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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2023
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________ to ______________
Commission file number 1-03480
MDU RESOURCES GROUP INC
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Delaware | | 30-1133956 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1200 West Century Avenue
P.O. Box 5650
Bismarck, North Dakota 58506-5650
(Address of principal executive offices)
(Zip Code)
(701) 530-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common Stock, par value $1.00 per share | MDU | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
Large Accelerated Filer | ☒ | Accelerated Filer | ☐ |
Non-Accelerated Filer | ☐ | Smaller Reporting Company | ☐ |
| | Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 1, 2023: 203,638,373 shares.
Definitions
The following abbreviations and acronyms used in this Form 10-Q are defined below:
| | | | | |
Abbreviation or Acronym | |
2022 Annual Report | Company's Annual Report on Form 10-K for the year ended December 31, 2022 |
AFUDC | Allowance for funds used during construction |
ASC | FASB Accounting Standards Codification |
ASU | FASB Accounting Standards Update |
Cascade | Cascade Natural Gas Corporation, an indirect wholly owned subsidiary of MDU Energy Capital |
Centennial | CEHI, LLC, a direct wholly owned subsidiary of the Company, formally known as Centennial Energy Holdings, Inc. prior to the separation of Knife River from the Company. References to Centennial's historical business and operations refer to the business and operations of Centennial Energy Holdings, Inc. |
Centennial Capital | Centennial Holdings Capital LLC, a direct wholly owned subsidiary of Centennial |
Company | MDU Resources Group, Inc. |
COVID-19 | Coronavirus disease 2019 |
Coyote Creek | Coyote Creek Mining Company, LLC, a subsidiary of The North American Coal Corporation |
Coyote Station | 427-MW coal-fired electric generating facility near Beulah, North Dakota (25 percent ownership) |
dk | Decatherm |
Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act |
EPA | United States Environmental Protection Agency |
Exchange Act | Securities Exchange Act of 1934, as amended |
FASB | Financial Accounting Standards Board |
FERC | Federal Energy Regulatory Commission |
Fidelity | Fidelity Exploration & Production Company, a direct wholly owned subsidiary of WBI Holdings (previously referred to as the Company's exploration and production segment) |
GAAP | Accounting principles generally accepted in the United States of America |
GHG | Greenhouse gas |
Grasslands Subsystem | A portion of WBI Energy Transmission's natural gas pipeline that runs from western North Dakota to north central Wyoming |
Intermountain | Intermountain Gas Company, an indirect wholly owned subsidiary of MDU Energy Capital |
IPUC | Idaho Public Utilities Commission |
IRA | Inflation Reduction Act of 2022 |
Knife River | Established as Knife River Corporation prior to the separation from the Company, a direct wholly owned subsidiary of Centennial. Knife River refers to Knife River Corporation, during the period prior to separation, now known as "KRC Materials, Inc." Following the separation Knife River refers to Knife River Holding Company, now known as Knife River Corporation. |
kWh | Kilowatt-hour |
kV | Kilovolt |
LIBOR | London Inter-bank Offered Rate |
MDU Construction Services | MDU Construction Services Group, Inc., a direct wholly owned subsidiary of Centennial |
MDU Energy Capital | MDU Energy Capital, LLC, a direct wholly owned subsidiary of the Company |
MISO | Midcontinent Independent System Operator, Inc., the organization that provides open-access transmission services and monitors the high-voltage transmission system in the Midwest United States and Manitoba, Canada and a southern United States region which includes much of Arkansas, Mississippi, and Louisiana. |
MMcf | Million cubic feet |
MMdk | Million dk |
Montana-Dakota | Montana-Dakota Utilities Co., a direct wholly owned subsidiary of MDU Energy Capital |
MTPSC | Montana Public Service Commission |
| | | | | |
MW | Megawatt |
NDDEQ | North Dakota Department of Environmental Quality |
NDPSC | North Dakota Public Service Commission |
NERC | North American Electric Reliability Corporation |
Oil | Includes crude oil and condensate |
PHMSA | Pipeline and Hazardous Materials Safety Administration |
Regional Haze Rule | The EPA developed the Regional Haze Rule requiring states to develop and implement comprehensive plans to reduce human-caused regional haze in designated areas such as national parks and wilderness areas. |
SDPUC | South Dakota Public Utilities Commission |
SEC | United States Securities and Exchange Commission |
Securities Act | Securities Act of 1933, as amended |
SOFR | Secured Overnight Financing Rate |
TSA | In connection with the separation of Knife River, the Company and Knife River entered into a Transition Services Agreement whereby each party will provide certain post-separation services on a transitional basis. |
UA | United Association of Journeyman and Apprentices of the Plumbing and Pipefitting Industry of the United States of America and Canada |
VIE | Variable interest entity |
Washington DOE | Washington State Department of Ecology |
WBI Energy | WBI Energy, Inc., an indirect wholly owned subsidiary of WBI Holdings |
WBI Energy Transmission | WBI Energy Transmission, Inc., an indirect wholly owned subsidiary of WBI Holdings |
WBI Holdings | WBI Holdings, Inc., a direct wholly owned subsidiary of Centennial |
WUTC | Washington Utilities and Transportation Commission |
Introduction
Montana-Dakota was incorporated under the state laws of Delaware in 1924. The Company was incorporated under the state laws of Delaware in 2018. Upon the completion of an internal holding company reorganization, Montana-Dakota became a subsidiary of the Company. Its principal executive offices are located at 1200 West Century Avenue, P.O. Box 5650, Bismarck, North Dakota 58506-5650, telephone (701) 530-1000.
