MDU Resources (MDU) - 2018 Q4 - Annual Report

Part I Forward-Looking Statements This section highlights that the 10-K report contains forward-looking statements, which are not historical facts and involve risks and uncertainties that could cause actual results to differ materially. The company disclaims any obligation to update these statements. - Forward-looking statements are identified by words like "anticipates," "estimates," "expects," "intends," "plans," "predicts" and similar expressions, and involve risks and uncertainties that could cause actual results to differ materially[17][18] - The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances that occur after the statement's date[19] Business and Properties MDU Resources Group, Inc. operates a two-platform business model: regulated energy delivery and construction materials and services, organized into five reportable segments. - MDU Resources Group, Inc. operates a two-platform business model: regulated energy delivery and construction materials and services, designed to balance seasonality and industry-specific risks[22] - The company completed a Holding Company Reorganization on January 2, 2019, making Montana-Dakota and Great Plains subsidiaries[21] - The company is organized into five reportable business segments: electric, natural gas distribution, pipeline and midstream, construction materials and contracting, and construction services[23] General Business Overview The company, incorporated in 2018, completed a holding company reorganization in January 2019 to make public utility divisions subsidiaries, operating a two-platform model with 11,797 employees as of December 31, 2018. - MDU Resources Group, Inc. completed an internal holding company reorganization on January 1, 2019, making Montana-Dakota and Great Plains subsidiaries[15][21] - The company operates with a two-platform business model: regulated energy delivery (electric, natural gas distribution, pipeline and midstream) and construction materials and services (construction materials and contracting, construction services)[22][23] Employee Count by Segment (as of December 31, 2018) | Segment | Employees | | :----------------------------- | :-------- | | MDU Resources Group, Inc. | 218 | | Montana-Dakota | 1,004 | | Cascade | 338 | | Intermountain | 242 | | WBI Holdings | 317 | | Knife River | 3,967 | | MDU Construction Services | 5,711 | | Total | 11,797| Electric Segment The Electric segment provides retail electric service to over 143,000 customers across four states, with a net electric plant investment of $1.5 billion and $312.1 million in 2018 revenues, 21% from renewable resources. - Montana-Dakota provides electric service to 143,022 customers in 184 communities across Montana, North Dakota, South Dakota, and Wyoming as of December 31, 2018[39] Electric Retail Customers and Revenues by Class (2016-2018) | Year | Customers Served | Revenues (Thousands of Dollars) | | :--- | :--------------- | :---------------------------- | | 2018 | | | | Residential | 118,426 | 126,173 | | Commercial | 22,756 | 141,961 | | Industrial | 236 | 36,081 | | Other | 1,604 | 7,882 | | Total | 143,022 | 312,097 | | 2017 | | | | Residential | 118,379 | 121,171 | | Commercial | 22,764 | 140,856 | | Industrial | 242 | 34,417 | | Other | 1,516 | 8,275 | | Total | 142,901 | 304,719 | | 2016 | | | | Residential | 118,483 | 117,014 | | Commercial | 22,693 | 135,390 | | Industrial | 244 | 31,913 | | Other | 1,528 | 7,580 | | Total | 142,948 | 291,897 | - Approximately 21% of electricity delivered from Montana-Dakota's owned generation in 2018 was from renewable resources, and carbon dioxide emission intensity has been reduced by approximately 24% since 2003[46] Electric Environmental Capital Expenditures (2018-2021 Estimates) | Year | Estimated Expenditures (Millions of Dollars) | | :--- | :----------------------------------------- | | 2018 | 9.2 | | 2019 | 6.8 | | 2020 | 2.7 | | 2021 | 1.8 | Natural Gas Distribution Segment The Natural Gas Distribution segment serves 957,727 customers across eight states with $1.7 billion net plant investment and $768.8 million retail sales revenues in 2018, facing minimal environmental expenditures. - The natural gas distribution operations serve 957,727 residential, commercial, and industrial customers in 339 communities across eight states as of December 31, 2018[68] Natural Gas Distribution Retail Customers and Revenues by Class (2016-2018) | Year | Customers Served | Revenues (Thousands of Dollars) | | :--- | :--------------- | :---------------------------- | | 2018 | | | | Residential | 850,595 | 464,697 | | Commercial | 106,297 | 279,566 | | Industrial | 835 | 24,555 | | Total | 957,727 | 768,818 | | 2017 | | | | Residential | 833,255 | 477,699 | | Commercial | 104,795 | 283,899 | | Industrial | 817 | 24,030 | | Total | 938,867 | 785,628 | | 2016 | | | | Residential | 818,163 | 429,828 | | Commercial | 103,438 | 253,333 | | Industrial | 807 | 23,337 | | Total | 922,408 | 706,498 | Natural Gas Distribution Retail Sales Revenues by Jurisdiction (2016-2018) | Jurisdiction | 2018 | 2017 | 2016 | | :------------- | :--- | :--- | :--- | | Idaho | 30% | 33% | 34% | | Washington | 26% | 26% | 26% | | North Dakota | 15% | 13% | 13% | | Montana | 9% | 9% | 8% | | Oregon | 8% | 8% | 8% | | South Dakota | 7% | 6% | 6% | | Minnesota | 3% | 3% | 3% | | Wyoming | 2% | 2% | 2% | - The natural gas distribution operations did not incur any material environmental expenditures in 2018 and do not expect to incur any material capital expenditures related to environmental compliance through 2021[83] Pipeline and Midstream Segment The Pipeline and Midstream segment, operated by WBI Energy, includes 4,000 miles of regulated natural gas transmission and 800 miles of nonregulated gathering facilities, with 353 Bcf storage capacity and no material environmental expenditures expected through 2021. - WBI Energy Transmission, the regulated