MDU Resources Reports Third Quarter Earnings; Board Authorizes Strategic Review for MDU Construction Services Group

BISMARCK, N.D., Nov. 3, 2022 /PRNewswire/ -- MDU Resources Group, Inc. (NYSE: MDU) today reported third quarter earnings on a generally accepted accounting principles (GAAP) basis of $147.9 million, or 73 cents per share, with adjusted earnings of $152.0 million, or 75 cents per share, compared to third quarter 2021 GAAP earnings of $139.3 million, or 68 cents per share.

For the nine months ended Sept. 30, MDU Resources on a GAAP basis earned $250.4 million, or $1.23 per share, with adjusted earnings of $254.5 million, or $1.25 per share, compared to GAAP earnings of $291.6 million, or $1.44 per share, for the same period in 2021.

MDU Resources announced on Aug. 4 its intent to separate its construction materials subsidiary, Knife River Corporation, into a standalone publicly traded company, and for that reason is reporting adjusted earnings that exclude costs attributable to the separation transaction. Adjusted earnings are a non-GAAP measure. For an explanation of non-GAAP earnings adjustments, see the "Non-GAAP Measures" section in this news release. Additional information about the proposed separation can be found on the company's website at www.mdu.com.

"Our quarter over quarter results have improved, with very strong demand for construction materials and construction services as evidenced by record revenues and record backlogs at both our construction businesses. With the strong year-to-date results and growing backlog, we increased our annual revenue guidance range at construction services by an estimated $100 million. While we continue to experience and adapt to inflationary pressures across our businesses, we are gaining momentum on recovering from these impacts," said David L. Goodin, president and CEO of MDU Resources. "Our utility and natural gas pipeline businesses continue to perform well, though higher interest costs impacted results."

Corporate Strategy Updates
As the next step of MDU Resources' strategic planning, the board of directors has unanimously determined the best way to optimize value would be to create two pure-play companies: a leading construction materials company and a pure-play regulated energy delivery company. Accordingly, the board has authorized management to commence a strategic review process for MDU Construction Services Group, Inc. with the objective of achieving the board's goal of creating two pure-play public companies.

MDU Resources is working to complete the separation of Knife River, which, as previously announced, is expected to be effected as a tax-free spinoff to MDU Resources shareholders to be completed in 2023. Knife River is a top producer of construction aggregates in the United States.

"We believe these steps will unlock significant value for MDU shareholders," Goodin said. "Having two pure-play companies would provide each company the opportunity to execute its individual business plans and achieve industry-leading performance."

Business Unit Highlights
The construction materials business had all-time record quarterly revenues, up 17% from third quarter 2021, and earned $102.8 million, compared to $96.3 million in the third quarter of 2021. Inflationary impacts, particularly higher fuel, material and labor costs, were largely recovered in the quarter through price increases. The business performed a significant portion of work that was delayed by unfavorable weather earlier in the year. Demand remains strong for construction materials and contracting work, with a record third quarter backlog of $895 million at Sept. 30, up 37% compared to $652 million at Sept. 30, 2021.

The construction services business had all-time record quarterly revenues, up 43% from third quarter 2021, and earned $28.0 million, compared to $23.1 million in the third quarter of 2021. Electrical and mechanical services workload remained strong during the quarter, particularly for hospitality, data center and renewable projects. Utility-related transmission and distribution work also was strong during the quarter. Earnings were negatively impacted by adjustments of $7.5 million, after tax, to changes in estimates on certain construction contracts; earnings in third quarter 2021 also were negatively impacted by a $5.5 million, after tax, adjustment to estimates on a construction contract. Demand remains strong for construction services work, with an all-time record backlog of $2.00 billion at Sept. 30, up 57% compared to $1.27 billion at Sept. 30, 2021. The company has increased 2022 revenue guidance by $100 million for construction services.

