UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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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, 2020
OR
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019
OR
|
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from _____________ to ______________
Commission file number 1-03480
MDU RESOURCES GROUP INC
(Exact name of registrant as specified in its charter)
|
| | | | | | | |
| Delaware | | 30-1133956 |
(State or other jurisdiction of
incorporation or organization)
| | (I.R.S. Employer Identification No.) |
1200 West Century Avenue
P.O. Box 5650
Bismarck,, North Dakota 58506-5650
(Address of principal executive offices)
(Zip Code)
(701) (701) 530-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
| | | | | | | |
| 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 ☒ No ☐.
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 ☒ No ☐.
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.
|
| | | | | | | | | | |
| Large Accelerated Filer | ☒ | Accelerated Filer | ☐ |
Non-Accelerated Filer | ☐ | Smaller Reporting Company | ☐ |
| | Emerging Growth 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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of October 25, 2019: 200,383,86929, 2020: 200,522,277 shares.
Definitions
The following abbreviations and acronyms used in this Form 10-Q are defined below:
|
| | | | |
| Abbreviation or Acronym | |
20182019 Annual Report | Company's Annual Report on Form 10-K for the year ended December 31, 20182019 |
| 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 |
BSSECARES Act | 345-kilovolt transmission line from Ellendale, North Dakota, to Big Stone City, South DakotaUnited States Coronavirus Aid, Relief, and Economic Security Act |
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, |
| COVID-19 | Coronavirus disease 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 |
|
| |
| 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 |
| NDDEQ | North Dakota Department of Environmental Quality |
| NDPSC | North Dakota Public Service Commission |
| NGL | Natural gas liquids |
| | | | | |
| Non-GAAP | Not in accordance with GAAP |
| Oil | Includes crude oil and condensate |
| OPUC | Oregon Public Utility Commission |
| PRP | Potentially Responsible Party |
| SDPUC | South Dakota Public Utilities Commission |
| SEC | United States Securities and Exchange Commission |
| Securities Act | Securities Act of 1933, as amended |
TCJASOFR | Tax Cuts and Jobs ActSecured Overnight Financing Rate |
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 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 |
| WBI Energy Transmission | WBI Energy Transmission, Inc., an indirect wholly owned subsidiary of WBI Holdings |
| 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, trends, 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 notother than statements of historical facts. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature, including statements contained within 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, the impact of COVID-19 on the Company's business, 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 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 -1A. Risk Factors in the 20182019 Annual Report and subsequent filings with the SEC.
Introduction
The Company is a regulated energy delivery and construction materials and services business. Montana-DakotaThe organizational entity was originally incorporated as Montana-Dakota under the state laws of the state of Delaware in 1924. ThePursuant to an internal holding company reorganization completed on January 1, 2019, the Company was incorporated under the state laws of the state of Delaware in 2018. Its principal executive offices are located 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 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. The electric segment is comprised of Montana-Dakota Cascade and Intermountain arewhile the natural gas distribution segment.segment is comprised of Montana-Dakota, also comprises the electric segment.Cascade and Intermountain.
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 1716 of the Notes to Consolidated Financial Statements.
Part I -- Financial Information
Item 1. Financial Statements
| | MDU Resources Group, Inc. | | Consolidated Statements of Income | Consolidated Statements of Income | Consolidated Statements of Income |
| (Unaudited) | (Unaudited) | (Unaudited) |
| | Three Months Ended | Nine Months Ended | | Three Months Ended | Nine Months Ended |
| | September 30, | | September 30, |
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
| | 2020 | 2019 | 2020 | 2019 |
| | (In thousands, except per share amounts) | | (In thousands, except per share amounts) |
| Operating revenues: | | Operating revenues: | |
| Electric, natural gas distribution and regulated pipeline and midstream | $ | 209,444 |
| $ | 200,617 |
| $ | 885,309 |
| $ | 851,761 |
| |
| Nonregulated pipeline and midstream, construction materials and contracting, construction services and other | 1,354,355 |
| 1,080,170 |
| 3,073,254 |
| 2,469,917 |
| |
| Electric, natural gas distribution and regulated pipeline | | Electric, natural gas distribution and regulated pipeline | $ | 210,115 | | $ | 209,444 | | $ | 870,151 | | $ | 885,309 | |
| Non-regulated pipeline, construction materials and contracting, construction services and other | | Non-regulated pipeline, construction materials and contracting, construction services and other | 1,377,174 | | 1,354,355 | | 3,277,440 | | 3,073,254 | |
| Total operating revenues | 1,563,799 |
| 1,280,787 |
| 3,958,563 |
| 3,321,678 |
| Total operating revenues | 1,587,289 | | 1,563,799 | | 4,147,591 | | 3,958,563 | |
| Operating expenses: | |
| |
| |
| |
| Operating expenses: | |
| Operation and maintenance: | |
| |
| |
| |
| Operation and maintenance: | |
| Electric, natural gas distribution and regulated pipeline and midstream | 86,249 |
| 82,920 |
| 262,434 |
| 252,961 |
| |
| Nonregulated pipeline and midstream, construction materials and contracting, construction services and other | 1,126,371 |
| 913,671 |
| 2,674,130 |
| 2,166,570 |
| |
| Electric, natural gas distribution and regulated pipeline | | Electric, natural gas distribution and regulated pipeline | 89,080 | | 86,249 | | 259,791 | | 262,434 | |
| Non-regulated pipeline, construction materials and contracting, construction services and other | | Non-regulated pipeline, construction materials and contracting, construction services and other | 1,124,939 | | 1,126,371 | | 2,804,398 | | 2,674,130 | |
| Total operation and maintenance | 1,212,620 |
| 996,591 |
| 2,936,564 |
| 2,419,531 |
| Total operation and maintenance | 1,214,019 | | 1,212,620 | | 3,064,189 | | 2,936,564 | |
| Purchased natural gas sold | 31,843 |
| 32,123 |
| 270,539 |
| 270,319 |
| Purchased natural gas sold | 31,524 | | 31,843 | | 253,780 | | 270,539 | |
| Depreciation, depletion and amortization | 65,021 |
| 55,016 |
| 187,937 |
| 161,298 |
| Depreciation, depletion and amortization | 72,084 | | 65,021 | | 212,832 | | 187,937 | |
| Taxes, other than income | 46,128 |
| 38,647 |
| 148,110 |
| 128,257 |
| Taxes, other than income | 50,501 | | 46,128 | | 167,197 | | 148,110 | |
| Electric fuel and purchased power | 18,717 |
| 18,406 |
| 64,413 |
| 58,901 |
| Electric fuel and purchased power | 15,450 | | 18,717 | | 50,557 | | 64,413 | |
| Total operating expenses | 1,374,329 |
| 1,140,783 |
| 3,607,563 |
| 3,038,306 |
| Total operating expenses | 1,383,578 | | 1,374,329 | | 3,748,555 | | 3,607,563 | |
| Operating income | 189,470 |
| 140,004 |
| 351,000 |
| 283,372 |
| Operating income | 203,711 | | 189,470 | | 399,036 | | 351,000 | |
| Other income | 3,014 |
| 2,683 |
| 12,222 |
| 4,864 |
| Other income | 4,612 | | 3,014 | | 13,669 | | 12,222 | |
| Interest expense | 25,258 |
| 20,955 |
| 74,094 |
| 62,202 |
| Interest expense | 23,761 | | 25,258 | | 73,132 | | 74,094 | |
| Income before income taxes | 167,226 |
| 121,732 |
| 289,128 |
| 226,034 |
| Income before income taxes | 184,562 | | 167,226 | | 339,573 | | 289,128 | |
| Income taxes | 31,098 |
| 14,363 |
| 48,766 |
| 32,629 |
| Income taxes | 31,547 | | 31,098 | | 61,178 | | 48,766 | |
| Income from continuing operations | 136,128 |
| 107,369 |
| 240,362 |
| 193,405 |
| Income from continuing operations | 153,015 | | 136,128 | | 278,395 | | 240,362 | |
| Income (loss) from discontinued operations, net of tax (Note 10) | 1,509 |
| (118 | ) | 26 |
| 85 |
| |
| Income (loss) from discontinued operations, net of tax | | Income (loss) from discontinued operations, net of tax | 63 | | 1,509 | | (484) | | 26 | |
| Net income | $ | 137,637 |
| $ | 107,251 |
| $ | 240,388 |
| $ | 193,490 |
| Net income | $ | 153,078 | | $ | 137,637 | | $ | 277,911 | | $ | 240,388 | |
| Earnings per share - basic: | |
| |
| |
| |
| Earnings per share - basic: | |
| Income from continuing operations | $ | .68 |
| $ | .55 |
| $ | 1.21 |
| $ | .99 |
| Income from continuing operations | $ | .76 | | $ | .68 | | $ | 1.39 | | $ | 1.21 | |
| Discontinued operations, net of tax | .01 |
| — |
| — |
| — |
| Discontinued operations, net of tax | 0 | | .01 | | 0 | | 0 | |
| Earnings per share - basic | $ | .69 |
| $ | .55 |
| $ | 1.21 |
| $ | .99 |
| Earnings per share - basic | $ | .76 | | $ | .69 | | $ | 1.39 | | $ | 1.21 | |
| Earnings per share - diluted: | |
| |
| |
| |
| Earnings per share - diluted: | |
| Income from continuing operations | $ | .68 |
| $ | .55 |
| $ | 1.21 |
| $ | .99 |
| Income from continuing operations | $ | .76 | | $ | .68 | | $ | 1.39 | | $ | 1.21 | |
| Discontinued operations, net of tax | .01 |
| — |
| — |
| — |
| Discontinued operations, net of tax | 0 | | .01 | | 0 | | 0 | |
| Earnings per share - diluted | $ | .69 |
| $ | .55 |
| $ | 1.21 |
| $ | .99 |
| Earnings per share - diluted | $ | .76 | | $ | .69 | | $ | 1.39 | | $ | 1.21 | |
| Weighted average common shares outstanding - basic | 199,343 |
| 196,018 |
| 198,016 |
| 195,618 |
| Weighted average common shares outstanding - basic | 200,522 | | 199,343 | | 200,495 | | 198,016 | |
| Weighted average common shares outstanding - diluted | 199,383 |
| 196,265 |
| 198,033 |
| 196,104 |
| Weighted average common shares outstanding - diluted | 200,619 | | 199,383 | | 200,515 | | 198,033 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | MDU Resources Group, Inc. | MDU Resources Group, Inc. | MDU Resources Group, Inc. |
| Consolidated Statements of Comprehensive Income | Consolidated Statements of Comprehensive Income | Consolidated Statements of Comprehensive Income |
| (Unaudited) | (Unaudited) | (Unaudited) |
| | | Three Months Ended | Nine Months Ended | | Three Months Ended | Nine Months Ended |
| | | September 30, | | | September 30, |
| | | 2019 |
| 2018 |
| 2019 | 2018 | | | 2020 | 2019 | 2020 | 2019 |
| | | (In thousands) | | | (In thousands) |
| Net income | | $ | 137,637 |
| $ | 107,251 |
| $ | 240,388 |
| $ | 193,490 |
| Net income | | $ | 153,078 | | $ | 137,637 | | $ | 277,911 | | $ | 240,388 | |
| Other comprehensive income: | | | 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 |
| |
| Reclassification adjustment for loss on derivative instruments included in net income, net of tax of $37 and $36 for the three months ended and $109 and $(177) for the nine months ended in 2020 and 2019, respectively | | Reclassification adjustment for loss on derivative instruments included in net income, net of tax of $37 and $36 for the three months ended and $109 and $(177) for the nine months ended in 2020 and 2019, respectively | | 111 | | 112 | | 334 | | 620 | |
| Amortization of postretirement liability losses included in net periodic benefit cost, net of tax of $152 and $95 for the three months ended and $456 and $284 for the nine months ended in 2020 and 2019, respectively | | Amortization of postretirement liability losses included in net periodic benefit cost, net of tax of $152 and $95 for the three months ended and $456 and $284 for the nine months ended in 2020 and 2019, respectively | | 471 | | 292 | | 1,413 | | 878 | |
| Net unrealized gain (loss) on available-for-sale investments: | | | 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 arising during the period, net of tax of $(13) and $3 for the three months ended and $19 and $35 for the nine months ended in 2020 and 2019, respectively | | Net unrealized gain (loss) on available-for-sale investments arising during the period, net of tax of $(13) and $3 for the three months ended and $19 and $35 for the nine months ended in 2020 and 2019, respectively | | (50) | | 12 | | 72 | | 130 | |
| Reclassification adjustment for (gain) loss on available-for-sale investments included in net income, net of tax of $7 and $(1) for the three months ended and $9 and $10 for the nine months ended in 2020 and 2019, respectively | | Reclassification adjustment for (gain) loss on available-for-sale investments included in net income, net of tax of $7 and $(1) for the three months ended and $9 and $10 for the nine months ended in 2020 and 2019, respectively | | 28 | | (4) | | 34 | | 36 | |
| Net unrealized gain (loss) on available-for-sale investments | | 8 |
| (18 | ) | 166 |
| (102 | ) | Net unrealized gain (loss) on available-for-sale investments | | (22) | | 8 | | 106 | | 166 | |
| Other comprehensive income | | 412 |
| 516 |
| 1,664 |
| 1,674 |
| Other comprehensive income | | 560 | | 412 | | 1,853 | | 1,664 | |
| Comprehensive income attributable to common stockholders | | $ | 138,049 |
| $ | 107,767 |
| $ | 242,052 |
| $ | 195,164 |
| Comprehensive income attributable to common stockholders | | $ | 153,638 | | $ | 138,049 | | $ | 279,764 | | $ | 242,052 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | MDU Resources Group, Inc. | MDU Resources Group, Inc. | MDU Resources Group, Inc. |
| Consolidated Balance Sheets | Consolidated Balance Sheets | Consolidated Balance Sheets |
| (Unaudited) | (Unaudited) | (Unaudited) |
| | September 30, 2019 |
| September 30, 2018 |
| December 31, 2018 |
| |
| | (In thousands, except shares and per share amounts) | | September 30, 2020 | September 30, 2019 | December 31, 2019 |
| Assets | | Assets | (In thousands, except shares and per share amounts) |
| Current assets: | | Current assets: | |
| Cash and cash equivalents | $ | 67,000 |
| $ | 67,077 |
| $ | 53,948 |
| Cash and cash equivalents | $ | 66,070 | | $ | 67,000 | | $ | 66,459 | |
| Receivables, net | 968,279 |
| 787,344 |
| 722,945 |
| Receivables, net | 1,009,433 | | 968,279 | | 836,605 | |
| Inventories | 286,057 |
| 270,293 |
| 287,309 |
| Inventories | 286,223 | | 286,057 | | 278,407 | |
| Current regulatory assets | | Current regulatory assets | 79,125 | | 69,181 | | 63,613 | |
| Prepayments and other current assets | 140,053 |
| 88,760 |
| 119,500 |
| Prepayments and other current assets | 61,706 | | 71,298 | | 52,617 | |
| Current assets held for sale | 426 |
| 571 |
| 430 |
| |
| Total current assets | 1,461,815 |
| 1,214,045 |
| 1,184,132 |
| Total current assets | 1,502,557 | | 1,461,815 | | 1,297,701 | |
| Investments | 144,417 |
| 143,303 |
| 138,620 |
| |
| Noncurrent assets: | | Noncurrent assets: | |
| Property, plant and equipment | 7,746,754 |
| 7,102,960 |
| 7,397,321 |
| Property, plant and equipment | 8,203,751 | | 7,746,754 | | 7,908,628 | |
| Less accumulated depreciation, depletion and amortization | 2,944,928 |
| 2,796,649 |
| 2,818,644 |
| Less accumulated depreciation, depletion and amortization | 3,115,805 | | 2,944,928 | | 2,991,486 | |
| Net property, plant and equipment | 4,801,826 |
| 4,306,311 |
| 4,578,677 |
| Net property, plant and equipment | 5,087,946 | | 4,801,826 | | 4,917,142 | |
| Deferred charges and other assets: | |
| |
| |
| |
| Goodwill | 681,349 |
| 640,203 |
| 664,922 |
| Goodwill | 712,677 | | 681,349 | | 681,358 | |
| Other intangible assets, net | 15,511 |
| 4,318 |
| 10,815 |
| Other intangible assets, net | 26,376 | | 15,511 | | 15,246 | |
| Operating lease right-of-use assets (Note 11) | 118,764 |
| — |
| — |
| |
| Regulatory assets | | Regulatory assets | 369,764 | | 362,799 | | 353,784 | |
| Investments | | Investments | 158,440 | | 144,417 | | 148,656 | |
| Operating lease right-of-use assets | | Operating lease right-of-use assets | 120,534 | | 118,764 | | 115,323 | |
| Other | 504,842 |
| 408,178 |
| 408,857 |
| Other | 147,205 | | 144,130 | | 153,849 | |
| Noncurrent assets held for sale | 2,087 |
| 1,835 |
| 2,087 |
| |
| Total deferred charges and other assets | 1,322,553 |
| 1,054,534 |
| 1,086,681 |
| |
| Total noncurrent assets | | Total noncurrent assets | 6,622,942 | | 6,268,796 | | 6,385,358 | |
| Total assets | $ | 7,730,611 |
| $ | 6,718,193 |
| $ | 6,988,110 |
| Total assets | $ | 8,125,499 | | $ | 7,730,611 | | $ | 7,683,059 | |
| Liabilities and Stockholders' Equity | |
| |
| |
| Liabilities and Stockholders' Equity | |
| Current liabilities: | |
| |
| |
| Current liabilities: | |
| Short-term borrowings | $ | 139,988 |
| $ | — |
| $ | — |
| Short-term borrowings | $ | 75,000 | | $ | 139,988 | | $ | 0 | |
| Long-term debt due within one year | 65,810 |
| 3,915 |
| 251,854 |
| Long-term debt due within one year | 1,558 | | 65,810 | | 16,540 | |
| Accounts payable | 378,370 |
| 339,713 |
| 358,505 |
| Accounts payable | 436,718 | | 378,370 | | 403,391 | |
| Taxes payable | 53,505 |
| 50,461 |
| 41,929 |
| Taxes payable | 96,708 | | 53,505 | | 48,970 | |
| Dividends payable | 40,460 |
| 38,714 |
| 39,695 |
| Dividends payable | 41,608 | | 40,460 | | 41,580 | |
| Accrued compensation | 93,642 |
| 62,836 |
| 69,007 |
| Accrued compensation | 110,730 | | 93,642 | | 99,269 | |
| Current operating lease liabilities (Note 11) | 32,584 |
| — |
| — |
| |
| Regulatory liabilities due within one year | | Regulatory liabilities due within one year | 39,837 | | 36,945 | | 42,935 | |
| Operating lease liabilities due within one year | | Operating lease liabilities due within one year | 33,770 | | 32,584 | | 31,664 | |
| Asset retirement obligations due within one year | | Asset retirement obligations due within one year | 4,198 | | 5,612 | | 4,277 | |
| Other accrued liabilities | 225,925 |
| 221,620 |
| 221,059 |
| Other accrued liabilities | 226,863 | | 186,761 | | 177,801 | |
| Current liabilities held for sale | 3,393 |
| 7,959 |
| 4,001 |
| |
| Total current liabilities | 1,033,677 |
| 725,218 |
| 986,050 |
| Total current liabilities | 1,066,990 | | 1,033,677 | | 866,427 | |
| Noncurrent liabilities: | | Noncurrent liabilities: | |
| Long-term debt | 2,180,946 |
| 1,911,555 |
| 1,856,841 |
| Long-term debt | 2,268,732 | | 2,180,946 | | 2,226,567 | |
| Deferred credits and other liabilities: | |
| |
| |
| |
| Deferred income taxes | 487,194 |
| 405,761 |
| 430,085 |
| Deferred income taxes | 533,524 | | 487,194 | | 506,583 | |
| Noncurrent operating lease liabilities (Note 11) | 86,166 |
| — |
| — |
| |
| Regulatory liabilities | | Regulatory liabilities | 434,936 | | 453,760 | | 447,370 | |
| Asset retirement obligations | | Asset retirement obligations | 425,567 | | 384,193 | | 413,298 | |
| Operating lease liabilities | | Operating lease liabilities | 87,140 | | 86,166 | | 83,742 | |
| Other | 1,147,022 |
| 1,154,366 |
| 1,148,359 |
| Other | 295,845 | | 309,069 | | 291,826 | |
| Total deferred credits and other liabilities | 1,720,382 |
| 1,560,127 |
| 1,578,444 |
| |
| Total noncurrent liabilities | | Total noncurrent liabilities | 4,045,744 | | 3,901,328 | | 3,969,386 | |
| Commitments and contingencies |
|
|
|
|
|
| Commitments and contingencies | |
Stockholders' equity: | |
| |
| |
| Stockholders' equity: | |
| Common stock | |
| |
| |
| |
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 |
| |
Common stock Authorized - 500,000,000 shares, $1.00 par value Shares issued - 201,061,198 at September 30, 2020, 200,876,334 at September 30, 2019 and 200,922,790 at December 31, 2019 | | Common stock Authorized - 500,000,000 shares, $1.00 par value Shares issued - 201,061,198 at September 30, 2020, 200,876,334 at September 30, 2019 and 200,922,790 at December 31, 2019 | 201,061 | | 200,876 | | 200,923 | |
| Other paid-in capital | 1,351,990 |
| 1,247,151 |
| 1,248,576 |
| Other paid-in capital | 1,366,494 | | 1,351,990 | | 1,355,404 | |
| Retained earnings | 1,283,044 |
| 1,124,830 |
| 1,163,602 |
| Retained earnings | 1,489,085 | | 1,283,044 | | 1,336,647 | |
| Accumulated other comprehensive loss | (36,678 | ) | (43,619 | ) | (38,342 | ) | Accumulated other comprehensive loss | (40,249) | | (36,678) | | (42,102) | |
| Treasury stock at cost - 538,921 shares | (3,626 | ) | (3,626 | ) | (3,626 | ) | Treasury stock at cost - 538,921 shares | (3,626) | | (3,626) | | (3,626) | |
| Total stockholders' equity | 2,795,606 |
| 2,521,293 |
| 2,566,775 |
| Total stockholders' equity | 3,012,765 | | 2,795,606 | | 2,847,246 | |
| Total liabilities and stockholders' equity | $ | 7,730,611 |
| $ | 6,718,193 |
| $ | 6,988,110 |
| Total liabilities and stockholders' equity | $ | 8,125,499 | | $ | 7,730,611 | | $ | 7,683,059 | |
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, 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) |
| | | Nine Months Ended |
| | | September 30, |
| | | 2019 |
| 2018 |
|
| | | (In thousands) |
| Operating activities: | | | |
| Net income | | $ | 240,388 |
| $ | 193,490 |
|
| Income from discontinued operations, net of tax | | 26 |
| 85 |
|
| Income from continuing operations | | 240,362 |
| 193,405 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| |
|
| Depreciation, depletion and amortization | | 187,937 |
| 161,298 |
|
| Deferred income taxes | | 49,222 |
| 42,428 |
|
| Changes in current assets and liabilities, net of acquisitions: | | |
| |
| Receivables | | (238,373 | ) | (55,749 | ) |
| Inventories | | 2,480 |
| (38,785 | ) |
| Other current assets | | (69,105 | ) | (3,452 | ) |
| Accounts payable | | 13,062 |
| 16,155 |
|
| Other current liabilities | | 53,458 |
| 31,971 |
|
| Other noncurrent changes | | (35,361 | ) | (27,170 | ) |
| Net cash provided by continuing operations | | 203,682 |
| 320,101 |
|
| Net cash used in discontinued operations | | (579 | ) | (2,720 | ) |
| Net cash provided by operating activities | | 203,103 |
| 317,381 |
|
| Investing activities: | | |
| |
|
| Capital expenditures | | (423,036 | ) | (345,599 | ) |
| Acquisitions, net of cash acquired | | (53,263 | ) | (27,858 | ) |
| Net proceeds from sale or disposition of property and other | | 28,391 |
| 12,451 |
|
| Investments | | (717 | ) | (1,560 | ) |
| Net cash used in continuing operations | | (448,625 | ) | (362,566 | ) |
| Net cash provided by discontinued operations | | — |
| 1,236 |
|
| Net cash used in investing activities | | (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 | | 302,724 |
| 356,952 |
|
| Repayment of long-term debt | | (166,956 | ) | (157,315 | ) |
| Proceeds from issuance of common stock | | 105,639 |
| — |
|
| Dividends paid | | (119,795 | ) | (115,859 | ) |
| Repurchase of common stock | | — |
| (5,020 | ) |
| Tax withholding on stock-based compensation | | (3,015 | ) | (2,330 | ) |
| Net cash provided by financing activities | | 258,574 |
| 76,428 |
|
| Effect of exchange rate changes on cash and cash equivalents | | — |
| (1 | ) |
| Increase in cash and cash equivalents | | 13,052 |
| 32,478 |
|
| Cash and cash equivalents -- beginning of year | | 53,948 |
| 34,599 |
|
| Cash and cash equivalents -- end of period | | $ | 67,000 |
| $ | 67,077 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| MDU Resources Group, Inc. |
| Consolidated Statements of Equity |
| (Unaudited) |
| | | 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, 2019 | 200,922,790 | | $ | 200,923 | | $ | 1,355,404 | | $ | 1,336,647 | | $ | (42,102) | | (538,921) | | $ | (3,626) | | $ | 2,847,246 | |
| Net income | — | | — | | — | | 25,130 | | — | | — | | — | | 25,130 | |
| Other comprehensive income | — | | — | | — | | — | | 707 | | — | | — | | 707 | |
| Dividends declared on common stock | — | | — | | — | | (41,789) | | — | | — | | — | | (41,789) | |
| Stock-based compensation | — | | — | | 2,250 | | — | | — | | — | | — | | 2,250 | |
| Issuance of common stock upon vesting of stock-based compensation, net of shares used for tax withholdings | 26,406 | | 26 | | (388) | | — | | — | | — | | — | | (362) | |
| Issuance of common stock | 112,002 | | 112 | | 3,298 | | — | | — | | — | | — | | 3,410 | |
| At March 31, 2020 | 201,061,198 | | $ | 201,061 | | $ | 1,360,564 | | $ | 1,319,988 | | $ | (41,395) | | (538,921) | | $ | (3,626) | | $ | 2,836,592 | |
| Net income | — | | — | | — | | 99,703 | | — | | — | | — | | 99,703 | |
| Other comprehensive income | — | | — | | — | | — | | 586 | | — | | — | | 586 | |
| Dividends declared on common stock | — | | — | | — | | (41,812) | | — | | — | | — | | (41,812) | |
| Stock-based compensation | — | | — | | 2,618 | | — | | — | | — | | — | | 2,618 | |
| At June 30, 2020 | 201,061,198 | | $ | 201,061 | | $ | 1,363,182 | | $ | 1,377,879 | | $ | (40,809) | | (538,921) | | $ | (3,626) | | $ | 2,897,687 | |
| Net income | — | | — | | — | | 153,078 | | — | | — | | — | | 153,078 | |
| Other comprehensive income | — | | — | | — | | — | | 560 | | — | | — | | 560 | |
| Dividends declared on common stock | — | | — | | — | | (41,872) | | — | | — | | — | | (41,872) | |
| Stock-based compensation | — | | — | | 3,312 | | — | | — | | — | | — | | 3,312 | |
| | | | | | | | |
| | | | | | | | |
| At September 30, 2020 | 201,061,198 | | $ | 201,061 | | $ | 1,366,494 | | $ | 1,489,085 | | $ | (40,249) | | (538,921) | | $ | (3,626) | | $ | 3,012,765 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| MDU Resources Group, Inc. |
| Consolidated Statements of Equity |
| (Unaudited) |
| | 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 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | | | | | | |
| MDU Resources Group, Inc. |
| Consolidated Statements of Cash Flows |
| (Unaudited) |
| Nine Months Ended |
| | September 30, |
| | 2020 | 2019 |
| | (In thousands) |
| Operating activities: | | |
| Net income | $ | 277,911 | | $ | 240,388 | |
| Income (loss) from discontinued operations, net of tax | (484) | | 26 | |
| Income from continuing operations | 278,395 | | 240,362 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| Depreciation, depletion and amortization | 212,832 | | 187,937 | |
| Deferred income taxes | 16,409 | | 49,222 | |
| Changes in current assets and liabilities, net of acquisitions: | | |
| Receivables | (100,141) | | (238,373) | |
| Inventories | (9,581) | | 2,480 | |
| Other current assets | 1,269 | | (69,105) | |
| Accounts payable | 19,125 | | 13,062 | |
| Other current liabilities | 74,286 | | 53,458 | |
| Other noncurrent changes | (10,139) | | (35,361) | |
| Net cash provided by continuing operations | 482,455 | | 203,682 | |
| Net cash used in discontinued operations | (688) | | (579) | |
| Net cash provided by operating activities | 481,767 | | 203,103 | |
| Investing activities: | | |
| Capital expenditures | (413,842) | | (423,036) | |
| Acquisitions, net of cash acquired | (71,479) | | (53,263) | |
| Net proceeds from sale or disposition of property and other | 23,463 | | 28,391 | |
| Investments | 24 | | (717) | |
| Net cash used in investing activities | (461,834) | | (448,625) | |
| Financing activities: | | |
| Issuance of short-term borrowings | 75,000 | | 169,977 | |
| Repayment of short-term borrowings | 0 | | (30,000) | |
| Issuance of long-term debt | 100,125 | | 302,724 | |
| Repayment of long-term debt | (73,699) | | (166,956) | |
| Proceeds from issuance of common stock | 3,410 | | 105,639 | |
| Dividends paid | (124,796) | | (119,795) | |
| Tax withholding on stock-based compensation | (362) | | (3,015) | |
| Net cash provided by (used in) financing activities | (20,322) | | 258,574 | |
| Increase (decrease) in cash and cash equivalents | (389) | | 13,052 | |
| Cash and cash equivalents -- beginning of year | 66,459 | | 53,948 | |
| Cash and cash equivalents -- end of period | $ | 66,070 | | $ | 67,000 | |
The accompanying notes are an integral part of these consolidated financial statements.
