UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2022March 31, 2023
OR
| | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________ to ______________
Commission file number 1-03480
MDU RESOURCES GROUP INC
(Exact name of registrant as specified in its charter)
| | | | | | | | |
| Delaware | | 30-1133956 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer Identification No.) |
1200 West Century Avenue
P.O. Box 5650
Bismarck, North Dakota 58506-5650
(Address of principal executive offices)
(Zip Code)
(701) 530-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| Common Stock, par value $1.00 per share | MDU | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
| Large Accelerated Filer | ☒ | Accelerated Filer | ☐ |
| Non-Accelerated Filer | ☐ | Smaller Reporting Company | ☐ |
| | Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of OctoberApril 27, 2022: 203,350,7402023: 203,638,373 shares.
Definitions
The following abbreviations and acronyms used in this Form 10-Q are defined below:
| | | | | |
| Abbreviation or Acronym | |
20212022 Annual Report | Company's Annual Report on Form 10-K for the year ended December 31, 20212022 |
| AFUDC | Allowance for funds used during construction |
| ASC | FASB Accounting Standards Codification |
| ASU | FASB Accounting Standards Update |
| Big Stone Station | 475-MW coal-fired electric generating facility near Big Stone City, South Dakota (22.7 percent ownership) |
| Cascade | Cascade Natural Gas Corporation, an indirect wholly owned subsidiary of MDU Energy Capital |
| Centennial | Centennial Energy Holdings, Inc., a direct wholly owned subsidiary of the Company |
| Centennial Capital | Centennial Holdings Capital LLC, a direct wholly owned subsidiary of Centennial |
Coincident Load Factor | The discount from peak requirements when the Company's peak is at a time different from the MISO system peak for the winter season. |
| Company | MDU Resources Group, Inc. |
| COVID-19 | Coronavirus disease 2019. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic and the President of the United States declared the COVID-19 outbreak a national emergency. |
| Coyote Creek | Coyote Creek Mining Company, LLC, a subsidiary of The North American Coal Corporation |
| Coyote Station | 427-MW coal-fired electric generating facility near Beulah, North Dakota (25 percent ownership) |
Diamond Willow | Diamond Willow Wind Farm located in Montana |
| dk | Decatherm |
| Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act |
| EPA | United States Environmental Protection Agency |
| Exchange Act | Securities Exchange Act of 1934, as amended |
| FASB | Financial Accounting Standards Board |
| FERC | Federal Energy Regulatory Commission |
Federal Reserve | Federal Reserve System, the central banking system of the United States. |
| Fidelity | Fidelity Exploration & Production Company, a direct wholly owned subsidiary of WBI Holdings (previously referred to as the Company's exploration and production segment) |
| GAAP | Accounting principles generally accepted in the United States of America |
| GHG | Greenhouse gas |
Great PlainsGrasslands Subsystem | Great Plains Natural Gas Co., a public utility divisionA portion of Montana-DakotaWBI Energy Transmission's natural gas pipeline that runs from western North Dakota to north central Wyoming |
| Intermountain | Intermountain Gas Company, an indirect wholly owned subsidiary of MDU Energy Capital |
| IPUC | Idaho Public Utilities Commission |
| IRA | Inflation Reduction Act of 2022 |
| IRS | Internal Revenue Service |
| Knife River | Knife River Corporation, a direct wholly owned subsidiary of Centennial |
| Knife River Holding Company | A wholly owned subsidiary of the Company that was established in conjunction with the proposed separation of Knife River |
| kWh | Kilowatt-hour |
| kV | Kilovolt |
| LIBOR | London Inter-bank Offered Rate |
| MDU Construction Services | MDU Construction Services Group, Inc., a direct wholly owned subsidiary of Centennial |
| MDU Energy Capital | MDU Energy Capital, LLC, a direct wholly owned subsidiary of the Company |
| MISO | Midcontinent Independent System Operator, Inc., the organization that provides open-access transmission services and monitors the high-voltage transmission system in the Midwest United States and Manitoba, Canada and a southern United States region which includes much of Arkansas, Mississippi, and Louisiana. |
| MMcf | Million cubic feet |
| MMdk | Million dk |
MNPUCMontana-Dakota | Minnesota PublicMontana-Dakota Utilities CommissionCo., a direct wholly owned subsidiary of MDU Energy Capital |
| | | | | |
Montana-DakotaMTPSC | Montana-Dakota Utilities Co., a direct wholly owned subsidiary of MDU Energy CapitalMontana Public Service Commission |
| MW | Megawatt |
| NDDEQ | North Dakota Department of Environmental Quality |
| NDPSC | North Dakota Public Service Commission |
| NERC | North American Electric Reliability Corporation |
| Oil | Includes crude oil and condensate |
| PHMSA | Pipeline and Hazardous Materials Safety Administration |
| Regional Haze Rule | The EPA developed the Regional Haze Rule requiring states to develop and implement comprehensive plans to reduce human-caused regional haze in designated areas such as national parks and wilderness areas. |
| SDPUC | South Dakota Public Utilities Commission |
| SEC | United States Securities and Exchange Commission |
| Securities Act | Securities Act of 1933, as amended |
| SOFR | Secured Overnight Financing Rate |
| UA | United Association of Journeyman and Apprentices of the Plumbing and Pipefitting Industry of the United States of America and Canada |
| 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 Energy Transmission | WBI Energy Transmission, Inc., an indirect wholly owned subsidiary of WBI Holdings |
| WBI Holdings | WBI Holdings, Inc., a direct wholly owned subsidiary of Centennial |
| WUTC | Washington Utilities and Transportation Commission |
Introduction
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, industrialthrough its electrical and utility customers,mechanical and transmission and distribution specialty contracting services, and provides construction materials and associated contracting services 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 upon2018. Upon the completion of an internal holding company reorganization, which resulted in Montana-Dakota becomingbecame a subsidiary of the Company. Its principal executive offices are located at 1200 West Century Avenue, P.O. Box 5650, Bismarck, North Dakota 58506-5650, telephone (701) 530-1000.
As part of the Company's continuous review of its business, the Company announced strategic initiatives in 2022 that are expected to enhance its value. On August 4, 2022, the Company announced that its Boardboard of Directors unanimouslydirectors approved a plan to pursue the separation of Knife River, the construction materials and contracting segment, from the Company. The separation will result in two independent, publicly traded companies, MDU Resources Group, Inc. and Knife River Holding Company, and is expected to be completed on May 31, 2023, subject to certain conditions, including the SEC declaring the Registration Statement on Form 10 for Knife River Holding Company to be effective. On May 3, 2023, the Company's board of directors approved the separation and the distribution of approximately 90 percent of the issued and outstanding shares of Knife River Holding Company to the Company's stockholders. Stockholders of the Company will receive one share of Knife River Holding Company common stock for every four shares of the Company's common stock held on May 22, 2023, the record date for the distribution. The Company will retain approximately 10 percent of Knife River Holding Company's common stock immediately following the separation with the intent to dispose of such shares within twelve months after the separation. Prior to completing the separation, the Company may adjust the percentage of Knife River Holding Company common stock to be distributed to the Company's stockholders and retained by the Company in response to market and other factors. The separation of Knife River is planned as a tax-free spinoff transaction to the Company’s stockholders for U.S. federal income tax purposes. More information on the separation and distribution can be found within the Form 10, which is not incorporated by reference herein.
The Company's financial results for the first quarter ended March 31, 2023, include Knife River. Upon completion of the separation, is expected to result in two independent, publicly traded companies: (1) MDU Resources Group, Inc., the existing company and (2)historical results of Knife River a construction materials and contracting company.will be presented as discontinued operations in the Company's Consolidated Financial Statements.
AsOn November 3, 2022, the next step of the Company’s strategic planning, the Board of Directors has unanimously determined the best way to optimize value would beCompany announced its intention to create two pure-play companies: a leading construction materials company and apublicly traded companies, one focused on regulated energy delivery company. Accordingly,and the other on construction materials, and that, to achieve this future structure, the Company's board hasof directors authorized management to commence a strategic review process forof MDU Construction Services withServices. The strategic review is underway and the objectiveCompany anticipates completing the strategic review during the second quarter of achieving the board’s goal of creating two pure-play public companies. For more information on the Company's risks associated with the anticipated separation or the proposed future structure of the companies, see Item 1A. Risk Factors.2023.
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.
Part I -- Financial Information
Item 1. Financial Statements
| MDU Resources Group, Inc. | | Consolidated Statements of Income | Consolidated Statements of Income | Consolidated Statements of Income |
| (Unaudited) | (Unaudited) | (Unaudited) |
| | Three Months Ended | Nine Months Ended | | | Three Months Ended |
| | | September 30, | | | March 31, |
| | | 2022 | 2021 | 2022 | 2021 | | | 2023 | 2022 |
| | | (In thousands, except per share amounts) | | | (In thousands, except per share amounts) |
| Operating revenues: | Operating revenues: | | Operating revenues: | | |
| Electric, natural gas distribution and regulated pipeline | Electric, natural gas distribution and regulated pipeline | $ | 263,614 | | $ | 237,065 | | $ | 1,140,528 | | $ | 940,017 | | Electric, natural gas distribution and regulated pipeline | | $ | 673,757 | | $ | 553,456 | |
| Non-regulated pipeline, construction materials and contracting, construction services and other | Non-regulated pipeline, construction materials and contracting, construction services and other | 1,713,592 | | 1,348,948 | | 3,974,158 | | 3,297,591 | | Non-regulated pipeline, construction materials and contracting, construction services and other | | 1,063,580 | | 863,103 | |
| Total operating revenues | Total operating revenues | 1,977,206 | | 1,586,013 | | 5,114,686 | | 4,237,608 | | Total operating revenues | | 1,737,337 | | 1,416,559 | |
| Operating expenses: | Operating expenses: | | Operating expenses: | | |
| Operation and maintenance: | Operation and maintenance: | | Operation and maintenance: | | |
| Electric, natural gas distribution and regulated pipeline | Electric, natural gas distribution and regulated pipeline | 89,502 | | 90,058 | | 281,430 | | 273,796 | | Electric, natural gas distribution and regulated pipeline | | 101,866 | | 97,665 | |
| Non-regulated pipeline, construction materials and contracting, construction services and other | Non-regulated pipeline, construction materials and contracting, construction services and other | 1,457,350 | | 1,122,840 | | 3,490,120 | | 2,828,557 | | Non-regulated pipeline, construction materials and contracting, construction services and other | | 1,002,876 | | 810,232 | |
| Total operation and maintenance | Total operation and maintenance | 1,546,852 | | 1,212,898 | | 3,771,550 | | 3,102,353 | | Total operation and maintenance | | 1,104,742 | | 907,897 | |
| Purchased natural gas sold | Purchased natural gas sold | 61,863 | | 41,135 | | 444,527 | | 280,584 | | Purchased natural gas sold | | 371,015 | | 267,353 | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 82,293 | | 75,229 | | 247,173 | | 222,613 | | Depreciation, depletion and amortization | | 81,862 | | 80,121 | |
| Taxes, other than income | Taxes, other than income | 56,267 | | 48,096 | | 185,303 | | 163,819 | | Taxes, other than income | | 80,890 | | 67,484 | |
| Electric fuel and purchased power | Electric fuel and purchased power | 20,080 | | 19,486 | | 68,370 | | 56,216 | | Electric fuel and purchased power | | 24,356 | | 26,361 | |
| Total operating expenses | Total operating expenses | 1,767,355 | | 1,396,844 | | 4,716,923 | | 3,825,585 | | Total operating expenses | | 1,662,865 | | 1,349,216 | |
| Operating income | Operating income | 209,851 | | 189,169 | | 397,763 | | 412,023 | | Operating income | | 74,472 | | 67,343 | |
| Other income (expense) | Other income (expense) | 4,769 | | 5,930 | | (1,877) | | 18,310 | | Other income (expense) | | 10,868 | | (2,400) | |
| Interest expense | Interest expense | 31,369 | | 23,389 | | 84,741 | | 70,224 | | Interest expense | | 38,020 | | 25,260 | |
| Income before income taxes | Income before income taxes | 183,251 | | 171,710 | | 311,145 | | 360,109 | | Income before income taxes | | 47,320 | | 39,683 | |
| Income taxes | Income taxes | 35,318 | | 32,748 | | 60,847 | | 68,860 | | Income taxes | | 8,977 | | 7,950 | |
| Income from continuing operations | Income from continuing operations | 147,933 | | 138,962 | | 250,298 | | 291,249 | | Income from continuing operations | | 38,343 | | 31,733 | |
| Discontinued operations, net of tax | Discontinued operations, net of tax | 38 | | 314 | | 103 | | 348 | | Discontinued operations, net of tax | | 10 | | 30 | |
| Net income | Net income | $ | 147,971 | | $ | 139,276 | | $ | 250,401 | | $ | 291,597 | | Net income | | $ | 38,353 | | $ | 31,763 | |
| Earnings per share - basic: | Earnings per share - basic: | | Earnings per share - basic: | | |
| Income from continuing operations | Income from continuing operations | $ | .73 | | $ | .68 | | $ | 1.23 | | $ | 1.44 | | Income from continuing operations | | $ | .19 | | $ | .16 | |
| Discontinued operations, net of tax | Discontinued operations, net of tax | — | | — | | — | | — | | Discontinued operations, net of tax | | — | | — | |
| Earnings per share - basic | Earnings per share - basic | $ | .73 | | $ | .68 | | $ | 1.23 | | $ | 1.44 | | Earnings per share - basic | | $ | .19 | | $ | .16 | |
| Earnings per share - diluted: | Earnings per share - diluted: | | Earnings per share - diluted: | | |
| Income from continuing operations | Income from continuing operations | $ | .73 | | $ | .68 | | $ | 1.23 | | $ | 1.44 | | Income from continuing operations | | $ | .19 | | $ | .16 | |
| Discontinued operations, net of tax | Discontinued operations, net of tax | — | | — | | — | | — | | Discontinued operations, net of tax | | — | | — | |
| Earnings per share - diluted | Earnings per share - diluted | $ | .73 | | $ | .68 | | $ | 1.23 | | $ | 1.44 | | Earnings per share - diluted | | $ | .19 | | $ | .16 | |
| Weighted average common shares outstanding - basic | Weighted average common shares outstanding - basic | 203,351 | | 202,863 | | 203,351 | | 201,647 | | Weighted average common shares outstanding - basic | | 203,624 | | 203,351 | |
| Weighted average common shares outstanding - diluted | Weighted average common shares outstanding - diluted | 203,644 | | 203,190 | | 203,407 | | 201,955 | | Weighted average common shares outstanding - diluted | | 203,910 | | 203,391 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | | | | | | | | | | | | | | | |
| MDU Resources Group, Inc. |
| Consolidated Statements of Comprehensive Income |
| (Unaudited) |
| | Three Months Ended | Nine Months Ended |
| | | September 30, | September 30, |
| | | 2022 | 2021 | 2022 | 2021 |
| | | (In thousands) |
| Net income | | $ | 147,971 | | $ | 139,276 | | $ | 250,401 | | $ | 291,597 | |
| Other comprehensive income (loss): | | | | | |
| Reclassification adjustment for loss on derivative instruments included in net income, net of tax of $37 and $36 for the three months ended and $109 and $109 for the nine months ended in 2022 and 2021, respectively | | 111 | | 111 | | 334 | | 334 | |
| Postretirement liability adjustment: | | | | | |
| Amortization of postretirement liability losses included in net periodic benefit credit, net of tax of $148 and $151 for the three months ended and $460 and $462 for the nine months ended in 2022 and 2021, respectively | | 461 | | 466 | | 1,367 | | 1,389 | |
| Reclassification of postretirement liability adjustment from regulatory asset, net of tax of $— and $— for the three months ended and $(1,086) and $— for the nine months ended in 2022 and 2021, respectively | | — | | — | | (3,265) | | — | |
| Postretirement liability adjustment | | 461 | | 466 | | (1,898) | | 1,389 | |
| Net unrealized loss on available-for-sale investments: | | | | | |
| Net unrealized loss on available-for-sale investments arising during the period, net of tax of $(88) and $(15) for the three months ended and $(207) and $(40) for the nine months ended in 2022 and 2021, respectively | | (329) | | (54) | | (777) | | (150) | |
| Reclassification adjustment for loss on available-for-sale investments included in net income, net of tax of $12 and $6 for the three months ended and $27 and $21 for the nine months ended in 2022 and 2021, respectively | | 42 | | 20 | | 99 | | 80 | |
| Net unrealized loss on available-for-sale investments | | (287) | | (34) | | (678) | | (70) | |
| Other comprehensive income (loss) | | 285 | | 543 | | (2,242) | | 1,653 | |
| Comprehensive income attributable to common stockholders | | $ | 148,256 | | $ | 139,819 | | $ | 248,159 | | $ | 293,250 | |
| | | | | | | | | | | | | |
| MDU Resources Group, Inc. |
| Consolidated Statements of Comprehensive Income |
| (Unaudited) |
| | | Three Months Ended |
| | | | March 31, |
| | | | | 2023 | 2022 |
| | | | | (In thousands) |
| Net income | | | | $ | 38,353 | | $ | 31,763 | |
| Other comprehensive income: | | | | | |
| Reclassification adjustment for loss on derivative instruments included in net income, net of tax of $11 and $36 for the three months ended in 2023 and 2022, respectively | | | | 34 | | 112 | |
| Postretirement liability adjustment: | | | | | |
| Amortization of postretirement liability losses included in net periodic benefit credit, net of tax of $34 and $164 for the three months ended in 2023 and 2022, respectively | | | | 100 | | 445 | |
| Net unrealized gain (loss) on available-for-sale investments: | | | | | |
| Net unrealized gain (loss) on available-for-sale investments arising during the period, net of tax of $19 and $(85) for the three months ended in 2023 and 2022, respectively | | | | 70 | | (320) | |
| Reclassification adjustment for loss on available-for-sale investments included in net income, net of tax of $3 and $8 for the three months ended in 2023 and 2022, respectively | | | | 13 | | 32 | |
| Net unrealized gain (loss) on available-for-sale investments | | | | 83 | | (288) | |
| Other comprehensive income | | | | 217 | | 269 | |
| Comprehensive income attributable to common stockholders | | | | $ | 38,570 | | $ | 32,032 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | MDU Resources Group, Inc. | MDU Resources Group, Inc. | MDU Resources Group, Inc. |
| Consolidated Balance Sheets | Consolidated Balance Sheets | Consolidated Balance Sheets |
| (Unaudited) | (Unaudited) | (Unaudited) |
| | | September 30, 2022 | September 30, 2021 | December 31, 2021 | | March 31, 2023 | March 31, 2022 | December 31, 2022 |
| Assets | Assets | (In thousands, except shares and per share amounts) | Assets | (In thousands, except shares and per share amounts) |
| Current assets: | Current assets: | | Current assets: | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 74,620 | | $ | 57,241 | | $ | 54,161 | | Cash and cash equivalents | $ | 93,189 | | $ | 64,904 | | $ | 80,517 | |
| Receivables, net | Receivables, net | 1,298,019 | | 979,862 | | 946,741 | | Receivables, net | 1,291,949 | | 948,024 | | 1,305,642 | |
| Inventories | Inventories | 398,642 | | 312,285 | | 335,609 | | Inventories | 425,834 | | 380,316 | | 387,525 | |
| Current regulatory assets | Current regulatory assets | 148,160 | | 133,135 | | 118,691 | | Current regulatory assets | 216,318 | | 89,078 | | 165,092 | |
| Prepayments and other current assets | Prepayments and other current assets | 104,850 | | 83,364 | | 95,741 | | Prepayments and other current assets | 81,424 | | 89,586 | | 72,972 | |
| Total current assets | Total current assets | 2,024,291 | | 1,565,887 | | 1,550,943 | | Total current assets | 2,108,714 | | 1,571,908 | | 2,011,748 | |
| Noncurrent assets: | Noncurrent assets: | | Noncurrent assets: | |
| Property, plant and equipment | Property, plant and equipment | 9,257,067 | | 8,634,737 | | 8,972,849 | | Property, plant and equipment | 9,475,608 | | 8,958,600 | | 9,364,038 | |
| Less accumulated depreciation, depletion and amortization | Less accumulated depreciation, depletion and amortization | 3,263,217 | | 3,175,756 | | 3,216,461 | | Less accumulated depreciation, depletion and amortization | 3,322,894 | | 3,158,091 | | 3,272,493 | |
| Net property, plant and equipment | Net property, plant and equipment | 5,993,850 | | 5,458,981 | | 5,756,388 | | Net property, plant and equipment | 6,152,714 | | 5,800,509 | | 6,091,545 | |
| Goodwill | Goodwill | 763,262 | | 717,646 | | 765,386 | | Goodwill | 763,500 | | 763,262 | | 763,500 | |
| Other intangible assets, net | Other intangible assets, net | 18,745 | | 22,241 | | 22,578 | | Other intangible assets, net | 16,334 | | 21,389 | | 17,532 | |
| Regulatory assets | Regulatory assets | 344,442 | | 379,245 | | 357,851 | | Regulatory assets | 349,500 | | 359,228 | | 329,659 | |
| Investments | Investments | 157,860 | | 171,859 | | 175,476 | | Investments | 172,467 | | 174,555 | | 161,913 | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | 119,586 | | 109,439 | | 124,138 | | Operating lease right-of-use assets | 118,052 | | 119,845 | | 119,375 | |
| Other | Other | 185,094 | | 143,565 | | 157,675 | | Other | 161,306 | | 160,019 | | 165,509 | |
| Total noncurrent assets | Total noncurrent assets | 7,582,839 | | 7,002,976 | | 7,359,492 | | Total noncurrent assets | 7,733,873 | | 7,398,807 | | 7,649,033 | |
| Total assets | Total assets | $ | 9,607,130 | | $ | 8,568,863 | | $ | 8,910,435 | | Total assets | $ | 9,842,587 | | $ | 8,970,715 | | $ | 9,660,781 | |
| Liabilities and Stockholders' Equity | Liabilities and Stockholders' Equity | | Liabilities and Stockholders' Equity | |
| Current liabilities: | Current liabilities: | | Current liabilities: | |
| Short-term borrowings | Short-term borrowings | $ | 100,000 | | $ | 50,000 | | $ | — | | Short-term borrowings | $ | 501,500 | | $ | 99,958 | | $ | 246,500 | |
| Long-term debt due within one year | Long-term debt due within one year | 214,453 | | 1,548 | | 148,053 | | Long-term debt due within one year | 78,031 | | 147,953 | | 78,031 | |
| Accounts payable | Accounts payable | 630,699 | | 525,704 | | 478,933 | | Accounts payable | 547,188 | | 449,746 | | 657,168 | |
| Taxes payable | Taxes payable | 93,565 | | 87,455 | | 80,372 | | Taxes payable | 73,914 | | 90,572 | | 70,810 | |
| Dividends payable | Dividends payable | 44,229 | | 43,212 | | 44,229 | | Dividends payable | 45,306 | | 44,229 | | 45,245 | |
| Accrued compensation | Accrued compensation | 99,824 | | 105,867 | | 81,904 | | Accrued compensation | 65,509 | | 64,796 | | 88,662 | |
| Operating lease liabilities due within one year | Operating lease liabilities due within one year | 34,569 | | 30,502 | | 35,368 | | Operating lease liabilities due within one year | 34,975 | | 34,618 | | 34,516 | |
| Regulatory liabilities due within one year | Regulatory liabilities due within one year | 18,599 | | 16,491 | | 16,303 | | Regulatory liabilities due within one year | 44,395 | | 31,186 | | 26,440 | |
| Other accrued liabilities | Other accrued liabilities | 232,364 | | 212,140 | | 207,078 | | Other accrued liabilities | 245,511 | | 203,670 | | 232,231 | |
| Total current liabilities | Total current liabilities | 1,468,302 | | 1,072,919 | | 1,092,240 | | Total current liabilities | 1,636,329 | | 1,166,728 | | 1,479,603 | |
| Noncurrent liabilities: | Noncurrent liabilities: | | Noncurrent liabilities: | |
| Long-term debt | Long-term debt | 2,773,999 | | 2,326,718 | | 2,593,847 | | Long-term debt | 2,769,037 | | 2,599,810 | | 2,763,394 | |
| Deferred income taxes | Deferred income taxes | 617,996 | | 557,582 | | 591,962 | | Deferred income taxes | 642,069 | | 587,940 | | 631,303 | |
| Asset retirement obligations | Asset retirement obligations | 472,931 | | 455,522 | | 458,061 | | Asset retirement obligations | 409,547 | | 463,080 | | 405,885 | |
| Regulatory liabilities | Regulatory liabilities | 433,212 | | 426,141 | | 428,790 | | Regulatory liabilities | 454,669 | | 433,628 | | 448,454 | |
| Operating lease liabilities | Operating lease liabilities | 85,884 | | 79,397 | | 89,253 | | Operating lease liabilities | 83,632 | | 85,874 | | 85,534 | |
| Other | Other | 262,948 | | 318,306 | | 273,408 | | Other | 271,922 | | 272,937 | | 259,479 | |
| Total noncurrent liabilities | Total noncurrent liabilities | 4,646,970 | | 4,163,666 | | 4,435,321 | | Total noncurrent liabilities | 4,630,876 | | 4,443,269 | | 4,594,049 | |
| Commitments and contingencies | Commitments and contingencies | | Commitments and contingencies | |
Stockholders' equity: | Stockholders' equity: | | Stockholders' equity: | |
Common stock Authorized - 500,000,000 shares, $1.00 par value Shares issued - 203,889,661 at September 30, 2022, 203,889,661 at September 30, 2021 and 203,889,661 at December 31, 2021 | 203,889 | | 203,889 | | 203,889 | | |
Common stock Authorized - 500,000,000 shares, $1.00 par value Shares issued - 204,162,814 at March 31, 2023, 203,889,661 at March 31, 2022 and 204,162,814 at December 31, 2022 | | Common stock Authorized - 500,000,000 shares, $1.00 par value Shares issued - 204,162,814 at March 31, 2023, 203,889,661 at March 31, 2022 and 204,162,814 at December 31, 2022 | 204,163 | | 203,889 | | 204,163 | |
| Other paid-in capital | Other paid-in capital | 1,455,241 | | 1,458,208 | | 1,461,205 | | Other paid-in capital | 1,461,294 | | 1,451,464 | | 1,466,037 | |
| Retained earnings | Retained earnings | 1,879,600 | | 1,720,232 | | 1,762,410 | | Retained earnings | 1,943,917 | | 1,749,726 | | 1,951,138 | |
| Accumulated other comprehensive loss | Accumulated other comprehensive loss | (43,246) | | (46,425) | | (41,004) | | Accumulated other comprehensive loss | (30,366) | | (40,735) | | (30,583) | |
| Treasury stock at cost - 538,921 shares | Treasury stock at cost - 538,921 shares | (3,626) | | (3,626) | | (3,626) | | Treasury stock at cost - 538,921 shares | (3,626) | | (3,626) | | (3,626) | |
| Total stockholders' equity | Total stockholders' equity | 3,491,858 | | 3,332,278 | | 3,382,874 | | Total stockholders' equity | 3,575,382 | | 3,360,718 | | 3,587,129 | |
| Total liabilities and stockholders' equity | Total liabilities and stockholders' equity | $ | 9,607,130 | | $ | 8,568,863 | | $ | 8,910,435 | | Total liabilities and stockholders' equity | $ | 9,842,587 | | $ | 8,970,715 | | $ | 9,660,781 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | MDU Resources Group, Inc. | MDU Resources Group, Inc. | MDU Resources Group, Inc. |
| Consolidated Statements of Equity | Consolidated Statements of Equity | Consolidated Statements of Equity |
| (Unaudited) | (Unaudited) | (Unaudited) |
| | Other
Paid-in
Capital | Retained Earnings | Accumu-lated
Other
Compre-hensive
Loss | | | Other
Paid-in
Capital | Retained Earnings | Accumu-lated
Other
Compre-hensive
Loss | |
| | Common Stock | Treasury Stock | | | Common Stock | Treasury Stock | |
| | Shares | Amount | Shares | Amount | Total | | Shares | Amount | Shares | Amount | Total |
| | | (In thousands, except shares) | | (In thousands, except shares) |
| At December 31, 2021 | 203,889,661 | | $ | 203,889 | | $ | 1,461,205 | | $ | 1,762,410 | | $ | (41,004) | | (538,921) | | $ | (3,626) | | $ | 3,382,874 | | |
| At December 31, 2022 | | At December 31, 2022 | 204,162,814 | | $ | 204,163 | | $ | 1,466,037 | | $ | 1,951,138 | | $ | (30,583) | | (538,921) | | $ | (3,626) | | $ | 3,587,129 | |
| Net income | Net income | — | | — | | — | | 31,763 | | — | | — | | — | | 31,763 | | Net income | — | | — | | — | | 38,353 | | — | | — | | — | | 38,353 | |
| Other comprehensive income | Other comprehensive income | — | | — | | — | | — | | 269 | | — | | — | | 269 | | Other comprehensive income | — | | — | | — | | — | | 217 | | — | | — | | 217 | |
| Dividends declared on common stock | Dividends declared on common stock | — | | — | | — | | (44,447) | | — | | — | | — | | (44,447) | | Dividends declared on common stock | — | | — | | — | | (45,574) | | — | | — | | — | | (45,574) | |
| Stock-based compensation | Stock-based compensation | — | | — | | 2,689 | | — | | — | | — | | — | | 2,689 | | Stock-based compensation | — | | — | | 3,108 | | — | | — | | — | | — | | 3,108 | |
| Repurchase of common stock | Repurchase of common stock | — | | — | | — | | — | | — | | (266,821) | | (7,399) | | (7,399) | | Repurchase of common stock | — | | — | | — | | — | | — | | (153,622) | | (4,811) | | (4,811) | |
| Issuance of common stock upon vesting of stock-based compensation, net of shares used for tax withholdings | Issuance of common stock upon vesting of stock-based compensation, net of shares used for tax withholdings | — | | — | | (12,303) | | — | | — | | 266,821 | | 7,399 | | (4,904) | | Issuance of common stock upon vesting of stock-based compensation, net of shares used for tax withholdings | — | | — | | (7,851) | | — | | — | | 153,622 | | 4,811 | | (3,040) | |
| Issuance of common stock | — | | — | | (127) | | — | | — | | — | | — | | (127) | | |
| At March 31, 2022 | 203,889,661 | | $ | 203,889 | | $ | 1,451,464 | | $ | 1,749,726 | | $ | (40,735) | | (538,921) | | $ | (3,626) | | $ | 3,360,718 | | |
| Net income | — | | — | | — | | 70,667 | | — | | — | | — | | 70,667 | | |
| Other comprehensive loss | — | | — | | — | | — | | (2,796) | | — | | — | | (2,796) | | |
| Dividends declared on common stock | — | | — | | — | | (44,446) | | — | | — | | — | | (44,446) | | |
| Stock-based compensation | — | | — | | 2,689 | | — | | — | | — | | — | | 2,689 | | |
| Issuance of common stock | — | | — | | (22) | | — | | — | | — | | — | | (22) | | |
| At June 30, 2022 | 203,889,661 | | $ | 203,889 | | $ | 1,454,131 | | $ | 1,775,947 | | $ | (43,531) | | (538,921) | | $ | (3,626) | | $ | 3,386,810 | | |
| Net income | — | | — | | — | | 147,971 | | — | | — | | — | | 147,971 | | |
| Other comprehensive income | — | | — | | — | | — | | 285 | | — | | — | | 285 | | |
| Dividends declared on common stock | — | | — | | — | | (44,318) | | — | | — | | — | | (44,318) | | |
| Stock-based compensation | — | | — | | 1,110 | | — | | — | | — | | — | | 1,110 | | |
| At September 30, 2022 | 203,889,661 | | $ | 203,889 | | $ | 1,455,241 | | $ | 1,879,600 | | $ | (43,246) | | (538,921) | | $ | (3,626) | | $ | 3,491,858 | | |
| At March 31, 2023 | | At March 31, 2023 | 204,162,814 | | $ | 204,163 | | $ | 1,461,294 | | $ | 1,943,917 | | $ | (30,366) | | (538,921) | | $ | (3,626) | | $ | 3,575,382 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
|
|
|
| | Other
Paid-in
Capital | Retained Earnings | Accumu-lated
Other
Compre-hensive
Loss | | | |
| Common Stock | Treasury Stock | |
| Shares | Amount | Shares | Amount | Total |
| | (In thousands, except shares) |
| At December 31, 2021 | 203,889,661 | | $ | 203,889 | | $ | 1,461,205 | | $ | 1,762,410 | | $ | (41,004) | | (538,921) | | $ | (3,626) | | $ | 3,382,874 | |
| Net income | — | | — | | — | | 31,763 | | — | | — | | — | | 31,763 | |
| Other comprehensive income | — | | — | | — | | — | | 269 | | — | | — | | 269 | |
| Dividends declared on common stock | — | | — | | — | | (44,447) | | — | | — | | — | | (44,447) | |
| Stock-based compensation | — | | — | | 2,689 | | — | | — | | — | | — | | 2,689 | |
| Repurchase of common stock | — | | — | | — | | — | | — | | (266,821) | | (7,399) | | (7,399) | |
| Issuance of common stock upon vesting of stock-based compensation, net of shares used for tax withholdings | — | | — | | (12,303) | | — | | — | | 266,821 | | 7,399 | | (4,904) | |
| Issuance of common stock | — | | — | | (127) | | — | | — | | — | | — | | (127) | |
| At March 31, 2022 | 203,889,661 | | $ | 203,889 | | $ | 1,451,464 | | $ | 1,749,726 | | $ | (40,735) | | (538,921) | | $ | (3,626) | | $ | 3,360,718 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| MDU Resources Group, Inc. |
| Consolidated Statements of Equity |
| (Unaudited) |
| | Other
Paid-in
Capital | Retained Earnings | Accumu-lated
Other
Compre-hensive
Loss | | | |
| Common Stock | Treasury Stock | |
| Shares | Amount | Shares | Amount | Total |
| | (In thousands, except shares) |
| At December 31, 2020 | 201,061,198 | | $ | 201,061 | | $ | 1,371,385 | | $ | 1,558,363 | | $ | (48,078) | | (538,921) | | $ | (3,626) | | $ | 3,079,105 | |
| Net income | — | | — | | — | | 52,131 | | — | | — | | — | | 52,131 | |
| Other comprehensive income | — | | — | | — | | — | | 568 | | — | | — | | 568 | |
| Dividends declared on common stock | — | | — | | — | | (42,943) | | — | | — | | — | | (42,943) | |
| Stock-based compensation | — | | — | | 2,574 | | — | | — | | — | | — | | 2,574 | |
| Repurchase of common stock | — | | — | | — | | — | | — | | (392,294) | | (6,701) | | (6,701) | |
| Issuance of common stock upon vesting of stock-based compensation, net of shares used for tax withholdings | — | | — | | (10,828) | | — | | — | | 392,294 | | 6,701 | | (4,127) | |
| Issuance of common stock | 672,260 | | 672 | | 19,027 | | — | | — | | — | | — | | 19,699 | |
| At March 31, 2021 | 201,733,458 | | $ | 201,733 | | $ | 1,382,158 | | $ | 1,567,551 | | $ | (47,510) | | (538,921) | | $ | (3,626) | | $ | 3,100,306 | |
| Net income | — | | — | | — | | 100,190 | | — | | — | | — | | 100,190 | |
| Other comprehensive income | — | | — | | — | | — | | 542 | | — | | — | | 542 | |
| Dividends declared on common stock | — | | — | | — | | (43,336) | | — | | — | | — | | (43,336) | |
| Stock-based compensation | — | | — | | 6,150 | | — | | — | | — | | — | | 6,150 | |
| Issuance of common stock | 1,088,843 | | 1,089 | | 33,861 | | — | | — | | — | | — | | 34,950 | |
| At June 30, 2021 | 202,822,301 | | $ | 202,822 | | $ | 1,422,169 | | $ | 1,624,405 | | $ | (46,968) | | (538,921) | | $ | (3,626) | | $ | 3,198,802 | |
| Net income | — | | — | | — | | 139,276 | | — | | — | | — | | 139,276 | |
| Other comprehensive income | — | | — | | — | | — | | 543 | | — | | — | | 543 | |
| Dividends declared on common stock | — | | — | | — | | (43,449) | | — | | — | | — | | (43,449) | |
| Stock-based compensation | — | | — | | 2,925 | | — | | — | | — | | — | | 2,925 | |
| Issuance of common stock | 1,067,360 | | 1,067 | | 33,114 | | — | | — | | — | | — | | 34,181 | |
| At September 30, 2021 | 203,889,661 | | $ | 203,889 | | $ | 1,458,208 | | $ | 1,720,232 | | $ | (46,425) | | (538,921) | | $ | (3,626) | | $ | 3,332,278 | |
| | | | | | | | |
| MDU Resources Group, Inc. |
| Consolidated Statements of Cash Flows |
| (Unaudited) |
| Three Months Ended |
| | March 31, |
| | 2023 | 2022 |
| | (In thousands) |
| Operating activities: | | |
| Net income | $ | 38,353 | | $ | 31,763 | |
| Discontinued operations, net of tax | 10 | | 30 | |
| Income from continuing operations | 38,343 | | 31,733 | |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | |
| Depreciation, depletion and amortization | 81,862 | | 80,121 | |
| Deferred income taxes | 8,856 | | (6,466) | |
| Provision for credit losses | 4,193 | | 1,735 | |
| Amortization of debt issuance costs | 380 | | 341 | |
| Employee stock-based compensation costs | 3,108 | | 2,689 | |
| Pension and postretirement benefit plan net periodic benefit credit | (1,090) | | (1,491) | |
| Unrealized (gains) losses on investments | (3,957) | | 5,147 | |
| Gains on sales of assets | (4,361) | | (3,136) | |
| Changes in current assets and liabilities, net of acquisitions: | | |
| Receivables | 14,969 | | (5,723) | |
| Inventories | (40,885) | | (44,080) | |
| Other current assets | (58,308) | | 34,491 | |
| Accounts payable | (93,549) | | 2,980 | |
| Other current liabilities | 16,715 | | 13,086 | |
| Pension and postretirement benefit plan contributions | (159) | | (149) | |
| Other noncurrent changes | (9,794) | | 1,139 | |
| Net cash provided by (used in) continuing operations | (43,677) | | 112,417 | |
| Net cash provided by (used in) discontinued operations | 29 | | (7) | |
| Net cash provided by (used in) operating activities | (43,648) | | 112,410 | |
| Investing activities: | | |
| Capital expenditures | (154,049) | | (150,288) | |
| Acquisitions, net of cash acquired | — | | (524) | |
| Net proceeds from sale or disposition of property and other | 7,282 | | 4,586 | |
| Investments | (4,257) | | (4,442) | |
| Net cash used in investing activities | (151,024) | | (150,668) | |
| Financing activities: | | |
| Issuance of short-term borrowings | 275,000 | | 100,000 | |
| Repayment of short-term borrowings | (20,000) | | — | |
| Issuance of long-term debt | 175,446 | | 150,000 | |
| Repayment of long-term debt | (169,891) | | (143,622) | |
| Debt issuance costs | (114) | | (718) | |
| Net proceeds from issuance of common stock | — | | (127) | |
| Dividends paid | (45,246) | | (44,229) | |
| Repurchase of common stock | (4,811) | | (7,399) | |
| Tax withholding on stock-based compensation | (3,040) | | (4,904) | |
| Net cash provided by financing activities | 207,344 | | 49,001 | |
| Increase in cash and cash equivalents | 12,672 | | 10,743 | |
| Cash and cash equivalents -- beginning of year | 80,517 | | 54,161 | |
| Cash and cash equivalents -- end of period | $ | 93,189 | | $ | 64,904 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | | | | | | |
| MDU Resources Group, Inc. |
| Consolidated Statements of Cash Flows |
| (Unaudited) |
| Nine Months Ended |
| | September 30, |
| | 2022 | 2021 |
| | (In thousands) |
| Operating activities: | | |
| Net income | $ | 250,401 | | $ | 291,597 | |
| Discontinued operations, net of tax | 103 | | 348 | |
| Income from continuing operations | 250,298 | | 291,249 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| Depreciation, depletion and amortization | 247,173 | | 222,613 | |
| Deferred income taxes | 18,741 | | 30,353 | |
| Provision for credit losses | 3,258 | | (801) | |
| Amortization of debt issuance costs | 1,080 | | 997 | |
| Employee stock-based compensation costs | 6,488 | | 11,649 | |
| Pension and postretirement benefit plan net periodic benefit credit | (4,515) | | (3,690) | |
| Unrealized (gains) losses on investments | 15,529 | | (4,408) | |
| Gains on sales of assets | (8,500) | | (10,518) | |
| Changes in current assets and liabilities, net of acquisitions: | | |
| Receivables | (346,879) | | (103,637) | |
| Inventories | (60,670) | | (21,402) | |
| Other current assets | (31,405) | | (74,413) | |
| Accounts payable | 148,456 | | 33,173 | |
| Other current liabilities | 62,106 | | 14,175 | |
| Pension and postretirement benefit plan contributions | (375) | | (326) | |
| Other noncurrent changes | (15,835) | | (19,129) | |
| Net cash provided by continuing operations | 284,950 | | 365,885 | |
| Net cash used in discontinued operations | (17) | | (75) | |
| Net cash provided by operating activities | 284,933 | | 365,810 | |
| Investing activities: | | |
| Capital expenditures | (463,002) | | (428,114) | |
| Acquisitions, net of cash acquired | 450 | | (13,721) | |
| Net proceeds from sale or disposition of property and other | 1,615 | | 12,954 | |
| Investments | (4,411) | | (3,777) | |
| Net cash used in investing activities | (465,348) | | (432,658) | |
| Financing activities: | | |
| Issuance of short-term borrowings | 100,000 | | 50,000 | |
| Repayment of short-term borrowings | — | | (50,000) | |
| Issuance of long-term debt | 270,250 | | 178,879 | |
| Repayment of long-term debt | (23,155) | | (63,835) | |
| Debt issuance costs | (1,082) | | (362) | |
| Net proceeds from issuance of common stock | (149) | | 88,830 | |
| Dividends paid | (132,687) | | (128,142) | |
| Repurchase of common stock | (7,399) | | (6,701) | |
| Tax withholding on stock-based compensation | (4,904) | | (4,127) | |
| Net cash provided by financing activities | 200,874 | | 64,542 | |
| Increase (decrease) in cash and cash equivalents | 20,459 | | (2,306) | |
| Cash and cash equivalents -- beginning of year | 54,161 | | 59,547 | |
| Cash and cash equivalents -- end of period | $ | 74,620 | | $ | 57,241 | |
The accompanying notes are an integral part of these consolidated financial statements.