The electric and natural gas utility earned $3.5 million in the third quarter, compared to earnings of $5.2 million in the third quarter of 2021. The utility experienced higher interest expense from increased debt balances to fund capital expenditures related to system upgrades and growth, as well as higher average interest rates. An interim electric rate increase of 5.3% was implemented July 15 in North Dakota, pending a decision on a requested increase of 12.3% before the state's Public Service Commission. The Washington Utilities and Transportation Commission approved the utility's request for an approximate 4% natural gas rate increase, which was effective Sept. 1. In the fourth quarter, the utility intends to file a request for an electric rate increase with the Montana Public Service Commission and a request for a natural gas rate increase with the Idaho Public Utilities Commission.

The pipeline business earned $9.8 million in the third quarter, compared to $10.6 million in the third quarter of 2021. The company experienced higher transportation revenues and record transportation volumes during the quarter, with the growth largely attributable to the North Bakken Expansion project that was placed in service earlier this year. The revenue increase was partially offset by the absence of income recorded in 2021 as allowed by the Federal Energy Regulatory Commission for funds used during construction on the North Bakken Expansion project, higher depreciation and higher interest expense. The company continues work on a number of expansion projects across its system that are expected to add incremental natural gas transportation capacity of more than 300 million cubic feet per day as they are completed in 2023-24, pending regulatory approvals.

Results at each of MDU Resources' businesses have been negatively impacted on a non-cash basis by lower investment returns on nonqualified benefit plans. Collectively, the negative earnings variance in the third quarter compared to last year was approximately $2.5 million, or 1 cent per share. For the nine months ended Sept. 30, the negative earnings variance from lower investment returns on nonqualified benefit plans is approximately $20.8 million, or 10 cents per share, compared to the same timeframe in 2021. The company attributes this change in investment returns to significant fluctuations in the financial markets.

Guidance
MDU Resources affirmed it expects adjusted earnings per share in the range of $1.75 to $1.90 in 2022, based on these assumptions:

• Normal weather for the remainder of 2022, including precipitation and temperatures, across all company markets.
• Continued availability of necessary equipment and materials.
• Pricing increases largely offsetting inflationary pressures at its construction businesses.
• Electric and natural gas customer growth continuing at a rate of 1-2% annually.
• Earnings before interest, taxes, depreciation and amortization (EBITDA) from continuing operations in the range of $875 million to $925 million.
• Construction materials revenues in the range of $2.45 billion to $2.65 billion with margins slightly lower than 2021 and construction services revenues in the range of $2.5 billion to $2.7 billion with margins lower than 2021.

The company plans to invest $702 million for capital projects in 2022. The capital program is expected to be largely funded from operating cash flows in the range of $550 million to $600 million. Future acquisitions are not included in this amount and would be incremental to the capital program. The company, on a consolidated basis, anticipates 5-8% long-term compound annual growth on earnings per share.

Conference Call
MDU Resources management will discuss third quarter results on a webcast at 8:30 a.m. EDT Nov. 3. The event can be accessed at www.mdu.com under the "Investor Relations" heading by selecting "Events & Presentations" and clicking on "Q3 2022 Earnings Conference Call." A replay of the webcast will be available at the same location.

About MDU Resources
MDU Resources Group, Inc., a member of the S&P MidCap 400 and the S&P High-Yield Dividend Aristocrats indices, is Building a Strong America^® by providing essential products and services through its regulated energy delivery and construction materials and services businesses. For more information about MDU Resources, visit www.mdu.com or contact the Investor Relations Department at [email protected].

Media Contact: Laura Lueder, manager of communications and public relations, 701-530-1095
Financial Contact: Brent Miller, director of financial projects and investor relations, 701-530-1730

Forward-Looking Statements

The information in this news release highlights the key growth strategies, projections and certain assumptions for the company and its subsidiaries and other matters for each of the company's businesses. Many of these highlighted statements and other statements not historical in nature are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934. Although the company believes that its expectations are based on reasonable assumptions, there is no assurance the company's projections or estimates for growth, shareholder value creation and financial guidance or other proposed strategies, including the anticipated separation of Knife River or the proposed future structure of two pure-play publicly traded companies will be achieved. Please refer to assumptions contained in this news release, as well as the various important factors listed in Part I, Item 1A - Risk Factors in the company's most recent Form 10-K and subsequent filings with the Securities and Exchange Commission.

