MDU Resources Group, Inc. — 2016 Form 10-K
Reporting period: Year ended December 31, 2016; filed February 24, 2017. MDU operates regulated electric, natural gas distribution and pipeline businesses, alongside construction materials and construction services businesses. It sold Dakota Prairie Refining in June 2016 and completed sales of Fidelity’s oil and gas assets between October 2015 and April 2016; both are reported as discontinued operations.
Financial results and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Operating revenue | $4.129 billion | $4.014 billion |
| Operating income | $409.1 million | $319.8 million |
| Operating margin | 9.9% | 8.0% |
| Income from continuing operations | $233.1 million | $176.4 million |
| Continuing-operations diluted EPS | $1.19 | $0.90 |
| Earnings (loss) on common stock | $63.7 million | $(623.1) million |
| Operating cash flow | $462.2 million | $661.8 million |
| Cash and cash equivalents at year-end | $46.1 million | $83.9 million |
| Total long-term debt, including current maturities | $1.790 billion | $1.796 billion |
| Total equity | $2.316 billion | $2.521 billion |
Operating cash flow fell $199.6 million, principally because of lower cash flows from discontinued operations and higher working-capital needs in several continuing businesses. Investing cash outflow was $305.1 million; financing cash outflow was $194.9 million. Cash capital expenditures were $388.2 million, while the company’s continuing-operations capital expenditure schedule reports $372.4 million. Available capacity under credit facilities was $504.9 million. Equity was 56% of total capitalization, down from 58% in 2015; debt was 44%.
Common dividends declared were $0.755 per share, versus $0.735 in 2015. Segment earnings on common stock before discontinued operations were led by construction materials and contracting at $102.7 million, electric at $42.2 million, construction services at $33.9 million, natural gas distribution at $27.1 million, and pipeline and midstream at $23.4 million.
Material changes versus 2015
- Revenue increased 2.9% and operating income rose 28%; continuing-operations earnings increased 32%.
- Construction materials and contracting earnings grew to $102.7 million from $89.1 million, supported by higher construction work, asphalt and aggregate volumes and margins, and a reduction in a previously recorded multiemployer pension withdrawal liability.
- Construction services earnings rose to $33.9 million from $23.8 million, chiefly on higher Western-region workloads and margins.
- Electric earnings increased to $42.2 million from $35.9 million, including approved rate increases and higher production tax credits; retail sales volumes declined 2%.
- Natural gas distribution earnings increased to $27.1 million from $23.6 million, reflecting customer growth, colder weather in some regions, rate increases and 4% higher retail sales volumes.
- Pipeline and midstream earnings improved to $23.4 million from $13.3 million, largely because 2015 included asset impairments. Lower gathering volumes partly offset the improvement.
- Reported common-stock earnings swung from a $623.1 million loss to $63.7 million of earnings. The comparison is heavily affected by discontinued-operation impairments: 2015 included major Fidelity write-downs, while 2016 included a $156.7 million after-tax Dakota Prairie Refining impairment. The 2016 discontinued-operations loss attributable to MDU was $168.7 million.
Outlook, commentary and risks
- Management projected annual rate-base growth of approximately 4% over five years from a $1.9 billion base at year-end 2016, and customer growth of 1% to 2% annually.
- Planned 2017 revenue ranges: construction materials and contracting, $1.85 billion to $1.95 billion, with margins expected to be slightly higher than 2016; construction services, $1.0 billion to $1.1 billion, with margins expected to be comparable.
- Estimated continuing-operations capital expenditures were $523 million in 2017, $547 million in 2018 and $435 million in 2019. Funding was expected from internal cash, credit facilities, long-term debt and asset sales; actual spending may vary.
- Key projects include a 160-mile electric transmission line expected to be completed in 2019; a wind-farm expansion estimated at $85 million and expected online in December 2018; and the Valley Expansion natural gas pipeline, estimated at $55 million to $60 million, with construction expected to begin in early 2018, subject to approvals.
- Risks include environmental and emissions regulation, coal-ash and pipeline-safety requirements, weather, commodity prices and regional economic conditions, construction project delays or cost overruns, regulatory cost-recovery timing, competition, access to financing, cybersecurity, and multiemployer pension obligations. Management noted that roughly 35% of its multiemployer pension plans were in endangered, seriously endangered or critical status.
- The Clean Power Plan was stayed by the Supreme Court; MDU had not included potential compliance capital costs in its 2017–2019 estimates. Washington’s emissions rule could increase Cascade costs; litigation challenging the rule was pending.
- Contingencies include the Portland Harbor Superfund matter, where the EPA’s selected remedy has an estimated site-wide present value cost of about $1 billion; MDU said its potential share could not be estimated and did not believe material remediation costs were probable. Cascade accrued $1.6 million for the Eugene manufactured-gas site and $12.5 million for the Bremerton site. MDU also had $315.0 million of asset-retirement obligations and $4.785 billion of disclosed contractual obligations, including debt, estimated interest, leases and purchase commitments.
- Centennial continued to guarantee $63.8 million of Dakota Prairie Refining debt after the sale; Tesoro agreed to indemnify Centennial for losses and litigation expenses arising from that guarantee. The filing also disclosed other guarantees and surety bonds.
Most important facts for investors to verify
- Separate recurring continuing-operations performance from discontinued-operation losses and disposal impairments when assessing 2016 earnings.
- Review the drivers and sustainability of stronger construction margins and earnings, as well as the construction businesses’ backlog and project execution.
- Track operating cash flow, working-capital needs, planned capital spending, financing requirements and debt maturities.
- Monitor regulatory proceedings and whether infrastructure, fuel and environmental costs are recovered promptly in customer rates.
- Assess potential exposure from environmental matters, asset-retirement obligations, multiemployer plans and guarantees associated with disposed businesses.
- Confirm delivery, permitting, costs and expected returns for major transmission, wind and pipeline projects; management’s projections are forward-looking and subject to risks.