MDU Resources Group, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. MDU is a diversified energy and infrastructure company with regulated electric and natural-gas distribution, pipeline and energy services, oil and gas production, construction materials and contracting, and construction services operations.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Operating revenues | $852.8 million | $901.8 million |
| Operating income | $71.1 million | $78.1 million |
| Income from continuing operations | $35.9 million | $42.5 million |
| Net income | $35.8 million | $43.0 million |
| diluted EPS | $0.19 | $0.23 |
| Operating margin | 8.3% | 8.7% |
Revenue declined 5.4% year over year; operating income fell 9.0% and net income fell 16.7%. The prior-year quarter benefited from a $4.2 million income-tax benefit tied to favorable resolution of tax matters. The effective tax rate rose to approximately 33.5% from 27.2%.
Cash flow: Operating activities provided $125.0 million, compared with $120.5 million. Investing activities used $156.4 million, including $174.4 million of capital expenditures; financing activities used $40.0 million. Cash declined $71.4 million during the quarter to $91.4 million. Operating cash flow less capital expenditures was approximately negative $49 million.
Balance sheet and liquidity: At March 31, cash was $91.4 million, current assets were $1.08 billion and current liabilities were $910.2 million. Debt, including amounts due within one year, totaled approximately $1.416 billion, versus $1.427 billion a year earlier. Available capacity under credit facilities was $591.5 million. Common stockholders’ equity was 66% of total capitalization. The declared common dividend was $0.1675 per share.
Material changes and segment performance
- Regulated electric and gas distribution: Earnings were $7.5 million and $25.5 million, respectively, down from $8.5 million and $27.5 million. Warmer weather reduced demand and distribution volumes.
- Pipeline and energy services: Earnings fell to $2.8 million from $6.9 million, mainly on lower storage revenue and gathering volumes.
- Exploration and production: Earnings declined to $12.9 million from $16.3 million. Lower gas prices and production and higher depletion expense outweighed increased oil production and realized oil prices.
- Construction materials and contracting: The seasonal first-quarter loss widened to $24.9 million from $21.4 million, reflecting lower aggregate margins and volumes and the absence of prior-year tax benefits.
- Construction services: Earnings increased to $11.4 million from $4.6 million on higher workloads and margins, equipment sales and rental margins.
Management cautions that seasonal operations can cause quarterly results to fluctuate and that interim results may not indicate full-year performance.
Outlook, risks and contingencies
- 2012 guidance: Diluted EPS projected at $1.00–$1.25. Management’s long-term annual EPS growth goal is 7%–10%, subject to market conditions and other assumptions.
- Investment plans: 2012 capital expenditures are estimated at approximately $700 million. E&P expects approximately $400 million of capital spending, oil production growth of 20%–30%, and natural gas production decline of 12%–20%. Guidance assumes May–December NYMEX prices of $95–$105 per barrel for oil and $2.25–$2.75 per Mcf for gas.
- Construction outlook: Construction materials backlog was approximately $532 million, versus $569 million a year earlier; construction services backlog was $333 million, versus $347 million. Management expects higher 2012 margins in both businesses than in 2011.
- Regulatory and capital projects: MDU’s share of the Big Stone Station air-quality control system is estimated at $125 million; the company intends to seek recovery through rates. An 88-MW gas turbine project was estimated at $85.6 million and received an advance prudence approval in April 2012. A Minnesota gas utility rate settlement approved in April calls for a $250,000 annual reduction effective June 1, 2012.
- Legal and environmental matters: Accrued litigation and environmental contingencies totaled $70.7 million. A construction-contract arbitration award of $22.0 million was accrued in Q4 2011; related claims and indemnification disputes remain. Other matters include environmental remediation claims with uncertain ultimate costs and a gravel-pit dispute with potentially up to $3.7 million in penalties plus daily penalties. Management did not expect the disclosed legal proceedings, after accruals, to materially affect consolidated results, financial position or cash flows.
- Guarantees: Approximately $563 million of surety bonds were outstanding and not recorded as liabilities. Fixed maximum guarantees to third parties totaled $85.7 million; $27.4 million of letters of credit were guaranteed, with no amounts outstanding under those letters at quarter-end.
- Other risks: Commodity price volatility, lower natural-gas prices and production, construction-market weakness, environmental regulation, greenhouse-gas requirements, and possible higher contributions or withdrawal liabilities for multiemployer pension plans. Certain derivatives have cross-default provisions; triggering them could require early settlement.
Disclosure controls were assessed as effective at a reasonable assurance level; the company reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the $1.00–$1.25 diluted EPS outlook and production, commodity-price and construction-margin assumptions remain achievable.
- How oil and natural-gas prices, hedges, and production trends affect E&P earnings and cash generation.
- The timing, final cost and regulatory recovery of the Big Stone environmental upgrades and other planned capital projects.
- Developments in the LPP/Bicent dispute, environmental matters, and the company’s accrued liabilities, guarantees and surety-bond exposures.
- Whether operating cash flow and available credit remain sufficient to fund the substantial 2012 capital program and seasonal working-capital needs.