MDU Resources Group, Inc. — Q1 2011 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2011; comparative period is Q1 2010. MDU is a diversified natural resources and infrastructure company, with regulated electric and natural gas utilities alongside construction services, pipelines and energy services, oil and gas production, and construction materials and contracting. The filing cautions that seasonal interim results may not indicate full-year performance.
Financial results and liquidity
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Operating revenue | $901.8 million | $834.8 million |
| Operating income | $78.1 million | $82.9 million |
| Operating margin | 8.7% | 9.9% |
| Income from continuing operations | $42.5 million | $41.8 million |
| Net income | $43.0 million | $41.8 million |
| Basic and diluted EPS | $0.23 | $0.22 |
| Cash from operating activities | $120.5 million | $85.1 million |
Revenue rose 8.0%, while operating income fell 5.9%; lower income taxes helped support earnings despite weaker operating income. Q1 2011 included a $4.2 million continuing-operations tax benefit from resolution of prior-year tax matters and $0.4 million after-tax income from discontinued operations. The quarterly common dividend was $0.1625 per share, versus $0.1575.
Cash and cash equivalents were $136.0 million at March 31, 2011, down from $222.1 million at year-end 2010. Current assets were $1.064 billion and current liabilities $654.8 million. Long-term debt was $1.414 billion, with $12.8 million due within one year; short-term borrowings were nil. Available capacity under company and subsidiary credit facilities was $650.7 million. Operating cash flow less reported capital expenditures of $82.7 million was approximately $37.8 million. The company reported $65% common equity as a share of total capitalization and fixed-charge coverage of 4.0x for the 12 months ended March 31, 2011.
Material changes versus Q1 2010
- Regulated electric and natural gas distribution earnings increased: electric earnings rose to $8.5 million from $5.9 million, and gas distribution earnings to $27.5 million from $23.3 million. Higher sales volumes, colder weather and rate increases contributed.
- Construction services earnings improved to $4.6 million from $0.1 million, reflecting higher workloads, margins and equipment and electrical supply sales.
- Natural gas and oil production earnings declined to $16.3 million from $22.2 million. Lower realized gas prices, increased depletion and lease operating costs, and reduced gas production outweighed higher oil prices and production.
- Pipeline and energy services earnings fell to $6.9 million from $8.8 million, amid lower gathering and transportation volumes and lower storage and energy-services margins.
- Construction materials and contracting recorded a seasonal loss of $21.4 million, compared with a $20.1 million loss. Weather-related delays, weaker concrete activity and lower aggregate volumes contributed.
- Operating cash flow increased $35.3 million, largely due to higher deferred taxes, including the effect of bonus depreciation. Investing cash use fell by $40.1 million, mainly because capital expenditures were lower; financing cash use increased as debt was repaid.
Outlook, risks and unusual items
Management projected 2011 diluted EPS of $1.05–$1.30 and a long-term operating EPS growth goal of 7%–10% annually. Estimated 2011 net capital expenditures were approximately $565 million, expected to be funded from operating cash flow. Oil and gas production guidance called for oil production growth of 5%–10% and natural gas production decline of 4%–8%. Construction services margins were expected to be comparable to 2010; construction materials and contracting volumes and margins were also expected to be comparable to 2010.
Key uncertainties include commodity prices, production performance, weather and seasonality, construction-market conditions, raw-material costs, regulation and environmental requirements. Management’s commodity-price assumptions for May–December 2011 included NYMEX natural gas at $4.00–$4.50/Mcf and oil at $95–$100/Bbl. The company had hedged approximately 50%–55% of estimated gas production and 60%–65% of estimated oil production for the remaining nine months of 2011.
Notable regulatory and contingency matters include a proposed North Dakota electric-rate settlement for a $7.6 million annual increase, subject to a May 2011 hearing, and ongoing Montana rate-case discussions. Washington’s utility regulator alleged more than 360 pipeline-safety violations by Cascade; the company could not estimate a likely civil penalty. In a separate matter, a $26.6 million Bitter Creek arbitration award was confirmed by a court after quarter-end; Bitter Creek appealed. A former subsidiary-related construction dispute includes a $149.7 million arbitration demand, which the company says it will vigorously defend. The company reported $40.5 million reserved for potential litigation and environmental liabilities. Approximately $555 million of surety bonds were outstanding and not recorded on the balance sheet.
Important facts for investors to verify
- Progress and final outcomes of the North Dakota and Montana electric rate proceedings, including recovery of utility investment costs.
- Resolution, penalties and required investment arising from the Cascade pipeline-safety complaint.
- Appeal and payment implications of the Bitter Creek award, and developments in the separate construction-contract arbitration.
- Whether the $1.05–$1.30 EPS outlook and $565 million capital plan remain achievable as commodity prices, production, weather and construction demand evolve.
- Liquidity, debt maturities and access to credit facilities, including the scheduled June 2011 expiration of the parent revolving credit agreement and anticipated extension or replacement.