UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 20212022
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) 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 April 29, 2021: 201,194,53728, 2022: 203,350,740 shares.
Definitions
The following abbreviations and acronyms used in this Form 10-Q are defined below:
| | | | | |
| Abbreviation or Acronym | |
20202021 Annual Report | Company's Annual Report on Form 10-K for the year ended December 31, 20202021 |
| 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 |
| 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 former direct wholly owned subsidiary of Centennial |
| Company | MDU Resources Group, Inc. |
| COVID-19 | Coronavirus disease 2019. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic and the President of the United States declared the COVID-19 outbreak a national emergency. |
| 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) |
| 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 Montana-Dakota |
IBEW | International Brotherhood of Electrical Workers |
ICWU | International Chemical Workers Union |
| Intermountain | Intermountain Gas Company, an indirect wholly owned subsidiary of MDU Energy Capital |
IPUCIRS | Idaho Public Utilities CommissionInternal Revenue Service |
| Knife River | Knife River Corporation, a direct wholly owned subsidiary of Centennial |
| kWh | Kilowatt-hour |
| LIBOR | London Inter-bank Offered Rate |
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 |
| MISO | Midcontinent Independent System Operator, Inc., the organization that provides open-access transmission services and monitors the high-voltage transmission system in the Midwest United States and Manitoba, Canada and a southern United States region which includes much of Arkansas, Mississippi, and Louisiana. |
| MMcf | Million cubic feet |
| MMdk | Million dk |
| MNPUC | Minnesota Public Utilities Commission |
| Montana-Dakota | Montana-Dakota Utilities Co., a direct wholly owned subsidiary of MDU Energy Capital |
| MW | Megawatt |
| NDDEQ | North Dakota Department of Environmental Quality |
| | | | | |
| NDPSC | North Dakota Public Service Commission |
Non-GAAP | Not in accordance with GAAP |
| Oil | Includes crude oil and condensate |
| PHMSA | Pipeline and Hazardous Materials Safety Administration |
| | | | | |
| Regional Haze Rule | The EPA developed the Regional Haze Rule requiring states to develop and implement comprehensive plans to reduce human-caused regional haze in designated areas such as national parks and wilderness areas. |
| SDPUC | South Dakota Public Utilities Commission |
| SEC | United States Securities and Exchange Commission |
Securities Act | Securities Act of 1933, as amended |
| SOFR | Secured Overnight Financing Rate |
SPP | Southwest Power Pool, the organization that manages the electric grid and wholesale power market for the central United States. |
| VIE | Variable interest entity |
| Washington DOE | Washington State Department of Ecology |
| WBI Energy | WBI Energy, Inc., an indirect wholly owned subsidiary of WBI Holdings |
| WBI Holdings | WBI Holdings, Inc., a direct wholly owned subsidiary of Centennial |
| WUTC | Washington Utilities and Transportation Commission |
WYPSCWygen III | 100-MW coal-fired electric generating facility near Gillette, Wyoming Public Service Commission(25 percent ownership) |
Introduction
The Company is a regulated energy delivery and construction materials and services business. The organizational entity was originally incorporated as Montana-Dakota under the state laws of Delaware in 1924. Pursuant to an internal holding company reorganization completed on January 1, 2019, the Company was incorporated under the state laws 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.
Montana-Dakota was incorporated under the state laws of Delaware in 1924. The Company was incorporated under the state laws of Delaware in 2018 upon the completion of an internal holding company reorganization, which resulted in Montana-Dakota becoming a subsidiary of the Company.
The Company's mission is to deliver superior value to stakeholders by providing essential infrastructure and services to America. The Company's strategy is to deliver superior value with a two-platform model of regulated energy delivery and construction materials and services, businesses, while also pursuing organic growth opportunities and using a disciplined approach to strategic acquisitions of well-managed companies and properties.
The Company focuses on infrastructure and is Building a Strong America® by providing essential products and services through its regulated energy delivery platform and its construction materials and services platform, which Each of the Company's platforms are both comprised of different operating segments. Most of these segments experience seasonality related to the industries in which they operate. The two-platform approach helps balance this seasonality and the riskrisks associated with each type of industry. Through its regulated energy delivery platform, the Company generates, transmits and distributes electricity and provides natural gas distribution, transportation and storage services. These businesses are regulated by state public service commissions and/or the FERC. The construction materials and services platform provides construction services to a variety of industries, including commercial, industrial and governmentalutility customers, and provides construction materials through aggregate mining and marketing of related products, such as ready-mixedready-mix concrete, asphalt and asphalt oil.
The Company is organized into five reportable business segments. These business segments include: electric, natural gas distribution, pipeline, construction materials and contracting, and construction services. The Company's business segments are determined based on the Company's method of internal reporting, which generally segregates the strategic business units due to differences in products, services and regulation. The internal reporting of these segments is defined based on the reporting and review process used by the Company's chief executive officer.
The Company, through its wholly owned subsidiary, MDU Energy Capital, owns Montana-Dakota, Cascade and Intermountain. The electric segment is comprised of Montana-Dakota while the natural gas distribution segment is comprised of Montana-Dakota, Cascade and Intermountain.
The Company, through its wholly owned subsidiary, Centennial, owns WBI Holdings,Energy, Knife River, MDU Construction Services and Centennial Capital. WBI HoldingsEnergy is the pipeline segment, Knife River is the construction materials and contracting segment, MDU Construction Services is the construction services segment and Centennial Capital is reflected in the Other category.
For more information on the Company's business segments, see Note 17 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 | | | | Three Months Ended |
| | | March 31, | | | | March 31, |
| | | 2021 | 2020 | | | | 2022 | 2021 |
| | | (In thousands, except per share amounts) | | | (In thousands, except per share amounts) |
| Operating revenues: | Operating revenues: | | | Operating revenues: | | |
| Electric, natural gas distribution and regulated pipeline | Electric, natural gas distribution and regulated pipeline | $ | 442,381 | | $ | 418,682 | | | Electric, natural gas distribution and regulated pipeline | | $ | 553,456 | | $ | 442,381 | |
| Non-regulated pipeline, construction materials and contracting, construction services and other | Non-regulated pipeline, construction materials and contracting, construction services and other | 785,557 | | 778,691 | | | Non-regulated pipeline, construction materials and contracting, construction services and other | | 863,103 | | 785,557 | |
| Total operating revenues | Total operating revenues | 1,227,938 | | 1,197,373 | | | Total operating revenues | | 1,416,559 | | 1,227,938 | |
| Operating expenses: | Operating expenses: | | | Operating expenses: | | |
| Operation and maintenance: | Operation and maintenance: | | | Operation and maintenance: | | |
| Electric, natural gas distribution and regulated pipeline | Electric, natural gas distribution and regulated pipeline | 94,333 | | 87,608 | | | Electric, natural gas distribution and regulated pipeline | | 97,665 | | 94,333 | |
| Non-regulated pipeline, construction materials and contracting, construction services and other | Non-regulated pipeline, construction materials and contracting, construction services and other | 717,326 | | 733,392 | | | Non-regulated pipeline, construction materials and contracting, construction services and other | | 810,232 | | 717,326 | |
| Total operation and maintenance | Total operation and maintenance | 811,659 | | 821,000 | | | Total operation and maintenance | | 907,897 | | 811,659 | |
| Purchased natural gas sold | Purchased natural gas sold | 176,237 | | 165,412 | | | Purchased natural gas sold | | 267,353 | | 176,237 | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 73,723 | | 69,239 | | | Depreciation, depletion and amortization | | 80,121 | | 73,723 | |
| Taxes, other than income | Taxes, other than income | 62,534 | | 64,112 | | | Taxes, other than income | | 67,484 | | 62,534 | |
| Electric fuel and purchased power | Electric fuel and purchased power | 18,621 | | 20,540 | | | Electric fuel and purchased power | | 26,361 | | 18,621 | |
| Total operating expenses | Total operating expenses | 1,142,774 | | 1,140,303 | | | Total operating expenses | | 1,349,216 | | 1,142,774 | |
| Operating income | Operating income | 85,164 | | 57,070 | | | Operating income | | 67,343 | | 85,164 | |
| Other income (expense) | Other income (expense) | 3,354 | | (1,005) | | | Other income (expense) | | (2,400) | | 3,354 | |
| Interest expense | Interest expense | 23,453 | | 24,553 | | | Interest expense | | 25,260 | | 23,453 | |
| Income before income taxes | Income before income taxes | 65,065 | | 31,512 | | | Income before income taxes | | 39,683 | | 65,065 | |
| Income taxes | Income taxes | 12,949 | | 5,973 | | | Income taxes | | 7,950 | | 12,949 | |
| Income from continuing operations | Income from continuing operations | 52,116 | | 25,539 | | | Income from continuing operations | | 31,733 | | 52,116 | |
| Income (loss) from discontinued operations, net of tax | 15 | | (409) | | | |
| Income from discontinued operations, net of tax | | Income from discontinued operations, net of tax | | 30 | | 15 | |
| Net income | Net income | $ | 52,131 | | $ | 25,130 | | | Net income | | $ | 31,763 | | $ | 52,131 | |
| Earnings per share - basic: | Earnings per share - basic: | | | Earnings per share - basic: | | |
| Income from continuing operations | Income from continuing operations | $ | .26 | | $ | .13 | | | Income from continuing operations | | $ | .16 | | $ | .26 | |
| Discontinued operations, net of tax | Discontinued operations, net of tax | 0 | | 0 | | | Discontinued operations, net of tax | | — | | — | |
| Earnings per share - basic | Earnings per share - basic | $ | .26 | | $ | .13 | | | Earnings per share - basic | | $ | .16 | | $ | .26 | |
| Earnings per share - diluted: | Earnings per share - diluted: | | | Earnings per share - diluted: | | |
| Income from continuing operations | Income from continuing operations | $ | .26 | | $ | .13 | | | Income from continuing operations | | $ | .16 | | $ | .26 | |
| Discontinued operations, net of tax | Discontinued operations, net of tax | 0 | | 0 | | | Discontinued operations, net of tax | | — | | — | |
| Earnings per share - diluted | Earnings per share - diluted | $ | .26 | | $ | .13 | | | Earnings per share - diluted | | $ | .16 | | $ | .26 | |
| Weighted average common shares outstanding - basic | Weighted average common shares outstanding - basic | 200,708 | | 200,440 | | | Weighted average common shares outstanding - basic | | 203,351 | | 200,708 | |
| Weighted average common shares outstanding - diluted | Weighted average common shares outstanding - diluted | 200,952 | | 200,456 | | | Weighted average common shares outstanding - diluted | | 203,391 | | 200,952 | |
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 | | | Three Months Ended |
| | | | | March 31, | | | | March 31, |
| | | | | 2021 | 2020 | | | | 2022 | 2021 |
| | | | | (In thousands) | | | | (In thousands) |
| Net income | Net income | | | $ | 52,131 | | $ | 25,130 | | Net income | | | $ | 31,763 | | $ | 52,131 | |
| Other comprehensive income: | Other comprehensive income: | | | | Other comprehensive income: | | | |
| Reclassification adjustment for loss on derivative instruments included in net income, net of tax of $37 and $36 for the three months ended in 2021 and 2020, respectively | | | 111 | | 111 | | |
| Amortization of postretirement liability losses included in net periodic benefit cost, net of tax of $151 and $149 for the three months ended in 2021 and 2020, respectively | | | 466 | | 462 | | |
| 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 $(12) and $36 for the three months ended in 2021 and 2020, respectively | | | (44) | | 135 | | |
| Reclassification adjustment for (gain) loss on available-for-sale investments included in net income, net of tax of $9 and $0 for the three months ended in 2021 and 2020, respectively | | | 35 | | (1) | | |
| Net unrealized gain (loss) on available-for-sale investments | | | (9) | | 134 | | |
| Reclassification adjustment for loss on derivative instruments included in net income, net of tax of $36 and $37 for the three months ended in 2022 and 2021, respectively | | Reclassification adjustment for loss on derivative instruments included in net income, net of tax of $36 and $37 for the three months ended in 2022 and 2021, respectively | | | 112 | | 111 | |
| Amortization of postretirement liability losses included in net periodic benefit credit, net of tax of $164 and $151 for the three months ended in 2022 and 2021, respectively | | Amortization of postretirement liability losses included in net periodic benefit credit, net of tax of $164 and $151 for the three months ended in 2022 and 2021, respectively | | | 445 | | 466 | |
| Net unrealized loss on available-for-sale investments: | | Net unrealized loss on available-for-sale investments: | | | |
| Net unrealized loss on available-for-sale investments arising during the period, net of tax of $(85) and $(12) for the three months ended in 2022 and 2021, respectively | | Net unrealized loss on available-for-sale investments arising during the period, net of tax of $(85) and $(12) for the three months ended in 2022 and 2021, respectively | | | (320) | | (44) | |
| Reclassification adjustment for loss on available-for-sale investments included in net income, net of tax of $8 and $9 for the three months ended in 2022 and 2021, respectively | | Reclassification adjustment for loss on available-for-sale investments included in net income, net of tax of $8 and $9 for the three months ended in 2022 and 2021, respectively | | | 32 | | 35 | |
| Net unrealized loss on available-for-sale investments | | Net unrealized loss on available-for-sale investments | | | (288) | | (9) | |
| Other comprehensive income | Other comprehensive income | | | 568 | | 707 | | Other comprehensive income | | | 269 | | 568 | |
| Comprehensive income attributable to common stockholders | Comprehensive income attributable to common stockholders | | | $ | 52,699 | | $ | 25,837 | | Comprehensive income attributable to common stockholders | | | $ | 32,032 | | $ | 52,699 | |
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) |
| | | March 31, 2021 | March 31, 2020 | December 31, 2020 | | March 31, 2022 | March 31, 2021 | December 31, 2021 |
| Assets | Assets | (In thousands, except shares and per share amounts) | Assets | (In thousands, except shares and per share amounts) |
| Current assets: | Current assets: | | Current assets: | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 55,094 | | $ | 116,526 | | $ | 59,547 | | Cash and cash equivalents | $ | 64,904 | | $ | 55,094 | | $ | 54,161 | |
| Receivables, net | Receivables, net | 784,582 | | 835,468 | | 873,986 | | Receivables, net | 948,024 | | 784,582 | | 946,741 | |
| Inventories | Inventories | 316,737 | | 305,958 | | 291,167 | | Inventories | 380,316 | | 316,737 | | 335,609 | |
| Current regulatory assets | Current regulatory assets | 98,452 | | 55,206 | | 68,527 | | Current regulatory assets | 89,078 | | 98,452 | | 118,691 | |
| Prepayments and other current assets | Prepayments and other current assets | 68,409 | | 60,230 | | 44,120 | | Prepayments and other current assets | 89,586 | | 68,409 | | 95,741 | |
| Total current assets | Total current assets | 1,323,274 | | 1,373,388 | | 1,337,347 | | Total current assets | 1,571,908 | | 1,323,274 | | 1,550,943 | |
| Noncurrent assets: | Noncurrent assets: | | Noncurrent assets: | |
| Property, plant and equipment | Property, plant and equipment | 8,288,879 | | 8,008,338 | | 8,300,770 | | Property, plant and equipment | 8,958,600 | | 8,288,879 | | 8,972,849 | |
| Less accumulated depreciation, depletion and amortization | Less accumulated depreciation, depletion and amortization | 3,096,371 | | 3,039,812 | | 3,133,831 | | Less accumulated depreciation, depletion and amortization | 3,158,091 | | 3,096,371 | | 3,216,461 | |
| Net property, plant and equipment | Net property, plant and equipment | 5,192,508 | | 4,968,526 | | 5,166,939 | | Net property, plant and equipment | 5,800,509 | | 5,192,508 | | 5,756,388 | |
| Goodwill | Goodwill | 714,963 | | 713,527 | | 714,963 | | Goodwill | 763,262 | | 714,963 | | 765,386 | |
| Other intangible assets, net | Other intangible assets, net | 23,961 | | 34,250 | | 25,496 | | Other intangible assets, net | 21,389 | | 23,961 | | 22,578 | |
| Regulatory assets | Regulatory assets | 379,917 | | 348,189 | | 379,381 | | Regulatory assets | 359,228 | | 379,917 | | 357,851 | |
| Investments | Investments | 167,741 | | 145,237 | | 165,022 | | Investments | 174,555 | | 167,741 | | 175,476 | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | 116,663 | | 114,382 | | 120,113 | | Operating lease right-of-use assets | 119,845 | | 116,663 | | 124,138 | |
| Other | Other | 150,248 | | 153,017 | | 144,111 | | Other | 160,019 | | 150,248 | | 157,675 | |
| Total noncurrent assets | Total noncurrent assets | 6,746,001 | | 6,477,128 | | 6,716,025 | | Total noncurrent assets | 7,398,807 | | 6,746,001 | | 7,359,492 | |
| Total assets | Total assets | $ | 8,069,275 | | $ | 7,850,516 | | $ | 8,053,372 | | Total assets | $ | 8,970,715 | | $ | 8,069,275 | | $ | 8,910,435 | |
| Liabilities and Stockholders' Equity | Liabilities and Stockholders' Equity | | Liabilities and Stockholders' Equity | |
| Current liabilities: | Current liabilities: | | Current liabilities: | |
| Short-term borrowings | Short-term borrowings | $ | 50,000 | | $ | 0 | | $ | 50,000 | | Short-term borrowings | $ | 99,958 | | $ | 50,000 | | $ | — | |
| Long-term debt due within one year | Long-term debt due within one year | 1,552 | | 16,560 | | 1,555 | | Long-term debt due within one year | 147,953 | | 1,552 | | 148,053 | |
| Accounts payable | Accounts payable | 379,348 | | 384,339 | | 426,264 | | Accounts payable | 449,746 | | 379,348 | | 478,933 | |
| Taxes payable | Taxes payable | 88,711 | | 58,743 | | 88,844 | | Taxes payable | 90,572 | | 88,711 | | 80,372 | |
| Dividends payable | Dividends payable | 42,740 | | 41,608 | | 42,611 | | Dividends payable | 44,229 | | 42,740 | | 44,229 | |
| Accrued compensation | Accrued compensation | 69,612 | | 55,199 | | 90,629 | | Accrued compensation | 64,796 | | 69,612 | | 81,904 | |
| Operating lease liabilities due within one year | | Operating lease liabilities due within one year | 34,618 | | 32,562 | | 35,368 | |
| Regulatory liabilities due within one year | Regulatory liabilities due within one year | 34,266 | | 60,072 | | 31,450 | | Regulatory liabilities due within one year | 31,186 | | 34,266 | | 16,303 | |
| Operating lease liabilities due within one year | 32,562 | | 31,141 | | 33,655 | | |
| Other accrued liabilities | Other accrued liabilities | 201,246 | | 176,817 | | 198,514 | | Other accrued liabilities | 203,670 | | 201,246 | | 207,078 | |
| Total current liabilities | Total current liabilities | 900,037 | | 824,479 | | 963,522 | | Total current liabilities | 1,166,728 | | 900,037 | | 1,092,240 | |
| Noncurrent liabilities: | Noncurrent liabilities: | | Noncurrent liabilities: | |
| Long-term debt | Long-term debt | 2,251,722 | | 2,438,675 | | 2,211,575 | | Long-term debt | 2,599,810 | | 2,251,722 | | 2,593,847 | |
| Deferred income taxes | Deferred income taxes | 528,551 | | 515,711 | | 516,098 | | Deferred income taxes | 587,940 | | 528,551 | | 591,962 | |
| Asset retirement obligations | | Asset retirement obligations | 463,080 | | 445,170 | | 458,061 | |
| Regulatory liabilities | Regulatory liabilities | 429,060 | | 443,205 | | 428,075 | | Regulatory liabilities | 433,628 | | 429,060 | | 428,790 | |
| Asset retirement obligations | 445,170 | | 417,469 | | 440,356 | | |
| Operating lease liabilities | Operating lease liabilities | 84,494 | | 83,414 | | 86,868 | | Operating lease liabilities | 85,874 | | 84,494 | | 89,253 | |
| Other | Other | 329,935 | | 290,971 | | 327,773 | | Other | 272,937 | | 329,935 | | 273,408 | |
| Total noncurrent liabilities | Total noncurrent liabilities | 4,068,932 | | 4,189,445 | | 4,010,745 | | Total noncurrent liabilities | 4,443,269 | | 4,068,932 | | 4,435,321 | |
| Commitments and contingencies | Commitments and contingencies | 0 | Commitments and contingencies | 0 |
Stockholders' equity: | Stockholders' equity: | | Stockholders' equity: | |
Common stock Authorized - 500,000,000 shares, $1.00 par value Shares issued - 201,733,458 at March 31, 2021, 201,061,198 at March 31, 2020 and 201,061,198 at December 31, 2020 | 201,733 | | 201,061 | | 201,061 | | |
Common stock Authorized - 500,000,000 shares, $1.00 par value Shares issued - 203,889,661 at March 31, 2022, 201,733,458 at March 31, 2021 and 203,889,661 at December 31, 2021 | | Common stock Authorized - 500,000,000 shares, $1.00 par value Shares issued - 203,889,661 at March 31, 2022, 201,733,458 at March 31, 2021 and 203,889,661 at December 31, 2021 | 203,889 | | 201,733 | | 203,889 | |
| Other paid-in capital | Other paid-in capital | 1,382,158 | | 1,360,564 | | 1,371,385 | | Other paid-in capital | 1,451,464 | | 1,382,158 | | 1,461,205 | |
| Retained earnings | Retained earnings | 1,567,551 | | 1,319,988 | | 1,558,363 | | Retained earnings | 1,749,726 | | 1,567,551 | | 1,762,410 | |
| Accumulated other comprehensive loss | Accumulated other comprehensive loss | (47,510) | | (41,395) | | (48,078) | | Accumulated other comprehensive loss | (40,735) | | (47,510) | | (41,004) | |
| Treasury stock at cost - 538,921 shares | 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 | Total stockholders' equity | 3,100,306 | | 2,836,592 | | 3,079,105 | | Total stockholders' equity | 3,360,718 | | 3,100,306 | | 3,382,874 | |
| Total liabilities and stockholders' equity | Total liabilities and stockholders' equity | $ | 8,069,275 | | $ | 7,850,516 | | $ | 8,053,372 | | Total liabilities and stockholders' equity | $ | 8,970,715 | | $ | 8,069,275 | | $ | 8,910,435 | |
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 Equity | Consolidated Statements of Equity | Consolidated Statements of Equity |
| (Unaudited) | (Unaudited) | (Unaudited) |
| | Other
Paid-in
Capital | Retained Earnings | Accumu-lated
Other
Compre-hensive
Loss | | | Other
Paid-in
Capital | Retained Earnings | Accumu-lated
Other
Compre-hensive
Loss | |
| | Common Stock | Treasury Stock | | | Common Stock | Treasury Stock | |
| | Shares | Amount | Shares | Amount | Total | | Shares | Amount | Shares | Amount | Total |
| | | (In thousands, except shares) | | (In thousands, except shares) |
| At December 31, 2020 | 201,061,198 | | $ | 201,061 | | $ | 1,371,385 | | $ | 1,558,363 | | $ | (48,078) | | (538,921) | | $ | (3,626) | | $ | 3,079,105 | | |
| At December 31, 2021 | | At December 31, 2021 | 203,889,661 | | $ | 203,889 | | $ | 1,461,205 | | $ | 1,762,410 | | $ | (41,004) | | (538,921) | | $ | (3,626) | | $ | 3,382,874 | |
| Net income | Net income | — | | — | | — | | 52,131 | | — | | — | | — | | 52,131 | | Net income | — | | — | | — | | 31,763 | | — | | — | | — | | 31,763 | |
| Other comprehensive income | Other comprehensive income | — | | — | | — | | — | | 568 | | — | | — | | 568 | | Other comprehensive income | — | | — | | — | | — | | 269 | | — | | — | | 269 | |
| Dividends declared on common stock | Dividends declared on common stock | — | | — | | — | | (42,943) | | — | | — | | — | | (42,943) | | Dividends declared on common stock | — | | — | | — | | (44,447) | | — | | — | | — | | (44,447) | |
| Stock-based compensation | Stock-based compensation | — | | — | | 2,574 | | — | | — | | — | | — | | 2,574 | | Stock-based compensation | — | | — | | 2,689 | | — | | — | | — | | — | | 2,689 | |
| Repurchase of common stock | Repurchase of common stock | — | | — | | — | | — | | — | | (392,294) | | (6,701) | | (6,701) | | Repurchase of common stock | — | | — | | — | | — | | — | | (266,821) | | (7,399) | | (7,399) | |
| Issuance of common stock upon vesting of stock-based compensation, net of shares used for tax withholdings | Issuance of common stock upon vesting of stock-based compensation, net of shares used for tax withholdings | — | | — | | (10,828) | | — | | — | | 392,294 | | 6,701 | | (4,127) | | Issuance of common stock upon vesting of stock-based compensation, net of shares used for tax withholdings | — | | — | | (12,303) | | — | | — | | 266,821 | | 7,399 | | (4,904) | |
| Issuance of common stock | Issuance of common stock | 672,260 | | 672 | | 19,027 | | — | | — | | — | | — | | 19,699 | | Issuance of common stock | — | | — | | (127) | | — | | — | | — | | — | | (127) | |
| At March 31, 2021 | 201,733,458 | | $ | 201,733 | | $ | 1,382,158 | | $ | 1,567,551 | | $ | (47,510) | | (538,921) | | $ | (3,626) | | $ | 3,100,306 | | |
| At March 31, 2022 | | At March 31, 2022 | 203,889,661 | | $ | 203,889 | | $ | 1,451,464 | | $ | 1,749,726 | | $ | (40,735) | | (538,921) | | $ | (3,626) | | $ | 3,360,718 | |
| | | | | Other
Paid-in
Capital | Retained Earnings | Accumu-lated
Other
Compre-hensive
Loss | | | | Other
Paid-in
Capital | Retained Earnings | Accumu-lated
Other
Compre-hensive
Loss | |
| | | Common Stock | Treasury Stock | | | | Accumu-lated
Other
Compre-hensive
Loss | Common Stock | Treasury Stock | |
| | | Shares | Amount | Shares | Amount | Total | | Accumu-lated
Other
Compre-hensive
Loss | Shares | Amount | Shares | Amount | Total |
| | | | (In thousands, except shares) | | | (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 | | |
| At December 31, 2020 | | At December 31, 2020 | | 201,061,198 | | $ | 201,061 | | $ | 1,371,385 | | $ | 1,558,363 | | $ | (48,078) | | (538,921) | | $ | (3,626) | | $ | 3,079,105 | |
| Net income | Net income | | — | | — | | — | | 25,130 | | — | | — | | — | | 25,130 | | Net income | | — | | — | | — | | 52,131 | | — | | — | | — | | 52,131 | |
| Other comprehensive income | Other comprehensive income | | — | | — | | — | | — | | 707 | | — | | — | | 707 | | Other comprehensive income | | — | | — | | — | | — | | 568 | | — | | — | | 568 | |
| Dividends declared on common stock | Dividends declared on common stock | | — | | — | | — | | (41,789) | | — | | — | | — | | (41,789) | | Dividends declared on common stock | | — | | — | | — | | (42,943) | | — | | — | | — | | (42,943) | |
| Stock-based compensation | Stock-based compensation | | — | | — | | 2,250 | | — | | — | | — | | — | | 2,250 | | Stock-based compensation | | — | | — | | 2,574 | | — | | — | | — | | — | | 2,574 | |
| Repurchase of common stock | | Repurchase of common stock | | — | | — | | — | | — | | — | | (392,294) | | (6,701) | | (6,701) | |
| Issuance of common stock upon vesting of stock-based compensation, net of shares used for tax withholdings | 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 upon vesting of stock-based compensation, net of shares used for tax withholdings | | — | | — | | (10,828) | | — | | — | | 392,294 | | 6,701 | | (4,127) | |
| Issuance of common stock | Issuance of common stock | | 112,002 | | 112 | | 3,298 | | — | | — | | — | | — | | 3,410 | | Issuance of common stock | | 672,260 | | 672 | | 19,027 | | — | | — | | — | | — | | 19,699 | |
| At March 31, 2020 | | 201,061,198 | | $ | 201,061 | | $ | 1,360,564 | | $ | 1,319,988 | | $ | (41,395) | | (538,921) | | $ | (3,626) | | $ | 2,836,592 | | |
| At March 31, 2021 | | At March 31, 2021 | | 201,733,458 | | $ | 201,733 | | $ | 1,382,158 | | $ | 1,567,551 | | $ | (47,510) | | (538,921) | | $ | (3,626) | | $ | 3,100,306 | |
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 Cash Flows | Consolidated Statements of Cash Flows | Consolidated Statements of Cash Flows |
| (Unaudited) | (Unaudited) | (Unaudited) |
| | Three Months Ended | | Three Months Ended |
| | | March 31, | | March 31, |
| | | 2021 | 2020 | | 2022 | 2021 |
| | | (In thousands) | | (In thousands) |
| Operating activities: | Operating activities: | | Operating activities: | |
| Net income | Net income | $ | 52,131 | | $ | 25,130 | | Net income | $ | 31,763 | | $ | 52,131 | |
| Income (loss) from discontinued operations, net of tax | 15 | | (409) | | |
| Income from discontinued operations, net of tax | | Income from discontinued operations, net of tax | 30 | | 15 | |
| Income from continuing operations | Income from continuing operations | 52,116 | | 25,539 | | Income from continuing operations | 31,733 | | 52,116 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 73,723 | | 69,239 | | Depreciation, depletion and amortization | 80,121 | | 73,723 | |
| Deferred income taxes | Deferred income taxes | 9,843 | | 1,813 | | Deferred income taxes | (6,466) | | 9,843 | |
| Provision for credit losses | | Provision for credit losses | 1,735 | | (317) | |
| Amortization of debt issuance costs | | Amortization of debt issuance costs | 341 | | 332 | |
| Employee stock-based compensation costs | | Employee stock-based compensation costs | 2,689 | | 2,574 | |
| Pension & postretirement benefit plan net periodic benefit credit | | Pension & postretirement benefit plan net periodic benefit credit | (1,491) | | (1,226) | |
| Unrealized losses on investments | | Unrealized losses on investments | 5,147 | | 529 | |
| Gains on sales of assets | | Gains on sales of assets | (3,136) | | (2,919) | |
| Changes in current assets and liabilities, net of acquisitions: | Changes in current assets and liabilities, net of acquisitions: | | | Changes in current assets and liabilities, net of acquisitions: | | |
| Receivables | Receivables | 89,407 | | 44,549 | | Receivables | (5,723) | | 89,724 | |
| Inventories | Inventories | (25,613) | | (29,337) | | Inventories | (44,080) | | (25,613) | |
| Other current assets | Other current assets | (46,837) | | 14,959 | | Other current assets | 34,491 | | (46,837) | |
| Accounts payable | Accounts payable | (41,965) | | (24,105) | | Accounts payable | 2,980 | | (41,965) | |
| Other current liabilities | Other current liabilities | (13,977) | | (23,259) | | Other current liabilities | 13,086 | | (13,977) | |
| Pension & postretirement benefit plan contributions | | Pension & postretirement benefit plan contributions | (149) | | (119) | |
| Other noncurrent changes | Other noncurrent changes | (1,052) | | 326 | | Other noncurrent changes | 1,139 | | (223) | |
| Net cash provided by continuing operations | Net cash provided by continuing operations | 95,645 | | 79,724 | | Net cash provided by continuing operations | 112,417 | | 95,645 | |
| Net cash used in discontinued operations | Net cash used in discontinued operations | (25) | | (434) | | Net cash used in discontinued operations | (7) | | (25) | |
| Net cash provided by operating activities | Net cash provided by operating activities | 95,620 | | 79,290 | | Net cash provided by operating activities | 112,410 | | 95,620 | |
| Investing activities: | Investing activities: | | Investing activities: | |
| Capital expenditures | Capital expenditures | (111,091) | | (139,485) | | Capital expenditures | (150,288) | | (111,091) | |
| Acquisitions, net of cash acquired | Acquisitions, net of cash acquired | (1,023) | | (67,593) | | Acquisitions, net of cash acquired | (524) | | (1,023) | |
| Net proceeds from sale or disposition of property and other | Net proceeds from sale or disposition of property and other | 9,035 | | 4,540 | | Net proceeds from sale or disposition of property and other | 4,586 | | 9,035 | |
| Investments | Investments | (3,248) | | 68 | | Investments | (4,442) | | (3,248) | |
| Net cash used in investing activities | Net cash used in investing activities | (106,327) | | (202,470) | | Net cash used in investing activities | (150,668) | | (106,327) | |
| Financing activities: | Financing activities: | | Financing activities: | |
| Issuance of short-term borrowings | Issuance of short-term borrowings | 50,000 | | 0 | | Issuance of short-term borrowings | 100,000 | | 50,000 | |
| Repayment of short-term borrowings | Repayment of short-term borrowings | (50,000) | | 0 | | Repayment of short-term borrowings | — | | (50,000) | |
| Issuance of long-term debt | Issuance of long-term debt | 93,295 | | 248,021 | | Issuance of long-term debt | 150,000 | | 93,298 | |
| Repayment of long-term debt | Repayment of long-term debt | (53,301) | | (36,242) | | Repayment of long-term debt | (143,622) | | (53,301) | |
| Proceeds from issuance of common stock | 19,699 | | 3,410 | | |
| Debt issuance costs | | Debt issuance costs | (718) | | (3) | |
| Net proceeds from issuance of common stock | | Net proceeds from issuance of common stock | (127) | | 19,699 | |
| Dividends paid | Dividends paid | (42,611) | | (41,580) | | Dividends paid | (44,229) | | (42,611) | |
| Repurchase of common stock | Repurchase of common stock | (6,701) | | 0 | | Repurchase of common stock | (7,399) | | (6,701) | |
| Tax withholding on stock-based compensation | Tax withholding on stock-based compensation | (4,127) | | (362) | | Tax withholding on stock-based compensation | (4,904) | | (4,127) | |
| Net cash provided by financing activities | Net cash provided by financing activities | 6,254 | | 173,247 | | Net cash provided by financing activities | 49,001 | | 6,254 | |
| Increase (decrease) in cash and cash equivalents | Increase (decrease) in cash and cash equivalents | (4,453) | | 50,067 | | Increase (decrease) in cash and cash equivalents | 10,743 | | (4,453) | |
| Cash and cash equivalents -- beginning of year | Cash and cash equivalents -- beginning of year | 59,547 | | 66,459 | | Cash and cash equivalents -- beginning of year | 54,161 | | 59,547 | |
| Cash and cash equivalents -- end of period | Cash and cash equivalents -- end of period | $ | 55,094 | | $ | 116,526 | | Cash and cash equivalents -- end of period | $ | 64,904 | | $ | 55,094 | |
The accompanying notes are an integral part of these consolidated financial statements.
