UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20182019
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _____________ to ______________
Commission file number 1-03480
MDU RESOURCES GROUP INC.INC
(Exact name of registrant as specified in its charter)
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| Delaware | | 41-042366030-1133956 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1200 West Century Avenue
P.O. Box 5650
Bismarck, North Dakota58506-5650
(Address of principal executive offices)
(Zip Code)
(701) (701) 530-1000
(Registrant's telephone number, including area code)
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| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| Common Stock, par value $1.00 per share | MDU | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ýYes☒ No o☐.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ýYes☒ No o☐.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ý Accelerated Filer | ☒ | Accelerated filer oFiler | ☐ |
Non-accelerated filerNon-Accelerated Filer o
| ☐ | Smaller reporting company oReporting Company | ☐ |
| |
| Emerging growth company oGrowth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No ý☒.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of October 26, 2018: 196,018,32425, 2019: 200,383,869 shares.
Index
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Item 1 | | |
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Item 2 | |
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Item 3 | | |
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Item 4 | | |
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Item 1 | | |
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Item 2 | | |
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Item 4 | | |
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Item 6 | | |
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Definitions
The following abbreviations and acronyms used in this Form 10-Q are defined below:
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| Abbreviation or Acronym | |
20172018 Annual Report | Company's Annual Report on Form 10-K for the year ended December 31, 20172018 |
| AFUDC | Allowance for funds used during construction |
| ASC | FASB Accounting Standards Codification |
| ASU | FASB Accounting Standards Update |
| Brazilian Transmission Lines | Company's former investment in companies owning three electric transmission lines in Brazil |
| BSSE | 345-kilovolt transmission line from Ellendale, North Dakota, to Big Stone City, South Dakota |
| Calumet | Calumet Specialty Products Partners, L.P. |
| Cascade | Cascade Natural Gas Corporation, an indirect wholly owned subsidiary of MDU Energy Capital |
| Centennial | Centennial Energy Holdings, Inc., a direct wholly owned subsidiary of the Company |
| Centennial Capital | Centennial Holdings Capital LLC, a direct wholly owned subsidiary of Centennial |
| Centennial Resources | Centennial Energy Resources LLC, a direct wholly owned subsidiary of Centennial |
| Company | MDU Resources Group, Inc. (formerly known as MDUR Newco), which, as the context requires, refers to the previous MDU Resources Group, Inc. prior to January 1, 2019, and the new holding company of the same name after January 1, 2019 |
| Coyote Creek | Coyote Creek Mining Company, LLC, a subsidiary of The North American Coal Corporation |
| Coyote Station | 427-MW coal-fired electric generating facility near Beulah, North Dakota (25 percent ownership) |
| Dakota Prairie Refinery | 20,000-barrel-per-day diesel topping plant built by Dakota Prairie Refining in southwestern North Dakota |
| Dakota Prairie Refining | Dakota Prairie Refining, LLC, a limited liability company previously owned by WBI Energy and Calumet (previously included in the Company's refining segment) |
| dk | Decatherm |
| Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act |
| EPA | United States Environmental Protection Agency |
| Exchange Act | Securities Exchange Act of 1934, as amended |
| FASB | Financial Accounting Standards Board |
| FERC | Federal Energy Regulatory Commission |
| Fidelity | Fidelity Exploration & Production Company, a direct wholly owned subsidiary of WBI Holdings (previously referred to as the Company's exploration and production segment) |
| GAAP | Accounting principles generally accepted in the United States of America |
| GHG | Greenhouse gas |
| Great Plains | Great Plains Natural Gas Co., a public utility division of the Company prior to the closing of the Holding Company Reorganization and a public utility division of Montana-Dakota as of January 1, 2019 |
| Holding Company Reorganization | The internal holding company reorganization completed on January 1, 2019, pursuant to the agreement and plan of merger, dated as of December 31, 2018, by and among Montana-Dakota, the Company and MDUR Newco Sub, which resulted in the Company becoming a holding company and owning all of the outstanding capital stock of Montana-Dakota |
| Intermountain | Intermountain Gas Company, an indirect wholly owned subsidiary of MDU Energy Capital |
| Knife River | Knife River Corporation, a direct wholly owned subsidiary of Centennial |
| Knife River - Northwest | Knife River Corporation - Northwest, an indirect wholly owned subsidiary of Knife River |
| kWh | Kilowatt-hour |
| LIBOR | London Inter-bank Offered Rate |
| LWG | Lower Willamette Group |
| MD&A | Management's Discussion and Analysis of Financial Condition and Results of Operations |
| MDU Construction Services | MDU Construction Services Group, Inc., a direct wholly owned subsidiary of Centennial |
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| MDU Energy Capital | MDU Energy Capital, LLC, a direct wholly owned subsidiary of the Company |
| MDUR Newco | MDUR Newco, Inc., a public holding company created by implementing the Holding Company Reorganization, now known as the Company |
| MDUR Newco Sub | MDUR Newco Sub, Inc., a direct, wholly owned subsidiary of MDUR Newco, which was merged with and into Montana-Dakota in the Holding Company Reorganization |
| MISO | Midcontinent Independent System Operator, Inc. |
| MMcf | Million cubic feet |
| MMdk | Million dk |
| MNPUC | Minnesota Public Utilities Commission |
| Montana-Dakota | Montana-Dakota Utilities Co., (formerly known as MDU Resources Group, Inc.), a public utility division of the Company prior to the closing of the Holding Company Reorganization and a direct wholly owned subsidiary of MDU Energy Capital as of January 1, 2019 |
| MTPSC | Montana Public Service Commission |
| MW | Megawatt |
| NDPSC | North Dakota Public Service Commission |
| Non-GAAP | Not in accordance with GAAP |
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| OPUC | Oregon Public Utility Commission |
Oregon DEQ | Oregon State Department of Environmental Quality |
Pronghorn | Natural gas processing plant located near Belfield, North Dakota (WBI Energy Midstream's 50 percent ownership interests were sold effective January 1, 2017) |
| PRP | Potentially Responsible Party |
ROD | Record of Decision |
SDPUC | South Dakota Public Utilities Commission |
| SEC | United States Securities and Exchange Commission |
SSIPSecurities Act | System Safety and Integrity ProgramSecurities Act of 1933, as amended |
| TCJA | Tax Cuts and Jobs Act |
| Tesoro | Tesoro Refining & Marketing Company LLC |
| VIE | Variable interest entity |
| Washington DOE | Washington State Department of Ecology |
| WBI Energy | WBI Energy, Inc., a direct wholly owned subsidiary of WBI Holdings |
WBI Energy Midstream | WBI Energy Midstream, LLC, an indirect wholly owned subsidiary of WBI Holdings |
| WBI Energy Transmission | WBI Energy Transmission, Inc., an indirect wholly owned subsidiary of WBI Holdings |
| WBI Holdings | WBI Holdings, Inc., a direct wholly owned subsidiary of Centennial |
| WUTC | Washington Utilities and Transportation Commission |
| WYPSC | Wyoming Public Service Commission |
Forward-Looking Statements
This Form 10-Q contains 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, objectives, goals, strategies, future events or performance, and underlying assumptions (many of which are based, in turn, upon further assumptions) and other statements that are not 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 Part I, Item 2 - MD&A - 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.
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. New factors emerge from time to time, and it is not possible for management to predict all of 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 Form 10-Q, Part I, Item 1A - Risk Factors in the 20172018 Annual Report and subsequent filings with the SEC.
Introduction
The Company is a regulated energy delivery and construction materials and services business, whichbusiness. Montana-Dakota was incorporated under the laws of the state of Delaware in 1924. The Company was incorporated under the laws of the state of Delaware in 2018. Its principal executive offices are at 1200 West Century Avenue, P.O. Box 5650, Bismarck, North Dakota 58506-5650, telephone (701) 530-1000.
On January 2, 2019, the Company announced the completion of the Holding Company Reorganization, which resulted in Montana-Dakota Great Plains,becoming a subsidiary of the Company. The merger was conducted pursuant to Section 251(g) of the General Corporation Law of the State of Delaware, which provides for the formation of a holding company without a vote of the stockholders of the constituent corporation. Immediately after consummation of the Holding Company Reorganization, the Company had, on a consolidated basis, the same assets, businesses and operations as Montana-Dakota had immediately prior to the consummation of the Holding Company Reorganization. As a result of the Holding Company Reorganization, the Company became the successor issuer to Montana-Dakota pursuant to Rule 12g-3(a) of the Exchange Act, and as a result, the Company's common stock was deemed registered under Section 12(b) of the Exchange Act.
The Company, through its wholly owned subsidiary, MDU Energy Capital, owns Montana-Dakota, Cascade and Intermountain. Montana-Dakota, Cascade and Intermountain compriseare the natural gas distribution segment. Montana-Dakota also comprises the electric segment.
The Company, through its wholly owned subsidiary, Centennial, owns WBI Holdings, Knife River, MDU Construction Services, Centennial Resources and Centennial Capital. WBI Holdings is the pipeline and midstream segment, Knife River is the construction materials and contracting segment, MDU Construction Services is the construction services segment, and Centennial Resources and Centennial Capital are both reflected in the Other category.
For more information on the Company's business segments, see Note 14.17 of the Notes to Consolidated Financial Statements.
Part I -- Financial Information
Item 1. Financial Statements
MDU Resources Group, Inc.
Consolidated Statements of Income
(Unaudited)
| | | MDU Resources Group, Inc. | | MDU Resources Group, Inc. |
| Consolidated Statements of Income | | Consolidated Statements of Income |
| (Unaudited) | | (Unaudited) |
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | Nine Months Ended |
| | | September 30, | | September 30, | September 30, |
| | | 2018 |
| 2017 |
| | 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | | (In thousands, except per share amounts) | (In thousands, except per share amounts) |
| Operating revenues: | | | | | |
| Electric, natural gas distribution and regulated pipeline and midstream | | $ | 200,617 |
| $ | 206,936 |
| | $ | 851,761 |
| $ | 866,035 |
| $ | 209,444 |
| $ | 200,617 |
| $ | 885,309 |
| $ | 851,761 |
|
| Nonregulated pipeline and midstream, construction materials and contracting, construction services and other | | 1,080,170 |
| 1,065,612 |
| | 2,469,917 |
| 2,412,077 |
| 1,354,355 |
| 1,080,170 |
| 3,073,254 |
| 2,469,917 |
|
| Total operating revenues | | 1,280,787 |
| 1,272,548 |
| | 3,321,678 |
| 3,278,112 |
| 1,563,799 |
| 1,280,787 |
| 3,958,563 |
| 3,321,678 |
|
| Operating expenses: | | |
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| Operation and maintenance: | | |
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|
| Electric, natural gas distribution and regulated pipeline and midstream | | 82,920 |
| 80,204 |
| | 252,961 |
| 237,881 |
| 86,249 |
| 82,920 |
| 262,434 |
| 252,961 |
|
| Nonregulated pipeline and midstream, construction materials and contracting, construction services and other | | 913,671 |
| 893,762 |
| | 2,166,570 |
| 2,116,575 |
| 1,126,371 |
| 913,671 |
| 2,674,130 |
| 2,166,570 |
|
| Total operation and maintenance | | 996,591 |
| 973,966 |
| | 2,419,531 |
| 2,354,456 |
| 1,212,620 |
| 996,591 |
| 2,936,564 |
| 2,419,531 |
|
| Purchased natural gas sold | | 32,123 |
| 33,319 |
| | 270,319 |
| 283,936 |
| 31,843 |
| 32,123 |
| 270,539 |
| 270,319 |
|
| Depreciation, depletion and amortization | | 55,016 |
| 52,155 |
| | 161,298 |
| 155,138 |
| 65,021 |
| 55,016 |
| 187,937 |
| 161,298 |
|
| Taxes, other than income | | 38,647 |
| 38,882 |
| | 128,257 |
| 127,273 |
| 46,128 |
| 38,647 |
| 148,110 |
| 128,257 |
|
| Electric fuel and purchased power | | 18,406 |
| 18,906 |
| | 58,901 |
| 57,544 |
| 18,717 |
| 18,406 |
| 64,413 |
| 58,901 |
|
| Total operating expenses | | 1,140,783 |
| 1,117,228 |
| | 3,038,306 |
| 2,978,347 |
| 1,374,329 |
| 1,140,783 |
| 3,607,563 |
| 3,038,306 |
|
| Operating income | | 140,004 |
| 155,320 |
| | 283,372 |
| 299,765 |
| 189,470 |
| 140,004 |
| 351,000 |
| 283,372 |
|
| Other income | | 2,683 |
| 2,068 |
| | 4,864 |
| 6,212 |
| 3,014 |
| 2,683 |
| 12,222 |
| 4,864 |
|
| Interest expense | | 20,955 |
| 20,909 |
| | 62,202 |
| 61,978 |
| 25,258 |
| 20,955 |
| 74,094 |
| 62,202 |
|
| Income before income taxes | | 121,732 |
| 136,479 |
| | 226,034 |
| 243,999 |
| 167,226 |
| 121,732 |
| 289,128 |
| 226,034 |
|
| Income taxes | | 14,363 |
| 46,930 |
| | 32,629 |
| 74,406 |
| 31,098 |
| 14,363 |
| 48,766 |
| 32,629 |
|
| Income from continuing operations | | 107,369 |
| 89,549 |
| | 193,405 |
| 169,593 |
| 136,128 |
| 107,369 |
| 240,362 |
| 193,405 |
|
| Income (loss) from discontinued operations, net of tax (Note 10) | | (118 | ) | (2,198 | ) | | 85 |
| (3,702 | ) | 1,509 |
| (118 | ) | 26 |
| 85 |
|
| Net income | | 107,251 |
| 87,351 |
| | 193,490 |
| 165,891 |
| $ | 137,637 |
| $ | 107,251 |
| $ | 240,388 |
| $ | 193,490 |
|
| Loss on redemption of preferred stocks | | — |
| — |
| | — |
| 600 |
| |
| Dividends declared on preferred stocks | | — |
| — |
| | — |
| 171 |
| |
| Earnings on common stock | | $ | 107,251 |
| $ | 87,351 |
| | $ | 193,490 |
| $ | 165,120 |
| |
| Earnings per common share - basic: | | |
| |
| | |
| |
| |
| Earnings before discontinued operations | | $ | .55 |
| $ | .46 |
| | $ | .99 |
| $ | .86 |
| |
| Earnings per share - basic: | | |
| |
| |
| |
|
| Income from continuing operations | | $ | .68 |
| $ | .55 |
| $ | 1.21 |
| $ | .99 |
|
| Discontinued operations, net of tax | | — |
| (.01 | ) | | — |
| (.01 | ) | .01 |
| — |
| — |
| — |
|
| Earnings per common share - basic | | $ | .55 |
| $ | .45 |
| | $ | .99 |
| $ | .85 |
| |
| Earnings per common share - diluted: | | |
| |
| | |
| |
| |
| Earnings before discontinued operations | | $ | .55 |
| $ | .46 |
| | $ | .99 |
| $ | .86 |
| |
| Earnings per share - basic | | $ | .69 |
| $ | .55 |
| $ | 1.21 |
| $ | .99 |
|
| Earnings per share - diluted: | | |
| |
| |
| |
|
| Income from continuing operations | | $ | .68 |
| $ | .55 |
| $ | 1.21 |
| $ | .99 |
|
| Discontinued operations, net of tax | | — |
| (.01 | ) | | — |
| (.02 | ) | .01 |
| — |
| — |
| — |
|
| Earnings per common share - diluted | | $ | .55 |
| $ | .45 |
| | $ | .99 |
| $ | .84 |
| |
| Dividends declared per common share | | $ | .1975 |
| $ | .1925 |
| | $ | .5925 |
| $ | .5775 |
| |
| Earnings per share - diluted | | $ | .69 |
| $ | .55 |
| $ | 1.21 |
| $ | .99 |
|
| Weighted average common shares outstanding - basic | | 196,018 |
| 195,304 |
| | 195,618 |
| 195,304 |
| 199,343 |
| 196,018 |
| 198,016 |
| 195,618 |
|
| Weighted average common shares outstanding - diluted | | 196,265 |
| 195,783 |
| | 196,104 |
| 195,922 |
| 199,383 |
| 196,265 |
| 198,033 |
| 196,104 |
|
The accompanying notes are an integral part of these consolidated financial statements.
MDU Resources Group, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
|
| | | | | | | | | | | | | |
| | | Three Months Ended | Nine Months Ended |
| | | September 30, | September 30, |
| | | 2018 |
| 2017 |
| 2018 | 2017 |
| | | (In thousands) |
| Net income | | $ | 107,251 |
| $ | 87,351 |
| $ | 193,490 |
| $ | 165,891 |
|
| Other comprehensive income: | | | | | |
| Reclassification adjustment for loss on derivative instruments included in net income, net of tax of $55 and $56 for the three months ended and $164 and $168 for the nine months ended in 2018 and 2017, respectively | | 92 |
| 92 |
| 279 |
| 275 |
|
| Postretirement liability adjustment: | | | | | |
| Amortization of postretirement liability losses included in net periodic benefit cost (credit), net of tax of $142 and $203 for the three months ended and $442 and $609 for the nine months ended in 2018 and 2017, respectively | | 442 |
| 333 |
| 1,309 |
| 1,002 |
|
| Reclassification of postretirement liability adjustment from regulatory asset, net of tax of $0 and $0 for the three months ended and $0 and $(725) for the nine months ended in 2018 and 2017, respectively | | — |
| — |
| — |
| (917 | ) |
| Postretirement liability adjustment | | 442 |
| 333 |
| 1,309 |
| 85 |
|
| Foreign currency translation adjustment: | | | | | |
| Foreign currency translation adjustment recognized during the period, net of tax of $0 and $9 for the three months ended and $(14) and $5 for the nine months ended in 2018 and 2017, respectively | | — |
| 15 |
| (61 | ) | 9 |
|
| Reclassification adjustment for foreign currency translation adjustment included in net income, net of tax of $0 and $0 for the three months ended and $75 and $0 for the nine months ended in 2018 and 2017, respectively | | — |
| — |
| 249 |
| — |
|
| Foreign currency translation adjustment | | — |
| 15 |
| 188 |
| 9 |
|
| Net unrealized gain (loss) on available-for-sale investments: | | | | | |
| Net unrealized loss on available-for-sale investments arising during the period, net of tax of $(13) and $(10) for the three months ended and $(52) and $(38) for the nine months ended in 2018 and 2017, respectively | | (51 | ) | (19 | ) | (199 | ) | (70 | ) |
| Reclassification adjustment for loss on available-for-sale investments included in net income, net of tax of $9 and $14 for the three months ended and $26 and $50 for the nine months ended in 2018 and 2017, respectively | | 33 |
| 27 |
| 97 |
| 93 |
|
| Net unrealized gain (loss) on available-for-sale investments | | (18 | ) | 8 |
| (102 | ) | 23 |
|
| Other comprehensive income | | 516 |
| 448 |
| 1,674 |
| 392 |
|
| Comprehensive income attributable to common stockholders | | $ | 107,767 |
| $ | 87,799 |
| $ | 195,164 |
| $ | 166,283 |
|
|
| | | | | | | | | | | | | |
| MDU Resources Group, Inc. |
| Consolidated Statements of Comprehensive Income |
| (Unaudited) |
| | | Three Months Ended | Nine Months Ended |
| | | September 30, | September 30, |
| | | 2019 |
| 2018 |
| 2019 | 2018 |
| | | (In thousands) |
| Net income | | $ | 137,637 |
| $ | 107,251 |
| $ | 240,388 |
| $ | 193,490 |
|
| Other comprehensive income: | | | | | |
| Reclassification adjustment for loss on derivative instruments included in net income, net of tax of $36 and $55 for the three months ended and $(177) and $164 for the nine months ended in 2019 and 2018, respectively | | 112 |
| 92 |
| 620 |
| 279 |
|
| Amortization of postretirement liability losses included in net periodic benefit cost, net of tax of $95 and $142 for the three months ended and $284 and $442 for the nine months ended in 2019 and 2018, respectively | | 292 |
| 442 |
| 878 |
| 1,309 |
|
| Foreign currency translation adjustment: | | | | | |
| Foreign currency translation adjustment recognized during the period, net of tax of $0 and $0 for the three months ended and $0 and $(14) for the nine months ended in 2019 and 2018, respectively | | — |
| — |
| — |
| (61 | ) |
| Reclassification adjustment for foreign currency translation adjustment included in net income, net of tax of $0 and $0 for the three months ended and $0 and $75 for the nine months ended in 2019 and 2018, respectively | | — |
| — |
| — |
| 249 |
|
| Foreign currency translation adjustment | | — |
| — |
| — |
| 188 |
|
| Net unrealized gain (loss) on available-for-sale investments: | | | | | |
| Net unrealized gain (loss) on available-for-sale investments arising during the period, net of tax of $3 and $(13) for the three months ended and $35 and $(52) for the nine months ended in 2019 and 2018, respectively | | 12 |
| (51 | ) | 130 |
| (199 | ) |
| Reclassification adjustment for (gain) loss on available-for-sale investments included in net income, net of tax of $(1) and $9 for the three months ended and $10 and $26 for the nine months ended in 2019 and 2018, respectively | | (4 | ) | 33 |
| 36 |
| 97 |
|
| Net unrealized gain (loss) on available-for-sale investments | | 8 |
| (18 | ) | 166 |
| (102 | ) |
| Other comprehensive income | | 412 |
| 516 |
| 1,664 |
| 1,674 |
|
| Comprehensive income attributable to common stockholders | | $ | 138,049 |
| $ | 107,767 |
| $ | 242,052 |
| $ | 195,164 |
|
The accompanying notes are an integral part of these consolidated financial statements.
MDU Resources Group, Inc.
Consolidated Balance Sheets
(Unaudited)
| | | MDU Resources Group, Inc. | | MDU Resources Group, Inc. |
| Consolidated Balance Sheets | | Consolidated Balance Sheets |
| (Unaudited) | | (Unaudited) |
| | September 30, 2018 |
| September 30, 2017 |
| December 31, 2017 |
| September 30, 2019 |
| September 30, 2018 |
| December 31, 2018 |
|
| (In thousands, except shares and per share amounts) | | |
| | | (In thousands, except shares and per share amounts) |
| Assets | | |
| Current assets: | | |
| Cash and cash equivalents | $ | 67,077 |
| $ | 37,356 |
| $ | 34,599 |
| $ | 67,000 |
| $ | 67,077 |
| $ | 53,948 |
|
| Receivables, net | 787,344 |
| 739,402 |
| 727,030 |
| 968,279 |
| 787,344 |
| 722,945 |
|
| Inventories | 270,293 |
| 232,555 |
| 226,583 |
| 286,057 |
| 270,293 |
| 287,309 |
|
| Prepayments and other current assets | 88,760 |
| 89,625 |
| 81,304 |
| 140,053 |
| 88,760 |
| 119,500 |
|
| Current assets held for sale | 571 |
| 304 |
| 479 |
| 426 |
| 571 |
| 430 |
|
| Total current assets | 1,214,045 |
| 1,099,242 |
| 1,069,995 |
| 1,461,815 |
| 1,214,045 |
| 1,184,132 |
|
| Investments | 143,303 |
| 133,895 |
| 137,613 |
| 144,417 |
| 143,303 |
| 138,620 |
|
| Property, plant and equipment | 7,102,960 |
| 6,658,891 |
| 6,770,829 |
| 7,746,754 |
| 7,102,960 |
| 7,397,321 |
|
| Less accumulated depreciation, depletion and amortization | 2,796,649 |
| 2,667,762 |
| 2,691,641 |
| 2,944,928 |
| 2,796,649 |
| 2,818,644 |
|
| Net property, plant and equipment | 4,306,311 |
| 3,991,129 |
| 4,079,188 |
| 4,801,826 |
| 4,306,311 |
| 4,578,677 |
|
| Deferred charges and other assets: | |
| |
| |
| |
| |
| |
|
| Goodwill | 640,203 |
| 631,791 |
| 631,791 |
| 681,349 |
| 640,203 |
| 664,922 |
|
| Other intangible assets, net | 4,318 |
| 4,209 |
| 3,837 |
| 15,511 |
| 4,318 |
| 10,815 |
|
| Operating lease right-of-use assets (Note 11) | | 118,764 |
| — |
| — |
|
| Other | 408,178 |
| 419,846 |
| 407,850 |
| 504,842 |
| 408,178 |
| 408,857 |
|
| Noncurrent assets held for sale | 1,835 |
| 64,333 |
| 4,392 |
| 2,087 |
| 1,835 |
| 2,087 |
|
| Total deferred charges and other assets | 1,054,534 |
| 1,120,179 |
| 1,047,870 |
| 1,322,553 |
| 1,054,534 |
| 1,086,681 |
|
| Total assets | $ | 6,718,193 |
| $ | 6,344,445 |
| $ | 6,334,666 |
| $ | 7,730,611 |
| $ | 6,718,193 |
| $ | 6,988,110 |
|
| Liabilities and Stockholders' Equity | |
| |
| |
| |
| |
| |
|
| Current liabilities: | |
| |
| |
| |
| |
| |
|
| Short-term borrowings | | $ | 139,988 |
| $ | — |
| $ | — |
|
| Long-term debt due within one year | $ | 3,915 |
| $ | 148,499 |
| $ | 148,499 |
| 65,810 |
| 3,915 |
| 251,854 |
|
| Accounts payable | 339,713 |
| 304,101 |
| 312,327 |
| 378,370 |
| 339,713 |
| 358,505 |
|
| Taxes payable | 50,461 |
| 108,946 |
| 42,537 |
| 53,505 |
| 50,461 |
| 41,929 |
|
| Dividends payable | 38,714 |
| 37,596 |
| 38,573 |
| 40,460 |
| 38,714 |
| 39,695 |
|
| Accrued compensation | 62,836 |
| 67,097 |
| 72,919 |
| 93,642 |
| 62,836 |
| 69,007 |
|
| Current operating lease liabilities (Note 11) | | 32,584 |
| — |
| — |
|
| Other accrued liabilities | 221,620 |
| 184,580 |
| 186,010 |
| 225,925 |
| 221,620 |
| 221,059 |
|
| Current liabilities held for sale | 7,959 |
| 5,749 |
| 11,993 |
| 3,393 |
| 7,959 |
| 4,001 |
|
| Total current liabilities | 725,218 |
| 856,568 |
| 812,858 |
| 1,033,677 |
| 725,218 |
| 986,050 |
|
| Long-term debt | 1,911,555 |
| 1,592,053 |
| 1,566,354 |
| 2,180,946 |
| 1,911,555 |
| 1,856,841 |
|
| Deferred credits and other liabilities: | |
| |
| |
| |
| |
| |
|
| Deferred income taxes | 405,761 |
| 652,413 |
| 347,271 |
| 487,194 |
| 405,761 |
| 430,085 |
|
| Noncurrent operating lease liabilities (Note 11) | | 86,166 |
| — |
| — |
|
| Other | 1,154,366 |
| 889,494 |
| 1,179,140 |
| 1,147,022 |
| 1,154,366 |
| 1,148,359 |
|
| Total deferred credits and other liabilities | 1,560,127 |
| 1,541,907 |
| 1,526,411 |
| 1,720,382 |
| 1,560,127 |
| 1,578,444 |
|
| Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity: | |
| |
| |
| |
| |
| |
|
| Common stock | |
| |
| |
| |
| |
| |
|
Authorized - 500,000,000 shares, $1.00 par value
Shares issued - 196,557,245 at September 30, 2018 and 195,843,297 at
September 30, 2017 and December 31, 2017 | 196,557 |
| 195,843 |
| 195,843 |
| |
Authorized - 500,000,000 shares, $1.00 par value
Shares issued - 200,876,334 at September 30, 2019, 196,557,245 at
September 30, 2018 and 196,564,907 at December 31, 2018 | | 200,876 |
| 196,557 |
| 196,565 |
|
| Other paid-in capital | 1,247,151 |
| 1,232,766 |
| 1,233,412 |
| 1,351,990 |
| 1,247,151 |
| 1,248,576 |
|
| Retained earnings | 1,124,830 |
| 964,275 |
| 1,040,748 |
| 1,283,044 |
| 1,124,830 |
| 1,163,602 |
|
| Accumulated other comprehensive loss | (43,619 | ) | (35,341 | ) | (37,334 | ) | (36,678 | ) | (43,619 | ) | (38,342 | ) |
| Treasury stock at cost - 538,921 shares | (3,626 | ) | (3,626 | ) | (3,626 | ) | (3,626 | ) | (3,626 | ) | (3,626 | ) |
| Total stockholders' equity | 2,521,293 |
| 2,353,917 |
| 2,429,043 |
| 2,795,606 |
| 2,521,293 |
| 2,566,775 |
|
| Total liabilities and stockholders' equity | $ | 6,718,193 |
| $ | 6,344,445 |
| $ | 6,334,666 |
| $ | 7,730,611 |
| $ | 6,718,193 |
| $ | 6,988,110 |
|
The accompanying notes are an integral part of these consolidated financial statements.
MDU Resources Group, Inc.
Consolidated Statements of Equity
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 | | | | | | |
| | | | Other Paid-in Capital |
| Retained Earnings |
| Accumu-lated Other Compre-hensive Loss |
| | | |
| | Common Stock | Treasury Stock | |
| | Shares |
| Amount |
| Shares |
| Amount |
| Total |
|
| | (In thousands, except shares) |
| Balance at December 31, 2017 | 195,843,297 |
| $ | 195,843 |
| $ | 1,233,412 |
| $ | 1,040,748 |
| $ | (37,334 | ) | (538,921 | ) | $ | (3,626 | ) | $ | 2,429,043 |
|
| Cumulative effect of adoption of ASU 2014-09 | — |
| — |
| — |
| (970 | ) | — |
| — |
| — |
| (970 | ) |
| Adjusted balance at January 1, 2018 | 195,843,297 |
| 195,843 |
| 1,233,412 |
| 1,039,778 |
| (37,334 | ) | (538,921 | ) | (3,626 | ) | 2,428,073 |
|
| Net income | — |
| — |
| — |
| 193,490 |
| — |
| — |
| — |
| 193,490 |
|
| Other comprehensive income | — |
| — |
| — |
| — |
| 1,674 |
| — |
| — |
| 1,674 |
|
| Reclassification of certain prior period tax effects from accumulated other comprehensive loss | — |
| — |
| — |
| 7,959 |
| (7,959 | ) | — |
| — |
| — |
|
| Dividends declared on common stock | — |
| — |
| — |
| (115,998 | ) | — |
| — |
| — |
| (115,998 | ) |
| Stock-based compensation | — |
| — |
| 3,810 |
| (399 | ) | — |
| — |
| — |
| 3,411 |
|
| Repurchase of common stock | — |
| — |
| — |
| — |
| — |
| (182,424 | ) | (5,020 | ) | (5,020 | ) |
| Issuance of common stock upon vesting of stock-based compensation, net of shares used for tax withholdings | — |
| — |
| (7,350 | ) | — |
| — |
| 182,424 |
| 5,020 |
| (2,330 | ) |
| Issuance of common stock | 713,948 |
| 714 |
| 17,279 |
| — |
| — |
| — |
| — |
| 17,993 |
|
| Balance at September 30, 2018 | 196,557,245 |
| $ | 196,557 |
| $ | 1,247,151 |
| $ | 1,124,830 |
| $ | (43,619 | ) | (538,921 | ) | $ | (3,626 | ) | $ | 2,521,293 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 | | | | | | | | |
| | | Other Paid-in Capital |
| Retained Earnings |
| Accumu-lated Other Compre-hensive Loss |
| | | |
| | Preferred Stock | Common Stock | Treasury Stock | |
| | Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Total |
|
| | (In thousands, except shares) |
| Balance at December 31, 2016 | 150,000 |
| $ | 15,000 |
| 195,843,297 |
| $ | 195,843 |
| $ | 1,232,478 |
| $ | 912,282 |
| $ | (35,733 | ) | (538,921 | ) | $ | (3,626 | ) | $ | 2,316,244 |
|
| Net income | — |
| — |
| — |
| — |
| — |
| 165,891 |
| — |
| — |
| — |
| 165,891 |
|
| Other comprehensive income | — |
| — |
| — |
| — |
| — |
| — |
| 392 |
| — |
| — |
| 392 |
|
| Dividends declared on preferred stocks | — |
| — |
| — |
| — |
| — |
| (171 | ) | — |
| — |
| — |
| (171 | ) |
| Dividends declared on common stock | — |
| — |
| — |
| — |
| — |
| (112,788 | ) | — |
| — |
| — |
| (112,788 | ) |
| Stock-based compensation | — |
| — |
| — |
| — |
| 2,729 |
| (339 | ) | — |
| — |
| — |
| 2,390 |
|
| Repurchase of common stock | — |
| — |
| — |
| — |
| — |
| — |
| — |
| (64,384 | ) | (1,684 | ) | (1,684 | ) |
Issuance of common stock upon vesting of stock-based compensation, net of shares used
for tax withholdings | — |
| — |
| — |
| — |
| (2,441 | ) | — |
| — |
| 64,384 |
| 1,684 |
| (757 | ) |
| Redemption of preferred stock | (150,000 | ) | (15,000 | ) | — |
| — |
| — |
| (600 | ) | — |
| — |
| — |
| (15,600 | ) |
| Balance at September 30, 2017 | — |
| $ | — |
| 195,843,297 |
| $ | 195,843 |
| $ | 1,232,766 |
| $ | 964,275 |
| $ | (35,341 | ) | (538,921 | ) | $ | (3,626 | ) | $ | 2,353,917 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| MDU Resources Group, Inc. |
| Consolidated Statements of Equity |
| (Unaudited) |
| Nine Months Ended September 30, 2019 | | | | | | |
| | | | Other Paid-in Capital |
| Retained Earnings |
| Accumu-lated Other Compre-hensive Loss |
| | | |
| | Common Stock | Treasury Stock | |
| | Shares |
| Amount |
| Shares |
| Amount |
| Total |
|
| | (In thousands, except shares) |
| At December 31, 2018 | 196,564,907 |
| $ | 196,565 |
| $ | 1,248,576 |
| $ | 1,163,602 |
| $ | (38,342 | ) | (538,921 | ) | $ | (3,626 | ) | $ | 2,566,775 |
|
| Net income | — |
| — |
| — |
| 40,926 |
| — |
| — |
| — |
| 40,926 |
|
| Other comprehensive income | — |
| — |
| — |
| — |
| 774 |
| — |
| — |
| 774 |
|
| Dividends declared on common stock | — |
| — |
| — |
| (40,019 | ) | — |
| — |
| — |
| (40,019 | ) |
| Stock-based compensation | — |
| — |
| 1,617 |
| — |
| — |
| — |
| — |
| 1,617 |
|
| Issuance of common stock upon vesting of stock-based compensation, net of shares used for tax withholdings | 246,214 |
| 246 |
| (3,261 | ) | — |
| — |
| — |
| — |
| (3,015 | ) |
| Issuance of common stock | 1,505,687 |
| 1,506 |
| 37,128 |
| — |
| — |
| — |
| — |
| 38,634 |
|
| At March 31, 2019 | 198,316,808 |
| $ | 198,317 |
| $ | 1,284,060 |
| $ | 1,164,509 |
| $ | (37,568 | ) | (538,921 | ) | $ | (3,626 | ) | $ | 2,605,692 |
|
| Net income | — |
| — |
| — |
| 61,825 |
| — |
| — |
| — |
| 61,825 |
|
| Other comprehensive income | — |
| — |
| — |
| — |
| 478 |
| — |
| — |
| 478 |
|
| Dividends declared on common stock | — |
| — |
| — |
| (40,367 | ) | — |
| — |
| — |
| (40,367 | ) |
| Stock-based compensation | — |
| — |
| 1,742 |
| — |
| — |
| — |
| — |
| 1,742 |
|
| Issuance of common stock | 1,222,302 |
| 1,222 |
| 29,709 |
| — |
| — |
| — |
| — |
| 30,931 |
|
| At June 30, 2019 | 199,539,110 |
| $ | 199,539 |
| $ | 1,315,511 |
| $ | 1,185,967 |
| $ | (37,090 | ) | (538,921 | ) | $ | (3,626 | ) | $ | 2,660,301 |
|
| Net income | — |
| — |
| — |
| 137,637 |
| — |
| — |
| — |
| 137,637 |
|
| Other comprehensive income | — |
| — |
| — |
| — |
| 412 |
| — |
| — |
| 412 |
|
| Dividends declared on common stock | — |
| — |
| — |
| (40,560 | ) | — |
| — |
| — |
| (40,560 | ) |
| Stock-based compensation | — |
| — |
| 1,742 |
| — |
| — |
| — |
| — |
| 1,742 |
|
| Issuance of common stock | 1,337,224 |
| 1,337 |
| 34,737 |
| — |
| — |
| — |
| — |
| 36,074 |
|
| At September 30, 2019 | 200,876,334 |
| $ | 200,876 |
| $ | 1,351,990 |
| $ | 1,283,044 |
| $ | (36,678 | ) | (538,921 | ) | $ | (3,626 | ) | $ | 2,795,606 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| MDU Resources Group, Inc. |
| Consolidated Statements of Equity |
| (Unaudited) |
| Nine Months Ended September 30, 2018 | | | | | | |
| | | Other Paid-in Capital |
| Retained Earnings |
| Accumu-lated Other Compre-hensive Loss |
| | | |
| | Common Stock | Treasury Stock | |
| | Shares |
| Amount |
| Shares |
| Amount |
| Total |
|
| | (In thousands, except shares) |
| At December 31, 2017 | 195,843,297 |
| $ | 195,843 |
| $ | 1,233,412 |
| $ | 1,040,748 |
| $ | (37,334 | ) | (538,921 | ) | $ | (3,626 | ) | $ | 2,429,043 |
|
| Cumulative effect of adoption of ASU 2014-09 | — |
| — |
| — |
| (970 | ) | — |
| — |
| — |
| (970 | ) |
| Adjusted balance at January 1, 2018 | 195,843,297 |
| 195,843 |
| 1,233,412 |
| 1,039,778 |
| (37,334 | ) | (538,921 | ) | (3,626 | ) | 2,428,073 |
|
| Net income | — |
| — |
| — |
| 42,437 |
| — |
| — |
| — |
| 42,437 |
|
| Other comprehensive income | — |
| — |
| — |
| — |
| 433 |
| — |
| — |
| 433 |
|
| Reclassification of certain prior period tax effects from accumulated other comprehensive loss | — |
| — |
| — |
| 7,959 |
| (7,959 | ) | — |
| — |
| — |
|
| Dividends declared on common stock | — |
| — |
| — |
| (38,705 | ) | — |
| — |
| — |
| (38,705 | ) |
| Stock-based compensation | — |
| — |
| 1,223 |
| — |
| — |
| — |
| — |
| 1,223 |
|
| Repurchase of common stock | — |
| — |
| — |
| — |
| — |
| (182,424 | ) | (5,020 | ) | (5,020 | ) |
Issuance of common stock upon vesting of stock-based compensation, net of shares used
for tax withholdings | — |
| — |
| (7,350 | ) | — |
| — |
| 182,424 |
| 5,020 |
| (2,330 | ) |
| At March 31, 2018 | 195,843,297 |
| $ | 195,843 |
| $ | 1,227,285 |
| $ | 1,051,469 |
| $ | (44,860 | ) | (538,921 | ) | $ | (3,626 | ) | $ | 2,426,111 |
|
| Net income | — |
| — |
| — |
| 43,802 |
| — |
| — |
| — |
| 43,802 |
|
| Other comprehensive income | — |
| — |
| — |
| — |
| 725 |
| — |
| — |
| 725 |
|
| Dividends declared on common stock | — |
| — |
| — |
| (38,847 | ) | — |
| — |
| — |
| (38,847 | ) |
| Stock-based compensation | — |
| — |
| 1,294 |
| — |
| — |
| — |
| — |
| 1,294 |
|
| Issuance of common stock | 713,948 |
| 714 |
| 17,279 |
| — |
| — |
| — |
| — |
| 17,993 |
|
| At June 30, 2018 | 196,557,245 |
| $ | 196,557 |
| $ | 1,245,858 |
| $ | 1,056,424 |
| $ | (44,135 | ) | (538,921 | ) | $ | (3,626 | ) | $ | 2,451,078 |
|
| Net income | — |
| — |
| — |
| 107,251 |
| — |
| — |
| — |
| 107,251 |
|
| Other comprehensive income | — |
| — |
| — |
| — |
| 516 |
| — |
| — |
| 516 |
|
| Dividends declared on common stock | — |
| — |
| — |
| (38,845 | ) | — |
| — |
| — |
| (38,845 | ) |
| Stock-based compensation | — |
| — |
| 1,293 |
| — |
| — |
| — |
| — |
| 1,293 |
|
| At September 30, 2018 | 196,557,245 |
| $ | 196,557 |
| $ | 1,247,151 |
| $ | 1,124,830 |
| $ | (43,619 | ) | (538,921 | ) | $ | (3,626 | ) | $ | 2,521,293 |
|
MDU Resources Group, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
| | | MDU Resources Group, Inc. | | MDU Resources Group, Inc. |
| Consolidated Statements of Cash Flows | | Consolidated Statements of Cash Flows |
| (Unaudited) | | (Unaudited) |
| | | Nine Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, |
| | | 2018 |
| 2017 |
| | 2019 |
| 2018 |
|
| | | (In thousands) | | (In thousands) |
| Operating activities: | | | | |
| Net income | | $ | 193,490 |
| $ | 165,891 |
| | $ | 240,388 |
| $ | 193,490 |
|
| Income (loss) from discontinued operations, net of tax | | 85 |
| (3,702 | ) | |
| Income from discontinued operations, net of tax | | | 26 |
| 85 |
|
| Income from continuing operations | | 193,405 |
| 169,593 |
| | 240,362 |
| 193,405 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| |
| | |
| |
|
| Depreciation, depletion and amortization | | 161,298 |
| 155,138 |
| | 187,937 |
| 161,298 |
|
| Deferred income taxes | | 42,428 |
| (16,777 | ) | | 49,222 |
| 42,428 |
|
| Changes in current assets and liabilities, net of acquisitions: | | |
| | | |
| |
| Receivables | | (55,749 | ) | (121,128 | ) | | (238,373 | ) | (55,749 | ) |
| Inventories | | (38,785 | ) | 2,047 |
| | 2,480 |
| (38,785 | ) |
| Other current assets | | (3,452 | ) | (40,655 | ) | | (69,105 | ) | (3,452 | ) |
| Accounts payable | | 16,155 |
| 30,097 |
| | 13,062 |
| 16,155 |
|
| Other current liabilities | | 31,971 |
| 66,647 |
| | 53,458 |
| 31,971 |
|
| Other noncurrent changes | | (27,170 | ) | (15,081 | ) | | (35,361 | ) | (27,170 | ) |
| Net cash provided by continuing operations | | 320,101 |
| 229,881 |
| | 203,682 |
| 320,101 |
|
| Net cash provided by (used in) discontinued operations | | (2,720 | ) | 42,020 |
| |
| Net cash used in discontinued operations | | | (579 | ) | (2,720 | ) |
| Net cash provided by operating activities | | 317,381 |
| 271,901 |
| | 203,103 |
| 317,381 |
|
| Investing activities: | | |
| |
| | |
| |
|
| Capital expenditures | | (345,599 | ) | (222,084 | ) | | (423,036 | ) | (345,599 | ) |
| Acquisitions, net of cash acquired | | (27,858 | ) | — |
| | (53,263 | ) | (27,858 | ) |
| Net proceeds from sale or disposition of property and other | | 12,451 |
| 121,162 |
| | 28,391 |
| 12,451 |
|
| Investments | | (1,560 | ) | (260 | ) | | (717 | ) | (1,560 | ) |
| Net cash used in continuing operations | | (362,566 | ) | (101,182 | ) | | (448,625 | ) | (362,566 | ) |
| Net cash provided by discontinued operations | | 1,236 |
| 2,234 |
| | — |
| 1,236 |
|
| Net cash used in investing activities | | (361,330 | ) | (98,948 | ) | | (448,625 | ) | (361,330 | ) |
| Financing activities: | | |
| |
| | |
| |
|
| Issuance of short-term borrowings | | | 169,977 |
| — |
|
| Repayment of short-term borrowings | | | (30,000 | ) | — |
|
| Issuance of long-term debt | | 356,952 |
| 133,437 |
| | 302,724 |
| 356,952 |
|
| Repayment of long-term debt | | (157,315 | ) | (183,968 | ) | | (166,956 | ) | (157,315 | ) |
| Proceeds from issuance of common stock | | | 105,639 |
| — |
|
| Dividends paid | | (115,859 | ) | (113,131 | ) | | (119,795 | ) | (115,859 | ) |
| Redemption of preferred stock | | — |
| (15,600 | ) | |
| Repurchase of common stock | | (5,020 | ) | (1,684 | ) | | — |
| (5,020 | ) |
| Tax withholding on stock-based compensation | | (2,330 | ) | (757 | ) | | (3,015 | ) | (2,330 | ) |
| Net cash provided by (used in) continuing operations | | 76,428 |
| (181,703 | ) | |
| Net cash provided by discontinued operations | | — |
| — |
| |
| Net cash provided by (used in) financing activities | | 76,428 |
| (181,703 | ) | |
| Net cash provided by financing activities | | | 258,574 |
| 76,428 |
|
| Effect of exchange rate changes on cash and cash equivalents | | (1 | ) | (1 | ) | | — |
| (1 | ) |
| Increase (decrease) in cash and cash equivalents | | 32,478 |
| (8,751 | ) | |
| Increase in cash and cash equivalents | | | 13,052 |
| 32,478 |
|
| Cash and cash equivalents -- beginning of year | | 34,599 |
| 46,107 |
| | 53,948 |
| 34,599 |
|
| Cash and cash equivalents -- end of period | | $ | 67,077 |
| $ | 37,356 |
| | $ | 67,000 |
| $ | 67,077 |
|
The accompanying notes are an integral part of these consolidated financial statements.
