MDU Resources Group, Inc. — Q1 2013 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012. MDU Resources is a diversified energy and infrastructure company with regulated electric and natural gas operations, pipeline and energy services, exploration and production, construction materials and contracting, and construction services. The interim statements are unaudited; management notes that seasonal operations can make quarterly results unrepresentative of the full year.
Financial and operating highlights
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Operating revenue | $931.6 million | $852.8 million |
| Operating income | $104.5 million | $71.1 million |
| Net income | $56.5 million | $35.8 million |
| Basic and diluted EPS | $0.30 | $0.19 |
| Operating cash flow | $136.9 million | $125.0 million |
| Capital expenditures | $188.5 million | $174.4 million |
| Cash and cash equivalents, March 31 | $74.1 million | $91.4 million |
| Total debt, March 31 | $1,827.2 million | $1,416.2 million |
Operating margin was approximately 11.2%, versus 8.3% a year earlier; net margin was approximately 6.1%, versus 4.2%. Operating cash flow less capital expenditures was negative approximately $51.6 million. The company reported $401.5 million of available capacity under credit facilities. Total equity was 59% of total capitalization, compared with 66% a year earlier. Common dividends declared were $0.1725 per share, up from $0.1675.
Q1 segment earnings on common stock included $32.5 million from natural gas distribution, $20.3 million from exploration and production, $11.7 million from construction services, $9.8 million from electric, $2.3 million from pipeline and energy services, and a $20.6 million loss from construction materials and contracting.
Material changes versus the prior comparable period
- Consolidated earnings on common stock rose $20.7 million, or 58%. Revenue increased approximately 9% and operating income approximately 47%.
- Natural gas distribution earnings increased $7.0 million, driven by higher sales volumes in colder weather and a $2.9 million after-tax gain on sale of an appliance service business.
- Exploration and production earnings rose $7.4 million. Oil production increased 46%, while natural gas production fell 33%; higher depreciation, operating costs and production taxes partly offset revenue gains.
- Electric earnings increased $2.3 million, principally on 9% higher retail sales volumes. Pipeline and energy services earnings fell $0.5 million, reflecting lower natural gas gathering volumes.
- Construction materials and contracting reported a seasonal loss of $20.6 million, narrower than the prior-year $24.9 million loss, on improved aggregate, asphalt and construction margins.
- Debt increased substantially year over year, including $100 million of Centennial senior notes issued in February 2013 at a weighted average interest rate of 4.7%. Operating cash flow increased, but capital expenditures exceeded it.
Outlook, commentary, risks and contingencies
- Company guidance: 2013 diluted EPS is projected at $1.30–$1.40. Long-term compound annual EPS growth goals are 7%–10%. Estimated 2013 capital expenditures are approximately $860 million, excluding noncontrolling-interest expenditures.
- Exploration and production: Management expects 2013 oil production to grow 25%–30%, NGL production to be flat to slightly higher, and natural gas production to decline 15%–25%. Planned E&P capital spending is approximately $400 million. Guidance assumes specified commodity-price ranges; the company has hedged portions of expected oil and natural gas production.
- Construction businesses: Construction materials and contracting backlog was approximately $589 million, versus $532 million a year earlier; management expects higher 2013 margins than in 2012. Construction services backlog was approximately $465 million, versus $333 million; management expects lower 2013 margins than in 2012.
- Growth projects: Dakota Prairie Refining, a 50%-owned joint venture with Calumet, is developing a 20,000-barrel-per-day diesel topping plant. Total project cost is estimated at approximately $300 million, with service expected in late 2014. The company consolidates the venture as primary beneficiary. Centennial subsequently guaranteed repayment of its $75 million term loan.
- Regulatory matters: Montana-Dakota requested natural gas rate increases in Montana and South Dakota. After quarter-end, Montana authorized an interim $850,000 annual increase, subject to refund. A proposed environmental cost-recovery rider for Big Stone Station was suspended pending review. The company estimates its share of Big Stone environmental upgrades at $100 million, with completion expected in 2015.
- Legal and environmental exposures: Accrued contingency liabilities were $33.3 million at March 31, 2013. A prior $22 million construction-contract arbitration award was vacated; an appeal was anticipated, and a loss remained reasonably possible if the award were reinstated and asserted against Centennial. Other disclosed matters include gravel-pit penalties, natural-gas gathering disputes, and manufactured-gas-plant remediation. Estimated cleanup costs for some sites remain uncertain.
- Other risks and unusual items: Commodity prices, production and gathering volumes, regulatory decisions, construction-market conditions, environmental requirements, and access to financing may affect results. Effective April 1, 2013, the company discontinued hedge accounting for existing commodity derivatives; subsequent fair-value changes will be recognized in earnings. Prior-year noncash oil and gas property write-downs caused trailing fixed-charge coverage to fall short of coverage requirements as reported; excluding those write-downs, the company reported coverage of 4.6 times for the 12 months ended March 31, 2013.
Important facts for investors to verify
- Whether 2013 EPS guidance and projected production growth are achieved, given commodity-price assumptions, production declines and hedging exposure.
- Funding needs and returns for the approximately $860 million capital program, including Dakota Prairie Refining and electric-system projects, and the effect of additional borrowing on leverage and liquidity.
- Progress and final outcomes of rate cases and environmental cost recovery, including the interim Montana order and Big Stone retrofit costs.
- Developments in the arbitration appeal, gathering disputes and environmental claims, including the potential for liabilities beyond amounts accrued.
- Construction backlog conversion, seasonal performance, and whether projected segment margins materialize.