Attached files

file filename
EX-95 - MDU RESOURCES MINE SAFETY DISCLOSURES - MDU RESOURCES GROUP INCa2016q3ex95.htm
EX-32 - MDU RESOURCES CERTIFICATION OF CEO AND CFO - MDU RESOURCES GROUP INCa2016q3ex32.htm
EX-31.B - MDU RESOURCES CERTIFICATION OF CHIEF FINANCIAL OFFICER - MDU RESOURCES GROUP INCa2016q3ex31b.htm
EX-31.A - MDU RESOURCES CERTIFICATION OF CHIEF EXECUTIVE OFFICER - MDU RESOURCES GROUP INCa2016q3ex31a.htm
EX-12 - MDU RESOURCES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - MDU RESOURCES GROUP INCa2016q3ex12.htm
EX-10.A - MDU RESOURCES 401 K RETIREMENT PLAN AMENDMENT 9-19-2016 - MDU RESOURCES GROUP INCa2016q3ex10a.htm
EX-4 - MDU RESOURCES FOURTH AMENDED AND RESTATED CREDIT AGREEMENT - MDU RESOURCES GROUP INCa2016q3ex4.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 September 30, 2016
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 definitions 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 (Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of October 31, 2016: 195,304,376 shares.





Definitions
The following abbreviations and acronyms used in this Form 10-Q are defined below:
Abbreviation or Acronym
 
2015 Annual Report
Company's Annual Report on Form 10-K for the year ended December 31, 2015
AFUDC
Allowance for funds used during construction
ASC
FASB Accounting Standards Codification
ATBs
Atmospheric tower bottoms
Bbl
Barrel
Brazilian Transmission Lines
Company's former investment in companies owning three electric transmission lines
Btu
British thermal unit
Calumet
Calumet Specialty Products Partners, L.P.
Cascade
Cascade Natural Gas Corporation, an indirect wholly owned subsidiary of MDU Energy Capital
Centennial
Centennial Energy Holdings, Inc., a direct wholly owned subsidiary of the Company
Centennial Capital
Centennial Holdings Capital LLC, a direct wholly owned subsidiary of Centennial
Centennial Resources
Centennial Energy Resources LLC, a direct wholly owned subsidiary of Centennial
Company
MDU Resources Group, Inc.
Coyote Creek
Coyote Creek Mining Company, LLC, a subsidiary of The North American Coal Corporation
Coyote Station
427-MW coal-fired electric generating facility near Beulah, North Dakota (25 percent ownership)
Dakota Prairie Refinery
20,000-barrel-per-day diesel topping plant built by Dakota Prairie Refining in southwestern North Dakota
Dakota Prairie Refining
Dakota Prairie Refining, LLC, a limited liability company previously owned by WBI Energy and Calumet (previously included in the Company's refining segment)
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
FERC
Federal Energy Regulatory Commission
Fidelity
Fidelity Exploration & Production Company, a direct wholly owned subsidiary of WBI Holdings (previously referred to as the Company's exploration and production segment)
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
IFRS
International Financial Reporting Standards
Intermountain
Intermountain Gas Company, an indirect wholly owned subsidiary of MDU Energy Capital
IPUC
Idaho Public Utilities Commission
JTL - Wyoming
JTL Group, Inc. (Wyoming Corporation), 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
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

2



MMdk
Million dk
MNPUC
Minnesota Public Utilities Commission
Montana-Dakota
Montana-Dakota Utilities Co., a public utility division of the Company
Montana Seventeenth Judicial District Court
Montana Seventeenth Judicial District Court, Phillips County
MPPAA
Multiemployer Pension Plan Amendments Act of 1980
MW
Megawatt
NDPSC
North Dakota Public Service Commission
NGL
Natural gas liquids
Oil
Includes crude oil and condensate
Omimex
Omimex Canada, Ltd.
OPUC
Oregon Public Utility Commission
Oregon DEQ
Oregon State Department of Environmental Quality
PRP
Potentially Responsible Party
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
Tesoro
Tesoro Refining & Marketing Company LLC
UA
United Association of Journeyman and Apprentices of the Plumbing and Pipefitting Industry of the United States and Canada
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
Washington DOE
Washington State Department of Ecology
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 regulated energy delivery and construction materials and services business, which was incorporated under the laws of the state of Delaware in 1924. Its principal executive offices are at 1200 West Century Avenue, P.O. Box 5650, Bismarck, North Dakota 58506-5650, telephone (701) 530-1000.
Montana-Dakota, 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 midstream segment and Fidelity, formerly 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 2016, the Company sold all of the outstanding membership interests in Dakota Prairie Refining and exited that line of business. Therefore, the results of Dakota Prairie Refining are reflected in discontinued operations, other than certain general and administrative costs and interest expense which are 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. The Company completed the sale of all of its marketed assets. 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 10 and 16.


