Document/ExhibitDescriptionPagesSize 1: 10-Q Mdu Resources Form 10-Q 06-30-2022 HTML 3.41M
6: EX-10.B Mdu Resources Director Compensation Plan 5-11-22 HTML 38K
5: EX-95 Mdu Resources Mine Safety Disclosures HTML 142K
2: EX-31.A Mdu Resources Certification of Chief Executive HTML 27K
Officer
3: EX-31.B Mdu Resources Certification of Chief Financial HTML 27K
Officer
4: EX-32 Mdu Resources Certification of CEO and CFO HTML 24K
12: R1 Cover page HTML 78K
13: R2 Consolidated Statements of Income HTML 133K
14: R3 Consolidated Statements of Comprehensive Income HTML 82K
15: R4 Consolidated Balance Sheets HTML 178K
16: R5 Consolidated Statements of Equity HTML 105K
17: R6 Consolidated Statements of Cash Flows HTML 132K
18: R7 Basis of presentation HTML 29K
19: R8 New accounting standards HTML 40K
20: R9 Seasonality of operations HTML 26K
21: R10 Receivables and allowance for expected credit HTML 86K
losses
22: R11 Inventories and natural gas in storage HTML 38K
23: R12 Earnings per share HTML 39K
24: R13 Equity HTML 40K
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27: R16 Business Combinations HTML 30K
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32: R21 Debt HTML 60K
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losses (Policies)
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losses (Details)
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losses (Details 2)
63: R52 Inventories and natural gas in storage (Details) HTML 41K
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65: R54 Equity (Details) HTML 38K
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67: R56 Reclassification out of accumulated other HTML 61K
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(Exact name of registrant as specified in its charter)
iDelaware
i30-1133956
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i1200 West Century Avenue
iP.O.
Box 5650
iBismarck, iNorth Dakotai58506-5650
(Address of principal executive offices)
(Zip Code)
(i701) i530-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading symbol(s)
Name of each exchange on which registered
iCommon Stock, par value $1.00 per share
iMDU
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐.
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer,""smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
Accelerated Filer
☒
Accelerated Filer
☐
Non-Accelerated Filer
☐
Smaller Reporting Company
i☐
Emerging
Growth Company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☒.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of July 29, 2022: i203,350,740
shares.
The
following abbreviations and acronyms used in this Form 10-Q are defined below:
Abbreviation or Acronym
2021 Annual Report
Company's Annual Report on Form 10-K for the year ended December 31, 2021
AFUDC
Allowance for funds used during construction
ASC
FASB Accounting Standards
Codification
ASU
FASB Accounting Standards Update
Cascade
Cascade Natural Gas Corporation, an indirect wholly owned subsidiary of MDU Energy Capital
Centennial
Centennial Energy Holdings, Inc., a direct wholly owned subsidiary of the Company
Centennial Capital
Centennial Holdings Capital LLC, a direct wholly owned subsidiary
of Centennial
Company
MDU Resources Group, Inc.
COVID-19
Coronavirus disease 2019. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic and the President of the United States declared the COVID-19 outbreak a national emergency.
Coyote Creek
Coyote Creek Mining Company, LLC, a subsidiary of The North American Coal Corporation
Coyote Station
427-MW coal-fired electric generating facility near Beulah, North Dakota (25 percent ownership)
Diamond
Willow
Diamond Willow Wind Farm located in Montana
dk
Decatherm
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act
EPA
United States Environmental Protection Agency
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Financial
Accounting Standards Board
FERC
Federal Energy Regulatory Commission
Federal Reserve
Federal Reserve System, the central banking system of the United States.
Fidelity
Fidelity Exploration & Production Company, a direct wholly owned subsidiary of WBI Holdings (previously referred to as the Company's exploration and production segment)
GAAP
Accounting principles generally accepted in
the United States of America
GHG
Greenhouse gas
Great Plains
Great Plains Natural Gas Co., a public utility division of Montana-Dakota
Intermountain
Intermountain Gas Company, an indirect wholly owned subsidiary of MDU Energy Capital
IPUC
Idaho Public Utilities Commission
IRS
Internal Revenue Service
Knife
River
Knife River Corporation, a direct wholly owned subsidiary of Centennial
kWh
Kilowatt-hour
LIBOR
London Inter-bank Offered Rate
MDU Construction Services
MDU Construction Services Group, Inc., a direct wholly owned subsidiary of Centennial
MDU Energy Capital
MDU Energy Capital, LLC, a direct wholly owned subsidiary of the
Company
MISO
Midcontinent Independent System Operator, Inc., the organization that provides open-access transmission services and monitors the high-voltage transmission system in the Midwest United States and Manitoba, Canada and a southern United States region which includes much of Arkansas, Mississippi, and Louisiana.
MMcf
Million cubic feet
MMdk
Million dk
MNPUC
Minnesota Public Utilities Commission
Montana-Dakota
Montana-Dakota
Utilities Co., a direct wholly owned subsidiary of MDU Energy Capital
Pipeline and Hazardous Materials Safety Administration
Regional Haze Rule
The EPA developed the Regional Haze Rule requiring states to develop and implement comprehensive plans to reduce human-caused regional haze in designated areas such as national parks and wilderness areas.
SDPUC
South
Dakota Public Utilities Commission
SEC
United States Securities and Exchange Commission
SOFR
Secured Overnight Financing Rate
VIE
Variable interest entity
Washington DOE
Washington State Department of Ecology
WBI Energy
WBI Energy, Inc., an indirect wholly owned subsidiary of WBI Holdings
WBI
Holdings
WBI Holdings, Inc., a direct wholly owned subsidiary of Centennial
WUTC
Washington Utilities and Transportation Commission
The Company's mission is to deliver superior value to stakeholders by providing essential infrastructure
and services to America. The Company generates, transmits and distributes electricity and provides natural gas distribution, transportation and storage services that are regulated by state public service commissions and/or the FERC. The Company also provides construction services to a variety of industries, including commercial, industrial and utility customers, and provides construction materials through aggregate mining and marketing of related products, such as ready-mix concrete, asphalt and asphalt oil.
Montana-Dakota was incorporated under the state laws of Delaware in 1924. The Company was incorporated under the state laws of Delaware in 2018 upon the completion of an internal
holding company reorganization, which resulted in Montana-Dakota becoming a subsidiary of the Company. Its principal executive offices are located at 1200 West Century Avenue, P.O. Box 5650, Bismarck, North Dakota58506-5650, telephone (701) 530-1000.
On August 4, 2022, the Company announced its Board of Directors unanimously approved a plan to pursue
the separation of Knife River from the Company. The separation is planned as a tax-free spinoff transaction to the Company’s stockholders for U.S. federal income tax purposes. The separation is expected to result in two independent, publicly traded and well-capitalized companies: (1) MDU Resources Group, Inc., the existing company and (2) Knife River, a construction materials and contracting company.
The Company is organized into five reportable business segments. These business segments include: electric, natural gas distribution, pipeline, construction materials and contracting, and construction services. The
Company's business segments are determined based on the Company's method of internal reporting, which generally segregates the strategic business units due to differences in products, services and regulation. The internal reporting of these segments is defined based on the reporting and review process used by the Company's chief executive officer.
The Company, through its wholly owned subsidiary, MDU Energy Capital, owns Montana-Dakota, Cascade and Intermountain. The electric segment is comprised of Montana-Dakota while the natural gas distribution segment is comprised of Montana-Dakota, Cascade and Intermountain.
The
Company, through its wholly owned subsidiary, Centennial, owns WBI Energy, Knife River, MDU Construction Services and Centennial Capital. WBI Energy is the pipeline segment, Knife River is the construction materials and contracting segment, MDU Construction Services is the construction services segment and Centennial Capital is reflected in the Other category.
For more information on the Company's business segments, see Note 17 of the Notes to Consolidated Financial Statements.
Reclassification adjustment for loss on derivative instruments included in net income, net of tax of $i36 and $i36
for the three months ended and $i72 and $i73
for the six months ended in 2022 and 2021, respectively
i111
i112
i223
i223
Postretirement
liability adjustment:
Amortization of postretirement liability losses included in net periodic benefit credit, net of tax of $i148 and $i160
for the three months ended and $i312 and $i311
for the six months ended in 2022 and 2021, respectively
i461
i457
i906
i923
Reclassification
of postretirement liability adjustment from regulatory asset, net of tax of $(i1,086) and $i—
for the three months ended and $(i1,086) and $i—
for the six months ended in 2022 and 2021, respectively
(i3,265)
i—
(i3,265)
i—
Postretirement
liability adjustment
(i2,804)
i457
(i2,359)
i923
Net
unrealized loss on available-for-sale investments:
Net unrealized loss on available-for-sale investments arising during the period, net of tax of $(i34) and $(i13)
for the three months ended and $(i119) and $(i25)
for the six months ended in 2022 and 2021, respectively
(i128)
(i52)
(i448)
(i96)
Reclassification
adjustment for loss on available-for-sale investments included in net income, net of tax of $i7 and $i6
for the three months ended and $i15 and $i15
for the six months ended in 2022 and 2021, respectively
i25
i25
i57
i60
Net
unrealized loss on available-for-sale investments
(i103)
(i27)
(i391)
(i36)
Other
comprehensive income (loss)
(i2,796)
i542
(i2,527)
i1,110
Comprehensive
income attributable to common stockholders
$
i67,871
$
i100,732
$
i99,903
$
i153,431
The
accompanying notes are an integral part of these consolidated financial statements.
iThe accompanying
consolidated interim financial statements were prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Interim financial statements do not include all disclosures provided in annual financial statements and, accordingly, these financial statements should be read in conjunction with those appearing in the 2021 Annual Report. The information is unaudited but includes all adjustments that are, in the opinion of management, necessary for a fair presentation of the accompanying consolidated interim financial statements and are of a normal recurring nature. Depreciation, depletion and amortization expense is reported separately on the Consolidated Statements of Income and therefore is excluded from the other line items within operating expenses.
On August 4, 2022, the
Company announced its Board of Directors unanimously approved a plan to pursue the separation of Knife River from the Company. The separation is planned as a tax-free spinoff transaction to the Company’s stockholders for U.S. federal income tax purposes.
The assets and liabilities of the Company's discontinued operations have been classified as held for sale and are included in prepayments and other current assets, noncurrent assets - other and other accrued liabilities on the Consolidated Balance Sheets. The results and supporting activities are shown in income from discontinued operations on the Consolidated Statements of Income. Unless otherwise indicated, the amounts presented
in the accompanying notes to the consolidated financial statements relate to the Company's continuing operations.
In the fourth quarter of 2021, the Company made changes to the presentation of the Consolidated Statements of Cash Flows to provide further clarity on the sources and uses of net cash provided by operating activities and net cash provided by (used in) financing activities. Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications did not impact total net cash provided by operating activities or net cash provided by financing activities for the six months ended June 30, 2021.
Management
has also evaluated the impact of events occurring after June 30, 2022, up to the date of the issuance of these consolidated interim financial statements on August 5, 2022, that would require recognition or disclosure in the Consolidated Financial Statements.
Note 2 - iNew
accounting standards
i
The following table provides a brief description of the accounting pronouncements applicable to the Company and the potential impact on its Consolidated Financial Statements and/or disclosures:
Standard
Description
Effective
date
Impact on financial statements/disclosures
ASU 2021-10 - Government Assistance
In November 2021, the FASB issued guidance on modifying the disclosure requirements to increase the transparency of government assistance including disclosure of the types of assistance, an entity's accounting for the assistance and the effect of the assistance on an entity's financial statements.
The Company is currently evaluating the impact the guidance will have on its disclosures for the year ended December 31,
2022.
ASU 2020-04 - Reference Rate Reform
In March 2020, the FASB issued optional guidance to ease the facilitation of the effects of reference rate reform on financial reporting. The guidance applies to certain contract modifications, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Beginning January 1, 2022, LIBOR or other discontinued reference rates cannot be applied to new contracts. New contracts will incorporate a new
reference rate, which includes SOFR. LIBOR or other discontinued reference rates cannot be applied to contract modifications or hedging relationships entered into or evaluated after December 31, 2022. Existing contracts referencing LIBOR or other reference rates expected to be discontinued must identify a replacement rate by June 30, 2023.
The
Company has updated its credit agreements to include language regarding the successor or alternate rate to LIBOR, and a review of other contracts and agreements is on-going. The Company does not expect the guidance to have a material impact on its results of operations, financial position, cash flows or disclosures.
Some of the Company's operations are highly seasonal and revenues from, and certain expenses for, such operations may fluctuate significantly among quarterly periods. Accordingly, the interim results for particular businesses, and for the Company as a whole, may not be indicative of results for the full fiscal year.
Note 4 - iReceivables
and allowance for expected credit losses
iReceivables consists primarily of trade receivables from the sale of goods and services, which are recorded at the invoiced amount, and contract assets, net of expected credit losses. For more information on contract assets, see Note 9. The
Company's trade receivables are all due in 12 months or less. The total balance of receivables past due 90 days or more was $i37.0 million, $i34.2 million
and $i44.8 million at June 30, 2022 and 2021, and December 31, 2021, respectively.
iThe
Company's expected credit losses are determined through a review using historical credit loss experience; changes in asset specific characteristics; current conditions; and reasonable and supportable future forecasts, among other specific account data, and is performed at least quarterly. The Company develops and documents its methodology to determine its allowance for expected credit losses at each of its reportable business segments. Risk characteristics used by the business segments may include customer mix, knowledge of customers and general economic conditions of the various local economies, among others. Specific account balances are written off when management determines the amounts to be uncollectible. Management has reviewed the balance reserved through the allowance for expected credit losses and believes it is reasonable.
i
Details
of the Company's expected credit losses were as follows:
iNatural gas in storage for the Company's regulated operations is generally valued at lower of cost or market using the
last-in, first-out method or lower of cost or net realizable value using the average cost or first-in, first-out method. The majority of all other inventories are valued at the lower of cost or net realizable value using the average cost method. The portion of the cost of natural gas in storage expected to be used within 12 months was included in inventories. iInventories on the Consolidated Balance Sheets were as follows:
The
remainder of natural gas in storage, which largely represents the cost of gas required to maintain pressure levels for normal operating purposes, was included in noncurrent assets - other and was $i47.2 million at June 30, 2022 and $ii47.5/
million at June 30, 2021 and December 31, 2021.
Note 6 - iEarnings per share
iBasic
earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the applicable period. Diluted earnings per share is computed by dividing net income by the total of the weighted average number of shares of common stock outstanding during the applicable period, plus the effect of non-vested performance share awards and restricted stock units. Common stock outstanding includes issued shares less shares held in treasury. Net income was the same for both the basic and diluted earnings per share calculations. iA
reconciliation of the weighted average common shares outstanding used in the basic and diluted earnings per share calculations follows:
Weighted average common shares outstanding - basic
i203,351
i201,345
i203,351
i201,028
Effect
of dilutive performance share awards and restricted stock units
i50
i348
i45
i300
Weighted
average common shares outstanding - diluted
i203,401
i201,693
i203,396
i201,328
Shares
excluded from the calculation of diluted earnings per share
i52
i—
i175
i—
Dividends
declared per common share
$
i.2175
$
i.2125
$
i.4350
$
i.4250
Note
7 - iEquity
The Company currently has a shelf registration statement on file with the SEC, under which the Company may issue and sell any combination of common stock and debt securities. The Company may sell such securities if warranted by market conditions and the
Company's capital requirements.
