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MDU Resources to spin off construction materials business Knife River

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Deal overview

On August 4, 2022, MDU Resource Group (NYSE: MDU, $30.82, market capitalization: $6.3 billion) unanimously approves plan to separate Knife River Corporation, a wholly-owned construction materials business by its board of directors announced that it did. After the spin-off, the MDU resource (stub entity) will focus on regulated utilities, natural gas pipelines, and related infrastructure services businesses. Meanwhile, Knife River (NewCo.) will operate as a stand-alone, aggregate-based, vertically integrated construction materials and contractor.

The spin-off will be effected through a pro-rata distribution of Knife River shares to MDU Resources shareholders. The transaction is expected to be tax-free to MDU Resources and its shareholders for U.S. federal income tax purposes. The separation is expected to be completed in 2023, subject to customary conditions, including final approval by MDU Resources’ Board of Directors, receipt of a tax opinion, and validity of a Form 10 registration statement with the U.S. Securities and Exchange Commission.

MDU Resources is dedicated to setting strong capital allocation strategies for each business in line with each entity’s respective long-term goals. Post-separation, MDU Resources intends to maintain a dividend policy consistent with its previous practice. Going forward, Knife River’s dividend policy will be determined in a manner consistent with the company’s stated capital allocation strategy, according to management commentary. Further details regarding the capital structure, governance and other elements of the transaction will be announced at a later date.

Following the planned separation, MDU Resources and Knife River will continue to be headquartered in Bismarck, North Dakota, and MDU Resources will continue to serve as the parent company to the other wholly owned subsidiaries.

JP Morgan Securities LLC and PJT Partners are acting as financial advisors on this transaction. Wachtell, Lipton, Rosen & Katz are serving as legal advisors.

Investors reacted positively to the news, as the stock rose 6.3% on the day of the announcement. Subsequently, Corvex Management, a New York-based activist investment firm known for investing in utility companies, acquired an approximately 5.0% stake in MDU Resources. Also highlighting the move as a positive step, he said he plans to consult with MDU’s management on additional strategic alternatives to increase the revenue potential of the existing power business.

Basis of transaction

MDU Resources (Parent Company) is an umbrella company with various wholly owned subsidiaries including Montana Dakota, Cascade, Intermountain, WBI Energy, Centennial Capital and Knife River. All subsidiaries have unique business values ​​and different strategic objectives. The Board continually evaluates business operations and value creation opportunities. In 2016, as part of a strategic review process, Fidelity sold its exploration and production company and exited the oil and gas production market. The Board now believes that Knife River (NewCo) is poised to operate as an independent public company, providing multiple synergies for shareholders and resulting value maximization.

Over time, after acquiring an aggregator company in 1992, MDU Resources built Knife River as a leading aggregate-based construction materials company. Since then, Knife River has grown through both organic and inorganic routes. Historically, the construction materials sector has always been volatile and sensitive to inflation and supply chain disruptions. Therefore, to de-risk its business model, Knife River has a strategy of expanding its market presence in high-margin materials businesses such as rock, sand, gravel, asphalt oil, ready-mixed concrete and related products. increase. Knife River currently has a presence in the western, central, and southern United States, and plans to further expand its market footprint across the United States. In addition, total reserves now exceed 1.2 billion tons, with 110 ready-mix plants, 50 asphalt plants and a combined 410,000 tons of liquid asphalt and cement depots. However, as reserves naturally deplete, we continue to seek acquisition opportunities to replace them. Acquired 12 companies in the last four years, increasing revenue by 23%. The business is capital intensive given its growth through acquisitions and with the separation, its leadership team seeks to establish a strong and coordinated capital allocation strategy to drive growth and maximize shareholder value. increase. As an infrastructure company, Knife River is also expected to benefit from proposed infrastructure development funding at the federal and local levels under the Infrastructure Investment and Jobs Act (IIJA).

Meanwhile, MDU Resources’ (stub entity) existing regulated electricity and natural gas utilities, natural pipelines and construction services are expected to contribute approximately 70% of pro forma EBITDA. By isolating risky assets, stub entities can focus on low-risk, relatively stable businesses and explore opportunities for business expansion. Also, the listing of his two new companies will enable investors to properly evaluate each business based on its operational and financial characteristics.

overall result

2Q22 results

MDU reported revenue of $1.7 billion, up 20.9% to 20.9%, 22.9% above consensus. By segment, construction services revenue was $685.4 million, growing 30.4% year-over-year on the back of increased workloads. Natural Gas Distribution revenues were $210.6 million, reflecting 36.8% year-over-year growth, largely supported by higher retail sales due to cold weather. , the Construction Materials and Contracting segment, grew 12.3% year-over-year to $711.8 million due to higher workloads and higher average material prices. Revenues from the Pipeline and Electric segments were $37.6 million and $85.3 million, up 5.6% and 1.8% year-over-year, respectively. Other earnings increased slightly to $4.4 million for him from $3.4 million reported a year ago.

Adjusted EBITDA was $201.1 million, down 8.8% year-over-year (-9.6% vs. consensus), with a corresponding margin of 11.7%, down 380 bps. Operating profit fell 12.4% to $120.6 million (-19.1% vs. consensus) and the equivalent margin fell 266 bps to 7.0%. Net income from continuing operations decreased 29.5% to $70.6 million (-33.0% vs. consensus), with corresponding margins narrowing 293 bps to 4.1%. Diluted EPS fell 30.0% to $0.35 (-30.0% vs consensus).


For fiscal 22E, management lowered its earnings per share estimate by $0.25 to $1.75 to $1.90, leading to an EBITDA range of $875 million to $925 million. This is a reduction of $25 million due to a delay at the beginning of the year and headwinds from inflation and supply chain challenges. By segment, earnings guidance for construction materials remains unchanged, while the construction services business is expected to have a significant backlog for the rest of the year, resulting in earnings guidance increasing his $200 million. Margins decreased slightly year-over-year. Electricity and natural gas customers grew between 1.0% and 2.0%. Capital expenditures for FY22E have been revised to $747 million and are expected to be funded by operating cash flow of $550 million to $600 million. Capital spending is expected to be $3.1 billion over the next five years.

Company Profile

MDU Resources Group, Inc. (parent company)

Founded in 1924, MDU Resources is a diversified US-based company with regulated utilities, energy distribution, construction materials and services businesses. It primarily operates through five business segments: Electricity, Natural Gas Distribution, Pipelines, Construction Materials & Contracting, and Construction Services. The company’s business activities are managed by his wholly-owned subsidiaries, MDU Energy Capital and Centennial. MDU Energy also operates through Montana Dakota, which manages natural gas and electric utilities, and Cascade and Intermountain, which are involved in natural gas. Meanwhile, Centennial oversees WBI Energy, which oversees pipeline operations, Knife River oversees construction materials and contracting operations, MDU Construction Services oversees construction services operations, and Centennial Capital oversees other businesses. The company has offices across the United States and will have 12,826 employees at the end of 2021.

Knife River (spin-off)

Founded in 1917 in North Dakota, Knife River is primarily engaged in the processing and marketing of construction materials such as crushed stone, sand and gravel. Manufacture of asphalt mixtures and supply of ready-mixed concrete. We have a diverse customer base that includes federal, state and local government agencies, commercial and residential developers, and private companies. With aggregate reserves of approximately 1.2 billion tons and his more than 6,000 employees, Knife River ranks as his sixth largest aggregate consolidator in the United States.