MDU RESOURCES GROUP INC 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation The Company is Building a Strong America® by providing essential infrastructure and services through its regulated energy delivery and construction materials and services businesses. The Company and its employees work hard to keep the economy of America moving with the products and services provided, which include powering, heating and connecting homes, factories, offices and stores; and building roads, highways, data infrastructure and airports. The Company's two-platform business model, regulated energy delivery and construction materials and services, are each comprised of different operating segments. Most of these segments experience seasonality related to the industries in which they operate. The two-platform approach helps balance this seasonality and the risks associated with each type of industry. The Company is authorized to conduct business in nearly every state and during peak construction season has employed over 16,000 employees. The Company’s organic investments are strong drivers of high-quality earnings and continue to be an important part of the Company’s growth. Management believes the Company is well positioned in the industries and markets in which it operates. The Company continues to effectively execute its strategy while managing the ongoing effects of the COVID-19 pandemic. Since early 2020, the Company has maintained its business continuity plans as well as a task force to monitor developments related to the pandemic allowing the Company to continue to provide safe and reliable services. Most of the Company's products and services are considered essential to its country and communities and, as a result, operations have generally continued throughout the pandemic. Certain of the Company's supply vendors are facing production and staffing challenges as they work to achieve production capacity and lead times consistent with pre-pandemic levels. Coupled with other challenges of the pandemic, these vendors are also experiencing strong demand from the residential construction market, some industrial segments and some utility infrastructure investments. In addition, freight markets continue to have challenges with driver shortages; strong demand for consumer goods; extended lead times; and costs for vehicles, driver retention and recruitment. The Company has implemented measures to proactively order supplies and work with additional suppliers to ensure work continues without delays; however, the Company has experienced some delays on delivery of certain materials as well as cost pressures from supply chain disruptions and commodity price inflation. The situation surrounding COVID-19 and the potential impacts on the Company and the economy remain fluid. A number of factors could directly impact the Company and the economy, including a widespread resurgence in COVID-19 infections, whether due to the spread of variants of the virus or otherwise; the rate of vaccinations; vaccine mandates; labor constraints; the strength of the global supply chain; and the rate in which governments are re-opening businesses or, in certain jurisdictions, reversing re-opening decisions. Due to the uncertainty of the economic outlook resulting from the COVID-19 pandemic, the Company continues to monitor the situation closely. Although there have been logistical and other challenges as a result of COVID-19, there were no material adverse impacts on the Company's results of operations for the years ended December 31, 2021 or 2020. The Company will continue to adjust its business in response to the pandemic while positioning for potential opportunities to enhance its competitive position. For more information specific to each of the Company's business segments, see the following discussions in each business segment's Outlook section. For more information on the possible impacts, see Item 1A - Risk Factors. MDU Resources Group, Inc. Form 10-K 33 Index Part II Consolidated Earnings Overview The following table summarizes the contribution to the consolidated income by each of the Company's business segments. Years ended December 31, 2021 2020 2019 (In millions, except per share amounts) Electric $ 51.9 $ 55.6 $ 54.8 Natural gas distribution 51.6 44.0 39.5 Pipeline 40.9 37.0 29.6 Construction materials and contracting 129.8 147.3 120.4 Construction services 109.4 109.7 93.0 Other (5.9) (3.1) (2.1) Income from continuing operations 377.7 390.5 335.2 Income (loss) from discontinued operations, net of tax .4 (.3) .3 Net income $ 378.1 $ 390.2 $ 335.5 Earnings per share - basic: Income from continuing operations $ 1.87 $ 1.95 $ 1.69 Discontinued operations, net of tax — — — Earnings per share - basic $ 1.87 $ 1.95 $ 1.69 Earnings per share - diluted: Income from continuing operations $ 1.87 $ 1.95 $ 1.69 Discontinued operations, net of tax — — — Earnings per share - diluted $ 1.87 $ 1.95 $ 1.69 2021 compared to 2020 The Company's consolidated earnings decreased $12.1 million. Negatively impacting the Company's earnings was a decrease in gross margin across most product lines at the construction materials and contracting business resulting from labor constraints; increased material costs, including asphalt oil and fuel; higher equipment, repair and maintenance costs; and less available paving work in certain regions. The decrease was partially offset by higher AFUDC for the construction of the North Bakken Expansion project and higher earnings due to increased natural gas transportation volumes at the pipeline business. Also positively impacting earnings were higher adjusted gross margins at the electric and natural gas businesses, largely a result of approved rate relief in certain jurisdictions, partially offset by higher operations and maintenance expenses. 2020 compared to 2019 The Company's consolidated earnings increased $54.7 million. The Company's earnings were positively impacted by increased earnings across all of the Company's businesses in 2020. The construction materials and contracting business experienced an increase in gross margin, primarily resulting from favorable weather conditions and higher realized materials margins on asphalt and asphalt-related products and ready-mix concrete, as well as most other product lines. The construction services business also experienced an increase in gross margin as a result of higher specialty contracting workloads, partially due to the businesses acquired, as well as hospitality projects, high-tech projects and natural disaster recovery work. The pipeline business experienced increased transportation volumes and revenues, largely related to organic growth projects, as well as higher storage-related revenues as a result of stronger demand for storage services. In addition, approved rate recovery positively impacted earnings at the electric and natural gas distribution businesses. A discussion of key financial data from the Company's business segments follows. Business Segment Financial and Operating Data Following are key financial and operating data for each of the Company's business segments. Also included are highlights on key growth strategies, projections and certain assumptions for the Company and its subsidiaries and other matters of the Company's business segments. Many of these highlighted points are "forward-looking statements." For more information, see Part I - Forward-Looking Statements. There is no assurance that the Company's projections, including estimates for growth and changes in earnings, will in fact be achieved. Please refer to assumptions contained in this section, as well as the various important factors listed in Item 1A - Risk Factors. Changes in such assumptions and factors could cause actual future results to differ materially from the Company's growth and earnings projections. For information pertinent to various commitments and contingencies, see Item 8 - Notes to Consolidated Financial Statements. For a summary of the Company's business segments, see Item 8 - Note 17. 34 MDU Resources Group, Inc. Form 10-K Index Part II Electric and Natural Gas Distribution Strategy and challenges The electric and natural gas distribution segments provide electric and natural gas distribution services to customers, as discussed in Items 1 and 2 - Business Properties. Both segments strive to be top performing utility companies measured by integrity, employee safety and satisfaction, customer service and shareholder return, while providing safe, environmentally responsible, reliable and competitively priced energy and related services to customers. The Company is focused on cultivating organic growth while managing operating costs and monitoring opportunities for these segments to retain, grow and expand their customer base through extensions of existing operations, including building and upgrading electric generation, transmission and distribution, and natural gas systems, and through selected acquisitions of companies and properties with similar operating and growth objectives at prices that will provide stable cash flows and an opportunity to earn a competitive return on investment. The continued efforts to create operational improvements and efficiencies across both segments promotes the Company's business integration strategy. The primary factors that impact the results of these segments are the ability to earn authorized rates of return, the cost of natural gas, cost of electric fuel and purchased power, weather, climate change initiatives, competitive factors in the energy industry, population growth and economic conditions in the segments' service areas. The electric and natural gas distribution segments are subject to extensive regulation in the jurisdictions where they conduct operations with respect to costs, timely recovery of investments and permitted returns on investment. The Company is focused on modernizing utility infrastructure to meet the varied energy needs of both its customers and communities while ensuring the delivery of safe, environmentally responsible, reliable and affordable energy. The segments continue to invest in facility upgrades to be in compliance with existing and known future regulations. To assist in the reduction of regulatory lag in obtaining revenue increases to align with increased investments, tracking mechanisms have been implemented in certain jurisdictions, as further discussed in Items 1 and 2 - Business Properties and Item 8 - Note 20. The segments are also subject to extensive regulation including certain operational and environmental compliance, cybersecurity, permit terms and system integrity. The natural gas segment recently implemented procedure changes issued by PHSMA that were effective July 1, 2021. Both segments are faced with the ongoing need to actively evaluate cybersecurity processes and procedures related to its transmission and distribution systems for opportunities to further strengthen its cybersecurity protections. Implementation of enhancements and additional requirements is ongoing. To date, many states have enacted and others are considering, mandatory clean energy standards requiring utilities to meet certain thresholds of renewable and/or carbon-free energy supply. The current presidential administration has made climate change a focus, including consideration for legislation on clean energy standards and GHG emission, and the Company expects that to continue. Over the long-term, the Company expects overall electric demand to be positively impacted by increased electrification trends, including electric vehicle adoption, as a means to address economy-wide carbon emission concerns and changing customer conservation patterns. These initiatives could result in increased costs to produce electricity and procure natural gas. To date, the impact of these initiatives on the Company is unknown. The Company will continue to monitor the progress of these initiatives and assess the potential impacts they may have on its stakeholders, business processes, results of operations, cash flows and disclosures. Revenues are impacted by both customer growth and usage, the latter of which is primarily impacted by weather, as well as impacts associated with commercial and industrial slow-downs, including economic recessions, and energy efficiencies. Very cold winters increase demand for natural gas and to a lesser extent, electricity, while warmer than normal summers increase demand for electricity, especially among residential and commercial customers. Average consumption among both electric and natural gas customers has tended to decline as more efficient appliances and furnaces are installed, and as the Company has implemented conservation programs. Natural gas weather normalization and decoupling mechanisms in certain jurisdictions have been implemented to largely mitigate the effect that would otherwise be caused by variations in volumes sold to these customers due to weather and changing consumption patterns on the Company's distribution margins, as further discussed in Items 1 and 2 - Business Properties. In February 2021, a prolonged period of unseasonably cold temperatures in the central United States significantly increased the demand for electric and natural gas services and contributed to increased market prices. The Company's transmission settlement process with SPP helped offset the increased energy costs to electric customers during the cold-weather event. Further, in some jurisdictions the Company utilized natural gas in storage to lessen the impact of high natural gas costs. Overall, Montana-Dakota and Great Plains incurred approximately $44.0 million in increased natural gas costs in order to maintain services for its customers. These extraordinary natural gas costs were recorded as regulatory assets as they are expected to be recovered from customers. Montana-Dakota and Great Plains have received approval for the recovery of purchased gas adjustments related to the cold-weather event in all jurisdictions impacted, including out-of-cycle purchased gas adjustment requests in most jurisdictions. The approval in Minnesota is subject to a prudence review by the MNPUC, which is pending, with an order to be issued on or before August 29, 2022. For a discussion of the Company's most recent cases by jurisdiction, see Item 8 - Note 20. The electric and natural gas distribution segments continue to face increased lead times on delivery of certain raw materials and equipment used in electric transmission and distribution system and natural gas pipeline projects. Long lead times are attributable to increased demand for steel products from pipeline companies as they continue pipeline system safety and integrity replacement projects driven by PHMSA regulations, as well as delays in the manufacturing of electrical equipment as a result of the COVID-19 pandemic, including delays in shipping times and issuance of permits for large and heavy loads. The Company did not experience significant impacts from these delays for the year ended December 31, 2021. MDU Resources Group, Inc. Form 10-K 35 Index Part II However, the Company continues to monitor the material lead times and is working with manufacturers to proactively order such materials and working with additional suppliers to help mitigate the risk of any delays. The ability to grow through acquisitions is subject to significant competition and acquisition premiums. In addition, the ability of the segments to grow their service territory and customer base is affected by regulatory constraints, the economic environment of the markets served and competition from other energy providers and fuels. The construction of new electric generating facilities, transmission lines and other service facilities is subject to increasing costs and lead times, extensive permitting procedures, and federal and state legislative and regulatory initiatives, which may necessitate increases in electric energy prices. Earnings overview - The following information summarizes the performance of the electric segment. 