MDU Resources Group, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. MDU is a diversified energy and infrastructure company with regulated electric, natural gas distribution and pipeline operations, plus exploration and production, construction materials and construction services businesses.
Financial performance and liquidity
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Operating revenue | $4.671 billion | $4.462 billion | Up 4.7% |
| Operating income | $488.2 million | $492.9 million | Down 0.9% |
| Earnings on common stock | $297.5 million | $278.2 million | Up 6.9% |
| Diluted EPS | $1.55 | $1.47 | Up 5.4% |
| Cash from operating activities | $615.8 million | $742.2 million | Down $126.4 million |
| Capital expenditures | $972.1 million | $909.4 million | Up $62.7 million |
| Long-term debt, including current maturities | $2.095 billion | $1.855 billion | Up $240.2 million |
- Operating margin was approximately 10.5%, compared with 11.0% in 2013, based on reported operating income and revenue.
- Year-end cash was $81.9 million; the company reported $677.3 million of available capacity under outstanding credit facilities. Total equity was $3.250 billion, and debt was 39% of capitalization.
- Net cash used in investing activities was $904.2 million; financing activities provided $325.2 million. Operating cash flow declined mainly because working capital needs increased by $131.9 million, particularly in exploration and production and construction services.
- 2014 dividends declared were $0.715 per share, versus $0.695 in 2013.
Material changes and segment results
- Electric: Earnings rose to $36.7 million from $34.8 million, supported by rate recovery for environmental upgrades and 4% higher retail sales volumes.
- Natural gas distribution: Earnings fell to $30.5 million from $37.7 million. Higher operating and depreciation costs and the absence of a prior-year business-sale gain outweighed rate increases and higher construction-related income; warmer weather reduced sales in some jurisdictions.
- Pipeline and energy services: Earnings increased to $22.6 million from $7.6 million, reflecting the absence of a 2013 asset impairment, higher transportation rates and volumes, and stronger Pronghorn results. Lower storage earnings and refinery start-up costs partly offset the improvement.
- Exploration and production: Earnings edged up to $96.8 million from $94.5 million. Higher natural gas prices and derivative gains partly offset lower oil prices and lower natural gas and NGL production. Total production declined 12% to 8.998 million BOE.
- Construction materials and contracting: Earnings were $51.5 million versus $50.9 million. Improved volumes and margins were largely offset by an $8.4 million after-tax multiemployer pension plan withdrawal liability.
- Construction services: Earnings rose to $54.4 million from $52.2 million on higher margins and favorable tax items, partly offset by higher overhead costs.
Consolidated earnings increased by $19.3 million. Favorable tax adjustments and stronger pipeline and energy services performance contributed; increased operating, depreciation and interest costs were offsets. Prior-year comparisons also include unusual items, including a $9.0 million after-tax gathering-asset impairment in 2013 and a $246.8 million after-tax oil and gas property write-down in 2012.
Outlook, risks and contingencies
- Management’s long-term goal is 7%–10% compound annual growth in earnings per share from operations. It projected approximately 11% annual compounded rate-base growth over five years and a gross capital investment program of approximately $1.8 billion, including $478 million planned for 2015.
- The company planned approximately $961 million of 2015 capital expenditures and debt retirement combined. Major projects include the approximately $200 million, 107.5-MW Thunder Spirit Wind project and Dakota Prairie Refinery, then expected to enter service in the second quarter of 2015. The refinery’s first-full-year EBITDA projection was $60 million–$80 million, shared equally with Calumet.
- Management delayed marketing Fidelity, its exploration and production business, amid falling oil prices. It assumed a sale after 2015 for planning purposes, expected lower 2015 production, and warned that low commodity prices made future noncash property write-downs likely. Its 2015 oil-price assumption was $50 per barrel.
- Key risks include oil, gas and construction-market volatility; regulatory cost recovery and environmental requirements; project execution and cost overruns; weather and seasonal demand; access to financing; construction backlog delays or cancellations; and pension funding obligations. Around 40% of the multiemployer pension plans to which the company contributes were reported in endangered or critical status.
- At year-end, debt maturities included $269.4 million in 2015 and $293.8 million in 2016. Contractual purchase commitments totaled $2.248 billion, in addition to $252.4 million of operating lease commitments. The company reported $92.8 million of asset retirement obligations.
- Legal and environmental matters include a disputed mining-permit case with potential civil penalties, an appealed judgment in a natural-gas gathering dispute, and manufactured-gas-plant remediation. The filing reports $27.6 million accrued for contingencies overall; certain site liabilities remain uncertain.
- The annual financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective as of December 31, 2014.
Most important facts for investors to verify
- Whether falling oil prices trigger the anticipated exploration and production impairment, and whether Fidelity can be sold on acceptable terms and timing.
- Whether the planned refinery and utility projects reach service on schedule and within budget, and whether the refinery achieves projected economics.
- Whether regulators approve requested rate increases and allow timely recovery of environmental, generation and infrastructure investments.
- How operating cash flow, working capital, debt maturities and planned capital spending affect liquidity and the dividend.
- The final multiemployer pension withdrawal assessment and the ultimate exposure from litigation and environmental remediation matters.
- Whether construction backlogs convert to revenue: year-end backlogs were $438 million in construction materials and $305 million in construction services, both below prior-year levels.