MDU Resources Group Inc: Form 10-Q for the period ended Sep 30, 2023

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 constructing and maintaining electrical and communication wiring and infrastructure. The Company is authorized to conduct business in nearly every state in the United States. 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.

On August 17, 2023, David L. Goodin, president and CEO of the Company announced that he intends to retire on January 5, 2024, after a 40-year career with the Company. The board of directors unanimously selected Nicole A. Kivisto, currently president and CEO of the Company's electric and natural gas utility companies, to succeed Mr. Goodin as the Company's president and CEO effective January 6, 2024. Ms. Kivisto will become a member of the board of directors at the same time.

Strategic Initiatives The Company announced strategic initiatives in 2022 as part of the Company's continuous review of its business. The Company incurred costs in connection with the announced strategic initiatives in 2022 and 2023, as noted in the Business Segment Financial and Operating Data section, and expects to continue to incur these costs until the initiatives are completed.

On May 31, 2023, the Company completed the separation of Knife River, formerly the construction materials and contracting segment, which 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 or 5.7 million shares 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.

On November 2, 2023, the Company announced its intent to pursue a tax-free spinoff of its wholly owned construction services business, MDU Construction Services. The Company's board of directors believes a tax-free spinoff of the construction services business supports the Company's goal of enhancing value for stockholders by becoming a pure-play regulated energy delivery company. For more information on the strategic initiatives, see Part II, Item IA. Risk Factors in this quarterly report, Part 1, Item 1A. Risk Factors in the 2022 Annual Report and subsequent filings with the SEC.

Based on the Company's anticipated future state as a pure-play regulated energy delivery business, the board established a long-term dividend payout ratio target of 60% to 70% of regulated energy delivery earnings. The Company has an 85-year history of uninterrupted dividend payments to stockholders and remains committed to paying a competitive dividend as the Company transitions to being a pure-play regulated company.

Market Trends 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. 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. The Company has continued to evaluate its businesses and has increased pricing for its products and services where possible. The ability to raise selling prices to cover higher costs due to inflation are subject to regulatory approval, customer demand, industry competition and the availability of materials, among other things.

For more information on possible impacts of these trends to the Company's businesses, see the Outlook for each segment below and Part I, Item 1A. Risk Factors in the 2022 Annual Report.

Forward-Looking Statements

The following sections contain forward-looking statements within the meaning of Section 21E of the Exchange Act. Forward-looking statements are all statements other than statements of historical fact, including without limitation those statements that are identified by the words "anticipates," "estimates," "expects," "intends," "plans," "predicts" and similar expressions, and include statements concerning plans, trends, objectives, goals, strategies, future events, including the long-term dividend payout ratio target, the pursuit of a tax-advantaged separation of its construction services business and proposed structure of a pure-play regulated energy delivery company, future events or performance, and underlying assumptions (many of which are based, in turn, upon further assumptions) and other statements other than statements of historical facts. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature, including statements contained within Business Segment Financial and Operating Data.

Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties. Nonetheless, the Company's expectations, beliefs or projections may not be achieved or accomplished and changes in such assumptions and factors could cause actual future results to differ materially.

Any forward-looking statement contained in this document speaks only as of the date on which the statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances that occur after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as required by law. New factors emerge from time to time, and it is not possible for management to predict all the factors, nor can it assess the effect of each factor on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. All forward-looking statements, whether written or oral and whether made by or on behalf of the Company, are expressly qualified by the risk factors and cautionary statements reported in Part II, Item 1A. Risk Factors in this quarterly report, Part I, Item 1A. Risk Factors in the 2022 Annual Report and subsequent filings with the SEC.

Consolidated Earnings Overview

The following table summarizes the contribution to the consolidated income by each of the Company's business segments.

(In millions, except per share amounts)

Three Months Ended September 30, 2023, Compared to Three Months Ended September 30, 2022 The Company's consolidated earnings decreased $73.1 million. The Company benefited from increased earnings from most businesses, but was negatively impacted by a decrease in income from discontinued operations.

• Earnings at the electric business were negatively impacted by lower residential volumes due to cooler weather and higher operation and maintenance expense, primarily payroll-related costs. The decrease in earnings was partially offset by higher retail sales revenue due to rate relief in North Dakota and Montana, an electric service agreement to provide power to a data center near Ellendale, North Dakota, and higher transmission revenue.
• The natural gas distribution business reported a lower seasonal loss benefiting from increased revenues during the period due to higher retail revenue, primarily the result of short-term debt interest recovery in Idaho and rate relief in Idaho and Washington; partially offset by higher operation and maintenance expense due to payroll-related costs. The business also experienced a 9.3 percent decrease in retail sales volumes to all customer classes due to seasonal weather patterns, which was partially offset by weather normalization and decoupling mechanisms.
• The earnings increase at the pipeline business was driven by higher transportation revenue, primarily a result of increased contracted volume commitments from the North Bakken Expansion project, higher storage-related revenue and new transportation and storage service rates effective August 1, 2023. The business also benefited from higher allowance for funds used during construction on the Company's organic growth projects. The increase was offset in part by higher operation and maintenance expense primarily due to payroll-related costs and higher interest expense as a result of higher interest rates and higher debt balances.
• The construction services business experienced record third quarter earnings primarily as a result of higher gross profit on electrical and mechanical projects. The increase in gross profit was driven by commercial, renewable, and institutional market projects, largely a result of efficiency on certain projects from labor and materials and project mix. The construction services business also benefited from higher transmission and distribution workloads and gross profit in the utility market. Earnings were partially offset by higher selling, general and administrative costs and increased interest expense.
• The Company benefited from an unrealized gain, reflected in Other, on the Company's retained interest in Knife River shares of $22.8 million, net of tax, and lower operating and maintenance expense from lower claims experience at the captive insurer; partially offset by costs incurred in connection with announced strategic initiatives.
• The decrease in earnings from discontinued operations was due to the Knife River separation. For the comparative periods, Knife River's operations are only reflected through May 2023, whereas 2022 includes a full quarter impact from Knife River's operations.

Nine Months Ended September 30, 2023, Compared to Nine Months Ended September 30, 2022 The Company's consolidated earnings decreased $6.4 million. The Company benefited from increased earnings from all businesses, but was negatively impacted by a decrease in income from discontinued operations.