2021 vs. 2020 2020 vs. 2019 Years ended December 31, 2021 2020 2019 Variance Variance (In millions) Operating revenues $ 349.6 $ 332.0 $ 351.7 5.3 % (5.6) % Electric fuel and purchased power 74.1 66.9 86.6 10.8 % (22.7) % Taxes, other than income .8 .6 .6 33.3 % — % Adjusted gross margin 274.7 264.5 264.5 3.9 % — % Operating expenses: Operation and maintenance 124.9 121.3 125.7 3.0 % (3.5) % Depreciation, depletion and amortization 66.8 63.0 58.7 6.0 % 7.3 % Taxes, other than income 16.7 16.8 16.1 (.6) % 4.3 % Total operating expenses 208.4 201.1 200.5 3.6 % .3 % Operating income 66.3 63.4 64.0 4.6 % (.9) % Other income 4.6 7.2 3.4 (36.1) % 111.8 % Interest expense 26.7 26.7 25.3 — % 5.5 % Income before income taxes 44.2 43.9 42.1 .7 % 4.3 % Income tax benefit (7.7) (11.7) (12.7) (34.2) % (7.9) % Net income $ 51.9 $ 55.6 $ 54.8 (6.7) % 1.5 % Adjusted gross margin is a non-GAAP financial measure. For additional information and reconciliation of the non-GAAP adjusted gross margin attributable to the electric segment, see the Non-GAAP Financial Measures section later in this Item. Operating statistics 2021 2020 2019 Revenues (millions) Retail sales: Residential $ 123.0 $ 122.6 $ 125.6 Commercial 133.3 131.2 142.1 Industrial 40.5 36.7 37.8 Other 6.8 6.6 7.4 303.6 297.1 312.9 Transportation and other 46.0 34.9 38.8 $ 349.6 $ 332.0 $ 351.7 Retail sales (million kWh) Residential 1,164.8 1,170.9 1,177.9 Commercial 1,433.0 1,419.4 1,499.9 Industrial 589.4 532.1 549.4 Other 84.4 82.1 87.1 3,271.6 3,204.5 3,314.3 Average cost of electric fuel and purchased power per kWh $ .021 $ .019 $ .023 2021 compared to 2020 Electric earnings decreased $3.7 million as a result of: • Adjusted gross margin increased $10.2 million attributable to: ◦ Higher transmission revenues of $3.3 million. ◦ Higher transmission interconnect upgrades of $2.4 million. ◦ Higher MISO revenue of $2.0 million. ◦ Higher demand revenues of $1.5 million. 36 MDU Resources Group, Inc. Form 10-K Index Part II ◦ Increased retail sales volumes of 2.1 percent, largely as a result of increased industrial and commercial sales volumes, offset in part by lower residential sales volumes, as the impacts of the COVID-19 pandemic began to reverse and businesses reopened. • Operation and maintenance increased $3.6 million. ◦ Primarily the result of: • Higher planned maintenance outage costs of $2.1 million at Big Stone Station and $800,000 higher maintenance fees at Thunder Spirit. • Higher other miscellaneous expenses. ◦ Partially offset by lower payroll-related costs of $700,000, which includes lower employee incentive accruals, offset in part by higher health care costs. • Depreciation, depletion and amortization increased $3.8 million largely resulting from: ◦ Increased property, plant and equipment balances, primarily related to transmission projects placed in service. ◦ Increased amortization of plant retirement and closure costs of $1.7 million recovered in operating revenues, as discussed in Item 8 - Note 6. • Taxes, other than income was comparable to the same period in the prior year. • Other income decreased $2.6 million. ◦ Primarily due to: • The absence of an out-of-period adjustment of $2.5 million in 2020 as a result of previously overstated benefit plan expenses. • Lower returns on certain of the Company's benefit plan investments of $1.3 million. ◦ Partially offset by increased interest income associated with higher contributions in aid of construction. • Interest expense was comparable to the same period in the prior year. • Income tax benefit decreased $4.0 million largely resulting from: ◦ Lower production tax credits of $2.1 million related to the expiration of the 10-year credit-qualifying period on certain facilities and less wind generation. ◦ Lower excess deferred tax amortization. 2020 compared to 2019 Electric earnings increased $800,000 as a result of: • Adjusted gross margin in 2020 was comparable to that of 2019. ◦ Positively impacted by higher rates of $2.8 million, including approved rate relief resulting in $2.0 million additional revenue. ◦ Offset by lower retail sales volumes of 3.3 percent across all customer classes due to warmer weather and slow-downs as a result of the COVID-19 pandemic. • Operation and maintenance expense decreased $4.4 million. ◦ Largely due to: • Lower generation station expenses of $3.5 million. • Lower payroll and other employee-related costs of approximately $1.5 million. ◦ Partially offset by increased bad debt expense of $500,000 as a result of the COVID-19 pandemic, as discussed later. • Depreciation, depletion and amortization increased $4.3 million largely from: ◦ Increased asset base driven by capital expenditures, which include transmission projects. ◦ Higher depreciation rates implemented from a Montana rate case of $1.2 million. • Taxes, other than income increased $700,000 from higher property taxes in certain jurisdictions. • Other income increased $3.8 million largely attributable to: ◦ An out-of-period adjustment of $2.5 million in the fourth quarter of 2020 as a result of previously overstated benefit plan expenses. ◦ The absence of the write-down of a non-utility investment in the second quarter of 2019 for $1.2 million. ◦ Lower 2020 pension expense. • Interest expense increased $1.4 million driven by higher short-term debt balances. • Income tax benefit decreased $1.0 million, largely due to higher income before income taxes. MDU Resources Group, Inc. Form 10-K 37 Index Part II Earnings overview - The following information summarizes the performance of the natural gas distribution segment. 2021 vs. 2020 2020 vs. 2019 Years ended December 31, 2021 2020 2019 Variance Variance (In millions) Operating revenues $ 971.9 $ 848.2 $ 865.2 14.6 % (2.0) % Purchased natural gas sold 542.0 448.1 477.6 21.0 % (6.2) % Taxes, other than income 34.7 32.4 30.3 7.1 % 6.9 % Adjusted gross margin 395.2 367.7 357.3 7.5 % 2.9 % Operating expenses: Operation and maintenance 194.1 185.4 185.0 4.7 % .2 % Depreciation, depletion and amortization 86.0 84.6 79.6 1.7 % 6.3 % Taxes, other than income 25.9 24.6 23.5 5.3 % 4.7 % Total operating expenses 306.0 294.6 288.1 3.9 % 2.3 % Operating income 89.2 73.1 69.2 22.0 % 5.6 % Other income 8.1 13.5 7.2 (40.0) % 87.5 % Interest expense 37.3 36.8 35.5 1.4 % 3.7 % Income before income taxes 60.0 49.8 40.9 20.5 % 21.8 % Income tax expense 8.4 5.8 1.4 44.8 % NM Net income $ 51.6 $ 44.0 $ 39.5 17.3 % 11.4 % * NM - not meaningful Adjusted gross margin is a non-GAAP financial measure. For additional information and reconciliation of the non-GAAP adjusted gross margin attributable to the natural gas distribution segment, see the Non-GAAP Financial Measures section later in this Item. Operating statistics 2021 2020 2019 Revenues (millions) Retail sales: Residential $ 548.1 $ 480.5 $ 479.7 Commercial 330.4 281.2 293.2 Industrial 31.1 26.2 26.5 909.6 787.9 799.4 Transportation and other 62.3 60.3 65.8 $ 971.9 $ 848.2 $ 865.2 Volumes (MMdk) Retail sales: Residential 65.6 65.5 69.4 Commercial 44.7 44.2 49.1 Industrial 5.0 4.8 5.2 115.3 114.5 123.7 Transportation sales: Commercial 1.9 2.0 2.2 Industrial 172.5 158.0 163.9 174.4 160.0 166.1 Total throughput 289.7 274.5 289.8 Average cost of natural gas per dk $ 4.70 $ 3.91 $ 3.86 2021 compared to 2020 : Natural gas distribution earnings increased $7.6 million as a result of: • Adjusted gross margin increased $27.5 million. ◦ Largely as a result of: • Approved rate relief in certain jurisdictions of $15.9 million. • Increased retail sales volumes of 0.7 percent across all customer classes, including the benefit of weather normalization and decoupling mechanisms in certain jurisdictions. • Increased transportation volumes of 9 percent, primarily to electric generation customers. • Higher non-regulated project revenues of $1.7 million. • Increased basic service charges due to customer growth and increased per unit average rates of $1.5 million each. 38 MDU Resources Group, Inc. Form 10-K Index Part II • Operation and maintenance increased $8.7 million. ◦ Primarily due to: • Higher payroll-related costs of $4.3 million, largely related to health care costs and straight-time payroll. • Decreased credits of $2.4 million for costs associated with the installation of meters partially from delaying meter replacements for safety measures implemented as a result of the COVID-19 pandemic. • Higher expenses for materials, new software, insurance and vehicle fuel. ◦ Partially offset by: • The absence of the write-off of an abandoned project in the third quarter of 2020 for $1.2 million. • Decreased bad debt expense of $1.0 million as the impacts of the COVID-19 pandemic began to subside. • Depreciation, depletion and amortization increased $1.4 million. ◦ Largely from increased property, plant and equipment balances from growth and replacement projects placed in service. ◦ Partially offset by decreased depreciation rates in certain jurisdictions of $4.0 million. • Taxes, other than income increased $1.3 million resulting from: ◦ Higher property taxes in certain jurisdictions of $700,000. ◦ Higher payroll taxes driven by increased payroll-related costs. • Other income decreased $5.4 million primarily related to: ◦ The absence of an out-of-period adjustment of $4.4 million in 2020 as a result of previously overstated benefit plan expenses. ◦ Decreased interest income related to the recovery of purchased gas cost adjustment balances in certain jurisdictions. • Interest expense increased $500,000, primarily from lower AFUDC borrowed. • Income tax expense increased $2.6 million due to higher income before income taxes. 2020 compared to 2019 Natural gas distribution earnings increased $4.5 million as a result of: • Adjusted gross margin increased $10.4 million . ◦ Largely the result of: • Approved rate recovery of $6.8 million in certain jurisdictions. • Higher basic service charges of $2.1 million due to customer growth of 2 percent. • Increased property tax tracker revenue of $1.7 million, which offsets the property tax expense below. ◦ Slightly offset by decreased retail sales volumes of 7.4 percent across all customer classes due to warmer weather and slow-downs as a result of the COVID-19 pandemic, largely offset by weather normalization and decoupling mechanisms in certain jurisdictions. • Operation and maintenance increased $400,000. ◦ Primarily related to: • Increased contract services, largely $1.2 million for the write-off of an abandoned project in the third quarter of 2020. • Increased software expenses. ◦ Partially offset by lower employee-related costs of $1.6 million as a result of the COVID-19 pandemic. • Depreciation, depletion and amortization increased $5.0 million , primarily from an increase in asset base driven by capital expenditures, which include system safety and reliability enhancements and other growth projects. • Taxes, other than income increased $1.1 million due to: ◦ Higher property taxes in certain jurisdictions of $1.7 million. ◦ Partially offset by lower payroll taxes. • Other income increased $6.3 million. ◦ Largely driven by: • An out-of-period adjustment of $4.4 million in the fourth quarter of 2020 as a result of previously overstated benefit plan expenses. • Lower 2020 benefit plan expenses of approximately $2.2 million. • The absence of the write-down of a non-utility investment of approximately $800,000 in the second quarter of 2019. ◦ Partially offset by a decrease in interest income of $1.5 million related to the recovery of purchased gas cost adjustment balances. • Interest expense increased $1.3 million, primarily attributable to increased long-term debt balances, partially offset by lower short-term borrowings. • Income tax expense increased $4.4 million as a result of: ◦ Higher income before income taxes. ◦ Permanent tax adjustments. MDU Resources Group, Inc. Form 10-K 39 Index Part II Outlook The Company continues to assess the impacts of the COVID-19 pandemic on its operations and is committed to providing safe and reliable service while ensuring the health and safety of its employees, customers and the communities in which it operates. In 2020, the Company instituted certain measures to help protect its employees from exposure to COVID-19 and to curb potential spread of the virus in customer homes and facilities, including suspension of disconnects due to nonpayment of bills, and continued to adjust and reduce these measures in 2021. In April 2020, the Company waived late payment fees to help customers experiencing financial hardships. As of October 2021, the Company had reinstated disconnects in all states of operation and late payment fees in a majority of states. As a consequence of the suspended disconnects and waived late fees, the Company's cash flows and collection of receivables have been affected but impacts have not been material. The Company experienced some impacts to its commercial and industrial electric and natural gas loads associated with reduced economic activity due to the COVID-19 pandemic and oil price impacts, as further discussed below, which began to transition back to historic levels in 2021. The Company filed requests for the use of deferred accounting for costs related to the COVID-19 pandemic in all of the jurisdictions in which it operates and has since withdrawn its applications in three of those jurisdictions. The Company has deferred an immaterial amount of costs related to the pandemic to date. The Company expects these segments will grow rate base by approximately 5 percent annually over the next five years on a compound basis. Operations are spread across eight states where the Company expects customer growth to be higher than the national average. In 2021 and 2020, these segments experienced retail customer growth of approximately 1.7 percent and 1.8 percent, respectively, and the Company expects customer growth to continue to average 1 percent to 2 percent per year. This customer growth, along with system upgrades and replacements needed to supply safe and reliable service, will require investments in new and replacement electric and natural gas systems. On July 1, 2021, the Company filed in North Dakota, and provided a courtesy copy to South Dakota, an integrated resource plan for the electric segment, which included the Company's plans for future resources to meet customer demand. This integrated resource plan was filed in Montana on September 15, 2021. These segments are exposed to energy price volatility and may be impacted by changes in oil and natural gas exploration and production activity. Rate schedules in the jurisdictions in which the Company's natural gas distribution segment operates contain clauses that permit the Company to file for rate adjustments for changes in the cost of purchased gas. Although changes in the price of natural gas are passed through to customers and have minimal impact on the Company's earnings, the natural gas distribution segment's customers benefit from lower natural gas prices through the Company's utilization of storage and fixed price contracts. During the third and fourth quarters of 2021, the Company experienced increased natural gas prices and expects this trend to continue through the winter due to the increase in demand outpacing the supply. The Company will continue to monitor natural gas prices, as well as oil and natural gas production levels. In February 2019, the Company announced the retirement of three aging coal-fired electric generating units, resulting from the Company's analysis showing that the plants are no longer expected to be cost competitive for customers. The Company ceased operations on March 31, 2021, of Unit 1 at Lewis & Clark Station in Sidney, Montana, and commenced decommissioning in July 2021. Units 1 and 2 at Heskett Station near Mandan, North Dakota, are being retired during the first quarter of 2022. In addition, during the first half of 2022, the Company will begin construction of Heskett Unit 4, an 88-MW simple-cycle natural gas-fired combustion turbine peaking unit at the existing Heskett Station near Mandan, North Dakota. The Company is one of four owners of Coyote Station and cannot make a unilateral decision on the plant's future; therefore, the Company could be negatively impacted by decisions of the other owners. State implementation of pollution control plans to improve visibility at Class I areas, such as national parks, under the EPA's Regional Haze Rule could require the owners of Coyote Station to incur significant new costs. If the owners decide to incur such costs, the costs could, dependent on determination by state regulatory commissions on approval to recover such costs from customers, negatively impact the Company's results of operations, financial position and cash flows. The NDDEQ submitted a draft state implementation plan to the EPA and federal land managers of the National Park Service, the United States Fish and Wildlife Service and the United States Forest Service for consultation, and the federal land managers have submitted comments back to the NDDEQ for review. North Dakota determined it is not reasonable to require controls during this planning period. The emissions modeling