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 2019 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.
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, and the President of the United States declared the COVID-19 outbreak as a national emergency. Governmental restrictions and guidelines implemented to control the spread of COVID-19 reduced commercial and interpersonal activity throughout the Company's areas of operation. Most of the Company's products and services are considered essential and accordingly operations have been generally allowed to continue. The Company has experienced some inefficiency impacts, including operation suspensions and interruptions at some locations to carry out preventive measures or in response to instances of positive tests. The Company has assessed the impacts of the COVID-19 pandemic on its results of operations for the three and six months ended June 30, 2020, and determined there were no material adverse impacts.
In the first quarter of 2020, the Company recorded an out-of-period adjustment to correct the recognition of revenue on a construction contract, which was the result of an overstatement of operating revenue and receivables of $7.7 million and an understatement of operating expense and accounts payable of $1.2 million in the year ended December 31, 2019. This adjustment resulted in an after-tax reduction to net income of $6.7 million in the first quarter of 2020. The Company evaluated the impact of the out-of-period adjustment and concluded it was not material to any previously issued interim and annual consolidated financial statements and the adjustment was not material to the three months ended March 31, 2020, and the six months ended June 30, 2020.
Effective January 1, 2020, the Company adopted the requirements of the ASU on the measurement of credit losses on certain financial instruments following a modified retrospective approach, as further discussed in Notes 2 and 4. As such, results for reporting periods beginning on January 1, 2020, are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with historic accounting. The Company's adoption of this guidance did not have a material impact on its financial reporting.
The assets and liabilities of the Company's discontinued operations have been classified as held for sale and are included in prepayments and other current assets, noncurrent assets - other and other accrued liabilities on the Consolidated Balance Sheets. The results and supporting activities are shown in income (loss) from discontinued operations on the Consolidated Statements of Income. Unless otherwise indicated, the amounts presented in the accompanying notes to the consolidated financial statements relate to the Company's continuing operations.
Management has also evaluated the impact of events occurring after June 30, 2020, up to the date of issuance of these consolidated interim financial statements.
Note 2 - New accounting standards
Recently adopted accounting standards
ASU 2016-13 - Measurement of Credit Losses on Financial Instruments In June 2016, the FASB issued guidance on the measurement of credit losses on certain financial instruments. The guidance introduced a new impairment model known as the current expected credit loss model that replaced the incurred loss impairment methodology previously included under GAAP. This guidance required entities to present certain investments in debt securities, trade accounts receivable and other financial assets at their net carrying value of the amount expected to be collected on the financial statements. The Company adopted the guidance on January 1, 2020, using a modified retrospective approach.
The Company formed an implementation team to review and assess existing financial assets to identify and evaluate the financial assets subject to the new current expected credit loss model. The Company assessed the impact of the guidance on its processes and internal controls and identified and updated existing internal controls and processes to ensure compliance with the new guidance; such modifications were deemed insignificant. During the assessment phase, the Company identified the complete portfolio of assets subject to the current expected credit loss model. The Company determined the guidance did not have a
material impact on its results of operations, financial position, cash flows or disclosures and did not record a material cumulative effect adjustment upon adoption. See Note 4 for additional information regarding the Company's expected credit losses.
ASU 2018-13 - Changes to the Disclosure Requirements for Fair Value Measurement In August 2018, the FASB issued guidance on modifying the disclosure requirements on fair value measurements as part of the disclosure framework project. The guidance modified, among other things, the disclosures required for Level 3 fair value measurements, including the range and weighted average of significant unobservable inputs. The guidance removed, among other things, the disclosure requirement to disclose transfers between Levels 1 and 2. The Company adopted the guidance on January 1, 2020, and determined the guidance did not have a material impact on its disclosures.
Recently issued accounting standards not yet adopted
ASU 2018-14 - Changes to the Disclosure Requirements for Defined Benefit Plans In August 2018, the FASB issued guidance on modifying the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans as part of the disclosure framework project. The guidance removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of disclosures and adds disclosure requirements identified as relevant. The guidance adds, among other things, the requirement to include an explanation for significant gains and losses related to changes in benefit obligations for the period. The guidance removes, among other things, the disclosure requirement to disclose the amount of net periodic benefit costs to be amortized over the next fiscal year from accumulated other comprehensive income (loss) and the effects a one percentage point change in assumed health care cost trend rates will have on certain benefit components. The guidance will be effective for the Company on January 1, 2021, and must be applied on a retrospective basis with early adoption permitted. The Company is evaluating the effects the adoption of the new guidance will have on its disclosures.
ASU 2019-12 - Simplifying the Accounting for Income Taxes In December 2019, the FASB issued guidance on simplifying the accounting for income taxes by removing certain exceptions in ASC 740 and providing simplification amendments. The guidance removes exceptions on intraperiod tax allocations and reporting and provides simplification on accounting for franchise taxes, tax basis goodwill and tax law changes. The guidance will be effective for the Company on January 1, 2021, with early adoption permitted. Transition requirements vary among the exceptions and amendments which include retrospective, modified retrospective and prospective application. The Company is currently evaluating the effects of the new guidance and does not expect the guidance to have a material impact on its results of operations, financial position, cash flows or disclosures.
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. LIBOR is expected to be retired with a full phase-out by the end of 2021 and replaced by a new reference rate, which includes SOFR. The guidance can be applied beginning in the interim period that includes March 12, 2020, and cannot be applied to contract modifications or hedging relationships entered into or evaluated after December 31, 2022. The Company is currently updating its credit agreements to include language regarding the successor or alternate rate to 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 - Seasonality of operations
Some of the Company's operations are highly seasonal and revenues from, and certain expenses for, such operations may fluctuate significantly among quarterly periods. Accordingly, the interim results for particular businesses, and for the Company as a whole, may not be indicative of results for the full fiscal year.
Note 4 - Receivables and allowance for expected credit losses
Receivables consists primarily of trade receivables from the sale of goods and services, which are recorded at the invoiced amount, and contract assets, net of expected credit losses. For more information on contract assets, see Note 8. The Company's trade accounts receivable are all due in 12 months or less. The total balance of receivables past due 90 days or more was $45.1 million, $47.2 million and $46.7 million at June 30, 2020 and 2019, and December 31, 2019, 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.
Details of the Company's expected credit losses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric
|
Natural gas
distribution
|
Construction
materials and
contracting
|
Construction
services
|
Total
|
|
|
(In thousands)
|
|
|
|
|
|
At January 1, 2020
|
$
|
328
|
|
$
|
1,056
|
|
$
|
5,357
|
|
$
|
1,756
|
|
$
|
8,497
|
|
|
Current expected credit loss provision
|
555
|
|
1,156
|
|
694
|
|
1,150
|
|
3,555
|
|
|
Less write-offs charged against the allowance
|
500
|
|
624
|
|
68
|
|
73
|
|
1,265
|
|
|
Credit loss recoveries collected
|
109
|
|
229
|
|
—
|
|
—
|
|
338
|
|
|
At March 31, 2020
|
$
|
492
|
|
$
|
1,817
|
|
$
|
5,983
|
|
$
|
2,833
|
|
$
|
11,125
|
|
|
Current expected credit loss provision
|
303
|
|
190
|
|
(314)
|
|
896
|
|
1,075
|
|
|
Less write-offs charged against the allowance
|
224
|
|
677
|
|
44
|
|
454
|
|
1,399
|
|
|
Credit loss recoveries collected
|
88
|
|
201
|
|
—
|
|
—
|
|
289
|
|
|
At June 30, 2020
|
$
|
659
|
|
$
|
1,531
|
|
$
|
5,625
|
|
$
|
3,275
|
|
$
|
11,090
|
|
The Company's allowance for doubtful accounts at June 30, 2019 and December 31, 2019, was $8.2 million and $8.5 million, respectively.
Note 5 - Inventories and natural gas in storage
Natural gas in storage for the Company's regulated operations is generally valued at lower of cost or market using the last-in, first-out method or lower of cost or net realizable value using the average cost or first-in, first-out method. The majority of all other inventories are valued at the lower of cost or net realizable value using the average cost method. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
June 30, 2019
|
December 31, 2019
|
|
|
(In thousands)
|
|
|
|
Aggregates held for resale
|
$
|
165,357
|
|
$
|
147,030
|
|
$
|
147,723
|
|
|
Asphalt oil
|
57,207
|
|
80,418
|
|
41,912
|
|
|
Materials and supplies
|
27,805
|
|
28,746
|
|
22,512
|
|
|
Merchandise for resale
|
22,974
|
|
27,167
|
|
22,232
|
|
|
Natural gas in storage (current)
|
11,776
|
|
15,841
|
|
22,058
|
|
|
Other
|
17,718
|
|
26,742
|
|
21,970
|
|
|
Total
|
$
|
302,837
|
|
$
|
325,944
|
|
$
|
278,407
|
|
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 $48.3 million, $48.2 million and $48.4 million at June 30, 2020 and 2019, and December 31, 2019, respectively.
Note 6 - Earnings per share
Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the applicable period. Diluted earnings per share is computed by dividing net income by the total of the weighted average number of shares of common stock outstanding during the applicable period, plus the effect of nonvested performance share awards and restricted stock units. Common stock outstanding includes issued shares less shares held in treasury. Net income was the same for both the basic and diluted earnings per share calculations. A reconciliation of the weighted average common shares outstanding used in the basic and diluted earnings per share calculations follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2020
|
2019
|
2020
|
2019
|
|
|
(In thousands, except per share amounts)
|
|
|
|
|
Weighted average common shares outstanding - basic
|
200,522
|
|
198,270
|
|
200,481
|
|
197,341
|
|
|
Effect of dilutive performance share awards and restricted stock units
|
17
|
|
17
|
|
16
|
|
15
|
|
|
Weighted average common shares outstanding - diluted
|
200,539
|
|
198,287
|
|
200,497
|
|
197,356
|
|
|
Shares excluded from the calculation of diluted earnings per share
|
187
|
|
—
|
|
191
|
|
93
|
|
|
Dividends declared per common share
|
$
|
.2075
|
|
$
|
.2025
|
|
$
|
.4150
|
|
$
|
.4050
|
|
Note 7 - Accumulated other comprehensive income (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, 2019
|
$
|
(1,430)
|
|
$
|
(40,734)
|
|
|
$
|
62
|
|
$
|
(42,102)
|
|
|
Other comprehensive income before reclassifications
|
—
|
|
—
|
|
|
135
|
|
135
|
|
|
Amounts reclassified from (to) accumulated other comprehensive loss
|
111
|
|
462
|
|
|
(1)
|
|
572
|
|
|
Net current-period other comprehensive income
|
111
|
|
462
|
|
|
134
|
|
707
|
|
|
At March 31, 2020
|
$
|
(1,319)
|
|
$
|
(40,272)
|
|
|
$
|
196
|
|
$
|
(41,395)
|
|
|
Other comprehensive loss before reclassifications
|
—
|
|
—
|
|
|
(13)
|
|
(13)
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
112
|
|
480
|
|
|
7
|
|
599
|
|
|
Net current-period other comprehensive income (loss)
|
112
|
|
480
|
|
|
(6)
|
|
586
|
|
|
At June 30, 2020
|
$
|
(1,207)
|
|
$
|
(39,792)
|
|
|
$
|
190
|
|
$
|
(40,809)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2018
|
$
|
(2,161)
|
|
$
|
(36,069)
|
|
|
$
|
(112)
|
|
$
|
(38,342)
|
|
|
Other comprehensive income before reclassifications
|
—
|
|
—
|
|
|
39
|
|
39
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
397
|
|
310
|
|
|
28
|
|
735
|
|
|
Net current-period other comprehensive income
|
397
|
|
310
|
|
|
67
|
|
774
|
|
|
At March 31, 2019
|
$
|
(1,764)
|
|
$
|
(35,759)
|
|
|
$
|
(45)
|
|
$
|
(37,568)
|
|
|
Other comprehensive income before reclassifications
|
—
|
|
—
|
|
|
79
|
|
79
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
111
|
|
276
|
|
|
12
|
|
399
|
|
|
Net current-period other comprehensive income
|
111
|
|
276
|
|
|
91
|
|
478
|
|
|
At June 30, 2019
|
$
|
(1,653)
|
|
$
|
(35,483)
|
|
|
$
|
46
|
|
$
|
(37,090)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following amounts were reclassified between accumulated other comprehensive loss and 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
|
|
Six Months Ended
|
|
Location on Consolidated
Statements of
Income
|
|
|
June 30,
|
|
June 30,
|
|
|
|
|
2020
|
2019
|
2020
|
2019
|
|
|
|
(In thousands)
|
|
|
|
|
|
Reclassification adjustment for loss on derivative instruments included in net income
|
$
|
(148)
|
|
$
|
(147)
|
|
$
|
(295)
|
|
$
|
(295)
|
|
Interest expense
|
|
|
36
|
|
36
|
|
72
|
|
(213)
|
|
Income taxes
|
|
|
(112)
|
|
(111)
|
|
(223)
|
|
(508)
|
|
|
|
Amortization of postretirement liability losses included in net periodic benefit cost
|
(635)
|
|
(365)
|
|
(1,246)
|
|
(775)
|
|
Other income
|
|
|
155
|
|
89
|
|
304
|
|
189
|
|
Income taxes
|
|
|
(480)
|
|
(276)
|
|
(942)
|
|
(586)
|
|
|
|
Reclassification adjustment on available-for-sale investments included in net income
|
(9)
|
|
(15)
|
|
(8)
|
|
(50)
|
|
Other income
|
|
|
2
|
|
3
|
|
2
|
|
10
|
|
Income taxes
|
|
|
(7)
|
|
(12)
|
|
(6)
|
|
(40)
|
|
|
|
Total reclassifications
|
$
|
(599)
|
|
$
|
(399)
|
|
$
|
(1,171)
|
|
$
|
(1,134)
|
|
|
Note 8 - Revenue from contracts with customers
Revenue is recognized when a performance obligation is satisfied by transferring control over a product or service to a customer. Revenue is measured based on consideration specified in a contract with a customer and excludes any sales incentives and amounts collected on behalf of third parties. The Company is considered an agent for certain taxes collected from customers. As such, the Company presents revenues net of these taxes at the time of sale to be remitted to governmental authorities, including sales and use taxes.