• Earnings at the electric business were positively impacted by higher retail revenue due to rate relief in North Dakota and Montana and higher data center revenue, including transmission. Also contributing to the increase was lower operation and maintenance expense.
• Earnings were higher at the natural gas distribution business due to approved rate relief in Washington and Idaho and higher basic service charges, short-term debt interest recovery in Idaho and higher transportation revenue. Earnings were partially offset by higher operation and maintenance expense, primarily attributable to payroll-related costs.
• Earnings at the pipeline business increased largely from increased transportation volumes associated with increased contracted volume commitments from the North Bakken Expansion project, higher storage-related revenues, and new transportation and storage service rates effective August 1, 2023. The pipeline business also benefited from higher non-regulated projects revenue. These increases were offset in part by higher operation and maintenance expense, largely increased payroll-related costs, higher non-regulated project costs and legal costs associated with the pipeline business's rate case filed with the FERC earlier this year.
• The construction services business saw increased earnings primarily from higher electrical and mechanical workloads in the commercial, industrial and institutional markets. Gross profit on electrical and mechanical projects increased in the commercial, industrial, institutional, and renewables markets, largely attributable to efficiencies on certain projects and project mix. The construction services business also benefited from higher transmission and distribution workloads and gross profit in the utility market. Earnings were partially offset by higher selling, general and administrative costs, including payroll-related costs and reserve for uncollectible accounts on certain projects, increased office expense and expenses associated with professional services.
• All of the Company's businesses were impacted by higher returns on nonqualified benefit plans, offset in part by increased interest expense as a result of higher average interest rates.
• The Company benefited from an unrealized gain, reflected in Other, on the Company's retained interest in Knife River of $113.6 million, net of tax, and lower claims experience at the captive insurer; partially offset by higher costs incurred in connection with announced strategic initiatives.
• The decrease in earnings from discontinued operations was due to the Knife River separation. For the comparative periods, Knife River's operations are only reflected through May 2023, whereas 2022 includes a full nine month impact from Knife River's operations. Also contributing to the earnings decrease was 2023 separation related costs of $47.1 million, net of tax.

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

Business Segment Financial and Operating Data

The following sections include 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.

For information pertinent to various commitments and contingencies, see the Notes to Consolidated Financial Statements. For a summary of the Company's business segments, see Note 18 of the Notes to Consolidated Financial Statements.

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 Note 18. 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; weather; climate change laws, regulations and 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 rate cases, see Note 21 and the 2022 Annual Report.

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 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. Recently, MISO and NERC 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 and accreditation process, versus the previous annual summer peak capacity requirement process. These changes have not had a significant impact on the capacity requirements for Montana-Dakota. 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.

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 and 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. Natural gas prices had stabilized by March 2023. The higher natural gas prices in December 2022 and January 2023 impacted both Intermountain and Cascade, both of which borrowed short-term debt of $125.0 million and $150.0 million, respectively, in January 2023 to finance the increased natural gas costs. To assist in the recovery of the higher natural gas costs, Intermountain filed an out-of-cycle purchased gas adjustment with the IPUC that was effective February 1, 2023 and is collecting interest costs associated with short-term borrowing with rates effective October 1, 2023. Cascade filed its annual update to its purchased gas adjustment with the WUTC requesting recovery of these increased gas costs for a period of two years rather than the normal one year period with rates effective November 1, 2023. As of September 2023, Intermountain has repaid $80.0 million of the $125.0 million short-term debt.

In late summer and fall of 2023, fuel and purchased power prices increased across Montana-Dakota's integrated system. This was caused by transmission congestion in northwest North Dakota due to delays in additional Southwest Power Pool transmission line build-out, as well as additional load growth in the Bakken region. Fuel and purchased power prices have remained elevated through October. To assist in the recovery of the higher fuel and purchased power costs, Montana-Dakota filed a waiver request with the NDPSC, which was approved on October 24, 2023, deferring the increased costs to the annual fuel clause adjustment. Montana-Dakota also has a similar waiver request pending with the SDPUC, which was filed on October 23, 2023, and anticipates filing a waiver request with the MTPSC.

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 well as increased demand for electrical equipment due to regulatory activity and grid expansion. 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, population changes and competition from other energy providers and fuels. The construction of new electric generating facilities, transmission lines and other service facilities is subject to increasing costs and lead times, extensive permitting procedures, and federal and state legislative and regulatory initiatives, which may necessitate increases in electric energy prices. As the industry continues to expand the use of renewable energy sources, the need for additional transmission infrastructure is growing. 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 85 mile 345-kV transmission line with Otter Tail Power Company in central North Dakota. On October 6, 2023, the FERC issued an order approving the Company's request for CWIP Incentive Rate and Abandoned Plant Incentive treatment on this project.

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

(In millions)

40

Index

Three Months Ended September 30, 2023, Compared to Three Months Ended September 30, 2022 Electric earnings decreased $700,000 as a result of:

• Revenue increased $8.8 million.
• Largely due to:
• Higher fuel and purchased power costs of $8.9 million recovered in customer rates and offset in expense, as described below.
• Higher data center revenue of $1.3 million, including net transmission.
• Rate relief of $1.0 million in North Dakota and Montana.
• Higher transmission interconnect upgrades of $600,000.
• Partially offset by:
• Lower retail sales volumes of $1.9 million, driven primarily by lower residential volumes, largely due to cooler weather, partially offset by higher commercial volumes. There was a 36.6 percent increase in volumes, which includes the data center as further discussed in the outlook section.
• Lower renewable tracker revenues of $600,000 associated with higher production tax credits offset in expense, as described below.
• Electric fuel and purchased power increased $8.9 million, largely the result of higher retail sales volumes and higher commodity costs, including recovery of fuel clause adjustments.
• Operation and maintenance increased $1.4 million, primarily the result of payroll-related costs.
• Depreciation, depletion and amortization increased $300,000, largely due to increased property, plant and equipment balances, as a result of transmission projects placed in service to improve reliability and update aging infrastructure.
• Taxes, other than income were comparable to the same period in the prior year.
• Other income (expense) increased $800,000, the result of higher interest income of $500,000, largely related to contributions in aid of construction and higher returns on the Company's nonqualified benefit plan investments of $200,000, as discussed in Note 14.
• Interest expense was comparable to the same period in the prior year. Higher AFUDC debt, largely due to higher rates, was largely offset by higher average interest rates.
• Income tax expense decreased $200,000, largely due to higher production tax credits and lower income before income taxes, partially offset by lower excess deferred income tax amortizations.