business of this segment, owns and operates approximately 4,000 miles of natural gas transmission, gathering, and storage lines[85] - The nonregulated business operates approximately 800 miles of field gathering lines in Montana and Wyoming[86] - WBI Energy Transmission's underground natural gas storage facilities have a certificated storage capacity of approximately 353 Bcf, including 193 Bcf of working gas capacity[89] - The pipeline and midstream operations did not incur any material environmental expenditures in 2018 and do not expect to incur any material capital expenditures related to environmental compliance with current laws and regulations through 2021[97] Construction Materials and Contracting Segment Knife River operates the Construction Materials and Contracting segment, mining and selling aggregates, asphalt mix, and ready-mixed concrete across 12 states, with backlog increasing to $706 million at December 31, 2018, and holding 1.0 billion tons of aggregate reserves. - Knife River operates construction materials and contracting businesses across 12 states, focusing on mining, processing, and selling construction aggregates, asphalt mix, and ready-mixed concrete[98] Knife River Backlog (2016-2018) | Date | Backlog (Millions of Dollars) | | :--- | :-------------------------- | | Dec 31, 2018 | 706 | | Dec 31, 2017 | 486 | | Dec 31, 2016 | 538 | - As of December 31, 2018, Knife River had 1.0 billion tons of estimated aggregate reserves, with approximately 938 million tons permitted[110] Aggregate Reserves and Sales (2016-2018) | Metric | 2018 | 2017 | 2016 | | :-------------------- | :----- | :----- | :----- | | Tons Sold (000's) | 29,795 | 28,213 | 27,580 | | Aggregate Reserves (000's tons) | 1,014,431 | 965,036 | 989,084 | Construction Services Segment MDU Construction Services provides inside and outside specialty contracting services, with backlog increasing to $939 million at December 31, 2018, driven by increased customer demand in a highly competitive environment. - MDU Construction Services provides inside and outside specialty contracting services, including electrical distribution and transmission, substations, lighting, traffic signals, gas pipelines, and renewable energy projects[127][128] MDU Construction Services Backlog (2016-2018) | Date | Backlog (Millions of Dollars) | | :--- | :-------------------------- | | Dec 31, 2018 | 939 | | Dec 31, 2017 | 708 | | Dec 31, 2016 | 475 | - The increase in backlog at December 31, 2018, was primarily due to increased projects from all revenue streams based on customer demand[130] - MDU Construction Services operates in a highly competitive business environment, with competition based primarily on price and reputation for quality, safety, and reliability[133] Risk Factors The company faces significant risks from government regulations, economic volatility, aging infrastructure, climate change, seasonality, competition, and labor shortages, which could materially affect its business and financial results. - The Company is subject to comprehensive government regulations that may delay or negatively impact its business, including allowed rates of return, cost recovery, and financing[140][141] - Economic volatility, including public and private expenditure levels, and economic conditions in service areas, can negatively affect demand for products and services, particularly in construction and utility businesses[144][145] - Aging infrastructure in utility and pipeline operations increases risks of equipment failure, leaks, and fires, leading to higher maintenance/replacement costs and potential regulatory scrutiny[160][161] - Climate change may increase the frequency and severity of extreme weather events, potentially damaging facilities, increasing repair costs, disrupting supply, and impacting regional economic health[166][168][170][172] - The Company's businesses are seasonal and subject to weather conditions, which influence demand for electricity and natural gas, and affect construction activities[186][187] Unresolved Staff Comments The Company has no unresolved comments with the SEC. - The Company has no unresolved comments with the SEC[204] Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 19 of the financial statements. - Information regarding legal proceedings is provided in Item 8 - Note 19[205] Mine Safety Disclosures Information regarding mine safety violations and other regulatory matters is incorporated by reference from Exhibit 95 of this Form 10-K. - Information regarding mine safety violations or other regulatory matters is provided in Exhibit 95 to this Form 10-K[206] Part II Market for Common Equity, Stockholder Matters and Issuer Purchases The Company's common stock is listed on the NYSE under 'MDU' and had approximately 11,300 stockholders of record as of December 31, 2018, with a long history of paying quarterly dividends. - The Company's common stock is listed on the New York Stock Exchange under the symbol "MDU"[209] - As of December 31, 2018, the Company had approximately 11,300 stockholders of record[209] - The Company has paid quarterly dividends for over 80 consecutive years, with increases for the last 28 consecutive years, subject to limitations from credit agreements, laws, and regulatory bodies[210] Issuer Purchases of Equity Securities (November 2018) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :----------------------------- | :----------------------------- | :--------------------------- | | November 1 through November 30, 2018 | 38,605 | $26.55 | Selected Financial Data This section provides a five-year summary of key financial and operating data, showing total operating revenues increased to $4.53 billion in 2018 from $4.44 billion in 2017, while operating income decreased slightly to $401.7 million from $424.0 million. Selected Consolidated Financial Data (2016-2018) | Metric | 2018 (Thousands) | 2017 (Thousands) | 2016 (Thousands) | | :------------------------------------- | :--------------- | :--------------- | :--------------- | | Operating revenues | $4,531,552 | $4,443,351 | $4,128,828 | | Operating income | $401,723 | $424,048 | $408,909 | | Earnings on common stock | $272,318 | $280,432 | $63,748 | | Earnings per common share - diluted | $1.39 | $1.43 | $0.33 | | Dividends declared per common share | $0.7950 | $0.7750 | $0.7550 | | Total assets | $6,988,110 | $6,334,666 | $6,284,467 | | Total long-term debt | $2,108,695 | $1,714,853 | $1,790,159 | | Total equity capitalization ratio | 55% | 59% | 56% | | Total debt capitalization ratio | 45% | 41% | 44% | Selected Segment Operating Revenues (2016-2018) | Segment | 2018 (Thousands) | 2017 (Thousands) | 2016 (Thousands) | | :----------------------------- | :--------------- | :--------------- | :--------------- | | Electric | $335,123 | $342,805 | $322,356 | | Natural gas distribution | $823,247 | $848,388 | $766,115 | | Pipeline and midstream | $128,923 | $122,213 | $141,602 | | Construction materials and contracting | $1,925,854 | $1,812,529 | $1,874,270 | | Construction services | $1,371,453 | $1,367,602 | $1,073,272 | Selected Segment Operating Income (2016-2018) | Segment | 2018 (Thousands) | 2017 (Thousands) | 2016 (Thousands) | | :----------------------------- | :--------------- | :--------------- | :--------------- | | Electric | $65,148 | $79,902 | $67,929 | | Natural gas distribution | $72,336 | $84,239 | $66,166 | | Pipeline and midstream | $36,128 | $36,004 | $42,864 | | Construction materials and contracting | $141,426 | $143,230 | $178,753 | | Construction services | $86,764 | $81,292 | $53,546 | Management's Discussion and Analysis (MD&A) This MD&A provides an overview of the Company's financial condition and results of operations, emphasizing its two-platform business model, strategic focus on organic growth and acquisitions, and detailing segment-specific performance, liquidity, and critical accounting policies. - The Company's strategy is to increase market share, profitability, and shareholder value through organic growth and strategic acquisitions in regulated energy delivery and construction materials and services[220] - The Tax Cuts and Jobs Act (TCJA) significantly impacted the Company by reducing corporate tax rates, repealing the domestic production deduction, and disallowing immediate expensing for regulated utility property[222] - The Company funds its growth and operations through internally generated funds, commercial paper, revolving credit facilities, and debt/equity issuances[221] Consolidated Earnings Overview The Company's consolidated earnings decreased by $8.1 million in 2018 due to the absence of a $39.5 million TCJA tax benefit from 2017, partially offset by a lower tax rate and higher construction services margins, while 2017 saw a $216.7 million increase over 2016. Consolidated Earnings by Segment (2016-2018) | Years ended December 31, | 2018 (Millions) | 2017 (Millions) | 2016 (Millions) | | :------------------------------------- | :-------------- | :-------------- | :-------------- | | Electric | $47.0 | $49.4 | $42.2 | | Natural gas distribution | $37.7 | $32.2 | $27.1 | | Pipeline and midstream | $28.5 | $20.5 | $23.4 | | Construction materials and contracting | $92.6 | $123.4 | $102.7 | | Construction services | $64.3 | $53.3 | $33.9 | | Other | $(0.7) | $(1.5) | $(3.2) | | Intersegment eliminations | $— | $6.9 | $6.3 | | Earnings before discontinued operations| $269.4 | $284.2 | $232.4 | | Income (loss) from discontinued operations, net of tax | $2.9 | $(3.8) | $(300.4) | | Loss from discontinued operations attributable to noncontrolling interest | $— | $— | $(131.7) | | Earnings on common stock | $272.3 | $280.4 | $63.7 | - Consolidated earnings decreased by $8.1 million in 2018 compared to 2017, primarily due to the absence of a $39.5 million tax benefit from the TCJA revaluation in 2017, partially offset by a lower federal statutory tax rate in 2018[225][226] - Consolidated earnings increased by $216.7 million in 2017 compared to 2016, largely due to the absence of a loss from the refining business sale (discontinued operations) and a $39.5 million income tax benefit from TCJA deferred tax revaluation[227][228] Business Segment Financial and Operating Data This section details the financial performance, strategies, and challenges for each of the Company's five reportable business segments, highlighting segment-specific earnings, revenue drivers, operational costs, and future outlooks. Electric and Natural Gas Distribution The Electric segment's earnings decreased by $2.4 million (5%) in 2018 due to lower adjusted gross margin, while Natural Gas Distribution earnings increased by $5.5 million (17%) from weather normalization and higher basic service charges, with both segments anticipating 5% annual rate base growth. Electric Segment Earnings Overview (2016-2018) | Years ended December 31, | 2018 (Millions) | 2017 (Millions) | 2016 (Millions) | | :----------------------- | :-------------- | :-------------- | :-------------- | | Operating revenues | $335.1 | $342.8 | $322.3 | | Adjusted gross margin | $253.7 | $263.3 | $246.2 | | Operating income | $65.2 | $79.9 | $67.9 | | Net income | $47.0 | $50.0 | $42.8 | | Earnings | $47.0 | $49.4 | $42.2 | - Electric earnings decreased $2.4 million (5%) in 2018, primarily due to a $9.6 million decrease in adjusted gross margin from tax reform refunds and a transmission formula rate adjustment, partially offset by increased retail sales volumes[240] Natural Gas Distribution Segment Earnings Overview (2016-2018) | Years ended December 31, | 2018 (Millions) | 2017 (Millions) | 2016 (Millions) | | :----------------------- | :-------------- | :-------------- | :-------------- | | Operating revenues | $823.2 | $848.4 | $766.1 | | Adjusted gross margin | $339.9 | $338.5 | $308.1 | | Operating income | $72.3 | $84.3 | $66.2 | | Net income | $37.7 | $32.3 | $27.2 | | Earnings | $37.7 | $32.2 | $27.1 | - Natural gas distribution earnings increased $5.5 million (17%) in 2018, driven by a $1.4 million increase in adjusted gross margin from weather normalization and higher basic service charges, despite a $9.1 million increase in operation and maintenance expenses[249][250] - The Electric and Natural Gas Distribution segments expect to grow rate base by approximately 5% annually over the next five years and anticipate 1% to 2% annual customer growth[256] - The Company plans to retire three aging coal-fired electric generation units by late 2021 and construct a new simple-cycle natural gas combustion turbine peaking unit in Mandan, North Dakota[259] Pipeline and Midstream The Pipeline and Midstream segment's earnings increased by $8.0 million (39%) in 2018, primarily due to a $6.7 million increase in revenues from higher natural gas transportation volumes and nonregulated project workloads, and a $9.6 million decrease in income taxes due to the TCJA. Pipeline and Midstream Segment Earnings Overview (2016-2018) | Years ended December 31, | 2018 (Millions) | 2017 (Millions) | 2016 (Millions) | | :----------------------- | :-------------- | :-------------- | :-------------- | | Operating revenues | $128.9 | $122.2 | $141.6 | | Operating income | $36.1 | $36.0 | $42.9 | | Earnings | $28.5 | $20.5 | $23.4 | - Pipeline and midstream earnings increased $8.0 million (39%) in 2018, driven by a $6.7 million increase in revenues from higher natural gas transportation volumes and nonregulated project workloads, and a $9.6 million decrease in income taxes due to the TCJA[270][273] - The Company plans to construct the North Bakken Expansion project (approximately 67 miles of new pipeline, $220 million estimated cost) with expected completion in late 2021[279] - The Valley Expansion project (38-mile pipeline) and Line Section 27 Expansion project (13 miles of new pipeline) were completed and placed into service in November 2018 and September 2018, respectively[280][281] Construction Materials and Contracting The Construction Materials and Contracting segment's earnings decreased by $30.8 million (25%) in 2018, primarily due to a $23.0 million increase in income taxes from the absence of a 2017 TCJA tax benefit, despite a $3.6 million increase in gross margin, with backlog increasing to $706 million. Construction Materials and Contracting Segment Earnings Overview (2016-2018) | Years ended December 31, | 2018 (Millions) | 2017 (Millions) | 2016 (Millions) | | :----------------------- | :-------------- | :-------------- | :-------------- | | Operating revenues | $1,925.9 | $1,812.5 | $1,874.3 | | Gross margin | $225.5 | $221.9 | $249.5 | | Operating income | $141.4 | $143.2 | $178.7 | | Earnings | $92.6 | $123.4 | $102.7 | - Construction materials and contracting earnings decreased $30.8 million (25%) in 2018, largely due to a $23.0 million increase in income taxes from the absence of a $41.9 million tax benefit recorded in 2017 related to TCJA deferred tax revaluation[292] - The segment's gross margin increased by $3.6 million in 2018, driven by higher asphalt product and aggregate volumes and margins, and increased realized prices[290] - The Company completed four acquisitions in 2018 (Teevin & Fischer Quarry, Tri-City Paving, Molalla Redi-Mix and Rock Products, Sweetman Construction Company) to expand its market presence in higher-margin materials[300] - Backlog for this segment increased to $706 million at December 31, 2018, up from $486 million at December 31, 2017, primarily due to work for state transportation departments, airports, military, homebuilders, and commercial developers[301] Construction Services The Construction Services segment's earnings increased by $11.0 million (21%) in 2018, primarily due to higher outside specialty contracting gross margins and a $5.6 million decrease in income taxes due to the TCJA, with backlog growing to $939 million. Construction Services Segment Earnings Overview (2016-2018) | Years ended December 31, | 2018 (Millions) | 2017 (Millions) | 2016 (Millions) | | :----------------------- | :-------------- | :-------------- | :-------------- | | Operating revenues | $1,371.5 | $1,367.6 | $1,073.3 | | Gross margin | $164.8 | $156.1 | $119.2 | | Operating income | $86.8 | $81.3 | $53.5 | | Earnings | $64.3 | $53.3 | $33.9 | - Construction services earnings increased $11.0 million (21%) in 2018, largely due to higher outside specialty contracting gross margins from increased equipment sales and rentals, and a $5.6 million decrease in income taxes due to the TCJA[307][308] - Backlog for this segment increased to $939 million at December 31, 2018, up from $708 million at December 31, 2017, driven by new project opportunities in inside specialty electrical and mechanical contracting, and outside power, communications, and natural gas operations[314] Other The 'Other' category includes general and administrative costs and interest expense previously allocated to discontinued businesses, with an operating loss of $(0.1) million in 2018, an improvement from $(0.6) million in 2017, due to Holding Company Reorganization costs. Other Segment Earnings Overview (2016-2018) | Years ended December 31, | 2018 (Millions) | 2017 (Millions) | 2016 (Millions) | | :----------------------- | :-------------- | :-------------- | :-------------- | | Operating revenues | $11.3 | $7.9 | $8.6 | | Operating loss | $(0.1) | $(0.6) | $(0.3) | | Loss | $(0.7) | $(1.5) | $(3.2) | - The 'Other' category includes general and administrative costs and interest expense previously allocated to the exploration and production and refining businesses that do not meet discontinued operations criteria[315] - Operation and maintenance expense in 2018 increased due to costs associated with the Holding Company Reorganization[315] Discontinued Operations Income from discontinued operations attributable to the Company was $2.9 million in 2018, primarily