MDU RESOURCES GROUP INC quarterly report, Q2 FY2020

MDU Resources Group, Inc. — Q2 2020 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2020. The company operates regulated electric, natural gas distribution and pipeline businesses, as well as construction materials and contracting and construction services businesses. Amounts below are in U.S. dollars.

Financial performance and liquidity

Metric	Q2 2020	Q2 2019	Six months 2020	Six months 2019
Revenue	$1.363 billion	$1.304 billion	$2.560 billion	$2.395 billion
Operating income	$138.3 million	$97.3 million	$195.3 million	$161.5 million
Net income	$99.7 million	$61.8 million	$124.8 million	$102.8 million
Diluted EPS	$0.50	$0.31	$0.62	$0.52

Revenue rose approximately 5% in Q2 and 7% for the first half year over year. Operating income increased approximately 42% and 21%, respectively; net income increased approximately 61% and 22%.
Approximate consolidated operating margin was 10.1% in Q2 versus 7.5% a year earlier, and 7.6% for the first half versus 6.7%. Net margin was approximately 7.3% and 4.7% for Q2, and 4.9% and 4.3% for the first half, respectively.
Management attributed stronger earnings chiefly to construction materials and contracting, supported by favorable weather, higher margins and acquisitions. Construction services, pipeline, electric and natural gas distribution also contributed to Q2 improvement. Six-month construction services results included an unusual prior-period contract adjustment.
Cash provided by operating activities was $261.4 million for the first half, compared with cash used of $22.9 million in 2019. Investing used $296.5 million; financing provided $33.0 million. Period-end cash was $64.4 million.
Cash-flow-statement capital expenditures were $248.8 million; management separately reported $310.6 million of first-half capital expenditures including completed business combinations. Full-year 2020 capital expenditures were estimated at approximately $614 million.
At June 30, cash was $64.4 million, current assets $1.397 billion and current liabilities $999.7 million. Debt included $75.0 million of short-term borrowings and $2.282 billion of long-term debt outstanding, including current maturities. Available borrowing capacity was $655.1 million; equity was 55% of total capitalization.
Six-month dividends paid were $83.2 million. Dividends declared were $0.415 per share, up from $0.405 in the prior-year period.

Material changes and business developments

Construction materials and contracting reported Q2 net income of $53.0 million, compared with $29.2 million; first-half net income was $14.8 million versus a $5.3 million loss. Construction services first-half net income increased to $44.8 million from $42.9 million.
Construction materials and contracting backlog was $875.1 million, down from $1.0 billion a year earlier; construction services backlog was $1.3 billion, up from $1.1 billion. The company expected to complete a significant portion of both backlogs within 12 months.
The company acquired a prestressed-concrete business and an electrical construction company in early 2020 for aggregate purchase consideration of $77.4 million, subject to adjustments. Acquisitions contributed to higher goodwill and intangible assets.
The company sold regulated gathering assets in Montana and North Dakota in April 2020. It also completed the Demicks Lake pipeline expansion, adding 175 MMcf per day of capacity.

Outlook, risks and unusual items

Management expected regulated businesses to grow rate base approximately 5% annually over five years and customer counts 1% to 2% annually. No full-year earnings or EPS guidance is stated in the supplied filing text.
The North Bakken Expansion project’s design capacity was reduced from 350 to 250 MMcf per day amid slower forecast production growth. Construction was expected to begin in early 2021, with late-2021 service subject to permits and regulatory approval. Heskett Unit 4, an 88-MW gas-fired peaking unit, was expected in service in 2023.
COVID-19 had not materially adversely affected reported results through June 30, but management cited reduced commercial and industrial utility demand, customer payment and collection effects, operating inefficiencies and uncertainty about future economic conditions. Utility disconnection suspensions and waived late fees affected cash collection. The company deferred approximately $17.9 million of employer payroll taxes under the CARES Act.
Construction outlook is exposed to recession-related reductions in public and private infrastructure funding, project awards and customer capital spending. Other cited risks include weather, commodity and materials costs, labor availability, supply delays, regulation, environmental requirements and energy-market conditions.
In Q1 2020, the company recorded a $6.7 million after-tax reduction in net income to correct a prior-period construction contract error: 2019 revenue and receivables had been overstated by $7.7 million, and operating expense and accounts payable understated by $1.2 million. Management concluded the correction was not material to prior statements or 2020 interim results.
Contingency accruals were $34.5 million. The company also reported $272.7 million of fixed-maximum guarantees and approximately $1.0 billion of surety bonds outstanding, neither with amounts outstanding under the specified guarantees and letters of credit at quarter-end. Its reported loss exposure to the Coyote Creek variable-interest entity was $34.8 million.
Regulatory rate cases and cost-recovery requests were pending in several jurisdictions. Outcomes and timing could affect results and cash flows. The company reported compliance with applicable debt covenants and no material off-balance-sheet arrangements.

Investor verification priorities

Review the construction contract correction, its timing, and the effect on construction services comparisons and receivables.
Assess whether construction backlogs convert to revenue and cash as expected, particularly given the decline in construction materials backlog and COVID-19 uncertainty.
Track utility rate-case decisions, recovery of deferred costs, and the timing of customer collections and payroll-tax repayments.
Verify funding needs against the $614 million capital expenditure estimate, debt maturities, commercial-paper access and available credit capacity.
Monitor North Bakken permitting and revised capacity assumptions, Heskett Unit 4 approval and costs, and coal-unit retirement cost recovery.
Evaluate potential obligations from environmental and other contingencies, guarantees, surety bonds and the Coyote Creek exposure.