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EX-31.B - MDU CERTIFICATION OF CHIEF FINANCIAL OFFICER - MDU RESOURCES GROUP INCmdu-9302014q3ex31b.htm
EX-95 - MDU MINE SAFETY DISCLOSURE - MDU RESOURCES GROUP INCmdu-9302014q3ex95.htm
EX-10.B - MDU 20140930 EXHIBIT 10(B) - MDU RESOURCES GROUP INCmdu-9302014q3ex10b.htm
EX-10.A - MDU 20140930 EXHIBIT 10(A) - MDU RESOURCES GROUP INCmdu-9302014q3ex10a.htm
EX-12 - MDU 20140930 EXHIBIT 12 - MDU RESOURCES GROUP INCmdu-9302014q3ex12.htm
EX-31.A - MDU CERTIFICATION OF CHIEF EXECUTIVE OFFICER - MDU RESOURCES GROUP INCmdu-9302014q3ex31a.htm
EX-32 - MDU CERTIFICATION OF CEO AND CFO - MDU RESOURCES GROUP INCmdu-9302014q3ex32.htm
EXCEL - IDEA: XBRL DOCUMENT - MDU RESOURCES GROUP INCFinancial_Report.xls


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 September 30, 2014

OR

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 1-3480
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, or a smaller reporting company. See the definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):
 
Large accelerated filer ý
Accelerated filer o
 
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)

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 October 31, 2014: 194,106,937 shares.





DEFINITIONS

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

Abbreviation or Acronym
 
2013 Annual Report
Company's Annual Report on Form 10-K for the year ended December 31, 2013
AFUDC
Allowance for funds used during construction
ASC
FASB Accounting Standards Codification
Bbl
Barrel
Bicent
Bicent Power LLC
Big Stone Station
475-MW coal-fired electric generating facility near Big Stone City, South Dakota (22.7 percent ownership)
BLM
Bureau of Land Management
BOE
One barrel of oil equivalent - determined using the ratio of one barrel of crude oil, condensate or natural gas liquids to six Mcf of natural gas
BOPD
Barrels of oil per day
Brazilian Transmission Lines
Company's investment in the company owning ECTE, ENTE and ERTE (ownership interests in ENTE and ERTE were sold in the fourth quarter of 2010 and portions of the ownership interest in ECTE were sold in the third quarters of 2013 and 2012 and the fourth quarters of 2011 and 2010)
Btu
British thermal unit
California Superior Court
Superior Court of the State of California, County of Los Angeles (South District - Long Beach)
Calumet
Calumet Specialty Products Partners, L.P.
Cascade
Cascade Natural Gas Corporation, an indirect wholly owned subsidiary of MDU Energy Capital
CEM
Colorado Energy Management, LLC, a former direct wholly owned subsidiary of Centennial Resources (sold in the third quarter of 2007)
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
Colorado State District Court
Colorado Thirteenth Judicial District Court, Yuma County
Company
MDU Resources Group, Inc.
Connolly-Pacific
Connolly-Pacific Co., an indirect wholly owned subsidiary of Knife River
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 being built by Dakota Prairie Refining in southwestern North Dakota
Dakota Prairie Refining
Dakota Prairie Refining, LLC, a limited liability company jointly owned by WBI Energy and Calumet
dk
Decatherm
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act
EBITDA
Earnings before interest, taxes, depreciation, depletion and amortization
ECTE
Empresa Catarinense de Transmissão de Energia S.A. (2.5 percent ownership interest at September 30, 2014, 2.5, 2.5, 2.5 and 14.99 percent ownership interests were sold in the third quarters of 2013 and 2012 and the fourth quarters of 2011 and 2010, respectively)
ENTE
Empresa Norte de Transmissão de Energia S.A. (entire 13.3 percent ownership interest sold in the fourth quarter of 2010)
EPA
U.S. Environmental Protection Agency
ERISA
Employee Retirement Income Security Act of 1974
ERTE
Empresa Regional de Transmissão de Energia S.A. (entire 13.3 percent ownership interest sold in the fourth quarter of 2010)
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
FIP
Funding improvement plan
GAAP
Accounting principles generally accepted in the United States of America

2



GHG
Greenhouse gas
Great Plains
Great Plains Natural Gas Co., a public utility division of the Company
Intermountain
Intermountain Gas Company, an indirect wholly owned subsidiary of MDU Energy Capital
JTL
JTL Group, Inc., an indirect wholly owned subsidiary of Knife River
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
MBbls
Thousands of barrels
MBOE
Thousands of BOE
Mcf
Thousand cubic feet
MDU Brasil
MDU Brasil Ltda., an indirect wholly owned subsidiary of Centennial Resources
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.
MMBO
Million barrels of oil
MMBtu
Million Btu
MMcf
Million cubic feet
MMdk
Million decatherms
Montana-Dakota
Montana-Dakota Utilities Co., a public utility division of the Company
Montana DEQ
Montana Department of Environmental Quality
Montana First Judicial District Court
Montana First Judicial District Court, Lewis and Clark County
Montana Seventeenth Judicial District Court
Montana Seventeenth Judicial District Court, Phillips County
MPPAA
Multiemployer Pension Plan Amendments Act of 1980
MTPSC
Montana Public Service Commission
MW
Megawatt
NDPSC
North Dakota Public Service Commission
NGL
Natural gas liquids
NSPS
New Source Performance Standards
Oil
Includes crude oil and condensate
Omimex
Omimex Canada, Ltd.
OPUC
Oregon Public Utility Commission
Oregon DEQ
Oregon State Department of Environmental Quality
Prairielands
Prairielands Energy Marketing, Inc., an indirect wholly owned subsidiary of WBI Holdings
PRP
Potentially Responsible Party
RCRA
Resource Conservation and Recovery Act
ROD
Record of Decision
RP
Rehabilitation plan
SEC
U.S. Securities and Exchange Commission
Securities Act
Securities Act of 1933, as amended
SourceGas
SourceGas Distribution LLC
VIE
Variable interest entity
WBI Energy
WBI Energy, Inc., an indirect 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


3



INTRODUCTION

The Company is a diversified natural resource company, 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, through the electric and natural gas distribution segments, generates, transmits and distributes electricity and distributes natural gas in Montana, North Dakota, South Dakota and Wyoming. Cascade distributes natural gas in Oregon and Washington. Intermountain distributes natural gas in Idaho. Great Plains distributes natural gas in western Minnesota and southeastern North Dakota. These operations also supply related value-added services.

The Company, through its wholly owned subsidiary, Centennial, owns WBI Holdings (comprised of the pipeline and energy services and the exploration and production segments), Knife River (construction materials and contracting segment), MDU Construction Services (construction services segment), Centennial Resources and Centennial Capital (both reflected in the Other category). For more information on the Company's business segments, see Note 19.


