MDU Resources (MDU) - 2019 Q4 - Annual Report

Part I Forward-Looking Statements This section highlights that the Form 10-K contains forward-looking statements, which are not historical facts and involve risks and uncertainties that could cause actual results to differ materially - Forward-looking statements are identified by words like 'anticipates,' 'estimates,' 'expects,' 'intends,' 'plans,' 'predicts' and similar expressions, and cover future events, performance, and underlying assumptions[15] - These statements involve risks and uncertainties that could cause actual results to differ materially from expectations[16] - The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances occurring after the statement's date[17] Items 1 and 2 Business and Properties MDU Resources Group, Inc. operates as a regulated energy delivery and construction materials and services business, organized into five reportable segments - The Company is a regulated energy delivery and construction materials and services business, operating with a two-platform business model to balance seasonality and industry risks[18][20] - On January 2, 2019, the Holding Company Reorganization was completed, making Montana-Dakota a subsidiary of the Company[19] - The Company is organized into five reportable business segments: electric, natural gas distribution, pipeline and midstream, construction materials and contracting, and construction services[21] General Business Overview - The Company's principal executive offices are located in Bismarck, North Dakota[18] - The regulated energy delivery platform provides electric and natural gas services, generation, transmission, distribution, and natural gas transportation, storage, and gathering, regulated by state public service commissions and/or FERC[20] - The construction materials and services platform provides construction services and materials (aggregates, ready-mixed concrete, asphalt) to commercial, industrial, and governmental sectors[20] Employee Count as of December 31, 2019 | Entity | Employees | | :--------------------------- | :-------- | | MDU Resources Group, Inc. | 244 | | MDU Energy Capital | 1,578 | | WBI Holdings | 335 | | Knife River | 4,255 | | MDU Construction Services | 6,947 | | Total | 13,359 | - The Company's operations are subject to federal, state, and local environmental laws and regulations, with ongoing monitoring of legislative and regulatory activity related to environmental and energy policy initiatives, including GHG emissions[29][31] - The Company uses technology in all business aspects and has a Cyber Risk Oversight Committee (CyROC) to oversee cybersecurity, providing quarterly reports to the Audit Committee[32][33] Electric Segment - The electric segment, operated through Montana-Dakota, serves 143,346 residential, commercial, industrial, and municipal customers in 185 communities across Montana, North Dakota, South Dakota, and Wyoming as of December 31, 2019[35] Electric Retail Customers and Revenues (2017-2019) | Class | 2019 Customers Served | 2019 Revenues ($ thousands) | 2018 Customers Served | 2018 Revenues ($ thousands) | 2017 Customers Served | 2017 Revenues ($ thousands) | | :------------- | :-------------------- | :-------------------------- | :-------------------- | :-------------------------- | :-------------------- | :-------------------------- | | Residential | 118,563 | 125,614 | 118,426 | 126,173 | 118,379 | 121,171 | | Commercial | 22,948 | 142,062 | 22,756 | 141,961 | 22,764 | 140,856 | | Industrial | 234 | 37,790 | 236 | 36,081 | 242 | 34,417 | | Other | 1,601 | 7,454 | 1,604 | 7,882 | 1,516 | 8,275 | | Total | 143,346 | 312,920 | 143,022 | 312,097 | 142,901 | 304,719 | - Montana-Dakota's electric operations are regulated by state public service commissions (MTPSC, NDPSC, SDPUC, WYPSC) and FERC for interstate transmission and wholesale power[37] - The interconnected system's generation capability includes coal, combustion turbine, wind, and reciprocating internal combustion engines, with 26% of electricity from owned generation in 2019 from renewable resources[39][41] Average Cost of Coal Purchased (2017-2019) | Metric | 2019 | 2018 | 2017 | | :----------------------- | :---- | :---- | :---- | | Average cost of coal per MMBtu | $2.15 | $2.00 | $2.07 | | Average cost of coal per ton | $31.36| $29.08| $30.04| - Montana-Dakota plans to retire three aging coal-fired electric generating units (Lewis & Clark Station in early 2021, Heskett Station units 1 and 2 in early 2022) and construct a new simple-cycle natural gas-fired combustion turbine peaking unit (Heskett Unit 4) by 2023[50][255] - The electric operations are subject to various environmental regulations (air, water, solid waste pollution control) and are in substantial compliance[57] Electric Environmental Capital Expenditures (2019-2022 Estimated) | Year | Amount (millions) | | :--- | :---------------- | | 2019 | $5.5 | | 2020 | $0.7 | | 2021 | $1.1 | | 2022 | $3.3 | Natural Gas Distribution Segment - The natural gas distribution segment, through Montana-Dakota, Cascade, and Intermountain, serves 977,468 residential, commercial, and industrial customers in 337 communities across eight states as of December 31, 2019[63] Natural Gas Distribution Retail Customers and Revenues (2017-2019) | Class | 2019 Customers Served | 2019 Revenues ($ thousands) | 2018 Customers Served | 2018 Revenues ($ thousands) | 2017 Customers Served | 2017 Revenues ($ thousands) | | :------------- | :-------------------- | :-------------------------- | :-------------------- | :-------------------------- | :-------------------- | :-------------------------- | | Residential | 868,821 | 479,673 | 850,595 | 464,697 | 833,255 | 477,699 | | Commercial | 107,741 | 293,201 | 106,297 | 279,566 | 104,795 | 283,899 | | Industrial | 906 | 26,570 | 835 | 24,555 | 817 | 24,030 | | Total | 977,468 | 799,444 | 957,727 | 768,818 | 938,867 | 785,628 | - The segment's operations are regulated by state public utility commissions (IPUC, MNPUC, MTPSC, NDPSC, OPUC, SDPUC, WUTC, WYPSC) regarding retail rates, service, accounting, and