MDU Resources Group, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. MDU operates regulated electric, natural gas distribution and pipeline businesses, alongside construction materials and contracting and construction services. Results are seasonal and the company cautions that first-quarter performance may not indicate full-year results.
Financial performance and condition
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Operating revenue | $1,416.6 million | $1,227.9 million |
| Operating income | $67.3 million | $85.2 million |
| Income from continuing operations | $31.7 million | $52.1 million |
| Net income | $31.8 million | $52.1 million |
| Diluted EPS | $0.16 | $0.26 |
| Operating cash flow | $112.4 million | $95.6 million |
| Capital expenditures | $150.3 million | $111.1 million |
Revenue rose about 15%, while operating income fell about 21% and net income fell about 39%. The decline in earnings reflects weaker construction margins, lower construction-services margins, lower pipeline storage-related revenue and lower returns on benefit-plan investments. Consolidated operating margin was approximately 4.8%, versus 6.9% a year earlier.
Operating cash flow increased despite lower earnings, with the comparison affected by recovery of purchased-gas adjustment balances and the absence of unusually high gas purchases in February 2021. Investing cash outflow increased as capital spending rose. Financing cash flow was $49.0 million, including new short- and long-term borrowings and $44.2 million of dividends paid.
At March 31, cash was $64.9 million and available borrowing capacity under subsidiary credit facilities was $523.5 million. Current assets were $1.57 billion and current liabilities were $1.17 billion. Debt comprised $2.75 billion of long-term debt, including current maturities, and $100.0 million of short-term borrowings; total debt therefore was approximately $2.85 billion. Total equity was $3.36 billion, and equity was 54% of total capitalization, compared with 57% a year earlier.
Material changes and segment performance
- Regulated utilities: Electric net income increased to $11.3 million from $10.7 million, supported by higher residential sales and transmission revenue. Natural gas distribution net income was essentially unchanged at $36.3 million; higher sales volumes and approved rate relief were largely offset by costs and lower investment returns. Higher gas prices and pass-through recoveries drove much of the increase in gas revenue.
- Pipeline: Net income declined to $7.3 million from $8.9 million, despite increased transportation demand revenue from the North Bakken Expansion, which entered service in February 2022. Lower storage-related revenue and higher depreciation, interest and other costs weighed on results.
- Construction materials and contracting: Net loss widened to $40.0 million from $30.8 million. Revenue increased, but higher fuel, repair, maintenance and labor costs and weaker margins contributed to a larger seasonal loss.
- Construction services: Net income declined to $21.3 million from $29.8 million. Revenue grew, but gross margin fell with project mix and timing, including less higher-margin industrial, storm-repair and fire-hardening work.
Construction materials and contracting backlog was $940.1 million, up from $818.8 million a year earlier. Construction services backlog was $1.67 billion, up from $1.27 billion. Management cautions that backlog is not a reliable indicator of future revenue or earnings. Remaining performance obligations across the disclosed construction and pipeline contracts totaled $3.1 billion.
Outlook, risks and unusual items
- Management expects utility rate base to grow approximately 5% annually over the next five years and customer growth to average 1%–2% per year. Estimated 2022 capital expenditures are approximately $769.9 million. The filing does not provide a consolidated earnings or EPS guidance figure.
- Management expects inflationary pressures and supply-chain challenges to continue through the rest of 2022. Reported exposures include higher fuel, materials and labor costs, workforce shortages, project timing, weather, commodity-price volatility and seasonal working-capital needs.
- Natural gas prices were elevated, and management expected that trend to continue through the next winter heating season. Gas commodity costs are generally passed through to distribution customers, with limited direct earnings effect, but higher costs and volatility remain relevant to operations and cash needs.
- Heskett Units 1 and 2 ceased operations in February 2022; construction of an 88-MW natural-gas peaking unit was expected to begin in Q2 2022, with service anticipated in the first half of 2023. The company also noted uncertainty over future costs and cost recovery related to environmental requirements at jointly owned Coyote Station.
- Regulatory matters include a pending Washington natural-gas rate settlement, a request to recover approximately $3.3 million related to an excess-deferred-tax tariff issue, and other rate and cost-recovery proceedings. Outcomes and timing are uncertain.
- At quarter-end, accrued liabilities for contingencies were $30.0 million, with related insurance receivables of $7.1 million and regulatory assets of $20.8 million. Guarantees had fixed maximum amounts of $147.9 million; approximately $1.1 billion of surety bonds were outstanding and not recorded as balance-sheet liabilities. The company reported no amounts outstanding under the specified guarantees or letters of credit.
- A major North Dakota snow and ice storm occurred April 22–24, after quarter-end. Repair costs were not finalized, but management did not expect a material financial-statement impact. Management reported no material adverse COVID-19 impact in the quarter and no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Whether construction margins recover as fuel, materials and labor costs evolve, and whether project mix supports construction-services margins.
- Progress on utility rate cases and recovery of gas, infrastructure and environmental costs, including the Washington tariff matter.
- Execution, timing and funding of the 2022 capital program and pipeline and generation projects, alongside rising debt and working-capital requirements.
- Whether backlog converts into revenue and earnings as expected; management explicitly says backlog is not a dependable earnings indicator.
- Potential Coyote Station environmental requirements and ownership decisions, and any material developments in disclosed litigation, environmental matters or guarantees.