from income tax adjustments, compared to a loss of $3.8 million in 2017 and a significant loss in 2016 associated with the refining business sale. Income (Loss) from Discontinued Operations (2016-2018) | Years ended December 31, | 2018 (Millions) | 2017 (Millions) | 2016 (Millions) | | :----------------------------------------------------- | :-------------- | :-------------- | :-------------- | | Income (loss) from discontinued operations, net of tax | $2.9 | $(3.8) | $(300.4) | | Loss from discontinued operations attributable to noncontrolling interest | $— | $— | $(131.7) | | Income (loss) from discontinued operations attributable to the Company, net of tax | $2.9 | $(3.8) | $(168.7) | - Income from discontinued operations attributable to the Company was $2.9 million in 2018, primarily related to income tax adjustments, compared to a loss of $3.8 million in 2017[316] - The decreased loss in 2017 compared to 2016 was largely due to the absence of a loss associated with the sale of the refining business in June 2016 and the reversal of a previously accrued legal liability[317][318] Intersegment Transactions Intersegment transactions, primarily operating revenues, are eliminated in the consolidated financial statements, with intersegment operating revenues totaling $64.3 million in 2018, up from $58.0 million in 2017. Intersegment Transactions (2016-2018) | Years ended December 31, | 2018 (Millions) | 2017 (Millions) | 2016 (Millions) | | :----------------------- | :-------------- | :-------------- | :-------------- | | Operating revenues | $64.3 | $58.0 | $57.4 | | Operation and maintenance| $13.7 | $9.1 | $8.7 | | Purchased natural gas sold | $50.6 | $48.9 | $48.7 | | Income from continuing operations* | $— | $(6.9) | $(6.3) | - Intersegment transactions are eliminated in the Company's Consolidated Statements of Income[319] Liquidity and Capital Commitments The Company's liquidity is supported by $53.9 million in cash and $384.6 million in available borrowing capacity as of December 31, 2018, with operating cash flows increasing by $51.9 million and capital expenditures significantly rising to $769 million in 2018. - At December 31, 2018, the Company had $53.9 million in cash and cash equivalents and $384.6 million in available borrowing capacity under outstanding credit facilities[320] - Cash flows provided by operating activities increased $51.9 million in 2018 from 2017, driven by stronger collection of accounts receivable and bonus depreciation for tax purposes[321][322] Capital Expenditures from Continuing Operations (2016-2021 Estimates) | Segment | 2018 (Millions) | 2017 (Millions) | 2016 (Millions) | 2019 Est. (Millions) | 2020 Est. (Millions) | 2021 Est. (Millions) | | :----------------------------- | :-------------- | :-------------- | :-------------- | :------------------- | :------------------- | :------------------- | | Electric | $186 | $109 | $111 | $104 | $103 | $88 | | Natural gas distribution | $206 | $147 | $126 | $204 | $180 | $158 | | Pipeline and midstream | $70 | $31 | $35 | $113 | $93 | $204 | | Construction materials and contracting | $280 | $44 | $38 | $133 | $135 | $127 | | Construction services | $25 | $19 | $60 | $25 | $17 | $18 | | Other | $2 | $2 | $2 | $5 | $3 | $3 | | Total capital expenditures | $769 | $352 | $372 | $584 | $531 | $598 | Outstanding Revolving Credit Facilities (December 31, 2018) | Company | Facility Limit (Millions) | Amount Outstanding (Millions) | Letters of Credit (Millions) | Expiration Date | | :----------------------------- | :------------------------ | :---------------------------- | :--------------------------- | :-------------- | | MDU Resources Group, Inc. | $175.0 | $48.5 | $— | 6/8/23 | | Cascade Natural Gas Corporation| $75.0 | $53.8 | $2.2 | 4/24/20 | | Intermountain Gas Company | $85.0 | $56.3 | $— | 4/24/20 | | Centennial Energy Holdings, Inc.| $500.0 | $289.6 | $— | 9/23/21 | New Accounting Standards Information regarding new accounting standards is incorporated by reference from Note 1 of the financial statements. - Information regarding new accounting standards is provided in Item 8 - Note 1[359] Critical Accounting Policies Involving Significant Estimates The Company's financial statements rely on significant estimates for impairment testing, fair values in business combinations, aggregate reserves, tax provisions, and revenue recognition for construction contracts, with annual goodwill impairment testing and revenue recognition over time using the cost-to-cost method. - The Company's financial statements require management to make estimates and assumptions for items such as impairment testing of long-lived assets and goodwill, fair values of acquired assets and liabilities, and revenue recognition[361] - Goodwill impairment testing is performed annually in the fourth quarter, comparing the fair value of each reporting unit (determined by weighted income and market approaches) to its carrying value[364][366] - Revenue for construction contracts is recognized over time using the cost-to-cost measure of progress, which depends on reasonably dependable estimates of completion, revenues, and costs[376] - Pension and other postretirement benefit costs are dependent on actuarial assumptions, including discount rates, expected return on plan assets, and health care cost trend rates, which are subject to market fluctuations[383][384] Non-GAAP Financial Measures The Company uses 'adjusted gross margin' as a non-GAAP financial measure for its electric and natural gas distribution segments, calculated by adding back operation and maintenance, depreciation, and certain non-income taxes to operating income, to provide a supplemental understanding of operating performance. - Adjusted gross margin is a non-GAAP financial measure used for the electric and natural gas distribution segments to evaluate operating performance[390] - Adjusted gross margin is calculated by adding back operation and maintenance