conducted for the combined western state agencies affected by the Regional Haze Rule was delayed and has subsequently delayed the NDDEQ state implementation plan process. Therefore, the NDDEQ's state implementation plan, which was due to the EPA by July 2021, is anticipated to be submitted to EPA in the first half of 2022. Additionally, in September 2021, Otter Tail Power Company filed its 2022 Integrated Resource Plan in Minnesota and North Dakota which included its intent to start the process of withdrawal from its 35 percent ownership interest in Coyote Station with an anticipated exit from the plant by December 31, 2028. The joint owners continue to collaborate in analyzing data and weighing decisions that impact the plant and each company's employees, customers and communities served. The Company continues to monitor legislation related to clean energy standards that may impact its segments. The current presidential administration is considering changes to the federal Clean Air Act, some of which were amended by the previous presidential administration. The content and impacts of the changes under consideration are uncertain and the Company continues to monitor for potential actions by the EPA. In Oregon, the Climate Protection Program Rule was approved in December 2021, which requires natural gas companies to reduce GHG emissions 50 percent below the baseline by 2035 and 90 percent below the baseline by 2050, which may be achieved through surrendering emissions allowances, investing in additional customer conservation and energy efficiency programs, purchasing community climate investment credits, and purchasing low carbon fuels such as renewable natural gas. The Company expects the compliance costs for these regulations to be recovered through customer rates. In Washington, the Climate Commitment Act signed into law in May 2021 requires natural gas distribution companies to reduce overall GHG emissions 45 percent below 1990 levels by 2030, 70 percent below 1990 levels by 2040 and 95 percent below 1990 levels by 2050, which may be achieved through increased energy efficiency and conservation measures, purchased emission allowances and offsets, and purchases of low carbon fuels. The Washington DOE has begun the Climate Commitment Program rule-making process and is expected to publish a final rule in the 40 MDU Resources Group, Inc. Form 10-K Index Part II fall of 2022. The Company has begun reviewing compliance options and expects the compliance costs for these regulations will be recovered through customer rates. The Company continues to be focused on the regulatory recovery of its investments by filing for rate adjustments to seek recovery of operating costs and capital investments, as well as reasonable returns as allowed by regulators. The Company's most recent cases by jurisdiction are discussed in Item 8 - Note 20. Pipeline Strategy and challenges The pipeline segment provides natural gas transportation, underground storage and energy-related services, as discussed in Items 1 and 2 - Business Properties. The segment focuses on utilizing its extensive expertise in the design, construction and operation of energy infrastructure and related services to increase market share and profitability through optimization of existing operations, organic growth and investments in energy-related assets within or in close proximity to its current operating areas. The segment focuses on the continual safety and reliability of its systems, which entails building, operating and maintaining safe natural gas pipelines and facilities. The segment continues to evaluate growth opportunities including the expansion of natural gas facilities; incremental pipeline projects; and expansion of energy-related services leveraging on its core competencies. In support of this strategy, the following were organic growth projects for the Company in 2021 and 2020: • The North Bakken Expansion project in western North Dakota, construction began in July of 2021 and was placed in service in February of 2022. The project has capacity to transport 250 MMcf of natural gas per day and can be increased to 625 MMcf per day with additional compression. • Phase II of the Line Section 22 Expansion project in the Billings, Montana, area was placed in service in September of 2020. The completion of Phase I and II increased capacity by 22.5 MMcf per day. • The Demicks Lake Expansion project in McKenzie County, North Dakota, was placed in service in February of 2020 and increased capacity by 175 MMcf per day. In April 2020 and November 2020, the Company completed the sales of its regulated and non-regulated natural gas gathering assets, respectively. With the completion of these sales, the Company has exited the natural gas gathering business. The segment is exposed to energy price volatility which is impacted by the fluctuations in pricing, production and basis differentials of the energy market's commodities. Legislative and regulatory initiatives on increased pipeline safety regulations and environmental matters such as the reduction of methane emissions could also impact the price and demand for natural gas. The pipeline segment is also subject to extensive regulation including certain operational and environmental compliance, cybersecurity, permit terms and system integrity. The Company continues to actively evaluate cybersecurity processes and procedures, including changes in the industry's cybersecurity regulations, for opportunities to further strengthen its cybersecurity protections. Implementation of enhancements and additional requirements is ongoing. The pipeline segment recently implemented procedural changes for additional regulations to strengthen the safety of natural gas transmission and storage facilities and hazardous liquid pipelines issued by PHSMA that were effective July 1, 2021. The segment reviews and secures existing permits and easements, as well as new permits and easements as necessary, to meet current demand and future growth opportunities on an ongoing basis. Groups opposing natural gas pipelines could also cause negative impacts on the segment with increased costs, potential delays to project completion or cancellation of prospective projects. The segment regularly experiences extended lead times on raw materials that are critical to the segment's construction and maintenance work. Long lead times on materials could delay maintenance work and construction projects potentially causing lost revenues and/or increased costs. Current national supply chain challenges did not have significant impacts to the procurement of raw materials for the year ended December 31, 2021. However, the Company is actively monitoring the situation and working with its manufacturers and suppliers to help mitigate the risk of delays. The segment focuses on the recruitment and retention of a skilled workforce to remain competitive and provide services to its customers. The industry in which it operates relies on a skilled workforce to construct energy infrastructure and operate existing infrastructure in a safe manner. A shortage of skilled personnel can create a competitive labor market which could increase costs incurred by the segment. Competition from other pipeline companies can also have a negative impact on the segment. MDU Resources Group, Inc. Form 10-K 41 Index Part II Earnings overview - The following information summarizes the performance of the pipeline segment. 2021 vs. 2020 2020 vs. 2019 Years ended December 31, 2021 2020 2019 Variance Variance (In millions) Operating revenues $ 142.6 $ 143.9 $ 140.4 (.9) % 2.5 % Operating expenses: Operation and maintenance 61.3 59.9 63.1 2.3 % (5.1) % Depreciation, depletion and amortization 20.5 21.7 21.2 (5.5) % 2.4 % Taxes, other than income 12.7 12.9 13.3 (1.6) % (3.0) % Total operating expenses 94.5 94.5 97.6 — % (3.2) % Operating income 48.1 49.4 42.8 (2.6) % 15.4 % Other income 9.4 2.9 1.2 224.1 % 141.7 % Interest expense 7.0 7.6 7.2 (7.9) % 5.6 % Income before income taxes 50.5 44.7 36.8 13.0 % 21.5 % Income tax expense 9.6 7.7 7.2 24.7 % 6.9 % Net income $ 40.9 $ 37.0 $ 29.6 10.5 % 25.0 % Operating statistics 2021 2020 2019 Transportation volumes (MMdk) 471.1 438.6 429.7 Natural gas gathering volumes (MMdk) — 8.6 13.9 Customer natural gas storage balance (MMdk): Beginning of period 25.5 16.2 13.9 Net injection (withdrawal) (2.5) 9.3 2.3 End of period 23.0 25.5 16.2 2021 compared to 2020 Pipeline earnings increased $3.9 million as a result of: • Revenues decreased $1.3 million. ◦ Primarily decreased gathering revenues of $4.9 million due to the sale of the Company's natural gas gathering assets in 2020. ◦ Partially offset by: • Increased transportation volumes and demand revenue of $1.8 million largely from organic growth projects, as previously discussed, and short-term discounted contracts. • Increased non-regulated project revenues of $1.4 million. • Operation and maintenance increased $1.4 million due to: ◦ The absence of the gain on sale of the Company's natural gas gathering assets of $1.5 million in 2020, offset partially by lower operating expenses related to the natural gas gathering assets. ◦ Partially offset by lower payroll-related costs. • Depreciation, depletion and amortization decreased $1.2 million. ◦ Primarily related to lower expense of $1.6 million due to the sale of the Company's natural gas gathering assets in 2020, as previously discussed. ◦ Slightly offset by increased property, plant and equipment balances related to organic growth projects. • Taxes, other than income was comparable to the same period in the prior year. • Other income increased $6.5 million. ◦ Primarily due to: • Higher AFUDC of $7.3 million for the construction of the North Bakken Expansion project. • The absence of the write-off of unrecovered gas costs and project expenses of $1.2 million in 2020. ◦ Partially offset by: • The absence of a positive impact of $700,000 related to the sale of the Company's regulated gathering assets in 2020. • The absence of an out-of-period adjustment of $500,000 in 2020 as a result of previously overstated benefit plan expenses. • Lower returns on certain of the Company's benefit plan investments. 42 MDU Resources Group, Inc. Form 10-K Index Part II • Interest expense decreased $600,000. ◦ Primarily due to: • Higher AFUDC of $1.5 million for the construction of the North Bakken Expansion project. • Lower average interest rates. ◦ Partially offset by higher debt balances. • Income tax expense increased $1.9 million. ◦ Largely a result of: • Higher income before income taxes. • The absence of the reversal of excess deferred taxes of $1.5 million associated with the sale of the Company's gas gathering assets in 2020. ◦ Partially offset by permanent tax adjustments and an energy efficiency tax benefit. 2020 compared to 2019 Pipeline earnings increased $7.4 million as a result of: • Revenues increased $3.5 million. ◦ Primarily the result of: • Increased transportation volumes and demand revenue of $6.2 million largely from organic growth projects, as previously discussed. • Increased storage-related revenues of $4.6 million as a result of stronger demand for storage services. • Additional revenues of $2.4 million primarily from increased rates effective May 1, 2019, due to the FERC rate case finalized in September 2019. ◦ Partially offset by: • Lower non-regulated project revenues of $5.3 million. • Lower volumes associated with the sale of the Company's natural gas gathering assets in 2020 and lower gathering rates resulting in a decrease in revenues of $4.3 million. • Operation and maintenance decreased $3.2 million. ◦ Largely driven by: • Decreased non-regulated project costs of $3.7 million associated with lower non-regulated project revenue. • A $1.5 million gain on the sale of the Company's non-regulated natural gas gathering assets in 2020. ◦ Partially offset by higher payroll-related costs. • Depreciation, depletion and amortization increased $500,000. ◦ Primarily due to: • Additional expense of $1.3 million associated with increased property, plant and equipment balances as a result of organic growth projects that have been placed into service. • Higher depreciation rates effective May 1, 2019, due to the FERC rate case finalized in September 2019. ◦ Partially offset by lower expense of $1.5 million due to the sale of the Company's natural gas gathering assets in 2020. • Taxes, other than income decreased $400,000. ◦ Driven by lower expense due to the sale of the Company's natural gas gathering assets in 2020. ◦ Partially offset by higher property taxes in certain jurisdictions of $300,000. • Other income increased $1.7 million. ◦ As a result of: • Higher AFUDC of $1.1 million. • A positive impact of $700,000 related to the sale of the Company's regulated gathering assets. • An out-of-period adjustment of $500,000 in the fourth quarter of 2020 as a result of previously overstated benefit plan expenses. ◦ Partially offset by a write-off of unrecovered gas costs and project expenses of $1.2 million. • Interest expense increased $400,000, primarily from higher debt balances to finance organic growth projects. • Income tax expense increased $500,000. ◦ Directly resulting from higher income before income taxes. ◦ Largely offset by the reversal of excess deferred taxes of $1.5 million associated with the sale of the Company's regulated natural gas gathering assets. Outlook The Company continues to manage the impacts of the COVID-19 pandemic on its operations and is committed to providing safe, reliable and compliant service while ensuring the health and safety of its employees, customers and the communities in which it operates. Overall, the pipeline business has experienced some impacts due to COVID-19 and does not expect significant delays to its regulatory filings or projects due to the pandemic. In February 2021, the FERC issued a revised notice of inquiry seeking new information and stakeholder perspectives regarding the certification of new interstate natural gas facilities. The FERC issued the original notice of inquiry seeking stakeholder perspectives on this topic in April 2018. The FERC also took a step toward reforming the way in which it analyzes GHG emissions for purposes of natural gas pipeline certificates by including a quantitative analysis of the GHG emissions associated with a pipeline replacement project. At this time, no accepted methodology for a GHG MDU Resources Group, Inc. Form 10-K 43 Index Part II significance calculation has been established. A technical conference led by FERC Staff discussing methods natural gas companies may use to mitigate the effects of direct and indirect GHG emissions was held on November 19, 2021. No clear guidance resulted from the conference and comments regarding various questions raised at the conference were due to the FERC on January 7, 2022. On February 18, 2022, the FERC issued two policy statements. The first is an updated certificate policy statement which will apply in pending and future certificate proceedings and is intended to explain how the FERC will consider applications to construct new interstate natural gas transportation facilities to determine whether a project is in the public convenience and necessity. This updated policy statement includes increased focus on the project purpose and need and environmental impacts. This update also focuses on impacts to landowners and environmental justice communities. The second is an interim policy statement which explains how the FERC will assess the impacts of natural gas infrastructure projects on climate change in its reviews under the National Environmental Policy Act and Natural Gas Act. Under the interim version of the policy statement, the FERC will proceed with the preparation of an environmental impact statement if a project may result in emissions of 100,000 metric tons per year of carbon dioxide equivalents or more. Comments are due on the interim policy statement by April 4, 2022. The Company continues to monitor and assess these initiatives and the potential impacts they may have on its business processes, current and future projects, results of operations and disclosures. The Company has continued to experience the effect of associated natural gas production in the Bakken, which has provided opportunities for organic growth projects and increased demand. The completion of organic growth projects has contributed to the volumes of natural gas the Company transports through its system. Although low oil prices slowed 2020 drilling activities and led to the shut-in of certain wells, the recovery of oil