MDU Resources Group, Inc.
Notes to Consolidated
Financial Statements
September 30, 20182019 and 20172018
(Unaudited)
Note 1 - Basis of presentation
The accompanying consolidated interim financial statements were prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Interim financial statements do not include all disclosures provided in annual financial statements and, accordingly, these financial statements should be read in conjunction with those appearing in the 20172018 Annual Report. The information is unaudited but includes all adjustments that are, in the opinion of management, necessary for a fair presentation of the accompanying consolidated interim financial statements and are of a normal recurring nature. Depreciation, depletion and amortization expense is reported separately on the Consolidated Statements of Income and therefore is excluded from the other line items within operating expenses. Management has also evaluated the impact of events occurring after September 30, 2018, up to the date of issuance of these consolidated interim financial statements.
On December 22, 2017, President Trump signed into lawJanuary 2, 2019, the TCJA which includes lower corporate tax rates, repealingCompany announced the domestic production deduction, disallowance of immediate expensing for regulated utility property and modifying or repealing many other business deductions and credits. The reduction in the corporate tax rate was effective on January 1, 2018, reducing the Company's income tax expense for 2018. The Company continues to review the componentscompletion of the TCJA andHolding Company Reorganization, which resulted in Montana-Dakota becoming a subsidiary of the impact onCompany. The purpose of the Company's consolidated financial statements and related disclosures for 2018 and thereafter.
While the Companyreorganization was able to make reasonable estimatesthe public utility division into a subsidiary of the impact ofholding company, just as the reduction in corporate tax rate on the Company's net deferred tax liabilities during the fourth quarter of 2017, such estimates may be affected by other analyses related to the TCJA, including, but not limited to, the state tax effect of adjustments to federal temporary differences and the calculation of deemed repatriation of deferred foreign income. The final transition impacts of the TCJA may differ from amounts disclosed, possibly materially, due to, among other things, interpretations, legislative action to address questions, changes in accounting standards for income taxes or related interpretations, or updates or changes to estimates the Company has utilized to calculate the transition impacts. The SEC has issued rules that would allow for a measurement period of up to one year after the enactment date of the TCJA to finalize the recording of the related tax impacts, of which there were no such material adjustments during the nine months ended September 30, 2018. The Company currently anticipates finalizing and recording any resulting adjustments by December 31, 2018, which will be included in income from continuing operations.
Due to the enactment of the TCJA, the regulated jurisdictions in which the Company's regulated businesses provide service have requested the Company furnish plans for the effect of the reduced corporate tax rate, which may impact the Company's rates to customers. Therefore, the Company has reserved for such impacts as an offset to revenue in certain jurisdictions. The Company will continue to make changes to reserve balances as new information becomes available. For more information on the details and statuses of the open requests, see Note 16.operating companies are wholly owned subsidiaries.
Effective January 1, 2018,2019, the Company adopted the requirements of the revenue from contracts with customers guidance following the modified retrospective method,ASU on leases, as further discussed in Notes 6 and 8.11. As such, results for reporting periods beginning January 1, 2018,2019, are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with the historic accounting for revenue recognition. Based on the Company's analysis, the Company did not identify a significant change in the timing of revenue recognition under the new guidance as compared to the historic accounting for revenue recognition.
Certain prior year amounts have been reclassified to conform to the current year presentation in the consolidated financial statements related to the retrospective adoption of the FASB guidance to improve the presentation of net periodic pension and net periodic postretirement benefit costs, which was effective on January 1, 2018. The components of net periodic pension and postretirement costs, other than service costs, were reclassified from operating expenses to other income on the Consolidated Statements of Income, as discussed in Note 6.leases.
The assets and liabilities for the Company's discontinued operations have been classified as held for sale and the results of operations are shown in income (loss) from discontinued operations, other than certain general and administrative costs and interest expense which do not meet the criteria for income (loss) from discontinued operations. At the time the assets were classified as held for sale, depreciation, depletion and amortization expense was no longer recorded. Unless otherwise indicated, the amounts presented in the accompanying notes to the consolidated financial statements relate to the Company's continuing operations. For more information on the Company's discontinued operations, see Note 10.
Management has also evaluated the impact of events occurring after September 30, 2019, up to the date of issuance of these consolidated interim financial statements.
Note 2 - Seasonality of operations
Some of the Company's operations are highly seasonal and revenues from, and certain expenses for, such operations may fluctuate significantly among quarterly periods. Accordingly, the interim results for particular businesses, and for the Company as a whole, may not be indicative of results for the full fiscal year.
Note 3 - Accounts receivable and allowance for doubtful accounts
Accounts receivable consistconsists primarily of trade receivables from the sale of goods and services which are recorded at the invoiced amount net of allowance for doubtful accounts, and costs and estimated earnings in excess of billings on uncompleted contracts. The total balance of receivables past due 90 days or more was $56.0 million, $29.2 million $27.2 million and $34.7$30.0 million at September 30, 20182019 and 2017,2018, and December 31, 2017,2018, respectively.
The allowance for doubtful accounts is determined through a review of past due balances and other specific account data. Account balances are written off when management determines the amounts to be uncollectible. The Company's allowance for doubtful accounts at September 30, 20182019 and 2017,2018, and December 31, 2017,2018, was $8.7 million, $7.3 million $9.0 million and $8.1$8.9 million, respectively.
Note 4 - Inventories and natural gas in storage
Natural gas in storage for the Company's regulated operations is generally carried at lower of cost or net realizable value, or cost using the last-in, first-out method. All other inventories are stated at the lower of cost or net realizable value. The portion of the cost of natural gas in storage expected to be used within one year was included in inventories. Inventories on the Consolidated Balance Sheets were as follows:
| | | | September 30, 2018 |
| September 30, 2017 |
| December 31, 2017 |
| September 30, 2019 |
| September 30, 2018 |
| December 31, 2018 |
|
| | (In thousands) | (In thousands) |
| Aggregates held for resale | $ | 133,477 |
| $ | 116,399 |
| $ | 115,268 |
| $ | 143,157 |
| $ | 133,477 |
| $ | 139,681 |
|
| Asphalt oil | 40,781 |
| 26,682 |
| 30,360 |
| 39,269 |
| 40,781 |
| 54,741 |
|
| Natural gas in storage (current) | 29,084 |
| 29,974 |
| 20,950 |
| |
| Materials and supplies | 23,563 |
| 20,778 |
| 18,650 |
| 25,696 |
| 23,563 |
| 23,611 |
|
| Merchandise for resale | 15,954 |
| 15,346 |
| 14,905 |
| 23,902 |
| 15,954 |
| 22,552 |
|
| Natural gas in storage (current) | | 32,164 |
| 29,084 |
| 22,117 |
|
| Other | 27,434 |
| 23,376 |
| 26,450 |
| 21,869 |
| 27,434 |
| 24,607 |
|
| Total | $ | 270,293 |
| $ | 232,555 |
| $ | 226,583 |
| $ | 286,057 |
| $ | 270,293 |
| $ | 287,309 |
|
The remainder of natural gas in storage, which largely represents the cost of gas required to maintain pressure levels for normal operating purposes, was included in deferred charges and other assets - other and was $48.2 million, $47.8 million $49.5 million and $49.3$48.5 million at September 30, 20182019 and 2017,2018, and December 31, 2017,2018, respectively.
Note 5 - Earnings per common share
Basic earnings per common share wereis computed by dividing earnings on common stocknet income by the weighted average number of shares of common stock outstanding during the applicable period. Diluted earnings per common share wereis computed by dividing earnings on common stocknet income by the total of the weighted average number of shares of common stock outstanding during the applicable period, plus the effect of nonvested performance share awards and restricted stock units. Common stock outstanding includes issued shares less shares held in treasury. Earnings on common stockNet income was the same for both the basic and diluted earnings per share calculations. A reconciliation of the weighted average common shares outstanding used in the basic and diluted earnings per share calculations was as follows:
| | | | Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended |
| | September 30, | September 30, |
| | 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | (In thousands) | (In thousands, except per share amounts) |
| Weighted average common shares outstanding - basic | 196,018 |
| 195,304 |
| 195,618 |
| 195,304 |
| 199,343 |
| 196,018 |
| 198,016 |
| 195,618 |
|
| Effect of dilutive performance share awards and restricted stock units | 247 |
| 479 |
| 486 |
| 618 |
| 40 |
| 247 |
| 17 |
| 486 |
|
| Weighted average common shares outstanding - diluted | 196,265 |
| 195,783 |
| 196,104 |
| 195,922 |
| 199,383 |
| 196,265 |
| 198,033 |
| 196,104 |
|
| Shares excluded from the calculation of diluted earnings per share | 114 |
| — |
| — |
| — |
| 155 |
| 114 |
| 243 |
| — |
|
| Dividends declared per common share | | $ | .2025 |
| $ | .1975 |
| $ | .6075 |
| $ | .5925 |
|
Note 6 - New accounting standards
Recently adopted accounting standards
ASU 2014-09 - Revenue from Contracts with Customers In May 2014, the FASB issued guidance on accounting for revenue from contracts with customers. The guidance provides for a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. In August 2015, the FASB issued guidance deferring the effective date of the revenue guidance and allowing entities to
early adopt. With this decision, the guidance was effective for the Company on January 1, 2018. Entities had the option of using either a full retrospective or modified retrospective approach to adopting the guidance. Under the modified retrospective approach, an entity recognizes the cumulative effect of initially applying the guidance with an adjustment to the opening balance of retained earnings in the period of adoption.
The Company adopted the guidance on January 1, 2018, using the modified retrospective approach. The Company elected the practical expedient to not disclose the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period, along with an explanation of when such revenue would be expected to be recognized. This practical expedient was used since the performance obligations are part of contracts with an original duration of one year or less. The Company also elected the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the Company otherwise would have recognized is one year or less. Upon completion of the Company's evaluation of contracts and methods of revenue recognition under the previous accounting guidance, the Company did not identify any material cumulative effect adjustments to be made to retained earnings. In addition, the Company has expanded revenue disclosures, both quantitatively and qualitatively, related to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, as discussed in Note 8. The Company reviewed its revenue streams to evaluate the impact of this guidance and did not identify a significant change in the timing of revenue recognition, results of operations, financial position or cash flows. The Company reviewed its internal controls related to revenue recognition and disclosures and concluded that the guidance impacted certain business processes and controls. As such, the Company developed modifications to its internal controls for certain topics under the guidance as they apply to the Company and such modifications were not deemed to be significant. Results for reporting periods beginning after December 31, 2017, are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with historic accounting for revenue recognition.
Under the modified retrospective approach, the guidance was applied only to contracts that were not completed as of January 1, 2018. Therefore, the Company recognized the cumulative effect of initially applying the guidance with an adjustment to the opening balance of retained earnings at January 1, 2018. For the nine months ended September 30, 2018, there were no material impacts to the financial statements as a result of applying the guidance. The cumulative effect of the changes made to the Consolidated Balance Sheet were as follows:
|
| | | | | | | | | |
| | December 31,
2017 |
| Adjustments |
| January 1,
2018 |
|
| | (In thousands) |
| Liabilities and Stockholders' Equity | | | |
| Current liabilities: | | | |
| Other accrued liabilities | $ | 186,010 |
| $ | 903 |
| $ | 186,913 |
|
| Deferred credits and other liabilities: | | | |
| Deferred income taxes | 347,271 |
| (332 | ) | 346,939 |
|
| Other | 1,179,140 |
| 399 |
| 1,179,539 |
|
| Commitments and contingencies | | | |
Stockholders' equity: | | | |
| Retained earnings | 1,040,748 |
| (970 | ) | 1,039,778 |
|
The cumulative effect adjustment is related to prepaid natural gas transportation to storage contracts where a separate performance obligation existed and has not yet been satisfied. As such, these contracts were still open and met the criteria for a cumulative effect adjustment.
ASU 2016-15 - Classification of Certain Cash Receipts and Cash Payments In August 2016, the FASB issued guidance to clarify the classification of certain cash receipts and payments in the statement of cash flows. The guidance is intended to standardize the presentation and classification of certain transactions, including cash payments for debt prepayment or extinguishment, proceeds from insurance claim settlements and distributions from equity method investments. In addition, the guidance clarifies how to classify transactions that have characteristics of more than one class of cash flows. The Company adopted the guidance on January 1, 2018, on a prospective basis. The guidance did not have a material effect on the Company's statement of cash flows.
ASU 2017-01 - Clarifying the Definition of a Business In January 2017, the FASB issued guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The guidance provides a screen to determine when an integrated set of assets and activities is not a business. The guidance also affects other aspects of accounting, such as determining reporting units for goodwill testing and whether an entity has acquired or sold a business. The Company adopted the guidance on January 1, 2018, on a prospective basis. The guidance did not have a material effect on the Company's results of operations, financial position, cash flows or disclosures.
ASU 2017-07 - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost In March 2017, the FASB issued guidance to improve the presentation of net periodic pension and net periodic postretirement benefit costs. The guidance required the service cost component to be presented in the income statement in the same line item or items as other compensation costs arising from services performed during the period. Other components of net periodic benefit cost shall be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The guidance also only allows the service cost component to be capitalized.
The Company adopted the guidance on January 1, 2018, on a retrospective basis. The guidance required the reclassification of all components of net periodic benefit costs, except for the service cost component, from operating expenses to other income on the Consolidated Statements of Income with no impact to earnings. As a result of the retrospective application of this change in accounting guidance, the Company reclassified $1.5 million and $4.5 million from operation and maintenance expense to other income on the Consolidated Statements of Income for the three and nine months ended September 30, 2017, respectively. The Company also reclassified unrealized gains on investments used to satisfy obligations under the defined benefit plans of $2.6 million and $7.9 million for the three and nine months ended September 30, 2017, respectively, which were included in operation and maintenance expense, to other income on the Consolidated Statements of Income. The guidance did not have a material effect on the Company's results of operations, cash flows or disclosures.
ASU 2018-02 - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income In February 2018, the FASB issued guidance that allows an entity to reclassify the stranded tax effects resulting from the newly enacted federal corporate income tax rate from accumulated other comprehensive income (loss) to retained earnings. The guidance is effective for the Company on January 1, 2019, including interim periods, with early adoption permitted. The guidance can be applied using one of two methods. One method is to record the reclassification of the stranded income taxes at the beginning of the period of adoption. The other method is to apply the guidance retrospectively to each period in which the income tax effects of the TCJA are recognized in accumulated other comprehensive income (loss). The Company early adopted the guidance on January 1, 2018, and elected to reclassify the stranded income taxes at the beginning of the period. During the first quarter of 2018, the Company reclassified $7.9 million of stranded tax expense from accumulated other comprehensive loss to retained earnings. The guidance did not have a material effect on the Company's results of operations, cash flows or disclosures.
Recently issued accounting standards not yet adopted
ASU 2016-02 - LeasesIn February 2016, the FASB issued guidance regarding leases. The guidance requiresrequired lessees to recognize a lease liability and a right-of-use asset on the balance sheet for operating and financing leases. The guidance remainsremained largely the same for lessors, although some changes were made to better align lessor accounting with the new lessee accounting and to align with the revenue recognition standard. The guidance also requiresrequired additional disclosures, both quantitative and qualitative, related to operating and financefinancing leases for the lessee and sales-type, direct financing and operating leases for the lessor. This guidance will be effective forThe Company adopted the Companystandard on January 1, 2019, with early adoption permitted.2019.
In July 2018, the FASB issued ASU 2018-11 - Leases: Targeted Improvements, an accounting standard update to ASU 2016-02. This ASU providesprovided an entity the option to adopt the guidance using one of two modified retrospective approaches. An entity cancould adopt the guidance using the modified retrospective transition approach beginning in the earliest year presented in the financial statements. This method of adoption would requirehave required the restatement of prior periods reported and the presentation of lease disclosures under the new guidance for all periods reported. The additional transition method of adoption, introduced by ASU 2018-11, allowsallowed entities the option to apply the guidance on the date of adoption by recognizing a cumulative effect adjustment to retained earnings during the period of adoption and doesdid not require prior comparative periods to be restated.
The Company is planning to adoptadopted the standard on January 1, 2019, utilizing the additional transition method of adoption applied on the date of adoption and the practical expedient that allowsallowed the Company to not reassess whether an expired or existing contract containscontained a lease, the classification of leases or initial direct costs, as well as the additional transition method of adoption applied on the date of adoption.costs. The Company did not identify any cumulative effect
adjustments. The Company also plans to adoptadopted a short-term leasing policy as the lessee where leases with a term of 12 months or less willare not be included on the Consolidated Balance Sheet.
As a practical expedient, a lessee may choose not to separate nonlease components from lease components and instead account for lease and nonlease components as a single lease component. The election shall be made by asset class. The Company formed a lease implementation team and is currently inhas elected to adopt the contract review and assessment phase to identify and evaluate contracts containing leases. Additionally,lease/nonlease component practical expedient for all asset classes as the team is implementing new and revising existing software to meet the reporting and disclosure requirements of the standard.lessee. The Company also has starteddid not elect the practical expedient to assess the impact the standard will have on its processes and internal controls and is identifying new and updating current processes. During the assessment phase, the Company is using various analytic methodologies to ensure the completeness ofuse hindsight when assessing the lease inventory. The Company expects that mostterm or impairment of the current operating leases will be subject to the guidance and recognized as operating lease liabilities and right-of-use assets for the existing leases on the Consolidated Balance Sheets upondate of adoption. During the fourth quarter of 2018, the Company will engage internal auditors to review and assess the completeness of the lease inventory and the effectiveness of the revised and new internal controls. The Company continues to evaluate the impact the new guidance will have on lease contracts where the Company is the lessor and, at this time, does not anticipate a significant impact.
In January 2018, the FASB issued a practical expedient for land easements under the new lease guidance. The practical expedient permits an entity to elect the option to not evaluate land easements under the new guidance if they existed or expired before the adoption of the new lease guidance and were not previously accounted for as leases under the previous lease guidance. Once an entity adopts the new guidance, the entity should apply the new guidance on a prospective basis to all new or modified land easements. The Company is currently planning to adopthas adopted this practical expedient.
The Company formed a lease implementation team to review and assess existing contracts to identify and evaluate those containing leases. Additionally, the team implemented new and revised existing software to meet the reporting and disclosure requirements of the standard. The Company also assessed the impact the standard had on its processes and internal controls and identified new and updated existing internal controls and processes to ensure compliance with the new lease standard; such modifications were not deemed to be significant. During the assessment phase, the Company used various surveys, reconciliations and analytic methodologies to ensure the completeness of the lease inventory. The Company determined that most of the current operating leases were subject to the guidance and were recognized as operating lease liabilities and right-of-use assets on the Consolidated Balance Sheet upon adoption. On January 1, 2019, the Company recorded approximately $112 million to right-of-use assets and lease liabilities as a result of the initial adoption of the guidance. In addition, the Company evaluated the impact the new guidance had on lease contracts where the Company is the lessor and determined it did not have a significant impact to the Company's financial statements.
ASU 2018-15 - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract In August 2018, the FASB issued guidance on the accounting for implementation costs of a hosting arrangement that is a service contract. The guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract similar to the costs incurred to develop or obtain internal-use software and such capitalized costs to be expensed over the term of the hosting arrangement. Costs incurred during the preliminary and postimplementation stages should continue to be expensed as activities are performed. The capitalized costs are required to be presented on the balance sheet in the same line the prepayment for the fees associated with the hosting arrangement would be presented. In addition, the expense related to the capitalized implementation costs should be presented in the same line on the income statement as the fees associated with the hosting element of the arrangements. The Company adopted the guidance effective January 1, 2019, on a prospective basis. The adoption of the guidance did not have a material impact on its results of operations, financial position, cash flows or disclosures.
Recently issued accounting standards not yet adopted
ASU 2016-13 - Measurement of Credit Losses on Financial Instruments In June 2016, the FASB issued guidance on the measurement of credit losses on certain financial instruments. The guidance introduces a new impairment model known as the current expected credit loss model that will replace the incurred loss impairment methodology currently included under GAAP. This guidance requires entities to present certain investments in debt securities, trade accounts receivable and other financial assets at their net carrying value of the amount expected to be collected on the financial statements. The guidance will be effective for the Company on January 1, 2020, and must be applied on a modified retrospective basis with early adoption permitted. The Company continues to monitor other
industry-specific issues as it relates toevaluate the regulated businesses butprovisions of the guidance and currently does not expect these issuesthe guidance to have a material impact on the Company'sits results of operations, financial position, cash flows or disclosures.
ASU 2017-04 - Simplifying the Test for Goodwill ImpairmentIn January 2017, the FASB issued guidance on simplifying the test for goodwill impairment by eliminating Step 2, which required an entity to measure the amount of impairment loss by comparing the implied fair value of reporting unit goodwill with the carrying amount of such goodwill. This guidance requires entities to perform a quantitative impairment test, previously Step 1, to identify both the existence of impairment and the amount of impairment loss by comparing the fair value of a reporting unit to its carrying amount. Entities will continue to have the option of performing a qualitative assessment to determine if the quantitative impairment test is necessary. The guidance also requires additional disclosures if an entity has one or more reporting units with zero or negative carrying amounts of net assets. The guidance will be effective for the Company on January 1, 2020, and must be applied on a prospective basis with early adoption permitted. The Company is evaluatinghas evaluated the effectsguidance and does not expect the adoption of the new guidance will have a material impact on its results of operations, financial position, cash flows and disclosures.
ASU 2018-07 - Improvements to Nonemployee Share-Based Payment Accounting In June 2018, the FASB issued guidance on simplifying the accounting for nonemployee share-based payment transactions by expanding the scope of ASC 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance will require nonemployee share-based payment awards be measured at the grant-date fair value of the equity instruments at the grant date. The guidance will be effective for the Company on January 1, 2019, including interim periods, and must be applied using a modified retrospective approach with early adoption permitted. The modified retrospective approach requires an entity to record a cumulative-effect adjustment to retained earnings at the beginning of the year ofor disclosures upon adoption. The Company is evaluatingplanning to early adopt the effectsguidance with the adoptionpreparation of its 2019 goodwill impairment test in the new guidance will have on its resultsfourth quarter of operations, financial position, cash flows and disclosures.2019.
ASU 2018-13 - Changes to the Disclosure Requirements for Fair Value MeasurementIn August 2018, the FASB issued guidance on modifying the disclosure requirements on fair value measurements as part of the disclosure framework project. The guidance modifies, among other things, the disclosures required for Level 3 fair value measurements, including the range and weighted average of significant unobservable inputs. The guidance removes, among other things, the disclosure requirement to disclose
transfers between Levels 1 and 2. The guidance will be effective for the Company on January 1, 2020, including interim periods, with early adoption permitted. Level 3 fair value measurement disclosures should be applied prospectively while all other amendments should be applied retrospectively. The Company is evaluating the effects the adoption of the new guidance will have on its disclosures.
ASU 2018-14 - Changes to the Disclosure Requirements for Defined Benefit PlansIn August 2018, the FASB issued guidance on modifying the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans as part of the disclosure framework project. The guidance removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of disclosures and adds disclosure requirements identified as relevant. The guidance adds, among other things, the requirement to include an explanation for significant gains and losses related to changes in benefit obligations for the period. The guidance removes, among other things, the disclosure requirement to disclose the amount of net periodic benefit costs to be amortized over the next fiscal year from accumulated other comprehensive income (loss) and the effects a one percentage point change in assumed health care cost trend rates will have on certain benefit components. The guidance will be effective for the Company on January 1, 2021, and must be applied on a retrospective basis with early adoption permitted. The Company is evaluating the effects the adoption of the new guidance will have on the its disclosures.
ASU 2018-15 - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract In August 2018, the FASB issued guidance on the accounting for implementation costs of a hosting arrangement that is a service contract. The guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract similar to the costs incurred to develop or obtain internal-use software and such capitalized costs to be expensed over the term of the hosting arrangement. Costs incurred during the preliminary and postimplementation stages should continue to be expensed as activities are performed. The capitalized costs are required to be presented on the balance sheet in the same line the prepayment for the fees associated with the hosting arrangement would be presented. In addition, the expense related to the capitalized implementation costs should be presented in the same line on the income statement as the fees associated with the hosting element of the arrangements. The guidance will be effective for the Company on January 1, 2020, including interim periods, and may be applied on a retrospective or a prospective basis with early adoption permitted. The Company is evaluating the effects the adoption of the new guidance will have on the its results of operations, financial position, cash flows and disclosures.
SEC File Number S7-15-16 - Disclosure Update and Simplification In October 2018, the SEC published guidance in the Federal Register on disclosure updates and simplifications. The guidance removes disclosures that are no longer considered cost beneficial, duplicative of GAAP required disclosures, clarifies the specific requirements of disclosures and adds disclosure requirements identified as relevant. The amendments are intended to facilitate disclosure of information to investors and simplify the compliance without significantly altering the total mix of information provided to investors. The guidance will be effective for the Company on November 5, 2018, including interim periods, and must be applied on a prospective basis. The Company is
evaluating the effects the adoption of the new guidance will have on its disclosures, various sections of the Annual Report on Form 10-K for the year ended December 31, 2018, and future reports on Form 10-Q.
Note 7 - ComprehensiveAccumulated other comprehensive income (loss)
The after-tax changes in the components of accumulated other comprehensive lossincome (loss) were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 | Net Unrealized Gain (Loss) on Derivative
Instruments
Qualifying as Hedges |
| Postretirement
Liability Adjustment |
| Foreign
Currency Translation Adjustment |
| Net Unrealized
Gain (Loss) on
Available-for-sale
Investments |
| Total
Accumulated
Other
Comprehensive
Loss |
|
| | (In thousands) |
| Balance at beginning of period | $ | (2,136 | ) | $ | (41,816 | ) | $ | — |
| $ | (183 | ) | $ | (44,135 | ) |
| Other comprehensive loss before reclassifications | — |
| — |
| — |
| (51 | ) | (51 | ) |
| Amounts reclassified from accumulated other comprehensive loss | 92 |
| 442 |
| — |
| 33 |
| 567 |
|
| Net current-period other comprehensive income (loss) | 92 |
| 442 |
| — |
| (18 | ) | 516 |
|
| Balance at end of period | $ | (2,044 | ) | $ | (41,374 | ) | $ | — |
| $ | (201 | ) | $ | (43,619 | ) |
|
| | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 | Net Unrealized Gain (Loss) on Derivative
Instruments
Qualifying as Hedges |
| Postretirement
Liability Adjustment |
| Net Unrealized
Gain (Loss) on
Available-for-sale
Investments |
| Total
Accumulated
Other
Comprehensive
Loss |
|
| | (In thousands) |
| At December 31, 2018 | $ | (2,161 | ) | $ | (36,069 | ) | $ | (112 | ) | $ | (38,342 | ) |
| Other comprehensive income before reclassifications | — |
| — |
| 39 |
| 39 |
|
| Amounts reclassified from accumulated other comprehensive loss | 397 |
| 310 |
| 28 |
| 735 |
|
| Net current-period other comprehensive income | 397 |
| 310 |
| 67 |
| 774 |
|
| At March 31, 2019 | $ | (1,764 | ) | $ | (35,759 | ) | $ | (45 | ) | $ | (37,568 | ) |
| Other comprehensive income before reclassifications | — |
| — |
| 79 |
| 79 |
|
| Amounts reclassified from accumulated other comprehensive loss | 111 |
| 276 |
| 12 |
| 399 |
|
| Net current-period other comprehensive income | 111 |
| 276 |
| 91 |
| 478 |
|
| At June 30, 2019 | $ | (1,653 | ) | $ | (35,483 | ) | $ | 46 |
| $ | (37,090 | ) |
| Other comprehensive income before reclassifications | — |
| — |
| 12 |
| 12 |
|
| Amounts reclassified (to) from accumulated other comprehensive loss | 112 |
| 292 |
| (4 | ) | 400 |
|
| Net current-period other comprehensive income | 112 |
| 292 |
| 8 |
| 412 |
|
| At September 30, 2019 | $ | (1,541 | ) | $ | (35,191 | ) | $ | 54 |
| $ | (36,678 | ) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 | Net Unrealized Gain (Loss) on Derivative
Instruments
Qualifying as Hedges |
| Postretirement
Liability Adjustment |
| Foreign
Currency Translation Adjustment |
| Net Unrealized
Gain (Loss) on
Available-for-sale
Investments |
| Total
Accumulated
Other
Comprehensive
Loss |
|
| | (In thousands) |
| Balance at beginning of period | $ | (2,117 | ) | $ | (33,469 | ) | $ | (155 | ) | $ | (48 | ) | $ | (35,789 | ) |
| Other comprehensive income (loss) before reclassifications | — |
| — |
| 15 |
| (19 | ) | (4 | ) |
| Amounts reclassified from accumulated other comprehensive loss | 92 |
| 333 |
| — |
| 27 |
| 452 |
|
| Net current-period other comprehensive income | 92 |
| 333 |
| 15 |
| 8 |
| 448 |
|
| Balance at end of period | $ | (2,025 | ) | $ | (33,136 | ) | $ | (140 | ) | $ | (40 | ) | $ | (35,341 | ) |
|
| | | | | | | | | | | | | | | |
| | | | | | |
| Nine Months Ended September 30, 2018 | Net Unrealized Gain (Loss) on Derivative
Instruments
Qualifying as Hedges |
| Postretirement
Liability Adjustment |
| Foreign
Currency Translation Adjustment |
| Net Unrealized
Gain (Loss) on
Available-for-sale
Investments |
| Total
Accumulated
Other
Comprehensive
Loss |
|
| | (In thousands) |
| Balance at beginning of period | $ | (1,934 | ) | $ | (35,163 | ) | $ | (155 | ) | $ | (82 | ) | $ | (37,334 | ) |
| Other comprehensive loss before reclassifications | — |
| — |
| (61 | ) | (199 | ) | (260 | ) |
| Amounts reclassified from accumulated other comprehensive loss | 279 |
| 1,309 |
| 249 |
| 97 |
| 1,934 |
|
| Net current-period other comprehensive income (loss) | 279 |
| 1,309 |
| 188 |
| (102 | ) | 1,674 |
|
| Reclassification adjustment of prior period tax effects related to TCJA included in accumulated other comprehensive loss | (389 | ) | (7,520 | ) | (33 | ) | (17 | ) | (7,959 | ) |
| Balance at end of period | $ | (2,044 | ) | $ | (41,374 | ) | $ | — |
| $ | (201 | ) | $ | (43,619 | ) |
|
| | | | | | | | | | | | | | | |
| | | | | | |
| Nine Months Ended September 30, 2017 | Net Unrealized Gain (Loss) on Derivative
Instruments
Qualifying as Hedges |
| Postretirement
Liability Adjustment |
| Foreign
Currency Translation Adjustment |
| Net Unrealized
Gain (Loss) on
Available-for-sale
Investments |
| Total
Accumulated
Other
Comprehensive
Loss |
|
| | (In thousands) |
| Balance at beginning of period | $ | (2,300 | ) | $ | (33,221 | ) | $ | (149 | ) | $ | (63 | ) | $ | (35,733 | ) |
| Other comprehensive income (loss) before reclassifications | — |
| — |
| 9 |
| (70 | ) | (61 | ) |
| Amounts reclassified from accumulated other comprehensive loss | 275 |
| 1,002 |
| — |
| 93 |
| 1,370 |
|
| Amounts reclassified to accumulated other comprehensive loss from regulatory asset | — |
| (917 | ) | — |
| — |
| (917 | ) |
| Net current-period other comprehensive income | 275 |
| 85 |
| 9 |
| 23 |
| 392 |
|
| Balance at end of period | $ | (2,025 | ) | $ | (33,136 | ) | $ | (140 | ) | $ | (40 | ) | $ | (35,341 | ) |
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 | Net Unrealized Gain (Loss) on Derivative
Instruments
Qualifying as Hedges |
| Postretirement
Liability Adjustment |
| Foreign
Currency Translation Adjustment |
| Net Unrealized
Gain (Loss) on
Available-for-sale
Investments |
| Total
Accumulated
Other
Comprehensive
Loss |
|
| | (In thousands) |
| At December 31, 2017 | $ | (1,934 | ) | $ | (35,163 | ) | $ | (155 | ) | $ | (82 | ) | $ | (37,334 | ) |
| Other comprehensive loss before reclassifications | — |
| — |
| (2 | ) | (105 | ) | (107 | ) |
| Amounts reclassified from accumulated other comprehensive loss | 92 |
| 418 |
| — |
| 30 |
| 540 |
|
| Net current-period other comprehensive income (loss) | 92 |
| 418 |
| (2 | ) | (75 | ) | 433 |
|
| Reclassification adjustment of prior period tax effects related to TCJA included in accumulated other comprehensive loss | (389 | ) | (7,520 | ) | (33 | ) | (17 | ) | (7,959 | ) |
| At March 31, 2018 | $ | (2,231 | ) | $ | (42,265 | ) | $ | (190 | ) | $ | (174 | ) | $ | (44,860 | ) |
| Other comprehensive loss before reclassifications | — |
| — |
| (59 | ) | (43 | ) | (102 | ) |
| Amounts reclassified from accumulated other comprehensive loss | 95 |
| 449 |
| 249 |
| 34 |
| 827 |
|
| Net current-period other comprehensive income (loss) | 95 |
| 449 |
| 190 |
| (9 | ) | 725 |
|
| At June 30, 2018 | $ | (2,136 | ) | $ | (41,816 | ) | $ | — |
| $ | (183 | ) | $ | (44,135 | ) |
| Other comprehensive loss before reclassifications | — |
| — |
| — |
| (51 | ) | (51 | ) |
| Amounts reclassified from accumulated other comprehensive loss | 92 |
| 442 |
| — |
| 33 |
| 567 |
|
| Net current-period other comprehensive income (loss) | 92 |
| 442 |
| — |
| (18 | ) | 516 |
|
| At September 30, 2018 | $ | (2,044 | ) | $ | (41,374 | ) | $ | — |
| $ | (201 | ) | $ | (43,619 | ) |
The following amounts were reclassified out of accumulated other comprehensive loss into net income. The amounts presented in parenthesis indicate a decrease to net income on the Consolidated Statements of Income. The reclassifications were as follows:
| | | | Three Months Ended | Nine Months Ended | Location on Consolidated Statements of Income | Three Months Ended | Nine Months Ended | Location on Consolidated Statements of Income |
| | September 30, | September 30, |
| | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 |
| | (In thousands) | | (In thousands) | |
| Reclassification adjustment for loss on derivative instruments included in net income | $ | (147 | ) | $ | (148 | ) | $ | (443 | ) | $ | (443 | ) | Interest expense | $ | (148 | ) | $ | (147 | ) | $ | (443 | ) | $ | (443 | ) | Interest expense |
| | 55 |
| 56 |
| 164 |
| 168 |
| Income taxes | 36 |
| 55 |
| (177 | ) | 164 |
| Income taxes |
| | (92 | ) | (92 | ) | (279 | ) | (275 | ) | | (112 | ) | (92 | ) | (620 | ) | (279 | ) | |
| Amortization of postretirement liability losses included in net periodic benefit cost (credit) | (584 | ) | (536 | ) | (1,751 | ) | (1,611 | ) | Other income | |
| Amortization of postretirement liability losses included in net periodic benefit cost | | (387 | ) | (584 | ) | (1,162 | ) | (1,751 | ) | Other income |
| | 142 |
| 203 |
| 442 |
| 609 |
| Income taxes | 95 |
| 142 |
| 284 |
| 442 |
| Income taxes |
| | (442 | ) | (333 | ) | (1,309 | ) | (1,002 | ) | | (292 | ) | (442 | ) | (878 | ) | (1,309 | ) | |
| Reclassification adjustment for loss on foreign currency translation adjustment included in net income | — |
| — |
| (324 | ) | — |
| Other income | |
| Reclassification adjustment for foreign currency translation adjustment included in net income | | — |
| — |
| — |
| (324 | ) | Other income |
| | — |
| — |
| 75 |
| — |
| Income taxes | — |
| — |
| — |
| 75 |
| Income taxes |
| | — |
| — |
| (249 | ) | — |
| | — |
| — |
| — |
| (249 | ) | |
| Reclassification adjustment on available-for-sale investments included in net income | (42 | ) | (41 | ) | (123 | ) | (143 | ) | Other income | 5 |
| (42 | ) | (46 | ) | (123 | ) | Other income |
| | 9 |
| 14 |
| 26 |
| 50 |
| Income taxes | (1 | ) | 9 |
| 10 |
| 26 |
| Income taxes |
| | (33 | ) | (27 | ) | (97 | ) | (93 | ) | | 4 |
| (33 | ) | (36 | ) | (97 | ) | |
| Total reclassifications | $ | (567 | ) | $ | (452 | ) | $ | (1,934 | ) | $ | (1,370 | ) | | $ | (400 | ) | $ | (567 | ) | $ | (1,534 | ) | $ | (1,934 | ) | |
Note 8 - Revenue from contracts with customers
Revenue is recognized when a performance obligation is satisfied by transferring control over a product or service to a customer. Revenue is measured based on consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Company is considered an agent for certain taxes collected from customers. As such, the Company presents revenues net of these taxes at the time of sale to be remitted to governmental authorities, including sales and use taxes.
