MDU Resources Group, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparison is with Q1 2017 unless noted. MDU operates regulated electric, natural gas distribution and pipeline businesses, alongside construction materials and construction services businesses. Results are unaudited and affected by seasonality.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Operating revenue | $976.3 million | $937.9 million |
| Operating income | $69.4 million | $65.8 million |
| Net income | $42.4 million | $37.3 million |
| Continuing-operations income | $42.0 million | $35.6 million |
| Diluted EPS | $0.22 | $0.19 |
| Declared common dividend per share | $0.1975 | $0.1925 |
| Cash from operating activities | $105.8 million | $86.5 million |
| Capital expenditures (cash flow statement) | $105.1 million | $72.3 million |
Operating margin was approximately 7.1%, compared with 7.0% in Q1 2017. Income taxes were $7.6 million, down from $12.2 million, primarily reflecting the lower federal corporate tax rate under the Tax Cuts and Jobs Act (TCJA). The company reported $0.5 million of income from discontinued operations, versus $1.7 million.
Balance sheet and liquidity
At March 31, 2018, cash and cash equivalents were $58.8 million. Total debt, including $149.2 million due within one year, was approximately $1.780 billion, compared with $1.703 billion at March 31, 2017. Stockholders’ equity was $2.426 billion. MDU reported $622.5 million of available borrowing capacity under its credit facilities; it was in compliance with applicable debt covenants. Equity was 58% of total capitalization.
Material changes and segment performance
- Revenue increased 4.1% year over year. Earnings on common stock rose to $42.4 million from $37.2 million, with lower tax expense contributing to the improvement.
- Natural gas distribution earnings increased to $32.6 million from $27.9 million, supported by approved rate recovery and higher adjusted gross margin; operating expenses also rose.
- Construction services earnings more than doubled to $15.1 million from $7.4 million, reflecting higher project demand, workloads and margins. Backlog increased to $674.7 million from $529.1 million.
- Pipeline and midstream earnings rose to $5.3 million from $3.9 million, supported by higher transportation volumes and organic growth projects.
- Electric earnings declined to $13.1 million from $14.3 million. Higher volumes were offset by customer tax-related revenue reserves, lower rate realization and higher operating costs.
- Construction materials and contracting reported a seasonal loss of $23.5 million, versus $19.9 million. Its backlog fell to $691.9 million from $724.6 million, primarily due to lower state-agency work.
Outlook, risks and unusual items
- Management expects regulated electric and natural gas businesses to grow rate base approximately 6% annually over the next five years and customer growth of 1% to 2% annually. Estimated 2018 capital expenditures are approximately $631 million.
- Planned investments include the Thunder Spirit Wind farm expansion and electric transmission and pipeline projects. The wind expansion is expected to be completed in late 2018; a 345-kV transmission project is expected to be completed in 2019.
- Management cited strong 2018 construction-services bidding activity and backlog, while noting construction results are seasonal and sensitive to weather, project timing, labor availability and competitive pricing. Natural gas production at record levels was expected to keep near-term pressure on gas prices.
- Regulators are considering how TCJA tax savings should affect utility rates. Rate reductions, customer refunds or revenue reserves may affect results; several proceedings remained pending. Management also expects the TCJA to pressure regulated-business cash flows through lower deferred taxes and the inability to immediately expense regulated utility property for tax purposes.
- Risks include regulatory and environmental requirements, commodity and material cost volatility, construction execution and labor constraints, weather, and project delays. MDU reported $37.4 million of accrued contingencies. It described the Portland Harbor cleanup and natural-resource-damage matters as not expected to result in material costs to the company, while noting the overall remedy’s estimated present-value cost is approximately $1 billion and allocation is unresolved.
- Centennial continued to guarantee $55.1 million of Dakota Prairie Refining debt; the buyer agreed to indemnify Centennial for losses and litigation expenses. Separately, the company disclosed $738.7 million of outstanding surety bonds, not recorded as balance-sheet liabilities.
- The company adopted the new revenue-recognition standard in 2018; management reported no material effect on first-quarter results. A $7.9 million reclassification of stranded tax effects from accumulated other comprehensive loss to retained earnings also had no material effect on earnings.
Important facts for investors to verify
- Progress and final outcomes of state and FERC proceedings on TCJA-related utility rate changes, including customer refunds and revenue reserves.
- Whether construction-services margins and backlog convert into profitable work, and whether the materials business improves as the construction season advances.
- Funding needs and execution for the approximately $631 million 2018 capital program, alongside debt maturities and available credit capacity.
- Developments in environmental matters, contingent liabilities, and the Dakota Prairie guarantee and related indemnity.
- Management’s forward-looking rate-base, customer-growth and project expectations; actual results may differ, and interim results are not necessarily indicative of full-year performance.