Attached files

file filename
EX-95 - MINE SAFETY DISCLOSURES - MDU RESOURCES GROUP INCa2015q2ex95.htm
EX-32 - CERTIFICATION CEO AND CFO EX 32 - MDU RESOURCES GROUP INCa2015q2ex32.htm
EX-12 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - MDU RESOURCES GROUP INCa2015q2ex12.htm
EX-10.A - MDU RESOURCES 401(K) AMENDMENT 6-30-2015 - MDU RESOURCES GROUP INCa2015q2ex10a.htm
EX-10.C - MDU RESOURCES SECTION 16 OFFICERS AND DIRECTORS - MDU RESOURCES GROUP INCa2015q2ex10c.htm
EX-10.B - WAIVER AND VOLUNTARY RELEASE - MDU RESOURCES GROUP INCa2015q2ex10b.htm
EX-31.A - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - MDU RESOURCES GROUP INCa2015q2ex31a.htm
EX-31.B - CERTIFICATION OF CHIEF FINANCIAL OFFICER - MDU RESOURCES GROUP INCa2015q2ex31b.htm


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, 2015

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 July 28, 2015: 195,063,757 shares.





DEFINITIONS

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

Abbreviation or Acronym
 
2014 Annual Report
Company's Annual Report on Form 10-K for the year ended December 31, 2014
AFUDC
Allowance for funds used during construction
ASC
FASB Accounting Standards Codification
ATBs
Atmospheric tower bottoms
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
Bombard Mechanical
Bombard Mechanical, LLC, an indirect wholly owned subsidiary of MDU Construction Services
BOPD
Barrels of oil per day
BPD
Barrels per day
Brazilian Transmission Lines
Company's former investment in companies owning three electric transmission lines
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
Clean Water Act
Federal Clean Water Act
Colorado Court of Appeals
Court of Appeals, State of Colorado
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 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
D.C. Circuit Court
United States Court of Appeals for the District of Columbia Circuit
dk
Decatherm
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act
EPA
United States Environmental Protection Agency
ERISA
Employee Retirement Income Security Act of 1974
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
Fidelity
Fidelity Exploration & Production Company, a direct wholly owned subsidiary of WBI Holdings (previously referred to as the Company's exploration and production segment)
FIP
Funding improvement plan
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
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

2



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
MATS
Mercury and Air Toxics Standards
MBbls
Thousands of barrels
MBOE
Thousands of BOE
Mcf
Thousand cubic feet
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
MEPP
Multiemployer pension plan
MISO
Midcontinent Independent System Operator, Inc.
MMBtu
Million Btu
MMcf
Million cubic feet
MMdk
Million dk
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
Nevada State District Court
District Court Clark County, Nevada
NGL
Natural gas liquids
NSPS
New Source Performance Standards
NYMEX
New York Mercantile Exchange
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
psi
Pounds per square inch
RCRA
Resource Conservation and Recovery Act
RIN
Renewable Identification Number
ROD
Record of Decision
RP
Rehabilitation plan
SDPUC
South Dakota Public Utilities Commission
SEC
United States Securities and Exchange Commission
SEC Defined Prices
The average price of oil and natural gas during the applicable 12-month period, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions
Securities Act
Securities Act of 1933, as amended
SourceGas
SourceGas Distribution LLC
South Dakota Supreme Court
Supreme Court of the State of South Dakota
United States District Court for the District of Montana
United States District Court for the District of Montana, Great Falls Division
United States Supreme Court
Supreme Court of the United States
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

3



Wyoming State District Court
District Court of the Fourth Judicial District Within and For Sheridan County, Wyoming
WYPSC
Wyoming Public Service Commission

4



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 segment and Fidelity, the Company's exploration and production business), Knife River (construction materials and contracting segment), MDU Construction Services (construction services segment), Centennial Resources and Centennial Capital (both reflected in the Other category).

In the second quarter of 2015, the Company announced its plan to market Fidelity and exit that line of business. Therefore, the results of Fidelity are reflected in discontinued operations, other than certain general and administrative costs and interest expense which are reflected in the Other category. For more information on the Company's business segments and discontinued operations, see Notes 9 and 14.


5



INDEX

Part I -- Financial Information
Page
 
 
Consolidated Statements of Income --
Three and Six Months Ended June 30, 2015 and 2014
 
 
Consolidated Statements of Comprehensive Income --
Three and Six Months Ended June 30, 2015 and 2014
 
 
Consolidated Balance Sheets --
June 30, 2015 and 2014, and December 31, 2014
 
 
Consolidated Statements of Cash Flows --
Six Months Ended June 30, 2015 and 2014
 
 
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
 

6



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,
 
2015
2014
2015
2014
 
(In thousands, except per share amounts)
Operating revenues:
 
 
 
 
Electric, natural gas distribution and regulated pipeline and energy services
$
215,472

$
226,472

$
621,762

$
678,775

Nonregulated pipeline and energy services, construction materials and contracting, construction services and other
770,743

726,092

1,226,802

1,174,551

Total operating revenues 
986,215

952,564

1,848,564

1,853,326

Operating expenses:
 

 

 

 

Fuel and purchased power
19,327

21,046

43,146

47,590

Purchased natural gas sold
66,589

82,252

267,739

322,329

Cost of crude oil
44,781


47,051


Operation and maintenance:
 

 

 

 

Electric, natural gas distribution and regulated pipeline and energy services
70,370

65,348

139,011

131,197

Nonregulated pipeline and energy services, construction materials and contracting, construction services and other
650,188