Disaggregation
In the following tables, revenue is disaggregated by the type of customer or service provided. The Company believes this level of disaggregation best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The table also includes a reconciliation of the disaggregated revenue by reportable segments. For more information on the Company's business segments, see Note 16.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2020
|
Electric
|
Natural gas
distribution
|
Pipeline
|
Construction
materials and
contracting
|
Construction
services
|
Other
|
Total
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Residential utility sales
|
$
|
27,954
|
|
$
|
78,653
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
106,607
|
|
|
Commercial utility sales
|
29,877
|
|
41,027
|
|
—
|
|
—
|
|
—
|
|
—
|
|
70,904
|
|
|
Industrial utility sales
|
8,072
|
|
5,658
|
|
—
|
|
—
|
|
—
|
|
—
|
|
13,730
|
|
|
Other utility sales
|
1,591
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1,591
|
|
|
Natural gas transportation
|
—
|
|
10,350
|
|
27,965
|
|
—
|
|
—
|
|
—
|
|
38,315
|
|
|
Natural gas gathering
|
—
|
|
—
|
|
1,181
|
|
—
|
|
—
|
|
—
|
|
1,181
|
|
|
Natural gas storage
|
—
|
|
—
|
|
3,104
|
|
—
|
|
—
|
|
—
|
|
3,104
|
|
|
Contracting services
|
—
|
|
—
|
|
—
|
|
303,356
|
|
—
|
|
—
|
|
303,356
|
|
|
Construction materials
|
—
|
|
—
|
|
—
|
|
482,498
|
|
—
|
|
—
|
|
482,498
|
|
|
Intrasegment eliminations
|
—
|
|
—
|
|
—
|
|
(164,719)
|
|
—
|
|
—
|
|
(164,719)
|
|
|
Inside specialty contracting
|
—
|
|
—
|
|
—
|
|
—
|
|
324,921
|
|
—
|
|
324,921
|
|
|
Outside specialty contracting
|
—
|
|
—
|
|
—
|
|
—
|
|
160,696
|
|
—
|
|
160,696
|
|
|
Other
|
7,717
|
|
2,711
|
|
3,363
|
|
—
|
|
412
|
|
2,861
|
|
17,064
|
|
|
Intersegment eliminations
|
(196)
|
|
(185)
|
|
(7,999)
|
|
(90)
|
|
(779)
|
|
(2,973)
|
|
(12,222)
|
|
|
Revenues from contracts with customers
|
75,015
|
|
138,214
|
|
27,614
|
|
621,045
|
|
485,250
|
|
(112)
|
|
1,347,026
|
|
|
Revenues out of scope
|
1,423
|
|
3,280
|
|
44
|
|
—
|
|
11,155
|
|
—
|
|
15,902
|
|
|
Total external operating revenues
|
$
|
76,438
|
|
$
|
141,494
|
|
$
|
27,658
|
|
$
|
621,045
|
|
$
|
496,405
|
|
$
|
(112)
|
|
$
|
1,362,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
Electric
|
Natural gas
distribution
|
Pipeline
|
Construction
materials and
contracting
|
Construction
services
|
Other
|
Total
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Residential utility sales
|
$
|
26,437
|
|
$
|
71,010
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
97,447
|
|
|
Commercial utility sales
|
33,231
|
|
41,250
|
|
—
|
|
—
|
|
—
|
|
—
|
|
74,481
|
|
|
Industrial utility sales
|
9,344
|
|
5,577
|
|
—
|
|
—
|
|
—
|
|
—
|
|
14,921
|
|
|
Other utility sales
|
1,879
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1,879
|
|
|
Natural gas transportation
|
—
|
|
10,706
|
|
24,804
|
|
—
|
|
—
|
|
—
|
|
35,510
|
|
|
Natural gas gathering
|
—
|
|
—
|
|
2,396
|
|
—
|
|
—
|
|
—
|
|
2,396
|
|
|
Natural gas storage
|
—
|
|
—
|
|
2,623
|
|
—
|
|
—
|
|
—
|
|
2,623
|
|
|
Contracting services
|
—
|
|
—
|
|
—
|
|
297,124
|
|
—
|
|
—
|
|
297,124
|
|
|
Construction materials
|
—
|
|
—
|
|
—
|
|
444,768
|
|
—
|
|
—
|
|
444,768
|
|
|
Intrasegment eliminations
|
—
|
|
—
|
|
—
|
|
(145,925)
|
|
—
|
|
—
|
|
(145,925)
|
|
|
Inside specialty contracting
|
—
|
|
—
|
|
—
|
|
—
|
|
319,276
|
|
—
|
|
319,276
|
|
|
Outside specialty contracting
|
—
|
|
—
|
|
—
|
|
—
|
|
133,288
|
|
—
|
|
133,288
|
|
|
Other
|
8,417
|
|
2,923
|
|
6,293
|
|
—
|
|
9
|
|
2,903
|
|
20,545
|
|
|
Intersegment eliminations
|
—
|
|
—
|
|
(7,513)
|
|
(168)
|
|
(721)
|
|
(2,879)
|
|
(11,281)
|
|
|
Revenues from contracts with customers
|
79,308
|
|
131,466
|
|
28,603
|
|
595,799
|
|
451,852
|
|
24
|
|
1,287,052
|
|
|
Revenues out of scope
|
1,703
|
|
2,401
|
|
77
|
|
—
|
|
12,340
|
|
—
|
|
16,521
|
|
|
Total external operating revenues
|
$
|
81,011
|
|
$
|
133,867
|
|
$
|
28,680
|
|
$
|
595,799
|
|
$
|
464,192
|
|
$
|
24
|
|
$
|
1,303,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2020
|
Electric
|
Natural gas
distribution
|
Pipeline
|
Construction
materials and
contracting
|
Construction
services
|
Other
|
Total
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Residential utility sales
|
$
|
60,303
|
|
$
|
265,354
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
325,657
|
|
|
Commercial utility sales
|
63,464
|
|
156,023
|
|
—
|
|
—
|
|
—
|
|
—
|
|
219,487
|
|
|
Industrial utility sales
|
18,439
|
|
14,179
|
|
—
|
|
—
|
|
—
|
|
—
|
|
32,618
|
|
|
Other utility sales
|
3,239
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3,239
|
|
|
Natural gas transportation
|
—
|
|
22,148
|
|
55,397
|
|
—
|
|
—
|
|
—
|
|
77,545
|
|
|
Natural gas gathering
|
—
|
|
—
|
|
3,271
|
|
—
|
|
—
|
|
—
|
|
3,271
|
|
|
Natural gas storage
|
—
|
|
—
|
|
6,150
|
|
—
|
|
—
|
|
—
|
|
6,150
|
|
|
Contracting services
|
—
|
|
—
|
|
—
|
|
401,757
|
|
—
|
|
—
|
|
401,757
|
|
|
Construction materials
|
—
|
|
—
|
|
—
|
|
690,408
|
|
—
|
|
—
|
|
690,408
|
|
|
Intrasegment eliminations
|
—
|
|
—
|
|
—
|
|
(208,823)
|
|
—
|
|
—
|
|
(208,823)
|
|
|
Inside specialty contracting
|
—
|
|
—
|
|
—
|
|
—
|
|
697,130
|
|
—
|
|
697,130
|
|
|
Outside specialty contracting
|
—
|
|
—
|
|
—
|
|
—
|
|
290,846
|
|
—
|
|
290,846
|
|
|
Other
|
16,167
|
|
5,209
|
|
6,604
|
|
—
|
|
763
|
|
5,852
|
|
34,595
|
|
|
Intersegment eliminations
|
(391)
|
|
(370)
|
|
(33,198)
|
|
(152)
|
|
(3,249)
|
|
(5,946)
|
|
(43,306)
|
|
|
Revenues from contracts with customers
|
161,221
|
|
462,543
|
|
38,224
|
|
883,190
|
|
985,490
|
|
(94)
|
|
2,530,574
|
|
|
Revenues out of scope
|
1,125
|
|
5,394
|
|
89
|
|
—
|
|
23,120
|
|
—
|
|
29,728
|
|
|
Total external operating revenues
|
$
|
162,346
|
|
$
|
467,937
|
|
$
|
38,313
|
|
$
|
883,190
|
|
$
|
1,008,610
|
|
$
|
(94)
|
|
$
|
2,560,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
Electric
|
Natural gas
distribution
|
Pipeline
|
Construction
materials and
contracting
|
Construction
services
|
Other
|
Total
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Residential utility sales
|
$
|
62,993
|
|
$
|
271,619
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
334,612
|
|
|
Commercial utility sales
|
68,902
|
|
163,043
|
|
—
|
|
—
|
|
—
|
|
—
|
|
231,945
|
|
|
Industrial utility sales
|
18,228
|
|
14,188
|
|
—
|
|
—
|
|
—
|
|
—
|
|
32,416
|
|
|
Other utility sales
|
3,678
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3,678
|
|
|
Natural gas transportation
|
—
|
|
22,276
|
|
49,862
|
|
—
|
|
—
|
|
—
|
|
72,138
|
|
|
Natural gas gathering
|
—
|
|
—
|
|
4,517
|
|
—
|
|
—
|
|
—
|
|
4,517
|
|
|
Natural gas storage
|
—
|
|
—
|
|
5,269
|
|
—
|
|
—
|
|
—
|
|
5,269
|
|
|
Contracting services
|
—
|
|
—
|
|
—
|
|
380,164
|
|
—
|
|
—
|
|
380,164
|
|
|
Construction materials
|
—
|
|
—
|
|
—
|
|
624,077
|
|
—
|
|
—
|
|
624,077
|
|
|
Intrasegment eliminations
|
—
|
|
—
|
|
—
|
|
(181,066)
|
|
—
|
|
—
|
|
(181,066)
|
|
|
Inside specialty contracting
|
—
|
|
—
|
|
—
|
|
—
|
|
618,805
|
|
—
|
|
618,805
|
|
|
Outside specialty contracting
|
—
|
|
—
|
|
—
|
|
—
|
|
240,686
|
|
—
|
|
240,686
|
|
|
Other
|
17,538
|
|
6,836
|
|
8,989
|
|
—
|
|
26
|
|
10,747
|
|
44,136
|
|
|
Intersegment eliminations
|
—
|
|
—
|
|
(31,468)
|
|
(264)
|
|
(849)
|
|
(10,704)
|
|
(43,285)
|
|
|
Revenues from contracts with customers
|
171,339
|
|
477,962
|
|
37,169
|
|
822,911
|
|
858,668
|
|
43
|
|
2,368,092
|
|
|
Revenues out of scope
|
2,239
|
|
(1,948)
|
|
124
|
|
—
|
|
26,257
|
|
—
|
|
26,672
|
|
|
Total external operating revenues
|
$
|
173,578
|
|
$
|
476,014
|
|
$
|
37,293
|
|
$
|
822,911
|
|
$
|
884,925
|
|
$
|
43
|
|
$
|
2,394,764
|
|
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 from contracting services are billed as work progresses in accordance with agreed upon contractual terms. Generally, billing to the customer occurs contemporaneous to revenue recognition. A variance in timing of the billings may result in a contract asset or a contract liability. A contract asset occurs when revenues are recognized under the cost-to-cost measure of progress, which exceeds amounts billed on uncompleted contracts. Such amounts will be billed as standard contract terms allow, usually based on various measures of performance or achievement. A contract liability occurs when there are billings in excess of revenues recognized under the cost-to-cost measure of progress on uncompleted contracts. Contract liabilities decrease as revenue is recognized from the satisfaction of the related performance obligation.
The changes in contract assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
December 31, 2019
|
Change
|
Location on Consolidated Balance Sheets
|
|
|
(In thousands)
|
|
|
|
|
Contract assets
|
$
|
136,514
|
|
$
|
109,078
|
|
$
|
27,436
|
|
Receivables, net
|
|
Contract liabilities - current
|
(158,272)
|
|
(142,768)
|
|
(15,504)
|
|
Accounts payable
|
|
Contract liabilities - noncurrent
|
(72)
|
|
(19)
|
|
(53)
|
|
Noncurrent liabilities - other
|
|
Net contract liabilities
|
$
|
(21,830)
|
|
$
|
(33,709)
|
|
$
|
11,879
|
|
|
The Company recognized $32.3 million and $121.7 million in revenue for the three and six months ended June 30, 2020, respectively, which was previously included in contract liabilities at December 31, 2019. The Company recognized $22.6 million and $79.0 million in revenue for the three and six months ended June 30, 2019, respectively, which was previously included in contract liabilities at December 31, 2018.
The Company recognized a net increase in revenues of $31.9 million and $42.9 million for the three and six months ended June 30, 2020, respectively, from performance obligations satisfied in prior periods. The Company recognized a net increase in revenues of $20.6 million and $32.5 million for the three and six months ended June 30, 2019, respectively, from performance obligations satisfied in prior periods.
Remaining performance obligations
The remaining performance obligations, also referred to as backlog, at the construction materials and contracting and construction services segments include unrecognized revenues that the Company reasonably expects to be realized. These unrecognized revenues can include: projects that have a written award, a letter of intent, a notice to proceed, an agreed upon work order to perform work on mutually accepted terms and conditions and change orders or claims to the extent management believes additional contract revenues will be earned and are deemed probable of collection. Excluded from remaining performance obligations are potential orders under master service agreements. The remaining performance obligations at the pipeline segment include firm transportation and storage contracts with fixed pricing and fixed volumes.
At June 30, 2020, the Company's remaining performance obligations were $2.3 billion. The Company expects to recognize the following revenue amounts in future periods related to these remaining performance obligations: $1.8 billion within the next 12 months or less; $296.0 million within the next 13 to 24 months; and $239.6 million in 25 months or more.
The majority of the Company's construction contracts have an original duration of less than two years. The Company's firm transportation and firm storage contracts have weighted average remaining durations of approximately five and two years, respectively.
Note 9 - 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 were material to the Company's financial position or results of operations.
For all business combinations, the Company preliminarily allocates the purchase price of the acquisitions to the assets acquired and liabilities assumed based on their estimated fair values as of the acquisition dates and are considered provisional until final fair values are determined or the measurement period has passed. The Company expects to record adjustments as it accumulates the information needed to estimate the fair value of assets acquired and liabilities assumed, including working capital balances; identifiable intangible assets; property, plant and equipment; total consideration and goodwill. The excess of the purchase price over the aggregate fair values is recorded as goodwill. The Company calculated the fair value of the assets acquired in 2020 and 2019 using a market or cost approach (or a combination of both). Fair values for some of the assets were determined based on Level 3 inputs including estimated future cash flows, discount rates, growth rates, sales projections, retention rates and terminal values, all of which require significant management judgment and are susceptible to change. The final fair value of the net assets
acquired may result in adjustments to the assets and liabilities, including goodwill, and will be made as soon as practical, but no later than 12 months from the respective acquisition dates. Any subsequent measurement period adjustments are not expected to have a material impact on the Company's 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 following are the acquisitions made during 2020 and 2019 at the construction materials and contracting segment:
•In February 2020, the Company acquired the assets of Oldcastle Infrastructure Spokane, a prestressed-concrete business in Washington.
•In December 2019, the Company acquired the assets of Roadrunner Ready Mix, Inc., a provider of ready-mixed concrete in Idaho.
•In March 2019, the Company acquired Viesko Redi-Mix, Inc., a provider of ready-mixed concrete in Oregon.
The following are the acquisitions made during 2020 and 2019 at the construction services segment:
•In February 2020, the Company acquired PerLectric, Inc., a leading electrical construction company in Virginia.
•In September 2019, the Company purchased the assets of Pride Electric, Inc., an electrical construction company in Washington.
The total purchase price for acquisitions that occurred in 2020 was $77.4 million, subject to certain adjustments, with cash acquired totaling $1.7 million. The purchase price includes consideration paid of $70.7 million and $5.0 million of indemnity holdback liabilities. The amounts allocated to the aggregated assets acquired and liabilities assumed during 2020 were as follows: $46.1 million to current assets; $4.9 million to property, plant and equipment; $27.3 million to goodwill; $20.6 million to other intangible assets; $21.2 million to current liabilities and $300,000 to noncurrent liabilities. During the second quarter of 2020, measurement period adjustments of $3.6 million were made to the previously reported provisional amounts, which reduced goodwill. At June 30, 2020, the purchase price allocations for these acquisitions were preliminary and will be finalized within 12 months of the respective acquisition dates. The Company issued debt to finance these acquisitions.
In 2019, the gross aggregate consideration for acquisitions was $56.8 million, subject to certain adjustments, and included $1.2 million of debt assumed. The amounts allocated to the aggregated assets acquired and liabilities assumed during 2019 were as follows: $15.8 million to current assets; $16.7 million to property, plant and equipment; $23.1 million to goodwill; $6.7 million to other intangible assets; $500,000 to other noncurrent assets; $5.9 million to current liabilities and $100,000 to noncurrent liabilities. At December 31, 2019, the purchase price adjustments for Viesko Redi-Mix, Inc. had been settled and no material adjustments were made to the provisional accounting. At June 30, 2020, the purchase price allocations for Pride Electric, Inc. and Roadrunner Ready Mix, Inc. were preliminary and will be finalized within 12 months of the respective acquisition dates. The Company issued debt and equity securities to finance these acquisitions.
Costs incurred for acquisitions are included in operation and maintenance expense on the Consolidated Statements of Income and were not material for the six months ended June 30, 2020 and 2019.
Note 10 - 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 $23.3 million for the three and six months ended June 30, 2020, respectively. The Company recognized revenue from operating leases of $12.5 million and $26.5 million for the three and six months ended June 30, 2019, respectively. At June 30, 2020, the Company had $10.4 million of lease receivables with a majority due within 12 months.
Note 11 - Goodwill and other intangible assets
The changes in the carrying amount of goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2020
|
Goodwill
Acquired
During
the Year
|
Measurement
Period
Adjustments
|
Balance at June 30, 2020
|
|
|
(In thousands)
|
|
|
|
|
Natural gas distribution
|
$
|
345,736
|
|
$
|
—
|
|
$
|
—
|
|
$
|
345,736
|
|
|
Construction materials and contracting
|
217,234
|
|
6,483
|
|
—
|
|
223,717
|
|
|
Construction services
|
118,388
|
|
24,436
|
|
(3,613)
|
|
139,211
|
|
|
Total
|
$
|
681,358
|
|
$
|
30,919
|
|
$
|
(3,613)
|
|
$
|
708,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2019
|
Goodwill
Acquired
During
the Year
|
Measurement
Period
Adjustments
|
Balance at June 30, 2019
|
|
|
(In thousands)
|
|
|
|
|
Natural gas distribution
|
$
|
345,736
|
|
$
|
—
|
|
$
|
—
|
|
$
|
345,736
|
|
|
Construction materials and contracting
|
209,421
|
|
14,473
|
|
—
|
|
223,894
|
|
|
Construction services
|
109,765
|
|
—
|
|
—
|
|
109,765
|
|
|
Total
|
$
|
664,922
|
|
$
|
14,473
|
|
$
|
—
|
|
$
|
679,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2019
|
Goodwill
Acquired
During
the Year
|
Measurement
Period
Adjustments
|
Balance at December 31, 2019
|
|
|
(In thousands)
|
|
|
|
|
Natural gas distribution
|
$
|
345,736
|
|
$
|
—
|
|
$
|
—
|
|
$
|
345,736
|
|
|
Construction materials and contracting
|
209,421
|
|
14,482
|
|
(6,669)
|
|
217,234
|
|
|
Construction services
|
109,765
|
|
8,623
|
|
—
|
|
118,388
|
|
|
Total
|
$
|
664,922
|
|
$
|
23,105
|
|
$
|
(6,669)
|
|
$
|
681,358
|
|
During 2020 and 2019, the Company completed two and three business combinations, respectively, and the results of these acquisitions have been included in the Company's construction materials and contracting and construction services segments. These business combinations increased the construction materials and contracting segment's goodwill balance at June 30, 2020 and 2019, and December 31, 2019, respectively, and increased the construction services segment's goodwill balance at June 30, 2020 and December 31, 2019, respectively, as noted in the previous tables. As a result of the business combinations, other intangible assets increased $21.0 million at June 30, 2020, compared to December 31, 2019. For more information related to these business combinations, see Note 9.