In August 2020, the Company amended the Distribution Agreement dated February 22, 2019, with J.P. Morgan Securities LLC and MUFG Securities Americas Inc., as sales agents. This agreement, as amended, allows the offering, issuance and sale of up to i6.4 million shares of the Company's
common stock in connection with an "at-the-market" offering. The common stock may be offered for sale, from time to time, in accordance with the terms and conditions of this agreement. As of June 30, 2022, the Company had capacity to issue up to i3.6 million additional shares of common stock under the "at-the-market" offering program.
* Net
proceeds include issuance costs of $i22,000 and $i149,000 for the three and six months ended June 30, 2022,
respectively, and $i443,000 and $i743,000 for the three and six months ended June 30, 2021, respectively.
** Net
proceeds were used for capital expenditures.
/
Note 8 - iAccumulated other comprehensive loss
i
The
after-tax changes in the components of accumulated other comprehensive loss were as follows:
Net Unrealized Gain (Loss) on Derivative Instruments Qualifying as Hedges
Postretirement Liability Adjustment
Net Unrealized Gain (Loss) on Available-for-sale Investments
The
following amounts were reclassified out of accumulated other comprehensive loss into net income. The amounts presented in parenthesis indicate a decrease to net income on the Consolidated Statements of Income. The reclassifications were as follows:
iRevenue is recognized when a performance obligation is satisfied
by transferring control over a product or service to a customer. Revenue is measured based on consideration specified in a contract with a customer and excludes any sales incentives and amounts collected on behalf of third parties. The Company is considered an agent for certain taxes collected from customers. As such, the Company presents revenues net of these taxes at the time of sale to be remitted to governmental authorities, including sales and use taxes.
Disaggregation
i
In
the following tables, revenue is disaggregated by the type of customer or service provided. The Company believes this level of disaggregation best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The table also includes a reconciliation of the disaggregated revenue by reportable segments. For more information on the Company's business segments, see Note 17.
Presented
in the previous tables are intrasegment revenues within the construction materials and contracting segment to highlight the focus on vertical integration as this segment sells materials to both third parties and internal customers. Due to consolidation requirements, these revenues must be eliminated against construction materials to arrive at the external operating revenue total for the segment.
The timing of revenue recognition may differ from the timing of invoicing to customers. The timing of invoicing to customers does not necessarily correlate with the timing of revenues being recognized under the cost-to-cost method of accounting. Contracts from contracting services are billed as work progresses
in accordance with agreed upon contractual terms. Generally, billing to the customer occurs contemporaneous to revenue recognition. A variance in timing of the billings may result in a contract asset or a contract liability. A contract asset occurs when revenues are recognized under the cost-to-cost measure of progress, which exceeds amounts billed on uncompleted contracts. Such amounts will be billed as standard contract terms allow, usually based on various measures of performance or achievement. A contract
liability occurs when there are billings in excess of revenues recognized under the cost-to-cost measure of progress on uncompleted contracts. Contract liabilities decrease as revenue is recognized from the satisfaction of the related performance obligation.
i
The changes in contract assets and
liabilities were as follows:
The
Company recognized $i14.8 million and $i136.7 million in revenue for the
three and six months ended June 30, 2022, respectively, which was previously included in contract liabilities at December 31, 2021. The Company recognized $i21.9 million and $i145.3 million
in revenue for the three and six months ended June 30, 2021, respectively, which was previously included in contract liabilities at December 31, 2020.
The Company recognized a net increase in revenues of $i30.0
million and $i42.4 million for the three and six months ended June 30, 2022, respectively, from performance obligations satisfied in prior periods. The company recognized a net increase in revenues of $i27.3
million and $i54.6 million for the three and six months ended June 30, 2021, respectively, from performance obligations satisfied in prior periods.
The remaining performance obligations, also referred to as backlog, at the construction materials and contracting and construction services segments include unrecognized revenues that the Company reasonably expects to be realized. These unrecognized revenues can include: projects that have a written award, a letter of intent, a notice to proceed, an agreed upon work order to perform work on mutually accepted terms and conditions and change orders or claims to the extent management believes additional contract revenues will be earned and are deemed probable of collection. Excluded from remaining performance obligations are potential orders under master service agreements. The majority of the
Company's construction contracts have an original duration of less than two years.
The remaining performance obligations at the pipeline segment include firm transportation contracts with fixed pricing and fixed volumes. The Company has applied the practical expedient, which does not require additional disclosures for contracts with an original duration of less than 12 months, to certain firm transportation and non-regulated contracts. The
Company's firm transportation contracts included in the remaining performance obligations have weighted average remaining durations of less than five years.
At June 30, 2022, the Company's remaining performance obligations were $i3.5 billion. The
Company expects to recognize the following revenue amounts in future periods related to these remaining performance obligations: $i2.8 billion within the next i12 months
or less; $i389.0 million within the next i13 to 24 months; and $i368.4
million in i25 months or more.
Note 10 - iBusiness
combinations
iThe following acquisitions were accounted for as business combinations in accordance with ASC 805 - Business Combinations. The results of the acquired businesses have been included in the Consolidated Financial Statements beginning on the acquisition date. Pro forma financial amounts reflecting the effects of the business combinations are not presented, as none of these business combinations, individually or in the aggregate, were material to the Company's financial position
or results of operations.
The acquisitions are also subject to customary adjustments based on, among other things, the amount of cash, debt and working capital in the business as of the closing date. The amounts included in the Consolidated Balance Sheets for these adjustments are considered provisional until final settlement has occurred.
The Company had no acquisitions in the first half of 2022.
In 2021, the construction materials and contracting segment's acquisitions included:
•Baker Rock Resources and Oregon Mainline Paving, two premier construction materials companies located around the Portland, Oregon metro area, acquired in November 2021. At June 30,
2022, the purchase price allocation was preliminary and will be finalized within 12 months of the acquisition date.
•Mt. Hood Rock, a construction aggregates business in Oregon, acquired in April 2021. As of March 31, 2022, the purchase price allocation was settled with no material adjustments to the provisional accounting.
In 2021, the total purchase price for acquisitions was $i236.1 million,
subject to certain adjustments, with cash acquired totaling $i900,000. The purchase price includes consideration paid of $i235.2
million. The amounts allocated to the aggregated assets acquired and liabilities assumed during 2021 were as follows: $i17.0 million to current assets; $i179.8
million to property, plant and equipment; $i50.6 million to goodwill; $i2.2 million to other
intangible assets; $i8.7 million to current liabilities; $i2.5
million to noncurrent liabilities - other; and $i3.2 million to deferred tax liabilities. During the first quarter of 2022, measurement period adjustments were made to previously reported provisional amounts, which decreased goodwill and increased property, plant and equipment by $i2.1 million.
The Company issued debt to finance these acquisitions.
Costs incurred for acquisitions are included in operation and maintenance expense on the Consolidated Statements of Income. For the six months ended June 30, 2022, the Company had ino acquisition costs.
For the six months ended June 30, 2021, acquisition costs were inot material.
Note 11 - iLeases
The Company's leases primarily include operating leases for equipment, buildings, easements and vehicles. The Company leases certain equipment to third parties through its utility and construction services segments, which are considered short-term operating leases with terms of less than 12 months.
The Company recognized revenue from operating leases of $i12.0
million and $i23.4 million for the three and six months ended June 30, 2022, respectively. The Company recognized revenue from operating leases of $i12.8
million and $i24.8 million for the three and six months ended June 30, 2021, respectively. At June 30, 2022, the Company had $i8.7
million of lease receivables with a majority due within 12 months.
The
previous tables include goodwill and intangible assets associated with the business combinations completed during 2021. For more information related to these business combinations, see Note 10.
Amortization expense for amortizable intangible assets for the three and six months ended June 30, 2022, was $i1.3 million and $i2.5
million, respectively. Amortization expense for amortizable intangible assets for the three and six months ended June 30, 2021, was $i1.2 million and $i2.7 million,
respectively. iEstimated amortization expense for identifiable intangible assets as of June 30, 2022, was:
Natural
gas costs recoverable through rate adjustments
iUp to 1 year
$
i83,557
$
i85,045
$
i86,371
Conservation
programs
iUp to 1 year
i7,883
i7,580
i8,225
Decoupling
iUp
to 1 year
i4,615
i6,750
i9,131
Cost
recovery mechanisms
iUp to 1 year
i3,459
i5,692
i4,536
Other
iUp
to 1 year
i3,021
i4,514
i10,428
i102,535
i109,581
i118,691
Noncurrent:
Pension
and postretirement benefits
i**
i137,582
i155,906
i142,681
Cost
recovery mechanisms
iUp to 10 years
i64,096
i44,415
i44,870
Plant
costs/asset retirement obligations
iOver plant lives
i63,334
i72,853
i63,116
Plant
to be retired
i-
i27,628
i46,061
i50,070
Manufactured
gas plant site remediation
i-
i26,031
i26,155
i26,053
Taxes
recoverable from customers
iOver plant lives
i12,365
i10,929
i12,339
Long-term
debt refinancing costs
iUp to 38 years
i3,482
i4,110
i3,794
Natural
gas costs recoverable through rate adjustments
iUp to 2 years
i1,839
i8,389
i5,186
Other
iUp
to 17 years
i10,704
i8,095
i9,742
i347,061
i376,913
i357,851
Total
regulatory assets
$
i449,596
$
i486,494
$
i476,542
Regulatory
liabilities:
Current:
Electric fuel and purchased power deferral
iUp to 1 year
$
i4,161
$
i5,431
$
i—
Taxes
refundable to customers
iUp to 1 year
i3,728
i3,434
i3,841
Cost
recovery mechanisms
iUp to 1 year
i3,172
i1,388
i214
Natural
gas costs refundable through rate adjustments
iUp to 1 year
i738
i8,935
i6,700
Other
iUp
to 1 year
i6,085
i4,266
i5,548
i17,884
i23,454
i16,303
Noncurrent:
Taxes
refundable to customers
iOver plant lives
i209,022
i222,098
i215,421
Plant
removal and decommissioning costs
iOver plant lives
i172,755
i171,381
i168,152
Pension
and postretirement benefits
i**
i19,686
i16,940
i20,434
Accumulated
deferred investment tax credit
iUp to 20 years
i14,009
i11,915
i12,696
Cost
recovery mechanisms
iUp to 20 years
i10,898
i2,499
i7,727
Other
iUp
to 16 years
i6,649
i3,634
i4,360
i433,019
i428,467
i428,790
Total
regulatory liabilities
$
i450,903
$
i451,921
$
i445,093
Net
regulatory position
$
(i1,307)
$
i34,573
$
i31,449
*Estimated
recovery or refund period for amounts currently being recovered or refunded in rates to customers.
** Recovered as expense is incurred or cash contributions are made.
//
At June 30, 2022 and 2021, and December 31, 2021, approximately $i262.9 million,
$i317.0 million and $i296.6 million,
respectively, of regulatory assets were not earning a rate of return; however, these regulatory assets are expected to be recovered from customers in future rates. These assets are largely comprised of the unfunded portion of pension and postretirement benefits, asset retirement obligations, accelerated depreciation on plant retirement and the estimated future cost of manufactured gas plant site remediation.
In the last half of 2021 and the first half of 2022, the Company has experienced higher natural gas costs due to the increase in demand outpacing the supply along with the impact of global events. This increase in natural gas costs experienced in certain jurisdictions has been offset by the recovery of prior period natural gas costs being recovered over a period longer than the normal one-year period, as further discussed below.
In
February 2021, a prolonged period of unseasonably cold temperatures in the central United States significantly increased the demand for electric and natural gas services and contributed to increased market prices. Overall, Montana-Dakota and Great Plains incurred approximately $i44.0 million in increased natural gas costs in order to maintain services for its customers. These extraordinary gas costs were recorded as regulatory assets as they are expected to be recovered from customers. Montana-Dakota and Great Plains have received approval for the recovery of purchased gas adjustments related to the
cold-weather event in all jurisdictions impacted, including out-of-cycle purchased gas adjustment requests in most jurisdictions. For a discussion of the Company's most recent cases by jurisdiction, see Note 19.
In 2019, the Company experienced increased natural gas costs in Washington from the rupture of the Enbridge pipeline in Canada in late 2018. As a result, the Company requested, and the WUTC approved, recovery through 2022 of the balance of natural gas costs recoverable related to this period of time, which was over three years rather than its normal one-year recovery period.
In February 2019, the
Company announced the retirement of three aging coal-fired electric generating units. The Company accelerated the depreciation related to these facilities in property, plant and equipment and recorded the difference between the accelerated depreciation, in accordance with GAAP, and the depreciation approved for rate-making purposes as regulatory assets. Requests were filed with the NDPSC and SDPUC, and subsequently approved, to offset the savings associated with the cessation of operations of these units with the amortization of the deferred regulatory assets. The Company ceased operations of Lewis & Clark Station in March 2021 and Units 1 and 2 at Heskett Station in February 2022. The Company subsequently reclassified
the costs being recovered for these facilities from plant retirement to cost recovery mechanisms in the previous table and began amortizing the associated plant retirement and closure costs in the jurisdictions where requests were filed, as previously discussed. The Company expects to recover the regulatory assets related to the plant retirements in future rates.
If, for any reason, the Company's regulated businesses cease to meet the criteria for application of regulatory accounting for all or part of their operations, the regulatory assets and liabilities relating to those portions ceasing to meet such criteria would be written off and included in the statement of income or accumulated other comprehensive loss in the period in which the discontinuance of regulatory
accounting occurs.
Note 14 - iFair value measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The fair value ASC establishes a hierarchy for grouping assets and liabilities, based on the significance of inputs. The estimated
fair values of the Company's assets and liabilities measured on a recurring basis are determined using the market approach.
iThe Company measures its investments in certain fixed-income and equity securities at fair value with changes in fair value recognized in income.The Company anticipates using these investments, which consist of
insurance contracts, to satisfy its obligations under its unfunded, nonqualified defined benefit and defined contribution plans for executive officers and certain key management employees, and invests in these fixed-income and equity securities for the purpose of earning investment returns and capital appreciation. These investments, which totaled $i97.4 million, $i105.7 million
and $i109.6 million, at June 30, 2022 and 2021, and December 31, 2021, respectively, are classified as investments on the Consolidated Balance Sheets. The net unrealized loss on these investments was $i8.4
million and $i14.1 million for the three and six months ended June 30, 2022, respectively. The net unrealized gain on these investments was $i3.8
million and $i3.9 million for the three and six months ended June 30, 2021. The change in fair value, which is considered part of the cost of the plan, is classified in other income on the Consolidated Statements of Income.
iThe
Company did not elect the fair value option, which records gains and losses in income, for its available-for-sale securities, which include mortgage-backed securities and U.S. Treasury securities. These available-for-sale securities are recorded at fair value and are classified as investments on the Consolidated Balance Sheets. Unrealized gains or losses are recorded in accumulated other comprehensive loss. iDetails of available-for-sale securities were as follows:
* The
insurance contracts invest approximately i64 percent in fixed-income investments, i15 percent
in common stock of large-cap companies, i7 percent in common stock of mid-cap companies, i6 percent in common stock of small-cap companies, i6 percent
in target date investments and i2 percent in cash equivalents.