4



INDEX

Part I -- Financial Information
Page
 
 
Consolidated Statements of Income --
Three and Nine Months Ended September 30, 2014 and 2013
 
 
Consolidated Statements of Comprehensive Income --
Three and Nine Months Ended September 30, 2014 and 2013
 
 
Consolidated Balance Sheets --
September 30, 2014 and 2013, and December 31, 2013
 
 
Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 2014 and 2013
 
 
Notes to Consolidated Financial Statements
 
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
Quantitative and Qualitative Disclosures About Market Risk
 
 
Controls and Procedures
 
 
Part II -- Other Information
 
 
 
Legal Proceedings
 
 
Risk Factors
 
 
Mine Safety Disclosures
 
 
Exhibits
 
 
Signatures
 
 
Exhibit Index
 
 
Exhibits
 

5



PART I -- FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

MDU RESOURCES GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2014
2013
2014
2013
 
(In thousands, except per share amounts)
Operating revenues:
 
 
 
 
Electric, natural gas distribution and pipeline and energy services
$
211,536

$
192,103

$
957,769

$
843,670

Exploration and production, construction materials and contracting, construction services and other
1,158,919

1,093,679

2,549,585

2,434,310

Total operating revenues 
1,370,455

1,285,782

3,507,354

3,277,980

Operating expenses:
 

 

 

 

Fuel and purchased power
19,236

19,983

66,826

59,760

Purchased natural gas sold
47,718

35,826

377,024

305,268

Operation and maintenance:
 

 

 

 

Electric, natural gas distribution and pipeline and energy services
79,848

64,078

225,180

206,808

Exploration and production, construction materials and contracting, construction services and other
897,887

870,252

2,002,884

1,925,762

Depreciation, depletion and amortization
103,497

99,966

306,180

288,816

Taxes, other than income
45,504

45,804

150,657

145,784

Total operating expenses
1,193,690

1,135,909

3,128,751

2,932,198

Operating income
176,765

149,873

378,603

345,782

Loss from equity method investments
(97
)
(61
)
(343
)
(380
)
Other income
2,644

2,326

7,552

5,003

Interest expense
22,425

21,012

64,912

63,312

Income before income taxes
156,887

131,126

320,900

287,093

Income taxes
54,769

46,576

109,818

99,559

Income from continuing operations
102,118

84,550

211,082

187,534

Income (loss) from discontinued operations, net of tax (Note 12)
3

(118
)
506

(254
)
Net income
102,121

84,432

211,588

187,280

Net loss attributable to noncontrolling interest
(1,088
)
(24
)
(2,390
)
(204
)
Dividends declared on preferred stocks
171

171

514

514

Earnings on common stock
$
103,038

$
84,285

$
213,464

$
186,970

 
 
 
 
 
Earnings per common share - basic:
 

 

 

 

Earnings before discontinued operations
$
.53

$
.45

$
1.11

$
.99

Discontinued operations, net of tax




Earnings per common share - basic
$
.53

$
.45

$
1.11

$
.99

 
 
 
 
 
Earnings per common share - diluted:
 

 

 

 

Earnings before discontinued operations
$
.53

$
.44

$
1.11

$
.99

Discontinued operations, net of tax




Earnings per common share - diluted
$
.53

$
.44

$
1.11

$
.99

 
 
 
 
 
Dividends declared per common share
$
.1775

$
.1725

$
.5325

$
.5175

 
 
 
 
 
Weighted average common shares outstanding - basic
193,949

188,831

191,958

188,831

 
 
 
 
 
Weighted average common shares outstanding - diluted
194,300

189,638

192,307

189,634

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

6



MDU RESOURCES GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2014
2013
2014
2013
 
(In thousands)
Net income
$
102,121

$
84,432

$
211,588

$
187,280

Other comprehensive income (loss):
 
 
 
 
Net unrealized gain (loss) on derivative instruments qualifying as hedges:
 
 
 
 
Net unrealized loss on derivative instruments arising during the period, net of tax of $0 and $0 for the three months ended and $0 and $(3,116) for the nine months ended in 2014 and 2013, respectively



(5,594
)
Reclassification adjustment for (gain) loss on derivative instruments included in net income, net of tax of $50 and $(297) for the three months ended and $264 and $(2,246) for the nine months ended in 2014 and 2013, respectively
82

(510
)
439

(3,678
)
Net unrealized gain (loss) on derivative instruments qualifying as hedges
82

(510
)
439

(9,272
)
Amortization of postretirement liability losses included in net periodic benefit cost, net of tax of $159 and $166 for the three months ended and $477 and $1,027 for the nine months ended in 2014 and 2013, respectively
261

271

781

1,344

Foreign currency translation adjustment:
 
 
 
 
Foreign currency translation adjustment recognized during the period, net of tax of $(89) and $(12) for the three months ended and $(36) and $(209) for the nine months ended in 2014 and 2013, respectively
(146
)
(20
)
(58
)
(351
)
Reclassification adjustment for loss on foreign currency translation adjustment included in net income, net of tax of $0 and $70 for the three months ended and $0 and $70 for the nine months ended in 2014 and 2013, respectively

115


143

Foreign currency translation adjustment
(146
)
95

(58
)
(208
)
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 $(33)and $(5) for the three months ended and $(48) and $(106) for the nine months ended in 2014 and 2013, respectively
(62
)
(10
)
(89
)
(197
)
Reclassification adjustment for loss on available-for-sale investments included in net income, net of tax of $16 and $20 for the three months ended and $54 and $63 for the nine months ended in 2014 and 2013, respectively
31

38

100

117

Net unrealized gain (loss) on available-for-sale investments
(31
)
28

11

(80
)
Other comprehensive income (loss)
166

(116
)
1,173

(8,216
)
Comprehensive income
102,287

84,316

212,761

179,064

Comprehensive loss attributable to noncontrolling interest
(1,088
)
(24
)
(2,390
)
(204
)
Comprehensive income attributable to common stockholders
$
103,375

$
84,340

$
215,151

$
179,268

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



7



MDU RESOURCES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)

 
September 30, 2014
September 30, 2013
December 31, 2013
(In thousands, except shares and per share amounts)
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
233,676

$
66,174

$
45,225

Receivables, net
784,028

787,311

713,067

Inventories
302,705

314,571

282,391

Deferred income taxes
13,041

26,284

25,048

Commodity derivative instruments
11,322

4,373

1,447

Prepayments and other current assets
72,900

56,257

49,510

Total current assets
1,417,672

1,254,970

1,116,688

Investments
115,656

108,664

112,939

Property, plant and equipment
9,438,609

8,651,334

8,803,866

Less accumulated depreciation, depletion and amortization
4,092,017

3,796,052

3,872,487

Net property, plant and equipment
5,346,592

4,855,282

4,931,379

Deferred charges and other assets:
 

 

 

Goodwill
636,039

636,039

636,039

Other intangible assets, net
10,596

14,092

13,099

Other
247,539

298,061

251,188

Total deferred charges and other assets 
894,174

948,192

900,326

Total assets
$
7,774,094

$
7,167,108

$
7,061,332

LIABILITIES AND EQUITY
 

 

 

Current liabilities:
 

 

 

Short-term borrowings
$

$
7,000

$
11,500

Long-term debt due within one year
149,101

44,024

12,277

Accounts payable
410,382

437,740

404,961

Taxes payable
105,027

80,392

74,175

Dividends payable
34,607

32,745

33,737

Accrued compensation
66,119

62,746

69,661

Commodity derivative instruments
44

9,740

7,483

Other accrued liabilities
173,247

171,420

171,106

Total current liabilities 
938,527

845,807

784,900

Long-term debt
2,061,456

1,967,872

1,842,286

Deferred credits and other liabilities:
 

 

 

Deferred income taxes
887,807

808,011

859,306

Other liabilities
727,801

794,928

718,938

Total deferred credits and other liabilities 
1,615,608

1,602,939

1,578,244

Commitments and contingencies
 

 

 

Equity:
 

 

 

Preferred stocks
15,000

15,000

15,000

Common stockholders' equity:
 