prices has allowed producers to bring wells back online and support new drilling. Associated natural gas production in the Bakken has returned to near pre-pandemic levels and is expected to grow due to new oil wells and increasing gas to oil ratios. The national record levels of natural gas supply has moderated the pressure on natural gas prices and minimized price volatility. While the Company believes there will continue to be varying pressures on natural gas production levels and prices, the long-term outlook for low natural gas prices continues to provide growth opportunity for industrial supply related projects and seasonal pricing differentials provide opportunities for storage services. The Company continues to focus on growth and improving existing operations through organic projects in all areas in which it operates, which includes additional organic growth projects with local distribution companies and industrial customers in various stages of development. In January 2019, the Company announced the North Bakken Expansion project, which includes construction of a new pipeline, compression and ancillary facilities to transport natural gas from core Bakken production areas near Tioga, North Dakota, to a new connection with Northern Border Pipeline in McKenzie County, North Dakota. Long-term take or pay customer contracts support the project at an amended design capacity of 250 MMcf per day, which can be readily expanded to meet forecasted natural gas growth levels and customer needs. In February 2020, the Company filed with the FERC its application for this project. In June 2021, the Company received a FERC order issuing a certificate of public convenience and necessity for the project and in July 2021, the FERC granted the Company a notice to proceed with construction. Construction began in July 2021 and the project was placed into service on February 1, 2022. In July 2021, the Company announced plans for a natural gas pipeline expansion project in eastern North Dakota. The Wahpeton Expansion project consists of 60 miles of pipe and ancillary facilities and is designed to increase capacity by 20 MMcf per day, which is supported by long-term customer agreements with Montana-Dakota and its utility customers. Construction is expected to begin in early 2024, depending on regulatory approvals, with an anticipated completion date later in 2024. On September 22, 2021, the Company filed with the FERC a request to initiate the pre-filing review process and received FERC approval of the pre-filing request on September 27, 2021. Construction Materials and Contracting Strategy and challenges The construction materials and contracting segment provides an integrated set of aggregate-based construction services, as discussed in Items 1 and 2 - Business Properties. The segment focuses on high-growth strategic markets located near major transportation corridors and desirable mid-sized metropolitan areas; strengthening the long-term, strategic aggregate reserve position through available purchase and/or lease opportunities; enhancing profitability through cost containment, margin discipline and vertical integration of the segment's operations; development and recruitment of talented employees; and continued growth through organic and strategic acquisition opportunities. A key element of the Company's long-term strategy for this business is to further expand its market presence in the higher-margin materials business (rock, sand, gravel, asphalt oil, asphalt concrete, ready-mix concrete and related products), complementing and expanding on the segment's expertise. The Company's continued acquisition activity supports this strategy. As one of the country's largest sand and gravel producers, the segment continues to strategically manage its approximately 1.2 billion tons of aggregate reserves in all its markets, as well as take further advantage of being vertically integrated. The segment's vertical integration allows it to manage operations from aggregate mining to final lay-down of concrete and asphalt, with control of and access to permitted aggregate reserves being significant. The Company's aggregate reserves are naturally declining and as a result, the Company seeks acquisition opportunities to replace the reserves. In the fourth quarter of 2021, the Company acquired Baker Rock Resources, an aggregates and asphalt supplier located in Beaverton, Oregon. The acquisition included approximately 80 million tons of proven aggregate reserves. In the first quarter of 2021, the Company received the necessary permitting to expand its operation capabilities at its Honey Creek quarry near Austin, Texas. Honey Creek contains an estimated 50 million tons of proven aggregate reserves. 44 MDU Resources Group, Inc. Form 10-K Index Part II The construction materials and contracting segment faces challenges that are not under the direct control of the business. The segment operates in geographically diverse and highly competitive markets. Competition can put negative pressure on the segment's operating margins. The segment is also subject to volatility in the cost of raw materials such as diesel fuel, gasoline, asphalt oil, cement and steel. Such volatility can have an impact on the segment's margins, including fixed-price construction contracts that are particularly vulnerable to the volatility of energy and material prices. The Company has and will continue to increase its product pricing to keep pace with rising costs. Other variables that can impact the segment's margins include adverse weather conditions, the timing of project starts or completion and declines or delays in new and existing projects due to the cyclical nature of the construction industry and governmental infrastructure spending. Accordingly, operating results in any particular period may not be indicative of the results that can be expected for any other period. The segment also faces challenges in the recruitment and retention of employees. Trends in the labor market include an aging workforce and availability issues. Most of the markets the segment operates in saw an increase in labor shortages in 2021, largely truck drivers, causing increased labor-related costs. The Company continues to monitor the labor markets and expects labor costs to continue to increase based on the increased demand for services and, to a lesser extent, the recent escalated inflationary environment in the United States. If labor costs continue to increase, it could negatively impact gross margin as the segment continues to face increasing pressure to control costs. The increase in labor shortages also impacts the segments ability to recruit and train a skilled workforce to meet the needs of increasing demand and seasonal work. In order to help attract new workers to the construction industry and enhance the skills of its current employees, the Company has completed a training facility in Oregon. The training facility offers hands-on training for heavy equipment operators and truck drivers, as well as leadership and safety training. Earnings overview - The following information summarizes the performance of the construction materials and contracting segment. 2021 vs. 2020 2020 vs. 2019 Years ended December 31, 2021 2020 2019 % change % change (In millions) Operating revenues $ 2,228.9 $ 2,178.0 $ 2,190.7 2.3 % (.6) % Cost of sales: Operation and maintenance 1,794.8 1,733.1 1,798.3 3.6 % (3.6) % Depreciation, depletion and amortization 96.8 84.8 74.3 14.2 % 14.1 % Taxes, other than income 47.7 46.0 44.1 3.7 % 4.3 % Total cost of sales 1,939.3 1,863.9 1,916.7 4.0 % (2.8) % Gross margin 289.6 314.1 274.0 (7.8) % 14.6 % Selling, general and administrative expense: Operation and maintenance 88.6 89.9 86.3 (1.4) % 4.2 % Depreciation, depletion and amortization 4.2 4.8 3.1 (12.5) % 54.8 % Taxes, other than income 5.7 4.9 4.6 16.3 % 6.5 % Total selling, general and administrative expense 98.5 99.6 94.0 (1.1) % 6.0 % Operating income 191.1 214.5 180.0 (10.9) % 19.2 % Other income 1.3 .8 1.6 62.5 % (50.0) % Interest expense 19.2 20.6 23.8 (6.8) % (13.4) % Income before income taxes 173.2 194.7 157.8 (11.0) % 23.4 % Income tax expense 43.4 47.4 37.4 (8.4) % 26.7 % Net income $ 129.8 $ 147.3 $ 120.4 (11.9) % 22.3 % Operating statistics Revenues Gross margin 2021 2020 2019 2021 2020 2019 (In millions) Aggregates $ 444.0 $ 406.6 $ 418.8 $ 47.8 $ 50.6 $ 46.8 Asphalt 339.8 349.9 332.8 37.6 42.5 35.5 Ready-mix concrete 584.4 547.0 526.0 66.1 58.4 46.3 Other products* 344.2 355.6 384.8 59.6 78.8 73.0 Contracting services 1,017.5 1,069.7 1,054.1 78.5 83.8 72.4 Intracompany eliminations (501.0) (550.8) (525.8) — — — $ 2,228.9 $ 2,178.0 $ 2,190.7 $ 289.6 $ 314.1 $ 274.0 * Other products includes cement, asphalt oil, merchandise, fabric, spreading and other products that individually are not considered to be a major line of business for the segment. MDU Resources Group, Inc. Form 10-K 45 Index Part II 2021 2020 2019 Sales (thousands): Aggregates (tons) 33,518 30,949 32,314 Asphalt (tons) 7,101 7,202 6,707 Ready-mix concrete (cubic yards) 4,267 4,087 4,123 Average sales price: Aggregates (per ton) $ 13.25 $ 13.14 $ 12.96 Asphalt (per ton) $ 47.86 $ 48.58 $ 49.62 Ready-mix concrete (per cubic yard) $ 136.94 $ 133.86 $ 127.58 2021 compared to 2020 Construction materials and contracting's earnings decreased $17.5 million as a result of: • Revenues increased $50.9 million. ◦ Largely the result of: • Higher aggregate sales volumes from the recent acquisitions contributed $20.1 million and strong demand for airport, commercial and health care work in Oregon added $16.3 million. Also contributing was an additional $1.6 million due to a few large projects in South Dakota. These increases were partially offset by lower volumes in Texas of $2.0 million driven by lower energy-related sales volumes. • Higher ready-mix concrete volumes from increased commercial and residential demand in Texas contributed $8.2 million, strong demand in Oregon added $7.8 million and recent acquisitions contributed an additional $4.5 million. Ready-mix concrete revenues also benefited from an increase in average sales price in all regions. These increases were partially offset by decreased sales of $14.8 million due to lower demand in Hawaii as a result of the overall slowdown of the travel industry from COVID-19. ◦ Partially offset by: • Decreased contracting revenues partially due to less available paving work in certain regions of $60.0 million and the absence of a few large jobs in 2020 of $17.5 million. These decreases were offset in part by strong demand for health care, agency and commercial work in Oregon of $28.8 million. • Decreased asphalt volumes primarily due to less available highway paving work in the public sector of $26.2 million in certain regions was partially offset by strong demand in Oregon. • Gross margin decreased $24.5 million. ◦ Primarily due to: • Lower margins in other product lines, primarily due to higher asphalt oil material costs of $15.1 million, along with repair and maintenance costs of $2.6 million. • Higher fuel costs of $13.3 million across all product lines. • Lower contracting services margins resulting from less available paving work of $8.2 million, as previously discussed, and the absence of a few large jobs for $5.2 million. These margins were also impacted by higher fuel costs, as previously discussed. • Lower asphalt margins resulting from less available paving work of $5.3 million, as previously discussed. • Lower aggregates margins resulting from reduced work in Hawaii due to the overall slowdown of the travel industry resulting from COVID-19 of $4.0 million, startup costs of $1.3 million associated with new aggregate sites in Texas and $600,000 higher material costs in Alaska. These decreases were partially offset by higher margins due to strong demand in Oregon of $1.7 million and South Dakota of $1.9 million along with the effects of recent acquisitions. • Labor constraints, especially truck drivers, which resulted in isolated project delays and staffing inefficiencies across the business. ◦ Partially offset by an increase in ready-mix concrete margins of $7.7 million due in part to higher average pricing in all regions and higher volumes in most regions. • Selling, general and administrative expense decreased $1.1 million. ◦ Largely the result of: • The recovery of prior bad debt expense of $1.6 million. • Higher gains on asset sales of $900,000. ◦ Offset in part by: • Increased payroll-related costs of $900,000, primarily for higher health care costs. • Higher acquisition costs of $700,000. • An increase in miscellaneous taxes, license and governmental fees. • Other income increased $500,000, primarily resulting from an out-of-period adjustment in 2020 as a result of previously overstated benefit plan expenses. • Interest expense decreased $1.4 million. ◦ Primarily resulting from lower average interest rates of $2.8 million. ◦ Offset in part by higher average debt balances. • Income tax expense decreased $4.0 million as a result of lower income before income taxes. 46 MDU Resources Group, Inc. Form 10-K Index Part II 2020 compared to 2019 Construction materials and contracting's earnings increased $26.9 million as a result of: • Revenues decreased $12.7 million. ◦ Largely from lower contracting revenues partially due to lower materials pricing as a result of decreased energy-related costs. ◦ Partially offset by higher material sales on most product lines due to an early start to the season, favorable weather conditions in certain regions and additional revenues associated with the businesses acquired. • Gross margin increased $40.1 million. ◦ Largely resulting from: • An increase to asphalt and asphalt-related product margins by $21.3 million overall due to lower fuel and material costs. • Strong pricing for ready-mix concrete in most markets resulting in 1.9 percent higher margins. • Contracting bid margins positively impacted gross margin partially resulting from lower direct costs associated with having a longer construction season due to favorable weather conditions. • Lower fuel costs across all product lines. ◦ Partially offset by lower gains on asset sales in certain regions of approximately $6.8 million. • Selling, general and administrative expense increased $5.6 million due to: ◦ Higher payroll-related costs of $2.2 million. ◦ An increase in amortization of intangible assets associated with the businesses acquired. • Other income decreased $800,000, largely resulting from an out-of-period adjustment to benefit expense in the fourth quarter of 2020 as a result of previously overstated benefit plan expenses. • Interest expense decreased $3.2 million driven by lower average debt balances in 2020 along with lower average interest rates. • Income tax expense increased $10.0 million, directly resulting from higher income before income taxes. Outlook The Company continues to assess the impacts of the COVID-19 pandemic on its operations and is committed to the health and safety of its employees, customers and the communities in which it operates. In 2021, the Company continued to implement safety measures developed in 2020 for its employees that were not able to work from home and experienced some inefficiencies and additional costs in relation to these measures, including delays in the ability to obtain permits from government agencies and, for the most part, has been able to continue business processes with minimal interruptions. The Company also continues to monitor job progress and service work and at this time has not experienced significant delays, cancellations or disruptions due to the pandemic. The American Rescue Plan Act approved by the United States Congress in the first quarter of 2021 provides $1.9 trillion in COVID-19 relief funding for states, schools and local governments. States are beginning to move forward with allocating these funds based on federal criteria and state needs, and in some cases, funding of infrastructure projects could positively impact the segment. Additionally, the bipartisan infrastructure proposal, known as the Infrastructure Investment and Jobs Act, was approved by the United States Congress in the fourth quarter of 2021. This initiative is providing long-term opportunities by designating $119 billion for the repair and rebuilding of roads and bridges across the Company's footprint. The Company continues to monitor the progress of these legislative items. The segment's vertically integrated aggregate-based business model provides the Company with the ability to capture margin throughout the sales delivery