Business context and reporting period
MDU Resources Group, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The diversified company operates regulated electric and natural gas utilities, pipelines and energy services, oil and gas exploration and production, construction materials and contracting, and construction services. Management cautions that seasonal operations can make interim results unrepresentative of full-year performance.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $968.0 million | $930.8 million | $1,820.8 million | $1,832.6 million |
| Operating income | $91.7 million | $82.3 million | $162.8 million | $160.4 million |
| Income from continuing operations | $49.0 million | $45.2 million | $84.9 million | $87.8 million |
| Net income | $54.1 million | $45.1 million | $89.9 million | $88.0 million |
| Common EPS, diluted | $0.29 | $0.24 | $0.47 | $0.46 |
| Operating margin | 9.5% | 8.8% | 8.9% | 8.7% |
At June 30, cash and cash equivalents were $101.6 million. Total debt was approximately $1.666 billion, including $282.2 million due within one year and $1.383 billion of long-term debt. The company reported $392.9 million of available capacity under credit facilities. Common stockholders’ equity was 63% of total capitalization, versus 66% a year earlier.
For the first six months, operating cash flow was $174.7 million, down from $254.3 million; investing cash outflow was $413.6 million, compared with $218.9 million; and financing cash inflow was $177.9 million, versus a $149.8 million outflow. Capital expenditures were $388.4 million and acquisition spending was $65.8 million. The company paid $63.6 million in dividends.
Material changes versus the prior comparable period
- Q2 revenue increased 4.0%, while six-month revenue edged down 0.6%. Q2 earnings on common stock rose to $53.9 million from $44.9 million; six-month earnings rose to $89.6 million from $87.7 million.
- Q2 results included a $15.0 million after-tax benefit from a pipeline-gathering contract dispute and $5.1 million of after-tax discontinued-operations income, largely reflecting estimated insurance recoveries. These items materially contributed to the quarterly earnings increase.
- Natural gas distribution posted a Q2 loss of $6.4 million, versus earnings of $1.9 million, and six-month earnings fell 35% to $19.1 million. Warmer weather reduced retail sales volumes; the six-month comparison also reflected higher operating costs and taxes.
- Pipeline and energy services earnings increased to $15.8 million for Q2 and $18.6 million for six months, benefiting substantially from the litigation-related gain. Lower gathering volumes and storage revenue were offsets.
- Exploration and production six-month earnings fell 18% to $30.9 million, amid lower natural gas prices and production, partly offset by increased oil production. Construction services earnings rose 86% to $20.1 million for six months. Construction materials and contracting reported a six-month loss of $17.1 million, slightly wider than the prior-year loss.
- Debt due within one year increased to $282.2 million from $139.3 million at December 31, 2011. Long-term debt was $1.383 billion, compared with $1.285 billion at year-end.
Outlook, commentary, risks and unusual items
Management projected 2012 diluted EPS of $1.00 to $1.25, with approximately 35% of earnings expected in Q3 and 25% in Q4. The long-term annual EPS growth goal from operations was 7% to 10%. Estimated 2012 capital expenditures were approximately $920 million; first-half net capital expenditures were $465.4 million. Management said funding would come from internal cash generation, credit facilities and long-term debt issuance.
- Exploration and production capital spending was raised to approximately $475 million. Management expected 2012 oil production to increase 25%–30% and natural gas production to decrease 25%–30%, reflecting a focus on oil and curtailments, divestments and deferred gas development. EPS guidance assumed August–December NYMEX prices of $85–$95 per barrel for oil and $2.75–$3.25 per Mcf for natural gas; the filing notes these estimates exclude basis differentials.
- Construction materials backlog was approximately $636 million, versus $649 million a year earlier; construction services backlog was approximately $344 million, versus $364 million. Management expected slightly lower 2012 margins for materials and contracting and higher margins for construction services.
- The company acquired a 50% interest in western North Dakota midstream assets for approximately $66 million and expects to fund 60% of certain future capital expenditures under the agreement. It also planned major utility, pipeline, generation and production investments.
- Key risks include commodity-price and basis volatility, reserve-estimate uncertainty and possible impairment, regulatory and environmental compliance costs, weather and seasonal demand, construction-market conditions, and potential higher multiemployer pension contributions. The filing describes environmental and litigation matters, including the Target Range gravel pit and manufactured-gas-plant sites; management said it did not expect the disclosed legal proceedings to materially affect financial position, results or cash flows.
- Credit agreements include restrictive covenants and cross-default provisions; the company reported compliance at June 30. Approximately $604 million of surety bonds were outstanding but not recorded on the balance sheet. Other guarantees and contingencies are described in the filing.
Important facts for investors to verify
- How much of reported Q2 earnings growth is attributable to the $15.0 million after-tax pipeline litigation benefit and discontinued-operations income, and whether these benefits recur.
- Whether full-year EPS guidance of $1.00–$1.25 remains achievable given weather-sensitive utility results, commodity assumptions, production changes and seasonality.
- Execution and funding of the approximately $920 million capital-spending plan, including the impact of additional borrowing and near-term debt maturities.
- Oil and gas production, realized prices, hedge coverage and reserve assumptions, including potential impairment exposure if prices or estimates weaken.
- Developments in material litigation, environmental remediation, regulatory proceedings and contingent guarantees, including the potential for costs beyond recorded accruals.