MDU RESOURCES GROUP INC - Quarter Report: 2019 September (Form 10-Q)
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 September 30, 2019
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________ to ______________
Commission file number 1-03480
MDU RESOURCES GROUP INC
(Exact name of registrant as specified in its charter)
Delaware | 30-1133956 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1200 West Century Avenue
P.O. Box 5650
Bismarck, North Dakota 58506-5650
(Address of principal executive offices)
(Zip Code)
(701) 530-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common Stock, par value $1.00 per share | MDU | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | ☒ | Accelerated Filer | ☐ |
Non-Accelerated Filer | ☐ | Smaller Reporting Company | ☐ |
Emerging Growth Company | ☐ | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of October 25, 2019: 200,383,869 shares.
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Index | |
Page | |
2
Definitions
The following abbreviations and acronyms used in this Form 10-Q are defined below:
Abbreviation or Acronym | |
2018 Annual Report | Company's Annual Report on Form 10-K for the year ended December 31, 2018 |
AFUDC | Allowance for funds used during construction |
ASC | FASB Accounting Standards Codification |
ASU | FASB Accounting Standards Update |
Brazilian Transmission Lines | Company's former investment in companies owning three electric transmission lines in Brazil |
BSSE | 345-kilovolt transmission line from Ellendale, North Dakota, to Big Stone City, South Dakota |
Calumet | Calumet Specialty Products Partners, L.P. |
Cascade | Cascade Natural Gas Corporation, an indirect wholly owned subsidiary of MDU Energy Capital |
Centennial | Centennial Energy Holdings, Inc., a direct wholly owned subsidiary of the Company |
Centennial Capital | Centennial Holdings Capital LLC, a direct wholly owned subsidiary of Centennial |
Centennial Resources | Centennial Energy Resources LLC, a direct wholly owned subsidiary of Centennial |
Company | MDU Resources Group, Inc. (formerly known as MDUR Newco), which, as the context requires, refers to the previous MDU Resources Group, Inc. prior to January 1, 2019, and the new holding company of the same name after January 1, 2019 |
Coyote Creek | Coyote Creek Mining Company, LLC, a subsidiary of The North American Coal Corporation |
Coyote Station | 427-MW coal-fired electric generating facility near Beulah, North Dakota (25 percent ownership) |
Dakota Prairie Refinery | 20,000-barrel-per-day diesel topping plant built by Dakota Prairie Refining in southwestern North Dakota |
Dakota Prairie Refining | Dakota Prairie Refining, LLC, a limited liability company previously owned by WBI Energy and Calumet (previously included in the Company's refining segment) |
dk | Decatherm |
Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act |
EPA | United States Environmental Protection Agency |
Exchange Act | Securities Exchange Act of 1934, as amended |
FASB | Financial Accounting Standards Board |
FERC | Federal Energy Regulatory Commission |
Fidelity | Fidelity Exploration & Production Company, a direct wholly owned subsidiary of WBI Holdings (previously referred to as the Company's exploration and production segment) |
GAAP | Accounting principles generally accepted in the United States of America |
GHG | Greenhouse gas |
Great Plains | Great Plains Natural Gas Co., a public utility division of the Company prior to the closing of the Holding Company Reorganization and a public utility division of Montana-Dakota as of January 1, 2019 |
Holding Company Reorganization | The internal holding company reorganization completed on January 1, 2019, pursuant to the agreement and plan of merger, dated as of December 31, 2018, by and among Montana-Dakota, the Company and MDUR Newco Sub, which resulted in the Company becoming a holding company and owning all of the outstanding capital stock of Montana-Dakota |
Intermountain | Intermountain Gas Company, an indirect wholly owned subsidiary of MDU Energy Capital |
Knife River | Knife River Corporation, a direct wholly owned subsidiary of Centennial |
Knife River - Northwest | Knife River Corporation - Northwest, an indirect wholly owned subsidiary of Knife River |
kWh | Kilowatt-hour |
LIBOR | London Inter-bank Offered Rate |
LWG | Lower Willamette Group |
MD&A | Management's Discussion and Analysis of Financial Condition and Results of Operations |
MDU Construction Services | MDU Construction Services Group, Inc., a direct wholly owned subsidiary of Centennial |
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MDU Energy Capital | MDU Energy Capital, LLC, a direct wholly owned subsidiary of the Company |
MDUR Newco | MDUR Newco, Inc., a public holding company created by implementing the Holding Company Reorganization, now known as the Company |
MDUR Newco Sub | MDUR Newco Sub, Inc., a direct, wholly owned subsidiary of MDUR Newco, which was merged with and into Montana-Dakota in the Holding Company Reorganization |
MISO | Midcontinent Independent System Operator, Inc. |
MMcf | Million cubic feet |
MMdk | Million dk |
MNPUC | Minnesota Public Utilities Commission |
Montana-Dakota | Montana-Dakota Utilities Co., (formerly known as MDU Resources Group, Inc.), a public utility division of the Company prior to the closing of the Holding Company Reorganization and a direct wholly owned subsidiary of MDU Energy Capital as of January 1, 2019 |
MTPSC | Montana Public Service Commission |
MW | Megawatt |
NDPSC | North Dakota Public Service Commission |
Non-GAAP | Not in accordance with GAAP |
OPUC | Oregon Public Utility Commission |
PRP | Potentially Responsible Party |
SEC | United States Securities and Exchange Commission |
Securities Act | Securities Act of 1933, as amended |
TCJA | Tax Cuts and Jobs Act |
Tesoro | Tesoro Refining & Marketing Company LLC |
VIE | Variable interest entity |
Washington DOE | Washington State Department of Ecology |
WBI Energy | WBI Energy, Inc., a direct wholly owned subsidiary of WBI Holdings |
WBI Energy Transmission | WBI Energy Transmission, Inc., an indirect wholly owned subsidiary of WBI Holdings |
WBI Holdings | WBI Holdings, Inc., a direct wholly owned subsidiary of Centennial |
WUTC | Washington Utilities and Transportation Commission |
WYPSC | Wyoming Public Service Commission |
4
Forward-Looking Statements
This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Exchange Act. Forward-looking statements are all statements other than statements of historical fact, including without limitation those statements that are identified by the words "anticipates," "estimates," "expects," "intends," "plans," "predicts" and similar expressions, and include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions (many of which are based, in turn, upon further assumptions) and other statements that are not statements of historical facts. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature, including statements contained within Part I, Item 2 - MD&A - Business Segment Financial and Operating Data.
Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties. Nonetheless, the Company's expectations, beliefs or projections may not be achieved or accomplished.
Any forward-looking statement contained in this document speaks only as of the date on which the statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances that occur after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all 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 2018 Annual Report and subsequent filings with the SEC.
Introduction
The Company is a regulated energy delivery and construction materials and services business. Montana-Dakota was incorporated under the laws of the state of Delaware in 1924. The Company was incorporated under the laws of the state of Delaware in 2018. Its principal executive offices are at 1200 West Century Avenue, P.O. Box 5650, Bismarck, North Dakota 58506-5650, telephone (701) 530-1000.
On January 2, 2019, the Company announced the completion of the Holding Company Reorganization, which resulted in Montana-Dakota becoming a subsidiary of the Company. The merger was conducted pursuant to Section 251(g) of the General Corporation Law of the State of Delaware, which provides for the formation of a holding company without a vote of the stockholders of the constituent corporation. Immediately after consummation of the Holding Company Reorganization, the Company had, on a consolidated basis, the same assets, businesses and operations as Montana-Dakota had immediately prior to the consummation of the Holding Company Reorganization. As a result of the Holding Company Reorganization, the Company became the successor issuer to Montana-Dakota pursuant to Rule 12g-3(a) of the Exchange Act, and as a result, the Company's common stock was deemed registered under Section 12(b) of the Exchange Act.
The Company, through its wholly owned subsidiary, MDU Energy Capital, owns Montana-Dakota, Cascade and Intermountain. Montana-Dakota, Cascade and Intermountain are the natural gas distribution segment. Montana-Dakota also comprises the electric segment.
The Company, through its wholly owned subsidiary, Centennial, owns WBI Holdings, Knife River, MDU Construction Services, Centennial Resources and Centennial Capital. WBI Holdings is the pipeline and midstream segment, Knife River is the construction materials and contracting segment, MDU Construction Services is the construction services segment, and Centennial Resources and Centennial Capital are both reflected in the Other category.
For more information on the Company's business segments, see Note 17 of the Notes to Consolidated Financial Statements.
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Part I -- Financial Information
Item 1. Financial Statements
MDU Resources Group, Inc. | ||||||||||||
Consolidated Statements of Income | ||||||||||||
(Unaudited) | ||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
(In thousands, except per share amounts) | ||||||||||||
Operating revenues: | ||||||||||||
Electric, natural gas distribution and regulated pipeline and midstream | $ | 209,444 | $ | 200,617 | $ | 885,309 | $ | 851,761 | ||||
Nonregulated pipeline and midstream, construction materials and contracting, construction services and other | 1,354,355 | 1,080,170 | 3,073,254 | 2,469,917 | ||||||||
Total operating revenues | 1,563,799 | 1,280,787 | 3,958,563 | 3,321,678 | ||||||||
Operating expenses: | ||||||||||||
Operation and maintenance: | ||||||||||||
Electric, natural gas distribution and regulated pipeline and midstream | 86,249 | 82,920 | 262,434 | 252,961 | ||||||||
Nonregulated pipeline and midstream, construction materials and contracting, construction services and other | 1,126,371 | 913,671 | 2,674,130 | 2,166,570 | ||||||||
Total operation and maintenance | 1,212,620 | 996,591 | 2,936,564 | 2,419,531 | ||||||||
Purchased natural gas sold | 31,843 | 32,123 | 270,539 | 270,319 | ||||||||
Depreciation, depletion and amortization | 65,021 | 55,016 | 187,937 | 161,298 | ||||||||
Taxes, other than income | 46,128 | 38,647 | 148,110 | 128,257 | ||||||||
Electric fuel and purchased power | 18,717 | 18,406 | 64,413 | 58,901 | ||||||||
Total operating expenses | 1,374,329 | 1,140,783 | 3,607,563 | 3,038,306 | ||||||||
Operating income | 189,470 | 140,004 | 351,000 | 283,372 | ||||||||
Other income | 3,014 | 2,683 | 12,222 | 4,864 | ||||||||
Interest expense | 25,258 | 20,955 | 74,094 | 62,202 | ||||||||
Income before income taxes | 167,226 | 121,732 | 289,128 | 226,034 | ||||||||
Income taxes | 31,098 | 14,363 | 48,766 | 32,629 | ||||||||
Income from continuing operations | 136,128 | 107,369 | 240,362 | 193,405 | ||||||||
Income (loss) from discontinued operations, net of tax (Note 10) | 1,509 | (118 | ) | 26 | 85 | |||||||
Net income | $ | 137,637 | $ | 107,251 | $ | 240,388 | $ | 193,490 | ||||
Earnings per share - basic: | ||||||||||||
Income from continuing operations | $ | .68 | $ | .55 | $ | 1.21 | $ | .99 | ||||
Discontinued operations, net of tax | .01 | — | — | — | ||||||||
Earnings per share - basic | $ | .69 | $ | .55 | $ | 1.21 | $ | .99 | ||||
Earnings per share - diluted: | ||||||||||||
Income from continuing operations | $ | .68 | $ | .55 | $ | 1.21 | $ | .99 | ||||
Discontinued operations, net of tax | .01 | — | — | — | ||||||||
Earnings per share - diluted | $ | .69 | $ | .55 | $ | 1.21 | $ | .99 | ||||
Weighted average common shares outstanding - basic | 199,343 | 196,018 | 198,016 | 195,618 | ||||||||
Weighted average common shares outstanding - diluted | 199,383 | 196,265 | 198,033 | 196,104 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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MDU Resources Group, Inc. | |||||||||||||
Consolidated Statements of Comprehensive Income | |||||||||||||
(Unaudited) | |||||||||||||
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||
(In thousands) | |||||||||||||
Net income | $ | 137,637 | $ | 107,251 | $ | 240,388 | $ | 193,490 | |||||
Other comprehensive income: | |||||||||||||
Reclassification adjustment for loss on derivative instruments included in net income, net of tax of $36 and $55 for the three months ended and $(177) and $164 for the nine months ended in 2019 and 2018, respectively | 112 | 92 | 620 | 279 | |||||||||
Amortization of postretirement liability losses included in net periodic benefit cost, net of tax of $95 and $142 for the three months ended and $284 and $442 for the nine months ended in 2019 and 2018, respectively | 292 | 442 | 878 | 1,309 | |||||||||
Foreign currency translation adjustment: | |||||||||||||
Foreign currency translation adjustment recognized during the period, net of tax of $0 and $0 for the three months ended and $0 and $(14) for the nine months ended in 2019 and 2018, respectively | — | — | — | (61 | ) | ||||||||
Reclassification adjustment for foreign currency translation adjustment included in net income, net of tax of $0 and $0 for the three months ended and $0 and $75 for the nine months ended in 2019 and 2018, respectively | — | — | — | 249 | |||||||||
Foreign currency translation adjustment | — | — | — | 188 | |||||||||
Net unrealized gain (loss) on available-for-sale investments: | |||||||||||||
Net unrealized gain (loss) on available-for-sale investments arising during the period, net of tax of $3 and $(13) for the three months ended and $35 and $(52) for the nine months ended in 2019 and 2018, respectively | 12 | (51 | ) | 130 | (199 | ) | |||||||
Reclassification adjustment for (gain) loss on available-for-sale investments included in net income, net of tax of $(1) and $9 for the three months ended and $10 and $26 for the nine months ended in 2019 and 2018, respectively | (4 | ) | 33 | 36 | 97 | ||||||||
Net unrealized gain (loss) on available-for-sale investments | 8 | (18 | ) | 166 | (102 | ) | |||||||
Other comprehensive income | 412 | 516 | 1,664 | 1,674 | |||||||||
Comprehensive income attributable to common stockholders | $ | 138,049 | $ | 107,767 | $ | 242,052 | $ | 195,164 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
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MDU Resources Group, Inc. | |||||||||
Consolidated Balance Sheets | |||||||||
(Unaudited) | |||||||||
September 30, 2019 | September 30, 2018 | December 31, 2018 | |||||||
(In thousands, except shares and per share amounts) | |||||||||
Assets | |||||||||
Current assets: | |||||||||
Cash and cash equivalents | $ | 67,000 | $ | 67,077 | $ | 53,948 | |||
Receivables, net | 968,279 | 787,344 | 722,945 | ||||||
Inventories | 286,057 | 270,293 | 287,309 | ||||||
Prepayments and other current assets | 140,053 | 88,760 | 119,500 | ||||||
Current assets held for sale | 426 | 571 | 430 | ||||||
Total current assets | 1,461,815 | 1,214,045 | 1,184,132 | ||||||
Investments | 144,417 | 143,303 | 138,620 | ||||||
Property, plant and equipment | 7,746,754 | 7,102,960 | 7,397,321 | ||||||
Less accumulated depreciation, depletion and amortization | 2,944,928 | 2,796,649 | 2,818,644 | ||||||
Net property, plant and equipment | 4,801,826 | 4,306,311 | 4,578,677 | ||||||
Deferred charges and other assets: | |||||||||
Goodwill | 681,349 | 640,203 | 664,922 | ||||||
Other intangible assets, net | 15,511 | 4,318 | 10,815 | ||||||
Operating lease right-of-use assets (Note 11) | 118,764 | — | — | ||||||
Other | 504,842 | 408,178 | 408,857 | ||||||
Noncurrent assets held for sale | 2,087 | 1,835 | 2,087 | ||||||
Total deferred charges and other assets | 1,322,553 | 1,054,534 | 1,086,681 | ||||||
Total assets | $ | 7,730,611 | $ | 6,718,193 | $ | 6,988,110 | |||
Liabilities and Stockholders' Equity | |||||||||
Current liabilities: | |||||||||
Short-term borrowings | $ | 139,988 | $ | — | $ | — | |||
Long-term debt due within one year | 65,810 | 3,915 | 251,854 | ||||||
Accounts payable | 378,370 | 339,713 | 358,505 | ||||||
Taxes payable | 53,505 | 50,461 | 41,929 | ||||||
Dividends payable | 40,460 | 38,714 | 39,695 | ||||||
Accrued compensation | 93,642 | 62,836 | 69,007 | ||||||
Current operating lease liabilities (Note 11) | 32,584 | — | — | ||||||
Other accrued liabilities | 225,925 | 221,620 | 221,059 | ||||||
Current liabilities held for sale | 3,393 | 7,959 | 4,001 | ||||||
Total current liabilities | 1,033,677 | 725,218 | 986,050 | ||||||
Long-term debt | 2,180,946 | 1,911,555 | 1,856,841 | ||||||
Deferred credits and other liabilities: | |||||||||
Deferred income taxes | 487,194 | 405,761 | 430,085 | ||||||
Noncurrent operating lease liabilities (Note 11) | 86,166 | — | — | ||||||
Other | 1,147,022 | 1,154,366 | 1,148,359 | ||||||
Total deferred credits and other liabilities | 1,720,382 | 1,560,127 | 1,578,444 | ||||||
Commitments and contingencies | |||||||||
Stockholders' equity: | |||||||||
Common stock | |||||||||
Authorized - 500,000,000 shares, $1.00 par value Shares issued - 200,876,334 at September 30, 2019, 196,557,245 at September 30, 2018 and 196,564,907 at December 31, 2018 | 200,876 | 196,557 | 196,565 | ||||||
Other paid-in capital | 1,351,990 | 1,247,151 | 1,248,576 | ||||||
Retained earnings | 1,283,044 | 1,124,830 | 1,163,602 | ||||||
Accumulated other comprehensive loss | (36,678 | ) | (43,619 | ) | (38,342 | ) | |||
Treasury stock at cost - 538,921 shares | (3,626 | ) | (3,626 | ) | (3,626 | ) | |||
Total stockholders' equity | 2,795,606 | 2,521,293 | 2,566,775 | ||||||
Total liabilities and stockholders' equity | $ | 7,730,611 | $ | 6,718,193 | $ | 6,988,110 | |||
The accompanying notes are an integral part of these consolidated financial statements.
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MDU Resources Group, Inc. | ||||||||||||||||||||||
Consolidated Statements of Equity | ||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||
Nine Months Ended September 30, 2019 | ||||||||||||||||||||||
Other Paid-in Capital | Retained Earnings | Accumu-lated Other Compre-hensive Loss | ||||||||||||||||||||
Common Stock | Treasury Stock | |||||||||||||||||||||
Shares | Amount | Shares | Amount | Total | ||||||||||||||||||
(In thousands, except shares) | ||||||||||||||||||||||
At December 31, 2018 | 196,564,907 | $ | 196,565 | $ | 1,248,576 | $ | 1,163,602 | $ | (38,342 | ) | (538,921 | ) | $ | (3,626 | ) | $ | 2,566,775 | |||||
Net income | — | — | — | 40,926 | — | — | — | 40,926 | ||||||||||||||
Other comprehensive income | — | — | — | — | 774 | — | — | 774 | ||||||||||||||
Dividends declared on common stock | — | — | — | (40,019 | ) | — | — | — | (40,019 | ) | ||||||||||||
Stock-based compensation | — | — | 1,617 | — | — | — | — | 1,617 | ||||||||||||||
Issuance of common stock upon vesting of stock-based compensation, net of shares used for tax withholdings | 246,214 | 246 | (3,261 | ) | — | — | — | — | (3,015 | ) | ||||||||||||
Issuance of common stock | 1,505,687 | 1,506 | 37,128 | — | — | — | — | 38,634 | ||||||||||||||
At March 31, 2019 | 198,316,808 | $ | 198,317 | $ | 1,284,060 | $ | 1,164,509 | $ | (37,568 | ) | (538,921 | ) | $ | (3,626 | ) | $ | 2,605,692 | |||||
Net income | — | — | — | 61,825 | — | — | — | 61,825 | ||||||||||||||
Other comprehensive income | — | — | — | — | 478 | — | — | 478 | ||||||||||||||
Dividends declared on common stock | — | — | — | (40,367 | ) | — | — | — | (40,367 | ) | ||||||||||||
Stock-based compensation | — | — | 1,742 | — | — | — | — | 1,742 | ||||||||||||||
Issuance of common stock | 1,222,302 | 1,222 | 29,709 | — | — | — | — | 30,931 | ||||||||||||||
At June 30, 2019 | 199,539,110 | $ | 199,539 | $ | 1,315,511 | $ | 1,185,967 | $ | (37,090 | ) | (538,921 | ) | $ | (3,626 | ) | $ | 2,660,301 | |||||
Net income | — | — | — | 137,637 | — | — | — | 137,637 | ||||||||||||||
Other comprehensive income | — | — | — | — | 412 | — | — | 412 | ||||||||||||||
Dividends declared on common stock | — | — | — | (40,560 | ) | — | — | — | (40,560 | ) | ||||||||||||
Stock-based compensation | — | — | 1,742 | — | — | — | — | 1,742 | ||||||||||||||
Issuance of common stock | 1,337,224 | 1,337 | 34,737 | — | — | — | — | 36,074 | ||||||||||||||
At September 30, 2019 | 200,876,334 | $ | 200,876 | $ | 1,351,990 | $ | 1,283,044 | $ | (36,678 | ) | (538,921 | ) | $ | (3,626 | ) | $ | 2,795,606 | |||||
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MDU Resources Group, Inc. | ||||||||||||||||||||||
Consolidated Statements of Equity | ||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||
Nine Months Ended September 30, 2018 | ||||||||||||||||||||||
Other Paid-in Capital | Retained Earnings | Accumu-lated Other Compre-hensive Loss | ||||||||||||||||||||
Common Stock | Treasury Stock | |||||||||||||||||||||
Shares | Amount | Shares | Amount | Total | ||||||||||||||||||
(In thousands, except shares) | ||||||||||||||||||||||
At December 31, 2017 | 195,843,297 | $ | 195,843 | $ | 1,233,412 | $ | 1,040,748 | $ | (37,334 | ) | (538,921 | ) | $ | (3,626 | ) | $ | 2,429,043 | |||||
Cumulative effect of adoption of ASU 2014-09 | — | — | — | (970 | ) | — | — | — | (970 | ) | ||||||||||||
Adjusted balance at January 1, 2018 | 195,843,297 | 195,843 | 1,233,412 | 1,039,778 | (37,334 | ) | (538,921 | ) | (3,626 | ) | 2,428,073 | |||||||||||
Net income | — | — | — | 42,437 | — | — | — | 42,437 | ||||||||||||||
Other comprehensive income | — | — | — | — | 433 | — | — | 433 | ||||||||||||||
Reclassification of certain prior period tax effects from accumulated other comprehensive loss | — | — | — | 7,959 | (7,959 | ) | — | — | — | |||||||||||||
Dividends declared on common stock | — | — | — | (38,705 | ) | — | — | — | (38,705 | ) | ||||||||||||
Stock-based compensation | — | — | 1,223 | — | — | — | — | 1,223 | ||||||||||||||
Repurchase of common stock | — | — | — | — | — | (182,424 | ) | (5,020 | ) | (5,020 | ) | |||||||||||
Issuance of common stock upon vesting of stock-based compensation, net of shares used for tax withholdings | — | — | (7,350 | ) | — | — | 182,424 | 5,020 | (2,330 | ) | ||||||||||||
At March 31, 2018 | 195,843,297 | $ | 195,843 | $ | 1,227,285 | $ | 1,051,469 | $ | (44,860 | ) | (538,921 | ) | $ | (3,626 | ) | $ | 2,426,111 | |||||
Net income | — | — | — | 43,802 | — | — | — | 43,802 | ||||||||||||||
Other comprehensive income | — | — | — | — | 725 | — | — | 725 | ||||||||||||||
Dividends declared on common stock | — | — | — | (38,847 | ) | — | — | — | (38,847 | ) | ||||||||||||
Stock-based compensation | — | — | 1,294 | — | — | — | — | 1,294 | ||||||||||||||
Issuance of common stock | 713,948 | 714 | 17,279 | — | — | — | — | 17,993 | ||||||||||||||
At June 30, 2018 | 196,557,245 | $ | 196,557 | $ | 1,245,858 | $ | 1,056,424 | $ | (44,135 | ) | (538,921 | ) | $ | (3,626 | ) | $ | 2,451,078 | |||||
Net income | — | — | — | 107,251 | — | — | — | 107,251 | ||||||||||||||
Other comprehensive income | — | — | — | — | 516 | — | — | 516 | ||||||||||||||
Dividends declared on common stock | — | — | — | (38,845 | ) | — | — | — | (38,845 | ) | ||||||||||||
Stock-based compensation | — | — | 1,293 | — | — | — | — | 1,293 | ||||||||||||||
At September 30, 2018 | 196,557,245 | $ | 196,557 | $ | 1,247,151 | $ | 1,124,830 | $ | (43,619 | ) | (538,921 | ) | $ | (3,626 | ) | $ | 2,521,293 | |||||
10
MDU Resources Group, Inc. | |||||||
Consolidated Statements of Cash Flows | |||||||
(Unaudited) | |||||||
Nine Months Ended | |||||||
September 30, | |||||||
2019 | 2018 | ||||||
(In thousands) | |||||||
Operating activities: | |||||||
Net income | $ | 240,388 | $ | 193,490 | |||
Income from discontinued operations, net of tax | 26 | 85 | |||||
Income from continuing operations | 240,362 | 193,405 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation, depletion and amortization | 187,937 | 161,298 | |||||
Deferred income taxes | 49,222 | 42,428 | |||||
Changes in current assets and liabilities, net of acquisitions: | |||||||
Receivables | (238,373 | ) | (55,749 | ) | |||
Inventories | 2,480 | (38,785 | ) | ||||
Other current assets | (69,105 | ) | (3,452 | ) | |||
Accounts payable | 13,062 | 16,155 | |||||
Other current liabilities | 53,458 | 31,971 | |||||
Other noncurrent changes | (35,361 | ) | (27,170 | ) | |||
Net cash provided by continuing operations | 203,682 | 320,101 | |||||
Net cash used in discontinued operations | (579 | ) | (2,720 | ) | |||
Net cash provided by operating activities | 203,103 | 317,381 | |||||
Investing activities: | |||||||
Capital expenditures | (423,036 | ) | (345,599 | ) | |||
Acquisitions, net of cash acquired | (53,263 | ) | (27,858 | ) | |||
Net proceeds from sale or disposition of property and other | 28,391 | 12,451 | |||||
Investments | (717 | ) | (1,560 | ) | |||
Net cash used in continuing operations | (448,625 | ) | (362,566 | ) | |||
Net cash provided by discontinued operations | — | 1,236 | |||||
Net cash used in investing activities | (448,625 | ) | (361,330 | ) | |||
Financing activities: | |||||||
Issuance of short-term borrowings | 169,977 | — | |||||
Repayment of short-term borrowings | (30,000 | ) | — | ||||
Issuance of long-term debt | 302,724 | 356,952 | |||||
Repayment of long-term debt | (166,956 | ) | (157,315 | ) | |||
Proceeds from issuance of common stock | 105,639 | — | |||||
Dividends paid | (119,795 | ) | (115,859 | ) | |||
Repurchase of common stock | — | (5,020 | ) | ||||
Tax withholding on stock-based compensation | (3,015 | ) | (2,330 | ) | |||
Net cash provided by financing activities | 258,574 | 76,428 | |||||
Effect of exchange rate changes on cash and cash equivalents | — | (1 | ) | ||||
Increase in cash and cash equivalents | 13,052 | 32,478 | |||||
Cash and cash equivalents -- beginning of year | 53,948 | 34,599 | |||||
Cash and cash equivalents -- end of period | $ | 67,000 | $ | 67,077 | |||
The accompanying notes are an integral part of these consolidated financial statements.
