MDU Resources Group, Inc. — 2010 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2010; it also reports unaudited fourth-quarter results. MDU is a diversified energy and infrastructure company with regulated electric and natural gas utilities, construction services, pipelines and energy services, natural gas and oil production, and construction materials and contracting businesses.
Financial performance and liquidity
| Metric | 2010 | 2009 |
|---|---|---|
| Operating revenue | $3.910 billion | $4.177 billion |
| Operating income (loss) | $410.7 million | $(153.1) million |
| Net income (loss) | $240.7 million | $(123.3) million |
| Earnings (loss) on common stock | $240.0 million | $(124.0) million |
| Diluted EPS | $1.27 | $(0.67) |
| Cash from operating activities | $551.6 million | $846.7 million |
| Cash and cash equivalents at year-end | $222.1 million | $175.1 million |
| Total long-term debt, including current maturities | $1.507 billion | $1.499 billion |
- Revenue fell about 6%; operating income was 10.5% of revenue in 2010, versus an operating loss in 2009. The prior-year result included a $620 million pretax noncash write-down of natural gas and oil properties.
- Operating cash flow declined about $295 million, primarily due to a $238 million increase in working-capital requirements. Net capital expenditures were $495 million; cash used in investing activities was $408 million.
- Year-end available capacity under company and subsidiary credit facilities was $609.6 million. Common equity was 64% of capitalization and debt 36%. The company reported fixed-charge coverage of 4.1 times.
- Common dividends were $0.635 per share for 2010, up from $0.6225 in 2009.
- Fourth-quarter 2010 revenue was $1.043 billion, net income $88.9 million, and diluted EPS $0.47, compared with revenue of $1.017 billion, net income of $72.6 million, and diluted EPS of $0.38 in fourth-quarter 2009.
Material changes and segment results
- Recovery from 2009's large oil-and-gas property impairment drove the return to profitability. Natural gas and oil production earned $85.6 million in 2010 versus a $296.7 million loss in 2009; higher oil prices and oil production helped, while lower gas prices and gas production were offsets.
- Electric earnings rose to $28.9 million from $24.1 million, mainly on higher retail margins and sales. Natural gas distribution earnings rose to $36.9 million from $30.8 million, including a $4.8 million tax benefit.
- Construction services earnings declined to $18.0 million from $25.6 million, reflecting lower workloads and margins. Construction materials and contracting earnings fell to $29.6 million from $47.1 million, as competition and weak residential and commercial markets pressured volumes and margins.
- Pipeline and energy services earnings declined to $23.2 million from $37.8 million. Results included a $26.6 million pretax ($16.5 million after-tax) arbitration charge and lower gathering and transportation volumes.
- The company sold most of its Brazilian transmission-line interests, recognizing a $22.7 million pretax ($13.8 million after-tax) gain. It also recorded a $3.3 million after-tax loss from discontinued operations.
Outlook, risks, contingencies, and unusual items
- Management projected 2011 diluted EPS of $1.05 to $1.30 and stated long-term EPS growth goals of 7% to 10% annually from operations. The outlook is subject to market, operating, regulatory, and other uncertainties.
- Estimated 2011 net capital expenditures were $561 million, with management expecting to fund them from operating cash flow. Oil production was forecast to increase 5%–10%, while natural gas production was expected to decrease 4%–8%. The production segment planned approximately $306 million of 2011 capital spending.
- Construction services backlog was approximately $373 million at year-end, compared with $383 million a year earlier. Construction materials and contracting backlog was $420 million, down from $459 million; management expected 2011 volumes and margins to be comparable to 2010.
- Environmental compliance could require significant investment. MDU’s share of the Big Stone Station air-control upgrade could exceed $100 million; the company intends to seek recovery through rates. Potential greenhouse-gas and coal-ash regulation could raise costs, and the ultimate effects were uncertain.
- The company had reserved $45.3 million for litigation and environmental matters, including the gathering arbitration charge. Other notable matters include a disputed construction-contract guarantee claim seeking $146 million plus additional damages, manufactured-gas-plant remediation exposures, and the Portland Harbor Superfund matter. Management said the guarantee claims were without merit and did not believe material Harbor remediation costs were probable.
- At year-end, pension-plan accumulated benefit obligations exceeded plan assets by approximately $96.9 million. Management expected approximately $34.2 million of 2011 pension contributions; multi-employer plan funding needs remain a risk.
- Other key risks include commodity-price and reserve-estimation volatility, construction-market weakness and backlog conversion, weather, regulatory cost recovery, access to capital, and potential environmental or legal obligations. The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Most important facts for investors to verify
- How much of the earnings rebound reflects recurring operations versus the absence of the 2009 impairment and the 2010 Brazilian sale gain?
- Whether the 2011 EPS outlook, capital plan, and production targets were achieved, and how sensitive results were to commodity prices and hedges.
- Cash-flow conversion and working-capital trends, alongside debt maturities, credit-facility availability, and compliance with debt covenants.
- Rate-case outcomes and recovery of environmental costs, particularly the Big Stone upgrade and manufactured-gas-plant remediation.
- Developments in the gathering arbitration and construction-guarantee disputes, pension funding, and the realization of construction backlogs.