MDU RESOURCES GROUP INC quarterly report, Q3 FY2009

MDU Resources Group, Inc. — Q3 2009 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2009. Financial statements are unaudited. MDU is a diversified natural resources and infrastructure company with regulated electric and gas utilities, pipelines, natural gas and oil production, construction services, and construction materials businesses. Amounts below are in millions of dollars unless stated otherwise.

Financial results

Metric	Q3 2009	Q3 2008	Nine months 2009	Nine months 2008
Operating revenue	$1,107.9	$1,333.8	$3,160.0	$3,707.5
Operating income (loss)	$160.3	$203.3	$(280.6)	$529.4
Net income (loss)	$92.6	$118.4	$(195.9)	$304.9
Common EPS, diluted	$0.50	$0.64	$(1.07)	$1.66
Operating cash flow	Not reported separately	Not reported separately	$629.2	$448.8

Q3 revenue fell 17% year over year and net income fell 22%; operating margin was approximately 14.5%, versus 15.2% a year earlier.
Nine-month revenue declined 15%. The reported loss includes a $620.0 million pretax, noncash write-down of natural gas and oil properties ($384.4 million after tax), recorded in Q1 after low commodity prices breached the full-cost ceiling. Excluding that charge, management reported adjusted 2009 EPS guidance, not adjusted year-to-date earnings.
Q3 results reflected lower realized natural gas and oil prices and lower gas production, weaker construction-services workloads, and a seasonal natural-gas distribution loss. Construction materials and contracting and pipeline and energy services earnings improved.
Q3 dividend was $0.155 per common share; nine-month dividends were $0.465 per share, versus $0.445 in 2008.

Balance sheet, cash flow and liquidity

At September 30, 2009, cash was $61.4 million and current assets were $970.5 million, against current liabilities of $645.0 million. Short-term borrowings were zero; long-term debt was $1,471.8 million, with $27.8 million due within one year. Total debt including current maturities was approximately $1.500 billion.
Total assets were $5,872.6 million and stockholders’ equity was $2,516.3 million. Common equity represented 62% of total capitalization, compared with 61% at year-end 2008.
Nine-month operating cash flow of $629.2 million exceeded capital expenditures of $344.8 million. Investing cash use was $333.0 million; financing cash use was $287.2 million. Cash increased $9.7 million from year-end 2008.
Net capital expenditures were $320.1 million for the first nine months; the company estimated approximately $460 million for full-year 2009, down from its prior estimate of $602 million. Management emphasized funding capital spending substantially from operating cash flow.
Available facilities included $125 million of parent revolving/commercial-paper capacity and $400 million for Centennial; neither had borrowings outstanding. Other disclosed facilities included $165 million drawn under MDU Energy Capital’s $175 million shelf agreement and $14.7 million drawn under Intermountain’s revolving facility.

Material changes and management outlook

Natural gas and oil production earnings fell sharply: nine-month segment loss was $328.2 million versus earnings of $179.8 million in 2008, principally due to the impairment, lower realized prices, and lower gas production. Management said the full-cost ceiling exceeded capitalized cost at September 30, but further price declines could trigger additional write-downs.
Construction-services nine-month earnings declined 44% to $22.9 million as workloads contracted. Backlog was about $264 million, compared with $608 million a year earlier; the 2009 figure excluded $182 million associated with the bankrupt Fontainebleau project.
Management projected 2009 diluted EPS of $1.25–$1.40 excluding the $384.4 million after-tax impairment; including the charge, projected EPS was a loss of $0.67–$0.82. Long-term operating EPS growth goals were 7%–10% annually. These are forward-looking estimates, not guarantees.
Management expected 2009 construction materials and contracting earnings to exceed 2008 and projected production of combined natural gas and oil to be 7%–10% below 2008. It estimated 2009 production-segment capital spending at approximately $200 million.
Plans included Wygen III generation expected online in June 2010 and two wind projects expected to enter commercial service around mid-2010. Participants decided not to proceed with the proposed Big Stone Station II project.
The company issued approximately $63 million of common stock year to date and said no further equity issuance was planned for 2009. It continued to cite capital-market volatility and credit-rating downgrades as potential sources of higher borrowing costs or reduced access to financing.

Risks, contingencies and unusual items

Commodity price volatility is material: Q3 realized gas and oil prices were down 34% and 47%, respectively, from the prior-year quarter. Production hedging and utility gas swaps reduce some exposure but introduce counterparty, collateral, and cross-default risks. Cascade had posted $4.4 million of collateral; additional collateral potentially required under specified triggers was $41.7 million.
CBNG water-permit and water-management litigation could adversely affect Fidelity’s Montana operations if permits or approvals are overturned. The permit case was appealed; a separate challenge remained pending.
Other disclosed matters include an unquantified indemnity demand under a construction-contract guarantee, environmental claims with potential liabilities not yet estimable, and an Oregon concrete-defect case with plaintiff-estimated damages exceeding $15 million. Management considered the identified environmental remediation exposure not probable to be material, while outcomes remain uncertain.
Outstanding surety bonds were approximately $529 million. Fixed maximum subsidiary guarantees totaled $103.7 million, with $0.5 million outstanding; letters of credit totaled $37.1 million. These amounts are not equivalent to recorded liabilities.
Benefit costs rose, including a $1.65 million pension-plan curtailment loss in Q3. The company planned to freeze certain defined-benefit accruals and change retiree medical eligibility effective January 1, 2010. Management also warned that underfunded multi-employer pension plans could increase future contributions.
Other risks include regulatory and environmental requirements, potential greenhouse-gas controls, seasonal utility results, construction backlog cancellations, customer and counterparty credit exposure, and access to capital markets. The company reported disclosure controls effective at a reasonable assurance level and no material quarterly change in internal controls.

Most important facts to verify

Reconcile the $620.0 million pretax impairment and $384.4 million after-tax effect to reported results, and confirm any subsequent commodity-price-driven impairment risk.
Assess the assumptions underlying the $1.25–$1.40 adjusted EPS outlook and the full-year loss guidance, including expected commodity prices, production, and hedging.
Monitor liquidity, credit ratings, borrowing costs, debt maturities, and actual capital spending versus the $460 million estimate.
Track construction-services backlog and Fontainebleau exposure, plus the timing and profitability of the Montana Alberta Tie Line work.
Follow outcomes of CBNG litigation, environmental claims, and the construction-contract indemnity demand, including any newly quantified exposure.