MDU Resources Group, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Unaudited results; filing dated November 6, 2015. MDU operates regulated electric and natural gas utilities, pipeline and energy services, construction materials and contracting, and construction services. Fidelity, its exploration and production business, was classified as discontinued operations after the company announced plans to sell it and exit the business.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $1,280.5 million | $1,213.2 million | $3,129.1 million | $3,066.5 million |
| Operating income | $109.7 million | $118.9 million | $198.7 million | $244.9 million |
| Income from continuing operations | $53.4 million | $63.6 million | $82.6 million | $124.1 million |
| Discontinued operations, net of tax | Loss of $202.6 million | Income of $38.5 million | Loss of $778.6 million | Income of $87.5 million |
| Net income (loss) attributable to common stock | Loss of $139.6 million | Income of $103.0 million | Loss of $675.5 million | Income of $213.5 million |
| Basic and diluted EPS | $(0.72) | $0.53 | $(3.47) | $1.11 |
| Operating margin, approximate | 8.6% | 9.8% | 6.4% | 8.0% |
Cash flow: Nine-month operating cash flow was $382.2 million, down from $419.3 million. Investing used $544.0 million, including $484.5 million of capital expenditures; financing provided $168.8 million. Cash and cash equivalents were $88.6 million at September 30, versus $81.9 million at December 31, 2014.
Debt and liquidity: Balance-sheet debt, including short-term borrowings and current maturities, totaled approximately $2.305 billion; short-term borrowings were $29.5 million. Cash was $88.6 million, and the company reported $393.5 million of available capacity under outstanding credit facilities. Total equity was $2.515 billion, down from $3.250 billion at year-end 2014, largely reflecting the loss. Equity was 52% of total capitalization, compared with 61% at year-end 2014. The board declared quarterly common dividends of $0.1825 per share, versus $0.1775 a year earlier.
Material changes and segment performance
- The reported net loss was driven principally by Fidelity’s discontinued-operations losses and impairments. Fidelity recorded a $500.4 million pretax full-cost ceiling write-down in Q1, a $400.0 million pretax held-for-sale impairment in Q2, and a further $356.1 million pretax held-for-sale impairment in Q3. Management attributed the impairments and weaker operating results to lower commodity prices and sale valuations.
- Construction materials and contracting earnings rose to $68.8 million in Q3 and $74.3 million for nine months, compared with $55.2 million and $42.2 million. Higher product-line margins and volumes, favorable weather, and lower diesel costs contributed.
- Construction services earnings fell to $4.7 million in Q3 and $16.5 million year to date, versus $9.9 million and $40.8 million, reflecting lower workloads and margins, equipment sales and rental margins, and electrical supply sales.
- Pipeline and energy services reported a Q3 loss of $9.5 million and a nine-month loss of $7.1 million, versus earnings of $5.1 million and $15.2 million. Results included gathering-asset impairments and higher Dakota Prairie Refinery losses. The refinery began operations in May 2015; the company’s after-tax share of its loss was $5.8 million for Q3 and $12.6 million year to date.
- Natural gas distribution earnings were $3.8 million for nine months, down from $10.5 million, mainly because warmer weather reduced retail sales volumes by 12%. Electric earnings increased in Q3 to $12.6 million from $9.2 million, but declined slightly year to date to $26.8 million from $28.0 million.
Outlook, risks, and unusual items
- The company had purchase and sale agreements covering the vast majority of Fidelity assets, representing more than 90% of its nine-month production, with closings expected in Q4 2015; it continued marketing remaining assets. Estimated gross proceeds were approximately $328 million, before purchase-price adjustments and income-tax benefits. Fidelity also expected about $11 million of exit costs, plus approximately $12 million of future office-lease payments, which could decline if space is subleased. Further impairments remain possible.
- For 2015, management projected construction materials and contracting revenue of $1.8–$2.0 billion and higher margins than in 2014. Construction services revenue was projected at $850–$950 million, with lower margins than in 2014. Estimated continuing-operations capital expenditures were approximately $583 million; discontinued-operations capital expenditures were approximately $87 million.
- Growth plans included utility infrastructure and generation investment, the Thunder Spirit Wind project, and pipeline expansions. The 345-kV Ellendale-to-Big Stone transmission project was expected to be completed in 2019. The planned Wind Ridge pipeline was canceled after its customer decided not to build the related fertilizer plant.
- Regulatory matters include pending electric and gas rate applications. Subsequent to quarter-end, the NDPSC approved a Montana-Dakota natural gas rate settlement providing a $2.6 million annual increase; a Cascade Oregon settlement for approximately $0.6 million annually was filed and remained pending. Recovery and timing of requested rate increases are uncertain.
- Key risks include commodity-price and reserve-estimate uncertainty; Fidelity sale execution and proceeds; Dakota Prairie Refinery operating costs and market margins; environmental and greenhouse-gas rules and recovery of compliance costs; and potential multiemployer pension-plan contributions or withdrawal liabilities. Knife River’s estimated withdrawal liability was $16.4 million, subject to plan-administrator determination.
- Disclosed contingencies include the Target Range gravel-pit matter, for which civil penalties of up to $3.7 million plus daily penalties were sought; environmental remediation matters, including Cascade accruals of $1.7 million for Eugene and $12.2 million for Bremerton; and other litigation. Management stated that, after accrued amounts, it did not expect the disclosed matters to materially affect financial position, results, or cash flows.
- Subsequent financing included $50 million of MDU Energy Capital senior notes at 4.31%, and $98 million of MDU Resources senior notes at a weighted average 3.90%, with a further $52 million scheduled for December 2015 at 4.03%.
Most important facts for investors to verify
- Whether Fidelity asset-sale agreements closed as expected, final net proceeds and tax effects, and any additional impairments or disposal costs.
- Whether continuing-operations earnings and operating cash flow can offset the loss of Fidelity and fund the planned capital program and dividends.
- Whether Dakota Prairie Refinery can improve operating performance and margins, and whether gathering-asset impairments or asset-sale negotiations continue.
- Outcomes and timing of utility rate cases, including whether requested infrastructure and environmental costs are recovered from customers.
- Actual debt, liquidity, and contingent obligations after the subsequent note issuances, including pension, litigation, environmental, and guarantee exposures.