MDU Resources Group, Inc.
Notes to Consolidated
Financial Statements
September 30, 20192020 and 20182019
(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 20182019 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.
On January 2, 2019,In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, and the President of the United States declared the COVID-19 outbreak as a national emergency. Governmental restrictions and guidelines implemented to control the spread of COVID-19 reduced commercial and interpersonal activity throughout the Company's areas of operation. Most of the Company's products and services are considered essential and accordingly operations have been generally allowed to continue. The Company has experienced some inefficiency impacts, including operation suspensions and interruptions at some locations to carry out preventive measures or in response to instances of positive tests or quarantines. The Company has assessed the impacts of the COVID-19 pandemic on its results of operations for the three and nine months ended September 30, 2020, and determined there were no material adverse impacts.
In the first quarter of 2020, the Company announcedrecorded an out-of-period adjustment to correct the completionrecognition of revenue on a construction contract, which was the result of an overstatement of operating revenue and receivables of $7.7 million and an understatement of operating expense and accounts payable of $1.2 million in the year ended December 31, 2019. This adjustment resulted in an after-tax reduction to net income of $6.7 million in the first quarter of 2020. The Company evaluated the impact of the Holding Company Reorganization, which resulted in Montana-Dakota becoming a subsidiary ofout-of-period adjustment and concluded it was not material to any previously issued interim and annual consolidated financial statements and the Company. The purpose ofadjustment was not material to the reorganization was to makethree months ended March 31, 2020 or the public utility division into a subsidiary of the holding company, just as the other operating companies are wholly owned subsidiaries.nine months ended September 30, 2020.
Effective January 1, 2019,2020, the Company adopted the requirements of the ASU on leases,the measurement of credit losses on certain financial instruments following a modified retrospective approach, as further discussed in Notes 62 and 11.4. As such, results for reporting periods beginning on January 1, 2019,2020, 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 leases.accounting. The Company's adoption of this guidance did not have a material impact on its financial reporting.
The assets and liabilities forof the Company's discontinued operations have been classified as held for sale and are included in prepayments and other current assets, noncurrent assets - other and other accrued liabilities on the Consolidated Balance Sheets. The results of operationsand supporting activities are shown in income (loss) from discontinued operations other than certain general and administrative costs and interest expense which do not meeton 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.Consolidated Statements of Income. 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, 2019,2020, up to the date of issuance of these consolidated interim financial statements.
Note 2 - SeasonalityNew accounting standards
Recently adopted accounting standards
ASU 2016-13 - Measurement of operationsCredit Losses on Financial Instruments
Some In June 2016, the FASB issued guidance on the measurement of credit losses on certain financial instruments. The guidance introduced a new impairment model known as the current expected credit loss model that replaced the incurred loss impairment methodology previously included under GAAP. This guidance required 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 Company adopted the guidance on January 1, 2020, using a modified retrospective approach.
The Company formed an implementation team to review and assess existing financial assets to identify and evaluate the financial assets subject to the new current expected credit loss model. The Company assessed the impact of the guidance on its processes and internal controls and identified and updated existing internal controls and processes to ensure compliance with the new guidance; such modifications were deemed insignificant. During the assessment phase, the Company identified the complete portfolio of assets subject to the current expected credit loss model. The Company determined the guidance did not have a material
impact on its results of operations, financial position, cash flows or disclosures and did not record a material cumulative effect adjustment upon adoption. See Note 4 for additional information regarding the Company's operationsexpected credit losses.
ASU 2018-13 - Changes to the Disclosure Requirements for Fair Value Measurement In August 2018, the FASB issued guidance on modifying the disclosure requirements on fair value measurements as part of the disclosure framework project. The guidance modified, among other things, the disclosures required for Level 3 fair value measurements, including the range and weighted average of significant unobservable inputs. The guidance removed, among other things, the disclosure requirement to disclose transfers between Levels 1 and 2. The Company adopted the guidance on January 1, 2020, and determined the guidance did not have a material impact on its disclosures.
Recently issued accounting standards not yet adopted
ASU 2018-14 - Changes to the Disclosure Requirements for Defined Benefit Plans In 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 highly seasonalno longer considered cost beneficial, clarifies the specific requirements of disclosures and revenuesadds 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 expenses for, such operations may fluctuate significantly among quarterly periods. Accordingly, the interim results for particular businesses, andbenefit components. The guidance will be effective for the Company ason January 1, 2021, and must be applied on a whole, may notretrospective basis with early adoption permitted. The Company is evaluating the effects the adoption of the new guidance will have on its disclosures.
ASU 2019-12 - Simplifying the Accounting for Income Taxes In December 2019, the FASB issued guidance on simplifying the accounting for income taxes by removing certain exceptions in ASC 740 and providing simplification amendments. The guidance removes exceptions on intraperiod tax allocations and reporting and provides simplification on accounting for franchise taxes, tax basis goodwill and tax law changes. The guidance will be indicative of resultseffective for the full fiscal year.
Company on January 1, 2021, with early adoption permitted. Transition requirements vary among the exceptions and amendments which include retrospective, modified retrospective and prospective application. The Company has evaluated the effects of the new guidance and does not expect the guidance to have a material impact on its results of operations, financial position, cash flows or disclosures. Note 3ASU 2020-04 - Accounts receivableReference Rate Reform In March 2020, the FASB issued optional guidance to ease the facilitation of the effects of reference rate reform on financial reporting. The guidance applies to certain contract modifications, hedging relationships and allowance for doubtful accounts
Accounts receivable consists primarilyother transactions that reference LIBOR or another reference rate expected to be discontinued because of trade receivables fromreference rate reform. LIBOR is expected to be retired with a full phase-out by the saleend of goods2021 and servicesreplaced by a new reference rate, which are recorded atincludes SOFR. The guidance can be applied beginning in the invoiced amount net of allowance for doubtful accounts,interim period that includes March 12, 2020, and costs and estimated earnings in excess of billings on uncompleted contracts. The total balance of receivables past due 90 dayscannot be applied to contract modifications or more was $56.0 million, $29.2 million and $30.0 million at September 30, 2019 and 2018, andhedging relationships entered into or evaluated after December 31, 2018, respectively.2022. The Company is currently updating its credit agreements to include language regarding the successor or alternate rate to LIBOR. The Company does not expect the guidance to have a material impact on its results of operations, financial position, cash flows or disclosures.
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, 2019 and 2018, and December 31, 2018, was $8.7 million, $7.3 million and $8.9 million, respectively.
Note 3 - 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 4 - Receivables and allowance for expected credit losses
Receivables consists primarily of trade receivables from the sale of goods and services, which are recorded at the invoiced amount, and contract assets, net of expected credit losses. For more information on contract assets, see Note 8. The Company's trade accounts receivable are all due in 12 months or less. The total balance of receivables past due 90 days or more was $48.9 million, $56.0 million and $46.7 million at September 30, 2020 and 2019, and December 31, 2019, respectively.
The Company's expected credit losses are determined through a review using historical credit loss experience, changes in asset specific characteristics, current conditions and reasonable and supportable future forecasts, among other specific account data, and is performed at least quarterly. The Company develops and documents its methodology to determine its allowance for expected credit losses at each of its reportable business segments. Risk characteristics used by the business segments may include customer mix, knowledge of customers and general economic conditions of the various local economies, among others. Specific account balances are written off when management determines the amounts to be uncollectible.
Details of the Company's expected credit losses were as follows:
| | | | | | | | | | | | | | | | | | | | |
| Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Total |
| | (In thousands) |
| At January 1, 2020 | $ | 328 | | $ | 1,056 | | $ | 0 | | $ | 5,357 | | $ | 1,756 | | $ | 8,497 | |
| Current expected credit loss provision | 555 | | 1,156 | | 0 | | 694 | | 1,150 | | 3,555 | |
| Less write-offs charged against the allowance | 500 | | 624 | | 0 | | 68 | | 73 | | 1,265 | |
| Credit loss recoveries collected | 109 | | 229 | | 0 | | 0 | | 0 | | 338 | |
| At March 31, 2020 | $ | 492 | | $ | 1,817 | | $ | 0 | | $ | 5,983 | | $ | 2,833 | | $ | 11,125 | |
| Current expected credit loss provision | 303 | | 190 | | 0 | | (314) | | 896 | | 1,075 | |
| Less write-offs charged against the allowance | 224 | | 677 | | 0 | | 44 | | 454 | | 1,399 | |
| Credit loss recoveries collected | 88 | | 201 | | 0 | | 0 | | 0 | | 289 | |
| At June 30, 2020 | $ | 659 | | $ | 1,531 | | $ | 0 | | $ | 5,625 | | $ | 3,275 | | $ | 11,090 | |
| Current expected credit loss provision | 435 | | 811 | | 2 | | 728 | | 1,635 | | 3,611 | |
| Less write-offs charged against the allowance | 269 | | 692 | | 0 | | 229 | | 117 | | 1,307 | |
| Credit loss recoveries collected | 75 | | 203 | | 0 | | 0 | | 0 | | 278 | |
| At September 30, 2020 | $ | 900 | | $ | 1,853 | | $ | 2 | | $ | 6,124 | | $ | 4,793 | | $ | 13,672 | |
The Company's allowance for doubtful accounts at September 30, 2019 and December 31, 2019, was $8.7 million and $8.5 million, respectively.
Note 5 - Inventories and natural gas in storage
Natural gas in storage for the Company's regulated operations is generally carriedvalued at lower of cost or market using the last-in, first-out method or lower of cost or net realizable value or cost using the last-in,average cost or first-in, first-out method. AllThe majority of all other inventories are statedvalued at the lower of cost or net realizable value.value using the average cost method. The portion of the cost of natural gas in storage expected to be used within one year12 months was included in inventories. Inventories on the Consolidated Balance Sheets were as follows:
|
| | | | | | | | | |
| | September 30, 2019 |
| September 30, 2018 |
| December 31, 2018 |
|
| | (In thousands) |
| Aggregates held for resale | $ | 143,157 |
| $ | 133,477 |
| $ | 139,681 |
|
| Asphalt oil | 39,269 |
| 40,781 |
| 54,741 |
|
| Materials and supplies | 25,696 |
| 23,563 |
| 23,611 |
|
| Merchandise for resale | 23,902 |
| 15,954 |
| 22,552 |
|
| Natural gas in storage (current) | 32,164 |
| 29,084 |
| 22,117 |
|
| Other | 21,869 |
| 27,434 |
| 24,607 |
|
| Total | $ | 286,057 |
| $ | 270,293 |
| $ | 287,309 |
|
| | | | | | | | | | | |
| | September 30, 2020 | September 30, 2019 | December 31, 2019 |
| | (In thousands) |
| Aggregates held for resale | $ | 168,132 | | $ | 143,157 | | $ | 147,723 | |
| Asphalt oil | 27,587 | | 39,269 | | 41,912 | |
| Materials and supplies | 26,609 | | 25,696 | | 22,512 | |
| Merchandise for resale | 21,525 | | 23,902 | | 22,232 | |
| Natural gas in storage (current) | 27,135 | | 32,164 | | 22,058 | |
| Other | 15,235 | | 21,869 | | 21,970 | |
| Total | $ | 286,223 | | $ | 286,057 | | $ | 278,407 | |
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 othernoncurrent assets - other and was $48.3 million, $48.2 million $47.8 million and $48.5$48.4 million at September 30, 20192020 and 2018,2019, and December 31, 2018,2019, respectively.
Note 5 - Earnings per shareIndexBasic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the applicable period. Diluted earnings per share is computed by dividing net 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. Net 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 follows:
|
| | | | | | | | | | | | |
| | Three Months Ended | Nine Months Ended |
| | September 30, | September 30, |
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | (In thousands, except per share amounts) |
| Weighted average common shares outstanding - basic | 199,343 |
| 196,018 |
| 198,016 |
| 195,618 |
|
| Effect of dilutive performance share awards and restricted stock units | 40 |
| 247 |
| 17 |
| 486 |
|
| Weighted average common shares outstanding - diluted | 199,383 |
| 196,265 |
| 198,033 |
| 196,104 |
|
| Shares excluded from the calculation of diluted earnings per share | 155 |
| 114 |
| 243 |
| — |
|
| Dividends declared per common share | $ | .2025 |
| $ | .1975 |
| $ | .6075 |
| $ | .5925 |
|
Note 6 - New accounting standardsEarnings per share
Recently adopted accounting standards
ASU 2016-02 - Leases In February 2016,Basic earnings per share is computed by dividing net income by the FASBweighted average number of shares of common stock outstanding during the applicable period. Diluted earnings per share is computed by dividing net 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 guidance regarding leases. The guidance required lessees to recognize a lease liability and a right-of-use asset on the balance sheet for operating and financing leases. The guidance remained largelyshares less shares held in treasury. Net income was the same for lessors, although some changes were made to better align lessor accounting withboth the new lessee accountingbasic and to align withdiluted earnings per share calculations. A reconciliation of the revenue recognition standard. The guidance also required additional disclosures, both quantitative and qualitative, related to operating and financing leases for the lessee and sales-type, direct financing and operating leases for the lessor. The Company adopted the standard on January 1, 2019.
In July 2018, the FASB issued ASU 2018-11 - Leases: Targeted Improvements, an accounting standard update to ASU 2016-02. This ASU provided an entity the option to adopt the guidance using one of two modified retrospective approaches. An entity could adopt the guidance using the modified retrospective transition approach beginningweighted average common shares outstanding used in the earliest year presented in the financial statements. This method of adoption would have required the restatement of prior periods reportedbasic 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, allowed entities the option to apply the guidance on the date of adoption by recognizing a cumulative effect adjustment to retaineddiluted earnings during the period of adoption and did not require prior comparative periods to be restated.per share calculations follows:
The Company adopted the standard on January 1, 2019, utilizing the additional transition method of adoption applied on the date of adoption and the practical expedient that allowed the Company to not reassess whether an expired or existing contract contained a lease, the classification of leases or initial direct costs. The Company did not identify any cumulative effect | | | | | | | | | | | | | | |
| Three Months Ended | Nine Months Ended |
| September 30, | September 30, |
| 2020 | 2019 | 2020 | 2019 |
| (In thousands, except per share amounts) |
| Weighted average common shares outstanding - basic | 200,522 | | 199,343 | | 200,495 | | 198,016 | |
| Effect of dilutive performance share awards and restricted stock units | 97 | | 40 | | 20 | | 17 | |
| Weighted average common shares outstanding - diluted | 200,619 | | 199,383 | | 200,515 | | 198,033 | |
| Shares excluded from the calculation of diluted earnings per share | 87 | | 155 | | 139 | | 243 | |
| Dividends declared per common share | $ | .2075 | | $ | .2025 | | $ | .6225 | | $ | .6075 | |
adjustments. The Company also adopted a short-term leasing policy as the lessee where leases with a term of 12 months or less are not 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 has elected to adopt the lease/nonlease component practical expedient for all asset classes as the lessee. The Company did not elect the practical expedient to use hindsight when assessing the lease term or impairment of right-of-use assets for the existing leases on the date of adoption.
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 has 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 evaluate the provisions of the guidance and currently does not expect the guidance to have a material impact on its results of operations, financial position, cash flows or disclosures.
ASU 2017-04 - Simplifying the Test for Goodwill Impairment In 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 has evaluated the guidance and does not expect the guidance will have a material impact on its results of operations, financial position, cash flows or disclosures upon adoption. The Company is planning to early adopt the guidance with the preparation of its 2019 goodwill impairment test in the fourth quarter of 2019.
ASU 2018-13 - Changes to the Disclosure Requirements for Fair Value Measurement In 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 Plans In 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 its disclosures.
Note 7 - Accumulated other comprehensive income (loss)
The after-tax changes in the components of accumulated other comprehensive income (loss)loss were as follows:
| | | | | | | | | | | | | | | |
| 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, 2019 | $ | (1,430) | | $ | (40,734) | | | $ | 62 | | $ | (42,102) | |
| Other comprehensive income before reclassifications | 0 | | 0 | | | 135 | | 135 | |
| Amounts reclassified (to) from accumulated other comprehensive loss | 111 | | 462 | | | (1) | | 572 | |
| Net current-period other comprehensive income | 111 | | 462 | | | 134 | | 707 | |
| At March 31, 2020 | $ | (1,319) | | $ | (40,272) | | | $ | 196 | | $ | (41,395) | |
| Other comprehensive loss before reclassifications | 0 | | 0 | | | (13) | | (13) | |
| Amounts reclassified from accumulated other comprehensive loss | 112 | | 480 | | | 7 | | 599 | |
| Net current-period other comprehensive income (loss) | 112 | | 480 | | | (6) | | 586 | |
| At June 30, 2020 | $ | (1,207) | | $ | (39,792) | | | $ | 190 | | $ | (40,809) | |
| Other comprehensive loss before reclassifications | 0 | | 0 | | | (50) | | (50) | |
| Amounts reclassified from accumulated other comprehensive loss | 111 | | 471 | | | 28 | | 610 | |
| Net current-period other comprehensive income (loss) | 111 | | 471 | | | (22) | | 560 | |
| At September 30, 2020 | $ | (1,096) | | $ | (39,321) | | | $ | 168 | | $ | (40,249) | |
|
| | | | | | | | | | | | |
| 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 | ) |
|
| | | | | | | | | | | | | | | |
| 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 | ) |
| | | | | | | | | | | | | | | |
| 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 | 0 | | 0 | | | 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 | 0 | | 0 | | | 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 | 0 | | 0 | | | 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) | |
The following amounts were reclassified out ofbetween accumulated other comprehensive loss intoand 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 |
| | September 30, | September 30, |
| | 2019 | 2018 | 2019 | 2018 |
| | (In thousands) | |
| Reclassification adjustment for loss on derivative instruments included in net income | $ | (148 | ) | $ | (147 | ) | $ | (443 | ) | $ | (443 | ) | Interest expense |
| | 36 |
| 55 |
| (177 | ) | 164 |
| Income taxes |
| | (112 | ) | (92 | ) | (620 | ) | (279 | ) | |
| Amortization of postretirement liability losses included in net periodic benefit cost | (387 | ) | (584 | ) | (1,162 | ) | (1,751 | ) | Other income |
| | 95 |
| 142 |
| 284 |
| 442 |
| Income taxes |
| | (292 | ) | (442 | ) | (878 | ) | (1,309 | ) | |
| Reclassification adjustment for foreign currency translation adjustment included in net income | — |
| — |
| — |
| (324 | ) | Other income |
| | — |
| — |
| — |
| 75 |
| Income taxes |
| | — |
| — |
| — |
| (249 | ) | |
| Reclassification adjustment on available-for-sale investments included in net income | 5 |
| (42 | ) | (46 | ) | (123 | ) | Other income |
| | (1 | ) | 9 |
| 10 |
| 26 |
| Income taxes |
| | 4 |
| (33 | ) | (36 | ) | (97 | ) | |
| Total reclassifications | $ | (400 | ) | $ | (567 | ) | $ | (1,534 | ) | $ | (1,934 | ) | |
| | | | | | | | | | | | | | | | | |
| Three Months Ended | Nine Months Ended | Location on Consolidated
Statements of
Income |
| September 30, | September 30, |
| 2020 | 2019 | 2020 | 2019 |
| (In thousands) | |
| Reclassification adjustment for loss on derivative instruments included in net income | $ | (148) | | $ | (148) | | $ | (443) | | $ | (443) | | Interest expense |
| 37 | | 36 | | 109 | | (177) | | Income taxes |
| (111) | | (112) | | (334) | | (620) | | |
| Amortization of postretirement liability losses included in net periodic benefit cost | (623) | | (387) | | (1,869) | | (1,162) | | Other income |
| 152 | | 95 | | 456 | | 284 | | Income taxes |
| (471) | | (292) | | (1,413) | | (878) | | |
| Reclassification adjustment on available-for-sale investments included in net income | (35) | | 5 | | (43) | | (46) | | Other income |
| 7 | | (1) | | 9 | | 10 | | Income taxes |
| (28) | | 4 | | (34) | | (36) | | |
| Total reclassifications | $ | (610) | | $ | (400) | | $ | (1,781) | | $ | (1,534) | | |
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.
As part of the adoption of ASC 606 - Revenue from Contracts with Customers, the Company 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 12 months or less.
