MDU Resources Group, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; unaudited. MDU operates regulated electric and natural gas utilities, pipeline and energy services, oil and gas exploration and production, construction materials and contracting, and construction services.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $1.370 billion | $1.286 billion | $3.507 billion | $3.278 billion |
| Operating income | $176.8 million | $149.9 million | $378.6 million | $345.8 million |
| Net income | $102.1 million | $84.4 million | $211.6 million | $187.3 million |
| Earnings on common stock | $103.0 million | $84.3 million | $213.5 million | $187.0 million |
| Diluted EPS | $0.53 | $0.44 | $1.11 | $0.99 |
- Revenue rose 6.6% in Q3 and 7.0% for the first nine months; common-stock earnings increased 22% and 14%, respectively. Operating margin was approximately 12.9% for Q3 and 10.8% year to date, versus 11.7% and 10.5% in 2013.
- Operating cash flow was $403.3 million for the nine months, down from $429.0 million. Capital expenditures were $638.7 million; acquisitions used $208.9 million, partly offset by $203.4 million in property-sale proceeds.
- At September 30, cash was $233.7 million. Current assets were $1.418 billion and current liabilities $938.5 million. Total debt, including debt due within one year, was $2.211 billion; total equity was $3.159 billion. Available capacity under credit facilities was $614.8 million.
- Dividends declared were $0.1775 per share in Q3 and $0.5325 year to date. The company issued common stock, receiving $144.9 million in net proceeds during the first nine months.
Material changes and business drivers
- Q3 earnings growth was substantially influenced by exploration and production commodity derivatives: an after-tax unrealized gain of $18.1 million versus an after-tax unrealized loss of $7.9 million a year earlier. Construction materials earnings also improved; construction services and electric earnings declined.
- For the first nine months, exploration and production earnings increased modestly, with higher oil production and natural gas prices partly offset by lower gas production, higher depletion and operating costs, and realized derivative losses. Pipeline and energy services earnings improved to $15.2 million from $1.3 million, including the absence of a prior-year $9.0 million after-tax asset impairment.
- Construction materials and contracting earnings rose to $42.2 million from $38.6 million; construction services earnings rose to $40.8 million from $36.7 million. Natural gas distribution earnings fell to $10.5 million from $15.4 million.
- In March, the company completed a $208.9 million acquisition of Powder River Basin oil and gas assets. It closed a sale of certain Mountrail County properties on September 30 for $184.4 million, subject to final adjustments.
Outlook, risks and unusual items
- 2014 diluted EPS guidance was $1.40–$1.50. Management described adjusted guidance as excluding discontinued operations and the $10.7 million after-tax year-to-date unrealized commodity-derivative gain, and stated GAAP guidance was also in that range; derivative fair-value changes may cause reported earnings to fluctuate. Long-term EPS growth goals were 7%–10% annually.
- Estimated 2014 gross capital expenditures were approximately $1.1 billion. The company projected utility rate-base growth of approximately 9% annually over five years, supported by a planned $1.3 billion investment program.
- On October 31, 2014, after the reporting date, the board approved a plan to market Fidelity and potentially exit oil and gas exploration and production. No sale was assured; execution, pricing, taxes, indemnities and possible impairment are risks.
- Dakota Prairie Refinery was near 90% complete; estimated project cost was approximately $360 million, with late-2014 service commencement projected. First-year EBITDA was estimated at $60–$80 million for the project, shared equally with Calumet. Project timing, cost and performance remain uncertain.
- Knife River expected a multiemployer pension withdrawal liability of approximately $14 million, or $8.4 million after tax; the plan administrator had not determined the final amount. Other disclosed exposures include environmental remediation, litigation and regulatory proceedings. Management said it did not expect the cited litigation and other probable or reasonably possible losses, beyond accrued amounts, to materially affect financial position, results or cash flows.
- Key risks include oil and gas price volatility, utility regulation and cost recovery, environmental and greenhouse-gas rules, multiemployer pension obligations, and the ability to complete the Fidelity sale. The filing also notes seasonal variability in operating results.
Important facts for investors to verify
- How much of earnings growth came from volatile unrealized derivative gains, and how results compare excluding those effects.
- Whether 2014 EPS guidance remains achievable, including the assumptions for commodity prices, production and derivative positions.
- Progress, expected proceeds, tax consequences and potential impairment implications of the planned Fidelity marketing and sale.
- Final costs and startup performance of Dakota Prairie Refinery, and the actual amount of Knife River’s pension withdrawal liability.
- Funding and timing for planned capital investment, debt maturities and rate-recovery approvals; the filing reports total debt of $2.211 billion and $149.1 million due within one year.
- Developments in environmental, litigation and regulatory matters, including the company’s accrued $31.9 million for contingencies.