11
MDU Resources Group, Inc.
Notes to Consolidated
Financial Statements
September 30, 2019 and 2018
(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 2018 Annual Report. The information is unaudited but includes all adjustments that are, in the opinion of management, necessary for a fair presentation of the accompanying consolidated interim financial statements and are of a normal recurring nature. Depreciation, depletion and amortization expense is reported separately on the Consolidated Statements of Income and therefore is excluded from the other line items within operating expenses.
On January 2, 2019, the Company announced the completion of the Holding Company Reorganization, which resulted in Montana-Dakota becoming a subsidiary of the Company. The purpose of the reorganization was to make the public utility division into a subsidiary of the holding company, just as the other operating companies are wholly owned subsidiaries.
Effective January 1, 2019, the Company adopted the requirements of the ASU on leases, as further discussed in Notes 6 and 11. As such, results for reporting periods beginning January 1, 2019, are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with the historic accounting for leases.
The assets and liabilities for the Company's discontinued operations have been classified as held for sale and the results of operations are shown in income (loss) from discontinued operations, other than certain general and administrative costs and interest expense which do not meet the criteria for income (loss) from discontinued operations. At the time the assets were classified as held for sale, depreciation, depletion and amortization expense was no longer recorded. Unless otherwise indicated, the amounts presented in the accompanying notes to the consolidated financial statements relate to the Company's continuing operations. For more information on the Company's discontinued operations, see Note 10.
Management has also evaluated the impact of events occurring after September 30, 2019, up to the date of issuance of these consolidated interim financial statements.
Note 2 - Seasonality of operations
Some of the Company's operations are highly seasonal and revenues from, and certain expenses for, such operations may fluctuate significantly among quarterly periods. Accordingly, the interim results for particular businesses, and for the Company as a whole, may not be indicative of results for the full fiscal year.
Note 3 - Accounts receivable and allowance for doubtful accounts
Accounts receivable consists primarily of trade receivables from the sale of goods and services which are recorded at the invoiced amount net of allowance for doubtful accounts, and costs and estimated earnings in excess of billings on uncompleted contracts. The total balance of receivables past due 90 days or more was $56.0 million, $29.2 million and $30.0 million at September 30, 2019 and 2018, and December 31, 2018, respectively.
The allowance for doubtful accounts is determined through a review of past due balances and other specific account data. Account balances are written off when management determines the amounts to be uncollectible. The Company's allowance for doubtful accounts at September 30, 2019 and 2018, and December 31, 2018, was $8.7 million, $7.3 million and $8.9 million, respectively.
12
Note 4 - Inventories and natural gas in storage
Natural gas in storage for the Company's regulated operations is generally carried at lower of cost or net realizable value, or cost using the last-in, first-out method. All other inventories are stated at the lower of cost or net realizable value. The portion of the cost of natural gas in storage expected to be used within one year was included in inventories. Inventories on the Consolidated Balance Sheets were as follows:
September 30, 2019 | September 30, 2018 | December 31, 2018 | |||||||
(In thousands) | |||||||||
Aggregates held for resale | $ | 143,157 | $ | 133,477 | $ | 139,681 | |||
Asphalt oil | 39,269 | 40,781 | 54,741 | ||||||
Materials and supplies | 25,696 | 23,563 | 23,611 | ||||||
Merchandise for resale | 23,902 | 15,954 | 22,552 | ||||||
Natural gas in storage (current) | 32,164 | 29,084 | 22,117 | ||||||
Other | 21,869 | 27,434 | 24,607 | ||||||
Total | $ | 286,057 | $ | 270,293 | $ | 287,309 | |||
The remainder of natural gas in storage, which largely represents the cost of gas required to maintain pressure levels for normal operating purposes, was included in deferred charges and other assets - other and was $48.2 million, $47.8 million and $48.5 million at September 30, 2019 and 2018, and December 31, 2018, respectively.
Note 5 - 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 nonvested performance share awards and restricted stock units. Common stock outstanding includes issued shares less shares held in treasury. Net income was the same for both the basic and diluted earnings per share calculations. A reconciliation of the weighted average common shares outstanding used in the basic and diluted earnings per share calculations follows:
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
(In thousands, except per share amounts) | ||||||||||||
Weighted average common shares outstanding - basic | 199,343 | 196,018 | 198,016 | 195,618 | ||||||||
Effect of dilutive performance share awards and restricted stock units | 40 | 247 | 17 | 486 | ||||||||
Weighted average common shares outstanding - diluted | 199,383 | 196,265 | 198,033 | 196,104 | ||||||||
Shares excluded from the calculation of diluted earnings per share | 155 | 114 | 243 | — | ||||||||
Dividends declared per common share | $ | .2025 | $ | .1975 | $ | .6075 | $ | .5925 | ||||
Note 6 - New accounting standards
Recently adopted accounting standards
ASU 2016-02 - Leases In February 2016, the FASB issued guidance regarding leases. The guidance required lessees to recognize a lease liability and a right-of-use asset on the balance sheet for operating and financing leases. The guidance remained largely the same for lessors, although some changes were made to better align lessor accounting with the new lessee accounting and to align with the revenue recognition standard. The guidance also required additional disclosures, both quantitative and qualitative, related to operating and financing leases for the lessee and sales-type, direct financing and operating leases for the lessor. The Company adopted the standard on January 1, 2019.
In July 2018, the FASB issued ASU 2018-11 - Leases: Targeted Improvements, an accounting standard update to ASU 2016-02. This ASU provided an entity the option to adopt the guidance using one of two modified retrospective approaches. An entity could adopt the guidance using the modified retrospective transition approach beginning in the earliest year presented in the financial statements. This method of adoption would have required the restatement of prior periods reported and the presentation of lease disclosures under the new guidance for all periods reported. The additional transition method of adoption, introduced by ASU 2018-11, allowed entities the option to apply the guidance on the date of adoption by recognizing a cumulative effect adjustment to retained earnings during the period of adoption and did not require prior comparative periods to be restated.
The Company adopted the standard on January 1, 2019, utilizing the additional transition method of adoption applied on the date of adoption and the practical expedient that allowed the Company to not reassess whether an expired or existing contract contained a lease, the classification of leases or initial direct costs. The Company did not identify any cumulative effect
13
adjustments. The Company also adopted a short-term leasing policy as the lessee where leases with a term of 12 months or less are not included on the Consolidated Balance Sheet.
As a practical expedient, a lessee may choose not to separate nonlease components from lease components and instead account for lease and nonlease components as a single lease component. The election shall be made by asset class. The Company has elected to adopt the lease/nonlease component practical expedient for all asset classes as the lessee. The Company did not elect the practical expedient to use hindsight when assessing the lease term or impairment of right-of-use assets for the existing leases on the date of adoption.
In January 2018, the FASB issued a practical expedient for land easements under the new lease guidance. The practical expedient permits an entity to elect the option to not evaluate land easements under the new guidance if they existed or expired before the adoption of the new lease guidance and were not previously accounted for as leases under the previous lease guidance. Once an entity adopts the new guidance, the entity should apply the new guidance on a prospective basis to all new or modified land easements. The Company has adopted this practical expedient.
The Company formed a lease implementation team to review and assess existing contracts to identify and evaluate those containing leases. Additionally, the team implemented new and revised existing software to meet the reporting and disclosure requirements of the standard. The Company also assessed the impact the standard had on its processes and internal controls and identified new and updated existing internal controls and processes to ensure compliance with the new lease standard; such modifications were not deemed to be significant. During the assessment phase, the Company used various surveys, reconciliations and analytic methodologies to ensure the completeness of the lease inventory. The Company determined that most of the current operating leases were subject to the guidance and were recognized as operating lease liabilities and right-of-use assets on the Consolidated Balance Sheet upon adoption. On January 1, 2019, the Company recorded approximately $112 million to right-of-use assets and lease liabilities as a result of the initial adoption of the guidance. In addition, the Company evaluated the impact the new guidance had on lease contracts where the Company is the lessor and determined it did not have a significant impact to the Company's financial statements.
ASU 2018-15 - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract In August 2018, the FASB issued guidance on the accounting for implementation costs of a hosting arrangement that is a service contract. The guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract similar to the costs incurred to develop or obtain internal-use software and such capitalized costs to be expensed over the term of the hosting arrangement. Costs incurred during the preliminary and postimplementation stages should continue to be expensed as activities are performed. The capitalized costs are required to be presented on the balance sheet in the same line the prepayment for the fees associated with the hosting arrangement would be presented. In addition, the expense related to the capitalized implementation costs should be presented in the same line on the income statement as the fees associated with the hosting element of the arrangements. The Company adopted the guidance effective January 1, 2019, on a prospective basis. The adoption of the guidance did not have a material impact on its results of operations, financial position, cash flows or disclosures.
Recently issued accounting standards not yet adopted
ASU 2016-13 - Measurement of Credit Losses on Financial Instruments In June 2016, the FASB issued guidance on the measurement of credit losses on certain financial instruments. The guidance introduces a new impairment model known as the current expected credit loss model that will replace the incurred loss impairment methodology currently included under GAAP. This guidance requires entities to present certain investments in debt securities, trade accounts receivable and other financial assets at their net carrying value of the amount expected to be collected on the financial statements. The guidance will be effective for the Company on January 1, 2020, and must be applied on a modified retrospective basis with early adoption permitted. The Company continues to evaluate the provisions of the guidance and currently does not expect the guidance to have a material impact on its results of operations, financial position, cash flows or disclosures.
ASU 2017-04 - Simplifying the Test for Goodwill Impairment In January 2017, the FASB issued guidance on simplifying the test for goodwill impairment by eliminating Step 2, which required an entity to measure the amount of impairment loss by comparing the implied fair value of reporting unit goodwill with the carrying amount of such goodwill. This guidance requires entities to perform a quantitative impairment test, previously Step 1, to identify both the existence of impairment and the amount of impairment loss by comparing the fair value of a reporting unit to its carrying amount. Entities will continue to have the option of performing a qualitative assessment to determine if the quantitative impairment test is necessary. The guidance also requires additional disclosures if an entity has one or more reporting units with zero or negative carrying amounts of net assets. The guidance will be effective for the Company on January 1, 2020, and must be applied on a prospective basis with early adoption permitted. The Company has evaluated the guidance and does not expect the guidance will have a material impact on its results of operations, financial position, cash flows or disclosures upon adoption. The Company is planning to early adopt the guidance with the preparation of its 2019 goodwill impairment test in the fourth quarter of 2019.
ASU 2018-13 - Changes to the Disclosure Requirements for Fair Value Measurement In August 2018, the FASB issued guidance on modifying the disclosure requirements on fair value measurements as part of the disclosure framework project. The guidance modifies, among other things, the disclosures required for Level 3 fair value measurements, including the range and weighted average of significant unobservable inputs. The guidance removes, among other things, the disclosure requirement to disclose
14
transfers between Levels 1 and 2. The guidance will be effective for the Company on January 1, 2020, including interim periods, with early adoption permitted. Level 3 fair value measurement disclosures should be applied prospectively while all other amendments should be applied retrospectively. The Company is evaluating the effects the adoption of the new guidance will have on its disclosures.
ASU 2018-14 - Changes to the Disclosure Requirements for Defined Benefit Plans In August 2018, the FASB issued guidance on modifying the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans as part of the disclosure framework project. The guidance removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of disclosures and adds disclosure requirements identified as relevant. The guidance adds, among other things, the requirement to include an explanation for significant gains and losses related to changes in benefit obligations for the period. The guidance removes, among other things, the disclosure requirement to disclose the amount of net periodic benefit costs to be amortized over the next fiscal year from accumulated other comprehensive income (loss) and the effects a one percentage point change in assumed health care cost trend rates will have on certain benefit components. The guidance will be effective for the Company on January 1, 2021, and must be applied on a retrospective basis with early adoption permitted. The Company is evaluating the effects the adoption of the new guidance will have on its disclosures.
Note 7 - Accumulated other comprehensive income (loss)
The after-tax changes in the components of accumulated other comprehensive income (loss) were as follows:
Nine Months Ended September 30, 2019 | Net Unrealized Gain (Loss) on Derivative Instruments Qualifying as Hedges | Postretirement Liability Adjustment | Net Unrealized Gain (Loss) on Available-for-sale Investments | Total Accumulated Other Comprehensive Loss | ||||||||
(In thousands) | ||||||||||||
At December 31, 2018 | $ | (2,161 | ) | $ | (36,069 | ) | $ | (112 | ) | $ | (38,342 | ) |
Other comprehensive income before reclassifications | — | — | 39 | 39 | ||||||||
Amounts reclassified from accumulated other comprehensive loss | 397 | 310 | 28 | 735 | ||||||||
Net current-period other comprehensive income | 397 | 310 | 67 | 774 | ||||||||
At March 31, 2019 | $ | (1,764 | ) | $ | (35,759 | ) | $ | (45 | ) | $ | (37,568 | ) |
Other comprehensive income before reclassifications | — | — | 79 | 79 | ||||||||
Amounts reclassified from accumulated other comprehensive loss | 111 | 276 | 12 | 399 | ||||||||
Net current-period other comprehensive income | 111 | 276 | 91 | 478 | ||||||||
At June 30, 2019 | $ | (1,653 | ) | $ | (35,483 | ) | $ | 46 | $ | (37,090 | ) | |
Other comprehensive income before reclassifications | — | — | 12 | 12 | ||||||||
Amounts reclassified (to) from accumulated other comprehensive loss | 112 | 292 | (4 | ) | 400 | |||||||
Net current-period other comprehensive income | 112 | 292 | 8 | 412 | ||||||||
At September 30, 2019 | $ | (1,541 | ) | $ | (35,191 | ) | $ | 54 | $ | (36,678 | ) | |
15
Nine Months Ended September 30, 2018 | Net Unrealized Gain (Loss) on Derivative Instruments Qualifying as Hedges | Postretirement Liability Adjustment | Foreign Currency Translation Adjustment | Net Unrealized Gain (Loss) on Available-for-sale Investments | Total Accumulated Other Comprehensive Loss | ||||||||||
(In thousands) | |||||||||||||||
At December 31, 2017 | $ | (1,934 | ) | $ | (35,163 | ) | $ | (155 | ) | $ | (82 | ) | $ | (37,334 | ) |
Other comprehensive loss before reclassifications | — | — | (2 | ) | (105 | ) | (107 | ) | |||||||
Amounts reclassified from accumulated other comprehensive loss | 92 | 418 | — | 30 | 540 | ||||||||||
Net current-period other comprehensive income (loss) | 92 | 418 | (2 | ) | (75 | ) | 433 | ||||||||
Reclassification adjustment of prior period tax effects related to TCJA included in accumulated other comprehensive loss | (389 | ) | (7,520 | ) | (33 | ) | (17 | ) | (7,959 | ) | |||||
At March 31, 2018 | $ | (2,231 | ) | $ | (42,265 | ) | $ | (190 | ) | $ | (174 | ) | $ | (44,860 | ) |
Other comprehensive loss before reclassifications | — | — | (59 | ) | (43 | ) | (102 | ) | |||||||
Amounts reclassified from accumulated other comprehensive loss | 95 | 449 | 249 | 34 | 827 | ||||||||||
Net current-period other comprehensive income (loss) | 95 | 449 | 190 | (9 | ) | 725 | |||||||||
At June 30, 2018 | $ | (2,136 | ) | $ | (41,816 | ) | $ | — | $ | (183 | ) | $ | (44,135 | ) | |
Other comprehensive loss before reclassifications | — | — | — | (51 | ) | (51 | ) | ||||||||
Amounts reclassified from accumulated other comprehensive loss | 92 | 442 | — | 33 | 567 | ||||||||||
Net current-period other comprehensive income (loss) | 92 | 442 | — | (18 | ) | 516 | |||||||||
At September 30, 2018 | $ | (2,044 | ) | $ | (41,374 | ) | $ | — | $ | (201 | ) | $ | (43,619 | ) | |
The following amounts were reclassified out of accumulated other comprehensive loss into net income. The amounts presented in parenthesis indicate a decrease to net income on the Consolidated Statements of Income. The reclassifications were as follows:
Three Months Ended | Nine Months Ended | Location on Consolidated Statements of Income | |||||||||||
September 30, | September 30, | ||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||
(In thousands) | |||||||||||||
Reclassification adjustment for loss on derivative instruments included in net income | $ | (148 | ) | $ | (147 | ) | $ | (443 | ) | $ | (443 | ) | Interest expense |
36 | 55 | (177 | ) | 164 | Income taxes | ||||||||
(112 | ) | (92 | ) | (620 | ) | (279 | ) | ||||||
Amortization of postretirement liability losses included in net periodic benefit cost | (387 | ) | (584 | ) | (1,162 | ) | (1,751 | ) | Other income | ||||
95 | 142 | 284 | 442 | Income taxes | |||||||||
(292 | ) | (442 | ) | (878 | ) | (1,309 | ) | ||||||
Reclassification adjustment for foreign currency translation adjustment included in net income | — | — | — | (324 | ) | Other income | |||||||
— | — | — | 75 | Income taxes | |||||||||
— | — | — | (249 | ) | |||||||||
Reclassification adjustment on available-for-sale investments included in net income | 5 | (42 | ) | (46 | ) | (123 | ) | Other income | |||||
(1 | ) | 9 | 10 | 26 | Income taxes | ||||||||
4 | (33 | ) | (36 | ) | (97 | ) | |||||||
Total reclassifications | $ | (400 | ) | $ | (567 | ) | $ | (1,534 | ) | $ | (1,934 | ) | |
16
Note 8 - Revenue from contracts with customers
Revenue is recognized when a performance obligation is satisfied by transferring control over a product or service to a customer. Revenue is measured based on consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Company is considered an agent for certain taxes collected from customers. As such, the Company presents revenues net of these taxes at the time of sale to be remitted to governmental authorities, including sales and use taxes.
As part of the adoption of ASC 606 - Revenue from Contracts with Customers, the Company elected the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the Company otherwise would have recognized is 12 months or less.
