MDU RESOURCES GROUP INC annual report, FY2017

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MDU Resources Group, Inc. — 2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017. MDU operates five reportable segments across regulated energy delivery and construction materials and services. Comparisons are with 2016 unless otherwise noted.

Financial performance and liquidity

  • Revenue: $4.443 billion, up 7.6% from $4.129 billion.
  • Operating income: $428.7 million, up from $409.1 million. Operating margin was approximately 9.7%, versus 9.9%.
  • Continuing operations: Income was $285.0 million, compared with $233.1 million; diluted EPS before discontinued operations was $1.45, versus $1.19.
  • Common-stock earnings: $280.4 million, or $1.43 diluted EPS, compared with $63.7 million, or $0.33, in 2016. The comparison is heavily affected by the prior-year discontinued-operations loss related to business sales.
  • Tax: Income tax expense was $65.0 million, including a $39.5 million benefit from revaluing deferred taxes after the Tax Cuts and Jobs Act (TCJA). The effective tax rate was 18.6%, versus 28.5%.
  • Cash flow: Operating cash flow was $448.0 million, down from $462.2 million. Cash capital expenditures were $341.4 million; reported capital expenditures including noncash items were $351.9 million. Investing activities used $214.2 million and financing activities used $245.4 million.
  • Cash and borrowing capacity: Cash and equivalents were $34.6 million at year-end. The company reported $687.1 million of available borrowing capacity under credit facilities.
  • Debt and capitalization: Long-term debt, including current maturities, was $1.715 billion, down from $1.790 billion. Debt was 41% of total capitalization and equity 59%.
  • Other metrics: Dividends declared were $0.775 per share, up from $0.755. Total assets were $6.335 billion.

Segments and changes from 2016

  • Electric: Revenue was $342.8 million and earnings $49.4 million, up from $42.2 million. Higher retail margins, approved rate recovery and increased residential and commercial sales supported results.
  • Natural gas distribution: Revenue was $848.4 million and earnings $32.2 million, up from $27.1 million. Colder weather, customer growth and rate increases lifted retail margins.
  • Pipeline and midstream: Revenue was $122.2 million and segment earnings $20.5 million, down from $23.4 million. The January 2017 sale of the Pronghorn interest reduced gathering and processing revenue; higher transportation volumes partly offset the decline.
  • Construction materials and contracting: Revenue was $1.813 billion, down from $1.874 billion; earnings rose to $123.4 million from $102.7 million. A $41.9 million tax benefit and stronger aggregate margins outweighed weaker asphalt and construction margins, affected by weather, pricing and reduced work in some regions.
  • Construction services: Revenue increased to $1.368 billion from $1.073 billion and earnings to $53.3 million from $33.9 million. Higher workloads and improved project execution supported margins, partly offset by higher overhead and losses on certain jobs.
  • Consolidated earnings also benefited from the absence of the 2016 loss associated with the refining-business sale. 2017 discontinued operations recorded a $3.8 million loss attributable to MDU, compared with a $168.7 million loss in 2016.

Outlook, risks and unusual items

  • Management expects regulated electric and natural gas rate base to grow approximately 6% annually over the next five years, and customer growth of 1% to 2% per year. Estimated capital expenditures are $628 million in 2018, $514 million in 2019 and $472 million in 2020.
  • Planned and ongoing investment includes the approximately $85 million Thunder Spirit Wind expansion, expected to be completed in late 2018, and a 345-kilovolt transmission line expected to be completed in 2019. Management expects the wind expansion to bring the electric portfolio to approximately 27% renewables by nameplate capacity.
  • Management says the TCJA is not expected to increase utility earnings and may reduce utility cash flows because regulated utility property cannot be immediately expensed. Tax-related regulatory amounts are subject to regulatory treatment and are generally expected to be returned to customers over time; final tax impacts remained under review.
  • Key risks include utility rate and cost-recovery decisions, environmental and emissions rules, weather and seasonality, commodity and construction-market conditions, project execution, labor availability, pension and multiemployer-plan obligations, financing access, and cybersecurity. Construction backlogs are not assured revenue and may be delayed, changed or canceled.
  • At year-end, MDU reported $35.4 million of accrued liabilities for contingencies, including litigation, production-tax, royalty and environmental matters. The Portland Harbor cleanup has an estimated overall present-value cost of approximately $1 billion, but MDU said it did not believe it was a responsible party and did not consider a material loss probable. Cascade has accrued for certain manufactured-gas-plant investigations and remediation.
  • The qualified pension plans were underfunded by approximately $91.5 million. MDU participates in approximately 75 multiemployer pension plans; management reported that about 35% were in endangered, seriously endangered or critical status.
  • Management announced that it would explore a possible holding-company reorganization. The filing does not provide a final decision or timetable.
  • The financial statements received an unqualified audit opinion; management and the auditor concluded internal control over financial reporting was effective as of year-end.

Important facts for investors to verify

  • Separate recurring operating performance from the $39.5 million TCJA tax benefit and the substantial year-over-year effect of discontinued operations.
  • Track regulators’ decisions on returning TCJA-related tax benefits to utility customers, and the resulting effects on earnings, rates and cash flow.
  • Assess whether construction-services growth and margins, and construction-materials demand and margins, are sustainable given seasonality, weather, competition and project risk.
  • Monitor the execution, cost and regulatory recovery of planned utility and pipeline capital projects, as well as funding needs against available liquidity and debt maturities.
  • Review developments in environmental matters, MEPP funding and withdrawal exposure, pension funding, and the status of the proposed corporate reorganization.