MDU Resources Group, Inc.
Notes to Consolidated
Financial Statements
September 30,March 31, 2023 and 2022 and 2021
(Unaudited)
Note 1 - Basis of presentation
The accompanying consolidated interim financial statements were prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Interim financial statements do not include all disclosures provided in annual financial statements and, accordingly, these financial statements should be read in conjunction with those appearing in the 20212022 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.
As part of the Company's continuous review of its business, the Company announced strategic initiatives in 2022 that are expected to enhance its value. On August 4, 2022, the Company announced that its Boardboard of Directors unanimouslydirectors approved a plan to pursue the separation of Knife River, the construction materials and contracting segment, from the Company. The separation will result in two independent, publicly traded companies, MDU Resources Group, Inc. and Knife River Holding Company, and is expected to be completed on May 31, 2023, subject to certain conditions, including the SEC declaring the Registration Statement on Form 10 for Knife River Holding Company to be effective. On May 3, 2023, the Company's board of directors approved the separation and the distribution of approximately 90 percent of the issued and outstanding shares of Knife River Holding Company to the Company's stockholders. Stockholders of the Company will receive one share of Knife River Holding Company common stock for every four shares of the Company's common stock held on May 22, 2023, the record date for the distribution. The Company will retain approximately 10 percent of Knife River Holding Company's common stock immediately following the separation with the intent to dispose of such shares within twelve months after the separation. Prior to completing the separation, the Company may adjust the percentage of Knife River Holding Company common stock to be distributed to the Company's stockholders and retained by the Company in response to market and other factors. The separation of Knife River is planned as a tax-free spinoff transaction to the Company’s stockholders for U.S. federal income tax purposes. As
The Company's financial results for the next stepquarter ended March 31, 2023, include Knife River. Upon completion of the Company’s strategic planning, onseparation, the historical results of Knife River will be presented as discontinued operations in the Company's Consolidated Financial Statements.
On November 2,3, 2022, the board of directors unanimously determined the best way to optimize value would beCompany announced its intention to create two pure-play companies: a leading construction materials company and apublicly traded companies, one focused on regulated energy delivery company. Accordingly,and the other on construction materials, and that, to achieve this future structure, the Company's board hasof directors authorized management to commence a strategic review process forof MDU Construction Services withServices. The strategic review is underway and the objectiveCompany anticipates completing the strategic review during the second quarter of achieving the board’s goal of creating two pure-play public companies.2023.
Discontinued operations include the supporting activities of Fidelity and are shown in income from discontinued operations on the Consolidated Statements of Income. Unless otherwise indicated, the amounts presented in the accompanying notes to the consolidated financial statements relate to the Company's continuing operations.
In the fourth quarter of 2021, the Company made changes to the presentation of the Consolidated Statements of Cash Flows to provide further clarity on the sources and uses of net cash provided by operating activities and net cash provided by (used in) financing activities. Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications did not impact total net cash provided by operating activities or net cash provided by financing activities for the nine months ended September 30, 2021.
Management has also evaluated the impact of events occurring after September 30, 2022,March 31, 2023, up to the date of the issuance of these consolidated interim financial statements on November 3, 2022,May 4, 2023, that would require recognition or disclosure in the Consolidated Financial Statements.
Note 2 - New accounting standards
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'sRecently adopted accounting for the assistance and the effect of the assistance on an entity's financial statements. | January 1, 2022 | The Company is currently evaluating the impact the guidance will have on its disclosures for the year ended December 31, 2022.standards |
| ASU 2020-04 - Reference Rate Reform | In March 2020, the FASB issued optional guidance to ease the facilitation of the effects of reference rate reform on financial reporting. The guidance applies to certain contract modifications, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Beginning January 1, 2022, LIBOR or other discontinued reference rates cannot be applied to new contracts. New contracts will incorporate a new reference rate, which includes SOFR. LIBOR or other discontinued reference rates cannot be applied to contract modifications or hedging relationships entered into or evaluated after December 31, 2022. Existing contracts referencing LIBOR or other reference rates expected to be discontinued must identify a replacement rate by June 30, 2023. | Effective as of March 12, 2020 and will continue through December 31, 2022 | For more information, see ASU 2022-06 - Reference Rate Reform: Deferral of Sunset Date in recently issued accounting standards not yet adopted. |
| Recently issued accounting standards not yet adopted |
| ASU 2022-06 - Reference Rate Reform: Deferral of Sunset Date | In December 2022, the FASB included a sunset provision within ASC 848 based on expectations of when LIBOR would cease being published. At the time ASU 2020-04 was issued, the UK Financial Conduct Authority had established its intent to cease overnight tenors of LIBOR after December 31, 2021. In March 2021, the UK Financial Conduct Authority announced that the intended cessation date of the overnight tenors of LIBOR would be June 30, 2023 which is beyond the current sunset date of ASC 848. The amendments in this Update defer the sunset date of ASC 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in ASC 848. | December 31, 2024 | The Company has updated its credit agreements to include language regarding the successor or alternate rate to LIBOR, and a review of other contracts and agreements is on-going. The Company does not expect the guidance to have a material impact on its results of operations, financial position, cash flows or disclosures. |
Note 3 - Seasonality of operations
Some of the Company's operations are highly seasonal and revenues from, and certain expenses for, such operations may fluctuate significantly among quarterly periods. Accordingly, the interim results for particular businesses, and for the Company as a whole, may not be indicative of results for the full fiscal year.
Note 4 - Receivables and allowance for expected credit losses
Receivables consistsconsist primarily of trade and contracting services contract 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 9.8. 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 $41.5$53.5 million, $37.9$50.7 million and $44.8$45.6 million at September 30,March 31, 2023 and 2022, and 2021, and December 31, 2021,2022, respectively.
The 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.
Details of the Company's expected credit losses were as follows:
| | | Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Total | | Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Total |
| | | (In thousands) | | (In thousands) |
| At December 31, 2021 | $ | 269 | | $ | 1,506 | | $ | 2 | | $ | 5,406 | | $ | 2,533 | | $ | 9,716 | | |
| At December 31, 2022 | | At December 31, 2022 | $ | 375 | | $ | 1,615 | | $ | 2 | | $ | 5,477 | | $ | 2,162 | | $ | 9,631 | |
| Current expected credit loss provision | Current expected credit loss provision | 565 | | 1,369 | | — | | (253) | | 54 | | 1,735 | | Current expected credit loss provision | 615 | | 2,324 | | — | | 428 | | 826 | | 4,193 | |
| Less write-offs charged against the allowance | Less write-offs charged against the allowance | 597 | | 932 | | — | | 27 | | 71 | | 1,627 | | Less write-offs charged against the allowance | 667 | | 1,225 | | — | | 83 | | 51 | | 2,026 | |
| Credit loss recoveries collected | Credit loss recoveries collected | 124 | | 180 | | — | | — | | 28 | | 332 | | Credit loss recoveries collected | 145 | | 229 | | — | | — | | 1 | | 375 | |
| At March 31, 2022 | $ | 361 | | $ | 2,123 | | $ | 2 | | $ | 5,126 | | $ | 2,544 | | $ | 10,156 | | |
| Current expected credit loss provision | 113 | | 92 | | — | | 12 | | 292 | | 509 | | |
| Less write-offs charged against the allowance | 234 | | 939 | | — | | 108 | | 104 | | 1,385 | | |
| Credit loss recoveries collected | 108 | | 177 | | — | | — | | — | | 285 | | |
| At June 30, 2022 | $ | 348 | | $ | 1,453 | | $ | 2 | | $ | 5,030 | | $ | 2,732 | | $ | 9,565 | | |
| Current expected credit loss provision | 300 | | 881 | | — | | (55) | | (111) | | 1,015 | | |
| Less write-offs charged against the allowance | 399 | | 1,822 | | — | | 75 | | 152 | | 2,448 | | |
| Credit loss recoveries collected | 85 | | 169 | | — | | — | | 40 | | 294 | | |
| At September 30, 2022 | $ | 334 | | $ | 681 | | $ | 2 | | $ | 4,900 | | $ | 2,509 | | $ | 8,426 | | |
| At March 31, 2023 | | At March 31, 2023 | $ | 468 | | $ | 2,943 | | $ | 2 | | $ | 5,822 | | $ | 2,938 | | $ | 12,173 | |
|
| | | Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Total | | Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Total |
| | | (In thousands) | | (In thousands) |
| At December 31, 2020 | $ | 899 | | $ | 2,571 | | $ | 2 | | $ | 6,164 | | $ | 5,722 | | $ | 15,358 | | |
| At December 31, 2021 | | At December 31, 2021 | $ | 269 | | $ | 1,506 | | $ | 2 | | $ | 5,406 | | $ | 2,533 | | $ | 9,716 | |
| Current expected credit loss provision | Current expected credit loss provision | 538 | | 1,273 | | — | | (1,049) | | (1,079) | | (317) | | Current expected credit loss provision | 565 | | 1,369 | | — | | (253) | | 54 | | 1,735 | |
| Less write-offs charged against the allowance | Less write-offs charged against the allowance | 888 | | 1,107 | | — | | 273 | | 401 | | 2,669 | | Less write-offs charged against the allowance | 597 | | 932 | | — | | 27 | | 71 | | 1,627 | |
| Credit loss recoveries collected | Credit loss recoveries collected | 129 | | 213 | | — | | — | | — | | 342 | | Credit loss recoveries collected | 124 | | 180 | | — | | — | | 28 | | 332 | |
| At March 31, 2021 | $ | 678 | | $ | 2,950 | | $ | 2 | | $ | 4,842 | | $ | 4,242 | | $ | 12,714 | | |
| Current expected credit loss provision | (110) | | (103) | | — | | 11 | | (639) | | (841) | | |
| Less write-offs charged against the allowance | 341 | | 787 | | — | | 232 | | 64 | | 1,424 | | |
| Credit loss recoveries collected | 100 | | 199 | | — | | — | | — | | 299 | | |
| At June 30, 2021 | $ | 327 | | $ | 2,259 | | $ | 2 | | $ | 4,621 | | $ | 3,539 | | $ | 10,748 | | |
| Current expected credit loss provision | 388 | | 411 | | — | | 233 | | (675) | | 357 | | |
| Less write-offs charged against the allowance | 525 | | 1,178 | | — | | 184 | | 265 | | 2,152 | | |
| Credit loss recoveries collected | 92 | | 168 | | — | | — | | 93 | | 353 | | |
| At September 30, 2021 | $ | 282 | | $ | 1,660 | | $ | 2 | | $ | 4,670 | | $ | 2,692 | | $ | 9,306 | | |
| At March 31, 2022 | | At March 31, 2022 | $ | 361 | | $ | 2,123 | | $ | 2 | | $ | 5,126 | | $ | 2,544 | | $ | 10,156 | |
|
Note 5 - Inventories and natural gas in storage
Natural gas in storage for the Company's regulated operations is generally valued at lower of cost or market using the last-in, first-out method or lower of cost or net realizable value using the average cost or first-in, first-out method. The majority of all other inventories are valued at the lower of cost or net realizable value using the average cost method. Inventories include production costs incurred as part of the Company's aggregate mining activities. These inventoriable production costs include all mining and processing costs associated with the production of aggregates. Stripping costs incurred during the production phase, which represent costs of removing overburden and waste materials to access mineral deposits, are a component of inventoriable production costs. The portion of the cost of natural gas in storage expected to be used within 12 months was included in inventories. Inventories on the Consolidated Balance Sheets were as follows:
| | | | September 30, 2022 | September 30, 2021 | December 31, 2021 | | March 31, 2023 | March 31, 2022 | December 31, 2022 |
| | | (In thousands) | | (In thousands) |
| Aggregates held for resale | Aggregates held for resale | $ | 198,711 | | $ | 183,693 | | $ | 184,363 | | Aggregates held for resale | $ | 207,564 | | $ | 195,489 | | $ | 199,110 | |
| Asphalt oil | Asphalt oil | 56,609 | | 32,964 | | 57,002 | | Asphalt oil | 101,271 | | 93,816 | | 68,609 | |
| Natural gas in storage (current) | 48,532 | | 28,683 | | 18,867 | | |
| Materials and supplies | Materials and supplies | 42,359 | | 27,253 | | 30,629 | | Materials and supplies | 45,310 | | 35,967 | | 40,056 | |
| Merchandise for resale | Merchandise for resale | 39,198 | | 26,639 | | 28,501 | | Merchandise for resale | 42,603 | | 33,393 | | 40,296 | |
| Natural gas in storage (current) | | Natural gas in storage (current) | 8,662 | | 10,801 | | 22,533 | |
| Other | Other | 13,233 | | 13,053 | | 16,247 | | Other | 20,424 | | 10,850 | | 16,921 | |
| Total | Total | $ | 398,642 | | $ | 312,285 | | $ | 335,609 | | Total | $ | 425,834 | | $ | 380,316 | | $ | 387,525 | |
The remainder of natural gas in storage, which largely represents the cost of gas required to maintain pressure levels for normal operating purposes, was included in noncurrent assets - other and was $47.2$47.4 million at September 30, 2022March 31, 2023 and $47.5 million at both September 30, 2021March 31, 2022 and December 31, 2021.2022.
Note 6 - Earnings per share
Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the applicable period. Diluted earnings per share is computed by dividing net income by the total of the weighted average number of shares of common stock outstanding during the applicable period, plus the effect of non-vested performance share awards and restricted stock units. Common stock outstanding includes issued shares less shares held in treasury. Net income was the same for both the basic and diluted earnings per share calculations. A reconciliation of the weighted average common shares outstanding used in the basic and diluted earnings per share calculations follows:
| | | Three Months Ended | Nine Months Ended | | Three Months Ended | |
| | September 30, | | March 31, | |
| | 2022 | 2021 | 2022 | 2021 | | 2023 | 2022 | |
| | (In thousands, except per share amounts) | | (In thousands, except per share amounts) |
| Weighted average common shares outstanding - basic | Weighted average common shares outstanding - basic | 203,351 | | 202,863 | | 203,351 | | 201,647 | | Weighted average common shares outstanding - basic | 203,624 | | 203,351 | | |
| Effect of dilutive performance share awards and restricted stock units | Effect of dilutive performance share awards and restricted stock units | 293 | | 327 | | 56 | | 308 | | Effect of dilutive performance share awards and restricted stock units | 286 | | 40 | | |
| Weighted average common shares outstanding - diluted | Weighted average common shares outstanding - diluted | 203,644 | | 203,190 | | 203,407 | | 201,955 | | Weighted average common shares outstanding - diluted | 203,910 | | 203,391 | | |
| Shares excluded from the calculation of diluted earnings per share | Shares excluded from the calculation of diluted earnings per share | — | | — | | 77 | | — | | Shares excluded from the calculation of diluted earnings per share | — | | — | | |
| Dividends declared per common share | Dividends declared per common share | $ | .2175 | | $ | .2125 | | $ | .6525 | | $ | .6375 | | Dividends declared per common share | $ | .2225 | | $ | .2175 | | |
Note 7 - Equity
The Company currently has a shelf registration statement on file with the SEC, under which the Company may issue and sell any combination of common stock and debt securities. The Company may sell such securities if warranted by market conditions and the Company's capital requirements.
In August 2020, the Company amended the Distribution Agreement dated February 22, 2019, with J.P. Morgan Securities LLC and MUFG Securities Americas Inc., as sales agents. This agreement, as amended, allows the offering, issuance and sale of up to 6.4 million shares of the Company's common stock in connection with an "at-the-market" offering. The common stock may be offered for sale, from time to time, in accordance with the terms and conditions of this agreement. As of September 30, 2022, the Company had capacity to issue up to 3.6 million additional shares of common stock under the "at-the-market" offering program.
Details of the Company's "at-the-market" offering activity was as follows:
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | |
| September 30, | | September 30, | |
| 2022 | 2021 | | 2022 | 2021 | |
| (In millions) | |
| Shares issued | — | | 1.0 | | | — | | 2.8 | | |
| Net proceeds * | $ | — | | $ | 34.2 | | ** | $ | (.1) | | $ | 88.8 | | ** |
* Net proceeds include issuance costs of $— and $149,000 for the three and nine months ended September 30, 2022, respectively, and $425,000 and $1.2 million for the three and nine months ended September 30, 2021, respectively.
** Net proceeds were used for capital expenditures.
Note 87 - Accumulated other comprehensive loss
The after-tax changes in the components of accumulated other comprehensive loss were as follows:
| | | | | | | | | | | | | | | |
| Net Unrealized
Gain (Loss) on
Derivative
Instruments
Qualifying as
Hedges | Postretirement
Liability
Adjustment | | Net Unrealized
Gain (Loss) on
Available-for-sale
Investments | Total
Accumulated
Other
Comprehensive
Loss |
| | (In thousands) |
| At December 31, 2021 | $ | (538) | | $ | (40,461) | | | $ | (5) | | $ | (41,004) | |
| Other comprehensive loss before reclassifications | — | | — | | | (320) | | (320) | |
| Amounts reclassified from accumulated other comprehensive loss | 112 | | 445 | | | 32 | | 589 | |
| Net current-period other comprehensive income (loss) | 112 | | 445 | | | (288) | | 269 | |
| At March 31, 2022 | $ | (426) | | $ | (40,016) | | | $ | (293) | | $ | (40,735) | |
| Other comprehensive loss before reclassifications | — | | — | | | (128) | | (128) | |
| Amounts reclassified to accumulated other comprehensive loss from a regulatory asset | — | | (3,265) | | | — | | (3,265) | |
| Amounts reclassified from accumulated other comprehensive loss | 111 | | 461 | | | 25 | | 597 | |
| Net current-period other comprehensive income (loss) | 111 | | (2,804) | | | (103) | | (2,796) | |
| At June 30, 2022 | $ | (315) | | $ | (42,820) | | | $ | (396) | | $ | (43,531) | |
| Other comprehensive loss before reclassifications | — | | — | | | (329) | | (329) | |
| Amounts reclassified from accumulated other comprehensive loss | 111 | | 461 | | | 42 | | 614 | |
| Net current-period other comprehensive income (loss) | 111 | | 461 | | | (287) | | 285 | |
| At September 30, 2022 | $ | (204) | | $ | (42,359) | | | $ | (683) | | $ | (43,246) | |
| | | | | | | | | | | | | | | |
| Net Unrealized
Gain (Loss) on
Derivative
Instruments
Qualifying as
Hedges | Postretirement
Liability
Adjustment | | Net Unrealized
Gain (Loss) on
Available-for-sale
Investments | Total
Accumulated
Other
Comprehensive
Loss |
| | (In thousands) |
| At December 31, 2022 | $ | (125) | | $ | (29,900) | | | $ | (558) | | $ | (30,583) | |
| Other comprehensive income before reclassifications | — | | — | | | 70 | | 70 | |
| Amounts reclassified from accumulated other comprehensive loss | 34 | | 100 | | | 13 | | 147 | |
| Net current-period other comprehensive income | 34 | | 100 | | | 83 | | 217 | |
| At March 31, 2023 | $ | (91) | | $ | (29,800) | | | $ | (475) | | $ | (30,366) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | Net Unrealized
Gain (Loss) on
Derivative
Instruments
Qualifying as
Hedges | Postretirement
Liability
Adjustment | | Net Unrealized
Gain (Loss) on
Available-for-sale
Investments | Total
Accumulated
Other
Comprehensive
Loss | | Net Unrealized
Gain (Loss) on
Derivative
Instruments
Qualifying as
Hedges | Postretirement
Liability
Adjustment | | Net Unrealized
Gain (Loss) on
Available-for-sale
Investments | Total
Accumulated
Other
Comprehensive
Loss |
| | | (In thousands) | | (In thousands) |
| At December 31, 2020 | $ | (984) | | $ | (47,207) | | | $ | 113 | | $ | (48,078) | | |
| At December 31, 2021 | | At December 31, 2021 | $ | (538) | | $ | (40,461) | | | $ | (5) | | $ | (41,004) | |
| Other comprehensive loss before reclassifications | Other comprehensive loss before reclassifications | — | | — | | | (44) | | (44) | | Other comprehensive loss before reclassifications | — | | — | | | (320) | | (320) | |
| Amounts reclassified from accumulated other comprehensive loss | Amounts reclassified from accumulated other comprehensive loss | 111 | | 466 | | | 35 | | 612 | | Amounts reclassified from accumulated other comprehensive loss | 112 | | 445 | | | 32 | | 589 | |
| Net current-period other comprehensive income (loss) | Net current-period other comprehensive income (loss) | 111 | | 466 | | | (9) | | 568 | | Net current-period other comprehensive income (loss) | 112 | | 445 | | | (288) | | 269 | |
| At March 31, 2021 | $ | (873) | | $ | (46,741) | | | $ | 104 | | $ | (47,510) | | |
| Other comprehensive loss before reclassifications | — | | — | | | (52) | | (52) | | |
| Amounts reclassified from accumulated other comprehensive loss | 112 | | 457 | | | 25 | | 594 | | |
| Net current-period other comprehensive income (loss) | 112 | | 457 | | | (27) | | 542 | | |
| At June 30, 2021 | $ | (761) | | $ | (46,284) | | | $ | 77 | | $ | (46,968) | | |
| Other comprehensive loss before reclassifications | — | | — | | | (54) | | (54) | | |
| Amounts reclassified from accumulated other comprehensive loss | 111 | | 466 | | | 20 | | 597 | | |
| Net current-period other comprehensive income (loss) | 111 | | 466 | | | (34) | | 543 | | |
| At September 30, 2021 | $ | (650) | | $ | (45,818) | | | $ | 43 | | $ | (46,425) | | |
| At March 31, 2022 | | At March 31, 2022 | $ | (426) | | $ | (40,016) | | | $ | (293) | | $ | (40,735) | |
The following amounts were reclassified out of accumulated other comprehensive loss into net income. The amounts presented in parenthesis indicate a decrease to net income on the Consolidated Statements of Income. The reclassifications were as follows:
| | | Three Months Ended | Nine Months Ended | Location on Consolidated
Statements of
Income | | Three Months Ended | | Location on Consolidated
Statements of
Income |
| | September 30, | | March 31, | |
| | 2022 | 2021 | 2022 | 2021 | | 2023 | 2022 | |
| | (In thousands) | | | (In thousands) | |
| Reclassification adjustment for loss on derivative instruments included in net income | Reclassification adjustment for loss on derivative instruments included in net income | $ | (148) | | $ | (147) | | $ | (443) | | $ | (443) | | Interest expense | Reclassification adjustment for loss on derivative instruments included in net income | $ | (45) | | $ | (148) | | | Interest expense |
| | 37 | | 36 | | 109 | | 109 | | Income taxes | | 11 | | 36 | | | Income taxes |
| | (111) | | (111) | | (334) | | (334) | | | | (34) | | (112) | | | |
| Amortization of postretirement liability losses included in net periodic benefit credit | Amortization of postretirement liability losses included in net periodic benefit credit | (609) | | (617) | | (1,827) | | (1,851) | | Other income | Amortization of postretirement liability losses included in net periodic benefit credit | (134) | | (609) | | | Other income |
| | 148 | | 151 | | 460 | | 462 | | Income taxes | | 34 | | 164 | | | Income taxes |
| | (461) | | (466) | | (1,367) | | (1,389) | | | | (100) | | (445) | | | |
| Reclassification adjustment on available-for-sale investments included in net income | Reclassification adjustment on available-for-sale investments included in net income | (54) | | (26) | | (126) | | (101) | | Other income | Reclassification adjustment on available-for-sale investments included in net income | (16) | | (40) | | | Other income |
| | 12 | | 6 | | 27 | | 21 | | Income taxes | | 3 | | 8 | | | Income taxes |
| | (42) | | (20) | | (99) | | (80) | | | | (13) | | (32) | | | |
| Total reclassifications | Total reclassifications | $ | (614) | | $ | (597) | | $ | (1,800) | | $ | (1,803) | | | Total reclassifications | $ | (147) | | $ | (589) | | | |
Note 98 - Revenue from contracts with customers
Revenue is recognized when a performance obligation is satisfied by transferring control over a product or service to a customer. Revenue is measured based on consideration specified in a contract with a customer and excludes any sales incentives and amounts collected on behalf of third parties. The Company is considered an agent for certain taxes collected from customers. As such, the Company presents revenues net of these taxes at the time of sale to be remitted to governmental authorities, including sales and use taxes.
