MDU Resources (MDU) - 2020 Q4 - Annual Report

Part I Forward-Looking Statements This section outlines forward-looking statements in the Form 10-K, noting inherent risks and uncertainties that may cause actual results to differ, and disclaims any obligation to update them - Forward-looking statements are identified by words like 'anticipates,' 'estimates,' 'expects,' 'intends,' 'plans,' 'predicts' and similar expressions, covering future events, performance, and underlying assumptions[15] - Such statements involve risks and uncertainties, including the impact of COVID-19, which could cause actual outcomes to differ materially from those expressed[16] - The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances occurring after the statement's date[17] Business and Properties MDU Resources Group operates regulated energy delivery and construction materials/services across five segments, focusing on organic growth, acquisitions, safety, and compliance after a 2019 reorganization - The Company operates a two-platform business model: regulated energy delivery and construction materials and services, aiming to balance seasonality and industry risks[20][21] - The five reportable business segments are electric, natural gas distribution, pipeline, construction materials and contracting, and construction services[22] - As of December 31, 2020, the Company had 12,994 employees across 40 states plus Washington D.C., with 7,204 employees represented by collective-bargaining agreements[26][27] - The Company is committed to safety, health, diversity, and inclusion, implementing policies and training, and establishing a Safety Leadership Council[28][34] - Operations are subject to extensive environmental laws and regulations, including those related to air, water, solid waste, and GHG emissions, with ongoing monitoring of legislative and regulatory activity[35][36] General Business Overview The Company completed a 2019 reorganization, establishing two business platforms, employing nearly 13,000 people, and prioritizing human capital, safety, diversity, and regulatory compliance - The Company completed a Holding Company Reorganization on January 2, 2019, making Montana-Dakota a subsidiary[19] - The Company's strategy involves delivering value through regulated energy delivery and construction materials/services, pursuing organic growth, and disciplined acquisitions[20] - As of December 31, 2020, the Company had 12,994 employees, with 7,204 covered by collective-bargaining agreements[26][27] - The Company established a Safety Leadership Council and implemented COVID-19 protection procedures, including daily self-assessments and social distancing[28][30] - The Company created a Cyber Risk Oversight Committee (CyROC) to oversee cybersecurity and provides quarterly reports to the Audit Committee[38][39] Electric Segment Montana-Dakota's electric segment serves 185 communities, with 2020 retail revenues of $297.1 million, 750,318 kW capacity (30% renewable), and plans to retire coal units while building an 88-MW natural gas unit - Montana-Dakota provides electric service to 185 communities in Montana, North Dakota, South Dakota, and Wyoming[41] Electric Retail Customers and Revenues (2018-2020) | Year | Customers Served | Revenues (Thousands of Dollars) | | :--- | :--------------- | :------------------------------ | | 2020 | 143,782 | $297,089 | | 2019 | 143,346 | $312,920 | | 2018 | 143,022 | $312,097 | - Montana-Dakota's interconnected system has an aggregate nameplate rating of 750,318 kW, with 30% of electricity from owned generation in 2020 derived from renewable resources[45][48] - The Company plans to retire three aging coal-fired electric generating units (Lewis & Clark Unit 1 by March 2021, Heskett Units 1 and 2 by early 2022) and construct a new 88-MW natural gas-fired combustion turbine peaking unit at Heskett Station by 2023[53][268] Average Cost of Coal Purchased (2018-2020) | Year | Average cost of coal per MMBtu | Average cost of coal per ton | | :--- | :----------------------------- | :--------------------------- | | 2020 | $2.10 | $30.52 | | 2019 | $2.15 | $31.36 | | 2018 | $2.00 | $29.08 | Natural Gas Distribution Segment The natural gas distribution segment serves nearly one million customers across eight states, with 2020 retail revenues of $787.9 million, operating 20,600 miles of systems, and focusing on RNG access and energy efficiency - The natural gas distribution segment serves residential, commercial, and industrial customers in 340 communities across eight states through approximately 20,600 miles of distribution systems[70] Natural Gas Distribution Retail Customers and Revenues (2018-2020) | Year | Customers Served | Revenues (Thousands of Dollars) | | :--- | :--------------- | :------------------------------ | | 2020 | 997,146 | $787,858 | | 2019 | 977,468 | $799,444 | | 2018 | 957,727 | $768,818 | - Markets are highly seasonal, with sales volumes dependent on weather, though mitigated by weather normalization mechanisms in certain jurisdictions[73] - Intermountain received approval in 2020 to facilitate access for Renewable Natural Gas (RNG) producers to its distribution system and to implement a commercial energy efficiency program[81][82] - The segment is investigating and remediating contamination at historic manufactured gas plant sites, with costs potentially recoverable through natural gas rates[86] Pipeline Segment The pipeline segment operates 3,700 miles of natural gas transmission and storage (350 Bcf capacity), divested gathering assets in 2020, and focuses on system expansion and energy services - WBI Energy Transmission operates approximately 3,700 miles of natural gas transmission and storage lines in Minnesota, Montana, North Dakota, South Dakota, and Wyoming[88] - The segment's underground natural gas storage facilities have a certificated storage capacity of approximately 350 Bcf, including 193 Bcf of working gas capacity[92] - In 2020, the Company divested its regulated and non-regulated natural gas gathering assets, exiting the natural gas gathering business[89][294] - WBI Energy Transmission transports substantially all of Montana-Dakota's natural gas, representing 23% of its subscribed firm transportation contract demand in 2020[95] Construction Materials and Contracting Segment Knife River operates construction materials and contracting across 12 states, managing 1.1 billion tons of aggregate reserves, made two acquisitions