636,096

1,077,990

1,048,166

Depreciation, depletion and amortization
54,154

50,381

107,151

100,645

Taxes, other than income
35,478

35,087

77,478

77,437

Total operating expenses
940,887

890,210

1,759,566

1,727,364

Operating income
45,328

62,354

88,998

125,962

Other income
2,320

2,470

2,764

4,638

Interest expense
23,790

21,484

46,919

42,431

Income before income taxes
23,858

43,340

44,843

88,169

Income taxes
9,801

13,894

15,626

27,696

Income from continuing operations
14,057

29,446

29,217

60,473

Income (loss) from discontinued operations, net of tax (Note 9)
(251,415
)
23,881

(576,020
)
48,993

Net income (loss)
(237,358
)
53,327

(546,803
)
109,466

Net loss attributable to noncontrolling interest
(7,754
)
(779
)
(11,282
)
(1,302
)
Dividends declared on preferred stocks
171

171

342

342

Earnings (loss) on common stock
$
(229,775
)
$
53,935

$
(535,863
)
$
110,426

 
 
 
 
 
Earnings (loss) per common share - basic:
 

 

 

 

Earnings before discontinued operations
$
.11

$
.16

$
.21

$
.32

Discontinued operations, net of tax
(1.29
)
.12

(2.96
)
.26

Earnings (loss) per common share - basic
$
(1.18
)
$
.28

$
(2.75
)
$
.58

 
 
 
 
 
Earnings (loss) per common share - diluted:
 

 

 

 

Earnings before discontinued operations
$
.11

$
.16

$
.21

$
.32

Discontinued operations, net of tax
(1.29
)
.12

(2.96
)
.26

Earnings (loss) per common share - diluted
$
(1.18
)
$
.28

$
(2.75
)
$
.58

 
 
 
 
 
Dividends declared per common share
$
.1825

$
.1775

$
.3650

$
.3550

 
 
 
 
 
Weighted average common shares outstanding - basic
194,805

192,060

194,643

190,946

 
 
 
 
 
Weighted average common shares outstanding - diluted
194,838

192,659

194,675

191,543

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

7



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

 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
 
2015
2014
2015
2014
 
(In thousands)
Net income (loss)
$
(237,358
)
$
53,327

$
(546,803
)
$
109,466

Other comprehensive income:
 
 
 
 
Net unrealized gain on derivative instruments qualifying as hedges:
 
 
 
 
Reclassification adjustment for loss on derivative instruments included in net income (loss), net of tax of $60 and $60 for the three months ended and $121 and $121 for the six months ended in 2015 and 2014, respectively
100

100

199

199

Reclassification adjustment for (gain) loss on derivative instruments included in income (loss) from discontinued operations, net of tax of $0 and $(50) for the three months ended and $0 and $93 for the six months ended in 2015 and 2014, respectively

(87
)

158

Net unrealized gain on derivative instruments qualifying as hedges
100

13

199

357

Amortization of postretirement liability losses included in net periodic benefit cost, net of tax of $420 and $150 for the three months ended and $649 and $318 for the six months ended in 2015 and 2014, respectively
584

245

959

520

Foreign currency translation adjustment:
 
 
 
 
Foreign currency translation adjustment recognized during the period, net of tax of $6 and $26 for the three months ended and $(63) and $54 for the six months ended in 2015 and 2014, respectively
9

42

(103
)
88

Reclassification adjustment for loss on foreign currency translation adjustment included in net income (loss), net of tax of $0 and $0 for the three months ended and $491 and $0 for the six months ended in 2015 and 2014, respectively


802


Foreign currency translation adjustment
9

42

699

88

Net unrealized gain (loss) on available-for-sale investments:
 
 
 
 
Net unrealized gain (loss) on available-for-sale investments arising during the period, net of tax of $(23) and $4 for the three months ended and $(34) and $5 for the six months ended in 2015 and 2014, respectively
(43
)
8

(64
)
10

Reclassification adjustment for loss on available-for-sale investments included in net income (loss), net of tax of $15 and $17 for the three months ended and $34 and $17 for the six months ended in 2015 and 2014, respectively
28

32

64

32

Net unrealized gain (loss) on available-for-sale investments
(15
)
40


42

Other comprehensive income
678

340

1,857

1,007

Comprehensive income (loss)
(236,680
)
53,667

(544,946
)
110,473

Comprehensive loss attributable to noncontrolling interest
(7,754
)
(779
)
(11,282
)
(1,302
)
Comprehensive income (loss) attributable to common stockholders
$
(228,926
)
$
54,446

$
(533,664
)
$
111,775

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



8



MDU RESOURCES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
June 30, 2015
June 30, 2014
December 31, 2014
(In thousands, except shares and per share amounts)
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
144,372

$
110,817

$
81,855

Receivables, net
627,169

584,658

599,186

Inventories
314,405

318,573

289,410

Deferred income taxes
38,171

22,487

32,012

Prepayments and other current assets
81,355

91,165

83,763

Current assets held for sale
77,292

172,518

131,177

Total current assets
1,282,764

1,300,218

1,217,403

Investments
119,446

116,557

117,883

Property, plant and equipment
6,556,058

5,950,594

6,294,778

Less accumulated depreciation, depletion and amortization
2,444,134

2,325,423

2,386,113

Net property, plant and equipment
4,111,924

3,625,171

3,908,665

Deferred charges and other assets:
 

 

 

Goodwill
635,204

636,039

635,204

Other intangible assets, net
8,506

11,266

9,840

Other
362,407

245,441

322,943

Noncurrent assets held for sale
749,804

1,757,637

1,620,470

Total deferred charges and other assets 
1,755,921

2,650,383

2,588,457

Total assets
$
7,270,055

$
7,692,329

$
7,832,408

LIABILITIES AND EQUITY
 

 

 

Current liabilities:
 

 

 

Short-term borrowings
$
26,000

$

$

Long-term debt due within one year
418,539

41,646

268,552

Accounts payable
272,988

279,511

279,115

Taxes payable
38,966

37,447

39,955

Dividends payable
35,734

34,388

35,607

Accrued compensation
48,420

44,303

57,402

Other accrued liabilities
164,675

151,762

155,765

Current liabilities held for sale
74,943

231,619

154,728

Total current liabilities 
1,080,265

820,676

991,124

Long-term debt
1,958,263

2,144,271

1,825,278

Deferred credits and other liabilities:
 