The Company's mission is to deliver superior value to stakeholders by providing essential infrastructure and services to America. The Company generates, transmits and distributes electricity and provides natural gas distribution, transportation and storage services that are regulated by state public service commissions and/or the FERC. The Company also provides construction services through its electrical and mechanical and transmission and distribution specialty contracting services, and prior to the separation of Knife River, provided construction materials and associated contracting services through aggregate mining and marketing of related products, such as ready-mix concrete, asphalt and asphalt oil through May 31, 2023.
As part of the Company's continuous review of its business, the Company announced strategic initiatives in 2022. On August 4, 2022, the Company announced that its board of directors approved a plan to pursue the separation of Knife River, the construction materials and contracting segment, from the Company. The separation was completed on May 31, 2023, and resulted in two independent, publicly traded companies, MDU Resources Group, Inc. and Knife River. The Company's board of directors approved the distribution of approximately 90 percent of the issued and outstanding shares of Knife River to the Company's stockholders. Stockholders of the Company received one share of Knife River common stock for every four shares of the Company's common stock held on May 22, 2023, the record date for the distribution. The Company retained approximately 10 percent of Knife River common stock immediately following the separation with the intent to dispose of such shares within twelve months after the separation. The separation of Knife River was a tax-free spinoff transaction to the Company’s stockholders for U.S. federal income tax purposes. More information on the separation and distribution can be found within Knife River's Form 10, which is not incorporated by reference herein.
The historical results of Knife River are presented as discontinued operations in the Company's Consolidated Financial Statements.
On November 3, 2022, the Company announced its intent to commence a strategic review process of MDU Construction Services. Upon completing the strategic review of its wholly owned construction services business, the Company's board of directors announced on July 10, 2023, that it will pursue a tax-advantaged separation of the construction services business from the Company. The Company's board of directors believes a tax-advantaged separation of the construction services business supports the Company's goal of enhancing value for stockholders by becoming a pure-play regulated energy delivery company.
The Company is organized into four reportable business segments. These business segments include: electric, natural gas distribution, pipeline, and construction services. The Company's business segments are determined based on the Company's method of internal reporting, which generally segregates the strategic business units due to differences in products, services and regulation. The internal reporting of these segments is defined based on the reporting and review process used by the Company's chief executive officer.
The Company, through its wholly owned subsidiary, MDU Energy Capital, owns Montana-Dakota, Cascade and Intermountain. The electric segment is comprised of Montana-Dakota while the natural gas distribution segment is comprised of Montana-Dakota, Cascade and Intermountain.
The Company, through its wholly owned subsidiary, Centennial, owns WBI Energy, MDU Construction Services and Centennial Capital. WBI Energy is the pipeline segment, MDU Construction Services is the construction services segment and Centennial Capital is reflected in the Other category.
For more information on the Company's business segments, see Note 18 of the Notes to Consolidated Financial Statements.
Part I -- Financial Information
Item 1. Financial Statements
| | | | | | | | | | | | | | |
MDU Resources Group, Inc. |
Consolidated Statements of Income |
(Unaudited) |
| Three Months Ended | Six Months Ended |
| June 30, | June 30, |
| 2023 | 2022 | 2023 | 2022 |
| (In thousands, except per share amounts) |
Operating revenues: | | | | |
Electric, natural gas distribution and regulated pipeline | $ | 340,492 | | $ | 323,616 | | $ | 1,014,423 | | $ | 877,233 | |
Non-regulated pipeline, construction services and other | 750,634 | | 686,133 | | 1,506,801 | | 1,239,631 | |
Total operating revenues | 1,091,126 | | 1,009,749 | | 2,521,224 | | 2,116,864 | |
Operating expenses: | | | | |
Operation and maintenance: | | | | |