MDU Resources Group, Inc.
Notes to Consolidated
Financial Statements
March 31, 20212022 and 20202021
(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 20202021 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.
Beginning in March 2020, 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 generally been allowed to continue. The Company has experienced some inefficiency impacts as a result of the COVID-19 pandemic, 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 months ended March 31, 2021 and 2020, and determined there were no material adverse impacts.
The assets and liabilities of 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 and supporting activities are shown in income (loss) from discontinued operations on the 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.
In the fourth quarter of 2021, the Company made changes to the presentation of the Consolidated Statements of Cash Flows to provide further clarity on the sources and uses of net cash provided by operating activities and net cash provided by (used in) financing activities. Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications did not impact total net cash provided by operating activities or net cash provided by financing activities for the three months ended March 31, 2021.
Management has also evaluated the impact of events occurring after March 31, 2021,2022, up to the date of the issuance of these consolidated interim financial statements on May 6, 2021,5, 2022, that would require recognition or disclosure in the financial statements.Consolidated Financial Statements.
Note 2 - New accounting standards
Recently adoptedThe following table provides a brief description of the accounting standards
ASU 2018-14 - Changespronouncements applicable 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)Company and the effects a one percentage point change in assumed health care cost trend rates will have on certain benefit components. The Company adopted the guidance on January 1, 2021, on a retrospective basis. The Company determined the new guidance will not materially impact its consolidated financial statement 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 Company adopted the guidance on January 1, 2021, and determined it did not have a materialpotential impact on its results of operations, financial position, cash flows Consolidated Financial Statements and/or disclosures.disclosures:
Recently issued accounting standards not yet adopted
ASU 2020-04 - Reference 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 other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. LIBOR is expected to be retired with a full phase-out by the end of 2021 and replaced by a new reference rate, which includes SOFR. The guidance can be applied beginning in the interim period that includes March 12, 2020, and cannot be applied to contract modifications or hedging relationships entered into or evaluated after December 31, 2022. The Company has updated its credit agreements to include language regarding the successor or alternate rate to LIBOR, and a review of other contracts and agreements is on-going. The Company does not expect the guidance to have a material impact on its results of operations, financial position, cash flows or disclosures.
| | | | | | | | | | | |
| Standard | Description | Effective date | Impact on financial statements/disclosures |
| ASU 2021-10 - Government Assistance | In November 2021, the FASB issued guidance on modifying the disclosure requirements to increase the transparency of government assistance including disclosure of the types of assistance, an entity's accounting for the assistance and the effect of the assistance on an entity's financial statements. | January 1, 2022 | The Company is currently evaluating the impact the guidance will have on its disclosures for the year ended December 31, 2022. |
| ASU 2020-04 - Reference 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 other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Beginning January 1, 2022, LIBOR or other discontinued reference rates cannot be applied to new contracts. New contracts will incorporate a new reference rate, which includes SOFR. LIBOR or other discontinued reference rates cannot be applied to contract modifications or hedging relationships entered into or evaluated after December 31, 2022. Existing contracts referencing LIBOR or other reference rates expected to be discontinued must identify a replacement rate by June 30, 2023. | Effective as of March 12, 2020 and will continue through December 31, 2022 | The Company has updated its credit agreements to include language regarding the successor or alternate rate to LIBOR, and a review of other contracts and agreements is on-going. The Company does not expect the guidance to have a material impact on its results of operations, financial position, cash flows or disclosures. |
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 9. The Company's trade receivables are all due in 12 months or less. The total balance of receivables past due 90 days or more was $50.7 million, $33.9 million $51.8 million and $43.9$44.8 million at March 31, 20212022 and 2020,2021, and December 31, 2020,2021, respectively.
The Company's expected credit losses are determined through a review using historical credit loss experience,experience; changes in asset specific characteristics,characteristics; current conditionsconditions; 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, and impacts of COVID-19, among others. Specific account balances are written off when management determines the amounts to be uncollectible. Management has reviewed the balance reserved through the allowance for expected credit losses and believes it is reasonable.
Details of the Company's expected credit losses were as follows:
| | | Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Total | | Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Total |
| | | (In thousands) | | (In thousands) |
| At December 31, 2020 | $ | 899 | | $ | 2,571 | | $ | 2 | | $ | 6,164 | | $ | 5,722 | | $ | 15,358 | | |
| At December 31, 2021 | | At December 31, 2021 | $ | 269 | | $ | 1,506 | | $ | 2 | | $ | 5,406 | | $ | 2,533 | | $ | 9,716 | |
| Current expected credit loss provision | Current expected credit loss provision | 538 | | 1,273 | | 0 | | (1,049) | | (1,079) | | (317) | | Current expected credit loss provision | 565 | | 1,369 | | — | | (253) | | 54 | | 1,735 | |
| Less write-offs charged against the allowance | Less write-offs charged against the allowance | 888 | | 1,107 | | 0 | | 273 | | 401 | | 2,669 | | Less write-offs charged against the allowance | 597 | | 932 | | — | | 27 | | 71 | | 1,627 | |
| Credit loss recoveries collected | Credit loss recoveries collected | 129 | | 213 | | 0 | | 0 | | 0 | | 342 | | Credit loss recoveries collected | 124 | | 180 | | — | | — | | 28 | | 332 | |
| At March 31, 2021 | $ | 678 | | $ | 2,950 | | $ | 2 | | $ | 4,842 | | $ | 4,242 | | $ | 12,714 | | |
| At March 31, 2022 | | At March 31, 2022 | $ | 361 | | $ | 2,123 | | $ | 2 | | $ | 5,126 | | $ | 2,544 | | $ | 10,156 | |
|
| | | Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Total | | Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Total |
| | | (In thousands) | | (In thousands) |
| At January 1, 2020 | $ | 328 | | $ | 1,056 | | $ | 0 | | $ | 5,357 | | $ | 1,756 | | $ | 8,497 | | |
| At December 31, 2020 | | At December 31, 2020 | $ | 899 | | $ | 2,571 | | $ | 2 | | $ | 6,164 | | $ | 5,722 | | $ | 15,358 | |
| Current expected credit loss provision | Current expected credit loss provision | 555 | | 1,156 | | 0 | | 694 | | 1,150 | | 3,555 | | Current expected credit loss provision | 538 | | 1,273 | | — | | (1,049) | | (1,079) | | (317) | |
| Less write-offs charged against the allowance | Less write-offs charged against the allowance | 500 | | 624 | | 0 | | 68 | | 73 | | 1,265 | | Less write-offs charged against the allowance | 888 | | 1,107 | | — | | 273 | | 401 | | 2,669 | |
| Credit loss recoveries collected | Credit loss recoveries collected | 109 | | 229 | | 0 | | 0 | | 0 | | 338 | | Credit loss recoveries collected | 129 | | 213 | | — | | — | | — | | 342 | |
| At March 31, 2020 | $ | 492 | | $ | 1,817 | | $ | 0 | | $ | 5,983 | | $ | 2,833 | | $ | 11,125 | | |
| At March 31, 2021 | | At March 31, 2021 | $ | 678 | | $ | 2,950 | | $ | 2 | | $ | 4,842 | | $ | 4,242 | | $ | 12,714 | |
|
Note 5 - Inventories and natural gas in storage
Natural gas in storage for the Company's regulated operations is generally valued at lower of cost or market using the last-in, first-out method or lower of cost or net realizable value using the average cost or first-in, first-out method. The majority of all other inventories are valued at the lower of cost or net realizable value using the average cost method. The portion of the cost of natural gas in storage expected to be used within 12 months was included in inventories. Inventories on the Consolidated Balance Sheets were as follows:
| | | | March 31, 2021 | March 31, 2020 | December 31, 2020 | | March 31, 2022 | March 31, 2021 | December 31, 2021 |
| | | (In thousands) | | (In thousands) |
| Aggregates held for resale | Aggregates held for resale | $ | 180,450 | | $ | 155,976 | | $ | 175,782 | | Aggregates held for resale | $ | 195,489 | | $ | 180,450 | | $ | 184,363 | |
| Asphalt oil | Asphalt oil | 59,853 | | 73,842 | | 28,238 | | Asphalt oil | 93,816 | | 59,853 | | 57,002 | |
| Materials and supplies | Materials and supplies | 26,481 | | 26,293 | | 25,142 | | Materials and supplies | 35,967 | | 26,481 | | 30,629 | |
| Merchandise for resale | Merchandise for resale | 24,319 | | 23,109 | | 21,087 | | Merchandise for resale | 33,393 | | 24,319 | | 28,501 | |
| Natural gas in storage (current) | Natural gas in storage (current) | 8,113 | | 7,872 | | 21,919 | | Natural gas in storage (current) | 10,801 | | 8,113 | | 18,867 | |
| Other | Other | 17,521 | | 18,866 | | 18,999 | | Other | 10,850 | | 17,521 | | 16,247 | |
| Total | Total | $ | 316,737 | | $ | 305,958 | | $ | 291,167 | | Total | $ | 380,316 | | $ | 316,737 | | $ | 335,609 | |
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 noncurrent assets - other and was $47.5 million at March 31, 2022 and 2021, and December 31, 2020, and $48.3 million at March 31, 2020.2021.
Note 6 - Earnings per share
Basic 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 non-vested 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 | | | Three Months Ended | |
| | March 31, | | | March 31, | |
| | 2021 | 2020 | | | 2022 | 2021 | |
| | (In thousands, except per share amounts) | | (In thousands, except per share amounts) |
| Weighted average common shares outstanding - basic | Weighted average common shares outstanding - basic | 200,708 | | 200,440 | | | Weighted average common shares outstanding - basic | 203,351 | | 200,708 | | |
| Effect of dilutive performance share awards and restricted stock units | Effect of dilutive performance share awards and restricted stock units | 244 | | 16 | | | Effect of dilutive performance share awards and restricted stock units | 40 | | 244 | | |
| Weighted average common shares outstanding - diluted | Weighted average common shares outstanding - diluted | 200,952 | | 200,456 | | | Weighted average common shares outstanding - diluted | 203,391 | | 200,952 | | |
| Shares excluded from the calculation of diluted earnings per share | Shares excluded from the calculation of diluted earnings per share | 0 | | 68 | | | Shares excluded from the calculation of diluted earnings per share | — | | — | | |
| Dividends declared per common share | Dividends declared per common share | $ | .2125 | | $ | .2075 | | | Dividends declared per common share | $ | .2175 | | $ | .2125 | | |
Note 7 - Equity
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 such securities if warranted by market conditions and the Company's capital requirements.
In August 2020, the Company amended the Distribution Agreement dated February 22, 2019, with JPJ.P. Morgan Securities LLC and MUFG Securities Americas Inc., as sales agents. This agreement, as amended, allows the offering, issuance and sale of up to 6.4 million shares of the Company's common stock in connection with an "at-the-market" offering. The common stock may be offered for sale, from time to time, in accordance with the terms and conditions of this agreement.
The Company issued 672,260 shares of common stock during the first quarter of 2021 pursuant to the "at-the-market" offering, receiving net proceeds of $19.7 million, which were used for capital expenditures. The Company incurred issuance costs of approximately $300,000 in connection with the sales of common stock under the "at-the-market" offering during the first quarter of 2021. The Company did 0t issue shares of common stock under the "at-the-market" offering during the first quarter of 2020. As of March 31, 2021,2022, the Company had capacity to issue up to 5.73.6 million additional shares of common stock under the "at-the-market" offering program.
Details of the Company's "at-the-market" offering activity was as follows:
| | | | | | | | | | | |
| Three Months Ended | |
| March 31, | |
| 2022 | 2021 | |
| (In millions) | |
| Shares issued | — | | .7 | | |
| Net proceeds * | $ | (.1) | | $ | 19.7 | | ** |
* Net proceeds include issuance costs of $127,000 and $300,000 for the three months ended March 31, 2022 and 2021, respectively
** Net proceeds were used for capital expenditures.
Note 8 - Accumulated other comprehensive income (loss)loss
The after-tax changes in the components of accumulated other comprehensive 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 | | 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) | | (In thousands) |
| At December 31, 2020 | $ | (984) | | $ | (47,207) | | | $ | 113 | | $ | (48,078) | | |
| | At December 31, 2021 | | At December 31, 2021 | $ | (538) | | $ | (40,461) | | | $ | (5) | | $ | (41,004) | |
| Other comprehensive loss before reclassifications | Other comprehensive loss before reclassifications | 0 | | 0 | | | (44) | | (44) | | Other comprehensive loss before reclassifications | — | | — | | | (320) | | (320) | |
| Amounts reclassified from accumulated other comprehensive loss | Amounts reclassified from accumulated other comprehensive loss | 111 | | 466 | | | 35 | | 612 | | Amounts reclassified from accumulated other comprehensive loss | 112 | | 445 | | | 32 | | 589 | |
| Net current-period other comprehensive income (loss) | Net current-period other comprehensive income (loss) | 111 | | 466 | | | (9) | | 568 | | Net current-period other comprehensive income (loss) | 112 | | 445 | | | (288) | | 269 | |
| At March 31, 2021 | $ | (873) | | $ | (46,741) | | | $ | 104 | | $ | (47,510) | | |
| At March 31, 2022 | | At March 31, 2022 | $ | (426) | | $ | (40,016) | | | $ | (293) | | $ | (40,735) | |
| | | | | | | | | | | | | | | |
| 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) | |
| | | | | | | | | | | | | | | |
| 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, 2020 | $ | (984) | | $ | (47,207) | | | $ | 113 | | $ | (48,078) | |
| Other comprehensive loss before reclassifications | — | | — | | | (44) | | (44) | |
| Amounts reclassified from accumulated other comprehensive loss | 111 | | 466 | | | 35 | | 612 | |
| Net current-period other comprehensive income (loss) | 111 | | 466 | | | (9) | | 568 | |
| At March 31, 2021 | $ | (873) | | $ | (46,741) | | | $ | 104 | | $ | (47,510) | |
The following amounts were reclassified out of accumulated other comprehensive loss into net income. The amounts presented in parenthesis indicate a decrease to net income on the Consolidated Statements of Income. The reclassifications were as follows:
| | | Three Months Ended | | Location on Consolidated
Statements of
Income | | Three Months Ended | | Location on Consolidated
Statements of
Income |
| | March 31, | | | March 31, | |
| | 2021 | 2020 | | | 2022 | 2021 | Location on Consolidated
Statements of
Income | |
| | (In thousands) | | | (In thousands) | |
| Reclassification adjustment for loss on derivative instruments included in net income | Reclassification adjustment for loss on derivative instruments included in net income | $ | (148) | | $ | (147) | | | Interest expense | Reclassification adjustment for loss on derivative instruments included in net income | $ | (148) | | $ | (148) | | | Interest expense |
| | 37 | | 36 | | | Income taxes | | 36 | | 37 | | | Income taxes |
| | (111) | | (111) | | | | | (112) | | (111) | | | |
| Amortization of postretirement liability losses included in net periodic benefit cost | (617) | | (611) | | | Other income | |
| Amortization of postretirement liability losses included in net periodic benefit credit | | Amortization of postretirement liability losses included in net periodic benefit credit | (609) | | (617) | | | Other income |
| | 151 | | 149 | | | Income taxes | | 164 | | 151 | | | Income taxes |
| | (466) | | (462) | | | | | (445) | | (466) | | | |
| Reclassification adjustment on available-for-sale investments included in net income | Reclassification adjustment on available-for-sale investments included in net income | (44) | | 1 | | | Other income | Reclassification adjustment on available-for-sale investments included in net income | (40) | | (44) | | | Other income |
| | 9 | | 0 | | | Income taxes | | 8 | | 9 | | | Income taxes |
| | (35) | | 1 | | | | | (32) | | (35) | | | |
| Total reclassifications | Total reclassifications | $ | (612) | | $ | (572) | | | | Total reclassifications | $ | (589) | | $ | (612) | | | |
Note 9 - 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.
Disaggregation
In the following 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.
| | Three Months Ended March 31, 2021 | Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Other | Total | |
| Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2022 | Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Other | Total |
| | (In thousands) | | (In thousands) |
| Residential utility sales | Residential utility sales | $ | 33,436 | | $ | 203,137 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 236,573 | | Residential utility sales | $ | 37,304 | | $ | 258,816 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 296,120 | |
| Commercial utility sales | Commercial utility sales | 32,928 | | 120,052 | | — | | — | | — | | — | | 152,980 | | Commercial utility sales | 35,600 | | 163,609 | | — | | — | | — | | — | | 199,209 | |
| Industrial utility sales | Industrial utility sales | 10,029 | | 8,812 | | — | | — | | — | | — | | 18,841 | | Industrial utility sales | 10,306 | | 13,024 | | — | | — | | — | | — | | 23,330 | |
| Other utility sales | Other utility sales | 1,566 | | 0 | | — | | — | | — | | — | | 1,566 | | Other utility sales | 1,750 | | — | | — | | — | | — | | — | | 1,750 | |
| Natural gas transportation | Natural gas transportation | — | | 12,452 | | 29,417 | | — | | — | | — | | 41,869 | | Natural gas transportation | — | | 12,381 | | 31,574 | | — | | — | | — | | 43,955 | |
| | Natural gas storage | Natural gas storage | — | | — | | 4,029 | | — | | — | | — | | 4,029 | | Natural gas storage | — | | — | | 3,719 | | — | | — | | — | | 3,719 | |
| Contracting services | Contracting services | — | | — | | — | | 96,025 | | — | | — | | 96,025 | | Contracting services | — | | — | | — | | 114,267 | | — | | — | | 114,267 | |
| Construction materials | Construction materials | — | | — | | — | | 216,412 | | — | | — | | 216,412 | | Construction materials | — | | — | | — | | 241,732 | | — | | — | | 241,732 | |
| Intrasegment eliminations | Intrasegment eliminations | — | | — | | — | | (46,716) | | — | | — | | (46,716) | | Intrasegment eliminations | — | | — | | — | | (46,033) | | — | | — | | (46,033) | |
| Inside specialty contracting | — | | — | | — | | — | | 355,190 | | — | | 355,190 | | |
| Outside specialty contracting | — | | — | | — | | — | | 151,363 | | — | | 151,363 | | |
| Electrical & mechanical specialty contracting | | Electrical & mechanical specialty contracting | — | | — | | — | | — | | 392,808 | | — | | 392,808 | |
| Transmission & distribution specialty contracting | | Transmission & distribution specialty contracting | — | | — | | — | | — | | 148,466 | | — | | 148,466 | |
| Other | Other | 9,773 | | 3,009 | | 2,660 | | 0 | | 36 | | 3,341 | | 18,819 | | Other | 12,753 | | 2,609 | | 1,709 | | — | | 48 | | 4,341 | | 21,460 | |
| Intersegment eliminations | Intersegment eliminations | (136) | | (142) | | (26,229) | | (62) | | (1,042) | | (3,324) | | (30,935) | | Intersegment eliminations | (124) | | (136) | | (25,940) | | (130) | | (1,059) | | (4,341) | | (31,730) | |
| Revenues from contracts with customers | Revenues from contracts with customers | 87,596 | | 347,320 | | 9,877 | | 265,659 | | 505,547 | | 17 | | 1,216,016 | | Revenues from contracts with customers | 97,589 | | 450,303 | | 11,062 | | 309,836 | | 540,263 | | — | | 1,409,053 | |
| Revenues out of scope | Revenues out of scope | (2,923) | | 2,886 | | 36 | | 0 | | 11,923 | | 0 | | 11,922 | | Revenues out of scope | (3,995) | | 115 | | 58 | | — | | 11,328 | | — | | 7,506 | |
| Total external operating revenues | Total external operating revenues | $ | 84,673 | | $ | 350,206 | | $ | 9,913 | | $ | 265,659 | | $ | 517,470 | | $ | 17 | | $ | 1,227,938 | | Total external operating revenues | $ | 93,594 | | $ | 450,418 | | $ | 11,120 | | $ | 309,836 | | $ | 551,591 | | $ | — | | $ | 1,416,559 | |
| | Three Months Ended March 31, 2020 | Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Other | Total | |
| Three Months Ended March 31, 2021 | | Three Months Ended March 31, 2021 | Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Other | Total |
| | (In thousands) | | (In thousands) |
| Residential utility sales | Residential utility sales | $ | 32,349 | | $ | 186,701 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 219,050 | | Residential utility sales | $ | 33,436 | | $ | 203,137 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 236,573 | |
| Commercial utility sales | Commercial utility sales | 33,587 | | 114,996 | | — | | — | | — | | — | | 148,583 | | Commercial utility sales | 32,928 | | 120,052 | | — | | — | | — | | — | | 152,980 | |
| Industrial utility sales | Industrial utility sales | 10,367 | | 8,521 | | — | | — | | — | | — | | 18,888 | | Industrial utility sales | 10,029 | | 8,812 | | — | | — | | — | | — | | 18,841 | |
| Other utility sales | Other utility sales | 1,648 | | 0 | | — | | — | | — | | — | | 1,648 | | Other utility sales | 1,566 | | — | | — | | — | | — | | — | | 1,566 | |
| Natural gas transportation | Natural gas transportation | — | | 11,798 | | 27,432 | | — | | — | | — | | 39,230 | | Natural gas transportation | — | | 12,452 | | 29,417 | | — | | — | | — | | 41,869 | |
| Natural gas gathering | — | | — | | 2,090 | | — | | — | | — | | 2,090 | | |
| Natural gas storage | Natural gas storage | — | | — | | 3,046 | | — | | — | | — | | 3,046 | | Natural gas storage | — | | — | | 4,029 | | — | | — | | — | | 4,029 | |
| Contracting services | Contracting services | — | | — | | — | | 98,401 | | — | | — | | 98,401 | | Contracting services | — | | — | | — | | 96,025 | | — | | — | | 96,025 | |
| Construction materials | Construction materials | — | | — | | — | | 207,910 | | — | | — | | 207,910 | | Construction materials | — | | — | | — | | 216,412 | | — | | — | | 216,412 | |
| Intrasegment eliminations | Intrasegment eliminations | — | | — | | — | | (44,104) | | — | | — | | (44,104) | | Intrasegment eliminations | — | | — | | — | | (46,716) | | — | | — | | (46,716) | |
| Inside specialty contracting | — | | — | | — | | — | | 372,209 | | — | | 372,209 | | |
| Outside specialty contracting | — | | — | | — | | — | | 130,150 | | — | | 130,150 | | |
| Electrical & mechanical specialty contracting | | Electrical & mechanical specialty contracting | — | | — | | — | | — | | 355,190 | | — | | 355,190 | |
| Transmission & distribution specialty contracting | | Transmission & distribution specialty contracting | — | | — | | — | | — | | 151,363 | | — | | 151,363 | |
| Other | Other | 8,450 | | 2,498 | | 3,241 | | 0 | | 351 | | 2,991 | | 17,531 | | Other | 9,773 | | 3,009 | | 2,660 | | — | | 36 | | 3,341 | | 18,819 | |
| Intersegment eliminations | Intersegment eliminations | (195) | | (185) | | (25,199) | | (63) | | (2,470) | | (2,973) | | (31,085) | | Intersegment eliminations | (136) | | (142) | | (26,229) | | (62) | | (1,042) | | (3,324) | | (30,935) | |
| Revenues from contracts with customers | Revenues from contracts with customers | 86,206 | | 324,329 | | 10,610 | | 262,144 | | 500,240 | | 18 | | 1,183,547 | | Revenues from contracts with customers | 87,596 | | 347,320 | | 9,877 | | 265,659 | | 505,547 | | 17 | | 1,216,016 | |
| Revenues out of scope | Revenues out of scope | (298) | | 2,114 | | 45 | | 0 | | 11,965 | | 0 | | 13,826 | | Revenues out of scope | (2,923) | | 2,886 | | 36 | | — | | 11,923 | | — | | 11,922 | |
| Total external operating revenues | Total external operating revenues | $ | 85,908 | | $ | 326,443 | | $ | 10,655 | | $ | 262,144 | | $ | 512,205 | | $ | 18 | | $ | 1,197,373 | | Total external operating revenues | $ | 84,673 | | $ | 350,206 | | $ | 9,913 | | $ | 265,659 | | $ | 517,470 | | $ | 17 | | $ | 1,227,938 | |
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.
