What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-02-24 compared with 2022-02-23 · 539 added, 493 removed, 752 unchanged (58% of the section changed)

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 is Building a Strong America® by providing essential infrastructure and services.

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 is authorized to conduct business in nearly every state in the United States and during peak construction season has employed over 16,800 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.

As part of the Company's strategic planning to optimize stockholder value, the Company announced its board of directors unanimously approved a plan to pursue a separation of Knife River from the Company on August 4, 2022, and, as a next step in its strategic planning, on November 3, 2022, the Company announced the board of directors' plan to create two pure-play companies:

a leading construction materials company and a regulated energy delivery company.

The separation of Knife River is planned as a tax-free spinoff transaction to the Company’s stockholders for U.S.

federal income tax purposes.

The transaction is expected to result in two independent, publicly traded companies.

Completion of the separation will be subject to, among other things, the effectiveness of a registration statement on Form 10 with the SEC, final approval from the Company’s board of directors, receipt of one or more tax opinions and a private letter ruling from the IRS, and other customary conditions.

The Company may, at any time and for any reason until the proposed transaction is complete, abandon the separation or modify or change its terms.

The separation is expected to be complete in the second quarter of 2023, but there can be no assurance regarding the ultimate timing of the separation or that the separation will ultimately occur.

In addition, the board has authorized management to commence a strategic review process for MDU Construction Services with the objective of achieving the board’s goal of creating two pure-play public companies.

The strategic review is well underway, and the Company anticipates completing it during the second quarter of 2023.

See Item 1A - Risk Factors for a description of the risks and uncertainties with the proposed future structure.

The Company incurred costs in connection with the announced strategic initiatives in 2022, as noted in the Business Segment Financial and Operating Data section, and expects to continue to incur these costs until the initiatives are completed.

The Company continues to manage the inflationary pressures experienced throughout the United States, including the impact that inflation, rising interest rates, commodity price volatility and supply chain disruptions may have on its business and customers and proactively looks for ways to lessen the impact to its business.

Inflation rates in the Unites States increased significantly during 2022, relative to historical precedent, and may continue to rise.

The Company has continued to evaluate its businesses and has increased pricing for its products and services where necessary as evidenced by the increase in revenues recognized in 2022.

The ability to raise selling prices to cover higher costs due to inflation are subject to customer demand, industry competition and the availability of materials, among other things.

Rising interest rates have resulted in, and will likely continue to result in, higher borrowing costs on new debt, resulting in impacts to the Company's asset valuations and negatively impacting the purchasing power of its customers.

For more information on possible impacts to the Company's businesses, see the Outlook for each segment below and Item 1A - Risk Factors.

36 MDU Resources Group, Inc.

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Income from continuing operations 367.3 377.7 390.5

Income (loss) from discontinued operations, net of tax .4 (.3) .3

Discontinued operations, net of tax .2 .4 (.3)

Net income $ 367.5 $ 378.1 $ 390.2

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2022 compared to 2021 The Company's consolidated earnings decreased $10.6 million.

The Company experienced decreased earnings at the construction materials and contracting, natural gas distribution and pipeline businesses.

While the construction materials and contracting business experienced higher average pricing on materials and increased contracting revenues, results were negatively impacted by ongoing inflationary pressures, including energy and other operating costs.

The natural gas distribution business experienced higher operating expenses, including subcontractor costs, as well as higher interest and depreciation expenses, partially offset by increased sales volumes and approved rate recovery in certain jurisdictions.

The pipeline business experienced higher interest expense and lower non-regulated project margins, partially offset by the net benefit of the North Bakken Expansion project.

The Company's earnings were further impacted by $21.0 million in lower returns on the Company's nonqualified benefit plan investments, as discussed in Note 8, and the costs incurred in connection with the announced strategic initiatives of $12.7 million, after tax.

Partially offsetting the decreases were increased earnings at the construction services business resulting from higher electrical and mechanical project margins and earnings from the segment's joint ventures, partially offset by higher overall operating expenses related to increased payroll-related costs and expected credit losses.

The electric business benefited from interim rate relief in North Dakota, higher net transmission revenues and higher retail sales volumes as a result of colder weather, as well as lower operation and maintenance expenses, largely related to plant closures.

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;

increased material costs, including asphalt oil and diesel fuel;

higher equipment, repair and maintenance costs;

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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.

Also positively impacting earnings was higher operating income 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.

A discussion of key financial data from the Company's business segments follows.

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Changes in such assumptions and factors could cause actual future results to differ materially from the Company's growth and earnings projections.

MDU Resources Group, Inc.

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.

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.

Both segments strive to be top performing utility companies measured by integrity, employee safety and satisfaction, customer service and stockholder return.

The segments provide safe, reliable, competitively priced and environmentally responsible energy service to customers while focusing on growth and expansion opportunities within and beyond its existing territories.

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.

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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 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, reliable, affordable and environmentally responsible 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.

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.

The Company also seeks rate adjustments for operating costs and capital investments, as well as reasonable returns on investments not covered by tracking mechanisms.

For more information on the Company's tracking mechanisms and recent cases, see Items 1 and 2 - Business Properties and Item 8 - Note 20.

These segments are also subject to extensive regulation related to certain operational and environmental compliance, cybersecurity, permit terms and system integrity.

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.

Within the past year, there have been cyber and physical attacks within the energy industry on energy infrastructure, such as substations, and the Company continues to evaluate the safeguards implemented to protect its electric and natural gas utility systems.

Implementation of enhancements and additional requirements to protect the Company's infrastructure 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.

The current presidential administration has made climate change a focus, as further discussed in the Outlook section.

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.

MISO and NERC have recently announced concerns with reliability of the electric grid due to capacity shortages, which has resulted from rapid expansion of renewables and rapid reduction of baseload resources such as coal, while load growth has increased faster than expected.

MISO received FERC approval of a seasonal resource adequacy construct, or accreditation process, versus the previous annual summer peak capacity requirement process.

The new construct will include a higher planning reserve margin in winter, spring and fall and a higher Coincident Load Factor for Montana-Dakota in the winter season.

This is a change from the current summer requirement only process.

These changes have not required Montana-Dakota to obtain additional accredited seasonal capacity but additional future accreditation process changes could impact the Company and result in increased costs to produce electricity.

The Company will continue to monitor the progress of these changes 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.

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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.

In December 2022 and January 2023, natural gas prices significantly increased across the Pacific Northwest from multiple price-pressuring events including wide-spread below-normal temperatures;

higher natural gas consumption;

reduced natural gas flows due to pipeline constraints, including maintenance in West Texas;

and historically low regional natural gas storage levels.

These higher natural gas prices impacted both Intermountain and Cascade, both of which initiated $125.0 million and $150.0 million in early 2023, respectively, of short-term debt to finance the increased natural gas costs.

Intermountain filed an out of cycle purchased gas adjustment effective February 1, 2023, to start recovering the higher prices.

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.

38 MDU Resources Group, Inc.

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 Company continues to proactively monitor and work with its manufacturers to reduce the effects of increased pricing and lead times on delivery of certain raw materials and equipment used in electric generation, 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 and shipping of electrical equipment as a result of the lingering effects of the COVID-19 pandemic, staffing shortages across multiple industries and global conflicts.

While not material, these segments have experienced delays and inflationary pressures, including increased costs related to purchased natural gas and capital expenditures.

The Company has been able to minimize the effects by working closely with suppliers or obtaining additional suppliers, as well as modifying project plans to accommodate extended lead times and increased costs.

The Company expects these delays and inflationary pressures to continue.

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.

As the industry continues to expand the use of renewable energy sources, the need for additional transmission infrastructure is growing.

