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Registrant
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68: R54 Revenue recognition (Details 6) HTML 36K
69: R55 Percentage-of-completion method (Details 7) HTML 52K
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71: R57 Income taxes (Details 9) HTML 36K
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73: R59 New accounting standards (Details 11) HTML 43K
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, par value $1.00
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No ý.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ý No o.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
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 (Check one):
Large accelerated filer ý
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
Emerging
growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý.
State the aggregate market value of the voting common stock held by nonaffiliates
of the registrant as of June 30, 2017: $i5,116,974,651.
Indicate the number of shares outstanding of the registrant's common stock, as of February 15, 2018: i195,304,376 shares.
The following abbreviations and acronyms used in this Form 10-K are defined below:
Abbreviation
or Acronym
AFUDC
Allowance for funds used during construction
Andeavor Field Services LLC
Formerly QEP Field Services, LLC doing business as Tesoro Logistics Rockies LLC
Army Corps
U.S. Army Corps of Engineers
ASC
FASB Accounting Standards Codification
ATBs
Atmospheric
tower bottoms
Bcf
Billion cubic feet
Big Stone Station
475-MW coal-fired electric generating facility near Big Stone City, South Dakota (22.7 percent ownership)
Brazilian Transmission Lines
Company's former investment in companies owning three electric transmission lines in Brazil
Btu
British thermal unit
Calumet
Calumet
Specialty Products Partners, L.P.
Capital Electric
Capital Electric Construction Company, Inc., a direct wholly owned subsidiary of MDU Construction Services
Cascade
Cascade Natural Gas Corporation, an indirect wholly owned subsidiary of MDU Energy Capital
Centennial
Centennial Energy Holdings, Inc., a direct wholly owned subsidiary of the Company
Centennial Capital
Centennial
Holdings Capital LLC, a direct wholly owned subsidiary of Centennial
Centennial's Consolidated EBITDA
Centennial's consolidated net income from continuing operations plus the related interest expense, taxes, depreciation, depletion, amortization of intangibles and any non-cash charge relating to asset impairment for the preceding 12-month period
Centennial Resources
Centennial Energy Resources LLC, a direct wholly owned subsidiary of Centennial
CERCLA
Comprehensive Environmental Response, Compensation and Liability Act
Clean
Air Act
Federal Clean Air Act
Clean Water Act
Federal Clean Water Act
Company
MDU Resources Group, Inc.
Coyote Creek
Coyote Creek Mining Company, LLC, a subsidiary of The North American Coal Corporation
Coyote Station
427-MW coal-fired electric generating facility near Beulah, North Dakota (25 percent ownership)
Dakota
Prairie Refinery
20,000-barrel-per-day diesel topping plant built by Dakota Prairie Refining in southwestern North Dakota
Dakota Prairie Refining
Dakota Prairie Refining, LLC, a limited liability company previously owned by WBI Energy and Calumet (previously included in the Company's refining segment)
D.C. Circuit Court
United States Court of Appeals for the District of Columbia Circuit
dk
Decatherm
Dodd-Frank
Act
Dodd-Frank Wall Street Reform and Consumer Protection Act
EBITDA
Earnings before interest, taxes, depreciation, depletion and amortization
EIN
Employer Identification Number
EPA
United States Environmental Protection Agency
ERISA
Employee Retirement Income Security Act of 1974
ESA
Endangered
Species Act
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
Fidelity
Fidelity Exploration & Production Company, a direct wholly owned subsidiary of WBI Holdings (previously referred to as the Company's exploration and production segment)
FIP
Funding
improvement plan
GAAP
Accounting principles generally accepted in the United States of America
GHG
Greenhouse gas
Great Plains
Great Plains Natural Gas Co., a public utility division of the Company
GVTC
Generation Verification Test Capacity
IBEW
International
Brotherhood of Electrical Workers
ICWU
International Chemical Workers Union
IFRS
International Financial Reporting Standards
MDU Resources Group, Inc. Form 10-K 3
Definitions
Intermountain
Intermountain
Gas Company, an indirect wholly owned subsidiary of MDU Energy Capital
IPUC
Idaho Public Utilities Commission
Item 8
Financial Statements and Supplementary Data
Knife River
Knife River Corporation, a direct wholly owned subsidiary of Centennial
Knife River - Northwest
Knife River Corporation - Northwest, an indirect wholly owned subsidiary of Knife River
K-Plan
Company's
401(k) Retirement Plan
kW
Kilowatts
kWh
Kilowatt-hour
LWG
Lower Willamette Group
MD&A
Management's Discussion and Analysis of Financial Condition and Results of Operations
Mdk
Thousand dk
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
MEPP
Multiemployer pension plan
MISO
Midcontinent Independent System Operator, Inc.
MMBtu
Million Btu
MMdk
Million
dk
MNPUC
Minnesota Public Utilities Commission
Montana-Dakota
Montana-Dakota Utilities Co., a public utility division of the Company
Montana DEQ
Montana Department of Environmental Quality
MPPAA
Multiemployer Pension Plan Amendments Act of 1980
MTPSC
Montana
Public Service Commission
MW
Megawatt
NDPSC
North Dakota Public Service Commission
NGL
Natural gas liquids
Oil
Includes crude oil and condensate
OPUC
Oregon Public Utility Commission
Oregon DEQ
Oregon
State Department of Environmental Quality
PCBs
Polychlorinated biphenyls
Pronghorn
Natural gas processing plant located near Belfield, North Dakota (WBI Energy Midstream's 50 percent ownership interests were sold effective January 1, 2017)
Proxy Statement
Company's 2018 Proxy Statement
PRP
Potentially Responsible Party
RCRA
Resource
Conservation and Recovery Act
ROD
Record of Decision
RP
Rehabilitation plan
SDPUC
South Dakota Public Utilities Commission
SEC
United States Securities and Exchange Commission
SEC Defined Prices
The average price of oil and natural gas during the applicable 12-month period, determined as an unweighted
arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions
Securities Act
Securities Act of 1933, as amended
Securities Act Industry Guide 7
Description of Property by Issuers Engaged or to be Engaged in Significant Mining Operations
Sheridan System
A separate electric system owned by Montana-Dakota
South Dakota DENR
South
Dakota Department of Environment and Natural Resources
SSIP
System Safety and Integrity Program
Stock Purchase Plan
Company's Dividend Reinvestment and Direct Stock Purchase Plan which was terminated effective December 5, 2016
TCJA
Tax Cuts and Jobs Act
Tesoro
Tesoro Refining & Marketing Company LLC
Thurston
County Superior Court
State of Washington Thurston County Superior Court
4 MDU Resources Group, Inc. Form 10-K
Definitions
UA
United
Association of Journeyman and Apprentices of the Plumbing and Pipefitting Industry of the United States and Canada
United States Supreme Court
Supreme Court of the United States
VIE
Variable interest entity
Washington DOE
Washington State Department of Ecology
WBI Energy
WBI Energy, Inc., a direct wholly owned subsidiary of WBI Holdings
WBI Energy Midstream
WBI
Energy Midstream, LLC, an indirect wholly owned subsidiary of WBI Holdings
WBI Energy Transmission
WBI Energy Transmission, Inc., an indirect wholly owned subsidiary of WBI Holdings
WBI Holdings
WBI Holdings, Inc., a direct wholly owned subsidiary of Centennial
WUTC
Washington Utilities and Transportation Commission
Wygen III
100-MW coal-fired electric generating facility near Gillette, Wyoming (25 percent ownership)
WYPSC
Wyoming
Public Service Commission
ZRCs
Zonal resource credits - a MW of demand equivalent assigned to generators by MISO for meeting system reliability requirements
MDU Resources Group, Inc. Form 10-K 5
Part
I
Forward-Looking Statements
This Form 10-K contains forward-looking statements within the meaning of Section 21E of the Exchange Act. Forward-looking statements are all statements other than statements of historical fact, including without limitation those statements that are identified by the words "anticipates,""estimates,""expects,""intends,""plans,""predicts" and similar expressions, and include statements concerning plans,
objectives, goals, strategies, future events or performance, and underlying assumptions (many of which are based, in turn, upon further assumptions) and other statements that are 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 Item 7 - MD&A - Business Segment Financial and Operating Data.
Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the
Company to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties. Nonetheless, the Company's expectations, beliefs or projections may not be achieved or accomplished.
Any forward-looking statement contained in this document speaks only as of the date on which the statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances that occur after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge
from time to time, and it is not possible for management to predict all of the factors, nor can it assess the effect of each factor on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. All forward-looking statements, whether written or oral and whether made by or on behalf of the Company, are expressly qualified by the risk factors and cautionary statements in this Form 10-K, including statements contained within Item 1A - Risk Factors.
Items 1 and 2. Business and Properties
General
The
Company is a regulated energy delivery and construction materials and services business, which was incorporated under the laws of the state of Delaware in 1924. Its principal executive offices are at 1200 West Century Avenue, P.O. Box 5650, Bismarck, North Dakota58506-5650, telephone (701) 530-1000.
The Company operates with a two-platform business model. Its regulated energy delivery platform and its construction materials and services platform are each comprised of different
operating segments. Some of these segments experience seasonality related to the industries in which they operate. The two-platform approach helps balance this seasonality and the risk associated with each type of industry. Through its regulated energy delivery platform, the Company provides electric and natural gas services to customers, generates, transmits and distributes electricity, and provides natural gas transportation, storage and gathering services. These businesses are regulated by state public service commissions and/or the FERC. The construction materials and services platform provides construction services to a variety of industries, including commercial, industrial and governmental, and provides construction materials through aggregate mining and marketing of related products, such as ready-mix concrete and asphalt.
The
Company is organized into five reportable business segments. These business segments include: electric, natural gas distribution, pipeline and midstream, construction materials and contracting, and construction services. The Company's reportable 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.
Montana-Dakota, Great Plains, Cascade and Intermountain comprise the natural gas distribution segment. Montana-Dakota
also comprises the electric segment.
The Company, through its wholly owned subsidiary, Centennial, owns WBI Holdings, Knife River, MDU Construction Services, Centennial Resources and Centennial Capital. WBI Holdings is the pipeline and midstream segment, Knife River is the construction materials and contracting segment, MDU Construction Services is the construction services segment, and Centennial Resources and Centennial Capital are both reflected in the Other category.
On November 21, 2017, the Company announced that its board of directors has directed senior management to explore reorganization to a holding company structure. The purpose of a potential reorganization
would be to make Montana-Dakota and Great Plains, which today are
6 MDU Resources Group, Inc. Form 10-K
Part I
divisions of the
Company, into a subsidiary of the holding company, just as the Company’s other operating companies are wholly owned subsidiaries.
For more information on the Company's business segments and discontinued operations, see Item 8 - Notes 2 and 13.
As of December 31, 2017, the Company had 10,140 employees with 205 employed
at MDU Resources Group, Inc., 963 at Montana-Dakota, 35 at Great Plains, 348 at Cascade, 240 at Intermountain, 319 at WBI Holdings, 3,466 at Knife River and 4,564 at MDU Construction Services. The number of employees at certain Company operations fluctuates during the year depending upon the number and size of construction projects. The Company considers its relations with employees to be satisfactory.
The following information regarding the number of employees represented by labor contracts is as of December 31, 2017.
At Montana-Dakota and WBI Energy Transmission, 353 and 68 employees, respectively, are represented
by the IBEW. Labor contracts with such employees are in effect through April 30, 2018, and March 31, 2018, respectively.
At Cascade, 192 employees are represented by the ICWU. The labor contract with the field operations group is effective through March 31, 2018.
At Intermountain, 127 employees are represented by the UA. Labor contracts with such employees are in effect through September 30, 2019.
Knife
River operates under 43 labor contracts that represent 685 of its construction materials and contracting employees. Knife River is in negotiations on one of its labor contracts.
MDU Construction Services has 130 labor contracts representing the majority of its employees. MDU Construction Services is in negotiations on 10 of its labor contracts.
The majority of the labor contracts contain provisions that prohibit work stoppages or strikes and
provide for binding arbitration dispute resolution in the event of an extended disagreement.
The Company's principal properties, which are of varying ages and are of different construction types, are generally in good condition, are well maintained and are generally suitable and adequate for the purposes for which they are used.
The financial results and data applicable to each of the Company's business segments, as well as their financing requirements, are set forth in Item 7 - MD&A and Item 8 - Note 13 and Supplementary Financial Information.
The operations of the
Company and certain of its subsidiaries are subject to federal, state and local laws and regulations providing for air, water and solid waste pollution control; state facility-siting regulations; zoning and planning regulations of certain state and local authorities; federal health and safety regulations and state hazard communication standards. The Company believes that it is in substantial compliance with these regulations, except as to what may be ultimately determined with regard to items discussed in Environmental matters in Item 8 - Note 17. There are no pending CERCLA actions for any of the Company's properties, other than the Portland, Oregon, Harbor Superfund
Site and the Bremerton Gasworks Superfund Site.
The Company produces GHG emissions primarily from its fossil fuel electric generating facilities, as well as from natural gas pipeline and storage systems, and operations of equipment and fleet vehicles. GHG emissions also result from customer use of natural gas for heating and other uses. As interest in reductions in GHG emissions has grown, the Company has developed renewable generation with lower or no GHG emissions. Governmental legislative and regulatory initiatives regarding environmental and energy policy are continuously evolving and could negatively impact the Company's operations and financial results. Until legislation and
regulation are finalized, the impact of these measures cannot be accurately predicted. The Company will continue to monitor legislative and regulatory activity related to environmental and energy policy initiatives. Disclosure regarding specific environmental matters applicable to each of the Company's businesses is set forth under each business description later. In addition, for a discussion of the Company's risks related to environmental laws and regulations, see Item 1A - Risk Factors.
This annual report on Form 10-K, the Company's quarterly reports on Form 10-Q and current reports on Form 8-K,
and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through the Company's Web site as soon as reasonably practicable after the Company has electronically filed such reports with, or furnished such reports to, the SEC. The Company's Web site address is www.mdu.com. The information available on the
Company's Web site is not part of this annual report on Form 10-K.
MDU Resources Group, Inc. Form 10-K 7
Part I
Electric
GeneralMontana-Dakota
provides electric service at retail, serving 142,901 residential, commercial, industrial and municipal customers in 178 communities and adjacent rural areas as of December 31, 2017. For more information on the retail customer classes served, see the table below. The principal properties owned by Montana-Dakota for use in its electric operations include interests in 16 electric generating units at 11 facilities and three small portable diesel generators, as further described under System Supply, System Demand and Competition, approximately 3,200 and 4,900 miles of transmission and distribution lines, respectively, and 73 transmission and 296 distribution substations. Montana-Dakota has obtained and holds, or is in the process of renewing, valid and existing franchises authorizing it to conduct its electric operations in all of the
municipalities it serves where such franchises are required. Montana-Dakota intends to protect its service area and seek renewal of all expiring franchises. At December 31, 2017, Montana-Dakota's net electric plant investment was $1.4 billion, and rate base was $1.1 billion.
The retail customers served and respective revenues by class for the electric business were as follows:
2017
2016
2015
Customers
Served
Revenues
Customers
Served
Revenues
Customers Served
Revenues
(Dollars
in thousands)
Residential
118,379
$
121,171
118,483
$
117,014
118,413
$
107,767
Commercial
22,764
140,856
22,693
135,390
22,423
121,463
Industrial
242
34,417
244
31,913
240
32,786
Other
1,516
8,275
1,528
7,580
1,511
6,791
142,901
$
304,719
142,948
$
291,897
142,587
$
268,807
Other
electric revenues for Montana-Dakota were $38.1 million, $30.4 million and $11.8 million for the years ended December 31, 2017, 2016 and 2015, respectively.
The percentage of electric retail revenues by jurisdiction was as follows:
2017
2016
2015
North
Dakota
66
%
68
%
65
%
Montana
20
%
19
%
21
%
Wyoming
9
%
8
%
9
%
South
Dakota
5
%
5
%
5
%
Retail electric rates, service, accounting and certain security issuances are subject to regulation by the MTPSC, NDPSC, SDPUC and WYPSC. The interstate transmission and wholesale electric power operations of Montana-Dakota also are subject to regulation by the FERC under provisions of the Federal Power Act, as are interconnections with other utilities and power generators, the issuance of securities, accounting and other matters.
Through MISO, Montana-Dakota
has access to wholesale energy, ancillary services and capacity markets for its interconnected system. MISO is a regional transmission organization responsible for operational control of the transmission systems of its members. MISO provides security center operations, tariff administration and operates day-ahead and real-time energy markets, ancillary services and capacity markets. As a member of MISO, Montana-Dakota's generation is sold into the MISO energy market and its energy needs are purchased from that market.
System Supply, System Demand and CompetitionThrough an interconnected electric system, Montana-Dakota serves markets in portions of western North Dakota, including Bismarck, Mandan, Dickinson, Williston and Watford City; eastern Montana, including Sidney, Glendive and Miles City; and northern South Dakota, including Mobridge. The interconnected system consists of
15 electric generating units at 10 facilities and three small portable diesel generators, which have an aggregate nameplate rating attributable to Montana-Dakota's interest of 704,143 kW and total net ZRCs of 528.2 in 2017. ZRCs are a MW of demand equivalent measure and are allocated to individual generators to meet planning reserve margin requirements within MISO. For 2017, Montana-Dakota's total ZRCs, including its firm purchase power contracts, were 553.1. Montana-Dakota's planning reserve margin requirement within MISO was 530.2 for 2017. The maximum electric
peak demand experienced to date attributable to Montana-Dakota's sales to retail customers on the interconnected system was 611,542 kW in August 2015. Montana-Dakota's latest forecast for its interconnected system indicates that its annual peak will continue to occur during the summer and the sales growth rate through 2022 will approximate two percent annually. Montana-Dakota's interconnected system electric generating capability includes five steam-turbine generating units at four facilities using coal for fuel, four combustion
8 MDU Resources Group, Inc.
Form 10-K
Part I
turbine units at three facilities, three wind electric generating facilities, two reciprocating internal combustion engines at one facility, a heat recovery electric generating facility and three small portable diesel generators.
In June 2016, Montana-Dakota and a partner began construction on a 345-kilovolt transmission line within the footprint of MISO from Ellendale, North Dakota, to Big Stone City, South Dakota, a distance of about 160 miles,
which will facilitate public policy goals and objectives, including delivery of renewable wind energy from North Dakota to eastern markets. The project has been approved as a MISO multivalue project. All necessary easements have been secured and the project is expected to be completed in 2019.
In December 2016, Montana-Dakota signed a 25-year agreement to purchase power from the expansion of the Thunder Spirit Wind farm in southwest North Dakota. In November 2017, the NDPSC approved the advance determination of prudence for the purchase of the Thunder Spirit Wind farm expansion. Montana-Dakota expects to soon have a purchase agreement in place and finalize the purchase when the construction is complete in late 2018. With the addition of the expansion, Montana-Dakota's total wind farm generation capacity will be approximately 155 MW and increase Montana-Dakota's electric generation portfolio to approximately 27 percent renewables.
The original 107.5-MW wind farm includes 43 turbines; it was purchased by Montana-Dakota in December 2015. The expansion will include 16 turbines. Acquisition costs for the project are estimated to be approximately $85 million.
Additional energy will be purchased as needed, or if more economical, from the MISO market. In 2017, Montana-Dakota purchased approximately 26 percent of its net kWh needs for its interconnected system through the MISO market.
Approximately 24 percent of the electricity delivered to customers from Montana-Dakota's owned generation in 2017 was from renewable resources. Although Montana-Dakota's generation resource capacity has increased to serve the needs of customers, the carbon dioxide emission intensity of the electric generation resource fleet has been reduced by
more than 25 percent since 2003 and is expected to continue to decline.
Through the Sheridan System, Montana-Dakota serves Sheridan, Wyoming, and neighboring communities. The maximum peak demand experienced to date attributable to Montana-Dakota sales to retail customers on that system was approximately 61,501 kW in July 2012. Montana-Dakota has a power supply contract with Black Hills Power, Inc. to purchase up to 49,000 kW of capacity annually through December 31, 2023. Wygen III serves a portion of the needs of its Sheridan-area customers.
MDU
Resources Group, Inc. Form 10-K 9
Part I
The following table sets forth details applicable to the Company's electric generating stations:
Generating
Station
Type
Nameplate Rating (kW)
2017 ZRCs
(a)
2017 Net Generation (kWh in thousands)
Interconnected System:
North
Dakota:
Coyote (b)
Steam
103,647
83.4
652,071
Heskett
Steam
86,000
87.1
454,134
Heskett
Combustion Turbine
89,038
59.0
3,400
Glen Ullin
Heat Recovery
7,500
4.0
45,548
Cedar
Hills
Wind
19,500
5.0
59,385
Diesel Units
Oil
5,475
3.7
9
Thunder
Spirit
Wind
107,500
20.6
428,528
South Dakota:
Big
Stone (b)
Steam
94,111
101.8
469,709
Montana:
Lewis
& Clark
Steam
44,000
50.9
225,984
Lewis & Clark
Reciprocating Internal Combustion Engine
18,700
16.1
5,453
Glendive
Combustion
Turbine
75,522
68.8
2,333
Miles City
Combustion Turbine
23,150
21.5
406
Diamond
Willow
Wind
30,000
6.3
93,696
704,143
528.2
2,440,656
Sheridan
System:
Wyoming:
Wygen
III (b)
Steam
28,000
N/A
189,984
732,143
528.2
2,630,640
(a)
Interconnected
system only. MISO requires generators to obtain their summer capability through the GVTC. The GVTC is then converted to ZRCs by applying each generator's forced outage factor against its GVTC. Wind generator's ZRCs are calculated based on a wind capacity study performed annually by MISO. ZRCs are used to meet supply obligations within MISO.
(b)
Reflects Montana-Dakota's ownership interest.
Virtually all of the current fuel requirements of the Heskett and Lewis &
Clark stations are met with coal supplied by subsidiaries of Westmoreland Coal Company under contracts that expire in December 2021 and December 2020, respectively. The Heskett and Lewis & Clark coal supply agreements provide for the purchase of coal necessary to supply the coal requirements of these stations at contracted pricing. Montana-Dakota estimates the Heskett and Lewis & Clark coal requirement to be in the range of 425,000 to 460,000 tons and 250,000 to 350,000 tons per contract year, respectively.
The owners of Coyote Station, including Montana-Dakota, have a contract
with Coyote Creek for coal supply to the Coyote Station that expires December 2040. Montana-Dakota estimates the Coyote Station coal supply agreement to be approximately 2.5 million tons per contract year. For more information, see Item 8 - Note 17.
The owners of Big Stone Station, including Montana-Dakota, have coal supply agreements, which meet a portion of the Big Stone Station's fuel requirements, for the purchase of 250,000 tons in 2018 and 2019 from Contura Coal Sales, LLC and 550,000 tons in 2018 from Peabody COALSALES, LLC both at contracted pricing. The remainder of the Big Stone Station fuel requirements will be secured through separate future contracts.
Montana-Dakota
has a coal supply agreement with Wyodak Resources Development Corp., to supply the coal requirements of Wygen III at contracted pricing through June 1, 2060. Montana-Dakota estimates the maximum annual coal consumption of the facility to be 585,000 tons.
The average cost of coal purchased, including freight, at Montana-Dakota's electric generating stations (including the Big Stone, Coyote and Wygen III stations) was as follows:
Montana-Dakota expects that it has secured adequate capacity available through existing baseload generating stations, renewable generation, turbine peaking stations, demand reduction programs and firm contracts to meet the peak customer demand requirements of its customers through 2024. Future capacity that is needed to replace contracts
and meet system growth requirements is expected to be met by constructing new generation resources, or acquiring additional capacity through power purchase contracts or the MISO capacity auction.
Montana-Dakota has major interconnections with its neighboring utilities and considers these interconnections adequate for coordinated planning, emergency assistance, exchange of capacity and energy and power supply reliability.
Montana-Dakota is subject to competition in varying degrees, in certain areas, from rural electric cooperatives, on-site generators, co-generators and municipally owned systems. In addition, competition in varying degrees exists between electricity and alternative forms of energy such as natural gas.
Regulatory Matters and Revenues
Subject to RefundIn North Dakota, Montana-Dakota's results of operations reflect monthly increases or decreases in electric fuel and purchased power costs (including demand charges) and Montana-Dakota is deferring those electric fuel and purchased power costs that are greater or less than amounts presently being recovered through its existing rate schedules. In Montana, a monthly Fuel and Purchased Power Tracking Adjustment mechanism allows Montana-Dakota's results of operations to reflect 90 percent of the increases or decreases in electric fuel and purchased power costs (including demand charges) and Montana-Dakota is deferring 90 percent of costs that are greater or less than amounts presently being recovered through its existing rate schedules. A fuel adjustment clause contained in South Dakota jurisdictional electric rate schedules allows Montana-Dakota's results of operations to reflect monthly increases or decreases
in electric fuel and purchased power costs. In Wyoming, an annual Electric Power Supply Cost Adjustment mechanism allows Montana-Dakota's results of operations to reflect increases or decreases in purchased power costs (including demand charges) related to power supply and Montana-Dakota is deferring costs that are greater or less than amounts presently being recovered through its existing rate schedules. Such orders generally provide that these amounts are recoverable or refundable through rate adjustments which are filed annually. Montana-Dakota's results of operations reflect 95 percent of the increases or decreases from the base purchased power costs and in addition also reflects 85 percent of the increases or decreases from the base coal price, which is also recovered through the Electric Power Supply Cost Adjustment. For more information, see Item 8 - Note 4.
For the Thunder
Spirit Wind project, Montana-Dakota implemented a renewable resource cost adjustment rider, and all of Montana-Dakota's wind resources pertaining to North Dakota electric operations were placed in this rider upon a final order of the most recent North Dakota electric general rate case. Montana-Dakota also has in place in North Dakota a transmission tracker to recover transmission costs associated with MISO and the Southwest Power Pool, regional transmission systems serving Montana-Dakota, along with certain of the transmission investments not recovered through retail rates. The tracking mechanism has an annual true-up.
In South Dakota, Montana-Dakota recovers the South Dakota investment in the Thunder Spirit Wind project through an Infrastructure Rider tracking mechanism that is subject to an annual true-up. Montana-Dakota also has in place in South Dakota a transmission tracker to recover transmission costs associated with
MISO and the Southwest Power Pool, regional transmission systems serving Montana-Dakota, along with certain of the transmission investments not recovered through retail rates. The tracking mechanism has an annual true-up.
In Montana, Montana-Dakota recovers in rates through a tracking mechanism the increases associated with its allocated share of Montana state and local taxes assessed to electric operations on an after tax basis.
For more information on regulatory matters, see Item 8 - Note 16.
Environmental MattersMontana-Dakota's electric operations are subject to federal, state and local laws and regulations providing for air, water and solid waste pollution control; state facility-siting regulations; zoning and planning regulations of certain
state and local authorities; federal health and safety regulations; and state hazard communication standards. Montana-Dakota believes it is in substantial compliance with these regulations.
Montana-Dakota's electric generating facilities have Title V Operating Permits, under the Clean Air Act, issued by the states in which they operate. Each of these permits has a five-year life. Near the expiration of these permits, renewal applications are submitted. Permits continue in force beyond the expiration date, provided the application for renewal is submitted by the required date, usually six months prior to expiration. The Title V Operating Permit renewal application for Big Stone Station was submitted timely to the South Dakota DENR in November 2013, and a final permit was issued in May 2017. An application to modify the Title V Operating Permit for incorporation of two new natural gas-fired engines at Lewis & Clark Station
was submitted to the Montana DEQ timely in December 2016, and a final permit was issued in July 2017. The Title V Operating Permit renewal application for Coyote Station was submitted timely to the North Dakota Department of Health in September 2017, with the permit expected to be issued in 2018. Wygen III is allowed to operate under the facility's construction permit until the Title V Operating Permit is issued by the Wyoming Department of Environmental Quality. The Title V Operating Permit application for Wygen III was submitted timely in January 2011, with the permit expected to be issued in 2018.
MDU Resources Group, Inc. Form 10-K 11
Part
I
State water discharge permits issued under the requirements of the Clean Water Act are maintained for power production facilities on the Yellowstone and Missouri rivers. These permits also have five-year lives. Montana-Dakota renews these permits as necessary prior to expiration. Other permits held by these facilities may include an initial siting permit, which is typically a one-time, preconstruction permit issued by the state; state permits to dispose of combustion by-products; state authorizations to withdraw water for operations; and Army Corps permits to construct water intake structures. Montana-Dakota's Army Corps permits grant one-time permission to construct and do not require
renewal. Other permit terms vary and the permits are renewed as necessary.
Montana-Dakota's electric operations are conditionally exempt small-quantity hazardous waste generators and subject only to minimum regulation under the RCRA. Montana-Dakota routinely handles PCBs from its electric operations in accordance with federal requirements. PCB storage areas are registered with the EPA as required.
Montana-Dakota incurred $3.7 million of environmental capital expenditures in 2017, mainly for coal ash management projects at Lewis & Clark Station, Big Stone Station and Coyote Station. Environmental capital expenditures are estimated to be $9.6 million, $9.2 million and $1.5 million in 2018, 2019 and 2020,
respectively, for various environmental upgrades and improvements for air emission and water and coal ash management at power plants. Montana-Dakota's capital and operational expenditures could also be affected by future air emission regulations, including a future regulation that may replace the Clean Power Plan rule published by the EPA in October 2015. The Clean Power Plan requires existing fossil fuel-fired electric generating facilities to reduce carbon dioxide emissions. On February 9, 2016, the United States Supreme Court granted an application for a stay of the Clean Power Plan pending disposition of the applicants' petition for review in the D.C. Circuit Court and disposition of the applicants' petition for a writ of certiorari if such a writ is sought. The EPA filed a motion with the D.C. Circuit Court on March 28, 2017, requesting the
Clean Power Plan's case be held in abeyance. The D.C. Circuit Court granted the EPA’s motion to hold the case in abeyance for 60 days. On August 8, 2017, the D.C. Circuit Court issued an order holding the case in abeyance for an additional 60-day period and directed the EPA to file status reports at 30-day intervals. In parallel, the EPA published a proposal on October 16, 2017, to repeal the Clean Power Plan in its entirety and followed with an advance notice of proposed rulemaking published in the Federal Register on December 28, 2017, requesting comment on replacing the Clean Power Plan through new rulemaking.
Natural Gas Distribution
GeneralThe
Company's natural gas distribution operations consist of Montana-Dakota, Great Plains, Cascade and Intermountain, which sell natural gas at retail, serving 938,867 residential, commercial and industrial customers in 335 communities and adjacent rural areas across eight states as of December 31, 2017, and provide natural gas transportation services to certain customers on the Company's systems. For more information on the retail customer classes served, see the table below. These services are provided through distribution systems aggregating approximately 19,600 miles. The natural gas distribution operations have obtained and hold, or are in the process of renewing, valid and existing franchises authorizing them to conduct their natural gas operations
in all of the municipalities they serve where such franchises are required. These operations intend to protect their service areas and seek renewal of all expiring franchises. At December 31, 2017, the natural gas distribution operations' net natural gas distribution plant investment was $1.5 billion, and rate base was $975 million.
The retail customers served and respective revenues by class for the natural gas distribution operations were as follows:
2017
2016
2015
Customers
Served
Revenues
Customers
Served
Revenues
Customers
Served
Revenues
(Dollars
in thousands)
Residential
833,255
$
477,699
818,163
$
429,828
803,846
$
455,301
Commercial
104,795
283,899
103,438
253,333
101,688
277,022
Industrial
817
24,030
807
23,337
811
26,568
938,867
$
785,628
922,408
$
706,498
906,345
$
758,891
Transportation
and other revenues for the natural gas distribution operations were $62.8 million, $59.6 million and $58.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.
12 MDU Resources Group, Inc. Form 10-K
Part I
The
percentage of the natural gas distribution operations' retail sales revenues by jurisdiction was as follows:
2017
2016
2015
Idaho
33
%
34
%
32
%
Washington
26
%
26
%
26
%
North
Dakota
13
%
13
%
15
%
Montana
9
%
8
%
8
%
Oregon
8
%
8
%
8
%
South
Dakota
6
%
6
%
6
%
Minnesota
3
%
3
%
3
%
Wyoming
2
%
2
%
2
%
The
natural gas distribution operations are subject to regulation by the IPUC, MNPUC, MTPSC, NDPSC, OPUC, SDPUC, WUTC and WYPSC regarding retail rates, service, accounting and certain security issuances.
System Supply, System Demand and Competition The natural gas distribution operations serve retail natural gas markets, consisting principally of residential and firm commercial space and water heating users, in portions of Idaho, including Boise, Nampa, Twin Falls, Pocatello and Idaho Falls; western Minnesota, including Fergus Falls, Marshall and Crookston; eastern Montana, including Billings, Glendive and Miles City; North Dakota, including Bismarck, Mandan, Dickinson, Wahpeton, Williston, Watford City, Minot and Jamestown; central and eastern Oregon, including Bend, Pendleton, Ontario and Baker City; western and north-central South Dakota, including Rapid City, Pierre, Spearfish and Mobridge; western,
southeastern and south-central Washington, including Bellingham, Bremerton, Longview, Aberdeen, Wenatchee/Moses Lake, Mount Vernon, Tri-Cities, Walla Walla and Yakima; and northern Wyoming, including Sheridan and Lovell. These markets are highly seasonal and sales volumes depend largely on the weather, the effects of which are mitigated in certain jurisdictions by a weather normalization mechanism discussed in Regulatory Matters. In addition to the residential and commercial sales, the utilities transport natural gas for larger commercial and industrial customers who purchase their own supply of natural gas.
Competition in varying degrees exists between natural gas and other fuels and forms of energy. The natural gas distribution operations have established various natural gas transportation service rates for their distribution businesses to retain interruptible commercial and industrial loads. These services have enhanced
the natural gas distribution operations' competitive posture with alternative fuels, although certain customers have bypassed the distribution systems by directly accessing transmission pipelines within close proximity. These bypasses did not have a material effect on results of operations.
The natural gas distribution operations and various distribution transportation customers obtain their system requirements directly from producers, processors and marketers. The Company's purchased natural gas is supplied by a portfolio of contracts specifying market-based pricing and is transported under transportation agreements with WBI Energy Transmission, Northern Border Pipeline Company, Northwest Pipeline LLC, South Dakota Intrastate Pipeline, TransCanada Corporation,
Northern Natural Gas, Gas Transmission Northwest LLC, Northwestern Energy, Viking Gas Transmission Company, Westcoast Energy Inc., Ruby Pipeline LLC, Foothills Pipe Lines Ltd. and NOVA Gas Transmission Ltd. The natural gas distribution operations have contracts for storage services to provide gas supply during the winter heating season and to meet peak day demand with various storage providers, including WBI Energy Transmission, Questar Pipeline Company, Northwest Pipeline LLC and Northern Natural Gas. In addition, certain of the operations have entered into natural gas supply management agreements with various parties. Demand for natural gas, which is a widely traded commodity, has historically been sensitive to seasonal heating and industrial load requirements as well as changes in market price. The natural gas distribution operations believe that, based on current and projected
domestic and regional supplies of natural gas and the pipeline transmission network currently available through their suppliers and pipeline service providers, supplies are adequate to meet their system natural gas requirements for the next decade.
Regulatory MattersThe natural gas distribution operations' retail natural gas rate schedules contain clauses permitting adjustments in rates based upon changes in natural gas commodity, transportation and storage costs. Current tariffs allow for recovery or refunds of under- or over-recovered gas costs through rate adjustments which are filed annually.
Montana-Dakota's North Dakota and South Dakota natural gas tariffs contain weather normalization mechanisms applicable to certain firm customers that adjust the distribution delivery charge revenues to reflect weather fluctuations during the
November 1 through May 1 billing periods.
In Montana, Montana-Dakota recovers in rates through a tracking mechanism the increases associated with Montana state and local taxes assessed to natural gas operations on an after tax basis.
MDU Resources Group, Inc. Form 10-K 13
Part I
On
December 28, 2015, the OPUC approved an extension of Cascade's decoupling mechanism until January 1, 2020, with an agreement that Cascade would initiate a review of the mechanism by September 30, 2019. Cascade also has an earnings sharing mechanism with respect to its Oregon jurisdictional operations as required by the OPUC.
On July 7, 2016, the WUTC approved a full decoupling mechanism where Cascade is allowed recovery of an average revenue per customer regardless of actual consumption. The mechanism also includes an earnings sharing component if Cascade earns beyond its authorized return. The decoupling mechanism will be reviewed following the end of 2019.
On December 22,
2016, the MNPUC approved a request by Great Plains to implement a full revenue decoupling mechanism pilot project. The decoupling mechanism will reflect the period October 1 through September 30 with the first adjustment to be billed to customers effective December 1 each year for the 3 year pilot project.
For more information on regulatory matters, see Item 8 - Note 16.
Environmental MattersThe natural gas distribution operations are subject to federal, state and local environmental, facility-siting, zoning and planning laws and regulations. The natural gas distribution operations believe it is in substantial compliance with those regulations.
The Company's
natural gas distribution operations are conditionally exempt small-quantity hazardous waste generators and subject only to minimum regulation under the RCRA. Certain locations of the natural gas distribution operations routinely handle PCBs from their natural gas operations in accordance with federal requirements. PCB storage areas are registered with the EPA as required. Capital and operational expenditures for natural gas distribution operations could be affected in a variety of ways by potential new GHG legislation or regulation. In particular, such legislation or regulation would likely increase capital expenditures for energy efficiency and conservation programs and operational costs associated with GHG emissions compliance. Natural gas distribution operations expect to recover the operational and capital expenditures for GHG regulatory compliance in rates consistent with the recovery of other reasonable costs of complying with environmental laws and regulations.
The
natural gas distribution operations did not incur any material environmental expenditures in 2017. Except as to what may be ultimately determined with regard to the issues described in the following paragraph, the natural gas distribution operations do not expect to incur any material capital expenditures related to environmental compliance with current laws and regulations through 2020.