 

 

Deferred income taxes
753,103

668,497

714,022

Other liabilities
755,742

675,758

756,759

Noncurrent liabilities held for sale
35,790

318,685

295,441

Total deferred credits and other liabilities 
1,544,635

1,662,940

1,766,222

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 - 195,411,301 at June 30, 2015,
194,138,654 at June 30, 2014 and 194,754,812 at December 31, 2014
195,411

194,139

194,755

Other paid-in capital
1,220,615

1,186,900

1,207,188

Retained earnings
1,155,777

1,645,291

1,762,827

Accumulated other comprehensive loss
(40,246
)
(37,198
)
(42,103
)
Treasury stock at cost - 538,921 shares
(3,626
)
(3,626
)
(3,626
)
Total common stockholders' equity
2,527,931

2,985,506

3,119,041

Total stockholders' equity
2,542,931

3,000,506

3,134,041

Noncontrolling interest
143,961

63,936

115,743

Total equity
2,686,892

3,064,442

3,249,784

Total liabilities and equity 
$
7,270,055

$
7,692,329

$
7,832,408

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

9



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

 
Six Months Ended
 
June 30,
 
2015
2014
 
(In thousands)
Operating activities:
 
 
Net income (loss)
$
(546,803
)
$
109,466

Income (loss) from discontinued operations, net of tax
(576,020
)
48,993

Income from continuing operations
29,217

60,473

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 

Depreciation, depletion and amortization
107,151

100,645

Deferred income taxes
24,874

30,516

Excess tax benefit on stock-based compensation

(4,729
)
Changes in current assets and liabilities:
 

 
Receivables
(37,661
)
18,518

Inventories
(67,604
)
(51,467
)
Other current assets
4,545

(46,003
)
Accounts payable
44,927

(30,741
)
Other current liabilities
(3,426
)
(39,300
)
Other noncurrent changes
(15,602
)
(6,379
)
Net cash provided by continuing operations
86,421

31,533

Net cash provided by discontinued operations
87,312

192,953

Net cash provided by operating activities
173,733

224,486

 
 
 
Investing activities:
 

 

Capital expenditures
(355,898
)
(215,970
)
Net proceeds from sale or disposition of property and other
29,550

11,222

Investments
1,208

(1,208
)
Net cash used in continuing operations
(325,140
)
(205,956
)
Net cash used in discontinued operations
(77,238
)
(379,764
)
Net cash used in investing activities
(402,378
)
(585,720
)
 
 
 
Financing activities:
 

 

Issuance of short-term borrowings
26,000


Repayment of short-term borrowings

(11,500
)
Issuance of long-term debt
320,988

441,451

Repayment of long-term debt
(38,137
)
(111,268
)
Proceeds from issuance of common stock
14,499

132,268

Dividends paid
(71,294
)
(67,717
)
Excess tax benefit on stock-based compensation

4,729

Tax withholding on stock-based compensation

(5,564
)
Contribution from noncontrolling interest
39,500

32,500

Net cash provided by continuing operations
291,556

414,899

Net cash used in discontinued operations
(271
)
(273
)
Net cash provided by financing activities
291,285

414,626

Effect of exchange rate changes on cash and cash equivalents
(123
)
85

Increase in cash and cash equivalents
62,517

53,477

Cash and cash equivalents -- beginning of year
81,855

57,340

Cash and cash equivalents -- end of period
$
144,372

$
110,817

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

10



MDU RESOURCES GROUP, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

June 30, 2015 and 2014
(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 2014 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 2014 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 June 30, 2015, up to the date of issuance of these consolidated interim financial statements.

In the second quarter of 2015, the Company announced its plan to market Fidelity, previously referred to as the Company's exploration and production segment, and exit that line of business. The Company's consolidated financial statements and accompanying notes for current and prior periods have been restated to present the results of operations of Fidelity as discontinued operations, other than certain general and administrative costs and interest expense which were previously allocated to the former exploration and production segment and do not meet the criteria for income (loss) from discontinued operations. In addition, the assets and liabilities have been treated and classified as held for sale. Unless otherwise indicated, the amounts presented in the accompanying notes to the consolidated financial statements relate to the Company's continuing operations. For more information on discontinued operations, see Note 9.

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 $30.3 million, $26.1 million and $29.4 million at June 30, 2015 and 2014, and December 31, 2014, 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 June 30, 2015 and 2014, and December 31, 2014, was $8.6 million, $9.6 million and $9.5 million, respectively.

Note 4 - Inventories and natural gas in storage
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. Crude oil and refined products at Dakota Prairie Refinery are carried at lower of cost or market value using the last-in, first-out method. All other inventories are stated at the lower of average cost or market value. The portion of the cost of natural gas in storage expected to be used within one year is included in inventories. Inventories consisted of:

11



 
June 30, 2015
June 30, 2014
December 31, 2014
 
(In thousands)
Aggregates held for resale
$
123,457

$
112,129

$
108,161

Asphalt oil
79,422

76,525

42,135

Materials and supplies
22,594

58,089

54,282

Merchandise for resale
16,140

25,507

24,420

Refined products
16,065



Natural gas in storage (current)
11,310

10,903

19,302

Crude oil
8,101


5,045

Other
37,316

35,420

36,065

Total
$
314,405

$
318,573

$
289,410


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 $49.3 million, $47.4 million and $49.3 million at June 30, 2015 and 2014, and December 31, 2014, respectively.

