MDU RESOURCES GROUP INC 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation The Company is Building a Strong America® by providing essential infrastructure and services. 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 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. 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. Form 10-K Index Part II Consolidated Earnings Overview The following table summarizes the contribution to the consolidated income by each of the Company's business segments. Years ended December 31, 2022 2021 2020 (In millions, except per share amounts) Electric $ 57.1 $ 51.9 $ 55.6 Natural gas distribution 45.2 51.6 44.0 Pipeline 35.3 40.9 37.0 Construction materials and contracting 116.2 129.8 147.3 Construction services 124.8 109.4 109.7 Other (11.3) (5.9) (3.1) Income from continuing operations 367.3 377.7 390.5 Discontinued operations, net of tax .2 .4 (.3) Net income $ 367.5 $ 378.1 $ 390.2 Earnings per share - basic: Income from continuing operations $ 1.81 $ 1.87 $ 1.95 Discontinued operations, net of tax — — — Earnings per share - basic $ 1.81 $ 1.87 $ 1.95 Earnings per share - diluted: Income from continuing operations $ 1.81 $ 1.87 $ 1.95 Discontinued operations, net of tax — — — Earnings per share - diluted $ 1.81 $ 1.87 $ 1.95 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 diesel fuel; higher equipment, repair and maintenance costs; and less available paving work in certain regions. The decrease was partially offset by higher AFUDC for the construction of the North Bakken Expansion project and higher earnings due to increased natural gas transportation volumes at the pipeline business. Also positively impacting earnings 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. Business Segment Financial and Operating Data Following are key financial and operating data for each of the Company's business segments. Also included are highlights on key growth strategies, projections and certain assumptions for the Company and its subsidiaries and other matters of the Company's business segments. Many of these highlighted points are "forward-looking statements." For more information, see Part I - Forward-Looking Statements. There is no assurance that the Company's projections, including estimates for growth and changes in earnings, will in fact be achieved. Please refer to assumptions contained in this section, as well as the various important factors listed in Item 1A - Risk Factors. Changes in such assumptions and factors could cause actual future results to differ materially from the Company's growth and earnings projections. MDU Resources Group, Inc. Form 10-K 37 Index Part II 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. 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 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. The continued efforts to create operational improvements and efficiencies across both segments promotes the Company's business integration strategy. The primary factors that impact the results of these segments are the ability to earn authorized rates of return, the cost of natural gas, cost of electric fuel and purchased power, weather, climate change initiatives, competitive factors in the energy industry, population growth and economic conditions in the segments' service areas. The electric and natural gas distribution segments are subject to extensive regulation in the jurisdictions where they conduct operations with respect to costs, timely recovery of investments and permitted returns on investment. The Company is focused on modernizing utility infrastructure to meet the varied energy needs of both its customers and communities while ensuring the delivery of safe, 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. 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. 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, 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. 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. Very cold winters increase demand for natural gas and to a lesser extent, electricity, while warmer than normal summers increase demand for electricity, especially among residential and commercial customers. Average consumption among both electric and natural gas customers has tended to decline as more efficient appliances and furnaces are installed, and as the Company has implemented conservation programs. Natural gas weather normalization and decoupling mechanisms in certain jurisdictions have been implemented to largely mitigate the effect that would otherwise be caused by variations in volumes sold to these customers due to weather and changing consumption patterns on the Company's distribution margins, as further discussed in Items 1 and 2 - Business Properties. In 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. 38 MDU Resources Group, Inc. Form 10-K Index Part II 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. Earnings overview - The following information summarizes the performance of the electric segment. 2022 vs. 2021 2021 vs. 2020 Years ended December 31, 2022 2021 2020 Variance Variance (In millions) Operating revenues $ 377.1 $ 349.6 $ 332.0 8 % 5 % 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 % Depreciation, depletion and amortization 67.8 66.8 63.0 1 % 6 % Taxes, other than income 16.9 17.5 17.4 (3) % 1 % Total operating expenses 297.4 283.3 268.6 5 % 5 % Operating income 79.7 66.3 63.4 20 % 5 % Other income .5 4.6 7.2 (89) % (36) % Interest expense 28.5 26.7 26.7 7 % — % Income before income taxes 51.7 44.2 43.9 17 % 1 % Income tax benefit (5.4) (7.7) (11.7) (30) % (34) % Net income $ 57.1 $ 51.9 $ 55.6 10 % (7) % Operating statistics 2022 2021 2020 Revenues (millions) Retail sales: Residential $ 135.4 $ 123.0 $ 122.6 Commercial 142.7 133.3 131.2 Industrial 43.0 40.5 36.7 Other 7.3 6.8 6.6 328.4 303.6 297.1 Transportation and other 48.7 46.0 34.9 $ 377.1 $ 349.6 $ 332.0 Volumes (million kWh) Retail sales: Residential 1,226.4 1,164.8 1,170.9 Commercial 1,437.7 1,433.0 1,419.4 Industrial 596.1 589.4 532.1 Other 83.7 84.4 82.1 3,343.9 3,271.6 3,204.5 Average cost of electric fuel and purchased power per kWh $ .026 $ .021 $ .019 MDU Resources Group, Inc. Form 10-K 39 Index Part II 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: • 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. ◦ Higher transmission interconnect upgrades of $2.4 million. ◦ Higher MISO revenue of $2.0 million. ◦ Higher demand revenues of $1.5 million. ◦ 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. • 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: ▪ Higher planned maintenance outage costs of $2.1 million at Big Stone Station and $800,000 higher maintenance fees at Thunder Spirit. ▪ Higher other miscellaneous expenses. ◦ Partially offset by lower payroll-related costs of $700,000, which includes lower employee incentive accruals, offset in part by higher health care costs. • Depreciation, depletion and amortization increased $3.8 million largely resulting from: ◦ Increased property, plant and equipment balances, primarily related to transmission projects placed in service. ◦ Increased amortization of plant retirement and closure costs of $1.7 million recovered in operating revenues, as discussed in Item 8 - Note 6. • Taxes, other than income was comparable to the same period in the prior year. 40 MDU Resources Group, Inc. Form 10-K Index Part II • Other income decreased $2.6 million. ◦ Primarily due to: ▪ The absence of an out-of-period adjustment of $2.5 million in 2020 as a result of previously overstated benefit plan expenses. ▪ Lower returns on 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. • Interest expense was comparable to the same period in the prior year. • Income tax benefit decreased $4.0 million largely resulting from: ◦ Lower production tax credits of $2.1 million related to the expiration of the 10-year credit-qualifying period on certain facilities and less wind generation. ◦ Lower excess deferred tax amortization. Earnings overview - The following information summarizes the performance of the natural gas distribution segment. 