Montana-Dakota and Great Plains have ties to six historic manufactured gas plants as a successor corporation or through direct ownership of the plant. Montana-Dakota is investigating one of these former manufactured gas plant sites and providing input on another site investigation conducted by a third party. To the extent not covered by insurance, Montana-Dakota may seek recovery in its natural gas rates charged to customers for certain investigation
and remediation costs incurred for these sites. Cascade has ties to nine historic manufactured gas plants as a successor corporation or through direct ownership of the plant. Cascade is involved in the investigation and remediation of three of these manufactured gas plants in Washington and Oregon. See Item 8 - Note 17 for a further discussion of these three manufactured gas plants. To the extent not covered by insurance, Cascade will seek recovery of investigation and remediation costs through its natural gas rates charged to customers.
Pipeline and Midstream
GeneralWBI Energy owns and operates both regulated and nonregulated businesses. The regulated business of this
segment, WBI Energy Transmission, owns and operates approximately 4,000 miles of natural gas transmission, gathering and storage lines in Montana, North Dakota, South Dakota and Wyoming. Three underground storage fields in Montana and Wyoming provide storage services to local distribution companies, industrial customers, natural gas marketers and others, and serve to enhance system reliability. Its system is strategically located near five natural gas producing basins, making natural gas supplies available to its transportation and storage customers. The system has 13 interconnecting points with other pipeline facilities allowing for the receipt and/or delivery of natural gas to and from other regions of the country and from Canada. Under the Natural Gas Act, as amended, WBI Energy Transmission is subject to the jurisdiction of the FERC regarding certificate, rate, service and accounting matters, and at December 31,
2017, its net plant investment was $404.6 million.
The nonregulated business of this segment owns and operates gathering facilities in Montana and Wyoming. In total, facilities include approximately 800 miles of operated field gathering lines, some of which interconnect with WBI Energy's regulated pipeline system. The nonregulated business provides natural gas gathering services and a variety of other energy-related services, including cathodic protection and energy efficiency product sales and installation services to large end-users. In November 2016, the Company entered into an agreement to sell its ownership in the Pronghorn assets, which included a 50 percent undivided interest in a natural gas processing plant, both oil and gas gathering pipelines, an oil storage terminal and an oil pipeline in western North Dakota.
The transaction closed in January 2017.
14 MDU Resources Group, Inc. Form 10-K
Part I
A majority of its pipeline and midstream business is transacted in the northern
Great Plains and Rocky Mountain regions of the United States.
System Supply, System Demand and CompetitionNatural gas supplies emanate from traditional and nontraditional production activities in the region from both on-system and off-system supply sources. New incremental supply from nontraditional sources have developed, such as the Bakken area in Montana and North Dakota, which has helped offset declines in traditional regional supply sources and supports WBI Energy Transmission's transportation and storage services. In addition, off-system supply sources are available through the Company's interconnections with other pipeline systems. WBI Energy Transmission will continue to look for opportunities to increase transportation, gathering and storage services through system expansion and/or other
pipeline interconnections or enhancements that could provide substantial future benefits.
WBI Energy Transmission's underground natural gas storage facilities have a certificated storage capacity of approximately 353 Bcf, including 193 Bcf of working gas capacity, 85 Bcf of cushion gas and 75 Bcf of native gas. These storage facilities enable customers to purchase natural gas throughout the year and meet winter peak requirements.
WBI Energy Transmission competes with several pipelines for its customers' transportation, storage and gathering business and at times may discount rates in an effort to retain market share. However, the strategic location of its system near five natural gas producing basins and the availability of underground storage and gathering services, along with interconnections with other pipelines, serve to enhance its competitive position.
Although
certain of WBI Energy Transmission's firm customers, including its largest firm customer Montana-Dakota, serve relatively secure residential, commercial and industrial end-users, they generally all have some price-sensitive end-users that could switch to alternate fuels.
WBI Energy Transmission transports substantially all of Montana-Dakota's natural gas, primarily utilizing firm transportation agreements, which for 2017 represented 34 percent of WBI Energy Transmission's subscribed firm transportation contract demand. The majority of the firm transportation agreements with Montana-Dakota expire in June 2022. In addition, Montana-Dakota has contracts with WBI Energy Transmission to provide firm storage
services to facilitate meeting Montana-Dakota's winter peak requirements expiring in July 2035.
The nonregulated business competes for existing customers in the fields in which it operates. Its focus on customer service and the variety of services it offers serve to enhance its competitive position.
Environmental MattersThe pipeline and midstream operations are generally subject to federal, state and local environmental, facility-siting, zoning and planning laws and regulations. The Company believes it is in substantial compliance with those regulations.
Ongoing operations are subject to the Clean Air Act, the Clean Water Act, the RCRA and other state and federal regulations. Administration of many provisions
of these laws has been delegated to the states where WBI Energy and its subsidiaries operate. Permit terms vary and all permits carry operational compliance conditions. Some permits require annual renewal, some have terms ranging from one to five years and others have no expiration date. Permits are renewed and modified, as necessary, based on defined permit expiration dates, operational demand and/or regulatory changes.
Detailed environmental assessments and/or environmental impact statements as required by the National Environmental Policy Act are included in the FERC's environmental review process for both the construction and abandonment of WBI Energy Transmission's natural gas transmission pipelines, compressor stations and storage facilities.
The pipeline and midstream operations did not
incur any material environmental expenditures in 2017 and do not expect to incur any material capital expenditures related to environmental compliance with current laws and regulations through 2020.
Construction Materials and Contracting
GeneralKnife River operates construction materials and contracting businesses headquartered in Alaska, California, Hawaii, Idaho, Iowa, Minnesota, Montana, North Dakota, Oregon, Texas, Washington and Wyoming. These operations mine, process and sell construction aggregates (crushed stone, sand and gravel); produce and sell asphalt mix; and supply ready-mixed concrete.
These products are used in most types of construction, performed by Knife River and other companies, including roads, freeways and bridges, as well as homes, schools, shopping centers, office buildings and industrial parks. Knife River focuses on vertical integration of construction services to support the aggregate based product lines including aggregate placement, asphalt and concrete paving, and site development and grading. Although not common to all locations, other products include the sale of cement, liquid asphalt for various commercial and roadway applications, various finished concrete products and other building materials and related contracting services.
MDU
Resources Group, Inc. Form 10-K 15
Part I
Knife River's backlog was approximately $486 million, $538 million and $491 million at December 31, 2017, 2016 and 2015, respectively. The decrease in backlog at December 31,
2017, compared to backlog at December 31, 2016, was primarily attributable to a lower backlog of state agency work. Backlog increases with awards of new contracts and decreases as work is performed on existing contracts. Knife River expects to complete a significant amount of the backlog at December 31, 2017, during the next 12 months.
Knife River's backlog is comprised of the anticipated revenues from the uncompleted portion of services to be performed under job-specific contracts.
A project is included in backlog when a contract is awarded and agreement on contract terms has been reached. However, backlog does not contain contracts for time and material projects that a fixed amount cannot be determined. Backlog is comprised of: (a) original contract amounts, (b) change orders for which customers have approved and (c) claim amounts that have been made against customers for which are determined to have a legal basis under existing contractual arrangements and as to which recovery is considered to be probable. Such claim amounts were immaterial for all periods presented. Backlog may be subject
to delay, default or cancellation at the election of the customers. Historically, cancellations have not had a materially adverse effect on backlog. Due to the nature of its contractual arrangements, in many instances Knife River's customers are not committed to the specific volumes of services to be purchased under a contract, but rather Knife River is committed to perform these services if and to the extent requested by the customer. Therefore, there can be no assurance as to the customers' requirements during a particular period or that such estimates at any point in time are predictive of future revenues.
CompetitionKnife River's construction materials products and contracting services are marketed under highly competitive conditions. Price is the principal competitive force to which
these products and services are subject, with service, quality, delivery time and proximity to the customer also being significant factors. Knife River focuses on markets located near aggregate sites to reduce transportation costs which allows Knife River to remain competitive with the pricing of aggregate products. The number and size of competitors varies in each of Knife River's principal market areas and product lines.
The demand for construction materials products and contracting services is significantly influenced by the cyclical nature of the construction industry in general. In addition, construction materials and contracting services activity in certain locations may be seasonal in nature due to the effects of weather. The key economic factors affecting product demand are changes in the level of local, state and federal governmental spending on roads and infrastructure projects, general economic conditions within
the market area that influence both the commercial and residential sectors, and prevailing interest rates.
Knife River's customers are a diverse group which includes federal, state and municipal government agencies, commercial and residential developers, and private parties. The mix of sales by customer will vary each year depending on the work available. Knife River is not dependent on any single customer or group of customers for sales of its products and services, the loss of which would have a material adverse effect on its construction materials businesses.
Reserve Information Aggregate reserve estimates are calculated based on the best available data. This data is collected from drill holes and other subsurface investigations, as well as investigations of surface features such as mine high walls and other exposures of the aggregate reserves. Mine plans,
production history and geologic data also are utilized to estimate reserve quantities.
Estimates are based on analyses of the data described above by experienced internal mining engineers, operating personnel and geologists. Property setbacks and other regulatory restrictions and limitations are identified to determine the total area available for mining. Data described previously are used to calculate the thickness of aggregate materials to be recovered. Topography associated with alluvial sand and gravel deposits is typically flat and volumes of these materials are calculated by applying the thickness of the resource over the areas available for mining. Volumes are then converted to tons by using an appropriate conversion factor. Typically, 1.5 tons per cubic yard in the ground is used for sand and gravel deposits.
Topography associated with the hard rock reserves is typically much
more diverse. Therefore, using available data, a final topography map is created and computer software is utilized to compute the volumes between the existing and final topographies. Volumes are then converted to tons by using an appropriate conversion factor. Typically, 2 tons per cubic yard in the ground is used for hard rock quarries.
Estimated reserves are probable reserves as defined in Securities Act Industry Guide 7. Remaining reserves are based on estimates of volumes that can be economically extracted and sold to meet current market and product applications. The reserve estimates include only salable tonnage and thus exclude waste materials that are generated in the crushing and processing phases of the operation. Approximately 891 million tons of the 965 million tons of aggregate reserves are permitted reserves. The remaining reserves are on properties that are expected
to be permitted for mining under current regulatory requirements. The data used to calculate the remaining reserves may require revisions in the future to account for changes in customer requirements and unknown geological occurrences. The years remaining were calculated by dividing remaining reserves by the three-year average sales from 2015 through 2017. Actual useful lives of these reserves will be subject to, among other things, fluctuations in customer demand, customer specifications, geological conditions and changes in mining plans.
16 MDU Resources Group,
Inc. Form 10-K
Part I
The following table sets forth details applicable to the Company's aggregate reserves under ownership or lease as of December 31, 2017, and sales for the years ended December 31, 2017,
2016 and 2015:
Number of Sites
(Crushed Stone)
Number
of Sites
(Sand & Gravel)
Tons Sold (000's)
Estimated Reserves
(000's tons)
Lease Expiration
Reserve
Life
(years)
Production Area
owned
leased
owned
leased
2017
2016
2015
Anchorage,
AK
—
—
1
—
1,425
1,343
1,837
14,548
N/A
9
Hawaii
—
5
—
—
1,614
1,901
1,892
50,659
2018-2064
28
Northern
CA
—
—
9
1
1,785
1,604
1,580
43,812
2018
26
Southern
CA
—
2
—
—
55
224
118
91,567
2035
Over
100
Portland, OR
1
3
5
3
4,694
4,044
3,562
213,018
2025-2057
52
Eugene,
OR
3
4
6
—
633
662
819
153,975
2021-2049
Over
100
Central OR/WA/ID
—
1
5
2
2,160
1,685
1,493
86,307
2020-2087
49
Southwest
OR
5
5
10
6
2,367
2,689
1,872
100,875
2019-2053
44
Central
MT
—
—
3
2
1,065
1,135
1,383
28,294
2023-2027
24
Northwest
MT
—
—
8
1
1,745
1,514
1,423
64,451
2020
41
Wyoming
—
—
1
2
613
742
888
10,092
2019-2020
13
Central
MN
—
1
33
8
2,773
2,831
2,556
50,092
2018-2028
18
Northern
MN
2
—
14
2
270
537
595
23,248
2018-2021
50
ND/SD
—
—
2
17
1,100
1,643
1,959
24,389
2019-2028
16
Texas
1
2
1
—
1,192
1,243
1,138
9,709
2022-2029
8
Sales
from other sources
4,722
3,783
3,844
28,213
27,580
26,959
965,036
The
965 million tons of estimated aggregate reserves at December 31, 2017, are comprised of 457 million tons that are owned and 508 million tons that are leased. Approximately 45 percent of the tons under lease have lease expiration dates of 20 years or more. The weighted average years remaining on all leases containing estimated probable aggregate reserves is approximately 23 years, including options for renewal that are at Knife River's discretion. Based on a three-year average of sales from 2015 through 2017 of leased reserves, the average time necessary to produce remaining aggregate reserves from such leases is approximately 47 years. Some sites have leases that expire prior to the exhaustion of the estimated reserves. The estimated reserve
life assumes, based on Knife River's experience, that leases will be renewed to allow sufficient time to fully recover these reserves.
The changes in Knife River's aggregate reserves for the years ended December 31 were as follows:
2017
2016
2015
(000's
of tons)
Aggregate reserves:
Beginning of year
989,084
1,022,513
1,061,156
Acquisitions
2,726
24,993
7,406
Sales
volumes*
(23,491
)
(23,797
)
(23,115
)
Other**
(3,283
)
(34,625
)
(22,934
)
End
of year
965,036
989,084
1,022,513
*
Excludes sales from other sources.
**
Includes property sales, revisions
of previous estimates and expiring leases.
Environmental MattersKnife River's construction materials and contracting operations are subject to regulation customary for such operations, including federal, state and local environmental compliance and reclamation regulations. Except as to the issues described later, Knife River believes it is in substantial compliance with these regulations. Individual permits applicable to Knife River's various operations are managed largely by local operations, particularly as they relate to application, modification, renewal, compliance and reporting procedures.
Knife
River's asphalt and ready-mixed concrete manufacturing plants and aggregate processing plants are subject to the Clean Air Act and the Clean Water Act requirements for controlling air emissions and water discharges. Some mining and construction activities also are subject to these laws. In most of the states where Knife River operates, these regulatory programs have been delegated to state and local regulatory authorities. Knife River's facilities also are subject to the RCRA as it applies to the management of hazardous wastes and
MDU Resources Group, Inc. Form 10-K 17
Part
I
underground storage tank systems. These programs also have generally been delegated to the state and local authorities in the states where Knife River operates. Knife River's facilities must comply with requirements for managing wastes and underground storage tank systems.
Some Knife River activities are directly regulated by federal agencies. For example, certain in-water mining operations are subject to provisions of the Clean Water Act that are administered by the Army Corps. Knife River operates several such operations, including gravel bar skimming and dredging operations, and Knife River has the associated permits as required. The expiration
dates of these permits vary, with five years generally being the longest term.
Knife River's operations also are occasionally subject to the ESA. For example, land use regulations often require environmental studies, including wildlife studies, before a permit may be granted for a new or expanded mining facility or an asphalt or concrete plant. If endangered species or their habitats are identified, ESA requirements for protection, mitigation or avoidance apply. Endangered species protection requirements are usually included as part of land use permit conditions. Typical conditions include avoidance, setbacks, restrictions on operations during certain times of the breeding or rearing season, and construction or purchase of mitigation habitat. Knife River's operations also are subject to state and federal cultural resources protection laws when new areas are disturbed for mining operations or processing plants. Land use permit
applications generally require that areas proposed for mining or other surface disturbances be surveyed for cultural resources. If any are identified, they must be protected or managed in accordance with regulatory agency requirements.
The most comprehensive environmental permit requirements are usually associated with new mining operations, although requirements vary widely from state to state and even within states. In some areas, land use regulations and associated permitting requirements are minimal. However, some states and local jurisdictions have very demanding requirements for permitting new mines. Environmental impact reports are sometimes required before a mining permit application can be considered for approval. These reports can take up to several years to complete. The report can include projected impacts of the proposed project on air and water quality, wildlife, noise levels, traffic, scenic vistas and other
environmental factors. The reports generally include suggested actions to mitigate the projected adverse impacts.
Provisions for public hearings and public comments are usually included in land use permit application review procedures in the counties where Knife River operates. After taking into account environmental, mine plan and reclamation information provided by the permittee as well as comments from the public and other regulatory agencies, the local authority approves or denies the permit application. Denial is rare, but land use permits often include conditions that must be addressed by the permittee. Conditions may include property line setbacks, reclamation requirements, environmental monitoring and reporting, operating hour restrictions, financial guarantees for reclamation, and other requirements intended to protect the environment or address concerns submitted by the public or other regulatory agencies.
Knife
River has been successful in obtaining mining and other land use permit approvals so sufficient permitted reserves are available to support its operations. For mining operations, this often requires considerable advanced planning to ensure sufficient time is available to complete the permitting process before the newly permitted aggregate reserve is needed to support Knife River's operations.
Knife River's Gascoyne surface coal mine last produced coal in 1995 but continues to be subject to reclamation requirements of the Surface Mining Control and Reclamation Act, as well as the North Dakota Surface Mining Act. Portions of the Gascoyne Mine remain under reclamation bond until the 10-year revegetation liability period has expired. A portion of the original permit has been released from bond and additional areas are currently in the process of having the bond released. Knife River's intention is to request bond release as soon
as it is deemed possible.
Knife River did not incur any material environmental expenditures in 2017 and, except as to what may be ultimately determined with regard to the issues described in the following paragraph, Knife River does not expect to incur any material expenditures related to environmental compliance with current laws and regulations through 2020.
In December 2000, Knife River - Northwest was named by the EPA as a PRP in connection with the cleanup of a commercial property site, acquired by Knife River - Northwest in 1999, and part of the Portland, Oregon, Harbor Superfund Site. For more information, see Item 8 - Note 17.
Mine SafetyThe Dodd-Frank
Act requires disclosure of certain mine safety information. For more information, see Item 4 - Mine Safety Disclosures.
Construction Services
General MDU Construction Services provides inside and outside specialty contracting services. Its outside services include design, construction and maintenance of overhead and underground electrical distribution and transmission lines, substations, external lighting, traffic signalization, and gas pipelines, as well as utility excavation and the manufacture and distribution of transmission line construction equipment. Its inside services include design, construction and maintenance of electrical and communication wiring and infrastructure, fire suppression systems, and mechanical
piping and services. This business also designs, constructs and maintains renewable energy projects.
18 MDU Resources Group, Inc. Form 10-K
Part I
These specialty
contracting services are provided to utilities and large manufacturing, commercial, industrial, institutional and government customers.
Construction and maintenance crews are active year round. However, activity in certain locations may be seasonal in nature due to the effects of weather.
MDU Construction Services operates a fleet of owned and leased trucks and trailers, support vehicles and specialty construction equipment, such as backhoes, excavators, trenchers, generators, boring machines and cranes. In addition, as of December 31, 2017, MDU Construction Services owned or leased facilities in 17 states. This space is used for offices, equipment yards, manufacturing, warehousing, storage and vehicle shops.
MDU Construction
Services’ backlog at December 31 was as follows:
2017
2016
2015
(In
millions)
Inside specialty contracting
$
625
$
435
$
408
Outside specialty contracting
83
40
85
$
708
$
475
$
493
The
increase in backlog at December 31, 2017, compared to backlog at December 31, 2016, was primarily attributable to an increase in projects from all revenue streams based on customer demand. Backlog increases with awards of new contracts and decreases as work is performed on existing contracts. MDU Construction Services expects to complete a significant amount of the backlog at December 31, 2017, during the next 12 months.
MDU Construction Services’ backlog is comprised
of the anticipated revenues from the uncompleted portion of services to be performed under job-specific contracts. A project is included in backlog when a contract is awarded and agreement on contract terms has been reached. However, backlog does not contain contracts for time and material projects that a fixed amount cannot be determined. Backlog is comprised of: (a) original contract amounts, (b) change orders for which customers have approved, (c) pending change orders expected to receive confirmation in the ordinary course
of business and (d) claim amounts that have been made against customers for which are determined to have a legal basis under existing contractual arrangements and as to which recovery is considered to be probable. Such claim amounts were immaterial for all periods presented. Backlog may be subject to delay, default or cancellation at the election of the customers. Historically, cancellations have not had a material adverse effect on backlog. Due to the nature of its contractual arrangements, in many instances MDU Construction Services' customers are not committed to the specific volumes of services to be purchased under a contract, but rather MDU Construction Services is committed to perform these services if and to the extent requested by the customer. Therefore, there can be no assurance as to the customers' requirements during a particular period or that such estimates at any
point in time are predictive of future revenues.
MDU Construction Services works with the National Electrical Contractors Association, the IBEW and other trade associations on hiring and recruiting a qualified workforce.
CompetitionMDU Construction Services operates in a highly competitive business environment. Most of MDU Construction Services' work is obtained on the basis of competitive bids or by negotiation of either cost-plus or fixed-price contracts. The workforce and equipment are highly mobile, providing greater flexibility in the size and location of MDU Construction Services' market area. Competition is based primarily on price and reputation for quality, safety and reliability. The size and location of the services provided, as well
as the state of the economy, will be factors in the number of competitors that MDU Construction Services will encounter on any particular project. MDU Construction Services believes that the diversification of the services it provides, the markets it serves throughout the United States and the management of its workforce will enable it to effectively operate in this competitive environment.
Utilities and independent contractors represent the largest customer base for this segment. Accordingly, utility and subcontract work accounts for a significant portion of the work performed by MDU Construction Services and the amount of construction contracts is dependent to a certain extent on the level and timing of maintenance and construction programs undertaken by customers. MDU Construction Services relies on repeat customers and strives to maintain
successful long-term relationships with these customers.
Environmental Matters MDU Construction Services' operations are subject to regulation customary for the industry, including federal, state and local environmental compliance. MDU Construction Services believes it is in substantial compliance with these regulations.
MDU Resources Group, Inc. Form 10-K 19
Part I
The
nature of MDU Construction Services' operations is such that few, if any, environmental permits are required. Operational convenience supports the use of petroleum storage tanks in several locations, which are permitted under state programs authorized by the EPA. MDU Construction Services has no ongoing remediation related to releases from petroleum storage tanks. MDU Construction Services' operations are conditionally exempt small-quantity waste generators, subject to minimal regulation under the RCRA. Federal permits for specific construction and maintenance jobs that may require these permits are typically obtained by the hiring entity, and not by MDU Construction Services.
MDU Construction Services did not incur any material environmental expenditures in 2017 and does not expect to incur any material capital expenditures related to environmental compliance with current laws
and regulations through 2020.
For information regarding construction services litigation, see Item 8 - Note 17.
Item 1A. Risk Factors
The Company's business and financial results are subject to a number of risks and uncertainties, including those set forth below and in other documents that it files with the SEC. The factors and the other matters discussed herein are important factors that could cause actual results or outcomes for the Company to differ materially from
those discussed in the forward-looking statements included elsewhere in this document. If any of the risks described below actually occur, the Company's business, prospects, financial condition or financial results could be materially harmed.
Economic Risks
The Company is subject to government regulations that may delay and/or have a negative impact on its business and its results of operations and cash flows. Statutory and regulatory requirements also may limit another party's ability to acquire the Company or impose conditions on an acquisition of or by the
Company.
The Company's electric and natural gas transmission and distribution businesses are subject to comprehensive regulation by federal, state and local regulatory agencies with respect to, among other things, allowed rates of return and recovery of investment and cost, financing, rate structures, health care coverage and cost, income taxes, property and other taxes, franchises; recovery of purchased power and purchased natural gas costs; and siting of generation and transmission facilities. These governmental regulations significantly influence the Company's operating environment and may affect its ability to recover costs from its customers. The Company is unable to predict
the impact on operating results from the future regulatory activities of any of these agencies. Changes in regulations or the imposition of additional regulations could have an adverse impact on the Company's results of operations and cash flows.
There can be no assurance that applicable regulatory commissions will determine all the costs of the Company's electric and natural gas transmission and distribution businesses to have been prudent, which could result in disallowance of costs. Also, the regulatory process for approval of rates for these businesses may not result in full recovery of the costs of providing services. Changes in regulatory requirements or operating conditions may require early retirement of certain assets. While regulation typically provides
relief for these types of retirements, there is no assurance the regulators will allow full recovery of all remaining costs leaving stranded asset costs. Rising fuel costs could increase the risk that the utility businesses will not be able to fully recover those fuel costs from their customers.
Approval from a number of federal and state regulatory agencies would need to be obtained by any potential acquirer of the Company as well as for acquisitions by the Company. The approval process could be lengthy and the outcome uncertain, which may defer potential acquirers from approaching the Company or impact the
Company's ability to pursue otherwise attractive acquisitions.
Economic volatility affects the Company's operations, as well as the demand for its products and services.
Unfavorable economic conditions can negatively affect the level of public and private expenditures on projects and the timing of these projects which, in turn, can negatively affect the demand for the Company's products and services, primarily at the Company's construction businesses. The level of demand for construction products and services could be adversely impacted by the economic conditions in the industries the
Company serves, as well as in the economy in general. State and federal budget issues affect the funding available for infrastructure spending.
The ability of the Company's electric and natural gas distribution businesses to grow in service territory, customer base and usage demand is affected by the economic environments and population growth of the markets served. This economic volatility could have a material adverse effect on the Company's results of operations, cash flows and asset values. Further, any material decreases in energy demand by customers, for economic or other reasons, could have a material adverse impact on the Company's earnings and results of operations.
20 MDU
Resources Group, Inc. Form 10-K
Part I
The Company's operations involve risks that may result from catastrophic events.
The Company's operations include a variety of inherent hazards and operating risks, such as product leaks, explosions, mechanical failures, vandalism, acts
of terrorism and acts of war, which could result in loss of human life; personal injury; property damage; environmental pollution; impairment of operations; and substantial financial losses. The Company maintains insurance against some, but not all, of these risks and losses. The occurrence of these losses not fully covered by insurance could have a material effect on the Company’s financial position, results of operations and cash flows.
The Company relies on financing sources and capital markets. Access to these markets may be adversely affected by factors beyond the Company's control. If the
Company is unable to obtain cost effective financing in the future, the Company's ability to execute its business plans, make capital expenditures or pursue acquisitions that the Company may otherwise rely on for future growth could be impaired. As a result, the market value of the Company's common stock may be adversely affected. If the Company issues a substantial amount of common stock it could have a dilutive effect on its existing shareholders.
The Company's operations, particularly its electric and natural
gas transmission and distribution businesses, require significant capital investment. The Company relies on the issuance of long-term debt and equity securities as sources of liquidity for capital requirements not satisfied by its cash flow from operations. If the Company is not able to access capital at competitive rates, the ability to implement its business plans may be adversely affected. Market disruptions may increase the cost of borrowing or adversely affect its ability to access one or more financial markets. Such disruptions could include:
•
A significant economic downturn
•
The
financial distress of unrelated industry leaders in the same line of business
•
Deterioration in capital market conditions
•
Turmoil in the financial services industry
•
Volatility in commodity prices
•
Terrorist
attacks
•
Cyberattacks
The issuance of a substantial amount of the Company's common stock, whether issued in connection with an acquisition or otherwise, could have a dilutive effect on existing shareholders, or the perception that such an issuance could occur, may adversely affect the market price of the Company's common stock.
The regulatory approval, permitting, construction, startup and/or operation of pipelines and power generation and transmission facilities may involve
unanticipated events, delays and unrecoverable costs.
The construction, startup and operation of pipelines and power generation and transmission facilities involve many risks, which may include: delays; breakdown or failure of equipment; inability to obtain required governmental permits and approvals; inability to obtain or renew easements; public opposition; inability to complete financing; inability to negotiate acceptable equipment acquisition, construction, fuel supply, off-take, transmission, transportation or other material agreements; changes in markets and market prices for power; cost increases and overruns; the risk of performance below expected levels of output or efficiency; and the inability to obtain full cost recovery in regulated rates. Such unanticipated events could negatively impact the Company's business, its results of operations
and cash flows.
Additionally, operating or other costs required to comply with current pipeline safety regulations and potential new regulations under various agencies could be significant. The regulations require verification of pipeline infrastructure records by pipeline owners and operators to confirm the maximum allowable operating pressure of certain lines. Increased emphasis on pipeline safety issues and increased regulatory scrutiny may result in penalties and higher costs of operations. If these costs are not fully recoverable from customers, they could have a material adverse effect on the Company’s results of operations and cash flows.
Financial market changes could impact the Company’s pension and post-retirement
benefit plans and obligations.
The global demand and price volatility for natural resources, interest rate changes, governmental budget constraints and threat of terrorism can create volatility in the financial markets. Changing financial market conditions could negatively affect the value of assets held in the Company's pension and other postretirement benefit plans and may increase the amount and accelerate the timing of required funding contributions for those plans as well liabilities and funding requirements for multiemployer plans to which the Company is a participating employer.
MDU
Resources Group, Inc. Form 10-K 21
Part I
The backlogs at the Company's construction materials and contracting and construction services businesses may not accurately represent future revenue.
Backlog consists of the uncompleted portion of services to be performed under job-specific contracts.
Contracts are subject to delay, default or cancellation and the contracts in the Company's backlog are subject to changes in the scope of services to be provided as well as adjustments to the costs relating to the applicable contracts. Backlog may also be affected by project delays or cancellations resulting from weather conditions, external market factors and economic factors beyond the Company's control. Accordingly, there is no assurance that backlog will be realized. The timing of contract
awards, duration of large new contracts and the mix of services can significantly affect backlog. Backlog at any given point in time may not accurately represent the revenue or net income that is realized in any period and the backlog as of the end of the year may not be indicative of the revenue and net income expected to be earned in the following year and should not be relied upon as a stand-alone indicator of future revenues or net income.
The Company's pipeline and midstream business is dependent on factors, including commodity prices and commodity price basis differentials, that are subject to external influences.
Fluctuations in oil, NGL and natural gas production and prices; fluctuations in commodity price
basis differentials; domestic and foreign supplies of oil, NGL and natural gas; political and economic conditions in oil producing countries; actions of the Organization of Petroleum Exporting Countries; and other external factors impact the development of natural gas supplies and the expansion and operation of natural gas pipeline systems. Prolonged depressed prices for oil, NGL and natural gas could negatively affect the growth, results of operations, cash flows and asset values of the Company's pipeline and midstream business.
Reductions in the Company's credit ratings could increase financing costs.
There is no assurance that the Company's
current credit ratings, or those of its subsidiaries, will remain in effect or that a rating will not be lowered or withdrawn by a rating agency. The Company's credit ratings may also change as a result of the differing methodologies or changes in the methodologies used by the rating agencies. A downgrade in credit ratings could lead to higher borrowing costs. A credit rating is not a recommendation to buy, sell or hold securities and is applicable only to the specific security to which it applies. Investors should make their own evaluation as to whether an investment in the security is appropriate.
Increasing costs associated with health care plans may adversely affect the
Company's results of operations.
The Company's self-insured costs of health care benefits for eligible employees continues to increase. Increasing levels of large individual health care claims and overall health care claims could have an adverse impact on operating results, financial position and liquidity. Legislation related to health care could also change the Company's benefit program and costs.
The Company is exposed to risk of loss resulting from the nonpayment and/or nonperformance by the Company's customers and counterparties.
If
the Company's customers or counterparties experience financial difficulties, the Company could experience difficulty in collecting receivables. The nonpayment and/or nonperformance by the Company's customers and counterparties, particularly customers and counterparties of the Company’s construction materials and contracting and construction services businesses for large construction projects, could have a negative impact on the Company's results of operations and cash flows. The Company
may also have indirect credit risk due to participation in energy markets such as MISO in which credit losses are socialized to all participants.
Changes in tax law may negatively affect the Company's business.
On December 22, 2017, President Trump signed into law the TCJA that significantly reforms the Internal Revenue Code of 1986, as amended. The TCJA, among other things, includes reductions to United States federal tax rates, repeals the domestic production deduction, disallows regulated utility property for immediate expensing, and modifies or repeals many other business deductions and credits. The changes to the Internal Revenue Code could materially impact the Company.
Future guidance, regulations and interpretations clarifying items within the TCJA may be contrary to the Company’s current interpretation or regulatory actions and could have an adverse impact to the Company. The Company continues to examine the impact the TCJA may have on the Company in future periods. The TCJA's impact on the economy, including overall demand and competition for the products and services the Company provides and associated labor availability and costs, is unknown and there could be negative impacts to the
Company. The Company's utility businesses' cash flows may be negatively impacted by the disallowance of immediate expensing of utility property. Other changes to federal and state tax laws have the ability to benefit or adversely affect the Company's earnings and customer costs. Significant changes to corporate tax rates could result in the impairment of deferred tax assets that are established based on existing law at the time of deferral. Changes to the value of various tax credits could change the economics of resources and the resource selection for the electric generation business. Regulation incorporates
22 MDU
Resources Group, Inc. Form 10-K
Part I
changes in tax law into the rate setting process for the regulated energy delivery businesses and therefore could create timing delays before the impact of changes are realized.
Environmental and Regulatory Risks
The Company's operations could be adversely impacted by climate
change.
Climate change may create physical and financial risks to the Company. Such risks could have an adverse effect on the Company's financial condition, results of operations and cash flows.
Utility customers’ energy needs vary with weather conditions, primarily temperature and humidity. For residential customers, heating and cooling represent the largest energy use. To the extent weather conditions are affected by climate change, customers’ energy use could increase or decrease. Increased energy use by its utility customers due to weather changes may require the Company to invest in additional generating assets, transmission and other
infrastructure to serve increased load. Decreased energy use due to weather changes may result in decreased revenues. Extreme weather conditions in general require more system backup, adding to costs, and can contribute to increased system stress, including service interruptions. Weather conditions outside of the Company's service territory could also have an impact on revenues. The Company buys and sells electricity that might be generated outside its service territory depending upon system needs and market opportunities. Extreme weather conditions creating high energy demand may raise electricity prices, which would increase the cost of energy provided to customers.
Severe weather impacts the
Company's utility service territories, primarily when thunderstorms, tornadoes and snow or ice storms occur. Severe weather events may damage or disrupt the Company's electric and natural gas transmission and distribution facilities, which could increase costs to repair damaged facilities and restore service to customers. The cost of providing service could increase to the extent the frequency of extreme weather events increases because of climate change or otherwise. The Company may not recover all costs related to mitigating these physical risks.
Severe weather may result in disruptions to the pipeline and midstream business's natural gas supply and transportation systems. These changes could result in increased maintenance and capital costs, disruption of
service, regulatory actions and lower customer satisfaction.
Extreme weather conditions caused by climate change or otherwise may cause infrastructure construction projects to be delayed or canceled and limit resources available for such projects increasing the project costs at the construction materials and contracting and construction services businesses.
Climate change may impact a region’s economic health, which could impact revenues at all of the Company's businesses. The Company's financial performance is tied to the health of the regional economies served. The Company provides natural gas and electric utility service, as well as
construction materials and services, for states and communities that are economically affected by the agriculture industry. Increases in severe weather events or significant changes in temperature and precipitation patterns could adversely affect the agriculture industry and correspondingly the economies of the states and communities affected by that industry.
The price of energy also has an impact on the economic health of communities. The cost of additional regulatory requirements to combat climate change, such as regulation of carbon dioxide emissions under the Clean Air Act, or other environmental regulation could impact the availability of goods and prices charged by suppliers which would normally be borne by consumers through higher prices for energy and purchased goods. To the extent financial markets view climate change and emissions of GHGs as a financial risk, this could negatively affect the
Company's ability to access capital markets or cause less than ideal terms and conditions.
The Company's operations are subject to environmental laws and regulations that may increase costs of operations, impact or limit business plans, or expose the Company to environmental liabilities.
The Company is subject to environmental laws and regulations affecting many aspects of its operations, regarding air and water quality, waste management and other environmental considerations. These laws and regulations can increase capital, operating and other costs, cause delays as a result of litigation and administrative proceedings, and create
compliance, remediation, containment, monitoring and reporting obligations, particularly relating to electric generation and natural gas gathering, transmission and storage operations. These laws and regulations generally require the Company to obtain and comply with a variety of environmental licenses, permits, inspections and other approvals. Although the Company strives to comply with all applicable environmental laws and regulations, public and private entities and private individuals may interpret the Company's legal or regulatory requirements differently and seek injunctive relief or other remedies against the Company. The
Company cannot predict the outcome, financial or operational, of any such litigation or administrative proceedings.
MDU Resources Group, Inc. Form 10-K 23
Part I
Existing
environmental laws and regulations may be revised and new laws and regulations seeking to protect the environment may be adopted or become applicable to the Company. These laws and regulations could require the Company to limit the use or output of certain facilities, restrict the use of certain fuels, retire and replace certain facilities, install pollution controls, remediate environmental impacts, remove or reduce environmental hazards, or forego or limit the development of resources. Revised or new laws and regulations that increase compliance costs or restrict operations, particularly if costs are not fully recoverable from customers, could have a material adverse effect on the Company's results of operations and cash
flows.
On April 17, 2015, the EPA published a rule, under the RCRA, for coal combustion residuals that regulates coal ash as a solid waste and not a hazardous waste. Site and groundwater analyses as required by the rule may identify the need to upgrade or close impoundments or the Company may need to install replacement ash management systems. The cost of replacement ash impoundments or landfills may be material. If these costs are not fully recoverable from customers, they could have a material adverse effect on the Company's results of operations and cash flows.
On August 15, 2014, the EPA published a rule under Section 316(b)
of the Clean Water Act, establishing requirements for water intake structures at existing steam electric generating facilities. The purpose of the rule is to reduce impingement and entrainment of fish and other aquatic organisms at cooling water intake structures. The majority of the Company's electric generating facilities are either not subject to the rule or have completed studies that project compliance expenditures are not material. The Lewis & Clark Station will complete a study that will be submitted to the Montana DEQ by July 31, 2019, to be used in determining any required controls. It is unknown at this time what controls may be required at this facility or if compliance costs will be material. The installation schedule for any required controls would be established with the permitting agency after the study is completed.