The electric and natural gas distribution segments generate revenueAs part of the adoption of ASC 606 - Revenue from Contracts with Customers, the salesCompany elected the practical expedient to recognize the incremental costs of electric and natural gas products and services, which includes retail and transportation services. These segments establish a customer's retail or transportation service account based on the customer's application/contract for service, which indicates approval ofobtaining a contract for service. The contract identifiesas an obligation to provide service in exchange for delivering or standing ready to deliverexpense when incurred if the identified commodity; and the customer is obligated to pay for the service as provided in the applicable tariff. The product sales are based on a fixed rate that includes a base and per-unit rate, which are included in approved tariffs as determined by state or federal regulatory agencies. The quantityamortization period of the commodity consumed or transported determines the total per-unit revenue. The service provided, along with the product consumed or transported, are a single performance obligation because both are required in combination to successfully transfer the contracted product or service to the customer. Revenues are recognized over time as customers receive and consume the products and services. The method of measuring progress toward the completion of the single performance
obligation is on a per-unit output method basis, with revenue recognized based on the direct measurement of the value to the customer of the goods or services transferred to date. For contracts governed by the Company’s utility tariffs, amounts are billed monthly with the amount due between 15 and 22 days of receipt of the invoice depending on the applicable state’s tariff. For other contracts not governed by tariff, payment terms are net thirty days. At this time, the segment has no material obligations for returns, refunds or other similar obligations.
The pipeline and midstream segment generates revenue from providing natural gas transportation, gathering and underground storage services, as well as other energy-related services to both third parties and internal customers, largely the natural gas distribution segment. The pipeline and midstream segment establishes a contract with a customer based upon the customer’s request for firm or interruptible natural gas transportation, storage or gathering service(s). The contract identifies an obligation for the segment to provide the requested service(s) in exchange for consideration from the customer over a specified term. Depending on the type of service(s) requested and contracted, the service provided may include transporting, gathering or storing an identified quantity of natural gas and/or standing ready to deliver or store an identified quantity of natural gas. Natural gas transportation, gathering and storage revenues are based on fixed rates, which may include reservation fees and/or per-unit commodity rates. The services provided by the segment are generally treated as single performance obligations satisfied over time simultaneous to when the service is provided and revenue is recognized. Rates for the segment’s regulated services are based on its FERC approved tariff or customer negotiated rates on special projects, and rates for its non-regulated services are negotiated with its customers and set forth in the contract. For contracts governed by the company’s tariff, amounts are billed on or before the ninth business day of the following month and the amount is due within twelve days of receipt of the invoice. For gathering contracts not governed by the tariff, amounts are due within twenty days of invoice receipt. For other contracts not governed by the tariff, payment terms are net thirty days. At this time, the segment has no material obligations for returns, refunds or other similar obligations.
The construction materials and contracting segment generates revenue from contracting services and construction materials sales. This segment focuses on the vertical integration of its contracting services with its construction materials to support the aggregate based product lines. This segment provides contracting services to a customer when a contract has been signed by both the customer and a representative of the segment obligating a service to be provided in exchange for the consideration identified in the contract. The nature of the services this segment provides generally includes integrating a set of services and related construction materials into a single project to create a distinct bundle of goods and services, whichasset that the Company evaluates to determine whether a separate performance obligation exists. The transaction priceotherwise would have recognized is the original contract price plus any subsequent change orders and variable consideration. Examples of variable consideration that exist in this segment's contracts include liquidated damages; performance bonuses12 months or incentives and penalties; claims; unapproved/unpriced change orders; and index pricing. The variable amounts usually arise upon achievement of certain performance metrics or change in project scope. The Company estimates the amount of revenue to be recognized on variable consideration using estimation methods that best predict the most likely amount of consideration the Company expects to be entitled to or expects to incur. The Company includes variable consideration in the estimated transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. Changes in circumstances could impact management's estimates made in determining the value of variable consideration recorded. The Company updates its estimate of the transaction price each reporting period and the effect of variable consideration on the transaction price is recognized as an adjustment to revenue on a cumulative catch-up basis. Revenue is recognized over time using the input method based on the measurement of progress on a project. The input method is the preferred method of measuring revenue because the costs incurred have been determined to represent the best indication of the overall progress toward the transfer of such goods or services promised to a customer. This segment also sells construction materials to third parties and internal customers. The contract for material sales is the use of a sales order or an invoice, which includes the pricing and payment terms. All material contracts contain a single performance obligation for the delivery of a single distinct product or a distinct separately identifiable bundle of products and services. Revenue is recognized at a point in time when the performance obligation has been satisfied with the delivery of the products or services. The warranties associated with the sales are those consistent with a standard warranty that the product meets certain specifications for quality or those required by law. For most contracts, amounts billed to customers are due within thirty days of receipt. There are no material obligations for returns, refunds or other similar obligations.
The construction services segment generates revenue from specialty contracting services which also includes the sale of construction equipment and other supplies. This segment provides specialty contracting services to a customer when a contract has been signed by both the customer and a representative of the segment obligating a service to be provided in exchange for the consideration identified in the contract. The nature of the services this segment provides generally includes multiple promised goods and services in a single project to create a distinct bundle of goods and services, which the Company evaluates to determine whether a separate performance obligation exists. The transaction price is the original contract price plus any subsequent change orders and variable consideration. Examples of variable consideration that exist in this segment's contracts include claims, unapproved/unpriced change orders, bonuses, incentives, penalties and liquidated damages. The variable amounts usually arise upon achievement of certain performance metrics or change in project scope. The Company estimates the amount of revenue to be recognized on variable consideration using estimation methods that best predict the most likely amount of consideration the Company expects to be entitled to or expects to incur. The Company includes variable consideration in the estimated transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. Changes in circumstances could impact management's estimates made in determining the value of variable consideration recorded. The Company updates its estimate of
the transaction price each reporting period and the effect of variable consideration on the transaction price is recognized as an adjustment to revenue on a cumulative catch-up basis. Revenue is recognized over time using the input method based on the measurement of progress on a project. The input method is the preferred method of measuring revenue because the costs incurred have been determined to represent the best indication of the overall progress toward the transfer of such goods or services promised to a customer. This segment also sells construction equipment and other supplies to third parties and internal customers. The contract for these sales is the use of a sales order or invoice, which includes the pricing and payment terms. All such contracts include a single performance obligation for the delivery of a single distinct product or a distinct separately identifiable bundle of products and services. Revenue is recognized at a point in time when the performance obligation has been satisfied with the delivery of the products or services. The warranties associated with the sales are those consistent with a standard warranty that the product meets certain specifications for quality or those required by law. For most contracts, amounts billed to customers are due within thirty days of receipt. There are no material obligations for returns, refunds or other similar obligations.
The Company recognizes all other revenues when services are rendered or goods are delivered.less.
Disaggregation
In the following table, revenue is disaggregated by the type of customer or service provided. The Company believes this level of disaggregation best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The table also includes a reconciliation of the disaggregated revenue by reportable segments. For more information on the Company's business segments, see Note 14.17.
| | | Three Months Ended September 30, 2018 | Electric |
| Natural gas distribution |
| Pipeline and midstream |
| Construction materials and contracting |
| Construction services |
| Other |
| Total |
| |
| Three Months Ended September 30, 2019 | | Electric |
| Natural gas distribution |
| Pipeline and midstream |
| Construction materials and contracting |
| Construction services |
| Other |
| Total |
|
| | (in thousands) | (In thousands) |
| Residential utility sales | $ | 31,424 |
| $ | 43,825 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 75,249 |
| $ | 30,376 |
| $ | 44,902 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 75,278 |
|
| Commercial utility sales | 36,259 |
| 28,174 |
| — |
| — |
| — |
| — |
| 64,433 |
| 36,670 |
| 29,148 |
| — |
| — |
| — |
| — |
| 65,818 |
|
| Industrial utility sales | 8,738 |
| 4,421 |
| — |
| — |
| — |
| — |
| 13,159 |
| 9,348 |
| 4,307 |
| — |
| — |
| — |
| — |
| 13,655 |
|
| Other utility sales | 2,056 |
| — |
| — |
| — |
| — |
| — |
| 2,056 |
| 1,862 |
| — |
| — |
| — |
| — |
| — |
| 1,862 |
|
| Natural gas transportation | — |
| 10,841 |
| 21,400 |
| — |
| — |
| — |
| 32,241 |
| — |
| 11,410 |
| 25,229 |
| — |
| — |
| — |
| 36,639 |
|
| Natural gas gathering | — |
| — |
| 2,320 |
| — |
| — |
| — |
| 2,320 |
| — |
| — |
| 2,510 |
| — |
| — |
| — |
| 2,510 |
|
| Natural gas storage | — |
| — |
| 2,795 |
| — |
| — |
| — |
| 2,795 |
| — |
| — |
| 3,044 |
| — |
| — |
| — |
| 3,044 |
|
| Contracting services | — |
| — |
| — |
| 409,006 |
| — |
| — |
| 409,006 |
| — |
| — |
| — |
| 461,716 |
| — |
| — |
| 461,716 |
|
| Construction materials | — |
| — |
| — |
| 538,962 |
| — |
| — |
| 538,962 |
| — |
| — |
| — |
| 638,862 |
| — |
| — |
| 638,862 |
|
| Intrasegment eliminations* | — |
| — |
| — |
| (204,040 | ) | — |
| — |
| (204,040 | ) | — |
| — |
| — |
| (231,078 | ) | — |
| — |
| (231,078 | ) |
| Inside specialty contracting | — |
| — |
| — |
| — |
| 217,474 |
| — |
| 217,474 |
| — |
| — |
| — |
| — |
| 317,202 |
| — |
| 317,202 |
|
| Outside specialty contracting | — |
| — |
| — |
| — |
| 100,988 |
| — |
| 100,988 |
| — |
| — |
| — |
| — |
| 151,285 |
| — |
| 151,285 |
|
| Other | 6,158 |
| 3,208 |
| 5,701 |
| — |
| 15 |
| 3,084 |
| 18,166 |
| 9,380 |
| 2,708 |
| 5,534 |
| — |
| 45 |
| 2,884 |
| 20,551 |
|
| Intersegment eliminations | — |
| — |
| (3,187 | ) | (165 | ) | (782 | ) | (3,037 | ) | (7,171 | ) | — |
| — |
| (3,831 | ) | (124 | ) | (1,226 | ) | (2,862 | ) | (8,043 | ) |
| Revenues from contracts with customers | 84,635 |
| 90,469 |
| 29,029 |
| 743,763 |
| 317,695 |
| 47 |
| 1,265,638 |
| 87,636 |
| 92,475 |
| 32,486 |
| 869,376 |
| 467,306 |
| 22 |
| 1,549,301 |
|
| Revenues out of scope | 1,445 |
| 1,779 |
| 42 |
| — |
| 11,883 |
| — |
| 15,149 |
| 2,209 |
| 1,167 |
| 47 |
| — |
| 11,075 |
| — |
| 14,498 |
|
| Total external operating revenues | $ | 86,080 |
| $ | 92,248 |
| $ | 29,071 |
| $ | 743,763 |
| $ | 329,578 |
| $ | 47 |
| $ | 1,280,787 |
| $ | 89,845 |
| $ | 93,642 |
| $ | 32,533 |
| $ | 869,376 |
| $ | 478,381 |
| $ | 22 |
| $ | 1,563,799 |
|
| |
| * | Intrasegment revenues are presented within the construction materials and contracting segment to highlight the focus on vertical integration as this segment sells materials to both third parties and internal customers. Due to consolidation requirements, these revenues must be eliminated against construction materials to arrive at the external operating revenue total for the segment. |
| | | Nine Months Ended September 30, 2018 | Electric |
| Natural gas distribution |
| Pipeline and midstream |
| Construction materials and contracting |
| Construction services |
| Other |
| Total |
| |
| Three Months Ended September 30, 2018 | | Electric |
| Natural gas distribution |
| Pipeline and midstream |
| Construction materials and contracting |
| Construction services |
| Other |
| Total |
|
| | (in thousands) | (In thousands) |
| Residential utility sales | $ | 93,359 |
| $ | 305,399 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 398,758 |
| $ | 31,424 |
| $ | 43,825 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 75,249 |
|
| Commercial utility sales | 103,636 |
| 185,885 |
| — |
| — |
| — |
| — |
| 289,521 |
| 36,259 |
| 28,174 |
| — |
| — |
| — |
| — |
| 64,433 |
|
| Industrial utility sales | 25,734 |
| 17,457 |
| — |
| — |
| — |
| — |
| 43,191 |
| 8,738 |
| 4,421 |
| — |
| — |
| — |
| — |
| 13,159 |
|
| Other utility sales | 5,766 |
| — |
| — |
| — |
| — |
| — |
| 5,766 |
| 2,056 |
| — |
| — |
| — |
| — |
| — |
| 2,056 |
|
| Natural gas transportation | — |
| 32,104 |
| 64,505 |
| — |
| — |
| — |
| 96,609 |
| — |
| 10,841 |
| 21,400 |
| — |
| — |
| — |
| 32,241 |
|
| Natural gas gathering | — |
| — |
| 6,900 |
| — |
| — |
| — |
| 6,900 |
| — |
| — |
| 2,320 |
| — |
| — |
| — |
| 2,320 |
|
| Natural gas storage | — |
| — |
| 8,563 |
| — |
| — |
| — |
| 8,563 |
| — |
| — |
| 2,795 |
| — |
| — |
| — |
| 2,795 |
|
| Contracting services | — |
| — |
| — |
| 730,628 |
| — |
| — |
| 730,628 |
| — |
| — |
| — |
| 409,006 |
| — |
| — |
| 409,006 |
|
| Construction materials | — |
| — |
| — |
| 1,100,185 |
| — |
| — |
| 1,100,185 |
| — |
| — |
| — |
| 538,962 |
| — |
| — |
| 538,962 |
|
| Intrasegment eliminations* | — |
| — |
| — |
| (363,877 | ) | — |
| — |
| (363,877 | ) | — |
| — |
| — |
| (204,040 | ) | — |
| — |
| (204,040 | ) |
| Inside specialty contracting | — |
| — |
| — |
| — |
| 667,664 |
| — |
| 667,664 |
| — |
| — |
| — |
| — |
| 217,474 |
| — |
| 217,474 |
|
| Outside specialty contracting | — |
| — |
| — |
| — |
| 283,432 |
| — |
| 283,432 |
| — |
| — |
| — |
| — |
| 100,988 |
| — |
| 100,988 |
|
| Other | 22,836 |
| 10,821 |
| 13,353 |
| — |
| 32 |
| 8,536 |
| 55,578 |
| 6,158 |
| 3,208 |
| 5,701 |
| — |
| 15 |
| 3,084 |
| 18,166 |
|
| Intersegment eliminations | — |
| — |
| (31,485 | ) | (501 | ) | (1,332 | ) | (8,343 | ) | (41,661 | ) | — |
| — |
| (3,187 | ) | (165 | ) | (782 | ) | (3,037 | ) | (7,171 | ) |
| Revenues from contracts with customers | 251,331 |
| 551,666 |
| 61,836 |
| 1,466,435 |
| 949,796 |
| 193 |
| 3,281,257 |
| 84,635 |
| 90,469 |
| 29,029 |
| 743,763 |
| 317,695 |
| 47 |
| 1,265,638 |
|
| Revenues out of scope | 653 |
| 2,786 |
| 129 |
| — |
| 36,853 |
| — |
| 40,421 |
| 1,445 |
| 1,779 |
| 42 |
| — |
| 11,883 |
| — |
| 15,149 |
|
| Total external operating revenues | $ | 251,984 |
| $ | 554,452 |
| $ | 61,965 |
| $ | 1,466,435 |
| $ | 986,649 |
| $ | 193 |
| $ | 3,321,678 |
| $ | 86,080 |
| $ | 92,248 |
| $ | 29,071 |
| $ | 743,763 |
| $ | 329,578 |
| $ | 47 |
| $ | 1,280,787 |
|
| |
| * | Intrasegment revenues are presented within the construction materials and contracting segment to highlight the focus on vertical integration as this segment sells materials to both third parties and internal customers. Due to consolidation requirements, these revenues must be eliminated against construction materials to arrive at the external operating revenue total for the segment. |
|
| | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 | Electric |
| Natural gas distribution |
| Pipeline and midstream |
| Construction materials and contracting |
| Construction services |
| Other |
| Total |
|
| | (In thousands) |
| Residential utility sales | $ | 93,368 |
| $ | 316,521 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 409,889 |
|
| Commercial utility sales | 105,572 |
| 192,191 |
| — |
| — |
| — |
| — |
| 297,763 |
|
| Industrial utility sales | 27,576 |
| 18,495 |
| — |
| — |
| — |
| — |
| 46,071 |
|
| Other utility sales | 5,540 |
| — |
| — |
| — |
| — |
| — |
| 5,540 |
|
| Natural gas transportation | — |
| 33,686 |
| 75,091 |
| — |
| — |
| — |
| 108,777 |
|
| Natural gas gathering | — |
| — |
| 7,027 |
| — |
| — |
| — |
| 7,027 |
|
| Natural gas storage | — |
| — |
| 8,313 |
| — |
| — |
| — |
| 8,313 |
|
| Contracting services | — |
| — |
| — |
| 841,881 |
| — |
| — |
| 841,881 |
|
| Construction materials | — |
| — |
| — |
| 1,262,938 |
| — |
| — |
| 1,262,938 |
|
| Intrasegment eliminations* | — |
| — |
| — |
| (412,144 | ) | — |
| — |
| (412,144 | ) |
| Inside specialty contracting | — |
| — |
| — |
| — |
| 936,008 |
| — |
| 936,008 |
|
| Outside specialty contracting | — |
| — |
| — |
| — |
| 391,971 |
| — |
| 391,971 |
|
| Other | 26,918 |
| 9,544 |
| 14,523 |
| — |
| 70 |
| 13,631 |
| 64,686 |
|
| Intersegment eliminations | — |
| — |
| (35,298 | ) | (388 | ) | (2,076 | ) | (13,566 | ) | (51,328 | ) |
| Revenues from contracts with customers | 258,974 |
| 570,437 |
| 69,656 |
| 1,692,287 |
| 1,325,973 |
| 65 |
| 3,917,392 |
|
| Revenues out of scope | 4,449 |
| (781 | ) | 171 |
| — |
| 37,332 |
| — |
| 41,171 |
|
| Total external operating revenues | $ | 263,423 |
| $ | 569,656 |
| $ | 69,827 |
| $ | 1,692,287 |
| $ | 1,363,305 |
| $ | 65 |
| $ | 3,958,563 |
|
| |
| * | Intrasegment revenues are presented within the construction materials and contracting segment to highlight the focus on vertical integration as this segment sells materials to both third parties and internal customers. Due to consolidation requirements, these revenues must be eliminated against construction materials to arrive at the external operating revenue total for the segment. |
|
| | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 | Electric |
| Natural gas distribution |
| Pipeline and midstream |
| Construction materials and contracting |
| Construction services |
| Other |
| Total |
|
| | (In thousands) |
| Residential utility sales | $ | 93,359 |
| $ | 305,399 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 398,758 |
|
| Commercial utility sales | 103,636 |
| 185,885 |
| — |
| — |
| — |
| — |
| 289,521 |
|
| Industrial utility sales | 25,734 |
| 17,457 |
| — |
| — |
| — |
| — |
| 43,191 |
|
| Other utility sales | 5,766 |
| — |
| — |
| — |
| — |
| — |
| 5,766 |
|
| Natural gas transportation | — |
| 32,104 |
| 64,505 |
| — |
| — |
| — |
| 96,609 |
|
| Natural gas gathering | — |
| — |
| 6,900 |
| — |
| — |
| — |
| 6,900 |
|
| Natural gas storage | — |
| — |
| 8,563 |
| — |
| — |
| — |
| 8,563 |
|
| Contracting services | — |
| — |
| — |
| 730,628 |
| — |
| — |
| 730,628 |
|
| Construction materials | — |
| — |
| — |
| 1,100,185 |
| — |
| — |
| 1,100,185 |
|
| Intrasegment eliminations* | — |
| — |
| — |
| (363,877 | ) | — |
| — |
| (363,877 | ) |
| Inside specialty contracting | — |
| — |
| — |
| — |
| 667,664 |
| — |
| 667,664 |
|
| Outside specialty contracting | — |
| — |
| — |
| — |
| 283,432 |
| — |
| 283,432 |
|
| Other | 22,836 |
| 10,821 |
| 13,353 |
| — |
| 32 |
| 8,536 |
| 55,578 |
|
| Intersegment eliminations | — |
| — |
| (31,485 | ) | (501 | ) | (1,332 | ) | (8,343 | ) | (41,661 | ) |
| Revenues from contracts with customers | 251,331 |
| 551,666 |
| 61,836 |
| 1,466,435 |
| 949,796 |
| 193 |
| 3,281,257 |
|
| Revenues out of scope | 653 |
| 2,786 |
| 129 |
| — |
| 36,853 |
| — |
| 40,421 |
|
| Total external operating revenues | $ | 251,984 |
| $ | 554,452 |
| $ | 61,965 |
| $ | 1,466,435 |
| $ | 986,649 |
| $ | 193 |
| $ | 3,321,678 |
|
| |
| * | Intrasegment revenues are presented within the construction materials and contracting segment to highlight the focus on vertical integration as this segment sells materials to both third parties and internal customers. Due to consolidation requirements, these revenues must be eliminated against construction materials to arrive at the external operating revenue total for the segment. |
Contract balances
The timing of revenue recognition may differ from the timing of invoicing to customers. The timing of invoicing to customers does not necessarily correlate with the timing of revenues being recognized under the cost‐to‐cost method of accounting. Contracts from contracting services are billed as work progresses in accordance with agreed upon contractual terms. Generally, billing to the customer occurs contemporaneous to revenue recognition. A variance in timing of the billings may result in a contract asset or a contract liability. A contract asset occurs when revenues are recognized under the cost-to-cost measure of progress, which exceeds amounts billed on uncompleted contracts. Such amounts will be billed as standard contract terms allow, usually based on various measures of performance or achievement. A contract liability occurs when there are billings in excess of revenues recognized under the cost-to-cost measure of progress on uncompleted contracts. Contract liabilities decrease as revenue is recognized from the satisfaction of the related performance obligation. The changes in contract assets and liabilities were as follows:
| | | | September 30, 2018 |
| December 31, 2017 |
| Change |
| Location on Consolidated Balance Sheets | September 30, 2019 |
| December 31, 2018 |
| Change |
| Location on Consolidated Balance Sheets |
| | (In thousands) | | | (In thousands) | |
| Contract assets | $ | 142,376 |
| $ | 109,540 |
| $ | 32,836 |
| Receivables, net | $ | 163,437 |
| $ | 104,239 |
| $ | 59,198 |
| Receivables, net |
| Contract liabilities - current | (98,470 | ) | (84,123 | ) | (14,347 | ) | Accounts payable | (120,207 | ) | (93,901 | ) | (26,306 | ) | Accounts payable |
| Contract liabilities - noncurrent | (399 | ) | — |
| (399 | ) | Deferred credits and other liabilities - other | (25 | ) | (135 | ) | 110 |
| Deferred credits and other liabilities - other |
| Net contract assets | $ | 43,507 |
| $ | 25,417 |
| $ | 18,090 |
| | $ | 43,205 |
| $ | 10,203 |
| $ | 33,002 |
| |
AtThe Company recognized $7.5 million and $86.5 million in revenue for the three and nine months ended September 30, 2018, the Company's net contract assets increased $18.1 million compared to December 31, 2017. Included in the change of total net contract assets2019, respectively, which was an increase in contract assets due to revenue recognized in excess of billings on contracts and an increasepreviously included in contract liabilities due to billings on contracts in excess of revenues recognized.at December 31, 2018. The Company recognized $10.3 million and $79.2 million in revenue for the three and nine months ended September 30, 2018, respectively, which was previously included in contract liabilities at December 31, 2017.
The Company recognized a net increase in revenues of $21.8 million and $40.3 million for the three and nine months ended September 30, 2019, respectively, from performance obligations satisfied in prior periods. The Company recognized a net decrease in revenues of $8.7 million and $3.7 million for the three and nine months ended September 30, 2018, respectively, from performance obligations satisfied in prior periods.
Remaining performance obligations
The remaining performance obligations at the construction materials and contracting and construction services segments include unrecognized revenues the Company reasonably expects to be realized which includes projects that have a written award, a letter of intent, a notice to proceed, an agreed upon work order to perform work on mutually accepted terms and conditions and change orders or claims to the extent management believes additional contract revenues will be earned and are deemed probable of
collection. Excluded from remaining performance obligations are potential orders under master service agreements. The remaining performance obligations at the pipeline and midstream segment include firm transportation and storage contracts with fixed pricing and fixed volumes.
At September 30, 2019, the Company's remaining performance obligations were $2.1 billion. The Company expects to recognize the following revenue amounts in future periods which primarily resulted from changes in estimatesrelated to these remaining performance obligations: $1.6 billion within the next 12 months; $255.0 million within the next 13 to 24 months; and $249.6 million thereafter.
The majority of variable consideration on certainthe Company's construction contracts.contracts have an original duration of less than two years. The Company's firm transportation and firm storage contracts have weighted average remaining durations of approximately five and three years, respectively.
Note 9 - AcquisitionsBusiness combinations
During 2019, the Company completed two acquisitions which were accounted for as business combinations. The following is a listing of the acquisitions made during 2019:
In April 2018,March 2019, the Company acquired Teevin & Fischer Quarry, LLC, an aggregate producer that provides crushed rock and gravel to construction and retail customers in Oregon. In June 2018, the Company acquired Tri-City Paving,Viesko Redi-Mix, Inc., a general contractor and aggregate, asphalt and ready-mixed concrete supplier in Minnesota. In July 2018, the Company acquired Molalla Redi-Mix and Rock Products, Inc., a producerprovider of ready-mixed concrete in Oregon. AsThe results of Viesko Redi-Mix, Inc. are included in the construction materials and contracting segment.
In September 30, 2018,2019, the gross aggregateCompany purchased the assets of Pride Electric, Inc., an electrical construction company in Washington. The results of Pride Electric, Inc. are included in the construction services segment.
considerationAll business combinations were accounted for these acquisitions was $27.9 million in cash, subject to certain adjustments, and 713,948 shares of common stockaccordance with a market value of $20.1 million asASC 805 - Business Combinations. The results of the respective acquisition date. Due to the holding period restriction on the common stock, the share consideration hasacquired businesses have been discounted to a fair value of approximately $18.0 million, as reflectedincluded in the Company's Consolidated Financial Statements beginning on the acquisition date. Pro forma financial statements. The acquisitions are subject to customary adjustments based on, among other things,amounts reflecting the amount of cash, debt and working capital in the businesses aseffects of the closing dates. The amounts included in the Consolidated Balance Sheets for these adjustments are considered provisional until final settlement has occurred.
The above acquisitions are considered business combinations andare not presented, as these business combinations were not material to the Company's financial position or results of operations.
For all business combinations, the Company has preliminarily allocatedallocates the purchase price of the acquisitions to identifiablethe assets acquired and liabilities assumed based on their estimated fair values as of the acquisition dates.dates and are considered provisional until final fair values are determined, or the measurement period has passed. The Company expects to record adjustments as it accumulates the information needed to estimate the fair value of assets acquired and liabilities assumed, including working capital balances, estimated fair value of identifiable intangible assets, property, plant and equipment, total consideration and goodwill. The excess of the purchase price over the aggregate fair values wasis recorded as goodwill. The Company calculated the fair value of the assets acquired in 2019 and 2018 using the income,a market or cost approach (or a combination thereof)of both). Fair values for some of the assets were determined based on Level 3 inputs including estimated future cash flows, discount rates, growth rates, sales projections, retention rates and terminal values, all of which require significant management judgment and are susceptible to change. The purchase price allocation is based upon preliminary information and is subject to change if additional information about the facts and circumstances that existed at the acquisition date becomes available. The final fair value of the net assets acquired may result in adjustments to the assets and liabilities, including goodwill. However, anygoodwill, and will be made as soon as practical, but no later than one year from the respective acquisition dates. Any subsequent measurement period adjustments are not expected to have a material impact on the Company's results of operations.
As of September 30, 2019, the gross aggregate consideration for acquisitions that occurred in 2019 was $54.5 million, subject to certain adjustments, and includes $1.2 million of debt assumed. The discount rate usedacquisitions are subject to customary adjustments based on, among other things, the amount of cash, debt and working capital in calculating the fair valuebusiness as of the common stock issued was determined by a Black-Scholes-Merton model.closing date. The model used Level 2 inputs including risk-free interest rate, volatility range and dividend yield. The results of the acquired businesses have beenamounts included in the Company's construction materialsConsolidated Balance Sheet for these adjustments are considered provisional until final settlement has occurred. The purchase price adjustments for Viesko Redi-Mix, Inc., have been settled and contracting segmentthe purchase price allocation is considered final.
During the third quarter of 2019, the Company finalized its valuation of the assets acquired and consolidated financial statements beginningliabilities assumed in conjunction with the acquisition in 2018 of Sweetman Construction Company. As a result, measurement period adjustments were made to the previously disclosed provisional fair values. These adjustments did not have a material impact on the acquisition dates. Pro forma financial amounts reflectingCompany's consolidated results of operations. The purchase price adjustments for the effects of the abovethree additional acquisitions are not presented, as such acquisitions were notin 2018 have been settled with no material adjustments made to the Company's financial position or results of operations.provisional accounting. The aggregate total consideration for the 2018 acquisitions and the final amounts allocated to the assets acquired and liabilities assumed were as follows:
|
| | | | | | | | | |
| | December 31, 2018 |
| Measurement Period Adjustments |
| September 30, 2019 |
|
| | (In thousands) |
| Assets | | | |
| Current assets: | | | |
| Receivables, net | $ | 18,984 |
| $ | — |
| $ | 18,984 |
|
| Inventories | 10,329 |
| (228 | ) | 10,101 |
|
| Prepayments and other current assets | 515 |
| (14 | ) | 501 |
|
| Total current assets | 29,828 |
| (242 | ) | 29,586 |
|
| Property, plant and equipment | 131,766 |
| 6,669 |
| 138,435 |
|
| Deferred charges and other assets: | | |
|
| Goodwill | 33,131 |
| (6,669 | ) | 26,462 |
|
| Other Intangible assets, net | 8,227 |
| — |
| 8,227 |
|
| Other | 927 |
| — |
| 927 |
|
| Total deferred charges and other assets | 42,285 |
| (6,669 | ) | 35,616 |
|
| Total assets acquired | $ | 203,879 |
| $ | (242 | ) | $ | 203,637 |
|
| Liabilities | | |
|
| Current liabilities | $ | 11,122 |
| $ | (242 | ) | $ | 10,880 |
|
| Deferred credits and other liabilities: | | |
|
| Asset retirement obligation | 914 |
| — |
| 914 |
|
| Deferred income taxes | 5,565 |
| — |
| 5,565 |
|
| Total deferred credits and other liabilities | 6,479 |
| — |
| 6,479 |
|
| Total liabilities assumed | $ | 17,601 |
| $ | (242 | ) | $ | 17,359 |
|
| Total consideration (fair value) | $ | 186,278 |
| $ | — |
| $ | 186,278 |
|
Note 10 - Discontinued operations
The assets and liabilities of the Company's discontinued operations have been classified as held for sale and the results of operations are shown in income (loss) from discontinued operations, other than certain general and administrative costs and interest expense which do not meet the criteria for income (loss) from discontinued operations. At the time the assets were classified as held for sale, depreciation, depletion and amortization expense was no longer recorded.
Dakota Prairie Refining On June 24, 2016, WBI Energy entered into a membership interest purchase agreement with Tesoro to sell all of the outstanding membership interests in Dakota Prairie Refining to Tesoro. WBI Energy and Calumet each previously owned 50 percent of the Dakota Prairie Refining membership interests and were equal members in building and operating Dakota Prairie Refinery. To effectuate the sale, WBI Energy acquired Calumet’s 50 percent membership interest in Dakota Prairie Refining on June 27, 2016. The sale of the membership interests to Tesoro closed on June 27, 2016. The sale of Dakota Prairie Refining reduced the Company’s risk by decreasing exposure to commodity prices. As of September 30, 2018, the Company incurred no material exit and disposal costs related to the sale of Dakota Prairie Refining and does not expect to incur any future material exit and disposal costs.
At September 30, 2018, Centennial continued to guarantee certain debt obligations of Dakota Prairie Refining and Tesoro continued to indemnify Centennial for any losses and litigation expenses arising from the guarantee. On October 17, 2018, Centennial was released of any further liabilities or obligations under this guarantee. For more information related to the guarantee, see Note 17.