Nine Months Ended September 30, 2023, Compared to Nine Months Ended September 30, 2022 Electric earnings increased $16.4 million as a result of:

• Revenue increased $16.2 million.
• Largely due to:
• Rate relief of $6.2 million in North Dakota and Montana.
• Higher fuel and purchased power costs of $5.5 million recovered in customer rates and offset in expense, as described below.
• Higher data center revenue of $2.0 million, including net transmission.
• Higher transmission interconnect upgrades of $1.6 million.
• Higher renewable tracker revenues of $1.0 million associated with lower production tax credits offset in expense, as described below.
• Higher retail sales volumes of 23.0 percent attributable to commercial customers, which include the data center as further discussed in the outlook section, largely offset by lower residential customers due to cooler weather in the third quarter of 2023.
• Electric fuel and purchased power increased $5.5 million, largely the result of higher commodity prices and higher retail sales volumes, partially offset by fuel clause adjustments.
• Operation and maintenance decreased $2.5 million.
• Largely the result of:
• Decreased contract services primarily due to the absence of prior year planned outage costs at Coyote Station of $1.7 million and lower transmission expense, partially offset by increased costs at the Company's other electric generating stations.
• Lower materials expense of $400,000, partially due to the closure of Units 1 and 2 at Heskett Station.
• Depreciation, depletion and amortization decreased $4.2 million.
• Primarily due to decreased amortization of plant retirement and closure costs of $5.2 million resulting from an extension to the recovery period for these costs, which are recovered in operating revenues, as discussed in Note 12.
• Partially offset by increased depreciation of $900,000 associated with higher property, plant and equipment balances, the result of transmission projects placed in service to improve reliability and update aging infrastructure.
• Taxes, other than income were comparable to the same period in the prior year.
• Other income (expense) increased $4.2 million, primarily resulting from higher returns on the Company's nonqualified benefit plan investments of $4.3 million, as discussed in Note 14, and higher interest income of $800,000, largely related to contributions in aid of construction, offset in part by lower AFUDC equity due to higher average short-term debt balance.
• Interest expense decreased $500,000 as a result of higher AFUDC debt, largely due to higher rates, partially offset by higher average interest rates.
• Income tax expense increased $5.9 million, largely due to higher income before income taxes and lower production tax credits driven by lower wind production.

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

(In millions)

42

Index

Three Months Ended September 30, 2023, Compared to Three Months Ended September 30, 2022 Natural gas distribution reported a decreased seasonal loss of $400,000 as a result of:

• Revenue increased $2.8 million.
• Largely due to:
• Approved rate recovery of short-term debt interest expense related to increased gas costs in Idaho of $3.2 million.
• Rate relief of $3.0 million in Idaho and Washington.
• Higher transportation revenue of $1.1 million due to 19.0 percent higher volumes, largely higher electric generation.
• Increased revenue-based taxes recovered in rates of $900,000 that were offset in expense, as described below.
• Higher basic service charges of $300,000.
• Partially offset by:
• Lower purchased natural gas sold of $5.1 million recovered in customer rates that was offset in expense, as described below.
• A 9.3 percent decrease in retail sales volumes to all customer classes, offset in part by weather normalization and decoupling mechanisms in certain jurisdictions.
• Purchased natural gas sold decreased $5.7 million, largely due to lower volumes of natural gas purchased of $5.3 million, lower natural gas costs of $500,000 as a result of lower purchased gas adjustments, partially offset by higher commodity prices. Purchased natural gas sold includes the absence of the prior year disallowance of $845,000 ordered by the MNPUC.
• Operation and maintenance increased $6.0 million.
• Largely attributable to:
• Higher payroll-related costs of $5.2 million.
• Higher uncollectible accounts expense $800,000, largely due to higher revenue.
• Higher contract services of $600,000, largely higher subcontractor labor.
• Partially offset by lower materials expense of $400,000.
• Depreciation, depletion and amortization increased $1.2 million, primarily resulting from growth and replacement projects placed in service, partially offset by lower depreciation rates in Minnesota.
• Taxes, other than income decreased $100,000, primarily from lower property taxes $1.0 million due to lower assessed values, offset by lower revenue based taxes of $900,000, which are recovered in rates.
• Other income (expense) increased $3.3 million driven primarily by higher interest income of $2.8 million, largely due to higher purchased gas costs, and higher returns on the Company's nonqualified benefit plans of $200,000, as discussed in Note 14.
• Interest expense increased $3.7 million, primarily from higher short-term and long-term debt balances from debt issued in 2023 and higher interest rates, partially offset by higher AFUDC debt of $500,000 due to higher rates.
• Income tax benefit decreased $600,000, the result of lower permanent tax adjustments and lower seasonal loss before income taxes.

Nine Months Ended September 30, 2023, Compared to Nine Months Ended September 30, 2022 Natural gas distribution increased $7.2 million as a result of:

• Revenue increased $126.4 million.
• Largely due to:
• Higher purchased natural gas sold of $98.8 million recovered in customer rates that was offset in expense, as described below, partially offset by $1.2 million of natural gas cost sharing in Oregon.
• Increased revenue-based taxes recovered in rates of $7.4 million that were offset in expense, as described below.
• Rate relief of $8.4 million in Washington and Idaho, including the excess deferred income tax tariff settlement of $1.1 million in Washington.
• Higher basic service charges of $3.5 million.
• Approved rate recovery of short-term debt interest expense related to increased gas costs in Idaho of $3.2 million.
• Higher transportation revenue of $2.8 million due to 15.1 percent higher volumes, largely higher electric generation.
• Higher nonregulated revenue $1.8 million, largely higher liquefied natural gas sales.
• Recovery of COVID-19 response costs, including bill assistance programs and waived late payment fees, in Oregon of $700,000.
• Partially offset by a 1.6 percent decrease in retail sales volumes to all customer classes.
• Purchased natural gas sold increased $99.0 million, primarily due to higher natural gas costs of $106.7 million as a result of higher market prices, including the higher recovery of purchased gas adjustments. These increases were partially offset by lower volumes of natural gas purchased of $7.7 million.
• Operation and maintenance increased $10.9 million.
• Largely resulting from:
• Higher payroll-related costs of $10.0 million, primarily higher incentive costs, straight-time payroll and health care costs.
• Increased uncollectible accounts expense of $1.7 million, largely due to higher revenue.
• Higher software related expenses of $800,000.
• Increased costs of $500,000 associated with vehicles and equipment.
• Partially offset by decreased other expenses, including gain on sale of the Company's customer service center, miscellaneous employee expenses and increased regulatory deferrals.
• Depreciation, depletion and amortization increased $3.2 million, primarily resulting from growth and replacement projects placed in service, partially offset by lower depreciation rates in Minnesota.
• Taxes, other than income increased $6.5 million, largely from higher revenue-based taxes of $7.4 million which are recovered in rates, partially offset by lower property taxes due to lower assessed values of $900,000.
• Other income (expense) increased $14.2 million driven by higher interest income of $8.5 million, largely related to purchased gas costs, and higher returns on the Company's nonqualified benefit plans of $6.2 million. These increases were offset in part by higher pension and postretirement expense.
• Interest expense increased $12.4 million, primarily from higher short-term and long-term debt balances from debt issued in 2023 and 2022 and higher interest rates, partially offset by higher AFUDC debt of $2.0 million, due to higher rates.
• Income tax benefit decreased $1.4 million, largely the result of higher income before taxes, partially offset by higher permanent tax adjustments.