security issuances[67] - Natural gas distribution operations are subject to federal, state, and local environmental laws and regulations, with the Company believing it is in substantial compliance[77] - Montana-Dakota and Cascade are involved in investigating and remediating historic manufactured gas plant sites, with costs potentially recoverable through natural gas rates[80] Pipeline and Midstream Segment - WBI Energy operates regulated (natural gas transmission, gathering, storage) and nonregulated (gathering, energy-related services) businesses, primarily in the northern Great Plains and Rocky Mountain regions[82][83][84] - The regulated business, WBI Energy Transmission, operates approximately 4,000 miles of natural gas lines and is subject to FERC jurisdiction[82] - WBI Energy Transmission's underground natural gas storage facilities have a certificated capacity of approximately 353 Bcf, including 194 Bcf of working gas capacity[86] - The pipeline and midstream operations are subject to federal, state, and local environmental laws and regulations, with the Company believing it is in substantial compliance[90][91] Construction Materials and Contracting Segment - Knife River operates construction materials and contracting businesses across 12 states, mining and selling aggregates, asphalt mix, and ready-mixed concrete, focusing on vertical integration[94] - Knife River's backlog was approximately $693 million at December 31, 2019, with a significant portion expected to be completed in the next 12 months[96] - The segment's products and services are marketed under highly competitive conditions, with price, service, quality, delivery time, and proximity to customers being key factors[99] - As of December 31, 2019, Knife River had estimated aggregate reserves of 1.1 billion tons, with approximately 978 million tons permitted[105][108] Knife River Aggregate Reserves and Sales (2017-2019) | Metric | 2019 | 2018 | 2017 | | :---------------------- | :---------- | :---------- | :---------- | | Estimated Reserves (000's tons) | 1,054,186 | 1,014,431 | 965,036 | | Sales (000's tons) | 32,314 | 29,795 | 28,213 | - Knife River's operations are subject to federal, state, and local environmental compliance and reclamation regulations, including the Clean Air Act, Clean Water Act, RCRA, and ESA[111][112][115] - Knife River - Northwest was named a PRP by the EPA for the Portland, Oregon, Harbor Superfund Site cleanup, but does not believe it will incur material environmental remediation costs[122][124] Item 1A. Risk Factors This section outlines significant economic, operational, environmental, and regulatory risks impacting the Company's business and financial condition - The Company is subject to extensive government regulations that can negatively impact its business, operating results, and cash flows, including allowed rates of return, cost recovery, and financing[136] - Economic volatility, including public and private expenditure levels, economic conditions in served industries, and population growth, affects demand for the Company's products and services, particularly in construction and utility businesses[139][140] - Operational risks include catastrophic events (leaks, explosions, fires, terrorism) in natural gas and electric operations, which could lead to loss of life, property damage, environmental pollution, and substantial financial losses not fully covered by insurance[142] - Environmental and regulatory risks include adverse impacts from climate change (severe weather, increased costs, decreased demand), stringent environmental laws and regulations (increased capital and operating costs, compliance delays, remediation obligations), and initiatives to reduce GHG emissions (carbon taxes, renewable energy mandates, increased capital/operating costs)[162][172][175][176] - Other risks include seasonality and weather conditions affecting revenues and operations, intense competition across all business segments, challenges in obtaining and retaining key personnel and skilled labor, potential warranty claims in construction businesses, reliance on subsidiary dividends as a holding company, and increasing costs related to multiemployer pension plans (MEPPs)[179][181][182][183][184][185][186][187] - Information technology disruptions or cyberattacks pose a significant risk, potentially leading to failures or unauthorized access, interrupting critical business functions, causing financial losses, and incurring legal or regulatory liabilities[189][191][193][194] Item 1B. Unresolved Staff Comments The Company has no unresolved comments with the SEC - The Company has no unresolved comments with the SEC[198] Item 3. Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 20 of the financial statements - Information regarding legal proceedings is provided in Item 8 - Note 20 of this Form 10-K[199] Item 4. Mine Safety Disclosures Mine safety disclosures, as required by the Dodd-Frank Act and Regulation S-K, are provided in Exhibit 95 - Mine safety disclosures are included in Exhibit 95 to this Form 10-K, as required by Section 1503(a) of the Dodd-Frank Act and Item 104 of Regulation S-K[200] Part II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company's common stock is listed on the NYSE, with 10,700 stockholders and a 29-year history of increasing quarterly dividends - The Company's common stock is listed on the New York Stock Exchange (NYSE) under the symbol 'MDU'[202] - As of December 31, 2019, there were approximately 10,700 stockholders of record[202] - The Company has paid quarterly dividends for over 80 consecutive years, with increases for the last 29 consecutive years[203] Issuer Purchases of Equity Securities (Q4 2019) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :------------------------------- | :------------------------------- | :--------------------------- | | October 1 through October 31, 2019 | — | — | | November 1 through November 30, 2019 | 41,644 | $29.16 | | December 1 through December 31, 2019 | — | — | | Total | 41,644 | | - These purchases were in connection with annual