MDU RESOURCES GROUP INC [MDU] Filings

10-Q 1 mdu-20230630.htm MDU RESOURCES FORM 10-Q 06-30-2023 mdu-20230630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to ______________

Commission file number 1-03480

MDU RESOURCES GROUP INC

(Exact name of registrant as specified in its charter)


Delaware						30-1133956
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

1200 West Century Avenue

P.O. Box 5650

Bismarck, North Dakota 58506-5650

(Address of principal executive offices)

(Zip Code)

(701) 530-1000

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, par value $1.00 per share	MDU	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐.

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer	☒	Accelerated Filer	☐
Non-Accelerated Filer	☐	Smaller Reporting Company	☐
		Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 1, 2023: 203,638,373 shares.


Index
			Page
Definitions			3
Introduction			5
Part I -- Financial Information
Item 1. Financial Statements			6
Consolidated Statements of Income -- Three and Six Months Ended June 30, 2023 and 2022			6
Consolidated Statements of Comprehensive Income -- Three and Six Months Ended J une 30, 2023 and 2022			7
Consolidated Balance Sheets -- June 30, 2023 and 2022, and December 31, 2022			8
Consolidated Statements of Equity -- Six Months Ended June 30, 2023 and 2022			9
Consolidated Statements of Cash Flows -- Six Months Ended June 30, 2023 and 2022			10
Notes to Consolidated Financial Statements			11
1. Basis of presentation			11
2. New accounting standards			12
3. Discontinued operations			12
4. Seasonality of operations			14
5. Receivables and allowance for expected credit losses			14
6. Inventories and natural gas in storage			15
7. Earnings per share			16
8. Accumulated other comprehensive loss			16
9. Revenue from contracts with customers			18
10. Leases			20
11. Goodwill and other intangible assets			20
12. Regulatory assets and liabilities			21
13. Environmental allowances and obligations			22
14. Fair value measurements			22
15. Debt			25
16. Income taxes			26
17. Cash flow information			27
18. Business segment data			27
19. Employee benefit plans			29
20. Stock-based compensation			30
21. Regulatory matters			30
22. Contingencies			31

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			33
Item 3. Quantitative and Qualitative Disclosures About Market Risk			56
Item 4. Controls and Procedures			57
Part II -- Other Information
Item 1. Legal Proceedings			58
Item 1A. Risk Factors			58
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			59
Item 3. Defaults Upon Senior Securities			59
Item 4. Mine Safety Disclosures			59
Item 5. Other Information			59
Item 6. Exhibits			59
Exhibits Index			60
Signatures			61

Index

Definitions

The following abbreviations and acronyms used in this Form 10-Q are defined below:


Abbreviation or Acronym
2022 Annual Report			Company's Annual Report on Form 10-K for the year ended December 31, 2022
AFUDC			Allowance for funds used during construction
ASC			FASB Accounting Standards Codification
ASU			FASB Accounting Standards Update
Cascade			Cascade Natural Gas Corporation, an indirect wholly owned subsidiary of MDU Energy Capital
Centennial			CEHI, LLC, a direct wholly owned subsidiary of the Company, formally known as Centennial Energy Holdings, Inc. prior to the separation of Knife River from the Company. References to Centennial's historical business and operations refer to the business and operations of Centennial Energy Holdings, Inc.
Centennial Capital			Centennial Holdings Capital LLC, a direct wholly owned subsidiary of Centennial
Company			MDU Resources Group, Inc.
COVID-19			Coronavirus disease 2019
Coyote Creek			Coyote Creek Mining Company, LLC, a subsidiary of The North American Coal Corporation
Coyote Station			427-MW coal-fired electric generating facility near Beulah, North Dakota (25 percent ownership)
dk			Decatherm
Dodd-Frank Act			Dodd-Frank Wall Street Reform and Consumer Protection Act
EPA			United States Environmental Protection Agency
Exchange Act			Securities Exchange Act of 1934, as amended
FASB			Financial Accounting Standards Board
FERC			Federal Energy Regulatory Commission
Fidelity			Fidelity Exploration & Production Company, a direct wholly owned subsidiary of WBI Holdings (previously referred to as the Company's exploration and production segment)
GAAP			Accounting principles generally accepted in the United States of America
GHG			Greenhouse gas
Grasslands Subsystem			A portion of WBI Energy Transmission's natural gas pipeline that runs from western North Dakota to north central Wyoming
Intermountain			Intermountain Gas Company, an indirect wholly owned subsidiary of MDU Energy Capital
IPUC			Idaho Public Utilities Commission
IRA			Inflation Reduction Act of 2022
Knife River			Established as Knife River Corporation prior to the separation from the Company, a direct wholly owned subsidiary of Centennial. Knife River refers to Knife River Corporation, during the period prior to separation, now known as "KRC Materials, Inc." Following the separation Knife River refers to Knife River Holding Company, now known as Knife River Corporation.
kWh			Kilowatt-hour
kV			Kilovolt
LIBOR			London Inter-bank Offered Rate
MDU Construction Services			MDU Construction Services Group, Inc., a direct wholly owned subsidiary of Centennial
MDU Energy Capital			MDU Energy Capital, LLC, a direct wholly owned subsidiary of the Company
MISO			Midcontinent Independent System Operator, Inc., the organization that provides open-access transmission services and monitors the high-voltage transmission system in the Midwest United States and Manitoba, Canada and a southern United States region which includes much of Arkansas, Mississippi, and Louisiana.
MMcf			Million cubic feet
MMdk			Million dk
Montana-Dakota			Montana-Dakota Utilities Co., a direct wholly owned subsidiary of MDU Energy Capital
MTPSC			Montana Public Service Commission