Initiatives
to reduce GHG emissions could adversely impact the Company's operations.
Concern that GHG emissions are contributing to global climate change has led to international, federal and state legislative and regulatory proposals to reduce or mitigate the effects of GHG emissions. The Company’s primary GHG emission is carbon dioxide from fossil fuels combustion at Montana-Dakota's electric generating facilities, particularly its coal-fired facilities. Approximately 50 percent of Montana-Dakota's owned generating capacity and approximately 76 percent of the electricity it generated in 2017 was from coal-fired facilities.
On October 23, 2015, the EPA published the Clean Power Plan
rule that requires existing fossil fuel-fired electric generating facilities to reduce carbon dioxide emissions. On February 9, 2016, however, the United States Supreme Court granted an application for a stay of the Clean Power Plan pending disposition of the applicants' petition for review in the D.C. Circuit Court and disposition of the applicants' petition for a writ of certiorari if such a writ is sought. The EPA filed a motion with the D.C. Circuit Court on March 28, 2017, requesting the Clean Power Plan's case be held in abeyance. The D.C. Circuit Court granted the EPA’s motion to hold the case in abeyance for 60 days. On August 8, 2017, the D.C. Circuit Court issued an order holding the case in abeyance for an additional 60-day period and directed the EPA to file status reports at 30-day intervals.
In parallel, the EPA published a proposal on October 16, 2017, to repeal the Clean Power Plan in its entirety and followed with an advance notice of proposed rulemaking published in the Federal Register on December 28, 2017, requesting comment on replacing the Clean Power Plan through new rulemaking. Compliance costs will become clearer as the EPA completes new rulemaking.
On January 14, 2015, the federal government of the United States announced a goal to reduce methane emissions from the oil and natural gas industry by 40 percent to 45 percent below 2012 levels by 2025. On June 3, 2016, the EPA published a rule updating new source performance standards for the oil and natural gas industry. The rule builds
on 2012 requirements to reduce volatile organic compound emissions from oil and natural gas sources by establishing requirements to reduce methane emissions from previously regulated sources, as well as adding volatile organic compound and methane requirements for sources previously not covered by the rule. The rule impacts new and modified natural gas gathering and boosting stations and transmission and storage compressor stations. WBI Energy is currently complying with the rules impacting new and modified sources. In addition, on March 10, 2016, the EPA announced plans to reduce emissions from the oil and natural gas industry by moving to regulate emissions from existing sources. On November 10, 2016, the EPA issued an Information Collection Request to oil and gas facility operators, including WBI Energy, to begin the process of existing source rule development. On March 7,
2017, the EPA published notice of withdrawal of the Information Collection Request.
On September 15, 2016, the Washington DOE issued a Clean Air rule that requires carbon dioxide emission reductions from various industries in the state, including emissions from the combustion of natural gas supplied to end-use customers by natural gas distribution companies, such as Cascade. In 2017, the rule requires Cascade to hold carbon dioxide emissions to a baseline, equal to the average emissions in 2012 to 2016. Beginning in 2018, annual carbon dioxide emissions are reduced by an additional 1.7 percent of the baseline from the previous year's emissions. Compliance for natural gas suppliers is to be achieved through purchasing emissions credits from projects located within the state of Washington and, to a limited and declining extent, out-of-state allowances. Purchasing emissions
credits and allowances will increase operating costs for Cascade. If Cascade is not able to receive timely and full recovery of compliance costs from its customers, such costs could adversely impact the results of its operations. On September 27, 2016 and September 30, 2016, Cascade
24 MDU Resources Group, Inc. Form 10-K
Part I
and
three other natural gas distribution utility companies jointly filed complaints in the United States District Court for the Eastern District of Washington and the Thurston County Superior Court, respectively, asking the courts to deem the rule invalid. The companies asserted that the Washington DOE undertook this rulemaking without the requisite statutory authority. On December 15, 2017, the Thurston County Superior Court vacated the Clean Air rule holding that it is invalid due to a lack of legislative approval to adopt the rule. The ruling may still be appealed by the Washington DOE or interveners. Litigation in the United States District Court for the Eastern District of Washington remains in abeyance pending evaluation of the recent ruling in the Thurston County Superior Court.
Additional treaties, legislation or regulations to reduce GHG emissions may be adopted that affect
the Company's utility operations by requiring additional energy conservation efforts or renewable energy sources, as well as other mandates that could significantly increase capital expenditures and operating costs or reduce demand for the Company's utility services. If the Company’s utility operations do not receive timely and full recovery of GHG emission compliance costs from customers, then such costs could adversely impact the results of its operations and cash flows.
The Company monitors, analyzes and reports GHG emissions from its other operations as required by applicable laws and regulations.
The Company will continue to monitor GHG regulations and their potential impact on operations.
Due to the uncertain availability of technologies to control GHG emissions and the unknown obligations that potential GHG emission legislation or regulations may create, the Company cannot determine the potential financial impact on its operations.
Other Risks
The Company's various businesses are seasonal and subject to weather conditions that can adversely affect the Company's operations, revenues and cash flows.
The
Company's results of operations can be affected by changes in the weather. Weather conditions influence the demand for electricity and natural gas and affect the price of energy commodities. Utility operations have historically generated lower revenues when weather conditions are cooler than normal in the summer and warmer than normal in the winter particularly in jurisdictions that do not have decoupling mechanisms in place. Where decoupling mechanism are in place, there is no assurance the Company will continue to receive such regulatory protection from adverse weather in future rates.
Adverse weather conditions, such as heavy or sustained rainfall or snowfall, storms, wind, and colder weather may affect the demand for products and the ability to perform services at the construction businesses and affect ongoing operation and maintenance
and construction activities for the electric and natural gas transmission and distribution businesses. In addition, severe weather can be destructive, causing outages, and/or property damage, which could require additional costs to be incurred.
As a result, adverse weather conditions could negatively affect the Company's results of operations, financial position and cash flows.
Competition exists in all of the Company's businesses.
The Company's businesses are subject to competition. Construction services' competition is based primarily on price and reputation for quality, safety and reliability.
Construction materials products are marketed under highly competitive conditions and are subject to such competitive forces as price, service, delivery time and proximity to the customer. The electric utility and natural gas industries also experience competitive pressures as a result of consumer demands, technological advances and other factors. The pipeline and midstream business competes with several pipelines for access to natural gas supplies and for gathering, transportation and storage business. Competition could negatively affect the Company's results of operations, financial position and cash flows.
The Company's inability to obtain, develop and retain key personnel and skilled labor forces may have a negative effect on the
Company's operations.
The Company must attract, develop and retain executive officers and other professional, technical and skilled labor forces with the skills and experience necessary to successfully manage, operate and grow the Company's businesses. Competition for these employees is high, and in some cases competition for these employees is on a regional or national basis. A shortage in the supply of these skilled personnel creates competitive hiring markets and increased labor expenses, decreased productivity and potentially lost business opportunities. Additionally, if the Company is unable to hire employees with the requisite skills, the
Company may also be forced to incur significant training expenses. As a result, the Company's ability to maintain productivity, relationships with customers, competitive costs, and quality services is limited by the ability to employ the necessary skilled personnel and could negatively affect the Company's results of operations, financial position and cash flows.
MDU Resources Group, Inc. Form 10-K 25
Part
I
The Company's construction materials and contracting and construction services businesses may be exposed to warranty claims.
The Company, particularly its construction businesses, may provide warranties guaranteeing the work performed against defects in workmanship and material. If warranty claims occur, they may require the Company to re-perform the services or to repair or replace the warranted
item, at a cost to the Company, and could also result in other damages if the Company is not able to adequately satisfy warranty obligations. In addition, the Company may be required under contractual arrangements with customers to warrant any defects or failures in materials the Company purchased from third parties. While the Company generally requires suppliers to provide warranties that are consistent with those the Company provides to customers, if any of the suppliers default
on their warranty obligations to the Company, the Company may nonetheless incur costs to repair or replace the defective materials. Costs incurred as a result of warranty claims could adversely affect the Company's results of operations, financial condition and cash flows.
The Company could be subject to limitations on its ability to pay dividends.
The Company depends on earnings from its divisions and dividends from its subsidiaries
to pay dividends on its common stock. Regulatory, contractual and legal limitations, as well as capital requirements and the Company's financial performance or cash flows, could restrict or influence the Company's ability or decision to pay dividends on its common stock and adversely affect the Company's stock price.
Costs related to obligations under MEPPs could have a material negative effect on the Company's results of operations and cash flows.
Various operating subsidiaries
of the Company participate in approximately 75 MEPPs for employees represented by certain unions. The Company is required to make contributions to these plans in amounts established under numerous collective bargaining agreements between the operating subsidiaries and those unions.
The Company may be obligated to increase its contributions to underfunded plans that are classified as being in endangered, seriously endangered or critical status as defined by the Pension Protection Act of 2006. Plans classified as being in one of these statuses are required to adopt RPs or FIPs to improve their
funded status through increased contributions, reduced benefits or a combination of the two. Based on available information, the Company believes that approximately 35 percent of the MEPPs to which it contributes are currently in endangered, seriously endangered or critical status.
The Company may also be required to increase its contributions to MEPPs if the other participating employers in such plans withdraw from the plans and are not able to contribute amounts sufficient to fund the unfunded liabilities associated with their participation in the plans. The amount and timing of any increase in the Company's required contributions to MEPPs may also depend upon one or more factors
including the outcome of collective bargaining, actions taken by trustees who manage the plans, actions taken by the plans' other participating employers, the industry for which contributions are made, future determinations that additional plans reach endangered, seriously endangered or critical status, government regulations and the actual return on assets held in the plans, among others. The Company may experience increased operating expenses as a result of the required contributions to MEPPs, which may have a material adverse effect on the Company's results of operations, financial position or cash flows.
In addition, pursuant to ERISA, as amended by MPPAA, the Company could incur
a partial or complete withdrawal liability upon withdrawing from a plan, exiting a market in which it does business with a union workforce or upon termination of a plan to the extent these plans are underfunded. The Company could also incur additional withdrawal liability if its withdrawal from a plan is determined by that plan to be part of a mass withdrawal.
Information technology disruptions or cyberattacks could adversely impact the Company's operations.
The Company's operations require uninterrupted operation of information technology systems and network infrastructure. While the
Company has policies, procedures and processes in place designed to strengthen and protect these systems, they may be vulnerable to failures or unauthorized access due to hacking, theft, sabotage, malicious software, acts of terrorism, acts of war, acts of nature or other causes. If these systems fail or become comprised, and they are not recovered in a timely manner, the Company may be unable to fulfill critical business functions. This may include interruption of electric generation, transmission and distribution facilities, natural gas storage and pipeline facilities, and facilities for delivery of construction materials or other products and services. The Company’s accounting systems and its ability to collect information and invoice customers for products and services could also be disrupted. If
the Company’s operations were disrupted, it could result in decreased revenues or significant remediation costs that have a material adverse effect on the Company's results of operations and cash flows. Additionally, because electric generation and transmission systems and natural gas pipelines are part of interconnected systems with other operators’ facilities, a cyber-related disruption in another operator’s system could negatively impact the Company's business.
26 MDU
Resources Group, Inc. Form 10-K
Part I
The Company, through the ordinary course of business, requires access to sensitive customer, employee and Company data. While the Company has implemented extensive security measures, a breach of its systems could compromise sensitive data. Such an event could result in negative
publicity and reputational harm, remediation costs, legal claims and fines that could have an adverse effect on the Company's financial results. Third-party service providers that perform critical business functions for the Company or have access to sensitive information within the Company also may be vulnerable to security breaches and information technology risks that could have an adverse effect on the Company.
The Company may be subject to potential material liabilities relating to the past sale of assets or businesses,
primarily arising from events prior to sale.
The Company previously sold its oil and natural gas assets and its membership interests in Dakota Prairie Refining. The Company may be subject to potential liabilities, either directly or through indemnification of the buyers or others, relating to these transactions or other sales, primarily arising from events prior to the sale, or from breaches of any representations, warranties or covenants in the purchase and sale agreements.
Other factors that could impact the Company's businesses.
The following are other factors that should be considered for
a better understanding of the risks to the Company. These other factors may materially negatively impact the Company's financial results in future periods.
•
Acquisition, disposal and impairments of assets or facilities
•
Changes in operation, performance and construction of plant facilities or other assets
•
Changes
in present or prospective generation
•
The availability of economic expansion or development opportunities
•
Population growth rates and demographic patterns
•
Market demand for, available supplies of, and/or costs of, energy- and construction-related products and services
•
The
cyclical nature of large construction projects at certain operations
•
Unanticipated project delays or changes in project costs, including related energy costs
•
Unanticipated changes in operating expenses or capital expenditures
•
Labor negotiations or disputes
•
Inability
of the contract counterparties to meet their contractual obligations
•
Changes in accounting principles and/or the application of such principles to the Company
•
Changes in technology
•
Changes
in legal or regulatory proceedings
•
Losses or costs relating to litigation
•
The ability to effectively integrate the operations and the internal controls of acquired companies
Item 1B. Unresolved Staff Comments
The Company
has no unresolved comments with the SEC.
Item 3. Legal Proceedings
For information regarding legal proceedings required by this item, see Item 8 - Note 17, which is incorporated herein by reference.
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-K, which is incorporated herein by reference.
MDU Resources Group, Inc. Form 10-K 27
Part II
Item 5.
Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company's common stock is listed on the New York Stock Exchange under the symbol "MDU." The price range of the Company's common stock as reported by the New York Stock Exchange during 2017 and 2016 and dividends declared thereon were as follows:
The Company depends on earnings from its divisions and dividends from its subsidiaries to pay dividends on common stock. The declaration and payment of dividends is at the sole discretion of the board of directors, subject to limitations imposed by the Company's credit agreements, federal and state laws, and applicable regulatory limitations. For more information on factors that may limit the
Company's ability to pay dividends, see Item 8 - Note 9.
The following table includes information with respect to the Company's purchase of equity securities:
Represents
shares of common stock purchased on the open market in connection with annual stock grants made to the Company's non-employee directors and for those directors who elected to receive additional shares of common stock in lieu of a portion of their cash retainer.
(2)
Not applicable. The Company does not currently have in place any publicly announced plans or programs to purchase equity securities.
28 MDU
Resources Group, Inc. Form 10-K
Part II
Item 6. Selected Financial Data
2017
2016
2015
2014
2013
2012
Selected
Financial Data
Operating revenues (000's):
Electric
$
342,805
$
322,356
$
280,615
$
277,874
$
257,260
$
236,895
Natural
gas distribution
848,388
766,115
817,419
921,986
851,945
754,848
Pipeline
and midstream
122,213
141,602
154,904
157,292
144,568
142,610
Construction
materials and contracting
1,812,529
1,874,270
1,904,282
1,765,330
1,712,137
1,617,425
Construction
services
1,367,602
1,073,272
926,427
1,119,529
1,039,839
938,558
Other
7,874
8,643
9,191
9,364
9,620
10,370
Intersegment
eliminations
(58,060
)
(57,430
)
(78,786
)
(136,302
)
(95,201
)
(74,595
)
$
4,443,351
$
4,128,828
$
4,014,052
$
4,115,073
$
3,920,168
$
3,626,111
Operating
income (loss) (000's):
Electric
$
82,153
$
68,497
$
57,955
$
61,331
$
54,274
$
49,852
Natural
gas distribution
84,878
65,014
53,810
65,633
78,829
67,579
Pipeline
and midstream
36,924
43,374
29,988
46,713
20,896
49,139
Construction
materials and contracting
143,716
178,719
146,026
86,462
93,629
57,864
Construction
services
81,590
53,705
43,376
82,309
85,246
66,531
Other
(549
)
(189
)
(8,438
)
(5,366
)
(4,384
)
(5,325
)
Intersegment
eliminations
—
—
(2,942
)
(9,900
)
(7,176
)
—
$
428,712
$
409,120
$
319,775
$
327,182
$
321,314
$
285,640
Earnings
(loss) on common stock (000's):
Electric
$
49,366
$
42,222
$
35,914
$
36,731
$
34,837
$
30,634
Natural
gas distribution
32,225
27,102
23,607
30,484
37,656
29,409
Pipeline
and midstream
20,493
23,435
13,250
24,666
7,701
26,588
Construction
materials and contracting
123,398
102,687
89,096
51,510
50,946
32,420
Construction
services
53,306
33,945
23,762
54,432
52,213
38,429
Other
(1,422
)
(3,231
)
(14,941
)
(7,386
)
(10,776
)
(7,209
)
Intersegment
eliminations
6,849
6,251
5,016
(6,095
)
(4,307
)
—
Earnings
on common stock before income (loss) from discontinued operations
284,215
232,411
175,704
184,342
168,270
150,271
Income
(loss) from discontinued operations, net of tax*
(3,783
)
(300,354
)
(834,080
)
109,311
109,615
(151,710
)
Loss
from discontinued operations attributable to noncontrolling interest
—
(131,691
)
(35,256
)
(3,895
)
(363
)
—
$
280,432
$
63,748
$
(623,120
)
$
297,548
$
278,248
$
(1,439
)
Earnings
(loss) per common share before discontinued operations - diluted
$
1.45
$
1.19
$
.90
$
.96
$
.89
$
.80
Discontinued
operations attributable to the Company, net of tax
(.02
)
(.86
)
(4.10
)
.59
.58
(.81
)
$
1.43
$
.33
$
(3.20
)
$
1.55
$
1.47
$
(.01
)
Common
Stock Statistics
Weighted average common shares outstanding -diluted (000's)
195,687
195,618
194,986
192,587
189,693
188,826
Dividends
declared per common share
$
.7750
$
.7550
$
.7350
$
.7150
$
.6950
$
.6750
Book
value per common share
$
12.44
$
11.78
$
12.83
$
16.66
$
15.01
$
13.95
Market
price per common share (year end)
$
26.88
$
28.77
$
18.32
$
23.50
$
30.55
$
21.24
Market
price ratios:
Dividend payout**
53
%
63
%
82
%
74
%
78
%
84
%
Yield
2.9
%
2.7
%
4.1
%
3.1
%
2.3
%
3.2
%
Market
value as a percent of book value
216.1
%
244.2
%
142.8
%
141.1
%
203.5
%
152.3
%
*
Reflects
oil and natural gas properties noncash write-downs of $315.3 million (after tax) and $246.8 million (after tax) in 2015 and 2012, respectively, and fair value impairments of assets held for sale of $157.8 million (after tax) and $475.4 million (after tax) in 2016 and 2015, respectively.
**
Based on continuing operations.
MDU
Resources Group, Inc. Form 10-K 29
Part II
Item 6. Selected Financial Data (continued)
2017
2016
2015
2014
2013
2012
General
Total
assets (000's)
$
6,334,666
$
6,284,467
$
6,565,154
$
7,805,405
$
7,043,365
$
6,675,609
Total
long-term debt (000's)
$
1,714,853
$
1,790,159
$
1,796,163
$
2,016,198
$
1,773,050
$
1,738,833
Capitalization
ratios:
Total equity
59
%
56
%
58
%
62
%
62
%
60
%
Total
debt
41
44
42
38
38
40
100
%
100
%
100
%
100
%
100
%
100
%
Electric
Retail
sales (thousand kWh)
3,306,470
3,258,537
3,316,017
3,308,358
3,173,086
2,996,528
Electric
system summer and firm purchase contract ZRCs (Interconnected system)
553.1
559.7
547.3
584.0
583.5
552.8
Electric
system peak demand obligation, including firm purchase contracts, planning reserve margin requirement (Interconnected system)
530.2
559.7
547.3
522.4
508.3
550.7
All-time
demand peak - kW (Interconnected system)
611,542
611,542
611,542
582,083
573,587
573,587
Electricity
produced (thousand kWh)
2,630,640
2,626,763
1,898,160
2,519,938
2,430,001
2,299,686
Electricity
purchased (thousand kWh)
955,687
904,702
1,658,002
1,010,422
971,261
870,516
Average
cost of electric fuel and purchased power per kWh
$
.022
$
.021
$
.024
$
.025
$
.025
$
.023
Natural
Gas Distribution
Sales (Mdk)
112,551
99,296
95,559
104,297
108,260
93,810
Transportation
(Mdk)
144,477
147,592
154,225
145,941
149,490
132,010
Degree
days (% of normal)
Montana-Dakota/Great Plains
100
%
89
%
88
%
103
%
105
%
84
%
Cascade
107
%
87
%
83
%
89
%
98
%
96
%
Intermountain
111
%
96
%
89
%
95
%
110
%
91
%
Pipeline
and Midstream
Transportation (Mdk)
312,520
285,254
290,494
233,483
178,598
137,720
Gathering
(Mdk)
16,064
20,049
33,441
38,372
40,737
47,084
Customer
natural gas storage balance (Mdk)
22,397
26,403
16,600
14,885
26,693
43,731
Construction
Materials and Contracting
Sales (000's):
Aggregates
(tons)
28,213
27,580
26,959
25,827
24,713
23,285
Asphalt
(tons)
6,237
7,203
6,705
6,070
6,228
5,988
Ready-mixed
concrete (cubic yards)
3,548
3,655
3,592
3,460
3,223
3,157
Aggregate
reserves (000's tons)
965,036
989,084
1,022,513
1,061,156
1,083,376
1,088,236
30 MDU
Resources Group, Inc. Form 10-K
Part II
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The Company's strategy is to apply its expertise in the regulated energy delivery and construction materials
and services businesses to increase market share, increase profitability and enhance shareholder value through organic growth opportunities and strategic acquisitions. The Company is focused on a disciplined approach to the acquisition of well-managed companies and properties.
The Company has capabilities to fund its growth and operations through various sources, including internally generated funds, commercial paper facilities, revolving credit facilities, and the issuance from time to time of debt and equity securities. For more information on the Company's capital expenditures, see Liquidity and Capital Commitments.
On December
22, 2017, President Trump signed into law the TCJA making significant changes to the United States federal income tax laws. Some of the more material changes from the TCJA impacting the Company includes lower corporate tax rates, repealing the domestic production deduction, disallowance of immediate expensing for regulated utility property and modifying or repealing many other business deductions and credits. During the fourth quarter of 2017, the Company performed a one-time revaluation of the net deferred tax liabilities to account for the reduction in the corporate tax rate from 35 percent to 21 percent, as discussed in Item 8 - Note 11. The Company is currently reviewing
the components of the TCJA and evaluating the impact on the Company for 2018 and thereafter. For information pertinent to the specific impacts or trends identified by the Company's business segments, see Business Segment Financial and Operating Data.
Consolidated Earnings Overview
The following table summarizes the contribution to consolidated earnings (loss) by each of the Company's business segments.
Loss from discontinued operations attributable to noncontrolling interest
—
(131.7
)
(35.3
)
Earnings
(loss) on common stock
$
280.4
$
63.7
$
(623.1
)
Earnings (loss) per common share - basic:
Earnings
before discontinued operations
$
1.46
$
1.19
$
.90
Discontinued operations attributable to the Company, net of tax
(.02
)
(.86
)
(4.10
)
Earnings
(loss) per common share - basic
$
1.44
$
.33
$
(3.20
)
Earnings (loss) per common share - diluted:
Earnings
before discontinued operations
$
1.45
$
1.19
$
.90
Discontinued operations attributable to the Company, net of tax
(.02
)
(.86
)
(4.10
)
Earnings
(loss) per common share - diluted
$
1.43
$
.33
$
(3.20
)
2017 compared to 2016The Company recognized consolidated earnings of $280.4 million
in 2017, compared to consolidated earnings of $63.7 million in 2016. This increase was the result of:
•
Discontinued operations which reflect the absence in 2017 of a loss associated with the sale of the refining business in June 2016
•
An income tax benefit of $39.5 million primarily for the revaluation of the Company's net deferred tax liabilities, as discussed in Item 8 - Note 11
•
Higher
inside and outside specialty contracting margins at the construction services business
•
Higher natural gas retail sales margins at the natural gas distribution business
•
Higher electric retail sales margins at the electric business
These increases were partially offset by:
•
Lower
asphalt product margins and lower construction margins at the construction materials and contracting business
MDU Resources Group, Inc. Form 10-K 31
Part II
•
Lower
gathering and processing revenues at the pipeline and midstream business
2016 compared to 2015The Company recognized consolidated earnings of $63.7 million in 2016, compared to a consolidated loss of $623.1 million in 2015. This increase was due to:
•
Discontinued operations which reflect the absence in 2016 of fair value impairments of the exploration and production
business's assets of $475.4 million (after tax) and a noncash write-down of oil and natural gas properties of $315.3 million (after tax) offset in part by a fair value impairment of the refining business of $156.7 million (after tax) in 2016
•
Higher construction, asphalt product and aggregate margins at the construction materials and contracting business
•
Other loss decreased primarily as the result of lower operation and maintenance and interest expense due to the sales of the exploration and production and refining
businesses
•
Higher inside construction margins offset in part by lower outside construction margins, which includes lower equipment sales and rental margins, at the construction services business
•
Lower impairment in 2016 at the pipeline and midstream business
•
Higher electric retail sales
margins offset in part by higher operation and maintenance expense and higher depreciation, depletion and amortization expense at the electric business
Business Segment Financial and Operating Data
Following are key financial and operating data for each of the Company's business segments. Also included are highlights on key growth strategies, projections and certain assumptions for the Company and its subsidiaries and other matters of the
Company's business segments. Many of these highlighted points are "forward-looking statements." There is no assurance that the Company's projections, including estimates for growth and changes in earnings, will in fact be achieved. Please refer to assumptions contained in this section, as well as the various important factors listed in Item 1A - Risk Factors. Changes in such assumptions and factors could cause actual future results to differ materially from the Company's growth and earnings projections.
For information pertinent to various commitments and contingencies, see Item 8 - Notes to Consolidated Financial Statements. For a summary of the Company's business segments,
see Item 8 - Note 13.
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 Items 1 and 2 - Business Properties. Both segments strive to be a top performing utility company measured by integrity, safety, employees, customer service and shareholder performance, while continuing to focus on providing safe, reliable and competitively priced energy and related services to customers. The Company continues to monitor opportunities for these segments to
retain, grow and expand their customer base through extensions of existing operations, including building and upgrading electric generation and transmission and natural gas systems, and through selected acquisitions of companies and properties at prices that will provide stable cash flows and an opportunity to earn a competitive return on investment. The continued efforts to create operational improvements and efficiencies across both segments promotes the Company's business integration strategy. The primary factors that impact the results of these segments are the ability to earn authorized rates of return, the cost of natural gas, cost of electric fuel and purchased power, competitive factors in the energy industry and economic conditions in the segments' service areas.
The electric and natural gas distribution segments are subject to extensive
regulation in the jurisdictions where they conduct operations with respect to costs, timely recovery of investments and permitted returns on investment as well as certain operational, system integrity and environmental regulations. To assist in the reduction of regulatory lag with the increase in investments, tracking mechanisms have been implemented. Legislative and regulatory initiatives to increase renewable energy resources and reduce GHG emissions could impact the price and demand for electricity and natural gas and result in the retirement of certain electric generating facilities before they are fully depreciated. Although the current administration has slowed environmental regulations, the segments continue to invest in facility upgrades to be in compliance with the existing and future regulations.
The ability to grow through acquisitions is subject to significant competition and acquisition premiums. In addition, the
ability of the segments to grow their service territory and customer base is affected by the economic environment of the markets served and competition from other energy providers and fuels. The construction of any new electric generating facilities, transmission lines and other service facilities is subject to increasing cost and lead time, extensive permitting procedures, and federal and state legislative and regulatory initiatives, which will necessitate increases in electric energy prices.
Revenues are impacted by both customer growth and usage, the latter of which is primarily impacted by weather. Very cold winters increase demand for natural gas and to a lesser extent, electricity, while warmer than normal summers increase demand for electricity, especially among residential and commercial customers. Average consumption among natural gas customers has tended to decline as more efficient
32 MDU
Resources Group, Inc. Form 10-K
Part II
appliances and furnaces are installed, and as the Company has implemented conservation programs. 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.
Earnings
overview - electric The following information summarizes the performance of the electric segment.
Average
cost of electric fuel and purchased power per kWh
$
.022
$
.021
$
.024
2017 compared to 2016 Electric earnings increased$7.2 million (17 percent)
compared to the prior year. The increase resulted from:
•
Increased electric retail sales margins from the recovery of additional investment in a MISO multivalue project, approved rate recovery in all jurisdictions and 2 percent higher retail sales volumes to commercial and residential customers
•
Lower depreciation, depletion and amortization expense of $1.5 million (after tax) from lower depreciation rates implemented in conjunction with regulatory recovery activity
Partially
offsetting the increase were:
•
Higher operation and maintenance expense of $3.0 million (after tax) largely from higher payroll-related costs, material costs and contract services
•
Income tax expense of $2.1 million for the revaluation of nonutility net deferred tax assets, as discussed in Item 8 - Note 11
2016
compared to 2015Electric earnings increased$6.3 million (18 percent) compared to the prior year due to:
•
Increased electric retail sales margins, largely due to approved final and interim rate increases reduced in part by decreased electric sales volumes of 2 percent, largely from decreased residential customer volumes
•
Favorable income tax changes, which includes $10.1 million
due to higher production tax credits
Partially offsetting these increases were:
•
Higher operation and maintenance expense of $17.1 million (after tax) primarily due to higher contract services and higher payroll-related costs
•
Higher depreciation, depletion and amortization expense of $7.8 million (after tax) due to increased property, plant and equipment balances
•
Lower
other income, which includes $7.1 million (after tax) primarily related to AFUDC
•
Higher interest expense, which includes $4.4 million (after tax) largely the result of higher long-term debt
Certain of the higher operation and maintenance expense, higher depreciation, depletion and amortization expense and higher production tax credits in 2016, due to increased capital investments, are potentially recoverable and/or refundable through the rate recovery process. The previous table also reflects lower average cost of electric fuel and purchased power per kWh due to no electric fuel and purchased power costs associated with the Thunder Spirit Wind farm in 2016 as compared to 2015.
MDU
Resources Group, Inc. Form 10-K 33
Part II
Earnings overview - natural gas distribution The following information summarizes the performance of the natural gas distribution segment.
Average
cost of natural gas, including transportation, per dk
$
4.26
$
4.35
$
5.22
*
Degree days are a measure of the daily temperature-related demand
for energy for heating.
2017 compared to 2016 The natural gas distribution business experienced an increase in earnings of $5.1 million (19 percent) compared to the prior year because of increased natural gas retail sales margins. The margin increase resulted from:
•
Increased
retail sales volumes of 13 percent across all customer classes from colder weather in all jurisdictions, offset in part by weather normalization in certain jurisdictions, and 2 percent customer growth
•
Approved final and interim rate increases
Partially offsetting the increase were:
•
Income tax expense of $4.3 million for the revaluation of nonutility net deferred tax assets, as discussed in Item 8 - Note 11
•
Higher
operation and maintenance expense, which includes $3.7 million (after tax) largely from higher payroll-related costs and material costs
•
Higher depreciation, depletion and amortization expense of $2.4 million (after tax) as a result of increased property, plant and equipment balances
2016 compared to 2015 The natural gas distribution business experienced an increase in earnings of $3.5 million (15 percent) compared to the prior year from higher natural gas retail sales margins. The margin increase resulted from:
•
Increased
retail sales volumes of 4 percent to all customer classes from customer growth and colder weather in certain regions
•
Approved final and interim rate increases
34 MDU Resources Group, Inc. Form 10-K
Part
II
Partially offsetting the increase were higher operation and maintenance expense, which includes $4.6 million (after tax) largely from higher payroll-related costs, and higher depreciation, depletion and amortization expense from increased property, plant and equipment balances.
The previous table also includes lower nonutility project costs reflected in operation and maintenance expense, as well as the pass-through of lower natural gas prices which are reflected in the decrease in both sales revenue and purchased natural gas sold in 2016.
OutlookThe
Company expects these segments will grow rate base by approximately 6 percent annually over the next five years on a compound basis. This growth projection is on a much larger base, having grown rate base at a record pace of 12 percent compounded annually over the past five-year period. Operations are spread across eight states where the Company expects customer growth to be higher than the national average. Customer growth is expected to grow by 1 percent to 2 percent per year. This customer growth, along with system upgrades and replacements needed to supply safe and reliable service, will require investments in new electric generation and transmission and natural gas systems.
The Company continues to be focused on the regulatory recovery of its investments.
Since, January 1, 2017, these segments have implemented rate increases in Idaho, Minnesota, Montana, North Dakota, Oregon, Wyoming and before the FERC. The Company files for rate adjustments to seek recovery of operating costs and capital investments, as well as reasonable returns as allowed by regulators. The Company's most recent cases by jurisdiction are discussed in Item 8 - Note 16.
With the enactment of the TCJA, the state regulators in jurisdictions where the segments operate have requested companies submit plans for the estimated impact of the TCJA. As such, the segments are using the deferral method of accounting for the revaluation of its regulated deferred
tax assets and liabilities. The impact of the revaluation of the segments' regulatory deferred tax assets and liabilities in the fourth quarter of 2017, the period of enactment, have been included in the Company's regulatory assets and liabilities, as discussed in Item 8 - Note 4. The Company does not anticipate the corporate tax rate reduction to increase earnings at the utility businesses. The Company anticipates the TCJA will negatively impact the segments' cash flows due to not being able to immediately expense utility property.
In December 2016, the Company
signed a 25-year agreement to purchase power from the expansion of the Thunder Spirit Wind farm in southwest North Dakota. In November 2017, the NDPSC approved the advance determination of prudence for the purchase of the Thunder Spirit Wind farm expansion. The Company expects to soon have a purchase agreement in place and finalize the purchase when the construction is complete in late 2018. With the addition of the expansion, the Company's total wind farm generation capacity will be approximately 155 MW and increase the Company's electric generation portfolio to approximately 27 percent renewables based on nameplate ratings. The Company's integrated
resource plans in North Dakota and Montana include additional generation projects.
In June 2016, the Company, along with a partner, began construction on a 345-kilovolt transmission line from Ellendale, North Dakota, to Big Stone City, South Dakota. The estimated capital investment for this project is $130 million to $150 million. All necessary easements have been secured and the project is expected to be completed in 2019.
In 2018, the Company will begin the construction of a new 12-inch natural gas pipeline that will run approximately 21 miles from northeast Milnor, North Dakota, to southwest of Gwinner, North Dakota. The pipeline will serve, in part, a manufacturing facility in Gwinner and is expected to be in service
by late 2018. The pipeline has the capacity to expand natural gas service to other key industries in the region.
Pipeline and Midstream
Strategy and challenges The pipeline and midstream segment provides natural gas transportation, gathering and underground storage services, as discussed in Items 1 and 2 - Business Properties. 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 and maintaining safe natural gas pipelines and facilities. The segment continues to evaluate growth opportunities including the expansion of existing storage, gathering and transmission facilities; incremental pipeline projects which expand pipeline capacity; and expansion of energy-related services in the region leveraging on core competencies.
The segment is exposed to energy price volatility which is impacted by the fluctuations in pricing, production and basis differentials of the energy market's commodities. Legislative and regulatory initiatives to increase pipeline safety regulations and reduce methane emissions could also impact the price and demand for natural gas.
The pipeline and midstream segment is subject to extensive regulation including certain operational, system integrity and environmental regulations as well as various permit terms and operational
compliance conditions. The segment is charged with the ongoing process of reviewing existing permits and easements as well as securing new permits and easements as necessary to meet current demand and future
MDU Resources Group, Inc. Form 10-K 35
Part II
growth
opportunities. Exposure to pipeline opposition groups could also cause negative impacts on the segment with increased costs and potential delays to project completion.
The segment focuses on the recruitment and retention of a skilled workforce to remain competitive and provide services to its customers. The industry in which it operates relies on a skilled workforce to construct energy infrastructure and operate existing infrastructure in a safe manner. A shortage of skilled personnel can create a competitive labor market which could increase costs incurred by the segment. Competition from other pipeline and midstream companies can also have a negative impact on the segment.
Earnings overview - pipeline and midstreamThe following information summarizes the performance of the pipeline and midstream segment.
2017 compared to 2016 Pipeline and midstream earnings decreased$2.9 million (13 percent) compared to the prior year largely resulting from lower gathering and processing revenues of $14.0 million (after tax). The decrease in revenues resulted
from lower volumes from the sale of the Pronghorn assets in January 2017, as discussed in Item 8 - Note 2. Also included in the decrease in earnings was income tax expense of $200,000 for the TCJA revaluation, as discussed in Item 8 - Note 11.
Partially offsetting the decrease were:
•
Lower depreciation, depletion and amortization expense of $5.0 million (after tax) resulting from the absence of the Pronghorn assets, as previously discussed
•
Lower
operation and maintenance expense, which includes $2.2 million (after tax) primarily from the absence of Pronghorn, as previously discussed, as well as the absence in 2017 of a $1.4 million (after tax) fair value impairment in 2016 associated with the Pronghorn sale
•
Lower interest expense due to lower debt balances
•
Higher transportation revenues of $1.0 million largely resulting from increased off-system transportation volumes due to recently completed organic growth projects
2016
compared to 2015 Pipeline and midstream earnings increased$10.1 million (77 percent) largely due to:
•
Lower operation and maintenance expense, which includes $13.6 million (after tax) largely due to the absence in 2016 of impairments of natural gas gathering assets of $10.6 million (after tax), as discussed in Item 8 - Notes 1 and 5, lower payroll-related costs and lower material costs partially offset by a fair value impairment in 2016 of $1.4 million (after tax) associated with the sale of Pronghorn, as previously discussed
•
Lower
depreciation, depletion and amortization of $1.9 million (after tax), largely due to the sale of certain non-strategic natural gas gathering assets in the fourth quarter of 2015
•
Higher storage services earnings, primarily due to higher average interruptible storage balances
•
Lower interest expense of $1.2 million (after tax), primarily the result of lower debt interest rates and balances
Partially offsetting the earnings increase
was lower gathering and processing revenues of $8.0 million (after tax) resulting from lower natural gas gathering volumes, primarily due to the sale of certain non-strategic natural gas gathering assets, as previously discussed, and lower oil gathering volumes, partially offset by higher oil gathering rates at Pronghorn.
