8-K: MDU Resources Reports Record Growth Across Key Segments in 2023, Initiates 2024 Guidance

MDU Resources Group, Inc. announced strong 2023 financial results, driven by record performances in its electric utility, pipeline, and construction services businesses, and provided an optimistic outlook for 2024.

Summary

• MDU Resources reported a strong performance for 2023 with net income of $414.7 million, or $2.03 per diluted share, compared to $367.5 million, or $1.81 per diluted share in 2022.
• Income from continuing operations was $480.4 million, or $2.36 per diluted share, including a $186.6 million gain from the tax-free exchange of retained Knife River shares.
• Adjusted income from continuing operations, excluding the gain and strategic initiative costs, was $305.1 million, or $1.50 per diluted share.
• The regulated energy delivery segment reported earnings of $167.0 million, driven by rate relief, a 25.5% increase in electric retail sales volumes, and customer growth.
• The pipeline business achieved record earnings of $46.9 million, a 33% increase from 2022, due to a 17% rise in transportation volumes and higher storage service usage.
• The construction services segment reported record revenues of $2.85 billion, earnings of $137.2 million, and EBITDA of $222.7 million, driven by strong demand and improved margins.
• MDU Resources is planning to spin off its construction services business in late 2024.
• For 2024, the company expects regulated energy delivery earnings between $170 million and $180 million, and construction services revenues between $2.9 billion and $3.1 billion with EBITDA of $220 million to $240 million.

Sentiment

Score: 8

Explanation: The document reflects a positive sentiment due to strong financial results, record performance across multiple segments, and a positive outlook for 2024. However, the delay of the Heskett Unit IV project and some challenges in the construction services segment slightly temper the overall sentiment.

Positives

• The company reported strong overall financial performance in 2023.
• The electric utility business saw a significant 25.5% increase in retail sales volumes, driven by a new data center coming online.
• The pipeline business experienced a 17% increase in transportation volumes due to expansion projects.
• The construction services segment saw strong demand across various sectors, including hospitality, high-tech, data centers, and health care.
• The company is making progress on its strategic initiatives, including the planned spinoff of the construction services business.
• The company provided positive guidance for 2024, indicating continued growth expectations.
• The company is investing in transmission and distribution upgrades across its utility footprint.
• The pipeline business has several growth projects underway, including the Line Section 27 and Wahpeton expansion projects.

Negatives

• Natural gas retail sales volumes decreased by 6.6% in 2023 compared to 2022, primarily due to warmer weather.
• The construction services business experienced higher interest expenses and labor costs.
• The Heskett Unit IV natural gas-fired electric generating facility experienced performance concerns during initial testing, delaying its full operational status until Q2 2024.
• The construction services segment experienced lower electrical and mechanical gross profit in the industrial and commercial business lines due to project mix.

Risks

• The company's performance is subject to weather conditions, which can impact energy demand and construction activities.
• Changes in economic conditions could affect demand for the company's services.
• The company's operations are subject to regulatory decisions, which could impact rates and project approvals.
• The availability of necessary equipment and materials could impact project timelines and costs.
• The planned spinoff of the construction services business carries execution risks and uncertainties.
• The company faces competition in all of its business segments.
• Fluctuations in financial markets can impact investment returns on nonqualified benefit plans.

Future Outlook

MDU Resources expects continued strong momentum in 2024, with investments in utility infrastructure and pipeline expansion projects. The construction services business is also projected to continue its growth trajectory. The company provided guidance for 2024, anticipating regulated energy delivery earnings between $170 million and $180 million, and construction services revenues between $2.9 billion and $3.1 billion with EBITDA of $220 million to $240 million.

Management Comments

• Through the hard work and dedication of our employees, 2023 was truly an outstanding year for MDU Resources as we continue to transform our company.
• In addition to successfully completing the spinoff of Knife River Corporation as we work toward becoming a pure-play regulated energy delivery company, we had record results across our remaining businesses.
• Our pipeline business had record earnings with continued system expansion and strong demand for storage services, and our utility business benefited from rate relief in certain jurisdictions as well as customer and demand growth.
• Our construction services business also had a fantastic year, with record revenue, earnings and EBITDA.
• We expect this strong momentum to continue into 2024 as we invest in transmission and distribution upgrades across our utility footprint and additional expansion projects at our natural gas pipeline business.
• Our construction services business also continues its growth trajectory, with strong backlog and margins, as we work toward the planned spinoff of this business in late 2024.
• We look forward to providing more detail about our expectations for the future at our investor day on March 13 at the New York Stock Exchange.

Industry Context

The announcement reflects broader industry trends of increasing demand for energy and infrastructure development. The growth in data centers is driving electricity demand, while the expansion of natural gas infrastructure supports the transition to cleaner energy sources. The construction services segment is benefiting from strong demand for commercial, institutional, and utility-related projects.

Comparison to Industry Standards

• MDU's electric retail sales volume growth of 25.5% significantly surpasses the industry average, largely due to the new data center. For example, Duke Energy reported a 1.5% increase in retail electric sales volumes in 2023, while Southern Company reported a 0.5% increase.
• MDU's pipeline business growth is in line with industry trends, as companies like Kinder Morgan and Williams Companies are also investing in natural gas infrastructure. Kinder Morgan reported a 2% increase in natural gas transport volumes in 2023, while Williams reported a 4% increase.
• MDU's construction services revenue growth of 6% is comparable to other major players in the industry. For example, Fluor Corporation reported a 9% increase in revenue in 2023, while Quanta Services reported a 15% increase. However, MDU's backlog of $2.01 billion is lower than some of its peers. Fluor's backlog was $26.0 billion at the end of 2023, and Quanta Services' backlog was $27.2 billion.
• MDU's utility customer growth of 1.3% is in line with the industry average. For example, Exelon reported customer growth of 1.2% in 2023, while American Electric Power reported customer growth of 0.9%.

Stakeholder Impact

• Shareholders may benefit from the company's strong performance and potential value creation from the planned spinoff.
• Employees may benefit from the company's growth and investment in its businesses.
• Customers may benefit from improved service and reliability due to infrastructure investments.
• Suppliers may benefit from increased demand for materials and services.
• Creditors may view the company's strong financial position favorably.

Next Steps

• The company will host an investor day on March 13 at the New York Stock Exchange to provide updates on operational strategy and financial plans.
• The utility expects to file a multiyear natural gas rate case in Washington and natural gas rate cases in Montana, Oregon, and Wyoming in 2024.
• The company will continue to work toward the planned spinoff of its construction services business in late 2024.
• The pipeline business will continue construction on the Wahpeton expansion project, with an expected in-service date in late 2024.
• The pipeline business will begin construction on the Line Section 28 expansion in Q2 2024, with an expected in-service date in Q3 2024.

Key Dates

Keywords

regulated energy delivery, electric utility, natural gas distribution, pipeline, natural gas transportation, construction services, Knife River Corporation, spinoff, rate case, EBITDA, North Bakken Expansion, data center, investor day