MDU Resources Group, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. The company is a diversified energy and infrastructure business with regulated electric and natural gas utilities, pipeline and energy services, exploration and production, construction materials and contracting, and construction services. Results are unaudited; management notes that seasonal operations mean interim results may not indicate full-year performance.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $1,060.6 million | $968.0 million | $1,992.2 million | $1,820.8 million |
| Operating income | $91.4 million | $91.7 million | $195.9 million | $162.8 million |
| Net income | $46.3 million | $54.1 million | $102.8 million | $89.9 million |
| Earnings on common stock | $46.3 million | $53.9 million | $102.7 million | $89.6 million |
| Diluted EPS | $0.24 | $0.29 | $0.54 | $0.47 |
| Operating margin | 8.6% | 9.5% | 9.8% | 8.9% |
Revenue increased about 9.6% in the quarter and 9.4% year to date. Operating income was nearly flat in Q2 but rose about 20% for the six-month period. Six-month earnings improved despite weaker pipeline and energy services results; Q2 common earnings declined about 14%.
- Cash flow: First-half operating cash flow was $233.9 million, compared with $174.7 million. Investing cash outflow was $410.5 million, including $431.4 million of capital expenditures. Cash increased to $115.0 million from $49.0 million at year-end 2012.
- Debt and liquidity: At June 30, short-term borrowings were $31.6 million, current long-term debt was $69.1 million, and long-term debt was $1,937.7 million. Total debt on these balance-sheet lines was approximately $2,038.4 million, versus $1,665.6 million at June 30, 2012. The company reported $207.8 million of available capacity under outstanding credit facilities. Equity was 57% of total capitalization, down from 63% a year earlier.
- Dividends: Declared common dividends were $0.1725 per share for Q2, versus $0.1675 in Q2 2012.
Material changes and segment drivers
- Exploration and production: Q2 earnings rose to $33.0 million from $18.0 million; first-half earnings rose to $53.3 million from $30.9 million. Higher oil production and realized natural gas prices, plus larger unrealized derivative gains, helped. Higher depletion, production taxes and lease operating costs, lower natural gas production and lower realized derivative gains partly offset the increases.
- Pipeline and energy services: Q2 recorded a $6.4 million loss, compared with $15.8 million earnings a year earlier; the first-half loss was $4.1 million versus $18.6 million earnings. The comparison reflects the absence of a $15.0 million after-tax litigation-related benefit in 2012 and a $9.0 million after-tax impairment of coalbed-gas gathering assets in 2013, versus a $1.7 million after-tax impairment in 2012. Low gas prices and reduced gathering activity also weighed on results.
- Construction services: Q2 earnings increased to $12.9 million from $8.7 million, and first-half earnings to $24.6 million from $20.1 million, on stronger workloads and margins and equipment sales and rental margins.
- Construction materials and contracting: Q2 earnings increased to $10.0 million from $7.8 million, helped by asphalt, liquid asphalt and ready-mixed concrete margins. The first-half loss narrowed to $10.5 million from $17.1 million.
- Natural gas distribution: The seasonal Q2 loss narrowed to $5.9 million from $6.4 million. First-half earnings rose to $26.6 million from $19.1 million, reflecting higher retail volumes, colder weather and a $2.8 million after-tax gain on sale of an appliance service business.
- Discontinued operations: Q2 had a $0.1 million loss, compared with $5.1 million income in Q2 2012, largely because the prior-year period included a benefit tied to the CEM/LPP matter.
Outlook, risks and unusual items
- 2013 guidance: Diluted EPS was projected at $1.30–$1.40, excluding discontinued operations, the $8.2 million after-tax unrealized commodity-derivative gain and the $9.0 million after-tax gathering-asset impairment. The filing also states that GAAP guidance, including these adjustments, is in the same range; investors should verify how management applies this wording and the effects of subsequent derivative valuation changes.
- Capital program and projects: Estimated 2013 capital expenditures were approximately $850 million; exploration and production alone planned about $400 million. The company and Calumet are developing a 20,000-barrel-per-day diesel topping plant, with estimated project costs of about $300 million and a targeted late-2014 start. A proposed North Dakota-to-western-Minnesota gas pipeline was estimated at $650–$700 million and remained subject to capacity commitments, permits and approvals.
- Operating outlook: Management expected 2013 oil production to increase 25%–35%, NGL production to be flat to slightly lower, and natural gas production to decline 15%–25%. Construction materials backlog was about $730 million and construction services backlog about $447 million at June 30.
- Regulatory and environmental matters: Rate proceedings were ongoing in Montana and South Dakota. Environmental projects include the Big Stone Station retrofit, with the company’s share estimated at about $100 million and completion expected in 2015, and Lewis & Clark pollution controls estimated at $26.1 million. Recovery of costs and regulatory approvals remain relevant uncertainties.
- Contingencies: Accrued liabilities for contingencies, including litigation and environmental matters, were $32.9 million. The LPP arbitration award against CEM had been vacated, but LPP appealed; a loss was considered reasonably possible if the appeal succeeded and the guarantee claim continued. A Montana gravel-pit matter also carried reasonably possible civil penalties. The filing reports approximately $713 million of outstanding surety bonds not recorded on the balance sheet.
- Other risks: Management identifies commodity-price volatility, natural gas production declines, seasonality, construction-market and input-cost pressures, project execution and permitting, environmental requirements, and potential greenhouse-gas regulation. The company reported no material change in other risk factors from its 2012 Form 10-K.
Important facts for investors to verify
- Reconcile the $1.30–$1.40 EPS guidance with the filing’s stated treatment of derivative gains and impairments, and monitor commodity prices and derivative mark-to-market effects.
- Track the timing, cost, financing and regulatory recovery of the diesel topping plant, Big Stone retrofit, Lewis & Clark controls and other planned capital spending.
- Assess whether oil growth can offset forecast declines in natural gas production and continued weakness in coalbed-gas gathering activity.
- Review the outcomes of rate cases, environmental proceedings and material litigation, including the appealed LPP matter and the Target Range gravel-pit claim.
- Monitor debt growth, maturities, credit-facility availability and cash generation relative to the approximately $850 million 2013 capital program.