Other amortizable intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
June 30, 2019
|
December 31, 2019
|
|
|
(In thousands)
|
|
|
|
Customer relationships
|
$
|
30,087
|
|
$
|
14,601
|
|
$
|
17,958
|
|
|
Less accumulated amortization
|
5,239
|
|
5,629
|
|
6,268
|
|
|
|
24,848
|
|
8,972
|
|
11,690
|
|
|
Noncompete agreements
|
4,229
|
|
3,179
|
|
3,439
|
|
|
Less accumulated amortization
|
2,084
|
|
1,798
|
|
1,957
|
|
|
|
2,145
|
|
1,381
|
|
1,482
|
|
|
Other
|
13,060
|
|
6,578
|
|
8,094
|
|
|
Less accumulated amortization
|
8,538
|
|
5,608
|
|
6,020
|
|
|
|
4,522
|
|
970
|
|
2,074
|
|
|
Total
|
$
|
31,515
|
|
$
|
11,323
|
|
$
|
15,246
|
|
Amortization expense for amortizable intangible assets for the three and six months ended June 30, 2020, was $2.7 million and $4.7 million, respectively. Amortization expense for amortizable intangible assets for the three and six months ended June 30, 2019, was $500,000 and $1.1 million, respectively. Estimated amortization expense for identifiable intangible assets as of June 30, 2020, was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder of
2020
|
2021
|
2022
|
2023
|
2024
|
Thereafter
|
|
|
(In thousands)
|
|
|
|
|
|
|
Amortization expense
|
$
|
5,313
|
|
$
|
5,199
|
|
$
|
4,711
|
|
$
|
4,490
|
|
$
|
4,160
|
|
$
|
7,642
|
|
Note 12 - Regulatory assets and liabilities
The following table summarizes the individual components of unamortized regulatory assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Recovery
Period as of
June 30,
2020
|
*
|
June 30, 2020
|
June 30, 2019
|
December 31, 2019
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Regulatory assets:
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Natural gas costs recoverable through rate adjustments
|
Up to 1 year
|
|
$
|
42,582
|
|
$
|
65,448
|
|
$
|
42,823
|
|
|
|
|
Cost recovery mechanisms
|
Up to 1 year
|
|
7,781
|
|
7,484
|
|
6,288
|
|
|
|
|
Conservation programs
|
Up to 1 year
|
|
7,256
|
|
6,529
|
|
6,963
|
|
|
|
|
Other
|
Up to 1 year
|
|
2,938
|
|
1,200
|
|
7,539
|
|
|
|
|
|
|
|
60,557
|
|
80,661
|
|
63,613
|
|
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
Pension and postretirement benefits
|
**
|
|
157,033
|
|
165,861
|
|
157,069
|
|
|
|
|
Asset retirement obligations
|
Over plant lives
|
|
68,191
|
|
64,215
|
|
66,000
|
|
|
|
|
Plant to be retired
|
-
|
|
49,185
|
|
16,933
|
|
32,931
|
|
|
|
|
Natural gas costs recoverable through rate adjustments
|
Up to 3 years
|
|
27,184
|
|
29,095
|
|
46,381
|
|
|
|
|
Manufactured gas plant site remediation
|
-
|
|
14,826
|
|
15,387
|
|
15,126
|
|
|
|
|
Cost recovery mechanisms
|
Up to 10 years
|
|
13,140
|
|
11,004
|
|
13,108
|
|
|
|
|
Taxes recoverable from customers
|
Over plant lives
|
|
10,890
|
|
11,755
|
|
11,486
|
|
|
|
|
Long-term debt refinancing costs
|
Up to 17 years
|
|
3,980
|
|
4,592
|
|
4,286
|
|
|
|
|
Other
|
Up to 19 years
|
|
6,596
|
|
8,322
|
|
7,397
|
|
|
|
|
|
|
|
351,025
|
|
327,164
|
|
353,784
|
|
|
|
|
Total regulatory assets
|
|
|
$
|
411,582
|
|
$
|
407,825
|
|
$
|
417,397
|
|
|
|
|
Regulatory liabilities:
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Natural gas costs refundable through rate adjustments
|
|
|
$
|
29,557
|
|
$
|
25,737
|
|
$
|
23,825
|
|
|
|
|
Electric fuel and purchased power deferral
|
|
|
7,799
|
|
4,686
|
|
5,824
|
|
|
|
|
Taxes refundable to customers
|
|
|
4,012
|
|
7,104
|
|
3,472
|
|
|
|
|
Other
|
|
|
6,632
|
|
12,447
|
|
9,814
|
|
|
|
|
|
|
|
48,000
|
|
49,974
|
|
42,935
|
|
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
Taxes refundable to customers
|
|
|
236,142
|
|
256,921
|
|
246,034
|
|
|
|
|
Plant removal and decommissioning costs
|
|
|
173,399
|
|
173,661
|
|
173,722
|
|
|
|
|
Pension and postretirement benefits
|
|
|
18,015
|
|
15,215
|
|
18,065
|
|
|
|
|
Other
|
|
|
11,096
|
|
10,067
|
|
9,549
|
|
|
|
|
|
|
|
438,652
|
|
455,864
|
|
447,370
|
|
|
|
|
Total regulatory liabilities
|
|
|
$
|
486,652
|
|
$
|
505,838
|
|
$
|
490,305
|
|
|
|
|
Net regulatory position
|
|
|
$
|
(75,070)
|
|
$
|
(98,013)
|
|
$
|
(72,908)
|
|
|
|
*Estimated recovery period for regulatory assets currently being recovered in rates charged to customers.
** Recovered as expense is incurred or cash contributions are made.
At June 30, 2020 and 2019, and December 31, 2019, approximately $296.6 million, $290.7 million and $276.5 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.
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 of the balance of natural gas costs recoverable related to this period of time over three years rather than its normal one-year recovery period.
In February 2019, the Company announced that it intends to retire three aging coal-fired electric generating units in early 2021 and early 2022. The Company has accelerated the depreciation related to these facilities in property, plant and equipment and has recorded the difference between the accelerated depreciation, in accordance with GAAP, and the depreciation approved for
rate-making purposes as regulatory assets. The Company expects to recover the regulatory assets related to the plants to be retired 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 removed from the balance sheet and included in the statement of income or accumulated other comprehensive income (loss) in the period in which the discontinuance of regulatory accounting occurs.
Note 13 - Fair value measurements
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 an insurance contract, to satisfy its obligations under its unfunded, nonqualified defined benefit plans for executive officers and certain key management employees, and invests in these fixed-income and equity securities for the purpose of earning investment returns and capital appreciation. These investments, which totaled $92.4 million, $83.1 million and $87.0 million, at June 30, 2020 and 2019, and December 31, 2019, respectively, are classified as investments on the Consolidated Balance Sheets. The net unrealized gains on these investments were $9.1 million and $5.4 million for the three and six months ended June 30, 2020, respectively. The net unrealized gains on these investments were $2.9 million and $9.3 million for the three and six months ended June 30, 2019, respectively. 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 income (loss). Details of available-for-sale securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair Value
|
|
|
(In thousands)
|
|
|
|
|
Mortgage-backed securities
|
$
|
9,812
|
|
$
|
239
|
|
$
|
6
|
|
$
|
10,045
|
|
|
U.S. Treasury securities
|
1,170
|
|
7
|
|
—
|
|
1,177
|
|
|
Total
|
$
|
10,982
|
|
$
|
246
|
|
$
|
6
|
|
$
|
11,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair Value
|
|
|
(In thousands)
|
|
|
|
|
Mortgage-backed securities
|
$
|
10,771
|
|
$
|
94
|
|
$
|
35
|
|
$
|
10,830
|
|
|
U.S. Treasury securities
|
180
|
|
—
|
|
—
|
|
180
|
|
|
Total
|
$
|
10,951
|
|
$
|
94
|
|
$
|
35
|
|
$
|
11,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair Value
|
|
|
(In thousands)
|
|
|
|
|
Mortgage-backed securities
|
$
|
9,804
|
|
$
|
87
|
|
$
|
10
|
|
$
|
9,881
|
|
|
U.S. Treasury securities
|
1,228
|
|
1
|
|
—
|
|
1,229
|
|
|
Total
|
$
|
11,032
|
|
$
|
88
|
|
$
|
10
|
|
$
|
11,110
|
|
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's Level 2 money market funds are valued at the net asset value of shares held at the end of the quarter, based on published market quotations on active markets, or using other known sources including pricing from outside sources. The estimated fair value of the Company's Level 2 mortgage-backed securities and U.S. Treasury securities are based on comparable market transactions, other observable inputs or other sources, including pricing from outside sources. The estimated fair value of the Company's Level 2 insurance contract is based on contractual cash surrender values that are determined primarily by investments in managed separate accounts of the insurer. These amounts approximate fair value. The managed separate accounts are valued based on other observable inputs or corroborated market data.
Though the Company believes the methods used to estimate fair value are consistent with those used by other market participants, the use of other methods or assumptions could result in a different estimate of fair value.
The Company's assets measured at fair value on a recurring basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at June 30, 2020, Using
|
|
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
Balance at June 30, 2020
|
|
|
(In thousands)
|
|
|
|
|
Assets:
|
|
|
|
|
|
Money market funds
|
$
|
—
|
|
$
|
8,478
|
|
$
|
—
|
|
$
|
8,478
|
|
|
Insurance contract*
|
—
|
|
92,413
|
|
—
|
|
92,413
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
Mortgage-backed securities
|
—
|
|
10,045
|
|
—
|
|
10,045
|
|
|
U.S. Treasury securities
|
—
|
|
1,177
|
|
—
|
|
1,177
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
$
|
—
|
|
$
|
112,113
|
|
$
|
—
|
|
$
|
112,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* The insurance contract invests approximately 38 percent in fixed-income investments, 23 percent in common stock of large-cap companies, 9 percent in common stock of mid-cap companies, 9 percent in common stock of small-cap companies, 4 percent in target date investments and 17 percent in cash equivalents.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at June 30, 2019, Using
|
|
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
Balance at June 30, 2019
|
|
|
(In thousands)
|
|
|
|
|
Assets:
|
|
|
|
|
|
Money market funds
|
$
|
—
|
|
$
|
10,816
|
|
$
|
—
|
|
$
|
10,816
|
|
|
Insurance contract*
|
—
|
|
83,134
|
|
—
|
|
83,134
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
Mortgage-backed securities
|
—
|
|
10,830
|
|
—
|
|
10,830
|
|
|
U.S. Treasury securities
|
—
|
|
180
|
|
—
|
|
180
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
$
|
—
|
|
$
|
104,960
|
|
$
|
—
|
|
$
|
104,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* The insurance contract invests approximately 51 percent in fixed-income investments, 22 percent in common stock of large-cap companies, 12 percent in common stock of mid-cap companies, 10 percent in common stock of small-cap companies, 4 percent in target date investments and 1 percent in cash equivalents.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2019, 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, 2019
|
|
|
(In thousands)
|
|
|
|
|
Assets:
|
|
|
|
|
|
Money market funds
|
$
|
—
|
|
$
|
8,440
|
|
$
|
—
|
|
$
|
8,440
|
|
|
Insurance contract*
|
—
|
|
87,009
|
|
—
|
|
87,009
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
Mortgage-backed securities
|
—
|
|
9,881
|
|
—
|
|
9,881
|
|
|
U.S. Treasury securities
|
—
|
|
1,229
|
|
—
|
|
1,229
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
$
|
—
|
|
$
|
106,559
|
|
$
|
—
|
|
$
|
106,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* The insurance contract invests approximately 51 percent in fixed-income investments, 23 percent in common stock of large-cap companies, 12 percent in common stock of mid-cap companies, 10 percent in common stock of small-cap companies, 3 percent in target date investments and 1 percent in cash equivalents.
The Company applies the provisions of the fair value measurement standard to its nonrecurring, non-financial measurements, including long-lived asset impairments. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. The Company reviews the carrying value of its long-lived assets, excluding goodwill, whenever events or changes in circumstances indicate that such carrying amounts may not be recoverable.
In the second quarter of 2019, the Company reviewed a non-utility investment at its electric and natural gas distribution segments for impairment. This was a cost-method investment and was written down to zero using the income approach to determine its fair value, requiring the Company to record a write-down of $2.0 million, before tax. The fair value of this investment was categorized as Level 3 in the fair value hierarchy. This reduction is reflected in investments on the Company's Consolidated Balance Sheet, as well as within other income on the Consolidated Statements of Income.
The Company performed a fair value assessment of the assets acquired and liabilities assumed in the business combinations that have occurred during 2020 and 2019. For more information on these Level 2 and Level 3 fair value measurements, see Note 9.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
June 30, 2019
|
December 31, 2019
|
|
|
(In thousands)
|
|
|
|
Carrying amount
|
$
|
2,281,876
|
|
$
|
2,379,806
|
|
$
|
2,243,107
|
|
|
Fair value
|
$
|
2,563,734
|
|
$
|
2,521,325
|
|
$
|
2,418,631
|
|
The carrying amounts of the Company's remaining financial instruments included in current assets and current liabilities approximate their fair values.
Note 14 - Debt
Certain debt instruments of the Company's subsidiaries contain restrictive and financial covenants and cross-default provisions. In order to borrow under the debt agreements, the subsidiary companies must be in compliance with the applicable covenants and certain other conditions, all of which the subsidiaries, as applicable, were in compliance with at June 30, 2020. In the event the Company's subsidiaries do not comply with the applicable covenants and other conditions, alternative sources of funding may need to be pursued.
Montana-Dakota's and Centennial's respective commercial paper programs are supported by revolving credit agreements. While the amount of commercial paper outstanding does not reduce available capacity under the respective revolving credit agreements, Montana-Dakota and Centennial do not issue commercial paper in an aggregate amount exceeding the available capacity under the credit agreements. The commercial paper borrowings may vary during the period, largely the result of fluctuations in working capital requirements due to the seasonality of certain operations of the Company's subsidiaries. Due to the impacts of the COVID-19 pandemic on the short-term capital markets, the Company temporarily borrowed under its revolving credit agreements in addition to accessing the commercial paper markets in the first half of 2020. At June 30, 2020, all borrowings under the revolving credit agreements for Montana-Dakota and Centennial had been repaid.
Long-term debt
Long-term Debt Outstanding Long-term debt outstanding was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
Interest
Rate at
June 30, 2020
|
June 30, 2020
|
June 30, 2019
|
December 31, 2019
|
|
|
|
(In thousands)
|
|
|
|
Senior Notes due on dates ranging from October 22, 2022 to June 15, 2060
|
4.43
|
%
|
$
|
1,900,000
|
|
$
|
1,656,000
|
|
$
|
1,850,000
|
|
|
Commercial paper supported by revolving credit agreements
|
1.02
|
%
|
290,100
|
|
433,350
|
|
222,900
|
|
|
Term Loan Agreement due on September 3, 2032
|
2.00
|
%
|
9,100
|
|
209,800
|
|
9,100
|
|
|
Credit agreements due on June 7, 2024
|
3.25
|
%
|
11,200
|
|
11,075
|
|
89,050
|
|
|
Medium-Term Notes due on dates ranging from September 1, 2020 to March 16, 2029
|
6.68
|
%
|
50,000
|
|
50,000
|
|
50,000
|
|
|
Other notes due on dates ranging from July 15, 2021 to November 30, 2038
|
4.59
|
%
|
28,342
|
|
26,105
|
|
29,117
|
|
|
Less unamortized debt issuance costs
|
|
6,668
|
|
6,164
|
|
7,010
|
|
|
Less discount
|
|
198
|
|
360
|
|
50
|
|
|
Total long-term debt
|
|
2,281,876
|
|
2,379,806
|
|
2,243,107
|
|
|
Less current maturities
|
|
16,560
|
|
51,822
|
|
16,540
|
|
|
Net long-term debt
|
|
$
|
2,265,316
|
|
$
|
2,327,984
|
|
$
|
2,226,567
|
|
Schedule of Debt Maturities Long-term debt maturities, which excludes unamortized debt issuance costs and discount, at June 30, 2020, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder of
2020
|
2021
|
2022
|
2023
|
2024
|
Thereafter
|
|
|
(In thousands)
|
|
|
|
|
|
|
Long-term debt maturities
|
$
|
15,762
|
|
$
|
1,522
|
|
$
|
148,021
|
|
$
|
77,921
|
|
$
|
362,722
|
|
$
|
1,682,794
|
|
Note 15 - Cash flow information
Cash expenditures for interest and income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2020
|
2019
|
|
|
|
(In thousands)
|
|
|
Interest, net*
|
$
|
47,769
|
|
$
|
45,702
|
|
|
Income taxes paid, net**
|
$
|
735
|
|
$
|
4,124
|
|
* AFUDC - borrowed was $1.3 million and $1.2 million for the six months ended June 30, 2020 and 2019, respectively.
** Income taxes paid, including discontinued operations, were $882,000 and $2.0 million for the six months ended June 30, 2020 and 2019, respectively.