Disaggregation
In the following tables, revenue is disaggregated by the type of customer or service provided. The Company believes this level of disaggregation best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The table also includes a reconciliation of the disaggregated revenue by reportable segments. For more information on the Company's business segments, see Note 17.
| | Three Months Ended September 30, 2022 | Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Other | Total | |
| Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2023 | Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Other | Total |
| | (In thousands) | | (In thousands) |
| Residential utility sales | Residential utility sales | $ | 36,981 | | $ | 64,074 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 101,055 | | Residential utility sales | $ | 37,825 | | $ | 327,651 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 365,476 | |
| Commercial utility sales | Commercial utility sales | 38,785 | | 43,734 | | — | | — | | — | | — | | 82,519 | | Commercial utility sales | 36,347 | | 204,927 | | — | | — | | — | | — | | 241,274 | |
| Industrial utility sales | Industrial utility sales | 10,838 | | 7,209 | | — | | — | | — | | — | | 18,047 | | Industrial utility sales | 10,763 | | 16,838 | | — | | — | | — | | — | | 27,601 | |
| Other utility sales | Other utility sales | 2,002 | | — | | — | | — | | — | | — | | 2,002 | | Other utility sales | 1,774 | | — | | — | | — | | — | | — | | 1,774 | |
| Natural gas transportation | Natural gas transportation | — | | 11,910 | | 32,144 | | — | | — | | — | | 44,054 | | Natural gas transportation | — | | 13,504 | | 34,983 | | — | | — | | — | | 48,487 | |
| Natural gas storage | Natural gas storage | — | | — | | 3,595 | | — | | — | | — | | 3,595 | | Natural gas storage | — | | — | | 3,861 | | — | | — | | — | | 3,861 | |
| Contracting services | Contracting services | — | | — | | — | | 492,207 | | — | | — | | 492,207 | | Contracting services | — | | — | | — | | 114,983 | | — | | — | | 114,983 | |
| Construction materials | Construction materials | — | | — | | — | | 742,982 | | — | | — | | 742,982 | | Construction materials | — | | — | | — | | 232,502 | | — | | — | | 232,502 | |
| Intrasegment eliminations | Intrasegment eliminations | — | | — | | — | | (259,761) | | — | | — | | (259,761) | | Intrasegment eliminations | — | | — | | — | | (39,585) | | — | | — | | (39,585) | |
| Electrical & mechanical specialty contracting | Electrical & mechanical specialty contracting | — | | — | | — | | — | | 543,717 | | — | | 543,717 | | Electrical & mechanical specialty contracting | — | | — | | — | | — | | 590,263 | | — | | 590,263 | |
| Transmission & distribution specialty contracting | Transmission & distribution specialty contracting | — | | — | | — | | — | | 181,550 | | — | | 181,550 | | Transmission & distribution specialty contracting | — | | — | | — | | — | | 152,022 | | — | | 152,022 | |
| Other | Other | 10,758 | | 3,494 | | 3,815 | | — | | 200 | | 4,438 | | 22,705 | | Other | 11,878 | | 4,721 | | 1,859 | | — | | 33 | | 4,739 | | 23,230 | |
| Intersegment eliminations | Intersegment eliminations | (124) | | (139) | | (3,595) | | (343) | | (2,229) | | (4,438) | | (10,868) | | Intersegment eliminations | (122) | | (150) | | (26,410) | | (132) | | (214) | | (4,739) | | (31,767) | |
| Revenues from contracts with customers | Revenues from contracts with customers | 99,240 | | 130,282 | | 35,959 | | 975,085 | | 723,238 | | — | | 1,963,804 | | Revenues from contracts with customers | 98,465 | | 567,491 | | 14,293 | | 307,768 | | 742,104 | | — | | 1,730,121 | |
| Other revenues | (47) | | 1,792 | | 86 | | — | | 11,571 | | — | | 13,402 | | |
| Revenues out of scope | | Revenues out of scope | (2,863) | | (1,974) | | 38 | | — | | 12,015 | | — | | 7,216 | |
| Total external operating revenues | Total external operating revenues | $ | 99,193 | | $ | 132,074 | | $ | 36,045 | | $ | 975,085 | | $ | 734,809 | | $ | — | | $ | 1,977,206 | | Total external operating revenues | $ | 95,602 | | $ | 565,517 | | $ | 14,331 | | $ | 307,768 | | $ | 754,119 | | $ | — | | $ | 1,737,337 | |
| | Three Months Ended September 30, 2021 | Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Other | Total | |
| Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2022 | Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Other | Total |
| | (In thousands) | | (In thousands) |
| Residential utility sales | Residential utility sales | $ | 36,412 | | $ | 55,284 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 91,696 | | Residential utility sales | $ | 37,304 | | $ | 258,816 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 296,120 | |
| Commercial utility sales | Commercial utility sales | 39,033 | | 35,338 | | — | | — | | — | | — | | 74,371 | | Commercial utility sales | 35,600 | | 163,609 | | — | | — | | — | | — | | 199,209 | |
| Industrial utility sales | Industrial utility sales | 10,495 | | 5,395 | | — | | — | | — | | — | | 15,890 | | Industrial utility sales | 10,306 | | 13,024 | | — | | — | | — | | — | | 23,330 | |
| Other utility sales | Other utility sales | 1,993 | | — | | — | | — | | — | | — | | 1,993 | | Other utility sales | 1,750 | | — | | — | | — | | — | | — | | 1,750 | |
| Natural gas transportation | Natural gas transportation | — | | 11,812 | | 28,058 | | — | | — | | — | | 39,870 | | Natural gas transportation | — | | 12,381 | | 31,574 | | — | | — | | — | | 43,955 | |
| Natural gas storage | Natural gas storage | — | | — | | 3,483 | | — | | — | | — | | 3,483 | | Natural gas storage | — | | — | | 3,719 | | — | | — | | — | | 3,719 | |
| Contracting services | Contracting services | — | | — | | — | | 415,106 | | — | | — | | 415,106 | | Contracting services | — | | — | | — | | 114,267 | | — | | — | | 114,267 | |
| Construction materials | Construction materials | — | | — | | — | | 617,823 | | — | | — | | 617,823 | | Construction materials | — | | — | | — | | 241,732 | | — | | — | | 241,732 | |
| Intrasegment eliminations | Intrasegment eliminations | — | | — | | — | | (201,630) | | — | | — | | (201,630) | | Intrasegment eliminations | — | | — | | — | | (46,033) | | — | | — | | (46,033) | |
| Electrical & mechanical specialty contracting | Electrical & mechanical specialty contracting | — | | — | | — | | — | | 317,238 | | — | | 317,238 | | Electrical & mechanical specialty contracting | — | | — | | — | | — | | 392,808 | | — | | 392,808 | |
| Transmission & distribution specialty contracting | Transmission & distribution specialty contracting | — | | — | | — | | — | | 185,842 | | — | | 185,842 | | Transmission & distribution specialty contracting | — | | — | | — | | — | | 148,466 | | — | | 148,466 | |
| Other | Other | 12,589 | | 2,110 | | 3,290 | | — | | 75 | | 3,423 | | 21,487 | | Other | 12,753 | | 2,609 | | 1,709 | | — | | 48 | | 4,341 | | 21,460 | |
| Intersegment eliminations | Intersegment eliminations | (136) | | (142) | | (3,908) | | (110) | | (289) | | (3,398) | | (7,983) | | Intersegment eliminations | (124) | | (136) | | (25,940) | | (130) | | (1,059) | | (4,341) | | (31,730) | |
| Revenues from contracts with customers | Revenues from contracts with customers | 100,386 | | 109,797 | | 30,923 | | 831,189 | | 502,866 | | 25 | | 1,575,186 | | Revenues from contracts with customers | 97,589 | | 450,303 | | 11,062 | | 309,836 | | 540,263 | | — | | 1,409,053 | |
| Other revenues | (1,456) | | 581 | | 45 | | — | | 11,657 | | — | | 10,827 | | |
| Revenues out of scope | | Revenues out of scope | (3,995) | | 115 | | 58 | | — | | 11,328 | | — | | 7,506 | |
| Total external operating revenues | Total external operating revenues | $ | 98,930 | | $ | 110,378 | | $ | 30,968 | | $ | 831,189 | | $ | 514,523 | | $ | 25 | | $ | 1,586,013 | | Total external operating revenues | $ | 93,594 | | $ | 450,418 | | $ | 11,120 | | $ | 309,836 | | $ | 551,591 | | $ | — | | $ | 1,416,559 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 | Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Other | Total |
| (In thousands) |
| Residential utility sales | $ | 103,648 | | $ | 439,639 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 543,287 | |
| Commercial utility sales | 108,400 | | 279,697 | | — | | — | | — | | — | | 388,097 | |
| Industrial utility sales | 32,067 | | 29,242 | | — | | — | | — | | — | | 61,309 | |
| Other utility sales | 5,632 | | — | | — | | — | | — | | — | | 5,632 | |
| Natural gas transportation | — | | 35,747 | | 95,685 | | — | | — | | — | | 131,432 | |
| Natural gas storage | — | | — | | 10,210 | | — | | — | | — | | 10,210 | |
| Contracting services | — | | — | | — | | 937,156 | | — | | — | | 937,156 | |
| Construction materials | — | | — | | — | | 1,535,077 | | — | | — | | 1,535,077 | |
| Intrasegment eliminations | — | | — | | — | | (475,026) | | — | | — | | (475,026) | |
| Electrical & mechanical specialty contracting | — | | — | | — | | — | | 1,443,758 | | — | | 1,443,758 | |
| Transmission & distribution specialty contracting | — | | — | | — | | — | | 496,190 | | — | | 496,190 | |
| Other | 33,727 | | 9,854 | | 8,200 | | — | | 357 | | 13,168 | | 65,306 | |
| Intersegment eliminations | (371) | | (416) | | (37,328) | | (674) | | (5,090) | | (13,168) | | (57,047) | |
| Revenues from contracts with customers | 283,103 | | 793,763 | | 76,767 | | 1,996,533 | | 1,935,215 | | — | | 5,085,381 | |
| Other revenues | (4,854) | | (831) | | 210 | | — | | 34,780 | | — | | 29,305 | |
| Total external operating revenues | $ | 278,249 | | $ | 792,932 | | $ | 76,977 | | $ | 1,996,533 | | $ | 1,969,995 | | $ | — | | $ | 5,114,686 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 | Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Other | Total |
| (In thousands) |
| Residential utility sales | $ | 99,106 | | $ | 341,901 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 441,007 | |
| Commercial utility sales | 105,795 | | 203,002 | | — | | — | | — | | — | | 308,797 | |
| Industrial utility sales | 30,878 | | 20,387 | | — | | — | | — | | — | | 51,265 | |
| Other utility sales | 5,384 | | — | | — | | — | | — | | — | | 5,384 | |
| Natural gas transportation | — | | 35,715 | | 85,160 | | — | | — | | — | | 120,875 | |
| Natural gas storage | — | | — | | 10,606 | | — | | — | | — | | 10,606 | |
| Contracting services | — | | — | | — | | 791,964 | | — | | — | | 791,964 | |
| Construction materials | — | | — | | — | | 1,332,997 | | — | | — | | 1,332,997 | |
| Intrasegment eliminations | — | | — | | — | | (394,126) | | — | | — | | (394,126) | |
| Electrical & mechanical specialty contracting | — | | — | | — | | — | | 1,020,130 | | — | | 1,020,130 | |
| Transmission & distribution specialty contracting | — | | — | | — | | — | | 502,328 | | — | | 502,328 | |
| Other | 31,827 | | 7,913 | | 10,760 | | — | | 168 | | 10,152 | | 60,820 | |
| Intersegment eliminations | (407) | | (425) | | (38,000) | | (314) | | (2,128) | | (10,082) | | (51,356) | |
| Revenues from contracts with customers | 272,583 | | 608,493 | | 68,526 | | 1,730,521 | | 1,520,498 | | 70 | | 4,200,691 | |
| Other revenues | (5,329) | | 5,880 | | 127 | | — | | 36,239 | | — | | 36,917 | |
| Total external operating revenues | $ | 267,254 | | $ | 614,373 | | $ | 68,653 | | $ | 1,730,521 | | $ | 1,556,737 | | $ | 70 | | $ | 4,237,608 | |
Presented in the previous tables are intrasegment revenuessales of materials to both third parties and internal customers 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, thesethe internal sales revenues must be eliminated against the construction materials product used in the contracting services to arrive at the external operating revenue total for the segment.
Contract balances
The timing of revenue recognition may differ from the timing of invoicing to customers. The timing of invoicing to customers does not necessarily correlate with the timing of revenues being recognized under the cost-to-cost method of accounting. Contracts forfrom construction work are billed as work progresses in accordance with agreed upon contractual terms. Generally, billing to the customer occurs contemporaneous to revenue recognition. A variance in timing of the billings may result in a contract asset or a contract liability. A contract asset occurs when revenues are recognized under the cost-to-cost measure of progress, which exceeds amounts billed on uncompleted contracts. Such amounts will be billed as standard contract terms allow, usually based on various measures of performance or achievement. A contract liability occurs when there are billings in excess of revenues recognized under the cost-to-cost measure of progress on uncompleted contracts. Contract liabilities decrease as revenue is recognized from the satisfaction of the related performance obligation.
The changes in contract assets and liabilities were as follows:
| | | September 30, 2022 | December 31, 2021 | Change | Location on Consolidated Balance Sheets | | March 31, 2023 | December 31, 2022 | Change | Location on Consolidated Balance Sheets |
| | (In thousands) | | | (In thousands) | |
| Contract assets | Contract assets | $ | 265,585 | | $ | 125,742 | | $ | 139,843 | | Receivables, net | Contract assets | $ | 212,687 | | $ | 185,289 | | $ | 27,398 | | Receivables, net |
| Contract liabilities - current | Contract liabilities - current | (216,439) | | (179,140) | | (37,299) | | Accounts payable | Contract liabilities - current | (202,788) | | (208,204) | | 5,416 | | Accounts payable |
| Contract liabilities - noncurrent | Contract liabilities - noncurrent | (12) | | (118) | | 106 | | Noncurrent liabilities - other | Contract liabilities - noncurrent | (442) | | (6) | | (436) | | Noncurrent liabilities - other |
| Net contract assets (liabilities) | Net contract assets (liabilities) | $ | 49,134 | | $ | (53,516) | | $ | 102,650 | | | Net contract assets (liabilities) | $ | 9,457 | | $ | (22,921) | | $ | 32,378 | | |
The Company recognized $11.2 million and $147.9$154.9 million in revenue for the three and nine months ended September 30, 2022, respectively,March 31, 2023, which was previously included in contract liabilities at December 31, 2021.2022. The Company recognized $7.1 million and $152.4$121.8 million in revenue for the three and nine months ended September 30, 2021, respectively,March 31, 2022, which was previously included in contract liabilities at December 31, 2020.2021.
The Company recognized a net increase in revenues of $14.5$21.3 million and $54.1$23.5 million for the three and nine months ended September 30,March 31, 2023 and 2022, respectively, from performance obligations satisfied in prior periods. The company recognized a net increase in revenues of $19.2 million and $63.3 million for the three and nine months ended September 30, 2021, respectively, from performance obligations satisfied in prior periods.
Remaining performance obligations
The remaining performance obligations, also referred to as backlog, at the construction materials and contracting and construction services segments include unrecognized revenues that the Company reasonably expects to be realized. These unrecognized revenues can include: projects that have a written award, a letter of intent, a notice to proceed, an agreed upon work order to perform work on mutually accepted terms and conditions and change orders or claims to the extent management believes additional contract revenues will be earned and are deemed probable of collection. Excluded from remaining performance obligations are potential orders under master service agreements. The majority of the Company's constructioncontracting services contracts have an original duration of less than two years.
The remaining performance obligations at the pipeline segment include firm transportation contracts with fixed pricing and fixed volumes. The Company has applied the practical expedient, which does not require additional disclosures for contracts with an original duration of less than 12 months, to certain firm transportation and non-regulated contracts. The Company's firm transportation contracts included in the remaining performance obligations have weighted average remaining durations of less than five years.
At September 30, 2022,March 31, 2023, the Company's remaining performance obligations were $3.3$3.7 billion. The Company expects to recognize the following revenue amounts in future periods related to these remaining performance obligations: $2.6 billion within the next 12 months or less; $369.7$454.5 million within the next 13 to 24 months; and $418.1$592.8 million in 25 months or more.
Note 109 - Business combinations
The following acquisitions wereacquisition was accounted for as a business combinationscombination in accordance with ASC 805 - Business Combinations. The results of the acquired businessesbusiness combination have been included in the Consolidated Financial Statements beginning on the acquisition date. Pro forma financial amounts reflecting the effects of the business combinationscombination are not presented as none of these business combinations, individually or in the aggregate, werebecause it was not material to the Company's financial position or results of operations.
The acquisitionsAcquisitions 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 ninethree months ended September 30, 2022.
March 31, 2023. In 2021,December 2022, the construction materials and contracting segment's acquisitions included:
•Baker Rock Resourcessegment acquired Allied Concrete and Oregon Mainline Paving, two construction materials companies located around the Portland, Oregon metro area, acquiredSupply Co., a producer of ready-mixed concrete in November 2021. As of September 30, 2022,California. At March 31, 2023, the purchase price allocation was settled with no material adjustments toconsidered preliminary and will be finalized within 12 months of the provisional accounting.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, theThe total purchase price for acquisitions that occurred in 2022 was $236.1$8.9 million, subject to certain adjustments, with cash acquired totaling $900,000.$2.8 million. The purchase price includes consideration paid of $235.2$1.5 million, a $70,000 holdback liability, and 273,153 shares of common stock with a market value of $8.4 million as of the respective acquisition date. Due to the holding period restriction on the common stock, the share consideration was discounted to a fair value of approximately $7.3 million. The amounts allocated to the aggregated assets acquired and liabilities assumed during 20212022 were as follows: $17.0$1.7 million to current assets; $179.8$5.9 million to property, plant and equipment; $50.6 million$200,000 to goodwill; $2.2 million to other intangible assets; $8.7 million$100,000 to current liabilities; $2.5 million$500,000 to noncurrent liabilities - other;other and $3.2$1.2 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 $2.1 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. ForIncome and were immaterial for both the ninethree months ended September 30, 2022, the Company had no acquisition costs. For the nine months ended September 30, 2021, acquisition costs were not material.March 31, 2023 and 2022.
Note 1110 - Leases
The Company's leases primarily include operating leases for equipment, buildings, easements and vehicles. The Company leases certain equipment to third parties through its utility and construction services segments, which are considered short-term operating leases with terms of less than 12 months.
The Company recognized revenue from operating leases of $11.7$12.2 million and $35.1$11.4 million for the three and nine months ended September 30,March 31, 2023 and 2022, respectively. The Company recognized revenue from operating leases of $11.8 million and $36.6 million for the three and nine months ended September 30, 2021, respectively. At September 30, 2022,March 31, 2023, the Company had $9.1 million of lease receivables with a majority due within 12 months.
Note 1211 - Goodwill and other intangible assets
The changes in the carrying amount of goodwill were as follows:
| | | Balance at January 1, 2022 | Goodwill
Acquired
During
the Year | Measurement
Period
Adjustments | Balance at September 30, 2022 | | Balance at January 1, 2023 | Goodwill
Acquired
During
the Year | Measurement
Period
Adjustments | Balance at March 31, 2023 |
| | | (In thousands) | | (In thousands) |
| Natural gas distribution | Natural gas distribution | $ | 345,736 | | $ | — | | $ | — | | $ | 345,736 | | Natural gas distribution | $ | 345,736 | | $ | — | | $ | — | | $ | 345,736 | |
| Construction materials and contracting | Construction materials and contracting | 276,426 | | — | | (2,124) | | 274,302 | | Construction materials and contracting | 274,540 | | — | | — | | 274,540 | |
| Construction services | Construction services | 143,224 | | — | | — | | 143,224 | | Construction services | 143,224 | | — | | — | | 143,224 | |
| Total | Total | $ | 765,386 | | $ | — | | $ | (2,124) | | $ | 763,262 | | Total | $ | 763,500 | | $ | — | | $ | — | | $ | 763,500 | |
| | | Balance at January 1, 2021 | Goodwill
Acquired
During
the Year | Measurement
Period
Adjustments | Balance at September 30, 2021 | | Balance at January 1, 2022 | Goodwill
Acquired
During
the Year | Measurement
Period
Adjustments | Balance at March 31, 2022 |
| | | (In thousands) | | (In thousands) |
| Natural gas distribution | Natural gas distribution | $ | 345,736 | | $ | — | | $ | — | | $ | 345,736 | | Natural gas distribution | $ | 345,736 | | $ | — | | $ | — | | $ | 345,736 | |
| Construction materials and contracting | Construction materials and contracting | 226,003 | | 2,900 | | (217) | | 228,686 | | Construction materials and contracting | 276,426 | | — | | (2,124) | | 274,302 | |
| Construction services | Construction services | 143,224 | | — | | — | | 143,224 | | Construction services | 143,224 | | — | | — | | 143,224 | |
| Total | Total | $ | 714,963 | | $ | 2,900 | | $ | (217) | | $ | 717,646 | | Total | $ | 765,386 | | $ | — | | $ | (2,124) | | $ | 763,262 | |
| | | Balance at January 1, 2021 | Goodwill
Acquired
During
the Year | Measurement
Period
Adjustments | Balance at December 31, 2021 | | Balance at January 1, 2022 | Goodwill
Acquired
During
the Year | Measurement
Period
Adjustments | Balance at December 31, 2022 |
| | | (In thousands) | | (In thousands) |
| Natural gas distribution | Natural gas distribution | $ | 345,736 | | $ | — | | $ | — | | $ | 345,736 | | Natural gas distribution | $ | 345,736 | | $ | — | | $ | — | | $ | 345,736 | |
| Construction materials and contracting | Construction materials and contracting | 226,003 | | 50,640 | | (217) | | 276,426 | | Construction materials and contracting | 276,426 | | 238 | | (2,124) | | 274,540 | |
| Construction services | Construction services | 143,224 | | — | | — | | 143,224 | | Construction services | 143,224 | | — | | — | | 143,224 | |
| Total | Total | $ | 714,963 | | $ | 50,640 | | $ | (217) | | $ | 765,386 | | Total | $ | 765,386 | | $ | 238 | | $ | (2,124) | | $ | 763,500 | |
Other amortizable intangible assets were as follows:
| | | | September 30, 2022 | September 30, 2021 | December 31, 2021 | | March 31, 2023 | March 31, 2022 | December 31, 2022 |
| | | (In thousands) | | (In thousands) |
| Customer relationships | Customer relationships | $ | 28,990 | | $ | 29,423 | | $ | 29,740 | | Customer relationships | $ | 28,990 | | $ | 28,990 | | $ | 28,990 | |
| Less accumulated amortization | Less accumulated amortization | 12,768 | | 9,705 | | 10,650 | | Less accumulated amortization | 14,680 | | 10,846 | | 13,724 | |
| | | 16,222 | | 19,718 | | 19,090 | | | 14,310 | | 18,144 | | 15,266 | |
| Noncompete agreements | Noncompete agreements | 4,591 | | 3,991 | | 4,591 | | Noncompete agreements | 4,331 | | 4,591 | | 4,591 | |
| Less accumulated amortization | Less accumulated amortization | 3,377 | | 2,710 | | 2,856 | | Less accumulated amortization | 3,405 | | 3,016 | | 3,529 | |
| | 1,214 | | 1,281 | | 1,735 | | | 926 | | 1,575 | | 1,062 | |
| Other | Other | 5,279 | | 11,957 | | 12,601 | | Other | 2,479 | | 6,969 | | 5,280 | |
| Less accumulated amortization | Less accumulated amortization | 3,970 | | 10,715 | | 10,848 | | Less accumulated amortization | 1,381 | | 5,299 | | 4,076 | |
| | | 1,309 | | 1,242 | | 1,753 | | | 1,098 | | 1,670 | | 1,204 | |
| Total | Total | $ | 18,745 | | $ | 22,241 | | $ | 22,578 | | Total | $ | 16,334 | | $ | 21,389 | | $ | 17,532 | |
The previous tables include goodwill and intangible assets associated with the business combinations completed during 2021.2022. For more information related to these business combinations, see Note 10.9.
Amortization expense for amortizable intangible assets for both the three and nine months ended September 30,March 31, 2023 and 2022, was $1.3 million and $3.8 million, respectively. Amortization expense for amortizable intangible assets for the three and nine months ended September 30, 2021, was $1.2 million and $3.9 million, respectively.million. Estimated amortization expense for identifiable intangible assets as of September 30, 2022,March 31, 2023, was:
| | | | | | | | | | | | | | | | | | | | |
| Remainder of 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter |
| (In thousands) |
| Amortization expense | $ | 1,159 | | $ | 4,591 | | $ | 4,249 | | $ | 2,200 | | $ | 1,781 | | $ | 4,765 | |
| | | | | | | | | | | | | | | | | | | | |
| Remainder of 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter |
| (In thousands) |
| Amortization expense | $ | 3,393 | | $ | 4,249 | | $ | 2,200 | | $ | 1,782 | | $ | 1,759 | | $ | 2,951 | |
Note 1312 - Regulatory assets and liabilities
The following table summarizes the individual components of unamortized regulatory assets and liabilities:
| | | Estimated Recovery or Refund Period as of September 30, 2022 | * | September 30, 2022 | September 30, 2021 | December 31, 2021 | | Estimated Recovery or Refund Period as of March 31, 2023 | * | March 31, 2023 | March 31, 2022 | December 31, 2022 |
| | (In thousands) | | (In thousands) |
| Regulatory assets: | Regulatory assets: | | Regulatory assets: | |
| Current: | Current: | | Current: | |
| Natural gas costs recoverable through rate adjustments | Natural gas costs recoverable through rate adjustments | Up to 1 year | | $ | 112,079 | | $ | 98,211 | | $ | 86,371 | | Natural gas costs recoverable through rate adjustments | Up to 1 year | | $ | 198,166 | | $ | 66,132 | | $ | 141,306 | |
| Conservation programs | Conservation programs | Up to 1 year | | 9,363 | | 8,495 | | 8,225 | | Conservation programs | Up to 1 year | | 8,599 | | 7,567 | | 8,544 | |
| Decoupling | Up to 1 year | | 6,549 | | 7,195 | | 9,131 | | |
| Cost recovery mechanisms | Cost recovery mechanisms | Up to 1 year | | 3,354 | | 4,693 | | 4,536 | | Cost recovery mechanisms | Up to 1 year | | 3,954 | | 3,432 | | 4,019 | |
| | Other | Other | Up to 1 year | | 16,815 | | 14,541 | | 10,428 | | Other | Up to 1 year | | 5,599 | | 11,947 | | 11,223 | |
| | 148,160 | | 133,135 | | 118,691 | | | 216,318 | | 89,078 | | 165,092 | |
| Noncurrent: | Noncurrent: | | Noncurrent: | |
| Pension and postretirement benefits | Pension and postretirement benefits | ** | | 137,582 | | 155,888 | | 142,681 | | Pension and postretirement benefits | ** | | 143,349 | | 142,681 | | 143,349 | |
| Cost recovery mechanisms | Cost recovery mechanisms | Up to 10 years | | 67,094 | | 43,955 | | 44,870 | | Cost recovery mechanisms | Up to 10 years | | 65,732 | | 67,989 | | 67,171 | |
| Plant costs/asset retirement obligations | Plant costs/asset retirement obligations | Over plant lives | | 61,941 | | 73,528 | | 63,116 | | Plant costs/asset retirement obligations | Over plant lives | | 44,131 | | 63,325 | | 44,462 | |
| Manufactured gas plant site remediation | | Manufactured gas plant site remediation | - | | 26,605 | | 26,089 | | 26,624 | |
| Environmental compliance programs | | Environmental compliance programs | - | | 21,942 | | — | | — | |
| Plant to be retired | Plant to be retired | - | | 24,740 | | 48,544 | | 50,070 | | Plant to be retired | - | | 21,072 | | 29,452 | | 21,525 | |
| Manufactured gas plant site remediation | - | | 25,963 | | 26,000 | | 26,053 | | |
| Taxes recoverable from customers | Taxes recoverable from customers | Over plant lives | | 12,394 | | 11,438 | | 12,339 | | Taxes recoverable from customers | Over plant lives | | 12,198 | | 12,492 | | 12,330 | |
| Long-term debt refinancing costs | Long-term debt refinancing costs | Up to 38 years | | 3,335 | | 3,952 | | 3,794 | | Long-term debt refinancing costs | Up to 37 years | | 3,041 | | 3,636 | | 3,188 | |
| Natural gas costs recoverable through rate adjustments | Up to 2 years | | 462 | | 6,084 | | 5,186 | | |
| | Other | Other | Up to 17 years | | 10,931 | | 9,856 | | 9,742 | | Other | Up to 16 years | | 11,430 | | 13,564 | | 11,010 | |
| | 344,442 | | 379,245 | | 357,851 | | | 349,500 | | 359,228 | | 329,659 | |
| Total regulatory assets | Total regulatory assets | | $ | 492,602 | | $ | 512,380 | | $ | 476,542 | | Total regulatory assets | | $ | 565,818 | | $ | 448,306 | | $ | 494,751 | |
| Regulatory liabilities: | Regulatory liabilities: | | Regulatory liabilities: | |
| Current: | Current: | | Current: | |
| Electric fuel and purchased power deferral | | Electric fuel and purchased power deferral | Up to 1 year | | 9,630 | | — | | 4,929 | |
| Natural gas costs refundable through rate adjustments | | Natural gas costs refundable through rate adjustments | Up to 1 year | | 6,331 | | 13,107 | | 955 | |
| Conservation programs | | Conservation programs | Up to 1 year | | 3,834 | | 144 | | 4,126 | |
| Cost recovery mechanisms | | Cost recovery mechanisms | Up to 1 year | | 2,926 | | 2,550 | | 1,977 | |
| Taxes refundable to customers | Taxes refundable to customers | Up to 1 year | | $ | 4,264 | | $ | 3,867 | | $ | 3,841 | | Taxes refundable to customers | Up to 1 year | | 1,513 | | 3,470 | | 3,937 | |
| Electric fuel and purchased power deferral | Up to 1 year | | 3,763 | | 3,205 | | — | | |
| Cost recovery mechanisms | Up to 1 year | | 2,674 | | 2,797 | | 214 | | |
| Natural gas costs refundable through rate adjustments | Up to 1 year | | 873 | | — | | 6,700 | | |
| Refundable fuel and electric costs | | Refundable fuel and electric costs | Up to 1 year | | 1,179 | | 316 | | 3,253 | |
| Other | Other | Up to 1 year | | 7,025 | | 6,622 | | 5,548 | | Other | Up to 1 year | | 18,982 | | 11,599 | | 7,263 | |
| | 18,599 | | 16,491 | | 16,303 | | | 44,395 | | 31,186 | | 26,440 | |
| Noncurrent: | Noncurrent: | | Noncurrent: | |
| Plant removal and decommissioning costs | | Plant removal and decommissioning costs | Over plant lives | | 214,467 | | 171,485 | | 208,650 | |
| Taxes refundable to customers | Taxes refundable to customers | Over plant lives | | 205,517 | | 218,566 | | 215,421 | | Taxes refundable to customers | Over plant lives | | 200,879 | | 212,472 | | 203,222 | |
| Plant removal and decommissioning costs | Over plant lives | | 174,481 | | 172,683 | | 168,152 | | |
| Cost recovery mechanisms | | Cost recovery mechanisms | Up to 19 years | | 16,313 | | 9,508 | | 14,025 | |
| | Accumulated deferred investment tax credit | | Accumulated deferred investment tax credit | Up to 19 years | | 13,996 | | 13,352 | | 13,594 | |
| Pension and postretirement benefits | Pension and postretirement benefits | ** | | 19,687 | | 16,915 | | 20,434 | | Pension and postretirement benefits | ** | | 7,376 | | 20,434 | | 7,376 | |
| Accumulated deferred investment tax credit | Up to 20 years | | 14,665 | | 12,403 | | 12,696 | | |
| Cost recovery mechanisms | Up to 20 years | | 12,535 | | — | | 7,727 | | |
| | Other | Other | Up to 16 years | | 6,327 | | 5,574 | | 4,360 | | Other | Up to 15 years | | 1,638 | | 6,377 | | 1,587 | |
| | 433,212 | | 426,141 | | 428,790 | | | 454,669 | | 433,628 | | 448,454 | |
| Total regulatory liabilities | Total regulatory liabilities | | $ | 451,811 | | $ | 442,632 | | $ | 445,093 | | Total regulatory liabilities | | $ | 499,064 | | $ | 464,814 | | $ | 474,894 | |
| Net regulatory position | Net regulatory position | | $ | 40,791 | | $ | 69,748 | | $ | 31,449 | | Net regulatory position | | $ | 66,754 | | $ | (16,508) | | $ | 19,857 | |
*Estimated recovery or refund period for amounts currently being recovered or refunded in rates to customers.
** Recovered as expense is incurred or cash contributions are made.
At September 30,March 31, 2023 and 2022, and 2021, and December 31, 2021,2022, approximately $264.4$255.6 million, $318.2$268.1 million and $296.6$242.5 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.remediation and the costs associated with environmental compliance.
The Company is subject to environmental compliance regulations in certain states which require natural gas distribution companies to reduce overall GHG emissions to certain thresholds as established by each applicable state. Compliance with these standards may be achieved through increased energy efficiency and conservation measures, purchased emission allowances and offsets,
purchases of community climate investment credits and purchases of low carbon fuels. Emission allowances are allocated by the respective states to the Company at no cost, of which a portion is required to be sold at auction. The Company expects the compliance costs for these regulations and the revenues from the sale of the allocated emissions allowances will be passed through to customers in rates and has, accordingly, deferred the environmental compliance obligation as a regulatory asset.
In the last half of 2021 and inthrough 2022, the Company has experienced higherhigh natural gas costs due to the increase in demand outpacing the supply along with the impact of global events. Additionally, in December 2022 and January 2023, natural gas prices significantly increased across the Pacific Northwest from multiple price-pressuring events including wide-spread below-normal temperatures and higher natural gas consumption; reduced natural gas flows due to pipeline constraints, including maintenance in West Texas; and historically low regional natural gas storage levels. This increase in natural gas costs experienced in certain jurisdictions has beenwas partially offset by the recovery of prior period natural gas costs being recovered over a period longer than the normal one-year period, as further discussed below.period.
In February 2021, a prolonged period of unseasonably cold temperatures in the central United States significantly increased the demand for electric and natural gas services and contributed to increased market prices. Overall, Montana-Dakota and Great Plains incurred approximately $44.0 million in increased natural gas costs in order to maintain services for its customers. These extraordinary gas costs were recorded as regulatory assets as they are expected to be recovered from customers. With the exception of $845,000 in Minnesota, Montana-Dakota and Great Plains have received approval for the recovery of purchased gas adjustments related to the cold-weather event in all jurisdictions impacted, including out-of-cycle purchased gas adjustment requests in most jurisdictions. For a discussion of the Company's most recent cases by jurisdiction, see Note 19.
In 2019, the Company experienced increased natural gas costs in Washington from the rupture of the Enbridge pipeline in Canada in late 2018. As a result, the Company requested, and the WUTC approved, recovery through 2022 of the balance of natural gas costs recoverable related to this period of time, which was over three years rather than its normal one-year recovery period.
In February 2019, the Company announced the retirement of three aging coal-fired electric generating units. The Company accelerated the depreciation related to these facilities in property, plant and equipment and recorded the difference between the accelerated depreciation, in accordance with GAAP, and the depreciation approved for rate-making purposes as regulatory assets. Requests were filed with the NDPSC and SDPUC, and subsequently approved, to offset the savings associated with the cessation of operations of these units with the amortization of the deferred regulatory assets. The Company ceased operations of Lewis & Clark Station in March 2021 and Units 1 and 2 at Heskett Station in February 2022. The Company subsequently reclassified the costs being recovered for these facilities from plant retirement to cost recovery mechanisms in the previous table and began amortizing the associated plant retirement and closure costs in the jurisdictions where requests were filed, as previously discussed.filed. 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 13 - Environmental allowances and obligations
The Company's natural gas distribution segment acquires environmental allowances as part of its requirement to comply with environmental regulations in certain states. Allowances are allocated by the respective states to the Company at no cost and additional allowances are required to be purchased as needed based on the requirements in the respective states. The segment records purchased and allocated environmental allowances at weighted average cost under the inventory method of accounting. Environmental allowances are included in noncurrent assets - other on the Consolidated Balance Sheets.
Environmental compliance obligations, which are based on GHG emissions, are measured at the carrying value of environmental allowances held plus the estimated value of additional allowances necessary to satisfy the compliance obligation. Environmental compliance obligations are included in noncurrent liabilities - other on the Consolidated Balance Sheets. At March 31, 2023, the Company accrued $21.9 million in compliance obligations.
As environmental allowances are surrendered, the segment reduces the associated environmental compliance assets and liabilities from the Consolidated Balance Sheets. The expenses associated with the Company’s environmental allowances and obligations are deferred as regulatory assets. For more information on the Company’s regulatory assets and liabilities, see Note 12.
Note 14 - Fair value measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The fair value ASC establishes a hierarchy for grouping assets and liabilities, based on the significance of inputs. The estimated fair values of the Company's assets and liabilities measured on a recurring basis are determined using the market approach.
The Company measures its investments in certain fixed-income and equity securities at fair value with changes in fair value recognized in income. The Company anticipates using these investments, which consist of insurance contracts, to satisfy its obligations under its unfunded, nonqualified defined benefit and defined contribution plans for executive officers and certain key management employees, and invests in these fixed-income and equity securities for the purpose of earning investment returns and capital appreciation. These investments, which totaled $95.2$105.9 million, $106.4$105.4 million and $109.6$98.0 million, at September 30,March 31, 2023 and 2022, and 2021, and December 31, 2021,2022, respectively, are classified as investments on the Consolidated Balance Sheets. The net unrealized gain on these investments was $3.8 million for the three months ended March 31, 2023. The net unrealized loss on these investments was $2.6 million and $16.8$5.8 million for the three and nine months ended September 30, 2022, respectively. The net unrealized gain on these investments was $373,000 and $4.2 million for the three and nine months ended September 30, 2021.March 31, 2022. The change in fair value, which is considered part of the cost of the plan, is classified in other income on the Consolidated Statements of Income.