* The
insurance contracts invest approximately i53 percent in fixed-income investments, i20 percent
in common stock of large-cap companies, i10 percent in common stock of mid-cap companies, i9 percent in common stock of small-cap companies, i6 percent
in target date investments and i2 percent in cash equivalents.
* The
insurance contracts invest approximately i61 percent in fixed-income investments, i17 percent
in common stock of large-cap companies, i8 percent in common stock of mid-cap companies, i7 percent in common stock of small-cap companies, i5 percent
in target date investments and i2 percent in cash equivalents.
The Company's money market funds are valued at the net asset value of shares held at the end of the period, based on published market quotations on active markets, or using other known sources including pricing from outside sources. The estimated
fair value of the Company's mortgage-backed securities and U.S. Treasury securities are based on comparable market transactions, other observable inputs or other sources, including pricing from outside sources. The estimated fair value of the Company's insurance contracts are based on contractual cash surrender values that are determined primarily by investments in managed separate accounts of the insurer. These amounts approximate fair value. The managed separate accounts are valued based on other observable inputs or corroborated market data.
Though the Company believes the methods used to
estimate fair value are consistent with those used by other market participants, the use of other methods or assumptions could result in a different estimate of fair value.
The Company applies the provisions of the fair value measurement standard to its nonrecurring, non-financial measurements, including long-lived asset impairments. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. The Company reviews the carrying value of its long-lived assets, excluding goodwill, whenever events or changes in circumstances indicate that such carrying amounts may not be recoverable.
The
Company performed fair value assessments of the assets acquired and liabilities assumed in the business combinations that occurred during 2021. The fair value of these assets and liabilities were determined based on Level 2 and Level 3 inputs.
The Company's long-term debt is not measured at fair value on the Consolidated Balance Sheets and the fair value is being provided for disclosure purposes only. The fair value was categorized as Level 2 in the fair value hierarchy and was based on discounted future cash flows using current market interest rates. iThe
estimated fair value of the Company's Level 2 long-term debt was as follows:
The
carrying amounts of the Company's remaining financial instruments included in current assets and current liabilities approximate their fair values.
Note 15 - iDebt
Certain debt instruments of the Company's subsidiaries
contain restrictive and financial covenants and cross-default provisions. In order to borrow under the debt agreements, the subsidiary companies must be in compliance with the applicable covenants and certain other conditions, all of which the subsidiaries, as applicable, were in compliance with at June 30, 2022. In the event the subsidiaries do not comply with the applicable covenants and other conditions, alternative sources of funding may need to be pursued.
Montana-Dakota's and Centennial's respective commercial paper programs are supported by revolving credit agreements. While the amount of commercial paper outstanding does not reduce available capacity under the respective revolving credit agreements,
Montana-Dakota and Centennial do not issue commercial paper in an aggregate amount exceeding the available capacity under the credit agreements. The commercial paper borrowings may vary during the period, largely the result of fluctuations in working capital requirements due to the seasonality of certain operations of the Company's subsidiaries.
Centennial On March 18, 2022,
Centennial entered into a $i100.0 million term loan agreement with a SOFR-based variable interest rate and a maturity date of March 17, 2023. The agreement contains customary covenants and provisions, including a covenant of Centennial not to permit, at any time, the ratio of total debt to total capitalization to be greater than i65
percent. The covenants also include certain restrictions on the sale of certain assets, loans and investments.
Long-term debt
Long-term Debt OutstandingiLong-term debt outstanding was as follows:
Other
notes due on dates ranging from January 1, 2024 to January 1, 2061
i.95
%
i2,411
i3,232
i2,564
Less
unamortized debt issuance costs
i6,809
i5,505
i6,090
Less
discount
i595
i28
i74
Total
long-term debt
i2,927,967
i2,337,049
i2,741,900
Less
current maturities
i214,453
i1,549
i148,053
Net
long-term debt
$
i2,713,514
$
i2,335,500
$
i2,593,847
Schedule
of Debt Maturities iLong-term debt maturities, which excludes unamortized debt issuance costs and discount, at June 30, 2022, were as follows:
Remainder
of
2022
2023
2024
2025
2026
Thereafter
(In thousands)
Long-term debt maturities
$
i147,953
$
i77,923
$
i586,064
$
i177,802
$
i140,802
$
i1,804,827
Note
16 - iCash flow information
i
Cash expenditures for interest and income taxes were as follows:
iThe Company's reportable segments are those that are based on the
Company's method of internal reporting, which generally segregates the strategic business units due to differences in products, services and regulation. The internal reporting of these operating segments is defined based on the reporting and review process used by the Company's chief executive officer.The Company's operations are located within the United States.
The electric segment generates, transmits and distributes electricity in Montana, North Dakota, South Dakota and Wyoming. The natural gas distribution segment distributes natural gas in those states, as well as in Idaho, Minnesota, Oregon and Washington. These operations also supply related value-added services.
The pipeline segment provides natural
gas transportation and underground storage services through a regulated pipeline system primarily in the Rocky Mountain and northern Great Plains regions of the United States. This segment also provides non-regulated cathodic protection and other energy-related services.
The construction materials and contracting segment mines, processes and sells construction aggregates (crushed stone, sand and gravel); produces and sells asphalt mix; and supplies ready-mix concrete. This segment focuses on vertical integration of its contracting services with its construction materials to support the aggregate-based product lines including aggregate placement, asphalt and concrete paving, and site development and grading. Although not common to all locations, other products include the sale of cement, asphalt oil for various commercial and roadway applications, various finished concrete products and other building materials and related contracting
services. This segment operates in the central, southern and western United States, including Alaska and Hawaii.
The construction services segment provides a full spectrum of construction services through its electrical and mechanical and transmission and distribution specialty contracting services across the United States. These specialty contracting services are provided to utilities and manufacturing, transportation, commercial, industrial, institutional, renewable and governmental customers. Its electrical and mechanical contracting services include construction and maintenance of electrical and communication wiring and infrastructure, fire suppression systems, and mechanical piping and services. Its transmission and distribution contracting services include construction and maintenance of overhead and underground electrical, gas and communication infrastructure, as well as manufacturing and distribution of transmission
line construction equipment and tools.
The Other category includes the activities of Centennial Capital, which, through its subsidiary InterSource Insurance Company, insures various types of risks as a captive insurer for certain of the Company's subsidiaries. The function of the captive insurer is to fund the self-insured layers of the insured Company's general liability, automobile liability, pollution liability and other coverages. Centennial Capital also owns certain real and personal property. In addition, the Other category includes certain assets, liabilities and tax adjustments of the holding company primarily associated with corporate functions and certain general and administrative costs (reflected in operation and maintenance expense) and interest
expense, which were previously allocated to the refining business and Fidelity and do not meet the criteria for income (loss) from discontinued operations.
Discontinued operations include the supporting activities of Fidelity other than certain general and administrative costs and interest expense as described above.
The information below follows the same accounting policies as described in Note 2 of the Notes to Consolidated Financial Statements in the 2021 Annual Report. iInformation
on the Company's segments was as follows:
Net
periodic benefit credit, including amount capitalized
(i898)
(i752)
(i1,796)
(i1,504)
Less
amount capitalized
i53
i44
i84
i83
Net
periodic benefit credit
$
(i951)
$
(i796)
$
(i1,880)
$
(i1,587)
/
The
components of net periodic benefit credit, other than the service cost component, are included in other income on the Consolidated Statements of Income. The service cost component is included in operation and maintenance expense on the Consolidated Statements of Income.
Nonqualified defined benefit plans
In addition to the qualified defined benefit pension plans reflected in the table at the beginning of this note, the Company also has unfunded, nonqualified defined benefit plans for executive officers and certain key management employees. The Company's net periodic benefit cost for these plans was $i773,000
and $i769,000 for the three months ended June 30, 2022 and 2021, respectively, and $ii1.5/
million for both the six months ended June 30, 2022 and 2021. The components of net periodic benefit cost for these plans are included in other income on the Consolidated Statements of Income.
Note 19 - iRegulatory matters
The
Company regularly reviews the need for electric and natural gas rate changes in each of the jurisdictions in which service is provided. The Company files for rate adjustments to seek recovery of operating costs and capital investments, as well as reasonable returns as allowed by regulators. Certain regulatory proceedings and cases may also contain recurring mechanisms that can have an annual true-up. Examples of these recurring mechanisms include: infrastructure riders, transmission trackers, renewable resource cost adjustment riders, as well as weather normalization and decoupling mechanisms. The following paragraphs summarize the Company's significant open regulatory proceedings and cases by jurisdiction including updates to those reported in the 2021 Annual Report and should be read in conjunction
with previous filings. The Company is unable to predict the ultimate outcome of these matters, the timing of final decisions of the various regulators and courts, or the effect on the Company's results of operations, financial position or cash flows.
Intermountain defers the difference between the actual cost of gas spent to serve customers and the amount approved to be recovered from customers and annually prepares a true-up pursuant to the purchased gas adjustment
tariff. On May 31, 2022, Intermountain filed an application with the IPUC for an out-of-cycle cost of gas adjustment requesting an increase in rates of approximately $i67.0 million annually or approximately i25.2
percent above current rates. The primary reason for the requested increase was to mitigate the under collection balance due to the significant increase in the commodity price for natural gas. On July 29, 2022, the request was approved with rates effective August 1, 2022. The new rates will be in effect until October 1, 2022, when rates based on Intermountain's annual purchased gas adjustment tariff filing will take effect, which is expected to be filed in August 2022.
MNPUC
Great Plains defers the difference between the actual cost of gas spent to serve customers and that recovered from customers on a monthly basis. Annually, Great Plains prepares a true-up pursuant to the purchased gas adjustment tariff. On August
30, 2021, the MNPUC issued an order to allow Great Plains recovery of an out-of-cycle cost of gas adjustment of $i8.8 million over a period of 27 months. The order was effective September 1, 2021, and is subject to a prudence review by the MNPUC. The requested increase was for the February 2021 extreme cold weather, primarily in the central United States, and market conditions surrounding the natural gas commodity market. The MNPUC prudence review is pending with
an order to be issued on or before August 29, 2022.
On June 1, 2022, Great Plains filed an application with the MNPUC for a decrease in its depreciation and amortization rates of approximately $i1.2 million annually or a decrease from a combined rate of i4.5
percent to i2.8 percent. Great Plains has requested the rates be retroactive to January 1, 2022. This matter is pending before the MNPUC.
NDPSC
On May 16, 2022, Montana-Dakota filed an application with the NDPSC for an electric general rate increase of approximately $i25.4 million
annually or i12.3 percent above current rates. The requested increase was primarily to recover investments in production, transmission and distribution facilities and the associated depreciation, operation and maintenance expenses and taxes associated with the increased investment. The NDPSC has 7 months to render a final decision on the rate case. On July 14, 2022, the NDPSC approved an interim rate increase of approximately $i10.9 million
annually or i5.3 percent above current rates, subject to refund, for service rendered on and after July 15, 2022.
On July 15, 2022, Montana-Dakota filed an application with the NDPSC to request an update to its transmission cost adjustment rider requesting to recover revenues of $i12.9 million,
which includes a true-up of the prior period adjustment, resulting in a decrease of $i1.6 million from current rates. The request is to recover transmission-related expenses and the revenue requirement for transmission facilities not currently recovered through electric service rates. The request proposes the rates be effective for service rendered on and after November 1, 2022. This matter is pending before the NDPSC.
SDPUC
Montana-Dakota
has a transmission cost recovery rider that allows annual updates to rates for actual costs associated with transmission-related projects and services. On March 1, 2022, Montana-Dakota filed an annual update to its transmission cost recovery rider to recover a revenue requirement of approximately $i2.5 million annually, which reflects a true-up of the prior period adjustment, resulting in an increase in current rates of approximately $i1.5 million.
On May 12, 2022, the SDPUC approved the rates as requested with an effective date of June 1, 2022.
WUTC
On September 30, 2021, Cascade filed an application with the WUTC for a natural gas rate increase of approximately $i13.7 million annually or approximately i5.1
percent above current rates. The requested increase was primarily to recover investments made in infrastructure upgrades, as well as to recover 2021 wage increases. On March 22, 2022, Cascade filed a multi-party settlement and stipulation on behalf of Cascade and the staff of the WUTC that would result in a revenue requirement increase of approximately $i10.7 million annually or approximately i4.0
percent above current rates. The WUTC has until September 1, 2022, to render a final decision on the rate case. This matter is pending before the WUTC.
On March 24, 2022, Cascade filed a request for a tariff revision with the WUTC to rectify an inadvertent IRS normalization violation resulting from its tariff established in 2018 that passes back to customers the reversal of plant-related excess deferred income taxes through an annual rate adjustment. This request was made in response to the issuance of an IRS private letter ruling to another Washington utility with the same annual rate adjustment tariff, which addressed its normalization violation. The private letter ruling concluded the tariff to refund excess deferred income taxes without corresponding adjustments for other components of rate base or changes in depreciation
or income tax expense, is an impermissible methodology under the IRS normalization and consistency rules. Cascade's request proposes a similar remedy through the tariff to recover the excess amounts refunded to customers while this tariff has been in place, and revises the method going forward to reflect excess deferred income taxes in rates in the same manner as other components of rate base from its most recent general rate case. Cascade has requested recovery of the excess refunded to customers of approximately $i3.3 million
and elimination of the currently deferred, but not yet refunded balance. This matter is pending before the WUTC, with an evidentiary hearing scheduled for November 17, 2022.
On June 1, 2022, Cascade filed its annual pipeline cost recovery mechanism requesting an increase in annual revenue of approximately $i2.6 million
or approximately i0.9 percent, which will be adjusted as necessary prior to the effective date. The filing includes a proposed effective date of November 1, 2022. This matter is pending before the WUTC.
Note 20 - iContingencies
iThe Company is party to claims and lawsuits arising out of its business and that of its consolidated subsidiaries, which may include, but are not limited to, matters involving property damage, personal injury, and environmental, contractual, statutory and regulatory obligations. The Company accrues a liability for those contingencies
when the incurrence of a loss is probable and the amount can be reasonably estimated. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. The Company does not accrue liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated or when the liability is believed to be only reasonably possible or remote. For contingencies where an unfavorable outcome is probable or reasonably possible and which are material, the Company discloses the nature of the contingency and, in some circumstances, an estimate of the possible loss. Accruals are based on the best information available, but in certain situations management is unable to estimate
an amount or range of a reasonably possible loss including, but not limited to when: (1) the damages are unsubstantiated or indeterminate, (2) the proceedings are in the early stages, (3) numerous parties are involved, or (4) the matter involves novel or unsettled legal theories.