On July 25, 2022, as part of its long range transmission plan, MISO announced approval of 18 transmission projects totaling $10.3 billion of investments in MISO's midwest subregion, of which Montana-Dakota is a part.

As part of MISO's long range transmission plan, in August 2022, the Company announced its intent to develop, construct and co-own an approximately 95 mile 345 kV transmission line with Otter Tail Power Company in central North Dakota.

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.

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Operating revenues $ 377.1 $ 349.6 $ 332.0 8 % 5 %

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:

Electric fuel and purchased power 92.0 74.1 66.9 24 % 11 %

Operation and maintenance 120.7 124.9 121.3 (3) % 3 %

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Net income $ 57.1 $ 51.9 $ 55.6 10 % (7) %

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

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$ 377.1 $ 349.6 $ 332.0

Retail sales (million kWh)

Volumes (million kWh)

Retail sales:

Residential 1,226.4 1,164.8 1,170.9

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Average cost of electric fuel and purchased power per kWh $ .026 $ .021 $ .019

MDU Resources Group, Inc.

2022 compared to 2021 Electric earnings increased $5.2 million as a result of:

• Revenue increased $27.5 million.

◦ Largely attributable to:

▪ Higher fuel and purchased power costs of $17.9 million recovered in customer rates and offset in expense, as described below.

▪ Interim rate relief in North Dakota of $5.0 million.

▪ Higher net transmission revenues of $3.9 million, largely from increased investment, and higher transmission interconnect upgrades of $800,000.

▪ Higher retail sales volumes of 2.2 percent, primarily to residential customers, largely due to colder weather in the first and fourth quarters of the year.

◦ Partially offset by:

▪ Lower renewable tracker revenues associated with higher production tax credits offset in expense, as described below.

▪ Lower per unit average rates of $1.0 million related to block rates in certain jurisdictions.

• Electric fuel and purchased power increased $17.9 million.

◦ Primarily the result of $17.4 million higher commodity price, including higher recovery of fuel clause adjustments, and increased retail sales volumes.

• Operation and maintenance decreased $4.2 million.

◦ Primarily due to:

▪ Decreased payroll-related costs, largely $2.8 million related to the Heskett Station and Lewis & Clark Station plant closures and lower incentive accruals of $1.9 million.

▪ Reduced materials costs and contract services from the Heskett Station and Lewis & Clark Station plant closures.

▪ Reduced costs due to the absence of the Big Stone Station outage in 2021.

◦ Partially offset by increased contract services associated with a planned outage at Coyote Station of $2.6 million.

• Depreciation, depletion and amortization increased $1.0 million, largely resulting from increased property, plant and equipment balances placed in service, mostly related to growth and replacement projects.

• Taxes, other than income decreased $600,000, largely as a result of lower coal conversion taxes in certain jurisdictions.

• Other income decreased $4.1 million, primarily due to lower returns on the Company's nonqualified benefit plan investments of $4.6 million, as discussed in Note 8, partially offset by higher AFUDC equity largely due to higher rates.

• Interest expense increased $1.8 million, largely resulting from $3.2 million due to higher long-term debt balances, partially offset by higher AFUDC debt largely due to higher rates.

• Income tax benefit decreased $2.3 million.

◦ Largely due to:

▪ Higher income taxes of $1.8 million related to higher taxable income.

▪ Higher permanent tax adjustments and decreased excess deferred amortization.

◦ Partially offset by higher production tax credits of $1.4 million driven by higher wind production.

2021 compared to 2020 Electric earnings decreased $3.7 million as a result of:

• Adjusted gross margin increased $10.2 million attributable to:

• Revenue increased $17.6 million

◦ Higher fuel and purchased power costs of $7.2 million recovered in customer rates and offset in expense, as described below.

◦ Higher transmission revenues of $3.3 million.

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◦ Higher demand revenues of $1.5 million.

36 MDU Resources Group, Inc.

◦ 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.

• Electric fuel and purchased power increased $7.2 million attributable to higher MISO costs as a result of increased energy costs, partially offset by decreased fuel costs associated with the Lewis & Clark Station plant closure.

• Operation and maintenance expense increased $3.6 million.

◦ Primarily the result of:

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• Taxes, other than income was comparable to the same period in the prior year.

40 MDU Resources Group, Inc.

• Other income decreased $2.6 million.

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▪ 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.

▪ Lower returns on the Company's nonqualified benefit plan investments of $1.3 million.

◦ Partially offset by increased interest income associated with higher contributions in aid of construction.

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◦ 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.

Earnings overview - The following information summarizes the performance of the natural gas distribution segment.

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Operating revenues $ 1,273.8 $ 971.9 $ 848.2 31 % 15 %

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:

Purchased natural gas sold 816.1 542.0 448.1 51 % 21 %

Operation and maintenance 205.3 194.1 185.4 6 % 5 %

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Income before income taxes 53.0 60.0 49.8 (12) % 20 %

Income tax expense 8.4 5.8 1.4 44.8 % NM

Income tax expense 7.8 8.4 5.8 (7) % 45 %

Net income $ 45.2 $ 51.6 $ 44.0 (12) % 17 %

* 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

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Average cost of natural gas per dk $ 6.22 $ 4.70 $ 3.91

MDU Resources Group, Inc.

2022 compared to 2021 :

Natural gas distribution earnings increased $7.6 million as a result of:

• Adjusted gross margin increased $27.5 million.

Natural gas distribution earnings decreased $6.4 million as a result of:

• Revenue increased $301.9 million, largely from:

◦ Higher purchased natural gas sold of $273.3 million recovered in customer rates that was offset in expense, as described below.

◦ Higher retail sales volumes of 13.7 percent across all customer classes due to colder weather, partially offset by weather normalization and decoupling mechanisms in certain jurisdictions.

◦ Higher revenue-based taxes recovered in rates of $10.1 million that were offset in expense, as described below.

◦ Approved rate relief of $3.6 million in certain jurisdictions and higher pipeline replacement mechanisms of $1.8 million.

• Purchased natural gas sold increased $274.1 million, primarily due to:

◦ Higher natural gas costs as a result of higher market prices of $198.1 million, including the higher recovery of purchase gas adjustments related to the February 2021 cold weather event and the 2018 Enbridge pipeline rupture.

◦ Higher volumes of natural gas purchased due to increased retail sales volumes.

◦ Purchased natural gas sold includes the disallowance of $845,000 ordered by the MNPUC, as discussed in Note 20.

• Operation and maintenance increased $11.2 million, primarily due to:

◦ Higher contract services of $6.4 million, primarily higher subcontractor costs.

◦ Higher payroll-related costs, including higher straight-time payroll of $4.7 million, partially offset by lower incentive accruals of $3.3 million.

◦ Higher other costs, partially resulting from inflation, including higher expected credit losses of $1.8 million from higher receivables balances associated with colder weather and higher gas costs;

higher software costs of $1.6 million;

higher vehicle fuel cost of $1.3 million;

and higher office, travel, materials and other miscellaneous employee costs.

• Depreciation, depletion and amortization increased $3.4 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 $1.0 million.

• Taxes, other than income increased $10.5 million, largely resulting from higher revenue-based taxes which are recovered in rates.

• Other income decreased $4.8 million primarily related to lower returns on the Company's nonqualified benefit plan investments of $7.0 million, as discussed in Note 8, partially offset by increased interest income.

• Interest expense increased $4.9 million, primarily from higher long-term debt balances and interest rates, partially offset by higher AFUDC debt largely due to higher rates.

• Income tax expense decreased $600,000 due to lower income taxes of $1.5 million related to lower taxable income, partially offset by higher permanent tax adjustments.

2021 compared to 2020 Natural gas distribution earnings increased $7.6 million as a result of:

• Revenue increased $123.7 million .