Disaggregation
In the following table,tables, 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 17.16.
| | | Three Months Ended September 30, 2019 | Electric |
| Natural gas distribution |
| Pipeline and midstream |
| Construction materials and contracting |
| Construction services |
| Other |
| Total |
| |
| Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2020 | Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Other | Total |
| | (In thousands) | | (In thousands) |
| Residential utility sales | $ | 30,376 |
| $ | 44,902 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 75,278 |
| Residential utility sales | $ | 33,086 | | $ | 48,399 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 81,485 | |
| Commercial utility sales | 36,670 |
| 29,148 |
| — |
| — |
| — |
| — |
| 65,818 |
| Commercial utility sales | 35,688 | | 28,731 | | — | | — | | — | | — | | 64,419 | |
| Industrial utility sales | 9,348 |
| 4,307 |
| — |
| — |
| — |
| — |
| 13,655 |
| Industrial utility sales | 8,428 | | 4,454 | | — | | — | | — | | — | | 12,882 | |
| Other utility sales | 1,862 |
| — |
| — |
| — |
| — |
| — |
| 1,862 |
| Other utility sales | 1,779 | | 0 | | — | | — | | — | | — | | 1,779 | |
| Natural gas transportation | — |
| 11,410 |
| 25,229 |
| — |
| — |
| — |
| 36,639 |
| Natural gas transportation | — | | 11,159 | | 27,583 | | — | | — | | — | | 38,742 | |
| Natural gas gathering | — |
| — |
| 2,510 |
| — |
| — |
| — |
| 2,510 |
| Natural gas gathering | — | | — | | 973 | | — | | — | | — | | 973 | |
| Natural gas storage | — |
| — |
| 3,044 |
| — |
| — |
| — |
| 3,044 |
| Natural gas storage | — | | — | | 3,885 | | — | | — | | — | | 3,885 | |
| Contracting services | — |
| — |
| — |
| 461,716 |
| — |
| — |
| 461,716 |
| Contracting services | — | | — | | — | | 448,569 | | — | | — | | 448,569 | |
| Construction materials | — |
| — |
| — |
| 638,862 |
| — |
| — |
| 638,862 |
| Construction materials | — | | — | | — | | 608,673 | | — | | — | | 608,673 | |
| Intrasegment eliminations* | — |
| — |
| — |
| (231,078 | ) | — |
| — |
| (231,078 | ) | |
| Intrasegment eliminations | | Intrasegment eliminations | — | | — | | — | | (234,693) | | — | | — | | (234,693) | |
| Inside specialty contracting | — |
| — |
| — |
| — |
| 317,202 |
| — |
| 317,202 |
| Inside specialty contracting | — | | — | | — | | — | | 352,845 | | — | | 352,845 | |
| Outside specialty contracting | — |
| — |
| — |
| — |
| 151,285 |
| — |
| 151,285 |
| Outside specialty contracting | — | | — | | — | | — | | 187,202 | | — | | 187,202 | |
| Other | 9,380 |
| 2,708 |
| 5,534 |
| — |
| 45 |
| 2,884 |
| 20,551 |
| Other | 7,663 | | 2,590 | | 3,203 | | 0 | | 486 | | 3,030 | | 16,972 | |
| Intersegment eliminations | — |
| — |
| (3,831 | ) | (124 | ) | (1,226 | ) | (2,862 | ) | (8,043 | ) | Intersegment eliminations | (195) | | (185) | | (3,622) | | (110) | | (425) | | (3,006) | | (7,543) | |
| Revenues from contracts with customers | 87,636 |
| 92,475 |
| 32,486 |
| 869,376 |
| 467,306 |
| 22 |
| 1,549,301 |
| Revenues from contracts with customers | 86,449 | | 95,148 | | 32,022 | | 822,439 | | 540,108 | | 24 | | 1,576,190 | |
| Revenues out of scope | 2,209 |
| 1,167 |
| 47 |
| — |
| 11,075 |
| — |
| 14,498 |
| Revenues out of scope | 998 | | (445) | | 46 | | 0 | | 10,500 | | 0 | | 11,099 | |
| Total external operating revenues | $ | 89,845 |
| $ | 93,642 |
| $ | 32,533 |
| $ | 869,376 |
| $ | 478,381 |
| $ | 22 |
| $ | 1,563,799 |
| Total external operating revenues | $ | 87,447 | | $ | 94,703 | | $ | 32,068 | | $ | 822,439 | | $ | 550,608 | | $ | 24 | | $ | 1,587,289 | |
| |
* | 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. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 | Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Other | Total |
| (In thousands) |
| Residential utility sales | $ | 30,376 | | $ | 44,902 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 75,278 | |
| Commercial utility sales | 36,670 | | 29,148 | | — | | — | | — | | — | | 65,818 | |
| Industrial utility sales | 9,348 | | 4,307 | | — | | — | | — | | — | | 13,655 | |
| Other utility sales | 1,862 | | 0 | | — | | — | | — | | — | | 1,862 | |
| Natural gas transportation | — | | 11,410 | | 25,229 | | — | | — | | — | | 36,639 | |
| Natural gas gathering | — | | — | | 2,510 | | — | | — | | — | | 2,510 | |
| Natural gas storage | — | | — | | 3,044 | | — | | — | | — | | 3,044 | |
| Contracting services | — | | — | | — | | 461,716 | | — | | — | | 461,716 | |
| Construction materials | — | | — | | — | | 638,862 | | — | | — | | 638,862 | |
| Intrasegment eliminations | — | | — | | — | | (231,078) | | — | | — | | (231,078) | |
| Inside specialty contracting | — | | — | | — | | — | | 317,202 | | — | | 317,202 | |
| Outside specialty contracting | — | | — | | — | | — | | 151,285 | | — | | 151,285 | |
| Other | 9,380 | | 2,708 | | 5,534 | | 0 | | 45 | | 2,884 | | 20,551 | |
| Intersegment eliminations | 0 | | 0 | | (3,831) | | (124) | | (1,226) | | (2,862) | | (8,043) | |
| Revenues from contracts with customers | 87,636 | | 92,475 | | 32,486 | | 869,376 | | 467,306 | | 22 | | 1,549,301 | |
| Revenues out of scope | 2,209 | | 1,167 | | 47 | | 0 | | 11,075 | | 0 | | 14,498 | |
| Total external operating revenues | $ | 89,845 | | $ | 93,642 | | $ | 32,533 | | $ | 869,376 | | $ | 478,381 | | $ | 22 | | $ | 1,563,799 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 | Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Other | Total |
| (In thousands) |
| Residential utility sales | $ | 93,389 | | $ | 313,753 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 407,142 | |
| Commercial utility sales | 99,152 | | 184,754 | | — | | — | | — | | — | | 283,906 | |
| Industrial utility sales | 26,867 | | 18,633 | | — | | — | | — | | — | | 45,500 | |
| Other utility sales | 5,018 | | 0 | | — | | — | | — | | — | | 5,018 | |
| Natural gas transportation | — | | 33,307 | | 82,980 | | — | | — | | — | | 116,287 | |
| Natural gas gathering | — | | — | | 4,244 | | — | | — | | — | | 4,244 | |
| Natural gas storage | — | | — | | 10,035 | | — | | — | | — | | 10,035 | |
| Contracting services | — | | — | | — | | 850,326 | | — | | — | | 850,326 | |
| Construction materials | — | | — | | — | | 1,299,081 | | — | | — | | 1,299,081 | |
| Intrasegment eliminations | — | | — | | — | | (443,516) | | — | | — | | (443,516) | |
| Inside specialty contracting | — | | — | | — | | — | | 1,049,975 | | — | | 1,049,975 | |
| Outside specialty contracting | — | | — | | — | | — | | 478,047 | | — | | 478,047 | |
| Other | 23,830 | | 7,800 | | 9,807 | | 0 | | 1,249 | | 8,882 | | 51,568 | |
| Intersegment eliminations | (586) | | (555) | | (36,820) | | (262) | | (3,674) | | (8,952) | | (50,849) | |
| Revenues from contracts with customers | 247,670 | | 557,692 | | 70,246 | | 1,705,629 | | 1,525,597 | | (70) | | 4,106,764 | |
| Revenues out of scope | 2,123 | | 4,949 | | 135 | | 0 | | 33,620 | | 0 | | 40,827 | |
| Total external operating revenues | $ | 249,793 | | $ | 562,641 | | $ | 70,381 | | $ | 1,705,629 | | $ | 1,559,217 | | $ | (70) | | $ | 4,147,591 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Nine Months Ended September 30, 2019 | Electric | Natural gas
distribution | Pipeline | 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 | | 0 | | — | | — | | — | | — | | 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 | | 0 | | 70 | | 13,631 | | 64,686 | |
| Intersegment eliminations | 0 | | 0 | | (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 | | 0 | | 37,332 | | 0 | | 41,171 | |
| Total external operating revenues | $ | 263,423 | | $ | 569,656 | | $ | 69,827 | | $ | 1,692,287 | | $ | 1,363,305 | | $ | 65 | | $ | 3,958,563 | |
Presented in the previous tables are intrasegment revenues 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.
|
| | | | | | | | | | | | | | | | | | | | | |
| Three 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 | $ | 31,424 |
| $ | 43,825 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 75,249 |
|
| Commercial utility sales | 36,259 |
| 28,174 |
| — |
| — |
| — |
| — |
| 64,433 |
|
| Industrial utility sales | 8,738 |
| 4,421 |
| — |
| — |
| — |
| — |
| 13,159 |
|
| Other utility sales | 2,056 |
| — |
| — |
| — |
| — |
| — |
| 2,056 |
|
| Natural gas transportation | — |
| 10,841 |
| 21,400 |
| — |
| — |
| — |
| 32,241 |
|
| Natural gas gathering | — |
| — |
| 2,320 |
| — |
| — |
| — |
| 2,320 |
|
| Natural gas storage | — |
| — |
| 2,795 |
| — |
| — |
| — |
| 2,795 |
|
| Contracting services | — |
| — |
| — |
| 409,006 |
| — |
| — |
| 409,006 |
|
| Construction materials | — |
| — |
| — |
| 538,962 |
| — |
| — |
| 538,962 |
|
| Intrasegment eliminations* | — |
| — |
| — |
| (204,040 | ) | — |
| — |
| (204,040 | ) |
| Inside specialty contracting | — |
| — |
| — |
| — |
| 217,474 |
| — |
| 217,474 |
|
| Outside specialty contracting | — |
| — |
| — |
| — |
| 100,988 |
| — |
| 100,988 |
|
| Other | 6,158 |
| 3,208 |
| 5,701 |
| — |
| 15 |
| 3,084 |
| 18,166 |
|
| Intersegment eliminations | — |
| — |
| (3,187 | ) | (165 | ) | (782 | ) | (3,037 | ) | (7,171 | ) |
| Revenues from contracts with customers | 84,635 |
| 90,469 |
| 29,029 |
| 743,763 |
| 317,695 |
| 47 |
| 1,265,638 |
|
| Revenues out of scope | 1,445 |
| 1,779 |
| 42 |
| — |
| 11,883 |
| — |
| 15,149 |
|
| Total external operating revenues | $ | 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‐costcost-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, 2019 |
| December 31, 2018 |
| Change |
| Location on Consolidated Balance Sheets |
| | (In thousands) | |
| Contract assets | $ | 163,437 |
| $ | 104,239 |
| $ | 59,198 |
| Receivables, net |
| Contract liabilities - current | (120,207 | ) | (93,901 | ) | (26,306 | ) | Accounts payable |
| Contract liabilities - noncurrent | (25 | ) | (135 | ) | 110 |
| Deferred credits and other liabilities - other |
| Net contract assets | $ | 43,205 |
| $ | 10,203 |
| $ | 33,002 |
| |
| | | | | | | | | | | | | | |
| September 30, 2020 | December 31, 2019 | Change | Location on Consolidated Balance Sheets |
| (In thousands) | |
| Contract assets | $ | 135,958 | | $ | 109,078 | | $ | 26,880 | | Receivables, net |
| Contract liabilities - current | (158,923) | | (142,768) | | (16,155) | | Accounts payable |
| Contract liabilities - noncurrent | (62) | | (19) | | (43) | | Noncurrent liabilities - other |
| Net contract liabilities | $ | (23,027) | | $ | (33,709) | | $ | 10,682 | | |
The Company recognized $15.6 million and $137.3 million in revenue for the three and nine months ended September 30, 2020, respectively, which was previously included in contract liabilities at December 31, 2019. The Company recognized $7.5 million and $86.5 million in revenue for the three and nine months ended September 30, 2019, respectively, which was previously included in contract liabilities at December 31, 2018.
The Company recognized $10.3a net increase in revenues of $34.7 million and $79.2$58.8 million in revenue for the three and nine months ended September 30, 2018,2020, respectively, which was previously includedfrom performance obligations satisfied in contract liabilities at December 31, 2017.
prior periods. 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, also referred to as backlog, at the construction materials and contracting and construction services segments include unrecognized revenues that the Company reasonably expects to be realized which includesrealized. These unrecognized revenues can include: 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 majority of the Company's construction contracts have an original duration of less than two years.
The remaining performance obligations at the pipeline and midstream segment include firm transportation and storage contracts with fixed pricing and fixed volumes. The Company has applied the practical expedient, which does not require additional disclosures for contracts with an original duration of less than 12 months, to certain firm transportation and non-regulated contracts. The Company's firm transportation and firm storage contracts included in the remaining performance obligations have weighted average remaining durations of approximately five and two years, respectively.
At September 30, 2019,2020, the Company's remaining performance obligations were $2.1$2.0 billion. The Company expects to recognize the following revenue amounts in future periods related to these remaining performance obligations: $1.6$1.5 billion within the next 12 months; $255.0months or less; $265.6 million within the next 13 to 24 months; and $249.6$260.6 million thereafter.in 25 months or more.
The majority of the Company's construction 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 - Business combinations
During 2019, the Company completed twoThe following acquisitions which were accounted for as business combinations. The following is a listing of the acquisitions made during 2019:
In March 2019, the Company acquired Viesko Redi-Mix, Inc., a provider of ready-mixed concrete in Oregon. The results of Viesko Redi-Mix, Inc. are included in the construction materials and contracting segment.
In September 2019, the Company 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.
All business combinations were accounted for in accordance with ASC 805 - Business CombinationsCombinations.. The results of the acquired businesses have been included in the Company's Consolidated Financial Statements beginning on the acquisition date. Pro forma financial amounts reflecting the effects of the business combinations are not presented, as none of these business combinations were not material to the Company's financial position or results of operations.
For all business combinations, the Company preliminarily allocates the purchase price of the acquisitions to the assets acquired and liabilities assumed based on their estimated fair values as of the acquisition 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 ofbalances; identifiable intangible assets,assets; property, plant and equipment,equipment; total consideration and goodwill. The excess of the purchase price over the aggregate fair values is recorded as goodwill. The Company calculated the fair value of the assets acquired in 20192020 and 20182019 using a market or cost approach (or a combination 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 final fair value of the net assets acquired may result in adjustments to the assets and liabilities, including goodwill, and will be made as soon as practical, but no later than one year12 months 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 acquisitions are also subject to customary adjustments based on, among other things, the amount of cash, debt and working capital in the business as of the closing date. The amounts included in the Consolidated Balance SheetSheets for these adjustments are considered provisional until final settlement has occurred.
The following are the acquisitions made during 2020 and 2019 at the construction materials and contracting segment:
•In February 2020, the Company acquired the assets of Oldcastle Infrastructure Spokane, a prestressed-concrete business in Washington.
•In December 2019, the Company acquired the assets of Roadrunner Ready Mix, Inc., a provider of ready-mixed concrete in Idaho.
•In March 2019, the Company acquired Viesko Redi-Mix, Inc., a provider of ready-mixed concrete in Oregon.
The following are the acquisitions made during 2020 and 2019 at the construction services segment:
•In February 2020, the Company acquired PerLectric, Inc., an electrical construction company in Virginia.
•In September 2019, the Company purchased the assets of Pride Electric, Inc., an electrical construction company in Washington.
The total purchase price for acquisitions that occurred in 2020 was $78.2 million, subject to certain adjustments, with cash acquired totaling $1.7 million. The purchase price includes consideration paid of $71.5 million and $5.0 million of indemnity holdback liabilities. The amounts allocated to the aggregated assets acquired and liabilities assumed during 2020 were as follows: $45.9 million to current assets; $4.9 million to property, plant and equipment; $31.3 million to goodwill; $17.6 million to other intangible assets; $21.2 million to current liabilities and $300,000 to noncurrent liabilities. During 2020, measurement period adjustments were made to previously reported provisional amounts, which increased goodwill by $400,000. At September 30, 2020, the purchase price allocations for these acquisitions were preliminary and will be finalized within 12 months of the respective acquisition dates. The Company issued debt to finance these acquisitions.
In 2019, the gross aggregate consideration for acquisitions was $56.8 million, subject to certain adjustments, and included $1.2 million of debt assumed. The amounts allocated to the aggregated assets acquired and liabilities assumed during 2019 were as follows: $15.8 million to current assets; $16.7 million to property, plant and equipment; $23.1 million to goodwill; $6.7 million to other intangible assets; $500,000 to other noncurrent assets; $5.9 million to current liabilities and $100,000 to noncurrent liabilities. At December 31, 2019, the purchase price adjustments for Viesko Redi-Mix, Inc., have had been settled and the purchase price allocation is considered final.
During the third quarter of 2019, the Company finalized its valuation of the assets acquired and liabilities assumed in conjunction with the acquisition in 2018 of Sweetman Construction Company. As a result, measurement periodno material adjustments were made to the previously disclosed provisional fair values. These adjustments did not have a material impact onaccounting. At September 30, 2020, the Company's consolidated results of operations. The purchase price adjustmentsmeasurement period for the three additional acquisitions in 2018 have been settledPride Electric, Inc. ended with no material adjustments made to the provisional accounting. The aggregate total considerationAt September 30, 2020, the purchase price allocation for the 2018 acquisitionsRoadrunner Ready Mix, Inc. was preliminary 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 liabilitieswill be finalized within 12 months of the Company's discontinued operations have been classified as heldacquisition date. The Company issued debt and equity securities to finance these acquisitions.
Costs incurred for saleacquisitions are included in operation and the results of operations are shown in income (loss) from discontinued operations, other than certain general and administrative costs and interestmaintenance 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 RefiningOn June 24, 2016, WBI Energy entered into a membership interest purchase agreement with Tesoro to sell all 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.
FidelityIn 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 on the Consolidated Balance Sheets were as follows:
|
| | | | | | | | | |
| | September 30, 2019 |
| September 30, 2018 |
| December 31, 2018 |
|
| | (In thousands) |
| Assets | | | |
| Current assets: | | | |
| Receivables, net | $ | 426 |
| $ | 571 |
| $ | 430 |
|
| Income taxes receivable (a) | — |
| 1,640 |
| — |
|
| Total current assets held for sale | 426 |
| 2,211 |
| 430 |
|
| Noncurrent assets: | | | |
| Deferred income taxes | 1,926 |
| 1,711 |
| 1,926 |
|
| Other | 161 |
| 161 |
| 161 |
|
| Total noncurrent assets held for sale | 2,087 |
| 1,872 |
| 2,087 |
|
| Total assets held for sale | $ | 2,513 |
| $ | 4,083 |
| $ | 2,517 |
|
| Liabilities | | | |
| Current liabilities: | | | |
| Accounts payable | $ | — |
| $ | 188 |
| $ | 80 |
|
| Taxes payable | 1,300 |
| 7,463 |
| 1,451 |
|
| Other accrued liabilities | 2,093 |
| 1,948 |
| 2,470 |
|
| Total current liabilities held for sale | 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 | $ | 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 reconciliation of the major classes of income and expense constituting pretax income (loss) from discontinued operations to the after-tax income (loss) from discontinued operations on the Consolidated Statements of Income was as follows:and were not material for the nine months ended September 30, 2020 and 2019.
|
| | | | | | | | | | | | |
| | 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 1110 - Leases
Most of theThe Company's leases the Company enters into areprimarily include operating leases for equipment, buildings, easements and vehicles as part of their ongoing operations.vehicles. The Company also leases certain equipment to third parties through its utility and construction services segments. The Company determines if an arrangement contains a lease at inception of a contract and accounts for all leases in accordance with ASC 842 - Leases. For more information on the adoption of 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 operationssegments, which are considered short-term 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 based on the present valuewith terms 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 term of the 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.than 12 months.
The Company has elected to recognizerecognized revenue from operating leases with an original lease term of 12$10.7 million and $34.0 million for the three and nine 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 operating lease liabilities presented on the Company's Consolidated Balance Sheet atended 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.2020, respectively. 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, 2019,2020, the Company had $10.0$8.4 million of lease receivables with a majority due within 12 months.
Note 1211 - Goodwill and other intangible assets
The changes in the carrying amount of goodwill were as follows:
|
| | | | | | | | | | | | |
| 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 |
|
| | | | | | | | | | | | | | |
| Balance at January 1, 2020 | Goodwill
Acquired
During
the Year | Measurement
Period
Adjustments | Balance at September 30, 2020 |
| | (In thousands) |
| Natural gas distribution | $ | 345,736 | | $ | 0 | | $ | 0 | | $ | 345,736 | |
| Construction materials and contracting | 217,234 | | 6,483 | | 0 | | 223,717 | |
| Construction services | 118,388 | | 24,436 | | 400 | | 143,224 | |
| Total | $ | 681,358 | | $ | 30,919 | | $ | 400 | | $ | 712,677 | |
|
| | | | | | | | | | | | |
| 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) |
| 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 |
|
| | | | | | | | | | | | | | |
| 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 | | $ | 0 | | $ | 0 | | $ | 345,736 | |
| Construction materials and contracting | 209,421 | | 14,473 | | (6,669) | | 217,225 | |
| Construction services | 109,765 | | 8,623 | | 0 | | 118,388 | |
| Total | $ | 664,922 | | $ | 23,096 | | $ | (6,669) | | $ | 681,349 | |
|
| | | | | | | | | | | | |
| 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) |
| Natural gas distribution | $ | 345,736 |
| $ | — |
| $ | — |
| $ | 345,736 |
|
| Construction materials and contracting | 176,290 |
| 33,131 |
| — |
| 209,421 |
|
| Construction services | 109,765 |
| — |
| — |
| 109,765 |
|
| Total | $ | 631,791 |
| $ | 33,131 |
| $ | — |
| $ | 664,922 |
|
| | | | | | | | | | | | | | |
| Balance at January 1, 2019 | Goodwill
Acquired
During
the Year | Measurement
Period
Adjustments | Balance at December 31, 2019 |
| | (In thousands) |
| Natural gas distribution | $ | 345,736 | | $ | 0 | | $ | 0 | | $ | 345,736 | |
| Construction materials and contracting | 209,421 | | 14,482 | | (6,669) | | 217,234 | |
| Construction services | 109,765 | | 8,623 | | 0 | | 118,388 | |
| Total | $ | 664,922 | | $ | 23,105 | | $ | (6,669) | | $ | 681,358 | |
During 2019Other amortizable intangible assets were as follows:
| | | | | | | | | | | |
| | September 30, 2020 | September 30, 2019 | December 31, 2019 |
| | (In thousands) |
| Customer relationships | $ | 27,551 | | $ | 18,011 | | $ | 17,958 | |
| Less accumulated amortization | 5,958 | | 5,823 | | 6,268 | |
| | 21,593 | | 12,188 | | 11,690 | |
| Noncompete agreements | 3,941 | | 3,419 | | 3,439 | |
| Less accumulated amortization | 2,176 | | 1,868 | | 1,957 | |
| 1,765 | | 1,551 | | 1,482 | |
| Other | 12,853 | | 7,488 | | 8,094 | |
| Less accumulated amortization | 9,835 | | 5,716 | | 6,020 | |
| | 3,018 | | 1,772 | | 2,074 | |
| Total | $ | 26,376 | | $ | 15,511 | | $ | 15,246 | |
The previous tables include goodwill 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 ofintangible assets associated with the business combinations other intangible assets increased $6.3 million at September 30, 2019, compared to December 31, 2018.completed during 2020 and 2019. For more information related to these business combinations, see Note 9.
OtherAmortization expense for amortizable intangible assets were as follows:
|
| | | | | | | | | |
| | September 30, 2019 |
| September 30, 2018 |
| December 31, 2018 |
|
| | (In thousands) |
| Customer relationships | $ | 18,011 |
| $ | 15,920 |
| $ | 22,720 |
|
| Less accumulated amortization | 5,823 |
| 13,342 |
| 13,535 |
|
| | 12,188 |
| 2,578 |
| 9,185 |
|
| Noncompete agreements | 3,419 |
| 2,606 |
| 2,605 |
|
| Less accumulated amortization | 1,868 |
| 1,911 |
| 1,956 |
|
| | 1,551 |
| 695 |
| 649 |
|
| Other | 7,488 |
| 6,458 |
| 6,458 |
|
| Less accumulated amortization | 5,716 |
| 5,413 |
| 5,477 |
|
| | 1,772 |
| 1,045 |
| 981 |
|
| Total | $ | 15,511 |
| $ | 4,318 |
| $ | 10,815 |
|
for the three and nine months ended September 30, 2020, was $2.1 million and $6.8 million, respectively. 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. Estimated amortization expense for identifiable intangible assets as of September 30, 2019,2020, was:
|
| | | | | | | | | | | | | | | | | | |
| | Remainder of 2019 |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| Thereafter |
|
| | (In thousands) |
| Amortization expense | $ | 931 |
| $ | 3,077 |
| $ | 2,042 |
| $ | 1,996 |
| $ | 1,957 |
| $ | 5,508 |
|
| | | | | | | | | | | | | | | | | | | | |
| Remainder of
2020 | 2021 | 2022 | 2023 | 2024 | Thereafter |
| (In thousands) |
| Amortization expense | $ | 2,462 | | $ | 4,579 | | $ | 4,108 | | $ | 3,975 | | $ | 3,653 | | $ | 7,599 | |
Note 1312 - Regulatory assets and liabilities
The following table summarizes the individual components of unamortized regulatory assets and liabilities:
| | | | | | | | | | | | | | | | | | | |
| Estimated
Recovery
Period as of
September 30,
2020 | * | September 30, 2020 | September 30, 2019 | December 31, 2019 | | |
| | | (In thousands) |
| Regulatory assets: | | | | | | | |
| Current: | | | | | | | |
| Natural gas costs recoverable through rate adjustments | Up to 1 year | | $ | 48,478 | | $ | 39,383 | | $ | 42,823 | | | |
| Cost recovery mechanisms | Up to 1 year | | 8,177 | | 8,706 | | 6,288 | | | |
| Conservation programs | Up to 1 year | | 7,857 | | 7,776 | | 6,963 | | | |
| Other | Up to 1 year | | 14,613 | | 13,316 | | 7,539 | | | |
| | | 79,125 | | 69,181 | | 63,613 | | | |
| Noncurrent: | | | | | | | |
| Pension and postretirement benefits | ** | | 157,015 | | 165,843 | | 157,069 | | | |
| Asset retirement obligations | Over plant lives | | 68,815 | | 64,771 | | 66,000 | | | |
| Plant to be retired | - | | 57,499 | | 26,152 | | 32,931 | | | |
| Manufactured gas plant site remediation | - | | 25,964 | | 15,510 | | 15,126 | | | |
| Natural gas costs recoverable through rate adjustments | Up to 3 years | | 24,677 | | 53,618 | | 46,381 | | | |
| Cost recovery mechanisms | Up to 10 years | | 14,281 | | 12,206 | | 13,108 | | | |
| Taxes recoverable from customers | Over plant lives | | 10,847 | | 11,600 | | 11,486 | | | |
| Long-term debt refinancing costs | Up to 17 years | | 3,826 | | 4,439 | | 4,286 | | | |
| Other | Up to 19 years | | 6,840 | | 8,660 | | 7,397 | | | |
| | | 369,764 | | 362,799 | | 353,784 | | | |
| Total regulatory assets | | | $ | 448,889 | | $ | 431,980 | | $ | 417,397 | | | |
| Regulatory liabilities: | | | | | | | |
| Current: | | | | | | | |
| Natural gas costs refundable through rate adjustments | | | $ | 20,556 | | $ | 19,194 | | $ | 23,825 | | | |
| Electric fuel and purchased power deferral | | | 6,171 | | 2,040 | | 5,824 | | | |
| Taxes refundable to customers | | | 4,223 | | 4,309 | | 3,472 | | | |
| Other | | | 8,887 | | 11,402 | | 9,814 | | | |
| | | 39,837 | | 36,945 | | 42,935 | | | |
| Noncurrent: | | | | | | | |
| Taxes refundable to customers | | | 232,186 | | 253,703 | | 246,034 | | | |
| Plant removal and decommissioning costs | | | 173,367 | | 174,595 | | 173,722 | | | |
| Pension and postretirement benefits | | | 17,991 | | 15,190 | | 18,065 | | | |
| Other | | | 11,392 | | 10,272 | | 9,549 | | | |
| | | 434,936 | | 453,760 | | 447,370 | | | |
| Total regulatory liabilities | | | $ | 474,773 | | $ | 490,705 | | $ | 490,305 | | | |
| Net regulatory position | | | $ | (25,884) | | $ | (58,725) | | $ | (72,908) | | | |
|
| | | | | | | | |
| | 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
** Recovered as expense is incurred or cash contributions are made.
At September 30, 2020 and 2019, and December 31, 2019, approximately $318.2 million, $278.6 million and $276.5 million, respectively, of the Company's regulatory assets arewere not earning a rate of return; however, these regulatory assets are expected to be recovered from customers in future rates. As of September 30,
In 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. TheWashington from the rupture of the Enbridge pipeline in Canada in late 2018. As a result, the Company has recorded theserequested, and the WUTC approved, recovery of the balance of natural gas costs as regulatory assets as they are expectedrecoverable related to be recovered from customers, as discussed in Note 19.this period of time over three years rather than its normal one-year recovery period.