At June 30, 2022 and 2021, and December 31, 2021, the Company accrued liabilities, which have not been discounted, of $i28.2 million,
$i30.8 million and $i37.0 million, respectively. At June 30, 2022 and 2021,
and December 31, 2021, the Company also recorded corresponding insurance receivables of $i5.9 million, $i6.9 million
and $i14.1 million, respectively, and regulatory assets of $i20.9 million, $i21.2 million
and $i21.2 million, respectively, related to the accrued liabilities. The accruals are for contingencies resulting from litigation, production taxes, royalty claims and environmental matters. This includes amounts that have been accrued for matters discussed in Environmental matters within this note. The Company will continue to monitor each matter and adjust accruals as might be warranted based on new information and further developments. Management believes that the outcomes with respect to probable and reasonably
possible losses in excess of the amounts accrued, net of insurance recoveries, while uncertain, either cannot be estimated or will not have a material effect upon the Company's financial position, results of operations or cash flows. Unless otherwise required by GAAP, legal costs are expensed as they are incurred.
Environmental matters
The Company is a party to claims for the cleanup of environmental contamination at certain manufactured gas plant sites, as well as a superfund site. There were no material changes to the Company's environmental matters that were previously reported in the 2021 Annual Report.
Guarantees
Certain
subsidiaries of the Company have outstanding guarantees to third parties that guarantee the performance of other subsidiaries of the Company. These guarantees are related to construction contracts, insurance deductibles and loss limits, and certain other guarantees. At June 30, 2022, the fixed maximum amounts guaranteed under these agreements aggregate $i276.0 million.
Certain of the guarantees also have no fixed maximum amounts specified. At June 30, 2022, the amounts of scheduled expiration of the maximum amounts guaranteed under these agreements aggregate to $i21.8 million in 2022; $i82.0 million
in 2023; $i160.6 million in 2024; $i900,000 in 2025; $i900,000
in 2026; $i800,000 thereafter; and $i9.0 million, which has no scheduled maturity date. There were ino
amounts outstanding under the previously mentioned guarantees at June 30, 2022. In the event of default under these guarantee obligations, the subsidiary issuing the guarantee for that particular obligation would be required to make payments under its guarantee.
Certain subsidiaries have outstanding letters of credit to third parties related to insurance policies and other agreements, some of which are guaranteed by other subsidiaries of the Company. At June 30, 2022, the fixed maximum amounts guaranteed under these letters of credit aggregated $i28.2 million.
At June 30, 2022, the amounts of scheduled expiration of the maximum amounts guaranteed under these letters of credit aggregate to $i27.6 million in 2022 and $i600,000
in 2023. There were ino amounts outstanding under the previously mentioned letters of credit at June 30, 2022. In the event of default under these letter of credit obligations, the subsidiary guaranteeing the letter of credit would be obligated for reimbursement of payments made under the letter of credit.
In addition, Centennial, Knife River and MDU Construction Services have issued guarantees to third parties related to the routine purchase of maintenance items, materials
and lease obligations for which no fixed maximum amounts have been specified. These guarantees have no scheduled maturity date. In the event a subsidiary of the Company defaults under these obligations, Centennial, Knife River or MDU Construction Services would be required to make payments under these guarantees. Any amounts outstanding by subsidiaries of the Company were reflected on the Consolidated Balance Sheet at June 30, 2022.
In the normal course of business, Centennial has surety bonds related to construction contracts and reclamation
obligations of its subsidiaries. In the event a subsidiary of Centennial does not fulfill a bonded obligation, Centennial would be responsible to the surety bond company for completion of the bonded contract or obligation. A large portion of the surety bonds is expected to expire within the next 12 months; however, Centennial will likely continue to enter into surety bonds for its subsidiaries in the future. At
June 30,
2022, approximately $i1.2 billion of surety bonds were outstanding, which were not reflected on the Consolidated Balance Sheet.
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.
Fuel Contract Coyote Station entered into a coal supply agreement with Coyote Creek that provides for the purchase of coal necessary to supply the coal requirements of the Coyote Station for the period May 2016 through December 2040. Coal purchased under the coal supply agreement is reflected in inventories on the Consolidated Balance Sheets and is recovered from customers as a component of electric fuel and purchased power.
The coal supply
agreement creates a variable interest in Coyote Creek due to the transfer of all operating and economic risk to the Coyote Station owners, as the agreement is structured so that the price of the coal will cover all costs of operations, as well as future reclamation costs. The Coyote Station owners are also providing a guarantee of the value of the assets of Coyote Creek as they would be required to buy the assets at book value should they terminate the contract prior to the end of the contract term and are providing a guarantee of the value of the equity of Coyote Creek in that they are required to buy the entity at the end of the contract term at equity value. Although the
Company has determined that Coyote Creek is a VIE, the Company has concluded that it is not the primary beneficiary of Coyote Creek because the authority to direct the activities of the entity is shared by the four unrelated owners of the Coyote Station, with no primary beneficiary existing. As a result, Coyote Creek is not required to be consolidated in the Company's financial statements.
Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations
The Company is Building a Strong America® by providing essential infrastructure and services. The Company and its employees work hard to keep the economy of America moving with the products and services provided, which include powering, heating and connecting homes, factories, offices and stores; and building roads, highways, data infrastructure and airports. The Company is authorized to conduct business in nearly every state in the United States and during peak construction season has employed over 16,000 employees. The Company's organic investments
are strong drivers of high-quality earnings and continue to be an important part of the Company's growth. Management believes the Company is well positioned in the industries and markets in which it operates.
On August 4, 2022, the Company announced its Board of Directors unanimously approved a plan to pursue a separation of Knife River from the Company. The separation is planned as a tax-free spinoff transaction to the Company’s stockholders for U.S. federal income tax
purposes. The transaction is expected to result in two independent, publicly traded and well-capitalized companies.
Completion of the separation will be subject to, among other things, the effectiveness of a registration statement on Form 10 with the SEC, final approval from the Company’s Board of Directors, receipt of a tax opinion and, if determined advisable, a private letter ruling from the IRS, and other customary conditions. The Company may, at any time and for any reason until the proposed transaction is complete, abandon the separation or modify or change its terms. The separation is expected to be complete in 2023, but there can be no assurance regarding the ultimate timing of the separation or that the separation will ultimately occur. See Part II, Item
1A. Risk Factors for a description of some of the risks and uncertainties associated with the proposed transaction.
The Company is facing inflationary pressures, including rising commodity prices; rising interest rates; and materials shortages due to foreign conflicts and lasting impacts of the COVID-19 pandemic. Inflation rates in the Unites States have increased significantly, relative to historical precedent, and may continue to rise. Suppliers may continue to raise prices that the Company may not be able to pass on to its customers. The ability to raise selling prices to cover higher costs due to inflation are subject to customer demand, industry competition and the availability of materials, among other things. Rising interest rates have resulted in and will
likely continue to result in higher borrowing costs on new debt, resulting in impacts to the Company's asset valuations and negatively impacting the purchasing power of its customers.
The construction materials and contracting and construction services businesses have experienced some impacts to earnings related to these pressures, while the electric and natural gas distribution businesses have experienced increased costs related to purchased natural gas and capital expenditures. The Company has implemented measures to proactively order supplies and work with additional suppliers to minimize the impacts of both supply chain delays and pricing increases; however, the Company has
experienced some delays on delivery of certain materials and cost pressures. The construction companies have increased product and bid pricing when possible to incorporate the rising costs experienced. The construction services business has also worked with vendors to secure pricing at the time of bid to mitigate the risk of price increases on materials. The electric and natural gas distribution businesses expect to request recovery of increased costs due to inflation in future rate cases. The Company continues to monitor the impact that inflation, rising interest rates, rising commodity prices and supply chain disruptions may have on its businesses and customers. For more information on possible impacts to the Company's businesses, see the Outlook for each segment below and Part I, Item 1A. Risk Factors
in the 2021 Annual Report.
Forward-Looking Statements
The following sections contain forward-looking statements within the meaning of Section 21E of the Exchange Act. Forward-looking statements are all statements other than statements of historical fact, including without limitation those statements that are identified by the words "anticipates,""estimates,""expects,""intends,""plans,""predicts" and similar expressions, and include statements concerning plans, trends, objectives, goals, strategies, future events or performance, and underlying assumptions (many of which are based, in turn, upon further assumptions) and other statements that are other than statements of historical facts. From time to time, the
Company may publish or otherwise make available forward-looking statements of this nature, including statements contained within Business Segment Financial and Operating Data.
Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties. Nonetheless, the
Company's expectations, beliefs or projections may not be achieved or accomplished and changes in such assumptions and factors could cause actual future results to differ materially.
Any forward-looking statement contained in this document speaks only as of the date on which the statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances that occur after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as required by law. New factors emerge from time to time, and it is not possible for management to predict all the factors, nor can it assess the effect of each factor on the Company's business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. All forward-looking statements, whether written or oral and whether made by or on behalf of the Company, are expressly qualified by the risk factors and cautionary statements reported in
The construction materials and contracting business experienced increased contracting workloads and higher average pricing, while results were negatively impacted by inflationary pressures, including higher diesel fuel, materials, labor and production costs. The natural gas distribution business experienced an increased seasonal loss driven by higher operating expenses, primarily due to increases in subcontractor costs, software expenses and vehicle fuel costs, as well as higher depreciation expense. The electric business experienced decreased commercial and residential retail sales volumes because of cooler weather and the pipeline business experienced lower
non-regulated project margins and higher interest expense, partially offset by the net benefit of the North Bakken Expansion project. The Company's earnings were further impacted by $12.1 million in lower returns on the Company's nonqualified benefit plan investments, as discussed in Note 14. Partially offsetting these decreases were higher overall workloads for electrical and mechanical services at the construction services business, primarily in the data center, hospitality and commercial facilities sectors.
The Company experienced decreased earnings across all of the Company's businesses. While the construction materials and contracting business experienced higher average pricing and increased contracting workloads, results were negatively impacted by inflationary pressures, including higher diesel fuel, repair and maintenance, materials, labor and production costs. The natural gas distribution business experienced higher operating expenses, including subcontractor costs and depreciation expense, partially offset by increased sales volumes and approved rate recovery in certain jurisdictions. Increased operating costs related to a planned maintenance outage at Coyote Station along with lower per unit average
rates decreased earnings at the electric business. The pipeline business experienced lower non-regulated project margins and higher interest expense, partially offset by the net benefit of the North Bakken Expansion project. The decrease in earnings at the construction services business was largely driven by increased selling, general and administrative expenses and lower industrial, institutional and utility margins, partially offset by higher commercial, renewable and service margins. The Company's earnings were further impacted by $18.3 million in lower returns on the Company's nonqualified benefit plan investments, as discussed in Note 14.
A discussion of key financial data from the
Company's business segments follows.
The following sections include key financial and operating data for each of the Company's business segments. Also included are highlights on key growth strategies, projections and certain assumptions for the Company and its subsidiaries
and other matters of the Company's business segments.
For information pertinent to various commitments and contingencies, see the Notes to Consolidated Financial Statements. For a summary of the Company's business segments, see Note 17 of the Notes to Consolidated Financial Statements.
Electric and Natural Gas Distribution
Strategy and challenges The electric and natural gas distribution segments provide electric and natural gas distribution services to customers, as discussed in Note 17. Both segments strive to be top performing utility companies
measured by integrity, employee safety and satisfaction, customer service and stockholder return. The segments provide safe, reliable, competitively priced and environmentally responsible energy service to customers while focusing on growth and expansion opportunities within and beyond its existing territories. The Company is focused on cultivating organic growth while managing operating costs and monitoring opportunities for these segments to retain, grow and expand their customer base through extensions of existing operations, including building and upgrading electric generation, transmission and distribution, and natural gas systems, and through selected acquisitions of companies and properties with similar operating and growth objectives at prices that will provide stable cash flows and an opportunity to earn a competitive return on investment. The continued efforts to create operational
improvements and efficiencies across both segments promotes the Company's business integration strategy. The primary factors that impact the results of these segments are the ability to earn authorized rates of return, cost of natural gas, cost of electric fuel and purchased power, weather, climate change initiatives, competitive factors in the energy industry, population growth and economic conditions in the segments' service areas.
The electric and natural gas distribution segments are subject to extensive regulation in the jurisdictions where they conduct operations with respect to costs, timely recovery of investments and permitted returns on investment. The Company is focused on modernizing utility infrastructure to meet the varied energy needs of both its
customers and communities while ensuring the delivery of safe, reliable, affordable and environmentally responsible energy. The segments continue to invest in facility upgrades to be in compliance with existing and known future regulations. To assist in the reduction of regulatory lag in obtaining revenue increases to align with increased investments, tracking mechanisms have been implemented in certain jurisdictions. The Company also seeks rate adjustments for operating costs and capital investments, as well as reasonable returns on investments, not covered by tracking mechanisms. For more information on the Company's tracking mechanisms and recent cases, see Note 19 and the 2021 Annual Report.
These segments are also subject to extensive regulation related to
certain operational and environmental compliance, cybersecurity, permit terms and system integrity. Both segments are faced with the ongoing need to actively evaluate cybersecurity processes and procedures related to its transmission and distribution systems for opportunities to further strengthen its cybersecurity protections. Implementation of enhancements and additional requirements is ongoing.
To date, many states have enacted and others are considering, mandatory clean energy standards requiring utilities to meet certain thresholds of renewable and/or carbon-free energy supply. The current presidential administration has made climate change a focus, as further discussed in the Outlook section. Over the long-term, the Company expects overall electric demand to be positively impacted by increased electrification trends, including electric
vehicle adoption, as a means to address economy-wide carbon emission concerns and changing customer conservation patterns. MISO and NERC have recently announced concerns with reliability of the electric grid due to capacity shortages, which has resulted from rapid expansion of renewables and rapid reduction of baseload resources such as coal, while load growth has increased faster than expected. These changes could result in increased costs to produce electricity and procure natural gas. The impact of these changes on the Company is unknown. The Company will continue to monitor the progress of these changes and assess the potential impacts they may have on its stakeholders, business processes, results of operations, cash flows and disclosures.
Revenues are impacted
by both customer growth and usage, the latter of which is primarily impacted by weather, as well as impacts associated with commercial and industrial slow-downs, including economic recessions, and energy efficiencies. Very cold winters increase demand for natural gas and to a lesser extent, electricity, while warmer than normal summers increase demand for electricity, especially among residential and commercial customers. Average consumption among both electric and natural gas customers has tended to decline as more efficient appliances and furnaces are installed, and as the Company has implemented conservation programs. Natural gas weather normalization and decoupling mechanisms in certain jurisdictions have been implemented to largely mitigate the effect that would otherwise be caused by variations in volumes sold to these customers due to weather and changing consumption patterns on
the Company's distribution margins.
