MDU Resources Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise stated. The filing is unaudited.
Business context
MDU operates regulated electric and natural gas utilities, pipeline and energy services, construction materials and contracting, and construction services. In the second quarter, it began marketing Fidelity, its oil and gas exploration and production business, and plans to exit that business. Fidelity is presented as discontinued operations, and its assets and liabilities are classified as held for sale.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenue, continuing operations | $986.2 | $952.6 | $1,848.6 | $1,853.3 |
| Operating income | $45.3 | $62.4 | $89.0 | $126.0 |
| Income from continuing operations | $14.1 | $29.4 | $29.2 | $60.5 |
| Net income (loss) | $(237.4) | $53.3 | $(546.8) | $109.5 |
| Basic and diluted EPS | $(1.18) | $0.28 | $(2.75) | $0.58 |
- Continuing-operations operating margin was approximately 4.6% in Q2 and 4.8% for the first half, down from approximately 6.5% and 6.8%, respectively, in 2014.
- Q2 revenue increased 3.5%, while first-half revenue was nearly flat. The reported consolidated losses principally reflect Fidelity impairment charges and weaker oil and gas prices and production.
- Cash from operating activities was $173.7 for the first half, versus $224.5 in 2014. Capital expenditures were $355.9; investing activities used $402.4. Financing activities provided $291.3. Period-end cash was $144.4, up from $81.9 at year-end 2014.
- At June 30, cash was $144.4 and stated available capacity under credit facilities was $337.5. Current assets were $1,282.8 and current liabilities were $1,080.3.
- Debt included $418.5 due within one year, $1,958.3 of long-term debt, and $26.0 of short-term borrowings. The filing reports $2,376.8 of contractual long-term debt obligations. Total equity was $2,686.9; equity as a percentage of capitalization was 53%, compared with 61% at December 31, 2014.
- Common dividends declared were $0.1825 per share for Q2 and $0.3650 for the first half, compared with $0.1775 and $0.3550 in 2014.
Material changes and segment results
- Fidelity recorded a $500.4 pretax noncash full-cost write-down in Q1 ($315.3 after tax) and a $400.0 pretax held-for-sale impairment in Q2 ($252.0 after tax). Together with weaker realized commodity prices and lower production, these drove discontinued-operations losses of $251.4 in Q2 and $576.0 for the first half. Management noted that additional impairment is possible if valuation assumptions or market conditions deteriorate.
- Construction materials and contracting improved: Q2 earnings rose to $20.1 from $10.6, and first-half earnings were $5.5 versus a $13.0 loss, helped by stronger margins, volumes, and favorable construction-season weather.
- Construction services earnings fell to $7.0 from $14.3 in Q2 and $11.8 from $30.9 for the first half, primarily due to lower workloads and margins.
- Pipeline and energy services reported a Q2 loss of $1.6 versus earnings of $5.8, and first-half earnings of $2.4 versus $10.1. The segment faced startup and operating costs at Dakota Prairie Refinery, adverse refined-product market conditions, and a $3.0 pretax impairment of coalbed gas gathering assets ($1.9 after tax). Refinery operations began in May 2015.
- Natural gas distribution first-half earnings declined to $16.1 from $22.8, mainly due to warmer weather and 12% lower retail sales volumes. Electric first-half earnings fell to $14.2 from $18.9, reflecting higher operating, depreciation, and interest costs.
Outlook, commentary, and risks
- The company assumed a Fidelity sale by year-end 2015 for forecasting purposes, but stated that the closing date was unknown and there was no assurance a sale would be completed. Fidelity planned approximately $100 of 2015 capital expenditures and expected oil production to decline about 30% for the year.
- Company-wide 2015 capital expenditures were estimated at approximately $691 ($662 net of proceeds from property sales or dispositions). Management projected regulated rate-base growth of approximately 11% compounded annually over five years, with a roughly $1.7 billion gross investment program.
- Management expected 2015 construction materials and contracting revenue of $1.8–$2.0 billion and higher margins than in 2014. For construction services, projected revenue was $850–$950 million, with lower margins expected than in 2014. No consolidated EPS guidance is clearly provided in the filing text.
- Dakota Prairie Refinery’s early results were affected by startup and rail costs and weak product pricing and local crude differentials. Management expected market conditions to improve and projected meaningful refinery EBITDA contributions in 2016; this is forward-looking and uncertain.
- Regulated utilities had several pending rate cases. Montana and Wyoming natural gas rate increases were approved; North Dakota interim natural gas rates were subject to refund, with proceedings pending. Other natural gas and electric rate applications were also pending.
- Key risks include commodity-price and reserve-estimate uncertainty; the ability to sell Fidelity at an acceptable price; possible further impairment; refinery operating and market risks; regulatory cost recovery; environmental rules and compliance spending; construction-market and margin variability; and multiemployer pension exposure. Knife River’s estimated withdrawal liability for one pension plan was $16.4 ($9.8 after tax), subject to the plan administrator’s determination.
- Disclosed legal and environmental matters include a potentially material penalty claim of up to $3.7 plus daily penalties in a Montana mining-permit dispute, and remediation exposure at manufactured-gas-plant sites. The company accrued $20.7 for contingencies, including litigation, production taxes, royalty claims, and environmental matters. Management did not expect the cited matters, after accruals, to materially affect financial position, results, or cash flows.
- After quarter-end, the company entered a $75.0 variable-rate term loan due July 20, 2016, with a funded-debt-to-capitalization covenant capped at 65%.
Important facts for investors to verify
- Whether Fidelity is sold by year-end, the realized sale price, and any additional impairment or sale-related costs.
- Fidelity’s reserve, production, and realized-price assumptions, and the effect of commodity-price changes on valuation and cash generation.
- Dakota Prairie Refinery’s operating performance, financing needs, and ability to achieve management’s 2016 EBITDA expectations.
- Debt maturities, credit-facility availability, covenant compliance, and the effect of the post-quarter $75.0 term loan on liquidity and leverage.
- Outcomes of pending utility rate cases and the recoverability of environmental and infrastructure costs.
- Final pension withdrawal liability and developments in the disclosed litigation and environmental matters.