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, 20222023
OR
| | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________ to ______________
Commission file number 1-03480
MDU RESOURCES GROUP INC
(Exact name of registrant as specified in its charter)
| | | | | | | | |
| Delaware | | 30-1133956 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer Identification No.) |
1200 West Century Avenue
P.O. Box 5650
Bismarck, North Dakota 58506-5650
(Address of principal executive offices)
(Zip Code)
(701) 530-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| Common Stock, par value $1.00 per share | MDU | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
| Large Accelerated Filer | ☒ | Accelerated Filer | ☐ |
| Non-Accelerated Filer | ☐ | Smaller Reporting Company | ☐ |
| | Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of October 27, 2022: 203,350,74026, 2023: 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 |
| Cascade | Cascade Natural Gas Corporation, an indirect wholly owned subsidiary of MDU Energy Capital |
| Centennial | Centennial Energy Holdings, Inc.,CEHI, LLC, a direct wholly owned subsidiary of the Company, formally known as Centennial Energy Holdings, Inc. prior to the separation of Knife River from the Company. References to Centennial's historical business and operations refer to the business and operations of Centennial Energy Holdings, Inc. |
| 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.2019 |
| Coyote Creek | Coyote Creek Mining Company, LLC, a subsidiary of The North American Coal Corporation |
| Coyote Station | 427-MW coal-fired electric generating facility near Beulah, North Dakota (25 percent ownership) |
Diamond Willow | Diamond Willow Wind Farm located in Montana |
| dk | Decatherm |
| Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act |
| EPA | United States Environmental Protection Agency |
| Exchange Act | Securities Exchange Act of 1934, as amended |
| FASB | Financial Accounting Standards Board |
| FERC | Federal Energy Regulatory Commission |
Federal Reserve | Federal Reserve System, the central banking system of the United States. |
| Fidelity | Fidelity Exploration & Production Company, a direct wholly owned subsidiary of WBI Holdings (previously referred to as the Company's exploration and production segment) |
| GAAP | Accounting principles generally accepted in the United States of America |
| GHG | Greenhouse gas |
Great Plains | Great Plains Natural Gas Co., a public utility division of Montana-Dakota |
| Intermountain | Intermountain Gas Company, an indirect wholly owned subsidiary of MDU Energy Capital |
| IPUC | Idaho Public Utilities Commission |
| IRA | Inflation Reduction Act of 2022 |
IRS | Internal Revenue Service |
| Knife River | Established as Knife River Corporation prior to the separation from the Company, a direct wholly owned subsidiary of CentennialCentennial. Knife River refers to Knife River Corporation, during the period prior to separation, now known as "KRC Materials, Inc." Following the separation Knife River refers to Knife River Holding Company, now known as Knife River Corporation. |
| 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 | MinnesotaMontana-Dakota Utilities Co., a direct wholly owned subsidiary of MDU Energy Capital |
| MTPSC | Montana Public UtilitiesService Commission |
| MW | Megawatt |
| NDDEQ | North Dakota Department of Environmental Quality |
| | | | | |
Montana-Dakota | Montana-Dakota Utilities Co., a direct wholly owned subsidiary of MDU Energy Capital |
MW | Megawatt |
NDDEQ | North Dakota Department of Environmental Quality |
| NDPSC | North Dakota Public Service Commission |
| NERC | North American Electric Reliability Corporation |
| Oil | Includes crude oil and condensate |
| PHMSA | Pipeline and Hazardous Materials Safety Administration |
| Regional Haze Rule | The EPA developed the Regional Haze Rule requiring states to develop and implement comprehensive plans to reduce human-caused regional haze in designated areas such as national parks and wilderness areas. |
| SDPUC | South Dakota Public Utilities Commission |
| SEC | United States Securities and Exchange Commission |
| Securities Act | Securities Act of 1933, as amended |
| SOFR | Secured Overnight Financing Rate |
| TSA | In connection with the separation of Knife River, the Company and Knife River entered into a Transition Services Agreement whereby each party will provide certain post-separation services on a transitional basis. |
| 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
Montana-Dakota was incorporated under the state laws of Delaware in 1924. The Company was incorporated under the state laws of Delaware in 2018. Upon the completion of an internal holding company reorganization, Montana-Dakota became 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.
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 through its electrical and mechanical and transmission and distribution specialty contracting services, and prior to a varietythe separation of industries, including commercial, industrial and utility customers, and providesKnife River, provided construction materials and associated contracting services through aggregate mining and marketing of related products, such as ready-mix concrete, asphalt and asphalt oil.oil through May 31, 2023.
Montana-Dakota was incorporated under the state laws of Delaware in 1924. The Company was incorporated under the state laws of Delawareannounced strategic initiatives in 2018 upon the completion of an internal holding company reorganization, which resulted in Montana-Dakota becoming a subsidiary2022 as part 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.
Company's continuous review of its business. On August 4, 2022,May 31, 2023, the Company announced its Board of Directors unanimously approved a plan to pursuecompleted the separation of Knife River, fromformerly the Company.construction materials and contracting segment, which resulted in two independent, publicly traded companies, MDU Resources Group, Inc. and Knife River. The Company's board of directors approved the distribution of approximately 90 percent of the issued and outstanding shares of Knife River to the Company's stockholders. Stockholders of the Company received one share of Knife River 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 retained approximately 10 percent or 5.7 million shares of Knife River common stock immediately following the separation with the intent to dispose of such shares within twelve months after the separation. The separation is planned asof Knife River was 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 Knife River's Form 10, which is not incorporated by reference herein.
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 are presented as discontinued operations in the Company's Consolidated Financial Statements.
On November 2, 2023, the Company announced its intent to pursue a tax-free spinoff of its wholly owned construction materials and contracting company.
As the next stepservices business, MDU Construction Services. The Company's board of directors believes a tax-free spinoff of the Company’s strategic planning,construction services business supports the BoardCompany's goal of Directors has unanimously determined the best way to optimizeenhancing value would be to create twofor stockholders by becoming a pure-play companies: a leading construction materials company and a regulated energy delivery company. Accordingly, the board has authorized management to commence a strategic review process for MDU Construction Services with the objective of achieving the board’s goal of creating two pure-play public companies. For more information on the Company's risks associated with the anticipated separation or the proposed future structure of the companies, see Item 1A. Risk Factors.
The Company is organized into fivefour 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 1718 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 | Nine Months Ended |
| | | September 30, | | September 30, |
| | | 2022 | 2021 | 2022 | 2021 | | 2023 | 2022 | 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 | $ | 279,534 | | $ | 263,774 | | $ | 1,293,959 | | $ | 1,141,007 | |
| 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 services and other | | Non-regulated pipeline, construction services and other | 721,261 | | 738,713 | | 2,228,061 | | 1,978,344 | |
| Total operating revenues | Total operating revenues | 1,977,206 | | 1,586,013 | | 5,114,686 | | 4,237,608 | | Total operating revenues | 1,000,795 | | 1,002,487 | | 3,522,020 | | 3,119,351 | |
| 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 | 99,295 | | 89,662 | | 296,818 | | 281,909 | |
| 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 services and other | | Non-regulated pipeline, construction services and other | 639,363 | | 677,789 | | 2,007,978 | | 1,795,615 | |
| Total operation and maintenance | Total operation and maintenance | 1,546,852 | | 1,212,898 | | 3,771,550 | | 3,102,353 | | Total operation and maintenance | 738,658 | | 767,451 | | 2,304,796 | | 2,077,524 | |
| Purchased natural gas sold | Purchased natural gas sold | 61,863 | | 41,135 | | 444,527 | | 280,584 | | Purchased natural gas sold | 55,967 | | 61,863 | | 542,848 | | 444,527 | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 82,293 | | 75,229 | | 247,173 | | 222,613 | | Depreciation, depletion and amortization | 53,146 | | 51,843 | | 158,877 | | 158,622 | |
| Taxes, other than income | Taxes, other than income | 56,267 | | 48,096 | | 185,303 | | 163,819 | | Taxes, other than income | 39,454 | | 40,248 | | 156,587 | | 139,305 | |
| Electric fuel and purchased power | Electric fuel and purchased power | 20,080 | | 19,486 | | 68,370 | | 56,216 | | Electric fuel and purchased power | 28,966 | | 20,080 | | 73,755 | | 68,370 | |
| Total operating expenses | Total operating expenses | 1,767,355 | | 1,396,844 | | 4,716,923 | | 3,825,585 | | Total operating expenses | 916,191 | | 941,485 | | 3,236,863 | | 2,888,348 | |
| Operating income | Operating income | 209,851 | | 189,169 | | 397,763 | | 412,023 | | Operating income | 84,604 | | 61,002 | | 285,157 | | 231,003 | |
| Other income (expense) | 4,769 | | 5,930 | | (1,877) | | 18,310 | | |
| Unrealized gain on investment in Knife River | | Unrealized gain on investment in Knife River | 30,150 | | — | | 170,170 | | — | |
| Other income | | Other income | 8,918 | | 5,774 | | 29,251 | | 2,521 | |
| Interest expense | Interest expense | 31,369 | | 23,389 | | 84,741 | | 70,224 | | Interest expense | 32,129 | | 20,196 | | 82,541 | | 58,275 | |
| Income before income taxes | Income before income taxes | 183,251 | | 171,710 | | 311,145 | | 360,109 | | Income before income taxes | 91,543 | | 46,580 | | 402,037 | | 175,249 | |
| Income taxes | Income taxes | 35,318 | | 32,748 | | 60,847 | | 68,860 | | Income taxes | 13,325 | | 4,211 | | 92,311 | | 28,352 | |
| Income from continuing operations | Income from continuing operations | 147,933 | | 138,962 | | 250,298 | | 291,249 | | Income from continuing operations | 78,218 | | 42,369 | | 309,726 | | 146,897 | |
| Discontinued operations, net of tax | Discontinued operations, net of tax | 38 | | 314 | | 103 | | 348 | | Discontinued operations, net of tax | (3,289) | | 105,602 | | (65,752) | | 103,504 | |
| Net income | Net income | $ | 147,971 | | $ | 139,276 | | $ | 250,401 | | $ | 291,597 | | Net income | $ | 74,929 | | $ | 147,971 | | $ | 243,974 | | $ | 250,401 | |
| 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 | $ | .38 | | $ | .21 | | $ | 1.52 | | $ | .72 | |
| Discontinued operations, net of tax | Discontinued operations, net of tax | — | | — | | — | | — | | Discontinued operations, net of tax | (.01) | | .52 | | (.32) | | .51 | |
| Earnings per share - basic | Earnings per share - basic | $ | .73 | | $ | .68 | | $ | 1.23 | | $ | 1.44 | | Earnings per share - basic | $ | .37 | | $ | .73 | | $ | 1.20 | | $ | 1.23 | |
| 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 | $ | .38 | | $ | .21 | | $ | 1.52 | | $ | .72 | |
| Discontinued operations, net of tax | Discontinued operations, net of tax | — | | — | | — | | — | | Discontinued operations, net of tax | (.01) | | .52 | | (.32) | | .51 | |
| Earnings per share - diluted | Earnings per share - diluted | $ | .73 | | $ | .68 | | $ | 1.23 | | $ | 1.44 | | Earnings per share - diluted | $ | .37 | | $ | .73 | | $ | 1.20 | | $ | 1.23 | |
| 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 | 203,638 | | 203,351 | | 203,633 | | 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 | 203,886 | | 203,644 | | 203,891 | | 203,407 | |
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 Comprehensive Income | Consolidated Statements of Comprehensive Income | Consolidated Statements of Comprehensive Income |
| (Unaudited) | (Unaudited) | (Unaudited) |
| | Three Months Ended | Nine Months Ended | | | Three Months Ended | Nine Months Ended |
| | | | September 30, | | | | September 30, |
| | | | 2022 | 2021 | 2022 | 2021 | | | | 2023 | 2022 | 2023 | 2022 |
| | | | (In thousands) | | | | (In thousands) |
| Net income | Net income | | $ | 147,971 | | $ | 139,276 | | $ | 250,401 | | $ | 291,597 | | Net income | | | $ | 74,929 | | $ | 147,971 | | $ | 243,974 | | $ | 250,401 | |
| Other comprehensive income (loss): | Other comprehensive income (loss): | | 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 | | |
| Reclassification adjustment for loss on derivative instruments included in net income, net of tax of $0 and $37 for the three months ended and $17 and $109 for the nine months ended in 2023 and 2022, respectively | | Reclassification adjustment for loss on derivative instruments included in net income, net of tax of $0 and $37 for the three months ended and $17 and $109 for the nine months ended in 2023 and 2022, respectively | | | — | | 111 | | 81 | | 334 | |
| Postretirement liability adjustment: | Postretirement liability adjustment: | | 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) | | — | | |
| Amortization of postretirement liability losses included in net periodic benefit credit, net of tax of $98 and $148 for the three months ended and $263 and $460 for the nine months ended in 2023 and 2022, respectively | | Amortization of postretirement liability losses included in net periodic benefit credit, net of tax of $98 and $148 for the three months ended and $263 and $460 for the nine months ended in 2023 and 2022, respectively | | | (6) | | 461 | | 481 | | 1,367 | |
| Reclassification of postretirement liability adjustment from regulatory asset, net of tax of $— and $— for the three months ended and $— and $(1,086) for the nine months ended in 2023 and 2022, respectively | | Reclassification of postretirement liability adjustment from regulatory asset, net of tax of $— and $— for the three months ended and $— and $(1,086) for the nine months ended in 2023 and 2022, respectively | | | — | | — | | — | | (3,265) | |
| Postretirement liability adjustment | Postretirement liability adjustment | | 461 | | 466 | | (1,898) | | 1,389 | | Postretirement liability adjustment | | | (6) | | 461 | | 481 | | (1,898) | |
| 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 gain (loss) on available-for-sale investments: | | 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 $(17) and $(88) for the three months ended and $(21) and $(207) for the nine months ended in 2023 and 2022, respectively | | Net unrealized gain (loss) on available-for-sale investments arising during the period, net of tax of $(17) and $(88) for the three months ended and $(21) and $(207) for the nine months ended in 2023 and 2022, respectively | | | (66) | | (329) | | (80) | | (777) | |
| Reclassification adjustment for loss on available-for-sale investments included in net income, net of tax of $3 and $12 for the three months ended and $9 and $27 for the nine months ended in 2023 and 2022, respectively | | Reclassification adjustment for loss on available-for-sale investments included in net income, net of tax of $3 and $12 for the three months ended and $9 and $27 for the nine months ended in 2023 and 2022, respectively | | | 10 | | 42 | | 36 | | 99 | |
| Net unrealized loss on available-for-sale investments | Net unrealized loss on available-for-sale investments | | (287) | | (34) | | (678) | | (70) | | Net unrealized loss on available-for-sale investments | | | (56) | | (287) | | (44) | | (678) | |
| Other comprehensive income (loss) | Other comprehensive income (loss) | | 285 | | 543 | | (2,242) | | 1,653 | | Other comprehensive income (loss) | | | (62) | | 285 | | 518 | | (2,242) | |
| Comprehensive income attributable to common stockholders | Comprehensive income attributable to common stockholders | | $ | 148,256 | | $ | 139,819 | | $ | 248,159 | | $ | 293,250 | | Comprehensive income attributable to common stockholders | | | $ | 74,867 | | $ | 148,256 | | $ | 244,492 | | $ | 248,159 | |
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 | | September 30, 2023 | September 30, 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 | $ | 74,620 | | $ | 57,241 | | $ | 54,161 | | |
| Cash, cash equivalents and restricted cash | | Cash, cash equivalents and restricted cash | $ | 32,493 | | $ | 57,859 | | $ | 70,428 | |
| Receivables, net | Receivables, net | 1,298,019 | | 979,862 | | 946,741 | | Receivables, net | 893,019 | | 850,137 | | 1,064,340 | |
| Current regulatory assets | | Current regulatory assets | 169,248 | | 148,160 | | 165,092 | |
| Inventories | Inventories | 398,642 | | 312,285 | | 335,609 | | Inventories | 80,235 | | 89,814 | | 64,248 | |
| Current regulatory assets | 148,160 | | 133,135 | | 118,691 | | |
| Prepayments and other current assets | Prepayments and other current assets | 104,850 | | 83,364 | | 95,741 | | Prepayments and other current assets | 63,805 | | 87,901 | | 55,123 | |
| Investment in Knife River | | Investment in Knife River | 276,213 | | — | | — | |
| Current assets of discontinued operations | | Current assets of discontinued operations | — | | 790,421 | | 592,517 | |
| Total current assets | Total current assets | 2,024,291 | | 1,565,887 | | 1,550,943 | | Total current assets | 1,515,013 | | 2,024,292 | | 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 | 7,211,680 | | 6,814,651 | | 6,874,630 | |
| 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 | 2,191,514 | | 2,096,450 | | 2,098,298 | |
| Net property, plant and equipment | Net property, plant and equipment | 5,993,850 | | 5,458,981 | | 5,756,388 | | Net property, plant and equipment | 5,020,166 | | 4,718,201 | | 4,776,332 | |
| Goodwill | Goodwill | 763,262 | | 717,646 | | 765,386 | | Goodwill | 488,960 | | 488,960 | | 488,960 | |
| Other intangible assets, net | Other intangible assets, net | 18,745 | | 22,241 | | 22,578 | | Other intangible assets, net | 2,526 | | 4,648 | | 4,102 | |
| Regulatory assets | Regulatory assets | 344,442 | | 379,245 | | 357,851 | | Regulatory assets | 428,969 | | 344,442 | | 329,659 | |
| Investments | Investments | 157,860 | | 171,859 | | 175,476 | | Investments | 139,327 | | 125,534 | | 128,827 | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | 119,586 | | 109,439 | | 124,138 | | Operating lease right-of-use assets | 75,729 | | 76,155 | | 73,502 | |
| Other | Other | 185,094 | | 143,565 | | 157,675 | | Other | 198,459 | | 181,860 | | 161,900 | |
| | Noncurrent assets of discontinued operations | | Noncurrent assets of discontinued operations | — | | 1,643,038 | | 1,685,751 | |
| Total noncurrent assets | Total noncurrent assets | 7,582,839 | | 7,002,976 | | 7,359,492 | | Total noncurrent assets | 6,354,136 | | 7,582,838 | | 7,649,033 | |
| Total assets | Total assets | $ | 9,607,130 | | $ | 8,568,863 | | $ | 8,910,435 | | Total assets | $ | 7,869,149 | | $ | 9,607,130 | | $ | 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 | $ | 306,400 | | $ | — | | $ | 38,500 | |
| 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 | 61,319 | | 86,319 | | 47,819 | |
| Accounts payable | Accounts payable | 630,699 | | 525,704 | | 478,933 | | Accounts payable | 414,479 | | 452,379 | | 525,560 | |
| Taxes payable | Taxes payable | 93,565 | | 87,455 | | 80,372 | | Taxes payable | 49,500 | | 80,691 | | 62,308 | |
| Dividends payable | Dividends payable | 44,229 | | 43,212 | | 44,229 | | Dividends payable | 25,455 | | 44,229 | | 45,245 | |
| Accrued compensation | Accrued compensation | 99,824 | | 105,867 | | 81,904 | | Accrued compensation | 94,230 | | 72,441 | | 59,470 | |
| 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 | 23,112 | | 21,568 | | 21,307 | |
| Regulatory liabilities due within one year | Regulatory liabilities due within one year | 18,599 | | 16,491 | | 16,303 | | Regulatory liabilities due within one year | 45,013 | | 18,599 | | 26,440 | |
| Other accrued liabilities | Other accrued liabilities | 232,364 | | 212,140 | | 207,078 | | Other accrued liabilities | 154,147 | | 158,514 | | 156,031 | |
| | Current liabilities of discontinued operations | | Current liabilities of discontinued operations | — | | 533,562 | | 496,923 | |
| Total current liabilities | Total current liabilities | 1,468,302 | | 1,072,919 | | 1,092,240 | | Total current liabilities | 1,173,655 | | 1,468,302 | | 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 | 2,279,828 | | 2,192,411 | | 2,317,848 | |
| Deferred income taxes | Deferred income taxes | 617,996 | | 557,582 | | 591,962 | | Deferred income taxes | 526,654 | | 442,468 | | 455,499 | |
| Asset retirement obligations | Asset retirement obligations | 472,931 | | 455,522 | | 458,061 | | Asset retirement obligations | 384,083 | | 444,967 | | 372,870 | |
| Regulatory liabilities | Regulatory liabilities | 433,212 | | 426,141 | | 428,790 | | Regulatory liabilities | 495,112 | | 433,212 | | 448,454 | |
| Operating lease liabilities | Operating lease liabilities | 85,884 | | 79,397 | | 89,253 | | Operating lease liabilities | 52,908 | | 55,453 | | 52,871 | |
| Other | Other | 262,948 | | 318,306 | | 273,408 | | Other | 199,475 | | 175,788 | | 180,603 | |
| Noncurrent liabilities of discontinued operations | | Noncurrent liabilities of discontinued operations | — | | 902,671 | | 765,904 | |
| Total noncurrent liabilities | Total noncurrent liabilities | 4,646,970 | | 4,163,666 | | 4,435,321 | | Total noncurrent liabilities | 3,938,060 | | 4,646,970 | | 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 - 203,638,373 at September 30, 2023, 203,889,661 at September 30, 2022 and 204,162,814 at December 31, 2022 | | Common stock Authorized - 500,000,000 shares, $1.00 par value Shares issued - 203,638,373 at September 30, 2023, 203,889,661 at September 30, 2022 and 204,162,814 at December 31, 2022 | 203,638 | | 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 | 1,462,939 | | 1,455,241 | | 1,466,037 | |
| Retained earnings | Retained earnings | 1,879,600 | | 1,720,232 | | 1,762,410 | | Retained earnings | 1,108,616 | | 1,879,600 | | 1,951,138 | |
| Accumulated other comprehensive loss | Accumulated other comprehensive loss | (43,246) | | (46,425) | | (41,004) | | Accumulated other comprehensive loss | (17,759) | | (43,246) | | (30,583) | |
| Treasury stock at cost - 538,921 shares | (3,626) | | (3,626) | | (3,626) | | |
| Treasury stock at cost 538,921 shares at September 30, 2022 and December 31, 2022 | | Treasury stock at cost 538,921 shares at September 30, 2022 and December 31, 2022 | — | | (3,626) | | (3,626) | |
| Total stockholders' equity | Total stockholders' equity | 3,491,858 | | 3,332,278 | | 3,382,874 | | Total stockholders' equity | 2,757,434 | | 3,491,858 | | 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 | $ | 7,869,149 | | $ | 9,607,130 | | $ | 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) | |
| 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 | |
| Net income | | Net income | — | | — | | — | | 130,692 | | — | | — | | — | | 130,692 | |
| Other comprehensive income | | Other comprehensive income | — | | — | | — | | — | | 363 | | — | | — | | 363 | |
| Dividends declared on common stock | | Dividends declared on common stock | — | | — | | — | | (45,158) | | — | | — | | — | | (45,158) | |
| Stock-based compensation | | Stock-based compensation | — | | — | | (927) | | — | | — | | — | | — | | (927) | |
| Separation of Knife River | | Separation of Knife River | (538,921) | | (539) | | — | | (969,934) | | 12,306 | | 538,921 | | 3,626 | | (954,541) | |
| Issuance of common stock | Issuance of common stock | — | | — | | (127) | | — | | — | | — | | — | | (127) | | Issuance of common stock | 14,480 | | 14 | | 368 | | — | | — | | — | | — | | 382 | |
| At March 31, 2022 | 203,889,661 | | $ | 203,889 | | $ | 1,451,464 | | $ | 1,749,726 | | $ | (40,735) | | (538,921) | | $ | (3,626) | | $ | 3,360,718 | | |
| At June 30, 2023 | | At June 30, 2023 | 203,638,373 | | $ | 203,638 | | $ | 1,460,735 | | $ | 1,059,517 | | $ | (17,697) | | — | | $ | — | | $ | 2,706,193 | |
| Net income | Net income | — | | — | | — | | 70,667 | | — | | — | | — | | 70,667 | | Net income | — | | — | | — | | 74,929 | | — | | — | | — | | 74,929 | |
| Other comprehensive loss | Other comprehensive loss | — | | — | | — | | — | | (2,796) | | — | | — | | (2,796) | | Other comprehensive loss | — | | — | | — | | — | | (62) | | — | | — | | (62) | |
| Dividends declared on common stock | Dividends declared on common stock | — | | — | | — | | (44,446) | | — | | — | | — | | (44,446) | | Dividends declared on common stock | — | | — | | — | | (25,645) | | — | | — | | — | | (25,645) | |
| Stock-based compensation | Stock-based compensation | — | | — | | 2,689 | | — | | — | | — | | — | | 2,689 | | Stock-based compensation | — | | — | | 2,204 | | — | | — | | — | | — | | 2,204 | |
| 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 | | |
| Separation of Knife River | | Separation of Knife River | | (185) | | | (185) | |
| | At September 30, 2023 | | At September 30, 2023 | 203,638,373 | | $ | 203,638 | | $ | 1,462,939 | | $ | 1,108,616 | | $ | (17,759) | | — | | $ | — | | $ | 2,757,434 | |
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, 2020 | 201,061,198 | | $ | 201,061 | | $ | 1,371,385 | | $ | 1,558,363 | | $ | (48,078) | | (538,921) | | $ | (3,626) | | $ | 3,079,105 | | |
| At December 31, 2021 | | 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 | Net income | — | | — | | — | | 52,131 | | — | | — | | — | | 52,131 | | Net income | — | | — | | — | | 31,763 | | — | | — | | — | | 31,763 | |
| Other comprehensive income | Other comprehensive income | — | | — | | — | | — | | 568 | | — | | — | | 568 | | Other comprehensive income | — | | — | | — | | — | | 269 | | — | | — | | 269 | |
| Dividends declared on common stock | Dividends declared on common stock | — | | — | | — | | (42,943) | | — | | — | | — | | (42,943) | | Dividends declared on common stock | — | | — | | — | | (44,447) | | — | | — | | — | | (44,447) | |
| Stock-based compensation | Stock-based compensation | — | | — | | 2,574 | | — | | — | | — | | — | | 2,574 | | Stock-based compensation | — | | — | | 2,689 | | — | | — | | — | | — | | 2,689 | |
| Repurchase of common stock | Repurchase of common stock | — | | — | | — | | — | | — | | (392,294) | | (6,701) | | (6,701) | | 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 | 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 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 | Issuance of common stock | 672,260 | | 672 | | 19,027 | | — | | — | | — | | — | | 19,699 | | Issuance of common stock | — | | — | | (127) | | — | | — | | — | | — | | (127) | |
| At March 31, 2021 | 201,733,458 | | $ | 201,733 | | $ | 1,382,158 | | $ | 1,567,551 | | $ | (47,510) | | (538,921) | | $ | (3,626) | | $ | 3,100,306 | | |
| At March 31, 2022 | | 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 | Net income | — | | — | | — | | 100,190 | | — | | — | | — | | 100,190 | | Net income | — | | — | | — | | 70,667 | | — | | — | | — | | 70,667 | |
| Other comprehensive income | Other comprehensive income | — | | — | | — | | — | | 542 | | — | | — | | 542 | | Other comprehensive income | — | | — | | — | | — | | (2,796) | | — | | — | | (2,796) | |
| Dividends declared on common stock | Dividends declared on common stock | — | | — | | — | | (43,336) | | — | | — | | — | | (43,336) | | Dividends declared on common stock | — | | — | | — | | (44,446) | | — | | — | | — | | (44,446) | |
| Stock-based compensation | Stock-based compensation | — | | — | | 6,150 | | — | | — | | — | | — | | 6,150 | | Stock-based compensation | — | | — | | 2,689 | | — | | — | | — | | — | | 2,689 | |
| Issuance of common stock | Issuance of common stock | 1,088,843 | | 1,089 | | 33,861 | | — | | — | | — | | — | | 34,950 | | Issuance of common stock | — | | — | | (22) | | — | | — | | — | | — | | (22) | |
| At June 30, 2021 | 202,822,301 | | $ | 202,822 | | $ | 1,422,169 | | $ | 1,624,405 | | $ | (46,968) | | (538,921) | | $ | (3,626) | | $ | 3,198,802 | | |
| At June 30, 2022 | | 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 | Net income | — | | — | | — | | 139,276 | | — | | — | | — | | 139,276 | | Net income | — | | — | | — | | 147,971 | | — | | — | | — | | 147,971 | |
| Other comprehensive income | Other comprehensive income | — | | — | | — | | — | | 543 | | — | | — | | 543 | | Other comprehensive income | — | | — | | — | | — | | 285 | | — | | — | | 285 | |
| Dividends declared on common stock | Dividends declared on common stock | — | | — | | — | | (43,449) | | — | | — | | — | | (43,449) | | Dividends declared on common stock | — | | — | | — | | (44,318) | | — | | — | | — | | (44,318) | |
| Stock-based compensation | Stock-based compensation | — | | — | | 2,925 | | — | | — | | — | | — | | 2,925 | | Stock-based compensation | — | | — | | 1,110 | | — | | — | | — | | — | | 1,110 | |
| 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 | | |
| | At September 30, 2022 | | At September 30, 2022 | 203,889,661 | | $ | 203,889 | | $ | 1,455,241 | | $ | 1,879,600 | | $ | (43,246) | | (538,921) | | $ | (3,626) | | $ | 3,491,858 | |
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 Cash Flows | Consolidated Statements of Cash Flows | Consolidated Statements of Cash Flows |
| (Unaudited) | (Unaudited) | (Unaudited) |
| | Nine Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, |
| | | 2022 | 2021 | | 2023 | 2022 |
| | | (In thousands) | | (In thousands) |
| Operating activities: | Operating activities: | | Operating activities: | |
| Net income | Net income | $ | 250,401 | | $ | 291,597 | | Net income | $ | 243,974 | | $ | 250,401 | |
| Discontinued operations, net of tax | Discontinued operations, net of tax | 103 | | 348 | | Discontinued operations, net of tax | (65,752) | | 103,504 | |
| Income from continuing operations | Income from continuing operations | 250,298 | | 291,249 | | Income from continuing operations | 309,726 | | 146,897 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 247,173 | | 222,613 | | Depreciation, depletion and amortization | 158,877 | | 158,622 | |
| Deferred income taxes | Deferred income taxes | 18,741 | | 30,353 | | Deferred income taxes | 63,745 | | 13,697 | |
| Provision for credit losses | Provision for credit losses | 3,258 | | (801) | | Provision for credit losses | 9,769 | | 3,554 | |
| Amortization of debt issuance costs | Amortization of debt issuance costs | 1,080 | | 997 | | Amortization of debt issuance costs | 991 | | 725 | |
| Employee stock-based compensation costs | Employee stock-based compensation costs | 6,488 | | 11,649 | | Employee stock-based compensation costs | 3,943 | | 5,689 | |
| Pension and postretirement benefit plan net periodic benefit credit | Pension and postretirement benefit plan net periodic benefit credit | (4,515) | | (3,690) | | Pension and postretirement benefit plan net periodic benefit credit | (4,086) | | (5,494) | |
| Unrealized gain on investment in Knife River | | Unrealized gain on investment in Knife River | (170,170) | | — | |
| Unrealized (gains) losses on investments | Unrealized (gains) losses on investments | 15,529 | | (4,408) | | Unrealized (gains) losses on investments | (3,501) | | 12,357 | |
| Gains on sales of assets | Gains on sales of assets | (8,500) | | (10,518) | | Gains on sales of assets | (6,761) | | (4,925) | |
| 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 | (346,879) | | (103,637) | | Receivables | 161,366 | | (107,314) | |
| Inventories | Inventories | (60,670) | | (21,402) | | Inventories | (19,694) | | (43,649) | |
| Other current assets | Other current assets | (31,405) | | (74,413) | | Other current assets | (68,161) | | (32,241) | |
| Accounts payable | Accounts payable | 148,456 | | 33,173 | | Accounts payable | (132,323) | | 89,876 | |
| Other current liabilities | Other current liabilities | 62,106 | | 14,175 | | Other current liabilities | 42,310 | | 40,931 | |
| Pension and postretirement benefit plan contributions | Pension and postretirement benefit plan contributions | (375) | | (326) | | Pension and postretirement benefit plan contributions | (7,541) | | (62) | |
| Other noncurrent changes | Other noncurrent changes | (15,835) | | (19,129) | | Other noncurrent changes | (3,362) | | (24,981) | |
| Net cash provided by continuing operations | Net cash provided by continuing operations | 284,950 | | 365,885 | | Net cash provided by continuing operations | 335,128 | | 253,682 | |
| Net cash used in discontinued operations | (17) | | (75) | | |
| Net cash provided by (used in) discontinued operations | | Net cash provided by (used in) discontinued operations | (160,214) | | 31,251 | |
| Net cash provided by operating activities | Net cash provided by operating activities | 284,933 | | 365,810 | | Net cash provided by operating activities | 174,914 | | 284,933 | |
| Investing activities: | Investing activities: | | Investing activities: | |
| Capital expenditures | Capital expenditures | (463,002) | | (428,114) | | Capital expenditures | (370,585) | | (341,162) | |
| Acquisitions, net of cash acquired | 450 | | (13,721) | | |
| | Net proceeds from sale or disposition of property and other | Net proceeds from sale or disposition of property and other | 1,615 | | 12,954 | | Net proceeds from sale or disposition of property and other | 13,238 | | (4,101) | |
| Investments | Investments | (4,411) | | (3,777) | | Investments | (3,339) | | (2,185) | |
| | Net cash used in continuing operations | | Net cash used in continuing operations | (360,686) | | (347,448) | |
| Net cash used in discontinued operations | | Net cash used in discontinued operations | (55,012) | | (117,900) | |
| Net cash used in investing activities | Net cash used in investing activities | (465,348) | | (432,658) | | Net cash used in investing activities | (415,698) | | (465,348) | |
| Financing activities: | Financing activities: | | Financing activities: | |
| Issuance of short-term borrowings | Issuance of short-term borrowings | 100,000 | | 50,000 | | Issuance of short-term borrowings | 461,400 | | — | |
| Repayment of short-term borrowings | Repayment of short-term borrowings | — | | (50,000) | | Repayment of short-term borrowings | (193,500) | | — | |
| Issuance of long-term debt | Issuance of long-term debt | 270,250 | | 178,879 | | Issuance of long-term debt | 411,900 | | 220,429 | |
| Repayment of long-term debt | Repayment of long-term debt | (23,155) | | (63,835) | | Repayment of long-term debt | (434,994) | | — | |
| Debt issuance costs | Debt issuance costs | (1,082) | | (362) | | Debt issuance costs | (1,844) | | (334) | |
| Net proceeds from issuance of common stock | Net proceeds from issuance of common stock | (149) | | 88,830 | | Net proceeds from issuance of common stock | — | | (149) | |
| Dividends paid | Dividends paid | (132,687) | | (128,142) | | Dividends paid | (135,861) | | (132,687) | |
| Repurchase of common stock | Repurchase of common stock | (7,399) | | (6,701) | | Repurchase of common stock | (4,811) | | (7,399) | |
| Tax withholding on stock-based compensation | Tax withholding on stock-based compensation | (4,904) | | (4,127) | | Tax withholding on stock-based compensation | (3,040) | | (4,904) | |
| Net cash provided by continuing operations | | Net cash provided by continuing operations | 99,250 | | 74,956 | |
| Net cash provided by discontinued operations | | Net cash provided by discontinued operations | 93,509 | | 125,918 | |
| Net cash provided by financing activities | Net cash provided by financing activities | 200,874 | | 64,542 | | Net cash provided by financing activities | 192,759 | | 200,874 | |
| Increase (decrease) in cash and cash equivalents | Increase (decrease) in cash and cash equivalents | 20,459 | | (2,306) | | Increase (decrease) in cash and cash equivalents | (48,025) | | 20,459 | |
| Cash and cash equivalents -- beginning of year | Cash and cash equivalents -- beginning of year | 54,161 | | 59,547 | | Cash and cash equivalents -- beginning of year | 80,518 | | 54,161 | |
| Cash and cash equivalents -- end of period | Cash and cash equivalents -- end of period | $ | 74,620 | | $ | 57,241 | | Cash and cash equivalents -- end of period | $ | 32,493 | | $ | 74,620 | |
The accompanying notes are an integral part of these consolidated financial statements.