in 2020, and faces competitive, cyclical market conditions - Knife River operates construction materials and contracting businesses in 12 states, producing and selling construction aggregates, asphalt mix, and ready-mixed concrete[100] - In 2020, Knife River acquired Oldcastle Infrastructure Spokane (prestressed-concrete) and McMurry Ready-Mix Co. (aggregates and concrete supplier)[101] - The segment's aggregate reserves are estimated at 1.1 billion tons as of December 31, 2020, with approximately 1.0 billion tons permitted[109][113] Aggregate Reserves and Sales (2018-2020) | Year | Aggregate Reserves (Thousands of Tons) | Sales (Thousands of Tons) | | :--- | :------------------------------------- | :------------------------ | | 2020 | 1,104,887 | 30,949 | | 2019 | 1,054,186 | 32,314 | | 2018 | 1,014,431 | 29,795 | - Knife River - Northwest was named a PRP by the EPA in connection with the Portland, Oregon, Harbor Superfund Site cleanup, but believes it is not probable to incur material remediation costs[125][673] Construction Services Segment MDU Construction Services provides specialty contracting across 44 states and D.C., acquired PerLectric in 2020, and operates in a highly competitive, bid-dependent market for utility and subcontract work - MDU Construction Services offers inside and outside specialty contracting services in 44 states plus Washington D.C.[127] - Inside services include electrical, communication, fire suppression, and mechanical piping; outside services include electrical distribution/transmission, substations, lighting, traffic signalization, and gas pipelines[127] - In 2020, MDU Construction Services acquired PerLectric, Inc., an electrical construction company in Fairfax, Virginia[128] - The segment operates in a highly competitive business environment, with competition based primarily on price and reputation for quality, safety, and reliability[131] Risk Factors This section details significant economic, operational, environmental, and regulatory risks, including government regulations, economic volatility, catastrophic events, COVID-19 impacts, and aging infrastructure - The Company's regulated energy delivery businesses are subject to comprehensive federal, state, and local regulations, which can impact rates, cost recovery, and financing[137] - Economic volatility, including public/private spending levels and customer payment abilities, can negatively affect demand for products and services, especially in construction and utility sectors[140][141] - Operations face risks from catastrophic events (e.g., explosions, natural disasters, pandemics) and disruptions to electric/natural gas grids, potentially leading to financial losses not fully covered by insurance[142][143] - The COVID-19 pandemic poses risks to business operations, revenues, liquidity, and cash flows due to potential employee illness, project suspensions, and reduced demand, though impacts have not been material to date[150][151][153][154] - Aging infrastructure in utility and pipeline operations increases maintenance costs, outage risks, and potential regulatory scrutiny, which may not be fully recoverable in rates[162][163] - Climate change and GHG emission reduction initiatives could adversely impact operations, increase costs, affect capital access, and lead to litigation or regulatory liabilities[168][177][179][180] - The Company relies on cash from subsidiaries to pay dividends, which can be restricted by regulatory, contractual, and legal limitations[189] - Information technology disruptions or cyber-attacks could adversely impact operations, reputation, and financial results, leading to increased compliance costs and potential penalties[195][197][198] Unresolved Staff Comments The Company has no unresolved comments with the SEC - The Company has no unresolved comments with the SEC[201] Legal Proceedings This section refers to Item 8 - Note 21 for detailed legal proceedings, especially environmental ones, with a $1.0 million disclosure threshold for monetary sanctions - The Company discloses information about proceedings under environmental provisions if monetary sanctions are expected to exceed $1.0 million[202] - Detailed information on legal proceedings is incorporated by reference from Item 8 - Note 21[203] Mine Safety Disclosures This section refers to Exhibit 95 for mine safety violations and regulatory matters as required by the Dodd-Frank Act and Regulation S-K - Information on mine safety violations and regulatory matters is provided in Exhibit 95 to this Form 10-K, as required by the Dodd-Frank Act[204] Part II Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company's common stock (NYSE: MDU) had 10,400 stockholders as of December 31, 2020, paid uninterrupted dividends for 83 years, and purchased 45,273 shares in Q4 2020 - The Company's common stock is listed on the New York Stock Exchange under the symbol 'MDU'[206] - As of December 31, 2020, there were approximately 10,400 stockholders of record[206] - The Company has paid uninterrupted dividends for 83 consecutive years, with an increase in payout for the last 30 consecutive years[207] Issuer Purchases of Equity Securities (Q4 2020) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :----------------------------- | :----------------------------- | :--------------------------- | | November 1 through November 30, 2020 | 45,273 | $25.40 | | Total | 45,273 | | Selected Financial Data This section provides a five-year summary of key financial and operating data, including revenues, income, EPS, and balance sheet metrics, highlighting performance across diverse business segments Selected Operating Revenues by Segment (2018-2020, in thousands) | Segment | 2020 (Thousands of Dollars) | 2019 (Thousands of Dollars) | 2018 (Thousands of Dollars) | | :----------------------------- | :------------ | :------------ | :------------ | | Electric | $332,029 | $351,725 | $335,123 | | Natural gas distribution | $848,185 | $865,222 | $823,247 | | Pipeline | $143,877 | $140,444 | $128,923 | | Construction materials and contracting | $2,178,002 | $2,190,717 | $1,925,854 | | Construction services | $2,095,723 | $1,849,266 | $1,371,453 | | Total Operating Revenues | $5,532,750 | $5,336,776 | $4,531,552 | Selected Operating Income by Segment (2018-2020, in thousands) | Segment | 2020 (Thousands of Dollars) | 2019 (Thousands of Dollars) | 2018 (Thousands of Dollars) | | :----------------------------- | :------------ | :------------ | :------------ | | Electric | $63,434 | $64,039 | $65,148 | | Natural gas distribution | $73,082 | $69,188 | $72,336 | | Pipeline | $49,436 | $42,796 | $36,128 | | Construction materials and contracting | $214,498 | $179,955 | $141,426 | | Construction services | $147,644 | $126,426 | $86,764 | | Total Operating Income | $544,925 | $481,220 | $401,723 | Earnings Per Common Share (Diluted, 2018-2020) | Metric | 2020 | 2019 | 2018 | | :------------------------------------- | :--- | :--- | :--- | | Earnings per common share before discontinued operations - diluted | $1.95 | $1.69 | $1.38 | | Discontinued operations attributable to the Company, net of tax | — | — | $0.01 | | Total Earnings per common share - diluted | $1.95 | $1.69 | $1.39 | Key Financial and Capitalization Ratios (2019-2020) | Metric | 2020 (Thousands of Dollars) | 2019 (Thousands of Dollars) | | :------------------------------------- | :------------ | :------------ | | Total assets | $8,053,372 | $7,683,059 | | Total long-term debt | $2,213,130 | $2,243,107 | | Capitalization ratios: Total equity | 58 % | 56 % | | Capitalization ratios: Total debt | 42 % | 44 % | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) The MD&A reviews financial performance, COVID-19 impact, consolidated earnings, and segment data, covering liquidity, capital, accounting standards, critical estimates, and non-GAAP measures - The Company's two-platform business model (regulated energy delivery and construction materials and services) helps balance seasonality and risks[215] - The COVID-19 pandemic has caused some inefficiency impacts but no material adverse impacts on results of operations for the year ended December 31, 2020[216][219] - The Company deferred approximately $56.7 million in payroll taxes in 2020 under the CARES Act, with 50% due by end of 2021 and the remainder by end of 2022[217] - Consolidated earnings increased by $54.7 million (16%) in 2020 compared to 2019, driven by increased earnings across all businesses[222][223] Consolidated Earnings Overview Consolidated net income increased by $54.7 million (16%) to $390.2 million in 2020, driven by higher margins in construction, increased pipeline revenues, and rate recovery in regulated segments Consolidated Net Income by Segment (2018-2020, in millions) | Segment | 2020 (Millions of Dollars) | 2019 (Millions of Dollars) | 2018 (Millions of Dollars) | | :----------------------------- | :---- | :---- | :---- | | Electric | $55.6 | $54.8 | $47.0 | | Natural gas distribution | $44.0 | $39.5 | $37.7 | | Pipeline | $37.0 | $29.6 | $28.5 | | Construction materials and contracting | $147.3 | $120.4 | $92.6 | | Construction services | $109.7 | $93.0 | $64.3 | | Other | $(3.1) | $(2.1) | $(0.7) | | Income from continuing operations | $390.5 | $335.2 | $269.4 | | Net income | $390.2 | $335.5 | $272.3 | - Consolidated earnings increased by $54.7 million (16%) in 2020 compared to 2019, driven by increased earnings across all businesses[222][223] - Key drivers for 2020 growth included favorable weather and higher materials margins in construction materials, increased workloads in construction services, and higher transportation/storage revenues in pipeline[223] - In 2019, consolidated earnings increased by $63.2 million (23%) compared to 2018, primarily due to higher gross margins in construction services and materials, and approved rate relief in the electric business[224][225] Business Segment Financial and Operating Data This section details financial and operational data for each of the five business segments, covering revenues, margins, expenses, net income, and key statistics, along with strategies, challenges, and outlooks Electric and Natural Gas Distribution Electric and Natural Gas Distribution segments aim for top utility performance, facing regulatory, supply chain, and environmental challenges, with Electric net income up $0.8 million and Natural Gas Distribution up $4.5 million in 2020 - Segments aim to be top-performing utilities, focusing on organic growth, cost management, and strategic acquisitions, while providing safe, reliable, and competitively priced energy[229] - Both segments are subject to extensive regulation, impacting allowed rates of return, cost recovery, and environmental compliance[230] - Increased lead times for raw materials (steel, electrical equipment) due to pipeline safety regulations and COVID-19 impacts are a challenge[233] - Revenues are impacted by customer growth and usage, with weather normalization and decoupling mechanisms mitigating weather-related volume fluctuations in certain natural gas jurisdictions[235] Electric Segment Net Income (2018-2020, in millions) | Year | Net Income (Millions of Dollars) | | :--- | :------------------------------- | | 2020 | $55.6 | | 2019 | $54.8 | | 2018 | $47.0 | - Electric earnings increased by $0.8 million in 2020, primarily due to higher rates ($2.8 million) offsetting lower retail sales volumes (3.3%) from warmer weather and COVID-19 impacts[239] Natural Gas Distribution Segment Net Income (2018-2020, in millions) | Year | Net Income (Millions of Dollars) | | :--- | :------------------------------- | | 2020 | $44.0 | | 2019 | $39.5 | | 2018 | $37.7 | - Natural gas distribution earnings increased by $4.5 million in 2020, driven by $6.8 million in approved rate recovery, 2% customer growth, and increased property tax tracker revenue, largely offsetting a 7.4% decrease in retail sales volumes due to warmer weather and COVID-19[254] - The Company expects these segments to grow rate base by approximately 5% annually over the next five years, with customer growth averaging 1% to 2% per year[266] - Plans include retiring three coal-fired units by early 2022 and constructing an 88-MW natural gas-fired unit (Heskett Unit 4) by 2023, approved by the NDPSC[268] Pipeline The Pipeline segment focuses on natural gas transportation and storage, divested gathering assets in 2020, and saw net income increase by $7.4 million (25.0%) to $37.0 million, driven by organic growth projects - The pipeline segment focuses on increasing market share and profitability through optimizing existing operations, organic growth, and investments in energy-related assets[272] - Organic growth projects completed in 2020 and 2019 include the Line Section 22 Expansion (22.5 MMcf/day capacity increase) and Demicks Lake Expansion (175 MMcf/day capacity increase)[272] - The segment divested its