stock grants to non-employee directors; the Company has no publicly announced plans to purchase equity securities[205][206] Item 6. Selected Financial Data This section provides a summary of key financial and operating data for the Company and its segments over a six-year period (2014-2019) Selected Financial Data (2014-2019) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | 2014 | | :---------------------------------------------- | :------------ | :------------ | :------------ | :------------ | :------------ | :------------ | | Operating revenues ($ thousands): | | | | | | | | Electric | $351,725 | $335,123 | $342,805 | $322,356 | $280,615 | $277,874 | | Natural gas distribution | $865,222 | $823,247 | $848,388 | $766,115 | $817,419 | $921,986 | | Pipeline and midstream | $140,444 | $128,923 | $122,213 | $141,602 | $154,904 | $157,292 | | Construction materials and contracting | $2,190,717 | $1,925,854 | $1,812,529 | $1,874,270 | $1,904,282 | $1,765,330 | | Construction services | $1,849,266 | $1,371,453 | $1,367,602 | $1,073,272 | $926,427 | $1,119,529 | | Other | $16,551 | $11,259 | $7,874 | $8,643 | $9,191 | $9,364 | | Intersegment eliminations | $(77,149) | $(64,307) | $(58,060) | $(57,430) | $(78,786) | $(136,302) | | Total Operating Revenues | $5,336,776| $4,531,552| $4,443,351| $4,128,828| $4,014,052| $4,115,073| | Operating income (loss) ($ thousands): | | | | | | | | Electric | $64,039 | $65,148 | $79,902 | $67,929 | $59,915 | $61,515 | | Natural gas distribution | $69,188 | $72,336 | $84,239 | $66,166 | $54,974 | $68,185 | | Pipeline and midstream | $42,796 | $36,128 | $36,004 | $42,864 | $30,218 | $46,500 | | Construction materials and contracting | $179,955 | $141,426 | $143,230 | $178,753 | $148,312 | $87,243 | | Construction services | $126,426 | $86,764 | $81,292 | $53,546 | $43,678 | $82,408 | | Other | $(1,184) | $(79) | $(619) | $(349) | $(8,414) | $(5,370) | | Intersegment eliminations | — | — | — | — | $(2,942) | $(9,900) | | Total Operating Income | $481,220 | $401,723 | $424,048 | $408,909 | $325,741 | $330,581 | | Earnings (loss) on common stock ($ thousands): | | | | | | | | Earnings per common share - diluted | $1.69 | $1.39 | $1.43 | $0.33 | $(3.20) | $1.55 | | Dividends declared per common share | $0.8150 | $0.7950 | $0.7750 | $0.7550 | $0.7350 | $0.7150 | | Book value per common share | $14.21 | $13.09 | $12.44 | $11.78 | $12.83 | $16.66 | | Market price per common share (year end) | $29.71 | $23.84 | $26.88 | $28.77 | $18.32 | $23.50 | | Total assets ($ thousands) | $7,683,059 | $6,988,110 | $6,334,666 | $6,284,467 | $6,565,154 | $7,805,405 | | Total long-term debt ($ thousands) | $2,243,107 | $2,108,695 | $1,714,853 | $1,790,159 | $1,796,163 | $2,016,198 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the Company's financial condition and results, covering consolidated earnings, segment data, liquidity, and critical accounting policies - The Company's strategy is to increase market share, profitability, and shareholder value through organic growth and strategic acquisitions in both regulated energy delivery and construction materials and services businesses[214] - The Company funds its growth and operations through internally generated funds, commercial paper, revolving credit facilities, and debt/equity issuances[215] Consolidated Earnings Overview Consolidated Earnings by Segment (2017-2019, in millions) | Years ended December 31, | 2019 | 2018 | 2017 | | :----------------------- | :---- | :---- | :---- | | Electric | $54.8 | $47.0 | $49.4 | | Natural gas distribution | $39.5 | $37.7 | $32.2 | | Pipeline and midstream | $29.6 | $28.5 | $20.5 | | Construction materials and contracting | $120.4| $92.6 | $123.4| | Construction services | $93.0 | $64.3 | $53.3 | | Other | $(2.1)| $(0.7)| $(1.5)| | Intersegment eliminations| — | — | $6.9 | | Earnings before discontinued operations | $335.2| $269.4| $284.2| | Income (loss) from discontinued operations, net of tax | $0.3 | $2.9 | $(3.8)| | Earnings on common stock | $335.5| $272.3| $280.4| | Earnings per common share - diluted | $1.69 | $1.39 | $1.43 | - Consolidated earnings increased by $63.2 million in 2019 compared to 2018, driven by higher gross margins in construction services and construction materials and contracting, approved rate relief in Montana for the electric business, and higher returns on benefit plan investments[218][219] - Consolidated earnings decreased by $8.1 million in 2018 compared to 2017, primarily due to the lower federal statutory tax rate from TCJA (partially offset by the absence of a 2017 tax benefit), lower returns on investments, and increased outside specialty contracting gross margins[220] Business Segment Financial and Operating Data Electric and Natural Gas Distribution - The electric and natural gas distribution segments aim to be top-performing utilities, focusing on safety, reliability, competitive pricing, organic growth, managing operating costs, and strategic acquisitions[224] - These segments are subject to extensive regulation, with tracking mechanisms implemented in certain jurisdictions to mitigate regulatory lag from increased investments[225] - Tariff increases on steel and aluminum, along with extended lead times for raw materials, could negatively affect construction projects and maintenance work[226] Electric Segment Earnings Overview (2017-2019, in millions) | Years ended December 31, | 2019 | 2018 | 2017 | | :----------------------- | :---- | :---- | :---- | | Operating revenues | $351.7| $335.1| $342.8| | Electric fuel and purchased power | $86.6 | $80.7 | $78.7 | | Taxes, other than income | $0.6 | $0.7 | $0.8 | | Adjusted gross margin| $264.5| $253.7| $263.3| | Operating income | $64.0 | $65.2 | $79.9 | | Net income | $54.8 | $47.0 | $50.0 | | Earnings | $54.8| $47.0| $49.4| | Retail sales (million kWh)| 3,314.3| 3,354.4| 3,306.5| | Average cost of electric fuel and purchased power per kWh | $0.023| $0.022| $0.022| - Electric earnings increased by $7.8 million (17%) in 2019, primarily due to higher adjusted gross margin from regulatory mechanisms (Montana