MDU Resources (MDU) - 2022 Q4 - Annual Report

Part I Business and Properties The company operates regulated energy and construction businesses and plans to separate into two pure-play public companies - The company is organized into five reportable business segments: electric, natural gas distribution, pipeline, construction materials and contracting, and construction services[22] - On August 4, 2022, the company announced a plan to separate its construction materials business, Knife River, into an independent, publicly traded company through a tax-free spinoff, expected to be complete in Q2 2023[20] Employee Count by Business Segment as of December 31, 2022 | Business Segment | Total Employees | Male | Female | | :--- | :--- | :--- | :--- | | MDU Resources Group, Inc. | 283 | 170 | 113 | | MDU Energy Capital | 1,596 | 1,155 | 441 | | WBI Energy | 321 | 260 | 61 | | Knife River | 3,797 | 3,294 | 503 | | MDU Construction Services | 8,932 | 8,238 | 694 | | Total | 14,929 | 13,117 | 1,812 | Electric The electric segment serves 144,561 customers, generating $377.1 million in 2022 revenue while reducing its carbon intensity Electric Retail Customers and Revenues (2020-2022) | Customer Class | 2022 Customers | 2022 Revenues ($ thousands) | 2021 Customers | 2021 Revenues ($ thousands) | 2020 Customers | 2020 Revenues ($ thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Residential | 119,398 | $135,412 | 119,113 | $123,043 | 118,893 | $122,545 | | Commercial | 23,327 | $142,722 | 23,149 | $133,336 | 23,050 | $131,207 | | Industrial | 230 | $42,937 | 231 | $40,477 | 230 | $36,736 | | Other | 1,606 | $7,335 | 1,610 | $6,754 | 1,609 | $6,601 | | Total | 144,561 | $328,406 | 144,103 | $303,610 | 143,782 | $297,089 | - Approximately 37% of the electricity delivered from Montana-Dakota's owned generation in 2022 was from renewable resources[53] - The company ceased operations at two coal-fired stations and began construction on an 88-MW natural gas peaking unit, expected to be in service in summer 2023[54] Natural Gas Distribution The natural gas segment serves over one million customers across eight states, generating $1.27 billion in 2022 revenue Natural Gas Distribution Retail Customers and Revenues (2020-2022) | Customer Class | 2022 Customers | 2022 Revenues ($ thousands) | 2021 Customers | 2021 Revenues ($ thousands) | 2020 Customers | 2020 Revenues ($ thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Residential | 922,266 | $715,494 | 905,535 | $548,091 | 887,429 | $480,466 | | Commercial | 111,478 | $450,932 | 110,196 | $330,468 | 108,788 | $281,175 | | Industrial | 1,077 | $41,466 | 939 | $31,103 | 929 | $26,217 | | Total | 1,034,821 | $1,207,892 | 1,016,670 | $909,662 | 997,146 | $787,858 | - The segment's retail rate schedules include clauses for adjusting rates based on changes in natural gas commodity, transportation, and storage costs[83] - Cascade expects to incur capital expenditures for compliance with Oregon and Washington climate programs, estimated at $4.3 million in 2023 and $19.1 million in 2024[92] Pipeline The pipeline segment operates 3,800 miles of transmission lines and storage facilities with 193 Bcf of working gas capacity - WBI Energy Transmission's regulated business operates approximately 3,800 miles of natural gas transmission and storage lines and is subject to FERC jurisdiction[95][96] - The segment's underground storage facilities have a certificated capacity of approximately 350 Bcf, including 193 Bcf of working gas capacity[99] - Affiliate Montana-Dakota is the largest firm customer, representing 22% of subscribed firm transportation contract demand in 2022[102] Construction Materials and Contracting The Knife River segment supplies construction aggregates and materials, holding 1.1 billion tons of proven and probable reserves Aggregate Production and Sites by State (as of Dec 31, 2022) | Production Area | Total Annual Aggregate Production (Tons in thousands) | Aggregate Sites (Owned/Leased) | | :--- | :--- | :--- | | | Crushed Stone | Sand & Gravel | Crushed Stone | Sand & Gravel | | Alaska | — | 1,041 | 0 / 0 | 1 / 0 | | California | 377 | 1,665 | 0 / 2 | 8 / 1 | | Hawaii | 1,470 | — | 0 / 5 | 0 / 0 | | Idaho | 5 | 2,339 | 0 / 1 | 6 / 3 | | Minnesota | 375 | 2,410 | 3 / 1 | 48 / 8 | | Montana | — | 3,043 | 0 / 0 | 11 / 2 | | North Dakota | — | 897 | 0 / 0 | 3 / 12 | | Oregon | 6,882 | 4,017 | 11 / 12 | 19 / 9 | | South Dakota | 1,878 | 2,226 | 2 / 0 | 1 / 3 | | Texas | 1,181 | 167 | 4 / 1 | 1 / 0 | | Wyoming | 1,166 | 1,043 | 2 / 6 | 1 / 4 | | Total | 13,334 | 18,848 | 22 / 28 | 99 / 42 | Total Mineral Reserves by Type and State (Tons in thousands, as of Dec 31, 2022) | Production Area | Total Crushed Stone Reserves | Total Sand & Gravel Reserves | Total Mineral Reserves | | :--- | :--- | :--- | :--- | | Alaska | — | 12,542 | 12,542 | | California | 89,913 | 19,070 | 108,983 | | Hawaii | 43,626 | — | 43,626 | | Idaho | 230 | 33,603 | 33,833 | | Minnesota | 15,853 | 59,184 | 75,037 | | Montana | — | 70,930 | 70,930 | | North Dakota | — | 22,378 | 22,378 | | Oregon | 375,263 | 131,686 | 506,949 | | South Dakota | 32,706 | 3,284 | 35,990 | | Texas | 70,142 | 8,368 | 78,510 | | Wyoming | 88,477 | 28,710 | 117,187 | | Total | 716,210 | 389,755 | 1,105,965 | - The average selling price per ton in 2022 was $16.12 for crushed stone and $10.53 for sand and gravel[123][127] Construction Services The construction services segment provides specialty contracting across the US, with one customer accounting for 15% of 2022 revenue - The segment provides a full spectrum of construction services, including electrical and mechanical contracting and transmission and distribution contracting[143] - The business operates in a highly competitive environment, with most work obtained through competitive bids or negotiated contracts[146] - In 2022, a single customer accounted for approximately 15% of the construction services segment's revenue[147] Risk Factors The company faces material risks from its planned business separation, economic volatility, aging infrastructure, and environmental regulations - The proposed separation of Knife River is subject to risks, including potential failure to complete the transaction and the risk that it may not qualify as a tax-free transaction, which could lead to substantial tax liabilities[152][153] - Economic volatility and unfavorable conditions can negatively affect demand for construction products and services, as well as impact customer growth and energy usage[169][170] - Significant portions of the company's natural gas pipelines and power generation facilities are aging, which increases risks of failure and higher maintenance costs[187] - Environmental laws and stakeholder actions related to climate change could increase operating costs, impact business plans, and require facility retirements[205][207][211] Legal Proceedings The company discloses environmental proceedings with potential monetary sanctions exceeding its $1.0 million threshold - The company has adopted a $1.0 million threshold for disclosing proceedings arising under environmental provisions[231] - Detailed information regarding legal proceedings is provided in Note 21 to the Consolidated Financial Statements[232] Mine Safety Disclosures Mine safety violation information required by the Dodd-Frank Act is provided in Exhibit 95 of the Form 10-K - Mine safety disclosures required by the Dodd-Frank Act are incorporated by reference from Exhibit 95 of this report[233] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock (NYSE: MDU) has a history of 85 consecutive years of dividends, with minor share repurchases in Q4 2022 - The company's common stock trades on the NYSE under the symbol 'MDU' and has paid uninterrupted dividends for 85 consecutive years[234][235] Issuer Purchases of Equity Securities (Q4 2022) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | October 1-31, 2022 | — | — | | November 1-30, 2022 | 40,800 | $30.64 | | December 1-31, 2022 | — | — | | Total | 40,800 | $30.64 | Management's Discussion and Analysis of Financial Condition and Results of Operations Consolidated net income decreased to $367.5 million in 2022, driven by inflationary pressures and strategic business reviews - Consolidated earnings decreased by $10.6 million in 2022, primarily due to inflationary pressures in the construction materials business and higher operating expenses in the natural gas distribution business[246][247] Consolidated Earnings by Segment (2020-2022) | Segment | 2022 Net Income (millions) | 2021 Net Income (millions) | 2020 Net Income (millions) | | :--- | :--- | :--- | :--- | | Electric | $57.1 | $51.9 | $55.6 | | Natural gas distribution | $45.2 | $51.6 | $44.0 | | Pipeline | $35.3 | $40.9 | $37.0 | | Construction materials and contracting | $116.2 | $129.8 | $147.3 | | Construction services | $124.8 | $109.4 | $109.7 | | Other | $(11.3) | $(5.9) | $(3.1) | | Income from continuing operations | $367.3 | $377.7 | $390.5 | Electric and Natural Gas Distribution The electric segment's net income rose on rate relief, while