MDU Resources Group, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. MDU is a diversified company spanning regulated electric and natural gas utilities, pipelines and energy services, oil and gas production, construction services, and construction materials and contracting. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Operating revenue | $906.4 | $958.0 | $1,741.2 | $2,052.0 |
| Operating income (loss) | $88.7 | $100.1 | $171.6 | $(440.9) |
| Net income (loss) | $48.9 | $55.3 | $90.7 | $(288.5) |
| EPS, diluted | $0.26 | $0.30 | $0.48 | $(1.57) |
- Q2 revenue declined about 5%; net income declined about 12%. Operating margin was approximately 9.8%, compared with 10.4% a year earlier.
- First-half revenue fell about 15%, but results swung to profit from a loss. The comparison is dominated by a $620.0 million pretax ($384.4 million after-tax) noncash oil and gas property write-down recorded in Q1 2009.
- First-half operating cash flow was $203.4 million, down from $398.4 million. Investing used $330.9 million, including $106.5 million for acquisitions; financing provided $18.3 million. Cash declined $109.3 million from year-end 2009 to $65.8 million.
- At June 30, current assets were $969.3 million and current liabilities $640.7 million. Balance-sheet debt comprised $3.7 million of short-term borrowings, $72.6 million due within one year, and $1,508.7 million of long-term debt. The filing reports compliance with applicable debt covenants.
- Common-stockholder equity was 62% of total capitalization. Fixed-charge coverage, including preferred dividends, was 4.5 times for the 12 months ended June 30, 2010.
- Quarterly dividend was $0.1575 per common share, up from $0.1550; first-half dividends paid were $59.5 million.
Material changes and segment trends
- Utilities and oil production supported first-half earnings: electric earnings rose to $10.8 million from $8.3 million; natural gas distribution to $23.4 million from $19.1 million; and oil and gas production earned $46.3 million versus a $352.5 million loss, largely reflecting the absence of the prior-year impairment.
- Construction remained weak. First-half construction services earnings fell to $3.1 million from $15.6 million; construction materials and contracting recorded a $14.5 million loss versus $0.3 million earnings. Management cited lower workloads, volumes and margins amid economic weakness and weather delays.
- Oil and gas production benefited from higher realized oil prices and oil output, but natural gas production and realized gas prices declined. Combined production was down about 11% year over year for the first half.
- Q2 earnings fell $6.3 million year over year, principally from weaker construction results. First-half earnings improved $379.2 million, primarily due to the absence of the 2009 write-down.
Outlook, risks and unusual items
- Management projected 2010 diluted EPS of $1.10–$1.35 and long-term operating EPS growth goals of 7%–10%. Guidance assumed August–December NYMEX oil prices of $70–$75 per barrel and specified natural gas price ranges; these are assumptions, not guarantees.
- 2010 capital expenditures were estimated at approximately $625 million; oil and gas production alone expected about $380 million. The company expected combined 2010 oil and gas production to be 3%–6% below 2009 levels.
- Utilities had rate matters pending or recently resolved. North Dakota approved an interim electric rate increase of $7.6 million annually while a larger amended request of $13.3 million annually remained pending; a hearing was set for November 2010. Wyoming approved an annual increase of $2.7 million.
- Fidelity’s Montana coalbed-natural-gas discharge permits were voided by the state Supreme Court, which ordered permit reevaluation by November 14, 2010. Operations could continue under existing permits during review, but the ultimate operational impact remained uncertain.
- Other material exposures include a construction-contract arbitration seeking $146 million plus additional damages, an Oregon concrete-defect claim estimated by plaintiffs at $26.5 million, and environmental matters. Cascade reserved $6.4 million for one cleanup site; potential costs and allocation for other sites were uncertain.
- Outstanding guarantees included $224.5 million of fixed maximum third-party guarantees and approximately $646 million of surety bonds, largely not recorded as balance-sheet liabilities. Derivative agreements also include collateral, cross-default, and early-settlement provisions.
- Oil and gas property carrying costs were below the full-cost ceiling at June 30, 2010, but sustained declines in commodity prices could trigger a future noncash write-down. MDU also identified climate regulation, commodity-price volatility, construction-market weakness, and CBNG litigation as risks.
- The planned sale of the Brazilian transmission-line investments had regulatory approval; financial closing was anticipated later in 2010. Results are seasonal and interim performance may not indicate full-year results.
Most important facts for investors to verify
- Progress and final outcome of the North Dakota rate case and Montana CBNG permit review, including any effect on earnings or operations.
- Delivery against the $1.10–$1.35 EPS outlook, especially commodity-price assumptions, hedge coverage, and projected production decline.
- Whether construction activity and margins stabilize, and whether public-infrastructure spending offsets continued weakness in private markets.
- Funding needs and cash generation against the approximately $625 million capital program, acquisition spending, and debt maturities.
- Developments in the $146 million arbitration demand, environmental exposures, guarantees, and the Brazilian investment sale.