rates, BSSE project recovery) and increased income tax benefits, partially offset by lower retail sales volumes[231][232][236] - Electric earnings decreased by $2.4 million (5%) in 2018, mainly due to lower adjusted gross margin from reserves against revenues for anticipated customer refunds (TCJA impact) and a transmission formula rate adjustment, partially offset by increased retail sales volumes[237] Natural Gas Distribution Segment Earnings Overview (2017-2019, in millions) | Years ended December 31, | 2019 | 2018 | 2017 | | :----------------------- | :---- | :---- | :---- | | Operating revenues | $865.2| $823.2| $848.4| | Purchased natural gas sold | $477.6| $454.8| $479.9| | Taxes, other than income | $30.3 | $28.5 | $30.0 | | Adjusted gross margin| $357.3| $339.9| $338.5| | Operating income | $69.2 | $72.3 | $84.3 | | Net income | $39.5 | $37.7 | $32.3 | | Earnings | $39.5| $37.7| $32.2| | Retail sales (MMdk) | 123.7 | 112.6 | 112.5 | | Transportation sales (MMdk)| 166.1 | 149.5 | 144.5 | | Average cost of natural gas per dk | $3.86 | $4.04 | $4.26 | - Natural gas distribution earnings increased by $1.8 million (5%) in 2019, driven by a $17.4 million increase in adjusted gross margin from higher retail sales volumes due to colder weather and approved rate recovery, along with higher returns on benefit plan investments[244][247] - Natural gas distribution earnings increased by $5.5 million (17%) in 2018, primarily due to increased retail sales margins from weather normalization and conservation revenue, and a significant decrease in income taxes due to the TCJA reduced corporate tax rate[250][253] - The Company expects these segments to grow rate base by approximately 5% annually over the next five years, with customer growth of 1% to 2% per year[254] - The Company is pursuing regulatory approval for deferred accounting for costs related to the retirement of Lewis & Clark Station and Heskett Station units 1 and 2, and for the construction of Heskett Unit 4[255][256] Pipeline and Midstream - The pipeline and midstream segment focuses on optimizing existing operations, organic growth, and investments in energy infrastructure, with recent projects increasing natural gas capacity[258] - The segment is exposed to energy price volatility and faces challenges from increased pipeline safety regulations, methane emission reduction initiatives, and tariff increases on raw materials[259][260] Pipeline and Midstream Segment Earnings Overview (2017-2019, in millions) | Years ended December 31, | 2019 | 2018 | 2017 | | :----------------------- | :---- | :---- | :---- | | Operating revenues | $140.4| $128.9| $122.2| | Operating income | $42.8 | $36.1 | $36.0 | | Net income | $29.6 | $28.5 | $20.5 | | Transportation volumes (MMdk)| 429.7 | 351.5 | 312.5 | | Natural gas gathering volumes (MMdk)| 13.9 | 14.9 | 16.1 | | Customer natural gas storage balance (MMdk) - End of period | 16.2 | 13.9 | 22.4 | - Pipeline and midstream earnings increased by $1.1 million (4%) in 2019, primarily due to increased natural gas transportation volumes from organic growth projects and higher rates from a finalized FERC rate case, partially offset by the absence of a 2018 income tax benefit[265][267] - Pipeline and midstream earnings increased by $8.0 million (39%) in 2018, largely due to increased transportation volumes from organic growth projects and a $4.2 million income tax benefit from a regulatory liability reversal[268][272] - The Company completed Phase I of the Line Section 22 Expansion project in November 2019 and the Demicks Lake project in February 2020, both increasing natural gas capacity[274][275] - The North Bakken Expansion project, with a design capacity of 350 MMcf per day, is expected to begin construction in early 2021 and be completed late 2021, pending regulatory approval[276] - The Company entered an agreement to divest its regulated gathering assets in Montana and North Dakota, with the sale expected to close in the first half of 2020, pending FERC approval[277] Construction Materials and Contracting - The construction materials and contracting segment focuses on high-growth strategic markets, strengthening aggregate reserve positions, enhancing profitability through cost containment and vertical integration, and growing through organic and acquisition opportunities[278] - The segment strategically manages approximately 1.1 billion tons of aggregate reserves and increased reserves by 40 million tons in 2019 through strategic asset purchases[280] - Challenges include competitive markets, volatility in raw material costs (diesel fuel, liquid asphalt, cement, steel), adverse weather, project timing, and recruitment/retention of skilled labor[281][282][283] Construction Materials and Contracting Segment Earnings Overview (2017-2019, in millions) | Years ended December 31, | 2019 | 2018 | 2017 | | :----------------------- | :---- | :---- | :---- | | Operating revenues | $2,190.7| $1,925.9| $1,812.5| | Gross margin | $274.0| $225.5| $221.9| | Operating income | $180.0| $141.4| $143.2| | Net income | $120.4| $92.6 | $123.4| | Aggregates sales (000's tons)| 32,314| 29,795| 28,213| | Asphalt sales (000's tons)| 6,707 | 6,838 | 6,237 | | Ready-mixed concrete sales (000's cubic yards)| 4,123 | 3,518 | 3,548 | - Earnings increased by $27.8 million (30%) in 2019, driven by higher revenues from contracting services and material sales due to strong economic environments and increased gains on asset sales[286] - Earnings decreased by $30.8 million (25%) in 2018, primarily due to a significant increase in income taxes from the absence of a 2017 tax benefit related to TCJA, despite higher asphalt product and aggregate volumes[290][293] - The segment's backlog at December 31, 2019, was $693 million, comparable to $706 million in 2018, with a significant amount expected to be completed in the next 12 months[297] - The Company acquired Viesko Redi-Mix, Inc. and Roadrunner Ready Mix, Inc. in 2019, and Oldcastle Infrastructure Spokane in Q1 2020, supporting its market expansion strategy[296][700] Construction Services - The construction