Edgar Filing: MDU RESOURCES GROUP INC

Wdesk | Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to ______________

Commission file number 1-03480

MDU RESOURCES GROUP, INC.

(Exact name of registrant as specified in its charter)



Delaware		41-0423660
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1200 West Century Avenue

P.O. Box 5650

Bismarck, North Dakota 58506-5650

(Address of principal executive offices)

(Zip Code)

(701) 530-1000

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act (Check one):



Large accelerated filer ý	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o
	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý.

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of July 27, 2018: 196,018,324 shares.

Index



		Page

Definitions		3

Forward-Looking Statements		5

Introduction		5

Part I -- Financial Information

Item 1	Financial Statements
	Consolidated Statements of Income -- Three and Six Months Ended June 30, 2018 and 2017	6

	Consolidated Statements of Comprehensive Income -- Three and Six Months Ended June 30, 2018 and 2017	7

	Consolidated Balance Sheets -- June 30, 2018 and 2017, and December 31, 2017	8

	Consolidated Statements of Equity -- Six Months Ended June 30, 2018 and 2017	9

	Consolidated Statements of Cash Flows -- Six Months Ended June 30, 2018 and 2017	10

	Notes to Consolidated Financial Statements	11

Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3	Quantitative and Qualitative Disclosures About Market Risk	51

Item 4	Controls and Procedures	51

Part II -- Other Information

Item 1	Legal Proceedings	53

Item 1A	Risk Factors	53

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	53

Item 4	Mine Safety Disclosures	53

Item 5	Other Information	53

Item 6	Exhibits	54

Exhibits Index		55

Signatures		56

Definitions

The following abbreviations and acronyms used in this Form 10-Q are defined below:



Abbreviation or Acronym
2017 Annual Report	Company's Annual Report on Form 10-K for the year ended December 31, 2017
AFUDC	Allowance for funds used during construction
ASC	FASB Accounting Standards Codification
ASU	FASB Accounting Standards Update
Brazilian Transmission Lines	Company's former investment in companies owning three electric transmission lines in Brazil
Calumet	Calumet Specialty Products Partners, L.P.
Cascade	Cascade Natural Gas Corporation, an indirect wholly owned subsidiary of MDU Energy Capital
Centennial	Centennial Energy Holdings, Inc., a direct wholly owned subsidiary of the Company
Centennial Capital	Centennial Holdings Capital LLC, a direct wholly owned subsidiary of Centennial
Centennial Resources	Centennial Energy Resources LLC, a direct wholly owned subsidiary of Centennial
Company	MDU Resources Group, Inc.
Coyote Creek	Coyote Creek Mining Company, LLC, a subsidiary of The North American Coal Corporation
Coyote Station	427-MW coal-fired electric generating facility near Beulah, North Dakota (25 percent ownership)
Dakota Prairie Refinery	20,000-barrel-per-day diesel topping plant built by Dakota Prairie Refining in southwestern North Dakota
Dakota Prairie Refining	Dakota Prairie Refining, LLC, a limited liability company previously owned by WBI Energy and Calumet (previously included in the Company's refining segment)
dk	Decatherm
Dodd-Frank Act	Dodd-Frank Wall Street Reform and Consumer Protection Act
EPA	United States Environmental Protection Agency
Exchange Act	Securities Exchange Act of 1934, as amended
FASB	Financial Accounting Standards Board
FERC	Federal Energy Regulatory Commission
Fidelity	Fidelity Exploration & Production Company, a direct wholly owned subsidiary of WBI Holdings (previously referred to as the Company's exploration and production segment)
GAAP	Accounting principles generally accepted in the United States of America
GHG	Greenhouse gas
Great Plains	Great Plains Natural Gas Co., a public utility division of the Company
IBEW	International Brotherhood of Electrical Workers
ICWU	International Chemical Workers Union
Intermountain	Intermountain Gas Company, an indirect wholly owned subsidiary of MDU Energy Capital
IPUC	Idaho Public Utilities Commission
Knife River	Knife River Corporation, a direct wholly owned subsidiary of Centennial
Knife River - Northwest	Knife River Corporation - Northwest, an indirect wholly owned subsidiary of Knife River
kWh	Kilowatt-hour
LWG	Lower Willamette Group
MD&A	Management's Discussion and Analysis of Financial Condition and Results of Operations
MDU Construction Services	MDU Construction Services Group, Inc., a direct wholly owned subsidiary of Centennial
MDU Energy Capital	MDU Energy Capital, LLC, a direct wholly owned subsidiary of the Company
MISO	Midcontinent Independent System Operator, Inc.
MMcf	Million cubic feet
MMdk	Million dk
MNPUC	Minnesota Public Utilities Commission
Montana-Dakota	Montana-Dakota Utilities Co., a public utility division of the Company
MTPSC	Montana Public Service Commission
MW	Megawatt



