MDU Resources Group, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Comparisons are with Q1 2020 unless noted. MDU operates regulated electric, natural gas distribution and pipeline businesses, alongside construction materials and contracting and construction services.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Operating revenue | $1.228 billion | $1.197 billion | Up 2.6% |
| Operating income | $85.2 million | $57.1 million | Up 49% |
| Income from continuing operations | $52.1 million | $25.5 million | Up 104% |
| Net income | $52.1 million | $25.1 million | Up 107% |
| Diluted EPS | $0.26 | $0.13 | Doubled |
| Net cash from operating activities | $95.6 million | $79.3 million | Up $16.3 million |
Operating margin was approximately 6.9%, versus 4.8%; net margin was approximately 4.2%, versus 2.1%. The company declared dividends of $0.2125 per share, compared with $0.2075.
- Segment earnings: Natural gas distribution $36.2 million (up $3.9 million); construction services $29.8 million (up $13.0 million); pipeline $8.9 million (up $1.5 million); electric $10.7 million (down $0.7 million); construction materials and contracting lost $30.8 million, an improvement of $7.4 million.
- Cash and liquidity: Cash was $55.1 million at quarter-end, down from $59.5 million at year-end 2020. Available borrowing capacity under subsidiary credit facilities was $695.5 million. Current assets were $1.323 billion and current liabilities $900.0 million.
- Debt and equity: Long-term debt carrying amount was $2.253 billion, plus $50 million of short-term borrowings. Total equity was $3.100 billion; equity was 57% of total capitalization.
- Investment and financing: Cash capital expenditures were $111.1 million; the company estimated 2021 capital expenditures of approximately $810.5 million. It issued 672,260 shares through its at-the-market program for net proceeds of $19.7 million, used for capital expenditures. Dividends paid were $42.6 million.
Material changes and drivers
Improved earnings reflected stronger construction services and construction materials margins, natural gas distribution rate relief and higher pipeline storage revenue. The construction services comparison also benefited from the absence of a Q1 2020 out-of-period contract revenue correction ($8.9 million pretax; $6.7 million after tax). Electric earnings declined with higher operating and depreciation costs and lower retail sales volumes. Construction materials’ seasonal loss narrowed on stronger materials sales and margins, including an earlier start to the season in some regions.
Operating cash flow increased, primarily with higher earnings and stronger construction services collections. Investing cash use fell to $106.3 million from $202.5 million, largely because of lower acquisition spending and capital expenditures. Financing cash flow was $6.2 million, compared with $173.2 million, reflecting lower long-term debt issuance.
Outlook, risks and unusual items
- Management expects regulated electric and natural gas businesses to grow rate base approximately 5% annually over the next five years and customer growth to average 1% to 2% annually. The 2021 capital expenditure estimate is approximately $810.5 million.
- February 2021 extreme cold drove approximately $44 million of additional natural gas costs for Montana-Dakota and Great Plains. The company sought recovery through out-of-cycle purchased-gas adjustment filings in four of five affected jurisdictions; recovery timing and regulatory outcomes remained partly pending at filing.
- Management reported no material adverse effect from COVID-19 on Q1 results, but noted vendor and freight constraints, material delays, and uncertainty if economic impacts persist. Construction results are seasonal and can vary with weather, project timing, input costs and labor availability.
- North Bakken Expansion remained subject to FERC approval, delaying the anticipated construction schedule and planned November 2021 in-service date. MDU also plans an 88-MW natural-gas peaking unit at Heskett; Lewis & Clark Unit 1 ceased operations March 31, 2021, and two Heskett coal units were expected to retire in early 2022.
- Regulatory, environmental and policy risks include potential costs under the Regional Haze Rule, evolving pipeline safety and emissions requirements, and uncertainty over future clean-energy standards. Other risks include construction-contract execution, commodity and interest-rate exposure, and supply-chain and skilled-labor constraints.
- At March 31, accrued contingency liabilities were $55.0 million, with related insurance receivables of $31.6 million and regulatory assets of $20.9 million. Fixed-maximum guarantees totaled $235.8 million and outstanding surety bonds approximately $1.1 billion; the filing reported no amounts outstanding under the specified guarantees and letters of credit. MDU’s stated exposure to the Coyote Creek coal-supply VIE was $33.1 million.
Investor facts to verify
- Whether regulators allow timely recovery of the cold-weather gas costs and how recovery periods affect customer bills and cash flows.
- Whether the North Bakken Expansion receives FERC approval, and the resulting project timing, costs and in-service date.
- Whether the $810.5 million capital plan, rate-base growth expectations and planned Heskett generation investment remain on schedule and within funding capacity.
- How much of the earnings increase is repeatable, particularly given the prior-year construction-contract correction and seasonal improvement in construction materials.
- Developments in Regional Haze Rule requirements, coal retirements, environmental obligations, construction backlogs and disclosed guarantees and contingencies.