4



Index
Part I -- Financial Information
Page
 
 
Consolidated Statements of Income --
Three and Nine Months Ended September 30, 2016 and 2015
 
 
Consolidated Statements of Comprehensive Income --
Three and Nine Months Ended September 30, 2016 and 2015
 
 
Consolidated Balance Sheets --
September 30, 2016 and 2015, and December 31, 2015
 
 
Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 2016 and 2015
 
 
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,
 
2016

2015

2016

2015

 
(In thousands, except per share amounts)
Operating revenues:
 
 
 
 
Electric, natural gas distribution and regulated pipeline and midstream
$
192,079

$
185,417

$
783,997

$
807,585

Nonregulated pipeline and midstream, construction materials and contracting, construction services and other
1,016,488

1,012,925

2,328,733

2,189,640

Total operating revenues 
1,208,567

1,198,342

3,112,730

2,997,225

Operating expenses:
 

 

 

 

Fuel and purchased power
16,800

20,616

54,725

63,761

Purchased natural gas sold
34,321

37,574

242,795

305,313

Operation and maintenance:
 

 

 

 

Electric, natural gas distribution and regulated pipeline and midstream
77,662

68,344

229,364

207,144

Nonregulated pipeline and midstream, construction materials and contracting, construction services and other
842,878

859,843

2,008,122

1,919,455

Depreciation, depletion and amortization
54,094

51,746

163,226

154,669

Taxes, other than income
36,128

32,391

116,864

109,039

Total operating expenses
1,061,883

1,070,514

2,815,096

2,759,381

Operating income
146,684

127,828

297,634

237,844

Other income
1,741

3,300

3,662

5,673

Interest expense
22,278

22,417

67,365

68,872

Income before income taxes
126,147

108,711

233,931

174,645

Income taxes
37,761

34,825

67,381

54,157

Income from continuing operations
88,386

73,886

166,550

120,488

Loss from discontinued operations, net of tax (Note 10)
(5,400
)
(223,112
)
(299,538
)
(816,517
)
Net income (loss)
82,986

(149,226
)
(132,988
)
(696,029
)
Loss from discontinued operations attributable to noncontrolling interest (Note 10)

(9,778
)
(131,691
)
(21,060
)
Dividends declared on preferred stocks
171

171

514

514

Earnings (loss) on common stock
$
82,815

$
(139,619
)
$
(1,811
)
$
(675,483
)
Earnings (loss) per common share - basic:
 

 

 

 

Earnings before discontinued operations
$
.45

$
.38

$
.85

$
.62

Discontinued operations attributable to the Company, net of tax
(.03
)
(1.10
)
(.86
)
(4.09
)
Earnings (loss) per common share - basic
$
.42

$
(.72
)
$
(.01
)
$
(3.47
)
Earnings (loss) per common share - diluted:
 

 

 

 

Earnings before discontinued operations
$
.45

$
.38

$
.85

$
.62

Discontinued operations attributable to the Company, net of tax
(.03
)
(1.10
)
(.86
)
(4.09
)
Earnings (loss) per common share - diluted
$
.42

$
(.72
)
$
(.01
)
$
(3.47
)
Dividends declared per common share
$
.1875

$
.1825

$
.5625

$
.5475

Weighted average common shares outstanding - basic
195,304

195,151

195,298

194,814

Weighted average common shares outstanding - diluted
195,811

195,169

195,794

194,833

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,
 
2016
2015
2016
2015
 
(In thousands)
Net income (loss)
$
82,986

$
(149,226
)
$
(132,988
)
$
(696,029
)
Other comprehensive income (loss):
 
 
 
 
Reclassification adjustment for loss on derivative instruments included in net income (loss), net of tax of $56 and $60 for the three months ended and $170 and $181 for the nine months ended in 2016 and 2015, respectively
92