NDPSC	North Dakota Public Service Commission
OPUC	Oregon Public Utility Commission
Oregon DEQ	Oregon State Department of Environmental Quality
Pronghorn	Natural gas processing plant located near Belfield, North Dakota (WBI Energy Midstream's 50 percent ownership interests were sold effective January 1, 2017)
PRP	Potentially Responsible Party
ROD	Record of Decision
SDPUC	South Dakota Public Utilities Commission
SEC	United States Securities and Exchange Commission
SSIP	System Safety and Integrity Program
TCJA	Tax Cuts and Jobs Act
Tesoro	Tesoro Refining & Marketing Company LLC
VIE	Variable interest entity
Washington DOE	Washington State Department of Ecology
WBI Energy	WBI Energy, Inc., a direct wholly owned subsidiary of WBI Holdings
WBI Energy Midstream	WBI Energy Midstream, LLC, an indirect wholly owned subsidiary of WBI Holdings
WBI Energy Transmission	WBI Energy Transmission, Inc., an indirect wholly owned subsidiary of WBI Holdings
WBI Holdings	WBI Holdings, Inc., a direct wholly owned subsidiary of Centennial
WUTC	Washington Utilities and Transportation Commission
WYPSC	Wyoming Public Service Commission

Forward-Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Exchange Act. Forward-looking statements are all statements other than statements of historical fact, including without limitation those statements that are identified by the words "anticipates," "estimates," "expects," "intends," "plans," "predicts" and similar expressions, and include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions (many of which are based, in turn, upon further assumptions) and other statements that are not statements of historical facts. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature, including statements contained within Part I, Item 2 - MD&A - Business Segment Financial and Operating Data.

Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties. Nonetheless, the Company's expectations, beliefs or projections may not be achieved or accomplished.

Any forward-looking statement contained in this document speaks only as of the date on which the statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances that occur after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all of the factors, nor can it assess the effect of each factor on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. All forward-looking statements, whether written or oral and whether made by or on behalf of the Company, are expressly qualified by the risk factors and cautionary statements reported in Part II, Item 1A - Risk Factors in this Form 10-Q, Part I, Item 1A - Risk Factors in the 2017 Annual Report and subsequent filings with the SEC.

Introduction

The Company is a regulated energy delivery and construction materials and services business, which was incorporated under the laws of the state of Delaware in 1924. Its principal executive offices are at 1200 West Century Avenue, P.O. Box 5650, Bismarck, North Dakota 58506-5650, telephone (701) 530-1000.

Montana-Dakota, Great Plains, Cascade and Intermountain comprise the natural gas distribution segment. Montana-Dakota also comprises the electric segment.

The Company, through its wholly owned subsidiary, Centennial, owns WBI Holdings, Knife River, MDU Construction Services, Centennial Resources and Centennial Capital. WBI Holdings is the pipeline and midstream segment, Knife River is the construction materials and contracting segment, MDU Construction Services is the construction services segment, and Centennial Resources and Centennial Capital are both reflected in the Other category.

For more information on the Company's business segments, see Note 14.

Part I -- Financial Information

Item 1. Financial Statements

MDU Resources Group, Inc.