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, these segments experienced retail customer growth of approximately 1.6 percent 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 in January 2023, experienced 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 which has assisted in the timely recovery of these costs. The Company will continue to monitor natural gas prices, as well as oil and natural gas production levels.

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 before the end 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. 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. Existing and proposed emissions reduction plans from the EPA 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.

On June 6, 2023, the Company received unanimous approval from the NDPSC on an electric service agreement to provide power for Applied Digital Corporation's data center near Ellendale, North Dakota. At full capacity, the data center requires 180 megawatts of electricity, which is the equivalent of about 28 percent of the Company's generation portfolio. The Applied Digital Corporation's load will be purchased from the MISO market and will not impact customers' power supply. The data center began taking electric service on March 4, 2023 under an interim electric service agreement approved by the NDPSC. On October 2, 2023, the Company filed with the NDPSC an electric service agreement request to serve an additional data center in its service territory.

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 EPA released rulemaking under the federal Clean Air Act in the federal register on May 23, 2023, amending GHG emission standards for new fossil-fired electric generating units and re-proposing GHG emission guidelines for existing fossil-fired electric generating units. The proposed standards for new natural gas-fired electric generating units have been made more stringent, requiring units that operate more frequently to install carbon capture controls or co-fire with hydrogen. For existing coal and natural gas-fired units operating more frequently and long-term, the EPA’s emissions guidelines include standards equivalent to installation of carbon capture pollution control or co-firing with lower or zero-carbon fuels, such as hydrogen. States must evaluate individual units and develop, adopt, and submit a plan to the EPA which would include emission standards for each individual unit. State plans are required to be submitted to the EPA no later than 24 months after the final rule effective date. The EPA requested comment on the proposed GHG emission standards and guidelines by August 8, 2023, and intends to finalize the rules in 2024. The EPA has not currently proposed GHG emission standards for existing simple cycle combustion turbines and intends to explore setting emission standards in the future for these units. It is unknown at this time what emission limits or controls would be required for each Montana-Dakota owned and jointly owned fossil-fired electric generating unit. Due to the uncertainty of the EPA rulemaking, Montana-Dakota cannot determine the potential financial impact on its operations.
• 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. Each year, compliance instruments will be distributed to the Company by the Oregon Department of Environmental Quality at no cost and will decline annually in step with the reductions from baseline. The Company intends to meet its obligations through surrendering no cost emissions allowances and will fill remaining compliance obligations by 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. Due to timing of regulatory recover, future compliance obligation purchases could impact the Company's operating cash flow. For more information about this rule and associated compliance costs, see Items 1 and 2 - Business Properties in the 2022 Annual Report. Cascade's 2023 Oregon integrated resource plan projects customer bills could increase substantially compared to costs included in customers' current bills as a result of the legislation. Projected customer bill impacts are estimates, subject to change as legislation is implemented and compliance begins, as well as, numerous assumptions used in the complex analysis of integrated resource planning. 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 OPUC approved the deferred accounting order on June 27, 2023. 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 Program Rule. Oral arguments were held on September 29, 2023. A decision could be issued in the second half of 2024. 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. As directed by the Climate Commitment Act, in September 2022 the Washington DOE published its final rule on the Climate Commitment Program, which was effective on October 30, 2022, and emissions compliance began on January 1, 2023. The Company must demonstrate that they have met GHG emissions reduction goals through a combination of on-site emissions reductions and the use of approved allowances and offsets. Emissions compliance may be achieved through increased energy efficiency and conservation measures, purchased allowances and offsets, and purchases of low carbon fuels. Emissions allowances are allocated by the Washington DOE to the Company at no cost and additional allowances are required to be purchased at auction. Auctions for allowances are held quarterly. The Company intends to meet the first compliance period requirements, in part, by purchasing allowances through auction. The Company expects the compliance costs for these regulations will be recovered through customer rates. Due to timing of regulatory recovery, the purchase of allowances could impact the Company's operating cash flow. For more information about this rule and associated compliance costs, see Items 1 and 2 - Business properties in the 2022 Annual Report. Cascade's 2023 Washington integrated resource plan projects customer bills could increase substantially compared to costs included in customers' current bills as a result of the legislation. Projected customer bill impacts are estimates, subject to change as the legislation is implemented and compliance begins, as well as, numerous assumptions used in the complex analysis of integrated resource planning. 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. The WUTC approved the deferred accounting order on February 28, 2023.
• 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, along with two other local natural gas distribution companies in Washington, filed a lawsuit on May 22, 2023, challenging these amendments which the Company believes will stifle innovation, increase the cost of housing and energy for our customers, and do not consider the limitations of electric heat pumps in colder climates. On June 1, 2023, the plaintiffs filed a motion for a preliminary injunction to preliminarily enjoin the challenged building code amendments. Oral arguments on the preliminary injunction were held on July 18, 2023. The court denied the preliminary injunction, finding no immediate harm and confirming the building code amendments were not yet in effect due to the stay of 120 days issued by the Washington State Building Code Council. On September 15, 2023, the Washington State Building Code Council voted to delay the implementation of the State Building and Energy Codes until March 15, 2024.

Pipeline

Strategy and challenges The pipeline segment provides natural gas transportation, underground storage and non-regulated cathodic protection services, as discussed in Note 18. 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 Company completed the following organic growth projects in 2022 and 2023:

• In February 2022, the North Bakken Expansion project in western North Dakota was placed in service. 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 August 2022, the Line Section 7 Expansion project was placed in service and increased system capacity by 6.7 MMcf per day.
• In November 2023, the Grasslands South Expansion project was placed in service. The project increased system capacity by 94 MMcf of natural gas per day.
• In November 2023, the Line Section 15 Expansion project was placed in service and will increase system capacity by 25 MMcf of natural gas per day.

