Business context and reporting period
MDU Resources Group, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. Its diversified businesses include regulated electric and natural gas utilities, pipeline and energy services, natural gas and oil production, construction services, and construction materials and contracting. Results are seasonal; interim performance may not indicate full-year results.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenue | $930.8 million | $906.4 million | $1,832.6 million | $1,741.2 million |
| Operating income | $82.3 million | $88.7 million | $160.4 million | $171.6 million |
| Net income | $45.1 million | $48.9 million | $88.0 million | $90.7 million |
| Basic and diluted EPS | $0.24 | $0.26 | $0.46 | $0.48 |
Revenue rose 2.7% in Q2 and 5.2% year to date, while common earnings fell about 8% and 3%, respectively. Operating margins were approximately 8.8% in Q2 versus 9.8% a year earlier, and 8.8% year to date versus 9.9%. The quarterly dividend was $0.1625 per share, up from $0.1575.
For the six months, operating cash flow was $254.3 million, compared with $203.4 million; capital expenditures were $224.9 million, versus $237.5 million. Investing cash use was $218.9 million, improved from $330.9 million, principally because prior-year acquisitions were higher. Financing used $149.8 million, compared with $18.3 million provided in the prior-year period. Cash declined $114.3 million from year-end to $107.8 million.
At June 30, cash was $107.8 million and available capacity under credit facilities was $619.7 million. Total long-term debt, including amounts due within one year, was $1.432 billion, down from $1.507 billion at December 31, 2010. No short-term borrowings were outstanding. Current assets were $1.071 billion and current liabilities $723.4 million. Common equity was 66% of total capitalization, and fixed-charge coverage was 4.0 times for the trailing 12 months.
Material changes versus the prior comparable period
- Q2 earnings declined mainly because pipeline transportation and storage activity weakened and natural gas production, realized gas prices and production margins fell. Higher oil prices and stronger construction-services activity partly offset these effects.
- Year-to-date natural gas and oil production earnings fell to $37.6 million from $46.3 million: gas production and realized gas prices declined, and operating and depletion costs increased. Higher oil prices and production partly offset the decline.
- Pipeline and energy services earnings fell to $11.7 million from $18.3 million year to date, reflecting lower transportation, storage and gathering volumes.
- Construction services earnings increased to $10.8 million from $3.1 million year to date, supported by improved Western-region workload and margins. Construction materials and contracting recorded a $16.4 million loss, compared with a $14.5 million loss, amid weak demand, competition, weather delays and lower margins.
- Utility earnings improved year to date: natural gas distribution rose to $29.4 million from $23.4 million, and electric rose to $13.3 million from $10.8 million. Colder weather, retail volumes and rate increases contributed; a $1.2 million tax benefit helped electric results.
Outlook, management commentary, risks and unusual items
Management projected 2011 diluted EPS of $1.05–$1.30 and long-term operating EPS growth goals of 7%–10% annually. It expected roughly 30% of annual earnings in each of the third and fourth quarters. Estimated 2011 capital expenditures were approximately $570 million, expected to be funded entirely from operating cash flow; natural gas and oil production capital spending was projected at approximately $300 million.
Production guidance called for 1%–5% oil growth and an 8%–12% gas decline in 2011, citing rain and flooding, natural declines and deferred gas development amid low prices. The company reported hedges covering approximately 55%–60% of estimated second-half 2011 gas production and 60%–65% of oil production. Construction-services backlog was approximately $364 million; construction-materials backlog was approximately $649 million, 93% public work. The latter segment expected 2011 volumes comparable to 2010.
Key exposures include commodity-price volatility, regulatory and environmental compliance costs, construction-market conditions, weather, and the ability to recover utility and environmental investment in rates. The company said its share of Big Stone Station air-quality upgrades could exceed $100 million. Its 88-MW gas turbine proposal was estimated at $85.6 million, with a projected 2015 in-service date. The filing also highlights uncertainty around greenhouse-gas rules, hydraulic-fracturing regulation, and multiemployer pension obligations.
Unusual and contingent items include a $4.2 million first-quarter tax benefit from favorable resolution of prior-year tax matters; a $3.6 million increase in unrecognized tax positions in Q2, largely related to tax years under examination; and $40.7 million reserved for potential litigation and environmental liabilities. Disputed matters include a $149.7 million construction-contract arbitration demand, a pavement-defect claim alleging $21.9 million plus interest and fees, and an appealed $26.6 million gathering-contract arbitration award. Cascade’s pipeline-safety case was settled after quarter-end for a $425,000 payment, with up to $1.8 million in suspended penalties tied to remediation. The company states it intends to defend certain claims and does not expect other ordinary-course proceedings to materially affect its financial position, results or cash flows.
Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the $1.05–$1.30 EPS outlook and projected production, capital spending and cash-flow funding remain achievable, particularly given commodity prices and weather-related disruption.
- Whether the construction-materials loss, lower pipeline activity and production-cost increases improve, and whether construction backlogs convert to profitable work.
- Progress on Big Stone environmental upgrades, proposed generation and transmission projects, regulatory approvals, and recovery of costs from customers.
- Developments in the LPP arbitration, runway claim, gathering-contract appeal, Cascade safety settlement and environmental matters, including adequacy of reserves and insurance coverage.
- Liquidity and refinancing access: the company had $619.7 million of available facility capacity, but also reported $688 million of outstanding surety bonds and other guarantees and commitments.