 

 

Common stock
 

 

 

Authorized - 500,000,000 shares, $1.00 par value
 
 
 
Shares issued - 194,548,389 at September 30, 2014, 189,369,450 at September 30, 2013 and 189,868,780 at December 31, 2013
194,548

189,369

189,869

Other paid-in capital
1,200,591

1,041,787

1,056,996

Retained earnings
1,713,774

1,546,000

1,603,130

Accumulated other comprehensive loss
(37,032
)
(56,937
)
(38,205
)
Treasury stock at cost - 538,921 shares
(3,626
)
(3,626
)
(3,626
)
Total common stockholders' equity
3,068,255

2,716,593

2,808,164

Total stockholders' equity
3,083,255

2,731,593

2,823,164

Noncontrolling interest
75,248

18,897

32,738

Total equity
3,158,503

2,750,490

2,855,902

Total liabilities and equity 
$
7,774,094

$
7,167,108

$
7,061,332

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

8



MDU RESOURCES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
Nine Months Ended
 
September 30,
 
2014
2013
 
(In thousands)
Operating activities:
 
 
Net income
$
211,588

$
187,280

Income (loss) from discontinued operations, net of tax
506

(254
)
Income from continuing operations
211,082

187,534

Adjustments to reconcile net income to net cash provided by operating activities:
 

 

Depreciation, depletion and amortization
306,180

288,816

Loss, net of distributions, from equity method investments
401

1,736

Deferred income taxes
37,006

46,212

Unrealized (gain) loss on commodity derivatives
(16,847
)
5,379

Excess tax benefit on stock-based compensation
(4,729
)

Changes in current assets and liabilities, net of acquisitions:
 

 
Receivables
(73,596
)
(107,482
)
Inventories
(20,153
)
1,562

Other current assets
(20,416
)
(15,397
)
Accounts payable
(22,007
)
25,817

Other current liabilities
32,767

18,680

Other noncurrent changes
(26,915
)
(24,149
)
Net cash provided by continuing operations
402,773

428,708

Net cash provided by discontinued operations
541

254

Net cash provided by operating activities
403,314

428,962

 
 
 
Investing activities:
 

 

Capital expenditures
(638,731
)
(648,465
)
Acquisitions, net of cash acquired
(208,945
)

Net proceeds from sale or disposition of property and other
203,386

40,985

Investments
792

218

Proceeds from sale of equity method investment

1,896

Net cash used in continuing operations
(643,498
)
(605,366
)
Net cash provided by discontinued operations


Net cash used in investing activities
(643,498
)
(605,366
)
 
 
 
Financing activities:
 

 

Issuance of short-term borrowings

5,000

Repayment of short-term borrowings
(11,500
)

Issuance of long-term debt
672,351

497,318

Repayment of long-term debt
(318,991
)
(255,980
)
Proceeds from issuance of common stock
144,868


Dividends paid
(102,105
)
(65,660
)
Excess tax benefit on stock-based compensation
4,729


Tax withholding on stock-based compensation
(5,564
)

Contribution from noncontrolling interest
44,900

13,000

Net cash provided by continuing operations
428,688

193,678

Net cash provided by discontinued operations


Net cash provided by financing activities
428,688

193,678

Effect of exchange rate changes on cash and cash equivalents
(53
)
(142
)
Increase in cash and cash equivalents
188,451

17,132

Cash and cash equivalents -- beginning of year
45,225

49,042

Cash and cash equivalents -- end of period
$
233,676

$
66,174

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

9



MDU RESOURCES GROUP, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

September 30, 2014 and 2013
(Unaudited)

Note 1 - Basis of presentation
The accompanying consolidated interim financial statements were prepared in conformity with the basis of presentation reflected in the consolidated financial statements included in the Company's 2013 Annual Report, and the standards of accounting measurement set forth in the interim reporting guidance in the ASC and any amendments thereto adopted by the FASB. Interim financial statements do not include all disclosures provided in annual financial statements and, accordingly, these financial statements should be read in conjunction with those appearing in the 2013 Annual Report. The information is unaudited but includes all adjustments that are, in the opinion of management, necessary for a fair presentation of the accompanying consolidated interim financial statements and are of a normal recurring nature. Depreciation, depletion and amortization expense is reported separately on the Consolidated Statements of Income and therefore is excluded from the other line items within operating expenses. Management has also evaluated the impact of events occurring after September 30, 2014, up to the date of issuance of these consolidated interim financial statements.

Note 2 - Seasonality of operations
Some of the Company's operations are highly seasonal and revenues from, and certain expenses for, such operations may fluctuate significantly among quarterly periods. Accordingly, the interim results for particular businesses, and for the Company as a whole, may not be indicative of results for the full fiscal year.

Note 3 - Accounts receivable and allowance for doubtful accounts
Accounts receivable consist primarily of trade receivables from the sale of goods and services which are recorded at the invoiced amount net of allowance for doubtful accounts, and costs and estimated earnings in excess of billings on uncompleted contracts. The total balance of receivables past due 90 days or more was $29.8 million, $31.1 million and $36.4 million at September 30, 2014 and 2013, and December 31, 2013, respectively.

The allowance for doubtful accounts is determined through a review of past due balances and other specific account data. Account balances are written off when management determines the amounts to be uncollectible. The Company's allowance for doubtful accounts at September 30, 2014 and 2013, and December 31, 2013, was $8.9 million, $9.6 million and $10.1 million, respectively.

Note 4 - Inventories and natural gas in storage
Inventories, other than natural gas in storage for the Company's regulated operations, are stated at the lower of average cost or market value. Natural gas in storage for the Company's regulated operations is generally carried at average cost, or cost using the last-in, first-out method. The portion of the cost of natural gas in storage expected to be used within one year is included in inventories. Inventories consisted of:
 
September 30,
2014
September 30,
2013
December 31,
2013
 
(In thousands)
Aggregates held for resale
$
106,623

$
104,784

$
101,568

Asphalt oil
33,551

43,078

38,099

Materials and supplies
71,515

71,370

69,808

Merchandise for resale
24,566

23,713

21,720

Natural gas in storage (current)
29,979

37,689

16,417

Other
36,471

33,937

34,779

Total
$
302,705

$
314,571

$
282,391


The remainder of natural gas in storage, which largely represents the cost of gas required to maintain pressure levels for normal operating purposes, is included in other assets and was $47.4 million, $48.6 million and $48.3 million at September 30, 2014 and 2013, and December 31, 2013, respectively.


10



Note 5 - Oil and natural gas properties disposition
Fidelity entered into a purchase and sale agreement on July 17, 2014, to sell certain oil and natural gas properties in Mountrail County, North Dakota. Proceeds from the sale were $184.4 million, subject to final adjustments. The effective date of the disposition was May 1, 2014, with the closing date occurring on September 30, 2014.

Note 6 - Impairment of long-lived assets
During the second quarter of 2013, the Company recognized an impairment of coalbed natural gas gathering assets at the pipeline and energy services segment of $14.5 million ($9.0 million after tax), which is recorded in operation and maintenance expense on the Consolidated Statements of Income. The impairment is related to coalbed natural gas gathering assets located in Wyoming and Montana where there has been a significant decline in natural gas development and production activity largely due to low natural gas prices. The coalbed natural gas gathering assets were written down to fair value that was determined using the income approach. For more information on this nonrecurring fair value measurement, see Note 16.