The Company did not elect the fair value option, which records gains and losses in income, for its available-for-sale securities, which include mortgage-backed securities and U.S. Treasury securities. These available-for-sale securities are recorded at fair value
and are classified as investments on the Consolidated Balance Sheets. Unrealized gains or losses are recorded in accumulated other comprehensive loss. Details of available-for-sale securities were as follows:
| | September 30, 2022 | Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Fair Value | |
| March 31, 2023 | | March 31, 2023 | Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Fair Value |
| | (In thousands) | | (In thousands) |
| Mortgage-backed securities | Mortgage-backed securities | $ | 8,486 | | $ | — | | $ | 783 | | $ | 7,703 | | Mortgage-backed securities | $ | 8,557 | | $ | 3 | | $ | 561 | | $ | 7,999 | |
| U.S. Treasury securities | U.S. Treasury securities | 2,468 | | — | | 82 | | 2,386 | | U.S. Treasury securities | 3,023 | | 8 | | 51 | | 2,980 | |
| Total | Total | $ | 10,954 | | $ | — | | $ | 865 | | $ | 10,089 | | Total | $ | 11,580 | | $ | 11 | | $ | 612 | | $ | 10,979 | |
| | | | | | | | | | | | | | |
| March 31, 2022 | Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Fair Value |
| (In thousands) |
| Mortgage-backed securities | $ | 8,778 | | $ | 3 | | $ | 310 | | $ | 8,471 | |
| U.S. Treasury securities | 2,688 | | — | | 63 | | 2,625 | |
| Total | $ | 11,466 | | $ | 3 | | $ | 373 | | $ | 11,096 | |
| | | | | | | | | | | | | | |
| September 30, 2021 | Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Fair Value |
| (In thousands) |
| Mortgage-backed securities | $ | 8,597 | | $ | 93 | | $ | 11 | | $ | 8,679 | |
| U.S. Treasury securities | 2,681 | | — | | 28 | | 2,653 | |
| Total | $ | 11,278 | | $ | 93 | | $ | 39 | | $ | 11,332 | |
| | December 31, 2021 | Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Fair Value | |
| December 31, 2022 | | December 31, 2022 | Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Fair Value |
| | (In thousands) | | (In thousands) |
| Mortgage-backed securities | Mortgage-backed securities | $ | 8,702 | | $ | 51 | | $ | 47 | | $ | 8,706 | | Mortgage-backed securities | $ | 8,928 | | $ | 2 | | $ | 636 | | $ | 8,294 | |
| U.S. Treasury securities | U.S. Treasury securities | 2,407 | | — | | 11 | | 2,396 | | U.S. Treasury securities | 2,608 | | — | | 72 | | 2,536 | |
| Total | Total | $ | 11,109 | | $ | 51 | | $ | 58 | | $ | 11,102 | | Total | $ | 11,536 | | $ | 2 | | $ | 708 | | $ | 10,830 | |
The Company's assets measured at fair value on a recurring basis were as follows:
| | | | Fair Value Measurements at September 30, 2022, Using | | | Fair Value Measurements at March 31, 2023, Using | |
| | | Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) | Significant
Other
Observable
Inputs
(Level 2) | Significant
Unobservable
Inputs
(Level 3) | Balance at September 30, 2022 | | Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) | Significant
Other
Observable
Inputs
(Level 2) | Significant
Unobservable
Inputs
(Level 3) | Balance at March 31, 2023 |
| | (In thousands) | | (In thousands) |
| Assets: | Assets: | | Assets: | |
| Money market funds | Money market funds | $ | — | | $ | 7,309 | | $ | — | | $ | 7,309 | | Money market funds | $ | — | | $ | 7,919 | | $ | — | | $ | 7,919 | |
| Insurance contracts* | Insurance contracts* | — | | 95,170 | | — | | 95,170 | | Insurance contracts* | — | | 105,857 | | — | | 105,857 | |
| Available-for-sale securities: | Available-for-sale securities: | | Available-for-sale securities: | |
| Mortgage-backed securities | Mortgage-backed securities | — | | 7,703 | | — | | 7,703 | | Mortgage-backed securities | — | | 7,999 | | — | | 7,999 | |
| U.S. Treasury securities | U.S. Treasury securities | — | | 2,386 | | — | | 2,386 | | U.S. Treasury securities | — | | 2,980 | | — | | 2,980 | |
| | Total assets measured at fair value | Total assets measured at fair value | $ | — | | $ | 112,568 | | $ | — | | $ | 112,568 | | Total assets measured at fair value | $ | — | | $ | 124,755 | | $ | — | | $ | 124,755 | |
|
* The insurance contracts invest approximately 6561 percent in fixed-income investments, 1415 percent in common stock of large-cap companies, 8 percent in common stock of mid-cap companies, 7 percent in target date investments, 6 percent in common stock of small-cap companies, 2 percent in cash equivalents and 1 percent in international investments.
| | | | | | | | | | | | | | |
| | Fair Value Measurements at March 31, 2022, Using | |
| | Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) | Significant
Other
Observable
Inputs
(Level 2) | Significant
Unobservable
Inputs
(Level 3) | Balance at March 31, 2022 |
| (In thousands) |
| Assets: | | | | |
| Money market funds | $ | — | | $ | 13,131 | | $ | — | | $ | 13,131 | |
| Insurance contracts* | — | | 105,371 | | — | | 105,371 | |
| Available-for-sale securities: | | | | |
| Mortgage-backed securities | — | | 8,471 | | — | | 8,471 | |
| U.S. Treasury securities | — | | 2,625 | | — | | 2,625 | |
| | | | |
| Total assets measured at fair value | $ | — | | $ | 129,598 | | $ | — | | $ | 129,598 | |
| | | | |
| | | | |
| | | | |
| | | | |
* The insurance contracts invest approximately 61 percent in fixed-income investments, 17 percent in common stock of large-cap companies, 8 percent in common stock of mid-cap companies, 6 percent in common stock of small-cap companies, 6 percent in target date investments and 2 percent in cash equivalents.
| | | | Fair Value Measurements at September 30, 2021, Using | | | Fair Value Measurements at December 31, 2022, Using | |
| | | Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) | Significant
Other
Observable
Inputs
(Level 2) | Significant
Unobservable
Inputs
(Level 3) | Balance at September 30, 2021 | | Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) | Significant
Other
Observable
Inputs
(Level 2) | Significant
Unobservable
Inputs
(Level 3) | Balance at December 31, 2022 |
| | (In thousands) | | (In thousands) |
| Assets: | Assets: | | Assets: | |
| Money market funds | Money market funds | $ | — | | $ | 9,907 | | $ | — | | $ | 9,907 | | Money market funds | $ | — | | $ | 7,361 | | $ | — | | $ | 7,361 | |
| Insurance contracts* | Insurance contracts* | — | | 106,371 | | — | | 106,371 | | Insurance contracts* | — | | 98,041 | | — | | 98,041 | |
| Available-for-sale securities: | Available-for-sale securities: | | Available-for-sale securities: | |
| Mortgage-backed securities | Mortgage-backed securities | — | | 8,679 | | — | | 8,679 | | Mortgage-backed securities | — | | 8,294 | | — | | 8,294 | |
| U.S. Treasury securities | U.S. Treasury securities | — | | 2,653 | | — | | 2,653 | | U.S. Treasury securities | — | | 2,536 | | — | | 2,536 | |
| | Total assets measured at fair value | Total assets measured at fair value | $ | — | | $ | 127,610 | | $ | — | | $ | 127,610 | | Total assets measured at fair value | $ | — | | $ | 116,232 | | $ | — | | $ | 116,232 | |
|
* The insurance contracts invest approximately 63 percent in fixed-income investments, 1615 percent in common stock of large-cap companies, 8 percent in common stock of mid-cap companies, 76 percent in common stock of small-cap companies, 5 percent in target date investments and 1 percent in cash equivalents.
| | | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2021, Using | |
| Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) | Significant
Other
Observable
Inputs
(Level 2) | Significant
Unobservable
Inputs
(Level 3) | Balance at December 31, 2021 |
| (In thousands) |
| Assets: | | | | |
| Money market funds | $ | — | | $ | 10,190 | | $ | — | | $ | 10,190 | |
| Insurance contracts* | — | | 109,603 | | — | | 109,603 | |
| Available-for-sale securities: | | | | |
| Mortgage-backed securities | — | | 8,706 | | — | | 8,706 | |
| U.S. Treasury securities | — | | 2,396 | | — | | 2,396 | |
| | | | |
| Total assets measured at fair value | $ | — | | $ | 130,895 | | $ | — | | $ | 130,895 | |
| | | | |
| | | | |
| | | | |
| | | | |
* The insurance contracts invest approximately 61 percent in fixed-income investments, 17 percent in common stock of large-cap companies, 8 percent in common stock of mid-cap companies, 7 percent in common stock of small-cap companies, 56 percent in target date investments and 2 percent in cash equivalents.
The Company's money market funds are valued at the net asset value of shares held at the end of the 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 combinationscombination that occurred during 2021.2022. 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. The estimated fair value of the Company's Level 2 long-term debt was as follows:
| | | | September 30, 2022 | September 30, 2021 | December 31, 2021 | | March 31, 2023 | March 31, 2022 | December 31, 2022 |
| | (In thousands) | | (In thousands) |
| Carrying amount | Carrying amount | $ | 2,988,452 | | $ | 2,328,266 | | $ | 2,741,900 | | Carrying amount | $ | 2,847,068 | | $ | 2,747,763 | | $ | 2,841,425 | |
| Fair value | Fair value | $ | 2,647,387 | | $ | 2,599,907 | | $ | 2,984,866 | | Fair value | $ | 2,535,125 | | $ | 2,755,041 | | $ | 2,469,625 | |
The carrying amounts of the Company's remaining financial instruments included in current assets and current liabilities approximate their fair values.
Note 15 - Debt
Certain debt instruments of the Company's subsidiaries contain restrictive and financial covenants and cross-default provisions. In order to borrow under the debt agreements, the subsidiary companies must be in compliance with the applicable covenants and certain other conditions, all of which the subsidiaries, as applicable, were in compliance with at September 30, 2022.March 31, 2023. In the event the subsidiaries do not comply with the applicable covenants and other conditions, alternative sources of funding may need to be pursued.
Montana-Dakota's and Centennial's respective commercial paper programs are supported by revolving credit agreements. While the amount of commercial paper outstanding does not reduce available capacity under the respective revolving credit agreements, Montana-Dakota and Centennial do not issue commercial paper in an aggregate amount exceeding the available capacity under the credit agreements. The commercial paper borrowings may vary during the period, largely the result of fluctuations in working capital requirements due to the seasonality of certain operations of the Company's subsidiaries.
Short-term debt
Cascade On January 20, 2023, Cascade entered into a $150.0 million term loan agreement with a SOFR-based interest rate and a maturity date of January 19, 2024. 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. The covenants also include certain restrictions on the sale of certain assets, loans and investments.
Intermountain On January 20, 2023, Intermountain entered into a $125.0 million term loan agreement with a SOFR-based interest rate and a maturity date of January 19, 2024. In March 2023, Intermountain paid down $20.0 million of the outstanding balance. 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. The covenants also include certain restrictions on the sale of certain assets, loans and investments.
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. On March 17, 2023, Centennial amended this agreement to extend the maturity date to September 15, 2023. The agreement contains customary covenants and provisions, including a covenant of Centennial not to permit, at any time, the ratio of total debt to total capitalization to be greater than 65 percent. The covenants also include certain restrictions on the sale of certain assets, loans and investments.
Long-term debt
Long-term Debt Outstanding Long-term debt outstanding was as follows:
| | | | Weighted Average Interest Rate at September 30, 2022 | September 30, 2022 | September 30, 2021 | December 31, 2021 | | Weighted Average Interest Rate at March 31, 2023 | March 31, 2023 | March 31, 2022 | December 31, 2022 |
| | | | (In thousands) | | | (In thousands) |
| Senior Notes due on dates ranging from October 22, 2022 to June 15, 2062 | 4.29 | % | $ | 2,365,000 | | $ | 2,025,000 | | $ | 2,125,000 | | |
| Senior Notes due on dates ranging from May 15, 2023 to June 15, 2062 | | Senior Notes due on dates ranging from May 15, 2023 to June 15, 2062 | 4.32 | % | $ | 2,258,500 | | $ | 2,275,000 | | $ | 2,258,500 | |
| Commercial paper supported by revolving credit agreements | Commercial paper supported by revolving credit agreements | 3.66 | % | 460,600 | | 168,800 | | 450,300 | | Commercial paper supported by revolving credit agreements | 6.18 | % | 462,600 | | 348,500 | | 415,500 | |
| Credit agreements due on June 7, 2024 | 4.55 | % | 125,580 | | 94,300 | | 127,500 | | |
| Medium-Term Notes due on dates ranging from September 15, 2027 to March 16, 2029 | Medium-Term Notes due on dates ranging from September 15, 2027 to March 16, 2029 | 7.32 | % | 35,000 | | 35,000 | | 35,000 | | Medium-Term Notes due on dates ranging from September 15, 2027 to March 16, 2029 | 7.32 | % | 35,000 | | 35,000 | | 35,000 | |
| Credit agreements due on dates ranging from December 19, 2024 to November 30, 2027 | | Credit agreements due on dates ranging from December 19, 2024 to November 30, 2027 | 8.04 | % | 89,144 | | 85,800 | | 130,000 | |
| Term Loan Agreement due on September 3, 2032 | Term Loan Agreement due on September 3, 2032 | 3.64 | % | 7,000 | | 7,700 | | 7,700 | | Term Loan Agreement due on September 3, 2032 | 3.64 | % | 7,000 | | 7,700 | | 7,000 | |
| Other notes due on dates ranging from January 1, 2024 to January 1, 2061 | Other notes due on dates ranging from January 1, 2024 to January 1, 2061 | .97 | % | 2,349 | | 3,198 | | 2,564 | | Other notes due on dates ranging from January 1, 2024 to January 1, 2061 | 1.43 | % | 1,561 | | 2,445 | | 2,253 | |
| Less unamortized debt issuance costs | Less unamortized debt issuance costs | | 6,633 | | 5,709 | | 6,090 | | Less unamortized debt issuance costs | | 6,453 | | 6,605 | | 6,542 | |
| Less discount | Less discount | | 444 | | 23 | | 74 | | Less discount | | 284 | | 77 | | 286 | |
| Total long-term debt | Total long-term debt | | 2,988,452 | | 2,328,266 | | 2,741,900 | | Total long-term debt | | 2,847,068 | | 2,747,763 | | 2,841,425 | |
| Less current maturities | Less current maturities | | 214,453 | | 1,548 | | 148,053 | | Less current maturities | | 78,031 | | 147,953 | | 78,031 | |
| Net long-term debt | Net long-term debt | | $ | 2,773,999 | | $ | 2,326,718 | | $ | 2,593,847 | | Net long-term debt | | $ | 2,769,037 | | $ | 2,599,810 | | $ | 2,763,394 | |
Schedule of Debt Maturities Long-term debt maturities, which excludes unamortized debt issuance costs and discount, at September 30, 2022,March 31, 2023, were as follows:
| | | | | | | | | | | | | | | | | | | | |
| Remainder of 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter |
| (In thousands) |
| Long-term debt maturities | $ | 147,253 | | $ | 77,923 | | $ | 646,983 | | $ | 177,802 | | $ | 140,802 | | $ | 1,804,766 | |
| | | | | | | | | | | | | | | | | | | | |
| Remainder of 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter |
| (In thousands) |
| Long-term debt maturities | $ | 78,031 | | $ | 601,846 | | $ | 177,802 | | $ | 140,802 | | $ | 111,452 | | $ | 1,743,872 | |
Note 16 - Cash flow information
Cash expenditures for interest and income taxes were as follows:
| | | Nine Months Ended | | Three Months Ended |
| | | September 30, | | March 31, |
| | | 2022 | 2021 | | | 2023 | 2022 | |
| | | (In thousands) | | (In thousands) |
| Interest, net* | Interest, net* | $ | 75,425 | | $ | 59,876 | | Interest, net* | $ | 28,442 | | $ | 15,657 | |
| Income taxes paid, net | $ | 17,664 | | $ | 61,250 | | |
| Income taxes paid (refunded), net | | Income taxes paid (refunded), net | $ | 8,122 | | $ | (363) | |
* AFUDC - borrowed was $2.4 million and $1.6 million$586,000 for the ninethree months ended September 30,March 31, 2023 and 2022, and 2021, respectively.
Noncash investing and financing transactions were as follows:
| | | September 30, 2022 | September 30, 2021 | December 31, 2021 | | March 31, 2023 | March 31, 2022 | December 31, 2022 |
| | (In thousands) | | (In thousands) |
| Right-of-use assets obtained in exchange for new operating lease liabilities | Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 36,492 | | $ | 26,120 | | $ | 55,987 | | Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 15,095 | | $ | 10,175 | | $ | 50,921 | |
| Property, plant and equipment additions in accounts payable | Property, plant and equipment additions in accounts payable | $ | 44,277 | | $ | 88,355 | | $ | 57,605 | | Property, plant and equipment additions in accounts payable | $ | 32,171 | | $ | 25,730 | | $ | 49,602 | |
| Debt assumed in connection with a business combination | $ | — | | $ | — | | $ | 10 | | |
| | Accrual for holdback payment related to a business combination | | Accrual for holdback payment related to a business combination | $ | — | | $ | — | | $ | 70 | |
| Stock issued in connection with a business combination | | Stock issued in connection with a business combination | $ | — | | $ | — | | $ | 7,304 | |
Note 17 - Business segment data
The Company's reportable segments are those that are based on the Company's method of internal reporting, which generally segregates the strategic business units due to differences in products, services and regulation. The internal reporting of these operating segments is defined based on the reporting and review process used by the Company's chief executive officer. The Company's operations are located within the United States.
The electric segment generates, transmits and distributes electricity in Montana, North Dakota, South Dakota and Wyoming. The natural gas distribution segment distributes natural gas in those states, as well as in Idaho, Minnesota, Oregon and Washington. These operations also supply related value-added services.
The pipeline segment provides natural gas transportation and underground storage services through a regulated pipeline system primarily in the Rocky Mountain and northern Great Plains regions of the United States. This segment also provides non-regulated cathodic protection and other energy-related services.
The construction materials and contracting segment mines, processes and sells construction aggregates (crushed stone and sand and gravel); produces and sells asphalt mix;asphalt; and supplies ready-mix concrete. This segment focuses onsegment's aggregate reserves provide the foundation for the vertical integration of its contracting services with its construction materials to support theits aggregate-based product lines including aggregate placement,heavy-civil construction, asphalt andpaving, concrete paving,construction and site development and grading. Although not common to all locations, other products includethe segment also includes the sale of cement, liquid asphalt oil for various commercialmodification and roadway applications,distribution, various finished concrete products, merchandise 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, andas well as costs associated with the announced strategic initiatives. Also included are certain general and administrative costs (reflected in operation and maintenance expense) and interest expense, which were previously allocated to the refining business and Fidelity and do not meet the criteria for income (loss) from discontinued operations, as well as transaction costs associated with the anticipated separation of Knife River.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 20212022 Annual Report. Information on the Company's segments was as follows:
| | | Three Months Ended | Nine Months Ended | | | Three Months Ended |
| | September 30, | | | March 31, |
| | | 2022 | | 2021 | | 2022 | | 2021 | | | | 2023 | | 2022 | |
| | | (In thousands) | | | (In thousands) |
| External operating revenues: | External operating revenues: | | | External operating revenues: | | | |
| Regulated operations: | Regulated operations: | | Regulated operations: | | |
| Electric | Electric | $ | 99,193 | | $ | 98,930 | | $ | 278,249 | | $ | 267,254 | | Electric | | $ | 95,602 | | $ | 93,594 | |
| Natural gas distribution | Natural gas distribution | 132,074 | | 110,378 | | 792,932 | | 614,373 | | Natural gas distribution | | 565,517 | | 450,418 | |
| Pipeline | Pipeline | 32,347 | | 27,757 | | 69,347 | | 58,390 | | Pipeline | | 12,638 | | 9,444 | |
| | | 263,614 | | 237,065 | | 1,140,528 | | 940,017 | | | | 673,757 | | 553,456 | |
| Non-regulated operations: | | Non-regulated operations: | | |
| Pipeline | | Pipeline | | 1,693 | | 1,676 | |
| Construction materials and contracting | | Construction materials and contracting | | 307,768 | | 309,836 | |
| Construction services | | Construction services | | 754,119 | | 551,591 | |
| Other | | Other | | — | | — | |
| | | | 1,063,580 | | 863,103 | |
| Total external operating revenues | | Total external operating revenues | | $ | 1,737,337 | | $ | 1,416,559 | |
|
| | | Three Months Ended | Nine Months Ended | | | Three Months Ended |
| | September 30, | | | March 31, |
| | | 2022 | | 2021 | | 2022 | | 2021 | | | | 2023 | | 2022 | |
| | | (In thousands) | | | (In thousands) |
| Non-regulated operations: | | |
| Pipeline | 3,698 | | 3,211 | | 7,630 | | 10,263 | | |
| Construction materials and contracting | 975,085 | | 831,189 | | 1,996,533 | | 1,730,521 | | |
| Construction services | 734,809 | | 514,523 | | 1,969,995 | | 1,556,737 | | |
| Other | — | | 25 | | — | | 70 | | |
| | 1,713,592 | | 1,348,948 | | 3,974,158 | | 3,297,591 | | |
| Total external operating revenues | $ | 1,977,206 | | $ | 1,586,013 | | $ | 5,114,686 | | $ | 4,237,608 | | |
| Intersegment operating revenues: | Intersegment operating revenues: | | Intersegment operating revenues: | | |
| Regulated operations: | Regulated operations: | | Regulated operations: | | |
| Electric | Electric | $ | 124 | | $ | 136 | | $ | 371 | | $ | 407 | | Electric | | $ | 122 | | $ | 124 | |
| Natural gas distribution | Natural gas distribution | 139 | | 142 | | 416 | | 425 | | Natural gas distribution | | 150 | | 136 | |
| Pipeline | Pipeline | 3,508 | | 3,845 | | 36,845 | | 37,530 | | Pipeline | | 26,259 | | 25,933 | |
| | 3,771 | | 4,123 | | 37,632 | | 38,362 | | | | 26,531 | | 26,193 | |
| Non-regulated operations: | Non-regulated operations: | | Non-regulated operations: | | |
| Pipeline | Pipeline | 87 | | 63 | | 483 | | 470 | | Pipeline | | 151 | | 7 | |
| Construction materials and contracting | Construction materials and contracting | 343 | | 110 | | 674 | | 314 | | Construction materials and contracting | | 132 | | 130 | |
| Construction services | Construction services | 2,229 | | 289 | | 5,090 | | 2,128 | | Construction services | | 214 | | 1,059 | |
| Other | Other | 4,438 | | 3,398 | | 13,168 | | 10,082 | | Other | | 4,739 | | 4,341 | |
| | 7,097 | | 3,860 | | 19,415 | | 12,994 | | | | 5,236 | | 5,537 | |
| Intersegment eliminations | (10,868) | | (7,983) | | (57,047) | | (51,356) | | |
| Total intersegment operating revenues | Total intersegment operating revenues | $ | — | | $ | — | | $ | — | | $ | — | | Total intersegment operating revenues | | $ | 31,767 | | $ | 31,730 | |
| | Operating income (loss): | Operating income (loss): | | Operating income (loss): | | |
| Electric | Electric | $ | 30,395 | | $ | 27,310 | | $ | 53,764 | | $ | 53,982 | | Electric | | $ | 21,091 | | $ | 15,044 | |
| Natural gas distribution | Natural gas distribution | (16,688) | | (14,249) | | 38,929 | | 42,925 | | Natural gas distribution | | 58,505 | | 56,256 | |
| Pipeline | Pipeline | 14,963 | | 12,284 | | 39,447 | | 35,896 | | Pipeline | | 13,040 | | 11,882 | |
| Construction materials and contracting | Construction materials and contracting | 147,367 | | 133,712 | | 157,116 | | 171,274 | | Construction materials and contracting | | (44,563) | | (44,605) | |
| Construction services | Construction services | 34,949 | | 30,120 | | 110,588 | | 108,172 | | Construction services | | 35,217 | | 29,498 | |
| Other | Other | (1,135) | | (8) | | (2,081) | | (226) | | Other | | (8,818) | | (732) | |
| Total operating income | Total operating income | $ | 209,851 | | $ | 189,169 | | $ | 397,763 | | $ | 412,023 | | Total operating income | | $ | 74,472 | | $ | 67,343 | |
| | Net income (loss): | Net income (loss): | | Net income (loss): | | |
| Regulated operations: | Regulated operations: | | Regulated operations: | | |
| Electric | Electric | $ | 21,596 | | $ | 20,564 | | $ | 37,476 | | $ | 41,618 | | Electric | | $ | 16,607 | | $ | 11,278 | |
| Natural gas distribution | Natural gas distribution | (18,058) | | (15,390) | | 10,758 | | 20,081 | | Natural gas distribution | | 38,928 | | 36,315 | |
| Pipeline | Pipeline | 9,379 | | 10,225 | | 24,527 | | 27,508 | | Pipeline | | 8,759 | | 7,956 | |
| | 12,917 | | 15,399 | | 72,761 | | 89,207 | | | | 64,294 | | 55,549 | |
| Non-regulated operations: | Non-regulated operations: | | Non-regulated operations: | | |
| Pipeline | Pipeline | 492 | | 356 | | (187) | | 1,166 | | Pipeline | | (460) | | (619) | |
| Construction materials and contracting | Construction materials and contracting | 102,764 | | 96,282 | | 95,337 | | 116,865 | | Construction materials and contracting | | (41,320) | | (40,010) | |
| Construction services | Construction services | 27,977 | | 23,130 | | 83,755 | | 81,839 | | Construction services | | 26,074 | | 21,324 | |
| Other | Other | 3,783 | | 3,795 | | (1,368) | | 2,172 | | Other | | (10,245) | | (4,511) | |
| | 135,016 | | 123,563 | | 177,537 | | 202,042 | | | | (25,951) | | (23,816) | |
| Income from continuing operations | Income from continuing operations | 147,933 | | 138,962 | | 250,298 | | 291,249 | | Income from continuing operations | | 38,343 | | 31,733 | |
| Discontinued operations, net of tax | Discontinued operations, net of tax | 38 | | 314 | | 103 | | 348 | | Discontinued operations, net of tax | | 10 | | 30 | |
| Net income | Net income | $ | 147,971 | | $ | 139,276 | | $ | 250,401 | | $ | 291,597 | | Net income | | $ | 38,353 | | $ | 31,763 | |
A reconciliation of reportable segment operating revenues to consolidated operating revenues is as follows:
| | | | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | | 2023 | | 2022 | |
| | | (In thousands) |
| Operating revenues reconciliation: | | | | |
| Total reportable segment operating revenues | | | $ | 1,764,365 | | $ | 1,443,948 | |
| Other revenue | | | 4,739 | | 4,341 | |
| Elimination of intersegment operating revenues | | | (31,767) | | (31,730) | |
| Total consolidated operating revenues | | | $ | 1,737,337 | | $ | 1,416,559 | |
Note 18 - Employee benefit plans
Pension and other postretirement plans
The Company has noncontributory qualified defined benefit pension plans and other postretirement benefit plans for certain eligible employees.
Components of net periodic benefit credit for the Company's pension benefit plans were as follows:
| | | Three Months Ended | Nine Months Ended | | Three Months Ended | |
| | September 30, | | March 31, | |
| | 2022 | 2021 | 2022 | 2021 | | 2023 | 2022 | |
| | (In thousands) | | (In thousands) |
| Components of net periodic benefit credit: | Components of net periodic benefit credit: | | Components of net periodic benefit credit: | | |
| | Interest cost | Interest cost | $ | 2,630 | | $ | 2,455 | | $ | 7,892 | | $ | 7,365 | | Interest cost | $ | 3,789 | | $ | 2,631 | | |
| Expected return on assets | Expected return on assets | (4,864) | | (4,894) | | (14,592) | | (14,682) | | Expected return on assets | (4,749) | | (4,864) | | |
| | Amortization of net actuarial loss | Amortization of net actuarial loss | 1,670 | | 2,004 | | 5,012 | | 6,012 | | Amortization of net actuarial loss | 901 | | 1,671 | | |
| Net periodic benefit credit | Net periodic benefit credit | $ | (564) | | $ | (435) | | $ | (1,688) | | $ | (1,305) | | Net periodic benefit credit | $ | (59) | | $ | (562) | | |
Components of net periodic benefit credit for the Company's other postretirement benefit plans were as follows:
| | | Three Months Ended | Nine Months Ended | | Three Months Ended | |
| | September 30, | | March 31, | |
| | 2022 | 2021 | 2022 | 2021 | | 2023 | 2022 | |
| | (In thousands) | | (In thousands) |
| Components of net periodic benefit credit: | Components of net periodic benefit credit: | | Components of net periodic benefit credit: | | |
| Service cost | Service cost | $ | 354 | | $ | 400 | | $ | 1,062 | | $ | 1,200 | | Service cost | $ | 227 | | $ | 354 | | |
| Interest cost | Interest cost | 474 | | 466 | | 1,422 | | 1,398 | | Interest cost | 670 | | 474 | | |
| Expected return on assets | Expected return on assets | (1,322) | | (1,275) | | (3,966) | | (3,825) | | Expected return on assets | (1,341) | | (1,322) | | |
| Amortization of prior service credit | Amortization of prior service credit | (350) | | (349) | | (1,050) | | (1,047) | | Amortization of prior service credit | (350) | | (350) | | |
| Amortization of net actuarial (gain) loss | (55) | | 6 | | (163) | | 18 | | |
| Amortization of net actuarial gain | | Amortization of net actuarial gain | (213) | | (54) | | |
| Net periodic benefit credit, including amount capitalized | Net periodic benefit credit, including amount capitalized | (899) | | (752) | | (2,695) | | (2,256) | | Net periodic benefit credit, including amount capitalized | (1,007) | | (898) | | |
| Less amount capitalized | Less amount capitalized | 48 | | 46 | | 132 | | 129 | | Less amount capitalized | 24 | | 31 | | |
| Net periodic benefit credit | Net periodic benefit credit | $ | (947) | | $ | (798) | | $ | (2,827) | | $ | (2,385) | | Net periodic benefit credit | $ | (1,031) | | $ | (929) | | |
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 $773,000$936,000 and $769,000$773,000 for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively, and $2.3 million for both the nine months ended September 30, 2022 and 2021.respectively. The components of net periodic benefit cost for these plans are included in other income on the Consolidated Statements of Income.
Note 19 - Regulatory matters
The Company regularly reviews the need for electric and natural gas rate changes in each of the jurisdictions in which service is provided. The Company files for rate adjustments to seek recovery of operating costs and capital investments, as well as reasonable returns as allowed by regulators. Certain regulatory proceedings and cases may also contain recurring mechanisms that can have an annual true-up. Examples of these recurring mechanisms include: infrastructure riders, transmission trackers, renewable resource cost adjustment riders, as well as weather normalization and decoupling mechanisms. The following paragraphs summarize the Company's significant open regulatory proceedings and cases by jurisdiction including updates to those reported in the 20212022 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.
IPUC
Intermountain filed a request with the IPUC for a natural gas general rate increase on December 1, 2022. The request was for an increase of $11.3 million annually or 3.2 percent above current rates, which was revised on March 9, 2023, to $6.8 million annually or 1.9 percent above current rates. The requested increase is primarily to recover investments made since the last rate case in 2016 and the depreciation, operation and maintenance expenses and taxes associated with the increased investments. A
MNPUC
Great Plains defers the difference between the actual cost of gas spentsettlement in principle has been reached and is expected 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 $8.8 million over a period of 27 months. The order was effective September 1, 2021, and was subject to a prudence review by the MNPUC. The requested increase was for the February 2021 extreme cold weather, primarily in the central United States, and market conditions surrounding the natural gas commodity market. On October 19, 2022, the MNPUC issued a final order disallowing $845,000 of the gas costs. These costs, which were deferred as a regulatory asset in natural gas costs recoverable through rate adjustments, were then recorded to expense as they were no longer recoverable from customers.
On June 1, 2022, Great Plainsbe filed an application with the MNPUC for a decrease in its depreciation and amortization rates of approximately $1.2 million annually or a decrease from a combined rate of 4.5 percent to 2.8 percent. Great Plains has requested the rates be retroactive to January 1, 2022.IPUC no later than May 15, 2023. This matter is pending before the MNPUC.IPUC.
MTPSC
On November 4, 2022, Montana-Dakota filed an application with the MTPSC for an electric general rate increase of approximately $10.5 million annually or 15.2 percent above current rates, which was revised on March 15, 2023, to $11.5 million annually or 17.0 percent above current rates to reflect the loss of a large industrial customer. The requested increase is primarily to recover investments made since the last rate case, including Heskett Unit 4, increases in operation and maintenance expenses, and increases in property taxes. On January 24, 2023, the MTPSC approved Montana-Dakota's request for an interim increase of approximately $1.7 million or 2.7 percent above current rates, subject to refund, effective February 1, 2023. The MTPSC has 9 months to render a final decision on the rate case. The matter is pending before the MTPSC with a hearing scheduled for June 20, 2023.
NDPSC
On May 16, 2022, Montana-Dakota filed an application with the NDPSC for an electric general rate increase of approximately $25.4 million annually or 12.3 percent above current rates. The requested increase is primarily to recover investments in production, transmission and distribution facilities and the associated depreciation, operation and maintenance expenses and taxes associated with the increased investment. The NDPSC has 7 months to render a final decision on the rate case. On July 14, 2022, the NDPSC approved an interim rate increase of approximately $10.9 million annually or 5.3 percent above current rates, subject to refund, for service rendered on and after July 15, 2022. The lower interim rate increase is largely due to excluding the recovery of Heskett Unit 4 which is expectedfrom interim rates due to benot being in service inuntil summer of 2023. On April 26, 2023, the first half of 2023.
On July 15, 2022, Montana-DakotaCompany filed an application with the NDPSC to request an update to its transmission cost adjustment rider requesting to recover revenuesall-party settlement reflecting an annual revenue increase of $12.9$15.3 million whichor 7.4 percent overall. The reduction from the original filing includes a true-upreturn on equity of 9.75 percent and maintaining depreciation expense at current levels. A hearing was held May 2, 2023. The matter is pending before the prior period adjustment, resulting in a decrease of $1.6 million from current rates. The request is to recover transmission-related expenses and the revenue requirement for transmission facilities not currently recovered through electric service rates. On October 5, 2022, the NDPSC approved the decrease with rates effective November 1, 2022.
Montana-Dakota has a renewable resource cost adjustment rate tariff that allows for annual adjustments for recent projected capital costs and related expenses for projects determined to be recoverable under the tariff. On November 1, 2022, Montana-Dakota filed an annual update to its renewable resource cost adjustment requesting to recover a revenue requirement of approximately $17.9 million annually. The update reflects a decrease of approximately $127,000 from the revenues currently included in rates.NDPSC.
WUTC
On September 30, 2021, Cascade filed an application with the WUTC for a natural gas rate increase of approximately $13.7 million annually or approximately 5.1 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 $10.7 million annually or approximately 4.0 percent above current rates. The WUTC issued a final order on August 23, 2022, adjusting the settlement primarily for 2020 actual depreciation expense. The final order approved an increase of $7.2 million annually with an effective date of September 1, 2022.