Contract balances
The timing of revenue recognition may differ from the timing of invoicing to customers. The timing of invoicing to customers does not necessarily correlate with the timing of revenues being recognized under the cost-to-cost method of accounting. Contracts from contracting services are billed as work progresses in accordance with agreed upon contractual terms. Generally, billing to the customer occurs contemporaneous to revenue recognition. A variance in timing of the billings may result in a contract asset or a contract liability. A contract asset occurs when revenues are recognized under the cost-to-cost measure of progress, which exceeds amounts billed on uncompleted contracts. Such amounts will be billed as standard contract terms allow, usually based on various measures of performance or achievement. A contract liability occurs when there are billings in excess of revenues recognized under the cost-to-cost measure of progress on uncompleted contracts. Contract liabilities decrease as revenue is recognized from the satisfaction of the related performance obligation.
The changes in contract assets and liabilities were as follows:
| | | March 31, 2021 | December 31, 2020 | Change | Location on Consolidated Balance Sheets | | March 31, 2022 | December 31, 2021 | Change | Location on Consolidated Balance Sheets |
| | (In thousands) | | | (In thousands) | |
| Contract assets | Contract assets | $ | 107,543 | | $ | 104,345 | | $ | 3,198 | | Receivables, net | Contract assets | $ | 164,622 | | $ | 125,742 | | $ | 38,880 | | Receivables, net |
| Contract liabilities - current | Contract liabilities - current | (142,828) | | (158,603) | | 15,775 | | Accounts payable | Contract liabilities - current | (154,136) | | (179,140) | | 25,004 | | Accounts payable |
| Contract liabilities - noncurrent | Contract liabilities - noncurrent | (171) | | (52) | | (119) | | Noncurrent liabilities - other | Contract liabilities - noncurrent | (40) | | (118) | | 78 | | Noncurrent liabilities - other |
| Net contract liabilities | $ | (35,456) | | $ | (54,310) | | $ | 18,854 | | | |
| Net contract assets (liabilities) | | Net contract assets (liabilities) | $ | 10,446 | | $ | (53,516) | | $ | 63,962 | | |
The Company recognized $121.8 million in revenue for the three months ended March 31, 2022, which was previously included in contract liabilities at December 31, 2021. The Company recognized $123.4 million in revenue for the three months ended March 31, 2021, which was previously included in contract liabilities at December 31, 2020. The Company recognized $89.4 million in revenue for the three months ended March 31, 2020, which was previously included in contract liabilities at December 31, 2019.
The Company recognized a net increase in revenues of $34.3$23.5 million and $19.5$34.3 million for the three months ended March 31, 20212022 and 2020,2021, 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. 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 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 one years, respectively.years.
At March 31, 2021,2022, the Company's remaining performance obligations were $2.2$3.1 billion. The Company expects to recognize the following revenue amounts in future periods related to these remaining performance obligations: $1.7$2.4 billion within the next 12 months or less; $283.8$311.1 million within the next 13 to 24 months; and $213.4$407.2 million in 25 months or more.
Note 10 - Business combinations
The following acquisitions were accounted for as business combinations in accordance with ASC 805 - Business Combinations. The results of the acquired businesses have been included in the 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, individually or in the aggregate, were material to the Company's financial position or results of operations.
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 Sheets for these adjustments are considered provisional until final settlement has occurred.
The Company had no acquisitions during the first quarter of 2022.
In 2020,2021, the construction materials and contracting segment made the following acquisitions:segment's acquisitions included:
•The assets of McMurry Ready-Mix Co., an aggregatesBaker Rock Resources and concrete supplier in Wyoming, wereOregon Mainline Paving, two premier construction materials companies located around the Portland, Oregon metro area, acquired in December 2020.November 2021. At March 31, 2022, the purchase price allocation was preliminary and will be finalized within 12 months of the acquisition date.
•The assets of Oldcastle Infrastructure Spokane,Mt. Hood Rock, a prestressed-concreteconstruction aggregates business in Washington, wereOregon, acquired in February 2020.April 2021. As of March 31, 2022, the purchase price allocation was settled with no material adjustments to the provisional accounting.
In February 2020,2021, the construction services segment acquired PerLectric, Inc., an electrical construction company in Virginia.
The total purchase price for acquisitions that occurred in 2020 was $110.2$236.1 million, subject to certain adjustments, with cash acquired totaling $1.7 million.$900,000. The purchase price includes consideration paid of $106.0 million and $2.5 million of indemnity holdback liabilities.$235.2 million. The amounts allocated to the aggregated assets acquired and liabilities assumed during 20202021 were as follows: $54.8$17.0 million to current assets; $27.1$179.8 million to property, plant and equipment; $33.6$50.6 million to goodwill; $19.0$2.2 million to other intangible assets; $22.6$8.7 million to current liabilities; $300,000$2.5 million to noncurrent liabilities - otherother; and $1.4$3.2 million to asset retirement obligations. Asdeferred tax liabilities. During the first quarter of December 31, 2020 and March 31, 2021, the purchase price adjustments had been settled and no material2022, measurement period adjustments were made to thepreviously reported provisional accounting for Oldcastle Infrastructure Spokaneamounts, which decreased goodwill and PerLectric, Inc., respectively. At March 31, 2021, the purchase price allocation for McMurry Ready-Mix Co. was preliminaryincreased property, plant and will be finalized within 12 months of the acquisition date.equipment by $2.1 million. The Company issued debt to finance thesethe acquisitions.
Costs incurred for acquisitions are included in operation and maintenance expense on the Consolidated Statements of Income and were not material for the three months ended March 31, 20212022 and 2020.2021.
Note 11 - Leases
The Company's leases primarily include operating leases for equipment, buildings, easements and vehicles. The Company leases certain equipment to third parties through its utility and construction services segments, which are considered short-term operating leases with terms of less than 12 months.
The Company recognized revenue from operating leases of $12.0$11.4 million and $12.1$12.0 million for the three months ended March 31, 20212022 and 2020,2021, respectively. At March 31, 2021,2022, the Company had $10.4$8.4 million of lease receivables with a majority due within 12 months.
Note 12 - Goodwill and other intangible assets
The changes in the carrying amount of goodwill were as follows:
| | | Balance at January 1, 2021 | Goodwill
Acquired
During
the Year | Measurement
Period
Adjustments | Balance at March 31, 2021 | | Balance at January 1, 2022 | Goodwill
Acquired
During
the Year | Measurement
Period
Adjustments | Balance at March 31, 2022 |
| | | (In thousands) | | (In thousands) |
| Natural gas distribution | Natural gas distribution | $ | 345,736 | | $ | 0 | | $ | 0 | | $ | 345,736 | | Natural gas distribution | $ | 345,736 | | $ | — | | $ | — | | $ | 345,736 | |
| Construction materials and contracting | Construction materials and contracting | 226,003 | | 0 | | 0 | | 226,003 | | Construction materials and contracting | 276,426 | | — | | (2,124) | | 274,302 | |
| Construction services | Construction services | 143,224 | | 0 | | 0 | | 143,224 | | Construction services | 143,224 | | — | | — | | 143,224 | |
| Total | Total | $ | 714,963 | | $ | 0 | | $ | 0 | | $ | 714,963 | | Total | $ | 765,386 | | $ | — | | $ | (2,124) | | $ | 763,262 | |
| | | Balance at January 1, 2020 | Goodwill
Acquired
During
the Year | Measurement
Period
Adjustments | Balance at March 31, 2020 | | Balance at January 1, 2021 | Goodwill
Acquired
During
the Year | Measurement
Period
Adjustments | Balance at March 31, 2021 |
| | | (In thousands) | | (In thousands) |
| Natural gas distribution | Natural gas distribution | $ | 345,736 | | $ | 0 | | $ | 0 | | $ | 345,736 | | Natural gas distribution | $ | 345,736 | | $ | — | | $ | — | | $ | 345,736 | |
| Construction materials and contracting | Construction materials and contracting | 217,234 | | 6,483 | | 0 | | 223,717 | | Construction materials and contracting | 226,003 | | — | | — | | 226,003 | |
| Construction services | Construction services | 118,388 | | 25,686 | | 0 | | 144,074 | | Construction services | 143,224 | | — | | — | | 143,224 | |
| Total | Total | $ | 681,358 | | $ | 32,169 | | $ | 0 | | $ | 713,527 | | Total | $ | 714,963 | | $ | — | | $ | — | | $ | 714,963 | |
| | | Balance at January 1, 2020 | Goodwill
Acquired
During
the Year | Measurement
Period
Adjustments | Balance at December 31, 2020 | | Balance at January 1, 2021 | Goodwill
Acquired
During
the Year | Measurement
Period
Adjustments | Balance at December 31, 2021 |
| | | (In thousands) | | (In thousands) |
| Natural gas distribution | Natural gas distribution | $ | 345,736 | | $ | 0 | | $ | 0 | | $ | 345,736 | | Natural gas distribution | $ | 345,736 | | $ | — | | $ | — | | $ | 345,736 | |
| Construction materials and contracting | Construction materials and contracting | 217,234 | | 8,778 | | (9) | | 226,003 | | Construction materials and contracting | 226,003 | | 50,640 | | (217) | | 276,426 | |
| Construction services | Construction services | 118,388 | | 24,436 | | 400 | | 143,224 | | Construction services | 143,224 | | — | | — | | 143,224 | |
| Total | Total | $ | 681,358 | | $ | 33,214 | | $ | 391 | | $ | 714,963 | | Total | $ | 714,963 | | $ | 50,640 | | $ | (217) | | $ | 765,386 | |
Other amortizable intangible assets were as follows:
| | | | March 31, 2021 | March 31, 2020 | December 31, 2020 | | March 31, 2022 | March 31, 2021 | December 31, 2021 |
| | | (In thousands) | | (In thousands) |
| Customer relationships | Customer relationships | $ | 28,836 | | $ | 30,087 | | $ | 28,836 | | Customer relationships | $ | 28,990 | | $ | 28,836 | | $ | 29,740 | |
| Less accumulated amortization | Less accumulated amortization | 7,792 | | 4,138 | | 6,887 | | Less accumulated amortization | 10,846 | | 7,792 | | 10,650 | |
| | | 21,044 | | 25,949 | | 21,949 | | | 18,144 | | 21,044 | | 19,090 | |
| Noncompete agreements | Noncompete agreements | 3,941 | | 4,229 | | 3,941 | | Noncompete agreements | 4,591 | | 3,941 | | 4,591 | |
| Less accumulated amortization | Less accumulated amortization | 2,441 | | 1,928 | | 2,309 | | Less accumulated amortization | 3,016 | | 2,441 | | 2,856 | |
| | 1,500 | | 2,301 | | 1,632 | | | 1,575 | | 1,500 | | 1,735 | |
| Other | Other | 11,957 | | 13,060 | | 12,927 | | Other | 6,969 | | 11,957 | | 12,601 | |
| Less accumulated amortization | Less accumulated amortization | 10,540 | | 7,060 | | 11,012 | | Less accumulated amortization | 5,299 | | 10,540 | | 10,848 | |
| | | 1,417 | | 6,000 | | 1,915 | | | 1,670 | | 1,417 | | 1,753 | |
| Total | Total | $ | 23,961 | | $ | 34,250 | | $ | 25,496 | | Total | $ | 21,389 | | $ | 23,961 | | $ | 22,578 | |
The previous tables include goodwill and intangible assets associated with the business combinations completed during 2020.2021. For more information related to these business combinations, see Note 10.
Amortization expense for amortizable intangible assets for the three months ended March 31, 2022 and 2021, and 2020, was $1.5$1.2 million and $2.0$1.5 million, respectively. Estimated amortization expense for identifiable intangible assets as of March 31, 2021,2022, was:
| | | | | | | | | | | | | | | | | | | | |
| Remainder of 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter |
| (In thousands) |
| Amortization expense | $ | 3,377 | | $ | 4,394 | | $ | 4,121 | | $ | 3,799 | | $ | 1,862 | | $ | 6,408 | |
| | | | | | | | | | | | | | | | | | | | |
| Remainder of 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter |
| (In thousands) |
| Amortization expense | $ | 3,630 | | $ | 4,470 | | $ | 4,200 | | $ | 2,206 | | $ | 1,716 | | $ | 5,167 | |
Note 13 - Regulatory assets and liabilities
The following table summarizes the individual components of unamortized regulatory assets and liabilities:
| | | Estimated Recovery or Refund Period as of March 31, 2021 | * | March 31, 2021 | March 31, 2020 | December 31, 2020 | | | Estimated Recovery or Refund Period as of March 31, 2022 | * | March 31, 2022 | March 31, 2021 | December 31, 2021 |
| | (In thousands) | | (In thousands) |
| Regulatory assets: | Regulatory assets: | | | Regulatory assets: | |
| Current: | Current: | | | Current: | |
| Natural gas costs recoverable through rate adjustments | Natural gas costs recoverable through rate adjustments | Up to 1 year | | $ | 76,782 | | $ | 39,805 | | $ | 42,481 | | | Natural gas costs recoverable through rate adjustments | Up to 1 year | | $ | 66,132 | | $ | 76,782 | | $ | 86,371 | |
| Decoupling | | Decoupling | Up to 1 year | | 7,609 | | 4,180 | | 9,131 | |
| Conservation programs | | Conservation programs | Up to 1 year | | 7,567 | | 6,679 | | 8,225 | |
| Cost recovery mechanisms | Cost recovery mechanisms | Up to 1 year | | 7,130 | | 6,686 | | 10,645 | | | Cost recovery mechanisms | Up to 1 year | | 3,432 | | 7,130 | | 4,536 | |
| Conservation programs | Up to 1 year | | 6,679 | | 6,303 | | 7,117 | | | |
| Other | Other | Up to 1 year | | 7,861 | | 2,412 | | 8,284 | | | Other | Up to 1 year | | 4,338 | | 3,681 | | 10,428 | |
| | 98,452 | | 55,206 | | 68,527 | | | | 89,078 | | 98,452 | | 118,691 | |
| Noncurrent: | Noncurrent: | | | Noncurrent: | |
| Pension and postretirement benefits | Pension and postretirement benefits | ** | | 155,924 | | 157,051 | | 155,942 | | | Pension and postretirement benefits | ** | | 142,681 | | 155,924 | | 142,681 | |
| Plant retirement | - | | 73,498 | | 41,080 | | 65,919 | | | |
| Cost recovery mechanisms | | Cost recovery mechanisms | Up to 10 years | | 67,989 | | 15,508 | | 44,870 | |
| Plant costs/asset retirement obligations | Plant costs/asset retirement obligations | Over plant lives | | 72,250 | | 67,475 | | 71,740 | | | Plant costs/asset retirement obligations | Over plant lives | | 63,325 | | 72,250 | | 63,116 | |
| Plant to be retired | | Plant to be retired | - | | 29,452 | | 73,498 | | 50,070 | |
| Manufactured gas plant site remediation | Manufactured gas plant site remediation | - | | 26,002 | | 15,699 | | 26,429 | | | Manufactured gas plant site remediation | - | | 26,089 | | 26,002 | | 26,053 | |
| Cost recovery mechanisms | Up to 10 years | | 15,508 | | 11,891 | | 16,245 | | | |
| Natural gas costs recoverable through rate adjustments | Up to 3 years | | 15,158 | | 33,027 | | 21,539 | | | |
| Taxes recoverable from customers | Taxes recoverable from customers | Over plant lives | | 10,800 | | 11,082 | | 10,785 | | | Taxes recoverable from customers | Over plant lives | | 12,492 | | 10,800 | | 12,339 | |
| Long-term debt refinancing costs | Long-term debt refinancing costs | Up to 39 years | | 4,268 | | 4,133 | | 4,426 | | | Long-term debt refinancing costs | Up to 38 years | | 3,636 | | 4,268 | | 3,794 | |
| Natural gas costs recoverable through rate adjustments | | Natural gas costs recoverable through rate adjustments | Up to 2 years | | 3,246 | | 15,158 | | 5,186 | |
| Other | Other | Up to 18 years | | 6,509 | | 6,751 | | 6,356 | | | Other | Up to 17 years | | 10,318 | | 6,509 | | 9,742 | |
| | 379,917 | | 348,189 | | 379,381 | | | | 359,228 | | 379,917 | | 357,851 | |
| Total regulatory assets | Total regulatory assets | | $ | 478,369 | | $ | 403,395 | | $ | 447,908 | | | Total regulatory assets | | $ | 448,306 | | $ | 478,369 | | $ | 476,542 | |
| Regulatory liabilities: | Regulatory liabilities: | | | Regulatory liabilities: | |
| Current: | Current: | | | Current: | |
| Natural gas costs refundable through rate adjustments | Natural gas costs refundable through rate adjustments | Up to 1 year | | $ | 16,344 | | $ | 32,181 | | $ | 18,565 | | | Natural gas costs refundable through rate adjustments | Up to 1 year | | $ | 13,107 | | $ | 16,344 | | $ | 6,700 | |
| Taxes refundable to customers | Taxes refundable to customers | Up to 1 year | | 3,092 | | 4,002 | | 3,557 | | | Taxes refundable to customers | Up to 1 year | | 3,470 | | 3,092 | | 3,841 | |
| Electric fuel and purchased power deferral | Electric fuel and purchased power deferral | Up to 1 year | | 2,001 | | 7,188 | | 3,667 | | | Electric fuel and purchased power deferral | Up to 1 year | | — | | 2,001 | | — | |
| Other | Other | Up to 1 year | | 12,829 | | 16,701 | | 5,661 | | | Other | Up to 1 year | | 14,609 | | 12,829 | | 5,762 | |
| | 34,266 | | 60,072 | | 31,450 | | | | 31,186 | | 34,266 | | 16,303 | |
| Noncurrent: | Noncurrent: | | | Noncurrent: | |
| Taxes refundable to customers | Taxes refundable to customers | Over plant lives | | 224,795 | | 240,148 | | 227,850 | | | Taxes refundable to customers | Over plant lives | | 212,472 | | 224,795 | | 215,421 | |
| Plant removal and decommissioning costs | Plant removal and decommissioning costs | Over plant lives | | 169,430 | | 174,120 | | 167,171 | | | Plant removal and decommissioning costs | Over plant lives | | 171,485 | | 169,430 | | 168,152 | |
| Pension and postretirement benefits | Pension and postretirement benefits | ** | | 16,965 | | 18,040 | | 16,989 | | | Pension and postretirement benefits | ** | | 20,434 | | 16,965 | | 20,434 | |
| Accumulated deferred investment tax credit | | Accumulated deferred investment tax credit | Up to 20 years | | 13,352 | | 11,428 | | 12,696 | |
| Other | Other | Up to 21 years | | 17,870 | | 10,897 | | 16,065 | | | Other | Up to 20 years | | 15,885 | | 6,442 | | 12,087 | |
| | 429,060 | | 443,205 | | 428,075 | | | | 433,628 | | 429,060 | | 428,790 | |
| Total regulatory liabilities | Total regulatory liabilities | | $ | 463,326 | | $ | 503,277 | | $ | 459,525 | | | Total regulatory liabilities | | $ | 464,814 | | $ | 463,326 | | $ | 445,093 | |
| Net regulatory position | Net regulatory position | | $ | 15,043 | | $ | (99,882) | | $ | (11,617) | | | Net regulatory position | | $ | (16,508) | | $ | 15,043 | | $ | 31,449 | |
*Estimated recovery or refund period for amounts currently being recovered or refunded in rates charged to customers.
** Recovered as expense is incurred or cash contributions are made.
At March 31, 2021 and 2020, and December 31, 2020, approximately $361.4 million, $285.8 million and $332.5 million, respectively, of regulatoryRegulatory assets were not earning a rate of return;return were approximately $268.1 million and $361.4 million at March 31, 2022 and 2021, respectively, and $296.6 million at December 31, 2021; however, these regulatory assets are expected to be recovered from customers in future rates. These assets are largely comprised of the unfunded portion of pension and postretirement benefits, asset retirement obligations, accelerated depreciation on plant to be retiredretirement and the estimated future cost of manufactured gas plant site remediation.
In February 2021, a prolonged period of unseasonably cold temperatures in the central United States significantly increased the demand for electric and natural gas services and contributed to increased market prices. Overall, Montana-Dakota and Great Plains incurred approximately $44.0 million in increased natural gas costs in February 2021 in order to maintain services for its customers. The Company has filed out-of-cycleThese extraordinary gas costs were recorded as regulatory assets as they are expected to be recovered from customers. Montana-Dakota and Great Plains have received approval for the recovery of purchased gas adjustment requests in four out of five jurisdictions affected by thisadjustments related to the cold-weather event as discussed in Note 19, and will continue to engage with its regulators to determine the appropriate recovery periods over which to recover the associated natural gas costs.all
jurisdictions impacted, including out-of-cycle purchased gas adjustment requests in most jurisdictions. For a discussion of the Company's most recent cases by jurisdiction, see Note 19.
In 2019, the Company experienced increased natural gas costs in Washington from the rupture of the Enbridge pipeline in Canada in late 2018. As a result, the Company requested, and the WUTC approved, recovery through 2022 of the balance of natural gas costs recoverable related to this period of time, which was over three years rather than its normal one-year recovery period.
In February 2019, the Company announced the retirement of three aging coal-fired electric generating units. 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 first unit ceased operations on March 31, 2021, and as discussed in Note 19, requests have beenRequests were filed with the NDPSC and SDPUC, and subsequently approved, to offset the savings associated with the cessation of operations of this unitthese units with the amortization of the deferred regulatory assets. The remaining two units are expectedCompany ceased operations of Lewis & Clark Station in March 2021 and Units 1 and 2 at Heskett Station in February 2022. The Company subsequently moved the costs being recovered for these facilities from plant retirement to be retiredcost recovery mechanisms in early 2022.the previous table and began amortizing the associated plant retirement and closure costs in the jurisdictions where requests were filed, as previously discussed. The Company expects to recover the regulatory assets related to the plant retirements 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)loss in the period in which the discontinuance of regulatory accounting occurs.