◦ Largely as a result of:

▪ Higher purchased natural gas sold of $93.9 million recovered in customer rates and was offset in expense, as described below.

▪ Approved rate relief in certain jurisdictions of $15.9 million.

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▪ Increased transportation volumes of 9 percent, primarily to electric generation customers.

▪ Higher revenue-based taxes recovered in rates of $2.3 million that were offset in expense, as described below.

▪ 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.

• Purchased natural gas sold increased $93.9 million, primarily due to higher natural gas costs as a result of higher market prices.

• Operation and maintenance increased $8.7 million.

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◦ Partially offset by decreased depreciation rates in certain jurisdictions of $4.0 million.

42 MDU Resources Group, Inc.

• Taxes, other than income increased $3.6 million resulting from:

◦ Higher revenue-based taxes of $2.3 million, which are recovered in rates.

◦ Higher property taxes in certain jurisdictions of $700,000.

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• 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.

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.

Outlook In 2022, the Company experienced rate base growth of 7.8 percent and expects these segments will grow rate base by approximately 6 percent to 7 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.

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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.

In 2022, the Company experienced increased natural gas prices across its service areas and more recently has seen higher natural gas prices in the Pacific Northwest, as previously discussed in Strategy and Challenges.

As a result, the Company has filed an out-of-cycle cost of gas adjustment in Idaho to assist in the timely recovery of these costs.

See Note 20 for additional details.

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.

In February 2019, the Company announced the retirement of three aging coal-fired electric generating units.

The Company ceased operations of Unit 1 at Lewis & Clark Station in Sidney, Montana, in March 2021 and Units 1 and 2 at Heskett Station near Mandan, North Dakota, in February 2022.

In addition, in May 2022, the Company began 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, with an expected in service date in the summer of 2023.

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.

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 21, 2028.

In October 2022, Otter Tail Power Company requested permission from the MNPUC to extend the deadline for its Integrated Resource Plan with the intent to update its modeling in light of recent developments in the industry, including increased capacity requirements in MISO.

Otter Tail Power Company's extension was granted by the MNPUC on November 1, 2022, with revised modeling due March 31, 2023.

The joint owners continue to collaborate in analyzing data and weighing decisions that impact the plant and its employees as well as each company's customers and communities served.

Further 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 NDDEQ submitted its state implementation plan to the EPA in August 2022 and expects a decision on the plan sometime in 2023.

The plan, as submitted by the NDDEQ, does not require additional controls for any units in North Dakota, including Coyote Station.

Legislation and rulemaking The Company continues to monitor legislation and rulemaking related to clean energy standards that may impact its segments.

Below are some of the specific legislative actions the Company is monitoring.

• The current presidential administration is considering changes to the federal Clean Air Act, some of which were amended by the previous presidential administration.

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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

For more information about the anticipated compliance costs, Items 1 and 2 - Business Properties.

Cascade's draft 2023 Oregon integrated resource plan projects customer bills could increase by about 100 percent by 2035 compared with costs included in bills today and by about 300 percent by 2050 as a result of the legislation.

On September 30, 2022, the Company filed a request for the use of deferred accounting for costs related to the rule and began deferring those costs.

The Company, along with the other two local natural gas distribution companies in Oregon, filed a lawsuit on March 18, 2022, challenging the Climate Protection

MDU Resources Group, Inc.

fall of 2022.

Program Rule.

The lawsuit was filed on behalf of customers as the Company does not believe the rule accomplishes environmental stewardship in the most effective and affordable way possible.

• 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.

As directed by the Climate Commitment Act, in September 2022, the Washington DOE published its final rule on the Climate Commitment Program.

The rule was effective on October 30, 2022 and emissions compliance began on January 1, 2023.

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.

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.

For more information about the anticipated compliance costs, see Items 1 and 2 - Business Properties.

Cascade's draft 2023 Washington integrated resource plan projects customer bills could increase by about 23 percent by 2035 compared with costs included in bills today and by about 78 percent by 2050 as a result of the legislation.

On October 14, 2022, the Company filed a request for the use of deferred accounting for costs related to the rule and began deferring those costs.

• On April 22, 2022, the Washington State Building Code Council approved revisions to the state's commercial energy code that will significantly limit the use of natural gas for space and water heating in new and retrofitted commercial and multifamily buildings and proposed the review of similar restrictions in the future for residential buildings.

On November 4, 2022, the Washington State Building Code Council adopted new residential codes requiring gas or electric heat pumps for most new space and water heating installations.

The Company continues to assess the impact of these revisions.

• The Company has reviewed the income tax provisions of the IRA signed into law in August 2022, and the Company will continue to evaluate whether any of the new or renewed energy tax credits will provide a benefit.

Strategy and challenges The pipeline segment provides natural gas transportation, underground storage and non-regulated cathodic protection 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.

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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.

In support of this strategy, the North Bakken Expansion project in western North Dakota 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.

In addition, the Line Section 7 Expansion project was placed in service in August of 2022 and increased system capacity by 6.7 MMcf per day.

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 pipeline segment is subject to extensive regulation related to 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 Company has continued to actively manage the national supply chain challenges being faced by working with its manufacturers and suppliers to help mitigate some of these risks on its business.

The segment regularly experiences extended lead times on raw materials that are critical to the segment's construction and maintenance work which could delay maintenance work and construction projects potentially causing lost revenues and/or increased costs.

The Company is partially mitigating these challenges by planning for extended lead times further in advance.

The segment is also currently experiencing inflationary pressures with increased raw material costs.

The Company expects supply chain challenges and inflationary pressures to continue in 2023.

The segment focuses on the recruitment and retention of a skilled workforce to remain competitive and provide services to its customers.

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End of period 21.2 23.0 25.5

2022 compared to 2021 Pipeline earnings decreased $5.6 million as a result of:

• Revenues increased $13.0 million.

◦ Driven by increased transportation volume revenues of $16.4 million, largely due to the North Bakken Expansion project placed in service in February 2022.

◦ Partially offset by:

▪ Lower non-regulated project revenues of $2.3 million.

▪ Lower transmission rates due to expired negotiated contracts converted to tariff rates.

• Operation and maintenance decreased $400,000.

◦ Primarily due to:

▪ Lower payroll-related costs of $2.2 million, largely related to lower incentive accruals and benefit-related costs.

▪ Lower non-regulated project costs of $1.3 million directly associated with lower non-regulated project revenues, as previously discussed.

◦ Partially offset by higher legal, maintenance materials and contract services.

• Depreciation, depletion and amortization increased $6.4 million due to increased property, plant and equipment balances, largely related to the North Bakken Expansion project.

• Taxes, other than income decreased $400,000 resulting from lower property taxes of $700,000 in Montana, partially offset by higher property taxes in North Dakota.

• Other income decreased $8.1 million, primarily due to:

◦ Lower AFUDC of $7.8 million as a result of the completion of the North Bakken Expansion project placed in service in February 2022.

◦ Lower returns on the Company's nonqualified benefit plan investments, as discussed in Note 8.

• Interest expense increased $4.3 million, resulting from interest associated with higher debt balances to fund capital expenditures and lower AFUDC as a result of the North Bakken Expansion project placed in service in February 2022.

• Income tax expense increased $600,000, largely a result of a reduction in tax credits, partially offset by lower income before income taxes.

MDU Resources Group, Inc.

2021 compared to 2020 Pipeline earnings increased $3.9 million as a result of:

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▪ 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.

▪ Lower returns on the Company's nonqualified benefit plan investments.

• Interest expense decreased $600,000.

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◦ 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.

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.

Outlook The Company continues to monitor and assess the potential impacts of two FERC draft policy statements issued in the first quarter of 2022.