MDU Resources Group, Inc.
Notes to Consolidated
Financial Statements
September 30, 20222023 and 20212022
(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.
The Company announced strategic initiatives in 2022 as part of the Company's continuous review of its business. On August 4, 2022,May 31, 2023, the Company announced its Board of Directors unanimously approved a plan to pursuecompleted the separation of Knife River, fromformerly the Company.construction materials and contracting segment, which resulted in two independent, publicly traded companies, MDU Resources Group, Inc. and Knife River. The Company's board of directors approved the distribution of approximately 90 percent of the issued and outstanding shares of Knife River to the Company's stockholders. Stockholders of the Company received one share of Knife River 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 retained approximately 10 percent or 5.7 million shares of Knife River common stock immediately following the separation with the intent to dispose of such shares within twelve months after the separation. The separation is planned asof Knife River was a tax-free spinoff transaction to the Company’s stockholders for U.S. federal income tax purposes. As
The Company's consolidated financial statements and accompanying notes for the next stepcurrent and prior periods have been restated to present the results of operations and the assets and liabilities of Knife River as discontinued operations, other than certain corporate overhead costs of the Company’s strategic planning, on November 2, 2022,Company historically allocated to Knife River, which are reflected in Other. Also included in discontinued operations in the boardConsolidated Statements of directors unanimously determined the best way to optimize value would be to create two pure-play companies: a leading construction materials company and a regulated energy delivery company. Accordingly, the board has authorized management to commence a strategic review process for MDU Construction Services with the objective of achieving the board’s goal of creating two pure-play public companies.
Discontinued operations includeIncome are the supporting activities of Fidelity and are shown in income from discontinued operations oncertain interest expense related to financing activity associated with the Consolidated Statements of Income.Knife River separation. Unless otherwise indicated, the amounts presented in the accompanying notes to the consolidated financial statements relate to the Company's continuing operations. For more information on discontinued operations, see Note 3.
In the fourth quarter of 2021,On November 2, 2023, the Company made changesannounced its intent to the presentationpursue a tax-free spinoff of its wholly owned construction services business, MDU Construction Services. The Company's board of directors believes a tax-free spinoff of the Consolidated Statementsconstruction services business supports the Company's goal of Cash Flows to provide further clarity on the sources and uses of net cash providedenhancing value for stockholders 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.becoming a pure-play regulated energy delivery company.
Management has also evaluated the impact of events occurring after September 30, 2022,2023, up to the date of the issuance of these consolidated interim financial statements on November 3, 2022,2, 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 identifyhave identified 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 below. |
| 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.LIBOR. 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 - Discontinued operations
On May 31, 2023, the Company completed the previously announced separation of Knife River, its former construction materials and contracting segment, into a new publicly traded company. The separation was achieved through the Company's pro-rata distribution of approximately 90 percent of the outstanding shares of Knife River to the Company's common stockholders. To effect the separation, the Company distributed to its stockholders one share of Knife River common stock for every four shares of the Company's common stock held on May 22, 2023, the record date for the distribution, with the Company retaining approximately 10 percent, or 5.7 million shares of Knife River common stock immediately following the separation. The Company intends to dispose of the retained shares within twelve months after the separation.
As a result of the separation, the historical assets and liabilities for Knife River have been classified as assets and liabilities of discontinued operations and the historical results of operations are shown in Discontinued operations, net of tax, other than allocated general corporate overhead costs of the Company, which do not meet the criteria for income (loss) from discontinued operations. The Company’s consolidated financial statements and accompanying notes for prior periods have been restated. For the comparative periods, Knife River's operations are only reflected through May 2023, whereas 2022 includes the full three and nine months from Knife River's operations.
On April 25, 2023, Knife River issued $425 million of senior notes, pursuant to an indenture, due 2031 to qualified institutional buyers. Knife River also entered into a new credit agreement which provided a revolving credit facility in an initial amount of up to $350 million and a senior secured term loan facility in an amount up to $275 million. The net proceeds from the notes offering, revolving credit facility and the term loan were used to repay $825 million of Knife River's intercompany obligations owed to Centennial. Centennial used the entirety of these proceeds from Knife River to repay a portion of its existing third-party indebtedness.
As a result of the separation, the Company retained legal ownership of 538,921 shares of the Company's common stock that were historically owned by a subsidiary of Knife River and recorded in Treasury stock at cost. Following the separation, the 538,921 treasury shares were retired.
The Company will provide to Knife River and Knife River will provide to the Company transition services in accordance with the TSA entered into on May 31, 2023. For the three and nine months ended September 30, 2023, the Company received $1.3 million and $1.9 million; and paid $407,000 and $684,000, respectively, for these related activities. The majority of the transition services are expected to be provided for a period of one year, however, no longer than two years after the separation.
Separation related costs of $1.0 million and $47.1 million, net of tax, were incurred during the three and nine months ended September 30, 2023, respectively. Separation costs incurred are presented in income (loss) from discontinued operations in the Consolidated Statements of Income. These charges primarily relate to transaction and third-party support costs, one-time business separation fees and related tax charges.
The Company had no assets or liabilities related to the discontinued operations of Knife River on its balance sheet as of September 30, 2023. The carrying amounts of the major classes of assets and liabilities of discontinued operations included in the Company’s Consolidated Balance Sheets were as follows:
| | | | | | | | |
| September 30, 2022 | December 31, 2022 |
| Assets | (In Thousands) |
| Current assets: | | |
| Cash and cash equivalents | $ | 16,761 | | $ | 10,090 | |
| Receivables, net | 447,882 | | 241,302 | |
| Inventories | 308,829 | | 323,277 | |
| Prepayments and other current assets | 16,949 | | 17,848 | |
| Total current assets of discontinued operations | 790,421 | | 592,517 | |
| Noncurrent assets: | | |
| Net property, plant and equipment | 1,275,649 | | 1,315,213 | |
| Goodwill | 274,302 | | 274,540 | |
| Other intangible assets, net | 14,097 | | 13,430 | |
| Investments | 32,326 | | 33,086 | |
| Operating lease right-of-use assets | 43,431 | | 45,872 | |
| Other | 3,233 | | 3,610 | |
| Total noncurrent assets of discontinued operations | 1,643,038 | | 1,685,751 | |
| Total assets of discontinued operations | $ | 2,433,459 | | $ | 2,278,268 | |
| Liabilities | | |
| Current liabilities: | | |
| Short-term borrowings | $ | 100,000 | | $ | 208,000 | |
| Long-term debt due within one year | 128,133 | | 30,211 | |
| Accounts payable | 178,320 | | 131,608 | |
| Taxes payable | 12,874 | | 8,502 | |
| Accrued compensation | 27,383 | | 29,192 | |
| Operating lease liabilities due within one year | 13,000 | | 13,210 | |
| Other accrued liabilities | 73,852 | | 76,200 | |
| Total current liabilities of discontinued operations | 533,562 | | 496,923 | |
| Noncurrent liabilities: | | |
| Long-term debt | 581,588 | | 445,546 | |
| Deferred income taxes | 175,529 | | 175,804 | |
| Asset retirement obligations | 27,964 | | 33,015 | |
| Operating lease liabilities | 30,431 | | 32,663 | |
| Other | 87,159 | | 78,876 | |
| Total noncurrent liabilities of discontinued operations | 902,671 | | 765,904 | |
| Total liabilities of discontinued operations | $ | 1,436,233 | | $ | 1,262,827 | |
The reconciliation of the major classes of income and expense constituting pretax income (loss) from discontinued operations to the after-tax income (loss) from discontinued operations on the Consolidated Statements of Income were as follows:
| | | | | | | | | | | | | | |
| Three Months Ended | Nine Months Ended |
| September 30, | September 30, |
| 2023 | 2022 | 2023 | 2022 |
| (In thousands) |
| Operating revenues | $ | — | | $ | 974,774 | | $ | 735,259 | | $ | 1,995,500 | |
| Operating expenses | 1,447 | | 825,874 | | 769,407 | | 1,828,602 | |
| Operating income (loss) | (1,447) | | 148,900 | | (34,148) | | 166,898 | |
| Other income (expense) | — | | (1,005) | | 2,382 | | (4,399) | |
| Interest expense | (66) | | 11,173 | | 37,545 | | 26,466 | |
| Income (loss) from discontinued operations before income taxes | (1,381) | | 136,722 | | (69,311) | | 136,033 | |
| Income taxes | 1,908 | | 31,120 | | (3,559) | | 32,529 | |
| Discontinued operations, net of tax | $ | (3,289) | | $ | 105,602 | | $ | (65,752) | | $ | 103,504 | |
Note 34 - 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 45 - Receivables and allowance for expected credit losses
Receivables consistsconsist primarily of trade receivables from the sale of goods and services, which are recorded at the invoiced amount, and contract assets, net of expected credit losses. For more information on contract assets, see Note 9. The Company's trade receivables are all due in 12 months or less. The total balance of receivables past due 90 days or more was $41.5$51.1 million, $37.9$30.8 million and $44.8$34.3 million at September 30, 20222023 and 2021,2022, 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
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 | | $ | 2,162 | | $ | 4,154 | |
| 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 | | — | | 826 | | 3,765 | |
| 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 | | — | | 51 | | 1,943 | |
| 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 | | |
| At March 31, 2023 | | At March 31, 2023 | $ | 468 | | $ | 2,943 | | $ | 2 | | $ | 2,938 | | $ | 6,351 | |
| Current expected credit loss provision | Current expected credit loss provision | 113 | | 92 | | — | | 12 | | 292 | | 509 | | Current expected credit loss provision | 182 | | 90 | | — | | 1,825 | | 2,097 | |
| Less write-offs charged against the allowance | Less write-offs charged against the allowance | 234 | | 939 | | — | | 108 | | 104 | | 1,385 | | Less write-offs charged against the allowance | 316 | | 1,454 | | — | | 103 | | 1,873 | |
| Credit loss recoveries collected | Credit loss recoveries collected | 108 | | 177 | | — | | — | | — | | 285 | | Credit loss recoveries collected | 79 | | 161 | | — | | 58 | | 298 | |
| At June 30, 2022 | $ | 348 | | $ | 1,453 | | $ | 2 | | $ | 5,030 | | $ | 2,732 | | $ | 9,565 | | |
| At June 30, 2023 | | At June 30, 2023 | $ | 413 | | $ | 1,740 | | $ | 2 | | $ | 4,718 | | $ | 6,873 | |
| Current expected credit loss provision | Current expected credit loss provision | 300 | | 881 | | — | | (55) | | (111) | | 1,015 | | Current expected credit loss provision | 513 | | 1,661 | | — | | 1,733 | | 3,907 | |
| Less write-offs charged against the allowance | Less write-offs charged against the allowance | 399 | | 1,822 | | — | | 75 | | 152 | | 2,448 | | Less write-offs charged against the allowance | 572 | | 2,758 | | — | | 27 | | 3,357 | |
| Credit loss recoveries collected | Credit loss recoveries collected | 85 | | 169 | | — | | — | | 40 | | 294 | | Credit loss recoveries collected | 75 | | 233 | | — | | — | | 308 | |
| At September 30, 2022 | $ | 334 | | $ | 681 | | $ | 2 | | $ | 4,900 | | $ | 2,509 | | $ | 8,426 | | |
| At September 30, 2023 | | At September 30, 2023 | $ | 429 | | $ | 876 | | $ | 2 | | $ | 6,424 | | $ | 7,731 | |
| | | | | | | | | | | | | | | | | | | | |
| Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Total |
| | (In thousands) |
| At December 31, 2020 | $ | 899 | | $ | 2,571 | | $ | 2 | | $ | 6,164 | | $ | 5,722 | | $ | 15,358 | |
| Current expected credit loss provision | 538 | | 1,273 | | — | | (1,049) | | (1,079) | | (317) | |
| Less write-offs charged against the allowance | 888 | | 1,107 | | — | | 273 | | 401 | | 2,669 | |
| Credit loss recoveries collected | 129 | | 213 | | — | | — | | — | | 342 | |
| 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 | |
| | | | | | | | | | | | | | | | | |
| Electric | Natural gas
distribution | Pipeline | Construction
services | Total |
| | (In thousands) |
| At December 31, 2021 | $ | 269 | | $ | 1,506 | | $ | 2 | | $ | 2,533 | | $ | 4,310 | |
| Current expected credit loss provision | 565 | | 1,369 | | — | | 54 | | 1,988 | |
| Less write-offs charged against the allowance | 597 | | 932 | | — | | 71 | | 1,600 | |
| Credit loss recoveries collected | 124 | | 180 | | — | | 28 | | 332 | |
| At March 31, 2022 | $ | 361 | | $ | 2,123 | | $ | 2 | | $ | 2,544 | | $ | 5,030 | |
| Current expected credit loss provision | 113 | | 92 | | — | | 292 | | 497 | |
| Less write-offs charged against the allowance | 234 | | 939 | | — | | 104 | | 1,277 | |
| Credit loss recoveries collected | 108 | | 177 | | — | | — | | 285 | |
| At June 30, 2022 | $ | 348 | | $ | 1,453 | | $ | 2 | | $ | 2,732 | | $ | 4,535 | |
| Current expected credit loss provision | 300 | | 881 | | — | | (111) | | 1,070 | |
| Less write-offs charged against the allowance | 399 | | 1,822 | | — | | 152 | | 2,373 | |
| Credit loss recoveries collected | 85 | | 169 | | — | | 40 | | 294 | |
| At September 30, 2022 | $ | 334 | | $ | 681 | | $ | 2 | | $ | 2,509 | | $ | 3,526 | |
Note 56 - 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. 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 | | September 30, 2023 | September 30, 2022 | December 31, 2022 |
| | | (In thousands) | | (In thousands) |
| Aggregates held for resale | $ | 198,711 | | $ | 183,693 | | $ | 184,363 | | |
| Asphalt oil | 56,609 | | 32,964 | | 57,002 | | |
| Merchandise for resale | | Merchandise for resale | 36,815 | | 26,538 | | 27,910 | |
| Natural gas in storage (current) | Natural gas in storage (current) | 48,532 | | 28,683 | | 18,867 | | Natural gas in storage (current) | 29,821 | | 48,532 | | 22,533 | |
| Materials and supplies | Materials and supplies | 42,359 | | 27,253 | | 30,629 | | Materials and supplies | $ | 7,824 | | $ | 9,917 | | $ | 6,846 | |
| Merchandise for resale | 39,198 | | 26,639 | | 28,501 | | |
| Other | Other | 13,233 | | 13,053 | | 16,247 | | Other | 5,775 | | 4,827 | | 6,959 | |
| Total | Total | $ | 398,642 | | $ | 312,285 | | $ | 335,609 | | Total | $ | 80,235 | | $ | 89,814 | | $ | 64,248 | |
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 $47.4 million, $47.2 million and $47.5 million at September 30, 2022 and $47.5 million at both2023, September 30, 20212022 and December 31, 2021.2022, respectively.
Note 67 - 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. As a result of the separation, the Company retained legal ownership of 538,921 shares of the Company's common stock that were historically owned by a subsidiary of Knife River and recorded in Treasury stock at cost. Following the separation, the 538,921 treasury shares were retired. The 538,921 shares of treasury stock did not have an impact on weighted-average shares outstanding, as they were not outstanding prior to being retired. 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 | Nine Months Ended |
| | September 30, | | September 30, |
| | 2022 | 2021 | 2022 | 2021 | | 2023 | 2022 | 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 | 203,638 | | 203,351 | | 203,633 | | 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 | 248 | | 293 | | 258 | | 56 | |
| 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 | 203,886 | | 203,644 | | 203,891 | | 203,407 | |
| | Earnings per share - basic: | | Earnings per share - basic: | |
| Income from continuing operations | | Income from continuing operations | $ | .38 | | $ | .21 | | $ | 1.52 | | $ | .72 | |
| Discontinued operations, net of tax | | Discontinued operations, net of tax | (.01) | | .52 | | (.32) | | .51 | |
| Earnings per share - basic | | Earnings per share - basic | $ | .37 | | $ | .73 | | $ | 1.20 | | $ | 1.23 | |
| | Earnings per share - diluted: | | Earnings per share - diluted: | |
| Income from continuing operations | | Income from continuing operations | $ | .38 | | $ | .21 | | $ | 1.52 | | $ | .72 | |
| Discontinued operations, net of tax | | Discontinued operations, net of tax | (.01) | | .52 | | (.32) | | .51 | |
| Earnings per share - diluted | | Earnings per share - diluted | $ | .37 | | $ | .73 | | $ | 1.20 | | $ | 1.23 | |
| | 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 | — | | — | | — | | 77 | |
| Dividends declared per common share | Dividends declared per common share | $ | .2175 | | $ | .2125 | | $ | .6525 | | $ | .6375 | | Dividends declared per common share | $ | .1250 | | $ | .2175 | | $ | .5700 | | $ | .6525 | |
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 8 - 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 | | 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, 2022 | | At December 31, 2022 | $ | (125) | | $ | (29,900) | | | $ | (558) | | $ | (30,583) | |
| Other comprehensive income before reclassifications | | Other comprehensive income before reclassifications | — | | — | | | 70 | | 70 | |
| Amounts reclassified from accumulated other comprehensive loss | | Amounts reclassified from accumulated other comprehensive loss | 34 | | 100 | | | 13 | | 147 | |
| Net current-period other comprehensive income | | Net current-period other comprehensive income | 34 | | 100 | | | 83 | | 217 | |
| At March 31, 2023 | | At March 31, 2023 | $ | (91) | | $ | (29,800) | | | $ | (475) | | $ | (30,366) | |
| Other comprehensive income before reclassifications | | Other comprehensive income before reclassifications | — | | — | | | (84) | | (84) | |
| Amounts reclassified from accumulated other comprehensive loss | | Amounts reclassified from accumulated other comprehensive loss | 47 | | 387 | | | 13 | | 447 | |
| Net current-period other comprehensive income (loss) | | Net current-period other comprehensive income (loss) | 47 | | 387 | | | (71) | | 363 | |
| Amounts reclassified related to the separation of Knife River | | Amounts reclassified related to the separation of Knife River | 44 | | 12,262 | | | — | | 12,306 | |
| At June 30, 2023 | | At June 30, 2023 | $ | — | | $ | (17,151) | | | $ | (546) | | $ | (17,697) | |
| Other comprehensive loss before reclassifications | Other comprehensive loss before reclassifications | — | | — | | | (44) | | (44) | | Other comprehensive loss before reclassifications | — | | — | | | (66) | | (66) | |
| 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 | — | | (6) | | | 10 | | 4 | |
| 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) | — | | (6) | | | (56) | | (62) | |
| 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 September 30, 2023 | | At September 30, 2023 | $ | — | | $ | (17,157) | | | $ | (602) | | $ | (17,759) | |
|
| | | | | | | | | | | | | | | |
| 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) | |
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 | Nine Months Ended | | Location on Consolidated
Statements of
Income |
| | September 30, | | September 30, | September 30, | |
| | 2022 | 2021 | 2022 | 2021 | | 2023 | 2022 | 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 | $ | — | | $ | (148) | | $ | (98) | | $ | (443) | | | Interest expense |
| | 37 | | 36 | | 109 | | 109 | | Income taxes | | — | | 37 | | 17 | | 109 | | | Income taxes |
| | (111) | | (111) | | (334) | | (334) | | | | — | | (111) | | (81) | | (334) | | | |
| 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 | (92) | | (609) | | (744) | | (1,827) | | | Other income |
| | 148 | | 151 | | 460 | | 462 | | Income taxes | | 98 | | 148 | | 263 | | 460 | | | Income taxes |
| | (461) | | (466) | | (1,367) | | (1,389) | | | | 6 | | (461) | | (481) | | (1,367) | | | |
| 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 | (13) | | (54) | | (45) | | (126) | | | Other income |
| | 12 | | 6 | | 27 | | 21 | | Income taxes | | 3 | | 12 | | 9 | | 27 | | | Income taxes |
| | (42) | | (20) | | (99) | | (80) | | | | (10) | | (42) | | (36) | | (99) | | | |
| Total reclassifications | Total reclassifications | $ | (614) | | $ | (597) | | $ | (1,800) | | $ | (1,803) | | | Total reclassifications | $ | (4) | | $ | (614) | | $ | (598) | | $ | (1,800) | | | |
Note 9 - 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.
The Company recognizes revenue from the sale of emissions allowances allocated under the environmental programs in certain states. The Company has the right to payment when the allowances are sold at auction. Revenue is recognized on a point in time basis within the quarter that the auction is held. The revenues associated with the sale of these allowances are deferred as a component of the respective jurisdiction’s regulatory asset or liability for environmental compliance. For more information on the Company’s regulatory assets and liabilities, see Note 12.
Changes in cost estimates on certain contracts may result in the issuance of change orders, which can be approved or unapproved by the customer, or the assertion of contract claims. The Company recognizes amounts associated with change orders and claims as revenue if it is probable that the contract price will be adjusted and the amount of any such adjustment can be reasonably estimated. Change orders and claims are negotiated in the normal course of business and represent management’s estimates of additional contract revenues that have been earned and are probable of collection. The Company received notification from a customer on a large project with a contract that was billed on a time and materials basis with no stated maximum price, that it is withholding payment of approximately $30.0 million on remaining outstanding billings, including retention. The Company believes it has substantial defenses against these claims based upon the terms of the contract and the Company's belief that it has performed under the terms of the contract. The Company believes collection of the remaining outstanding billings, including retention is probable and, as a result, the Company has recognized the revenue from this project in its results. However, there is uncertainty surrounding this matter, including the potential long-term nature of dispute resolution, the Company filing a lien on the property and the broad range of possible consideration amounts as a result of negotiations and potential litigation to resolve the dispute.
