MDU Resources Group Inc. - 10-Q Summary (Period Ended June 30, 2007)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2007. MDU Resources Group, Inc. is a diversified natural resource company operating in electric and natural gas distribution, pipeline and energy services, natural gas and oil production, construction services, construction materials and mining, and independent power production. The company is a large accelerated filer incorporated in Delaware.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2007 | Six Months Ended June 30, 2006 |
|---|---|---|
| Total Operating Revenues | $1,769.9 million | $1,765.0 million |
| Net Income | $136.1 million | $124.7 million |
| Earnings on Common Stock | $135.8 million | $124.3 million |
| Diluted EPS | $0.74 | $0.69 |
| Operating Cash Flow | $138.6 million | $191.5 million |
| Capital Expenditures | $242.7 million | $240.6 million |
| Total Debt (Current + Long-term) | $1,355.9 million | $1,458.3 million |
| Cash and Cash Equivalents | $68.1 million | $114.8 million |
Material Changes vs. Prior Period
- Earnings Growth: Consolidated earnings increased by $11.5 million (9.2%) for the six months ended June 30, 2007, compared to the prior year. This was driven primarily by higher income from discontinued operations ($12.7 million vs. $3.8 million) and increased earnings in the electric and construction services segments.
- Discontinued Operations: The company reclassified domestic independent power production assets and Innovatum as discontinued operations. The increase in income from these operations is largely due to the absence of depreciation expense on assets held for sale and earnings from the Hardin Generating Station.
- Segment Performance:
- Electric: Earnings increased $3.1 million due to higher retail sales volumes and margins.
- Construction Services: Earnings increased $5.2 million due to higher construction margins and equipment sales.
- Natural Gas & Oil Production: Earnings decreased $6.4 million due to higher depreciation, depletion, and amortization (DD&A) and lease operating costs, partially offset by a 4% increase in production.
- Construction Materials & Mining: Earnings decreased $0.7 million, reflecting lower volumes in aggregates and ready-mixed concrete due to a slowdown in the residential housing market.
- Cash Flow: Operating cash flow decreased by $52.9 million, primarily due to increased cash used related to discontinued operations (higher tax payments on estimated gains from asset sales) and increased working capital requirements.
Guidance, Outlook, and Risks
- 2007 EPS Guidance: Management projects diluted earnings per share for 2007 in the range of $2.15 to $2.35. This includes an estimated $90 million after-tax gain from the sale of domestic independent power production assets. Excluding this gain, guidance is $1.65 to $1.85.
- Subsequent Events:
- Acquisition: On July 2, 2007, the company acquired Cascade Natural Gas Corporation for approximately $475 million.
- Divestiture: On July 10, 2007, the company sold its domestic independent power production business (Centennial Power and CEM) for $636 million, expecting an after-tax gain of approximately $90 million.
- Production Outlook: The company expects combined natural gas and oil production to increase 5% to 7% in 2007. Long-term compound annual growth goals for production and earnings per share are 7% to 10%.
- Risks and Contingencies:
- Legal Proceedings: Significant litigation involves coalbed natural gas (CBNG) operations in Montana and Wyoming, including challenges to water discharge permits and environmental impact statements. A settlement was reached in the "Royalties Case" in March 2007.
- Regulatory: Montana-Dakota filed for an electric rate increase in July 2007. Williston Basin is involved in litigation regarding gas storage reservoir pressure depletion.
- Market Risk: The company utilizes derivatives to hedge commodity price risks. As of June 30, 2007, approximately 35-40% of estimated natural gas production for the remainder of 2007 was hedged.
Investor Verification Checklist
- Asset Sale Closing: Verify the final closing terms and actual gain realization from the sale of the domestic independent power production assets (expected $90 million after-tax).
- Cascade Integration: Monitor the integration of Cascade Natural Gas and the impact on the natural gas distribution segment's revenue and earnings.
- CBNG Litigation Status: Track the outcome of the Ninth Circuit decision regarding the injunction on CBNG development in the Montana Powder River Basin and the status of water discharge permit challenges.
- Production Volumes: Confirm if the 5-7% production growth target is met, considering delays in infrastructure installation and weather conditions mentioned in the filing.
- Capital Expenditures: Review the execution of the estimated $1.1 billion in 2007 net capital expenditures, noting that ~46% is tied to the Cascade acquisition.