The carrying amounts of the major classes of assets and liabilities classified as held for sale, related to the operations of and activity associated with Dakota Prairie Refining, on the Consolidated Balance Sheets were as follows:
|
| | | | | | | | | |
| | September 30, 2018 |
| September 30, 2017 |
| December 31, 2017 |
|
| | (In thousands) |
| Assets | | | |
| Current assets: | | | |
| Income taxes receivable (a) | $ | 1,640 |
| $ | 8,444 |
| $ | 1,778 |
|
| Total current assets held for sale | 1,640 |
| 8,444 |
| 1,778 |
|
| Total assets held for sale | $ | 1,640 |
| $ | 8,444 |
| $ | 1,778 |
|
| Liabilities | | | |
| Noncurrent liabilities: | | | |
| Deferred income taxes (b) | $ | 37 |
| $ | 55 |
| $ | 37 |
|
| Total noncurrent liabilities held for sale | 37 |
| 55 |
| 37 |
|
| Total liabilities held for sale | $ | 37 |
| $ | 55 |
| $ | 37 |
|
| |
(a) | On the Company's Consolidated Balance Sheets, these amounts were reclassified to taxes payable and are reflected in current liabilities held for sale. |
| |
(b) | On the Company's Consolidated Balance Sheets, these amounts were reclassified to deferred charges and other assets - deferred income taxes and are reflected in noncurrent assets held for sale. |
Fidelity In the second quarter of 2015, the Company began the marketing and sale process of Fidelity with an anticipated sale to occur within one year. Between September 2015 and March 2016, the Company entered into purchase and sale agreements to sell substantially all of Fidelity's oil and natural gas assets. The completion of these sales occurred between October 2015 and April 2016. In July 2018, the Company completed the sale of a majority of the remaining property, plant and equipment. The sale of Fidelity was part of the Company's strategic plan to grow its capital investments in the remaining business segments and to focus on creating a greater long-term value.
Dakota Prairie Refining and Fidelity The carrying amounts of the major classes of assets and liabilities classified as held for sale related to the operations of Fidelity, on the Consolidated Balance Sheets were as follows:
| | | | September 30, 2018 |
| September 30, 2017 |
| December 31, 2017 |
| September 30, 2019 |
| September 30, 2018 |
| December 31, 2018 |
|
| | (In thousands) | (In thousands) |
| Assets | | |
| Current assets: | | |
| Receivables, net | $ | 571 |
| $ | 304 |
| $ | 479 |
| $ | 426 |
| $ | 571 |
| $ | 430 |
|
| Income taxes receivable (a) | | — |
| 1,640 |
| — |
|
| Total current assets held for sale | 571 |
| 304 |
| 479 |
| 426 |
| 2,211 |
| 430 |
|
| Noncurrent assets: | | |
| Net property, plant and equipment | — |
| 2,064 |
| 1,631 |
| |
| Deferred income taxes | 1,711 |
| 62,163 |
| 2,637 |
| 1,926 |
| 1,711 |
| 1,926 |
|
| Other | 161 |
| 161 |
| 161 |
| 161 |
| 161 |
| 161 |
|
| Total noncurrent assets held for sale | 1,872 |
| 64,388 |
| 4,429 |
| 2,087 |
| 1,872 |
| 2,087 |
|
| Total assets held for sale | $ | 2,443 |
| $ | 64,692 |
| $ | 4,908 |
| $ | 2,513 |
| $ | 4,083 |
| $ | 2,517 |
|
| Liabilities | | |
| Current liabilities: | | |
| Accounts payable | $ | 188 |
| $ | 68 |
| $ | 30 |
| $ | — |
| $ | 188 |
| $ | 80 |
|
| Taxes payable | 7,463 |
| 11,745 |
| 10,857 |
| 1,300 |
| 7,463 |
| 1,451 |
|
| Other accrued liabilities | 1,948 |
| 2,380 |
| 2,884 |
| 2,093 |
| 1,948 |
| 2,470 |
|
| Total current liabilities held for sale | 9,599 |
| 14,193 |
| 13,771 |
| 3,393 |
| 9,599 |
| 4,001 |
|
| Noncurrent liabilities: | | |
| Deferred income taxes (b) | | — |
| 37 |
| — |
|
| Total noncurrent liabilities held for sale | | — |
| 37 |
| — |
|
| Total liabilities held for sale | $ | 9,599 |
| $ | 14,193 |
| $ | 13,771 |
| $ | 3,393 |
| $ | 9,636 |
| $ | 4,001 |
|
| |
| (a) | On the Company's Consolidated Balance Sheets, these amounts were reclassified to taxes payable and are reflected in current liabilities held for sale. |
| |
| (b) | On the Company's Consolidated Balance Sheets, these amounts were reclassified to deferred charges and other assets - deferred income taxes and are reflected in noncurrent assets held for sale. |
The Company's deferred tax assets included in assets held for sale were largely comprised of federal and state net operating loss carryforwards. The Company realized substantially all of the outstanding net operating loss carryforwards in 2017.
The Company has incurred $10.5 million of exit and disposal costs to date. As of September 30, 2018, the Company has incurred no exit and disposal costs for the year. As of September 30, 2017, the Company had incurred no exit and disposal costs for the year. The Company does not expect to incur any additional material exit and disposal costs related to the sale of Fidelity. The exit and disposal costs are associated with severance and other related matters.
Dakota Prairie Refining and Fidelity The reconciliation of the major classes of income and expense constituting pretax income (loss) from discontinued operations which includes Dakota Prairie Refining and Fidelity, to the after-tax income (loss) from discontinued operations on the Consolidated Statements of Income was as follows:
|
| | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | |
| | September 30, | | September 30, | |
| | 2018 |
| 2017 |
| | 2018 |
| 2017 |
| |
| | (In thousands) | |
| Operating revenues | $ | 61 |
| $ | 121 |
| | $ | 201 |
| $ | 356 |
| |
| Operating expenses | 216 |
| 384 |
| | 825 |
| (4,988 | ) | |
| Operating income (loss) | (155 | ) | (263 | ) | | (624 | ) | 5,344 |
| |
| Other income (expense) | — |
| — |
| | 12 |
| (13 | ) | |
| Interest expense | — |
| — |
| | 575 |
| 239 |
| |
| Income (loss) from discontinued operations before income taxes | (155 | ) | (263 | ) | | (1,187 | ) | 5,092 |
| |
| Income taxes | (37 | ) | 1,935 |
| * | (1,272 | ) | 8,794 |
| * |
| Income (loss) from discontinued operations | $ | (118 | ) | $ | (2,198 | ) | | $ | 85 |
| $ | (3,702 | ) | |
| |
* | Includes the eliminations for the presentation of income tax adjustments between continuing and discontinued operations. |
|
| | | | | | | | | | | | |
| | Three Months Ended | Nine Months Ended |
| | September 30, | September 30, |
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | (In thousands) |
| Operating revenues | $ | 230 |
| $ | 61 |
| $ | 298 |
| $ | 201 |
|
| Operating expenses | (1,760 | ) | 216 |
| 264 |
| 825 |
|
| Operating income (loss) | 1,990 |
| (155 | ) | 34 |
| (624 | ) |
| Other income | — |
| — |
| — |
| 12 |
|
| Interest expense | — |
| — |
| — |
| 575 |
|
| Income (loss) from discontinued operations before income taxes | 1,990 |
| (155 | ) | 34 |
| (1,187 | ) |
| Income taxes | 481 |
| (37 | ) | 8 |
| (1,272 | ) |
| Income (loss) from discontinued operations | $ | 1,509 |
| $ | (118 | ) | $ | 26 |
| $ | 85 |
|
Note 11 - Leases
Most of the leases the Company enters into are for equipment, buildings, easements and vehicles as part of their ongoing operations. The Company retainedalso leases certain liabilitiesequipment to third parties through its utility and construction services segments. The Company determines if an arrangement contains a lease at inception of Dakota Prairie Refining.a contract and accounts for all leases in accordance with ASC 842 - Leases. InFor more information on the first quarteradoption of 2017,ASC 842, see Note 6.
The recognition of leases requires the Company to make estimates and assumptions that affect the lease classification and the assets and liabilities recorded. The accuracy of lease assets and liabilities reported on the Consolidated Financial Statements depends on, among other things, management's estimates of interest rates used to discount the lease assets and liabilities to their present value, as well as the lease terms based on the unique facts and circumstances of each lease.
Lessee accounting
The leases the Company has entered into as part of its ongoing operations are considered operating leases and are recognized on the balance sheet as right-of-use assets, current lease liabilities and, if applicable, noncurrent lease liabilities. Lease liabilities and their corresponding right-of-use assets are recorded a reversalbased on the present value of lease payments over the expected lease term. The Company determines the lease term based on the non-cancelable and cancelable periods in each contract. The non-cancelable period consists of the previously accrued liabilityterm of $7.0 million ($4.3 million after tax) duethe contract that is legally enforceable and cannot be canceled by either party without incurring a significant penalty. The cancelable period is determined by various factors that are based on who has the right to cancel a contract. If only the lessor has the right to cancel the contract, the Company will assume the contract will continue. If the lessee is the only party that has the right to cancel the contract, the Company looks to asset, entity and market-based factors. If both the lessor and the lessee have the right to cancel the contract, the Company assumes the contract will not continue.
Generally, the leases for vehicles and equipment have a term of five years or less and buildings and easements have a longer term of up to 35 years or more. To date, the Company does not have any residual value guarantee amounts probable of being owed to a lessor, financing leases or material agreements with related parties.
The Company has elected to recognize leases with an original lease term of 12 months or less in income on a straight-line basis over the term of the lease and not recognize a corresponding right-of-use asset or lease liability. Lease costs are included in operation and maintenance expense on the Company's Consolidated Statements of Income. The discount rate used to calculate the present value of the lease liabilities is based upon the implied rate within each contract. If the rate is unknown or cannot be determined, the Company uses an incremental borrowing rate which is determined by the length of the contract, asset class and the Company's borrowing rates as of the commencement date of the contract.
The following tables provide information on the Company's operating leases:
|
| | | | | | |
| | Three Months Ended | Nine Months Ended |
| | September 30, | September 30, |
| | 2019 | 2019 |
| | (In thousands) |
| Lease costs: | | |
| Operating lease cost | $ | 10,536 |
| $ | 32,444 |
|
| Variable lease cost | 381 |
| 1,180 |
|
| Short-term lease cost | 28,270 |
| 85,982 |
|
| Total lease costs | $ | 39,187 |
| $ | 119,606 |
|
|
| | | |
| | September 30, 2019 |
|
| | (Dollars in thousands) |
| Weighted average remaining lease term | 2.98 years |
|
| Weighted average discount rate | 4.63 | % |
| Cash paid for amounts included in the measurement of lease liabilities | $ | 32,261 |
|
The reconciliation of the future undiscounted cash flows to the resolutionoperating lease liabilities presented on the Company's Consolidated Balance Sheet at September 30, 2019, was as follows:
|
| | | |
| | (In thousands) |
| Remainder of 2019 | $ | 10,619 |
|
| 2020 | 32,605 |
|
| 2021 | 23,488 |
|
| 2022 | 15,838 |
|
| 2023 | 9,913 |
|
| Thereafter | 54,765 |
|
| Total | 147,228 |
|
| Less discount | 28,478 |
|
| Total operating lease liabilities | $ | 118,750 |
|
As previously disclosed in the 2018 Annual Report, the undiscounted annual minimum lease payments due under the Company's leases following the previous lease accounting standard as of December 31, 2018, were as follows:
|
| | | | | | | | | | | | | | | | | | |
| | 2019 |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| Thereafter |
|
| | (In thousands) |
| Operating leases | $ | 37,740 |
| $ | 26,255 |
| $ | 17,868 |
| $ | 11,647 |
| $ | 7,278 |
| $ | 49,098 |
|
Lessor accounting
The Company leases certain equipment to third parties which are considered operating leases. The Company recognized revenue from operating leases of $11.2 million and $37.7 million for the three and nine months ended September 30, 2019, respectively.
The majority of the Company's operating leases are short-term leases of less than 12 months. At September 30, 2019, the Company had $10.0 million of lease receivables with a legal matter.majority due within 12 months.
Note 1112 - Goodwill and other intangible assets
The changes in the carrying amount of goodwill were as follows:
|
| | | | | | | | | |
| Nine Months Ended September 30, 2018 | Balance at January 1, 2018 |
| Goodwill Acquired
During the Year* |
| Balance at September 30, 2018 |
|
| | (In thousands) |
| Natural gas distribution | $ | 345,736 |
| $ | — |
| $ | 345,736 |
|
| Construction materials and contracting | 176,290 |
| 8,412 |
| 184,702 |
|
| Construction services | 109,765 |
| — |
| 109,765 |
|
| Total | $ | 631,791 |
| $ | 8,412 |
| $ | 640,203 |
|
| |
* | Relates to business acquisitions that occurred during the period, as discussed in Note 9.
|
|
| | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 | Balance at January 1, 2019 |
| Goodwill Acquired
During the Year |
| Measurement Period Adjustments |
| Balance at September 30, 2019 |
|
| | (In thousands) |
| Natural gas distribution | $ | 345,736 |
| $ | — |
| $ | — |
| $ | 345,736 |
|
| Construction materials and contracting | 209,421 |
| 14,473 |
| (6,669 | ) | 217,225 |
|
| Construction services | 109,765 |
| 8,623 |
| — |
| 118,388 |
|
| Total | $ | 664,922 |
| $ | 23,096 |
| $ | (6,669 | ) | $ | 681,349 |
|
| | | Nine Months Ended September 30, 2017 | Balance at January 1, 2017 |
| Goodwill Acquired
During the Year |
| Balance at September 30, 2017 |
| |
| Nine Months Ended September 30, 2018 | | Balance at January 1, 2018 |
| Goodwill Acquired
During the Year |
| Measurement Period Adjustments |
| Balance at September 30, 2018 |
|
| | (In thousands) | (In thousands) |
| Natural gas distribution | $ | 345,736 |
| $ | — |
| $ | 345,736 |
| $ | 345,736 |
| $ | — |
| $ | — |
| $ | 345,736 |
|
| Construction materials and contracting | 176,290 |
| — |
| 176,290 |
| 176,290 |
| 8,412 |
| — |
| 184,702 |
|
| Construction services | 109,765 |
| — |
| 109,765 |
| 109,765 |
| — |
| — |
| 109,765 |
|
| Total | $ | 631,791 |
| $ | — |
| $ | 631,791 |
| $ | 631,791 |
| $ | 8,412 |
| $ | — |
| $ | 640,203 |
|
| | | Year Ended December 31, 2017 | Balance at January 1, 2017 |
| Goodwill Acquired
During the Year |
| Balance at December 31, 2017 |
| |
| Year Ended December 31, 2018 | | Balance at January 1, 2018 |
| Goodwill Acquired
During the Year |
| Measurement Period Adjustments |
| Balance at December 31, 2018 |
|
| | (In thousands) | (In thousands) |
| Natural gas distribution | $ | 345,736 |
| $ | — |
| $ | 345,736 |
| $ | 345,736 |
| $ | — |
| $ | — |
| $ | 345,736 |
|
| Construction materials and contracting | 176,290 |
| — |
| 176,290 |
| 176,290 |
| 33,131 |
| — |
| 209,421 |
|
| Construction services | 109,765 |
| — |
| 109,765 |
| 109,765 |
| — |
| — |
| 109,765 |
|
| Total | $ | 631,791 |
| $ | — |
| $ | 631,791 |
| $ | 631,791 |
| $ | 33,131 |
| $ | — |
| $ | 664,922 |
|
During 2019 and 2018, the Company completed two and four business combinations, respectively, and the results of these acquisitions have been included in the Company's construction materials and contracting and construction services segments. These business combinations increased the construction materials and contracting segment's goodwill balance at September 30, 2019 and 2018, and December 31, 2018, and increased the construction services segment's goodwill balance at September 30, 2019, as noted in the previous tables. As a result of the business combinations, other intangible assets increased $6.3 million at September 30, 2019, compared to December 31, 2018. For more information related to these business combinations, see Note 9.
Other amortizable intangible assets were as follows:
| | | | September 30, 2018 |
| September 30, 2017 |
| December 31, 2017 |
| September 30, 2019 |
| September 30, 2018 |
| December 31, 2018 |
|
| | (In thousands) | (In thousands) |
| Customer relationships | $ | 15,920 |
| $ | 15,248 |
| $ | 15,248 |
| $ | 18,011 |
| $ | 15,920 |
| $ | 22,720 |
|
| Less accumulated amortization | 13,342 |
| 13,176 |
| 13,382 |
| 5,823 |
| 13,342 |
| 13,535 |
|
| | 2,578 |
| 2,072 |
| 1,866 |
| 12,188 |
| 2,578 |
| 9,185 |
|
| Noncompete agreements | 2,606 |
| 2,430 |
| 2,430 |
| 3,419 |
| 2,606 |
| 2,605 |
|
| Less accumulated amortization | 1,911 |
| 1,769 |
| 1,805 |
| 1,868 |
| 1,911 |
| 1,956 |
|
| | 695 |
| 661 |
| 625 |
| 1,551 |
| 695 |
| 649 |
|
| Other | 6,458 |
| 7,020 |
| 6,990 |
| 7,488 |
| 6,458 |
| 6,458 |
|
| Less accumulated amortization | 5,413 |
| 5,544 |
| 5,644 |
| 5,716 |
| 5,413 |
| 5,477 |
|
| | 1,045 |
| 1,476 |
| 1,346 |
| 1,772 |
| 1,045 |
| 981 |
|
| Total | $ | 4,318 |
| $ | 4,209 |
| $ | 3,837 |
| $ | 15,511 |
| $ | 4,318 |
| $ | 10,815 |
|
Amortization expense for amortizable intangible assets for the three and nine months ended September 30, 2019, was $500,000 and $1.6 million, respectively. Amortization expense for amortizable intangible assets for the three and nine months ended September 30, 2018, was $300,000 and $900,000, respectively. Amortization expense for amortizable intangible assets for the three and nine months ended September 30, 2017, was $500,000 and $1.7 million, respectively. Estimated amortization expense for amortizableidentifiable intangible assets is $1.4 million in 2018, $1.2 million inas of September 30, 2019, $600,000 in 2020, $400,000 in 2021, $400,000 in 2022 and $1.2 million thereafter.was:
|
| | | | | | | | | | | | | | | | | | |
| | Remainder of 2019 |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| Thereafter |
|
| | (In thousands) |
| Amortization expense | $ | 931 |
| $ | 3,077 |
| $ | 2,042 |
| $ | 1,996 |
| $ | 1,957 |
| $ | 5,508 |
|
Note 13 - Regulatory assets and liabilities
The following table summarizes the individual components of unamortized regulatory assets and liabilities:
|
| | | | | | | | |
| | Estimated Recovery Period | * | September 30, 2019 |
| December 31, 2018 |
|
| | | | (In thousands) |
| Regulatory assets: | | | | |
| Pension and postretirement benefits (a) | (e) | | $ | 165,843 |
| $ | 165,898 |
|
Natural gas costs recoverable through rate adjustments (a) (b)
| Up to 3 years | | 93,001 |
| 42,652 |
|
| Asset retirement obligations (a) | Over plant lives | | 64,771 |
| 60,097 |
|
| Cost recovery mechanisms (a) (b) | Up to 4 years | | 20,912 |
| 17,948 |
|
| Manufactured gas plant site remediation (a) | - | | 15,739 |
| 17,068 |
|
| Taxes recoverable from customers (a) | Over plant lives | | 11,600 |
| 11,946 |
|
| Plants to be retired (a) | - | | 26,152 |
| — |
|
| Conservation programs (b) | Up to 1 year | | 9,467 |
| 7,494 |
|
| Long-term debt refinancing costs (a) | Up to 19 years | | 4,439 |
| 4,898 |
|
| Costs related to identifying generation development (a) | Up to 8 years | | 2,166 |
| 2,508 |
|
| Other (a) (b) | Up to 20 years | | 17,501 |
| 9,608 |
|
| Total regulatory assets | | | $ | 431,591 |
| $ | 340,117 |
|
| Regulatory liabilities: | | | | |
| Taxes refundable to customers (c) (d) | | | $ | 258,012 |
| $ | 277,833 |
|
| Plant removal and decommissioning costs (c) (d) | | | 176,016 |
| 173,143 |
|
| Natural gas costs refundable through rate adjustments (d) | | | 19,194 |
| 29,995 |
|
| Pension and postretirement benefits (c) | | | 12,942 |
| 15,264 |
|
| Other (c) (d) | | | 24,153 |
| 25,197 |
|
| Total regulatory liabilities | | | $ | 490,317 |
| $ | 521,432 |
|
| Net regulatory position | | | $ | (58,726 | ) | $ | (181,315 | ) |
| |
| * | Estimated recovery period for regulatory assets currently being recovered in rates charged to customers. |
| |
| (a) | Included in deferred charges and other assets - other on the Consolidated Balance Sheets. |
| |
| (b) | Included in prepayments and other current assets on the Consolidated Balance Sheets. |
| |
| (c) | Included in deferred credits and other liabilities - other on the Consolidated Balance Sheets. |
| |
| (d) | Included in other accrued liabilities on the Consolidated Balance Sheets. |
| |
| (e) | Recovered as expense is incurred or cash contributions are made. |
The regulatory assets are expected to be recovered in rates charged to customers. A portion of the Company's regulatory assets are not earning a return; however, these regulatory assets are expected to be recovered from customers in future rates. As of September 30, 2019 and December 31, 2018, approximately $278.2 million and $313.5 million, respectively, of regulatory assets were not earning a rate of return.
During the first quarter of 2019 and the fourth quarter of 2018, the Company experienced increased natural gas costs in certain jurisdictions where it supplies natural gas. The Company has recorded these natural gas costs as regulatory assets as they are expected to be recovered from customers, as discussed in Note 19.
In February 2019, the Company announced that it intends to retire three aging coal-fired electric generation units within the next three years. The Company has accelerated the depreciation related to these facilities in property, plant and equipment and has recorded the difference between the accelerated depreciation, in accordance with GAAP, and the depreciation approved for rate-making purposes as regulatory assets. The Company expects to recover the regulatory assets related to the plants to be retired in future rates.
If, for any reason, the Company's regulated businesses cease to meet the criteria for application of regulatory accounting for all or part of their operations, the regulatory assets and liabilities relating to those portions ceasing to meet such criteria would be removed from the balance sheet and included in the statement of income or accumulated other comprehensive income (loss) in the period in which the discontinuance of regulatory accounting occurs.
Note 1214 - Fair value measurements
The Company measures its investments in certain fixed-income and equity securities at fair value with changes in fair value recognized in income. The Company anticipates using these investments, which consist of an insurance contract, to satisfy its obligations under its unfunded, nonqualified benefit plans for executive officers and certain key management employees, and invests in these fixed-income and equity securities for the purpose of earning investment returns and capital appreciation. These investments, which totaled $84.2 million, $80.4 million $75.0 million and $77.4$73.8 million, at September 30, 20182019 and 2017,2018, and December 31, 2017,2018, respectively, are classified as investments on the Consolidated Balance Sheets. The net unrealized gains on these investments were $1.1 million and $10.4 million for the three and nine months ended September 30, 2019, respectively. The net unrealized gains on these investments were $2.1 million and $3.0 million for the three and nine months ended September 30, 2018, respectively. The net unrealized gains on these investments were $1.9 million and $6.9 million for the three and nine months ended September 30, 2017, respectively. The change in fair value, which is considered part of the cost of the plan, is classified in other income on the Consolidated Statements of Income. In connection with the adoption of ASU 2017-07, as discussed in Note 6, the Company has elected to reclassify prior period unrealized gains from operation and maintenance expense to other income on the Consolidated Statements of Income.
The Company did not elect the fair value option, which records gains and losses in income, for its available-for-sale securities. The available-for-sale securities include mortgage-backed securities and U.S. Treasury securities. These available-for-sale securities are recorded at fair value and are classified as investments on the Consolidated Balance Sheets. Unrealized gains or losses are recorded in accumulated other comprehensive income (loss).loss. Details of available-for-sale securities were as follows:
| | | September 30, 2018 | Cost |
| Gross Unrealized Gains |
| Gross Unrealized Losses |
| Fair Value |
| |
| September 30, 2019 | | Cost |
| Gross Unrealized Gains |
| Gross Unrealized Losses |
| Fair Value |
|
| | (In thousands) | (In thousands) |
| Mortgage-backed securities | $ | 10,550 |
| $ | 3 |
| $ | 251 |
| $ | 10,302 |
| $ | 9,577 |
| $ | 86 |
| $ | 16 |
| $ | 9,647 |
|
| U.S. Treasury securities | 179 |
| — |
| — |
| 179 |
| 1,258 |
| — |
| 1 |
| 1,257 |
|
| Total | $ | 10,729 |
| $ | 3 |
| $ | 251 |
| $ | 10,481 |
| $ | 10,835 |
| $ | 86 |
| $ | 17 |
| $ | 10,904 |
|
| | | September 30, 2017 | Cost |
| Gross Unrealized Gains |
| Gross Unrealized Losses |
| Fair Value |
| |
| September 30, 2018 | | Cost |
| Gross Unrealized Gains |
| Gross Unrealized Losses |
| Fair Value |
|
| | (In thousands) | (In thousands) |
| Mortgage-backed securities | $ | 9,488 |
| $ | 11 |
| $ | 72 |
| $ | 9,427 |
| $ | 10,550 |
| $ | 3 |
| $ | 251 |
| $ | 10,302 |
|
| U.S. Treasury securities | 613 |
| — |
| 1 |
| 612 |
| 179 |
| — |
| — |
| 179 |
|
| Total | $ | 10,101 |
| $ | 11 |
| $ | 73 |
| $ | 10,039 |
| $ | 10,729 |
| $ | 3 |
| $ | 251 |
| $ | 10,481 |
|
| | | December 31, 2017 | Cost |
| Gross Unrealized Gains |
| Gross Unrealized Losses |
| Fair Value |
| |
| December 31, 2018 | | Cost |
| Gross Unrealized Gains |
| Gross Unrealized Losses |
| Fair Value |
|
| | (In thousands) | (In thousands) |
| Mortgage-backed securities | $ | 10,342 |
| $ | 4 |
| $ | 129 |
| $ | 10,217 |
| $ | 10,473 |
| $ | 21 |
| $ | 162 |
| $ | 10,332 |
|
| U.S. Treasury securities | 205 |
| — |
| 1 |
| 204 |
| 179 |
| — |
| — |
| 179 |
|
| Total | $ | 10,547 |
| $ | 4 |
| $ | 130 |
| $ | 10,421 |
| $ | 10,652 |
| $ | 21 |
| $ | 162 |
| $ | 10,511 |
|
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The fair value ASC establishes a hierarchy for grouping assets and liabilities, based on the significance of inputs. The estimated fair values of the Company's assets and liabilities measured on a recurring basis are determined using the market approach. The Company's Level 2 money market funds are valued at the net asset value of shares held at the end of the quarter, based on published market quotations on active markets, or using other known sources including pricing from outside sources. The estimated fair value of the Company's Level 2 mortgage-backed securities and U.S. Treasury securities are based on comparable market transactions, other observable inputs or other sources, including pricing from outside sources. The estimated fair value of the Company's Level 2 insurance contract is based on contractual cash surrender values that are determined primarily by investments in managed separate accounts of the insurer. These amounts approximate fair value. The managed separate accounts are valued based on other observable inputs or corroborated market data.
Though the Company believes the methods used to estimate fair value are consistent with those used by other market participants, the use of other methods or assumptions could result in a different estimate of fair value. For the nine months ended September 30, 20182019 and 2017,2018, there were no transfers between Levels 1 and 2.
The Company's assets and liabilities measured at fair value on a recurring basis were as follows:
| | | | Fair Value Measurements at September 30, 2018, Using | | Fair Value Measurements at September 30, 2019, Using | |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) |
| Significant Other Observable Inputs (Level 2) |
| Significant Unobservable Inputs (Level 3) |
| Balance at September 30, 2018 |
| Quoted Prices in Active Markets for Identical Assets (Level 1) |
| Significant Other Observable Inputs (Level 2) |
| Significant Unobservable Inputs (Level 3) |
| Balance at September 30, 2019 |
|
| | (In thousands) | (In thousands) |
| Assets: | | |
| Money market funds | $ | — |
| $ | 9,948 |
| $ | — |
| $ | 9,948 |
| $ | — |
| $ | 7,472 |
| $ | — |
| $ | 7,472 |
|
| Insurance contract* | — |
| 80,358 |
| — |
| 80,358 |
| — |
| 84,222 |
| — |
| 84,222 |
|
| Available-for-sale securities: | | |
| Mortgage-backed securities | — |
| 10,302 |
| — |
| 10,302 |
| — |
| 9,647 |
| — |
| 9,647 |
|
| U.S. Treasury securities | — |
| 179 |
| — |
| 179 |
| — |
| 1,257 |
| — |
| 1,257 |
|
| Total assets measured at fair value | $ | — |
| $ | 100,787 |
| $ | — |
| $ | 100,787 |
| $ | — |
| $ | 102,598 |
| $ | — |
| $ | 102,598 |
|
| |
| * | The insurance contract invests approximately 53 percent in fixed-income investments, 21 percent in common stock of large-cap companies, 11 percent in common stock of mid-cap companies, 10 percent in common stock of small-cap companies, 3 percent in target date investments and 2 percent in cash equivalents. |
|
| | | | | | | | | | | | |
| | Fair Value Measurements at September 30, 2018, Using | |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) |
| Significant Other Observable Inputs (Level 2) |
| Significant Unobservable Inputs (Level 3) |
| Balance at September 30, 2018 |
|
| | (In thousands) |
| Assets: | | | | |
| Money market funds | $ | — |
| $ | 9,948 |
| $ | — |
| $ | 9,948 |
|
| Insurance contract* | — |
| 80,358 |
| — |
| 80,358 |
|
| Available-for-sale securities: | | | | |
| Mortgage-backed securities | — |
| 10,302 |
| — |
| 10,302 |
|
| U.S. Treasury securities | — |
| 179 |
| — |
| 179 |
|
| Total assets measured at fair value | $ | — |
| $ | 100,787 |
| $ | — |
| $ | 100,787 |
|
| |
| * | The insurance contract invests approximately 47 percent in fixed-income investments, 24 percent in common stock of large-cap companies, 13 percent in common stock of mid-cap companies, 12 percent in common stock of small-cap companies, 3 percent in target date investments and 1 percent in cash equivalents. |
| | | | Fair Value Measurements at September 30, 2017, Using | | Fair Value Measurements at December 31, 2018, Using | |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) |
| Significant Other Observable Inputs (Level 2) |
| Significant Unobservable Inputs (Level 3) |
| Balance at September 30, 2017 |
| Quoted Prices in Active Markets for Identical Assets (Level 1) |
| Significant Other Observable Inputs (Level 2) |
| Significant Unobservable Inputs (Level 3) |
| Balance at December 31, 2018 |
|
| | (In thousands) | (In thousands) |
| Assets: | | |
| Money market funds | $ | — |
| $ | 6,204 |
| $ | — |
| $ | 6,204 |
| $ | — |
| $ | 10,799 |
| $ | — |
| $ | 10,799 |
|
| Insurance contract* | — |
| 74,991 |
| — |
| 74,991 |
| — |
| 73,838 |
| — |
| 73,838 |
|
| Available-for-sale securities: | | |
| Mortgage-backed securities | — |
| 9,427 |
| — |
| 9,427 |
| — |
| 10,332 |
| — |
| 10,332 |
|
| U.S. Treasury securities | — |
| 612 |
| — |
| 612 |
| — |
| 179 |
| — |
| 179 |
|
| Total assets measured at fair value | $ | — |
| $ | 91,234 |
| $ | — |
| $ | 91,234 |
| $ | — |
| $ | 95,148 |
| $ | — |
| $ | 95,148 |
|
| |
| * | The insurance contract invests approximately 5053 percent in fixed-income investments, 2321 percent in common stock of large-cap companies, 1311 percent in common stock of mid-cap companies, 1110 percent in common stock of small-cap companies, 23 percent in target date investments and 12 percent in cash equivalents. |
The Company applies the provisions of the fair value measurement standard to its nonrecurring, non-financial measurements, including long-lived asset impairments. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. The Company reviews the carrying value of its long-lived assets, excluding goodwill, whenever events or changes in circumstances indicate that such carrying amounts may not be recoverable.
|
| | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2017, Using | |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) |
| Significant Other Observable Inputs (Level 2) |
| Significant Unobservable Inputs (Level 3) |
| Balance at December 31, 2017 |
|
| | (In thousands) |
| Assets: | | | | |
| Money market funds | $ | — |
| $ | 6,965 |
| $ | — |
| $ | 6,965 |
|
| Insurance contract* | — |
| 77,388 |
| — |
| 77,388 |
|
| Available-for-sale securities: | | | | |
| Mortgage-backed securities | — |
| 10,217 |
| — |
| 10,217 |
|
| U.S. Treasury securities | — |
| 204 |
| — |
| 204 |
|
| Total assets measured at fair value | $ | — |
| $ | 94,774 |
| $ | — |
| $ | 94,774 |
|
| |
* | The insurance contract invests approximately 49 percent in fixed-income investments, 23 percent in common stock of large-cap companies, 14 percent in common stock of mid-cap companies, 11 percent in common stock of small-cap companies, 2 percent in target date investments and 1 percent in cash equivalents. |
The Company's long-term debt is not measured at fair value on the Consolidated Balance Sheets and the fair value is being provided for disclosure purposes only. The fair value was categorized as Level 2 in the fair value hierarchy and was based on discounted future cash flows using current market interest rates. The estimated fair value of the Company's Level 2 long-term debt was as follows:
|
| | | | | | |
| | Carrying Amount |
| Fair Value |
|
| | (In thousands) |
| Long-term debt at September 30, 2018 | $ | 1,915,470 |
| $ | 1,987,360 |
|
| Long-term debt at September 30, 2017 | $ | 1,740,552 |
| $ | 1,846,811 |
|
| Long-term debt at December 31, 2017 | $ | 1,714,853 |
| $ | 1,826,256 |
|
|
| | | | | | |
| | Carrying Amount |
| Fair Value |
|
| | (In thousands) |
| Long-term debt at September 30, 2019 | $ | 2,246,756 |
| $ | 2,450,209 |
|
| Long-term debt at September 30, 2018 | $ | 1,915,470 |
| $ | 1,987,360 |
|
| Long-term debt at December 31, 2018 | $ | 2,108,695 |
| $ | 2,183,819 |
|
The carrying amounts of the Company's remaining financial instruments included in current assets and current liabilities approximate their fair values.
Note 15 - Debt
Certain debt instruments of the Company's subsidiaries contain restrictive covenants and cross-default provisions. In order to borrow under the respective debt instruments, the subsidiary companies must be in compliance with the applicable covenants and certain other conditions all of which the subsidiaries, as applicable, were in compliance with at September 30, 2019. In the event the Company's subsidiaries do not comply with the applicable covenants and other conditions, alternative sources of funding may need to be pursued.
Montana-Dakota's and Centennial's respective commercial paper programs are supported by revolving credit agreements. While the amount of commercial paper outstanding does not reduce available capacity under the respective revolving credit agreements, Montana-Dakota and Centennial do not issue commercial paper in an aggregate amount exceeding the available capacity under their respective credit agreements. The commercial paper borrowings may vary during the period, largely the result of fluctuations in working capital requirements due to the seasonality of the construction businesses.
Short-term debt
The following describes certain transactions during the three and nine months ended September 30, 2019, included in outstanding short-term debt:
| |
| • | On March 22, 2019, Cascade entered into a $40.0 million term loan agreement with a variable interest rate and a maturity date of December 31, 2019. |
| |
| • | On April 12, 2019, Centennial entered into a $50.0 million term loan agreement with a variable interest rate and a maturity date of April 11, 2020. |
| |
| • | On August 7, 2019, Centennial entered into a $50.0 million term loan agreement with a variable interest rate and a maturity date of January 31, 2020. |
Long-term debt
The following describes certain transactions during the three and nine months ended September 30, 2019, included in outstanding long-term debt:
| |
| • | On April 4, 2019, Centennial issued $150.0 million of senior notes with maturity dates ranging from April 4, 2029 to April 4, 2034, at a weighted average interest rate of 4.60 percent. |
| |
| • | On June 7, 2019, Cascade amended its revolving credit agreement to increase the borrowing limit from $75.0 million to $100.0 million and extend the termination date from April 24, 2020 to June 7, 2024. |
On June 7, 2019, Intermountain amended its revolving credit agreement to extend the termination date from April 24, 2020 to June 7, 2024.
| |
| • | On June 13, 2019, Cascade issued $75.0 million of senior notes with maturity dates ranging from June 13, 2029 to June 13, 2049, at a weighted average interest rate of 3.93 percent. |
| |
| • | On June 13, 2019, Intermountain issued $50.0 million of senior notes with maturity dates ranging from June 13, 2029 to June 13, 2049, at a weighted average interest rate of 3.92 percent. |
Long-term Debt Outstanding Long-term debt outstanding was as follows:
|
| | | | | | | | |
| | Weighted Average Interest Rate at September 30, 2019 |
| September 30, 2019 |
| December 31, 2018 |
|
| | | (In thousands) |
| Senior notes due on dates ranging from December 15, 2019 to January 15, 2055 | 4.52 | % | $ | 1,655,000 |
| $ | 1,381,000 |
|
| Commercial paper supported by revolving credit agreements | 2.46 | % | 281,800 |
| 338,100 |
|
| Term loan agreements due on dates ranging from September 3, 2032 to November 18, 2059 | 2.75 | % | 209,100 |
| 209,800 |
|
| Credit agreements due on June 7, 2024 | 4.66 | % | 31,000 |
| 110,100 |
|
| Medium-term notes due on dates ranging from September 1, 2020 to March 16, 2029 | 6.68 | % | 50,000 |
| 50,000 |
|
| Other notes due on dates ranging from July 15, 2021 to November 30, 2038 | 5.01 | % | 26,083 |
| 25,229 |
|
| Less unamortized debt issuance costs | | 6,074 |
| 5,207 |
|
| Less discount | | 153 |
| 327 |
|
| Total long-term debt | | 2,246,756 |
| 2,108,695 |
|
| Less current maturities | | 65,810 |
| 251,854 |
|
| Net long-term debt | | $ | 2,180,946 |
| $ | 1,856,841 |
|
Schedule of Debt Maturities Long-term debt maturities, which excludes unamortized debt issuance costs and discount, as of September 30, 2019, were as follows:
|
| | | | | | | | | | | | | | | | | | |
| | Remainder of 2019 |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| Thereafter |
|
| | (In thousands) |
| Long-term debt maturities | $ | 50,110 |
| $ | 15,902 |
| $ | 204,522 |
| $ | 147,402 |
| $ | 155,502 |
| $ | 1,679,545 |
|
Note 1316 - Cash flow information
Cash expenditures for interest and income taxes were as follows:
| | | | Nine Months Ended | Nine Months Ended |
| | September 30, | September 30, |
| | 2018 |
| 2017 |
| 2019 |
| 2018 |
|
| | (In thousands) | (In thousands) |
| Interest, net* | $ | 58,359 |
| $ | 58,119 |
| $ | 64,596 |
| $ | 58,359 |
|
| Income taxes paid, net** | $ | 8,887 |
| $ | 46,430 |
| $ | 1,816 |
| $ | 8,887 |
|
| |
| * | AFUDC - borrowed was $1.8$2.0 million and $676,000$1.8 million for the nine months ended September 30, 20182019 and 2017,2018, respectively. |
| |
| ** | Income taxes paid, net ofincluding discontinued operations, were $5.1$2.0 million and $1.4$5.1 million for the nine months ended September 30, 20182019 and 2017,2018, respectively. |
Noncash investing and financing transactions were as follows:
| | | | September 30, 2018 |
| September 30, 2017 |
| December 31, 2017 |
| September 30, 2019 |
| September 30, 2018 |
| December 31, 2018 |
|
| | (In thousands) | | (In thousands) |
| Right-of-use assets obtained in exchange for new operating lease liabilities | | $ | 46,770 |
| $ | — |
| $ | — |
|
| Property, plant and equipment additions in accounts payable | $ | 34,594 |
| $ | 16,914 |
| $ | 29,263 |
| $ | 34,368 |
| $ | 34,594 |
| $ | 42,355 |
|
| Issuance of common stock in connection with acquisition | $ | 17,993 |
| $ | — |
| $ | — |
| |
| Debt assumed in connection with a business combination | | $ | 1,163 |
| $ | — |
| $ | — |
|
| Issuance of common stock in connection with a business combination | | $ | — |
| $ | 17,993 |
| $ | 18,186 |
|
Note 1417 - Business segment data
The Company's reportable segments are those that are based on the Company's method of internal reporting, which generally segregates the strategic business units due to differences in products, services and regulation. The internal reporting of these operating segments is defined based on the reporting and review process used by the Company's chief executive officer. The vast majority of the Company's operations are located within the United States.