2022 vs. 2021 2021 vs. 2020 Years ended December 31, 2022 2021 2020 Variance Variance (In millions) Operating revenues $ 1,273.8 $ 971.9 $ 848.2 31 % 15 % 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 % Depreciation, depletion and amortization 89.4 86.0 84.6 4 % 2 % Taxes, other than income 71.1 60.6 57.0 17 % 6 % Total operating expenses 1,181.9 882.7 775.1 34 % 14 % Operating income 91.9 89.2 73.1 3 % 22 % Other income 3.3 8.1 13.5 (59) % (40) % Interest expense 42.2 37.3 36.8 13 % 1 % Income before income taxes 53.0 60.0 49.8 (12) % 20 % Income tax expense 7.8 8.4 5.8 (7) % 45 % Net income $ 45.2 $ 51.6 $ 44.0 (12) % 17 % Operating statistics 2022 2021 2020 Revenues (millions) Retail sales: Residential $ 715.5 $ 548.1 $ 480.5 Commercial 450.9 330.4 281.2 Industrial 41.5 31.1 26.2 1,207.9 909.6 787.9 Transportation and other 65.9 62.3 60.3 $ 1,273.8 $ 971.9 $ 848.2 Volumes (MMdk) Retail sales: Residential 74.8 65.6 65.5 Commercial 51.0 44.7 44.2 Industrial 5.4 5.0 4.8 131.2 115.3 114.5 Transportation sales: Commercial 2.0 1.9 2.0 Industrial 165.7 172.5 158.0 167.7 174.4 160.0 Total throughput 298.9 289.7 274.5 Average cost of natural gas per dk $ 6.22 $ 4.70 $ 3.91 MDU Resources Group, Inc. Form 10-K 41 Index Part II 2022 compared to 2021 : 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. ▪ Increased retail sales volumes of 0.7 percent across all customer classes, including the benefit of weather normalization and decoupling mechanisms in certain jurisdictions. ▪ Increased transportation volumes of 9 percent, primarily to electric generation customers. ▪ Higher 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. • 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. ◦ Primarily due to: ▪ Higher payroll-related costs of $4.3 million, largely related to health care costs and straight-time payroll. ▪ Decreased credits of $2.4 million for costs associated with the installation of meters partially from delaying meter replacements for safety measures implemented as a result of the COVID-19 pandemic. ▪ Higher expenses for materials, new software, insurance and vehicle fuel. ◦ Partially offset by: ▪ The absence of the write-off of an abandoned project in the third quarter of 2020 for $1.2 million. ▪ Decreased bad debt expense of $1.0 million as the impacts of the COVID-19 pandemic began to subside. • Depreciation, depletion and amortization increased $1.4 million. ◦ Largely from increased property, plant and equipment balances from growth and replacement projects placed in service. ◦ Partially offset by decreased depreciation rates in certain jurisdictions of $4.0 million. 42 MDU Resources Group, Inc. Form 10-K Index Part II • 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. ◦ Higher payroll taxes driven by increased payroll-related costs. • Other income decreased $5.4 million primarily related to: ◦ The absence of an out-of-period adjustment of $4.4 million in 2020 as a result of previously overstated benefit plan expenses. ◦ Decreased interest income related to the recovery of purchased gas cost adjustment balances in certain jurisdictions. • Interest expense increased $500,000, primarily from lower AFUDC borrowed. • Income tax expense increased $2.6 million due to higher income before income taxes. 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. In 2022 and 2021, these segments experienced retail customer growth of approximately 1.6 percent and 1.7 percent, respectively, and the Company expects customer growth to continue to average 1 percent to 2 percent per year. This customer growth, along with system upgrades and replacements needed to supply safe and reliable service, will require investments in new and replacement electric and natural gas systems. 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 natural 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. 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. 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. 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 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. The content and impacts of the changes under consideration are uncertain and the Company continues to monitor for potential actions by the EPA. • In Oregon, the Climate Protection Program Rule was approved in December 2021, which requires natural gas companies to reduce GHG emissions 50 percent below the baseline by 2035 and 90 percent below the baseline by 2050, which may be achieved through surrendering emissions allowances, investing in additional customer conservation and energy efficiency programs, purchasing community climate investment credits, and purchasing low carbon fuels such as renewable natural gas. The Company expects the compliance costs for these regulations to be recovered through customer rates. 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. Form 10-K 43 Index Part II 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. 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. Pipeline 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. The segment focuses on the continual safety and reliability of its systems, which entails building, operating and maintaining safe natural gas pipelines and facilities. The segment continues to evaluate growth opportunities including the expansion of natural gas facilities; incremental pipeline projects; and expansion of energy-related services leveraging on its core competencies. In support of this strategy, the 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. 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 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 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. 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. The industry in which it operates relies on a skilled workforce to construct energy infrastructure and operate existing infrastructure in a safe manner. A shortage of skilled personnel can create a competitive labor market which could increase costs incurred by the segment. Competition from other pipeline companies can also have a negative impact on the segment. 44 MDU Resources Group, Inc. Form 10-K Index Part II Earnings overview - The following information summarizes the performance of the pipeline segment. 