36 MDU Resources Group, Inc. Form 10-K
Part II
OutlookThe Company has continued to feel the effects of natural gas production at record levels which keeps downward pressure on natural gas prices in the near term. The Company continues to focus on growth and improving existing operations through organic projects in all areas in which it operates. The following describes recent growth projects.
The Company's Valley Expansion project, a 38-mile pipeline that will deliver natural gas supply to eastern North Dakota and far western Minnesota, is expected to be complete in the fourth quarter of 2018. The project, which is designed to transport 40 million cubic feet of natural gas per day, is under the jurisdiction of
the FERC. In February 2018, the Company received an order issuing a certificate of public convenience and necessity from the FERC. Construction is expected to begin as soon as the conditions of the certificate have been met, including the receipt of outstanding permits.
In June 2017, the Company announced plans to complete a Line Section 27 expansion project in the Bakken area of northwestern North Dakota. The project will include approximately 13 miles of new pipeline and associated facilities. The project, as designed, will increase capacity by over 200 million cubic feet per day and bring total capacity of the Line Section 27 to over 600 million cubic feet per day. The project is expected to be placed in service in the fall of 2018.
In
2017, the Company completed and placed into service the Charbonneau and Line Section 25 expansion projects, which include a new compression station as well as other compressor additions and enhancements at existing stations. The Company's revenues have been positively impacted by the increase in transportation volumes with these projects.
The impact of the TCJA on the pipeline and midstream industry is uncertain. With the enactment of the TCJA, the regulated pipeline is using the deferral method of accounting for the revaluation of its regulated deferred tax assets and liabilities. The impact of the revaluation of the regulated pipeline's regulatory deferred tax assets and liabilities in the fourth quarter of 2017, the period of enactment, have been included in
the Company's regulatory assets and liabilities, as discussed in Item 8 - Note 4.
Construction Materials and Contracting
Strategy and challengesThe construction materials and contracting segment provides an integrated set of construction services, as discussed in Items 1 and 2 - Business Properties. The segment focuses on high-growth strategic markets located near major transportation corridors and desirable mid-sized metropolitan areas; strengthening the long-term, strategic aggregate reserve position through available purchase and/or lease opportunities; enhancing profitability through
cost containment, margin discipline and vertical integration of the segment's operations; development and recruitment of talented employees; and continued growth through organic and acquisition opportunities.
A key element of the Company's long-term strategy for this business is to further expand its market presence in the higher-margin materials business (rock, sand, gravel, liquid asphalt, asphalt concrete, ready-mixed concrete and related products), complementing and expanding on the segment's expertise. The segment expects to continue cost containment efforts, positioning its operations for the resurgence in the private market, while continuing the emphasis on industrial, energy and public works projects.
As one of the country's largest sand and gravel producers, the segment will continue to strategically
manage its 1.0 billion tons of aggregate reserves in all its markets, as well as take further advantage of being vertically integrated. The segment's vertical integration allows the segment to manage operations from aggregate mining to final lay-down of concrete and asphalt, with control of and access to permitted aggregate reserves being significant.
The construction materials and contracting segment faces challenges that are not under the direct control of the business. The segment operates in highly competitive markets. Competition can put negative pressure on the ability of the segment to earn a reasonable return. The segment is also subject to volatility in the cost of raw materials such as diesel, gasoline, liquid asphalt, cement and steel. Such volatility can have a negative impact on the segment's margins. Other variables that can impact the segment's margins include adverse
weather conditions, the timing of project starts or completion and declines or delays in new and existing projects due to the cyclical nature of the construction industry.
The segment also faces challenges in the recruitment and retention of employees. Trends in the labor market include an aging workforce and availability issues. The segment also faces increasing pressure to reduce costs and the need for temporary employment because of the seasonality of the work performed in certain regions.
MDU Resources Group, Inc. Form 10-K 37
Part
II
Earnings overview - construction materials and contracting The following information summarizes the performance of the construction materials and contracting segment.
2017 compared to 2016 Earnings at the construction materials and contracting business increased$20.7 million (20 percent) compared to the prior year. The increase was the result of:
•
An
income tax benefit of $41.9 million for the revaluation of the segment's net deferred tax liabilities, as discussed in Item 8 - Note 11
•
Higher aggregate margins of $5.0 million (after tax) primarily due to strong commercial and residential demand in certain regions
Partially offsetting these increases were:
•
Lower asphalt product margins resulting from lower revenues driven by competitive pricing and lower
volumes from unfavorable weather during the first half of the year, less available work and increased competition in certain regions
•
Lower construction margins of $5.5 million (after tax), largely decreased workloads caused by unfavorable weather during the first half of the year and less available work in energy-producing states
•
Higher selling, general and administrative expense of $4.1 million (after tax) from the absence in 2017 of a $6.7 million (after tax) reduction to a MEPP withdrawal liability, as discussed
in Item 8 - Note 14, offset in part by lower depreciation, depletion and amortization and lower office expense
2016 compared to 2015Earnings at the construction materials and contracting business increased$13.6 million (15 percent) due to:
•
Higher construction margins of $8.1 million (after tax) resulting from higher revenues due to more available work in most regions
•
Lower
selling, general and administrative expense from a $6.7 million (after tax) reduction in 2016 to a previously recorded MEPP withdrawal liability compared to an increase to a MEPP withdrawal liability of $1.5 million (after tax) in 2015, as discussed in Item 8 - Note 14
•
Higher asphalt product margins of $2.9 million (after tax) resulting from higher volumes and lower asphalt oil and production costs
•
Higher aggregate margins of $2.3 million (after tax) resulting from higher
volumes due to increased demand
Partially offsetting these increases were:
•
Higher effective income tax rates
•
Lower other product lines margins of $1.3 million (after tax)
Lower diesel fuel costs contributed to higher earnings from all product lines in 2016.
38 MDU
Resources Group, Inc. Form 10-K
Part II
OutlookThe segment's vertically integrated aggregates based business model provides the Company with the ability to capture margin throughout the sales delivery process. The aggregate products are sold internally and externally for use in other products such as ready-mixed concrete, asphaltic concrete and public
and private construction markets. The contracting services and construction materials are sold primarily to construction contractors in connection with street, highway and other public infrastructure projects, as well as private commercial and residential development projects. The public infrastructure projects have traditionally been more stable markets as public funding is more secure during periods of economic decline. The public funding is, however, dependent on federal funding such as appropriations to the Federal Highway Administration. Spending on private development is highly dependent on both local and national economic cycles, providing additional sales during times of strong economic cycles.
The Company remains optimistic about overall economic growth and infrastructure spending. The IBIS World Industry Report for sand and gravel mining
in the United States projects a 2.7 percent annual growth rate over the next five years. The report also states the demand for clay and refractory materials is projected to continue deteriorating in several downstream manufacturing industries, but this decline will be offset by stronger demand from the housing market and buoyant demand from the highway and bridge construction market. This stronger demand in the housing markets along with continued demand from the highway and bridge construction markets should provide a stable demand for construction materials and contracting products and services in the near future.
The impact of the TCJA on the economy as a whole is unclear at this time. As such, the impact to the construction materials and contracting industry is also uncertain. Under the TCJA, the domestic production deduction will no longer be able to be taken. The domestic production deduction was originally introduced
to incentivize domestic production activities and was a deduction of up to 9 percent on qualified production activity income for which this segment's activities qualified. The Company expects the lower federal corporate tax rate will more than offset the loss of the domestic production deduction for this segment.
Construction Services
Strategy and challenges The construction services segment provides inside and outside specialty contracting, as discussed in Items 1 and 2 - Business Properties. The construction services segment focuses on providing a superior return on investment by building new and strengthening existing customer relationships; ensuring quality
service; safely executing projects; effectively controlling costs; collecting on receivables; retaining, developing and recruiting talented employees; growing through organic and acquisition opportunities; and focusing efforts on projects that will permit higher margins while properly managing risk.
The construction services segment faces challenges in the highly competitive markets in which it operates. Competitive pricing environments, project delays and effects from restrictive regulatory requirements have negatively impacted margins in the past and could affect margins in the future. Additionally, margins may be negatively impacted on a quarterly basis due to adverse weather conditions, as well as timing of project starts or completions, declines or delays in new projects due to the cyclical nature of the construction industry and other factors. These challenges may also impact the risk of loss on certain projects. Accordingly,
operating results in any particular period may not be indicative of the results that can be expected for any other period.
The need to ensure available specialized labor resources for projects also drives strategic relationships with customers and project margins. These trends include an aging workforce and labor availability issues, increasing pressure to reduce costs and improve reliability, and increasing duration and complexity of customer capital programs. Due to these and other factors, we believe customer demand for labor resources will continue to increase, possibly outpacing, the supply of industry resources.
MDU Resources
Group, Inc. Form 10-K 39
Part II
Earnings overview - construction services The following information summarizes the performance of the construction services segment.
2017
compared to 2016Construction services earnings increased$19.4 million (57 percent) compared to the prior year largely because of:
•
Higher inside specialty contracting margins of $12.8 million (after tax) driven by an increase in revenues from an increase in the number and size of construction projects in 2017 and decreased costs from the successful management of labor performance on projects in a majority of the business activities performed partially offset by job losses on certain projects
•
Higher
outside specialty contracting margins of $9.8 million (after tax) driven by higher contracting workloads and equipment revenues in areas impacted by storm activity
•
An income tax benefit of $4.3 million for the revaluation of the segment's net deferred tax liabilities, as discussed in Item 8 - Note 11
Partially offsetting these increases were:
•
Higher selling, general and administrative expense, largely payroll-related costs
•
The
absence in 2017 of a $1.5 million tax benefit related to the disposition of a non-strategic asset
2016 compared to 2015 Construction services earnings increased$10.1 million (43 percent) compared to the prior year largely because of:
•
Higher inside specialty contracting margins of $13.0 million (after tax) resulting from higher workloads from the successful completion of construction projects in certain markets, as well as lower labor costs due to increased efficiencies and lower workers' compensation claim costs partially offset by a loss
on a project
•
Higher margins of $3.5 million (after tax) resulting from the sale of a non-strategic asset in 2015
These increases were partially offset by:
•
Higher selling, general and administrative expense of $4.0 million (after tax), primarily due to higher payroll and benefit-related costs and higher bad debt expense
•
Lower
outside construction margins, primarily lower equipment revenues impacted by decreased customer demand
OutlookThe Company continues to expect long-term growth in the electric transmission market, although the timing of large bids and subsequent construction is likely to be highly variable from year to year. The Company believes several multi-year transmission projects will be available for bid in the 2018 timeframe and also expects bidding activity in small and medium-sized transmission and distribution projects to continue in 2018.
The impact of the TCJA on the economy as a whole is unclear at this time. As such, the impact to the construction services
industry is also uncertain. While it is unclear what impact the TCJA may have on the construction services industry, the Company is optimistic about overall economic growth and infrastructure spending and believes that improving industry activity will continue in both market segments and the drivers for investment will remain intact. The Company believes that regulatory reform, state renewable portfolio standards, the aging of the electric grid, and the general improvement of the economy will positively impact the level of spending by its customers. Although competition remains strong, these trends are viewed as positive factors in the future.
40 MDU
Resources Group, Inc. Form 10-K
Part II
The Company expects bidding activity to remain strong in both outside and inside specialty construction companies for the year 2018. Although bidding remains highly competitive in all areas, the Company expects the segment's skilled workforce will continue to provide a benefit
in securing and executing profitable projects.
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.
2017 compared to 2016Other loss decreased $1.7 million compared to the prior year primarily the result of lower interest expense from the repayment of long-term debt with the sale of the remaining exploration and production assets. Lower operation and maintenance expense was due to the absence of the refining business in 2017 offset in part by the loss on the disposition of certain assets during the year.
2016 compared to 2015Other
loss decreased $11.8 million compared to the prior year primarily due to lower operation and maintenance expense and interest expense previously allocated to the exploration and production business, due to the sale of that business which included the repayment of long-term debt. Also contributing to the decreased loss was lower operation and maintenance expense in 2016 due to the absence of a 2015 corporate asset impairment and the absence of a 2015 foreign currency translation loss including the effects of the sale of the Company's remaining interest in the Brazilian Transmission Lines.
Income (loss) from discontinued operations before intercompany eliminations, net of tax
$
3.1
$
(303.2
)
$
(829.9
)
Intercompany
eliminations*
(6.9
)
2.8
(4.2
)
Loss from discontinued operations, net of tax
(3.8
)
(300.4
)
(834.1
)
Loss
from discontinued operations attributable to noncontrolling interest
—
(131.7
)
(35.3
)
Loss from discontinued operations attributable to the Company, net of tax
$
(3.8
)
$
(168.7
)
$
(798.8
)
*
Includes
eliminations for the presentation of income tax adjustments between continuing and discontinued operations.
2017 compared to 2016 The loss from discontinued operations attributable to the Company was $3.8 million compared to a loss of $168.7 million in the prior year. The decreased loss was largely due to the absence in 2017 of a loss associated with the sale of the refining business in June 2016, as well as the reversal in 2017
of a previously accrued liability due to the resolution of a legal matter, as discussed in Item 8 - Note 2.
2016 compared to 2015The loss from discontinued operations attributable to the Company was $168.7 million compared to a loss of $798.8 million in the prior year. The decreased loss is primarily due to the completion of the sales of Company's exploration and production and refining businesses. The decreased loss was largely the result of the absence in 2016 of a noncash write-down of oil and natural gas properties of $315.3 million (after tax) and fair value impairments of the exploration and production business's
assets held for sale of $475.4 million (after tax), as discussed in Item 8 - Note 2, partially offset by a fair value impairment of the refining business of $156.7 million (after tax) in 2016, as discussed in Item 8 - Note 2.
MDU Resources Group, Inc. Form 10-K 41
Part
II
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:
At December 31, 2017, the
Company had cash and cash equivalents of $34.6 million and available borrowing capacity of $687.1 million under the outstanding credit facilities of the Company and its 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; the Company's credit facilities, as described later in Capital resources; the issuance of long-term debt; and issuance of equity securities.
Cash
flows
Operating activities The changes in cash flows from operating activities generally follow the results of operations as discussed in Business Segment Financial and Operating Data and also are affected by changes in working capital. Changes in cash flows for discontinued operations are related to the former exploration and production and refining businesses.
Cash flows provided by operating activities in 2017decreased$14.2 million from 2016. The decrease in cash flows provided by operating activities reflects higher working capital requirements at the construction services business largely resulting from higher receivables due
to increased workloads during the year and at the construction materials business due to higher receivables resulting from increased workloads later in the year. Higher natural gas purchases including the effects of colder weather also added to higher working capital requirements at the natural gas distribution business. Higher income taxes paid from continuing operations was largely offset by higher income taxes received from discontinued operations resulting from the realization of net operating losses at the discontinued operations. Higher earnings from continuing operations in 2017, compared to 2016, partially offset the decrease in cash flows provided by operating activities. Higher margins at the electric, natural gas distribution and construction services businesses were partially offset by lower margins at the construction materials business.
Cash flows provided by operating activities in 2016 decreased $199.6 million
from 2015. The decrease in cash flows provided by operating activities was largely from lower cash flows at the exploration and production business. The decrease was also due to higher working capital requirements at the electric, natural gas distribution and pipeline and midstream businesses. Partially offsetting the decrease in cash flows provided by operating activities was higher cash flows from continuing operations (excluding working capital) at the electric, pipeline and midstream and construction materials and contracting businesses.
Investing activities Cash flows used in investing activities in 2017decreased$90.9 million from 2016 largely resulting from net proceeds
from the sale of Pronghorn in January 2017 at the pipeline and midstream business.
Cash flows used in investing activities in 2016 decreased $77.4 million from 2015 primarily due to lower capital expenditures largely at the electric and refining businesses. Partially offsetting this decrease were lower proceeds from the sale of properties at the exploration and production business.
Financing activitiesCash flows used in financing activities in 2017increased$50.4 million from 2016 primarily due to the higher net repayment of long-term debt.
42 MDU
Resources Group, Inc. Form 10-K
Part II
Cash flows used in financing activities in 2016 decreased $60.8 million from 2015 primarily due to the lower repayment of long-term debt of $250.9 million, partially offset by debt repayment in connection with the sale of the refining business, lower capital contributions at the refining business and lower issuance of long-term debt of $36.9 million.
Defined
benefit pension plans
The Company has noncontributory qualified defined benefit pension plans for certain employees. Plan assets consist of investments in equity and fixed-income securities. Various actuarial assumptions are used in calculating the benefit expense (income) and liability (asset) related to the pension plans. Actuarial assumptions include assumptions about the discount rate, expected return on plan assets and rate of future compensation increases as determined by the Company within certain guidelines. At December 31, 2017, the pension plans' accumulated benefit obligations exceeded these plans' assets by approximately $91.5 million.
Pretax pension expense reflected in the years ended December 31, 2017, 2016 and 2015, was $1.7 million, $2.1 million and $2.0 million, respectively. The Company's pension expense is currently projected to be approximately $2.0 million to $3.0 million in 2018. Funding for the pension plans is actuarially determined. The minimum required contributions for 2017 and 2015
were approximately $3.1 million and $3.9 million, respectively. There were no minimum required contributions for 2016. For more information on the Company's pension plans, see Item 8 - Note 14.
Capital expenditures
The Company's capital expenditures from continuing operations for 2015 through 2017 and as anticipated for 2018
through 2020 are summarized in the following table.
Actual (a)
Estimated
2015
2016
2017
2018
2019
2020
(In
millions)
Capital expenditures:
Electric
$
333
$
111
$
109
$
229
$
107
$
98
Natural
gas distribution
131
126
147
203
211
172
Pipeline
and midstream
18
35
31
97
100
109
Construction
materials and contracting
48
38
44
79
78
76
Construction
services
38
60
19
17
16
16
Other
4
2
2
3
2
1
Total
capital expenditures
$
572
$
372
$
352
$
628
$
514
$
472
(a)
Capital expenditures for 2017, 2016 and 2015 include noncash capital expenditure-related accounts payable and AFUDC, totaling $10.5 million, $(15.8) million and $35.3 million, respectively.
The 2017 capital expenditures were met from internal sources. The Company has included in the estimated capital expenditures for 2018 the purchase of the Thunder
Spirit Wind farm expansion, the Valley Expansion project and the Line Section 27 expansion project, as previously discussed in Business Segment Financial and Operating Data.
Estimated capital expenditures for the years 2018 through 2020 include those for:
•
System upgrades
•
Routine replacements
•
Service
extensions
•
Routine equipment maintenance and replacements
•
Buildings, land and building improvements
•
Pipeline, gathering and other midstream projects
•
Power
generation and transmission opportunities, including certain costs for additional electric generating capacity
•
Environmental upgrades
•
Other growth opportunities
The Company continues to evaluate potential future acquisitions and other growth opportunities; however, they are dependent upon the availability of economic opportunities and, as a result, capital expenditures may
vary significantly from the estimates in the preceding table. It is anticipated that all of the funds required for capital expenditures for the years 2018 through 2020 will be met from various sources, including internally generated funds; the Company's credit facilities, as described later; issuance of long-term debt; and issuance of equity securities.
MDU Resources Group, Inc. Form 10-K 43
Part
II
Capital resources
Certain debt instruments of the Company and its subsidiaries, including those discussed later, contain restrictive covenants and cross-default provisions. In order to borrow under the respective credit agreements, the Company and its subsidiaries must be in compliance with the applicable
covenants and certain other conditions, all of which the Company and its subsidiaries, as applicable, were in compliance with at December 31, 2017. In the event the Company and its subsidiaries do not comply with the applicable covenants and other conditions, alternative sources of funding may need to be pursued. For more information on the covenants, certain other conditions and cross-default provisions, see Item 8 - Note 6.
The
commercial paper program is supported by a revolving credit agreement with various banks (provisions allow for increased borrowings, at the option of the Company on stated conditions, up to a maximum of $225.0 million). There were no amounts outstanding under the revolving credit agreement.
(b)
Amount outstanding under commercial paper program.
(c)
Certain provisions allow for increased
borrowings, up to a maximum of $100.0 million.
(d)
Outstanding letter(s) of credit reduce the amount available under the credit agreement.
(e)
Certain provisions allow for increased borrowings, up to a maximum of $110.0 million.
(f)
The
commercial paper program is supported by a revolving credit agreement with various banks (provisions allow for increased borrowings, at the option of Centennial on stated conditions, up to a maximum of $600.0 million). There were no amounts outstanding under the revolving credit agreement.
The Company's and Centennial's respective commercial paper programs are supported by revolving credit agreements. While the amount of commercial paper outstanding does not reduce available capacity under the respective revolving credit agreements, the
Company and Centennial do not issue commercial paper in an aggregate amount exceeding the available capacity under their credit agreements. The commercial paper borrowings may vary during the period, largely the result of fluctuations in working capital requirements due to the seasonality of the construction businesses.
The Company's coverage of fixed charges including preferred stock dividends was 4.2 times and 3.9 times for the 12 months ended December 31, 2017 and 2016, respectively. The coverage of fixed charges is used as an indicator of the Company's ability to satisfy
fixed charges.
Total equity as a percent of total capitalization was 59 percent and 56 percent at December 31, 2017 and 2016, 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 the
Company is financing its operations, as well as its financial strength.
The following includes information related to the preceding table.
MDU Resources Group, Inc.The Company's revolving credit agreement supports its commercial paper program. Commercial paper borrowings under this agreement are classified as long-term debt as they are intended to be refinanced on a long-term basis through continued commercial paper borrowings. The Company's objective is to maintain acceptable credit ratings in order to access the capital markets through the issuance of commercial paper. Historically, downgrades in the Company's
credit ratings have not limited, nor are currently expected to limit, the Company's ability to access the capital markets. If the Company were to experience a downgrade of its credit ratings in the future, it may need to borrow under its credit agreement and may experience an increase in overall interest rates with respect to its cost of borrowings.
Prior to the maturity of the credit agreement, the Company expects that it will negotiate the extension or replacement of this agreement. If the Company is unable to successfully negotiate an extension of, or replacement for, the credit agreement, or if
the fees on this facility become too expensive, which the Company does not currently anticipate, the Company would seek alternative funding.
Cascade Natural Gas Corporation On April 25, 2017, Cascade amended its revolving credit agreement to increase the borrowing limit from $50.0 million to $75.0 million and extend the termination date from July 9, 2018 to April 24, 2020. The credit agreement contains
44 MDU
Resources Group, Inc. Form 10-K
Part II
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. Other covenants include restrictions on the sale of certain assets, limitations on indebtedness and the making of certain investments.
Cascade's credit agreement also contains cross-default
provisions. These provisions state that if Cascade fails to make any payment with respect to any indebtedness or contingent obligation, in excess of a specified amount, under any agreement that causes such indebtedness to be due prior to its stated maturity or the contingent obligation to become payable, Cascade will be in default under the revolving credit agreement.
Intermountain Gas Company On April 25, 2017, Intermountain amended its revolving credit agreement to increase the borrowing limit from $65.0 million to $85.0 million and extend the termination date from July 13, 2018 to April 24, 2020. The credit 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. Other covenants include restrictions on the sale of certain assets, limitations on indebtedness and the making of certain investments.
Intermountain's credit agreement also contains cross-default provisions. These provisions state that if Intermountain fails to make any payment with respect to any indebtedness or contingent obligation, in excess of a specified amount, under any agreement that causes such indebtedness to be due prior to its stated maturity or the contingent obligation to become payable, or certain conditions result in an early termination date under any swap contract that is in excess of a specified amount, then Intermountain will be
in default under the revolving credit agreement.
Centennial Energy Holdings, Inc. Centennial's revolving credit agreement supports its commercial paper program. Commercial paper borrowings under this agreement are classified as long-term debt as they are intended to be refinanced on a long-term basis through continued commercial paper borrowings. Centennial's objective is to maintain acceptable credit ratings in order to access the capital markets through the issuance of commercial paper. Historically, downgrades in Centennial's credit ratings have not limited, nor are currently expected to limit, Centennial's ability to access the capital markets. If Centennial were to experience a downgrade of its credit ratings in the future, it may need to borrow under its credit agreement and may experience an increase in overall interest rates with respect to its cost of borrowings.
Prior
to the maturity of the Centennial credit agreement, Centennial expects that it will negotiate the extension or replacement of this agreement, which provides credit support to access the capital markets. In the event Centennial is unable to successfully negotiate this agreement, or in the event the fees on this facility become too expensive, which Centennial does not currently anticipate, it would seek alternative funding.
WBI Energy Transmission, Inc. WBI Energy Transmission has a $200.0 million uncommitted note purchase and private shelf agreement with an expiration date of May 16, 2019. WBI Energy Transmission had $100.0 million of notes outstanding at December 31, 2017,
which reduced the remaining capacity under this uncommitted private shelf agreement to $100.0 million. On December 22, 2017, WBI Energy Transmission contracted to issue an additional $40.0 million under the private shelf agreement at an interest rate of 4.18 percent on June 15, 2018.
Off balance sheet arrangements
As of December 31, 2017, the Company had no material off balance sheet arrangements as defined by the rules of the SEC.
Contractual
obligations and commercial commitments
For more information on the Company's contractual obligations on long-term debt, operating leases and purchase commitments, see
Item 8 - Notes 6 and 17. At December 31, 2017, the Company's commitments under these obligations were as follows:
2018
2019
2020
2021
2022
Thereafter
Total
(In
millions)
Long-term debt
$
148.5
$
125.5
$
73.0
$
15.3
$
147.2
$
1,211.0
$
1,720.5
Estimated
interest payments*
71.2
62.6
62.2
59.1
58.7
512.9
826.7
Operating
leases
55.5
45.3
33.2
18.6
7.0
40.8
200.4
Purchase
commitments
360.8
215.0
162.4
135.3
99.1
773.8
1,746.4
$
636.0
$
448.4
$
330.8
$
228.3
$
312.0
$
2,538.5
$
4,494.0
*
Estimated
interest payments are calculated based on the applicable rates and payment dates.
MDU Resources Group, Inc. Form 10-K 45
Part II
At
December 31, 2017, the Company had total liabilities of $342.0 million related to asset retirement obligations that are excluded from the table above. Of the total asset retirement obligations, the current portion was $4.3 million at December 31, 2017, and was included in other accrued liabilities on the Consolidated Balance Sheet. The remainder, which constitutes the long-term portion of asset retirement obligations, was included in deferred credits and other liabilities - other on the Consolidated Balance Sheet. Due to the nature of these obligations, the
Company cannot determine precisely when the payments will be made to settle these obligations. For more information, see Item 8 - Note 7.
The Company has no uncertain tax positions in 2018.
The Company's minimum funding requirements for its defined benefit pension plans for 2018, which are not reflected in the previous table, are $3.1 million. For information on potential contributions above the funding minimum requirements, see item 8 - Note 14.
The
Company's MEPP contributions are based on union employee payroll, which cannot be determined in advance for future periods. The Company may also be required to make additional contributions to its MEPPs as a result of their funded status. For more information, see Item 1A - Risk Factors and Item 8 - Note 14.
The Company has prepared its financial statements in conformity with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. The Company's significant accounting policies are discussed in Item 8 - Note 1.
Estimates are used for items such as impairment testing of long-lived assets and goodwill; fair values of acquired assets and liabilities under the acquisition method of accounting; aggregate reserves; property depreciable lives; tax provisions; uncollectible accounts; environmental and other loss contingencies; accumulated provision for revenues subject to refund; costs on construction contracts; unbilled revenues;
actuarially determined benefit costs; asset retirement obligations; and the valuation of stock-based compensation. The Company's critical accounting policies are subject to judgments and uncertainties that affect the application of such policies. As discussed below, the Company's financial position or results of operations may be materially different when reported under different conditions or when using different assumptions in the application of such policies.
As additional information becomes available, or actual amounts are determinable, the recorded estimates are revised. Consequently, operating results can be affected by revisions to prior accounting estimates. The following critical accounting policies involve significant judgments and estimates.
Impairment
of long-lived assets and intangibles
The Company reviews the carrying values of its long-lived assets and intangibles, excluding assets held for sale, whenever events or changes in circumstances indicate that such carrying values may not be recoverable and at least annually for goodwill.
Goodwill The Company performs its goodwill impairment testing annually in the fourth quarter. In addition, the test is performed on an interim basis whenever events or circumstances indicate that the carrying amount of goodwill may not be recoverable. Examples of such events or circumstances may include a significant adverse change in business climate, weakness in an industry in which the
Company's reporting units operate or recent significant cash or operating losses with expectations that those losses will continue.
The goodwill impairment test is a two-step process performed at the reporting unit level. The Company has determined that the reporting units for its goodwill impairment test are its operating segments, or components of an operating segment, that constitute a business for which discrete financial information is available and for which segment management regularly reviews the operating results. For more information on the Company's operating segments, see Item 8 - Note 13. The first step of the impairment test involves comparing the fair value of each reporting unit to its carrying value.
If the fair value of a reporting unit exceeds its carrying value, the test is complete and no impairment is recorded. If the fair value of a reporting unit is less than its carrying value, step two of the test is performed to determine the amount of impairment loss, if any. The impairment is computed by comparing the implied fair value of the reporting unit's goodwill to the carrying value of that goodwill. If the carrying value is greater than the implied fair value, an impairment loss must be recorded. For the years ended December 31, 2017, 2016, and 2015, there were no significant impairment losses recorded. At December 31, 2017, the fair value substantially exceeded the carrying value
at all reporting units.
Determining the fair value of a reporting unit requires judgment and the use of significant estimates which include assumptions about the Company's future revenue, profitability and cash flows, amount and timing of estimated capital expenditures, inflation rates, weighted average cost of capital, operational plans, and current and future economic conditions, among others. The fair value of each reporting unit is
46 MDU Resources Group, Inc. Form 10-K
Part
II
determined using a weighted combination of income and market approaches. The Company uses a discounted cash flow methodology for its income approach. Under the income approach, the discounted cash flow model determines fair value based on the present value of projected cash flows over a specified period and a residual value related to future cash flows beyond the projection period. Both values are discounted using a rate which reflects the best estimate of the weighted average cost of capital at each reporting unit. The weighted average cost of capital, which varies by reporting unit and is in the range
of 5 percent to 9 percent, and a long-term growth rate projection of approximately 3 percent were utilized in the goodwill impairment test performed in the fourth quarter of 2017. Under the market approach, the Company estimates fair value using multiples derived from comparable sales transactions and enterprise value to EBITDA for comparative peer companies for each respective reporting unit. These multiples are applied to operating data for each reporting unit to arrive at an indication of fair value. In addition, the Company adds a reasonable control premium when calculating the fair value utilizing the peer multiples, which
is estimated as the premium that would be received in a sale in an orderly transaction between market participants. The Company believes that the estimates and assumptions used in its impairment assessments are reasonable and based on available market information.
Long-Lived Assets Unforeseen events and changes in circumstances and market conditions and material differences in the value of long-lived assets and intangibles due to changes in estimates of future cash flows could negatively affect the fair value of the Company's assets and result in an impairment charge. If an impairment indicator exists for tangible and intangible assets, excluding goodwill, the asset group held and used is tested for recoverability by comparing an estimate
of undiscounted future cash flows attributable to the assets compared to the carrying value of the assets. If impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value of the assets and recording a loss if the carrying value is greater than the fair value.
There is risk involved when determining the fair value of assets, tangible and intangible, as there may be unforeseen events and changes in circumstances and market conditions that have a material impact on the estimated amount and timing of future cash flows. In addition, the fair value of the asset could be different using different estimates and assumptions in the valuation techniques used.
The Company believes its estimates used in calculating the fair value of long-lived assets, including goodwill
and identifiable intangibles, are reasonable based on the information that is known when the estimates are made.
Revenue recognition
Revenue is recognized when the earnings process is complete, as evidenced by an agreement between the customer and the Company, when delivery has occurred or services have been rendered, when the fee is fixed or determinable and when collection is reasonably assured. The recognition of revenue requires the Company to make estimates and assumptions that affect the reported amounts of revenue. Critical estimates related to the recognition of revenue include costs on construction contracts under the percentage-of-completion
method.
The Company recognizes construction contract revenue from fixed-price and modified fixed-price construction contracts at its construction businesses using the percentage-of-completion method, measured by the percentage of costs incurred to date to estimated total costs for each contract. This method depends largely on the ability to make reasonably dependable estimates related to the extent of progress toward completion of the contract, contract
revenues and contract costs. Inasmuch as contract prices are generally set before the work is performed, the estimates pertaining to every project could contain significant unknown risks such as volatile labor, material and fuel costs, weather delays, adverse project site conditions, unforeseen actions by regulatory agencies, performance by subcontractors, job management and relations with project owners. Changes in estimates could have a material effect on the Company's results of operations, financial position and cash flows.
Several factors are evaluated in determining the bid price for contract
work. These include, but are not limited to, the complexities of the job, past history performing similar types of work, seasonal weather patterns, competition and market conditions, job site conditions, work force safety, reputation of the project owner, availability of labor, materials and fuel, project location and project completion dates. As a project commences, estimates are continually monitored and revised as information becomes available and actual costs and conditions surrounding the job become known. If a loss is anticipated on a contract, the loss is immediately recognized.
The Company believes its estimates surrounding percentage-of-completion accounting are reasonable based on the information that is known when the estimates are made. The
Company has contract administration, accounting and management control systems in place that allow its estimates to be updated and monitored on a regular basis. Because of the many factors that are evaluated in determining bid prices, it is inherent that the Company's estimates have changed in the past and will continually change in the future as new information becomes available for each job. There were no material changes in contract estimates at the individual contract level in 2017.
Pension and other postretirement benefits
The
Company has noncontributory defined benefit pension plans and other postretirement benefit plans for certain eligible employees. Various actuarial assumptions are used in calculating the benefit expense (income) and liability (asset) related to these plans. Costs of
MDU Resources Group, Inc. Form 10-K 47
Part II
providing
pension and other postretirement benefits bear the risk of change, as they are dependent upon numerous factors based on assumptions of future conditions.
The Company makes various assumptions when determining plan costs, including the current discount rates and the expected long-term return on plan assets, the rate of compensation increases, actuarially determined mortality data, and health care cost trend rates. In selecting the expected long-term return on plan assets, which is considered to be one of the key variables in determining benefit expense or income, the Company considers historical returns, current market conditions and expected future market trends, including changes in interest rates and equity and bond market performance. Another key variable in
determining benefit expense or income is the discount rate. In selecting the discount rate, the Company matches forecasted future cash flows of the pension and postretirement plans to a yield curve which consists of a hypothetical portfolio of high-quality corporate bonds with varying maturity dates, as well as other factors, as a basis. The Company's pension and other postretirement benefit plan assets are primarily made up of equity and fixed-income investments. Fluctuations in actual equity and bond market returns as well as changes in general interest rates may result in increased or decreased pension and other postretirement benefit costs in the future. Management estimates the rate of compensation increase based on long-term assumed wage increases and the health care cost trend rates are determined
by historical and future trends. The Company estimates that a 50 basis point decrease in the discount rate or in the expected return on plan assets would each increase expense by less than $1.5 million (after tax) for the year ended December 31, 2017.
The Company believes the estimates made for its pension and other postretirement benefits are reasonable based on the information that is known when the estimates are made. These estimates and assumptions are subject to a number of variables and are expected to change in the future. Estimates and assumptions will be affected by changes in the discount rate, the expected long-term return on plan assets, the rate of compensation
increase and health care cost trend rates. The Company plans to continue to use its current methodologies to determine plan costs. For more information on the assumptions used in determining plan costs, see Item 8 - Note 14.
Income taxes
The Company is required to make judgments regarding the potential tax effects of various financial transactions and ongoing operations to estimate the Company's obligation to taxing authorities. These tax obligations include income, real estate and sales/use taxes. Judgments related to income taxes require the recognition in the
Company's financial statements of a tax position that is more-likely-than-not to be sustained on audit.
Judgment and estimation is required in developing the provision for income taxes and the reporting of tax-related assets and liabilities and, if necessary, any valuation allowances. The interpretation of tax laws can involve uncertainty, since tax authorities may interpret such laws differently. Actual income tax could vary from estimated amounts and may result in favorable or unfavorable impacts to net income, cash flows, and tax-related assets and liabilities. In addition, the effective tax rate may be affected by other changes including the allocation of property, payroll and revenues between states.
The Company assesses the deferred tax assets for recoverability taking into consideration
historical and anticipated earnings levels; the reversal of other existing temporary differences; available net operating losses and tax carryforwards; and available tax planning strategies that could be implemented to realize the deferred tax assets. Based on this assessment, management must evaluate the need for, and amount of, a valuation allowance against the deferred tax assets. As facts and circumstances change, adjustment to the valuation allowance may be required.
Effects of Inflation
Inflation did not have a significant effect on the Company's operations in 2017, 2016 or 2015.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the impact of market fluctuations associated with interest rates. The Company has policies and procedures to assist in controlling these market risks and from time to time has utilized derivatives to manage a portion of its risk.
Interest rate risk
The Company uses fixed and variable rate long-term debt to partially finance capital expenditures and mandatory debt retirements. These debt agreements expose the Company to market risk
related to changes in interest rates. The Company manages this risk by taking advantage of market conditions when timing the placement of long-term financing. The Company from time to time has utilized interest rate swap agreements to manage a portion of the Company's interest rate risk and may take advantage of such agreements in the future to minimize such risk. For additional information on the Company's long-term debt, see Item 8 - Notes 5 and 6.
The
following table shows the amount of long-term debt, which excludes unamortized debt issuance costs and discount, and related weighted average interest rates, both by expected maturity dates, as of December 31, 2017.