Index


MW			Megawatt
NDDEQ			North Dakota Department of Environmental Quality
NDPSC			North Dakota Public Service Commission
NERC			North American Electric Reliability Corporation
Oil			Includes crude oil and condensate
PHMSA			Pipeline and Hazardous Materials Safety Administration
Regional Haze Rule			The EPA developed the Regional Haze Rule requiring states to develop and implement comprehensive plans to reduce human-caused regional haze in designated areas such as national parks and wilderness areas.
SDPUC			South Dakota Public Utilities Commission
SEC			United States Securities and Exchange Commission
Securities Act			Securities Act of 1933, as amended
SOFR			Secured Overnight Financing Rate
TSA			In connection with the separation of Knife River, the Company and Knife River entered into a Transition Services Agreement whereby each party will provide certain post-separation services on a transitional basis.
UA			United Association of Journeyman and Apprentices of the Plumbing and Pipefitting Industry of the United States of America and Canada
VIE			Variable interest entity
Washington DOE			Washington State Department of Ecology
WBI Energy			WBI Energy, Inc., an indirect wholly owned subsidiary of WBI Holdings
WBI Energy Transmission			WBI Energy Transmission, Inc., an indirect wholly owned subsidiary of WBI Holdings
WBI Holdings			WBI Holdings, Inc., a direct wholly owned subsidiary of Centennial
WUTC			Washington Utilities and Transportation Commission

Index

Introduction

Montana-Dakota was incorporated under the state laws of Delaware in 1924. The Company was incorporated under the state laws of Delaware in 2018. Upon the completion of an internal holding company reorganization, Montana-Dakota became a subsidiary of the Company. Its principal executive offices are located at 1200 West Century Avenue, P.O. Box 5650, Bismarck, North Dakota 58506-5650, telephone (701) 530-1000.

The Company's mission is to deliver superior value to stakeholders by providing essential infrastructure and services to America. The Company generates, transmits and distributes electricity and provides natural gas distribution, transportation and storage services that are regulated by state public service commissions and/or the FERC. The Company also provides construction services through its electrical and mechanical and transmission and distribution specialty contracting services, and prior to the separation of Knife River, provided construction materials and associated contracting services through aggregate mining and marketing of related products, such as ready-mix concrete, asphalt and asphalt oil through May 31, 2023.

As part of the Company's continuous review of its business, the Company announced strategic initiatives in 2022. On August 4, 2022, the Company announced that its board of directors approved a plan to pursue the separation of Knife River, the construction materials and contracting segment, from the Company. The separation was completed on May 31, 2023, and resulted in two independent, publicly traded companies, MDU Resources Group, Inc. and Knife River. The Company's board of directors approved the distribution of approximately 90 percent of the issued and outstanding shares of Knife River to the Company's stockholders. Stockholders of the Company received one share of Knife River common stock for every four shares of the Company's common stock held on May 22, 2023, the record date for the distribution. The Company retained approximately 10 percent of Knife River common stock immediately following the separation with the intent to dispose of such shares within twelve months after the separation. The separation of Knife River was a tax-free spinoff transaction to the Company’s stockholders for U.S. federal income tax purposes. More information on the separation and distribution can be found within Knife River's Form 10, which is not incorporated by reference herein.

