MDU Resources Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019, compared with the three months ended March 31, 2018, unless otherwise noted. The company operates regulated electric, natural gas distribution and pipeline businesses, alongside construction materials and contracting and construction services businesses. A holding-company reorganization took effect January 1, 2019; the company reported that consolidated assets, businesses and operations were unchanged by the reorganization.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Operating revenue | $1,091.2 million | $976.3 million |
| Operating income | $64.2 million | $69.4 million |
| Income from continuing operations | $41.1 million | $42.0 million |
| Net income | $40.9 million | $42.4 million |
| Diluted EPS | $0.21 | $0.22 |
| Cash from operating activities | $1.6 million | $105.8 million |
| Capital expenditures | $133.8 million | $105.1 million |
Revenue increased 11.8%, while operating income and net income declined. Management attributed the earnings decline principally to seasonal losses at acquired construction businesses and less favorable weather and materials margins in construction materials and contracting. Colder weather lifted natural-gas distribution volumes; increased demand and workloads benefited construction services.
- Segment results: Electric net income was $15.5 million versus $13.1 million; natural gas distribution was $36.5 million versus $32.6 million; pipeline and midstream was $6.8 million versus $5.3 million; construction services was $20.0 million versus $15.1 million. Construction materials and contracting recorded a $34.4 million net loss versus a $23.5 million loss. Other recorded a $3.3 million loss versus $0.7 million.
- Cash flow: The sharp year-over-year fall in operating cash flow was attributed largely to higher receivables, including slower construction-services collections, and higher gas purchases and collection timing. Investing used $160.1 million, including acquisition-related spending; financing provided $154.3 million.
- Balance sheet and liquidity: At March 31, cash was $49.7 million. Total assets were $7.28 billion and stockholders’ equity was $2.61 billion. Debt included $70.0 million of short-term borrowings and $2.20 billion of long-term debt, including current maturities. The company reported $296.0 million of available borrowing capacity and a 53% equity-to-total-capitalization ratio.
- Dividends and equity issuance: The quarterly dividend declared was $0.2025 per share, versus $0.1975 a year earlier. The company issued 1.4 million shares under its at-the-market program in Q1, receiving $35.9 million net proceeds.
Material changes and notable items
- Construction services revenue rose to $420.7 million from $334.1 million, supported by increased inside and outside contracting demand. Its backlog was $1.0 billion at March 31, 2019, compared with $674.7 million a year earlier.
- Construction materials and contracting revenue rose to $227.1 million from $213.3 million, but its seasonal operating loss widened to $41.6 million from $26.3 million. Backlog increased to $943.4 million from $691.9 million.
- Natural gas distribution throughput increased to 95.3 MMdk from 85.7 MMdk, primarily reflecting higher retail volumes in colder weather. Pipeline transportation volumes rose to 98.7 MMdk from 78.3 MMdk.
- The company acquired Oregon ready-mixed concrete provider Viesko Redi-Mix in March for gross consideration of $32.1 million, including $1.2 million of assumed debt; purchase accounting remained provisional. It also purchased additional Texas aggregate deposits.
- The company adopted the new lease standard on January 1, 2019, recording about $112 million of right-of-use assets and lease liabilities at adoption. March 31 operating lease liabilities were $107.4 million.
Outlook, risks and contingencies
- Management expects regulated electric and natural gas distribution rate base to grow approximately 5% annually over five years, with customer growth of 1% to 2% annually. Estimated 2019 capital expenditures were approximately $644.1 million.
- Management planned two pipeline projects for 2019 and a further Demicks Lake expansion for 2020. A proposed North Bakken expansion, estimated at $220 million, was targeted for completion in late 2021, subject to permits and customer agreements.
- The company intends to retire three aging coal-fired generating units within three years, with expected retirements in late 2020 and late 2021, and plans to develop a natural-gas peaking unit at the Mandan site.
- Key risks include seasonal and weather-sensitive construction results; competitive pricing and input-cost volatility, including higher asphalt costs; labor availability; regulatory rate recovery and permitting; project timing; and pipeline safety, environmental and emissions requirements. Management also cited extended lead times for certain materials and possible effects from tariffs on steel and aluminum.
- Regulatory cases remained pending, including an electric rate case in Montana, a Washington Cascade gas rate case, and a FERC pipeline rate case. In Washington, a $48.0 million purchased-gas-cost surcharge was approved for recovery over three years beginning April 1, 2019. Several customer refunds and rate changes related to tax reform were also implemented or pending.
- Contingency accruals, including litigation, production taxes, royalty claims and environmental matters, totaled $32.4 million at March 31, 2019. The company said losses beyond accruals, net of insurance, either could not be estimated or were not expected to materially affect its financial position, results or cash flows. It reported $182.5 million of maximum fixed guarantees and $903.9 million of surety bonds outstanding, with no amounts outstanding under the specified guarantees and letters of credit.
Most important facts for investors to verify
- Whether operating cash flow and construction-services receivable collections recover, given the steep year-over-year decline in quarterly operating cash flow.
- Whether construction materials and contracting margins improve after the larger seasonal loss, and whether backlog converts to profitable revenue.
- Debt, commercial-paper usage, borrowing availability and planned funding for the estimated $644.1 million of 2019 capital expenditures.
- Outcomes and timing of pending utility and FERC rate proceedings, including recovery of gas costs and the proposed Montana electric rate settlement.
- Permitting, cost, schedule and customer-contract progress for announced pipeline projects and planned coal-unit retirements and replacement generation.