In February 2019, the Company announced that it intends to retire threeone aging coal-fired electric generationgenerating unit in early 2021 and two units within the next three years.in early 2022. 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 1413 - 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 defined 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 $95.7 million, $84.2 million $80.4 million and $73.8$87.0 million, at September 30, 20192020 and 2018,2019, and December 31, 2018,2019, respectively, are classified as investments on the Consolidated Balance Sheets. The net unrealized gains on these investments were $3.3 million and $8.7 million for the three and nine months ended September 30, 2020, respectively. 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 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.
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, which 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 loss.income (loss). Details of available-for-sale securities were as follows:
| | | | | | | | | | | | | | |
| September 30, 2020 | Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Fair Value |
| (In thousands) |
| Mortgage-backed securities | $ | 9,813 | | $ | 213 | | $ | 4 | | $ | 10,022 | |
| U.S. Treasury securities | 1,166 | | 3 | | 0 | | 1,169 | |
| Total | $ | 10,979 | | $ | 216 | | $ | 4 | | $ | 11,191 | |
| | | September 30, 2019 | 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 | $ | 9,577 |
| $ | 86 |
| $ | 16 |
| $ | 9,647 |
| Mortgage-backed securities | $ | 9,577 | | $ | 86 | | $ | 16 | | $ | 9,647 | |
| U.S. Treasury securities | 1,258 |
| — |
| 1 |
| 1,257 |
| U.S. Treasury securities | 1,258 | | 0 | | 1 | | 1,257 | |
| Total | $ | 10,835 |
| $ | 86 |
| $ | 17 |
| $ | 10,904 |
| Total | $ | 10,835 | | $ | 86 | | $ | 17 | | $ | 10,904 | |
|
| | | | | | | | | | | | |
| September 30, 2018 | Cost |
| Gross Unrealized Gains |
| Gross Unrealized Losses |
| Fair Value |
|
| | (In thousands) |
| Mortgage-backed securities | $ | 10,550 |
| $ | 3 |
| $ | 251 |
| $ | 10,302 |
|
| U.S. Treasury securities | 179 |
| — |
| — |
| 179 |
|
| Total | $ | 10,729 |
| $ | 3 |
| $ | 251 |
| $ | 10,481 |
|
|
| | | | | | | | | | | | |
| December 31, 2018 | Cost |
| Gross Unrealized Gains |
| Gross Unrealized Losses |
| Fair Value |
|
| | (In thousands) |
| Mortgage-backed securities | $ | 10,473 |
| $ | 21 |
| $ | 162 |
| $ | 10,332 |
|
| U.S. Treasury securities | 179 |
| — |
| — |
| 179 |
|
| Total | $ | 10,652 |
| $ | 21 |
| $ | 162 |
| $ | 10,511 |
|
| | | | | | | | | | | | | | |
| December 31, 2019 | Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Fair Value |
| (In thousands) |
| Mortgage-backed securities | $ | 9,804 | | $ | 87 | | $ | 10 | | $ | 9,881 | |
| U.S. Treasury securities | 1,228 | | 1 | | 0 | | 1,229 | |
| Total | $ | 11,032 | | $ | 88 | | $ | 10 | | $ | 11,110 | |
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, 2019 and 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, 2020, 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, 2020 |
| (In thousands) |
| Assets: | | | | |
| Money market funds | $ | — | | $ | 8,478 | | $ | — | | $ | 8,478 | |
| Insurance contract* | — | | 95,687 | | — | | 95,687 | |
| Available-for-sale securities: | | | | |
| Mortgage-backed securities | — | | 10,022 | | — | | 10,022 | |
| U.S. Treasury securities | — | | 1,169 | | — | | 1,169 | |
| | | | |
| Total assets measured at fair value | $ | — | | $ | 115,356 | | $ | — | | $ | 115,356 | |
| | | | |
| | | | |
| | | | |
|
| | | | | | | | | | | | |
| | 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, 2019 |
|
| | (In thousands) |
| Assets: | | | | |
| Money market funds | $ | — |
| $ | 7,472 |
| $ | — |
| $ | 7,472 |
|
| Insurance contract* | — |
| 84,222 |
| — |
| 84,222 |
|
| Available-for-sale securities: | | | | |
| Mortgage-backed securities | — |
| 9,647 |
| — |
| 9,647 |
|
| U.S. Treasury securities | — |
| 1,257 |
| — |
| 1,257 |
|
| Total assets measured at fair value | $ | — |
| $ | 102,598 |
| $ | — |
| $ | 102,598 |
|
| | | | | | | | | | | | | | |
| | 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, 2019 |
| (In thousands) |
| Assets: | | | | |
| Money market funds | $ | — | | $ | 7,472 | | $ | — | | $ | 7,472 | |
| Insurance contract* | — | | 84,222 | | — | | 84,222 | |
| Available-for-sale securities: | | | | |
| Mortgage-backed securities | — | | 9,647 | | — | | 9,647 | |
| U.S. Treasury securities | — | | 1,257 | | — | | 1,257 | |
| | | | |
| Total assets measured at fair value | $ | — | | $ | 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 December 31, 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 December 31, 2019 |
| (In thousands) |
| Assets: | | | | |
| Money market funds | $ | — | | $ | 8,440 | | $ | — | | $ | 8,440 | |
| Insurance contract* | — | | 87,009 | | — | | 87,009 | |
| Available-for-sale securities: | | | | |
| Mortgage-backed securities | — | | 9,881 | | — | | 9,881 | |
| U.S. Treasury securities | — | | 1,229 | | — | | 1,229 | |
| | | | |
| Total assets measured at fair value | $ | — | | $ | 106,559 | | $ | — | | $ | 106,559 | |
| | | | |
| | | | |
| | | | |
| | | | |
|
| | | | | | | | | | | | |
| | 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 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 December 31, 2018 |
|
| | (In thousands) |
| Assets: | | | | |
| Money market funds | $ | — |
| $ | 10,799 |
| $ | — |
| $ | 10,799 |
|
| Insurance contract* | — |
| 73,838 |
| — |
| 73,838 |
|
| Available-for-sale securities: | | | | |
| Mortgage-backed securities | — |
| 10,332 |
| — |
| 10,332 |
|
| U.S. Treasury securities | — |
| 179 |
| — |
| 179 |
|
| Total assets measured at fair value | $ | — |
| $ | 95,148 |
| $ | — |
| $ | 95,148 |
|
| |
* | 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. |
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.
In the second quarter of 2019, the Company reviewed a non-utility investment at its electric and natural gas distribution segments for impairment. This was a cost-method investment and was written down to 0 using the income approach to determine its fair value, requiring the Company to record a write-down of $2.0 million, before tax. The fair value of this investment was categorized as Level 3 in the fair value hierarchy. TheThis reduction is reflected in investments on the Company's Consolidated Balance Sheet, as well as within other income on the Consolidated Statements of Income.
The Company performed a fair value assessment of the assets acquired and liabilities assumed in the business combinations that have occurred during 2020 and 2019. For more information on these Level 2 and Level 3 fair value measurements, see Note 9.
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, 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 |
|
| | | | | | | | | | | |
| | September 30, 2020 | September 30, 2019 | December 31, 2019 |
| (In thousands) |
| Carrying amount | $ | 2,270,290 | | $ | 2,246,756 | | $ | 2,243,107 | |
| Fair value | $ | 2,593,743 | | $ | 2,450,209 | | $ | 2,418,631 | |
The carrying amounts of the Company's remaining financial instruments included in current assets and current liabilities approximate their fair values.
Note 1514 - Debt
Certain debt instruments of the Company's subsidiaries contain restrictive and financial covenants and cross-default provisions. In order to borrow under the respective debt instruments,agreements, 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, 2019.2020. 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 respectivethe 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 certain operations of the construction businesses.
Short-term debt
The following describes certain transactions duringCompany's subsidiaries. Due to the three and nine months ended September 30, 2019, included in outstandingearly impacts of the COVID-19 pandemic on the 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 duringcapital markets, 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 amendedCompany temporarily borrowed under its revolving credit agreementagreements in addition to extendaccessing the termination date from April 24,commercial paper markets in the first half of 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.. At September 30, 2020, all borrowings under the revolving credit agreements for Montana-Dakota and Centennial had been repaid.
|
| |
• | 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 |
|
| | | | | | | | | | | | | | |
| | Weighted
Average
Interest
Rate at
September 30, 2020 | September 30, 2020 | September 30, 2019 | December 31, 2019 |
| | | (In thousands) |
| Senior Notes due on dates ranging from October 22, 2022 to June 15, 2060 | 4.43 | % | $ | 1,900,000 | | $ | 1,655,000 | | $ | 1,850,000 | |
| Commercial paper supported by revolving credit agreements | 0.44 | % | 214,150 | | 281,800 | | 222,900 | |
| Term Loan Agreement due on September 3, 2032 | 2.00 | % | 8,400 | | 209,100 | | 9,100 | |
| Credit agreements due on June 7, 2024 | 2.40 | % | 91,000 | | 31,000 | | 89,050 | |
| Medium-Term Notes due on dates ranging from September 15, 2027 to March 16, 2029 | 7.32 | % | 35,000 | | 50,000 | | 50,000 | |
| Other notes due on dates ranging from July 15, 2021 to November 30, 2038 | 4.60 | % | 28,284 | | 26,083 | | 29,117 | |
| Less unamortized debt issuance costs | | 6,526 | | 6,074 | | 7,010 | |
| Less discount | | 18 | | 153 | | 50 | |
| Total long-term debt | | 2,270,290 | | 2,246,756 | | 2,243,107 | |
| Less current maturities | | 1,558 | | 65,810 | | 16,540 | |
| Net long-term debt | | $ | 2,268,732 | | $ | 2,180,946 | | $ | 2,226,567 | |
Schedule of Debt Maturities Long-term debt maturities, which excludes unamortized debt issuance costs and discount, as ofat September 30, 2019,2020, 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 |
|
| | | | | | | | | | | | | | | | | | | | |
| Remainder of
2020 | 2021 | 2022 | 2023 | 2024 | Thereafter |
| (In thousands) |
| Long-term debt maturities | $ | 28 | | $ | 1,528 | | $ | 148,038 | | $ | 77,921 | | $ | 366,571 | | $ | 1,682,748 | |
Note 1615 - Cash flow information
Cash expenditures for interest and income taxes were as follows:
| | | | | | | | |
| Nine Months Ended |
| | September 30, |
| | 2020 | 2019 | |
| | (In thousands) |
| Interest, net* | $ | 63,086 | | $ | 64,596 | |
| Income taxes paid, net** | $ | 43,448 | | $ | 1,816 | |
|
| | | | | | |
| | Nine Months Ended |
| | September 30, |
| | 2019 |
| 2018 |
|
| | (In thousands) |
| Interest, net* | $ | 64,596 |
| $ | 58,359 |
|
| Income taxes paid, net** | $ | 1,816 |
| $ | 8,887 |
|
** Income taxes paid, including discontinued operations, were $43.5 million and $2.0 million for the nine months ended September 30, 2020 and 2019, respectively.
| | |
* | AFUDC - borrowed was $2.0 million and $1.8 million for the nine months ended September 30, 2019 and 2018, respectively. |
| |
** | Income taxes paid, including discontinued operations, were $2.0 million and $5.1 million for the nine months ended September 30, 2019 and 2018, respectively. |
Noncash investing and financing transactions were as follows:
| | | | | | | | | | | |
| September 30, 2020 | September 30, 2019 | December 31, 2019 |
| (In thousands) |
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 41,315 | | $ | 46,770 | | $ | 54,880 | |
| Property, plant and equipment additions in accounts payable | $ | 33,240 | | $ | 34,368 | | $ | 46,119 | |
| Accrual for holdback payment related to a business combination | $ | 5,000 | | $ | 0 | | $ | 0 | |
| Debt assumed in connection with a business combination | $ | 0 | | $ | 1,163 | | $ | 1,163 | |
|
| | | | | | | | | |
| | September 30, 2019 |
| September 30, 2018 |
| December 31, 2018 |
|
| | (In thousands) |
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 46,770 |
| $ | — |
| $ | — |
|
| Property, plant and equipment additions in accounts payable | $ | 34,368 |
| $ | 34,594 |
| $ | 42,355 |
|
| 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 1716 - 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 nonregulatednon-regulated 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 mines, processes and sells construction aggregates (crushed stone, sand and gravel); produces and sells asphalt mix; and supplies 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, andincluding 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. This segment also constructs and maintains renewable energy projects. These specialty contracting services are provided to utilities and large manufacturing, commercial, industrial, institutional and governmentalgovernment 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. In addition, the Other category 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 thatand do not meet the criteria for income (loss) from discontinued operations. The Other category also includes Centennial Resources' former investment in Brazil.
Discontinued operations include 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 20182019 Annual Report. Information on the Company's segments was as follows:
|
| | | | | | | | | | | | |
| | Three Months Ended | Nine Months Ended |
| | September 30, | September 30, |
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | (In thousands) |
| External operating revenues: | | | | |
| Regulated operations: | | | | |
| Electric | $ | 89,845 |
| $ | 86,080 |
| $ | 263,423 |
| $ | 251,984 |
|
| Natural gas distribution | 93,642 |
| 92,248 |
| 569,656 |
| 554,452 |
|
| Pipeline and midstream | 25,957 |
| 22,289 |
| 52,230 |
| 45,325 |
|
| | 209,444 |
| 200,617 |
| 885,309 |
| 851,761 |
|
| Nonregulated operations: | | | | |
| Pipeline and midstream | 6,576 |
| 6,782 |
| 17,597 |
| 16,640 |
|
| Construction materials and contracting | 869,376 |
| 743,763 |
| 1,692,287 |
| 1,466,435 |
|
| Construction services | 478,381 |
| 329,578 |
| 1,363,305 |
| 986,649 |
|
| Other | 22 |
| 47 |
| 65 |
| 193 |
|
| | 1,354,355 |
| 1,080,170 |
| 3,073,254 |
| 2,469,917 |
|
| Total external operating revenues | $ | 1,563,799 |
| $ | 1,280,787 |
| $ | 3,958,563 |
| $ | 3,321,678 |
|
| | | | | |
| | | | | | | | | | | | | | |
| Three Months Ended | Nine Months Ended |
| September 30, | September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | |
| | (In thousands) |
| External operating revenues: | | | | |
| Regulated operations: | | | | |
| Electric | $ | 87,447 | | $ | 89,845 | | $ | 249,793 | | $ | 263,423 | |
| Natural gas distribution | 94,703 | | 93,642 | | 562,641 | | 569,656 | |
| Pipeline | 27,965 | | 25,957 | | 57,717 | | 52,230 | |
| | 210,115 | | 209,444 | | 870,151 | | 885,309 | |
| Non-regulated operations: | | | | |
| Pipeline | 4,103 | | 6,576 | | 12,664 | | 17,597 | |
| Construction materials and contracting | 822,439 | | 869,376 | | 1,705,629 | | 1,692,287 | |
| Construction services | 550,608 | | 478,381 | | 1,559,217 | | 1,363,305 | |
| Other | 24 | | 22 | | (70) | | 65 | |
| | 1,377,174 | | 1,354,355 | | 3,277,440 | | 3,073,254 | |
| Total external operating revenues | $ | 1,587,289 | | $ | 1,563,799 | | $ | 4,147,591 | | $ | 3,958,563 | |
| | | | |
| | | | | | | | | | | | | | |
| Three Months Ended | Nine Months Ended |
| September 30, | September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | |
| | (In thousands) |
| Intersegment operating revenues: | | | | |
| Regulated operations: | | | | |
| Electric | $ | 195 | | $ | 0 | | $ | 586 | | $ | 0 | |
| Natural gas distribution | 185 | | 0 | | 555 | | 0 | |
| Pipeline | 3,543 | | 3,750 | | 36,583 | | 35,098 | |
| 3,923 | | 3,750 | | 37,724 | | 35,098 | |
| Non-regulated operations: | | | | |
| Pipeline | 79 | | 81 | | 237 | | 200 | |
| Construction materials and contracting | 110 | | 124 | | 262 | | 388 | |
| Construction services | 425 | | 1,226 | | 3,674 | | 2,076 | |
| Other | 3,006 | | 2,862 | | 8,952 | | 13,566 | |
| 3,620 | | 4,293 | | 13,125 | | 16,230 | |
| Intersegment eliminations | (7,543) | | (8,043) | | (50,849) | | (51,328) | |
| Total intersegment operating revenues | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | |
| | | | |
| Operating income (loss): | | | | |
| Electric | $ | 21,159 | | $ | 21,930 | | $ | 48,827 | | $ | 49,708 | |
| Natural gas distribution | (18,393) | | (15,565) | | 32,285 | | 32,132 | |
| Pipeline | 11,762 | | 11,416 | | 35,406 | | 32,017 | |
| Construction materials and contracting | 148,522 | | 143,024 | | 179,994 | | 147,622 | |
| Construction services | 40,507 | | 29,950 | | 102,185 | | 89,381 | |
| Other | 154 | | (1,285) | | 339 | | 140 | |
| Total operating income | $ | 203,711 | | $ | 189,470 | | $ | 399,036 | | $ | 351,000 | |
| | | | |
| Net income (loss): | | | | |
| Regulated operations: | | | | |
| Electric | $ | 16,787 | | $ | 16,291 | | $ | 40,314 | | $ | 39,267 | |
| Natural gas distribution | (17,614) | | (15,625) | | 13,795 | | 14,623 | |
| Pipeline | 7,812 | | 6,933 | | 23,882 | | 20,316 | |
| 6,985 | | 7,599 | | 77,991 | | 74,206 | |
| Non-regulated operations: | | | | |
| Pipeline | 189 | | 801 | | 444 | | 1,380 | |
| Construction materials and contracting | 107,307 | | 102,611 | | 122,113 | | 97,328 | |
| Construction services | 29,789 | | 21,113 | | 74,544 | | 63,982 | |
| Other | 8,745 | | 4,004 | | 3,303 | | 3,466 | |
| 146,030 | | 128,529 | | 200,404 | | 166,156 | |
| Income from continuing operations | 153,015 | | 136,128 | | 278,395 | | 240,362 | |
| Income (loss) from discontinued operations, net of tax | 63 | | 1,509 | | (484) | | 26 | |
| Net income | $ | 153,078 | | $ | 137,637 | | $ | 277,911 | | $ | 240,388 | |
|
| | | | | | | | | | | | |
| | 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 |
|
28
Note 1817 - 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 |
| Three Months Ended September 30, | 2020 | 2019 | 2020 | 2019 |
| (In thousands) |
| Components of net periodic benefit cost (credit): | | | | |
| Service cost | $ | 0 | | $ | 0 | | $ | 383 | | $ | 286 | |
| Interest cost | 3,023 | | 3,806 | | 609 | | 746 | |
| Expected return on assets | (4,987) | | (4,559) | | (1,115) | | (1,201) | |
| Amortization of prior service credit | 0 | | 0 | | (349) | | (289) | |
| Amortization of net actuarial loss | 1,793 | | 1,387 | | 71 | | 27 | |
| Net periodic benefit cost (credit), including amount capitalized | (171) | | 634 | | (401) | | (431) | |
| Less amount capitalized | 0 | | 0 | | 39 | | 26 | |
| Net periodic benefit cost (credit) | $ | (171) | | $ | 634 | | $ | (440) | | $ | (457) | |
|
| | | | | | | | | | | | |
| | Pension Benefits | Other Postretirement Benefits |
| Three Months Ended September 30, | 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | (In thousands) |
| Components of net periodic benefit cost (credit): | | | | |
| Service cost | $ | — |
| $ | — |
| $ | 286 |
| $ | 374 |
|
| Interest cost | 3,806 |
| 3,648 |
| 746 |
| 725 |
|
| Expected return on assets | (4,559 | ) | (5,188 | ) | (1,201 | ) | (1,217 | ) |
| Amortization of prior service credit | — |
| — |
| (289 | ) | (349 | ) |
| Amortization of net actuarial loss | 1,387 |
| 1,751 |
| 27 |
| 160 |
|
| Net periodic benefit cost (credit), including amount capitalized | 634 |
| 211 |
| (431 | ) | (307 | ) |
| Less amount capitalized | — |
| — |
| 26 |
| 46 |
|
| Net periodic benefit cost (credit) | $ | 634 |
| $ | 211 |
| $ | (457 | ) | $ | (353 | ) |
|
| | | | | | | | | | | | |
| | Pension Benefits | Other Postretirement Benefits |
| Nine Months Ended September 30, | 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | (In thousands) |
| Components of net periodic benefit cost (credit): | | | | |
| Service cost | $ | — |
| $ | — |
| $ | 857 |
| $ | 1,121 |
|
| Interest cost | 11,419 |
| 10,943 |
| 2,239 |
| 2,175 |
|
| Expected return on assets | (13,677 | ) | (15,565 | ) | (3,603 | ) | (3,650 | ) |
| Amortization of prior service credit | — |
| — |
| (866 | ) | (1,046 | ) |
| Amortization of net actuarial loss | 4,160 |
| 5,254 |
| 82 |
| 480 |
|
| Net periodic benefit cost (credit), including amount capitalized | 1,902 |
| 632 |
| (1,291 | ) | (920 | ) |
| Less amount capitalized | — |
| — |
| 84 |
| 128 |
|
| Net periodic benefit cost (credit) | $ | 1,902 |
| $ | 632 |
| $ | (1,375 | ) | $ | (1,048 | ) |
| | | | | | | | | | | | | | |
| | | | |
| Pension Benefits | Other
Postretirement Benefits |
| Nine Months Ended September 30, | 2020 | 2019 | 2020 | 2019 |
| (In thousands) |
| Components of net periodic benefit cost (credit): | | | | |
| Service cost | $ | 0 | | $ | 0 | | $ | 1,149 | | $ | 857 | |
| Interest cost | 9,070 | | 11,419 | | 1,827 | | 2,239 | |
| Expected return on assets | (14,962) | | (13,677) | | (3,764) | | (3,603) | |
| Amortization of prior service credit | 0 | | 0 | | (1,048) | | (866) | |
| Amortization of net actuarial loss | 5,379 | | 4,160 | | 215 | | 82 | |
| Net periodic benefit cost (credit), including amount capitalized | (513) | | 1,902 | | (1,621) | | (1,291) | |
| Less amount capitalized | 0 | | 0 | | 106 | | 84 | |
| Net periodic benefit cost (credit) | $ | (513) | | $ | 1,902 | | $ | (1,727) | | $ | (1,375) | |
The 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. The Company's net periodic benefit cost for these plans for the three and nine months ended September 30, 2019,2020, was $1.1$1.0 million and $3.3$2.9 million, respectively. The Company's net periodic benefit cost for these plans for the three and nine months ended September 30, 2018,2019, was $1.1 million and $3.3 million, respectively. 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 1918 - 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. Certain regulatory proceedings and cases may also contain recurring mechanisms that can have an annual true-up. Examples of these recurring mechanisms include: infrastructure riders, transmission trackers, renewable resource cost adjustment riders, as well as weather normalization and decoupling mechanisms. The following paragraphs summarize the Company's most recentsignificant regulatory proceedings and cases by jurisdiction, are discussed inincluding the following paragraphs.
MNPUC
On April 18, 2019, the MNPUC approved a decrease in rates for Great Plainsstatus of $400,000 on an annual basis to reflect TCJA impacts effective May 1, 2019,each open request, as well as a one-time TCJA refundupdates to those reported in the 2019 Annual Report. The Company is unable to predict the ultimate outcome of approximately $600,000 forthese matters, the period from January 1, 2018 through April 30, 2019. The refunds were credited to customers' bills between August 14, 2019timing of final decisions of the various regulators and September 16, 2019.courts, or the effect on the Company's results of operations, financial position or cash flows.