The historical results of Knife River are presented as discontinued operations in the Company's Consolidated Financial Statements.

On November 3, 2022, the Company announced its intent to commence a strategic review process of MDU Construction Services. Upon completing the strategic review of its wholly owned construction services business, the Company's board of directors announced on July 10, 2023, that it will pursue a tax-advantaged separation of the construction services business from the Company. The Company's board of directors believes a tax-advantaged separation of the construction services business supports the Company's goal of enhancing value for stockholders by becoming a pure-play regulated energy delivery company.

The Company is organized into four reportable business segments. These business segments include: electric, natural gas distribution, pipeline, and construction services. The Company's business segments are determined based on the Company's method of internal reporting, which generally segregates the strategic business units due to differences in products, services and regulation. The internal reporting of these segments is defined based on the reporting and review process used by the Company's chief executive officer.

The Company, through its wholly owned subsidiary, MDU Energy Capital, owns Montana-Dakota, Cascade and Intermountain. The electric segment is comprised of Montana-Dakota while the natural gas distribution segment is comprised of Montana-Dakota, Cascade and Intermountain.

The Company, through its wholly owned subsidiary, Centennial, owns WBI Energy, MDU Construction Services and Centennial Capital. WBI Energy is the pipeline segment, MDU Construction Services is the construction services segment and Centennial Capital is reflected in the Other category.

For more information on the Company's business segments, see Note 18 of the Notes to Consolidated Financial Statements.

Index

Part I -- Financial Information

Item 1. Financial Statements


MDU Resources Group, Inc.
Consolidated Statements of Income
(Unaudited)
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
	(In thousands, except per share amounts)
Operating revenues:
Electric, natural gas distribution and regulated pipeline	$	340,492	$	323,616	$	1,014,423	$	877,233
Non-regulated pipeline, construction services and other	750,634		686,133		1,506,801		1,239,631
Total operating revenues	1,091,126		1,009,749		2,521,224		2,116,864
Operating expenses:
Operation and maintenance:
Electric, natural gas distribution and regulated pipeline	95,483		94,422		197,522		192,247
Non-regulated pipeline, construction services and other	674,110		615,095		1,368,616		1,117,826
Total operation and maintenance	769,593		709,517		1,566,138		1,310,073
Purchased natural gas sold	115,866		115,312		486,881		382,665
Depreciation, depletion and amortization	53,498		55,006		105,730		106,779
Taxes, other than income	49,706		45,480		117,133		99,057
Electric fuel and purchased power	20,432		21,929		44,789		48,290
Total operating expenses	1,009,095		947,244		2,320,671		1,946,864
Operating income	82,031		62,505		200,553		170,000
Unrealized gain on investment in Knife River	140,020		—		140,020		—
Other income (expense)	9,959		(2,209)		20,333		(3,253)
Interest expense	26,459		19,187		50,412		38,079
Income before income taxes	205,551		41,109		310,494		128,668
Income taxes	57,918		5,347		78,986		24,140
Income from continuing operations	147,633		35,762		231,508		104,528
Discontinued operations, net of tax	(16,941)		34,905		(62,464)		(2,098)
Net income	$	130,692	$	70,667	$	169,044	$	102,430
Earnings per share - basic:
Income from continuing operations	$	.72	$	.18	$	1.14	$	.51
Discontinued operations, net of tax	(.08)		.17		(.31)		(.01)
Earnings per share - basic	$	.64	$	.35	$	.83	$	.50
Earnings per share - diluted:
Income from continuing operations	$	.72	$	.18	$	1.14	$	.51
Discontinued operations, net of tax	(.08)		.17		(.31)		(.01)
Earnings per share - diluted	$	.64	$	.35	$	.83	$	.50
Weighted average common shares outstanding - basic	203,635		203,351		203,630		203,351
Weighted average common shares outstanding - diluted	203,877		203,401		203,894		203,396

The accompanying notes are an integral part of these consolidated financial statements.