The electric segment generates, transmits and distributes electricity in Montana, North Dakota, South Dakota and Wyoming. The natural gas distribution segment distributes natural gas in those states, as well as in Idaho, Minnesota, Oregon and Washington. These operations also supply related value-added services.
The pipeline and midstream segment provides natural gas transportation, underground storage and gathering services through regulated and nonregulated pipeline systems primarily in the Rocky Mountain and northern Great Plains regions of the United States. This segment also provides cathodic protection and other energy-related services.
The construction materials and contracting segment operations mine, processmines, processes and sellsells construction aggregates (crushed stone, sand and gravel); produceproduces and sellsells asphalt mix; and supplysupplies ready-mixed concrete. This segment focuses on vertical integration of its contracting services with its construction materials to support the aggregate based product lines including aggregate placement, asphalt and concrete paving, and site development and grading. Although not common to all locations, other products include the sale of cement, liquid asphalt for various commercial and roadway applications, various finished concrete products and other building materials and related contracting services. This segment operates in the central, southern and western United States and Alaska and Hawaii.
The construction services segment provides inside and outside specialty contracting services. Its inside services include design, construction and maintenance of electrical and communication wiring and infrastructure, fire suppression systems, and mechanical piping and services. Its outside services include design, construction and maintenance of overhead and underground electrical distribution and transmission lines, substations, external lighting, traffic signalization, and gas pipelines, as well as utility excavation and the manufacture and distribution of transmission line construction equipment. Its inside services include design, construction and maintenance of electrical and communication wiring and infrastructure, fire suppression systems, and mechanical piping and services. This segment also constructs and maintains renewable energy projects. These specialty contracting services are provided to utilities and large manufacturing, commercial, industrial, institutional and governmentgovernmental customers.
The Other category includes the activities of Centennial Capital, which, through its subsidiary InterSource Insurance Company, insures various types of risks as a captive insurer for certain of the Company's subsidiaries. The function of the captive insurer is to fund the self-insured layers of the insured Company's general liability, automobile liability, pollution liability and other coverages. Centennial Capital also owns certain real and personal property. TheIn addition, the Other category also includes certain assets, liabilities and tax adjustments of the holding company primarily associated with corporate functions and certain general and administrative costs (reflected in operation and maintenance expense) and interest expense which were previously allocated to the refining business and Fidelity andthat do not meet the criteria for income (loss) from discontinued operations. The Other category also includes Centennial Resources' former investment in Brazil.
Discontinued operations includesinclude the results and supporting activities of Dakota Prairie Refining and Fidelity other than certain general and administrative costs and interest expense as described above. For more information on discontinued operations, see Note 10.
The information below follows the same accounting policies as described in Note 1 of the Company's Notes to Consolidated Financial Statements in the 20172018 Annual Report. Information on the Company's segments was as follows:
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | Nine Months Ended |
| | September 30, | | September 30, | | September 30, |
| | 2018 |
| 2017 |
| | 2018 |
| 2017 |
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | (In thousands) | | (In thousands) |
| External operating revenues: | | | | | | | |
| Regulated operations: | | | | | |
| Electric | $ | 86,080 |
| $ | 91,531 |
| | $ | 251,984 |
| $ | 254,330 |
| | $ | 89,845 |
| $ | 86,080 |
| $ | 263,423 |
| $ | 251,984 |
|
| Natural gas distribution | 92,248 |
| 92,253 |
| | 554,452 |
| 566,364 |
| | 93,642 |
| 92,248 |
| 569,656 |
| 554,452 |
|
| Pipeline and midstream | 22,289 |
| 23,152 |
| | 45,325 |
| 45,341 |
| | 25,957 |
| 22,289 |
| 52,230 |
| 45,325 |
|
| | 200,617 |
| 206,936 |
| | 851,761 |
| 866,035 |
| | 209,444 |
| 200,617 |
| 885,309 |
| 851,761 |
|
| Nonregulated operations: | | | | | |
| Pipeline and midstream | 6,782 |
| 5,356 |
| | 16,640 |
| 13,518 |
| | 6,576 |
| 6,782 |
| 17,597 |
| 16,640 |
|
| Construction materials and contracting | 743,763 |
| 686,010 |
| | 1,466,435 |
| 1,388,212 |
| | 869,376 |
| 743,763 |
| 1,692,287 |
| 1,466,435 |
|
| Construction services | 329,578 |
| 374,111 |
| | 986,649 |
| 1,009,693 |
| | 478,381 |
| 329,578 |
| 1,363,305 |
| 986,649 |
|
| Other | 47 |
| 135 |
| | 193 |
| 654 |
| | 22 |
| 47 |
| 65 |
| 193 |
|
| | 1,080,170 |
| 1,065,612 |
| | 2,469,917 |
| 2,412,077 |
| | 1,354,355 |
| 1,080,170 |
| 3,073,254 |
| 2,469,917 |
|
| Total external operating revenues | $ | 1,280,787 |
| $ | 1,272,548 |
| | $ | 3,321,678 |
| $ | 3,278,112 |
| | $ | 1,563,799 |
| $ | 1,280,787 |
| $ | 3,958,563 |
| $ | 3,321,678 |
|
| | | | | | |
|
| | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | |
| | September 30, | | September 30, | |
| | 2018 |
| 2017 |
| | 2018 |
| 2017 |
| |
| | (In thousands) | |
| Intersegment operating revenues: | |
| |
| | |
| |
| |
| Regulated operations: | | | | | | |
| Electric | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| |
| Natural gas distribution | — |
| — |
| | — |
| — |
| |
| Pipeline and midstream | 3,070 |
| 3,081 |
| | 31,252 |
| 30,923 |
| |
| | 3,070 |
| 3,081 |
| | 31,252 |
| 30,923 |
| |
| Nonregulated operations: | | | | | | |
| Pipeline and midstream | 117 |
| 38 |
| | 233 |
| 132 |
| |
| Construction materials and contracting | 165 |
| 142 |
| | 501 |
| 400 |
| |
| Construction services | 782 |
| 415 |
| | 1,332 |
| 715 |
| |
| Other | 3,037 |
| 1,910 |
| | 8,343 |
| 5,411 |
| |
| | 4,101 |
| 2,505 |
| | 10,409 |
| 6,658 |
| |
| Intersegment eliminations | (7,171 | ) | (5,586 | ) | | (41,661 | ) | (37,581 | ) | |
| Total intersegment operating revenues | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| |
| | | | | | | |
| Earnings (loss) on common stock: | |
| |
| | |
| |
| |
| Regulated operations: | | | | | | |
| Electric | $ | 15,284 |
| $ | 15,712 |
| | $ | 37,500 |
| $ | 37,904 |
| |
| Natural gas distribution | (11,887 | ) | (10,883 | ) | | 13,884 |
| 14,181 |
| |
| Pipeline and midstream | 10,109 |
| 5,853 |
| | 20,809 |
| 15,901 |
| |
| | 13,506 |
| 10,682 |
| | 72,193 |
| 67,986 |
| |
| Nonregulated operations: | | | | | | |
| Pipeline and midstream | 848 |
| 95 |
| | 1,136 |
| (770 | ) | |
| Construction materials and contracting | 78,876 |
| 63,221 |
| | 79,691 |
| 64,477 |
| |
| Construction services | 9,278 |
| 13,144 |
| | 38,457 |
| 32,896 |
| |
| Other | 4,861 |
| 552 |
| | 1,928 |
| (1,888 | ) | |
| | 93,863 |
| 77,012 |
| | 121,212 |
| 94,715 |
| |
| Intersegment eliminations | — |
| 1,855 |
| * | — |
| 6,121 |
| * |
Earnings on common stock before income (loss) from discontinued operations | 107,369 |
| 89,549 |
| | 193,405 |
| 168,822 |
| |
| Income (loss) from discontinued operations, net of tax | (118 | ) | (2,198 | ) | * | 85 |
| (3,702 | ) | * |
| Total earnings on common stock | $ | 107,251 |
| $ | 87,351 |
| | $ | 193,490 |
| $ | 165,120 |
| |
| |
* | Includes the eliminations for the presentation of income tax adjustments between continuing and discontinued operations. |
|
| | | | | | | | | | | | |
| | Three Months Ended | Nine Months Ended |
| | September 30, | September 30, |
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | (In thousands) |
| Intersegment operating revenues: | |
| |
| |
| |
|
| Regulated operations: | | | | |
| Electric | $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| Natural gas distribution | — |
| — |
| — |
| — |
|
| Pipeline and midstream | 3,750 |
| 3,070 |
| 35,098 |
| 31,252 |
|
| | 3,750 |
| 3,070 |
| 35,098 |
| 31,252 |
|
| Nonregulated operations: | | | | |
| Pipeline and midstream | 81 |
| 117 |
| 200 |
| 233 |
|
| Construction materials and contracting | 124 |
| 165 |
| 388 |
| 501 |
|
| Construction services | 1,226 |
| 782 |
| 2,076 |
| 1,332 |
|
| Other | 2,862 |
| 3,037 |
| 13,566 |
| 8,343 |
|
| | 4,293 |
| 4,101 |
| 16,230 |
| 10,409 |
|
| Intersegment eliminations | (8,043 | ) | (7,171 | ) | (51,328 | ) | (41,661 | ) |
| Total intersegment operating revenues | $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| | | | | |
| Operating income (loss): | | | | |
| Electric | $ | 21,930 |
| $ | 21,140 |
| $ | 49,708 |
| $ | 52,321 |
|
| Natural gas distribution | (15,565 | ) | (11,665 | ) | 32,132 |
| 32,503 |
|
| Pipeline and midstream | 11,416 |
| 9,036 |
| 32,017 |
| 25,687 |
|
| Construction materials and contracting | 143,024 |
| 109,598 |
| 147,622 |
| 120,591 |
|
| Construction services | 29,950 |
| 11,863 |
| 89,381 |
| 51,853 |
|
| Other | (1,285 | ) | 32 |
| 140 |
| 417 |
|
| Total operating income | $ | 189,470 |
| $ | 140,004 |
| $ | 351,000 |
| $ | 283,372 |
|
| | | | | |
| Net income (loss): | | | | |
| Regulated operations: | | | | |
| Electric | $ | 16,291 |
| $ | 15,284 |
| $ | 39,267 |
| $ | 37,500 |
|
| Natural gas distribution | (15,625 | ) | (11,887 | ) | 14,623 |
| 13,884 |
|
| Pipeline and midstream | 6,933 |
| 10,109 |
| 20,316 |
| 20,809 |
|
| | 7,599 |
| 13,506 |
| 74,206 |
| 72,193 |
|
| Nonregulated operations: | | | | |
| Pipeline and midstream | 801 |
| 848 |
| 1,380 |
| 1,136 |
|
| Construction materials and contracting | 102,611 |
| 78,876 |
| 97,328 |
| 79,691 |
|
| Construction services | 21,113 |
| 9,278 |
| 63,982 |
| 38,457 |
|
| Other | 4,004 |
| 4,861 |
| 3,466 |
| 1,928 |
|
| | 128,529 |
| 93,863 |
| 166,156 |
| 121,212 |
|
| Income from continuing operations | 136,128 |
| 107,369 |
| 240,362 |
| 193,405 |
|
| Income (loss) from discontinued operations, net of tax | 1,509 |
| (118 | ) | 26 |
| 85 |
|
| Net income | $ | 137,637 |
| $ | 107,251 |
| $ | 240,388 |
| $ | 193,490 |
|
Note 1518 - Employee benefit plans
Pension and other postretirement plans
The Company has noncontributory qualified defined benefit pension plans and other postretirement benefit plans for certain eligible employees. Components of net periodic benefit cost (credit) for the Company's pension and other postretirement benefit plans were as follows:
| | | | Pension Benefits | Other Postretirement Benefits | Pension Benefits | Other Postretirement Benefits |
| Three Months Ended September 30, | 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | (In thousands) | (In thousands) |
| Components of net periodic benefit cost (credit): | | |
| Service cost | $ | — |
| $ | — |
| $ | 374 |
| $ | 377 |
| $ | — |
| $ | — |
| $ | 286 |
| $ | 374 |
|
| Interest cost | 3,648 |
| 4,052 |
| 725 |
| 816 |
| 3,806 |
| 3,648 |
| 746 |
| 725 |
|
| Expected return on assets | (5,188 | ) | (5,132 | ) | (1,217 | ) | (1,160 | ) | (4,559 | ) | (5,188 | ) | (1,201 | ) | (1,217 | ) |
| Amortization of prior service credit | — |
| — |
| (349 | ) | (343 | ) | — |
| — |
| (289 | ) | (349 | ) |
| Amortization of net actuarial loss | 1,751 |
| 1,589 |
| 160 |
| 213 |
| 1,387 |
| 1,751 |
| 27 |
| 160 |
|
| Net periodic benefit cost (credit), including amount capitalized | 211 |
| 509 |
| (307 | ) | (97 | ) | 634 |
| 211 |
| (431 | ) | (307 | ) |
| Less amount capitalized | — |
| 65 |
| 46 |
| (95 | ) | — |
| — |
| 26 |
| 46 |
|
| Net periodic benefit cost (credit) | $ | 211 |
| $ | 444 |
| $ | (353 | ) | $ | (2 | ) | $ | 634 |
| $ | 211 |
| $ | (457 | ) | $ | (353 | ) |
| | | | Pension Benefits | Other Postretirement Benefits | Pension Benefits | Other Postretirement Benefits |
| Nine Months Ended September 30, | 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | (In thousands) | (In thousands) |
| Components of net periodic benefit cost (credit): | | |
| Service cost | $ | — |
| $ | — |
| $ | 1,121 |
| $ | 1,130 |
| $ | — |
| $ | — |
| $ | 857 |
| $ | 1,121 |
|
| Interest cost | 10,943 |
| 12,155 |
| 2,175 |
| 2,449 |
| 11,419 |
| 10,943 |
| 2,239 |
| 2,175 |
|
| Expected return on assets | (15,565 | ) | (15,395 | ) | (3,650 | ) | (3,480 | ) | (13,677 | ) | (15,565 | ) | (3,603 | ) | (3,650 | ) |
| Amortization of prior service credit | — |
| — |
| (1,046 | ) | (1,029 | ) | — |
| — |
| (866 | ) | (1,046 | ) |
| Amortization of net actuarial loss | 5,254 |
| 4,767 |
| 480 |
| 649 |
| 4,160 |
| 5,254 |
| 82 |
| 480 |
|
| Net periodic benefit cost (credit), including amount capitalized | 632 |
| 1,527 |
| (920 | ) | (281 | ) | 1,902 |
| 632 |
| (1,291 | ) | (920 | ) |
| Less amount capitalized | — |
| 245 |
| 128 |
| (248 | ) | — |
| — |
| 84 |
| 128 |
|
| Net periodic benefit cost (credit) | $ | 632 |
| $ | 1,282 |
| $ | (1,048 | ) | $ | (33 | ) | $ | 1,902 |
| $ | 632 |
| $ | (1,375 | ) | $ | (1,048 | ) |
In accordance with ASU 2017-07, theThe components of net periodic benefit cost (credit), other than the service cost component, are included in other income on the Consolidated Statements of Income. The service cost component is included in operation and maintenance expense on the Consolidated Statements of Income.
Nonqualified defined benefit plans
In addition to the qualified defined benefit pension plans reflected in the table at the beginning of this note, the Company also has unfunded, nonqualified defined benefit plans for executive officers and certain key management employees that generally provideemployees. The Company's net periodic benefit cost for defined benefit payments at age 65 followingthese plans for the employee's retirement or, upon death, to their beneficiaries for a 15-year period. In February 2016, the Company froze the unfunded, nonqualified defined benefit plans to new participantsthree and eliminated benefit increases. Vesting for participants not fully vestednine months ended September 30, 2019, was retained.$1.1 million and $3.3 million, respectively. The Company's net periodic benefit cost for these plans for the three and nine months ended September 30, 2018, was $1.1 millionand $3.3 million, respectively. The Company's net periodic benefit cost for these plans for the three and nine months ended September 30, 2017, was $1.2 million and $3.5 million, respectively. In accordance with ASU 2017-07, the components of net periodic benefit cost for these plans, which does not contain any service costs, are included in other income on the Consolidated Statements of Income.
Note 1619 - Regulatory matters
The Company regularly reviews the need for electric and natural gas rate changes in each of the jurisdictions in which service is provided. The Company files for rate adjustments to seek recovery of operating costs and capital investments, as well as reasonable returns as allowed by regulators. The Company's most recent cases by jurisdiction are discussed in the following paragraphs. The jurisdictions in which the Company provides service have requested the Company furnish plans for the effect of the reduced corporate tax rate due to the enactment of the TCJA which may impact the Company's rates. The following paragraphs include additional details and statuses of each open request.
MNPUC
On December 29, 2017,April 18, 2019, the MNPUC issuedapproved a notice of investigation related to tax changes with the enactment of the TCJA. On January 19, 2018, the MNPUC issued a notice of requestdecrease in rates for information, commission planning meeting and subsequent comment period. Pursuant to the notice, Great Plains provided preliminary impacts of the TCJA$400,000 on January 30, 2018. On
March 2, 2018, Great Plains submitted its initial filing addressing the impacts of the TCJA advocating existing rates are reasonable and a reduction in rates is not warranted. On August 9, 2018, the MNPUC ruled that Great Plains reduce ratesan annual basis to reflect TCJA impacts and to also provideeffective May 1, 2019, as well as a one-time TCJA refund that capturesof approximately $600,000 for the TCJA impactsperiod from January 1, 2018 through the implementation date of new rates. To date, an order by the MNPUC has not been issued. This matter is pending before the MNPUC.April 30, 2019. The refunds were credited to customers' bills between August 14, 2019 and September 16, 2019.
On December 27, 2017, the MTPSC requested Montana-Dakota identify a plan for the impacts of the TCJA and to file a proposal for the impacts on the electric segment by March 31, 2018. On April 2, 2018, Montana-Dakota submitted its plan requesting the MTPSC recognize the identified need for additional rate relief and to consider the effects of the TCJA in a general electric rate case to be submitted by September 30, 2018. Montana-Dakota submitted the general electric rate case on September 28, 2018, as discussed below. A hearing is scheduled for December 4, 2018. This matter is pending before the MTPSC.
On September 28, 2018, Montana-Dakota27, 2019, Great Plains filed an application with the MTPSCMNPUC for an electrica natural gas rate increase of approximately $11.9$2.9 million annually or approximately 18.912.0 percent above current rates. The requested increase iswas primarily to recover investments in facilities to enhance safety and reliability and the depreciation and taxes associated with the increase in investment. The increase was offset by tax savings related to the TCJA. Montana-DakotaGreat Plains also requested an interim increase of approximately $4.6$2.6 million or approximately 7.311.0 percent, subject to refund. This matter is pending before the MTPSC.MNPUC.
NDPSCMTPSC
On July 21, 2017, Montana-Dakota filed31, 2019, the MTPSC approved an application with the NDPSC for a natural gaselectric rate increase of approximately $5.9 million annually or approximately 5.4 percent above current rates. The requested increase isthat was primarily to recover the increased investmentMontana-Dakota's investments in distribution facilities to enhance system safety and reliability and the depreciation and taxes associated with such investments, partially offset by the impacts of TCJA. The approved rates included a $9.0 million annual increase in investment. Montana-Dakota also introduced a SSIPimplemented on September 1, 2019, and an additional $300,000 annual increase to be implemented beginning 12 months after the proposed adjustment mechanism required to fund the SSIP. Montana-Dakota requested an interim increasedate of approximately $4.6 million or approximately 4.2 percent, subject to refund. approval.
NDPSC
On September 6, 2017,October 22, 2019, the NDPSC approved an increase in rates to recover approximately $1.5 million annually for the request for interimrevenue requirements on certain of Montana-Dakota's electric transmission projects through its transmission cost adjustment rate. The rates were effective with service rendered on or after September 19, 2017. October 28, 2019.
On February 14, 2018,August 28, 2019, Montana-Dakota filed a revised interim increase request of approximately $2.7 million, subject to refund, incorporating the estimated impacts of the TCJA reduction in the federal corporate income tax rate. On March 1, 2018, the updated interim rates were implemented. The impact of the TCJA was submitted as part of a rebuttal testimony identifying a reduction of the adjusted revenue requirement to approximately $3.6 million. A hearing was held May 30, 2018 through June 1, 2018. On July 19, 2018, a settlement was filed reflecting a revised annual revenue increase of approximately $2.5 million or approximately 2.3 percent. The proposed adjustment mechanism to fund the SSIP was not included in the settlement and will be decided on separately by the NDPSC. On September 26, 2018,an application with the NDPSC issuedfor an order approving the settlement as filed but did not approve the SSIP recovery mechanism. On October 5, 2018, Montana-Dakota submittedadvanced determination of prudence and a compliance filing, which included a refund plan for the interim amountcertificate of public convenience and necessity to be refunded to customers.construct, own and operate Heskett Unit 4, an 88-MW simple-cycle natural gas-fired combustion turbine peaking unit at Heskett Station near Mandan, North Dakota. This matter is pending before the NDPSC.
On January 10, 2018,September 16, 2019, Montana-Dakota submitted an application with the NDPSC issued a general order initiatingrequesting the investigation intouse of deferred accounting for the effectstreatment of the TCJA. The order required regulatory deferral accounting on the impacts of the TCJA and for companies to file comments and the expected impacts. On February 15, 2018, Montana-Dakota filed a summary of the primary impacts of the TCJA on the electric and natural gas utilities. On March 9, 2018, Montana-Dakota submitted a request to decrease its electric rates by $7.2 million or 3.9 percent annually. On August 10, 2018, a settlement agreement was filed requesting a decrease in rates of approximately $8.4 million. On September 26, 2018, the NDPSC issued an order approving the settlement along with requiring an additional adjustmentcosts related to the rates to return 100 percentretirement of the tax-effective 2018 excess deferred income taxes. On October 10, 2018, Montana-Dakota submitted a compliance filing, which included a refund plan for the interim amount to be refunded to customers.Lewis & Clark Station in Sidney, Montana, and units 1 and 2 at Heskett Station near Mandan, North Dakota. This matter is pending before the NDPSC.
OPUC
On December 29, 2017, Cascade filed a request with the OPUC to use deferraldeferred accounting for the 2018 net benefits associated with the implementation of the TCJA. On September 12, 2019, the OPUC approved the request, including a settlement to refund to customers $1.4 million related to TJCA impacts for the period from January 2018 through March 2019. These refunds will be reflected in customers' rates over a 12-month period beginning November 1, 2019.
On June 14, 2019, Cascade filed a request with the OPUC to implement a new pipeline safety cost recovery mechanism to recover investments to replace Cascade's highest risk infrastructure. If approved, Cascade would file a report annually with the OPUC detailing actual projects undertaken and costs incurred for the year on November 1, seeking recovery for investments from January 1 through December 31 of that same year. This matter is pending before the OPUC.
WUTC
On May 31, 2018,March 29, 2019, Cascade filed a general rate case with the OPUCWUTC requesting an overall increase in annual revenue of approximately $2.3$12.7 million or approximately 3.5 percent5.5 percent. On September 20, 2019, Cascade filed a joint settlement agreement with the WUTC reflecting a revised annual increase of $6.5 million or approximately 2.8 percent. A hearing on an annual basis, which incorporates the impact of the TCJA.settlement is scheduled for November 5, 2019. This matter is pending before the OPUC.
SDPUCWUTC.
On December 29, 2017, the SDPUC issued an order initiating the investigation into the effects of the TCJA. The order required Montana-Dakota to provide comments by February 1, 2018, regarding the general effects of the TCJA on the cost of service in South Dakota and possible mechanisms for adjusting rates. The order also stated that all rates impacted by the federal income tax shall be adjusted effective January 1, 2018, subject to refund. On May 4, 2018 and June 2, 2018, Montana-Dakota submitted detailed plans to address the TCJA impacts on the natural gas and electric utilities, respectively, to the SDPUC staff. On September 28, 2018, a settlement agreement was submitted to the SDPUC reflecting a proposal to refund approximately$600,000 to electric customers and approximately $1.3 million to natural gas customers. These refunds reflect the impact of the
TCJA on 2018. On October 23, 2018, an order was issued by the SDPUC approving the settlement agreement. Proposed rate changes to reflect 2018 pro forma results and the TCJA impacts will be submitted by December 1, 2018.
WUTC
On August 31, 2017, Cascade filed an application with the WUTC for a natural gas rate increase of approximately $5.9 million annually or approximately 2.7 percent above current rates. The requested increase includes costs associated with increased infrastructure investment and the associated operating expenses. Also included in the request is recovery of operation and maintenance costs associated with a maximum allowable operating pressure validation plan. On January 3, 2018, the WUTC filed a bench request requiring Cascade to provide information related to the impacts of the TCJA on Cascade's revenue requirement and a proposed ratemaking treatment of those impacts. On March 23, 2018, Cascade filed its rebuttal testimony revising the revenue requirement to a decrease of approximately $1.7 million annually, which includes the impacts of the TCJA. On May 17, 2018, Cascade, the WUTC staff and interveners in the case reached a settlement on all matters in the rate case except the treatment of interim tax benefits for the period January 1, 2018 through July 31, 2018. The settlement included an overall annual rate reduction of approximately $2.9 million or approximately 1.4 percent plus specific tariffs passing excess deferred income taxes back to customers totaling approximately $2.5 million. On July 20, 2018, the WUTC approved the settlement reflecting a decrease in annual revenues, as well as refunding an additional $1.6 million for the interim tax benefits for the period of January 1, 2018 through July 31, 2018. The refund of excess deferred income taxes and interim tax benefits is over a fifteen month period. These changes were effective August 1, 2018.
On June 1, 2018,2019, Cascade filed its annual pipeline cost recovery mechanism requesting an increase in annual revenue of $2.3approximately $1.6 million or approximately 1.10.7 percent. On October 11 2018,10, 2019, Cascade filed its final update to the cost recovery mechanism with a revised increase in annual revenue of $2.1approximately $440,000 or approximately 0.2 percent. On October 24, 2019, the WUTC approved the increase with rates effective for services provided on or after November 1, 2019.
On September 13, 2019, Cascade filed its annual purchased gas adjustment with the WUTC requesting an annual increase of approximately $12.8 million or approximately 1.0 percent.5.7 percent for a period of three years. The requested increase will go into effectis primarily due to unrecovered purchased gas costs as a result of the rupture of the Enbridge pipeline in Canada on October 9, 2018, causing increased natural gas costs. On October 24, 2019, the WUTC approved the increase with rates effective for services provided on or after November 1, 2018.2019.
WYPSC
On December 29, 2017,April 4, 2019, Montana-Dakota submitted compliance rates to the WYPSC issuedreflecting a general order requiring regulatory deferral accounting on the impacts of the TCJA. A technical conference was held on February 6, 2018, to discuss the implications of the TCJA. On March 23, 2018, the WYPSC issued an order requiring all public utilities to submit an initial assessment of the overall effects on the TCJA on their rates by March 30, 2018. On March 30, 2018, Montana-Dakota submitted its initial assessment indicating a rate reduction for its electric ratesdecrease in the amountannual revenues of approximately $1.1 million annually or approximately 4.2 percent. Revisedpercent to reflect TCJA impacts. On April 8, 2019, the WYPSC approved the Company's requested decrease in electric rates reflecting this reduction were submittedand required a refund to customers for the period from January 1, 2018 through the date prior to the WYPSCimplementation of the rates within 90 days of the effective date of the new rates. The new rates were implemented for service rendered on June 13, 2018.and after May 1, 2019, and the refunds of approximately $1.6 million were credited to customers' bills on July 25, 2019.
On March 30, 2018, Montana-Dakota reported its natural gas earnings do not support a decrease in rates and requested the WYPSC allow the impacts of the TCJA be addressed in a natural gas rate case to be submitted by June 1, 2019. Both matters areOn
September 12, 2019, the WYPSC approved a one-time refund of approximately $200,000 to be credited to customers' bills by November 1, 2019, for the TCJA impacts from January 1, 2018 through June 30, 2019.
On May 23, 2019, Montana-Dakota filed an application with the WYPSC for a natural gas rate increase of approximately $1.1 million annually or approximately 7.0 percent above current rates. The requested increase was to recover increased operating expenses and investments in distribution facilities to improve system safety and reliability. This matter is pending before the WYPSC.
FERC
Montana-Dakota and certain MISO Transmission Owners with projected rates submitted a filing to the FERC on February 1, 2018, requesting the FERC to waive certain provisions of the MISO tariff in order for Montana-Dakota and certain MISO Transmission Owners with projected rates to revise their rates to reflect the reduction in the corporate tax rate. Under the MISO tariff, rates are to be changed only on an annual basis with any changes reflected in subsequent true-ups. On March 15, 2018, the FERC approved the waiver request and new rates reflecting the effects of the TCJA were implemented by MISO on March 1, 2018. MISO also retroactively re-billed the January and February 2018 services to reflect the new rates. On September 4, 2018, Montana-Dakota filed an update to its transmission formula rate under the MISO tariff for the multivalue project for $12.5 million, which is effective January 1, 2019.
On July 18, 2018, the FERC issued a final rule on Rate Changes Relating to Federal Income Tax Rate reductions resulting from the TCJA which requires natural gas pipeline companies to make a one-time informational filing to evaluate the impact of the lower corporate income tax rate and also select one of four options presented by the FERC to address the impact. In accordance with WBI Energy Transmission’s offer of settlement and stipulation and agreement with the FERC dated June 4, 2014, the Company iswas to make a filing with new proposed rates to be effective no later than May 1, 2019. On October 31, 2018, the Company filed a rate case with the FERC. Following negotiations between FERC withstaff, customers and the Company, on May 30, 2019, the FERC granted the Company's request to place interim settlement rates effectiveinto effect May 1, 2019. Due2019, subject to refund or surcharge, and pending the timingFERC's consideration of the rate case filing of a settlement agreement. Based on as filed volumes and settlement rates, the revenue increase is approximately $4.5 million annually. Included in the revenue increase are the impacts from higher depreciation rates agreed to in the settlement, as well as the impacts of the TCJA. On June 28, 2019, the Company will be exempt fromfiled a final settlement agreement and related documents with the one-time informational filing required byFERC. On September 30, 2019, the FERC’sFERC approved the final rule.settlement agreement and related documents.
On August 29, 2019, Montana-Dakota filed an update to its transmission formula rate under the MISO tariff for the multivalue project for $13.4 million, which is effective January 1, 2020.
Note 1720 - Contingencies
The Company is party to claims and lawsuits arising out of its business and that of its consolidated subsidiaries, which may include, but are not limited to, matters involving property damage, personal injury, and environmental, contractual, statutory and regulatory obligations. The Company accrues a liability for those contingencies when the incurrence of a loss is probable and the amount can be reasonably estimated. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. The Company does not accrue liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated or when the liability is believed to be only reasonably possible or remote. For contingencies where an unfavorable outcome is probable or reasonably possible and which are material, the Company discloses the nature of the contingency and, in some circumstances, an estimate of the possible loss. Accruals are based on the best information available, but in certain situations management is unable to estimate an amount or range of a reasonably possible loss including, but not limited to when: (1) the damages are unsubstantiated or indeterminate, (2) the proceedings are in the early stages, (3) numerous parties are involved, or (4) the matter involves novel or unsettled legal theories.
TheAt September 30, 2019 and 2018, and December 31, 2018, the Company accrued liabilities of $30.4 million, $34.3 million and $35.4 million, which have not been discounted, including liabilities held for sale, of $30.6 million, $30.4 million and $30.4 million, respectively. The accruals are for contingencies, including litigation, production taxes, royalty claims and environmental matters at September 30, 2018 and 2017, and December 31, 2017, respectively.matters. This includes amounts that have been accrued for matters discussed in Environmental matters within this note. The Company will continue to monitor each matter and adjust accruals as might be warranted based on new information and further developments. Management believes that the outcomes with respect to probable and reasonably possible losses in excess of the amounts accrued, net of insurance recoveries, while uncertain, either cannot be estimated or will not have a material effect upon the Company's financial position, results of operations or cash flows. Unless otherwise required by GAAP, legal costs are expensed as they are incurred.
Environmental matters
Portland Harbor Site In December 2000, Knife River - Northwest was named by the EPA as a PRP in connection with the cleanup of a riverbedthe Willamette River site adjacent to a commercial property site acquired by Knife River - Northwest from Georgia-Pacific West, Inc. in 1999. The riverbed site is part of the Portland, Oregon, Harbor Superfund Site. TheSite where the EPA wants responsible parties to share in the cleanupcosts of sediment contamination in the Willamette River.cleanup. To date, costs of the overall remedial investigation and feasibility study of the harbor site are being recorded, and initially paid, through an administrative consent order by the LWG, a group of several entities, which does not include Knife River - Northwest or Georgia-Pacific West, Inc.LWG. Investigative costs are indicated to be in excess of $100 million. On January 6, 2017, Region 10 of the EPA issued an ROD with its selected remedy for cleanup of the in-river portion of the site. Implementation of the remedyRemediation is expected to take up to 13 years with a present value cost estimate of approximately $1 billion. Corrective action will not be taken until remedial design/remedial action plans are approved by the EPA. Knife River - Northwest was also received notice in January 2008notified that the Portland Harbor Natural Resource Trustee Council intends to perform an injury assessment to natural resources resulting from the release of hazardous substances at the Harbor Superfund Site. The Portland Harbor Natural Resource Trustee Council indicates the injury determination is appropriate to facilitate early settlement of damages and restoration for natural resource injuries. It is not possible to estimate the costs of natural resource damages until an assessment is completed and allocations are undertaken.
Based upon a review of the Portland Harbor sediment contamination evaluation by the Oregon DEQ and other information available,At this time, Knife River - Northwest does not believe it is a responsible party. In addition, Knife River - Northwestparty and has notified Georgia-Pacific West, Inc., that it intends to seek indemnity for liabilities incurred in relation to the above matters pursuant to the terms of their sale agreement. Knife River - Northwest has entered into an agreement tolling the statute of limitations in connection with the LWG's potential claim for contribution to the costs of the remedial investigation and feasibility study. By letter in March 2009, LWG has stated its intent to file suit against Knife River - Northwest and others to recover LWG's investigation costs to the extent Knife River - Northwest cannot demonstrate its non-liability for the contamination or is unwilling to participate in an alternative dispute resolution process that has been
established to address the matter. At this time, Knife River - Northwest has agreed to participate in the alternative dispute resolution process.
The Company believes it is not probable that it will incur any material environmental remediation costs or damages in relation to the above referenced matter.
Manufactured Gas Plant Sites There are three claimsClaims have been made against Cascade for cleanup of environmental contamination at manufactured gas plant sites operated by Cascade's predecessors and a similar claim has been made against Montana-Dakota for a site operated by Montana-Dakota and its predecessors. TheAny accruals related to these claims are reflected in regulatory assets. For more information, see Note 13.
The first claim is forDemand has been made of Montana-Dakota to participate in investigation and remediation of environmental contamination at a site in Eugene, Oregon whichMissoula, Montana. The site operated as a former manufactured gas plant from approximately 1907 to 1938 when it was received in 1995. The Oregon DEQ released an ROD in January 2015converted to a butane-air plant that selected a remediation alternative foroperated until 1956. Montana-Dakota or its predecessors owned or controlled the site as recommended in an earlier staff report. The total estimated cost for the selected remediation, including long-term maintenance, is approximately $3.5 million of which $400,000 has been incurred. Cascade and other PRPs will share in the cleanup costs with Cascade expecting to pay approximately 50 percent of the remediation and maintenance costs. Cascade has an accrual balance of $1.6 million for remediation of this site. In January 2013, the OPUC approved Cascade's application to defer environmental remediation costs at the Eugene site for a period of 12 months starting November 30, 2012. Cascadethe time it operated as a manufactured gas plant and Montana-Dakota operated the butane-air plant from 1940 to 1951, at which time it sold the plant. There are no documented wastes or by-products resulting from the mixing or distribution of butane-air gas. Preliminary assessment of a portion of the site provided a recommended remedial alternative for that portion of approximately $560,000. However, the recommended remediation would not address any potential contamination to adjacent parcels that may be impacted by contamination from the manufactured gas plant. Montana-Dakota and another party agreed to voluntarily investigate and remediate the site and that Montana-Dakota will pay two-thirds of the costs for further investigation and remediation of the site. Montana-Dakota received orders reauthorizingnotice from a prior insurance carrier that it will participate in payment of defense costs incurred in relation to the deferred accountingclaim. Montana-Dakota has accrued $375,000 for the 12-month periods starting November 30, 2013, December 1, 2014, December 1, 2015, December 1, 2016 and December 1, 2017.remediation of this site.