100

275

299

Amortization of postretirement liability (gains) losses included in net periodic benefit cost, net of tax of $143 and $233 for the three months ended and $(676) and $881 for the nine months ended in 2016 and 2015, respectively
236

382

(1,111
)
1,341

Foreign currency translation adjustment:
 
 
 
 
Foreign currency translation adjustment recognized during the period, net of tax of $(2) and $(44) for the three months ended and $32 and $(107) for the nine months ended in 2016 and 2015, respectively
(4
)
(73
)
52

(176
)
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 $0 and $491 for the nine months ended in 2016 and 2015, respectively



802

Foreign currency translation adjustment
(4
)
(73
)
52

626

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 $(23) and $(19) for the three months ended and $(35) and $(57) for the nine months ended in 2016 and 2015, respectively
(42
)
(35
)
(65
)
(105
)
Reclassification adjustment for loss on available-for-sale investments included in net income (loss), net of tax of $18 and $15 for the three months ended and $57 and $53 for the nine months ended in 2016 and 2015, respectively
33

28

106

98

Net unrealized gain (loss) on available-for-sale investments
(9
)
(7
)
41

(7
)
Other comprehensive income (loss)
315

402

(743
)
2,259

Comprehensive income (loss)
83,301

(148,824
)
(133,731
)
(693,770
)
Comprehensive loss from discontinued operations attributable to noncontrolling interest

(9,778
)
(131,691
)
(21,060
)
Comprehensive income (loss) attributable to common stockholders
$
83,301

$
(139,046
)
$
(2,040
)
$
(672,710
)
The accompanying notes are an integral part of these consolidated financial statements.



7



MDU Resources Group, Inc.
Consolidated Balance Sheets
(Unaudited)
 
September 30, 2016
September 30, 2015
December 31, 2015
(In thousands, except shares and per share amounts)
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
59,868

$
88,630

$
83,903

Receivables, net
665,142

663,342

582,475

Inventories
245,790

245,987

240,551

Deferred income taxes
31,378

31,892

33,121

Prepayments and other current assets
49,081

55,860

29,528

Current assets held for sale
93,366

117,823

54,847

Total current assets
1,144,625

1,203,534

1,024,425

Investments
126,048

118,063

119,704

Property, plant and equipment
6,588,445

6,199,880

6,387,702

Less accumulated depreciation, depletion and amortization
2,583,566

2,443,830

2,489,322

Net property, plant and equipment
4,004,879

3,756,050

3,898,380

Deferred charges and other assets:
 

 

 

Goodwill
641,527

635,204

635,204

Other intangible assets, net
6,529

7,908

7,342

Other
360,537

346,163

351,603

Noncurrent assets held for sale
69,061

909,150

565,509

Total deferred charges and other assets 
1,077,654

1,898,425

1,559,658

Total assets
$
6,353,206

$
6,976,072

$
6,602,167

Liabilities and Equity
 

 

 

Current liabilities:
 

 

 

Long-term debt due within one year
$
93,598

$
258,539

$
238,539

Accounts payable
281,373

271,767

286,061

Taxes payable
59,747

42,637

46,880

Dividends payable
36,791

35,807

36,784

Accrued compensation
58,604

59,218

45,192

Other accrued liabilities
191,904

157,116

167,322

Current liabilities held for sale
22,185

123,628

130,375

Total current liabilities 
744,202

948,712

951,153

Long-term debt
1,808,350

1,942,234

1,557,624

Deferred credits and other liabilities:
 

 

 

Deferred income taxes
693,704

718,348

696,750

Other
821,889

755,790

812,342

Noncurrent liabilities held for sale

96,117

63,750

Total deferred credits and other liabilities 
1,515,593

1,570,255

1,572,842

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 - 195,843,297 at September 30, 2016, 195,804,665 at
September 30, 2015 and December 31, 2015
195,843

195,805

195,805

Other paid-in capital
1,231,396

1,228,875

1,230,119

Retained earnings
884,339

980,421

996,355

Accumulated other comprehensive loss
(37,891
)
(39,844
)
(37,148
)
Treasury stock at cost - 538,921 shares
(3,626
)
(3,626
)
(3,626
)
Total common stockholders' equity
2,270,061

2,361,631

2,381,505

Total stockholders' equity
2,285,061

2,376,631

2,396,505

Noncontrolling interest

138,240

124,043

Total equity
2,285,061

2,514,871

2,520,548

Total liabilities and equity 
$
6,353,206

$
6,976,072

$
6,602,167

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,
 
 
2016

2015

 
 