regulated natural gas gathering assets in April 2020 and non-regulated natural gas gathering assets in November 2020, exiting the gathering business[293][294] Pipeline Segment Net Income (2018-2020, in millions) | Year | Net Income (Millions of Dollars) | | :--- | :------------------------------- | | 2020 | $37.0 | | 2019 | $29.6 | | 2018 | $28.5 | - Pipeline earnings increased by $7.4 million in 2020, driven by increased transportation volumes and demand revenue ($6.2 million) from organic growth projects and higher storage-related revenues ($4.6 million)[279] - The North Bakken Expansion project, with a design capacity of 250 MMcf/day, is expected to begin construction in Q2 2021 and be in-service late 2021, supported by long-term take-or-pay contracts[292] Construction Materials and Contracting Construction Materials and Contracting focuses on high-growth markets, managing 1.1 billion tons of aggregate reserves, made key acquisitions in 2020, and saw net income increase by $26.9 million (22.3%) to $147.3 million - The segment's long-term strategy is to expand market presence in higher-margin materials and strengthen aggregate reserve positions through purchases and leases[296] - In 2020, the Company acquired McMurry Ready-Mix Co. (aggregates and concrete supplier) and Oldcastle Infrastructure Spokane (prestressed-concrete business)[297][312] - Challenges include competitive markets, volatility in raw material costs (diesel fuel, liquid asphalt, cement, steel), adverse weather, and the cyclical nature of the construction industry[298] Construction Materials and Contracting Net Income (2018-2020, in millions) | Year | Net Income (Millions of Dollars) | | :--- | :------------------------------- | | 2020 | $147.3 | | 2019 | $120.4 | | 2018 | $92.6 | - Earnings increased by $26.9 million in 2020, primarily due to higher material revenues and margins, higher contracting margins, and lower fuel costs, partially offset by lower gains on asset sales[302] - Backlog remained strong at $673 million as of December 31, 2020, comparable to $693 million in 2019, with a significant portion related to street and highway construction[313] Construction Services Construction Services focuses on project execution and growth, acquired PerLectric in 2020, and saw net income increase by $16.7 million (18.0%) to $109.7 million, despite competitive markets and supply chain challenges - The segment's strategy involves safely executing projects, building customer relationships, controlling costs, and growing through organic and acquisition opportunities[314] - In 2020, the Company acquired PerLectric, Inc., an electrical construction company in Fairfax, Virginia[330] - Challenges include competitive pricing, project delays, supply chain disruptions, raw material cost increases, and labor availability issues[315][316] Construction Services Net Income (2018-2020, in millions) | Year | Net Income (Millions of Dollars) | | :--- | :------------------------------- | | 2020 | $109.7 | | 2019 | $93.0 | | 2018 | $64.3 | - Earnings increased by $16.7 million in 2020, primarily due to higher inside specialty contracting workloads (high-tech, hospitality, industrial projects) and outside workloads (utility projects, storm/wildfire restoration)[319] Construction Services Backlog (2019-2020, in millions) | Category | 2020 (Millions of Dollars) | 2019 (Millions of Dollars) | | :----------------------------- | :------ | :------ | | Inside specialty contracting | $1,059 | $908 | | Outside specialty contracting | $214 | $236 | | Total | $1,273 | $1,144 | Other The 'Other' category, including Centennial Capital's captive insurer and corporate G&A, reported a net loss of $3.1 million in 2020, primarily due to higher insurance claims - The 'Other' category includes Centennial Capital's captive insurer activities and corporate general and administrative costs not meeting discontinued operations criteria[331] Other Segment Net Loss (2018-2020, in millions) | Year | Net Loss (Millions of Dollars) | | :--- | :----------------------------- | | 2020 | $(3.1) | | 2019 | $(2.1) | | 2018 | $(0.7) | - The net loss in 2020 was negatively impacted by higher insurance claims compared to 2019[332] Intersegment Transactions This section details the elimination of intersegment transactions, which totaled $77.0 million in operating revenues for 2020, to reconcile segment data with consolidated financial statements - Intersegment transactions are eliminated to reconcile segment data with consolidated financial statements[333] Intersegment Transactions (2018-2020, in millions) | Metric | 2020 (Millions of Dollars) | 2019 (Millions of Dollars) | 2018 (Millions of Dollars) | | :----------------------------- | :---- | :---- | :---- | | Operating revenues | $77.0 | $77.1 | $64.3 | | Operation and maintenance | $19.1 | $21.1 | $13.7 | | Purchased natural gas sold | $57.9 | $56.0 | $50.6 | Liquidity and Capital Commitments The Company maintains strong liquidity with $59.6 million cash and $736.3 million borrowing capacity, with operating cash flows increasing to $768.4 million in 2020 and estimated capital expenditures of $826 million for 2021 - As of December 31, 2020, the Company had $59.6 million in cash and cash equivalents and $736.3 million in available borrowing capacity under subsidiary credit facilities[334] - Cash flows provided by operating activities increased to $768.4 million in 2020 from $542.3 million in 2019, driven by stronger accounts receivable collections, decreased natural gas purchases, and payroll tax deferrals under the CARES Act[336] Capital Expenditures (2018-2023, in millions) | Segment | 2018 (Millions of Dollars) | 2019 (Millions of Dollars) | 2020 (Millions of Dollars) | 2021 (Millions of Dollars) | 2022 (Millions of Dollars) | 2023 (Millions of Dollars) | | :----------------------------- | :------------ | :------------ | :------------ | :--------------- | :--------------- | :--------------- | | Electric | $186 | $99 | $115 | $141 | $182 | $109 | | Natural gas distribution | $206 | $207 | $193 | $215 | $225 | $188 | | Pipeline | $70 | $71 | $62 | $230 | $74 | $110 | | Construction materials and contracting | $280 | $190 | $191 | $189 | $154 | $150 | | Construction services | $25 | $61 | $84 | $46 | $34 | $35 | | Other | $2 | $8 | $3 | $5 | $4 | $3 | | Total capital expenditures | $769 | $636 | $648 | $826 | $673 | $595 | - Estimated capital expenditures for 2021-2023 include the North Bakken Expansion