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 17.18.
| | Three Months Ended September 30, 2022 | Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Other | Total | |
| Three Months Ended September 30, 2023 | | Three Months Ended September 30, 2023 | Electric | Natural gas
distribution | Pipeline | Construction
services | Other | Total |
| | (In thousands) | | (In thousands) |
| Residential utility sales | Residential utility sales | $ | 36,981 | | $ | 64,074 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 101,055 | | Residential utility sales | $ | 34,303 | | $ | 68,733 | | $ | — | | $ | — | | $ | — | | $ | 103,036 | |
| Commercial utility sales | Commercial utility sales | 38,785 | | 43,734 | | — | | — | | — | | — | | 82,519 | | Commercial utility sales | 49,754 | | 40,360 | | — | | — | | — | | 90,114 | |
| Industrial utility sales | Industrial utility sales | 10,838 | | 7,209 | | — | | — | | — | | — | | 18,047 | | Industrial utility sales | 10,747 | | 7,272 | | — | | — | | — | | 18,019 | |
| Other utility sales | Other utility sales | 2,002 | | — | | — | | — | | — | | — | | 2,002 | | Other utility sales | 1,865 | | — | | — | | — | | — | | 1,865 | |
| Natural gas transportation | Natural gas transportation | — | | 11,910 | | 32,144 | | — | | — | | — | | 44,054 | | Natural gas transportation | — | | 13,050 | | 35,338 | | — | | — | | 48,388 | |
| Natural gas storage | Natural gas storage | — | | — | | 3,595 | | — | | — | | — | | 3,595 | | Natural gas storage | — | | — | | 4,808 | | — | | — | | 4,808 | |
| Contracting services | — | | — | | — | | 492,207 | | — | | — | | 492,207 | | |
| Construction materials | — | | — | | — | | 742,982 | | — | | — | | 742,982 | | |
| Intrasegment eliminations | — | | — | | — | | (259,761) | | — | | — | | (259,761) | | |
| Electrical & mechanical specialty contracting | Electrical & mechanical specialty contracting | — | | — | | — | | — | | 543,717 | | — | | 543,717 | | Electrical & mechanical specialty contracting | — | | — | | — | | 514,378 | | — | | 514,378 | |
| Transmission & distribution specialty contracting | Transmission & distribution specialty contracting | — | | — | | — | | — | | 181,550 | | — | | 181,550 | | Transmission & distribution specialty contracting | — | | — | | — | | 192,056 | | — | | 192,056 | |
| Other | Other | 10,758 | | 3,494 | | 3,815 | | — | | 200 | | 4,438 | | 22,705 | | Other | 14,701 | | 3,881 | | 3,916 | | (89) | | 1,689 | | 24,098 | |
| Intersegment eliminations | Intersegment eliminations | (124) | | (139) | | (3,595) | | (343) | | (2,229) | | (4,438) | | (10,868) | | Intersegment eliminations | (27) | | (69) | | (3,701) | | — | | (1,689) | | (5,486) | |
| 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 | 111,343 | | 133,227 | | 40,361 | | 706,345 | | — | | 991,276 | |
| Other revenues | (47) | | 1,792 | | 86 | | — | | 11,571 | | — | | 13,402 | | |
| Revenues out of scope | | Revenues out of scope | (3,254) | | 1,669 | | 43 | | 11,061 | | — | | 9,519 | |
| 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 | $ | 108,089 | | $ | 134,896 | | $ | 40,404 | | $ | 717,406 | | $ | — | | $ | 1,000,795 | |
| | Three Months Ended September 30, 2021 | Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Other | Total | |
| Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2022 | Electric | Natural gas
distribution | Pipeline | Construction
services | Other | Total |
| | (In thousands) | | (In thousands) |
| Residential utility sales | Residential utility sales | $ | 36,412 | | $ | 55,284 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 91,696 | | Residential utility sales | $ | 36,981 | | $ | 64,074 | | $ | — | | $ | — | | $ | — | | $ | 101,055 | |
| Commercial utility sales | Commercial utility sales | 39,033 | | 35,338 | | — | | — | | — | | — | | 74,371 | | Commercial utility sales | 38,785 | | 43,734 | | — | | — | | — | | 82,519 | |
| Industrial utility sales | Industrial utility sales | 10,495 | | 5,395 | | — | | — | | — | | — | | 15,890 | | Industrial utility sales | 10,838 | | 7,209 | | — | | — | | — | | 18,047 | |
| Other utility sales | Other utility sales | 1,993 | | — | | — | | — | | — | | — | | 1,993 | | Other utility sales | 2,002 | | — | | — | | — | | — | | 2,002 | |
| Natural gas transportation | Natural gas transportation | — | | 11,812 | | 28,058 | | — | | — | | — | | 39,870 | | Natural gas transportation | — | | 11,910 | | 32,144 | | — | | — | | 44,054 | |
| Natural gas storage | Natural gas storage | — | | — | | 3,483 | | — | | — | | — | | 3,483 | | Natural gas storage | — | | — | | 3,595 | | — | | — | | 3,595 | |
| Contracting services | — | | — | | — | | 415,106 | | — | | — | | 415,106 | | |
| Construction materials | — | | — | | — | | 617,823 | | — | | — | | 617,823 | | |
| Intrasegment eliminations | — | | — | | — | | (201,630) | | — | | — | | (201,630) | | |
| Electrical & mechanical specialty contracting | Electrical & mechanical specialty contracting | — | | — | | — | | — | | 317,238 | | — | | 317,238 | | Electrical & mechanical specialty contracting | — | | — | | — | | 543,717 | | — | | 543,717 | |
| Transmission & distribution specialty contracting | Transmission & distribution specialty contracting | — | | — | | — | | — | | 185,842 | | — | | 185,842 | | Transmission & distribution specialty contracting | — | | — | | — | | 181,550 | | — | | 181,550 | |
| Other | Other | 12,589 | | 2,110 | | 3,290 | | — | | 75 | | 3,423 | | 21,487 | | Other | 10,758 | | 3,495 | | 3,814 | | 200 | | 1,472 | | 19,739 | |
| Intersegment eliminations | Intersegment eliminations | (136) | | (142) | | (3,908) | | (110) | | (289) | | (3,398) | | (7,983) | | Intersegment eliminations | (34) | | (69) | | (3,581) | | (2,037) | | (1,472) | | (7,193) | |
| 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 | 99,330 | | 130,353 | | 35,972 | | 723,430 | | — | | 989,085 | |
| Other revenues | (1,456) | | 581 | | 45 | | — | | 11,657 | | — | | 10,827 | | |
| Revenues out of scope | | Revenues out of scope | (47) | | 1,792 | | 86 | | 11,571 | | — | | 13,402 | |
| 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 | $ | 99,283 | | $ | 132,145 | | $ | 36,058 | | $ | 735,001 | | $ | — | | $ | 1,002,487 | |
| | Nine Months Ended September 30, 2022 | Electric | Natural gas
distribution | Pipeline | Construction
materials and
contracting | Construction
services | Other | Total | |
| | Nine Months Ended September 30, 2023 | | Nine Months Ended September 30, 2023 | Electric | Natural gas
distribution | Pipeline | Construction
services | Other | Total |
| | (In thousands) | | (In thousands) |
| Residential utility sales | Residential utility sales | $ | 103,648 | | $ | 439,639 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 543,287 | | Residential utility sales | $ | 102,953 | | $ | 517,351 | | $ | — | | $ | — | | $ | — | | $ | 620,304 | |
| Commercial utility sales | Commercial utility sales | 108,400 | | 279,697 | | — | | — | | — | | — | | 388,097 | | Commercial utility sales | 124,363 | | 316,483 | | — | | — | | — | | 440,846 | |
| Industrial utility sales | Industrial utility sales | 32,067 | | 29,242 | | — | | — | | — | | — | | 61,309 | | Industrial utility sales | 31,880 | | 33,293 | | — | | — | | — | | 65,173 | |
| Other utility sales | Other utility sales | 5,632 | | — | | — | | — | | — | | — | | 5,632 | | Other utility sales | 5,349 | | — | | — | | — | | — | | 5,349 | |
| Natural gas transportation | Natural gas transportation | — | | 35,747 | | 95,685 | | — | | — | | — | | 131,432 | | Natural gas transportation | — | | 38,225 | | 104,716 | | — | | — | | 142,941 | |
| Natural gas storage | Natural gas storage | — | | — | | 10,210 | | — | | — | | — | | 10,210 | | Natural gas storage | — | | — | | 12,427 | | — | | — | | 12,427 | |
| Contracting services | — | | — | | — | | 937,156 | | — | | — | | 937,156 | | |
| Construction materials | — | | — | | — | | 1,535,077 | | — | | — | | 1,535,077 | | |
| Intrasegment eliminations | — | | — | | — | | (475,026) | | — | | — | | (475,026) | | |
| Electrical & mechanical specialty contracting | Electrical & mechanical specialty contracting | — | | — | | — | | — | | 1,443,758 | | — | | 1,443,758 | | Electrical & mechanical specialty contracting | — | | — | | — | | 1,672,948 | | — | | 1,672,948 | |
| Transmission & distribution specialty contracting | Transmission & distribution specialty contracting | — | | — | | — | | — | | 496,190 | | — | | 496,190 | | Transmission & distribution specialty contracting | — | | — | | — | | 511,563 | | — | | 511,563 | |
| Other | Other | 33,727 | | 9,854 | | 8,200 | | — | | 357 | | 13,168 | | 65,306 | | Other | 38,111 | | 11,874 | | 9,713 | | 121 | | 6,412 | | 66,231 | |
| Intersegment eliminations | Intersegment eliminations | (371) | | (416) | | (37,328) | | (674) | | (5,090) | | (13,168) | | (57,047) | | Intersegment eliminations | (82) | | (208) | | (37,889) | | — | | (6,412) | | (44,591) | |
| Revenues from contracts with customers | Revenues from contracts with customers | 283,103 | | 793,763 | | 76,767 | | 1,996,533 | | 1,935,215 | | — | | 5,085,381 | | Revenues from contracts with customers | 302,574 | | 917,018 | | 88,967 | | 2,184,632 | | — | | 3,493,191 | |
| Other revenues | (4,854) | | (831) | | 210 | | — | | 34,780 | | — | | 29,305 | | |
| Revenues out of scope | | Revenues out of scope | (7,799) | | 2,469 | | 119 | | 34,040 | | — | | 28,829 | |
| Total external operating revenues | Total external operating revenues | $ | 278,249 | | $ | 792,932 | | $ | 76,977 | | $ | 1,996,533 | | $ | 1,969,995 | | $ | — | | $ | 5,114,686 | | Total external operating revenues | $ | 294,775 | | $ | 919,487 | | $ | 89,086 | | $ | 2,218,672 | | $ | — | | $ | 3,522,020 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Nine Months Ended September 30, 2022 | Electric | Natural gas
distribution | Pipeline | 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 | |
| Electrical & mechanical specialty contracting | — | | — | | — | | 1,443,758 | | — | | 1,443,758 | |
| Transmission & distribution specialty contracting | — | | — | | — | | 496,190 | | — | | 496,190 | |
| Other | 33,727 | | 9,854 | | 8,201 | | 357 | | 4,368 | | 56,507 | |
| Intersegment eliminations | (102) | | (206) | | (37,309) | | (4,391) | | (4,368) | | (46,376) | |
| Revenues from contracts with customers | 283,372 | | 793,973 | | 76,787 | | 1,935,914 | | — | | 3,090,046 | |
| Revenues out of scope | (4,854) | | (831) | | 210 | | 34,780 | | — | | 29,305 | |
| Total external operating revenues | $ | 278,518 | | $ | 793,142 | | $ | 76,997 | | $ | 1,970,694 | | $ | — | | $ | 3,119,351 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 revenues within the construction materials and contracting segment to highlight the focus on vertical integration as this segment sells materials to both third parties and internal customers. Due to consolidation requirements, these revenues must be eliminated against construction materials to arrive at the external operating revenue total for the segment.
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 | | September 30, 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 | $ | 199,370 | | $ | 154,144 | | $ | 45,226 | | Receivables, net |
| Contract liabilities - current | Contract liabilities - current | (216,439) | | (179,140) | | (37,299) | | Accounts payable | Contract liabilities - current | (183,705) | | (168,361) | | (15,344) | | Accounts payable |
| Contract liabilities - noncurrent | Contract liabilities - noncurrent | (12) | | (118) | | 106 | | Noncurrent liabilities - other | Contract liabilities - noncurrent | (435) | | (6) | | (429) | | Noncurrent liabilities - other |
| Net contract assets (liabilities) | Net contract assets (liabilities) | $ | 49,134 | | $ | (53,516) | | $ | 102,650 | | | Net contract assets (liabilities) | $ | 15,230 | | $ | (14,223) | | $ | 29,453 | | |
The Company recognized $11.2$6.3 million and $147.9$164.3 million in revenue for the three and nine months ended September 30, 2023, respectively, which was previously included in contract liabilities at December 31, 2022. The Company recognized $8.2 million and $118.7 million in revenue for the three and nine months ended September 30, 2022, respectively, which was previously included in contract liabilities at December 31, 2021. The Company recognized $7.1 million and $152.4 million in revenue for the three and nine months ended September 30, 2021, respectively, which was previously included in contract liabilities at December 31, 2020.
The Company recognized a net increase in revenues of $14.5$20.2 million and $54.1$41.7 million for the three and nine months ended September 30, 2023, respectively, from performance obligations satisfied in prior periods. The Company recognized a net increase in revenues of $9.6 million and $43.7 million for the three and nine months ended September 30, 2022, respectively, from performance obligations satisfied in prior periods. The company recognized a net increase in revenues of $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 includesegment includes 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 and storage 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 and firm storage contracts included in the remaining performance obligations have weighted average remaining durations of approximately less than five years.years and two years, respectively.
At September 30, 2022,2023, the Company's remaining performance obligations were $3.3$2.5 billion. The Company expects to recognize the following revenue amounts in future periods related to these remaining performance obligations: $2.6$1.6 billion within the next 12 months or less; $369.7$371.0 million within the next 13 to 24 months; and $418.1$519.5 million in 25 months or more.
Note 10 - Business combinations
The following acquisitions were accounted for as business combinations in accordance with ASC 805 - Business Combinations. The results of the acquired businesses have been included in the Consolidated Financial Statements beginning on the acquisition date. Pro forma financial amounts reflecting the effects of the business combinations are not presented, as none of these business combinations, individually or in the aggregate, were material to the Company's financial position or results of operations.
The acquisitions are also subject to customary adjustments based on, among other things, the amount of cash, debt and working capital in the business as of the closing date. The amounts included in the Consolidated Balance Sheets for these adjustments are considered provisional until final settlement has occurred.
The Company had no acquisitions in the nine months ended September 30, 2022.
In 2021, the construction materials and contracting segment's acquisitions included:
•Baker Rock Resources and Oregon Mainline Paving, two construction materials companies located around the Portland, Oregon metro area, acquired in November 2021. As of September 30, 2022, the purchase price allocation was settled with no material adjustments to the provisional accounting.
•Mt. Hood Rock, a construction aggregates business in Oregon, acquired in April 2021. As of March 31, 2022, the purchase price allocation was settled with no material adjustments to the provisional accounting.
In 2021, the total purchase price for acquisitions was $236.1 million, subject to certain adjustments, with cash acquired totaling $900,000. The purchase price includes consideration paid of $235.2 million. The amounts allocated to the aggregated assets acquired and liabilities assumed during 2021 were as follows: $17.0 million to current assets; $179.8 million to property, plant and equipment; $50.6 million to goodwill; $2.2 million to other intangible assets; $8.7 million to current liabilities; $2.5 million to noncurrent liabilities - other; and $3.2 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. For the nine months ended September 30, 2022, the Company had no acquisition costs. For the nine months ended September 30, 2021, acquisition costs were not material.
Note 11 - 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 $11.2 million and $34.5 million for the three and nine months ended September 30, 2023, respectively. The Company recognized revenue from operating leases of $11.7 million and $35.1 million for the three and nine months ended September 30, 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, 2022,2023, 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:which is related to the natural gas distribution and construction services segments, remained unchanged at $489.0 million at September 30, 2023 and 2022, and December 31, 2022. No impairments of goodwill have been recorded in these periods.
| | | | | | | | | | | | | | |
| Balance at January 1, 2022 | Goodwill
Acquired
During
the Year | Measurement
Period
Adjustments | Balance at September 30, 2022 |
| | (In thousands) |
| Natural gas distribution | $ | 345,736 | | $ | — | | $ | — | | $ | 345,736 | |
| Construction materials and contracting | 276,426 | | — | | (2,124) | | 274,302 | |
| Construction services | 143,224 | | — | | — | | 143,224 | |
| Total | $ | 765,386 | | $ | — | | $ | (2,124) | | $ | 763,262 | |
| | | | | | | | | | | | | | |
| Balance at January 1, 2021 | Goodwill
Acquired
During
the Year | Measurement
Period
Adjustments | Balance at September 30, 2021 |
| | (In thousands) |
| Natural gas distribution | $ | 345,736 | | $ | — | | $ | — | | $ | 345,736 | |
| Construction materials and contracting | 226,003 | | 2,900 | | (217) | | 228,686 | |
| Construction services | 143,224 | | — | | — | | 143,224 | |
| Total | $ | 714,963 | | $ | 2,900 | | $ | (217) | | $ | 717,646 | |
| | | | | | | | | | | | | | |
| Balance at January 1, 2021 | Goodwill
Acquired
During
the Year | Measurement
Period
Adjustments | Balance at December 31, 2021 |
| | (In thousands) |
| Natural gas distribution | $ | 345,736 | | $ | — | | $ | — | | $ | 345,736 | |
| Construction materials and contracting | 226,003 | | 50,640 | | (217) | | 276,426 | |
| Construction services | 143,224 | | — | | — | | 143,224 | |
| Total | $ | 714,963 | | $ | 50,640 | | $ | (217) | | $ | 765,386 | |
Other amortizable intangible assets were as follows:
| | | | September 30, 2022 | September 30, 2021 | December 31, 2021 | | September 30, 2023 | September 30, 2022 | December 31, 2022 |
| | | (In thousands) | | (In thousands) |
| Customer relationships | Customer relationships | $ | 28,990 | | $ | 29,423 | | $ | 29,740 | | Customer relationships | $ | 10,450 | | $ | 10,450 | | $ | 10,450 | |
| Less accumulated amortization | Less accumulated amortization | 12,768 | | 9,705 | | 10,650 | | Less accumulated amortization | 7,924 | | 5,834 | | 6,356 | |
| | | 16,222 | | 19,718 | | 19,090 | | | 2,526 | | 4,616 | | 4,094 | |
| Noncompete agreements | Noncompete agreements | 4,591 | | 3,991 | | 4,591 | | Noncompete agreements | 292 | | 552 | | 552 | |
| Less accumulated amortization | Less accumulated amortization | 3,377 | | 2,710 | | 2,856 | | Less accumulated amortization | 292 | | 520 | | 544 | |
| | 1,214 | | 1,281 | | 1,735 | | | — | | 32 | | 8 | |
| Other | 5,279 | | 11,957 | | 12,601 | | |
| Less accumulated amortization | 3,970 | | 10,715 | | 10,848 | | |
| | 1,309 | | 1,242 | | 1,753 | | |
| Total | Total | $ | 18,745 | | $ | 22,241 | | $ | 22,578 | | Total | $ | 2,526 | | $ | 4,648 | | $ | 4,102 | |
The previous tables include goodwill andAmortization expense for amortizable intangible assets associated withfor the business combinations completed during 2021. For more information related to these business combinations, see Note 10.
three and nine months ended September 30, 2023, was $522,000 and $1.6 million, respectively. Amortization expense for amortizable intangible assets for the three and nine months ended September 30, 2022, was $1.3 million$565,000 and $3.8$1.7 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. Estimated amortization expense for identifiable intangible assets as of September 30, 2022, was:2023 is estimated to be as follows:
| | | | | | | | | | | | | | | | | | | | |
| 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 | $ | 522 | | $ | 1,888 | | $ | 116 | | $ | — | | $ | — | | $ | — | |
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 September 30, 2023 | * | September 30, 2023 | September 30, 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 | | $ | 107,101 | | $ | 112,079 | | $ | 141,306 | |
| Electric fuel and purchased power deferral | | Electric fuel and purchased power deferral | Up to 1 year | | 17,775 | | 2,328 | | 2,656 | |
| Conservation programs | Conservation programs | Up to 1 year | | 9,363 | | 8,495 | | 8,225 | | Conservation programs | Up to 1 year | | 14,411 | | 9,363 | | 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 | | 9,461 | | 3,354 | | 4,019 | |
| Other | Other | Up to 1 year | | 16,815 | | 14,541 | | 10,428 | | Other | Up to 1 year | | 20,500 | | 21,036 | | 8,567 | |
| | 148,160 | | 133,135 | | 118,691 | | | 169,248 | | 148,160 | | 165,092 | |
| Noncurrent: | Noncurrent: | | Noncurrent: | |
| Pension and postretirement benefits | Pension and postretirement benefits | ** | | 137,582 | | 155,888 | | 142,681 | | Pension and postretirement benefits | ** | | 144,448 | | 137,582 | | 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 | | 68,539 | | 67,094 | | 67,171 | |
| Natural gas costs recoverable through rate adjustments | | Natural gas costs recoverable through rate adjustments | Up to 2 years | | 64,914 | | 462 | | — | |
| 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 | | 43,520 | | 61,941 | | 44,462 | |
| Environmental compliance programs | | Environmental compliance programs | - | | 36,605 | | — | | — | |
| Manufactured gas plant site remediation | | Manufactured gas plant site remediation | - | | 24,577 | | 25,963 | | 26,624 | |
| Plant to be retired | Plant to be retired | - | | 24,740 | | 48,544 | | 50,070 | | Plant to be retired | - | | 19,947 | | 24,740 | | 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 | | 12,266 | | 12,394 | | 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 | | 2,747 | | 3,335 | | 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 | | 11,406 | | 10,931 | | 11,010 | |
| | 344,442 | | 379,245 | | 357,851 | | | 428,969 | | 344,442 | | 329,659 | |
| Total regulatory assets | Total regulatory assets | | $ | 492,602 | | $ | 512,380 | | $ | 476,542 | | Total regulatory assets | | $ | 598,217 | | $ | 492,602 | | $ | 494,751 | |
| Regulatory liabilities: | Regulatory liabilities: | | Regulatory liabilities: | |
| Current: | Current: | | Current: | |
| Taxes refundable to customers | Up to 1 year | | $ | 4,264 | | $ | 3,867 | | $ | 3,841 | | |
| Natural gas costs refundable through rate adjustments | | Natural gas costs refundable through rate adjustments | Up to 1 year | | 20,445 | | 873 | | 955 | |
| Electric fuel and purchased power deferral | Electric fuel and purchased power deferral | Up to 1 year | | 3,763 | | 3,205 | | — | | Electric fuel and purchased power deferral | Up to 1 year | | — | | 3,763 | | 4,929 | |
| Cost recovery mechanisms | Cost recovery mechanisms | Up to 1 year | | 2,674 | | 2,797 | | 214 | | Cost recovery mechanisms | Up to 1 year | | 5,754 | | 2,674 | | 1,977 | |
| Natural gas costs refundable through rate adjustments | Up to 1 year | | 873 | | — | | 6,700 | | |
| Conservation programs | | Conservation programs | Up to 1 year | | 1,976 | | 325 | | 4,126 | |
| Taxes refundable to customers | | Taxes refundable to customers | Up to 1 year | | 1,513 | | 4,264 | | 3,937 | |
| Refundable fuel and electric costs | | Refundable fuel and electric costs | Up to 1 year | | 18 | | 1,812 | | 3,253 | |
| Other | Other | Up to 1 year | | 7,025 | | 6,622 | | 5,548 | | Other | Up to 1 year | | 15,307 | | 4,888 | | 7,263 | |
| | 18,599 | | 16,491 | | 16,303 | | | 45,013 | | 18,599 | | 26,440 | |
| Noncurrent: | Noncurrent: | | Noncurrent: | |
| Plant removal and decommissioning costs | | Plant removal and decommissioning costs | Over plant lives | | 220,499 | | 174,481 | | 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 | | 194,804 | | 205,517 | | 203,222 | |
| Plant removal and decommissioning costs | Over plant lives | | 174,481 | | 172,683 | | 168,152 | | |
| Environmental compliance programs | | Environmental compliance programs | - | | 36,126 | | — | | — | |
| Cost recovery mechanisms | | Cost recovery mechanisms | Up to 19 years | | 20,012 | | 12,535 | | 14,025 | |
| Accumulated deferred investment tax credit | | Accumulated deferred investment tax credit | Up to 19 years | | 14,800 | | 14,665 | | 13,594 | |
| Pension and postretirement benefits | Pension and postretirement benefits | ** | | 19,687 | | 16,915 | | 20,434 | | Pension and postretirement benefits | ** | | 7,120 | | 19,687 | | 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 | | 1,751 | | 6,327 | | 1,587 | |
| | 433,212 | | 426,141 | | 428,790 | | | 495,112 | | 433,212 | | 448,454 | |
| Total regulatory liabilities | Total regulatory liabilities | | $ | 451,811 | | $ | 442,632 | | $ | 445,093 | | Total regulatory liabilities | | $ | 540,125 | | $ | 451,811 | | $ | 474,894 | |
| Net regulatory position | Net regulatory position | | $ | 40,791 | | $ | 69,748 | | $ | 31,449 | | Net regulatory position | | $ | 58,092 | | $ | 40,791 | | $ | 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, 20222023 and 2021,2022, and December 31, 2021,2022, approximately $211.8 million, $264.4 million $318.2 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, accelerated depreciation on plant retirement, certain pipeline integrity costs 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 and proceeds from the sale of allowances as a regulatory liability.
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. This increaseAdditionally, in December 2022 and January 2023, natural gas costs experienced in certain jurisdictions has been partially offset byprices significantly increased across the recovery of prior periodPacific Northwest from multiple price-pressuring events including wide-spread below-normal temperatures and higher natural gas costs being recovered over a period longer than the normal one-year period, as further discussed below.
In February 2021, a prolonged period of unseasonably cold temperatures in the central United States significantly increased the demand for electric andconsumption; reduced natural gas servicesflows due to pipeline constraints, including maintenance in West Texas; and contributed to increased market prices. Overall, Montana-Dakota and Great Plains incurred approximately $44.0 million in increasedhistorically low regional 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. storage levels.
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.21.
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 September 30, 2023, the Company accrued $36.6 million in compliance obligations.
The Company recognizes revenue from the sale of emissions allowances allocated under the environmental programs when the allowances are sold at auction. The revenues associated with the sale of these allowances are deferred as a component of the respective jurisdiction’s regulatory asset or liability for environmental compliance.