Electric, natural gas distribution and regulated pipeline | 95,483 | | 94,422 | | 197,522 | | 192,247 | |
Non-regulated pipeline, construction services and other | 674,110 | | 615,095 | | 1,368,616 | | 1,117,826 | |
Total operation and maintenance | 769,593 | | 709,517 | | 1,566,138 | | 1,310,073 | |
Purchased natural gas sold | 115,866 | | 115,312 | | 486,881 | | 382,665 | |
Depreciation, depletion and amortization | 53,498 | | 55,006 | | 105,730 | | 106,779 | |
Taxes, other than income | 49,706 | | 45,480 | | 117,133 | | 99,057 | |
Electric fuel and purchased power | 20,432 | | 21,929 | | 44,789 | | 48,290 | |
Total operating expenses | 1,009,095 | | 947,244 | | 2,320,671 | | 1,946,864 | |
Operating income | 82,031 | | 62,505 | | 200,553 | | 170,000 | |
Unrealized gain on investment in Knife River | 140,020 | | — | | 140,020 | | — | |
Other income (expense) | 9,959 | | (2,209) | | 20,333 | | (3,253) | |
Interest expense | 26,459 | | 19,187 | | 50,412 | | 38,079 | |
Income before income taxes | 205,551 | | 41,109 | | 310,494 | | 128,668 | |
Income taxes | 57,918 | | 5,347 | | 78,986 | | 24,140 | |
Income from continuing operations | 147,633 | | 35,762 | | 231,508 | | 104,528 | |
Discontinued operations, net of tax | (16,941) | | 34,905 | | (62,464) | | (2,098) | |
Net income | $ | 130,692 | | $ | 70,667 | | $ | 169,044 | | $ | 102,430 | |
Earnings per share - basic: | | | | |
Income from continuing operations | $ | .72 | | $ | .18 | | $ | 1.14 | | $ | .51 | |
Discontinued operations, net of tax | (.08) | | .17 | | (.31) | | (.01) | |
Earnings per share - basic | $ | .64 | | $ | .35 | | $ | .83 | | $ | .50 | |
Earnings per share - diluted: | | | | |
Income from continuing operations | $ | .72 | | $ | .18 | | $ | 1.14 | | $ | .51 | |
Discontinued operations, net of tax | (.08) | | .17 | | (.31) | | (.01) | |
Earnings per share - diluted | $ | .64 | | $ | .35 | | $ | .83 | | $ | .50 | |
Weighted average common shares outstanding - basic | 203,635 | | 203,351 | | 203,630 | | 203,351 | |
Weighted average common shares outstanding - diluted | 203,877 | | 203,401 | | 203,894 | | 203,396 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | | | | | | | | | | | | | | | | | |
MDU Resources Group, Inc. |
Consolidated Statements of Comprehensive Income |
(Unaudited) |
| | | Three Months Ended | Six Months Ended |
| | | June 30, | June 30, |
| | | | 2023 | 2022 | 2023 | 2022 |
| | | | (In thousands) |
Net income | | | | $ | 130,692 | | $ | 70,667 | | $ | 169,044 | | $ | 102,430 | |
Other comprehensive income (loss): | | | | | | | |
Reclassification adjustment for loss on derivative instruments included in net income, net of tax of $6 and $36 for the three months ended and $17 and $72 for the six months ended in 2023 and 2022, respectively | | | | 47 | | 111 | | 81 | | 223 | |
Postretirement liability adjustment: | | | | | | | |
Amortization of postretirement liability losses included in net periodic benefit credit, net of tax of $131 and $148 for the three months ended and $165 and $312 for the six months ended in 2023 and 2022, respectively | | | | 387 | | 461 | | 487 | | 906 | |
Reclassification of postretirement liability adjustment from regulatory asset, net of tax of $— and $(1,086) for the three months ended and $— and $(1,086) for the six months ended in 2023 and 2022, respectively | | | | — | | (3,265) | | — | | (3,265) | |
Postretirement liability adjustment | | | | 387 | | (2,804) | | 487 | | (2,359) | |
Net unrealized gain (loss) on available-for-sale investments: | | | | | | | |
Net unrealized gain (loss) on available-for-sale investments arising during the period, net of tax of $(22) and $(34) for the three months ended and $(4) and $(119) for the six months ended in 2023 and 2022, respectively | | | | (84) | | (128) | | (14) | | (448) | |
Reclassification adjustment for loss on available-for-sale investments included in net income, net of tax of $3 and $7 for the three months ended and $6 and $15 for the six months ended in 2023 and 2022, respectively | | | | 13 | | 25 | | 26 | | 57 | |
Net unrealized gain (loss) on available-for-sale investments | | | | (71) | | (103) | | 12 | | (391) | |
Other comprehensive income (loss) | | | | 363 | | (2,796) | | 580 | | (2,527) | |
Comprehensive income attributable to common stockholders | | | | $ | 131,055 | | $ | 67,871 | | $ | 169,624 | | $ | 99,903 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | | | | | | | | | |
MDU Resources Group, Inc. |
Consolidated Balance Sheets |
(Unaudited) |
| June 30, 2023 | June 30, 2022 | December 31, 2022 |
Assets | (In thousands, except shares and per share amounts) |
Current assets: | | | |