The segment is exposed to natural gas and oil price volatility including fluctuations in basis differentials. 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. However, supply chain challenges related to electrical equipment have delayed the anticipated in-service date of one of the Company's growth projects as noted in the Outlook section. The segment is also currently experiencing inflationary pressures with increased raw material and contract services costs. The Company expects supply chain challenges and inflationary pressures to continue.

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.

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

(In millions)

Three Months Ended September 30, 2023, Compared to Three Months Ended September 30, 2022 Pipeline earnings increased $2.1 million as a result of:

• Revenues increased $4.4 million.
• Driven by:
• Increased transportation volumes, largely due to increased North Bakken Expansion contracted volume commitments of $2.1 million.
• Higher storage-related revenues.
• New rates effective August 1, 2023, of $1.7 million, as discussed in note 21.
• Partially offsetting these increases were non-renewal of certain contracts.
• Operation and maintenance increased $2.4 million.
• Primarily from:
• Higher payroll-related costs of $2.2 million.
• Higher other costs including insurance and contract services.
• Partially offset by lower materials.
• Depreciation, depletion and amortization decreased $600,000 driven largely by fully depreciated plant balances.
• Taxes, other than income were comparable to the same period in the prior year.
• Other income increased $300,000, driven primarily by higher AFUDC for the construction of the Company's growth projects.
• Interest expense increased $700,000, primarily from higher average interest rates and higher debt balances to fund capital expenditures, partially offset by higher AFUDC, as previously discussed.
• Income tax expense increased largely due to higher income before taxes.

Nine Months Ended September 30, 2023, Compared to Nine Months Ended September 30, 2022 Pipeline earnings increased $4.6 million as a result of:

• Revenues increased $12.7 million.
• Primarily driven by:
• Increased transportation volumes, largely due to increased contracted volume commitments of $5.6 million and a full nine months of benefit from the North Bakken Expansion project that was placed in service in February 2022.
• Higher storage-related revenues of $3.6 million.
• New rates effective August 1, 2023, of $1.7 million, as discussed in note 21.
• Higher non-regulated projects revenues.
• Partially offsetting these increases were non-renewal of certain contracts.
• Operation and maintenance increased $7.8 million.
• Primarily from:
• Higher payroll-related costs of $4.8 million.
• Higher non-regulated project costs of $1.2 million.
• Higher legal costs of $400,000, largely due to the FERC rate case.
• Higher other costs, primarily contract services.
• Depreciation, depletion and amortization was comparable to the same period in the prior year.
• Taxes, other than income decreased by $400,000, primarily due to lower property tax valuations in certain jurisdictions.
• Other income increased $2.3 million, driven primarily by higher returns of $2.1 million on the Company's nonqualified benefit plan investments and higher AFUDC as previously discussed.
• Interest expense increased $2.1 million, primarily from higher average interest rates and higher debt balances to fund capital expenditures, partially offset by higher AFUDC as previously discussed.
• Income tax expense increased largely due to higher income before taxes.

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 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 rules to update, strengthen and expand standards intended to significantly reduce GHG emissions and other air pollutants from emission sources in the oil and natural gas industries. The standards will apply to various sources of GHG emissions including natural gas compressors, pneumatic controllers and pumps, fugitive emissions components and super-emitter events. The final rules are expected to be issued by the end of 2023. Additionally, the EPA is revising the current GHG reporting rules to improve the calculation, monitoring and reporting of GHG data and incorporate provisions in the IRA. The first of these revisions was published in the Federal Register on August 1, 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 forecasted production growth. The production delay, along with the long-term contractual commitments on the North Bakken Expansion project placed in service in February 2022, negatively impacted customer renewal of certain contracts. Natural gas production has since rebounded, currently exceeding pre-pandemic levels and the Company expects gradual increases in oil well drilling activity over the next 2 years. 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 natural gas 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. On May 27, 2022, the Company filed with FERC its application for the project and received FERC's approval on October 19, 2023. Construction is expected to begin in early 2024 with an anticipated completion date later in 2024.

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 began in the second quarter of 2023, with an anticipated completion date in early 2024. Supply chain challenges related to electrical equipment have impacted the project's schedule, resulting in a delay from the original anticipated in-service date of late 2023.

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

Construction Services

Strategy and challenges The construction services segment provides electrical, mechanical and transmission and distribution specialty contracting services, as discussed in Note 18. 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 Part I, Item 1A. Risk Factors in the 2022 Annual Report. 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 can 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 on pricing 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 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 actual 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 attempting to mitigate the inflationary impacts seen across the United States. The segment is currently experiencing continued labor constraints 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. Challenges faced by the Company to ensure available specialized labor resources, 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.

(In millions)

(In millions)

51

Three Months Ended September 30, 2023, Compared to Three Months Ended September 30, 2022 Construction services earnings increased $8.0 million as a result of:

• Revenues decreased $19.6 million.
• Largely due to lower electrical and mechanical workloads as a result of:
• Lower renewable workloads driven largely by a $24.2 million decrease due to timing and progress of renewable projects.
• Lower commercial workloads, primarily in the hospitality sector of $13.4 million due to progress on large projects. The commercial market was also impacted by decreased low voltage workloads of $5.8 million, partially offset by higher data center workloads.
• Lower industrial workloads of $16.3 million in the general industrial and high-tech sectors of $6.8 million and $4.2 million, respectively; offset in part by higher government and maintenance workloads of $4.2 million and $3.5 million, respectively.
• Partially offsetting these decreases were higher workloads in the institutional market of $17.4 million. Institutional workloads were driven by an increase of $15.9 million in the healthcare sector due to project mix.
• Transmission and distribution revenues increased by $8.8 million, largely attributable to the utility market. Distribution and transmission sector workloads increased by $23.7 million and $16.8 million, respectively, partially offset by lower electrical workloads of $32.0 million due to project timing.
• Gross profit increased $24.2 million.
• Largely due to higher gross profit on electrical and mechanical work in the commercial, renewable and institutional sectors of $21.7 million, primarily due to efficiency on certain projects from labor and materials; offset partially by lower industrial gross profit. Transmission and distribution gross profit increased $5.6 million as a result of labor and equipment efficiencies on certain projects.
• Selling, general and administrative expense increased $9.0 million.
• Primarily due to:
• Increased payroll-related costs of $5.5 million related to operational growth.
• Increased reserve for uncollectible accounts of $1.8 million on certain projects.
• Increased expenses associated with professional services of $1.2 million.
• Other income decreased $1.5 million, primarily related to the Company's joint ventures activity.
• Interest expense increased $4.7 million due to higher working capital needs and higher average interest rates.
• Income tax expense increased $2.2 million primarily resulting from an increase in income before income taxes.