On September 27, 2019, Great Plains filed an application with the MNPUC for a natural gas rate increase of approximately $2.9 million annually or approximately 12.0 percent above current rates. The requested increase was primarily to recover investments in facilities to enhance safety and reliability and the depreciation and taxes associated with the increase in investment. On November 22, 2019, Great Plains also requestedreceived approval to implement an interim rate increase of approximately $2.6 million or approximately 11.0 percent, subject to refund.refund, effective January 1, 2020. On October 26, 2020, the MNPUC issued a final order authorizing an annual increase in revenues of approximately $2.6 million or approximately 11.5 percent. Great Plains shall submit compliance filings within 30 days of the order.
MTPSC
On May 8, 2020, Montana-Dakota filed a request with the MTPSC to use deferred accounting for costs related to the COVID-19 pandemic. This matter is pending before the MNPUC.
MTPSCMTPSC.
On July 31, 2019,June 22, 2020, Montana-Dakota filed an application with the MTPSC approved an electricfor a natural gas rate increase thatof approximately $8.6 million annually or approximately 13.4 percent above current rates. The requested increase was primarily to recover Montana-Dakota'sinvestments in facilities that were made to enhance system safety and reliability, as well as the depreciation, taxes and operation and maintenance costs associated with this increase in investment. The Company requested an interim rate increase of approximately $4.9 million or approximately 8.2 percent, subject to refund, to be effective February 1, 2021. This matter is pending before the MTPSC.
NDPSC
On April 24, 2020, Montana-Dakota filed a request with the NDPSC to use deferred accounting for costs related to the COVID-19 pandemic. This matter is pending before the NDPSC.
On July 17, 2020, Montana-Dakota filed an annual update to its transmission cost adjustment rider with the NDPSC requesting to recover revenues of approximately $15.5 million, which includes a true-up of the prior period adjustment, resulting in an increase of approximately $6.3 million over current rates. This filing includes approximately $3.3 million related to transmission capital projects. On October 28, 2020, the NDPSC approved the increase with rates effective November 1, 2020. Due to COVID-19, the NDPSC extended the recovery period of the under-recovered balance of approximately $1.6 million to two years, which was included in the total increase.
On August 26, 2020, Montana-Dakota filed an application with the NDPSC for a natural gas rate increase of approximately $9.0 million annually or approximately 7.8 percent above current rates. The requested increase was primarily to recover investments in facilities to enhance system safety and reliability and the depreciation and taxes associated with such investments, partially offset by the impactsincrease in investment. Montana-Dakota also requested an interim increase of TCJA. The approved rates included a $9.0approximately $6.9 million annual increase implemented on September 1, 2019, and an additional $300,000 annual increaseor approximately 6.0 percent, subject to refund, to be implemented beginning 12 months after the date of approval.
NDPSC
On October 22, 2019, the NDPSC approved an increase in rates to recover approximately $1.5 million annually for the revenue requirements on certain of Montana-Dakota's electric transmission projects through its transmission cost adjustment rate. The rates were effective October 28, 2019.
On August 28, 2019, Montana-Dakota filed an application with the NDPSC for an advanced determination of prudence and a certificate of public convenience and necessity to 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 September 16, 2019, Montana-Dakota submitted an application with the NDPSC requesting the use of deferred accounting for the treatment of costs related to the retirement of Lewis & Clark Station in Sidney, Montana, and unitsJanuary 1, and 2 at Heskett Station near Mandan, North Dakota.2021. This matter is pending before the NDPSC.
OPUC
On December 29, 2017,March 26, 2020, Cascade filed a request with the OPUC to use deferred accounting for costs related to the 2018 net benefits associated with the implementation of the TCJA.COVID-19 pandemic. On September 12, 2019,October 20, 2020, 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.this request.
On June 14, 2019,March 31, 2020, Cascade filed a requestnatural gas general rate case with the OPUC to implementrequesting an increase in annual revenue of approximately $4.9 million or approximately 7.2 percent, which included a new pipeline safety costrequest for an additional recovery mechanism to recover investments to replace Cascade's highest risk infrastructure. If approved,of environmental remediation deferred costs of approximately $364,000. On September 30, 2020, Cascade would filefiled a report annuallysettlement agreement with the OPUC detailing actual projects undertaken and costs incurred for the year on Novemberreflecting an annual increase in revenues of approximately $3.2 million or approximately 4.8 percent. This filing includes a proposed effective date of February 1, seeking recovery for investments from January 1 through December 31 of that same year.2021. This matter is pending before the OPUC.
SDPUC
On May 1, 2020, Montana-Dakota filed a request with the SDPUC to use deferred accounting for costs related to the COVID-19 pandemic. On August 19, 2020, the SDPUC approved this request with an accounting order to track expenses and revenues related to the COVID-19 pandemic beginning on March 13, 2020.
WUTC
On March 29, 2019,May 27, 2020, Cascade filed a general rate caserequest with the WUTC requesting an increase in annual revenue of $12.7 million or approximately 5.5 percent. On September 20, 2019, Cascade filed a joint settlement agreement withto use deferred accounting for costs related to the WUTC reflecting a revised annual increase of $6.5 million or approximately 2.8 percent. A hearing on the settlement is scheduled for November 5, 2019.COVID-19 pandemic. This matter is pending before the WUTC.
On May 31, 2019,29, 2020, Cascade filed its annual pipeline cost recovery mechanism requesting an increase in annual revenue of approximately $1.6$1.0 million or approximately 0.70.4 percent. On October 10, 2019,14, 2020, Cascade filed its finalan update to the cost recovery mechanism with a revisedrequesting an increase in revenue of approximately $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 5.7 percent for a period of three years. The requested increase is 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, 2019.
WYPSC
On April 4, 2019, Montana-Dakota submitted compliance rates to the WYPSC reflecting a decrease in annual revenuesrevenue of approximately $1.1 million or approximately 4.20.5 percent, to reflect TCJA impacts.which reflects actual costs as of September 30, 2020. On April 8, 2019,October 29, 2020, the WYPSCfiling was approved the Company's requested decrease in electricwith rates and required a refund to customers for the period from Januaryeffective November 1, 2018 through the date prior to the implementation of the rates within 90 days of the effective date of the new rates. The new rates were implemented for service rendered on and after May 1, 2019, and the refunds of approximately $1.6 million were credited to customers' bills on July 25, 2019.2020.
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. On
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-Dakota19, 2020, Cascade filed an application with the WYPSCWUTC for a natural gas rate increase of approximately $1.1$13.8 million annually or approximately 7.05.3 percent above current rates. The WUTC has 11 months to render a final decision on the rate case. The requested increase was primarily to recover investments made in infrastructure upgrades, as well as increased operating expensesoperation and investments in distribution facilities to improve system safety and reliability.maintenance costs. This matter is pending before the WYPSC.WUTC.
FERC
In accordance with WBI Energy Transmission’s offer of settlement and stipulation and agreement with the FERC dated June 4, 2014, the Company was 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 staff, customers and the Company, on May 30, 2019, the FERC granted the Company's request to place interim settlement rates into effect May 1, 2019, subject to refund or surcharge, and pending the FERC's consideration of the 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 filed a final settlement agreement and related documents with the FERC. On September 30, 2019, the FERC approved the final settlement agreement and related documents.
On August 29, 2019,1, 2020, Montana-Dakota filed an update to its transmission formula rate under the MISO tariff for the multivalueits multi-value project for $13.4$12.9 million, which is effective January 1, 2020.2021.
Note 2019 - 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.
At September 30, 20192020 and 2018,2019, and December 31, 2018,2019, the Company accrued liabilities which have not been discounted, including liabilities held for sale, of $72.7 million, $30.6 million $30.4and $29.1 million, respectively. At September 30, 2020 and 2019, and December 31, 2019, the Company also recorded corresponding insurance receivables of $49.1 million, $15.3 million and $30.4$16.2 million, respectively.respectively, and regulatory assets of $20.9 million, $12.0 million and $10.5 million, respectively, related to the accrued liabilities. The accruals are for contingencies, including litigation, production taxes, royalty claims and environmental 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 asThe Company is a PRP in connection withparty to claims for the cleanup of environmental contamination at certain manufactured gas plant sites, as well as a superfund site. There were no material changes to the Willamette River site adjacent to a commercial property site acquired by Knife River - Northwest from Georgia-Pacific West, Inc. The riverbed site is part of the Portland, Oregon, Harbor Superfund Site where the EPA wants responsible parties to shareCompany's environmental matters that were previously reported in the costs of 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. Investigative costs are indicated to be in excess of $100 million. Remediation 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 notified 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. It is not possible to estimate the costs of natural resource damages until an assessment is completed and allocations are undertaken.
At this time, Knife River - Northwest does not believe it is a responsible party 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. 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.2019 Annual Report other than as set forth below.
Manufactured Gas Plant SitesClaims 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. Any accruals related to these claims are reflected in regulatory assets. For more information, see Note 13.
Demand has been made of Montana-Dakota to participate in investigation and remediation of environmental contamination at a site in Missoula, Montana. The site operated as a former manufactured gas plant from approximately 1907 to 1938 when it was converted to a butane-air plant that operated until 1956. Montana-Dakota or its predecessors owned or controlled the site for a period of the 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 notice from a prior insurance carrier that it will participate in payment of defense costs incurred in relation to the claim. Montana-Dakota has accrued $375,000 for the remediation of this site.
A claim was 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 confirmsconfirmed 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 $3.8$5.4 million has been incurred. Based on the site investigation, preliminary remediation alternative costs were provided by consultants in August 2020; therefore, the accrual for these costs was increased in the third quarter of 2020 by $11.1 million. The preliminary information received through the completion of the data report allowed for the projection of possible costs for a variety of site configurations, remedial measures and potential natural resource damage claims of between $13.6 million and $71.0 million. Cascade has accrued $3.8$2.2 million for the remedial investigation and feasibility study, as well as $6.4$17.5 million for remediation of this site; however, thesite. The accrual for remediation costscost will be reviewed and adjusted, if necessary, after the 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.
A claim was 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.
CascadeCompany has received notices from and entered into agreementagreements 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, Cascadethe Company intends to seek recovery through the OPUC and WUTC of remediation costs inthrough its natural gas rates charged to customers.
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 sellerssubsidiaries. The remaining guarantee is expected to expire in three purchase and sale agreements for periods ranging up to 10 years from the date of sale.2021. 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, 2019,2020, the fixed maximum amounts guaranteed under these agreements aggregated $206.5$255.5 million. Certain of the guarantees also have no fixed maximum amounts specified. At September 30, 2019,2020, the amounts of scheduled expiration of the maximum amounts guaranteed under these agreements aggregate to $2.0 million in 2019; $192.2$23.8 million in 2020; $700,000$199.7 million in 2021; $16.1 million in 2022; $5.3 million in 2023; $500,000 in 2022; $500,000 in 2023; $1.62024; $1.1 million thereafter; and $9.0 million, which has no scheduled maturity date; anddate. There were 0 amounts were outstanding.outstanding under the previously mentioned guarantees at September 30, 2020. 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, 2019,2020, the fixed maximum amounts guaranteed under these letters of credit aggregated $30.0$22.5 million. At September 30, 2019,2020, the amounts of scheduled expiration of the maximum amounts guaranteed under these letters of credit aggregate to $24.4$20.2 million in 2019 and $5.62020; $1.8 million in 2020 with2021 and $500,000 in 2022. There were 0 amounts outstanding.outstanding under the previously mentioned letters of credit at September 30, 2020. 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, 2019.2020.
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, 2019,2020, approximately $930.1$922.7 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, 2019,2020, 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 $36.6$34.2 million.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
On January 2, 2019, the Company announced the completionThe Company's strategy is to enhance shareholder value by increasing market share and profitability in its regulated energy delivery and construction materials and services businesses, pursuing organic growth opportunities and using a disciplined approach to strategic acquisitions 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, businesseswell-managed companies 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.properties.
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; generates, transmits and distributes 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 customers,industries, 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 tobased on 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 inCompany anticipates that all of 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 throughfunds required for capital expenditures for 2020 will be met from various sources, including internally generated funds,funds; credit facilities and commercial paper facilities, revolving credit facilities, term loansof the Company's subsidiaries, as described later; and the issuance from time to time of debt and equity securities. securities if necessary.
For more information on the Company's capital expenditures, and funding sources, see Liquidity and Capital Commitments.
Impact of the COVID-19 pandemic on the Company
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, and the President of the United States declared the COVID-19 outbreak as a national emergency. Most of the Company's products and services are considered essential to our country and our communities; therefore, operations have generally been permitted to continue. While the Company has experienced some inefficiency impacts, including operation suspensions and interruptions at some locations to carry out preventative measures or in response to instances of positive tests, the impacts have not been material. For more information on specific impacts to each of the Company's business segments, see the respective Outlook sections. The Company has been able to maintain employment for its workforce and remains committed to the health and safety of its employees and the communities where it operates. In the first quarter of 2020, the MDU Resources Group Foundation accelerated and provided additional donations to charitable organizations impacted by COVID-19 in the communities in which the Company operates.
In March 2020, the President of the United States signed into law the CARES Act in response to the COVID-19 pandemic. The CARES Act provided economic relief and stimulus to support the national economy during the pandemic, including support for individuals and businesses affected by the pandemic and economic downturn. The CARES Act allowed businesses to defer payment of the employer portion of social security taxes incurred through the end of 2020. At September 30, 2020, the Company had deferred approximately $38.8 million in payroll taxes related to this provision. The Company is required to pay 50 percent of the payroll taxes deferred by the Company under this provision by the end of 2021 and the remaining balance by the end of 2022.
The Company continues to adjust its business in response to the pandemic while positioning for an economic rebound and potential opportunities to enhance its competitive position. The Company's business strategy incorporates preparation for unexpected economic adversity, which includes maintaining a strong liquidity position to weather a variety of economic scenarios, a strong balance sheet with conservative debt leverage and financial flexibility to access diverse sources of capital. For more information on the Company's liquidity, see Liquidity and Capital Commitments. In addition, the Company evaluated its planned capital projects and delayed certain expenditures to provide additional financial flexibility and to ensure projects will provide acceptable returns on investment.
The Company established a task force to monitor developments related to the pandemic and implemented procedures to protect employees. Procedures are established to promptly notify employees, contractors and customers when individuals may have been exposed to COVID-19 and need to be tested or self-quarantined due to potential contact. Additionally, the Company has modified its work practices to include social distancing measures and hygiene practices. Many employees that have the capacity to work from home continue to do so as the Company has delayed return to work processes for certain office employees due to the rise in local COVID-19 cases in some operating regions. The Company has also enacted additional physical and cybersecurity measures to safeguard systems for remote work locations.
Although there have been logistical and other challenges as a result of COVID-19, there were no material adverse impacts on the Company's results of operations for the three and nine months ended September 30, 2020. The situation surrounding COVID-19 remains fluid and the potential for a material adverse impact on the Company increases the longer the virus impacts the level of
economic activity in the United States. Due to the uncertainty of the economic outlook resulting from the COVID-19 pandemic, the Company continues to monitor the situation closely. For more information on the possible impacts, see Item 1A. Risk Factors.
Consolidated Earnings Overview
The following table summarizes the contribution to the consolidated earningsincome by each of the Company's business segments. | | | | Three Months Ended | Nine Months Ended | | Three Months Ended | Nine Months Ended |
| | September 30, | | September 30, |
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
| | 2020 | | 2019 | | 2020 | | 2019 | |
| | (In millions, except per share amounts) | | (In millions, except per share amounts) |
| Electric | $ | 16.3 |
| $ | 15.3 |
| $ | 39.3 |
| $ | 37.5 |
| Electric | $ | 16.8 | | $ | 16.3 | | $ | 40.3 | | $ | 39.3 | |
| Natural gas distribution | (15.6 | ) | (11.9 | ) | 14.6 |
| 13.9 |
| Natural gas distribution | (17.6) | | (15.6) | | 13.8 | | 14.6 | |
| Pipeline and midstream | 7.7 |
| 11.0 |
| 21.7 |
| 21.9 |
| |
| Pipeline | | Pipeline | 8.0 | | 7.7 | | 24.3 | | 21.7 | |
| Construction materials and contracting | 102.6 |
| 78.9 |
| 97.3 |
| 79.7 |
| Construction materials and contracting | 107.3 | | 102.6 | | 122.1 | | 97.3 | |
| Construction services | 21.1 |
| 9.3 |
| 64.0 |
| 38.5 |
| Construction services | 29.8 | | 21.1 | | 74.5 | | 64.0 | |
| Other | 4.0 |
| 4.8 |
| 3.5 |
| 1.9 |
| Other | 8.7 | | 4.0 | | 3.4 | | 3.5 | |
| Income from continuing operations | 136.1 |
| 107.4 |
| 240.4 |
| 193.4 |
| Income from continuing operations | 153.0 | | 136.1 | | 278.4 | | 240.4 | |
| Income (loss) from discontinued operations, net of tax | 1.5 |
| (.1 | ) | — |
| .1 |
| Income (loss) from discontinued operations, net of tax | .1 | | 1.5 | | (.5) | | — | |
| Net income | $ | 137.6 |
| $ | 107.3 |
| $ | 240.4 |
| $ | 193.5 |
| Net income | $ | 153.1 | | $ | 137.6 | | $ | 277.9 | | $ | 240.4 | |
| Earnings per share - basic: | |
| |
| |
| |
| Earnings per share - basic: | |
| Income from continuing operations | $ | .68 |
| $ | .55 |
| $ | 1.21 |
| $ | .99 |
| Income from continuing operations | $ | .76 | | $ | .68 | | $ | 1.39 | | $ | 1.21 | |
| Discontinued operations, net of tax | .01 |
| — |
| — |
| — |
| Discontinued operations, net of tax | — | | .01 | | — | | — | |
| Earnings per share - basic | $ | .69 |
| $ | .55 |
| $ | 1.21 |
| $ | .99 |
| Earnings per share - basic | $ | .76 | | $ | .69 | | $ | 1.39 | | $ | 1.21 | |
| Earnings per share - diluted: | |
| |
| |
| |
| Earnings per share - diluted: | |
| Income from continuing operations | $ | .68 |
| $ | .55 |
| $ | 1.21 |
| $ | .99 |
| Income from continuing operations | $ | .76 | | $ | .68 | | $ | 1.39 | | $ | 1.21 | |
| Discontinued operations, net of tax | .01 |
| — |
| — |
| — |
| Discontinued operations, net of tax | — | | .01 | | — | | — | |
| Earnings per share - diluted | $ | .69 |
| $ | .55 |
| $ | 1.21 |
| $ | .99 |
| Earnings per share - diluted | $ | .76 | | $ | .69 | | $ | 1.39 | | $ | 1.21 | |
Three Months Ended September 30, 2019,2020, Compared to Three Months Ended September 30, 20182019 The Company recognized consolidated earnings of $137.6$153.1 million for the quarter ended September 30, 2019,2020, compared to $107.3$137.6 million for the same period in 2018.2019.
Positively impactingThe Company's earnings were positively impacted by increased earnings across most of the Company's earnings was an increase in gross margin at the construction materials and contracting business, largely 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, thebusinesses. The construction services business experienced an increase in gross margin primarily theas a result of higher inside and outside specialty contracting workloads, partially due to the businesses acquired as well as hospitality projects, high-tech projects and the
absence of changes to estimates recorded in the third 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 the absence in 2019 of an income tax benefit for the reversal of a previously recorded regulatory liability at the pipeline and midstream business.
Nine Months Ended September 30, 2019, Compared to Nine Months Ended September 30, 2018 disaster recovery work. The Company recognized consolidated earnings of $240.4 million for the nine months ended September 30, 2019, compared to $193.5 million for the same period in 2018.
Positively impacting the Company's earnings was an increase in gross margin at the construction services business, largely the result of higher inside and outside specialty contracting workloads and the absence of changes to estimates recorded in the third quarter of 2018 for variable consideration previously recognized on certain construction contracts. In addition, the construction materials and contracting business experienced an increase in gross margin largelyas well, resulting from strong economic environments in certain states, contributions from the businesses acquired since the third quarter of 2018higher contracting bid margins and anhigher realized materials margins. The increase in gains recognized on asset sales. Also contributingOther was primarily related to thehigher income tax benefits. Partially offsetting these increases was an increased earnings was approved rate recovery at both the natural gas distribution and electric businesses, as well as higher retail sales volumesseasonal loss at the natural gas distribution business.business, largely resulting from higher operation and maintenance costs.
Nine Months Ended September 30, 2020, Compared to Nine Months Ended September 30, 2019 The Company recognized consolidated earnings of $277.9 million for the nine months ended September 30, 2020, compared to $240.4 million for the same period in 2019.
The Company's earnings were positively impacted by increased earnings across most of the Company's businesses. The main driver of the increased earnings was higher gross margins at the construction businesses. At the construction materials and contracting business, favorable weather conditions in certain regions, higher margins and additional revenues from recent acquisitions had a positive impact on gross margin. The construction services business also experienced an increase in gross margin resulting from higher inside and outside specialty contracting workloads, partially due to the business acquired during the first quarter of 2020, offset in part by an out-of-period adjustment of approximately $6.7 million, net of tax, to correct the revenue recognition on a construction contract, as discussed in Note 1. The pipeline business's increased earnings reflect higher revenue from organic growth projects and midstream business had increased rates and volumes of natural gas being transported that was partially offset by the absence in 2019 of an income tax benefit for the reversal of a previously recorded regulatory liability.approved rates.
A discussion of key financial data from the Company's business segments follows.
Business Segment Financial and Operating Data
Following areThe following sections include key financial and operating data for each of the Company's business segments. Also included are highlights on key growth strategies, projections and certain assumptions for the Company and its subsidiaries and other matters of the Company's business segments. 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 -1A. Risk Factors in the 20182019 Annual Report. Changes in such assumptions and factors could cause actual future results to differ materially from the Company's growth and earnings 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 1716 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 17.16. Both segments strive to be a top performing utility company measured by integrity, employee safety employeeand 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 monitoris focused on cultivating organic growth while managing operating costs and monitoring opportunities for these segments to retain, grow and expand their customer base through extensions of existing operations, including building and upgrading electric generation, transmission and distribution and natural gas systems, and through selected acquisitions of companies and properties with similar operating and growth objectives at prices that will provide stable cash flows and an opportunity to earn a competitive return on investment. The continued efforts to create operational improvements and efficiencies across both segments promotes the Company's business integration strategy. The primary factors that impact the results of these segments are the ability to earn authorized rates of return, 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 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 natural gas. The segments continue to invest in facility upgrades to be in compliance with the existing and future regulations. To assist in the reduction of regulatory lag in obtaining revenue increases to align with increased investments, tracking mechanisms have been implemented in certain jurisdictions, as further discussed in Note 18.
Tariff increases on steelIn September 2019, the Pipeline and aluminum materials could negatively affectHazardous Materials Safety Administration issued a rule for additional regulations to strengthen the segments' construction projectssafety of natural gas transmission and maintenance work. The Company continues to monitor the impact of tariffs on raw material costs.storage facilities and hazardous liquid pipelines. The natural gas distributionsegment has a plan to implement procedure changes for the initial requirements. While the initial requirements became effective July 1, 2020, enforcement of the initial requirements will not begin until January 1, 2021, due to the COVID-19 pandemic. The natural gas segment is also evaluating procedure changes necessary for the additional requirements that will become effective July 1, 2021.
State implementation of pollution control plans to improve visibility and air quality at national parks under the EPA's Regional Haze Rule could require the owners of Coyote Station to incur significant new costs. If the owners decide to incur such costs, the costs could, dependent on determination by state regulatory commissions on approval to recover such costs from customers, negatively impact the Company's results of operations, financial position and cash flows. The NDDEQ's state implementation plan is due to be submitted to the EPA by July 2021. The Company expects the NDDEQ to draft a state implementation plan and share its controls selection with federal land managers of the Bureau of Land Management in December 2020.
