MDU

MDU Resources Group Inc. 2008 Annual Report (10-K) Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2008. MDU Resources Group, Inc. is a diversified natural resource company operating in the United States and Brazil. Its principal segments include regulated electric and natural gas distribution, construction services, pipeline and energy services, natural gas and oil production, and construction materials and contracting. As of year-end, the Company employed 10,074 people.

Key Financial Metrics

Note: 2008 results include an $84.2 million after-tax noncash write-down of natural gas and oil properties.

Material Changes vs. Prior Period

• Consolidated Earnings: Decreased $138.4 million (32%) compared to 2007. The decline was primarily driven by the absence of $109.3 million in income from discontinued operations (sale of domestic independent power production assets in 2007) and the $84.2 million noncash write-down of natural gas and oil properties.
• Construction Materials: Earnings dropped $46.8 million due to the economic downturn, lower residential construction workloads, and higher diesel fuel costs.
• Natural Gas & Oil Production: Earnings decreased $20.2 million despite higher average realized prices for gas and oil. The decline was offset by the write-down, higher depletion rates, and increased production taxes.
• Acquisitions: The Company acquired Intermountain Gas Company (Idaho) in October 2008 and Cascade Natural Gas Corporation (Washington/Oregon) in July 2007, significantly boosting natural gas distribution revenues and earnings.
• Debt: Total debt increased by approximately $442 million, largely due to borrowings to fund the Intermountain acquisition and increased capital expenditures.

Guidance, Outlook, and Risks

• 2009 Guidance: Management projects diluted earnings per share in the range of $1.05 to $1.30. This represents a decline from 2008 but aligns with long-term compound annual growth goals of 7% to 10%.
• Commodity Hedging: For 2009, the Company has hedged approximately 40% to 45% of estimated natural gas production. Oil price assumptions for guidance are $45 to $50 per barrel.
• Capital Markets: The Company notes that volatility in capital markets has increased. While it continues to issue commercial paper, accessing long-term debt markets may be more challenging and result in higher interest rates.
• Key Risks:
  • Environmental Litigation: Ongoing lawsuits regarding Coalbed Natural Gas (CBNG) water management in Montana and Wyoming could impact future development.
  • Storage Dispute: Williston Basin is engaged in litigation regarding gas diversion from its Elk Basin Storage Reservoir by third-party producers, with estimated replacement costs of approximately $103 million.
  • Regulatory: Potential new greenhouse gas (GHG) emission regulations could significantly increase capital and operating costs for coal-fired electric generation.

Investor Verification Checklist

• Write-Down Impact: Verify the sensitivity of future earnings to natural gas and oil price fluctuations, given the $135.8 million pre-tax write-down taken in 2008.
• CBNG Litigation Status: Monitor the outcome of the Northern Cheyenne Tribe appeal regarding water discharge permits, which could restrict CBNG operations in Montana.
• Storage Gas Recovery: Track the progress of the Williston Basin vs. Anadarko/Howell litigation regarding the recovery of diverted storage gas and associated damages.
• Construction Backlog: Review the $453 million backlog in the construction materials segment and the $604 million backlog in construction services to gauge revenue visibility in a slowing economy.
• Debt Covenants: Confirm continued compliance with debt covenants, particularly the funded debt to total capitalization ratios (generally capped at 65%) across various subsidiaries.