2022 vs. 2021 2021 vs. 2020 Years ended December 31, 2022 2021 2020 Variance Variance (In millions) Operating revenues $ 155.6 $ 142.6 $ 143.9 9 % (1) % Operating expenses: Operation and maintenance 60.9 61.3 59.9 (1) % 2 % Depreciation, depletion and amortization 26.9 20.5 21.7 31 % (6) % Taxes, other than income 12.3 12.7 12.9 (3) % (2) % Total operating expenses 100.1 94.5 94.5 6 % — % Operating income 55.5 48.1 49.4 15 % (3) % Other income 1.3 9.4 2.9 (86) % 224 % Interest expense 11.3 7.0 7.6 61 % (8) % Income before income taxes 45.5 50.5 44.7 (10) % 13 % Income tax expense 10.2 9.6 7.7 6 % 25 % Net income $ 35.3 $ 40.9 $ 37.0 (14) % 11 % Operating statistics 2022 2021 2020 Transportation volumes (MMdk) 482.9 471.1 438.6 Natural gas gathering volumes (MMdk) — — 8.6 Customer natural gas storage balance (MMdk): Beginning of period 23.0 25.5 16.2 Net injection (withdrawal) (1.8) (2.5) 9.3 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. Form 10-K 45 Index Part II 2021 compared to 2020 Pipeline earnings increased $3.9 million as a result of: • Revenues decreased $1.3 million. ◦ Primarily decreased gathering revenues of $4.9 million due to the sale of the Company's natural gas gathering assets in 2020. ◦ Partially offset by: ▪ Increased transportation volumes and demand revenue of $1.8 million largely from organic growth projects, as previously discussed, and short-term discounted contracts. ▪ Increased non-regulated project revenues of $1.4 million. • Operation and maintenance increased $1.4 million due to: ◦ The absence of the gain on sale of the Company's natural gas gathering assets of $1.5 million in 2020, offset partially by lower operating expenses related to the natural gas gathering assets. ◦ Partially offset by lower payroll-related costs. • Depreciation, depletion and amortization decreased $1.2 million. ◦ Primarily related to lower expense of $1.6 million due to the sale of the Company's natural gas gathering assets in 2020, as previously discussed. ◦ Slightly offset by increased property, plant and equipment balances related to organic growth projects. • Taxes, other than income was comparable to the same period in the prior year. • Other income increased $6.5 million. ◦ Primarily due to: ▪ Higher AFUDC of $7.3 million for the construction of the North Bakken Expansion project. ▪ The absence of the write-off of unrecovered gas costs and project expenses of $1.2 million in 2020. ◦ Partially offset by: ▪ The absence of a positive impact of $700,000 related to the sale of the Company's regulated gathering assets in 2020. ▪ The absence of an out-of-period adjustment of $500,000 in 2020 as a result of previously overstated benefit plan expenses. ▪ Lower returns on the Company's nonqualified benefit plan investments. • Interest expense decreased $600,000. ◦ Primarily due to: ▪ Higher AFUDC of $1.5 million for the construction of the North Bakken Expansion project. ▪ Lower average interest rates. ◦ Partially offset by higher debt balances. • Income tax expense increased $1.9 million. ◦ Largely a result of: ▪ Higher income before income taxes. ▪ The absence of the reversal of excess deferred taxes of $1.5 million associated with the sale of the Company's gas gathering assets in 2020. ◦ Partially offset by permanent tax adjustments and an energy efficiency tax benefit. 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 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 46 MDU Resources Group, Inc. Form 10-K Index Part II 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 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 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 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; 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 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. Form 10-K 47 Index Part II 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. 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. 2022 vs. 2021 2021 vs. 2020 Years ended December 31, 2022 2021 2020 % change % change (In millions) Operating revenues $ 2,534.7 $ 2,228.9 $ 2,178.0 14 % 2 % Cost of sales: Operation and maintenance* 2,009.6 1,737.4 1,676.6 16 % 4 % Depreciation, depletion and amortization 112.9 96.8 84.8 17 % 14 % Taxes, other than income 51.3 47.7 46.0 8 % 4 % Total cost of sales 2,173.8 1,881.9 1,807.4 16 % 4 % Gross profit 360.9 347.0 370.6 4 % (6) % Selling, general and administrative expense: Operation and maintenance* 155.8 146.0 146.4 7 % — % Depreciation, depletion and amortization 4.9 4.2 4.8 17 % (13) % Taxes, other than income 5.9 5.7 4.9 4 % 16 % Total selling, general and administrative expense 166.6 155.9 156.1 7 % — % Operating income 194.3 191.1 214.5 2 % (11) % Other income (expense) (5.4) 1.3 .8 (515) % 63 % Interest expense 30.1 19.2 20.6 57 % (7) % Income before income taxes 158.8 173.2 194.7 (8) % (11) % Income tax expense 42.6 43.4 47.4 (2) % (8) % Net income $ 116.2 $ 129.8 $ 147.3 (10) % (12) % * 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 (In millions) Aggregates $ 496.6 $ 444.0 $ 406.6 $ 69.6 $ 60.6 $ 62.7 Asphalt 427.5 339.8 349.9 41.7 40.4 45.5 Ready-mix concrete 609.5 584.4 547.0 85.9 81.5 74.4 Other products* 407.3 344.3 356.3 63.6 64.0 82.6 Contracting services 1,187.7 1,017.5 1,069.7 100.1 100.5 105.4 Intracompany eliminations (593.9) (501.1) (551.5) — — — $ 2,534.7 $ 2,228.9 $ 2,178.0 $ 360.9 $ 347.0 $ 370.6 * Other products includes cement, asphalt oil, merchandise, fabric, spreading and other products that individually are not considered to be a major line of business for the segment. 48 MDU Resources Group, Inc. Form 10-K Index Part II 2022 2021 2020 Sales (thousands): Aggregates (tons) 33,994 33,518 30,949 Asphalt (tons) 7,254 7,101 7,202 Ready-mix concrete (cubic yards) 4,015 4,267 4,087 Average sales price: Aggregates (per ton) $ 14.61 $ 13.25 $ 13.14 Asphalt (per ton) $ 58.93 $ 47.86 $ 48.58 Ready-mix concrete (per cubic yard) $ 151.80 $ 136.94 $ 133.86 2022 compared to 2021 Construction materials and contracting's earnings decreased $13.6 million as a result of: • 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: ▪ 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. Form 10-K 49 Index Part II 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 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. These increases were partially offset by decreased sales of $14.8 million due to lower demand in Hawaii as a result of the overall slowdown of the travel industry from COVID-19. ◦ Partially offset by: ▪ Decreased contracting revenues partially due to less available paving work in certain regions of $60.0 million and the absence of a few large jobs in 2020 of $17.5 million. These decreases were offset in part by strong demand for health care, agency and commercial work in Oregon of $28.8 million. ▪ Decreased asphalt volumes primarily due to less available highway paving work in the public sector of $26.2 million in certain regions was partially offset by strong demand in Oregon. • Gross profit decreased $23.6 million. ◦ Primarily due to: ▪ 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 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 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 net gains on asset sales of $1.4 million. ◦ Offset in part by: ▪ Increased payroll-related costs of $1.6 million, primarily for higher health care costs. ▪ Higher acquisition costs of $700,000. ▪ An increase in miscellaneous taxes, license and governmental fees. • Other income increased $500,000, primarily resulting from an out-of-period adjustment in 2020 as a result of previously overstated benefit plan expenses. • Interest expense decreased $1.4 million. ◦ Primarily resulting from lower average interest rates of $2.8 million. ◦ Offset in part by higher average debt balances. • Income tax expense decreased $4.0 million as a result of lower income before income taxes. 