On March 24, 2022, Cascade filed a request for a tariff revision with the WUTC to rectify an inadvertent IRS normalization violation resulting from its tariff established in 2018 that passes back to customers the reversal of plant-related excess deferred income taxes through an annual rate adjustment. This request was made in response to the issuanceissuances of an IRS private letter ruling to another Washington utility with the same annual rate adjustment tariff, which addressed its normalization violation.violations. 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 proposesproposed a similar remedy through the tariff to recover the excess amounts refunded to customers while this tariff has been in place, and revisesrevised 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 $3.3 million and elimination of the currently deferred, but not yet refunded balance. A multi-party settlement was filed with the WUTC on October 21, 2022. This matter is pending beforeOn January 23, 2023, the WUTC.
WUTC denied recovery of the excess refunded to customers, but approved the tariff revision going forward to rectify the inadvertent normalization violation. On October 14, 2022,February 1, 2023, Cascade filed an updatea motion for clarification with the WUTC on the currently deferred but not yet refunded balance. A clarifying conference was held on February 27, 2023, resulting in approval to its annual pipeline cost recovery mechanism requesting an increase in annual revenuereverse the currently deferred but not yet refunded balance of approximately $1.2 million or approximately 0.4 percent. The filing$1.1 million. On February 28, 2023, this matter was finalized by the WUTC with rates effective NovemberMarch 1, 2022.2023.
FERC
On September 1, 2022, Montana-DakotaJanuary 27, 2023, WBI Energy Transmission filed an update toa general rate case with the FERC for increases in its transmission formula rate under the MISO tarifftransportation and storage services rates that also includes a Greenhouse Gas Cost Recovery Mechanism for its multi-value project and network upgrade charges for $15.4 million,anticipated future costs. New rates, which is effective Januaryare pending FERC approval, will be in effect August 1, 2023.
Note 20 - Contingencies
The Company is party to claims and lawsuits arising out of its business and that of its consolidated subsidiaries, which may include, but are not limited to, matters involving property damage, personal injury, and environmental, contractual, statutory and regulatory obligations. The Company accrues a liability for those contingencies when the incurrence of a loss is probable and the amount can be reasonably estimated. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. The Company does not accrue liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated or when the liability is believed to be only reasonably possible or remote. For contingencies where an unfavorable outcome is probable or reasonably possible and which are material, the Company discloses the nature of the contingency and, in some circumstances, an estimate of the possible loss. Accruals are based on the best information available, but in certain situations management is unable to estimate an amount or range of a reasonably possible loss including, but not limited to when: (1) the damages are unsubstantiated or indeterminate, (2) the proceedings are in the early stages, (3) numerous parties are involved, or (4) the matter involves novel or unsettled legal theories.
At September 30,March 31, 2023 and 2022, and 2021, and December 31, 2021,2022, the Company accrued contingent liabilities, which have not been discounted, of $33.6$25.4 million, $34.7$30.0 million and $37.0$32.9 million, respectively. At September 30,March 31, 2023 and 2022, and 2021, and December 31, 2021,2022, the Company also recorded corresponding insurance receivables of $11.9$3.3 million, $11.7$7.1 million and $14.1$10.4 million,
respectively, and regulatory assets of $20.5$20.9 million, $21.1$20.8 million and $21.2$20.9 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 20212022 Annual Report.
Guarantees
Certain subsidiaries of the Company have outstanding guarantees to third parties that guarantee the performance of other subsidiaries of the Company. These guarantees are related to construction contracts, insurance deductibles and loss limits, and certain other guarantees. At September 30, 2022,March 31, 2023, the fixed maximum amounts guaranteed under these agreements aggregate $333.7$350.0 million. Certain of the guarantees also have no fixed maximum amounts specified. At September 30, 2022,March 31, 2023, the amounts of scheduled expiration of the maximum amounts guaranteed under these agreements aggregate to $10.8 million in 2022; $68.6$28.3 million in 2023; $110.6$144.1 million in 2024; $130.5$163.3 million in 2025; $1.3$1.5 million in 2026; $700,000$1.0 million in 2027; $300,000 thereafter; and $11.2$11.5 million, which has no scheduled maturity date. There were no amounts outstanding under the previously mentioned guarantees at September 30, 2022.March 31, 2023. In the event of default under these guarantee obligations, the subsidiary issuing the guarantee for that particular obligation would be required to make payments under its guarantee.
Certain subsidiaries have outstanding letters of credit to third parties related to insurance policies and other agreements, some of which are guaranteed by other subsidiaries of the Company. At September 30, 2022,March 31, 2023, the fixed maximum amounts guaranteed under these letters of credit aggregated $25.0$26.0 million. At September 30, 2022,March 31, 2023, the amounts of scheduled expiration of the maximum amounts guaranteed under these letters of credit aggregate to $21.8 million in 2022, $2.7$25.6 million in 2023, and $500,000$400,000 in 2024. There were no amounts outstanding under the previously mentioned letters of credit at September 30, 2022.March 31, 2023. In the event of default under these letter of credit obligations, the subsidiary guaranteeing the letter of credit would be obligated for reimbursement of payments made under the letter of credit.
In addition, Centennial, Knife River and MDU Construction Services have issued guarantees to third parties related to the routine purchase of maintenance items, materials and lease obligations for which no fixed maximum amounts have been specified. These guarantees have no scheduled maturity date. In the event a subsidiary of the Company defaults under these obligations, Centennial, Knife River or MDU Construction Services would be required to make payments under these guarantees. Any amounts outstanding by subsidiaries of the Company were reflected on the Consolidated Balance Sheet at September 30, 2022.March 31, 2023.
In the normal course of business, Centennial has surety bonds related to construction contracts and reclamation obligations of its subsidiaries. In the event a subsidiary of Centennial does not fulfill a bonded obligation, Centennial would be responsible to the surety bond company for completion of the bonded contract or obligation. A large portion of the surety bonds is expected to expire within the next 12 months; however, Centennial will likely continue to enter into surety bonds for its subsidiaries in the future. At September 30, 2022,March 31, 2023, approximately $932.4 million$1.6 billion of surety bonds were outstanding, which were not reflected on the Consolidated Balance Sheet.
Variable interest entities
The Company evaluates its arrangements and contracts with other entities to determine if they are VIEs and if so, if the Company is the primary beneficiary.
Fuel Contract Coyote Station entered into a coal supply agreement with Coyote Creek that provides for the purchase of coal necessary to supply the coal requirements of the Coyote Station for the period May 2016 through December 2040. Coal purchased under the coal supply agreement is reflected in inventories on the Consolidated Balance Sheets and is recovered from customers as a component of electric fuel and purchased power.
The coal supply agreement creates a variable interest in Coyote Creek due to the transfer of all operating and economic risk to the Coyote Station owners, as the agreement is structured so that the price of the coal will cover all costs of operations, as well as future reclamation costs. The Coyote Station owners are also providing a guarantee of the value of the assets of Coyote Creek as they would be required to buy the assets at book value should they terminate the contract prior to the end of the contract term and are providing a guarantee of the value of the equity of Coyote Creek in that they are required to buy the entity at the end of the contract term at equity value. Although the Company has determined that Coyote Creek is a VIE, the Company has concluded that it is not the primary beneficiary of Coyote Creek because the authority to direct the activities of the entity is shared by the four unrelated owners of the Coyote Station, with no primary beneficiary existing. As a result, Coyote Creek is not required to be consolidated in the Company's financial statements.
At September 30, 2022,March 31, 2023, the Company's exposure to loss as a result of the Company's involvement with the VIE, based on the Company's ownership percentage, was $30.0$29.1 million.
Note 21 - Subsequent event
On April 21, 2023, Intermountain repaid an additional $30.0 million of the $125.0 million term loan agreement issued on January 20, 2023. For more information on this debt agreement, see Note 15.
On April 25, 2023, Knife River Holding Company issued $425.0 million of 7.75 percent senior notes due May 1, 2031, pursuant to an indenture agreement. The proceeds from the issuance of these notes will be held in escrow until the effective date of the Knife River separation or, if the separation does not occur within the time frame specified, released back to the lenders, along with accrued interest.
On May 1, 2023, the Company entered into a $75.0 million term loan agreement with a SOFR-based interest rate and a maturity date of November 1, 2023. The agreement contains customary covenants and provisions, including a covenant of the Company 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 May 3, 2023, the Company's board of directors approved the separation and the distribution of approximately 90 percent of the issued and outstanding shares of Knife River Holding Company to the Company's stockholders. Stockholders of the Company will receive one share of Knife River Holding Company common stock for every four shares of the Company's common stock held on May 22, 2023, the record date for the distribution. The Company will retain approximately 10 percent of Knife River Holding Company's common stock immediately following the separation with the intent to dispose of such shares within twelve months after the separation. Prior to completing the separation, the Company may adjust the percentage of Knife River Holding Company common stock to be distributed to the Company's stockholders and retained by the Company in response to market and other factors. The separation is expected to be complete May 31, 2023, subject to certain conditions, including the SEC declaring the registration statement on Form 10 for Knife River Holding Company to be effective.
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 16,00016,800 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.
Strategic Initiatives As part of the Company's continuous review of its business, the Company announced strategic initiatives in 2022 that are expected to enhance its value. The Company incurred costs in connection with the announced strategic initiatives in 2022 and 2023, as noted in the Business Segment Financial and Operating Data section, and expects to continue to incur these costs until the initiatives are completed.
On August 4, 2022, the Company announced that its Boardboard of Directors unanimouslydirectors approved a plan to pursue athe separation of Knife River, the construction materials and contracting segment, from the Company. The separation will result in two independent, publicly traded companies, MDU Resources Group, Inc. and Knife River Holding Company, and is expected to be completed on May 31, 2023, subject to certain conditions, including the SEC declaring the Registration Statement on Form 10 for Knife River Holding Company to be effective. On May 3, 2023, the Company's board of directors approved the separation and the distribution of approximately 90 percent of the issued and outstanding shares of Knife River Holding Company to the Company's stockholders. Stockholders of the Company will receive one share of Knife River Holding Company common stock for every four shares of the Company's common stock held on May 22, 2023, the record date for the distribution. The Company will retain approximately 10 percent of Knife River Holding Company's common stock immediately following the separation with the intent to dispose of such shares within twelve months after the separation. Prior to completing the separation, the Company may adjust the percentage of Knife River Holding Company common stock to be distributed to the Company's stockholders and retained by the Company in response to market and other factors. The separation of Knife River 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 ofMore information on the separation willand distribution can be subject to, among other things,found within the effectiveness of a registration statement on Form 10, with the SEC, final approval from the Company’s Board of Directors, receipt of a tax opinion and a private letter ruling from the IRS, and other customary conditions. The Company may, at any time and for any reason until the proposed transactionwhich 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.not incorporated by reference herein.
As the next step of the Company's strategic planning, onOn November 2,3, 2022, the Board of Directors unanimously determined the best way to optimize value would beCompany announced its intention to create two pure-play companies: a leading construction materials company and apublicly traded companies, one focused on regulated energy delivery company. Accordingly,and the other on construction materials, and that, to achieve this future structure, the Company's board hasof directors authorized management to commence a strategic review process forof MDU Construction Services withServices. The strategic review is underway and the objectiveCompany anticipates completing the strategic review during the second quarter of achieving2023. For more information on the board’s goal of creating two pure-play public companies. Seestrategic initiatives, see Part II, Item IA. Risk Factors in this quarterly report, Part 1, Item 1A. Risk Factors for a description of some ofin the risks2022 Annual Report and uncertaintiessubsequent filings with the proposed future structure.SEC.
Market Trends While recent banking and economic issues has created some disruption in the commercial paper market, the Company has not experienced liquidity issues. Further, the Company has the ability to borrow against the revolving credit facilities of Centennial and Montana-Dakota, providing the Company with flexibility in the current commercial paper market. The Company continues to manage the inflationary pressures experienced throughout the United States. Inflation rates in the Unites Statesmonitor financial services disruptions but does not have increased significantly, relativeany material exposure to historical precedent, and may continue to rise. The Company has continued to evaluate its businesses and has increased pricing for its products and services where necessary as evidenced by the increase in revenues recognized in 2022. The ability to raise selling prices to cover higher costs due to inflation are subject to customer demand, industry competition and the availability of materials, among other things.recently distressed financial institutions. Rising interest rates have resulted in and will likely continue to result in higher borrowing costs on new debt, resulting in impacts to the Company's asset valuations and negatively impacting the purchasing power of its customers.
The Company continues to monitormanage the inflationary pressures experienced throughout the United States, including the impact that inflation, rising interest rates, rising commodity pricesprice volatility and supply chain disruptions may have on its businessesbusiness and customers and proactively looks for ways to lessen the impact to its businesses. business. The Company has continued to evaluate its businesses and has increased pricing for its products and services where possible. 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.
For more information on possible impacts of these trends to the Company's businesses, see the Outlook for each segment below and Part I, Item 1A. Risk Factors in the 20212022 Annual Report.
Forward-Looking Statements
The following sections contain forward-looking statements within the meaning of Section 21E of the Exchange Act. Forward-looking statements are all statements other than statements of historical fact, including without limitation those statements that are identified by the words "anticipates," "estimates," "expects," "intends," "plans," "predicts" and similar expressions, and include statements concerning plans, trends, objectives, goals, strategies, future events, including the separation of Knife River or the proposed structure of two pure-play publicly traded companies, 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 Part II, Item 1A. Risk Factors in this quarterly report, Part I, Item 1A. Risk Factors in the 20212022 Annual Report and subsequent filings with the SEC.
Consolidated Earnings Overview
The following table summarizes the contribution to the consolidated income by each of the Company's business segments.
| | | Three Months Ended | Nine Months Ended | | Three Months Ended | |
| | September 30, | | March 31, | |
| | | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | | |
| | (In millions, except per share amounts) | | (In millions, except per share amounts) |
| Electric | Electric | $ | 21.6 | | $ | 20.6 | | $ | 37.5 | | $ | 41.6 | | Electric | $ | 16.6 | | $ | 11.3 | | |
| Natural gas distribution | Natural gas distribution | (18.1) | | (15.4) | | 10.8 | | 20.1 | | Natural gas distribution | 38.9 | | 36.3 | | |
| Pipeline | Pipeline | 9.8 | | 10.6 | | 24.3 | | 28.7 | | Pipeline | 8.3 | | 7.3 | | |
| Construction materials and contracting | Construction materials and contracting | 102.8 | | 96.3 | | 95.3 | | 116.9 | | Construction materials and contracting | (41.3) | | (40.0) | | |
| Construction services | Construction services | 28.0 | | 23.1 | | 83.8 | | 81.8 | | Construction services | 26.1 | | 21.3 | | |
| Other | Other | 3.8 | | 3.8 | | (1.4) | | 2.2 | | Other | (10.3) | | (4.5) | | |
| Income from continuing operations | Income from continuing operations | 147.9 | | 139.0 | | 250.3 | | 291.3 | | Income from continuing operations | 38.3 | | 31.7 | | |
| Discontinued operations, net of tax | Discontinued operations, net of tax | — | | .3 | | .1 | | .3 | | Discontinued operations, net of tax | — | | — | | |
| Net income | Net income | $ | 147.9 | | $ | 139.3 | | $ | 250.4 | | $ | 291.6 | | Net income | $ | 38.3 | | $ | 31.7 | | |
| Earnings per share - basic: | Earnings per share - basic: | | Earnings per share - basic: | | |
| Income from continuing operations | Income from continuing operations | $ | .73 | | $ | .68 | | $ | 1.23 | | $ | 1.44 | | Income from continuing operations | $ | .19 | | $ | .16 | | |
| Discontinued operations, net of tax | Discontinued operations, net of tax | — | | — | | — | | — | | Discontinued operations, net of tax | — | | — | | |
| Earnings per share - basic | Earnings per share - basic | $ | .73 | | $ | .68 | | $ | 1.23 | | $ | 1.44 | | Earnings per share - basic | $ | .19 | | $ | .16 | | |
| Earnings per share - diluted: | Earnings per share - diluted: | | Earnings per share - diluted: | | |
| Income from continuing operations | Income from continuing operations | $ | .73 | | $ | .68 | | $ | 1.23 | | $ | 1.44 | | Income from continuing operations | $ | .19 | | $ | .16 | | |
| Discontinued operations, net of tax | Discontinued operations, net of tax | — | | — | | — | | — | | Discontinued operations, net of tax | — | | — | | |
| Earnings per share - diluted | Earnings per share - diluted | $ | .73 | | $ | .68 | | $ | 1.23 | | $ | 1.44 | | Earnings per share - diluted | $ | .19 | | $ | .16 | | |
Three Months Ended September 30, 2022,March 31, 2023, Compared to Three Months Ended September 30, 2021March 31, 2022 The Company's consolidated earnings increased $8.6$6.6 million.
The Company's earnings primarilyCompany benefited from increased earnings across the regulated energy delivery and construction services businesses, partially offset by a slightly higher seasonal loss at the construction businesses. The construction materials and contracting business benefited from higher average pricing on materials and increased contracting workloads, and the construction services business benefited from higher margins on electrical and mechanical work, primarily in the industrial, institutional and commercial sectors, as well as higher utility margins. Both of the construction business's earnings were negatively impacted by inflationary pressures, including higher diesel fuel and other operating costs; however, these costs are largely being recovered through price increases.business. Earnings at the electric business were positively impacted by interim rate relief in certain jurisdictions and lower operationoperating expenses associated with the closure of Units 1 and maintenance expenses as a result of the coal-fired electric plant closures and the absence of a planned maintenance outage in 2021. Partially offsetting the increased earnings was an increased seasonal loss2 at Heskett Station. Revenues were higher at the natural gas distribution business due to approved rate relief in Washington and a 4.2 percent increase in retail sales volumes to all customer classes due to colder weather, partially offset by higher operation and maintenance expense. Earnings at the pipeline business increased largely from increased transportation volumes due to a full quarter of benefit from the North Bakken Expansion project and its increased contracted volume commitments beginning in February 2023. The construction services business saw increased revenues across most sectors, which were partially offset by higher operating costs attributable to inflationary pressures. The construction materials and contracting business reported a higher seasonal loss as a result of unfavorable weather across most regions, particularly in the Pacific region, but was able to increase gross profit largely from increases in average selling prices across its product lines. All of the Company's businesses were impacted by increased interest rates as a result of higher operating expenses, including increased subcontractor costs and depreciation expense, and increasedaverage interest expense at the pipeline business as a result of higher debt balances,rates, partially offset by the nethigher investment returns of $9.1 million on nonqualified benefit of the North Bakken Expansion project. Also negatively impacting results were transaction costs of $4.1 million, after tax, associated with the anticipated spinoff of Knife River included in Other.
Nine Months Ended September 30, 2022, Compared to Nine Months Ended September 30, 2021 The Company's consolidated earnings decreased $41.2 million.
The Company experienced decreased earnings across most of the Company's businesses. While the construction materials and contracting business experienced higher average pricing on materials and increased contracting workloads, results were negatively impacted by ongoing inflationary pressures, including higher diesel fuel and other operating costs. The natural gas distribution business experienced higher operating expenses, including subcontractor costs, as well as higher depreciation and interest expenses, partially offset by increased sales volumes and approved rate recovery in certain jurisdictions. The pipeline business experienced higher interest expense and lower non-regulated project margins, partially offset by the net benefit of the North Bakken Expansion project. Increased operating costs related to a planned maintenance outage at Coyote Station along with lower per unit average rates decreased earnings at the electric business, partially offset by interim rate relief in certain jurisdictions and higher transmission revenues.plans. The Company's earnings were furtheralso impacted by $20.8 millioncosts incurred in lower returns on the Company's nonqualified benefit plan investments, as discussed2023 in Note 14, and the transaction costsconnection with announced strategic initiatives of $4.1$8.3 million, after tax, associated with the anticipated spinoff of Knife River included in Other. Partially offsetting the decreases were increased earnings at the construction services business resulting primarily from higher commercial and service margins and earnings from the Company's joint ventures, partially offset by higher overall operating costs related to inflationary pressures and higher selling, general and administrative expenses.tax.
A discussion of key financial data from the Company's business segments follows.
Business Segment Financial and Operating Data
The following sections include key financial and operating data for each of the Company's business segments. Also included are highlights on key growth strategies, projections and certain assumptions for the Company and its subsidiaries and other matters of the Company's business segments.
For information pertinent to various commitments and contingencies, see the Notes to Consolidated Financial Statements. For a summary of the Company's business segments, see Note 17 of the Notes to Consolidated Financial Statements.
Electric and Natural Gas Distribution
Strategy and challenges The electric and natural gas distribution segments provide electric and natural gas distribution services to customers, as discussed in Note 17. Both segments strive to be top performing utility companies measured by integrity, employee safety and satisfaction, customer service and 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,return; weather; climate change initiatives,laws, regulations and initiatives; competitive factors in the energy industry,industry; population growthgrowth; 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 rate cases, see Note 19 and the 20212022 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. Within the past year, there have been cyber and physical attacks within the energy industry on infrastructure, such as substations, and the Company continues to evaluate the safeguards implemented to protect its electric and natural gas utility systems. Implementation of enhancements and additional requirements to protect the Company's infrastructure 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. Recently, MISO and NERC have recently announced concerns with reliability of the electric grid due to capacity shortages, which has resulted from rapid expansion of renewables and rapid reduction of baseload resources such as coal, while load growth has increased faster than expected. MISO has recently approvedreceived FERC approval of a seasonal resource adequacy construct orand accreditation process, versus the existingprevious annual summer peak capacity requirement process. The new construct will include a higher planning reserve margin in winter, spring and fall and a higher Coincident Load Factor for Montana-Dakota in the winter season. This is a change from the current summer requirement only process. Both of these will likely require Montana-Dakota to obtain additional accredited seasonal capacity. These changes could result in increased costs to produce electricity; however, thehave not had a significant impact of these changes on the Company is unknown.capacity requirements for Montana-Dakota. 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.
In December 2022 and January 2023, natural gas prices significantly increased across the Pacific Northwest from multiple price-pressuring events including wide-spread below-normal temperatures and higher natural gas consumption; reduced natural gas flows due to pipeline constraints, including maintenance in West Texas; and historically low regional natural gas storage levels. As of March 2023, natural gas prices have stabilized. The higher natural gas prices in December 2022 and January 2023 impacted both
Intermountain and Cascade, both of which borrowed short-term debt of $125.0 million and $150.0 million, respectively, in January 2023 to finance the increased natural gas costs. To assist in the recovery of the higher natural gas costs, Intermountain filed an out-of-cycle purchased gas adjustment with the IPUC that was effective February 1, 2023. In March and April 2023, Intermountain repaid $20.0 million and $30 million, respectively, of the $125.0 million short-term debt.
The Company continues to proactively monitor and work with its manufacturers to reduce the effects of increased pricing and lead times on delivery of certain raw materials and equipment used in electric generation, 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 lingering effects of the COVID-19 pandemic, staffing shortages across multiple industries and subsequent supply chain issues. While not material, theseglobal conflicts. These segments have experienced delays and inflationary pressures, including increased costs related to purchased natural gas and capital expenditures. The Company has been able to minimize the effects by working closely with suppliers or obtaining additional suppliers, as well as modifying project plans to accommodate extended lead times and increased costs. The Company expects these delays and inflationary pressures to continue throughout the remainder of 2022 and into 2023.continue.
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, population changes and competition from other energy providers and fuels. As the industry continues to expand the use of renewable energy sources, the need for additional transmission is growing. On July 25, 2022, as part of its long range transmission plan, MISO announced approval of 18 transmission projects totaling $10.3 billion of investments in MISO's midwest subregion, of which Montana-Dakota is a part. As part of MISO's long range transmission plan, in August 2022, the Company announced its intent to develop, construct and co-own an approximately 95 mile 345 kV transmission line with Otter Tail Power Company in central North Dakota. The construction of new electric generating facilities, transmission lines and other service facilities is subject to increasing costs and lead times, extensive permitting procedures, and federal and state legislative and regulatory initiatives, which may necessitate increases in electric energy prices. As the industry continues to expand the use of renewable energy sources, the need for additional transmission infrastructure is growing. As part of MISO's long range transmission plan, in August 2022, the Company announced its intent to develop, construct and co-own an approximately 95 mile 345-kV transmission line with Otter Tail Power Company in central North Dakota.
Earnings overview - The following information summarizes the performance of the electric segment.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| | 2022 | | 2021 | | Variance | | 2022 | | 2021 | | Variance |
| (In millions) |
| Operating revenues | $ | 99.3 | | $ | 99.1 | | — | % | | $ | 278.6 | | $ | 267.7 | | 4 | % |
| Operating expenses: | | | | | | | |
| Electric fuel and purchased power | 20.1 | | 19.5 | | 3 | % | | 68.3 | | 56.2 | | 22 | % |
| Operation and maintenance | 28.7 | | 31.2 | | (8) | % | | 91.0 | | 93.8 | | (3) | % |
| Depreciation, depletion and amortization | 15.7 | | 17.0 | | (8) | % | | 52.0 | | 50.0 | | 4 | % |
| Taxes, other than income | 4.4 | | 4.1 | | 7 | % | | 13.5 | | 13.7 | | (1) | % |
| Total operating expenses | 68.9 | | 71.8 | | (4) | % | | 224.8 | | 213.7 | | 5 | % |
| Operating income | 30.4 | | 27.3 | | 11 | % | | 53.8 | | 54.0 | | — | % |
| Other income (expense) | .5 | | 1.2 | | (58) | % | | (.8) | | 3.4 | | (124) | % |
| Interest expense | 7.0 | | 6.6 | | 6 | % | | 21.0 | | 19.8 | | 6 | % |
| Income before income taxes | 23.9 | | 21.9 | | 9 | % | | 32.0 | | 37.6 | | (15) | % |
| Income tax (benefit) expense | 2.3 | | 1.3 | | 77 | % | | (5.5) | | (4.0) | | 38 | % |
| Net income | $ | 21.6 | | $ | 20.6 | | 5 | % | | $ | 37.5 | | $ | 41.6 | | (10) | % |
| | | | | | | | | | | | | | |
| Operating statistics | Three Months Ended | Nine Months Ended |
| September 30, | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 | |
| Revenues (millions) | | | | |
| Retail sales: | | | | |
| Residential | $ | 36.6 | | $ | 35.4 | | $ | 100.6 | | $ | 96.0 | |
| Commercial | 38.4 | | 38.0 | | 105.3 | | 102.5 | |
| Industrial | 10.8 | | 10.2 | | 31.3 | | 29.9 | |
| Other | 2.0 | | 1.9 | | 5.4 | | 5.2 | |
| 87.8 | | 85.5 | | 242.6 | | 233.6 | |
| Transportation and other | 11.5 | | 13.6 | | 36.0 | | 34.1 | |
| $ | 99.3 | | $ | 99.1 | | $ | 278.6 | | $ | 267.7 | |
| Volumes (million kWh) | | | | |
| Retail Sales: | | | | |
| Residential | 304.9 | | 317.3 | | 906.7 | | 906.3 | |
| Commercial | 358.3 | | 393.0 | | 1,051.7 | | 1,101.9 | |
| Industrial | 143.7 | | 145.1 | | 431.7 | | 433.7 | |
| Other | 21.6 | | 23.8 | | 61.7 | | 65.1 | |
| 828.5 | | 879.2 | | 2,451.8 | | 2,507.0 | |
| Average cost of electric fuel and purchased power per kWh | $ | .022 | | $ | .020 | | $ | .026 | | $ | .020 | |
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| | 2023 | | 2022 | | Variance | | | | |
| (In millions) |
| Operating revenues | $ | 95.7 | | $ | 93.7 | | 2 | % | | | | |
| Operating expenses: | | | | | | | |
| Electric fuel and purchased power | 24.4 | | 26.3 | | (7) | % | | | | |
| Operation and maintenance | 29.9 | | 30.8 | | (3) | % | | | | |
| Depreciation, depletion and amortization | 15.6 | | 16.9 | | (8) | % | | | | |
| Taxes, other than income | 4.7 | | 4.6 | | 2 | % | | | | |
| Total operating expenses | 74.6 | | 78.6 | | (5) | % | | | | |
| Operating income | 21.1 | | 15.1 | | 40 | % | | | | |
| Other income (expense) | 1.2 | | (.3) | | 500 | % | | | | |
| Interest expense | 6.8 | | 7.1 | | (4) | % | | | | |
| Income before income taxes | 15.5 | | 7.7 | | 101 | % | | | | |
| Income tax benefit | (1.1) | | (3.6) | | (69) | % | | | | |
| Net income | $ | 16.6 | | $ | 11.3 | | 47 | % | | | | |
| | | | | | | | | | |
| Operating statistics | Three Months Ended | |
| March 31, | |
| 2023 | | 2022 | | | |
| Revenues (millions) | | | | |
| Retail sales: | | | | |
| Residential | $ | 36.2 | | $ | 35.2 | | | |
| Commercial | 34.8 | | 33.6 | | | |
| Industrial | 10.4 | | 9.8 | | | |
| Other | 1.7 | | 1.6 | | | |
| 83.1 | | 80.2 | | | |
| Transportation and other | 12.6 | | 13.5 | | | |
| $ | 95.7 | | $ | 93.7 | | | |
| Volumes (million kWh) | | | | |
| Retail sales: | | | | |
| Residential | 357.3 | | 357.7 | | | |
| Commercial | 385.5 | | 364.1 | | | |
| Industrial | 147.3 | | 140.3 | | | |
| Other | 20.2 | | 19.5 | | | |
| 910.3 | | 881.6 | | | |
| Average cost of electric fuel and purchased power per kWh | $ | .025 | | $ | .027 | | | |
Three Months Ended September 30, 2022,March 31, 2023, Compared to Three Months Ended September 30, 2021March 31, 2022 Electric earnings increased $1.0$5.3 million as a result of:
•Revenue was comparable to the same period in the prior year. increased $2.0 million.
◦Largely due to:
▪Interim rate relief of $3.1 million in certain jurisdictions was mostlyjurisdictions.
▪Higher renewable tracker revenues of $600,000 associated with lower production tax credits offset in expense, as described below.
▪Higher per unit average rates of $500,000, largely related to block rates in certain jurisdictions.
▪Higher retail sales volumes of 3.3 percent attributable to commercial and industrial customers.
◦Partially offset by lower retail sales volumes across allfuel and purchased power costs of $1.9 million recovered in customer classes.rates and offset in expense, as described below.
•Electric fuel and purchased power increased $600,000 as adecreased $1.9 million, largely the result of increased energylower commodity costs, including recovery of fuel clause adjustments, partially offset in revenue above.by higher retail sales volumes.
•Operation and maintenance decreased $2.5 million.$900,000.
◦Largely the result of:
•▪Decreased payroll-relatedReduced costs largelyof $700,000 for straight time payroll and materials due to lower incentive accrualsthe closure of $1.2 millionUnits 1 and plant closures of $700,000.2 at Heskett Station.
•▪Decreased contract services due toof $500,000, primarily lower transmission expense and the absence of theoffset in part by higher Big Stone Station outagecosts.
◦Partially offset by increased costs during 2021.of $400,000 for vehicles and equipment.
•Depreciation, depletion and amortization decreased $1.3 million.
◦Primarily due to decreased amortization of plant retirement and closure costs of $1.6$1.5 million resulting from an extension to the recovery period for these costs, which are recovered in operating revenues, as discussed in Note 13.12.
◦Partially offset by increased property, plant and equipment balances, primarily as a result of transmission projects placed in service.
•Taxes, other than income were comparableservice to the same period in the prior year.
•Other income decreased $700,000, primarily resulting from lower returns on the Company's nonqualified benefit plan investments, as discussed in Note 14.
•Interest expense increased $400,000, largely resulting from higher long-term debt balances from debt issued in 2021, partially offset by higher AFUDC largely due to higher rates.
•Income tax expense increased $1.0 million, largely due to higher income before income taxesimprove reliability and lower production tax credits of $400,000 driven by lower wind production.
Nine Months Ended September 30, 2022, Compared to Nine Months Ended September 30, 2021 Electric earnings decreased $4.1 million as a result of:
•Revenue increased $10.9 million.
◦Largely due to:
•Higher fuel and purchased power costs of $12.1 million recovered in customer rates and offset in expense, as described below.
•Interim rate relief in certain jurisdictions of $2.5 million.
•Higher transmission revenues, primarily from higher net transmission of $2.3 million and higher transmission interconnect upgrades of $500,000.
◦Partially offset by:
•Lower renewable tracker revenues associated with higher production tax credits.
•Lower per unit average rates of $1.9 million related to block rates in certain jurisdictions.
•Electric fuel and purchased power increased $12.1 million.
◦Primarily the result of higher MISO costs as a result of increased energy costs, partially offset by decreased fuel costs associated with the Heskett Station and Lewis & Clark Station plant closures.
•Operation and maintenance decreased $2.8 million.
◦Primarily due to:
•Decreased payroll-related costs, largely due to lower incentive accruals of $2.2 million and plant closures of $2.1 million, as previously discussed.
•Decreased materials costs of $1.2 million as a result of plant closures, as previously discussed.
•Reduced costs from the Heskett Station plant closure and the absence of the Big Stone outage during 2021.
◦Partially offset by increased contract service costs associated with a planned outage at Coyote Station of $2.6 million.
•Depreciation, depletion and amortization increased $2.0 million, primarily due to:
◦Increased amortization of plant retirement and closure costs of $1.2 million recovered in operating revenues, as discussed in Note 13.
◦Increased property, plant and equipment balances placed in service, largely related to growth and replacement projects.update aging infrastructure.
•Taxes, other than income were comparable to the same period in the prior year.
•Other income (expense) decreased $4.2increased $1.5 million, largely lowerprimarily resulting from higher returns on the Company's nonqualified benefit plan investments of $4.4$1.9 million, as discussed in Note 14, partially offset in part by higherthe absence of AFUDC largelyequity due to higher rates.average short-term debt balance.
•Interest expense increased $1.2 million,decreased $300,000 as a result of higher AFUDC debt, largely resulting fromdue to higher long-term debt balances from debt issued in 2021,rates, partially offset by higher AFUDC largely due to higher rates.average interest rates and debt balances.
•Income tax benefit increased $1.5 million.
◦Largelydecreased $2.5 million, largely due to:
•Higherto higher income before income taxes and lower production tax credits of $1.5 million$800,000 driven by higherlower wind production.
•Lower income before income taxes.Index◦Partially offset by permanent tax adjustments and excess deferred tax amortization of $700,000.
Earnings overview - The following information summarizes the performance of the natural gas distribution segment.