The electric and natural gas distribution segments continue to face increased pricing and lead times on delivery of certain raw materials and equipment used in electric transmission and distribution system and natural gas pipeline projects. Long lead times are attributable to increased demand for steel products from pipeline companies as they continue pipeline system safety and integrity replacement projects driven by PHMSA regulations, as well as delays in the manufacturing and shipping of electrical equipment as a result of the COVID-19 pandemic and subsequent supply chain issues. In addition, the segments are currently experiencing increased fuel costs as well as other general inflationary pressures. The Company continues
to monitor these risks and
has practices in place to minimize the impacts of long lead times and materials pricing such as working with manufacturers to proactively order impacted materials, as well as working with additional suppliers. While not material, these segments have experienced delays and inflationary pressures, including increased costs related to purchased natural gas and capital expenditures. The Company expects these delays and inflationary pressures to continue throughout at least the remainder of 2022.
The ability to grow through
acquisitions is subject to significant competition and acquisition premiums. In addition, the ability of the segments to grow their service territory and customer base is affected by regulatory constraints, the economic environment of the markets served and competition from other energy providers and fuels. As the industry continues to expand the use of renewable energy sources, the need for additional transmission is growing. On July 25, 2022, as part of its long range transmission plan, MISO announced approval of 18 transmission projects totaling $10.3 billion of investments in MISO's midwest subregion, of which Montana-Dakota is a part. The Company intends to pursue the available opportunities associated with MISO's plan. The construction of new electric generating facilities, transmission lines and other service facilities is subject
to increasing costs and lead times, extensive permitting procedures, and federal and state legislative and regulatory initiatives, which may necessitate increases in electric energy prices.
Earnings overview - The following information summarizes the performance of the electric segment.
Three Months Ended June 30, 2022, Compared to Three Months Ended June 30,
2021 Electric earnings decreased $5.7 million as a result of:
•Revenue increased $1.7 million.
◦Largely due to:
•Higher electric fuel and purchased power costs of $3.8 million recovered in customer rates that were offset in expense, as described below.
•Higher net transmission revenues of $900,000.
◦Partially offset by:
•Lower renewable tracker revenues, largely due to higher production tax credits of $1.5 million.
•Lower retail sales volumes of 3.4 percent, primarily
commercial and residential retail sales as a result of cooler weather.
•Lower per unit average rates of $400,000.
•Electric fuel and purchased power increased $3.8 million.
◦Primarily the result of higher MISO costs of $5.7 million as a result of increased energy costs.
◦Partially offset by decreased fuel costs associated with the Heskett Station and Lewis & Clark Station plant closures.
•Operation and maintenance was comparable to the same period in the prior year. Increased contract service costs associated with a planned outage
at Coyote Station were mostly offset by decreased payroll-related costs, largely due to plant closures, as previously discussed, and lower stock-based compensation expense.
•Depreciation, depletion and amortization increased $2.5 million, primarily due to increased amortization of plant retirement and closure costs recovered in operating revenues, as discussed in Note 13.
•Taxes, other than income were comparable to the same period in the prior year.
•Other income (expense) decreased $2.6 million, directly resulting from lower returns on the Company's nonqualified benefit plan investments, as discussed in Note 14.
•Interest
expense increased $400,000, as a result of higher long-term debt balances from debt issued in 2021.
•Income tax benefit increased $1.8 million.
◦Largely due to:
•Lower income before income taxes.
•Higher production tax credits driven by higher wind production.
◦Partially offset by lower permanent tax adjustments.
Six Months Ended June 30, 2022, Compared to Six Months Ended June 30, 2021 Electric earnings decreased $5.1 million as a result of:
•Revenue
increased $10.7 million.
◦Largely due to:
•Higher fuel and purchased power costs of $11.6 million recovered in customer rates that were offset in expense, as described below.
•Higher transmission revenues, primarily from higher net transmission of $1.7 million and higher transmission interconnect upgrades of $400,000.
◦Partially offset by:
•Lower renewable tracker revenues associated with higher production tax credits.
•Lower per unit average rates of $1.4 million.
•Electric fuel and purchased
power increased $11.6 million.
◦Primarily the result of higher MISO costs of $14.9 million as a result of increased energy costs.
◦Partially offset by decreased fuel costs associated with the Heskett Station and Lewis & Clark Station plant closures.
•Operation and maintenance was comparable to the same period in the prior year. Increased contract service costs associated with a planned outage at Coyote Station were mostly offset by decreased payroll-related costs, largely due to plant closures, as previously discussed.
•Depreciation, depletion and amortization increased $3.3 million, primarily due
to:
◦Increased amortization of plant retirement and closure costs of $2.8 million recovered in operating revenues, as discussed in Note 13.
◦Increased property, plant and equipment balances placed in service, largely related to growth and replacement projects.
•Taxes, other than income decreased $500,000 due to lower coal conversion taxes in certain jurisdictions.
•Other income (expense) decreased $3.4 million.
◦Largely lower returns on the Company's nonqualified benefit plan investments of $3.8 million, as discussed in Note 14.
◦Partially
offset by higher AFUDC largely due to higher rates.
Three
Months Ended June 30, 2022, Compared to Three Months Ended June 30, 2021 Natural gas distribution's seasonal loss increased $6.8 million as a result of:
◦Higher purchased natural gas sold of $51.8 million recovered in customer rates that was offset in expense, as described below.
◦Higher retail sales volumes of approximately 27.2 percent across all customer classes due to colder weather, partially offset by weather normalization and decoupling mechanisms in certain jurisdictions.
◦Higher revenue-based
taxes recovered in rates of $2.1 million that were offset in expense, as described below.
◦Higher rate recovery under pipeline replacement mechanisms in certain jurisdictions.
•Purchased natural gas sold increased $51.8 million, primarily due to:
◦Higher natural gas costs as a result of higher market prices of $32.5 million, including the higher recovery of purchased gas adjustments related to the February 2021 cold weather event and the 2018 Enbridge pipeline rupture.
◦Higher volumes of natural gas purchased of $19.3 million.
•Operation and maintenance increased $4.8 million due to:
◦Increased
contract services of $1.7 million, primarily higher subcontractor costs.
◦Higher software costs of $600,000.
◦Higher vehicle fuel costs.
◦Payroll-related costs were comparable with lower stock-based compensation expense offset by higher straight-time payroll.
•Depreciation, depletion and amortization increased $2.1 million, primarily resulting from:
◦Increased property, plant and equipment balances from growth and replacement projects placed in service.
◦The
absence of decreased depreciation rates in certain jurisdictions in 2021.
•Taxes, other than income increased $2.2 million resulting from higher revenue-based taxes being recovered in rates.
•Other income (expense) decreased $3.1 million, largely the result of lower returns on the Company's nonqualified benefit plan investments, as discussed in Note 14.
•Interest expense increased $600,000, primarily due to higher long-term debt balances from debt issued in 2022 and 2021 and higher interest rates.
•Income tax benefit increased $1.1 million as a result of an increased seasonal loss.
Six
Months Ended June 30, 2022, Compared to Six Months Ended June 30, 2021 Natural gas distribution's earnings decreased $6.7 million as a result of:
◦Higher purchased natural gas sold of $142.8 million recovered in customer rates that was offset in expense, as described below.
◦Higher revenue-based taxes recovered in rates of $5.8 million that were offset in expense, as described below.
◦Higher retail sales volumes of approximately 13.6 percent across all customer classes, partially offset by weather
normalization and decoupling mechanisms in certain jurisdictions.
◦Higher pipeline replacement mechanisms of $1.2 million, as well as approved rate relief of $1.0 million.
•Purchased natural gas sold increased $142.8 million, primarily due to:
◦Higher natural gas costs as a result of higher market prices of $105.6 million, including the higher recovery of purchased gas adjustments related to the February 2021 cold weather event and the 2018 Enbridge pipeline rupture.
◦Higher volumes of natural gas purchased of $37.2 million.
•Operation and maintenance increased $7.8 million, due to:
◦Increased
contract services of $2.8 million, primarily higher subcontractor costs.
◦Higher software costs of $1.5 million.
◦Higher payroll-related costs, largely higher straight-time payroll, offset in part by lower stock-based compensation expense.
•Depreciation, depletion and amortization increased $2.0 million from increased property, plant and equipment balances from growth and replacement projects placed in service.
•Taxes, other than income increased $5.8 million resulting from higher revenue-based taxes being recovered in rates.
•Other
income (expense) decreased $5.1 million, primarily the result of lower returns on the Company's nonqualified benefit plan investments, as discussed in Note 14.
•Interest expense increased $1.0 million, primarily due to higher long-term debt balances from debt issued in 2022 and 2021 and higher interest rates.
•Income tax expense decreased $1.0 million, largely the result of lower income before income taxes.
Outlook The
Company expects these segments will grow rate base by approximately 5 percent annually over the next five years on a compound basis. Operations are spread across eight states where the Company expects customer growth to be higher than the national average. The Company expects customer growth to continue to average 1 percent to 2 percent per year and as of June 30, 2022, these segments experienced retail customer growth of approximately 1.6 percent. This customer growth, along with system upgrades and replacements needed to supply safe and reliable service, will require investments in new and replacement electric and natural gas systems.
These segments are exposed to energy price volatility and may be impacted
by changes in oil and natural gas exploration and production activity. Rate schedules in the jurisdictions in which the Company's natural gas distribution segment operates contain clauses that permit the Company to file for rate adjustments for changes in the cost of purchased natural gas. Although changes in the price of natural gas are passed through to customers and have minimal impact on the Company's earnings, the natural gas distribution segment's customers benefit from lower natural gas prices through the Company's utilization of storage and fixed price contracts.
During the last half of 2021 and the first half of 2022, the Company experienced increased natural gas prices and expects this trend to continue through the next winter heating season due to the increase in demand outpacing the supply along with the impact of global events. As a result, the Company has filed an out-of-cycle cost of gas adjustment in Idaho to assist in the timely recovery of these costs. See Note 19 for additional details. The Company will continue to monitor natural gas prices, as well as oil and natural gas production levels.
In February 2019, the Company announced the retirement
of three aging coal-fired electric generating units, resulting from the Company's analysis showing that the plants are no longer expected to be cost competitive for customers. The Company ceased operations of Unit 1 at Lewis & Clark Station in Sidney, Montana, in March 2021 and Units 1 and 2 at Heskett Station near Mandan, North Dakota, in February 2022. In addition, in May 2022 the Company began construction of Heskett Unit 4, an 88-MW simple-cycle natural gas-fired combustion turbine peaking unit at the existing Heskett Station near Mandan, North Dakota, with an expected in service date in the first half of 2023.
The
Company is one of four owners of Coyote Station and cannot make a unilateral decision on the plant's future; therefore, the Company could be negatively impacted by decisions of the other owners. In September 2021, Otter Tail Power Company filed its 2022 Integrated Resource Plan in Minnesota and North Dakota, which included its intent to start the process of withdrawal from its 35 percent ownership interest in Coyote Station with an anticipated exit from the plant by December 31, 2028. The joint owners continue to collaborate in analyzing data and weighing decisions that impact the plant and its employees as well as each company's customers and communities served. State implementation of pollution control plans to improve visibility at Class I areas, such as national parks, under the EPA's Regional Haze Rule could require the owners
of Coyote Station to incur significant new costs. If the owners decide to incur such costs, the costs could, dependent on determination by state regulatory commissions on approval to recover such costs from customers, negatively impact the Company's results of operations, financial position and cash flows. The NDDEQ submitted a draft state implementation plan to the EPA and federal land managers of the National Park Service, the United States Fish and Wildlife Service and the United States Forest Service for consultation, and the federal land managers have submitted comments back to the NDDEQ for review. The NDDEQ determined it is not reasonable to require controls during this planning period. The emissions modeling was delayed and has subsequently delayed the NDDEQ state implementation plan process. The NDDEQ state implementation plan was open for public comment from April
20, 2022 through June 1, 2022, and, as currently drafted, does not require additional controls for any units in North Dakota, including Coyote Station. Therefore, the NDDEQ's state implementation plan, which was due to the EPA by July 2021, is anticipated to be submitted to the EPA in August 2022.
Legislation and rulemaking The Company continues to monitor legislation and rulemaking related to clean energy standards that may impact its segments. Below are some of the specific legislative actions the Company is monitoring.
•The current presidential administration is considering changes to the federal Clean Air Act, some
of which were amended by the previous presidential administration. The content and impacts of the changes under consideration are uncertain and the Company continues to monitor for potential actions by the EPA.
•In Oregon, the Climate Protection Program Rule was approved in December 2021, which requires natural gas companies to reduce GHG emissions 50 percent below the baseline by 2035 and 90 percent below the baseline by 2050, which may be achieved through surrendering emissions allowances, investing in additional customer conservation and energy efficiency programs, purchasing community climate investment credits, and purchasing low carbon fuels such as renewable natural gas. The Company expects the compliance costs for these regulations
to be recovered through customer rates. The Company, along with the other two local distribution companies in Oregon, filed a lawsuit on March 18, 2022, challenging the Climate Protection Program Rule. The lawsuit was filed on behalf of customers as the Company does not believe the rule accomplishes environmental stewardship in the most effective and affordable way possible.
•In Washington, the Climate Commitment Act signed into law in May 2021 requires natural gas distribution companies to reduce overall GHG emissions 45 percent below 1990 levels by 2030, 70 percent below 1990 levels by 2040 and 95 percent below 1990 levels by 2050, which may be achieved through increased energy efficiency
and conservation measures, purchased emission allowances and offsets, and purchases of low carbon fuels. As directed by the Climate Commitment Act, the Washington DOE has begun the Climate Commitment Program rule-making process and is expected to publish a final rule in the fall of 2022. The Company has begun reviewing compliance options and expects the compliance costs for these regulations will be recovered through customer rates.
•On April 22, 2022, the Washington State Building Code Council approved revisions
to the state's commercial energy code that will significantly limit the use of natural gas for space and water heating in new and retrofitted commercial and multifamily buildings and proposed the review of similar restrictions in the future for residential buildings. The Company is currently assessing the impact of these revisions.
Pipeline
Strategy and challenges The pipeline segment provides natural gas transportation, underground storage and energy-related services, as discussed in Note 17. The segment focuses on utilizing its extensive expertise in the design, construction and operation of energy infrastructure and related services to increase
market share and profitability through optimization of existing operations, organic growth and investments in energy-related assets within or in close proximity to its current operating areas. The segment focuses on the continual safety and reliability of its systems, which entails building, operating and maintaining safe natural gas pipelines and facilities. The segment continues to evaluate growth opportunities including the expansion of natural gas facilities; incremental pipeline projects; and expansion of energy-related services leveraging on its core competencies. In support of this strategy, the North Bakken Expansion project in western North Dakota was placed in service in February of 2022. The project has capacity to transport 250 MMcf of natural gas per day and can be increased to 625 MMcf per day with additional compression. In addition, the Line Section 7 Expansion project was placed in service in August of 2022 and increased system capacity by 6.7 MMcf per
day.
The segment is exposed to energy price volatility which is impacted by the fluctuations in pricing, production and basis differentials of the energy market's commodities. Legislative and regulatory initiatives on increased pipeline safety regulations and environmental matters such as the reduction of methane emissions could also impact the price and demand for natural gas.