process. The aggregate products are sold internally and externally for use in other products such as ready-mix concrete, asphaltic concrete and public and private construction markets. The contracting services and construction materials are sold in connection with street, highway and other public infrastructure projects, as well as private commercial, industrial and residential development projects. The public infrastructure projects have traditionally been more stable markets as public funding is more secure during periods of economic decline. The public projects are, however, dependent on federal and state funding such as appropriations to the Federal Highway Administration. Spending on private development is highly dependent on both local and national economic cycles, providing additional sales during times of strong economic cycles. During 2021 and 2020, the Company made strategic purchases and completed several acquisitions that support the Company's long-term strategy to expand its market presence. In the second quarter of 2021, the Company acquired Mt. Hood Rock, a construction aggregates business located in Portland, Oregon. In the fourth quarter of 2021, the Company acquired Baker Rock Resources, a construction materials company located in Beaverton, Oregon, and Oregon Mainline Paving, an asphalt paving company located in McMinnville, Oregon. The acquisition of Baker Rock Resources complements the segment's Portland Metro operations and replenishes aggregate reserves in a market with high demand. Oregon Mainline Paving also supports the segment's vertically integrated business model. The Company continues to evaluate additional acquisition opportunities. For more information on the Company's business combinations, see Item 8 - Note 4. The construction materials and contracting segment's backlog remained strong at December 31, 2021, at $708 million, as compared to backlog at December 31, 2020, of $673 million. A significant portion of the Company's backlog relates to street and highway construction. Period over period increases or decreases cannot be used as an indicator of future revenues or net income. The Company expects to complete an estimated $665 million of backlog at December 31, 2021, during the next 12 months. Factors noted in Item 1A - Risk Factors can cause revenues to be realized in periods and at levels that are different from originally projected. MDU Resources Group, Inc. Form 10-K 47 Index Part II Construction Services Strategy and challenges The construction services segment provides electrical and mechanical and transmission and distribution specialty contracting services, as discussed in Items 1 and 2 - Business Properties. The construction services segment focuses on safely executing projects; providing a superior return on investment by building new and strengthening existing customer relationships; ensuring quality service; effectively controlling costs; retaining, developing and recruiting talented employees; growing through organic and strategic acquisition opportunities; and focusing efforts on projects that will permit higher margins while properly managing risk. The growth experienced by the segment in recent years is due in part to its ability to support national customers in most of the regions in which it operates. The construction services segment faces challenges, which are not under direct control of the business, in the highly competitive markets in which it operates. Competitive pricing environments, project delays, changes in management's estimates of variable consideration and the effects from restrictive regulatory requirements have negatively impacted revenues and margins in the past and could affect revenues and margins in the future. Additionally, margins may be negatively impacted on a quarterly basis due to adverse weather conditions, as well as timing of project starts or completions; disruptions to the supply chain due to transportation delays, raw material cost increases and shortages, and closures of businesses or facilities; declines or delays in new projects due to the cyclical nature of the construction industry; and other factors. Current national supply chain challenges did not have significant impacts to the procurement of project materials for the year ended December 31, 2021. However, the Company is actively monitoring the situation and working with its manufacturers and suppliers to help mitigate the risk of delays and price increases. These challenges may also impact the risk of loss on certain projects. Accordingly, operating results in any particular period may not be indicative of the results that can be expected for any other period. The need to ensure available specialized labor resources for projects also drives strategic relationships with customers and project margins. These trends include an aging workforce and labor availability issues, as well as increasing duration and complexity of customer capital programs. In 2021, the markets the segment operates in saw an increase in labor shortages which caused increased labor-related costs while the segment continues to face increasing pressure to reduce costs and improve reliability. The Company continues to monitor the labor markets and expects labor costs to continue to increase based on the increased demand for services and, to a lesser extent, the recent escalated inflationary environment in the United States. Due to these and other factors, the Company believes overall customer and competitor demand for labor resources will continue to increase, possibly surpassing the supply of industry resources. Earnings overview - The following information summarizes the performance of the construction services segment. 2021 vs. 2020 2020 vs. 2019 Years ended December 31, 2021 2020 2019 Variance Variance (In millions) Operating revenues $ 2,051.6 $ 2,095.7 $ 1,849.3 (2.1) % 13.3 % Cost of sales: Operation and maintenance 1,725.5 1,747.5 1,555.4 (1.3) % 12.4 % Depreciation, depletion and amortization 15.8 15.7 15.0 .6 % 4.7 % Taxes, other than income 62.4 74.2 58.8 (15.9) % 26.2 % Total cost of sales 1,803.7 1,837.4 1,629.2 (1.8) % 12.8 % Gross margin 247.9 258.3 220.1 (4.0) % 17.4 % Selling, general and administrative expense: Operation and maintenance 92.9 98.1 87.0 (5.3) % 12.8 % Depreciation, depletion and amortization 4.5 7.8 2.0 (42.3) % NM Taxes, other than income 4.8 4.8 4.7 — % 2.1 % Total selling, general and administrative expense 102.2 110.7 93.7 (7.7) % 18.1 % Operating income 145.7 147.6 126.4 (1.3) % 16.8 % Other income 2.6 2.0 1.9 30.0 % 5.3 % Interest expense 3.5 4.1 5.3 (14.6) % (22.6) % Income before income taxes 144.8 145.5 123.0 (.5) % 18.3 % Income tax expense 35.4 35.8 30.0 (1.1) % 19.3 % Net income $ 109.4 $ 109.7 $ 93.0 (.3) % 18.0 % * NM - not meaningful 48 MDU Resources Group, Inc. Form 10-K Index Part II Operating Statistics Revenues Gross margin Business Line 2021 2020 2019 2021 2020 2019 (In millions) Electrical & mechanical Commercial $ 553.2 $ 741.5 $ 505.8 $ 59.8 $ 48.4 $ 41.9 Industrial 457.5 374.8 344.1 51.3 41.3 32.8 Institutional 123.1 158.8 274.7 6.2 23.8 11.9 Renewables 12.3 5.4 10.4 1.2 1.1 1.6 Service & other 188.4 121.0 139.3 25.1 21.5 25.0 1,334.5 1,401.5 1,274.3 143.6 136.1 113.2 Transmission & distribution Utility 630.5 592.5 530.3 92.4 106.7 100.0 Transportation 103.1 111.8 66.0 11.9 15.5 6.9 733.6 704.3 596.3 104.3 122.2 106.9 Intrasegment eliminations (16.5) (10.1) (21.3) — — — $ 2,051.6 $ 2,095.7 $ 1,849.3 $ 247.9 $ 258.3 $ 220.1 2021 compared to 2020 Construction services earnings decreased $300,000 as a result of: • Revenues decreased $44.1 million. ◦ Largely due to: • The completion of several large commercial projects in early 2021 and 2020 in the Las Vegas market of $129.0 million. • Decreased institutional projects of $15.0 million from less available work and the completion of a larger project. • The completion of a significant industrial project of $43.0 million. • Decreased demand for electric transportation projects which includes traffic signalization and street lighting. ◦ Partially offset by: • Higher industrial work due to the number of projects awarded and progress on significant projects of $96.0 million. • Increased service work of $37.0 million related to the repair and maintenance of electrical, mechanical and fire protection systems. • Strong demand for utility projects including the progress on substations of $21.0 million and power line repair of $3.0 million. • Gross margin decreased $10.4 million. ◦ Largely due to: • The absence of higher margin utility projects in 2020 negatively impacted gross margin by $15.0 million, which includes storm power line repair and fire hardening work. • Decreased transportation margins, largely the completion of a higher margin project of $5.1 million. • Institutional projects, primarily the recognition of reduced margins of $9.4 million from lower margin work in 2021 and the impacts of a job loss of $8.4 million related to change order disputes which resulted in a significant job recognizing higher labor and material costs. ◦ Partially offset by: • Increased industrial margins primarily due to a change order settlement of $10.0 million on a significant project. • The absence of a job loss in 2020 of $8.9 million related to a large commercial project. • An increase in the amount of service work awarded and the progress on that work. • Selling, general and administrative expense decreased $8.5 million. ◦ Largely due to: • Lower bad debt expense of $7.0 million, largely due to changes in estimates related to expected credit losses. • Lower amortization expense of $3.2 million. ◦ Offset in part by: • Higher office expenses of $1.3 million. • Increased payroll-related costs. • Other income increased $600,000, largely related to increased earnings on investments. • Interest expense decreased $600,000, largely related to decreased debt balances due to lower working capital needs and increased cash collections. • Income tax expense decreased $400,000 as a result of lower income before income taxes. 2020 compared to 2019 Construction services earnings increased $16.7 million as a result of: • Revenues increased $246.4 million as a result of: ◦ Increased electrical and mechanical workloads, largely from higher revenues of $71.4 million due to the addition of PerLectric, Inc. and increased customer demand for high-tech, hospitality and industrial projects. These increases were partially offset by decreased institutional projects. MDU Resources Group, Inc. Form 10-K 49 Index Part II ◦ Increased transmission and distribution workloads as a result of strong demand for utility projects including storm-related power line repair and wildfire restoration work and increased demand for utility transportation projects. • Gross margin increased $38.2 million. ◦ Primarily resulting from a higher volume of work resulting in an increase in revenues, as previously discussed. ◦ Partially offset by an increase in operation and maintenance expense as a direct result of the expenses related to the increased workloads. • Selling, general and administrative expense increased $17.0 million, largely resulting from: ◦ Increased costs of $8.3 million associated with the addition of PerLectric, Inc. operations. ◦ Increased allowance for uncollectible accounts of $3.6 million. ◦ Higher payroll-related costs of $3.1 million and office expenses. • Other income was comparable to the same period in the prior year. • Interest expense decreased $1.2 million, primarily from lower debt balances due to lower working capital needs as a result of payroll tax deferrals and increased cash collections. • Income tax expense increased $5.8 million, directly resulting from higher income before income taxes. Outlook The Company continues to assess the impacts of the COVID-19 pandemic on its operations and is committed to the health and safety of its employees, customers and the communities in which it operates. In 2021, the Company continued to implement safety measures developed in 2020 for its employees that were not able to work from home and experienced some inefficiencies in relation to these measures but, for the most part, has been able to continue pre-pandemic business processes. The Company continues to monitor job progress and service work for delays, cancellations and disruptions due to the pandemic and expects possible disruptions to continue in 2022. Despite the challenges presented by the COVID-19 pandemic, the Company believes there are long-term growth opportunities and demand for construction services. The American Rescue Plan act approved by the United States Congress in the first quarter of 2021 provides $1.9 trillion in COVID-19 relief funding for states, schools and local government including broadband infrastructure. States are beginning to move forward with allocating these funds based on federal criteria and state needs, and in some cases, funding of infrastructure projects could positively impact the segment. Additionally, the bipartisan infrastructure proposal, known as the Infrastructure Investment and Jobs Act, was approved by the United States Congress in the fourth quarter of 2021. These include investments for upgrades to electric and grid infrastructure, transportation systems, airports and electric vehicle infrastructure, all industries this segment supports. The Company will continue to monitor the progress of these legislative items. The Company continued to have bidding opportunities in both specialty contracting markets in 2021 as evidenced by the segment's backlog. Although bidding remains highly competitive in all areas, the Company expects the segment's relationship with existing customers, skilled workforce, quality of service and effective cost management will continue to provide a benefit in securing and executing profitable projects in the future. The Company has also seen rapidly growing needs for services across the electric vehicle charging, wind generation and energy storage markets that complement existing renewable project work performed by the Company. The construction services segment's backlog at December 31 was as follows: 2021 2020 (In millions) Electrical & mechanical $ 1,109 $ 1,059 Transmission & distribution 276 214 $ 1,385 $ 1,273 The increase in backlog at December 31, 2021, as compared to backlog at December 31, 2020, was largely attributable to the new project opportunities that the Company continues to be awarded across its diverse operations, particularly within the institutional, renewable and power utility markets. The increases in backlog have been offset by decreases in the commercial, industrial and transportation markets due to the timing of project completions. Period over period increases or decreases cannot be used as an indicator of future revenues or net income. The Company expects to complete an estimated $1.2 billion of the backlog at December 31, 2021, during the next 12 months. Factors noted in Item 1A - Risk Factors can cause revenues to be realized in periods and at levels that are different from originally projected. Additionally, the Company continues to further evaluate potential acquisition opportunities that would be accretive to earnings of the Company and continue to grow the segment's backlog. 