services segment provides inside and outside specialty contracting, focusing on project execution, customer relationships, quality service, cost control, employee development, and growth through organic and acquisition opportunities[299][300] - The segment faces challenges from competitive pricing, project delays, variable consideration estimates, restrictive regulations, adverse weather, and labor market trends (aging workforce, availability issues)[301][302] Construction Services Segment Earnings Overview (2017-2019, in millions) | Years ended December 31, | 2019 | 2018 | 2017 | | :----------------------- | :---- | :---- | :---- | | Operating revenues | $1,849.3| $1,371.5| $1,367.6| | Gross margin | $220.1| $164.8| $156.1| | Operating income | $126.4| $86.8 | $81.3 | | Net income | $93.0 | $64.3 | $53.3 | | Backlog (millions) | $1,144| $939 | $708 | - Earnings increased by $28.7 million (45%) in 2019, primarily due to higher operating revenues from increased inside and outside specialty contracting workloads and customer demand[304][305] - Earnings increased by $11.0 million (21%) in 2018, mainly due to higher outside specialty contracting gross margins from increased equipment sales and rentals, and a lower corporate tax rate due to TCJA[307][308] - The segment's backlog increased by 22% to $1.1 billion at December 31, 2019, driven by new project opportunities in hospitality, high-tech, mission-critical, public, power, communications, and natural gas sectors[310] - The Company acquired Pride Electric, Inc. in Q3 2019 and PerLectric, Inc. in Q1 2020, supporting its acquisition growth strategy[311][700] Other Other Segment Net Loss (2017-2019, in millions) | Years ended December 31, | 2019 | 2018 | 2017 | | :----------------------- | :---- | :---- | :---- | | Operating revenues | $16.6 | $11.3 | $7.9 | | Operating loss | $(1.2)| $(0.1)| $(0.6)| | Net loss | $(2.1)| $(0.7)| $(1.5)| - The 'Other' category includes insurance activity from the Company's captive insurer, general and administrative costs, and interest expense previously allocated to discontinued operations, and costs associated with the Holding Company Reorganization in 2018[313][314] Discontinued Operations Income (Loss) from Discontinued Operations (2017-2019, in millions) | Years ended December 31, | 2019 | 2018 | 2017 | | :----------------------- | :---- | :---- | :---- | | Income from discontinued operations before intercompany eliminations, net of tax | $0.3 | $2.9 | $3.1 | | Intercompany eliminations| — | — | $(6.9)| | Income (loss) from discontinued operations, net of tax | $0.3| $2.9| $(3.8)| - Discontinued operations include the results of Dakota Prairie Refining and Fidelity, excluding certain general and administrative costs and interest expense[315] - The loss in 2017 was largely due to eliminations for income tax adjustments between continuing and discontinued operations[315] Intersegment Transactions Intersegment Transactions (2017-2019, in millions) | Years ended December 31, | 2019 | 2018 | 2017 | | :----------------------- | :---- | :---- | :---- | | Operating revenues | $77.1 | $64.3 | $58.0 | | Operation and maintenance| $21.1 | $13.7 | $9.1 | | Purchased natural gas sold | $56.0 | $50.6 | $48.9 | | Income from continuing operations* | — | — | $(6.9)| - Intersegment transactions are eliminated in the consolidated financial statements to avoid double-counting revenues and expenses between the Company's business segments[316][317] Liquidity and Capital Commitments - As of December 31, 2019, the Company had $66.5 million in cash and cash equivalents and $644.4 million in available borrowing capacity under credit facilities[318] - The Company expects to meet its obligations through internally generated funds, credit facilities, and the issuance of long-term debt and equity securities[318] Cash Flows - Cash flows from operating activities increased by $42.4 million in 2019, driven by increased earnings from construction businesses and lower inventory balances, partially offset by higher natural gas purchases and pension contributions[320] - Cash flows used in investing activities decreased by $107.0 million in 2019, primarily due to lower cash used in acquisition activity and higher proceeds from asset sales at construction businesses[323] - Cash flows provided by financing activities decreased by $156.3 million in 2019, mainly due to higher repayment of long-term debt, partially offset by proceeds from common stock issuance ($106.8 million)[325] Defined Benefit Pension Plans - As of December 31, 2019, the pension plans' accumulated benefit obligations exceeded assets by approximately $55.9 million[327] Pretax Pension Expense (2017-2019) | Year | Pretax Pension Expense (millions) | | :--- | :-------------------------------- | | 2019 | $2.5 | | 2018 | $0.843 | | 2017 | $1.7 | - Projected pension expense for 2020 is approximately $300,000[327] Capital Expenditures Capital Expenditures from Continuing Operations (Actual 2017-2019, Estimated 2020-2022, in millions) | Segment | 2017 Actual | 2018 Actual | 2019 Actual | 2020 Estimated | 2021 Estimated | 2022 Estimated | | :------------------------------- | :---------- | :---------- | :---------- | :------------- | :------------- | :------------- | | Electric | $109 | $186 | $99 | $111 | $128 | $139 | | Natural gas distribution | $147 | $206 | $207 | $221 | $191 | $180 | | Pipeline and midstream | $31 | $70 | $71 | $85 | $304 | $53 | | Construction materials and contracting | $44 | $280 | $190 | $167 | $154 | $157 | | Construction services | $19 | $25 | $61 | $61 | $20 | $20 | | Other | $2 | $2 | $8 | $5 | $3 | $3 | | Total capital expenditures | $352 | $769 | $636 | $650 | $800 | $552 | - 2019 capital expenditures included two business combinations in construction materials and contracting and one in construction services, funded by internal sources, long-term debt, and equity securities[330] - Estimated capital expenditures for 2020-2022 include the Demicks Lake Expansion, North Bakken Expansion, and Heskett Unit 4 projects[330] Capital Resources - The Company's subsidiaries