Consolidated Statements of Income

(Unaudited)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2018			2017			2018		2017
	(In thousands, except per share amounts)
Operating revenues:
Electric, natural gas distribution and regulated pipeline and midstream	$	226,684		$	225,485		$	651,143	$	659,100
Nonregulated pipeline and midstream, construction materials and contracting, construction services and other	837,913			842,154			1,389,747		1,346,465
Total operating revenues	1,064,597			1,067,639			2,040,890		2,005,565
Operating expenses:
Operation and maintenance:
Electric, natural gas distribution and regulated pipeline and midstream	83,928			78,125			170,042		157,677
Nonregulated pipeline and midstream, construction materials and contracting, construction services and other	738,156			743,823			1,252,898		1,222,814
Total operation and maintenance	822,084			821,948			1,422,940		1,380,491
Purchased natural gas sold	56,228			57,668			238,196		250,617
Depreciation, depletion and amortization	53,553			51,658			106,282		102,983
Taxes, other than income	40,757			40,953			89,610		88,391
Electric fuel and purchased power	17,983			16,752			40,494		38,638
Total operating expenses	990,605			988,979			1,897,522		1,861,120
Operating income	73,992			78,660			143,368		144,445
Other income	1,599			1,801			2,181		4,144
Interest expense	20,800			20,766			41,246		41,068
Income before income taxes	54,791			59,695			104,303		107,521
Income taxes	10,716			15,290			18,267		27,478
Income from continuing operations	44,075			44,405			86,036		80,043
Income (loss) from discontinued operations, net of tax (Note 10)	(273		)	(3,190		)	203		(1,504		)
Net income	43,802			41,215			86,239		78,539
Loss on redemption of preferred stocks	—			600			—		600
Dividends declared on preferred stocks	—			—			—		171
Earnings on common stock	$	43,802		$	40,615		$	86,239	$	77,768
Earnings per common share - basic:
Earnings before discontinued operations	$	.22		$	.22		$	.44	$	.41
Discontinued operations, net of tax	—			(.01		)	—		(.01		)
Earnings per common share - basic	$	.22		$	.21		$	.44	$	.40
Earnings per common share - diluted:
Earnings before discontinued operations	$	.22		$	.22		$	.44	$	.40
Discontinued operations, net of tax	—			(.01		)	—		—
Earnings per common share - diluted	$	.22		$	.21		$	.44	$	.40
Dividends declared per common share	$	.1975		$	.1925		$	.3950	$	.3850
Weighted average common shares outstanding - basic	195,524			195,304			195,415		195,304
Weighted average common shares outstanding - diluted	196,169			195,973			196,077		195,993

The accompanying notes are an integral part of these consolidated financial statements.

MDU Resources Group, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2018			2017			2018			2017
	(In thousands)
Net income	$	43,802		$	41,215		$	86,239		$	78,539
Other comprehensive income (loss):
Reclassification adjustment for loss on derivative instruments included in net income, net of tax of $53 and $56 for the three months ended and $109 and $112 for the six months ended in 2018 and 2017, respectively	95			92			187			183
Postretirement liability adjustment:
Amortization of postretirement liability losses included in net periodic benefit cost (credit), net of tax of $145 and $190 for the three months ended and $300 and $406 for the six months ended in 2018 and 2017, respectively	449			312			867			669
Reclassification of postretirement liability adjustment from regulatory asset, net of tax of $0 and $0 for the three months ended and $0 and $(725) for the six months ended in 2018 and 2017, respectively	—			—			—			(917		)
Postretirement liability adjustment	449			312			867			(248		)
Foreign currency translation adjustment:
Foreign currency translation adjustment recognized during the period, net of tax of $(13) and $(9) for the three months ended and $(14) and $(3) for the six months ended in 2018 and 2017, respectively	(59		)	(15		)	(61		)	(6		)
Reclassification adjustment for foreign currency translation adjustment included in net income, net of tax of $75 and $0 for the three months ended and $75 and $0 for the six months ended in 2018 and 2017, respectively	249			—			249			—
Foreign currency translation adjustment	190			(15		)	188			(6		)
Net unrealized gain (loss) on available-for-sale investments:
Net unrealized loss on available-for-sale investments arising during the period, net of tax of $(12) and $(13) for the three months ended and $(39) and $(28) for the six months ended in 2018 and 2017, respectively	(43		)	(24		)	(148		)	(51		)
Reclassification adjustment for loss on available-for-sale investments included in net income, net of tax of $10 and $17 for the three months ended and $17 and $36 for the six months ended in 2018 and 2017, respectively	34			31			64			66
Net unrealized gain (loss) on available-for-sale investments	(9		)	7			(84		)	15
Other comprehensive income (loss)	725			396			1,158			(56		)
Comprehensive income attributable to common stockholders	$	44,527		$	41,611		$	87,397		$	78,483

The accompanying notes are an integral part of these consolidated financial statements.

