Document/ExhibitDescriptionPagesSize 1: 10-Q Mdu Resources Form 10-Q 09-30-2022 HTML 3.59M
6: EX-10.A Mdu Resources 401 K Retirement Plan Amendment HTML 25K
8-17-2022
5: EX-95 Mdu Resources Mine Safety Disclosures HTML 117K
2: EX-31.A Mdu Resources Certification of Chief Executive HTML 27K
Officer
3: EX-31.B Mdu Resources Certification of Chief Financial HTML 27K
Officer
4: EX-32 Mdu Resources Certification of CEO and CFO HTML 24K
12: R1 Cover page HTML 78K
13: R2 Consolidated Statements of Income HTML 132K
14: R3 Consolidated Statements of Comprehensive Income HTML 82K
15: R4 Consolidated Balance Sheets HTML 177K
16: R5 Consolidated Statements of Equity HTML 113K
17: R6 Consolidated Statements of Cash Flows HTML 131K
18: R7 Basis of presentation HTML 29K
19: R8 New accounting standards HTML 40K
20: R9 Seasonality of operations HTML 26K
21: R10 Receivables and allowance for expected credit HTML 106K
losses
22: R11 Inventories and natural gas in storage HTML 38K
23: R12 Earnings per share HTML 39K
24: R13 Equity HTML 40K
25: R14 Accumulated other comprehensive loss HTML 110K
26: R15 Revenue from contracts with customers HTML 235K
27: R16 Business Combinations HTML 30K
28: R17 Leases HTML 26K
29: R18 Goodwill and other intangible assets HTML 81K
30: R19 Regulatory assets and liabilities HTML 90K
31: R20 Fair value measurements HTML 113K
32: R21 Debt HTML 60K
33: R22 Cash flow information HTML 39K
34: R23 Business segment data HTML 121K
35: R24 Employee benefit plans HTML 62K
36: R25 Regulatory matters HTML 33K
37: R26 Contingencies HTML 36K
38: R27 Basis of presentation (Policies) HTML 26K
39: R28 New accounting standards (Policies) HTML 30K
40: R29 Receivables and allowance for expected credit HTML 33K
losses (Policies)
41: R30 Inventories and natural gas in storage (Policies) HTML 27K
42: R31 Earnings per share (Policies) HTML 26K
43: R32 Revenue from contracts with customers (Policies) HTML 26K
44: R33 Business Combinations (Policies) HTML 26K
45: R34 Fair value disclosures (Policies) HTML 28K
46: R35 Business segment data (Policies) HTML 27K
47: R36 Contingencies (Policies) HTML 30K
48: R37 Receivables and allowance for expected credit HTML 102K
losses (Tables)
49: R38 Inventories and natural gas in storage (Tables) HTML 38K
50: R39 Earnings per share (Tables) HTML 38K
51: R40 Equity (Tables) HTML 38K
52: R41 Accumulated other comprehensive loss (Tables) HTML 112K
53: R42 Revenue from contracts with customers (Tables) HTML 228K
54: R43 Goodwill and other intangible assets (Tables) HTML 88K
55: R44 Regulatory assets and liabilities (Tables) HTML 147K
56: R45 Fair value measurements (Tables) HTML 111K
57: R46 Debt (Tables) HTML 58K
58: R47 Cash flow information (Tables) HTML 39K
59: R48 Business segment data (Tables) HTML 113K
60: R49 Employee benefit plans (Tables) HTML 56K
61: R50 Receivables and allowance for expected credit HTML 25K
losses (Details)
62: R51 Receivables and allowance for expected credit HTML 63K
losses (Details 2)
63: R52 Inventories and natural gas in storage (Details) HTML 41K
64: R53 Earnings per share (Details) HTML 35K
65: R54 Equity (Details) HTML 38K
66: R55 Accumulated other comprehensive loss (Details) HTML 68K
67: R56 Reclassification out of accumulated other HTML 63K
comprehensive loss (Details 2)
68: R57 Disaggregation of revenue (Details) HTML 131K
69: R58 Contract balances (Details 2) HTML 46K
70: R59 Revenue from contracts with customers Remaining HTML 36K
performance obligations (Details 3)
71: R60 Business Combinations (Details) HTML 57K
72: R61 Lessor accounting (Details) HTML 28K
73: R62 Goodwill rollforward (Details) HTML 42K
74: R63 Other intangible assets (Details 2) HTML 44K
75: R64 Future amortization expense (Details 3) HTML 36K
76: R65 Regulatory assets (Details) HTML 85K
77: R66 Regulatory liabilities (Details 2) HTML 64K
78: R67 Fair value measurements Insurance contracts HTML 28K
(Details)
79: R68 Available-for-sale securities (Details 2) HTML 40K
80: R69 Fair value measurements (Details 3) HTML 57K
81: R70 Fair value measurements (Details 4) HTML 34K
82: R71 Short-term Debt (Details 1) HTML 32K
83: R72 Long-term debt outstanding (Details 2) HTML 55K
84: R73 Schedule of debt maturities (Details 3) HTML 40K
85: R74 Cash flow information (Details) HTML 38K
86: R75 Business segment data (Details) HTML 130K
87: R76 Employee benefit plans (Details) HTML 61K
88: R77 Mnpuc (Details) HTML 40K
89: R78 Ndpsc (Details 2) HTML 45K
90: R79 Wutc (Details 3) HTML 45K
91: R80 Ferc (Details 4) HTML 29K
92: R81 Litigation (Details) HTML 29K
93: R82 Guarantees (Details 2) HTML 50K
94: R83 Variable interest entities (Details 3) HTML 27K
97: XML IDEA XML File -- Filing Summary XML 174K
95: XML XBRL Instance -- mdu-20220930_htm XML 4.64M
96: EXCEL IDEA Workbook of Financial Reports XLSX 188K
8: EX-101.CAL XBRL Calculations -- mdu-20220930_cal XML 195K
9: EX-101.DEF XBRL Definitions -- mdu-20220930_def XML 875K
10: EX-101.LAB XBRL Labels -- mdu-20220930_lab XML 1.78M
11: EX-101.PRE XBRL Presentations -- mdu-20220930_pre XML 1.08M
7: EX-101.SCH XBRL Schema -- mdu-20220930 XSD 172K
98: JSON XBRL Instance as JSON Data -- MetaLinks 494± 697K
99: ZIP XBRL Zipped Folder -- 0000067716-22-000062-xbrl Zip 591K
(Exact name of registrant as specified in its charter)
iDelaware
i30-1133956
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i1200 West Century Avenue
iP.O.
Box 5650
iBismarck, iNorth Dakotai58506-5650
(Address of principal executive offices)
(Zip Code)
(i701) i530-1000
(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
iCommon Stock, par value $1.00 per share
iMDU
iNew
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. iYes☒ 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). iYes☒ 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.
iLarge
Accelerated Filer
☒
Accelerated Filer
☐
Non-Accelerated Filer
☐
Smaller Reporting Company
i☐
Emerging
Growth Company
i☐
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 i☐ No ☒.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of October 27, 2022: i203,350,740
shares.
The
following abbreviations and acronyms used in this Form 10-Q are defined below:
Abbreviation or Acronym
2021 Annual Report
Company's Annual Report on Form 10-K for the year ended December 31, 2021
AFUDC
Allowance for funds used during construction
ASC
FASB Accounting Standards
Codification
ASU
FASB Accounting Standards Update
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
Coincident Load Factor
The discount from peak requirements when the Company's peak is at a time different from the MISO system peak for the winter season.
Company
MDU Resources Group, Inc.
COVID-19
Coronavirus disease 2019. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic and the President of the United States declared the COVID-19 outbreak a national emergency.
Coyote Creek
Coyote
Creek Mining Company, LLC, a subsidiary of The North American Coal Corporation
Coyote Station
427-MW coal-fired electric generating facility near Beulah, North Dakota (25 percent ownership)
Diamond Willow
Diamond Willow Wind Farm located in Montana
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
Federal Reserve
Federal Reserve System, the central banking system of the United States.
Fidelity
Fidelity Exploration & Production Company, a
direct wholly owned subsidiary of WBI Holdings (previously referred to as the Company's exploration and production segment)
GAAP
Accounting principles generally accepted in the United States of America
GHG
Greenhouse gas
Great Plains
Great Plains Natural Gas Co., a public utility division of Montana-Dakota
Intermountain
Intermountain Gas Company, an
indirect wholly owned subsidiary of MDU Energy Capital
IRA
Inflation Reduction Act of 2022
IRS
Internal Revenue Service
Knife River
Knife River Corporation, a direct wholly owned subsidiary of Centennial
kWh
Kilowatt-hour
kV
Kilovolt
LIBOR
London
Inter-bank Offered Rate
MDU Construction Services
MDU Construction Services Group, Inc., a direct wholly owned subsidiary of Centennial
MDU Energy Capital
MDU Energy Capital, LLC, a direct wholly owned subsidiary of the Company
MISO
Midcontinent Independent System Operator, Inc., the organization that provides open-access transmission services and monitors the high-voltage transmission system in the Midwest United States and Manitoba, Canada and a southern United States region
which includes much of Arkansas, Mississippi, and Louisiana.
Montana-Dakota
Utilities Co., a direct wholly owned subsidiary of MDU Energy Capital
MW
Megawatt
NDDEQ
North Dakota Department of Environmental Quality
NDPSC
North Dakota Public Service Commission
NERC
North American Electric Reliability Corporation
Oil
Includes crude oil and condensate
PHMSA
Pipeline
and Hazardous Materials Safety Administration
Regional Haze Rule
The EPA developed the Regional Haze Rule requiring states to develop and implement comprehensive plans to reduce human-caused regional haze in designated areas such as national parks and wilderness areas.
SDPUC
South Dakota Public Utilities Commission
SEC
United States Securities and Exchange Commission
SOFR
Secured Overnight Financing Rate
VIE
Variable
interest entity
Washington DOE
Washington State Department of Ecology
WBI Energy
WBI Energy, Inc., an indirect wholly owned subsidiary of WBI Holdings
WBI Holdings
WBI Holdings, Inc., a direct wholly owned subsidiary of Centennial
WUTC
Washington Utilities and Transportation Commission
The
Company's mission is to deliver superior value to stakeholders by providing essential infrastructure and services to America. The Company generates, transmits and distributes electricity and provides natural gas distribution, transportation and storage services that are regulated by state public service commissions and/or the FERC. The Company also provides construction services to a variety of industries, including commercial, industrial and utility customers, and provides construction materials through aggregate mining and marketing of related products, such as ready-mix concrete, asphalt and asphalt oil.
Montana-Dakota was incorporated under the state laws of Delaware in 1924. The
Company was incorporated under the state laws of Delaware in 2018 upon the completion of an internal holding company reorganization, which resulted in Montana-Dakota becoming a subsidiary of the Company. Its principal executive offices are located at 1200 West Century Avenue, P.O. Box 5650, Bismarck, North Dakota58506-5650, telephone (701) 530-1000.
On August 4, 2022, the
Company announced its Board of Directors unanimously approved a plan to pursue the separation of Knife River from the Company. The separation is planned as a tax-free spinoff transaction to the Company’s stockholders for U.S. federal income tax purposes. The separation is expected to result in two independent, publicly traded companies: (1) MDU Resources Group, Inc., the existing company and (2) Knife River, a construction materials and contracting company.
As the next step of the Company’s strategic planning, the Board of Directors has unanimously determined the best way to optimize value would be to create two pure-play companies: a leading construction materials company and
a regulated energy delivery company. Accordingly, the board has authorized management to commence a strategic review process for MDU Construction Services with the objective of achieving the board’s goal of creating two pure-play public companies. For more information on the Company's risks associated with the anticipated separation or the proposed future structure of the companies, see Item 1A. Risk Factors.
The Company is organized into five reportable business segments. These business segments include: electric, natural gas distribution, pipeline, construction materials and contracting, and construction services. The Company's business segments are determined based on the
Company's method of internal reporting, which generally segregates the strategic business units due to differences in products, services and regulation. The internal reporting of these segments is defined based on the reporting and review process used by the Company's chief executive officer.
The Company, through its wholly owned subsidiary, MDU Energy Capital, owns Montana-Dakota, Cascade and Intermountain. The electric segment is comprised of Montana-Dakota while the natural gas distribution segment is comprised of Montana-Dakota, Cascade and Intermountain.
The Company, through its wholly owned subsidiary, Centennial, owns WBI Energy,
Knife River, MDU Construction Services and Centennial Capital. WBI Energy is the pipeline segment, Knife River is the construction materials and contracting segment, MDU Construction Services is the construction services segment and Centennial Capital is reflected in the Other category.
For more information on the Company's business segments, see Note 17 of the Notes to Consolidated Financial Statements.
Reclassification adjustment for loss on derivative instruments included in net income, net of tax of $i37 and $i36
for the three months ended and $i109 and $i109
for the nine months ended in 2022 and 2021, respectively
i111
i111
i334
i334
Postretirement
liability adjustment:
Amortization of postretirement liability losses included in net periodic benefit credit, net of tax of $i148 and $i151
for the three months ended and $i460 and $i462
for the nine months ended in 2022 and 2021, respectively
i461
i466
i1,367
i1,389
Reclassification
of postretirement liability adjustment from regulatory asset, net of tax of $i— and $i—
for the three months ended and $(i1,086) and $i—
for the nine months ended in 2022 and 2021, respectively
i—
i—
(i3,265)
i—
Postretirement
liability adjustment
i461
i466
(i1,898)
i1,389
Net
unrealized loss on available-for-sale investments:
Net unrealized loss on available-for-sale investments arising during the period, net of tax of $(i88) and $(i15)
for the three months ended and $(i207) and $(i40)
for the nine months ended in 2022 and 2021, respectively
(i329)
(i54)
(i777)
(i150)
Reclassification
adjustment for loss on available-for-sale investments included in net income, net of tax of $i12 and $i6
for the three months ended and $i27 and $i21
for the nine months ended in 2022 and 2021, respectively
i42
i20
i99
i80
Net
unrealized loss on available-for-sale investments
(i287)
(i34)
(i678)
(i70)
Other
comprehensive income (loss)
i285
i543
(i2,242)
i1,653
Comprehensive
income attributable to common stockholders
$
i148,256
$
i139,819
$
i248,159
$
i293,250
The
accompanying notes are an integral part of these consolidated financial statements.
iThe 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 2021 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 August 4, 2022, the
Company announced its Board of Directors unanimously approved a plan to pursue the separation of Knife River from the Company. The separation is planned as a tax-free spinoff transaction to the Company’s stockholders for U.S. federal income tax purposes. As the next step of the Company’s strategic planning, on November 2, 2022, the board of directors unanimously determined the best way to optimize value would be to create two pure-play companies: a leading construction materials company and a regulated energy delivery company. Accordingly, the board has authorized management to commence a strategic review process for MDU Construction Services with the objective of achieving
the board’s goal of creating two pure-play public companies.
Discontinued operations include the supporting activities of Fidelity and are shown in income from discontinued operations on the Consolidated Statements of Income. Unless otherwise indicated, the amounts presented in the accompanying notes to the consolidated financial statements relate to the Company's continuing operations.
In the fourth quarter of 2021, the Company made changes to the presentation of the Consolidated Statements of Cash Flows to provide further clarity on the sources and uses of net cash provided by operating activities and net cash provided by (used in) financing activities. Certain prior period amounts have been reclassified to conform
to the current year presentation. These reclassifications did not impact total net cash provided by operating activities or net cash provided by financing activities for the nine months ended September 30, 2021.
