MDU Resources Group, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. This unaudited report covers the quarter and nine months ended September 30, 2022, compared with the same 2021 periods. MDU operates regulated electric, natural gas distribution and pipeline businesses, alongside construction materials and contracting and construction services. Results are seasonal. Unless otherwise noted, financial figures below are in millions of dollars.
Financial performance and condition
- Revenue: Third-quarter revenue was $1,977.2, up 24.7% from $1,586.0. Nine-month revenue was $5,114.7, up 20.7% from $4,237.6. Growth was driven substantially by construction businesses and higher natural gas costs passed through to utility customers.
- Profit and EPS: Q3 operating income was $209.9, up from $189.2; net income was $148.0, versus $139.3; diluted EPS was $0.73, versus $0.68. For nine months, operating income declined to $397.8 from $412.0, net income to $250.4 from $291.6, and diluted EPS to $1.23 from $1.44.
- Margins: Calculated operating margin was approximately 10.6% in Q3 (11.9% in 2021) and 7.8% for nine months (9.7% in 2021). The filing attributes pressure on year-to-date results to inflation and higher costs, among other factors.
- Cash flow and investment: Nine-month operating cash flow was $284.9, down from $365.8. Capital expenditures were $463.0, compared with $428.1; operating cash flow less capital expenditures was negative $178.1. Investing cash outflow was $465.3. Financing cash inflow was $200.9, principally reflecting new debt.
- Liquidity and debt: At September 30, cash was $74.6 and available borrowing capacity under subsidiary credit facilities was $371.6. Short-term borrowings were $100.0; long-term debt, including current maturities, was approximately $2,988.5, for total debt of roughly $3,088.5. The filing reported compliance with applicable debt covenants. Equity was 53% of total capitalization, versus 58% a year earlier.
- Dividends: Dividends paid during the first nine months totaled $132.7; dividends declared were $0.6525 per share, compared with $0.6375 in 2021.
Material changes and segment trends
- Q3 consolidated earnings increased $8.6, led by construction materials and contracting, construction services and electric operations. Nine-month earnings declined $41.2, with lower results across several businesses and reduced returns on nonqualified benefit-plan investments contributing to the decrease.
- Construction materials and contracting Q3 net income rose to $102.8 from $96.3, but nine-month net income fell to $95.3 from $116.9. Higher prices and activity were offset year to date by inflation-driven costs, including diesel, labor and materials, and higher interest expense.
- Construction services Q3 net income increased to $28.0 from $23.1; nine-month net income was $83.8 versus $81.8. Backlog was $2.0 billion at September 30, up 57% year over year; the company expected to complete about $1.67 billion within 12 months.
- Regulated natural gas distribution revenue rose sharply, partly because higher gas costs are passed through to customers. Nine-month segment net income decreased to $10.8 from $20.1, reflecting higher operating, depreciation and interest costs, among other items.
- Pipeline nine-month net income declined to $24.3 from $28.7 despite revenue growth; the North Bakken Expansion contributed transportation revenue, while higher depreciation and interest and lower non-regulated project margins weighed on earnings.
Outlook, management commentary and risks
- Management estimated 2022 capital expenditures of approximately $702 million and expected regulated utility rate base to grow about 5% annually over the next five years, with customer growth averaging 1% to 2% annually. These are outlook statements, not guarantees.
- The company announced plans to spin off Knife River as a separate public company, expected in 2023, subject to approvals, tax matters and other conditions. The board also authorized a strategic review of MDU Construction Services. The company cautioned either initiative could be delayed, changed or abandoned; no assurance was given that expected benefits would be achieved.
- Management cited inflation, higher interest and commodity costs, supply-chain delays, labor availability and project timing as pressures. Higher natural gas prices were expected to continue into the next heating season; commodity costs passed through to utility customers generally have limited direct earnings impact, but affect working capital and affordability.
- Risks also include regulation and rate recovery, environmental and emissions requirements, electric-grid capacity and reliability, construction project execution and fixed-price contract exposure, and the timing and economics of proposed separations. The company reported $33.6 million of accrued contingent liabilities, partly offset by $11.9 million of insurance receivables and $20.5 million of regulatory assets. It also reported $333.7 million of fixed maximum guarantees and $932.4 million of surety bonds outstanding; no amounts were outstanding under the specified guarantees and letters of credit.
- A Minnesota regulator disallowed $845,000 of gas costs related to the 2021 cold-weather event; the company recorded the amount as expense. A North Dakota electric rate case remained pending, with interim relief approved subject to refund.
Important facts for investors to verify
- Progress, approval conditions, costs and final capital structure for the Knife River separation, and the outcome of the MDU Construction Services strategic review.
- Whether construction pricing and backlog convert into profitable revenue as inflation, labor constraints, supply delays and project mix affect margins.
- Funding needs and liquidity as operating cash flow trails capital spending, debt balances rise, and interest rates and working-capital requirements increase.
- Regulatory decisions and recovery of gas costs, infrastructure investments and environmental compliance costs, including the pending rate matters.
- Whether pension-asset market losses and lower benefit-plan investment returns affect future expenses; management noted qualified pension plan assets had lost 25% through September 30, with the impact expected in expense beginning in 2023.