Index


MDU Resources Group, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
	Three Months Ended			Six Months Ended
	June 30,			June 30,
		2023		2022		2023		2022
		(In thousands)
Net income		$	130,692	$	70,667	$	169,044	$	102,430
Other comprehensive income (loss):
Reclassification adjustment for loss on derivative instruments included in net income, net of tax of $6 and $36 for the three months ended and $17 and $72 for the six months ended in 2023 and 2022, respectively		47		111		81		223
Postretirement liability adjustment:
Amortization of postretirement liability losses included in net periodic benefit credit, net of tax of $131 and $148 for the three months ended and $165 and $312 for the six months ended in 2023 and 2022, respectively		387		461		487		906
Reclassification of postretirement liability adjustment from regulatory asset, net of tax of $— and $(1,086) for the three months ended and $— and $(1,086) for the six months ended in 2023 and 2022, respectively		—		(3,265)		—		(3,265)
Postretirement liability adjustment		387		(2,804)		487		(2,359)
Net unrealized gain (loss) on available-for-sale investments:
Net unrealized gain (loss) on available-for-sale investments arising during the period, net of tax of $(22) and $(34) for the three months ended and $(4) and $(119) for the six months ended in 2023 and 2022, respectively		(84)		(128)		(14)		(448)
Reclassification adjustment for loss on available-for-sale investments included in net income, net of tax of $3 and $7 for the three months ended and $6 and $15 for the six months ended in 2023 and 2022, respectively		13		25		26		57
Net unrealized gain (loss) on available-for-sale investments		(71)		(103)		12		(391)
Other comprehensive income (loss)		363		(2,796)		580		(2,527)
Comprehensive income attributable to common stockholders		$	131,055	$	67,871	$	169,624	$	99,903

The accompanying notes are an integral part of these consolidated financial statements.

Index


MDU Resources Group, Inc.
Consolidated Balance Sheets
(Unaudited)
	June 30, 2023		June 30, 2022		December 31, 2022
Assets	(In thousands, except shares and per share amounts)
Current assets:
Cash and cash equivalents	$	50,780	$	53,663	$	70,428
Receivables, net	934,173		760,696		1,064,340
Current regulatory assets	193,162		102,535		165,092
Inventories	60,154		50,977		64,248
Prepayments and other current assets	60,502		82,533		55,123
Investment in Knife River	246,063		—		—
Current assets of discontinued operations	—		798,665		583,218
Total current assets	1,544,834		1,849,069		2,002,449
Noncurrent assets:
Property, plant and equipment	7,083,229		6,692,019		6,874,630
Less accumulated depreciation, depletion and amortization	2,160,439		2,067,811		2,098,298
Net property, plant and equipment	4,922,790		4,624,208		4,776,332
Goodwill	488,960		488,960		488,960
Other intangible assets, net	3,049		5,213		4,102
Regulatory assets	345,185		347,061		329,659
Investments	139,569		127,847		128,827
Operating lease right-of-use assets	74,553		69,869		73,502
Other	165,910		170,709		161,900

Noncurrent assets of discontinued operations	—		1,636,027		1,685,751
Total noncurrent assets	6,140,016		7,469,894		7,649,033
Total assets	$	7,684,850	$	9,318,963	$	9,651,482
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings	$	345,000	$	—	$	38,500
Long-term debt due within one year	1,319		86,319		47,819
Accounts payable	399,339		394,317		525,560
Taxes payable	60,284		97,471		62,308
Dividends payable	45,310		44,229		45,245
Accrued compensation	66,555		69,538		59,470
Operating lease liabilities due within one year	22,666		19,960		21,307
Regulatory liabilities due within one year	48,057		17,884		26,440
Other accrued liabilities	143,235		138,479		156,031

Current liabilities of discontinued operations	—		502,317		487,624
Total current liabilities	1,131,765		1,370,514		1,470,304
Noncurrent liabilities:
Long-term debt	2,246,103		2,003,881		2,317,848
Deferred income taxes	515,661		428,249		455,499
Asset retirement obligations	380,058		440,216		372,870
Regulatory liabilities	455,877		433,019		448,454
Operating lease liabilities	52,328		50,625		52,871
Other	196,865		178,204		180,603
Noncurrent liabilities of discontinued operations	—		1,027,445		765,904
Total noncurrent liabilities	3,846,892		4,561,639		4,594,049
Commitments and contingencies
Stockholders' equity:
Common stock Authorized - 500,000,000 shares, $1.00 par value Shares issued - 203,638,373 at June 30, 2023, 203,889,661 at June 30, 2022 and 204,162,814 at December 31, 2022	203,638		203,889		204,163
Other paid-in capital	1,460,735		1,454,131		1,466,037
Retained earnings	1,059,517		1,775,947		1,951,138
Accumulated other comprehensive loss	(17,697)		(43,531)		(30,583)
Treasury stock at cost 538,921 shares at June 30, 2022 and December 31, 2022	—		(3,626)		(3,626)
Total stockholders' equity	2,706,193		3,386,810		3,587,129
Total liabilities and stockholders' equity	$	7,684,850	$	9,318,963	$	9,651,482

The accompanying notes are an integral part of these consolidated financial statements.

