MDU Resources Group, Inc. — 2015 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015. MDU is a diversified energy and infrastructure company with regulated electric, natural gas distribution and pipeline operations, plus construction materials, construction services and refining businesses. Fidelity, its oil and gas exploration and production business, was classified as discontinued operations as the company pursued its exit.
Financial results and key metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Operating revenue | $4.192 billion | $4.115 billion |
| Operating income | $254.1 million | $319.4 million |
| Operating margin | Approximately 6.1% | Approximately 7.8% |
| Continuing-operations income | $114.7 million; $0.77 diluted EPS | $179.2 million; $0.95 diluted EPS |
| Net loss attributable to common stock | $623.1 million; $(3.20) diluted EPS | Income of $297.5 million; $1.55 diluted EPS |
| Cash from operating activities | $641.1 million | $603.7 million |
| Cash and cash equivalents | $84.6 million | $81.9 million |
| Long-term debt, including current maturities | $1.871 billion | $2.094 billion |
Operating cash flow included $200.0 million from discontinued operations; continuing operations provided $441.1 million. Investing activities used $382.5 million and financing activities used $255.7 million. The company reported $799.2 million of available capacity under outstanding credit facilities. Total equity was $2.521 billion, down from $3.250 billion, and debt was 43% of capitalization versus 39% in 2014. Common dividends declared were $0.735 per share, compared with $0.715.
Material changes versus 2014
- Revenue increased about 1.9%, but operating income declined about 20%. Construction materials and contracting earnings rose to $89.1 million from $51.5 million, while construction services earnings fell to $23.8 million from $54.5 million.
- The natural gas distribution business reported earnings of $23.6 million, down from $30.5 million, with warmer weather reducing retail sales volumes. Pipeline and midstream earnings fell to $13.3 million from $24.7 million, including a $10.6 million after-tax gathering-asset impairment.
- Refining reported a $22.5 million loss attributable to MDU, compared with a $2.1 million loss in 2014. The Dakota Prairie Refinery began commercial operations in May 2015; start-up-related costs, rail and contract services costs, and weak product margins weighed on results.
- The consolidated loss was driven principally by discontinued operations: a $772.4 million after-tax loss, including a $475.4 million after-tax impairment of assets held for sale and a $315.3 million after-tax noncash oil and gas property write-down. The 2014 discontinued-operations result was $115.2 million of income.
- MDU completed most Fidelity asset sales in the fourth quarter and continued marketing remaining assets. Assets and liabilities held for sale declined substantially from 2014.
Outlook, risks and unusual items
- Management projected approximately 7% annual compounded rate-base growth over five years, supported by an approximately $1.5 billion electric and natural gas distribution capital investment program. Estimated company net capital expenditures were $342 million in 2016, $546 million in 2017 and $519 million in 2018, excluding debt maturities.
- For 2016, management projected construction materials and contracting revenue of $1.85–$1.95 billion and construction services revenue of $950 million–$1.1 billion; margins were expected to be slightly higher than in 2015. Backlogs at year-end were $491 million and $493 million, respectively, but are subject to delays, scope changes or cancellation.
- The company completed its 107.5-MW Thunder Spirit wind farm purchase for approximately $214 million, including associated costs, and completed an 18.7-MW engine generation project. A proposed 345-kV transmission line, with MDU’s estimated share of cost at approximately $205 million, was targeted for completion in 2019.
- Key risks include commodity prices and refining spreads, refinery operating performance and crude supply, weather, construction-market cyclicality, access to financing, environmental compliance costs, and the timing and recovery of regulated investments. The Supreme Court stayed the EPA Clean Power Plan in February 2016; potential compliance costs were not included in 2016–2018 capital estimates.
- Other matters to monitor include underfunded multiemployer pension plans and a currently estimated $16.4 million withdrawal liability; environmental remediation and litigation contingencies; and a $242.2 million asset retirement obligation, largely increased by revised estimates for natural gas distribution mains and lines.
- The company reported effective internal control over financial reporting, and the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Final proceeds, closing status, remaining assets and any further impairments or liabilities from the Fidelity divestiture.
- Whether continuing-operations earnings and cash generation can support planned investment, debt service and dividends amid increased capital needs.
- Refinery operating performance, product margins, rail and other operating costs, and the facility’s financing arrangements.
- Regulatory decisions and rate recovery for planned investments, including pending rate cases and environmental compliance expenditures.
- Construction backlog conversion, margins, and customer cancellations or project delays.
- Potential exposure from pension obligations, asset retirement estimates, environmental matters and disclosed litigation.