Noncash investing and financing transactions were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
June 30, 2019
|
December 31, 2019
|
|
|
(In thousands)
|
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
$
|
24,181
|
|
$
|
24,990
|
|
$
|
54,880
|
|
|
Property, plant and equipment additions in accounts payable
|
$
|
36,493
|
|
$
|
27,312
|
|
$
|
46,119
|
|
|
Accrual for holdback payment related to a business combination
|
$
|
5,000
|
|
$
|
—
|
|
$
|
—
|
|
|
Debt assumed in connection with a business combination
|
$
|
—
|
|
$
|
1,163
|
|
$
|
1,163
|
|
Note 16 - 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 vast majority of 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, underground storage and gathering services through regulated and nonregulated pipeline systems primarily in the Rocky Mountain and northern Great Plains regions of the United States. This segment also provides cathodic protection and other energy-related services.
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-mixed 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, liquid asphalt for various commercial and roadway applications, various finished concrete products and other building materials and related contracting services. This segment operates in the central, southern and western United States, including Alaska and Hawaii.
The construction services segment provides inside and outside specialty contracting services. Its inside services include design, construction and maintenance of electrical and communication wiring and infrastructure, fire suppression systems, and mechanical piping and services. Its outside services include design, construction and maintenance of overhead and underground electrical distribution and transmission lines, substations, external lighting, traffic signalization, and gas pipelines, as well as utility excavation and the manufacture and distribution of transmission line construction equipment. This segment also constructs and maintains renewable energy projects. These specialty contracting services are provided to utilities and large manufacturing, commercial, industrial, institutional and government customers.
The Other category includes the activities of Centennial Capital, which, through its subsidiary InterSource Insurance Company, insures various types of risks as a captive insurer for certain of the Company's subsidiaries. The function of the captive insurer is to fund the self-insured layers of the insured Company's general liability, automobile liability, pollution liability and other coverages. Centennial Capital also owns certain real and personal property. In addition, the Other category includes certain assets, liabilities and tax adjustments of the holding company primarily associated with corporate functions and certain general and administrative costs (reflected in operation and maintenance expense) and interest expense, which were previously allocated to the refining business and Fidelity and do not meet the criteria for income (loss) from discontinued operations. The Other category also includes Centennial Resources' former investment in Brazil.
Discontinued operations include the results and 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 1 of the Notes to Consolidated Financial Statements in the 2019 Annual Report. Information on the Company's segments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
External operating revenues:
|
|
|
|
|
|
|
|
Regulated operations:
|
|
|
|
|
|
|
|
Electric
|
$
|
76,438
|
|
$
|
81,011
|
|
|
$
|
162,346
|
|
$
|
173,578
|
|
|
|
Natural gas distribution
|
141,494
|
|
133,867
|
|
|
467,937
|
|
476,014
|
|
|
|
Pipeline
|
23,421
|
|
21,369
|
|
|
29,752
|
|
26,272
|
|
|
|
|
241,353
|
|
236,247
|
|
|
660,035
|
|
675,864
|
|
|
|
Nonregulated operations:
|
|
|
|
|
|
|
|
Pipeline
|
4,237
|
|
7,311
|
|
|
8,561
|
|
11,021
|
|
|
|
Construction materials and contracting
|
621,045
|
|
595,799
|
|
|
883,190
|
|
822,911
|
|
|
|
Construction services
|
496,405
|
|
464,192
|
|
|
1,008,610
|
|
884,925
|
|
|
|
Other
|
(112)
|
|
24
|
|
|
(94)
|
|
43
|
|
|
|
|
1,121,575
|
|
1,067,326
|
|
|
1,900,267
|
|
1,718,900
|
|
|
|
Total external operating revenues
|
$
|
1,362,928
|
|
$
|
1,303,573
|
|
|
$
|
2,560,302
|
|
$
|
2,394,764
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment operating revenues:
|
|
|
|
|
|
|
|
Regulated operations:
|
|
|
|
|
|
|
|
Electric
|
$
|
196
|
|
$
|
—
|
|
|
$
|
391
|
|
$
|
—
|
|
|
|
Natural gas distribution
|
185
|
|
—
|
|
|
370
|
|
—
|
|
|
|
Pipeline
|
7,857
|
|
7,426
|
|
|
33,040
|
|
31,349
|
|
|
|
|
8,238
|
|
7,426
|
|
|
33,801
|
|
31,349
|
|
|
|
Nonregulated operations:
|
|
|
|
|
|
|
|
Pipeline
|
142
|
|
87
|
|
|
158
|
|
119
|
|
|
|
Construction materials and contracting
|
90
|
|
168
|
|
|
152
|
|
264
|
|
|
|
Construction services
|
779
|
|
721
|
|
|
3,249
|
|
849
|
|
|
|
Other
|
2,973
|
|
2,879
|
|
|
5,946
|
|
10,704
|
|
|
|
|
3,984
|
|
3,855
|
|
|
9,505
|
|
11,936
|
|
|
|
Intersegment eliminations
|
(12,222)
|
|
(11,281)
|
|
|
(43,306)
|
|
(43,285)
|
|
|
|
Total intersegment operating revenues
|
$
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
Electric
|
$
|
12,810
|
|
$
|
9,791
|
|
|
$
|
27,669
|
|
$
|
27,779
|
|
|
|
Natural gas distribution
|
678
|
|
(2,621)
|
|
|
50,677
|
|
47,696
|
|
|
|
Pipeline
|
12,225
|
|
10,698
|
|
|
23,644
|
|
20,602
|
|
|
|
Construction materials and contracting
|
74,741
|
|
46,178
|
|
|
31,472
|
|
4,597
|
|
|
|
Construction services
|
37,882
|
|
31,966
|
|
|
61,678
|
|
59,431
|
|
|
|
Other
|
(82)
|
|
1,299
|
|
|
185
|
|
1,425
|
|
|
|
Total operating income
|
$
|
138,254
|
|
$
|
97,311
|
|
|
$
|
195,325
|
|
$
|
161,530
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss):
|
|
|
|
|
|
|
|
Regulated operations:
|
|
|
|
|
|
|
|
Electric
|
$
|
12,153
|
|
$
|
7,471
|
|
|
$
|
23,527
|
|
$
|
22,976
|
|
|
|
Natural gas distribution
|
(959)
|
|
(6,252)
|
|
|
31,410
|
|
30,248
|
|
|
|
Pipeline
|
8,684
|
|
6,378
|
|
|
16,070
|
|
13,382
|
|
|
|
|
19,878
|
|
7,597
|
|
|
71,007
|
|
66,606
|
|
|
|
Nonregulated operations:
|
|
|
|
|
|
|
|
Pipeline
|
268
|
|
742
|
|
|
255
|
|
579
|
|
|
|
Construction materials and contracting
|
53,020
|
|
29,166
|
|
|
14,806
|
|
(5,283)
|
|
|
|
Construction services
|
27,932
|
|
22,845
|
|
|
44,755
|
|
42,869
|
|
|
|
Other
|
(1,256)
|
|
2,795
|
|
|
(5,442)
|
|
(537)
|
|
|
|
|
79,964
|
|
55,548
|
|
|
54,374
|
|
37,628
|
|
|
|
Income from continuing operations
|
99,842
|
|
63,145
|
|
|
125,381
|
|
104,234
|
|
|
|
Loss from discontinued operations, net of tax
|
(139)
|
|
(1,320)
|
|
|
(548)
|
|
(1,483)
|
|
|
|
Net income
|
$
|
99,703
|
|
$
|
61,825
|
|
|
$
|
124,833
|
|
$
|
102,751
|
|
|
Note 17 - Employee benefit plans
Pension and other postretirement plans
The Company has noncontributory qualified defined benefit pension plans and other postretirement benefit plans for certain eligible employees. Components of net periodic benefit cost (credit) for the Company's pension and other postretirement benefit plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other
Postretirement Benefits
|
|
|
Three Months Ended June 30,
|
2020
|
2019
|
2020
|
2019
|
|
|
(In thousands)
|
|
|
|
|
Components of net periodic benefit cost (credit):
|
|
|
|
|
|
Service cost
|
$
|
—
|
|
$
|
—
|
|
$
|
414
|
|
$
|
227
|
|
|
Interest cost
|
3,074
|
|
3,840
|
|
627
|
|
713
|
|
|
Expected return on assets
|
(5,214)
|
|
(3,998)
|
|
(1,401)
|
|
(1,182)
|
|
|
Amortization of prior service credit
|
—
|
|
—
|
|
(402)
|
|
(228)
|
|
|
Amortization of net actuarial (gain) loss
|
1,723
|
|
1,418
|
|
142
|
|
(42)
|
|
|
Net periodic benefit cost (credit), including amount capitalized
|
(417)
|
|
1,260
|
|
(620)
|
|
(512)
|
|
|
Less amount capitalized
|
—
|
|
—
|
|
35
|
|
27
|
|
|
Net periodic benefit cost (credit)
|
$
|
(417)
|
|
$
|
1,260
|
|
$
|
(655)
|
|
$
|
(539)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other
Postretirement Benefits
|
|
|
Six Months Ended June 30,
|
2020
|
2019
|
2020
|
2019
|
|
|
(In thousands)
|
|
|
|
|
Components of net periodic benefit cost (credit):
|
|
|
|
|
|
Service cost
|
$
|
—
|
|
$
|
—
|
|
$
|
766
|
|
$
|
571
|
|
|
Interest cost
|
6,047
|
|
7,613
|
|
1,218
|
|
1,493
|
|
|
Expected return on assets
|
(9,975)
|
|
(9,118)
|
|
(2,649)
|
|
(2,402)
|
|
|
Amortization of prior service credit
|
—
|
|
—
|
|
(699)
|
|
(577)
|
|
|
Amortization of net actuarial loss
|
3,586
|
|
2,773
|
|
144
|
|
55
|
|
|
Net periodic benefit cost (credit), including amount capitalized
|
(342)
|
|
1,268
|
|
(1,220)
|
|
(860)
|
|
|
Less amount capitalized
|
—
|
|
—
|
|
67
|
|
58
|
|
|
Net periodic benefit cost (credit)
|
$
|
(342)
|
|
$
|
1,268
|
|
$
|
(1,287)
|
|
$
|
(918)
|
|
The components of net periodic benefit cost (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 for the three and six months ended June 30, 2020, was $900,000 and $1.9 million, respectfully. The Company's net periodic benefit cost for these plans for the three and six months ended June 30, 2019, was $1.1 million and $2.2 million, respectfully. The components of net periodic benefit cost for these plans are included in other income on the Consolidated Statements of Income.
Note 18 - 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 regulatory proceedings and cases by jurisdiction, including the status of each open request, as well as updates to those reported in the 2019 Annual Report. The Company is unable to predict the ultimate outcome of these matters, the timing of final decisions of the various regulators and courts, or the effect on the Company's results of operations, financial position or cash flows.
IPUC
On May 4, 2020, Intermountain filed a request with the IPUC for authority to facilitate access for RNG producers to its distribution system to move RNG to the producers' buyers. Intermountain has executed contracts with three RNG producers to facilitate such access. Intermountain intends to completely insulate utility customers from all potential impacts of RNG production. If any startup or extraordinary expenses are incurred, the RNG producer will be billed for the actual expenses that are incurred. Additionally, Intermountain will be collecting an access fee that will be recorded as non-utility revenue. On June 12, 2020, the IPUC issued an accounting order approving this request.
On May 12, 2020, Intermountain filed a request with the IPUC to use deferred accounting for costs related to the COVID-19 pandemic. On July 7, 2020, the IPUC approved this request with an accounting order to track expenses and revenues related to the COVID-19 pandemic. This order had an immediate effective date.
MNPUC
On September 27, 2019, Great Plains filed an application with the MNPUC for a natural gas rate increase of approximately $2.9 million annually or approximately 12.0 percent above current rates. The requested increase was primarily to recover investments in facilities to enhance safety and reliability and the depreciation and taxes associated with the increase in investment. On November 22, 2019, Great Plains received approval to implement an interim rate increase of approximately $2.6 million or approximately 11.0 percent, subject to refund, effective January 1, 2020. This matter is pending before the MNPUC.
On April 20, 2020, Great Plains filed a request with the MNPUC to use deferred accounting for costs related to the COVID-19 pandemic. On May 22, 2020, the MNPUC approved this request with an accounting order to track expenses and revenues related to the COVID-19 pandemic. This order had an immediate effective date.
MTPSC
On November 1, 2019, Montana-Dakota submitted an application with the MTPSC requesting the use of deferred accounting for the treatment of costs related to the retirement of Lewis & Clark Station in Sidney, Montana, and Units 1 and 2 at Heskett Station near Mandan, North Dakota. On June 18, 2020, the MTPSC approved this request with an accounting order to allow Montana-Dakota to defer costs related to the retirement of the plants with an immediate effective date.
On May 8, 2020, Montana-Dakota filed a request with the MTPSC to use deferred accounting for costs related to the COVID-19 pandemic. This matter is pending before the MTPSC.
On June 22, 2020, Montana-Dakota filed an application with the MTPSC for a natural gas rate increase of approximately $8.6 million annually or approximately 13.4 percent above current rates. The requested increase was primarily to recover investments in facilities that were made to enhance system safety and reliability, as well as the depreciation, taxes and operation and maintenance costs associated with this increase in investment. The Company requested an interim rate increase of approximately $4.9 million or approximately 8.2 percent, subject to refund, to be effective February 1, 2021. This matter is pending before the MTPSC.
NDPSC
On August 28, 2019, Montana-Dakota filed an application with the NDPSC for an advanced determination of prudence and a certificate of public convenience and necessity to construct, own and operate Heskett Unit 4, an 88-MW simple-cycle natural gas-fired combustion turbine peaking unit at the existing Heskett Station near Mandan, North Dakota.
On September 16, 2019, Montana-Dakota submitted an application with the NDPSC requesting the use of deferred accounting for the treatment of costs related to the retirement of Lewis & Clark Station in Sidney, Montana, and Units 1 and 2 at Heskett Station near Mandan, North Dakota.
On April 2, 2020, a combined settlement, for the previously discussed matters, was filed with the NDPSC. The settlement recommended approval of the advanced determination of prudence and deferred accounting. A consolidated hearing was held on April 30, 2020. On July 23, 2020, a modified settlement agreement adjusting the amortization period of deferred costs was filed with the NDPSC. On August 5, 2020, the NDPSC approved the combined settlement.
On April 24, 2020, Montana-Dakota filed a request with the NDPSC to use deferred accounting for costs related to the COVID-19 pandemic. This matter is pending before the NDPSC.
On July 17, 2020, Montana-Dakota filed an annual update to its transmission cost adjustment rider with the NDPSC requesting to recover revenues of approximately $15.5 million, which includes a true-up of the prior period adjustment, resulting in an increase of approximately $6.3 million over current rates. This filing includes approximately $3.3 million related to transmission capital projects. This matter is pending before the NDPSC.
OPUC
On March 26, 2020, Cascade filed a request with the OPUC to use deferred accounting for costs related to the COVID-19 pandemic. This matter is pending before the OPUC.
On March 31, 2020, Cascade filed a natural gas general rate case with the OPUC requesting an increase in annual revenue of approximately $4.9 million or approximately 7.2 percent, which included a request for an additional recovery of environmental remediation deferred costs of approximately $364,000. This matter is pending before the OPUC.
SDPUC
On May 1, 2020, Montana-Dakota filed a request with the SDPUC to use deferred accounting for costs related to the COVID-19 pandemic. This matter is pending before the SDPUC.
WUTC
On May 27, 2020, Cascade filed a request with the WUTC to use deferred accounting for costs related to the COVID-19 pandemic. This matter is pending before the WUTC.
On May 29, 2020, Cascade filed its annual pipeline cost recovery mechanism requesting an increase in annual revenue of approximately $1.0 million or approximately 0.4 percent. The filing includes a proposed effective date of November 1, 2020. This matter is pending before the WUTC.
On June 19, 2020, Cascade filed an application with the WUTC for a natural gas rate increase of approximately $13.8 million annually or approximately 5.3 percent above current rates. The WUTC has 11 months to render a final decision on the rate case. The requested increase was primarily to recover investments made in infrastructure upgrades, as well as increased operation and maintenance costs. This matter is pending before the WUTC.
WYPSC
On May 14, 2020, Montana-Dakota filed separate requests for its electric and natural gas services with the WYPSC to use deferred accounting for costs related to the COVID-19 pandemic. On June 1, 2020, the WYPSC approved these requests with an accounting order to track expenses and revenues related to the COVID-19 pandemic. This order had an immediate effective date.
Note 19 - 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 June 30, 2020 and 2019, and December 31, 2019, the Company accrued liabilities which have not been discounted, including liabilities held for sale, of $34.5 million, $32.1 million and $29.1 million, respectively. The accruals are for contingencies, including litigation, production taxes, royalty claims and environmental matters. This includes amounts that have been accrued for matters discussed in Environmental matters within this note. The Company will continue to monitor each matter and adjust accruals as might be warranted based on new information and further developments. Management believes that the outcomes with respect to probable and reasonably possible losses in excess of the amounts accrued, net of insurance recoveries, while uncertain, either cannot be estimated or will not have a material effect upon the Company's financial position, results of operations or cash flows. Unless otherwise required by GAAP, legal costs are expensed as they are incurred.
Environmental matters
The Company is a party to claims for the cleanup of environmental contamination at certain manufactured gas plant sites, as well as a superfund site. There were no material changes to the Company's environmental matters that were previously reported in the 2019 Annual Report.