Management has also evaluated the impact of events occurring after September 30, 2022, up to the date of the issuance of these consolidated interim financial statements on November 3, 2022, that would require recognition or disclosure in the Consolidated Financial Statements.
The following table provides a brief description of the accounting pronouncements
applicable to the Company and the potential impact on its Consolidated Financial Statements and/or disclosures:
Standard
Description
Effective date
Impact on financial statements/disclosures
ASU 2021-10 - Government Assistance
In November 2021, the FASB issued guidance on
modifying the disclosure requirements to increase the transparency of government assistance including disclosure of the types of assistance, an entity's accounting for the assistance and the effect of the assistance on an entity's financial statements.
The Company is currently evaluating the impact the guidance will have on its disclosures for the year ended December 31, 2022.
ASU 2020-04 - Reference Rate Reform
In March 2020, the FASB issued optional guidance to ease the facilitation of the effects of reference rate reform on financial reporting.
The guidance applies to certain contract modifications, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Beginning January 1, 2022, LIBOR or other discontinued reference rates cannot be applied to new contracts. New contracts will incorporate a new reference rate, which includes SOFR. LIBOR or other discontinued reference rates cannot be applied to contract modifications or hedging relationships entered into or evaluated after December
31, 2022. Existing contracts referencing LIBOR or other reference rates expected to be discontinued must identify a replacement rate by June 30, 2023.
The Company has updated its credit agreements to include language regarding the successor or alternate rate to LIBOR, and a review of other contracts and agreements is on-going. The
Company does not expect the guidance to have a material impact on its results of operations, financial position, cash flows or disclosures.
Note 3 - iSeasonality of operations
Some of the Company's operations are highly seasonal and revenues from, and certain expenses for, such operations may fluctuate significantly
among quarterly periods. Accordingly, the interim results for particular businesses, and for the Company as a whole, may not be indicative of results for the full fiscal year.
Note 4 - iReceivables and allowance for expected credit losses
iReceivables
consists primarily of trade receivables from the sale of goods and services, which are recorded at the invoiced amount, and contract assets, net of expected credit losses. For more information on contract assets, see Note 9. The Company's trade receivables are all due in 12 months or less. The total balance of receivables past due 90 days or more was $i41.5 million,
$i37.9 million and $i44.8
million at September 30, 2022 and 2021, and December 31, 2021, respectively.
iThe Company's expected credit losses are determined through a review using historical credit loss experience; changes in asset specific characteristics; current conditions; and reasonable and supportable future forecasts, among other specific account data, and is performed
at least quarterly. The Company develops and documents its methodology to determine its allowance for expected credit losses at each of its reportable business segments. Risk characteristics used by the business segments may include customer mix, knowledge of customers and general economic conditions of the various local economies, among others. Specific account balances are written off when management determines the amounts to be uncollectible. Management has reviewed the balance reserved through the allowance for expected credit losses and believes it is reasonable.
iNatural gas in storage for the Company's regulated operations is generally valued at lower of cost or market using the
last-in, first-out method or lower of cost or net realizable value using the average cost or first-in, first-out method. The majority of all other inventories are valued at the lower of cost or net realizable value using the average cost method. The portion of the cost of natural gas in storage expected to be used within 12 months was included in inventories. iInventories on the Consolidated Balance Sheets were as follows:
The
remainder of natural gas in storage, which largely represents the cost of gas required to maintain pressure levels for normal operating purposes, was included in noncurrent assets - other and was $i47.2 million at September 30, 2022 and $ii47.5/
million at both September 30, 2021 and December 31, 2021.
iBasic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the applicable period. Diluted earnings per share is computed by dividing net income by the total of the weighted average number of shares of common stock outstanding during the applicable period, plus the effect of non-vested performance share awards and restricted stock units. Common stock outstanding includes issued shares less shares held in treasury. Net income was the same for both the basic and diluted earnings per share calculations. iA
reconciliation of the weighted average common shares outstanding used in the basic and diluted earnings per share calculations follows:
Weighted average common shares outstanding - basic
i203,351
i202,863
i203,351
i201,647
Effect
of dilutive performance share awards and restricted stock units
i293
i327
i56
i308
Weighted
average common shares outstanding - diluted
i203,644
i203,190
i203,407
i201,955
Shares
excluded from the calculation of diluted earnings per share
i—
i—
i77
i—
Dividends
declared per common share
$
i.2175
$
i.2125
$
i.6525
$
i.6375
Note
7 - iEquity
The Company currently has a shelf registration statement on file with the SEC, under which the Company may issue and sell any combination of common stock and debt securities. The Company may sell such securities if warranted by market conditions and the
Company's capital requirements.
In August 2020, the Company amended the Distribution Agreement dated February 22, 2019, with J.P. Morgan Securities LLC and MUFG Securities Americas Inc., as sales agents. This agreement, as amended, allows the offering, issuance and sale of up to i6.4 million shares of the Company's
common stock in connection with an "at-the-market" offering. The common stock may be offered for sale, from time to time, in accordance with the terms and conditions of this agreement. As of September 30, 2022, the Company had capacity to issue up to i3.6 million additional shares of common stock under the "at-the-market" offering program.
i
Details
of the Company's "at-the-market" offering activity was as follows:
* Net
proceeds include issuance costs of $i— and $i149,000 for the three and nine months ended September 30, 2022,
respectively, and $i425,000 and $i1.2 million for the three and nine months ended September 30, 2021,
respectively.
** Net proceeds were used for capital expenditures.
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:
iRevenue is recognized when a performance obligation is satisfied
by transferring control over a product or service to a customer. Revenue is measured based on consideration specified in a contract with a customer and excludes any sales incentives and amounts collected on behalf of third parties. The Company is considered an agent for certain taxes collected from customers. As such, the Company presents revenues net of these taxes at the time of sale to be remitted to governmental authorities, including sales and use taxes.
Disaggregation
i
In
the following tables, revenue is disaggregated by the type of customer or service provided. The Company believes this level of disaggregation best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The table also includes a reconciliation of the disaggregated revenue by reportable segments. For more information on the Company's business segments, see Note 17.
Presented
in the previous tables are intrasegment revenues within the construction materials and contracting segment to highlight the focus on vertical integration as this segment sells materials to both third parties and internal customers. Due to consolidation requirements, these revenues must be eliminated against construction materials to arrive at the external operating revenue total for the segment.
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 for construction work 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.
i
The changes in contract assets and
liabilities were as follows:
The Company recognized a net increase in revenues of $i14.5
million and $i54.1 million for the three and nine months ended September 30, 2022, respectively, from performance obligations satisfied in prior periods. The company recognized a net increase in revenues of $i19.2
million and $i63.3 million for the three and nine months ended September 30, 2021, respectively, from performance obligations satisfied in prior periods.
The remaining performance obligations, also referred to as backlog, at the construction materials and contracting and construction services segments include unrecognized revenues that the Company reasonably expects to be realized. These unrecognized revenues can include: projects that have a written award, a letter of intent, a notice to proceed, an agreed upon work order to perform work on mutually accepted terms and conditions and change orders or claims to the extent management believes additional contract revenues will be earned and are deemed probable of collection. Excluded from remaining performance obligations are potential orders under master service agreements. The majority of the
Company's construction contracts have an original duration of less than two years.
The remaining performance obligations at the pipeline segment include firm transportation contracts with fixed pricing and fixed volumes. The Company has applied the practical expedient, which does not require additional disclosures for contracts with an original duration of less than 12 months, to certain firm transportation and non-regulated contracts. The
Company's firm transportation contracts included in the remaining performance obligations have weighted average remaining durations of less than five years.
At September 30, 2022, the Company's remaining performance obligations were $i3.3 billion. The
Company expects to recognize the following revenue amounts in future periods related to these remaining performance obligations: $i2.6 billion within the next i12 months
or less; $i369.7 million within the next i13 to 24 months; and $i418.1
million in i25 months or more.
Note 10 - iBusiness
combinations
iThe following acquisitions were accounted for as business combinations in accordance with ASC 805 - Business Combinations. The results of the acquired businesses have been included in the Consolidated Financial Statements beginning on the acquisition date. Pro forma financial amounts reflecting the effects of the business combinations are not presented, as none of these business combinations, individually or in the aggregate, were material to the Company's financial position
or results of operations.
The acquisitions are also subject to customary adjustments based on, among other things, the amount of cash, debt and working capital in the business as of the closing date. The amounts included in the Consolidated Balance Sheets for these adjustments are considered provisional until final settlement has occurred.
In 2021, the construction materials and contracting segment's acquisitions included:
•Baker Rock Resources and Oregon Mainline Paving, two construction materials companies located around the Portland, Oregon metro area, acquired
in November 2021. As of September 30, 2022, the purchase price allocation was settled with no material adjustments to the provisional accounting.
•Mt. Hood Rock, a construction aggregates business in Oregon, acquired in April 2021. As of March 31, 2022, the purchase price allocation was settled with no material adjustments to the provisional accounting.
In 2021, the total purchase price for acquisitions was $i236.1
million, subject to certain adjustments, with cash acquired totaling $i900,000. The purchase price includes consideration paid of $i235.2
million. The amounts allocated to the aggregated assets acquired and liabilities assumed during 2021 were as follows: $i17.0 million to current assets; $i179.8
million to property, plant and equipment; $i50.6 million to goodwill; $i2.2 million to other
intangible assets; $i8.7 million to current liabilities; $i2.5
million to noncurrent liabilities - other; and $i3.2 million to deferred tax liabilities. During the first quarter of 2022, measurement period adjustments were made to previously reported provisional amounts, which decreased goodwill and increased property, plant and equipment by $i2.1 million.
The Company issued debt to finance these acquisitions.
Costs incurred for acquisitions are included in operation and maintenance expense on the Consolidated Statements of Income. For the nine months ended September 30, 2022, the Company had ino acquisition
costs. For the nine months ended September 30, 2021, acquisition costs were inot material.
Note 11 - iLeases
The Company's leases primarily include operating leases for equipment, buildings, easements and vehicles. The Company leases certain equipment to third parties through its utility and construction services segments, which are considered short-term operating leases with terms of less than 12 months.
The Company recognized revenue from operating leases of $i11.7
million and $i35.1 million for the three and nine months ended September 30, 2022, respectively. The Company recognized revenue from operating leases of $i11.8
million and $i36.6 million for the three and nine months ended September 30, 2021, respectively. At September 30, 2022, the Company had $i9.1
million of lease receivables with a majority due within 12 months.
The
previous tables include goodwill and intangible assets associated with the business combinations completed during 2021. For more information related to these business combinations, see Note 10.
Amortization expense for amortizable intangible assets for the three and nine months ended September 30, 2022, was $i1.3 million and $i3.8
million, respectively. Amortization expense for amortizable intangible assets for the three and nine months ended September 30, 2021, was $i1.2 million and $i3.9 million,
respectively. iEstimated amortization expense for identifiable intangible assets as of September 30, 2022, was:
Natural
gas costs recoverable through rate adjustments
iUp to 1 year
$
i112,079
$
i98,211
$
i86,371
Conservation
programs
iUp to 1 year
i9,363
i8,495
i8,225
Decoupling
iUp
to 1 year
i6,549
i7,195
i9,131
Cost
recovery mechanisms
iUp to 1 year
i3,354
i4,693
i4,536
Other
iUp
to 1 year
i16,815
i14,541
i10,428
i148,160
i133,135
i118,691
Noncurrent:
Pension
and postretirement benefits
i**
i137,582
i155,888
i142,681
Cost
recovery mechanisms
iUp to 10 years
i67,094
i43,955
i44,870
Plant
costs/asset retirement obligations
iOver plant lives
i61,941
i73,528
i63,116
Plant
to be retired
i-
i24,740
i48,544
i50,070
Manufactured
gas plant site remediation
i-
i25,963
i26,000
i26,053
Taxes
recoverable from customers
iOver plant lives
i12,394
i11,438
i12,339
Long-term
debt refinancing costs
iUp to 38 years
i3,335
i3,952
i3,794
Natural
gas costs recoverable through rate adjustments
iUp to 2 years
i462
i6,084
i5,186
Other
iUp
to 17 years
i10,931
i9,856
i9,742
i344,442
i379,245
i357,851
Total
regulatory assets
$
i492,602
$
i512,380
$
i476,542
Regulatory
liabilities:
Current:
Taxes refundable to customers
iUp to 1 year
$
i4,264
$
i3,867
$
i3,841
Electric
fuel and purchased power deferral
iUp to 1 year
i3,763
i3,205
i—
Cost
recovery mechanisms
iUp to 1 year
i2,674
i2,797
i214
Natural
gas costs refundable through rate adjustments
iUp to 1 year
i873
i—
i6,700
Other
iUp
to 1 year
i7,025
i6,622
i5,548
i18,599
i16,491
i16,303
Noncurrent:
Taxes
refundable to customers
iOver plant lives
i205,517
i218,566
i215,421
Plant
removal and decommissioning costs
iOver plant lives
i174,481
i172,683
i168,152
Pension
and postretirement benefits
i**
i19,687
i16,915
i20,434
Accumulated
deferred investment tax credit
iUp to 20 years
i14,665
i12,403
i12,696
Cost
recovery mechanisms
iUp to 20 years
i12,535
i—
i7,727
Other
iUp
to 16 years
i6,327
i5,574
i4,360
i433,212
i426,141
i428,790
Total
regulatory liabilities
$
i451,811
$
i442,632
$
i445,093
Net
regulatory position
$
i40,791
$
i69,748
$
i31,449
*Estimated
recovery or refund period for amounts currently being recovered or refunded in rates to customers.
** Recovered as expense is incurred or cash contributions are made.
//
At September 30, 2022 and 2021, and December 31, 2021, approximately $i264.4 million,
$i318.2 million and $i296.6 million,
respectively, of regulatory assets were not earning a rate of return; however, these regulatory assets are expected to be recovered from customers in future rates. These assets are largely comprised of the unfunded portion of pension and postretirement benefits, asset retirement obligations, accelerated depreciation on plant retirement and the estimated future cost of manufactured gas plant site remediation.
In the last half of 2021 and in 2022, the Company has experienced higher natural gas costs due to the increase in demand outpacing the supply along with the impact of global events. This increase in natural gas costs experienced in certain jurisdictions has been partially offset by the recovery of prior period natural gas costs being recovered over a period longer than the normal one-year period, as further discussed below.
In
February 2021, a prolonged period of unseasonably cold temperatures in the central United States significantly increased the demand for electric and natural gas services and contributed to increased market prices. Overall, Montana-Dakota and Great Plains incurred approximately $i44.0 million in increased natural gas costs in order to maintain services for its customers. These extraordinary gas costs were recorded as regulatory assets as they are expected to be recovered from customers. With the exception of $i845,000
in Minnesota, Montana-Dakota and Great Plains have received approval for the recovery of purchased gas adjustments related to the cold-weather event in all jurisdictions impacted, including out-of-cycle purchased gas adjustment requests in most jurisdictions. For a discussion of the Company's most recent cases by jurisdiction, see Note 19.
In 2019, the Company experienced increased natural gas costs in Washington from the rupture of the Enbridge pipeline in Canada in late 2018. As a result, the Company requested, and the WUTC approved, recovery through 2022 of the balance of natural gas costs recoverable related to this period of time, which was over three years rather than its normal
one-year recovery period.