expense, depreciation, depletion and amortization expense, and certain non-income taxes to operating income (loss)[391] Electric Segment Adjusted Gross Margin Reconciliation (2016-2018) | Years ended December 31, | 2018 (Millions) | 2017 (Millions) | 2016 (Millions) | | :----------------------- | :-------------- | :-------------- | :-------------- | | Operating income | $65.2 | $79.9 | $67.9 | | Adjustments: | | | | | Operation and maintenance| $123.0 | $122.2 | $115.8 | | Depreciation, depletion and amortization | $51.0 | $47.7 | $50.2 | | Taxes, other than income | $14.5 | $13.5 | $12.3 | | Adjusted gross margin| $253.7 | $263.3 | $246.2 | Natural Gas Distribution Segment Adjusted Gross Margin Reconciliation (2016-2018) | Years ended December 31, | 2018 (Millions) | 2017 (Millions) | 2016 (Millions) | | :----------------------- | :-------------- | :-------------- | :-------------- | | Operating income | $72.3 | $84.3 | $66.2 | | Adjustments: | | | | | Operation and maintenance| $173.4 | $164.3 | $156.9 | | Depreciation, depletion and amortization | $72.5 | $69.4 | $65.4 | | Taxes, other than income | $21.7 | $20.5 | $19.6 | | Adjusted gross margin| $339.9 | $338.5 | $308.1 | Effects of Inflation Inflation did not have a significant effect on the Company's operations in 2018, 2017, or 2016. - Inflation did not have a significant effect on the Company's operations in 2018, 2017, or 2016[396] Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to interest rate market fluctuations, which it manages through policies and occasional derivatives, with $2.11 billion in long-term debt at December 31, 2018, carrying a weighted average interest rate of 4.6% for fixed-rate debt and 3.2% for variable-rate debt. - The Company is exposed to market fluctuations associated with interest rates and manages this risk by timing long-term financing and occasionally utilizing interest rate swap agreements[397][398] Long-Term Debt and Weighted Average Interest Rates (December 31, 2018) | Debt Type | 2019 (Millions) | 2020 (Millions) | 2021 (Millions) | 2022 (Millions) | 2023 (Millions) | Thereafter (Millions) | Total (Millions) | Weighted Average Interest Rate | | :---------- | :-------------- | :-------------- | :-------------- | :-------------- | :-------------- | :-------------------- | :--------------- | :----------------------------- | | Fixed rate | $51.9 | $15.8 | $0.8 | $147.3 | $77.2 | $1,173.0 | $1,466.0 | 4.6% | | Variable rate | $200.0 | $110.1 | $289.6 | $— | $48.5 | $— | $648.2 | 3.2% | - At December 31, 2018 and 2017, the Company had no outstanding interest rate hedges[399] Financial Statements and Supplementary Data This section presents the Company's audited consolidated financial statements, including statements of income, comprehensive income, balance sheets, equity, and cash flows for 2016-2018, along with management's report on internal control, independent auditor's reports, and detailed notes covering accounting policies and segment data. - Management concluded that the Company's internal control over financial reporting was effective as of December 31, 2018, based on the COSO framework[404] - Deloitte & Touche LLP expressed an unqualified opinion on the Company's consolidated financial statements and internal control over financial reporting as of December 31, 2018[407][412][413] Management's Report on Internal Control Over Financial Reporting Management of MDU Resources Group, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, concluding its effectiveness as of December 31, 2018, based on the COSO framework. - Management is responsible for establishing and maintaining adequate internal control over financial reporting[401] - Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2018, using the COSO Internal Control-Integrated Framework (2013)[403] - Based on the evaluation, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2018[404] Report of Independent Registered Public Accounting Firm (Financial Statements) Deloitte & Touche LLP audited the consolidated financial statements for the three years ended December 31, 2018, expressing an unqualified opinion that they present fairly the financial position, results of operations, and cash flows in conformity with GAAP. - Deloitte & Touche LLP audited the consolidated financial statements for the three years ended December 31, 2018[406] - The auditors expressed an unqualified opinion that the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows in conformity with GAAP[406] Report of Independent Registered Public Accounting Firm (Internal Control) Deloitte & Touche LLP audited the effectiveness of MDU Resources Group, Inc.'s internal control over financial reporting as of December 31, 2018, based on COSO criteria, expressing an unqualified opinion that the Company maintained effective internal control. - Deloitte & Touche LLP audited the internal control over financial reporting as of December 31, 2018, based on COSO criteria[412] - The auditors expressed an unqualified opinion that the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018[412] Consolidated Statements of Income The Consolidated Statements of Income show total operating revenues of $4.53 billion in 2018, up from $4.44 billion in 2017, with operating income at $401.7 million and diluted earnings per common share at $1.39 in 2018. Consolidated Statements of Income (2016-2018) | Metric | 2018 (Thousands) | 2017 (Thousands) | 2016 (Thousands) | | :----------------------------------------------------- | :--------------- | :--------------- | :--------------- | | Total operating revenues | $4,531,552 | $4,443,351 | $4,128,828 | | Total operating expenses | $4,129,829 | $4,019,303 | $3,719,919 | | Operating income | $401,723 | $424,048 | $408,909 | | Income before income taxes | $316,871 | $350,027 | $326,228 | | Income taxes | $47,485 | $65,041 | $93,132 | | Income from continuing operations | $269,386 | $284,986 | $233,096 | | Income (loss) from