Guarantees
In 2009, multiple sale agreements were signed to sell the Company's ownership interests in the Brazilian Transmission Lines. In connection with the sale, Centennial agreed to guarantee payment of any indemnity obligations of certain of the Company's indirect wholly owned subsidiaries. The remaining guarantee is expected to expire in 2021. The guarantees were required by the buyers as a condition to the sale of the Brazilian Transmission Lines.
Certain subsidiaries of the Company have outstanding guarantees to third parties that guarantee the performance of other subsidiaries of the Company. These guarantees are related to construction contracts, insurance deductibles and loss limits, and certain other guarantees. At June 30, 2020, the fixed maximum amounts guaranteed under these agreements aggregated $272.7 million. Certain of the guarantees also have no fixed maximum amounts specified. At June 30, 2020, the amounts of scheduled expiration of the maximum amounts guaranteed under these agreements aggregate to $91.8 million in 2020; $169.4 million in 2021; $400,000 in 2022; $500,000 in 2023; $500,000 in 2024; $1.1 million thereafter; and $9.0 million, which has no scheduled maturity date. There were no amounts outstanding under the previously mentioned guarantees at June 30, 2020. In the event of default under these guarantee obligations, the subsidiary issuing the guarantee for that particular obligation would be required to make payments under its guarantee.
Certain subsidiaries have outstanding letters of credit to third parties related to insurance policies and other agreements, some of which are guaranteed by other subsidiaries of the Company. At June 30, 2020, the fixed maximum amounts guaranteed under these letters of credit aggregated $23.9 million. At June 30, 2020, the amounts of scheduled expiration of the maximum amounts guaranteed under these letters of credit aggregate to $20.4 million in 2020 and $3.5 million in 2021. There were no amounts outstanding under the previously mentioned letters of credit at June 30, 2020. In the event of default under these letter of credit obligations, the subsidiary guaranteeing the letter of credit would be obligated for reimbursement of payments made under the letter of credit.
In addition, Centennial, Knife River and MDU Construction Services have issued guarantees to third parties related to the routine purchase of maintenance items, materials and lease obligations for which no fixed maximum amounts have been specified. These guarantees have no scheduled maturity date. In the event a subsidiary of the Company defaults under these obligations, Centennial, Knife River or MDU Construction Services would be required to make payments under these guarantees. Any amounts outstanding by subsidiaries of the Company were reflected on the Consolidated Balance Sheet at June 30, 2020.
In the normal course of business, Centennial has surety bonds related to construction contracts and reclamation obligations of its subsidiaries. In the event a subsidiary of Centennial does not fulfill a bonded obligation, Centennial would be responsible to the surety bond company for completion of the bonded contract or obligation. A large portion of the surety bonds is expected to expire within the next 12 months; however, Centennial will likely continue to enter into surety bonds for its subsidiaries in the future. At June 30, 2020, approximately $1.0 billion of surety bonds were outstanding, which were not reflected on the Consolidated Balance Sheet.
Variable interest entities
The Company evaluates its arrangements and contracts with other entities to determine if they are VIEs and if so, if the Company is the primary beneficiary.
Fuel Contract Coyote Station entered into a coal supply agreement with Coyote Creek that provides for the purchase of coal necessary to supply the coal requirements of the Coyote Station for the period May 2016 through December 2040. Coal purchased under the coal supply agreement is reflected in inventories on the Consolidated Balance Sheets and is recovered from customers as a component of electric fuel and purchased power.
The coal supply agreement creates a variable interest in Coyote Creek due to the transfer of all operating and economic risk to the Coyote Station owners, as the agreement is structured so that the price of the coal will cover all costs of operations, as well as future reclamation costs. The Coyote Station owners are also providing a guarantee of the value of the assets of Coyote Creek as they would be required to buy the assets at book value should they terminate the contract prior to the end of the contract term and are providing a guarantee of the value of the equity of Coyote Creek in that they are required to buy the entity at the end of the contract term at equity value. Although the Company has determined that Coyote Creek is a VIE, the Company has concluded that it is not the primary beneficiary of Coyote Creek because the authority to direct the activities of the entity is shared by the four unrelated owners of the Coyote Station, with no primary beneficiary existing. As a result, Coyote Creek is not required to be consolidated in the Company's financial statements.
At June 30, 2020, 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 $34.8 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
(In millions, except per share amounts)
|
|
|
|
|
Electric
|
$
|
12.2
|
|
$
|
7.5
|
|
$
|
23.5
|
|
$
|
23.0
|
|
|
Natural gas distribution
|
(1.0)
|
|
(6.3)
|
|
31.4
|
|
30.3
|
|
|
Pipeline
|
9.0
|
|
7.1
|
|
16.3
|
|
14.0
|
|
|
Construction materials and contracting
|
53.0
|
|
29.2
|
|
14.8
|
|
(5.3)
|
|
|
Construction services
|
27.9
|
|
22.8
|
|
44.8
|
|
42.9
|
|
|
Other
|
(1.3)
|
|
2.8
|
|
(5.5)
|
|
(.7)
|
|
|
Income from continuing operations
|
99.8
|
|
63.1
|
|
125.3
|
|
104.2
|
|
|
Loss from discontinued operations, net of tax
|
(.1)
|
|
(1.3)
|
|
(.5)
|
|
(1.5)
|
|
|
Net income
|
$
|
99.7
|
|
$
|
61.8
|
|
$
|
124.8
|
|
$
|
102.7
|
|
|
Earnings per share - basic:
|
|
|
|
|
|
Income from continuing operations
|
$
|
.50
|
|
$
|
.32
|
|
$
|
.62
|
|
$
|
.53
|
|
|
Discontinued operations, net of tax
|
—
|
|
(.01)
|
|
—
|
|
(.01)
|
|
|
Earnings per share - basic
|
$
|
.50
|
|
$
|
.31
|
|
$
|
.62
|
|
$
|
.52
|
|
|
Earnings per share - diluted:
|
|
|
|
|
|
Income from continuing operations
|
$
|
.50
|
|
$
|
.32
|
|
$
|
.62
|
|
$
|
.53
|
|
|
Discontinued operations, net of tax
|
—
|
|
(.01)
|
|
—
|
|
(.01)
|
|
|
Earnings per share - diluted
|
$
|
.50
|
|
$
|
.31
|
|
$
|
.62
|
|
$
|
.52
|
|
Three Months Ended June 30, 2020, Compared to Three Months Ended June 30, 2019 The Company recognized consolidated earnings of $99.7 million for the quarter ended June 30, 2020, compared to $61.8 million for the same period in 2019.
The Company's earnings were positively impacted by increased earnings across all of the Company's businesses. The construction materials and contracting business experienced an increase in gross margin, largely the result of favorable weather conditions in certain regions and recent acquisitions. The natural gas distribution business's seasonal loss decreased as a result of increased margins due to weather normalization and conservation adjustments, higher retail sales volumes and approved rate recovery in certain jurisdictions. The construction services business experienced an increase in gross margin as well, primarily resulting from higher inside and outside specialty contracting workloads, partially due to the businesses acquired. The electric business's earnings reflect the absence of maintenance outage costs incurred during 2019. The pipeline business also experienced an increase in earnings, largely related to higher demand from organic growth projects and higher volumes of natural gas being moved into storage. In addition, the Company benefited from $6.2 million in higher returns on certain of the Company's benefit plan investments.
Six Months Ended June 30, 2020, Compared to Six Months Ended June 30, 2019 The Company recognized consolidated earnings of $124.8 million for the six months ended June 30, 2020, compared to $102.7 million for the same period in 2019.
The Company's earnings were positively impacted by increased earnings across all of the Company's businesses. The main driver of the increased earnings was higher gross margin, largely from favorable weather conditions in certain regions and additional revenues from recent acquisitions, at the construction materials and contracting business. The pipeline business's increased earnings reflect higher revenue from organic growth projects and approved rates. The construction services business experienced an increase in gross margin resulting from higher inside and outside specialty contracting workloads, partially due to the business acquired during the first quarter of 2020, offset in part by an out-of-period adjustment of approximately $6.7 million, net of tax, to correct the revenue recognition on a construction contract, as discussed in Note 1. The natural gas distribution and electric businesses positively contributed to the earnings as well, largely driven by approved rate recovery and the absence of maintenance outage costs incurred during 2019.
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. Many of these highlighted points are "forward-looking statements." For more information, see Forward-Looking Statements. There is no assurance that the Company's projections, including estimates for growth and changes in earnings, will in fact be achieved. Please refer to assumptions contained in this section, as well as the various important factors listed in Part II, Item 1A. Risk Factors and Part I, Item 1A. Risk Factors in the 2019 Annual Report. Changes in such assumptions and factors could cause actual future results to differ materially from the Company's growth and earnings projections.
For information pertinent to various commitments and contingencies, see the Notes to Consolidated Financial Statements. For a summary of the Company's business segments, see Note 16 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 16. Both segments strive to be a top performing utility company measured by integrity, safety, employee satisfaction, customer service and shareholder return, while continuing to focus on providing safe, environmentally friendly, reliable and competitively priced energy and related services to customers. The Company is focused on cultivating organic growth while managing operating costs and continues to monitor opportunities for these segments to retain, grow and expand their customer base through extensions of existing operations, including building and upgrading electric generation, 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, the cost of natural gas, cost of electric fuel and purchased power, weather, competitive factors in the energy industry, population growth and economic conditions in the segments' service areas.
The electric and natural gas distribution segments are subject to extensive regulation in the jurisdictions where they conduct operations with respect to costs, timely recovery of investments and permitted returns on investment, as well as certain operational, environmental and system integrity regulations. Legislative and regulatory initiatives to increase renewable energy resources and reduce GHG emissions could impact the price and demand for electricity and natural gas, as well as increase costs to produce electricity and natural gas. The segments continue to invest in facility upgrades to be in compliance with the existing and future regulations. To assist in the reduction of regulatory lag with the increase in investments, tracking mechanisms have been implemented in certain jurisdictions, as further discussed in Note 18.
In September 2019, the Pipeline and Hazardous Materials Safety Administration issued a rule for additional regulations to strengthen the safety of natural gas transmission and storage facilities and hazardous liquid pipelines. The natural gas segment has a plan to implement procedure changes for the initial requirements. While the initial requirements became effective July 1, 2020, enforcement of the initial requirements will not begin until January 1, 2021, due to the COVID-19 pandemic. The natural gas segment is also evaluating procedure changes necessary for the additional requirements that will become effective July 1, 2021.
State implementation of pollution control plans to improve visibility and air quality at national parks under the EPA's Regional Haze Rule could require the owners of Coyote Station to incur significant new costs. If the owners decide to incur such costs, the costs could, dependent on determination by state regulatory commissions on approval to recover such costs from customers, negatively impact the Company's results of operations, financial position and cash flows. The NDDEQ's state implementation plan is due to be submitted to the EPA by July 2021. The Company expects the NDDEQ to draft a state implementation plan and share its controls selection with federal land managers of the Bureau of Land Management in December 2020.
The electric and natural gas distribution segments are facing increased lead times on delivery of certain raw materials used in electric transmission and natural gas pipeline projects. Long lead times are attributable to increased demand for steel products from pipeline companies as they respond to the United States Department of Transportation Pipeline System Safety and Integrity Plan. The Company continues to monitor the material lead times and is working with manufacturers to proactively order such materials to help mitigate the risk of delays due to extended lead times.
The ability to grow through acquisitions is subject to significant competition and acquisition premiums. In addition, the ability of the segments to grow their service territory and customer base is affected by regulatory constraints, the economic environment of the markets served and competition from other energy providers and fuels. The construction of any 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 will likely necessitate increases in electric energy prices.
Revenues are impacted by both customer growth and usage, the latter of which is primarily impacted by weather. Very cold winters increase demand for natural gas and to a lesser extent, electricity, while warmer than normal summers increase demand for electricity, especially among residential and commercial customers. Average consumption among 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 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.
Earnings overview - The following information summarizes the performance of the electric segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
(Dollars in millions, where applicable)
|
|
|
|
|
Operating revenues
|
$
|
76.6
|
|
$
|
81.0
|
|
$
|
162.7
|
|
$
|
173.6
|
|
|
Electric fuel and purchased power
|
14.6
|
|
19.4
|
|
35.1
|
|
45.7
|
|
|
Taxes, other than income
|
.1
|
|
.1
|
|
.3
|
|
.3
|
|
|
Adjusted gross margin
|
61.9
|
|
61.5
|
|
127.3
|
|
127.6
|
|
|
Operating expenses:
|
|
|
|
|
|
Operation and maintenance
|
29.0
|
|
33.6
|
|
59.7
|
|
63.8
|
|
|
Depreciation, depletion and amortization
|
15.7
|
|
13.9
|
|
31.3
|
|
27.6
|
|
|
Taxes, other than income
|
4.4
|
|
4.2
|
|
8.7
|
|
8.4
|
|
|
Total operating expenses
|
49.1
|
|
51.7
|
|
99.7
|
|
99.8
|
|
|
Operating income
|
12.8
|
|
9.8
|
|
27.6
|
|
27.8
|
|
|
Other income (expense)
|
2.5
|
|
(.1)
|
|
2.1
|
|
2.1
|
|
|
Interest expense
|
6.8
|
|
6.2
|
|
13.6
|
|
12.7
|
|
|
Income before income taxes
|
8.5
|
|
3.5
|
|
16.1
|
|
17.2
|
|
|
Income taxes
|
(3.7)
|
|
(4.0)
|
|
(7.4)
|
|
(5.8)
|
|
|
Net income
|
$
|
12.2
|
|
$
|
7.5
|
|
$
|
23.5
|
|
$
|
23.0
|
|
|
Retail sales (million kWh):
|
|
|
|
|
|
Residential
|
257.7
|
|
226.6
|
|
588.3
|
|
606.2
|
|
|
Commercial
|
323.7
|
|
336.7
|
|
699.5
|
|
742.9
|
|
|
Industrial
|
115.9
|
|
136.2
|
|
268.9
|
|
275.7
|
|
|
Other
|
20.4
|
|
22.1
|
|
40.8
|
|
44.0
|
|
|
|
717.7
|
|
721.6
|
|
1,597.5
|
|
1,668.8
|
|
|
Average cost of electric fuel and purchased power per kWh
|
$
|
.019
|
|
$
|
.024
|
|
$
|
.020
|
|
$
|
.025
|
|
Adjusted gross margin is a non-GAAP financial measure. For additional information and reconciliation of the non-GAAP adjusted gross margin attributable to the electric segment, see the Non-GAAP Financial Measures section later in this Item.
Three Months Ended June 30, 2020, Compared to Three Months Ended June 30, 2019 Electric earnings increased $4.7 million (63 percent) as a result of:
Adjusted gross margin: Increase of $400,000, largely the result of the customer sales mix. Retail sales experienced higher residential sales volumes due to the transition of individuals being at home more, which was offset by lower industrial and commercial sales volumes driven by slow-downs, both as a result of the COVID-19 pandemic, as discussed later, and the associated economic recession.
Operation and maintenance: Decrease of $4.6 million, largely due to the absence of maintenance outage costs at Coyote Station incurred during 2019, lower payroll-related costs and decreased miscellaneous employee expenses.
Depreciation, depletion and amortization: Increase of $1.8 million, primarily due to the reserve for certain costs related to the retirement of three aging coal-fired electric generating units, as discussed later and in Note 12, which is offset in income taxes; higher depreciation rates implemented from the Montana rate case; and increased property, plant and equipment balances.
Taxes, other than income: Comparable to the same period in the prior year.
Other income (expense): Increase in income of $2.6 million as a result of higher returns on certain of the Company's benefit plan investments, the absence of the write-down of a non-utility investment in the second quarter of 2019, as discussed in Note 13, and decreased pension expense.
Interest expense: Increase of $600,000 resulting from higher short-term debt balances.
Income taxes: Increase of $300,000 due to an increase in taxable income, partially offset by an increase in excess deferred tax amortization.
Six Months Ended June 30, 2020, Compared to Six Months Ended June 30, 2019 Electric earnings increased $500,000 (2 percent) as a result of:
Adjusted gross margin: Decrease of $300,000, largely the result of lower retail sales volumes of approximately 4.3 percent across all customer classes, partially offset by approved rate relief in Montana.
Operation and maintenance: Decrease of $4.1 million due to the absence of maintenance outage costs at Coyote Station incurred during 2019, as well as lower payroll-related costs.
Depreciation, depletion and amortization: Increase of $3.7 million as a result of the reserve for certain costs related to the retirement of three aging coal-fired electric generating units, as discussed later and in Note 12, which is offset in income taxes; increased property, plant and equipment balances; and higher depreciation rates implemented from the Montana rate case.
Taxes, other than income: Comparable to the same period in the prior year.
Other income (expense): Comparable to the same period in the prior year.
Interest expense: Increase of $900,000 resulting from higher debt balances.
Income taxes: Increase in income tax benefits of $1.6 million, primarily due to higher excess deferred tax amortization and increased production tax credits.