The pipeline segment is subject to extensive regulation related to certain operational and environmental compliance, cybersecurity, permit terms and system integrity. The Company continues to actively evaluate cybersecurity processes and procedures, including changes in the industry's cybersecurity regulations, for opportunities to further strengthen its cybersecurity protections. Implementation of enhancements and additional
requirements is ongoing. The segment reviews and secures existing permits and easements, as well as new permits and easements as necessary, to meet current demand and future growth opportunities on an ongoing basis. Groups opposing natural gas pipelines could also cause negative impacts on the segment with increased costs, potential delays to project completion or cancellation of prospective projects.
The segment regularly experiences extended lead times on raw materials that are critical to the segment's construction and maintenance work. In addition, the segment is currently experiencing increased fuel and raw material costs, as well as other inflationary pressures. Long lead times on materials could delay maintenance work and construction projects potentially causing lost revenues and/or increased costs. The Company is actively managing the
national supply chain challenges and inflationary costs, including longer than normal lead times for certain items, and working with its manufacturers and suppliers to help mitigate these risks including procuring materials further in advance to minimize delays and impacts. The Company expects supply chain challenges and inflationary pressures to continue throughout at least the remainder of 2022.
The segment focuses on the recruitment and retention of a skilled workforce to remain competitive and provide services to its customers. The industry in which it operates relies on a skilled workforce to construct energy infrastructure and operate existing infrastructure in a safe manner. A shortage of skilled personnel can create a competitive labor market which could increase costs incurred by the segment. Competition from other pipeline companies
can also have a negative impact on the segment.
Earnings overview - The following information summarizes the performance of the pipeline segment.
Three Months Ended June 30, 2022, Compared to Three Months Ended June 30, 2021Pipeline earnings decreased $2.1 million as a result of:
•Revenues increased $2.0 million.
◦Driven by increased transportation volume revenues of $4.1 million, largely due to the North Bakken Expansion project placed in service in February 2022.
◦Partially
offset by lower non-regulated project revenues.
•Operation and maintenance decreased $1.3 million resulting primarily from lower non-regulated project costs associated with lower non-regulated project revenues, as previously discussed. Lower payroll-related costs, largely due to lower incentive accruals, were mostly offset by higher materials and legal costs.
•Depreciation, depletion and amortization increased $1.6 million due to increased property, plant and equipment balances, largely related to the North Bakken Expansion project.
•Taxes, other than income were comparable to the same period in the prior year.
•Other income (expense) decreased $2.6 million, driven by:
◦Lower
returns on the Company's nonqualified benefit plan investments of $1.3 million, as discussed in Note 14.
◦Lower AFUDC as a result of the completion of the North Bakken Expansion project placed in service in February 2022.
•Interest expense increased $800,000, primarily due to higher debt balances to fund capital expenditures.
•Income tax expense was comparable to the same period in the prior year.
Six Months EndedJune 30, 2022, Compared to Six Months Ended June 30, 2021Pipeline
earnings decreased $3.6 million as a result of:
•Revenues increased $2.9 million.
◦Driven by increased transportation volume revenues of $7.0 million, largely due to the North Bakken Expansion project placed in service in February 2022.
◦Partially offset by:
•Lower non-regulated project revenues of $3.0 million.
•Lower storage-related revenues of $700,000.
•Lower transmission rate, due to an expired negotiated contract converted to tariff rate.
•Operation
and maintenance decreased $1.1 million, driven by:
◦Lower non-regulated project costs of $1.9 million associated with lower non-regulated project revenues, as previously discussed.
◦Higher materials, legal and contract services costs were partially offset by lower payroll-related costs, largely due to lower incentive accruals.
•Depreciation, depletion and amortization increased $2.8 million due to increased property, plant and equipment balances, largely related to the North Bakken Expansion project.
•Taxes, other than income were comparable to the same period in the prior year.
•Other
income (expense) decreased $3.4 million, resulting from:
◦Largely due to lower returns on the Company's nonqualified benefit plan investments of $1.8 million, as discussed in Note 14.
◦Lower AFUDC as a result of the completion of the North Bakken Expansion project placed in service in February 2022.
•Interest expense increased $1.3 million, primarily due to interest associated with higher debt balances to fund capital expenditures.
•Income tax expense was comparable to the same period in the prior year.
Outlook
On February 18, 2022, the FERC issued two policy statements regarding the certification of new interstate natural gas facilities. The two policy statements were subsequently converted to draft policy statements by the FERC on March 24, 2022. The first draft policy statement, the Updated Certificate Policy Statement, describes how the FERC will determine whether a new interstate natural gas transportation project is required by public convenience and necessity. It includes increased focus on a project's purpose and need and the environmental impacts; as well as impacts on landowners and environmental justice communities. The FERC also clarified the updated policy statement will not apply to projects that have been filed with the FERC prior to the policy statement being finalized. The second draft policy statement, the Interim GHG Policy Statement,
explains how the FERC will assess the impacts of natural gas infrastructure projects on climate change in its reviews under the National Environmental Policy Act and Natural Gas Act. The FERC invited public comment on the draft policy statements which were due April 25, 2022. The Company continues to monitor and assess these initiatives and the potential impacts they may have on its business processes, current and future projects, results of operations and disclosures.
The Company has continued to experience the effect of associated natural gas production in the Bakken, which has provided opportunities for organic growth projects and increased demand. The completion of organic growth projects has contributed to
higher volumes of natural gas the Company transports through its system. Increased oil prices have allowed producers to bring wells back online and support new drilling. As a result, associated natural gas production in the Bakken has returned to near pre-pandemic levels and is expected to continue to grow due to new oil wells and increasing gas to oil ratios.
The low levels of natural gas in storage nationally, along with global events, has put upward pressure on natural gas prices and increased volatility. While the Company believes there will continue to be varying pressures on natural gas production levels and prices, the long-term outlook for natural gas prices continues to provide growth opportunity for industrial supply related projects and seasonal pricing
differentials provide opportunities for storage services.
The Company continues to focus on growth and improving existing operations through organic projects in all areas in which it operates, which includes additional organic growth projects with local distribution companies and industrial customers in various stages of development.
In July 2021, the Company announced plans for a natural gas pipeline expansion project in eastern North Dakota. The Wahpeton Expansion project consists of 60 miles of pipe and ancillary facilities and is designed to increase capacity by 20 MMcf per day, which is supported by long-term customer agreements with Montana-Dakota and its utility customers. Construction is expected to begin in early
2024, depending on regulatory approvals, with an anticipated completion date later in 2024. On May 27, 2022, the Company filed with FERC its application for this project.
The Company has also entered into long-term customer agreements for the construction of four additional growth projects. The first of these projects, Line Section 7 Expansion project, was placed in service in August 2022 and increased system capacity by 6.7 MMcf per day. The remaining projects are still dependent on regulatory approvals and anticipated to be completed in 2023. Estimated capital expenditures for these projects is approximately $108 million and is included in the pipeline segment's estimated capital expenditures for 2022 and 2023.
The projects will add total incremental system capacity of over 300 MMcf per day.
Construction Materials and Contracting
Strategy and challenges The construction materials and contracting segment provides an integrated set of aggregate-based construction services, as discussed in Note 17. The segment focuses on high-growth strategic markets located near major transportation corridors and desirable mid-sized metropolitan areas; strengthening the long-term, strategic aggregate reserve position through available purchase and/or lease opportunities; enhancing profitability through cost containment, margin discipline and vertical integration of the segment's operations; development and recruitment of talented employees; and continued growth through organic
and strategic acquisition opportunities.
A key element of the Company's long-term strategy for this business is to further expand its market presence in the higher-margin materials business (rock, sand, gravel, asphalt oil, asphalt concrete, ready-mix concrete and related products), complementing and expanding on the segment's expertise. The Company's continued acquisition activity supports this strategy.
As one of the country's largest sand and gravel producers, the segment continues to strategically manage its aggregate reserves, as well as take further advantage of being vertically integrated. The segment's vertical integration allows it to manage operations from aggregate mining to final lay-down of concrete and asphalt,
with control of and access to permitted aggregate reserves being significant. The Company's aggregate reserves are naturally declining and, as a result, the Company seeks acquisition opportunities to replace the reserves.
The construction materials and contracting segment faces challenges that are not under the direct control of the business. The segment operates in geographically diverse and highly competitive markets. Competition can put negative pressure on the segment's operating margins. The segment is also subject to volatility, including recent inflationary pressures, in the cost of raw materials such as diesel fuel, gasoline, asphalt oil, cement and steel, with diesel fuel and asphalt oil costs having the most significant impact on the segment's recent
results. Such volatility and inflationary pressures may continue to have an impact on the segment's margins, including fixed-price construction contracts that are particularly vulnerable to the volatility of energy and
material prices. The Company has increased product pricing where necessary to mitigate the effects of recent inflationary costs, however, there is a lag between announced price increases and the time when they will be fully recognized. The
Company will continue to evaluate future price increases to stay ahead of inflationary pressures as they are expected to continue throughout at least the remainder of 2022. In addition, while the Company has not yet experienced significant cement supply shortages, it has started to receive notices from cement suppliers for the ready-mix concrete product line about potential supply allocations, which could impact sales volumes in future periods. Other variables that can impact the segment's margins include adverse weather conditions, the timing of project starts or completions and declines or delays in new and existing projects due to the cyclical nature of the construction industry and governmental infrastructure spending. Accordingly, operating results in any particular period may not be indicative of the results that can be expected for any other period.
The
segment also faces challenges in the recruitment and retention of employees. Trends in the labor market include an aging workforce and availability issues. Most of the markets the segment operates in have experienced labor shortages, largely truck drivers, causing increased labor-related costs and delays or inefficiencies on projects. The Company continues to monitor the labor markets and expects labor costs to continue to increase based on the increased demand for services and, to a lesser extent, the recent escalated inflationary environment in the United States. The increase in labor shortages also impacts the segment's ability to recruit and train a skilled workforce to meet the needs of increasing demand and seasonal work. In order to help attract new workers to the construction industry and enhance the skills of its current employees, the
Company has completed a training facility in Oregon. The training facility offers hands-on training for heavy equipment operators and truck drivers, as well as leadership and safety training.
Earnings overview - The following information summarizes the performance of the construction materials and contracting segment.
*Other
products includes cement, asphalt oil, merchandise, fabric, spreading and other products that individually are not considered to be a major line of business for the segment.
Three Months Ended June 30, 2022, Compared to Three Months Ended June 30, 2021 Construction materials and contracting's earnings decreased $18.8 million as a result of:
•Revenuesincreased $78.0
million.
◦Primarily the result of:
•Increased contracting revenues of $49.9 million due to more available work, strong demand in some regions and revenue from recent acquisitions.
•Higher average selling prices across all product lines, as well as additional asphalt volumes from recent acquisitions in Oregon, which were partially offset by lower asphalt sales volumes largely resulting from unfavorable weather conditions in certain regions.
◦Partially offset by:
•An increase in intrasegment eliminations for materials sales.
•Lower ready-mix concrete sales
volumes due to the absence of large projects and unfavorable weather conditions in certain regions.
•Decreased aggregates sales volumes due to unfavorable weather conditions, offset in part by increased revenues of $9.3 million from recent acquisitions.
•Gross margin decreased $18.4 million, primarily due to higher operating costs across the business as a result of inflationary pressures, including diesel fuel costs of $13.1 million and higher materials, labor and production costs. In addition, contracting services margins decreased from the impacts of unfavorable weather conditions and the mix of work performed.
•Selling, general and administrative expense was comparable to the same period in the prior year.
•Other
income (expense) decreased $4.1 million, primarily due to lower returns on the Company's nonqualified benefit plan investments, as discussed in Note 14.
•Interest expense increased $2.6 million, largely the result of higher debt balances to fund recent acquisitions and higher working capital needs.
•Income tax expense decreased $5.9 million, largely due to the lower income before income taxes.
Six Months Ended June 30, 2022, Compared to Six Months Ended June 30, 2021 Construction materials and contracting's earnings decreased $28.0 million as a result of:
•Revenuesincreased $122.3 million.
◦Primarily the result of:
•Higher average selling prices across all product lines, as well as:
◦Increased aggregates sales volumes, largely from recent acquisitions, partially offset by unfavorable weather conditions.
◦Additional asphalt revenues from recent acquisitions were offset in part by lower sales volumes in Iowa, North Dakota and South Dakota due to unfavorable weather conditions causing a late start to the season.
•Increased contracting revenues of $68.1 million across all regions, particularly in Idaho and Oregon due to strong demand and revenues from recent
acquisitions.
◦These increases were partially offset by:
•An increase in intrasegment eliminations for materials sales.
•Lower ready-mix concrete sales volumes due to the absence of certain large projects, decreased demand and unfavorable weather conditions in certain regions.
•Gross margin decreased $24.0 million, primarily due to higher operating costs across the business as a result of inflationary pressures, including diesel fuel costs of $18.0 million and higher repair and maintenance, materials, labor and production costs. In addition, contracting services margins decreased from the impacts of unfavorable weather conditions and the mix of work.
•Selling,
general and administrative expense increased $3.7 million.
◦Largely due to:
•Increased employee-related costs of $1.0 million.
•Higher professional fees of $900,000.
•Less recovery of bad debt expense of $800,000.
•Increased technology expenses.
•Other income (expense) decreased $5.9 million, primarily due to lower returns on the Company's nonqualified benefit plan investments, as discussed in Note 14.
•Interest
expense increased $3.2 million, largely the result of higher debt balances to fund recent acquisitions and higher working capital needs.
•Income tax expense (benefit) decreased $8.8 million, largely due to the lower income before income taxes.
Outlook The American Rescue Plan Act enacted in the first quarter of 2021 provides $1.9 trillion in COVID-19 relief funding for states, schools and local governments. States are beginning to move forward with allocating these funds based on federal criteria and state needs, and in some cases, funding of infrastructure projects could positively impact the segment. Additionally, the bipartisan infrastructure proposal, known as the Infrastructure Investment and Jobs Act, was enacted in the fourth quarter of 2021. This initiative is providing long-term opportunities by designating $119 billion for
the repair and rebuilding of roads and bridges across the Company's footprint. The Company continues to monitor the implementation of these legislative items.
The segment's vertically integrated aggregates-based business model provides the Company with the ability to capture margin throughout the sales delivery process. The aggregate products are sold internally and externally for use in other products such as ready-mix concrete, asphaltic concrete and public and private construction markets. The contracting services and construction materials are sold in connection with street, highway and other public infrastructure projects, as well as private commercial, industrial and residential
development projects. The public infrastructure projects have traditionally been more stable markets as public funding is more secure during periods of economic decline. The public projects are, however, dependent on federal and state funding such as appropriations to the Federal Highway Administration. Spending on private development is highly dependent on both local and national economic cycles, providing additional sales during times of strong economic cycles and potential for reductions during times of inflation or supply shortages.