The electric and natural gas distribution segments are facing increased lead times on delivery of certain raw materials used in electric transmission and natural gas pipeline projects. In addition to the effect of tariffs, longLong 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.Plan, as well as delays in the manufacturing of electrical equipment as a result of the COVID-19 pandemic, including delays in trucking times and issuance of permits for large and heavy loads. 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 regulatory constraints, 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 costs and lead 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.weather, as well as impacts associated with commercial and industrial slow-downs including economic recessions. Very cold winters increase demand for natural gas and to a lesser extent, electricity, while warmer than normal summers increase demand for electricity, especially
among residential and commercial customers. Average consumption among both electric and natural gas customers has tended to decline as more efficient appliances and furnaces are installed, and as the Company has implemented conservation programs. Natural gas 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 - 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, |
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
| | 2020 | | 2019 | | 2020 | | 2019 | |
| | (Dollars in millions, where applicable) | | (Dollars in millions, where applicable) |
| Operating revenues | $ | 89.8 |
| $ | 86.1 |
| $ | 263.4 |
| $ | 252.0 |
| Operating revenues | $ | 87.6 | | $ | 89.8 | | $ | 250.4 | | $ | 263.4 | |
| Electric fuel and purchased power | 18.7 |
| 18.4 |
| 64.4 |
| 58.9 |
| Electric fuel and purchased power | 15.5 | | 18.7 | | 50.6 | | 64.4 | |
| Taxes, other than income | .1 |
| .2 |
| .4 |
| .6 |
| Taxes, other than income | .1 | | .1 | | .5 | | .4 | |
| Adjusted gross margin | 71.0 |
| 67.5 |
| 198.6 |
| 192.5 |
| Adjusted gross margin | 72.0 | | 71.0 | | 199.3 | | 198.6 | |
| Operating expenses: | |
| |
| | | Operating expenses: | | | |
| Operation and maintenance | 30.8 |
| 30.1 |
| 94.6 |
| 91.3 |
| Operation and maintenance | 30.7 | | 30.8 | | 90.5 | | 94.6 | |
| Depreciation, depletion and amortization | 14.2 |
| 12.6 |
| 41.8 |
| 37.7 |
| Depreciation, depletion and amortization | 15.8 | | 14.2 | | 47.0 | | 41.8 | |
| Taxes, other than income | 4.1 |
| 3.7 |
| 12.5 |
| 11.2 |
| Taxes, other than income | 4.4 | | 4.1 | | 13.0 | | 12.5 | |
| Total operating expenses | 49.1 |
| 46.4 |
| 148.9 |
| 140.2 |
| Total operating expenses | 50.9 | | 49.1 | | 150.5 | | 148.9 | |
| Operating income | 21.9 |
| 21.1 |
| 49.7 |
| 52.3 |
| Operating income | 21.1 | | 21.9 | | 48.8 | | 49.7 | |
| Other income | .6 |
| .8 |
| 2.7 |
| 2.1 |
| Other income | 1.2 | | .6 | | 3.3 | | 2.7 | |
| Interest expense | 6.2 |
| 6.3 |
| 18.9 |
| 19.4 |
| Interest expense | 6.4 | | 6.2 | | 20.1 | | 18.9 | |
| Income before income taxes | 16.3 |
| 15.6 |
| 33.5 |
| 35.0 |
| Income before income taxes | 15.9 | | 16.3 | | 32.0 | | 33.5 | |
| Income taxes | — |
| .3 |
| (5.8 | ) | (2.5 | ) | Income taxes | (.9) | | — | | (8.3) | | (5.8) | |
| Net income | $ | 16.3 |
| $ | 15.3 |
| $ | 39.3 |
| $ | 37.5 |
| Net income | $ | 16.8 | | $ | 16.3 | | $ | 40.3 | | $ | 39.3 | |
| Retail sales (million kWh): | | Retail sales (million kWh): | |
| Residential | 259.4 |
| 282.9 |
| 865.6 |
| 903.0 |
| Residential | 296.1 | | 259.4 | | 884.4 | | 865.6 | |
| Commercial | 359.5 |
| 374.3 |
| 1,102.4 |
| 1,131.7 |
| Commercial | 356.7 | | 359.5 | | 1,056.2 | | 1,102.4 | |
| Industrial | 127.8 |
| 132.9 |
| 403.5 |
| 406.8 |
| Industrial | 117.1 | | 127.8 | | 386.0 | | 403.5 | |
| Other | 20.9 |
| 24.5 |
| 64.9 |
| 70.5 |
| Other | 21.3 | | 20.9 | | 62.1 | | 64.9 | |
| | 767.6 |
| 814.6 |
| 2,436.4 |
| 2,512.0 |
| | 791.2 | | 767.6 | | 2,388.7 | | 2,436.4 | |
| Average cost of electric fuel and purchased power per kWh | $ | .021 |
| $ | .021 |
| $ | .024 |
| $ | .022 |
| Average cost of electric fuel and purchased power per kWh | $ | .018 | | $ | .021 | | $ | .019 | | $ | .024 | |
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 section later in this Item.
Three Months Ended September 30, 2019,2020, Compared to Three Months Ended September 30, 20182019 Electric earnings increased $1.0 million (7$500,000 (3 percent) as a result of:
Adjusted gross margin: Increase of $3.5$1.0 million, largely the result of higher retail sales volumes. Retail sales experienced 14.1 percent higher residential sales volumes due to the continued trend of individuals being at home more, which was partially offset by lower industrial and commercial sales volumes driven by slow-downs, both as a result of higher revenues. The revenue increase was primarily due to implemented regulatory mechanisms, which include approved Montana interim and final rates,the COVID-19 pandemic, as discussed in Note 19,later, and recovery of the investment in the Thunder Spirit Wind farm expansion placed into service in the fourth quarter of 2018. Also contributing to the increase was the absence in 2019 of a transmission formula rate adjustment recognized in the 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.associated economic recession.
Operation and maintenance: Increase of $700,000, largely dueComparable to higher payroll-related costs, partially offset by decreased contracted services resulting from lower subcontractor costs.the same period in the prior year.
Depreciation, depletion and amortization: Increase of $1.6 million, primarily due to the reserve for certain costs related to the retirement of three aging coal-fired electric generating units, as a result ofdiscussed later and in Note 12, which is offset in income taxes; increased property, plant and equipment
balances including the Thunder Spirit Wind farm expansion, as previously discussed, balances; and other capital projects.higher depreciation rates implemented from a Montana rate case.
Taxes, other than income: Increase of $400,000, primarily from higher property taxes in certain jurisdictions.
Other income: Comparable to the same period in the prior year.
Other income: Increase of $600,000 as a result of higher returns on certain of the Company's benefit plan investments.
Interest expense: Comparable to the same period in the prior year.
Income taxes: Comparable to the same period in prior year.Decrease of $900,000, primarily higher excess deferred tax amortization.
Nine Months Ended September 30, 2019,2020, Compared to Nine Months Ended September 30, 20182019 Electric earnings increased $1.8$1.0 million (5(3 percent) as a result of:
Adjusted gross margin: Increase of $6.1 million as a$700,000, largely the result of approved rate relief in Montana, increased tracker revenue and 2.2 percent higher revenues. The revenue increase was primarily due to implemented regulatory mechanisms, which include approved Montana interim and final rates, as discussed in Note 19; recovery of the investment in the 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 increase was the absence in 2019 of a transmission formula rate adjustment recognized in the third quarter of 2018 for decreased costs on the BSSE project. Theseresidential retail sales volumes. Partially offsetting these increases were partially offset by lower retail sales volumes of approximately 3 percent across allto commercial and industrial customer classes.classes and decreased transmission revenue.
Operation and maintenance: IncreaseDecrease of $3.3$4.1 million, largely due to higher contract services, primarily driven by athe absence of maintenance outage costs at Coyote Station incurred during 2019 and higherlower payroll-related costs.
Depreciation, depletion and amortization: Increase of $4.1$5.2 million, primarily as a result of the reserve for certain costs related to the retirement of three aging coal-fired electric generating units, as discussed later and in Note 12, which is offset in income taxes; increased property, plant and equipment balances including the Thunder Spirit Wind farm expansion, as previously discussed,balances; and other capital projects.higher depreciation rates implemented from a Montana rate case.
Taxes, other than income: Increase of $1.3 million, primarily$500,000 from higher property taxes in certain jurisdictions.taxes.
Other income: Increase of $600,000 primarilyattributable to the resultabsence of higher returns on the Company's benefit plan investments, partially offset by the write-down of a non-utility investment in the second quarter of 2019, as discussed in Note 14.13, and decreased pension expense, partially offset by lower returns on certain of the Company's benefit plan investments.
Interest expense: DecreaseIncrease of $500,000$1.2 million driven by higher AFUDC, which resulted from more interest being capitalized on regulated construction projects.debt balances.
Income taxes: Increase in income tax benefits of $3.3$2.5 million, largely resulting fromprimarily higher excess deferred tax amortization and increased production tax credits.
Earnings overview - The following informationinformation summarizes the performance of the natural gas distribution segment.
| | | | | | | | | | | | | | |
| Three Months Ended | Nine Months Ended |
| September 30, | September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | |
| (Dollars in millions, where applicable) |
| Operating revenues | $ | 94.9 | | $ | 93.6 | | $ | 563.2 | | $ | 569.7 | |
| Purchased natural gas sold | 35.0 | | 35.6 | | 290.3 | | 305.6 | |
| Taxes, other than income | 3.8 | | 3.2 | | 23.1 | | 20.7 | |
| Adjusted gross margin | 56.1 | | 54.8 | | 249.8 | | 243.4 | |
| Operating expenses: | | | | |
| Operation and maintenance | 46.9 | | 44.4 | | 135.9 | | 134.3 | |
| Depreciation, depletion and amortization | 21.3 | | 19.9 | | 63.1 | | 59.1 | |
| Taxes, other than income | 6.3 | | 6.1 | | 18.5 | | 17.9 | |
| Total operating expenses | 74.5 | | 70.4 | | 217.5 | | 211.3 | |
| Operating income (loss) | (18.4) | | (15.6) | | 32.3 | | 32.1 | |
| Other income | 2.2 | | 1.7 | | 6.6 | | 5.3 | |
| Interest expense | 9.3 | | 8.9 | | 27.5 | | 26.1 | |
| Income (loss) before income taxes | (25.5) | | (22.8) | | 11.4 | | 11.3 | |
| Income taxes | (7.9) | | (7.2) | | (2.4) | | (3.3) | |
| Net income (loss) | $ | (17.6) | | $ | (15.6) | | $ | 13.8 | | $ | 14.6 | |
| Volumes (MMdk) | | | | |
| Retail sales: | | | | |
| Residential | 4.4 | | 4.1 | | 41.8 | | 44.3 | |
| Commercial | 4.0 | | 4.2 | | 29.1 | | 31.5 | |
| Industrial | .9 | | .9 | | 3.4 | | 3.6 | |
| 9.3 | | 9.2 | | 74.3 | | 79.4 | |
| Transportation sales: | | | | |
| Commercial | .3 | | .3 | | 1.4 | | 1.5 | |
| Industrial | 39.6 | | 45.7 | | 115.4 | | 117.9 | |
| 39.9 | | 46.0 | | 116.8 | | 119.4 | |
| Total throughput | 49.2 | | 55.2 | | 191.1 | | 198.8 | |
| Average cost of natural gas per dk | $ | 3.75 | | $ | 3.88 | | $ | 3.90 | | $ | 3.85 | |
|
| | | | | | | | | | | | |
| | Three Months Ended | Nine Months Ended |
| | September 30, | September 30, |
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | (Dollars in millions, where applicable) |
| Operating revenues | $ | 93.6 |
| $ | 92.2 |
| $ | 569.7 |
| $ | 554.5 |
|
| Purchased natural gas sold | 35.6 |
| 35.2 |
| 305.6 |
| 301.6 |
|
| Taxes, other than income | 3.2 |
| 3.1 |
| 20.7 |
| 21.0 |
|
| Adjusted gross margin | 54.8 |
| 53.9 |
| 243.4 |
| 231.9 |
|
| Operating expenses: | |
| |
| | |
|
| Operation and maintenance | 44.4 |
| 42.1 |
| 134.3 |
| 129.4 |
|
| Depreciation, depletion and amortization | 19.9 |
| 18.1 |
| 59.1 |
| 53.5 |
|
| Taxes, other than income | 6.1 |
| 5.4 |
| 17.9 |
| 16.5 |
|
| Total operating expenses | 70.4 |
| 65.6 |
| 211.3 |
| 199.4 |
|
| Operating income (loss) | (15.6 | ) | (11.7 | ) | 32.1 |
| 32.5 |
|
| Other income | 1.7 |
| .7 |
| 5.3 |
| 2.0 |
|
| Interest expense | 8.9 |
| 7.7 |
| 26.1 |
| 22.6 |
|
| Income (loss) before income taxes | (22.8 | ) | (18.7 | ) | 11.3 |
| 11.9 |
|
| Income taxes | (7.2 | ) | (6.8 | ) | (3.3 | ) | (2.0 | ) |
| Net income (loss) | $ | (15.6 | ) | $ | (11.9 | ) | $ | 14.6 |
| $ | 13.9 |
|
| Volumes (MMdk) | |
| |
| | |
| Retail sales: | | | | |
| Residential | 4.1 |
| 4.0 |
| 44.3 |
| 40.4 |
|
| Commercial | 4.2 |
| 4.0 |
| 31.5 |
| 29.0 |
|
| Industrial | .9 |
| .8 |
| 3.6 |
| 3.2 |
|
| | 9.2 |
| 8.8 |
| 79.4 |
| 72.6 |
|
| Transportation sales: | | | | |
| Commercial | .3 |
| .3 |
| 1.5 |
| 1.5 |
|
| Industrial | 45.7 |
| 42.0 |
| 117.9 |
| 108.1 |
|
| | 46.0 |
| 42.3 |
| 119.4 |
| 109.6 |
|
| Total throughput | 55.2 |
| 51.1 |
| 198.8 |
| 182.2 |
|
| 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 section later in this Item.
Three Months Ended September 30, 2019,2020, Compared to Three Months Ended September 30, 20182019 Natural gas distribution's seasonal loss increased $3.7$2.0 million (31(13 percent) as a result of:
Adjusted gross margin: Increase of $900,000, primarily driven by$1.3 million, largely the result of approved rate recovery in certain jurisdictions. Increased retail sales volumes of 4 percent related to all customer classes were offset by weather normalization and conservation adjustments in certain jurisdictions.
Operation and maintenance:Increase of $2.3 million, largely due to higher payroll-related costs.
Depreciation, depletion and amortization: Increase of $1.8 million, primarily as a result of increased property, plant and equipment balances.
Taxes, other than income: Increase of $700,000, primarily from higher property taxes in certain jurisdictions.
Other income: Increase of $1.0 million driven by increased interest income related to 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 adjustmentsrelief 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$2.5 million, largely resulting fromprimarily due to higher payroll-related costs, andhigher conservation expenses being recovered in revenue partially offset by lower contract services due toand the absencewrite-off of the prior year's recognition of a non-recurring expense related to the approved WUTC general rate case settlementan abandoned project in the secondthird quarter of 2018.2020.
Depreciation, depletion and amortization: Increase of $5.6$1.4 million, resulting from increased property, plant and equipment balances.
Taxes, other than income: Comparable to the same period in the prior year.
Other income: Increase of $500,000 as a result of higher returns on certain of the Company's benefit plan investments and decreased pension and postretirement expense, partially offset by decreased interest income related to the recovery of purchased gas cost adjustment balances.
Interest expense: Increase of $400,000 driven by higher debt balances.
Income taxes: Increase in income tax benefits of $700,000 due to an increase in the seasonal loss.
Nine Months Ended September 30, 2020, Compared to Nine Months Ended September 30, 2019 Natural gas distribution earnings decreased $800,000 (6 percent) as a result of:
Adjusted gross margin: Increase of $6.4 million, largely the result of approved rate recovery in certain jurisdictions and higher conservation revenue, which offsets the conservation expense in operation and maintenance expense. Weather normalization and conservation adjustments in certain jurisdictions were mostly offset by decreased retail sales volumes of approximately 6.3 percent across all customer classes due to warmer winter weather.
Operation and maintenance: Increase of $1.6 million, primarily higher payroll-related costs, the write-off of an abandoned project in the third quarter of 2020 and higher conservation expenses being recovered in revenue.
Depreciation, depletion and amortization: Increase of $4.0 million as a result of increased property, plant and equipment balances.
Taxes, other than income: Increase of $1.4 million, primarily from$600,000 due to higher property taxes in certain jurisdictions.taxes.
Other income: Increase of $3.3$1.3 million, largely resulting from increased interest income related to higher gas costs to be collected from customers, as discussed in Notes 13primarily decreased pension and 19,postretirement expense and higher returns on the Company's benefit plan investments. Partially offsetting these increases wasabsence of the write-down of a non-utility investment in the second quarter of 2019, as discussed in Note 14.13, partially offset by lower returns on certain of the Company's benefit plan investments and decreased interest income related to the recovery of purchased gas cost adjustment balances.
Interest expense: Increase of $3.5$1.4 million largely resulting from increasedhigher long-term debt balances, to finance higher gas costs to be collected from customers.partially offset by lower short-term debt balances.
Income taxes: Increase in income tax benefits of $1.3 million resulting from increased$900,000 due to permanent tax benefits.adjustments.
Outlook The Company continues to assess the impacts of the COVID-19 pandemic on its operations and is committed to providing safe and reliable service while ensuring the health and safety of its employees, customers and the communities in which it operates. In response to the pandemic, the Company instituted certain measures to help protect its employees from exposure to COVID-19 and to curb potential spread of the virus in customer homes and facilities, including suspension of disconnects due to nonpayment of bills. The Company also waived late payment fees effective April 1, 2020, to help customers experiencing financial hardships. As a consequence of the suspended disconnects and waived late fees, the Company's cash flows and collection of receivables have been affected. The Company reinstated disconnects and late payment fees in five of its eight states effective September 1, 2020. The Company has experienced some impacts to its commercial and industrial electric and natural gas loads associated with reduced economic activity due to the COVID-19 pandemic and oil price impacts, as further discussed below, partially offset by increased residential demand. The Company expects this trend on demand to continue throughout the pandemic. The Company temporarily implemented cost containment measures in response to the COVID-19 pandemic, including reduced employee travel and temporary delays in training for employees, as well as delays in filling open positions and contract work. The Company has filed requests for the use of deferred accounting for costs related to the COVID-19 pandemic in all jurisdictions in which it operates; however, the Company has not deferred any costs related to the pandemic to date. The Company's outstanding filings by jurisdiction related to the COVID-19 pandemic are discussed in Note 18.
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 byaverage 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.
These segments are exposed to energy price volatility. Rate schedules in the jurisdictions in which the Company's natural gas distribution segment operates contain clauses that permit the Company to file for rate adjustments for changes in the cost of purchased gas. Although changes in the price of natural gas are passed through to customers and have minimal impact on the Company's earnings, the natural gas distribution segment's customers benefit from lower natural gas prices through the Company's utilization of storage and fixed price contracts. Demand for the Company's regulated energy delivery services could be impacted by reduced oil and natural gas exploration and production activity. The Company continues to monitor natural gas prices, as well as the oil and natural gas production levels.
In February 2019, the Company announced that it intends to retire three aging coal-fired electric generationgenerating units, within the next 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 Unit 1 at Lewis & Clark Station in Sidney, Montana, and in early 2022 for unitsUnits 1 and 2 at Heskett Station near Mandan, North Dakota. In addition, the Company announced that it intends to construct a newHeskett Unit 4, an 88-MW simple-cycle natural gas-fired combustion turbine peaking unit at the existing plant siteHeskett Station near Mandan, North Dakota. The new simple-cycle turbineHeskett Unit 4 production costs coupled with the MISO market purchases are expected to be about half the total cost of continuing to run the coal-fired electric generationgenerating units at Heskett and Lewis & Clark stations. The simple-cycle turbineHeskett Unit 4 was included in the Company's recently submitted integrated resource plan.plan submitted to the NDPSC in July 2019. On August 28, 2019, the Company filed for an advanced determination of prudence with the NDPSC for Heskett Unit 4. This request was approved by the new simple-cycle turbine. If approved, the simple-cycle turbineNDPSC on August 5, 2020. Heskett Unit 4 is expected to be placed into service in 2023. On September 16, 2019,The Company filed, and the Company filedcommissions approved, requests with the NDPSC, a requestMTPSC and SDPUC for the usage of deferred accounting for the costs related to the retirement of Unit 1 at Lewis & Clark Station and unitsUnits 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 19.18.
Pipeline and Midstream
Strategy and challenges The pipeline and midstream segment provides natural gas transportation, gathering and underground storage services, as discussed in Note 17.16. 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 transmissionnatural gas facilities; incremental pipeline projects; and expansion of energy-related services leveraging on its core competencies. In support of this strategy, the Company completed and placed into service the following projects in 2020 and 2019:
•In September 2020 and November 2019, Phase II and Phase I, respectively, of the Line Section 22 Expansion project in the Billings, Montana, area. The total project increased capacity by 22.5 MMcf per day.
•In February 2020, the Demicks Lake Expansion project in McKenzie County, North Dakota, increased capacity by 175 MMcf per day.
•In September 2019, the Demicks Lake project in McKenzie County, North Dakota, increased capacity by 175 MMcf per day.
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 of tariffs on raw material costs. The segment regularly 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 regulations, as well as various permit terms and operational compliance conditions. TheIn September 2019, the Pipeline and Hazardous Materials Safety Administration recently issued a rule for additional rulesregulations to strengthen the safety of natural gas transmission and storage facilities and hazardous liquid pipelines. The Company is currently evaluatingsegment has implemented procedure changes for the first phaseinitial requirements that became effective July 1, 2020; however, due to the COVID-19 pandemic, enforcement of the rules.initial requirements will not begin until January 1, 2021. The segment is chargedevaluating procedure changes and implementation of physical modifications of existing facilities necessary for additional requirements that will become effective July 1, 2021. The segment is faced 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, |
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
| | 2020 | | 2019 | | 2020 | | 2019 | |
| | (Dollars in millions) | | (Dollars in millions) |
| Operating revenues | $ | 36.4 |
| $ | 32.3 |
| $ | 105.1 |
| $ | 93.5 |
| Operating revenues | $ | 35.7 | | $ | 36.4 | | $ | 107.2 | | $ | 105.1 | |
| Operating expenses: | | Operating expenses: | |
| Operation and maintenance | 16.1 |
| 15.9 |
| 47.5 |
| 45.5 |
| Operation and maintenance | 15.4 | | 16.1 | | 45.4 | | 47.5 | |
| Depreciation, depletion and amortization | 5.6 |
| 4.3 |
| 15.6 |
| 13.1 |
| Depreciation, depletion and amortization | 5.2 | | 5.6 | | 16.5 | | 15.6 | |
| Taxes, other than income | 3.3 |
| 3.0 |
| 10.0 |
| 9.2 |
| Taxes, other than income | 3.3 | | 3.3 | | 9.9 | | 10.0 | |
| Total operating expenses | 25.0 |
| 23.2 |
| 73.1 |
| 67.8 |
| Total operating expenses | 23.9 | | 25.0 | | 71.8 | | 73.1 | |
| Operating income | 11.4 |
| 9.1 |
| 32.0 |
| 25.7 |
| Operating income | 11.8 | | 11.4 | | 35.4 | | 32.0 | |
| Other income | .1 |
| .8 |
| .9 |
| 1.3 |
| Other income | .2 | | .1 | | 1.2 | | .9 | |
| Interest expense | 1.8 |
| 1.6 |
| 5.3 |
| 4.1 |
| Interest expense | 1.9 | | 1.8 | | 5.7 | | 5.3 | |
| Income before income taxes | 9.7 |
| 8.3 |
| 27.6 |
| 22.9 |
| Income before income taxes | 10.1 | | 9.7 | | 30.9 | | 27.6 | |
| Income taxes | 2.0 |
| (2.7 | ) | 5.9 |
| 1.0 |
| Income taxes | 2.1 | | 2.0 | | 6.6 | | 5.9 | |
| Net income | $ | 7.7 |
| $ | 11.0 |
| $ | 21.7 |
| $ | 21.9 |
| Net income | $ | 8.0 | | $ | 7.7 | | $ | 24.3 | | $ | 21.7 | |
| Transportation volumes (MMdk) | 111.1 |
| 92.7 |
| 319.9 |
| 259.3 |
| Transportation volumes (MMdk) | 108.9 | | 111.1 | | 316.2 | | 319.9 | |
| Natural gas gathering volumes (MMdk) | 3.6 |
| 3.8 |
| 10.5 |
| 11.2 |
| Natural gas gathering volumes (MMdk) | 2.0 | | 3.6 | | 7.4 | | 10.5 | |
| Customer natural gas storage balance (MMdk): | | Customer natural gas storage balance (MMdk): | |
| Beginning of period | 11.4 |
| 16.2 |
| 13.9 |
| 22.4 |
| Beginning of period | 19.1 | | 11.4 | | 16.2 | | 13.9 | |
| Net injection | 12.8 |
| 7.1 |
| 10.3 |
| .9 |
| Net injection | 14.0 | | 12.8 | | 16.9 | | 10.3 | |
| End of period | 24.2 |
| 23.3 |
| 24.2 |
| 23.3 |
| End of period | 33.1 | | 24.2 | | 33.1 | | 24.2 | |
Three Months Ended September 30, 2019,2020, Compared to Three Months Ended September 30, 20182019 Pipeline earnings increased $300,000 (3 percent) as a result of:
Revenues: Decrease of $700,000, largely attributable to lower non-regulated project revenues and midstreamthe absence of gathering revenue due to the sale of the Company's regulated gathering assets, as discussed later. These decreases were partially offset by revenue from organic growth projects, as previously discussed, and increased natural gas storage volumes.
Operation and maintenance: Decrease of $700,000, primarily due to lower non-regulated project costs associated with lower non-regulated project revenue, partially offset by higher payroll-related costs.
Depreciation, depletion and amortization: Decrease of $400,000 as a result of the absence of the assets associated with sale of the Company's regulated gathering assets, as discussed later.
Taxes, other than income: Comparable to the same period in the prior year.
Other income: Comparable to the same period in the prior year.
Interest expense: Comparable to the same period in the prior year.
Income taxes: Comparable to the same period in the prior year.
Nine Months Ended September 30, 2020, Compared to Nine Months Ended September 30, 2019 Pipeline earnings decreased $3.3increased $2.6 million (29(12 percent) as a result of:
Revenues: Increase of $4.1$2.1 million, largely attributable to increased volumes of natural gas transported through its system as a result ofrevenue from organic growth projects, completed in 2018 andas previously discussed; increased rates effective May 1, 2019, due to the FERC rate case recently finalized within September 2019; and increased natural gas storage volumes. These increases were partially offset by lower non-regulated project revenues and lower revenues due to the FERC,sale of the Company's regulated gathering assets, as discussed in Note 19.later.
Operation and maintenance: ComparableDecrease of $2.1 million, primarily lower non-regulated project costs associated with lower non-regulated project revenue, as previously discussed, and lower expenses due to the same period in prior year.sale of the Company's regulated gathering assets, as discussed later, partially offset by higher payroll-related costs.
Depreciation, depletion and amortization: Increase of $1.3 million,$900,000, primarily due to higher depreciation rates effective May 1, 2019, due to the recently finalizedFERC rate case with the FERC, as discussedfinalized in Note 19,September 2019, and increased property, plant and equipment balances, largely the result of organic growth projects that have been placed into service.service, partially offset by the absence of the assets associated with the sale of the Company's regulated gathering assets, as discussed later.
Taxes, other than income: Increase of $300,000 resulting from higher property taxes in certain jurisdictions.
Other income: Decreaseof$700,000 as a result of lower AFUDC.