The secondA claim iswas made against Cascade for contamination at the Bremerton Gasworks Superfund Site in Bremerton, Washington, which was received in 1997. A preliminary investigation has found soil and groundwater at the site contain contaminants requiring further investigation and cleanup. The EPA conducted a Targeted Brownfields Assessment of the site and released a report summarizing the results of that assessment in August 2009. The assessment confirms that contaminants have affected soil and groundwater at the site, as well as sediments in the adjacent Port Washington Narrows. Alternative remediation options have been identified with preliminary cost estimates ranging from $340,000 to $6.4 million. Data developed through the assessment and previous investigations indicates the contamination likely derived from multiple, different sources and multiple current and former owners of properties and businesses in the vicinity of the site may be responsible for the contamination. In April 2010, the Washington DOE issued notice it considered Cascade a PRP for hazardous substances at the site. In May 2012, the EPA added the site to the National Priorities List of Superfund sites. Cascade has entered into an administrative settlement agreement and consent order with the EPA regarding the scope and schedule for a remedial investigation and feasibility study for the site. Current estimates for the cost to complete the remedial investigation and feasibility study are approximately $7.6 million of which $2.7$3.8 million has been incurred. Cascade has accrued $4.9$3.8 million for the remedial investigation and feasibility study, as well as $6.4 million for remediation of this site; however, the accrual for remediation costs will be reviewed and adjusted, if necessary, after completion of the remedial investigation and feasibility study. In April 2010, Cascade filed a petition with the WUTC for authority to defer the
costs incurred in relation to the environmental remediation of this site. The WUTC approved the petition in September 2010, subject to conditions set forth in the order.
The thirdA claim iswas made against Cascade for contamination at a site in Bellingham, Washington. Cascade received notice from a party in May 2008 that Cascade may be a PRP, along with other parties, for contamination from a manufactured gas plant owned by Cascade and its predecessor from about 1946 to 1962. Other PRPs reached an agreed order and work plan with the Washington DOE for completion of a remedial investigation and feasibility study for the site. A feasibility study prepared for one of the PRPs in March 2018 identifies five cleanup action alternatives for the site with estimated costs ranging from $8.0 million to $20.4 million with a selected preferred alternative having an estimated total cost of $9.3 million. The other PRPs will develop a cleanup action plan and, after public review of the cleanup action plan, develop design documents. Cascade believes its proportional share of any liability will be relatively small in comparison to other PRPs. The plant manufactured gas from coal between approximately 1890 and 1946. In 1946, shortly after Cascade's predecessor acquired the plant, it converted the plant to a propane-air gas facility. There are no documented wastes or by-products resulting from the mixing or distribution of propane-air gas. Cascade has recorded an accrual for this site for an amount that is not material.
Cascade has received notices from and entered into agreement with certain of its insurance carriers that they will participate in defense of Cascade for certain of the contamination claims subject to full and complete reservations of rights and defenses to insurance coverage. To the extent these claims are not covered by insurance, Cascade intends to seek recovery through the OPUC and WUTC of remediation costs in its natural gas rates charged to customers.
In June 2016, WBI Energy sold all of the outstanding membership interests in Dakota Prairie Refining. In connection with the sale, Centennial agreed to continue to guarantee certain debt obligations of Dakota Prairie Refining which totaled $49.9 million at September 30, 2018, and were expected to mature in 2023. Tesoro agreed to indemnify Centennial for any losses and litigation expenses arising from the guarantee. The estimated fair value of the indemnity asset is reflected in deferred charges and other assets - other and the guarantee liability is reflected in other accrued liabilities and deferred credits and other liabilities - other, on the Consolidated Balance Sheets. Continuation of the guarantee was required as a condition to the sale of Dakota Prairie Refining. On October 17, 2018, Centennial was released from this guarantee of certain debt obligations of Dakota Prairie Refining.
Guarantees
In 2009, multiple sale agreements were signed to sell the Company's ownership interests in the Brazilian Transmission Lines. In connection with the sale, Centennial agreed to guarantee payment of any indemnity obligations of certain of the Company's indirect wholly owned subsidiaries who were the sellers in three purchase and sale agreements for periods ranging up to 10 years from the date of sale. The guarantees were required by the buyers as a condition to the sale of the Brazilian Transmission Lines.
Certain subsidiaries of the Company have outstanding guarantees to third parties that guarantee the performance of other subsidiaries of the Company. These guarantees are related to construction contracts, insurance deductibles and loss limits, and certain other guarantees. At September 30, 2018,2019, the fixed maximum amounts guaranteed under these agreements aggregated $197.2$206.5 million. TheAt September 30, 2019, the amounts of scheduled expiration of the maximum amounts guaranteed under these agreements aggregate to $1.1 million in 2018; $114.9$2.0 million in 2019; $74.2$192.2 million in 2020; $500,000$700,000 in 2021; $500,000 in 2022; $2.0$500,000 in 2023; $1.6 million thereafter; and $4.0$9.0 million, which has no scheduled maturity date. Theredate; and 0 amounts were no amounts outstanding under the above guarantees at September 30, 2018.outstanding. In the event of default under these guarantee obligations, the subsidiary issuing the guarantee for that particular obligation would be required to make payments under its guarantee.
Certain subsidiaries have outstanding letters of credit to third parties related to insurance policies and other agreements, some of which are guaranteed by other subsidiaries of the Company. At September 30, 2018,2019, the fixed maximum amounts guaranteed under these letters of credit aggregated $29.5$30.0 million. TheAt September 30, 2019, the amounts of scheduled expiration of the maximum amounts guaranteed under these letters of credit aggregate to $28.0$24.4 million in 20182019 and $1.5$5.6 million in 2019. There were no2020 with 0 amounts outstanding under the above letters of credit at September 30, 2018.outstanding. In the event of default under these letter of credit obligations, the subsidiary guaranteeing the letter of credit would be obligated for reimbursement of payments made under the letter of credit.
In addition, Centennial, Knife River and MDU Construction Services have issued guarantees to third parties related to the routine purchase of maintenance items, materials and lease obligations for which no fixed maximum amounts have been specified. These guarantees have no scheduled maturity date. In the event a subsidiary of the Company defaults under these obligations, Centennial, Knife River or MDU Construction Services would be required to make payments under these guarantees. Any amounts outstanding by subsidiaries of the Company were reflected on the Consolidated Balance Sheet at September 30, 2018.2019.
In the normal course of business, Centennial has surety bonds related to construction contracts and reclamation obligations of its subsidiaries. In the event a subsidiary of Centennial does not fulfill a bonded obligation, Centennial would be responsible to the surety bond company for completion of the bonded contract or obligation. A large portion of the surety bonds is expected to expire within the next 12 months; however, Centennial will likely continue to enter into surety bonds for its subsidiaries in the future. At September 30, 2018,2019, approximately $619.6$930.1 million of surety bonds were outstanding, which were not reflected on the Consolidated Balance Sheet.
Variable interest entities
The Company evaluates its arrangements and contracts with other entities to determine if they are VIEs and if so, if the Company is the primary beneficiary.
Fuel Contract Coyote Station entered into a coal supply agreement with Coyote Creek that provides for the purchase of coal necessary to supply the coal requirements of the Coyote Station for the period May 2016 through December 2040. Coal purchased under the coal supply agreement is reflected in inventories on the Company's Consolidated Balance Sheets and is recovered from customers as a component of electric fuel and purchased power.
The coal supply agreement creates a variable interest in Coyote Creek due to the transfer of all operating and economic risk to the Coyote Station owners, as the agreement is structured so that the price of the coal will cover all costs of operations, as well as future reclamation costs. The Coyote Station owners are also providing a guarantee of the value of the assets of Coyote Creek as they would be required to buy the assets at book value should they terminate the contract prior to the end of the contract term and are providing a guarantee of the value of the equity of Coyote Creek in that they are required to buy the entity at the end of the contract term at equity value. Although the Company has determined that Coyote Creek is a VIE, the Company has concluded that it is not the primary beneficiary of Coyote Creek because the authority to direct the activities of the entity is shared by the four unrelated owners of the Coyote Station, with no primary beneficiary existing. As a result, Coyote Creek is not required to be consolidated in the Company's financial statements.
At September 30, 2018,2019, the Company's exposure to loss as a result of the Company's involvement with the VIE, based on the Company's ownership percentage, was $39.2$36.6 million.
Note 18 - Subsequent Events
On October 4, 2018, the Company acquired Sweetman Construction Company, a provider of aggregates, asphalt and ready-mixed concrete in South Dakota, which will be included in the Company's construction materials and contracting segment. To date, the initial accounting for the acquisition is incomplete. Due to the limited time since the date of the acquisition, it is impracticable for the Company to make business combination disclosures related to the acquisition. The Company is still gathering the necessary information to provide such disclosures in future filings.
On October 18, 2018, the Company entered into a $100.0 million term loan agreement with a variable interest rate, which matures on November 18, 2019.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
On January 2, 2019, the Company announced the completion of the Holding Company Reorganization, which resulted in Montana-Dakota becoming a subsidiary of the Company. The merger was conducted pursuant to Section 251(g) of the General Corporation Law of the State of Delaware, which provides for the formation of a holding company without a vote of the stockholders of the constituent corporation. Immediately after consummation of the Holding Company Reorganization, the Company had, on a consolidated basis, the same assets, businesses and operations as Montana-Dakota had immediately prior to the consummation of the Holding Company Reorganization. As a result of the Holding Company Reorganization, the Company
became the successor issuer to Montana-Dakota pursuant to Rule 12g-3(a) of the Exchange Act, and as a result, the Company's common stock was deemed registered under Section 12(b) of the Exchange Act.
The Company operates with a two-platform business model. Its regulated energy delivery platform and its construction materials and services platform are each comprised of different operating segments. Some of these segments experience seasonality related to the industries in which they operate. The two-platform approach helps balance this seasonality and the risk associated with each type of industry. Through its regulated energy delivery platform, the Company provides electric and natural gas services to customers,customers; generates, transmits and distributes electricity,electricity; and provides natural gas transportation, storage and gathering services. These businesses are regulated by state public service commissions and/or the FERC. The construction materials and services platform provides construction services to a variety of industries,customers, including commercial, industrial and governmental industries, and provides construction materials through aggregate mining and marketing of related products, such as ready-mixed concrete and asphalt.
The Company is organized into five reportable business segments. These business segments include: electric, natural gas distribution, pipeline and midstream, construction materials and contracting, and construction services. The Company's business segments are determined based on the Company's method of internal reporting, which generally segregates the strategic business units due to differences in products, services and regulation. The internal reporting of these segments is defined based on the reporting and review process used by the Company's chief executive officer.
The Company's strategy is to apply its expertise in the regulated energy delivery and construction materials and services businesses to increase market share, increase profitability and enhance shareholder value through organic growth opportunities and strategic acquisitions. The Company is focused on a disciplined approach to the acquisition of well-managed companies and properties.
The Company has capabilities to fund its growth and operations through various sources, including internally generated funds, commercial paper facilities, revolving credit facilities, term loans and the issuance from time to time of debt and equity securities. For more information on the Company's capital expenditures and funding sources, see Liquidity and Capital Commitments.
On December 22, 2017, President Trump signed into law the TCJA making significant changes to the United States federal income tax laws. Some of the more material changes from the TCJA impacting the Company included lower corporate tax rates, repealing the domestic production deduction, disallowance of immediate expensing for regulated utility property and modifying or repealing many other business deductions and credits. The Company continues to review the components of the TCJA and evaluate the impact on the Company for 2018 and thereafter. For information pertinent to the specific impacts or trends identified by the Company's business segments, see Business Segment Financial and Operating Data.
Consolidated Earnings Overview
The following table summarizes the contribution to the consolidated earnings by each of the Company's business segments. | | | | Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended |
| | September 30, | September 30, |
| | 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | (In millions, except per share amounts) | (In millions, except per share amounts) |
| Electric | $ | 15.3 |
| $ | 15.7 |
| $ | 37.5 |
| $ | 37.9 |
| $ | 16.3 |
| $ | 15.3 |
| $ | 39.3 |
| $ | 37.5 |
|
| Natural gas distribution | (11.9 | ) | (10.9 | ) | 13.9 |
| 14.2 |
| (15.6 | ) | (11.9 | ) | 14.6 |
| 13.9 |
|
| Pipeline and midstream | 11.0 |
| 6.0 |
| 21.9 |
| 15.1 |
| 7.7 |
| 11.0 |
| 21.7 |
| 21.9 |
|
| Construction materials and contracting | 78.9 |
| 63.2 |
| 79.7 |
| 64.5 |
| 102.6 |
| 78.9 |
| 97.3 |
| 79.7 |
|
| Construction services | 9.3 |
| 13.1 |
| 38.5 |
| 32.9 |
| 21.1 |
| 9.3 |
| 64.0 |
| 38.5 |
|
| Other | 4.8 |
| .6 |
| 1.9 |
| (1.9 | ) | 4.0 |
| 4.8 |
| 3.5 |
| 1.9 |
|
| Intersegment eliminations | — |
| 1.9 |
| — |
| 6.1 |
| |
| Earnings before discontinued operations | 107.4 |
| 89.6 |
| 193.4 |
| 168.8 |
| |
| Income from continuing operations | | 136.1 |
| 107.4 |
| 240.4 |
| 193.4 |
|
| Income (loss) from discontinued operations, net of tax | (.1 | ) | (2.2 | ) | .1 |
| (3.7 | ) | 1.5 |
| (.1 | ) | — |
| .1 |
|
| Earnings on common stock | $ | 107.3 |
| $ | 87.4 |
| $ | 193.5 |
| $ | 165.1 |
| |
| Earnings per common share - basic: | |
| |
| |
| |
| |
| Earnings before discontinued operations | $ | .55 |
| $ | .46 |
| $ | .99 |
| $ | .86 |
| |
| Net income | | $ | 137.6 |
| $ | 107.3 |
| $ | 240.4 |
| $ | 193.5 |
|
| Earnings per share - basic: | | |
| |
| |
| |
|
| Income from continuing operations | | $ | .68 |
| $ | .55 |
| $ | 1.21 |
| $ | .99 |
|
| Discontinued operations, net of tax | — |
| (.01 | ) | — |
| (.01 | ) | .01 |
| — |
| — |
| — |
|
| Earnings per common share - basic | $ | .55 |
| $ | .45 |
| $ | .99 |
| $ | .85 |
| |
| Earnings per common share - diluted: | |
| |
| |
| |
| |
| Earnings before discontinued operations | $ | .55 |
| $ | .46 |
| $ | .99 |
| $ | .86 |
| |
| Earnings per share - basic | | $ | .69 |
| $ | .55 |
| $ | 1.21 |
| $ | .99 |
|
| Earnings per share - diluted: | | |
| |
| |
| |
|
| Income from continuing operations | | $ | .68 |
| $ | .55 |
| $ | 1.21 |
| $ | .99 |
|
| Discontinued operations, net of tax | — |
| (.01 | ) | — |
| (.02 | ) | .01 |
| — |
| — |
| — |
|
| Earnings per common share - diluted | $ | .55 |
| $ | .45 |
| $ | .99 |
| $ | .84 |
| |
| Earnings per share - diluted | | $ | .69 |
| $ | .55 |
| $ | 1.21 |
| $ | .99 |
|
Three Months Ended September 30, 2018,2019, Compared to Three Months Ended September 30, 20172018 The Company recognized consolidated earnings of $107.3$137.6 million for the quarter ended September 30, 2018,2019, compared to $87.4$107.3 million for the same period in 2017.2018.
Positively impacting the Company's earnings were decreased income taxes across allwas an increase in gross margin at the construction materials and contracting business, segments as alargely resulting from strong economic environments in certain states, contributions from the businesses acquired since the third quarter of 2018 and an increase in gains recognized on asset sales. In addition, the construction services business experienced an increase in gross margin, primarily the result of lower corporate tax rates duehigher inside and outside specialty contracting workloads and the
absence of changes to estimates recorded in the TCJAthird quarter of 2018 for variable consideration previously recognized on certain construction contracts. Partially offsetting these increases were higher operating expenses at the natural gas business and a $4.2 millionthe absence in 2019 of an income tax benefit for the reversal of a previously recorded regulatory liability at the pipeline and midstream business based on a FERC final accounting order issued during the third quarter. At the construction materials and contracting business, higher asphalt product volumes and margins and higher construction revenues and margins contributed to the increased earnings. The Company's earnings were negatively impacted from a net decrease in revenues due to changes in estimates of variable consideration related to certain construction contracts at the construction services business, as well as increased operation and maintenance expense and reserves against revenues in certain jurisdictions for anticipated refunds to customers for lower income taxes as a result of the TCJA at the natural gas distribution business.
Nine Months Ended September 30, 2018,2019, Compared to Nine Months Ended September 30, 20172018 The Company recognized consolidated earnings of $193.5$240.4 million for the nine months ended September 30, 2018,2019, compared to $165.1$193.5 million for the same period in 2017.2018.
Positively impacting the Company's earnings were decreased income taxes across allwas an increase in gross margin at the construction services business, segments as alargely the result of lower corporate tax rates duehigher inside and outside specialty contracting workloads and the absence of changes to estimates recorded in the TCJA and a tax benefit from the reversalthird quarter of a regulatory liability at the pipeline and midstream business, as2018 for variable consideration previously discussed. The earnings atrecognized on certain construction contracts. In addition, the construction materials and contracting business increased due to higher construction revenues and marginsexperienced an increase in gross margin, largely resulting from favorable job performance and strong demandeconomic environments in certain regions. Higher nonregulated project revenuesstates, contributions from the businesses acquired since the third quarter of 2018 and transportation revenuesan increase in gains recognized on asset sales. Also contributing to the increased earnings was approved rate recovery at both the natural gas distribution and electric businesses, as well as higher retail sales volumes at the natural gas distribution business. The pipeline and midstream business also contributed to the increase in earnings. The construction services business had increased earnings as a resultrates and volumes of higher equipment sales and rentalsnatural gas being transported that was partially offset by the absence in 2019 of an income tax benefit for the reversal of a net decrease in revenues due to changes in estimates of variable consideration related to certain construction contracts.previously recorded regulatory liability.
A discussion of key financial data from the Company's business segments follows.
Business Segment Financial and Operating Data
Following are 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. Many of these highlighted points are "forward-looking statements." For more information, see Forward-Looking Statements. There is no assurance that the Company's projections, including estimates for growth and changes in earnings, will in fact be achieved. Please refer to assumptions contained in this section, as well as the various important factors listed in Part II, Item 1A - Risk Factors and Part I, Item 1A - Risk Factors in the 20172018 Annual Report. Changes in such assumptions and factors could cause actual future results to differ materially from the Company's growth and earnings projections, see Forward-Looking Statements.projections.
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 14.17 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 14.17. Both segments strive to be a top performing utility company measured by integrity, safety, employee satisfaction, customer service and shareholder return, while continuing to focus on providing safe, environmentally friendly, reliable and competitively priced energy and related services to customers. The Company continues to monitor 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 transmissiondistribution and natural gas systems, and through selected acquisitions of companies and properties 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, the cost of natural gas, cost of electric fuel and purchased power, weather, 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, as well as certain operational, environmental and system integrity and environmental regulations. To assist in the reduction of regulatory lag with the increase in investments, tracking mechanisms have been implemented in certain jurisdictions. The Pipeline and Hazardous Materials Safety Administration recently issued additional rules to strengthen the safety of natural gas transmission and hazardous liquid pipelines. The Company is currently evaluating the first phase of the rules. Legislative and regulatory initiatives to increase renewable energy resources and reduce GHG emissions could impact the price and demand for electricity and natural gas, as well as increase costs to produce electricity and result in the retirement of certain electric generating facilities before they are fully depreciated. Although the current administration has slowed environmental regulations, thenatural gas. The segments continue to invest in facility upgrades to be in compliance with the existing and future regulations.
Tariff increases on steel and aluminum materials could negatively affect the segments' construction projects and maintenance work. The Company continues to monitor the impact tariff increases will haveof tariffs on raw material costs. The natural gas distribution segment is also facing increased lead times on delivery of certain raw materials used in pipeline projects. In addition to the effect of tariffs, long lead times are attributable to increased demand for steel products from pipeline companies as they respond to the United States Department of Transportation Pipeline System Safety and Integrity Plan. The Company continues to monitor the material lead times and is working with manufacturers to proactively order such materials to help mitigate the risk of delays due to extended lead times.
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 the economic environment of the markets served and competition from other energy providers and fuels. The construction of any new electric generating facilities, transmission lines and other service facilities is subject to increasing costcosts and lead time,times, extensive permitting procedures, and federal and state legislative and regulatory initiatives, which will likely necessitate increases in electric energy prices.
Revenues are impacted by both customer growth and usage, the latter of which is primarily impacted by weather. 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. DecouplingNatural gas 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.
Earnings overview - electric The following information summarizes the performance of the electric segment.
| | | | Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended |
| | September 30, | September 30, | September 30, |
| | 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | (Dollars in millions, where applicable) | (Dollars in millions, where applicable) |
| Operating revenues | $ | 86.1 |
| $ | 91.5 |
| $ | 252.0 |
| $ | 254.3 |
| $ | 89.8 |
| $ | 86.1 |
| $ | 263.4 |
| $ | 252.0 |
|
| Electric fuel and purchased power | 18.4 |
| 18.9 |
| 58.9 |
| 57.5 |
| 18.7 |
| 18.4 |
| 64.4 |
| 58.9 |
|
| Taxes, other than income | .2 |
| .2 |
| .6 |
| .6 |
| .1 |
| .2 |
| .4 |
| .6 |
|
| Adjusted gross margin | 67.5 |
| 72.4 |
| 192.5 |
| 196.2 |
| 71.0 |
| 67.5 |
| 198.6 |
| 192.5 |
|
| Operating expenses: | |
| |
| | | |
| |
| | |
| Operation and maintenance | 30.1 |
| 31.0 |
| 91.3 |
| 89.0 |
| 30.8 |
| 30.1 |
| 94.6 |
| 91.3 |
|
| Depreciation, depletion and amortization | 12.6 |
| 12.2 |
| 37.7 |
| 35.5 |
| 14.2 |
| 12.6 |
| 41.8 |
| 37.7 |
|
| Taxes, other than income | 3.7 |
| 3.5 |
| 11.2 |
| 10.5 |
| 4.1 |
| 3.7 |
| 12.5 |
| 11.2 |
|
| Total operating expenses | 46.4 |
| 46.7 |
| 140.2 |
| 135.0 |
| 49.1 |
| 46.4 |
| 148.9 |
| 140.2 |
|
| Operating income | 21.1 |
| 25.7 |
| 52.3 |
| 61.2 |
| 21.9 |
| 21.1 |
| 49.7 |
| 52.3 |
|
| Other income | .8 |
| .8 |
| 2.1 |
| 2.2 |
| .6 |
| .8 |
| 2.7 |
| 2.1 |
|
| Interest expense | 6.3 |
| 6.4 |
| 19.4 |
| 19.0 |
| 6.2 |
| 6.3 |
| 18.9 |
| 19.4 |
|
| Income before income taxes | 15.6 |
| 20.1 |
| 35.0 |
| 44.4 |
| 16.3 |
| 15.6 |
| 33.5 |
| 35.0 |
|
| Income taxes | .3 |
| 4.4 |
| (2.5 | ) | 5.9 |
| — |
| .3 |
| (5.8 | ) | (2.5 | ) |
| Net income | 15.3 |
| 15.7 |
| 37.5 |
| 38.5 |
| $ | 16.3 |
| $ | 15.3 |
| $ | 39.3 |
| $ | 37.5 |
|
| Loss/dividends on preferred stock | — |
| — |
| — |
| .6 |
| |
| Earnings | $ | 15.3 |
| $ | 15.7 |
| $ | 37.5 |
| $ | 37.9 |
| |
| Retail sales (million kWh): | | |
| Residential | 282.9 |
| 278.7 |
| 903.0 |
| 860.2 |
| 259.4 |
| 282.9 |
| 865.6 |
| 903.0 |
|
| Commercial | 374.3 |
| 377.7 |
| 1,131.7 |
| 1,122.7 |
| 359.5 |
| 374.3 |
| 1,102.4 |
| 1,131.7 |
|
| Industrial | 132.9 |
| 133.7 |
| 406.8 |
| 395.9 |
| 127.8 |
| 132.9 |
| 403.5 |
| 406.8 |
|
| Other | 24.5 |
| 28.5 |
| 70.5 |
| 75.7 |
| 20.9 |
| 24.5 |
| 64.9 |
| 70.5 |
|
| | 814.6 |
| 818.6 |
| 2,512.0 |
| 2,454.5 |
| 767.6 |
| 814.6 |
| 2,436.4 |
| 2,512.0 |
|
| Average cost of electric fuel and purchased power per kWh | $ | .021 |
| $ | .021 |
| $ | .022 |
| $ | .022 |
| $ | .021 |
| $ | .021 |
| $ | .024 |
| $ | .022 |
|
Adjusted gross margin is a non-GAAP financial measure. For additional information and reconciliation of the non-GAAP adjusted gross margin attributable to the electric segment, see the Non-GAAP Financial Measures.Measures section later in this Item.
Three Months Ended September 30, 2018,2019, Compared to Three Months Ended September 30, 20172018 Electric earnings decreased $400,000 (3increased $1.0 million (7 percent) as a result of:
Adjusted gross margin: DecreaseIncrease of $4.9$3.5 million as a result of higher revenues. The revenue increase was primarily due to lower operating revenues driven byimplemented regulatory mechanisms, which include approved Montana interim and final rates, as discussed in Note 19, and recovery of the reserves against revenuesinvestment in certain jurisdictions for anticipated refunds to customers for lower income taxes duethe Thunder Spirit Wind farm expansion placed into service in the fourth quarter of 2018. Also contributing to the enactmentincrease was the absence in 2019 of the TCJA and a transmission formula rate adjustment due to a decreaserecognized in estimatedthe third quarter of 2018 for decreased costs on the BSSE project. These increases were partially offset by lower retail sales volumes of approximately 6 percent across all customer classes primarily from cooler summer temperatures.
Operation and maintenance: DecreaseIncrease of $900,000,$700,000, largely due to higher payroll-related costs, partially offset by decreased contracted services resulting from decreased payroll-relatedlower subcontractor costs.
Depreciation, depletion and amortization: Increase of $400,000$1.6 million as a result of increased property, plant balances.and equipment
balances including the Thunder Spirit Wind farm expansion, as previously discussed, and other capital projects.
Taxes, other than income: Comparable to the same periodIncrease of $400,000, primarily from higher property taxes in prior year.certain jurisdictions.
Other income: Comparable to the same period in prior year.
Interest expense: Comparable to the same period in prior year.
Income taxes: Decrease of $4.1 million dueComparable to the enactment of the TCJA reduced corporate tax rate on January 1, 2018, which had a favorable impact compared to the third quarter of 2017, as well as the reduction of income before income taxes. A majority of the reductionsame period in income taxes are being reserved against revenues, as previously discussed, resulting in a minimal impact on overall earnings.prior year.
Nine Months Ended September 30, 2018,2019, Compared to Nine Months Ended September 30, 20172018 Electric earnings decreased $400,000 (1increased $1.8 million (5 percent) as a result of:
Adjusted gross margin: DecreaseIncrease of $3.7$6.1 million as a result of higher revenues. The revenue increase was primarily due to lower operating revenues driven byimplemented regulatory mechanisms, which include approved Montana interim and final rates, as discussed in Note 19; recovery of the reserves against
revenuesinvestment in certain jurisdictions for anticipated refunds to customers for lower income taxes duethe Thunder Spirit Wind farm expansion placed into service in the fourth quarter of 2018; and recovery of the investment in the BSSE project placed into service in the first quarter of 2019. Also contributing to the enactmentincrease was the absence in 2019 of the TCJA and a transmission formula rate adjustment due to a decreaserecognized in estimatedthe third quarter of 2018 for decreased costs on the BSSE project. Partially offsetting the decreases to adjusted gross marginThese increases were the absence in 2018 of reserves against revenues related to tracker balances in prior years and increasedpartially offset by lower retail sales volumes of 2approximately 3 percent toacross all customer classes.
Operation and maintenance: Increase of $2.3$3.3 million, largely fromdue to higher contract services, primarily driven by a maintenance outage at generating stationsCoyote Station, and higher payroll-related costs.
Depreciation, depletion and amortization: Increase of $2.2$4.1 million as a result of increased property, plant balances.and equipment balances including the Thunder Spirit Wind farm expansion, as previously discussed, and other capital projects.
Taxes, other than income: Increase of $700,000,$1.3 million, primarily from higher property taxes in certain jurisdictions.
Other income: Comparable toIncrease of $600,000, primarily the same periodresult of higher returns on the Company's benefit plan investments, partially offset by the write-down of a non-utility investment, as discussed in prior year.Note 14.
Interest expense: IncreaseDecrease of $400,000 as a result of$500,000 driven by higher debt balances.AFUDC, which resulted from more interest being capitalized on regulated construction projects.
Income taxes: Decrease of $8.4 million due to the enactment of the TCJA reduced corporate tax rate, which had a favorable impact compared to the nine months ended September 30, 2017, and reduced income before income taxes. A majority of the reductionIncrease in income taxes are being reserved against revenues, as previously discussed,tax benefits of $3.3 million, largely resulting in a minimal impact on overall earnings. Partially offsetting the decrease in taxes were lowerfrom increased production tax credits.
Earnings overview - natural gas distribution The following information summarizes the performance of the natural gas distribution segment.
| | | | Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended |
| | September 30, | September 30, |
| | 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | (Dollars in millions, where applicable) | (Dollars in millions, where applicable) |
| Operating revenues | $ | 92.2 |
| $ | 92.3 |
| $ | 554.5 |
| $ | 566.4 |
| $ | 93.6 |
| $ | 92.2 |
| $ | 569.7 |
| $ | 554.5 |
|
| Purchased natural gas sold | 35.2 |
| 36.4 |
| 301.6 |
| 314.9 |
| 35.6 |
| 35.2 |
| 305.6 |
| 301.6 |
|
| Taxes, other than income | 3.1 |
| 3.0 |
| 21.0 |
| 21.9 |
| 3.2 |
| 3.1 |
| 20.7 |
| 21.0 |
|
| Adjusted gross margin | 53.9 |
| 52.9 |
| 231.9 |
| 229.6 |
| 54.8 |
| 53.9 |
| 243.4 |
| 231.9 |
|
| Operating expenses: | |
| |
| | |
| |
| |
| | |
|
| Operation and maintenance | 42.1 |
| 39.8 |
| 129.4 |
| 119.8 |
| 44.4 |
| 42.1 |
| 134.3 |
| 129.4 |
|
| Depreciation, depletion and amortization | 18.1 |
| 17.4 |
| 53.5 |
| 51.7 |
| 19.9 |
| 18.1 |
| 59.1 |
| 53.5 |
|
| Taxes, other than income | 5.4 |
| 5.2 |
| 16.5 |
| 15.4 |
| 6.1 |
| 5.4 |
| 17.9 |
| 16.5 |
|
| Total operating expenses | 65.6 |
| 62.4 |
| 199.4 |
| 186.9 |
| 70.4 |
| 65.6 |
| 211.3 |
| 199.4 |
|
| Operating income (loss) | (11.7 | ) | (9.5 | ) | 32.5 |
| 42.7 |
| (15.6 | ) | (11.7 | ) | 32.1 |
| 32.5 |
|
| Other income | .7 |
| .7 |
| 2.0 |
| 1.6 |
| 1.7 |
| .7 |
| 5.3 |
| 2.0 |
|
| Interest expense | 7.7 |
| 7.9 |
| 22.6 |
| 23.1 |
| 8.9 |
| 7.7 |
| 26.1 |
| 22.6 |
|
| Income (loss) before income taxes | (18.7 | ) | (16.7 | ) | 11.9 |
| 21.2 |
| (22.8 | ) | (18.7 | ) | 11.3 |
| 11.9 |
|
| Income taxes | (6.8 | ) | (5.8 | ) | (2.0 | ) | 6.9 |
| (7.2 | ) | (6.8 | ) | (3.3 | ) | (2.0 | ) |
| Net income (loss) | (11.9 | ) | (10.9 | ) | 13.9 |
| 14.3 |
| $ | (15.6 | ) | $ | (11.9 | ) | $ | 14.6 |
| $ | 13.9 |
|
| Loss/dividends on preferred stock | — |
| — |
| — |
| .1 |
| |
| Earnings (loss) | $ | (11.9 | ) | $ | (10.9 | ) | $ | 13.9 |
| $ | 14.2 |
| |
| Volumes (MMdk) | |
| |
| | | |
| |
| | |
| Retail sales: | | |
| Residential | 4.0 |
| 3.9 |
| 40.4 |
| 40.4 |
| 4.1 |
| 4.0 |
| 44.3 |
| 40.4 |
|
| Commercial | 4.0 |
| 4.0 |
| 29.0 |
| 29.0 |
| 4.2 |
| 4.0 |
| 31.5 |
| 29.0 |
|
| Industrial | .8 |
| .8 |
| 3.2 |
| 3.3 |
| .9 |
| .8 |
| 3.6 |
| 3.2 |
|
| | 8.8 |
| 8.7 |
| 72.6 |
| 72.7 |
| 9.2 |
| 8.8 |
| 79.4 |
| 72.6 |
|
| Transportation sales: | | |
| Commercial | .3 |
| .3 |
| 1.5 |
| 1.4 |
| .3 |
| .3 |
| 1.5 |
| 1.5 |
|
| Industrial | 42.0 |
| 35.8 |
| 108.1 |
| 102.1 |
| 45.7 |
| 42.0 |
| 117.9 |
| 108.1 |
|
| | 42.3 |
| 36.1 |
| 109.6 |
| 103.5 |
| 46.0 |
| 42.3 |
| 119.4 |
| 109.6 |
|
| Total throughput | 51.1 |
| 44.8 |
| 182.2 |
| 176.2 |
| 55.2 |
| 51.1 |
| 198.8 |
| 182.2 |
|
| Average cost of natural gas, including transportation, per dk | $ | 4.00 |
| $ | 4.20 |
| $ | 4.16 |
| $ | 4.33 |
| |
| Average cost of natural gas per dk | | $ | 3.88 |
| $ | 4.00 |
| $ | 3.85 |
| $ | 4.16 |
|
Adjusted gross margin is a non-GAAP financial measure. For additional information and reconciliation of the non-GAAP adjusted gross margin attributable to the natural gas distribution segment, see the Non-GAAP Financial Measures.Measures section later in this Item.
Three Months Ended September 30, 2018,2019, Compared to Three Months Ended September 30, 20172018 Natural gas distribution experienced an increaseddistribution's seasonal loss of $1.0increased $3.7 million (9(31 percent) as a result of:
Adjusted gross margin: Increase of $1.0 million resulting from$900,000, primarily driven by approved rate recovery as well as conservation revenue offsetting the conservation expense in operation and maintenance expense. These increases were partially offset by reserves against revenues in certain jurisdictions for anticipated refunds to customers for lower income taxes due to the enactment of the TCJA.
Operation and maintenance:Increase of $2.3 million, primarily conservation expenses being recovered in revenue, higher contract services and higher payroll-related costs.
Depreciation, depletion and amortization: Increase of $700,000, primarily as a result of increased plant balances offset in part by lower depreciation rates implemented in certain jurisdictions.
Taxes, other than income: Comparable to the same period in prior year.
Other income: Comparable to the same period in prior year.
Interest expense: Comparable to the same period in prior year.
Income taxes: Increase in income tax benefits of $1.0 million as a result of increased loss before income taxes, partially offset by the reduced corporate tax rate creating less of a benefit due to the enactment of the TCJA. A portion of the reduction in income taxes are being reserved against revenues, as previously discussed.
Nine Months Ended September 30, 2018, Compared to Nine Months Ended September 30, 2017 Natural gas distribution earnings decreased $300,000 (2 percent) as a result of:
Adjusted gross margin: Increase of $2.3 million, largely resulting from approved rate recovery and conservation revenue, which offsets the conservation expense in operation and maintenance expense, offset in part by the reserves against revenues in certain jurisdictions for anticipated refunds to customers for lower income taxes due to the enactment of the TCJA. Partially offsetting the increase were lower Increased retail sales volumes reduced in partof 4 percent related to all customer classes were offset by weather normalization mechanismsand conservation adjustments in certain jurisdictions.
Operation and maintenance: Increase of $9.6$2.3 million, largely relateddue to conservation expenses being recovered in revenue; contract services, which includes the recognition of a non-recurring expense related to the approved WUTC general rate case settlement in second quarter 2018; and higher payroll-related costs.
Depreciation, depletion and amortization: Increase of $1.8 million, primarily as a result of increased property, plant balances offset in part by lower depreciation rates implemented in certain jurisdictions.and equipment balances.
Taxes, other than income: Increase of $1.1 million due to$700,000, primarily from higher property taxes in certain jurisdictions.
Other income: Increase of $400,000 due$1.0 million driven by increased interest income related to lower net periodic benefit costs.higher gas costs to be collected from customers, as discussed in Notes 13 and 19.
Interest expense: Increase of $1.2 million, largely resulting from increased debt balances to finance higher gas costs to be collected from customers.
Income taxes: Comparable to the same period in prior year.
Nine Months Ended September 30, 2019, Compared to Nine Months Ended September 30, 2018 Natural gas distribution earnings increased $700,000 (5 percent) as a result of:
Adjusted gross margin: Increase of $11.5 million, primarily driven by an increase in retail sales volumes of 9 percent related to all customer classes due to colder weather, offset in part by weather normalization and conservation adjustments in certain jurisdictions, and approved rate recovery in certain jurisdictions. The adjusted gross margins were also positively impacted by higher rate realization due to higher conservation revenue, which offsets the conservation expense in operation and maintenance expense.
Operation and maintenance: Increase of $4.9 million, largely resulting from higher payroll-related costs and conservation expenses being recovered in revenue, partially offset by lower contract services due to the absence of the prior year's recognition of a non-recurring expense related to the approved WUTC general rate case settlement in the second quarter of 2018.
Depreciation, depletion and amortization: Increase of $5.6 million, primarily as a result of increased property, plant and equipment balances.
Taxes, other than income: Increase of $1.4 million, primarily from higher property taxes in certain jurisdictions.
Other income: Increase of $3.3 million, largely resulting from increased interest income related to higher gas costs to be collected from customers, as discussed in Notes 13 and 19, and higher returns on the Company's benefit plan investments. Partially offsetting these increases was the write-down of a non-utility investment, as discussed in Note 14.
Interest expense: Increase of $3.5 million, largely resulting from increased debt balances to finance higher gas costs to be collected from customers.
Income taxes: Decrease of $8.9 million, largely due to the enactment of the TCJA on January 1, 2018, which had a favorable impact compared to the nine months ended September 30, 2017, and reduced income before income taxes. A portion of the reductionIncrease in income taxes are being reserved against revenues, as previously discussed,tax benefits of $1.3 million resulting in a minimal impact on overall earnings.from increased permanent tax benefits.
Outlook The Company expects these segments will grow rate base by approximately 5 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. Customer growth is expected to grow by 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 generation and transmission and natural gas systems.