During 2021, the Company made strategic purchases and completed acquisitions that support the Company's long-term strategy to expand its market presence. The
Company continues to evaluate additional acquisition opportunities. For more information on the Company's business combinations, see Note 10.
The construction materials and contracting segment's backlog remained strong at June 30, 2022, at $1.13 billion, as compared to backlog of $912.1 million at June 30, 2021. A significant portion of the Company's backlog relates to publicly funded projects, largely street and highway construction projects. Period over period increases or decreases in backlog cannot be used as an indicator of future revenues or net income. The Company expects
to complete an estimated $1.05 billion of backlog at June 30, 2022, during the next 12 months. While the Company believes the current backlog of work remains firm, prolonged delays in the receipt of critical supplies and materials or continued increases to pricing could result in customers seeking to delay or terminate existing or pending agreements. Factors noted in Part I, Item 1A. Risk Factors in the 2021 Annual Report can cause revenues to be realized in periods and at levels that are different from originally projected.
Construction Services
Strategy and challenges The construction services segment provides electrical
and mechanical and transmission and distribution specialty contracting services, as discussed in Note 17. The construction services segment focuses on safely executing projects; providing a superior return on investment by building new and strengthening existing customer relationships; ensuring quality service; effectively controlling costs; retaining, developing and recruiting talented employees; growing through organic and strategic acquisition opportunities; and focusing efforts on projects that will permit higher margins while properly managing risk. The growth experienced by the segment in recent years is due in part to its ability to support national customers in most of the regions in which it operates.
The construction services segment faces challenges, which are not under direct control of the business, in the highly competitive markets in which it operates, including those described in Part I, Item 1A. Risk Factors
in the 2021 Annual Report. These factors, and those noted below, have caused fluctuations in revenues, gross margins and earnings in the past and are expected to cause fluctuations in the future.
•Revenue mix and impact on margins. The mix of revenues based on the types of services the segment provides can impact margins as certain industries and services provide higher margin opportunities. Larger or more complex projects typically result in higher margin opportunities since the segment assumes a higher degree of performance risk and there is greater utilization of the segment's resources for longer construction timelines. However, larger or more complex projects have a higher risk of regulatory and seasonal or cyclical delay. Project schedules fluctuate, which can affect the amount of work performed in a given period. Smaller or less complex projects typically have a greater
number of companies competing for them, and competitors at times
may be more aggressive when pursuing available work. A greater percentage of smaller scale or less complex work in a given period could negatively impact margins due to the inefficiency of transitioning between a greater numbers of smaller projects versus continuous production on a few larger projects.
•Project variability and performance. Margins for a single project may fluctuate period to period due to changes in the volume or type of work performed, the pricing structure under the project contract
or job productivity. Productivity and performance on a project can vary period to period based on a number of factors, including unexpected project difficulties; unexpected project site conditions; project location, including locations with challenging operating conditions or difficult geographic characteristics; whether the work is on an open or encumbered right of way; inclement weather or severe weather events; environmental restrictions or regulatory delays; political or legal challenges related to a project; and the performance of third parties. In addition, the type of contract can impact the margin on a project. Under fixed-price contracts, which are more common with larger or more complex projects, the segment assumes risk related to project estimates versus execution. Revenues under
this type of contract can vary, sometimes significantly, from original projects due to additional project complexity; timing uncertainty or extended bidding; extended regulatory or permitting processes; and other factors, which can result in a reduction in profit or losses on a project.
•Subcontractor work and provision of materials. Some work under project contracts is subcontracted out to other companies and margins on subcontractor work is generally lower than work performed by the Company. Increased subcontractor work in a given period may therefore result in lower margins. In addition, inflationary or other pressures
may increase the cost of materials under fixed-price contracts and may result in decreased margins on the project. The Company has worked to implement provisions in project contracts to allow for the pass-through of inflationary costs to customers where feasible and will continue to do so to mitigate the impacts.
The segment is currently experiencing increased fuel and material costs as well as impacts from delays in the national supply chain. The inflationary costs and national supply chain challenges experienced by the segment have increased costs but have not had significant impacts to the procurement of project materials. However, the
Company expects these inflationary pressures and national supply chain challenges to continue throughout at least the remainder of 2022. The Company is actively monitoring the situation and is working with its manufacturers, suppliers and customers to help mitigate these risks. Accordingly, operating results in any particular period may not be indicative of the results that can be expected for any other period.
The need to ensure available specialized labor resources for projects also drives strategic relationships with customers and project margins. These trends include an aging workforce and labor availability issues, as well as increasing duration and complexity of customer capital programs. Most of the markets the segment operates in have experienced labor shortages which in some cases have caused increased labor-related costs. The
Company continues to monitor the labor markets and expects labor costs to continue to increase based on increases included in collective bargaining agreements and, to a lesser extent, the recent escalated inflationary environment in the United States. Due to these and other factors, the Company believes overall customer and competitor demand for labor resources will continue to increase.
Earnings overview - The following information summarizes the performance of the construction services segment.
Three
Months Ended June 30, 2022, Compared to Three Months Ended June 30, 2021Construction services earnings increased $5.6 million as a result of:
•Revenues increased $159.8 million.
◦Largely due to:
•Higher commercial workloads driven largely by a $43.5 million increase in the hospitality sector, primarily from the progress on large projects; a $24.3 million increase in data center work from the number of projects started during the quarter; and an increase in the general commercial sector.
•Higher renewable workloads of $52.6 million due to the timing of and progress on commercial
renewable projects.
•Higher institutional workloads, primarily in the healthcare sector of $7.4 million and the education sector. Both sectors benefited from the mix of project work in the quarter.
•Higher service workloads of $8.4 million from service work for the repair and maintenance of electrical systems.
◦Partially offset by:
•Lower industrial workloads substantially from the mix of project work, primarily in the maintenance sector of $16.7 million and the high-tech sector of $11.0 million.
•Lower utility workloads due to project timing for the transmission and distribution sectors of $26.0 million offset in part by higher
workloads in the underground, electrical, storm repair and telecommunications sectors from the timing and mix of project work.
•Gross margin increased $11.4 million.
◦Largely due to:
•Higher commercial, renewable and service margins of $10.1 million due substantially to project mix.
•Higher utility margins of $2.6 million resulting from the mix of customer projects and higher storm margins.
◦Partially offset by:
•Higher overall operating costs related to inflationary pressures, including increased fuel and material costs and higher labor costs from decreased
productivity on certain projects.
•Lower institutional and industrial margins of $900,000 due to the timing of project completions and project starts.
•Lower transportation margins, primarily for street lighting and traffic signalization projects.
•Selling, general and administrative expense increased $3.1 million.
◦Primarily due to:
•Increased payroll-related costs of $2.1 million, largely related to higher employee incentive accruals.
•Increased reserve for uncollectible accounts.
•Other income
decreased $600,000, primarily due to lower returns on the Company's nonqualified benefit plan investments, as discussed in Note 14.
•Interest expense was comparable to the same period in the prior year.
•Income tax expense increased $1.8 million primarily resulting from an increase in income before income taxes.
Six Months Ended June 30, 2022, Compared to Six Months Ended June 30,
2021Construction services earnings decreased $2.9 million as a result of:
•Revenues increased $193.9 million.
◦Largely due to:
•Higher commercial workloads driven largely by a $45.5 million increase in the general commercial sector as a result of an overall increase from project mix and progression on contracts; a $30.0 million increase in the hospitality sector, primarily from the addition of a large hospitality project; and an increase in the data center sector significantly resulting from the addition of more projects.
•Higher renewable workloads of $76.9 million due to the timing
of commercial renewable projects.
•Higher institutional workloads, primarily in the education sector contributing an additional $12.7 million and the healthcare sector contributing an additional $7.2 million, both as a result of increased activity from project mix and progress on projects.
•Higher service workloads of $23.7 million from service work for the repair and maintenance of electrical systems.
•Higher utility workloads, primarily from an increase in the electrical, underground and distribution sectors of $28.8 million from increased customer released projects, partially offset by lower transmission workloads from customer demand and storm work.
◦Partially offset by:
•Lower
industrial workloads of $43.3 million, primarily resulting from the completion of a large high-tech project as well as the timing of other projects, partially offset by an increase in the refinery and general industrial sectors from project mix and timing.
•Lower transportation workloads, primarily in the street lighting sector of $9.0 million due to lower demand and the mix of projects.
•Gross margin increased $1.9 million.
◦Largely due to higher commercial, renewable and service margins of $14.3 million, primarily the result of project mix and progression on projects.
◦Partially offset by:
•Higher overall operating costs
related to inflationary pressures, including increased fuel and material costs and higher labor costs from decreased productivity on certain projects.
•Lower industrial and institutional margins of $9.9 million from the absence of higher margin work, as well as the completion of projects and the timing of project completions and project starts.
•Lower utility margins from lower margins on storm repair projects.
•Lower transportation margins of $1.2 million for street lighting and traffic signalization projects due to lower margin work.
•Selling, general and administrative expense increased $4.4 million.
◦Primarily due to:
•Increased
reserve for uncollectible accounts of $2.1 million.
•Increased payroll-related costs of $1.5 million, largely related to higher employee incentive accruals.
•Increased office expenses of $900,000.
•Other income decreased $700,000, primarily due to lower returns on the Company's nonqualified benefit plan investments, as discussed in Note 14.
•Interest expense was comparable to the same period in the prior year.
•Income tax expense decreased $600,000 directly resulting from a decrease in income before income taxes.
Outlook
The American Rescue Plan act approved by the United States Congress and signed into law by the President of the United States in the first quarter of 2021 provides $1.9 trillion in COVID-19 relief funding for states, schools and local government including broadband infrastructure. States are beginning to move forward with allocating these funds based on federal criteria and state needs, and in some cases, funding of infrastructure projects could positively impact the segment. Additionally, the bipartisan infrastructure proposal, known as the Infrastructure Investment and Jobs Act, was approved by the United States Congress and signed into law by the President of the United States in the fourth quarter of 2021. These include investments for upgrades to electric and grid infrastructure, transportation systems, airports and electric vehicle infrastructure, all industries this segment supports. The
Company will continue to monitor the implementation of these legislative items.
The Company continues to have bidding opportunities in the specialty contracting markets in which it operated during 2022 as evidenced by the segment's backlog. Although bidding remains highly competitive in all areas, the Company expects the segment's relationship with existing customers, skilled workforce, quality of service and effective cost management will continue to provide a benefit in securing and executing profitable projects in the future. The Company has also seen rapidly growing needs for services across the electric vehicle charging, wind generation and energy storage markets that complement
existing renewable projects performed by the Company.
The construction services segment's backlog at June 30, was as follows:
2022
2021
(In
millions)
Electrical & mechanical
$
1,691
$
1,059
Transmission & distribution
233
261
$
1,924
$
1,320
The 46 percent increase in backlog at June
30, 2022, as compared to backlog at June 30, 2021, was largely attributable to the new project opportunities that the Company continues to be awarded across its diverse operations, particularly within the commercial, institutional, renewable and industrial markets. These increases were partially offset by decreases in the transportation market due to the timing of project completions. Period over period increases or decreases in backlog cannot be used as an indicator of future revenues or net income. The Company expects to complete an estimated $1.64 billion of backlog at June 30, 2022, during the next 12 months. While the Company
believes the current backlog of work remains firm, prolonged delays in the receipt of critical supplies and materials could result in customers seeking to delay or terminate existing or pending agreements. As of June 30, 2022, customers have not provided the Company any indications that they no longer wish to proceed with planned projects that have been included in backlog. Additionally, the Company continues to further evaluate potential acquisition opportunities that would be accretive to earnings of the Company and continue to grow the segment's backlog. Factors noted in Part I, Item 1A. Risk Factors in the 2021 Annual Report can cause revenues to be realized in periods
and at levels that are different from originally projected.
The labor contract that the construction services segment was negotiating at December 31, 2021, as reported in Items 1 and 2 - Business Properties - General in the 2021 Annual Report, has been ratified.
Other
was negatively impacted by higher income tax adjustments in 2022 related to the consolidated company's annualized estimated tax rate. In addition, higher premiums for the captive insurer were experienced in 2022 compared to 2021, which impacts both operation and maintenance expense and operating revenues. General and administrative costs and interest expense previously allocated to the exploration and production and refining businesses that do not meet the criteria for income (loss) from discontinued operations are also included in Other.
Other was negatively impacted by higher income tax adjustments in 2022 related to the consolidated company's annualized estimated tax rate and a loss on the disposal of assets recorded
in operation and maintenance expense. In addition, higher premiums for the captive insurer were experienced in 2022 compared to 2021, which impacts both operation and maintenance expense and operating revenues. General and administrative costs and interest expense previously allocated to the exploration and production and refining businesses that do not meet the criteria for income (loss) from discontinued operations are also included in Other.
Amounts presented in the preceding tables will
not agree with the Consolidated Statements of Income due to the Company's elimination of intersegment transactions. The amounts related to these items were as follows:
For more information on intersegment eliminations, see Note 17.
Liquidity and Capital Commitments
At June 30, 2022, the
Company had cash and cash equivalents of $65.4 million and available borrowing capacity of $432.5 million under the outstanding credit facilities of the Company's subsidiaries. The Company expects to meet its obligations for debt maturing within one year and its other operating and capital requirements from various sources, including internally generated funds; credit facilities and commercial paper of the Company's subsidiaries, as described in Capital resources; and issuance of debt and equity securities if necessary.
Components of net cash provided by operating activities:
Income
from continuing operations
$
102.4
$
152.3
$
(49.9)
Adjustments to reconcile net income to net cash provided by operating activities
179.4
155.8
23.6
Receivables
(242.3)
(17.4)
(224.9)
Inventories
(63.8)
(25.3)
(38.5)
Other
current assets
12.9
(52.8)
65.7
Accounts payable
104.4
(3.9)
108.3
Other current liabilities
29.2
(22.6)
51.8
Pension
and postretirement benefit plan contributions
(.3)
(.2)
(.1)
Other noncurrent changes
(4.5)
(3.0)
(1.5)
Net cash used in discontinued operations
—
(.1)
.1
Net
cash provided by operating activities
$
117.4
$
182.8
$
(65.4)
The changes in cash flows from operating activities generally follow the results of operations, as discussed in Business Segment Financial and Operating Data, and are affected by changes in working capital. The decrease in cash flows provided by operating activities in the previous table was largely driven by higher working capital needs at the construction services and construction materials and contracting businesses due to fluctuations in job activity resulting in higher receivables in the period, as
well as lower collections of accounts receivable compared to first half of 2021, and increased asphalt oil inventory balances as a result of higher prices, offset in part by increased accounts payable. Decreased net income across all of the Company's businesses also contributed to the decreased cash flows. Partially offsetting the net decrease in cash flows provided by operating activities was the recovery of purchased gas adjustment balances and the absence of higher natural gas purchases in February 2021, as discussed in Note 13, partially offset by the associated deferred taxes at the natural gas distribution business.