As environmental allowances are surrendered, the segment reduces the associated environmental compliance assets and liabilities from the Consolidated Balance Sheets. The expenses and revenues associated with the Company’s environmental allowances and obligations are deferred as regulatory assets and liabilities. 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$62.7 million, $106.4$75.7 million and $109.6$78.0 million, at September 30, 20222023 and 2021,2022, and December 31, 2021,2022, respectively, are classified as investments on the Consolidated Balance Sheets. The net unrealized loss on these investments was $2.6$1.4 million for the three months ended and an unrealized gain of $3.5 million for the nine months ended September 30, 2023, respectively. The net unrealized loss on these investments was $1.3 million and $16.8$12.4 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. 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, 2023 | Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Fair Value |
| (In thousands) |
| Mortgage-backed securities | $ | 8,386 | | $ | — | | $ | 750 | | $ | 7,636 | |
| U.S. Treasury securities | 3,307 | | 11 | | 23 | | 3,295 | |
| Total | $ | 11,693 | | $ | 11 | | $ | 773 | | $ | 10,931 | |
| | | | | | | | | | | | | | |
| September 30, 2022 | Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Fair Value |
| (In thousands) |
| Mortgage-backed securities | $ | 8,486 | | $ | — | | $ | 783 | | $ | 7,703 | |
| U.S. Treasury securities | 2,468 | | — | | 82 | | 2,386 | |
| Total | $ | 10,954 | | $ | — | | $ | 865 | | $ | 10,089 | |
| | | | | | | | | | | | | | |
| December 31, 2022 | Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Fair Value |
| (In thousands) |
| Mortgage-backed securities | $ | 8,928 | | $ | 2 | | $ | 636 | | $ | 8,294 | |
| U.S. Treasury securities | 2,608 | | — | | 72 | | 2,536 | |
| Total | $ | 11,536 | | $ | 2 | | $ | 708 | | $ | 10,830 | |
| | | | | | | | | | | | | | |
| 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 |
| (In thousands) |
| Mortgage-backed securities | $ | 8,702 | | $ | 51 | | $ | 47 | | $ | 8,706 | |
| U.S. Treasury securities | 2,407 | | — | | 11 | | 2,396 | |
| Total | $ | 11,109 | | $ | 51 | | $ | 58 | | $ | 11,102 | |
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 September 30, 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 September 30, 2023 |
| | (In thousands) | | (In thousands) |
| Assets: | Assets: | | Assets: | |
| Investment in Knife River | | Investment in Knife River | 276,213 | | $ | — | | $ | — | | $ | 276,213 | |
| Money market funds | Money market funds | $ | — | | $ | 7,309 | | $ | — | | $ | 7,309 | | Money market funds | — | | 25,818 | | — | | 25,818 | |
| Insurance contracts* | Insurance contracts* | — | | 95,170 | | — | | 95,170 | | Insurance contracts* | — | | 62,736 | | — | | 62,736 | |
| 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 | — | | 7,637 | | — | | 7,637 | |
| U.S. Treasury securities | U.S. Treasury securities | — | | 2,386 | | — | | 2,386 | | U.S. Treasury securities | — | | 3,295 | | — | | 3,295 | |
| | Total assets measured at fair value | Total assets measured at fair value | $ | — | | $ | 112,568 | | $ | — | | $ | 112,568 | | Total assets measured at fair value | $ | 276,213 | | $ | 99,486 | | $ | — | | $ | 375,699 | |
|
* The insurance contracts invest approximately 50 percent in fixed-income investments, 19 percent in common stock of large-cap companies, 10 percent in target date investments, 10 percent in common stock of mid-cap companies, 6 percent in common stock of small-cap companies, 3 percent in cash equivalents, 1 percent in international investments, and 1 percent in high-yield investments.
| | | | | | | | | | | | | | |
| | Fair Value Measurements at September 30, 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, 2022 |
| (In thousands) |
| Assets: | | | | |
| Money market funds | $ | — | | $ | 4,878 | | $ | — | | $ | 4,878 | |
| Insurance contracts* | — | | 75,723 | | — | | 75,723 | |
| Available-for-sale securities: | | | | |
| Mortgage-backed securities | — | | 7,703 | | — | | 7,703 | |
| U.S. Treasury securities | — | | 2,386 | | — | | 2,386 | |
| | | | |
| Total assets measured at fair value | $ | — | | $ | 90,690 | | $ | — | | $ | 90,690 | |
| | | | |
| | | | |
| | | | |
| | | | |
* The insurance contracts invest approximately 65 percent in fixed-income investments, 14 percent in common stock of large-cap companies, 7 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 | |
| | 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 |
| (In thousands) |
| Assets: | | | | |
| Money market funds | $ | — | | $ | 9,907 | | $ | — | | $ | 9,907 | |
| Insurance contracts* | — | | 106,371 | | — | | 106,371 | |
| Available-for-sale securities: | | | | |
| Mortgage-backed securities | — | | 8,679 | | — | | 8,679 | |
| U.S. Treasury securities | — | | 2,653 | | — | | 2,653 | |
| | | | |
| Total assets measured at fair value | $ | — | | $ | 127,610 | | $ | — | | $ | 127,610 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | | | | | | | | | | | |
| | 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 December 31, 2022 |
| (In thousands) |
| Assets: | | | | |
| Money market funds | $ | — | | $ | 4,913 | | $ | — | | $ | 4,913 | |
| Insurance contracts* | — | | 77,958 | | — | | 77,958 | |
| Available-for-sale securities: | | | | |
| Mortgage-backed securities | — | | 8,294 | | — | | 8,294 | |
| U.S. Treasury securities | — | | 2,536 | | — | | 2,536 | |
| | | | |
| Total assets measured at fair value | $ | — | | $ | 93,701 | | $ | — | | $ | 93,701 | |
| | | | |
| | | | |
| | | | |
| | | | |
* 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 combinations that occurred during 2021. The fair value of these assets and liabilities were determined based on Level 2 and Level 3 inputs.
The Company's long-term debt is not measured at fair value on the Consolidated Balance Sheets and the fair value is being provided for disclosure purposes only. The fair value was categorized as Level 2 in the fair value hierarchy and was based on discounted future cash flows using current market interest rates. 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 | | September 30, 2023 | September 30, 2022 | December 31, 2022 |
| | (In thousands) | | (In thousands) |
| Carrying amount | Carrying amount | $ | 2,988,452 | | $ | 2,328,266 | | $ | 2,741,900 | | Carrying amount | $ | 2,341,147 | | $ | 2,278,730 | | $ | 2,365,667 | |
| Fair value | Fair value | $ | 2,647,387 | | $ | 2,599,907 | | $ | 2,984,866 | | Fair value | $ | 1,960,926 | | $ | 1,989,362 | | $ | 2,053,396 | |
The carrying amounts of the Company's remaining financial instruments included in current assets and current liabilities approximate their fair values.
Note 15 - Debt
Due to the Knife River separation, Centennial repaid all of its outstanding debt in the second quarter of 2023, which was funded by the Knife River repayment and the Company entering into various new debt instruments. Refer to Note 3 for additional information related to the repayment of debt associated with the Knife River separation.
Certain debt instruments of the Company'sCompany and its subsidiaries contain restrictive and financial covenants and cross-default provisions. In order to borrow under the debt agreements, the subsidiary companiesCompany and its subsidiaries must be in compliance with the applicable covenants and certain other conditions, all of which the Company and its subsidiaries, as applicable, were in compliance with at September 30, 2022.2023. In the event the Company or its 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 areprogram is supported by a revolving credit agreements.agreement. While the amount of commercial paper outstanding does not reduce available capacity under the respective revolving credit agreements,agreement, Montana-Dakota and Centennial dodoes not issue commercial paper in an aggregate amount exceeding the available capacity under the credit agreements.agreement. The commercial paper and revolving credit agreement 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'sCompany and its subsidiaries.
Short-term debt
CentennialCascade On March 18, 2022, CentennialJanuary 20, 2023, Cascade entered into a $100.0$150.0 million term loan agreement with a SOFR-based variable interest rate and a maturity date of March 17, 2023.January 19, 2024. The agreement contains customary covenants and provisions, including a covenant of CentennialCascade 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 variable interest rate and a maturity date of January 19, 2024. In March, April, and May 2023, Intermountain paid down $20.0 million, $30.0 million, and $30.0 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.
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. On May 31, 2023, Centennial repaid the full balance outstanding under the term loan agreement.
On December 19, 2022, Centennial entered into a $135.0 million term loan agreement with a SOFR-based variable interest rate and a maturity date of December 18, 2023. On May 31, 2023, Centennial repaid the full balance outstanding under the term loan agreement.
MDU Resources Group, Inc. On May 1, 2023, the Company entered into a $75.0 million term loan agreement with a SOFR-based variable interest rate and a maturity date of November 1, 2023. On May 31, 2023, the Company repaid the full balance outstanding under the term loan agreement.
On May 31, 2023, the Company entered into a $150.0 million revolving credit agreement with a SOFR-based variable interest rate and a maturity date of May 29, 2024. At September 30, 2023, the amount outstanding was $111.4 million. 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.
Long-term debt
Centennial On June 9, 2023, Centennial repaid the full balances outstanding on all its long-term senior note debt, which aggregated $455.0 million.
MDU Resources Group, Inc. On May 31, 2023, the Company entered into a $200.0 million revolving credit agreement with a SOFR-based variable interest rate and a maturity date of May 31, 2028. 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. The credit 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 31, 2023, the Company entered into a $375.0 million term loan agreement with a SOFR-based variable interest rate and a maturity date of May 31, 2025. The term loan 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.
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 September 30, 2023 | September 30, 2023 | September 30, 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 | | |
| Commercial paper supported by revolving credit agreements | 3.66 | % | 460,600 | | 168,800 | | 450,300 | | |
| Credit agreements due on June 7, 2024 | 4.55 | % | 125,580 | | 94,300 | | 127,500 | | |
| Senior Notes due on dates ranging from July 15, 2024 to June 15, 2062 | | Senior Notes due on dates ranging from July 15, 2024 to June 15, 2062 | 4.33 | % | $ | 1,757,000 | | $ | 1,847,000 | | $ | 1,848,500 | |
| Term Loan Agreements due on dates ranging from May 31, 2025 to September 3, 2032 | | Term Loan Agreements due on dates ranging from May 31, 2025 to September 3, 2032 | 6.52 | % | 381,300 | | 7,000 | | 7,000 | |
| Commercial paper supported by revolving credit agreement | | Commercial paper supported by revolving credit agreement | 5.80 | % | 97,700 | | 268,272 | | 349,050 | |
| 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 | |
| Term Loan Agreement due on September 3, 2032 | 3.64 | % | 7,000 | | 7,700 | | 7,700 | | |
| Other notes due on dates ranging from January 1, 2024 to January 1, 2061 | .97 | % | 2,349 | | 3,198 | | 2,564 | | |
| Credit agreements due on dates ranging from October 13, 2027 to November 30, 2027 | | Credit agreements due on dates ranging from October 13, 2027 to November 30, 2027 | 8.50 | % | 38,900 | | 125,580 | | 130,000 | |
| Other notes due on dates ranging from January 1, 2024 to November 30, 2038 | | Other notes due on dates ranging from January 1, 2024 to November 30, 2038 | 8.41 | % | 37,884 | | 1,617 | | 1,614 | |
| Less unamortized debt issuance costs | Less unamortized debt issuance costs | | 6,633 | | 5,709 | | 6,090 | | Less unamortized debt issuance costs | | 6,637 | | 5,295 | | 5,211 | |
| Less discount | Less discount | | 444 | | 23 | | 74 | | Less discount | | — | | 444 | | 286 | |
| Total long-term debt | Total long-term debt | | 2,988,452 | | 2,328,266 | | 2,741,900 | | Total long-term debt | | 2,341,147 | | 2,278,730 | | 2,365,667 | |
| Less current maturities | Less current maturities | | 214,453 | | 1,548 | | 148,053 | | Less current maturities | | 61,319 | | 86,319 | | 47,819 | |
| Net long-term debt | Net long-term debt | | $ | 2,773,999 | | $ | 2,326,718 | | $ | 2,593,847 | | Net long-term debt | | $ | 2,279,828 | | $ | 2,192,411 | | $ | 2,317,848 | |
Schedule of Debt Maturities Long-term debt maturities, which excludes unamortized debt issuance costs and discount, at September 30, 2022,2023, 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 | $ | 619 | | $ | 158,400 | | $ | 532,700 | | $ | 140,700 | | $ | 59,600 | | $ | 1,455,765 | |
Note 16 - Income taxes
During the three and nine months ended September 30, 2023, Income before income taxes was $91.5 million and $402.0 million respectively, while income tax expense was $13.3 million and $92.3 million, respectively. The effective tax rate was 14.6 percent and 23.0 percent for the three and nine months ended September 30, 2023, respectively. The effective tax rate for the current three and nine month periods differed from the 2023 statutory rate of 24.8 percent primarily due to tax credits and other permanent tax benefits, partially offset by tax expense recorded related to basis differences in the Company's retained Knife River shares.
During the three and nine months ended September 30, 2022, Income before income taxes was $46.6 million and $175.2 million respectively, and income tax expense was $4.2 million and $28.4 million, respectively. The effective tax rate was 9.0 percent and 16.2 percent for the three and nine months ended September 30, 2022, respectively. The effective tax rate differed from the 2022 statutory rate of 24.8 percent due to tax credits and other permanent tax benefits.
Note 1617 - Cash flow information
Cash expenditures for interest and income taxes were as follows:
| | | Nine Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, |
| | | 2022 | 2021 | | | 2023 | 2022 | |
| | | (In thousands) | | (In thousands) |
| Interest, net* | Interest, net* | $ | 75,425 | | $ | 59,876 | | Interest, net* | $ | 84,352 | | $ | 55,954 | |
| Income taxes paid, net | $ | 17,664 | | $ | 61,250 | | |
| Income taxes paid (refunded), net** | | Income taxes paid (refunded), net** | $ | 40,290 | | $ | (5,499) | |
*AFUDC - borrowed was $2.4$7.4 million and $1.6$2.4 million for the nine months ended September 30, 2023 and 2022, respectively.
**Income taxes paid, including discontinued operations, were $39.4 million and 2021,$17.7 million for the nine months ended September 30, 2023 and 2022, respectively.
Noncash investing and financing transactions were as follows:
| | | September 30, 2022 | September 30, 2021 | December 31, 2021 | | September 30, 2023 | September 30, 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 | $ | 36,307 | | $ | 30,641 | | $ | 39,158 | |
| 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 | $ | 37,598 | | $ | 39,393 | | $ | 35,637 | |
| Debt assumed in connection with a business combination | $ | — | | $ | — | | $ | 10 | | |
|
Restricted Cash
Restricted cash represents deposits held by the Company’s captive insurance company that is required by state insurance regulations to remain in the captive insurance company as cash. The Company had restricted cash of $24.7 million, $33.8 million and $35.6 million at September 30, 2023 and 2022 and December 31, 2022, respectively.
Note 1718 - 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, sand and gravel); produces and sells asphalt mix; and supplies ready-mix concrete. This segment focuses on vertical integration of its contracting services with its construction materials to support the aggregate-based product lines including aggregate placement, asphalt and concrete paving, and site development and grading. Although not common to all locations, other products include the sale of cement, asphalt oil for various commercial and roadway applications, various finished concrete products and other building materials and related contracting services. This segment operates in the central, southern and western United States, including Alaska and Hawaii.
The construction services segment provides a full spectrum of construction services through its electrical and mechanical and transmission and distribution specialty contracting services across the United States. These specialty contracting services are provided to utilities, and manufacturing, transportation, commercial, industrial, institutional, renewable and governmental customers. Its electrical and mechanical contracting services include construction and maintenance of electrical and communication wiring and infrastructure, fire suppression systems, and mechanical piping and services. Its transmission and distribution contracting services include construction and maintenance of overhead and underground electrical, gas and communication infrastructure, as well as manufacturing and supplying transmission 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 Knife River which 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 includeincludes Knife River's operations, strategic initiative costs and interest on debt facilities repaid in connection with the Knife River separation. For the comparative periods below, Knife River's operations are only reflected through May 2023, whereas 2022 includes the full three and nine months from Knife River's operations. Discontinued operations also includes 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 | Nine Months Ended |
| | September 30, | | September 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | | 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 | $ | 108,089 | | $ | 99,283 | | $ | 294,775 | | $ | 278,518 | |
| Natural gas distribution | Natural gas distribution | 132,074 | | 110,378 | | 792,932 | | 614,373 | | Natural gas distribution | 134,896 | | 132,145 | | 919,487 | | 793,142 | |
| Pipeline | Pipeline | 32,347 | | 27,757 | | 69,347 | | 58,390 | | Pipeline | 36,549 | | 32,346 | | 79,697 | | 69,347 | |
| | | 263,614 | | 237,065 | | 1,140,528 | | 940,017 | | | 279,534 | | 263,774 | | 1,293,959 | | 1,141,007 | |
| Non-regulated operations: | | Non-regulated operations: | |
| Pipeline | | Pipeline | 3,855 | | 3,712 | | 9,389 | | 7,650 | |
| Construction services | | Construction services | 717,406 | | 735,001 | | 2,218,672 | | 1,970,694 | |
| Other | | Other | — | | — | | — | | — | |
| | | 721,261 | | 738,713 | | 2,228,061 | | 1,978,344 | |
| Total external operating revenues | | Total external operating revenues | $ | 1,000,795 | | $ | 1,002,487 | | $ | 3,522,020 | | $ | 3,119,351 | |
| | Intersegment operating revenues: | | Intersegment operating revenues: | |
| Regulated operations: | | Regulated operations: | |
| Electric | | Electric | $ | 27 | | $ | 34 | | $ | 82 | | $ | 102 | |
| Natural gas distribution | | Natural gas distribution | 69 | | 69 | | 208 | | 206 | |
| Pipeline | | Pipeline | 3,666 | | 3,508 | | 37,624 | | 36,845 | |
| | | 3,762 | | 3,611 | | 37,914 | | 37,153 | |
| Non-regulated operations: | | Non-regulated operations: | |
| Pipeline | | Pipeline | 35 | | 73 | | 265 | | 464 | |
| Construction services | | Construction services | — | | 2,037 | | — | | 4,391 | |
| Other | | Other | 1,689 | | 1,472 | | 6,412 | | 4,368 | |
| | | 1,724 | | 3,582 | | 6,677 | | 9,223 | |
| Total intersegment operating revenues | | Total intersegment operating revenues | $ | 5,486 | | $ | 7,193 | | $ | 44,591 | | $ | 46,376 | |
| | Operating income (loss): | | Operating income (loss): | |
| Electric | | Electric | $ | 28,718 | | $ | 30,395 | | $ | 71,372 | | $ | 53,764 | |
| Natural gas distribution | | Natural gas distribution | (15,258) | | (16,688) | | 45,674 | | 38,929 | |
| Pipeline | | Pipeline | 17,767 | | 14,963 | | 44,693 | | 39,448 | |
| Construction services | | Construction services | 50,091 | | 34,949 | | 139,619 | | 110,588 | |
| Other | | Other | 3,286 | | (2,617) | | (16,201) | | (11,726) | |
| Total operating income | | Total operating income | $ | 84,604 | | $ | 61,002 | | $ | 285,157 | | $ | 231,003 | |
| | Income (loss) from continuing operations: | | Income (loss) from continuing operations: | |
| Regulated operations: | | Regulated operations: | |
| Electric | | Electric | $ | 20,942 | | $ | 21,596 | | $ | 53,887 | | $ | 37,476 | |
| Natural gas distribution | | Natural gas distribution | (17,764) | | (18,058) | | 18,007 | | 10,758 | |
| Pipeline | | Pipeline | 11,450 | | 9,381 | | 29,029 | | 25,015 | |
| | | 14,628 | | 12,919 | | 100,923 | | 73,249 | |
| Non-regulated operations: | | Non-regulated operations: | |
| Pipeline | | Pipeline | 508 | | 779 | | 337 | | (179) | |
| Construction services | | Construction services | 35,975 | | 29,248 | | 105,951 | | 86,596 | |
| Other | | Other | 27,107 | | (577) | | 102,515 | | (12,769) | |
| | | 63,590 | | 29,450 | | 208,803 | | 73,648 | |
| Income from continuing operations | | Income from continuing operations | 78,218 | | 42,369 | | 309,726 | | 146,897 | |
| Discontinued operations, net of tax | | Discontinued operations, net of tax | (3,289) | | 105,602 | | (65,752) | | 103,504 | |
| Net income | | Net income | $ | 74,929 | | $ | 147,971 | | $ | 243,974 | | $ | 250,401 | |
| | | | | | | | | | | | | | |
| Three Months Ended | Nine Months Ended |
| September 30, | September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | |
| | (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: | | | | |
| Regulated operations: | | | | |
| Electric | $ | 124 | | $ | 136 | | $ | 371 | | $ | 407 | |
| Natural gas distribution | 139 | | 142 | | 416 | | 425 | |
| Pipeline | 3,508 | | 3,845 | | 36,845 | | 37,530 | |
| 3,771 | | 4,123 | | 37,632 | | 38,362 | |
| Non-regulated operations: | | | | |
| Pipeline | 87 | | 63 | | 483 | | 470 | |
| Construction materials and contracting | 343 | | 110 | | 674 | | 314 | |
| Construction services | 2,229 | | 289 | | 5,090 | | 2,128 | |
| Other | 4,438 | | 3,398 | | 13,168 | | 10,082 | |
| 7,097 | | 3,860 | | 19,415 | | 12,994 | |
| Intersegment eliminations | (10,868) | | (7,983) | | (57,047) | | (51,356) | |
| Total intersegment operating revenues | $ | — | | $ | — | | $ | — | | $ | — | |
| | | | |
| Operating income (loss): | | | | |
| Electric | $ | 30,395 | | $ | 27,310 | | $ | 53,764 | | $ | 53,982 | |
| Natural gas distribution | (16,688) | | (14,249) | | 38,929 | | 42,925 | |
| Pipeline | 14,963 | | 12,284 | | 39,447 | | 35,896 | |
| Construction materials and contracting | 147,367 | | 133,712 | | 157,116 | | 171,274 | |
| Construction services | 34,949 | | 30,120 | | 110,588 | | 108,172 | |
| Other | (1,135) | | (8) | | (2,081) | | (226) | |
| Total operating income | $ | 209,851 | | $ | 189,169 | | $ | 397,763 | | $ | 412,023 | |
| | | | |
| Net income (loss): | | | | |
| Regulated operations: | | | | |
| Electric | $ | 21,596 | | $ | 20,564 | | $ | 37,476 | | $ | 41,618 | |
| Natural gas distribution | (18,058) | | (15,390) | | 10,758 | | 20,081 | |
| Pipeline | 9,379 | | 10,225 | | 24,527 | | 27,508 | |
| 12,917 | | 15,399 | | 72,761 | | 89,207 | |
| Non-regulated operations: | | | | |
| Pipeline | 492 | | 356 | | (187) | | 1,166 | |
| Construction materials and contracting | 102,764 | | 96,282 | | 95,337 | | 116,865 | |
| Construction services | 27,977 | | 23,130 | | 83,755 | | 81,839 | |
| Other | 3,783 | | 3,795 | | (1,368) | | 2,172 | |
| 135,016 | | 123,563 | | 177,537 | | 202,042 | |
| Income from continuing operations | 147,933 | | 138,962 | | 250,298 | | 291,249 | |
| Discontinued operations, net of tax | 38 | | 314 | | 103 | | 348 | |
| Net income | $ | 147,971 | | $ | 139,276 | | $ | 250,401 | | $ | 291,597 | |
| | | | | | | | | | | | | | |
| Three Months Ended | Nine Months Ended |
| September 30, | September 30, |
| 2023 | | 2022 | | 2023 | | 2022 | |
| (In thousands) |
| Operating revenues reconciliation: | | | | |
| Total reportable segment operating revenues | $ | 1,004,592 | | $ | 1,008,208 | | $ | 3,560,199 | | $ | 3,161,359 | |
| Other revenue | 1,689 | | 1,472 | | 6,412 | | 4,368 | |
| Elimination of intersegment operating revenues | (5,486) | | (7,193) | | (44,591) | | (46,376) | |
| Total consolidated operating revenues | $ | 1,000,795 | | $ | 1,002,487 | | $ | 3,522,020 | | $ | 3,119,351 | |
Note 1819 - 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.
In connection with the previously discussed separation of Knife River on May 31, 2023, Knife River's pension plan, including the associated assets and liabilities, was transferred to Knife River and therefore is no longer reflected as part of the Company. Also in connection with the separation, a remeasurement of the Company's postretirement plan and the Company's unfunded, non-qualified defined benefit plan were performed and the applicable liabilities from the plans relating to transferring employees were transferred to Knife River.
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 | Nine Months Ended |
| | September 30, | | September 30, |
| | 2022 | 2021 | 2022 | 2021 | | 2023 | 2022 | 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 | $ | 3,380 | | $ | 2,349 | | $ | 10,140 | | $ | 7,047 | |
| Expected return on assets | Expected return on assets | (4,864) | | (4,894) | | (14,592) | | (14,682) | | Expected return on assets | (4,299) | | (4,370) | | (12,897) | | (13,112) | |
| | Amortization of net actuarial loss | Amortization of net actuarial loss | 1,670 | | 2,004 | | 5,012 | | 6,012 | | Amortization of net actuarial loss | 773 | | 1,456 | | 2,319 | | 4,370 | |
| Net periodic benefit credit | Net periodic benefit credit | $ | (564) | | $ | (435) | | $ | (1,688) | | $ | (1,305) | | Net periodic benefit credit | $ | (146) | | $ | (565) | | $ | (438) | | $ | (1,695) | |
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 | Nine Months Ended |
| | September 30, | | September 30, |
| | 2022 | 2021 | 2022 | 2021 | | 2023 | 2022 | 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 | $ | 131 | | $ | 223 | | $ | 405 | | $ | 669 | |
| Interest cost | Interest cost | 474 | | 466 | | 1,422 | | 1,398 | | Interest cost | 489 | | 346 | | 1,467 | | 1,038 | |
| Expected return on assets | Expected return on assets | (1,322) | | (1,275) | | (3,966) | | (3,825) | | Expected return on assets | (1,334) | | (1,319) | | (4,026) | | (3,957) | |
| Amortization of prior service credit | Amortization of prior service credit | (350) | | (349) | | (1,050) | | (1,047) | | Amortization of prior service credit | (330) | | (330) | | (989) | | (989) | |
| Amortization of net actuarial (gain) loss | (55) | | 6 | | (163) | | 18 | | |
| Amortization of net actuarial gain | | Amortization of net actuarial gain | (96) | | (142) | | (408) | | (425) | |
| 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 | (1,140) | | (1,222) | | (3,551) | | (3,664) | |
| Less amount capitalized | Less amount capitalized | 48 | | 46 | | 132 | | 129 | | Less amount capitalized | 23 | | 47 | | 76 | | 131 | |
| Net periodic benefit credit | Net periodic benefit credit | $ | (947) | | $ | (798) | | $ | (2,827) | | $ | (2,385) | | Net periodic benefit credit | $ | (1,163) | | $ | (1,269) | | $ | (3,627) | | $ | (3,795) | |
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$759,000 and $769,000$648,000 for the three months ended September 30, 20222023 and 2021,2022, respectively, and $2.3 million and $1.9 million for both the nine months ended September 30, 2023 and 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 20 - Stock-based compensation
In connection with the completed separation of Knife River through the spinoff, the provisions of the existing compensation plans required adjustments to the number and terms of outstanding employee time-vested restricted stock units and performance share awards to preserve the intrinsic value of the awards immediately prior to the separation. The outstanding awards will continue to vest over the original vesting period, which is generally three years from the grant date. However, the performance share awards will no longer be subject to performance-based vesting conditions. The number of performance share awards were first adjusted for performance. The combined performance factors were determined based on the performance of the Company as of December 31, 2022. Outstanding awards at the time of the spinoff were converted into awards of the holder’s employer following separation. The Company recorded $204,000 of incremental compensation expense related to the conversion of the restricted stock units, which is being recognized over the remaining service period of one to three years. There was no incremental compensation expense related to the conversion of the performance share awards.
Note 1921 - 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.
MNPUC
Great Plains defers the difference between the actual cost of gas spent to serve customers and that recovered from customers on a monthly basis. Annually, Great Plains prepares a true-up pursuant to the purchased gas adjustment tariff. On August 30, 2021, the MNPUC issued an order to allow Great Plains recovery of an out-of-cycle cost of gas adjustment of $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.MTPSC
On June 1, 2022, Great Plains 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. This matter is pending before the MNPUC.
NDPSC
On May 16,November 4, 2022, Montana-Dakota filed an application with the NDPSCMTPSC for an electric general rate increase of approximately $25.4$10.5 million annually or 12.315.2 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. On June 12, 2023, an all-party settlement agreement was filed reflecting an annual revenue increase of $6.1 million or 9.1 percent overall. The reduction from the original filing includes a return on equity of 9.65 percent and removal of Heskett Unit 4 due to not being in service until the second half of 2023. The MTPSC issued a final order approving the settlement on September 21, 2023, with rates effective October 1, 2023.
NDPSC
On July 14, 2023, Montana-Dakota filed an application with the NDPSC to request an update to its transmission cost adjustment rider requesting to recover revenues of $2.2 million, which includes a true-up of a prior period adjustment, resulting in a decrease of $10.7 million from current rates. The request is to recover transmission-related expenses and the revenue requirement for transmission facilities not currently recovered through electric service rates. The request also reflects the inclusion of the proposed net benefit of a large customer now taking service under Rate 45, as discussed in Part I, Item 2, which accounted for approximately $7.6 million of the decrease. A revised filing was submitted on August 25, 2023, reducing the request to $1.3 million. The NDPSC approved the transmission cost adjustment on September 27, 2023, with rates effective November 1, 2023.
On November 1, 2023, Montana-Dakota filed a request with the NDPSC for a natural gas general rate increase of approximately $11.6 million annually or 7.5 percent above current rates. The requested increase is primarily to recover investments in system upgrades and pipeline replacement projects enhancing the reliability, safety and integrity of the natural gas system, as well as increased costs to operate and maintain that system. The filing also includes a request for interim revenue of $10.1 million, subject to refund, to be effective early January 2024. The NDPSC has up to seven months to issue a final decision on this general rate increase request. This matter is pending before the NDPSC.
