MDU Resources Group, Inc. — 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. MDU is a diversified energy and natural-resources company with regulated electric, natural-gas distribution and pipeline businesses, plus construction services, oil and gas production, and construction materials operations. The filing was signed February 17, 2010.
Financial results and liquidity
| Metric | 2009 | 2008 |
|---|---|---|
| Revenue | $4.177 billion | $5.003 billion |
| Operating income (loss) | $(153.1) million | $512.0 million |
| Net income (loss) | $(123.3) million | $293.7 million |
| Common earnings (loss) per diluted share | $(0.67) | $1.59 |
| Cash provided by operating activities | $846.7 million | $786.2 million |
| Capital expenditures | $448.7 million | $746.5 million |
| Cash and cash equivalents at year-end | $175.1 million | $51.7 million |
| Total debt | $1.510 billion | $1.752 billion |
Revenue declined about 16.5%. The reported operating loss included a $620.0 million pretax, noncash impairment of oil and gas properties ($384.4 million after tax). Cash from operations increased, substantially supported by lower working-capital needs. Cash used in investing activities was $432.1 million, primarily reflecting $448.7 million of capital expenditures; financing activities used $291.9 million. Year-end current assets were $1.062 billion versus current liabilities of $667.2 million. Common equity was 63% of capitalization, compared with 61% a year earlier.
MDU paid common dividends of $0.6225 per share for 2009, up from $0.60 in 2008. Fixed-charge coverage was insufficient after the impairment; excluding it, management reported coverage of 4.6 times.
Fourth quarter: Revenue was $1.017 billion and net income was $72.6 million, or $0.39 basic and $0.38 diluted per share. Fourth-quarter 2008 revenue was $1.296 billion and net loss was $11.3 million, or $0.06 per share, including an $84.2 million after-tax oil and gas write-down.
Material changes and operating performance
- Oil and gas production: The segment recorded a $296.7 million loss versus $122.3 million of earnings in 2008. Realized natural-gas and oil prices fell 30% and 42%, respectively; gas production declined 13%, while oil production rose 11%. Total production fell from 82.3 to 75.3 Bcfe. Proved reserves fell to 653.7 Bcfe from 810.4 Bcfe, with the filing attributing significant negative gas-reserve revisions in part to new SEC-defined pricing rules.
- Construction services: Revenue fell to $819.1 million from $1.257 billion, and earnings declined 49% to $25.6 million amid lower workloads. Backlog was $383 million, down from $604 million.
- Construction materials and contracting: Revenue declined to $1.515 billion from $1.641 billion, but earnings increased to $47.1 million from $30.2 million, aided by stronger liquid-asphalt results and cost reductions. Aggregate sales fell to 24.0 million tons from 31.1 million. Backlog was $459 million, slightly above the prior year.
- Pipeline and energy services: Earnings increased to $37.8 million from $26.4 million, supported by increased transportation and storage activity and lower operating costs.
- Electric and natural-gas distribution: Electric earnings increased to $24.1 million from $18.7 million. Natural-gas distribution earnings declined to $30.8 million from $34.8 million, including the absence of a prior-year gain on a service-business sale.
Outlook, risks and contingencies
- Management projected 2010 diluted EPS of $1.10–$1.35 and long-term operating EPS growth of 7%–10% annually. These are forward-looking estimates, not guarantees.
- Management expected 2010 oil and gas production to be approximately level with 2009 and forecast about $375 million of segment capital spending, including approximately $150 million for growth opportunities and potential acquisitions. Guidance assumes specified natural-gas and oil prices; the company had hedged 45%–50% of estimated 2010 production of both commodities as of the filing’s stated date.
- Construction-services margins were expected to be lower in 2010; liquid-asphalt margins were also expected below 2009’s record levels. Management cited public infrastructure stimulus projects as an opportunity for construction businesses.
- MDU anticipated Wygen III and two wind projects to enter commercial service in 2010. The Big Stone Station II participants decided not to proceed with that project; MDU sought regulatory treatment for costs incurred.
- Key risks include volatile commodity prices, oil and gas reserve and impairment assumptions, economic weakness and construction backlog execution, regulatory cost recovery, environmental and greenhouse-gas requirements, weather, access to capital, and pension funding. Oil and gas properties remain sensitive to sustained price declines.
- CBNG water-permit and related litigation could materially affect Fidelity’s existing or future operations if adverse decisions restrict permits. Other matters include a Sierra Club appeal concerning the Big Stone Station, Portland Harbor Superfund exposure and manufactured-gas-plant claims. The filing states that the Portland Harbor remediation and natural-resource-damage costs cannot yet be estimated; Cascade’s potential share of certain site costs is also unclear.
- A contractor sought $146 million plus additional damages in arbitration relating to a former subsidiary’s power-plant construction contract and demanded performance under Centennial’s guarantee. MDU said it considered the claims without merit and intended to defend them.
- Long-term debt maturities total $12.6 million in 2010, $72.3 million in 2011, $136.3 million in 2012 and $258.8 million in 2013. The company reported compliance with applicable debt covenants at year-end. Auditors gave unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- How much of the 2009 loss reflects the noncash impairment versus the continuing effects of lower commodity prices and reduced gas production; monitor future ceiling-test exposure and reserve revisions.
- Whether oil and gas production, realized prices, hedges and the $375 million capital-spending plan support the 2010 guidance.
- Whether construction backlogs convert to revenue and margin, particularly given the lower construction-services backlog and expected margin pressure.
- Developments in CBNG litigation, environmental claims and the $146 million arbitration demand, including any changes to estimated exposure or insurance and indemnity recoveries.
- Progress on rate cases, cost recovery, planned generation projects and the pending sale of the Brazilian transmission-line interests.
- Liquidity and financing needs against planned capital spending, debt maturities, pension obligations and the company’s dividend policy.