(In thousands)
Operating activities:
 
 
 
Net loss
 
$
(132,988
)
$
(696,029
)
Loss from discontinued operations, net of tax
 
(299,538
)
(816,517
)
Income from continuing operations
 
166,550

120,488

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

 

Depreciation, depletion and amortization
 
163,226

154,669

Deferred income taxes
 
(1,346
)
(48
)
Changes in current assets and liabilities, net of acquisitions:
 
 

 
Receivables
 
(75,308
)
(76,447
)
Inventories
 
(4,153
)
(3,660
)
Other current assets
 
(18,824
)
34,493

Accounts payable
 
15,514

47,629

Other current liabilities
 
48,973

5,187

Other noncurrent changes
 
(25,284
)
(4,478
)
Net cash provided by continuing operations
 
269,348

277,833

Net cash provided by discontinued operations
 
7,127

125,738

Net cash provided by operating activities
 
276,475

403,571

Investing activities:
 
 

 

Capital expenditures
 
(303,873
)
(397,005
)
Net proceeds from sale or disposition of property and other
 
17,583

37,679

Investments
 
56

1,309

Net cash used in continuing operations
 
(286,234
)
(358,017
)
Net cash provided by (used in) discontinued operations
 
31,918

(185,999
)
Net cash used in investing activities
 
(254,316
)
(544,016
)
Financing activities:
 
 

 

Issuance of long-term debt
 
341,777

327,475

Repayment of long-term debt
 
(236,433
)
(143,333
)
Proceeds from issuance of common stock
 

21,894

Dividends paid
 
(110,366
)
(107,028
)
Tax withholding on stock-based compensation
 
(323
)

Net cash provided by (used in) continuing operations
 
(5,345
)
99,008

Net cash provided by (used in) discontinued operations
 
(40,852
)
69,780

Net cash provided by (used in) financing activities
 
(46,197
)
168,788

Effect of exchange rate changes on cash and cash equivalents
 
3

(192
)
Increase (decrease) in cash and cash equivalents
 
(24,035
)
28,151

Cash and cash equivalents -- beginning of year
 
83,903

60,479

Cash and cash equivalents -- end of period
 
$
59,868

$
88,630

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

9



MDU Resources Group, Inc.
Notes to Consolidated
Financial Statements
September 30, 2016 and 2015
(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 2015 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 2015 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, 2016, up to the date of issuance of these consolidated interim financial statements.

On June 24, 2016, WBI Energy entered into a membership interest purchase agreement with Tesoro to sell all of the outstanding membership interests in Dakota Prairie Refining to Tesoro. WBI Energy and Calumet each previously owned 50 percent of the Dakota Prairie Refining membership interests and were equal members in building and operating Dakota Prairie Refinery. To effectuate the sale, WBI Energy acquired Calumet’s 50 percent membership interest in Dakota Prairie Refining on June 27, 2016. The sale of the membership interests to Tesoro closed on June 27, 2016. The sale of Dakota Prairie Refining reduces the Company’s risk by decreasing exposure to commodity prices.

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. Between September 2015 and March 2016, the Company entered into purchase and sale agreements to sell all of Fidelity's marketed oil and natural gas assets. The completion of these sales occurred between October 2015 and April 2016. The sale of Fidelity was 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 the Company's discontinued operations have been classified as held for sale and the results of operations are shown in 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 restated. At the time the assets were classified as held for sale, depreciation, depletion and amortization expense was no longer recorded. 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 the Company's discontinued operations, see Note 10.
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 $26.3 million, $29.3 million and $27.8 million at September 30, 2016 and 2015, and December 31, 2015, 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, 2016 and 2015, and December 31, 2015, was $10.2 million, $9.0 million and $9.8 million, respectively.

10



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. 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:
 
September 30, 2016

September 30, 2015

December 31, 2015

 
(In thousands)
Aggregates held for resale
$
119,078

$
115,736

$
115,854

Asphalt oil
23,480

33,581

36,498

Natural gas in storage (current)
35,625

28,222

21,023

Materials and supplies
18,584

19,404

16,997

Merchandise for resale
15,672

15,563

15,318

Other
33,351

33,481

34,861

Total
$
245,790

$
245,987

$
240,551

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 $49.1 million, $49.3 million and $49.1 million at September 30, 2016 and 2015, and December 31, 2015, respectively.

