Business context and reporting period
MDU Resources Group, Inc. is a diversified energy and infrastructure company with regulated electric and natural gas utilities, pipeline and energy services, oil and gas exploration and production, construction materials and contracting, and construction services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012; comparisons are with the same 2011 periods. Results are seasonal and may not indicate full-year performance.
Financial performance and position
Amounts below are in millions, except per-share data.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenue | $1,173.5 | $1,152.2 | $2,994.3 | $2,984.7 |
| Operating income (loss) | $(34.0) | $119.4 | $128.7 | $279.8 |
| Net income (loss) | $(29.7) | $64.0 | $60.2 | $152.0 |
| Common EPS, diluted | $(0.16) | $0.34 | $0.32 | $0.80 |
| Cash from operating activities | Not separately presented | Not separately presented | $329.4 | $411.6 |
The principal unusual item was a $160.1 million pretax ($100.9 million after-tax) noncash write-down of oil and gas properties in Q3, required under the full-cost ceiling test, largely because of lower SEC-defined natural gas prices. The filing says the write-down would have been $19.5 million higher pretax without the effect of cash-flow hedges.
At September 30, cash and cash equivalents were $74.2 million, down from $162.8 million at year-end 2011. Current assets were $1,249.4 million and current liabilities $1,025.1 million. Debt comprised $11.0 million short-term borrowings, $240.6 million due within one year, and $1,502.4 million long-term debt. The company reported $281.4 million of available capacity under company and subsidiary credit facilities. Common stockholders’ equity was 61% of total capitalization, compared with 66% at September 30, 2011 and year-end 2011.
Nine-month capital expenditures were $629.8 million; cash used in investing activities was $652.4 million. The company estimated 2012 net capital expenditures of approximately $940 million. Cash provided by financing activities was $234.6 million, including $400.4 million of long-term debt issuance; dividends paid were $95.4 million. Operating cash flow fell $82.3 million year over year, mainly due to higher working-capital needs.
Material changes and segment results
- Exploration and production: Q3 earnings fell to a loss of $87.8 million from income of $22.5 million, primarily due to the impairment. For nine months, the segment lost $56.9 million versus income of $60.1 million. Oil production rose, but natural gas production and realized prices fell; nine-month oil production increased 23% while gas production declined 26%.
- Construction materials and contracting: Q3 earnings rose to $41.9 million from $33.1 million; nine-month earnings rose to $24.7 million from $16.7 million, reflecting improved construction margins and other product margins, partly offset by weaker aggregate/asphalt results and higher costs.
- Construction services: Earnings increased to $9.9 million from $5.1 million for Q3 and to $30.0 million from $15.8 million for nine months, mainly on higher workloads and margins.
- Utilities: Electric earnings improved to $11.0 million from $8.3 million for Q3 and to $23.0 million from $21.7 million for nine months. Natural gas distribution posted a seasonal Q3 loss of $8.8 million, narrower than the prior-year loss, but nine-month earnings declined to $10.3 million from $18.2 million, largely due to warmer weather and lower sales volumes.
- Pipeline and energy services: Q3 earnings declined to $3.3 million from $5.2 million, with lower gathering volumes. Nine-month earnings increased to $21.9 million from $16.9 million, including a $15.0 million after-tax benefit from reversal of a prior litigation charge, partly offset by lower gathering volumes.
Outlook, risks and contingencies
Management projected 2012 EPS of $1.05–$1.20 excluding the Q3 impairment and a second-quarter $15.0 million after-tax litigation benefit; including those items, projected EPS was $0.60–$0.75. Long-term compound annual EPS growth goals from operations were 7%–10%. Guidance depended in part on estimated November–December NYMEX prices of $90–$95 per barrel for oil and $3.00–$3.50 per Mcf for natural gas, excluding basis differentials. Management cautioned that actual results could differ materially from projections.
Exploration and production capital spending was expected to be approximately $525 million in 2012. Management expected oil production growth of 25%–30% and natural gas production decline of 25%–30% for the year. The company reported hedges on portions of 2012 and 2013 oil and gas production; these reduce, but do not eliminate, commodity-price exposure.
Planned investment and regulatory matters include an estimated $125 million company share for Big Stone Station air-quality controls, expected by 2015; an estimated $85 million, 88-MW gas turbine targeted for late 2014; and approximately $75 million of 2012 utility investment to serve Bakken-area growth. Montana-Dakota requested a $3.5 million annual natural gas rate increase in Montana, including a $1.7 million interim increase subject to refund. These projects, rate recovery and environmental requirements create execution, cost and regulatory risks.
Material risks include volatile oil and gas prices and basis differentials, reserve-estimate uncertainty and potential further noncash impairments, environmental and emissions rules, weather-sensitive utility demand, construction-market conditions, and possible higher contributions or withdrawal liabilities for multiemployer pension plans. The company had accrued $41.6 million for litigation and environmental contingencies at September 30. Notable matters include the CEM construction-contract guarantee and ongoing gathering-contract disputes; management stated that other legal outcomes were not expected to materially affect financial position, results or cash flows. Approximately $532 million of surety bonds were outstanding and off balance sheet; fixed maximum subsidiary guarantees totaled $73.3 million.
After quarter-end, the company increased its revolving-credit borrowing limit to $125 million and extended that facility to 2017. MDU Energy Capital also issued $25 million of senior notes at a weighted-average 4.1% rate, with maturities from 2022 to 2042.
Important facts for investors to verify
- Whether oil and gas prices, reserve revisions or costs trigger additional full-cost ceiling impairments.
- Whether commodity prices, production volumes and hedge settlements support the stated 2012 EPS guidance.
- Funding needs and returns for the projected $940 million of 2012 net capital expenditures, and the effect of debt maturities and purchase commitments.
- Regulatory approval and cost recovery for utility rate requests and planned generation and environmental projects.
- Developments in material litigation and environmental matters, including the CEM guarantee, gathering disputes and contingent obligations.