MDU Resources Group, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Interim financial statements are unaudited. MDU is a diversified natural-resources and infrastructure company with regulated electric and natural-gas utilities, pipeline and energy services, oil and gas production, construction services, and construction materials and contracting operations.
Financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Operating revenue | $1,152.2 million | $1,125.9 million | $2,984.7 million | $2,867.1 million |
| Operating income | $119.4 million | $109.0 million | $279.8 million | $280.6 million |
| Net income | $64.0 million | $61.0 million | $152.0 million | $151.7 million |
| Diluted EPS | $0.34 | $0.32 | $0.80 | $0.80 |
| Operating margin | 10.4% | 9.7% | 9.4% | 9.8% |
Q3 revenue rose 2.3% and operating income rose 9.6%; nine-month revenue rose 4.1%, while operating income was essentially unchanged. The Q3 increase in earnings chiefly reflected the absence of a $16.5 million after-tax natural-gas gathering arbitration charge recorded in 2010 and improved oil prices and production. Nine-month earnings were nearly flat as stronger construction-services and pipeline results were offset by weaker construction-materials and oil-and-gas production results.
- Cash flow: Operating cash flow was $411.6 million for the first nine months, versus $371.5 million in 2010. Investing used $325.8 million, including $339.5 million of capital expenditures; financing used $189.0 million. Cash declined $103.4 million from year-end 2010 to $118.7 million.
- Liquidity and debt: Current assets were $1.132 billion and current liabilities $764.4 million (current ratio approximately 1.48). Debt totaled approximately $1.424 billion, comprising $76.6 million due within one year and $1.347 billion of long-term debt. Cash was $118.7 million, with $621.7 million of available capacity under credit facilities. The company reported compliance with applicable debt covenants.
- Capital and shareholder returns: Nine-month net capital expenditures were $323.0 million; estimated 2011 net capital expenditures were approximately $515 million, expected to be funded entirely from operating cash flow. Dividends were $0.1625 per common share for Q3, up from $0.1575.
Segment developments and changes
- Electric: Q3 earnings fell to $8.3 million from $11.3 million, mainly on higher operating and benefit costs. Nine-month earnings were $21.7 million versus $22.1 million.
- Natural-gas distribution: Q3 seasonal loss widened to $11.2 million from $10.1 million. Nine-month earnings improved to $18.2 million from $13.4 million, helped by higher sales volumes in colder weather.
- Construction services: Nine-month earnings increased to $15.8 million from $9.0 million, supported by stronger Western-region workload and margins. Backlog was $331 million, versus $317 million a year earlier.
- Pipeline and energy services: Q3 earnings were $5.2 million versus a $7.4 million loss in 2010; nine-month earnings rose to $16.9 million from $10.9 million. The prior-year arbitration charge drove much of the comparison, while transportation, gathering, and storage activity weakened.
- Natural-gas and oil production: Q3 earnings rose to $22.5 million from $18.7 million as higher oil prices and production outweighed lower gas prices and production. Nine-month earnings declined to $60.1 million from $65.0 million, reflecting weaker gas prices and volumes and higher depletion and operating costs.
- Construction materials and contracting: Q3 earnings declined to $33.1 million from $40.3 million; nine-month earnings fell to $16.7 million from $25.8 million, primarily due to lower asphalt and ready-mixed concrete margins and volumes, higher input costs, weather delays, and the Minnesota government shutdown.
Outlook, risks, and contingencies
- Management projected 2011 diluted EPS of $1.05–$1.15 and a long-term 7%–10% compound annual EPS growth goal from operations. These are forward-looking projections, not guarantees.
- 2011 oil-and-gas capital spending was expected to be approximately $300 million. Management forecast oil production growth of 4%–7% and natural-gas production decline of 7%–10%; low gas prices were prompting deferral of some gas development. Hedging covered approximately 45%–50% of estimated Q4 gas production and 60%–65% of estimated Q4 oil production.
- Potential utility investment includes the company’s share of Big Stone Station air-quality upgrades, which could exceed $100 million, and a proposed 88-MW gas turbine estimated at $85.6 million. Regulatory prudence approvals were pending.
- Material litigation includes LPP’s $149.7 million arbitration claim concerning a construction-contract guarantee; the company disputes the claims and is defending itself. Bitter Creek’s appeal of a roughly $26.6 million arbitration award remained pending, and a separate Omimex claim estimated damages of $18.8 million–$22.6 million. Management stated the Omimex claim was without merit.
- Cascade settled a pipeline-safety complaint for an immediate $425,000 payment and up to $1.8 million in suspended penalties contingent on remediation. Environmental exposures include manufactured-gas-plant sites; Cascade had reserved $6.4 million for the Bremerton site. Total reserves for potential litigation and environmental liabilities were $40.6 million at quarter-end.
- Other notable risks include commodity-price volatility, environmental and greenhouse-gas regulation, coal-plant compliance costs, hydraulic-fracturing regulation, multiemployer pension obligations, and seasonal operating results. Management noted that interim results may not indicate full-year performance.
Most important facts for investors to verify
- Whether full-year EPS reaches the $1.05–$1.15 outlook and whether segment trends support the stated long-term growth goal.
- Oil and natural-gas production, realized prices, hedge coverage, and the effect of declining gas output and rising production costs.
- Regulatory approval, final cost, timing, and customer rate recovery for Big Stone upgrades and proposed generation projects.
- Developments and potential company exposure in the LPP arbitration, Bitter Creek award appeal, Omimex dispute, and Cascade safety remediation.
- Execution of the approximately $515 million capital plan, operating cash generation, available credit capacity, and debt maturities.
- Construction-materials margins and volumes, public-versus-private backlog mix, and sensitivity to weather, public infrastructure spending, and input costs.