Index


MDU Resources Group, Inc.
Consolidated Statements of Equity
(Unaudited)
				Other Paid-in Capital		Retained Earnings		Accumu-lated Other Compre-hensive Loss
	Common Stock									Treasury Stock
	Shares	Amount								Shares	Amount		Total
	(In thousands, except shares)
At December 31, 2022	204,162,814	$	204,163	$	1,466,037	$	1,951,138	$	(30,583)	(538,921)	$	(3,626)	$	3,587,129
Net income	—	—		—		38,353		—		—	—		38,353
Other comprehensive income	—	—		—		—		217		—	—		217
Dividends declared on common stock	—	—		—		(45,574)		—		—	—		(45,574)
Stock-based compensation	—	—		3,108		—		—		—	—		3,108
Repurchase of common stock	—	—		—		—		—		(153,622)	(4,811)		(4,811)
Issuance of common stock upon vesting of stock-based compensation, net of shares used for tax withholdings	—	—		(7,851)		—		—		153,622	4,811		(3,040)
At March 31, 2023	204,162,814	$	204,163	$	1,461,294	$	1,943,917	$	(30,366)	(538,921)	$	(3,626)	$	3,575,382
Net income	—	—		—		130,692		—		—	—		130,692
Other comprehensive income	—	—		—		—		363		—	—		363
Dividends declared on common stock	—	—		—		(45,158)		—		—	—		(45,158)
Stock-based compensation	—	—		(927)		—		—		—	—		(927)
Separation of Knife River	(538,921)	(539)		—		(969,934)		12,306		538,921	3,626		(954,541)
Issuance of common stock	14,480	14		368		—		—		—	—		382
At June 30, 2023	203,638,373	$	203,638	$	1,460,735	$	1,059,517	$	(17,697)	—	$	—	$	2,706,193





				Other Paid-in Capital		Retained Earnings		Accumu-lated Other Compre-hensive Loss
	Common Stock									Treasury Stock
	Shares	Amount								Shares	Amount		Total
	(In thousands, except shares)
At December 31, 2021	203,889,661	$	203,889	$	1,461,205	$	1,762,410	$	(41,004)	(538,921)	$	(3,626)	$	3,382,874
Net income	—	—		—		31,763		—		—	—		31,763
Other comprehensive income	—	—		—		—		269		—	—		269
Dividends declared on common stock	—	—		—		(44,447)		—		—	—		(44,447)
Stock-based compensation	—	—		2,689		—		—		—	—		2,689
Repurchase of common stock	—	—		—		—		—		(266,821)	(7,399)		(7,399)
Issuance of common stock upon vesting of stock-based compensation, net of shares used for tax withholdings	—	—		(12,303)		—		—		266,821	7,399		(4,904)
Issuance of common stock	—	—		(127)		—		—		—	—		(127)
At March 31, 2022	203,889,661	$	203,889	$	1,451,464	$	1,749,726	$	(40,735)	(538,921)	$	(3,626)	$	3,360,718
Net income	—	—		—		70,667		—		—	—		70,667
Other comprehensive income	—	—		—		—		(2,796)		—	—		(2,796)
Dividends declared on common stock	—	—		—		(44,446)		—		—	—		(44,446)
Stock-based compensation	—	—		2,689		—		—		—	—		2,689
Issuance of common stock	—	—		(22)		—		—		—	—		(22)
At June 30, 2022	203,889,661	$	203,889	$	1,454,131	$	1,775,947	$	(43,531)	(538,921)	$	(3,626)	$	3,386,810

The accompanying notes are an integral part of these consolidated financial statements.