Note 5 - Earnings (loss) per common share
Basic earnings (loss) per common share were computed by dividing earnings (loss) on common stock by the weighted average number of shares of common stock outstanding during the applicable period. Diluted earnings (loss) per common share were computed by dividing earnings (loss) 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 (loss) was the same for both the basic and diluted earnings (loss) per share calculations. A reconciliation of the weighted average common shares outstanding used in the basic and diluted earnings (loss) per share calculations was as follows:
 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
 
2015

2014

2015

2014

 
(In thousands)
Weighted average common shares outstanding - basic
194,805

192,060

194,643

190,946

Effect of dilutive performance share awards
33

599

32

597

Weighted average common shares outstanding - diluted
194,838

192,659

194,675

191,543

Shares excluded from the calculation of diluted earnings per share





Note 6 - Cash flow information
Cash expenditures for interest and income taxes were as follows:
 
Six Months Ended
 
June 30,
 
2015

2014

 
(In thousands)
Interest, net of amounts capitalized and AFUDC - borrowed of $5.0 million and $5.7 million in 2015 and 2014, respectively
$
45,102

$
39,384

Income taxes paid, net
$
3,117

$
56,267


Noncash investing transactions were as follows:
 
June 30,
 
2015

2014

 
(In thousands)
Property, plant and equipment additions in accounts payable
$
13,467

$
47,499


Note 7 - New Accounting Standards
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity In April 2014, the FASB issued guidance related to the definition and reporting of discontinued operations. The guidance changed the definition of discontinued operations to include only disposals of a component or group of components that represent a strategic shift and that have a major effect on an entity's operations or financial results. The guidance also expands the disclosure requirements for

12



transactions that meet the definition of a discontinued operation, and also requires entities to disclose information about individually significant components that are disposed of or held for sale that do not meet the definition of a discontinued operation. This guidance was effective for the Company on January 1, 2015, and is to be applied prospectively for all disposals or components initially classified as held for sale after the effective date, with early adoption permitted. The adoption required additional disclosures for the Company's discontinued operations, however it did not impact the Company's results of operations, financial position or cash flows.

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 was to be effective for the Company on January 1, 2017. In July 2015, the FASB approved a decision to defer the effective date one year and allow entities to early adopt. With this decision, the guidance will be effective for the Company on January 1, 2018. 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.

Simplifying the Presentation of Debt Issuance Costs In April 2015, the FASB issued guidance on simplifying the presentation of debt issuance costs in the financial statements. This guidance requires entities to present debt issuance costs as a direct deduction to the related debt liability. The amortization of these costs will be reported as interest expense. The guidance will be effective for the Company on January 1, 2016, and is to be applied retrospectively. Early adoption of this guidance is permitted, however the Company has not elected to do so. The guidance will require a reclassification of the debt issuance costs on the Consolidated Balance Sheets, but will not impact the Company's results of operations or cash flows.

Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent) In May 2015, the FASB issued guidance on fair value measurement and disclosure requirements removing the requirement to include investments in the fair value hierarchy for which fair value is measured using the net asset value per share practical expedient. The new guidance also removes the requirement to make certain disclosures for all investments that are eligible to be measured at net asset value using the practical expedient, and rather limits those disclosures to investments for which the practical expedient have been elected. This guidance will be effective for the Company on January 1, 2016, with early adoption permitted. The Company is evaluating the effects the adoption of the new guidance will have on its disclosures, however it will not impact the Company's results of operations, financial position or cash flows.

Simplifying the Measurement of Inventory In July 2015, the FASB issued guidance regarding inventory that is measured using the first-in, first-out or average cost method. The guidance does not apply to inventory measured using the last-in, first-out or the retail inventory method. The guidance requires inventory within its scope to be measured at the lower of cost or net realizable value, which is the estimated selling price in the normal course of business less reasonably predictable costs of completion, disposal and transportation. These amendments more closely align GAAP with International Financial Reporting Standards. This guidance will be effective for the Company on January 1, 2017, and should be applied prospectively with early adoption permitted as of the beginning of an interim or annual reporting period. The Company is evaluating the effects the adoption of the new guidance will have on its results of operations, financial position and cash flows.


13




Note 8 - Comprehensive income (loss)
The following tables include reclassification adjustments for gains (losses) on derivative instruments qualifying as hedges included in income (loss) from discontinued operations. The after-tax changes in the components of accumulated other comprehensive loss were as follows:
Three Months Ended
June 30, 2015
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
$
(2,972
)
$
(37,843
)
$
(139
)
$
30

$
(40,924
)
Other comprehensive income (loss) before reclassifications


9

(43
)
(34
)
Amounts reclassified from accumulated other comprehensive loss
100

584


28

712

Net current-period other comprehensive income (loss)
100

584

9

(15
)
678

Balance at end of period
$
(2,872
)
$
(37,259
)
$
(130
)
$
15

$
(40,246
)

Three Months Ended
June 30, 2014
Net Unrealized Gain (Loss) on Derivative
 Instruments
 Qualifying as Hedges
Postretirement
 Liability Adjustment
Foreign Currency Translation Adjustment
Net Unrealized Gain on Available-for-sale Investments
Total Accumulated
 Other
Comprehensive
 Loss
 
(In thousands)
Balance at beginning of period
$
(3,421
)
$
(33,532
)
$
(621
)
$
36

$
(37,538
)
Other comprehensive income before reclassifications


42

8

50

Amounts reclassified from accumulated other comprehensive loss
13

245


32

290

Net current-period other comprehensive income
13

245

42

40

340

Balance at end of period
$
(3,408
)
$
(33,287
)
$
(579
)
$
76

$
(37,198
)
Six Months Ended
June 30, 2015
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
$
(3,071
)
$
(38,218
)
$
(829
)
$
15

$
(42,103
)
Other comprehensive loss before reclassifications


(103
)
(64
)
(167
)
Amounts reclassified from accumulated other comprehensive loss
199

