MDU Resources Group, Inc. — FY 2019 Form 10-K
Reporting period: Year ended December 31, 2019. The filing is an annual report, not a standalone fourth-quarter report. MDU operates regulated energy businesses and construction materials and services businesses across five reportable segments. A holding-company reorganization took effect January 1, 2019; management stated it did not change the consolidated company’s underlying assets, businesses, or operations.
Financial performance and position
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Operating revenue | $5.337 billion | $4.532 billion | +17.8% |
| Operating income | $481.2 million | $401.7 million | +19.8% |
| Income from continuing operations | $335.2 million | $269.4 million | +24.4% |
| Earnings on common stock | $335.5 million | $272.3 million | +23.2% |
| Diluted EPS | $1.69 | $1.38 | +22.5% |
| Cash from operating activities | $542.3 million | $499.9 million | +$42.4 million |
| Cash and cash equivalents at year-end | $66.5 million | $53.9 million | +$12.5 million |
| Long-term debt, including current maturities | $2.243 billion | $2.109 billion | +$134.4 million |
Operating margin was approximately 9.0%, compared with 8.9% in 2018. Net cash used in investing activities was $603.9 million, including $576.1 million of capital expenditures and $55.6 million of net acquisition spending. The company reported $644.4 million of available borrowing capacity under subsidiary credit facilities. Equity was 56% of total capitalization; debt was 44%.
Dividends declared were $0.815 per share, up from $0.795. The company reported a 48% payout ratio based on continuing operations and a 2.8% year-end dividend yield.
Material changes and segment results
- Construction materials and contracting: Earnings rose to $120.4 million from $92.6 million. Revenue grew to $2.191 billion from $1.926 billion, supported by stronger markets, acquisitions, higher contracting margins, and asset-sale gains. Aggregate sales increased 8.5%; year-end backlog was $693 million, down from $706 million.
- Construction services: Earnings increased to $93.0 million from $64.3 million, as revenue rose to $1.849 billion from $1.371 billion on increased inside and outside contracting workloads. Backlog grew 22% to $1.144 billion.
- Electric: Earnings rose to $54.8 million from $47.0 million, reflecting rate relief and recovery of the 345-kV BSSE transmission investment placed in service in 2019. Operating income nevertheless declined to $64.0 million from $65.1 million as depreciation and other costs increased.
- Natural gas distribution: Earnings increased to $39.5 million from $37.7 million. Colder weather and rate recovery lifted adjusted gross margin, partly offset by higher operating expenses, depreciation, and interest.
- Pipeline and midstream: Earnings increased to $29.6 million from $28.5 million. Higher transportation volumes and rates were partly offset by increased depreciation, interest, and the absence of a 2018 tax benefit.
Management attributed the consolidated earnings increase mainly to higher construction workloads and margins, acquisitions, asset-sale gains, utility rate recovery, and better benefit-plan investment returns. Results also reflect higher depreciation and interest costs.
Outlook, risks, and unusual items
- Management expected regulated utility rate base to grow about 5% annually over five years and customer growth of 1%–2% per year. Estimated capital expenditures were $650 million in 2020, $800 million in 2021, and $552 million in 2022; funding was expected from operations, debt, and equity.
- MDU planned to retire Lewis & Clark coal units in early 2021 and Heskett units 1 and 2 in early 2022, subject to regulatory matters. It proposed an 88-MW natural-gas peaking unit at Heskett, targeted for service in 2023 if approved.
- Pipeline projects included the North Bakken Expansion, designed for 350 MMcf per day, with construction expected to begin in 2021 subject to permits and customer commitments. A sale of approximately 400 miles of regulated gathering assets was pending FERC approval and expected to close in the first half of 2020.
- Key risks include regulation and the timing or full recovery of costs in rates; aging infrastructure; environmental and climate-related requirements; weather and seasonality; construction-market cyclicality, labor availability, and project-estimate risk; commodity and interest-rate exposure; cybersecurity; and pension and multiemployer-plan obligations.
- Year-end asset retirement obligations were $417.6 million. Purchase commitments totaled $1.729 billion, including contracts with terms extending up to 41 years. Construction subsidiaries had approximately $1.1 billion of surety bonds outstanding, not recorded on the balance sheet. The company said no material off-balance-sheet arrangements existed under the SEC definition.
- Environmental matters include the Portland Harbor Superfund site and manufactured-gas-plant remediation claims. The company stated it did not believe material Portland Harbor remediation costs or damages were probable; certain other site costs were accrued, with some amounts expected to be recovered through rates or insurance.
- The company recorded a $2.0 million pre-tax write-down of a non-utility investment. No goodwill impairment was recorded. Adoption of lease accounting added approximately $112 million of right-of-use assets and lease liabilities at January 1, 2019, without a cumulative retained-earnings adjustment.
- The 2019 Form 10-K followed the holding-company reorganization, so some parent-only prior-period presentations are not directly comparable. Deloitte issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- Whether 2019 earnings growth and construction backlog convert into durable cash generation, especially given seasonality and project-estimate uncertainty.
- Regulatory approvals and recoverability of costs associated with coal-unit retirements, the proposed Heskett gas unit, and ongoing rate cases.
- Execution, permitting, customer commitments, and expected returns for planned pipeline expansions and the gathering-asset sale.
- Debt and liquidity trends alongside the planned capital program, acquisitions, equity issuance, and rising purchase commitments.
- Potential exposure from environmental claims, asset-retirement obligations, pension and multiemployer plans, and unrecorded surety bonds.