In February 2019, the Company announced the retirement of three aging coal-fired electric generating units. The Company accelerated the depreciation related to these facilities in property, plant and equipment and recorded the difference between the accelerated depreciation, in accordance with GAAP, and the depreciation approved for rate-making purposes as regulatory assets. Requests were filed with the NDPSC and SDPUC, and subsequently approved, to offset the savings associated with the cessation of operations of these units with the amortization of the deferred regulatory assets. The Company ceased operations of Lewis & Clark Station in March 2021
and Units 1 and 2 at Heskett Station in February 2022. The Company subsequently reclassified the costs being recovered for these facilities from plant retirement to cost recovery mechanisms in the previous table and began amortizing the associated plant retirement and closure costs in the jurisdictions where requests were filed, as previously discussed. The Company expects to recover the regulatory assets related to the plant retirements in future rates.
If, for any reason, the Company's regulated businesses cease to meet the criteria for application of regulatory accounting for all or part of their operations, the regulatory assets and liabilities relating to those portions ceasing
to meet such criteria would be written off and included in the statement of income or accumulated other comprehensive loss in the period in which the discontinuance of regulatory accounting occurs.
Note 14 - iFair value measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction
between market participants at the measurement date. The fair value ASC establishes a hierarchy for grouping assets and liabilities, based on the significance of inputs. The estimated fair values of the Company's assets and liabilities measured on a recurring basis are determined using the market approach.
iThe Company measures its investments in certain fixed-income and equity securities at fair value with changes in fair
value recognized in income.The Company anticipates using these investments, which consist of insurance contracts, to satisfy its obligations under its unfunded, nonqualified defined benefit and defined contribution plans for executive officers and certain key management employees, and invests in these fixed-income and equity securities for the purpose of earning investment returns and capital appreciation. These investments, which totaled $i95.2 million,
$i106.4 million and $i109.6 million, at September 30, 2022 and 2021,
and December 31, 2021, respectively, are classified as investments on the Consolidated Balance Sheets. The net unrealized loss on these investments was $i2.6 million and $i16.8
million for the three and nine months ended September 30, 2022, respectively. The net unrealized gain on these investments was $i373,000 and $i4.2 million
for the three and nine months ended September 30, 2021. 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.
iThe Company did not elect the fair value option, which records gains and losses in income, for its available-for-sale securities, which include mortgage-backed securities and U.S. Treasury securities. These available-for-sale securities are recorded at fair value and are classified
as investments on the Consolidated Balance Sheets. Unrealized gains or losses are recorded in accumulated other comprehensive loss. iDetails of available-for-sale securities were as follows:
* The
insurance contracts invest approximately i65 percent in fixed-income investments, i14 percent
in common stock of large-cap companies, i7 percent in common stock of mid-cap companies, i6 percent in common stock of small-cap companies, i6 percent
in target date investments and i2 percent in cash equivalents.
* The
insurance contracts invest approximately i63 percent in fixed-income investments, i16 percent
in common stock of large-cap companies, i8 percent in common stock of mid-cap companies, i7 percent in common stock of small-cap companies, i5 percent
in target date investments and i1 percent in cash equivalents.
* The
insurance contracts invest approximately i61 percent in fixed-income investments, i17 percent
in common stock of large-cap companies, i8 percent in common stock of mid-cap companies, i7 percent in common stock of small-cap companies, i5 percent
in target date investments and i2 percent in cash equivalents.
The Company's money market funds are valued at the net asset value of shares held at the end of the period, based on published market quotations on active markets, or using other known sources including pricing from outside sources. The estimated
fair value of the Company's mortgage-backed securities and U.S. Treasury securities are based on comparable market transactions, other observable inputs or other sources, including pricing from outside sources. The estimated fair value of the Company's insurance contracts are based on contractual cash surrender values that are determined primarily by investments in managed separate accounts of the insurer. These amounts approximate fair value. The managed separate accounts are valued based on other observable inputs or corroborated market data.
Though the Company believes the methods used to
estimate fair value are consistent with those used by other market participants, the use of other methods or assumptions could result in a different estimate of fair value.
The Company applies the provisions of the fair value measurement standard to its nonrecurring, non-financial measurements, including long-lived asset impairments. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. The Company reviews the carrying value of its long-lived assets, excluding goodwill, whenever events or changes in circumstances indicate that such carrying amounts may not be recoverable.
The
Company performed fair value assessments of the assets acquired and liabilities assumed in the business combinations that occurred during 2021. The fair value of these assets and liabilities were determined based on Level 2 and Level 3 inputs.
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. iThe
estimated fair value of the Company's Level 2 long-term debt was as follows:
The
carrying amounts of the Company's remaining financial instruments included in current assets and current liabilities approximate their fair values.
Note 15 - iDebt
Certain debt instruments of the Company's subsidiaries
contain restrictive and financial covenants and cross-default provisions. In order to borrow under the debt agreements, the subsidiary companies must be in compliance with the applicable covenants and certain other conditions, all of which the subsidiaries, as applicable, were in compliance with at September 30, 2022. In the event the subsidiaries do not comply with the applicable covenants and other conditions, alternative sources of funding may need to be pursued.
Montana-Dakota's and Centennial's respective commercial paper programs are supported by revolving credit agreements. While the amount of commercial paper outstanding does not reduce available capacity under the respective revolving credit
agreements, Montana-Dakota and Centennial do not issue commercial paper in an aggregate amount exceeding the available capacity under the credit agreements. The commercial paper borrowings may vary during the period, largely the result of fluctuations in working capital requirements due to the seasonality of certain operations of the Company's subsidiaries.
Centennial On March
18, 2022, Centennial entered into a $i100.0 million term loan agreement with a SOFR-based variable interest rate and a maturity date of March 17, 2023. The agreement contains customary covenants and provisions, including a covenant of Centennial not to permit, at any time, the ratio of total debt to total capitalization to be greater than i65
percent. The covenants also include certain restrictions on the sale of certain assets, loans and investments.
Long-term debt
Long-term Debt OutstandingiLong-term debt outstanding was as follows:
Other
notes due on dates ranging from January 1, 2024 to January 1, 2061
i.97
%
i2,349
i3,198
i2,564
Less
unamortized debt issuance costs
i6,633
i5,709
i6,090
Less
discount
i444
i23
i74
Total
long-term debt
i2,988,452
i2,328,266
i2,741,900
Less
current maturities
i214,453
i1,548
i148,053
Net
long-term debt
$
i2,773,999
$
i2,326,718
$
i2,593,847
Schedule
of Debt Maturities iLong-term debt maturities, which excludes unamortized debt issuance costs and discount, at September 30, 2022, were as follows:
Remainder
of
2022
2023
2024
2025
2026
Thereafter
(In thousands)
Long-term debt maturities
$
i147,253
$
i77,923
$
i646,983
$
i177,802
$
i140,802
$
i1,804,766
Note
16 - iCash flow information
i
Cash expenditures for interest and income taxes were as follows:
iThe Company's reportable segments are those that are based on the
Company's method of internal reporting, which generally segregates the strategic business units due to differences in products, services and regulation. The internal reporting of these operating segments is defined based on the reporting and review process used by the Company's chief executive officer.The Company's operations are located within the United States.
The electric segment generates, transmits and distributes electricity in Montana, North Dakota, South Dakota and Wyoming. The natural gas distribution segment distributes natural gas in those states, as well as in Idaho, Minnesota, Oregon and Washington. These operations also supply related value-added services.
The pipeline segment provides natural
gas transportation and underground storage services through a regulated pipeline system primarily in the Rocky Mountain and northern Great Plains regions of the United States. This segment also provides non-regulated cathodic protection and other energy-related services.
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-mix concrete. This segment focuses on vertical integration of its contracting services with its construction materials to support the aggregate-based product lines including aggregate placement, asphalt and concrete paving, and site development and grading. Although not common to all locations, other products include the sale of cement, asphalt oil for various commercial and roadway applications, various finished concrete products and other building materials and related contracting
services. This segment operates in the central, southern and western United States, including Alaska and Hawaii.
The construction services segment provides a full spectrum of construction services through its electrical and mechanical and transmission and distribution specialty contracting services across the United States. These specialty contracting services are provided to utilities and manufacturing, transportation, commercial, industrial, institutional, renewable and governmental customers. Its electrical and mechanical contracting services include construction and maintenance of electrical and communication wiring and infrastructure, fire suppression systems, and mechanical piping and services. Its transmission and distribution contracting services include construction and maintenance of overhead and underground electrical, gas and communication infrastructure, as well as manufacturing and distribution of transmission
line construction equipment and tools.
The Other category includes the activities of Centennial Capital, which, through its subsidiary InterSource Insurance Company, insures various types of risks as a captive insurer for certain of the Company's subsidiaries. The function of the captive insurer is to fund the self-insured layers of the insured Company's general liability, automobile liability, pollution liability and other coverages. Centennial Capital also owns certain real and personal property. In addition, the Other category includes certain assets, liabilities and tax adjustments of the holding company primarily associated with corporate functions and certain general and administrative costs (reflected in operation and maintenance expense) and interest
expense, which were previously allocated to the refining business and Fidelity and do not meet the criteria for income (loss) from discontinued operations, as well as transaction costs associated with the anticipated separation of Knife River.
Discontinued operations include the supporting activities of Fidelity other than certain general and administrative costs and interest expense as described above.
The information below follows the same accounting policies as described in Note 2 of the Notes to Consolidated Financial Statements in the 2021 Annual Report. iInformation
on the Company's segments was as follows:
Net
periodic benefit credit, including amount capitalized
(i899)
(i752)
(i2,695)
(i2,256)
Less
amount capitalized
i48
i46
i132
i129
Net
periodic benefit credit
$
(i947)
$
(i798)
$
(i2,827)
$
(i2,385)
/
The
components of net periodic benefit credit, other than the service cost component, are included in other income on the Consolidated Statements of Income. The service cost component is included in operation and maintenance expense on the Consolidated Statements of Income.
Nonqualified defined benefit plans
In addition to the qualified defined benefit pension plans reflected in the table at the beginning of this note, the Company also has unfunded, nonqualified defined benefit plans for executive officers and certain key management employees. The Company's net periodic benefit cost for these plans was $i773,000
and $i769,000 for the three months ended September 30, 2022 and 2021, respectively, and $ii2.3/
million for both the nine months ended September 30, 2022 and 2021. The components of net periodic benefit cost for these plans are included in other income on the Consolidated Statements of Income.
Note 19 - iRegulatory matters
The
Company regularly reviews the need for electric and natural gas rate changes in each of the jurisdictions in which service is provided. The Company files for rate adjustments to seek recovery of operating costs and capital investments, as well as reasonable returns as allowed by regulators. Certain regulatory proceedings and cases may also contain recurring mechanisms that can have an annual true-up. Examples of these recurring mechanisms include: infrastructure riders, transmission trackers, renewable resource cost adjustment riders, as well as weather normalization and decoupling mechanisms. The following paragraphs summarize the Company's significant open regulatory proceedings and cases by jurisdiction including updates to those reported in the 2021 Annual Report and should be read in conjunction
with previous filings. The Company is unable to predict the ultimate outcome of these matters, the timing of final decisions of the various regulators and courts, or the effect on the Company's results of operations, financial position or cash flows.
Great Plains defers the difference between the actual cost of gas spent to serve customers and that recovered from customers on a monthly basis. Annually, Great Plains prepares a true-up pursuant to the purchased gas
adjustment tariff. On August 30, 2021, the MNPUC issued an order to allow Great Plains recovery of an out-of-cycle cost of gas adjustment of $i8.8 million over a period of 27 months. The order was effective September 1, 2021, and was subject to a prudence review by the MNPUC. The requested increase was for the February 2021 extreme cold weather, primarily in the central United States, and market conditions surrounding
the natural gas commodity market. On October 19, 2022, the MNPUC issued a final order disallowing $i845,000 of the gas costs. These costs, which were deferred as a regulatory asset in natural gas costs recoverable through rate adjustments, were then recorded to expense as they were no longer recoverable from customers.
On June 1, 2022, Great Plains filed an application with the MNPUC for a decrease
in its depreciation and amortization rates of approximately $i1.2 million annually or a decrease from a combined rate of i4.5
percent to i2.8 percent. Great Plains has requested the rates be retroactive to January 1, 2022. This matter is pending before the MNPUC.
NDPSC
On May 16, 2022, Montana-Dakota filed an application with the NDPSC for an electric general rate increase of approximately $i25.4 million
annually or i12.3 percent above current rates. The requested increase is primarily to recover investments in production, transmission and distribution facilities and the associated depreciation, operation and maintenance expenses and taxes associated with the increased investment. The NDPSC has 7 months to render a final decision on the rate case. On July 14, 2022, the NDPSC approved an interim rate increase of approximately $i10.9 million
annually or i5.3 percent above current rates, subject to refund, for service rendered on and after July 15, 2022. The lower interim rate increase is largely due to excluding the recovery of Heskett Unit 4, which is expected to be in service in the first half of 2023.
On July 15, 2022, Montana-Dakota filed an application with the NDPSC to request an update to its transmission
cost adjustment rider requesting to recover revenues of $i12.9 million, which includes a true-up of the prior period adjustment, resulting in a decrease of $i1.6 million
from current rates. The request is to recover transmission-related expenses and the revenue requirement for transmission facilities not currently recovered through electric service rates. On October 5, 2022, the NDPSC approved the decrease with rates effective November 1, 2022.
Montana-Dakota has a renewable resource cost adjustment rate tariff that allows for annual adjustments for recent projected capital costs and related expenses for projects determined to be recoverable under the tariff. On November 1, 2022, Montana-Dakota filed an annual update to its renewable resource cost adjustment requesting to recover a revenue requirement of approximately $i17.9 million
annually. The update reflects a decrease of approximately $i127,000 from the revenues currently included in rates.
WUTC
On September 30, 2021, Cascade filed an application with the WUTC for a natural gas rate increase of approximately $i13.7 million
annually or approximately i5.1 percent above current rates. The requested increase was primarily to recover investments made in infrastructure upgrades, as well as to recover 2021 wage increases. On March 22, 2022, Cascade filed a multi-party settlement and stipulation on behalf of Cascade and the staff of the WUTC that would result in a revenue requirement increase of approximately $i10.7 million
annually or approximately i4.0 percent above current rates. The WUTC issued a final order on August 23, 2022, adjusting the settlement primarily for 2020 actual depreciation expense. The final order approved an increase of $i7.2
million annually with an effective date of September 1, 2022.
On March 24, 2022, Cascade filed a request for a tariff revision with the WUTC to rectify an inadvertent IRS normalization violation resulting from its tariff established in 2018 that passes back to customers the reversal of plant-related excess deferred income taxes through an annual rate adjustment. This request was made in response to the issuance of an IRS private letter ruling to another Washington utility with the same annual rate adjustment tariff, which addressed its normalization violation. The private letter ruling concluded the tariff to refund excess deferred income taxes without corresponding adjustments for other components of rate base or changes in depreciation or income tax expense, is an impermissible methodology under the IRS normalization and consistency
rules. Cascade's request proposes a similar remedy through the tariff to recover the excess amounts refunded to customers while this tariff has been in place, and revises the method going forward to reflect excess deferred income taxes in rates in the same manner as other components of rate base from its most recent general rate case. Cascade has requested recovery of the excess refunded to customers of approximately $i3.3 million and elimination of the currently deferred, but not yet refunded balance. A multi-party
settlement was filed with the WUTC on October 21, 2022. This matter is pending before the WUTC.
On October 14, 2022, Cascade filed an update to its annual pipeline cost recovery mechanism requesting an increase in annual revenue of approximately $i1.2 million or approximately i0.4
percent. The filing was effective November 1, 2022.