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 October 31, 2023, Montana-Dakota filed an annual update to its renewable resource cost adjustment requesting to recover a revenue requirement of approximately $21.0 million annually. The update reflects an increase of approximately $5.7 million from the revenues currently included in rates. The request proposes the rates be effective for service rendered on and after February 1, 2024. This matter is pending before the NDPSC.
SDPUC
On August 15, 2023, Montana-Dakota filed a request with the SDPUC for an electric general rate increase of approximately $3.0 million annually or 17.3 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 NDPSCSDPUC has 7up to six months to renderissue a final decision on this request. This matter is pending before the rate case. SDPUC.
On July 14, 2022,August 15, 2023, Montana-Dakota filed a request with the NDPSC approved an interimSDPUC for a natural gas general rate increase of approximately $10.9$7.4 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 expected to be in service in the first half of 2023.
On July 15, 2022, Montana-Dakota filed an application with the NDPSC to request an update to its transmission cost adjustment rider requesting to recover revenues of $12.9 million, which includes a true-up of 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.
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 5.111.2 percent above current rates. The requested increase wasis 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 actualassociated 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 revisionoperation and maintenance expenses and taxes associated with the WUTCincreased investment. The SDPUC has up to rectify an inadvertent IRS normalization violation resulting from its tariff established in 2018 that passes backsix months to customers the reversal of plant-related excess deferred income taxes through an annual rate adjustment. This request was made in response to the issuance of an IRS private letter ruling to another Washington utility with the same annual rate adjustment tariff, which addressed its normalization violation. The private letter ruling concluded the tariff to refund excess deferred income taxes without corresponding adjustments for other components of rate base or changes in depreciation or income tax expense, is an impermissible methodology under the IRS normalization and consistency rules. Cascade's request proposesissue a similar remedy through the tariff to recover the excess amounts refunded to customers whiledecision on this tariff has been in place, and revises the method going forward to reflect excess deferred income taxes in rates in the same manner as other components of rate base from its most recent general rate case. Cascade has requested recovery of the excess refunded to customers of approximately $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.request. This matter is pending before the WUTC.SDPUC.
WUTC
On October 14, 2022,June 1, 2023, Cascade filed an update to its annual pipeline cost recovery mechanism requesting an increase in annual revenue of approximately $1.2$3.1 million or approximately 0.40.9 percent, which was revised on October 13, 2023, to $2.4 million or 0.7 percent. The filing was effective November 1, 2022.2023.
FERC
On SeptemberJanuary 27, 2023, WBI Energy Transmission filed a general rate case with the FERC for increases in its transportation and storage services rates that also included a Greenhouse Gas Cost Recovery Mechanism for anticipated future costs. In August 2023, the Company reached a rate case settlement agreement with its customers and FERC staff and the agreed-upon rates were placed into effect as of August 1, 2022,2023. The settlement agreement did not include a Greenhouse Gas Cost Recovery Mechanism. On October 17, 2023, the Administrative Law Judge certified the Company's rate case settlement agreement to the FERC for final approval.
On August 31, 2023, Montana-Dakota filed an update to its transmission formula rate under the MISO tariff for its multi-value project and network upgrade chargeschanges for $15.4$15.2 million which isto be effective January 1, 2023.2024.
Note 2022 - 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, 20222023 and 2021,2022, and December 31, 2021,2022, the Company accrued contingent liabilities, which have not been discounted, of $33.6$21.0 million, $34.7$33.5 million and $37.0$31.9 million, respectively. At September 30, 20222023 and 2021,2022, and December 31, 2021,2022, the Company also recorded corresponding insurance receivables of $98,000, $11.9 million $11.7 million and $14.1$10.0 million, respectively, and regulatory assets of $20.1 million, $20.5 million $21.1 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.sites. There were no material changes to the Company's environmental matters that were previously reported in the 20212022 Annual Report.Report other than the removal of the Portland Harbor Site, which relates to Knife River and any potential associated liability was included in the distribution of Knife River.
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, 2022,2023, the fixed maximum amounts guaranteed under these agreements aggregate $333.7$330.8 million. Certain of the guarantees also have no fixed maximum amounts specified. At September 30, 2022,2023, the amounts of scheduled expiration of the maximum amounts guaranteed under these agreements aggregate to $10.8 million in 2022; $68.6$9.5 million in 2023; $110.6$67.4 million in 2024; $130.5$251.1 million in 2025; $1.3$1.5 million in 2026; $700,000 thereafter;$1.0 million in 2027; and $11.2 million, which has no scheduled maturity date.$300,000 thereafter. There were no amounts outstanding under the previously mentioned guarantees at September 30, 2022.2023. 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, 2022,2023, the fixed maximum amounts guaranteed under these letters of credit aggregated $25.0 million. At September 30, 2022,$11.1 million, with the amounts of scheduled expiration of the maximum amounts guaranteed under these letters of credit aggregate to $21.8 million in 2022, $2.7$8.9 million in 2023 and $500,000$2.2 million in 2024. There were no amounts outstanding under the previously mentioned letters of credit at September 30, 2022.2023. 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, 2022.2023.
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, 2022,2023, approximately $932.4$330.8 million of surety bonds were outstanding, which were not reflected on the Consolidated Balance Sheet.
Variable interest entities
The Company evaluates its arrangements and contracts with other entities to determine if they are VIEs and if so, if the Company is the primary beneficiary.
Fuel Contract Coyote Station entered into a coal supply agreement with Coyote Creek that provides for the purchase of coal necessary to supply the coal requirements of the Coyote Station for the period May 2016 through December 2040. Coal purchased under the coal supply agreement is reflected in inventories on the 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, 2022,2023, 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$28.1 million.
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 infrastructureconstructing and airports.maintaining electrical and communication wiring and infrastructure. The Company is authorized to conduct business in nearly every state in the United States and during peak construction season has employed over 16,000 employees.States. The Company's organic investments are strong drivers of high-quality earnings and continue to be an important part of the Company's growth. Management believes the Company is well positioned in the industries and markets in which it operates.
On August 4, 2022,17, 2023, David L. Goodin, president and CEO of the Company announced that he intends to retire on January 5, 2024, after a 40-year career with the Company. The board of directors unanimously selected Nicole A. Kivisto, currently president and CEO of the Company's electric and natural gas utility companies, to succeed Mr. Goodin as the Company's president and CEO effective January 6, 2024. Ms. Kivisto will become a member of the board of directors at the same time.
Strategic Initiatives The Company announced strategic initiatives in 2022 as part of the Company's continuous review of its Board of Directors unanimously approved a planbusiness. 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 pursue acontinue to incur these costs until the initiatives are completed.
On May 31, 2023, the Company completed the separation of Knife River, fromformerly the Company.construction materials and contracting segment, which resulted in two independent, publicly traded companies, MDU Resources Group, Inc. and Knife River. The Company's board of directors approved the distribution of approximately 90 percent of the issued and outstanding shares of Knife River to the Company's stockholders. Stockholders of the Company received one share of Knife River 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 retained approximately 10 percent or 5.7 million shares of Knife River common stock immediately following the separation with the intent to dispose of such shares within twelve months after the separation. The separation is planned asof Knife River was 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 Knife River's Form 10, which is not incorporated by reference herein.
On November 2, 2023, the Company announced its intent to pursue a tax-free spinoff of its wholly owned construction services business, MDU Construction Services. The transaction is expected to result in two independent, publicly traded and well-capitalized companies. CompletionCompany's board of directors believes a tax-free spinoff of the separation will be subject to, among other things,construction services business supports the effectivenessCompany's goal of enhancing value for stockholders by becoming a registration statementpure-play regulated energy delivery company. For more information on Form 10 with the SEC, final approval from the Company’s Board of Directors, receipt of a tax opinion and a private letter ruling from the IRS, and other customary conditions. The Company may, at any time and for any reason until the proposed transaction is complete, abandon the separation or modify or change its terms. The separation is expected to be complete in 2023, but there can be no assurance regarding the ultimate timing of the separation or that the separation will ultimately occur. 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 uncertainties associatedsubsequent filings with the proposed transaction.SEC.
As the next step ofBased on the Company's strategic planning, on November 2, 2022, the Board of Directors unanimously determined the best way to optimize value would be to create twoanticipated future state as a pure-play companies: a leading construction materials company and a regulated energy delivery company. Accordingly,business, the board established a long-term dividend payout ratio target of 60% to 70% of regulated energy delivery earnings. The Company has authorized managementan 85-year history of uninterrupted dividend payments to commencestockholders and remains committed to paying a strategic review process for MDU Construction Services withcompetitive dividend as the objective of achieving the board’s goal of creating twoCompany transitions to being a pure-play public companies. See Part II, Item 1A. Risk Factors for a description of some of the risks and uncertainties with the proposed future structure.regulated company.
Market Trends The Company continues to manage the inflationary pressures experienced throughout the United States. InflationStates, including the impact that inflation, rising interest rates, incommodity price volatility and supply chain disruptions may have on its business and customers and proactively looks for ways to lessen the Unites States have increased significantly, relativeimpact 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.business. 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 continueshas continued to monitor the impact that inflation, rising interest rates, rising commodity prices and supply chain disruptions may have onevaluate its businesses and customershas increased pricing for its products and proactively looks for waysservices where possible. The ability to lessenraise selling prices to cover higher costs due to inflation are subject to regulatory approval, customer demand, industry competition and the impact to its businesses. 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 long-term dividend payout ratio target, the pursuit of a tax-advantaged separation of Knife River,its construction services business and proposed structure of a pure-play regulated energy delivery company, 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 | Nine Months Ended |
| | September 30, | | September 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | | 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 | $ | 20.9 | | $ | 21.6 | | $ | 53.9 | | $ | 37.5 | |
| Natural gas distribution | Natural gas distribution | (18.1) | | (15.4) | | 10.8 | | 20.1 | | Natural gas distribution | (17.7) | | (18.1) | | 18.0 | | 10.8 | |
| Pipeline | Pipeline | 9.8 | | 10.6 | | 24.3 | | 28.7 | | Pipeline | 11.9 | | 10.2 | | 29.4 | | 24.8 | |
| Construction materials and contracting | 102.8 | | 96.3 | | 95.3 | | 116.9 | | |
| Construction services | Construction services | 28.0 | | 23.1 | | 83.8 | | 81.8 | | Construction services | 36.0 | | 29.2 | | 106.0 | | 86.6 | |
| Other | Other | 3.8 | | 3.8 | | (1.4) | | 2.2 | | Other | 27.1 | | (.5) | | 102.4 | | (12.8) | |
| Income from continuing operations | Income from continuing operations | 147.9 | | 139.0 | | 250.3 | | 291.3 | | Income from continuing operations | 78.2 | | 42.4 | | 309.7 | | 146.9 | |
| Discontinued operations, net of tax | Discontinued operations, net of tax | — | | .3 | | .1 | | .3 | | Discontinued operations, net of tax | (3.3) | | 105.6 | | (65.7) | | 103.5 | |
| Net income | Net income | $ | 147.9 | | $ | 139.3 | | $ | 250.4 | | $ | 291.6 | | Net income | $ | 74.9 | | $ | 148.0 | | $ | 244.0 | | $ | 250.4 | |
| 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 | $ | .38 | | $ | .21 | | $ | 1.52 | | $ | .72 | |
| Discontinued operations, net of tax | Discontinued operations, net of tax | — | | — | | — | | — | | Discontinued operations, net of tax | (.01) | | .52 | | (.32) | | .51 | |
| Earnings per share - basic | Earnings per share - basic | $ | .73 | | $ | .68 | | $ | 1.23 | | $ | 1.44 | | Earnings per share - basic | $ | .37 | | $ | .73 | | $ | 1.20 | | $ | 1.23 | |
| 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 | $ | .38 | | $ | .21 | | $ | 1.52 | | $ | .72 | |
| Discontinued operations, net of tax | Discontinued operations, net of tax | — | | — | | — | | — | | Discontinued operations, net of tax | (.01) | | .52 | | (.32) | | .51 | |
| Earnings per share - diluted | Earnings per share - diluted | $ | .73 | | $ | .68 | | $ | 1.23 | | $ | 1.44 | | Earnings per share - diluted | $ | .37 | | $ | .73 | | $ | 1.20 | | $ | 1.23 | |
Three Months Ended September 30, 2022,2023, Compared to Three Months Ended September 30, 20212022 The Company's consolidated earnings increased $8.6decreased $73.1 million.
The Company's earnings primarilyCompany benefited from increased earnings from most businesses, but was negatively impacted by a decrease in income from discontinued operations.
•Earnings at the construction businesses.electric business were negatively impacted by lower residential volumes due to cooler weather and higher operation and maintenance expense, primarily payroll-related costs. The construction materialsdecrease in earnings was partially offset by higher retail sales revenue due to rate relief in North Dakota and contractingMontana, an electric service agreement to provide power to a data center near Ellendale, North Dakota, and higher transmission revenue.
•The natural gas distribution business reported a lower seasonal loss benefiting from increased revenues during the period due to higher retail revenue, primarily the result of short-term debt interest recovery in Idaho and rate relief in Idaho and Washington; partially offset by higher operation and maintenance expense due to payroll-related costs. The business also experienced a 9.3 percent decrease in retail sales volumes to all customer classes due to seasonal weather patterns, which was partially offset by weather normalization and decoupling mechanisms.
•The earnings increase at the pipeline business was driven by higher transportation revenue, primarily a result of increased contracted volume commitments from the North Bakken Expansion project, higher storage-related revenue and new transportation and storage service rates effective August 1, 2023. The business also benefited from higher average pricingallowance for funds used during construction on materialsthe Company's organic growth projects. The increase was offset in part by higher operation and increased contracting workloads,maintenance expense primarily due to payroll-related costs and thehigher interest expense as a result of higher interest rates and higher debt balances.
•The construction services business benefited fromexperienced record third quarter earnings primarily as a result of higher marginsgross profit on electrical and mechanical work, primarilyprojects. The increase in gross profit was driven by commercial, renewable, and institutional market projects, largely a result of efficiency on certain projects from labor and materials and project mix. The construction services business also benefited from higher transmission and distribution workloads and gross profit in the industrial, institutionalutility market. Earnings were partially offset by higher selling, general and commercial sectors, as well as higher utility margins. Bothadministrative costs and increased interest expense.
•The Company benefited from an unrealized gain, reflected in Other, on the Company's retained interest in Knife River shares of $22.8 million, net of tax, and lower operating and maintenance expense from lower claims experience at the construction business'scaptive insurer; partially offset by costs incurred in connection with announced strategic initiatives.
•The decrease in earnings werefrom discontinued operations was due to the Knife River separation. For the comparative periods, Knife River's operations are only reflected through May 2023, whereas 2022 includes a full quarter impact from Knife River's operations.
Nine Months Ended September 30, 2023, Compared to Nine Months Ended September 30, 2022 The Company's consolidated earnings decreased $6.4 million. The Company benefited from increased earnings from all businesses, but was negatively impacted by inflationary pressures, including higher diesel fuel and other operating costs; however, these costs are largely being recovered through price increases. a decrease in income from discontinued operations.
•Earnings at the electric business were positively impacted by interimhigher retail revenue due to rate relief in certain jurisdictionsNorth Dakota and Montana and higher data center revenue, including transmission. Also contributing to the increase was lower operation and maintenance expenses as a result of the coal-fired electric plant closures and the absence of a planned maintenance outage in 2021. Partially offsetting the increased earnings was an increased seasonal lossexpense.
•Earnings were higher at the natural gas distribution business due to approved rate relief in Washington and Idaho and higher basic service charges, short-term debt interest recovery in Idaho and higher transportation revenue. Earnings were partially offset by higher operation and maintenance expense, primarily attributable to payroll-related costs.
•Earnings at the pipeline business increased largely from increased transportation volumes associated with increased contracted volume commitments from the North Bakken Expansion project, higher storage-related revenues, and new transportation and storage service rates effective August 1, 2023. The pipeline business also benefited from higher non-regulated projects revenue. These increases were offset in part by higher operation and maintenance expense, largely increased payroll-related costs, higher non-regulated project costs and legal costs associated with the pipeline business's rate case filed with the FERC earlier this year.
•The construction services business saw increased earnings primarily from higher electrical and mechanical workloads in the commercial, industrial and institutional markets. Gross profit on electrical and mechanical projects increased in the commercial, industrial, institutional, and renewables markets, largely attributable to efficiencies on certain projects and project mix. The construction services business also benefited from higher transmission and distribution workloads and gross profit in the utility market. Earnings were partially offset by higher selling, general and administrative costs, including payroll-related costs and reserve for uncollectible accounts on certain projects, increased office expense and expenses associated with professional services.
•All of the Company's businesses were impacted by higher returns on nonqualified benefit plans, offset in part by increased interest expense 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, partially offset by the net benefit of the North Bakken Expansion project. Also negatively impacting results were transaction costs of $4.1 million, after tax, associated with the anticipated spinoff of Knife River included in Other.rates.
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 recoverybenefited from an unrealized gain, reflected in certain jurisdictions. The pipeline business experienced higher interest expense and lower non-regulated project margins, partially offset by the net benefit of the North Bakken Expansion project. Increased operating costs related to a planned maintenance outage at Coyote Station along with lower per unit average rates decreased earnings at the electric business, partially offset by interim rate relief in certain jurisdictions and higher transmission revenues. The Company's earnings were further impacted by $20.8 million in lower returnsOther, on the Company's nonqualified benefit plan investments, as discussedretained interest in Note 14, and the transaction costs of $4.1 million, after tax, associated with the anticipated spinoff of Knife River included in Other. Partially offsetting the decreases were increased earningsof $113.6 million, net of tax, and lower claims experience at the construction services business resulting primarily from higher commercial and service margins and earnings from the Company's joint ventures,captive insurer; partially offset by higher overall operating costs incurred in connection with announced strategic initiatives.
•The decrease in earnings from discontinued operations was due to the Knife River separation. For the comparative periods, Knife River's operations are only reflected through May 2023, whereas 2022 includes a full nine month impact from Knife River's operations. Also contributing to the earnings decrease was 2023 separation related to inflationary pressures and higher selling, general and administrative expenses.costs of $47.1 million, net of 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 1718 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 17.18. 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 1921 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. Natural gas prices had stabilized by March 2023. 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 and is collecting interest costs associated with short-term borrowing with rates effective October 1, 2023. Cascade filed its annual update to its purchased gas adjustment with the WUTC requesting recovery of these increased gas costs for a period of two years rather than the normal one year period with rates effective November 1, 2023. As of September 2023, Intermountain has repaid $80.0 million of the $125.0 million short-term debt.
In late summer and fall of 2023, fuel and purchased power prices increased across Montana-Dakota's integrated system. This was caused by transmission congestion in northwest North Dakota due to delays in additional Southwest Power Pool transmission line build-out, as well as additional load growth in the Bakken region. Fuel and purchased power prices have remained elevated through October. To assist in the recovery of the higher fuel and purchased power costs, Montana-Dakota filed a waiver request with the NDPSC, which was approved on October 24, 2023, deferring the increased costs to the annual fuel clause adjustment. Montana-Dakota also has a similar waiver request pending with the SDPUC, which was filed on October 23, 2023, and anticipates filing a waiver request with the MTPSC.
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 ofwell as increased demand for electrical equipment due to regulatory activity and grid expansion. The Company has been able to minimize the COVID-19 pandemiceffects by working closely with suppliers or obtaining additional suppliers, as well as modifying project plans to accommodate extended lead times and subsequent supply chain issues. While not material, these segments have experienced delays and inflationary pressures, including increased costs related to purchased natural gas and capital expenditures.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 85 mile 345-kV transmission line with Otter Tail Power Company in central North Dakota. On October 6, 2023, the FERC issued an order approving the Company's request for CWIP Incentive Rate and Abandoned Plant Incentive treatment on this project.
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 | | Nine Months Ended |
| September 30, | | September 30, |
| | 2023 | | 2022 | | Variance | | 2023 | | 2022 | | Variance |
| (In millions) |
| Operating revenues | $ | 108.1 | | $ | 99.3 | | 9 | % | | $ | 294.8 | | $ | 278.6 | | 6 | % |
| Operating expenses: | | | | | | | |
| Electric fuel and purchased power | 29.0 | | 20.1 | | 44 | % | | 73.8 | | 68.3 | | 8 | % |
| Operation and maintenance | 30.1 | | 28.7 | | 5 | % | | 88.5 | | 91.0 | | (3) | % |
| Depreciation, depletion and amortization | 16.0 | | 15.7 | | 2 | % | | 47.8 | | 52.0 | | (8) | % |
| Taxes, other than income | 4.3 | | 4.4 | | (2) | % | | 13.3 | | 13.5 | | (1) | % |
| Total operating expenses | 79.4 | | 68.9 | | 15 | % | | 223.4 | | 224.8 | | (1) | % |
| Operating income | 28.7 | | 30.4 | | (6) | % | | 71.4 | | 53.8 | | 33 | % |
| Other income (expense) | 1.3 | | .5 | | 160 | % | | 3.4 | | (0.8) | | 525 | % |
| Interest expense | 7.0 | | 7.0 | | — | % | | 20.5 | | 21.0 | | (2) | % |
| Income before income taxes | 23.0 | | 23.9 | | (4) | % | | 54.3 | | 32.0 | | 70 | % |
| Income tax (benefit) expense | 2.1 | | 2.3 | | (9) | % | | 0.4 | | (5.5) | | 107 | % |
| Net income | $ | 20.9 | | $ | 21.6 | | (3) | % | | $ | 53.9 | | $ | 37.5 | | 44 | % |
| | | | | | | | | | | | | | |
| Operating statistics | Three Months Ended | Nine Months Ended |
| September 30, | September 30, |
| 2023 | | 2022 | | 2023 | | 2022 | |
| Revenues (millions) | | | | |
| Retail sales: | | | | |
| Residential | $ | 33.6 | | $ | 36.6 | | $ | 100.0 | | $ | 100.6 | |
| Commercial | 47.1 | | 38.4 | | 118.1 | | 105.3 | |
| Industrial | 10.5 | | 10.8 | | 31.0 | | 31.3 | |
| Other | 1.8 | | 2.0 | | 5.1 | | 5.4 | |
| 93.0 | | 87.8 | | 254.2 | | 242.6 | |
| Other | 15.1 | | 11.5 | | 40.6 | | 36.0 | |
| $ | 108.1 | | $ | 99.3 | | $ | 294.8 | | $ | 278.6 | |
| Volumes (million kWh) | | | | |
| Retail sales: | | | | |
| Residential | 275.5 | | 304.9 | | 899.3 | | 906.7 | |
| Commercial | 692.1 | | 358.3 | | 1,619.9 | | 1,051.7 | |
| Industrial | 143.5 | | 143.7 | | 435.7 | | 431.7 | |
| Other | 20.6 | | 21.6 | | 61.5 | | 61.7 | |
| 1,131.7 | | 828.5 | | 3,016.4 | | 2,451.8 | |
| Average cost of electric fuel and purchased power per kWh | $ | .024 | | $ | .022 | | $ | .023 | | $ | .026 | |
Three Months Ended September 30, 2022,2023, Compared to Three Months Ended September 30, 2021 Electric earnings increased $1.0 million as a result of:
•Revenue was comparable to the same period in the prior year. Interim rate relief in certain jurisdictions was mostly offset by lower retail sales volumes across all customer classes.
•Electric fuel and purchased power increased $600,000 as a result of increased energy costs, offset in revenue above.
•Operation and maintenance decreased $2.5 million.
◦Largely the result of:
•Decreased payroll-related costs, largely due to lower incentive accruals of $1.2 million and plant closures of $700,000.
•Decreased contract services due to lower transmission expense and the absence of the Big Stone Station outage costs during 2021.
•Depreciation, depletion and amortization decreased $1.3 million.
◦Primarily due to decreased amortization of plant retirement and closure costs of $1.6 million resulting from an extension to the recovery period for these costs, which are recovered in operating revenues, as discussed in Note 13.
◦Partially offset by increased property, plant and equipment balances, primarily as a result of transmission projects placed in service.
•Taxes, other than income were comparable to the same period in the prior year.
•Other income decreased $700,000, primarily resulting from lower returns on the Company's nonqualified benefit plan investments, as discussed in Note 14.
•Interest expense increased $400,000, largely resulting from higher long-term debt balances from debt issued in 2021, partially offset by higher AFUDC largely due to higher rates.
•Income tax expense increased $1.0 million, largely due to higher income before income taxes and lower production tax credits of $400,000 driven by lower wind production.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021 Electric earnings decreased $4.1 million$700,000 as a result of:
•Revenue increased $10.9$8.8 million.
◦Largely due to:
•▪Higher fuel and purchased power costs of $12.1$8.9 million recovered in customer rates and offset in expense, as described below.
•▪Interim rate relief in certain jurisdictionsHigher data center revenue of $2.5 million.$1.3 million, including net transmission.
•▪Rate relief of $1.0 million in North Dakota and Montana.
▪Higher transmission revenues, primarily from higher net transmission of $2.3 million and higher transmission interconnect upgrades of $500,000.$600,000.
◦Partially offset by:
•▪Lower retail sales volumes of $1.9 million, driven primarily by lower residential volumes, largely due to cooler weather, partially offset by higher commercial volumes. There was a 36.6 percent increase in volumes, which includes the data center as further discussed in the outlook section.
▪Lower renewable tracker revenues of $600,000 associated with higher production tax credits.
•Lower per unit average rates of $1.9 million related to block ratescredits offset in certain jurisdictions.expense, as described below.
•Electric fuel and purchased power increased $12.1 million.
◦Primarily$8.9 million, largely the result of higher MISOretail sales volumes and higher commodity costs, as a resultincluding recovery of increased energy costs, partially offset by decreased fuel costs associated with the Heskett Station and Lewis & Clark Station plant closures.clause adjustments.
•Operation and maintenance decreased $2.8 million.
◦Primarily due to:
•Decreased payroll-related costs, largely due to lower incentive accruals of $2.2increased $1.4 million, and plant closures of $2.1 million, as previously discussed.
•Decreased materials costs of $1.2 million as aprimarily the 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.payroll-related costs.
•Depreciation, depletion and amortization increased $2.0 million, primarily$300,000, largely due to:
◦Increased amortization of plant retirement and closure costs of $1.2 million recovered in operating revenues, as discussed in Note 13.
◦Increasedto increased property, plant and equipment balances, as a result of transmission projects placed in service largely related to growthimprove reliability and replacement projects.update aging infrastructure.
•Taxes, other than income were comparable to the same period in the prior year.
•Other income (expense) decreased $4.2 million,increased $800,000, the result of higher interest income of $500,000, largely lowerrelated to contributions in aid of construction and higher returns on the Company's nonqualified benefit plan investments of $4.4 million,$200,000, as discussed in Note 14, partially offset by higher14.
•Interest expense was comparable to the same period in the prior year. Higher AFUDC debt, largely due to higher rates, was largely offset by higher average interest rates.
•Income tax expense decreased $200,000, largely due to higher production tax credits and lower income before income taxes, partially offset by lower excess deferred income tax amortizations.
•Nine Months Ended September 30, 2023, Compared to Nine Months Ended September 30, 2022 Interest expenseElectric earnings increased $1.2$16.4 million largely resulting from higher long-term debt balances from debt issued in 2021, partially offset by higher AFUDC largely due to higher rates.as a result of:
•Income tax benefitRevenue increased $1.5$16.2 million.
◦Largely due to:
•▪Rate relief of $6.2 million in North Dakota and Montana.
▪Higher fuel and purchased power costs of $5.5 million recovered in customer rates and offset in expense, as described below.
▪Higher data center revenue of $2.0 million, including net transmission.
▪Higher transmission interconnect upgrades of $1.6 million.
▪Higher renewable tracker revenues of $1.0 million associated with lower production tax credits offset in expense, as described below.
▪Higher retail sales volumes of $1.5 million driven23.0 percent attributable to commercial customers, which include the data center as further discussed in the outlook section, largely offset by higher wind production.lower residential customers due to cooler weather in the third quarter of 2023.
•Electric fuel and purchased power increased $5.5 million, largely the result of higher commodity prices and higher retail sales volumes, partially offset by fuel clause adjustments.
•Operation and maintenance decreased $2.5 million.
◦Largely the result of:
▪Decreased contract services primarily due to the absence of prior year planned outage costs at Coyote Station of $1.7 million and lower transmission expense, partially offset by increased costs at the Company's other electric generating stations.
▪Lower income before income taxes.materials expense of $400,000, partially due to the closure of Units 1 and 2 at Heskett Station.
•Depreciation, depletion and amortization decreased $4.2 million.
