MDU Resources Group, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended March 31, 2010; filed May 5, 2010. MDU is a diversified natural-resource and infrastructure company, with regulated electric and natural-gas utilities and businesses in pipeline and energy services, natural-gas and oil production, construction services, and construction materials and contracting. Results are unaudited. Management cautions that seasonal operations mean first-quarter results may not indicate full-year performance.
Key financial metrics
| Metric | Q1 2010 | Q1 2009 or comparison |
|---|---|---|
| Operating revenue | $834.8 million | $1,094.0 million, down 23.7% |
| Operating income (loss) | $82.9 million | $(540.9) million |
| Operating margin | 9.9% | (49.4)% |
| Net income (loss) | $41.8 million | $(343.8) million |
| Common earnings (loss) per diluted share | $0.22 | $(1.87) |
| Cash from operating activities | $85.1 million | $247.8 million |
| Capital expenditures | $123.9 million gross; $122.5 million net | $145.4 million gross |
| Cash and cash equivalents | $106.7 million at March 31 | $175.1 million at December 31, 2009 |
| Debt | $1.50 billion, including current maturities | $1.50 billion at December 31, 2009 |
Current assets were $989.8 million and current liabilities $662.9 million at March 31, 2010. The current ratio was approximately 1.49. The company reported $7.7 million of short-term borrowings and $72.6 million of long-term debt due within one year. Common stockholders’ equity was 63% of total capitalization.
Material changes versus the prior comparable period
- The earnings rebound primarily reflects the absence of the prior-year $620.0 million pretax ($384.4 million after-tax) noncash natural-gas and oil property write-down. Q1 2010 operating income and earnings therefore should not be read as an equivalent improvement in recurring operations.
- Revenue fell by $259.2 million, largely reflecting lower natural-gas prices passed through to utility customers, lower construction activity, and lower natural-gas production revenue. Oil revenue rose with substantially higher realized oil prices.
- Operating cash flow declined $162.7 million, mainly due to higher working-capital requirements, including recoverable gas costs and weaker cash collections at construction and production businesses.
- Construction services earnings fell to $0.1 million from $8.6 million amid lower workloads and margins. Construction materials and contracting reported a seasonal loss of $20.1 million, versus $15.7 million, reflecting lower volumes and margins.
- Pipeline and energy services earnings rose to $8.8 million from $6.4 million, while natural-gas and oil production earnings were $22.2 million versus a prior-year loss of $373.3 million, heavily affected by the write-down.
Outlook, management commentary, risks and unusual items
- Management projected 2010 diluted EPS of $1.10–$1.35 and long-term annual EPS growth from operations of 7%–10%. The company expected 2010 production of natural gas and oil combined to be 3%–6% below 2009 levels.
- Estimated 2010 capital expenditures were approximately $618 million, including investment in utility systems, generation, pipelines, and production properties. Management cited approximately $375 million of planned spending for natural-gas and oil production.
- Management’s production guidance assumed May–December natural-gas price ranges of $4.00–$5.00 per Mcf across specified indices and NYMEX crude oil of $78–$83 per barrel. It reported hedges covering approximately 50% of estimated natural-gas and oil production for the last nine months of 2010.
- A $113 million acquisition of Green River Basin natural-gas properties, including 63 Bcfe of proved reserves, closed April 29, 2010, after quarter-end; the price remained subject to customary adjustments.
- Rate matters include Wyoming electric rates approved at an annual increase of $2.7 million effective May 1, 2010, and a North Dakota request for a $15.4 million annual increase filed in April. A proposed North Dakota settlement for recovery of about $10.2 million of Big Stone Station II costs was awaiting commission action.
- Key risks include commodity-price volatility and potential future impairment of oil and gas properties; litigation and permitting risk affecting coalbed-natural-gas operations; proposed greenhouse-gas regulation and associated compliance costs; and ongoing weakness and margin pressure in construction markets.
- Contingencies include an arbitration demand seeking $146 million plus additional damages under a construction-contract guarantee; environmental remediation exposures, including a $6.4 million reserve at a Washington manufactured-gas-plant site; and approximately $605 million of outstanding surety bonds. The company disputes certain claims and states that some outcomes or liabilities cannot yet be estimated.
- Utility and production derivatives expose the company to commodity and counterparty risks. Certain agreements contain collateral or cross-default provisions; the filing reports $22.8 million and $12.4 million of liability-position derivatives with credit-risk-related contingent features at Cascade and Fidelity, respectively.
Important facts for investors to verify
- How much of the earnings improvement reflects recurring operations versus the absence of the 2009 noncash impairment.
- Whether operating cash flow and working capital improve, and how the company funds planned capital spending and the post-quarter acquisition.
- Progress on the North Dakota rate request and Big Stone Station II cost recovery, and the effect of approved Wyoming rates.
- Developments in coalbed-natural-gas litigation, environmental matters, and the $146 million-plus arbitration demand, including potential financial exposure.
- Whether production, commodity-price, hedge, and EPS assumptions underlying 2010 guidance are achieved; guidance is forward-looking and subject to stated risks.