Note 14 - Fair value measurements
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 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 insurance contracts, to satisfy its obligations under its unfunded, nonqualified defined benefit and defined contribution 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 $105.4 million, $101.6 million $83.3 million and $100.1$109.6 million, at March 31, 20212022 and 2020,2021, and December 31, 2020,2021, respectively, are classified as investments on the Consolidated Balance Sheets. The net unrealized gainsloss on these investments was $5.8 million for the three months ended March 31, 2022. The net unrealized gain on these investments was $127,000 for the three months ended March 31, 2021. The net unrealized loss on these investments was $3.7 million for the three months ended March 31, 2020. 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, 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 income (loss).loss. Details of available-for-sale securities were as follows:
| | March 31, 2021 | Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Fair Value | |
| March 31, 2022 | | March 31, 2022 | Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Fair Value |
| | (In thousands) | | (In thousands) |
| Mortgage-backed securities | Mortgage-backed securities | $ | 8,709 | | $ | 155 | | $ | 10 | | $ | 8,854 | | Mortgage-backed securities | $ | 8,778 | | $ | 3 | | $ | 310 | | $ | 8,471 | |
| U.S. Treasury securities | U.S. Treasury securities | 2,636 | | 0 | | 14 | | 2,622 | | U.S. Treasury securities | 2,688 | | — | | 63 | | 2,625 | |
| Total | Total | $ | 11,345 | | $ | 155 | | $ | 24 | | $ | 11,476 | | Total | $ | 11,466 | | $ | 3 | | $ | 373 | | $ | 11,096 | |
| | March 31, 2020 | Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Fair Value | |
| March 31, 2021 | | March 31, 2021 | Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Fair Value |
| | (In thousands) | | (In thousands) |
| Mortgage-backed securities | Mortgage-backed securities | $ | 9,691 | | $ | 236 | | $ | 0 | | $ | 9,927 | | Mortgage-backed securities | $ | 8,709 | | $ | 155 | | $ | 10 | | $ | 8,854 | |
| U.S. Treasury securities | U.S. Treasury securities | 1,173 | | 12 | | 0 | | 1,185 | | U.S. Treasury securities | 2,636 | | — | | 14 | | 2,622 | |
| Total | Total | $ | 10,864 | | $ | 248 | | $ | 0 | | $ | 11,112 | | Total | $ | 11,345 | | $ | 155 | | $ | 24 | | $ | 11,476 | |
| | | | | | | | | | | | | | |
| December 31, 2020 | Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Fair Value |
| (In thousands) |
| Mortgage-backed securities | $ | 9,799 | | $ | 156 | | $ | 9 | | $ | 9,946 | |
| U.S. Treasury securities | 1,386 | | 0 | | 5 | | 1,381 | |
| Total | $ | 11,185 | | $ | 156 | | $ | 14 | | $ | 11,327 | |
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 | | | | | | | | | | | | | | |
| December 31, 2021 | Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Fair Value |
| (In thousands) |
| Mortgage-backed securities | $ | 8,702 | | $ | 51 | | $ | 47 | | $ | 8,706 | |
| U.S. Treasury securities | 2,407 | | — | | 11 | | 2,396 | |
| Total | $ | 11,109 | | $ | 51 | | $ | 58 | | $ | 11,102 | |
The Company's assets measured 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. were as follows:
| | | | | | | | | | | | | | |
| | Fair Value Measurements at March 31, 2022, Using | |
| | Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) | Significant
Other
Observable
Inputs
(Level 2) | Significant
Unobservable
Inputs
(Level 3) | Balance at March 31, 2022 |
| (In thousands) |
| Assets: | | | | |
| Money market funds | $ | — | | $ | 13,131 | | $ | — | | $ | 13,131 | |
| Insurance contracts* | — | | 105,371 | | — | | 105,371 | |
| Available-for-sale securities: | | | | |
| Mortgage-backed securities | — | | 8,471 | | — | | 8,471 | |
| U.S. Treasury securities | — | | 2,625 | | — | | 2,625 | |
| | | | |
| Total assets measured at fair value | $ | — | | $ | 129,598 | | $ | — | | $ | 129,598 | |
| | | | |
| | | | |
| | | | |
* The insurance contracts invest approximately 61 percent in fixed-income investments, 17 percent in common stock of large-cap companies, 8 percent in common stock of mid-cap companies, 6 percent in common stock of small-cap companies, 6 percent in target date investments and 2 percent in cash equivalents.
| | | | | | | | | | | | | | |
| | Fair Value Measurements at March 31, 2021, Using | |
| | Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) | Significant
Other
Observable
Inputs
(Level 2) | Significant
Unobservable
Inputs
(Level 3) | Balance at March 31, 2021 |
| (In thousands) |
| Assets: | | | | |
| Money market funds | $ | — | | $ | 9,388 | | $ | — | | $ | 9,388 | |
| Insurance contracts* | — | | 101,632 | | — | | 101,632 | |
| Available-for-sale securities: | | | | |
| Mortgage-backed securities | — | | 8,854 | | — | | 8,854 | |
| U.S. Treasury securities | — | | 2,622 | | — | | 2,622 | |
| | | | |
| Total assets measured at fair value | $ | — | | $ | 122,496 | | $ | — | | $ | 122,496 | |
| | | | |
| | | | |
| | | | |
| | | | |
* The insurance contracts invest approximately 54 percent in fixed-income investments, 19 percent in common stock of large-cap companies, 10 percent in common stock of mid-cap companies, 9 percent in common stock of small-cap companies, 6 percent in target date investments and 2 percent in cash equivalents.
| | | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2021, 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, 2021 |
| (In thousands) |
| Assets: | | | | |
| Money market funds | $ | — | | $ | 10,190 | | $ | — | | $ | 10,190 | |
| Insurance contracts* | — | | 109,603 | | — | | 109,603 | |
| Available-for-sale securities: | | | | |
| Mortgage-backed securities | — | | 8,706 | | — | | 8,706 | |
| U.S. Treasury securities | — | | 2,396 | | — | | 2,396 | |
| | | | |
| Total assets measured at fair value | $ | — | | $ | 130,895 | | $ | — | | $ | 130,895 | |
| | | | |
| | | | |
| | | | |
| | | | |
* The insurance contracts invest approximately 61 percent in fixed-income investments, 17 percent in common stock of large-cap companies, 8 percent in common stock of mid-cap companies, 7 percent in common stock of small-cap companies, 5 percent in target date investments and 2 percent in cash equivalents.
The Company's 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 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 insurance contracts are 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.
The Company's assets measured at fair value on a recurring basis were as follows:
| | | | | | | | | | | | | | |
| | Fair Value Measurements at March 31, 2021, Using | |
| | Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) | Significant
Other
Observable
Inputs
(Level 2) | Significant
Unobservable
Inputs
(Level 3) | Balance at March 31, 2021 |
| (In thousands) |
| Assets: | | | | |
| Money market funds | | $ | 9,388 | | $ | — | | $ | 9,388 | |
| Insurance contracts* | — | | 101,632 | | | 101,632 | |
| Available-for-sale securities: | | | | |
| Mortgage-backed securities | — | | 8,854 | | — | | 8,854 | |
| U.S. Treasury securities | — | | 2,622 | | — | | 2,622 | |
| | | | |
| Total assets measured at fair value | $ | — | | $ | 122,496 | | $ | — | | $ | 122,496 | |
| | | | |
| | | | |
| | | | |
* The insurance contracts invest approximately 54 percent in fixed-income investments, 19 percent in common stock of large-cap companies, 10 percent in common stock of mid-cap companies, 9 percent in common stock of small-cap companies, 6 percent in target date investments and 2 percent in cash equivalents.
| | | | | | | | | | | | | | |
| | Fair Value Measurements at March 31, 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 March 31, 2020 |
| (In thousands) |
| Assets: | | | | |
| Money market funds | $ | — | | $ | 8,470 | | $ | — | | $ | 8,470 | |
| Insurance contract* | — | | 83,254 | | — | | 83,254 | |
| Available-for-sale securities: | | | | |
| Mortgage-backed securities | — | | 9,927 | | — | | 9,927 | |
| U.S. Treasury securities | — | | 1,185 | | — | | 1,185 | |
| | | | |
| Total assets measured at fair value | $ | — | | $ | 102,836 | | $ | — | | $ | 102,836 | |
| | | | |
| | | | |
| | | | |
| | | | |
* The insurance contract invests approximately 58 percent in fixed-income investments, 20 percent in common stock of large-cap companies, 8 percent in common stock of mid-cap companies, 8 percent in common stock of small-cap companies, 4 percent in target date investments and 2 percent in cash equivalents.
| | | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 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 December 31, 2020 |
| (In thousands) |
| Assets: | | | | |
| Money market funds | $ | — | | $ | 8,917 | | $ | — | | $ | 8,917 | |
| Insurance contract* | — | | 100,104 | | — | | 100,104 | |
| Available-for-sale securities: | | | | |
| Mortgage-backed securities | — | | 9,946 | | — | | 9,946 | |
| U.S. Treasury securities | — | | 1,381 | | — | | 1,381 | |
| | | | |
| Total assets measured at fair value | $ | — | | $ | 120,348 | | $ | — | | $ | 120,348 | |
| | | | |
| | | | |
| | | | |
| | | | |
* The insurance contract invests approximately 57 percent in fixed-income investments, 18 percent in common stock of large-cap companies, 9 percent in common stock of mid-cap companies, 9 percent in common stock of small-cap companies, 5 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.
The Company performed fair value assessments of the assets acquired and liabilities assumed in the business combinations that occurred during 2020.2021. The fair value of these assets and liabilities were determined based on Level 2 and Level 3 inputs.
The estimated fair value of the Company's Level 2 commodity derivative instruments is based on futures prices, volatility and time to maturity, among other things. Counterparty statements are utilized to determine the value of the commodity derivative instruments and are reviewed and corroborated using various methodologies and significant observable inputs. The Company's and the counterparties' nonperformance risk is also evaluated.
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:
| | | | March 31, 2021 | March 31, 2020 | December 31, 2020 | | March 31, 2022 | March 31, 2021 | December 31, 2021 |
| | (In thousands) | | (In thousands) |
| Carrying amount | Carrying amount | $ | 2,253,274 | | $ | 2,455,235 | | $ | 2,213,130 | | Carrying amount | $ | 2,747,763 | | $ | 2,253,274 | | $ | 2,741,900 | |
| Fair value | Fair value | $ | 2,473,806 | | $ | 2,618,297 | | $ | 2,537,289 | | Fair value | $ | 2,755,041 | | $ | 2,473,806 | | $ | 2,984,866 | |
The carrying amounts of the Company's remaining financial instruments included in current assets and current liabilities approximate their fair values.
Note 15 - Debt
Certain debt instruments of the Company's subsidiaries contain restrictive and financial covenants and cross-default provisions. In order to borrow under the debt 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 March 31, 2021.2022. In the event the 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 the 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 Company's subsidiaries.
Short-term debt
Centennial On March 18, 2022, Centennial entered into a $100.0 million term loan agreement with a SOFR-based variable interest rate and a maturity date of March 17, 2023. 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 65 percent. The covenants also include certain restrictions on the sale of certain assets, loans and investments.
Long-term debt
Long-term Debt Outstanding Long-term debt outstanding was as follows:
| | | | Weighted Average Interest Rate at March 31, 2021 | March 31, 2021 | March 31, 2020 | December 31, 2020 | | Weighted Average Interest Rate at March 31, 2022 | March 31, 2022 | March 31, 2021 | December 31, 2021 |
| | | | (In thousands) | | | (In thousands) |
| Senior Notes due on dates ranging from October 22, 2022 to October 30, 2060 | 4.40 | % | $ | 1,950,000 | | $ | 1,850,000 | | $ | 1,950,000 | | |
| Senior Notes due on dates ranging from October 22, 2022 to September 15, 2061 | | Senior Notes due on dates ranging from October 22, 2022 to September 15, 2061 | 4.28 | % | $ | 2,275,000 | | $ | 1,950,000 | | $ | 2,125,000 | |
| Commercial paper supported by revolving credit agreements | Commercial paper supported by revolving credit agreements | .33 | % | 218,900 | | 265,000 | | 125,600 | | Commercial paper supported by revolving credit agreements | .90 | % | 348,500 | | 218,900 | | 450,300 | |
| Credit agreements due on June 7, 2024 | Credit agreements due on June 7, 2024 | 2.20 | % | 43,350 | | 259,550 | | 95,900 | | Credit agreements due on June 7, 2024 | 3.25 | % | 85,800 | | 43,350 | | 127,500 | |
| Medium-Term Notes due on dates ranging from September 15, 2027 to March 16, 2029 | Medium-Term Notes due on dates ranging from September 15, 2027 to March 16, 2029 | 7.32 | % | 35,000 | | 50,000 | | 35,000 | | Medium-Term Notes due on dates ranging from September 15, 2027 to March 16, 2029 | 7.32 | % | 35,000 | | 35,000 | | 35,000 | |
| Term Loan Agreement due on September 3, 2032 | Term Loan Agreement due on September 3, 2032 | 2.00 | % | 8,400 | | 9,100 | | 8,400 | | Term Loan Agreement due on September 3, 2032 | 2.00 | % | 7,700 | | 8,400 | | 7,700 | |
| Other notes due on dates ranging from July 15, 2021 to July 1, 2061 | .82 | % | 3,282 | | 28,374 | | 4,034 | | |
| Other notes due on dates ranging from January 1, 2024 to January 1, 2061 | | Other notes due on dates ranging from January 1, 2024 to January 1, 2061 | .95 | % | 2,445 | | 3,282 | | 2,564 | |
| Less unamortized debt issuance costs | Less unamortized debt issuance costs | | 5,655 | | 6,640 | | 5,803 | | Less unamortized debt issuance costs | | 6,605 | | 5,655 | | 6,090 | |
| Less discount | Less discount | | 3 | | 149 | | 1 | | Less discount | | 77 | | 3 | | 74 | |
| Total long-term debt | Total long-term debt | | 2,253,274 | | 2,455,235 | | 2,213,130 | | Total long-term debt | | 2,747,763 | | 2,253,274 | | 2,741,900 | |
| Less current maturities | Less current maturities | | 1,552 | | 16,560 | | 1,555 | | Less current maturities | | 147,953 | | 1,552 | | 148,053 | |
| Net long-term debt | Net long-term debt | | $ | 2,251,722 | | $ | 2,438,675 | | $ | 2,211,575 | | Net long-term debt | | $ | 2,599,810 | | $ | 2,251,722 | | $ | 2,593,847 | |
Schedule of Debt Maturities Long-term debt maturities, which excludes unamortized debt issuance costs and discount, at March 31, 2021,2022, were as follows:
| | | | | | | | | | | | | | | | | | | | |
| Remainder of
2021 | 2022 | 2023 | 2024 | 2025 | Thereafter |
| (In thousands) |
| Long-term debt maturities | $ | 780 | | $ | 148,021 | | $ | 77,921 | | $ | 323,672 | | $ | 177,802 | | $ | 1,530,736 | |
| | | | | | | | | | | | | | | | | | | | |
| Remainder of 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter |
| (In thousands) |
| Long-term debt maturities | $ | 147,953 | | $ | 77,925 | | $ | 495,104 | | $ | 177,802 | | $ | 140,802 | | $ | 1,714,859 | |
Note 16 - Cash flow information
Cash expenditures for interest and income taxes were as follows:
| | | Three Months Ended | | Three Months Ended |
| | | March 31, | | March 31, |
| | | 2021 | 2020 | | | 2022 | 2021 | |
| | | (In thousands) | | (In thousands) |
| Interest, net* | Interest, net* | $ | 14,303 | | $ | 15,978 | | Interest, net* | $ | 15,657 | | $ | 14,303 | |
| Income taxes paid (refunded), net | Income taxes paid (refunded), net | $ | 13,880 | | $ | (1) | | Income taxes paid (refunded), net | $ | (363) | | $ | 13,880 | |
* AFUDC - borrowed was $348,000$586,000 and $627,000$348,000 for the three months ended March 31, 20212022 and 2020,2021, respectively.
Noncash investing and financing transactions were as follows:
| | | March 31, 2021 | March 31, 2020 | December 31, 2020 | | March 31, 2022 | March 31, 2021 | December 31, 2021 |
| | (In thousands) | | (In thousands) |
| Right-of-use assets obtained in exchange for new operating lease liabilities | Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 9,236 | | $ | 10,655 | | $ | 54,356 | | Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 10,175 | | $ | 9,236 | | $ | 55,987 | |
| Property, plant and equipment additions in accounts payable | Property, plant and equipment additions in accounts payable | $ | 20,594 | | $ | 27,425 | | $ | 26,082 | | Property, plant and equipment additions in accounts payable | $ | 25,730 | | $ | 20,594 | | $ | 57,605 | |
| Accrual for holdback payment related to a business combination | $ | 0 | | $ | 5,000 | | $ | 2,500 | | |
| Debt assumed in connection with a business combination | | Debt assumed in connection with a business combination | $ | — | | $ | — | | $ | 10 | |
Note 17 - 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 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 segment provides natural gas transportation and underground storage services through a regulated pipeline system primarily in the Rocky Mountain and northern Great Plains regions of the United States. This segment also provides non-regulated cathodic protection and other energy-related services. In 2020, the pipeline segment divested its regulated and non-regulated natural gas gathering assets. With the completion of these sales, the segment exited the natural gas gathering business.
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-mixedready-mix 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 oil 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, as well asincluding Alaska and Hawaii.
The construction services segment provides insidea full spectrum of construction services through its electrical and outsidemechanical and transmission and distribution specialty contracting services in 44 states plus Washington D.C.across the country. These specialty contracting services are provided to utilities and manufacturing, transportation, commercial, industrial, institutional, renewable and governmental customers. Its insideelectrical and mechanical contracting services include design, construction and maintenance of electrical and communication wiring and infrastructure, fire suppression systems, and mechanical piping and services. Its outsidetransmission and distribution contracting services include design, construction and maintenance of overhead and underground electrical, distributiongas and transmission lines, substations, external lighting, traffic signalization, and gas pipelines,communication infrastructure, as well as utility excavation and the manufacturemanufacturing and distribution of transmission line construction equipment. This segment also constructsequipment and maintains renewable energy projects. These specialty contracting services are provided to utilities and large manufacturing, commercial, industrial, institutional and governmental customers.tools.
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 and 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 Fidelity other than certain general and administrative costs and interest expense as described above.
The information below follows the same accounting policies as described in Note 2 of the Notes to Consolidated Financial Statements in the 20202021 Annual Report. Information on the Company's segments was as follows:
| | | Three Months Ended | | | | Three Months Ended |
| | March 31, | | | | March 31, |
| | | 2021 | | 2020 | | | | | 2022 | | 2021 | |
| | | (In thousands) | | | (In thousands) |
| External operating revenues: | External operating revenues: | | | External operating revenues: | | | |
| Regulated operations: | Regulated operations: | | | Regulated operations: | | |
| Electric | Electric | $ | 84,673 | | $ | 85,908 | | | Electric | | $ | 93,594 | | $ | 84,673 | |
| Natural gas distribution | Natural gas distribution | 350,206 | | 326,443 | | | Natural gas distribution | | 450,418 | | 350,206 | |
| Pipeline | Pipeline | 7,502 | | 6,331 | | | Pipeline | | 9,444 | | 7,502 | |
| | | 442,381 | | 418,682 | | | | | 553,456 | | 442,381 | |
| Non-regulated operations: | Non-regulated operations: | | | Non-regulated operations: | | |
| Pipeline | Pipeline | 2,411 | | 4,324 | | | Pipeline | | 1,676 | | 2,411 | |
| Construction materials and contracting | Construction materials and contracting | 265,659 | | 262,144 | | | Construction materials and contracting | | 309,836 | | 265,659 | |
| Construction services | Construction services | 517,470 | | 512,205 | | | Construction services | | 551,591 | | 517,470 | |
| Other | Other | 17 | | 18 | | | Other | | — | | 17 | |
| | | 785,557 | | 778,691 | | | | | 863,103 | | 785,557 | |
| Total external operating revenues | Total external operating revenues | $ | 1,227,938 | | $ | 1,197,373 | | | Total external operating revenues | | $ | 1,416,559 | | $ | 1,227,938 | |
|
| | | Three Months Ended | | | | Three Months Ended |
| | March 31, | | | | March 31, |
| | | 2021 | | 2020 | | | | | 2022 | | 2021 | |
| | | (In thousands) | | | (In thousands) |
| Intersegment operating revenues: | Intersegment operating revenues: | | | Intersegment operating revenues: | | |
| Regulated operations: | Regulated operations: | | | Regulated operations: | | |
| Electric | Electric | $ | 136 | | $ | 195 | | | Electric | | $ | 124 | | $ | 136 | |
| Natural gas distribution | Natural gas distribution | 142 | | 185 | | | Natural gas distribution | | 136 | | 142 | |
| Pipeline | Pipeline | 25,990 | | 25,183 | | | Pipeline | | 25,933 | | 25,990 | |
| | 26,268 | | 25,563 | | | | | 26,193 | | 26,268 | |
| Non-regulated operations: | Non-regulated operations: | | | Non-regulated operations: | | |
| Pipeline | Pipeline | 239 | | 16 | | | Pipeline | | 7 | | 239 | |
| Construction materials and contracting | Construction materials and contracting | 62 | | 63 | | | Construction materials and contracting | | 130 | | 62 | |
| Construction services | Construction services | 1,042 | | 2,470 | | | Construction services | | 1,059 | | 1,042 | |
| Other | Other | 3,324 | | 2,973 | | | Other | | 4,341 | | 3,324 | |
| | 4,667 | | 5,522 | | | | | 5,537 | | 4,667 | |
| Intersegment eliminations | Intersegment eliminations | (30,935) | | (31,085) | | | Intersegment eliminations | | (31,730) | | (30,935) | |
| Total intersegment operating revenues | Total intersegment operating revenues | $ | 0 | | $ | 0 | | | Total intersegment operating revenues | | $ | — | | $ | — | |
| | Operating income (loss): | Operating income (loss): | | | Operating income (loss): | | |
| Electric | Electric | $ | 13,865 | | $ | 14,859 | | | Electric | | $ | 15,044 | | $ | 13,865 | |
| Natural gas distribution | Natural gas distribution | 53,573 | | 49,998 | | | Natural gas distribution | | 56,256 | | 53,573 | |
| Pipeline | Pipeline | 12,536 | | 11,419 | | | Pipeline | | 11,882 | | 12,536 | |
| Construction materials and contracting | Construction materials and contracting | (34,889) | | (43,269) | | | Construction materials and contracting | | (44,605) | | (34,889) | |
| Construction services | Construction services | 40,277 | | 23,796 | | | Construction services | | 29,498 | | 40,277 | |
| Other | Other | (198) | | 267 | | | Other | | (732) | | (198) | |
| Total operating income | Total operating income | $ | 85,164 | | $ | 57,070 | | | Total operating income | | $ | 67,343 | | $ | 85,164 | |
| | Net income (loss): | Net income (loss): | | | Net income (loss): | | |
| Regulated operations: | Regulated operations: | | | Regulated operations: | | |
| Electric | Electric | $ | 10,749 | | $ | 11,374 | | | Electric | | $ | 11,278 | | $ | 10,749 | |
| Natural gas distribution | Natural gas distribution | 36,178 | | 32,369 | | | Natural gas distribution | | 36,315 | | 36,178 | |
| Pipeline | Pipeline | 9,194 | | 7,386 | | | Pipeline | | 7,956 | | 9,194 | |
| | 56,121 | | 51,129 | | | | | 55,549 | | 56,121 | |
| Non-regulated operations: | Non-regulated operations: | | | Non-regulated operations: | | |
| Pipeline | Pipeline | (296) | | (13) | | | Pipeline | | (619) | | (296) | |
| Construction materials and contracting | Construction materials and contracting | (30,813) | | (38,215) | | | Construction materials and contracting | | (40,010) | | (30,813) | |
| Construction services | Construction services | 29,825 | | 16,823 | | | Construction services | | 21,324 | | 29,825 | |
| Other | Other | (2,721) | | (4,185) | | | Other | | (4,511) | | (2,721) | |
| | (4,005) | | (25,590) | | | | | (23,816) | | (4,005) | |
| Income from continuing operations | Income from continuing operations | 52,116 | | 25,539 | | | Income from continuing operations | | 31,733 | | 52,116 | |
| Income (loss) from discontinued operations, net of tax | 15 | | (409) | | | |
| Income from discontinued operations, net of tax | | Income from discontinued operations, net of tax | | 30 | | 15 | |
| Net income | Net income | $ | 52,131 | | $ | 25,130 | | | Net income | | $ | 31,763 | | $ | 52,131 | |
Note 18 - 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)credit for the Company's pension andbenefit plans were as follows:
| | | | | | | | | | |
| Three Months Ended | |
| March 31, | |
| 2022 | 2021 | | |
| (In thousands) |
| Components of net periodic benefit credit: | | | | |
| | | | |
| Interest cost | $ | 2,631 | | $ | 2,455 | | | |
| Expected return on assets | (4,864) | | (4,894) | | | |
| | | | |
| Amortization of net actuarial loss | 1,671 | | 2,004 | | | |
| Net periodic benefit credit | $ | (562) | | $ | (435) | | | |
Components of net periodic benefit credit for the Company's other postretirement benefit plans were as follows:
| | | Pension Benefits | Other
Postretirement Benefits | | Three Months Ended | |
| Three Months Ended March 31, | 2021 | 2020 | 2021 | 2020 | |
| | (In thousands) | | March 31, | |
| Components of net periodic benefit cost (credit): | | |
| | | 2022 | 2021 | |
| | | (In thousands) |
| Components of net periodic benefit credit: | | Components of net periodic benefit credit: | | |
| Service cost | Service cost | $ | 0 | | $ | 0 | | $ | 400 | | $ | 352 | | Service cost | $ | 354 | | $ | 400 | | |
| Interest cost | Interest cost | 2,455 | | 2,973 | | 466 | | 591 | | Interest cost | 474 | | 466 | | |
| Expected return on assets | Expected return on assets | (4,894) | | (4,761) | | (1,275) | | (1,248) | | Expected return on assets | (1,322) | | (1,275) | | |
| Amortization of prior service credit | Amortization of prior service credit | 0 | | 0 | | (349) | | (297) | | Amortization of prior service credit | (350) | | (349) | | |
| Amortization of net actuarial loss | 2,004 | | 1,863 | | 6 | | 2 | | |
| Net periodic benefit cost (credit), including amount capitalized | (435) | | 75 | | (752) | | (600) | | |
| Amortization of net actuarial (gain) loss | | Amortization of net actuarial (gain) loss | (54) | | 6 | | |
| Net periodic benefit credit, including amount capitalized | | Net periodic benefit credit, including amount capitalized | (898) | | (752) | | |
| Less amount capitalized | Less amount capitalized | 0 | | 0 | | 39 | | 32 | | Less amount capitalized | 31 | | 39 | | |
| Net periodic benefit cost (credit) | $ | (435) | | $ | 75 | | $ | (791) | | $ | (632) | | |
| Net periodic benefit credit | | Net periodic benefit credit | $ | (929) | | $ | (791) | | |
The components of net periodic benefit cost (credit),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 was $769,000$773,000 and $1.0 million$769,000 for the three months ended March 31, 20212022 and 2020,2021, respectively. The components of net periodic benefit cost for these plans are included in other income on the Consolidated Statements of Income.
Note 19 - 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 significant open regulatory proceedings and cases by jurisdiction including updates to those reported in the 20202021 Annual Report. The Company is unable to predict the ultimate outcome of these matters, the timing of final decisions of the various regulators and courts, or the effect on the Company's results of operations, financial position or cash flows.
On January 12, 2021, Intermountain filed an application with the IPUC for a decrease in its depreciation and amortization rates of approximately $2.9 million annually or a decrease from a combined rate of 3.0 percent to 2.6 percent. Intermountain has requested the rates be retroactive to January 1, 2021. This matter is pending before the IPUC.MNPUC
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 received approval to implement an interim rate increase of approximately $2.6 million or approximately 11.0 percent, subject to refund, effective January 1, 2020. On October 26, 2020, the MNPUC issued an order authorizing an annual increase in revenues of approximately $2.6 million or approximately 11.5 percent. On February 25, 2021, the MNPUC approved implementing the rates effective April 1, 2021.
Great Plains defers the difference between the actual cost of gas spent to serve customers and that recovered from customers on a monthly basis. Annually, the CompanyGreat Plains prepares a true-up pursuant to the purchased gas adjustment tariff. On MarchAugust 30, 2021, the MNPUC issued an order to allow Great Plains filedrecovery of an out-of-cycle cost of gas adjustment withof $8.8 million over a period of 27 months. The order was effective September 1, 2021, and is subject to a prudence review by the MNPUC for the recovery of approximately $11.1 million.MNPUC. The requested increase was for the February 2021 extreme cold weather, primarily in the central United States, and market conditions surrounding the natural gas commodity market. The length of recovery was requested at 28 months with a rate structure that is higher in the summer and lower in the winter due to the lower gas usage in the summer to mitigate the impact on customers. This matterMNPUC prudence review is pending before the MNPUC.