Cash and cash equivalents | $ | 50,780 | | $ | 53,663 | | $ | 70,428 | |
Receivables, net | 934,173 | | 760,696 | | 1,064,340 | |
Current regulatory assets | 193,162 | | 102,535 | | 165,092 | |
Inventories | 60,154 | | 50,977 | | 64,248 | |
Prepayments and other current assets | 60,502 | | 82,533 | | 55,123 | |
Investment in Knife River | 246,063 | | — | | — | |
Current assets of discontinued operations | — | | 798,665 | | 583,218 | |
Total current assets | 1,544,834 | | 1,849,069 | | 2,002,449 | |
Noncurrent assets: | | | |
Property, plant and equipment | 7,083,229 | | 6,692,019 | | 6,874,630 | |
Less accumulated depreciation, depletion and amortization | 2,160,439 | | 2,067,811 | | 2,098,298 | |
Net property, plant and equipment | 4,922,790 | | 4,624,208 | | 4,776,332 | |
Goodwill | 488,960 | | 488,960 | | 488,960 | |
Other intangible assets, net | 3,049 | | 5,213 | | 4,102 | |
Regulatory assets | 345,185 | | 347,061 | | 329,659 | |
Investments | 139,569 | | 127,847 | | 128,827 | |
Operating lease right-of-use assets | 74,553 | | 69,869 | | 73,502 | |
Other | 165,910 | | 170,709 | | 161,900 | |
| | | |
Noncurrent assets of discontinued operations | — | | 1,636,027 | | 1,685,751 | |
Total noncurrent assets | 6,140,016 | | 7,469,894 | | 7,649,033 | |
Total assets | $ | 7,684,850 | | $ | 9,318,963 | | $ | 9,651,482 | |
Liabilities and Stockholders' Equity | | | |
Current liabilities: | | | |
Short-term borrowings | $ | 345,000 | | $ | — | | $ | 38,500 | |
Long-term debt due within one year | 1,319 | | 86,319 | | 47,819 | |
Accounts payable | 399,339 | | 394,317 | | 525,560 | |
Taxes payable | 60,284 | | 97,471 | | 62,308 | |
Dividends payable | 45,310 | | 44,229 | | 45,245 | |
Accrued compensation | 66,555 | | 69,538 | | 59,470 | |
Operating lease liabilities due within one year | 22,666 | | 19,960 | | 21,307 | |
Regulatory liabilities due within one year | 48,057 | | 17,884 | | 26,440 | |
Other accrued liabilities | 143,235 | | 138,479 | | 156,031 | |
| | | |
Current liabilities of discontinued operations | — | | 502,317 | | 487,624 | |
Total current liabilities | 1,131,765 | | 1,370,514 | | 1,470,304 | |
Noncurrent liabilities: | | | |
Long-term debt | 2,246,103 | | 2,003,881 | | 2,317,848 | |
Deferred income taxes | 515,661 | | 428,249 | | 455,499 | |
Asset retirement obligations | 380,058 | | 440,216 | | 372,870 | |
Regulatory liabilities | 455,877 | | 433,019 | | 448,454 | |
Operating lease liabilities | 52,328 | | 50,625 | | 52,871 | |
Other | 196,865 | | 178,204 | | 180,603 | |
Noncurrent liabilities of discontinued operations | — | | 1,027,445 | | 765,904 | |
Total noncurrent liabilities | 3,846,892 | | 4,561,639 | | 4,594,049 | |
Commitments and contingencies | | | |
Stockholders' equity: | | | |
Common stock Authorized - 500,000,000 shares, $1.00 par value Shares issued - 203,638,373 at June 30, 2023, 203,889,661 at June 30, 2022 and 204,162,814 at December 31, 2022 | 203,638 | | 203,889 | | 204,163 | |
Other paid-in capital | 1,460,735 | | 1,454,131 | | 1,466,037 | |
Retained earnings | 1,059,517 | | 1,775,947 | | 1,951,138 | |
Accumulated other comprehensive loss | (17,697) | | (43,531) | | (30,583) | |
Treasury stock at cost 538,921 shares at June 30, 2022 and December 31, 2022 | — | | (3,626) | | (3,626) | |
Total stockholders' equity | 2,706,193 | | 3,386,810 | | 3,587,129 | |
Total liabilities and stockholders' equity | $ | 7,684,850 | | $ | 9,318,963 | | $ | 9,651,482 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
MDU Resources Group, Inc. |
Consolidated Statements of Equity |
(Unaudited) |
| | | Other Paid-in Capital | Retained Earnings | Accumu-lated Other Compre-hensive Loss | | | |
| Common Stock | Treasury Stock | |
| Shares | Amount | Shares | Amount | Total |
| (In thousands, except shares) |
At December 31, 2022 | 204,162,814 | | $ | 204,163 | | $ | 1,466,037 | | $ | 1,951,138 | | $ | (30,583) | | (538,921) | | $ | (3,626) | | $ | 3,587,129 | |
Net income | — | | — | | — | | 38,353 | | — | | — | | — | | 38,353 | |
Other comprehensive income | — | | — | | — | | — | | 217 | | — | | — | | 217 | |
Dividends declared on common stock | — | | — | | — | | (45,574) | | — | | — | | — | | (45,574) | |
Stock-based compensation | — | | — | | 3,108 | | — | | — | | — | | — | | 3,108 | |
Repurchase of common stock | — | | — | | — | | — | | — | | (153,622) | | (4,811) | | (4,811) | |
Issuance of common stock upon vesting of stock-based compensation, net of shares used for tax withholdings | — | | — | | (7,851) | | — | | — | | 153,622 | | 4,811 | | (3,040) | |
At March 31, 2023 | 204,162,814 | | $ | 204,163 | | $ | 1,461,294 | | $ | 1,943,917 | | $ | (30,366) | | (538,921) | | $ | (3,626) | | $ | 3,575,382 | |