the natural gas segment's income fell due to higher operating costs Electric Segment Financial Summary | Metric (in millions) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Operating revenues | $377.1 | $349.6 | $332.0 | | Operating income | $79.7 | $66.3 | $63.4 | | Net income | $57.1 | $51.9 | $55.6 | Natural Gas Distribution Segment Financial Summary | Metric (in millions) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Operating revenues | $1,273.8 | $971.9 | $848.2 | | Operating income | $91.9 | $89.2 | $73.1 | | Net income | $45.2 | $51.6 | $44.0 | - The company expects the electric and natural gas distribution segments to grow rate base by approximately 6% to 7% annually over the next five years[272] Pipeline The pipeline segment's net income decreased to $35.3 million due to lower AFUDC and higher interest expense post-project completion Pipeline Segment Financial Summary | Metric (in millions) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Operating revenues | $155.6 | $142.6 | $143.9 | | Operating income | $55.5 | $48.1 | $49.4 | | Net income | $35.3 | $40.9 | $37.0 | - The North Bakken Expansion project was placed in service in February 2022, increasing transportation revenues by $16.4 million but also leading to higher depreciation and lower AFUDC[280][288] - Future growth projects include the Wahpeton, Line Section 27, and Grasslands South expansions, with expected completion in 2023 and 2024[297][298][299] Construction Materials and Contracting The segment's net income fell to $116.2 million as cost inflation for materials and labor offset a 14% revenue increase Construction Materials and Contracting Segment Financial Summary | Metric (in millions) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Operating revenues | $2,534.7 | $2,228.9 | $2,178.0 | | Gross profit | $360.9 | $347.0 | $370.6 | | Net income | $116.2 | $129.8 | $147.3 | - Gross profit was negatively impacted by higher operating costs, including a $59.3 million increase in asphalt oil costs and a $42.6 million increase in fuel costs[311] - Backlog increased to $935 million at December 31, 2022, compared to $708 million at the end of 2021[316] Construction Services The segment's net income grew 14% to $124.8 million, driven by strong revenue growth from commercial projects and a higher backlog Construction Services Segment Financial Summary | Metric (in millions) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Operating revenues | $2,699.2 | $2,051.6 | $2,095.7 | | Gross profit | $276.0 | $247.9 | $258.3 | | Net income | $124.8 | $109.4 | $109.7 | - Revenue growth was driven by electrical and mechanical commercial projects, with a $251.5 million increase in hospitality projects and a $121.8 million increase in data center projects[326] Construction Services Backlog (Year-End) | Business Line (in millions) | 2022 | 2021 | | :--- | :--- | :--- | | Electrical & mechanical | $1,861 | $1,109 | | Transmission & distribution | $270 | $276 | | Total | $2,131 | $1,385 | Liquidity and Capital Commitments The company maintains strong liquidity with $510 million in operating cash flow and projects $647 million in 2023 capital expenditures Summary of Cash Flows (in millions) | Activity | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash from Operating activities | $510.0 | $495.8 | $768.4 | | Net cash used in Investing activities | $(638.9) | $(885.9) | $(630.2) | | Net cash from (used in) Financing activities | $155.2 | $384.7 | $(145.1) | Capital Expenditures (Actual and Estimated, in millions) | Segment | 2022 (Actual) | 2023 (Est.) | 2024 (Est.) | 2025 (Est.) | | :--- | :--- | :--- | :--- | :--- | | Electric | $134 | $112 | $127 | $130 | | Natural gas distribution | $240 | $224 | $311 | $260 | | Pipeline | $62 | $145 | $117 | $127 | | Construction materials and contracting | $182 | $125 | $183 | $173 | | Construction services | $36 | $38 | $34 | $34 | | Other | $3 | $3 | $4 | $4 | | Total | $657 | $647 | $776 | $728 | - Total equity as a percent of total capitalization was 54% at December 31, 2022, compared to 55% at the end of 2021[360] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to commodity price and interest rate risks, managed through derivatives and financing strategies Long-Term Debt by Rate Type (as of Dec 31, 2022) | Rate Type | Total Amount ($ millions) | Weighted Average Interest Rate | | :--- | :--- | :--- | | Fixed rate | $2,302.8 | 4.4% | | Variable rate | $545.5 | 5.4% | - The company enters into commodity price derivative contracts to minimize price