FERC
On September 1, 2022, Montana-Dakota filed an update to its transmission formula rate under the MISO tariff for its multi-value project and network upgrade charges for $i15.4 million, which is effective January 1, 2023.
iThe 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, 2022 and 2021, and December 31, 2021, the
Company accrued contingent liabilities, which have not been discounted, of $i33.6 million, $i34.7 million and $i37.0 million,
respectively. At September 30, 2022 and 2021, and December 31, 2021, the Company also recorded corresponding insurance receivables of $i11.9 million, $i11.7 million
and $i14.1 million, respectively, and regulatory assets of $i20.5 million, $i21.1 million
and $i21.2 million, respectively, related to the accrued liabilities. The accruals are for contingencies resulting from litigation, production taxes, royalty claims and environmental matters. This includes amounts that have been accrued for matters discussed in Environmental matters within this note. The Company will continue to monitor each matter and adjust accruals as might be warranted based on new information and further developments. Management believes that the outcomes with respect to probable and reasonably
possible losses in excess of the amounts accrued, net of insurance recoveries, while uncertain, either cannot be estimated or will not have a material effect upon the Company's financial position, results of operations or cash flows. Unless otherwise required by GAAP, legal costs are expensed as they are incurred.
Environmental matters
The Company is a party to claims for the cleanup of environmental contamination at certain manufactured gas plant sites, as well as a superfund site. There were no material changes to the Company's environmental matters that were previously reported in the 2021 Annual Report.
Guarantees
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, 2022, the fixed maximum amounts guaranteed under these agreements aggregate $i333.7 million.
Certain of the guarantees also have no fixed maximum amounts specified. At September 30, 2022, the amounts of scheduled expiration of the maximum amounts guaranteed under these agreements aggregate to $i10.8 million in 2022; $i68.6 million
in 2023; $i110.6 million in 2024; $i130.5 million in 2025; $i1.3 million
in 2026; $i700,000 thereafter; and $i11.2 million, which has no scheduled maturity date. There were ino
amounts outstanding under the previously mentioned guarantees at September 30, 2022. In the event of default under these guarantee obligations, the subsidiary issuing the guarantee for that particular obligation would be required to make payments under its guarantee.
Certain subsidiaries have outstanding letters of credit to third parties related to insurance policies and other agreements, some of which are guaranteed by other subsidiaries of the Company. At September 30, 2022, the fixed maximum amounts guaranteed under these letters of credit aggregated $i25.0 million.
At September 30, 2022, the amounts of scheduled expiration of the maximum amounts guaranteed under these letters of credit aggregate to $i21.8 million in 2022, $i2.7 million
in 2023 and $i500,000 in 2024. There were ino amounts outstanding under the previously mentioned letters of credit at September 30,
2022. In the event of default under these letter of credit obligations, the subsidiary guaranteeing the letter of credit would be obligated for reimbursement of payments made under the letter of credit.
In addition, Centennial, Knife River and MDU Construction Services have issued guarantees to third parties related to the routine purchase of maintenance items, materials and lease obligations for which no fixed maximum amounts have been specified. These guarantees have no scheduled maturity date. In the event a subsidiary of the Company defaults under these obligations, Centennial, Knife River or MDU Construction Services would be required to make payments under these guarantees. Any amounts outstanding by subsidiaries of the
Company were reflected on the Consolidated Balance Sheet at September 30, 2022.
In the normal course of business, Centennial has surety bonds related to construction contracts and reclamation obligations of its subsidiaries. In the event a subsidiary of Centennial does not fulfill a bonded obligation, Centennial would be responsible to the surety bond company for completion of the bonded contract or obligation. A large portion of the surety bonds is expected to expire within the next 12 months; however, Centennial will likely continue to enter into surety bonds for its subsidiaries
in the future. At September 30, 2022, approximately $i932.4 million of surety bonds were outstanding, which were not reflected on the Consolidated Balance Sheet.
iThe
Company evaluates its arrangements and contracts with other entities to determine if they are VIEs and if so, if the Company is the primary beneficiary.
Fuel Contract Coyote Station entered into a coal supply agreement with Coyote Creek that provides for the purchase of coal necessary to supply the coal requirements of the Coyote Station for the period May 2016 through December 2040. Coal purchased under the coal supply agreement is reflected in inventories on the Consolidated Balance Sheets and is recovered from customers as a component of electric fuel and purchased power.
The coal supply
agreement creates a variable interest in Coyote Creek due to the transfer of all operating and economic risk to the Coyote Station owners, as the agreement is structured so that the price of the coal will cover all costs of operations, as well as future reclamation costs. The Coyote Station owners are also providing a guarantee of the value of the assets of Coyote Creek as they would be required to buy the assets at book value should they terminate the contract prior to the end of the contract term and are providing a guarantee of the value of the equity of Coyote Creek in that they are required to buy the entity at the end of the contract term at equity value. Although the
Company has determined that Coyote Creek is a VIE, the Company has concluded that it is not the primary beneficiary of Coyote Creek because the authority to direct the activities of the entity is shared by the four unrelated owners of the Coyote Station, with no primary beneficiary existing. As a result, Coyote Creek is not required to be consolidated in the Company's financial statements.
Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations
The Company is Building a Strong America® by providing essential infrastructure and services. The Company and its employees work hard to keep the economy of America moving with the products and services provided, which include powering, heating and connecting homes, factories, offices and stores; and building roads, highways, data infrastructure and airports. The Company is authorized to conduct business in nearly every state in the United States and during peak construction season has employed over 16,000 employees. The Company's organic investments
are strong drivers of high-quality earnings and continue to be an important part of the Company's growth. Management believes the Company is well positioned in the industries and markets in which it operates.
On August 4, 2022, the Company announced its Board of Directors unanimously approved a plan to pursue a separation of Knife River from the Company. The separation is planned as a tax-free spinoff transaction to the Company’s stockholders for U.S. federal income tax
purposes. The transaction is expected to result in two independent, publicly traded and well-capitalized companies. Completion of the separation will be subject to, among other things, the effectiveness of a registration statement on Form 10 with the SEC, final approval from the Company’s Board of Directors, receipt of a tax opinion and a private letter ruling from the IRS, and other customary conditions. The Company may, at any time and for any reason until the proposed transaction is complete, abandon the separation or modify or change its terms. The separation is expected to be complete in 2023, but there can be no assurance regarding the ultimate timing of the separation or that the separation will ultimately occur. See Part II, Item 1A. Risk Factors for a description of some of the risks and uncertainties
associated with the proposed transaction.
As the next step of the Company's strategic planning, on November 2, 2022, the Board of Directors unanimously determined the best way to optimize value would be to create two pure-play companies: a leading construction materials company and a regulated energy delivery company. Accordingly, the board has authorized management to commence a strategic review process for MDU Construction Services with the objective of achieving the board’s goal of creating two pure-play public companies. See Part II, Item 1A. Risk Factors for a description of some of the risks and uncertainties with the proposed future structure.
The Company continues
to manage the inflationary pressures experienced throughout the United States. Inflation rates in the Unites States have increased significantly, relative to historical precedent, and may continue to rise. The Company has continued to evaluate its businesses and has increased pricing for its products and services where necessary as evidenced by the increase in revenues recognized in 2022. The ability to raise selling prices to cover higher costs due to inflation are subject to customer demand, industry competition and the availability of materials, among other things. Rising interest rates have resulted in and will likely continue to result in higher borrowing costs on new debt, resulting in impacts to the Company's asset valuations and negatively impacting the purchasing power of its customers.
The
Company continues to monitor the impact that inflation, rising interest rates, rising commodity prices and supply chain disruptions may have on its businesses and customers and proactively looks for ways to lessen the impact to its businesses. For more information on possible impacts to the Company's businesses, see the Outlook for each segment below and Part I, Item 1A. Risk Factors in the 2021 Annual Report.
Forward-Looking Statements
The following sections contain forward-looking statements within the meaning of Section 21E of the Exchange Act. Forward-looking statements are all statements other than statements of historical fact, including without limitation those statements that are
identified by the words "anticipates,""estimates,""expects,""intends,""plans,""predicts" and similar expressions, and include statements concerning plans, trends, objectives, goals, strategies, future events, including the separation of Knife River, or performance, and underlying assumptions (many of which are based, in turn, upon further assumptions) and other statements that are other than statements of historical facts. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature, including statements contained within Business Segment Financial and Operating Data.
Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed. The
Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties. Nonetheless, the Company's expectations, beliefs or projections may not be achieved or accomplished and changes in such assumptions and factors could cause actual future results to differ materially.
Any forward-looking statement contained in this document speaks only as of the date on which the statement is made, and the
Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances that occur after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as required by law. New factors emerge from time to time, and it is not possible for management to predict all the factors, nor can it assess the effect of each factor on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. All forward-looking statements, whether written or oral and whether made by or on behalf of the Company, are expressly qualified by the risk factors and cautionary statements reported in Part II, Item 1A. Risk Factors
in this quarterly report, Part I, Item 1A. Risk Factors in the 2021 Annual Report and subsequent filings with the SEC.
The Company's earnings primarily benefited from earnings at the construction businesses. The construction materials and contracting business benefited from higher average pricing on materials and increased contracting workloads, and the construction services business benefited from higher margins on electrical and mechanical work, primarily in the industrial, institutional and commercial sectors, as well as higher utility margins. Both of the construction business's earnings were negatively impacted by inflationary pressures, including higher diesel fuel and other operating
costs; however, these costs are largely being recovered through price increases. Earnings at the electric business were positively impacted by interim rate relief in certain jurisdictions and lower operation and maintenance expenses as a result of the coal-fired electric plant closures and the absence of a planned maintenance outage in 2021. Partially offsetting the increased earnings was an increased seasonal loss at the natural gas distribution business as a result of higher operating expenses, including increased subcontractor costs and depreciation expense, and increased interest expense at the pipeline business as a result of higher debt balances, partially offset by the net benefit of the North Bakken Expansion project. Also negatively impacting results were transaction costs of $4.1 million, after tax, associated with the anticipated spinoff of Knife River included in Other.
The Company experienced decreased earnings across most of the Company's businesses. While the construction materials and contracting business experienced higher average pricing on materials and increased contracting workloads, results were negatively impacted by ongoing inflationary pressures, including higher diesel fuel and other operating costs. The natural gas distribution business experienced higher operating expenses, including subcontractor costs, as well as higher depreciation and interest
expenses, partially offset by increased sales volumes and approved rate recovery in certain jurisdictions. The pipeline business experienced higher interest expense and lower non-regulated project margins, partially offset by the net benefit of the North Bakken Expansion project. Increased operating costs related to a planned maintenance outage at Coyote Station along with lower per unit average rates decreased earnings at the electric business, partially offset by interim rate relief in certain jurisdictions and higher transmission revenues. The Company's earnings were further impacted by $20.8 million in lower returns on the Company's nonqualified benefit plan investments, as discussed in Note 14, and the transaction costs of $4.1 million, after tax, associated with the anticipated spinoff of Knife River
included in Other. Partially offsetting the decreases were increased earnings at the construction services business resulting primarily from higher commercial and service margins and earnings from the Company's joint ventures, partially offset by higher overall operating costs related to inflationary pressures and higher selling, general and administrative expenses.
A discussion of key financial data from the Company's business segments follows.
The following sections include key financial and operating data for each of the Company's business segments. Also included are highlights on key growth strategies, projections and certain assumptions for the Company and its subsidiaries and other matters of the Company's business segments.
For information pertinent to various commitments and contingencies, see the Notes to Consolidated Financial Statements. For a summary of the Company's business
segments, see Note 17 of the Notes to Consolidated Financial Statements.
Electric and Natural Gas Distribution
Strategy and challenges The electric and natural gas distribution segments provide electric and natural gas distribution services to customers, as discussed in Note 17. Both segments strive to be top performing utility companies measured by integrity, employee safety and satisfaction, customer service and stockholder return. The segments provide safe, reliable, competitively priced and environmentally responsible energy service to customers while focusing on growth and expansion opportunities within and beyond its existing territories. The Company is focused
on cultivating organic growth while managing operating costs and monitoring opportunities for these segments to retain, grow and expand their customer base through extensions of existing operations, including building and upgrading electric generation, transmission and distribution, and natural gas systems, and through selected acquisitions of companies and properties with similar operating and growth objectives at prices that will provide stable cash flows and an opportunity to earn a competitive return on investment. The continued efforts to create operational improvements and efficiencies across both segments promotes the Company's business integration strategy. The primary factors that impact the results of these segments are the ability to earn authorized rates of return, cost of natural gas, cost of electric fuel and purchased power, weather, climate change initiatives, competitive
factors in the energy industry, population growth and economic conditions in the segments' service areas.
The electric and natural gas distribution segments are subject to extensive regulation in the jurisdictions where they conduct operations with respect to costs, timely recovery of investments and permitted returns on investment. The Company is focused on modernizing utility infrastructure to meet the varied energy needs of both its customers and communities while ensuring the delivery of safe, reliable, affordable and environmentally responsible energy. The segments continue to invest in facility upgrades to be in compliance with existing and known future regulations. To assist in the reduction of regulatory lag in obtaining revenue increases to align with increased investments, tracking mechanisms have been implemented in certain jurisdictions.
The Company also seeks rate adjustments for operating costs and capital investments, as well as reasonable returns on investments, not covered by tracking mechanisms. For more information on the Company's tracking mechanisms and recent cases, see Note 19 and the 2021 Annual Report.
These segments are also subject to extensive regulation related to certain operational and environmental compliance, cybersecurity, permit terms and system integrity. Both segments are faced with the ongoing need to actively evaluate cybersecurity processes and procedures related to its transmission and distribution systems for opportunities to further strengthen its cybersecurity protections. Implementation of enhancements and additional requirements is ongoing.
To
date, many states have enacted and others are considering, mandatory clean energy standards requiring utilities to meet certain thresholds of renewable and/or carbon-free energy supply. The current presidential administration has made climate change a focus, as further discussed in the Outlook section. Over the long-term, the Company expects overall electric demand to be positively impacted by increased electrification trends, including electric vehicle adoption, as a means to address economy-wide carbon emission concerns and changing customer conservation patterns. MISO and NERC have recently announced concerns with reliability of the electric grid due to capacity shortages, which has resulted from rapid expansion of renewables and rapid reduction of baseload resources such as coal, while load growth has increased faster than expected. MISO has recently approved a seasonal resource adequacy
construct, or accreditation process, versus the existing annual summer peak capacity requirement process. The new construct will include a higher planning reserve margin in winter, spring and fall and a higher Coincident Load Factor for Montana-Dakota in the winter season. This is a change from the current summer requirement only process. Both of these will likely require Montana-Dakota to obtain additional accredited seasonal capacity. These changes could result in increased costs to produce electricity; however, the impact of these changes on the Company is unknown. The Company will continue to monitor the progress of these changes and assess the potential impacts they may have on its stakeholders, business processes, results of operations, cash flows and disclosures.
Revenues
are impacted by both customer growth and usage, the latter of which is primarily impacted by weather, as well as impacts associated with commercial and industrial slow-downs, including economic recessions, and energy efficiencies. Very cold winters increase demand for natural gas and to a lesser extent, electricity, while warmer than normal summers increase demand for electricity, especially among residential and commercial customers. Average consumption among both electric and natural gas customers has tended to decline as more efficient appliances and furnaces are installed, and as the Company has implemented conservation programs. Natural gas weather normalization and decoupling mechanisms in certain jurisdictions have been implemented to largely mitigate the effect that would otherwise be caused by variations in volumes sold to these customers due to weather and changing consumption
patterns on the Company's distribution margins.