discontinued operations, net of tax | $2,932 | $(3,783) | $(300,354) | | Net income (loss) | $272,318 | $281,203 | $(67,258) | | Earnings on common stock | $272,318 | $280,432 | $63,748 | | Earnings per common share - diluted | $1.39 | $1.43 | $0.33 | Consolidated Statements of Comprehensive Income The Consolidated Statements of Comprehensive Income show net income of $272.3 million in 2018, with total comprehensive income of $279.3 million, including reclassification adjustments for derivative instruments, postretirement liability adjustments, and foreign currency translation. Consolidated Statements of Comprehensive Income (2016-2018) | Metric | 2018 (Thousands) | 2017 (Thousands) | 2016 (Thousands) | | :----------------------------------------------------- | :--------------- | :--------------- | :--------------- | | Net income (loss) | $272,318 | $281,203 | $(67,258) | | Other comprehensive income (loss) | $6,951 | $(1,601) | $1,415 | | Comprehensive income (loss) | $279,269 | $279,602 | $(65,843) | | Comprehensive income attributable to common stockholders | $279,269 | $279,602 | $65,848 | - Other comprehensive income (loss) components include reclassification adjustments for derivative instruments, postretirement liability adjustments, foreign currency translation adjustments, and net unrealized loss on available-for-sale investments[421] Consolidated Balance Sheets The Consolidated Balance Sheets show total assets of $6.99 billion at December 31, 2018, an increase from $6.33 billion in 2017, with net property, plant and equipment rising to $4.58 billion and total stockholders' equity increasing to $2.57 billion. Consolidated Balance Sheets (December 31, 2017-2018) | Metric | 2018 (Thousands) | 2017 (Thousands) | | :------------------------------------- | :--------------- | :--------------- | | Assets | | | | Total current assets | $1,184,132 | $1,069,995 | | Net property, plant and equipment | $4,578,677 | $4,079,188 | | Total deferred charges and other assets| $1,086,681 | $1,047,870 | | Total assets | $6,988,110 | $6,334,666 | | Liabilities and Stockholders' Equity| | | | Total current liabilities | $986,050 | $812,858 | | Long-term debt | $1,856,841 | $1,566,354 | | Total deferred credits and other liabilities | $1,578,444 | $1,526,411 | | Total liabilities | $4,421,335 | $3,905,623 | | Total stockholders' equity | $2,566,775 | $2,429,043 | | Total liabilities and stockholders' equity | $6,988,110 | $6,334,666 | - Total assets increased to $6.99 billion at December 31, 2018, from $6.33 billion in 2017, driven by increases in property, plant and equipment, and deferred charges and other assets[423] - Total stockholders' equity increased to $2.57 billion at December 31, 2018, from $2.43 billion in 2017[423] Consolidated Statements of Equity The Consolidated Statements of Equity detail changes in stockholders' equity for 2016-2018, showing total equity increased from $2.32 billion in 2016 to $2.57 billion in 2018, reflecting net income, other comprehensive income/loss, dividends, and stock-based compensation. Consolidated Statements of Equity Summary (2016-2018) | Metric | December 31, 2016 (Thousands) | December 31, 2017 (Thousands) | December 31, 2018 (Thousands) | | :------------------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | | Total Stockholders' Equity (Beginning) | $2,520,548 | $2,316,244 | $2,429,043 | | Net income (loss) | $(67,258) | $281,203 | $272,318 | | Other comprehensive income (loss) | $1,415 | $(1,601) | $6,951 | | Dividends declared on common stock | $(147,821) | $(151,966) | $(156,453) | | Stock-based compensation | $4,383 | $3,375 | $5,060 | | Cumulative effect of adoption of ASU 2014-09 | $— | $— | $(970) | | Total Stockholders' Equity (End) | $2,316,244 | $2,429,043 | $2,566,775 | - Total stockholders' equity increased from $2.32 billion at December 31, 2016, to $2.57 billion at December 31, 2018[425][426] - The cumulative effect of adopting ASU 2014-09 (Revenue from Contracts with Customers) resulted in a $(970) thousand adjustment to retained earnings at January 1, 2018[425][481] Consolidated Statements of Cash Flows The Consolidated Statements of Cash Flows show net cash provided by operating activities increased to $499.9 million in 2018 from $448.0 million in 2017, while net cash used in investing activities significantly increased to $710.9 million due to higher capital expenditures and acquisitions. Consolidated Statements of Cash Flows (2016-2018) | Metric | 2018 (Thousands) | 2017 (Thousands) | 2016 (Thousands) | | :------------------------------------- | :--------------- | :--------------- | :--------------- | | Net cash provided by operating activities | $499,881 | $448,011 | $462,209 | | Net cash used in investing activities | $(710,907) | $(214,168) | $(305,095) | | Net cash provided by (used in) financing activities | $230,376 | $(245,350) | $(194,914) | | Increase (decrease) in cash and cash equivalents | $19,349 | $(11,508) | $(37,796) | | Cash and cash equivalents - end of year | $53,948 | $34,599 | $46,107 | - Net cash provided by operating activities increased by $51.9 million in 2018, largely due to stronger collection of accounts receivable and bonus depreciation[321][322] - Net cash used in investing activities increased by $496.7 million in 2018, primarily due to acquisition activity and higher capital expenditures[325] - Net cash provided by financing activities increased by $475.7 million in 2018, mainly due to increased debt issuance for acquisitions and capital projects[327] Notes to Consolidated Financial Statements These notes provide detailed information supporting the consolidated financial statements, covering significant accounting policies, revenue recognition, acquisitions, discontinued operations, goodwill, regulatory assets, fair value measurements, debt, asset retirement obligations, equity, employee benefits, jointly owned facilities, regulatory matters, and commitments and