must comply with restrictive and financial covenants in their debt instruments to borrow, which they were in compliance with at December 31, 2019[332] Outstanding Revolving Credit Facilities (December 31, 2019, in millions) | Company | Facility Limit | Amount Outstanding | Letters of Credit | | :--------------------------- | :------------- | :----------------- | :---------------- | | Montana-Dakota Utilities Co. | $175.0 | $118.6 | — | | Cascade Natural Gas Corporation | $100.0 | $64.6 | $2.2 | | Intermountain Gas Company | $85.0 | $24.5 | $1.4 | | Centennial Energy Holdings, Inc. | $600.0 | $104.3 | — | - Total equity as a percent of total capitalization was 56% at December 31, 2019, indicating financial strength[337] - The Company has a shelf registration statement for up to $1.0 billion in common stock and debt securities, and issued 3.6 million shares of common stock for $94.0 million net proceeds in 2019 under an 'at-the-market' offering[338][339][340] - The Company is proactively replacing LIBOR with Secured Overnight Financing Rate in new/renewed debt instruments and does not anticipate a significant impact from LIBOR reform[341] Dividend Restrictions - The Company's ability to pay dividends depends on earnings and dividends from its subsidiaries, which are subject to regulatory, contractual, and legal limitations[354] - Approximately $1.4 billion of the net assets of the Company's subsidiaries were restricted from use for dividend payments at December 31, 2019, based on the most restrictive limitation (funded debt to capitalization ratio not exceeding 65%)[583] Off Balance Sheet Arrangements - As of December 31, 2019, the Company had no material off-balance sheet arrangements as defined by SEC rules[355] Contractual Obligations and Commercial Commitments Contractual Obligations and Commercial Commitments (December 31, 2019, in millions) | Obligation Type | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | | :------------------------ | :--------------- | :-------- | :-------- | :---------------- | :-------- | | Long-term debt maturities*| $16.6 | $149.5 | $451.3 | $1,632.8 | $2,250.2 | | Estimated interest payments**| $0.8 | $6.6 | $13.9 | $74.4 | $95.7 | | Operating leases | $35.2 | $41.8 | $17.6 | $47.9 | $142.5 | | Purchase commitments | $405.5 | $434.5 | $210.5 | $678.4 | $1,728.9 | | Total | $458.1 | $632.4| $693.3| $2,433.5 | $4,217.3| - The Company had total asset retirement obligations of $417.6 million at December 31, 2019, with $4.3 million as the current portion, but the timing of payments cannot be precisely determined[358][99] - The Company has no minimum funding requirements for its defined benefit pension plans for 2020 due to a $20.0 million contribution in 2019[360] New Accounting Standards - Information regarding new accounting standards is incorporated by reference from Note 1 of the financial statements[362] Critical Accounting Policies Involving Significant Estimates - The preparation of financial statements requires management to make significant estimates and assumptions, which can affect reported amounts of assets, liabilities, revenues, and expenses[363][364] - Key areas involving significant estimates include impairment testing of long-lived assets and goodwill, fair values in business combinations, aggregate reserves, property depreciable lives, tax provisions, revenue recognition on construction contracts, and actuarially determined benefit costs[364] - Goodwill impairment testing is performed annually in the fourth quarter, or more frequently if impairment indicators exist, by comparing the fair value of each reporting unit to its carrying value[367][368] - Fair value determination for reporting units involves significant judgment and estimates, using a weighted combination of income (discounted cash flow) and market approaches[369][370] - Business combinations are accounted for by recording acquired assets and assumed liabilities at fair value, with the excess purchase price recorded as goodwill, requiring significant judgment in fair value estimation[374][375] - Revenue recognition for construction contracts uses the cost-to-cost measure of progress, which relies heavily on dependable estimates of total costs to complete projects, contract revenues, and contract costs[378][380] Non-GAAP Financial Measures - The Company uses 'adjusted gross margin' as a non-GAAP financial measure for its electric and natural gas distribution segments to evaluate operating performance[392][393] - Adjusted gross margin is calculated by adding back operation and maintenance expense, depreciation, depletion and amortization expense, and certain taxes (other than income) to operating income[393] Electric Segment Operating Income to Adjusted Gross Margin Reconciliation (2017-2019, in millions) | Years ended December 31, | 2019 | 2018 | 2017 | | :----------------------- | :---- | :---- | :---- | | Operating income | $64.0 | $65.2 | $79.9 | | Total adjustments | $200.5| $188.5| $183.4| | Adjusted gross margin| $264.5| $253.7| $263.3| Natural Gas Distribution Segment Operating Income to Adjusted Gross Margin Reconciliation (2017-2019, in millions) | Years ended December 31, | 2019 | 2018 | 2017 | | :----------------------- | :---- | :---- | :---- | | Operating income | $69.2 | $72.3 | $84.3 | | Total adjustments | $288.1| $267.6| $254.2| | Adjusted gross margin| $357.3| $339.9| $338.5| Effects of Inflation - Inflation did not have a significant effect on the Company's operations in 2019, 2018, or 2017[398] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company manages interest rate risk from fixed and variable long-term debt through policies and procedures, with no outstanding interest rate hedges - The Company is exposed to interest rate risk from its fixed and variable rate long-term debt, which is used to finance capital expenditures and debt retirements[399][400] - The Company manages interest rate risk by timing long-term financing and has utilized interest rate swap agreements in the past[400] - As of December 31, 2019 and 2018, the Company had no outstanding interest