MDU RESOURCES GROUP INC quarterly report, Q3 FY2020

MDU Resources Group, Inc. — Q3 2020 Form 10-Q

Reporting period: Three and nine months ended September 30, 2020. The company operates regulated electric, natural gas distribution and pipeline businesses, alongside construction materials and contracting and construction services businesses.

Financial performance

Metric	Q3 2020	Q3 2019	Nine months 2020	Nine months 2019
Operating revenue	$1.587 billion	$1.564 billion	$4.148 billion	$3.959 billion
Operating income	$203.7 million	$189.5 million	$399.0 million	$351.0 million
Net income	$153.1 million	$137.6 million	$277.9 million	$240.4 million
Diluted EPS	$0.76	$0.69	$1.39	$1.21
Operating margin	12.8%	12.1%	9.6%	8.9%

Operating margin is calculated as operating income divided by operating revenue. Revenue increased 1.5% in the quarter and 4.8% year to date; net income increased 11.2% and 15.6%, respectively. Higher construction segment earnings were the main driver of year-to-date profit growth.

Cash flow: Nine-month operating cash flow was $481.8 million, versus $203.1 million in 2019. Investing cash outflow was $461.8 million, including $413.8 million of capital expenditures and $71.5 million for acquisitions. Financing cash outflow was $20.3 million; dividends paid were $124.8 million.
Balance sheet and liquidity: At September 30, cash and cash equivalents were $66.1 million; total assets were $8.125 billion and stockholders’ equity was $3.013 billion. Balance-sheet debt included $75.0 million of short-term borrowings, $1.6 million of long-term debt due within one year and $2.269 billion of long-term debt. The debt note reports $2.270 billion of long-term debt outstanding, including commercial paper. Available borrowing capacity under subsidiary credit facilities was $652.6 million; revolving-credit borrowings had been repaid by quarter-end.
Capital and dividends: Estimated 2020 capital expenditures were approximately $626 million, including acquisitions and the North Bakken Expansion project. Dividends declared were $0.2075 per share for Q3 and $0.6225 per share for the first nine months.

Material changes and segment performance

Construction materials and contracting: Nine-month net income rose to $122.1 million from $97.3 million, supported by higher bid and materials margins, favorable weather in some regions and acquisitions. Q3 revenue declined, with wildfire and tropical-storm impacts and lower contracting and materials sales; Q3 earnings nevertheless increased to $107.3 million from $102.6 million.
Construction services: Nine-month net income increased to $74.5 million from $64.0 million, reflecting higher inside and outside contracting workloads and acquisitions. Backlog was $1.3 billion, up from $1.2 billion a year earlier.
Natural gas distribution: Nine-month net income declined to $13.8 million from $14.6 million; warmer winter weather reduced volumes, partly offset by rate recovery. Its seasonal Q3 loss widened to $17.6 million from $15.6 million.
Pipeline: Nine-month net income increased to $24.3 million from $21.7 million, reflecting organic growth projects, approved rates and higher storage volumes. The company sold regulated gathering assets in April 2020.
Electric: Nine-month net income increased to $40.3 million from $39.3 million, with rate relief and residential sales partly offset by lower commercial and industrial volumes and higher depreciation.

Outlook, risks and unusual items

Management reported no material adverse COVID-19 impact on results through September 30, 2020, but warned that prolonged economic disruption could adversely affect demand, collections, construction activity, liquidity and cash flows. Utility disconnects and late fees were suspended in response to the pandemic; reinstatement began in five of eight states on September 1. The company deferred approximately $38.8 million of employer payroll taxes under the CARES Act, payable in 2021 and 2022.
Management expects regulated utility rate base to grow approximately 5% annually over the next five years and customer growth to average 1%–2% annually. These are projections, not guarantees. Significant rate requests and regulatory proceedings remained pending; approvals and recoveries are uncertain.
The company plans to retire three aging coal-fired units in early 2021 and early 2022 and expects its proposed 88-MW Heskett Unit 4 gas-fired peaking unit to enter service in 2023. The North Bakken Expansion’s planned capacity was reduced from 350 to 250 MMcf per day amid delayed production forecasts; management expected FERC approval in early 2021.
Construction materials backlog was $571.3 million, down from $746.9 million a year earlier, primarily due to lower public-infrastructure backlog. Management cited uncertainty around tax receipts and project bid-letting.
An out-of-period construction-contract correction recorded in Q1 reduced 2020 net income by $6.7 million after tax. It corrected a 2019 revenue and receivables overstatement of $7.7 million and an expense and accounts-payable understatement of $1.2 million; management said it was not material to prior or current-period financial statements.
Environmental exposure includes the Bremerton Gasworks site. After preliminary remediation alternatives indicated possible costs of $13.6 million to $71.0 million, Cascade increased its accrual by $11.1 million in Q3; recorded accruals were $2.2 million for investigation and feasibility work and $17.5 million for remediation. Costs may be affected by insurance and regulatory recovery.
Other disclosed exposures include $72.7 million of accrued liabilities for contingencies, offset in part by recorded insurance receivables and regulatory assets; $922.7 million of outstanding surety bonds; and $34.2 million of estimated exposure to the Coyote Creek variable-interest entity. The filing states no material off-balance-sheet arrangements.
After quarter-end, regulators approved certain rate or cost-recovery updates, and subsidiaries announced additional debt issuances. The filing also identifies risks from commodity prices, regulation, weather, construction-market cyclicality, labor availability, supply-chain delays and environmental requirements.

Important facts for investors to verify

Whether construction margins and workloads remain strong, and how the lower construction-materials backlog converts to revenue.
Progress, economics, permitting and regulatory recovery for the North Bakken Expansion and planned coal-unit retirements and replacement generation.
Outcomes and timing of pending utility rate cases and COVID-19 cost-recovery requests.
Receivable collection trends, especially as pandemic-related customer protections change, and the company’s ability to sustain operating cash flow and fund its capital program.
Updates to the Bremerton remediation estimate, insurance participation and expected recovery from customers.
Debt levels, financing costs, covenant compliance and the effect of deferred payroll-tax payments and planned capital spending on liquidity.