MDU Resources Group, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This annual filing is not a standalone fourth-quarter report. MDU operates electric, natural gas distribution, pipeline and construction services businesses; results reflect the May 31, 2023 separation of Knife River as discontinued operations.
Financial results and liquidity
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total operating revenue | $4.657 billion | $4.442 billion | +4.9% |
| Operating income | $426.0 million | $370.0 million | +15.1% |
| Income from continuing operations | $480.4 million | $250.8 million | +91.5% |
| Net income | $414.7 million | $367.5 million | +12.8% |
| Diluted EPS | $2.03 | $1.81 | +$0.22 |
| Cash from operating activities | $332.6 million | $510.0 million | Down $177.4 million |
| Capital expenditures | $519.7 million cash outflow | $478.4 million cash outflow | Higher investment |
Continuing-operations operating margin was approximately 9.1% (operating income divided by revenue). Continuing-operations income includes a $186.6 million pretax gain from the tax-free exchange of MDU’s retained Knife River shares; the increase in earnings should be viewed in that context. Discontinued operations recorded a $65.7 million loss in 2023, including $47.8 million of after-tax Knife River separation costs.
At year-end, cash, cash equivalents and restricted cash were $77.0 million, with $525.8 million of available borrowing capacity. The balance sheet reported $95.0 million of short-term borrowings, $61.3 million of current long-term debt and $2.237 billion of long-term debt. Total assets were $7.833 billion and stockholders’ equity was $2.905 billion. Equity was 55% of total capitalization under the company’s stated measure. Interest expense increased to $114.3 million from $80.7 million.
Segment performance and changes
- Electric: Segment net income rose to $71.6 million from $57.1 million. Revenue increased 6%, supported by rate relief, transmission work and service to a new data center; total retail sales volumes rose 25.5%, largely from that data center.
- Natural gas distribution: Net income increased to $48.5 million from $45.2 million. Revenue rose slightly, while retail gas volumes declined 6.6% amid warmer weather. Higher payroll and interest costs offset some rate-related gains.
- Pipeline: Net income increased to $47.4 million from $36.2 million. Revenue grew 14%, primarily reflecting higher transportation volumes, new rates and expansion projects.
- Construction services: Continuing-operations income increased to $142.4 million from $129.5 million. Revenue grew 6% and gross profit rose to $321.9 million from $276.0 million, while backlog declined to $2.011 billion from $2.131 billion.
- Knife River separation: The 2022 comparison includes a full year of Knife River in discontinued operations; 2023 includes activity only through the May separation. MDU disposed of its remaining 5.7 million Knife River shares in a tax-free exchange in November.
Outlook, risks and unusual items
- MDU expects utility rate base to grow approximately 7% annually over the next five years and customer growth to average 1%–2% annually. Planned capital expenditures are $612 million in 2024, $535 million in 2025 and $532 million in 2026; estimates may change.
- The board approved pursuing a tax-free spinoff of MDU Construction Services, expected in late 2024, subject to regulatory, tax and board approvals and other conditions. The transaction may be delayed, changed or abandoned.
- The 88-MW Heskett Unit 4 project was delayed after start-up testing damaged generator and turbine components. Service is expected in the second quarter of 2024, subject to the root-cause review and further delays.
- Management cited inflation, higher interest rates, labor constraints and supply-chain delays. Regulatory recovery, weather, fuel and commodity prices, project execution, cybersecurity, and environmental rules also pose risks.
- Washington emissions rules resulted in a $66.8 million environmental compliance liability in 2023; MDU received $61.9 million from allowance sales. Related costs and proceeds are subject to regulatory accounting and expected rate treatment. Oregon’s climate program was invalidated by a court in December 2023; state efforts to reinstate it may affect future obligations.
- A construction customer is withholding approximately $31 million on a large project. MDU considers collection probable and has recognized the revenue, but dispute resolution, including potential litigation, remains uncertain.
- Natural gas distribution goodwill had only about a 4% fair-value cushion over carrying value in the 2023 impairment test; no impairment was recorded. MDU reported no material effect from cybersecurity incidents to date and received unqualified audit opinions on its financial statements and internal controls.
Important facts for investors to verify
- How much of the increase in continuing earnings is attributable to the Knife River exchange gain and other nonrecurring or investment-related items.
- Progress, costs, tax treatment and final timing of the proposed MDU Construction Services spinoff, and its implications for dividends and the remaining company’s leverage.
- Rate-case outcomes and recovery timing for fuel, gas and environmental compliance costs, including Washington emissions allowances.
- Execution, financing and returns on the projected capital program, including Heskett Unit 4 and pipeline expansions.
- Resolution and collectability of the $31 million construction receivable, and any resulting effects on cash flow or earnings.
- Cash generation and debt maturities: operating cash flow declined, while debt and interest costs remain material. The filing targets a 60%–70% dividend payout ratio based on future regulated earnings; the board retains discretion over dividend payments.