Interest expense: Comparable to the same period in the prior year.
Other income: Increase of $300,000 resulting from increased AFUDC.
Interest expense: Increase of $400,000 driven by increased long-term debt balances.
Income taxes: Increase of $4.7 million, primarily driven by the absence in 2019 of an income tax benefit related$700,000, largely due to the reversalincrease in income before income taxes.
Outlook The Company continues to successfully manage the impacts of a previously recorded regulatory liability basedthe COVID-19 pandemic on a FERC final accounting order issuedits operations and is committed to providing safe, reliable and compliant service while ensuring the health and safety of its employees, customers and the communities in which it operates. The Company experienced minor delays on capital and maintenance projects during the first quarter of 2020 but resumed project activities in the second quarter of 2020. Work has progressed on these projects as scheduled through the third quarter of 2018.
Nine Months Ended September 30, 2019, Compared2020. The Company does not expect delays to Nine Months Ended September 30, 2018 Pipeline and midstream earnings decreased $200,000 (1 percent) as a result of:
Revenues: Increase of $11.6 million, largely attributable to increased volumes of natural gas transported through its system as a result of organic growth projects completed in 2018 and increased rates effective May 1, 2019,regulatory filings due to the rate case recently finalized with the FERC, as discussed in Note 19. Revenue was also positively impacted by higher nonregulated project revenue.pandemic.
Operation and maintenance: Increase of $2.0 million, largely from higher nonregulated project costs as a result of increased nonregulated project revenue, as previously discussed, and higher material and payroll-related costs.
Depreciation, depletion and amortization: Increase of $2.5 million, primarily due to increased property, plant and equipment balances, largely the result of organic growth 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: Increase of $800,000 driven by higher property taxes in certain jurisdictions.
Other income: Decrease of $400,000 as a result of lower AFUDC, partially offset by higher returns on the Company's benefit plan investments.
Interest expense: Increase of $1.2 million, largely resulting from higher debt balances to finance the organic growth projects completed during 2018, as previously discussed.
Income taxes: Increase of $4.9 million, primarily driven by the absence in 2019 of an income tax benefit related to the reversal of a previously recorded regulatory liability based on a FERC final accounting order issued during the third quarter of 2018.
Outlook The Company has continued to experience the effectseffect of associated natural gas production at record levels,in the Bakken, which has 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 the Company transports through its system. TheReduced global oil demand due to the COVID-19 pandemic and disagreements in oil supply levels between the Organization of the Petroleum Exporting Countries and other countries led to record levelslow oil prices during the first quarter of natural gas supply2020; however, oil prices started to recover during the second and third quarters of 2020 as states and other countries started to reopen. Although the recent decrease in oil prices has slowed drilling activities and also led to the shut-in of certain wells, producers have moderatedbegun to bring wells back online and the need for storage services and put downward pressure on natural gas prices and minimized 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.
In September 2019,national record levels of natural gas supply over the last few years have moderated the need for storage services and put downward pressure on natural gas prices and minimized price volatility. While the Company completed and placed into service the Demicks Lake project in McKenzie County, North Dakota, as scheduled. The project included approximately 14 miles of 20-inch pipe and increased capacity by 175 MMcf per day. The Company began construction on the Line Section 22 Expansion project in the Billings, Montana, area in May of 2019 with an expected in-service date in November 2019. The project is 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 expectedbelieves there will continue to be in-service in the first quarter of 2020.varying pressures on natural gas production levels and prices due to these circumstances, seasonal pricing differentials provide opportunities for storage services.
In January 2019, the Company announced the North Bakken Expansion project, which includes construction of a new pipeline, compression and ancillary facilities to transport natural 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 production 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 completionin-service date late in 2021, which is dependent on regulatory and environmental permitting. On June 28, 2019,February 14, 2020, the Company filed with the FERC its application for this project. On July 28, 2020, the Company filed an amendment to its application with the FERC reflecting a requestdecrease to initiate the National Environmental Policy Act pre-filing processdesign capacity from 350 MMcf per day to 250 MMcf per day by reducing compression due to delays in forecasted growth levels of natural gas production in the Bakken region. Further, as a result of the forecasted Bakken oil and associated natural gas production delays driven by COVID-19 pandemic-related demand decreases and commodity price impacts, the Company negotiated adjustments to certain long-term customer commitments. A portion of the first-year committed volumes have been delayed one year and, through a combination of rate, volume and term adjustments, the overall project return profile remains unchanged. These long-term commitments support the project at a design capacity of 250 MMcf per day, which can be readily expanded in the future when forecasted growth levels rebound. FERC approval of the project is anticipated in early 2021.
In December 2019, the Company entered into a purchase and sale agreement with Scout Energy Group II, LP to divest of its regulated gathering assets located in Montana and North Dakota, which includes approximately 400 miles of natural gas gathering pipelines and associated compression and ancillary facilities. On January 8, 2020, the Company filed an application with the FERC to authorize abandonment by sale of the gathering assets and received FERC approval on April 2, 2020. The sale closed in April 2020 with an effective date of January 1, 2020. Pursuant to the FERC's approval of the pre-filing request on July 3, 2019.abandonment by sale, proposed accounting treatment was filed with the FERC in October 2020 and is subject to final approval.
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 17.16. 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 acquisition activity supports this strategy.
As one of the country's largest sand and gravel producers, the segment continues to strategically manage its approximately 1.01.1 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'sfirst quarter of 2019, the Company purchased additional aggregate deposits in Texas that are estimated to contain a 40-year supply of high-quality aggregates for projected local market needs. Also, during 2019, the Company increased aggregate reserves increased by approximately 5040 million tons primarilylargely due to acquisition activity.strategic asset purchases.
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. Although it is difficult to determine the split between inflation and supply/demand increases, diesel fuel costs remained fairly stable for the first nine months of 2019, while asphalt oil costs have trended higher in 2019 compared to 2018. Such volatility can have a negativean 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 governmental 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 control costs, as well as find and train a skilled workforce to meet the needs of 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, |
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
| | 2020 | | 2019 | | 2020 | | 2019 | |
| | (Dollars in millions) | | (Dollars in millions) |
| Operating revenues | $ | 869.5 |
| $ | 743.9 |
| $ | 1,692.7 |
| $ | 1,466.9 |
| Operating revenues | $ | 822.5 | | $ | 869.5 | | $ | 1,705.9 | | $ | 1,692.7 | |
| Cost of sales: | | Cost of sales: | |
| Operation and maintenance | 668.9 |
| 586.0 |
| 1,384.4 |
| 1,210.9 |
| Operation and maintenance | 612.4 | | 668.9 | | 1,351.2 | | 1,384.4 | |
| Depreciation, depletion and amortization | 19.7 |
| 15.1 |
| 55.2 |
| 42.1 |
| Depreciation, depletion and amortization | 22.2 | | 19.7 | | 63.0 | | 55.2 | |
| Taxes, other than income | 13.4 |
| 11.8 |
| 34.8 |
| 30.8 |
| Taxes, other than income | 13.6 | | 13.4 | | 36.6 | | 34.8 | |
| Total cost of sales | 702.0 |
| 612.9 |
| 1,474.4 |
| 1,283.8 |
| Total cost of sales | 648.2 | | 702.0 | | 1,450.8 | | 1,474.4 | |
| Gross margin | 167.5 |
| 131.0 |
| 218.3 |
| 183.1 |
| Gross margin | 174.3 | | 167.5 | | 255.1 | | 218.3 | |
| Selling, general and administrative expense: | | Selling, general and administrative expense: | |
| Operation and maintenance | 22.7 |
| 20.1 |
| 64.6 |
| 57.3 |
| Operation and maintenance | 23.7 | | 22.7 | | 67.5 | | 64.6 | |
| Depreciation, depletion and amortization | .9 |
| .5 |
| 2.4 |
| 1.6 |
| Depreciation, depletion and amortization | 1.3 | | .9 | | 3.6 | | 2.4 | |
| Taxes, other than income | .9 |
| .8 |
| 3.7 |
| 3.6 |
| Taxes, other than income | .8 | | .9 | | 4.0 | | 3.7 | |
| Total selling, general and administrative expense | 24.5 |
| 21.4 |
| 70.7 |
| 62.5 |
| Total selling, general and administrative expense | 25.8 | | 24.5 | | 75.1 | | 70.7 | |
| Operating income | 143.0 |
| 109.6 |
| 147.6 |
| 120.6 |
| Operating income | 148.5 | | 143.0 | | 180.0 | | 147.6 | |
| Other income (expense) | .2 |
| (.1 | ) | 1.5 |
| (1.0 | ) | |
| Other income | | Other income | .3 | | .2 | | 1.0 | | 1.5 | |
| Interest expense | 6.4 |
| 4.4 |
| 18.6 |
| 12.5 |
| Interest expense | 5.0 | | 6.4 | | 15.9 | | 18.6 | |
| Income before income taxes | 136.8 |
| 105.1 |
| 130.5 |
| 107.1 |
| Income before income taxes | 143.8 | | 136.8 | | 165.1 | | 130.5 | |
| Income taxes | 34.2 |
| 26.2 |
| 33.2 |
| 27.4 |
| Income taxes | 36.5 | | 34.2 | | 43.0 | | 33.2 | |
| Net income | $ | 102.6 |
| $ | 78.9 |
| $ | 97.3 |
| $ | 79.7 |
| Net income | $ | 107.3 | | $ | 102.6 | | $ | 122.1 | | $ | 97.3 | |
| Sales (000's): | |
| |
| |
| |
| Sales (000's): | |
| Aggregates (tons) | 11,860 |
| 10,366 |
| 24,815 |
| 21,860 |
| Aggregates (tons) | 10,722 | | 11,860 | | 23,678 | | 24,815 | |
| Asphalt (tons) | 3,317 |
| 3,380 |
| 5,396 |
| 5,581 |
| Asphalt (tons) | 3,542 | | 3,317 | | 5,935 | | 5,396 | |
| Ready-mixed concrete (cubic yards) | 1,372 |
| 1,103 |
| 3,124 |
| 2,623 |
| Ready-mixed concrete (cubic yards) | 1,266 | | 1,372 | | 3,089 | | 3,124 | |
Three Months Ended September 30, 2019,2020, Compared to Three Months Ended September 30, 20182019 Construction materials and contractingcontracting's earnings increased $23.7$4.7 million (30(5 percent) as a result of:
Revenues: Decrease of $47.0 million, primarily the result of lower contracting services and material sales, which were negatively impacted by wildfires and tropical storms, partially offset by favorable weather conditions in some states.
Gross margin: Increase of $6.8 million due to higher contracting bid margins and higher realized material margins, largely from asphalt and asphalt-related products as a result of lower energy-related costs and strong pricing for ready-mixed concrete in most markets, partially offset by lower gains on asset sales in certain regions.
Selling, general and administrative expense: Increase of $1.3 million, primarily due to higher payroll-related costs and depreciation expense.
Other income: Comparable to the same period in the prior year.
Interest expense: Decrease of $1.4 million resulting from lower average interest rates and lower average debt balances.
Income taxes: Increase of $2.3 million, largely due to the increase in income before income taxes.
Nine Months Ended September 30, 2020, Compared to Nine Months Ended September 30, 2019 Construction materials and contracting's earnings increased $24.8 million (25 percent) as a result of:
Revenues: Increase of $125.6$13.2 million, primarily the result of higher revenues from contracting services and material sales due to strong economic environmentsan early start to the season, favorable weather conditions in certain statesregions and additional material volumesrevenues associated with the businesses acquired, sincepartially offset by the negative impact of wildfires and tropical storms during the third quarter of 2018.2020.
Gross margin: Increase of $36.5$36.8 million, largely due to the higher revenues, resulting from strong economic environments in certain states, as previously discussed, higher contracting bid margins and higher realized material prices. Also contributing was an increasemargins, largely from asphalt and asphalt-related products as a result of lower energy-related costs and strong pricing for ready-mixed concrete in gains from asset sales in certain regions of approximately $7.0 million.most markets.
Selling, general and administrative expense: Increase of $3.1$4.4 million, largely related to the businesses acquired since the third quarter of 2018higher payroll-related costs and higher payroll-related costs.depreciation expense.
Other income (expense):income: Comparable to the same period in prior year.
Interest expense: IncreaseDecrease of $2.0 million, largely resulting from higher debt balances$500,000 as a result of recent acquisitions.
Income taxes: Increase of $8.0 million, largely the result of increased income before income taxes.
Nine Months Ended September 30, 2019, Compared to Nine Months Ended September 30, 2018 Construction materials and contracting earnings increased $17.6 million (22 percent) as a result of:
Revenues: Increase of $225.8 million, primarily the result of higher revenues from contracting services and material sales due to strong economic environments in certain states and additional material volumes associated with the businesses acquired since the third quarter of 2018.
Gross margin: Increase of $35.2 million, largely resulting from higher revenues due to strong economic environments in certain states, as previously discussed, higher contracting bid margins and higher realized material prices. Also contributing was an increase in gains on asset sales in certain regions of approximately $6.8 million.
Selling, general and administrative expense: Increase of $8.2 million, primarily related to the businesses acquired since the third quarter of 2018 and higher payroll-related costs.
Other income (expense): Increase of $2.5 million, primarily due to higherlower returns on certain of the Company's benefit plan investments.
Interest expense: IncreaseDecrease of $6.1$2.7 million largely resulting from higherlower average debt balances as a result of recent acquisitions.and lower average interest rates.
Income taxes: Increase of $5.8$9.8 million, largely due to the result of increasedincrease in income before income taxes.
Outlook The Company continues to assess the impacts of the COVID-19 pandemic on its operations and is committed to the health and safety of its employees, customers and the communities in which it operates. The Company has implemented safety and social distancing measures for its employees that are not able to work from home and has experienced some inefficiencies and additional costs in relation to these measures but, for the most part, has been able to continue business processes with minimal interruptions. The Company also continues to monitor job progress and service work and at this time has not experienced significant delays, cancellations or disruptions due to the pandemic. The Company will continue to monitor the demand for construction materials and contracting services as such services may be reduced by recessionary impacts of the pandemic as the traditional customers for these services reduce capital expenditures. State and local mandates have been issued in response to the COVID-19 pandemic requiring individuals to stay in place, leading to a reduction in fuel consumption in the United States, which directly reduces fuel tax collections. In addition, states, cities and counties across the country are experiencing low sales tax and other revenues as a result of the COVID-19 pandemic. The reduction in tax collections may impact funds available for public infrastructure projects, which in turn could have a material adverse impact on the Company's results of operations, financial position and cash flows. Meanwhile, a comprehensive infrastructure funding program, if adopted, by the United States Congress could positively impact the segment.
The segment's vertically integrated aggregates-basedaggregate-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,projects are, however, dependent on statefederal and federalstate 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.
TheDuring 2020 and 2019, the Company remains optimistic about overall economic growthmade strategic asset purchases and infrastructure spending. The IBISWorld Incorporated Industry Report issued in June 2019 for sand and gravel mining inacquired businesses that support the United States projects a 1.1 percent annual growth rate through 2024. The report also states the demand for clay and refractory materials is projectedCompany's long-term strategy to continue deteriorating in several downstream manufacturing industries. However, the report expects this decline will be offset by rising activity in the residential and nonresidential construction markets, growing public sector investment in the highway and bridge construction markets 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.
expand its market presence. In 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 2019,2020, the Company acquired Viesko Redi-Mix, Inc.,the assets of Oldcastle Infrastructure Spokane, a ready-mixed concrete supplier headquartered near Salem, Oregon.prestressed-concrete business located in Spokane, Washington. The Company continues to evaluate additional acquisition opportunities. For more information on the Company's business combinations, see Note 9.
The construction materials and contracting segment's backlog at September 30, 2019,2020, was $746.9$571.3 million, updown from $590.0$746.9 million at September 30, 2018.2019. The increasedecrease in backlog was primarilylargely attributable to increased agencya decrease in public infrastructure backlog. The economic uncertainty due to COVID-19 continues to have an impact on certain industries the segment serves, including the unpredictability of the level of tax collections, which the Company believes has led to a reduction in public work and bidding opportunities in nearly every region.bid-letting. The Company expects to complete a significant amount of the backlog at September 30, 2019,2020, during the next 12 months.
All of 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 onlabor contracts that the construction materials and contracting segment due to their operations in Oregon.
Five of the labor contracts that Knife River was negotiating, as reported in Items 1 and 2 - Business Properties - General in the 20182019 Annual Report, have been ratified.
Construction Services
Strategy and challenges The construction services segment provides inside and outside specialty contracting, as discussed in Note 17.16. The construction services segment focuses on safely executing projects; providing a superior return on investment by building new and strengthening existing customer relationships; ensuring quality service; 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 growth experienced by the segment in recent years is due in part to its ability to support national customers in most of the regions in which it operates.
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 from 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,completions; disruptions to the supply chain due to transportation delays, travel restrictions, raw material cost increases and shortages and closures of businesses or facilities; declines or delays in new projects due to the cyclical nature of the construction industryindustry; 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 overall customer and competitor 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, |
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
| | 2020 | | 2019 | | 2020 | | 2019 | |
| | (In millions) | | (In millions) |
| Operating revenues | $ | 479.6 |
| $ | 330.4 |
| $ | 1,365.4 |
| $ | 988.0 |
| Operating revenues | $ | 551.0 | | $ | 479.6 | | $ | 1,562.9 | | $ | 1,365.4 | |
| Cost of sales: | | Cost of sales: | |
| Operation and maintenance | 409.0 |
| 289.3 |
| 1,151.7 |
| 838.0 |
| Operation and maintenance | 461.7 | | 409.0 | | 1,309.0 | | 1,151.7 | |
| Depreciation, depletion and amortization | 3.7 |
| 3.5 |
| 11.1 |
| 10.7 |
| Depreciation, depletion and amortization | 3.9 | | 3.7 | | 11.8 | | 11.1 | |
| Taxes, other than income | 14.1 |
| 9.7 |
| 44.6 |
| 32.0 |
| Taxes, other than income | 17.2 | | 14.1 | | 57.8 | | 44.6 | |
| Total cost of sales | 426.8 |
| 302.5 |
| 1,207.4 |
| 880.7 |
| Total cost of sales | 482.8 | | 426.8 | | 1,378.6 | | 1,207.4 | |
| Gross margin | 52.8 |
| 27.9 |
| 158.0 |
| 107.3 |
| Gross margin | 68.2 | | 52.8 | | 184.3 | | 158.0 | |
| Selling, general and administrative expense: | | Selling, general and administrative expense: | |
| Operation and maintenance | 21.4 |
| 14.6 |
| 63.9 |
| 51.0 |
| Operation and maintenance | 24.9 | | 21.4 | | 72.4 | | 63.9 | |
| Depreciation, depletion and amortization | .5 |
| .4 |
| 1.3 |
| 1.1 |
| Depreciation, depletion and amortization | 1.8 | | .5 | | 5.9 | | 1.3 | |
| Taxes, other than income | .9 |
| 1.0 |
| 3.4 |
| 3.3 |
| Taxes, other than income | 1.0 | | .9 | | 3.8 | | 3.4 | |
| Total selling, general and administrative expense | 22.8 |
| 16.0 |
| 68.6 |
| 55.4 |
| Total selling, general and administrative expense | 27.7 | | 22.8 | | 82.1 | | 68.6 | |
| Operating income | 30.0 |
| 11.9 |
| 89.4 |
| 51.9 |
| Operating income | 40.5 | | 30.0 | | 102.2 | | 89.4 | |
| Other income | .3 |
| .5 |
| 1.4 |
| 1.1 |
| Other income | .6 | | .3 | | 1.3 | | 1.4 | |
| Interest expense | 1.6 |
| .9 |
| 4.0 |
| 2.7 |
| Interest expense | 1.0 | | 1.6 | | 3.3 | | 4.0 | |
| Income before income taxes | 28.7 |
| 11.5 |
| 86.8 |
| 50.3 |
| Income before income taxes | 40.1 | | 28.7 | | 100.2 | | 86.8 | |
| Income taxes | 7.6 |
| 2.2 |
| 22.8 |
| 11.8 |
| Income taxes | 10.3 | | 7.6 | | 25.7 | | 22.8 | |
| Net income | $ | 21.1 |
| $ | 9.3 |
| $ | 64.0 |
| $ | 38.5 |
| Net income | $ | 29.8 | | $ | 21.1 | | $ | 74.5 | | $ | 64.0 | |
Three Months Ended September 30, 2019,2020, Compared to Three Months Ended September 30, 20182019 Construction services earnings increased $11.8$8.7 million (128(41 percent) as a result of:
Revenues: Increase of $149.2$71.4 million, largely the result of higher inside specialty contracting workloads from increased customer demand for hospitality, high-tech and commercial projects, partially due to the businesses acquired. Higher outside specialty contracting workloads also increased as a result of strong demand for utility projects including storm-related power line repair and wildfire restoration work. The increases were offset in part by decreased equipment sales and rentals and decreased inside specialty contracting customer demand for refinery projects.
Gross margin: Increase of $15.4 million, primarily from the higher volume of work resulting in an increase in revenues, as previously discussed, as well as higher margins on certain projects, partially offset by an increase in operation and maintenance expense as a direct result of the expenses related to the increased workloads.
Selling, general and administrative expense: Increase of $4.9 million due in part to the increased allowance for uncollectible accounts, higher payroll-related costs and higher depreciation expense, partially offset by lower office expenses.
Other income: Increase of $300,000 as a result of higher gains from asset sales.
Interest expense: Decrease of $600,000 driven by lower debt balances.
Income taxes: Increase of $2.7 million, largely due to the increase in income before income taxes.
Nine Months Ended September 30, 2020, Compared to Nine Months Ended September 30, 2019 Construction services earnings increased $10.5 million (17 percent) as a result of:
Revenues: Increase of $197.5 million, largely the result of higher inside specialty contracting workloads from greater customer demand for hospitality, high-tech and high-tech projects. Also contributing to the increase wascommercial projects and higher outside specialty contracting workloads, primarily the result ofwhich includes increased demand for utility projects. RevenueThe businesses acquired also contributed to the increase in revenues. Partially offsetting the increase was also positively impacted by the absence of $9.5 milliona decrease in changes to estimates recorded in the third quarter of 2018 for variable consideration previously recognized on certain construction contracts.equipment sales and rentals.
Gross margin: Increase of $24.9$26.3 million, primarily due tofrom the higher volume of work resulting in an increase in revenues, as previously discussed, partially offset by an increase in operation and maintenance expense as a direct result of the expenses related to the increased workloads. Also negatively impacting gross margin was an out-of-period adjustment in the first quarter of 2020 to correct an overstatement of operating revenue of $7.7 million and an understatement of operation and maintenance expense of $1.2 million previously recognized on a construction contract, as discussed in Note 1.
Selling, general and administrative expense: Increase of $6.8$13.5 million primarily payroll-related costs,due in part to the increased allowance for uncollectible accounts, as well as increased professional serviceshigher payroll-related costs, depreciation expense and office expenses.
Other income: Comparable to the same period in the prior year.
Interest expense: IncreaseDecrease of $700,000 primarily due to higherdriven by lower debt balances as a result of additional working capital needs during the construction season.balances.
Income taxes: Increase of $5.4$2.9 million, largely due to an increase in income before income taxes.
Nine Months Ended September 30, 2019, Compared to Nine Months EndedSeptember 30, 2018 Construction services earnings increased $25.5 million (66 percent) as a result of:
Revenues: Increase 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 increase 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 changes to estimates recorded in the third quarter of 2018 for variable consideration previously recognized on certain construction contracts.
Gross margin: Increase of $50.7 million, primarily due to the higher volume of work resulting in an increase in revenues, as previously discussed, partially offset by an increase in operation and maintenance expense as a direct result of the expenses related to the increased workloads.
Selling, general and administrative expense: Increase of $13.2 million, primarily payroll-related costs, as well as increased office expenses and professional services.
Other income: Comparable to the same period in prior year.
Interest expense: Increase of $1.3 million, primarily due to higher debt balances as a result of additional working capital needs during the construction season.
Income taxes: Increase of $11.0 million, largely due to an increase in income before income taxes.
Outlook The Company expectscontinues to assess the impacts of the COVID-19 pandemic on its operations and is committed to the health and safety of its employees, customers and the communities in which it operates. The Company has implemented safety and social distancing measures for its employees that are not able to work from home and has experienced some inefficiencies in relation to these measures but, for the most part, has been able to continue business processes. The Company continues to bid and be awarded work despite the challenging environment, as evidenced by the strong backlog for the segment, as further discussed below. The Company also continues to monitor job progress and service work and has experienced some delays, cancellations and disruptions due to the pandemic. The Company will continue to monitor the demand for construction services as such services may be reduced by recessionary impacts of the pandemic as the traditional customers for these services reduce capital expenditures.
The Company continues to have bidding activity to remain strongopportunities for both inside and outside specialty construction companiescontracting work in 2019.2020. Although bidding remains highly competitive in all areas, the Company expects the segment's skilled workforce, quality of service and effective cost management will continue to provide a benefit in securing and executing profitable projects.
The construction services segment had backlog at September 30, 2019,2020, of $1.2$1.3 billion, up from $896.3 million$1.2 billion at September 30, 2018.2019. The increase in backlog was largely attributable to the new project opportunities that the Company continues to seebe awarded across its diverse operations, particularly in inside specialty electrical and mechanical contracting forin the hospitality, and gaming, high-tech mission critical and public entities.industries. The Company's outside power, communications and natural gas specialty operationscontracting also have a high volume of available work. The Company expects to complete a significant amount of the backlog at September 30, 2019,2020, 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.
In support of the third quarter of 2019,Company's strategic plan to grow through acquisitions, the Company purchased the assets of Pride Electric,acquired PerLectric, Inc., an electrical construction company in Redmond, Washington.Fairfax, Virginia, in the first quarter of 2020. For more information on the Company's business combinations, see Note 9.
DuringAll of 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 onlabor contracts that the construction services segment due to their operationswas negotiating, as reported in Oregon.