Index


MDU Resources Group, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
	Six Months Ended
	June 30,
	2023		2022
	(In thousands)
Operating activities:
Net income	$	169,044	$	102,430
Discontinued operations, net of tax	(62,464)		(2,098)
Income from continuing operations	231,508		104,528
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization	105,730		106,779
Deferred income taxes	55,478		2,439
Provision for credit losses	5,862		2,485
Amortization of debt issuance costs	792		481
Employee stock-based compensation costs	1,740		4,713
Pension and postretirement benefit plan net periodic benefit credit	(2,775)		(3,658)
Unrealized gain on investment in Knife River	(140,020)		—
Unrealized (gains) losses on investments	(4,885)		10,579
Gains on sales of assets	(4,887)		(2,935)
Changes in current assets and liabilities, net of acquisitions:
Receivables	124,306		(27,093)
Inventories	1,427		(4,741)
Other current assets	(27,614)		18,345
Accounts payable	(137,308)		27,113
Other current liabilities	19,090		34,858
Pension and postretirement benefit plan contributions	(17)		(54)
Other noncurrent changes	1,606		(12,449)
Net cash provided by continuing operations	230,033		261,390
Net cash used in discontinued operations	(156,932)		(142,282)
Net cash provided by operating activities	73,101		119,108
Investing activities:
Capital expenditures	(232,137)		(209,891)
Acquisitions, net of cash acquired	—		—
Net proceeds from sale or disposition of property and other	13,532		30
Investments	(2,974)		(3,072)
Net cash used in continuing operations	(221,579)		(212,933)
Net cash used in discontinued operations	(55,012)		(78,092)
Net cash used in investing activities	(276,591)		(291,025)
Financing activities:
Issuance of short-term borrowings	500,000		—
Repayment of short-term borrowings	(193,500)		—
Issuance of long-term debt	389,500		179,407
Repayment of long-term debt	(506,191)		(147,397)
Debt issuance costs	(1,864)		(320)
Net proceeds from issuance of common stock	—		(149)
Dividends paid	(90,552)		(88,457)
Repurchase of common stock	(4,811)		(7,399)
Tax withholding on stock-based compensation	(3,040)		(4,905)
Net cash provided by (used in) continuing operations	89,542		(69,220)
Net cash provided by discontinued operations	94,300		254,028
Net cash provided by financing activities	183,842		184,808
Increase (decrease) in cash and cash equivalents	(19,648)		12,891
Cash and cash equivalents -- beginning of year	70,428		40,772
Cash and cash equivalents -- end of period	$	50,780	$	53,663

The accompanying notes are an integral part of these consolidated financial statements.

Index

MDU Resources Group, Inc.

Notes to Consolidated

Financial Statements

June 30, 2023 and 2022

(Unaudited)

Note 1 - Basis of presentation

The accompanying consolidated interim financial statements were prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Interim financial statements do not include all disclosures provided in annual financial statements and, accordingly, these financial statements should be read in conjunction with those appearing in the 2022 Annual Report. The information is unaudited but includes all adjustments that are, in the opinion of management, necessary for a fair presentation of the accompanying consolidated interim financial statements and are of a normal recurring nature. Depreciation, depletion and amortization expense is reported separately on the Consolidated Statements of Income and therefore is excluded from the other line items within operating expenses.

The Company's consolidated financial statements and accompanying notes for the current and prior periods have been restated to present the results of operations and the assets and liabilities of Knife River as discontinued operations, other than certain corporate overhead costs of the Company historically allocated to Knife River, which are reflected in Other. Also included in discontinued operations in the Consolidated Statements of Income are the supporting activities of Fidelity and certain interest expense related to financing activity associated with the Knife River separation. Unless otherwise indicated, the amounts presented in the accompanying notes to the consolidated financial statements relate to the Company's continuing operations. For more information on discontinued operations, see Note 3.

On November 3, 2022, the Company announced its intent to commence a strategic review of MDU Construction Services. Upon completing the strategic review of its wholly owned construction services business, the Company's board of directors announced on July 10, 2023, that it will pursue a tax-advantaged separation of the construction services business from the Company. The Company's board of directors believes a tax-advantaged separation of the construction services business supports the Company's goal of enhancing value for stockholders by becoming a pure-play regulated energy delivery company.

Management has also evaluated the impact of events occurring after June 30, 2023, up to the date of the issuance of these consolidated interim financial statements on August 3, 2023, that would require recognition or disclosure in the Consolidated Financial Statements.