◦Primarily due to decreased amortization of plant retirement and closure costs of $5.2 million resulting from an extension to the recovery period for these costs, which are recovered in operating revenues, as discussed in Note 12.
◦Partially offset by permanentincreased depreciation of $900,000 associated with higher property, plant and equipment balances, the result of transmission projects placed in service to improve reliability and update aging infrastructure.
•Taxes, other than income were comparable to the same period in the prior year.
•Other income (expense) increased $4.2 million, primarily resulting from higher returns on the Company's nonqualified benefit plan investments of $4.3 million, as discussed in Note 14, and higher interest income of $800,000, largely related to contributions in aid of construction, offset in part by lower AFUDC equity due to higher average short-term debt balance.
•Interest expense decreased $500,000 as a result of higher AFUDC debt, largely due to higher rates, partially offset by higher average interest rates.
•Income tax adjustmentsexpense increased $5.9 million, largely due to higher income before income taxes and excess deferredlower production tax amortization of $700,000.credits driven by lower wind production.
Earnings overview - The following information summarizes the performance of the natural gas distribution segment.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| | 2022 | | 2021 | | Variance | | 2022 | | 2021 | | Variance |
| (In millions) |
| Operating revenues | $ | 132.2 | | $ | 110.5 | | 20 | % | | $ | 793.3 | | $ | 614.8 | | 29 | % |
| Operating expenses: | | | | | | | |
| Purchased natural gas sold | 65.3 | | 44.9 | | 45 | % | | 481.3 | | 318.0 | | 51 | % |
| Operation and maintenance | 49.5 | | 47.7 | | 4 | % | | 154.4 | | 145.0 | | 6 | % |
| Depreciation, depletion and amortization | 22.7 | | 21.5 | | 6 | % | | 67.4 | | 64.2 | | 5 | % |
| Taxes, other than income | 11.4 | | 10.6 | | 8 | % | | 51.3 | | 44.7 | | 15 | % |
| Total operating expenses | 148.9 | | 124.7 | | 19 | % | | 754.4 | | 571.9 | | 32 | % |
| Operating income (loss) | (16.7) | | (14.2) | | 18 | % | | 38.9 | | 42.9 | | (9) | % |
| Other income | 1.4 | | 1.3 | | 8 | % | | .3 | | 5.4 | | (94) | % |
| Interest expense | 10.7 | | 9.3 | | 15 | % | | 29.8 | | 27.6 | | 8 | % |
| 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) | % |
| | | | | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| | 2023 | | 2022 | | Variance | | 2023 | | 2022 | | Variance |
| (In millions) |
| Operating revenues | $ | 135.0 | | $ | 132.2 | | 2 | % | | $ | 919.7 | | $ | 793.3 | | 16 | % |
| Operating expenses: | | | | | | | |
| Purchased natural gas sold | 59.6 | | 65.3 | | (9) | % | | 580.3 | | 481.3 | | 21 | % |
| Operation and maintenance | 55.5 | | 49.5 | | 12 | % | | 165.3 | | 154.4 | | 7 | % |
| Depreciation, depletion and amortization | 23.9 | | 22.7 | | 5 | % | | 70.6 | | 67.4 | | 5 | % |
| Taxes, other than income | 11.3 | | 11.4 | | (1) | % | | 57.8 | | 51.3 | | 13 | % |
| Total operating expenses | 150.3 | | 148.9 | | 1 | % | | 874.0 | | 754.4 | | 16 | % |
| Operating income (loss) | (15.3) | | (16.7) | | 8 | % | | 45.7 | | 38.9 | | 17 | % |
| Other income | 4.7 | | 1.4 | | 236 | % | | 14.5 | | .3 | | NM |
| Interest expense | 14.4 | | 10.7 | | 35 | % | | 42.2 | | 29.8 | | 42 | % |
| Income (loss) before income taxes | (25.0) | | (26.0) | | 4 | % | | 18.0 | | 9.4 | | 91 | % |
| Income tax (benefit) expense | (7.3) | | (7.9) | | (8) | % | | — | | (1.4) | | (100) | % |
| Net income (loss) | $ | (17.7) | | $ | (18.1) | | 2 | % | | $ | 18.0 | | $ | 10.8 | | 67 | % |
| NM - not meaningful |
| | | | | | | | | | | | | | |
| Operating statistics | Three Months Ended | Nine Months Ended |
| September 30, | September 30, |
| 2023 | | 2022 | | 2023 | | 2022 | |
| Revenues (millions) | | | | |
| Retail sales: | | | | |
| Residential | $ | 69.5 | | $ | 64.9 | | $ | 516.2 | | $ | 438.5 | |
| Commercial | 41.0 | | 44.5 | | 314.6 | | 278.3 | |
| Industrial | 7.2 | | 7.2 | | 33.1 | | 29.2 | |
| 117.7 | | 116.6 | | 863.9 | | 746.0 | |
| Transportation and other | 17.3 | | 15.6 | | 55.8 | | 47.3 | |
| $ | 135.0 | | $ | 132.2 | | $ | 919.7 | | $ | 793.3 | |
| Volumes (MMdk) | | | | |
| Retail sales: | | | | |
| Residential | 4.0 | | 4.5 | | 46.5 | | 47.3 | |
| Commercial | 3.8 | | 4.2 | | 32.5 | | 32.9 | |
| Industrial | .9 | | .9 | | 3.8 | | 3.9 | |
| 8.7 | | 9.6 | | 82.8 | | 84.1 | |
| Transportation sales: | | | | |
| Commercial | .3 | | .3 | | 1.4 | | 1.4 | |
| Industrial | 50.1 | | 42.1 | | 135.9 | | 118.0 | |
| 50.4 | | 42.4 | | 137.3 | | 119.4 | |
| Total throughput | 59.1 | | 52.0 | | 220.1 | | 203.5 | |
| Average cost of natural gas per dk | $ | 6.85 | | $ | 6.82 | | $ | 7.01 | | $ | 5.72 | |
Three Months Ended September 30, 2022,2023, Compared to Three Months Ended September 30, 20212022 Natural gas distribution'sdistribution reported a decreased seasonal loss increased $2.7 millionof $400,000 as a result of:
•Operating revenuesRevenue increased $21.7 million, largely resulting from:$2.8 million.
◦Largely due to:
▪Approved rate recovery of short-term debt interest expense related to increased gas costs in Idaho of $3.2 million.
▪Rate relief of $3.0 million in Idaho and Washington.
▪Higher transportation revenue of $1.1 million due to 19.0 percent higher volumes, largely higher electric generation.
▪Increased revenue-based taxes recovered in rates of $900,000 that were offset in expense, as described below.
▪Higher basic service charges of $300,000.
◦Partially offset by:
▪Lower purchased natural gas sold of $19.5$5.1 million recovered in customer rates that was offset in expense, as described below.
◦▪HigherA 9.3 percent decrease in retail sales volumes to all customer classes, offset in part by weather normalization and decoupling mechanisms of $2.6 million in certain jurisdictions.
•Purchased natural gas sold decreased $5.7 million, largely due to lower volumes of natural gas purchased of $5.3 million, lower natural gas costs of $500,000 as a result of lower purchased gas adjustments, partially offset by higher commodity prices. Purchased natural gas sold includes the absence of the prior year disallowance of $845,000 ordered by the MNPUC.
•Operation and maintenance increased $20.4$6.0 million.
◦Largely attributable to:
▪Higher payroll-related costs of $5.2 million.
▪Higher uncollectible accounts expense $800,000, largely due to higher revenue.
▪Higher contract services of $600,000, largely higher subcontractor labor.
◦Partially offset by lower materials expense of $400,000.
•Depreciation, depletion and amortization increased $1.2 million, primarily resulting from growth and replacement projects placed in service, partially offset by lower depreciation rates in Minnesota.
•Taxes, other than income decreased $100,000, primarily from lower property taxes $1.0 million due to lower assessed values, offset by lower revenue based taxes of $900,000, which are recovered in rates.
•Other income (expense) increased $3.3 million driven primarily by higher interest income of $2.8 million, largely due to higher purchased gas costs, and higher returns on the Company's nonqualified benefit plans of $200,000, as discussed in Note 14.
•Interest expense increased $3.7 million, primarily from higher short-term and long-term debt balances from debt issued in 2023 and higher interest rates, partially offset by higher AFUDC debt of $500,000 due to higher rates.
•Income tax benefit decreased $600,000, the result of lower permanent tax adjustments and lower seasonal loss before income taxes.
Nine Months Ended September 30, 2023, Compared to Nine Months Ended September 30, 2022 Natural gas distribution increased $7.2 million as a result of:
•Revenue increased $126.4 million.
◦Largely due to:
▪Higher purchased natural gas sold of $98.8 million recovered in customer rates that was offset in expense, as described below, partially offset by $1.2 million of natural gas cost sharing in Oregon.
▪Increased revenue-based taxes recovered in rates of $7.4 million that were offset in expense, as described below.
▪Rate relief of $8.4 million in Washington and Idaho, including the excess deferred income tax tariff settlement of $1.1 million in Washington.
▪Higher basic service charges of $3.5 million.
▪Approved rate recovery of short-term debt interest expense related to increased gas costs in Idaho of $3.2 million.
▪Higher transportation revenue of $2.8 million due to 15.1 percent higher volumes, largely higher electric generation.
▪Higher nonregulated revenue $1.8 million, largely higher liquefied natural gas sales.
▪Recovery of COVID-19 response costs, including bill assistance programs and waived late payment fees, in Oregon of $700,000.
◦Partially offset by a 1.6 percent decrease in retail sales volumes to all customer classes.
•Purchased natural gas sold increased $99.0 million, primarily due to higher natural gas costs of $106.7 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. Purchasedadjustments. These increases were partially offset by lower volumes of natural gas sold includes the disallowancepurchased of $845,000 ordered by MNPUC, as discussed in Note 19.$7.7 million.
•Operation and maintenance increased $1.8 million largely resulting from higher subcontractor costs.
•Depreciation, depletion and amortization increased $1.2 million, primarily resulting from increased property, plant and equipment balances from growth and replacement projects placed in service.
•Taxes, other than income increased $800,000, largely from higher revenue-based taxes which are recovered in rates.
•Other income was comparable to the same period in the prior year. Lower returns on the Company's nonqualified benefit plan investments were largely offset by higher interest income.
•Interest expense increased $1.4 million, primarily due to higher long-term debt balances from debt issued in 2022 and 2021 and higher interest rates, partially offset by higher AFUDC of $400,000.
•Income tax benefit increased $1.1 million as a result of an increased seasonal loss.
Nine Months Ended September 30, 2022, Compared to Nine Months Ended September 30, 2021 Natural gas distribution's earnings decreased $9.3 million as a result of:
•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$10.9 million.
◦Primarily due to:Largely resulting from:
•▪Higher contract servicespayroll-related costs of $4.5$10.0 million, primarily higher subcontractorincentive costs, straight-time payroll and health care costs.
•▪Increased uncollectible accounts expense of $1.7 million, largely due to higher revenue.
▪Higher software related expenses of $800,000.
▪Increased costs of $1.7 million.$500,000 associated with vehicles and equipment.
•◦HigherPartially offset by decreased other costs, partially resulting from inflation,expenses, including vehicle fuel costsgain on sale of $800,000; higher bad debt expense of $700,000; and higher office, travel, materials, and otherthe Company's customer service center, miscellaneous employee costs.expenses and increased regulatory deferrals.
•Depreciation, depletion and amortization increased $3.2 million, from increased property, plant and equipment balancesprimarily resulting from growth and replacement projects placed in service.service, partially offset by lower depreciation rates in Minnesota.
•Taxes, other than income increased $6.6$6.5 million, resultinglargely from higher revenue-based taxes of $7.4 million which are recovered in rates.rates, partially offset by lower property taxes due to lower assessed values of $900,000.
•Other income decreased $5.1(expense) increased $14.2 million primarily the resultdriven by higher interest income of lower$8.5 million, largely related to purchased gas costs, and higher returns on the Company's nonqualified benefit plan investmentsplans of $6.8 million, as discussed$6.2 million. These increases were offset in Note 14, partially offsetpart by increased interest income.higher pension and postretirement expense.
•Interest expense increased $2.2$12.4 million, primarily due tofrom higher short-term and long-term debt balances from debt issued in 20222023 and 20212022 and higher interest rates, partially offset by higher AFUDC.AFUDC debt of $2.0 million, due to higher rates.
•Income tax (benefit) expensebenefit decreased $2.0$1.4 million, largely the result of lowerhigher income before income taxes.taxes, partially offset by higher permanent tax adjustments.
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 assistwhich has assisted 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 inbefore the first halfend of 2023.
The Company is one of four owners of Coyote Station and cannot make a unilateral decision on the plant's future; therefore, the Company could be negatively impacted by decisions of the other owners. In September 2021, Otter Tail Power Company filed its 2022 Integrated Resource Plan in Minnesota and North Dakota, which included its intent to start the process of withdrawal from its 35 percent ownership interest in Coyote Station with an anticipated exit from the plant by December 31, 2028. In October 2022, Otter Tail Power Company requested permission from the MNPUC to extend the deadline for its Integrated Resource Plan with the intent to update its modeling in light of recent developments in the industry, including capacity requirements in MISO. The joint owners continue to collaborate in analyzing data and weighing decisions that impact the plant and its employees as well as each company's customers and communities served. Further state implementation of pollution controlExisting and proposed emissions reduction plans to improve visibility at Class I areas, such as national parks, underfrom the EPA's Regional Haze RuleEPA 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 20222022.
On June 6, 2023, the Company received unanimous approval from the NDPSC on an electric service agreement to provide power for Applied Digital Corporation's data center near Ellendale, North Dakota. At full capacity, the data center requires 180 megawatts of electricity, which is the equivalent of about 28 percent of the Company's generation portfolio. The Applied Digital Corporation's load will be purchased from the MISO market and expects a decisionwill not impact customers' power supply. The data center began taking electric service on the plan sometime in 2023. The plan, as submittedMarch 4, 2023 under an interim electric service agreement approved by the NDDEQ, does not requireNDPSC. On October 2, 2023, the Company filed with the NDPSC an electric service agreement request to serve an additional controls for any unitsdata center in North Dakota, including Coyote Station.its service territory.
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 toEPA released rulemaking under the federal Clean Air Act somein the federal register on May 23, 2023, amending GHG emission standards for new fossil-fired electric generating units and re-proposing GHG emission guidelines for existing fossil-fired electric generating units. The proposed standards for new natural gas-fired electric generating units have been made more stringent, requiring units that operate more frequently to install carbon capture controls or co-fire with hydrogen. For existing coal and natural gas-fired units operating more frequently and long-term, the EPA’s emissions guidelines include standards equivalent to installation of carbon capture pollution control or co-firing with lower or zero-carbon fuels, such as hydrogen. States must evaluate individual units and develop, adopt, and submit a plan to the EPA which were amendedwould include emission standards for each individual unit. State plans are required to be submitted to the EPA no later than 24 months after the final rule effective date. The EPA requested comment on the proposed GHG emission standards and guidelines by August 8, 2023, and intends to finalize the previous presidential administration.rules in 2024. The contentEPA has not currently proposed GHG emission standards for existing simple cycle combustion turbines and impactsintends to explore setting emission standards in the future for these units. It is unknown at this time what emission limits or controls would be required for each Montana-Dakota owned and jointly owned fossil-fired electric generating unit. Due to the uncertainty of the changes under consideration are uncertain andEPA rulemaking, Montana-Dakota cannot determine the Company continues to monitor for potential actions by the EPA.financial impact on its operations.
•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 recover, 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 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 OPUC approved the deferred accounting order on June 27, 2023. 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. Oral arguments were held on September 29, 2023. A decision could be issued in the second half of 2024. 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 assessingalong with two other local natural gas distribution companies in Washington, filed a lawsuit on May 22, 2023, challenging these amendments which the impactCompany believes will stifle innovation, increase the cost of these revisions.
•housing and energy for our customers, and do not consider the limitations of electric heat pumps in colder climates. On June 1, 2023, the plaintiffs filed a motion for a preliminary injunction to preliminarily enjoin the challenged building code amendments. Oral arguments on the preliminary injunction were held on July 18, 2023. The Company has reviewedcourt denied the income tax provisionspreliminary injunction, finding no immediate harm and confirming the building code amendments were not yet in effect due to the stay of 120 days issued by the Washington State Building Code Council. On September 15, 2023, the Washington State Building Code Council voted to delay the implementation of the IRA signed into law in August 2022State Building and does not expect any material income tax benefits as a result. The Company will continue to explore whether any of the new or renewed energy tax credits will provide a benefit.Energy Codes until March 15, 2024.
Pipeline
Strategy and challenges The pipeline segment provides natural gas transportation, underground storage and energy-relatednon-regulated cathodic protection services, as discussed in Note 17.18. 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 and 2023:
•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.
•In November 2023, the Grasslands South Expansion project was placed in service. The project increased system capacity by 94 MMcf of natural gas per day.
•In November 2023, the Line Section 15 Expansion project was placed in service and will increase system capacity by 25 MMcf of natural gas per day.
The segment is exposed to energynatural gas and oil price volatility which is impacted by theincluding fluctuations in pricing, production and basis differentials of the energy market's commodities.differentials. 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. However, supply chain challenges related to electrical equipment have delayed the anticipated in-service date of one of the Company's growth projects as noted in the Outlook section. The segment is also currently experiencing inflationary pressures with increased fuel and raw material costs, as well as other inflationary pressures.and contract services costs. The Company expects supply chain challenges and inflationary pressures to continue throughout the remainder of 2022 and into 2023.continue.
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 | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, | | September 30, |
| | | 2022 | | 2021 | | Variance | | 2022 | | 2021 | | Variance | | 2023 | | 2022 | | Variance | | 2023 | | 2022 | | Variance |
| | | (In millions) | | (In millions) |
| Operating revenues | Operating revenues | $ | 39.7 | | $ | 34.9 | | 14 | % | | $ | 114.3 | | $ | 106.7 | | 7 | % | Operating revenues | $ | 44.1 | | $ | 39.7 | | 11 | % | | $ | 127.0 | | $ | 114.3 | | 11 | % |
| 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 | 17.0 | | 14.6 | | 16 | % | | 52.7 | | 44.9 | | 17 | % |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 6.9 | | 5.2 | | 33 | % | | 20.0 | | 15.5 | | 29 | % | Depreciation, depletion and amortization | 6.3 | | 6.9 | | (9) | % | | 20.0 | | 20.0 | | — | % |
| Taxes, other than income | Taxes, other than income | 3.2 | | 3.2 | | — | % | | 10.0 | | 9.8 | | 2 | % | Taxes, other than income | 3.0 | | 3.2 | | (6) | % | | 9.6 | | 10.0 | | (4) | % |
| Total operating expenses | Total operating expenses | 24.7 | | 22.6 | | 9 | % | | 74.9 | | 70.8 | | 6 | % | Total operating expenses | 26.3 | | 24.7 | | 6 | % | | 82.3 | | 74.9 | | 10 | % |
| Operating income | Operating income | 15.0 | | 12.3 | | 22 | % | | 39.4 | | 35.9 | | 10 | % | Operating income | 17.8 | | 15.0 | | 19 | % | | 44.7 | | 39.4 | | 13 | % |
| Other income | Other income | .6 | | 2.8 | | (79) | % | | — | | 5.6 | | (100) | % | Other income | .9 | | .6 | | 50 | % | | 2.3 | | — | | NM |
| Interest expense | Interest expense | 3.0 | | 1.7 | | 76 | % | | 8.1 | | 5.6 | | 45 | % | Interest expense | 3.3 | | 2.6 | | 27 | % | | 9.5 | | 7.4 | | 28 | % |
| Income before income taxes | Income before income taxes | 12.6 | | 13.4 | | (6) | % | | 31.3 | | 35.9 | | (13) | % | Income before income taxes | 15.4 | | 13.0 | | 18 | % | | 37.5 | | 32.0 | | 17 | % |
| Income tax expense | Income tax expense | 2.8 | | 2.8 | | — | % | | 7.0 | | 7.2 | | (3) | % | Income tax expense | 3.5 | | 2.8 | | 25 | % | | 8.1 | | 7.2 | | 13 | % |
| Income from continuing operations | | Income from continuing operations | 11.9 | | 10.2 | | 17 | % | | 29.4 | | 24.8 | | 19 | % |
| Discontinued operations, net of tax* | | Discontinued operations, net of tax* | — | | (0.4) | | (100) | % | | (0.5) | | (0.5) | | — | % |
| Net income | Net income | $ | 9.8 | | $ | 10.6 | | (7) | % | | $ | 24.3 | | $ | 28.7 | | (15) | % | Net income | $ | 11.9 | | $ | 9.8 | | 21 | % | | $ | 28.9 | | $ | 24.3 | | 19 | % |
| NM - not meaningful | | NM - not meaningful |
| *Discontinued operations includes interest on debt facilities repaid in connection with strategic initiatives. | | *Discontinued operations includes interest on debt facilities repaid in connection with strategic initiatives. |
| | Operating statistics | Operating statistics | Three Months Ended | Nine Months Ended | Operating statistics | Three Months Ended | Nine Months Ended |
| | September 30, | | September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | | 2023 | | 2022 | |
| Transportation volumes (MMdk) | Transportation volumes (MMdk) | 130.9 | | 122.0 | | 357.1 | | 351.5 | | Transportation volumes (MMdk) | 146.9 | | 130.9 | | 419.2 | | 357.1 | |
| 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 | 27.8 | | 14.8 | | 21.2 | | 23.0 | |
| Net injections | Net injections | 13.3 | | 12.8 | | 5.1 | | 3.3 | | Net injections | 15.0 | | 13.3 | | 21.6 | | 5.1 | |
| End of period | End of period | 28.1 | | 28.8 | | 28.1 | | 28.8 | | End of period | 42.8 | | 28.1 | | 42.8 | | 28.1 | |
Three Months Ended September 30, 2022,2023, Compared to Three Months Ended September 30, 20212022 Pipeline earnings decreased $800,000increased $2.1 million as a result of:
•Revenues increased $4.8 million, primarily driven by increased$4.4 million.
◦Driven by:
▪Increased transportation volume revenues,volumes, largely due to theincreased North Bakken Expansion project placedcontracted volume commitments of $2.1 million.
▪Higher storage-related revenues.
▪New rates effective August 1, 2023, of $1.7 million, as discussed in service in February 2022.note 21.
▪Partially offsetting these increases were non-renewal of certain contracts.
•Operation and maintenance increased $400,000 primarily from higher$2.4 million.
◦Primarily from:
▪Higher payroll-related costs of $2.2 million.
▪Higher other costs including insurance and contract services costs, non-regulated project costs and materials, partiallyservices.
▪Partially offset by lower payroll-related costs largely due to lower incentive accruals.materials.
•Depreciation, depletion and amortization increased $1.7 million due to increased property,decreased $600,000 driven largely by fully depreciated plant and equipment balances, largely related to the North Bakken Expansion project.balances.
•Taxes, other than income were comparable to the same period in the prior year.
•Other income decreased $2.2 million,increased $300,000, driven primarily by lowerhigher AFUDC for the construction of the Company's growth projects.
•Interest expense increased $700,000, primarily from higher average interest rates and higher debt balances to fund capital expenditures, partially offset by higher AFUDC, as previously discussed.
•Income tax expense increased largely due to higher income before taxes.
Nine Months Ended September 30, 2023, Compared to Nine Months Ended September 30, 2022 Pipeline earnings increased $4.6 million as a result of:
•Revenues increased $12.7 million.
◦Primarily driven by:
▪Increased transportation volumes, largely due to increased contracted volume commitments of the completion$5.6 million and a full nine months of benefit from the North Bakken Expansion project that was placed in service in February 2022.
•▪Interest expense increased $1.3Higher storage-related revenues of $3.6 million.
▪New rates effective August 1, 2023, of $1.7 million, primarily from higher debt balances to fund capital expenditures and lower AFUDC as a resultdiscussed in note 21.
▪Higher non-regulated projects revenues.
▪Partially offsetting these increases were non-renewal of the completion of the North Bakken Expansion project placed in service in February 2022.certain contracts.
•Income tax expenseOperation and maintenance increased $7.8 million.
◦Primarily from:
▪Higher payroll-related costs of $4.8 million.
▪Higher non-regulated project costs of $1.2 million.
▪Higher legal costs of $400,000, largely due to the FERC rate case.
▪Higher other costs, primarily contract services.
•Depreciation, depletion and amortization 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 comparabledecreased by $400,000, primarily due to the same periodlower property tax valuations in the prior year.certain jurisdictions.
•Other income decreased $5.6increased $2.3 million, resulting from:
◦Lower AFUDCdriven primarily by higher returns of $3.7$2.1 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 and higher AFUDC as discussed in Note 14.previously discussed.
•Interest expense increased $2.5$2.1 million, primarily due tofrom higher average interest associated withrates and higher debt balances to fund capital expenditures, and lowerpartially offset by higher AFUDC as a result of the North Bakken Expansion project placed in service in February 2022.previously discussed.
•Income tax expense was comparableincreased largely due to the same period in the prior year.higher income before taxes.
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 rules to update, strengthen and expand standards intended to significantly reduce GHG emissions and other air pollutants from emission sources in the oil and natural gas industries. The standards will apply to various sources of GHG emissions including natural gas compressors, pneumatic controllers and pumps, fugitive emissions components and super-emitter events. The final rules are expected to be issued by the end of 2023. Additionally, the EPA is revising the current GHG reporting rules to improve the calculation, monitoring and reporting of GHG data and incorporate provisions in the IRA. The first of these revisions was published in the Federal Register on August 1, 2023. 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. The production delay, along with the long-term contractual commitments on the North Bakken Expansion project placed in service in the first quarter ofFebruary 2022, has negatively impacted customer renewalsrenewal of certain contracts. Natural gas production has since rebounded, currently exceeding pre-pandemic levels and the Company expects gradual increases in oil well drilling activity over the next 2 years. Bakken natural gas production outlook remains positive with continued growth expected due to new oil wells and increasing gas to oil ratios.
The low levels ofIncreases 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 approval on October 19, 2023. Construction is expected to begin in early 2024 with an anticipated completion date later in 2024.
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 beginbegan in earlythe second quarter of 2023, pending regulatory approvals, with an anticipated completion date in early 2024. Supply chain challenges related to electrical equipment have impacted the project's schedule, resulting in a delay from the original anticipated in-service date of late 2023.
In addition to the Wahpeton Expansion and 2023 Line Section 27 Expansion projects, the Company has also entered into long-term customer agreementsSee Capital Expenditures within this section for the construction of two additional growth projects, which are dependent on regulatory approvals and anticipated to be completed in 2023. Estimated capital expenditures for these projects is approximately $65 million and is included in the pipeline segment's estimated capital expenditures for 2022 and 2023. The projects are anticipated to add total incremental system capacity of 119 MMcf per day.
Construction Materials and Contracting
Strategy and challenges The construction materials and contracting segment provides an integrated set of aggregate-based services, as discussed in Note 17. The segment focuses on high-growth strategic markets located near major transportation corridors and desirable mid-sized metropolitan areas; strengthening the long-term, strategic aggregate reserve position through available purchase and/or lease opportunities; enhancing profitability through cost containment, margin discipline and vertical integration of the segment's operations; development and recruitment of talented employees; and continued growth through organic and strategic acquisition opportunities.
A key element of the Company's long-term strategy for this business is to further expand its market presence in the higher-margin materials business (rock, sand, gravel, ready-mix concrete, asphalt concrete and related products), complementing and expanding on the segment's expertise. The Company's continued acquisition activity supports this strategy.
As one of the country's largest sand and gravel producers, the segment continues to strategically manage its aggregate reserves, as well as take further advantage of being vertically integrated. The segment's vertical integration allows it to manage operations from aggregate mining to final lay-down of concrete and asphalt, with control of and access to permitted aggregate reserves being significant. The Company's aggregate reserves are naturally declining and, as a result, the Company seeks acquisition opportunities to replace the reserves.
The segment's management continually monitors its operating margins and has been proactive in addressing the inflationary impacts seen across the United States. The Company has increased its product pricing where necessary to mitigate the effects on the segment's gross margin. Due to existing contractual provisions, there can be a lag between the announced price increases and the time when they can be fully recognized. The Company will continue to evaluate future price increases on a regular cadence to keep pace with inflationary pressures as they are expected to continue throughout the remainder of 2022 and into 2023.