Earnings overview - The following information summarizes the performance of the natural gas distribution segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
(Dollars in millions, where applicable)
|
|
|
|
|
Operating revenues
|
$
|
141.7
|
|
$
|
133.9
|
|
$
|
468.3
|
|
$
|
476.0
|
|
|
Purchased natural gas sold
|
64.6
|
|
62.3
|
|
255.2
|
|
270.0
|
|
|
Taxes, other than income
|
6.3
|
|
5.3
|
|
19.4
|
|
17.4
|
|
|
Adjusted gross margin
|
70.8
|
|
66.3
|
|
193.7
|
|
188.6
|
|
|
Operating expenses:
|
|
|
|
|
|
Operation and maintenance
|
43.1
|
|
43.6
|
|
89.1
|
|
90.0
|
|
|
Depreciation, depletion and amortization
|
21.0
|
|
19.7
|
|
41.8
|
|
39.1
|
|
|
Taxes, other than income
|
6.0
|
|
5.6
|
|
12.1
|
|
11.8
|
|
|
Total operating expenses
|
70.1
|
|
68.9
|
|
143.0
|
|
140.9
|
|
|
Operating income (loss)
|
.7
|
|
(2.6)
|
|
50.7
|
|
47.7
|
|
|
Other income
|
4.1
|
|
.8
|
|
4.4
|
|
3.7
|
|
|
Interest expense
|
9.0
|
|
8.8
|
|
18.1
|
|
17.1
|
|
|
Income (loss) before income taxes
|
(4.2)
|
|
(10.6)
|
|
37.0
|
|
34.3
|
|
|
Income taxes
|
(3.2)
|
|
(4.3)
|
|
5.6
|
|
4.0
|
|
|
Net income (loss)
|
$
|
(1.0)
|
|
$
|
(6.3)
|
|
$
|
31.4
|
|
$
|
30.3
|
|
|
Volumes (MMdk)
|
|
|
|
|
|
Retail sales:
|
|
|
|
|
|
Residential
|
9.7
|
|
8.8
|
|
37.4
|
|
40.2
|
|
|
Commercial
|
6.3
|
|
6.4
|
|
25.1
|
|
27.3
|
|
|
Industrial
|
1.0
|
|
1.1
|
|
2.5
|
|
2.7
|
|
|
|
17.0
|
|
16.3
|
|
65.0
|
|
70.2
|
|
|
Transportation sales:
|
|
|
|
|
|
Commercial
|
.4
|
|
.4
|
|
1.1
|
|
1.2
|
|
|
Industrial
|
30.2
|
|
31.6
|
|
75.8
|
|
72.2
|
|
|
|
30.6
|
|
32.0
|
|
76.9
|
|
73.4
|
|
|
Total throughput
|
47.6
|
|
48.3
|
|
141.9
|
|
143.6
|
|
|
Average cost of natural gas per dk
|
$
|
3.81
|
|
$
|
3.83
|
|
$
|
3.93
|
|
$
|
3.85
|
|
Adjusted gross margin is a non-GAAP financial measure. For additional information and reconciliation of the non-GAAP adjusted gross margin attributable to the natural gas distribution segment, see the Non-GAAP Financial Measures section later in this Item.
Three Months Ended June 30, 2020, Compared to Three Months Ended June 30, 2019 Natural gas distribution's seasonal loss decreased $5.3 million (85 percent) as a result of:
Adjusted gross margin: Increase of $4.5 million, largely the result of weather normalization and conservation adjustments in certain jurisdictions, higher retail sales volumes and approved rate relief in certain jurisdictions. Retail sales experienced higher residential sales volumes due to the transition of individuals being at home more, which was partially offset by lower commercial and industrial sales volumes driven by economic slow-downs, both as a result of the COVID-19 pandemic, as discussed later, for a net increase of approximately 4.3 percent.
Operation and maintenance: Decrease of $500,000 as a result of lower miscellaneous employee expenses.
Depreciation, depletion and amortization: Increase of $1.3 million, resulting from increased property, plant and equipment balances.
Taxes, other than income: Increase of $400,000 due to higher property taxes in certain jurisdictions.
Other income: Increase of $3.3 million as a result of higher returns on certain of the Company's benefit plan investments, decreased pension and postretirement expense and the absence of the write-down of a non-utility investment in the second quarter of 2019, as discussed in Note 13.
Interest expense: Comparable to the same period in the prior year.
Income taxes: Decrease in income tax benefits of $1.1 million due to a decrease in the seasonal loss.
Six Months Ended June 30, 2020, Compared to Six Months Ended June 30, 2019 Natural gas distribution earnings increased $1.1 million (4 percent) as a result of:
Adjusted gross margin: Increase of $5.1 million, primarily driven by approved rate recovery in certain jurisdictions, partially offset by decreased retail sales volumes across all customer classes due to warmer winter weather in jurisdictions without weather normalization mechanisms in place.
Operation and maintenance: Decrease of $900,000, primarily as a result of lower miscellaneous employee expenses.
Depreciation, depletion and amortization: Increase of $2.7 million as a result of increased property, plant and equipment balances.
Taxes, other than income: Comparable to the same period in the prior year.
Other income: Increase of $700,000, primarily due to decreased pension and postretirement expense and the absence of the write-down of a non-utility investment in the second quarter of 2019, as discussed in Note 13, partially offset by lower returns on certain of the Company's benefit plan investments.
Interest expense: Increase of $1.0 million resulting from higher long-term debt balances, partially offset by lower short-term debt balances.
Income taxes: Increase of $1.6 million due to lower permanent tax adjustments and an increase in taxable income.
Outlook The Company continues to assess the impacts of the COVID-19 pandemic on its operations and is committed to providing safe and reliable service while ensuring the health and safety of its employees, customers and the communities in which it operates. In response to the pandemic, the Company instituted certain measures to help protect its employees from exposure to COVID-19 and to curb potential spread of the virus in customer homes and facilities, including suspension of disconnects due to nonpayment of bills. The Company also waived late payment fees effective April 1, 2020, to help customers experiencing financial hardships. As a consequence of the suspended disconnects and waived late fees, the Company's cash flows and collection of receivables have been affected. The Company has experienced some impacts to its commercial and industrial electric and natural gas loads associated with reduced economic demand from its customers due to the COVID-19 pandemic and oil price impacts, as further discussed below, partially offset by increased residential demand. The Company expects this trend on demand to continue throughout the pandemic. The Company has implemented temporary cost containment measures in response to the COVID-19 pandemic, including reduced employee travel and temporary delays in training for employees, as well as delays in filling open positions and contract work. The Company has filed requests for the use of deferred accounting for costs related to the COVID-19 pandemic in all jurisdictions in which it operates; however, the company has not deferred any costs related to the pandemic to date. The Company's most recent filings by jurisdiction related to the COVID-19 pandemic are discussed in Note 18.
The Company expects these segments will grow rate base by approximately 5 percent annually over the next five years on a compound basis. Operations are spread across eight states where the Company expects customer growth to be higher than the national average. Customer growth is expected to average 1 percent to 2 percent per year. This customer growth, along with
system upgrades and replacements needed to supply safe and reliable service, will require investments in new and replacement electric and natural gas systems.
These segments are exposed to energy price volatility. 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 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. Demand for the Company's regulated energy delivery services could be impacted by reduced oil and natural gas exploration and production activity. The Company continues to monitor natural gas prices, as well as the oil and natural gas production levels.
In February 2019, the Company announced that it intends to retire three aging coal-fired electric generating units, resulting from the Company's analysis showing that the plants are no longer expected to be cost competitive for customers. The retirements are expected to be in early 2021 for Lewis & Clark Station in Sidney, Montana, and in early 2022 for Units 1 and 2 at Heskett Station near Mandan, North Dakota. In addition, the Company announced that it intends to construct Heskett Unit 4, an 88-MW simple-cycle natural gas-fired combustion turbine peaking unit at the existing Heskett Station near Mandan, North Dakota. Heskett Unit 4 production costs coupled with the MISO market purchases are expected to be about half the total cost of continuing to run the coal-fired electric generating units at Heskett and Lewis & Clark stations. Heskett Unit 4 was included in the Company's integrated resource plan submitted to the NDPSC in July 2019. On August 28, 2019, the Company filed for an advanced determination of prudence with the NDPSC for Heskett Unit 4. This request was approved by the NDPSC on August 5, 2020, as discussed in Note 18. Heskett Unit 4 is expected to be placed into service in 2023. The Company filed requests with the NDPSC, MTPSC and SDPUC for the usage of deferred accounting for the costs related to the retirement of Lewis & Clark Station and Units 1 and 2 at Heskett Station. These requests for the use of deferred accounting have been approved by all commissions, as discussed in Note 18 and the 2019 Annual Report.
The Company continues to be focused on the regulatory recovery of its investments. The Company files for rate adjustments to seek recovery of operating costs and capital investments, as well as reasonable returns as allowed by regulators. The Company's most recent cases by jurisdiction are discussed in Note 18.
Pipeline
Strategy and challenges The pipeline segment provides natural gas transportation, gathering and underground storage services, as discussed in Note 16. 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 storage and transmission facilities; incremental pipeline projects; and expansion of energy-related services leveraging on its core competencies. In support of this strategy, the Company completed and placed into service the following projects in 2020 and 2019:
•In February 2020, the Demicks Lake Expansion project in McKenzie County, North Dakota, increased capacity by 175 MMcf per day.
•In November 2019, Phase I of the Line Section 22 Expansion project in the Billings, Montana, area increased capacity by 14.3 MMcf per day.
•In September 2019, the Demicks Lake project in McKenzie County, North Dakota, increased capacity by 175 MMcf per day.
The segment is exposed to energy price volatility which is impacted by the fluctuations in pricing, production and basis differentials of the energy market's commodities. Legislative and regulatory initiatives to increase pipeline safety regulations and reduce methane emissions could also impact the price and demand for natural gas.
The segment regularly experiences extended lead times on raw materials that are critical to the segment's construction and maintenance work. Long lead times on materials could delay maintenance work and project construction potentially causing lost revenues and/or increased costs. The Company continues to proactively monitor and plan for the material lead times, as well as work with manufacturers and suppliers to help mitigate the risk of delays due to extended lead times.
The pipeline segment is subject to extensive regulation including certain operational, environmental and system integrity regulations, as well as various permit terms and operational compliance conditions. In September 2019, the Pipeline and Hazardous Materials Safety Administration issued a rule for additional regulations to strengthen the safety of natural gas transmission and storage facilities and hazardous liquid pipelines. The segment has implemented procedure changes for the initial requirements that became effective July 1, 2020; however, due to the COVID-19 pandemic, enforcement of the initial requirements will not begin until January 1, 2021. The segment is evaluating procedure changes necessary for the additional requirements that will become effective July 1, 2021. The segment is faced with the ongoing process of reviewing existing permits and easements, as well as securing new permits and easements as necessary to meet current demand and future growth opportunities. Exposure to pipeline opposition groups could also cause negative impacts on the segment with increased costs and potential delays to project completion.
The segment focuses on the recruitment and retention of a skilled workforce to remain competitive and provide services to its customers. The industry in which it operates relies on a skilled workforce to construct energy infrastructure and operate existing infrastructure in a safe manner. A shortage of skilled personnel can create a competitive labor market which could increase costs incurred by the segment. Competition from other pipeline 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
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
(Dollars in millions)
|
|
|
|
|
Operating revenues
|
$
|
35.7
|
|
$
|
36.2
|
|
$
|
71.5
|
|
$
|
68.8
|
|
|
Operating expenses:
|
|
|
|
|
|
Operation and maintenance
|
15.1
|
|
16.9
|
|
30.1
|
|
31.5
|
|
|
Depreciation, depletion and amortization
|
5.3
|
|
5.3
|
|
11.2
|
|
10.1
|
|
|
Taxes, other than income
|
3.1
|
|
3.3
|
|
6.6
|
|
6.6
|
|
|
Total operating expenses
|
23.5
|
|
25.5
|
|
47.9
|
|
48.2
|
|
|
Operating income
|
12.2
|
|
10.7
|
|
23.6
|
|
20.6
|
|
|
Other income
|
1.0
|
|
.2
|
|
1.0
|
|
.8
|
|
|
Interest expense
|
1.9
|
|
1.8
|
|
3.9
|
|
3.6
|
|
|
Income before income taxes
|
11.3
|
|
9.1
|
|
20.7
|
|
17.8
|
|
|
Income taxes
|
2.3
|
|
2.0
|
|
4.4
|
|
3.8
|
|
|
Net income
|
$
|
9.0
|
|
$
|
7.1
|
|
$
|
16.3
|
|
$
|
14.0
|
|
|
Transportation volumes (MMdk)
|
95.6
|
|
110.1
|
|
207.3
|
|
208.8
|
|
|
Natural gas gathering volumes (MMdk)
|
2.1
|
|
3.5
|
|
5.4
|
|
6.9
|
|
|
Customer natural gas storage balance (MMdk):
|
|
|
|
|
|
Beginning of period
|
3.8
|
|
2.3
|
|
16.2
|
|
13.9
|
|
|
Net injection (withdrawal)
|
15.3
|
|
9.1
|
|
2.9
|
|
(2.5)
|
|
|
End of period
|
19.1
|
|
11.4
|
|
19.1
|
|
11.4
|
|
Three Months Ended June 30, 2020, Compared to Three Months Ended June 30, 2019 Pipeline earnings increased $1.9 million (26 percent) as a result of:
Revenues: Decrease of $500,000, largely attributable to lower nonregulated project revenues and the absence of gathering revenue due to the sale of the Company's regulated gathering assets, as discussed later. These decreases were largely offset by revenue from organic growth projects, as previously discussed, and increased volumes of natural gas moved into storage.
Operation and maintenance: Decrease of $1.8 million, primarily due to lower nonregulated project costs associated with lower nonregulated project revenue.
Depreciation, depletion and amortization: Comparable to the same period in the prior year.
Taxes, other than income: Comparable to the same period in the prior year.
Other income: Increase of $800,000 as a result of higher returns on certain of the Company's benefit plan investments and lower pension expense.
Interest expense: Comparable to the same period in the prior year.
Income taxes: Comparable to the same period in the prior year.
Six Months Ended June 30, 2020, Compared to Six Months Ended June 30, 2019 Pipeline earnings increased $2.3 million (17 percent) as a result of:
Revenues: Increase of $2.7 million, largely attributable to increased demand revenue from organic growth projects, as previously discussed, and increased rates effective May 1, 2019, due to the FERC rate case finalized in September 2019. These increases were partially offset by lower nonregulated project revenues.
Operation and maintenance: Decrease of $1.4 million, primarily due to lower nonregulated project costs associated with lower nonregulated project revenue, as previously discussed.
Depreciation, depletion and amortization: Increase of $1.1 million, primarily due to higher depreciation rates effective May 1, 2019, due to the FERC rate case finalized in September 2019, and increased property, plant and equipment balances, largely the result of organic growth projects that have been placed into service.
Taxes, other than income: Comparable to the same period in the prior year.
Other income: Comparable to the same period in the prior year.
Interest expense: Increase of $300,000 as a result of increased long-term debt balances.
Income taxes: Increase of $600,000 due to higher taxable income.
Outlook The Company continues to assess the impacts of the COVID-19 pandemic on its operations and is committed to providing safe, reliable and compliant service while ensuring the health and safety of its employees, customers and the communities in which it operates. The Company has experienced some limited availability of personal protective equipment but has been able to obtain sufficient supplies to keep essential work activities moving forward. The Company experienced minor delays on capital and maintenance projects during the first quarter of 2020 but resumed project activities in the second quarter of 2020. The Company does not expect delays to its regulatory filings due to the pandemic.
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 the volumes of natural gas the Company transports through its system. Reduced global oil demand due to the COVID-19 pandemic and disagreements in oil supply levels between the Organization of the Petroleum Exporting Countries and other countries led to record low oil prices during the first quarter of 2020; however, oil prices have started to recover during the second quarter of 2020 as states and other countries have started to reopen. Although the recent decrease in oil prices has slowed drilling activities and also led to the shut-in of certain wells, the Company continues to focus on growth and improving existing operations through organic projects in all areas in which it operates. The national record levels of natural gas supply over the last few years have moderated the need for storage services and put downward pressure on natural gas prices and minimized price volatility. While the Company believes there will continue to be varying pressures on natural gas production levels and prices due to these circumstances, seasonal pricing differentials provide opportunities for storage services. The following describes current growth projects.
The Company began construction on the Line Section 22 Expansion project in the Billings, Montana, area in May 2019. Phase I of the project was placed into service in November 2019, as previously discussed. Although the Company experienced minor delays in the construction of Phase II, it is expected to be in-service in the third quarter of 2020 and is designed to increase capacity by 8.2 MMcf per day to serve incremental demand in Billings, Montana. The Company has signed long-term contracts supporting the project.
In January 2019, the Company announced the North Bakken Expansion project, which includes construction of a new pipeline, compression and ancillary facilities to transport natural gas from core Bakken production areas near Tioga, North Dakota, to a new connection with Northern Border Pipeline in McKenzie County, North Dakota. Construction is expected to begin in early 2021 with an estimated in-service date late in 2021, which is dependent on regulatory and environmental permitting. On February 14, 2020, the Company filed with the FERC its application for this project. On July 28, 2020, the Company filed an amendment to its application with the FERC reflecting a decrease to the design capacity from 350 MMcf per day to 250 MMcf per day by reducing compression due to delays in forecasted growth levels of natural gas production in the Bakken region. The Company's long-term customer commitments support the project at a revised design capacity of 250 MMcf per day, which can be readily expanded in the future if forecasted growth levels rebound. FERC approval of the project is anticipated in early 2021.