Note 7 - Earnings per common share
Basic earnings per common share were computed by dividing earnings on common stock by the weighted average number of shares of common stock outstanding during the applicable period. Diluted earnings per common share were computed by dividing earnings on common stock by the total of the weighted average number of shares of common stock outstanding during the applicable period, plus the effect of outstanding performance share awards. Common stock outstanding includes issued shares less shares held in treasury. Net income was the same for both the basic and diluted earnings per share calculations. A reconciliation of the weighted average common shares outstanding used in the basic and diluted earnings per share calculations was as follows:
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2014

2013

2014

2013

 
(In thousands)
Weighted average common shares outstanding - basic
193,949

188,831

191,958

188,831

Effect of dilutive performance share awards
351

807

349

803

Weighted average common shares outstanding - diluted
194,300

189,638

192,307

189,634

Shares excluded from the calculation of diluted earnings per share





Note 8 - Cash flow information
Cash expenditures for interest and income taxes were as follows:
 
Nine Months Ended
 
September 30,
 
2014

2013

 
(In thousands)
Interest, net of amounts capitalized and AFUDC - borrowed of $8.6 million and $6.3 million in 2014 and 2013, respectively
$
61,690

$
60,281

Income taxes paid
$
44,166

$
30,262


Noncash investing transactions were as follows:
 
September 30,
 
2014

2013

 
(In thousands)
Property, plant and equipment additions in accounts payable
$
96,373

$
85,646


Note 9 - New Accounting Standard
Revenue from Contracts with Customers In May 2014, the FASB issued guidance on accounting for revenue from contracts with customers. The guidance provides for a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. This guidance will be effective for the Company on January 1, 2017. Entities will have the option of using either a full retrospective or modified retrospective approach to adopting the guidance. Under the modified approach, an entity would recognize the cumulative effect of initially applying the guidance with an adjustment to the opening balance of retained earnings in the period of adoption. In addition, the modified approach will require additional disclosures. The Company is evaluating the effects the adoption of the new revenue guidance will have on its results of operations, financial position, cash flows and disclosures, as well as its method of adoption.

11




Note 10 - Comprehensive income (loss)
The after-tax changes in the components of accumulated other comprehensive loss were as follows:

Three Months Ended September 30, 2014
Net Unrealized Gain (Loss) on Derivative
 Instruments
 Qualifying as Hedges
Postretirement
 Liability Adjustment
Foreign Currency Translation Adjustment
Net Unrealized Gain (Loss) on Available-for-sale Investments
Total Accumulated
 Other
Comprehensive
 Loss
 
(In thousands)
Balance at beginning of period
$
(3,408
)
$
(33,287
)
$
(579
)
$
76

$
(37,198
)
Other comprehensive income (loss) before reclassifications


(146
)
(62
)
(208
)
Amounts reclassified from accumulated other comprehensive loss
82

261


31

374

Net current-period other comprehensive income (loss)
82

261

(146
)
(31
)
166

Balance at end of period
$
(3,326
)
$
(33,026
)
$
(725
)
$
45

$
(37,032
)

Three Months Ended September 30, 2013
Net Unrealized Gain (Loss) on Derivative
 Instruments
 Qualifying as Hedges
Postretirement
 Liability Adjustment
Foreign Currency Translation Adjustment
Net Unrealized Gain (Loss) on Available-for-sale Investments
Total Accumulated
 Other
Comprehensive
 Loss
 
(In thousands)
Balance at beginning of period
$
(2,744
)
$
(53,275
)
$
(813
)
$
11

$
(56,821
)
Other comprehensive income (loss) before reclassifications


(20
)
(10
)
(30
)
Amounts reclassified from accumulated other comprehensive loss
(510
)
272

114

38

(86
)
Net current-period other comprehensive income (loss)
(510
)
272

94

28

(116
)
Balance at end of period
$
(3,254
)
$
(53,003
)
$
(719
)
$
39

$
(56,937
)

Nine Months Ended September 30, 2014
Net Unrealized Gain (Loss) on Derivative
 Instruments
 Qualifying as Hedges
Postretirement
 Liability Adjustment
Foreign Currency Translation Adjustment
Net Unrealized Gain (Loss) on Available-for-sale Investments
Total Accumulated
 Other
Comprehensive
 Loss
 
(In thousands)
Balance at beginning of period
$
(3,765
)
$
(33,807
)
$
(667
)
$
34

$
(38,205
)
Other comprehensive income (loss) before reclassifications


(58
)
(89
)
(147
)
Amounts reclassified from accumulated other comprehensive loss
439

781


100

1,320

Net current-period other comprehensive income (loss)
439

781

(58
)
11

1,173

Balance at end of period
$
(3,326
)
$
(33,026
)
$
(725
)
$
45

$
(37,032
)


12



Nine Months Ended September 30, 2013
Net Unrealized Gain (Loss) on Derivative
 Instruments
 Qualifying as Hedges
Postretirement
 Liability Adjustment
Foreign Currency Translation Adjustment
Net Unrealized Gain (Loss) on Available-for-sale Investments
Total Accumulated
 Other
Comprehensive
 Loss
 
(In thousands)
Balance at beginning of period
$
6,018

$
(54,347
)
$
(511
)
$
119

$
(48,721
)
Other comprehensive income (loss) before reclassifications
(5,594
)

(351
)
(197
)
(6,142
)
Amounts reclassified from accumulated other comprehensive loss
(3,678
)
1,344

143

117

(2,074
)
Net current-period other comprehensive income (loss)
(9,272
)
1,344

(208
)
(80
)
(8,216
)
Balance at end of period
$
(3,254
)
$
(53,003
)
$
(719
)
$
39

$
(56,937
)

Reclassifications out of accumulated other comprehensive loss were as follows:
 
Three Months Ended
Nine Months Ended
Location on Consolidated Statements of Income
 
September 30,
September 30,
 
2014
2013
2014
2013
 
(In thousands)
 
Reclassification adjustment for gain (loss) on derivative instruments included in net income:
 
 
 
 
 
Commodity derivative instruments
$
28

$
1,007

$
(223
)
$
6,903

Operating revenues
Interest rate derivative instruments
(160
)
(200
)
(480
)
(979
)
Interest expense
 
(132
)
807

(703
)
5,924

 
 
50

(297
)
264

(2,246
)
Income taxes
 
(82
)
510

(439
)
3,678

 
Amortization of postretirement liability losses included in net periodic benefit cost
(420
)
(437
)
(1,258
)
(2,371
)
(a)
 
159

166

477

1,027

Income taxes
 
(261
)
(271
)
(781
)
(1,344
)
 
Reclassification adjustment for loss on foreign currency translation adjustment included in net income

(185
)

(213
)
Earnings (loss) from equity method investments
 

70


70

Earnings (loss) from equity method investments
 

(115
)

(143
)
 
Reclassification adjustment for loss on available-for-sale investments included in net income
(47
)
(58
)
(154
)
(180
)
Other income
 
16

20

54

63

Income taxes
 
(31
)
(38
)
(100
)
(117
)
 
Total reclassifications
$
(374
)
$
86

$
(1,320
)
$
2,074

 
 (a) Included in net periodic benefit cost (credit). For more information, see Note 20.


Note 11 - Acquisition
On February 10, 2014, the Company entered into agreements to purchase working interests and leasehold positions in oil and natural gas production assets in the southern Powder River Basin of Wyoming. The effective date of the acquisition was October 1, 2013, and the closing occurred on March 6, 2014. The purchase price was $208.9 million, including purchase price adjustments.