Nine Months Ended September 30, 2023, Compared to Nine Months Ended September 30, 2022 Construction services earnings increased $17.0 million as a result of:

• Revenues increased $243.6 million.
• Largely due to higher electrical and mechanical workloads as a result of:
• Higher commercial workloads driven largely by a $185.9 million increase in the hospitality sector and a $95.2 million increase in data center work primarily from the progress on large projects; partially offset by a $21.4 million decrease in general commercial sector workloads.
• Higher industrial workloads in the high-tech and government sectors of $61.0 million and $11.6 million, respectively; partially offset by lower data com workloads of $38.3 million.
• Higher institutional workloads, primarily in the healthcare sector of $35.1 million and government sector workloads of $5.5 million.
• Offset partially by lower renewable workloads of $78.9 million due to the timing of commercial and renewable projects.
• Also contributing were higher utility workloads as a result of:
• Increases in distribution workloads of $60.0 million, storm work of $21.4 million and transmission workloads of $20.2 million.
• Increases in utility revenues were partially offset by lower workloads in electrical of $70.8 million.
• Transportation workloads also decreased, largely due to lower workloads in street lighting of $15.6 million, government of $6.4 million, and electrical of $3.7 million; partially offset by higher workloads in traffic signalization of $6.9 million.
• Gross profit increased $48.2 million.
• Largely due to higher gross profit on electrical and mechanical work in the commercial, industrial, institutional and renewable sectors of $46.1 million due to efficiency on certain from labor and materials, project mix, and the timing of project completions and project starts; offset partially by lower service gross profit. Transmission and distribution gross profit increased largely due to utility projects of $4.7 million as a result of project mix; partially offset by lower transportation gross profit.
• Selling, general and administrative expense increased $19.2 million.
• Primarily due to:
• Increased payroll-related costs of $9.6 million related to operational growth.
• Increased reserve for uncollectible accounts of $4.2 million on certain projects.
• Increased office expenses of $2.7 million, largely increased rent.
• Increased expenses associated with professional services of $2.4 million.
• Other income increased $2.8 million, primarily related to results from the Company's joint ventures.
• Interest expense increased $6.4 million due to higher working capital needs and higher average interest rates.
• Income tax expense increased $6.0 million primarily resulting from an increase in income before income taxes.

Outlook On November 2, 2023, the Company announced its intent to pursue a tax-free spinoff of its wholly owned construction services business, MDU Construction Services. The Company's board of directors believes a tax-free spinoff of the construction services business supports the Company's goal of enhancing value for stockholders by becoming a pure-play regulated energy delivery company.

Funding for public projects is highly dependent on federal and state funding. 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 2023 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, solar generation and energy storage markets that complement existing renewable projects performed by the Company.

The construction services segment's backlog at September 30, was as follows:

(In millions)

The decrease in backlog at September 30, 2023, as compared to backlog at September 30, 2022, was largely attributable to the progress of completion on certain electrical and mechanical projects within industrial, renewables, institutional and commercial markets. This decrease in backlog has been partially offset by an increase in transmission and distribution related to project awards in both the transportation and utility markets. Period over period increases or decreases in backlog cannot be used as an indicator of future revenues or net income. 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 September 30, 2023, the Company has not experienced any material impacts related to customer notices indicating that they no longer wish to proceed with planned projects that have been included in backlog. Factors noted in Part I, Item 1A. Risk Factors in the 2022 Annual Report can cause revenues to be realized in periods and at levels that are different from originally projected.

Other

(In millions)

Three Months Ended September 30, 2023, Compared to Three Months Ended September 30, 2022

Other earnings decreased $81.3 million from the same period in 2022, largely attributable to the discontinued operations of Knife River, formerly the construction materials and contracting segment, which is now classified within the Other segment. The decrease in earnings was partially offset by a $22.8 million, net of tax, unrealized gain on the Company's retained interest in Knife River in 2023. Other experienced $5.6 million lower operation and maintenance expense, due primarily to lower insurance claims experience at the captive insurer and corporate overhead costs classified as continuing operations which were previously allocated to the construction materials business for the third quarter of 2022; partially offset by strategic initiative costs incurred. Interest expense also increased largely due to the issuance of debt facilities in connection with funding the strategic initiative costs; partially offset by interest income related to intercompany borrowings through the Company's cash management program.

Also included in Other is 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.

Nine Months Ended September 30, 2023, Compared to Nine Months Ended September 30, 2022

Other earnings decreased $51.6 million from the same period in 2022, largely attributable to the discontinued operations of Knife River, formerly the construction materials and contracting segment, which is now classified within the Other segment. Partially offsetting this decrease was a benefit of $113.6 million, net of tax, unrealized gain on the Company's retained interest in Knife River. Other experienced higher operation and maintenance expense of $6.5 million, due to strategic initiative costs incurred; partially offset by corporate overhead costs classified as continuing operations which were previously allocated to the construction materials business for the first five months of 2023 and for nine months of 2022 and lower claims experience at the captive insurer. Interest expense also increased largely due to the issuance of debt facilities in connection with funding of the strategic initiative costs; partially offset by interest income related to intercompany borrowings through the Company's cash management program.

Also 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.

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:

(In millions)

For more information on intersegment eliminations, see Note 18.

Liquidity and Capital Commitments

At September 30, 2023, the Company had cash, cash equivalents and restricted cash of $32.5 million and available borrowing capacity of $429.0 million under the outstanding credit facilities of the Company and its subsidiaries. The Company expects to meet its obligations for debt maturing within one year and its other operating and capital requirements from various sources, including internally generated funds; credit facilities and commercial paper of the Company and its subsidiaries, as described in Capital resources; and issuance of debt and equity securities if necessary.

Cash flows

(In millions)

Operating activities

(In millions)

55

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 affected by changes in working capital. The decrease in cash flows provided by operating activities in the previous table was primarily driven by increased cash used in discontinued operations, primarily cash used at Knife River and higher costs incurred in 2023 associated with the separation. Also contributing were, the payment of increased natural gas costs and the purchase of environmental allowances in 2023, as discussed in Note 13, all at the natural gas distribution business. Partially offsetting these items was the timing of collection of accounts receivable from customers at the natural gas distribution and construction services businesses and the sale of environment allowances in 2023 at the natural gas distribution business.