Disaggregation
In the following table, 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 September 30, 2019 | Electric | Natural gas distribution | Pipeline and midstream | Construction materials and contracting | Construction services | Other | Total | ||||||||||||||
(In thousands) | |||||||||||||||||||||
Residential utility sales | $ | 30,376 | $ | 44,902 | $ | — | $ | — | $ | — | $ | — | $ | 75,278 | |||||||
Commercial utility sales | 36,670 | 29,148 | — | — | — | — | 65,818 | ||||||||||||||
Industrial utility sales | 9,348 | 4,307 | — | — | — | — | 13,655 | ||||||||||||||
Other utility sales | 1,862 | — | — | — | — | — | 1,862 | ||||||||||||||
Natural gas transportation | — | 11,410 | 25,229 | — | — | — | 36,639 | ||||||||||||||
Natural gas gathering | — | — | 2,510 | — | — | — | 2,510 | ||||||||||||||
Natural gas storage | — | — | 3,044 | — | — | — | 3,044 | ||||||||||||||
Contracting services | — | — | — | 461,716 | — | — | 461,716 | ||||||||||||||
Construction materials | — | — | — | 638,862 | — | — | 638,862 | ||||||||||||||
Intrasegment eliminations* | — | — | — | (231,078 | ) | — | — | (231,078 | ) | ||||||||||||
Inside specialty contracting | — | — | — | — | 317,202 | — | 317,202 | ||||||||||||||
Outside specialty contracting | — | — | — | — | 151,285 | — | 151,285 | ||||||||||||||
Other | 9,380 | 2,708 | 5,534 | — | 45 | 2,884 | 20,551 | ||||||||||||||
Intersegment eliminations | — | — | (3,831 | ) | (124 | ) | (1,226 | ) | (2,862 | ) | (8,043 | ) | |||||||||
Revenues from contracts with customers | 87,636 | 92,475 | 32,486 | 869,376 | 467,306 | 22 | 1,549,301 | ||||||||||||||
Revenues out of scope | 2,209 | 1,167 | 47 | — | 11,075 | — | 14,498 | ||||||||||||||
Total external operating revenues | $ | 89,845 | $ | 93,642 | $ | 32,533 | $ | 869,376 | $ | 478,381 | $ | 22 | $ | 1,563,799 | |||||||
* | Intrasegment revenues are presented within the construction materials and contracting segment to highlight the focus on vertical integration as this segment sells materials to both third parties and internal customers. Due to consolidation requirements, these revenues must be eliminated against construction materials to arrive at the external operating revenue total for the segment. |
17
Three Months Ended September 30, 2018 | Electric | Natural gas distribution | Pipeline and midstream | Construction materials and contracting | Construction services | Other | Total | ||||||||||||||
(In thousands) | |||||||||||||||||||||
Residential utility sales | $ | 31,424 | $ | 43,825 | $ | — | $ | — | $ | — | $ | — | $ | 75,249 | |||||||
Commercial utility sales | 36,259 | 28,174 | — | — | — | — | 64,433 | ||||||||||||||
Industrial utility sales | 8,738 | 4,421 | — | — | — | — | 13,159 | ||||||||||||||
Other utility sales | 2,056 | — | — | — | — | — | 2,056 | ||||||||||||||
Natural gas transportation | — | 10,841 | 21,400 | — | — | — | 32,241 | ||||||||||||||
Natural gas gathering | — | — | 2,320 | — | — | — | 2,320 | ||||||||||||||
Natural gas storage | — | — | 2,795 | — | — | — | 2,795 | ||||||||||||||
Contracting services | — | — | — | 409,006 | — | — | 409,006 | ||||||||||||||
Construction materials | — | — | — | 538,962 | — | — | 538,962 | ||||||||||||||
Intrasegment eliminations* | — | — | — | (204,040 | ) | — | — | (204,040 | ) | ||||||||||||
Inside specialty contracting | — | — | — | — | 217,474 | — | 217,474 | ||||||||||||||
Outside specialty contracting | — | — | — | — | 100,988 | — | 100,988 | ||||||||||||||
Other | 6,158 | 3,208 | 5,701 | — | 15 | 3,084 | 18,166 | ||||||||||||||
Intersegment eliminations | — | — | (3,187 | ) | (165 | ) | (782 | ) | (3,037 | ) | (7,171 | ) | |||||||||
Revenues from contracts with customers | 84,635 | 90,469 | 29,029 | 743,763 | 317,695 | 47 | 1,265,638 | ||||||||||||||
Revenues out of scope | 1,445 | 1,779 | 42 | — | 11,883 | — | 15,149 | ||||||||||||||
Total external operating revenues | $ | 86,080 | $ | 92,248 | $ | 29,071 | $ | 743,763 | $ | 329,578 | $ | 47 | $ | 1,280,787 | |||||||
* | Intrasegment revenues are presented within the construction materials and contracting segment to highlight the focus on vertical integration as this segment sells materials to both third parties and internal customers. Due to consolidation requirements, these revenues must be eliminated against construction materials to arrive at the external operating revenue total for the segment. |
Nine Months Ended September 30, 2019 | Electric | Natural gas distribution | Pipeline and midstream | Construction materials and contracting | Construction services | Other | Total | ||||||||||||||
(In thousands) | |||||||||||||||||||||
Residential utility sales | $ | 93,368 | $ | 316,521 | $ | — | $ | — | $ | — | $ | — | $ | 409,889 | |||||||
Commercial utility sales | 105,572 | 192,191 | — | — | — | — | 297,763 | ||||||||||||||
Industrial utility sales | 27,576 | 18,495 | — | — | — | — | 46,071 | ||||||||||||||
Other utility sales | 5,540 | — | — | — | — | — | 5,540 | ||||||||||||||
Natural gas transportation | — | 33,686 | 75,091 | — | — | — | 108,777 | ||||||||||||||
Natural gas gathering | — | — | 7,027 | — | — | — | 7,027 | ||||||||||||||
Natural gas storage | — | — | 8,313 | — | — | — | 8,313 | ||||||||||||||
Contracting services | — | — | — | 841,881 | — | — | 841,881 | ||||||||||||||
Construction materials | — | — | — | 1,262,938 | — | — | 1,262,938 | ||||||||||||||
Intrasegment eliminations* | — | — | — | (412,144 | ) | — | — | (412,144 | ) | ||||||||||||
Inside specialty contracting | — | — | — | — | 936,008 | — | 936,008 | ||||||||||||||
Outside specialty contracting | — | — | — | — | 391,971 | — | 391,971 | ||||||||||||||
Other | 26,918 | 9,544 | 14,523 | — | 70 | 13,631 | 64,686 | ||||||||||||||
Intersegment eliminations | — | — | (35,298 | ) | (388 | ) | (2,076 | ) | (13,566 | ) | (51,328 | ) | |||||||||
Revenues from contracts with customers | 258,974 | 570,437 | 69,656 | 1,692,287 | 1,325,973 | 65 | 3,917,392 | ||||||||||||||
Revenues out of scope | 4,449 | (781 | ) | 171 | — | 37,332 | — | 41,171 | |||||||||||||
Total external operating revenues | $ | 263,423 | $ | 569,656 | $ | 69,827 | $ | 1,692,287 | $ | 1,363,305 | $ | 65 | $ | 3,958,563 | |||||||
* | Intrasegment revenues are presented within the construction materials and contracting segment to highlight the focus on vertical integration as this segment sells materials to both third parties and internal customers. Due to consolidation requirements, these revenues must be eliminated against construction materials to arrive at the external operating revenue total for the segment. |
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Nine Months Ended September 30, 2018 | Electric | Natural gas distribution | Pipeline and midstream | Construction materials and contracting | Construction services | Other | Total | ||||||||||||||
(In thousands) | |||||||||||||||||||||
Residential utility sales | $ | 93,359 | $ | 305,399 | $ | — | $ | — | $ | — | $ | — | $ | 398,758 | |||||||
Commercial utility sales | 103,636 | 185,885 | — | — | — | — | 289,521 | ||||||||||||||
Industrial utility sales | 25,734 | 17,457 | — | — | — | — | 43,191 | ||||||||||||||
Other utility sales | 5,766 | — | — | — | — | — | 5,766 | ||||||||||||||
Natural gas transportation | — | 32,104 | 64,505 | — | — | — | 96,609 | ||||||||||||||
Natural gas gathering | — | — | 6,900 | — | — | — | 6,900 | ||||||||||||||
Natural gas storage | — | — | 8,563 | — | — | — | 8,563 | ||||||||||||||
Contracting services | — | — | — | 730,628 | — | — | 730,628 | ||||||||||||||
Construction materials | — | — | — | 1,100,185 | — | — | 1,100,185 | ||||||||||||||
Intrasegment eliminations* | — | — | — | (363,877 | ) | — | — | (363,877 | ) | ||||||||||||
Inside specialty contracting | — | — | — | — | 667,664 | — | 667,664 | ||||||||||||||
Outside specialty contracting | — | — | — | — | 283,432 | — | 283,432 | ||||||||||||||
Other | 22,836 | 10,821 | 13,353 | — | 32 | 8,536 | 55,578 | ||||||||||||||
Intersegment eliminations | — | — | (31,485 | ) | (501 | ) | (1,332 | ) | (8,343 | ) | (41,661 | ) | |||||||||
Revenues from contracts with customers | 251,331 | 551,666 | 61,836 | 1,466,435 | 949,796 | 193 | 3,281,257 | ||||||||||||||
Revenues out of scope | 653 | 2,786 | 129 | — | 36,853 | — | 40,421 | ||||||||||||||
Total external operating revenues | $ | 251,984 | $ | 554,452 | $ | 61,965 | $ | 1,466,435 | $ | 986,649 | $ | 193 | $ | 3,321,678 | |||||||
* | Intrasegment revenues are presented within the construction materials and contracting segment to highlight the focus on vertical integration as this segment sells materials to both third parties and internal customers. Due to consolidation requirements, these revenues must be eliminated against construction materials to arrive at the external operating revenue total for the segment. |
Contract balances
The timing of revenue recognition may differ from the timing of invoicing to customers. The timing of invoicing to customers does not necessarily correlate with the timing of revenues being recognized under the cost‐to‐cost method of accounting. Contracts from contracting services are billed as work progresses in accordance with agreed upon contractual terms. Generally, billing to the customer occurs contemporaneous to revenue recognition. A variance in timing of the billings may result in a contract asset or a contract liability. A contract asset occurs when revenues are recognized under the cost-to-cost measure of progress, which exceeds amounts billed on uncompleted contracts. Such amounts will be billed as standard contract terms allow, usually based on various measures of performance or achievement. A contract liability occurs when there are billings in excess of revenues recognized under the cost-to-cost measure of progress on uncompleted contracts. Contract liabilities decrease as revenue is recognized from the satisfaction of the related performance obligation. The changes in contract assets and liabilities were as follows:
September 30, 2019 | December 31, 2018 | Change | Location on Consolidated Balance Sheets | |||||||
(In thousands) | ||||||||||
Contract assets | $ | 163,437 | $ | 104,239 | $ | 59,198 | Receivables, net | |||
Contract liabilities - current | (120,207 | ) | (93,901 | ) | (26,306 | ) | Accounts payable | |||
Contract liabilities - noncurrent | (25 | ) | (135 | ) | 110 | Deferred credits and other liabilities - other | ||||
Net contract assets | $ | 43,205 | $ | 10,203 | $ | 33,002 | ||||
The Company recognized $7.5 million and $86.5 million in revenue for the three and nine months ended September 30, 2019, respectively, which was previously included in contract liabilities at December 31, 2018. The Company recognized $10.3 million and $79.2 million in revenue for the three and nine months ended September 30, 2018, respectively, which was previously included in contract liabilities at December 31, 2017.
The Company recognized a net increase in revenues of $21.8 million and $40.3 million for the three and nine months ended September 30, 2019, respectively, from performance obligations satisfied in prior periods. The Company recognized a net decrease in revenues of $8.7 million and $3.7 million for the three and nine months ended September 30, 2018, respectively, from performance obligations satisfied in prior periods.
Remaining performance obligations
The remaining performance obligations at the construction materials and contracting and construction services segments include unrecognized revenues the Company reasonably expects to be realized which includes projects that have a written award, a letter of intent, a notice to proceed, an agreed upon work order to perform work on mutually accepted terms and conditions and change orders or claims to the extent management believes additional contract revenues will be earned and are deemed probable of
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collection. Excluded from remaining performance obligations are potential orders under master service agreements. The remaining performance obligations at the pipeline and midstream segment include firm transportation and storage contracts with fixed pricing and fixed volumes.
At September 30, 2019, the Company's remaining performance obligations were $2.1 billion. The Company expects to recognize the following revenue amounts in future periods related to these remaining performance obligations: $1.6 billion within the next 12 months; $255.0 million within the next 13 to 24 months; and $249.6 million thereafter.
The majority of the Company's construction contracts have an original duration of less than two years. The Company's firm transportation and firm storage contracts have weighted average remaining durations of approximately five and three years, respectively.
Note 9 - Business combinations
During 2019, the Company completed two acquisitions which were accounted for as business combinations. The following is a listing of the acquisitions made during 2019:
• | In March 2019, the Company acquired Viesko Redi-Mix, Inc., a provider of ready-mixed concrete in Oregon. The results of Viesko Redi-Mix, Inc. are included in the construction materials and contracting segment. |
• | In September 2019, the Company purchased the assets of Pride Electric, Inc., an electrical construction company in Washington. The results of Pride Electric, Inc. are included in the construction services segment. |
All business combinations were accounted for in accordance with ASC 805 - Business Combinations. The results of the acquired businesses have been included in the Company's Consolidated Financial Statements beginning on the acquisition date. Pro forma financial amounts reflecting the effects of the business combinations are not presented, as these business combinations were not material to the Company's financial position or results of operations.
For all business combinations, the Company preliminarily allocates the purchase price of the acquisitions to the assets acquired and liabilities assumed based on their estimated fair values as of the acquisition dates and are considered provisional until final fair values are determined, or the measurement period has passed. The Company expects to record adjustments as it accumulates the information needed to estimate the fair value of assets acquired and liabilities assumed, including working capital balances, estimated fair value of identifiable intangible assets, property, plant and equipment, total consideration and goodwill. The excess of the purchase price over the aggregate fair values is recorded as goodwill. The Company calculated the fair value of the assets acquired in 2019 and 2018 using a market or cost approach (or a combination of both). Fair values for some of the assets were determined based on Level 3 inputs including estimated future cash flows, discount rates, growth rates, sales projections, retention rates and terminal values, all of which require significant management judgment and are susceptible to change. The final fair value of the net assets acquired may result in adjustments to the assets and liabilities, including goodwill, and will be made as soon as practical, but no later than one year from the respective acquisition dates. Any subsequent measurement period adjustments are not expected to have a material impact on the Company's results of operations.
As of September 30, 2019, the gross aggregate consideration for acquisitions that occurred in 2019 was $54.5 million, subject to certain adjustments, and includes $1.2 million of debt assumed. The acquisitions are 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 Sheet for these adjustments are considered provisional until final settlement has occurred. The purchase price adjustments for Viesko Redi-Mix, Inc., have been settled and the purchase price allocation is considered final.
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During the third quarter of 2019, the Company finalized its valuation of the assets acquired and liabilities assumed in conjunction with the acquisition in 2018 of Sweetman Construction Company. As a result, measurement period adjustments were made to the previously disclosed provisional fair values. These adjustments did not have a material impact on the Company's consolidated results of operations. The purchase price adjustments for the three additional acquisitions in 2018 have been settled with no material adjustments made to the provisional accounting. The aggregate total consideration for the 2018 acquisitions and the final amounts allocated to the assets acquired and liabilities assumed were as follows:
December 31, 2018 | Measurement Period Adjustments | September 30, 2019 | |||||||
(In thousands) | |||||||||
Assets | |||||||||
Current assets: | |||||||||
Receivables, net | $ | 18,984 | $ | — | $ | 18,984 | |||
Inventories | 10,329 | (228 | ) | 10,101 | |||||
Prepayments and other current assets | 515 | (14 | ) | 501 | |||||
Total current assets | 29,828 | (242 | ) | 29,586 | |||||
Property, plant and equipment | 131,766 | 6,669 | 138,435 | ||||||
Deferred charges and other assets: | |||||||||
Goodwill | 33,131 | (6,669 | ) | 26,462 | |||||
Other Intangible assets, net | 8,227 | — | 8,227 | ||||||
Other | 927 | — | 927 | ||||||
Total deferred charges and other assets | 42,285 | (6,669 | ) | 35,616 | |||||
Total assets acquired | $ | 203,879 | $ | (242 | ) | $ | 203,637 | ||
Liabilities | |||||||||
Current liabilities | $ | 11,122 | $ | (242 | ) | $ | 10,880 | ||
Deferred credits and other liabilities: | |||||||||
Asset retirement obligation | 914 | — | 914 | ||||||
Deferred income taxes | 5,565 | — | 5,565 | ||||||
Total deferred credits and other liabilities | 6,479 | — | 6,479 | ||||||
Total liabilities assumed | $ | 17,601 | $ | (242 | ) | $ | 17,359 | ||
Total consideration (fair value) | $ | 186,278 | $ | — | $ | 186,278 | |||
Note 10 - Discontinued operations
The assets and liabilities of the Company's discontinued operations have been classified as held for sale and the results of operations are shown in income (loss) from discontinued operations, other than certain general and administrative costs and interest expense which do not meet the criteria for income (loss) from discontinued operations. At the time the assets were classified as held for sale, depreciation, depletion and amortization expense was no longer recorded.
Dakota Prairie Refining On June 24, 2016, WBI Energy entered into a membership interest purchase agreement with Tesoro to sell all the outstanding membership interests in Dakota Prairie Refining to Tesoro. WBI Energy and Calumet each previously owned 50 percent of the Dakota Prairie Refining membership interests and were equal members in building and operating Dakota Prairie Refinery. To effectuate the sale, WBI Energy acquired Calumet’s 50 percent membership interest in Dakota Prairie Refining on June 27, 2016. The sale of the membership interests to Tesoro closed on June 27, 2016. The sale of Dakota Prairie Refining reduced the Company’s risk by decreasing exposure to commodity prices.
Fidelity In the second quarter of 2015, the Company began the marketing and sale process of Fidelity with an anticipated sale to occur within one year. Between September 2015 and March 2016, the Company entered into purchase and sale agreements to sell substantially all of Fidelity's oil and natural gas assets. The completion of these sales occurred between October 2015 and April 2016. In July 2018, the Company completed the sale of a majority of the remaining property, plant and equipment. The sale of Fidelity was part of the Company's strategic plan to grow its capital investments in the remaining business segments and to focus on creating a greater long-term value.
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Dakota Prairie Refining and Fidelity The carrying amounts of the major classes of assets and liabilities classified as held for sale on the Consolidated Balance Sheets were as follows:
September 30, 2019 | September 30, 2018 | December 31, 2018 | |||||||
(In thousands) | |||||||||
Assets | |||||||||
Current assets: | |||||||||
Receivables, net | $ | 426 | $ | 571 | $ | 430 | |||
Income taxes receivable (a) | — | 1,640 | — | ||||||
Total current assets held for sale | 426 | 2,211 | 430 | ||||||
Noncurrent assets: | |||||||||
Deferred income taxes | 1,926 | 1,711 | 1,926 | ||||||
Other | 161 | 161 | 161 | ||||||
Total noncurrent assets held for sale | 2,087 | 1,872 | 2,087 | ||||||
Total assets held for sale | $ | 2,513 | $ | 4,083 | $ | 2,517 | |||
Liabilities | |||||||||
Current liabilities: | |||||||||
Accounts payable | $ | — | $ | 188 | $ | 80 | |||
Taxes payable | 1,300 | 7,463 | 1,451 | ||||||
Other accrued liabilities | 2,093 | 1,948 | 2,470 | ||||||
Total current liabilities held for sale | 3,393 | 9,599 | 4,001 | ||||||
Noncurrent liabilities: | |||||||||
Deferred income taxes (b) | — | 37 | — | ||||||
Total noncurrent liabilities held for sale | — | 37 | — | ||||||
Total liabilities held for sale | $ | 3,393 | $ | 9,636 | $ | 4,001 | |||
(a) | On the Company's Consolidated Balance Sheets, these amounts were reclassified to taxes payable and are reflected in current liabilities held for sale. |
(b) | On the Company's Consolidated Balance Sheets, these amounts were reclassified to deferred charges and other assets - deferred income taxes and are reflected in noncurrent assets held for sale. |
The reconciliation of the major classes of income and expense constituting pretax income (loss) from discontinued operations to the after-tax income (loss) from discontinued operations on the Consolidated Statements of Income was as follows:
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
(In thousands) | ||||||||||||
Operating revenues | $ | 230 | $ | 61 | $ | 298 | $ | 201 | ||||
Operating expenses | (1,760 | ) | 216 | 264 | 825 | |||||||
Operating income (loss) | 1,990 | (155 | ) | 34 | (624 | ) | ||||||
Other income | — | — | — | 12 | ||||||||
Interest expense | — | — | — | 575 | ||||||||
Income (loss) from discontinued operations before income taxes | 1,990 | (155 | ) | 34 | (1,187 | ) | ||||||
Income taxes | 481 | (37 | ) | 8 | (1,272 | ) | ||||||
Income (loss) from discontinued operations | $ | 1,509 | $ | (118 | ) | $ | 26 | $ | 85 | |||
Note 11 - Leases
Most of the leases the Company enters into are for equipment, buildings, easements and vehicles as part of their ongoing operations. The Company also leases certain equipment to third parties through its utility and construction services segments. The Company determines if an arrangement contains a lease at inception of a contract and accounts for all leases in accordance with ASC 842 - Leases. For more information on the adoption of ASC 842, see Note 6.
The recognition of leases requires the Company to make estimates and assumptions that affect the lease classification and the assets and liabilities recorded. The accuracy of lease assets and liabilities reported on the Consolidated Financial Statements depends on, among other things, management's estimates of interest rates used to discount the lease assets and liabilities to their present value, as well as the lease terms based on the unique facts and circumstances of each lease.
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Lessee accounting
The leases the Company has entered into as part of its ongoing operations are considered operating leases and are recognized on the balance sheet as right-of-use assets, current lease liabilities and, if applicable, noncurrent lease liabilities. Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The Company determines the lease term based on the non-cancelable and cancelable periods in each contract. The non-cancelable period consists of the term of the contract that is legally enforceable and cannot be canceled by either party without incurring a significant penalty. The cancelable period is determined by various factors that are based on who has the right to cancel a contract. If only the lessor has the right to cancel the contract, the Company will assume the contract will continue. If the lessee is the only party that has the right to cancel the contract, the Company looks to asset, entity and market-based factors. If both the lessor and the lessee have the right to cancel the contract, the Company assumes the contract will not continue.
Generally, the leases for vehicles and equipment have a term of five years or less and buildings and easements have a longer term of up to 35 years or more. To date, the Company does not have any residual value guarantee amounts probable of being owed to a lessor, financing leases or material agreements with related parties.
The Company has elected to recognize leases with an original lease term of 12 months or less in income on a straight-line basis over the term of the lease and not recognize a corresponding right-of-use asset or lease liability. Lease costs are included in operation and maintenance expense on the Company's Consolidated Statements of Income. The discount rate used to calculate the present value of the lease liabilities is based upon the implied rate within each contract. If the rate is unknown or cannot be determined, the Company uses an incremental borrowing rate which is determined by the length of the contract, asset class and the Company's borrowing rates as of the commencement date of the contract.