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. Form 10-K Index Part II 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 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 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. The contracting services and construction materials are sold in connection with street, highway and other public infrastructure projects, as well as private commercial, industrial and residential development projects. The public infrastructure projects have traditionally been more stable markets as public funding is more secure during periods of economic decline. The public projects are, however, dependent on federal and state funding such as appropriations to the Federal Highway Administration. Spending on private development is highly dependent on both local and national economic cycles, providing additional sales during times of strong economic cycles 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 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. Construction Services Strategy and challenges The construction services segment provides electrical and mechanical and transmission and distribution specialty contracting services, as discussed in Items 1 and 2 - Business Properties. The construction services segment focuses on safely executing projects; providing a superior return on investment by building new and strengthening existing customer relationships; ensuring quality service; effectively controlling costs; retaining, developing and recruiting talented employees; growing through organic and strategic acquisition opportunities; and focusing efforts on projects that will permit higher margins while properly managing risk. The growth experienced by the segment in recent years is due in part to 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. Form 10-K 51 Index Part II project; 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. 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 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. The need to ensure available specialized labor resources for projects also drives strategic relationships with customers and project margins. These trends include an aging workforce and labor availability issues, as well as increasing duration and complexity of customer capital programs. 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. 2022 vs. 2021 2021 vs. 2020 Years ended December 31, 2022 2021 2020 Variance Variance (In millions) Operating revenues $ 2,699.2 $ 2,051.6 $ 2,095.7 32 % (2) % Cost of sales: Operation and maintenance 2,325.9 1,725.5 1,747.5 35 % (1) % Depreciation, depletion and amortization 16.9 15.8 15.7 7 % 1 % Taxes, other than income 80.4 62.4 74.2 29 % (16) % Total cost of sales 2,423.2 1,803.7 1,837.4 34 % (2) % 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 4.6 4.5 7.8 2 % (42) % Taxes, other than income 5.3 4.8 4.8 10 % — % Total selling, general and administrative expense 111.4 102.2 110.7 9 % (8) % Operating income 164.6 145.7 147.6 13 % (1) % Other income 7.3 2.6 2.0 181 % 30 % Interest expense 6.3 3.5 4.1 80 % (15) % Income before income taxes 165.6 144.8 145.5 14 % — % Income tax expense 40.8 35.4 35.8 15 % (1) % Net income $ 124.8 $ 109.4 $ 109.7 14 % — % 52 MDU Resources Group, Inc. Form 10-K Index Part II Operating Statistics Revenues Gross profit Business Line 2022 2021 2020 2022 2021 2020 (In millions) Electrical & mechanical Commercial $ 1,082.5 $ 553.2 $ 741.5 $ 105.2 $ 59.8 $ 48.4 Industrial 405.7 457.5 374.8 43.4 51.3 41.3 Institutional 215.5 123.1 158.8 3.8 6.2 23.8 Renewables 151.1 12.3 5.4 (.6) 1.2 1.1 Service & other 143.0 188.4 121.0 19.8 25.1 21.5 1,997.8 1,334.5 1,401.5 171.6 143.6 136.1 Transmission & distribution Utility 645.1 630.5 592.5 100.3 92.4 106.7 Transportation 72.3 103.1 111.8 4.1 11.9 15.5 717.4 733.6 704.3 104.4 104.3 122.2 Intrasegment eliminations (16.0) (16.5) (10.1) — — — $ 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: • Revenues decreased $44.1 million. ◦ Largely due to: ▪ The completion of several large commercial projects in early 2021 and 2020 in the Las Vegas market of $129.0 million. ▪ Decreased institutional projects of $15.0 million from less available work and the completion of a larger project. ▪ The completion of a significant industrial project of $43.0 million. ▪ Decreased demand for electric transportation projects which includes traffic signalization and street lighting. ◦ Partially offset by: ▪ Higher industrial work due to the number of projects awarded and progress on significant projects of $96.0 million. ▪ Increased service work of $37.0 million related to the repair and maintenance of electrical, mechanical and fire protection systems. ▪ Strong demand for utility projects including the progress on substations of $21.0 million and power line repair of $3.0 million. MDU Resources Group, Inc. Form 10-K 53 Index Part II • Gross profit decreased $10.4 million. ◦ Largely due to: ▪ 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 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. ▪ An increase in the amount of service work awarded and the progress on that work. • Selling, general and administrative expense decreased $8.5 million. ◦ Largely due to: ▪ Lower bad debt expense of $7.0 million, largely due to changes in estimates related to expected credit losses. ▪ Lower amortization expense of $3.2 million. ◦ Offset in part by: ▪ Higher office expenses of $1.3 million. ▪ Increased payroll-related costs. • Other income increased $600,000, largely related to increased earnings on investments. • Interest expense decreased $600,000, largely related to decreased debt balances due to lower working capital needs and increased cash collections. • Income tax expense decreased $400,000 as a result of lower income before income taxes. 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 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. 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. 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 projects performed by the Company. The construction services segment's backlog at December 31 was as follows: 2022 2021 (In millions) Electrical & mechanical $ 1,861 $ 1,109 Transmission & distribution 270 276 $ 2,131 $ 1,385 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. Form 10-K Index Part II Other 2022 vs. 2021 2021 vs. 2020 Years ended December 31, 2022 2021 2020 Variance Variance (In millions) Operating revenues $ 17.6 $ 13.7 $ 11.9 28 % 15 % Operating expenses: Operation and maintenance 25.1 15.2 12.2 65 % 25 % Depreciation, depletion and amortization 4.4 4.6 2.7 (4) % 70 % Taxes, other than income .1 .1 .1 — % — % Total operating expenses 29.6 19.9 15.0 49 % 33 % Operating loss (12.0) (6.2) (3.1) 94 % (100) % Other income 1.0 .4 .4 150 % — % Interest expense 1.5 .3 .8 400 % (63) % Loss before income taxes (12.5) (6.1) (3.5) 105 % (74) % Income tax benefit (1.2) (.2) (.4) 500 % 50 % Net loss $ (11.3) $ (5.9) $ (3.1) (93) % (90) % 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. Intersegment Transactions Amounts presented in the preceding tables will not agree with the Consolidated Statements of Income due to the Company's elimination of intersegment transactions. The amounts related to these items were as follows: Years ended December 31, 2022 2021 2020 (In millions) Intersegment transactions: Operating revenues $ 84.1 $ 77.6 $ 77.0 Operation and maintenance 25.9 18.7 19.1 Purchased natural gas sold 58.2 58.9 57.9 For more information on intersegment eliminations, see Item 8 - Note 17. Liquidity and Capital Commitments At December 31, 2022, the Company had cash and cash equivalents of $80.5 million and available borrowing capacity of $427.3 million under the outstanding credit facilities of the