The Company continues to monitor and work with its manufacturers to reduce the effects of increased pricing and lead times on delivery of certain raw materials and equipment used in electric transmission and distribution system and natural gas pipeline
projects. Long lead times are attributable to increased demand for steel products from pipeline companies as they continue pipeline system safety and integrity replacement
projects driven by PHMSA regulations, as well as delays in the manufacturing and shipping of electrical equipment as a result of the COVID-19 pandemic and subsequent supply chain issues. While not material, these segments have experienced delays and inflationary pressures, including increased costs related to purchased natural gas and capital expenditures. The Company expects these delays and inflationary pressures to continue throughout the remainder of 2022 and into 2023.
The ability to grow through acquisitions is subject to significant competition and acquisition premiums. In addition, the ability of the segments to grow their service territory and customer base is affected by regulatory constraints, the economic environment of the markets served and competition from other energy providers and fuels. As the industry continues to expand the
use of renewable energy sources, the need for additional transmission is growing. On July 25, 2022, as part of its long range transmission plan, MISO announced approval of 18 transmission projects totaling $10.3 billion of investments in MISO's midwest subregion, of which Montana-Dakota is a part. As part of MISO's long range transmission plan, in August 2022, the Company announced its intent to develop, construct and co-own an approximately 95 mile 345 kV transmission line with Otter Tail Power Company in central North Dakota. The construction of 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 may necessitate increases in electric energy prices.
Earnings
overview - The following information summarizes the performance of the electric segment.
Three Months Ended September 30, 2022, Compared to Three Months Ended September 30,
2021 Electric earnings increased $1.0 million as a result of:
•Revenue was comparable to the same period in the prior year. Interim rate relief in certain jurisdictions was mostly offset by lower retail sales volumes across all customer classes.
•Electric fuel and purchased power increased $600,000 as a result of increased energy costs, offset in revenue above.
•Operation and maintenance decreased $2.5 million.
◦Largely the result of:
•Decreased payroll-related costs, largely due to lower incentive accruals of $1.2 million and plant closures of $700,000.
•Decreased
contract services due to lower transmission expense and the absence of the Big Stone Station outage costs during 2021.
•Depreciation, depletion and amortization decreased $1.3 million.
◦Primarily due to decreased amortization of plant retirement and closure costs of $1.6 million resulting from an extension to the recovery period for these costs, which are recovered in operating revenues, as discussed in Note 13.
◦Partially offset by increased property, plant and equipment balances, primarily as a result of transmission projects placed in service.
•Taxes, other than income were comparable to the same
period in the prior year.
•Other income decreased $700,000, primarily resulting from lower returns on the Company's nonqualified benefit plan investments, as discussed in Note 14.
•Interest expense increased $400,000, largely resulting from higher long-term debt balances from debt issued in 2021, partially offset by higher AFUDC largely due to higher rates.
•Income tax expense increased $1.0 million, largely due to higher income before income taxes and lower production tax credits of $400,000 driven by lower wind production.
•Higher fuel and purchased power costs of $12.1 million recovered in customer rates and offset in expense, as described below.
•Interim rate relief in certain jurisdictions of $2.5 million.
•Higher transmission revenues, primarily from higher net transmission of $2.3 million and higher transmission interconnect upgrades of $500,000.
◦Partially offset by:
•Lower
renewable tracker revenues associated with higher production tax credits.
•Lower per unit average rates of $1.9 million related to block rates in certain jurisdictions.
•Electric fuel and purchased power increased $12.1 million.
◦Primarily the result of higher MISO costs as a result of increased energy costs, partially offset by decreased fuel costs associated with the Heskett Station and Lewis & Clark Station plant closures.
•Operation and maintenance decreased $2.8 million.
◦Primarily due to:
•Decreased payroll-related costs, largely due to lower incentive
accruals of $2.2 million and plant closures of $2.1 million, as previously discussed.
•Decreased materials costs of $1.2 million as a result of plant closures, as previously discussed.
•Reduced costs from the Heskett Station plant closure and the absence of the Big Stone outage during 2021.
◦Partially offset by increased contract service costs associated with a planned outage at Coyote Station of $2.6 million.
•Depreciation, depletion and amortization increased $2.0 million, primarily due to:
◦Increased amortization of plant retirement
and closure costs of $1.2 million recovered in operating revenues, as discussed in Note 13.
◦Increased property, plant and equipment balances placed in service, largely related to growth and replacement projects.
•Taxes, other than income were comparable to the same period in the prior year.
•Other income (expense) decreased $4.2 million, largely lower returns on the Company's nonqualified benefit plan investments of $4.4 million, as discussed in Note 14, partially offset by higher AFUDC largely due to higher rates.
•Interest
expense increased $1.2 million, largely resulting from higher long-term debt balances from debt issued in 2021, partially offset by higher AFUDC largely due to higher rates.
•Income tax benefit increased $1.5 million.
◦Largely due to:
•Higher production tax credits of $1.5 million driven by higher wind production.
•Lower income before income taxes.
◦Partially offset by permanent tax adjustments and excess deferred tax amortization of $700,000.
Earnings overview - The following information summarizes the performance of the natural
gas distribution segment.
Three
Months Ended September 30, 2022, Compared to Three Months Ended September 30, 2021 Natural gas distribution's seasonal loss increased $2.7 million as a result of:
◦Higher purchased natural gas sold of $19.5 million recovered in customer rates that was offset in expense, as described below.
◦Higher weather normalization and decoupling mechanisms of $2.6 million in certain jurisdictions.
•Purchased natural gas sold increased $20.4 million, primarily due to higher natural gas costs as a result of higher
market prices, including the higher recovery of purchased gas adjustments related to the February 2021 cold weather event and the 2018 Enbridge pipeline rupture. Purchased natural gas sold includes the disallowance of $845,000 ordered by MNPUC, as discussed in Note 19.
•Operation and maintenance increased $1.8 million largely resulting from higher subcontractor costs.
•Depreciation, depletion and amortization increased $1.2 million, primarily resulting from increased property, plant and equipment balances from growth and replacement projects placed in service.
•Taxes, other than income increased $800,000, largely from higher revenue-based taxes which are recovered in rates.
•Other income was comparable
to the same period in the prior year. Lower returns on the Company's nonqualified benefit plan investments were largely offset by higher interest income.
•Interest expense increased $1.4 million, primarily due to higher long-term debt balances from debt issued in 2022 and 2021 and higher interest rates, partially offset by higher AFUDC of $400,000.
•Income tax benefit increased $1.1 million as a result of an increased seasonal loss.
Nine Months Ended September 30, 2022, Compared to Nine Months Ended September 30, 2021 Natural gas distribution's earnings decreased $9.3 million as a result
of:
◦Higher purchased natural gas sold of $162.4 million recovered in customer rates that was offset in expense, as described below.
◦Higher retail sales volumes of approximately 12.0 percent across all customer classes due to colder weather, partially offset by weather normalization and decoupling mechanisms in certain jurisdictions.
◦Higher revenue-based taxes recovered in rates of $6.4 million that were offset in expense, as described below.
◦Higher pipeline replacement mechanisms of $1.3 million, as well as approved rate relief of $1.2 million.
•Purchased
natural gas sold increased $163.3 million, primarily due to:
◦Higher natural gas costs as a result of higher market prices of $125.1 million, including the higher recovery of purchased gas adjustments related to the February 2021 cold weather event and the 2018 Enbridge pipeline rupture.
◦Higher volumes of natural gas purchased.
•Operation and maintenance increased $9.4 million.
◦Primarily due to:
•Higher contract services of $4.5 million, primarily higher subcontractor costs.
•Higher
software costs of $1.7 million.
•Higher other costs, partially resulting from inflation, including vehicle fuel costs of $800,000; higher bad debt expense of $700,000; and higher office, travel, materials, and other miscellaneous employee costs.
•Depreciation, depletion and amortization increased $3.2 million from increased property, plant and equipment balances from growth and replacement projects placed in service.
•Taxes, other than income increased $6.6 million resulting from higher revenue-based taxes which are recovered in rates.
•Other income decreased $5.1 million, primarily the result of lower returns on the Company's
nonqualified benefit plan investments of $6.8 million, as discussed in Note 14, partially offset by increased interest income.
•Interest expense increased $2.2 million, primarily due to higher long-term debt balances from debt issued in 2022 and 2021 and higher interest rates, partially offset by higher AFUDC.
•Income tax (benefit) expense decreased $2.0 million, largely the result of lower income before income taxes.
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. The Company expects customer growth to continue to average 1 percent to 2 percent per year and as of September 30, 2022, these segments experienced retail customer growth of approximately 1.6 percent. This customer growth, along with system upgrades and replacements needed to supply safe and reliable service, will require investments in new and replacement electric and natural gas systems.
These segments are exposed to energy price volatility and may be impacted by changes
in oil and natural gas exploration and production activity. Rate schedules in the jurisdictions in which the Company's natural gas distribution segment operates contain clauses that permit the Company to file for rate adjustments for changes in the cost of purchased natural gas. Although changes in the price of natural gas are passed through to customers and have minimal impact on the Company's earnings, the natural gas distribution segment's customers benefit from lower natural gas prices through the Company's utilization of storage and fixed price contracts.
During the last half of 2021 and in 2022, the Company experienced increased natural gas prices and expects this trend to continue through the next winter heating season due to the increase in demand outpacing the supply along with the impact of global events. As a result, the Company filed an out-of-cycle cost of gas adjustment in Idaho to assist in the timely recovery of these costs. The Company will continue to monitor natural gas prices, as well as oil and natural gas production levels.
In February 2019, the Company announced the retirement of three aging coal-fired electric generating units. The
Company ceased operations of Unit 1 at Lewis & Clark Station in Sidney, Montana, in March 2021 and Units 1 and 2 at Heskett Station near Mandan, North Dakota, in February 2022. In addition, in May 2022 the Company began construction of Heskett Unit 4, an 88-MW simple-cycle natural gas-fired combustion turbine peaking unit at the existing Heskett Station near Mandan, North Dakota, with an expected in service date in the first half of 2023.
The Company is one of four owners of Coyote Station and cannot make a unilateral decision on the plant's future; therefore, the Company could be negatively impacted by decisions of the other owners. In September 2021, Otter Tail Power Company
filed its 2022 Integrated Resource Plan in Minnesota and North Dakota, which included its intent to start the process of withdrawal from its 35 percent ownership interest in Coyote Station with an anticipated exit from the plant by December 31, 2028. In October 2022, Otter Tail Power Company requested permission from the MNPUC to extend the deadline for its Integrated Resource Plan with the intent to update its modeling in light of recent developments in the industry, including capacity requirements in MISO. The joint owners continue to collaborate in analyzing data and weighing decisions that impact the plant and its employees as well as each company's customers and communities served. Further state implementation of pollution control plans to improve visibility at Class I areas, such as national parks, under the EPA's Regional Haze Rule could require the owners of Coyote Station to incur significant new costs. If the
owners decide to incur such costs, the costs could, dependent on determination by state regulatory commissions on approval to recover such costs from customers, negatively impact the Company's results of operations, financial position and cash flows. The NDDEQ submitted their state implementation plan to the EPA in August 2022 and expects a decision on the plan sometime in 2023. The plan, as submitted by the NDDEQ, does not require additional controls for any units in North Dakota, including Coyote Station.
Legislation and rulemaking The Company continues to monitor legislation and rulemaking related to clean energy standards that may impact its segments. Below are some of the specific legislative actions the
Company is monitoring.
•The current presidential administration is considering changes to the federal Clean Air Act, some of which were amended by the previous presidential administration. The content and impacts of the changes under consideration are uncertain and the Company continues to monitor for potential actions by the EPA.
•In Oregon, the Climate Protection Program Rule was approved in December 2021, which requires natural gas companies to reduce GHG emissions 50 percent below the baseline by 2035 and 90 percent below the baseline by 2050, which may be achieved through surrendering emissions allowances, investing in additional customer conservation and energy efficiency programs, purchasing community climate investment credits, and purchasing
low carbon fuels such as renewable natural gas. The Company expects the compliance costs for these regulations to be recovered through customer rates. On September 30, 2022, the Company filed a request for the use of deferred accounting for costs related to the rule and will begin deferring those costs. The Company, along with the other two local natural gas distribution companies in Oregon, filed a lawsuit on March 18, 2022, challenging the Climate Protection Program Rule. The lawsuit was filed on behalf of customers as the Company does not believe
the rule accomplishes environmental stewardship in the most effective and affordable way possible.
•In Washington, the Climate Commitment Act signed into law in May 2021 requires natural gas distribution companies to reduce overall GHG emissions 45 percent below 1990 levels by 2030, 70 percent below 1990 levels by 2040 and 95 percent below 1990 levels by 2050, which may be achieved through increased energy efficiency and conservation measures, purchased emission allowances and offsets, and purchases of low carbon fuels. As directed by the Climate Commitment Act, in September 2022 the Washington DOE published its final rule on the Climate Commitment Program. The rule is effective on October 30, 2022, and emissions compliance begins on January 1, 2023. The
Company has begun reviewing compliance options and expects the compliance costs for these regulations will be recovered through customer rates. On October 14, 2022, the Company filed a request for the use of deferred accounting for costs related to the rule and will begin deferring those costs.
•On April 22, 2022, the Washington State Building Code Council approved revisions to the state's commercial energy code that will significantly limit the use of natural gas for space and water heating in new and retrofitted commercial and multifamily buildings and proposed the review of similar restrictions in the future for residential buildings. The
Company is currently assessing the impact of these revisions.
•The Company has reviewed the income tax provisions of the IRA signed into law in August 2022 and does not expect any material income tax benefits as a result. The Company will continue to explore whether any of the new or renewed energy tax credits will provide a benefit.
Pipeline
Strategy and challenges The pipeline segment provides natural gas transportation, underground storage and energy-related services, as discussed in Note 17. The segment focuses on utilizing its extensive expertise in the design, construction and operation of energy infrastructure and related services to increase market share and profitability through optimization of existing operations, organic growth and investments in energy-related assets within or in close proximity to its current operating areas. The segment focuses on the continual safety and reliability of its systems, which entails building, operating and maintaining safe natural gas pipelines and facilities. The segment continues to evaluate growth opportunities including the expansion of natural gas facilities; incremental pipeline projects; and expansion of energy-related services leveraging on its core competencies. In support of this strategy, the
North Bakken Expansion project in western North Dakota was placed in service in February of 2022. The project has capacity to transport 250 MMcf of natural gas per day and can be increased to 625 MMcf per day with additional compression. In addition, the Line Section 7 Expansion project was placed in service in August of 2022 and increased system capacity by 6.7 MMcf per day.
The segment is exposed to energy price volatility which is impacted by the fluctuations in pricing, production and basis differentials of the energy market's commodities. Legislative and regulatory initiatives on increased pipeline safety regulations and environmental matters such as the reduction of methane emissions could also impact the price and demand for natural gas.
The pipeline segment is subject to extensive regulation related to certain operational and environmental compliance, cybersecurity, permit
terms and system integrity. The Company continues to actively evaluate cybersecurity processes and procedures, including changes in the industry's cybersecurity regulations, for opportunities to further strengthen its cybersecurity protections. Implementation of enhancements and additional requirements is ongoing. The segment reviews and secures existing permits and easements, as well as new permits and easements as necessary, to meet current demand and future growth opportunities on an ongoing basis. Groups opposing natural gas pipelines could also cause negative impacts on the segment with increased costs, potential delays to project completion or cancellation of prospective projects.
The Company is actively managing the national supply chain challenges and
inflationary costs including working with its manufacturers and suppliers to help mitigate some of these risks on its business. The segment regularly experiences extended lead times on raw materials that are critical to the segment's construction and maintenance work which could delay maintenance work and construction projects potentially causing lost revenues and/or increased costs. The segment is also currently experiencing increased fuel and raw material costs, as well as other inflationary pressures. The Company expects supply chain challenges and inflationary pressures to continue throughout the remainder of 2022 and into 2023.