959

802

64

2,024

Net current-period other comprehensive income
199

959

699


1,857

Balance at end of period
$
(2,872
)
$
(37,259
)
$
(130
)
$
15

$
(40,246
)

14



Six Months Ended
June 30, 2014
Net Unrealized Gain (Loss) on Derivative
 Instruments
 Qualifying as Hedges
Postretirement
 Liability Adjustment
Foreign Currency Translation Adjustment
Net Unrealized Gain 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 before reclassifications


88

10

98

Amounts reclassified from accumulated other comprehensive loss
357

520


32

909

Net current-period other comprehensive income
357

520

88

42

1,007

Balance at end of period
$
(3,408
)
$
(33,287
)
$
(579
)
$
76

$
(37,198
)

Reclassifications out of accumulated other comprehensive loss were as follows:
 
Three Months Ended
Six Months Ended
Location on Consolidated Statements of Income
 
June 30,
June 30,
 
2015
2014
2015
2014
 
(In thousands)
 
Reclassification adjustment for loss on derivative instruments included in net income (loss):
 
 
 
 
 
Interest rate derivative instruments
$
(160
)
$
(160
)
$
(320
)
$
(320
)
Interest expense
 
60

60

121

121

Income taxes
 
(100
)
(100
)
(199
)
(199
)
 
Commodity derivative instruments, net of tax

87


(158
)
Discontinued operations
 
(100
)
(13
)
(199
)
(357
)
 
Amortization of postretirement liability losses included in net periodic benefit cost
(1,004
)
(395
)
(1,608
)
(838
)
(a)
 
420

150

649

318

Income taxes
 
(584
)
(245
)
(959
)
(520
)
 
Reclassification adjustment for loss on foreign currency translation adjustment included in net income (loss)


(1,293
)

Other income
 


491


Income taxes
 


(802
)

 
Reclassification adjustment for loss on available-for-sale investments included in net income (loss)
(43
)
(49
)
(98
)
(49
)
Other income
 
15

17

34

17

Income taxes
 
(28
)
(32
)
(64
)
(32
)
 
Total reclassifications
$
(712
)
$
(290
)
$
(2,024
)
$
(909
)
 
 (a) Included in net periodic benefit cost (credit). For more information, see Note 15.
 

Note 9 - Discontinued operations
In the second quarter of 2015, the Company began the marketing and sale process of Fidelity with an anticipated sale to occur within one year. The sale of Fidelity is part of the Company's strategic plan to grow its capital investments in the remaining business segments and to focus on creating a greater long-term value. The assets and liabilities for these operations have been classified as held for sale and the results of operations are shown in income (loss) from discontinued operations, other than certain general and administrative costs and interest expense which do not meet the criteria for income (loss) from discontinued operations. The Company's consolidated financial statements and accompanying notes for current and prior periods have been

15



restated. At the time the assets were classified as held for sale, depreciation, depletion and amortization expense was no longer recorded.

The carrying amounts of the major classes of assets and liabilities that are classified as held for sale on the Company's Consolidated Balance Sheets were as follows:
 
June 30, 2015
June 30, 2014
December 31, 2014
 
(In thousands)
ASSETS
 
 
 
Current assets:
 
 
 
Receivables, net
$
33,551

$
146,589

$
94,132

Inventories
6,748

12,849

11,401

Deferred income taxes

6,623


Commodity derivative instruments
2,537

129

18,335

Prepayments and other current assets
34,456

6,328

7,309

Total current assets held for sale
77,292

172,518

131,177

Noncurrent assets:
 
 
 
Investments
37

37

37

Net property, plant and equipment
1,097,576

1,753,509

1,618,099

Deferred income taxes
52,017



Other
161

4,091

2,334

Less allowance for impairment of assets held for sale
399,987



Total noncurrent assets held for sale
749,804

1,757,637

1,620,470

Total assets held for sale
$
827,096

$
1,930,155

$
1,751,647

LIABILITIES
 
 
 
Current liabilities:
 
 
 
Long-term debt due within one year
$

$
569

$
897

Accounts payable
49,400

165,189

103,556

Taxes payable
4,064

15,051

19,900

Deferred income taxes
1,401


8,206

Accrued compensation
4,460

5,721

5,373

Commodity derivative instruments
3,511

17,449


Other accrued liabilities
12,107

27,640

16,796

Total current liabilities held for sale
74,943

231,619

154,728

Noncurrent liabilities:
 
 
 
Long-term debt

608


Deferred income taxes

257,316

238,391

Other liabilities
35,790

60,761

57,050

Total noncurrent liabilities held for sale
35,790

318,685

295,441

Total liabilities held for sale
$
110,733

$
550,304

$
450,169


At the time the Company committed to the plan to sell Fidelity, the Company performed a fair value assessment of the assets and liabilities classified as held for sale. The estimated fair value was determined using the income and the market approaches. The income approach was determined by using the present value of future estimated cash flows. The income approach considered management’s views on current operating measures as well as assumptions pertaining to market forces in the oil and gas industry including estimated reserves, estimated prices, market differentials, estimates of well operating and future development costs and timing of operations. The estimated cash flows were discounted using a rate believed to be consistent with those used by principal market participants. The market approach was provided by a third party and based on market transactions involving similar interests in oil and natural gas properties. The fair value assessment indicated an impairment based on the current carrying value exceeding the estimated fair value, which resulted in the Company writing down Fidelity’s assets at June 30, 2015. An impairment of $400.0 million ($252.0 million after tax) was recorded and included in operating expenses from discontinued operations during the second quarter of 2015. The estimated fair value of Fidelity's assets have been categorized as Level 3 in the fair value hierarchy.

Unforeseen events and changes in circumstances and market conditions and material differences in the value of the assets held for sale due to changes in estimates of future cash flows could negatively affect the estimated fair value of Fidelity and result in additional impairment charges. Various factors, including oil and natural gas prices, market differentials, changes in estimates of reserve quantities, unsuccessful results of exploration and development efforts or changes in operating and development

16



costs could result in future impairments of the Company's assets held for sale. In addition, the ultimate sales price of Fidelity may differ from the estimated fair value.