Company's subsidiaries. The Company expects to meet its obligations for debt maturing within 12 months and its other operating and capital requirements from various sources, including internally generated funds; credit facilities and commercial paper of the Company's subsidiaries, as described later in Capital resources; and the issuance of debt and equity securities if necessary. MDU Resources Group, Inc. Form 10-K 55 Index Part II Cash flows Years ended December 31, 2022 2021 2020 (In millions) Net cash provided by (used in) Operating activities $ 510.0 $ 495.8 $ 768.4 Investing activities (638.9) (885.9) (630.2) Financing activities 155.2 384.7 (145.1) Increase (decrease) in cash and cash equivalents 26.3 (5.4) (6.9) Cash and cash equivalents -- beginning of year 54.2 59.6 66.5 Cash and cash equivalents -- end of year $ 80.5 $ 54.2 $ 59.6 Operating activities 2022 vs. 2021 2021 vs. 2020 Years ended December 31, 2022 2021 2020 Variance Variance (In millions) Income from continuing operations $ 367.3 $ 377.7 $ 390.5 $ (10.4) $ (12.8) 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) Inventories (46.6) (42.3) (7.2) (4.3) (35.1) Other current assets (9.4) (72.0) 31.6 62.6 (103.6) Accounts payable 186.3 15.3 16.0 171.0 (.7) Other current liabilities 27.0 (17.6) 35.6 44.6 (53.2) Pension and postretirement benefit plan contributions (.5) (.5) (.4) — (.1) Other noncurrent changes (6.0) (55.4) 30.3 49.4 (85.7) Net cash provided by (used in) discontinued operations .2 (.3) (1.4) .5 1.1 Net cash provided by operating activities $ 510.0 $ 495.8 $ 768.4 $ 14.2 $ (272.6) 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 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 was higher bonus depreciation related to acquisitions at construction materials and contracting business. 56 MDU Resources Group, Inc. Form 10-K Index Part II Investing activities 2022 vs. 2021 2021 vs. 2020 Years ended December 31, 2022 2021 2020 Variance Variance (In millions) Capital expenditures $ (656.6) $ (659.4) $ (558.0) $ 2.8 $ (101.4) Acquisitions, net of cash acquired 1.8 (237.7) (106.0) 239.5 (131.7) Net proceeds from sale or disposition of property and other 22.4 15.2 35.6 7.2 (20.4) Investments (6.5) (4.0) (1.8) (2.5) (2.2) 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. Financing activities 2022 vs. 2021 2021 vs. 2020 Years ended December 31, 2022 2021 2020 Variance Variance (In millions) Issuance of short-term borrowings $ 246.5 $ 50.0 $ 75.0 $ 196.5 $ (25.0) Repayment of short-term borrowings — (100.0) (25.0) 100.0 (75.0) Issuance of long-term debt 361.6 554.0 117.4 (192.4) 436.6 Repayment of long-term debt (261.7) (25.0) (148.6) (236.7) 123.6 Debt issuance costs (1.9) (.9) (.5) (1.0) (.4) Proceeds from issuance of common stock (.1) 88.8 3.4 (88.9) 85.4 Dividends paid (176.9) (171.3) (166.4) (5.6) (4.9) Repurchase of common stock (7.4) (6.7) — (.7) (6.7) Tax withholding on stock-based compensation (4.9) (4.2) (.4) (.7) (3.8) 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. The construction services business also increased its long-term borrowings as a result of increased working capital needs. In addition, net proceeds from the issuance of common stock under the Company's "at-the-market" offering during 2021 also contributed to the increase in cash flows from financing activities. Partially offsetting these increases were decreased short-term borrowings during 2021 at the natural gas distribution business. Montana-Dakota repaid $50 million of short-term borrowings during the first quarter of 2021 related to short-term borrowings during 2020. Montana-Dakota also issued $50 million of short-term borrowings during the first quarter of 2021 related to financing the higher natural gas purchases, as previously discussed, which was repaid prior to the end of the year. Defined benefit pension plans The Company has noncontributory qualified defined benefit pension plans for certain employees. Plan assets consist of investments in equity and fixed-income securities. Various actuarial assumptions are used in calculating the benefit expense (income) and liability (asset) related to the pension plans. Actuarial assumptions include assumptions about the discount rate and expected return on plan assets. For 2022, the Company MDU Resources Group, Inc. Form 10-K 57 Index Part II 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, 2022 and 2021 or 2020. For more information on the Company's pension plans, see Item 8 - Note 18. Capital expenditures The Company's capital expenditures for 2020 through 2022 and as anticipated for 2023 through 2025 are summarized in the following table. Actual (a) Estimated 2020 2021 2022 2023 2024 2025 (In millions) Capital expenditures: Electric $ 115 $ 82 $ 134 $ 112 $ 127 $ 130 Natural gas distribution 193 170 240 224 311 260 Pipeline 62 235 62 145 117 127 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 (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: • System upgrades • Routine replacements • Service extensions • Routine equipment maintenance and replacements • Buildings, land and building improvements • Pipeline and natural gas storage projects • Power generation and transmission opportunities • Environmental upgrades, 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. Form 10-K Index Part II The Company continues to evaluate potential future acquisitions and other growth opportunities that would be incremental to the outlined capital program; however, they are dependent upon the availability of economic opportunities and, as a result, capital expenditures may vary significantly from the estimates in the preceding table. The Company continuously monitors its capital expenditures for project delays and changes in economic viability and adjusts as necessary. It is anticipated that all of the funds required for capital expenditures for the years 2023 through 2025 will be funded by various sources, including internally generated funds; credit facilities and commercial paper of the Company's subsidiaries, as described later; and issuance of debt and equity securities if necessary. 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, the issuance of long-term debt and the sale of equity securities. Debt resources 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. As of December 31, 2022, the Company had investment grade credit ratings at all entities issuing debt. For more information on the covenants, certain other conditions and cross-default provisions, see Item 8 - Note 9. The following table summarizes the outstanding revolving credit facilities of the Company's subsidiaries at December 31, 2022: Company Facility Facility Limit Amount Outstanding Letters of Credit Expiration Date (In millions) Montana-Dakota Utilities Co. Commercial paper/Revolving credit agreement (a) $ 175.0 $ 117.5 $ — 12/19/24 Cascade Natural Gas Corporation Revolving credit agreement $ 100.0 (b) $ 44.4 $ 2.2 (c) 11/30/27 Intermountain Gas Company Revolving credit agreement $ 100.0 (d) $ 85.6 $ — 10/13/27 Centennial Energy Holdings, Inc. Commercial paper/Revolving credit agreement (e) $ 600.0 $ 298.0 $ — 12/19/24 (a) The commercial paper program is supported by a revolving credit agreement with various banks (provisions allow for increased borrowings, at the option of Montana-Dakota on stated conditions, up to a maximum of $225.0 million). 