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | |
| | September 30, | | September 30, | | March 31, | |
| | | 2022 | | 2021 | | Variance | | 2022 | | 2021 | | Variance | | 2023 | | 2022 | | Variance | |
| | (In millions) | | (In millions) |
| Operating revenues | Operating revenues | $ | 132.2 | | $ | 110.5 | | 20 | % | | $ | 793.3 | | $ | 614.8 | | 29 | % | Operating revenues | $ | 565.7 | | $ | 450.6 | | 26 | % | |
| Operating expenses: | Operating expenses: | | | | | | | Operating expenses: | | | |
| Purchased natural gas sold | Purchased natural gas sold | 65.3 | | 44.9 | | 45 | % | | 481.3 | | 318.0 | | 51 | % | Purchased natural gas sold | 397.3 | | 293.3 | | 35 | % | |
| Operation and maintenance | Operation and maintenance | 49.5 | | 47.7 | | 4 | % | | 154.4 | | 145.0 | | 6 | % | Operation and maintenance | 57.2 | | 54.1 | | 6 | % | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 22.7 | | 21.5 | | 6 | % | | 67.4 | | 64.2 | | 5 | % | Depreciation, depletion and amortization | 23.2 | | 22.2 | | 5 | % | |
| Taxes, other than income | Taxes, other than income | 11.4 | | 10.6 | | 8 | % | | 51.3 | | 44.7 | | 15 | % | Taxes, other than income | 29.5 | | 24.7 | | 19 | % | |
| Total operating expenses | Total operating expenses | 148.9 | | 124.7 | | 19 | % | | 754.4 | | 571.9 | | 32 | % | Total operating expenses | 507.2 | | 394.3 | | 29 | % | |
| Operating income (loss) | (16.7) | | (14.2) | | 18 | % | | 38.9 | | 42.9 | | (9) | % | |
| Other income | 1.4 | | 1.3 | | 8 | % | | .3 | | 5.4 | | (94) | % | |
| Operating income | | Operating income | 58.5 | | 56.3 | | 4 | % | |
| Other income (expense) | | Other income (expense) | 4.9 | | (.4) | | 1325 | % | |
| Interest expense | Interest expense | 10.7 | | 9.3 | | 15 | % | | 29.8 | | 27.6 | | 8 | % | Interest expense | 14.1 | | 9.5 | | 48 | % | |
| Income (loss) before income taxes | (26.0) | | (22.2) | | 17 | % | | 9.4 | | 20.7 | | (55) | % | |
| Income tax (benefit) expense | (7.9) | | (6.8) | | 16 | % | | (1.4) | | .6 | | (333) | % | |
| Net income (loss) | $ | (18.1) | | $ | (15.4) | | 17 | % | | $ | 10.8 | | $ | 20.1 | | (46) | % | |
| Income before income taxes | | Income before income taxes | 49.3 | | 46.4 | | 6 | % | |
| Income tax expense | | Income tax expense | 10.4 | | 10.1 | | 3 | % | |
| Net income | | Net income | $ | 38.9 | | $ | 36.3 | | 7 | % | |
| | | | | | | | | | | | | | |
| Operating statistics | Three Months Ended | Nine Months Ended |
| September 30, | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 | |
| Revenues (millions) | | | | |
| Retail sales: | | | | |
| Residential | $ | 64.9 | | $ | 55.3 | | $ | 438.5 | | $ | 344.0 | |
| Commercial | 44.5 | | 35.6 | | 278.3 | | 204.5 | |
| Industrial | 7.2 | | 5.4 | | 29.2 | | 20.5 | |
| 116.6 | | 96.3 | | 746.0 | | 569.0 | |
| Transportation and other | 15.6 | | 14.2 | | 47.3 | | 45.8 | |
| $ | 132.2 | | $ | 110.5 | | $ | 793.3 | | $ | 614.8 | |
| Volumes (MMdk) | | | | |
| Retail sales: | | | | |
| Residential | 4.5 | | 4.5 | | 47.3 | | 42.3 | |
| Commercial | 4.2 | | 4.2 | | 32.9 | | 29.3 | |
| Industrial | .9 | | .9 | | 3.9 | | 3.5 | |
| 9.6 | | 9.6 | | 84.1 | | 75.1 | |
| Transportation sales: | | | | |
| Commercial | .3 | | .2 | | 1.4 | | 1.3 | |
| Industrial | 42.1 | | 44.7 | | 118.0 | | 127.5 | |
| 42.4 | | 44.9 | | 119.4 | | 128.8 | |
| Total throughput | 52.0 | | 54.5 | | 203.5 | | 203.9 | |
| Average cost of natural gas per dk | $ | 6.82 | | $ | 4.72 | | $ | 5.72 | | $ | 4.24 | |
| | | | | | | | | | |
| Operating statistics | Three Months Ended | |
| March 31, | |
| 2023 | | 2022 | | | |
| Revenues (millions) | | | | |
| Retail sales: | | | | |
| Residential | $ | 325.3 | | $ | 258.6 | | | |
| Commercial | 202.9 | | 162.7 | | | |
| Industrial | 16.7 | | 13.0 | | | |
| 544.9 | | 434.3 | | | |
| Transportation and other | 20.8 | | 16.3 | | | |
| $ | 565.7 | | $ | 450.6 | | | |
| Volumes (MMdk) | | | | |
| Retail sales: | | | | |
| Residential | 32.3 | | 31.0 | | | |
| Commercial | 21.4 | | 20.5 | | | |
| Industrial | 1.9 | | 1.8 | | | |
| 55.6 | | 53.3 | | | |
| Transportation sales: | | | | |
| Commercial | .7 | | .7 | | | |
| Industrial | 48.8 | | 41.0 | | | |
| 49.5 | | 41.7 | | | |
| Total throughput | 105.1 | | 95.0 | | | |
| Average cost of natural gas per dk | $ | 7.15 | | $ | 5.50 | | | |
Three Months Ended September 30, 2022,March 31, 2023, Compared to Three Months Ended September 30, 2021March 31, 2022 Natural gas distribution's seasonal lossearnings increased $2.7$2.6 million as a result of:
•Operating revenuesRevenue increased $21.7$115.1 million, largely resulting from:
◦Higher purchased natural gas sold of $19.5$104.0 million recovered in customer rates that was offset in expense, as described below, partially offset by $2.0 million of natural gas cost sharing in Oregon.
◦Increased revenue-based taxes recovered in rates of $4.6 million that were offset in expense, as described below.
◦HigherApproved rate relief in Washington of $3.7 million, which includes the excess deferred income tax tariff settlement of $1.1 million, as discussed in Note 19.
◦A 4.2 percent increase in retail sales volumes to all customer classes due to colder weather, partially offset by weather normalization and decoupling mechanisms of $2.6$2.1 million in certain jurisdictions.
•Purchased natural gas sold increased $20.4$104.0 million, primarily due to higher natural gas costs of $91.7 million as a result of higher market prices, including the higher recovery of purchased gas adjustments related to the February 2021 cold weather event and the 2018 Enbridge pipeline rupture.adjustments. Purchased natural gas sold includes the disallowancewas also impacted by higher volumes of $845,000 ordered by MNPUC, as discussed in Note 19.natural gas purchased of $12.3 million due to increased retail sales volumes.
•Operation and maintenance increased $1.8$3.1 million.
◦Largely resulting from:
▪Higher payroll-related costs of $2.4 million, largely resulting fromprimarily higher subcontractorstraight time costs of $1.6 million and higher health care costs.
▪Higher costs of $1.0 million associated with vehicles and equipment.
•Depreciation, depletion and amortization increased $1.2$1.0 million, primarily resulting from increased property, plant and equipment balances from growth and replacement projects placed in service.service, partially offset by lower depreciation rates in certain jurisdictions.
•Taxes, other than income increased $800,000,$4.8 million, largely from higher revenue-based taxes which are recovered in rates.
•Other income (expense) increased $5.3 million driven by higher interest income of $2.9 million, largely related to higher purchased gas costs, and higher returns on the Company's nonqualified benefit plans of $2.8 million. These increases were offset in part by higher pension and postretirement expense.
•Interest expense increased $4.6 million, primarily from higher short-term and long-term debt balances from debt issued in 2023 and 2022 and higher interest rates, partially offset by higher AFUDC debt of $800,000 due to higher rates.
•Income tax expense was comparable to the same period in the prior year. Lower returns on the Company's nonqualified benefit plan investments were largely offset by higher interest income.
•Interest expense increased $1.4 million, primarily due to higher long-term debt balances from debt issued in 2022 and 2021 and higher interest rates, partially offset by higher AFUDC of $400,000.
•Income tax benefit increased $1.1 million as a result of an increased seasonal loss.
Nine Months Ended September 30, 2022, Compared to Nine Months Ended September 30, 2021 Natural gas distribution's earnings decreased $9.3 million as a result of:
•Operating revenues increased $178.5 million, largely resulting from:
◦Higher purchased natural gas sold of $162.4 million recovered in customer rates that was offset in expense, as described below.
◦Higher retail sales volumes of approximately 12.0 percent across all customer classes due to colder weather, partially offset by weather normalization and decoupling mechanisms in certain jurisdictions.
◦Higher revenue-based taxes recovered in rates of $6.4 million that were offset in expense, as described below.
◦Higher pipeline replacement mechanisms of $1.3 million, as well as approved rate relief of $1.2 million.
•Purchased natural gas sold increased $163.3 million, primarily due to:
◦Higher natural gas costs as a result of higher market prices of $125.1 million, including the higher recovery of purchased gas adjustments related to the February 2021 cold weather event and the 2018 Enbridge pipeline rupture.
◦Higher volumes of natural gas purchased.
•Operation and maintenance increased $9.4 million.
◦Primarily due to:
•Higher contract services of $4.5 million, primarily higher subcontractor costs.
•Higher software costs of $1.7 million.
•Higher other costs, partially resulting from inflation, including vehicle fuel costs of $800,000; higher bad debt expense of $700,000; and higher office, travel, materials, and other miscellaneous employee costs.
•Depreciation, depletion and amortization increased $3.2 million from increased property, plant and equipment balances from growth and replacement projects placed in service.
•Taxes, other than income increased $6.6 million resulting from higher revenue-based taxes which are recovered in rates.
•Other income decreased $5.1 million, primarily the result of lower returns on the Company's nonqualified benefit plan investments of $6.8 million, as discussed in Note 14, partially offset by increased interest income.
•Interest expense increased $2.2 million, primarily due to higher long-term debt balances from debt issued in 2022 and 2021 and higher interest rates, partially offset by higher AFUDC.
•Income tax (benefit) expense decreased $2.0 million, largely the result of lower income before income taxes.
Outlook TheIn 2022, the Company experienced rate base growth of 7.8 percent and expects these segments will grow rate base by approximately 56 percent to 7 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. TheIn 2022, these segments experienced retail customer growth of approximately 1.6 percent and the Company expects customer growth to continue to average 1 percent to 2 percent per year and as of September 30, 2022, these segments experienced retail customer growth of approximately 1.6 percent.year. This customer growth, along with system upgrades and replacements needed to supply safe and reliable service, will require investments in new and replacement electric and natural gas systems.
These segments are exposed to energy price volatility 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 inIn 2022, the Company experienced increased natural gas prices across its service areas, and expects this trend to continue throughin January 2023, experienced higher natural gas prices in the next winter heating season due to the increasePacific Northwest, as previously discussed in demand outpacing the supply along with the impact of global events.Strategy and Challenges. 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. The Company will continue to monitor natural gas prices, as well as oil and natural gas production levels.
In February 2019, the Company announced the retirement of three aging coal-fired electric generating units. The Company ceased operations of Unit 1 at Lewis & Clark Station in Sidney, Montana, in March 2021 and Units 1 and 2 at Heskett Station near Mandan, North Dakota, in February 2022. In addition, in May 2022 the Company began construction of Heskett Unit 4, an 88-MW simple-cycle natural gas-fired combustion turbine peaking unit at the existing Heskett Station near Mandan, North Dakota, with an expected in service date in the first halfsummer 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 31,21, 2028. In October 2022,March 2023, Otter Tail Power Company requested permission from the MNPUC to extend the deadline forfiled its 2023 Integrated Resource Plan, withwhich differs from the intent2022 filing by supporting retention of Coyote Station in its generation portfolio as long as it is not required to update its modeling in light of recent developmentsmake major capital investments in the industry, includingplant. Otter Tail Power Company maintains that continuous operation of the facility would be beneficial in meeting MISO's new minimum capacity planning requirements, in MISO.the Minnesota Clean Energy Law and other statutes and regulations. The joint owners continue to collaborate in analyzing data and weighing decisions that impact the plant and its employees as well as each company's customers and communities served. Further state implementation of pollution control plans to improve visibility at Class I areas, such as national parks, under the EPA's Regional Haze Rule could require the owners of Coyote Station to incur significant new costs. If the owners decide to incur such costs, the costs could, dependent on determination by state regulatory commissions on approval to recover such costs from customers, negatively impact the Company's results of operations, financial position and cash flows. The NDDEQ submitted theirits state implementation plan to the EPA in August 2022 and expects a decision on the plan sometime in 2023. The plan, as submitted by the NDDEQ, does not require additional controls for any units in North Dakota, including Coyote Station.
The labor contract at Intermountain with the UA, as reported in Items 1 and 2 - Business Properties - General in the 2022 Annual Report, has been ratified and is effective through March 31, 2027.
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 may2050. Each year, compliance instruments will be achieveddistributed to the Company by the Oregon Department of Environmental Quality at no cost and will decline annually in step with the reductions from baseline. The Company intends to meet its obligations through surrendering no cost emissions allowances and will fill remaining compliance obligations by 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. Due to timing of regulatory recovery, future compliance obligation purchases could impact the Company's operating cash flow. For more information about this rule and associated compliance costs, see Items 1 and 2 - Business Properties in the 2022 Annual Report. Cascade's draft 2023 Oregon integrated resource plan projects customer bills could increase substantially compared to costs included in customers' current bills as a result of the legislation. Projected customer bill impacts are estimates, subject to change as legislation is implemented and compliance begins, as well as, numerous assumptions used in the complex analysis of integrated resource planning. On September 30, 2022, the Company filed a request for the use of deferred accounting for costs related to the rule and will beginbegan deferring those costs. The Company, along with the other two local natural gas distribution companies in Oregon, filed a lawsuit on March 18, 2022, challenging the Climate Protection Program Rule. The lawsuit was filed on behalf of customers as the Company does not believe the rule accomplishes environmental stewardship in the most effective and affordable way possible.
•In Washington, the Climate Commitment Act signed into law in May 2021 requires natural gas distribution companies to reduce overall GHG emissions 45 percent below 1990 levels by 2030, 70 percent below 1990 levels by 2040 and 95 percent below 1990 levels by 2050, which may be achieved through increased energy efficiency and conservation measures, purchased emission allowances and offsets, and purchases of low carbon fuels.2050. As directed by the Climate Commitment Act, in September 2022 the Washington DOE published its final rule on the Climate Commitment Program. The rule isProgram, which was effective on October 30, 2022, and emissions compliance beginsbegan on January 1, 2023. The Company has begun reviewingmust demonstrate that they have met GHG emissions reduction goals through a combination of on-site emissions reductions and the use of approved allowances and offsets. Emissions compliance optionsmay be achieved through increased energy efficiency and conservation measures, purchased allowances and offsets, and purchases of low carbon fuels. Emissions allowances are allocated by the Washington DOE to the Company at no cost and additional allowances are required to be purchased at auction. Auctions for allowances are held quarterly. The Company intends to meet the first compliance period requirements, in part, by purchasing allowances through auction. The Company expects the compliance costs for these regulations will be recovered through customer rates. Due to timing of regulatory recovery, the purchase of allowances could impact the Company's operating cash flow. For more information about this rule and associated compliance costs, see Items 1 and 2 - Business properties in the 2022 Annual Report. Cascade's 2023 Washington integrated resource plan projects customer bills could increase substantially compared to costs included in customers' current bills as a result of the legislation. Projected customer bill impacts are estimates, subject to change as the legislation is implemented and compliance begins, as well as, numerous assumptions used in the complex analysis of integrated resource planning. On October 14, 2022, the Company filed a request for the use of deferred accounting for costs related to the rule and will beginbegan deferring those costs. The WUTC approved the deferred accounting order on February 28, 2023.
•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. On November 4, 2022, the Washington State Building Code Council adopted new residential codes requiring gas or electric heat pumps for most new space and water heating installations. The Company is currently assessingcontinues to assess the impact of these revisions.
•The Company has reviewed the income tax provisions of the IRA signed into law in August 2022, and does not expect any material income tax benefits as a result. Thethe Company will continue to exploreevaluate whether any of the new or renewed energy tax credits will provide a benefit.
Pipeline
Strategy and challenges The pipeline segment provides natural gas transportation, underground storage and energy-relatednon-regulated cathodic protection services, as discussed in Note 17. The segment focuses on utilizing its extensive expertise in the design, construction and operation of energy infrastructure and related services to increase market share and profitability through optimization of existing operations, organic growth and investments in energy-related assets within or in close proximity to its current operating areas. The segment focuses on the continual safety and reliability of its systems, which entails building, operating and maintaining safe natural gas pipelines and facilities. The segment continues to evaluate growth opportunities including the expansion of natural gas facilities; incremental pipeline projects; and expansion of energy-related services leveraging on its core competencies. In support of this strategy, the Company completed the following organic growth projects in 2022:
•In February 2022, the North Bakken Expansion project in western North Dakota was placed in service in February of 2022.service. 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,August 2022, the Line Section 7 Expansion project was placed in service in August of 2022 and increased system capacity by 6.7 MMcf per day.
The segment is exposed to energy price volatility which is impacted by the fluctuations in pricing, production and basis differentials of the energy market's commodities. Legislative and regulatory initiatives on increased pipeline safety regulations and environmental matters such as the reduction of methane emissions could also impact the price and demand for natural gas.
The pipeline segment is subject to extensive regulation related to certain operational and environmental compliance, cybersecurity, permit terms and system integrity. The Company continues to actively evaluate cybersecurity processes and procedures, including changes in the industry's cybersecurity regulations, for opportunities to further strengthen its cybersecurity protections. Implementation of enhancements and additional requirements is ongoing. The segment reviews and secures existing permits and easements, as well as new permits and easements as necessary, to meet current demand and future growth opportunities on an ongoing basis. Groups opposing natural gas pipelines could also cause negative impacts on the segment with increased costs, potential delays to project completion or cancellation of prospective projects.
The Company ishas continued to actively managingmanage the national supply chain challenges and inflationary costs includingbeing faced by working with its manufacturers and suppliers to help mitigate some of these risks on its business. The segment regularly experiences extended lead times on raw materials that are critical to the segment's construction and maintenance work which could delay maintenance work and construction projects potentially causing lost revenues and/or increased costs. The Company is partially mitigating these challenges by planning for extended lead times further in advance. The segment is also currently experiencing inflationary pressures with increased fuel and raw material costs, as well as other inflationary pressures.costs. The Company expects supply chain challenges and inflationary pressures to continue throughout the remainder of 2022 and intoin 2023.
The segment focuses on the recruitment and retention of a skilled workforce to remain competitive and provide services to its customers. The industry in which it operates relies on a skilled workforce to construct energy infrastructure and operate existing infrastructure in a safe manner. A shortage of skilled personnel can create a competitive labor market which could increase costs incurred by the segment. Competition from other pipeline companies can also have a negative impact on the segment.
Earnings overview - The following information summarizes the performance of the pipeline segment.
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | |
| | September 30, | | September 30, | | March 31, | |
| | | 2022 | | 2021 | | Variance | | 2022 | | 2021 | | Variance | | 2023 | | 2022 | | Variance | |
| | | (In millions) | | (In millions) |
| Operating revenues | Operating revenues | $ | 39.7 | | $ | 34.9 | | 14 | % | | $ | 114.3 | | $ | 106.7 | | 7 | % | Operating revenues | $ | 40.8 | | $ | 37.1 | | 10 | % | |
| Operating expenses: | Operating expenses: | | | | Operating expenses: | | |
| Operation and maintenance | Operation and maintenance | 14.6 | | 14.2 | | 3 | % | | 44.9 | | 45.5 | | (1) | % | Operation and maintenance | 17.5 | | 15.4 | | 14 | % | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 6.9 | | 5.2 | | 33 | % | | 20.0 | | 15.5 | | 29 | % | Depreciation, depletion and amortization | 6.9 | | 6.3 | | 10 | % | |
| Taxes, other than income | Taxes, other than income | 3.2 | | 3.2 | | — | % | | 10.0 | | 9.8 | | 2 | % | Taxes, other than income | 3.3 | | 3.5 | | (6) | % | |
| Total operating expenses | Total operating expenses | 24.7 | | 22.6 | | 9 | % | | 74.9 | | 70.8 | | 6 | % | Total operating expenses | 27.7 | | 25.2 | | 10 | % | |
| Operating income | Operating income | 15.0 | | 12.3 | | 22 | % | | 39.4 | | 35.9 | | 10 | % | Operating income | 13.1 | | 11.9 | | 10 | % | |
| Other income | Other income | .6 | | 2.8 | | (79) | % | | — | | 5.6 | | (100) | % | Other income | .7 | | .1 | | 600 | % | |
| Interest expense | Interest expense | 3.0 | | 1.7 | | 76 | % | | 8.1 | | 5.6 | | 45 | % | Interest expense | 3.3 | | 2.5 | | 32 | % | |
| Income before income taxes | Income before income taxes | 12.6 | | 13.4 | | (6) | % | | 31.3 | | 35.9 | | (13) | % | Income before income taxes | 10.5 | | 9.5 | | 11 | % | |
| Income tax expense | Income tax expense | 2.8 | | 2.8 | | — | % | | 7.0 | | 7.2 | | (3) | % | Income tax expense | 2.2 | | 2.2 | | — | % | |
| Net income | Net income | $ | 9.8 | | $ | 10.6 | | (7) | % | | $ | 24.3 | | $ | 28.7 | | (15) | % | Net income | $ | 8.3 | | $ | 7.3 | | 13 | % | |
| | Operating statistics | Operating statistics | Three Months Ended | Nine Months Ended | Operating statistics | Three Months Ended | |
| | September 30, | | March 31, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | | |
| Transportation volumes (MMdk) | Transportation volumes (MMdk) | 130.9 | | 122.0 | | 357.1 | | 351.5 | | Transportation volumes (MMdk) | 129.7 | | 110.5 | | |
| Customer natural gas storage balance (MMdk): | Customer natural gas storage balance (MMdk): | | Customer natural gas storage balance (MMdk): | | |
| Beginning of period | Beginning of period | 14.8 | | 16.0 | | 23.0 | | 25.5 | | Beginning of period | 21.2 | | 23.0 | | |
| Net injections | 13.3 | | 12.8 | | 5.1 | | 3.3 | | |
| Net withdrawal | | Net withdrawal | (12.2) | | (20.2) | | |
| End of period | End of period | 28.1 | | 28.8 | | 28.1 | | 28.8 | | End of period | 9.0 | | 2.8 | | |
Three Months Ended September 30, 2022,March 31, 2023, Compared to Three Months Ended September 30, 2021March 31, 2022 Pipeline earnings decreased $800,000increased $1.0 million as a result of:
•Revenues increased $4.8$3.7 million, primarily driven by increased transportation volume revenues,volumes, largely due to a full first quarter of benefit from the North Bakken Expansion project that was placed in service in February 2022.2022, as well as increased contracted volume commitments beginning in February 2023. The Company also benefited from slightly higher storage-related revenues, partially offsetting these increases were non-renewal of certain contracts.
•Operation and maintenance increased $400,000 primarily from higher contract services$2.1 million.
◦Primarily from:
▪Higher payroll-related costs non-regulated projectof $800,000.
▪Higher legal costs and materials, partially offset by lower payroll-related costsof $500,000, largely due to lower incentive accruals.the pending rate case.
▪Higher other costs, including materials and contract services.
•Depreciation, depletion and amortization increased $1.7 million$600,000 due to increased property, plant and equipment balances, largely related to the North Bakken Expansion project.project in service for the full quarter, as previously discussed.
•Taxes, other than income were comparable to the same period in the prior year.
•Other income decreased $2.2increased $600,000, driven primarily by higher returns of $1.0 million driven primarilyon the Company's nonqualified benefit plan investments, partially offset by lower AFUDC as a result of the completion of the North Bakken Expansion project placed in service in February 2022.
•Interest expense increased $1.3 million,$800,000, primarily from higher average interest rates and higher debt balances to fund capital expenditures and lower AFUDC as a result of the completion of the North Bakken Expansion project placed in service in February 2022.expenditures.
•Income tax expense was comparable to the same period in the prior year.
Nine Months EndedSeptember 30, 2022, Compared to Nine Months Ended September 30, 2021 Pipeline earnings decreased $4.4 million as a result of:
•Revenues increased $7.6 million.
◦Driven by increased transportation volume revenues of $11.8 million, largely due to the North Bakken Expansion project placed in service in February 2022.
◦Partially offset by:
•Lower non-regulated project revenues of $2.5 million.
•Lower storage-related revenues of $900,000.
•Lower transmission rates, due to expired negotiated contracts converted to tariff rate.
•Operation and maintenance decreased $600,000.
◦Primarily due to:
•Lower payroll-related costs of $1.7 million, largely related to lower incentive accruals.
•Lower non-regulated project costs of $1.5 million directly associated with lower non-regulated project revenues, as previously discussed.
◦Partially offset by higher contract services, materials and legal costs.
•Depreciation, depletion and amortization increased $4.5 million due to increased property, plant and equipment balances, largely related to the North Bakken Expansion project.
•Taxes, other than income were comparable to the same period in the prior year.
•Other income decreased $5.6 million, resulting from:
◦Lower AFUDC of $3.7 million as a result of the completion of the North Bakken Expansion project placed in service in February 2022.
◦Lower returns on the Company's nonqualified benefit plan investments, as discussed in Note 14.
•Interest expense increased $2.5 million, primarily due to interest associated with higher debt balances to fund capital expenditures and lower AFUDC as a result of the North Bakken Expansion project placed in service in February 2022.
•Income tax expense was comparable to the same period in the prior year.
Outlook On February 18, 2022,The Company continues to monitor and assess the FERC issuedpotential impacts of two policy statements regarding the certification of new interstate natural gas facilities. The two policy statements were subsequently converted toFERC draft policy statements byissued in the FERC on March 24,first quarter of 2022. The first draft policy statement,One is the Updated Certificate of Policy Statement, which describes how the FERC will determine whether a new interstate natural gas transportation project is required by public convenience and necessity. It includes increased focus on a project's purpose and need and the environmental impacts; as well as impacts on landowners and environmental justice communities. The FERC also clarified the updated policy statement will not apply to projects that have been filed with the FERC prior to the policy statement being finalized. The second draft policy statement, the Interim GHG Policy Statement, explains how the FERC will assess the impacts of natural gas infrastructure projects on climate change in its reviews under the National Environmental Policy Act and Natural Gas Act. The FERC invited public comment on the draft policy statements which were due April 25, 2022. The Company continues to monitor and assess these initiatives and the potential impacts they may have on its business processes, current and future projects, results of operations and disclosures.
The Company has reviewed the income tax provisions of the IRA signed into law in August 2022 and does not expect any material income tax benefits as a result. The Company has also evaluated the impacts of the methane emissions charge imposed under the IRA legislation and does not expect any material fees given the current GHG reporting thresholds. The Company continues to monitor, evaluate and implement additional GHG emissions reduction strategies, including increased monitoring frequency and emission source control technologies to minimize potential risk.
The EPA recently proposed additional rules to update, strengthen and expand standards intended to significantly reduce GHG emissions and other air pollutants from the oil and natural gas industries. The standards will apply to natural gas compressors, pneumatic controllers and pumps, fugitive emissions components and super-emitter events. The EPA projects the final rules will be issued in August 2023. Additionally, the EPA anticipates revising the current GHG reporting rules to incorporate provisions in the IRA. These revisions are anticipated to be issued later this year. The Company continues to monitor and assess the proposed rules 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. Associated natural gas production in the Bakken fell during the COVID-19 pandemic delaying previously forecasted production growth. Natural gas production has rebounded to pre-pandemic levels and drilling rig activity continues to increase.activities have increased, and the Company expects continued gradual increases over the next 2 years. The production delay, along with long-term contractual commitments on the North Bakken Expansion project placed in service in the first quarter ofFebruary 2022, has negatively impacted customer renewals of certain contracts. Bakken natural gas production outlook remains positive with continued growth expected due to new oil wells and increasing gas to oil ratios.
Increases in national and global natural gas in storage nationally, which continue to trend below the five-year average, along with global events,supply has put upwardmoderated pressure on natural gas prices and increasedprice 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 natural gas storage services.
The Company continues to focus on improving existing operations and growth opportunities through organic projects in all areas in which it operates, which includes additional projects with local distribution companies, Bakken area producers 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 approximately 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 project and received FERC's final environmental impact statement in April 2023.
On September 19, 2022, the Company filed with the FERC its prior notice application for its 2023 Line Section 27 Expansion project. This project consists of a new compressor station and ancillary facilities and is designed to increase capacity by 175 MMcf per day, which is supported by a long-term customer agreement. Construction is expected to begin in earlythe second quarter of 2023 with an anticipated completion date in late 2023.
On December 22, 2022, the Company filed with the FERC its prior notice application for its Grasslands South Expansion project. This project consists of approximately 15 miles of pipe in western North Dakota, utilizing existing capacity on its Grasslands Subsystem to a new connection with Big Horn Gas Gathering, LLC in northeastern Wyoming and ancillary facilities in North Dakota and Wyoming. A long-term customer agreement supports a design for incremental capacity of 94 MMcf per day. Construction is expected to begin in the second quarter of 2023 with an anticipated completion date in late 2023.
On March 6, 2023, the Company filed with the FERC its prior notice application for its Line Section 15 Expansion project. Long-term customer agreements support a design for incremental capacity of 25 MMcf per day. This project consists of additional compression, uprating operational pressure of approximately 23 miles of pipe in western South Dakota and additional ancillary facilities. Construction is expected to begin in the second quarter of 2023, pending regulatory approvals, with an anticipated completion date in late 2023.
In additionSee Capital Expenditures within this section for information on the expenditures related to the Wahpeton Expansion and 2023 Line Section 27 Expansion projects, the Company has also entered into long-term customer agreements for the construction of two additionalthese growth projects, which are dependent on regulatory approvals and anticipated to be completed in 2023. Estimated capital expenditures for these projects is approximately $65 million and is included in the pipeline segment's estimated capital expenditures for 2022 and 2023. The projects are anticipated to add total incremental system capacity of 119 MMcf per day.projects.
Construction Materials and Contracting
Strategy and challenges The segment is a leading aggregates-based construction materials and contracting segment provides an integrated set of aggregate-based services,service provider in the United States, as discussed in Note 17. The segment focuses on continued growth and maximizing its vertical integration, leveraging its core values to be a supplier of choice in all its markets. The segment is also focused on its commitment to its stakeholders by operating with integrity and always striving for excellence; development and recruitment of talented employees; sustainable practices to create value for the communities it serves; being the provider of choice in midsize, high-growth strategic markets located near major transportation corridors and desirable mid-sized metropolitan areas;markets; strengthening the long-term, strategic aggregate reserve position through available purchase and/or lease opportunities;opportunities in existing and new geographies; and enhancing profitability through cost containment, margin disciplineits supply chain to provide reliable, timely and vertical integrationefficient services to its end customers. As previously discussed, the Company is pursuing a tax-free spinoff of the segment's operations; developmentconstruction materials and recruitmentcontracting segment, and the separation is expected to be completed in May of talented employees; and continued growth through organic and strategic acquisition opportunities.2023.
A key element of the Company's long-term strategy for this businessThe segment is to further expand its market presence in the higher-margin materials business (rock, sand, gravel, ready-mix concrete, asphalt concrete and related products), complementing and expanding on the segment's expertise. The Company's continued acquisition activity supports this strategy.
As one of the country's largestleading producers of crushed stone and sand and gravel, producers, the segmentand 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 permit expansion and acquisition opportunities to replace the reserves.
The segment's management continually monitors its operating margins and has been proactive in addressingapplying strategies to address the inflationary impacts seen across the United States. The Company has increased its product pricing where necessaryand continues to implement cost savings initiatives to mitigate thethese effects on the segment's gross margin. Due to existing contractual provisions, there can be a lag between the announced price increases and the time when they can be fully recognized. The Company will continue to evaluate futurefurther price increases on a regular cadence in an attempt to keep pace withstay ahead of inflationary pressures as they are expected to continue throughout the remainder of 2022 and into 2023.enhance stockholder value.
The segment operates in geographically diverse and competitive markets that can put negative pressure on the segment's operatingyet strives to maximize efficiencies, including transportation costs and economies of scale, to maintain strong margins. The segment's margins can also be impacted byexperience negative pressure from competition, as well as impacts of the volatility in the cost of raw materials such as diesel fuel, gasoline, asphalt oil, cement and steel, with diesel fuel and asphalt oil costs having the most significant impact on the segment's recent results. Such volatility and inflationary pressures may continue to have an impact on the segment's margins, including fixed-price construction contracts that are particularly
vulnerable to the volatility of energy and material prices. These increases are partially offset by mitigation measures implemented by the Company, including price increases, escalation clauses in contracting services contracts, pre-purchased materials and other cost savings initiatives. While the Company has experienced some supply chain constraints, the Company hasit continues to have good relationships with its suppliers and has not experienced significantany material adverse impacts of shortages or delays on materials or experienced any material adverse impacts to its results of operations.materials. 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's operations can also be significantly impacted by favorable and unfavorable weather conditions. Unseasonably wet and/or cold weather in the states it operates in can delay the start to construction season or cause temporary delays on specific projects, while unseasonably dry or warm weather in the states it operates in can allow for an early start to the construction season or allow for early completions on specific projects. Either of these conditions can impact both its construction materials sales and contracting services revenues. In early 2023, the western part of the United States had near record levels of precipitation, which impacted the segment's results. Other variables that can impact the segment’s margins include 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. Accordingly, operating results in any particular period may not be indicative of the results that can be expected for any other period.
As a people first company, the segment continually takes steps to address the challenge of recruitment and retention of employees. In order to help attract new workers to the construction industry and enhance the skills of its current employees, the Company has completed construction ofconstructed and operates a corporate-wide state-of-the-art training centerfacility located in the Pacific Northwest. The training facility offers hands-on training for heavy equipment operators and truck drivers, as well as leadership and safety training. Trends in the labor market include an aging workforce and labor availability issues, and most of the markets the segment operates in have experienced labor shortages, largely truck drivers, causing increased labor-related costs and delays or inefficiencies on projects. The new training facility is expected to help address some of these challenges. The Company continues to monitor the labor markets and assess additional opportunities to enhance and support its workforce. Despite these efforts, the Company expects labor costs to continue to increase based on the increased demand for services and, to a lesser extent, the recent escalated inflationary environment in the United States.
Earnings overview - The following information summarizes the performance of the construction materials and contracting segment.