13



The acquisition was accounted for under the acquisition method of accounting and, accordingly, the acquired assets and liabilities assumed have been recorded at their respective fair values as of the date of acquisition. The results of operations of the acquired properties are included in the financial statements since the date of the acquisition. Pro forma financial amounts reflecting the effects of the acquisition are not presented, as such acquisition was not material to the Company's financial position or results of operations.

Note 12 - Discontinued operations
In 2007, Centennial Resources sold CEM to Bicent. In connection with the sale, Centennial Resources agreed to indemnify Bicent and its affiliates from certain third party claims arising out of or in connection with Centennial Resources' ownership or operation of CEM prior to the sale. In addition, Centennial had previously guaranteed CEM's obligations under a construction contract. The Company incurred legal expenses and had a benefit related to the resolution of this matter in the second quarter of 2014, which are reflected in discontinued operations in the consolidated financial statements and accompanying notes. Discontinued operations are included in the Other category.

Note 13 - Equity method investments
Investments in companies in which the Company has the ability to exercise significant influence over operating and financial policies are accounted for using the equity method. At September 30, 2014 and 2013, the Company had no significant equity method investments.

In August 2006, MDU Brasil acquired ownership interests in the Brazilian Transmission Lines. The electric transmission lines are primarily in northeastern and southern Brazil. The transmission contracts provide for revenues denominated in the Brazilian Real, annual inflation adjustments and change in tax law adjustments. The functional currency for the Brazilian Transmission Lines is the Brazilian Real.

In 2009, multiple sales agreements were signed for the Company to sell its ownership interests in the Brazilian Transmission Lines. In November 2010, the Company completed the sale of its entire ownership interest in ENTE and ERTE and 59.96 percent of the Company's ownership interest in ECTE. The Company's remaining interest in ECTE is being sold over a four-year period. In August 2013 and 2012, and November 2011, the Company completed the sale of one-fourth of the remaining interest in each year. The Company recognized an immaterial gain in 2013. The Company's remaining ownership interest in ECTE is being accounted for under the cost method.

Note 14 - Goodwill and other intangible assets
The changes in the carrying amount of goodwill were as follows:
Nine Months Ended
September 30, 2014
Balance
as of
January 1,
2014*
Goodwill
Acquired
During
the Year
Balance
as of
September 30, 2014*
 
(In thousands)
Natural gas distribution
$
345,736

$

$
345,736

Pipeline and energy services
9,737


9,737

Construction materials and contracting
176,290


176,290

Construction services
104,276


104,276

Total
$
636,039

$

$
636,039

  * Balance is presented net of accumulated impairment of $12.3 million at the pipeline and energy services segment, which occurred in prior periods.



14



Nine Months Ended
September 30, 2013
Balance
as of
January 1,
2013*
Goodwill
Acquired
During the
Year
Balance
as of
September 30, 2013*
 
(In thousands)
Natural gas distribution
$
345,736

$

$
345,736

Pipeline and energy services
9,737


9,737

Construction materials and contracting
176,290


176,290

Construction services
104,276


104,276

Total
$
636,039

$

$
636,039

  * Balance is presented net of accumulated impairment of $12.3 million at the pipeline and energy services segment, which occurred in prior periods.


Year Ended
December 31, 2013
Balance
as of
January 1,
2013*
Goodwill
Acquired
During the
Year
Balance
as of
December 31,
2013*
 
(In thousands)
Natural gas distribution
$
345,736

$

$
345,736

Pipeline and energy services
9,737


9,737

Construction materials and contracting
176,290


176,290

Construction services
104,276


104,276

Total
$
636,039

$

$
636,039

  * Balance is presented net of accumulated impairment of $12.3 million at the pipeline and energy services segment, which occurred in prior periods.


Other amortizable intangible assets were as follows:
 
September 30,
2014
September 30,
2013
December 31,
2013
 
(In thousands)
Customer relationships
$
21,310

$
21,310

$
21,310

Accumulated amortization
(15,116
)
(13,221
)
(13,726
)
 
6,194

8,089

7,584

Noncompete agreements
5,080

6,186

6,186

Accumulated amortization
(4,021
)
(4,706
)
(4,840
)
 
1,059

1,480

1,346

Other
10,921

10,995

10,995

Accumulated amortization
(7,578
)
(6,472
)
(6,826
)
 
3,343

4,523

4,169

Total
$
10,596

$
14,092

$
13,099


Amortization expense for amortizable intangible assets for the three and nine months ended September 30, 2014, was $700,000 and $2.5 million, respectively. Amortization expense for amortizable intangible assets for the three and nine months ended September 30, 2013, was $1.2 million and $3.0 million, respectively. Estimated amortization expense for amortizable intangible assets is $3.3 million in 2014, $2.5 million in 2015, $2.2 million in 2016, $1.9 million in 2017, $1.0 million in 2018 and $2.2 million thereafter.

Note 15 - Derivative instruments
The Company's policy allows the use of derivative instruments as part of an overall energy price, foreign currency and interest rate risk management program to efficiently manage and minimize commodity price, foreign currency and interest rate risk. As of September 30, 2014, the Company had no outstanding foreign currency or interest rate hedges.

The fair value of derivative instruments must be estimated as of the end of each reporting period and is recorded on the Consolidated Balance Sheets as an asset or a liability.


15



Fidelity
At September 30, 2014 and 2013, and December 31, 2013, Fidelity held oil swap and collar agreements with total forward notional volumes of 1.4 million, 3.9 million and 2.9 million Bbl, respectively, and natural gas swap agreements with total forward notional volumes of 7.3 million, 16.5 million and 18.3 million MMBtu, respectively. Fidelity utilizes these derivative instruments to manage a portion of the market risk associated with fluctuations in the price of oil and natural gas on its forecasted sales of oil and natural gas production.

Effective April 1, 2013, Fidelity elected to de-designate all commodity derivative contracts previously designated as cash flow hedges and elected to discontinue hedge accounting prospectively for all of its commodity derivative instruments. When the criteria for hedge accounting is not met or when hedge accounting is not elected, realized gains and losses and unrealized gains and losses are both recorded in operating revenues on the Consolidated Statements of Income. As a result of discontinuing hedge accounting on commodity derivative instruments, gains and losses on the oil and natural gas derivative instruments remain in accumulated other comprehensive income (loss) as of the de-designation date and are reclassified into earnings in future periods as the underlying hedged transactions affect earnings. At April 1, 2013, accumulated other comprehensive income (loss) included $1.8 million of unrealized gains, representing the mark-to-market value of the Company's commodity derivative instruments that qualified as cash flow hedges as of the balance sheet date. The Company expects to reclassify into earnings from accumulated other comprehensive income (loss) the remaining value related to de-designating commodity derivative instruments over the next 3 months.

Prior to April 1, 2013, changes in the fair value attributable to the effective portion of the hedging instruments, net of tax, were recorded in stockholders' equity as a component of accumulated other comprehensive income (loss). To the extent that the hedges were not effective or did not qualify for hedge accounting, the ineffective portion of the changes in fair market value was recorded directly in earnings. Gains and losses on the oil and natural gas derivative instruments were reclassified from accumulated other comprehensive income (loss) into operating revenues on the Consolidated Statements of Income at the date the oil and natural gas quantities were settled.