The segment focuses on the recruitment and retention of a skilled workforce to remain competitive and provide services to its customers. The industry in which it operates relies on a skilled workforce to construct
energy infrastructure and operate existing infrastructure in a safe manner. A shortage of skilled personnel can create a competitive labor market which could increase costs incurred by the segment. Competition from other pipeline companies can also have a negative impact on the segment.
Earnings overview - The following information summarizes the performance of the pipeline segment.
•Revenues increased $4.8 million, primarily driven by increased transportation volume revenues, largely due to the North Bakken Expansion project placed in service in February 2022.
•Operation
and maintenance increased $400,000 primarily from higher contract services costs, non-regulated project costs and materials, partially offset by lower payroll-related costs largely due to lower incentive accruals.
•Depreciation, depletion and amortization increased $1.7 million due to increased property, plant and equipment balances, largely related to the North Bakken Expansion project.
•Taxes, other than income were comparable to the same period in the prior year.
•Other income decreased $2.2 million, driven primarily by lower AFUDC as a result of the completion of the North Bakken Expansion project placed in service in February 2022.
•Interest
expense increased $1.3 million, primarily from higher debt balances to fund capital expenditures and lower AFUDC as a result of the completion of the North Bakken Expansion project placed in service in February 2022.
•Income tax expense was comparable to the same period in the prior year.
◦Driven by increased transportation volume revenues of $11.8 million, largely due to the
North Bakken Expansion project placed in service in February 2022.
◦Partially offset by:
•Lower non-regulated project revenues of $2.5 million.
•Lower storage-related revenues of $900,000.
•Lower transmission rates, due to expired negotiated contracts converted to tariff rate.
•Operation and maintenance decreased $600,000.
◦Primarily due to:
•Lower payroll-related costs of $1.7 million, largely related
to lower incentive accruals.
•Lower non-regulated project costs of $1.5 million directly associated with lower non-regulated project revenues, as previously discussed.
◦Partially offset by higher contract services, materials and legal costs.
•Depreciation, depletion and amortization increased $4.5 million due to increased property, plant and equipment balances, largely related to the North Bakken Expansion project.
•Taxes, other than income were comparable to the same period in the prior year.
•Other income decreased $5.6 million, resulting
from:
◦Lower AFUDC of $3.7 million as a result of the completion of the North Bakken Expansion project placed in service in February 2022.
◦Lower returns on the Company's nonqualified benefit plan investments, as discussed in Note 14.
•Interest expense increased $2.5 million, primarily due to interest associated with higher debt balances to fund capital expenditures and lower AFUDC as a result of the North Bakken Expansion project placed in service in February 2022.
•Income tax expense was comparable to the same period in the prior year.
Outlook
On February 18, 2022, the FERC issued two policy statements regarding the certification of new interstate natural gas facilities. The two policy statements were subsequently converted to draft policy statements by the FERC on March 24, 2022. The first draft policy statement, the Updated Certificate Policy Statement, describes how the FERC will determine whether a new interstate natural gas transportation project is required by public convenience and necessity. It includes increased focus on a project's purpose and need and the environmental impacts; as well as impacts on landowners and environmental justice communities. The FERC also clarified the updated policy statement will not apply to projects that have been filed with the FERC prior to the policy statement being finalized. The second draft policy statement, the Interim GHG Policy Statement,
explains how the FERC will assess the impacts of natural gas infrastructure projects on climate change in its reviews under the National Environmental Policy Act and Natural Gas Act. The FERC invited public comment on the draft policy statements which were due April 25, 2022. The Company continues to monitor and assess these initiatives and the potential impacts they may have on its business processes, current and future projects, results of operations and disclosures.
The Company has reviewed the income tax provisions of the IRA signed into law in August 2022 and does not expect any material income tax benefits as a result. The Company
has also evaluated the impacts of the methane emissions charge imposed under the IRA legislation and does not expect any material fees given the current GHG reporting thresholds. The Company continues to monitor, evaluate and implement additional GHG emissions reduction strategies, including increased monitoring frequency and emission source control technologies to minimize potential risk.
The Company has continued to experience the effect of associated natural gas production in the Bakken, which has provided opportunities for organic growth projects and increased demand. The completion of organic growth projects has contributed to higher volumes of natural gas the Company transports
through its system. Associated natural gas production in the Bakken fell during the pandemic delaying previously forecasted production growth. Natural gas production has rebounded to pre-pandemic levels and drilling rig activity continues to increase. The production delay along with long-term contractual commitments on the North Bakken Expansion project placed in service in the first quarter of 2022 has negatively impacted customer renewals of certain contracts. Bakken natural gas production outlook remains positive with continued growth expected due to new oil wells and increasing gas to oil ratios.
The low levels of natural gas in storage nationally, which continue to trend below the five-year average, along with global events, has put upward pressure on natural gas prices and increased volatility. While the
Company believes there will continue to be varying pressures on natural gas production levels and prices, the long-term outlook for natural gas prices continues to provide growth opportunity for industrial supply-related projects and seasonal pricing differentials provide opportunities for storage services.
The Company continues to focus on improving existing operations and growth opportunities through organic projects in all areas in which it operates, which includes additional projects with local distribution companies and industrial customers in various stages of development.
In July 2021, the Company announced plans for a natural gas pipeline expansion project in eastern North Dakota. The Wahpeton Expansion project
consists of 60 miles of pipe and ancillary facilities and is designed to increase capacity by 20 MMcf per day, which is supported by long-term customer agreements with Montana-Dakota and its utility customers. Construction is expected to begin in early 2024, depending on regulatory approvals, with an anticipated completion date later in 2024. On May 27, 2022, the Company filed with FERC its application for this project.
On September 19, 2022, the Company filed with the FERC its prior notice application for its 2023 Line Section 27 Expansion project. This project consists of a new compressor station and ancillary facilities and is designed to increase capacity by
175 MMcf per day, which is supported by a long-term customer agreement. Construction is expected to begin in early 2023, pending regulatory approvals, with an anticipated completion date in late 2023.
In addition to the Wahpeton Expansion and 2023 Line Section 27 Expansion projects, the Company has also entered into long-term customer agreements for the construction of two additional growth projects, which are dependent on regulatory approvals and anticipated to be completed in 2023. Estimated capital expenditures for these projects is approximately $65 million and is included in the pipeline segment's estimated capital expenditures for 2022 and 2023. The projects are anticipated to add total incremental system capacity of 119 MMcf per day.
Construction
Materials and Contracting
Strategy and challenges The construction materials and contracting segment provides an integrated set of aggregate-based services, as discussed in Note 17. The segment focuses on high-growth strategic markets located near major transportation corridors and desirable mid-sized metropolitan areas; strengthening the long-term, strategic aggregate reserve position through available purchase and/or lease opportunities; enhancing profitability through cost containment, margin discipline and vertical integration of the segment's operations; development and recruitment of talented employees; and continued growth through organic and strategic acquisition opportunities.
A key element of the Company's long-term strategy for this business is to further expand its market presence
in the higher-margin materials business (rock, sand, gravel, ready-mix concrete, asphalt concrete and related products), complementing and expanding on the segment's expertise. The Company's continued acquisition activity supports this strategy.
As one of the country's largest sand and gravel producers, the segment continues to strategically manage its aggregate reserves, as well as take further advantage of being vertically integrated. The segment's vertical integration allows it 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.
The segment's management continually monitors its operating margins and has been proactive in addressing the inflationary impacts seen across the United States. The Company has increased its product pricing where necessary to mitigate the effects on the segment's gross margin. Due to existing contractual provisions, there can be a lag between the announced price increases and the time when they can be fully recognized. The
Company will continue to evaluate future price increases on a regular cadence to keep pace with inflationary pressures as they are expected to continue throughout the remainder of 2022 and into 2023.
The segment operates in geographically diverse and competitive markets that can put negative pressure on the segment's operating margins. The segment's margins can also be impacted by volatility in the cost of raw materials such as diesel fuel, gasoline, asphalt oil, cement and steel, with diesel fuel and asphalt oil costs having the most significant impact on the segment's recent results. Such volatility and inflationary pressures may continue to have an impact on the segment's margins, including fixed-price construction contracts that are particularly vulnerable to the volatility of energy and material prices. While the
Company has experienced some supply chain constraints, the Company has good relationships with its suppliers and has not experienced significant shortages or delays on materials or experienced any material adverse impacts to its results of operations. Other variables that can impact the segment's margins include adverse weather conditions, the timing of project starts or completions and declines or delays in new and existing projects due to the cyclical nature of the construction industry and governmental infrastructure spending. Accordingly, operating results in any particular period may not be indicative of the results that can be expected for any other period.
As a people first company, the segment continually takes steps to address the challenge of recruitment and retention of employees. In order to help attract new workers to the construction
industry and enhance the skills of its current employees, the Company has completed construction of a corporate-wide state-of-the-art training center located in the Pacific Northwest. The training facility offers hands-on training for heavy equipment operators and truck drivers, as well as leadership and safety training. Trends in the labor market include an aging workforce and availability issues, and most of the markets the segment operates in have experienced labor shortages, largely truck drivers, causing increased labor-related costs and delays or inefficiencies on projects. The new training facility is expected to help address some of these challenges. The Company continues to monitor the labor markets and assess additional opportunities to enhance and support its workforce. Despite these efforts,
the Company expects labor costs to continue to increase based on the increased demand for services and, to a lesser extent, the recent escalated inflationary environment in the United States.
Earnings overview - The following information summarizes the performance of the construction materials and contracting segment.
*Other
products includes cement, asphalt oil, merchandise, fabric, spreading and other products that individually are not considered to be a major line of business for the segment.
Three
Months Ended September 30, 2022, Compared to Three Months Ended September 30, 2021 Construction materials and contracting's earnings increased $6.5 million as a result of:
•Revenuesincreased $144.1 million.
◦Primarily the result of increased revenues across all product lines.
•The Company benefited from higher average selling prices of nearly $100 million across all product lines. Also positively impacting materials revenues were:
◦Increased
aggregates sales volumes due to additional revenue from recent acquisitions, including the benefit of approximately 700,000 tons, and higher volumes in certain markets as a result of higher demand.
◦Increased asphalt sales volumes, largely from higher demand due to more available public work in Minnesota of 198,000 tons and Montana and Wyoming of 82,000 tons. Also contributing was higher sales volumes due to the recent acquisitions, which contributed an additional 76,000 tons.
◦Partially offsetting these increases were lower ready-mix sales volumes as a result of lower demand in certain regions.
•Increased contracting revenues due to more available work, strong demand in some regions and revenue from recent acquisitions of $15.8 million.
◦Partially
offset by:
•An increase in internal materials sales used in other product lines and contracting services provided.
•Gross margin increased $15.6 million, directly resulting from the higher revenues previously discussed, partially offset by higher operating costs across the business primarily as a result of inflationary pressures, including diesel fuel costs of $12.9 million and higher labor, materials, equipment and production costs.
•Selling, general and administrative expense increased $1.9 million as a result of increased payroll-related costs, partially resulting from inflationary pressures.
•Other expense increased $1.0 million due to lower returns on the
Company's nonqualified benefit plan investments, as discussed in Note 14.
•Interest expense increased $4.0 million, largely the result of higher debt balances, largely to fund recent acquisitions and higher working capital needs, and higher average interest rates.
•Income tax expense increased $2.2 million, largely due to higher income before income taxes.
Nine Months Ended September 30, 2022, Compared to Nine Months Ended September 30,
2021 Construction materials and contracting's earnings decreased $21.6 million as a result of:
•Revenuesincreased $266.4 million.
◦Primarily the result of increased revenues across all product lines.
•The Company benefited from higher average selling prices of nearly $175 million across all product lines. Also impacting materials revenues were:
◦Increased asphalt sales volumes of 294,000 tons from recent acquisitions.
◦Increased aggregate sales volumes of 1.7
million tons from recent acquisitions. Also contributing was strong market demand in Idaho and Montana.
◦Increased other revenues from other retail and cement revenues.
◦Lower ready-mix concrete sales volumes in Oregon, Hawaii and Alaska due to the decreased demand and the absence of certain large projects, and higher delivery costs in South Dakota.
•Increased contracting revenue across all regions as a result of more available work and increased pricing related to inflationary costs, as well as revenues from recent acquisitions.
◦These increases were partially offset by:
•An increase in internal materials sales used
in other product lines and contracting services provided.
•Gross margin decreased $8.5 million.
◦Primarily the result of higher operating costs across the business primarily as a result of inflationary pressures, including diesel fuel costs of $30.9 million and higher labor, materials, repair and maintenance, equipment, delivery and production costs. In addition, contracting services margins decreased from the mix of work and project delays.
◦Partially offset by increased margins for aggregates and ready-mix as a result of the increased revenues previously discussed.
•Selling, general and administrative expense increased $5.7 million, largely due to:
◦Increased
payroll-related costs of $2.9 million, partially resulting from inflationary pressures.
◦Higher professional fees of $800,000, partially due to increased audit fees and acquisition-related costs.
◦Lower recovery of bad debt expense of $800,000.
◦Higher depreciation and amortization of $600,000, primarily due to the completion of the training center.
◦Increased technology expenses.
•Other income (expense) decreased $6.9 million, mainly due to lower returns on the Company's nonqualified benefit plan investments, as discussed in Note
14.
•Interest expense increased $7.1 million, largely the result of higher debt balances to fund recent acquisitions and higher working capital needs.
•Income tax expense decreased $6.6 million, largely due to lower income before income taxes.
Outlook In August 2022, the Company announced its intent to separate this segment into a standalone publicly traded company. The separation is expected to result in two independent, publicly traded companies: (1) MDU Resources Group, Inc., the existing company and (2) Knife River, a construction materials and contracting company. The separation is expected to be completed in 2023 and is expected to unlock the inherent value within the two companies,
which each have unique growth prospects and investment opportunities.
The American Rescue Plan Act enacted in the first quarter of 2021 provides $1.9 trillion in COVID-19 relief funding for states, schools and local governments. States are beginning to move forward with allocating these funds based on federal criteria and state needs, and in some cases, funding of infrastructure projects could positively impact the segment. Additionally, the bipartisan infrastructure proposal, known as the Infrastructure Investment and Jobs Act, was enacted in the fourth quarter of 2021. This initiative is providing long-term opportunities by designating $119 billion for the repair and rebuilding of roads and bridges across the Company's footprint. In addition, the IRA provides $369 billion in new funding for clean energy programs. These programs include new
tax incentives for solar, battery storage and hydrogen development along with funding to expand the production of electric vehicles and the build out of infrastructure to support electric vehicles. In addition to federal funding, 13 out of the 14 of the states in which the Company operates have implemented their own funding mechanisms for public projects, including projects related to highways, airports and other public infrastructure. The Company continues to monitor the implementation of these legislative items.
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-mix concrete, asphaltic concrete and public and private construction markets. The contracting services and construction materials are sold in connection with street, highway and other public infrastructure projects, as well as private commercial, industrial and residential development projects. The public infrastructure projects have traditionally been more stable markets as public funding is more secure during periods of economic decline. The public projects are, however, dependent on federal and state funding such as appropriations to the Federal Highway Administration. Spending on private development is highly dependent on both local and national economic cycles, providing additional sales during times of strong economic cycles and potential for reductions during times of inflation or supply shortages.