Note 5 - Impairment of long-lived assets
During the second quarter of 2015, the Company recognized an impairment of coalbed natural gas gathering assets at the pipeline and midstream segment of $3.0 million, 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 where there had been continued decline in natural gas development and production activity due to low natural gas prices. The coalbed natural gas gathering assets were written down to their estimated fair value that was determined using the income approach.

The Company negotiated a purchase and sale agreement for the sale of certain non-strategic natural gas gathering assets at the pipeline and midstream segment and, as a result, recognized an impairment during the third quarter of 2015 of $14.1 million, largely related to these assets, which is recorded in operation and maintenance expense on the Consolidated Statements of Income. The natural gas gathering assets were written down to their estimated fair value that was determined using the market approach.

For more information on these nonrecurring fair value measurements, see Note 13.

For information regarding impairments related to the Company's discontinued operations, see Note 10.
Note 6 - 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
Nine Months Ended
 
September 30,
September 30,
 
2016

2015

2016

2015

 
(In thousands)
Weighted average common shares outstanding - basic
195,304

195,151

195,298

194,814

Effect of dilutive performance share awards
507

18

496

19

Weighted average common shares outstanding - diluted
195,811

195,169

195,794

194,833

Shares excluded from the calculation of diluted earnings per share





11



Note 7 - Cash flow information
Cash expenditures for interest and income taxes were as follows:
 
Nine Months Ended
 
September 30,
 
2016

2015

 
(In thousands)
Interest, net of amounts capitalized and AFUDC - borrowed of $842 and $6,989 in 2016 and 2015, respectively
$
66,281

$
69,253

Income taxes paid, net
$
73,771

$
39,543

Noncash investing transactions were as follows:
 
September 30,
 
2016

2015

 
(In thousands)
Property, plant and equipment additions in accounts payable
$
22,560

$
15,348

Note 8 - New accounting standards
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 August 2015, the FASB issued guidance deferring the effective date of the revenue guidance one year and allowing 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 was effective for the Company on January 1, 2016, and was to be applied retrospectively. Early adoption of this guidance was permitted, however the Company did not elect to do so. The guidance required a reclassification of the debt issuance costs on the Consolidated Balance Sheets, but did not impact the Company's results of operations or cash flows. As a result of the retrospective application of this change in accounting principle, the Company reclassified debt issuance costs of $100,000 and $100,000 from prepayments and other current assets and $5.2 million and $6.0 million from deferred charges and other assets - other to long-term debt on its Consolidated Balance Sheets at September 30, 2015 and December 31, 2015, respectively.
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 has been elected. This guidance was effective for the Company on January 1, 2016, with early adoption permitted. The application of this guidance affected the Company's disclosures; however, it did 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 IFRS. 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 planning to adopt the guidance on January 1, 2017, and does not anticipate the guidance to have a material effect on its results of operations, financial position or cash flows.
Balance Sheet Classification of Deferred Taxes In November 2015, the FASB issued guidance regarding the classification of deferred taxes on the balance sheet. The guidance will require all deferred tax assets and liabilities to be classified as noncurrent. These amendments will align GAAP with IFRS. This guidance will be effective for the Company on January 1, 2017, with early adoption permitted. Entities will have the option to apply the guidance prospectively, for all deferred tax assets and liabilities, or