Investing activities

(In millions)

The cash used in investing activities decreased as compared to 2022. Lower cash used in discontinued operations was the result of lower capital expenditures at Knife River in the five months of 2023 versus the nine months of 2022. This was partially offset by higher cash used in continuing operations, primarily increased capital expenditures at the pipeline business. Net proceeds from the sale or disposition of property at the electric and natural gas distribution businesses increased due to higher salvage values on assets and lower costs of removal.

Financing activities

(In millions)

The decrease in cash provided by financing activities in the previous table was primarily due to repayments of short-term and long-term debt at the construction services and natural gas distribution businesses and working capital collections at the construction services business. In addition, due to the Knife River separation, Centennial repaid all of its outstanding debt in the second quarter of 2023, which was facilitated by the Knife River repayment and the Company entering into various new debt instruments. Refer to Note 3 for additional information related to the repayment of debt associated with the Knife River separation. Partially offsetting these decreases, was the issuance of short-term borrowings at the natural gas distribution business to fund higher natural gas costs and issuance of long-term debt at the Company to replace the Centennial debt repayment and to fund capital expenditures at the Pipeline business.

The Company's primary liquidity needs have historically been to support working capital requirements, fund capital expenditures and return cash to stockholders. The absence of cash flows historically generated from discontinued operations is not expected to adversely affect the Company's liquidity or ability to fund working capital needs. The Company announced on August 3, 2023, its intent to change its dividend practice targeting a dividend payout ratio of 60 percent to 70 percent of regulated energy delivery earnings due to its objective of becoming a pure-play regulated energy delivery business. The absence of cash flows historically generated from or used in discontinued operations may have an impact on how the Company finances its capital expenditures. As such, the Company will continue to assess its ability and manner in which it funds future capital expenditures and its dividend policy in light of the absence of cash flows from discontinued operations, as well as the Company's overall strategy, cash generation, debt levels and ongoing requirements for cash to fund operations.

Capital expenditures

Capital expenditures for the first nine months of 2023 and 2022 were $374.0 million and $340.7 million, respectively. Capital expenditures allocated to the Company's business segments are estimated to be approximately $530.3 million for 2023. Capital expenditure estimates have been updated from what was previously reported in the 2022 Annual Report to accommodate project timeline and scope changes made throughout the first half of 2023.

The Company has included in the estimated capital expenditures for 2023 multiple organic growth projects at the pipeline business and construction of Heskett Unit 4 at the electric business, as previously discussed in Business Segment Financial and Operating Data, as well as 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; and other growth opportunities.

The Company continues to evaluate potential future acquisitions and other growth opportunities that would be incremental to the outlined capital program; however, they are dependent upon the availability of economic opportunities and, as a result, capital expenditures may vary significantly from the estimate previously discussed. 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 2023 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 and its subsidiaries contain restrictive and financial covenants and cross-default provisions. In order to borrow under the respective debt instruments, the Company and its subsidiaries must be in compliance with the applicable covenants and certain other conditions, all of which the Company and its subsidiaries, as applicable, were in compliance with at September 30, 2023. In the event the Company and its subsidiaries do not comply with the applicable covenants and other conditions, alternative sources of funding may need to be pursued. As of September 30, 2023, 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 Part II, Item 6 in this document and Part II, Item 8 in the 2022 Annual Report.

The following table summarizes the outstanding revolving credit facilities of the Company and its subsidiaries at September 30, 2023:

(In millions)

(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). Effective October 18, 2023 the facility limit was increased from $175.0 million to $200.0 million (with provisions that allow for increased borrowings up to a maximum of $ 250.0 million) and a maturity date of October 18, 2028.

(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) Certain provisions allow for increased borrowings, up to a maximum of $250.0 million.

Due to the Knife River separation, Centennial repaid all of its outstanding debt in the second quarter of 2023, which was facilitated by the Knife River repayment previously discussed in Note 3 and the Company entering into various new debt instruments.

The Montana-Dakota commercial paper program is supported by a revolving credit agreement. While the amount of commercial paper outstanding does not reduce available capacity under the respective revolving credit agreement, Montana-Dakota does not issue commercial paper in an aggregate amount exceeding the available capacity under the credit agreement. The commercial paper and revolving credit agreement 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 and its subsidiaries.

Total equity as a percent of total capitalization was 51 percent at September 30, 2023. Including the debt reflected in liabilities of discontinued operations, the Company's total equity as a percentage of total capitalization was 53 percent at September 30, 2022, and 54 percent at December 31, 2022. 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.

Cascade 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 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. In March, April, and May 2023, Intermountain repaid $20.0 million, $30 million, and $30 million, respectively, of the outstanding balance. 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 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. On March 17, 2023, Centennial amended this agreement to extend the maturity date to September 15, 2023. On May 31, 2023, Centennial repaid the full balance outstanding under the term loan agreement.

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. On May 31, 2023, Centennial repaid the full balance outstanding under the term loan agreement.

On June 9, 2023, Centennial repaid the full balances outstanding on all its long-term senior note debt, which aggregated $455.0 million.

MDU Resources Group, Inc. On May 1, 2023, the Company entered into a $75.0 million term loan agreement with a SOFR-based variable interest rate and a maturity date of November 1, 2023. The agreement contained customary covenants and provisions, including a covenant of the Company not to permit, at any time, the ratio of total debt to total capitalization to be greater than 65 percent. The covenants also included certain restrictions on the sale of certain assets, loans and investments. On May 31, 2023, the Company repaid the full balance outstanding under the term loan agreement.

On May 31, 2023, the Company entered into a $375.0 million term loan agreement with a SOFR-based variable interest rate and a maturity date of May 31, 2025. The agreement contains customary covenants and provisions, including a covenant of the Company 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.

Equity Resources

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, allowed 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. On August 10, 2023, the Company provided notice of termination, effective August 10, 2023, of the distribution agreement. Prior to the termination, the Company had capacity to issue up to 3.6 million additional shares of common stock under the "at-the-market" offering. The Company was not subject to any termination penalties related to the termination of the distribution agreement.

The Company had no issuances of shares under the "at-the-market" offering program for both the three months ended September 30, 2023 and 2022.

Material cash requirements

Apart from the effect of the spinoff of Knife River in the second quarter of 2023, there were no material changes in the Company's remaining contractual obligations related to estimated interest payments, asset retirement obligations and uncertain tax positions for 2023 from those reported in the 2022 Annual Report. For more information on the Company's contractual obligations on long-term debt, operating leases and purchase commitments, see Part II, Item 7 in the 2022 Annual Report.

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.

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.