50 MDU Resources Group, Inc. Form 10-K Index Part II Other 2021 vs. 2020 2020 vs. 2019 Years ended December 31, 2021 2020 2019 Variance Variance (In millions) Operating revenues $ 13.7 $ 11.9 $ 16.6 15.1 % (28.3) % Operating expenses: Operation and maintenance 15.2 12.2 15.6 24.6 % (21.8) % Depreciation, depletion and amortization 4.6 2.7 2.1 70.4 % 28.6 % Taxes, other than income .1 .1 .1 — % — % Total operating expenses 19.9 15.0 17.8 32.7 % (15.7) % Operating loss (6.2) (3.1) (1.2) (100.0) % (158.3) % Other income .4 .4 .9 — % (55.6) % Interest expense .3 .8 1.9 (62.5) % (57.9) % Loss before income taxes (6.1) (3.5) (2.2) (74.3) % (59.1) % Income tax benefit (.2) (.4) (.1) 50.0% NM Net loss $ (5.9) $ (3.1) $ (2.1) (90.3) % (47.6)% * NM - not meaningful Included in Other is insurance activity at the Company's captive insurer and general and administrative costs and interest expense previously allocated to the exploration and production and refining businesses that do not meet the criteria for income (loss) from discontinued operations. Other was negatively impacted in 2021 as a result of higher insurance claims experience at the captive insurer and depreciation expense as compared to 2020. Premiums for the captive insurer were also higher in 2021 compared to 2020, which impacts both operating revenues and operation and maintenance expense. Other was negatively impacted in 2020 as a result of higher insurance claims as compared to 2019, whereas 2019 had higher insurance premiums which increased both operating revenues and operation and maintenance expense. Intersegment Transactions Amounts presented in the preceding tables will not agree with the Consolidated Statements of Income due to the Company's elimination of intersegment transactions. The amounts related to these items were as follows: Years ended December 31, 2021 2020 2019 (In millions) Intersegment transactions: Operating revenues $ 77.6 $ 77.0 $ 77.1 Operation and maintenance 18.7 19.1 21.1 Purchased natural gas sold 58.9 57.9 56.0 For more information on intersegment eliminations, see Item 8 - Note 17. Liquidity and Capital Commitments At December 31, 2021, the Company had cash and cash equivalents of $54.2 million and available borrowing capacity of $380.0 million under the outstanding credit facilities of the Company's subsidiaries. The Company expects to meet its obligations for debt maturing within 12 months and its other operating and capital requirements from various sources, including internally generated funds; credit facilities and commercial paper of the Company's subsidiaries, as described later in Capital resources; and the issuance of debt and equity securities if necessary. MDU Resources Group, Inc. Form 10-K 51 Index Part II Cash flows Years ended December 31, 2021 2020 2019 (In millions) Net cash provided by (used in) Operating activities $ 495.8 $ 768.4 $ 542.3 Investing activities (885.9) (630.2) (603.9) Financing activities 384.7 (145.1) 74.1 Increase (decrease) in cash and cash equivalents (5.4) (6.9) 12.5 Cash and cash equivalents -- beginning of year 59.6 66.5 54.0 Cash and cash equivalents -- end of year $ 54.2 $ 59.6 $ 66.5 Operating activities 2021 vs. 2020 2020 vs. 2019 Years ended December 31, 2021 2020 2019 Variance Variance (In millions) Income from continuing operations $ 377.7 $ 390.5 $ 335.2 $ (12.8) $ 55.3 Adjustments to reconcile net income to net cash provided by operating activities 350.9 276.2 309.7 74.7 (33.5) Receivables (60.0) (2.8) (112.2) (57.2) 109.4 Inventories (42.3) (7.2) 9.3 (35.1) (16.5) Other current assets (72.0) 31.6 (38.3) (103.6) 69.9 Accounts payable 15.3 16.0 30.1 (.7) (14.1) Other current liabilities (17.6) 35.6 51.3 (53.2) (15.7) Pension & postretirement benefit plan contributions (.5) (.4) (25.6) (.1) 25.2 Other noncurrent changes (55.4) 30.3 (17.7) (85.7) 48.0 Net cash provided by (used in) discontinued operations (.3) (1.4) .5 1.1 (1.9) Net cash provided by operating activities $ 495.8 $ 768.4 $ 542.3 $ (272.6) $ 226.1 The changes in cash flows from operating activities generally follow the results of operations as discussed in Business Segment Financial and Operating Data and are also affected by changes in working capital. The decrease in cash flows provided by operating activities from 2021 to 2020 was largely driven by an increase in natural gas purchases and the related unbilled revenues at the natural gas distribution business, as discussed in Item 8 - Notes 2 and 6, partially offset by the associated deferred taxes and increased payables. Also contributing to the decrease was the payment of previously deferred CARES Act taxes and the timing of income tax payments across all of the Company's businesses, as well as the timing of insurance claim payments in relation to receipt of insurance reimbursement at the construction services business. In addition, higher asphalt oil inventory balances due to higher material costs and tank storage balances and higher aggregate inventory balances as a result of production at the businesses acquired at the construction materials and contracting business contributed to the decrease. Partially offsetting the decrease in cash flows provided by operating activities were higher bonus depreciation related to acquisitions at construction materials and contracting business. The increase in cash flows provided by operating activities from 2020 to 2019 was reflective of the increased earnings across all businesses. The increase in cash flows provided by operating activities was largely driven by stronger collection of accounts receivable at the construction services business and decreased receivables at the construction materials and contracting business as compared to the prior period as a result of lower contracting revenues. Also contributing to the increase in cash flows provided by operating activities was the decrease in natural gas purchases in 2020 as a result of milder temperatures and lower gas costs and recovery of purchased gas cost adjustment balances at the natural gas distribution business. The Company also benefited from the deferral of payroll taxes related to the CARES Act and the absence of pension contributions at all of its businesses. Partially offsetting these increases was higher cash needs due to decreased bonus depreciation for tax purposes taken on qualified property in 2020 as compared to 2019 and a decrease in deferred taxes as a result of the purchased gas cost adjustment recorded in 2019. 52 MDU Resources Group, Inc. Form 10-K Index Part II Investing activities 2021 vs. 2020 2020 vs. 2019 Years ended December 31, 2021 2020 2019 Variance Variance (In millions) Capital expenditures $ (659.4) $ (558.0) $ (576.1) $ (101.4) $ 18.1 Acquisitions, net of cash acquired (237.7) (106.0) (55.6) (131.7) (50.4) Net proceeds from sale or disposition of property and other 15.2 35.6 29.8 (20.4) 5.8 Investments (4.0) (1.8) (2.0) (2.2) .2 Net cash used in investing activities $ (885.9) $ (630.2) $ (603.9) $ (255.7) $ (26.3) The increase in cash used in investing activities from 2021 to 2020 was primarily the result of higher cash used in acquisition activity at the construction materials and contracting business, partially offset by decreased acquisition activity at the construction services business. In addition, increased capital expenditures in 2021 at the pipeline business, largely related to the North Bakken Expansion project, and the construction materials and contracting business contributed to the increase, partially offset by lower capital expenditures at the electric and natural gas distribution businesses related to reduced electric transmission and distribution projects and reduced natural gas meters and mains. The increase in cash used in investing activities from 2020 to 2019 was primarily related to additional cash needs for acquisition activity in 2020 compared to 2019 at the construction businesses, increased capital expenditures in 2020 at the electric business and lower proceeds on asset sales in 2020 at the construction materials and contracting business. Partially offsetting these increases were decreased capital expenditures in 2020 at the construction materials and contracting business, proceeds on the natural gas gathering asset sales at the pipeline business and higher proceeds on asset sales in 2020 at the construction services businesses. Financing activities 2021 vs. 2020 2020 vs. 2019 Years ended December 31, 2021 2020 2019 Variance Variance (In millions) Issuance of short-term borrowings $ 50.0 $ 75.0 $ 170.0 $ (25.0) $ (95.0) Repayment of short-term borrowings (100.0) (25.0) (170.0) (75.0) 145.0 Issuance of long-term debt 554.0 117.4 604.0 436.6 (486.6) Repayment of long-term debt (25.0) (148.6) (468.9) 123.6 320.3 Debt issuance costs (.9) (.5) (4.5) (.4) 4.0 Proceeds from issuance of common stock 88.8 3.4 106.8 85.4 (103.4) Dividends paid (171.3) (166.4) (160.3) (4.9) (6.1) Repurchase of common stock (6.7) — — (6.7) — Tax withholding on stock-based compensation (4.2) (.4) (3.0) (3.8) 2.6 Net cash provided by (used in) financing activities $ 384.7 $ (145.1) $ 74.1 $ 529.8 $ (219.2) The increase in cash flows provided by financing activities from 2021 to 2020 was largely the result of increased long-term borrowings for acquisitions at the construction materials and contracting business, and increased long-term borrowings, net of repayments, associated with capital expenditures at the pipeline, electric and natural gas distribution businesses. The construction services business also increased its long-term borrowings as a result of increased working capital needs. In addition, net proceeds from the issuance of common stock under the Company's "at-the-market" offering during 2021 also contributed to the increase in cash flows from financing activities. Partially offsetting these increases were decreased short-term borrowings during 2021 at the natural gas distribution business. Montana-Dakota repaid $50 million of short-term borrowings during the first quarter of 2021 related to short-term borrowings during 2020. Montana-Dakota also issued $50 million of short-term borrowings during the first quarter of 2021 related to financing the higher natural gas purchases, as previously discussed, which was repaid prior to the end of the year. The increase in cash flows used in financing activities from 2020 to 2019 was largely the result of a decrease in net long-term and short-term debt borrowings in 2020 as compared to 2019 due to lower working capital needs. In addition, the Company had decreased net proceeds of $103.5 million in 2020 due to the absence of common stock issuance under its "at-the-market" offering and 401(k) plan. Defined benefit pension plans The Company has noncontributory qualified defined benefit pension plans for certain employees. Plan assets consist of investments in equity and fixed-income securities. Various actuarial assumptions are used in calculating the benefit expense (income) and liability (asset) related to the pension plans. Actuarial assumptions include assumptions about the discount rate and expected return on plan assets. At December 31, 2021, the pension plans' accumulated benefit obligations exceeded these plans' assets by approximately $38.4 million. Pretax pension income reflected in the Consolidated Statements of Income for the years ended December 31, 2021 and 2020, was $1.7 million and $684,000, respectively. Pretax pension expense reflected in the Consolidated Statements of Income for the year ended December 31, 2019, was $2.5 million. The Company's MDU Resources Group, Inc. Form 10-K 53 Index Part II pension income is currently projected to be approximately $2.3 million in 2022. Funding for the pension plans is actuarially determined. The Company has no minimum funding requirements for its defined benefit pension plans for 2022 due to an additional contribution of $20.0 million in 2019, which created prefunding credits to be used in future periods. There were no minimum required contributions for the years ended December 31, 2021 and 2020, and the minimum required contributions for the year ended December 31, 2019, was approximately $4.9 million. For more information on the Company's pension plans, see Item 8 - Note 18. Capital expenditures The Company's capital expenditures for 2019 through 2021 and as anticipated for 2022 through 2024 are summarized in the following table. Actual* Estimated 2019 2020 2021 2022 2023 2024 (In millions) Capital expenditures: Electric $ 99 $ 115 $ 82 $ 165 $ 116 $ 85 Natural gas distribution 207 193 170 248 232 207 Pipeline 71 62 235 72 159 106 Construction materials and contracting 190 191 418 189 166 172 Construction services 61 84 29 47 42 43 Other 8 3 2 5 4 3 Total capital expenditures $ 636 $ 648 $ 936 $ 726 $ 719 $ 616 * Capital expenditures for 2021, 2020 and 2019 include noncash transactions such as capital expenditure-related accounts payable, AFUDC and accrual of holdback payments in connection with acquisitions totaling $38.7 million, $(15.7) million and $4.8 million, respectively. The 2021 capital expenditures include the completed business combinations at the construction materials and contracting segment, as discussed in Item 8 - Note 4, and the North Bakken Expansion project at the pipeline segment. The 2021 capital expenditures were funded by internal sources, equity issuance and borrowings under credit facilities and issuance of commercial paper of the Company's subsidiaries. The Company has included in the estimated capital expenditures for 2022 through 2024 the Wahpeton Expansion and additional growth projects at the pipeline segment and construction of Heskett Unit 4, as previously discussed in Business Segment Financial and Operating Data. Estimated capital expenditures for the years 2022 through 2024 include those for: • System upgrades • Routine replacements • Service extensions • Routine equipment maintenance and replacements • Buildings, land and building improvements • Pipeline and natural gas storage projects • Power generation and transmission opportunities • Environmental upgrades • Other growth opportunities The Company continues to evaluate potential future acquisitions and other growth opportunities that would be incremental to the outlined capital program; however, they are dependent upon the availability of economic opportunities and, as a result, capital expenditures may vary significantly from the estimates in the preceding table. The Company continuously monitors its capital expenditures for project delays and changes in economic viability and adjusts as necessary. It is anticipated that all of the funds required for capital expenditures for the years 2022 through 2024 will be funded by various sources, including internally generated funds; credit facilities and commercial paper of the Company's subsidiaries, as described later; and issuance of debt and equity securities if necessary. 54 MDU Resources Group, Inc. Form 10-K Index Part II Capital resources The Company requires significant cash to support and grow its businesses. The primary sources of cash other than cash generated from operating activities are cash from revolving credit facilities, cash from the issuance of long-term debt and cash from equity markets. Debt resources Certain debt instruments of the Company's subsidiaries, including those discussed later, contain restrictive and financial covenants and cross-default provisions. In order to borrow under the debt agreements, the subsidiary companies must be in compliance with the applicable covenants and certain other conditions, all of which the subsidiaries, as applicable, were in compliance with at December 31, 2021. In the event the subsidiaries do not comply with the applicable covenants and other conditions, alternative sources of funding may need to be pursued. As of December 31, 2021, the Company had investment grade credit ratings at all entities issuing debt. For more information on the covenants, certain other conditions and cross-default provisions, see Item 8 - Note 9. The following table summarizes the outstanding revolving credit facilities of the Company's subsidiaries at December 31, 2021: Company Facility Facility Limit Amount Outstanding Letters of Credit Expiration Date (In millions) Montana-Dakota Utilities Co. Commercial paper/Revolving credit agreement (a) $ 175.0 $ 64.9 $ — 12/19/24 Cascade Natural Gas Corporation Revolving credit agreement $ 100.0 (b) $ 71.0 $ 2.2 (c) 6/7/24 Intermountain Gas Company Revolving credit agreement $ 85.0 (d) $ 56.5 $ — 6/7/24 Centennial Energy Holdings, Inc. Commercial paper/Revolving credit agreement (e) $ 600.0 $ 385.4 $ — 12/19/24 (a) The commercial paper program is supported by a revolving credit agreement with various banks (provisions allow for increased borrowings, at the option of Montana-Dakota on stated conditions, up to a maximum of $225.0 million). There were no amounts outstanding under the revolving credit agreement. (b) Certain provisions allow for increased borrowings, up to a maximum of $125.0 million. (c) Outstanding letter(s) of credit reduce the amount available under the credit agreement. (d) Certain provisions allow for increased borrowings, up to a maximum of $110.0 million. (e) The commercial paper program is supported by a revolving credit agreement with various banks (provisions allow for increased borrowings, at the option of Centennial on stated conditions, up to a maximum of $700.0 million). There were no amounts outstanding under the revolving credit agreement. The respective commercial paper programs are supported by revolving credit agreements. While the amount of commercial paper outstanding does not reduce available capacity under the respective revolving credit agreements, Montana-Dakota and Centennial do not issue commercial paper in an aggregate amount exceeding the available capacity under their credit agreements. The commercial paper borrowings may vary during the period, largely the result of fluctuations in working capital requirements due to the seasonality of certain operations of the Company's subsidiaries. Any borrowings under its commercial paper and revolving credit agreements are classified as long-term debt as they are intended to be refinanced on a long-term basis through continued borrowings. Total equity as a percent of total capitalization was 55 percent and 58 percent at December 31, 2021 and 2020, respectively. This ratio is calculated as the Company's total equity, divided by the Company's total capital. Total capital is the Company's total debt, including short-term borrowings and long-term debt due within 12 months, plus total equity. This ratio is an indicator of how the Company is financing its operations, as well as its financial strength. Certain of the Company's debt instruments use LIBOR as a benchmark for establishing the applicable interest rate. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The Company has been proactive to anticipate the reform of LIBOR by updating its credit agreements to include language regarding the successor or alternate rate to LIBOR. The Company continues to evaluate the impact the reform will have on its debt instruments and, at this time, does not anticipate a significant impact. Montana-Dakota Montana-Dakota's objective is to maintain acceptable credit ratings in order to access the capital markets through the issuance of commercial paper. Historically, downgrades in credit ratings have not limited, nor are currently expected to limit, Montana-Dakota's ability to access the capital markets. If Montana-Dakota were to experience a downgrade of its credit ratings in the future, it may need to borrow under its credit agreement and may experience an increase in overall interest rates with respect to its cost of borrowings. Prior to the maturity of the credit agreement, Montana-Dakota expects that it will negotiate the extension or replacement of this agreement. If Montana-Dakota is unable to successfully negotiate an extension of, or replacement for, the credit agreement, or if the fees on this facility become too expensive, which Montana-Dakota does not currently anticipate, it would seek alternative funding. On March 8, 2021, Montana-Dakota entered into a $50.0 million term loan agreement with a LIBOR-based variable interest rate and a maturity date of March 7, 2022. At December 31, 2021, Montana-Dakota had no amount outstanding under the agreement. The agreement contains customary covenants and provisions, including a covenant of Montana-Dakota not to permit, at any time, the ratio of total debt to total capitalization to be greater than 65 percent. The covenants also include certain restrictions on the sale of certain assets, loans and investments. MDU Resources Group, Inc. Form 10-K 55 Index Part II On September 15, 2021, Montana-Dakota entered into a $125.0 million note purchase agreement with maturity dates ranging from September 15, 2051 to September 15, 2061, at a weighted average interest rate of 3.23 percent. On September 15, 2021 and December 15, 2021, Montana-Dakota issued $75.0 million and $50.0 million, respectively, in senior notes under the note purchase agreement. The agreement contains customary covenants and provisions, including a covenant of Montana-Dakota not to permit, at any time, the ratio of total debt to total capitalization to be greater than 65 percent. Centennial Centennial's objective is to maintain acceptable credit ratings in order to access the capital markets through the issuance of commercial paper. Historically, downgrades in Centennial's credit ratings have not limited, nor are currently expected to limit, Centennial's ability to access the capital markets. If Centennial were to experience a downgrade of its credit ratings in the future, it may need to borrow under its credit agreement and may experience an increase in overall interest rates with respect to its cost of borrowings. Prior to the maturity of the Centennial credit agreement, Centennial expects that it will negotiate the extension or replacement of this agreement, which provides credit support to access the capital markets. In the event Centennial is unable to successfully negotiate this agreement, or in the event the fees on this facility become too expensive, which Centennial does not currently anticipate, it would seek alternative funding. WBI Energy Transmission WBI Energy Transmission has a $300.0 million uncommitted note purchase and private shelf agreement with an expiration date of May 16, 2022. WBI Energy Transmission had $195.0 million of notes outstanding at December 31, 2021, which reduced the remaining capacity under this uncommitted private shelf agreement to $105.0 million. On December 23, 2021, WBI Energy Transmission entered into a $50.0 million note purchase agreement with a maturity date of December 23, 2041, at an interest rate of 3.67 percent. The agreement contains customary covenants and provisions, including a covenant of WBI Energy Transmission not to permit, at any time, the ratio of total debt to total capitalization to be greater than 55 percent. Equity Resources The Company currently has a shelf registration statement on file with the SEC, under which the Company may issue and sell any combination of common stock and debt securities. The Company may sell such securities if warranted by market conditions and the Company's capital requirements. Any public offer and sale of such securities will be made only by means of a prospectus meeting the requirements of the Securities Act and the rules and regulations thereunder. For more information on the Company's equity, see Item 8 - Note 12. In August 2020, the Company amended the Distribution Agreement dated February 22, 2019, with J.P. Morgan Securities LLC and MUFG Securities Americas Inc., as sales agents. This agreement, as amended, allows the offering, issuance and sale of up to 6.4 million shares of the Company's common stock in connection with an “at-the-market” offering. The common stock may be offered for sale, from time to time, in accordance with the terms and conditions of the agreement. As of December 31, 2021, the Company had capacity to issue up to 3.6 million additional shares of common stock under the "at-the-market" offering program. Proceeds from the sale of shares of common stock under the agreement have been and are expected to be used for general corporate purposes, which may include, among other things, working capital, capital expenditures, debt repayment and the financing of acquisitions. Details of the Company's "at-the-market" offering activity for the years ended December 31 was as follows: 2021 2020 (In millions) Shares issued 2.8 — Net proceeds * $ 88.8 $ — Issuance costs $ 1.2 $ — * Net proceeds were used for capital expenditures. Dividend restrictions For information on the Company's dividends and dividend restrictions, see Item 8 - Note 12. 56 MDU Resources Group, Inc. Form 10-K Index Part II Material cash requirements For more information on the Company's contractual obligations on long-term debt, operating leases and purchase commitments, see Item 8 - Notes 9, 10 and 21. At December 31, 2021, the Company's material cash requirements under these obligations were as follows: Less than 1 year 1-3 years 3-5 years More than 5 years Total (In millions) Long-term debt maturities* $ 148.1 $ 716.5 $ 318.6 $ 1,564.9 $ 2,748.1 Estimated interest payments** 98.6 178.7 157.3 835.8 1,270.4 Operating leases 38.6 47.2 19.0 44.0 148.8 Purchase commitments 589.9 342.1 186.1 731.7 1,849.8 $ 875.2 $ 1,284.5 $ 681.0 $ 3,176.4 $ 6,017.1 * Unamortized debt issuance costs and discount are excluded from the table. ** Represents the estimated interest payments associated with the Company's long-term debt outstanding at December 31, 2021, assuming current interest rates and consistent amounts outstanding until their respective maturity dates over the periods indicated in the table above. Material short-term cash requirements of the Company include repayment of outstanding borrowings and interest payments on those agreements, payments on operating lease agreements, payment of obligations on purchase commitments and asset retirement obligations. At December 31, 2021, the current portion of asset retirement obligations was $10.6 million and was included in other accrued liabilities on the Consolidated Balance Sheets. Material long-term cash requirements of the Company include repayment of outstanding borrowings and interest payments on those agreements, payments on operating lease agreements, payment of obligations on purchase commitments and asset retirement obligations. At December 31, 2021, the Company had total liabilities of $468.7 million related to asset retirement obligations that are excluded from the table above. Due to the nature of these obligations, the Company cannot determine precisely when the payments will be made to settle these obligations. For more information, see Item 8 - Note 11. Not reflected in the previous table are $1.7 million in uncertain tax positions at December 31, 2021. The Company has no minimum funding requirements for its defined benefit pension plans for 2022 due to an additional contribution of $20.0 million in 2019. The Company's MEPP contributions are based on union employee payroll, which cannot be determined in advance for future periods. The Company may also be required to make additional contributions to its MEPPs as a result of their funded status. For more information, see Item 1A - Risk Factors and Item 8 - Note 18. New Accounting Standards For information regarding new accounting standards, see Item 8 - Note 2, which is incorporated herein by reference. Critical Accounting Estimates The Company has prepared its financial statements in conformity with GAAP. The preparation of its financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Management reviews these estimates and assumptions based on historical experience, changes in business conditions and other relevant factors believed to be reasonable under the circumstances. Critical accounting estimates are defined as estimates that require management to make assumptions about matters that are uncertain at the time the estimate was made and changes in the estimates could have a material impact on the Company's financial position or results of operations. The Company's critical accounting estimates are subject to judgments and uncertainties that affect the application of its significant accounting policies discussed in Item 8 - Note 2. As additional information becomes available, or actual amounts are determinable, the recorded estimates are revised. Consequently, the Company's financial position or results of operations may be materially different when reported under different conditions or when using different assumptions in the application of the following critical accounting estimates. MDU Resources Group, Inc. Form 10-K 57 Index Part II Goodwill The Company performs its goodwill impairment testing annually in the fourth quarter. In addition, the test is performed on an interim basis whenever events or circumstances indicate that the carrying amount of goodwill may not be recoverable. Examples of such events or circumstances may include a significant adverse change in business climate, weakness in an industry in which the Company's reporting units operate or recent significant cash or operating losses with expectations that those losses will continue. The Company has determined that the reporting units for its goodwill impairment test are its operating segments, or components of an operating segment, that constitute a business for which discrete financial information is available and for which segment management regularly reviews the operating results. For more information on the Company's operating segments, see Item 8 - Note 17. Goodwill impairment, if any, is measured by comparing the fair value of each reporting unit to its carrying value. If the fair value of a reporting unit exceeds its carrying value, the goodwill of the reporting unit is not impaired. If the carrying value of a reporting unit exceeds its fair value, the Company must record an impairment loss for the amount that the carrying value of the reporting unit, including goodwill, exceeds the fair value of the reporting unit. For the years ended December 31, 2021, 2020 and 2019, there were no impairment losses recorded. At October 31, 2021, the fair value substantially exceeded the carrying value at all reporting units; therefore, the Company did not perform additional sensitivity analyses to determine what impact changes in estimates would have on the fair value of the reporting units. Determining the fair value of a reporting unit requires judgment and the use of significant estimates which include assumptions about the Company's future revenue, profitability and cash flows, amount and timing of estimated capital expenditures, inflation rates, risk adjusted cost of capital, operational plans, and current and future economic conditions, among others. The fair value of each reporting unit is determined using a weighted combination of income and market approaches. The Company believes that the estimates and assumptions used in its impairment assessments are reasonable and based on available market information. The Company uses a discounted cash flow methodology for its income approach. Under the income approach, the discounted cash flow model determines fair value based on the present value of projected cash flows over a specified period and a residual value related to future cash flows beyond the projection period. Both values are discounted using a rate which reflects the best estimate of the risk adjusted cost of capital at each reporting unit. The risk adjusted cost of capital varies by reporting unit and was in the range of 5 percent to 9 percent in 2021, 4 percent to 8 percent for 2020 and 4 percent to 9 percent for 2019. Under the market approach, the Company estimates fair value using various multiples derived from enterprise value to EBITDA for comparative peer companies for each respective reporting unit. These multiples are applied to operating data for each reporting unit to arrive at an indication of fair value. In addition, the Company adds a reasonable control premium when calculating the fair value utilizing the peer multiples, which is estimated as the premium that would be received in a sale in an orderly transaction between market participants. The Company used a 15 percent control premium for the years ended December 31, 2021, 2020 and 2019. The Company uses significant judgment in estimating its five-year forecast. The assumptions underlying cash flow projections are in sync as applicable with the Company's strategy and assumptions. Future projections are heavily correlated with the current year results of operations. Future results of operations may vary due to economic and financial impacts. The long-term growth rates used in the five-year forecast are developed by management based on industry data, management's knowledge of the industry and management's strategic plans. The long-term growth rate varies by reporting unit and was 1 percent to 3 percent in 2021, 2020 and 2019. Business combinations The Company accounts for acquisitions on the Consolidated Financial Statements starting from the date of the acquisition, which is the date that control is obtained. The acquisition method of accounting requires acquired assets and liabilities assumed be recorded at their respective fair values as of the date of the acquisition. The excess of the purchase price over the fair value of the assets acquired and liabilities assumed is recorded as goodwill. The estimation of fair values of acquired assets and liabilities assumed by the Company requires significant judgment and requires various assumptions. Although independent appraisals may be used to assist in the determination of the fair value of certain assets and liabilities, the appraised values may be based on significant estimates provided by management. The amounts and useful lives assigned to depreciable and amortizable assets compared to amounts assigned to goodwill, which is not amortized, can affect the results of operations in the period of and periods subsequent to a business combination. In determining fair values of acquired assets and liabilities assumed, the Company uses various observable inputs for similar assets or liabilities in active markets and various unobservable inputs, which includes the use of valuation models. Fair values are based on various factors including, but not limited to, age and condition of property, maintenance records, auction values for equipment with similar characteristics, recent sales and listings of comparable properties, data collected from drill holes and other subsurface investigations and geologic data. The Company primarily uses the market and cost approaches in determining the fair value of land and property, plant and equipment. A combination of the market and income approaches are used for aggregate reserves and intangibles, primarily a discounted cash flow model. The Company must develop reasonable and supportable assumptions to evaluate future cash flows. The process is highly subjective and requires a large degree of management judgement. Assumptions used may vary for each specific business combination due to unique circumstances of each transaction. Assumptions may include discount rate, time period, terminal value and growth rate. The values generated from the discounted cash flow model are sensitive to the assumptions used. Inaccurate assumptions can lead to deviations from the values generated. 