Index

Note 2 - New accounting standards

The following table provides a brief description of the accounting pronouncements applicable to the Company and the potential impact on its Consolidated Financial Statements and/or disclosures:


Standard	Description	Effective date	Impact on financial statements/disclosures
Recently adopted accounting standards
ASU 2020-04 - Reference Rate Reform	In March 2020, the FASB issued optional guidance to ease the facilitation of the effects of reference rate reform on financial reporting. The guidance applies to certain contract modifications, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Beginning January 1, 2022, LIBOR or other discontinued reference rates cannot be applied to new contracts. New contracts will incorporate a new reference rate, which includes SOFR. LIBOR or other discontinued reference rates cannot be applied to contract modifications or hedging relationships entered into or evaluated after December 31, 2022. Existing contracts referencing LIBOR or other reference rates expected to be discontinued must have identified a replacement rate by June 30, 2023.	Effective as of March 12, 2020 through December 31, 2022	For more information, see ASU 2022-06 - Reference Rate Reform: Deferral of Sunset Date in recently issued accounting standards adopted.
ASU 2022-06 - Reference Rate Reform: Deferral of Sunset Date	In December 2022, the FASB included a sunset provision within ASC 848 based on expectations of when LIBOR would cease being published. At the time ASU 2020-04 was issued, the UK Financial Conduct Authority had established its intent to cease overnight tenors of LIBOR after December 31, 2021. In March 2021, the UK Financial Conduct Authority announced that the intended cessation date of the overnight tenors of LIBOR would be June 30, 2023 which is beyond the current sunset date of ASC 848. The amendments in this Update defer the sunset date of ASC 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in ASC 848.	December 31, 2024	The Company has updated its credit agreements to include language regarding the successor or alternate rate to LIBOR. The Company does not expect the guidance to have a material impact on its results of operations, financial position, cash flows or disclosures.

Note 3 - Discontinued operations

On May 31, 2023, the Company completed the previously announced separation of Knife River, its construction materials and contracting segment, into a new publicly traded company. The separation was achieved through the Company's pro-rata distribution of approximately 90 percent of the outstanding shares of Knife River to the Company's common stockholders. To effect the separation, the Company distributed to its stockholders one share of Knife River common stock for every four shares of the Company's common stock held on May 22, 2023, the record date for the distribution, with the Company retaining approximately 10 percent of the shares of Knife River common stock immediately following the separation. The Company intends to dispose of the retained shares within twelve months after the separation.

As a result of the separation, the historical assets and liabilities for Knife River have been classified as assets and liabilities of discontinued operations and the historical results of operations are shown in Discontinued operations, net of tax, other than allocated general corporate overhead costs of the Company, which do not meet the criteria for income (loss) from discontinued operations. The Company’s consolidated financial statements and accompanying notes for prior periods have been restated. For the comparative periods, Knife River's operations are only reflected through May 2023, whereas 2022 includes the full three and six months from Knife River's operations.

On April 25, 2023, Knife River issued $425 million of senior notes, pursuant to an indenture, due 2031 to qualified institutional buyers. Knife River also entered into a new credit agreement which provided a revolving credit facility in an initial amount of up to $350 million and a senior secured term loan facility in an amount up to $275 million. The net proceeds from the notes offering, revolving credit facility and the term loan were used to repay $825 million of Knife River's intercompany obligations owed to Centennial. Centennial used the entirety of these proceeds from Knife River to repay a portion of its existing third-party indebtedness.

As a result of the separation, the Company retained legal ownership of 538,921 shares of the Company's common stock that were historically owned by a subsidiary of Knife River and recorded in Treasury stock at cost. Following the separation, the 538,921 treasury shares were retired.

The Company will provide to Knife River and Knife River will provide to the Company transition services in accordance with the TSA entered into on May 31, 2023. For the three and six months ended June 30, 2023, the Company received $599,000 and paid $277,000 related to these activities. The majority of the transition services are expected to be provided for a period of one year, however, no longer than two years after the separation.

Index

Separation costs of $41.2 million and $46.1 million, net of tax, were incurred during the three and six months ended June 30, 2023, respectively. Separation costs incurred are presented in income (loss) from discontinued operations in the Consolidated Statements of Income. These charges primarily relate to transaction and third-party support costs, one-time business separation fees and related tax charges.