NDPSC
On August 26, 2020, Montana-Dakota filedwith 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 the increase in investment. On December 16, 2020, Montana-Dakota received approval to implement an interim rate increase of approximately $6.9 million or approximately 6.0 percent, subject to refund, effective January 1, 2021. A hearing was held March 17 and 18, 2021. On April 9, 2021, Montana-Dakota, NDPSC Advocacy Staff and the intervener in the case filed a settlement agreement reflecting an updated increase of approximately $6.9 million annually or approximately 6.0 percent above current rates. On May 5, 2021, the NDPSC approved the settlement agreement with rates effective June 1, 2021.
On March 2, 2021, Montana-Dakota filed an informational update to the generation resource recovery rider with the NDPSC related to the retirement of Unit 1 at Lewis & Clark Station. The filing includes the annual revenue requirement offset by the related amortization of the accelerated depreciation on the plant, net of excess deferred income taxes, and the decommissioning costs projectedorder to be incurred in 2021 resulting in 0 impact to customers.
Montana-Dakota defers the difference between the actual cost of gas spent to serve customers and that recovered from customersissued on a monthly basis. Annually the Company prepares a true-up pursuant to the purchased gas adjustment tariff. On March 31, 2021, Montana-Dakota filed an out-of-cycle cost of gas adjustment with the NDPSC for approximately $13.5 million. The requested increase was for the February 2021 extreme cold weather, primarily in the central United States, and market conditions surrounding the natural gas commodity market. The filing was made to expedite recovery of these costs and maintain the timing of annual purchased gas adjustment filings. This matter is pendingor before the NDPSC.August 29, 2022.
SDPUC
Montana-Dakota has a transmission cost recovery rider that allows annual updates to rates for actual costs forassociated with transmission-related projects and services. On March 1, 2021,2022, Montana-Dakota filed an annual update to its transmission cost recovery rider to recover a revenue requirement of approximately $1.0$2.5 million annually, which reflects a true-up of the prior period adjustment, resulting in an increase in current rates of approximately $274,000. On April 30, 2021,$1.5 million. This matter is pending before the SDPUC approved the rates as requested with an effective date of May 1, 2021.SDPUC.
Montana-Dakota has an infrastructure rider rate tariff that allows for annual adjustments for recent projected capital costs and related expenses for projects determined to be recoverable under the electric tariff. On February 26, 2021,March 1, 2022, Montana-Dakota filed an annual update to its infrastructure rider requesting to recover a revenue requirement of approximately $1.0 million$940,000 annually, which reflects a true-up of the prior period adjustment, resulting in a decrease in current rates of approximately $236,000.$88,000. On April 30, 2021,28, 2022, the SDPUC approved the rates as requested with an effective date of May 1, 2021.
On March 11, 2021, Montana-Dakota filed an informational update to the infrastructure rider rate tariff with the SDPUC related to the retirement of Unit 1 at Lewis & Clark Station. The filing includes the annual revenue requirement offset by the related amortization of the accelerated depreciation on the plant, net of excess deferred income taxes, and the decommissioning costs projected to be incurred in 2021 resulting in 0 impact to customers. This matter is pending before the SDPUC.
Montana-Dakota defers the difference between the actual cost of gas spent to serve customers and that recovered from customers on a monthly basis. Annually the Company prepares a true-up pursuant to the purchased gas cost adjustment tariff. On March 31, 2021, Montana-Dakota filed an out-of-cycle cost of gas adjustment with the SDPUC for approximately $5.5 million. The requested increase was for the February 2021 extreme cold weather, primarily in the central United States, and market conditions surrounding the natural gas commodity market. The filing was made to expedite recovery of these costs and maintain the timing of annual purchased gas adjustment filings. On April 30, 2021, the SDPUC approved the rates as requested with an effective date of May 1, 2021.2022.
WUTC
On June 19, 2020,September 30, 2021, Cascade filed an application with the WUTC for a natural gas rate increase of approximately $13.8$13.7 million annually or approximately 5.35.1 percent above current rates. The requested increase was primarily to recover investments made in infrastructure upgrades, as well as increased operationto recover 2021 wage increases. On March 22, 2022, Cascade filed a multi-party settlement and maintenance costs.stipulation on behalf of Cascade updated its filing on July 24, 2020, toand the staff of the WUTC that would result in a revenue requirement increase of approximately $14.3$10.7 million annually or approximately 5.5 percent. Cascade filed a rebuttal case on January 8, 2021, supporting an increase of approximately $7.4 million annually or approximately 2.8 percent. The revised revenue within the rebuttal case reflects several adjustments including depreciation, reduction to return on equity, delays on certain projects, adjustments to income taxes and updates to wages. A hearing was held February 24, 2021, and briefs were filed with the WUTC on March 22, 2021.4.0 percent above current rates. The WUTC has 11 months to render a final decision on the rate case. This matter is pending before the WUTC.
WYPSC
On May 14, 2020, Montana-DakotaMarch 24, 2022, Cascade filed separate requestsa request for its electric and natural gas servicesa tariff revision with the WYPSCWUTC to userectify an inadvertent IRS normalization violation resulting from its tariff established in 2018 that passes back to customers the reversal of plant-related excess deferred accounting for costs relatedincome taxes through an annual rate adjustment. This request was made in response to the COVID-19 pandemic. Montana-Dakota determined the deferred accounting orders were no longer needed and the filings were withdrawn by Montana-Dakota on March 2, 2021.
Montana-Dakota defers the difference between the actual costissuance of gas spentan IRS private letter ruling to serve customers and that recovered from customers on a monthly basis. Annually the Company prepares a true-up pursuant to the purchased gas cost adjustment tariff. On March 31, 2021, Montana-Dakota filed an out-of-cycle cost of gas adjustmentanother Washington utility with the WYPSCsame annual rate adjustment tariff, which addressed its normalization violation. The private letter ruling concluded the tariff to refund excess deferred income taxes without corresponding adjustments for approximately $1.6 million. The requested increase was forother components of rate base or changes in depreciation or income tax expense, is an impermissible methodology under the February 2021 extreme cold weather, primarilyIRS normalization and consistency rules. Cascade's request proposes a similar remedy through the tariff to recover the excess amounts refunded to customers while this tariff has been in place, and revises the method going forward to reflect excess deferred income taxes in rates in the central United States, and market conditions surrounding the natural gas commodity market. The filing was made to expeditesame manner as other components of rate base from its most recent general rate case. Cascade has requested recovery of these coststhe excess refunded to customers of approximately $3.3 million and maintainelimination of the timing of annual purchased gas adjustment filings. On April 30, 2021,currently deferred, but not yet refunded balance. This matter is pending before the WYPSC approved the rates as requested with an effective date of May 1, 2021.WUTC.
Note 20 - 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 March 31, 20212022 and 2020,2021, and December 31, 2020,2021, the Company accrued liabilities, which have not been discounted, including liabilities held for sale, of $30.0 million, $55.0 million $33.1 million and $41.5$37.0 million, respectively. At March 31, 20212022 and 2020,2021, and December 31, 2020,2021, the Company also recorded corresponding insurance receivables of $7.1 million, $31.6 million $19.0 million and $17.5$14.1 million, respectively, and regulatory assets of $20.8 million, $20.9 million $10.8 million and $21.3$21.2 million, respectively, related to the accrued liabilities. The accruals are for contingencies includingresulting from 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
The Company is a party 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 Company's environmental matters that were previously reported in the 20202021 Annual Report.
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. The remaining guarantee is expected to expire in 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 March 31, 2021,2022, the fixed maximum amounts guaranteed under these agreements aggregated $235.8aggregate $147.9 million. Certain of the guarantees also have no fixed maximum amounts specified. At March 31, 2021,2022, the amounts of scheduled expiration of the maximum amounts guaranteed under these agreements aggregate to $120.8 million in 2021; $42.4$48.5 million in 2022; $61.9$44.3 million in 2023; $500,000$44.3 million in 2024; $500,000$800,000 in 2025; $700,000$800,000 in 2026; $200,000 thereafter; and $9.0 million, which has no scheduled maturity date. There were 0no amounts outstanding under the previously mentioned guarantees at March 31, 2021.2022. 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 March 31, 2021,2022, the fixed maximum amounts guaranteed under these letters of credit aggregated $25.5$29.2 million. At March 31, 2021,2022, the amounts of scheduled expiration of the maximum amounts guaranteed under these letters of credit aggregate to $23.6$28.6 million in 20212022 and $1.9 million$600,000 in 2022.2023. There were 0no amounts outstanding under the previously mentioned letters of credit at March 31, 2021.2022. 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 March 31, 2021.2022.
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 March 31, 2021,2022, approximately $1.1 billion 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 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 March 31, 2021,2022, 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 $33.1$31.0 million.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The Company focuses on infrastructure and is Building a Strong America® by providing essential productsinfrastructure and services through its regulated energy delivery and construction materials and services businesses. The Company and its employees work hard to keep the economy of the United StatesAmerica moving with the products and services provided, which include powering, heating and connecting homes, factories, offices and stores; and building roads, highways, data infrastructure and airports.
The Company's two-platform business model, regulated energy delivery and construction materials and services, are each comprised of different operating segments. Most of these segments experience seasonality related to the industries in which they operate. The two-platform approach helps balance this seasonality and the risks associated with each type of industry. The Company is authorized to conduct business in 46 statesnearly every state and during peak times may employconstruction season has employed over 15,60016,000 employees. The Company's organic investments are strong drivers of high-quality earnings growth and continue to be an important part of the Company's growth story.growth. Management believes the Company is well positioned in the industries and markets in which it operates.
The Company continues to effectively execute its strategy while managingand is continually adjusting its businesses in response to the ongoing effects of the COVID-19 pandemic. Most of the Company's products and services are considered essential to our countryAmerica and ourits communities and, as a result, operations have generally been permitted to proceed. In early 2020, the Company implemented its business continuity plans to continue to provide safe and reliable services during the pandemic.
continued. The Company has a task force to monitor developments related to the pandemic and implement procedures to protect employees and customers. In March 2020, the Company took measures to mitigate the risk of COVID-19 transmission by requiring employees that had the capacity to do so to work from home. The Company also enacted additional physical and cybersecurity measures to safeguard systems for remote work locations. To date, certain office employees continue to work remotely due to the number of COVID-19 cases in some operating regions. The Company will be using a phased approach as it brings the remaining office employees not participating in the Company's telecommute program back to their work locations following the first quarter of 2021.
Certain of the Company's supply vendors are facing production and staffing challenges as they work to achieve production capacity and lead times consistent with pre-pandemic levels. Coupled with other challenges of the pandemic, these vendors are also experiencing strong demand from the residential construction market, some industrial segments and some utility infrastructure investments. In addition, freight markets continue to have challenges with driver shortages; strong demand for consumer goods; extended lead times; and costs for vehicles, driver retention and recruitment. As a result, the Company has experienced some price increases and disruptions and delays on delivery of certain materials.
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 months ended March 31, 2021 and 2020. The Company will continue to adjust its business in response to the pandemic while positioning for potential opportunities to enhance its competitive position. 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 specific to each ofand there have been no material adverse impacts from COVID-19 on the Company's business segments, see the following discussions in each business segment's Outlook section.results of operations. For more information on the possible impacts to the Company's businesses, see Part I, Item 1A. Risk Factors in the 2020 Annual Report.2021 Form 10-K.
Forward-Looking Statements
The following sections contain forward-looking statements within the meaning of Section 21E of the Exchange Act. Forward-looking statements are all statements other than statements of historical fact, including without limitation those statements that are identified by the words "anticipates," "estimates," "expects," "intends," "plans," "predicts" and similar expressions, and include statements concerning plans, trends, objectives, goals, strategies, future events or performance, and underlying assumptions (many of which are based, in turn, upon further assumptions) and other statements that are other than statements of historical facts. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature, including statements contained within Business Segment Financial and Operating Data.
Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, 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 and changes in such assumptions and factors could cause actual future results to differ materially.
Any forward-looking statement contained in this document speaks only as of the date on which the statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances that occur after the date on which the statement is made or to reflect the occurrence of unanticipated events. 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 I, Item 1A. Risk Factors in the 20202021 Annual Report and subsequent filings with the SEC.
Consolidated Earnings Overview
The following table summarizes the contribution to the consolidated income by each of the Company's business segments.
| | | Three Months Ended | | | Three Months Ended | |
| | March 31, | | | March 31, | |
| | | 2021 | | 2020 | | | | 2022 | | 2021 | | |
| | (In millions, except per share amounts) | | (In millions, except per share amounts) |
| Electric | Electric | $ | 10.7 | | $ | 11.4 | | | Electric | $ | 11.3 | | $ | 10.7 | | |
| Natural gas distribution | Natural gas distribution | 36.2 | | 32.3 | | | Natural gas distribution | 36.3 | | 36.2 | | |
| Pipeline | Pipeline | 8.9 | | 7.4 | | | Pipeline | 7.3 | | 8.9 | | |
| Construction materials and contracting | Construction materials and contracting | (30.8) | | (38.2) | | | Construction materials and contracting | (40.0) | | (30.8) | | |
| Construction services | Construction services | 29.8 | | 16.8 | | | Construction services | 21.3 | | 29.8 | | |
| Other | Other | (2.7) | | (4.2) | | | Other | (4.5) | | (2.7) | | |
| Income from continuing operations | Income from continuing operations | 52.1 | | 25.5 | | | Income from continuing operations | 31.7 | | 52.1 | | |
| Loss from discontinued operations, net of tax | — | | (.4) | | | |
| Discontinued operations, net of tax | | Discontinued operations, net of tax | — | | — | | |
| Net income | Net income | $ | 52.1 | | $ | 25.1 | | | Net income | $ | 31.7 | | $ | 52.1 | | |
| Earnings per share - basic: | Earnings per share - basic: | | | Earnings per share - basic: | | |
| Income from continuing operations | Income from continuing operations | $ | .26 | | $ | .13 | | | Income from continuing operations | $ | .16 | | $ | .26 | | |
| Discontinued operations, net of tax | Discontinued operations, net of tax | — | | — | | | Discontinued operations, net of tax | — | | — | | |
| Earnings per share - basic | Earnings per share - basic | $ | .26 | | $ | .13 | | | Earnings per share - basic | $ | .16 | | $ | .26 | | |
| Earnings per share - diluted: | Earnings per share - diluted: | | | Earnings per share - diluted: | | |
| Income from continuing operations | Income from continuing operations | $ | .26 | | $ | .13 | | | Income from continuing operations | $ | .16 | | $ | .26 | | |
| Discontinued operations, net of tax | Discontinued operations, net of tax | — | | — | | | Discontinued operations, net of tax | — | | — | | |
| Earnings per share - diluted | Earnings per share - diluted | $ | .26 | | $ | .13 | | | Earnings per share - diluted | $ | .16 | | $ | .26 | | |
Three Months Ended March 31, 2021,2022, Compared to Three Months Ended March 31, 20202021 The Company's consolidated earnings increased $27.0 million or 107 percent for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.decreased $20.4 million.
The Company's earnings were positively impacted by increased earnings across most of the Company's businesses. The construction services business experienced an increase in gross margin as a result of higher outside specialty contracting workloads resulting from strong demand for utility projects, partially offset by decreased inside specialty contracting workloads resulting from decreased demand for refinery and commercial projects. In addition, 2020 earnings for the construction services business were negatively impacted by an out-of-period adjustment of approximately $6.7 million, net of tax, to correct revenue previously recognized on a construction contract. The construction materials and contracting business experienced an increase inlower margins from higher fuel, repair and maintenance and labor-related costs, partially offset by increased average product pricing. The construction services business experienced decreased gross margin largely attributable to lower industrial margins due to the timing of projects and less storm-repair and fire-hardening power line work that is typically higher-margin work, offset in part by increased commercial margins. The pipeline business experienced decreased natural gas storage-related revenue and higher operating expenses, partially offset by increased demand revenues associated with the North Bakken Expansion project. The Company's earnings were further impacted by $6.2 million in lower returns on certain of the Company's benefit plan investments. Partially offsetting these decreases were higher residential retail sales volumes at the electric business and higher retail sales volumes across all customer classes, as well resulting from higher realized materials revenues and margins and higher contracting bid margins. The natural gas
distribution business benefited fromas approved rate relief in certain jurisdictions, partially offset by higher operation and maintenance expenses. The pipeline business also experienced increased storage-related revenues resulting in a positive impact to earnings. Favorable income tax adjustments related to the Company's consolidated annualized estimated tax rate had a positive impact on Other. Partially offsetting these increases were decreased earnings at the electric business, largely resulting from higher operation and maintenance expenses and depreciation, depletion and amortization costs.natural gas distribution business.
A discussion of key financial data from the Company's business segments follows.
Business Segment Financial and Operating Data
The following sections include key financial and operating data for each of the Company's business segments. Also included are highlights on key growth strategies, projections and certain assumptions for the Company and its subsidiaries and other matters of the Company's business segments.
For information pertinent to various commitments and contingencies, see the Notes to Consolidated Financial Statements. For a summary of the Company's business segments, see Note 17 of the Notes to Consolidated Financial Statements.
Electric and Natural Gas Distribution
Strategy and challenges The electric and natural gas distribution segments provide electric and natural gas distribution services to customers, as discussed in Note 17. Both segments strive to be top performing utility companies measured by integrity, employee safety and satisfaction, customer service and shareholder return, while providingreturn. The segments provide safe, reliable, competitively priced and environmentally responsible reliableenergy service to customers while focusing on growth and competitively priced energyexpansion opportunities within and related services to customers.beyond its existing territories. The Company is focused on cultivating organic growth while managing operating costs and monitoring opportunities for these segments to retain, grow and expand their customer base through extensions of existing operations, including building and upgrading electric generation, transmission and distribution, and natural gas systems, and through selected acquisitions of companies and properties with similar operating and growth objectives at prices that will provide stable cash flows and an opportunity to earn a competitive return on investment. The continued efforts to create operational improvements and efficiencies across both segments promotes the Company's business integration strategy. The primary factors that impact the results of these segments are the ability to earn authorized rates of return, the cost of natural gas, cost of electric fuel and
purchased power, weather, climate change initiatives, competitive factors in the energy industry, population growth and economic conditions in the segments' service areas.
The electric and natural gas distribution segments are subject to extensive regulation in the jurisdictions where they conduct operations with respect to costs, timely recovery of investments and permitted returns on investment, as well as certain operational, environmental and system integrity regulations. To date, many states have enacted, and others are considering, mandatory clean energy standards requiring utilities to meet certain thresholds of renewable energy generation. Federal legislation for clean energy standards and GHG emissions has been considered and may be implemented in the near future. The current administration has also made climate change a focus during the first quarter of 2021. Over the long-term, the Company expects overall electric demand to be positively impacted by higher demand resulting from increased electrification trends, including electric vehicle adoption, as a means to address economy-wide carbon emissions concerns and changing customer conservation patterns. These initiatives could result in increased costs to produce electricity and procure natural gas. To date, the impact of these initiatives on the Company is unknown. The Company will continue to monitor the progress of these initiatives and assess the potential impacts they may have on its stakeholders, business processes, results of operations, cash flows and disclosures.
investment. The Company is focused on modernizing utility infrastructure to meet the varied energy needs of both its customers and communities while ensuring the delivery of safe, environmentally responsible, reliable and affordable energy. The segments continue to invest in facility upgrades to be in compliance with existing and known future regulations. To assist in the reduction of regulatory lag in obtaining revenue increases to align with increased investments, tracking mechanisms have been implemented in certain jurisdictions,jurisdictions. The Company also seeks rate adjustments for operating costs and capital investments, as well as reasonable returns on investments, not covered by tracking mechanisms. For more information on the Company's tracking mechanisms and recent cases, see Note 19 and the 2021 Annual Report.
The segments are also subject to extensive regulation related to certain operational and environmental compliance, cybersecurity, permit terms and system integrity. Both segments are faced with the ongoing need to actively evaluate cybersecurity processes and procedures related to its transmission and distribution systems for opportunities to further strengthen its cybersecurity protections. Implementation of enhancements and additional requirements is ongoing.
To date, many states have enacted and others are considering, mandatory clean energy standards requiring utilities to meet certain thresholds of renewable and/or carbon-free energy supply. The current presidential administration has made climate change a focus, as further discussed in Note 19.
In September 2019, the PHMSA issuedOutlook section. Over the long-term, the Company expects overall electric demand to be positively impacted by increased electrification trends, including electric vehicle adoption, as a rule for additional regulationsmeans to strengthenaddress economy-wide carbon emission concerns and changing customer conservation patterns. These initiatives could result in increased costs to produce electricity and procure natural gas. The impact of these initiatives on the safetyCompany is unknown. The Company will continue to monitor the progress of natural gas transmissionthese initiatives and storage facilities and hazardous liquid pipelines. The natural gas segment has implemented procedure changes forassess the initial requirements and continues to evaluate and prepare procedure changes necessary for the additional requirements effective July 1, 2021.
State implementation of pollution control plans to improve visibility at Class I areas, such as 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, dependentpotential impacts they may have on determination by state regulatory commissions on approval to recover such costs from customers, negatively impact the Company'sits stakeholders, business processes, results of operations, financial positioncash flows and cash flows. The NDDEQ plans to draft a state implementation plan and share its controls selection with federal land managers of the National Park Service, the United States Fish and Wildlife Service and the United States Forest Service in the first half of 2021. The emissions modeling being conducted for the combined western state agencies affected by the Regional Haze Rule is delayed and not yet available for the NDDEQ to draft a state implementation plan. Therefore, the NDDEQ's state implementation plan, which is due to the EPA by July 2021, is anticipated to be delayed and submitted during the second half of 2021. Additionally, the Company is one of four owners of Coyote Station and cannot make a unilateral decision on the plant's future. The Company could be negatively impacted by the decisions of the other owners.
Revenues are impacted by both customer growth and usage, the latter of which is primarily impacted by weather, as well as impacts associated with commercial and industrial slow-downs, including economic recessions, and energy efficiencies. Very cold winters increase demand for natural gas and to a lesser extent, electricity, while warmer than normal summers increase demand for electricity, especially among residential and commercial customers. Average consumption among both electric and natural gas customers has tended to decline as more efficient appliances and furnaces are installed, and as the Company has implemented conservation programs. Natural gas weather normalization and decoupling mechanisms in certain jurisdictions have been implemented to largely mitigate the effect that would otherwise be caused by variations in volumes sold to these customers due to weather and changing consumption patterns on the Company's distribution margins.
In February 2021, a prolonged period of unseasonably cold temperatures in the central United States significantly increased the demand for electric and natural gas services and contributed to increased market prices. The Company's transmission settlement process with SPP helped offset the increased energy costs to customers during the cold weather event. Further, in some jurisdictions the Company utilized natural gas in storage to lessen the impact of high natural gas costs. Overall, Montana-Dakota and Great Plains incurred approximately $44.0 million in increased natural gas costs in February 2021 in order to maintain services for its customers. Montana-Dakota and Great Plains have filed out-of-cycle purchased gas adjustment requests in four out of five jurisdictions affected by this cold-weather event, as discussed in Note 19, and will continue to engage with its regulators to determine the appropriate recovery periods over which to recover the associated natural gas costs.
The electric and natural gas distribution segments are facingcontinue to face increased pricing and lead times on delivery of certain raw materials and equipment used in electric transmission and distribution system and natural gas pipeline projects. Long lead times are attributable to increased demand for steel products from pipeline companies as they continue pipeline system safety and integrity replacement projects driven by PHMSA regulations, as well as delays in the manufacturing and shipping of electrical equipment as a result of the COVID-19 pandemic including delays in trucking times and issuance of permits for large and heavy loads.subsequent supply chain issues. In addition, the segments are currently experiencing increased fuel costs as well as other general inflationary pressures. The Company continues to monitor these risks and has practices in place to minimize the materialimpacts of long lead times and isinflationary costs such as working with manufacturers to proactively order suchimpacted materials, as well as working with additional suppliers. The segments have not experienced material delays or inflationary pressures. The Company expects these delays and inflationary pressures to help mitigatecontinue throughout the riskremainder of any delays due to extended lead times.2022.
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 likelymay necessitate increases in electric energy prices.
Earnings overview - The following information summarizes the performance of the electric segment.
| | | Three Months Ended | | | Three Months Ended | |
| | March 31, | | | March 31, | |
| | | 2021 | | 2020 | | Variance | | | 2022 | | 2021 | | Variance | |
| | (In millions) | | | (In millions) | | |
| Operating revenues | Operating revenues | $ | 84.8 | | $ | 86.1 | | (2) | % | | Operating revenues | $ | 93.7 | | $ | 84.8 | | 10 | % | |
| Operating expenses: | | Operating expenses: | | | |
| Electric fuel and purchased power | Electric fuel and purchased power | 18.6 | | 20.6 | | (10) | % | | Electric fuel and purchased power | 26.3 | | 18.6 | | 41 | % | |
| Taxes, other than income | .2 | | .1 | | 100 | % | | |
| Adjusted gross margin | 66.0 | | 65.4 | | 1 | % | | |
| Operating expenses: | | | | |
| Operation and maintenance | Operation and maintenance | 31.3 | | 30.7 | | 2 | % | | Operation and maintenance | 30.8 | | 31.3 | | (2) | % | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 16.1 | | 15.5 | | 4 | % | | Depreciation, depletion and amortization | 16.9 | | 16.1 | | 5 | % | |
| Taxes, other than income | Taxes, other than income | 4.7 | | 4.3 | | 9 | % | | Taxes, other than income | 4.6 | | 4.9 | | (6) | % | |
| Total operating expenses | Total operating expenses | 52.1 | | 50.5 | | 3 | % | | Total operating expenses | 78.6 | | 70.9 | | 11 | % | |
| Operating income | Operating income | 13.9 | | 14.9 | | (7) | % | | Operating income | 15.1 | | 13.9 | | 9 | % | |
| Other income (expense) | Other income (expense) | .5 | | (.4) | | 225 | % | | Other income (expense) | (.3) | | .5 | | (160) | % | |
| Interest expense | Interest expense | 6.5 | | 6.8 | | (4) | % | | Interest expense | 7.1 | | 6.5 | | 9 | % | |
| Income before income taxes | Income before income taxes | 7.9 | | 7.7 | | 3 | % | | Income before income taxes | 7.7 | | 7.9 | | (3) | % | |
| Income tax benefit | Income tax benefit | (2.8) | | (3.7) | | 24 | % | | Income tax benefit | (3.6) | | (2.8) | | 29 | % | |
| Net income | Net income | $ | 10.7 | | $ | 11.4 | | (6) | % | | Net income | $ | 11.3 | | $ | 10.7 | | 6 | % | |
| | | | | | | | | | |
| Operating statistics | Three Months Ended | | |
| March 31, | | |
| 2021 | | 2020 | | | |
| Retail sales (million kWh): | | | | |
| Residential | 334.9 | | 330.6 | | | |
| Commercial | 361.8 | | 375.8 | | | |
| Industrial | 144.5 | | 153.0 | | | |
| Other | 19.2 | | 20.4 | | | |
| 860.4 | | 879.8 | | | |
| Average cost of electric fuel and purchased power per kWh | $ | .019 | | $ | .021 | | | |
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. | | | | | | | | | | |
| Operating statistics | Three Months Ended | |
| March 31, | |
| 2022 | | 2021 | | | |
| Revenues (millions): | | | | |
| Retail sales: | | | | |
| Residential | $ | 35.2 | | $ | 31.9 | | | |
| Commercial | 33.6 | | 31.4 | | | |
| Industrial | 9.8 | | 9.6 | | | |
| Other | 1.6 | | 1.5 | | | |
| 80.2 | | 74.4 | | | |
| Transportation and other | 13.5 | | 10.4 | | | |
| $ | 93.7 | | $ | 84.8 | | | |
| Retail sales (million kWh) | | | | |
| Residential | 357.7 | | 334.9 | | | |
| Commercial | 364.1 | | 361.8 | | | |
| Industrial | 140.3 | | 144.5 | | | |
| Other | 19.5 | | 19.2 | | | |
| 881.6 | | 860.4 | | | |
| Average cost of electric fuel and purchased power per kWh | $ | .027 | | $ | .019 | | | |
Three Months Ended March 31, 2021,2022, Compared to Three Months Ended March 31, 20202021 Electric earnings decreased $700,000increased $600,000 as a result of:
Adjusted gross margin:• IncreaseRevenue increased $8.9 million.
