MDU Resources Group, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Comparisons are with Q1 2015. Fidelity’s oil and gas assets were classified as discontinued operations, and prior periods were restated accordingly.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Operating revenue | $905.2 million | $862.3 million |
| Operating income | $41.8 million | $43.7 million |
| Income from continuing operations | $14.7 million | $15.2 million |
| Earnings on common stock | $24.7 million | Loss of $306.1 million |
| Basic and diluted EPS | $0.13 | Loss of $1.57 |
| Operating cash flow | $45.2 million | $98.9 million |
| Capital expenditures | $115.2 million consolidated; $98.2 million continuing operations | $135.3 million consolidated |
Revenue rose about 5%, while operating income declined; operating margin was approximately 4.6%, versus 5.1% a year earlier. The sharp improvement in common-stock earnings primarily reflects the absence of the prior-year after-tax $315.3 million oil and gas property write-down. Q1 2016 discontinued operations recorded a loss of $0.8 million, including a $0.9 million after-tax impairment reversal.
Cash and cash equivalents were $90.9 million at March 31, 2016. Total debt, including short-term borrowings and current maturities, was approximately $2.0 billion. The Company reported $586.7 million of available capacity under credit facilities. Total equity was $2.50 billion. The quarterly common dividend was $0.1875 per share, up from $0.1825.
Business and comparative developments
- Regulated electric earnings increased to $11.1 million from $8.3 million, supported by rate trackers and tax benefits, partly offset by lower sales volumes and higher costs.
- Natural gas distribution earnings increased to $25.2 million from $21.5 million, with higher retail sales and transportation volumes and rate increases.
- Pipeline and midstream earnings declined to $5.3 million from $6.4 million, chiefly due to lower gathering and processing volumes.
- Construction materials and contracting recorded a seasonal loss of $14.5 million, little changed year over year. Construction services earnings rose to $6.0 million from $4.8 million.
- Refining losses increased to $7.2 million from $2.4 million as Dakota Prairie Refinery operating costs, depreciation and interest increased; market conditions weighed on product margins.
- Fidelity asset sales were substantially completed by the filing date, with some sales closing in April 2016. The divestiture is intended to redirect capital toward remaining businesses. The Company recorded $1.8 million of Fidelity exit and disposal costs in Q1 and expected a further $4.3 million during the rest of 2016.
Outlook, risks and contingencies
- Management projected approximately $362 million of 2016 capital expenditures from continuing operations, net of expected property-sale proceeds; funding sources include operating cash, credit facilities, long-term debt and asset sales.
- Utility rate base was $1.8 billion at year-end 2015; management projected about 7% annual compounded growth over five years, including an approximate $1.5 billion capital investment program. Customer growth was projected at 1.5% to 2.0% annually.
- 2016 projected revenue ranges: construction materials and contracting, $1.85–$1.95 billion; construction services, $950 million–$1.1 billion. Management expected margins in both businesses to be slightly higher than 2015. March 31 backlogs were $831 million and $530 million, respectively.
- Dakota Prairie Refinery remained a significant uncertainty: management cited possible continuing operating losses, funding constraints and future impairment if market conditions persist, and was evaluating strategic alternatives.
- Regulatory matters include pending or interim utility rate proceedings. The Montana electric settlement approved an annual increase of $3.0 million effective April 1, 2016, with a further $4.4 million effective April 1, 2017; other proceedings remained pending.
- Risks include commodity and refined-product pricing, regulation and environmental compliance (including greenhouse-gas rules), seasonal working-capital needs, construction-market and labor conditions, and multiemployer pension obligations. JTL-Wyoming’s estimated withdrawal liability was $16.4 million and is disputed. Management stated that, after recorded accruals, it did not expect disclosed litigation and other probable or reasonably possible losses to materially affect the Company.
Important facts for investors to verify
- Progress, proceeds, remaining obligations and indemnities related to Fidelity asset sales and exit costs.
- Dakota Prairie Refinery operating performance, liquidity, strategic review and potential impairment exposure.
- Whether utility rate-case outcomes and interim rates are finalized, and whether they support planned investment and recovery.
- Operating cash flow, capital spending and borrowing needs, particularly given the year-over-year cash-flow decline and seasonal working-capital requirements.
- Developments in the JTL-Wyoming pension dispute and material environmental or litigation contingencies.