In November 2017,February 2019, the NDPSC approvedCompany announced that it intends to retire three aging coal-fired electric generation units within the advancenext three years, resulting from the Company's analysis showing that the plants are no longer expected to be cost competitive for customers. The retirements are expected to be in early 2021 for Lewis & Clark Station in Sidney, Montana, and in early 2022 for units 1 and 2 at Heskett Station near Mandan, North Dakota. In addition, the Company announced that it intends to construct a new 88-MW simple-cycle natural gas-fired combustion turbine peaking unit at the existing plant site near Mandan, North Dakota. The new simple-cycle turbine coupled with the MISO market purchases are expected to be about half the total cost of continuing to run the coal-fired electric generation units at Heskett and Lewis & Clark stations. The simple-cycle turbine was included in the Company's recently submitted integrated resource plan. On August 28, 2019, the Company filed for an advanced determination of prudence with the NDPSC for the purchase ofnew simple-cycle turbine. If approved, the Thunder Spirit Wind farm expansion in southwest North Dakota. Construction of the Thunder Spirit Wind farm expansion began in May 2018. In February 2018, the Company signed a purchase agreement to obtain ownership of the expansion. In August 2018, the FERC granted approval for the Company to purchase the Thunder Spirit Wind farm expansion and on October 31, 2018, the Company finalized the purchase and placed into service the Thunder Spirit Wind farm expansion. With the addition of the expansion, the total Thunder Spirit Wind farm generation capacity will be approximately 155 MW and will increase the Company's electric generation portfolio to approximately 27 percent renewables based on nameplate ratings. The Company's integrated resource plans filed in North Dakota and Montana in 2017 include additional generation projects in the 2025 timeframe.
In June 2016, the Company, along with a partner, began construction on the BSSE project. The estimated capital investment for this project has been narrowed to a range of $130 million to $140 million. All necessary easements have been secured and construction is well underway. The projectsimple-cycle turbine is expected to be completedplaced into service in 2023. On September 16, 2019, the first quarterCompany filed with the NDPSC a request for the usage of 2019.deferred accounting for the costs related to the retirement of Lewis & Clark Station and units 1 and 2 at Heskett Station. Requests for the usage of deferred accounting will also be filed in Montana and South Dakota.
The Company continues to be focused on the regulatory recovery of its investments. The Company files for rate adjustments to seek recovery of operating costs and capital investments, as well as reasonable returns as allowed by regulators. The Company also continues to propose pipeline safety cost recovery mechanisms in certain jurisdictions focusing on the safety of its infrastructure. The Company's most recent cases by jurisdiction are discussed in Note 16.
With the enactment of the TCJA, the state regulators in jurisdictions where the segments operate have requested companies submit plans for the estimated impact of the TCJA. The segments determined the use of the deferral method of accounting for the revaluation of its regulated deferred tax assets and liabilities was appropriate. As such, the Company recorded a regulatory liability for the excess deferred income taxes that related to the effect of the change in tax rates on its regulated deferred tax assets and liabilities in the fourth quarter of 2017. For the nine months ended September 30, 2018, the Company reserved an additional regulatory liability of approximately $16.0 million, which is an offset to the Company's revenues, as previously discussed. The additional reserves were calculated by completing a revenue requirement calculation in each state where the Company thought it was probable that the refund of tax savings would be returned to the Company's customers. The Company continues to work with the state regulators on plans for the impacts of the TCJA, as discussed in Note 16. The Company anticipates the TCJA will negatively impact the segments' cash flows due to not being able to immediately expense utility property for tax purposes, as well as lower deferred taxes.
The Company currently does not have any labor contracts in negotiations at the electric and natural gas distribution segments.19.
Pipeline and Midstream
Strategy and challenges The pipeline and midstream segment provides natural gas transportation, gathering and underground storage services, as discussed in Note 14.17. 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 existing storage, gathering and transmission facilities; incremental pipeline projects, which expand pipeline capacity;projects; and expansion of energy-related services leveraging on its core competencies.
The segment is exposed to energy price volatility which is impacted by the fluctuations in pricing, production and basis differentials of the energy market's commodities. Legislative and regulatory initiatives to increase pipeline safety regulations and reduce methane emissions could also impact the price and demand for natural gas.
Tariff increases on steel and aluminum materials could negatively affect the segment's construction projects and maintenance work. The Company continues to monitor the impact tariff increases will haveof tariffs on raw material costs. The segment experiences extended lead times on raw materials that are critical to the segment's construction and maintenance work. Long lead times on materials could delay maintenance work and project construction potentially causing lost revenues and/or increased costs. The Company continues to proactively monitor and plan for the material lead times, as well as work with manufacturers and suppliers to help mitigate the risk of delays due to extended lead times.
The pipeline and midstream segment is subject to extensive regulation including certain operational, environmental and system integrity and environmental regulations, as well as various permit terms and operational compliance conditions. The Pipeline and Hazardous Materials Safety Administration recently issued additional rules to strengthen the safety of natural gas transmission and hazardous liquid pipelines. The Company is currently evaluating the first phase of the rules. The segment is charged with the ongoing process of reviewing existing permits and easements, as well as securing new permits and easements as necessary to meet current demand and future growth opportunities. Exposure to pipeline opposition groups could also cause negative impacts on the segment with increased costs and potential delays to project completion.
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 and midstream companies can also have a negative impact on the segment.
Earnings overview - The following information summarizes the performance of the pipeline and midstream segment.
| | | | Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended |
| | September 30, | September 30, |
| | 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | (Dollars in millions) | (Dollars in millions) |
| Operating revenues | $ | 32.3 |
| $ | 31.6 |
| $ | 93.5 |
| $ | 89.9 |
| $ | 36.4 |
| $ | 32.3 |
| $ | 105.1 |
| $ | 93.5 |
|
| Operating expenses: | | |
| Operation and maintenance | 15.9 |
| 13.9 |
| 45.5 |
| 41.6 |
| 16.1 |
| 15.9 |
| 47.5 |
| 45.5 |
|
| Depreciation, depletion and amortization | 4.3 |
| 4.2 |
| 13.1 |
| 12.4 |
| 5.6 |
| 4.3 |
| 15.6 |
| 13.1 |
|
| Taxes, other than income | 3.0 |
| 3.1 |
| 9.2 |
| 9.2 |
| 3.3 |
| 3.0 |
| 10.0 |
| 9.2 |
|
| Total operating expenses | 23.2 |
| 21.2 |
| 67.8 |
| 63.2 |
| 25.0 |
| 23.2 |
| 73.1 |
| 67.8 |
|
| Operating income | 9.1 |
| 10.4 |
| 25.7 |
| 26.7 |
| 11.4 |
| 9.1 |
| 32.0 |
| 25.7 |
|
| Other income | .8 |
| .3 |
| 1.3 |
| 1.2 |
| .1 |
| .8 |
| .9 |
| 1.3 |
|
| Interest expense | 1.6 |
| 1.2 |
| 4.1 |
| 3.8 |
| 1.8 |
| 1.6 |
| 5.3 |
| 4.1 |
|
| Income before income taxes | 8.3 |
| 9.5 |
| 22.9 |
| 24.1 |
| 9.7 |
| 8.3 |
| 27.6 |
| 22.9 |
|
| Income taxes | (2.7 | ) | 3.5 |
| 1.0 |
| 9.0 |
| 2.0 |
| (2.7 | ) | 5.9 |
| 1.0 |
|
| Earnings | $ | 11.0 |
| $ | 6.0 |
| $ | 21.9 |
| $ | 15.1 |
| |
| Net income | | $ | 7.7 |
| $ | 11.0 |
| $ | 21.7 |
| $ | 21.9 |
|
| Transportation volumes (MMdk) | 92.7 |
| 82.4 |
| 259.3 |
| 229.0 |
| 111.1 |
| 92.7 |
| 319.9 |
| 259.3 |
|
| Natural gas gathering volumes (MMdk) | 3.8 |
| 4.1 |
| 11.2 |
| 12.1 |
| 3.6 |
| 3.8 |
| 10.5 |
| 11.2 |
|
| Customer natural gas storage balance (MMdk): | | |
| Beginning of period | 16.2 |
| 25.1 |
| 22.4 |
| 26.4 |
| 11.4 |
| 16.2 |
| 13.9 |
| 22.4 |
|
| Net injection | 7.1 |
| 9.5 |
| .9 |
| 8.2 |
| 12.8 |
| 7.1 |
| 10.3 |
| .9 |
|
| End of period | 23.3 |
| 34.6 |
| 23.3 |
| 34.6 |
| 24.2 |
| 23.3 |
| 24.2 |
| 23.3 |
|
Three Months Ended September 30, 2018,2019, Compared to Three Months Ended September 30, 20172018 Pipeline and midstream earnings increased $5.0decreased $3.3 million (84(29 percent) as a result of:
Revenues: Increase of $700,000,$4.1 million, largely attributable to higher nonregulated project revenues of $1.6 million, resulting from increased project workloads. The segment also had increased volumes of natural gas transported through its system as a result of an organic growth projectprojects completed in September 2018 which were more than offset by decreased storage related revenue reflectingand increased rates effective May 1, 2019, due to the decrease in natural gas pricing spreads,rate case recently finalized with the FERC, as discussed in the Outlook section.Note 19.
Operation and maintenance:Increase of $2.0 million, primarily from higher nonregulated project costs directly related to the increase in nonregulated project workloads, as previously discussed, as well as higher material costs, contract services and professional services. Partially offsetting these increases were lower payroll-related costs.
Depreciation, depletion and amortization: Comparable to the same period in prior year.
Taxes, other than income: Comparable to the same period in prior year.
OtherDepreciation, depletion and amortization: Increase of $1.3 million, primarily due to higher depreciation rates effective May 1, 2019, due to the recently finalized rate case with the FERC, as discussed in Note 19, and increased property, plant and equipment balances, largely the result of organic growth projects that have been placed into service.
Taxes, other than income: Increase of $500,000$300,000 resulting from higher property taxes in certain jurisdictions.
Other income: Decreaseof$700,000 as a result of higherlower AFUDC.
Interest expense: Increase of $400,000, largely resulting from higher debt balances.Comparable to the same period in prior year.
Income taxes: DecreaseIncrease of $6.2$4.7 million, primarily due todriven by the realizationabsence in 2019 of a $4.2 millionan income tax benefit related to the reversal of a previously recorded regulatory liability recorded in 2017 based on a FERC final accounting order issued during the third quarter of 2018, lower corporate tax rate resulting from the enactment of the TCJA and the reduction of income before income taxes.2018.
Nine Months Ended September 30, 2018,2019, Compared to Nine Months Ended September 30, 20172018 Pipeline and midstream earnings increased $6.8 million (45decreased $200,000 (1 percent) as a result of:
Revenues: Increase of $3.6$11.6 million, largely attributable to higher nonregulated project revenues, as previously discussed, and higher transportation revenuesincreased volumes of $1.4 millionnatural gas transported through its system as a result of organic growth projects completed in 2018 and increased rates effective May 1, 2019, due to the second quarter of 2017 and September 2018, which contributed to increased volumes of natural gas being transported through its system. These increases were partially offset by decreased storage related revenues reflectingrate case recently finalized with the decrease in natural gas pricing spreads,FERC, as discussed in the Outlook section.Note 19. Revenue was also positively impacted by higher nonregulated project revenue.
Operation and maintenance: Increase of $3.9$2.0 million, primarilylargely from higher nonregulated project costs as a result of increased nonregulated project revenue, as previously discussed, materials, professional services and contract services.higher material and payroll-related costs.
Depreciation, depletion and amortization: Increase of $700,000,$2.5 million, primarily due to increased property, plant and equipment balances, largely resulting fromthe result of organic growth projects.projects that have been placed into service, and higher depreciation rates effective May 1, 2019, due to the recently finalized rate case with the FERC, as discussed in Note 19.
Taxes, other than income: Comparable to the same periodIncrease of $800,000 driven by higher property taxes in prior year.certain jurisdictions.
Other income: Comparable toDecrease of $400,000 as a result of lower AFUDC, partially offset by higher returns on the same period in prior year.Company's benefit plan investments.
Interest expense: Increase of $300,000,$1.2 million, largely resulting from higher debt balances.balances to finance the organic growth projects completed during 2018, as previously discussed.
Income taxes: DecreaseIncrease of $8.0$4.9 million, primarily duedriven by the absence in 2019 of an income tax benefit related to the realizationreversal of a $4.2 million benefit, as previously discussed, lower corporate tax rate resulting fromrecorded regulatory liability based on a FERC final accounting order issued during the enactmentthird quarter of the TCJA and the reduction of income before income taxes.2018.
Outlook The Company has continued to experience the effects of natural gas production at record levels, which is keepinghas provided opportunities for organic growth projects and increased demand. The completion of organic growth projects has contributed to the Company transporting increasing volumes of natural gas through its system. The record levels of natural gas supply have moderated the need for storage services and put downward pressure on natural gas prices and spreadsminimized pricing volatility. Both natural gas production levels and pressure on natural gas prices are expected to continue in the near term. The Company continues to focus on growth and improving existing operations through organic projects in all areas in which it operates. The following describes recent growth projects.
Construction on the Company's Valley Expansion project, a 38-mile pipeline that will deliver natural gas supply to eastern North Dakota and far western Minnesota, began in May 2018. The project, which is designed to transport 40 MMcf of natural gas per day, is under the jurisdiction of the FERC. Construction is on schedule with an in-service date in November 2018.
In September 2018,2019, the Company completed construction and placed into service Line Section 27 Expansion project in the Bakken area of northwestern North Dakota. The project includes approximately 13 miles of new pipeline and associated facilities. The project increases capacity by over 200 MMcf per day and brings total capacity of Line Section 27 to over 600 MMcf per day.
Earlier this year, the Company announced two additional natural gas pipeline growth projects, the Demicks Lake project and Line Section 22 Expansion project.in McKenzie County, North Dakota, as scheduled. The Company has signed long-term commitment contracts supporting both projects. The Demicks Lake project which includesincluded approximately 14 miles of 20-inch pipe and will increaseincreased capacity by 175 MMcf per day, is located in McKenzie County, North Dakota. Construction is expected to begin in 2019, with an in-service date inday. The Company began construction on the fall of 2019. The Line Section 22 Expansion project in the Billings, Montana, area is also scheduled for construction in May of 2019 with an expected in-service date in lateNovember 2019. The project willis designed to increase capacity by 22.5 MMcf per day to serve incremental demand in Billings, Montana. The Company has signed long-term contracts supporting both projects.
Additionally, the Company expects to begin construction on the Demicks Lake Expansion project, located in McKenzie County, North Dakota, in the fourth quarter of 2019. The Company has signed a long-term contract supporting this project, which is designed to increase capacity by 175 MMcf per day. The Demicks Lake Expansion project is expected to be in-service in the first quarter of 2020.
In 2017,January 2019, the Company completed and placed into serviceannounced the Charbonneau and Line Section 25 expansion projects,North Bakken Expansion project, which includeincludes construction of a new pipeline, compression station, as well as other compressor additions and enhancements at existing stations. Partly due to the completion of these two expansion projects and the Line Section 27 project, the Company continuesancillary facilities to transport increasing volumesnatural gas from core Bakken production areas near Tioga, North Dakota, and extend to a new connection with Northern Border Pipeline in McKenzie County, North Dakota. The Company's long-term customer commitments and anticipated incremental commitments with the continuing record levels of natural gas through its system.
The impactproduction in the Bakken region support the project at an increased design capacity of 350 MMcf per day. Construction is expected to begin in early 2021 with an estimated completion date late in 2021, which is dependent on regulatory and environmental permitting. On June 28, 2019, the Company filed with the FERC a request to initiate the National Environmental Policy Act pre-filing process and received FERC approval of the TCJApre-filing request on the pipeline and midstream segment remains uncertain. As such, the regulated pipeline is using the deferral method of accounting for the revaluation of its regulated deferred tax assets and liabilities associated with non-negotiated rate contracts. No reserves have been established as a result of the TCJA enactment. The Company continues to monitor the FERC activity regarding TCJA, as discussed in Note 16.
The Company currently does not have any labor contracts in negotiations at the pipeline and midstream segment.July 3, 2019.
Construction Materials and Contracting
Strategy and challenges The construction materials and contracting segment provides an integrated set of aggregate-based construction services, as discussed in Note 14.17. The segment focuses on high-growth strategic markets located near major transportation corridors and desirable mid-sized metropolitan areas; strengthening the long-term, strategic aggregate reserve position through available purchase and/or lease opportunities; enhancing profitability through cost containment, margin discipline and vertical integration of the segment's operations; development and recruitment of talented employees; and continued growth through organic and acquisition opportunities.
A key element of the Company's long-term strategy for this business is to further expand its market presence in the higher-margin materials business (rock, sand, gravel, liquid asphalt, asphalt concrete, ready-mixed concrete and related products), complementing and expanding on the segment's expertise. The Company's acquisitions thus far in 2018 supportacquisition activity supports this strategy.
As one of the country's largest sand and gravel producers, the segment will continuecontinues to strategically manage its nearlyapproximately 1.0 billion tons of aggregate reserves in all its markets, as well as take further advantage of being vertically integrated. The segment's vertical integration allows the segment to manage operations from aggregate mining to final lay-down of concrete and asphalt, with control of and access to permitted aggregate reserves being significant. The Company's aggregate reserves are naturally declining and as a result, the Company seeks acquisition opportunities to replace the reserves. In 2018, the Company's aggregate reserves increased by approximately 50 million tons primarily due to acquisition activity.
The construction materials and contracting segment faces challenges that are not under the direct control of the business. The segment operates in geographically diverse and highly competitive markets. Competition can put negative pressure on the segment's operating margins. The segment is also subject to volatility in the cost of raw materials such as diesel fuel, gasoline, liquid asphalt, cement and steel. In 2018,Although it is difficult to determine the segment has experienced highersplit between inflation and supply/demand increases, diesel fuel andcosts remained fairly stable for the first nine months of 2019, while asphalt oil costs ashave trended higher in 2019 compared to 2017.2018. Such volatility can have a negative impact on the segment's margins. Other variables that can impact the segment's margins include adverse weather conditions, the timing of project starts or completion and declines or delays in new and existing projects due to the cyclical nature of the construction industry and federalgovernmental infrastructure spending.
The segment also faces challenges in the recruitment and retention of employees. Trends in the labor market include an aging workforce and availability issues. The segment continues to face increasing pressure to reducecontrol costs, as well as find and increasetrain a skilled workforce to meet the useneeds of temporary employment because of the seasonality of the work performed in certain regions.increasing demand and seasonal work.
Earnings overview - The following information summarizes the performance of the construction materials and contracting segment. | | | | Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended |
| | September 30, | September 30, |
| | 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | (Dollars in millions) | (Dollars in millions) |
| Operating revenues | $ | 743.9 |
| $ | 686.1 |
| $ | 1,466.9 |
| $ | 1,388.6 |
| $ | 869.5 |
| $ | 743.9 |
| $ | 1,692.7 |
| $ | 1,466.9 |
|
| Cost of sales: | | |
| Operation and maintenance | 586.0 |
| 537.1 |
| 1,210.9 |
| 1,143.5 |
| 668.9 |
| 586.0 |
| 1,384.4 |
| 1,210.9 |
|
| Depreciation, depletion and amortization | 15.1 |
| 13.2 |
| 42.1 |
| 39.3 |
| 19.7 |
| 15.1 |
| 55.2 |
| 42.1 |
|
| Taxes, other than income | 11.8 |
| 11.3 |
| 30.8 |
| 29.7 |
| 13.4 |
| 11.8 |
| 34.8 |
| 30.8 |
|
| Total cost of sales | 612.9 |
| 561.6 |
| 1,283.8 |
| 1,212.5 |
| 702.0 |
| 612.9 |
| 1,474.4 |
| 1,283.8 |
|
| Gross margin | 131.0 |
| 124.5 |
| 183.1 |
| 176.1 |
| 167.5 |
| 131.0 |
| 218.3 |
| 183.1 |
|
| Selling, general and administrative expense: | | |
| Operation and maintenance | 20.1 |
| 18.1 |
| 57.3 |
| 55.1 |
| 22.7 |
| 20.1 |
| 64.6 |
| 57.3 |
|
| Depreciation, depletion and amortization | .5 |
| .8 |
| 1.6 |
| 2.8 |
| .9 |
| .5 |
| 2.4 |
| 1.6 |
|
| Taxes, other than income | .8 |
| .7 |
| 3.6 |
| 3.2 |
| .9 |
| .8 |
| 3.7 |
| 3.6 |
|
| Total selling, general and administrative expense | 21.4 |
| 19.6 |
| 62.5 |
| 61.1 |
| 24.5 |
| 21.4 |
| 70.7 |
| 62.5 |
|
| Operating income | 109.6 |
| 104.9 |
| 120.6 |
| 115.0 |
| 143.0 |
| 109.6 |
| 147.6 |
| 120.6 |
|
| Other income (expense) | (.1 | ) | (.1 | ) | (1.0 | ) | .2 |
| .2 |
| (.1 | ) | 1.5 |
| (1.0 | ) |
| Interest expense | 4.4 |
| 3.8 |
| 12.5 |
| 11.3 |
| 6.4 |
| 4.4 |
| 18.6 |
| 12.5 |
|
| Income before income taxes | 105.1 |
| 101.0 |
| 107.1 |
| 103.9 |
| 136.8 |
| 105.1 |
| 130.5 |
| 107.1 |
|
| Income taxes | 26.2 |
| 37.8 |
| 27.4 |
| 39.4 |
| 34.2 |
| 26.2 |
| 33.2 |
| 27.4 |
|
| Earnings | $ | 78.9 |
| $ | 63.2 |
| $ | 79.7 |
| $ | 64.5 |
| |
| Net income | | $ | 102.6 |
| $ | 78.9 |
| $ | 97.3 |
| $ | 79.7 |
|
| Sales (000's): | |
| |
| |
| |
| |
| |
| |
| |
|
| Aggregates (tons) | 10,366 |
| 10,078 |
| 21,860 |
| 20,957 |
| 11,860 |
| 10,366 |
| 24,815 |
| 21,860 |
|
| Asphalt (tons) | 3,380 |
| 3,009 |
| 5,581 |
| 5,054 |
| 3,317 |
| 3,380 |
| 5,396 |
| 5,581 |
|
| Ready-mixed concrete (cubic yards) | 1,103 |
| 1,098 |
| 2,623 |
| 2,697 |
| 1,372 |
| 1,103 |
| 3,124 |
| 2,623 |
|
Three Months Ended September 30, 2018,2019, Compared to Three Months Ended September 30, 20172018 Construction materials and contracting'scontracting earnings increased $15.7$23.7 million (25(30 percent) as a result of:
Revenues: Increase of $57.8$125.6 million, primarily the result of increased asphalt product volumes, largely attributablehigher revenues from contracting services and material sales due to recent acquisitions and increased agency work. Also contributing to increased revenue was the strong demandeconomic environments in certain regions for construction work.states and additional material volumes associated with the businesses acquired since the third quarter of 2018.
Gross margin: Increase of $6.5$36.5 million, largely due to the higher revenues resulting from strong economic environments in certain states, as previously discussed, higher asphalt product volumescontracting bid margins and margins, largely attributable to recent acquisitions, lower mobilization costs and increased agency work.higher realized material prices. Also contributing to thewas an increase was higher construction revenues and margins due to favorable job performance and strong demandin gains from asset sales in certain regions. Partially offsetting these margin increases were decreased margins on other product lines.regions of approximately $7.0 million.
Selling, general and administrative expense: Increase of $1.8$3.1 million, primarily payroll-related costs and professional serviceslargely related to the recent acquisitions.businesses acquired since the third quarter of 2018 and higher payroll-related costs.
Other income:income (expense): Comparable to the same period in prior year.
Interest expense: Increase of $600,000,$2.0 million, largely resulting from higher debt balances as a result of recent acquisitions, capital expenditures and higher working capital needs.acquisitions.
Income taxes: DecreaseIncrease of $11.6$8.0 million, due tolargely the enactmentresult of the TCJA that lowered the corporate tax rate.increased income before income taxes.
Nine Months Ended September 30, 2018,2019, Compared to Nine Months Ended September 30, 20172018 Construction materials and contracting'scontracting earnings increased $15.2$17.6 million (24(22 percent) as a result of:
Revenues: Increase of $78.3$225.8 million, primarily the result of increased asphalt product volumeshigher revenues from contracting services and material sales due to increased agency demand and increased aggregate volumes as a result of strong market demand. Also contributing to increased revenue was the strong demandeconomic environments in certain regions for construction work.states and additional material volumes associated with the businesses acquired since the third quarter of 2018.
Gross margin: Increase of $7.0$35.2 million, largely resulting from higher construction revenues and margins, which were positively impacted by favorable job performance and strong demand in certain regions. Also contributing to the increase were higher asphalt product volumes and margins due to increased agency demand and timing of projects and higher aggregate volumes and margins due to strong market demand. Partially offsetting these increases were lower ready-mixed concrete volumeseconomic environments in certain states, as previously discussed, higher contracting bid margins and margins due to a decreasehigher realized material prices. Also contributing was an increase in available work and unfavorable weather conditions and decreased marginsgains on other product lines.asset sales in certain regions of approximately $6.8 million.
Selling, general and administrative expense:Increase of $1.4$8.2 million, largely professional servicesprimarily related to the acquisitions in 2018.businesses acquired since the third quarter of 2018 and higher payroll-related costs.
Other income:income (expense): DecreaseIncrease of $1.2$2.5 million, largelyprimarily due to higher returns on the result of lower returns onCompany's benefit plan investments.
Interest expense: Increase of $1.2$6.1 million, largely resulting from higher debt balances.balances as a result of recent acquisitions.
Income taxes: DecreaseIncrease of $12.0$5.8 million, due tolargely the enactmentresult of the TCJA that lowered the corporate tax rate.increased income before income taxes.
Outlook The segment's vertically integrated aggregates basedaggregates-based business model provides the Company with the ability to capture margin throughout the sales delivery process. The aggregate products are sold internally and externally for use in other products such as ready-mixed concrete, asphaltic concrete and public and private construction markets. The contracting services and construction materials are sold primarily to construction contractors in connection with street, highway and other public infrastructure projects, as well as private commercial and residential development projects. The public infrastructure projects have traditionally been more stable markets as public funding is more secure during periods of economic decline. The public funding is, however, dependent on state and federal funding such as appropriations to the Federal Highway Administration. Spending on private development is highly dependent on both local and national economic cycles, providing additional sales during times of strong economic cycles.
The Company remains optimistic about overall economic growth and infrastructure spending. The IBIS WorldIBISWorld Incorporated Industry Report issued in May 2018June 2019 for sand and gravel mining in the United States projects a 1.81.1 percent annual growth rate over the next five years.through 2024. The report also states the demand for clay and refractory materials is projected to continue deteriorating in several downstream manufacturing industries, butindustries. However, the report expects this decline will be offset by stronger demand fromrising activity in the housing marketresidential and buoyant demand fromnonresidential construction markets, growing public sector investment in the highway and bridge construction market. Thismarkets and the oil and gas sector growth. The Company believes stronger demand in the housing construction markets along with continued demand from the highway and bridge construction markets should provide a stable demand for construction materials and contracting products and services in the near future.
In April 2018,the first quarter of 2019, the Company purchased additional aggregate deposits in Texas, which augments existing company operations and enhances its ability to sell aggregates to third parties in the coming years. Also, in the first quarter of 2019, the Company acquired Teevin & Fischer Quarry, LLC, a crushed rock and gravel supplier in northwestern Oregon. In June 2018, the Company acquired Tri-City Paving,Viesko Redi-Mix, Inc., a general contractor and aggregate, asphalt and ready-mixed concrete supplier headquartered in Little Falls, Minnesota. In July 2018, the Company acquired Molalla Redi-Mix and Rock Products, Inc., which produces ready-mixed concrete in Molalla,near Salem, Oregon. In October, 2018, the Company acquired Sweetman Construction Company, a premier provider of aggregates, asphalt and ready-mixed concrete in Sioux Falls, South Dakota. These acquisitions are expected to be accretive to the segment's earnings for 2018, as well as into 2019. The Company continues to evaluate additional acquisition opportunities. For more information on these acquisitions,the Company's business combinations, see Notes 9 and 18.Note 9.
The construction materials and contracting segment's backlog at September 30, 2018,2019, was $590.0$746.9 million, up from $519.7$590.0 million at September 30, 2017.2018. The increase in backlog was primarily attributable to increased state agency work.work and bidding opportunities in nearly every region. The Company expects to complete a significant amount of backlog at September 30, 2019, during the next 12 months.
During the second quarter of 2019, the governor of Oregon signed House Bill 3427, which creates a Corporate Activity Tax. The tax was enacted in the third quarter of 2019 and is effective for the Company on January 1, 2020. The Company does not expect the additional taxation will have a material impact of the TCJA on the economy as a whole continues to be unclear at this time. As such, the impact to the construction materials and contracting industry is also uncertain. Under the TCJA, the domestic production deduction is no longer available. The domestic production deduction was originally introducedsegment due to incentivize domestic production activities and was a deduction of up to 9 percent on qualified production activity income for which this segment's activities qualified. The Company expects the lower federal corporate tax rate will more than offset the losstheir operations in Oregon.
Five of the domestic production deduction for this segment.
The Company currently does not have any labor contracts that Knife River was negotiating, as reported in negotiations atItems 1 and 2 - Business Properties - General in the construction materials and contracting segment.2018 Annual Report, have been ratified.
Construction Services
Strategy and challenges The construction services segment provides inside and outside specialty contracting, as discussed in Note 14.17. The construction services segment focuses on providing a superior return on investment by building new and strengthening existing customer relationships; ensuring quality service; safely executing projects; effectively controlling costs; collecting on receivables; retaining, developing and recruiting talented employees; growing through organic and acquisition opportunities; and focusing efforts on projects that will permit higher margins while properly managing risk.
The construction services segment faces challenges in the highly competitive markets in which it operates. Competitive pricing environments, project delays, changes in management's estimates of variable consideration and the effects offrom restrictive regulatory requirements have negatively impacted revenues and margins in the past and could affect revenues and margins in the future. Additionally, margins may be negatively impacted on a quarterly basis due to adverse weather conditions, as well as timing of project starts or completions, declines or delays in new projects due to the cyclical nature of the construction industry and other
factors. These challenges may also impact the risk of loss on certain projects. 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. These trends include an aging workforce and labor availability issues, increasing pressure to reduce costs and improve reliability, and increasing duration and complexity of customer capital programs. Due to these and other factors, the Company believes customer demand for labor resources will continue to increase, possibly surpassing the supply of industry resources.
Earnings overview - The following information summarizes the performance of the construction services segment.
| | | | Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended |
| | September 30, | September 30, |
| | 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | (In millions) | (In millions) |
| Operating revenues | $ | 330.4 |
| $ | 374.5 |
| $ | 988.0 |
| $ | 1,010.4 |
| $ | 479.6 |
| $ | 330.4 |
| $ | 1,365.4 |
| $ | 988.0 |
|
| Cost of sales: | | |
| Operation and maintenance | 289.3 |
| 318.6 |
| 838.0 |
| 856.1 |
| 409.0 |
| 289.3 |
| 1,151.7 |
| 838.0 |
|
| Depreciation, depletion and amortization | 3.5 |
| 3.5 |
| 10.7 |
| 10.8 |
| 3.7 |
| 3.5 |
| 11.1 |
| 10.7 |
|
| Taxes, other than income | 9.7 |
| 11.0 |
| 32.0 |
| 33.7 |
| 14.1 |
| 9.7 |
| 44.6 |
| 32.0 |
|
| Total cost of sales | 302.5 |
| 333.1 |
| 880.7 |
| 900.6 |
| 426.8 |
| 302.5 |
| 1,207.4 |
| 880.7 |
|
| Gross margin | 27.9 |
| 41.4 |
| 107.3 |
| 109.8 |
| 52.8 |
| 27.9 |
| 158.0 |
| 107.3 |
|
| Selling, general and administrative expense: | | |
| Operation and maintenance | 14.6 |
| 17.9 |
| 51.0 |
| 50.2 |
| 21.4 |
| 14.6 |
| 63.9 |
| 51.0 |
|
| Depreciation, depletion and amortization | .4 |
| .4 |
| 1.1 |
| 1.1 |
| .5 |
| .4 |
| 1.3 |
| 1.1 |
|
| Taxes, other than income | 1.0 |
| .8 |
| 3.3 |
| 3.0 |
| .9 |
| 1.0 |
| 3.4 |
| 3.3 |
|
| Total selling, general and administrative expense | 16.0 |
| 19.1 |
| 55.4 |
| 54.3 |
| 22.8 |
| 16.0 |
| 68.6 |
| 55.4 |
|
| Operating income | 11.9 |
| 22.3 |
| 51.9 |
| 55.5 |
| 30.0 |
| 11.9 |
| 89.4 |
| 51.9 |
|
| Other income | .5 |
| .3 |
| 1.1 |
| 1.1 |
| .3 |
| .5 |
| 1.4 |
| 1.1 |
|
| Interest expense | .9 |
| 1.0 |
| 2.7 |
| 2.8 |
| 1.6 |
| .9 |
| 4.0 |
| 2.7 |
|
| Income before income taxes | 11.5 |
| 21.6 |
| 50.3 |
| 53.8 |
| 28.7 |
| 11.5 |
| 86.8 |
| 50.3 |
|
| Income taxes | 2.2 |
| 8.5 |
| 11.8 |
| 20.9 |
| 7.6 |
| 2.2 |
| 22.8 |
| 11.8 |
|
| Earnings | $ | 9.3 |
| $ | 13.1 |
| $ | 38.5 |
| $ | 32.9 |
| |
| Net income | | $ | 21.1 |
| $ | 9.3 |
| $ | 64.0 |
| $ | 38.5 |
|
Three Months Ended September 30, 2018,2019, Compared to Three Months Ended September 30, 20172018 Construction services earnings decreased $3.8increased $11.8 million (29(128 percent) as a result of:
Revenues: DecreaseIncrease of $44.1$149.2 million, largely duethe result of higher inside specialty contracting workloads from greater customer demand for hospitality and high-tech projects. Also contributing to the completionincrease was higher outside specialty contracting workloads, primarily the result of construction projects in 2017 and a net decrease in revenuesincreased demand for utility projects. Revenue was also positively impacted by the absence of $9.5 million duein changes to changesestimates recorded in estimatesthe third quarter of 2018 for variable consideration previously recognized on certain construction contracts. These decreases are offset in part by an increase in equipment sales and rentals.
Gross margin: DecreaseIncrease of $13.5$24.9 million, largelyprimarily due to the higher volume of work resulting from a net decreasein an increase in revenues, of $9.5 million due to changes in estimates of variable consideration, as previously discussed. Partially offsettingdiscussed, partially offset by an increase in operation and maintenance expense as a direct result of the decrease wasexpenses related to the increased outside equipment sales and rentals.workloads.
Selling, general and administrative expense: DecreaseIncrease of $3.1$6.8 million, primarily payroll-related costs, as well as increased professional services and decreased bad debt expense offset in part by higher office expense and outside professional costs.expenses.
Other income: Comparable to the same period in prior year.
Interest expense: ComparableIncrease of $700,000, primarily due to higher debt balances as a result of additional working capital needs during the same period in prior year.construction season.
Income taxes: DecreaseIncrease of $6.3$5.4 million, largely due to the enactment of the TCJA on January 1, 2018, which reduced the corporate tax rate creating a favorable impact compared to the third quarter of 2017.an increase in income before income taxes.
Nine Months Ended September 30, 2018,2019, Compared to Nine Months EndedSeptember 30, 20172018 Construction services earnings increased $5.6$25.5 million (17(66 percent) as a result of:
Revenues: ComparableIncrease of $377.4 million, largely the result of higher inside specialty contracting workloads from greater customer demand for hospitality and high-tech projects. Also contributing to the same periodincrease was higher outside specialty contracting workloads, primarily the result of increased demand for utility projects. Revenue was also positively impacted by the absence of $9.5 million in prior year.changes to estimates recorded in the third quarter of 2018 for variable consideration previously recognized on certain construction contracts.
Gross margin: DecreaseIncrease of $2.5$50.7 million, largely resulting from a net decrease in revenuesprimarily due to changesthe higher volume of work resulting in estimates of variable consideration on certain construction contracts,an increase in revenues, as previously discussed, as wellpartially offset by an increase in operation and maintenance expense as a reductiondirect result of inside specialty contracting gross margins driven by decreased workloads and customer demand. Partially offsetting these decreases were higherthe expenses related to the increased workloads.
outside equipment sales and rentals.
Selling, general and administrative expense: Increase of $1.1$13.2 million, primarily due topayroll-related costs, as well as increased office expenseexpenses and outside professional costs offset in part by decreased payroll-related costs and bad debt expense.services.
Other income: Comparable to the same period in prior year.
Interest expense: ComparableIncrease of $1.3 million, primarily due to higher debt balances as a result of additional working capital needs during the same period in prior year.construction season.
Income taxes: DecreaseIncrease of $9.1$11.0 million, primarilylargely due to the enactment of the TCJA, as previously discussed, which created a favorable impact compared to the nine months ended September 30, 2017.an increase in income before income taxes.
Outlook The Company continues to expect long-term growth in the electric transmission market, although the timing of large bids and subsequent construction is likely to be highly variable from year to year. For the remainder of 2018 and into 2019, the Company continues to believe several projects will be available for bid, including bidding activity in small and medium-sized projects.
The Company continues to expectexpects bidding activity to remain strong infor both outsideinside and insideoutside specialty construction companies for the remainder of 2018 and intoin 2019. Although bidding remains highly competitive in all areas, the Company expects the segment's skilled workforce will continue to provide a benefit in securing and executing profitable projects. The construction services segment had backlog at September 30, 2018,2019, of $896.3 million,$1.2 billion, up from $675.8$896.3 million at September 30, 2017.2018. The increase in backlog was primarilylargely attributable to an increasethe new project opportunities that the Company continues to see across its diverse operations, particularly in inside specialty construction projects based on customer demand.electrical and mechanical contracting for the hospitality and gaming, high-tech, mission critical and public entities. The Company's outside power, communications and natural gas specialty operations also have a high volume of available work. The Company expects to complete a significant amount of backlog at September 30, 2019, during the next 12 months. Additionally, the Company continues to further evaluate potential acquisition opportunities that would be accretive to the Company and continue to grow the Company's backlog.
The impactIn the third quarter of 2019, the TCJACompany purchased the assets of Pride Electric, Inc., an electrical construction company in Redmond, Washington. For more information on the economy asCompany's business combinations, see Note 9.
During the second quarter of 2019, the governor of Oregon signed House Bill 3427, which creates a whole continues to remain unclear at this time. As such,Corporate Activity Tax. The tax was enacted in the impact tothird quarter of 2019 and is effective for the construction services industry is also uncertain. While it is unclear whatCompany on January 1, 2020. The Company does not expect the additional taxation will have a material impact the TCJA may have on the construction services industry, the Company is optimistic about overall economic growth and infrastructure spending and believes that improving industry activity will continuesegment due to their operations in both market segments and the drivers for investment will remain intact. As the Company continues to experience growth in its operations, the impacts of the lower corporate tax rate offsets the increase in taxes on operating income. The Company believes that regulatory reform, state renewable portfolio standards, the aging of the electric grid, and the general improvement of the economy will positively impact the level of spending by its customers. Although competition remains strong, these trends are viewed as positive factors in the future.