volatility for its customers, but these were not material as of year-end 2022[418] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements and the independent auditor's unqualified opinion - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022[423] - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the financial statements and on the effectiveness of internal control[425][426] Consolidated Statements of Income Consolidated Statements of Income (Years ended December 31) | (In thousands, except per share amounts) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total operating revenues | $6,973,864 | $5,680,733 | $5,532,750 | | Total operating expenses | $6,399,911 | $5,146,514 | $4,987,825 | | Operating income | $573,953 | $534,219 | $544,925 | | Income from continuing operations | $367,276 | $377,731 | $390,527 | | Net income | $367,489 | $378,131 | $390,205 | | Earnings per share - diluted | $1.81 | $1.87 | $1.95 | Consolidated Balance Sheets Consolidated Balance Sheets (As of December 31) | (In thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Assets | | | | Total current assets | $2,011,748 | $1,550,943 | | Net property, plant and equipment | $6,091,545 | $5,756,388 | | Goodwill | $763,500 | $765,386 | | Total assets | $9,660,781 | $8,910,435 | | Liabilities and Stockholders' Equity | | | | Total current liabilities | $1,479,603 | $1,092,240 | | Long-term debt | $2,763,394 | $2,593,847 | | Total noncurrent liabilities | $4,594,049 | $4,435,321 | | Total stockholders' equity | $3,587,129 | $3,382,874 | | Total liabilities and stockholders' equity | $9,660,781 | $8,910,435 | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (Years ended December 31) | (In thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $510,064 | $495,777 | $768,374 | | Net cash used in investing activities | $(638,881) | $(885,878) | $(630,243) | | Net cash provided by (used in) financing activities | $155,173 | $384,715 | $(145,043) | | Increase (decrease) in cash and cash equivalents | $26,356 | $(5,386) | $(6,912) | Notes to Consolidated Financial Statements The notes detail accounting policies, segment data, financial instruments, debt, and significant commitments Controls and Procedures Management concluded that disclosure controls and procedures were effective as of year-end 2022, with no material changes in the fourth quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[712] - No material changes were made to the company's internal control over financial reporting during the fourth quarter of 2022[713] Part III Part III incorporates information by reference from the company's 2023 Proxy Statement Directors, Executive Officers and Corporate Governance Information regarding directors, officers, and governance is incorporated by reference from the company's 2023 Proxy Statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's upcoming Proxy Statement[719] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2023 Proxy Statement - Information regarding executive compensation is incorporated by reference from the company's upcoming Proxy Statement[720] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Over 2.6 million securities remain available for future issuance under stockholder-approved equity compensation plans Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Securities to be Issued Upon Exercise | Securities Remaining for Future Issuance | | :--- | :--- | :--- | | Equity compensation plans approved by stockholders | 754,044 | 2,635,636 | | Equity compensation plans not approved by stockholders | N/A | N/A | | Total | 754,044 | 2,635,636 | Certain Relationships and Related Transactions, and Director Independence Information regarding related transactions and director independence is incorporated by reference from the 2023 Proxy Statement - Information regarding related transactions and director independence is incorporated by reference from the company's upcoming Proxy Statement[725] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the 2023 Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference from the company's upcoming Proxy Statement[726] Part IV Part IV contains the list of exhibits and financial statement schedules filed with the Form 10-K Exhibits, Financial Statement Schedules This section indexes financial statements, schedules, and exhibits, including condensed parent company financials - This section lists all financial statements, schedules, and exhibits, with Schedule I providing condensed financial information for the parent company[728][735]