◦Largely due to:
•Higher fuel and purchased power costs recovered in customer rates that were offset in expense, as described below.
•Higher retail sales volumes of $600,000, largely the result of $1.1 million higher transmission revenues, due equally to increased revenues from SPP as the result of a FERC settlement and higher tracker revenues2.5 percent, primarily residential retail sales as a result of morecolder weather.
•Higher transmission assets,revenues, primarily from higher net transmission of $700,000 and $500,000higher transmission interconnect upgrades of $600,000.
◦Partially offset by lower per unit average rates of $900,000.
•Electric fuel and purchased power increased $7.7 million.
•Primarily the result of higher revenues associated with transmission interconnect upgrades. Adjusted gross margin was negatively impacted by a decrease in retail sales volumesMISO costs of 2.2 percent. Decreased commercial and industrial retail sales volumes were partially offset by higher residential sales volumes due to the continued trend of individuals being at home more$9.2 million as a result of the COVID-19 pandemic, as discussed later.increased energy costs.
•Partially offset by decreased fuel costs associated with the Lewis & Clark Station and Heskett Station plant closures.
•Operation and maintenance:maintenance decreased $500,000.
◦ IncreaseLargely resulting from decreased payroll-related costs of $600,000,$1.0 million, largely due to increased payroll-related costs of $800,000, partiallyplant closures, as previously discussed.
◦Partially offset by decreasedincreased contract services.service costs, including transmission engineering costs as well as maintenance costs at Coyote Station and Wygen III.
•Depreciation, depletion and amortization:amortization increased $800,000, primarily due to:
◦Increased amortization of plant retirement and closure costs recovered in operating revenues, as discussed in Note 13.
◦Increase of $600,000 as a direct result of increasedIncreased property, plant and equipment balances primarily from transmission projects placed in service.service, largely related to growth and replacement projects.
•Taxes, other than income: Increase of $400,000, due in equal part to higher property taxes in certain jurisdictions and higher payroll taxes driven by increased payroll-related costs.
Other income (expense): Increased income of $900,000 as a result of higher returns on certain of the Company's benefit plan investments.
Interest expense: Comparablewere comparable to the same period in the prior year.
•Other income (expense) decreased $800,000.
◦Largely lower returns on certain of the Company's benefit plan investments of $1.2 million.
◦Partially offset by higher AFUDC largely due to higher rates.
•Interest expense increased $600,000, largely resulting from higher long-term debt balances from debt issued in 2021.
•Income tax benefit:benefit increased $800,000.
◦ Decrease of $900,000, primarily lowerLargely due to higher production tax credits related to the expiration of a 10-year credit-qualifying period on certain facilities and less$1.1 million driven by higher wind generation.production.
Partially offset by lower permanent tax adjustments and excess deferred tax amortization. Earnings overview - The following information summarizes the performance of the natural gas distribution segment.
| | | Three Months Ended | | | Three Months Ended | |
| | March 31, | | | March 31, | |
| | | 2021 | | 2020 | | Variance | | | 2022 | | 2021 | | Variance | |
| | (In millions) | | | (In millions) | | |
| Operating revenues | Operating revenues | $ | 350.4 | | $ | 326.6 | | 7 | % | | Operating revenues | $ | 450.6 | | $ | 350.4 | | 29 | % | |
| Operating expenses: | | Operating expenses: | | | |
| Purchased natural gas sold | Purchased natural gas sold | 202.2 | | 190.5 | | 6 | % | | Purchased natural gas sold | 293.3 | | 202.2 | | 45 | % | |
| Taxes, other than income | 13.9 | | 13.2 | | 5 | % | | |
| Adjusted gross margin | 134.3 | | 122.9 | | 9 | % | | |
| Operating expenses: | | | | |
| Operation and maintenance | Operation and maintenance | 51.2 | | 46.0 | | 11 | % | | Operation and maintenance | 54.1 | | 51.2 | | 6 | % | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 22.5 | | 20.8 | | 8 | % | | Depreciation, depletion and amortization | 22.2 | | 22.5 | | (1) | % | |
| Taxes, other than income | Taxes, other than income | 7.0 | | 6.1 | | 15 | % | | Taxes, other than income | 24.7 | | 20.9 | | 18 | % | |
| Total operating expenses | Total operating expenses | 80.7 | | 72.9 | | 11 | % | | Total operating expenses | 394.3 | | 296.8 | | 33 | % | |
| Operating income | Operating income | 53.6 | | 50.0 | | 7 | % | | Operating income | 56.3 | | 53.6 | | 5 | % | |
| Other income | 1.7 | | .3 | | NM | | |
| Other income (expense) | | Other income (expense) | (.4) | | 1.7 | | (124) | % | |
| Interest expense | Interest expense | 9.2 | | 9.2 | | — | % | | Interest expense | 9.5 | | 9.2 | | 3 | % | |
| Income before income taxes | Income before income taxes | 46.1 | | 41.1 | | 12 | % | | Income before income taxes | 46.4 | | 46.1 | | 1 | % | |
| Income tax expense | Income tax expense | 9.9 | | 8.8 | | 13 | % | | Income tax expense | 10.1 | | 9.9 | | 2 | % | |
| Net income | Net income | $ | 36.2 | | $ | 32.3 | | 12 | % | | Net income | $ | 36.3 | | $ | 36.2 | | — | % | |
| | | | | | | | | | |
| Operating statistics | Three Months Ended | |
| March 31, | |
| 2022 | | 2021 | | | |
| Revenues (millions) | | | | |
| Retail sales: | | | | |
| Residential | $ | 258.6 | | $ | 203.9 | | | |
| Commercial | 162.7 | | 120.6 | | | |
| Industrial | 13.0 | | 8.9 | | | |
| 434.3 | | 333.4 | | | |
| Transportation and other | 16.3 | | 17.0 | | | |
| $ | 450.6 | | $ | 350.4 | | | |
| Volumes (MMdk) | | | | |
| Retail sales: | | | | |
| Residential | 31.0 | | 28.8 | | | |
| Commercial | 20.5 | | 18.6 | | | |
| Industrial | 1.8 | | 1.5 | | | |
| 53.3 | | 48.9 | | | |
| Transportation sales: | | | | |
| Commercial | .7 | | .7 | | | |
| Industrial | 41.0 | | 43.9 | | | |
| 41.7 | | 44.6 | | | |
| Total throughput | 95.0 | | 93.5 | | | |
| Average cost of natural gas per dk | $ | 5.50 | | $ | 4.13 | | | |
*NM - not meaningfulIndex | | | | | | | | | | |
| Operating statistics | Three Months Ended | | |
| March 31, | | |
| 2021 | | 2020 | | | |
| Volumes (MMdk) | | | | |
| Retail sales: | | | | |
| Residential | 28.8 | | 27.7 | | | |
| Commercial | 18.6 | | 18.8 | | | |
| Industrial | 1.5 | | 1.5 | | | |
| 48.9 | | 48.0 | | | |
| Transportation sales: | | | | |
| Commercial | .7 | | .7 | | | |
| Industrial | 43.9 | | 45.6 | | | |
| 44.6 | | 46.3 | | | |
| Total throughput | 93.5 | | 94.3 | | | |
| Average cost of natural gas per dk | $ | 4.13 | | $ | 3.97 | | | |
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 March 31, 2021,2022, Compared to Three Months Ended March 31, 20202021 Natural gas distributiondistribution's earnings increased $3.9 million$100,000 as a result of:
Adjusted gross margin:• Increase of $11.4Operating revenues increased $100.2 million, largely the result of $5.7 millionresulting from:
◦Higher purchased natural gas sold recovered in approved rate reliefcustomer rates that was offset in certain jurisdictions; $2.2 million in higher weather normalization and decoupling mechanisms; and increasedexpense, as described below.
◦Higher retail sales volumes of approximately 1.89.0 percent primarily to residential customers.across all customer classes, partially offset by weather normalization and decoupling mechanisms in certain jurisdictions.
Operation and maintenance:◦ IncreaseHigher revenue-based taxes recovered in rates of $5.2$3.8 million primarily due to higher payroll-related costs of $2.2 million and decreased credits for costs associated with the installation of meters partially from delaying meter replacements for safety measures implementedthat were offset in expense, as a result of the COVID-19 pandemic.described below.
Depreciation, depletion and amortization:◦ Increase of $1.7 million, resulting from increased property, plant and equipment balances from growth and replacement projects placed in service.
Taxes, other than income: Increase of $900,000, due in part to higher property taxesApproved rate relief in certain jurisdictions of $600,000,$1.2 million, as well as higher payroll taxes driven bycost recovery and tracker mechanisms of $1.0 million.
•Purchased natural gas sold increased payroll-related costs.$91.1 million, primarily due to:
Other income:◦ Increase of $1.4 millionHigher natural gas costs as a result of higher returns on certain of the Company's benefit plan investments of $1.8 million, partially offset by decreased interest income related to themarket prices.
◦Higher recovery of purchased gas adjustment balances.adjustments of $30.0 million related to the February 2021 cold weather event and the 2018 Enbridge pipeline rupture.
Interest expense:• ComparableOperation and maintenance increased $2.9 million, due to:
◦Increased contract services of $1.3 million, primarily higher subcontractor costs.
◦Higher payroll-related costs of $1.0 million, largely higher straight-time payroll.
◦Higher software costs.
•Depreciation, depletion and amortization was comparable to the same period in the prior year.
•Taxes, other than income increased $3.8 million resulting from higher revenue-based taxes being recovered in rates.
•Other income (expense) decreased $2.1 million as a result of lower returns on certain of the Company's benefit plan investments.
•Interest expense was comparable to the same period in the prior year.
•Income tax expense: Increase of $1.1 million dueexpense was comparable to an increasethe same period in income before taxes.the prior year.
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 2020, 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, and continues to adjust these measures in 2021. In April 2020, the Company waived late payment fees to help customers experiencing financial hardships. As of January 1, 2021, the Company has reinstated disconnects and late payment fees to certain customer classes in seven of its eight states of operation. As a consequence of the suspended disconnects and waived late fees, the Company's cash flows and collection of receivables have been affected. To date, the Company 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. The Company expects this downward trend on demand to continue throughout the pandemic. In the first quarter of 2021, the Company continued certain cost containment measures in response to the COVID-19 pandemic, including reduced employee travel and temporary delays in non-essential training for employees. The Company filed requests for the use of deferred accounting for costs related to the COVID-19 pandemic in all of the jurisdictions in which it operates and has since withdrawn its applications in two of those jurisdictions. The Company has deferred an immaterial amount related to the pandemic to date.
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. In 2020,2021, these segments experienced retail customer growth of approximately 1.81.7 percent, and the Company expects customer growth to continue to average 1 percent to 2 percent per year. This customer growth, along with system upgrades and replacements needed to supply safe and reliable service, will require investments in new and replacement electric and natural gas systems.
These segments are exposed to energy price volatility.volatility and may be impacted by changes in oil and natural gas exploration and production activity. Rate schedules in the jurisdictions in which the Company's natural gas distribution segment operates contain clauses that permit the Company to file for rate adjustments for changes in the cost of purchased 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.
Additionally, During the last half of 2021 and the first quarter of 2022, the Company has implemented risk mitigation measures to minimize the price volatility associated withexperienced increased natural gas costsprices and expects this trend to continue through derivative contracts at Cascade. Demand for the Company's regulated energy delivery services could be impacted by reduced oil and natural gas exploration and production activity.next winter heating season due to the increase in demand outpacing the supply along with the impact of global events. The Company continueswill continue to monitor natural gas prices, as well as oil and natural gas production levels.
In February 2019, the Company announced the retirement of three aging coal-fired electric generating units, resulting from the Company's analysis showing that the plants are no longer expected to be cost competitive for customers. The Company ceased operations on March 31, 2021, of Unit 1 at Lewis & Clark Station in Sidney, Montana. The Company began pre-decommissioning activities on April 1,Montana, in March 2021 and will commence decommissioning of Unit 1 later in 2021. The retirement of Units 1 and 2 at Heskett Station near Mandan, North Dakota, is expected in earlyFebruary 2022. In addition, the Company announced that it intends to constructwill begin construction of Heskett Unit 4, an 88-MW simple-cycle natural gas-fired combustion turbine peaking unit at the existing Heskett Station near Mandan, North Dakota. Heskett Unit 4 production costs coupledDakota, in the second quarter of 2022 with an expected in service date in the MISO market purchases are expected to be aboutfirst half the total cost of continuing to run the coal-fired electric generating units at Heskett and Lewis & Clark stations.2023.
The Company continues to be focusedis one of four owners of Coyote Station and cannot make a unilateral decision on the plant's future; therefore, the Company could be negatively impacted by decisions of the other owners. State implementation of pollution control plans to improve visibility at Class I areas, such as 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 recoverycommissions on approval to recover such costs from customers, negatively impact the Company's results of its investmentsoperations, financial position and cash flows. The NDDEQ submitted a draft state implementation plan to the EPA and federal land managers of the National Park Service, the United States Fish and Wildlife Service and the United States Forest Service for consultation, and the federal land managers have submitted comments back to the NDDEQ for review. North Dakota determined it is not reasonable to require controls during this planning period. The emissions modeling conducted for the combined western state agencies affected by filingthe Regional Haze Rule was delayed and has subsequently delayed the NDDEQ state implementation plan process. The NDDEQ state implementation plan is open for rate adjustments to seek recovery of operating costs and capital investments, as well as reasonable returns as allowed by regulators. The Company's most recent cases by jurisdiction are discussed in Note 19.
The labor contract at Cascade with the ICWU has been ratified and is effective through March 31, 2024. The labor contract at Montana-Dakota with the IBEW was extendedpublic comment from April 20, 2022 through June 15, 2021,1, 2022, and, isas currently drafted, does not require additional controls for any units in negotiations.North Dakota, including Coyote Station. Therefore, the NDDEQ's state
implementation plan, which was due to the EPA by July 2021, is anticipated to be submitted to the EPA in the summer of 2022. Additionally, in September 2021, Otter Tail Power Company filed its 2022 Integrated Resource Plan in Minnesota and North Dakota which included its intent to start the process of withdrawal from its 35 percent ownership interest in Coyote Station with an anticipated exit from the plant by December 31, 2028. The joint owners continue to collaborate in analyzing data and weighing decisions that impact the plant and its employees as well as each company's customers and communities served.
On April 22, 2022 through April 24, 2022, a major snow and ice storm in northwest North Dakota caused widespread power outages and significant damage to the Company's electric transmission and distribution system. The Company is working on repairing the damages. Although total storm costs are not yet finalized, anticipated impacts to the financial statements are not expected to be material.
Legislation and rulemaking The Company continues to monitor legislation and rulemaking related to clean energy standards that may impact its segments. Below are some of the specific legislative actions the Company is monitoring.
•The current presidential administration is considering changes to the federal Clean Air Act, some of which were amended by the previous presidential administration. The content and impacts of the changes under consideration are uncertain and the Company continues to monitor for potential actions by the EPA.
•In Oregon, the Climate Protection Program Rule was approved in December 2021, which requires natural gas companies to reduce GHG emissions 50 percent below the baseline by 2035 and 90 percent below the baseline by 2050, which may be achieved through surrendering emissions allowances, investing in additional customer conservation and energy efficiency programs, purchasing community climate investment credits, and purchasing low carbon fuels such as renewable natural gas. The Company expects the compliance costs for these regulations to be recovered through customer rates. The Company, along with the other two local distribution companies in Oregon, filed a lawsuit on March 18, 2022, challenging the Climate Protection Program Rule. The lawsuit was filed on behalf of customers as the Company does not believe the rule accomplishes environmental stewardship in the most effective and affordable way possible.
•In Washington, the Climate Commitment Act signed into law in May 2021 requires natural gas distribution companies to reduce overall GHG emissions 45 percent below 1990 levels by 2030, 70 percent below 1990 levels by 2040 and 95 percent below 1990 levels by 2050, which may be achieved through increased energy efficiency and conservation measures, purchased emission allowances and offsets, and purchases of low carbon fuels. As directed by the Climate Commitment Act, the Washington DOE has begun the Climate Commitment Program rule-making process and is expected to publish a final rule in the fall of 2022. The Company has begun reviewing compliance options and expects the compliance costs for these regulations will be recovered through customer rates.
•On April 22, 2022, the Washington State Building Code Council approved revisions to the state's commercial energy code that will significantly limit the use of natural gas for space and water heating in new and retrofitted commercial and multifamily buildings and proposed the review of similar restrictions in the future for residential buildings. The Company is currently assessing the impact of these revisions.
Pipeline
Strategy and challenges The pipeline segment provides natural gas transportation, underground storage and energy-related services, as discussed in Note 17. The segment focuses on utilizing its extensive expertise in the design, construction and operation of energy infrastructure and related services to increase market share and profitability through optimization of existing operations, organic growth and investments in energy-related assets within or in close proximity to its current operating areas. The segment focuses on the continual safety and reliability of its systems, which entails building, operating and maintaining safe natural gas pipelines and facilities. The segment continues to evaluate growth opportunities including the expansion of natural gas facilities; incremental pipeline projects; and expansion of energy-related services leveraging on its core competencies. In support of this strategy, the Company completed the following organic growth projects in 2020:
•In September 2020, Phase II of the Line Section 22North Bakken Expansion project in the Billings, Montana, area was placed in service. The completion of Phase I and II increased capacity by 22.5 MMcf per day.
•In February 2020, the Demicks Lake Expansion project in McKenzie County,western North Dakota was placed in service in February of 2022. The project has capacity to transport 250 MMcf of natural gas per day and can be increased capacity by 175to 625 MMcf per day.day with additional compression.
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 on increased pipeline safety regulations and environmental matters such as the reduction of methane emissions could also impact the price and demand for natural gas. In February 2021, the FERC issued a revised notice of inquiry seeking new information and stakeholder perspectives regarding the certification of new interstate natural gas facilities. The FERC issued the original notice of inquiry seeking stakeholder perspectives on this topic in April 2018. The FERC also took a step toward reforming the way in which it analyzes GHG emissions for purposes of natural gas pipeline certificates. The Company is monitoring the progress of these initiatives and is assessing the potential impacts they may have on its business processes, results of operations and disclosures, including its current North Bakken Expansion project application, as discussed in the Outlook section.
The pipeline segment is also subject to extensive regulation includingrelated to certain operational and environmental compliance, cybersecurity, permit terms and system integrity. In September 2019, the PHMSA issued a rule for additional regulations to strengthen the safety of natural gas transmission and storage facilities and hazardous liquid pipelines. The segment has implemented procedure changes for the initial requirements andCompany continues to actively evaluate procedurecybersecurity processes and procedures, including changes and implementationin the industry's cybersecurity regulations, for opportunities to further strengthen its cybersecurity protections. Implementation of physical modifications to existing facilities necessary forenhancements and additional requirements that will become effective July 1, 2021.is ongoing. The segment reviews and secures existing permits and easements, as well as new permits and easements as necessary, to meet current demand and future growth opportunities on an ongoing basis. Groups opposing natural gas pipelines could also cause negative impacts on the segment with increased costs, potential delays to project completion or cancellation of prospective projects.
In April 2020 and November 2020, the Company completed the sales of its regulated and non-regulated natural gas gathering assets, respectively. With the completion of these sales, the Company has exited the natural gas gathering business.
The segment regularly experiences extended lead times on raw materials that are critical to the segment's construction and maintenance work. In addition, the segment is currently experiencing increased fuel and raw material costs, as well as other inflationary pressures. Long lead times on materials could delay maintenance work and project construction projects potentially causing lost revenues and/or increased costs. TheCurrent national supply chain challenges and inflationary costs have not been impactful to the procurement of necessary materials at the pipeline segment, however, the Company proactively monitors and plans for materialis actively monitoring these situations,
including longer than normal lead times as well as worksfor certain items, and working with its manufacturers and suppliers to help mitigate these risks. The Company expects supply chain challenges and inflationary pressures to continue throughout the riskremainder of delays due to extended lead times.2022.
The segment focuses on the recruitment and retention of a skilled workforce to remain competitive and provide services to its customers. The industry in which it operates relies on a skilled workforce to construct energy infrastructure and operate existing infrastructure in a safe manner. A shortage of skilled personnel can create a competitive labor market which could increase costs incurred by the segment. Competition from other pipeline companies can also have a negative impact on the segment.
Earnings overview - The following information summarizes the performance of the pipeline segment.
| | | Three Months Ended | | | Three Months Ended | |
| | March 31, | | | March 31, | |
| | | 2021 | | 2020 | | Variance | | | 2022 | | 2021 | | Variance | |
| | | (In millions) | | | (In millions) | | |
| Operating revenues | Operating revenues | $ | 36.1 | | $ | 35.8 | | 1 | % | | Operating revenues | $ | 37.1 | | $ | 36.1 | | 3 | % | |
| Operating expenses: | Operating expenses: | | | Operating expenses: | | |
| Operation and maintenance | Operation and maintenance | 15.1 | | 15.0 | | 1 | % | | Operation and maintenance | 15.4 | | 15.1 | | 2 | % | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 5.2 | | 5.8 | | (10) | % | | Depreciation, depletion and amortization | 6.3 | | 5.2 | | 21 | % | |
| Taxes, other than income | Taxes, other than income | 3.3 | | 3.6 | | (8) | % | | Taxes, other than income | 3.5 | | 3.3 | | 6 | % | |
| Total operating expenses | Total operating expenses | 23.6 | | 24.4 | | (3) | % | | Total operating expenses | 25.2 | | 23.6 | | 7 | % | |
| Operating income | Operating income | 12.5 | | 11.4 | | 10 | % | | Operating income | 11.9 | | 12.5 | | (5) | % | |
| Other income | Other income | .9 | | — | | NM | | Other income | .1 | | .9 | | (89) | % | |
| Interest expense | Interest expense | 2.0 | | 1.9 | | 5 | % | | Interest expense | 2.5 | | 2.0 | | 25 | % | |
| Income before income taxes | Income before income taxes | 11.4 | | 9.5 | | 20 | % | | Income before income taxes | 9.5 | | 11.4 | | (17) | % | |
| Income tax expense | Income tax expense | 2.5 | | 2.1 | | 19 | % | | Income tax expense | 2.2 | | 2.5 | | (12) | % | |
| Net income | Net income | $ | 8.9 | | $ | 7.4 | | 21 | % | | Net income | $ | 7.3 | | $ | 8.9 | | (18) | % | |
*NM - not meaningful
| | Operating statistics | Operating statistics | Three Months Ended | | Operating statistics | Three Months Ended | |
| | March 31, | | | March 31, | |
| | 2021 | | 2020 | | | | 2022 | | 2021 | | |
| Transportation volumes (MMdk) | Transportation volumes (MMdk) | 110.8 | | 111.7 | | | Transportation volumes (MMdk) | 110.5 | | 110.8 | | |
| Natural gas gathering volumes (MMdk) | — | | 3.3 | | | |
| Customer natural gas storage balance (MMdk): | Customer natural gas storage balance (MMdk): | | | Customer natural gas storage balance (MMdk): | | |
| Beginning of period | Beginning of period | 25.5 | | 16.2 | | | Beginning of period | 23.0 | | 25.5 | | |
| Net withdrawal | Net withdrawal | (20.3) | | (12.4) | | | Net withdrawal | (20.2) | | (20.3) | | |
| End of period | End of period | 5.2 | | 3.8 | | | End of period | 2.8 | | 5.2 | | |
Three Months Ended March 31, 2021,2022, Compared to Three Months Ended March 31, 20202021 Pipeline earnings increased $1.5decreased $1.6 million as a result of:
Revenues:• Increase of $300,000, largely attributable toRevenues increased storage-related$1.0 million.
◦Driven by increased transportation revenues of $2.1$2.7 million, partiallylargely due to the demand associated with the North Bakken Expansion project placed in service in February 2022.
◦Partially offset by lower non-regulated project revenues of $500,000 and lower gas gathering volumes associated with the sales of the Company's natural gas gathering assets in 2020.storage-related revenues.
•Operation and maintenance:maintenance was comparable to the same period in the prior year. Higher payroll-related costs, software costs and contract services were largely offset by lower non-regulated project costs.
• ComparableDepreciation, depletion and amortization increased $1.1 million due to increased property, plant and equipment balances, largely related to the North Bakken Expansion project.
•Taxes, other than income were comparable to the same period in the prior year.
Depreciation, depletion and amortization:• Decrease of $600,000 as a result of the absence of natural gas gathering assets discussed above, offset in part by higher property, plant and equipment balances related to organic growth projects.
Taxes, other than income: Decrease of $300,000, primarilyOther income decreased $800,000, largely due to the absence of natural gas gathering assets discussed above.
Other income: Increase of $900,000 as a result of higher AFUDC of $700,000 and higherlower returns on certain of the Company's benefit plan investments.
•Interest expense:expense increased $500,000, primarily due to higher debt balances.
• ComparableIncome tax expense was comparable to the same period in the prior year.
Income tax expense:Index Increase of $400,000, largely resulting from an increase in income before taxes.Outlook On February 18, 2022, the FERC issued two policy statements regarding the certification of new interstate natural gas facilities. The two policy statements were subsequently converted to draft policy statements by the FERC on March 24, 2022. The first draft policy statement, the Updated Certificate Policy Statement, describes how the FERC will determine whether a new interstate natural gas transportation project is required by public convenience and necessity. It includes increased focus on a project's purpose and need and the environmental impacts; as well as impacts on landowners and environmental justice communities. The FERC also clarified the updated policy statement will not apply to projects that have been filed with the FERC prior to the policy statement being finalized. The second draft policy statement, the Interim GHG Policy Statement, explains how the FERC will assess the impacts of natural gas infrastructure projects on climate change in its reviews under the National Environmental Policy Act and Natural Gas Act. The FERC invited public comment on the draft policy statements which were due April 25, 2022. The Company continues to managemonitor and assess these initiatives and the potential impacts of the COVID-19 pandemicthey may have on its business processes, current and future projects, results of 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. Overall, COVID-19 has had minimal impacts to the pipeline business. The Company does not expect delays to its regulatory filings or projects due to the pandemic.disclosures.
The Company has continued to experience the effect of associated natural gas production in the Bakken, which has provided opportunities for organic growth projects and increased demand. The completion of organic growth projects has contributed to thehigher volumes of natural gas the Company transports through its system. Although lowIncreased oil prices slowed 2020 drilling activities and led to the shut-in of certain wells, the recovery of oil prices hashave allowed producers to bring wells back online and support new drilling. As a result, associated natural gas production in the Bakken has returned to near pre-pandemic levels.levels and is expected to continue to grow due to new oil wells and increasing gas to oil ratios.