rate hedges[402] Long-Term Debt by Expected Maturity and Interest Rates (December 31, 2019, in millions) | Type | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | Fair Value | | :------------ | :---- | :---- | :---- | :---- | :---- | :--------- | :-------- | :--------- | | Fixed rate | $16.6 | $1.5 | $148.0| $77.9 | $61.4 | $1,632.8 | $1,938.2 | $2,113.7 | | Avg. Int. Rate| 4.8% | 1.1% | 4.5% | 3.7% | 4.2% | 4.6% | 4.5% | | | Variable rate | — | — | — | — | $312.0| — | $312.0 | $312.0 | | Avg. Int. Rate| —% | —% | —% | —% | 2.7% | —% | 2.7% | | Item 8. Financial Statements and Supplementary Data This section presents the Company's audited consolidated financial statements, management's internal control report, and independent auditor's reports Management's Report on Internal Control Over Financial Reporting - Management is responsible for establishing and maintaining adequate internal control over financial reporting[404] - Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2019, using the COSO framework[406] - Based on the evaluation, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2019[407] Report of Independent Registered Public Accounting Firm - Deloitte & Touche LLP audited the consolidated financial statements and expressed an unqualified opinion that they present fairly, in all material respects, the financial position, results of operations, and cash flows for the periods ended December 31, 2019, 2018, and 2017[409] - The auditors also expressed an unqualified opinion on the Company's internal control over financial reporting as of December 31, 2019[410] - Critical audit matters included revenue from construction contracts due to judgments in estimating total costs and profit, and the impact of rate regulation on financial statements due to management's judgments on cost recovery and refunds[413][414][417][419] Opinion on Internal Control over Financial Reporting - Deloitte & Touche LLP audited the internal control over financial reporting and expressed an unqualified opinion that the Company maintained effective internal control over financial reporting as of December 31, 2019, based on COSO criteria[422] - Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements[426] Consolidated Statements of Income Consolidated Statements of Income (2017-2019, in thousands) | Years ended December 31, | 2019 | 2018 | 2017 | | :----------------------- | :------------ | :------------ | :------------ | | Total operating revenues | $5,336,776 | $4,531,552 | $4,443,351 | | Total operating expenses | $4,855,556 | $4,129,829 | $4,019,303 | | Operating income | $481,220 | $401,723 | $424,048 | | Income before income taxes | $398,445 | $316,871 | $350,027 | | Income taxes | $63,279 | $47,485 | $65,041 | | Income from continuing operations | $335,166 | $269,386 | $284,986 | | Income (loss) from discontinued operations, net of tax | $287 | $2,932 | $(3,783) | | Net income | $335,453 | $272,318 | $281,203 | | Earnings on common stock | $335,453 | $272,318 | $280,432 | | Earnings per common share - diluted | $1.69 | $1.39 | $1.43 | Consolidated Statements of Comprehensive Income Consolidated Statements of Comprehensive Income (2017-2019, in thousands) | Years ended December 31, | 2019 | 2018 | 2017 | | :----------------------- | :------------ | :------------ | :------------ | | Net income | $335,453 | $272,318 | $281,203 | | Other comprehensive income (loss) | $(3,760) | $6,951 | $(1,601) | | Comprehensive income attributable to common stockholders | $331,693| $279,269| $279,602| Consolidated Balance Sheets Consolidated Balance Sheets (December 31, 2018 & 2019, in thousands) | December 31, | 2019 | 2018 | | :----------------------- | :------------ | :------------ | | Assets: | | | | Total current assets | $1,297,701 | $1,184,132 | | Net property, plant and equipment | $4,917,142 | $4,578,677 | | Total deferred charges and other assets | $1,319,560 | $1,086,681 | | Total assets | $7,683,059| $6,988,110| | Liabilities and Stockholders' Equity: | | | | Total current liabilities| $866,427 | $986,050 | | Long-term debt | $2,226,567 | $1,856,841 | | Total deferred credits and other liabilities | $1,742,819 | $1,578,444 | | Total stockholders' equity | $2,847,246 | $2,566,775 | | Total liabilities and stockholders' equity | $7,683,059| $6,988,110| Consolidated Statements of Equity Consolidated Statements of Equity (2017-2019, in thousands) | Metric | December 31, 2017 | December 31, 2018 | December 31, 2019 | | :----------------------- | :---------------- | :---------------- | :---------------- | | Total Equity | $2,429,043 | $2,566,775 | $2,847,246 | | Net income | $281,203 | $272,318 | $335,453 | | Other comprehensive income (loss) | $(1,601) | $6,951 | $(3,760) | | Dividends declared on common stock | $(151,966) | $(156,453) | $(162,408) | | Issuance of common stock | — | $18,176 | $106,848 | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (2017-2019, in thousands) | Years ended December 31, | 2019 | 2018 | 2017 | | :----------------------- | :------------ | :------------ | :------------ | | Net cash provided by operating activities | $542,280 | $499,881 | $448,011 | | Net cash used in investing activities | $(603,861) | $(710,907) | $(214,168) | | Net cash provided by (used in) financing activities | $74,092 | $230,376 | $(245,350) | | Increase (decrease) in cash and cash equivalents | $12,511 | $19,349 | $(11,508) | | Cash and cash equivalents - end of year | $66,459 | $53,948 | $34,599 | Notes to Consolidated Financial Statements Note 1 - Summary of Significant Accounting Policies - The consolidated financial statements include electric, natural gas distribution, pipeline and midstream, construction materials and contracting, construction services, and other businesses, with intercompany balances and transactions eliminated[438] - Regulated businesses follow FERC's Uniform System of Accounts and regulatory accounting provisions, deferring certain income and expense items as regulatory assets or liabilities[439][440] - The Holding Company Reorganization was completed on January 2, 2019, making Montana-Dakota