MDU Resources Group, Inc. — Q3 2021 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2021; unaudited. MDU operates regulated electric, natural gas distribution and pipeline businesses, alongside construction materials and contracting and construction services. The company says its diversified platforms help balance seasonal operations. Comparisons below are with the corresponding 2020 period.
Financial and operating highlights
| Metric | Q3 2021 | First nine months 2021 |
|---|---|---|
| Operating revenue | $1.586 billion, essentially flat | $4.238 billion, up 2.2% |
| Operating income | $189.2 million, down 7.1% | $412.0 million, up 3.3% |
| Net income | $139.3 million, down 9.0% | $291.6 million, up 4.9% |
| Diluted EPS | $0.68, versus $0.76 | $1.44, versus $1.39 |
| Cash from operations | Not reported as a quarterly figure in the supplied filing text | $365.8 million, versus $481.8 million |
| Capital expenditures | Not reported as a quarterly figure in the supplied filing text | $428.1 million cash outflow; management’s broader nine-month capital-expenditure measure, including a completed acquisition, was $507.9 million |
Consolidated operating margin was approximately 11.9% in Q3 and 9.7% for the first nine months, versus 12.8% and 9.6%, respectively, in 2020. These ratios are calculated from reported operating income and revenue.
Q3 earnings fell mainly because construction materials and contracting faced lower asphalt and contracting margins, higher asphalt-oil and fuel costs, and less public-sector paving work. Construction services earnings also declined, reflecting a contract estimate change, labor-cost pressure and less disaster-recovery work. For the nine-month period, higher earnings in electric, natural gas distribution, pipeline and construction services more than offset weaker construction materials and contracting results.
- Construction materials and contracting: Q3 net income $96.3 million, down 10%; nine-month net income $116.9 million, down 4%. Revenue increased, but margins weakened.
- Construction services: Q3 net income $23.1 million, down 22%; nine-month net income $81.8 million, up 10%.
- Electric: Q3 net income $20.6 million, up 22%; nine-month net income $41.6 million, up 3%.
- Natural gas distribution: Q3 seasonal loss narrowed to $15.4 million from $17.6 million; nine-month net income rose to $20.1 million from $13.8 million.
- Pipeline: Q3 net income was $10.6 million versus $8.0 million; nine-month net income was $28.7 million versus $24.3 million. Higher AFUDC on the North Bakken Expansion supported results.
Balance sheet, debt and liquidity
At September 30, 2021, total assets were $8.57 billion and stockholders’ equity was $3.33 billion. Cash and cash equivalents were $57.2 million. Short-term borrowings were $50.0 million; long-term debt, including current maturities, was approximately $2.33 billion. Total debt including short-term borrowings was approximately $2.38 billion. Equity was 58% of total capitalization.
Management reported $694.7 million of available borrowing capacity under subsidiary credit facilities. The company was in compliance with applicable debt covenants. Nine-month financing included $88.8 million net proceeds from at-the-market share sales, $178.5 million of long-term debt issuance and $128.1 million of dividends paid.
Cash flow, outlook and material risks
Operating cash flow declined by $115.9 million year over year, largely because of higher natural gas purchases and working-capital needs. Investing cash outflow was $432.7 million, including $428.1 million of capital expenditures; financing provided $64.5 million. Management estimated 2021 capital expenditures of approximately $774.5 million and expects funding from internally generated cash, borrowing facilities, and debt and equity issuance.
- Management expects regulated electric and natural gas businesses to grow rate base by approximately 5% annually over the next five years and customer growth to average 1% to 2% per year.
- Construction materials and contracting backlog was $651.7 million, up 14% year over year. Construction services backlog was $1.273 billion, comparable with the prior year. Management expects to complete a significant portion of both backlogs over the next 12 months.
- Remaining performance obligations across construction and pipeline businesses were $2.4 billion; $1.6 billion was expected to be recognized within 12 months.
- The North Bakken Expansion was under construction and expected to be completed in early 2022, subject to favorable weather. The Wahpeton pipeline expansion was planned for construction in early 2024, subject to regulatory approval.
- The February 2021 extreme cold event generated approximately $44 million of additional natural gas costs recorded as regulatory assets for recovery from customers. Recovery approvals were received in affected jurisdictions; a Minnesota prudence review remained pending.
- Supply-chain delays and higher material, freight and labor costs could pressure project timing and margins. Management cited persistent skilled-labor shortages, especially in construction businesses, and elevated natural gas prices.
- Climate and environmental regulation, including Washington emissions-reduction requirements and the EPA Regional Haze Rule, may increase costs. MDU said the effects of some initiatives remain uncertain; recovery of regulated costs depends on regulators.
- Three aging coal units are being retired: Lewis & Clark Unit 1 ceased operations in March 2021, while two Heskett units were expected to retire in early 2022. The company planned an 88-MW natural-gas peaking unit at Heskett.
- COVID-19 had no material adverse effect on results for the nine-month periods presented, according to management, but risks include renewed restrictions, workforce disruption, supply constraints, customer collections and cybersecurity exposure.
- Accrued contingency liabilities were $34.7 million, with associated insurance receivables and regulatory assets partly offsetting exposure. The filing says excess losses, net of insurance, either cannot be estimated or are not expected to materially affect results. Outstanding surety bonds were approximately $897.2 million; the company also reported a $32.1 million proportionate exposure to the Coyote Creek variable-interest entity.
Most important facts for investors to verify
- Whether construction margins recover as asphalt, fuel, labor and public-sector project conditions evolve.
- Whether operating cash flow improves after the working-capital and gas-purchase pressures reported in 2021, and how planned capital spending is funded.
- Progress, cost and timing of the North Bakken Expansion, Heskett replacement generation and other capital projects.
- Regulatory decisions and customer recovery of the $44 million cold-weather gas costs, as well as outcomes of pending rate cases and environmental requirements.
- Backlog conversion, contract-estimate revisions and labor availability in both construction segments.
- Debt, liquidity and share dilution, including further use of the at-the-market equity program, which had capacity for up to 3.6 million additional shares at quarter-end.