Business context and reporting period
MDU Resources Group, Inc. filed this Form 10-K for the fiscal year ended December 31, 2018. The company operates regulated electric, natural gas distribution, and pipeline businesses alongside construction materials and contracting and construction services businesses. Results are seasonal, particularly in construction and utility operations.
On January 1, 2019, the company completed an internal holding-company reorganization. Management said the consolidated group retained the same assets, businesses, and operations after the change.
Financial performance and key metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Operating revenue | $4.532 billion | $4.443 billion |
| Operating income | $401.7 million | $424.0 million |
| Income from continuing operations | $269.4 million | $285.0 million |
| Earnings on common stock | $272.3 million | $280.4 million |
| Diluted EPS | $1.39 | $1.43 |
| Cash provided by operating activities | $499.9 million | $448.0 million |
| Cash and cash equivalents, year-end | $53.9 million | $34.6 million |
| Total long-term debt, including current maturities | $2.109 billion | $1.715 billion |
| Equity / debt share of capitalization | 55% / 45% | 59% / 41% |
Operating margin was approximately 8.9%, down from 9.5% in 2017. Operating cash flow improved, while cash used in investing activities rose to $710.9 million, largely reflecting acquisitions and higher capital spending. The filing reports $384.6 million of available borrowing capacity under outstanding credit facilities at year-end. The current ratio was approximately 1.20, based on reported current assets and current liabilities.
Declared dividends were $0.795 per share for 2018, up from $0.775 in 2017. The company reported more than 80 consecutive years of quarterly dividend payments and 28 consecutive years of increases.
Fourth-quarter comparison
Unaudited fourth-quarter 2018 operating revenue was $1.210 billion, operating income was $118.4 million, and net income was $78.8 million; diluted EPS was $0.40. In fourth-quarter 2017, revenue was $1.165 billion, operating income was $124.3 million, net income was $115.3 million, and diluted EPS was $0.59. The 2017 quarter included a $39.5 million income tax benefit from the Tax Cuts and Jobs Act (TCJA), an important factor in the year-over-year earnings comparison.
Material changes versus the prior comparable period
- Revenue increased about 2%, but operating income declined about 5% and common-stock earnings declined about 3%.
- Electric earnings fell to $47.0 million from $49.4 million, primarily reflecting lower adjusted gross margin, including customer tax-reform refunds and a transmission formula-rate adjustment.
- Natural gas distribution earnings rose to $37.7 million from $32.2 million, supported by higher retail margins and customer growth, partly offset by higher operating costs.
- Pipeline and midstream earnings increased to $28.5 million from $20.5 million. Higher transportation volumes and a $4.2 million tax benefit contributed; storage-related revenue was pressured by lower natural-gas price spreads.
- Construction materials and contracting earnings declined to $92.6 million from $123.4 million. Higher revenue and gross margin were outweighed in part by the absence of a $41.9 million 2017 deferred-tax revaluation benefit.
- Construction services earnings increased to $64.3 million from $53.3 million, mainly on stronger outside specialty contracting margins.
- Debt increased by approximately $394 million year over year, as the company financed acquisitions, capital projects, and working-capital requirements. The company completed four construction-materials acquisitions in 2018; reported total consideration was approximately $186 million, including cash and issued shares.
Guidance, outlook, risks, contingencies, and unusual items
- Management projected regulated electric and natural gas rate base growth of approximately 5% annually over the next five years and customer growth of 1% to 2% annually.
- The company expects to spend $584 million on capital expenditures in 2019 and estimates $531 million in 2020 and $598 million in 2021. These estimates include identified growth projects and may change with opportunities and project needs.
- The approximately $130 million BSSE transmission project began entering service in February 2019. The announced North Bakken Expansion was estimated at approximately $220 million, with construction expected to begin in 2021, subject to regulatory and environmental approvals and customer commitments.
- After year-end, the company announced plans to retire three coal-fired units in late 2020 and late 2021 and construct a natural-gas peaking unit at the Mandan site. Timing may be affected by the coal supplier’s bankruptcy proceeding.
- The company recorded approximately $18.5 million of additional regulatory liabilities during 2018 related to TCJA benefits expected to be returned to customers. Many jurisdictional rate settlements were implemented or scheduled for 2019; some matters remained pending.
- Key risks include regulatory decisions and recovery of costs, environmental and greenhouse-gas rules, severe weather, aging infrastructure, commodity-price and interest-rate changes, construction-market cyclicality, labor availability, project execution, cyber incidents, and multiemployer pension obligations. The company reported that approximately 30% of its multiemployer pension plans were in endangered, seriously endangered, or critical status.
- Accrued liabilities for contingencies, including litigation, production taxes, royalty claims, and environmental matters, totaled $30.4 million at year-end. The company also reported $375.6 million of asset-retirement obligations. It stated that it did not believe material environmental remediation costs or damages were probable for its Portland Harbor Superfund involvement; several manufactured-gas-plant matters remain subject to investigation, accruals, insurance, or potential rate recovery.
- Unusual comparisons include the 2017 TCJA tax benefit, 2018 customer refunds and tax-related regulatory reserves, acquisition costs, and discontinued-operation adjustments. Management reported no material goodwill impairment in 2018.
Most important facts an investor should verify
- Reconcile reported 2018 earnings and fourth-quarter year-over-year results for TCJA benefits, customer refunds, and other tax-related items.
- Review debt growth, 2019 maturities, available credit capacity, covenant compliance, and funding plans for the capital program and acquisitions.
- Track execution, approvals, costs, and customer commitments for major pipeline, transmission, generation, and coal-retirement plans.
- Check the outcome of pending rate cases and the timing and amounts of tax-reform refunds or rate adjustments.
- Assess whether construction backlogs convert into profitable revenue; the company cautions that backlog can be delayed, changed, or canceled.
- Monitor environmental and pension exposures, including remediation estimates, regulatory recovery, and potential increases in multiemployer plan contributions.