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MDU sees $25M earnings drop in 2015

DICKINSON -- MDU Resources Group Inc. earnings dropped $25 million from 2014 to 2015, including losses at its Dickinson diesel refinery. "We have good momentum going into 2016," CEO Dave Goodin said Thursday during an earnings call with investors...

DICKINSON -- MDU Resources Group Inc. earnings dropped $25 million from 2014 to 2015, including losses at its Dickinson diesel refinery.

“We have good momentum going into 2016," CEO Dave Goodin said Thursday during an earnings call with investors. "However, I’m not satisfied with our overall earnings performance for 2015.”

Consolidated adjusted earnings were $180 million, or 92 cents per share, in 2015 compared with

$205.5 million, or $1.07 per share in 2014. Consolidated adjusted earnings in the fourth quarter were $48.6 million, or 25 cents per share, compared with $67.8 million, or 35 cents per share in fourth quarter 2014.

Going into 2016, the company's adjusted earnings per share guidance is in the range of $1 to $1.15, excluding refinery operations.

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“Our construction materials business, which operates in 19 states, increased earnings last year in all of its regions," Goodin said.

But that was not enough to offset more than $20 million in losses at Dakota Prairie Refinery, of which MDU shares 50 percent ownership.

“The company just continues to tread water,” said Edward Jones analyst Brian Youngberg. “The gain momentum in one area and something else happens.”

The refinery, at least in the near term, is a drag on earnings.

The company’s share of 2015 refining resulted in an adjusted loss of $20.5 million due to a struggling oil market. The refinery’s cost input has risen as less of a discount is being issued for Bakken crude.

At the same time, reduced oilfield activity has decreased the demand for diesel fuel and a slowdown in Canadian tar sands development has reduced the demand for naphtha. There also were two unplanned outages late in the year.

Youngberg said investors are willing to pay for the utilities company, pipelines and a construction

business that shows a lot of promise but then there is this other part of the business that has been

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struggling for more than half the year and “may not recover at all.”

The refinery business is expected to break even or operate at a loss in the coming year, WBI Energy CEO Martin Fritz said.

The majority of the loss now is more related to lower margins than demand, Fritz said. However, the refinery is expected to run at 90 percent capacity in 2016 because there is still a margin on diesel though it’s not as robust as hoped.

“Obviously, we might not be the right long-term owner (of the refinery), but that remains to be seen,” Fritz said during the earnings call.

Youngberg said MDU Resources can stay in the refining business with a view to build a second or third refinery as demand returns or get out.

“The question is how long do you wait this thing out,” Youngberg said. “They need to do one or the other, and I lean toward get out.”

Youngberg said he thinks the company should make that decision in 2016, preferably in the first half.

He would also like to see the sale of the company’s oil exploration and production subsidiary complete by that time.

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MDU Resources has closed on four sale agreements of Fidelity Exploration and Production Company and has signed a purchase and sale agreement for a fifth asset package. These sales represent more than 93 percent of total production. The expected $450 million from the sales will pay down debt.

Youngberg said MDU Resources got out of the oil business to reduce its exposure to commodity price volatility but is now facing that volatility on the refining side.

Elsewhere in the corporation, a $7.2 million earnings loss from lower natural gas and electric sales in the utility business was partially offset by increased utility rates. Utility customer count is expected to reach 1,050,000 across the company’s service area.

The pipeline and midstream business had adjusted earnings of $23.9 million.

The construction businesses were the one bright spot.

The construction materials business had record earnings of $90.6 million, a 51 percent increase from 2014. This momentum is continuing into 2016 with a record year-end 2015 backlog of $491 million.

The construction services business focus on rebuilding backlog also was successful, ending the year at $493 million, an increase of 62 percent from $305 million at year-end 2014.

That backlog includes projects such as a 130-mile transmission project, a Department of Homeland Security project, a 15-megawatt solar project in the southwest and a $63.4 million contract awarded in January to reconstruct a portion of Interstate 29 in Sioux City, Iowa.

“We look at ‘16 as a positive year,” said Dave Barney, president of Knife River Corp.

And the recently passed federal transportation bill has Barney hopeful for 2017.

“We’re excited about it; it’s definitely going to be a positive impact,” he said.

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