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. (c) Outstanding letter(s) of credit reduce the amount available under the credit agreement. (d) Certain provisions allow for increased borrowings, up to a maximum of $125.0 million. (e) The commercial paper program is supported by a revolving credit agreement with various banks (provisions allow for increased borrowings, at the option of Centennial on stated conditions, up to a maximum of $700.0 million). 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. While the amount of commercial paper outstanding does not reduce available capacity under the respective revolving credit agreements, Montana-Dakota and Centennial do not issue commercial paper in an aggregate amount exceeding the available capacity under their credit agreements. The commercial paper borrowings may vary during the period, largely the result of fluctuations in working capital requirements due to the seasonality of certain operations of the Company's subsidiaries. Total equity as a percent of total capitalization was 54 percent and 55 percent at December 31, 2022 and 2021, respectively. This ratio is calculated as the Company's total equity, divided by the Company's total capital. Total capital is the Company's total debt, including short-term borrowings and long-term debt due within 12 months, plus total equity. 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. Historically, downgrades in credit ratings have not limited, nor are currently expected to limit, Montana-Dakota's ability to access the capital markets. If Montana-Dakota were to experience a downgrade of its credit ratings in the future, it may need to borrow under its credit agreement and may experience an increase in overall interest rates with respect to its cost of borrowings. Prior to the maturity of the credit agreement, Montana-Dakota expects that it will negotiate the extension or replacement of this agreement. If Montana-Dakota is unable to successfully negotiate an extension of, or replacement for, the credit agreement, or if the fees on this facility become too expensive, which Montana-Dakota does not currently anticipate, it would seek alternative funding. 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. Form 10-K 59 Index Part II 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. Historically, downgrades in Centennial's credit ratings have not limited, nor are currently expected to limit, Centennial's ability to access the capital markets. If Centennial were to experience a downgrade of its credit ratings in the future, it may need to borrow under its credit agreement and may experience an increase in overall interest rates with respect to its cost of borrowings. Prior to the maturity of the Centennial credit agreement, Centennial expects that it will negotiate the extension or replacement of this agreement, which provides credit support to access the capital markets. In the event Centennial is unable to successfully negotiate this agreement, or in the event the fees on this facility become too expensive, which Centennial does not currently anticipate, it would seek alternative funding. 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 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. 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. 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. Form 10-K Index Part II Equity Resources The Company currently has a shelf registration statement on file with the SEC, under which the Company may issue and sell any combination of common stock and debt securities. The Company may sell such securities if warranted by market conditions and the Company's capital requirements. Any public offer and sale of such securities will be made only by means of a prospectus meeting the requirements of the Securities Act and the rules and regulations thereunder. For more information on the Company's equity, see Item 8 - Note 12. In August 2020, the Company amended the Distribution Agreement dated February 22, 2019, with J.P. Morgan Securities LLC and MUFG Securities Americas Inc., as sales agents. This agreement, as amended, allows the offering, issuance and sale of up to 6.4 million shares of the Company's common stock in connection with an “at-the-market” offering. The common stock may be offered for sale, from time to time, in accordance with the terms and conditions of the agreement. As of December 31, 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. Dividend restrictions For information on the Company's dividends and dividend restrictions, see Item 8 - Note 12. Material cash requirements For more information on the Company's contractual obligations on long-term debt, operating leases and purchase commitments, see Item 8 - Notes 9, 10 and 21. At December 31, 2022, the Company's material cash requirements under these obligations were as follows: Less than 1 year 1-3 years 3-5 years More than 5 years Total (In millions) Short-term debt $ 246.5 $ — $ — $ — $ 246.5 Long-term debt maturities* 78.1 654.7 371.6 1,743.9 2,848.3 Estimated interest payments** 163.0 229.0 182.2 903.7 1,477.9 Operating leases 38.9 46.5 18.5 40.0 143.9 Purchase commitments 712.9 416.2 185.3 676.5 1,990.9 $ 1,239.4 $ 1,346.4 $ 757.6 $ 3,364.1 $ 6,707.5 * Unamortized debt issuance costs and discount are excluded from the table. ** Represents the estimated interest payments associated with the Company's long-term debt outstanding at December 31, 2022, assuming current interest rates and consistent amounts outstanding until their respective maturity dates over the periods indicated in the table above. Material short-term cash requirements of the Company include repayment of outstanding borrowings and interest payments on those agreements, payments on operating lease agreements, payment of obligations on purchase commitments and asset retirement obligations. At December 31, 2022, the current portion of asset retirement obligations was $4.6 million and was included in other accrued liabilities on the Consolidated Balance Sheets. Material long-term cash requirements of the Company include repayment of outstanding borrowings and interest payments on those agreements, payments on operating lease agreements, payment of obligations on purchase commitments and asset retirement obligations. At December 31, 2022, the Company had total liabilities of $410.5 million related to asset retirement obligations that are excluded from the table above. Due to the nature of these obligations, the Company cannot determine precisely when the payments will be made to settle these obligations. For more information, see Item 8 - Note 11. Not reflected in the previous table are $2.0 million in uncertain tax positions at December 31, 2022. 