Changes in such assumptions and factors could cause actual future results to differ materially from growth and financial guidance. All forward-looking statements in this news release are expressly qualified by such cautionary statements and by reference to the underlying assumptions. Undue reliance should not be placed on forward-looking statements, which speak only as of the date they are made. Except as required by law, the company does not undertake to update forward-looking statements, whether as a result of new information, future events or otherwise.

Throughout this news release, the company presents financial information prepared in accordance with GAAP, as well as EBITDA, EBITDA from continuing operations and adjusted earnings, which are considered non-GAAP financial measures. The use of these non-GAAP financial measures should not be construed as alternatives to earnings, operating income or operating cash flows. The company believes the use of these non-GAAP financial measures are beneficial in evaluating the company's financial performance due to its diverse operations. Please refer to the "Non-GAAP Financial Measures" section contained in this document for additional information.

Performance Summary

Forecasted capital expenditures include line-of-sight opportunities at the company's business units, with a focus on infrastructure development and grid safety, reliability and resiliency. Future acquisitions would be incremental to the outlined capital program.

Non-GAAP Financial Measures
The company, in addition to presenting its earnings in conformity with GAAP, has provided non-GAAP financial measures of EBITDA by operating segment, EBITDA from continuing operations, 2022 EBITDA guidance from continuing operations, adjusted net income (loss) and adjusted earnings (loss) per share. The company defines EBITDA as net income (loss) attributable to the operating segment before interest; taxes; and depreciation, depletion and amortization; and EBITDA from continuing operations as income (loss) from continuing operations before interest; taxes; and depreciation, depletion and amortization. The company defines adjusted net income (loss) as net income (loss) attributable to the company before any transaction costs related to the Knife River spinoff.

The company believes these non-GAAP financial measures provide meaningful information to investors about operational efficiency compared to the company's peers by excluding the impacts of differences in tax jurisdictions and structures, debt levels, capital investment and the one-time costs associated with the separation of Knife River from the company. The company's management uses the non-GAAP financial measures in conjunction with GAAP results when evaluating the company's operating results internally and calculating compensation packages. Non-GAAP financial measures are not standardized; therefore, it may not be possible to compare such financial measures with other companies' non-GAAP financial measures having the same or similar names. The presentation of this additional information is not meant to be considered a substitution for financial measures prepared in accordance with GAAP. The company strongly encourages investors to review the consolidated financial statements in their entirety and to not rely on any single financial measure.

The following tables provide a reconciliation of consolidated GAAP net income to EBITDA from continuing operations for actual as well as forecasted results. The reconciliation for each operating segment's EBITDA is included within each operating segment's condensed income statement.

The following table provides a reconciliation of consolidated GAAP net income to adjusted net income and GAAP earnings per share to adjusted earnings per share.

The electric business reported net income of $21.6 million in the third quarter, compared to $20.6 million for the same period in 2021. This increase was largely the result of lower operation and maintenance expense due to lower payroll-related and materials costs, partially associated with the Heskett Station and Lewis & Clark Station plant closures, and the absence of maintenance outage costs from a planned outage at Big Stone Station during 2021. Higher revenues associated with North Dakota interim rate relief were offset by decreased retail sales volumes.

The previous table also reflects items that are passed through to customers resulting in no impact to earnings. These items include $600,000 higher electric fuel and purchased power costs, which increased both operating revenues and electric fuel and purchased power; lower production tax credits driven by lower wind production during the quarter, which increased operating revenues and decreased income tax benefits; and lower depreciation and amortization expense driven largely by coal-fired electric plant closures, which was offset in operating revenues.

The electric business's EBITDA increased $1.1 million in the third quarter of 2022, compared to 2021, primarily the result of North Dakota interim rate relief and lower operation and maintenance expense, partially offset by lower retail sales volumes, as previously discussed.

