MDU RESOURCES GROUP INC quarterly report, Q2 FY2019

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MDU Resources Group, Inc. — Q2 2019 Form 10-Q

Reporting period: Three and six months ended June 30, 2019; unaudited. Comparisons are with the corresponding 2018 periods. The January 2019 holding-company reorganization made MDU Resources the parent of Montana-Dakota Utilities; the company states consolidated assets and operations were unchanged.

Financial performance and position

  • Q2 revenue: $1.304 billion, up 22.4% year over year. Operating income was $97.3 million versus $74.0 million; continuing-operations income was $63.1 million versus $44.1 million. Net income was $61.8 million versus $43.8 million; diluted EPS was $0.31 versus $0.22.
  • First-half revenue: $2.395 billion, up 17.3%. Operating income was $161.5 million versus $143.4 million; continuing-operations income was $104.2 million versus $86.0 million. Net income was $102.8 million versus $86.2 million; diluted EPS was $0.52 versus $0.44.
  • Cash flow, first half: Operating activities used $22.9 million, compared with $176.6 million provided in 2018. Capital expenditures were $281.7 million and investing activities used $305.1 million. Financing activities provided $346.0 million, including debt and equity issuance.
  • Liquidity at June 30: Cash was $72.0 million; available borrowing capacity under credit facilities was $411.9 million. Current assets were $1.445 billion and current liabilities were $912.6 million.
  • Debt and equity: Balance-sheet short-term borrowings were $90.0 million, current long-term debt $51.8 million, and long-term debt $2.328 billion. Equity was $2.660 billion; equity represented 52% of total capitalization, versus 57% a year earlier. The company reported compliance with applicable debt covenants.
  • Dividend: $0.2025 per share declared for Q2, compared with $0.1975 in Q2 2018.

Material changes and operating drivers

  • Q2 earnings improved primarily on stronger construction services workloads and margins, improved construction materials and contracting results, and higher pipeline transportation volumes. First-half results also benefited from natural gas distribution rate recovery and higher volumes. Construction materials and contracting had a first-half loss, attributed mainly to seasonal negative gross margins at acquired businesses.
  • Q2 construction services revenue was $464.2 million versus $323.0 million; construction materials and contracting revenue was $595.8 million versus $509.4 million. Pipeline and midstream revenue increased to $36.0 million from $30.6 million.
  • First-half construction services net income rose to $42.9 million from $29.2 million. Construction materials and contracting reported a $5.3 million loss versus $0.8 million income. Electric earnings were $23.0 million versus $22.2 million; natural gas distribution earnings were $30.3 million versus $25.8 million.
  • First-half working-capital movements, particularly higher receivables tied to construction revenue and gas costs and collection timing, contributed to the operating cash outflow. Receivables past due 90 days or more were $47.2 million, up from $36.6 million a year earlier.

Outlook, risks, and unusual items

  • Management expects regulated rate base to grow about 5% annually over five years and customer growth of 1% to 2% per year. Estimated 2019 capital expenditures are approximately $674.2 million. No consolidated earnings or EPS guidance is provided in the supplied filing text.
  • Planned generation changes include retiring Lewis & Clark Station in late 2020 and Heskett units 1 and 2 in late 2021, and proposing an 88-MW natural-gas peaking unit for service in 2023, subject to regulatory approval.
  • Pipeline growth plans include projects expected to enter service in late 2019 and early 2020, plus the North Bakken Expansion, targeted for late 2021 and dependent on regulatory and environmental approvals. Remaining performance obligations were $2.3 billion, of which $1.8 billion was expected to be recognized within 12 months.
  • Construction materials and contracting backlog was $1.0 billion; construction services backlog was $1.1 billion. Management expected to complete a significant amount of each within 12 months. The company cautioned that seasonality, weather, project timing, competitive pricing, labor availability, input costs, and acquisition-related performance can affect results.
  • Regulatory recovery and rate cases remain important: a Washington surcharge approved recovery of about $48 million of purchased-gas costs over three years; other utility and pipeline rate matters were pending. Oregon’s new Corporate Activity Tax was expected to take effect for the company in 2020, with impact still under evaluation.
  • Unusual item: a non-utility investment was written down by $2.0 million before tax in Q2. The company also adopted lease accounting in 2019, recognizing about $112 million of right-of-use assets and lease liabilities at adoption.
  • Accrued liabilities for contingencies were $32.1 million. The company cited environmental and litigation matters, including Portland Harbor cleanup proceedings; it stated it did not believe a material remediation cost or damages were probable for that matter. Guarantees had maximum amounts of $274.2 million and surety bonds of about $1.1 billion; no amounts were outstanding under the disclosed guarantees and letters of credit at quarter-end.
  • Management identified interest-rate exposure, regulatory and environmental requirements, possible project delays and cost increases, and construction-business seasonality among relevant risks. It reported no material change to previously disclosed risk factors and no material off-balance-sheet arrangements.

Important facts for investors to verify

  • Whether construction-services growth and backlog convert to revenue and cash without margin deterioration, and whether construction materials’ seasonal first-half loss reverses.
  • The causes and persistence of the operating cash outflow, receivables growth, and the company’s seasonal working-capital funding needs.
  • Debt maturities, commercial-paper usage, borrowing availability, interest costs, and compliance with subsidiary debt covenants.
  • Regulatory outcomes and cost recovery for gas purchases, rate cases, planned coal-unit retirements, and the proposed peaking unit.
  • Project permitting, customer commitments, costs, and in-service timing for pipeline expansions; and the potential impact of Oregon’s Corporate Activity Tax.
  • Updates to environmental exposures, guarantees, surety bonds, and the company’s stated assessment that certain matters are not expected to materially affect results.