MDU Resources Group, Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; filed November 3, 2010. Unaudited. MDU is a diversified energy and infrastructure company spanning regulated electric and natural gas utilities, pipeline and energy services, natural gas and oil production, construction services, and construction materials and contracting.
Financial performance and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Operating revenue | $1,125.9 million | $1,107.9 million | $2,867.1 million | $3,160.0 million |
| Operating income (loss) | $109.0 million | $160.3 million | $280.6 million | $(280.6) million |
| Net income (loss) | $61.0 million | $92.6 million | $151.7 million | $(195.9) million |
| Common EPS, diluted | $0.32 | $0.50 | $0.80 | $(1.07) |
| Operating margin | 9.7% | 14.5% | 9.8% | (8.9)% |
Q3 revenue rose about 2%, while common earnings fell about 34%. Nine-month revenue declined about 9%; the year-over-year return to profit largely reflects the absence of the 2009 $620 million pre-tax ($384.4 million after-tax) noncash write-down of natural gas and oil properties. Nine-month 2010 results include a $26.6 million pre-tax ($16.5 million after-tax) pipeline gathering arbitration charge.
- Cash flow: Nine-month operating cash flow was $371.5 million, down from $629.2 million. Capital expenditures were $340.2 million; acquisitions used $106.5 million. Investing cash outflow was $429.2 million and financing cash outflow was $81.2 million. Cash declined from $175.1 million at year-end 2009 to $36.3 million.
- Debt and liquidity: Debt carrying value was approximately $1.511 billion, including current maturities and short-term borrowings. Available capacity under credit facilities was $627.3 million. The current ratio was approximately 1.42. Common equity was 64% of total capitalization; fixed-charge coverage was 4.0 times for the trailing 12 months.
- Margins and segment trends: Utility electric earnings improved on rate increases and higher sales. Natural gas distribution remained seasonally loss-making in Q3. Construction services and construction materials earnings declined amid weaker workloads, volumes, and margins. Pipeline and energy services posted a Q3 loss, chiefly from the arbitration charge. Production earnings fell in Q3 as lower gas prices and production and higher depletion costs outweighed stronger oil prices and volumes.
- Common dividends were $0.1575 per share for Q3, versus $0.1550 a year earlier.
Material changes and management outlook
- Management projected 2010 diluted EPS of $1.10–$1.25. The filing states this range both excluding the arbitration charge and potential gain on the Brazilian transmission-lines sale and, in a parenthetical, including them; investors should clarify the guidance presentation.
- Management’s long-term compound annual EPS growth goal from operations remained 7%–10%. The company estimated 2010 capital expenditures of approximately $555 million and production about 6% below 2009. Production guidance was affected by lower natural-gas development spending, a shift toward oil-play acreage, and delays in well-completion services.
- At September 30, construction-services backlog was about $317 million, up from $264 million a year earlier; construction-materials backlog was about $464 million, down from $494 million. Management expected lower 2010 construction-materials volumes and margins than in 2009 and lower construction-services margins than in 2009.
- Management cited economic uncertainty, competition, commodity-price volatility, regulatory requirements, permitting, and environmental compliance as important challenges. Natural-gas and oil price assumptions and hedge coverage underpin production guidance.
Risks, contingencies, and unusual items
- Gathering arbitration: A panel awarded SourceGas approximately $26.6 million on October 15, 2010; MDU recorded the charge in Q3 and was assessing legal remedies to challenge the award.
- CBNG permits: A Montana Supreme Court ruling required reevaluation of discharge permits. A permit issued October 15, effective November 14, requires treatment and limits discharge to 1,700 gallons per minute. Management said the limit has insignificant current-production impact but could constrain future drilling.
- Power-plant environmental costs: Big Stone Station may need pollution controls under South Dakota regional-haze rules; MDU’s share was expected to exceed $100 million. Cost recovery and the choice among controls, retirement, or repowering remain uncertain.
- Other claims and commitments: Centennial faces a demand under a construction-contract guarantee related to a $146 million arbitration claim, plus additional claimed costs; MDU disputes the claims. Construction-related lawsuits include asserted damages of approximately $26.5 million and $6 million–$11 million. These are claims, not stated liabilities.
- Cascade reserved $6.4 million for remediation at a Washington manufactured-gas-plant site. Other environmental matters remain under investigation, with some potential costs not estimable from the filing.
- The planned sale of MDU’s Brazilian transmission-line interests had regulatory approval; financial closing was anticipated in 2010. Separately, Fidelity agreed in October 2010 to sell a 25% working interest in its Niobrara acreage.
Important facts for investors to verify
- How the $1.10–$1.25 EPS guidance treats the arbitration charge and possible Brazilian sale gain, and whether assumptions have changed.
- The status and financial outcome of the SourceGas arbitration challenge and the Brazilian transmission-lines sale.
- Rate-case decisions, Big Stone compliance options and recoverability, and the effect of the new CBNG permit on future development.
- Whether production, commodity-price, hedge, capital-spending, and construction-backlog expectations are being met.
- Cash conversion and funding needs: operating cash flow fell sharply, cash balances declined, and planned 2010 capital expenditures were approximately $555 million.