Net income | — | | — | | — | | 130,692 | | — | | — | | — | | 130,692 | |
Other comprehensive income | — | | — | | — | | — | | 363 | | — | | — | | 363 | |
Dividends declared on common stock | — | | — | | — | | (45,158) | | — | | — | | — | | (45,158) | |
Stock-based compensation | — | | — | | (927) | | — | | — | | — | | — | | (927) | |
Separation of Knife River | (538,921) | | (539) | | — | | (969,934) | | 12,306 | | 538,921 | | 3,626 | | (954,541) | |
Issuance of common stock | 14,480 | | 14 | | 368 | | — | | — | | — | | — | | 382 | |
At June 30, 2023 | 203,638,373 | | $ | 203,638 | | $ | 1,460,735 | | $ | 1,059,517 | | $ | (17,697) | | — | | $ | — | | $ | 2,706,193 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
|
|
|
| | Other Paid-in Capital | Retained Earnings | Accumu-lated Other Compre-hensive Loss | | | |
| Common Stock | Treasury Stock | |
| Shares | Amount | Shares | Amount | Total |
| (In thousands, except shares) |
At December 31, 2021 | 203,889,661 | | $ | 203,889 | | $ | 1,461,205 | | $ | 1,762,410 | | $ | (41,004) | | (538,921) | | $ | (3,626) | | $ | 3,382,874 | |
Net income | — | | — | | — | | 31,763 | | — | | — | | — | | 31,763 | |
Other comprehensive income | — | | — | | — | | — | | 269 | | — | | — | | 269 | |
Dividends declared on common stock | — | | — | | — | | (44,447) | | — | | — | | — | | (44,447) | |
Stock-based compensation | — | | — | | 2,689 | | — | | — | | — | | — | | 2,689 | |
Repurchase of common stock | — | | — | | — | | — | | — | | (266,821) | | (7,399) | | (7,399) | |
Issuance of common stock upon vesting of stock-based compensation, net of shares used for tax withholdings | — | | — | | (12,303) | | — | | — | | 266,821 | | 7,399 | | (4,904) | |
Issuance of common stock | — | | — | | (127) | | — | | — | | — | | — | | (127) | |
At March 31, 2022 | 203,889,661 | | $ | 203,889 | | $ | 1,451,464 | | $ | 1,749,726 | | $ | (40,735) | | (538,921) | | $ | (3,626) | | $ | 3,360,718 | |
Net income | — | | — | | — | | 70,667 | | — | | — | | — | | 70,667 | |
Other comprehensive income | — | | — | | — | | — | | (2,796) | | — | | — | | (2,796) | |
Dividends declared on common stock | — | | — | | — | | (44,446) | | — | | — | | — | | (44,446) | |
Stock-based compensation | — | | — | | 2,689 | | — | | — | | — | | — | | 2,689 | |
Issuance of common stock | — | | — | | (22) | | — | | — | | — | | — | | (22) | |
At June 30, 2022 | 203,889,661 | | $ | 203,889 | | $ | 1,454,131 | | $ | 1,775,947 | | $ | (43,531) | | (538,921) | | $ | (3,626) | | $ | 3,386,810 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | | | | | | |
MDU Resources Group, Inc. |
Consolidated Statements of Cash Flows |
(Unaudited) |
| Six Months Ended |
| June 30, |
| 2023 | 2022 |
| (In thousands) |
Operating activities: | | |
Net income | $ | 169,044 | | $ | 102,430 | |
Discontinued operations, net of tax | (62,464) | | (2,098) | |
Income from continuing operations | 231,508 | | 104,528 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | |
Depreciation, depletion and amortization | 105,730 | | 106,779 | |
Deferred income taxes | 55,478 | | 2,439 | |
Provision for credit losses | 5,862 | | 2,485 | |
Amortization of debt issuance costs | 792 | | 481 | |
Employee stock-based compensation costs | 1,740 | | 4,713 | |
Pension and postretirement benefit plan net periodic benefit credit | (2,775) | | (3,658) | |
Unrealized gain on investment in Knife River | (140,020) | | — | |
Unrealized (gains) losses on investments | (4,885) | | 10,579 | |
Gains on sales of assets | (4,887) | | (2,935) | |
Changes in current assets and liabilities, net of acquisitions: | | |
Receivables | 124,306 | | (27,093) | |
Inventories | 1,427 | | (4,741) | |
Other current assets | (27,614) | | 18,345 | |
Accounts payable | (137,308) | | 27,113 | |
Other current liabilities | 19,090 | | 34,858 | |
Pension and postretirement benefit plan contributions | (17) | | (54) | |
Other noncurrent changes | 1,606 | | (12,449) | |
Net cash provided by continuing operations | 230,033 | | 261,390 | |
Net cash used in discontinued operations | (156,932) | | (142,282) | |
Net cash provided by operating activities | 73,101 | | 119,108 | |
Investing activities: | | |
Capital expenditures | (232,137) | | (209,891) | |
Acquisitions, net of cash acquired | — | | — | |
Net proceeds from sale or disposition of property and other | 13,532 | | 30 | |
Investments | (2,974) | | (3,072) | |
Net cash used in continuing operations | (221,579) | | (212,933) | |
Net cash used in discontinued operations | (55,012) | | (78,092) | |
Net cash used in investing activities | (276,591) | | (291,025) | |
Financing activities: | | |
Issuance of short-term borrowings | 500,000 | | — | |