The Company had no assets or liabilities related to the discontinued operations of Knife River on its balance sheet as of June 30, 2023. The carrying amounts of the major classes of assets and liabilities of discontinued operations included in the Company’s Consolidated Balance Sheets were as follows:


	June 30, 2022		December 31, 2022
Assets	(In Thousands)
Current assets:
Cash and cash equivalents	$	1,569	$	790
Receivables, net	423,420		241,302
Inventories	350,457		323,277
Prepayments and other current assets	23,219		17,849
Total current assets of discontinued operations	798,665		583,218
Noncurrent assets:
Net property, plant and equipment	1,264,604		1,315,213
Goodwill	274,302		274,540
Other intangible assets, net	14,827		13,430
Investments	33,400		33,086
Operating lease right-of-use assets	45,932		45,872
Other	2,962		3,610
Total noncurrent assets of discontinued operations	1,636,027		1,685,751
Total assets of discontinued operations	$	2,434,692	$	2,268,969
Liabilities
Current liabilities:
Short-term borrowings	$	100,000	$	208,000
Long-term debt due within one year	128,134		30,211
Accounts payable	174,585		122,309
Taxes payable	(12,500)		8,502
Accrued compensation	28,621		29,192
Operating lease liabilities due within one year	13,666		13,210
Other accrued liabilities	69,811		76,200
Total current liabilities of discontinued operations	502,317		487,624
Noncurrent liabilities:
Long-term debt	709,632		445,546
Deferred income taxes	169,484		175,804
Asset retirement obligations	27,779		33,015
Operating lease liabilities	32,266		32,663
Other	88,284		78,876
Total noncurrent liabilities of discontinued operations	1,027,445		765,904
Total liabilities of discontinued operations	$	1,529,762	$	1,253,528

Index

The reconciliation of the major classes of income and expense constituting pretax income (loss) from discontinued operations to the after-tax income (loss) from discontinued operations on the Consolidated Statements of Income were as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
	(In thousands)
Operating revenues	$	428,020	$	711,227	$	735,259	$	1,020,726
Operating expenses	416,686		653,116		767,960		1,002,728
Operating income (loss)	11,334		58,111		(32,701)		17,998
Other income (expense)	1,889		(2,037)		2,381		(3,394)
Interest expense	23,544		8,926		37,611		15,293
Income (loss) from discontinued operations before income taxes	(10,321)		47,148		(67,931)		(689)
Income taxes	6,620		12,243		(5,467)		1,409
Income (loss) from discontinued operations	$	(16,941)	$	34,905	$	(62,464)	$	(2,098)

Note 4 - Seasonality of operations

Some of the Company's operations are highly seasonal and revenues from, and certain expenses for, such operations may fluctuate significantly among quarterly periods. Accordingly, the interim results for particular businesses, and for the Company as a whole, may not be indicative of results for the full fiscal year.

Note 5 - Receivables and allowance for expected credit losses

Receivables consist primarily of trade receivables from the sale of goods and services, which are recorded at the invoiced amount, and contract assets, net of expected credit losses. For more information on contract assets, see Note 9. The Company's trade receivables are all due in 12 months or less. The total balance of receivables past due 90 days or more was $57.9 million, $27.4 million and $34.3 million at June 30, 2023 and 2022, and December 31, 2022, respectively.

The Company's expected credit losses are determined through a review using historical credit loss experience; changes in asset specific characteristics; current conditions; and reasonable and supportable future forecasts, among other specific account data, and is performed at least quarterly. The Company develops and documents its methodology to determine its allowance for expected credit losses at each of its reportable business segments. Risk characteristics used by the business segments may include customer mix, knowledge of customers and general economic conditions of the various local economies, among others. Specific account balances are written off when management determines the amounts to be uncollectible. Management has reviewed the balance reserved through the allowance for expected credit losses and believes it is reasonable.

Details of the Company's expected credit losses were as follows:


	Electric		Natural gas distribution		Pipeline		Construction services		Total
	(In thousands)
At December 31, 2022	$	375	$	1,615	$	2	$	2,162	$	4,154
Current expected credit loss provision	615		2,324		—		826		3,765
Less write-offs charged against the allowance	667		1,225		—		51		1,943
Credit loss recoveries collected	145		229		—		1		375
At March 31, 2023	$	468	$	2,943	$	2	$	2,938	$	6,351
Current expected credit loss provision	182		90		—		1,825		2,097
Less write-offs charged against the allowance	316		1,454		—		103		1,873
Credit loss recoveries collected	79		161		—		58		298
At June 30, 2023	$	413	$	1,740	$	2	$	4,718	$	6,873

Index


	Electric		Natural gas distribution		Pipeline		Construction services		Total
	(In thousands)
At December 31, 2021	$	269	$	1,506	$	2	$	2,533	$	4,310
Current expected credit loss provision	565		1,369		—		54		1,988
Less write-offs charged against the allowance	597		932		—		71		1,600
Credit loss recoveries collected	124		180		—		28		332
At March 31, 2022	$	361	$	2,123	$	2