MDU RESOURCES GROUP INC annual report, FY2020

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MDU Resources Group, Inc. — 2020 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020, and compares results primarily with 2019. MDU operates regulated electric, natural gas distribution and pipeline businesses, alongside construction materials and contracting and construction services businesses.

Financial performance and position

  • Revenue: $5.533 billion, up 3.7% from $5.337 billion. Growth in construction services and pipeline was partly offset by lower electric and natural gas distribution revenue and slightly lower construction materials revenue.
  • Profit: Operating income was $544.9 million, up 13.2%; net income was $390.2 million, up 16.3%; diluted continuing-operations EPS was $1.95, versus $1.69.
  • Margins: Operating margin was approximately 9.9%, versus 9.0% in 2019; net margin was approximately 7.1%, versus 6.3%. Electric adjusted gross margin was $264.5 million, unchanged, while natural gas distribution adjusted gross margin rose 2.9% to $367.7 million. Adjusted gross margin is a non-GAAP measure.
  • Cash flow: Operating cash flow was $768.4 million, versus $542.3 million. Investing activities used $630.2 million and financing activities used $145.0 million. Cash capital expenditures were $558.0 million; management’s reported capital expenditures, including specified noncash items, were $648.3 million.
  • Debt and liquidity: Long-term debt was $2.213 billion; the balance sheet also reported $50.0 million in short-term borrowings. Cash was $59.5 million, with $736.3 million of available borrowing capacity. Equity was 58% of total capitalization, compared with 56% in 2019. Current assets were $1.337 billion and current liabilities $963.5 million.
  • Shareholder returns: Dividends declared were $0.835 per share, a 30th consecutive annual increase. The company reported 83 consecutive years of dividend payments.

Material changes versus 2019

  • Construction materials and contracting net income rose to $147.3 million from $120.4 million, supported by stronger materials margins, favorable weather and lower fuel costs; aggregate sales volumes declined.
  • Construction services net income increased to $109.7 million from $93.0 million, reflecting higher inside and outside contracting workloads, including acquired operations.
  • Pipeline net income increased to $37.0 million from $29.6 million, with higher transportation volumes and storage revenue; MDU also sold its regulated and nonregulated gathering assets and exited the gathering business.
  • Natural gas distribution net income rose to $44.0 million from $39.5 million, including approved rate recovery and customer growth. Electric net income increased modestly to $55.6 million from $54.8 million; lower sales volumes were offset by rates, expense reductions and other income.
  • Operating cash flow increased substantially, helped by stronger receivable collections, lower natural gas purchases, deferred payroll taxes and no pension contributions in 2020.

Outlook, commentary, risks and unusual items

  • Management said COVID-19 caused some operating inefficiencies, interruptions and reduced commercial and industrial energy demand, but no material adverse impact on 2020 results. The company deferred approximately $56.7 million of employer payroll taxes under the CARES Act, payable in installments by the end of 2021 and 2022. It cautioned that prolonged economic effects could become material.
  • Management expects regulated electric and natural gas rate base to grow approximately 5% annually, compounded, over five years, and customer growth to average 1% to 2% annually. The filing provides no consolidated earnings guidance.
  • Planned projects include an 88-MW natural-gas peaking unit at Heskett, expected in service in 2023, and the North Bakken Expansion pipeline, with a revised 250-MMcf-per-day design capacity and expected late-2021 in-service timing, subject to regulatory and permitting processes.
  • At year-end, construction materials backlog was $673 million and construction services backlog was $1.273 billion. Management expected to complete a significant portion of each within 12 months; backlog is subject to delay, cancellation and cost changes.
  • Estimated capital expenditures were $826 million in 2021, $673 million in 2022 and $595 million in 2023. These are estimates and include major planned projects.
  • Risks include regulation and recovery of costs, environmental and climate rules, aging infrastructure, severe weather, construction-market cycles and funding, skilled-labor constraints, commodity and interest-rate movements, cybersecurity, COVID-19, and multiemployer pension obligations. The company reported $1.783 billion in purchase commitments and $953.9 million in outstanding surety bonds, neither reflected as balance-sheet debt.
  • Unusual items included a $4.4 million after-tax fourth-quarter benefit-plan adjustment increasing 2020 income and a $6.7 million after-tax first-quarter adjustment reducing income to correct a construction-contract revenue error relating to 2019. Management concluded neither adjustment was material to previously issued statements or 2020 results.
  • Environmental matters include Cascade’s Bremerton Gasworks site, for which remediation costs were preliminarily estimated at $13.6 million to $71.0 million; Cascade had accrued $17.5 million for remediation at year-end. The company reported $41.5 million of accrued liabilities for contingencies overall, partly offset by insurance receivables and regulatory assets. Auditors issued unqualified opinions on the financial statements and internal controls.

Important facts for investors to verify

  • Whether construction-business margins and earnings remain resilient if favorable weather, workload levels or public infrastructure funding change.
  • Actual timing, cost, regulatory approval and customer demand for Heskett Unit 4 and the North Bakken Expansion.
  • Regulatory recovery and timing for utility investments, coal-unit retirements and environmental remediation; monitor the Bremerton site estimate as studies progress.
  • Liquidity and debt developments, including repayment of the $50 million Montana-Dakota term loan in February 2021 and scheduled debt maturities.
  • Cash conversion and dividend capacity, including the eventual payroll-tax repayments and restrictions on subsidiary distributions.