Items 1 and 2 - Business Properties - General in the 2019 Annual Report, have been ratified.
|
| | | | | | | | | | | | |
| | Three Months Ended | Nine Months Ended |
| | September 30, | September 30, |
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | (In millions) |
| Operating revenues | $ | 2.9 |
| $ | 3.1 |
| $ | 13.6 |
| $ | 8.5 |
|
| Operating expenses: | | | | |
| Operation and maintenance | 3.6 |
| 2.6 |
| 11.8 |
| 6.5 |
|
| Depreciation, depletion and amortization | .5 |
| .5 |
| 1.5 |
| 1.5 |
|
| Taxes, other than income | — |
| — |
| .1 |
| .1 |
|
| Total operating expenses | 4.1 |
| 3.1 |
| 13.4 |
| 8.1 |
|
| Operating income (loss) | (1.2 | ) | — |
| .2 |
| .4 |
|
| Other income | .2 |
| .4 |
| .7 |
| .6 |
|
| Interest expense | .4 |
| .5 |
| 1.5 |
| 2.2 |
|
| Loss before income taxes | (1.4 | ) | (.1 | ) | (.6 | ) | (1.2 | ) |
| Income taxes | (5.4 | ) | (4.9 | ) | (4.1 | ) | (3.1 | ) |
| Net income | $ | 4.0 |
| $ | 4.8 |
| $ | 3.5 |
| $ | 1.9 |
|
| | | | | | | | | | | | | | |
| Three Months Ended | Nine Months Ended |
| September 30, | September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | |
| (In millions) |
| Operating revenues | $ | 3.1 | | $ | 2.9 | | $ | 8.9 | | $ | 13.6 | |
| Operating expenses: | | | | |
| Operation and maintenance | 2.3 | | 3.6 | | 6.7 | | 11.8 | |
| Depreciation, depletion and amortization | .6 | | .5 | | 1.9 | | 1.5 | |
| Taxes, other than income | — | | — | | — | | .1 | |
| Total operating expenses | 2.9 | | 4.1 | | 8.6 | | 13.4 | |
| Operating income (loss) | .2 | | (1.2) | | .3 | | .2 | |
| Other income | .1 | | .2 | | .4 | | .7 | |
| Interest expense | .1 | | .4 | | .7 | | 1.5 | |
| Income (loss) before income taxes | .2 | | (1.4) | | — | | (.6) | |
| Income taxes | (8.5) | | (5.4) | | (3.4) | | (4.1) | |
| Net income | $ | 8.7 | | $ | 4.0 | | $ | 3.4 | | $ | 3.5 | |
Three Months Ended September 30, 2019,2020, Compared to Three Months Ended September 30, 20182019 Included in Other are generalGeneral 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. Favorableoperations are included in Other, as well as income tax adjustments related to the Company's consolidated Company's annualized estimated tax rate positively impacted the results of Other.rate.
Nine Months Ended September 30, 2019,2020, Compared to Nine Months Ended September 30, 2018 2019Included in Other was In the first quarter of 2020, insurance activity at the Company's captive insurer decreased, 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. FavorableOther, as well as income tax adjustments related to the Company's consolidated Company's annualized estimated tax rate for 2019 positively impacted the results of Other.rate.
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 | | Three Months Ended | Nine Months Ended |
| | September 30, | September 30, | | September 30, |
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
| | 2020 | | 2019 | | 2020 | | 2019 | |
| | (In millions) | | (In millions) |
| Intersegment transactions: | | |
| |
| Intersegment transactions: | | |
| Operating revenues | $ | 8.0 |
| $ | 7.2 |
| $ | 51.3 |
| $ | 41.7 |
| Operating revenues | $ | 7.5 | | $ | 8.0 | | $ | 50.9 | | $ | 51.3 | |
| Operation and maintenance | 4.3 |
| 4.1 |
| 16.2 |
| 10.4 |
| Operation and maintenance | 4.0 | | 4.3 | | 14.4 | | 16.2 | |
| Purchased natural gas sold | 3.7 |
| 3.1 |
| 35.1 |
| 31.3 |
| Purchased natural gas sold | 3.5 | | 3.7 | | 36.5 | | 35.1 | |
|
For more information on intersegment eliminations, see Note 17.16.
Liquidity and Capital Commitments
At September 30, 2019,2020, the Company had cash and cash equivalents of $67.0$66.1 million and available borrowing capacity of $543.6$652.6 million under the outstanding credit facilities of the Company's subsidiaries. During the first quarter of 2020, short-term capital markets were disrupted as a result of the COVID-19 pandemic. Consequently, the Company temporarily borrowed under its revolving credit agreements in addition to accessing the commercial paper markets and maintained higher than normal cash balances to ensure liquidity during this volatile period. At September 30, 2020, all borrowings under the revolving credit agreements for Montana-Dakota and Centennial had been repaid. The Company expects to meet its obligations for debt maturing within one year and its other operating and capital requirements from various sources, including internally generated funds; credit facilities and commercial paper of the Company's subsidiaries, as described in Capital resources; theand issuance of long-term debt;debt and the issuance of equity securities.securities if necessary.
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 2019 decreased $114.32020 was $481.8 million fromcompared to $203.1 millionin the comparable period in 2018. first nine months of 2019. The decreaseincrease in cash flows provided by operating activities was largely driven by an increase inthe stronger collection of accounts receivable as a result of higher revenues at the construction businessesservices business and decreased receivables at the construction materials and contracting business as compared to the prior period. Also contributing to the decrease inincrease of cash flows provided by operating activities was the increasedecrease in natural gas purchases that include the effectsin 2020 as a result of colder weather, highermilder temperatures and recovery of purchased gas costs and the timing of collection of suchcost adjustment balances from customers at the natural gas distribution business.business, as well as the Company's deferral of payroll taxes related to the CARES Act, as previously discussed. Partially offsetting
these decreasesincreases was higher cash needs due to cash flows provided by operating activities were lowerincreased inventory balances due to the higher workloads at the construction materials and contracting business in 2019 as compared to the increase in inventory balances in 2018 due to the activity of the acquired businesses.resulting from increased aggregate production and a higher average cost per ton.
Investing activities Cash flows used in investing activities in the first nine months of 20192020 was $448.6$461.8 million compared to $361.3$448.6 million in the first nine months of 20182019. The increase in cash used in investing activities was primarily relateddue to higher cash used in acquisition activity in 2020 compared to 2019 at the construction services business, increased capital expenditures in 2020 at the electric business and asset purchases offset in part bylower proceeds on asset sales in 2020 at the construction businesses.materials and contracting business. Partially offsetting these increases were decreased capital expenditures in 2020 at the construction materials and contracting business.
Financing activities Cash flows provided byused in financing activities in the first nine months of 20192020 was $258.6$20.3 million compared to $76.4cash flows provided by financing activities of $258.6 million in the first nine months of 2018.2019. The change was largely the result of a decrease in net long-term and short-term debt borrowings in 2020 as compared to 2019 due to lower working capital needs. In addition, during the first nine months of 2020, the Company had decreased net proceeds of $102.2 million from the 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 was also due to increased borrowings at the natural gas distribution business, largely resulting from short-term borrowings for higher natural gas costs, as previously discussed, and long-term borrowings for funding capital investments.plan.
Defined benefit pension plans
There were no material changes to the Company's qualified noncontributory defined benefit pension plans from those reported in the 20182019 Annual 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.Report. For more information, see Note 1817 and Part II, Item 7 in the 20182019 Annual Report.
Capital expenditures
Capital expenditures for the first nine months of 2020 were $473.7 million, which includes the completed business combinations at the construction materials and contracting and construction services businesses. 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, which includes completed acquisitions at the construction materials and contracting business. Capital expenditures allocated to the Company's business segments are estimated to be approximately $645$626 million for 2019.2020. Capital expenditures have been updated from what was previously reported in the 2019 Annual Report to accommodate project timeline and scope changes made throughout 2020. The Company will continue to monitor capital expenditures for project delays and changes in economic viability related to COVID-19. The Company has included in the estimated capital expenditures for 2019 the completed purchase of additional aggregate deposits,2020 the completed business combinations of a ready-mixed concrete supplier and an electrical construction company and a prestressed-concrete business, as well as the Demicks Lake project, the Line Section 22 Expansion project and the Demicks LakeNorth Bakken Expansion project, as previously discussed in Business Segment Financial and Operating Data.
Estimated capital expenditures for 20192020 also include system upgrades; service extensions; routine equipment maintenance and replacements; buildings, land and building improvements; pipeline and natural gas storage 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;opportunities that would be incremental to the outlined capital program; however, they aresuch growth is 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 20192020 will be met from various sources, including internally generated funds; credit facilities and commercial paper of the Company's subsidiaries, as described later; issuance of long-term debt; and issuance of debt and equity securities.securities if necessary.
Capital resources
Certain debt instruments of the Company's subsidiaries contain restrictive and financial 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, 2019.2020. In the event the 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 in the 20182019 Annual Report.
The following table summarizes the outstanding revolving credit facilities of the Company's subsidiaries at September 30, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Company | | Facility | | Facility
Limit | | Amount
Outstanding | | Letters
of Credit | | Expiration
Date | |
| | | | (In millions) | | | | | |
| Montana-Dakota Utilities Co. | | Commercial paper/Revolving credit agreement | (a) | $ | 175.0 | | | $ | 73.6 | | | $ | — | | | 12/19/24 | |
| Cascade Natural Gas Corporation | | Revolving credit agreement | | $ | 100.0 | | (b) | $ | 52.5 | | | $ | 2.2 | | (c) | 6/7/24 | |
| Intermountain Gas Company | | Revolving credit agreement | | $ | 85.0 | | (d) | $ | 38.5 | | | $ | — | | | 6/7/24 | |
| Centennial Energy Holdings, Inc. | | Commercial paper/Revolving credit agreement | (e) | $ | 600.0 | | | $ | 140.6 | | | $ | — | | | 12/19/24 | |
|
| | | | | | | | | | | | | | | | |
| Company | | Facility | | Facility Limit |
| | Amount Outstanding |
| | Letters of Credit |
| | Expiration Date |
| | | | | (In millions) | | | | |
| 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 | | $ | 100.0 |
| (c) | $ | 8.9 |
| | $ | 2.2 |
| (d) | 6/7/24 |
| Intermountain Gas Company | | 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 |
| | $ | 203.6 |
| (b) | $ | — |
| | 9/23/21 |
(b)Certain provisions allow for increased borrowings, up to a maximum of $125.0 million.
(c)Outstanding letter(s) of credit reduce the amount available under the credit agreement.
(d)Certain provisions allow for increased borrowings, up to a maximum of $110.0 million.
(e)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 $700.0 million). At September 30, 2020, there were no amounts outstanding under the revolving credit agreement.
| | |
(a) | The commercial paper program is supported by a revolving credit agreement with various banks (provisions allow for increased borrowings, at the option of Montana-Dakota on stated conditions, up to a maximum of $225.0 million). 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 $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 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 subsidiary companiesMontana-Dakota and Centennial do not issue commercial paper in an aggregate amount exceeding the available capacity under theirthe 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 certain operations of the construction businesses.Company's subsidiaries. Due to the early impacts of the COVID-19 pandemic on the short-term capital markets, the Company temporarily borrowed under its revolving credit agreements in addition to accessing the commercial paper markets in the first half of 2020. At September 30, 2020, all borrowings under the revolving credit agreements for Montana-Dakota and Centennial had been repaid. As the short-term capital markets have generally rebounded since the early impacts of COVID-19, the Company has not experienced difficulty accessing capital markets, servicing debt or meeting applicable debt covenants.
Total equity as a percent of total capitalization was 56 percent, 54 percent 57 percent and 5556 percent at September 30, 20192020 and 2018,2019, and December 31, 2018,2019, 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.
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 board 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 authorization on a periodic basis and the aggregate amount of securities authorized for sale may be increased in the future.
On February 22, 2019, theThe Company entered intohas a Distribution Agreementdistribution 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 did not issue shares of common stock for the three and nine months ended September 30, 2020, under its "at-the-market" offering. 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, 2019,2020, 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 Ratethe SOFR, or equivalent rate agreed upon by the lenders, in certain of theirits new debt instruments, as well as those that are being renewed. The Company is currently updating its credit agreements to include language regarding the successor or alternate rate to LIBOR. 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, 2019,15, 2020, Cascade amended its revolving creditissued $50.0 million of senior notes under a note purchase agreement to increase the borrowing limit from $75.0 million to $100.0 millionwith maturity dates of June 15, 2050 and extend the maturity date from April 24, 2020 to June 7, 2024.15, 2060, at a weighted average interest rate of 3.66 percent. 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,October 30, 2020, Cascade issued $75.0$25.0 million of senior notes under a note purchase agreement with a maturity dates ranging from June 13, 2029 to June 13, 2049,date of October 30, 2060, at a weighted averagean interest rate of 3.933.34 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 Company On 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 to be greater than 65 percent. The covenants also include certain limitations on subsidiary indebtedness, restrictions on the sale of certain assets, loans and investments.
On August 7, 2019, Centennial entered into a $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,October 27, 2020, WBI Energy Transmission contracted to issue an additional $45.0$25.0 million of senior notes under theits uncommitted private shelf agreement on December 16, 2020, with a maturity date of December 16, 2035, at an interest rate of 4.17 percent on December 16, 2019.3.26 percent. The remaining capacity under this uncommitted private shelf agreement is $115.0$105.0 million.
Montana-Dakota Utilities Co. On July 24, 2019, Montana-Dakota entered into a $200.0 million note purchase agreement with maturity dates 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 Montana-Dakota not to permit, at any time, the ratio of total debt to total capitalization to be greater than 65 percent.
Off balance sheet arrangements
As ofAt September 30, 2019,2020, the Company had no material off balance sheet arrangements as defined by the rules of the SEC.
Contractual obligations and commercial commitments
There were no material changes in the Company's contractual obligations from continuing operations relating to operating leases,estimated interest payments, purchase commitments, asset retirement obligations, uncertain tax positions and minimum funding requirements for its defined benefit plans for 20192020 from those reported in the 20182019 Annual Report.
At September 30, 2019, the Company's commitments for long-term debt and estimated interest payments presented on a calendar-year basis were 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 20182019 Annual Report.
New Accounting Standards
For information regarding new accounting standards, see Note 6,2, 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 goodwill; fair values of acquired assets and liabilities under the acquisition method of accounting; tax provisions;regulatory assets expected to be recovered in rates charged to customers; revenue recognized using the cost-to-cost measure of progress for contracts; and actuarially determined benefit costs.costs; and tax provisions. There were no material changes in the Company's critical accounting policies involving significant estimates from those reported in the 20182019 Annual Report. For more information on critical accounting policies involving significant estimates, see Part II, Item 7 in the 20182019 Annual Report.
Non-GAAP Financial Measures
The Business 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 net 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-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. For these reasons, period over period, the segments' operating income (loss) is generally not 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, |
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
| | 2020 | | 2019 | | 2020 | | 2019 | |
| | (In millions) | | (In millions) |
| Operating income | $ | 21.9 |
| $ | 21.1 |
| $ | 49.7 |
| $ | 52.3 |
| Operating income | $ | 21.1 | | $ | 21.9 | | $ | 48.8 | | $ | 49.7 | |
| Adjustments: | | Adjustments: | |
| Operating expenses: | |
| |
| | | Operating expenses: | | | |
| Operation and maintenance | 30.8 |
| 30.1 |
| 94.6 |
| 91.3 |
| Operation and maintenance | 30.7 | | 30.8 | | 90.5 | | 94.6 | |
| Depreciation, depletion and amortization | 14.2 |
| 12.6 |
| 41.8 |
| 37.7 |
| Depreciation, depletion and amortization | 15.8 | | 14.2 | | 47.0 | | 41.8 | |
| Taxes, other than income | 4.1 |
| 3.7 |
| 12.5 |
| 11.2 |
| Taxes, other than income | 4.4 | | 4.1 | | 13.0 | | 12.5 | |
| Total adjustments | 49.1 |
| 46.4 |
| 148.9 |
| 140.2 |
| Total adjustments | 50.9 | | 49.1 | | 150.5 | | 148.9 | |
| Adjusted gross margin | $ | 71.0 |
| $ | 67.5 |
| $ | 198.6 |
| $ | 192.5 |
| Adjusted gross margin | $ | 72.0 | | $ | 71.0 | | $ | 199.3 | | $ | 198.6 | |
The following information reconciles operating income (loss) to adjusted gross margin for the natural gas distribution segment.
| | | | | | | | | | | | | | |
| Three Months Ended | Nine Months Ended |
| September 30, | September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | |
| (In millions) |
| Operating income (loss) | $ | (18.4) | | $ | (15.6) | | $ | 32.3 | | $ | 32.1 | |
| Adjustments: | | | | |
| Operating expenses: | | | | |
| Operation and maintenance | 46.9 | | 44.4 | | 135.9 | | 134.3 | |
| Depreciation, depletion and amortization | 21.3 | | 19.9 | | 63.1 | | 59.1 | |
| Taxes, other than income | 6.3 | | 6.1 | | 18.5 | | 17.9 | |
| Total adjustments | 74.5 | | 70.4 | | 217.5 | | 211.3 | |
| Adjusted gross margin | $ | 56.1 | | $ | 54.8 | | $ | 249.8 | | $ | 243.4 | |
|
| | | | | | | | | | | | |
| | Three Months Ended | Nine Months Ended |
| | September 30, | September 30, |
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| | (In millions) |
| Operating income (loss) | $ | (15.6 | ) | $ | (11.7 | ) | $ | 32.1 |
| $ | 32.5 |
|
| Adjustments: | | | | |
| Operating expenses: | | | | |
| Operation and maintenance | 44.4 |
| 42.1 |
| 134.3 |
| 129.4 |
|
| Depreciation, depletion and amortization | 19.9 |
| 18.1 |
| 59.1 |
| 53.5 |
|
| Taxes, other than income | 6.1 |
| 5.4 |
| 17.9 |
| 16.5 |
|
| Total adjustments | 70.4 |
| 65.6 |
| 211.3 |
| 199.4 |
|
| Adjusted gross margin | $ | 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 20182019 Annual Report.
At September 30, 2019,2020, 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 other procedures include controls and proceduresare designed to provide reasonable assurance that information required to be disclosed is accumulated and communicated to management, including the Company's chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. The Company's management, with the participation of the Company's chief executive officer and chief financial officer, has evaluated the effectiveness of the Company's disclosure controls and other procedures as of the end of the period covered by this report. Based upon that evaluation, the chief executive officer and the chief financial officer have concluded that, as of the end of the period covered by this report, such controls and procedures were effective at a reasonable assurance level.
Changes in internal controls
No change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended September 30, 2019,2020, 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 regardingThere were no material changes to the Company's legal proceedings required by this item, seein Part 1, Item 3 - Legal Proceedings in the 2019 Annual Report other than as disclosed in Note 20,19, 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 -1A. Risk Factors in the 20182019 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 -1A. Risk Factors in the 20182019 Annual Report.Report other than as set forth below.
COVID-19 may have a negative impact on the Company's business operations, revenues, results of operations, liquidity and cash flows.
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The COVID-19 pandemic has negatively impacted the global economy, lowered equity market valuations, created significant volatility and disruption in the financial markets, decreased oil and natural gas prices, increased unemployment levels and disrupted certain global supply chains and may continue to negatively impact the economy and the financial markets. To the extent the COVID-19 pandemic adversely affects the Company's business, operations, revenues, liquidity or cash flows, it may also have the effect of heightening many of the other risks described in Part I, Item IA. Risk Factors in the 2019 Annual Report. The degree to which COVID-19 will impact the Company will depend on future developments, including severity and duration of the outbreak, actions taken by governmental authorities and timing of when relatively normal economic and operating conditions resume.
The regulated businesses have been deemed essential service providers and have seen some impacts on their businesses; however, the Company could be materially affected if its businesses were no longer deemed critical. Future actions of its regulatory commissions on accounting for COVID-19 pandemic impacts may also affect the Company's future operating results and cash flows. The Company has experienced some impacts to its commercial and industrial electric and natural gas loads associated with reduced economic demand from its customers due to the COVID-19 pandemic, partially offset by increased residential demand. Other factors that could have an impact on the Company's regulated businesses and future operating results, revenues and liquidity include impacts related to the health, safety, and availability of its employees and contractors; continued suspended shut-offs of natural gas in certain regions for nonpayment; continued flexible payment plans for utility customers; counterparty credit; costs and availability of supplies; capital construction and infrastructure operation and maintenance programs; financing plans; pension valuations; travel restrictions; and legal and regulatory matters, including the potential for delayed regulatory filings and recovery of invested capital.
The construction businesses have generally been deemed essential service providers and have seen some inefficiencies and interruptions on its businesses; however, the Company could be materially impacted if its businesses were no longer deemed critical. The Company has experienced some impacts to its public infrastructure work bid-letting, which is believed to be associated with reduced fuel, sales and other tax collections due to reduced economic activity and fuel consumption. These businesses could be further impacted in the future by site closures, government shut-down measures, additional inefficiencies due to compliance with safety and social distancing measures, public and private sector budget changes and constraints, and the impact of overall macro and local economic conditions on future construction projects. Other factors that could have an impact on the Company's construction businesses and future operating results, revenues and liquidity include impacts related to the health, safety, and availability of its employees and contractors; counterparty credit; costs and availability of supplies; financing plans; pension valuations; and travel restrictions.
The Company's operations have experienced some disruptions due to its employees or third-party employees being diagnosed with COVID-19 or other illnesses and required quarantine periods for those in close contact to COVID-19. Self-quarantine or actual viral health issues may have a negative impact on the Company's employees and the ability to continue its work activities under a normal course of business. Moreover, the diagnosis of COVID-19 or other illnesses could require the Company or its business partners to suspend projects, quarantine employees or institute more aggressive preventive measures including closure of job sites. Mandated healthcare protocols could lead to a shortage of employees or altered operations. If a significant percentage of the Company's workforce are unable to work, because of illness, quarantine or government restrictions in connection with the COVID-19 pandemic, the Company's operations may be negatively impacted, potentially materially adversely affecting its business, operations, revenues, liquidity and cash flows.
A portion of the Company's workforce has been working remotely and the Company has delayed return to work processes for certain office employees due to the rise in local COVID-19 cases in some operating regions. To date, the Company has not experienced any significant delays or information technology disruptions. However, the continued shift of a portion of the Company's workforce from an on-premise model to a remote model, along with the increased amount of social engineering and attacks by bad actors taking
advantage of the virus, could affect the Company's ability to maintain secure operations, communications and productivity in the future.
Significant changes in energy prices could negatively affect the Company's businesses.
Fluctuations in oil, NGL and natural gas production and prices; fluctuations in commodity price basis differentials; supplies of domestic and foreign oil, NGL and natural gas; political and economic conditions in oil-producing countries; actions of the Organization of Petroleum Exporting Countries; demand for oil due to economic slowdowns associated with the COVID-19 pandemic; and other external factors impact the development of oil and natural gas supplies and the expansion and operation of natural gas pipeline systems. The Company has continued to experience the effect of associated natural gas production in the Bakken, which has provided opportunities for organic growth projects and increased demand at the pipeline business. However, depressed oil and natural gas prices is putting pressure on customer's ability to meet credit requirements and will continue to be a challenge the longer prices remain depressed. Demand from certain industrial customers of the electric business have also been impacted by the depressed prices. Additionally, these impacts could extend to commercial and residential customers of the electric and natural gas distribution businesses located in service areas impacted by decreased oil and natural gas exploration and production activity. Prolonged depressed prices for oil, NGL and natural gas could negatively affect the growth, results of operations, cash flows and asset values of the Company's electric, natural gas distribution and pipeline businesses.
If oil and natural gas prices increase significantly, customer demand for utility, pipeline and construction materials could decline, which could have a material impact on the Company's results of operations and cash flows. While the Company has fuel clause recovery mechanisms for its utility operations in all of the states in which it operates, higher utility fuel costs could significantly impact results of operations if such costs are not recovered. Delays in the collection of utility fuel cost recoveries, as compared to expenditures for fuel purchases, could have a negative impact on the Company's cash flows. High oil prices also affect the cost and demand for asphalt products and related contracting services.
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 |
| Period | (a)
Total Number
of Shares
(or Units)
Purchased (1)
| (b)
| (b)
Average Price
Paid per Share
(or Unit)
| (c)
| (c)
Total Number of Shares
(or Units) Purchased
as Part of Publicly
Announced Plans
or Programs (2)
| (d)
| (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, 20192020 | — |
| — |
| — |
| — |
|
August 1 through August 31, 20192020 | — |
| — |
| — |
| — |
|
September 1 through September 30, 20192020 | — |
| — |
| — |
| — |
|
| Total | — |
| | — |
| — |
|
(1) Represents shares of common stock withheld by the Company 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.
| | |
(1) | Represents shares of common stock withheld by the Company 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 signature page to this report.
| | | | | | | | | | | | | | | | | | | | | | | |
| Exhibits Index |
| | | Incorporated by Reference |
| Exhibit Number | Exhibit Description | Filed
Herewith | Form | Period
Ended | Exhibit | Filing
Date | File Number |
| | | | | | | |
Exhibits Index |
| | | Incorporated by Reference |
Exhibit Number | Exhibit Description | Filed Herewith | Form | Period Ended | Exhibit | Filing Date | File Number |
| | | | | | | |
2(a)3(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)3(b) | | | 8-K | | 3.1 | 2/15/19 | 1-03480 |
*4(a)31(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 | | | | | | |
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* | 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. |
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+ | 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.
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.
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| | MDU RESOURCES GROUP, INC. |
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| DATE: | November 1, 20195, 2020 | BY: | /s/ Jason L. Vollmer |
| | | Jason L. Vollmer |
| | | Vice President, Chief Financial Officer
and Treasurer |
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| | | |
| | BY: | /s/ Stephanie A. Barth |
| | | Stephanie A. Barth |
| | | Vice President, Chief Accounting Officer
and Controller |