MDU Resources Group, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. MDU is a diversified energy and infrastructure company with regulated utility, pipeline, oil and gas production, construction materials, and construction services businesses. First-quarter results are seasonal and may not indicate full-year performance.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Operating revenue | $918.5 million | $1,042.9 million |
| Operating income (loss) | $(474.3) million | $102.9 million |
| Net income (loss) | $(309.4) million | $56.1 million |
| Loss per diluted share | $(1.57) | Income per diluted share $0.30 |
| Operating cash flow | $94.7 million | $137.0 million |
| Cash capital expenditures | $189.5 million | $179.6 million |
- Revenue declined about 12%; the company recorded a $500.4 million pretax ($315.3 million after-tax) noncash write-down of oil and gas properties following a decline in SEC-defined commodity prices. The impairment drove the consolidated operating and net losses.
- Cash and cash equivalents were $122.2 million at quarter-end, versus $81.9 million at December 31, 2014. Available capacity under company and subsidiary credit facilities was $588.0 million.
- Total debt, including short-term borrowings and current maturities, was approximately $2.21 billion at March 31, 2015, versus $2.09 billion at year-end 2014. This included $409.3 million due within one year. Total equity was $2.93 billion; equity was 57% of total capitalization.
- Management estimated 2015 capital expenditures at approximately $755 million gross ($676 million net of expected property-sale proceeds). Cash capital expenditures in the first quarter were $189.5 million.
Material changes and segment performance
- Exploration and production: Reported a $328.9 million loss on common stock, compared with $20.9 million earnings. In addition to the impairment, lower realized oil, NGL, and gas prices and lower oil production weighed on results. Total production fell about 18% to 1.907 million BOE; oil production declined 25%.
- Natural gas distribution: Earnings declined to $21.5 million from $27.3 million, mainly due to warmer weather and 14% lower retail sales volumes.
- Electric: Earnings declined to $8.3 million from $11.0 million, reflecting higher operating, interest, and depreciation costs and 2% lower retail sales volumes.
- Pipeline and energy services: Earnings were $4.0 million, down from $4.3 million, with refinery start-up costs and lower storage earnings partly offset by higher transportation rates and volumes.
- Construction materials and contracting: Seasonal loss narrowed to $14.6 million from $23.6 million, helped by favorable weather, higher sales volumes, and improved margins; results included a $1.5 million after-tax multiemployer pension withdrawal charge.
- Construction services: Earnings fell to $4.8 million from $16.6 million, primarily due to lower Western-region workloads and margins after major projects were substantially completed in 2014.
Outlook, commentary, and risks
- Management’s long-term goal is 7%–10% annual growth in adjusted earnings per share from operations. It projected utility rate-base growth of about 11% compounded annually over five years and planned $477 million of 2015 utility gross capital investment.
- MDU intends to market and sell its exploration and production business, but delayed the process because of low oil prices; its planning assumption was a sale after 2015. Management anticipated further noncash oil and gas property write-downs if commodity prices remained weak.
- The Dakota Prairie Refinery had begun producing diesel, with sales expected to start in May 2015. Total project cost was estimated at $425 million–$435 million; projected EBITDA for its first full year was $60 million–$80 million, to be shared equally with Calumet.
- Construction materials backlog was $664 million, versus $653 million a year earlier; construction services backlog was $321 million, versus $397 million. The filing projected 2015 revenues of $1.7 billion–$1.9 billion for construction materials and $1.1 billion–$1.3 billion for construction services.
- Key exposures include oil and gas prices and reserve estimates, utility regulation and cost recovery, environmental and greenhouse-gas rules, refinery start-up and operating risks, construction market conditions, and multiemployer pension obligations. Knife River’s estimated withdrawal liability was $16.4 million pretax, subject to final determination.
- Contingencies include environmental remediation claims and litigation; the company reported $25.8 million of accrued contingencies. Management said the disclosed matters, after accrued liabilities, were not expected to materially affect financial position, results, or cash flows, while acknowledging uncertainty.
Important facts for investors to verify
- Whether subsequent commodity prices and reserve revisions trigger additional oil and gas property impairments, and how those affect asset values and reported earnings.
- Progress and realized economics of a potential exploration and production sale, including timing and proceeds.
- Whether the refinery reaches commercial sales and achieves the projected first-full-year EBITDA range.
- Debt maturities, available credit capacity, covenant compliance, and funding needs for planned capital expenditures.
- Outcomes of pending utility rate cases, environmental cost recovery requests, and material legal, environmental, and pension matters.
- Whether construction backlogs convert to revenue and margins, particularly given the year-over-year decline in construction services backlog.