MDU Resources Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. Unless stated otherwise, figures below are in U.S. dollars. Comparisons reflect Knife River as discontinued operations; its results are included through May 31, 2023 in 2023 versus the full comparable periods in 2022.
Business context
MDU provides regulated electric, natural gas distribution and pipeline services, as well as construction services. The company completed the tax-free Knife River spinoff on May 31, 2023, distributing approximately 90% of Knife River shares and retaining approximately 10%, which it intended to sell within 12 months. On July 10, 2023, the board announced plans to pursue a tax-advantaged separation of construction services, aiming to become a pure-play regulated energy delivery company.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Operating revenue | $1,091.1 million | $1,009.7 million | $2,521.2 million | $2,116.9 million |
| Operating income | $82.0 million | $62.5 million | $200.6 million | $170.0 million |
| Income from continuing operations | $147.6 million | $35.8 million | $231.5 million | $104.5 million |
| Discontinued operations, net of tax | $(16.9) million | $34.9 million | $(62.5) million | $(2.1) million |
| Net income | $130.7 million | $70.7 million | $169.0 million | $102.4 million |
| Diluted EPS | $0.64 | $0.35 | $0.83 | $0.50 |
- Q2 operating margin was approximately 7.5%, versus 6.2% a year earlier.
- Cash and cash equivalents were $50.8 million at June 30. Six-month cash from operating activities was $73.1 million, compared with $119.1 million; continuing operations generated $230.0 million, while discontinued operations used $156.9 million.
- Six-month capital expenditures were $232.1 million. Estimated 2023 capital expenditures were approximately $528.3 million.
- At June 30, short-term borrowings were $345.0 million and long-term debt was $2.246 billion. Available borrowing capacity was $474.7 million; equity was 51% of total capitalization. The company reported compliance with debt covenants.
- Six-month dividends paid were $90.6 million. The quarterly dividend declared was $0.2225 per share.
Material changes and drivers
- Revenue increased 8% in Q2 and 19% in the first half. Continuing-operations earnings rose substantially, but included a $140.0 million pretax unrealized gain on the retained Knife River investment, recorded at a June 30 fair value of $246.1 million. Management cited the gain as $90.8 million net of tax.
- Electric earnings improved with rate relief, higher sales volumes and lower operating and fuel costs. Natural gas distribution earnings improved year to date with rate relief and basic service charges; revenue and purchased-gas cost increases substantially reflected pass-through gas costs.
- Pipeline earnings benefited from higher transportation volumes, including North Bakken Expansion commitments, and storage revenue. Construction services earnings increased with stronger electrical and mechanical workloads, although inflation and higher operating costs were offsets.
- Knife River separation costs were $41.2 million for Q2 and $46.1 million for the first half, net of tax. Discontinued operations also reflected seasonal losses and separation-related financing and transaction costs.
- The company’s retained Knife River shares and the associated fair-value gain are market-price-sensitive. Q2 and year-to-date profit comparisons are therefore not solely indicative of operating performance.
Outlook, risks and contingencies
- Management expects regulated electric and natural gas businesses to grow rate base approximately 6%–7% annually over the next five years and customer growth to average 1%–2% per year. The filing does not provide consolidated earnings guidance.
- The company announced on August 3, 2023, a dividend practice targeting a payout ratio of 60%–70% of regulated energy delivery earnings.
- Management cited higher interest rates, inflation, commodity-price volatility, supply-chain delays and labor constraints. Approximately 30.8% of debt was variable-rate at June 30; a 1 percentage-point rate increase would add an estimated $8.0 million to annual pretax interest expense.
- Regulatory and environmental exposure includes pending rate matters, proposed emissions rules and state climate programs. The company expects certain compliance costs to be recovered through customer rates, but timing could affect cash flow and customer bills.
- Accrued contingent liabilities were $20.9 million. Guarantees had fixed maximum amounts of $325.5 million, with no amounts outstanding; approximately $707.8 million of surety bonds were outstanding and not recorded on the balance sheet. Management said material excess losses were not estimable or were not expected to materially affect results, financial position or cash flows.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether and when MDU disposes of its retained Knife River shares, and the realized proceeds compared with the reported $246.1 million fair value.
- How much reported earnings growth is recurring operating performance versus the Knife River fair-value gain, separation costs and discontinued-operation results.
- Progress, costs and timing of the proposed construction-services separation and the transition arrangements with Knife River.
- Actual capital spending, borrowing needs and dividend capacity following the spinoff, including implementation of the 60%–70% payout target.
- Outcomes of pending rate cases, environmental proceedings and emissions requirements, and any resulting effects on customer rates, cash flows or investment plans.