project and construction of Heskett Unit 4[346] - Total equity as a percent of total capitalization was 58% at December 31, 2020, up from 56% in 2019, indicating financial strength[354] - The Company has an 'at-the-market' offering program with capacity to issue up to 6.4 million additional shares of common stock[356][357] Cash flows Operating cash flows increased to $768.4 million in 2020, investing activities used $630.2 million, and financing activities shifted to a net use of $145.1 million, reflecting changes in collections, acquisitions, and debt activity Consolidated Statements of Cash Flows (2018-2020, in thousands) | Activity | 2020 (Thousands of Dollars) | 2019 (Thousands of Dollars) | 2018 (Thousands of Dollars) | | :----------------------------- | :------------ | :------------ | :------------ | | Net cash provided by operating activities | $768,374 | $542,280 | $499,881 | | Net cash used in investing activities | $(630,243) | $(603,861) | $(710,907) | | Net cash provided by (used in) financing activities | $(145,043) | $74,092 | $230,376 | | Increase (decrease) in cash and cash equivalents | $(6,912) | $12,511 | $19,349 | - Operating cash flows increased in 2020 due to stronger accounts receivable collections in construction, decreased natural gas purchases, and payroll tax deferrals (CARES Act)[336] - Investing cash flows increased in 2020 primarily due to higher acquisition activity in construction businesses and increased capital expenditures in the electric segment[338] - Financing cash flows shifted from provided to used in 2020, mainly due to decreased net long-term and short-term debt borrowings and the absence of common stock issuance under the 'at-the-market' offering[340][341] Defined benefit pension plans Pension plans had a $53.5 million deficit at year-end 2020, with pretax pension income of $684,000 in 2020, and no minimum funding contributions required for 2021 - At December 31, 2020, the pension plans' accumulated benefit obligations exceeded assets by approximately $53.5 million[343] - Pretax pension income was $684,000 in 2020, compared to expenses of $2.5 million in 2019 and $843,000 in 2018[343] - No minimum funding requirements for defined benefit pension plans in 2021 due to an additional $20.0 million contribution in 2019[343] Capital expenditures Total capital expenditures were $648 million in 2020, with estimated expenditures of $826 million for 2021, including major projects like North Bakken Expansion and Heskett Unit 4 Capital Expenditures (2018-2023, in millions) | Segment | 2018 (Millions of Dollars) | 2019 (Millions of Dollars) | 2020 (Millions of Dollars) | 2021 (Millions of Dollars) | 2022 (Millions of Dollars) | 2023 (Millions of Dollars) | | :----------------------------- | :------------ | :------------ | :------------ | :--------------- | :--------------- | :--------------- | | Electric | $186 | $99 | $115 | $141 | $182 | $109 | | Natural gas distribution | $206 | $207 | $193 | $215 | $225 | $188 | | Pipeline | $70 | $71 | $62 | $230 | $74 | $110 | | Construction materials and contracting | $280 | $190 | $191 | $189 | $154 | $150 | | Construction services | $25 | $61 | $84 | $46 | $34 | $35 | | Other | $2 | $8 | $3 | $5 | $4 | $3 | | Total capital expenditures | $769 | $636 | $648 | $826 | $673 | $595 | - 2020 capital expenditures included completed business combinations in construction materials and services[346] - Estimated capital expenditures for 2021-2023 include the North Bakken Expansion project and construction of Heskett Unit 4[346] - Funding for capital expenditures is anticipated from internal funds, credit facilities, commercial paper, and potential debt/equity issuances[348] Capital resources Subsidiaries maintain $960 million in credit facilities, with $221.5 million outstanding at year-end 2020, all debt entities have investment-grade ratings, and the Company is transitioning from LIBOR to SOFR Outstanding Revolving Credit Facilities (December 31, 2020, in millions) | Company | Facility Limit (Millions of Dollars) | Amount Outstanding (Millions of Dollars) | Letters of Credit (Millions of Dollars) | | :----------------------------- | :------------- | :----------------- | :---------------- | | Montana-Dakota Utilities Co. | $175.0 | $87.7 | $— | | Cascade Natural Gas Corporation | $100.0 | $54.0 | $2.2 | | Intermountain Gas Company | $85.0 | $41.9 | $— | | Centennial Energy Holdings, Inc. | $600.0 | $37.9 | $— | - Total equity as a percent of total capitalization was 58% at December 31, 2020, and all entities issuing debt had investment-grade credit ratings[354] - The Company has a shelf registration statement for issuing common stock and debt securities, and an 'at-the-market' offering program with capacity for 6.4 million additional shares[355][357] - The Company is transitioning from LIBOR to SOFR in new and renewed debt instruments to address reference rate reform[358] - Cascade issued $75.0 million in senior notes in 2020 with maturity dates ranging from 2050 to 2060[364] Dividend restrictions This section refers to Item 8 - Note 12 for information on the Company's dividends and associated restrictions - Information on the Company's dividends and dividend restrictions is detailed in Item 8 - Note 12[368] Off balance sheet arrangements As of December 31, 2020, the Company had no material off-balance sheet arrangements as defined by SEC rules - As of December 31, 2020, the Company had no material off-balance sheet arrangements[369] Contractual obligations and Commercial Commitments Total contractual obligations and commercial commitments were $5.34 billion at year-end 2020, excluding $446.9 million in asset retirement obligations due to uncertain timing, with no pension funding required for 2021 Contractual Obligations and Commercial Commitments (December 31, 2020, in millions) | Obligation | Less than 1 year (Millions of Dollars) | 1-3 years (Millions of Dollars) | 3-5 years (Millions of Dollars) | More than 5 years (Millions of Dollars) | Total (Millions of Dollars) | | :----------------------------- | :--------------- | :-------- | :-------- | :---------------- | :------ | | Long-term debt maturities | $1.6 | $225.9 | $460.7 | $1,530.7 | $2,218.9 | | Estimated interest payments | $90.8 | $173.5 | $156.4 | $770.3 | $1,191.0 | | Operating leases | $36.6 | $41.8 | $20.0 | $48.8 | $147.2 | | Purchase commitments | $458.4 | $409.2 | $223.6 | $691.6 | $1,782.8 | | Total | $587.4 | $850.4 | $860.7 | $3,041.4 | $5,339.9 | - Total liabilities for asset retirement obligations were $446.9 million at December 31, 2020, excluded from the table due to uncertain payment timing[373] - The Company has no minimum funding requirements for its defined benefit pension plans for 2021[374] - MEPP contributions are based on union employee payroll and may increase due to underfunded status, potentially impacting results of operations and cash flows[375] New Accounting Standards This section refers to Item 8 - Note 2 for information regarding new accounting standards, both recently adopted and issued but not yet adopted - Information regarding new accounting standards is provided in Item 8 - Note 2[376] Critical Accounting Estimates Critical accounting estimates, including goodwill, business combinations, regulatory accounting, revenue recognition, pension costs, and income taxes, require significant judgment and could materially impact financial results - Critical accounting estimates involve significant judgment and assumptions, and changes could materially impact financial position or results of operations[378] Goodwill Annual goodwill impairment testing uses income and market approaches, with no impairment losses recorded in 2018-2020, and fair value substantially exceeded carrying value at October 31, 2020 - Goodwill impairment testing is performed annually in the fourth quarter, or more frequently if impairment is indicated[379] - Fair value of reporting units is determined using a weighted combination of income (discounted cash flow) and market approaches (comparative peer multiples)[382] - No goodwill impairment losses were recorded for the years ended December 31, 2020, 2019, and 2018[381] - At October 31, 2020, the fair value substantially exceeded the carrying value at all reporting units[381] Business combinations Acquisitions are accounted for using the acquisition method, recording assets and liabilities at fair value, involving significant judgment in estimating intangible assets and property, with a one-year measurement period for adjustments - Acquisitions are accounted for using the acquisition method, recording acquired assets and liabilities at their estimated fair values[383] - Estimation of fair values requires significant judgment and assumptions, often using market and cost approaches for tangible assets and discounted cash flow models for aggregate reserves and intangibles[383][384] - A measurement period of up to one year allows for adjustments to provisional amounts recognized for business combinations[385] Regulatory accounting Regulated businesses apply regulatory accounting, deferring income/expense as regulatory assets ($447.9 million) or liabilities ($459.5 million) at year-end 2020, based on expected future rate treatment - Regulated businesses defer certain income and expense items as regulatory assets or liabilities based on expected regulatory treatment in future rates[386] - Management continually assesses the likelihood of recovery in future rates for incurred costs and refunds to customers for regulatory assets and liabilities[387] Regulatory Assets and Liabilities (2019-2020, in millions) | Metric | 2020 (Millions of Dollars) | 2019 (Millions of Dollars) | | :----------------------------- | :---- | :---- | | Total regulatory assets | $447.9 | $417.4 | | Total regulatory liabilities | $459.5 | $490.3 | Revenue recognition Revenue is recognized upon transfer of control, with construction contract revenue recognized over time using the cost-to-cost method, which requires reliable estimates and accounts for variable consideration - Revenue is recognized when a performance obligation is satisfied by transferring control over a product or service to a customer[388] - Construction contract revenue is recognized over time using an input method based on the cost-to-cost measure of progress, requiring reliable estimates of total costs and completion progress[390] - Variable consideration (e.g., liquidated damages, performance bonuses) is included in the estimated transaction price when it is probable that a significant reversal of cumulative revenue will not occur[393] - Total construction contract revenue was $3.1 billion in 2020 and $2.8 billion in 2019[390] Pension and other postretirement benefits Pension and postretirement benefit plans rely on actuarial assumptions; a 50-basis point decrease in discount rate or expected return would increase 2020 after-tax expense by approximately $2.0 million each - Plan costs are dependent on actuarial assumptions, including discount rates, expected long-term return on plan assets, rate of compensation increases, and health care cost trend rates[396] - A 50-basis point decrease in the discount rate or expected return on plan assets would each increase expense by approximately $2.0 million (after-tax) for the year ended December 31, 2020[397] - Estimates are based on historical returns, market conditions, investment mix, and expected future market trends[396] Income taxes The Company estimates tax obligations based on transaction effects, recognizing tax positions with a 'more-likely-than-not' threshold, and assesses deferred tax asset recoverability based on earnings and tax planning - Judgments are required for potential tax effects of financial transactions and operations to estimate tax obligations[399] - Tax positions are recognized if it is 'more-likely-than-not' that they will be sustained on audit[399] - Deferred tax assets are assessed for recoverability based on historical/anticipated earnings, temporary differences, and tax planning strategies, with valuation allowances adjusted as needed[401] Non-GAAP Financial Measures The Company uses 'adjusted gross margin' as a non-GAAP measure for electric and natural gas distribution segments, calculated by adding back O&M, depreciation, and certain non-income taxes to operating income, to provide clearer operational insight - Adjusted gross margin is a non-GAAP financial measure used for electric and natural gas distribution segments to understand operating performance[402] - Adjusted gross margin is calculated by adding back operation and maintenance, depreciation, depletion and amortization, and certain non-income taxes to operating income[403] - This measure is useful because regulated segments pass through commodity and revenue taxes to customers, which can distort GAAP operating income[404] Electric Segment Adjusted Gross Margin