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. The Company's MEPP contributions are based on union employee payroll, which cannot be determined in advance for future periods. The Company may also be required to make additional contributions to its MEPPs as a result of their funded status. For more information, see Item 1A - Risk Factors and Item 8 - Note 18. New Accounting Standards For information regarding new accounting standards, see Item 8 - Note 2, which is incorporated herein by reference. MDU Resources Group, Inc. Form 10-K 61 Index Part II Critical Accounting Estimates The Company has prepared its financial statements in conformity with GAAP. The preparation of its financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Management reviews these estimates and assumptions based on historical experience, changes in business conditions and other relevant factors believed to be reasonable under the circumstances. Critical accounting estimates are defined as estimates that require management to make assumptions about matters that are uncertain at the time the estimate was made and changes in the estimates could have a material impact on the Company's financial position or results of operations. The Company's critical accounting estimates are subject to judgments and uncertainties that affect the application of its significant accounting policies discussed in Item 8 - Note 2. As additional information becomes available, or actual amounts are determinable, the recorded estimates are revised. Consequently, the Company's financial position or results of operations may be materially different when reported under different conditions or when using different assumptions in the application of the following critical accounting estimates. Goodwill The Company performs its goodwill impairment testing annually in the fourth quarter. In addition, the test is performed on an interim basis whenever events or circumstances indicate that the carrying amount of goodwill may not be recoverable. Examples of such events or circumstances may include a significant adverse change in business climate, weakness in an industry in which the Company's reporting units operate or recent significant cash or operating losses with expectations that those losses will continue. The Company has determined that the reporting units for its goodwill impairment test are its operating segments, or components of an operating segment, that constitute a business for which discrete financial information is available and for which segment management regularly reviews the operating results. For more information on the Company's operating segments, see Item 8 - Note 17. Goodwill impairment, if any, is measured by comparing the fair value of each reporting unit to its carrying value. If the fair value of a reporting unit exceeds its carrying value, the goodwill of the reporting unit is not impaired. If the carrying value of a reporting unit exceeds its fair value, the Company must record an impairment loss for the amount that the carrying value of the reporting unit, including goodwill, exceeds the fair value of the reporting unit. For the years ended December 31, 2022, 2021 and 2020, there were no impairment losses recorded. 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. The Company believes that the estimates and assumptions used in its impairment assessments are reasonable and based on available market information. The Company uses a discounted cash flow methodology for its income approach. Under the income approach, the discounted cash flow model determines fair value based on the present value of projected cash flows over a specified period and a residual value related to future cash flows beyond the projection period. Both values are discounted using a rate which reflects the best estimate of the risk adjusted cost of capital at each reporting unit. The risk adjusted cost of capital varies by reporting unit and was in the range of 6 percent to 10 percent in 2022, 5 percent to 9 percent for 2021 and 4 percent to 8 percent for 2020. Under the market approach, the Company estimates fair value using various multiples derived from enterprise value to EBITDA for comparative peer companies for each respective reporting unit. These multiples are applied to operating data for each reporting unit to arrive at an indication of fair value. In addition, the Company adds a reasonable control premium when calculating the fair value utilizing the peer multiples, which is estimated as the premium that would be received in a sale in an orderly transaction between market participants. The Company used a 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. The assumptions underlying cash flow projections are in sync as applicable with the Company's strategy and assumptions. Future projections are heavily correlated with the current year results of operations. Future results of operations may vary due to economic and financial impacts. The long-term growth rates 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. Construction 62 MDU Resources Group, Inc. Form 10-K Index Part II 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 The Company is subject to rate regulation by state public service commissions and/or the FERC. Regulatory assets generally represent incurred or accrued costs that have been deferred and are expected to be recovered in rates charged to customers. Regulatory liabilities generally represent amounts that are expected to be refunded to customers in future rates or amounts collected in current rates for future costs. Management continually assesses the likelihood of recovery in future rates of incurred costs and refunds to customers associated with regulatory assets and liabilities. Decisions made by the various regulatory agencies can directly impact the amount and timing of these items. Therefore, expected recovery or refund of these deferred items generally is based on specific ratemaking decisions or precedent for each item. If future recovery of costs is no longer probable, the Company would be required to include those costs in the statement of income or accumulated other comprehensive loss in the period in which it is no longer deemed probable. The Company believes that the accounting subject to rate regulation remains appropriate and its regulatory assets are probable of recovery in current rates or in future rate proceedings. At December 31, 2022 and 2021, the Company's regulatory assets were $494.8 million and $476.5 million, respectively, and regulatory liabilities were $474.9 million and $445.1 million, respectively. At December 31, 2022 and 2021, regulatory assets in recovery were $427.8 million and $367.7 million, respectively, and regulatory assets not in recovery were $67.0 million and $108.8 million, respectively. Revenue recognition Revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The recognition of revenue requires the Company to make estimates and assumptions that affect the reported amounts of revenue. The accuracy of revenues reported on the Consolidated Financial Statements depends on, among other things, management's estimates of total costs to complete projects because the Company uses the cost-to-cost measure of progress on construction contracts for revenue recognition. To determine the proper revenue recognition method for contracts, the Company evaluates whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. For most contracts, the customer contracts with the Company to provide a significant service of integrating a complex set of tasks and components into a single project. Hence, the Company's contracts are generally accounted for as one performance obligation. The Company recognizes construction contract revenue over time using an input method based on the cost-to-cost measure of progress for contracts because it best depicts the transfer of assets to the customer which occurs as the Company incurs costs on the contract. Under the cost-to-cost measure of progress, the costs incurred are compared with total estimated costs of a performance obligation. Revenues are recorded proportionately to the costs incurred. This method depends largely on the ability to make reasonably dependable estimates related to the extent of progress toward completion of the contract, contract revenues and contract costs. Since contract prices are generally set before the work is performed, the estimates pertaining