MDU Resources Group, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparative period is Q1 2019. MDU operates regulated electric, natural gas distribution and pipeline businesses, as well as construction materials and construction services businesses. Figures below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Operating revenue | $1,197.4 million | $1,091.2 million | Up 9.7% |
| Operating income | $57.1 million | $64.2 million | Down 11.1% |
| Income from continuing operations | $25.5 million | $41.1 million | Down 37.8% |
| Net income | $25.1 million | $40.9 million | Down 38.6% |
| Diluted EPS | $0.13 | $0.21 | Down $0.08 |
| Operating cash flow | $79.3 million | $1.6 million | Up $77.7 million |
| Capital expenditures | $139.5 million | $133.8 million | Up $5.6 million |
Operating margin was approximately 4.8%, versus 5.9% a year earlier. Cash and cash equivalents were $116.5 million at March 31, 2020, compared with $66.5 million at year-end 2019. Total debt, including current maturities, was approximately $2.455 billion, up from $2.243 billion at year-end; the company reported no short-term borrowings on the balance sheet. Available borrowing capacity under subsidiary revolving facilities was $431.8 million. Equity was 54% of total capitalization, versus 56% at year-end.
Q1 operating cash flow benefited primarily from lower natural gas purchases and recovery of purchased-gas cost balances, as well as higher construction-services workloads. Investing cash outflow was $202.5 million, including $67.6 million of acquisition cash outlays; financing cash inflow was $173.2 million. Dividends paid were $41.6 million. The declared dividend was $0.2075 per share.
Business and material period-over-period changes
- Regulated businesses: Electric segment net income fell to $11.4 million from $15.5 million; natural gas distribution fell to $32.3 million from $36.5 million. Milder winter weather reduced utility sales volumes. Rate recovery partly offset the impact.
- Pipeline: Net income rose to $7.4 million from $6.8 million, supported by higher transportation volumes and rates. Transportation volumes increased to 111.7 MMdk from 98.7 MMdk.
- Construction materials and contracting: Net loss widened to $38.2 million from $34.4 million. Higher revenue and improved gross margin were more than offset by seasonal operating costs and lower returns on benefit-plan investments. The segment reported $905.1 million of backlog, compared with $943.3 million a year earlier.
- Construction services: Net income declined to $16.8 million from $20.0 million despite revenue growth, reflecting higher selling, general and administrative costs and the construction-contract adjustment described below. Backlog was $1.3 billion, up from $1.0 billion.
Management attributed approximately $10.1 million of lower Q1 earnings to reduced returns on certain benefit-plan investments. The filing also reports an out-of-period construction-contract correction that reduced Q1 2020 net income by $6.7 million after tax. The correction addressed 2019 overstated revenue and receivables of $7.7 million and understated expense and accounts payable of $1.2 million. Management concluded it was not material to prior statements or Q1 2020.
Outlook, risks and unusual items
- Management reported no significant COVID-19 impact on Q1 results and said essential operations generally continued. It cautioned that prolonged disruption could affect demand, collections, cash flows, construction activity, supply chains, workforce availability and capital projects. Utility service disconnections for nonpayment were suspended and late fees waived beginning April 1, 2020, potentially affecting collections.
- Management estimated 2020 capital expenditures of approximately $599 million and expects utility rate base to grow about 5% annually over the next five years; customer growth is projected at 1%–2% annually. These are forward-looking estimates, not guarantees.
- Regulated businesses have pending rate and deferred-accounting matters, including requests related to pandemic costs. The company is pursuing retirement of three coal-fired units in 2021–2022 and an 88-MW gas peaking unit targeted for service in 2023, subject to regulatory approval.
- Pipeline growth plans include the North Bakken Expansion, designed for 350 MMcf per day, with construction expected to begin in early 2021 subject to approvals and permitting. Management noted low oil prices could delay forecast production growth and affect the project. Phase II of the Line Section 22 project was paused, with a planned third-quarter 2020 in-service date.
- In April 2020, Montana-Dakota entered a $75 million variable-rate term loan due April 7, 2021, using proceeds to repay its revolving-credit borrowings and part of its commercial paper. The company also closed in April on the sale of regulated gathering assets to Scout Energy, following FERC approval.
- Contingencies include $33.1 million of accrued liabilities for matters including litigation, taxes and environmental issues; $292.0 million of fixed maximum guarantees; and approximately $1.2 billion of surety bonds not recorded on the balance sheet. Management stated that excess losses, net of insurance, either could not be estimated or were not expected to materially affect the company.
Important facts for investors to verify
- Whether COVID-19-related lower activity, customer payment measures and project delays materially change full-year cash flow, earnings or capital spending.
- The size and persistence of returns on benefit-plan investments and their effect on reported earnings.
- Construction-services contract estimates, receivable quality and the implications of the $6.7 million after-tax contract correction.
- Debt and liquidity after the April term loan, including refinancing needs and compliance with subsidiary debt covenants.
- Regulatory decisions, cost recovery and timing for the planned coal retirements, replacement generation and pipeline expansion projects.
- Whether construction backlogs convert to revenue and cash on expected schedules, particularly if economic conditions weaken.