MDU Resources Group, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. MDU is a regulated energy delivery and construction materials and services company. Results are unaudited; interim results may not indicate full-year performance, in part because of seasonality.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Operating revenue | $937.9 million | $860.2 million |
| Operating income | $67.1 million | $62.0 million |
| Income from continuing operations | $35.6 million | $31.9 million |
| Net income | $37.3 million | $13.8 million |
| Earnings on common stock | $37.2 million | $24.7 million |
| Diluted EPS | $0.19 | $0.13 |
| Dividends declared per common share | $0.1925 | $0.1875 |
Operating margin was approximately 7.2% in both periods. Revenue increased about 9%; operating income increased about 8%. The comparison in net income benefited from discontinued operations, including the absence of the prior-year refining-business loss. Continuing-operations EPS increased from $0.16 to $0.18.
- Cash flow: Operating cash flow was $86.5 million, versus $45.5 million, including cash flows from discontinued operations. Continuing-operations operating cash flow was $83.2 million, versus $85.3 million. Investing activities provided $45.6 million, versus using $79.5 million; financing activities used $127.5 million, versus providing $40.7 million.
- Investing and distributions: Cash-flow-statement capital expenditures were $72.3 million. The company estimated 2017 capital expenditures of approximately $519 million. Dividends paid were $37.8 million.
- Liquidity and debt: Cash was $50.7 million. Long-term debt, including current maturities, was approximately $1.703 billion. The company reported $652.3 million of available borrowing capacity. Total equity was $2.314 billion; equity was 58% of total capitalization.
Material changes and segment results
- Regulated electric earnings rose to $14.3 million from $11.1 million, supported by rate recovery, higher retail volumes and lower depreciation expense.
- Natural gas distribution earnings rose to $27.9 million from $25.2 million. Retail sales volumes increased 21%, reflecting colder weather and customer growth, as well as rate recovery.
- Pipeline and midstream earnings declined to $3.9 million from $5.3 million, primarily because of the January 2017 sale of the Pronghorn interest and lower volumes. Pronghorn sale proceeds were approximately $100 million.
- Construction materials and contracting reported a seasonal loss of $19.9 million, compared with a $14.5 million loss. Poor weather, lower construction margins and revenues, and lower ready-mixed concrete volumes contributed.
- Construction services earnings increased to $7.4 million from $6.0 million, reflecting higher electrical and industrial construction workloads. The prior-year period included a $1.5 million tax benefit absent in 2017.
- Discontinued operations produced $1.7 million of income, versus an $18.0 million loss. The 2017 result included reversal of a previously accrued liability following resolution of a legal matter: $7.0 million pretax, or $4.3 million after tax. Dakota Prairie Refining and Fidelity are reported as discontinued operations.
Outlook, risks and unusual items
- Management projected regulated rate-base growth of approximately 4% annually over five years and customer growth of 1% to 2% per year. Estimated 2017 capital expenditures were approximately $519 million.
- For 2017, construction materials and contracting projected revenue of $1.85 billion to $1.95 billion and slightly higher margins than 2016; backlog was approximately $725 million, down from $831 million a year earlier. Construction services projected revenue of $1.0 billion to $1.1 billion and margins comparable to 2016; backlog was approximately $529 million, essentially flat year over year.
- Growth projects include a 345-kV transmission line expected to be completed in 2019, a wind-farm expansion expected online in December 2018, and the Valley Expansion pipeline project, with construction expected to begin in 2018, subject to permits and approvals.
- Regulatory proceedings, rate recovery, commodity-price volatility, construction-market conditions, weather, labor availability and costs, and environmental requirements are key business risks. The filing reported no material change to previously disclosed risk factors.
- Environmental contingencies include the Portland Harbor Superfund site; the EPA’s selected remedy has an estimated present-value cost of approximately $1 billion for the site overall, but the company stated it did not believe it was a responsible party and did not expect material remediation costs or damages. Cascade had accrued $1.6 million for the Eugene site and $12.4 million for the Bremerton site; its potential share of the Bellingham matter was not estimable.
- Centennial continued to guarantee $62.6 million of Dakota Prairie Refining debt; Tesoro agreed to indemnify it for losses and litigation expenses related to the guarantee. The company also reported approximately $744 million of surety bonds outstanding, not reflected on the balance sheet.
- After quarter-end, the company redeemed all preferred stock for approximately $15.9 million, funded with commercial paper borrowings and cash. Cascade and Intermountain also increased and extended their revolving credit facilities on April 25, 2017.
Important facts for investors to verify
- How much of the earnings increase reflects recurring continuing operations versus discontinued-operation items and the $4.3 million after-tax legal-liability reversal.
- Whether the construction businesses recover from weather-related first-quarter weakness and achieve their 2017 revenue and margin outlook.
- Progress, cost, permitting and regulatory recovery for major capital projects and pending rate cases, including potential customer refunds.
- The company’s ultimate exposure, insurance recovery and regulatory cost recovery for environmental matters and guarantees.
- Funding and execution of planned capital expenditures, and the continued availability and cost of commercial paper and other credit facilities.