MDU Resources Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts are in millions unless noted. The filing was signed November 2, 2023. Following the May 31 spinoff of Knife River, its historical results are presented as discontinued operations; comparative periods were restated.
Business context and financial performance
MDU provides regulated electric, natural gas distribution and pipeline services, and specialty construction services. It retained about 10% of Knife River after distributing approximately 90% to shareholders and intended to sell the retained shares within 12 months.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Operating revenue | $1,000.8 | $1,002.5 | $3,522.0 | $3,119.4 |
| Operating income | $84.6 | $61.0 | $285.2 | $231.0 |
| Income from continuing operations | $78.2 | $42.4 | $309.7 | $146.9 |
| Discontinued operations, net of tax | $(3.3) | $105.6 | $(65.8) | $103.5 |
| Net income | $74.9 | $148.0 | $244.0 | $250.4 |
| Diluted EPS | $0.37 | $0.73 | $1.20 | $1.23 |
| Interest expense | $32.1 | $20.2 | $82.5 | $58.3 |
Q3 revenue was nearly unchanged, while nine-month revenue increased 13%. Higher operating income and continuing earnings reflected growth across most businesses, including construction services, pipeline and utilities. Reported net income fell because the comparison included Knife River earnings in 2022 and 2023 separation costs. The company recorded a $30.2 million pretax unrealized gain on its retained Knife River investment in Q3 and $170.2 million year to date; these are fair-value gains, not operating cash receipts.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $174.9, down from $284.9. Continuing operations provided $335.1; discontinued operations used $160.2.
- Investing cash outflow was $415.7, including $370.6 of capital expenditures. Financing cash inflow was $192.8. Cash and cash equivalents ended the period at $32.5.
- Short-term borrowings were $306.4; long-term debt, including current maturities, was approximately $2,341.1. Equity was 51% of total capitalization.
- Management reported $429.0 of available borrowing capacity under outstanding credit facilities. The company was in compliance with debt covenants and reported investment-grade credit ratings at its debt-issuing entities.
- About 35.6% of debt was variable-rate at September 30. Management estimated a 1 percentage-point rate increase would add $9.4 of annual pretax interest expense.
- Capital expenditures were estimated at approximately $530.3 for 2023. The long-term debt schedule includes $158.4 due in 2024 and $532.7 in 2025.
Material changes and outlook
- Continuing-operations earnings improved substantially year over year for the nine months, but total net income was slightly lower. The $47.1 after-tax Knife River separation costs contributed to the year-to-date discontinued-operations loss.
- Construction services posted nine-month revenue growth of 12% and operating income growth of 26%; Q3 revenue declined 3% while operating income increased 44%, reflecting improved project gross profit and mix. Backlog was $1.85 billion, versus $2.00 billion a year earlier.
- Pipeline earnings benefited from higher transportation volumes, storage revenue and new rates. Utility results reflected rate relief and customer growth, partly offset by higher labor, interest and operating costs. Management expects regulated utility rate base to grow approximately 6%–7% annually over five years and customer growth of 1%–2% annually.
- On November 2, 2023, MDU announced its intent to pursue a tax-free spinoff of MDU Construction Services to become a regulated energy delivery company. Completion, timing and benefits are uncertain. The board set a long-term dividend payout target of 60%–70% of regulated energy delivery earnings; the company said it has paid dividends uninterrupted for 85 years.
- Management cited inflation, higher interest rates, supply-chain delays, labor availability and commodity-price volatility. Weather, rate recovery and regulatory decisions also affect results. Climate and emissions rules may require additional investment or compliance spending; timing of recovery through rates can affect cash flow.
- A construction customer is withholding approximately $30.0 on outstanding billings and retention on a large project. MDU believes collection is probable and has recognized the revenue, but acknowledges uncertainty and possible lengthy dispute resolution or litigation.
Most important facts for investors to verify
- Whether and when MDU sells its retained Knife River shares, and the proceeds realized versus the reported fair value.
- Progress, costs, capital structure and tax treatment of the proposed MDU Construction Services spinoff, and the effect on dividends and cash flows.
- Resolution and collectability of the approximately $30.0 customer receivable dispute.
- Regulatory outcomes and timing for pending rate cases, fuel-cost recovery and environmental compliance-cost recovery.
- Debt refinancing and liquidity needs, especially variable-rate exposure and upcoming maturities; compare planned capital spending with operating cash generation.