Repayment of short-term borrowings | (193,500) | | — | |
Issuance of long-term debt | 389,500 | | 179,407 | |
Repayment of long-term debt | (506,191) | | (147,397) | |
Debt issuance costs | (1,864) | | (320) | |
Net proceeds from issuance of common stock | — | | (149) | |
Dividends paid | (90,552) | | (88,457) | |
Repurchase of common stock | (4,811) | | (7,399) | |
Tax withholding on stock-based compensation | (3,040) | | (4,905) | |
Net cash provided by (used in) continuing operations | 89,542 | | (69,220) | |
Net cash provided by discontinued operations | 94,300 | | 254,028 | |
Net cash provided by financing activities | 183,842 | | 184,808 | |
Increase (decrease) in cash and cash equivalents | (19,648) | | 12,891 | |
Cash and cash equivalents -- beginning of year | 70,428 | | 40,772 | |
Cash and cash equivalents -- end of period | $ | 50,780 | | $ | 53,663 | |
The accompanying notes are an integral part of these consolidated financial statements.
MDU Resources Group, Inc.
Notes to Consolidated
Financial Statements
June 30, 2023 and 2022
(Unaudited)
Note 1 - Basis of presentation
The accompanying consolidated interim financial statements were prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Interim financial statements do not include all disclosures provided in annual financial statements and, accordingly, these financial statements should be read in conjunction with those appearing in the 2022 Annual Report. The information is unaudited but includes all adjustments that are, in the opinion of management, necessary for a fair presentation of the accompanying consolidated interim financial statements and are of a normal recurring nature. Depreciation, depletion and amortization expense is reported separately on the Consolidated Statements of Income and therefore is excluded from the other line items within operating expenses.
As part of the Company's continuous review of its business, the Company announced strategic initiatives in 2022. On August 4, 2022, the Company announced that its board of directors approved a plan to pursue the separation of Knife River, the construction materials and contracting segment, from the Company. The separation was completed on May 31, 2023, and resulted in two independent, publicly traded companies, MDU Resources Group, Inc. and Knife River. The Company's board of directors approved the distribution of approximately 90 percent of the issued and outstanding shares of Knife River to the Company's stockholders. Stockholders of the Company received one share of Knife River common stock for every four shares of the Company's common stock held on May 22, 2023, the record date for the distribution. The Company retained approximately 10 percent of Knife River common stock immediately following the separation with the intent to dispose of such shares within twelve months after the separation. The separation of Knife River was a tax-free spinoff transaction to the Company’s stockholders for U.S. federal income tax purposes.
The Company's consolidated financial statements and accompanying notes for the current and prior periods have been restated to present the results of operations and the assets and liabilities of Knife River as discontinued operations, other than certain corporate overhead costs of the Company historically allocated to Knife River, which are reflected in Other. Also included in discontinued operations in the Consolidated Statements of Income are the supporting activities of Fidelity and certain interest expense related to financing activity associated with the Knife River separation. Unless otherwise indicated, the amounts presented in the accompanying notes to the consolidated financial statements relate to the Company's continuing operations. For more information on discontinued operations, see Note 3.
On November 3, 2022, the Company announced its intent to commence a strategic review of MDU Construction Services. Upon completing the strategic review of its wholly owned construction services business, the Company's board of directors announced on July 10, 2023, that it will pursue a tax-advantaged separation of the construction services business from the Company. The Company's board of directors believes a tax-advantaged separation of the construction services business supports the Company's goal of enhancing value for stockholders by becoming a pure-play regulated energy delivery company.
Management has also evaluated the impact of events occurring after June 30, 2023, up to the date of the issuance of these consolidated interim financial statements on August 3, 2023, that would require recognition or disclosure in the Consolidated Financial Statements.