The low levels of natural gas in storage nationally, along with global events, has put upward pressure on natural gas prices and increased volatility. While the Company believes there will continue to be varying pressures on natural gas production levels and prices, the long-term outlook for natural gas prices continues to provide growth opportunity for industrial supply related projects and seasonal pricing differentials provide opportunities for storage services. The Company continues to focus on growth and improving existing operations through organic projects in all areas in which it operates. The national record levelsoperates, which includes additional organic growth projects with local distribution companies and industrial customers in various stages 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 believes there will continue to be varying pressures on natural gas production levels and prices due to these circumstances, low natural gas prices provide growth opportunity for industrial supply related projects and seasonal pricing differentials provide opportunities for storage services.development.
In January 2019,July 2021, the Company announced theplans for a natural gas pipeline expansion project in eastern North BakkenDakota. The Wahpeton Expansion project which includes constructionconsists of a new pipeline, compression60 miles of pipe and ancillary facilities and is designed to transport natural gas from core Bakken production areas near Tioga, North Dakota,increase capacity by 20 MMcf per day, which is supported by long-term customer agreements with Montana-Dakota and its utility customers. Construction is expected to a new connectionbegin in early 2024, depending on regulatory approvals, with Northern Border Pipelinean anticipated completion date later in McKenzie County, North Dakota. In February 2020,2024. On September 22, 2021, the Company filed with the FERC its application for this project. Long-term take or paya request to initiate the pre-filing review process and received FERC approval of the pre-filing request on September 27, 2021.
The Company has also entered into long-term customer contracts support the project at an amended design capacity of 250 MMcf per day, which can be readily expanded to meet forecasted natural gas growth levels and customer needs. In December 2020, the FERC issued its environment assessmentagreements for the project. Constructionconstruction of the project isfour additional growth projects, three of which are still dependent on regulatory approvals. Estimated capital expenditures for these projects is approximately $108 million and environmental permitting, whichis included in the Companypipeline segment's estimated capital expenditures for 2022 and 2023. The projects are anticipated to receivebe completed in the first quarter 2021, with construction expected to begin in the second quarter2022 and a project in-service date2023 and will add incremental system capacity of November 1, 2021. The Company continues to await FERC approval and is adjusting its construction schedule to reflect the delay, which will result in a later in-service date.over 300 MMcf per day.
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. 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 strategic 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 oil, asphalt concrete, ready-mixedready-mix concrete and related products), complementing and expanding on the segment's expertise. The Company's continued acquisition activity supports this strategy.
As one of the country's largest sand and gravel producers, the segment continues to strategically manage its approximately 1.1 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 segmentit 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 the first quarter of 2021, the Company received the necessary permitting to expand its operation capabilities at its Honey Creek quarry near Austin, Texas. Honey Creek contains an estimated 40-year supply of aggregates. During 2020, the Company made strategic asset purchases that contributed approximately 115 million tons of aggregate reserves.
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, including recent inflationary pressures, in the cost of raw materials such as diesel fuel, gasoline, liquid asphalt oil, cement and steel. Such volatility can have an impact on the segment's margins, including fixed-price construction contracts that are particularly vulnerable to the volatility of energy and material prices. The Company has increased product pricing where necessary to mitigate the effects of recent inflationary costs and will continue to evaluate future increases. The Company expects inflationary pressures to continue throughout the remainder of 2022. 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. Accordingly, operating results in any particular period may not be indicative of the results that can be expected for any other period.
The segment also faces challenges in the recruitment and retention of employees. Trends in the labor market include an aging workforce and availability issues. In 2021 and the first quarter of 2022, most of the markets the segment operates in saw an increase in labor shortages, largely truck drivers, causing increased labor-related costs and delays or inefficiencies on projects. The segmentCompany continues to face increasing pressuremonitor the labor markets and expects labor costs to control costs, as well ascontinue to increase based on the increased demand for services and, to a lesser extent, the recent escalated inflationary environment in the United States. The increase in labor shortages also impacts the segment's ability to recruit and train a skilled workforce to meet the needs of increasing demand and seasonal work.
In order to help attract new workers to the construction industry and enhance the skills of its current employees, the Company has completed a training facility in Oregon. The training facility offers hands-on training for heavy equipment operators and truck drivers, as well as leadership and safety training. Earnings overview - The following information summarizes the performance of the construction materials and contracting segment.
| | | Three Months Ended | | | Three Months Ended | |
| | March 31, | | | March 31, | |
| | | 2021 | | 2020 | | Variance | | | 2022 | | 2021 | | Variance | |
| | | (In millions) | | | (In millions) | | |
| Operating revenues | Operating revenues | $ | 265.7 | | $ | 262.2 | | 1 | % | | Operating revenues | $ | 310.0 | | $ | 265.7 | | 17 | % | |
| Cost of sales: | Cost of sales: | | | Cost of sales: | | |
| Operation and maintenance | Operation and maintenance | 243.2 | | 250.7 | | (3) | % | | Operation and maintenance | 287.0 | | 243.2 | | 18 | % | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 22.3 | | 19.6 | | 14 | % | | Depreciation, depletion and amortization | 27.3 | | 22.3 | | 22 | % | |
| Taxes, other than income | Taxes, other than income | 9.8 | | 9.5 | | 3 | % | | Taxes, other than income | 10.9 | | 9.8 | | 11 | % | |
| Total cost of sales | Total cost of sales | 275.3 | | 279.8 | | (2) | % | | Total cost of sales | 325.2 | | 275.3 | | 18 | % | |
| Gross margin | Gross margin | (9.6) | | (17.6) | | 45 | % | | Gross margin | (15.2) | | (9.6) | | (58) | % | |
| Selling, general and administrative expense: | Selling, general and administrative expense: | | | Selling, general and administrative expense: | | |
| Operation and maintenance | Operation and maintenance | 21.7 | | 22.4 | | (3) | % | | Operation and maintenance | 25.3 | | 21.7 | | 17 | % | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 1.1 | | 1.0 | | 10 | % | | Depreciation, depletion and amortization | 1.1 | | 1.1 | | — | % | |
| Taxes, other than income | Taxes, other than income | 2.5 | | 2.3 | | 9 | % | | Taxes, other than income | 3.0 | | 2.5 | | 20 | % | |
| Total selling, general and administrative expense | Total selling, general and administrative expense | 25.3 | | 25.7 | | (2) | % | | Total selling, general and administrative expense | 29.4 | | 25.3 | | 16 | % | |
| Operating loss | Operating loss | (34.9) | | (43.3) | | 19 | % | | Operating loss | (44.6) | | (34.9) | | 28 | % | |
| Other expense | Other expense | (.1) | | (1.1) | | 91 | % | | Other expense | (2.0) | | (.1) | | NM | |
| Interest expense | Interest expense | 4.7 | | 5.2 | | (10) | % | | Interest expense | 5.2 | | 4.7 | | 11 | % | |
| Loss before income taxes | Loss before income taxes | (39.7) | | (49.6) | | 20 | % | | Loss before income taxes | (51.8) | | (39.7) | | 30 | % | |
| Income tax benefit | Income tax benefit | (8.9) | | (11.4) | | 22 | % | | Income tax benefit | (11.8) | | (8.9) | | 33 | % | |
| Net loss | Net loss | $ | (30.8) | | $ | (38.2) | | 19 | % | | Net loss | $ | (40.0) | | $ | (30.8) | | 30 | % | |
| | | | | | | | | | |
| Operating statistics | Three Months Ended | | |
| March 31, | | |
| 2021 | | 2020 | | | |
| Sales (000's): | | | | |
| Aggregates (tons) | 4,808 | | 4,217 | | | |
| Asphalt (tons) | 294 | | 227 | | | |
| Ready-mixed concrete (cubic yards) | 732 | | 704 | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating statistics | Revenues | | | | Gross margin | | |
| Three Months Ended | | | Three Months Ended | |
| March 31, | | | March 31, | |
| 2022 | | 2021 | | | | | 2022 | | 2021 | | | |
| (In millions) | | |
| Aggregates | $ | 77.6 | | $ | 70.4 | | | | | $ | (2.8) | | $ | (2.7) | | | |
| Asphalt | 18.1 | | 14.3 | | | | | (6.1) | | (4.8) | | | |
| Ready-mix concrete | 108.5 | | 100.7 | | | | | 5.2 | | 5.7 | | | |
| Other products* | 37.5 | | 31.0 | | | | | (13.7) | | (11.7) | | | |
| Contracting services | 114.3 | | 96.0 | | | | | 2.2 | | 3.9 | | | |
| Intracompany eliminations | (46.0) | | (46.7) | | | | | — | | — | | | |
| $ | 310.0 | | $ | 265.7 | | | | | $ | (15.2) | | $ | (9.6) | | | |
*Other products includes cement, asphalt oil, merchandise, fabric, spreading and other products that individually are not considered to be a major line of business for the segment.
| | | | | | | | | | |
| Three Months Ended | |
| March 31, | |
| 2022 | | 2021 | | | |
| Sales (thousands): | | | | |
| Aggregates (tons) | 4,970 | | 4,808 | | | |
| Asphalt (tons) | 316 | | 294 | | | |
| Ready-mix concrete (cubic yards) | 734 | | 732 | | | |
| Average sales price: | | | | |
| Aggregates (per ton) | $ | 15.62 | | $ | 14.65 | | | |
| Asphalt (per ton) | $ | 57.21 | | $ | 48.45 | | | |
| Ready-mix concrete (per cubic yard) | $ | 147.89 | | $ | 137.57 | | | |
Three Months Ended March 31, 2021,2022, Compared to Three Months Ended March 31, 20202021 Construction materials and contracting's seasonal loss decreased $7.4increased $9.2 million as a result of:
Revenues: •Increase of $3.5 million, primarilyRevenuesincreased $44.3 million.
◦Primarily the result of higher materialsof:
•Higher average sale prices across all product lines.
•Increased contracting revenues of $13.3$18.3 million for aggregates and ready-mixed concrete due to an early startfavorable weather, timing of work and strong demand in some regions and revenue from companies acquired since the comparable period last year.
•Higher ready-mix concrete revenues of $7.8 million due to higher average sale prices, as previously mentioned, in all regions along with higher ready-mix volumes in Texas.
•Higher aggregate sales volumes due to recent acquisitions and average sale prices, as previously mentioned, contributed $5.9 million in Oregon. Also contributing were increased volumes associated with the seasonstartup of the Honey Creek quarry in certain regions. The increase wasTexas. These increases were partially offset by the absence of a large project in South Dakota.
•Gross margin decreased contracting services$5.6 million.
◦Primarily due to:
•Higher operating costs across all product lines, including fuel costs of $5.0 million, repair and maintenance expenses, and labor-related costs.
•Lower margins in other product lines, primarily due to less favorable weather conditions in certain regions in 2021 delaying the start of some project work.
Gross margin: Increase of $8.0 million, largely resulting from higher overall realized materials revenuesfuel and margins and higher contracting margins. Aggregates product margins increased $3.0 million and ready-mixed concrete margins increased $2.7 million due to the early start to the season discussed above. Contracting bid margins positively impacted gross margin as a result of higher realized bid margins. Partially offsetting these increases were decreased asphalt and asphalt-related product margins of $1.8 million, largely resulting from higher repair and maintenance costs, in the first quarter of 2021.as previously discussed.
•Lower contracting services margins resulting from mix of work performed. These decreases were partially offset by favorable job performance in northern California.
•Lower asphalt margins due to higher materials, repair and maintenance and productions costs, as previously mentioned, of $1.3 million, as well as lower ready-mix concrete margins due to less bad debt recovery.
◦Selling, general and administrative expense:expense increased $4.1 million.
◦ DecreaseLargely due to:
•Increased payroll-related costs of $400,000,$1.7 million.
•Increased office expenses of $1.0 million.
•Higher professional fees of $900,000.
•Less recovery of bad debt expense.
•Other expense increased $1.9 million, primarily due to the recovery of prior bad debt expense of $1.1 million, partially offset by higher payroll-related costs.
Other expense: Decrease of $1.0 million, driven by higherlower returns on the Company's benefit plan investments.
•Interest expense: Decreaseexpense increased $500,000, largely the result of $500,000 resulting from lower average interest rates and lower averagehigher debt balances.balances due to recent acquisitions.
•Income tax benefit: Decrease of $2.5benefits increased $2.9 million, largely due to a decrease in the seasonalhigher loss 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. In 2020, the Company implemented safety and social distancing measures for its employees that were not able to work from home and experienced some inefficiencies and additional costs in relation to these measures, including delays in the ability to obtain permits from government agencies and, 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 American Rescue Plan Act approved by the United States Congress and signed into law by the President of the United States in the first quarter of 2021 provides $1.9 trillion in COVID-19 relief funding for states, schools and local governments. BecauseStates are beginning to move forward with allocating these funds based on federal criteria and state needs, and in some cases, funding of limited guidance currently available to states on how the funds can be spent, there is uncertainty regarding whether the funds will be made available for infrastructure projects that could positively impact the segment. Additionally, the current administrationbipartisan infrastructure proposal, known as the Infrastructure Investment and Jobs Act, was approved by the United States Congress are expected to release a comprehensive infrastructure proposal that, if adopted, could positively impactand signed into law by the segment.President of the United States in the fourth quarter of 2021. This initiative is providing long-term opportunities by designating $119 billion for the repair and rebuilding of roads and bridges across the Company's footprint. The Company continues to monitor the progressimplementation of these legislative items.
The segment's vertically integrated aggregate-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-mixedready-mix concrete, asphaltic concrete and public and private construction markets. The contracting services and construction materials are sold in connection with street, highway and other public infrastructure projects, as well as private commercial, industrial 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 projects are, however, dependent on federal and state 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.
During 2021, and 2020, the Company made strategic purchases and completed acquisitions that support the Company's long-term strategy to expand its market presence. In April 2021, the Company acquired Mt. Hood Rock, a construction aggregates business located in Portland, Oregon. The Company continues to evaluate additional acquisition opportunities that would be accretive to earnings of the Company.opportunities. For more information on the Company's business combinations, see Note 10.
The construction materials and contracting segment's backlog remained strong at March 31, 2021, was $818.82022, at $940.1 million, which is down slightly fromas compared to backlog of $905.1$818.8 million at March 31, 2020. The decrease in2021. A significant portion of the Company's backlog was largely attributable to the timing of bidding activity, primarily relatedrelates to street and highway construction projectsconstruction. Period over period increases or decreases in certain regions. The Company continues to monitor bidding activitybacklog cannot be used as it moves into the second quarteran indicator of 2021.future revenues or net income. The Company expects to complete a significant amountan estimated $886.5 million of backlog at March 31, 2021,2022, during the next 12 months.
One of the labor contracts that the construction materials and contracting segment was negotiating as of December 31, 2020, as reported Factors noted in Items 1 and 2 - Business Properties - GeneralPart I, Item 1A. Risk Factors in the 20202021 Annual Report has been ratified.can cause revenues to be realized in periods and at levels that are different from originally projected.
Construction Services
Strategy and challenges The construction services segment provides insideelectrical and outsidemechanical and transmission and distribution specialty contracting services, as discussed in Note 17. The construction services segment focuses on safely executing projects; providing a superior return on investment by building new and strengthening existing customer relationships; ensuring quality service; effectively controlling costs; retaining, developing and recruiting talented employees; growing through organic and strategic acquisition opportunities; and focusing efforts on projects that will permit higher margins while properly managing risk. The growth experienced by the segment in recent years is due in part to its ability to support national customers in most of the regions in which it operates.
The construction services segment faces challenges, which are not under direct control of the business, in the 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; disruptions to the supply chain due to transportation delays, travel restrictions, raw material cost increases and shortages, and closures of businesses or facilities;chain; declines or delays in new projects due to the cyclical nature of the construction industry; inflationary pressures; and other factors. The segment is currently experiencing increased fuel and material costs as well as impacts from delays in the national supply chain. The inflationary costs and national supply chain challenges experienced by the segment have not had significant impacts to the procurement of project materials or project margins. However, the Company expects these inflationary pressures and national supply chain challenges to continue throughout the remainder of 2022. The Company is actively monitoring these situations and working with its manufacturers, suppliers and customers to help mitigate these risks. 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, andas well as increasing duration and complexity of customer capital programs. In 2021 and the first quarter of 2022, the markets the segment operates in saw an increase in labor shortages which caused increased labor-related costs. The Company continues to monitor the labor markets and expects labor costs to continue to increase based on the increased demand for services and, to a lesser extent, the recent escalated inflationary environment in the United States. Due to these and other factors, the Company believes overall customer and competitor demand for labor resources will continue to increase, possibly surpassing the supply of industry resources.
Earnings overview - The following information summarizes the performance of the construction services segment.
| | | Three Months Ended | | | Three Months Ended | |
| | March 31, | | | March 31, | |
| | | 2021 | | 2020 | | Variance | | | 2022 | | 2021 | | Variance | |
| | | (In millions) | | | (In millions) | | |
| Operating revenues | Operating revenues | $ | 518.5 | | $ | 514.7 | | 1 | % | | Operating revenues | $ | 552.6 | | $ | 518.5 | | 7 | % | |
| Cost of sales: | Cost of sales: | | | Cost of sales: | | |
| Operation and maintenance | Operation and maintenance | 427.2 | | 436.2 | | (2) | % | | Operation and maintenance | 471.1 | | 427.2 | | 10 | % | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 4.0 | | 3.9 | | 3 | % | | Depreciation, depletion and amortization | 4.1 | | 4.0 | | 3 | % | |
| Taxes, other than income | Taxes, other than income | 19.4 | | 23.4 | | (17) | % | | Taxes, other than income | 19.0 | | 19.4 | | (2) | % | |
| Total cost of sales | Total cost of sales | 450.6 | | 463.5 | | (3) | % | | Total cost of sales | 494.2 | | 450.6 | | 10 | % | |
| Gross margin | Gross margin | 67.9 | | 51.2 | | 33 | % | | Gross margin | 58.4 | | 67.9 | | (14) | % | |
| Selling, general and administrative expense: | Selling, general and administrative expense: | | | Selling, general and administrative expense: | | |
| Operation and maintenance | Operation and maintenance | 24.6 | | 23.9 | | 3 | % | | Operation and maintenance | 26.0 | | 24.6 | | 6 | % | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 1.3 | | 1.9 | | (32) | % | | Depreciation, depletion and amortization | 1.1 | | 1.3 | | (15) | % | |
| Taxes, other than income | Taxes, other than income | 1.7 | | 1.6 | | 6 | % | | Taxes, other than income | 1.8 | | 1.7 | | 6 | % | |
| Total selling, general and administrative expense | Total selling, general and administrative expense | 27.6 | | 27.4 | | 1 | % | | Total selling, general and administrative expense | 28.9 | | 27.6 | | 5 | % | |
| Operating income | Operating income | 40.3 | | 23.8 | | 69 | % | | Operating income | 29.5 | | 40.3 | | (27) | % | |
| Other income | Other income | .2 | | .1 | | 100 | % | | Other income | .1 | | .2 | | (50) | % | |
| Interest expense | Interest expense | .9 | | 1.2 | | (25) | % | | Interest expense | .9 | | .9 | | — | % | |
| Income before income taxes | Income before income taxes | 39.6 | | 22.7 | | 74 | % | | Income before income taxes | 28.7 | | 39.6 | | (28) | % | |
| Income tax expense | Income tax expense | 9.8 | | 5.9 | | 66 | % | | Income tax expense | 7.4 | | 9.8 | | (24) | % | |
| Net income | Net income | $ | 29.8 | | $ | 16.8 | | 77 | % | | Net income | $ | 21.3 | | $ | 29.8 | | (29) | % | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating Statistics | Revenues | | | | Gross margin | | |
| Three Months Ended | | | | Three Months Ended | | |
| March 31, | | | March 31, | |
| Business Line | 2022 | | 2021 | | | | | 2022 | | 2021 | | | |
| (In millions) | | |
| Electrical & mechanical | | | | | | | | | |
| Commercial | $ | 188.1 | | $ | 166.1 | | | | | $ | 20.3 | | $ | 17.5 | | | |
| Industrial | 95.0 | | 126.4 | | | | | 9.8 | | 17.2 | | | |
| Institutional | 40.7 | | 32.1 | | | | | .6 | | 2.2 | | | |
| Renewables | 24.9 | | .6 | | | | | 1.0 | | .3 | | | |
| Service & other | 46.5 | | 31.2 | | | | | 5.7 | | 5.0 | | | |
| 395.2 | | 356.4 | | | | | 37.4 | | 42.2 | | | |
| Transmission & distribution | | | | | | | | | |
| Utility | 143.0 | | 141.3 | | | | | 19.9 | | 23.8 | | | |
| Transportation | 17.9 | | 24.1 | | | | | 1.1 | | 1.9 | | | |
| 160.9 | | 165.4 | | | | | 21.0 | | 25.7 | | | |
| Intrasegment eliminations | (3.5) | | (3.3) | | | | | — | | — | | | |
| $ | 552.6 | | $ | 518.5 | | | | | $ | 58.4 | | $ | 67.9 | | | |
Three Months Ended March 31, 2021,2022, Compared to Three Months Ended March 31, 20202021 Construction services earnings increased $13.0decreased $8.5 million as a result of:
Revenues: •IncreaseRevenues increased $34.1 million.
◦Largely due to:
•Higher commercial workloads of $3.8$29.0 million, primarily resulting from higher outside specialty contracting workloads partially offset by lower inside specialty contracting workloads. Outsidea decrease in the hospitality sector from the timing of project completions.
•Higher renewable workloads, contributed $20.2largely from commercial customers, of $24.3 million or 13.9% more compareddue to new projects.
•Higher utility workloads, primarily in the same perioddistribution and electrical sectors of $16.0 million.
•Increased service work for the repair and maintenance of electric systems and higher institutional project demand in the education and government sectors from the mix of project work.
◦Partially offset by:
•Decreased industrial workloads, primarily in the high-tech sector of $37.5 million resulting from the absence of a significant project completed in the prior year,year.
•Decreased storm-repair and fire-hardening power line work of $15.0 million.
•Lower electric transportation workloads, mostly traffic signalization and street lighting projects and work for governmental customers, as a result of strongreduced demand for services and prior year weather events.
•Gross margin decreased $9.5 million.
◦Largely due to:
•The absence of higher margin work due to the timing of project completions and project starts mainly contributed to lower industrial and institutional margins of $9.0 million.
•Lower utility projects including storm-relatedmargins from the absence in 2022 of storm-repair and fire-hardening power line repairwork of $3.9 million, which largely resulted from the mix of customer projects.
•Decreased transportation margins primarily on street lighting and line hardening restoration work. Inside workloads decreased $17.0 million, or 4.6% less compared to the same period in the prior year, as a result of decreased customer demand for refinery and commercial projects, which were partiallytraffic signalization projects.
◦Partially offset by increased high-tech projectscommercial, renewable and service margins of $4.2 million due substantially to the absence of a negative out-of-period adjustment in first quarter 2020 of $7.7 million to correct revenue previously recognized on a construction contract.different project mix.
Gross margin:• Increase of $16.7 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 which is also reflected in lower cost of sales. Also contributing to the increase was the absence of a negative out-of-period adjustment in first quarter 2020 of $8.9 million to correct revenue previously recognized on a construction contract.
Selling, general and administrative expense:expense increased $1.3 million.
◦ ComparablePrimarily due to:
•Increased reserve for uncollectible accounts of $1.1 million.
•Increased office expenses of $1.1 million.
◦Partially offset by decreased payroll-related costs of $600,000 and lower professional fees.
•Other income was comparable to the same period in the prior year.
Other income:• ComparableInterest expense was comparable to the same period in the prior year.
Interest expense:• Decrease of $300,000 driven by lower debt balances.
Income tax expense: Increase of $3.9expense decreased $2.4 million directly resulting from an increasea decrease 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. In 2020, the Company implemented safety and social distancing measures for its employees that were not able to work from home and experienced some inefficiencies in relation to these measures but, for the most part, has been able to continue pre-pandemic business processes. The Company continues to monitor job progress and service work for delays, cancellations and disruptions due to the pandemic but expects minimal disruptions in 2021. Despite the challenges presented by the COVID-19 pandemic, the Company believes there are long-term growth opportunities and demand for construction services. The American Rescue Plan Actact approved by the United States Congress and signed into law by the President of the United States in the first quarter of 2021 provides $1.9 trillion in COVID-19 relief funding for states, schools and local government including broadband infrastructure. BecauseStates are beginning to move forward with allocating these funds based on federal criteria and state needs, and in some cases, funding of limited guidance currently available to states on how the funds can be spent, there is uncertainty regarding whether the funds will be made available for infrastructure projects that could positively impact the segment. Additionally, the current administrationbipartisan infrastructure proposal, known as the Infrastructure Investment and Jobs Act, was approved by the United States Congress are expectedand signed into law by the President of the United States in the fourth quarter of 2021. These include investments for upgrades to release a comprehensiveelectric and grid infrastructure, proposal that, if adopted, could positively impact the segment.transportation systems, airports and electric vehicle infrastructure, all industries this segment supports. The Company will continue to monitor the progressimplementation of these legislative items.
The Company continues to have bidding opportunities forin both inside and outside specialty contracting workmarkets in 20212022 as evidenced by the segment's backlog. Although bidding remains highly competitive in all areas, the Company expects the segment's relationship with existing customers, skilled workforce, quality of service and effective cost management will continue to provide a benefit in securing and executing profitable projects.projects in the future. The Company has also seen rapidly growing needs for services across the electric vehicle charging, wind generation and energy storage markets that complement existing renewable projects performed by the Company.
The construction services segment's backlog at March 31, was as follows:
| | | | | | | | |
| Three Months Ended |
| March 31, |
| 2021 | 2020 |
| (In millions) |
| Inside specialty contracting | $ | 1,009 | | $ | 1,041 | |
| Outside specialty contracting | 264 | 226 |
| $ | 1,273 | | $ | 1,267 | |
| | | | | | | | |
| 2022 | 2021 |
| (In millions) |
| Electrical & mechanical | $ | 1,388 | | $ | 1,009 | |
| Transmission & distribution | 280 | 264 |
| $ | 1,668 | | $ | 1,273 | |
The slight31 percent increase in backlog at March 31, 2022, as compared to backlog at March 31, 2021, was largely attributable to the new project opportunities that the Company continues to be awarded across its diverse operations, particularly inside specialty contractingwithin the commercial, institutional, renewable and power utility markets. These increases were partially offset by decreases in the hospitality, high-techindustrial and public industries. The Company's outside power, communications and natural gas specialty contracting also have a high volumetransportation markets due to the timing of available work.project completions. Period over period increases or decreases in backlog cannot be used as an indicator of future revenues or net income. The Company expects to complete a significant amountan estimated $1.4 billion of the backlog at March 31, 2021,2022, during the next 12 months. Additionally, the Company continues to further evaluate potential acquisition opportunities that would be accretive to earnings of the Company and continue to grow the segment's backlog. Factors noted in Part I, Item 1A. Risk Factors in the 2021 Annual Report can cause revenues to be realized in periods and at levels that are different from originally projected.
The labor contract that the construction services segment was negotiating at December 31, 2021, as reported in Items 1 and 2 - Business Properties - General in the 2021 Annual Report, has been ratified.