The Company has entered into various commitments largely consisting of contracts for natural gas; purchased power; natural gas transportation and storage; royalties; information technology; and construction materials. Certain of these contracts are subject to variability in volume and price. The commitments under these contracts as of September 30, 2023, were:

(In millions)

59

Defined benefit pension plans

The Company has noncontributory qualified defined benefit pension plans. Various assumptions are used in calculating the benefit expense (income) and liability (asset) related to these plans, as such costs of providing these benefits bear the risk of changes as they are dependent upon assumptions of future conditions.

In connection with the previously discussed separation of Knife River on May 31, 2023, Knife River's pension plan, including the associated assets and liabilities, were transferred to Knife River and therefore are no longer reflected as part of the Company. Also in connection with the separation, a remeasurement of the Company's postretirement plan and the Company's unfunded, non-qualified defined benefit plan were performed and the applicable liabilities from the plans relating to transferring employees were transferred to Knife River. The Company contributed approximately $7.5 million to its pension plans in 2023, largely resulting from a decline in asset values decreasing the funded status of the plans. For more information, see Note 19 and Part II, Item 7 in the 2022 Annual Report.

New Accounting Standards

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

Critical Accounting Estimates

The Company's critical accounting estimates include impairment testing of goodwill; fair values of acquired assets and liabilities under the acquisition method of accounting; regulatory assets expected to be recovered in rates charged to customers; revenue recognized using the cost-to-cost measure of progress for contracts; actuarially determined benefit costs; and tax provisions. There were no material changes in the Company's critical accounting estimates from those reported in the 2022 Annual Report. For more information on critical accounting estimates, see Part II, Item 7 in the 2022 Annual Report.

The Company is exposed to the impact of market fluctuations associated with interest rates and commodity prices. The Company has policies and procedures to assist in controlling these market risks and from time to time has utilized derivatives to manage a portion of its risk. Market risk sensitive instruments were not entered into for trading purposes.

Interest rate risk

Rising interest rates have resulted in and will likely continue to result in higher borrowing costs on new debt and existing variable interest rate debt. The Company has realized increases in both the amount of variable interest rate debt recorded on the balance sheet and the weighted average interest rates on variable debt from those reported in the 2022 Annual Report. As of September 30, 2023 and December 31, 2022, approximately 35.6 percent and 21.5 percent, respectively, of the outstanding debt recorded on the balance sheet consisted of variable interest rate facilities (which use SOFR as the benchmark rate). This increase was the result of refinancing associated with the separation of Knife River, as discussed in Note 3 and Note 15, and higher gas costs, as discussed in Item 2. An increase of 1 percent in the interest rate on the Company's outstanding variable interest rate facilities as of September 30, 2023, would cause a $9.4 million pre-tax annual increase in interest expense.

At September 30, 2023, the Company had no outstanding interest rate hedges.

Commodity price risk

There were no material changes to commodity price risk faced by the Company from those reported in the 2022 Annual Report.

Evaluation of disclosure controls and procedures

The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. The Company's disclosure controls and other procedures are designed to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The Company's disclosure controls and other procedures are designed to provide reasonable assurance that information required to be disclosed is accumulated and communicated to management, including the Company's chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. The Company's management, with the participation of the Company's chief executive officer and chief financial officer, has evaluated the effectiveness of the Company's disclosure controls and other procedures as of the end of the period covered by this report. Based upon that evaluation, the chief executive officer and the chief financial officer have concluded that, as of the end of the period covered by this report, such controls and procedures were effective at a reasonable assurance level.

Changes in internal controls

No change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended September 30, 2023, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

Please refer to the Company's risk factors that are disclosed in Part I, Item 1A. Risk Factors in the 2022 Annual Report that could be materially harmful to the Company's business, prospects, financial condition or financial results if they occur. At September 30, 2023, there were no material changes to the Company's risk factors provided in Part I, Item 1A. Risk Factors in the 2022 Annual Report other than as set forth below.

The separation of Knife River into an independent, publicly traded company is subject to various risks and uncertainties.

The separation of Knife River was completed on May 31, 2023, and resulted in two independent, publicly traded companies. The execution of the separation has required significant time and attention from the Company’s senior management and employees and several of the Company's employees transferred to Knife River after the consummation of the separation, which could cause disruption in business processes. The Company retained 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. The realized value on the proceeds of the retained shares are subject to various factors, including, Knife River's stock price, the trading market for Knife River's stock and the capital markets in general, among other things.

The proposed separation of MDU Construction Services into an independent, publicly traded company is subject to various risks and uncertainties and may not achieve its intended goals.

On November 2, 2023, the Company announced its intent to pursue a tax-free spinoff of its wholly-owned construction services business, MDU Construction Services. The proposed separation is complex, and completion of the proposed separation and the timing of its completion will be subject to a number of factors and conditions, including the readiness of the new company to operate as an independent public company and finalization of the capital structure of the new company, among other things. The uncertainties associated with this process, foreseen and unforeseen costs incurred, and efforts involved, may negatively affect the Company's operating results, business and the Company's relationships with employees, customers, suppliers and vendors. Unanticipated developments could delay, prevent or otherwise adversely affect the proposed separation, including, but not limited to, changes in general economic and financial market conditions and material adverse changes in business or industry conditions. There can be no assurances that the Company will be able to complete the proposed separation or that the combined value of the common stock of the two companies will be equal to or greater than what the value of the Company's common stock would have been had the proposed separation not occurred. The execution of the separation may require significant time and attention from the Company’s senior management and employees, which could cause disruption in business processes. In addition, if the separation is completed, the Company may not be able to achieve the full strategic and financial benefits that are expected to result from the separation.

The Company is a holding company and relies on cash from its subsidiaries to pay dividends.

The Company's investments in its subsidiaries comprise the Company's primary assets. The Company depends on earnings, cash flows and dividends from its subsidiaries to pay dividends on its common stock. Regulatory, contractual and legal limitations, as well as their capital requirements, affect the ability of the subsidiaries to pay dividends to the Company and thereby could restrict or influence the Company's ability or decision to pay dividends on its common stock, which could adversely affect the Company's stock price.

There is no assurance as to the amount, if any, of future dividends to the holding company because the subsidiaries depend on future earnings, capital requirements and financial conditions to fund such dividends. Following the separation of Knife River, the Company's board of directors announced on August 3, 2023, a modification to its dividend practice targeting a dividend payout ratio of 60 percent to 70 percent of regulated energy delivery earnings. The Company cannot predict the market's future reaction to this change in dividend practice.