The following tables provide information on the Company's operating leases:
Three Months Ended | Nine Months Ended | |||||
September 30, | September 30, | |||||
2019 | 2019 | |||||
(In thousands) | ||||||
Lease costs: | ||||||
Operating lease cost | $ | 10,536 | $ | 32,444 | ||
Variable lease cost | 381 | 1,180 | ||||
Short-term lease cost | 28,270 | 85,982 | ||||
Total lease costs | $ | 39,187 | $ | 119,606 | ||
September 30, 2019 | |||
(Dollars in thousands) | |||
Weighted average remaining lease term | 2.98 years | ||
Weighted average discount rate | 4.63 | % | |
Cash paid for amounts included in the measurement of lease liabilities | $ | 32,261 | |
The reconciliation of the future undiscounted cash flows to the operating lease liabilities presented on the Company's Consolidated Balance Sheet at September 30, 2019, was as follows:
(In thousands) | |||
Remainder of 2019 | $ | 10,619 | |
2020 | 32,605 | ||
2021 | 23,488 | ||
2022 | 15,838 | ||
2023 | 9,913 | ||
Thereafter | 54,765 | ||
Total | 147,228 | ||
Less discount | 28,478 | ||
Total operating lease liabilities | $ | 118,750 | |
23
As previously disclosed in the 2018 Annual Report, the undiscounted annual minimum lease payments due under the Company's leases following the previous lease accounting standard as of December 31, 2018, were as follows:
2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | |||||||||||||
(In thousands) | ||||||||||||||||||
Operating leases | $ | 37,740 | $ | 26,255 | $ | 17,868 | $ | 11,647 | $ | 7,278 | $ | 49,098 | ||||||
Lessor accounting
The Company leases certain equipment to third parties which are considered operating leases. The Company recognized revenue from operating leases of $11.2 million and $37.7 million for the three and nine months ended September 30, 2019, respectively.
The majority of the Company's operating leases are short-term leases of less than 12 months. At September 30, 2019, the Company had $10.0 million of lease receivables with a majority due within 12 months.
Note 12 - Goodwill and other intangible assets
The changes in the carrying amount of goodwill were as follows:
Nine Months Ended September 30, 2019 | Balance at January 1, 2019 | Goodwill Acquired During the Year | Measurement Period Adjustments | Balance at September 30, 2019 | ||||||||
(In thousands) | ||||||||||||
Natural gas distribution | $ | 345,736 | $ | — | $ | — | $ | 345,736 | ||||
Construction materials and contracting | 209,421 | 14,473 | (6,669 | ) | 217,225 | |||||||
Construction services | 109,765 | 8,623 | — | 118,388 | ||||||||
Total | $ | 664,922 | $ | 23,096 | $ | (6,669 | ) | $ | 681,349 | |||
Nine Months Ended September 30, 2018 | Balance at January 1, 2018 | Goodwill Acquired During the Year | Measurement Period Adjustments | Balance at September 30, 2018 | ||||||||
(In thousands) | ||||||||||||
Natural gas distribution | $ | 345,736 | $ | — | $ | — | $ | 345,736 | ||||
Construction materials and contracting | 176,290 | 8,412 | — | 184,702 | ||||||||
Construction services | 109,765 | — | — | 109,765 | ||||||||
Total | $ | 631,791 | $ | 8,412 | $ | — | $ | 640,203 | ||||
Year Ended December 31, 2018 | Balance at January 1, 2018 | Goodwill Acquired During the Year | Measurement Period Adjustments | Balance at December 31, 2018 | ||||||||
(In thousands) | ||||||||||||
Natural gas distribution | $ | 345,736 | $ | — | $ | — | $ | 345,736 | ||||
Construction materials and contracting | 176,290 | 33,131 | — | 209,421 | ||||||||
Construction services | 109,765 | — | — | 109,765 | ||||||||
Total | $ | 631,791 | $ | 33,131 | $ | — | $ | 664,922 | ||||
During 2019 and 2018, the Company completed two and four business combinations, respectively, and the results of these acquisitions have been included in the Company's construction materials and contracting and construction services segments. These business combinations increased the construction materials and contracting segment's goodwill balance at September 30, 2019 and 2018, and December 31, 2018, and increased the construction services segment's goodwill balance at September 30, 2019, as noted in the previous tables. As a result of the business combinations, other intangible assets increased $6.3 million at September 30, 2019, compared to December 31, 2018. For more information related to these business combinations, see Note 9.
24
Other amortizable intangible assets were as follows:
September 30, 2019 | September 30, 2018 | December 31, 2018 | |||||||
(In thousands) | |||||||||
Customer relationships | $ | 18,011 | $ | 15,920 | $ | 22,720 | |||
Less accumulated amortization | 5,823 | 13,342 | 13,535 | ||||||
12,188 | 2,578 | 9,185 | |||||||
Noncompete agreements | 3,419 | 2,606 | 2,605 | ||||||
Less accumulated amortization | 1,868 | 1,911 | 1,956 | ||||||
1,551 | 695 | 649 | |||||||
Other | 7,488 | 6,458 | 6,458 | ||||||
Less accumulated amortization | 5,716 | 5,413 | 5,477 | ||||||
1,772 | 1,045 | 981 | |||||||
Total | $ | 15,511 | $ | 4,318 | $ | 10,815 | |||
Amortization expense for amortizable intangible assets for the three and nine months ended September 30, 2019, was $500,000 and $1.6 million, respectively. Amortization expense for amortizable intangible assets for the three and nine months ended September 30, 2018, was $300,000 and $900,000, respectively. Estimated amortization expense for identifiable intangible assets as of September 30, 2019, was:
Remainder of 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | |||||||||||||
(In thousands) | ||||||||||||||||||
Amortization expense | $ | 931 | $ | 3,077 | $ | 2,042 | $ | 1,996 | $ | 1,957 | $ | 5,508 | ||||||
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Note 13 - Regulatory assets and liabilities
The following table summarizes the individual components of unamortized regulatory assets and liabilities:
Estimated Recovery Period | * | September 30, 2019 | December 31, 2018 | |||||
(In thousands) | ||||||||
Regulatory assets: | ||||||||
Pension and postretirement benefits (a) | (e) | $ | 165,843 | $ | 165,898 | |||
Natural gas costs recoverable through rate adjustments (a) (b) | Up to 3 years | 93,001 | 42,652 | |||||
Asset retirement obligations (a) | Over plant lives | 64,771 | 60,097 | |||||
Cost recovery mechanisms (a) (b) | Up to 4 years | 20,912 | 17,948 | |||||
Manufactured gas plant site remediation (a) | - | 15,739 | 17,068 | |||||
Taxes recoverable from customers (a) | Over plant lives | 11,600 | 11,946 | |||||
Plants to be retired (a) | - | 26,152 | — | |||||
Conservation programs (b) | Up to 1 year | 9,467 | 7,494 | |||||
Long-term debt refinancing costs (a) | Up to 19 years | 4,439 | 4,898 | |||||
Costs related to identifying generation development (a) | Up to 8 years | 2,166 | 2,508 | |||||
Other (a) (b) | Up to 20 years | 17,501 | 9,608 | |||||
Total regulatory assets | $ | 431,591 | $ | 340,117 | ||||
Regulatory liabilities: | ||||||||
Taxes refundable to customers (c) (d) | $ | 258,012 | $ | 277,833 | ||||
Plant removal and decommissioning costs (c) (d) | 176,016 | 173,143 | ||||||
Natural gas costs refundable through rate adjustments (d) | 19,194 | 29,995 | ||||||
Pension and postretirement benefits (c) | 12,942 | 15,264 | ||||||
Other (c) (d) | 24,153 | 25,197 | ||||||
Total regulatory liabilities | $ | 490,317 | $ | 521,432 | ||||
Net regulatory position | $ | (58,726 | ) | $ | (181,315 | ) | ||
* | Estimated recovery period for regulatory assets currently being recovered in rates charged to customers. |
(a) | Included in deferred charges and other assets - other on the Consolidated Balance Sheets. |
(b) | Included in prepayments and other current assets on the Consolidated Balance Sheets. |
(c) | Included in deferred credits and other liabilities - other on the Consolidated Balance Sheets. |
(d) | Included in other accrued liabilities on the Consolidated Balance Sheets. |
(e) | Recovered as expense is incurred or cash contributions are made. |
The regulatory assets are expected to be recovered in rates charged to customers. A portion of the Company's regulatory assets are not earning a return; however, these regulatory assets are expected to be recovered from customers in future rates. As of September 30, 2019 and December 31, 2018, approximately $278.2 million and $313.5 million, respectively, of regulatory assets were not earning a rate of return.
During the first quarter of 2019 and the fourth quarter of 2018, the Company experienced increased natural gas costs in certain jurisdictions where it supplies natural gas. The Company has recorded these natural gas costs as regulatory assets as they are expected to be recovered from customers, as discussed in Note 19.
In February 2019, the Company announced that it intends to retire three aging coal-fired electric generation units within the next three years. The Company has accelerated the depreciation related to these facilities in property, plant and equipment and has recorded the difference between the accelerated depreciation, in accordance with GAAP, and the depreciation approved for rate-making purposes as regulatory assets. The Company expects to recover the regulatory assets related to the plants to be retired in future rates.
If, for any reason, the Company's regulated businesses cease to meet the criteria for application of regulatory accounting for all or part of their operations, the regulatory assets and liabilities relating to those portions ceasing to meet such criteria would be removed from the balance sheet and included in the statement of income or accumulated other comprehensive income (loss) in the period in which the discontinuance of regulatory accounting occurs.
26
Note 14 - Fair value measurements
The Company measures its investments in certain fixed-income and equity securities at fair value with changes in fair value recognized in income. The Company anticipates using these investments, which consist of an insurance contract, to satisfy its obligations under its unfunded, nonqualified benefit plans for executive officers and certain key management employees, and invests in these fixed-income and equity securities for the purpose of earning investment returns and capital appreciation. These investments, which totaled $84.2 million, $80.4 million and $73.8 million, at September 30, 2019 and 2018, and December 31, 2018, respectively, are classified as investments on the Consolidated Balance Sheets. The net unrealized gains on these investments were $1.1 million and $10.4 million for the three and nine months ended September 30, 2019, respectively. The net unrealized gains on these investments were $2.1 million and $3.0 million for the three and nine months ended September 30, 2018, respectively. The change in fair value, which is considered part of the cost of the plan, is classified in other income on the Consolidated Statements of Income.
The Company did not elect the fair value option, which records gains and losses in income, for its available-for-sale securities. The available-for-sale securities include mortgage-backed securities and U.S. Treasury securities. These available-for-sale securities are recorded at fair value and are classified as investments on the Consolidated Balance Sheets. Unrealized gains or losses are recorded in accumulated other comprehensive loss. Details of available-for-sale securities were as follows:
September 30, 2019 | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||
(In thousands) | ||||||||||||
Mortgage-backed securities | $ | 9,577 | $ | 86 | $ | 16 | $ | 9,647 | ||||
U.S. Treasury securities | 1,258 | — | 1 | 1,257 | ||||||||
Total | $ | 10,835 | $ | 86 | $ | 17 | $ | 10,904 | ||||
September 30, 2018 | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||
(In thousands) | ||||||||||||
Mortgage-backed securities | $ | 10,550 | $ | 3 | $ | 251 | $ | 10,302 | ||||
U.S. Treasury securities | 179 | — | — | 179 | ||||||||
Total | $ | 10,729 | $ | 3 | $ | 251 | $ | 10,481 | ||||
December 31, 2018 | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||
(In thousands) | ||||||||||||
Mortgage-backed securities | $ | 10,473 | $ | 21 | $ | 162 | $ | 10,332 | ||||
U.S. Treasury securities | 179 | — | — | 179 | ||||||||
Total | $ | 10,652 | $ | 21 | $ | 162 | $ | 10,511 | ||||
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The fair value ASC establishes a hierarchy for grouping assets and liabilities, based on the significance of inputs. The estimated fair values of the Company's assets and liabilities measured on a recurring basis are determined using the market approach. The Company's Level 2 money market funds are valued at the net asset value of shares held at the end of the quarter, based on published market quotations on active markets, or using other known sources including pricing from outside sources. The estimated fair value of the Company's Level 2 mortgage-backed securities and U.S. Treasury securities are based on comparable market transactions, other observable inputs or other sources, including pricing from outside sources. The estimated fair value of the Company's Level 2 insurance contract is based on contractual cash surrender values that are determined primarily by investments in managed separate accounts of the insurer. These amounts approximate fair value. The managed separate accounts are valued based on other observable inputs or corroborated market data.
Though the Company believes the methods used to estimate fair value are consistent with those used by other market participants, the use of other methods or assumptions could result in a different estimate of fair value. For the nine months ended September 30, 2019 and 2018, there were no transfers between Levels 1 and 2.
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The Company's assets and liabilities measured at fair value on a recurring basis were as follows:
Fair Value Measurements at September 30, 2019, Using | ||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance at September 30, 2019 | |||||||||
(In thousands) | ||||||||||||
Assets: | ||||||||||||
Money market funds | $ | — | $ | 7,472 | $ | — | $ | 7,472 | ||||
Insurance contract* | — | 84,222 | — | 84,222 | ||||||||
Available-for-sale securities: | ||||||||||||
Mortgage-backed securities | — | 9,647 | — | 9,647 | ||||||||
U.S. Treasury securities | — | 1,257 | — | 1,257 | ||||||||
Total assets measured at fair value | $ | — | $ | 102,598 | $ | — | $ | 102,598 | ||||
* | The insurance contract invests approximately 53 percent in fixed-income investments, 21 percent in common stock of large-cap companies, 11 percent in common stock of mid-cap companies, 10 percent in common stock of small-cap companies, 3 percent in target date investments and 2 percent in cash equivalents. |
Fair Value Measurements at September 30, 2018, Using | ||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance at September 30, 2018 | |||||||||
(In thousands) | ||||||||||||
Assets: | ||||||||||||
Money market funds | $ | — | $ | 9,948 | $ | — | $ | 9,948 | ||||
Insurance contract* | — | 80,358 | — | 80,358 | ||||||||
Available-for-sale securities: | ||||||||||||
Mortgage-backed securities | — | 10,302 | — | 10,302 | ||||||||
U.S. Treasury securities | — | 179 | — | 179 | ||||||||
Total assets measured at fair value | $ | — | $ | 100,787 | $ | — | $ | 100,787 | ||||
* | The insurance contract invests approximately 47 percent in fixed-income investments, 24 percent in common stock of large-cap companies, 13 percent in common stock of mid-cap companies, 12 percent in common stock of small-cap companies, 3 percent in target date investments and 1 percent in cash equivalents. |
Fair Value Measurements at December 31, 2018, Using | ||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance at December 31, 2018 | |||||||||
(In thousands) | ||||||||||||
Assets: | ||||||||||||
Money market funds | $ | — | $ | 10,799 | $ | — | $ | 10,799 | ||||
Insurance contract* | — | 73,838 | — | 73,838 | ||||||||
Available-for-sale securities: | ||||||||||||
Mortgage-backed securities | — | 10,332 | — | 10,332 | ||||||||
U.S. Treasury securities | — | 179 | — | 179 | ||||||||
Total assets measured at fair value | $ | — | $ | 95,148 | $ | — | $ | 95,148 | ||||
* | The insurance contract invests approximately 53 percent in fixed-income investments, 21 percent in common stock of large-cap companies, 11 percent in common stock of mid-cap companies, 10 percent in common stock of small-cap companies, 3 percent in target date investments and 2 percent in cash equivalents. |
The Company applies the provisions of the fair value measurement standard to its nonrecurring, non-financial measurements, including long-lived asset impairments. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. The Company reviews the carrying value of its long-lived assets, excluding goodwill, whenever events or changes in circumstances indicate that such carrying amounts may not be recoverable.
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In the second quarter of 2019, the Company reviewed a non-utility investment at its electric and natural gas distribution segments for impairment. This was a cost-method investment and was written down to zero using the income approach to determine its fair value, requiring the Company to record a write-down of $2.0 million, before tax. The fair value of this investment was categorized as Level 3 in the fair value hierarchy. The reduction is reflected in investments on the Company's Consolidated Balance Sheet, as well as within other income on the Consolidated Statements of Income.
The Company'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 long-term debt was as follows:
Carrying Amount | Fair Value | |||||
(In thousands) | ||||||
Long-term debt at September 30, 2019 | $ | 2,246,756 | $ | 2,450,209 | ||
Long-term debt at September 30, 2018 | $ | 1,915,470 | $ | 1,987,360 | ||
Long-term debt at December 31, 2018 | $ | 2,108,695 | $ | 2,183,819 | ||
The carrying amounts of the Company's remaining financial instruments included in current assets and current liabilities approximate their fair values.
Note 15 - Debt
Certain debt instruments of the Company's subsidiaries contain restrictive covenants and cross-default provisions. In order to borrow under the respective debt instruments, the subsidiary companies must be in compliance with the applicable covenants and certain other conditions all of which the subsidiaries, as applicable, were in compliance with at September 30, 2019. In the event the Company's subsidiaries do not comply with the applicable covenants and other conditions, alternative sources of funding may need to be pursued.
Montana-Dakota's and Centennial's respective commercial paper programs are supported by revolving credit agreements. While the amount of commercial paper outstanding does not reduce available capacity under the respective revolving credit agreements, Montana-Dakota and Centennial do not issue commercial paper in an aggregate amount exceeding the available capacity under their respective credit agreements. The commercial paper borrowings may vary during the period, largely the result of fluctuations in working capital requirements due to the seasonality of the construction businesses.
Short-term debt
The following describes certain transactions during the three and nine months ended September 30, 2019, included in outstanding short-term debt:
• | On March 22, 2019, Cascade entered into a $40.0 million term loan agreement with a variable interest rate and a maturity date of December 31, 2019. |
• | On April 12, 2019, Centennial entered into a $50.0 million term loan agreement with a variable interest rate and a maturity date of April 11, 2020. |
• | On August 7, 2019, Centennial entered into a $50.0 million term loan agreement with a variable interest rate and a maturity date of January 31, 2020. |
Long-term debt
The following describes certain transactions during the three and nine months ended September 30, 2019, included in outstanding long-term debt:
• | On April 4, 2019, Centennial issued $150.0 million of senior notes with maturity dates ranging from April 4, 2029 to April 4, 2034, at a weighted average interest rate of 4.60 percent. |
• | On June 7, 2019, Cascade amended its revolving credit agreement to increase the borrowing limit from $75.0 million to $100.0 million and extend the termination date from April 24, 2020 to June 7, 2024. |
• | On June 7, 2019, Intermountain amended its revolving credit agreement to extend the termination date from April 24, 2020 to June 7, 2024. |
• | On June 13, 2019, Cascade issued $75.0 million of senior notes with maturity dates ranging from June 13, 2029 to June 13, 2049, at a weighted average interest rate of 3.93 percent. |
• | On June 13, 2019, Intermountain issued $50.0 million of senior notes with maturity dates ranging from June 13, 2029 to June 13, 2049, at a weighted average interest rate of 3.92 percent. |
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Long-term Debt Outstanding Long-term debt outstanding was as follows:
Weighted Average Interest Rate at September 30, 2019 | September 30, 2019 | December 31, 2018 | ||||||
(In thousands) | ||||||||
Senior notes due on dates ranging from December 15, 2019 to January 15, 2055 | 4.52 | % | $ | 1,655,000 | $ | 1,381,000 | ||
Commercial paper supported by revolving credit agreements | 2.46 | % | 281,800 | 338,100 | ||||
Term loan agreements due on dates ranging from September 3, 2032 to November 18, 2059 | 2.75 | % | 209,100 | 209,800 | ||||
Credit agreements due on June 7, 2024 | 4.66 | % | 31,000 | 110,100 | ||||
Medium-term notes due on dates ranging from September 1, 2020 to March 16, 2029 | 6.68 | % | 50,000 | 50,000 | ||||
Other notes due on dates ranging from July 15, 2021 to November 30, 2038 | 5.01 | % | 26,083 | 25,229 | ||||
Less unamortized debt issuance costs | 6,074 | 5,207 | ||||||
Less discount | 153 | 327 | ||||||
Total long-term debt | 2,246,756 | 2,108,695 | ||||||
Less current maturities | 65,810 | 251,854 | ||||||
Net long-term debt | $ | 2,180,946 | $ | 1,856,841 | ||||
Schedule of Debt Maturities Long-term debt maturities, which excludes unamortized debt issuance costs and discount, as of September 30, 2019, were as follows:
Remainder of 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | |||||||||||||
(In thousands) | ||||||||||||||||||
Long-term debt maturities | $ | 50,110 | $ | 15,902 | $ | 204,522 | $ | 147,402 | $ | 155,502 | $ | 1,679,545 | ||||||
Note 16 - Cash flow information
Cash expenditures for interest and income taxes were as follows:
Nine Months Ended | ||||||
September 30, | ||||||
2019 | 2018 | |||||
(In thousands) | ||||||
Interest, net* | $ | 64,596 | $ | 58,359 | ||
Income taxes paid, net** | $ | 1,816 | $ | 8,887 | ||
* | AFUDC - borrowed was $2.0 million and $1.8 million for the nine months ended September 30, 2019 and 2018, respectively. |
** | Income taxes paid, including discontinued operations, were $2.0 million and $5.1 million for the nine months ended September 30, 2019 and 2018, respectively. |
Noncash investing and financing transactions were as follows:
September 30, 2019 | September 30, 2018 | December 31, 2018 | |||||||
(In thousands) | |||||||||
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 46,770 | $ | — | $ | — | |||
Property, plant and equipment additions in accounts payable | $ | 34,368 | $ | 34,594 | $ | 42,355 | |||
Debt assumed in connection with a business combination | $ | 1,163 | $ | — | $ | — | |||
Issuance of common stock in connection with a business combination | $ | — | $ | 17,993 | $ | 18,186 | |||
Note 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 vast majority of the Company's operations are located within the United States.
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The electric segment generates, transmits and distributes electricity in Montana, North Dakota, South Dakota and Wyoming. The natural gas distribution segment distributes natural gas in those states, as well as in Idaho, Minnesota, Oregon and Washington. These operations also supply related value-added services.
The pipeline and midstream segment provides natural gas transportation, underground storage and gathering services through regulated and nonregulated pipeline systems primarily in the Rocky Mountain and northern Great Plains regions of the United States. This segment also provides cathodic protection and other energy-related services.
The construction materials and contracting segment mines, processes and sells construction aggregates (crushed stone, sand and gravel); produces and sells asphalt mix; and supplies ready-mixed concrete. This segment focuses on vertical integration of its contracting services with its construction materials to support the aggregate based product lines including aggregate placement, asphalt and concrete paving, and site development and grading. Although not common to all locations, other products include the sale of cement, liquid asphalt for various commercial and roadway applications, various finished concrete products and other building materials and related contracting services. This segment operates in the central, southern and western United States and Alaska and Hawaii.
The construction services segment provides inside and outside specialty contracting services. Its inside services include design, construction and maintenance of electrical and communication wiring and infrastructure, fire suppression systems, and mechanical piping and services. Its outside services include design, construction and maintenance of overhead and underground electrical distribution and transmission lines, substations, external lighting, traffic signalization, and gas pipelines, as well as utility excavation and the manufacture and distribution of transmission line construction equipment. This segment also constructs and maintains renewable energy projects. These specialty contracting services are provided to utilities and large manufacturing, commercial, industrial, institutional and governmental customers.
