MDU Resources Group Inc. 2006 Annual Report Summary
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2006. MDU Resources Group, Inc. is a diversified natural resource company operating in the United States and internationally. Its principal segments include regulated electric and natural gas distribution (Montana-Dakota, Great Plains), construction services, pipeline and energy services, natural gas and oil production, construction materials and mining, and independent power production. The company employs approximately 11,526 people.
Key Financial Metrics
| Metric | 2006 | 2005 |
|---|---|---|
| Operating Revenues | $4,070.7 million | $3,452.4 million |
| Operating Income | $532.2 million | $449.2 million |
| Net Income | $315.8 million | $275.1 million |
| Earnings on Common Stock | $315.1 million | $274.4 million |
| Diluted EPS | $1.74 | $1.53 |
| Cash Flow from Operating Activities | $659.5 million | $483.2 million |
| Net Capital Expenditures | $603.3 million | $730.4 million |
| Total Assets | $4,903.5 million | $4,423.6 million |
| Long-Term Debt (net of current) | $1,170.5 million | $1,104.8 million |
| Common Equity | $2,149.9 million | $1,876.6 million |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated operating revenues increased 18% to $4.07 billion, driven by higher volumes in construction services, natural gas and oil production, and construction materials.
- Earnings Increase: Earnings on common stock rose 15% to $315.1 million. Key drivers included higher earnings from construction materials and mining (up 56%), construction services (up 91%), and pipeline/energy services (up 36%).
- Production Volumes: Natural gas production increased 5% and oil production increased 20% compared to 2005, aided by acquisitions in South Texas and Big Horn Basin.
- Independent Power Production: Earnings in this segment declined 80% to $4.5 million, primarily due to the absence of a $15.6 million gain from the 2005 sale of the Termoceara Generating Facility and higher interest costs related to the new Hardin Generating Facility.
- Discontinued Operations: The company recorded a loss of $2.2 million from discontinued operations, primarily related to the sale of Innovatum (cable and pipeline magnetization business).
Guidance, Outlook, and Risks
- 2007 Guidance: Management projects diluted earnings per share for 2007 in the range of $1.50 to $1.70. Long-term compound annual growth goals for EPS are 7% to 10%.
- Acquisitions: The company has a definitive agreement to acquire Cascade Natural Gas Corporation for approximately $475 million, expected to close in Q3 2007. It also plans to sell domestic independent power production assets, with closing expected in Q2 2007.
- Capital Expenditures: Estimated net capital expenditures for 2007 are $1.02 billion, significantly higher than 2006, largely due to the anticipated Cascade acquisition and electric system upgrades.
- Key Risks:
- Regulatory/Litigation: Ongoing litigation regarding Coalbed Natural Gas (CBNG) water discharge permits in Montana and Wyoming could restrict operations. A lawsuit regarding gas storage diversion at the Elk Basin Storage Reservoir is pending.
- Commodity Prices: Results are sensitive to fluctuations in natural gas and oil prices, though the company hedges 30-35% of 2007 natural gas production.
- Environmental: Potential liabilities related to the Portland, Oregon, Harbor Superfund Site, though the company believes it is not a responsible party.
Investor Verification Checklist
- Verify the status and regulatory approval timeline for the Cascade Natural Gas acquisition ($475 million).
- Monitor the outcome of CBNG litigation in Montana and Wyoming, specifically regarding water discharge permits and the Ninth Circuit injunction.
- Confirm the closing date and proceeds from the planned sale of domestic independent power production assets.
- Review the resolution of the Elk Basin Storage Reservoir litigation regarding gas diversion by Anadarko/Howell.
- Assess the impact of the Portland Harbor Superfund Site on potential future environmental liabilities.
- Track the execution of the 2007 capital expenditure plan, particularly the $79 million allocated to electric generation and the $282 million for natural gas and oil production.