MDU Resources Group, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; unaudited. Comparisons are with the corresponding 2020 periods. MDU operates regulated electric, natural gas distribution and pipeline businesses, alongside construction materials and contracting and construction services. Results are seasonal, particularly in construction.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Operating revenue | $1.424B | $1.363B | $2.652B | $2.560B |
| Operating income | $137.7M | $138.3M | $222.9M | $195.3M |
| Net income | $100.2M | $99.7M | $152.3M | $124.8M |
| Diluted EPS | $0.50 | $0.50 | $0.76 | $0.62 |
| Operating cash flow | Not presented separately for the quarter | $182.8M | $261.4M |
- Q2 revenue grew 4.5%, while operating income was nearly flat and net income increased modestly. Operating margin was approximately 9.7%, down from 10.1%.
- First-half revenue rose 3.6%; net income increased 22.0%. Operating margin improved to approximately 8.4% from 7.6%.
- First-half cash from operations fell $78.6M despite higher earnings, principally reflecting working-capital movements, including natural gas purchases and higher construction-business working capital.
- Capital expenditures were $261.9M in the first half; net cash used in investing activities was $266.5M. Management estimates 2021 capital expenditures of approximately $805.9M.
Segments and material changes
- Electric: First-half net income declined to $21.0M from $23.5M. Higher operation and maintenance, depreciation and lower production tax credits outweighed improved adjusted gross margin.
- Natural gas distribution: First-half net income increased to $35.5M from $31.4M, supported by rate relief, higher volumes and transportation revenue. Q2 remained seasonally loss-making, but the loss narrowed.
- Pipeline: First-half net income rose to $18.1M from $16.3M, with higher storage-related and non-regulated project revenue and higher AFUDC, partly offset by lost gathering revenue after 2020 asset sales.
- Construction materials and contracting: First-half net income increased to $20.6M from $14.8M on stronger materials margins and contracting bid margins. Q2 earnings declined to $51.4M from $53.0M, as weather and project-start delays reduced contracting activity.
- Construction services: First-half net income increased to $58.7M from $44.8M, reflecting higher workload and the absence of a 2020 out-of-period construction-contract correction. Q2 net income was $28.9M versus $27.9M.
- Management attributed the first-half increase in consolidated earnings to improved results across most businesses, including construction services and construction materials. The absence of a prior-year construction-services adjustment contributed to the year-over-year improvement.
Liquidity, debt and capital
- At June 30, cash and cash equivalents were $57.9M; current assets were $1.462B and current liabilities $944.4M. Management reported $611.8M of available borrowing capacity under subsidiary credit facilities.
- Long-term debt, net of issuance costs and current maturities, was $2.336B; short-term borrowings were $50.0M and current debt maturities $1.5M. Equity was $3.199B, or 57% of total capitalization, versus 55% a year earlier.
- First-half financing included $171.8M of long-term debt issuance, $48.2M of long-term debt repayments, $54.6M net proceeds from at-the-market share sales and $85.4M of dividends paid. ATM proceeds were used for capital expenditures.
- Subsidiaries were in compliance with applicable debt covenants at quarter-end. The company reported no material off-balance-sheet arrangements.
Outlook, risks and unusual items
- Management expects regulated businesses to grow rate base approximately 5% annually over the next five years and customer growth to average 1% to 2% annually. These are operating expectations; the filing does not provide consolidated earnings or EPS guidance.
- Remaining performance obligations were $2.4B at June 30, with $1.8B expected to be recognized within 12 months or less. Construction materials and contracting backlog was $912.1M; construction services backlog was $1.320B.
- February 2021 extreme cold caused approximately $44M of extraordinary natural gas costs, recorded as regulatory assets for expected recovery. Recovery requests had been approved in three of four affected jurisdictions; Minnesota denied Great Plains’ request and opened an investigation. Recovery timing and outcomes remain uncertain.
- MDU ceased operation of Lewis & Clark Unit 1 in March 2021 and began decommissioning in July. Two other coal units are expected to retire in early 2022; the company intends to build an 88-MW natural-gas peaking unit at Heskett Station. Regional Haze requirements could require additional costs, and recovery depends on regulatory decisions.
- Management cited continuing supply, freight and labor constraints, material price increases, project timing and weather as business risks. COVID-19 had not materially adversely affected results through June 30, but its course and possible restrictions remain uncertain.
- Other risks include regulation and rate recovery, commodity and interest-rate exposure, construction project execution, cybersecurity and third-party system risks. The filing reports $30.8M of accrued contingency liabilities, with associated insurance receivables and regulatory assets; management said excess losses were not expected to materially affect financial position, results or cash flows, though outcomes remain uncertain.
- In May 2021, Washington regulators approved Cascade rates resulting in an annual revenue decrease of approximately $391,000, effective July 1, despite the company’s earlier request for an increase. A petition for reconsideration was denied.
Investor verification priorities
- Track recovery of the approximately $44M cold-weather gas costs, especially the Minnesota proceeding and remaining jurisdiction approvals.
- Compare cash generation with earnings and monitor working capital, capital spending and funding needs against the approximately $805.9M 2021 capital estimate.
- Assess whether segment backlog converts to revenue and margins, considering seasonal construction activity, labor shortages, materials costs and project delays.
- Follow retirement and replacement plans for coal units, Regional Haze requirements, and regulatory recovery of associated costs.
- Monitor Cascade’s rate outcome and other rate cases, as well as the effect of ATM share issuance on share count and per-share results.