MDU

MDU Resources Group Inc. - Q1 2009 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009. MDU Resources Group, Inc. is a diversified natural resource company operating in the United States and Brazil. Its primary segments include electric and natural gas distribution, pipeline and energy services, natural gas and oil production, construction services, and construction materials and contracting. The company is a large accelerated filer incorporated in Delaware.

Key Financial Metrics

Material Changes vs. Prior Period

• Significant Write-Down: The company recorded a noncash write-down of $620.0 million ($384.4 million after-tax) on natural gas and oil properties due to low commodity prices causing capitalized costs to exceed the full-cost ceiling. This was the primary driver of the net loss.
• Revenue Decline: Total operating revenues decreased by approximately 2.5% compared to Q1 2008, driven by lower natural gas and oil production revenues and reduced construction workloads.
• Segment Performance:
  • Natural Gas & Oil Production: Earnings swung from a $50.6 million profit in Q1 2008 to a $373.3 million loss in Q1 2009, primarily due to the write-down and a 61% drop in realized oil prices.
  • Natural Gas Distribution: Earnings increased 46% to $23.9 million, largely due to the acquisition of Intermountain Gas Company in October 2008.
  • Construction Services: Earnings decreased 20% to $8.6 million due to lower workloads.
• Cash Flow: Operating cash flow improved by $105.3 million year-over-year, despite the net loss, due to lower working capital requirements and the noncash nature of the asset write-down.

Guidance, Outlook, and Risks

• 2009 Earnings Guidance:
  • Excluding the Q1 write-down: Diluted EPS projected at $1.05 to $1.30.
  • Including the Q1 write-down: Diluted EPS projected as a loss of $0.79 to $1.04.
• Capital Expenditures: Estimated 2009 capital expenditures reduced to approximately $385 million (down from $602 million previously) due to low commodity prices.
• Commodity Hedging: The company has hedged approximately 40-45% of estimated natural gas production and 25-30% of oil production for the remainder of 2009. Guidance assumes NYMEX crude oil prices of $48-$53/barrel and natural gas prices ranging from $2.50 to $4.25/Mcf depending on the index.
• Liquidity and Credit: The company maintains access to capital markets via commercial paper and credit facilities. A recent credit rating downgrade has not limited access but may increase borrowing costs. Fixed charge coverage was insufficient for the 12 months ended March 31, 2009, solely due to the noncash write-downs; excluding these, coverage was 5.9 times.
• Key Risks:
  • Volatility in natural gas and oil prices.
  • Ongoing litigation regarding Coalbed Natural Gas (CBNG) water permits in Montana and Wyoming, which could materially affect operations if permits are set aside.
  • Environmental and regulatory risks related to greenhouse gas emissions and electric generation.
  • Economic downturn impacting construction and materials segments.

Investor Verification Checklist

• Asset Write-Down Sustainability: Verify if commodity prices have stabilized or if further write-downs are anticipated in subsequent quarters.
• CBNG Litigation Status: Monitor the appeal of the Montana Supreme Court regarding Fidelity's water discharge permits, as a loss could halt operations.
• Fixed Charge Coverage: Review the company's ability to meet debt covenants excluding noncash charges, as actual earnings were insufficient to cover fixed charges for the trailing 12 months.
• Capital Expenditure Execution: Confirm if the reduced $385 million capex plan aligns with long-term growth strategies or if it signals a prolonged contraction in the production segment.
• Intermountain Integration: Assess the full-year contribution of the Intermountain acquisition to the natural gas distribution segment's earnings.