MDU Resources Group, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. MDU operates regulated electric, natural gas distribution and pipeline businesses, plus construction materials and contracting and construction services businesses. The holding-company reorganization completed January 1, 2019 left consolidated assets and operations unchanged.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $1,563.8 million | $1,280.8 million | $3,958.6 million | $3,321.7 million |
| Operating income | $189.5 million | $140.0 million | $351.0 million | $283.4 million |
| Net income | $137.6 million | $107.3 million | $240.4 million | $193.5 million |
| Diluted EPS | $0.69 | $0.55 | $1.21 | $0.99 |
| Operating margin | 12.1% | 10.9% | 8.9% | 8.5% |
- Revenue rose 22% in Q3 and 19% year to date. Growth was concentrated in construction materials and contracting and construction services, reflecting higher workloads, acquisitions, stronger markets, and some increased asset-sale gains.
- Q3 construction materials and contracting net income increased to $102.6 million from $78.9 million; construction services net income rose to $21.1 million from $9.3 million. For nine months, the respective figures were $97.3 million versus $79.7 million and $64.0 million versus $38.5 million.
- Regulated businesses were mixed: nine-month electric net income increased to $39.3 million from $37.5 million; natural gas distribution earnings were $14.6 million versus $13.9 million. Pipeline and midstream earnings were $21.7 million versus $21.9 million. Natural gas distribution recorded a seasonal Q3 loss of $15.6 million, compared with a $11.9 million loss a year earlier.
- Operating cash flow was $203.1 million for the first nine months, down from $317.4 million. The company attributed the decline mainly to higher construction receivables and increased gas purchases and collection timing. Capital expenditures were $423.0 million in cash-flow reporting; management reported $469.2 million of capital expenditures including acquisitions and an aggregate-deposit purchase.
- Cash was $67.0 million at September 30. Total debt, including short-term borrowings and current maturities, was approximately $2.39 billion, versus $2.11 billion at December 31, 2018. Equity was 54% of total capitalization. The company reported $543.6 million of available borrowing capacity under subsidiary credit facilities.
- Current assets were $1.46 billion and current liabilities $1.03 billion. Dividends declared were $0.2025 per share for Q3 and $0.6075 per share for the nine-month period.
Material changes and unusual items
- Nine-month earnings increased by $46.9 million. Management cited stronger construction segment margins and workloads, acquisitions and asset-sale gains, utility rate recovery and higher natural gas retail volumes. Construction services also benefited from the absence of $9.5 million of unfavorable contract-estimate changes recorded in Q3 2018.
- Q3 pipeline and midstream earnings declined despite higher revenue, primarily because a prior-year income-tax benefit from reversal of a regulatory liability did not recur. Natural gas distribution costs and financing needs increased, partly reflecting higher gas costs expected to be recovered from customers.
- The company issued 3.6 million shares through its at-the-market program during the first nine months, receiving $94.0 million net proceeds; proceeds were used for capital expenditures and acquisitions. Total common shares issued increased from 196.6 million at year-end 2018 to 200.9 million at September 30, 2019.
- Adoption of the new lease standard in January 2019 added approximately $112 million of right-of-use assets and lease liabilities at adoption. At September 30, operating lease liabilities totaled $118.8 million.
- Two 2019 acquisitions—Viesko Redi-Mix and Pride Electric—had aggregate consideration of $54.5 million, including $1.2 million of assumed debt; purchase-price allocations remained partly provisional.
Outlook, risks and contingencies
- Management estimated 2019 capital expenditures of approximately $645 million, subject to variation with acquisitions and growth opportunities. It expects utility rate base to grow about 5% annually over five years and customer growth of 1%–2% per year.
- Construction materials and contracting backlog was $746.9 million, up from $590.0 million a year earlier; construction services backlog was $1.2 billion, up from $896.3 million. Management expected to complete a significant amount of each backlog over the next 12 months. These are forward-looking expectations, not guarantees.
- Pipeline projects include the Demicks Lake Expansion, expected in service in Q1 2020, and the North Bakken Expansion, with construction expected to begin in 2021 subject to regulatory and environmental approvals. The company completed the Demicks Lake project in September 2019.
- The company intends to retire three aging coal-fired units in early 2021 and early 2022 and has sought approval for an 88-MW natural-gas peaking unit, targeted for service in 2023. Regulatory approvals and recovery of retirement costs remain relevant uncertainties.
- Risks discussed include seasonality and weather, construction-market cyclicality, project timing and contract estimates, labor availability, commodity and material costs, regulatory decisions, permitting, pipeline safety requirements, and interest rates. Management reported no material changes to the risk factors in its 2018 Annual Report.
- Environmental and other contingency accruals totaled $30.6 million. Management said material losses beyond amounts accrued were either not estimable or not expected to materially affect financial position, results or cash flows. Portland Harbor remediation exposure was not considered probable to result in material costs by the company; several other environmental matters remain under investigation or remediation. Surety bonds of approximately $930.1 million were outstanding and not recorded as balance-sheet liabilities.
- No material off-balance-sheet arrangements were reported. Management stated disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether construction segment growth and margins persist, and how much resulted from acquisitions, asset sales and the prior-year contract-estimate comparison.
- Cash conversion and working-capital trends, particularly construction receivables and recovery timing for higher natural gas costs.
- Funding needs and dilution from capital spending, acquisitions, debt issuance and the at-the-market share program.
- Regulatory outcomes, customer cost recovery and approvals for coal retirements, replacement generation and pipeline projects.
- Potential exposure from environmental matters, guarantees and surety bonds, including developments that could change estimates or accruals.