contingencies. - The Company's regulated businesses apply regulatory accounting, deferring certain income and expense items based on expected regulatory treatment[431] - The TCJA's reduced corporate tax rate required a one-time revaluation of deferred tax assets and liabilities in Q4 2017, with regulated impacts deferred as regulatory liabilities[434][435] - The Company adopted ASU 2014-09 (Revenue from Contracts with Customers) on January 1, 2018, using the modified retrospective approach, with no material cumulative effect adjustments to retained earnings[479][480] Note 1 - Summary of Significant Accounting Policies This note outlines the Company's basis of presentation, including consolidation, regulatory accounting, and the impact of the Holding Company Reorganization, detailing policies for cash, receivables, inventories, investments, property, plant and equipment, goodwill, revenue recognition, asset retirement obligations, legal costs, stock-based compensation, and income taxes, along with new accounting standard adoptions and TCJA impacts. - The Company's consolidated financial statements include electric, natural gas distribution, pipeline and midstream, construction materials and contracting, construction services, and other businesses, with intercompany balances and transactions eliminated[429] - The Holding Company Reorganization, completed January 2, 2019, made Montana-Dakota and Great Plains subsidiaries of the Company[433] - The Company adopted ASU 2014-09 (Revenue from Contracts with Customers) on January 1, 2018, using the modified retrospective approach, with no material cumulative effect adjustments to retained earnings[479][480] - The TCJA's reduction in corporate tax rate required a one-time revaluation of deferred tax assets and liabilities in Q4 2017, with regulated impacts deferred as regulatory liabilities[434][435] Note 2 - Revenue from Contracts with Customers This note disaggregates revenue by customer type or service for 2018, showing total external operating revenues of $4.53 billion, explaining revenue recognition timing, contract assets and liabilities, and a $36.7 million net increase in revenues from prior period performance obligations. Disaggregated Revenue by Segment and Service (Year ended December 31, 2018) | Revenue Type | Electric (Thousands) | Natural gas distribution (Thousands) | Pipeline and midstream (Thousands) | Construction materials and contracting (Thousands) | Construction services (Thousands) | Other (Thousands) | Total (Thousands) | | :----------------------------- | :------------------- | :--------------------------------- | :--------------------------------- | :--------------------------------------- | :-------------------------------- | :---------------- | :---------------- | | Residential utility sales | $121,477 | $457,959 | $— | $— | $— | $— | $579,436 | | Commercial utility sales | $136,236 | $276,716 | $— | $— | $— | $— | $412,952 | | Industrial utility sales | $34,353 | $24,603 | $— | $— | $— | $— | $58,956 | | Other utility sales | $7,556 | $— | $— | $— | $— | $— | $7,556 | | Natural gas transportation | $— | $43,238 | $89,159 | $— | $— | $— | $132,397 | | Natural gas gathering | $— | $— | $9,159 | $— | $— | $— | $9,159 | | Natural gas storage | $— | $— | $11,543 | $— | $— | $— | $11,543 | | Contracting services | $— | $— | $— | $968,755 | $— | $— | $968,755 | | Construction materials | $— | $— | $— | $1,423,068 | $— | $— | $1,423,068 | | Inside specialty contracting | $— | $— | $— | $— | $926,875 | $— | $926,875 | | Outside specialty contracting | $— | $— | $— | $— | $392,544 | $— | $392,544 | | Other | $31,568 | $14,579 | $18,865 | $— | $525 | $11,259 | $76,796 | | Total external operating revenues | $335,123 | $823,247 | $78,018 | $1,925,185 | $1,369,772 | $207 | $4,531,552 | Net Contract Assets and Liabilities (December 31, 2017-2018) | Metric | December 31, 2018 (Thousands) | December 31, 2017 (Thousands) | Change (Thousands) | | :-------------------------- | :---------------------------- | :---------------------------- | :----------------- | | Contract assets | $104,239 | $109,540 | $(5,301) | | Contract liabilities - current | $(93,901) | $(84,123) | $(9,778) | | Contract liabilities - noncurrent | $(135) | $— | $(135) | | Net contract assets | $10,203 | $25,417 | $(15,214) | - The Company recognized a net increase in revenues of $36.7 million for the year ended December 31, 2018, from performance obligations satisfied in prior periods[510] Note 3 - Acquisitions In 2018, the Company completed four acquisitions in its construction materials and contracting segment for $168.1 million in cash and $18.2 million in common stock, resulting in a $33.1 million increase in goodwill and $8.2 million in other intangible assets, with purchase price allocation remaining provisional. - In 2018, the Company acquired Teevin & Fischer Quarry, Tri-City Paving, Molalla Redi-Mix and Rock Products, and Sweetman Construction Company, all included in the construction materials and contracting segment[511][514] - The gross aggregate consideration for these acquisitions was $168.1 million in cash and 721,610 shares of common stock (fair value of approximately $18.2 million)[512] Preliminary Purchase Price Allocation for 2018 Acquisitions | Asset/Liability Category | 2018 Acquisitions (Thousands) | | :----------------------------- | :---------------------------- | | Total assets acquired | $203,879 | | Total liabilities assumed | $17,601 | | Total consideration (fair value) | $186,278 | | Goodwill | $33,131 | | Other intangible assets, net | $8,227 | Note 4 - Discontinued Operations This note details the discontinued operations of Dakota Prairie Refining, sold in June 2016 with a $251.9 million impairment loss, and Fidelity, with most assets sold by July 2018, resulting in $2.9 million income from discontinued operations in 2018. - Dakota Prairie Refining was sold on June 27, 2016, and Fidelity's oil and natural g