One is the Updated Certificate of Policy Statement, which describes how the FERC will determine whether a new interstate natural gas transportation project is required by public convenience and necessity.

It includes increased focus on a project's purpose and need and the environmental impacts;

as well as impacts on landowners and environmental justice communities.

The second draft policy statement, the Interim GHG Policy Statement, 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.

The Company has reviewed the income tax provisions of the IRA signed into law in August 2022 and does not expect any material income tax benefits as a result.

The Company has also evaluated the impacts of the methane emissions charge imposed under the IRA legislation and does not expect any material fees given the current GHG reporting thresholds.

The Company continues to monitor, evaluate and implement additional GHG emissions reduction strategies, including increased monitoring frequency and emission source control technologies to minimize potential risk.

The EPA recently proposed additional rules to update, strengthen and expand standards intended to significantly reduce GHG emissions and other air pollutants from the oil and natural gas industries.

The standards will apply to natural gas compressors, pneumatic controllers and pumps, fugitive emissions components and super-emitter events.

The EPA projects the final rules will be issued in August 2023.

Additionally, the EPA anticipates revising the current GHG reporting rules to incorporate provisions in the IRA.

These revisions are anticipated to be issued in April 2023.

The Company continues to monitor and assess the proposed rules 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.

The completion of organic growth projects has contributed to higher volumes of natural gas the Company transports through its system.

Associated natural gas production in the Bakken fell during the COVID-19 pandemic delaying previously

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forecasted production growth.

Natural gas production has rebounded to pre-pandemic levels and drilling rig activities have increased, and the Company expects continued gradual increases over the next 2 years.

The production delay, along with long-term contractual commitments on the North Bakken Expansion project placed in service in February 2022, has negatively impacted customer renewals of certain contracts.

Bakken natural gas production outlook remains positive with continued growth expected due to new oil wells and increasing gas to oil ratios.

Increases in national and global natural gas supply has moderated pressure on natural gas prices and 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 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 improving existing operations and growth opportunities through organic projects in all areas in which it operates, which includes additional projects with local distribution companies, Bakken area producers and industrial customers in various stages of development.

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.

The Wahpeton Expansion project consists of approximately 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.

On May 27, 2022, the Company filed with FERC its application for the project and received FERC's draft environmental impact statement for the project on November 3, 2022.

In accordance with the FERC schedule for environmental review on the project, the final environmental impact statement is planned to be available in April 2023.

On September 19, 2022, the Company filed with the FERC its prior notice application for its 2023 Line Section 27 Expansion project.

This project consists of a new compressor station and ancillary facilities and is designed to increase capacity by 175 MMcf per day, which is supported by a long-term customer agreement.

Construction is expected to begin in early 2023, pending regulatory approvals, with an anticipated completion date in late 2023.

On December 22, 2022, the Company filed with the FERC its prior notice application for its Grasslands South Expansion project.

This project consists of approximately 15 miles of pipe in western North Dakota, utilizing existing capacity on its Grasslands Subsystem to a new connection with Big Horn Gas Gathering, LLC in northeastern Wyoming and ancillary facilities in North Dakota and Wyoming.

A long-term customer agreement supports a design for incremental capacity of 94 MMcf per day.

Construction is expected to begin in the second quarter of 2023, pending regulatory approvals, with an anticipated completion date in late 2023.

In addition, the Company has entered into long-term customer agreements for the construction of a fourth growth project with incremental natural gas design capacity anticipated to be 25 MMcf per day.

The project is dependent on regulatory approvals and anticipated to be completed in 2023.

See Capital Expenditures within this section for additional information on the expenditures related to these projects.

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;

Strategy and challenges The segment is a leading aggregates-based construction materials and contracting services provider in the United States, as discussed in Items 1 and 2 - Business Properties.

The segment focuses on continued growth and maximizing its vertical integration, leveraging its core values to be a supplier of choice in all its markets.

The segment is also focused on its commitment to its employees, customers and communities by operating with integrity and always striving for excellence;

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.

sustainable practices to create value for the communities it serves;

being the provider of choice in midsize, high-growth markets;

strengthening the long-term, strategic aggregate reserve position through available purchase and/or lease opportunities in existing and new geographies;

and enhancing its supply chain to provide reliable, timely and efficient services to its end customers.

As previously discussed, the Company is pursuing a tax-free spinoff of the construction materials and contracting segment, and the separation is expected to be complete in the second quarter of 2023.

The segment is one of the leading producers of crushed stone and sand and gravel, and the segment continues to strategically manage its aggregate reserves, 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.

The Company's aggregate reserves are naturally declining and as a result, the Company seeks permit expansion and acquisition opportunities to replace the reserves.

The segment's management continually monitors its margins and has been proactive in applying strategies to address the inflationary impacts seen across the United States.

The Company has increased its product pricing where necessary and continues to implement cost savings initiatives to mitigate these effects on the segment's gross margin.

Due to existing contractual provisions, there can be a lag between the announced price increases and the time when they can be fully recognized.

The Company will continue to evaluate further price increases on a regular cadence to stay ahead of inflationary pressures and enhance stockholder value.

The segment operates in geographically diverse and competitive markets yet strives to maximize efficiencies, including transportation costs and economies of scale, to maintain strong margins.

The segment's margins can experience negative pressure from competition, as well as impacts of the volatility in the cost of raw materials such as fuel, asphalt oil, cement and steel, with fuel and asphalt oil costs having the most significant impact on

MDU Resources Group, Inc.

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.

the segment's recent results.

Such volatility and inflationary pressures may continue to 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.

These increases are partially offset by mitigation measures implemented by the Company, including price increases, escalation clauses in contracting services contracts, pre-purchased materials and other cost savings initiatives.

While the Company has experienced some supply chain constraints, it continues to have good relationships with its suppliers and has not experienced any material adverse impacts of shortages or delays on materials.

Other variables that can impact the segment's margins include adverse weather conditions, the timing of project starts or completions 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.

As a people first company, the segment continually takes steps to address the challenge of recruitment and retention of employees.

In order to help attract new workers to the construction industry and enhance the skills of its current employees, the Company has completed construction of a corporate-wide, state-of-the-art training facility in the Pacific Northwest.

The training facility offers hands-on training for heavy equipment operators and truck drivers, as well as leadership and safety training.

Trends in the labor market include an aging workforce and availability issues, and most of the markets the segment operates in have experienced labor shortages, largely truck drivers, causing increased labor-related costs and delays or inefficiencies on projects.

The new training facility is expected to help address some of these challenges.

The Company continues to monitor the labor markets and assess additional opportunities to enhance and support its workforce.

Despite these efforts, the Company 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.

Earnings overview - The following information summarizes the performance of the construction materials and contracting segment.

7 unchanged sentences

Total cost of sales 2,173.8 1,881.9 1,807.4 16 % 4 %

Gross margin 289.6 314.1 274.0 (7.8) % 14.6 %

Gross profit 360.9 347.0 370.6 4 % (6) %

Selling, general and administrative expense:

4 unchanged sentences

Operating income 194.3 191.1 214.5 2 % (11) %

Other income 1.3 .8 1.6 62.5 % (50.0) %

Other income (expense) (5.4) 1.3 .8 (515) % 63 %

Interest expense 30.1 19.2 20.6 57 % (7) %

2 unchanged sentences

Net income $ 116.2 $ 129.8 $ 147.3 (10) % (12) %

Operating statistics Revenues Gross margin

* The Company identified certain costs that were reclassified from cost of sales to selling, general and administrative expenses in 2021 and 2020 of $57.4 million and $56.5 million, respectively, and had no impact to net income.

Operating statistics Revenues Gross profit

2022 2021 2020 2022 2021 2020

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• Revenues increased $305.8 million.