Other
| | | Three Months Ended | | | Three Months Ended | |
| | March 31, | | | March 31, | |
| | | 2021 | | 2020 | | Variance | | | 2022 | | 2021 | | Variance | |
| | (In millions) | | | (In millions) | | |
| Operating revenues | Operating revenues | $ | 3.3 | | $ | 3.0 | | 10 | % | | Operating revenues | $ | 4.3 | | $ | 3.3 | | 30 | % | |
| Operating expenses: | Operating expenses: | | | Operating expenses: | | |
| Operation and maintenance | Operation and maintenance | 2.3 | | 2.0 | | 15 | % | | Operation and maintenance | 4.0 | | 2.3 | | 74 | % | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 1.2 | | .7 | | 71 | % | | Depreciation, depletion and amortization | 1.1 | | 1.2 | | (8) | % | |
| | Total operating expenses | Total operating expenses | 3.5 | | 2.7 | | 30 | % | | Total operating expenses | 5.1 | | 3.5 | | 46 | % | |
| Operating income (loss) | (.2) | | .3 | | NM | | |
| Operating loss | | Operating loss | (.8) | | (.2) | | NM | |
| Other income | Other income | .1 | | .1 | | — | % | | Other income | .1 | | .1 | | — | % | |
| Interest expense | Interest expense | .1 | | .3 | | (67) | % | | Interest expense | .1 | | .1 | | — | % | |
| Income (loss) before income taxes | (.2) | | .1 | | NM | | |
| Loss before income taxes | | Loss before income taxes | (.8) | | (.2) | | NM | |
| Income tax expense | Income tax expense | 2.5 | | 4.3 | | (42) | % | | Income tax expense | 3.7 | | 2.5 | | 48 | % | |
| Net loss | Net loss | $ | (2.7) | | $ | (4.2) | | 36 | % | | Net loss | $ | (4.5) | | $ | (2.7) | | 67 | % | |
*NM - not meaningful
Three Months Ended March 31, 2021,2022, Compared to Three Months Ended March 31, 2020 2021
Other was positively impactedexperienced higher operation and maintenance expense in 2022 related to a loss on the first quarterdisposal of assets. Premiums for the captive insurer were higher in 2022 compared to 2021, by lowerwhich impacts both operation and maintenance expense and operating revenues. The net loss for Other also reflects income tax adjustments related to the Company's consolidated company's annualized estimated tax rate, partially offset by higher depreciation, depletion and amortization expense for software placed in service.rate. 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.
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 | | | Three Months Ended | |
| | March 31, | | | March 31, | |
| | | 2021 | | 2020 | | | | 2022 | | 2021 | | |
| | | (In millions) | | (In millions) |
| Intersegment transactions: | Intersegment transactions: | | | Intersegment transactions: | | |
| Operating revenues | Operating revenues | $ | 30.9 | | $ | 31.0 | | | Operating revenues | $ | 31.7 | | $ | 30.9 | | |
| Operation and maintenance | Operation and maintenance | 4.9 | | 5.9 | | | Operation and maintenance | 5.8 | | 4.9 | | |
| Purchased natural gas sold | Purchased natural gas sold | 26.0 | | 25.1 | | | Purchased natural gas sold | 25.9 | | 26.0 | | |
|
For more information on intersegment eliminations, see Note 17.
Liquidity and Capital Commitments
At March 31, 2021,2022, the Company had cash and cash equivalents of $55.1$64.9 million and available borrowing capacity of $695.5$523.5 million under the outstanding credit facilities of the Company's subsidiaries. The Company expects to meet its obligations for debt maturing within one year and its other operating and capital requirements from various sources, including internally generated funds; credit facilities and commercial paper of the Company's subsidiaries, as described in Capital resources; and issuance of debt and equity securities.securities if necessary.
Cash flows
| | | Three Months Ended | | Three Months Ended |
| | March 31, | | March 31, |
| | | 2021 | | 2020 | | | 2022 | | 2021 | |
| | (In millions) | | (In millions) |
| Net cash provided by (used in): | Net cash provided by (used in): | | Net cash provided by (used in): | |
| Operating activities | Operating activities | $ | 95.6 | | $ | 79.3 | | Operating activities | $ | 112.4 | | $ | 95.6 | |
| Investing activities | Investing activities | (106.3) | | (202.5) | | Investing activities | (150.7) | | (106.3) | |
| Financing activities | Financing activities | 6.2 | | 173.2 | | Financing activities | 49.0 | | 6.2 | |
| Increase (decrease) in cash and cash equivalents | Increase (decrease) in cash and cash equivalents | (4.5) | | 50.0 | | Increase (decrease) in cash and cash equivalents | 10.7 | | (4.5) | |
| Cash and cash equivalents -- beginning of year | Cash and cash equivalents -- beginning of year | 59.6 | | 66.5 | | Cash and cash equivalents -- beginning of year | 54.2 | | 59.6 | |
| Cash and cash equivalents -- end of period | Cash and cash equivalents -- end of period | $ | 55.1 | | $ | 116.5 | | Cash and cash equivalents -- end of period | $ | 64.9 | | $ | 55.1 | |
Operating activities
| | | | | | | | | | | | Three Months Ended | |
| | Three Months Ended | | | March 31, | |
| | March 31, | | | 2022 | | 2021 | | Variance | |
| | | 2021 | | 2020 | | Variance | | | (In millions) | | |
| Components of net cash provided by operating activities: | Components of net cash provided by operating activities: | (In millions) | | Components of net cash provided by operating activities: | | |
| Income from continuing operations | Income from continuing operations | $ | 52.1 | | $ | 25.5 | | $ | 26.6 | | | Income from continuing operations | $ | 31.7 | | $ | 52.1 | | $ | (20.4) | | |
| Depreciation, depletion and amortization | 73.7 | | 69.2 | | 4.5 | | | |
| Deferred income taxes | 9.8 | | 1.8 | | 8.0 | | | |
| Adjustments to reconcile net income to net cash provided by operating activities | | Adjustments to reconcile net income to net cash provided by operating activities | 78.9 | | 82.5 | | (3.6) | | |
| Receivables | Receivables | 89.4 | | 44.5 | | 44.9 | | | Receivables | (5.7) | | 89.7 | | (95.4) | | |
| Inventories | Inventories | (25.6) | | (29.3) | | 3.7 | | | Inventories | (44.1) | | (25.6) | | (18.5) | | |
| Other current assets | Other current assets | (46.8) | | 15.0 | | (61.8) | | | Other current assets | 34.5 | | (46.8) | | 81.3 | | |
| Accounts payable | Accounts payable | (42.0) | | (24.1) | | (17.9) | | | Accounts payable | 3.0 | | (42.0) | | 45.0 | | |
| Other current liabilities | Other current liabilities | (14.0) | | (23.2) | | 9.2 | | | Other current liabilities | 13.1 | | (14.0) | | 27.1 | | |
| Pension & postretirement benefit plan contributions | | Pension & postretirement benefit plan contributions | (.1) | | (.1) | | — | | |
| Other noncurrent changes | Other noncurrent changes | (1.0) | | .3 | | (1.3) | | | Other noncurrent changes | 1.1 | | (.2) | | 1.3 | | |
| Net cash used in discontinued operations | — | | (.4) | | .4 | | | |
| | Net cash provided by operating activities | Net cash provided by operating activities | $ | 95.6 | | $ | 79.3 | | $ | 16.3 | | | Net cash provided by operating activities | $ | 112.4 | | $ | 95.6 | | $ | 16.8 | | |
The changes in cash flows from operating activities generally follow the results of operations, as discussed in Business Segment Financial and Operating Data, and are affected by changes in working capital. The increase in cash flows provided by operating activities in the previous table was largely driven by the recovery of purchased gas adjustment balances and the absence of higher earnings at most businessesnatural gas purchases in the first quarter of 2021. Also contributing to the increase was lower working capital requirements at the construction services business largely drivenFebruary 2021, as discussed in Note 13, partially offset by the stronger collection of accounts receivable offset in part by an increase in accounts payable from the fluctuation in job activity.associated deferred taxes. Partially offsetting the net increase in cash flows provided by operating activities was higher working capital needs at the construction services business due to fluctuations in job activity resulting in higher receivables in the period, as well as lower collections of accounts receivable compared to first quarter 2021, offset in part by increased accounts payable. In addition, the construction materials and contracting business experienced an increase in natural gas purchases,asphalt oil inventory balances as discussed in Note 13, partially offset by the associated deferred taxes.
a result of higher prices. Investing activities
| | | | | | | | | | | | Three Months Ended | |
| | Three Months Ended | | | March 31, | |
| | March 31, | | | 2022 | | 2021 | | Variance | |
| | | 2021 | | 2020 | | Variance | | | (In millions) | | |
| Components of net cash used in investing activities: | Components of net cash used in investing activities: | (In millions) | | Components of net cash used in investing activities: | | |
| Capital expenditures | Capital expenditures | $ | (111.1) | | $ | (139.5) | | $ | 28.4 | | | Capital expenditures | $ | (150.3) | | $ | (111.1) | | $ | (39.2) | | |
| Acquisitions, net of cash acquired | Acquisitions, net of cash acquired | (1.0) | | (67.6) | | 66.6 | | | Acquisitions, net of cash acquired | (.5) | | (1.0) | | .5 | | |
| Net proceeds from sale or disposition of property and other | Net proceeds from sale or disposition of property and other | 9.0 | | 4.5 | | 4.5 | | | Net proceeds from sale or disposition of property and other | 4.5 | | 9.0 | | (4.5) | | |
| Investments | Investments | (3.2) | | .1 | | (3.3) | | | Investments | (4.4) | | (3.2) | | (1.2) | | |
| Net cash used in investing activities | Net cash used in investing activities | $ | (106.3) | | $ | (202.5) | | $ | 96.2 | | | Net cash used in investing activities | $ | (150.7) | | $ | (106.3) | | $ | (44.4) | | |
The decreaseincrease in cash used in investing activities in the previous table was primarily due to lower cash used in acquisition activity in 2021 compared to 2020 at the construction services and construction materials and contracting businesses. Also contributing to the decrease was lowerincreased capital expenditures in 20212022 at the electric and natural gas distribution businessbusinesses related to reduced natural gas growthincreased electric production and distribution projects and higher proceeds on asset sales in 2021 atnatural gas distribution projects including natural gas meters and mains. The pipeline business also experienced increased capital expenditures, primarily related to the construction services business.North Bakken Expansion project.
Financing activities
| | | | | | | | | | | | Three Months Ended | |
| | Three Months Ended | | | March 31, | |
| | March 31, | | | 2022 | | 2021 | | Variance | |
| | | 2021 | | 2020 | | Variance | | | (In millions) | | |
| Components of net cash provided by financing activities: | Components of net cash provided by financing activities: | (In millions) | | Components of net cash provided by financing activities: | | |
| Issuance of short-term borrowings | Issuance of short-term borrowings | $ | 50.0 | | $ | — | | $ | 50.0 | | | Issuance of short-term borrowings | $ | 100.0 | | $ | 50.0 | | $ | 50.0 | | |
| Repayment of short-term borrowings | Repayment of short-term borrowings | (50.0) | | — | | (50.0) | | | Repayment of short-term borrowings | — | | (50.0) | | 50.0 | | |
| Issuance of long-term debt | Issuance of long-term debt | 93.3 | | 248.0 | | (154.7) | | | Issuance of long-term debt | 150.0 | | 93.3 | | 56.7 | | |
| Repayment of long-term debt | Repayment of long-term debt | (53.3) | | (36.2) | | (17.1) | | | Repayment of long-term debt | (143.6) | | (53.3) | | (90.3) | | |
| Proceeds from issuance of common stock | 19.7 | | 3.4 | | 16.3 | | | |
| Debt issuance costs | | Debt issuance costs | (.7) | | — | | (.7) | | |
| Net proceeds from issuance of common stock | | Net proceeds from issuance of common stock | (.1) | | 19.7 | | (19.8) | | |
| Dividends paid | Dividends paid | (42.6) | | (41.6) | | (1.0) | | | Dividends paid | (44.2) | | (42.6) | | (1.6) | | |
| Repurchase of common stock | Repurchase of common stock | (6.7) | | — | | (6.7) | | | Repurchase of common stock | (7.4) | | (6.7) | | (.7) | | |
| Tax withholding on stock-based compensation | Tax withholding on stock-based compensation | (4.2) | | (.4) | | (3.8) | | | Tax withholding on stock-based compensation | (5.0) | | (4.2) | | (.8) | | |
| Net cash provided by financing activities | Net cash provided by financing activities | $ | 6.2 | | $ | 173.2 | | $ | (167.0) | | | Net cash provided by financing activities | $ | 49.0 | | $ | 6.2 | | $ | 42.8 | | |
The decreaseincrease in cash provided by financing activities in the previous table was largely the result of a decrease inincreased issuance of short-term and long-term debt issuances in 2021 as compared to 2020 due to reduced acquisition activity at the construction services and construction materials and contracting businessesbusiness to finance acquisitions and lowerhigher working capital needs, as a result of higher cash collections at the construction services business. In addition, an increase inpartially offset by the repayment of long-termcommercial paper borrowings that were replaced by short-term debt atand private placement borrowings. In addition, the natural gas distribution business also contributedpipeline and construction services businesses experienced increased commercial paper borrowings to finance increased capital expenditures and higher working capital needs, respectively. Partially offsetting the decrease. In 2021,increase in cash provided by financing activities was the Company received increased net proceedsabsence of $16.3 million from the issuance of common stock under the Company's "at-the-market" offering. Slightly offsetting these items was the purchase of common stock on the open marketoffering during 2022, as discussed in 2021 for the vesting of awards under the Company's long-term performance-based incentive plan. At the natural gas distribution business, the Company issued and repaid $50 million in short term borrowings during the first quarter of 2021. The issuance was related to financing the higher natural gas purchases, as previously discussed, and the repayment was related to short-term borrowings completed during 2020.Note 7.
Defined benefit pension plans
There were no material changes to the Company's qualified noncontributory defined benefit pension plans from those reported in the 20202021 Annual Report. For more information, see Note 18 and Part II, Item 7 in the 20202021 Annual Report.
Capital expenditures
Capital expenditures for the first three months of 2022 and 2021 were $119.8 million and $107.2 million. Capital expenditures for the first three months of 2020 were $188.9 million, which includes the completed business combinations at the construction materials and contracting and construction services businesses.respectively. Capital expenditures allocated to the Company's business segments are estimated to be approximately $810.5$769.9 million for 2021.2022. Capital expenditures have been updated from what was previously reported in the 20202021 Annual Report to accommodate project timeline and scope changes made throughout the first quarter of 2021. The Company will continue to monitor capital expenditures for project delays and changes in economic viability related to COVID-19. 2022.
The Company has included in the estimated capital expenditures for 20212022 the completed business combinationWahpeton Expansion and additional growth projects at the pipeline segment and construction of a construction aggregates business andHeskett Unit 4 at the North Bakken Expansion project,natural gas distribution segment, as previously discussed in Business Segment Financial and Operating Data.
Estimated capital expenditures for 2021 also includeData, as well as system upgrades; routine replacements; service extensions; routine equipment maintenance and replacements; buildings, land and building improvements; pipeline and natural gas storage projects; power generation and transmission opportunities, 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 that would be incremental to the outlined capital program; however, such growth isthey are dependent upon the availability of economic opportunities and, as a result, capital expenditures may vary significantly from the estimate previously discussed. The Company continuously monitors its capital expenditures for project delays and changes in economic viability and adjusts as necessary. It is anticipated that all of the funds required for capital expenditures for 20212022 will be met fromfunded by various sources, including internally generated funds; credit facilities and commercial paper of the Company's subsidiaries, as described later; and issuance of debt and equity securities if necessary.
Capital resources
The Company requires significant cash to support and grow its businesses. The primary sources of cash other than cash generated from operating activities are cash from revolving credit facilities, cash from the issuance of long-term debt and cash from the sale of equity securities.
CapitalDebt 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 March 31, 2021.2022. 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 20202021 Annual Report.
The following table summarizes the outstanding revolving credit facilities of the Company's subsidiaries at March 31, 2021:2022:
| | Company | Company | | Facility | | Facility
Limit | | Amount
Outstanding | | Letters
of Credit | | Expiration
Date | | Company | | Facility | | Facility
Limit | | Amount
Outstanding | | Letters
of Credit | | Expiration
Date | |
| | (In millions) | | | | (In millions) | | |
| Montana-Dakota Utilities Co. | Montana-Dakota Utilities Co. | | Commercial paper/Revolving credit agreement | (a) | $ | 175.0 | | | $ | 99.5 | | | $ | — | | | 12/19/24 | | Montana-Dakota Utilities Co. | | Commercial paper/Revolving credit agreement | (a) | $ | 175.0 | | | $ | 29.4 | | | $ | — | | | 12/19/24 | |
| Cascade Natural Gas Corporation | Cascade Natural Gas Corporation | | Revolving credit agreement | | $ | 100.0 | | (b) | $ | 30.4 | | | $ | 2.2 | | (c) | 6/7/24 | | Cascade Natural Gas Corporation | | Revolving credit agreement | | $ | 100.0 | | (b) | $ | 49.9 | | | $ | 2.2 | | (c) | 6/7/24 | |
| Intermountain Gas Company | Intermountain Gas Company | | Revolving credit agreement | | $ | 85.0 | | (d) | $ | 13.0 | | | $ | — | | | 6/7/24 | | Intermountain Gas Company | | Revolving credit agreement | | $ | 85.0 | | (d) | $ | 35.9 | | | $ | — | | | 6/7/24 | |
| Centennial Energy Holdings, Inc. | Centennial Energy Holdings, Inc. | | Commercial paper/Revolving credit agreement | (e) | $ | 600.0 | | | $ | 119.4 | | | $ | — | | | 12/19/24 | | Centennial Energy Holdings, Inc. | | Commercial paper/Revolving credit agreement | (e) | $ | 600.0 | | | $ | 319.1 | | | $ | — | | | 12/19/24 | |
(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). At March 31, 2021,2022, there were no amounts outstanding under the revolving credit agreement.
(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 March 31, 2021,2022, there were no amounts outstanding under the revolving 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, Montana-Dakota and Centennial do not issue commercial paper in an aggregate amount exceeding the available capacity under the 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 Company's subsidiaries.
Total equity as a percent of total capitalization was 54 percent, 57 percent 54 percent and 5855 percent at March 31, 20212022 and 2020,2021, and December 31, 2020,2021, 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.
On March 23, 2022, Centennial issued $150.0 million of senior notes under a note purchase agreement with maturity dates ranging from March 23, 2032 to March 23, 2034, at a weighted average interest rate of 3.71 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.
Equity Resources
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 such securities if warranted by market conditions and the Company's capital requirements.
In August 2020, the Company amended the Distribution Agreement dated February 22, 2019, with JPJ.P. Morgan Securities LLC and MUFG Securities Americas Inc., as sales agents. This agreement, as amended, allows the offering, issuance and sale of up to 6.4 million shares of the Company's common stock in connection with an "at-the-market" offering. The common stock may be
offered for sale, from time to time, in accordance with the terms and conditions of this agreement. As of March 31, 2022, the Company had capacity to issue up to 3.6 million additional shares of common stock under the "at-the-market" offering program. Proceeds from the sale of shares of common stock under this agreement have been and are expected to be used for general corporate purposes, which may include, among other things, working capital, capital expenditures, debt repayment and the financing of acquisitions.
The Company issued 672,260 sharesDetails of common stock during the first quarter of 2021 pursuant to theCompany's "at-the-market" offering receiving netactivity was as follows:
| | | | | | | | | | | |
| Three Months Ended | |
| March 31, | |
| 2022 | 2021 | |
| (In millions) | |
| Shares issued | — | | .7 | | |
| Net proceeds * | $ | (.1) | | $ | 19.7 | | ** |
* Net proceeds include issuance costs of $19.7 million, which$127,000 and $300,000 for the three months ended March 31, 2022 and 2021, respectively
** Net proceeds were used for capital expenditures. The Company incurred issuance costs of approximately $300,000 in connection with the sales of common stock under the "at-the-market" offering during the first quarter of 2021. The Company did not issue shares of common stock under the "at-the-market" offering during the first quarter of 2020. As of March 31, 2021, the Company had capacity to issue up to 5.7 million additional shares of common stock under the "at-the-market" offering program.
Certain of
Material cash requirements
For more information on the Company's contractual obligations on long-term debt, instruments use LIBOR as a benchmark for establishing the applicable interest rate. LIBOR is the subject of recent national, internationaloperating leases and other regulatory guidance and proposals for reform. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently thanpurchase commitments, see Part II, Item 7 in the past. The Company has been proactive to anticipate the reform of LIBOR by replacing it with the SOFR, or equivalent rate agreed upon by the lenders, in certain of its 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.
Montana-Dakota On March 8, 2021 Montana-Dakota entered into a $50.0 million term loan agreement with a LIBOR-based variable interest rate and a maturity date of March 7, 2022. 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. The covenants also include certain restrictions on the sale of certain assets, loans and investments.
Off balance sheet arrangements
At March 31, 2021, the Company had no material off balance sheet arrangements as defined by the rules of the SEC.
Contractual obligations and commercial commitments
Annual Report. There were no material changes in the Company's contractual obligations from continuing operations relatingrelated to estimated interest payments, purchase commitments, asset retirement obligations, uncertain tax positions and minimum funding requirements for its defined benefit plans for 20212022 from those reported in the 20202021 Annual Report.
TheMaterial short-term cash requirements of the Company has entered into variousinclude repayment of outstanding borrowings and interest payments on those agreements, payments on operating lease agreements, payment of obligations on purchase commitments largely consistingand asset retirement obligations.
Material long-term cash requirements of contracts for natural gasthe Company include repayment of outstanding borrowings and coal supply; purchased power; natural gas transportationinterest payments on those agreements, payments on operating lease agreements, payment of obligations on purchase commitments and storage; royalties; information technology; and construction materials. Certain of these contracts are subject to variability in volume and price. The commitments under these contracts as of March 31, 2021, were:
| | | | | | | | | | | | | | | | | |
| Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total |
| (In millions) |
| Purchase commitments | $ | 539.2 | | $ | 437.7 | | $ | 227.4 | | $ | 802.8 | | $ | 2,007.1 | |
For more information on contractual obligations and commercial commitments, see Part II, Item 7 in the 2020 Annual Report.asset retirement obligations.
New Accounting Standards
For information regarding new accounting standards, see Note 2, which is incorporated by reference.
Critical Accounting Estimates
The Company's critical accounting estimates include impairment testing of goodwill; fair values of acquired assets and liabilities under the acquisition method of accounting; regulatory assets expected to be recovered in rates charged to customers; revenue recognized using the cost-to-cost measure of progress for contracts; actuarially determined benefit costs; and tax provisions. There were no material changes in the Company's critical accounting estimates from those reported in the 20202021 Annual Report. For more information on critical accounting estimates, see Part II, Item 7 in the 20202021 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 | |
| March 31, | |
| | 2021 | | 2020 | | | |
| (In millions) |
| Operating income | $ | 13.9 | | $ | 14.9 | | | |
| Adjustments: | | | | |
| Operating expenses: | | | | |
| Operation and maintenance | 31.3 | | 30.7 | | | |
| Depreciation, depletion and amortization | 16.1 | | 15.5 | | | |
| Taxes, other than income | 4.7 | | 4.3 | | | |
| Total adjustments | 52.1 | | 50.5 | | | |
| Adjusted gross margin | $ | 66.0 | | $ | 65.4 | | | |
The following information reconciles operating income to adjusted gross margin for the natural gas distribution segment.
| | | | | | | | | | |
| Three Months Ended | |
| March 31, | |
| | 2021 | | 2020 | | | |
| (In millions) |
| Operating income | $ | 53.6 | | $ | 50.0 | | | |
| Adjustments: | | | | |
| Operating expenses: | | | | |
| Operation and maintenance | 51.2 | | 46.0 | | | |
| Depreciation, depletion and amortization | 22.5 | | 20.8 | | | |
| Taxes, other than income | 7.0 | | 6.1 | | | |
| Total adjustments | 80.7 | | 72.9 | | | |
| Adjusted gross margin | $ | 134.3 | | $ | 122.9 | | | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the impact of market fluctuations associated with interest rates and commodity prices. The Company has policies and procedures to assist in controlling these market risks and from time to time has utilized derivatives to manage a portion of its risk.
Interest rate risk
There were no material changes to interest rate risk faced by the Company from those reported in the 20202021 Annual Report.
At March 31, 2021,2022, the Company had no outstanding interest rate hedges.
Commodity price risk
There were no material changes to commodity price risk faced by the Company from those reported in the 20202021 Annual Report.
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 are designed to provide reasonable assurance that information required to be disclosed is accumulated and communicated to management, including the Company's chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. The Company's management, with the participation of the Company's chief executive officer and chief financial officer, has evaluated the effectiveness of the Company's disclosure controls and other procedures as of the end of the period
covered by this report. Based upon that evaluation, the chief executive officer and the chief financial officer have concluded that, as of the end of the period covered by this report, such controls and procedures were effective at a reasonable assurance level.
Changes in internal controls
No change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended March 31, 2021,2022, 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
There were no material changes to the Company's legal proceedings in Part 1, Item 3 - Legal Proceedings in the 20202021 Annual Report.
Item 1A. Risk Factors
Please refer to the Company's risk factors that are disclosed in Part I, Item 1A. Risk Factors in the 20202021 Annual Report that could be materially harmful to the Company's business, prospects, financial condition or financial results if they occur. At March 31, 2021,2022, there were no material changes to the Company's risk factors provided in Part I, Item 1A. Risk Factors in the 20202021 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table includes information with respect to the Company's purchase of equity securities:
| ISSUER PURCHASES OF EQUITY SECURITIES | | Period | Period | (a)
Total Number
of Shares
(or Units)
Purchased (1) | (b)
Average Price
Paid per Share
(or Unit) | (c)
Total Number of Shares
(or Units) Purchased
as Part of Publicly
Announced Plans
or Programs (2) | (d)
Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs (2) | Period | (a)
Total Number
of Shares
(or Units)
Purchased (1) | (b)
Average Price
Paid per Share
(or Unit) | (c)
Total Number of Shares
(or Units) Purchased
as Part of Publicly
Announced Plans
or Programs (2) | (d)
Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs (2) |
| January 1 through January 31, 2021 | — | | — | | — | | — | | |
| February 1 through February 28, 2021 | 241,392 | | $27.76 | | — | | — | | |
| March 1 through March 31, 2021 | — | | — | | — | | — | | |
| January 1 through January 31, 2022 | | January 1 through January 31, 2022 | — | | $ | — | | — | | — | |
| February 1 through February 28, 2022 | | February 1 through February 28, 2022 | 266,821 | | $ | 27.73 | | — | | — | |
| March 1 through March 31, 2022 | | March 1 through March 31, 2022 | — | | $ | — | | — | | — | |
| Total | Total | 241,392 | | | — | | — | | Total | 266,821 | | $ | 27.73 | | — | | — | |
(1) Represents shares of common stock purchased on the open market 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 |
| | | | | | | |
| 3(a) | | | 8-K | | 3.2 | 5/8/19 | 1-03480 |
| 3(b) | | | 8-K | | 3.1 | 2/15/19 | 1-03480 |
+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 | | | | | | |
Signatures
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | | MDU RESOURCES GROUP, INC. |
| | | | |
| DATE: | May 6, 20215, 2022 | BY: | /s/ Jason L. Vollmer |
| | | | Jason L. Vollmer |
| | | | Vice President and Chief Financial Officer |
| | | | |
| | | | |
| | | BY: | /s/ Stephanie A. Barth |
| | | | Stephanie A. Barth |
| | | | Vice President, Chief Accounting Officer
and Controller |