In December 2019, the Company entered into a purchase and sale agreement with Scout Energy Group II, LP to divest of its regulated gathering assets located in Montana and North Dakota, which includes approximately 400 miles of natural gas gathering pipelines and associated compression and ancillary facilities. On January 8, 2020, the Company filed an application with the FERC to authorize abandonment by sale of the gathering assets and received FERC approval on April 2, 2020. The sale closed in April 2020 with an effective date of January 1, 2020.
Construction Materials and Contracting
Strategy and challenges The construction materials and contracting segment provides an integrated set of aggregate-based construction services, as discussed in Note 16. The segment focuses on high-growth strategic markets located near major transportation corridors and desirable mid-sized metropolitan areas; strengthening the long-term, strategic aggregate reserve position through available purchase and/or lease opportunities; enhancing profitability through cost containment, margin discipline and vertical integration of the segment's operations; development and recruitment of talented employees; and continued growth through organic and acquisition opportunities.
A key element of the Company's long-term strategy for this business is to further expand its market presence in the higher-margin materials business (rock, sand, gravel, liquid asphalt, asphalt concrete, ready-mixed concrete and related products), complementing and expanding on the segment's expertise. The Company's acquisition activity supports this strategy.
As one of the country's largest sand and gravel producers, the segment continues to strategically manage its approximately 1.1 billion tons of aggregate reserves in all its markets, as well as take further advantage of being vertically integrated. The segment's vertical integration allows the segment to manage operations from aggregate mining to final lay-down of concrete and asphalt, with control of and access to permitted aggregate reserves being significant. The Company's aggregate reserves are naturally declining and as a result, the Company seeks acquisition opportunities to replace the reserves. In the first quarter of 2019, the Company purchased additional aggregate deposits in Texas that are estimated to contain a 40-year supply of high-quality aggregates for projected local market needs. Also, during 2019, the Company increased aggregate reserves by approximately 40 million tons largely due to strategic asset purchases.
The construction materials and contracting segment faces challenges that are not under the direct control of the business. The segment operates in geographically diverse and highly competitive markets. Competition can put negative pressure on the segment's operating margins. The segment is also subject to volatility in the cost of raw materials such as diesel fuel, gasoline, liquid asphalt, cement and steel. Such volatility can have a negative impact on the segment's margins. Other variables that can impact the segment's margins include adverse weather conditions, the timing of project starts or completion and declines or delays in new and existing projects due to the cyclical nature of the construction industry and governmental infrastructure spending.
The segment also faces challenges in the recruitment and retention of employees. Trends in the labor market include an aging workforce and availability issues. The segment continues to face increasing pressure to control costs, as well as find and train a skilled workforce to meet the needs of increasing demand and seasonal work.
Earnings overview - The following information summarizes the performance of the construction materials and contracting segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
(Dollars in millions)
|
|
|
|
|
Operating revenues
|
$
|
621.1
|
|
$
|
596.0
|
|
$
|
883.3
|
|
$
|
823.2
|
|
|
Cost of sales:
|
|
|
|
|
|
Operation and maintenance
|
487.9
|
|
494.7
|
|
738.7
|
|
715.5
|
|
|
Depreciation, depletion and amortization
|
21.2
|
|
18.7
|
|
40.8
|
|
35.5
|
|
|
Taxes, other than income
|
13.6
|
|
13.0
|
|
23.0
|
|
21.4
|
|
|
Total cost of sales
|
522.7
|
|
526.4
|
|
802.5
|
|
772.4
|
|
|
Gross margin
|
98.4
|
|
69.6
|
|
80.8
|
|
50.8
|
|
|
Selling, general and administrative expense:
|
|
|
|
|
|
Operation and maintenance
|
21.6
|
|
21.8
|
|
43.8
|
|
41.8
|
|
|
Depreciation, depletion and amortization
|
1.3
|
|
.7
|
|
2.3
|
|
1.5
|
|
|
Taxes, other than income
|
.8
|
|
.9
|
|
3.2
|
|
2.9
|
|
|
Total selling, general and administrative expense
|
23.7
|
|
23.4
|
|
49.3
|
|
46.2
|
|
|
Operating income
|
74.7
|
|
46.2
|
|
31.5
|
|
4.6
|
|
|
Other income
|
1.9
|
|
—
|
|
.7
|
|
1.3
|
|
|
Interest expense
|
5.7
|
|
6.8
|
|
10.9
|
|
12.1
|
|
|
Income (loss) before income taxes
|
70.9
|
|
39.4
|
|
21.3
|
|
(6.2)
|
|
|
Income taxes
|
17.9
|
|
10.2
|
|
6.5
|
|
(.9)
|
|
|
Net income (loss)
|
$
|
53.0
|
|
$
|
29.2
|
|
$
|
14.8
|
|
$
|
(5.3)
|
|
|
Sales (000's):
|
|
|
|
|
|
Aggregates (tons)
|
8,739
|
|
9,084
|
|
12,956
|
|
12,955
|
|
|
Asphalt (tons)
|
2,166
|
|
1,913
|
|
2,393
|
|
2,079
|
|
|
Ready-mixed concrete (cubic yards)
|
1,119
|
|
1,144
|
|
1,823
|
|
1,752
|
|
Three Months Ended June 30, 2020, Compared to Three Months Ended June 30, 2019 Construction materials and contracting's earnings increased $23.8 million (82 percent) as a result of:
Revenues: Increase of $25.1 million, primarily the result of higher contracting services and material sales due to favorable weather conditions in certain regions, as well as additional revenues associated with the businesses acquired.
Gross margin: Increase of $28.8 million, largely due to higher revenues, as previously discussed, higher contracting bid margins and higher realized material margins.
Selling, general and administrative expense: Comparable to the same period in the prior year.
Other income: Increase of $1.9 million, primarily the result of higher returns on certain of the Company's benefit plan investments.
Interest expense: Decrease of $1.1 million resulting from lower average debt balances and lower average interest rates.
Income taxes: Increase of $7.7 million due to higher taxable income.
Six Months Ended June 30, 2020, Compared to Six Months Ended June 30, 2019 Construction materials and contracting's earnings increased $20.1 million (380 percent) as a result of:
Revenues: Increase of $60.1 million, primarily the result of higher contracting services and material sales due to an early start to the construction season, favorable weather conditions in certain regions and additional revenues associated with the businesses acquired.
Gross margin: Increase of $30.0 million, largely due to higher revenues, as previously discussed, higher contracting bid margins and higher realized material margins.
Selling, general and administrative expense: Increase of $3.1 million, largely related to higher payroll-related costs and higher depreciation expense.
Other income: Decrease in income of $600,000 as a result of lower returns on certain of the Company's benefit plan investments.
Interest expense: Decrease of $1.2 million, resulting from lower average debt balances and lower average interest rates.
Income taxes: Increase of $7.4 million due to higher taxable income.
Outlook The Company continues to assess the impacts of the COVID-19 pandemic on its operations and is committed to the health and safety of its employees, customers and the communities in which it operates. The Company has implemented safety and social distancing measures for its employees that are not able to work from home and has experienced some inefficiencies and additional costs in relation to these measures but, for the most part, has been able to continue business processes with minimal interruptions. The Company also continues to monitor job progress and service work and at this time has not experienced significant delays, cancellations or disruptions due to the pandemic, partially due to the geographic diversity of operations in markets that have largely remained open for business. The Company will continue to monitor the demand for construction materials and contracting services as such services may be reduced by recessionary impacts of the pandemic as the traditional customers for these services reduce capital expenditures. State and federal mandates have been issued in response to the COVID-19 pandemic requiring individuals to stay in place, leading to a reduction in fuel consumption in the United States, which directly reduces fuel tax collections. In addition, states, cities and counties across the country are experiencing low sales tax and other revenues as a result of the COVID-19 pandemic. The reduction in tax collections may impact funds available for public infrastructure projects, which in turn could have a material adverse impact on the Company's results of operations, financial position and cash flows. Meanwhile, a comprehensive infrastructure funding program, if adopted, by the United States Congress could positively impact the segment.
The segment's vertically integrated aggregate-based business model provides the Company with the ability to capture margin throughout the sales delivery process. The aggregate products are sold internally and externally for use in other products such as ready-mixed concrete, asphaltic concrete and public and private construction markets. The contracting services and construction materials are sold primarily to construction contractors in connection with street, highway and other public infrastructure projects, as well as private commercial and residential development projects. The public infrastructure projects have traditionally been more stable markets as public funding is more secure during periods of economic decline. The public projects are, however, dependent on state and federal funding such as appropriations to the Federal Highway Administration. Spending on private development is highly dependent on both local and national economic cycles, providing additional sales during times of strong economic cycles.
During 2020 and 2019, the Company made strategic asset purchases and acquired businesses that support the Company's long-term strategy to expand its market presence. In the first quarter of 2020, the Company acquired the assets of Oldcastle Infrastructure Spokane, a prestressed-concrete business located in Spokane, Washington. The Company continues to evaluate additional acquisition opportunities. For more information on the Company's business combinations, see Note 9.
The construction materials and contracting segment's backlog at June 30, 2020, was $875.1 million, down from $1.0 billion at June 30, 2019. The decrease in backlog was largely attributable to the mix of work included in backlog, favorable weather conditions during 2020 allowing the Company to complete more backlog than is typically completed during this period and a reduction in new projects awarded in the second quarter of 2020 associated with economic uncertainty as a result of the COVID-19 pandemic. The Company expects to complete a significant amount of the backlog at June 30, 2020, during the next 12 months.
Five of the labor contracts that Knife River was negotiating, as reported in Items 1 and 2 - Business Properties - General in the 2019 Annual Report, have been ratified.
Construction Services
Strategy and challenges The construction services segment provides inside and outside specialty contracting, as discussed in Note 16. 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 acquisition opportunities; and focusing efforts on projects that will permit higher margins while properly managing risk. The growth experienced by the segment in recent years is due in part to its ability to support national customers in most of the regions in which they operate.
The construction services segment faces challenges in the highly competitive markets in which it operates. Competitive pricing environments, project delays, changes in management's estimates of variable consideration and the effects from restrictive regulatory requirements have negatively impacted revenues and margins in the past and could affect revenues and margins in the future. Additionally, margins may be negatively impacted on a quarterly basis due to adverse weather conditions, as well as timing of project starts or completions; disruptions to the supply chain due to transportation delays, travel restrictions, raw material cost increases and shortages and closures of businesses or facilities; declines or delays in new projects due to the cyclical nature of the construction industry; and other factors. These challenges may also impact the risk of loss on certain projects. Accordingly, operating results in any particular period may not be indicative of the results that can be expected for any other period.
The need to ensure available specialized labor resources for projects also drives strategic relationships with customers and project margins. These trends include an aging workforce and labor availability issues, increasing pressure to reduce costs and improve reliability, and increasing duration and complexity of customer capital programs. Due to these and other factors, the Company believes overall customer and competitor demand for labor resources will continue to increase, possibly surpassing the supply of industry resources.
Earnings overview - The following information summarizes the performance of the construction services segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
(In millions)
|
|
|
|
|
Operating revenues
|
$
|
497.2
|
|
$
|
464.9
|
|
$
|
1,011.9
|
|
$
|
885.7
|
|
|
Cost of sales:
|
|
|
|
|
|
Operation and maintenance
|
411.1
|
|
391.1
|
|
847.3
|
|
742.7
|
|
|
Depreciation, depletion and amortization
|
4.0
|
|
3.7
|
|
7.9
|
|
7.3
|
|
|
Taxes, other than income
|
17.2
|
|
14.6
|
|
40.6
|
|
30.5
|
|
|
Total cost of sales
|
432.3
|
|
409.4
|
|
895.8
|
|
780.5
|
|
|
Gross margin
|
64.9
|
|
55.5
|
|
116.1
|
|
105.2
|
|
|
Selling, general and administrative expense:
|
|
|
|
|
|
Operation and maintenance
|
23.5
|
|
22.1
|
|
47.4
|
|
42.4
|
|
|
Depreciation, depletion and amortization
|
2.4
|
|
.4
|
|
4.2
|
|
.8
|
|
|
Taxes, other than income
|
1.1
|
|
1.0
|
|
2.8
|
|
2.6
|
|
|
Total selling, general and administrative expense
|
27.0
|
|
23.5
|
|
54.4
|
|
45.8
|
|
|
Operating income
|
37.9
|
|
32.0
|
|
61.7
|
|
59.4
|
|
|
Other income
|
.5
|
|
.6
|
|
.7
|
|
1.2
|
|
|
Interest expense
|
1.1
|
|
1.4
|
|
2.3
|
|
2.5
|
|
|
Income before income taxes
|
37.3
|
|
31.2
|
|
60.1
|
|
58.1
|
|
|
Income taxes
|
9.4
|
|
8.4
|
|
15.3
|
|
15.2
|
|
|
Net income
|
$
|
27.9
|
|
$
|
22.8
|
|
$
|
44.8
|
|
$
|
42.9
|
|
Three Months Ended June 30, 2020, Compared to Three Months Ended June 30, 2019 Construction services earnings increased $5.1 million (22 percent) as a result of:
Revenues: Increase of $32.3 million, largely the result of higher outside specialty contracting workloads, which includes increased demand for utility projects. Higher inside specialty contracting workloads from increased customer demand for hospitality, data center and commercial projects also contributed to the increase, partially due to the businesses acquired. The increase was offset in part by decreased equipment sales and rentals and decreased customer demand for refinery projects.
Gross margin: Increase of $9.4 million, primarily due to the higher volume of work resulting in an increase in revenues, as previously discussed, partially offset by an increase in operation and maintenance expense as a direct result of the expenses related to the increased workloads.
Selling, general and administrative expense: Increase of $3.5 million due in part to higher bad debt expense, depreciation expense and payroll-related costs, partially offset by lower office expenses.
Other income: Comparable to the same period in the prior year.
Interest expense: Decrease of $300,000 resulting from lower debt balances.
Income taxes: Increase of $1.0 million, largely due to an increase in income before income taxes.
Six Months Ended June 30, 2020, Compared to Six Months Ended June 30, 2019 Construction services earnings increased $1.9 million (4 percent) as a result of:
Revenues: Increase of $126.2 million, largely the result of higher outside specialty contracting workloads, which includes increased demand for utility projects, and higher inside specialty contracting workloads from greater customer demand for hospitality and high-tech projects. The businesses acquired also contributed to the increase in revenues. Partially offsetting the increase was a decrease in equipment sales and rentals.
Gross margin: Increase of $10.9 million, primarily due to the higher volume of work resulting in an increase in revenues, as previously discussed, partially offset by an increase in operation and maintenance expense as a direct result of the expenses related to the increased workloads. Also negatively impacting gross margin was an out-of-period adjustment in the first quarter of 2020 to correct an overstatement of operating revenue of $7.7 million and an understatement of operation and maintenance expense of $1.2 million previously recognized on a construction contract, as discussed in Note 1.
Selling, general and administrative expense: Increase of $8.6 million due in part to higher bad debt expense, depreciation expense, payroll-related costs and office expenses.
Other income: Decrease of $500,000, largely the result of lower disposal of equipment that was not capitalized and lower returns on certain of the Company's benefit plan investments.
Interest expense: Comparable to the same period in the prior year.
Income taxes: Comparable to the same period in the prior year.
Outlook The Company continues to assess the impacts of the COVID-19 pandemic on its operations and is committed to the health and safety of its employees, customers and the communities in which it operates. The Company has implemented safety and social distancing measures for its employees that are not able to work from home and has experienced some inefficiencies in relation to these measures but, for the most part, has been able to continue business processes. The Company continues to bid and be awarded work despite the challenging environment, as evidenced by the strong backlog for the segment, as further discussed below. The Company also continues to monitor job progress and service work and has experienced some delays, cancellations and disruptions due to the pandemic. The Company will continue to monitor the demand for construction services as such services may be reduced by recessionary impacts of the pandemic as the traditional customers for these services reduce capital expenditures. In addition, the Company has been reviewing contracts for rights and obligations to protect its margins.
The Company continues to have bidding opportunities for both inside and outside specialty construction companies in 2020. Although bidding remains highly competitive in all areas, the Company expects the segment's skilled workforce, quality of service and effective cost management will continue to provide a benefit in securing and executing profitable projects.
The construction services segment had backlog at June 30, 2020, of $1.3 billion, up from $1.1 billion at June 30, 2019. The increase in backlog was largely attributable to the new project opportunities that the Company continues to be awarded across its diverse operations, particularly inside specialty electrical and mechanical contracting in the hospitality, high-tech, mission critical and public industries. The Company's outside power, communications and natural gas specialty contracting also have a high volume of available work. The Company expects to complete a significant amount of the backlog at June 30, 2020, during the next 12 months. Additionally, the Company continues to further evaluate potential acquisition opportunities that would be accretive to the Company and continue to grow the Company's backlog.
In support of the Company's strategic plan to grow through acquisitions, the Company acquired PerLectric, Inc., an electrical construction company in Fairfax, Virginia, in the first quarter of 2020. For more information on the Company's business combinations, see Note 9.
All of the labor contracts that the construction services segment was negotiating, as reported in Items 1 and 2 - Business Properties - General in the 2019 Annual Report, have been ratified.