12



retrospectively. The Company is planning to adopt the guidance in the fourth quarter of 2016 and will be applying the retrospective method of adoption. The guidance requires a reclassification of current deferred income taxes to noncurrent deferred income taxes on the Consolidated Balance Sheets; however, it does not impact the Company's results of operations or cash flows.
Recognition and Measurement of Financial Assets and Financial Liabilities In January 2016, the FASB issued guidance regarding the classification and measurement of financial instruments. The guidance revises the way an entity classifies and measures investments in equity securities, the presentation of certain fair value changes for financial liabilities measured at fair value and amends certain disclosure requirements related to the fair value of financial instruments. This guidance will be effective for the Company on January 1, 2018, with early adoption of certain amendments permitted. The guidance should be applied using a modified retrospective approach with the exception of equity securities without readily determinable fair values which will be applied prospectively. The Company is evaluating the effects the adoption of the new guidance will have on its results of operations, financial position, cash flows and disclosures.
Leases In February 2016, the FASB issued guidance regarding leases. The guidance requires lessees to recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term on the statement of financial position for leases with terms of more than 12 months. This guidance also requires additional disclosures. This guidance will be effective for the Company on January 1, 2019, and should be applied using a modified retrospective approach with early adoption permitted. The Company is evaluating the effects the adoption of the new guidance will have on its results of operations, financial position, cash flows and disclosures.
Improvements to Employee Share-Based Payment Accounting In March 2016, the FASB issued guidance regarding simplification of several aspects of the accounting for share-based payment transactions. The guidance will affect the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance will be effective for the Company on January 1, 2017, with early adoption permitted in any interim or annual period. An entity that elects early adoption must adopt all of the amendments in the same period. Certain amendments of this guidance are to be applied retrospectively and others prospectively. The Company is planning to adopt the guidance on January 1, 2017. The Company anticipates the guidance will have an impact to the Consolidated Statements of Income and the Consolidated Balance Sheets on a prospective basis with all taxes related to share-based payments recognized as income tax expense or benefit and no longer recognized in additional paid-in capital. The Company anticipates the guidance will not have a material impact on its cash flows.
Classification of Certain Cash Receipts and Cash Payments In August 2016, the FASB issued guidance to clarify the classification of certain cash receipts and payments in the statement of cash flows. This guidance will be effective for the Company on January 1, 2018, with early adoption permitted. An entity that elects early adoption must adopt all the amendments in the same period and apply any adjustments as of the beginning of the fiscal year. Entities must apply the guidance retrospectively unless it is impracticable then may apply it prospectively as of the earliest date practicable. The Company is evaluating the effects the adoption of the new guidance will have on its cash flows and disclosures.
Note 9 - Comprehensive income (loss)
The after-tax changes in the components of accumulated other comprehensive loss were as follows:
Three Months Ended
September 30, 2016
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
$
(2,484
)
$
(35,604
)
$
(144
)
$
26

$
(38,206
)
Other comprehensive loss before reclassifications


(4
)
(42
)
(46
)
Amounts reclassified from accumulated other comprehensive loss
92

236


33

361

Net current-period other comprehensive income (loss)
92

236

(4
)
(9
)
315

Balance at end of period
$
(2,392
)
$
(35,368
)
$
(148
)
$
17

$
(37,891
)

13



Three Months Ended
September 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
$
(2,872
)
$
(37,259
)
$
(130
)
$
15

$
(40,246
)
Other comprehensive loss before reclassifications


(73
)
(35
)
(108
)
Amounts reclassified from accumulated other comprehensive loss
100

382


28

510

Net current-period other comprehensive income (loss)
100

382

(73
)
(7
)
402

Balance at end of period
$
(2,772
)
$
(36,877
)
$
(203
)
$
8

$
(39,844
)
Nine Months Ended
September 30, 2016
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
$
(2,667
)
$
(34,257
)
$
(200
)
$
(24
)
$
(37,148
)
Other comprehensive income (loss) before reclassifications


52

(65
)
(13
)
Amounts reclassified from accumulated other comprehensive loss
275

(1,111
)

106

(730
)
Net current-period other comprehensive income (loss)
275

(1,111
)
52

41

(743
)
Balance at end of period
$
(2,392
)
$
(35,368
)
$
(148
)
$
17

$
(37,891
)
Nine Months Ended
September 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


(176
)
(105
)
(281
)
Amounts reclassified from accumulated other comprehensive loss
299

1,341

802

98

2,540

Net current-period other comprehensive income (loss)
299

1,341

626

(7
)
2,259

Balance at end of period
$
(2,772
)
$
(36,877
)
$
(203
)
$
8

$
(39,844
)

14



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,
 
2016
2015
2016
2015
 
(In thousands)
 
Reclassification adjustment for loss on derivative instruments included in net income (loss):
 
 
 
 
 
Interest rate derivative instruments
$
(148
)
$
(160
)
$
(445
)
$
(480
)
Interest expense
 
56

60

170

181

Income taxes
 
(92
)
(100
)
(275
)
(299
)
 
Amortization of postretirement liability gains (losses) included in net periodic benefit cost
(379
)
(615
)
1,787

(2,222
)
(a)
 
143

233

(676
)
881

Income taxes
 
(236
)
(382
)
1,111

(1,341
)
 
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)
(51
)
(43
)
(163
)
(151
)
Other income
 
18

15

57

53

Income taxes
 
(33
)
(28
)
(106
)
(98
)
 
Total reclassifications
$
(361
)
$
(510
)
$
730

$
(2,540
)
 
(a) Included in net periodic benefit cost. For more information, see Note 17.
 