◦ Primarily the result of increased revenues across all product lines as the business benefited from higher average selling prices of nearly $250 million, largely in response to inflationary pressures.

◦ Also impacting materials revenues were:

▪ Increased aggregates sales volumes of $10.2 million due mainly to recent acquisitions contributing 2.2 million tons, offset in part by lower volumes in certain states.

▪ Increased asphalt sales volumes of $7.2 million from higher demand in California, Minnesota, Montana, North Dakota and Wyoming of $13.7 million, partially offset by lower volumes in Texas due to less available paving work.

▪ Lower ready-mix concrete sales volumes of $38.5 million across all regions resulting from lower residential demand and fewer impact projects.

▪ Decreased revenues for other products associated with volumes, largely related to asphalt oil.

▪ Increased contracting revenues of $170.2 million across most regions as a result of more available agency and commercial work, recent acquisitions contributing $27.9 million and more available paving work in Idaho, Minnesota, Montana, North Dakota and Wyoming.

In addition, inflationary pressures led to higher contract values in all regions.

◦ These increases were partially offset by an increase in the elimination for internal materials sales used in other products and services.

• Gross profit increased $13.9 million.

◦ Primarily the result of higher average selling prices, as previously noted, contributions from recent acquisitions of $12.9 million and increased margins for aggregates and ready-mix concrete as a result of implemented price increases outpacing inflationary pressures.

◦ Partially offset by higher operating costs across the business, mostly the result of inflationary pressures.

These costs include higher asphalt oil costs of $59.3 million;

higher labor costs of $32.0 million;

higher fuel costs of $42.6 million;

and higher cement costs of $20.7 million.

• Selling, general and administrative expense increased $10.7 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.

▪ Increased payroll-related costs of $11.6 million, partially resulting from inflationary pressures.

▪ Increased travel expenses of $2.3 million.

▪ Increased office expenses of $1.7 million.

▪ Increased professional fees of $1.7 million, partially due to increased legal and audit fees.

▪ Increased expected credit losses of $1.4 million related to the absence of recoveries received during 2021.

▪ Increased safety and training costs.

◦ Offset in part by higher net gains on asset sales of $7.5 million.

• Other income (expense) decreased $6.7 million, primarily resulting from lower returns on the Company's nonqualified benefit plan investments, as discussed in Note 8.

• Interest expense increased $10.9 million, related to higher debt balances to fund recent acquisitions and higher working capital needs, along with higher average interest rates.

• Income tax expense decreased $800,000 as a result of lower income before income taxes.

MDU Resources Group, Inc.

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 acquisitions in 2021 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.

▪ 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 acquisitions in 2021 contributed an additional $4.5 million.

Ready-mix concrete revenues also benefited from an increase in average sales price in all regions.

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▪ 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.

• Gross profit decreased $23.6 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.

▪ Lower gross profit and 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.

▪ Lower asphalt gross profit of $5.1 million, largely resulting from less available paving work.

▪ Lower contracting services gross profit resulting from less available paving work of $8.6 million, as previously discussed, and the absence of a few large jobs for $5.4 million.

Margins were also impacted by higher fuel costs, as previously discussed.

▪ Lower aggregates gross profit resulting from reduced work in Hawaii due to the overall slowdown of the travel industry resulting from COVID-19 of $3.9 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 $2.1 million and South Dakota of $1.4 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.

◦ Partially offset by an increase in ready-mix concrete gross profit of $7.1 million due in part to higher average pricing in all regions and higher volumes in most regions.

• Selling, general and administrative expense decreased $200,000.

◦ Largely the result of:

▪ The recovery of prior bad debt expense of $2.1 million.

• Higher gains on asset sales of $900,000.

▪ Higher net gains on asset sales of $1.4 million.

◦ Offset in part by:

• Increased payroll-related costs of $900,000, primarily for higher health care costs.

▪ Increased payroll-related costs of $1.6 million, primarily for higher health care costs.

▪ Higher acquisition costs of $700,000.

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• Income tax expense decreased $4.0 million as a result of lower income before income taxes.

Outlook In August 2022, the Company announced its intent to separate this segment into a standalone publicly traded company.

The separation is expected to result in two independent, publicly traded companies:

(1) MDU Resources Group, Inc., the existing company and (2) Knife River, a construction materials and contracting services company.

The separation is expected to be completed in the second quarter of 2023 and is expected to unlock inherent value within the two companies, which each have unique growth prospects and investment opportunities.

The Company may, at any time and for any reason until the proposed transaction is complete, abandon the separation or modify or change its terms.

For a complete discussion of all of the conditions to and the risks and uncertainties associated with the separation and distribution, see Item 1A - Risk Factors.

50 MDU Resources Group, Inc.

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.

Funding for public projects is dependent on federal and state funding, such as appropriations to the Federal Highway Administration.

The American Rescue Plan Act enacted 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.

Additionally, the bipartisan infrastructure proposal, known as the IRA, was enacted in the fourth quarter of 2021 and is providing long-term opportunities by designating $119 billion for the repair and rebuilding of roads and bridges across the Company's footprint.

In addition, the IRA provides $369 billion in new funding for clean energy programs.

These programs include new tax incentives for solar, battery storage and hydrogen development along with funding to expand the production of electric vehicles and the build out of infrastructure to support electric vehicles.

In addition to federal funding, 11 out of the 14 states in which the Company operates have implemented their own funding mechanisms for public projects, including projects related to highways, airports and other public infrastructure.

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 segment's vertically integrated aggregates-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.

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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.

Spending on private development is highly dependent on both local and national economic cycles, providing additional sales during times of strong economic cycles and potential for reductions during recessionary periods.

During 2022 and 2021, the Company made strategic purchases and completed acquisitions that support the Company's long-term strategy to expand its market presence in the higher-margin materials markets.

The Company continues to evaluate additional acquisition opportunities.

For more information on the Company's business combinations, see Item 8 - Note 4.

In 2022, the Company is upgrading its prestress facility located in Spokane, Washington.

The state-of-the-art facility is expected to be completed during the first half of 2023.

The facility is expected to be a platform for growth through improved productivity and quality, which will help meet strong market demand for prefabricated concrete solutions.

The construction materials and contracting segment's backlog remained strong at December 31, 2022, at $935 million, as compared to backlog at December 31, 2021, of $708 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.

A significant portion of the Company's backlog at December 31, 2022, relates to publicly funded projects, largely street and highway construction projects, which are primarily driven by public work projects for state departments of transportation.

Period over period increases or decreases in backlog cannot be used as an indicator of future revenues or net income.

Of the $935 million of backlog at December 31, 2022, the Company expects to complete an estimated $836 million during 2023.

While the Company believes the current backlog of work remains firm, prolonged delays in the receipt of critical supplies and materials or continued increases to pricing could result in customers seeking to delay or terminate existing or pending agreements.

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.

Construction Services

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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.

The growth experienced by the segment in recent years is due in part to the project awards in the markets served and the 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 markets in which it operates, including those described in Item 1A - Risk Factors.

These factors, and those noted below, have caused fluctuations in revenues, gross margins and earnings in the past and are likely to cause fluctuations in the future.

• Revenue mix and impact on margins.

The mix of revenues based on the types of services the segment provides can impact margins as certain industries and services provide higher margin opportunities.

Larger or more complex projects typically result in higher margin opportunities since the segment assumes a higher degree of performance risk and there is greater utilization of the segment's resources for longer construction timelines.

However, larger or more complex projects have a higher risk of regulatory and seasonal or cyclical delay.

Project schedules fluctuate, which can affect the amount of work performed in a given period.

Smaller or less complex projects typically have a greater number of companies competing for them, and competitors at times may be more aggressive when pursuing available work.

