements and restrictions on subsidiary dividends.