Components of net cash used in investing activities:
Capital
expenditures
$
(290.1)
$
(261.9)
$
(28.2)
Acquisitions, net of cash acquired
(.5)
(13.7)
13.2
Net proceeds from sale or disposition of property and other
4.3
12.4
(8.1)
Investments
(4.7)
(3.3)
(1.4)
Net
cash used in investing activities
$
(291.0)
$
(266.5)
$
(24.5)
The increase in cash used in investing activities in the previous table was primarily due to increased capital expenditures in 2022 at the electric and natural gas distribution businesses related to increased electric production projects, including the construction of Heskett Unit 4 and the repower of Diamond Willow, and higher natural gas distribution projects, including natural gas mains and meters. The construction services business also experienced lower proceeds from asset sales in 2022. Offsetting
the increased cash used in investing activities was decreased capital expenditures at the pipeline business as a result of the North Bakken Expansion project being placed in service in February 2022 and lower cash used for acquisition activity at the construction materials and contracting business.
Components of net cash provided by financing activities:
Issuance
of short-term borrowings
$
100.0
$
50.0
$
50.0
Repayment of short-term borrowings
—
(50.0)
50.0
Issuance of long-term debt
334.3
171.8
162.5
Repayment
of long-term debt
(147.5)
(48.1)
(99.4)
Debt issuance costs
(1.1)
—
(1.1)
Net proceeds from issuance of common stock
(.1)
54.6
(54.7)
Dividends
paid
(88.4)
(85.3)
(3.1)
Repurchase of common stock
(7.4)
(6.7)
(.7)
Tax withholding on stock-based compensation
(5.0)
(4.2)
(.8)
Net
cash provided by financing activities
$
184.8
$
82.1
$
102.7
The increase in cash provided by financing activities in the previous table was largely the result of increased issuance of short-term and long-term debt at the construction services and construction materials and contracting businesses to fund higher working capital needs and at the natural gas distribution and pipeline businesses to fund capital expenditures. The issuances were partially offset by the repayment of commercial paper borrowings that were replaced by short-term debt and private placement
borrowings. Also partially offsetting the increase in cash provided by financing activities was the absence of the issuance of common stock under the Company's "at-the-market" offering during 2022, as discussed in Note 7.
Defined benefit pension plans
The Company has noncontributory qualified defined benefit pension plans. Various assumptions are used in calculating the benefit expense (income) and liability (asset) related to these plans, as such costs of providing these benefits bear the risk of changes as they are dependent upon assumptions of future conditions.
For
2022, the Company assumed a long-term rate of return on its qualified defined pension plan assets of 6 percent. Through June 30, 2022, due to the decline in the equity and fixed-income markets, the Company experienced a 21 percent loss on its qualified defined pension plan assets. Differences between actuarial assumptions and actual plan results are deferred and amortized into expense when the accumulated differences exceed 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets. Therefore, this change in asset values will be reflected in future expenses of the plans, beginning in 2023.
There were no other material changes to the
Company's qualified noncontributory defined benefit pension plans from those reported in the 2021 Annual Report. For more information, see Note 18 and Part II, Item 7 in the 2021 Annual Report.
Capital expenditures
Capital expenditures for the first six months of 2022 and 2021 were $280.6 million and $283.2 million, respectively. Capital expenditures allocated to the Company's business segments are estimated to be approximately $747.2 million for 2022. Capital expenditures have been updated from what was previously reported in the 2021 Annual Report to accommodate project timeline and scope changes made throughout the first half of 2022.
The
Company has included in the estimated capital expenditures for 2022 the Wahpeton Expansion and additional growth projects at the pipeline business and construction of Heskett Unit 4 at the electric business, as previously discussed in Business Segment Financial and Operating Data, as well as system upgrades; routine replacements; service extensions; routine equipment maintenance and replacements; buildings, land and building improvements; pipeline and natural gas storage projects; power generation and transmission opportunities, environmental upgrades; and other growth opportunities.
The Company continues to evaluate potential future acquisitions and other growth opportunities that would be incremental to the outlined capital program; however, they are dependent upon the availability of economic opportunities and, as a result, capital expenditures
may vary significantly from the estimate previously discussed. The Company continuously monitors its capital expenditures for project delays and changes in economic viability and adjusts as necessary. It is anticipated that all of the funds required for capital expenditures for 2022 will be funded by various sources, including internally generated funds; credit facilities and commercial paper of the Company's subsidiaries, as described later; and issuance of debt and equity securities if necessary.
The Company requires significant cash to support and grow its businesses. The primary sources of cash other than cash generated from operating activities are cash from revolving credit facilities, cash from the issuance of long-term debt and cash from the sale of equity securities.
Debt resources
Certain debt instruments of the Company's subsidiaries contain restrictive and financial covenants and cross-default provisions. In order to borrow under the respective debt instruments, the subsidiary companies must be in compliance with the applicable covenants and certain other conditions, all of which
the subsidiaries, as applicable, were in compliance with at June 30, 2022. In the event the subsidiaries do not comply with the applicable covenants and other conditions, alternative sources of funding may need to be pursued. For more information on the covenants, certain other conditions and cross-default provisions, see Part II, Item 8 in the 2021 Annual Report.
(a)The
commercial paper program is supported by a revolving credit agreement with various banks (provisions allow for increased borrowings, at the option of Montana-Dakota on stated conditions, up to a maximum of $225.0 million). At June 30, 2022, there were no amounts outstanding under the revolving credit agreement.
(b)Certain provisions allow for increased borrowings, up to a maximum of $125.0 million.
(c)Outstanding letter(s) of credit reduce the amount available under the credit agreement.
(d)Certain provisions allow for increased borrowings, up to a maximum of $110.0 million.
(e)The commercial paper program is supported by a revolving credit agreement
with various banks (provisions allow for increased borrowings, at the option of Centennial on stated conditions, up to a maximum of $700.0 million). At June 30, 2022, there were no amounts outstanding under the revolving credit agreement.
The respective commercial paper programs are supported by revolving credit agreements. While the amount of commercial paper outstanding does not reduce available capacity under the respective revolving credit agreements, Montana-Dakota and Centennial do not issue commercial paper in an aggregate amount exceeding the available capacity under the credit agreements. The commercial paper borrowings may vary during the period, largely the result of fluctuations in working capital requirements
due to the seasonality of certain operations of the Company's subsidiaries.
Total equity as a percent of total capitalization was 53 percent, 57 percent and 55 percent at June 30, 2022 and 2021, and December 31, 2021, respectively. This ratio is calculated as the Company's total equity, divided by the Company's total capital. Total capital is the Company's total
debt, including short-term borrowings and long-term debt due within one year, plus total equity. This ratio is an indicator of how a company is financing its operations, as well as its financial strength.
Cascade On June 15, 2022, Cascade issued $50.0 million of senior notes under a note purchase agreement with maturity dates ranging from June 15, 2032 to June 15, 2052, at a weighted average interest rate of 4.50 percent. The agreement contains customary covenants and provisions, including a covenant of Cascade not to permit, at any time, the ratio of total debt to total capitalization to be greater than 65 percent.
Intermountain On June 15, 2022, Intermountain issued $40.0 million of
senior notes under a note purchase agreement with maturity dates ranging from June 15, 2052 to June 15, 2062, at a weighted average interest rate of 4.68 percent. The agreement contains customary covenants and provisions, including a covenant of Intermountain not to permit, at any time, the ratio of total debt to total capitalization to be greater than 65 percent.
Centennial On March 18, 2022, Centennial entered into a $100.0 million term loan agreement with a SOFR-based variable interest rate and a maturity date of March 17, 2023. The agreement contains customary covenants and provisions, including a covenant of Centennial not to permit, at any time, the ratio of total debt to total capitalization to be greater than 65 percent. The covenants also include certain restrictions on the sale of certain assets,
loans and investments.
On March 23, 2022, Centennial issued $150.0 million of senior notes under a note purchase agreement with maturity dates ranging from March 23, 2032 to March 23, 2034, at a weighted average interest rate of 3.71 percent. The agreement contains customary covenants and provisions, including a covenant of Centennial not to permit, at any time, the ratio of total debt to total capitalization to be greater than 60 percent.
Equity Resources
The
Company currently has a shelf registration statement on file with the SEC, under which the Company may issue and sell any combination of common stock and debt securities. The Company may sell such securities if warranted by market conditions and the Company's capital requirements.
In August 2020, the Company amended the Distribution Agreement dated February 22, 2019, with J.P. Morgan Securities LLC and MUFG Securities Americas Inc., as sales agents. This agreement, as amended, allows the offering, issuance and sale of up to 6.4 million shares of
the Company's common stock in connection with an "at-the-market" offering. The common stock may be offered for sale, from time to time, in accordance with the terms and conditions of this agreement. As of June 30, 2022, the Company had capacity to issue up to 3.6 million additional shares of common stock under the "at-the-market" offering program. Proceeds from the sale of shares of common stock under this agreement have been and are expected to be used for general corporate purposes, which may include, among other things, working capital, capital expenditures, debt repayment and the financing of acquisitions.
Details of the
Company's "at-the-market" offering activity was as follows:
* Net
proceeds include issuance costs of $22,000 and $149,000 for the three and six months ended June 30, 2022, respectively, and $443,000 and $743,000 for the three and six months ended June 30, 2021, respectively.
** Net proceeds were used for capital expenditures.
Material cash requirements
For more information on the Company's contractual obligations on long-term debt, operating leases and purchase
commitments, see Part II, Item 7 in the 2021 Annual Report. There were no material changes in the Company's contractual obligations related to asset retirement obligations, uncertain tax positions and minimum funding requirements for its defined benefit plans for 2022 from those reported in the 2021 Annual Report.
At June 30, 2022, the Company's future estimated interest payments increased 12 percent since December 31, 2021, due to higher debt balances and rising interest rates. The Company expects interest rates will continue to increase in the last half of 2022 as indicated by the
Federal Reserve. At June 30, 2022, the Company's future purchase commitments increased 14 percent since December 31, 2021, largely due to higher natural gas costs and contract extensions associated with natural gas supply at the natural gas distribution business and increases to the cost of asphalt oil at the construction materials and contracting business. It is anticipated that these items will be funded by various sources, including internally generated funds, as well as credit facilities and commercial paper of the Company's subsidiaries.
Material
short-term cash requirements of the Company include repayment of outstanding borrowings and interest payments on those agreements, payments on operating lease agreements, payment of obligations on purchase commitments and asset retirement obligations.
Material long-term cash requirements of the Company include repayment of outstanding borrowings and interest payments on those agreements, payments on operating lease agreements, payment of obligations on purchase commitments and asset retirement obligations.
The Company's critical accounting estimates include impairment testing of goodwill; fair values of acquired assets and liabilities under the acquisition method of accounting; regulatory assets expected to be recovered in rates charged to customers; revenue recognized using the cost-to-cost measure of progress for contracts; actuarially determined benefit costs; and tax provisions. There
were
no material changes in the Company's critical accounting estimates from those reported in the 2021 Annual Report. For more information on critical accounting estimates, see Part II, Item 7 in the 2021 Annual Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the impact of market fluctuations associated with interest rates and commodity prices. The Company has policies and procedures to assist in controlling these market risks and from time to time has utilized derivatives
to manage a portion of its risk.
Interest rate risk
There were no material changes to interest rate risk faced by the Company from those reported in the 2021 Annual Report.
There were no material changes to commodity price risk faced by the Company from those reported in the 2021 Annual Report.
Item
4. Controls and Procedures
Evaluation of disclosure controls and procedures
The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. The Company's disclosure controls and other procedures are designed to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The Company's disclosure controls and other procedures are designed to provide reasonable assurance that information required to be
disclosed is accumulated and communicated to management, including the Company's chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. The Company's management, with the participation of the Company's chief executive officer and chief financial officer, has evaluated the effectiveness of the Company's disclosure controls and other procedures as of the end of the period covered by this report. Based upon that evaluation, the chief executive officer and the chief financial officer have concluded that, as of the end of the period covered by this report, such controls and procedures were effective
at a reasonable assurance level.
Changes in internal controls
No change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended June 30, 2022, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
There were no material changes to the Company's legal proceedings in Part 1, Item 3 - Legal Proceedings in the 2021 Annual Report.
Item 1A. Risk Factors
Please refer to the Company's risk factors that are disclosed in Part I, Item 1A. Risk Factors in the 2021 Annual Report that could be materially harmful to the
Company's business, prospects, financial condition or financial results if they occur. At June 30, 2022, there were no material changes to the Company's risk factors provided in Part I, Item 1A. Risk Factors in the 2021 Annual Report other than as set forth below.
The proposed separation of Knife River into an independent, publicly traded company is subject to various risks and uncertainties, and may not be completed on the terms or timeline currently contemplated, if at all.
On August 4, 2022, the Company announced its plan to separate Knife River, the construction materials and contracting business, from the
Company, resulting in two independent, publicly traded companies. The proposed separation is expected to be effected as a tax-free spinoff to the Company’s stockholders for U.S. federal income tax purposes and is expected to be completed in 2023, subject to the satisfaction of customary conditions, including final approval by the Company’s Board of Directors, receipt of a tax opinion and, if determined advisable, a private letter ruling from the IRS, and the effectiveness of a registration statement on Form 10 to be filed with the SEC.
The execution of the proposed separation will require significant time and attention from the Company’s senior management and employees, which
could disrupt the Company’s ongoing business and adversely affect financial results and results of operations. The proposed separation is also complex, and completion of the proposed separation and the timing of its completion will be subject to a number of factors and conditions, including the readiness of the new company to operate as an independent public company and finalization of the capital structure of the new company. Unanticipated developments could delay, prevent or otherwise adversely affect the proposed separation, including, but not limited to, changes in general economic and financial market conditions, material adverse changes in business or industry conditions, unanticipated costs and potential problems or delays in obtaining various regulatory and tax approvals or clearances. In particular, changes in interest or exchange rates and the effects of inflation could delay
or adversely affect the proposed separation, including in connection with any debt financing transactions undertaken in connection with the separation or the terms of any indebtedness incurred in connection therewith. There can be no assurances that the Company will be able to complete the proposed separation on the terms or on the timeline that was announced, if at all. In addition, if the separation is completed, the Company may not be able to achieve the full strategic and financial benefits that are expected to result from the separation. There can be no assurance that the combined value of the common stock of the two companies will be equal to or greater than what the value of the Company’s common stock would have been
had the proposed separation not occurred.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table includes information with respect to the Company's purchase of equity securities:
ISSUER PURCHASES OF EQUITY SECURITIES
Period
(a) Total
Number of Shares (or Units) Purchased (1)
(b) Average Price Paid per Share (or Unit)
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (2)
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (2)
(1) Represents
shares of common stock purchased on the open market in connection with the vesting of shares granted pursuant to the Long-Term Performance-Based Incentive Plan.
(2) Not applicable. The Company does not currently have in place any publicly announced plans or programs to purchase equity securities.
For information regarding mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Act and Item 104 of Regulation S-K, see Exhibit 95 to this Form 10-Q, which is incorporated herein by reference.
Item 5. Other Information
None.
Item 6. Exhibits
See the index to exhibits immediately
preceding the signature page to this report.
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Pursuant
to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
