MDU to spin off giant contractor Knife River

MDU’s spinoff of its Knife River operations would create two companies with the flexibility to deploy capital in a way that’s tailored to their separate business profiles. (Image: MDU Resources Group)

The MDU Resources Group’s board of directors unanimously approved a plan to separate its wholly owned construction materials business, Knife River Corporation, from the company.

The separation will result in two independent, publicly traded companies, each of which the MDU Resources board believes will be positioned well for durable growth and shareholder value creation.

The separation is expected to be effected as a tax-free spinoff to MDU Resources shareholders and to be completed in 2023.

MDU Resources built Knife River Corp. largely through nearly 100 acquisitions since 1992, growing its revenue to $2.2 billion. Knife River is among the nation’s largest construction materials and contracting businesses, with more than 1 billion tons of rock and 5,000 employees (at peak) across 178 U.S. locations. Knife River operates in the Dakotas, Minnesota, Iowa, Texas, Nebraska, Montana, Wyoming, Idaho, Washington, Oregon, California, Alaska and Hawaii.

Knife River’s revenues have grown to $2.2 billion since the first of MDU’s 100 acquisitions in 1992. (Image: MDU Resources Group)

“We are proud of the strong businesses we have built and are confident now is the right time to take this step to best serve our customers, employees, communities and shareholders,” said David L. Goodin, president and CEO of MDU Resources. Both companies’ proven management teams will be able to more directly focus resources and capital to achieve their respective strategic goals, he pointed out.

Dennis W. Johnson, chair of MDU Resources board, said, “The board regularly assesses MDU Resources’ business, operations and value creation opportunities. Our most recent assessment determined that a separation of Knife River could unlock significant value. The MDU Resources board believes Knife River is ready to continue its success as a stand-alone public company and take full advantage of anticipated work resulting from federal infrastructure funding.”

Benefits of separation

The MDU Resources board believes the two companies have unique growth prospects and investment opportunities. The separation is expected to have a number of benefits for MDU Resources and Knife River stakeholders, including:

• Enhanced strategic focus: Each company will be able to pursue individualized strategies specific to the industries in which they operate, and use equity tailored to its own business to enhance acquisition programs and retention and hiring.
• Optimized capital structures: Each company will benefit from a distinct capital structure and financial policies tailored to its separate business profile and needs.
• Tailored capital allocation strategies: Each company will have enhanced flexibility to deploy capital toward its specific growth opportunities.
• Distinct investment opportunities: Investors will have two compelling investment opportunities and will be able to better assess the value of the two companies based on their respective operational and financial characteristics.

MDU Resources: Regulated Utility and Infrastructure Business Focused on Building a Strong America

Following the planned separation, MDU Resources will remain headquartered in Bismarck, N.D., and continue to be the parent company for MDU Resources’ existing regulated electric and natural gas utilities (Cascade Natural Gas Corp., Intermountain Gas Co., Montana-Dakota Utilities Co.), natural gas pipeline business (WBI Energy Inc.) and construction services company (MDU Construction Services Group Inc.). MDU Resources expects approximately 70% of its pro forma EBITDA to be generated from its regulated businesses, providing low-risk, stable returns to shareholders.

The company’s utilities provide electric and natural gas service to 1.2 million customers across eight states. The combined utility business has a rate base of $2.8 billion and is expected to make $1.6 billion in capital investments over the next five years. It generated $321 million of EBITDA in 2021.

MDU’s spinoff of its Knife River operations would create two companies with the flexibility to deploy capital in a way that’s tailored to their separate business profiles. (Image: MDU Resources Group)

WBI Energy provides natural gas transportation and underground storage services through regulated pipeline systems primarily in the Rocky Mountain and northern Great Plains regions of the U.S. and provides non-regulated cathodic protection and other energy-related services. It generated $78 million of EBITDA in 2021. With approximately 98% of WBI Energy’s EBITDA coming from regulated business, it is focused on growing this business through pipeline expansion projects.

MDU Construction Services Group provides specialty contracting services across the U.S., primarily electrical and mechanical, and transmission and distribution services. MDU Construction Services Group is comprised of 16 local operating companies employing more than 8,500 skilled workers during peak season and has been ranked the fourth largest U.S. electrical contractor. It generated $169 million of EBITDA in 2021.

Knife River: Vertically Integrated Aggregates Producer and Provider of Construction Materials and Contracting Services Focused on Organic and M&A Growth

Knife River, which provides construction materials and contracting services throughout the western, central and southern United States, also will remain headquartered in Bismarck.

Knife River produces and delivers aggregates and markets crushed stone, sand, gravel and related construction materials, including ready-mix concrete, asphalt and other value-added products. It also distributes cement and asphalt oil. Knife River has more than 1 billion tons of aggregate reserves, 110 ready-mix plants, 50 asphalt plants and a combined 410,000 tons of liquid asphalt and cement storage. It also performs integrated contracting services for most types of aggregate-related construction, including:

Knife River provided ready-mix for Medford, OR’s, Heimann Cancer Center.(Image: MDU Resources Group)

• Roads
• Freeways
• Bridges
• Residential properties
• Schools
• Shopping centers
• Office
• Buildings
• Industrial parks

Knife River has a successful track record of growth. In just the past four years, it has completed 12 acquisitions and increased revenues 23%. Knife River generated $293 million of EBITDA in 2021. MDU Resources’ board believes Knife River is poised to benefit from significant investments at the federal and local levels in infrastructure development and upgrades.

Transaction details

With the spinoff, it is expected that MDU Resources shareholders will retain their current shares of MDU Resources stock and receive a pro rata distribution of shares of Knife River stock in a transaction that is expected to be tax free to MDU Resources and its shareholders for U.S. federal income tax purposes. The actual number of shares to be distributed to MDU Resources shareholders will be determined prior to closing, as will the specific transaction structure.

The separation is expected to be completed in 2023. The proposed separation is subject to customary conditions, including final approval by the MDU Resources board of directors, receipt of a tax opinion and, if determined advisable, a private letter ruling from the Internal Revenue Service, and the filing and effectiveness of a Form 10 registration statement with the U.S. Securities and Exchange Commission. No assurance can be given regarding the form that a spinoff transaction may take or the specific terms or timing thereof, or that a spinoff will in fact occur.

MDU Resources is committed to establishing strong capital allocation strategies for each business that align with each business’s long-term goals. Post-separation, MDU Resources intends to maintain a dividend policy consistent with its historic practice. Knife River’s dividend policy will be determined in the future in a manner consistent with its stated capital allocation strategies. Further details related to capital structure, governance and other elements of the transaction will be announced at a later date.

Second Quarter 2022 financial results

MDU Resources also announced today its second quarter financial results, headlined by a quarterly dividend on the company’s common stock of 21.75 cents per share, unchanged from the previous quarter. The company had previously reported second quarter earnings of $70.7 million, or 35 cents per share, which was a 30% drop from 2021.

“Both our construction businesses had record revenues in the quarter, however ongoing inflationary impacts and supply chain challenges continue to create headwinds. Weather impacts and negative market returns on nonqualified benefit plan investments also contributed to lower-than-expected earnings,” said MDU CEO Goodin. “With our combined construction backlog of work up 37% to an all-time record of $3.1 billion, we expect to recover some momentum in the third quarter as our record level of more than 16,500 skilled employees continues building a strong America.”

MDU Resources discussed the separation announcement during its second quarter 2022 earnings conference call.