MDU Resources Group, Inc. — Q3 2013 Form 10-Q
Business context and reporting period. Diversified natural-resource and infrastructure company with regulated electric and gas utilities, pipeline and energy services, oil and gas exploration and production, construction materials, and construction services businesses. The filing covers the quarter and nine months ended September 30, 2013; results are unaudited and some businesses are seasonal.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $1.286 billion | $1.174 billion | $3.278 billion | $2.994 billion |
| Operating income (loss) | $149.9 million | $(34.0) million | $345.8 million | $128.7 million |
| Net income (loss) | $84.4 million | $(29.7) million | $187.3 million | $60.2 million |
| Earnings per diluted common share | $0.44 | $(0.16) | $0.99 | $0.32 |
| Operating cash flow | Not presented by quarter | $429.0 million | $329.4 million |
Cash flow and investment. Nine-month capital expenditures were $648.5 million, versus $629.8 million in 2012. Investing activities used $605.4 million; financing activities provided $193.7 million. Cash increased $17.1 million from year-end 2012 to $66.2 million. Management estimated 2013 net capital expenditures of approximately $820 million.
Debt and liquidity. At September 30, 2013, long-term debt, including amounts due within one year, was $2.012 billion; short-term borrowings were $7.0 million. Cash was $66.2 million and reported available capacity under company and subsidiary credit facilities was $345.8 million. Total equity was $2.750 billion; equity was 58% of total capitalization, compared with 61% a year earlier. Nine-month dividends paid were $65.7 million; the declared dividend was $0.1725 per share for Q3.
Material changes and operating drivers
- Consolidated earnings rose sharply from Q3 and nine-month 2012, substantially because 2012 included a $160.1 million pretax ($100.9 million after-tax) noncash write-down of oil and gas properties. The filing cautions that this comparison is not solely indicative of underlying improvement.
- Exploration and production benefited from higher oil output and realized prices: nine-month oil production rose 40%, while natural gas production fell 18%. Commodity derivatives produced realized and unrealized losses in 2013, reducing earnings.
- Construction materials and contracting earnings increased to $49.2 million for Q3 and $38.6 million for nine months, reflecting stronger aggregate, asphalt and other product margins. Construction services earnings also increased, supported by higher workloads and equipment margins.
- Pipeline and energy services nine-month earnings declined to $1.3 million from $21.9 million, including the absence of a $15.0 million after-tax 2012 litigation-related benefit and higher 2013 gathering-asset impairments. Low gas prices and reduced gathering volumes also weighed on results.
- Natural gas distribution had a seasonal Q3 loss of $11.2 million, compared with $8.8 million. Nine-month earnings improved to $15.4 million from $10.3 million, helped by colder weather, higher sales volumes and a $2.8 million after-tax business-sale gain.
Outlook, risks and unusual items
- Management raised 2013 adjusted diluted EPS guidance to $1.35–$1.45, excluding discontinued operations, a $3.4 million after-tax unrealized commodity-derivative loss and a $9.0 million after-tax gathering-asset impairment. GAAP EPS guidance was $1.30–$1.40. Long-term EPS growth goals were 7%–10% annually.
- Management projected approximately $400 million of 2013 exploration and production capital spending, 30%–35% oil-production growth, a slight decrease in NGL output and a 15%–20% decrease in natural gas production. Results remain sensitive to commodity prices, production performance and derivative marks.
- Dakota Prairie Refining, a 50%-owned project with Calumet, was under construction and expected to begin operations in late 2014. Estimated project cost was approximately $300 million; projected first-year EBITDA was $70–$90 million to be shared equally. The company consolidates the project as the primary beneficiary of a variable-interest entity and guarantees its $75 million term loan.
- Other planned growth projects include an estimated $77 million, 88-MW gas turbine targeted for service in Q3 2014, and substantial utility, pipeline and transmission investments. Regulatory approvals, permitting, construction costs and timely rate recovery are key execution risks.
- Regulatory proceedings included utility rate cases and environmental cost-recovery requests. WBI Energy Transmission filed a FERC rate case seeking a $28.9 million annual increase. The filing also describes environmental remediation matters, royalty and contract litigation, and other contingencies; management stated that reasonably possible losses beyond recorded accruals were not expected to materially affect financial position, results or cash flows.
- Accrued liabilities for contingencies were $30.8 million. Approximately $552 million of surety bonds were outstanding and not reflected on the balance sheet. The company also disclosed $2.183 billion of purchase commitments and $2.012 billion of long-term debt obligations.
- Oil and gas property costs were below the full-cost ceiling at September 30, 2013, but lower commodity prices, reserve revisions or higher costs could trigger future noncash write-downs. Environmental rules, including potential greenhouse-gas controls, could increase costs or constrain operations.
Most important facts for investors to verify
- Whether full-year EPS lands within management’s adjusted and GAAP guidance, and reconcile the specified exclusions to reported results.
- Whether oil growth, natural-gas declines, realized prices and derivative settlements match the operating assumptions underlying guidance.
- Whether construction margins and backlogs convert into revenue and cash flow; reported backlogs were $525 million for construction materials and $433 million for construction services.
- Funding, construction progress, permits, startup timing and actual economics of Dakota Prairie Refinery and other major capital projects.
- Credit-facility availability, debt maturities, capital-spending funding needs, and the potential cash or earnings effects of regulatory and legal contingencies.