MDU Resources Group, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. MDU is a diversified energy, natural resources and construction company. Comparisons are with Q1 2013 unless otherwise noted.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Operating revenue | $1.043 billion | $931.6 million |
| Operating income | $102.9 million | $104.5 million |
| Income from continuing operations | $56.2 million | $56.6 million |
| Earnings on common stock | $56.5 million | $56.3 million |
| Diluted EPS | $0.30 | $0.30 |
| Operating cash flow | $137.0 million | $136.9 million |
| Capital expenditures | $179.6 million | $188.5 million |
Revenue increased about 12%, while operating income declined about 2%; common earnings rose slightly and diluted EPS was unchanged. Construction services and pipeline and energy services earnings improved; natural gas distribution and construction materials and contracting earnings weakened. Construction materials reported a seasonal loss of $23.6 million, versus $20.6 million.
Cash used in investing activities was $380.3 million, including the $206.3 million Powder River Basin oil and gas asset acquisition. Financing provided $281.7 million, including $309.5 million of long-term debt issuance and $54.8 million of common stock proceeds. Cash increased to $83.7 million from $45.2 million at year-end 2013.
At March 31, total debt was approximately $2.106 billion, including $12.2 million due within one year; long-term debt was $2.094 billion. Total equity was $2.950 billion. MDU reported $454.3 million of available capacity under credit facilities and was in compliance with applicable debt covenants. Equity was 58% of total capitalization, compared with 60% at December 31, 2013.
Material changes and business drivers
- Electric earnings rose 12% to $11.0 million, primarily on 10% higher retail sales volumes and higher average realized rates.
- Natural gas distribution earnings fell 16% to $27.3 million, reflecting higher payroll and benefit costs, the absence of a prior-year business-sale gain, and higher depreciation; rate increases partly offset the decline.
- Pipeline and energy services earnings rose 87% to $4.3 million, driven by Pronghorn gathering and processing and higher transportation volumes.
- Exploration and production earnings increased 3% to $20.9 million. Higher gas prices and oil production were partly offset by derivative losses, lower gas and NGL production, and higher costs.
- Construction services earnings increased 42% to $16.6 million on higher workloads and margins in the Western region. Construction materials and contracting reported a larger first-quarter seasonal loss, driven by lower construction margins and higher selling, general and administrative expense.
- The company acquired working interests and leasehold positions in the Powder River Basin for $206.3 million, closing March 6, 2014. Results were included from acquisition; pro forma information was omitted because the acquisition was not material.
Guidance, outlook and risks
- Management projected 2014 diluted EPS of $1.50 to $1.65, excluding discontinued operations and a $4.3 million after-tax unrealized commodity-derivative loss; the filing states GAAP guidance, including these adjustments, is in the same range.
- Estimated 2014 gross capital expenditures were approximately $1.2 billion, including the Powder River Basin acquisition and associated drilling costs. Separately, the filing estimated net capital expenditures of approximately $1.1 billion. Management expected to fund investment through operating cash, credit facilities, debt and equity issuance.
- For 2014, management expected oil production to increase 15% to 20%, while NGL production was expected to decline 20% to 25% and natural gas production 25% to 30%, principally reflecting asset divestitures. The company planned about $670 million of exploration and production capital expenditures.
- Dakota Prairie Refinery construction was underway; total project cost was estimated at $350 million, with service expected in late 2014 and first-year EBITDA projected at $70 million to $90 million, shared equally with Calumet. These are forward-looking estimates.
- Regulatory matters included pending recovery requests for electric generation investment, an environmental cost rider update, and a WBI Energy Transmission rate case settlement in principle. Rate outcomes and approvals remained subject to regulators.
- Risks include commodity-price volatility, operating and development costs, seasonal construction activity, regulation and environmental compliance, permitting, and litigation or remediation exposure. Contingencies included environmental claims and lawsuits; management said probable and reasonably possible losses beyond accrued amounts were not expected to materially affect financial position, results or cash flows.
- Commodity derivatives were recorded as a $12.2 million liability at quarter-end. Cross-default provisions could require early settlement or termination if specified debt defaults occur. The filing also reported $588.8 million of surety bonds, not recorded as liabilities.
Most important facts for investors to verify
- Whether the $1.50–$1.65 EPS outlook and production targets are achieved, including the impact of commodity prices and derivative positions.
- Final spending and funding needs for the Powder River Basin program, other capital projects and the Dakota Prairie Refinery.
- Regulatory decisions and timing for requested rate increases and cost-recovery mechanisms.
- Construction segment backlog, margins and seasonal performance; reported March 31 backlogs were $653 million for construction materials and $397 million for construction services.
- Developments in litigation and environmental matters, and any effect on accrued liabilities or cash flows.