Note 2 - New accounting standards
The following table provides a brief description of the accounting pronouncements applicable to the Company and the potential impact on its Consolidated Financial Statements and/or disclosures:
| | | | | | | | | | | |
Standard | Description | Effective date | Impact on financial statements/disclosures |
Recently adopted accounting standards |
ASU 2020-04 - Reference Rate Reform | In March 2020, the FASB issued optional guidance to ease the facilitation of the effects of reference rate reform on financial reporting. The guidance applies to certain contract modifications, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Beginning January 1, 2022, LIBOR or other discontinued reference rates cannot be applied to new contracts. New contracts will incorporate a new reference rate, which includes SOFR. LIBOR or other discontinued reference rates cannot be applied to contract modifications or hedging relationships entered into or evaluated after December 31, 2022. Existing contracts referencing LIBOR or other reference rates expected to be discontinued must have identified a replacement rate by June 30, 2023. | Effective as of March 12, 2020 through December 31, 2022 | For more information, see ASU 2022-06 - Reference Rate Reform: Deferral of Sunset Date in recently issued accounting standards adopted. |
ASU 2022-06 - Reference Rate Reform: Deferral of Sunset Date | In December 2022, the FASB included a sunset provision within ASC 848 based on expectations of when LIBOR would cease being published. At the time ASU 2020-04 was issued, the UK Financial Conduct Authority had established its intent to cease overnight tenors of LIBOR after December 31, 2021. In March 2021, the UK Financial Conduct Authority announced that the intended cessation date of the overnight tenors of LIBOR would be June 30, 2023 which is beyond the current sunset date of ASC 848. The amendments in this Update defer the sunset date of ASC 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in ASC 848. | December 31, 2024 | The Company has updated its credit agreements to include language regarding the successor or alternate rate to LIBOR. The Company does not expect the guidance to have a material impact on its results of operations, financial position, cash flows or disclosures. |
Note 3 - Discontinued operations
On May 31, 2023, the Company completed the previously announced separation of Knife River, its construction materials and contracting segment, into a new publicly traded company. The separation was achieved through the Company's pro-rata distribution of approximately 90 percent of the outstanding shares of Knife River to the Company's common stockholders. To effect the separation, the Company distributed to its stockholders one share of Knife River common stock for every four shares of the Company's common stock held on May 22, 2023, the record date for the distribution, with the Company retaining approximately 10 percent of the shares of Knife River common stock immediately following the separation. The Company intends to dispose of the retained shares within twelve months after the separation.
As a result of the separation, the historical assets and liabilities for Knife River have been classified as assets and liabilities of discontinued operations and the historical results of operations are shown in Discontinued operations, net of tax, other than allocated general corporate overhead costs of the Company, which do not meet the criteria for income (loss) from discontinued operations. The Company’s consolidated financial statements and accompanying notes for prior periods have been restated. For the comparative periods, Knife River's operations are only reflected through May 2023, whereas 2022 includes the full three and six months from Knife River's operations.
On April 25, 2023, Knife River issued $425 million of senior notes, pursuant to an indenture, due 2031 to qualified institutional buyers. Knife River also entered into a new credit agreement which provided a revolving credit facility in an initial amount of up to $350 million and a senior secured term loan facility in an amount up to $275 million. The net proceeds from the notes offering, revolving credit facility and the term loan were used to repay $825 million of Knife River's intercompany obligations owed to Centennial. Centennial used the entirety of these proceeds from Knife River to repay a portion of its existing third-party indebtedness.
As a result of the separation, the Company retained legal ownership of 538,921 shares of the Company's common stock that were historically owned by a subsidiary of Knife River and recorded in Treasury stock at cost. Following the separation, the 538,921 treasury shares were retired.
The Company will provide to Knife River and Knife River will provide to the Company transition services in accordance with the TSA entered into on May 31, 2023. For the three and six months ended June 30, 2023, the Company received $599,000 and paid $277,000 related to these activities. The majority of the transition services are expected to be provided for a period of one year, however, no longer than two years after the separation.
Separation costs of $41.2 million and $46.1 million, net of tax, were incurred during the three and six months ended June 30, 2023, respectively. Separation costs incurred are presented in income (loss) from discontinued operations in the Consolidated Statements of Income. These charges primarily relate to transaction and third-party support costs, one-time business separation fees and related tax charges.
The Company had no assets or liabilities related to the discontinued operations of Knife River on its balance sheet as of June 30, 2023. The carrying amounts of the major classes of assets and liabilities of discontinued operations included in the Company’s Consolidated Balance Sheets were as follows:
| | | | | | | | |