2018
2019
2020
2021
2022
Thereafter
Total
Fair
Value
(Dollars
in millions)
Long-term debt:
Fixed rate
$
148.5
$
51.7
$
15.7
$
.7
$
147.2
$
1,211.0
$
1,574.8
$
1,680.6
Weighted
average interest rate
6.1
%
4.3
%
5.1
%
2.1
%
4.5
%
4.7
%
4.8
%
—
Variable
rate
—
$
73.8
$
57.3
$
14.6
—
—
$
145.7
$
145.7
Weighted
average interest rate
—
1.7
%
3.7
%
1.9
%
—
—
2.5
%
—
MDU
Resources Group, Inc. Form 10-K 49
Part II
Item 8. Financial Statements and Supplementary Data
Management's Report on Internal Control Over Financial Reporting
The management of MDU Resources Group, Inc. is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).
Based on our evaluation under the framework in Internal
Control-Integrated Framework (2013), management concluded that the Company's internal control over financial reporting was effective as of December 31, 2017.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2017, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report.
Vice President, Chief Financial Officer and Treasurer
50 MDU Resources Group, Inc. Form 10-K
Part II
Report
of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of MDU Resources Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of MDU Resources Group, Inc. and subsidiaries (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, equity, and cash flows, for each of the three years in the period ended December 31, 2017,
and the related notes and the financial statement schedules listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial
statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits include performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2002.
MDU Resources Group, Inc. Form 10-K 51
Part
II
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of MDU Resources Group, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of MDU Resources Group, Inc. and subsidiaries (the "Company") as of December 31, 2017, based on criteria established
in Internal Control-Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedules as of and for the year ended December
31, 2017, of the Company and our report dated February 23, 2018, expressed an unqualified opinion on those consolidated financial statements and financial statement schedules.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Reclassification adjustment for loss on derivative instruments included in net income (loss), net of tax of $224, $226 and $233 in 2017, 2016 and 2015, respectively
i366
i367
i404
Postretirement
liability adjustment:
Postretirement liability losses arising during the period, net of tax of $(1,162), $(836) and $(55) in 2017, 2016 and 2015, respectively
(i1,812
)
(i1,470
)
(i88
)
Amortization
of postretirement liability losses included in net periodic benefit cost (credit), net of tax of $645, $1,425 and $1,128 in 2017, 2016 and 2015, respectively
i1,013
i2,506
i1,794
Reclassification
of postretirement liability adjustment (from) to regulatory asset, net of tax of $(876), $0 and $1,416 in 2017, 2016 and 2015, respectively
(i1,143
)
i—
i2,255
Postretirement
liability adjustment
(i1,942
)
i1,036
i3,961
Foreign
currency translation adjustment:
Foreign currency translation adjustment recognized during the period, net of tax of $(3), $31 and $(105) in 2017, 2016 and 2015, respectively
(i6
)
i51
(i173
)
Reclassification
adjustment for loss on foreign currency translation adjustment included in net income (loss), net of tax of $0, $0 and $490 in 2017, 2016 and 2015, respectively
i—
i—
i802
Foreign
currency translation adjustment
(i6
)
i51
i629
Net
unrealized loss on available-for-sale investments:
Net unrealized loss on available-for-sale investments arising during the period, net of tax of $(75), $(98) and $(91) in 2017, 2016 and 2015, respectively
(i139
)
(i182
)
(i170
)
Reclassification
adjustment for loss on available-for-sale investments included in net income (loss), net of tax of $65, $77 and $70 in 2017, 2016 and 2015, respectively
i120
i143
i131
Net
unrealized loss on available-for-sale investments
(i19
)
(i39
)
(i39
)
Other
comprehensive income (loss)
(i1,601
)
i1,415
i4,955
Comprehensive
income (loss)
i279,602
(i65,843
)
(i652,736
)
Comprehensive
loss from discontinued operations attributable to noncontrolling interest
i—
(i131,691
)
(i35,256
)
Comprehensive
income (loss) attributable to common stockholders
$
i279,602
$
i65,848
$
(i617,480
)
The
accompanying notes are an integral part of these consolidated financial statements.
Adjustments
to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion and amortization
i207,486
i216,318
i211,747
Deferred
income taxes
(i25,423
)
(i2,049
)
(i25,356
)
Changes
in current assets and liabilities, net of acquisitions:
Receivables
(i108,255
)
(i25,641
)
i4,704
Inventories
i9,135
i2,433
i2,265
Other
current assets
(i30,588
)
(i17,925
)
i60,182
Accounts
payable
i26,013
i7,039
i37,224
Other
current liabilities
i4,648
i36,146
i6,864
Other
noncurrent changes
(i18,790
)
(i26,459
)
(i10,240
)
Net
cash provided by continuing operations
i349,212
i422,958
i463,779
Net
cash provided by discontinued operations
i98,799
i39,251
i198,053
Net
cash provided by operating activities
i448,011
i462,209
i661,832
Investing
activities:
Capital expenditures
(i341,382
)
(i388,183
)
(i536,832
)
Net
proceeds from sale or disposition of property and other
i126,588
i44,826
i54,569
Investments
(i1,608
)
(i1,396
)
i1,515
Net
cash used in continuing operations
(i216,402
)
(i344,753
)
(i480,748
)
Net
cash provided by discontinued operations
i2,234
i39,658
i98,295
Net
cash used in investing activities
(i214,168
)
(i305,095
)
(i382,453
)
Financing
activities:
Issuance of long-term debt
i140,812
i309,064
i345,920
Repayment
of long-term debt
(i217,394
)
(i315,647
)
(i566,498
)
Proceeds
from issuance of common stock
i—
i—
i21,898
Dividends
paid
(i150,727
)
(i147,156
)
(i142,835
)
Redemption
of preferred stock
(i15,600
)
i—
i—
Repurchase
of common stock
(i1,684
)
i—
i—
Tax
withholding on stock-based compensation
(i757
)
(i323
)
i—
Net
cash used in continuing operations
(i245,350
)
(i154,062
)
(i341,515
)
Net
cash provided by (used in) discontinued operations
i—
(i40,852
)
i85,785
Net
cash used in financing activities
(i245,350
)
(i194,914
)
(i255,730
)
Effect
of exchange rate changes on cash and cash equivalents
(i1
)
i4
(i225
)
Increase
(decrease) in cash and cash equivalents
(i11,508
)
(i37,796
)
i23,424
Cash
and cash equivalents - beginning of year
i46,107
i83,903
i60,479
Cash
and cash equivalents - end of year
$
i34,599
$
i46,107
$
i83,903
The
accompanying notes are an integral part of these consolidated financial statements.
MDU Resources Group, Inc. Form 10-K 57
Part II
Notes
to Consolidated Financial Statements
Note 1 - iSummary of Significant Accounting Policies
Basis of presentation
iThe
abbreviations and acronyms used throughout are defined following the Notes to Consolidated Financial Statements. The consolidated financial statements of the Company include the accounts of the following businesses: electric, natural gas distribution, pipeline and midstream, construction materials and contracting, construction services and other. The electric and natural gas distribution businesses, as well as a portion of the pipeline and midstream business, are regulated. Construction materials and contracting, construction services and the other businesses, as well as a portion of the pipeline and midstream business, are nonregulated. For further descriptions of the Company's businesses, see Note 13. Intercompany balances and transactions have been
eliminated in consolidation, except for certain transactions related to the Company's regulated operations in accordance with GAAP. The statements also include the ownership interests in the assets, liabilities and expenses of jointly owned electric generating facilities.
The Company's regulated businesses are subject to various state and federal agency regulations. The accounting policies followed by these businesses are generally subject to the Uniform System of Accounts of the FERC. These accounting policies differ in some respects from those used by the Company's nonregulated businesses.
The
Company's regulated businesses account for certain income and expense items under the provisions of regulatory accounting, which requires these businesses to defer as regulatory assets or liabilities certain items that would have otherwise been reflected as expense or income, respectively, based on the expected regulatory treatment in future rates. The expected recovery or flowback of these deferred items generally is based on specific ratemaking decisions or precedent for each item. Regulatory assets and liabilities are being amortized consistently with the regulatory treatment established by the FERC and the applicable state public service commissions. See Note 4 for more information regarding the nature and amounts of these regulatory deferrals.
Depreciation, depletion and amortization expense is reported separately on the Consolidated Statements of Income and therefore is
excluded from the other line items within operating expenses.
Management has also evaluated the impact of events occurring after December 31, 2017, up to the date of issuance of these consolidated financial statements.
On December 22, 2017, President Trump signed into law the TCJA which includes lower corporate tax rates, repealing the domestic production deduction, disallowance of immediate expensing for regulated utility property and modifying or repealing many other business deductions and credits. In accordance with the accounting guidance on accounting for income taxes, entities must account for the effects of the change in tax laws or rates in the period of enactment. In the fourth quarter of 2017, the period of enactment, the
Company performed a one-time revaluation of the net deferred tax liabilities to account for the reduction in the corporate tax rate from 35 percent to 21 percent effective January 1, 2018. For more information on the impacts of the TCJA on the year ended December 31, 2017, see Notes 4 and 11. The Company is currently reviewing the components of the TCJA and evaluating the impact on the Company's consolidated financial statements and related disclosures for 2018 and thereafter.
As part of the
Company's strategic plan to grow its capital investments while focusing on creating a greater long-term value and reducing the Company's risk by decreasing exposure to commodity prices, the Company completed the sales of substantially all of Fidelity's oil and and natural gas assets between October 2015 and April 2016 and Dakota Prairie Refining on June 27, 2016.
The assets and liabilities for the Company's discontinued operations have been classified as held for sale and the results of operations are shown in loss from discontinued operations, other than certain general and administrative costs and interest expense which do
not meet the criteria for income (loss) from discontinued operations. At the time the assets were classified as held for sale, depreciation, depletion and amortization expense was no longer recorded. Unless otherwise indicated, the amounts presented in the accompanying notes to the consolidated financial statements relate to the Company's continuing operations. For more information on the Company's discontinued operations, see Note 2.
Cash and cash equivalents
iThe
Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts receivable and allowance for doubtful accounts
Accounts receivable consists primarily of trade receivables from the sale of goods and services which are recorded at the invoiced amount net of allowance for doubtful accounts, and costs and estimated earnings in excess of billings on uncompleted contracts. For mo
58 MDU Resources
Group, Inc. Form 10-K
Part II
re information, see Percentage-of-completion method in this note. The total balance of receivables past due 90 days or more was $i34.7 million
and $i29.2 million at December 31, 2017 and 2016, respectively.
iThe
allowance for doubtful accounts is determined through a review of past due balances and other specific account data. Account balances are written off when management determines the amounts to be uncollectible. The Company's allowance for doubtful accounts at December 31, 2017 and 2016, was $i8.1 million
and $i10.5 million, respectively.
Inventories and natural gas in storage
iNatural gas in storage for the
Company's regulated operations is generally carried at lower of cost or net realizable value, or cost using the last-in, first-out method. All other inventories are stated at the lower of cost or net realizable value. The portion of the cost of natural gas in storage expected to be used within one year was included in inventories. iInventories at December 31 consisted of:
2017
2016
(In
thousands)
Aggregates held for resale
$
i115,268
$
i115,471
Asphalt
oil
i30,360
i29,103
Natural
gas in storage (current)
i20,950
i25,761
Materials
and supplies
i18,650
i18,372
Merchandise
for resale
i14,905
i16,437
Other
i26,450
i33,129
Total
$
i226,583
$
i238,273
The
remainder of natural gas in storage, which largely represents the cost of gas required to maintain pressure levels for normal operating purposes, was included in deferred charges and other assets - other and was $i49.3 million and $i49.5 million
at December 31, 2017 and 2016, respectively.
Investments
iThe Company's investments include the cash surrender value of life insurance policies, an insurance contract, mortgage-backed securities and U.S. Treasury securities. The
Company measures its investment in the insurance contract at fair value with any unrealized gains and losses recorded on the Consolidated Statements of Income. The Company has not elected the fair value option for its mortgage-backed securities and U.S. Treasury securities and, as a result, the unrealized gains and losses on these investments are recorded in accumulated other comprehensive income (loss). For more information, see Notes 5 and 14.
Property, plant and equipment
iAdditions
to property, plant and equipment are recorded at cost. When regulated assets are retired, or otherwise disposed of in the ordinary course of business, the original cost of the asset is charged to accumulated depreciation. With respect to the retirement or disposal of all other assets, the resulting gains or losses are recognized as a component of income. The Company is permitted to capitalize AFUDC on regulated construction projects and to include such amounts in rate base when the related facilities are placed in service. In addition, the Company capitalizes interest, when applicable, on certain construction projects associated with its other operations. iThe
amount of AFUDC and interest capitalized for the years ended December 31 were as follows:
2017
2016
2015
(In
thousands)
Interest capitalized
$
i—
$
i—
$
i4,381
AFUDC
- borrowed
$
i966
$
i914
$
i4,907
AFUDC
- equity
$
i909
$
i565
$
i7,971
Generally,
property, plant and equipment are depreciated on a straight-line basis over the average useful lives of the assets, except for depletable aggregate reserves, which are depleted based on the units-of-production method. The Company collects removal costs for plant assets in regulated utility rates. These amounts are recorded as regulatory liabilities, which are included in deferred credits and other liabilities - other.
MDU Resources Group, Inc. Form 10-K 59
Part
II
iProperty, plant and equipment at December 31 was as follows:
2017
2016
Weighted
Average
Depreciable
Life
in Years
(Dollars in thousands, where applicable)
Regulated:
Electric:
Generation
$
i1,034,765
$
i1,036,373
i39
Distribution
i415,543
i398,382
i44
Transmission
i296,941
i284,048
i57
Construction
in progress
i117,906
i62,212
—
Other
i117,109
i107,598
i15
Natural
gas distribution:
Distribution
i1,831,795
i1,718,633
i47
Construction
in progress
i19,823
i19,934
—
Other
i468,227
i440,846
i18
Pipeline
and midstream:
Transmission
i516,932
i490,143
i53
Gathering
i37,837
i37,831
i20
Storage
i45,629
i45,350
i62
Construction
in progress
i17,488
i16,507
—
Other
i41,054
i40,873
i33
Nonregulated:
Pipeline
and midstream:
Gathering and processing
i31,678
i31,682
i19
Construction
in progress
i17
i13
—
Other
i9,649
i9,800
i10
Construction
materials and contracting:
Land
i95,745
i94,625
—
Buildings
and improvements
i102,435
i102,347
i20
Machinery,
vehicles and equipment
i947,979
i930,471
i12
Construction
in progress
i7,750
i16,181
—
Aggregate
reserves
i406,139
i405,751
*
Construction
services:
Land
i5,216
i5,346
—
Buildings
and improvements
i27,351
i26,693
i25
Machinery,
vehicles and equipment
i137,924
i132,217
i6
Other
i6,774
i7,105
i4
Other:
Land
i2,837
i2,837
—
Other
i28,286
i46,431
i19
Less
accumulated depreciation, depletion and amortization
i2,691,641
i2,578,902
Net
property, plant and equipment
$
i4,079,188
$
i3,931,327
*
Depleted
on the units-of-production method based on recoverable aggregate reserves.
Impairment of long-lived assets
iThe Company reviews the carrying values of its long-lived assets, excluding goodwill and assets held for sale, whenever
events or changes in circumstances indicate that such carrying values may not be recoverable. The determination of whether an impairment has occurred is based on an estimate of undiscounted future cash flows attributable to the assets, compared to the carrying value of the assets. If impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value of the assets and recording a loss if the carrying value is greater than the fair value. In the third quarter of 2015, the Company recognized an impairment of $i14.1 million
(before tax), largely related to the sale of certain non-strategic natural gas gathering assets that were written down to their estimated fair value that was determined using the market approach. In the second quarter of 2015, the Company recognized an impairment of $i3.0 million (before tax) related to coalbed natural gas gathering assets located in Wyoming where there had been continued decline in natural gas development and
production activity due to low natural gas prices. The coalbed natural gas gathering assets were
60 MDU Resources Group, Inc. Form 10-K
Part II
written down to
their estimated fair value that was determined using the income approach. The impairments are recorded in operation and maintenance expense on the Consolidated Statements of Income. For more information on these nonrecurring fair value measurements, see Note 5.
No significant impairment losses were recorded in 2016 or 2017, other than those related to the Company's assets held for sale and discontinued operations. For more information regarding these impairments, see Note 2.
Unforeseen events and changes in circumstances could require the recognition of impairment losses at some future date.
Goodwill
iGoodwill
represents the excess of the purchase price over the fair value of identifiable net tangible and intangible assets acquired in a business combination. Goodwill is required to be tested for impairment annually, which is completed in the fourth quarter, or more frequently if events or changes in circumstances indicate that goodwill may be impaired.
The goodwill impairment test is a two-step process performed at the reporting unit level. The Company has determined that the reporting units for its goodwill impairment test are its operating segments, or components of an operating segment, that constitute a business for which discrete financial information is available and for which segment management regularly reviews the operating results. For more information on the
Company's operating segments, see Note 13. The first step of the impairment test involves comparing the fair value of each reporting unit to its carrying value. If the fair value of a reporting unit exceeds its carrying value, the test is complete and no impairment is recorded. If the fair value of a reporting unit is less than its carrying value, step two of the test is performed to determine the amount of impairment loss, if any. The impairment is computed by comparing the implied fair value of the reporting unit's goodwill to the carrying value of that goodwill. If the carrying value is greater than the implied fair value, an impairment loss must be recorded. For the years ended December 31, 2017, 2016 and 2015, there were no significant
impairment losses recorded. At December 31, 2017, the fair value substantially exceeded the carrying value at all reporting units.
Determining the fair value of a reporting unit requires judgment and the use of significant estimates which include assumptions about the Company's future revenue, profitability and cash flows, amount and timing of estimated capital expenditures, inflation rates, weighted average cost of capital, operational plans, and current and future economic conditions, among others. The fair value of each reporting unit is determined using a weighted combination of income and market approaches. The Company uses a discounted cash flow methodology for
its income approach. Under the income approach, the discounted cash flow model determines fair value based on the present value of projected cash flows over a specified period and a residual value related to future cash flows beyond the projection period. Both values are discounted using a rate which reflects the best estimate of the weighted average cost of capital at each reporting unit. The weighted average cost of capital, which varies by reporting unit and is in the range of i5 percent to i9 percent,
and a long-term growth rate projection of approximately i3 percent were utilized in the goodwill impairment test performed in the fourth quarter of 2017. Under the market approach, the Company estimates fair value using multiples derived from comparable sales transactions and enterprise value to EBITDA for comparative peer companies for each respective reporting unit. These multiples
are applied to operating data for each reporting unit to arrive at an indication of fair value. In addition, the Company adds a reasonable control premium when calculating the fair value utilizing the peer multiples, which is estimated as the premium that would be received in a sale in an orderly transaction between market participants. The Company believes that the estimates and assumptions used in its impairment assessments are reasonable and based on available market information.
Revenue recognition
iRevenue
is recognized when the earnings process is complete, as evidenced by an agreement between the customer and the Company, when delivery has occurred or services have been rendered, when the fee is fixed or determinable and when collection is reasonably assured. The Company recognizes utility revenue each month based on the services provided to all utility customers during the month. Accrued unbilled revenue which is included in receivables, net, represents revenues recognized in excess of amounts billed. Accrued unbilled revenue at Montana-Dakota, Cascade and Intermountain was $i112.7 million
and $i117.7 million at December 31, 2017 and 2016, respectively. The Company recognizes construction contract revenue at its construction businesses using the percentage-of-completion method
as discussed later. The Company recognizes all other revenues when services are rendered or goods are delivered. The Company presents revenues net of taxes collected from customers at the time of sale to be remitted to governmental authorities, including sales and use taxes.
Percentage-of-completion method
iThe
Company recognizes construction contract revenue from fixed-price and modified fixed-price construction contracts at its construction businesses using the percentage-of-completion method, measured by the percentage of costs incurred to date to estimated total costs for each contract. If a loss is anticipated on a contract, the loss is immediately recognized.
MDU
Resources Group, Inc. Form 10-K 61
Part II
Costs and estimated earnings in excess of billings on uncompleted contracts represent revenues recognized in excess of amounts billed and were included in receivables, net. Billings in excess of costs and estimated earnings on uncompleted contracts
represent billings in excess of revenues recognized and were included in accounts payable. iCosts and estimated earnings in excess of billings and billings in excess of costs and estimated earnings on uncompleted contracts at December 31 were as follows:
2017
2016
(In
thousands)
Costs and estimated earnings in excess of billings on uncompleted contracts
$
i109,541
$
i64,558
Billings
in excess of costs and estimated earnings on uncompleted contracts
$
i84,123
$
i64,832
Amounts
representing balances billed but not paid by customers under retainage provisions in contracts at December 31 were as follows:
2017
2016
(In
thousands)
Short-term retainage*
$
i57,134
$
i45,109
Long-term
retainage**
i1,410
i1,506
Total
retainage
$
i58,544
$
i46,615
*
Expected
to be paid within one year or less and included in receivables, net.
**
Included in deferred charges and other assets - other.
Asset retirement obligations
iThe
Company records the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the Company capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, the Company either settles the obligation for the recorded amount or incurs a gain or loss at its nonregulated operations or incurs a regulatory asset or liability at its regulated operations. For more information on asset retirement obligations, see Note 7.
Legal
costs
iThe Company expenses external legal fees as they are incurred.
Natural gas costs recoverable or refundable through rate adjustments
iUnder
the terms of certain orders of the applicable state public service commissions, the Company is deferring natural gas commodity, transportation and storage costs that are greater or less than amounts presently being recovered through its existing rate schedules. Such orders generally provide that these amounts are recoverable or refundable through rate adjustments which are filed annually. Natural gas costs refundable through rate adjustments were $i28.5 million and $i25.6 million
at December 31, 2017 and 2016, respectively, which is included in other accrued liabilities. Natural gas costs recoverable through rate adjustments were $i14.5 million and $i2.2 million
at December 31, 2017 and 2016, respectively, which is included in prepayments and other current assets.
Stock-based compensation
iThe Company records the compensation expense for performance share awards using an estimated forfeiture rate. The estimated forfeiture rate is calculated
based on an average of actual historical forfeitures. The Company also preforms an analysis of any known factors at the time of the calculation to identify any necessary adjustments to the average historical forfeiture rate. At the time actual forfeitures become more than estimated forfeitures, the Company records compensation expense using actual forfeitures.
Income taxes
iThe
Company provides deferred federal and state income taxes on all temporary differences between the book and tax basis of the Company's assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Excess deferred income tax balances associated with the Company's rate-regulated activities have been recorded as a regulatory liability and are included in other liabilities. These regulatory liabilities are expected to be reflected as a reduction in future rates charged to customers in accordance with applicable regulatory procedures.
The
Company uses the deferral method of accounting for investment tax credits and amortizes the credits on regulated electric and natural gas distribution plant over various periods that conform to the ratemaking treatment prescribed by the applicable state public service commissions.
62 MDU Resources Group, Inc. Form 10-K
Part II
iThe
Company records uncertain tax positions in accordance with accounting guidance on accounting for income taxes on the basis of a two-step process in which (1) the Company determines whether it is more-likely-than-not that the tax position will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely than-not recognition threshold, the Company recognizes the largest amount of the tax benefit that is more than i50
percent likely to be realized upon ultimate settlement with the related tax authority. Tax positions that do not meet the more-likely-than-not criteria are reflected as a tax liability. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income taxes.
Earnings (loss) per common share
iBasic earnings (loss) per common share were computed by dividing earnings (loss) on common stock by the weighted average number of shares of common stock
outstanding during the year. Diluted earnings (loss) per common share were computed by dividing earnings (loss) on common stock by the total of the weighted average number of shares of common stock outstanding during the year, plus the effect of nonvested performance share awards. Common stock outstanding includes issued shares less shares held in treasury. Earnings (loss) on common stock was the same for both the basic and diluted earnings (loss) per share calculations. iA reconciliation of the weighted average common shares outstanding used in
the basic and diluted earnings (loss) per share calculation was as follows:
2017
2016
2015
(In
thousands)
Weighted average common shares outstanding - basic
i195,304
i195,299
i194,928
Effect
of dilutive performance share awards
i383
i319
i58
Weighted
average common shares outstanding - diluted
i195,687
i195,618
i194,986
Shares
excluded from the calculation of diluted earnings per share
i—
i—
i—
Use
of estimates
iThe preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates are used for items such as long-lived assets and goodwill; fair values of acquired assets and liabilities under the acquisition method of accounting; aggregate reserves; property depreciable lives; tax provisions; uncollectible
accounts; environmental and other loss contingencies; accumulated provision for revenues subject to refund; costs on construction contracts; unbilled revenues; actuarially determined benefit costs; asset retirement obligations; and the valuation of stock-based compensation. As additional information becomes available, or actual amounts are determinable, the recorded estimates are revised. Consequently, operating results can be affected by revisions to prior accounting estimates.
New accounting standards
Recently adopted accounting standards
iSimplifying
the Measurement of InventoryIn July 2015, the FASB issued guidance regarding inventory that is measured using the first-in, first-out or average cost method. The guidance does not apply to inventory measured using the last-in, first-out or the retail inventory method. The guidance requires inventory within its scope to be measured at the lower of cost or net realizable value, which is the estimated selling price in the normal course of business less reasonably predictable costs of completion, disposal and transportation. These amendments more closely align GAAP with IFRS. The Company adopted the guidance on January 1, 2017, on a prospective basis. The guidance did not have a material effect on the Company's
results of operations, financial position, cash flows or disclosures.
Improvements to Employee Share-Based Payment Accounting In March 2016, the FASB issued guidance regarding simplification of several aspects of the accounting for share-based payment transactions. The guidance affects the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and calculation of dilutive shares. The Company adopted the guidance on January 1, 2017. All amendments in the guidance that apply to the Company were adopted on a prospective basis resulting in no adjustments being made to retained earnings. The adoption of the guidance impacted
the Consolidated Statement of Income and the Consolidated Balance Sheet in the first quarter of 2017 due to the taxes related to the stock-based compensation award that vested in February 2017 being recognized as income tax expense as compared to a reduction to additional paid-in capital under the previous guidance. Adoption of the guidance also increased the number of shares included in the diluted earnings per share calculation due to the exclusion of tax benefits in the incremental shares calculation. The change in the weighted average common shares outstanding - diluted did not result in a material effect on the earnings per common share - diluted.
MDU
Resources Group, Inc. Form 10-K 63
Part II
Recently issued accounting standards not yet adopted
Revenue from Contracts with Customers In May 2014, the FASB issued guidance on accounting for revenue from contracts
with customers. The guidance provides for a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. In August 2015, the FASB issued guidance deferring the effective date of the revenue guidance and allowing entities to early adopt. With this decision, the guidance was effective for the Company on January 1, 2018. Entities had the option of using either a full retrospective or modified retrospective approach to adopting the guidance. Under the modified retrospective approach, an entity recognizes the cumulative effect of initially applying the guidance with an adjustment to the opening balance of retained
earnings in the period of adoption.
The Company adopted the guidance on January 1, 2018, using the modified retrospective approach. The Company has substantially completed the evaluation of contracts and methods of revenue recognition under the previous accounting guidance and has not identified any material cumulative effect adjustments to be made to retained earnings. In addition, the Company will have expanded revenue disclosures, both quantitatively and qualitatively, related to the nature, amount, timing and uncertainty of revenue and cash
flows arising from contracts with customers in the first quarter of 2018. The Company has reviewed substantially all of its revenue streams to evaluate the impact of this guidance and does not anticipate a significant change in the timing of revenue recognition, results of operations, financial position or cash flows. The Company reviewed its internal controls related to revenue recognition and disclosures and concluded that the guidance impacts certain business processes and controls. As such, the Company has developed modifications to its internal controls for certain topics under the guidance as they apply to the
Company and such modifications were not deemed to be significant.
Recognition and Measurement of Financial Assets and Financial LiabilitiesIn January 2016, the FASB issued guidance regarding the classification and measurement of financial instruments. The guidance revises the way an entity classifies and measures investments in equity securities, the presentation of certain fair value changes for financial liabilities measured at fair value and amends certain disclosure requirements related to the fair value of financial instruments. This guidance was effective for the Company on January 1, 2018. The guidance was to be applied using a modified retrospective approach with the exception of equity securities without readily determinable fair values
which should be applied prospectively. The Company continues to evaluate the effects the adoption of the new guidance will have on its results of operations, financial position, cash flows and disclosures and does not anticipate a material impact.
Classification of Certain Cash Receipts and Cash Payments In August 2016, the FASB issued guidance to clarify the classification of certain cash receipts and payments in the statement of cash flows. The guidance is intended to standardize the presentation and classification of certain transactions, including cash payments for debt prepayment or extinguishment, proceeds from insurance claim settlements and distributions from equity method investments. In addition, the guidance clarifies how to classify transactions that have characteristics of more than one class of cash flows.
The Company adopted the guidance on January 1, 2018, on a prospective basis. The Company does not anticipate the guidance to have a material effect on its future results of operations, financial position, cash flows and disclosures.
Clarifying the Definition of a Business In January 2017, the FASB issued guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The guidance provides a screen to determine when an integrated set of assets and activities is not a business. The guidance also affects other aspects of accounting, such as determining reporting units for goodwill testing and whether an entity has
acquired or sold a business. The Company adopted the guidance on January 1, 2018, on a prospective basis. The Company does not anticipate the guidance to have a material effect on its future results of operations, financial position, cash flows and disclosures.
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost In March 2017, the FASB issued guidance to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The guidance requires the service cost component to be presented in the income statement in the same line item or items as other compensation costs arising from services performed during the
period. Other components of net benefit costs shall be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The guidance also allows only the service cost component to be eligible for capitalization. The guidance was effective for the Company on January 1, 2018, including interim periods, on a retrospective basis for all periods presented with the exception of the capitalization of the service cost component which was adopted on a prospective basis.
The Company will reclassify all components of net periodic benefit costs, except for the service cost component, from operating expenses to other income (expense) on the Consolidated Statements
of Income for all years presented prior to January 1, 2018, beginning in the first quarter of 2018, with no impact to earnings. The guidance will not have a material impact on the Company's disclosures or cash flows.
Under FERC regulation, all components of net periodic benefit costs are currently eligible for capitalization. The Company's electric and natural gas distribution businesses have elected to continue to defer all components of net periodic benefit costs as regulatory assets or liabilities.
64 MDU
Resources Group, Inc. Form 10-K
Part II
Leases In February 2016, the FASB issued guidance regarding leases. The guidance requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet for operating and financing leases with terms of more than 12 months. The guidance remains largely the same for lessors, although some changes were made to better align lessor accounting with the new lessee accounting and to align with the revenue
recognition standard. The guidance also requires additional disclosures, both quantitative and qualitative, related to operating and finance leases for the lessee and sales-type, direct financing and operating leases for the lessor. This guidance will be effective for the Company on January 1, 2019, and should be applied using a retrospective approach with early adoption permitted. The Company continues to evaluate the potential impact the adoption of the new guidance will have on its results of operations, financial position, cash flows and disclosures. The Company is planning to adopt the standard on January 1, 2019, utilizing
the practical expedient that allows the Company to not reassess whether an expired or existing contract contains a lease, the classification of leases or initial direct costs.
In January 2018, the FASB issued a practical expedient for land easements under the new lease guidance. The practical expedient permits an entity to elect the option to not evaluate land easements under the new guidance if they existed or expired before the adoption of the new lease guidance and were not previously accounted for as leases under the previous lease guidance. Once an entity adopts the new guidance, the entity should apply the new guidance on a prospective basis to all new or modified land easements. The
Company is currently evaluating the impact of the practical expedient.
On January 5, 2018, the FASB issued a proposed accounting standard update to the guidance that would allow an entity the option to adopt the guidance on a modified retrospective basis. Under the modified retrospective approach, an entity would recognize a cumulative effect adjustment of initially applying the guidance to the opening balance of retained earnings in the period of adoption. The Company is monitoring the status of the proposal.
Simplifying the Test for Goodwill Impairment In January 2017, the FASB issued guidance on simplifying the test for goodwill impairment by eliminating Step 2, which required an entity to measure the amount of impairment
loss by comparing the implied fair value of reporting unit goodwill with the carrying amount of such goodwill. This guidance requires entities to perform a quantitative impairment test, previously Step 1, to identify both the existence of impairment and the amount of impairment loss by comparing the fair value of a reporting unit to its carrying amount. Entities will continue to have the option of performing a qualitative assessment to determine if the quantitative impairment test is necessary. The guidance also requires additional disclosures if an entity has one or more reporting units with zero or negative carrying amounts of net assets. The guidance will be effective for the Company on January 1, 2020, and should be applied on a prospective basis with early adoption permitted. The
Company is evaluating the effects the adoption of the new guidance will have on its results of operations, financial position, cash flows and disclosures.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income In February 2018, the FASB issued guidance that allows an entity to reclassify the stranded tax effects resulting from the newly enacted federal corporate income tax rate from accumulated other comprehensive income (loss) to retained earnings. The guidance is effective for the Company on January 1, 2019, including interim periods, with early adoption permitted. The guidance can be applied using one of two methods. One method is to record the reclassification of the stranded income taxes at the beginning of the period of adoption. The
other method is to apply the guidance retrospectively to each period in which the income tax effects of the TCJA are recognized in accumulated other comprehensive income (loss). The Company is evaluating adoption of the guidance in the first quarter of 2018. At December 31, 2017, the Company had $i7.7
million of stranded tax effects in the accumulated other comprehensive loss balance.
Variable interest entities
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. GAAP provides a framework for identifying VIEs and determining when a company should include the assets, liabilities, noncontrolling interest and results of activities of a VIE in its consolidated financial statements.
A VIE should be consolidated if a party with an ownership, contractual or other financial interest in the VIE (a variable interest holder) has the power to direct the VIE's most significant activities and the obligation to absorb losses or right to receive benefits of the VIE that could be significant to the VIE. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the VIE's assets, liabilities and noncontrolling interests at fair value and subsequently account for the VIE as if it were consolidated.
The
Company's evaluation of whether it qualifies as the primary beneficiary of a VIE involves significant judgments, estimates and assumptions and includes a qualitative analysis of the activities that most significantly impact the VIE's economic performance and whether the Company has the power to direct those activities, the design of the entity, the rights of the parties and the purpose of the arrangement.
MDU Resources Group, Inc. Form 10-K 65
Part
II
Comprehensive income (loss)
iComprehensive income (loss) is the sum of net income (loss) as reported and other comprehensive income (loss). The Company's other comprehensive income (loss) resulted from gains (losses) on derivative instruments qualifying
as hedges, postretirement liability adjustments, foreign currency translation adjustments and gains (losses) on available-for-sale investments.
iThe after-tax changes in the components of accumulated other comprehensive loss as of December 31, 2017, 2016 and 2015, were as follows:
iReclassifications
out of accumulated other comprehensive loss for the years ended December 31 were as follows:
2017
2016
Location on Consolidated
Statements of Income
(In
thousands)
Reclassification adjustment for loss on derivative
instruments included in net income (loss):
Interest rate derivative instruments
$
(i590
)
$
(i593
)
Interest
expense
i224
i226
Income
taxes
(i366
)
(i367
)
Amortization
of postretirement liability losses included
in net periodic benefit cost (credit)
(i1,658
)
(i3,931
)
(a)
i645
i1,425
Income
taxes
(i1,013
)
(i2,506
)
Reclassification
adjustment for loss on available-for-sale
investments included in net income (loss)
(i185
)
(i220
)
Other
income
i65
i77
Income
taxes
(i120
)
(i143
)
Total
reclassifications
$
(i1,499
)
$
(i3,016
)
(a)
Included
in net periodic benefit cost (credit). For more information, see Note 14.
Note 2 - iAssets
Held for Sale and Discontinued Operations
Assets held for sale
The assets of Pronghorn were classified as held for sale in the fourth quarter of 2016. Pronghorn's results of operations for 2016 were included in the pipeline and midstream segment.
66 MDU Resources Group, Inc. Form 10-K
Part II
Pronghorn
On November 21, 2016, WBI Energy Midstream announced it had entered into a purchase and sale agreement to sell its i50 percent non-operating ownership interest in Pronghorn to Andeavor Field Services LLC. The transaction closed on January 1, 2017, which generated approximately $i100 million
of proceeds for the Company. The sale of Pronghorn further reduced the Company's risk exposure to commodity prices.
iThe carrying amounts of the major classes of assets classified as held for sale associated with Pronghorn on the Company's Consolidated Balance Sheets at December 31
were as follows:
2016
(In thousands)
Assets
Current assets:
Prepayments
and other current assets
$
i68
Total
current assets held for sale
i68
Noncurrent
assets:
Net property, plant and equipment
i93,424
Goodwill
i9,737
Less
allowance for impairment of assets held for sale
i2,311
Total
noncurrent assets held for sale
i100,850
Total
assets held for sale
$
i100,918
The
Company performed a fair value assessment of the assets and liabilities classified as held for sale. In the fourth quarter of 2016, the fair value assessment was determined using the market approach based on the purchase and sale agreement with Andeavor Field Services LLC. The fair value assessment indicated an impairment based on the carrying value exceeding the fair value, which resulted in the Company recording an impairment of $i2.3 million
($i1.4 million after tax) in the quarter ended December 31, 2016. The fair value of Pronghorn's assets have been categorized as Level 3
in the fair value hierarchy. The impairment was recorded in operation and maintenance expense on the Consolidated Statement of Income.
Discontinued operations
The assets and liabilities of the Company's discontinued operations have been classified as held for sale and the results of operations are shown in loss from discontinued operations, other than certain general and administrative costs and interest expense which do not meet the criteria for income (loss) from discontinued operations. At the time the assets were classified as held for sale, depreciation, depletion and amortization expense was no longer recorded.