During
2021, the Company made strategic purchases and completed acquisitions that support the Company's long-term strategy to expand its market presence in the higher-margin materials markets. The Company continues to evaluate additional acquisition opportunities. For more information on the Company's business combinations, see Note 10. In 2022, the Company is also upgrading its prestress facility located in Spokane, Washington. The state of the art facility is expected to be in service in December 2022. The facility is expected be a platform for growth through improved
productivity and quality, which will help meet strong market demand for prefabricated concrete solutions.
The construction materials and contracting segment's backlog remained strong at September 30, 2022, at $895.0 million, as compared to backlog of $651.7 million at September 30, 2021. A significant portion of the Company's backlog relates to publicly funded projects, largely street and highway construction projects. Period over period increases or decreases in backlog cannot be used as an indicator of future revenues or net income. Of the $895.0 million of backlog at September 30, 2022, the Company expects to complete
an estimated $820.5 million during the next 12 months. While the Company believes the current backlog of work remains firm, prolonged delays in the receipt of critical supplies and materials or continued increases to pricing could result in customers seeking to delay or terminate existing or pending agreements. Factors noted in Part I, Item 1A. Risk Factors in the 2021 Annual Report can cause revenues to be realized in periods and at levels that are different from originally projected.
The labor contracts that the construction materials and contracting segment was negotiating at December 31, 2021, as reported in Items 1 and 2 - Business Properties - General in the 2021 Annual Report, have been ratified.
Construction
Services
Strategy and challenges The construction services segment provides electrical and mechanical and transmission and distribution specialty contracting services, as discussed in Note 17. The construction services segment focuses on safely executing projects; providing a superior return on investment by building new and strengthening existing customer relationships; ensuring quality service; effectively controlling costs; retaining, developing and recruiting talented employees; growing through organic and strategic acquisition opportunities; and focusing efforts on projects that will permit higher margins while properly managing risk. The growth experienced by the segment in recent years is due in part to its ability to support national customers in most of the regions in which it operates.
The construction services segment faces challenges, which are not under
direct control of the business, in competitive markets in which it operates, including those described in Part I, Item 1A. Risk Factors in the 2021 Annual Report. These factors, and those noted below, have caused fluctuations in revenues, gross margins and earnings in the past and are likely to cause fluctuations in the future.
•Revenue mix and impact on margins. The mix of revenues based on the types of services the segment provides can impact margins as certain industries and services provide higher margin opportunities. Larger or more complex projects typically result in higher margin opportunities since the segment assumes a higher degree of performance risk and there is greater utilization of the segment's resources for longer construction timelines. However, larger or more complex projects have a higher risk of regulatory and seasonal or cyclical delay. Project schedules
fluctuate, which can affect the amount of work performed in a given period. Smaller or less complex projects typically have a greater number of companies competing for them, and competitors at times may be more aggressive when pursuing available work. A greater percentage of smaller scale or less complex work in a given period could negatively impact margins due to the inefficiency of transitioning between a greater number of smaller projects versus continuous production on a few larger projects.
•Project variability and performance. Margins for a single project may fluctuate period to period due to changes in the volume or type of work performed, the pricing structure under the project contract or job productivity. Productivity and performance on a project can vary period to period based
on a number of factors, including unexpected project difficulties; unexpected project site conditions; project location, including locations with challenging operating conditions or difficult geographic characteristics; whether the work is on an open or encumbered right of way; inclement weather or severe weather events; environmental restrictions or regulatory delays; political or legal challenges related to a project; and the performance of third parties. In addition, the type of contract can impact the margin on a project. Under fixed-price contracts, which are more common with larger or more complex projects, the segment assumes risk related to project estimates versus execution. Revenues under this type of contract
can vary, sometimes significantly, from original projects due to additional project complexity; timing uncertainty or extended bidding; extended regulatory or permitting processes; and other factors, which can result in a reduction in profit or losses on a project.
•Subcontractor work and provision of materials. Some work under project contracts is subcontracted out to other companies and margins on subcontractor work is generally lower than work performed by the Company. Increased subcontractor work in a given period may therefore result in lower margins. In addition, inflationary or other pressures may increase the cost of materials under fixed-price contracts
and may result in decreased margins on the project. The Company has worked to implement provisions in project contracts to allow for the pass-through of inflationary costs to customers where feasible and will continue to do so to mitigate the impacts.
The segment's management continually monitors its operating margins and has been proactive in addressing the inflationary impacts seen across the United States. The segment is currently experiencing increased fuel and material costs as well as impacts from delays in the national supply chain. The segment is working with suppliers and providers of goods and services in advance of
construction
to secure pricing and reduce delays for goods and services. The inflationary costs and national supply chain challenges experienced by the segment have increased costs but have not had significant impacts to the procurement of project materials. The Company expects these inflationary pressures and national supply chain challenges to continue throughout the remainder of 2022 and into 2023. 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, as well as increasing duration and complexity of customer capital programs. Most of the markets the segment operates
in have experienced labor shortages which in some cases have caused increased labor-related costs. The Company continues to monitor the labor markets and expects labor costs to continue to increase based on increases included in collective bargaining agreements and, to a lesser extent, the recent escalated inflationary environment in the United States. Due to these and other factors, the Company believes overall customer and competitor demand for labor resources will continue to increase.
Earnings overview - The following information summarizes the performance of the construction services segment.
Three
Months Ended September 30, 2022, Compared to Three Months Ended September 30, 2021Construction services earnings increased $4.9 million as a result of:
•Revenues increased $222.2 million.
◦Largely due to higher electrical and mechanical workloads as a result of:
•Higher commercial workloads driven largely by a $97.5 million increase in the hospitality sector, primarily from the progress on large projects; a $30.0 million increase in data center work from the number of and progress on projects started during the quarter; and an increase in the general commercial sector.
•Higher
renewable workloads of $41.3 million due to the timing of and progress on commercial renewable projects.
•Higher industrial workloads in the high-tech sector of $22.1 million, the general industrial sector of $14.8 million and the maintenance sector of $14.7 million, all of which benefited from the mix of project work; partially offset by lower refinery workloads.
•Higher institutional workloads, primarily in the healthcare sector of $11.2 million, the education sector of $8.4 million and the government sector, all of which benefited from the mix of project work in the quarter.
◦Also contributing were higher utility workloads as a result of increases in the electrical sector of $14.1 million, the underground sector of $11.9 million, the substation sector of $5.6 million
and the distribution sector, all of which benefited from the project timing. These were offset by lower transportation workloads for street lighting also due to project timing.
•Gross margin increased $5.5 million.
◦Largely due to:
•Higher margins on electrical and mechanical work in the industrial, institutional and commercial sectors due to project mix, as well as gains associated with completed commercial jobs.
•Higher utility margins of $7.8 million resulting from the mix of customer projects, partially offset by lower storm margins.
◦Partially offset by:
•Higher
overall operating costs related to inflationary pressures, including increased fuel and material costs and higher labor costs from decreased efficiencies on certain projects.
•Lower margins on renewable work, partly due to revisions in estimates on a project due to delays and labor impacts.
•Lower transportation margins, primarily for street lighting and electrical sectors due to customer demand.
•Selling, general and administrative expense increased $700,000.
◦Primarily due to:
•Increased reserve for uncollectible accounts of $600,000.
•Increased office expenses
of $400,000
◦Partially offset by decreased payroll-related costs, primarily due to lower incentive accruals.
•Other income increased $2.6 million, primarily related to the Company's joint ventures.
•Interest expense increased $800,000 due to higher working capital needs.
•Income tax expense increased $1.7 million primarily resulting from an increase in income before income taxes.
Nine Months Ended September 30, 2022, Compared to Nine Months Ended September 30, 2021Construction
services earnings increased $2.0 million as a result of:
•Revenues increased $416.2 million.
◦Largely due to higher electrical and mechanical workloads as a result of:
•Higher commercial workloads driven largely by a $127.5 million increase in the hospitality sector as a result of progress on large projects; a $58.3 million increase in the data center sector from the number of and progress on projects; and an increase in general commercial workloads as a result of project mix and the progress on contracts.
•Higher renewable workloads due to the timing of and progress on commercial renewable projects.
•Higher
institutional workloads, with the education sector contributing an additional $21.0 million, the healthcare sector contributing an additional $18.4 million, and the government sector contributing $4.9 million, all of which were the result of increased activity from project mix and progress on projects.
•Higher service workloads due to the demand for the repair and maintenance of electrical and mechanical systems.
◦Also contributing were higher utility workloads, primarily from an increase in the electrical sector of $32.6 million, the underground sector of $17.3 million, the distribution and substation sectors of $16.1 million and the telecommunications sector of $5.6 million, all of which benefited from increased customer released projects, partially offset by lower transmission and storm work from decreased customer demand.
◦Partially
offset by:
•Lower transportation workloads, primarily in the street lighting sector of $25.3 million due to lower demand, partially offset by higher traffic signalization and government workloads.
•Lower industrial workloads, primarily in the high-tech sector of $26.5 million, largely due to the completion of a large high-tech project as well as the timing of other projects, and the maintenance sector of $8.4 million related to the timing of projects. Partially offsetting these decreases was an increase in general industrial sector from project mix and timing.
•Higher commercial and service margins primarily the result of project mix and progression on projects.
•Higher utility margins from the mix of utility projects, offset in part by lower storm margins.
◦Partially offset by:
•Higher overall operating costs related to inflationary pressures, including increased fuel and material costs and higher labor costs from decreased efficiencies on certain projects.
•Lower industrial margins of $3.9 million from the absence of certain higher margin work in 2021, as well as
the timing of project completions and project starts.
•Lower transportation margins on street lighting and traffic signalization projects.
•Renewable project margin was negatively impacted from revisions in estimates on a project due to delays and labor impacts.
•Selling, general and administrative expense increased $5.1 million.
◦Primarily due to:
•Increased reserve for uncollectible accounts of $2.6 million.
•Increased office expenses of $1.3 million from an increase in facility costs.
•Increased
payroll-related costs of $1.2 million, largely related to higher employee incentive accruals from the higher number of employees.
•Other income increased $2.0 million, primarily related to the Company's joint ventures.
•Interest expense increased $1.2 million due to higher working capital needs.
•Income tax expense increased $1.2 million directly resulting from an increase in income before income taxes.
Outlook The American Rescue Plan provides $1.9 trillion in COVID-19 relief funding for states, schools and local government including broadband infrastructure. States are beginning to move forward with allocating these
funds based on federal criteria and state needs, and in some cases, funding of infrastructure projects could positively impact the segment. Additionally, the bipartisan infrastructure proposal, known as the Infrastructure Investment and Jobs Act, was enacted in the fourth quarter of 2021. These include investments for upgrades to electric and grid infrastructure, transportation systems, airports and electric vehicle infrastructure, all industries this segment supports. In addition, the IRA provides $369 billion in new funding for clean energy programs. These programs include new tax incentives for solar, battery storage and hydrogen development along with funding to expand the production of electric vehicles and the build out of infrastructure to support electric vehicles. The Company will continue to monitor the implementation of these legislative items.
The
Company continues to have bidding opportunities in the specialty contracting markets in which it operated in during 2022 as evidenced by the segment's backlog. Although bidding remains highly competitive in all areas, the Company expects the segment's relationship with existing customers, skilled workforce, quality of service and effective cost management will continue to provide a benefit in securing and executing profitable projects in the future. The Company has also seen rapidly growing needs for services across the electric vehicle charging, wind generation and energy storage markets that complement existing renewable projects performed by the Company.
The construction services
segment's backlog at September 30, was as follows:
2022
2021
(In millions)
Electrical & mechanical
$
1,724
$
1,041
Transmission & distribution
278
232
$
2,002
$
1,273
The
57 percent increase in backlog at September 30, 2022, as compared to backlog at September 30, 2021, was largely attributable to the new project opportunities that the Company continues to be awarded across its diverse operations, particularly within the commercial, institutional, utility and industrial markets. These increases were partially offset by decreases in the transportation market due to the timing of project completions. Period over period increases or decreases in backlog cannot be used as an indicator of future revenues or net income. Of the $2.0 billion of backlog at September 30, 2022, the Company expects to complete an estimated $1.67 billion
during the next 12 months. While the Company believes the current backlog of work remains firm, prolonged delays in the receipt of critical supplies and materials could result in customers seeking to delay or terminate existing or pending agreements. As of September 30, 2022, customers have not provided the Company any indications that they no longer wish to proceed with planned projects that have been included in backlog. Additionally, the Company continues to further evaluate potential acquisition opportunities that would be accretive to earnings of the Company and continue to grow the segment's
backlog. Factors noted in Part I, Item 1A. Risk Factors in the 2021 Annual Report can cause revenues to be realized in periods and at levels that are different from originally projected.
The labor contract that the construction services segment was negotiating at December 31, 2021, as reported in Items 1 and 2 - Business Properties - General in the 2021 Annual Report, has been ratified.
Other
was positively impacted by income tax adjustments related to the consolidated company's annualized estimated tax rate. Operating expenses were positively impacted from a reduction in estimated losses recorded at the captive insurer. In addition, higher premiums for the captive insurer were experienced in 2022 compared to 2021, which impacts both operation and maintenance expense and operating revenues. Also included in Other are general and administrative costs and interest expense previously allocated to the exploration and production and refining businesses that do not meet the criteria for income (loss) from discontinued operations, as well as transaction costs associated with the anticipated spinoff of Knife River.
Other
was negatively impacted by income tax adjustments related to the consolidated company's annualized estimated tax rate. Operating expenses were positively impacted from a reduction in estimated losses recorded at the captive insurer, partially offset by a loss on the disposal of assets recorded in operation and maintenance expense. In addition, higher premiums for the captive insurer were experienced in 2022 compared to 2021, which impacts both operation and maintenance expense and operating revenues. Also included in Other are general and administrative costs and interest expense previously allocated to the exploration and production and refining businesses that do not meet the criteria for income (loss) from discontinued operations, as well as transaction costs associated with the anticipated spinoff of Knife River.
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:
For more information on intersegment eliminations, see Note 17.
Liquidity and Capital Commitments
At September 30, 2022, the
Company had cash and cash equivalents of $74.6 million and available borrowing capacity of $371.6 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 and commercial paper of the Company's subsidiaries, as described in Capital resources; and issuance of debt and equity securities if necessary.
Components of net cash provided by operating activities:
Income
from continuing operations
$
250.3
$
291.3
$
(41.0)
Adjustments to reconcile net income to net cash provided by operating activities
279.3
246.1
33.2
Changes in current assets and liabilities, net of acquisitions:
Receivables
(346.9)
(103.6)
(243.3)
Inventories
(60.7)
(21.4)
(39.3)
Other
current assets
(31.4)
(74.4)
43.0
Accounts payable
148.4
33.1
115.3
Other current liabilities
62.1
14.2
47.9
Pension
and postretirement benefit plan contributions
(.4)
(.3)
(.1)
Other noncurrent changes
(15.8)
(19.1)
3.3
Net cash used in discontinued operations
—
(.1)
.1
Net
cash provided by operating activities
$
284.9
$
365.8
$
(80.9)
The changes in cash flows from operating activities generally follow the results of operations, as discussed in Business Segment Financial and Operating Data, and are affected by changes in working capital. The decrease in cash flows provided by operating activities in the previous table was largely driven by higher working capital needs at the construction services and construction materials and contracting businesses due to fluctuations in job activity resulting in higher receivables in the period, as
well as lower collections of accounts receivable compared to first nine months of 2021 offset in part by increased accounts payable. Also contributing to the decrease were increased inventories related to higher gas costs at the natural gas distribution business and lower earnings across most of the Company's businesses. Partially offsetting the net decrease in cash flows provided by operating activities was the recovery of purchased gas adjustment balances and the absence of higher natural gas purchases in February 2021, as discussed in Note 13. Other current assets and liabilities were also impacted by the Company's net tax position.