The Other category includes the activities of Centennial Capital, which, through its subsidiary InterSource Insurance Company, insures various types of risks as a captive insurer for certain of the Company's subsidiaries. The function of the captive insurer is to fund the self-insured layers of the insured Company's general liability, automobile liability, pollution liability and other coverages. Centennial Capital also owns certain real and personal property. In addition, the Other category includes certain assets, liabilities and tax adjustments of the holding company primarily associated with corporate functions and certain general and administrative costs (reflected in operation and maintenance expense) and interest expense which were previously allocated to the refining business and Fidelity that do not meet the criteria for income (loss) from discontinued operations. The Other category also includes Centennial Resources' former investment in Brazil.
Discontinued operations include the results and supporting activities of Dakota Prairie Refining and Fidelity other than certain general and administrative costs and interest expense as described above. For more information on discontinued operations, see Note 10.
The information below follows the same accounting policies as described in Note 1 of the Company's Notes to Consolidated Financial Statements in the 2018 Annual Report. Information on the Company's segments was as follows:
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
(In thousands) | ||||||||||||
External operating revenues: | ||||||||||||
Regulated operations: | ||||||||||||
Electric | $ | 89,845 | $ | 86,080 | $ | 263,423 | $ | 251,984 | ||||
Natural gas distribution | 93,642 | 92,248 | 569,656 | 554,452 | ||||||||
Pipeline and midstream | 25,957 | 22,289 | 52,230 | 45,325 | ||||||||
209,444 | 200,617 | 885,309 | 851,761 | |||||||||
Nonregulated operations: | ||||||||||||
Pipeline and midstream | 6,576 | 6,782 | 17,597 | 16,640 | ||||||||
Construction materials and contracting | 869,376 | 743,763 | 1,692,287 | 1,466,435 | ||||||||
Construction services | 478,381 | 329,578 | 1,363,305 | 986,649 | ||||||||
Other | 22 | 47 | 65 | 193 | ||||||||
1,354,355 | 1,080,170 | 3,073,254 | 2,469,917 | |||||||||
Total external operating revenues | $ | 1,563,799 | $ | 1,280,787 | $ | 3,958,563 | $ | 3,321,678 | ||||
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Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
(In thousands) | ||||||||||||
Intersegment operating revenues: | ||||||||||||
Regulated operations: | ||||||||||||
Electric | $ | — | $ | — | $ | — | $ | — | ||||
Natural gas distribution | — | — | — | — | ||||||||
Pipeline and midstream | 3,750 | 3,070 | 35,098 | 31,252 | ||||||||
3,750 | 3,070 | 35,098 | 31,252 | |||||||||
Nonregulated operations: | ||||||||||||
Pipeline and midstream | 81 | 117 | 200 | 233 | ||||||||
Construction materials and contracting | 124 | 165 | 388 | 501 | ||||||||
Construction services | 1,226 | 782 | 2,076 | 1,332 | ||||||||
Other | 2,862 | 3,037 | 13,566 | 8,343 | ||||||||
4,293 | 4,101 | 16,230 | 10,409 | |||||||||
Intersegment eliminations | (8,043 | ) | (7,171 | ) | (51,328 | ) | (41,661 | ) | ||||
Total intersegment operating revenues | $ | — | $ | — | $ | — | $ | — | ||||
Operating income (loss): | ||||||||||||
Electric | $ | 21,930 | $ | 21,140 | $ | 49,708 | $ | 52,321 | ||||
Natural gas distribution | (15,565 | ) | (11,665 | ) | 32,132 | 32,503 | ||||||
Pipeline and midstream | 11,416 | 9,036 | 32,017 | 25,687 | ||||||||
Construction materials and contracting | 143,024 | 109,598 | 147,622 | 120,591 | ||||||||
Construction services | 29,950 | 11,863 | 89,381 | 51,853 | ||||||||
Other | (1,285 | ) | 32 | 140 | 417 | |||||||
Total operating income | $ | 189,470 | $ | 140,004 | $ | 351,000 | $ | 283,372 | ||||
Net income (loss): | ||||||||||||
Regulated operations: | ||||||||||||
Electric | $ | 16,291 | $ | 15,284 | $ | 39,267 | $ | 37,500 | ||||
Natural gas distribution | (15,625 | ) | (11,887 | ) | 14,623 | 13,884 | ||||||
Pipeline and midstream | 6,933 | 10,109 | 20,316 | 20,809 | ||||||||
7,599 | 13,506 | 74,206 | 72,193 | |||||||||
Nonregulated operations: | ||||||||||||
Pipeline and midstream | 801 | 848 | 1,380 | 1,136 | ||||||||
Construction materials and contracting | 102,611 | 78,876 | 97,328 | 79,691 | ||||||||
Construction services | 21,113 | 9,278 | 63,982 | 38,457 | ||||||||
Other | 4,004 | 4,861 | 3,466 | 1,928 | ||||||||
128,529 | 93,863 | 166,156 | 121,212 | |||||||||
Income from continuing operations | 136,128 | 107,369 | 240,362 | 193,405 | ||||||||
Income (loss) from discontinued operations, net of tax | 1,509 | (118 | ) | 26 | 85 | |||||||
Net income | $ | 137,637 | $ | 107,251 | $ | 240,388 | $ | 193,490 | ||||
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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) for the Company's pension and other postretirement benefit plans were as follows:
Pension Benefits | Other Postretirement Benefits | |||||||||||
Three Months Ended September 30, | 2019 | 2018 | 2019 | 2018 | ||||||||
(In thousands) | ||||||||||||
Components of net periodic benefit cost (credit): | ||||||||||||
Service cost | $ | — | $ | — | $ | 286 | $ | 374 | ||||
Interest cost | 3,806 | 3,648 | 746 | 725 | ||||||||
Expected return on assets | (4,559 | ) | (5,188 | ) | (1,201 | ) | (1,217 | ) | ||||
Amortization of prior service credit | — | — | (289 | ) | (349 | ) | ||||||
Amortization of net actuarial loss | 1,387 | 1,751 | 27 | 160 | ||||||||
Net periodic benefit cost (credit), including amount capitalized | 634 | 211 | (431 | ) | (307 | ) | ||||||
Less amount capitalized | — | — | 26 | 46 | ||||||||
Net periodic benefit cost (credit) | $ | 634 | $ | 211 | $ | (457 | ) | $ | (353 | ) | ||
Pension Benefits | Other Postretirement Benefits | |||||||||||
Nine Months Ended September 30, | 2019 | 2018 | 2019 | 2018 | ||||||||
(In thousands) | ||||||||||||
Components of net periodic benefit cost (credit): | ||||||||||||
Service cost | $ | — | $ | — | $ | 857 | $ | 1,121 | ||||
Interest cost | 11,419 | 10,943 | 2,239 | 2,175 | ||||||||
Expected return on assets | (13,677 | ) | (15,565 | ) | (3,603 | ) | (3,650 | ) | ||||
Amortization of prior service credit | — | — | (866 | ) | (1,046 | ) | ||||||
Amortization of net actuarial loss | 4,160 | 5,254 | 82 | 480 | ||||||||
Net periodic benefit cost (credit), including amount capitalized | 1,902 | 632 | (1,291 | ) | (920 | ) | ||||||
Less amount capitalized | — | — | 84 | 128 | ||||||||
Net periodic benefit cost (credit) | $ | 1,902 | $ | 632 | $ | (1,375 | ) | $ | (1,048 | ) | ||
The components of net periodic benefit cost (credit), other than the service cost component, are included in other income on the Consolidated Statements of Income. The service cost component is included in operation and maintenance expense on the Consolidated Statements of Income.
Nonqualified defined benefit plans
In addition to the qualified defined benefit pension plans reflected in the table at the beginning of this note, the Company also has unfunded, nonqualified defined benefit plans for executive officers and certain key management employees. The Company's net periodic benefit cost for these plans for the three and nine months ended September 30, 2019, was $1.1 million and $3.3 million, respectively. The Company's net periodic benefit cost for these plans for the three and nine months ended September 30, 2018, was $1.1 million and $3.3 million, respectively. The components of net periodic benefit cost for these plans, which does not contain any service costs, are included in other income on the Consolidated Statements of Income.
Note 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. The Company's most recent cases by jurisdiction are discussed in the following paragraphs.
MNPUC
On April 18, 2019, the MNPUC approved a decrease in rates for Great Plains of $400,000 on an annual basis to reflect TCJA impacts effective May 1, 2019, as well as a one-time TCJA refund of approximately $600,000 for the period from January 1, 2018 through April 30, 2019. The refunds were credited to customers' bills between August 14, 2019 and September 16, 2019.
33
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. Great Plains also requested an interim increase of approximately $2.6 million or approximately 11.0 percent, subject to refund. This matter is pending before the MNPUC.
MTPSC
On July 31, 2019, the MTPSC approved an electric rate increase that was primarily to recover Montana-Dakota's investments in facilities to enhance safety and reliability and the depreciation and taxes associated with such investments, partially offset by the impacts of TCJA. The approved rates included a $9.0 million annual increase implemented on September 1, 2019, and an additional $300,000 annual increase to be implemented beginning 12 months after the date of approval.
NDPSC
On October 22, 2019, the NDPSC approved an increase in rates to recover approximately $1.5 million annually for the revenue requirements on certain of Montana-Dakota's electric transmission projects through its transmission cost adjustment rate. The rates were effective October 28, 2019.
On August 28, 2019, Montana-Dakota filed an application with the NDPSC for an advanced determination of prudence and a certificate of public convenience and necessity to construct, own and operate Heskett Unit 4, an 88-MW simple-cycle natural gas-fired combustion turbine peaking unit at Heskett Station near Mandan, North Dakota. This matter is pending before the NDPSC.
On September 16, 2019, Montana-Dakota submitted an application with the NDPSC requesting the use of deferred accounting for the treatment of costs related to the retirement of Lewis & Clark Station in Sidney, Montana, and units 1 and 2 at Heskett Station near Mandan, North Dakota. This matter is pending before the NDPSC.
OPUC
On December 29, 2017, Cascade filed a request with the OPUC to use deferred accounting for the 2018 net benefits associated with the implementation of the TCJA. On September 12, 2019, the OPUC approved the request, including a settlement to refund to customers $1.4 million related to TJCA impacts for the period from January 2018 through March 2019. These refunds will be reflected in customers' rates over a 12-month period beginning November 1, 2019.
On June 14, 2019, Cascade filed a request with the OPUC to implement a new pipeline safety cost recovery mechanism to recover investments to replace Cascade's highest risk infrastructure. If approved, Cascade would file a report annually with the OPUC detailing actual projects undertaken and costs incurred for the year on November 1, seeking recovery for investments from January 1 through December 31 of that same year. This matter is pending before the OPUC.
WUTC
On March 29, 2019, Cascade filed a general rate case with the WUTC requesting an increase in annual revenue of $12.7 million or approximately 5.5 percent. On September 20, 2019, Cascade filed a joint settlement agreement with the WUTC reflecting a revised annual increase of $6.5 million or approximately 2.8 percent. A hearing on the settlement is scheduled for November 5, 2019. This matter is pending before the WUTC.
On May 31, 2019, Cascade filed its annual pipeline cost recovery mechanism requesting an increase in revenue of approximately $1.6 million or approximately 0.7 percent. On October 10, 2019, Cascade filed its final update to the cost recovery mechanism with a revised increase in revenue of approximately $440,000 or approximately 0.2 percent. On October 24, 2019, the WUTC approved the increase with rates effective for services provided on or after November 1, 2019.
On September 13, 2019, Cascade filed its annual purchased gas adjustment with the WUTC requesting an annual increase of approximately $12.8 million or approximately 5.7 percent for a period of three years. The requested increase is primarily due to unrecovered purchased gas costs as a result of the rupture of the Enbridge pipeline in Canada on October 9, 2018, causing increased natural gas costs. On October 24, 2019, the WUTC approved the increase with rates effective for services provided on or after November 1, 2019.
WYPSC
On April 4, 2019, Montana-Dakota submitted compliance rates to the WYPSC reflecting a decrease in annual revenues of approximately $1.1 million or approximately 4.2 percent to reflect TCJA impacts. On April 8, 2019, the WYPSC approved the Company's requested decrease in electric rates and required a refund to customers for the period from January 1, 2018 through the date prior to the implementation of the rates within 90 days of the effective date of the new rates. The new rates were implemented for service rendered on and after May 1, 2019, and the refunds of approximately $1.6 million were credited to customers' bills on July 25, 2019.
On March 30, 2018, Montana-Dakota reported its natural gas earnings do not support a decrease in rates and requested the WYPSC allow the impacts of the TCJA be addressed in a natural gas rate case to be submitted by June 1, 2019. On
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September 12, 2019, the WYPSC approved a one-time refund of approximately $200,000 to be credited to customers' bills by November 1, 2019, for the TCJA impacts from January 1, 2018 through June 30, 2019.
On May 23, 2019, Montana-Dakota filed an application with the WYPSC for a natural gas rate increase of approximately $1.1 million annually or approximately 7.0 percent above current rates. The requested increase was to recover increased operating expenses and investments in distribution facilities to improve system safety and reliability. This matter is pending before the WYPSC.
FERC
In accordance with WBI Energy Transmission’s offer of settlement and stipulation and agreement with the FERC dated June 4, 2014, the Company was to make a filing with new proposed rates to be effective no later than May 1, 2019. On October 31, 2018, the Company filed a rate case with the FERC. Following negotiations between FERC staff, customers and the Company, on May 30, 2019, the FERC granted the Company's request to place interim settlement rates into effect May 1, 2019, subject to refund or surcharge, and pending the FERC's consideration of the filing of a settlement agreement. Based on as filed volumes and settlement rates, the revenue increase is approximately $4.5 million annually. Included in the revenue increase are the impacts from higher depreciation rates agreed to in the settlement, as well as the impacts of the TCJA. On June 28, 2019, the Company filed a final settlement agreement and related documents with the FERC. On September 30, 2019, the FERC approved the final settlement agreement and related documents.
On August 29, 2019, Montana-Dakota filed an update to its transmission formula rate under the MISO tariff for the multivalue project for $13.4 million, which is effective January 1, 2020.
Note 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 September 30, 2019 and 2018, and December 31, 2018, the Company accrued liabilities which have not been discounted, including liabilities held for sale, of $30.6 million, $30.4 million and $30.4 million, respectively. The accruals are for contingencies, including litigation, production taxes, royalty claims and environmental matters. This includes amounts that have been accrued for matters discussed in Environmental matters within this note. The Company will continue to monitor each matter and adjust accruals as might be warranted based on new information and further developments. Management believes that the outcomes with respect to probable and reasonably possible losses in excess of the amounts accrued, net of insurance recoveries, while uncertain, either cannot be estimated or will not have a material effect upon the Company's financial position, results of operations or cash flows. Unless otherwise required by GAAP, legal costs are expensed as they are incurred.
Environmental matters
Portland Harbor Site In December 2000, Knife River - Northwest was named by the EPA as a PRP in connection with the cleanup of the Willamette River site adjacent to a commercial property site acquired by Knife River - Northwest from Georgia-Pacific West, Inc. The riverbed site is part of the Portland, Oregon, Harbor Superfund Site where the EPA wants responsible parties to share in the costs of cleanup. To date, costs of the overall remedial investigation and feasibility study of the harbor site are being recorded, and initially paid, through an administrative consent order by the LWG. Investigative costs are indicated to be in excess of $100 million. Remediation is expected to take up to 13 years with a present value cost estimate of approximately $1 billion. Corrective action will not be taken until remedial design/remedial action plans are approved by the EPA. Knife River - Northwest was also notified that the Portland Harbor Natural Resource Trustee Council intends to perform an injury assessment to natural resources resulting from the release of hazardous substances at the Harbor Superfund Site. It is not possible to estimate the costs of natural resource damages until an assessment is completed and allocations are undertaken.
At this time, Knife River - Northwest does not believe it is a responsible party and has notified Georgia-Pacific West, Inc., that it intends to seek indemnity for liabilities incurred in relation to the above matters pursuant to the terms of their sale agreement. Knife River - Northwest has entered into an agreement tolling the statute of limitations in connection with the LWG's potential claim for contribution to the costs of the remedial investigation and feasibility study. LWG has stated its intent to file suit against Knife River - Northwest and others to recover LWG's investigation costs to the extent Knife River - Northwest cannot demonstrate its non-liability for the contamination or is unwilling to participate in an alternative dispute resolution process that has been
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established to address the matter. At this time, Knife River - Northwest has agreed to participate in the alternative dispute resolution process.
The Company believes it is not probable that it will incur any material environmental remediation costs or damages in relation to the above referenced matter.
Manufactured Gas Plant Sites Claims have been made against Cascade for cleanup of environmental contamination at manufactured gas plant sites operated by Cascade's predecessors and a similar claim has been made against Montana-Dakota for a site operated by Montana-Dakota and its predecessors. Any accruals related to these claims are reflected in regulatory assets. For more information, see Note 13.
Demand has been made of Montana-Dakota to participate in investigation and remediation of environmental contamination at a site in Missoula, Montana. The site operated as a former manufactured gas plant from approximately 1907 to 1938 when it was converted to a butane-air plant that operated until 1956. Montana-Dakota or its predecessors owned or controlled the site for a period of the time it operated as a manufactured gas plant and Montana-Dakota operated the butane-air plant from 1940 to 1951, at which time it sold the plant. There are no documented wastes or by-products resulting from the mixing or distribution of butane-air gas. Preliminary assessment of a portion of the site provided a recommended remedial alternative for that portion of approximately $560,000. However, the recommended remediation would not address any potential contamination to adjacent parcels that may be impacted by contamination from the manufactured gas plant. Montana-Dakota and another party agreed to voluntarily investigate and remediate the site and that Montana-Dakota will pay two-thirds of the costs for further investigation and remediation of the site. Montana-Dakota received notice from a prior insurance carrier that it will participate in payment of defense costs incurred in relation to the claim. Montana-Dakota has accrued $375,000 for the remediation of this site.
A claim was made against Cascade for contamination at the Bremerton Gasworks Superfund Site in Bremerton, Washington, which was received in 1997. A preliminary investigation has found soil and groundwater at the site contain contaminants requiring further investigation and cleanup. The EPA conducted a Targeted Brownfields Assessment of the site and released a report summarizing the results of that assessment in August 2009. The assessment confirms that contaminants have affected soil and groundwater at the site, as well as sediments in the adjacent Port Washington Narrows. Alternative remediation options have been identified with preliminary cost estimates ranging from $340,000 to $6.4 million. Data developed through the assessment and previous investigations indicates the contamination likely derived from multiple, different sources and multiple current and former owners of properties and businesses in the vicinity of the site may be responsible for the contamination. In April 2010, the Washington DOE issued notice it considered Cascade a PRP for hazardous substances at the site. In May 2012, the EPA added the site to the National Priorities List of Superfund sites. Cascade has entered into an administrative settlement agreement and consent order with the EPA regarding the scope and schedule for a remedial investigation and feasibility study for the site. Current estimates for the cost to complete the remedial investigation and feasibility study are approximately $7.6 million of which $3.8 million has been incurred. Cascade has accrued $3.8 million for the remedial investigation and feasibility study, as well as $6.4 million for remediation of this site; however, the accrual for remediation costs will be reviewed and adjusted, if necessary, after completion of the remedial investigation and feasibility study. In April 2010, Cascade filed a petition with the WUTC for authority to defer the costs incurred in relation to the environmental remediation of this site. The WUTC approved the petition in September 2010, subject to conditions set forth in the order.
A claim was made against Cascade for contamination at a site in Bellingham, Washington. Cascade received notice from a party in May 2008 that Cascade may be a PRP, along with other parties, for contamination from a manufactured gas plant owned by Cascade and its predecessor from about 1946 to 1962. Other PRPs reached an agreed order and work plan with the Washington DOE for completion of a remedial investigation and feasibility study for the site. A feasibility study prepared for one of the PRPs in March 2018 identifies five cleanup action alternatives for the site with estimated costs ranging from $8.0 million to $20.4 million with a selected preferred alternative having an estimated total cost of $9.3 million. The other PRPs will develop a cleanup action plan and, after public review of the cleanup action plan, develop design documents. Cascade believes its proportional share of any liability will be relatively small in comparison to other PRPs. The plant manufactured gas from coal between approximately 1890 and 1946. In 1946, shortly after Cascade's predecessor acquired the plant, it converted the plant to a propane-air gas facility. There are no documented wastes or by-products resulting from the mixing or distribution of propane-air gas. Cascade has recorded an accrual for this site for an amount that is not material.
Cascade has received notices from and entered into agreement with certain of its insurance carriers that they will participate in defense of Cascade for certain of the contamination claims subject to full and complete reservations of rights and defenses to insurance coverage. To the extent these claims are not covered by insurance, Cascade intends to seek recovery through the OPUC and WUTC of remediation costs in its natural gas rates charged to customers.
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Guarantees
In 2009, multiple sale agreements were signed to sell the Company's ownership interests in the Brazilian Transmission Lines. In connection with the sale, Centennial agreed to guarantee payment of any indemnity obligations of certain of the Company's indirect wholly owned subsidiaries who were the sellers in three purchase and sale agreements for periods ranging up to 10 years from the date of sale. The guarantees were required by the buyers as a condition to the sale of the Brazilian Transmission Lines.
Certain subsidiaries of the Company have outstanding guarantees to third parties that guarantee the performance of other subsidiaries of the Company. These guarantees are related to construction contracts, insurance deductibles and loss limits, and certain other guarantees. At September 30, 2019, the fixed maximum amounts guaranteed under these agreements aggregated $206.5 million. At September 30, 2019, the amounts of scheduled expiration of the maximum amounts guaranteed under these agreements aggregate to $2.0 million in 2019; $192.2 million in 2020; $700,000 in 2021; $500,000 in 2022; $500,000 in 2023; $1.6 million thereafter; $9.0 million, which has no scheduled maturity date; and no amounts were outstanding. In the event of default under these guarantee obligations, the subsidiary issuing the guarantee for that particular obligation would be required to make payments under its guarantee.
Certain subsidiaries have outstanding letters of credit to third parties related to insurance policies and other agreements, some of which are guaranteed by other subsidiaries of the Company. At September 30, 2019, the fixed maximum amounts guaranteed under these letters of credit aggregated $30.0 million. At September 30, 2019, the amounts of scheduled expiration of the maximum amounts guaranteed under these letters of credit aggregate to $24.4 million in 2019 and $5.6 million in 2020 with no amounts outstanding. In the event of default under these letter of credit obligations, the subsidiary guaranteeing the letter of credit would be obligated for reimbursement of payments made under the letter of credit.
In addition, Centennial, Knife River and MDU Construction Services have issued guarantees to third parties related to the routine purchase of maintenance items, materials and lease obligations for which no fixed maximum amounts have been specified. These guarantees have no scheduled maturity date. In the event a subsidiary of the Company defaults under these obligations, Centennial, Knife River or MDU Construction Services would be required to make payments under these guarantees. Any amounts outstanding by subsidiaries of the Company were reflected on the Consolidated Balance Sheet at September 30, 2019.
