MDU Resources Group, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Year-over-year comparisons are with Q1 2022. Results include Knife River, which was still part of MDU during the quarter.
Business context
MDU operates regulated electric, natural gas distribution and pipeline businesses, alongside construction materials and contracting (Knife River) and construction services. The company was pursuing a Knife River spin-off and reviewing strategic alternatives for MDU Construction Services.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Operating revenue | $1.737 billion | $1.417 billion |
| Operating income | $74.5 million | $67.3 million |
| Income from continuing operations | $38.3 million | $31.7 million |
| Net income | $38.4 million | $31.8 million |
| Diluted EPS | $0.19 | $0.16 |
| Operating cash flow | $(43.6) million | $112.4 million |
| Cash capital expenditures | $154.0 million | $150.3 million |
Operating margin was approximately 4.3%, compared with 4.8% a year earlier; net margin was approximately 2.2% in both periods. Revenue growth chiefly reflected higher natural gas costs passed through to customers and increased construction-services activity, rather than equivalent growth in underlying earnings.
- Cash and liquidity: Cash was $93.2 million at March 31. Management reported $421.1 million of available borrowing capacity and no liquidity issues, while noting some commercial-paper-market disruption.
- Debt: Short-term borrowings were $501.5 million; long-term debt was $2.769 billion, with another $78.0 million due within one year. Total debt including short-term borrowings and current maturities was approximately $3.349 billion. Equity was 52% of total capitalization.
- Balance sheet: Total assets were $9.843 billion and stockholders’ equity was $3.575 billion. Current assets were $2.109 billion and current liabilities $1.636 billion.
- Dividends: $0.2225 per common share was declared for the quarter, versus $0.2175 in Q1 2022.
Material changes and operating drivers
- Net income rose $6.6 million. Electric, natural gas distribution, pipeline and construction services earnings improved; these gains were partly offset by a larger seasonal loss in construction materials and contracting and higher costs in “Other.”
- Construction services revenue increased 37% to $754.3 million, and net income rose to $26.1 million from $21.3 million, despite inflationary costs and losses on certain projects.
- Natural gas distribution revenue increased 26% to $565.7 million, largely from higher purchased-gas costs recovered through rates; segment net income increased to $38.9 million from $36.3 million.
- Electric net income increased to $16.6 million from $11.3 million, supported by interim rate relief and lower operating costs following Heskett unit closures.
- Pipeline net income increased to $8.3 million from $7.3 million, with higher transportation volumes reflecting the North Bakken Expansion.
- Construction materials and contracting reported a net loss of $41.3 million versus $40.0 million. Adverse weather reduced volumes, while higher average selling prices and cost savings supported gross profit.
- Cash from operations swung to an outflow, principally due to the timing of natural-gas cost payments and customer collections, environmental-allowance purchases, and construction-services working-capital needs. Financing cash flow increased to $207.3 million, primarily from additional short-term borrowing.
Outlook, strategic actions and risks
- Management estimated 2023 capital expenditures of approximately $646.4 million. Regulated electric and gas businesses expect annual rate-base growth of about 6%–7% over five years and customer growth averaging 1%–2% annually.
- At March 31, remaining performance obligations were $3.7 billion, with $2.6 billion expected to be recognized within 12 months. Construction-services backlog was $2.098 billion; construction materials and contracting services backlog was $958.5 million. The filing cautions that backlog is not a reliable predictor of future revenue or earnings.
- Knife River’s separation was expected for May 31, 2023, subject to conditions including SEC effectiveness of its Form 10 registration statement. On May 3, the board approved distributing approximately 90% of Knife River shares, at one share for every four MDU shares held on the May 22 record date; MDU expected to retain about 10% temporarily. The planned transaction was intended to be tax-free, but could be delayed, changed or abandoned.
- Management expected to complete its strategic review of MDU Construction Services in Q2 2023. Separation-related costs were $8.3 million after tax in Q1, and further costs were expected until the initiatives were completed.
- Management cited inflation, rising interest rates, commodity-price volatility, supply-chain delays, labor availability and weather as pressures on costs, margins and project timing. Higher rates increased borrowing costs; the company had no interest-rate hedges outstanding at quarter-end.
- Natural-gas price spikes in the Pacific Northwest increased utility cash needs and borrowing. Management said prices had stabilized by March; recovery through customer rates and its timing remain relevant to cash flow.
- Regulatory matters included pending electric and gas rate cases and a WBI Energy FERC rate case. Recovery of costs, regulatory decisions and environmental rules could affect results and cash flow. The company reported $25.4 million of accrued contingent liabilities, related insurance receivables of $3.3 million and regulatory assets of $20.9 million. It also had $1.6 billion of outstanding surety bonds not recorded on the balance sheet and $29.1 million of exposure to the Coyote Creek variable-interest entity.
- Management stated that subsidiaries were in compliance with applicable debt covenants at March 31 and that it expected to meet obligations through operating cash, credit facilities, commercial paper and, if needed, debt or equity issuance.
Most important facts for investors to verify
- Whether the Knife River separation closed on the expected terms and timing, including the final distribution percentage, retained stake and resulting treatment of Knife River in MDU’s financial statements.
- How much of the revenue increase reflects pass-through gas costs versus durable volume, rate or margin growth, and whether operating cash flow recovers from the Q1 working-capital outflow.
- Debt refinancing and repayment needs, borrowing costs, available credit capacity and the effect of short-term utility borrowings on liquidity.
- Outcomes and timing of pending rate cases and recovery of gas, environmental and other regulatory costs.
- Whether construction backlogs convert to revenue and earnings without material project delays, cost overruns or adverse weather effects.
- Costs and completion of the Knife River separation and MDU Construction Services strategic review, including any changes to MDU’s dividend policy after separation.