Business context and reporting period
MDU Resources Group, Inc. is a diversified natural resources and infrastructure company with regulated utility and pipeline operations, natural gas and oil production, construction services, and construction materials businesses. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2009; comparisons are with the corresponding 2008 periods. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Three months ended June 30, 2009 | Three months ended June 30, 2008 | Six months ended June 30, 2009 | Six months ended June 30, 2008 |
|---|---|---|---|---|
| Operating revenue | $958.0 | $1,251.8 | $2,052.0 | $2,373.7 |
| Operating income (loss) | $100.1 | $198.5 | $(440.9) | $326.1 |
| Net income (loss) | $55.3 | $115.5 | $(288.5) | $186.6 |
| Common EPS, diluted | $0.30 | $0.63 | $(1.57) | $1.01 |
- Six-month operating results include a $620.0 million noncash pretax write-down of natural gas and oil properties ($384.4 million after tax). Excluding this charge, the company reported adjusted 2009 diluted EPS guidance separately below; the filing does not provide adjusted six-month GAAP earnings.
- Operating cash flow was $398.4, compared with $238.8 in the first half of 2008. Investing cash outflow was $271.5, versus $550.4; financing cash outflow was $144.6, versus financing inflow of $287.7.
- Cash and cash equivalents were $34.3 at June 30, 2009, down from $51.7 at December 31, 2008. Current assets were $1,063.9 and current liabilities $691.6.
- Long-term debt, including amounts due within one year, was approximately $1,664.5 at June 30, 2009; short-term borrowings were zero. Common equity was 59% of total capitalization, compared with 61% at year-end 2008. The company reported $51.9 of parent-company commercial paper and $138.0 at Centennial outstanding, classified as long-term debt.
- Net capital expenditures were $240.6 in the first half; full-year 2009 net capital expenditures were estimated at approximately $415. The quarterly common dividend was $0.155 per share, up from $0.145.
- The filing does not report a single consolidated margin measure. Segment results were mixed: second-quarter pipeline and energy services and construction materials earnings rose, while construction services and natural gas and oil production earnings fell.
Material changes versus the prior comparable period
- Second-quarter revenue declined by about $293.7 and common-stock earnings fell by about $60.2. Management cited sharply lower realized natural gas and oil prices, lower gas production, lower construction workloads, weaker gas distribution retail sales, and the absence of a prior-year $4.4 after-tax gain on a Cascade service sale.
- For the first half, common-stock earnings declined by about $475.0, primarily reflecting the after-tax property write-down and lower realized commodity prices. Natural gas production was down 10% and oil prices were down 58% year over year; oil production rose 13%.
- Construction services earnings fell 51% for the quarter amid lower workloads. Construction materials and contracting earnings improved, helped by cost reductions and stronger liquid-asphalt margins, although aggregate and ready-mixed concrete sales volumes weakened.
- Operating cash flow increased year over year, principally because of lower working-capital requirements; the company also reduced capital spending and acquisition outlays.
Guidance, outlook, risks, contingencies and unusual items
- Management projected 2009 diluted EPS of $1.05–$1.30 excluding the first-quarter $2.09-per-share noncash write-down; including the charge, projected EPS was a loss of $0.79–$1.04. Long-term operating EPS growth goals were 7%–10% annually. Guidance depends on stated commodity-price assumptions, including August–December NYMEX oil prices of $58–$63 per barrel.
- Natural gas and oil production capital spending was reduced to approximately $170 for 2009; management expected combined production 7%–10% below 2008. The company had hedged approximately 45%–50% of estimated second-half 2009 gas production and 30%–35% of oil production.
- At June 30, the full-cost ceiling exceeded the carrying cost of producing properties, but management warned that sustained subsequent declines in gas or oil prices could trigger further write-downs. The first-quarter charge was noncash.
- Construction services backlog was about $507, down from $655 a year earlier; approximately 35% related to Fontainebleau Las Vegas, which filed for Chapter 11. Construction materials backlog was about $707. Management cautioned that backlog can be delayed, changed or cancelled.
- Credit-market volatility and ratings downgrades could raise borrowing costs or limit financing access. The company said it continued to access commercial-paper markets, had credit facilities available, and was in compliance with debt covenants at June 30. It reported insufficient fixed-charge coverage for the trailing 12 months including the property write-downs; excluding those charges, coverage was 4.9 times.
- Material exposures include a contractor’s unquantified indemnity demand under a construction guarantee, which the company disputes; appealed litigation over Fidelity’s Montana coalbed-natural-gas discharge permits; and environmental claims for which some potential liabilities could not be estimated. A natural-gas-storage dispute was settled in July 2009, with Howell and Anadarko agreeing to replace a portion of lost storage gas.
- Counterparty and derivative risks include Cascade and Intermountain gas derivatives, with $67.9 of liability-position contracts subject to credit-related collateral features; Cascade had posted $8.5, and the filing estimated $59.4 of additional collateral or immediate settlement exposure if features were triggered. Outstanding surety bonds were approximately $695.8.
- Management cited economic weakness, commodity-price volatility, environmental and regulatory requirements, climate-change regulation, customer and counterparty credit risk, and potential construction-project delays as significant risks.
Important facts for investors to verify
- Whether commodity prices and hedge settlements support the EPS outlook, and whether further full-cost ceiling write-downs are required.
- Construction backlog conversion, especially the Fontainebleau-related work, and the effect of continuing weakness on construction workloads and margins.
- Liquidity and refinancing access, commercial-paper availability, credit ratings, covenant compliance, and planned capital spending.
- Developments in CBNG permit appeals, environmental matters, the disputed construction-guarantee claim, and performance under the storage-gas replacement agreement.
- Potential collateral calls and counterparty exposure associated with commodity derivatives, guarantees, and surety bonds.