The natural gas distribution business reported a seasonal loss of $18.1 million in the third quarter, compared to a loss of $15.4 million for the same period in 2021. The additional loss was driven by higher operating expenses that include increased subcontractor costs and higher depreciation expense. Interest expense also increased as a result of increased debt balances to fund increased capital expenditures, as well as higher average interest rates. Partially offsetting the higher costs was higher rate recovery through decoupling mechanisms.

The previous table also reflects items that are passed through to customers resulting in no impact to earnings. These items include $19.5 million in higher natural gas costs, which increased both operating revenues and purchased natural gas sold.

The natural gas distribution business's EBITDA decreased $1.2 million in the third quarter, compared to 2021, primarily the result of higher subcontractor costs, as previously discussed.

The pipeline business reported net income of $9.8 million in the third quarter, compared to $10.6 million for the same period in 2021. The decrease reflects higher interest expense resulting from higher debt balances. The business benefited from increased transportation revenues due largely to the North Bakken Expansion project offset in part by associated lower allowance for funds used during construction, which is reflected in other income and interest expense, and higher depreciation expense.

The pipeline business's EBITDA increased $2.2 million in the third quarter, compared to 2021, primarily from higher transportation revenues, partially offset by lower allowance for funds used during construction, as previously discussed.

The company expects to complete an estimated $1.67 billion of backlog on record at September 30, within the following 12 months.

The construction services business reported net income of $28.0 million in the third quarter, compared to $23.1 million for the same period in 2021. Record revenues during the quarter were primarily driven by approximately 70% higher electrical and mechanical workloads. Commercial workloads were favorably impacted by the progress on large hospitality projects and the number of data center projects started during the quarter. The industrial and institutional business lines also benefited from the mix of projects during the quarter. Transmission and distribution had relatively flat revenues with higher utility-related workloads and lower transportation workloads due to the timing of street lighting projects. This business saw lower margin percentages on record revenues for the quarter, which was attributable mostly to higher operating costs related to inflation, including material and labor costs. Earnings were negatively impacted by adjustments of $7.5 million, after tax, to estimates on certain construction contracts; earnings in third quarter 2021 also were negatively impacted by a $5.5 million, after tax, adjustment on a construction contract. In addition, higher income related to the business's joint ventures was partially offset by higher interest expense resulting from higher working capital needs.

The construction services business's EBITDA increased $8.0 million in the third quarter, compared to 2021, primarily a result of higher gross margin and income related to joint ventures, as previously discussed.

The construction materials and contracting business's backlog was $895 million at September 30, compared to backlog at September 30, 2021, of $652 million. The company expects to complete an estimated $820 million of backlog on record at September 30, 2022, within the following 12 months.

The construction materials and contracting business reported net income of $102.8 million in the third quarter, compared to $96.3 million in the same period in 2021. The business had record revenues during the quarter from increases seen across all its product lines. The business benefited from higher average materials pricing across its product lines. In addition, contracting workloads increased 19% during the quarter as a result of strong demand in some regions and the impacts of recent acquisitions. This business saw slightly lower margin percentages on record revenues for the quarter, which was attributable mostly to higher operating costs primarily related to inflation, including diesel fuel, materials, labor, equipment and production costs. Increased interest expense as a result of higher average debt balances and rates, as well as higher selling, general and administrative costs due to labor-related costs also had a negative impact in the quarter.

The construction materials and contracting business's EBITDA increased $17.6 million in the third quarter, compared to 2021, as a result of higher revenues, partially offset by higher operating costs, as previously discussed.

Other was positively impacted in the third quarter by income tax adjustments related to the consolidated company's annualized estimated tax rate. Operating expenses were positively impacted from a reduction in estimated losses recorded at the captive insurer. Other also was impacted by higher premiums in 2022 for the captive insurer compared to 2021, which impacts both operation and maintenance expense and operating revenues. Also included in Other are 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, as well as transaction costs associated with the anticipated spinoff of Knife River.

SOURCE MDU Resources Group, Inc.