Components of net cash used in investing activities:
Capital expenditures
$
(463.0)
$
(428.1)
$
(34.9)
Acquisitions, net of cash acquired
.4
(13.7)
14.1
Net
proceeds from sale or disposition of property and other
1.6
13.0
(11.4)
Investments
(4.4)
(3.8)
(.6)
Net cash used in investing activities
$
(465.4)
$
(432.6)
$
(32.8)
The
increase in cash used in investing activities in the previous table was primarily due to increased capital expenditures in 2022 related to increased electric production projects, including the construction of Heskett Unit 4 and the repower of Diamond Willow at the electric business; higher natural gas distribution projects, including natural gas mains and meters at the natural gas distribution business; and the construction of a new building at the construction services business. The construction services and electric businesses also experienced lower proceeds from asset sales in 2022 related to the sale of a building and decommissioning activities related to plant closures, respectively. Offsetting the increased cash used in investing activities was decreased capital expenditures at the pipeline business as a result of the North Bakken Expansion project being placed in service in February 2022 and lower cash used for acquisition activity at the construction materials
and contracting business.
Components of net cash provided by financing activities:
Issuance of short-term borrowings
$
100.0
$
50.0
$
50.0
Repayment of short-term borrowings
—
(50.0)
50.0
Issuance
of long-term debt
270.3
178.9
91.4
Repayment of long-term debt
(23.1)
(63.8)
40.7
Debt issuance costs
(1.1)
(.4)
(.7)
Net
proceeds from issuance of common stock
(.1)
88.8
(88.9)
Dividends paid
(132.7)
(128.1)
(4.6)
Repurchase of common stock
(7.4)
(6.7)
(.7)
Tax
withholding on stock-based compensation
(5.0)
(4.2)
(.8)
Net cash provided by financing activities
$
200.9
$
64.5
$
136.4
The increase in cash provided by financing activities in the previous table was largely the result of increased issuance of short-term
and long-term debt at the construction services and construction materials and contracting businesses to fund higher working capital needs and at the electric and natural gas distribution business to fund capital expenditures and higher natural gas costs. The issuances were partially offset by the repayment of commercial paper borrowings that were replaced by short-term debt and private placement borrowings. Also partially offsetting the increase in cash provided by financing activities was the absence of the issuance of common stock under the Company's "at-the-market" offering during 2022, as discussed in Note 7.
Defined benefit pension plans
The
Company has noncontributory qualified defined benefit pension plans. Various assumptions are used in calculating the benefit expense (income) and liability (asset) related to these plans, as such costs of providing these benefits bear the risk of changes as they are dependent upon assumptions of future conditions.
For 2022, the Company assumed a long-term rate of return on its qualified defined pension plan assets of 6 percent. Through September 30, 2022, due to the decline in the equity and fixed-income markets, the Company experienced a 25 percent loss on its qualified defined pension plan assets. Differences between actuarial assumptions and actual plan results are deferred and amortized into expense when
the accumulated differences exceed 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets. Therefore, this change in asset values will be reflected in future expenses of the plans, beginning in 2023.
There were no other material changes to the Company's qualified noncontributory defined benefit pension plans from those reported in the 2021 Annual Report. For more information, see Note 18 and Part II, Item 7 in the 2021 Annual Report.
Capital expenditures for the first nine months of 2022 and 2021 were $451.1 million and $507.9 million, respectively. Capital expenditures allocated to the Company's business segments are estimated to be approximately $702 million for 2022. Capital expenditures have been updated from what was previously reported in the 2021 Annual Report to accommodate project timeline and scope changes made throughout the first three quarters of 2022.
The Company has included in the estimated capital expenditures for 2022 multiple organic growth projects at the pipeline business and construction of Heskett Unit 4 at the electric business, as previously discussed in Business Segment Financial and Operating Data, as well as system upgrades;
routine replacements; service extensions; routine equipment maintenance and replacements; buildings, land and building improvements; pipeline and natural gas storage projects; power generation and transmission opportunities, environmental upgrades; and other growth opportunities.
The Company continues to evaluate potential future acquisitions and other growth opportunities that would be incremental to the outlined capital program; however, they are dependent upon the availability of economic opportunities and, as a result, capital expenditures may vary significantly from the estimate previously discussed. The Company continuously monitors its capital expenditures for project delays and changes in economic viability and adjusts as necessary. It is anticipated that
all of the funds required for capital expenditures for 2022 will be funded by various sources, including internally generated funds; credit facilities and commercial paper of the Company's subsidiaries, as described later; and issuance of debt and equity securities if necessary.
Capital resources
The Company requires significant cash to support and grow its businesses. The primary sources of cash other than cash generated from operating activities are cash from revolving credit facilities, cash from the issuance of long-term
debt and cash from the sale of equity securities.
Debt 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, 2022. In the event the subsidiaries do not comply with
the applicable covenants and other conditions, alternative sources of funding may need to be pursued. For more information on the covenants, certain other conditions and cross-default provisions, see Part II, Item 8 in the 2021 Annual Report.
(a)The
commercial paper program is supported by a revolving credit agreement with various banks (provisions allow for increased borrowings, at the option of Montana-Dakota on stated conditions, up to a maximum of $225.0 million). At September 30, 2022, there were no amounts outstanding under the revolving credit agreement.
(b)Certain provisions allow for increased borrowings, up to a maximum of $125.0 million.
(c)Outstanding letter(s) of credit reduce the amount available under the credit agreement.
(d)Certain provisions allow for increased borrowings, up to a maximum of $110.0 million.
(e)The commercial paper program is supported by a revolving credit
agreement with various banks (provisions allow for increased borrowings, at the option of Centennial on stated conditions, up to a maximum of $700.0 million). At September 30, 2022, there were no amounts outstanding under the revolving credit agreement.
The respective commercial paper programs are supported by revolving credit agreements. While the amount of commercial paper outstanding does not reduce available capacity under the respective revolving credit agreements, Montana-Dakota and Centennial do not issue commercial paper in an aggregate amount exceeding the available capacity under the credit agreements. The commercial paper borrowings may vary during the period, largely the result of fluctuations in working
capital requirements due to the seasonality of certain operations of the Company's subsidiaries.
Total equity as a percent of total capitalization was 53 percent, 58 percent and 55 percent at September 30, 2022 and 2021, and December 31, 2021, respectively. This ratio is calculated as the Company's total equity, divided by the Company's total capital.
Total
capital is the Company's total debt, including short-term borrowings and long-term debt due within one year, plus total equity. This ratio is an indicator of how a company is financing its operations, as well as its financial strength.
Cascade On June 15, 2022, Cascade issued $50.0 million of senior notes under a note purchase agreement with maturity dates ranging from June 15, 2032 to June 15, 2052, at a weighted average interest rate of 4.50 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.
Intermountain On
June 15, 2022, Intermountain issued $40.0 million of senior notes under a note purchase agreement with maturity dates ranging from June 15, 2052 to June 15, 2062, at a weighted average interest rate of 4.68 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.
On October 13, 2022, Intermountain amended and restated its revolving credit agreement to increase the borrowing capacity to $100.0 million and extend the maturity date to October 13, 2027. Any borrowings under the revolving credit agreement are classified as long-term debt as they are intended to be refinanced on a long-term basis through continued borrowings.
Centennial
On March 18, 2022, Centennial entered into a $100.0 million term loan agreement with a SOFR-based variable interest rate and a maturity date of March 17, 2023. The agreement contains customary covenants and provisions, including a covenant of Centennial not to permit, at any time, the ratio of total debt to total capitalization to be greater than 65 percent. The covenants also include certain restrictions on the sale of certain assets, loans and investments.
On March 23, 2022, Centennial issued $150.0 million of senior notes under a note purchase agreement with maturity dates ranging from March 23, 2032 to March 23, 2034, at a weighted average interest rate
of 3.71 percent. The agreement contains customary covenants and provisions, including a covenant of Centennial not to permit, at any time, the ratio of total debt to total capitalization to be greater than 60 percent.
Equity Resources
The Company currently has a shelf registration statement on file with the SEC, under which the Company may issue and sell any combination of common stock and debt securities. The Company may sell such securities if warranted by market conditions and the Company's capital requirements.
In
August 2020, the Company amended the Distribution Agreement dated February 22, 2019, with J.P. Morgan Securities LLC and MUFG Securities Americas Inc., as sales agents. This agreement, as amended, allows the offering, issuance and sale of up to 6.4 million shares of the Company's common stock in connection with an "at-the-market" offering. The common stock may be offered for sale, from time to time, in accordance with the terms and conditions of this agreement. As of September 30, 2022, the Company had capacity to issue up to 3.6 million additional shares of common stock under the "at-the-market" offering program.
Proceeds from the sale of shares of common stock under this agreement have been and are expected to be used for general corporate purposes, which may include, among other things, working capital, capital expenditures, debt repayment and the financing of acquisitions.
Details of the Company's "at-the-market" offering activity was as follows:
* Net
proceeds include issuance costs of $— and $149,000 for the three and nine months ended September 30, 2022, respectively, and $425,000 and $1.2 million for the three and nine months ended September 30, 2021, respectively.
** Net proceeds were used for capital expenditures.
Material cash requirements
For more information on the Company's contractual obligations on long-term debt, operating leases
and purchase commitments, see Part II, Item 7 in the 2021 Annual Report. There were no material changes in the Company's contractual obligations related to asset retirement obligations, uncertain tax positions and minimum funding requirements for its defined benefit plans for 2022 from those reported in the 2021 Annual Report.
At September 30, 2022, the Company's future estimated interest payments increased 12 percent since December
31, 2021, due to higher debt balances and rising interest rates. The Company expects interest rates will continue to increase the remainder of 2022 as indicated by the Federal Reserve. At September 30, 2022, the Company's future purchase commitments increased 7 percent since December 31, 2021, down from an increase of 14 percent at June 30, 2022. The increase in purchase commitments is largely due to increases to the cost of asphalt oil at the construction materials and contracting business and higher natural gas costs and contract extensions associated with natural
gas supply at the natural gas distribution business. The Company anticipates that these items will be funded by various sources, including internally generated funds, as well as credit facilities and commercial paper of the Company's subsidiaries.
Material short-term cash requirements of the Company include repayment of outstanding borrowings and interest payments on those agreements, payments on operating lease agreements, payment of obligations on purchase commitments and asset retirement obligations.
Material long-term cash requirements of the
Company include repayment of outstanding borrowings and interest payments on those agreements, payments on operating lease agreements, payment of obligations on purchase commitments and asset retirement obligations.
The Company's critical accounting estimates include impairment testing of goodwill;
fair values of acquired assets and liabilities under the acquisition method of accounting; regulatory assets expected to be recovered in rates charged to customers; revenue recognized using the cost-to-cost measure of progress for contracts; actuarially determined benefit costs; and tax provisions. There were no material changes in the Company's critical accounting estimates from those reported in the 2021 Annual Report. For more information on critical accounting estimates, see Part II, Item 7 in the 2021 Annual Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The
Company is exposed to the impact of market fluctuations associated with interest rates and commodity prices. The Company has policies and procedures to assist in controlling these market risks and from time to time has utilized derivatives to manage a portion of its risk.
Interest rate risk
There were no material changes to interest rate risk faced by the Company from those reported in the 2021 Annual Report.
There
were no material changes to commodity price risk faced by the Company from those reported in the 2021 Annual Report.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. The Company's disclosure controls and other procedures are designed to provide reasonable assurance that information required to be disclosed in the reports that the Company
files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The Company's disclosure controls and other procedures are designed to provide reasonable assurance that information required to be disclosed is accumulated and communicated to management, including the Company's chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. The Company's management, with the participation of the Company's chief executive officer and chief financial officer, has evaluated the effectiveness of the
Company's disclosure controls and other procedures as of the end of the period covered by this report. Based upon that evaluation, the chief executive officer and the chief financial officer have concluded that, as of the end of the period covered by this report, such controls and procedures were effective at a reasonable assurance level.
Changes in internal controls
No change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended September 30, 2022, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial
reporting.
There were no material changes to the Company's legal proceedings in Part 1, Item 3 - Legal Proceedings in the 2021 Annual Report.
Item
1A. Risk Factors
Please refer to the Company's risk factors that are disclosed in Part I, Item 1A. Risk Factors in the 2021 Annual Report that could be materially harmful to the Company's business, prospects, financial condition or financial results if they occur. At September 30, 2022, there were no material changes to the Company's risk factors provided in Part I, Item 1A. Risk Factors in the 2021 Annual Report other than as set forth below.
The proposed separation of Knife River into an independent, publicly traded company is subject to various risks and uncertainties, and may not be
completed on the terms or timeline currently contemplated, if at all. In addition, the Company's review of options to optimize the value of its construction services business is subject to various risks and uncertainties and may not achieve its intended goals.
On August 4, 2022, the Company announced its plan to separate Knife River, the construction materials and contracting business, from the Company, resulting in two independent, publicly traded companies. The proposed separation is expected to be effected as a tax-free spinoff to the Company’s stockholders
for U.S. federal income tax purposes and is expected to be completed in 2023, subject to the satisfaction of customary conditions, including final approval by the Company’s Board of Directors, receipt of a tax opinion and a private letter ruling from the IRS, and the effectiveness of a registration statement on Form 10 to be filed with the SEC.
The execution of the proposed separation will require significant time and attention from the Company’s senior management and employees, which could disrupt the Company’s ongoing business and adversely affect financial results and results of operations. The proposed separation is also complex, and completion of the proposed separation and
the timing of its completion will be subject to a number of factors and conditions, including the readiness of the new company to operate as an independent public company and finalization of the capital structure of the new company. Unanticipated developments could delay, prevent or otherwise adversely affect the proposed separation, including, but not limited to, changes in general economic and financial market conditions, material adverse changes in business or industry conditions, unanticipated costs and potential problems or delays in obtaining various regulatory and tax approvals or clearances. In particular, changes in interest or exchange rates and the effects of inflation could delay or adversely affect the proposed separation, including in connection with any debt financing transactions undertaken in connection with the separation or the terms of any indebtedness incurred in connection therewith. There can be no assurances that the
Company will be able to complete the proposed separation on the terms or on the timeline that was announced, if at all. In addition, if the separation is completed, the Company may not be able to achieve the full strategic and financial benefits that are expected to result from the separation. There can be no assurance that the combined value of the common stock of the two companies will be equal to or greater than what the value of the Company’s common stock would have been had the proposed separation not occurred, or that the separation will not adversely impact the ability of the Company to maintain its historical practices with respect to dividends.
In addition, on November
3, 2022, the Company announced its intention to create two pure-play publicly traded companies, one focused on regulated energy delivery and the other on construction materials, and that, to achieve this future structure, the board has authorized management to commence a strategic review process of MDU Construction Services. The Company's intent to create two pure-play publicly traded companies is subject to changing market conditions and may not receive the level of market support that the Company expects, and may not be completed timely or at all.
(1) Represents
shares of common stock purchased on the open market in connection with the vesting of shares granted pursuant to the Long-Term Performance-Based Incentive Plan.
(2) Not applicable. The Company does not currently have in place any publicly announced plans or programs to purchase equity securities.
Item 4. Mine Safety Disclosures
For information regarding mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Act and Item 104 of Regulation
S-K, see Exhibit 95 to this Form 10-Q, which is incorporated herein by reference.
Item 5. Other Information
None.
Item 6. Exhibits
See the index to exhibits immediately preceding the signature page to this report.
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
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.
