MDU Resources Group, Inc. — Q3 2018 Form 10-Q
Business context and reporting period: The filing covers the quarter and nine months ended September 30, 2018. MDU operates regulated electric, natural gas distribution, and pipeline businesses, alongside construction materials and contracting and construction services businesses. Results reflect the company’s two-platform model and seasonal construction activity.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $1.281 billion | $1.273 billion | $3.322 billion | $3.278 billion |
| Operating income | $140.0 million | $155.3 million | $283.4 million | $299.8 million |
| Net income | $107.3 million | $87.4 million | $193.5 million | $165.9 million |
| Common earnings per share | $0.55 basic and diluted | $0.45 basic and diluted | $0.99 basic; $0.99 diluted | $0.85 basic; $0.84 diluted |
| Operating margin | 10.9% | 12.2% | 8.5% | 9.1% |
| Cash from operating activities | — | $317.4 million | $271.9 million |
Operating margin is calculated from reported operating income and revenue. Higher earnings despite lower operating income mainly reflected lower income taxes under the Tax Cuts and Jobs Act (TCJA), stronger construction materials and contracting results, and a $4.2 million pipeline-related tax benefit from reversal of a regulatory liability. The quarter’s earnings also benefited from construction materials’ higher asphalt volumes and margins. Lower operating income reflected higher operating expenses and weaker construction services results.
Cash, debt, and liquidity: At September 30, 2018, cash was $67.1 million; current assets were $1.214 billion and current liabilities were $725.2 million. Long-term debt, including $3.9 million due within one year, totaled $1.915 billion, versus $1.741 billion at September 30, 2017. The company reported $479.5 million of available borrowing capacity and compliance with applicable debt covenants. Total cash capital expenditures were $345.6 million for the first nine months; management reported $398.3 million including acquisitions. Cash used in investing activities was $361.3 million, up from $98.9 million a year earlier.
Material changes and segment performance
- Construction materials and contracting: Earnings rose to $78.9 million from $63.2 million in Q3 and to $79.7 million from $64.5 million year to date. Higher asphalt volumes and margins, agency work, and strong demand supported results; fuel and asphalt costs, weather, and project mix remain relevant factors.
- Construction services: Q3 earnings declined to $9.3 million from $13.1 million, with revenue down $44.1 million. A $9.5 million net revenue reduction from revised estimates of variable consideration on certain contracts contributed to the decline. Nine-month earnings increased to $38.5 million from $32.9 million, aided by tax savings and equipment sales and rentals.
- Pipeline and midstream: Earnings increased to $11.0 million from $6.0 million in Q3 and $21.9 million from $15.1 million year to date. Higher project and transportation activity contributed; lower natural-gas price spreads reduced storage-related revenue.
- Utilities: Electric earnings were slightly lower year to date. Natural gas distribution earnings decreased to $13.9 million from $14.2 million year to date, while the segment recorded a seasonal Q3 loss of $11.9 million. Customer refunds and reserves related to the TCJA, operating costs, and rate recovery affected results.
For the first nine months, the company generated $317.4 million of operating cash flow and paid $115.9 million in dividends. Cash capital expenditures substantially exceeded operating cash flow. Common dividends declared were $0.1975 per share for Q3, versus $0.1925 in Q3 2017.
Outlook, risks, and contingencies
- Management estimated 2018 capital expenditures at approximately $786 million, including acquisitions and projects such as the Thunder Spirit Wind expansion, Valley Expansion pipeline, and Line Section 27 expansion. The company cited expected utility customer growth of 1% to 2% annually.
- Construction materials backlog was $590.0 million at September 30, versus $519.7 million a year earlier; construction services backlog was $896.3 million, versus $675.8 million. Management expected the 2018 acquisitions to be accretive, but did not provide a quantified full-year earnings forecast.
- Rate outcomes remain important. A Montana electric rate case sought an annual increase of about $11.9 million; various jurisdictions were considering or implementing TCJA-related customer rate reductions or refunds. The company recorded about $16.0 million of additional regulatory liabilities in the first nine months for expected tax-related customer benefits.
- Key operating risks include construction contract estimate revisions, project timing and weather, labor availability and costs, competition, energy prices, regulation and permitting, and higher steel and aluminum costs or prolonged material delivery lead times. Management cautioned that seasonal interim results may not indicate full-year results.
- Accrued liabilities for contingencies, including litigation, production taxes, royalty claims, and environmental matters, totaled $30.4 million. The company said excess probable or reasonably possible losses, net of insurance, were not expected to materially affect its financial position, results, or cash flows, while noting some losses could not be estimated.
- At quarter-end, certain guarantees related to Dakota Prairie Refining remained in place; Centennial was released from them on October 17, 2018. Other disclosed exposures included $197.2 million of maximum fixed guarantees, $29.5 million of guaranteed letters of credit, and $619.6 million of surety bonds; no amounts were outstanding under the guarantees or letters of credit described.
- Subsequent events included the October 4 acquisition of Sweetman Construction and a $100 million variable-rate term loan entered into October 18, maturing in November 2019. The company also entered a separate $100 million term loan in September, maturing in October 2019.
Important facts for investors to verify
- Final customer refund amounts and timing, and the outcomes of pending rate cases and regulatory proceedings.
- Whether construction contract estimate changes or variable consideration continue to affect revenue and margins.
- Execution, funding, and returns on the planned capital program, acquisitions, and growth projects, alongside the increase in debt.
- Whether elevated construction services and materials backlogs convert into profitable work given labor, weather, input-cost, and project risks.
- Developments in environmental and legal matters, including the Portland Harbor proceeding and the final purchase accounting for 2018 acquisitions.