a subsidiary[441] - The Company adopted ASU 2016-02 (Leases) effective January 1, 2019, recognizing operating lease liabilities and right-of-use assets on the balance sheet, with an initial impact of approximately $112 million[443][489] - Discontinued operations (Dakota Prairie Refining and Fidelity) are classified as held for sale, with results shown in income (loss) from discontinued operations[444] Accounts Receivable Retainage (December 31, 2018 & 2019, in thousands) | Retainage Type | 2019 | 2018 | | :--------------- | :------ | :------ | | Short-term | $75,590 | $56,228 | | Long-term | $14,228 | $4,152 | | Total | $89,818| $60,380| Inventories (December 31, 2018 & 2019, in thousands) | Inventory Type | 2019 | 2018 | | :----------------------- | :------ | :------ | | Aggregates held for resale | $147,723| $139,681| | Asphalt oil | $41,912 | $54,741 | | Materials and supplies | $22,512 | $23,611 | | Merchandise for resale | $22,232 | $22,552 | | Natural gas in storage (current) | $22,058 | $22,117 | | Other | $21,970 | $24,607 | | Total | $278,407| $287,309| Allowance for Funds Used During Construction (AFUDC) (2017-2019, in thousands) | AFUDC Type | 2019 | 2018 | 2017 | | :--------- | :---- | :---- | :---- | | Borrowed | $2,807| $2,290| $966 | | Equity | $698 | $1,897| $909 | - The Company adopted ASU 2017-04 (Simplifying the Test for Goodwill Impairment) in Q4 2019, eliminating Step 2 of the impairment test, with no material impact[490] - The Company adopted ASU 2018-15 (Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract) effective January 1, 2019, with no material impact[491] - The Company adopted ASU 2016-13 (Measurement of Credit Losses on Financial Instruments) on January 1, 2020, with no material impact[492][493] Note 2 - Revenue from Contracts with Customers - Revenue is recognized when control over a product or service is transferred to a customer, measured by the consideration expected in the contract, excluding sales incentives and third-party taxes[502] Disaggregated Revenue by Customer/Service and Segment (2019, in thousands) | Revenue Type | Electric | Natural gas distribution | Pipeline and midstream | Construction materials and contracting | Construction services | Other | Total | | :----------------------- | :------- | :----------------------- | :--------------------- | :------------------------------------- | :-------------------- | :---- | :-------- | | Residential utility sales| $125,369 | $483,452 | — | — | — | — | $608,821 | | Commercial utility sales | $141,596 | $296,835 | — | — | — | — | $438,431 | | Industrial utility sales | $37,765 | $26,895 | — | — | — | — | $64,660 | | Natural gas transportation | — | $45,449 | $101,665 | — | — | — | $147,114 | | Contracting services | — | — | — | $1,088,633 | — | — | $1,088,633| | Construction materials | — | — | — | $1,627,833 | — | — | $1,627,833| | Inside specialty contracting | — | — | — | — | $1,266,196 | — | $1,266,196| | Outside specialty contracting | — | — | — | — | $531,882 | — | $531,882 | | Total external operating revenues | $351,725| $865,222| $84,192| $2,189,651| $1,845,896| $90| $5,336,776| - The Company recognized $89.0 million in revenue in 2019 from amounts previously included in contract liabilities at December 31, 2018[509] - At December 31, 2019, the Company's remaining performance obligations (backlog) were $2.0 billion, with $1.5 billion expected to be recognized within the next 12 months[512] Note 3 - Business Combinations - Acquisitions are accounted for using the acquisition method, recording acquired assets and assumed liabilities at fair value, with the excess purchase price as goodwill[514][515] - In 2019, the Company acquired Roadrunner Ready Mix, Inc. (Idaho) and Viesko Redi-Mix, Inc. (Oregon) in the construction materials and contracting segment, and Pride Electric, Inc. (Washington) in the construction services segment[517] - Gross aggregate consideration for 2019 acquisitions was $56.8 million, including $1.2 million of assumed debt, with $23.1 million allocated to goodwill[518] - In 2018, the Company acquired Sweetman Construction Company, Molalla Redi-Mix and Rock Products, Inc., Tri-City Paving, Inc., and Teevin & Fischer Quarry, LLC[517] - Gross aggregate consideration for 2018 acquisitions was $168.1 million in cash and 721,610 common shares (fair value $18.2 million)[519] Note 4 - Discontinued Operations - Discontinued operations include Dakota Prairie Refining (sold in 2016) and Fidelity's oil and natural gas assets (substantially sold in 2015-2018), classified as held for sale[521][523] Assets and Liabilities Held for Sale (December 31, 2018 & 2019, in thousands) | December 31, | 2019 | 2018 | | :----------------------- | :------------ | :------------ | | Total assets held for sale | $1,851 | $2,517 | | Total liabilities held for sale | $3,511 | $4,001 | Income (Loss) from Discontinued Operations (2017-2019, in thousands) | Years ended December 31, | 2019 | 2018 | 2017 | | :----------------------- | :---- | :---- | :---- | | Operating revenues | $103 | $(459)| $465 | | Operating income (loss) | $(187)| $(1,380)| $5,072| | Income (loss) from discontinued operations | $287 | $2,932| $(3,783)| Note 5 - Leases - The Company accounts for all leases under ASC 842, recognizing operating lease liabilities and corresponding right-of-use assets on the balance sheet[525][527] - Leases with an original term of 12 months or less are expensed on a straight-line basis and not recognized on the balance sheet[460] Operating Lease Costs (2019, in thousands) | Lease Cost Type | 2019 | | :----------------- | :------ | | Operating lease cost | $43,759 | | Variable lease cost| $1,555 | | Short-term lease cost| $120,030| | Total lease costs| $165,344| Operating Lease Liabilities Reconciliation (December 31, 2019, in thousands) | Year | Undiscounted Cash Flows | | :---------- | :---------------------- | | 2020 | $35,156 | | 2021 | $24,893 | | 2022 | $16,932 | | 2023 | $10,227 | | 2024 | $7,368 | | Thereafter | $47,926 | | Total | $142,502 | | Less discount | $27,096 | | *Total operating lease liabilities