There were no components of the derivative instruments' gain or loss excluded from the assessment of hedge effectiveness. Gains and losses must be reclassified into earnings as a result of the discontinuance of cash flow hedges if it is probable that the original forecasted transactions will not occur, and there were no such reclassifications.

Certain of Fidelity's derivative instruments contain cross-default provisions that state if Fidelity or any of its affiliates fails to make payment with respect to certain indebtedness, in excess of specified amounts, the counterparties could require early settlement or termination of the derivative instruments in liability positions. The aggregate fair value of Fidelity's derivative instruments with credit-risk-related contingent features that are in a liability position at September 30, 2014 and 2013, and December 31, 2013, were $44,000, $9.9 million and $7.5 million, respectively. The aggregate fair value of assets that would have been needed to settle the instruments immediately if the credit-risk-related contingent features were triggered on September 30, 2014 and 2013, and December 31, 2013, were $44,000, $9.9 million and $7.5 million, respectively.

Centennial
Centennial has historically entered into interest rate derivative instruments to manage a portion of its interest rate exposure on the forecasted issuance of long-term debt. As of September 30, 2014 and 2013, and December 31, 2013, Centennial had no outstanding interest rate swap agreements.


16



Fidelity and Centennial
The gains and losses on derivative instruments were as follows:

 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2014
2013
2014
2013
 
(In thousands)
Commodity derivatives designated as cash flow hedges:
 
 
 
 
Amount of loss recognized in accumulated other comprehensive loss (effective portion), net of tax
$

$

$

$
(6,153
)
Amount of (gain) loss reclassified from accumulated other comprehensive loss into operating revenues (effective portion), net of tax
(18
)
(634
)
140

(4,349
)
Amount of loss recognized in operating revenues (ineffective portion), before tax



(1,422
)
 
 
 
 
 
Interest rate derivatives designated as cash flow hedges:
 
 
 
 
Amount of gain recognized in accumulated other comprehensive loss (effective portion), net of tax



559

Amount of loss reclassified from accumulated other comprehensive loss into interest expense (effective portion), net of tax
100

124

299

671

Amount of loss recognized in interest expense (ineffective portion), before tax



(769
)
 
 
 
 
 
Commodity derivatives not designated as hedging instruments:
 
 
 
 
Amount of gain (loss) recognized in operating revenues, before tax
28,755

(12,594
)
16,847

(3,957
)

Over the next 12 months net losses of approximately $553,000 (after tax) are estimated to be reclassified from accumulated other comprehensive income (loss) into earnings, as the hedged transactions affect earnings.

The location and fair value of the gross amount of the Company's derivative instruments on the Consolidated Balance Sheets were as follows:

Asset
Derivatives
Location on
Consolidated
Balance Sheets
Fair Value at September 30, 2014
Fair Value at September 30, 2013
Fair Value at December 31, 2013
 
 
(In thousands)
Not designated as hedges:
 

 
 
Commodity derivatives
Commodity derivative instruments
$
11,322

$
4,373

$
1,447

 
Other assets - noncurrent
259

1,771

503

Total asset derivatives
 
$
11,581

$
6,144

$
1,950


Liability
Derivatives
Location on
Consolidated
Balance Sheets
Fair Value at September 30, 2014
Fair Value at September 30, 2013
Fair Value at December 31, 2013
 
 
(In thousands)
Not designated as hedges:
 

 

 

Commodity derivatives
Commodity derivative instruments
$
44

$
9,740

$
7,483

 
Other liabilities - noncurrent

149


Total liability derivatives
 
$
44

$
9,889

$
7,483



17



All of the Company's commodity derivative instruments at September 30, 2014 and 2013, and December 31, 2013, were subject to legally enforceable master netting agreements. However, the Company's policy is to not offset fair value amounts for derivative instruments and, as a result, the Company's derivative assets and liabilities are presented gross on the Consolidated Balance Sheets. The gross derivative assets and liabilities (excluding settlement receivables and payables that may be subject to the same master netting agreements) presented on the Consolidated Balance Sheets and the amount eligible for offset under the master netting agreements is presented in the following table:

September 30, 2014
Gross Amounts Recognized on the Consolidated Balance Sheets
Gross Amounts Not Offset on the Consolidated Balance Sheets
Net
 
(In thousands)
Assets:
 
 
 
Commodity derivatives
$
11,581

$
(44
)
$
11,537

Total assets
$
11,581

$
(44
)
$
11,537

Liabilities:
 
 

Commodity derivatives
$
44

$
(44
)
$

Total liabilities
$
44

$
(44
)
$


September 30, 2013
Gross Amounts Recognized on the Consolidated Balance Sheets
Gross Amounts Not Offset on the Consolidated Balance Sheets
Net
 
(In thousands)
Assets:
 
 
 
Commodity derivatives
$
6,144

$
(4,939
)
$
1,205

Total assets
$
6,144

$
(4,939
)
$
1,205

Liabilities:
 
 
 
Commodity derivatives
$
9,889

$
(4,939
)
$
4,950

Total liabilities
$
9,889

$
(4,939
)
$
4,950


December 31, 2013
Gross Amounts Recognized on the Consolidated Balance Sheets
Gross Amounts Not Offset on the Consolidated Balance Sheets
Net
 
(In thousands)
Assets:
 
 
 
Commodity derivatives
$
1,950

$
(1,950
)
$

Total assets
$
1,950

$
(1,950
)
$

Liabilities:
 
 
 
Commodity derivatives
$
7,483

$
(1,950
)
$
5,533

Total liabilities
$
7,483

$
(1,950
)
$
5,533


Note 16 - Fair value measurements
The Company measures its investments in certain fixed-income and equity securities at fair value with changes in fair value recognized in income. The Company anticipates using these investments, which consist of an insurance contract, to satisfy its obligations under its unfunded, nonqualified benefit plans for executive officers and certain key management employees, and invests in these fixed-income and equity securities for the purpose of earning investment returns and capital appreciation. These investments, which totaled $63.6 million, $58.1 million and $62.4 million, at September 30, 2014 and 2013, and December 31, 2013, respectively, are classified as Investments on the Consolidated Balance Sheets. The net unrealized loss on these investments was $800,000 for the three months ended September 30, 2014, and the net unrealized gain on these investments was $1.2 million for the nine months ended September 30, 2014, respectively. The net unrealized gains on these investments were $4.1 million and $9.2 million for the three and nine months ended September 30, 2013, respectively. The change in fair value, which is considered part of the cost of the plan, is classified in operation and maintenance expense on the Consolidated Statements of Income.


18



The Company did not elect the fair value option, which records gains and losses in income, for its available-for-sale securities, which include mortgage-backed securities and U.S. Treasury securities. These available-for-sale securities are recorded at fair value and are classified as Investments on the Consolidated Balance Sheets. Unrealized gains or losses are recorded in accumulated other comprehensive income (loss). Details of available-for-sale securities were as follows:

September 30, 2014
Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
 
(In thousands)
Mortgage-backed securities
$
7,838

$
71

$
(8
)
$
7,901

U.S. Treasury securities
2,368

8

(2
)
2,374

Total
$
10,206

$
79

$
(10
)
$
10,275


September 30, 2013
Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
 
(In thousands)
Mortgage-backed securities
$
8,051

$
70

$
(20
)
$
8,101

U.S. Treasury securities
1,912

15

(4
)
1,923

Total
$
9,963

$
85

$
(24
)
$
10,024


December 31, 2013
Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
 
(In thousands)
Mortgage-backed securities
$
8,151

$
69

$
(27
)
$
8,193

U.S. Treasury securities
1,906

15

(4
)
1,917

Total
$
10,057

$
84

$
(31
)
$
10,110


The fair value of the Company's money market funds approximates cost.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The ASC establishes a hierarchy for grouping assets and liabilities, based on the significance of inputs.

