MDU Resources Group, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. MDU operates electric, natural gas distribution, pipeline and construction services businesses. Knife River was spun off in May 2023, and its prior-period results are reported as discontinued operations. MDU plans to spin off Everus Construction, its construction services business, in late 2024, with the goal of becoming a pure-play regulated energy delivery company.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Operating revenue | $1,213.8 million | $1,430.1 million |
| Operating income | $135.9 million | $118.5 million |
| Operating margin | 11.2% | 8.3% |
| Continuing-operations income | $100.9 million | $83.9 million |
| Diluted continuing-operations EPS | $0.49 | $0.41 |
| Net income | $100.9 million | $38.4 million |
| Cash from operating activities | $165.1 million | $(43.6) million |
| Capital expenditures | $126.2 million | $111.6 million |
Revenue declined about 15%, reflecting lower natural gas commodity costs passed through to customers and reduced construction services activity. Operating income and continuing-operations earnings increased despite the revenue decline. The prior-year net loss from discontinued operations ($45.5 million) makes the increase in total net income less indicative of continuing-business growth. Consolidated net profit margin was 8.3%, compared with 2.7% in Q1 2023; continuing-operations net margin was 8.3%, compared with 5.9%.
Q1 operating cash flow was positive versus an outflow in the prior-year quarter, reflecting working-capital movements and the absence of Knife River discontinued-operation cash outflows. Investing cash outflow was $117.3 million and financing cash outflow was $35.5 million. Cash and restricted cash were $89.3 million at quarter-end.
At March 31, 2024, total debt carrying value was approximately $2.39 billion, including $60.7 million due within one year; there were no short-term borrowings outstanding on the balance sheet. The company reported $456.2 million of available borrowing capacity, investment-grade credit ratings at all debt-issuing entities, and compliance with debt covenants. Equity was 56% of total capitalization. Long-term debt’s weighted-average interest rates vary by instrument; 19.6% of outstanding debt was variable-rate. A 1 percentage-point increase in variable rates would raise annual pretax interest expense by an estimated $4.7 million.
Material changes and business drivers
- Electric: Earnings rose 8% to $17.9 million, helped by rate relief and service to a data center; higher fuel and purchased-power costs were recovered in rates. Residential volumes were lower.
- Natural gas distribution: Earnings rose 3% to $40.1 million. Warmer weather reduced retail volumes 7%, partly offset by rate relief, weather normalization and decoupling. Lower gas costs reduced reported revenue but were largely passed through to customers.
- Pipeline: Continuing-operations earnings increased to $15.1 million from $8.4 million, supported by organic growth projects, higher transportation volumes and new rates.
- Construction services: Revenue declined 17% to $625.7 million as electrical and mechanical workloads fell, while improved project margins helped lift operating income to $38.9 million. Backlog was $2.18 billion, up from $2.10 billion a year earlier.
- Consolidated operating income increased to $135.9 million from $118.5 million. The prior-period comparison also reflects Knife River as discontinued operations and changes in corporate-cost allocation.
Outlook, risks and contingencies
- Management expects regulated utility rate base to grow about 7% annually over the next five years and customer growth to average 1%–2% annually. Estimated 2024 capital expenditures are $620.7 million.
- The planned Everus Construction tax-free spinoff is expected in late 2024. Management set a long-term dividend payout target of 60%–70% of regulated energy delivery earnings and stated its commitment to a competitive dividend.
- Pending utility rate proceedings include interim rate increases in North Dakota and South Dakota and a Washington multi-year natural gas rate request. Outcomes and timing remain uncertain.
- Heskett Unit 4, an 88-MW peaking unit, is expected to enter service in Q2 2024, assuming no further delays. Pipeline expansions are also underway, with projects expected in service in 2024.
- Management cites inflation, higher interest rates, commodity and supply-chain volatility, labor constraints, weather, regulation and cybersecurity as business risks. New or changing emissions rules may require additional costs; recovery through customer rates is not assured. Washington climate-compliance cost recovery was expected to begin June 2024; Oregon’s climate-program rules were invalidated by a court, and replacement rules are expected in 2025.
- A construction customer is withholding approximately $31 million of outstanding billings, including retention, on a large project. MDU believes collection is probable and has recognized the revenue, but acknowledges uncertainty and possible extended dispute resolution or litigation.
- Accrued liabilities for litigation and environmental contingencies were $22.9 million. The company also reported $329.9 million of fixed-maximum guarantees and $738.1 million of surety bonds outstanding; no amounts were outstanding under the specified guarantees or letters of credit at quarter-end.
- On April 1, 2024, WBI Energy Transmission entered a $60 million term loan at 4.52%, due in 2039. Management reported disclosure controls effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Progress, approvals, costs and tax treatment of the planned Everus spinoff, and the financial statements’ expected composition after separation.
- Whether interim and requested utility rates become final, and the timing and recoverability of deferred fuel, gas and emissions-compliance costs.
- Collection prospects and potential exposure related to the approximately $31 million construction-billing dispute.
- Execution, cost and in-service timing of Heskett Unit 4 and pipeline growth projects, alongside the $620.7 million 2024 capital plan.
- Debt maturities, borrowing availability and sensitivity to interest rates, as well as the realization of construction backlog and management’s stated growth outlook.