MDU Resources Group, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. The company operates regulated electric, natural gas distribution and pipeline businesses, plus construction materials and contracting and construction services. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $1,720.9 | $1,423.7 | $3,137.5 | $2,651.6 |
| Operating income | $120.6 | $137.7 | $187.9 | $222.9 |
| Net income | $70.7 | $100.2 | $102.4 | $152.3 |
| Diluted EPS | $0.35 | $0.50 | $0.50 | $0.76 |
- Revenue rose approximately 21% in Q2 and 18% for the first half, while net income fell approximately 29% and 33%, respectively. Consolidated operating margin was approximately 7.0% for Q2 and 6.0% for the first half, versus 9.7% and 8.4% in the comparable 2021 periods.
- Q2 segment net income: electric $4.6 million (down from $10.3 million); natural gas distribution loss of $7.5 million (versus a $0.7 million loss); pipeline $7.1 million (versus $9.2 million); construction materials and contracting $32.6 million (versus $51.4 million); construction services $34.5 million (up from $28.9 million).
- For the first half, construction materials and contracting recorded a $7.4 million loss, versus $20.6 million of income a year earlier. Construction services earned $55.8 million, down from $58.7 million; natural gas distribution earned $28.8 million, down from $35.5 million.
- Management attributed weaker earnings chiefly to inflation in fuel, materials and labor, higher operating and depreciation costs, lower returns on nonqualified benefit-plan investments, and higher interest expense. Growth in construction-services workloads and higher construction pricing partly offset these factors.
Cash flow, debt and liquidity
- First-half operating cash flow was $117.5 million, down from $182.8 million. Investing cash use was $291.0 million, including $290.1 million of capital expenditures; financing provided $184.8 million. Cash ended the period at $65.4 million.
- Cash flow from operations less cash capital expenditures was negative approximately $172.7 million, compared with negative approximately $79.1 million in the first half of 2021. Management cited higher receivables and inventories from working-capital demands, partly offset by increased accounts payable.
- At June 30, total debt, including short-term borrowings and current maturities, was approximately $3.03 billion, compared with approximately $2.49 billion a year earlier. Short-term borrowings were $100 million; long-term debt was $2.71 billion current and $2.71 billion noncurrent? The balance sheet reports $214.5 million due within one year and $2.71 billion noncurrent. Total long-term debt before current maturities was $2.93 billion.
- The company reported $432.5 million of available borrowing capacity under subsidiary credit facilities and a 53% equity-to-total-capitalization ratio. Subsidiaries were in compliance with applicable debt covenants at period-end.
- First-half dividends paid were $88.5 million. Capital expenditures allocated to segments were estimated at approximately $747.2 million for full-year 2022.
Material changes, outlook and risks
- Revenue growth reflected higher natural-gas prices passed through to customers, increased construction workloads and pricing, and growth in construction-services projects. The higher pass-through gas revenue largely had a corresponding expense and should not be read as equivalent margin growth.
- Construction materials and contracting revenue increased, but gross margin declined: diesel fuel, materials, labor and production costs exceeded pricing and workload gains. Construction-services backlog reached $1.924 billion at June 30, up 46% year over year; construction materials and contracting backlog was $1.13 billion, up from $912.1 million. Backlog is not a guarantee of future revenue or earnings.
- Management expected utility rate base to grow approximately 5% annually over the next five years and customer growth to average 1%–2% annually. Natural-gas costs and supply pressures were expected to remain elevated through the next winter heating season. The filing provides no consolidated full-year earnings or EPS guidance.
- Key operating risks include inflation, rising interest rates, supply-chain delays, labor shortages, weather and project timing, commodity-price volatility, and regulatory and environmental requirements. The company reported a 21% loss on qualified pension-plan assets through June 30; the effect on pension expense was expected to begin in 2023.
- Regulatory matters include pending rate cases and cost-recovery proceedings. The company noted that outcomes and timing are uncertain. It had accrued $28.2 million for contingencies, with related insurance receivables of $5.9 million and regulatory assets of $20.9 million. It also had approximately $1.2 billion of surety bonds outstanding, not recorded as balance-sheet liabilities.
- After quarter-end, on August 4, the board approved pursuing a tax-free spinoff of Knife River, expected in 2023, subject to approvals and other conditions. The company may change or abandon the transaction; there is no assurance it will be completed or deliver expected benefits.
Investor verification points
- Reconcile the decline in earnings and margins against segment results, particularly construction-materials cost inflation and the natural-gas distribution seasonal loss.
- Assess working-capital requirements, cash conversion and planned capital spending against borrowing needs, debt maturities and rising interest costs.
- Verify whether construction backlogs convert to profitable work given supply, labor, weather and customer-delay risks.
- Track pending regulatory decisions, customer recovery of higher gas and operating costs, and the timing and amount of any approved rate changes.
- Monitor the Knife River separation’s approvals, tax treatment, capital structure, costs and timing, and distinguish reported discontinued-operation amounts from the proposed future spinoff.
Note: The balance-sheet debt components are $100.0 million of short-term borrowings, $214.5 million of current maturities and $2,713.5 million of noncurrent long-term debt; together these equal approximately $3.03 billion.