Historically, the Company used the full-cost method of accounting for its oil and natural gas production activities. Under this method, all costs incurred in the acquisition, exploration and development of oil and natural gas properties are capitalized and amortized on the units-of-production method based on total proved reserves.

Prior to the oil and natural gas properties being classified as held for sale, capitalized costs were subject to a "ceiling test" that limits such costs to the aggregate of the present value of future net cash flows from proved reserves discounted at 10 percent, as mandated under the rules of the SEC, plus the cost of unproved properties not subject to amortization, plus the effects of cash flow hedges, less applicable income taxes. Proved reserves and associated future cash flows are determined based on SEC Defined Prices and exclude cash outflows associated with asset retirement obligations that have been accrued on the balance sheet. If capitalized costs, less accumulated amortization and related deferred income taxes, exceed the full-cost ceiling at the end of any quarter, a permanent noncash write-down is required to be charged to earnings in that quarter regardless of subsequent price changes.

The Company's capitalized cost under the full-cost method of accounting exceeded the full-cost ceiling at March 31, 2015. SEC Defined Prices, adjusted for market differentials, were used to calculate the ceiling test. Accordingly, the Company was required to write down its oil and natural gas producing properties. The Company recorded a $500.4 million ($315.3 million after tax) noncash write-down in operating expenses from discontinued operations in the first quarter of 2015.

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.

The reconciliation of the major classes of income and expense constituting pretax income (loss) from discontinued operations to the after-tax net income (loss) from discontinued operations on the Company's Consolidated Statements of Income were as follows:
 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
 
2015
2014
2015
2014
 
(In thousands)
Operating revenues
$
43,087

$
139,580

$
98,023

$
277,115

Operating expenses
442,725

103,057

1,015,677

201,307

Operating income (loss)
(399,638
)
36,523

(917,654
)
75,808

Other income
188

1,010

2,069

1,025

Interest expense
33

31

55

57

Income (loss) from discontinued operations before income taxes
(399,483
)
37,502

(915,640
)
76,776

Income taxes
(148,068
)
13,621

(339,620
)
27,783

Income (loss) from discontinued operations
$
(251,415
)
$
23,881

$
(576,020
)
$
48,993



17



Note 10 - Goodwill and other intangible assets
The changes in the carrying amount of goodwill were as follows:
Six Months Ended
June 30, 2015
Balance
as of
January 1,
2015*
Goodwill
Acquired
During
the Year
Balance
as of
June 30, 2015*
 
(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
103,441


103,441

Total
$
635,204

$

$
635,204

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

Six Months Ended
June 30, 2014
Balance
as of
January 1,
2014*
Goodwill
Acquired
During the
Year
Balance
as of
June 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.


Year Ended
December 31, 2014
Balance
as of
January 1,
2014*
Goodwill
Acquired
During the
Year/Other
Balance
as of
December 31,
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

(835
)
103,441

Total
$
636,039

$
(835
)
$
635,204

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


18



Other amortizable intangible assets were as follows:
 
June 30,
2015
June 30,
2014
December 31, 2014
 
(In thousands)
Customer relationships
$
20,975

$
21,310

$
21,310

Accumulated amortization
(16,065
)
(14,734
)
(15,556
)
 
4,910

6,576

5,754

Noncompete agreements
4,409

5,080

5,080

Accumulated amortization
(3,581
)
(3,936
)
(4,098
)
 
828

1,144

982

Other
8,300

10,921

10,921

Accumulated amortization
(5,532
)
(7,375
)
(7,817
)
 
2,768

3,546

3,104

Total
$
8,506

$
11,266

$
9,840


Amortization expense for amortizable intangible assets for the three and six months ended June 30, 2015, was $700,000 and $1.4 million, respectively. Amortization expense for amortizable intangible assets for the three and six months ended June 30, 2014, was $1.0 million and $1.8 million, respectively. Estimated amortization expense for amortizable intangible assets is $2.5 million in 2015, $2.2 million in 2016, $1.9 million in 2017, $1.0 million in 2018, $900,000 in 2019 and $1.4 million thereafter.

Note 11 - 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 June 30, 2015, 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.

Fidelity
At June 30, 2015 and 2014, and December 31, 2014, Fidelity held oil swap agreements with total forward notional volumes of 1.1 million, 2.5 million and 270,000 Bbl, respectively, and natural gas swap agreements with total forward notional volumes of 1.8 million, 11.0 million and 5.0 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. The gains and losses on the commodity derivative instruments held by Fidelity are included in income (loss) from discontinued operations and the associated assets and liabilities are classified as held for sale.

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 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 remained in accumulated other comprehensive income (loss) as of the de-designation date and were reclassified into earnings in future periods as the underlying hedged transactions affected earnings.

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 income (loss) from discontinued operations on the Consolidated Statements of Income at the date the oil and natural gas quantities were settled.

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 were in a liability position at June 30, 2015 and 2014, were $3.5 million and $17.4 million, respectively. Fidelity had no derivative instruments that were in a liability position with credit-risk-related contingent features at December 31, 2014. The aggregate fair value of assets that would have been needed to settle

19



the instruments immediately if the credit-risk-related contingent features were triggered on June 30, 2015 and 2014, were $3.5 million and $17.4 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 June 30, 2015 and 2014, and December 31, 2014, Centennial had no outstanding interest rate swap agreements.