The segment operates in geographically diverse and competitive markets that can put negative pressure on the segment's operating margins. The segment's margins can also be impacted by volatility in the cost of raw materials such as diesel fuel, gasoline, asphalt oil, cement and steel, with diesel fuel and asphalt oil costs having the most significant impact on the segment's recent results. Such volatility and inflationary pressures may continue to have an impact on the segment's margins, including fixed-price construction contracts that are particularly vulnerable to the volatility of energy and material prices. While the Company has experienced some supply chain constraints, the Company has good relationships with its suppliers and has not experienced significant shortages or delays on materials or experienced any material adverse impacts to its results of operations. Other variables that can impact the segment's margins include adverse weather conditions, the timing of project starts or completions and declines or delays in new and existing projects due to the cyclical nature of the construction industry and governmental infrastructure spending. Accordingly, operating results in any particular period may not be indicative of the results that can be expected for any other period.
As a people first company, the segment continually takes steps to address the challenge of recruitment and retention of employees. In order to help attract new workers to the construction industry and enhance the skills of its current employees, the Company has completed construction of a corporate-wide state-of-the-art training center located in the Pacific Northwest. The training facility offers hands-on training for heavy equipment operators and truck drivers, as well as leadership and safety training. Trends in the labor market include an aging workforce and availability issues, and most of the markets the segment operates in have experienced labor shortages, largely truck drivers, causing increased labor-related costs and delays or inefficiencies on projects. The new training facility is expected to help address some of these challenges. The Company continues to monitor the labor markets and assess additional opportunities to enhance and support its workforce. Despite these efforts, the Company expects labor costs to continue to increase based on the increased demand for services and, to a lesser extent, the recent escalated inflationary environment in the United States.
Earnings overview - The following information summarizes the performance of the construction materials and contracting segment.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| | 2022 | | 2021 | | Variance | | 2022 | | 2021 | | Variance |
| | (In millions) |
| Operating revenues | $ | 975.4 | | $ | 831.3 | | 17 | % | | $ | 1,997.2 | | $ | 1,730.8 | | 15 | % |
| Cost of sales: | | | | | | | |
| Operation and maintenance | 758.7 | | 636.3 | | 19 | % | | 1,633.9 | | 1,376.5 | | 19 | % |
| Depreciation, depletion and amortization | 29.2 | | 24.5 | | 19 | % | | 84.9 | | 71.1 | | 19 | % |
| Taxes, other than income | 15.3 | | 13.9 | | 10 | % | | 41.3 | | 37.6 | | 10 | % |
| Total cost of sales | 803.2 | | 674.7 | | 19 | % | | 1,760.1 | | 1,485.2 | | 19 | % |
| Gross margin | 172.2 | | 156.6 | | 10 | % | | 237.1 | | 245.6 | | (3) | % |
| Selling, general and administrative expense: | | | | | | | |
| Operation and maintenance | 22.9 | | 20.9 | | 10 | % | | 71.6 | | 66.8 | | 7 | % |
| Depreciation, depletion and amortization | 1.2 | | 1.0 | | 20 | % | | 3.7 | | 3.1 | | 19 | % |
| Taxes, other than income | .7 | | 1.0 | | (30) | % | | 4.7 | | 4.4 | | 7 | % |
| Total selling, general and administrative expense | 24.8 | | 22.9 | | 8 | % | | 80.0 | | 74.3 | | 8 | % |
| Operating income | 147.4 | | 133.7 | | 10 | % | | 157.1 | | 171.3 | | (8) | % |
| Other income (expense) | (1.3) | | (.3) | | 333 | % | | (6.1) | | .8 | | (863) | % |
| Interest expense | 8.8 | | 4.8 | | 83 | % | | 21.5 | | 14.4 | | 49 | % |
| 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) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) |
| Aggregates | $ | 171.8 | | $ | 144.2 | | $ | 385.8 | | $ | 339.7 | | | $ | 34.4 | | $ | 28.9 | | $ | 50.2 | | $ | 43.7 | |
| Asphalt | 205.5 | | 153.1 | | 345.2 | | 268.9 | | | 28.1 | | 24.7 | | 32.5 | | 33.4 | |
| Ready-mix concrete | 198.9 | | 182.4 | | 475.5 | | 446.2 | | | 29.8 | | 25.1 | | 54.1 | | 50.7 | |
| Other products* | 166.7 | | 138.1 | | 328.5 | | 278.1 | | | 44.3 | | 43.3 | | 42.7 | | 55.7 | |
| Contracting services | 492.2 | | 415.1 | | 937.2 | | 792.0 | | | 35.6 | | 34.6 | | 57.6 | | 62.1 | |
| Intracompany eliminations | (259.7) | | (201.6) | | (475.0) | | (394.1) | | | — | | — | | — | | — | |
| $ | 975.4 | | $ | 831.3 | | $ | 1,997.2 | | $ | 1,730.8 | | | $ | 172.2 | | $ | 156.6 | | $ | 237.1 | | $ | 245.6 | |
*Other products includes cement, asphalt oil, merchandise, fabric, spreading and other products that individually are not considered to be a major line of business for the segment.
| | | | | | | | | | | | | | |
| Three Months Ended | Nine Months Ended |
| September 30, | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 | |
| Sales (thousands): | | | | |
| Aggregates (tons) | 12,399 | | 11,346 | | 26,890 | | 25,687 | |
| Asphalt (tons) | 3,550 | | 3,290 | | 5,967 | | 5,675 | |
| Ready-mix concrete (cubic yards) | 1,306 | | 1,350 | | 3,179 | | 3,283 | |
| Average selling price: | | | | |
| Aggregates (per ton) | $ | 13.86 | | $ | 12.71 | | $ | 14.35 | | $ | 13.22 | |
| Asphalt (per ton) | $ | 57.90 | | $ | 46.55 | | $ | 57.85 | | $ | 47.38 | |
| Ready-mix concrete (per cubic yard) | $ | 152.34 | | $ | 135.10 | | $ | 149.59 | | $ | 135.93 | |
Three Months Ended September 30, 2022, Compared to Three Months Ended September 30, 2021 Construction materials and contracting's earnings increased $6.5 million as a result of:
•Revenuesincreased $144.1 million.
◦Primarily the result of increased revenues across all product lines.
•The Company benefited from higher average selling prices of nearly $100 million across all product lines. Also positively impacting materials revenues were:
◦Increased aggregates sales volumes due to additional revenue from recent acquisitions, including the benefit of approximately 700,000 tons, and higher volumes in certain markets as a result of higher demand.
◦Increased asphalt sales volumes, largely from higher demand due to more available public work in Minnesota of 198,000 tons and Montana and Wyoming of 82,000 tons. Also contributing was higher sales volumes due to the recent acquisitions, which contributed an additional 76,000 tons.
◦Partially offsetting these increases were lower ready-mix sales volumes as a result of lower demand in certain regions.
•Increased contracting revenues due to more available work, strong demand in some regions and revenue from recent acquisitions of $15.8 million.
◦Partially offset by:
•An increase in internal materials sales used in other product lines and contracting services provided.
•Gross margin increased $15.6 million, directly resulting from the higher revenues previously discussed, partially offset by higher operating costs across the business primarily as a result of inflationary pressures, including diesel fuel costs of $12.9 million and higher labor, materials, equipment and production costs.
•Selling, general and administrative expense increased $1.9 million as a result of increased payroll-related costs, partially resulting from inflationary pressures.
•Other expense increased $1.0 million due to lower returns on the Company's nonqualified benefit plan investments, as discussed in Note 14.
•Interest expense increased $4.0 million, largely the result of higher debt balances, largely to fund recent acquisitions and higher working capital needs, and higher average interest rates.
•Income tax expense increased $2.2 million, largely due to higher income before income taxes.
Nine Months Ended September 30, 2022, Compared to Nine Months Ended September 30, 2021 Construction materials and contracting's earnings decreased $21.6 million as a result of:
•Revenuesincreased $266.4 million.
◦Primarily the result of increased revenues across all product lines.
•The Company benefited from higher average selling prices of nearly $175 million across all product lines. Also impacting materials revenues were:
◦Increased asphalt sales volumes of 294,000 tons from recent acquisitions.
◦Increased aggregate sales volumes of 1.7 million tons from recent acquisitions. Also contributing was strong market demand in Idaho and Montana.
◦Increased other revenues from other retail and cement revenues.
◦Lower ready-mix concrete sales volumes in Oregon, Hawaii and Alaska due to the decreased demand and the absence of certain large projects, and higher delivery costs in South Dakota.
•Increased contracting revenue across all regions as a result of more available work and increased pricing related to inflationary costs, as well as revenues from recent acquisitions.
◦These increases were partially offset by:
•An increase in internal materials sales used in other product lines and contracting services provided.
•Gross margin decreased $8.5 million.
◦Primarily the result of higher operating costs across the business primarily as a result of inflationary pressures, including diesel fuel costs of $30.9 million and higher labor, materials, repair and maintenance, equipment, delivery and production costs. In addition, contracting services margins decreased from the mix of work and project delays.
◦Partially offset by increased margins for aggregates and ready-mix as a result of the increased revenues previously discussed.
•Selling, general and administrative expense increased $5.7 million, largely due to:
◦Increased payroll-related costs of $2.9 million, partially resulting from inflationary pressures.
◦Higher professional fees of $800,000, partially due to increased audit fees and acquisition-related costs.
◦Lower recovery of bad debt expense of $800,000.
◦Higher depreciation and amortization of $600,000, primarily due to the completion of the training center.
◦Increased technology expenses.
•Other income (expense) decreased $6.9 million, mainly due to lower returns on the Company's nonqualified benefit plan investments, as discussed in Note 14.
•Interest expense increased $7.1 million, largely the result of higher debt balances to fund recent acquisitions and higher working capital needs.
•Income tax expense decreased $6.6 million, largely due to lower income before income taxes.
Outlook In August 2022, the Company announced its intent to separate this segment into a standalone publicly traded company. The separation is expected to result in two independent, publicly traded companies: (1) MDU Resources Group, Inc., the existing company and (2) Knife River, a construction materials and contracting company. The separation is expected to be completed in 2023 and is expected to unlock the inherent value within the two companies, which each have unique growth prospects and investment opportunities.
The American Rescue Plan Act enacted in the first quarter of 2021 provides $1.9 trillion in COVID-19 relief funding for states, schools and local governments. States are beginning to move forward with allocating these funds based on federal criteria and state needs, and in some cases, funding of infrastructure projects could positively impact the segment. Additionally, the bipartisan infrastructure proposal, known as the Infrastructure Investment and Jobs Act, was enacted in the fourth quarter of 2021. This initiative is providing long-term opportunities by designating $119 billion for the repair and rebuilding of roads and bridges across the Company's footprint. In addition, the IRA provides $369 billion in new funding for clean energy programs. These programs include new tax incentives for solar, battery storage and hydrogen development along with funding to expand the production of electric vehicles and the build out of infrastructure to support electric vehicles. In addition to federal funding, 13 out of the 14 of the states in which the Company operates have implemented their own funding mechanisms for public projects, including projects related to highways, airports and other public infrastructure. The Company continues to monitor the implementation of these legislative items.
The segment's vertically integrated aggregates-based business model provides the Company with the ability to capture margin throughout the sales delivery process. The aggregate products are sold internally and externally for use in other products such as ready-mix concrete, asphaltic concrete and public and private construction markets. The contracting services and construction materials are sold in connection with street, highway and other public infrastructure projects, as well as private commercial, industrial and residential development projects. The public infrastructure projects have traditionally been more stable markets as public funding is more secure during periods of economic decline. The public projects are, however, dependent on federal and state funding such as appropriations to the Federal Highway Administration. Spending on private development is highly dependent on both local and national economic cycles, providing additional sales during times of strong economic cycles and potential for reductions during times of inflation or supply shortages.
During 2021, the Company made strategic purchases and completed acquisitions that support the Company's long-term strategy to expand its market presence in the higher-margin materials markets. The Company continues to evaluate additional acquisition opportunities. For more information on the Company's business combinations, see Note 10. In 2022, the Company is also upgrading its prestress facility located in Spokane, Washington. The state of the art facility is expectedexpenditures related to be in service in December 2022. The facility is expected be a platform forthese growth through improved productivity and quality, which will help meet strong market demand for prefabricated concrete solutions.
The construction materials and contracting segment's backlog remained strong at September 30, 2022, at $895.0 million, as compared to backlog of $651.7 million at September 30, 2021. A significant portion of the Company's backlog relates to publicly funded projects, largely street and highway construction projects. Period over period increases or decreases in backlog cannot be used as an indicator of future revenues or net income. Of the $895.0 million of backlog at September 30, 2022, the Company expects to complete an estimated $820.5 million during the next 12 months. While the Company believes the current backlog of work remains firm, prolonged delays in the receipt of critical supplies and materials or continued increases to pricing could result in customers seeking to delay or terminate existing or pending agreements. Factors noted in Part I, Item 1A. Risk Factors in the 2021 Annual Report can cause revenues to be realized in periods and at levels that are different from originally projected.
The labor contracts that the construction materials and contracting segment was negotiating at December 31, 2021, as reported in Items 1 and 2 - Business Properties - General in the 2021 Annual Report, have been ratified.
Construction Services
Strategy and challenges The construction services segment provides electrical, and mechanical and transmission and distribution specialty contracting services, as discussed in Note 17.18. 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 on pricing 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 actual 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 increased fuelcontinued labor constraints 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 | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, | | September 30, |
| | | 2022 | | 2021 | | Variance | | 2022 | | 2021 | | Variance | | 2023 | | 2022 | | 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 | $ | 717.4 | | $ | 737.0 | | (3) | % | | $ | 2,218.7 | | $ | 1,975.1 | | 12 | % |
| 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 | 607.9 | | 651.8 | | (7) | % | | 1,891.1 | | 1,708.1 | | 11 | % |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 4.3 | | 3.9 | | 10 | % | | 12.6 | | 11.8 | | 7 | % | Depreciation, depletion and amortization | 4.7 | | 4.3 | | 9 | % | | 13.6 | | 12.6 | | 8 | % |
| Taxes, other than income | Taxes, other than income | 20.2 | | 14.2 | | 42 | % | | 60.5 | | 49.9 | | 21 | % | Taxes, other than income | 19.9 | | 20.2 | | (1) | % | | 71.9 | | 60.5 | | 19 | % |
| Total cost of sales | Total cost of sales | 676.3 | | 459.6 | | 47 | % | | 1,781.1 | | 1,372.4 | | 30 | % | Total cost of sales | 632.5 | | 676.3 | | (6) | % | | 1,976.6 | | 1,781.2 | | 11 | % |
| Gross margin | 60.7 | | 55.2 | | 10 | % | | 194.0 | | 186.5 | | 4 | % | |
| Gross profit | | Gross profit | 84.9 | | 60.7 | | 40 | % | | 242.1 | | 193.9 | | 25 | % |
| 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 | 32.6 | | 23.5 | | 39 | % | | 94.9 | | 76.0 | | 25 | % |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 1.2 | | 1.0 | | 20 | % | | 3.3 | | 3.4 | | (3) | % | Depreciation, depletion and amortization | 1.2 | | 1.2 | | — | % | | 3.7 | | 3.3 | | 12 | % |
| Taxes, other than income | Taxes, other than income | 1.1 | | 1.1 | | — | % | | 4.0 | | 3.7 | | 8 | % | Taxes, other than income | 1.0 | | 1.1 | | (9) | % | | 3.9 | | 4.0 | | (3) | % |
| 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 | 34.8 | | 25.8 | | 35 | % | | 102.5 | | 83.3 | | 23 | % |
| Operating income | Operating income | 34.9 | | 30.1 | | 16 | % | | 110.6 | | 108.2 | | 2 | % | Operating income | 50.1 | | 34.9 | | 44 | % | | 139.6 | | 110.6 | | 26 | % |
| Other income | Other income | 3.5 | | .9 | | 289 | % | | 4.6 | | 2.6 | | 77 | % | Other income | 2.0 | | 3.5 | | (43) | % | | 7.5 | | 4.7 | | 60 | % |
| Interest expense | Interest expense | 1.7 | | .9 | | 89 | % | | 3.8 | | 2.6 | | 46 | % | Interest expense | 4.7 | | — | | NM | | 6.6 | | 0.2 | | NM |
| Income before income taxes | Income before income taxes | 36.7 | | 30.1 | | 22 | % | | 111.4 | | 108.2 | | 3 | % | Income before income taxes | 47.4 | | 38.4 | | 23 | % | | 140.5 | | 115.1 | | 22 | % |
| Income tax expense | Income tax expense | 8.7 | | 7.0 | | 24 | % | | 27.6 | | 26.4 | | 5 | % | Income tax expense | 11.4 | | 9.2 | | 24 | % | | 34.5 | | 28.5 | | 21 | % |
| Income from continuing operations | | Income from continuing operations | 36.0 | | 29.2 | | 23 | % | | 106.0 | | 86.6 | | 22 | % |
| Discontinued operations, net of tax* | | Discontinued operations, net of tax* | — | | (1.2) | | (100) | % | | (5.2) | | (2.8) | | 86 | % |
| Net income | Net income | $ | 28.0 | | $ | 23.1 | | 21 | % | | $ | 83.8 | | $ | 81.8 | | 2 | % | Net income | $ | 36.0 | | $ | 28.0 | | 29 | % | | $ | 100.8 | | $ | 83.8 | | 20 | % |
| *Discontinued operations includes interest on debt facilities repaid in connection with strategic initiatives. | | *Discontinued operations includes interest on debt facilities repaid in connection with strategic initiatives. |
| NM - not meaningful | | NM - not meaningful |
| | 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 | 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 | | | 2023 | | 2022 | | 2023 | | 2022 | | | 2023 | | 2022 | | 2023 | | 2022 | |
| | (In millions) | | (In millions) |
| Electrical & mechanical | Electrical & mechanical | | Electrical & mechanical | |
| Commercial | Commercial | $ | 276.6 | | $ | 143.2 | | $ | 706.6 | | $ | 457.0 | | | $ | 21.8 | | $ | 20.8 | | $ | 67.2 | | $ | 56.7 | | Commercial | $ | 266.6 | | $ | 276.6 | | $ | 947.8 | | $ | 706.6 | | | $ | 32.7 | | $ | 21.8 | | $ | 99.8 | | $ | 67.2 | |
| Industrial | Industrial | 132.3 | | 99.8 | | 339.4 | | 350.2 | | | 11.3 | | 7.5 | | 33.4 | | 37.3 | | Industrial | 116.0 | | 132.3 | | 367.3 | | 339.4 | | | 8.3 | | 11.3 | | 35.2 | | 33.4 | |
| Institutional | Institutional | 58.9 | | 36.3 | | 155.0 | | 108.2 | | | 1.0 | | (1.4) | | 2.3 | | 2.0 | | Institutional | 76.3 | | 58.9 | | 195.2 | | 155.0 | | | 6.1 | | 1.0 | | 11.8 | | 2.3 | |
| Renewables | Renewables | 43.4 | | 2.1 | | 122.8 | | 4.7 | | | (3.9) | | .2 | | .1 | | .6 | | Renewables | 19.2 | | 43.4 | | 43.9 | | 122.8 | | | 1.8 | | (3.9) | | 2.3 | | .1 | |
| Service & other | Service & other | 35.3 | | 38.2 | | 127.0 | | 106.2 | | | 3.7 | | 3.8 | | 14.8 | | 13.7 | | Service & other | 38.8 | | 35.3 | | 126.0 | | 127.0 | | | 3.6 | | 3.7 | | 14.3 | | 14.7 | |
| | 546.5 | | 319.6 | | 1,450.8 | | 1,026.3 | | | 33.9 | | 30.9 | | 117.8 | | 110.3 | | | 516.9 | | 546.5 | | 1,680.2 | | 1,450.8 | | | 52.5 | | 33.9 | | 163.4 | | 117.7 | |
| Transmission & distribution | Transmission & distribution | | | | Transmission & distribution | | | |
| Utility | Utility | 179.6 | | 168.6 | | 477.5 | | 465.6 | | | 25.8 | | 20.8 | | 72.2 | | 68.5 | | Utility | 188.8 | | 179.6 | | 508.9 | | 477.5 | | | 31.1 | | 25.8 | | 76.9 | | 72.2 | |
| Transportation | Transportation | 16.1 | | 30.0 | | 59.5 | | 78.2 | | | 1.0 | | 3.5 | | 4.0 | | 7.7 | | Transportation | 15.7 | | 16.1 | | 40.6 | | 59.5 | | | 1.3 | | 1.0 | | 1.8 | | 4.0 | |
| | 195.7 | | 198.6 | | 537.0 | | 543.8 | | | 26.8 | | 24.3 | | 76.2 | | 76.2 | | | 204.5 | | 195.7 | | 549.5 | | 537.0 | | | 32.4 | | 26.8 | | 78.7 | | 76.2 | |
| Intrasegment eliminations | Intrasegment eliminations | (5.2) | | (3.4) | | (12.7) | | (11.2) | | | — | | — | | — | | — | | Intrasegment eliminations | (4.0) | | (5.2) | | (11.0) | | (12.7) | | | — | | — | | — | | — | |
| | $ | 737.0 | | $ | 514.8 | | $ | 1,975.1 | | $ | 1,558.9 | | | $ | 60.7 | | $ | 55.2 | | $ | 194.0 | | $ | 186.5 | | | $ | 717.4 | | $ | 737.0 | | $ | 2,218.7 | | $ | 1,975.1 | | | $ | 84.9 | | $ | 60.7 | | $ | 242.1 | | $ | 193.9 | |
Three Months Ended September 30, 2022,2023, Compared to Three Months Ended September 30, 20212022 Construction services earnings increased $4.9$8.0 million as a result of:
•Revenues decreased $19.6 million.
◦Largely due to lower electrical and mechanical workloads as a result of:
▪Lower renewable workloads driven largely by a $24.2 million decrease due to timing and progress of renewable projects.
▪Lower commercial workloads, primarily in the hospitality sector of $13.4 million due to progress on large projects. The commercial market was also impacted by decreased low voltage workloads of $5.8 million, partially offset by higher data center workloads.
▪Lower industrial workloads of $16.3 million in the general industrial and high-tech sectors of $6.8 million and $4.2 million, respectively; offset in part by higher government and maintenance workloads of $4.2 million and $3.5 million, respectively.
▪Partially offsetting these decreases were higher workloads in the institutional market of $17.4 million. Institutional workloads were driven by an increase of $15.9 million in the healthcare sector due to project mix.
◦Transmission and distribution revenues increased by $8.8 million, largely attributable to the utility market. Distribution and transmission sector workloads increased by $23.7 million and $16.8 million, respectively, partially offset by lower electrical workloads of $32.0 million due to project timing.
•Gross profit increased $24.2 million.
◦Largely due to higher gross profit on electrical and mechanical work in the commercial, renewable and institutional sectors of $21.7 million, primarily due to efficiency on certain projects from labor and materials; offset partially by lower industrial gross profit. Transmission and distribution gross profit increased $5.6 million as a result of labor and equipment efficiencies on certain projects.
•Selling, general and administrative expense increased $9.0 million.
◦Primarily due to:
▪Increased payroll-related costs of $5.5 million related to operational growth.
▪Increased reserve for uncollectible accounts of $1.8 million on certain projects.
▪Increased expenses associated with professional services of $1.2 million.
•Other income decreased $1.5 million, primarily related to the Company's joint ventures activity.
•Interest expense increased $4.7 million due to higher working capital needs and higher average interest rates.
•Income tax expense increased $2.2 million primarily resulting from an increase in income before income taxes.
Nine Months Ended September 30, 2023, Compared to Nine Months Ended September 30, 2022 Construction services earnings increased $17.0 million as a result of:
•Revenues increased $222.2$243.6 million.
◦Largely due to higher electrical and mechanical workloads as a result of:
•▪Higher commercial workloads driven largely by a $97.5$185.9 million increase in the hospitality sector and a $95.2 million increase in data center work primarily from the progress on large projects; partially offset by a $30.0$21.4 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$61.0 million and the maintenance sector of $14.7$11.6 million, all of which benefited from the mix of project work;respectively; partially offset by lower refinery workloads.data com workloads of $38.3 million.
•▪Higher institutional workloads, primarily in the healthcare sector of $11.2 million, the education sector of $8.4$35.1 million and the government sector allworkloads of which benefited from$5.5 million.
▪Offset partially by lower renewable workloads of $78.9 million due to the mixtiming of project work in the quarter.commercial and renewable projects.
◦Also contributing were higher utility workloads as a result of:
▪Increases in distribution workloads of increases in the electrical sector$60.0 million, storm work of $14.1 million, the underground sector of $11.9 million, the substation sector of $5.6$21.4 million and the distribution sector, alltransmission workloads of which benefited from the project timing. These$20.2 million.
▪Increases in utility revenues were partially offset by lower transportation workloads forin electrical of $70.8 million.
▪Transportation workloads also decreased, largely due to lower workloads in street lighting also due to project timing.of $15.6 million, government of $6.4 million, and electrical of $3.7 million; partially offset by higher workloads in traffic signalization of $6.9 million.
•Gross marginprofit increased $5.5$48.2 million.
◦Largely due to:
•Higher marginsto higher gross profit on electrical and mechanical work in the commercial, industrial, institutional and commercialrenewable sectors of $46.1 million due to efficiency on certain from labor and materials, project mix, and the timing of project completions and project starts; offset partially by lower service gross profit. Transmission and distribution gross profit increased largely due to utility projects of $4.7 million as well as gains associated with completed commercial jobs.
•Higher utility marginsa result of $7.8 million resulting from the mix of customer projects,project mix; partially offset by lower storm margins.
◦Partially offset by:
•Higher overall operating costs related to inflationary pressures, including increased fuel and material costs and higher labor costs from decreased efficiencies on certain projects.
•Lower margins on renewable work, partly due to revisions in estimates on a project due to delays and labor impacts.
•Lower transportation margins, primarily for street lighting and electrical sectors due to customer demand.gross profit.
•Selling, general and administrative expense increased $700,000.$19.2 million.
◦Primarily due to:
•▪Increased payroll-related costs of $9.6 million related to operational growth.
▪Increased reserve for uncollectible accounts of $600,000.$4.2 million on certain projects.
•▪Increased office expenses of $400,000$2.7 million, largely increased rent.
◦▪Partially offset by decreased payroll-related costs, primarily due to lower incentive accruals.Increased expenses associated with professional services of $2.4 million.
•Other income increased $2.6$2.8 million, primarily related to results from the Company's joint ventures.
•Interest expense increased $800,000$6.4 million due to higher working capital needs.needs and higher average interest rates.
•Income tax expense increased $1.7$6.0 million primarily resulting from an increase in income before income taxes.
Nine Months Ended September 30, 2022, ComparedOutlook On November 2, 2023, the Company announced its intent to Nine Months Ended September 30, 2021 pursue a tax-free spinoff of its wholly owned construction services business, MDU Construction Services. The Company's board of directors believes a tax-free spinoff of the 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 tobusiness supports the Company's joint ventures.goal of enhancing value for stockholders by becoming a pure-play regulated energy delivery company.
•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. 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, windsolar generation and energy storage markets that complement existing renewable projects performed by the Company.
