MDU Resources Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. MDU is a regulated energy delivery and construction materials and services company. Results reflect continuing operations after the sales of Fidelity’s oil and gas assets and Dakota Prairie Refining, which are presented as discontinued operations. Management cautions that seasonal interim results may not indicate full-year performance.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Operating revenue | $1,208.6 million | $1,198.3 million | $3,112.7 million | $2,997.2 million |
| Operating income | $146.7 million | $127.8 million | $297.6 million | $237.8 million |
| Income from continuing operations | $88.4 million | $73.9 million | $166.6 million | $120.5 million |
| Net income (loss) | $83.0 million | $(149.2) million | $(133.0) million | $(696.0) million |
| Common EPS, diluted | $0.42 | $(0.72) | $(0.01) | $(3.47) |
| Operating cash flow | Not separately presented for the quarter | $276.5 million | $403.6 million |
Consolidated operating margin was approximately 12.1% in Q3 2016 versus 10.7% in Q3 2015, and 9.6% for the first nine months versus 7.9% in 2015. The nine-month net loss primarily reflects discontinued-operations losses; continuing operations generated $166.6 million of income. Cash flow from continuing operations was $269.3 million, compared with $277.8 million a year earlier.
- Segment results: Nine-month earnings improved in construction materials and contracting ($88.8 million versus $74.3 million), construction services ($20.2 million versus $16.5 million), pipeline and midstream ($18.3 million versus $6.6 million), and electric ($31.8 million versus $26.8 million). Natural gas distribution earnings were $4.9 million versus $3.8 million.
- Cash and liquidity: Cash was $59.9 million at September 30. The company reported $375.3 million of available capacity under credit facilities and working capital of approximately $400.4 million.
- Debt: Current maturities and long-term debt totaled approximately $1.902 billion, versus $2.201 billion at September 30, 2015. Long-term debt due within one year was $93.6 million. Total debt was higher than the $1.796 billion at December 31, 2015.
- Capital spending and dividends: Cash-flow-statement capital expenditures were $303.9 million for the nine months. Continuing-operations capital expenditures were $279.7 million; full-year 2016 continuing-operations spending was estimated at approximately $374 million, or $354 million net of expected proceeds. Nine-month common dividends declared were $0.5625 per share.
Material changes versus prior periods
- Q3 common earnings improved to $82.8 million from a loss of $139.6 million, while nine-month common loss narrowed to $1.8 million from $675.5 million. Comparisons are heavily affected by prior-year impairments and write-downs in discontinued operations.
- In June 2016, MDU sold Dakota Prairie Refining to Tesoro and exited refining. The sale produced a $251.9 million pretax impairment ($156.7 million after tax) in Q2 2016.
- MDU completed sales of Fidelity’s marketed oil and gas assets between October 2015 and April 2016. The absence of major 2015 Fidelity impairments and a noncash property write-down materially reduced discontinued-operations losses in 2016.
- Continuing revenue rose about 0.9% in Q3 and 3.9% for the nine months. Construction services revenue grew, while construction materials revenue was approximately flat for the nine months. Lower natural gas prices reduced reported natural gas distribution revenue and purchased-gas expense.
- Operating cash flow declined $127.1 million year over year for the nine months, largely because of lower cash flows from the former exploration and production and refining businesses and higher utility working-capital requirements.
Outlook, commentary, and risks
- 2016 outlook: Management projected construction materials and contracting revenue of $1.85–$1.95 billion, with margins slightly above 2015; construction services revenue of $1.0–$1.1 billion, with margins slightly below 2015. September 30 backlogs were $580 million and $518 million, respectively. These are forward-looking estimates, not guarantees.
- Management expected utility customer growth of 1%–2% annually and approximately $35 million of 2016 investment to serve customers in the Bakken region. A 160-mile transmission project was expected to be completed in 2019. The 2016 capital program was expected to be funded through internal cash, credit facilities, debt issuance, and asset sales.
- Pipeline and midstream projects include the Valley Expansion project, estimated at $55–$60 million, with construction expected to begin in early 2018 subject to permits and approvals. A separate project to connect the Demicks Lake plant was delayed by the plant owner.
- Key risks include regulation and recovery of utility costs, GHG-emissions requirements, pipeline safety and operating incidents, commodity prices and production levels affecting midstream activity, construction-market competition and input costs, labor availability, and multiemployer pension obligations. The Clean Power Plan was stayed pending litigation; potential compliance costs remained uncertain.
- Contingencies include environmental matters, litigation, and guarantees. Centennial continued to guarantee $64.9 million of Dakota Prairie Refining debt, with Tesoro agreeing to indemnify it for losses and litigation expenses. The company also disclosed approximately $560.7 million of surety bonds and $34.9 million of guaranteed letters of credit; no amounts were outstanding under the specified guarantees or letters of credit at quarter-end.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No commodity, foreign-currency, or interest-rate hedges were outstanding at September 30.
Important facts for investors to verify
- How much of the reported earnings improvement reflects recurring continuing operations versus the absence of prior-period impairments and other discontinued-operation effects.
- Actual full-year segment revenue, margins, backlog conversion, and capital spending compared with management’s 2016 estimates.
- Utility rate-case outcomes, interim-rate refunds, and the timing and extent of recovery for infrastructure and environmental costs.
- Potential exposure from environmental claims, the MEPP withdrawal-liability dispute, indemnities, and guarantees related to businesses sold.
- Debt and liquidity needs as capital projects proceed, including compliance with credit-agreement covenants and access to commercial-paper and capital markets.