The estimated fair values of the Company's assets and liabilities measured on a recurring basis are determined using the market approach.

The Company's Level 2 money market funds consist of investments in short-term unsecured promissory notes and the value is based on comparable market transactions taking into consideration the credit quality of the issuer. The estimated fair value of the Company's Level 2 mortgage-backed securities and U.S. Treasury securities are based on comparable market transactions, other observable inputs or other sources, including pricing from outside sources.

The estimated fair value of the Company's Level 2 insurance contract is based on contractual cash surrender values that are determined primarily by investments in managed separate accounts of the insurer. These amounts approximate fair value. The managed separate accounts are valued based on other observable inputs or corroborated market data.

The estimated fair value of the Company's Level 2 commodity derivative instruments is based upon futures prices, volatility and time to maturity, among other things. Counterparty statements are utilized to determine the value of the commodity derivative instruments and are reviewed and corroborated using various methodologies and significant observable inputs. The Company's and the counterparties' nonperformance risk is also evaluated.

Though the Company believes the methods used to estimate fair value are consistent with those used by other market participants, the use of other methods or assumptions could result in a different estimate of fair value. For the nine months ended September 30, 2014 and 2013, there were no transfers between Levels 1 and 2.


19



The Company's assets and liabilities measured at fair value on a recurring basis were as follows:

 
Fair Value Measurements at September 30, 2014, Using
 
 
Quoted Prices in
Active Markets
for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Balance at September 30, 2014
 
(In thousands)
Assets:
 
 
 
 
Money market funds
$

$
19,687

$

$
19,687

Insurance contract*

63,578


63,578

Available-for-sale securities:
 
 
 
 
Mortgage-backed securities

7,901


7,901

U.S. Treasury securities

2,374


2,374

Commodity derivative instruments

11,581


11,581

Total assets measured at fair value
$

$
105,121

$

$
105,121

Liabilities:
 
 
 
 
Commodity derivative instruments
$

$
44

$

$
44

Total liabilities measured at fair value
$

$
44

$

$
44

*  The insurance contract invests approximately 21 percent in common stock of mid-cap companies, 17 percent in common stock of small-cap companies, 29 percent in common stock of large-cap companies, 32 percent in fixed-income investments and 1 percent in cash equivalents.


 
Fair Value Measurements at September 30, 2013, Using
 
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Balance at September 30, 2013
 
(In thousands)
Assets:
 
 
 
 
Money market funds
$

$
21,019

$

$
21,019

Insurance contract*

58,142


58,142

Available-for-sale securities:
 
 
 
 
Mortgage-backed securities

8,101


8,101

U.S. Treasury securities

1,923


1,923

Commodity derivative instruments

6,144


6,144

Total assets measured at fair value
$

$
95,329

$

$
95,329

Liabilities:
 
 
 
 
Commodity derivative instruments
$

$
9,889

$

$
9,889

Total liabilities measured at fair value
$

$
9,889

$

$
9,889

*  The insurance contract invests approximately 29 percent in common stock of mid-cap companies, 28 percent in common stock of small-cap companies, 28 percent in common stock of large-cap companies and 15 percent in fixed-income investments.



20



 
Fair Value Measurements at December 31, 2013, Using
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs
 (Level 3)
Balance at December 31, 2013
 
(In thousands)
Assets:
 
 
 
 
Money market funds
$

$
19,227

$

$
19,227

Insurance contract*

62,370


62,370

Available-for-sale securities:
 
 
 
 
Mortgage-backed securities

8,193


8,193

U.S. Treasury securities

1,917


1,917

Commodity derivative instruments

1,950


1,950

Total assets measured at fair value
$

$
93,657

$

$
93,657

Liabilities:
 
 
 
 
Commodity derivative instruments
$

$
7,483

$

$
7,483

Total liabilities measured at fair value
$

$
7,483

$

$
7,483

* The insurance contract invests approximately 29 percent in common stock of mid-cap companies, 28 percent in common stock of small-cap companies, 28 percent in common stock of large-cap companies and 15 percent in fixed-income investments.


The Company applies the provisions of the fair value measurement standard to its nonrecurring, non-financial measurements, including long-lived asset impairments. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. The Company reviews the carrying value of its long-lived assets, excluding goodwill and oil and natural gas properties, whenever events or changes in circumstances indicate that such carrying amounts may not be recoverable. During the second quarter of 2013, coalbed natural gas gathering assets were reviewed for impairment and found to be impaired and were written down to their estimated fair value using the income approach. Under this approach, fair value is determined by using the present value of future estimated cash flows. The factors used to determine the estimated future cash flows include, but are not limited to, internal estimates of gathering revenue, future commodity prices and operating costs and equipment salvage values. The estimated cash flows are discounted using a rate that approximates the weighted average cost of capital of a market participant. These fair value inputs are not typically observable. At June 30, 2013, coalbed natural gas gathering assets were written down to the nonrecurring fair value measurement of $9.7 million. The fair value of these coalbed natural gas gathering assets have been categorized as Level 3 (Significant Unobservable Inputs) in the fair value hierarchy.

The Company's long-term debt is not measured at fair value on the Consolidated Balance Sheets and the fair value is being provided for disclosure purposes only. The fair value was based on discounted future cash flows using current market interest rates. The estimated fair value of the Company's Level 2 long-term debt was as follows:
 
Carrying
Amount
Fair
Value
 
(In thousands)
Long-term debt at September 30, 2014
$
2,210,557

$
2,332,887

Long-term debt at September 30, 2013
$
2,011,896

$
2,106,887

Long-term debt at December 31, 2013
$
1,854,563

$
1,912,590


The carrying amounts of the Company's remaining financial instruments included in current assets and current liabilities approximate their fair values.

Note 17 - Long-term debt
On May 8, 2014, the Company amended its revolving credit agreement to increase the borrowing limit to $175.0 million and extend the termination date to May 8, 2019.
The Company entered into a $150.0 million note purchase agreement on January 28, 2014, and issued $50.0 million of Senior Notes on April 15, 2014, with a due date of April 15, 2044, at an interest rate of 5.2 percent. The remaining $100.0 million of

21



Senior Notes was issued on July 15, 2014, with due dates ranging from July 15, 2024 to July 15, 2026, at a weighted average interest rate of 4.3 percent.
On May 8, 2014, Centennial entered into an amended and restated revolving credit agreement which increased the borrowing limit to $650.0 million and extended the termination date to May 8, 2019. The credit agreement contains customary covenants and provisions, including a covenant of Centennial not to permit, as of the end of any fiscal quarter, the ratio of total consolidated debt to total consolidated capitalization to be greater than 65 percent. Other covenants include restrictions on the sale of certain assets, limitations on subsidiary indebtedness and the making of certain loans and investments.
Centennial's revolving credit agreement contains cross-default provisions. These provisions state that if Centennial or any subsidiary of Centennial fails to make any payment with respect to any indebtedness or contingent obligation, in excess of a specified amount, under any agreement that causes such indebtedness to be due prior to its stated maturity or the contingent obligation to become payable, then Centennial will be in default under the revolving credit agreement.