Note 10 - Discontinued operations
The assets and liabilities of the Company's discontinued operations have been classified as held for sale and the results of operations are shown in 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 restated. At the time the assets were classified as held for sale, depreciation, depletion and amortization expense was no longer recorded.
Dakota Prairie Refining
On June 24, 2016, WBI Energy entered into a membership interest purchase agreement with Tesoro to sell all of the outstanding membership interests in Dakota Prairie Refining to Tesoro. WBI Energy and Calumet each previously owned 50 percent of the Dakota Prairie Refining membership interests and were equal members in building and operating Dakota Prairie Refinery. To effectuate the sale, WBI Energy acquired Calumet’s 50 percent membership interest in Dakota Prairie Refining on June 27, 2016. The sale of the membership interests to Tesoro closed on June 27, 2016. The sale of Dakota Prairie Refining reduces the Company’s risk by decreasing exposure to commodity prices.
In connection with the sale, WBI Energy has cash in an escrow account for RINs obligations, which is included in current assets held for sale on the Consolidated Balance Sheet at September 30, 2016. The Company retained certain liabilities of Dakota Prairie Refining which are reflected in current liabilities held for sale on the Consolidated Balance Sheet at September 30, 2016. In October 2016, the RINs liability was paid and the cash was removed from escrow. Also, Centennial continues to guarantee certain debt obligations of Dakota Prairie Refining; however, Tesoro has agreed to indemnify Centennial for any losses and litigation expenses arising from the guarantee. For more information related to the guarantee, see Note 19.

15



The carrying amounts of the major classes of assets and liabilities that are classified as held for sale related to the operations of and activity associated with Dakota Prairie Refining on the Company's Consolidated Balance Sheets were as follows:
 
September 30, 2016

September 30, 2015

 
December 31, 2015

 
 
(In thousands)
 
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$

$
564

 
$
688

 
Receivables, net
13

14,648

 
7,693

 
Inventories

12,354

 
13,176

 
Deferred income taxes

116

(a)

 
Income taxes receivable
32,388


 
2,495

 
Prepayments and other current assets
7,741

7,125

 
6,214

 
Total current assets held for sale
40,142

34,807

 
30,266

 
Noncurrent assets:
 
 
 
 
 
Net property, plant and equipment

415,817

 
412,717

 
Deferred income taxes
2,984


 

 
Other

5,052

 
9,627

 
Total noncurrent assets held for sale
2,984

420,869

 
422,344

 
Total assets held for sale
$
43,126

$
455,676

 
$
452,610

 
Liabilities
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Short-term borrowings
$

$
29,500

 
$
45,500

 
Long-term debt due within one year

4,125

 
5,250

 
Accounts payable
7,063

21,472

 
24,468

 
Taxes payable

7,470

 
1,391

 
Deferred income taxes


 
272

 
Accrued compensation

1,059

 
938

 
Other accrued liabilities
7,743

1,217

 
4,953

 
Total current liabilities held for sale
14,806

64,843

 
82,772

 
Noncurrent liabilities:
 
 
 
 
 
Long-term debt

64,875

 
63,750

 
Deferred income taxes

11,632

(b)
23,569

(b)
Total noncurrent liabilities held for sale

76,507

 
87,319

 
Total liabilities held for sale
$
14,806

$
141,350

 
$
170,091

 
(a)
On the Company's Consolidated Balance Sheet, this amount was reclassified to a current deferred income tax liability and is reflected in
current liabilities held for sale.
(b)
On the Company's Consolidated Balance Sheets, these amounts were reclassified to noncurrent deferred income tax assets and are
reflected in noncurrent assets held for sale.
 
The Company performed a fair value assessment of the assets and liabilities classified as held for sale. In the second quarter of 2016, the fair value assessment was determined using the market approach based on the sale transaction to Tesoro. The fair value assessment indicated an impairment based on the carrying value exceeding the fair value, which resulted in the Company recording an impairment of $251.9 million ($156.7 million after tax) in the quarter ended June 30, 2016. The impairment was included in operating expenses from discontinued operations. The fair value of Dakota Prairie Refining’s assets has been categorized as Level 3 in the fair value hierarchy. At September 30, 2016, Dakota Prairie Refining had not incurred any material exit and disposal costs, and does not expect to incur any material exit and disposal costs.
Fidelity
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. Between September 2015 and March 2016, the Company entered into purchase and sale agreements to sell all of Fidelity's marketed oil and natural gas assets. The completion of these sales occurred between October 2015 and April 2016. The sale of Fidelity was 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.