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | |
| | September 30, | | September 30, | | March 31, | |
| | | 2022 | | 2021 | | Variance | | 2022 | | 2021 | | Variance | | 2023 | | 2022 | | Variance | |
| | | (In millions) | | (In millions) |
| Operating revenues | Operating revenues | $ | 975.4 | | $ | 831.3 | | 17 | % | | $ | 1,997.2 | | $ | 1,730.8 | | 15 | % | Operating revenues | $ | 307.9 | | $ | 310.0 | | (1) | % | |
| Cost of sales: | Cost of sales: | | | | Cost of sales: | | |
| Operation and maintenance | Operation and maintenance | 758.7 | | 636.3 | | 19 | % | | 1,633.9 | | 1,376.5 | | 19 | % | Operation and maintenance | 265.8 | | 271.6 | | (2) | % | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 29.2 | | 24.5 | | 19 | % | | 84.9 | | 71.1 | | 19 | % | Depreciation, depletion and amortization | 28.4 | | 27.3 | | 4 | % | |
| Taxes, other than income | Taxes, other than income | 15.3 | | 13.9 | | 10 | % | | 41.3 | | 37.6 | | 10 | % | Taxes, other than income | 9.6 | | 10.0 | | (4) | % | |
| Total cost of sales | Total cost of sales | 803.2 | | 674.7 | | 19 | % | | 1,760.1 | | 1,485.2 | | 19 | % | Total cost of sales | 303.8 | | 308.9 | | (2) | % | |
| Gross margin | 172.2 | | 156.6 | | 10 | % | | 237.1 | | 245.6 | | (3) | % | |
| Gross profit | | Gross profit | 4.1 | | 1.1 | | 273 | % | |
| Selling, general and administrative expense: | Selling, general and administrative expense: | | | | Selling, general and administrative expense: | | |
| Operation and maintenance | Operation and maintenance | 22.9 | | 20.9 | | 10 | % | | 71.6 | | 66.8 | | 7 | % | Operation and maintenance | 43.6 | | 40.7 | | 7 | % | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 1.2 | | 1.0 | | 20 | % | | 3.7 | | 3.1 | | 19 | % | Depreciation, depletion and amortization | 1.2 | | 1.1 | | 9 | % | |
| Taxes, other than income | Taxes, other than income | .7 | | 1.0 | | (30) | % | | 4.7 | | 4.4 | | 7 | % | Taxes, other than income | 3.9 | | 3.9 | | — | % | |
| Total selling, general and administrative expense | Total selling, general and administrative expense | 24.8 | | 22.9 | | 8 | % | | 80.0 | | 74.3 | | 8 | % | Total selling, general and administrative expense | 48.7 | | 45.7 | | 7 | % | |
| Operating income | 147.4 | | 133.7 | | 10 | % | | 157.1 | | 171.3 | | (8) | % | |
| Operating loss | | Operating loss | (44.6) | | (44.6) | | — | % | |
| Other income (expense) | Other income (expense) | (1.3) | | (.3) | | 333 | % | | (6.1) | | .8 | | (863) | % | Other income (expense) | .9 | | (2.0) | | 145 | % | |
| Interest expense | Interest expense | 8.8 | | 4.8 | | 83 | % | | 21.5 | | 14.4 | | 49 | % | Interest expense | 9.5 | | 5.2 | | 83 | % | |
| Income before income taxes | 137.3 | | 128.6 | | 7 | % | | 129.5 | | 157.7 | | (18) | % | |
| Income tax expense | 34.5 | | 32.3 | | 7 | % | | 34.2 | | 40.8 | | (16) | % | |
| Net income | $ | 102.8 | | $ | 96.3 | | 7 | % | | $ | 95.3 | | $ | 116.9 | | (18) | % | |
| Loss before income taxes | | Loss before income taxes | (53.2) | | (51.8) | | 3 | % | |
| Income tax benefit | | Income tax benefit | (11.9) | | (11.8) | | 1 | % | |
| Net loss | | Net loss | $ | (41.3) | | $ | (40.0) | | 3 | % | |
*The Company identified certain costs that were reclassified from cost of sales to selling, general and administrative expense of $16.3 million for the three months ended March, 31, 2022. The reclassification had no impact to net income.
| | Operating statistics | Operating statistics | Revenues | | Gross margin | Operating statistics | Revenues | | Gross profit |
| | Three Months Ended | Nine Months Ended | | Three Months Ended | Nine Months Ended | | Three Months Ended | | | Three Months Ended | |
| | September 30, | | September 30, | | March 31, | | | March 31, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | | | | 2023 | | 2022 | | |
| | (In millions) | | (In millions) |
| Aggregates | Aggregates | $ | 171.8 | | $ | 144.2 | | $ | 385.8 | | $ | 339.7 | | | $ | 34.4 | | $ | 28.9 | | $ | 50.2 | | $ | 43.7 | | Aggregates | $ | 83.5 | | $ | 77.6 | | | | $ | 2.3 | | $ | .4 | | |
| Ready-mix concrete | | Ready-mix concrete | 96.8 | | 108.5 | | | | 8.8 | | 9.3 | | |
| Asphalt | Asphalt | 205.5 | | 153.1 | | 345.2 | | 268.9 | | | 28.1 | | 24.7 | | 32.5 | | 33.4 | | Asphalt | 13.6 | | 18.1 | | | | (6.0) | | (5.2) | | |
| Ready-mix concrete | 198.9 | | 182.4 | | 475.5 | | 446.2 | | | 29.8 | | 25.1 | | 54.1 | | 50.7 | | |
| Other products* | Other products* | 166.7 | | 138.1 | | 328.5 | | 278.1 | | | 44.3 | | 43.3 | | 42.7 | | 55.7 | | Other products* | 38.6 | | 37.5 | | | | (6.3) | | (11.7) | | |
| Contracting services | Contracting services | 492.2 | | 415.1 | | 937.2 | | 792.0 | | | 35.6 | | 34.6 | | 57.6 | | 62.1 | | Contracting services | 115.0 | | 114.3 | | | | 5.3 | | 8.3 | | |
| Intracompany eliminations | Intracompany eliminations | (259.7) | | (201.6) | | (475.0) | | (394.1) | | | — | | — | | — | | — | | Intracompany eliminations | (39.6) | | (46.0) | | | | — | | — | | |
| | $ | 975.4 | | $ | 831.3 | | $ | 1,997.2 | | $ | 1,730.8 | | | $ | 172.2 | | $ | 156.6 | | $ | 237.1 | | $ | 245.6 | | | $ | 307.9 | | $ | 310.0 | | | | $ | 4.1 | | $ | 1.1 | | |
*Other products includes cement, asphalt oil, merchandise, fabric and spreading and other products that individually are not considered to be a major line of business for the segment.
| | | Three Months Ended | Nine Months Ended | | Three Months Ended | |
| | September 30, | | March 31, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | | |
| Sales (thousands): | Sales (thousands): | | Sales (thousands): | | |
| Aggregates (tons) | Aggregates (tons) | 12,399 | | 11,346 | | 26,890 | | 25,687 | | Aggregates (tons) | 4,868 | | 4,970 | | |
| Ready-mix concrete (cubic yards) | | Ready-mix concrete (cubic yards) | 561 | | 734 | | |
| Asphalt (tons) | Asphalt (tons) | 3,550 | | 3,290 | | 5,967 | | 5,675 | | Asphalt (tons) | 179 | | 316 | | |
| Ready-mix concrete (cubic yards) | 1,306 | | 1,350 | | 3,179 | | 3,283 | | |
| Average selling price: | Average selling price: | | Average selling price: | | |
| Aggregates (per ton) | Aggregates (per ton) | $ | 13.86 | | $ | 12.71 | | $ | 14.35 | | $ | 13.22 | | Aggregates (per ton) | $ | 17.16 | | $ | 15.62 | | |
| Ready-mix concrete (per cubic yard) | | Ready-mix concrete (per cubic yard) | $ | 172.64 | | $ | 147.89 | | |
| Asphalt (per ton) | Asphalt (per ton) | $ | 57.90 | | $ | 46.55 | | $ | 57.85 | | $ | 47.38 | | Asphalt (per ton) | $ | 76.07 | | $ | 57.21 | | |
| Ready-mix concrete (per cubic yard) | $ | 152.34 | | $ | 135.10 | | $ | 149.59 | | $ | 135.93 | | |
*Average selling price includes freight and delivery and other revenues.
Three Months Ended September 30, 2022,March 31, 2023, Compared to Three Months Ended September 30, 2021March 31, 2022 Construction materials and contracting's earningsseasonal loss increased $6.5$1.3 million as a result of:
•RevenuesRevenue increased $144.1decreased $2.1 million.
◦Primarily the result of increased revenues across all product lines.of:
•▪The Company benefited from higher average selling pricesReady-mix sales volumes decreased $29.9 million, largely a result of nearly $100 millionunfavorable weather across all product lines. Also positively impacting materials revenues were:most states of operation.
◦▪Increased aggregatesAsphalt sales volumes due to additional revenue from recent acquisitions, includingdecreased $10.4 million, largely a result of unfavorable weather in the benefitPacific and Northwest states as well as the absence of approximately 700,000 tons,impact projects and less available paving work in certain regions.
▪Aggregates sales volumes decreased $1.8 million, largely a result of unfavorable weather in the Pacific and North Central states, partially offset by higher volumes in certain markets as a result of higher demand.
◦Increased asphalt sales volumes, largely from higher demandregions due to more available public work in Minnesota of 198,000 tonsdemand by data center, commercial and Montana and Wyoming of 82,000 tons. Also contributing was higher sales volumes due to the recent acquisitions, which contributed an additional 76,000 tons.
◦Partially offsetting these increases were lower ready-mix sales volumes as a result of lower demand in certain regions.
•Increased contracting revenues due to more available work, strong demand in some regions and revenue from recent acquisitions of $15.8 million.residential customers.
◦Partially offset by:
•▪An increase in internal materials sales used in otherHigher average selling prices across most product lines and contracting services provided.of nearly $33.0 million, largely in response to inflationary pressures.
▪Contracting revenues increased slightly due to more available work in certain regions being mostly offset by delays in the Pacific states due to unfavorable weather.
•Gross marginprofit increased $15.6$3.0 million, directly resulting from theprimarily due to higher revenues previously discussed,average selling prices across most product lines as well as cost savings initiatives, partially offset by higher operatingcement, labor, natural gas and diesel costs across the business primarilywhich increased year over year on a cost-per-unit basis due to inflation. Gross profit was also impacted by unfavorable weather in certain regions, as a result of inflationary pressures, including diesel fuel costs of $12.9 million and higher labor, materials, equipment and production costs.previously discussed, resulting in less hours worked.
•Selling, general and administrative expense increased $1.9 million as a$3.0 million.
◦Largely the result of increasedof:
▪Increased payroll-related costs partiallyof $3.9 million higher, largely due to inflationary pressures, offset in part by decreased health care costs of $3.1 million resulting from inflationary pressures.a change in accounting election.
▪Increased professional services of $900,000, primarily for one-time strategic initiative costs incurred in 2023.
▪Increased expected credit losses of $700,000 associated with an increase in receivable balances over 90 days and absence of bad debt recoveries in 2022.
▪Increased other costs related to corporate costs, insurance and safety training.
◦Offset in part by higher net gains on asset sales of $1.4 million.
•Other expenseincome (expense) increased $1.0$2.9 million due to lowerhigher returns on the Company's nonqualified benefit plan investments, as discussed in Note 14.
•Interest expense increased $4.0$4.3 million largely the result of higher debt balances, largely to fund recent acquisitions and higher working capital needs, and higher average interest rates.
•Income tax expense increased $2.2 million, largely duebenefit was comparable to higher income before income taxes.
Nine Months Ended September 30, 2022, Compared to Nine Months Ended September 30, 2021 Construction materials and contracting's earnings decreased $21.6 million as a result of:
•Revenuesincreased $266.4 million.
◦Primarilysame period in the result of increased revenues across all product lines.
•The Company benefited from higher average selling prices of nearly $175 million across all product lines. Also impacting materials revenues were:
◦Increased asphalt sales volumes of 294,000 tons from recent acquisitions.
◦Increased aggregate sales volumes of 1.7 million tons from recent acquisitions. Also contributing was strong market demand in Idaho and Montana.
◦Increased other revenues from other retail and cement revenues.
◦Lower ready-mix concrete sales volumes in Oregon, Hawaii and Alaska due to the decreased demand and the absence of certain large projects, and higher delivery costs in South Dakota.
•Increased contracting revenue across all regions as a result of more available work and increased pricing related to inflationary costs, as well as revenues from recent acquisitions.
◦These increases were partially offset by:
•An increase in internal materials sales used in other product lines and contracting services provided.
•Gross margin decreased $8.5 million.
◦Primarily the result of higher operating costs across the business primarily as a result of inflationary pressures, including diesel fuel costs of $30.9 million and higher labor, materials, repair and maintenance, equipment, delivery and production costs. In addition, contracting services margins decreased from the mix of work and project delays.
◦Partially offset by increased margins for aggregates and ready-mix as a result of the increased revenues previously discussed.
•Selling, general and administrative expense increased $5.7 million, largely due to:
◦Increased payroll-related costs of $2.9 million, partially resulting from inflationary pressures.
◦Higher professional fees of $800,000, partially due to increased audit fees and acquisition-related costs.
◦Lower recovery of bad debt expense of $800,000.
◦Higher depreciation and amortization of $600,000, primarily due to the completion of the training center.
◦Increased technology expenses.
•Other income (expense) decreased $6.9 million, mainly due to lower returns on the Company's nonqualified benefit plan investments, as discussed in Note 14.
•Interest expense increased $7.1 million, largely the result of higher debt balances to fund recent acquisitions and higher working capital needs.
•Income tax expense decreased $6.6 million, largely due to lower income before income taxes.prior year.
Outlook In August 2022, the Company announced its intent to separate this segment into a standalone publicly traded company. The separation is expected to result in two independent, publicly traded companies: (1) MDU Resources Group, Inc., the existing company and (2) Knife River, a construction materials and contracting services company. The separation is expected to be completed in May of 2023 and is expected to unlock the inherent value within the two companies, which each have unique growth prospects and investment opportunities. 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. For a complete discussion of all the conditions to and the risk and uncertainties associated with the separation and distribution, see Part II, Item IA. Risk Factors in this quarterly report and Part I, Item 1A - Risk Factors in the 2022 Annual Report.
Funding for public projects is dependent on federal and state funding, such as appropriations to the Federal Highway Administration. 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,IRA, was enacted in the fourth quarter of 2021. This initiative2021 and is providing long-term opportunities by designating $119 billion for the repair and rebuilding of roads and bridges across the Company's footprint. In addition, the IRA provides $369 billion in new funding for clean energy programs. These programs include new tax incentives for solar, battery storage and hydrogen development along with funding to expand the production of electric vehicles and the build out of infrastructure to support electric vehicles. In addition to federal funding, 1311 out of the 14 of the states in which the Company operates have implemented their own funding mechanisms for public projects, including projects related to highways, airports and other public infrastructure. The Company continues to monitor the implementationprogress 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 2021,2022, the Company made strategic purchases and completed acquisitions that support the Company's long-term strategy to expand its market presencean acquisition in the higher-margin materials markets. The Company continues to evaluate additional acquisition opportunities. For more information on the Company's business combinations, see Note 10.9. In 2022, the Company is alsobegan upgrading its prestress facility located in Spokane, Washington. The state of the artstate-of-the-art facility is expected to be in service in December 2022.completed during the first half of 2023. The facility is expected to be a platform for growth through improved productivity and quality, which will help meet strong market demand for prefabricated concrete solutions.
The construction materials and contracting segment's backlog remainedremains strong as it begins to enter its peak construction season. Contracting services backlog was $958.5 million at September 30, 2022, at $895.0 million, asMarch 31, 2023, compared to contracting services backlog of $651.7$778.0 million at September 30, 2021.March 31, 2022. A significant portion of the Company's backlog at March 31, 2023, relates to publicly funded projects, largely street and highway construction projects.projects, which are primarily driven by public work projects for state departments of transportation. Period over period increases or decreases in backlog cannot be used as an indicator of future revenues or net income. Of the $895.0 million of backlog at September 30, 2022, the Company expects to complete an estimated $820.5 million during the next 12 months. While the Company believes the current backlog of work remains firm, prolonged delays in the receipt of critical supplies and materials or continued increases to pricing could result in customers seeking to delay or terminate existing or pending agreements. Factors noted in Part I, Item 1A. Risk Factors in the 20212022 Annual Report can cause revenues to be realized in periods and at levels that are different from originally projected.
The labor contracts that the construction materials and contracting services segment waswere negotiating at December 31, 2021,2022, as reported in Items 1 and 2 - Business Properties - General in the 20212022 Annual Report, have been ratified.
Construction Services
Strategy and challenges The construction services segment provides electrical and mechanical and transmission and distribution specialty contracting services, as discussed in Note 17. The construction services segment focuses on safely executing projects; providing a superior return on investment by building new and strengthening existing customer relationships; ensuring quality service; effectively controlling costs; retaining, developing and recruiting talented employees; growing through organic and strategic acquisition opportunities; and focusing efforts on projects that will permit higher margins while properly managing risk. The growth experienced by the segment in recent years is due in part to itsthe project awards in the markets served and the 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 competitivethe markets in which it operates, including those described in Part I, Item 1A. Risk Factors in the 20212022 Annual Report. These factors, and those noted below, have caused fluctuations in revenues, gross margins and earnings in the past and are likely to cause fluctuations in the future.
•Revenue mix and impact on margins. The mix of revenues based on the types of services the segment provides can impact margins as certain industries and services provide higher margin opportunities. Larger or more complex projects typically result in higher margin opportunities since the segment assumes a higher degree of performance risk and there is greater utilization of the segment's resources for longer construction timelines. However, larger or more complex projects can have a higher risk of regulatory and seasonal or cyclical delay. Project schedules fluctuate, which can affect the amount of work performed in a given period. Smaller or less complex projects typically have a greater number of companies competing for them, and competitors at times may be more aggressive when pursuing available work. A greater percentage of smaller scale or less complex work in a given period could negatively impact margins due to the inefficiency of transitioning between a greater number of smaller projects versus continuous production on a few larger projects.
•Project variability and performance. Margins for a single project may fluctuate period to period due to changes in the volume or type of work performed, the pricing structure under the project contract or job productivity. Productivity and performance on a project can vary period to period based on a number of factors, including unexpected project difficulties; unexpected project site conditions; project location, including locations with challenging operating conditions or difficult geographic characteristics; whether the work is on an open or encumbered right of way; inclement weather or severe weather events; environmental restrictions or regulatory delays; political or legal challenges related to a project; and the performance of third parties. In addition, the type of contract can impact the margin on a project. Under fixed-price contracts, which are more common with larger or more complex projects, the segment assumes risk related to project estimates versus execution. Revenues under this type of contract can vary, sometimes significantly, from original projects due to additional project complexity; timing uncertainty or extended bidding; extended regulatory or permitting processes; and other factors, which can result in a reduction in profit or losses on a project.
•Subcontractor work and provision of materials. Some work under project contracts is subcontracted out to other companies and margins on subcontractor work is generally lower than work performed by the Company. Increased subcontractor work in a given period may therefore result in lower margins. In addition, inflationary or other pressures may increase the cost of materials under fixed-price contracts and may result in decreased margins on the project. The Company has worked to implement provisions in project contracts to allow for the pass-through of inflationary costs to customers where feasible and will continue to do so to mitigate the impacts.
The segment's management continually monitors its operating margins and has been proactive in addressingattempting to mitigate the inflationary impacts seen across the United States. The segment is currently experiencing increasedcontinued labor constraints and changing fuel and material costs, as well as impacts from delays in the national supply chain. The segment is working with suppliers and providers of goods and services in advance of
construction to secure pricing and reduce delays for goods and services. The inflationary costs and national supply chain challenges experienced by the segment have increased costs but have not had significant impacts to the procurement of project materials. 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. These increases are partially offset by mitigation measures implemented by the Company, including escalation clauses in contracts, pre-purchased materials and other cost savings initiatives. The segment also continues recruitment and retention efforts to attract and retain employees. The Company expects these inflationary pressures and national supply chain challenges to continue throughout the remainder of 2022 and into 2023.continue. 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 trendsChallenges faced by the Company to ensure available specialized labor resources, 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 the 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 | | Nine Months Ended | | Three Months Ended | |
| | September 30, | | September 30, | | March 31, | |
| | | 2022 | | 2021 | | Variance | | 2022 | | 2021 | | Variance | | 2023 | | 2022 | | Variance | |
| | | (In millions) | | (In millions) |
| Operating revenues | Operating revenues | $ | 737.0 | | $ | 514.8 | | 43 | % | | $ | 1,975.1 | | $ | 1,558.9 | | 27 | % | Operating revenues | $ | 754.3 | | $ | 552.6 | | 37 | % | |
| Cost of sales: | Cost of sales: | | | | Cost of sales: | | |
| Operation and maintenance | Operation and maintenance | 651.8 | | 441.5 | | 48 | % | | 1,708.0 | | 1,310.7 | | 30 | % | Operation and maintenance | 653.9 | | 471.1 | | 39 | % | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 4.3 | | 3.9 | | 10 | % | | 12.6 | | 11.8 | | 7 | % | Depreciation, depletion and amortization | 4.2 | | 4.1 | | 2 | % | |
| Taxes, other than income | Taxes, other than income | 20.2 | | 14.2 | | 42 | % | | 60.5 | | 49.9 | | 21 | % | Taxes, other than income | 28.2 | | 19.0 | | 48 | % | |
| Total cost of sales | Total cost of sales | 676.3 | | 459.6 | | 47 | % | | 1,781.1 | | 1,372.4 | | 30 | % | Total cost of sales | 686.3 | | 494.2 | | 39 | % | |
| Gross margin | 60.7 | | 55.2 | | 10 | % | | 194.0 | | 186.5 | | 4 | % | |
| Gross profit | | Gross profit | 68.0 | | 58.4 | | 16 | % | |
| Selling, general and administrative expense: | Selling, general and administrative expense: | | | | Selling, general and administrative expense: | | |
| Operation and maintenance | Operation and maintenance | 23.5 | | 23.0 | | 2 | % | | 76.1 | | 71.2 | | 7 | % | Operation and maintenance | 29.9 | | 26.0 | | 15 | % | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 1.2 | | 1.0 | | 20 | % | | 3.3 | | 3.4 | | (3) | % | Depreciation, depletion and amortization | 1.3 | | 1.1 | | 18 | % | |
| Taxes, other than income | Taxes, other than income | 1.1 | | 1.1 | | — | % | | 4.0 | | 3.7 | | 8 | % | Taxes, other than income | 1.6 | | 1.8 | | (11) | % | |
| Total selling, general and administrative expense | Total selling, general and administrative expense | 25.8 | | 25.1 | | 3 | % | | 83.4 | | 78.3 | | 7 | % | Total selling, general and administrative expense | 32.8 | | 28.9 | | 13 | % | |
| Operating income | Operating income | 34.9 | | 30.1 | | 16 | % | | 110.6 | | 108.2 | | 2 | % | Operating income | 35.2 | | 29.5 | | 19 | % | |
| Other income | Other income | 3.5 | | .9 | | 289 | % | | 4.6 | | 2.6 | | 77 | % | Other income | 2.8 | | .1 | | 2700 | % | |
| Interest expense | Interest expense | 1.7 | | .9 | | 89 | % | | 3.8 | | 2.6 | | 46 | % | Interest expense | 3.7 | | .9 | | 311 | % | |
| Income before income taxes | Income before income taxes | 36.7 | | 30.1 | | 22 | % | | 111.4 | | 108.2 | | 3 | % | Income before income taxes | 34.3 | | 28.7 | | 20 | % | |
| Income tax expense | Income tax expense | 8.7 | | 7.0 | | 24 | % | | 27.6 | | 26.4 | | 5 | % | Income tax expense | 8.2 | | 7.4 | | 11 | % | |
| Net income | Net income | $ | 28.0 | | $ | 23.1 | | 21 | % | | $ | 83.8 | | $ | 81.8 | | 2 | % | Net income | $ | 26.1 | | $ | 21.3 | | 22 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating Statistics | Revenues | | Gross Margin |
| Three Months Ended | Nine Months Ended | | Three Months Ended | Nine Months Ended |
| September 30, | September 30, | | September 30, | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 | | | 2022 | | 2021 | | 2022 | | 2021 | |
| (In millions) |
| Electrical & mechanical | | | | | | | | | |
| Commercial | $ | 276.6 | | $ | 143.2 | | $ | 706.6 | | $ | 457.0 | | | $ | 21.8 | | $ | 20.8 | | $ | 67.2 | | $ | 56.7 | |
| Industrial | 132.3 | | 99.8 | | 339.4 | | 350.2 | | | 11.3 | | 7.5 | | 33.4 | | 37.3 | |
| Institutional | 58.9 | | 36.3 | | 155.0 | | 108.2 | | | 1.0 | | (1.4) | | 2.3 | | 2.0 | |
| Renewables | 43.4 | | 2.1 | | 122.8 | | 4.7 | | | (3.9) | | .2 | | .1 | | .6 | |
| Service & other | 35.3 | | 38.2 | | 127.0 | | 106.2 | | | 3.7 | | 3.8 | | 14.8 | | 13.7 | |
| 546.5 | | 319.6 | | 1,450.8 | | 1,026.3 | | | 33.9 | | 30.9 | | 117.8 | | 110.3 | |
| Transmission & distribution | | | | | | | | | |
| Utility | 179.6 | | 168.6 | | 477.5 | | 465.6 | | | 25.8 | | 20.8 | | 72.2 | | 68.5 | |
| Transportation | 16.1 | | 30.0 | | 59.5 | | 78.2 | | | 1.0 | | 3.5 | | 4.0 | | 7.7 | |
| 195.7 | | 198.6 | | 537.0 | | 543.8 | | | 26.8 | | 24.3 | | 76.2 | | 76.2 | |
| Intrasegment eliminations | (5.2) | | (3.4) | | (12.7) | | (11.2) | | | — | | — | | — | | — | |
| $ | 737.0 | | $ | 514.8 | | $ | 1,975.1 | | $ | 1,558.9 | | | $ | 60.7 | | $ | 55.2 | | $ | 194.0 | | $ | 186.5 | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating Statistics | Revenues | | Gross profit |
| Three Months Ended | | | Three Months Ended | |
| March 31, | | | March 31, | |
| 2023 | | 2022 | | | | | 2023 | | 2022 | | | |
| (In millions) |
| Electrical & mechanical | | | | | | | | | |
| Commercial | $ | 346.1 | | $ | 188.1 | | | | | $ | 30.0 | | $ | 20.3 | | | |
| Industrial | 127.7 | | 95.0 | | | | | 13.1 | | 9.8 | | | |
| Institutional | 55.5 | | 40.7 | | | | | 1.7 | | .6 | | | |
| Renewables | 11.7 | | 24.9 | | | | | (.5) | | 1.0 | | | |
| Service & other | 52.1 | | 46.5 | | | | | 5.6 | | 5.7 | | | |
| 593.1 | | 395.2 | | | | | 49.9 | | 37.4 | | | |
| Transmission & distribution | | | | | | | | | |
| Utility | 152.4 | | 143.0 | | | | | 17.9 | | 19.9 | | | |
| Transportation | 12.5 | | 17.9 | | | | | .2 | | 1.1 | | | |
| 164.9 | | 160.9 | | | | | 18.1 | | 21.0 | | | |
| Intrasegment eliminations | (3.7) | | (3.5) | | | | | — | | — | | | |
| $ | 754.3 | | $ | 552.6 | | | | | $ | 68.0 | | $ | 58.4 | | | |
Three Months Ended September 30, 2022,March 31, 2023, Compared to Three Months Ended September 30, 2021March 31, 2022 Construction services earnings increased $4.9$4.8 million as a result of:
•Revenues increased $222.2$201.7 million.
◦Largely due to higher electrical and mechanical workloads as a result of:
•▪Higher commercial workloads driven largely by a $97.5$126.7 million increase in the hospitality sector and a $49.0 million increase in data center work primarily from the progress on large ongoing projects; partially offset by a $30.0$13.0 million increasedecrease in data center work from the number of and progress on projects started during the quarter; and an increase in the general commercial sector.sector workloads.
•Higher renewable workloads of $41.3 million due to the timing of and progress on commercial renewable projects.
•▪Higher industrial workloads in the high-tech sectorand government sectors of $22.1 million, the general industrial sector of $14.8$29.1 million and the maintenance sector of $14.7$5.2 million, all of which benefited from the mix of project work;respectively; partially offset by lower refinerymaintenance workloads.
•▪Higher institutional workloads, primarily in the healthcare sector of $11.2$9.5 million and the education sector of $8.4$4.6 million.
▪Higher service workloads of $5.6 million and the government sector, all of which benefited from the mixrepair and maintenance for electrical and mechanical projects.
▪Offset partially by lower renewable workloads of project work in$13.0 million due to the quarter.completion of renewable projects.
◦Also contributing were higher utility workloads as a result of increases in the electrical sectorstorm work of $14.1$18.6 million, the underground sector of $11.9$5.5 million and the substation sector of $5.6$3.4 million; offset by lower workloads in the electrical sector of $21.4 million and the distribution sector all of which benefited from the project timing. These were offset by lower transportation workloads for street lighting also due to project timing.$4.4 million.
•Gross marginprofit increased $5.5$9.6 million.
◦Largely due to:
•Higher marginsto higher gross profit on electrical and mechanical work in the commercial, industrial and institutional and commercial sectorssector of $14.1 million due to higher revenues and project mix, as well as gains associated with completed commercial jobs.
•Higher utilityoffset partially by lower renewable margins from the absence of $7.8 millionhigher margin work resulting from the mixtiming of customer projects, partially offset by lower storm margins.project completions and project starts.
◦Partially offset by:
•▪Higher overall operating costs related to inflationary pressures, including increased fuellabor, subcontractor and material costs and higher labor costs from decreased efficienciesequipment costs.
▪Losses of $6.5 million on certain industrial and institutional projects.
•▪Lower transmission and distribution margins on renewable work, partly due to revisions in estimates onfrom the absence of higher margin utility projects as a project due to delaysresult of the type of customer projects and labor impacts.
•Lowerlower transportation margins, primarily forin the street lighting and electrical sectors due to customer demand.sector.
•Selling, general and administrative expense increased $700,000.$3.9 million.
◦Primarily due to:
•▪Increased payroll-related costs of $2.0 million due to increased support functions for revenue growth, as previously discussed.
▪Increased reserve for uncollectible accounts of $600,000.$800,000 due to economic factors and an increase in receivable balances over 90 days.
•▪Increased office expenses of $400,000
◦Partially offset by decreased payroll-related costs, primarily due to lower incentive accruals.$700,000.
•Other income increased $2.6$2.7 million, primarily related to the Company's joint ventures.
•Interest expense increased $800,000$2.8 million due to higher working capital needs.needs and higher average interest rates.
•Income tax expense increased $1.7 million$800,000 primarily resulting from an increase in income before income taxes.
Nine Months Ended September 30, 2022, Compared to Nine Months Ended September 30, 2021 Construction services earnings increased $2.0 million as a result of:
•Revenues increased $416.2 million.
◦Largely due to higher electrical and mechanical workloads as a result of:
•Higher commercial workloads driven largely by a $127.5 million increase in the hospitality sector as a result of progress on large projects; a $58.3 million increase in the data center sector from the number of and progress on projects; and an increase in general commercial workloads as a result of project mix and the progress on contracts.
•Higher renewable workloads due to the timing of and progress on commercial renewable projects.
•Higher institutional workloads, with the education sector contributing an additional $21.0 million, the healthcare sector contributing an additional $18.4 million, and the government sector contributing $4.9 million, all of which were the result of increased activity from project mix and progress on projects.
•Higher service workloads due to the demand for the repair and maintenance of electrical and mechanical systems.
◦Also contributing were higher utility workloads, primarily from an increase in the electrical sector of $32.6 million, the underground sector of $17.3 million, the distribution and substation sectors of $16.1 million and the telecommunications sector of $5.6 million, all of which benefited from increased customer released projects, partially offset by lower transmission and storm work from decreased customer demand.
◦Partially offset by:
•Lower transportation workloads, primarily in the street lighting sector of $25.3 million due to lower demand, partially offset by higher traffic signalization and government workloads.
•Lower industrial workloads, primarily in the high-tech sector of $26.5 million, largely due to the completion of a large high-tech project as well as the timing of other projects, and the maintenance sector of $8.4 million related to the timing of projects. Partially offsetting these decreases was an increase in general industrial sector from project mix and timing.
•Gross margin increased $7.5 million.
◦Largely due to:
•Higher commercial and service margins primarily the result of project mix and progression on projects.
•Higher utility margins from the mix of utility projects, offset in part by lower storm margins.
◦Partially offset by:
•Higher overall operating costs related to inflationary pressures, including increased fuel and material costs and higher labor costs from decreased efficiencies on certain projects.
•Lower industrial margins of $3.9 million from the absence of certain higher margin work in 2021, as well as the timing of project completions and project starts.
•Lower transportation margins on street lighting and traffic signalization projects.
•Renewable project margin was negatively impacted from revisions in estimates on a project due to delays and labor impacts.
•Selling, general and administrative expense increased $5.1 million.
◦Primarily due to:
•Increased reserve for uncollectible accounts of $2.6 million.
•Increased office expenses of $1.3 million from an increase in facility costs.
•Increased payroll-related costs of $1.2 million, largely related to higher employee incentive accruals from the higher number of employees.
•Other income increased $2.0 million, primarily related to the Company's joint ventures.
•Interest expense increased $1.2 million due to higher working capital needs.
•Income tax expense increased $1.2 million directly resulting from an increase in income before income taxes.
Outlook Funding for public projects is highly dependent on federal and state funding, such as appropriations to the Federal Highway Administration. The American Rescue Plan provides $1.9 trillion in COVID-19 relief funding for states, schools and local government including broadband infrastructure. States are beginning to move forward with allocating these funds based on federal criteria and state needs, and in some cases, funding of infrastructure projects could positively impact the segment. Additionally, the bipartisan infrastructure proposal, known as the Infrastructure Investment and Jobs Act, was enacted in the fourth quarter of 2021. These include2021 and is providing long-term opportunities by designating funds for investments for upgrades to electric and grid infrastructure, transportation systems, airports and electric vehicle infrastructure, all industries this segment supports. In addition, the IRA provides $369 billion in new funding for clean energy programs. These programs include new tax incentives for solar, battery storage and hydrogen development along with funding to expand the production of electric vehicles and the build out of infrastructure to support electric vehicles. The Company will continue to monitor the implementation of these legislative items.
The Company continues to have bidding opportunities in the specialty contracting markets in which it operated in during 20222023 as evidenced by the segment's backlog. Although bidding remains highly competitive in all areas, the Company expects the segment's relationship with existing customers, skilled workforce, quality of service and effective cost management will continue to provide a benefit in securing and executing profitable projects in the future. The Company has also seen rapidly growing needs for services across the electric vehicle charging, wind generation and energy storage markets that complement existing renewable projects performed by the Company.
