MDU Resources Group, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. MDU operates regulated electric, natural gas distribution and pipeline businesses, alongside construction materials and contracting and construction services. Results are seasonal, so interim performance may not indicate full-year results.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $1,064.6 million | $1,067.6 million | $2,040.9 million | $2,005.6 million |
| Operating income | $74.0 million | $78.7 million | $143.4 million | $144.4 million |
| Income from continuing operations | $44.1 million | $44.4 million | $86.0 million | $80.0 million |
| Net income | $43.8 million | $41.2 million | $86.2 million | $78.5 million |
| Basic EPS | $0.22 | $0.21 | $0.44 | $0.40 |
| Operating cash flow | — | — | $176.6 million | $139.5 million |
| Capital expenditures | — | — | $210.6 million cash outflow | $143.8 million cash outflow |
Q2 revenue was nearly unchanged year over year, while six-month revenue rose about 1.8%. Operating income declined about 5.9% in Q2 and 0.7% for the half year. Common-stock earnings increased about 7.9% in Q2 and 10.9% for the half year. Lower income-tax expense following the Tax Cuts and Jobs Act (TCJA) supported earnings; in regulated jurisdictions, some tax savings were reserved for customers.
Six-month investing cash outflow was $222.3 million, compared with $22.5 million in 2017, reflecting higher capital spending and acquisitions and the absence of prior-year property-sale proceeds. Financing provided $52.7 million, versus $123.0 million used in the prior-year period. Dividends declared were $0.1975 per share for Q2 and $0.3950 for the first half.
Liquidity, debt and capital
- At June 30, cash and cash equivalents were $41.7 million; reported available borrowing capacity was $548.9 million.
- Debt due within one year was $109.2 million and long-term debt was $1,743.7 million, totaling approximately $1.853 billion, compared with $1.715 billion at December 31, 2017.
- Total stockholders’ equity was $2.451 billion. Equity was 57% of total capitalization, compared with 59% at year-end 2017.
- Management expected to fund obligations and capital needs through operating cash, credit facilities and debt and equity issuance. Estimated 2018 capital expenditures were approximately $672 million, including acquisitions and growth projects.
Segments, changes and outlook
- Electric and natural gas distribution: Six-month earnings were broadly flat in electric and increased modestly in gas, while gas distribution earnings fell sharply in Q2. TCJA-related customer refunds, higher operating costs and a nonrecurring expense connected with a Washington rate-case settlement affected results. Management expects regulated rate base to grow about 6% annually over five years and customer growth of 1%–2% annually.
- Pipeline and midstream: Six-month earnings rose to $11.0 million from $9.2 million, supported by higher transportation volumes and nonregulated project revenue. Growth projects were underway, including Valley Expansion and Line Section 27, with expected in-service dates in late 2018. Lower natural-gas price spreads weighed on storage-related revenue.
- Construction materials and contracting: Q2 earnings increased to $24.3 million from $21.2 million, aided by lower taxes and stronger construction margins, partly offset by weaker materials margins. First-half earnings declined to $0.8 million from $1.3 million. Backlog was $731.2 million, down from $765.8 million a year earlier. Management cited higher diesel and asphalt costs and weather-related pressures.
- Construction services: First-half earnings rose to $29.2 million from $19.7 million, reflecting stronger outside contracting margins, higher workloads and equipment sales and rentals. Backlog reached a record $887.9 million, versus $595.7 million a year earlier.
- Growth and capital plans: Two construction-materials-related acquisitions closed during Q2; consideration included cash and 713,948 common shares. The company also expected to purchase the Thunder Spirit Wind farm expansion after construction, scheduled for late 2018 completion. It reported completion of a sale of most remaining Fidelity property and equipment in July 2018.
Risks, contingencies and unusual items
- The company recorded an additional approximately $11.3 million regulatory liability in the first half for expected customer benefits from lower taxes. Rate proceedings and tax-recovery treatments remained pending in several jurisdictions.
- Import tariffs and extended delivery lead times for steel, aluminum and other materials may increase costs or delay utility and pipeline work. Other risks include regulatory outcomes, construction labor availability, project timing, weather, commodity prices and competition.
- Environmental and other contingency liabilities, including amounts held for sale, totaled $31.1 million at June 30. Significant matters include Portland Harbor and manufactured-gas-plant sites; the company stated that certain potential losses could not be estimated and did not expect probable or reasonably possible excess losses to materially affect its financial position, results or cash flows.
- The company continued a $51.0 million guarantee related to Dakota Prairie Refining debt, with Tesoro indemnifying it for losses and litigation expenses. Other disclosed guarantees included $186.5 million of fixed maximum amounts and $789.2 million of surety bonds outstanding; no amounts were outstanding under the specified guarantees and letters of credit at quarter-end.
- Management cited $39.8 million of exposure, based on its ownership share, to the Coyote Creek variable-interest entity. The company did not consolidate it.
- The company adopted the new customer-revenue standard in 2018; it reported no material effect on results, financial position or cash flows. The adoption reduced opening retained earnings by $970,000.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Track the outcome and timing of pending utility rate cases and how TCJA savings and deferred taxes will be returned to customers.
- Assess whether announced growth projects and the approximately $672 million 2018 capital program remain on schedule and within budget, and how they will be financed.
- Monitor construction-segment margins, backlog conversion, input-cost inflation and labor availability, as well as pipeline project execution and storage economics.
- Review debt growth, borrowing capacity, cash generation relative to investment needs, and the terms and remaining capacity of credit and private shelf facilities.
- Follow developments in environmental proceedings, guarantees and indemnities, and the outstanding surety-bond commitments.
- Consider the company’s warning that seasonal operations and forward-looking projections may cause actual full-year results to differ from interim performance or expectations.