Fidelity and Centennial
The gains and losses on derivative instruments were as follows:
 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
 
2015
2014
2015
2014
 
(In thousands)
Commodity derivatives designated as cash flow hedges:
 
 
 
 
Amount of (gain) loss reclassified from accumulated other comprehensive loss into discontinued operations (effective portion), net of tax
$

$
(87
)
$

$
158

 
 
 
 
 
Interest rate derivatives designated as cash flow hedges:
 
 
 
 
Amount of loss reclassified from accumulated other comprehensive loss into interest expense (effective portion), net of tax
100

100

199

199

 
 
 
 
 
Commodity derivatives not designated as hedging instruments:
 
 
 
 
Amount of loss recognized in discontinued operations, before tax
(8,101
)
(5,196
)
(19,309
)
(11,908
)

Over the next 12 months net losses of approximately $400,000 (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 June 30, 2015
Fair Value at June 30, 2014
Fair Value at December 31, 2014
 
 
(In thousands)
Not designated as hedges:
 

 
 
Commodity derivatives
Current assets held for sale
$
2,537

$
129

$
18,335

 
Noncurrent assets held for sale

131


Total asset derivatives
 
$
2,537

$
260

$
18,335


Liability
Derivatives
Location on
Consolidated
Balance Sheets
Fair Value at June 30, 2015
Fair Value at June 30, 2014
Fair Value at December 31, 2014
 
 
(In thousands)
Not designated as hedges:
 

 

 

Commodity derivatives
Current liabilities held for sale
$
3,511

$
17,449

$

Total liability derivatives
 
$
3,511

$
17,449

$



20



All of the Company's commodity derivative instruments at June 30, 2015 and 2014, and December 31, 2014, 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:
June 30, 2015
Gross Amounts Recognized on the Consolidated Balance Sheets
Gross Amounts Not Offset on the Consolidated Balance Sheets
Net
 
(In thousands)
Assets:
 
 
 
Commodity derivatives
$
2,537

$
(2,537
)
$

Total assets
$
2,537

$
(2,537
)
$

Liabilities:
 
 

Commodity derivatives
$
3,511

$
(2,537
)
$
974

Total liabilities
$
3,511

$
(2,537
)
$
974


June 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
$
260

$
(260
)
$

Total assets
$
260

$
(260
)
$

Liabilities:
 
 
 
Commodity derivatives
$
17,449

$
(260
)
$
17,189

Total liabilities
$
17,449

$
(260
)
$
17,189


December 31, 2014
Gross Amounts Recognized on the Consolidated Balance Sheets
Gross Amounts Not Offset on the Consolidated Balance Sheets
Net
 
(In thousands)
Assets:
 
 
 
Commodity derivatives
$
18,335

$

$
18,335

Total assets
$
18,335

$

$
18,335


Note 12 - 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 $68.2 million, $64.4 million and $65.8 million, at June 30, 2015 and 2014, and December 31, 2014, respectively, are classified as Investments on the Consolidated Balance Sheets. The net unrealized gains on these investments were $400,000 and $2.4 million for the three and six months ended June 30, 2015, respectively. The net unrealized gains on these investments were $1.1 million and $2.0 million for the three and six months ended June 30, 2014, 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.


21



The Company did not elect the fair value option, which records gains and losses in income, for its available-for-sale securities, which include mortgage-backed securities and U.S. Treasury securities. These available-for-sale securities are recorded at fair value and are classified as Investments on the Consolidated Balance Sheets. Unrealized gains or losses are recorded in accumulated other comprehensive income (loss). Details of available-for-sale securities were as follows:
June 30, 2015
Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
 
(In thousands)
Mortgage-backed securities
$
8,072

$
29

$
(28
)
$
8,073

U.S. Treasury securities
2,327

22


2,349

Total
$
10,399

$
51

$
(28
)
$
10,422


June 30, 2014
Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
 
(In thousands)
Mortgage-backed securities
$
7,989

$
91

$
(5
)
$
8,075

U.S. Treasury securities
2,066

30


2,096

Total
$
10,055

$
121

$
(5
)
$
10,171


December 31, 2014
Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
 
(In thousands)
Mortgage-backed securities
$
6,594

$
60

$
(18
)
$
6,636

U.S. Treasury securities
3,574


(19
)
3,555

Total
$
10,168

$
60

$
(37
)
$
10,191


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 RIN obligations are based on the market approach using quoted prices from an independent pricing service. RINs are assigned to biofuels produced or imported into the United States as required by the EPA, which sets annual quotas for the percentage of biofuels that must be blended into transportation fuels consumed in the United States. As a producer of diesel fuel, Dakota Prairie Refinery is required to blend biofuels into the fuel it produces at a rate that will meet the EPA's quota. RINs are purchased in the open market to satisfy the requirement as Dakota Prairie Refinery is currently unable to blend biofuels into the diesel fuel it produces.

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 six months ended June 30, 2015 and 2014, there were no transfers between Levels 1 and 2.

22




The Company's assets and liabilities measured at fair value on a recurring basis were as follows:
 
Fair Value Measurements at June 30, 2015, Using
 
 
Quoted Prices in
Active Markets
for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Balance at June 30, 2015
 
(In thousands)
Assets:
 
 
 
 
Money market funds
$

$
16,358

$

$
16,358

Insurance contract*

68,187


68,187

Available-for-sale securities:
 
 
 
 
Mortgage-backed securities

8,073


8,073

U.S. Treasury securities

2,349


2,349

Total assets measured at fair value
$

$
94,967

$

$
94,967

Liabilities:
 
 
 
 
RIN obligations
$

$
538

$

$
538

Total liabilities measured at fair value
$

$
538

$

$
538

* The insurance contract invests approximately 20 percent in common stock of mid-cap companies, 18 percent in common stock of small-cap companies, 28 percent in common stock of large-cap companies, 32 percent in fixed-income investments, 1 percent in target date investments and 1 percent in cash equivalents.
 