Reconciliation (2018-2020, in millions) | Metric | 2020 (Millions of Dollars) | 2019 (Millions of Dollars) | 2018 (Millions of Dollars) | | :----------------------------- | :---- | :---- | :---- | | Operating income | $63.4 | $64.0 | $65.2 | | Total adjustments | $201.1 | $200.5 | $188.5 | | Adjusted gross margin | $264.5 | $264.5 | $253.7 | Natural Gas Distribution Segment Adjusted Gross Margin Reconciliation (2018-2020, in millions) | Metric | 2020 (Millions of Dollars) | 2019 (Millions of Dollars) | 2018 (Millions of Dollars) | | :----------------------------- | :---- | :---- | :---- | | Operating income | $73.1 | $69.2 | $72.3 | | Total adjustments | $294.6 | $288.1 | $267.6 | | Adjusted gross margin | $367.7 | $357.3 | $339.9 | Effects of Inflation Inflation did not significantly affect the Company's operations in 2020, 2019, or 2018 - Inflation did not have a significant effect on the Company's operations in 2020, 2019, or 2018[408] Quantitative and Qualitative Disclosures About Market Risk The Company manages market risks from commodity prices and interest rates through policies and derivatives, minimizing natural gas price risk and timing long-term financing for interest rate exposure - The Company is exposed to market fluctuations in commodity prices and interest rates, managed through policies, procedures, and derivatives[409] - Interest rate risk on long-term debt is managed by timing long-term financing, with no outstanding interest rate hedges at December 31, 2020 and 2019[410] Long-Term Debt by Expected Maturity (December 31, 2020, in millions) | Type | 2021 (Millions of Dollars) | 2022 (Millions of Dollars) | 2023 (Millions of Dollars) | 2024 (Millions of Dollars) | 2025 (Millions of Dollars) | Thereafter (Millions of Dollars) | Total (Millions of Dollars) | Fair Value (Millions of Dollars) | | :----------------------------- | :--- | :--- | :--- | :--- | :--- | :--------- | :---- | :--------- | | Fixed rate | $1.6 | $148.0 | $77.9 | $61.4 | $177.8 | $1,530.7 | $1,997.4 | $2,321.6 | | Weighted average interest rate | 1.1% | 4.5% | 3.7% | 4.2% | 4.0% | 4.5% | 4.4% | | | Variable rate | $— | $— | $— | $221.5 | $— | $— | $221.5 | $221.5 | | Weighted average interest rate | —% | —% | —% | 1.0% | —% | —% | 1.0% | | - Commodity price risk for natural gas costs is minimized using derivative contracts, which were not material in 2020 or 2019[413] Financial Statements and Supplementary Data This section presents audited consolidated financial statements, management's report on internal control, independent auditor's reports, and detailed notes on accounting policies, segments, and financial instruments - Management concluded that the Company's internal control over financial reporting was effective as of December 31, 2020[417] - Deloitte & Touche LLP issued an unqualified opinion on the Company's consolidated financial statements and internal control over financial reporting[419][420] - Critical audit matters included revenue recognition from construction contracts and the impact of rate regulation on financial statements, both requiring significant judgment and audit effort[423][424][427][429] Management's Report on Internal Control Over Financial Reporting Management concluded that the Company's internal control over financial reporting was effective as of December 31, 2020, based on its assessment using the COSO framework - Management is responsible for establishing and maintaining adequate internal control over financial reporting[414] - Management assessed the effectiveness of internal control over financial reporting as of December 31, 2020, using the COSO framework[416] - Management concluded that the Company's internal control over financial reporting was effective as of December 31, 2020[417] Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting, highlighting critical audit matters in construction revenue and rate regulation - Deloitte & Touche LLP issued an unqualified opinion on the consolidated financial statements for the period ended December 31, 2020[419] - An unqualified opinion was also expressed on the effectiveness of the Company's internal control over financial reporting as of December 31, 2020[420] - Critical audit matters included revenue from construction contracts, due to judgments in estimating total costs and profit, and regulatory matters, due to management's judgments on cost recovery and refunds[423][424][427][429] Consolidated Statements of Income Total operating revenues were $5.53 billion in 2020, with operating income of $544.9 million and net income of $390.2 million, resulting in diluted EPS of $1.95 Consolidated Statements of Income (2018-2020, in thousands) | Metric | 2020 (Thousands of Dollars) | 2019 (Thousands of Dollars) | 2018 (Thousands of Dollars) | | :----------------------------- | :------------ | :------------ | :------------ | | Total operating revenues | $5,532,750 | $5,336,776 | $4,531,552 | | Total operating expenses | $4,987,825 | $4,855,556 | $4,129,829 | | Operating income | $544,925 | $481,220 | $401,723 | | Income from continuing operations | $390,527 | $335,166 | $269,386 | | Net income | $390,205 | $335,453 | $272,318 | | Earnings per share - diluted | $1.95 | $1.69 | $1.39 | Consolidated Statements of Comprehensive Income Net income was $390.2 million in 2020, with an other comprehensive loss of $6.0 million primarily from postretirement liability adjustments, leading to total comprehensive income of $384.2 million Consolidated Statements of Comprehensive Income (2018-2020, in thousands) | Metric | 2020 (Thousands of Dollars) | 2019 (Thousands of Dollars) | 2018 (Thousands of Dollars) | | :----------------------------- | :------------ | :------------ | :------------ | | Net income | $390,205 | $335,453 | $272,318 | | Other comprehensive income (loss) | $(5,976) | $(3,760) | $6,951 | | Comprehensive income attributable to common stockholders | $384,229 | $331,693 | $279,269 | - Other comprehensive loss in 2020 was primarily due to postretirement liability adjustments[444] Consolidated Balance Sheets Total assets were $8.05 billion at year-end 2020, with net property, plant and equipment at $5.17 billion, goodwill at $715.0 million, and total stockholders' equity at $3.08 billion Consolidated Balance Sheets (December 31, 2019-2020, in thousands) | Asset/Liability/Equity | 2020 (Thousands of Dollars) | 2019 (Thousands of Dollars) | | :----------------------------- | :------------ | :------------ | | Total current assets | $1,337,347 | $1,297,701 | | Net property, plant and equipment | $5,166,939 | $4,917,142 | | Goodwill | $714,963 | $681,358 | | Total assets | $8,053,372 | $7,683,059 | | Total current liabilities | $963,522 | $866,427 | | Total noncurrent liabilities | $4,010,745 | $3,969,386 | | Total liabilities and stockholders' equity | $8,053,372 | $7,683,059 | | Total stockholders' equity | $3,079,105 | $2,847,246 | Consolidated Statements of Equity Total stockholders' equity increased to $3.08 billion at year-end 2020, driven by $390.2 million net income, partially offset by $168.5 million in dividends and other comprehensive losses Consolidated Statements of Equity (2018-2020, in thousands) | Metric | 2020 (Thousands of Dollars) | 2019 (Thousands of Dollars) | 2018 (Thousands of Dollars) | | :----------------------------- | :------------ | :------------ | :------------ | | Total Stockholders' Equity (End of Year) | $3,079,105 | $2,847,246 | $2,566,775 | | Net income | $390,205 | $335,453 | $272,318 | | Dividends declared on common stock | $(168,489) | $(162,408) | $(156,453) | - Total stockholders' equity increased by $231.8 million in 2020, primarily due to net income and stock-based compensation, partially offset by dividends and other comprehensive loss[448] Consolidated Statements of Cash Flows Operating cash flows increased to $768.4 million in 2020, investing activities used $630.2 million, and financing activities shifted to a net use of $145.0 million Consolidated Statements of Cash Flows (2018-2020, in thousands) | Activity | 2020 (Thousands of Dollars) | 2019 (Thousands of Dollars) | 2018 (Thousands of Dollars) | | :----------------------------- | :------------ | :------------ | :------------ | | Net cash provided by operating activities | $768,374 | $542,280 | $499,881 | | Net cash used in investing activities | $(630,243) | $(603,861) | $(710,907) | | Net cash provided by (used in) financing activities | $(145,043) | $74,092 | $230,376 | | Increase (decrease) in cash and cash equivalents | $(6,912) | $12,511 | $19,349 | - The increase in operating cash flows in 2020 was largely driven by increased earnings, stronger collection of accounts receivable, and decreased natural gas purchases[336] - The increase in cash used in investing activities in 2020 was primarily due to additional cash needs for acquisition activity and increased capital expenditures in the electric business[338] - The shift to cash used in financing activities in 2020 was largely due to a decrease in net long-term and short-term debt borrowings and the absence of common stock issuance[340][341] Notes to Consolidated Financial Statements These notes provide detailed disclosures supporting consolidated financial statements, covering basis of presentation, accounting policies, revenue recognition, business segments, and financial instruments Note 1 - Basis of Presentation Consolidated financial statements, prepared under GAAP, reflect a 2019 reorganization; COVID-19 had no material impact in 2020, and out-of-period adjustments and ASU 2016-13 adoption were immaterial - The consolidated financial statements include the Company and its wholly-owned subsidiaries, prepared in accordance with GAAP[460] - The Holding Company Reorganization was completed on January 2, 2019, making Montana-Dakota a subsidiary[453] - The COVID-19 pandemic had no material adverse impacts on the Company's results of operations for the twelve months ended December 31, 2020[454] - Out-of-period adjustments were recorded in 2020 for revenue recognition ($6.7 million after-tax reduction) and benefit plan expenses ($4.4 million after-tax increase), both deemed immaterial to prior periods[455][456] - The Company adopted ASU 2016-13 (Measurement of Credit Losses on Financial Instruments) on January 1, 2020, with no material impact[457] Note 2 - Significant Accounting Policies This note details significant accounting policies, including the immaterial adoption of ASU 2016-13 and 2018-13, and discusses other standards not expected to have a material impact, covering revenue, business combinations, and regulatory accounting - Adopted ASU 2016-13 (Credit Losses) and ASU 2018-13 (Fair Value Measurement) on January 1, 2020, with no material impact on financial reporting[463][465] - Recently issued standards (ASU 2018-14, ASU 2019-12, ASU 2020-04) are not expected to have a material impact[466][467][468] - Revenue is recognized when control of a product or service is transferred to a customer, measured based on contract consideration[470] - Construction contract revenue is recognized over time using the cost-to-cost method, while material sales are recognized at a point in time upon delivery[473][474] - Receivables are recorded net of expected credit losses, determined quarterly using historical experience, current conditions, and future forecasts[478][479] - Regulated businesses apply regulatory accounting, deferring certain income/expense items as regulatory assets/liabilities based on expected regulatory treatment[491] - Goodwill is tested for impairment annually, comparing the fair value of reporting units to their carrying value; no impairment losses were recorded in 2018-2020[493][494] - The Company uses commodity price derivative contracts to minimize natural gas cost volatility, not designated as hedging instruments[496] Note 3 - Revenue from Contracts with Customers Total external operating revenues were $5.53 billion in 2020, with construction segments recognizing revenue over time using the cost-to-cost method; backlog totaled $2.1 billion at year-end 2020 - Revenue is recognized when a performance obligation is satisfied by transferring control over a product or service to a customer[510] External Operating Revenues by Segment (2018-2020, in thousands) | Segment | 2020 (Thousands of Dollars) | 2019 (Thousands of Dollars) | 2018 (Thousands of Dollars) | | :----------------------------- | :------------ | :------------ | :------------ | | Electric | $331,538 | $351,725 | $335,123 | | Natural gas distribution | $847,651 | $865,222 | $823,247 | | Pipeline | $85,346 | $84,192 | $78,018 | | Construction materials and contracting | $2,177,585 | $2,189,651 | $1,925,185 | | Construction services | $2,090,685 | $1,845,896 | $1,369,772 | | Total external operating revenues | $5,532,750 | $5,336,776 | $4,531,552 | - Construction contracts generally involve a single performance obligation, with revenue reco