The construction services segment's backlog at September 30,March 31, was as follows:
| | | 2022 | 2021 | | 2023 | 2022 |
| | (In millions) | | (In millions) |
| Electrical & mechanical | Electrical & mechanical | $ | 1,724 | | $ | 1,041 | | Electrical & mechanical | $ | 1,792 | | $ | 1,388 | |
| Transmission & distribution | Transmission & distribution | 278 | 232 | Transmission & distribution | 306 | 280 |
| | $ | 2,002 | | $ | 1,273 | | | $ | 2,098 | | $ | 1,668 | |
The 57 percent increase in backlog at September 30, 2022,March 31, 2023, as compared to backlog at September 30, 2021,March 31, 2022, was largely attributable to the new project opportunities that the Company continues to be awarded across its diverse operations, particularly within the commercial, industrial, institutional utility and industrialtransportation markets. TheseThe increases werein backlog have been partially offset by decreases in the renewable and transportation marketmarkets due to the timing of project completions. Period over period increases or decreases in backlog cannot be used as an indicator of future revenues or net income. Of the $2.0 billion of backlog at September 30, 2022, the Company expects to complete an estimated $1.67 billion during the next 12 months. While the Company believes the current backlog of work remains firm, prolonged delays in the receipt of critical supplies and materials could result in customers seeking to delay or terminate existing or pending agreements. As of September 30, 2022, customers have not providedMarch 31, 2023, the Company has not experienced any indicationsmaterial impacts related to customer notices indicating 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 CompanyCompany's backlog and continue to grow the segment's backlog.revenues and earnings. Factors noted in Part I, Item 1A. Risk Factors in the 20212022 Annual Report can cause revenues to be realized in periods and at levels that are different from originally projected.
The labor contract that the construction services segment was negotiating at December 31, 2021, as reported in Items 1 and 2 - Business Properties - General in the 2021 Annual Report, has been ratified.
Other
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | |
| | September 30, | | September 30, | | March 31, | |
| | | 2022 | | 2021 | | Variance | | 2022 | | 2021 | | Variance | | 2023 | | 2022 | | Variance | |
| | (In millions) | | (In millions) |
| Operating revenues | Operating revenues | $ | 4.4 | | $ | 3.4 | | 29 | % | | $ | 13.2 | | $ | 10.1 | | 31 | % | Operating revenues | $ | 4.7 | | $ | 4.3 | | 9 | % | |
| Operating expenses: | Operating expenses: | | | | Operating expenses: | | |
| Operation and maintenance | Operation and maintenance | 4.5 | | 2.3 | | 96 | % | | 11.9 | | 6.9 | | 72 | % | Operation and maintenance | 12.4 | | 4.0 | | 210 | % | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 1.1 | | 1.1 | | — | % | | 3.3 | | 3.5 | | (6) | % | Depreciation, depletion and amortization | 1.1 | | 1.1 | | — | % | |
| | Total operating expenses | Total operating expenses | 5.6 | | 3.4 | | 65 | % | | 15.2 | | 10.4 | | 46 | % | Total operating expenses | 13.5 | | 5.1 | | 165 | % | |
| Operating loss | Operating loss | (1.2) | | — | | — | % | | (2.0) | | (.3) | | 567 | % | Operating loss | (8.8) | | (.8) | | 1,000 | % | |
| Other income | Other income | .3 | | — | | — | % | | .4 | | .5 | | (20) | % | Other income | .6 | | .1 | | 500 | % | |
| Interest expense | Interest expense | .4 | | .1 | | 300 | % | | .8 | | .2 | | 300 | % | Interest expense | .9 | | .1 | | 800 | % | |
| Loss before income taxes | Loss before income taxes | (1.3) | | (.1) | | 1200 | % | | (2.4) | | — | | — | % | Loss before income taxes | (9.1) | | (.8) | | 1,038 | % | |
| Income tax benefit | (5.1) | | (3.9) | | 31 | % | | (1.0) | | (2.2) | | (55) | % | |
| Net income (loss) | $ | 3.8 | | $ | 3.8 | | — | % | | $ | (1.4) | | $ | 2.2 | | (163) | % | |
| Income tax expense | | Income tax expense | 1.2 | | 3.7 | | (68) | % | |
| Net loss | | Net loss | $ | (10.3) | | $ | (4.5) | | 127 | % | |
Three Months Ended September 30, 2022,March 31, 2023, Compared to Three Months Ended September 30, 2021March 31, 2022
Other experienced higher operation and maintenance expense related to the Company's strategic initiatives. Income tax expense was positively impacted bylower due to the benefit from deductible strategic initiative costs and lower income tax adjustments related to the consolidated company'sCompany's annualized estimated tax rate. Operating expenses were positively impacted from a reduction in estimated losses recorded at the captive insurer. In addition, higher premiums for the captive insurer were experienced in 2022 compared to 2021, which impacts both operation and maintenance expense and operating revenues.
Also included in Other areis insurance activity at the Company's captive insurer and general and administrative costs and interest expense previously allocated to the exploration and production and refining businesses that do not meet the criteria for income (loss) from discontinued operations, as well as transaction costs associated with the anticipated spinoff of Knife River.
Nine Months Ended September 30, 2022, Compared to Nine Months Ended September 30, 2021
Other was negatively impacted by income tax adjustments related to the consolidated company's annualized estimated tax rate. Operating expenses were positively impacted from a reduction in estimated losses recorded at the captive insurer, partially offset by a loss on the disposal of assets recorded in operation and maintenance expense. In addition, higher premiums for the captive insurer were experienced in 2022 compared to 2021, which impacts both operation and maintenance expense and operating revenues. Also included in Other are general and administrative costs and interest expense previously allocated to the exploration and production and refining businesses that do not meet the criteria for income (loss) from discontinued operations, as well as transaction costs associated with the anticipated spinoff of Knife River.operations.
Intersegment Transactions
Amounts presented in the preceding tables will not agree with the Consolidated Statements of Income due to the Company's elimination of intersegment transactions. The amounts related to these items were as follows:
| | | Three Months Ended | Nine Months Ended | | Three Months Ended | |
| | September 30, | | March 31, | |
| | | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | | |
| | | (In millions) | | (In millions) |
| Intersegment transactions: | Intersegment transactions: | | | Intersegment transactions: | | |
| Operating revenues | Operating revenues | $ | 10.8 | | $ | 8.0 | | $ | 57.0 | | $ | 51.4 | | Operating revenues | $ | 31.8 | | $ | 31.7 | | |
| Operation and maintenance | Operation and maintenance | 7.3 | | 4.2 | | 20.2 | | 14.0 | | Operation and maintenance | 5.5 | | 5.8 | | |
| Purchased natural gas sold | Purchased natural gas sold | 3.5 | | 3.8 | | 36.8 | | 37.4 | | Purchased natural gas sold | 26.3 | | 25.9 | | |
|
For more information on intersegment eliminations, see Note 17.
Liquidity and Capital Commitments
At September 30, 2022,March 31, 2023, the Company had cash and cash equivalents of $74.6$93.2 million and available borrowing capacity of $371.6$421.1 million under the outstanding credit facilities of the Company's subsidiaries. In anticipation of the separation of Knife River, the Company is evaluating the refinancing of current debt facilities, as well as other debt facilities for Knife River as discussed in Note 21. The Company also continues to monitor financial services disruptions but does not have any material exposure to the recently distressed financial institutions. The Company has experienced slight disruptions in the commercial paper market, but with access to its revolving credit agreements the Company has not experienced any liquidity issues. 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.
Cash flows
| | | Nine Months Ended | | Three Months Ended |
| | September 30, | | March 31, |
| | | 2022 | | 2021 | | | 2023 | | 2022 | |
| | (In millions) | | (In millions) |
| Net cash provided by (used in): | Net cash provided by (used in): | | Net cash provided by (used in): | |
| Operating activities | Operating activities | $ | 284.9 | | $ | 365.8 | | Operating activities | $ | (43.6) | | $ | 112.4 | |
| Investing activities | Investing activities | (465.4) | | (432.6) | | Investing activities | (151.0) | | (150.7) | |
| Financing activities | Financing activities | 200.9 | | 64.5 | | Financing activities | 207.3 | | 49.0 | |
| Increase (decrease) in cash and cash equivalents | 20.4 | | (2.3) | | |
| Increase in cash and cash equivalents | | Increase in cash and cash equivalents | 12.7 | | 10.7 | |
| Cash and cash equivalents -- beginning of year | Cash and cash equivalents -- beginning of year | 54.2 | | 59.6 | | Cash and cash equivalents -- beginning of year | 80.5 | | 54.2 | |
| Cash and cash equivalents -- end of period | Cash and cash equivalents -- end of period | $ | 74.6 | | $ | 57.3 | | Cash and cash equivalents -- end of period | $ | 93.2 | | $ | 64.9 | |
Operating activities
| | | Nine Months Ended | | | Three Months Ended | |
| | September 30, | | | March 31, | |
| | | 2022 | | 2021 | | Variance | | | 2023 | | 2022 | | Variance | |
| | (In millions) | | | (In millions) | |
| Components of net cash provided by operating activities: | | | |
| Components of net cash provided by (used in) operating activities: | | Components of net cash provided by (used in) operating activities: | | |
| Income from continuing operations | Income from continuing operations | $ | 250.3 | | $ | 291.3 | | $ | (41.0) | | | Income from continuing operations | $ | 38.3 | | $ | 31.7 | | $ | 6.6 | | |
| Adjustments to reconcile net income to net cash provided by operating activities | Adjustments to reconcile net income to net cash provided by operating activities | 279.3 | | 246.1 | | 33.2 | | | Adjustments to reconcile net income to net cash provided by operating activities | 89.0 | | 78.9 | | 10.1 | | |
| Changes in current assets and liabilities, net of acquisitions: | Changes in current assets and liabilities, net of acquisitions: | | | Changes in current assets and liabilities, net of acquisitions: | | |
| Receivables | Receivables | (346.9) | | (103.6) | | (243.3) | | | Receivables | 15.0 | | (5.7) | | 20.7 | | |
| Inventories | Inventories | (60.7) | | (21.4) | | (39.3) | | | Inventories | (40.9) | | (44.1) | | 3.2 | | |
| Other current assets | Other current assets | (31.4) | | (74.4) | | 43.0 | | | Other current assets | (58.3) | | 34.5 | | (92.8) | | |
| Accounts payable | Accounts payable | 148.4 | | 33.1 | | 115.3 | | | Accounts payable | (93.5) | | 3.0 | | (96.5) | | |
| Other current liabilities | Other current liabilities | 62.1 | | 14.2 | | 47.9 | | | Other current liabilities | 16.7 | | 13.1 | | 3.6 | | |
| Pension and postretirement benefit plan contributions | Pension and postretirement benefit plan contributions | (.4) | | (.3) | | (.1) | | | Pension and postretirement benefit plan contributions | (.1) | | (.1) | | — | | |
| Other noncurrent changes | Other noncurrent changes | (15.8) | | (19.1) | | 3.3 | | | Other noncurrent changes | (9.8) | | 1.1 | | (10.9) | | |
| Net cash used in discontinued operations | — | | (.1) | | .1 | | | |
| Net cash provided by operating activities | $ | 284.9 | | $ | 365.8 | | $ | (80.9) | | | |
| | Net cash provided by (used in) operating activities | | Net cash provided by (used in) operating activities | $ | (43.6) | | $ | 112.4 | | $ | (156.0) | | |
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 decreaseincrease in cash flows provided byused in operating activities in the previous table was largelyprimarily 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 collectionspayment of accounts receivable compared to first nine months of 2021 offset in part by increased accounts payable. Also contributing to the decrease were increased inventories related to highernatural gas costs and timing of collection from customers at the natural gas distribution business, and lower earnings across mostpartially offset by the associated deferred taxes, as well as the purchase of the Company's businesses. Partially offsetting the net decreaseenvironmental allowances 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 2021,2023, as discussed in Note 13. Other current assetsHigher working capital needs resulting from fluctuations in job activity at the construction services business also contributed to the increase. Partially offsetting the increase in cash flows used in operating activities was lower working capital needs due to higher collection of accounts receivable balances at the construction materials and liabilities were also impacted by the Company's net tax position.
Investing activities
| | | Nine Months Ended | | | Three Months Ended | |
| | September 30, | | | March 31, | |
| | | 2022 | | 2021 | | Variance | | | 2023 | | 2022 | | Variance | |
| | (In millions) | | | (In millions) | |
| Components of net cash used in investing activities: | Components of net cash used in investing activities: | | | Components of net cash used in investing activities: | | |
| Capital expenditures | Capital expenditures | $ | (463.0) | | $ | (428.1) | | $ | (34.9) | | | Capital expenditures | $ | (154.0) | | $ | (150.3) | | $ | (3.7) | | |
| Acquisitions, net of cash acquired | Acquisitions, net of cash acquired | .4 | | (13.7) | | 14.1 | | | Acquisitions, net of cash acquired | — | | (.5) | | .5 | | |
| Net proceeds from sale or disposition of property and other | Net proceeds from sale or disposition of property and other | 1.6 | | 13.0 | | (11.4) | | | Net proceeds from sale or disposition of property and other | 7.2 | | 4.5 | | 2.7 | | |
| Investments | Investments | (4.4) | | (3.8) | | (.6) | | | Investments | (4.2) | | (4.4) | | .2 | | |
| Net cash used in investing activities | Net cash used in investing activities | $ | (465.4) | | $ | (432.6) | | $ | (32.8) | | | Net cash used in investing activities | $ | (151.0) | | $ | (150.7) | | $ | (.3) | | |
The increase in cash used in investing activities in the previous table was primarily dueremained consistent as compared to increased2022. Increased capital expenditures in 2022 related to increased electric production projects, including the construction of Heskett Unit 4 and the repower of Diamond Willow at the electric business; higher natural gas distribution projects, including natural gas mains and meters at the natural gas distribution business; and the construction of a new building at the construction services business. The construction services and electric businesses also experienced lower proceeds from asset saleswere offset in 2022 related to the sale of a building and decommissioning activities related to plant closures, respectively. Offsetting the increased cash used in investing activities waspart by decreased capital expenditures at the pipeline business as a result ofrelated to the North Bakken Expansion project being placed in service in February 2022 and lower cash used for acquisition activityproject. Net proceeds from the sale or disposition of property at the construction materialselectric and contracting business.natural gas distribution businesses increased due to lower costs of removal and higher salvage value on assets.
Financing activities
| | | Nine Months Ended | | | Three Months Ended | |
| | September 30, | | | March 31, | |
| | | 2022 | | 2021 | | Variance | | | 2023 | | 2022 | | Variance | |
| | (In millions) | | | (In millions) | |
| Components of net cash provided by financing activities: | Components of net cash provided by financing activities: | | | Components of net cash provided by financing activities: | | |
| Issuance of short-term borrowings | Issuance of short-term borrowings | $ | 100.0 | | $ | 50.0 | | $ | 50.0 | | | Issuance of short-term borrowings | $ | 275.0 | | $ | 100.0 | | $ | 175.0 | | |
| Repayment of short-term borrowings | Repayment of short-term borrowings | — | | (50.0) | | 50.0 | | | Repayment of short-term borrowings | (20.0) | | — | | (20.0) | | |
| Issuance of long-term debt | Issuance of long-term debt | 270.3 | | 178.9 | | 91.4 | | | Issuance of long-term debt | 175.4 | | 150.0 | | 25.4 | | |
| Repayment of long-term debt | Repayment of long-term debt | (23.1) | | (63.8) | | 40.7 | | | Repayment of long-term debt | (169.9) | | (143.6) | | (26.3) | | |
| Debt issuance costs | Debt issuance costs | (1.1) | | (.4) | | (.7) | | | Debt issuance costs | (.1) | | (.7) | | .6 | | |
| Net proceeds from issuance of common stock | Net proceeds from issuance of common stock | (.1) | | 88.8 | | (88.9) | | | Net proceeds from issuance of common stock | — | | (.1) | | .1 | | |
| Dividends paid | Dividends paid | (132.7) | | (128.1) | | (4.6) | | | Dividends paid | (45.2) | | (44.2) | | (1.0) | | |
| Repurchase of common stock | Repurchase of common stock | (7.4) | | (6.7) | | (.7) | | | Repurchase of common stock | (4.8) | | (7.4) | | 2.6 | | |
| Tax withholding on stock-based compensation | Tax withholding on stock-based compensation | (5.0) | | (4.2) | | (.8) | | | Tax withholding on stock-based compensation | (3.1) | | (5.0) | | 1.9 | | |
| Net cash provided by financing activities | Net cash provided by financing activities | $ | 200.9 | | $ | 64.5 | | $ | 136.4 | | | Net cash provided by financing activities | $ | 207.3 | | $ | 49.0 | | $ | 158.3 | | |
The increase in cash provided by financing activities in the previous table was largelyprimarily due to the resultissuance of short-term borrowings at the natural gas distribution business to fund higher natural gas costs, as well as increased issuance of short-term and long-term debt at the construction services and construction materials and contracting businesses to fundbusiness as a result of higher working capital needsneeds. Partially offsetting these increases were higher commercial paper and short-term debt repayments at the electric and natural gas distribution business to fund capital expenditures and higher natural gas costs. The issuances were partially offset by the repayment of commercial paper borrowings that were replaced by short-term debt and private placement borrowings. Also partially offsetting the increase in cash provided by financing activities was the absence of the issuance of common stock under the Company's "at-the-market" offering during 2022, as discussed in Note 7.businesses.
Defined benefit pension plans
The Company has noncontributory qualified defined benefit pension plans. Various assumptions are used in calculating the benefit expense (income) and liability (asset) related to these plans, as such costs of providing these benefits bear the risk of changes as they are dependent upon assumptions of future conditions.
For 2022, the Company assumed a long-term rate of return on its qualified defined pension plan assets of 6 percent. Through September 30, 2022, due to the decline in the equity and fixed-income markets, the Company experienced a 25 percent loss on its qualified defined pension plan assets. Differences between actuarial assumptions and actual plan results are deferred and amortized into expense when the accumulated differences exceed 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets. Therefore, this change in asset values will be reflected in future expenses of the plans, beginning in 2023.
There were no other material changes to the Company's qualified noncontributory defined benefit pension plans from those reported in the 2021 Annual Report. For more information, see Note 18 and Part II, Item 7 in the 2021 Annual Report.
Capital expenditures
Capital expenditures for the first ninethree months of 2023 and 2022 and 2021 were $451.1$136.7 million and $507.9$119.8 million, respectively. Capital expenditures allocated to the Company's business segments are estimated to be approximately $702$646.4 million for 2022.2023. Capital expendituresexpenditure estimates have been updated from what was previously reported in the 20212022 Annual Report to accommodate project timeline and scope changes made throughout the first three quartersquarter of 2022.2023.
The Company has included in the estimated capital expenditures for 20222023 multiple organic growth projects at the pipeline business and construction of Heskett Unit 4 at the electric business, as previously discussed in Business Segment Financial and Operating Data, as well as system upgrades; routine replacements; service extensions; routine equipment maintenance and replacements; buildings, land and building improvements; pipeline and natural gas storage projects; power generation and transmission opportunities, environmental upgrades; and other growth opportunities.
The Company continues to evaluate potential future acquisitions and other growth opportunities that would be incremental to the outlined capital program; however, they are dependent upon the availability of economic opportunities and, as a result, capital expenditures may vary significantly from the estimate previously discussed. The Company continuously monitors its capital expenditures for project delays and changes in economic viability and adjusts as necessary. It is anticipated that all of the funds required for capital expenditures for 20222023 will be funded by various sources, including internally generated funds; credit facilities and commercial paper of the Company's subsidiaries, as described later; and issuance of debt and equity securities if necessary.
Capital resources
The Company requires significant cash to support and grow its businesses. The primary sources of cash other than cash generated from operating activities are cash from revolving credit facilities, cash from the issuance of long-term debt and cash from the sale of equity securities.
Debt resources
Certain debt instruments of the Company's subsidiaries contain restrictive and financial covenants and cross-default provisions. In order to borrow under the respective debt instruments, the subsidiary companies must be in compliance with the applicable covenants and certain other conditions, all of which the subsidiaries, as applicable, were in compliance with at September 30, 2022.March 31, 2023. In the event the subsidiaries do not comply with the applicable covenants and other conditions, alternative sources of funding may need to be pursued. As of March 31, 2023, the Company had investment grade credit ratings at all entities issuing debt. For more information on the covenants, certain other conditions and cross-default provisions, see Part II, Item 8 in the 20212022 Annual Report.
The following table summarizes the outstanding revolving credit facilities of the Company's subsidiaries at September 30, 2022:March 31, 2023:
| | Company | Company | | Facility | | Facility
Limit | | Amount
Outstanding | | Letters
of Credit | | Expiration
Date | | Company | | Facility | | Facility
Limit | | Amount
Outstanding | | Letters
of Credit | | Expiration
Date | |
| | (In millions) | | | | (In millions) | | |
| Montana-Dakota Utilities Co. | Montana-Dakota Utilities Co. | | Commercial paper/Revolving credit agreement | (a) | $ | 175.0 | | | $ | 86.7 | | | $ | — | | | 12/19/24 | | Montana-Dakota Utilities Co. | | Commercial paper/Revolving credit agreement | (a) | $ | 175.0 | | | $ | 67.6 | | | $ | — | | | 12/19/24 | |
| Cascade Natural Gas Corporation | Cascade Natural Gas Corporation | | Revolving credit agreement | | $ | 100.0 | | (b) | $ | 60.6 | | | $ | 2.2 | | (c) | 6/7/24 | | Cascade Natural Gas Corporation | | Revolving credit agreement | | $ | 100.0 | | (b) | $ | 10.7 | | | $ | 2.2 | | (c) | 11/30/27 | |
| Intermountain Gas Company | Intermountain Gas Company | | Revolving credit agreement | | $ | 85.0 | | (d) | $ | 65.0 | | | $ | — | | | 6/7/24 | | Intermountain Gas Company | | Revolving credit agreement | | $ | 100.0 | | (d) | $ | — | | | $ | — | | | 10/13/27 | |
| Centennial Energy Holdings, Inc. | Centennial Energy Holdings, Inc. | | Commercial paper/Revolving credit agreement | (e) | $ | 600.0 | | | $ | 373.9 | | | $ | — | | | 12/19/24 | | Centennial Energy Holdings, Inc. | | Commercial paper/Revolving credit agreement | (e) | $ | 600.0 | | | $ | 473.4 | | | $ | — | | | 12/19/24 | |
(a)The commercial paper program is supported by a revolving credit agreement with various banks (provisions allow for increased borrowings, at the option of Montana-Dakota on stated conditions, up to a maximum of $225.0 million). At September 30, 2022,March 31, 2023, 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$125.0 million.
(e)The commercial paper program is supported by a revolving credit agreement with various banks (provisions allow for increased borrowings, at the option of Centennial on stated conditions, up to a maximum of $700.0 million). At September 30, 2022,March 31, 2023, there were no amountswas $78.4 million outstanding under the revolving credit agreement.
The respective commercial paper programs are supported by revolving credit agreements. While the amount of commercial paper outstanding does not reduce available capacity under the respective revolving credit agreements, Montana-Dakota and Centennial do not issue commercial paper in an aggregate amount exceeding the available capacity under the credit agreements. The commercial paper borrowings may vary during the period, largely the result of fluctuations in working capital requirements due to the seasonality of certain operations of the Company's subsidiaries.
Total equity as a percent of total capitalization was 53 percent, 58 percent and 5552 percent at September 30,March 31, 2023 and 54 percent at March 31, 2022 and 2021, and December 31, 2021, respectively.2022. 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,12 months, plus total equity. ThisManagement believes this ratio is an indicator of how a companythe Company is financing its operations, as well as its financial strength.
MDU Resources Group, Inc. On May 1, 2023, MDU Resources Group, Inc. entered into a $75.0 million term loan agreement with a SOFR-based interest rate and a maturity date of November 1, 2023. The agreement contains customary covenants and provisions, including a covenant of MDU Resources 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.
Cascade On June 15, 2022,January 20, 2023, Cascade issued $50.0entered into a $150.0 million of senior notes under a note purchaseterm loan agreement with maturity dates ranging from June 15, 2032 to June 15, 2052, at a weighted averageSOFR-based interest rate and a maturity date of 4.50 percent.January 19, 2024. 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. The covenants also include certain restrictions on the sale of certain assets, loans and investments.
Intermountain On June 15, 2022,January 20, 2023, Intermountain issued $40.0entered into a $125.0 million of senior notes under a note purchaseterm loan agreement with maturity dates ranging from June 15, 2052 to June 15, 2062, at a weighted averageSOFR-based interest rate and a maturity date of 4.68 percent.January 19, 2024. In March and April 2023, Intermountain repaid $20.0 million and $30 million, respectively, of the outstanding balance. 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. The covenants also include certain restrictions on the sale of certain assets, loans and investments.
On October 13, 2022, Intermountain amended and restated its revolving credit agreement to increase the borrowing capacity to $100.0 million and extend the maturity date to October 13, 2027. Any borrowings under the revolving credit agreement are classified as long-term debt as they are intended to be refinanced on a long-term basis through continued borrowings.
Centennial On March 18, 2022, Centennial entered into a $100.0 million term loan agreement with a SOFR-based variable interest rate and a maturity date of March 17, 2023. On March 17, 2023, Centennial amended this agreement to extend the maturity date to September 15, 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. Any public offer and sale of such securities will be made only by means of a prospectus meeting the requirements of the Securities Act and the rules and regulations thereunder.
In August 2020, the Company amended the Distribution Agreement dated February 22, 2019, with J.P. Morgan Securities LLC and MUFG Securities Americas Inc., as sales agents. This agreement, as amended, allows the offering, issuance and sale of up to 6.4 million shares of the Company's common stock in connection with an "at-the-market" offering. The common stock may be offered for sale, from time to time, in accordance with the terms and conditions of this agreement. As of September 30, 2022,March 31, 2023, 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.
DetailsThe Company had no issuances of shares under the Company's "at-the-market" offering activity was as follows:
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | |
| September 30, | | September 30, | |
| 2022 | 2021 | | 2022 | 2021 | |
| (In millions) | |
| Shares issued | — | | 1.0 | | | — | | 2.8 | | |
| Net proceeds * | $ | — | | $ | 34.2 | | ** | $ | (.1) | | $ | 88.8 | | ** |
* Net proceeds include issuance costs of $— and $149,000program for both the three and nine months ended September 30, 2022, respectively,March 31, 2023 and $425,000 and $1.2 million for the three and nine months ended September 30, 2021, respectively.
** Net proceeds were used for capital expenditures.
Material cash requirements
There were no material changes in the Company's contractual obligations related to estimated interest payments, purchase commitments, asset retirement obligations and uncertain tax positions for 2023 from those reported in the 2022 Annual Report. 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 20212022 Annual Report. There were no material changes in the Company's contractual obligations related to asset retirement obligations, uncertain tax positions and minimum funding requirements for its defined benefit plans for 2022 from those reported in the 2021 Annual Report.
At September 30, 2022, the Company's future estimated interest payments increased 12 percent since December 31, 2021, due to higher debt balances and rising interest rates. The Company expects interest rates will continue to increase the remainder of 2022 as indicated by the Federal Reserve. At September 30, 2022, the Company's future purchase commitments increased 7 percent since December 31, 2021, down from an increase of 14 percent at June 30, 2022. The increase in purchase commitments is largely due to increases to the cost of asphalt oil at the construction materials and contracting business and higher natural gas costs and contract extensions associated with natural gas supply at the natural gas distribution business. The Company anticipates that these items will be funded by various sources, including internally generated funds, as well as credit facilities and commercial paper of the Company's subsidiaries.
Material short-term cash requirements of the Company include repayment of outstanding borrowings and interest payments on those agreements, payments on operating lease agreements, payment of obligations on purchase commitments and asset retirement obligations.
Material long-term cash requirements of the Company include repayment of outstanding borrowings and interest payments on those agreements, payments on operating lease agreements, payment of obligations on purchase commitments and asset retirement obligations.
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.
There were no other material changes to the Company's qualified noncontributory defined benefit pension plans from those reported in the 2022 Annual Report other than the Company expects to contribute approximately $8.3 million to its pension plans in 2023, largely resulting from an actual decline in asset values decreasing the funded status of the plans. For more information, see Note 18 and Part II, Item 7 in the 2022 Annual Report.
New Accounting Standards
For information regarding new accounting standards, see Note 2, which is incorporated by reference.
Critical Accounting Estimates
The Company's critical accounting estimates include impairment testing of goodwill; fair values of acquired assets and liabilities under the acquisition method of accounting; regulatory assets expected to be recovered in rates charged to customers; revenue recognized using the cost-to-cost measure of progress for contracts; actuarially determined benefit costs; and tax provisions. There were no material changes in the Company's critical accounting estimates from those reported in the 20212022 Annual Report. For more information on critical accounting estimates, see Part II, Item 7 in the 20212022 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 changesRising interest rates have resulted in and will likely continue to result in higher borrowing costs on new debt and existing variable interest rate risk faced bydebt. The Company has realized increases in the Companyweighted average interest rates on the commercial paper programs and revolving credit facilities of its subsidiaries of 1.05 percent and 1.73 percent, respectively, from those reported in the 20212022 Annual Report.
At September 30, 2022,March 31, 2023, the Company had no outstanding interest rate hedges.
Commodity price risk
There were no material changes to commodity price risk faced by the Company from those reported in the 20212022 Annual Report.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. The Company's disclosure controls and other procedures are designed to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The Company's disclosure controls and other procedures are designed to provide reasonable assurance that information required to be disclosed is accumulated and communicated to management, including the Company's chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. The Company's management, with the participation of the Company's chief executive officer and chief financial officer, has evaluated the effectiveness of the Company's disclosure controls and other procedures as of the end of the period covered by this report. Based upon that evaluation, the chief executive officer and the chief financial officer have concluded that, as of the end of the period covered by this report, such controls and procedures were effective at a reasonable assurance level.
Changes in internal controls
No change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended September 30, 2022,March 31, 2023, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
Part II -- Other Information
Item 1. Legal Proceedings
There were no material changes to the Company's legal proceedings in Part 1, Item 3 - Legal Proceedings in the 20212022 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 20212022 Annual Report that could be materially harmful to the Company's business, prospects, financial condition or financial results if they occur. At September 30, 2022,March 31, 2023, there were no material changes to the Company's risk factors provided in Part I, Item 1A. Risk Factors in the 20212022 Annual Report other than as set forth below.
The proposed separation of Knife River Holding Company into an independent, publicly traded company is subject to various risks and uncertainties, and may not be completed on the terms or timeline currently contemplated, if at all. In addition, the Company's review of options to optimize the value of its construction services business is subject to various risks and uncertainties and may not achieve its intended goals.
On August 4, 2022, the Company announced its plan to separate Knife River Holding Company, the construction materials and contracting business, from the Company, resultingwhich would result in two independent, publicly traded companies. The proposed separationcompanies, which 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 completedoccur in 2023, subject to the satisfactionMay of customary conditions, including final approval by the Company’s Board of Directors, receipt of a tax opinion and a private letter ruling from the IRS, and the effectiveness of a registration statement on Form 10 to be filed with the SEC.
2023. The execution of the proposed separation has required and will continue to 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. Further, the Company's employees may be distracted due to the uncertainty regarding their future roles with the Company or Knife River Holding Company pending the consummation of the proposed separation. Additionally, foreseen and unforeseen costs may be incurred in connection with the proposed separation, including fees such as advisory, accounting, tax, legal, reorganization, debt breakage, restructuring, severance/employee benefit-related, regulatory, SEC filing and other professional services, some of which may be incurred regardless of when the separation occurs. 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 Company is a holding company and relies on cash from its subsidiaries to pay dividends.
The Company's investments in its subsidiaries comprise the separation is completed, theCompany's primary assets. The Company may not be abledepends on earnings, cash flows and dividends from its subsidiaries to achieve the full strategicpay dividends on its common stock. Regulatory, contractual and financial benefits that are expected to result from the separation. There can be no assurance that the combined value of the common stock of the two companies will be equal to or greater than what the value of the Company’s common stock would have been had the proposed separation not occurred, or that the separation will not adversely impactlegal limitations, as well as their capital requirements, affect the ability of the Companysubsidiaries to maintain its historical practices with respectpay dividends to dividends.
In addition, on November 3, 2022, the Company announcedand thereby could restrict or influence the Company's ability or decision to pay dividends on its intentioncommon stock, which could adversely affect the Company's stock price.
There is no assurance as to create two pure-play publicly traded companies, one focusedthe amount, if any, of future dividends to the holding company because the subsidiaries depend on future earnings, capital requirements and financial conditions to fund such dividends. Following the separation of Knife River, the Company's board of directors expects to review its dividend practice with the intent to align payout relative to regulated energy delivery and the other on construction materials, and that, to achieve this future structure, the board has authorized management to commence a strategic review process of MDU Construction Services. The Company's intent to create twoearnings with pure-play publicly traded companies is subject to changing market conditions and may not receive the level of market support that the Company expects, and may not be completed timely or at all.peer companies.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table includes information with respect to the Company's purchase of equity securities:
| | | | | | | | | | | | | | |
ISSUER PURCHASES OF EQUITY SECURITIES |
Period | (a)
Total Number
of Shares
(or Units)
Purchased (1) | (b)
Average Price
Paid per Share
(or Unit) | (c)
Total Number of Shares
(or Units) Purchased
as Part of Publicly
Announced Plans
or Programs (2) | (d)
Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs (2) |
July 1 through July 31, 2022 | — | | $ | — | | — | | — | |
August 1 through August 31, 2022 | — | | $ | — | | — | | — | |
September 1 through September 30, 2022 | — | | $ | — | | — | | — | |
Total | — | | $ | — | | — | | — | |
| | | | | | | | | | | | | | |
| 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) |
| January 1 through January 31, 2023 | — | | $ | — | | — | | — | |
| February 1 through February 28, 2023 | 153,622 | | $ | 31.32 | | — | | — | |
| March 1 through March 31, 2023 | — | | $ | — | | — | | — | |
| Total | 153,622 | | $ | 31.32 | | — | | — | |
(1) Represents shares of common stock purchased on the open market in connection with the vesting of shares granted pursuant to the Long-Term Performance-Based Incentive Plan.
(2) Not applicable. The Company does not currently have in place any publicly announced plans or programs to purchase equity securities.
Item 4. Mine Safety Disclosures
For information regarding mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Act and Item 104 of Regulation S-K, see Exhibit 95 to this Form 10-Q, which is incorporated herein by reference.
Item 5. Other Information
None.
Item 6. Exhibits
See the index to exhibits immediately preceding the signature page to this report.
| | | | | | | | | | | | | | | | | | | | | | | |
| Exhibits Index |
| | | Incorporated by Reference |
| Exhibit Number | Exhibit Description | Filed
Herewith | Form | Period
Ended | Exhibit | Filing
Date | File Number |
| | | | | | | |
| 3(a) | | | 8-K | | 3.2 | 5/8/19 | 1-03480 |
| 3(b) | | | 8-K | | 3.1 | 2/15/19 | 1-03480 |
+10(a) | | X | | | | | |
| 31(a) | | X | | | | | |
| 31(b) | | X | | | | | |
| 32 | | X | | | | | |
| 95 | | X | | | | | |
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | | | | | | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | | | | | | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | | | | | |
+ Management contract, compensatory plan or arrangement.
Signatures
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | | MDU RESOURCES GROUP, INC. |
| | | | |
| DATE: | November 3, 2022May 4, 2023 | BY: | /s/ Jason L. Vollmer |
| | | | Jason L. Vollmer |
| | | | Vice President and Chief Financial Officer |
| | | | |
| | | | |
| | | BY: | /s/ Stephanie A. Barth |
| | | | Stephanie A. Barth |
| | | | Vice President, Chief Accounting Officer
and Controller |