Dakota Prairie Refining On June 24, 2016, WBI Energy entered into
a membership interest purchase agreement with Tesoro to sell all of the outstanding membership interests in Dakota Prairie Refining to Tesoro. WBI Energy and Calumet each previously owned i50 percent of the Dakota Prairie Refining membership interests and were equal members in building and operating Dakota Prairie Refinery. To effectuate the sale, WBI Energy acquired Calumet's
i50 percent membership interest in Dakota Prairie Refining on June 27, 2016. The sale of the membership interests to Tesoro closed on June 27, 2016. The sale of Dakota Prairie Refining reduced the
Company's risk by decreasing exposure to commodity prices.
Centennial continues to guarantee certain debt obligations of Dakota Prairie Refining; however, Tesoro has agreed to indemnify Centennial for any losses and litigation expenses arising for the guarantee. For more information related to the guarantee, see Note 17.
MDU Resources Group, Inc. Form 10-K 67
Part
II
The carrying amounts of the major classes of assets and liabilities classified as held for sale, related to the operations of and activity associated with Dakota Prairie Refining, on the Company's Consolidated Balance Sheets at December 31 were as follows:
2017
2016
(In
thousands)
Assets
Current assets:
Income taxes receivable
$
i1,778
$
i13,987
Total
current assets held for sale
i1,778
i13,987
Total
assets held for sale
$
i1,778
(a)
$
i13,987
Liabilities
Current
liabilities:
Accounts payable
$
i—
$
i7,425
Total
current liabilities held for sale
i—
i7,425
Noncurrent
liabilities:
Deferred income taxes (b)
i37
i14
Total
noncurrent liabilities held for sale
i37
i14
Total
liabilities held for sale
$
i37
$
i7,439
(a)
On
the Company's Consolidated Balance Sheets, these amounts were reclassified to current income taxes payable and are reflected in current liabilities held for sale.
(b)
On the Company's Consolidated Balance Sheets, these amounts were reclassified to noncurrent deferred income tax assets
and are reflected in noncurrent assets held for sale.
The
Company retained certain liabilities of Dakota Prairie Refining which were reflected in current liabilities held for sale on the Consolidated Balance Sheet at December 31, 2016. In the first quarter of 2017, the Company recorded a reversal of a previously accrued liability of $i7.0
million ($i4.3 million after tax) due to the resolution of a legal matter. As of December 31, 2017, Dakota Prairie Refining had not incurred any material exit and disposal costs, and does not expect
to incur any material exit and disposal costs.
The Company performed a fair value assessment of the assets and liabilities classified as held for sale. In the second quarter of 2016, the fair value assessment was determined using the market approach based on the sale transaction to Tesoro. The fair value assessment indicated an impairment based on the carrying value exceeding the fair value, which resulted in the Company recording an impairment of $i251.9 million
($i156.7 million after tax) in the quarter ended June 30, 2016. The impairment was included in operating expenses from discontinued operations. The fair value of Dakota Prairie Refining's
assets have been categorized as Level 3 in the fair value hierarchy.
Fidelity In the second quarter of 2015, the Company began the marketing and sale process of Fidelity with an anticipated sale to occur within one year. Between September 2015 and March 2016, the Company entered into purchase and sale agreements to sell substantially all of Fidelity's oil and natural gas assets. The completion of these sales occurred between October 2015 and April 2016. The sale of Fidelity was part of the Company's strategic plan to grow its capital investments in the remaining business segments and to focus on creating a greater long-term value.
68 MDU
Resources Group, Inc. Form 10-K
Part II
iThe
carrying amounts of the major classes of assets and liabilities classified as held for sale, related to the operations of Fidelity, on the Company's Consolidated Balance Sheets at December 31 were as follows:
2017
2016
(In
thousands)
Assets
Current assets:
Receivables, net
$
i479
$
i355
Total
current assets held for sale
i479
i355
Noncurrent
assets:
Net property, plant and equipment
i1,631
i5,507
Deferred
income taxes
i2,637
i91,098
Other
i161
i161
Less
allowance for impairment of assets held for sale
i—
i938
Total
noncurrent assets held for sale
i4,429
i95,828
Total
assets held for sale
$
i4,908
$
i96,183
Liabilities
Current
liabilities:
Accounts payable
$
i30
$
i141
Taxes
payable
i10,857
i19
(a)
Other
accrued liabilities
i2,884
i2,358
Total
current liabilities held for sale
i13,771
i2,518
Total
liabilities held for sale
$
i13,771
$
i2,518
(a)
On
the Company's Consolidated Balance Sheets, this amount was reclassified to prepayments and other current assets and
is reflected in current assets held for sale.
At December 31, 2017 and 2016, the Company’s deferred tax assets included in assets held for sale were largely comprised of $i2.6 million
and $i89.3 million, respectively, of federal and state net operating loss carryforwards. The Company realized substantially all of the outstanding net operating loss carryforwards
in 2017.
The Company had federal income tax net operating loss carryforwards of $i4.4 million and $i297.2 million
at December 31, 2017 and 2016, respectively. At December 31, 2017 and 2016, the Company had various state income tax net operating loss carryforwards of $i13.8 million
and $i189.1 million, respectively. The federal net operating loss carryforwards expire in 2036 and 2037 if not utilized. The state net operating loss carryforwards are due to expire between 2023 and 2037. It is likely a portion of the
benefit from the state carryforwards will not be realized; therefore, valuation allowances of $i349,000 and $i500,000
have been provided in 2017 and 2016, respectively.
The Company performed a fair value assessment of the assets and liabilities classified as held for sale. In the first quarter of 2016, the fair value assessment was determined using the market approach largely based on a purchase and sale agreement. The estimated fair value exceeded the carrying value and the Company recorded an impairment reversal of $i1.4
million ($i900,000 after tax) in the first quarter of 2016. In the second quarter of 2016, the fair value assessment was determined using the income and market approaches. The income approach was determined by using the present value of future estimated cash flows. The market
approach was based on market transactions of similar properties. The estimated carrying value exceeded the fair value and the Company recorded an impairment of $i900,000 ($i600,000
after tax) in the second quarter of 2016.
In the second quarter of 2015, the estimated fair value was determined using the income and the market approaches. The income approach was determined by using the present value of future estimated cash flows. The income approach considered management's views on current operating measures as well as assumptions pertaining to market forces in the oil and gas industry including estimated reserves, estimated prices, market differentials, estimates of well operating and future development costs and timing of operations. The estimated cash flows were discounted using a rate believed to be consistent with those used by principal market participants. The market approach was provided by a third party and based on market transactions involving similar interests in oil and natural gas properties. The fair value assessment indicated an impairment based on the carrying value exceeding the estimated
fair value, which is resulted in the Company writing down Fidelity's assets at June 30, 2015, and recording an impairment of $i400.0 million ($i252.0 million
after tax) during the second quarter of 2015. In the third quarter of 2015, the estimated fair value of Fidelity was determined by agreed upon pricing in the purchase and sale agreements for the assets subject to the agreements, the majority of which closed during the fourth quarter of 2015, including customary purchase price adjustments. The values received in the bid proposals were lower than originally anticipated due to lower commodity prices
MDU Resources Group, Inc. Form 10-K 69
Part
II
than those projected in the second quarter of 2015. For those assets for which a purchase and sale agreement had not been entered into at that time, the fair value was based on the market approach utilizing multiples based on similar interests in oil and natural gas properties. The fair value assessment indicated an impairment based on the carrying value exceeding the estimated fair value, which resulted in the Company writing down Fidelity's assets at September 30, 2015, and recording an impairment of $i356.1 million
($i224.4 million after tax). In the fourth quarter of 2015, the fair value assessment was determined using the market approach based on purchase and sale agreements. The estimated fair value exceeded the carrying value and the Company recorded
an impairment reversal of $i1.6 million ($i1.0 million
after tax) in the fourth quarter of 2015. The impairments were included in operating expenses from discontinued operations. The estimated fair value of Fidelity's assets have been categorized as Level 3 in the fair value hierarchy.
The Company incurred transaction costs of approximately $i300,000
in the first quarter of 2016 and $i2.5 million in 2015. In addition to the transaction costs, and due in part to the change in plans to sell the assets of Fidelity rather than sell Fidelity as a company, Fidelity incurred and expensed approximately
$i5.6 million of exit and disposal costs in 2016, and has incurred $i10.5 million
of exit and disposal costs to date. The Company does not expect to incur any additional material exit and disposal costs. The exit and disposal costs are associated with severance and other related matters and exclude the office lease expiration discussed in the following paragraph.
Fidelity vacated its office space in Denver, Colorado in 2016. The Company incurred lease payments of approximately $i900,000
in 2016. Lease termination payments of $i3.2 million and $i3.3 million
were made during the second quarter of 2016 and fourth quarter of 2015, respectively. Existing office furniture and fixtures were relinquished to the lessor in the second quarter of 2016.
Historically, the company used the full-cost method of accounting for its oil and natural gas production activities. Under this method, all costs incurred in the acquisition, exploration and development of oil and natural gas properties are capitalized and amortized on the units-of-production method based on total proved reserves.
Prior to the oil and natural gas properties being classified as held for sale, capitalized costs were subject to a "ceiling test" that limits such costs to the aggregate of the present value of future net cash flows from proved reserves discounted at 10 percent, as mandated under the
rules of the SEC, plus the cost of unproved properties not subject to amortization, plus the effects of cash flow hedges, less applicable income taxes. Proved reserves and associated future cash flows are determined based on SEC Defined Prices and exclude cash outflows associated with asset retirement obligations that have been accrued on the balance sheet. If capitalized costs, less accumulated amortization and related deferred income taxes, exceed the full-cost ceiling at the end of any quarter, a permanent noncash write-down is required to be charged to earnings in that quarter regardless of subsequent price changes.
The Company's capitalized cost under the full-cost method of accounting exceeded the full-cost ceiling at March 31, 2015. SEC Defined Prices, adjusted for market differentials,
were used to calculate the ceiling test. Accordingly, the Company was required to write down its oil and natural gas producing properties. The Company recorded a $i500.4 million ($i315.3 million
after tax) noncash write-down in operating expenses from discontinued operations in the first quarter of 2015.
Fidelity previously held commodity derivatives that were not designated as hedging instruments. The amount of loss recognized in discontinued operations, before tax, was $i18.3 million
in the year ended December 31, 2015.
Dakota Prairie Refining and Fidelity iThe reconciliation of the major classes of income and expense constituting pretax income (loss) from discontinued operations, which includes Dakota Prairie Refining and Fidelity, to the after-tax loss from discontinued operations on the Company's Consolidated Statements of Income for
the years ended December 31 were as follows:
2017
2016
2015
(In
thousands)
Operating revenues
$
i465
$
i123,024
$
i363,115
Operating
expenses
(i4,607
)
i513,813
i1,666,941
Operating
income (loss)
i5,072
(i390,789
)
(i1,303,826
)
Other
income (expense)
(i13
)
i306
i3,149
Interest
expense
i250
i1,753
i2,124
Income
(loss) from discontinued operations before income taxes
i4,809
(i392,236
)
(i1,302,801
)
Income
taxes*
i8,592
(i91,882
)
(i468,721
)
Loss
from discontinued operations
(i3,783
)
(i300,354
)
(i834,080
)
Loss
from discontinued operations attributable to noncontrolling interest
i—
(i131,691
)
(i35,256
)
Loss
from discontinued operations attributable to the Company
$
(i3,783
)
$
(i168,663
)
$
(i798,824
)
*
Includes
eliminations for the presentation of income tax adjustments between continuing and discontinued operations.
70 MDU Resources Group, Inc. Form 10-K
Part II
The
pretax income (loss) from discontinued operations attributable to the Company, related to the operations of and activity associated with Dakota Prairie Refining, was $i6.9 million, $(i253.5) million
and $(i31.5) million for the years ended December 31, 2017, 2016 and 2015, respectively.
Note 3
- iGoodwill and Other Intangible Assets
iThe changes in the carrying amount of goodwill for the year ended December 31,
2017, were as follows:
Balance
is presented net of accumulated impairment of $i12.3 million at the pipeline and midstream segment, which occurred in prior periods.
iOther
amortizable intangible assets at December 31 were as follows:
2017
2016
(In thousands)
Customer relationships
$
i15,248
$
i17,145
Less
accumulated amortization
i13,382
i13,917
i1,866
i3,228
Noncompete
agreements
i2,430
i2,430
Less
accumulated amortization
i1,805
i1,658
i625
i772
Other
i6,990
i7,768
Less
accumulated amortization
i5,644
i5,843
i1,346
i1,925
Total
$
i3,837
$
i5,925
Amortization
expense for amortizable intangible assets for the years ended December 31, 2017, 2016 and 2015, was $i2.0 million, $i2.5 million
and $i2.5 million, respectively. Estimated amortization expense for intangible assets is $i1.3 million
in 2018, $i1.0 million in 2019, $i500,000
in 2020, $i300,000 in 2021, $i200,000
in 2022 and $i500,000 thereafter.
MDU Resources Group, Inc. Form 10-K 71
Part
II
Note 4 - iRegulatory Assets and Liabilities
iiThe
following table summarizes the individual components of unamortized regulatory assets and liabilities as of December 31:/
Estimated Recovery
Period
*
2017
2016
(In
thousands)
Regulatory assets:
Pension and postretirement benefits (a)
i(e)
$
i163,896
$
i176,025
Taxes
recoverable from customers (a)
iOver plant lives
i12,073
i28,278
Manufactured
gas plant sites remediation (a)
i-
i18,213
i18,259
Asset
retirement obligations (a)
iOver plant lives
i56,078
i42,580
Natural
gas costs recoverable through rate adjustments (b)
iUp to 1 year
i14,465
i2,242
Long-term
debt refinancing costs (a)
iUp to 20 years
i5,563
i6,248
Costs
related to identifying generation development (a)
iUp to 9 years
i2,960
i3,407
Other
(a) (b)
iUp to 20 years
i27,715
i30,281
Total
regulatory assets
i300,963
i307,320
Regulatory
liabilities:
Plant removal and decommissioning costs (c)
i176,190
i176,972
Taxes
refundable to customers (c)
i279,668
i11,010
Pension
and postretirement benefits (c)
i11,056
i9,099
Natural
gas costs refundable through rate adjustments (d)
i28,514
i25,580
Other
(c) (d)
i23,870
i19,191
Total
regulatory liabilities
i519,298
i241,852
Net
regulatory position
$
(i218,335
)
$
i65,468
*
Estimated
recovery period for regulatory assets currently being recovered in rates charged to customers.
(a)
Included in deferred charges and other assets - other on the Consolidated Balance Sheets.
(b)
Included in prepayments and other current assets on the Consolidated Balance Sheets.
(c)
Included
in deferred credits and other liabilities - other on the Consolidated Balance Sheets.
(d)
Included in other accrued liabilities on the Consolidated Balance Sheets.
(e)
Recovered as expense is incurred or cash contributions are made.
The
regulatory assets are expected to be recovered in rates charged to customers. A portion of the Company's regulatory assets are not earning a return; however, these regulatory assets are expected to be recovered from customers in future rates. As of December 31, 2017 and 2016, approximately $i269.1 million
and $i255.4 million, respectively, of regulatory assets were not earning a rate of return.
In the fourth quarter of 2017, the Company performed a one-time revaluation of the Company's regulated
deferred tax assets and liabilities for the reduction of the corporate tax rate from 35 percent to 21 percent effective January 1, 2018, as identified in the TCJA. The revaluation of the Company's regulatory deferred tax assets and liabilities are being deferred as the Company works with the various regulators on a plan for amounts expected to be returned to customers, as discussed in Note 16. In the fourth quarter of 2017, the revaluation of the deferred tax assets and liabilities resulted in a decrease of $i15.5 million
in taxes recoverable from customers and an increase of $i270.0 million in taxes refundable to customers. These regulatory amounts are expected to generally be refunded over the remaining life of the related assets as prescribed in the TCJA. The approved regulatory treatment of the impacts of the TCJA by the various regulators may affect the analyses performed.
If,
for any reason, the Company's regulated businesses cease to meet the criteria for application of regulatory accounting for all or part of their operations, the regulatory assets and liabilities relating to those portions ceasing to meet such criteria would be removed from the balance sheet and included in the statement of income or accumulated other comprehensive income (loss) in the period in which the discontinuance of regulatory accounting occurs.
Note 5 - iFair
Value Measurements
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 an insurance contract, to satisfy its obligations under its unfunded, nonqualified benefit plans for executive officers and certain
key management employees, and invests in these fixed-income and equity securities for the purpose of earning investment returns and capital appreciation. These investments, which totaled $i77.4 million and $i70.9 million
at December 31, 2017 and 2016, respectively, were classified as investments on the Consolidated Balance Sheets. The net unrealized gains on these investments for the years ended December 31, 2017, 2016 and 2015, were $i9.3 million,
$i3.4 million and
72 MDU Resources Group, Inc. Form 10-K
Part
II
$i1.7 million, respectively. The change in fair value, which is considered part of the cost of the plan, is classified in operation and maintenance expense on the Consolidated Statements of Income.
The
Company did not elect the fair value option, which records gains and losses in income, for its available-for-sale securities, which include mortgage-backed securities and U.S. Treasury securities. These available-for-sale securities are recorded at fair value and are classified as investments on the Consolidated Balance Sheets. Unrealized gains or losses are recorded in accumulated other comprehensive income (loss). iDetails of available-for-sale securities were as follows:
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 ASC establishes a hierarchy for grouping assets and liabilities, based on the significance of inputs.
The estimated fair values of the Company's assets and liabilities measured on a recurring basis are determined using the market approach.
The Company's Level 2 money market funds are valued at the net asset value of shares held at the end of the 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 Level 2 mortgage-backed securities and U.S. Treasury securities are based on comparable market transactions, other observable inputs or other sources, including pricing from outside sources.
The estimated fair value of the Company's Level 2 insurance contract is based on contractual cash surrender values that are determined primarily by investments in managed separate accounts of the insurer. These amounts approximate fair value. The managed separate accounts are valued based on other observable inputs or corroborated market data.
Though the
Company believes the methods used to estimate fair value are consistent with those used by other market participants, the use of other methods or assumptions could result in a different estimate of fair value. For the years ended December 31, 2017 and 2016, there were no transfers between Levels 1 and 2.
MDU Resources Group, Inc. Form 10-K 73
Part
II
iThe Company's assets measured at fair value on a recurring basis were as follows:
The
insurance contract invests approximately i49 percent in fixed-income investments, i23 percent
in common stock of large-cap companies, i14 percent in common stock of mid-cap companies, i11 percent
in common stock of small-cap companies, i2 percent in target date investments and i1 percent
in cash equivalents.
The
insurance contract invests approximately i52 percent in fixed-income investments, i22 percent
in common stock of large-cap companies, i13 percent in common stock of mid-cap companies, i10 percent
in common stock of small-cap companies, i1 percent in target date investments and i2 percent
in cash equivalents.
The Company applies the provisions of the fair value measurement standard to its nonrecurring, non-financial measurements, including long-lived asset impairments. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. The Company reviews the carrying value of its long-lived assets, excluding goodwill, whenever events or changes in circumstances indicate that such carrying amounts may not be recoverable.
During
the second quarter of 2015, coalbed natural gas gathering assets at the pipeline and midstream segment were reviewed for impairment and found to be impaired and were written down to their estimated fair value using the income approach. Under this approach, fair value is determined by using the present value of future estimated cash flows. The factors used to determine the estimated future cash flows include, but are not limited to, internal estimates of gathering revenue, future commodity prices and operating costs and equipment salvage values. The estimated cash flows are discounted using a rate that approximates the weighted average cost of capital of a market participant. These fair value inputs are not typically observable. At June 30, 2015, natural gas gathering assets were written down to the nonrecurring fair value measurement of $i1.1 million.
During
the third quarter of 2015, the Company was negotiating the sale of certain non-strategic natural gas gathering assets at the pipeline and midstream segment and as a result these assets were found to be impaired and were written down to their estimated fair value using the market approach. The estimated fair value of natural gas gathering assets that were impaired at September 30, 2015, was largely determined by agreed upon pricing in a purchase and sale agreement that the Company was negotiating, and these assets were sold in the fourth quarter of 2015. At September 30, 2015, natural gas gathering assets were written down to the nonrecurring fair value measurement of $i10.8 million.
74 MDU Resources Group, Inc. Form 10-K
Part II
The fair value of these natural gas gathering assets have been categorized as Level 3 in the fair value hierarchy.
The
Company performed a fair value assessment of the assets and liabilities classified as held for sale. For more information on these Level 3 nonrecurring fair value measurements, see Note 2.
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 based on discounted future cash flows using current market interest rates. iThe
estimated fair value of the Company's Level 2 long-term debt at December 31 was as follows:
2017
2016
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
(In
thousands)
Long-term debt
$
i1,714,853
$
i1,826,256
$
i1,790,159
$
i1,841,885
The
carrying amounts of the Company's remaining financial instruments included in current assets and current liabilities approximate their fair values.
Note 6 -i Debt
Certain debt instruments of the Company
and its subsidiaries, including those discussed later, contain restrictive covenants and cross-default provisions. In order to borrow under the respective credit agreements, the Company and its subsidiaries must be in compliance with the applicable covenants and certain other conditions. In the event the Company and its subsidiaries do not comply with the applicable covenants and other conditions, alternative sources of funding may need to be pursued.
iThe
following table summarizes the outstanding revolving credit facilities of the Company and its subsidiaries:
The
commercial paper program is supported by a revolving credit agreement with various banks (provisions allow for increased borrowings, at the option of the Company on stated conditions, up to a maximum of $i225.0 million). There were no amounts outstanding under the revolving credit
agreement.
(b)
Amount outstanding under commercial paper program.
(c)
Certain provisions allow for increased borrowings, up to a maximum of $i100.0 million.
(d)
Outstanding
letter(s) of credit reduce the amount available under the credit agreement.
(e)
Certain provisions allow for increased borrowings, up to a maximum of $i110.0 million.
(f)
The
commercial paper program is supported by a revolving credit agreement with various banks (provisions allow for increased borrowings, at the option of Centennial on stated conditions, up to a maximum of $i600.0 million). There were no amounts outstanding under the revolving credit agreement.
The
Company's and Centennial's respective commercial paper programs are supported by revolving credit agreements. While the amount of commercial paper outstanding does not reduce available capacity under the respective revolving credit agreements, the Company and Centennial do not issue commercial paper in an aggregate amount exceeding the available capacity under their credit agreements. The commercial paper borrowings may vary during the period, largely the result of fluctuations in working capital requirements due to the seasonality of the construction businesses.
The following includes information related to the preceding table.
Long-term debt
MDU Resources Group, Inc. The
Company's revolving credit agreement supports its commercial paper program. Commercial paper borrowings under this agreement are classified as long-term debt as they are intended to be refinanced on a long-term basis through continued commercial paper borrowings.
MDU Resources Group, Inc. Form 10-K 75
Part II
The
credit agreement contains customary covenants and provisions, including covenants of the Company not to permit, as of the end of any fiscal quarter, (A) the ratio of funded debt to total capitalization (determined on a consolidated basis) to be greater than i65 percent
or (B) the ratio of funded debt to capitalization (determined with respect to the Company alone, excluding its subsidiaries) to be greater than i65 percent.
Other covenants include limitations on the sale of certain assets and on the making of certain loans and investments.
There are no credit facilities that contain cross-default provisions between the Company and any of its subsidiaries.
Cascade Natural Gas Corporation 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.
On April 25, 2017, Cascade amended its revolving credit agreement to increase the borrowing limit from $i50.0 million
to $i75.0 million and extend the termination date from July 9, 2018 to April 24, 2020. The credit agreement contains customary covenants and provisions, including a covenant of Cascade not to permit, at any time, the ratio of total debt
to total capitalization to be greater than i65 percent. Other covenants include restrictions on the sale of certain assets, limitations on indebtedness and the making of certain investments.
Cascade's credit agreement also contains cross-default
provisions. These provisions state that if Cascade fails to make any payment with respect to any indebtedness or contingent obligation, in excess of a specified amount, under any agreement that causes such indebtedness to be due prior to its stated maturity or the contingent obligation to become payable, Cascade will be in default under the revolving credit agreement.
Intermountain Gas Company 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.
On April 25, 2017, Intermountain amended its revolving credit agreement to increase the borrowing limit from $i65.0 million
to $i85.0 million and extend the termination date from July 13, 2018 to April 24, 2020. The credit 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 i65 percent. Other covenants include restrictions on the sale of certain assets, limitations on indebtedness and the making of certain investments.
Intermountain's credit agreement also contains cross-default
provisions. These provisions state that if Intermountain fails to make any payment with respect to any indebtedness or contingent obligation, in excess of a specified amount, under any agreement that causes such indebtedness to be due prior to its stated maturity or the contingent obligation to become payable, or certain conditions result in an early termination date under any swap contract that is in excess of a specified amount, then Intermountain will be in default under the revolving credit agreement.
Centennial Energy Holdings, Inc. Centennial's revolving credit agreement supports its commercial paper program. Commercial paper borrowings under this agreement are classified as long-term debt as they are intended to be refinanced on a long-term basis through continued commercial paper borrowings.
Centennial's
revolving credit agreement and certain debt outstanding under an expired uncommitted long-term master shelf agreement contain customary covenants and provisions, including a covenant of Centennial, not to permit, as of the end of any fiscal quarter, the ratio of total consolidated debt to total consolidated capitalization to be greater than i65 percent
(for the revolving credit agreement) and a covenant of Centennial and certain of its subsidiaries, not to permit, as of the end of any fiscal quarter, the ratio of total debt to total capitalization to be greater than i60 percent
(for the master shelf agreement). The master shelf agreement also includes a covenant that does not permit the ratio of Centennial's EBITDA to interest expense, for the 12-month period ended each fiscal quarter, to be less than i1.75 to 1. Other covenants include restricted payments, restrictions on the sale of certain assets, limitations on subsidiary indebtedness, minimum
consolidated net worth, limitations on priority debt and the making of certain loans and investments.
Certain of Centennial's financing agreements contain cross-default provisions. These provisions state that if Centennial or any subsidiary of Centennial fails to make any payment with respect to any indebtedness or contingent obligation, in excess of a specified amount, under any agreement that causes such indebtedness to be due prior to its stated maturity or the contingent obligation to become payable, the applicable agreements will be in default.
WBI Energy Transmission, Inc. WBI Energy Transmission has a $i200.0 million
uncommitted note purchase and private shelf agreement with an expiration date of May 16, 2019. WBI Energy Transmission had $i100.0 million of notes outstanding at December 31, 2017, which reduced the remaining capacity under this uncommitted private shelf
agreement to $i100.0 million. This agreement contains customary covenants and provisions, including a covenant of WBI Energy Transmission not to permit, as of the end of any fiscal quarter, the ratio of total debt to total capitalization to be greater than i55 percent.
Other covenants include a limitation on priority debt and restrictions on the
76 MDU Resources Group, Inc. Form 10-K
Part II
sale of certain assets and the making
of certain investments. On December 22, 2017, WBI Energy Transmission contracted to issue an additional $i40.0 million under the private shelf agreement at an interest rate of i4.18 percent
on June 15, 2018.
Long-term Debt OutstandingiLong-term debt outstanding was as follows:
iSchedule
of Debt Maturities Long-term debt maturities, which excludes unamortized debt issuance costs and discount, for the five years and thereafter following December 31, 2017, were as follows:
2018
2019
2020
2021
2022
Thereafter
(In
thousands)
Long-term debt maturities
$
i148,499
$
i125,504
$
i73,012
$
i15,312
$
i147,214
$
i1,211,007
Note 7
- iAsset Retirement Obligations
The Company records obligations related to retirement costs of natural gas distribution mains and lines, natural gas transmission lines, storage facilities, decommissioning of certain electric generating facilities, reclamation of certain aggregate properties, special handling and disposal of hazardous materials at certain electric generating facilities, natural gas distribution facilities and buildings, and certain
other obligations as asset retirement obligations.
iA reconciliation of the Company's liability, which is included in other accrued liabilities and deferred credits and other liabilities - other on the Consolidated Balance Sheets, for the years ended December 31 was as follows:
2017
2016
(In
thousands)
Balance at beginning of year
$
i314,970
$
i242,224
Liabilities
incurred
i15,110
i15,114
Liabilities
settled
(i4,981
)
(i4,338
)
Accretion
expense*
i16,839
i13,918
Revisions
in estimates
i31
i48,052
Balance
at end of year
$
i341,969
$
i314,970
*
Includes
$i15.6 million and $i12.7 million
in 2017 and 2016, respectively, related to regulatory assets.
The 2016 revisions in estimates consist principally of updated asset retirement obligation costs associated with natural gas transmission lines and storage facilities at the pipeline and midstream segment.
The Company believes that largely all expenses related to asset retirement obligations at the Company's regulated operations will be recovered in rates over time and, accordingly, defers such
expenses as regulatory assets. For more information on the Company's regulatory assets and liabilities, see Note 4.
MDU Resources Group, Inc. Form 10-K 77
Part II
Note 8
- iPreferred Stocks
iPreferred stocks at December 31 were as follows:
2017
2016
(In
thousands, except shares
and per share amounts)
Authorized:
Preferred -
500,000 shares, cumulative, par value $100, issuable in series
Preferred
stock A -
1,000,000 shares, cumulative, without par value, issuable in series (none outstanding)
Preference -
500,000 shares, cumulative, without par value, issuable in series (none outstanding)
Outstanding:
4.50%
Series - 100,000 shares
$
i—
$
i10,000
4.70%
Series - 50,000 shares
i—
i5,000
Total
preferred stocks
$
i—
$
i15,000
For
the years 2016 and 2015, dividends declared on the i4.50% Series and i4.70%
Series preferred stocks were $i4.50 and $i4.70
per share, respectively. On April 1, 2017, the Company redeemed all outstanding i4.50% Series and i4.70%
Series preferred stocks at $i105 per share and $i102
per share, respectively, for a repurchase price of approximately $i15.6 million and $i300,000
of redeemable preferred stock classified as long-term debt.
Note 9 - iCommon Stock
For the years 2017, 2016 and 2015, dividends declared on common stock were $i.7750,
$i.7550 and $i.7350 per common share, respectively.
The Stock Purchase Plan provided interested
investors the opportunity to make optional cash investments and to reinvest all or a percentage of their cash dividends in shares of the Company's common stock. The K-Plan provides participants the option to invest in the Company's common stock. From January 2015 through August 2015, the Stock Purchase Plan and K-Plan, with respect to Company stock, purchased shares of authorized but unissued common stock from the Company. From September 2015 through December 2017, the K-Plan purchased shares of common stock on the open market. At December 31, 2017, there were i7.8 million
shares of common stock reserved for original issuance under the K-Plan. From September 2015 through December 4, 2016, the Stock Purchase Plan purchased shares of common stock on the open market. On December 5, 2016, the Stock Purchase Plan was terminated and all remaining shares reserved for original issuance under the plan were de-registered.
The Company depends on earnings from its divisions and dividends from its subsidiaries to pay dividends on common stock. The declaration and payment of dividends is at the sole discretion of the board of directors, subject to limitations imposed by the
Company's credit agreements, federal and state laws, and applicable regulatory limitations. In addition, the Company and Centennial are generally restricted to paying dividends out of capital accounts or net assets. The following discusses the most restrictive limitations.
Pursuant to a covenant under a credit agreement, Centennial may only declare or pay distributions if as of the last day of any fiscal quarter, the ratio of Centennial's average consolidated indebtedness as of the last day of such fiscal quarter and each of the preceding three fiscal quarters to Centennial's Consolidated EBITDA does not exceed i3
to 1; and after giving effect to such distribution, all distributions made during the 12-month period ending on the last day of the fiscal quarter in which such distribution is made will not exceed the remainder of Centennial's Consolidated EBITDA minus Centennial's capital expenditures less the net cash proceeds from all sales of capital assets from continuing operations, for the immediately preceding 12-month period. Intermountain has regulatory limitations on the amount of dividends it can pay. Based on these limitations, approximately $i1.3 billion
of the net assets of the Company's subsidiaries were restricted from being used to transfer funds to the Company at December 31, 2017. In addition, the Company's credit agreement also contains restrictions on dividend payments. The most restrictive limitation requires the Company not to permit the ratio of funded debt to capitalization (determined with respect to the Company alone,
excluding its subsidiaries) to be greater than i65 percent. Based on this limitation, approximately $i384 million
of the Company's (excluding its subsidiaries) net assets, which represents common stockholders' equity including retained earnings, would be restricted from use for dividend payments at December 31, 2017. In addition, state regulatory commissions may require the Company to maintain certain capitalization ratios. These requirements are not expected to affect the Company's ability to pay dividends in the near term.
78 MDU
Resources Group, Inc. Form 10-K
Part II
Note 10 - iStock-Based
Compensation
The Company has several stock-based compensation plans under which it is currently authorized to grant restricted stock and other stock awards. As of December 31, 2017, there were i5.1 million
remaining shares available to grant under these plans. The Company generally purchases shares on the open market for non-employee director stock awards. The Company purchased shares on the open market for the employee performance shares that vested in 2017. The Company anticipates future employee performance share awards will continue to be satisfied by purchasing shares on the open market.
Total stock-based compensation expense (after tax) was $i2.7 million,
$i3.3 million and $i2.9 million
in 2017, 2016 and 2015, respectively.
As of December 31, 2017, total remaining unrecognized compensation expense related to stock-based compensation was approximately $i4.8 million
(before income taxes) which will be amortized over a weighted average period of i1.5 years.
Stock awards
Non-employee directors receive shares of common stock in addition to and in lieu of cash payment for directors' fees. Shares of common stock were issued under the non-employee director stock compensation plan or the non-employee director
long-term incentive compensation plan. There were i40,572 shares with a fair value of $i1.1 million,
i37,218 shares with a fair value of $i1.1 million
and i58,181 shares with a fair value of $i1.1 million
issued under these plans during the years ended December 31, 2017, 2016 and 2015, respectively.
Performance share awards
Since 2003, key employees of the Company have been awarded performance share awards each year. Entitlement to performance shares is based on the Company's total shareholder return over designated performance periods as measured against a selected peer group.
iTarget
grants of performance shares outstanding at December 31, 2017, were as follows:
Grant Date
Performance
Period
Target Grant
of Shares
February 2016
2016-2018
i258,825
March
2016
2016-2018
i2,151
February 2017
2017-2019
i164,558
Participants
may earn from izero to i200 percent
of the target grant of shares based on the Company's total shareholder return relative to that of the selected peer group. Compensation expense is based on the grant-date fair value as determined by Monte Carlo simulation. The blended volatility term structure ranges are comprised of i50 percent historical volatility and i50 percent
implied volatility. Risk-free interest rates were based on U.S. Treasury security rates in effect as of the grant date. iAssumptions used for grants of performance shares issued in 2017, 2016 and 2015 were:
2017
2016
2015
Weighted
average grant-date fair value
$i24.31
$i14.60
$i18.98
Blended
volatility range
i22.70
%
–
i25.56
%
i29.25
%
–
i32.51
%
i22.86
%
–
i24.61
%
Risk-free
interest rate range
i.69
%
–
i1.61
%
i.47
%
–
i.92
%
i.05
%
–
i1.07
%
Weighted
average discounted dividends per share
$i1.70
$i1.56
$i1.57
The
fair value of the performance shares that vested during the years ended December 31, 2017 and 2016, was $i9.6 million and $i953,000,
respectively. There were no performance shares that vested in 2015.
iA summary of the status of the performance share awards for the year ended December 31, 2017, was as follows:
Number
of
Shares
Weighted
Average
Grant-Date
Fair Value
Nonvested at beginning of period
i664,188
$
i21.47
Granted
i203,646
i24.31
Additional
performance shares earned
i81,643
i19.22
Less:
Vested
i360,319
i24.88
Forfeited
i163,624
i24.46
Nonvested
at end of period
i425,534
$
i18.35
MDU
Resources Group, Inc. Form 10-K 79
Part II
Note 11 - iIncome
Taxes
iThe components of income before income taxes from continuing operations for each of the years ended December 31 were as follows:
2017
2016
2015
(In
thousands)
United States
$
i350,064
$
i326,252
$
i248,379
Foreign
(i37
)
(i24
)
(i1,326
)
Income
before income taxes from continuing operations
$
i350,027
$
i326,228
$
i247,053
iIncome
tax expense from continuing operations for the years ended December 31 was as follows:
2017
2016
2015
(In
thousands)
Current:
Federal
$
i74,272
$
i81,989
$
i85,897
State
i16,192
i13,190
i10,093
Foreign
i—
i2
i30
i90,464
i95,181
i96,020
Deferred:
Income
taxes:
Federal
(i24,497
)
(i2,102
)
(i19,632
)
State
(i864
)
i1,184
(i5,304
)
Investment
tax credit - net
(i62
)
(i1,131
)
(i420
)
(i25,423
)
(i2,049
)
(i25,356
)
Total
income tax expense
$
i65,041
$
i93,132
$
i70,664
In
accordance with the accounting guidance on accounting for income taxes, the tax effects of the change in tax laws or rates are to be recorded in the period of enactment. The TCJA was enacted on December 22, 2017, as discussed in Note 1. Therefore, the reduction in the corporate tax rate from 35 percent to 21 percent required the Company to prepare a one-time revaluation of the Company's deferred tax assets and liabilities in the fourth quarter of 2017, the period of enactment. The deferred taxes were revalued at the new tax rate because deferred taxes should reflect what the Company expects to pay or receive in future periods under
the applicable tax rate. As a result of the revaluation, the Company reduced the value of these assets and liabilities and recorded a tax benefit from continuing operations of $i39.5 million on the Consolidated Statements of Income for the year ended December 31, 2017. Included
in the tax benefit from continuing operations was income tax expense of $i7.7 million related to amounts in accumulated other comprehensive loss and $i1.0 million
related to the Company's assets held for sale.
