MDU Resources Group, Inc. — Q2 2014 Form 10-Q
Business context and period. Diversified energy and infrastructure company spanning regulated electric and natural gas utilities, pipeline and energy services, oil and gas production, construction materials and contracting, and construction services. This unaudited filing covers the quarter and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $1,094.0 million | $1,060.6 million | $2,136.9 million | $1,992.2 million |
| Operating income | $98.9 million | $91.4 million | $201.8 million | $195.9 million |
| Income from continuing operations | $52.8 million | $46.4 million | $109.0 million | $103.0 million |
| Net income | $53.3 million | $46.3 million | $109.5 million | $102.8 million |
| Earnings per common share, diluted | $0.28 | $0.24 | $0.58 | $0.54 |
Q2 revenue increased about 3% and six-month revenue about 7%; diluted EPS rose $0.04 for the quarter and $0.04 for the six-month period. Common dividends declared were $0.1775 per share for Q2 and $0.3550 for the first half.
- Cash flow: First-half operating cash flow was $210.5 million, down from $233.9 million. Capital expenditures were $390.1 million and acquisitions, net of cash acquired, were $206.3 million. Investing cash outflow was $585.7 million; financing cash inflow was $420.2 million. Cash ended the period at $90.3 million.
- Debt and liquidity: Long-term debt, including $42.2 million due within one year, totaled $2,187.1 million; no short-term borrowings were outstanding. Available capacity under company and subsidiary credit facilities was $669.8 million. Total equity was $3,064.4 million, and equity was 58% of total capitalization.
- Capital funding: The company issued common stock for $132.3 million in the first half and issued $50 million of senior notes at 5.2% in April. A further $100 million of notes was issued in July at a weighted-average rate of 4.3%.
Material changes and operating performance
- Pipeline and energy services: Q2 earnings improved to $5.8 million from a $6.4 million loss; first-half earnings were $10.1 million versus a $4.1 million loss. Drivers included the absence of a prior-year $9.0 million after-tax impairment, better Pronghorn results, and higher transportation rates and volumes.
- Exploration and production: Earnings fell to $19.2 million in Q2 from $33.0 million and to $40.1 million for the first half from $53.3 million. Realized and unrealized commodity-derivative losses, higher depletion expense, and lower natural-gas production outweighed higher oil production and stronger unhedged prices. First-half oil production rose 14%; natural-gas production declined 19%.
- Utilities: Electric earnings increased to $7.8 million for Q2 and $18.9 million for the first half, supported by higher rates and sales. Natural gas distribution had a seasonal Q2 loss of $4.5 million, improved from $5.9 million; first-half earnings declined to $22.8 million from $26.6 million, partly because the prior year included a business-sale gain and 2014 costs were higher.
- Construction: Construction services first-half earnings rose to $30.9 million from $24.6 million on improved workloads and margins. Construction materials and contracting recorded a first-half loss of $13.0 million, compared with a $10.5 million loss, amid weaker construction revenue and margins; Q2 earnings increased modestly to $10.6 million.
Outlook, risks, contingencies and unusual items
- 2014 outlook: Diluted EPS guidance is $1.50–$1.65. The filing states this range excludes discontinued operations and the $7.5 million after-tax unrealized commodity-derivative loss, and also describes GAAP guidance as the same range. Management targets long-term EPS growth of 7%–10%. Estimated 2014 gross capital expenditures are approximately $1.1 billion; net capital expenditures are estimated at approximately $863 million.
- Segment expectations: E&P expects 10%–15% oil-production growth, with NGL production down 20%–25% and natural-gas production down 20%–25%, primarily reflecting asset sales. The Dakota Prairie Refinery was about 75% complete, with late-2014 service expected and total project cost estimated at $350 million; first-year EBITDA was projected at $70–$90 million, shared equally with Calumet. These are forward-looking estimates, not guaranteed outcomes.
- Subsequent asset sale: Fidelity agreed in July to sell certain Mountrail County oil and gas properties for approximately $200 million, subject to adjustments and closing conditions; closing was expected by September 30, 2014.
- Commodity and regulatory exposure: Commodity derivatives produced substantial gains and losses between periods; at June 30, derivative liabilities were $17.4 million. The company identified commodity-price volatility, environmental compliance costs, and proposed greenhouse-gas rules as risks. Montana-Dakota’s $7.4 million annual recovery request for a gas turbine remained pending; an $8.6 million annual environmental recovery rider was approved in July. A WBI Energy Transmission rate settlement remained subject to FERC approval.
- Contingencies: Accrued contingencies, including litigation, production taxes, royalty claims and environmental matters, totaled $32.1 million. Disclosed matters include construction-materials penalties sought of up to $3.7 million plus daily amounts, former-employee litigation seeking approximately $23.8 million plus other damages, and environmental cleanup claims with uncertain ultimate costs. Management said probable and reasonably possible losses beyond accruals were not expected to materially affect financial position, results or cash flows.
- Other unusual items: The 2014 first-half results benefited from the absence of the prior-year pipeline impairment. Q2 included a benefit related to resolution of a legacy claim in discontinued operations. The company acquired Powder River Basin oil and gas interests for $206.3 million in March.
Important facts for investors to verify
- Whether reported earnings and 2014 EPS guidance are materially affected by realized and unrealized commodity-derivative results, and how the stated guidance treatment reconciles to GAAP.
- Whether the approximately $200 million Mountrail County asset sale closes on expected terms and how it changes production, capital spending and guidance.
- Progress, cost and commissioning timing for the Dakota Prairie Refinery, and whether projected EBITDA is achieved.
- Outcomes of pending utility and pipeline rate proceedings, including the turbine recovery request and FERC settlement.
- Potential exposure from environmental matters and litigation, and whether recorded accruals remain adequate as proceedings develop.