MDU Resources Group, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. The company operates regulated electric and natural gas utilities, pipelines and midstream assets, construction materials and contracting, and construction services. The statements are unaudited. Results exclude the former Dakota Prairie Refining and Fidelity businesses from continuing operations; both are reported as discontinued operations.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $1,067.6 million | $1,043.9 million | $2,005.6 million | $1,904.2 million |
| Operating income | $79.7 million | $89.0 million | $146.8 million | $151.0 million |
| Income from continuing operations | $44.4 million | $46.3 million | $80.0 million | $78.2 million |
| Net income (loss) | $41.2 million | $(229.8) million | $78.5 million | $(216.0) million |
| Basic EPS | $0.21 | $(0.56) | $0.40 | $(0.43) |
| Operating cash flow | Not stated by quarter in the provided filing text | $139.5 million | $102.6 million |
Q2 revenue increased 2.3%, while operating income and continuing-operations income declined year over year. For the first half, revenue grew 5.3%; continuing-operations income increased 2.4%. Prior-year net losses and EPS were heavily affected by discontinued-operation losses, including the refinery sale impairment. Q2 and six-month common dividends declared were $0.1925 and $0.3850 per share, respectively.
Liquidity, debt and cash flow
- At June 30, 2017, cash and cash equivalents were $40.0 million; available borrowing capacity under credit facilities was $638.2 million.
- Total debt, including debt due within one year, was approximately $1.761 billion, compared with $1.790 billion at December 31, 2016. Long-term debt due within one year was $83.5 million.
- First-half operating cash flow was $139.5 million, investing cash flow was a $22.5 million outflow, and financing cash flow was a $123.0 million outflow. Cash decreased $6.1 million to $40.0 million.
- Cash capital expenditures were $143.8 million for the first half. Management estimated 2017 capital expenditures of approximately $515 million, including $150 million of growth capital not allocated to a specific segment.
- Management reported compliance with applicable debt covenants at June 30. No material off-balance-sheet arrangements were reported.
Material changes and segment results
- The sharp improvement in reported net income versus 2016 primarily reflects the absence of the prior-year loss on the Dakota Prairie Refining sale, including a $251.9 million pretax impairment recorded in Q2 2016. The 2017 discontinued-operations loss attributable to MDU was $3.2 million for Q2 and $1.5 million for the first half.
- Construction services earnings rose to $12.4 million in Q2 and $19.7 million in the first half, driven by higher inside workloads and margins and project execution.
- Natural gas distribution earnings improved to a Q2 seasonal loss of $2.8 million from $7.8 million, and first-half earnings increased to $25.1 million from $17.5 million. Higher retail volumes, colder weather in several regions, customer growth and rate recovery contributed.
- Construction materials and contracting earnings fell to $21.2 million in Q2 from $33.7 million and to $1.3 million for the first half from $19.2 million. Weather delays, lower asphalt volumes and margins, competition, material costs and weaker construction margins were cited.
- Pipeline and midstream earnings declined to $5.3 million in Q2 and $9.2 million in the first half, largely reflecting the January 2017 sale of the company’s 50% Pronghorn interest, lower gathering rates and volumes. The Pronghorn sale generated approximately $100 million in proceeds.
- Electric earnings were $7.8 million in Q2 versus $8.0 million, and $22.2 million for the first half versus $19.2 million.
Outlook, risks and contingencies
- Management projected utility rate-base growth of approximately 4% annually over five years and customer growth of 1% to 2% per year. It estimated 2017 capital expenditures at approximately $515 million.
- For 2017, construction materials and contracting projected revenue of $1.8 billion to $1.9 billion and slightly lower margins than 2016; its backlog was approximately $766 million, down from $805 million a year earlier. Construction services projected revenue of $1.2 billion to $1.3 billion and margins comparable to 2016; backlog was approximately $596 million, up from $508 million.
- Planned projects include an estimated $85 million Thunder Spirit Wind expansion, subject to regulatory approval, and pipeline expansions. Management cautioned that projections depend on assumptions and are subject to risks.
- Key business risks include regulation and timely cost recovery, permitting and construction costs, weather and seasonality, commodity and materials price volatility, competition, labor availability, and project execution. Management said there were no material changes to previously disclosed risk factors.
- Contingencies include a $44.8 million judgment against a contractor in a case involving a Capital Electric employee; Capital Electric disputes that it was required to insure the contractor, and no accrual was recorded. Environmental matters include the Portland Harbor Superfund site, where the selected remedy has an estimated present value cost of approximately $1 billion; the company stated it did not believe a material company cost was probable. Cascade has recorded site-specific environmental accruals, including $1.6 million for Eugene and $13.8 million for Bremerton investigation and remediation.
- Centennial continued to guarantee $58.5 million of Dakota Prairie Refining debt; Tesoro agreed to indemnify it for losses and litigation expenses arising from that guarantee. Other disclosed exposures include $765.5 million of surety bonds and guarantees and $33.8 million of letters of credit, with no amounts outstanding under the specified guarantees or letters of credit at period-end.
- In Q1 2017, the company reversed a previously accrued $7.0 million pretax liability following resolution of a legal matter. The company redeemed its outstanding preferred stock effective April 1, 2017, for approximately $15.9 million.
Important facts for investors to verify
- How much of the earnings improvement reflects continuing operations versus the absence of 2016 discontinued-operation impairments and losses.
- Whether construction materials margins and volumes recover from weather-related delays, competition and lower asphalt activity.
- Regulatory outcomes and customer refunds associated with interim electric rates, plus the status of pending utility rate requests and the Thunder Spirit Wind expansion.
- Execution, funding and returns for the projected $515 million 2017 capital program, and the effect of the Pronghorn sale on pipeline and midstream earnings.
- Potential outcomes and company exposure from the Capital Electric litigation and environmental matters, including whether accrued amounts or insurance and indemnification recoveries change.