to every project could contain significant unknown risks such as volatile labor, material and fuel costs, weather delays, adverse project site conditions, unforeseen actions by regulatory agencies, performance by subcontractors, job management and relations with project owners. Changes in estimates could have a material effect on the Company's results of operations, financial position and cash flows. For the years ended December 31, 2022 and 2021, the Company's total construction contract revenue was $3.8 billion and $3.0 billion, respectively. Several factors are evaluated in determining the bid price for contract work. These include, but are not limited to, the complexities of the job, past history performing similar types of work, seasonal weather patterns, competition and market conditions, job site conditions, work force safety, reputation of the project owner, availability of labor, materials and fuel, project location and project completion dates. As a project commences, estimates are continually monitored and revised as information becomes available and actual costs and conditions surrounding the job become known. If a loss is anticipated on a contract, the loss is immediately recognized. Contracts are often modified to account for changes in contract specifications and requirements. The Company considers contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Generally, contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration of services provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price and the measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis. MDU Resources Group, Inc. Form 10-K 63 Index Part II 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 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. The Company believes its estimates surrounding the cost-to-cost method are reasonable based on the information that is known when the estimates are made. The Company has contract administration, accounting and management control systems in place that allow its estimates to be updated and monitored on a regular basis. Because of the many factors that are evaluated in determining bid prices, it is inherent that the Company's estimates have changed in the past and will continually change in the future as new information becomes available for each job. Pension and other postretirement benefits The Company has noncontributory defined benefit pension plans and other postretirement benefit plans for certain eligible employees. Various actuarial assumptions are used in calculating the benefit expense (income) and liability (asset) related to these plans. Costs of providing pension and other postretirement benefits bear the risk of change, as they are dependent upon numerous factors based on assumptions of future conditions. The Company makes various assumptions when determining plan costs, including the current discount rates and the expected long-term return on plan assets, the rate of compensation increases, actuarially determined mortality data and health care cost trend rates. In selecting the expected long-term return on plan assets, which is considered to be one of the key variables in determining benefit expense or income, the Company considers historical returns, current market conditions, the mix of investments and expected future market trends, including changes in interest rates and equity and bond market performance. Another key variable in determining benefit expense or income is the discount rate. In selecting the discount rate, the Company matches forecasted future cash flows of the pension and postretirement plans to a yield curve which consists of a hypothetical portfolio of high-quality corporate bonds with varying maturity dates, as well as other factors, as a basis. The Company's pension and other postretirement benefit plan assets are primarily made up of equity and fixed-income investments. Fluctuations in actual equity and bond market returns, as well as changes in general interest rates, may result in increased or decreased pension and other postretirement benefit costs in the future. Management estimates the rate of compensation increase based on long-term assumed wage increases and the health care cost trend rates are determined by historical and future trends. The Company believes the estimates made for its pension and other postretirement benefits are reasonable based on the information that is known when the estimates are made. These estimates and assumptions are subject to a number of variables and are expected to change in the future. Estimates and assumptions will be affected by changes in the discount rate, the expected long-term return on plan assets, the rate of compensation increase and health care cost trend rates. A 50 basis point change in the assumed discount rate and the expected long-term return on plan assets would have had the following effects at December 31, 2022: Pension Benefits Other Postretirement Benefits 50 Basis Point Increase 50 Basis Point Decrease 50 Basis Point Increase 50 Basis Point Decrease Discount rate (In millions) Projected benefit obligation as of December 31, 2022 $ (13.7) $ 14.8 $ (2.5) $ 2.7 Net periodic benefit cost (credit) for 2023 $ — $ (.1) $ (.2) $ .2 Expected long-term return on plan assets Net periodic benefit cost (credit) for 2023 $ (1.6) $ 1.6 $ (.4) $ .4 A 100 basis point change in the assumed health care cost trend rates would have had the following effects at December 31, 2022: 100 Basis Point Increase 100 Basis Point Decrease (In millions) Service and interest cost components for 2023 $ .1 $ (.1) Postretirement benefit obligation as of December 31, 2022 $ 1.8 $ (1.6) 64 MDU Resources Group, Inc. Form 10-K Index Part II 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. 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. 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. Income taxes The Company is required to make judgments regarding the potential tax effects of various financial transactions and ongoing operations to estimate the Company's obligation to taxing authorities. These tax obligations include income, real estate, franchise and sales/use taxes. Judgments related to income taxes require the recognition in the Company's financial statements that a tax position is more-likely-than-not to be sustained on audit. Judgment and estimation is required in developing the provision for income taxes and the reporting of tax-related assets and liabilities and, if necessary, any valuation allowances. The interpretation of tax laws can involve uncertainty, since tax authorities may interpret such laws differently. Actual income tax could vary from estimated amounts and may result in favorable or unfavorable impacts to net income, cash flows and tax-related assets and liabilities. In addition, the effective tax rate may be affected by other changes including the allocation of property, payroll and revenues between states. The Company assesses the deferred tax assets for recoverability taking into consideration historical and anticipated earnings levels; the reversal of other existing temporary differences; available net operating losses and tax carryforwards; and available tax planning strategies that could be implemented to realize the deferred tax assets. Based on this assessment, management must evaluate the need for, and amount of, a valuation allowance against the deferred tax assets. As facts and circumstances change, adjustment to the valuation allowance may be required.