MDU Resources Group Inc. reported third-quarter earnings on a generally accepted accounting principles (GAAP) basis of $147.9 million, or 73 cents per share, with adjusted earnings of $152.0 million, or 75 cents per share, compared to third quarter 2021 GAAP earnings of $139.3 million, or 68 cents per share.
For the nine months ended Sept. 30, MDU Resources on a GAAP basis earned $250.4 million, or $1.23 per share, with adjusted earnings of $254.5 million, or $1.25 per share, compared to GAAP earnings of $291.6 million, or $1.44 per share, for the same period in 2021.
MDU Resources announced on Aug. 4 its intent to separate its construction materials subsidiary, Knife River Corp., into a standalone publicly traded company, and for that reason is reporting adjusted earnings that exclude costs attributable to the separation transaction. Adjusted earnings are a non-GAAP measure.
“Our quarter over quarter results have improved, with very strong demand for construction materials and construction services as evidenced by record revenues and record backlogs at both our construction businesses. With the strong year-to-date results and growing backlog, we increased our annual revenue guidance range at construction services by an estimated $100 million. While we continue to experience and adapt to inflationary pressures across our businesses, we are gaining momentum on recovering from these impacts,” said David L. Goodin, president and CEO of MDU Resources. “Our utility and natural gas pipeline businesses continue to perform well, though higher interest costs impacted results.”
As the next step of MDU Resources’ strategic planning, the board of directors has unanimously determined the best way to optimize value would be to create two pure-play companies: a leading construction materials company and a pure-play regulated energy delivery company. Accordingly, the board has authorized management to commence a strategic review process for MDU Construction Services Group, Inc. with the objective of achieving the board’s goal of creating two pure-play public companies.
MDU Resources is working to complete the separation of Knife River, which, as previously announced, is expected to be effected as a tax-free spinoff to MDU Resources shareholders to be completed in 2023. Knife River is a top producer of construction aggregates in the United States.
“We believe these steps will unlock significant value for MDU shareholders,” Goodin said. “Having two pure-play companies would provide each company the opportunity to execute its individual business plans and achieve industry-leading performance.”
The construction materials business had all-time record quarterly revenues, up 17% from third quarter 2021, and earned $102.8 million, compared to $96.3 million in the third quarter of 2021. Inflationary impacts, particularly higher fuel, material and labor costs, were largely recovered in the quarter through price increases.
The business performed a significant portion of work that was delayed by unfavorable weather earlier in the year. Demand remains strong for construction materials and contracting work, with a record third quarter backlog of $895 million at Sept. 30, up 37% compared to $652 million at Sept. 30, 2021.
The construction services business had all-time record quarterly revenues, up 43% from third quarter 2021, and earned $28.0 million, compared to $23.1 million in the third quarter of 2021. Electrical and mechanical services workload remained strong during the quarter, particularly for hospitality, data center and renewable projects.
Utility-related transmission and distribution work also was strong during the quarter. Earnings were negatively impacted by adjustments of $7.5 million, after tax, to changes in estimates on certain construction contracts; earnings in third quarter 2021 also were negatively impacted by a $5.5 million, after tax, adjustment to estimates on a construction contract.
Demand remains strong for construction services work, with an all-time record backlog of $2.00 billion at Sept. 30, up 57% compared to $1.27 billion at Sept. 30, 2021. The company has increased 2022 revenue guidance by $100 million for construction services.
The electric and natural gas utility earned $3.5 million in the third quarter, compared to earnings of $5.2 million in the third quarter of 2021. The utility experienced higher interest expense from increased debt balances to fund capital expenditures related to system upgrades and growth, as well as higher average interest rates. An interim electric rate increase of 5.3% was implemented July 15 in North Dakota, pending a decision on a requested increase of 12.3% before the state’s Public Service Commission.
The Washington Utilities and Transportation Commission approved the utility’s request for an approximate 4% natural gas rate increase, which was effective Sept. 1. In the fourth quarter, the utility intends to file a request for an electric rate increase with the Montana Public Service Commission and a request for a natural gas rate increase with the Idaho Public Utilities Commission.
The pipeline business earned $9.8 million in the third quarter, compared to $10.6 million in the third quarter of 2021. The company experienced higher transportation revenues and record transportation volumes during the quarter, with the growth largely attributable to the North Bakken Expansion project that was placed in service earlier this year.
The revenue increase was partially offset by the absence of income recorded in 2021 as allowed by the Federal Energy Regulatory Commission for funds used during construction on the North Bakken Expansion project, higher depreciation and higher interest expense. The company continues work on a number of expansion projects across its system that are expected to add incremental natural gas transportation capacity of more than 300 million cu. ft. per day as they are completed in 2023-24, pending regulatory approvals.
Results at each of MDU Resources’ businesses have been negatively impacted on a non-cash basis by lower investment returns on nonqualified benefit plans. Collectively, the negative earnings variance in the third quarter compared to last year was approximately $2.5 million, or 1 cent per share.
For the nine months ended Sept. 30, the negative earnings variance from lower investment returns on nonqualified benefit plans is approximately $20.8 million, or 10 cents per share, compared to the same timeframe in 2021. The company attributes this change in investment returns to significant fluctuations in the financial markets.