Centennial entered into two separate two year $125.0 million term loan agreements with variable interest rates on March 31, 2014 and April 2, 2014, respectively. These agreements contain customary covenants and default provisions, including covenants not to permit, as of the end of any fiscal quarter, the ratio of Centennial's total debt to total capitalization to be greater than 65 percent. The covenants also include certain limitations on subsidiary indebtedness and restrictions on the sale of certain assets and on the making of certain loans and investments. On August 6, 2014, Centennial paid all of the outstanding borrowings under one of the two year term loan agreements and all the outstanding borrowings under the remaining two year term loan agreement were paid on October 2, 2014.
In addition, borrowings outstanding that were classified as long-term debt under the Company’s and Centennial’s commercial paper programs totaled $293.5 million at September 30, 2014, compared to $153.9 million at December 31, 2013, respectively.

Note 18 - Equity
A summary of the changes in equity was as follows:
Nine Months Ended September 30, 2014
Total Stockholders' Equity
Noncontrolling Interest
Total Equity
 
(In thousands)
Balance at December 31, 2013
$
2,823,164

$
32,738

$
2,855,902

Net income (loss)
213,978

(2,390
)
211,588

Other comprehensive income
1,173


1,173

Dividends declared on preferred stocks
(514
)

(514
)
Dividends declared on common stock
(102,461
)

(102,461
)
Stock-based compensation
4,257


4,257

Issuance of common stock upon vesting of stock-based compensation, net of shares used for tax withholdings
(5,564
)

(5,564
)
Net tax benefit on stock-based compensation
4,729


4,729

Issuance of common stock
144,493


144,493

Contribution from noncontrolling interest

44,900

44,900

Balance at September 30, 2014
$
3,083,255

$
75,248

$
3,158,503


Nine Months Ended September 30, 2013
Total Stockholders' Equity
Noncontrolling Interest
Total Equity
 
(In thousands)
Balance at December 31, 2012
$
2,648,248

$

$
2,648,248

Net income (loss)
187,484

(204
)
187,280

Other comprehensive loss
(8,216
)

(8,216
)
Dividends declared on preferred stocks
(514
)

(514
)
Dividends declared on common stock
(97,720
)

(97,720
)
Stock-based compensation
3,730


3,730

Net tax deficit on stock-based compensation
(1,419
)

(1,419
)
Contribution from noncontrolling interest

19,101

19,101

Balance at September 30, 2013
$
2,731,593

$
18,897

$
2,750,490



22



Note 19 - Business segment data
The Company's reportable segments are those that are based on the Company's method of internal reporting, which generally segregates the strategic business units due to differences in products, services and regulation. The internal reporting of these operating segments is defined based on the reporting and review process used by the Company's chief executive officer. The vast majority of the Company's operations are located within the United States. The Company also has an investment in a foreign country, which consists of Centennial Resources' investment in ECTE.

The electric segment generates, transmits and distributes electricity in Montana, North Dakota, South Dakota and Wyoming. The natural gas distribution segment distributes natural gas in those states as well as in Idaho, Minnesota, Oregon and Washington. These operations also supply related value-added services.

The pipeline and energy services segment provides natural gas transportation, underground storage, processing and gathering services, as well as oil gathering, through regulated and nonregulated pipeline systems and processing facilities primarily in the Rocky Mountain and northern Great Plains regions of the United States. This segment is constructing Dakota Prairie Refinery in conjunction with Calumet to refine crude oil and also provides cathodic protection and other energy-related services.

The exploration and production segment is engaged in oil and natural gas development and production activities in the Rocky Mountain and Mid-Continent/Gulf States regions of the United States. For more information regarding this segment, see Note 23.

The construction materials and contracting segment mines aggregates and markets crushed stone, sand, gravel and related construction materials, including ready-mixed concrete, cement, asphalt, liquid asphalt and other value-added products. It also performs integrated contracting services. This segment operates in the central, southern and western United States and Alaska and Hawaii.

The construction services segment specializes in constructing and maintaining electric and communication lines, gas pipelines, fire suppression systems, and external lighting and traffic signalization equipment. This segment also provides utility excavation services and inside electrical wiring, cabling and mechanical services, sells and distributes electrical materials, and manufactures and distributes specialty equipment.

The Other category includes the activities of Centennial Capital, which insures various types of risks as a captive insurer for certain of the Company's subsidiaries. The function of the captive insurer is to fund the deductible layers of the insured companies' general liability, automobile liability and pollution liability coverages. Centennial Capital also owns certain real and personal property. The Other category also includes Centennial Resources' investment in ECTE.

The information below follows the same accounting policies as described in Note 1 of the Company's Notes to Consolidated Financial Statements in the 2013 Annual Report. Information on the Company's businesses was as follows:
Three Months Ended September 30, 2014
External
Operating
Revenues
Inter-
segment
Operating
Revenues
Earnings
on Common
Stock
 
(In thousands)
Electric
$
68,936

$

$
9,162

Natural gas distribution
96,185


(12,252
)
Pipeline and energy services
46,415

4,334

5,060

 
211,536

4,334

1,970

Exploration and production
147,677

8,130

34,750

Construction materials and contracting
740,496

6,322

55,218

Construction services
270,313

16,420

9,876

Other
433

2,601

2,746

 
1,158,919

33,473

102,590

Intersegment eliminations

(37,807
)
(1,522
)
Total
$
1,370,455

$

$
103,038



23



Three Months Ended September 30, 2013
External
Operating
Revenues
Inter-
segment
Operating
Revenues
Earnings
on Common
Stock
 
(In thousands)
Electric
$
68,314

$

$
11,417

Natural gas distribution
77,417


(11,204
)
Pipeline and energy services
46,372

4,906

5,310

 
192,103

4,906

5,523

Exploration and production
119,234

10,714

17,434

Construction materials and contracting
706,982

7,422

49,159

Construction services
267,038

3,097

12,154

Other
425

1,859

1,217

 
1,093,679

23,092

79,964

Intersegment eliminations

(27,998
)
(1,202
)
Total
$
1,285,782

$

$
84,285

 
 
 
 
Nine Months Ended September 30, 2014
External
Operating
Revenues
Inter-
segment
Operating
Revenues
Earnings
on Common
Stock
 
(In thousands)
Electric
$
207,732

$

$
28,018

Natural gas distribution
616,496


10,516

Pipeline and energy services
133,541

30,497

15,198

 
957,769

30,497

53,732

Exploration and production
393,653

39,269

74,869

Construction materials and contracting
1,339,371

18,445

42,199

Construction services
815,313

27,431

40,751

Other
1,248

6,069

4,618

 
2,549,585

91,214

162,437

Intersegment eliminations

(121,711
)
(2,705
)
Total
$
3,507,354

$

$
213,464

 
 
 
 
Nine Months Ended September 30, 2013
External
Operating
Revenues
Inter-
segment
Operating
Revenues
Earnings
on Common
Stock
 
(In thousands)
Electric
$
189,949

$

$
25,652

Natural gas distribution
536,756


15,420

Pipeline and energy services
116,965

31,623

1,247

 
843,670

31,623

42,319

Exploration and production
371,648

33,083

70,713

Construction materials and contracting
1,287,305

24,673

38,602

Construction services
774,103

7,011

36,733

Other
1,254

5,516

1,862

 
2,434,310

70,283

147,910

Intersegment eliminations

(101,906
)
(3,259
)
Total
$
3,277,980

$

$
186,970