In the normal course of business, Centennial has surety bonds related to construction contracts and reclamation obligations of its subsidiaries. In the event a subsidiary of Centennial does not fulfill a bonded obligation, Centennial would be responsible to the surety bond company for completion of the bonded contract or obligation. A large portion of the surety bonds is expected to expire within the next 12 months; however, Centennial will likely continue to enter into surety bonds for its subsidiaries in the future. At September 30, 2019, approximately $930.1 million of surety bonds were outstanding, which were not reflected on the Consolidated Balance Sheet.
Variable interest entities
The Company evaluates its arrangements and contracts with other entities to determine if they are VIEs and if so, if the Company is the primary beneficiary.
Fuel Contract Coyote Station entered into a coal supply agreement with Coyote Creek that provides for the purchase of coal necessary to supply the coal requirements of the Coyote Station for the period May 2016 through December 2040. Coal purchased under the coal supply agreement is reflected in inventories on the Company's Consolidated Balance Sheets and is recovered from customers as a component of electric fuel and purchased power.
The coal supply agreement creates a variable interest in Coyote Creek due to the transfer of all operating and economic risk to the Coyote Station owners, as the agreement is structured so that the price of the coal will cover all costs of operations, as well as future reclamation costs. The Coyote Station owners are also providing a guarantee of the value of the assets of Coyote Creek as they would be required to buy the assets at book value should they terminate the contract prior to the end of the contract term and are providing a guarantee of the value of the equity of Coyote Creek in that they are required to buy the entity at the end of the contract term at equity value. Although the Company has determined that Coyote Creek is a VIE, the Company has concluded that it is not the primary beneficiary of Coyote Creek because the authority to direct the activities of the entity is shared by the four unrelated owners of the Coyote Station, with no primary beneficiary existing. As a result, Coyote Creek is not required to be consolidated in the Company's financial statements.
At September 30, 2019, the Company's exposure to loss as a result of the Company's involvement with the VIE, based on the Company's ownership percentage, was $36.6 million.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
On January 2, 2019, the Company announced the completion of the Holding Company Reorganization, which resulted in Montana-Dakota becoming a subsidiary of the Company. The merger was conducted pursuant to Section 251(g) of the General Corporation Law of the State of Delaware, which provides for the formation of a holding company without a vote of the stockholders of the constituent corporation. Immediately after consummation of the Holding Company Reorganization, the Company had, on a consolidated basis, the same assets, businesses and operations as Montana-Dakota had immediately prior to the consummation of the Holding Company Reorganization. As a result of the Holding Company Reorganization, the Company
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became the successor issuer to Montana-Dakota pursuant to Rule 12g-3(a) of the Exchange Act, and as a result, the Company's common stock was deemed registered under Section 12(b) of the Exchange Act.
The Company operates with a two-platform business model. Its regulated energy delivery platform and its construction materials and services platform are each comprised of different operating segments. Some of these segments experience seasonality related to the industries in which they operate. The two-platform approach helps balance this seasonality and the risk associated with each type of industry. Through its regulated energy delivery platform, the Company provides electric and natural gas services to customers; generates, transmits and distributes electricity; and provides natural gas transportation, storage and gathering services. These businesses are regulated by state public service commissions and/or the FERC. The construction materials and services platform provides construction services to a variety of customers, including commercial, industrial and governmental industries, and provides construction materials through aggregate mining and marketing of related products, such as ready-mixed concrete and asphalt.
The Company is organized into five reportable business segments. These business segments include: electric, natural gas distribution, pipeline and midstream, construction materials and contracting, and construction services. The Company's business segments are determined based on the Company's method of internal reporting, which generally segregates the strategic business units due to differences in products, services and regulation. The internal reporting of these segments is defined based on the reporting and review process used by the Company's chief executive officer.
The Company's strategy is to apply its expertise in the regulated energy delivery and construction materials and services businesses to increase market share, increase profitability and enhance shareholder value through organic growth opportunities and strategic acquisitions. The Company is focused on a disciplined approach to the acquisition of well-managed companies and properties.
The Company has capabilities to fund its growth and operations through various sources, including internally generated funds, commercial paper facilities, revolving credit facilities, term loans and the issuance from time to time of debt and equity securities. For more information on the Company's capital expenditures and funding sources, see Liquidity and Capital Commitments.
Consolidated Earnings Overview
The following table summarizes the contribution to the consolidated earnings by each of the Company's business segments.
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
(In millions, except per share amounts) | ||||||||||||
Electric | $ | 16.3 | $ | 15.3 | $ | 39.3 | $ | 37.5 | ||||
Natural gas distribution | (15.6 | ) | (11.9 | ) | 14.6 | 13.9 | ||||||
Pipeline and midstream | 7.7 | 11.0 | 21.7 | 21.9 | ||||||||
Construction materials and contracting | 102.6 | 78.9 | 97.3 | 79.7 | ||||||||
Construction services | 21.1 | 9.3 | 64.0 | 38.5 | ||||||||
Other | 4.0 | 4.8 | 3.5 | 1.9 | ||||||||
Income from continuing operations | 136.1 | 107.4 | 240.4 | 193.4 | ||||||||
Income (loss) from discontinued operations, net of tax | 1.5 | (.1 | ) | — | .1 | |||||||
Net income | $ | 137.6 | $ | 107.3 | $ | 240.4 | $ | 193.5 | ||||
Earnings per share - basic: | ||||||||||||
Income from continuing operations | $ | .68 | $ | .55 | $ | 1.21 | $ | .99 | ||||
Discontinued operations, net of tax | .01 | — | — | — | ||||||||
Earnings per share - basic | $ | .69 | $ | .55 | $ | 1.21 | $ | .99 | ||||
Earnings per share - diluted: | ||||||||||||
Income from continuing operations | $ | .68 | $ | .55 | $ | 1.21 | $ | .99 | ||||
Discontinued operations, net of tax | .01 | — | — | — | ||||||||
Earnings per share - diluted | $ | .69 | $ | .55 | $ | 1.21 | $ | .99 | ||||
Three Months Ended September 30, 2019, Compared to Three Months Ended September 30, 2018 The Company recognized consolidated earnings of $137.6 million for the quarter ended September 30, 2019, compared to $107.3 million for the same period in 2018.
Positively impacting the Company's earnings was an increase in gross margin at the construction materials and contracting business, largely resulting from strong economic environments in certain states, contributions from the businesses acquired since the third quarter of 2018 and an increase in gains recognized on asset sales. In addition, the construction services business experienced an increase in gross margin, primarily the result of higher inside and outside specialty contracting workloads and the
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absence of changes to estimates recorded in the third quarter of 2018 for variable consideration previously recognized on certain construction contracts. Partially offsetting these increases were higher operating expenses at the natural gas business and the absence in 2019 of an income tax benefit for the reversal of a previously recorded regulatory liability at the pipeline and midstream business.
Nine Months Ended September 30, 2019, Compared to Nine Months Ended September 30, 2018 The Company recognized consolidated earnings of $240.4 million for the nine months ended September 30, 2019, compared to $193.5 million for the same period in 2018.
Positively impacting the Company's earnings was an increase in gross margin at the construction services business, largely the result of higher inside and outside specialty contracting workloads and the absence of changes to estimates recorded in the third quarter of 2018 for variable consideration previously recognized on certain construction contracts. In addition, the construction materials and contracting business experienced an increase in gross margin, largely resulting from strong economic environments in certain states, contributions from the businesses acquired since the third quarter of 2018 and an increase in gains recognized on asset sales. Also contributing to the increased earnings was approved rate recovery at both the natural gas distribution and electric businesses, as well as higher retail sales volumes at the natural gas distribution business. The pipeline and midstream business had increased rates and volumes of natural gas being transported that was partially offset by the absence in 2019 of an income tax benefit for the reversal of a previously recorded regulatory liability.
A discussion of key financial data from the Company's business segments follows.
Business Segment Financial and Operating Data
Following are key financial and operating data for each of the Company's business segments. Also included are highlights on key growth strategies, projections and certain assumptions for the Company and its subsidiaries and other matters of the Company's business segments. Many of these highlighted points are "forward-looking statements." For more information, see Forward-Looking Statements. There is no assurance that the Company's projections, including estimates for growth and changes in earnings, will in fact be achieved. Please refer to assumptions contained in this section, as well as the various important factors listed in Part I, Item 1A - Risk Factors in the 2018 Annual Report. Changes in such assumptions and factors could cause actual future results to differ materially from the Company's growth and earnings projections.
For information pertinent to various commitments and contingencies, see the Notes to Consolidated Financial Statements. For a summary of the Company's business segments, see Note 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 a top performing utility company measured by integrity, safety, employee satisfaction, customer service and shareholder return, while continuing to focus on providing safe, environmentally friendly, reliable and competitively priced energy and related services to customers. The Company continues to monitor opportunities for these segments to retain, grow and expand their customer base through extensions of existing operations, including building and upgrading electric generation, transmission and distribution and natural gas systems, and through selected acquisitions of companies and properties at prices that will provide stable cash flows and an opportunity to earn a competitive return on investment. The continued efforts to create operational improvements and efficiencies across both segments promotes the Company's business integration strategy. The primary factors that impact the results of these segments are the ability to earn authorized rates of return, cost of natural gas, cost of electric fuel and purchased power, weather, competitive factors in the energy industry, population growth and economic conditions in the segments' service areas.
The electric and natural gas distribution segments are subject to extensive regulation in the jurisdictions where they conduct operations with respect to costs, timely recovery of investments and permitted returns on investment, as well as certain operational, environmental and system integrity regulations. To assist in the reduction of regulatory lag with the increase in investments, tracking mechanisms have been implemented in certain jurisdictions. The Pipeline and Hazardous Materials Safety Administration recently issued additional rules to strengthen the safety of natural gas transmission and hazardous liquid pipelines. The Company is currently evaluating the first phase of the rules. Legislative and regulatory initiatives to increase renewable energy resources and reduce GHG emissions could impact the price and demand for electricity and natural gas, as well as increase costs to produce electricity and natural gas. The segments continue to invest in facility upgrades to be in compliance with the existing and future regulations.
Tariff increases on steel and aluminum materials could negatively affect the segments' construction projects and maintenance work. The Company continues to monitor the impact of tariffs on raw material costs. The natural gas distribution segment is also facing increased lead times on delivery of certain raw materials used in pipeline projects. In addition to the effect of tariffs, long lead times are attributable to increased demand for steel products from pipeline companies as they respond to the United States Department of Transportation Pipeline System Safety and Integrity Plan. The Company continues to monitor the material lead times and is working with manufacturers to proactively order such materials to help mitigate the risk of delays due to extended lead times.
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The ability to grow through acquisitions is subject to significant competition and acquisition premiums. In addition, the ability of the segments to grow their service territory and customer base is affected by the economic environment of the markets served and competition from other energy providers and fuels. The construction of any new electric generating facilities, transmission lines and other service facilities is subject to increasing costs and lead times, extensive permitting procedures, and federal and state legislative and regulatory initiatives, which will likely necessitate increases in electric energy prices.
Revenues are impacted by both customer growth and usage, the latter of which is primarily impacted by weather. Very cold winters increase demand for natural gas and to a lesser extent, electricity, while warmer than normal summers increase demand for electricity, especially among residential and commercial customers. Average consumption among both electric and natural gas customers has tended to decline as more efficient appliances and furnaces are installed, and as the Company has implemented conservation programs. Natural gas decoupling mechanisms in certain jurisdictions have been implemented to largely mitigate the effect that would otherwise be caused by variations in volumes sold to these customers due to weather and changing consumption patterns on the Company's distribution margins.
Earnings overview - The following information summarizes the performance of the electric segment.
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
(Dollars in millions, where applicable) | ||||||||||||
Operating revenues | $ | 89.8 | $ | 86.1 | $ | 263.4 | $ | 252.0 | ||||
Electric fuel and purchased power | 18.7 | 18.4 | 64.4 | 58.9 | ||||||||
Taxes, other than income | .1 | .2 | .4 | .6 | ||||||||
Adjusted gross margin | 71.0 | 67.5 | 198.6 | 192.5 | ||||||||
Operating expenses: | ||||||||||||
Operation and maintenance | 30.8 | 30.1 | 94.6 | 91.3 | ||||||||
Depreciation, depletion and amortization | 14.2 | 12.6 | 41.8 | 37.7 | ||||||||
Taxes, other than income | 4.1 | 3.7 | 12.5 | 11.2 | ||||||||
Total operating expenses | 49.1 | 46.4 | 148.9 | 140.2 | ||||||||
Operating income | 21.9 | 21.1 | 49.7 | 52.3 | ||||||||
Other income | .6 | .8 | 2.7 | 2.1 | ||||||||
Interest expense | 6.2 | 6.3 | 18.9 | 19.4 | ||||||||
Income before income taxes | 16.3 | 15.6 | 33.5 | 35.0 | ||||||||
Income taxes | — | .3 | (5.8 | ) | (2.5 | ) | ||||||
Net income | $ | 16.3 | $ | 15.3 | $ | 39.3 | $ | 37.5 | ||||
Retail sales (million kWh): | ||||||||||||
Residential | 259.4 | 282.9 | 865.6 | 903.0 | ||||||||
Commercial | 359.5 | 374.3 | 1,102.4 | 1,131.7 | ||||||||
Industrial | 127.8 | 132.9 | 403.5 | 406.8 | ||||||||
Other | 20.9 | 24.5 | 64.9 | 70.5 | ||||||||
767.6 | 814.6 | 2,436.4 | 2,512.0 | |||||||||
Average cost of electric fuel and purchased power per kWh | $ | .021 | $ | .021 | $ | .024 | $ | .022 | ||||
Adjusted gross margin is a non-GAAP financial measure. For additional information and reconciliation of the non-GAAP adjusted gross margin attributable to the electric segment, see the Non-GAAP Financial Measures section later in this Item.
Three Months Ended September 30, 2019, Compared to Three Months Ended September 30, 2018 Electric earnings increased $1.0 million (7 percent) as a result of:
Adjusted gross margin: Increase of $3.5 million as a result of higher revenues. The revenue increase was primarily due to implemented regulatory mechanisms, which include approved Montana interim and final rates, as discussed in Note 19, and recovery of the investment in the Thunder Spirit Wind farm expansion placed into service in the fourth quarter of 2018. Also contributing to the increase was the absence in 2019 of a transmission formula rate adjustment recognized in the third quarter of 2018 for decreased costs on the BSSE project. These increases were partially offset by lower retail sales volumes of approximately 6 percent across all customer classes primarily from cooler summer temperatures.
Operation and maintenance: Increase of $700,000, largely due to higher payroll-related costs, partially offset by decreased contracted services resulting from lower subcontractor costs.
Depreciation, depletion and amortization: Increase of $1.6 million as a result of increased property, plant and equipment
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balances including the Thunder Spirit Wind farm expansion, as previously discussed, and other capital projects.
Taxes, other than income: Increase of $400,000, primarily from higher property taxes in certain jurisdictions.
Other income: Comparable to the same period in prior year.
Interest expense: Comparable to the same period in prior year.
Income taxes: Comparable to the same period in prior year.
Nine Months Ended September 30, 2019, Compared to Nine Months Ended September 30, 2018 Electric earnings increased $1.8 million (5 percent) as a result of:
Adjusted gross margin: Increase of $6.1 million as a result of higher revenues. The revenue increase was primarily due to implemented regulatory mechanisms, which include approved Montana interim and final rates, as discussed in Note 19; recovery of the investment in the Thunder Spirit Wind farm expansion placed into service in the fourth quarter of 2018; and recovery of the investment in the BSSE project placed into service in the first quarter of 2019. Also contributing to the increase was the absence in 2019 of a transmission formula rate adjustment recognized in the third quarter of 2018 for decreased costs on the BSSE project. These increases were partially offset by lower retail sales volumes of approximately 3 percent across all customer classes.
Operation and maintenance: Increase of $3.3 million, largely due to higher contract services, primarily driven by a maintenance outage at Coyote Station, and higher payroll-related costs.
Depreciation, depletion and amortization: Increase of $4.1 million as a result of increased property, plant and equipment balances including the Thunder Spirit Wind farm expansion, as previously discussed, and other capital projects.
Taxes, other than income: Increase of $1.3 million, primarily from higher property taxes in certain jurisdictions.
Other income: Increase of $600,000, primarily the result of higher returns on the Company's benefit plan investments, partially offset by the write-down of a non-utility investment, as discussed in Note 14.
Interest expense: Decrease of $500,000 driven by higher AFUDC, which resulted from more interest being capitalized on regulated construction projects.
Income taxes: Increase in income tax benefits of $3.3 million, largely resulting from increased production tax credits.
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Earnings overview - The following information summarizes the performance of the natural gas distribution segment.
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
(Dollars in millions, where applicable) | ||||||||||||
Operating revenues | $ | 93.6 | $ | 92.2 | $ | 569.7 | $ | 554.5 | ||||
Purchased natural gas sold | 35.6 | 35.2 | 305.6 | 301.6 | ||||||||
Taxes, other than income | 3.2 | 3.1 | 20.7 | 21.0 | ||||||||
Adjusted gross margin | 54.8 | 53.9 | 243.4 | 231.9 | ||||||||
Operating expenses: | ||||||||||||
Operation and maintenance | 44.4 | 42.1 | 134.3 | 129.4 | ||||||||
Depreciation, depletion and amortization | 19.9 | 18.1 | 59.1 | 53.5 | ||||||||
Taxes, other than income | 6.1 | 5.4 | 17.9 | 16.5 | ||||||||
Total operating expenses | 70.4 | 65.6 | 211.3 | 199.4 | ||||||||
Operating income (loss) | (15.6 | ) | (11.7 | ) | 32.1 | 32.5 | ||||||
Other income | 1.7 | .7 | 5.3 | 2.0 | ||||||||
Interest expense | 8.9 | 7.7 | 26.1 | 22.6 | ||||||||
Income (loss) before income taxes | (22.8 | ) | (18.7 | ) | 11.3 | 11.9 | ||||||
Income taxes | (7.2 | ) | (6.8 | ) | (3.3 | ) | (2.0 | ) | ||||
Net income (loss) | $ | (15.6 | ) | $ | (11.9 | ) | $ | 14.6 | $ | 13.9 | ||
Volumes (MMdk) | ||||||||||||
Retail sales: | ||||||||||||
Residential | 4.1 | 4.0 | 44.3 | 40.4 | ||||||||
Commercial | 4.2 | 4.0 | 31.5 | 29.0 | ||||||||
Industrial | .9 | .8 | 3.6 | 3.2 | ||||||||
9.2 | 8.8 | 79.4 | 72.6 | |||||||||
Transportation sales: | ||||||||||||
Commercial | .3 | .3 | 1.5 | 1.5 | ||||||||
Industrial | 45.7 | 42.0 | 117.9 | 108.1 | ||||||||
46.0 | 42.3 | 119.4 | 109.6 | |||||||||
Total throughput | 55.2 | 51.1 | 198.8 | 182.2 | ||||||||
Average cost of natural gas per dk | $ | 3.88 | $ | 4.00 | $ | 3.85 | $ | 4.16 | ||||
Adjusted gross margin is a non-GAAP financial measure. For additional information and reconciliation of the non-GAAP adjusted gross margin attributable to the natural gas distribution segment, see the Non-GAAP Financial Measures section later in this Item.
Three Months Ended September 30, 2019, Compared to Three Months Ended September 30, 2018 Natural gas distribution's seasonal loss increased $3.7 million (31 percent) as a result of:
Adjusted gross margin: Increase of $900,000, primarily driven by approved rate recovery in certain jurisdictions. Increased retail sales volumes of 4 percent related to all customer classes were offset by weather normalization and conservation adjustments in certain jurisdictions.
Operation and maintenance: Increase of $2.3 million, largely due to higher payroll-related costs.
Depreciation, depletion and amortization: Increase of $1.8 million, primarily as a result of increased property, plant and equipment balances.
Taxes, other than income: Increase of $700,000, primarily from higher property taxes in certain jurisdictions.
Other income: Increase of $1.0 million driven by increased interest income related to higher gas costs to be collected from customers, as discussed in Notes 13 and 19.
Interest expense: Increase of $1.2 million, largely resulting from increased debt balances to finance higher gas costs to be collected from customers.
Income taxes: Comparable to the same period in prior year.
42
Nine Months Ended September 30, 2019, Compared to Nine Months Ended September 30, 2018 Natural gas distribution earnings increased $700,000 (5 percent) as a result of:
Adjusted gross margin: Increase of $11.5 million, primarily driven by an increase in retail sales volumes of 9 percent related to all customer classes due to colder weather, offset in part by weather normalization and conservation adjustments in certain jurisdictions, and approved rate recovery in certain jurisdictions. The adjusted gross margins were also positively impacted by higher rate realization due to higher conservation revenue, which offsets the conservation expense in operation and maintenance expense.
Operation and maintenance: Increase of $4.9 million, largely resulting from higher payroll-related costs and conservation expenses being recovered in revenue, partially offset by lower contract services due to the absence of the prior year's recognition of a non-recurring expense related to the approved WUTC general rate case settlement in the second quarter of 2018.
Depreciation, depletion and amortization: Increase of $5.6 million, primarily as a result of increased property, plant and equipment balances.
Taxes, other than income: Increase of $1.4 million, primarily from higher property taxes in certain jurisdictions.
Other income: Increase of $3.3 million, largely resulting from increased interest income related to higher gas costs to be collected from customers, as discussed in Notes 13 and 19, and higher returns on the Company's benefit plan investments. Partially offsetting these increases was the write-down of a non-utility investment, as discussed in Note 14.
Interest expense: Increase of $3.5 million, largely resulting from increased debt balances to finance higher gas costs to be collected from customers.
Income taxes: Increase in income tax benefits of $1.3 million resulting from increased permanent tax benefits.
Outlook The Company expects these segments will grow rate base by approximately 5 percent annually over the next five years on a compound basis. Operations are spread across eight states where the Company expects customer growth to be higher than the national average. Customer growth is expected to grow by 1 percent to 2 percent per year. This customer growth, along with system upgrades and replacements needed to supply safe and reliable service, will require investments in new and replacement electric generation and transmission and natural gas systems.
In February 2019, the Company announced that it intends to retire three aging coal-fired electric generation units within the next three years, resulting from the Company's analysis showing that the plants are no longer expected to be cost competitive for customers. The retirements are expected to be in early 2021 for Lewis & Clark Station in Sidney, Montana, and in early 2022 for units 1 and 2 at Heskett Station near Mandan, North Dakota. In addition, the Company announced that it intends to construct a new 88-MW simple-cycle natural gas-fired combustion turbine peaking unit at the existing plant site near Mandan, North Dakota. The new simple-cycle turbine coupled with the MISO market purchases are expected to be about half the total cost of continuing to run the coal-fired electric generation units at Heskett and Lewis & Clark stations. The simple-cycle turbine was included in the Company's recently submitted integrated resource plan. On August 28, 2019, the Company filed for an advanced determination of prudence with the NDPSC for the new simple-cycle turbine. If approved, the simple-cycle turbine is expected to be placed into service in 2023. On September 16, 2019, the Company filed with the NDPSC a request for the usage of deferred accounting for the costs related to the retirement of Lewis & Clark Station and units 1 and 2 at Heskett Station. Requests for the usage of deferred accounting will also be filed in Montana and South Dakota.