The Company's regulated operations prepared a one-time revaluation of the Company's regulatory deferred tax assets and liabilities in the fourth quarter of 2017 related to the enactment of the TCJA. The revaluation is being deferred under regulatory accounting as the Company works with the various regulators on a plan for amounts expected to be returned to customers, as discussed in Notes 4 and 16. The revaluation of the deferred tax assets and liabilities resulted
in a net decrease of $i285.5 million in the fourth quarter of 2017. These regulatory amounts are expected to generally be refunded over the remaining life of the related assets as prescribed in the TCJA. The approved regulatory treatment of the impacts of the TCJA by the various regulators may affect the analyses performed.
The changes included in the TCJA are broad and complex. While the
Company was able to make reasonable estimates of the impact of the reduction in corporate tax rate on the Company's net deferred tax liabilities, it may be affected by other analyses related to the TCJA, including, but not limited to, the state tax effect of adjustments to federal temporary differences and the calculation of deemed repatriation of deferred foreign income. The final transition impacts of the TCJA may differ from amounts disclosed, possibly materially, due to, among other things, changes in interpretations, legislative action to address questions, changes in accounting standards for income taxes or related interpretations, or updates or changes to estimates the Company has utilized to calculate the transition impacts. The SEC has issued rules that would allow for a measurement period of
up to one year after the enactment date of the TCJA to finalize the recording of the related tax impacts. The Company currently anticipates finalizing and recording any resulting adjustments by December 31, 2018, which will be included in income from continuing operations.
80 MDU Resources Group, Inc. Form 10-K
Part
II
iComponents of deferred tax assets and deferred tax liabilities at December 31 were as follows:
2017
2016
(In
thousands)
Deferred tax assets:
Postretirement
$
i55,736
$
i87,872
Compensation-related
i16,298
i44,995
Alternative
minimum tax credit carryforward
i37,683
i29,338
Federal
renewable energy credit
i19,367
i16,944
Customer
advances
i8,712
i13,524
Legal
and environmental contingencies
i7,363
i9,895
Asset
retirement obligations
i6,380
i8,867
Other
i35,738
i46,957
Total
deferred tax assets
i187,277
i258,392
Deferred
tax liabilities:
Depreciation and basis differences on property, plant and equipment
i429,577
i774,838
Postretirement
i43,505
i70,670
Intangible
asset amortization
i16,979
i26,413
Other
i32,591
i45,580
Total
deferred tax liabilities
i522,652
i917,501
Valuation
allowance
i11,896
i9,117
Net
deferred income tax liability
$
i347,271
$
i668,226
As
of December 31, 2017 and 2016, the Company had various state income tax net operating loss carryforwards of $i130.1 million and $i114.7 million,
respectively, and federal and state income tax credit carryforwards, excluding alternative minimum tax credit carryforwards, of $i52.5 million and $i43.3 million,
respectively. Included in the state credits are various regulatory investment tax credits of approximately $i28.0 million and $i20.7 million
at December 31, 2017 and 2016, respectively. The federal income tax credit carryforwards expire in 2036 and 2037 if not utilized and state income tax credit carryforwards are due to expire between 2018 and 2045. It is likely that a portion of the benefit from the state carryforwards will not be realized; therefore, valuation allowances have been provided. Changes in tax regulations or assumptions regarding current and future taxable income could require additional valuation allowances in the future. The alternative minimum tax credit carryforwards are refundable. For information regarding net operating loss carryforwards and valuation allowances related to discontinued operations, see Note 2.
iThe
following table reconciles the change in the net deferred income tax liability from December 31, 2016, to December 31, 2017, to deferred income tax benefit:
2017
(In thousands)
Change
in net deferred income tax liability from the preceding table
$
(i320,955
)
Deferred taxes associated with other comprehensive loss
i1,182
Deferred
taxes associated with TCJA enactment for regulated activities
i285,520
Other
i8,830
Deferred
income tax benefit for the period
$
(i25,423
)
MDU
Resources Group, Inc. Form 10-K 81
Part II
iTotal
income tax expense differs from the amount computed by applying the statutory federal income tax rate to income before taxes. The reasons for this difference were as follows:
TCJA
revaluation related to accumulated other comprehensive loss balance
i7,735
i2.2
i—
i—
i—
i—
Other
(i7,235
)
(i2.0
)
(i7,251
)
(i2.3
)
(i11,163
)
(i4.5
)
Total
income tax expense
$
i65,041
i18.6
$
i93,132
i28.5
$
i70,664
i28.6
Included
in the TCJA is the deemed repatriation transition tax which is a one-time transition tax on previously untaxed accumulated earnings and profits of certain foreign operations that is payable over 8 years. At December 31, 2017, the Company's liability for the deemed repatriation transition tax was $i447,000. Historically, deferred income taxes were accrued with respect
to the Company's foreign operations.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state, local and foreign jurisdictions. The Company is no longer subject to U.S. federal or non-U.S. income tax examinations by tax authorities for years ending prior to 2014. With few exceptions, as of December 31, 2017, the Company is no longer subject to state and local income
tax examinations by tax authorities for years ending prior to 2013.
Included in income tax expense is interest on uncertain tax positions. For the years ended December 31, 2017, 2016 and 2015, the Company recognized approximately $(i99,000),
$(i92,000) and $i122,000, respectively,
of interest (income) expense in income tax expense. At December 31, 2017 and 2016, the Company had accrued receivables of approximately $i46,000 and $i54,000,
respectively, for interest.
Note 12 - iCash Flow Information
iCash
expenditures for interest and income taxes for the years ended December 31 were as follows:
2017
2016
2015
(In
thousands)
Interest, net*
$
i79,638
$
i87,920
$
i88,775
Income
taxes paid, net**
$
i112,137
$
i105,908
$
i61,405
*
Capitalized
interest and AFUDC - borrowed was $i966,000, $i914,000 and $i9.3 million
for the years ended December 31, 2017, 2016 and 2015, respectively.
**
Income taxes paid, net of discontinued operations, were $i9.7 million,
$i1.3 million and $i2.4 million
for the years ended December 31, 2017, 2016 and 2015, respectively.
Noncash investing transactions at December 31 were as follows:
2017
2016
2015
(In
thousands)
Property, plant and equipment additions in accounts payable
$
i29,263
$
i22,712
$
i39,754
Note 13
- iBusiness Segment Data
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 vast majority of the Company's operations are located within the United States.
82 MDU Resources Group, Inc. Form 10-K
Part
II
The electric segment generates, transmits and distributes electricity in Montana, North Dakota, South Dakota and Wyoming. The natural gas distribution segment distributes natural gas in those states as well as in Idaho, Minnesota, Oregon and Washington. These operations also supply related value-added services.
The pipeline and midstream segment provides natural gas transportation, underground storage and gathering services through regulated and nonregulated pipeline systems primarily in the Rocky Mountain and northern Great Plains regions of the United States. This segment also provides cathodic protection and other energy-related services.
For information on the Company's natural gas and oil gathering and processing facility sold on January 1, 2017, see Note 2.
The construction materials and contracting segment operations mine, process and sell construction aggregates (crushed stone, sand and gravel); produce and sell asphalt mix; and supply ready-mixed concrete. This segment focuses on vertical integration of construction services to support the aggregate based product lines including aggregate placement, asphalt and concrete paving, and site development and grading. Although not common to all locations, other products include the sale of cement, liquid asphalt for various commercial and roadway applications, various
finished concrete products and other building materials and related contracting services.This segment operates in the central, southern and western United States and Alaska and Hawaii.
The construction services segment provides inside and outside specialty contracting services. Its outside services include design, construction and maintenance of overhead and underground electrical distribution and transmission lines, substations, external lighting, traffic signalization, and gas pipelines, as well as utility excavation and the manufacture and distribution of transmission line construction equipment. Its inside services include design, construction and maintenance of electrical and communication wiring and infrastructure, fire suppression systems, and mechanical piping and services. This business also designs, constructs and maintains renewable energy projects. These specialty contracting
services are provided to utilities and large manufacturing, commercial, industrial, institutional and government customers.
The Other category includes the activities of Centennial Capital, which 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 deductible self-insured layers of the insured companies' general liability, automobile liability, pollution liability and other coverages. Centennial Capital also owns certain real and personal property. The Other category also includes certain general and administrative costs (reflected in operation and maintenance expense) and interest expense which were previously allocated to the refining business and Fidelity and
do not meet the criteria for income (loss) from discontinued operations. The Other category also includes Centennial Resources' former investment in Brazil.
Discontinued operations includes the results and supporting activities of Dakota Prairie Refining and Fidelity other than certain general and administrative costs and interest expense as described above. Dakota Prairie Refining refined crude oil and produced and sold diesel fuel, naphtha, ATBs and other by-products of the production process. In the second quarter of 2016, the Company sold all of the outstanding membership interests in Dakota Prairie Refining. Fidelity engaged in oil and natural gas development and production activities in the Rocky Mountain and Mid-Continent/Gulf States regions of the United States. Between
September 2015 and March 2016, the Company entered into purchase and sale agreements to sell substantially all of Fidelity's oil and natural gas assets. The completion of these sales occurred between October 2015 and April 2016. For more information on discontinued operations, see Note 2.
MDU Resources Group, Inc. Form 10-K 83
Part
II
The information below follows the same accounting policies as described in Note 1. iInformation on the Company's segments as of December 31 and for the years then ended was as follows:
2017
2016
2015
(In
thousands)
External operating revenues:
Regulated operations:
Electric
$
i342,805
$
i322,356
$
i280,615
Natural
gas distribution
i848,388
i766,115
i817,419
Pipeline
and midstream
i53,566
i52,983
i51,004
i1,244,759
i1,141,454
i1,149,038
Nonregulated
operations:
Pipeline and midstream
i19,602
i39,602
i54,281
Construction
materials and contracting
i1,811,964
i1,873,696
i1,901,530
Construction
services
i1,366,317
i1,072,663
i907,767
Other
i709
i1,413
i1,436
i3,198,592
i2,987,374
i2,865,014
Total
external operating revenues
$
i4,443,351
$
i4,128,828
$
i4,014,052
Intersegment
operating revenues:
Regulated operations:
Electric
$
i—
$
i—
$
i—
Natural
gas distribution
i—
i—
i—
Pipeline
and midstream
i48,867
i48,794
i49,065
i48,867
i48,794
i49,065
Nonregulated
operations:
Pipeline and midstream
i178
i223
i554
Construction
materials and contracting
i565
i574
i2,752
Construction
services
i1,285
i609
i18,660
Other
i7,165
i7,230
i7,755
i9,193
i8,636
i29,721
Intersegment
eliminations
(i58,060
)
(i57,430
)
(i78,786
)
Total
intersegment operating revenues
$
i—
$
i—
$
i—
Depreciation,
depletion and amortization:
Electric
$
i47,715
$
i50,220
$
i37,583
Natural
gas distribution
i69,381
i65,426
i64,756
Pipeline
and midstream
i16,788
i24,885
i27,981
Construction
materials and contracting
i55,862
i58,413
i65,937
Construction
services
i15,739
i15,307
i13,420
Other
i2,001
i2,067
i2,070
Total
depreciation, depletion and amortization
$
i207,486
$
i216,318
$
i211,747
Interest
expense:
Electric
$
i25,377
$
i24,982
$
i17,421
Natural
gas distribution
i31,234
i30,405
i29,471
Pipeline
and midstream
i4,990
i7,903
i9,895
Construction
materials and contracting
i14,778
i15,265
i15,183
Construction
services
i3,742
i4,059
i3,959
Other
i3,564
i5,854
i15,853
Intersegment
eliminations
(i897
)
(i620
)
(i603
)
Total
interest expense
$
i82,788
$
i87,848
$
i91,179
84 MDU
Resources Group, Inc. Form 10-K
Part II
2017
2016
2015
(In
thousands)
Income taxes:
Electric
$
i7,699
$
i1,449
$
i11,523
Natural
gas distribution
i22,756
i9,181
i11,377
Pipeline
and midstream
i12,281
i12,408
i7,505
Construction
materials and contracting
i5,405
i60,625
i41,619
Construction
services
i25,558
i17,748
i16,432
Other
(i1,809
)
(i2,028
)
(i9,834
)
Intersegment
eliminations
(i6,849
)
(i6,251
)
(i7,958
)
Total
income taxes
$
i65,041
$
i93,132
$
i70,664
Earnings
(loss) on common stock:
Regulated operations:
Electric
$
i49,366
$
i42,222
$
i35,914
Natural
gas distribution
i32,225
i27,102
i23,607
Pipeline
and midstream
i20,620
i22,060
i20,680
i102,211
i91,384
i80,201
Nonregulated
operations:
Pipeline and midstream
(i127
)
i1,375
(i7,430
)
Construction
materials and contracting
i123,398
i102,687
i89,096
Construction
services
i53,306
i33,945
i23,762
Other
(i1,422
)
(i3,231
)
(i14,941
)
i175,155
i134,776
i90,487
Intersegment
eliminations (a)
i6,849
i6,251
i5,016
Earnings
on common stock before loss from discontinued operations
i284,215
i232,411
i175,704
Loss
from discontinued operations, net of tax (a)
(i3,783
)
(i300,354
)
(i834,080
)
Loss
from discontinued operations attributable to noncontrolling interest
i—
(i131,691
)
(i35,256
)
Total
earnings (loss) on common stock
$
i280,432
$
i63,748
$
(i623,120
)
Capital
expenditures:
Electric
$
i109,107
$
i111,134
$
i332,876
Natural
gas distribution
i146,981
i126,272
i130,793
Pipeline
and midstream
i31,054
i34,467
i18,315
Construction
materials and contracting
i44,302
i37,845
i48,126
Construction
services
i18,630
i60,344
i38,269
Other
i1,850
i2,358
i3,755
Total
capital expenditures (b)
$
i351,924
$
i372,420
$
i572,134
Assets:
Electric
(c)
$
i1,470,922
$
i1,406,694
$
i1,325,858
Natural
gas distribution (c)
i2,201,081
i2,099,296
i2,038,433
Pipeline
and midstream
i566,295
i550,615
i591,651
Construction
materials and contracting
i1,238,696
i1,220,459
i1,261,963
Construction
services
i591,382
i513,093
i442,845
Other
(d)
i261,419
i283,255
i287,940
Assets
held for sale
i4,871
i211,055
i616,464
Total
assets
$
i6,334,666
$
i6,284,467
$
i6,565,154
MDU
Resources Group, Inc. Form 10-K 85
Part II
2017
2016
2015
(In
thousands)
Property, plant and equipment:
Electric
(c)
$
i1,982,264
$
i1,888,613
$
i1,786,148
Natural
gas distribution (c)
i2,319,845
i2,179,413
i2,076,581
Pipeline
and midstream
i700,284
i672,199
i758,729
Construction
materials and contracting
i1,560,048
i1,549,375
i1,553,428
Construction
services
i177,265
i171,361
i163,279
Other
i31,123
i49,268
i49,537
Less
accumulated depreciation, depletion and amortization
i2,691,641
i2,578,902
i2,489,322
Net
property, plant and equipment
$
i4,079,188
$
i3,931,327
$
i3,898,380
(a)
Includes
eliminations for the presentation of income tax adjustments between continuing and discontinued operations.
(b)
Capital expenditures for 2017, 2016 and 2015 include noncash capital expenditure-related accounts payable and AFUDC, totaling $i10.5 million, $(i15.8) million
and $i35.3 million, respectively.
(c)
Includes allocations of common utility property.
(d)
Includes
assets not directly assignable to a business (i.e. cash and cash equivalents, certain accounts receivable, certain investments and other miscellaneous current and deferred assets).
Note 14 - iEmployee
Benefit Plans
Pension and other postretirement benefit plans
The Company has noncontributory qualified defined benefit pension plans and other postretirement benefit plans for certain eligible employees. The Company uses a measurement date of December 31 for all of its pension and postretirement benefit plans.
Prior to 2013, defined pension plan benefits and accruals for all nonunion and certain union plans were frozen. On June 30, 2015, an additional union plan was frozen. As of June 30, 2015, all of the
Company's defined pension plans were frozen. These employees were eligible to receive additional defined contribution plan benefits.
Effective January 1, 2010, eligibility to receive retiree medical benefits was modified at certain of the Company's businesses. Employees who had attained age 55 with 10 years of continuous service by December 31, 2010, will be provided the current retiree medical insurance benefits or can elect the new benefit, if desired, regardless of when they retire. All other current employees must meet the new eligibility criteria of age 60 and 10 years of continuous service at the time they retire. These employees will be eligible for a specified company funded Retiree Reimbursement Account. Employees hired after December 31,
2009, will not be eligible for retiree medical benefits at certain of the Company's businesses.
In 2012, the Company modified health care coverage for certain retirees. Effective January 1, 2013, post-65 coverage was replaced by a fixed-dollar subsidy for retirees and spouses to be used to purchase individual insurance through an exchange.
86 MDU Resources Group, Inc.
Form 10-K
Part II
iChanges in benefit obligation and plan assets for the years ended
December 31, 2017 and 2016, and amounts recognized in the Consolidated Balance Sheets at December 31, 2017 and 2016, were as follows:
Pension
Benefits
Other
Postretirement Benefits
2017
2016
2017
2016
(In
thousands)
Change in benefit obligation:
Benefit obligation at beginning of year
$
i436,307
$
i442,960
$
i89,304
$
i92,734
Service
cost
i—
i—
i1,508
i1,647
Interest
cost
i16,207
i17,218
i3,265
i3,688
Plan
participants' contributions
i—
i—
i1,368
i1,405
Actuarial
(gain) loss
i19,119
i1,882
i1,781
(i3,872
)
Benefits
paid
(i25,710
)
(i25,753
)
(i6,020
)
(i6,298
)
Benefit
obligation at end of year
i445,923
i436,307
i91,206
i89,304
Change
in net plan assets:
Fair value of plan assets at beginning of year
i333,509
i332,667
i82,846
i82,593
Actual
gain on plan assets
i45,473
i26,595
i9,612
i4,184
Employer
contribution
i1,112
i—
i933
i962
Plan
participants' contributions
i—
i—
i1,368
i1,405
Benefits
paid
(i25,710
)
(i25,753
)
(i6,020
)
(i6,298
)
Fair
value of net plan assets at end of year
i354,384
i333,509
i88,739
i82,846
Funded
status - under
$
(i91,539
)
$
(i102,798
)
$
(i2,467
)
$
(i6,458
)
Amounts
recognized in the Consolidated
Balance Sheets at December 31:
Deferred charges and other assets - other
$
i—
$
i—
$
i19,114
$
i13,131
Other
accrued liabilities
i—
i—
i612
i538
Deferred
credits and other liabilities - other
i91,539
i102,798
i20,969
i19,051
Benefit
obligation liabilities - net amount recognized
$
(i91,539
)
$
(i102,798
)
$
(i2,467
)
$
(i6,458
)
Amounts
recognized in accumulated other comprehensive (income) loss or regulatory assets (liabilities) consist of:
Actuarial loss
$
i186,486
$
i198,668
$
i13,423
$
i17,470
Prior
service credit
i—
i—
(i11,632
)
(i13,003
)
Total
$
i186,486
$
i198,668
$
i1,791
$
i4,467
Employer
contributions and benefits paid in the preceding table include only those amounts contributed directly to, or paid directly from, plan assets. Accumulated other comprehensive (income) loss in the above table includes amounts related to regulated operations, which are recorded as regulatory assets (liabilities) and are expected to be reflected in rates charged to customers over time. For more information on regulatory assets (liabilities), see Note 4.
Unrecognized pension actuarial losses in excess of 10 percent of the greater of the projected benefit obligation or the market-related value of assets are amortized over the average life expectancy of plan participants for frozen plans. The market-related value of assets is determined using a five-year average of assets.
iThe
pension plans all have accumulated benefit obligations in excess of plan assets. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for these plans at December 31 were as follows:
2017
2016
(In
thousands)
Projected benefit obligation
$
i445,923
$
i436,307
Accumulated
benefit obligation
$
i445,923
$
i436,307
Fair
value of plan assets
$
i354,384
$
i333,509
MDU
Resources Group, Inc. Form 10-K 87
Part II
iComponents of net periodic
benefit cost (credit) for the Company's pension and other postretirement benefit plans for the years ended December 31 were as follows:
Pension Benefits
Other
Postretirement
Benefits
2017
2016
2015
2017
2016
2015
(In
thousands)
Components of net periodic benefit cost (credit):
Service cost
$
i—
$
i—
$
i86
$
i1,508
$
i1,647
$
i1,816
Interest
cost
i16,207
i17,218
i17,141
i3,265
i3,688
i3,607
Expected
return on assets
(i20,528
)
(i20,924
)
(i22,254
)
(i4,641
)
(i4,533
)
(i4,795
)
Amortization
of prior service cost (credit)
i—
i—
i36
(i1,371
)
(i1,371
)
(i1,371
)
Recognized
net actuarial loss
i6,355
i6,215
i7,016
i857
i1,491
i1,960
Curtailment
loss
i—
i—
i258
i—
i—
i—
Net
periodic benefit cost (credit), including amount capitalized
i2,034
i2,509
i2,283
(i382
)
i922
i1,217
Less
amount capitalized
i310
i381
i316
(i370
)
(i52
)
i120
Net
periodic benefit cost (credit)
i1,724
i2,128
i1,967
(i12
)
i974
i1,097
Other
changes in plan assets and benefit obligations recognized in accumulated comprehensive (income) loss or regulatory assets (liabilities):
Net
(gain) loss
(i5,827
)
(i3,789
)
i8,257
(i3,190
)
(i3,523
)
(i1,336
)
Amortization
of actuarial loss
(i6,355
)
(i6,215
)
(i7,016
)
(i857
)
(i1,491
)
(i1,960
)
Amortization
of prior service (cost) credit
i—
i—
(i294
)
i1,371
i1,371
i1,371
Total
recognized in accumulated other comprehensive (income) loss or regulatory assets (liabilities)
(i12,182
)
(i10,004
)
i947
(i2,676
)
(i3,643
)
(i1,925
)
Total
recognized in net periodic benefit cost (credit), accumulated other comprehensive (income) loss and regulatory assets (liabilities)
$
(i10,458
)
$
(i7,876
)
$
i2,914
$
(i2,688
)
$
(i2,669
)
$
(i828
)
The
estimated net loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss and regulatory assets into net periodic benefit cost in 2018 is $i7.0 million. The estimated net
loss and prior service credit for the other postretirement benefit plans that will be amortized from accumulated other comprehensive loss and regulatory assets into net periodic benefit cost in 2018 are $i800,000
and $i1.4 million, respectively. Prior service cost is amortized on a straight line basis over the average remaining service period of active participants.
iWeighted
average assumptions used to determine benefit obligations at December 31 were as follows:
Pension Benefits
Other
Postretirement Benefits
2017
2016
2017
2016
Discount
rate
i3.38
%
i3.83
%
i3.41
%
i3.86
%
Expected
return on plan assets
i6.75
%
i6.75
%
i5.75
%
i5.75
%
Rate
of compensation increase
N/A
N/A
i3.00
%
i3.00
%
Weighted
average assumptions used to determine net periodic benefit cost for the years ended December 31 were as follows:
Pension Benefits
Other
Postretirement Benefits
2017
2016
2017
2016
Discount
rate
i3.83
%
i4.00
%
i3.86
%
i4.06
%
Expected
return on plan assets
i6.75
%
i6.75
%
i5.75
%
i5.75
%
Rate
of compensation increase
N/A
N/A
i3.00
%
i3.00
%
The expected rate of return on pension plan assets is based on a targeted asset allocation range determined by the funded ratio of the plan. As of December 31, 2017, the expected rate of return on pension plan assets is based on the targeted asset allocation range of i40 percent
to i50 percent equity securities and i50 percent
to i60 percent fixed-income securities and the expected rate of return from these asset categories. The expected rate of return on other postretirement
plan assets is based on the targeted asset allocation range of i20 percent to i25 percent
equity securities and i75 percent to i80 percent
fixed-income securities and the expected rate of return from these asset categories. The expected return on plan assets for other postretirement benefits reflects insurance-related investment costs.
88 MDU Resources Group, Inc. Form 10-K
Part II
iHealth
care rate assumptions for the Company's other postretirement benefit plans as of December 31 were as follows:
2017
2016
Health
care trend rate assumed for next year
i7.5
%
–
i8.5
%
i8.6
%
–
i10.7
%
Health
care cost trend rate - ultimate
i4.5
%
i4.5
%
Year
in which ultimate trend rate achieved
i2024
i2024
The
Company's other postretirement benefit plans include health care and life insurance benefits for certain retirees. The plans underlying these benefits may require contributions by the retiree depending on such retiree's age and years of service at retirement or the date of retirement. The accounting for the health care plans anticipates future cost-sharing changes that are consistent with the Company's expressed intent to generally increase retiree contributions each year by the excess of the expected health care cost trend rate over isix percent.
iAssumed
health care cost trend rates may have a significant effect on the amounts reported for the health care plans. A one percentage point change in the assumed health care cost trend rates would have had the following effects at December 31, 2017:
1 Percentage
Point Increase
1 Percentage
Point
Decrease
(In thousands)
Effect on total of service and interest cost components
$
i306
$
(i247
)
Effect
on postretirement benefit obligation
$
i5,433
$
(i4,551
)
Outside
investment managers manage the Company's pension and postretirement assets. The Company's investment policy with respect to pension and other postretirement assets is to make investments solely in the interest of the participants and beneficiaries of the plans and for the exclusive purpose of providing benefits accrued and defraying the reasonable expenses of administration. The Company strives to maintain investment diversification to assist in minimizing the risk of large losses. The Company's policy guidelines allow for investment of funds in cash equivalents, fixed-income securities and equity securities. The guidelines prohibit investment
in commodities and futures contracts, equity private placement, employer securities, leveraged or derivative securities, options, direct real estate investments, precious metals, venture capital and limited partnerships. The guidelines also prohibit short selling and margin transactions. The Company's practice is to periodically review and rebalance asset categories based on its targeted asset allocation percentage policy.
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 ASC establishes a hierarchy for grouping assets and liabilities, based on the significance of inputs.
The
estimated fair values of the Company's pension plans' assets are determined using the market approach.
The carrying value of the pension plans' Level 2 cash equivalents approximates fair value and is determined using observable inputs in active markets or the net asset value of shares held at year end, which is determined using other observable inputs including pricing from outside sources.
The estimated fair value of the pension plans' Level 1 equity securities is based on the closing price reported on the active market on which the individual securities are traded.
The estimated fair value of the pension plans' Level 1 and Level 2 collective and mutual funds are based on the net asset value of shares held at year end, based on either published market quotations
on active markets or other known sources including pricing from outside sources.
The estimated fair value of the pension plans' Level 2 corporate and municipal bonds is determined using other observable inputs, including benchmark yields, reported trades, broker/dealer quotes, bids, offers, future cash flows and other reference data.
The estimated fair value of the pension plans' Level 1 U.S. Government securities are valued based on quoted prices on an active market.
The estimated fair value of the pension plans' Level 2 U.S. Government securities are valued mainly using other observable inputs, including benchmark yields, reported trades, broker/dealer quotes, bids, offers, to be announced prices, future cash flows and other reference data. Some of these securities are valued using pricing from outside sources.
MDU
Resources Group, Inc. Form 10-K 89
Part II
Though the Company believes the methods used to estimate fair value are consistent with those used by other market participants, the use of other methods or assumptions could result in a different estimate of fair value. For the years ended December 31, 2017
and 2016, there were no transfers between Levels 1 and 2.
iThe fair value of the Company's pension plans' assets (excluding cash) by class were as follows:
Collective
and mutual funds invest approximately i31 percent in common stock of international companies, i28 percent
in corporate bonds, i19 percent in common stock of large-cap U.S. companies, i7 percent
in cash equivalents, i1 percent in U.S. Government securities and i14 percent
in other investments.
Collective
and mutual funds invest approximately i29 percent in common stock of international companies, i21 percent
in corporate bonds, i20 percent in common stock of large-cap U.S. companies, i8 percent
in cash equivalents, i7 percent in U.S. Government securities and i15 percent
in other investments.
The estimated fair values of the Company's other postretirement benefit plans' assets are determined using the market approach.
The estimated fair value of the other postretirement benefit plans' Level 2 cash equivalents is valued at the net asset value of shares held at year end, based on published market quotations on active markets, or using other known sources including pricing from outside sources.
The estimated fair value of the other postretirement benefit plans' Level 1
equity securities is based on the closing price reported on the active market on which the individual securities are traded.
90 MDU Resources Group, Inc. Form 10-K
Part II
The
estimated fair value of the other postretirement benefit plans' Level 2 insurance contract is based on contractual cash surrender values that are determined primarily by investments in managed separate accounts of the insurer. These amounts approximate fair value. The managed separate accounts are valued based on other observable inputs or corroborated market data.
Though the Company believes the methods used to estimate fair value are consistent with those used by other market participants, the use of other methods or assumptions could result in a different estimate of fair value. For the years ended December 31, 2017 and 2016,
there were no transfers between Levels 1 and 2.
The fair value of the Company's other postretirement benefit plans' assets (excluding cash) by asset class were as follows:
The
insurance contract invests approximately i38 percent in corporate bonds, i23 percent
in common stock of large-cap U.S. companies, i21 percent in U.S. Government securities, i9 percent
in mortgage-backed securities and i9 percent in other investments.
The
insurance contract invests approximately i38 percent in corporate bonds, i25 percent
in common stock of large-cap U.S. companies, i20 percent in U.S. Government securities, i9 percent
in mortgage-backed securities and i8 percent in other investments.
The
Company expects to contribute approximately $i17.7 million to its defined benefit pension plans and approximately $i800,000
to its postretirement benefit plans in 2018.
MDU Resources Group, Inc. Form 10-K 91
Part II
iThe
following benefit payments, which reflect future service, as appropriate, and expected Medicare Part D subsidies are as follows:
Years
Pension
Benefits
Other
Postretirement Benefits
Expected
Medicare
Part D Subsidy
(In
thousands)
2018
$
i25,111
$
i5,490
$
i152
2019
i25,280
i5,525
i147
2020
i25,587
i5,396
i141
2021
i25,866
i5,391
i132
2022
i26,185
i5,470
i123
2023
- 2027
i130,994
i27,106
i454
Nonqualified
benefit plans
In addition to the qualified defined pension benefit plans reflected in the table at the beginning of this note, the Company also has unfunded, nonqualified benefit plans for executive officers and certain key management employees that generally provide for defined benefit payments at age 65 following the employee's retirement or, upon death, to their beneficiaries for a 15-year period. In February 2016, the Company froze the unfunded, nonqualified defined benefit plans to new participants and eliminated benefit increases. Vesting for participants not fully vested was retained. The Company's net periodic benefit cost for these plans was $i4.7
million, $i1.8 million and $i7.1 million
in 2017, 2016 and 2015, respectively, which reflects a curtailment gain of $i3.3 million in the first quarter
of 2016 . The total projected benefit obligation for these plans was $i102.5 million and $i101.8 million
at December 31, 2017 and 2016, respectively. The accumulated benefit obligation for these plans was $i102.5
million and $i101.8 million at December 31,
2017 and 2016, respectively. A weighted average discount rate of i3.20 percent and i3.56 percent
at December 31, 2017 and 2016, respectively, was used to determine the benefit obligation. iNo
rate of compensation increase was used to determine the benefit obligation at December 31, 2017 and 2016, due to the plans being froze. A discount rate of i3.56 percent
and i3.77 percent for the years ended December 31, 2017 and 2016,
respectively, and a rate of compensation increase of i4.00 percent for the year ended 2016 was used to determine net
periodic benefit cost.
The amount of benefit payments for the unfunded, nonqualified benefit plans are expected to aggregate $i7.1 million in 2018;
$i7.3 million in 2019; $i7.7
million in 2020; $i7.7 million in 2021; $i7.0
million in 2022 and $i37.0 million for the years 2023 through 2027.
In 2012, the
Company established a nonqualified defined contribution plan for certain key management employees. Expenses incurred under this plan for 2017, 2016 and 2015 were $i736,000, $i395,000
and $i207,000, respectively.
The Company had investments of $i122.9 million
and $i111.0 million at December 31, 2017 and 2016, respectively, consisting of equity securities of $i68.3 million
and $i62.5 million, respectively, life insurance carried on plan participants (payable upon the employee's death) of $i36.5 million
and $i35.5 million, respectively, and other investments of $i18.1 million
and $i13.0 million, respectively. The Company anticipates using these investments to satisfy obligations under these plans.
Defined contribution plans
The
Company sponsors various defined contribution plans for eligible employees and the costs incurred under these plans were $i41.2 million in 2017, $i40.9 million
in 2016 and $i36.8 million in 2015.
Multiemployer plans
The Company contributes to a number of multiemployer defined benefit pension plans under the terms of collective-bargaining agreements that
cover its union-represented employees. The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects:
•
Assets contributed to the MEPP by one employer may be used to provide benefits to employees of other participating employers
•
If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers
•
If
the Company chooses to stop participating in some of its MEPPs, the Company may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability
The Company's participation in these plans is outlined in the following table. Unless otherwise noted, the most recent Pension Protection Act zone status available in 2017 and 2016 is for the plan's year-end at December 31, 2016, and December 31,
2015, respectively. The zone status is based on information that the Company received from the plan and is certified by the plan's actuary. Among other factors, plans in the red zone are generally less than i65 percent funded, plans in the yellow zone are between i65 percent
and i80 percent funded, and plans in the green zone are at least i80 percent
funded.
92 MDU Resources Group, Inc. Form 10-K
Part II
i
EIN/Pension
Plan Number
Pension Protection Act Zone Status
FIP/RP Status Pending/Implemented
Contributions
Surcharge Imposed
Expiration Date
of Collective
Bargaining
Agreement
Pension Fund
2017
2016
2017
2016
2015
(In
thousands)
Alaska Laborers-Employers Retirement Fund
91-6028298-001
Yellow as of 6/30/2017
Yellow as of 6/30/2016
iImplemented
$
i690
$
i766
$
i917
iNo
i12/31/2018
Edison
Pension Plan
93-6061681-001
Green
Green
iNo
i12,725
i6,242
i5,517
iNo
i6/30/2019
IBEW
Local No. 82 Pension Plan
31-6127268-001
Green as of 6/30/2017
Green as of 6/30/2016
iNo
i1,757
i2,560
i2,252
iNo
i12/1/2019
IBEW
Local 212 Pension Trust Fund
31-6127280-001
Green as of 4/30/2016
Yellow as of 4/30/2015
iNo
i1,312
i1,146
i937
iNo
i6/2/2019
IBEW
Local No. 357 Pension Plan A
88-6023284-001
Green
Green
iNo
i3,286
i3,016
i1,896
iNo
i5/31/2018
IBEW
Local 648 Pension Plan
31-6134845-001
Red as of 2/28/2017
Red as of 2/29/2016
iImplemented
i2,254
i773
i745
iNo
i9/2/2018
Idaho
Plumbers and Pipefitters Pension Plan
82-6010346-001
Green as of 5/31/2017
Green as of 5/31/2016
iNo
i1,156
i1,221
i1,169
iNo
i9/30/2019
Minnesota
Teamsters Construction Division Pension Fund
41-6187751-001
Green as of 11/30/2016
Green as of 11/30/2015
iNo
i826
i690
i737
iNo
i4/30/2019
National
Automatic Sprinkler Industry Pension Fund
52-6054620-001
Red
Red
iImplemented
i718
i775
i677
iNo
7/31/2018- 3/31/2021
National
Electrical Benefit Fund
53-0181657-001
Green
Green
iNo
i8,891
i6,366
i5,271
iNo
10/31/2017- 3/31/2021
Sheet
Metal Workers' Pension Plan of Southern CA, AZ and NV
95-6052257-001
Yellow
Red
iImplemented
i1,016
i1,087
i714
iNo
i6/30/2018
Southwest
Marine Pension Trust
95-6123404-001
Red
Red
iImplemented
i48
i50
i26
iNo
i1/31/2019
Other
funds
i22,066
i19,835
i18,254
Total
contributions
$
i56,745
$
i44,527
$
i39,112
/
The
Company was listed in the plans' Forms 5500 as providing more than 5 percent of the total contributions for the following plans and plan years:
Pension Fund
Year Contributions to Plan Exceeded More Than 5 Percent
of Total Contributions (as of December 31 of the Plan's Year-End)
Edison Pension Plan
2016 and 2015
IBEW Local 82 Pension Plan
2016 and 2015
IBEW
Local 124 Pension Trust Fund
2016 and 2015
IBEW Local 212 Pension Trust Fund
2016 and 2015
IBEW Local 357 Pension Plan A
2016 and 2015
IBEW Local 648 Pension Plan
2016 and 2015
Idaho Plumbers and Pipefitters Pension Plan
2016 and 2015
International Union of Operating Engineers Local 701 Pension
Trust Fund
2016 and 2015
Minnesota Teamsters Construction Division Pension Fund
2016 and 2015
Pension and Retirement Plan of Plumbers and Pipefitters Local 525
2016 and 2015
On September 24, 2014, Knife River provided notice to the Operating Engineers Local 800 & WY Contractors Association, Inc. Pension Plan for Wyoming that it was withdrawing from the plan effective October 26, 2014. In the fourth quarter of 2016, Knife River and the
plan entered into a settlement agreement whereby the plan administrator assessed Knife River’s final withdrawal liability with quarterly payments of approximately $i42,000 until all benefits are satisfied. Knife River discounted the expected future payments. Based on this calculation, Knife River
adjusted its liability accrual from $i16.4 million to $i5.2 million
in the fourth quarter of 2016.
The Company also contributes to a number of multiemployer other postretirement plans under the terms of collective-bargaining agreements that cover its union-represented employees. These plans provide benefits such as health insurance, disability insurance and life insurance to retired union employees. Many of the multiemployer other postretirement plans are combined with active multiemployer health and welfare plans. The Company's total contributions to its multiemployer other postretirement plans, which also includes contributions to active
MDU
Resources Group, Inc. Form 10-K 93
Part II
multiemployer health and welfare plans, were $i51.7 million,
$i36.1 million and $i31.4 million
for the years ended December 31, 2017, 2016 and 2015, respectively.