A greater percentage of smaller scale or less complex work in a given period could negatively impact margins due to the inefficiency of transitioning between a greater number of smaller projects versus continuous production on a few larger projects.

• Project variability and performance.

Margins for a single project may fluctuate period to period due to changes in the volume or type of work performed, the pricing structure under the project contract or job productivity.

Productivity and performance on a project can vary period to period based on a number of factors, including unexpected project difficulties;

unexpected project site conditions;

project location, including locations with challenging operating conditions or difficult geographic characteristics;

whether the work is on an open or encumbered right of way;

inclement weather or severe weather events;

environmental restrictions or regulatory delays;

political or legal challenges related to a

MDU Resources Group, Inc.

and the performance of third parties.

In addition, the type of contract can impact the margin on a project.

Under fixed-price contracts, which are more common with larger or more complex projects, the segment assumes risk related to project estimates versus execution.

Revenues under this type of contract can vary, sometimes significantly, from original projects due to additional project complexity;

timing uncertainty or extended bidding;

extended regulatory or permitting processes;

and other factors, which can result in a reduction in profit or losses on a project.

• Subcontractor work and provision of materials.

Some work under project contracts is subcontracted out to other companies and margins on subcontractor work is generally lower than work performed by the Company.

Increased subcontractor work in a given period may therefore result in lower margins.

In addition, inflationary or other pressures may increase the cost of materials under fixed-price contracts and may result in decreased margins on the project.

The Company has worked to implement provisions in project contracts to allow for the pass-through of inflationary costs to customers where feasible and will continue to do so to mitigate the impacts.

The segment's management continually monitors its operating margins and has been proactive in addressing the inflationary impacts seen across the United States.

The segment is currently experiencing continued labor constraints and increased fuel and material costs, as well as impacts from delays in the national supply chain.

The segment is working with suppliers and providers of goods and services in advance of construction to secure pricing and reduce delays for goods and services.

The inflationary costs and national supply chain challenges experienced by the segment have increased costs but have not had significant impacts to the procurement of project materials.

These increases are partially offset by mitigation measures implemented by the Company, including escalation clauses in contracts, pre-purchased materials and other cost savings initiatives.

The segment also continues recruitment and retention efforts to attract and retain employees.

The Company expects these inflationary pressures and national supply chain challenges to continue.

Accordingly, operating results in any particular period may not be indicative of the results that can be expected for any other period.

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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.

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.

Most of the markets the segment operates in have experienced labor shortages which in some cases have caused increased labor-related costs.

The Company continues to monitor the labor markets and expects labor costs to continue to increase based on increases included in the collective bargaining agreements 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.

Earnings overview - The following information summarizes the performance of the construction services segment.

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Total cost of sales 2,423.2 1,803.7 1,837.4 34 % (2) %

Gross margin 247.9 258.3 220.1 (4.0) % 17.4 %

Gross profit 276.0 247.9 258.3 11 % (4) %

Selling, general and administrative expense:

Operation and maintenance 101.5 92.9 98.1 9 % (5) %

Depreciation, depletion and amortization 4.5 7.8 2.0 (42.3) % NM

Depreciation, depletion and amortization 4.6 4.5 7.8 2 % (42) %

Taxes, other than income 5.3 4.8 4.8 10 % — %

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Net income $ 124.8 $ 109.4 $ 109.7 14 % — %

* NM - not meaningful

52 MDU Resources Group, Inc.

Operating Statistics

Revenues Gross margin

Revenues Gross profit

Business Line 2022 2021 2020 2022 2021 2020

13 unchanged sentences

$ 2,699.2 $ 2,051.6 $ 2,095.7 $ 276.0 $ 247.9 $ 258.3

2022 compared to 2021 Construction services earnings increased $15.4 million as a result of:

• Revenues increased $647.6 million.

◦ Largely due to:

▪ Increased electrical and mechanical revenues, partially as a result of inflationary pressures as well as:

◦ Higher commercial revenues driven largely by a $251.5 million increase in hospitality projects due to the progress on large projects, a $121.8 million increase in data center projects driven by both the number of and progress on projects and an increase in general commercial projects as a result of project mix and progression of contracts.

◦ Higher renewable revenues from the timing of and progress on projects.

◦ Higher institutional revenues largely the result of increased activity and progress on projects from education projects of $26.0 million, healthcare projects of $24.1 million and government projects.

▪ Increased utility revenues for electrical projects of $37.5 million, underground projects of $24.5 million, distribution projects of $12.7 million, telecommunications projects of $7.0 million and substation projects, with each sector being driven by higher customer demand.

These increases were partially offset by lower transmission and storm work projects.

◦ Partially offset by:

▪ Lower industrial revenues driven by decreased demand for maintenance, high-tech and refinery projects and lower service revenues driven by decreased demand for the repair and maintenance of electrical and mechanical projects.

▪ Lower transportation revenues, primarily from lower customer demand for street lighting projects of $39.8 million.

• Gross profit increased $28.1 million.

◦ Largely due to the increased electrical and mechanical revenues previously discussed.

◦ Partially offset by higher operating costs related to inflationary pressures, including labor, materials and equipment costs.

• Selling, general and administrative expense increased $9.2 million resulting from higher payroll-related costs of $5.7 million, increased expected credit losses of $2.4 million due to changes in estimates during 2021 and higher office expenses.

• Other income increased $4.7 million, primarily related to the Company's joint ventures.

• Interest expense increased $2.8 million due to higher working capital needs and higher interest rates.

• Income tax expense increased $5.4 million as a result of higher income before income taxes.

2021 compared to 2020 Construction services earnings decreased $300,000 as a result of:

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▪ 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.

MDU Resources Group, Inc.

• Gross profit 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.

▪ The absence of higher margin utility projects in 2020 negatively impacted gross profit by $15.0 million, which includes storm power line repair and fire hardening work.

▪ Decreased transportation gross profit, 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.

▪ Increased industrial gross profit 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.

10 unchanged sentences

• 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.

◦ 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.

◦ 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.

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.

Outlook Funding for public projects is highly dependent on federal and state funding, such as appropriations to the Federal Highway Administration.

The American Rescue Plan 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.

Additionally, the Infrastructure Investment and Jobs Act, was enacted in the fourth quarter of 2021 and is providing long-term opportunities by designating funds for investments for upgrades to electric and grid infrastructure, transportation systems, airports and electric vehicle infrastructure, all industries this segment supports.

In addition, the IRA provides $369 billion in new funding for clean energy programs.

The Company will continue to monitor the implementation of these legislative items.

The Company continues to have bidding opportunities in the specialty contracting markets in which it operated in during 2022, 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:

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$ 2,131 $ 1,385

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.

The increase in backlog at December 31, 2022, as compared to backlog at December 31, 2021, was largely attributable to the new project opportunities that the Company continues to be awarded across its diverse operations, particularly within the commercial, industrial, institutional, and power utility markets.

The increases in backlog have been offset by decreases in the renewable and transportation markets due to the timing of project completions.

Period over period increases or decreases in backlog cannot be used as an indicator of future revenues or net income.

Of the $2.1 billion of backlog at December 31, 2022, the Company expects to complete an estimated $1.8 billion during 2023.

While the Company believes the current backlog of work remains firm, prolonged delays in the receipt of critical supplies and materials could result in customers seeking to delay or terminate existing or pending agreements.

As of December 31, 2022, customers have not provided the Company with any indications that they no longer wish to proceed with the planned projects that have been included in backlog.

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.

Factors noted in Item 1A - Risk Factors can cause revenues to be realized in periods and at levels that are different from originally projected.