The Company continues to be focused on the regulatory recovery of its investments. The Company files for rate adjustments to seek recovery of operating costs and capital investments, as well as reasonable returns as allowed by regulators. The Company also continues to propose pipeline safety cost recovery mechanisms in certain jurisdictions focusing on the safety of its infrastructure. The Company's most recent cases by jurisdiction are discussed in Note 19.
Pipeline and Midstream
Strategy and challenges The pipeline and midstream segment provides natural gas transportation, gathering and underground storage services, as discussed in Note 17. The segment focuses on utilizing its extensive expertise in the design, construction and operation of energy infrastructure and related services to increase market share and profitability through optimization of existing operations, organic growth and investments in energy-related assets within or in close proximity to its current operating areas. The segment focuses on the continual safety and reliability of its systems, which entails building, operating and maintaining safe natural gas pipelines and facilities. The segment continues to evaluate growth opportunities including the expansion of existing storage, gathering and transmission facilities; incremental pipeline projects; and expansion of energy-related services leveraging on its core competencies.
The segment is exposed to energy price volatility which is impacted by the fluctuations in pricing, production and basis differentials of the energy market's commodities. Legislative and regulatory initiatives to increase pipeline safety regulations and reduce methane emissions could also impact the price and demand for natural gas.
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Tariff increases on steel and aluminum materials could negatively affect the segment's construction projects and maintenance work. The Company continues to monitor the impact of tariffs on raw material costs. The segment experiences extended lead times on raw materials that are critical to the segment's construction and maintenance work. Long lead times on materials could delay maintenance work and project construction potentially causing lost revenues and/or increased costs. The Company continues to proactively monitor and plan for the material lead times, as well as work with manufacturers and suppliers to help mitigate the risk of delays due to extended lead times.
The pipeline and midstream segment is subject to extensive regulation including certain operational, environmental and system integrity regulations, as well as various permit terms and operational compliance conditions. The Pipeline and Hazardous Materials Safety Administration recently issued additional rules to strengthen the safety of natural gas transmission and hazardous liquid pipelines. The Company is currently evaluating the first phase of the rules. The segment is charged with the ongoing process of reviewing existing permits and easements, as well as securing new permits and easements as necessary to meet current demand and future growth opportunities. Exposure to pipeline opposition groups could also cause negative impacts on the segment with increased costs and potential delays to project completion.
The segment focuses on the recruitment and retention of a skilled workforce to remain competitive and provide services to its customers. The industry in which it operates relies on a skilled workforce to construct energy infrastructure and operate existing infrastructure in a safe manner. A shortage of skilled personnel can create a competitive labor market which could increase costs incurred by the segment. Competition from other pipeline and midstream companies can also have a negative impact on the segment.
Earnings overview - The following information summarizes the performance of the pipeline and midstream segment.
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
(Dollars in millions) | ||||||||||||
Operating revenues | $ | 36.4 | $ | 32.3 | $ | 105.1 | $ | 93.5 | ||||
Operating expenses: | ||||||||||||
Operation and maintenance | 16.1 | 15.9 | 47.5 | 45.5 | ||||||||
Depreciation, depletion and amortization | 5.6 | 4.3 | 15.6 | 13.1 | ||||||||
Taxes, other than income | 3.3 | 3.0 | 10.0 | 9.2 | ||||||||
Total operating expenses | 25.0 | 23.2 | 73.1 | 67.8 | ||||||||
Operating income | 11.4 | 9.1 | 32.0 | 25.7 | ||||||||
Other income | .1 | .8 | .9 | 1.3 | ||||||||
Interest expense | 1.8 | 1.6 | 5.3 | 4.1 | ||||||||
Income before income taxes | 9.7 | 8.3 | 27.6 | 22.9 | ||||||||
Income taxes | 2.0 | (2.7 | ) | 5.9 | 1.0 | |||||||
Net income | $ | 7.7 | $ | 11.0 | $ | 21.7 | $ | 21.9 | ||||
Transportation volumes (MMdk) | 111.1 | 92.7 | 319.9 | 259.3 | ||||||||
Natural gas gathering volumes (MMdk) | 3.6 | 3.8 | 10.5 | 11.2 | ||||||||
Customer natural gas storage balance (MMdk): | ||||||||||||
Beginning of period | 11.4 | 16.2 | 13.9 | 22.4 | ||||||||
Net injection | 12.8 | 7.1 | 10.3 | .9 | ||||||||
End of period | 24.2 | 23.3 | 24.2 | 23.3 | ||||||||
Three Months Ended September 30, 2019, Compared to Three Months Ended September 30, 2018 Pipeline and midstream earnings decreased $3.3 million (29 percent) as a result of:
Revenues: Increase of $4.1 million, largely attributable to increased volumes of natural gas transported through its system as a result of organic growth projects completed in 2018 and increased rates effective May 1, 2019, due to the rate case recently finalized with the FERC, as discussed in Note 19.
Operation and maintenance: Comparable to the same period in prior year.
Depreciation, depletion and amortization: Increase of $1.3 million, primarily due to higher depreciation rates effective May 1, 2019, due to the recently finalized rate case with the FERC, as discussed in Note 19, and increased property, plant and equipment balances, largely the result of organic growth projects that have been placed into service.
Taxes, other than income: Increase of $300,000 resulting from higher property taxes in certain jurisdictions.
Other income: Decrease of $700,000 as a result of lower AFUDC.
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Interest expense: Comparable to the same period in prior year.
Income taxes: Increase of $4.7 million, primarily driven by the absence in 2019 of an income tax benefit related to the reversal of a previously recorded regulatory liability based on a FERC final accounting order issued during the third quarter of 2018.
Nine Months Ended September 30, 2019, Compared to Nine Months Ended September 30, 2018 Pipeline and midstream earnings decreased $200,000 (1 percent) as a result of:
Revenues: Increase of $11.6 million, largely attributable to increased volumes of natural gas transported through its system as a result of organic growth projects completed in 2018 and increased rates effective May 1, 2019, due to the rate case recently finalized with the FERC, as discussed in Note 19. Revenue was also positively impacted by higher nonregulated project revenue.
Operation and maintenance: Increase of $2.0 million, largely from higher nonregulated project costs as a result of increased nonregulated project revenue, as previously discussed, and higher material and payroll-related costs.
Depreciation, depletion and amortization: Increase of $2.5 million, primarily due to increased property, plant and equipment balances, largely the result of organic growth projects that have been placed into service, and higher depreciation rates effective May 1, 2019, due to the recently finalized rate case with the FERC, as discussed in Note 19.
Taxes, other than income: Increase of $800,000 driven by higher property taxes in certain jurisdictions.
Other income: Decrease of $400,000 as a result of lower AFUDC, partially offset by higher returns on the Company's benefit plan investments.
Interest expense: Increase of $1.2 million, largely resulting from higher debt balances to finance the organic growth projects completed during 2018, as previously discussed.
Income taxes: Increase of $4.9 million, primarily driven by the absence in 2019 of an income tax benefit related to the reversal of a previously recorded regulatory liability based on a FERC final accounting order issued during the third quarter of 2018.
Outlook The Company has continued to experience the effects of natural gas production at record levels, which has provided opportunities for organic growth projects and increased demand. The completion of organic growth projects has contributed to the Company transporting increasing volumes of natural gas through its system. The record levels of natural gas supply have moderated the need for storage services and put downward pressure on natural gas prices and minimized pricing volatility. Both natural gas production levels and pressure on natural gas prices are expected to continue in the near term. The Company continues to focus on growth and improving existing operations through organic projects in all areas in which it operates. The following describes recent growth projects.
In September 2019, the Company completed and placed into service the Demicks Lake project in McKenzie County, North Dakota, as scheduled. The project included approximately 14 miles of 20-inch pipe and increased capacity by 175 MMcf per day. The Company began construction on the Line Section 22 Expansion project in the Billings, Montana, area in May of 2019 with an expected in-service date in November 2019. The project is designed to increase capacity by 22.5 MMcf per day to serve incremental demand in Billings, Montana. The Company has signed long-term contracts supporting both projects.
Additionally, the Company expects to begin construction on the Demicks Lake Expansion project, located in McKenzie County, North Dakota, in the fourth quarter of 2019. The Company has signed a long-term contract supporting this project, which is designed to increase capacity by 175 MMcf per day. The Demicks Lake Expansion project is expected to be in-service in the first quarter of 2020.
In January 2019, the Company announced the North Bakken Expansion project, which includes construction of a new pipeline, compression and ancillary facilities to transport natural gas from core Bakken production areas near Tioga, North Dakota, and extend to a new connection with Northern Border Pipeline in McKenzie County, North Dakota. The Company's long-term customer commitments and anticipated incremental commitments with the continuing record levels of natural gas production in the Bakken region support the project at an increased design capacity of 350 MMcf per day. Construction is expected to begin in early 2021 with an estimated completion date late in 2021, which is dependent on regulatory and environmental permitting. On June 28, 2019, the Company filed with the FERC a request to initiate the National Environmental Policy Act pre-filing process and received FERC approval of the pre-filing request on July 3, 2019.
Construction Materials and Contracting
Strategy and challenges The construction materials and contracting segment provides an integrated set of aggregate-based construction services, as discussed in Note 17. The segment focuses on high-growth strategic markets located near major transportation corridors and desirable mid-sized metropolitan areas; strengthening the long-term, strategic aggregate reserve position through available purchase and/or lease opportunities; enhancing profitability through cost containment, margin discipline and vertical integration of the segment's operations; development and recruitment of talented employees; and continued growth through organic and acquisition opportunities.
45
A key element of the Company's long-term strategy for this business is to further expand its market presence in the higher-margin materials business (rock, sand, gravel, liquid asphalt, asphalt concrete, ready-mixed concrete and related products), complementing and expanding on the segment's expertise. The Company's acquisition activity supports this strategy.
As one of the country's largest sand and gravel producers, the segment continues to strategically manage its approximately 1.0 billion tons of aggregate reserves in all its markets, as well as take further advantage of being vertically integrated. The segment's vertical integration allows the segment to manage operations from aggregate mining to final lay-down of concrete and asphalt, with control of and access to permitted aggregate reserves being significant. The Company's aggregate reserves are naturally declining and as a result, the Company seeks acquisition opportunities to replace the reserves. In 2018, the Company's aggregate reserves increased by approximately 50 million tons primarily due to acquisition activity.
The construction materials and contracting segment faces challenges that are not under the direct control of the business. The segment operates in geographically diverse and highly competitive markets. Competition can put negative pressure on the segment's operating margins. The segment is also subject to volatility in the cost of raw materials such as diesel fuel, gasoline, liquid asphalt, cement and steel. Although it is difficult to determine the split between inflation and supply/demand increases, diesel fuel costs remained fairly stable for the first nine months of 2019, while asphalt oil costs have trended higher in 2019 compared to 2018. Such volatility can have a negative impact on the segment's margins. Other variables that can impact the segment's margins include adverse weather conditions, the timing of project starts or completion and declines or delays in new and existing projects due to the cyclical nature of the construction industry and governmental infrastructure spending.
The segment also faces challenges in the recruitment and retention of employees. Trends in the labor market include an aging workforce and availability issues. The segment continues to face increasing pressure to control costs, as well as find and train a skilled workforce to meet the needs of increasing demand and seasonal work.
Earnings overview - The following information summarizes the performance of the construction materials and contracting segment.
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
(Dollars in millions) | ||||||||||||
Operating revenues | $ | 869.5 | $ | 743.9 | $ | 1,692.7 | $ | 1,466.9 | ||||
Cost of sales: | ||||||||||||
Operation and maintenance | 668.9 | 586.0 | 1,384.4 | 1,210.9 | ||||||||
Depreciation, depletion and amortization | 19.7 | 15.1 | 55.2 | 42.1 | ||||||||
Taxes, other than income | 13.4 | 11.8 | 34.8 | 30.8 | ||||||||
Total cost of sales | 702.0 | 612.9 | 1,474.4 | 1,283.8 | ||||||||
Gross margin | 167.5 | 131.0 | 218.3 | 183.1 | ||||||||
Selling, general and administrative expense: | ||||||||||||
Operation and maintenance | 22.7 | 20.1 | 64.6 | 57.3 | ||||||||
Depreciation, depletion and amortization | .9 | .5 | 2.4 | 1.6 | ||||||||
Taxes, other than income | .9 | .8 | 3.7 | 3.6 | ||||||||
Total selling, general and administrative expense | 24.5 | 21.4 | 70.7 | 62.5 | ||||||||
Operating income | 143.0 | 109.6 | 147.6 | 120.6 | ||||||||
Other income (expense) | .2 | (.1 | ) | 1.5 | (1.0 | ) | ||||||
Interest expense | 6.4 | 4.4 | 18.6 | 12.5 | ||||||||
Income before income taxes | 136.8 | 105.1 | 130.5 | 107.1 | ||||||||
Income taxes | 34.2 | 26.2 | 33.2 | 27.4 | ||||||||
Net income | $ | 102.6 | $ | 78.9 | $ | 97.3 | $ | 79.7 | ||||
Sales (000's): | ||||||||||||
Aggregates (tons) | 11,860 | 10,366 | 24,815 | 21,860 | ||||||||
Asphalt (tons) | 3,317 | 3,380 | 5,396 | 5,581 | ||||||||
Ready-mixed concrete (cubic yards) | 1,372 | 1,103 | 3,124 | 2,623 | ||||||||
Three Months Ended September 30, 2019, Compared to Three Months Ended September 30, 2018 Construction materials and contracting earnings increased $23.7 million (30 percent) as a result of:
Revenues: Increase of $125.6 million, primarily the result of higher revenues from contracting services and material sales due to strong economic environments in certain states and additional material volumes associated with the businesses acquired since the third quarter of 2018.
46
Gross margin: Increase of $36.5 million, largely due to the higher revenues resulting from strong economic environments in certain states, as previously discussed, higher contracting bid margins and higher realized material prices. Also contributing was an increase in gains from asset sales in certain regions of approximately $7.0 million.
Selling, general and administrative expense: Increase of $3.1 million, largely related to the businesses acquired since the third quarter of 2018 and higher payroll-related costs.
Other income (expense): Comparable to the same period in prior year.
Interest expense: Increase of $2.0 million, largely resulting from higher debt balances as a result of recent acquisitions.
Income taxes: Increase of $8.0 million, largely the result of increased income before income taxes.
Nine Months Ended September 30, 2019, Compared to Nine Months Ended September 30, 2018 Construction materials and contracting earnings increased $17.6 million (22 percent) as a result of:
Revenues: Increase of $225.8 million, primarily the result of higher revenues from contracting services and material sales due to strong economic environments in certain states and additional material volumes associated with the businesses acquired since the third quarter of 2018.
Gross margin: Increase of $35.2 million, largely resulting from higher revenues due to strong economic environments in certain states, as previously discussed, higher contracting bid margins and higher realized material prices. Also contributing was an increase in gains on asset sales in certain regions of approximately $6.8 million.
Selling, general and administrative expense: Increase of $8.2 million, primarily related to the businesses acquired since the third quarter of 2018 and higher payroll-related costs.
Other income (expense): Increase of $2.5 million, primarily due to higher returns on the Company's benefit plan investments.
Interest expense: Increase of $6.1 million, largely resulting from higher debt balances as a result of recent acquisitions.
Income taxes: Increase of $5.8 million, largely the result of increased income before income taxes.
Outlook The segment's vertically integrated aggregates-based business model provides the Company with the ability to capture margin throughout the sales delivery process. The aggregate products are sold internally and externally for use in other products such as ready-mixed concrete, asphaltic concrete and public and private construction markets. The contracting services and construction materials are sold primarily to construction contractors in connection with street, highway and other public infrastructure projects, as well as private commercial and residential development projects. The public infrastructure projects have traditionally been more stable markets as public funding is more secure during periods of economic decline. The public funding is, however, dependent on state and federal funding such as appropriations to the Federal Highway Administration. Spending on private development is highly dependent on both local and national economic cycles, providing additional sales during times of strong economic cycles.
The Company remains optimistic about overall economic growth and infrastructure spending. The IBISWorld Incorporated Industry Report issued in June 2019 for sand and gravel mining in the United States projects a 1.1 percent annual growth rate through 2024. The report also states the demand for clay and refractory materials is projected to continue deteriorating in several downstream manufacturing industries. However, the report expects this decline will be offset by rising activity in the residential and nonresidential construction markets, growing public sector investment in the highway and bridge construction markets and the oil and gas sector growth. The Company believes stronger demand in the housing construction markets along with continued demand from the highway and bridge construction markets should provide a stable demand for construction materials and contracting products and services in the near future.
In the first quarter of 2019, the Company purchased additional aggregate deposits in Texas, which augments existing company operations and enhances its ability to sell aggregates to third parties in the coming years. Also, in the first quarter of 2019, the Company acquired Viesko Redi-Mix, Inc., a ready-mixed concrete supplier headquartered near Salem, Oregon. The Company continues to evaluate additional acquisition opportunities. For more information on the Company's business combinations, see Note 9.
The construction materials and contracting segment's backlog at September 30, 2019, was $746.9 million, up from $590.0 million at September 30, 2018. The increase in backlog was primarily attributable to increased agency work and bidding opportunities in nearly every region. The Company expects to complete a significant amount of backlog at September 30, 2019, during the next 12 months.
During the second quarter of 2019, the governor of Oregon signed House Bill 3427, which creates a Corporate Activity Tax. The tax was enacted in the third quarter of 2019 and is effective for the Company on January 1, 2020. The Company does not expect the additional taxation will have a material impact on the construction materials and contracting segment due to their operations in Oregon.
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Five of the labor contracts that Knife River was negotiating, as reported in Items 1 and 2 - Business Properties - General in the 2018 Annual Report, have been ratified.
Construction Services
Strategy and challenges The construction services segment provides inside and outside specialty contracting, as discussed in Note 17. The construction services segment focuses on providing a superior return on investment by building new and strengthening existing customer relationships; ensuring quality service; safely executing projects; effectively controlling costs; collecting on receivables; retaining, developing and recruiting talented employees; growing through organic and acquisition opportunities; and focusing efforts on projects that will permit higher margins while properly managing risk.
The construction services segment faces challenges in the highly competitive markets in which it operates. Competitive pricing environments, project delays, changes in management's estimates of variable consideration and the effects 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, declines or delays in new projects due to the cyclical nature of the construction industry and other factors. These challenges may also impact the risk of loss on certain projects. Accordingly, operating results in any particular period may not be indicative of the results that can be expected for any other period.
The need to ensure available specialized labor resources for projects also drives strategic relationships with customers and project margins. These trends include an aging workforce and labor availability issues, increasing pressure to reduce costs and improve reliability, and increasing duration and complexity of customer capital programs. Due to these and other factors, the Company believes customer demand for labor resources will continue to increase, possibly surpassing the supply of industry resources.
Earnings overview - The following information summarizes the performance of the construction services segment.
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
(In millions) | ||||||||||||
Operating revenues | $ | 479.6 | $ | 330.4 | $ | 1,365.4 | $ | 988.0 | ||||
Cost of sales: | ||||||||||||
Operation and maintenance | 409.0 | 289.3 | 1,151.7 | 838.0 | ||||||||
Depreciation, depletion and amortization | 3.7 | 3.5 | 11.1 | 10.7 | ||||||||
Taxes, other than income | 14.1 | 9.7 | 44.6 | 32.0 | ||||||||
Total cost of sales | 426.8 | 302.5 | 1,207.4 | 880.7 | ||||||||
Gross margin | 52.8 | 27.9 | 158.0 | 107.3 | ||||||||
Selling, general and administrative expense: | ||||||||||||
Operation and maintenance | 21.4 | 14.6 | 63.9 | 51.0 | ||||||||
Depreciation, depletion and amortization | .5 | .4 | 1.3 | 1.1 | ||||||||
Taxes, other than income | .9 | 1.0 | 3.4 | 3.3 | ||||||||
Total selling, general and administrative expense | 22.8 | 16.0 | 68.6 | 55.4 | ||||||||
Operating income | 30.0 | 11.9 | 89.4 | 51.9 | ||||||||
Other income | .3 | .5 | 1.4 | 1.1 | ||||||||
Interest expense | 1.6 | .9 | 4.0 | 2.7 | ||||||||
Income before income taxes | 28.7 | 11.5 | 86.8 | 50.3 | ||||||||
Income taxes | 7.6 | 2.2 | 22.8 | 11.8 | ||||||||
Net income | $ | 21.1 | $ | 9.3 | $ | 64.0 | $ | 38.5 | ||||
Three Months Ended September 30, 2019, Compared to Three Months Ended September 30, 2018 Construction services earnings increased $11.8 million (128 percent) as a result of:
Revenues: Increase of $149.2 million, largely the result of higher inside specialty contracting workloads from greater customer demand for hospitality and high-tech projects. Also contributing to the increase was higher outside specialty contracting workloads, primarily the result of increased demand for utility projects. Revenue was also positively impacted by the absence of $9.5 million in changes to estimates recorded in the third quarter of 2018 for variable consideration previously recognized on certain construction contracts.
Gross margin: Increase of $24.9 million, primarily due to the higher volume of work resulting in an increase in revenues, as previously discussed, partially offset by an increase in operation and maintenance expense as a direct result of the expenses related to the increased workloads.
48
Selling, general and administrative expense: Increase of $6.8 million, primarily payroll-related costs, as well as increased professional services and office expenses.
Other income: Comparable to the same period in prior year.
Interest expense: Increase of $700,000, primarily due to higher debt balances as a result of additional working capital needs during the construction season.
Income taxes: Increase of $5.4 million, largely due to an increase in income before income taxes.
Nine Months Ended September 30, 2019, Compared to Nine Months Ended September 30, 2018 Construction services earnings increased $25.5 million (66 percent) as a result of:
Revenues: Increase of $377.4 million, largely the result of higher inside specialty contracting workloads from greater customer demand for hospitality and high-tech projects. Also contributing to the increase was higher outside specialty contracting workloads, primarily the result of increased demand for utility projects. Revenue was also positively impacted by the absence of $9.5 million in changes to estimates recorded in the third quarter of 2018 for variable consideration previously recognized on certain construction contracts.
Gross margin: Increase of $50.7 million, primarily due to the higher volume of work resulting in an increase in revenues, as previously discussed, partially offset by an increase in operation and maintenance expense as a direct result of the expenses related to the increased workloads.
Selling, general and administrative expense: Increase of $13.2 million, primarily payroll-related costs, as well as increased office expenses and professional services.
Other income: Comparable to the same period in prior year.
Interest expense: Increase of $1.3 million, primarily due to higher debt balances as a result of additional working capital needs during the construction season.
Income taxes: Increase of $11.0 million, largely due to an increase in income before income taxes.
Outlook The Company expects bidding activity to remain strong for both inside and outside specialty construction companies in 2019. Although bidding remains highly competitive in all areas, the Company expects the segment's skilled workforce will continue to provide a benefit in securing and executing profitable projects. The construction services segment had backlog at September 30, 2019, of $1.2 billion, up from $896.3 million at September 30, 2018. The increase in backlog was largely attributable to the new project opportunities that the Company continues to see across its diverse operations, particularly in inside specialty electrical and mechanical contracting for the hospitality and gaming, high-tech, mission critical and public entities. The Company's outside power, communications and natural gas specialty operations also have a high volume of available work. The Company expects to complete a significant amount of backlog at September 30, 2019, during the next 12 months. Additionally, the Company continues to further evaluate potential acquisition opportunities that would be accretive to the Company and continue to grow the Company's backlog.