Amounts contributed in 2017, 2016 and 2015 to defined contribution multiemployer plans were $i32.2 million,
$i23.8 million and $i19.5 million,
respectively.
Note 15 - iJointly Owned Facilities
The consolidated financial statements include the Company's ownership interests in the assets, liabilities and expenses of the Big Stone Station, Coyote Station and Wygen III.
Each owner of the stations is responsible for financing its investment in the jointly owned facilities.
The Company's share of the stations operating expenses was reflected in the appropriate categories of operating expenses (fuel, operation and maintenance and taxes, other than income) in the Consolidated Statements of Income.
iAt December 31, the
Company's share of the cost of utility plant in service and related accumulated depreciation for the stations was as follows:
2017
2016
(In thousands)
Big
Stone Station:
Utility plant in service
$
i158,084
$
i157,144
Less
accumulated depreciation
i51,740
i49,568
$
i106,344
$
i107,576
Coyote
Station:
Utility plant in service
$
i155,287
$
i156,334
Less
accumulated depreciation
i103,897
i105,928
$
i51,390
$
i50,406
Wygen
III:
Utility plant in service
$
i65,065
$
i66,251
Less
accumulated depreciation
i7,652
i7,550
$
i57,413
$
i58,701
Note 16
- 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. The
Company's most recent cases by jurisdiction are discussed in the following paragraphs. The jurisdictions in which the Company provides service have requested the Company furnish plans for the effect of the reduced corporate tax rate due to the enactment of the TCJA which may impact the Company's rates. The following paragraphs include additional details on each jurisdiction's request.
IPUC
On August 12, 2016, Intermountain filed an application with the IPUC for a natural gas rate increase of approximately $i10.2 million
annually or approximately i4.1 percent above current rates. The request includes rate recovery associated with increased investment in facilities and increased operating expenses. On January 17, 2017, Intermountain provided the IPUC with an updated revenue request of approximately $i9.4
million. On April 28, 2017, the IPUC issued an order approving an increase of approximately $i4.1 million or approximately i1.6 percent
above current rates based on a i9.5 percent return on equity effective with service rendered on and after May 1, 2017. On May 18, 2017, Intermountain filed a petition for reconsideration with the IPUC requesting the reconsideration of certain items denied in the order dated
April 28, 2017. On June 15, 2017, the IPUC granted the request for reconsideration. On August 17, 2017, Intermountain, the IPUC staff and the interveners of the case filed a stipulation and settlement resolving all issues. The stipulation and settlement reflected an increase of approximately $i1.2 million
or i1.36 percent more in annual revenue than the amounts approved on April 28, 2017, as well as changes in billing determinants. The total annual increase in revenue of approximately $i6.7 million
was approved by the IPUC on September 14, 2017, with rates effective October 1, 2017.
On January 17, 2018, the IPUC issued a general order initiating the investigation of the impacts of the TCJA. The order required the tax rate reduction to be deferred as a regulatory liability and for companies to report on the expected impacts of the TCJA by March 30, 2018.
94 MDU Resources Group, Inc.
Form 10-K
Part II
MNPUC
On December 21, 2016, Great Plains filed an application with the MNPUC requesting authority to implement a gas utility infrastructure cost tariff of approximately $i456,000
annually. The tariff will allow Great Plains to recover infrastructure investments, not previously included in rates, mandated by federal or state agencies associated with Great Plains' pipeline integrity programs. On October 6, 2017, the MNPUC approved the implementation of the natural gas utility infrastructure cost tariff to collect an annual increase of approximately $i456,000.
Great Plains submitted a compliance filing on October 10, 2017, and the rates were implemented for service rendered on and after November 1, 2017.
On December 29, 2017, the MNPUC issued a notice of investigation related to tax changes with the enactment of the TCJA. On January 19, 2018, the MNPUC issued a notice of request for information, commission planning meeting and subsequent comment period. Great Plains was to provide preliminary impacts of the TCJA by January 30, 2018. A commission planning meeting was held on February 6, 2018, to discuss the impacts of the TCJA. Initial filings addressing the impacts of the TCJA are to
be submitted by March 2, 2018.
MTPSC
On September 25, 2017, Montana-Dakota filed an application with the MTPSC for a natural gas rate increase of approximately $i2.8 million annually
or approximately i4.1 percent above current rates. The requested increase is primarily to recover the increased investment in distribution facilities to enhance system safety and reliability and the depreciation and taxes associated with the increase in investment. Montana-Dakota is also introducing an SSIP and the proposed adjustment mechanism required to
fund the SSIP. Montana-Dakota requested an interim increase of approximately $i1.6 million or approximately i2.3 percent,
subject to refund. On December 27, 2017, the MTPSC requested Montana-Dakota identify a plan for the impacts of the TCJA for the natural gas segment within the natural gas rate case. On January 12, 2018, Montana-Dakota filed a revised interim increase of approximately $i764,000, subject to refund, incorporating
the estimated impacts of the TCJA reduction in the federal corporate income tax rate. A hearing is scheduled for April 26, 2018. This matter is pending before the MTPSC.
On December 27, 2017, the MTPSC requested Montana-Dakota identify a plan for the impacts of the TCJA and to file a proposal for the impacts on the electric segment by March 31, 2018.
NDPSC
On June 30, 2017, Montana-Dakota filed an application for advance determination of prudence and a certificate of public convenience and necessity with the NDPSC to purchase an expansion of the Thunder Spirit Wind farm. The advance determination of prudence would provide Montana-Dakota with
assurance that the project is prudent and in the best interest of the public and assists in the recovery of Montana-Dakota's investment upon completion of the project. The expansion is expected to serve customers by the end of 2018 and is estimated to cost approximately $i85 million. On November 16, 2017, the NDPSC granted Montana-Dakota's request for an advance determination of prudence
and certificate of public convenience and necessity to acquire and operate the Thunder Spirit Wind farm expansion.
On July 21, 2017, Montana-Dakota filed an application with the NDPSC for a natural gas rate increase of approximately $i5.9 million annually or approximately i5.4 percent
above current rates. The requested increase is primarily to recover the increased investment in distribution facilities to enhance system safety and reliability and the depreciation and taxes associated with the increase in investment. Montana-Dakota is also introducing an SSIP and the proposed adjustment mechanism required to fund the SSIP. Montana-Dakota requested an interim increase of approximately $i4.6 million
or approximately i4.2 percent, subject to refund. On September 6, 2017, the NDPSC approved the request for interim rates effective with service rendered on or after September 19, 2017. On January 12, 2018, Montana-Dakota
requested a delay of the rate case as a result of the enactment of the TCJA to allow the Company time to investigate the implications of the TCJA on the rate case. On February 14, 2018, the NDPSC approved the delay of hearing and scheduled it to begin on May 30, 2018. Also on February 14, 2018, Montana-Dakota filed a revised interim increase request of approximately $i2.7
million, subject to refund, incorporating the estimated impacts of the TCJA reduction in the federal corporate income tax rate.This matter is pending before the NDPSC.
On January 10, 2018, the NDPSC issued a general order initiating the investigation into the effects of the TCJA. The order required regulatory deferral accounting on the impacts of the TCJA and for companies to file comments and the expected impacts. On February 15, 2018, Montana-Dakota filed a summary of the primary impacts of the TCJA on the electric and natural gas utilities.
OPUC
On September 29, 2017, Cascade filed an application with the OPUC for an annual pipeline replacement safety cost
recovery mechanism of approximately $i784,000 or approximately i1.2
percent of additional revenue. The requested increase includes incremental pipeline replacement investments associated with qualifying pipeline integrity projects. This matter is pending before the OPUC.
MDU Resources Group, Inc. Form 10-K 95
Part II
On
December 29, 2017, Cascade filed a request with the OPUC to use deferral accounting for the 2018 net benefits associated with the implementation of the TCJA.
SDPUC
On December 29, 2017, the SDPUC issued an order initiating the investigation into the effects of the TCJA. The order required Montana-Dakota to provide comments by February 1, 2018, regarding the general effects of the TCJA on the cost of service in South Dakota and possible mechanisms for adjusting rates. The order also stated that all rates impacted by the federal income tax shall be adjusted effective January 1, 2018, subject to refund.
WUTC
On
May 31, 2017, Cascade filed an application with the WUTC for an annual pipeline replacement cost recovery mechanism of approximately $i1.6 million or approximately i.75
percent of additional revenue. The requested increase includes incremental pipeline replacement investments associated with qualifying pipeline integrity projects. On October 12, 2017, Cascade filed a required update revising the request to approximately $i1.3 million or approximately
i.61 percent of additional revenue and on October 26, 2017, the WUTC approved the order with rates effective November 1, 2017.
On August 31, 2017, Cascade filed an application with the WUTC for a natural
gas rate increase of approximately $i5.9 million annually or approximately i2.7 percent
above current rates. The requested increase includes costs associated with increased infrastructure investment and the associated operating expenses. Also included in the request is recovery of operation and maintenance costs associated with a maximum allowable operating pressure validation plan. On January 3, 2018, the WUTC filed a bench request requiring Cascade to provide information related to the impacts of the TCJA on Cascade's revenue requirement and a proposed ratemaking treatment of those impacts. On January 12, 2018, Cascade filed a response to the bench request reducing the revenue requirement to approximately $i1.7 million
annually, which includes the estimated impacts of the TCJA. This matter is pending before the WUTC.
WYPSC
On December 29, 2017, the WYPSC issued a general order requiring regulatory deferral accounting on the impacts of the TCJA. A technical conference was held on February 6, 2018, to discuss the implications of the TCJA.
FERC
On September 1, 2017, Montana-Dakota submitted an update to its transmission formula rate under the MISO tariff, which reflects an incremental increase of approximately $i2.5 million
to include a revenue requirement for the Company's multivalue project, for a total of $i13.6 million, which was effective January 1, 2018.
Montana-Dakota and certain MISO Transmission Owners
with projected rates submitted a filing to the FERC on February 1, 2018, requesting the FERC to waive certain provisions of the MISO tariff in order for Montana-Dakota and certain MISO Transmission Owners with projected rates to revise their rates to reflect the reduction in the corporate tax rate. Under the MISO tariff, rates are to be changed only on an annual basis with any changes reflected in subsequent true-ups. If the waiver is granted, MISO expects to implement new rates reflecting the reduction in the tax rate beginning with services rendered on March 1, 2018, and will re-bill January and February 2018 services to reflect the new rates.
On February 7, 2018, WBI Energy Transmission announced it will hold an initial rate change pre-filing settlement meeting with customers
on April 10, 2018. In accordance with WBI Energy Transmission’s offer of settlement and stipulation and agreement with the FERC dated June 4, 2014, the Company is to make a filing with new proposed rates to be effective no later than May 1, 2019. Assuming a five-month suspension period, WBI Energy Transmission would expect to file by October 31, 2018.
Note 17 - iCommitments
and Contingencies
The Company is party to claims and lawsuits arising out of its business and that of its consolidated subsidiaries, which may include, but are not limited to, matters involving property damage, personal injury, and environmental, contractual, statutory and regulatory obligations. The Company accrues a liability for those contingencies when the incurrence of a loss is probable and the amount can be reasonably estimated. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. The
Company does not accrue liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated or when the liability is believed to be only reasonably possible or remote. For contingencies where an unfavorable outcome is probable or reasonably possible and which are material, the Company discloses the nature of the contingency and, in some circumstances, an estimate of the possible loss. Accruals are based on the best information available, but in certain situations management is unable to estimate an amount or range of a reasonably possible loss including, but not limited to when: (1) the damages are unsubstantiated or indeterminate, (2) the proceedings are in the early stages, (3) numerous parties are involved, or (4)
96 MDU
Resources Group, Inc. Form 10-K
Part II
the matter involves novel or unsettled legal theories. The Company accrued liabilities of $i35.4 million
and $i31.8 million, which have not been discounted, including liabilities held for sale, for contingencies, including litigation, production taxes, royalty claims and environmental matters at December 31, 2017 and 2016, respectively. This includes amounts that may have been accrued for matters discussed in Litigation and 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.
Litigation
Construction Services Capital Electric provided employees in 2012 to perform work for a contractor on a project in Kansas. One of
the Capital Electric employees was injured while working on the project and brought a lawsuit against the contractor. Judgment was entered in favor of the employee and his spouse on November 3, 2016, in the amount of $i44.8 million following a court determination that the employee’s injuries were caused by the contractor’s negligence. The contractor claims that Capital Electric was contractually required,
but failed, to name the contractor as an additional insured under any liability policy in effect at the time of the project and that such failure resulted in the entry of judgment against the contractor. In March 2017, Capital Electric filed a petition for declaratory judgment in the District Court of Wyandotte County, Kansas for a judicial determination that any agreement between Capital Electric and the contractor for the project did not require Capital Electric to include the contractor as an additional insured under any liability policy issued to Capital Electric and that if such an agreement was found to exist, it would be void and unenforceable under Kansas law. Subsequent to December 31, 2017, the matter has been settled with Capital Electric being released from all claims of liability and the declaratory judgment action being dismissed.
Environmental matters
Portland
Harbor Site In December 2000, Knife River - Northwest was named by the EPA as a PRP in connection with the cleanup of a riverbed site adjacent to a commercial property site acquired by Knife River - Northwest from Georgia-Pacific West, Inc. in 1999. The riverbed site is part of the Portland, Oregon, Harbor Superfund Site. The EPA wants responsible parties to share in the cleanup of sediment contamination in the Willamette River. To date, costs of the overall remedial investigation and feasibility study of the harbor site are being recorded, and initially paid, through an administrative consent order by the LWG, a group of several entities, which does not include Knife River - Northwest or Georgia-Pacific West, Inc. Investigative costs are indicated to be in excess of $i100 million.
On January 6, 2017, Region 10 of the EPA issued an ROD with its selected remedy for cleanup of the in-river portion of the site. Implementation of the remedy is expected to take up to 13 years with a present value cost estimate of approximately $i1 billion. Corrective action will not be taken until remedial design/remedial action plans are approved by the EPA. Knife River - Northwest also received notice in January 2008
that the Portland Harbor Natural Resource Trustee Council intends to perform an injury assessment to natural resources resulting from the release of hazardous substances at the Harbor Superfund Site. The Portland Harbor Natural Resource Trustee Council indicates the injury determination is appropriate to facilitate early settlement of damages and restoration for natural resource injuries. It is not possible to estimate the costs of natural resource damages until an assessment is completed and allocations are undertaken.
Based upon a review of the Portland Harbor sediment contamination evaluation by the Oregon DEQ and other information available, Knife River - Northwest does not believe it is a responsible party. In addition, Knife River - Northwest has notified Georgia-Pacific West, Inc., that it intends to seek indemnity for liabilities incurred in relation to the above matters pursuant to the terms of their sale agreement.
Knife River - Northwest has entered into an agreement tolling the statute of limitations in connection with the LWG's potential claim for contribution to the costs of the remedial investigation and feasibility study. By letter in March 2009, LWG stated its intent to file suit against Knife River - Northwest and others to recover LWG's investigation costs to the extent Knife River - Northwest cannot demonstrate its non-liability for the contamination or is unwilling to participate in an alternative dispute resolution process that has been established to address the matter. At this time, Knife River - Northwest has agreed to participate in the alternative dispute resolution process.
The Company believes it is not probable that it will incur any material environmental remediation costs or damages in relation to the above referenced matter.
Manufactured
Gas Plant Sites There are three claims against Cascade for cleanup of environmental contamination at manufactured gas plant sites operated by Cascade's predecessors.
The first claim is for contamination at a site in Eugene, Oregon which was received in 1995. There are PRPs in addition to Cascade that may be liable for cleanup of the contamination. Some of these PRPs have shared in the investigation costs. It is expected that these and other PRPs will share in the cleanup costs. The Oregon DEQ released an ROD in January 2015 that selected a remediation alternative for the site as recommended in an earlier staff report. The total estimated cost for the selected remediation, including long-term maintenance, is approximately $i3.5 million
of which $i400,000 has been incurred. It is not known at this time what share of the cleanup costs will
MDU Resources Group, Inc. Form 10-K 97
Part
II
actually be borne by Cascade; however, Cascade has paid i50 percent of the ongoing investigation and design costs and anticipates its proportional share of the final costs could be approximately
i50 percent. Cascade has an accrual balance of $i1.6 million
for remediation of this site. In January 2013, the OPUC approved Cascade's application to defer environmental remediation costs at the Eugene site for a period of 12 months starting November 30, 2012. Cascade received orders reauthorizing the deferred accounting for the 12-month periods starting November 30, 2013, December 1, 2014, December 1, 2015, December 1, 2016 and December 1, 2017.
The second claim is for contamination at the Bremerton Gasworks Superfund Site in Bremerton, Washington which was received in 1997. A preliminary investigation has found soil and groundwater at the site contain contaminants requiring further investigation
and cleanup. The EPA conducted a Targeted Brownfields Assessment of the site and released a report summarizing the results of that assessment in August 2009. The assessment confirms that contaminants have affected soil and groundwater at the site, as well as sediments in the adjacent Port Washington Narrows. Alternative remediation options have been identified with preliminary cost estimates ranging from $i340,000
to $i6.4 million. Data developed through the assessment and previous investigations indicates the contamination likely derived from multiple, different sources and multiple current and former owners of properties and businesses in the vicinity of the site may be responsible for the contamination. In April 2010, the Washington DOE issued notice it considered Cascade a
PRP for hazardous substances at the site. In May 2012, the EPA added the site to the National Priorities List of Superfund sites. Cascade has entered into an administrative settlement agreement and consent order with the EPA regarding the scope and schedule for a remedial investigation and feasibility study for the site. Current estimates for the cost to complete the remedial investigation and feasibility study are approximately $i7.6 million
of which $i1.7 million has been incurred. Cascade has accrued $i5.9 million
for the remedial investigation and feasibility study as well as $i6.4 million for remediation of this site; however, the accrual for remediation costs will be reviewed and adjusted, if necessary, after completion of the remedial investigation and feasibility study. In April 2010, Cascade filed a petition with the WUTC for authority to defer the costs, which are included in other noncurrent assets, incurred in relation to the environmental
remediation of this site. The WUTC approved the petition in September 2010, subject to conditions set forth in the order.
The third claim is for contamination at a site in Bellingham, Washington. Cascade received notice from a party in May 2008 that Cascade may be a PRP, along with other parties, for contamination from a manufactured gas plant owned by Cascade and its predecessor from about 1946 to 1962. The notice indicates that current estimates to complete investigation and cleanup of the site exceed $i8.0 million.
Other PRPs have reached an agreed order and work plan with the Washington DOE for completion of a remedial investigation and feasibility study for the site. A report documenting the initial phase of the remedial investigation was completed in June 2011. There is currently not enough information available to estimate the potential liability to Cascade associated with this claim although Cascade believes its proportional share of any liability will be relatively small in comparison to other PRPs. The plant manufactured gas from coal between approximately 1890 and 1946. In 1946, shortly after Cascade's predecessor acquired the plant, it converted the plant to a propane-air gas facility. There are no documented wastes or by-products resulting from the mixing or distribution of propane-air gas. Cascade has not recorded an accrual for this site.
Cascade has received notices from and entered into agreement with certain of its insurance
carriers that they will participate in defense of Cascade for these contamination claims subject to full and complete reservations of rights and defenses to insurance coverage. To the extent these claims are not covered by insurance, Cascade intends to seek recovery through the OPUC and WUTC of remediation costs in its natural gas rates charged to customers. The accruals related to these matters are reflected in regulatory assets. For more information, see Note 4.
Operating leases
The Company leases certain equipment, facilities and land under operating lease agreements. iThe
amounts of annual minimum lease payments due under these leases as of December 31, 2017, were:
2018
2019
2020
2021
2022
Thereafter
(In
thousands)
Operating leases
$
i55,511
$
i45,307
$
i33,168
$
i18,562
$
i7,047
$
i40,833
Rent
expense was $i73.7 million, $i65.0 million and $i53.9 million for
the years ended December 31, 2017, 2016 and 2015, respectively.
98 MDU Resources Group, Inc. Form 10-K
Part II
Purchase
commitments
The Company has entered into various commitments, largely construction, natural gas and coal supply, purchased power, natural gas transportation and storage, and service, shipping and construction materials supply contracts, some of which are subject to variability in volume and price. The commitment terms vary in length, up to i43 years.
iThe commitments under these contracts as of December 31, 2017, were:
2018
2019
2020
2021
2022
Thereafter
(In
thousands)
Purchase commitments
$
i360,751
$
i215,005
$
i162,424
$
i135,334
$
i99,068
$
i773,820
These
commitments were not reflected in the Company's consolidated financial statements. Amounts purchased under various commitments for the years ended December 31, 2017, 2016 and 2015, were $i516.1 million, $i539.3 million and
$i842.1 million, respectively.
Guarantees
In June 2016, WBI Energy sold all of the outstanding membership interests in Dakota Prairie Refining. In connection with the sale, Centennial agreed to continue to guarantee certain debt obligations of Dakota Prairie Refining which totaled $i56.3 million
at December 31, 2017, and are expected to mature in 2023. Tesoro agreed to indemnify Centennial for any losses and litigation expenses arising from the guarantee. The estimated fair values of the indemnity asset and guarantee liability are reflected in deferred charges and other assets - other and deferred credits and other liabilities - other, respectively, on the Consolidated Balance Sheets. Continuation of the guarantee was required as a condition to the sale of Dakota Prairie Refining.
In March 2016, a sale agreement was signed to sell Fidelity's assets in the Paradox Basin. In connection with the sale, Centennial agreed to guarantee Fidelity's indemnity obligations associated with the Paradox Basin assets. The guarantee was required by the buyer as a condition to the sale of the Paradox Basin assets.
In
2009, multiple sale agreements were signed to sell the Company's ownership interests in the Brazilian Transmission Lines. In connection with the sale, Centennial has agreed to guarantee payment of any indemnity obligations of certain of the Company's indirect wholly owned subsidiaries who are the sellers in three purchase and sale agreements for periods ranging up to 10 years from the date of sale. The guarantees were required by the buyers as a condition to the sale of the Brazilian Transmission Lines.
Certain subsidiaries of the
Company have outstanding guarantees to third parties that guarantee the performance of other subsidiaries of the Company. These guarantees are related to construction contracts, insurance deductibles and loss limits, and certain other guarantees. At December 31, 2017, the fixed maximum amounts guaranteed under these agreements aggregated $i108.0 million.
The amounts of scheduled expiration of the maximum amounts guaranteed under these agreements aggregate $i6.4 million in 2018; $i25.9 million
in 2019; $i68.7 million in 2020; $i500,000
in 2021; $i500,000 in 2022; $i2.0 million
thereafter; and $i4.0 million, which has no scheduled maturity date. There were ino
amounts outstanding under the above guarantees at December 31, 2017. 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 December 31, 2017, the fixed maximum
amounts guaranteed under these letters of credit aggregated $i34.0 million, all of which expire in 2018. There were ino
amounts outstanding under the above letters of credit at December 31, 2017. In the event of default under these letter of credit obligations, the subsidiary issuing the letter of credit for that particular obligation would be required to make payments under its 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 and MDU Construction Services would be required to make payments under these guarantees.
Any amounts outstanding by subsidiaries of the Company for these guarantees were reflected on the Consolidated Balance Sheet at December 31, 2017.
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. As of December 31, 2017, approximately $i616.5 million of surety bonds were outstanding, which were not reflected on the Consolidated Balance Sheet.
MDU
Resources Group, Inc. Form 10-K 99
Part II
Variable interest entities
The Company evaluates its arrangements and contracts with other entities to determine if they are VIEs and if so, if the
Company is the primary beneficiary. For more information, see Note 1.
Fuel Contract Coyote Station entered into a coal supply agreement with Coyote Creek that provides for the purchase of coal necessary to supply the coal requirements of the Coyote Station for the period May 2016 through December 2040. Coal purchased under the coal supply agreement is reflected in inventories on the Company's Consolidated Balance Sheets and is recovered from customers as a component of electric fuel and purchased power.
The coal supply agreement creates a variable interest in Coyote Creek due to the transfer of all operating and economic risk to the Coyote
Station owners, as the agreement is structured so that the price of the coal will cover all costs of operations as well as future reclamation costs. The Coyote Station owners are also providing a guarantee of the value of the assets of Coyote Creek as they would be required to buy the assets at book value should they terminate the contract prior to the end of the contract term and are providing a guarantee of the value of the equity of Coyote Creek in that they are required to buy the entity at the end of the contract term at equity value. Although the Company has determined that Coyote Creek is a VIE, the
Company has concluded that it is not the primary beneficiary of Coyote Creek because the authority to direct the activities of the entity is shared by the four unrelated owners of the Coyote Station, with no primary beneficiary existing. As a result, Coyote Creek is not required to be consolidated in the Company's financial statements.
Discontinued
operations attributable to the Company, net of tax
(i.03
)
(i.80
)
(i.03
)
i—
Earnings
(loss) per common share - basic
i.13
(i.56
)
i.42
i.34
Earnings
(loss) per common share - diluted:
Earnings before discontinued operations
i.16
i.24
i.45
i.33
Discontinued
operations attributable to the Company, net of tax
(i.03
)
(i.80
)
(i.03
)
i—
Earnings
(loss) per common share - diluted
i.13
(i.56
)
i.42
i.33
Weighted
average common shares outstanding:
Basic
i195,284
i195,304
i195,304
i195,304
Diluted
i195,284
i195,699
i195,811
i195,889
Notes:
•
Fourth quarter 2016 reflects a reduction to a previously recorded MEPP withdrawal liability of $i11.1
million (before tax). For more information, see Note 14.
•
First quarter 2016 has been recast to present the results of operations of Dakota Prairie Refining as discontinued operations, other than certain general and administrative costs and interest expense which were previously allocated to the former refining segment and do not meet the criteria for income (loss) from discontinued operations.
•
Fourth quarter 2017 reflects an income
tax benefit of $i39.5 million related to the TCJA. For more information, see Note 11.
Certain
Company operations are highly seasonal and revenues from and certain expenses for such operations may fluctuate significantly among quarterly periods. Accordingly, quarterly financial information may not be indicative of results for a full year.
iExploration and Production Activities (Unaudited)
In the second quarter of 2015, the
Company began the marketing and sale process of Fidelity with an anticipated sale to occur within one year. Between September 2015 and March 2016, the Company entered into purchase and sale agreements to sell substantially all of
MDU Resources Group, Inc. Form 10-K 101
Part II
Fidelity's
oil and natural gas assets. The completion of these sales occurred between October 2015 and April 2016. Prior to the asset sales, Fidelity was significantly involved in the development and production of oil and natural gas resources. Upon the completion of the asset sales, the Company had no remaining proved oil, NGL or natural gas reserves. At the time the Company committed to a plan to sell Fidelity, the Company stopped the use of the full-cost method of accounting for its oil and natural gas production activities. The assets and liabilities were classified as held for sale and the results of operations included in income (loss) from discontinued operations, other than certain general and administrative
costs and interest expense which do not meet the criteria for income (loss) from discontinued operations. For more information, see Note 2.
102 MDU Resources Group, Inc. Form 10-K
Part II
Definitions
The
following abbreviations and acronyms used in Notes to Consolidated Financial Statements are defined below:
Abbreviation or Acronym
AFUDC
Allowance for funds used during construction
Andeavor Field Services LLC
Formerly QEP Field Services, LLC doing business as Tesoro Logistics Rockies LLC
ASC
FASB Accounting Standards Codification
ATBs
Atmospheric
tower bottoms
Big Stone Station
475-MW coal-fired electric generating facility near Big Stone City, South Dakota (22.7 percent ownership)
Brazilian Transmission Lines
Company's former investment in companies owning three electric transmission lines in Brazil
Calumet
Calumet Specialty Products Partners, L.P.
Capital Electric
Capital Electric Construction Company, Inc., a direct wholly owned subsidiary of MDU Construction Services
Cascade
Cascade
Natural Gas Corporation, an indirect wholly owned subsidiary of MDU Energy Capital
Centennial
Centennial Energy Holdings, Inc., a direct wholly owned subsidiary of the Company
Centennial Capital
Centennial Holdings Capital LLC, a direct wholly owned subsidiary of Centennial
Centennial's Consolidated EBITDA
Centennial's consolidated net income from continuing operations plus the related interest expense, taxes, depreciation, depletion, amortization of intangibles and any non-cash charge
relating to asset impairment for the preceding 12-month period
Centennial Resources
Centennial Energy Resources LLC, a direct wholly owned subsidiary of Centennial
Company
MDU Resources Group, Inc.
Coyote Creek
Coyote Creek Mining Company, LLC, a subsidiary of The North American Coal Corporation
Coyote Station
427-MW coal-fired electric generating facility near Beulah, North Dakota (25 percent ownership)
Dakota
Prairie Refinery
20,000-barrel-per-day diesel topping plant built by Dakota Prairie Refining in southwestern North Dakota
Dakota Prairie Refining
Dakota Prairie Refining, LLC, a limited liability company previously owned by WBI Energy and Calumet (previously included in the Company's refining segment)
EBITDA
Earnings before interest, taxes, depreciation, depletion and amortization
EIN
Employer Identification Number
EPA
United
States Environmental Protection Agency
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
Fidelity
Fidelity Exploration & Production Company, a direct wholly owned subsidiary of WBI Holdings (previously referred to as the Company's exploration and production segment)
FIP
Funding improvement plan
GAAP
Accounting
principles generally accepted in the United States of America
Great Plains
Great Plains Natural Gas Co., a public utility division of the Company
IBEW
International Brotherhood of Electrical Workers
IFRS
International Financial Reporting Standards
Intermountain
Intermountain Gas Company, an indirect wholly owned subsidiary of MDU Energy Capital
IPUC
Idaho
Public Utilities Commission
Knife River
Knife River Corporation, a direct wholly owned subsidiary of Centennial
Knife River - Northwest
Knife River Corporation - Northwest, an indirect wholly owned subsidiary of Knife River
K-Plan
Company's 401(k) Retirement Plan
LWG
Lower Willamette Group
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
MEPP
Multiemployer pension plan
MISO
Midcontinent Independent System Operator, Inc.
MNPUC
Minnesota Public Utilities Commission
Montana-Dakota
Montana-Dakota
Utilities Co., a public utility division of the Company
MTPSC
Montana Public Service Commission
MW
Megawatt
MDU Resources Group, Inc. Form 10-K 103
Part
II
NDPSC
North Dakota Public Service Commission
NGL
Natural gas liquids
Oil
Includes crude oil and condensate
OPUC
Oregon
Public Utility Commission
Oregon DEQ
Oregon State Department of Environmental Quality
Pronghorn
Natural gas processing plant located near Belfield, North Dakota (WBI Energy Midstream's 50 percent ownership interests were sold effective January 1, 2017)
PRP
Potentially Responsible Party
ROD
Record of Decision
RP
Rehabilitation
plan
SDPUC
South Dakota Public Utilities Commission
SEC
United States Securities and Exchange Commission
SEC Defined Prices
The average price of oil and natural gas during the applicable 12-month period, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions
SSIP
System
Safety and Integrity Program
Stock Purchase Plan
Company's Dividend Reinvestment and Direct Stock Purchase Plan which was terminated effective December 5, 2016
TCJA
Tax Cuts and Jobs Act
Tesoro
Tesoro Refining & Marketing Company LLC
VIE
Variable interest entity
Washington DOE
Washington
State Department of Ecology
WBI Energy
WBI Energy, Inc., a direct wholly owned subsidiary of WBI Holdings
WBI Energy Midstream
WBI Energy Midstream, LLC, an indirect wholly owned subsidiary of WBI Holdings
WBI Energy Transmission
WBI Energy Transmission, Inc., an indirect wholly owned subsidiary of WBI Holdings
WBI Holdings
WBI Holdings, Inc., a direct wholly owned subsidiary of Centennial
WUTC
Washington
Utilities and Transportation Commission
Wygen III
100-MW coal-fired electric generating facility near Gillette, Wyoming (25 percent ownership)
WYPSC
Wyoming Public Service Commission
104 MDU Resources Group, Inc. Form 10-K
Part
II
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
The following information includes the evaluation of disclosure controls and procedures by the Company's chief executive officer and the chief financial officer, along with any significant changes in internal controls of the
Company.
Evaluation of Disclosure Controls and Procedures
The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. The Company's disclosure controls and other procedures are designed to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The Company's disclosure controls and procedures include controls and procedures designed to provide reasonable assurance that information
required to be disclosed is accumulated and communicated to management, including the Company's chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. The Company's management, with the participation of the Company's chief executive officer and chief financial officer, has evaluated the effectiveness of the Company's disclosure controls and procedures. 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 quarter ended December 31, 2017, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
Management's Annual Report on Internal Control Over Financial Reporting
The information required by this item is included in this Form 10-K at Item 8 - Management's Report on Internal Control Over Financial Reporting.
Attestation
Report of the Registered Public Accounting Firm
The information required by this item is included in this Form 10-K at Item 8 - Report of Independent Registered Public Accounting Firm.
Item 9B. Other Information
None.
MDU Resources Group, Inc. Form 10-K 105
Part
III
Item 10. Directors, Executive Officers and Corporate Governance
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
The following table includes information as of December 31, 2017, with respect to the Company's equity compensation plans:
Plan
Category
(a)
Number of securities to be issued upon exercise of outstanding options, warrants and rights
(b)
Weighted average exercise price of outstanding options, warrants and rights
(c)
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity
compensation plans approved by stockholders (1)
692,761
(2)
$
—
(3)
4,662,030
(4)(5)
Equity compensation plans not approved by stockholders
N/A
N/A
N/A
Total
692,761
$
—
4,662,030
(1)
Consists
of the Non-Employee Director Long-Term Incentive Compensation Plan and the Long-Term Performance-Based Incentive Plan.
(2)
Consists of performance shares.
(3)
No weighted average exercise price is shown for the performance shares.
(4)
This amount includes 4,307,574 shares
available for future issuance under the Long-Term Performance-Based Incentive Plan in connection with grants of restricted stock, performance units, performance shares or other equity-based awards.
(5)
This amount includes 354,456 shares available for future issuance under the Non-Employee Director Long-Term Incentive Compensation Plan. Under this plan, in addition to a cash retainer, non-employee directors, excluding the Chair of the Board, are awarded shares equal in value to $110,000 annually and the Chair of the Board is awarded shares equal in value to $145,000 annually. A non-employee director may acquire additional shares under the plan in lieu of receiving the cash portion of the director's
retainer or fees.
The
accompanying notes are an integral part of these condensed financial statements.
Notes to Condensed Financial Statements
Note 1 - Summary of Significant Accounting Policies
Basis of presentationThe condensed financial information reported in Schedule I is being presented to comply with Rule 12-04 of Regulation S-X. The information is unconsolidated and is presented for the parent company only, which is comprised of MDU Resources Group, Inc. (the Company) and Montana-Dakota and Great Plains, public
utility divisions of the Company. In Schedule I, investments in subsidiaries are presented under the equity method of accounting where the assets and liabilities of the subsidiaries are not consolidated. The investments in net assets of the subsidiaries are recorded on the Condensed Balance Sheets. The income from subsidiaries is reported as equity in earnings of subsidiaries on the Condensed Statements of Income. The consolidated financial statements
of MDU Resources Group, Inc. reflect certain businesses as discontinued operations. These statements should be read in conjunction with the consolidated financial statements and notes thereto of MDU Resources Group, Inc.
Earnings (loss) per common share Please refer to the Consolidated Statements of Income of the registrant for earnings (loss) per common share. In addition, see Item 8 - Note 1 for information on the computation of earnings (loss) per common share.
Note 2 - Debt At December 31, 2017, the Company had long-term debt
maturities, excluding unamortized debt issuance costs, of $i100.0 million in 2018, $i74.5 million
in 2019, $i700,000 in 2020, $i700,000
in 2021, $i700,000 in 2022 and $i538.1 million
scheduled to mature in years after 2022.
For more information on debt, see Item 8 - Note 6.
Note 3 - Dividends The Company depends on earnings from its divisions and dividends from its subsidiaries to pay dividends on common stock. Cash dividends paid to the Company by subsidiaries were $i116.1 million,
$i115.8 million and $i110.6 million
for the years ended December 31, 2017, 2016 and 2015, respectively.
110 MDU Resources Group, Inc. Form 10-K
Part IV
MDU
RESOURCES GROUP, INC.
Schedule II - iConsolidated Valuation and Qualifying Accounts
For the years ended December 31, 2017, 2016 and 2015
Additions
Description
Balance
at Beginning of Year
Charged to Costs and Expenses
Other
*
Deductions
**
Balance at End of Year
(In
thousands)
Allowance for doubtful accounts:
2017
$
i10,479
$
i7,024
$
i989
$
i10,423
$
i8,069
2016
i9,835
i8,302
i851
i8,509
i10,479
2015
i9,511
i11,343
i1,012
i12,031
i9,835
*
Recoveries.
**
Uncollectible
accounts written off.
All other schedules are omitted because of the absence of the conditions under which they are required, or because the information required is included in the Company's Consolidated Financial Statements and Notes thereto.
Indenture dated as of August
1, 1992, between Cascade Natural Gas Corporation and The Bank of New York relating to Medium-Term Notes, filed by Cascade Natural Gas Corporation
First Supplemental Indenture dated as of October 25, 1993,
between Cascade Natural Gas Corporation and The Bank of New York relating to Medium-Term Notes and the 7.5% Notes due November 15, 2031, filed by Cascade Natural Gas Corporation
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
+ Management
contract, compensatory plan or arrangement.
MDU Resources Group, Inc. agrees to furnish to the SEC upon request any instrument with respect to long-term debt that MDU Resources Group, Inc. has not filed as an exhibit pursuant to the exemption provided by Item 601(b)(4)(iii)(A) of Regulation S-K.
114 MDU Resources Group, Inc. Form 10-K
Part
IV
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the date indicated.