 
Fair Value Measurements at June 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 June 30, 2014
 
(In thousands)
Assets:
 
 
 
 
Money market funds
$

$
16,031

$

$
16,031

Insurance contract*

64,449


64,449

Available-for-sale securities:
 
 
 
 
Mortgage-backed securities

8,075


8,075

U.S. Treasury securities

2,096


2,096

Total assets measured at fair value
$

$
90,651

$

$
90,651

* The insurance contract invests approximately 21 percent in common stock of mid-cap companies, 18 percent in common stock of small-cap companies, 29 percent in common stock of large-cap companies, 31 percent in fixed-income investments and 1 percent in cash equivalents.
 


23



 
Fair Value Measurements at December 31, 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 December 31, 2014
 
(In thousands)
Assets:
 
 
 
 
Money market funds
$

$
16,138

$

$
16,138

Insurance contract*

65,831


65,831

Available-for-sale securities:
 
 
 
 
Mortgage-backed securities

6,636


6,636

U.S. Treasury securities

3,555


3,555

Total assets measured at fair value
$

$
92,160

$

$
92,160

* The insurance contract invests approximately 20 percent in common stock of mid-cap companies, 18 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.
 

The Company applies the provisions of the fair value measurement standard to its nonrecurring, non-financial measurements, including long-lived asset impairments. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. The Company reviews the carrying value of its long-lived assets, excluding goodwill, whenever events or changes in circumstances indicate that such carrying amounts may not be recoverable.

During the second quarter of 2015, 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, 2015, coalbed natural gas gathering assets were written down to the nonrecurring fair value measurement of $1.1 million. The fair value of these coalbed natural gas gathering assets have been categorized as Level 3 in the fair value hierarchy.

The Company performed a fair value assessment of the assets and liabilities classified as held for sale. For more information on this Level 3 nonrecurring fair value measurement, see Note 9.

The Company's long-term debt is not measured at fair value on the Consolidated Balance Sheets and the fair value is being provided for disclosure purposes only. The fair value was 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 June 30, 2015
$
2,376,802

$
2,468,204

Long-term debt at June 30, 2014
$
2,185,917

$
2,282,174

Long-term debt at December 31, 2014
$
2,093,830

$
2,238,548


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


24



Note 13 - Equity
A summary of the changes in equity was as follows:
Six Months Ended June 30, 2015
Total Stockholders' Equity
Noncontrolling Interest
Total Equity
 
(In thousands)
Balance at December 31, 2014
$
3,134,041

$
115,743

$
3,249,784

Net loss
(535,521
)
(11,282
)
(546,803
)
Other comprehensive income
1,857


1,857

Dividends declared on preferred stocks
(342
)

(342
)
Dividends declared on common stock
(71,078
)

(71,078
)
Stock-based compensation
1,107


1,107

Net tax deficit on stock-based compensation
(1,632
)

(1,632
)
Issuance of common stock
14,499


14,499

Contribution from noncontrolling interest

39,500

39,500

Balance at June 30, 2015
$
2,542,931

$
143,961

$
2,686,892


Six Months Ended June 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)
110,768

(1,302
)
109,466

Other comprehensive income
1,007


1,007

Dividends declared on preferred stocks
(342
)

(342
)
Dividends declared on common stock
(68,025
)

(68,025
)
Stock-based compensation
2,796


2,796

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

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


4,729

Issuance of common stock
131,973


131,973

Contribution from noncontrolling interest

32,500

32,500

Balance at June 30, 2014
$
3,000,506

$
63,936

$
3,064,442


Note 14 - Business segment data
The Company's reportable segments are those that are based on the Company's method of internal reporting, which generally segregates the strategic business units due to differences in products, services and regulation. The internal reporting of these operating segments is defined based on the reporting and review process used by the Company's chief executive officer. The vast majority of the Company's operations are located within the United States.

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

The pipeline 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 recently commenced operations of Dakota Prairie Refinery in conjunction with Calumet to refine crude oil. The facility produces and sells diesel fuel, naphtha and ATBs. This segment also provides cathodic protection and other energy-related services.

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 provides utility construction services specializing in constructing and maintaining electric and communications lines, gas pipelines, fire suppression systems, and external lighting and traffic signalization. This segment also provides utility excavation and inside electrical and mechanical services, and manufactures and distributes transmission line construction equipment and supplies.

25




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 certain general and administrative costs (reflected in operation and maintenance expense) and interest expense which were previously allocated to Fidelity and do not meet the criteria for income (loss) from discontinued operations. The Other category also included Centennial Resources' investment in the Brazilian Transmission Lines.

Discontinued operations includes the results of Fidelity other than certain general and administrative costs and interest expense as described above. Fidelity 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. The Company has begun marketing Fidelity and plans to exit that line of business. Discontinued operations also includes legal expenses and a benefit related to the vacation of an arbitration award in 2014 related to Centennial Resources. For more information on discontinued operations, see Note 9.

The information below follows the same accounting policies as described in Note 1 of the Company's Notes to Consolidated Financial Statements in the 2014 Annual Report. Information on the Company's businesses was as follows:
 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
 
2015
2014
2015
2014
 
(In thousands)
External operating revenues:
 
 
 
 
Regulated operations:
 
 
 
 
Electric
$
64,265

$
65,149

$
136,041

$
138,796

Natural gas distribution
132,965

146,077

463,538

520,311

Pipeline and energy services
18,242

15,246

22,183

19,668

 
215,472

226,472

621,762

678,775

Nonregulated operations:
 
 
 
 
Pipeline and energy services
63,131

16,044

77,834

29,859

Construction materials and contracting
495,640

434,452

701,298

598,875

Construction services
211,515

275,109

446,918

545,002

Other
457

487

752

815

 
770,743

726,092

1,226,802

1,174,551

Total external operating revenues
$
986,215

$
952,564

$
1,848,564

$
1,853,326

 
 
 
 
 
Intersegment operating revenues:
 

 

 

 

Regulated operations:
 
 
 
 
Electric
$

$

$

$

Natural gas distribution