In the third quarter of 2019, the Company purchased the assets of Pride Electric, Inc., an electrical construction company in Redmond, Washington. For more information on the Company's business combinations, see Note 9.
During the second quarter of 2019, the governor of Oregon signed House Bill 3427, which creates a Corporate Activity Tax. The tax was enacted in the third quarter of 2019 and is effective for the Company on January 1, 2020. The Company does not expect the additional taxation will have a material impact on the construction services segment due to their operations in Oregon.
49
Other
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
(In millions) | ||||||||||||
Operating revenues | $ | 2.9 | $ | 3.1 | $ | 13.6 | $ | 8.5 | ||||
Operating expenses: | ||||||||||||
Operation and maintenance | 3.6 | 2.6 | 11.8 | 6.5 | ||||||||
Depreciation, depletion and amortization | .5 | .5 | 1.5 | 1.5 | ||||||||
Taxes, other than income | — | — | .1 | .1 | ||||||||
Total operating expenses | 4.1 | 3.1 | 13.4 | 8.1 | ||||||||
Operating income (loss) | (1.2 | ) | — | .2 | .4 | |||||||
Other income | .2 | .4 | .7 | .6 | ||||||||
Interest expense | .4 | .5 | 1.5 | 2.2 | ||||||||
Loss before income taxes | (1.4 | ) | (.1 | ) | (.6 | ) | (1.2 | ) | ||||
Income taxes | (5.4 | ) | (4.9 | ) | (4.1 | ) | (3.1 | ) | ||||
Net income | $ | 4.0 | $ | 4.8 | $ | 3.5 | $ | 1.9 | ||||
Three Months Ended September 30, 2019, Compared to Three Months Ended September 30, 2018 Included in Other are general and administrative costs and interest expense previously allocated to the exploration and production and refining businesses that do not meet the criteria for income (loss) from discontinued operations. Favorable income tax adjustments related to the consolidated Company's annualized estimated tax rate positively impacted the results of Other.
Nine Months Ended September 30, 2019, Compared to Nine Months Ended September 30, 2018 Included in Other was insurance activity at the Company's captive insurer which impacted both operating revenues and operation and maintenance expense. General and administrative costs and interest expense previously allocated to the exploration and production and refining businesses that do not meet the criteria for income (loss) from discontinued operations are also included in Other. Favorable income tax adjustments related to the consolidated Company's annualized estimated tax rate for 2019 positively impacted the results of Other.
Intersegment Transactions
Amounts presented in the preceding tables will not agree with the Consolidated Statements of Income due to the Company's elimination of intersegment transactions. The amounts related to these items were as follows:
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
(In millions) | ||||||||||||
Intersegment transactions: | ||||||||||||
Operating revenues | $ | 8.0 | $ | 7.2 | $ | 51.3 | $ | 41.7 | ||||
Operation and maintenance | 4.3 | 4.1 | 16.2 | 10.4 | ||||||||
Purchased natural gas sold | 3.7 | 3.1 | 35.1 | 31.3 | ||||||||
For more information on intersegment eliminations, see Note 17.
Liquidity and Capital Commitments
At September 30, 2019, the Company had cash and cash equivalents of $67.0 million and available borrowing capacity of $543.6 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 of the Company's subsidiaries, as described in Capital resources; the issuance of long-term debt; and the issuance of equity securities.
Cash flows
Operating activities The changes in cash flows from operating activities generally follow the results of operations as discussed in Business Segment Financial and Operating Data and also are affected by changes in working capital. Cash flows provided by operating activities in the first nine months of 2019 decreased $114.3 million from the comparable period in 2018. The decrease in cash flows provided by operating activities was largely driven by an increase in accounts receivable as a result of higher revenues at the construction businesses as compared to the prior period. Also contributing to the decrease in cash flows provided by operating activities was the increase in natural gas purchases that include the effects of colder weather, higher gas costs and the timing of collection of such balances from customers at the natural gas distribution business. Partially offsetting
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these decreases to cash flows provided by operating activities were lower inventory balances due to the higher workloads at the construction materials and contracting business in 2019 as compared to the increase in inventory balances in 2018 due to the activity of the acquired businesses.
Investing activities Cash flows used in investing activities in the first nine months of 2019 was $448.6 million compared to $361.3 million in the first nine months of 2018. The increase in cash used in investing activities was primarily related to acquisition activity and asset purchases offset in part by proceeds on asset sales at the construction businesses.
Financing activities Cash flows provided by financing activities in the first nine months of 2019 was $258.6 million compared to $76.4 million in the first nine months of 2018. The change was largely the result of proceeds from issuance of common stock and higher debt borrowings in 2019 offset in part by the repayment of debt. The Company issued common stock for net proceeds of $105.6 million under its "at-the-market" offering and 401(k) plan during the first nine months of 2019 and increased long-term and short-term debt financing at the construction businesses for financing of acquisitions and working capital needs. The increase was also due to increased borrowings at the natural gas distribution business, largely resulting from short-term borrowings for higher natural gas costs, as previously discussed, and long-term borrowings for funding capital investments.
Defined benefit pension plans
There were no material changes to the Company's qualified noncontributory defined benefit pension plans from those reported in the 2018 Annual Report other than an increase of approximately $2.5 million for the year in pension expense in 2019, largely resulting from a revised assumption for the expected long-term rate of return on assets used to calculate the expense and an actual decline in asset values. For more information, see Note 18 and Part II, Item 7 in the 2018 Annual Report.
Capital expenditures
Capital expenditures for the first nine months of 2019 were $469.2 million, which includes the completed aggregate deposit purchase at the construction materials and contracting business and the completed business combinations at the construction materials and contracting and construction services businesses. Capital expenditures in the first nine months of 2018 were $398.3 million, which includes completed acquisitions at the construction materials and contracting business. Capital expenditures allocated to the Company's business segments are estimated to be approximately $645 million for 2019. The Company has included in the estimated capital expenditures for 2019 the completed purchase of additional aggregate deposits, the completed business combinations of a ready-mixed concrete supplier and an electrical company, the Demicks Lake project, the Line Section 22 Expansion project and the Demicks Lake Expansion project, as previously discussed in Business Segment Financial and Operating Data.
Estimated capital expenditures for 2019 also include system upgrades; service extensions; routine equipment maintenance and replacements; buildings, land and building improvements; pipeline projects; power generation and transmission opportunities, including certain costs for additional electric generating capacity; environmental upgrades; and other growth opportunities.
The Company continues to evaluate potential future acquisitions and other growth opportunities; however, they are dependent upon the availability of economic opportunities and, as a result, capital expenditures may vary significantly from the estimate previously discussed. It is anticipated that all of the funds required for capital expenditures for 2019 will be met from various sources, including internally generated funds; credit facilities of the Company's subsidiaries, as described later; issuance of long-term debt; and issuance of equity securities.
Capital resources
Certain debt instruments of the Company's subsidiaries contain restrictive and financial covenants and cross-default provisions. In order to borrow under the respective debt instruments, the subsidiary companies must be in compliance with the applicable covenants and certain other conditions, all of which the subsidiaries, as applicable, were in compliance with at September 30, 2019. 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 2018 Annual Report.
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The following table summarizes the outstanding revolving credit facilities of the Company's subsidiaries at September 30, 2019:
Company | Facility | Facility Limit | Amount Outstanding | Letters of Credit | Expiration Date | |||||||||||
(In millions) | ||||||||||||||||
Montana-Dakota Utilities Co. | Commercial paper/Revolving credit agreement | (a) | $ | 175.0 | $ | 78.2 | (b) | $ | — | 6/8/23 | ||||||
Cascade Natural Gas Corporation | Revolving credit agreement | $ | 100.0 | (c) | $ | 8.9 | $ | 2.2 | (d) | 6/7/24 | ||||||
Intermountain Gas Company | Revolving credit agreement | $ | 85.0 | (e) | $ | 22.1 | $ | 1.4 | (d) | 6/7/24 | ||||||
Centennial Energy Holdings, Inc. | Commercial paper/Revolving credit agreement | (f) | $ | 500.0 | $ | 203.6 | (b) | $ | — | 9/23/21 | ||||||
(a) | The commercial paper program is supported by a revolving credit agreement with various banks (provisions allow for increased borrowings, at the option of Montana-Dakota on stated conditions, up to a maximum of $225.0 million). There were no amounts outstanding under the credit agreement. |
(b) | Amount outstanding under commercial paper program. |
(c) | Certain provisions allow for increased borrowings, up to a maximum of $125.0 million. |
(d) | Outstanding letter(s) of credit reduce the amount available under the credit agreement. |
(e) | Certain provisions allow for increased borrowings, up to a maximum of $110.0 million. |
(f) | The commercial paper program is supported by a revolving credit agreement with various banks (provisions allow for increased borrowings, at the option of Centennial on stated conditions, up to a maximum of $600.0 million). There were no amounts outstanding under the credit agreement. |
The respective commercial paper programs are supported by revolving credit agreements. While the amount of commercial paper outstanding does not reduce available capacity under the respective revolving credit agreements, the subsidiary companies do not issue commercial paper in an aggregate amount exceeding the available capacity under their credit agreements. The commercial paper borrowings may vary during the period, largely the result of fluctuations in working capital requirements due to the seasonality of the construction businesses.
Total equity as a percent of total capitalization was 54 percent, 57 percent and 55 percent at September 30, 2019 and 2018, and December 31, 2018, respectively. This ratio is calculated as the Company's total equity, divided by the Company's total capital. Total capital is the Company's total debt, including short-term borrowings and long-term debt due within one year, plus total equity. This ratio is an indicator of how a company is financing its operations, as well as its financial strength.
The Company currently has a shelf registration statement on file with the SEC, under which the Company may issue and sell any combination of common stock and debt securities. The Company may sell all or a portion of such securities if warranted by market conditions and the Company's capital requirements. Any public offer and sale of such securities will be made only by means of a prospectus meeting the requirements of the Securities Act and the rules and regulations thereunder. The Company's board of directors currently has authorized the issuance and sale of up to an aggregate of $1.0 billion worth of such securities. The Company's board of directors reviews this authorization on a periodic basis and the aggregate amount of securities authorized may be increased in the future.
On February 22, 2019, the Company entered into a Distribution Agreement with J.P. Morgan Securities LLC and MUFG Securities Americas Inc., as sales agents, with respect to the issuance and sale of up to 10.0 million shares of the Company's common stock in connection with an “at-the-market” offering. The common stock may be offered for sale, from time to time, in accordance with the terms and conditions of the agreement. Proceeds from the sale of shares of common stock under the agreement have been and are expected to be used for general corporate purposes, which may include, among other things, working capital, capital expenditures, debt repayment and the financing of acquisitions.
The Company issued 1.3 million and 3.6 million shares of common stock for the three and nine months ended September 30, 2019, respectively, pursuant to the “at-the-market” offering. The Company received net proceeds of $34.6 million and $94.0 million for the three and nine months ended September 30, 2019, respectively. The Company paid commissions to the sales agents of approximately $350,000 and $950,000 for the three and nine months ended September 30, 2019, respectively, in connection with the sales of common stock under the "at-the-market" offering. The net proceeds were used for capital expenditures and acquisitions. As of September 30, 2019, the Company had remaining capacity to issue up to 6.4 million additional shares of common stock under the "at-the-market" offering program.
Certain of the Company's debt instruments use LIBOR as a benchmark for establishing the applicable interest rate. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The Company has been proactive to anticipate the reform of LIBOR by replacing it with Secured Overnight Financing Rate in certain of their new debt instruments, as well as those that are being renewed. The Company continues to evaluate the impact the reform will have on its debt instruments and, at this time, does not anticipate a significant impact.
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Cascade Natural Gas Corporation On June 7, 2019, Cascade amended its revolving credit agreement to increase the borrowing limit from $75.0 million to $100.0 million and extend the maturity date from April 24, 2020 to June 7, 2024. The credit agreement contains customary covenants and provisions, including a covenant of Cascade not to permit, at any time, the ratio of total debt to total capitalization to be greater than 65 percent.
On June 13, 2019, Cascade issued $75.0 million of senior notes under a note purchase agreement with maturity dates ranging from June 13, 2029 to June 13, 2049, at a weighted average interest rate of 3.93 percent. The agreement contains customary covenants and provisions, including a covenant of Cascade not to permit, at any time, the ratio of total debt to total capitalization to be greater than 65 percent.
Cascade's credit agreements also contain cross-default provisions. These provisions state that if Cascade fails to make any payment with respect to any indebtedness or contingent obligation, in excess of a specified amount, under any agreement that causes such indebtedness to be due prior to its stated maturity or the contingent obligation to become payable, Cascade will be in default under the revolving credit agreement.
Intermountain Gas Company On June 7, 2019, Intermountain amended its revolving credit agreement to extend the termination date from April 24, 2020 to June 7, 2024. The agreement contains customary covenants and provisions, including a covenant of Intermountain not to permit, at any time, the ratio of total debt to total capitalization to be greater than 65 percent.
On June 13, 2019, Intermountain issued $50.0 million of senior notes under a note purchase agreement with maturity dates ranging from June 13, 2029 to June 13, 2049, at a weighted average interest rate of 3.92 percent. The agreement contains customary covenants and provisions, including a covenant of Intermountain not to permit, at any time, the ratio of total debt to total capitalization to be greater than 65 percent.
Intermountain's credit agreements also contain cross-default provisions. These provisions state that if Intermountain fails to make any payment with respect to any indebtedness or contingent obligation, in excess of a specified amount, under any agreement that causes such indebtedness to be due prior to its stated maturity or the contingent obligation to become payable, or certain conditions result in an early termination date under any swap contract that is in excess of a specified amount, then Intermountain will be in default under the revolving credit agreement.
Centennial Energy Holdings, Inc. On April 4, 2019, Centennial issued $150.0 million of senior notes under a note purchase agreement with maturity dates ranging from April 4, 2029 to April 4, 2034, at a weighted average interest rate of 4.60 percent. The agreement contains customary covenants and provisions, including a covenant of Centennial not to permit, at any time, the ratio of total debt to total capitalization to be greater than 60 percent.
On April 12, 2019, Centennial entered into a $50.0 million term loan agreement with a variable interest rate which matures on April 11, 2020. The agreement contains customary covenants and provisions, including a covenant of Centennial not to permit, at any time, the ratio of funded debt to capitalization to be greater than 65 percent. The covenants also include certain limitations on subsidiary indebtedness, restrictions on the sale of certain assets, loans and investments.
On August 7, 2019, Centennial entered into a $50.0 million term loan agreement with a variable interest rate which matures on January 31, 2020. The agreement contains customary covenants and provisions, including a covenant of Centennial not to permit, at any time, the ratio of funded debt to capitalization to be greater than 65 percent. The covenants also include limitations on subsidiary indebtedness, restrictions on the sale of certain assets, loans and investments.
WBI Energy Transmission, Inc. On July 26, 2019, WBI Energy Transmission amended its uncommitted note purchase and private shelf agreement to extend the issuance period to May 16, 2022, and increase the aggregate issuance capacity from $200.0 million to $300.0 million. On July 3, 2019, WBI Energy Transmission contracted to issue an additional $45.0 million under the uncommitted private shelf agreement at an interest rate of 4.17 percent on December 16, 2019. The remaining capacity under this uncommitted private shelf agreement is $115.0 million.
Montana-Dakota Utilities Co. On July 24, 2019, Montana-Dakota entered into a $200.0 million note purchase agreement with maturity dates ranging from October 17, 2039 to November 18, 2059, at a weighted average interest rate of 3.95 percent. On October 17, 2019, Montana-Dakota issued $100.0 million in senior notes under the note purchase agreement with the remaining $100.0 million scheduled to be issued on November 18, 2019. The agreement contains customary covenants and provisions, including a covenant of Montana-Dakota not to permit, at any time, the ratio of total debt to total capitalization to be greater than 65 percent.
Off balance sheet arrangements
As of September 30, 2019, the Company had no material off balance sheet arrangements as defined by the rules of the SEC.
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Contractual obligations and commercial commitments
There were no material changes in the Company's contractual obligations from continuing operations relating to operating leases, purchase commitments, asset retirement obligations, uncertain tax positions and minimum funding requirements for its defined benefit plans for 2019 from those reported in the 2018 Annual Report.
At September 30, 2019, the Company's commitments for long-term debt and estimated interest payments presented on a calendar-year basis were as follows:
Remainder of 2019 | 1 - 3 years | 3 - 5 years | More than 5 years | Total | |||||||||||
(In millions) | |||||||||||||||
Long-term debt maturities* | $ | 50.1 | $ | 367.8 | $ | 247.3 | $ | 1,587.8 | $ | 2,253.0 | |||||
Estimated interest payments** | 24.9 | 249.4 | 140.5 | 525.9 | 940.7 | ||||||||||
$ | 75.0 | $ | 617.2 | $ | 387.8 | $ | 2,113.7 | $ | 3,193.7 | ||||||
* | Unamortized debt issuance costs and discount are excluded from the table. |
** | Represents the estimated interest payments associated with the Company's long-term debt outstanding at September 30, 2019, assuming current interest rates and consistent amounts outstanding until their respective maturity dates over the periods indicated in the table above. |
For more information on contractual obligations and commercial commitments, see Part II, Item 7 in the 2018 Annual Report.
New Accounting Standards
For information regarding new accounting standards, see Note 6, which is incorporated by reference.
Critical Accounting Policies Involving Significant Estimates
The Company's critical accounting policies involving significant estimates include impairment testing of long-lived assets and goodwill; fair values of acquired assets and liabilities under the acquisition method of accounting; tax provisions; revenue recognized using the cost-to-cost measure of progress for contracts; and actuarially determined benefit costs. There were no material changes in the Company's critical accounting policies involving significant estimates from those reported in the 2018 Annual Report. For more information on critical accounting policies involving significant estimates, see Part II, Item 7 in the 2018 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.
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The following information reconciles operating income to adjusted gross margin for the electric segment.
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
(In millions) | ||||||||||||
Operating income | $ | 21.9 | $ | 21.1 | $ | 49.7 | $ | 52.3 | ||||
Adjustments: | ||||||||||||
Operating expenses: | ||||||||||||
Operation and maintenance | 30.8 | 30.1 | 94.6 | 91.3 | ||||||||
Depreciation, depletion and amortization | 14.2 | 12.6 | 41.8 | 37.7 | ||||||||
Taxes, other than income | 4.1 | 3.7 | 12.5 | 11.2 | ||||||||
Total adjustments | 49.1 | 46.4 | 148.9 | 140.2 | ||||||||
Adjusted gross margin | $ | 71.0 | $ | 67.5 | $ | 198.6 | $ | 192.5 | ||||
The following information reconciles operating income (loss) to adjusted gross margin for the natural gas distribution segment.
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
(In millions) | ||||||||||||
Operating income (loss) | $ | (15.6 | ) | $ | (11.7 | ) | $ | 32.1 | $ | 32.5 | ||
Adjustments: | ||||||||||||
Operating expenses: | ||||||||||||
Operation and maintenance | 44.4 | 42.1 | 134.3 | 129.4 | ||||||||
Depreciation, depletion and amortization | 19.9 | 18.1 | 59.1 | 53.5 | ||||||||
Taxes, other than income | 6.1 | 5.4 | 17.9 | 16.5 | ||||||||
Total adjustments | 70.4 | 65.6 | 211.3 | 199.4 | ||||||||
Adjusted gross margin | $ | 54.8 | $ | 53.9 | $ | 243.4 | $ | 231.9 | ||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the impact of market fluctuations associated with interest rates. The Company has policies and procedures to assist in controlling these market risks and from time to time has utilized derivatives to manage a portion of its risk.
Interest rate risk
There were no material changes to interest rate risk faced by the Company from those reported in the 2018 Annual Report.
At September 30, 2019, the Company had no outstanding interest rate hedges.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. The Company's disclosure controls and other procedures are designed to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The Company's disclosure controls and procedures include controls and procedures designed to provide reasonable assurance that information required to be disclosed is accumulated and communicated to management, including the Company's chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. The Company's management, with the participation of the Company's chief executive officer and chief financial officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the chief executive officer and the chief financial officer have concluded that, as of the end of the period covered by this report, such controls and procedures were effective at a reasonable assurance level.
Changes in internal controls
No change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended September 30, 2019, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
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Part II -- Other Information
Item 1. Legal Proceedings
For information regarding legal proceedings required by this item, see Note 20, which is incorporated herein by reference.
Item 1A. Risk Factors
Please refer to the Company's risk factors that are disclosed in Part I, Item 1A - Risk Factors in the 2018 Annual Report that could be materially harmful to the Company's business, prospects, financial condition or financial results if they occur. There were no material changes to the Company's risk factors provided in Part I, Item 1A - Risk Factors in the 2018 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 | (a) Total Number of Shares (or Units) Purchased (1) | (b) Average Price Paid per Share (or Unit) | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (2) | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (2) | ||||
July 1 through July 31, 2019 | — | — | — | — | ||||
August 1 through August 31, 2019 | — | — | — | — | ||||
September 1 through September 30, 2019 | — | — | — | — | ||||
Total | — | — | — | |||||
(1) | Represents shares of common stock withheld by the Company to pay taxes in connection with the vesting of shares granted pursuant to the Long-Term Performance-Based Incentive Plan. |
(2) | Not applicable. The Company does not currently have in place any publicly announced plans or programs to purchase equity securities. |
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.
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Exhibits Index | |||||||
Incorporated by Reference | |||||||
Exhibit Number | Exhibit Description | Filed Herewith | Form | Period Ended | Exhibit | Filing Date | File Number |
2(a) | 8-K | 2(a) | 1/2/19 | 1-03480 | |||
3(a) | 8-K | 3(a) | 1/2/19 | 1-03480 | |||
3(b) | 8-K | 3.2 | 5/8/19 | 1-03480 | |||
3(c) | 8-K | 3.1 | 2/15/19 | 1-03480 | |||
*4(a) | X | ||||||
+10(a) | X | ||||||
31(a) | X | ||||||
31(b) | X | ||||||
32 | X | ||||||
95 | X | ||||||
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | ||||||
101.SCH | XBRL Taxonomy Extension Schema Document | ||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||||||
* | Schedules and exhibits to this agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished as a supplement to the SEC upon request. |
+ | Management contract, compensatory plan or arrangement. |
MDU Resources Group, Inc. agrees to furnish to the SEC upon request any instrument with respect to long-term debt that MDU Resources Group, Inc. has not filed as an exhibit pursuant to the exemption provided by Item 601(b)(4)(iii)(A) of Regulation S-K.
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Signatures
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MDU RESOURCES GROUP, INC. | |||
DATE: | November 1, 2019 | BY: | /s/ Jason L. Vollmer |
Jason L. Vollmer | |||
Vice President, Chief Financial Officer and Treasurer | |||
BY: | /s/ Stephanie A. Barth | ||
Stephanie A. Barth | |||
Vice President, Chief Accounting Officer and Controller | |||
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