MDU Resources Group, Inc.

Consolidated Balance Sheets

(Unaudited)



	June 30, 2018			June 30, 2017			December 31, 2017
(In thousands, except shares and per share amounts)
Assets
Current assets:
Cash and cash equivalents	$	41,659		$	40,048		$	34,599
Receivables, net	743,687			661,771			727,030
Inventories	278,239			249,870			226,583
Prepayments and other current assets	52,035			63,953			81,304
Current assets held for sale	572			328			479
Total current assets	1,116,192			1,015,970			1,069,995
Investments	140,053			131,726			137,613
Property, plant and equipment	6,975,919			6,591,382			6,770,829
Less accumulated depreciation, depletion and amortization	2,758,163			2,638,098			2,691,641
Net property, plant and equipment	4,217,756			3,953,284			4,079,188
Deferred charges and other assets:
Goodwill	642,374			631,791			631,791
Other intangible assets, net	4,190			4,785			3,837
Other	409,407			416,759			407,850
Noncurrent assets held for sale	3,998			76,183			4,392
Total deferred charges and other assets	1,059,969			1,129,518			1,047,870
Total assets	$	6,533,970		$	6,230,498		$	6,334,666
Liabilities and Stockholders' Equity
Current liabilities:
Long-term debt due within one year	$	109,199		$	83,499		$	148,499
Accounts payable	330,926			279,211			312,327
Taxes payable	47,803			55,037			42,537
Dividends payable	38,714			37,596			38,573
Accrued compensation	53,933			52,951			72,919
Other accrued liabilities	208,696			181,030			186,010
Current liabilities held for sale	11,713			4,481			11,993
Total current liabilities	800,984			693,805			812,858
Long-term debt	1,743,711			1,677,977			1,566,354
Deferred credits and other liabilities:
Deferred income taxes	362,896			668,239			347,271
Other	1,175,301			887,525			1,179,140
Total deferred credits and other liabilities	1,538,197			1,555,764			1,526,411
Commitments and contingencies
Stockholders' equity:
Common stock
Authorized - 500,000,000 shares, $1.00 par value Shares issued - 196,557,245 at June 30, 2018 and 195,843,297 at June 30, 2017 and December 31, 2017	196,557			195,843			195,843
Other paid-in capital	1,245,858			1,231,892			1,233,412
Retained earnings	1,056,424			914,632			1,040,748
Accumulated other comprehensive loss	(44,135		)	(35,789		)	(37,334		)
Treasury stock at cost - 538,921 shares	(3,626		)	(3,626		)	(3,626		)
Total stockholders' equity	2,451,078			2,302,952			2,429,043
Total liabilities and stockholders' equity	$	6,533,970		$	6,230,498		$	6,334,666

The accompanying notes are an integral part of these consolidated financial statements.

MDU Resources Group, Inc.

Consolidated Statements of Equity

(Unaudited)



Six Months Ended June 30, 2018
				Other Paid-in Capital			Retained Earnings			Accumu-lated Other Compre-hensive Loss
	Common Stock												Treasury Stock
	Shares	Amount											Shares		Amount			Total

Balance at December 31, 2017	195,843,297	$	195,843	$	1,233,412		$	1,040,748		$	(37,334	)	(538,921	)	$	(3,626	)	$	2,429,043
Cumulative effect of adoption of ASU 2014-09	—	—		—			(970		)	—			—		—			(970		)
Adjusted balance at January 1, 2018	195,843,297	195,843		1,233,412			1,039,778			(37,334		)	(538,921	)	(3,626		)	2,428,073
Net income	—	—		—			86,239			—			—		—			86,239
Other comprehensive income	—	—		—			—			1,158			—		—			1,158
Reclassification of certain prior period tax effects from accumulated other comprehensive loss	—	—		—			7,959			(7,959		)	—		—			—
Dividends declared on common stock	—	—		—			(77,286		)	—			—		—			(77,286		)
Stock-based compensation	—	—		2,517			(266		)	—			—		—			2,251
Repurchase of common stock	—	—		—			—			—			(182,424	)	(5,020		)	(5,020		)
Issuance of common stock upon vesting of stock-based compensation, net of shares used for tax withholdings	—	—		(7,350		)	—			—			182,424		5,020			(2,330		)
Issuance of common stock	713,948	714		17,279			—			—			—		—			17,993
Balance at June 30, 2018	196,557,245	$	196,557	$	1,245,858		$	1,056,424		$	(44,135	)	(538,921	)	$	(3,626	)	$	2,451,078