58 MDU Resources Group, Inc. Form 10-K Index Part II There is a measurement period after the acquisition date during which the Company may adjust the amounts recognized for a business combination. Any such adjustments are recorded in the period the adjustment is determined with the corresponding offset to goodwill. These adjustments are typically based on obtaining additional information that existed at the acquisition date regarding the assets acquired and the liabilities assumed. The measurement period ends once the Company has obtained all necessary information that existed as of the acquisition date, but does not extend beyond one year from the date of the acquisition. Once the measurement period has ended, any adjustments to assets acquired or liabilities assumed are recorded in income from continuing operations. Regulatory accounting The Company is subject to rate regulation by state public service commissions and/or the FERC. Regulatory assets generally represent incurred or accrued costs that have been deferred and are expected to be recovered in rates charged to customers. Regulatory liabilities generally represent amounts that are expected to be refunded to customers in future rates or amounts collected in current rates for future costs. Management continually assesses the likelihood of recovery in future rates of incurred costs and refunds to customers associated with regulatory assets and liabilities. Decisions made by the various regulatory agencies can directly impact the amount and timing of these items. Therefore, expected recovery or refund of these deferred items generally is based on specific ratemaking decisions or precedent for each item. If future recovery of costs is no longer probable, the Company would be required to include those costs in the statement of income or accumulated other comprehensive loss in the period in which it is no longer deemed probable. The Company believes that the accounting subject to rate regulation remains appropriate and its regulatory assets are probable of recovery in current rates or in future rate proceedings. At December 31, 2021 and 2020, the Company's regulatory assets were $476.5 million and $447.9 million, respectively, and regulatory liabilities were $445.1 million and $459.5 million, respectively. At December 31, 2021 and 2020, regulatory assets in recovery were $367.7 million and $324.6 million, respectively, and regulatory assets not in recovery were $108.8 million and $123.3 million, respectively. Revenue recognition Revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The recognition of revenue requires the Company to make estimates and assumptions that affect the reported amounts of revenue. The accuracy of revenues reported on the Consolidated Financial Statements depends on, among other things, management's estimates of total costs to complete projects because the Company uses the cost-to-cost measure of progress on construction contracts for revenue recognition. To determine the proper revenue recognition method for contracts, the Company evaluates whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. For most contracts, the customer contracts with the Company to provide a significant service of integrating a complex set of tasks and components into a single project. Hence, the Company's contracts are generally accounted for as one performance obligation. The Company recognizes construction contract revenue over time using an input method based on the cost-to-cost measure of progress for contracts because it best depicts the transfer of assets to the customer which occurs as the Company incurs costs on the contract. Under the cost-to-cost measure of progress, the costs incurred are compared with total estimated costs of a performance obligation. Revenues are recorded proportionately to the costs incurred. This method depends largely on the ability to make reasonably dependable estimates related to the extent of progress toward completion of the contract, contract revenues and contract costs. Since contract prices are generally set before the work is performed, the estimates pertaining to every project could contain significant unknown risks such as volatile labor, material and fuel costs, weather delays, adverse project site conditions, unforeseen actions by regulatory agencies, performance by subcontractors, job management and relations with project owners. Changes in estimates could have a material effect on the Company's results of operations, financial position and cash flows. For the years ended December 31, 2021 and 2020, the Company's total construction contract revenue was $3.0 billion and $3.1 billion, respectively. Several factors are evaluated in determining the bid price for contract work. These include, but are not limited to, the complexities of the job, past history performing similar types of work, seasonal weather patterns, competition and market conditions, job site conditions, work force safety, reputation of the project owner, availability of labor, materials and fuel, project location and project completion dates. As a project commences, estimates are continually monitored and revised as information becomes available and actual costs and conditions surrounding the job become known. If a loss is anticipated on a contract, the loss is immediately recognized. Contracts are often modified to account for changes in contract specifications and requirements. The Company considers contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Generally, contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration of services provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price and the measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis. MDU Resources Group, Inc. Form 10-K 59 Index Part II The Company's construction contracts generally contain variable consideration including liquidated damages, performance bonuses or incentives, claims, unapproved/unpriced change orders and penalties or index pricing. The variable amounts usually arise upon achievement of certain performance metrics or change in project scope. The Company estimates the amount of revenue to be recognized on variable consideration using estimation methods that best predict the most likely amount of consideration the Company expects to be entitled to or expects to incur. The Company includes variable consideration in the estimated transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. Changes in circumstances could impact management's estimates made in determining the value of variable consideration recorded. The Company updates its estimate of the transaction price each reporting period and the effect of variable consideration on the transaction price is recognized as an adjustment to revenue on a cumulative catch-up basis. The Company believes its estimates surrounding the cost-to-cost method are reasonable based on the information that is known when the estimates are made. The Company has contract administration, accounting and management control systems in place that allow its estimates to be updated and monitored on a regular basis. Because of the many factors that are evaluated in determining bid prices, it is inherent that the Company's estimates have changed in the past and will continually change in the future as new information becomes available for each job. Pension and other postretirement benefits The Company has noncontributory defined benefit pension plans and other postretirement benefit plans for certain eligible employees. Various actuarial assumptions are used in calculating the benefit expense (income) and liability (asset) related to these plans. Costs of providing pension and other postretirement benefits bear the risk of change, as they are dependent upon numerous factors based on assumptions of future conditions. The Company makes various assumptions when determining plan costs, including the current discount rates and the expected long-term return on plan assets, the rate of compensation increases, actuarially determined mortality data and health care cost trend rates. In selecting the expected long-term return on plan assets, which is considered to be one of the key variables in determining benefit expense or income, the Company considers historical returns, current market conditions, the mix of investments and expected future market trends, including changes in interest rates and equity and bond market performance. Another key variable in determining benefit expense or income is the discount rate. In selecting the discount rate, the Company matches forecasted future cash flows of the pension and postretirement plans to a yield curve which consists of a hypothetical portfolio of high-quality corporate bonds with varying maturity dates, as well as other factors, as a basis. The Company's pension and other postretirement benefit plan assets are primarily made up of equity and fixed-income investments. Fluctuations in actual equity and bond market returns, as well as changes in general interest rates, may result in increased or decreased pension and other postretirement benefit costs in the future. Management estimates the rate of compensation increase based on long-term assumed wage increases and the health care cost trend rates are determined by historical and future trends. The Company believes the estimates made for its pension and other postretirement benefits are reasonable based on the information that is known when the estimates are made. These estimates and assumptions are subject to a number of variables and are expected to change in the future. Estimates and assumptions will be affected by changes in the discount rate, the expected long-term return on plan assets, the rate of compensation increase and health care cost trend rates. A 50 basis point change in the assumed discount rate and the expected long-term return on plan assets would have had the following effects at December 31, 2021: Pension Benefits Other Postretirement Benefits 50 Basis Point Increase 50 Basis Point Decrease 50 Basis Point Increase 50 Basis Point Decrease Discount rate (In millions) Projected benefit obligation as of December 31, 2021 $ (22.0) $ 24.2 $ (4.0) $ 4.5 Net periodic benefit cost (credit) for 2022 $ .3 $ (.4) $ (.3) $ .2 Expected long-term return on plan assets Net periodic benefit cost (credit) for 2022 $ (1.8) $ 1.8 $ (.5) $ .5 A 100 basis point change in the assumed health care cost trend rates would have had the following effects at December 31, 2021: 100 Basis Point Increase 100 Basis Point Decrease (In millions) Service and interest cost components for 2022 $ .2 $ (.1) Postretirement benefit obligation as of December 31, 2021 $ 3.0 $ (2.6) The Company plans to continue to use its current methodologies to determine plan costs. For more information on the assumptions used in determining plan costs, see Item 8 - Note 18. 60 MDU Resources Group, Inc. Form 10-K Index Part II Income taxes The Company is required to make judgments regarding the potential tax effects of various financial transactions and ongoing operations to estimate the Company's obligation to taxing authorities. These tax obligations include income, real estate, franchise and sales/use taxes. Judgments related to income taxes require the recognition in the Company's financial statements that a tax position is more-likely-than-not to be sustained on audit. Judgment and estimation is required in developing the provision for income taxes and the reporting of tax-related assets and liabilities and, if necessary, any valuation allowances. The interpretation of tax laws can involve uncertainty, since tax authorities may interpret such laws differently. Actual income tax could vary from estimated amounts and may result in favorable or unfavorable impacts to net income, cash flows and tax-related assets and liabilities. In addition, the effective tax rate may be affected by other changes including the allocation of property, payroll and revenues between states. The Company assesses the deferred tax assets for recoverability taking into consideration historical and anticipated earnings levels; the reversal of other existing temporary differences; available net operating losses and tax carryforwards; and available tax planning strategies that could be implemented to realize the deferred tax assets. Based on this assessment, management must evaluate the need for, and amount of, a valuation allowance against the deferred tax assets. As facts and circumstances change, adjustment to the valuation allowance may be required. Non-GAAP Financial Measures The Business Segment Financial and Operating Data includes financial information prepared in accordance with GAAP, as well as another financial measure, adjusted gross margin, that is considered a non-GAAP financial measure as it relates to the Company's electric and natural gas distribution segments and is intended to be a helpful supplemental financial measure for investors' understanding of the utility segments' operating performance. The Company's management believes that adjusted gross margin and the remaining operating expenses that calculate operating income (loss) are useful in assessing the company's segment performance as management has the ability to influence control over the remaining operating expenses. This non-GAAP financial measure should not be considered as an alternative to, or more meaningful than, GAAP financial measures such as operating income (loss) or net income (loss). The Company's non-GAAP financial measure, adjusted gross margin, is not standardized; therefore, it may not be possible to compare this financial measure with other companies’ gross margin measures having the same or similar names. In addition to operating revenues and operating expenses, management also uses the non-GAAP financial measure of adjusted gross margin when evaluating the results of operations for the electric and natural gas distribution segments. Adjusted gross margin for the electric and natural gas distribution segments is calculated by adding back adjustments to operating income (loss). These add-back adjustments include: operation and maintenance expense; depreciation, depletion and amortization expense; and certain taxes, other than income. The Company's adjusted gross margin is impacted by fluctuations in power purchases and natural gas and other fuel supply costs. However, while these fluctuating costs impact adjusted gross margin as a percentage of revenue, they only impact adjusted gross margin if the costs cannot be passed through to customers. The following information reconciles operating income to adjusted gross margin for the electric segment. Years ended December 31, 2021 2020 2019 (In millions) Operating income $ 66.3 $ 63.4 $ 64.0 Adjustments: Operating expenses: Operation and maintenance 124.9 121.3 125.7 Depreciation, depletion and amortization 66.8 63.0 58.7 Taxes, other than income 16.7 16.8 16.1 Total adjustments 208.4 201.1 200.5 Adjusted gross margin $ 274.7 $ 264.5 $ 264.5 The following information reconciles operating income to adjusted gross margin for the natural gas distribution segment. Years ended December 31, 2021 2020 2019 (In millions) Operating income $ 89.2 $ 73.1 $ 69.2 Adjustments: Operating expenses: Operation and maintenance 194.1 185.4 185.0 Depreciation, depletion and amortization 86.0 84.6 79.6 Taxes, other than income 25.9 24.6 23.5 Total adjustments 306.0 294.6 288.1 Adjusted gross margin $ 395.2 $ 367.7 $ 357.3 MDU Resources Group, Inc. Form 10-K 61 Index Part II