The Company currently does not have any labor contracts in negotiations at the construction services segment.Oregon.
Other
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | Nine Months Ended |
| | September 30, | | September 30, | | September 30, |
| | 2018 |
| 2017 |
| | 2018 |
| 2017 |
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | (In millions) | | (In millions) |
| Operating revenues | $ | 3.1 |
| $ | 2.1 |
| | $ | 8.5 |
| $ | 6.1 |
| | $ | 2.9 |
| $ | 3.1 |
| $ | 13.6 |
| $ | 8.5 |
|
| Operating expenses: | | | | | |
| Operation and maintenance | 2.6 |
| .1 |
| | 6.5 |
| 5.8 |
| | 3.6 |
| 2.6 |
| 11.8 |
| 6.5 |
|
| Depreciation, depletion and amortization | .5 |
| .5 |
| | 1.5 |
| 1.5 |
| | .5 |
| .5 |
| 1.5 |
| 1.5 |
|
| Taxes, other than income | — |
| — |
| | .1 |
| .1 |
| | — |
| — |
| .1 |
| .1 |
|
| Total operating expenses | 3.1 |
| .6 |
| | 8.1 |
| 7.4 |
| | 4.1 |
| 3.1 |
| 13.4 |
| 8.1 |
|
| Operating income (loss) | — |
| 1.5 |
| | .4 |
| (1.3 | ) | | (1.2 | ) | — |
| .2 |
| .4 |
|
| Other income | .4 |
| .3 |
| | .6 |
| .6 |
| | .2 |
| .4 |
| .7 |
| .6 |
|
| Interest expense | .5 |
| .8 |
| | 2.2 |
| 2.7 |
| | .4 |
| .5 |
| 1.5 |
| 2.2 |
|
| Income (loss) before income taxes | (.1 | ) | 1.0 |
| | (1.2 | ) | (3.4 | ) | | |
| Loss before income taxes | | (1.4 | ) | (.1 | ) | (.6 | ) | (1.2 | ) |
| Income taxes | (4.9 | ) | .4 |
| | (3.1 | ) | (1.5 | ) | | (5.4 | ) | (4.9 | ) | (4.1 | ) | (3.1 | ) |
| Earnings (loss) | $ | 4.8 |
| $ | .6 |
| | $ | 1.9 |
| $ | (1.9 | ) | | |
| Net income | | $ | 4.0 |
| $ | 4.8 |
| $ | 3.5 |
| $ | 1.9 |
|
Three Months Ended September 30, 2019, Compared to Three Months Ended September 30, 2018 Included in Other are general and administrative costs and interest expense previously allocated to the exploration and production and refining businesses that do not meet the criteria for income (loss) from discontinued operations, as well as otheroperations. Favorable income tax adjustments in 2018.
Discontinued OperationsNine Months Ended September 30, 2019, Compared to Nine Months Ended September 30, 2018 Included in Other was insurance activity at the Company's captive insurer which impacted both operating revenues and operation and maintenance expense. 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 are also included in Other. Favorable income tax adjustments related to the consolidated Company's annualized estimated tax rate for 2019 positively impacted the results of Other.
|
| | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | |
| | September 30, | | September 30, | |
| | 2018 |
| 2017 |
| | 2018 |
| 2017 |
| |
| | (In millions) | |
| Income (loss) from discontinued operations before intercompany eliminations, net of tax | $ | (.1 | ) | $ | (.3 | ) | | $ | .1 |
| $ | 2.4 |
| |
| Intercompany eliminations | — |
| (1.9 | ) | * | — |
| (6.1 | ) | * |
| Income (loss) from discontinued operations, net of tax | $ | (.1 | ) | $ | (2.2 | ) | | $ | .1 |
| $ | (3.7 | ) | |
| |
* | Includes eliminations for the presentation of income tax adjustments between continuing and 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:
|
| | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | |
| | September 30, | | September 30, | |
| | 2018 |
| 2017 |
| | 2018 |
| 2017 |
| |
| | (In millions) | |
| Intersegment transactions: | | | | |
| |
| |
| Operating revenues | $ | 7.2 |
| $ | 5.6 |
| | $ | 41.7 |
| $ | 37.6 |
| |
| Operation and maintenance | 4.1 |
| 2.5 |
| | 10.4 |
| 6.6 |
| |
| Purchased natural gas sold | 3.1 |
| 3.1 |
| | 31.3 |
| 31.0 |
| |
| Income from continuing operations | — |
| (1.9 | ) | * | — |
| (6.1 | ) | * |
| |
* | Includes eliminations for the presentation of income tax adjustments between continuing and discontinued operations. |
|
| | | | | | | | | | | | |
| | Three Months Ended | Nine Months Ended |
| | September 30, | September 30, |
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | (In millions) |
| Intersegment transactions: | | | |
| |
|
| Operating revenues | $ | 8.0 |
| $ | 7.2 |
| $ | 51.3 |
| $ | 41.7 |
|
| Operation and maintenance | 4.3 |
| 4.1 |
| 16.2 |
| 10.4 |
|
| Purchased natural gas sold | 3.7 |
| 3.1 |
| 35.1 |
| 31.3 |
|
For more information on intersegment eliminations, see Note 14.17.
Liquidity and Capital Commitments
At September 30, 2018,2019, the Company had cash and cash equivalents of $67.1$67.0 million and available borrowing capacity of $479.5$543.6 million under the outstanding credit facilities of the Company and itsCompany's 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 of the Company's credit facilities,subsidiaries, as described in Capital resources; the issuance of long-term debt; and the issuance of equity securities.
Cash flows
Operating activities The changes in cash flows from operating activities generally follow the results of operations as discussed in Business Segment Financial and Operating Data and also are affected by changes in working capital. Cash flows provided by operating activities in the first nine months of 2018 increased $45.52019 decreased $114.3 million from the comparable period in 2017.
Increases:2018. The increasedecrease in cash flows provided by operating activities was largely driven by stronger collectionan increase in accounts receivable as a result of accounts receivablehigher revenues at the construction services business and bonus depreciation for tax purposes duebusinesses as compared to the TCJA at the construction materials and contracting business.prior period. Also contributing to the increasedecrease in cash flows provided by operating activities was the changeincrease in natural gas purchases that include the effects of colder weather, higher gas costs recoverable and the usetiming of a prepaid gas contract resulting in lower gas purchasescollection of such balances from customers at the natural gas distribution business, as well asbusiness. Partially offsetting
these decreases to cash flows provided by operating activities were lower inventory balances due to the increase in the Company's consolidated earnings during the first nine months of 2018.
Decreases: Partially offsetting these increases were higher inventory balancesworkloads at the construction materials and contracting business duein 2019 as compared to higher asphalt oilthe increase in inventory largely resulting from higher average per ton cost, and higher aggregate inventory from higher productionbalances in 2018. Operating cash flows from discontinued operations also decreased2018 due to the realizationactivity of net operating loss carryforwards in 2017.the acquired businesses.
Investing activities Cash flows used in investing activities in the first nine months of 20182019 was $361.3$448.6 million compared to $98.9$361.3 million in the first nine months of 20172018. The increase in cash used in investing activities was primarily related to the absence in 2018 of net proceeds from the sale of Pronghorn in January 2017 and higher capital expenditures at the pipeline and midstream business; acquisition activity and asset purchases offset in the second and third quarters of 2018part by proceeds on asset sales at the construction materials and contracting business; and higher capital expenditures related to various construction projects in 2018 at the electric and natural gas distribution businesses.
Financing activities Cash flows provided by financing activities in the first nine months of 20182019 was $76.4$258.6 million compared to cash flows used in financing activities of $181.7$76.4 million in the first nine months of 2017.2018. The change was largely the result of proceeds from issuance of common stock and higher debt borrowings in 2019 offset in part by the repayment of debt. The Company issued common stock for net proceeds of $105.6 million under its "at-the-market" offering and 401(k) plan during the first nine months of 2019 and increased long-term and short-term debt financing at the construction businesses for financing of acquisitions and working capital needs. The increase in cash provided by financing activities was largelyalso due to increased debt issuance from an increase in commercial paper balances used for acquisitions, ongoing capital expenditures and working capital needs at the construction materials and contracting business; the issuance of an additional $40 million under the private shelf agreement for capital projects at the pipeline and midstream business; and the issuance of a $100 million term loan for capital projects at the electric and natural gas distribution businesses. This increase in issuance of long-term debt was partially offset by the higher debt repayment on a line of creditborrowings at the natural gas distribution business;business, largely resulting from short-term borrowings for higher debt repayment on debt that matured during third quarter 2018 at the electric and natural gas distribution businesses;costs, as previously discussed, and the strong collection of accounts receivable resulting in lower commercial paper balances at the construction services business.long-term borrowings for funding capital investments.
Defined benefit pension plans
There were no material changes to the Company's qualified noncontributory defined benefit pension plans from those reported in the 20172018 Annual Report.Report other than an increase of approximately $2.5 million for the year in pension expense in 2019, largely resulting from a revised assumption for the expected long-term rate of return on assets used to calculate the expense and an actual decline in asset values. For more information, see Note 1518 and Part II, Item 7 in the 20172018 Annual Report.
Capital expenditures
Capital expenditures for the first nine months of 2019 were $469.2 million, which includes the completed aggregate deposit purchase at the construction materials and contracting business and the completed business combinations at the construction materials and contracting and construction services businesses. Capital expenditures in the first nine months of 2018 were $398.3 million, includingwhich includes completed acquisitions at the construction materials and contracting business. Capital expenditures allocated to the Company's business segments are estimated to be approximately $786$645 million for 2018.2019. The Company has included in the estimated capital expenditures for 20182019 the completed acquisitions, as previously discussed, the purchase of additional aggregate deposits, the Thunder Spirit Wind farm expansion,completed business combinations of a ready-mixed concrete supplier and an electrical company, the ValleyDemicks Lake project, the Line Section 22 Expansion project and the Line Section 27 expansionDemicks Lake Expansion project, as previously discussed in Business Segment Financial and Operating Data.
Estimated capital expenditures for 20182019 also include system upgrades; service extensions; routine equipment maintenance and replacements; buildings, land and building improvements; pipeline gathering and other midstream projects; power generation and transmission opportunities, including certain costs for additional electric generating capacity; environmental upgrades; and other growth opportunities.
The Company continues to evaluate potential future acquisitions and other growth opportunities; however, they are dependent upon the availability of economic opportunities and, as a result, capital expenditures may vary significantly from the estimate previously discussed. It is anticipated that all of the funds required for capital expenditures for 20182019 will be met from various sources, including internally generated funds; credit facilities of the Company's credit facilities,subsidiaries, as described later; issuance of long-term debt; and issuance of equity securities.
Capital resources
Certain debt instruments of the Company and itsCompany's subsidiaries contain restrictive and financial covenants and cross-default provisions. In order to borrow under the respective credit agreements,debt instruments, the Company and its subsidiariessubsidiary companies 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, 2018.2019. 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. For more information on the covenants, certain other conditions and cross-default provisions, see Part II, Item 8 - Note 6, in the 20172018 Annual Report.
The following table summarizes the outstanding revolving credit facilities of the Company and itsCompany's subsidiaries at September 30, 2018:2019:
| | | Company | | Facility | | Facility Limit |
| | Amount Outstanding |
| | Letters of Credit |
| | Expiration Date | | Facility | | Facility Limit |
| | Amount Outstanding |
| | Letters of Credit |
| | Expiration Date |
| | | | (In millions) | | | | | | (In millions) | | | |
| MDU Resources Group, Inc. | | Commercial paper/Revolving credit agreement | (a) | $ | 175.0 |
| | $ | 87.9 |
| (b) | $ | — |
| | 6/8/23 | |
| Montana-Dakota Utilities Co. | | | Commercial paper/Revolving credit agreement | (a) | $ | 175.0 |
| | $ | 78.2 |
| (b) | $ | — |
| | 6/8/23 |
| Cascade Natural Gas Corporation | | Revolving credit agreement | | $ | 75.0 |
| (c) | $ | 7.1 |
| | $ | 2.2 |
| (d) | 4/24/20 | | Revolving credit agreement | | $ | 100.0 |
| (c) | $ | 8.9 |
| | $ | 2.2 |
| (d) | 6/7/24 |
| Intermountain Gas Company | | Revolving credit agreement | | $ | 85.0 |
| (e) | $ | 46.7 |
| | $ | — |
| | 4/24/20 | | Revolving credit agreement | | $ | 85.0 |
| (e) | $ | 22.1 |
| | $ | 1.4 |
| (d) | 6/7/24 |
| Centennial Energy Holdings, Inc. | | Commercial paper/Revolving credit agreement | (f) | $ | 500.0 |
| | $ | 211.6 |
| (b) | $ | — |
| | 9/23/21 | | Commercial paper/Revolving credit agreement | (f) | $ | 500.0 |
| | $ | 203.6 |
| (b) | $ | — |
| | 9/23/21 |
| |
| (a) | The commercial paper program is supported by a revolving credit agreement with various banks (provisions allow for increased borrowings, at the option of the CompanyMontana-Dakota on stated conditions, up to a maximum of $225.0 million). There were no amounts outstanding under the credit agreement. |
| |
| (b) | Amount outstanding under commercial paper program. |
| |
| (c) | Certain provisions allow for increased borrowings, up to a maximum of $100.0$125.0 million. |
| |
| (d) | Outstanding letter(s) of credit reduce the amount available under the credit agreement. |
| |
| (e) | Certain provisions allow for increased borrowings, up to a maximum of $110.0 million. |
| |
| (f) | The commercial paper program is supported by a revolving credit agreement with various banks (provisions allow for increased borrowings, at the option of Centennial on stated conditions, up to a maximum of $600.0 million). There were no amounts outstanding under the credit agreement. |
The Company's and Centennial's respective commercial paper programs are supported by revolving credit agreements. While the amount of commercial paper outstanding does not reduce available capacity under the respective revolving credit agreements, the Company and Centennialsubsidiary companies do not issue commercial paper in an aggregate amount exceeding the available capacity under their credit agreements. The commercial paper borrowings may vary during the period, largely the result of fluctuations in working capital requirements due to the seasonality of the construction businesses.
The Company's coverage of earnings to fixed charges including preferred stock dividends was 4.0 times, 4.1 times and 4.2 times for the 12 months ended September 30, 2018 and 2017, and December 31, 2017, respectively.
Total equity as a percent of total capitalization was 5754 percent, 57 percent and 5955 percent at September 30, 20182019 and 2017,2018, and December 31, 2017,2018, respectively. 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 one year, plus total equity. This ratio is an indicator of how a company is financing its operations, as well as its financial strength.
MDU Resources Group, Inc.The Company currently has a shelf registration statement on file with the SEC, under which the Company may issue and sell any combination of common stock and debt securities. The Company may sell all or a portion of such securities if warranted by market conditions and the Company's capital requirements. Any public offer and sale of such securities will be made only by means of a prospectus meeting the requirements of the Securities Act and the rules and regulations thereunder. The Company's revolving credit agreement supports its commercial paper program. Commercial paper borrowings underboard of directors currently has authorized the issuance and sale of up to an aggregate of $1.0 billion worth of such securities. The Company's board of directors reviews this agreement are classified as long-term debt as they are intended to be refinancedauthorization on a long-termperiodic basis through continued commercial paper borrowings. The Company's objective is to maintain acceptable credit ratings in order to accessand the capital markets through the issuanceaggregate amount of commercial paper. Historically, downgradessecurities authorized may be increased in the Company's credit ratings have not limited, nor are currently expected to limit, the Company's ability to access the capital markets. If the Company were to experience a downgrade of its credit ratings in the future, it may need to borrow under its credit agreement and may experience an increase in overall interest rates with respect to its cost of borrowings.future.
On June 8, 2018, the Company entered into an amended and restated revolving credit agreement which extended the maturity date to June 8, 2023.
On September 17, 2018,February 22, 2019, the Company entered into a Distribution Agreement with J.P. Morgan Securities LLC and MUFG Securities Americas Inc., as sales agents, with respect to the issuance and sale of up to 10.0 million shares of the Company's common stock in connection with an “at-the-market” offering. The common stock may be offered for sale, from time to time, in accordance with the terms and conditions of the agreement. Proceeds from the sale of shares of common stock under the agreement have been and are expected to be used for general corporate purposes, which may include, among other things, working capital, capital expenditures, debt repayment and the financing of acquisitions.
The Company issued 1.3 million and 3.6 million shares of common stock for the three and nine months ended September 30, 2019, respectively, pursuant to the “at-the-market” offering. The Company received net proceeds of $34.6 million and $94.0 million for the three and nine months ended September 30, 2019, respectively. The Company paid commissions to the sales agents of approximately $350,000 and $950,000 for the three and nine months ended September 30, 2019, respectively, in connection with the sales of common stock under the "at-the-market" offering. The net proceeds were used for capital expenditures and acquisitions. As of September 30, 2019, the Company had remaining capacity to issue up to 6.4 million additional shares of common stock under the "at-the-market" offering program.
Certain of the Company's debt instruments use LIBOR as a benchmark for establishing the applicable interest rate. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The Company has been proactive to anticipate the reform of LIBOR by replacing it with Secured Overnight Financing Rate in certain of their new debt instruments, as well as those that are being renewed. The Company continues to evaluate the impact the reform will have on its debt instruments and, at this time, does not anticipate a significant impact.
Cascade Natural Gas Corporation On June 7, 2019, Cascade amended its revolving credit agreement to increase the borrowing limit from $75.0 million to $100.0 million term loanand extend the maturity date from April 24, 2020 to June 7, 2024. The credit 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.
On June 13, 2019, Cascade issued $75.0 million of senior notes under a note purchase agreement with maturity dates ranging from June 13, 2029 to June 13, 2049, at a variableweighted average interest rate and a maturity date of October 17, 2019.3.93 percent. 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.
Cascade's credit agreements also contain cross-default provisions. These provisions state that if Cascade fails to make any payment with respect to any indebtedness or contingent obligation, in excess of a specified amount, under any agreement that causes such indebtedness to be due prior to its stated maturity or the contingent obligation to become payable, Cascade will be in default under the revolving credit agreement.
Intermountain Gas CompanyOn June 7, 2019, Intermountain amended its revolving credit agreement to extend the termination date from April 24, 2020 to June 7, 2024. 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.
On June 13, 2019, Intermountain issued $50.0 million of senior notes under a note purchase agreement with maturity dates ranging from June 13, 2029 to June 13, 2049, at a weighted average interest rate of 3.92 percent. 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.
Intermountain's credit agreements also contain cross-default provisions. These provisions state that if Intermountain fails to make any payment with respect to any indebtedness or contingent obligation, in excess of a specified amount, under any agreement that causes such indebtedness to be due prior to its stated maturity or the contingent obligation to become payable, or certain conditions result in an early termination date under any swap contract that is in excess of a specified amount, then Intermountain will be in default under the revolving credit agreement.
Centennial Energy Holdings, Inc. On April 4, 2019, Centennial issued $150.0 million of senior notes under a note purchase agreement with maturity dates ranging from April 4, 2029 to April 4, 2034, at a weighted average interest rate of 4.60 percent. The agreement contains customary covenants and provisions, including a covenant of Centennial not to permit, at any time, the ratio of total debt to total capitalization to be greater than 60 percent.
On April 12, 2019, Centennial entered into a $50.0 million term loan agreement with a variable interest rate which matures on April 11, 2020. The agreement contains customary covenants and provisions, including a covenant of Centennial not to permit, at any time, the ratio of funded debt to capitalization (on either a consolidated or unconsolidated basis) to be greater than 65 percent. OtherThe covenants also include certain limitations on subsidiary indebtedness, restrictions on the sale of certain assets, limitations on indebtednessloans and the making of certain investments.
On October 18, 2018, the CompanyAugust 7, 2019, Centennial entered into a $100.0$50.0 million term loan agreement with a variable interest rate which matures on January 31, 2020. The agreement contains customary covenants and provisions, including a covenant of Centennial not to permit, at any time, the ratio of funded debt to capitalization to be greater than 65 percent. The covenants also include limitations on subsidiary indebtedness, restrictions on the sale of certain assets, loans and investments.
WBI Energy Transmission, Inc. On July 26, 2019, WBI Energy Transmission amended its uncommitted note purchase and private shelf agreement to extend the issuance period to May 16, 2022, and increase the aggregate issuance capacity from $200.0 million to $300.0 million. On July 3, 2019, WBI Energy Transmission contracted to issue an additional $45.0 million under the uncommitted private shelf agreement at an interest rate of 4.17 percent on December 16, 2019. The remaining capacity under this uncommitted private shelf agreement is $115.0 million.
Montana-Dakota Utilities Co. On July 24, 2019, Montana-Dakota entered into a $200.0 million note purchase agreement with maturity datedates ranging from October 17, 2039 to November 18, 2059, at a weighted average interest rate of 3.95 percent. On October 17, 2019, Montana-Dakota issued $100.0 million in senior notes under the note purchase agreement with the remaining $100.0 million scheduled to be issued on November 18, 2019. The agreement contains customary covenants and provisions, including a covenant of the CompanyMontana-Dakota not to permit, at any time, the ratio of fundedtotal debt to total capitalization (on either a consolidated or unconsolidated basis) to be greater than 65 percent. Other covenants include restrictions on the sale of certain assets, limitations on indebtedness and the making of certain investments.
WBI Energy Transmission, Inc. On June 15, 2018, WBI Energy Transmission issued an additional $40.0 million under the private shelf agreement, with a maturity date of January 31, 2033, at an interest rate of 4.18 percent. WBI Energy Transmission had
$140.0 million of notes outstanding at September 30, 2018, which reduces the remaining capacity under this uncommitted private shelf agreement to $60.0 million.
Off balance sheet arrangements
As of September 30, 2018,2019, the Company had no material off balance sheet arrangements as defined by the rules of the SEC.
Contractual obligations and commercial commitments
There arewere no material changes in the Company's contractual obligations from continuing operations relating to estimated interest payments, operating leases, purchase commitments, asset retirement obligations, uncertain tax positions and minimum funding requirements for its defined benefit plans for 20182019 from those reported in the 20172018 Annual Report. The
At September 30, 2019, the Company's contractual obligation oncommitments for long-term debt for 2019 has been updated from $125.5 million to $225.5 million due to the term loan agreement entered intoand estimated interest payments presented on September 17, 2018. Therea calendar-year basis were no other material changes to the contractual obligations on long-term debt.as follows:
|
| | | | | | | | | | | | | | | |
| | Remainder of 2019 |
| 1 - 3 years |
| 3 - 5 years |
| More than 5 years |
| Total |
|
| | (In millions) | |
| Long-term debt maturities* | $ | 50.1 |
| $ | 367.8 |
| $ | 247.3 |
| $ | 1,587.8 |
| $ | 2,253.0 |
|
| Estimated interest payments** | 24.9 |
| 249.4 |
| 140.5 |
| 525.9 |
| 940.7 |
|
| | $ | 75.0 |
| $ | 617.2 |
| $ | 387.8 |
| $ | 2,113.7 |
| $ | 3,193.7 |
|
| |
| * | Unamortized debt issuance costs and discount are excluded from the table. |
| |
| ** | Represents the estimated interest payments associated with the Company's long-term debt outstanding at September 30, 2019, assuming current interest rates and consistent amounts outstanding until their respective maturity dates over the periods indicated in the table above. |
For more information on contractual obligations and commercial commitments, see Part II, Item 7 in the 20172018 Annual Report.
New Accounting Standards
For information regarding new accounting standards, see Note 6, which is incorporated by reference.
Critical Accounting Policies Involving Significant Estimates
The Company's critical accounting policies involving significant estimates include impairment testing of long-lived assets and intangibles,goodwill; fair values of acquired assets and liabilities under the acquisition method of accounting; tax provisions; revenue recognition, purchase accounting, pensionrecognized using the cost-to-cost measure of progress for contracts; and other postretirement benefits, and income taxes.actuarially determined benefit costs. There were no material changes in the Company's critical accounting policies involving significant estimates from those reported in the 20172018 Annual Report other than the addition of a critical accounting policy involving revenue recognition due to the adoption of the new guidance, as discussed in Note 6, and the addition of a critical accounting policy involving purchase accounting due to the Company's recent acquisitions, as discussed in Note 9.Report. For more information on critical accounting policies involving significant estimates, see Part II, Item 7 in the 20172018 Annual Report.
Revenue recognition
Revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The recognition of revenue requires the Company to make estimates and assumptions that affect the reported amounts of revenue. The accuracy of revenues reported on the Consolidated Financial Statements depends on, among other things, management's estimates of total costs to complete projects because the Company uses the cost-to-cost measure of progress on construction contracts for revenue recognition.
To determine the proper revenue recognition method for contracts, the Company evaluates whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. For most contracts, the customer contracts with the Company to provide a significant service of integrating a complex set of tasks and components into a single project. Hence, the Company's contracts are generally accounted for as one performance obligation.
The Company recognizes construction contract revenue over time using the cost-to-cost measure of progress for contracts because it best depicts the transfer of assets to the customer which occurs as the Company incurs costs on the contract. Under the cost-to-cost measure of progress, the costs incurred are compared with total estimated costs of a performance obligation. Revenues are recorded proportionately to the costs incurred. This method depends largely on the ability to make reasonably dependable estimates related to the extent of progress toward completion of the contract, contract revenues and contract costs. Inasmuch as contract prices are generally set before the work is performed, the estimates pertaining to every project could contain significant unknown risks such as volatile labor, material and fuel costs, weather delays, adverse project site conditions, unforeseen actions by regulatory agencies, performance by subcontractors, job management and relations with project owners. Changes in estimates could have a material effect on the Company's results of operations, financial position and cash flows.
Several factors are evaluated in determining the bid price for contract work. These include, but are not limited to, the complexities of the job, past history performing similar types of work, seasonal weather patterns, competition and market conditions, job site conditions, work force safety, reputation of the project owner, availability of labor, materials and fuel, project location and project completion dates. As a project commences, estimates are continually monitored and revised as information becomes available and actual costs and conditions surrounding the job become known. If a loss is anticipated on a contract, the loss is immediately recognized.
Contracts are often modified to account for changes in contract specifications and requirements. The Company considers contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Generally, contract modifications are for goods or services that are not distinct from the existing contract due to the significant
integration of services provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price and the measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis.
The Company's construction contracts generally contain variable consideration including liquidated damages, performance bonuses or incentives, claims, unapproved/unpriced change orders and penalties or index pricing. The variable amounts usually arise upon achievement of certain performance metrics or change in project scope. The Company estimates the amount of revenue to be recognized on variable consideration using estimation methods that best predict the most likely amount of consideration the Company expects to be entitled to or expects to incur. The Company includes variable consideration in the estimated transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. Changes in circumstances could impact management's estimates made in determining the value of variable consideration recorded. The Company updates its estimate of the transaction price each reporting period and the effect of variable consideration on the transaction price is recognized as an adjustment to revenue on a cumulative catch-up basis.
The Company believes its estimates surrounding the cost-to-cost method are reasonable based on the information that is known when the estimates are made. The Company has contract administration, accounting and management control systems in place that allow its estimates to be updated and monitored on a regular basis. Because of the many factors that are evaluated in determining bid prices, it is inherent that the Company's estimates have changed in the past and will continually change in the future as new information becomes available for each job. There have been no material changes in contract estimates in 2018.
Purchase accounting
The Company accounts for acquisitions under the purchase method of accounting and, accordingly, the acquired assets and liabilities assumed are recorded at their respective fair values. The excess of the purchase price over the fair value of the assets acquired and liabilities assumed is recorded as goodwill. Acquired assets and liabilities assumed by the Company are subject to various estimates. The recorded values of assets and liabilities are based on third-party estimates and valuations when available. The remaining values are based on management's judgments and estimates, and accordingly, the Company's financial position or result of operations may be affected by changes in estimates and judgments.
The fair value of owned recoverable aggregate reserve deposits is determined using qualified internal personnel, as a well as external experts including geologists. Reserve estimates are calculated based on the best available data. This data is collected from drill holes and other subsurface investigations, as well as investigations of surface features such as mine high walls and other exposures of the aggregate reserves. Mine plans, production history and geologic data also are utilized to estimate reserve quantities. Value is assigned to the aggregate reserves based on a review of market royalty rates, comparable depletion rates, expected cash flows and the number of years of recoverable aggregate reserves at owned aggregate sites.
The fair value of property, plant and equipment is based on a valuation performed either by qualified internal personnel and/or external appraisers. Fair values assigned to plant and equipment are based on several factors including the age and conditions of the equipment, maintenance records of the equipment and auction values for equipment with similar characteristics at the time of purchase. The Intangible assets are valued using a discounted cash flows methodology.
While the allocation of the purchase price of an acquisition is subject to a considerable degree of judgment and uncertainty, the Company does not expect the estimates to vary significantly once an acquisition has been completed.
Non-GAAP Financial Measures
The following discussionBusiness Segment Financial and Operating Data includes financial information prepared in accordance with GAAP, as well as another financial measure, adjusted gross margin, that is considered a non-GAAP financial measure as it relates to the Company's electric and natural gas distribution segments. The presentation of adjusted gross margin is intended to be a useful supplemental financial measure for investors’ understanding of the segments' operating performance. This non-GAAP financial measure should not be considered as an alternative to, or more meaningful than, GAAP financial measures such as operating income (loss) or earningsnet income (loss). The Company's non-GAAP financial measure, adjusted gross margin, is not standardized; therefore, it may not be possible to compare this financial measure with other companies’ gross margin measures having the same or similar names.
In addition to operating revenues and operating expenses, management also uses the non-GAAP financial measure of adjusted gross margin when evaluating the results of operations for the electric and natural gas distribution segments. Adjusted gross margin for the electric and natural gas distribution segments is calculated by adding back adjustments to operating income (loss). These add backadd-back adjustments include: operation and maintenance expense; depreciation, depletion and amortization expense; and certain taxes, other than income.
Adjusted gross margin includes operating revenues less the cost of electric fuel and purchased power, purchased natural gas sold and certain taxes, other than income. These taxes, other than income, included as a reduction to adjusted gross margin relate to revenue taxes. These segments pass on to their customers the increases and decreases in the wholesale cost of power purchases, natural gas and other fuel supply costs in accordance with regulatory requirements. As such, the segments' revenues are directly impacted by the fluctuations in such commodities. Revenue taxes, which are passed back to customers, fluctuate with revenues
as they are calculated as a percentage of revenues. PeriodFor these reasons, period over period, the segments' operating income (loss) is generally not impacted by the increase or decrease in revenues since the change is directly related to the increase or decrease in wholesale cost of power purchases, natural gas or other fuel supply costs, nor is it impacted by revenue taxes since it is a direct result of revenues.impacted. The Company's management believes the adjusted gross margin is a useful supplemental financial measure as these items are included in both operating revenues and operating expenses. The Company's management also believes that adjusted gross margin and the remaining operating expenses that calculate operating income (loss) are useful in assessing the Company's utility performance as management has the ability to influence control over the remaining operating expenses.
The following information reconciles operating income to adjusted gross margin for the electric segment.
| | | | Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended |
| | September 30, | September 30, |
| | 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | (In millions) | (In millions) |
| Operating income | $ | 21.1 |
| $ | 25.7 |
| $ | 52.3 |
| $ | 61.2 |
| $ | 21.9 |
| $ | 21.1 |
| $ | 49.7 |
| $ | 52.3 |
|
| Adjustments: | | |
| Operating expenses: | |
| |
| | | |
| |
| | |
| Operation and maintenance | 30.1 |
| 31.0 |
| 91.3 |
| 89.0 |
| 30.8 |
| 30.1 |
| 94.6 |
| 91.3 |
|
| Depreciation, depletion and amortization | 12.6 |
| 12.2 |
| 37.7 |
| 35.5 |
| 14.2 |
| 12.6 |
| 41.8 |
| 37.7 |
|
| Taxes, other than income | 3.7 |
| 3.5 |
| 11.2 |
| 10.5 |
| 4.1 |
| 3.7 |
| 12.5 |
| 11.2 |
|
| Total adjustments | 46.4 |
| 46.7 |
| 140.2 |
| 135.0 |
| 49.1 |
| 46.4 |
| 148.9 |
| 140.2 |
|
| Adjusted gross margin | $ | 67.5 |
| $ | 72.4 |
| $ | 192.5 |
| $ | 196.2 |
| $ | 71.0 |
| $ | 67.5 |
| $ | 198.6 |
| $ | 192.5 |
|
The following information reconciles operating income (loss) to adjusted gross margin for the natural gas distribution segment.
| | | | Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended |
| | September 30, | September 30, | September 30, | September 30, |
| | 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | (In millions) | (In millions) |
| Operating income (loss) | $ | (11.7 | ) | $ | (9.5 | ) | $ | 32.5 |
| $ | 42.7 |
| $ | (15.6 | ) | $ | (11.7 | ) | $ | 32.1 |
| $ | 32.5 |
|
| Adjustments: | | |
| Operating expenses: | | |
| Operation and maintenance | 42.1 |
| 39.8 |
| 129.4 |
| 119.8 |
| 44.4 |
| 42.1 |
| 134.3 |
| 129.4 |
|
| Depreciation, depletion and amortization | 18.1 |
| 17.4 |
| 53.5 |
| 51.7 |
| 19.9 |
| 18.1 |
| 59.1 |
| 53.5 |
|
| Taxes, other than income | 5.4 |
| 5.2 |
| 16.5 |
| 15.4 |
| 6.1 |
| 5.4 |
| 17.9 |
| 16.5 |
|
| Total adjustments | 65.6 |
| 62.4 |
| 199.4 |
| 186.9 |
| 70.4 |
| 65.6 |
| 211.3 |
| 199.4 |
|
| Adjusted gross margin | $ | 53.9 |
| $ | 52.9 |
| $ | 231.9 |
| $ | 229.6 |
| $ | 54.8 |
| $ | 53.9 |
| $ | 243.4 |
| $ | 231.9 |
|
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the impact of market fluctuations associated with interest rates. 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.
Interest rate risk
There were no material changes to interest rate risk faced by the Company from those reported in the 20172018 Annual Report.
At September 30, 2018,2019, the Company had no outstanding interest rate hedges.
Item 4. Controls and Procedures
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 procedures include controls and procedures 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 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 quarterthree months ended September 30, 2018,2019, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
Part II -- Other Information
Item 1. Legal Proceedings
For information regarding legal proceedings required by this item, see Note 17,20, which is incorporated herein by reference.
Item 1A. Risk Factors
Please refer to the Company's risk factors that are disclosed in Part I, Item 1A - Risk Factors in the 20172018 Annual Report that could be materially harmful to the Company's business, prospects, financial condition or financial results if they occur. There were no material changes to the Company's risk factors provided in Part I, Item 1A - Risk Factors in the 20172018 Annual Report, except for the following:
The Company's operations could be negatively impacted by import tariffs and/or other government mandates.
Imposed and proposed import tariffs could significantly increase the prices and delivery lead times on raw materials that are critical to the Company, such as aluminum and steel. The Company is currently experiencing extended lead times on deliveries of raw materials that are critical to the electric, natural gas distribution and pipeline and midstream business segments. In addition, tariff increases on raw materials and finished products may have a similar impact on other product suppliers of the Company, which could increase the negative impact on the delivery and the cost of raw materials and finished product supplies used by the Company. Prolonged lead times on the delivery of raw materials and further tariff increases could have a material adverse effect on the Company's business, financial condition and results of operations.Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table includes information with respect to the Company's purchase of equity securities:
ISSUER PURCHASES OF EQUITY SECURITIES
|
| | | | | | | | |
| ISSUER PURCHASES OF EQUITY SECURITIES |
| Period | (a) Total Number of Shares (or Units) Purchased (1) |
| (b) Average Price Paid per Share (or Unit) |
| (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (2) |
| (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (2) |
|
July 1 through July 31, 20182019 | — |
| — |
| — |
| — |
|
August 1 through August 31, 20182019 | — |
| — |
| — |
| — |
|
September 1 through September 30, 20182019 | — |
| — |
| — |
| — |
|
| Total | — |
| | — |
| — |
|
| |
| (1) | Represents shares of common stock purchased onwithheld by the open marketCompany to pay taxes in connection with the vesting of shares granted pursuant to the Long-Term Performance-Based Incentive Plan. |
| |
| (2) | Not applicable. The Company does not currently have in place any publicly announced plans or programs to purchase equity securities. |
Item 4. Mine Safety Disclosures
For information regarding mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Act and Item 104 of Regulation S-K, see Exhibit 95 to this Form 10-Q, which is incorporated herein by reference.
Item 5. Other Information
None.
Item 6. Exhibits
See the index to exhibits immediately preceding the exhibits filed withsignature page to this report.
Exhibits Index |
| | | | | | | |
| Exhibits Index |
| | | | Incorporated by Reference |
| Exhibit Number | Exhibit Description | Filed Herewith | Form | Period Ended | Exhibit | Filing Date | File Number |
| | | | | | | | |
122(a) | | | 8-K | | 2(a) | 1/2/19 | 1-03480 |
| 3(a) | | | 8-K | | 3(a) | 1/2/19 | 1-03480 |
| 3(b) | | | 8-K | | 3.2 | 5/8/19 | 1-03480 |
| 3(c) | | | 8-K | | 3.1 | 2/15/19 | 1-03480 |
| *4(a) | | X | | | | | |
| +10(a) | | X | | | | | |
| 31(a) | | X | | | | | |
| 31(b) | | X | | | | | |
| 32 | | X | | | | | |
| 95 | | X | | | | | |
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | | | | | | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | | | | | | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | |
| |
| * | Schedules and exhibits to this agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished as a supplement to the SEC upon request. |
| |
| + | Management contract, compensatory plan or arrangement. |
MDU Resources Group, Inc. agrees to furnish to the SEC upon request any instrument with respect to long-term debt that MDU Resources Group, Inc. has not filed as an exhibit pursuant to the exemption provided by Item 601(b)(4)(iii)(A) of Regulation S-K. |
|
MDU Resources Group, Inc. agrees to furnish to the SEC upon request any instrument with respect to long-term debt that MDU Resources Group, Inc. has not filed as an exhibit pursuant to the exemption provided by Item 601(b)(4)(iii)(A) of Regulation S-K. |
Signatures
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | |
| | | MDU RESOURCES GROUP, INC. |
| | | | |
| DATE: | November 2, 20181, 2019 | BY: | /s/ Jason L. Vollmer |
| | | | Jason L. Vollmer |
| | | | Vice President, Chief Financial Officer
and Treasurer |
| | | | |
| | | | |
| | | BY: | /s/ Stephanie A. Barth |
| | | | Stephanie A. Barth |
| | | | Vice President, Chief Accounting Officer
and Controller |