| June 30, 2022 | December 31, 2022 |
Assets | (In Thousands) |
Current assets: | | |
Cash and cash equivalents | $ | 1,569 | | $ | 790 | |
Receivables, net | 423,420 | | 241,302 | |
Inventories | 350,457 | | 323,277 | |
Prepayments and other current assets | 23,219 | | 17,849 | |
Total current assets of discontinued operations | 798,665 | | 583,218 | |
Noncurrent assets: | | |
Net property, plant and equipment | 1,264,604 | | 1,315,213 | |
Goodwill | 274,302 | | 274,540 | |
Other intangible assets, net | 14,827 | | 13,430 | |
Investments | 33,400 | | 33,086 | |
Operating lease right-of-use assets | 45,932 | | 45,872 | |
Other | 2,962 | | 3,610 | |
Total noncurrent assets of discontinued operations | 1,636,027 | | 1,685,751 | |
Total assets of discontinued operations | $ | 2,434,692 | | $ | 2,268,969 | |
Liabilities | | |
Current liabilities: | | |
Short-term borrowings | $ | 100,000 | | $ | 208,000 | |
Long-term debt due within one year | 128,134 | | 30,211 | |
Accounts payable | 174,585 | | 122,309 | |
Taxes payable | (12,500) | | 8,502 | |
Accrued compensation | 28,621 | | 29,192 | |
Operating lease liabilities due within one year | 13,666 | | 13,210 | |
Other accrued liabilities | 69,811 | | 76,200 | |
Total current liabilities of discontinued operations | 502,317 | | 487,624 | |
Noncurrent liabilities: | | |
Long-term debt | 709,632 | | 445,546 | |
Deferred income taxes | 169,484 | | 175,804 | |
Asset retirement obligations | 27,779 | | 33,015 | |
Operating lease liabilities | 32,266 | | 32,663 | |
Other | 88,284 | | 78,876 | |
Total noncurrent liabilities of discontinued operations | 1,027,445 | | 765,904 | |
Total liabilities of discontinued operations | $ | 1,529,762 | | $ | 1,253,528 | |
The reconciliation of the major classes of income and expense constituting pretax income (loss) from discontinued operations to the after-tax income (loss) from discontinued operations on the Consolidated Statements of Income were as follows:
| | | | | | | | | | | | | | |
| Three Months Ended | Six Months Ended |
| June 30, | June 30, |
| 2023 | 2022 | 2023 | 2022 |
| (In thousands) |
Operating revenues | $ | 428,020 | | $ | 711,227 | | $ | 735,259 | | $ | 1,020,726 | |
Operating expenses | 416,686 | | 653,116 | | 767,960 | | 1,002,728 | |
Operating income (loss) | 11,334 | | 58,111 | | (32,701) | | 17,998 | |
Other income (expense) | 1,889 | | (2,037) | | 2,381 | | (3,394) | |
Interest expense | 23,544 | | 8,926 | | 37,611 | | 15,293 | |
Income (loss) from discontinued operations before income taxes | (10,321) | | 47,148 | | (67,931) | | (689) | |
Income taxes | 6,620 | | 12,243 | | (5,467) | | 1,409 | |
Income (loss) from discontinued operations | $ | (16,941) | | $ | 34,905 | | $ | (62,464) | | $ | (2,098) | |
Note 4 - Seasonality of operations
Some of the Company's operations are highly seasonal and revenues from, and certain expenses for, such operations may fluctuate significantly among quarterly periods. Accordingly, the interim results for particular businesses, and for the Company as a whole, may not be indicative of results for the full fiscal year.
Note 5 - Receivables and allowance for expected credit losses
Receivables consist primarily of trade receivables from the sale of goods and services, which are recorded at the invoiced amount, and contract assets, net of expected credit losses. For more information on contract assets, see Note 9. The Company's trade receivables are all due in 12 months or less. The total balance of receivables past due 90 days or more was $57.9 million, $27.4 million and $34.3 million at June 30, 2023 and 2022, and December 31, 2022, respectively.
The Company's expected credit losses are determined through a review using historical credit loss experience; changes in asset specific characteristics; current conditions; and reasonable and supportable future forecasts, among other specific account data, and is performed at least quarterly. The Company develops and documents its methodology to determine its allowance for expected credit losses at each of its reportable business segments. Risk characteristics used by the business segments may include customer mix, knowledge of customers and general economic conditions of the various local economies, among others. Specific account balances are written off when management determines the amounts to be uncollectible. Management has reviewed the balance reserved through the allowance for expected credit losses and believes it is reasonable.
Details of the Company's expected credit losses were as follows:
| | | | | | | | | | | | | | | | | |
| Electric | Natural gas distribution | Pipeline | Construction services | Total |
| (In thousands) |
At December 31, 2022 | $ | 375 | | $ | 1,615 | | $ | 2 | | $ | 2,162 | | $ | 4,154 | |
Current expected credit loss provision | 615 | | 2,324 | | — | | 826 | | 3,765 | |
Less write-offs charged against the allowance | 667 | | 1,225 | | — | | 51 | | 1,943 | |
Credit loss recoveries collected | 145 | | 229 | | — | | 1 | | 375 | |
At March 31, 2023 | $ | 468 | | $ | 2,943 | | $ | 2 | | $ | 2,938 | | $ | 6,351 | |
Current expected credit loss provision | 182 | | 90 | | — | | 1,825 | | 2,097 | |
Less write-offs charged against the allowance | 316 | | 1,454 | | — | | 103 | | 1,873 | |
Credit loss recoveries collected | 79 | | 161 | | — | | 58 | | 298 | |
At June 30, 2023 | $ | 413 | | $ | 1,740 | | $ | 2 | | $ | 4,718 | | $ | 6,873 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| Electric | Natural gas distribution | Pipeline | Construction services | Total |
| (In thousands) |
At December 31, 2021 | $ | 269 | | $ | 1,506 | | $ | 2 | | $ | 2,533 | | $ | 4,310 | |
Current expected credit loss provision | 565 | | 1,369 | | — | | 54 | | 1,988 | |
Less write-offs charged against the allowance | 597 | | 932 | | — | | 71 | | 1,600 | |
Credit loss recoveries collected | 124 | | 180 | | — | | 28 | | 332 | |
At March 31, 2022 | $ | 361 | | $ | 2,123 | | $ | 2 | |