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
(In millions)
|
|
|
|
|
Operating revenues
|
$
|
2.9
|
|
$
|
2.9
|
|
$
|
5.9
|
|
$
|
10.7
|
|
|
Operating expenses:
|
|
|
|
|
|
Operation and maintenance
|
2.3
|
|
1.1
|
|
4.4
|
|
8.2
|
|
|
Depreciation, depletion and amortization
|
.6
|
|
.6
|
|
1.3
|
|
1.0
|
|
|
Taxes, other than income
|
—
|
|
—
|
|
—
|
|
.1
|
|
|
Total operating expenses
|
2.9
|
|
1.7
|
|
5.7
|
|
9.3
|
|
|
Operating income
|
—
|
|
1.2
|
|
.2
|
|
1.4
|
|
|
Other income
|
—
|
|
.2
|
|
.2
|
|
.3
|
|
|
Interest expense
|
.3
|
|
.5
|
|
.6
|
|
1.0
|
|
|
Income (loss) before income taxes
|
(.3)
|
|
.9
|
|
(.2)
|
|
.7
|
|
|
Income taxes
|
1.0
|
|
(1.9)
|
|
5.3
|
|
1.4
|
|
|
Net income (loss)
|
$
|
(1.3)
|
|
$
|
2.8
|
|
$
|
(5.5)
|
|
$
|
(.7)
|
|
Three Months Ended June 30, 2020, Compared to Three Months Ended June 30, 2019 In the second quarter of 2020, the Company recorded higher income tax adjustments related to the Company's consolidated annualized estimated tax rate compared to the second quarter of 2019. General and administrative costs and interest expense previously allocated to the exploration and production and refining businesses that do not meet the criteria for income (loss) from discontinued operations are also included in Other.
Six Months Ended June 30, 2020, Compared to Six Months Ended June 30, 2019 During the first six months of 2020, the Company recorded higher income tax adjustments related to the Company's consolidated annualized estimated tax rate compared to the same period in 2019. Also, in the first quarter of 2020, insurance activity at the Company's captive insurer decreased, which impacted both operating revenues and operation and maintenance expense. General and administrative costs and interest expense previously allocated to the exploration and production and refining businesses that do not meet the criteria for income (loss) from discontinued operations are also included in Other.
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
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
(In millions)
|
|
|
|
|
Intersegment transactions:
|
|
|
|
|
|
Operating revenues
|
$
|
12.3
|
|
$
|
11.3
|
|
$
|
43.3
|
|
$
|
43.2
|
|
|
Operation and maintenance
|
4.5
|
|
3.9
|
|
10.3
|
|
11.9
|
|
|
Purchased natural gas sold
|
7.8
|
|
7.4
|
|
33.0
|
|
31.3
|
|
|
|
|
|
|
|
For more information on intersegment eliminations, see Note 16.
Liquidity and Capital Commitments
At June 30, 2020, the Company had cash and cash equivalents of $64.4 million and available borrowing capacity of $655.1 million under the outstanding credit facilities of the Company's subsidiaries. During the first quarter of 2020, short-term capital markets were disrupted as a result of the COVID-19 pandemic. Consequently, the Company temporarily borrowed under its revolving credit agreements in addition to accessing the commercial paper markets and maintained higher than normal cash balances to ensure liquidity during this volatile period. In April 2020, Montana-Dakota entered into a $75.0 million term loan, which was used to repay all of its outstanding revolving credit agreement borrowings and a portion of its outstanding commercial paper borrowings. In June 2020, Centennial paid off its revolving credit agreement borrowings with commercial paper. The Company expects to meet its obligations for debt maturing within one year and its other operating and capital requirements from various sources, including internally generated funds; credit facilities and commercial paper of the Company's subsidiaries, as described in Capital resources; and issuance of debt and equity securities if necessary.
Cash flows
Operating activities The changes in cash flows from operating activities generally follow the results of operations, as discussed in Business Segment Financial and Operating Data, and also are affected by changes in working capital. Cash flows provided by operating activities in the first six months of 2020 was $261.4 million compared to cash flows used in operating activities of $22.9 million in the first six months of 2019. The increase in cash flows provided by operating activities was largely driven by the stronger collection of accounts receivable at the construction services business. Also contributing to the increase of cash flows provided by operating activities was the decrease in natural gas purchases in 2020 as a result of milder temperatures and recovery of purchased gas cost adjustment balances at the natural gas distribution business, as well as the Company's deferral of payroll taxes related to the CARES Act, as previously discussed.
Investing activities Cash flows used in investing activities in the first six months of 2020 was $296.5 million compared to $305.1 million in the first six months of 2019. The decrease in cash used in investing activities was primarily related to decreased capital expenditures in 2020 at the construction materials and contracting business, as well as additional proceeds on the sale of non-strategic assets. Partially offsetting these decreases was higher cash used in acquisition activity in 2020 compared to 2019 at the construction services business.
Financing activities Cash flows provided by financing activities in the first six months of 2020 was $33.0 million compared to $346.0 million in the first six months of 2019. The change was largely the result of a decrease in long-term debt issuance and short-term borrowings in 2020 as compared to 2019 due to decreased working capital needs and capital expenditures. The Company also increased repayments on commercial paper and revolving credit agreements at Montana-Dakota. During the first six months of 2020, the Company had decreased net proceeds of $66.2 million for the issuance of common stock under its "at-the-market" offering and 401(k) plan.
Defined benefit pension plans
There were no material changes to the Company's qualified noncontributory defined benefit pension plans from those reported in the 2019 Annual Report. For more information, see Note 17 and Part II, Item 7 in the 2019 Annual Report.
Capital expenditures
Capital expenditures for the first six months of 2020 were $310.6 million, which includes the completed business combinations at the construction materials and contracting and construction services businesses. Capital expenditures in the first six months of 2019 were $298.3 million, which includes the completed aggregate deposit purchase and business combination at the construction material and contracting business. Capital expenditures allocated to the Company's business segments are estimated to be approximately $614 million for 2020. Capital expenditures have been updated from what was previously reported in the 2019 Annual Report to accommodate project timeline and scope changes made throughout the first half of 2020. The Company will continue to monitor capital expenditures for project delays and changes in economic viability related to COVID-19. The Company has included in the estimated capital expenditures for 2020 the completed business combinations of an electrical construction company and a prestressed-concrete business, as well as the North Bakken Expansion project, as previously discussed in Business Segment Financial and Operating Data.
Estimated capital expenditures for 2020 also include system upgrades; service extensions; routine equipment maintenance and replacements; buildings, land and building improvements; pipeline and natural gas storage projects; power generation and transmission opportunities, including certain costs for additional electric generating capacity; 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, such growth is dependent upon the availability of economic opportunities and, as a result, capital expenditures may vary significantly from the estimate previously discussed. It is anticipated that all of the funds required for capital expenditures for 2020 will be met from 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
Certain debt instruments of the Company's subsidiaries contain restrictive and financial covenants and cross-default provisions. In order to borrow under the respective debt instruments, the subsidiary companies must be in compliance with the applicable covenants and certain other conditions, all of which the subsidiaries, as applicable, were in compliance with at June 30, 2020. In the event the subsidiaries do not comply with the applicable covenants and other conditions, alternative sources of funding may need to be pursued. For more information on the covenants, certain other conditions and cross-default provisions, see Part II, Item 8 in the 2019 Annual Report.
The following table summarizes the outstanding revolving credit facilities of the Company's subsidiaries at June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Facility
|
|
Facility
Limit
|
|
Amount
Outstanding
|
|
Letters
of Credit
|
|
Expiration
Date
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
Montana-Dakota Utilities Co.
|
|
Commercial paper/Revolving credit agreement
|
(a)
|
$
|
175.0
|
|
|
$
|
35.0
|
|
|
$
|
—
|
|
|
12/19/24
|
|
|
Cascade Natural Gas Corporation
|
|
Revolving credit agreement
|
|
$
|
100.0
|
|
(b)
|
$
|
—
|
|
|
$
|
2.2
|
|
(c)
|
6/7/24
|
|
|
Intermountain Gas Company
|
|
Revolving credit agreement
|
|
$
|
85.0
|
|
(d)
|
$
|
11.2
|
|
|
$
|
1.4
|
|
(c)
|
6/7/24
|
|
|
Centennial Energy Holdings, Inc.
|
|
Commercial paper/Revolving credit agreement
|
(e)
|
$
|
600.0
|
|
|
$
|
255.1
|
|
|
$
|
—
|
|
|
12/19/24
|
|
(a)The commercial paper program is supported by a revolving credit agreement with various banks (provisions allow for increased borrowings, at the option of Montana-Dakota on stated conditions, up to a maximum of $225.0 million). At June 30, 2020, there were no amounts outstanding under the revolving credit agreement.
(b)Certain provisions allow for increased borrowings, up to a maximum of $125.0 million.
(c)Outstanding letter(s) of credit reduce the amount available under the credit agreement.
(d)Certain provisions allow for increased borrowings, up to a maximum of $110.0 million.
(e)The commercial paper program is supported by a revolving credit agreement with various banks (provisions allow for increased borrowings, at the option of Centennial on stated conditions, up to a maximum of $700.0 million). At June 30, 2020, there were no amounts outstanding under the revolving credit agreement.
The respective commercial paper programs are supported by revolving credit agreements. While the amount of commercial paper outstanding does not reduce available capacity under the respective revolving credit agreements, Montana-Dakota and Centennial do not issue commercial paper in an aggregate amount exceeding the available capacity under the credit agreements. The commercial paper borrowings may vary during the period, largely the result of fluctuations in working capital requirements due to the seasonality of certain operations of the Company's subsidiaries. Due to the impacts of the COVID-19 pandemic on the short-term capital markets, the Company temporarily borrowed under its revolving credit agreements in addition to accessing the commercial paper markets in the first half of 2020. At June 30, 2020, all borrowings under the revolving credit agreements for Montana-Dakota and Centennial had been repaid.
Total equity as a percent of total capitalization was 55 percent, 52 percent and 56 percent at June 30, 2020 and 2019, and December 31, 2019, respectively. This ratio is calculated as the Company's total equity, divided by the Company's total capital. Total capital is the Company's total debt, including short-term borrowings and long-term debt due within one year, plus total equity. This ratio is an indicator of how a company is financing its operations, as well as its financial strength.
The Company currently has a shelf registration statement on file with the SEC, under which the Company may issue and sell any combination of common stock and debt securities. The Company may sell such securities if warranted by market conditions and the Company's capital requirements. Any public offer and sale of such securities will be made only by means of a prospectus meeting the requirements of the Securities Act and the rules and regulations thereunder. The Company's board of directors currently has authorized the issuance and sale of up to an aggregate of $1.0 billion worth of such securities. The Company's board of directors reviews this authorization on a periodic basis and the aggregate amount of securities authorized for sale may be increased in the future.
The Company has a Distribution Agreement with J.P. Morgan Securities LLC and MUFG Securities Americas Inc., as sales agents, with respect to the issuance and sale of up to 10.0 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 the agreement. Proceeds from the sale of shares of common stock under the 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.
The Company did not issue shares of common stock for the three and six months ended June 30, 2020, under its "at-the-market" offering. The Company issued 924,000 and 2.3 million shares of common stock for the three and six months ended June 30, 2019, respectively, pursuant to the “at-the-market” offering. The Company received net proceeds of $23.5 million and $59.4 million for the three and six months ended June 30, 2019, respectively. The Company paid commissions to the sales agents of approximately $237,000 and $600,000 for the three and six months ended June 30, 2019, respectively, in connection with the sales of common stock under the "at-the-market" offering. As of June 30, 2020, the Company had remaining capacity to issue up to 6.4 million additional shares of common stock under the "at-the-market" offering program.
Certain of the Company's debt instruments use LIBOR as a benchmark for establishing the applicable interest rate. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The Company has been proactive to anticipate the reform of LIBOR by replacing it with the SOFR, or equivalent rate agreed upon by the lenders, in certain of its new debt instruments, as well as those that are being renewed. The Company is currently updating its credit agreements to include
language regarding the successor or alternate rate to LIBOR. The Company continues to evaluate the impact the reform will have on its debt instruments and, at this time, does not anticipate a significant impact.
Montana-Dakota On April 8, 2020, Montana-Dakota entered into a $75.0 million term loan agreement with a variable interest rate and a maturity date of April 7, 2021. The agreement contains customary covenants and provisions, including a covenant of Montana-Dakota not to permit, at any time, the ratio of total debt to total capitalization to be greater than 65 percent. The covenants also include certain restrictions on the sale of certain assets, loans and investments.
Cascade On June 15, 2020, Cascade issued $50.0 million of senior notes under a note purchase agreement with maturity dates of June 15, 2050 and June 15, 2060, at a weighted average interest rate of 3.66 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.
Off balance sheet arrangements
At June 30, 2020, the Company had no material off balance sheet arrangements as defined by the rules of the SEC.
Contractual obligations and commercial commitments
There were no material changes in the Company's contractual obligations from continuing operations relating to estimated interest payments, purchase commitments, asset retirement obligations, uncertain tax positions and minimum funding requirements for its defined benefit plans for 2020 from those reported in the 2019 Annual Report.
For more information on contractual obligations and commercial commitments, see Part II, Item 7 in the 2019 Annual Report.
New Accounting Standards
For information regarding new accounting standards, see Note 2, which is incorporated by reference.
Critical Accounting Policies Involving Significant Estimates
The Company's critical accounting policies involving significant estimates include impairment testing of long-lived assets and 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 policies involving significant estimates from those reported in the 2019 Annual Report. For more information on critical accounting policies involving significant estimates, see Part II, Item 7 in the 2019 Annual Report.
Non-GAAP Financial Measures
The Business Segment Financial and Operating Data includes financial information prepared in accordance with GAAP, as well as another financial measure, adjusted gross margin, that is considered a non-GAAP financial measure as it relates to the Company's electric and natural gas distribution segments. The presentation of adjusted gross margin is intended to be a useful supplemental financial measure for investors’ understanding of the segments' operating performance. This non-GAAP financial measure should not be considered as an alternative to, or more meaningful than, GAAP financial measures such as operating income (loss) or net income (loss). The Company's non-GAAP financial measure, adjusted gross margin, is not standardized; therefore, it may not be possible to compare this financial measure with other companies’ gross margin measures having the same or similar names.
In addition to operating revenues and operating expenses, management also uses the non-GAAP financial measure of adjusted gross margin when evaluating the results of operations for the electric and natural gas distribution segments. Adjusted gross margin for the electric and natural gas distribution segments is calculated by adding back adjustments to operating income (loss). These add-back adjustments include: operation and maintenance expense; depreciation, depletion and amortization expense; and certain taxes, other than income.
Adjusted gross margin includes operating revenues less the cost of electric fuel and purchased power, purchased natural gas sold and certain taxes, other than income. These taxes, other than income, included as a reduction to adjusted gross margin relate to revenue taxes. These segments pass on to their customers the increases and decreases in the wholesale cost of power purchases, natural gas and other fuel supply costs in accordance with regulatory requirements. As such, the segments' revenues are directly impacted by the fluctuations in such commodities. Revenue taxes, which are passed back to customers, fluctuate with revenues as they are calculated as a percentage of revenues. For these reasons, period over period, the segments' operating income (loss) is generally not impacted. The Company's management believes the adjusted gross margin is a useful supplemental financial measure as these items are included in both operating revenues and operating expenses. The Company's management also believes that adjusted gross margin and the remaining operating expenses that calculate operating income (loss) are useful in assessing the Company's utility performance as management has the ability to influence control over the remaining operating expenses.
The following information reconciles operating income to adjusted gross margin for the electric segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
(In millions)
|
|
|
|
|
Operating income
|
$
|
12.8
|
|
$
|
9.8
|
|
$
|
27.6
|
|
$
|
27.8
|
|
|
Adjustments:
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
Operation and maintenance
|
29.0
|
|
33.6
|
|
59.7
|
|
63.8
|
|
|
Depreciation, depletion and amortization
|
15.7
|
|
13.9
|
|
31.3
|
|
27.6
|
|
|
Taxes, other than income
|
4.4
|
|
4.2
|
|
8.7
|
|
8.4
|
|
|
Total adjustments
|
49.1
|
|
51.7
|
|
99.7
|
|
99.8
|
|
|
Adjusted gross margin
|
$
|
61.9
|
|
$
|
61.5
|
|
$
|
127.3
|
|
$
|
127.6
|
|
The following information reconciles operating income (loss) to adjusted gross margin for the natural gas distribution segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
(In millions)
|
|
|
|
|
Operating income (loss)
|
$
|
.7
|
|
$
|
(2.6)
|
|
$
|
50.7
|
|
$
|
47.7
|
|
|
Adjustments:
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
Operation and maintenance
|
43.1
|
|
43.6
|
|
89.1
|
|
90.0
|
|
|
Depreciation, depletion and amortization
|
21.0
|
|
19.7
|
|
41.8
|
|
39.1
|
|
|
Taxes, other than income
|
6.0
|
|
5.6
|
|
12.1
|
|
11.8
|
|
|
Total adjustments
|
70.1
|
|
68.9
|
|
143.0
|
|
140.9
|
|
|
Adjusted gross margin
|
$
|
70.8
|
|
$
|
66.3
|
|
$
|
193.7
|
|
$
|
188.6
|
|