54 MDU Resources Group, Inc.

11 unchanged sentences

Loss before income taxes (12.5) (6.1) (3.5) 105 % (74) %

Income tax benefit (.2) (.4) (.1) 50.0% NM

Income tax benefit (1.2) (.2) (.4) 500 % 50 %

Net loss $ (11.3) $ (5.9) $ (3.1) (93) % (90) %

* 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.

During 2022, Other experienced higher operation and maintenance expense related to costs incurred of $14.4 million for the announced strategic initiatives, partially offset by a reduction in the estimated losses recorded at the captive insurer.

Other was positively impacted by higher premiums included in operating revenues in 2022 for the captive insurer compared to 2021.

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

28 unchanged sentences

Adjustments to reconcile net income to net cash provided by operating activities 355.0 350.9 276.2 4.1 74.7

Changes in current assets and current liabilities, net of acquisitions:

Receivables (363.3) (60.0) (2.8) (303.3) (57.2)

3 unchanged sentences

Other current liabilities 27.0 (17.6) 35.6 44.6 (53.2)

Pension & postretirement benefit plan contributions (.5) (.4) (25.6) (.1) 25.2

Pension and postretirement benefit plan contributions (.5) (.5) (.4) — (.1)

Other noncurrent changes (6.0) (55.4) 30.3 49.4 (85.7)

2 unchanged sentences

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.

The increase in cash flows provided by operating activities from 2022 to 2021 was largely driven by higher 2022 accounts payable for natural gas purchases due to higher natural gas prices and colder weather, partially offset by the associated increased receivables from customers.

Partially offsetting the increase in cash flows provided by operating activities was higher working capital needs at the construction services business due to fluctuations in job activity resulting in higher receivables in the period, as well as lower collections of accounts receivable compared to 2021, offset in part by increased accounts payable.

In addition, higher revenues resulted in higher receivables in the period at the construction materials and contracting business.

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, 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.

Partially offsetting the decrease in cash flows provided by operating activities was higher bonus depreciation related to acquisitions at construction materials and contracting business.

56 MDU Resources Group, Inc.

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Net cash used in investing activities $ (638.9) $ (885.9) $ (630.2) $ 247.0 $ (255.7)

The decrease in cash used in investing activities from 2022 to 2021 was primarily the result of lower cash used for acquisition activity at the construction materials and contracting business, along with increased proceeds from asset sales.

Decreased capital expenditures at the pipeline business as a result of the North Bakken Expansion project being placed in service in February 2022 were mostly offset by increased capital expenditures at the natural gas distribution business for higher natural gas distribution projects, including natural gas mains and meters, and at the electric business for increased electric production projects, including the construction of Heskett Unit 4 and the repower of Diamond Willow.

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

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Net cash provided by (used in) financing activities $ 155.2 $ 384.7 $ (145.1) $ (229.5) $ 529.8

The decrease in cash flows provided by financing activities from 2022 to 2021 was largely the result of increased repayment and decreased issuance of long-term debt at the construction materials and contracting business.

Partially offsetting this was increased issuances of short-term borrowings as long-term debt was replaced with short-term debt at the construction materials and contracting business related to the anticipated spinoff previously discussed and decreased repayment of short-term borrowings at Montana-Dakota.

Partially offsetting the decrease was the increased issuance of long-term debt at the construction services business as a result of higher working capital needs and the absence of the issuance of common stock under the Company's "at-the-market" offering during 2022, as discussed in Note 12.

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.

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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

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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

For 2022, the Company

MDU Resources Group, Inc.

pension income is currently projected to be approximately $2.3 million in 2022.

assumed a long-term rate of return on its qualified defined pension plan assets of 6 percent.

Due to the decline in the equity and fixed-income markets, the Company experienced more of a loss than estimated on its qualified defined pension plan assets.

Differences between actuarial assumptions and actual plan results are deferred and amortized into expense when the accumulated differences exceed 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets.

Therefore, this change in asset values will be reflected in future expenses of the plans beginning in 2023.

The funded status of the plans did not change significantly with the decrease in assets because the liabilities decreased as well.

The Company's benefit obligations for the pension plans also saw a decline in value due to higher discount rates at the end of 2022.

At December 31, 2022, the pension plans' accumulated benefit obligations exceeded these plans' assets by approximately $41.6 million.

Pretax pension income reflected in the Consolidated Statements of Income for the years ended December 31, 2022, 2021 and 2020, was $2.3 million, $1.7 million and $684,000, respectively.

The Company's pension income is currently projected to be approximately $236,000 in 2023.

Funding for the pension plans is actuarially determined.

The Company has no minimum funding requirements for its defined benefit pension plans for 2023 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.

There were no minimum required contributions for the years ended December 31, 2022 and 2021 or 2020.

For more information on the Company's pension plans, see Item 8 - Note 18.

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The Company's capital expenditures for 2020 through 2022 and as anticipated for 2023 through 2025 are summarized in the following table.

Actual* Estimated

Actual (a) Estimated

2020 2021 2022 2023 2024 2025

4 unchanged sentences

Pipeline 62 235 62 145 117 127

Construction materials and contracting

190 191 418 189 166 172

Construction services 61 84 29 47 42 43

Construction materials and contracting (b) 191 418 182 125 183 173

Construction services (b) 84 29 36 38 34 34

Other 3 2 3 3 4 4

Total capital expenditures $ 648 $ 936 $ 657 $ 647 $ 776 $ 728

* 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.

(a) Capital expenditures for 2022, 2021 and 2020 include noncash transactions such as capital expenditure-related accounts payable, the issuance of the Company's equity securities in connection with an acquisition, AFUDC and accrual of holdback payments in connection with acquisitions totaling $1.7 million, $38.7 million and $(15.7) million, respectively.

(b) Capital expenditures for both the construction materials and contracting and construction services segments are subject to change with the announced strategic initiatives.

The 2022 capital expenditures were funded by internal sources, equity issuance, long-term debt issuances 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 2023 through 2025 the development and construction of a renewable natural gas facility at the Deschutes County Landfill near Bend, Oregon, at the natural gas distribution segment;

construction of Heskett Unit 4 at the electric segment;

and the Wahpeton Expansion and additional growth projects at the pipeline segment, as previously discussed in Business Segment Financial and Operating Data.

Estimated capital expenditures for the years 2023 through 2025 include those for:

6 unchanged sentences

• Power generation and transmission opportunities

• Environmental upgrades

• Environmental upgrades, including:

◦ The investigation of a manufactured gas plant site

◦ The closure of coal ash management units

◦ Upgrades to maintain air emissions compliance at electric generating stations

• Other growth opportunities

58 MDU Resources Group, Inc.

The Company continues to evaluate potential future acquisitions and other growth opportunities that would be incremental to the outlined capital program;

4 unchanged sentences

and issuance of debt and equity securities if necessary.

54 MDU Resources Group, Inc.

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.

The primary sources of cash other than cash generated from operating activities are cash from revolving credit facilities, the issuance of long-term debt and the sale of equity securities.

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.

Certain debt instruments of the Company's subsidiaries contain restrictive and financial covenants and cross-default provisions.

In order to borrow under the respective debt instruments, 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, 2022.

In the event the subsidiaries do not comply with the applicable covenants and other conditions, alternative sources of funding may need to be pursued.

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(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.

At December 31, 2022, 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.

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(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.

At December 31, 2022, there were no amounts outstanding under the revolving credit agreement.

The respective commercial paper programs are supported by revolving credit agreements.

1 unchanged sentence

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 54 percent and 55 percent at December 31, 2022 and 2021, respectively.

1 unchanged sentence

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.

Management believes this ratio is an indicator of how the Company is financing its operations, as well as its financial strength.

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.

3 unchanged sentences

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.

MDU Energy Capital On October 21, 2022, MDU Energy Capital entered into a $11.5 million term loan agreement with a SOFR-based variable interest rate and a maturity date of July 21, 2023.

