MDU Resources Group, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited. MDU operates regulated electric and natural gas utilities, pipelines and midstream services, construction materials and contracting, and construction services. Results are seasonal, and interim performance may not indicate full-year results.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $1,272.5 million | $1,208.6 million | $3,278.1 million | $3,112.7 million |
| Operating income | $156.4 million | $146.7 million | $303.2 million | $297.6 million |
| Income from continuing operations | $89.5 million | $88.4 million | $169.6 million | $166.6 million |
| Earnings (loss) on common stock | $87.4 million | $82.8 million | $165.1 million | $(1.8) million |
| Diluted EPS | $0.45 | $0.42 | $0.84 | $(0.01) |
| Dividends declared per common share | $0.1925 | $0.1875 | $0.5775 | $0.5625 |
Revenue increased about 5% in both comparison periods. Q3 earnings growth reflected stronger construction services and utility results, partly offset by weaker construction materials and pipeline/midstream results. Nine-month 2016 common earnings were heavily affected by discontinued operations, including the refining-business sale loss; 2017 discontinued-operations loss attributable to MDU was $3.7 million versus $167.8 million in 2016.
Segment performance and changes
- Utilities: Q3 electric earnings rose to $15.7 million from $12.7 million; nine-month earnings were $37.9 million versus $31.8 million. Natural gas distribution had a seasonal Q3 loss of $10.9 million, improved from $12.5 million, and nine-month earnings increased to $14.2 million from $4.9 million, helped by colder weather, customer growth and rate recovery.
- Pipeline and midstream: Earnings declined to $6.0 million in Q3 from $6.7 million and to $15.1 million for nine months from $18.3 million. Lower gathering and processing revenue, including the January 2017 sale of the Pronghorn interest, was partly offset by lower costs and stronger transportation.
- Construction materials and contracting: Earnings declined to $63.2 million in Q3 from $69.5 million and to $64.5 million for nine months from $88.8 million. Weather delays, reduced work availability, competition and lower asphalt and construction margins weighed on results.
- Construction services: Earnings increased to $13.1 million in Q3 from $7.2 million and to $32.9 million for nine months from $20.2 million, on stronger workloads and margins.
Cash flow, debt and liquidity
- Nine-month cash from operating activities was $271.9 million, down from $276.5 million. Continuing-operations operating cash flow was $229.9 million versus $269.3 million; the filing attributes the decrease primarily to working-capital needs, including higher construction-services workloads.
- Cash used in investing activities was $98.9 million, compared with $254.3 million, reflecting Pronghorn sale proceeds and lower capital expenditures. The cash-flow statement reports capital expenditures of $222.1 million for the period.
- Cash used in financing activities was $181.7 million, versus $46.2 million, including debt repayments, dividends and redemption of preferred stock.
- At September 30, cash was $37.4 million. Total debt, including current maturities, was $1,740.6 million, compared with $1,901.9 million at September 30, 2016 and $1,790.2 million at December 31, 2016. Total equity was $2,353.9 million. Equity was 57% of total capitalization.
- Available borrowing capacity under credit facilities was $663.3 million. Management expected to meet obligations and capital needs through operating cash, credit facilities, long-term debt issuance and asset sales. The company reported compliance with applicable debt covenants.
Outlook, commentary and notable items
- Management projected utility rate-base growth of about 4% annually over the next five years and customer growth of 1% to 2% annually. It reported $37.3 million in annual revenue from final rate increases implemented since January 1, 2017; additional rate requests were pending.
- 2017 construction materials and contracting revenue guidance was reduced to $1.7–$1.8 billion from $1.8–$1.9 billion, with margins expected to be slightly below 2016. Backlog was approximately $520 million, down from $580 million a year earlier.
- 2017 construction services revenue guidance was raised to $1.25–$1.35 billion from $1.2–$1.3 billion; margins were expected to be comparable to 2016. Backlog was approximately $676 million, up from $518 million.
- 2017 capital expenditures were estimated at approximately $342 million, plus up to $150 million of additional growth capital, subject to opportunity timing. Planned projects include utility investments and pipeline expansions.
- The company received approximately $100 million from the January 2017 Pronghorn sale. All outstanding preferred stock was redeemed effective April 1, 2017, for approximately $15.9 million.
- Management cautioned that forward-looking statements depend on assumptions and are subject to risks, including regulation and cost recovery, weather and seasonality, construction demand and competition, energy-price volatility, permitting, labor availability, and environmental requirements.
Risks, contingencies and unusual exposures
- Contingency accruals were $34.3 million at September 30, 2017. Management stated that material losses beyond accrued amounts either could not be estimated or were not expected to materially affect financial position, results or cash flows.
- A contractor is pursuing claims related to a $44.8 million judgment in an employee-injury case involving Capital Electric. Capital Electric filed for declaratory relief; the matter was pending and no accrual was recorded.
- Environmental matters include Portland Harbor, where the EPA’s selected cleanup remedy has an estimated present-value cost of about $1 billion for the overall site. MDU said it did not believe it was a responsible party and did not consider material remediation costs or damages probable. Certain Cascade manufactured-gas-plant matters have recorded accruals.
- MDU continued to guarantee $57.4 million of Dakota Prairie Refining debt; Tesoro agreed to indemnify Centennial for losses and litigation expenses arising from that guarantee. Other disclosed exposures included $119.4 million of fixed maximum guarantees with no amounts outstanding, $34.0 million of letters of credit with no amounts outstanding, and approximately $556.8 million of surety bonds not reflected on the balance sheet.
Investor verification checklist
- Confirm the drivers and sustainability of utility earnings improvement, including weather, approved rates, customer growth and regulatory recovery.
- Track construction materials’ reduced revenue outlook, margins and backlog, and whether construction-services backlog converts to revenue at expected margins.
- Review cash conversion and working-capital needs, capital spending, debt maturities and continued access to commercial paper and credit facilities.
- Monitor pending utility rate cases, the Thunder Spirit wind expansion approval and major pipeline project costs, timing and contracted capacity.
- Follow the Capital Electric litigation, environmental matters, guarantees and any changes to contingency accruals.