Six Months Ended June 30, 2017
									Other Paid-in Capital			Retained Earnings			Accumu-lated Other Compre-hensive Loss
	Preferred Stock					Common Stock												Treasury Stock
	Shares		Amount			Shares	Amount											Shares		Amount			Total

Balance at December 31, 2016	150,000		$	15,000		195,843,297	$	195,843	$	1,232,478		$	912,282		$	(35,733	)	(538,921	)	$	(3,626	)	$	2,316,244
Net income	—		—			—	—		—			78,539			—			—		—			78,539
Other comprehensive loss	—		—			—	—		—			—			(56		)	—		—			(56		)
Dividends declared on preferred stocks	—		—			—	—		—			(171		)	—			—		—			(171		)
Dividends declared on common stock	—		—			—	—		—			(75,192		)	—			—		—			(75,192		)
Stock-based compensation	—		—			—	—		1,855			(226		)	—			—		—			1,629
Repurchase of common stock	—		—			—	—		—			—			—			(64,384	)	(1,684		)	(1,684		)
Issuance of common stock upon vesting of stock-based compensation, net of shares used for tax withholdings	—		—			—	—		(2,441		)	—			—			64,384		1,684			(757		)
Redemption of preferred stock	(150,000	)	(15,000		)	—	—		—			(600		)	—			—		—			(15,600		)
Balance at June 30, 2017	—		$	—		195,843,297	$	195,843	$	1,231,892		$	914,632		$	(35,789	)	(538,921	)	$	(3,626	)	$	2,302,952

MDU Resources Group, Inc.

Consolidated Statements of Cash Flows

(Unaudited)



	Six Months Ended
	June 30,
	2018			2017
	(In thousands)
Operating activities:
Net income	$	86,239		$	78,539
Income (loss) from discontinued operations, net of tax	203			(1,504		)
Income from continuing operations	86,036			80,043
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization	106,282			102,983
Deferred income taxes	4,186			(5,293		)
Changes in current assets and liabilities, net of acquisitions:
Receivables	(13,853		)	(43,478		)
Inventories	(47,396		)	(13,573		)
Other current assets	29,072			(15,799		)
Accounts payable	15,748			11,611
Other current liabilities	7,849			(6,387		)
Other noncurrent changes	(11,566		)	(4,460		)
Net cash provided by continuing operations	176,358			105,647
Net cash provided by discontinued operations	224			33,846
Net cash provided by operating activities	176,582			139,493
Investing activities:
Capital expenditures	(210,612		)	(143,764		)
Acquisitions, net of cash acquired	(20,009		)	—
Net proceeds from sale or disposition of property and other	9,286			119,361
Investments	(916		)	(358		)
Net cash used in continuing operations	(222,251		)	(24,761		)
Net cash provided by discontinued operations	—			2,234
Net cash used in investing activities	(222,251		)	(22,527		)
Financing activities:
Issuance of long-term debt	240,746			63,827
Repayment of long-term debt	(103,521		)	(93,275		)
Dividends paid	(77,145		)	(75,535		)
Redemption of preferred stock	—			(15,600		)
Repurchase of common stock	(5,020		)	(1,684		)
Tax withholding on stock-based compensation	(2,330		)	(757		)
Net cash provided by (used in) continuing operations	52,730			(123,024		)
Net cash provided by discontinued operations	—			—
Net cash provided by (used in) financing activities	52,730			(123,024		)
Effect of exchange rate changes on cash and cash equivalents	(1		)	(1		)
Increase (decrease) in cash and cash equivalents	7,060			(6,059		)
Cash and cash equivalents -- beginning of year