The agreement contains customary covenants and provisions, including a covenant of MDU Energy Capital not to permit, at any time, the ratio of total debt to total capitalization to be greater than 70 percent.

The covenants also include certain restrictions on the sale of certain assets, loans and investments.

Cascade On November 30, 2022, Cascade amended and restated its revolving credit agreement to extend the maturity date to November 30, 2027.

Any borrowings under the revolving credit agreement are classified as long-term debt as they are intended to be refinanced on a long-term basis

MDU Resources Group, Inc.

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.

through continued borrowings.

The credit agreement contains customary covenants and provisions, including a covenant of Cascade not to permit, at any time, the ratio of total debt to total capitalization to be greater than 65 percent.

Other covenants include restrictions on the sale of certain assets, limitations on indebtedness and the making of certain investments.

On June 15, 2022, Cascade issued $50.0 million of senior notes under a note purchase agreement with maturity dates ranging from June 15, 2032 to June 15, 2052, at a weighted average interest rate of 4.50 percent.

The agreement contains customary covenants and provisions, including a covenant of Cascade not to permit, at any time, the ratio of debt to total capitalization to be greater than 65 percent.

Other covenants include restrictions on the sale of certain assets, limitations on indebtedness and the making of certain investments.

On January 20, 2023, Cascade entered into a $150.0 million term loan agreement with a SOFR-based variable interest rate and a maturity date of January 19, 2024.

The agreement contains customary covenants and provisions, including a covenant of Cascade 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.

Intermountain On October 13, 2022, Intermountain amended and restated its revolving credit agreement to increase the borrowing capacity to $100.0 million and extend the maturity date to October 13, 2027.

Any borrowings under the revolving credit agreement are classified as long-term debt as they are intended to be refinanced on a long-term basis through continued borrowings.

The credit agreement contains customary covenants and provisions, including a covenant of Intermountain not to permit, at any time, the ratio of total debt to total capitalization to be greater than 65 percent.

Other covenants include restrictions on the sale of certain assets, limitations on indebtedness and the making of certain investments.

On June 15, 2022, Intermountain issued $40.0 million of senior notes under a note purchase agreement with maturity dates ranging from June 15, 2052 to June 15, 2062, at a weighted average interest rate of 4.68 percent.

The agreement contains customary covenants and provisions, including a covenant of Intermountain not to permit, at any time, the ratio of debt to total capitalization to be greater than 65 percent.

Other covenants include restrictions on the sale of certain assets, limitations on indebtedness and the making of certain investments.

On January 20, 2023, Intermountain entered into a $125.0 million term loan agreement with a SOFR-based variable interest rate and a maturity date of January 19, 2024.

The agreement contains customary covenants and provisions, including a covenant of Intermountain 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.

Centennial Centennial's objective is to maintain acceptable credit ratings in order to access the capital markets through the issuance of commercial paper.

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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.

On March 18, 2022, Centennial entered into a $100.0 million term loan agreement with a SOFR-based variable interest rate and a maturity date of March 17, 2023.

The agreement contains customary covenants and provisions, including a covenant of Centennial 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.

On March 23, 2022, Centennial issued $150.0 million of senior notes under a note purchase agreement with maturity dates ranging from March 23, 2032 to March 23, 2034, at a weighted average interest rate of 3.71 percent.

The agreement contains customary covenants and provisions, including a covenant of Centennial not to permit, at any time, the ratio of debt to total capitalization to be greater than 60 percent.

Other covenants include restrictions on the sale of certain assets, limitations on indebtedness and the making of certain investments.

On December 19, 2022, Centennial entered into a $135.0 million term loan agreement with a SOFR-based variable interest rate and a maturity date of December 18, 2023.

The covenants also include certain restrictions on the sale of certain assets, loans and investments.

WBI Energy Transmission On December 22, 2022, WBI Energy Transmission amended its uncommitted note purchase and private shelf agreement to increase capacity to $350.0 million with an expiration date of December 22, 2025.

On December 22, 2022, WBI Energy Transmission issued $40.0 million in senior notes under the private shelf agreement with a maturity date of December 22, 2030, at an interest rate of 6.67 percent.

WBI Energy Transmission had $235.0 million of notes outstanding at December 31, 2022, which reduced the remaining capacity under this uncommitted private shelf agreement to $115.0 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.

This agreement contains customary covenants and provisions, including a covenant of WBI Energy Transmission not to permit, as of the end of any fiscal quarter, the ratio of total debt to total capitalization to be greater than 55 percent.

Other covenants include a limitation on priority debt, restrictions on the sale of certain assets and the making of certain investments.

60 MDU Resources Group, Inc.

Equity Resources

8 unchanged sentences

As of December 31, 2022, the Company had capacity to issue up to 3.6 million additional shares of common stock under the "at-the-market" offering program.

The Company did not issue any shares under the "at-the-market" offering program in 2022.

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:

(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.

Material cash requirements

4 unchanged sentences

(In millions)

Short-term debt $ 246.5 $ — $ — $ — $ 246.5

Long-term debt maturities* 78.1 654.7 371.6 1,743.9 2,848.3

19 unchanged sentences

For information regarding new accounting standards, see Item 8 - Note 2, which is incorporated herein by reference.

MDU Resources Group, Inc.

Critical Accounting Estimates

6 unchanged sentences

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.

The Company performs its goodwill impairment testing annually in the fourth quarter.

7 unchanged sentences

For the years ended December 31, 2022, 2021 and 2020, 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.

At October 31, 2022, the fair value substantially exceeded the carrying value at the Company's reporting units with goodwill, with the exception of the natural gas distribution reporting unit.

The Company's annual impairment testing indicated the natural gas distribution reporting unit's fair value is not substantially in excess of its carrying value ("cushion").

Based on the Company's assessment, the estimated fair value of the natural gas distribution reporting unit exceeded its carrying value, which includes $345.7 million of goodwill, by approximately 8 percent as of October 31, 2022.

The decrease in the natural gas distribution reporting unit's cushion from the prior year was primarily attributable to the risk adjusted cost of capital increasing from 5.0 percent in 2021 to 6.4 percent 2022, which directly correlates with the treasury rates at the date of the test.

The natural gas distribution reporting unit is at risk of future impairment if projected operating results are not met or other inputs into the fair value measurement model change.

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, long-term growth rates, 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.

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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 used a 20 percent control premium in 2022 and a 15 percent control premium in 2021 and 2020.

The Company uses significant judgment in estimating its five-year forecast.

2 unchanged sentences

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.

The long-term growth rates 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.

62 MDU Resources Group, Inc.

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.

materials and contracting and construction services long-term growth rate was 3 percent in 2022, 2021 and 2020.

Natural gas distribution's long-term growth rate has been in the range of 1.5 percent to 3 percent in 2022, 2021 and 2020.

Regulatory accounting

33 unchanged sentences

MDU Resources Group, Inc.

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 Company's construction contracts generally contain variable consideration including liquidated damages, performance bonuses or incentives, claims, 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.

The Company estimates the amount of revenue to be recognized on variable consideration using one of the two prescribed estimation methods, the expected value method or the most likely amount method, depending on which method best predicts the most likely amount of consideration the Company expects to be entitled to or expects to incur.

Assumptions as to the occurrence of future events and the likelihood and amount of variable consideration are made during the contract performance period.

Estimates of variable consideration and assessment of anticipated performance and all information (historical, current and forecasted) that is reasonably available to management.

The Company only 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.

When determining if the variable consideration is constrained, the Company considers if factors exist that could increase the likelihood of the magnitude of a potential reversal of revenue.

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.

34 unchanged sentences

$ 1.8 $ (1.6)

64 MDU Resources Group, Inc.

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.