The construction services segment's backlog at September 30, was as follows:
| | | 2022 | 2021 | | 2023 | 2022 |
| | (In millions) | | (In millions) |
| Electrical & mechanical | Electrical & mechanical | $ | 1,724 | | $ | 1,041 | | Electrical & mechanical | $ | 1,526 | | $ | 1,724 | |
| Transmission & distribution | Transmission & distribution | 278 | 232 | Transmission & distribution | 324 | 278 |
| | $ | 2,002 | | $ | 1,273 | | | $ | 1,850 | | $ | 2,002 | |
The 57 percent increasedecrease in backlog at September 30, 2022,2023, as compared to backlog at September 30, 2021,2022, was largely attributable to the new project opportunities that the Company continues to be awarded across its diverse operations, particularlyprogress of completion on certain electrical and mechanical projects within theindustrial, renewables, institutional and commercial institutional, utility and industrial markets. These increases wereThis decrease in backlog has been partially offset by decreasesan increase in transmission and distribution related to project awards in both the transportation market due to the timing of project completions.and utility markets. 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 provided2023, 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 Company and continue to grow the segment's backlog. 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 | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, | | September 30, |
| | | 2022 | | 2021 | | Variance | | 2022 | | 2021 | | Variance | | 2023 | | 2022 | | Variance | | 2023 | | 2022 | | Variance |
| | (In millions) | | (In millions) |
| Operating revenues | Operating revenues | $ | 4.4 | | $ | 3.4 | | 29 | % | | $ | 13.2 | | $ | 10.1 | | 31 | % | Operating revenues | $ | 1.7 | | $ | 1.5 | | 13 | % | | $ | 6.4 | | $ | 4.4 | | 45 | % |
| 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 | (2.6) | | 3.0 | | (187) | % | | 19.4 | | 12.9 | | 50 | % |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 1.1 | | 1.1 | | — | % | | 3.3 | | 3.5 | | (6) | % | Depreciation, depletion and amortization | 1.0 | | 1.1 | | (9) | % | | 3.2 | | 3.3 | | (3) | % |
| | Taxes, other than income | | Taxes, other than income | — | | — | | — | % | | — | | — | | — | % |
| Total operating expenses | Total operating expenses | 5.6 | | 3.4 | | 65 | % | | 15.2 | | 10.4 | | 46 | % | Total operating expenses | (1.6) | | 4.1 | | (139) | % | | 22.6 | | 16.2 | | 40 | % |
| Operating loss | (1.2) | | — | | — | % | | (2.0) | | (.3) | | 567 | % | |
| Other income | .3 | | — | | — | % | | .4 | | .5 | | (20) | % | |
| Operating income (loss) | | Operating income (loss) | 3.3 | | (2.6) | | (227) | % | | (16.2) | | (11.8) | | 37 | % |
| Unrealized gain on investment in Knife River | | Unrealized gain on investment in Knife River | 30.2 | | — | | NM | | 170.2 | | — | | NM |
| Other income (expense) | | Other income (expense) | 5.8 | | — | | NM | | 10.0 | | (1.3) | | 869 | % |
| Interest expense | Interest expense | .4 | | .1 | | 300 | % | | .8 | | .2 | | 300 | % | Interest expense | 8.6 | | .1 | | NM | | 12.3 | | .2 | | NM |
| Loss before income taxes | (1.3) | | (.1) | | 1200 | % | | (2.4) | | — | | — | % | |
| 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 (loss) before income taxes | | Income (loss) before income taxes | 30.7 | | (2.7) | | NM | | 151.7 | | (13.3) | | NM |
| Income tax expense (benefit) | | Income tax expense (benefit) | 3.6 | | (2.2) | | NM | | 49.3 | | (.5) | | NM |
| Income (loss) from continuing operations | | Income (loss) from continuing operations | 27.1 | | (.5) | | NM | | 102.4 | | (12.8) | | NM |
| Discontinued operations, net of tax | | Discontinued operations, net of tax | (3.3) | | $ | 105.6 | | (103) | % | | (60.0) | | 106.8 | | (156) | % |
| Net income | | Net income | $ | 23.8 | | $ | 105.1 | | (77) | % | | $ | 42.4 | | $ | 94.0 | | 55 | % |
| NM - not meaningful | | NM - not meaningful |
Three Months Ended September 30, 2022,2023, Compared to Three Months Ended September 30, 20212022
Other was positively impacted by income tax adjustments relatedearnings decreased $81.3 million from the same period in 2022, largely attributable to the consolidated company's annualized estimateddiscontinued operations of Knife River, formerly the construction materials and contracting segment, which is now classified within the Other segment. The decrease in earnings was partially offset by a $22.8 million, net of tax, rate. Operating expenses were positively impacted from a reductionunrealized gain on the Company's retained interest in estimated losses recorded at the captive insurer. In addition, higher premiums for the captive insurer wereKnife River in 2023. Other experienced in 2022 compared to 2021, which impacts both$5.6 million lower operation and maintenance expense, due primarily to lower insurance claims experience at the captive insurer and operating revenues. corporate overhead costs classified as continuing operations which were previously allocated to the construction materials business for the third quarter of 2022; partially offset by strategic initiative costs incurred. Interest expense also increased largely due to the issuance of debt facilities in connection with funding the strategic initiative costs; partially offset by interest income related to intercompany borrowings through the Company's cash management program.
Also included in Other areis 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.
Nine Months Ended September 30, 2022,2023, Compared to Nine Months Ended September 30, 20212022
Other was negatively impacted by income tax adjustments relatedearnings decreased $51.6 million from the same period in 2022, largely attributable to the consolidated company's annualized estimateddiscontinued operations of Knife River, formerly the construction materials and contracting segment, which is now classified within the Other segment. Partially offsetting this decrease was a benefit of $113.6 million, net of tax, rate. Operating expenses were positively impacted from a reduction in estimated losses recorded at the captive insurer, partially offset by a lossunrealized gain on the disposal of assets recordedCompany's retained interest in operation and maintenance expense. In addition,Knife River. Other experienced higher premiums for the captive insurer were experienced in 2022 compared to 2021, which impacts both operation and maintenance expense of $6.5 million, due to strategic initiative costs incurred; partially offset by corporate overhead costs classified as continuing operations which were previously allocated to the construction materials business for the first five months of 2023 and operating revenues. for nine months of 2022 and lower claims experience at the captive insurer. Interest expense also increased largely due to the issuance of debt facilities in connection with funding of the strategic initiative costs; partially offset by interest income related to intercompany borrowings through the Company's cash management program.
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.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 | Nine Months Ended |
| | September 30, | | September 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | | 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 | $ | 5.5 | | $ | 7.2 | | $ | 44.6 | | $ | 46.4 | |
| Operation and maintenance | Operation and maintenance | 7.3 | | 4.2 | | 20.2 | | 14.0 | | Operation and maintenance | 1.9 | | 3.7 | | 7.1 | | 9.6 | |
| Purchased natural gas sold | Purchased natural gas sold | 3.5 | | 3.8 | | 36.8 | | 37.4 | | Purchased natural gas sold | 3.6 | | 3.5 | | 37.5 | | 36.8 | |
| Other income | | Other income | 5.9 | | .2 | | 8.5 | | .3 | |
| Interest expense | | Interest expense | 5.9 | | .2 | | 8.5 | | .3 | |
| |
For more information on intersegment eliminations, see Note 17.18.
Liquidity and Capital Commitments
At September 30, 2022,2023, the Company had cash, and cash equivalents and restricted cash of $74.6$32.5 million and available borrowing capacity of $371.6$429.0 million under the outstanding credit facilities of the Company'sCompany and its subsidiaries. The Company expects to meet its obligations for debt maturing within one year and its other operating and capital requirements from various sources, including internally generated funds; credit facilities and commercial paper of the Company'sCompany and its subsidiaries, as described in Capital resources; and issuance of debt and equity securities if necessary.
Cash flows
| | | Nine Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | | 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 | $ | 174.9 | | $ | 284.9 | |
| Investing activities | Investing activities | (465.4) | | (432.6) | | Investing activities | (415.7) | | (465.4) | |
| Financing activities | Financing activities | 200.9 | | 64.5 | | Financing activities | 192.8 | | 200.9 | |
| Increase (decrease) in cash and cash equivalents | Increase (decrease) in cash and cash equivalents | 20.4 | | (2.3) | | Increase (decrease) in cash and cash equivalents | (48.0) | | 20.4 | |
| 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 | $ | 32.5 | | $ | 74.6 | |
Operating activities
| | | Nine Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | | 2022 | | 2021 | | Variance | | | 2023 | | 2022 | | Variance | |
| | (In millions) | | | (In millions) | |
| Components of net cash provided by operating activities: | Components of net cash provided by operating activities: | | | Components of net cash provided by operating activities: | | |
| Net income (loss) | | Net income (loss) | $ | 244.0 | | $ | 250.3 | | $ | (6.3) | | |
| Income (loss) from discontinued operations, net of tax | | Income (loss) from discontinued operations, net of tax | (65.7) | | 103.5 | | (169.2) | | |
| Income from continuing operations | Income from continuing operations | $ | 250.3 | | $ | 291.3 | | $ | (41.0) | | | Income from continuing operations | 309.7 | | 146.8 | | 162.9 | | |
| 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 | 52.8 | | 184.2 | | (131.4) | | |
| 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 | 161.4 | | (107.3) | | 268.7 | | |
| Inventories | Inventories | (60.7) | | (21.4) | | (39.3) | | | Inventories | (19.7) | | (43.6) | | 23.9 | | |
| Other current assets | Other current assets | (31.4) | | (74.4) | | 43.0 | | | Other current assets | (68.2) | | (32.2) | | (36.0) | | |
| Accounts payable | Accounts payable | 148.4 | | 33.1 | | 115.3 | | | Accounts payable | (132.3) | | 89.9 | | (222.2) | | |
| Other current liabilities | Other current liabilities | 62.1 | | 14.2 | | 47.9 | | | Other current liabilities | 42.3 | | 40.9 | | 1.4 | | |
| Pension and postretirement benefit plan contributions | Pension and postretirement benefit plan contributions | (.4) | | (.3) | | (.1) | | | Pension and postretirement benefit plan contributions | (7.5) | | (.1) | | (7.4) | | |
| Other noncurrent changes | Other noncurrent changes | (15.8) | | (19.1) | | 3.3 | | | Other noncurrent changes | (3.4) | | (25.0) | | 21.6 | | |
| Net cash used in discontinued operations | — | | (.1) | | .1 | | | |
| Net cash provided by operating activities | Net cash provided by operating activities | $ | 284.9 | | $ | 365.8 | | $ | (80.9) | | | Net cash provided by operating activities | 335.1 | | 253.6 | | 81.5 | | |
| Net cash provided by (used in) discontinued operations | | Net cash provided by (used in) discontinued operations | (160.2) | | 31.3 | | (191.5) | | |
| Net cash provided by operating activities | | Net cash provided by operating activities | $ | 174.9 | | $ | 284.9 | | $ | (110.0) | | |
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 decrease in cash flows provided by operating activities in the previous table was largelyprimarily driven by increased cash used in discontinued operations, primarily cash used at Knife River and higher working capital needs atcosts incurred in 2023 associated with the construction services and construction materials and contracting businesses due to fluctuations in job activity resulting in higher receivables in the period, as well as lower collections of accounts receivable compared to first nine months of 2021 offset in part by increased accounts payable.separation. Also contributing towere, the decrease werepayment of increased inventories related to highernatural gas costs and the purchase of environmental allowances in 2023, as discussed in Note 13, all at the natural gas distribution business and lower earnings across most of the Company's businesses.business. Partially offsetting the net decrease in cash flows provided by operating activitiesthese items was the recoverytiming of purchasedcollection of accounts receivable from customers at the natural gas adjustment balancesdistribution and construction services businesses and the absencesale of higherenvironment allowances in 2023 at the natural gas purchases in February 2021, as discussed in Note 13. Other current assets and liabilities were also impacted by the Company's net tax position.
Investing activities
| | | Nine Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | | 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 | $ | (370.6) | | $ | (341.2) | | $ | (29.4) | | |
| Acquisitions, net of cash acquired | Acquisitions, net of cash acquired | .4 | | (13.7) | | 14.1 | | | Acquisitions, net of cash acquired | — | | — | | — | | |
| 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 | 13.2 | | (4.1) | | 17.3 | | |
| Investments | Investments | (4.4) | | (3.8) | | (.6) | | | Investments | (3.3) | | (2.2) | | (1.1) | | |
| Net cash used in continuing operations | | Net cash used in continuing operations | (360.7) | | (347.5) | | (13.2) | | |
| Net cash used in discontinued operations | | Net cash used in discontinued operations | (55.0) | | (117.9) | | 62.9 | | |
| Net cash used in investing activities | Net cash used in investing activities | $ | (465.4) | | $ | (432.6) | | $ | (32.8) | | | Net cash used in investing activities | $ | (415.7) | | $ | (465.4) | | $ | 49.7 | | |
The increase in cash used in investing activities in the previous table was primarily duedecreased as compared to increased capital expenditures in 2022 related to increased electric production projects, including the construction of Heskett Unit 4 and the repower of Diamond Willow at the electric business; higher natural gas distribution projects, including natural gas mains and meters at the natural gas distribution business; and the construction of a new building at the construction services business. The construction services and electric businesses also experienced lower proceeds from asset sales in 2022 related to the sale of a building and decommissioning activities related to plant closures, respectively. Offsetting the increased2022. Lower cash used in investing activitiesdiscontinued operations was decreasedthe result of lower capital expenditures at Knife River in the five months of 2023 versus the nine months of 2022. This was partially offset by higher cash used in continuing operations, primarily increased capital expenditures at the pipeline business as a resultbusiness. Net proceeds from the sale or disposition of property at the North Bakken Expansion project being placed in service in February 2022electric and natural gas distribution businesses increased due to higher salvage values on assets and lower cash used for acquisition activity at the construction materials and contracting business.costs of removal.
Financing activities
| | | Nine Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | | 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 | $ | 461.4 | | $ | — | | $ | 461.4 | | |
| Repayment of short-term borrowings | Repayment of short-term borrowings | — | | (50.0) | | 50.0 | | | Repayment of short-term borrowings | (193.5) | | — | | (193.5) | | |
| Issuance of long-term debt | Issuance of long-term debt | 270.3 | | 178.9 | | 91.4 | | | Issuance of long-term debt | 411.9 | | 220.4 | | 191.5 | | |
| Repayment of long-term debt | Repayment of long-term debt | (23.1) | | (63.8) | | 40.7 | | | Repayment of long-term debt | (435.0) | | — | | (435.0) | | |
| Debt issuance costs | Debt issuance costs | (1.1) | | (.4) | | (.7) | | | Debt issuance costs | (1.8) | | (.3) | | (1.5) | | |
| 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 | (135.9) | | (132.7) | | (3.2) | | |
| 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 | (3.0) | | (4.9) | | 1.9 | | |
| Net cash provided by continuing operations | | Net cash provided by continuing operations | 99.3 | | 75.0 | | 24.3 | | |
| Net cash provided by discontinued operations | | Net cash provided by discontinued operations | 93.5 | | 125.9 | | (32.4) | | |
| Net cash provided by financing activities | Net cash provided by financing activities | $ | 200.9 | | $ | 64.5 | | $ | 136.4 | | | Net cash provided by financing activities | $ | 192.8 | | $ | 200.9 | | $ | (8.1) | | |
The increasedecrease in cash provided by financing activities in the previous table was largely the result of increased issuanceprimarily due to repayments of short-term and long-term debt at the construction services and construction materialsnatural gas distribution businesses and contracting businesses to fund higher working capital needs andcollections at the electricconstruction services business. In addition, due to the Knife River separation, Centennial repaid all of its outstanding debt in the second quarter of 2023, which was facilitated by the Knife River repayment and the Company entering into various new debt instruments. Refer to Note 3 for additional information related to the repayment of debt associated with the Knife River separation. Partially offsetting these decreases, was the issuance of short-term borrowings at the 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 debtcosts and private placement borrowings. Also partially offsetting the increase in cash provided by financing activities was the absence of the issuance of common stock under the Company's "at-the-market" offering during 2022, as discussed in Note 7.
Defined benefit pension plans
The Company has noncontributory qualified defined benefit pension plans. Various assumptions are used in calculating the benefit expense (income) and liability (asset) related to these plans, as such costs of providing these benefits bear the risk of changes as they are dependent upon assumptions of future conditions.
For 2022,long-term debt at 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 replace the decline inCentennial debt repayment and to fund capital expenditures at 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.Pipeline business.
The Company's primary liquidity needs have historically been to support working capital requirements, fund capital expenditures and return cash to stockholders. The absence of cash flows historically generated from discontinued operations is not expected to adversely affect the Company's liquidity or ability to fund working capital needs. The Company announced on August 3, 2023, its intent to change its dividend practice targeting a dividend payout ratio of 60 percent to 70 percent of regulated energy delivery earnings due to its objective of becoming a pure-play regulated energy delivery business. The absence of cash flows historically generated from or used in discontinued operations may have an impact on how the Company finances its capital expenditures. As such, the Company will continue to assess its ability and manner in which it funds future capital expenditures and its dividend policy in light of the absence of cash flows from discontinued operations, as well as the Company's overall strategy, cash generation, debt levels and ongoing requirements for cash to fund operations.
Capital expenditures
Capital expenditures for the first nine months of 2023 and 2022 and 2021 were $451.1$374.0 million and $507.9$340.7 million, respectively. Capital expenditures allocated to the Company's business segments are estimated to be approximately $702$530.3 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 quartershalf 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'sCompany and its subsidiaries contain restrictive and financial covenants and cross-default provisions. In order to borrow under the respective debt instruments, the subsidiary companiesCompany and its subsidiaries must be in compliance with the applicable covenants and certain other conditions, all of which the Company and its subsidiaries, as applicable, were in compliance with at September 30, 2022.2023. In the event the Company and its subsidiaries do not comply with the applicable covenants and other conditions, alternative sources of funding may need to be pursued. As of September 30, 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 6 in this document and Part II, Item 8 in the 20212022 Annual Report.
The following table summarizes the outstanding revolving credit facilities of the Company'sCompany and its subsidiaries at September 30, 2022:2023:
| | 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 | | | $ | 97.7 | | | $ | — | | | 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) | $ | 9.7 | | | $ | 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) | $ | 29.2 | | | $ | — | | | 10/13/27 | |
| Centennial Energy Holdings, Inc. | | Commercial paper/Revolving credit agreement | (e) | $ | 600.0 | | | $ | 373.9 | | | $ | — | | | 12/19/24 | | |
| MDU Resources Group, Inc. | | MDU Resources Group, Inc. | | Revolving credit agreement | | $ | 150.0 | | | $ | 111.4 | | | $ | — | | | 5/29/24 | |
| MDU Resources Group, Inc. | | MDU Resources Group, Inc. | | Revolving credit agreement | | $ | 200.0 | | (e) | $ | 36.9 | | | $ | 8.9 | | (c) | 5/31/28 | |
(a)The commercial paper program is supported by a revolving credit agreement with various banks (provisions allow for increased borrowings, at the option of Montana-Dakota on stated conditions, up to a maximum of $225.0 million). At September 30, 2022, there were no amounts outstanding underEffective October 18, 2023 the revolving credit agreement.facility limit was increased from $175.0 million to $200.0 million (with provisions that allow for increased borrowings up to a maximum of $ 250.0 million) and a maturity date of October 18, 2028.
(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)Certain provisions allow for increased borrowings, up to a maximum of $250.0 million.
Due to the Knife River separation, Centennial repaid all of its outstanding debt in the second quarter of 2023, which was facilitated by the Knife River repayment previously discussed in Note 3 and the Company entering into various new debt instruments.
The Montana-Dakota commercial paper program is supported by a revolving credit agreement with various banks (provisions allow for increased borrowings, at the option of Centennial on stated conditions, up to a maximum of $700.0 million). At September 30, 2022, there were no amounts outstanding under the revolving credit agreement.
The respective commercial paper programs are supported by revolving credit agreements. While the amount of commercial paper outstanding does not reduce available capacity under the respective revolving credit agreements,agreement, Montana-Dakota and Centennial dodoes not issue commercial paper in an aggregate amount exceeding the available capacity under the credit agreements.agreement. The commercial paper and revolving credit agreement 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'sCompany and its subsidiaries.
Total equity as a percent of total capitalization was 5351 percent 58 percent and 55at September 30, 2023. Including the debt reflected in liabilities of discontinued operations, the Company's total equity as a percentage of total capitalization was 53 percent at September 30, 2022, and 2021, and54 percent at 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.
Cascade On June 15, 2022,January 20, 2023, Cascade issued $50.0 million of senior notes under a note purchase agreement with maturity dates ranging from June 15, 2032 to June 15, 2052, at a weighted average interest rate of 4.50 percent. The agreement contains customary covenants and provisions, including a covenant of Cascade not to permit, at any time, the ratio of total debt to total capitalization to be greater than 65 percent.
Intermountain On June 15, 2022, Intermountain issued $40.0 million of senior notes under a note purchase agreement with maturity dates ranging from June 15, 2052 to June 15, 2062, at a weighted average interest rate of 4.68 percent. The agreement contains customary covenants and provisions, including a covenant of Intermountain not to permit, at any time, the ratio of total debt to total capitalization to be greater than 65 percent.
On October 13, 2022, Intermountain amended and restated its revolving credit agreement to increase the borrowing capacity to $100.0 million and extend the maturity date to October 13, 2027. Any borrowings under the revolving credit agreement are classified as long-term debt as they are intended to be refinanced on a long-term basis through continued borrowings.
Centennial On March 18, 2022, Centennial entered into a $100.0$150.0 million term loan agreement with a SOFR-based variable interest rate and a maturity date of March 17, 2023.January 19, 2024. The agreement contains customary covenants and provisions, including a covenant of CentennialCascade 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 March 23, 2022, Centennial issued $150.0January 20, 2023, Intermountain entered into a $125.0 million of senior notes under a note purchaseterm loan agreement with maturity dates ranging from March 23, 2032 to March 23, 2034, at a weighted averageSOFR-based variable interest rate and a maturity date of 3.71 percent.January 19, 2024. In March, April, and May 2023, Intermountain repaid $20.0 million, $30 million, and $30 million, respectively, of the outstanding balance. The agreement contains customary covenants and provisions, including a covenant of CentennialIntermountain not to permit, at any time, the ratio of total debt to total capitalization to be greater than 6065 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. On May 31, 2023, Centennial repaid the full balance outstanding under the term loan agreement.
On December 19, 2022, Centennial entered into a $135.0 million term loan agreement with a SOFR-based variable interest rate and a maturity date of December 18, 2023.On May 31, 2023, Centennial repaid the full balance outstanding under the term loan agreement.
On June 9, 2023, Centennial repaid the full balances outstanding on all its long-term senior note debt, which aggregated $455.0 million.
MDU Resources Group, Inc. On May 1, 2023, the Company entered into a $75.0 million term loan agreement with a SOFR-based variable interest rate and a maturity date of November 1, 2023. The agreement contained 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 included certain restrictions on the sale of certain assets, loans and investments. On May 31, 2023, the Company repaid the full balance outstanding under the term loan agreement.
On May 31, 2023, the Company entered into a $375.0 million term loan agreement with a SOFR-based variable interest rate and a maturity date of May 31, 2025. 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.
Equity Resources
The Company currently has a shelf registration statement on file with the SEC, under which the Company may issue and sell any combination of common stock and debt securities. The Company may sell such securities if warranted by market conditions and the Company's capital requirements.
In August 2020, the Company amended the Distribution Agreement dated February 22, 2019, with J.P. Morgan Securities LLC and MUFG Securities Americas Inc., as sales agents. This agreement, as amended, allowsallowed 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 timeOn August 10, 2023, the Company provided notice of termination, effective August 10, 2023, of the distribution agreement. Prior to time, in accordance with the terms and conditions of this agreement. As of September 30, 2022,termination, the Company had capacity to issue up to 3.6 million additional shares of common stock under the "at-the-market" offering program. Proceeds fromoffering. The Company was not subject to any termination penalties related to the saletermination of the distribution agreement.
The Company had no issuances of shares of common stock under this agreement have been and are expected to be used for general corporate purposes, which may include, among other things, working capital, capital expenditures, debt repayment and the financing of acquisitions.
Details of the Company's "at-the-market" offering activity was as follows:
| | | | | | | | | | | | | | | | | | | | |
| 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,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
Apart from the effect of the spinoff of Knife River in the second quarter of 2023, there were no material changes in the Company's remaining contractual obligations related to estimated interest payments, 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.
The Company has entered into various commitments largely consisting of contracts for natural gas; purchased power; natural gas transportation and storage; royalties; information technology; and construction materials. Certain of these contracts are subject to variability in volume and price. The commitments under these contracts as of September 30, 2023, were:
| | | | | | | | | | | | | | | | | |
| Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total |
| (In millions) |
| Purchase commitments | $ | 706.2 | | $ | 514.4 | | $ | 244.0 | | $ | 691.4 | | $ | 2,156.0 | |
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.
In connection with the previously discussed separation of Knife River on May 31, 2023, Knife River's pension plan, including the associated assets and liabilities, were transferred to Knife River and therefore are no longer reflected as part of the Company. Also in connection with the separation, a remeasurement of the Company's postretirement plan and the Company's unfunded, non-qualified defined benefit plan were performed and the applicable liabilities from the plans relating to transferring employees were transferred to Knife River. The Company contributed approximately $7.5 million to its pension plans in 2023, largely resulting from a decline in asset values decreasing the funded status of the plans. For more information, see Note 19 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. Market risk sensitive instruments were not entered into for trading purposes.
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 both the Companyamount of variable interest rate debt recorded on the balance sheet and the weighted average interest rates on variable debt from those reported in the 20212022 Annual Report. As of September 30, 2023 and December 31, 2022, approximately 35.6 percent and 21.5 percent, respectively, of the outstanding debt recorded on the balance sheet consisted of variable interest rate facilities (which use SOFR as the benchmark rate). This increase was the result of refinancing associated with the separation of Knife River, as discussed in Note 3 and Note 15, and higher gas costs, as discussed in Item 2. An increase of 1 percent in the interest rate on the Company's outstanding variable interest rate facilities as of September 30, 2023, would cause a $9.4 million pre-tax annual increase in interest expense.
At September 30, 2022,2023, 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, 2022,2023, 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, 2022,2023, 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 into an independent, publicly traded company is subject to various risks and uncertainties, and may not beuncertainties.
The separation of Knife River was completed on May 31, 2023, and resulted in two independent, publicly traded companies. The execution of the terms or timeline currently contemplated, if at all. In addition,separation has required significant time and attention from the Company’s senior management and employees and several of the Company's reviewemployees transferred to Knife River after the consummation of optionsthe separation, which could cause disruption in business processes. The Company retained approximately 10 percent of the shares of Knife River common stock immediately following the separation. The Company intends to optimizedispose of the retained shares within twelve months after the separation. The realized value on the proceeds of its construction services businessthe retained shares are subject to various factors, including, Knife River's stock price, the trading market for Knife River's stock and the capital markets in general, among other things.
The proposed separation of MDU Construction Services into an independent, publicly traded company is subject to various risks and uncertainties and may not achieve its intended goals.
On August 4, 2022,November 2, 2023, the Company announced its planintent to separate Knife River, thepursue a tax-free spinoff of its wholly-owned construction materials and contractingservices business, from the Company, resulting in two independent, publicly traded companies.MDU Construction Services. The proposed separation is expected to be effected as a tax-free spinoff to the Company’s stockholders for U.S. federal income tax purposes and is expected to be completed in 2023, subject to the satisfaction of customary conditions, including final approval by the Company’s Board of Directors, receipt of a tax opinion and a private letter ruling from the IRS, and the effectiveness of a registration statement on Form 10 to be filed with the SEC.
The execution of the proposed separation will require significant time and attention from the Company’s senior management and employees, which could disrupt the Company’s ongoing business and adversely affect financial results and results of operations. The proposed separation is also complex, and completion of the proposed separation and the timing of its completion will be subject to a number of factors and conditions, including the readiness of the new company to operate as an independent public company and finalization of the capital structure of the new company.company, among other things. The uncertainties associated with this process, foreseen and unforeseen costs incurred, and efforts involved, may negatively affect the Company's operating results, business and the Company's relationships with employees, customers, suppliers and vendors. 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 and 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.conditions. There can be no assurances that the Company will be able to complete the proposed separation onor that the termscombined value of the common stock of the two companies will be equal to or ongreater than what the timeline that was announced, if at all.value of the Company's common stock would have been had the proposed separation not occurred. The execution of the separation may require significant time and attention from the Company’s senior management and employees, which could cause disruption in business processes. In addition, if the separation is completed, the Company may not be able to achieve the full strategic and financial benefits that are expected to result from the separation. There can be no assurance that
The Company is a holding company and relies on cash from its subsidiaries to pay dividends.
The Company's investments in its subsidiaries comprise the combined value of theCompany's primary assets. The Company depends on earnings, cash flows and dividends from its subsidiaries to pay dividends on its 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 impactstock. Regulatory, contractual and legal 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 and thereby could restrict or influence the Company's ability or decision to pay dividends on its common stock, which could adversely affect the Company's stock price.
There is no assurance as to the 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 announced on August 3, 2023, a modification to its intentiondividend practice targeting a dividend payout ratio of 60 percent to create two pure-play publicly traded companies, one focused on70 percent of regulated energy delivery andearnings. The Company cannot predict the other on construction materials, and that,market's future reaction to achieve this future structure, the board has authorized management to commence a strategic review process of MDU Construction Services. The Company's intent to create two pure-play publicly traded companies is subject to changing market conditions and may not receive the level of market support that the Company expects, and may not be completed timely or at all.change in dividend practice.
Item 2. Unregistered Sales of Equity Securities, and Use of Proceeds, and Issuer Purchases of Equity Securities
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, 20222023 | — | | $ | — | | — | | — | |
August 1 through August 31, 20222023 | — | | $ | — | | — | | — | |
September 1 through September 30, 20222023 | — | | $ | — | | — | | — | |
| Total | — | | $ | — | | — | | — | |
(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 Disclosures3. Defaults Upon Senior Securities
For information regarding mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Act and Item 104 of Regulation S-K, see Exhibit 95 to this Form 10-Q, which is incorporated herein by reference.
None.
Item 5. Other Information
None.During the three months ended September 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
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, 20222, 2023 | BY: | /s/ Jason L. Vollmer |
| | | | Jason L. Vollmer |
| | | | Vice President, and Chief Financial Officer and Treasurer |
| | | | |
| | | | |
| | | BY: | /s/ Stephanie A. Barth |
| | | | Stephanie A. Barth |
| | | | Vice President, Chief Accounting Officer
and Controller |