16



The carrying amounts of the major classes of assets and liabilities that are classified as held for sale related to the operations of Fidelity on the Company's Consolidated Balance Sheets were as follows:
 
September 30, 2016

September 30, 2015

December 31, 2015

 
(In thousands)
Assets
 
 
 
Current assets:
 
 
 
Receivables, net
$
7,930

$
24,703

$
13,387

Inventories

7,034

1,308

Commodity derivative instruments

8,633


Income taxes receivable
45,294


9,665

Prepayments and other current assets

42,762

221

Total current assets held for sale
53,224

83,132

24,581

Noncurrent assets:
 
 
 
Investments

37

37

Net property, plant and equipment
5,507

1,114,285

793,422

Deferred income taxes
61,347

141,556

127,655

Other
161

162

161

Less allowance for impairment of assets held for sale
938

756,127

754,541

Total noncurrent assets held for sale
66,077

499,913

166,734

Total assets held for sale
$
119,301

$
583,045

$
191,315

Liabilities
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
175

$
32,375

$
25,013

Taxes payable

3,769

1,052

Deferred income taxes
4,120

4,955

3,620

Accrued compensation

5,982

13,080

Other accrued liabilities
3,084

11,820

4,838

Total current liabilities held for sale
7,379

58,901

47,603

Noncurrent liabilities:
 
 
 
Other

31,242


Total noncurrent liabilities held for sale

31,242


Total liabilities held for sale
$
7,379

$
90,143

$
47,603

The Company performed a fair value assessment of the assets and liabilities classified as held for sale. In the second quarter of 2016, the fair value assessment was determined using the income and market approaches. The income approach was determined by using the present value of future estimated cash flows. The market approach was based on market transactions of similar properties. The estimated carrying value exceeded the fair value and the Company recorded an impairment of $900,000 ($600,000 after tax) in the second quarter of 2016. In the first quarter of 2016, the fair value assessment was determined using the market approach largely based on a purchase and sale agreement. The estimated fair value exceeded the carrying value and the Company recorded an impairment reversal of $1.4 million ($900,000 after tax) in the first quarter of 2016. The Company recorded fair value impairments of $356.1 million ($224.4 million after tax) and $756.1 million ($476.4 million after tax) for the three and nine months ended September 30, 2015, respectively, related to the assets and liabilities classified as held for sale. The impairments and impairment reversal were included in operating expenses from discontinued operations. The estimated fair value of Fidelity's assets have been categorized as Level 3 in the fair value hierarchy. For more information related to the 2015 fair value impairments, see Part II, Item 8 - Note 2, in the 2015 Annual Report.
The Company incurred transaction costs of approximately $300,000 in the first quarter of 2016, and $2.5 million in 2015. In addition to the transaction costs, and due in part to the change in plans to sell the assets of Fidelity rather than sell Fidelity as a company, Fidelity incurred and expensed approximately $5.6 million of exit and disposal costs for the nine months ended September 30, 2016, and has incurred $10.5 million of exit and disposal costs to date. Fidelity incurred no exit and disposal costs for the three months ended September 30, 2016, and the Company does not expect to incur any additional material exit and disposal costs. The exit and disposal costs are associated with severance and other related matters and exclude the office lease expiration discussed in the following paragraph.
Fidelity vacated its office space in Denver, Colorado. The Company incurred lease payments of approximately $900,000 in 2016. Lease termination payments of $3.2 million and $3.3 million were made during the second quarter of 2016 and fourth quarter of 2015, respectively. Existing office furniture and fixtures were relinquished to the lessor in the second quarter of 2016.

17



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.
Dakota Prairie Refining and Fidelity
The reconciliation of the major classes of income and expense constituting pretax income (loss) from discontinued operations, which includes Dakota Prairie Refining and Fidelity, to the after-tax net loss from discontinued operations on the Company's Consolidated Statements of Income was as follows:
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2016

2015

2016

2015

 
(In thousands)
Operating revenues
$
162

$
140,428

$
122,894

$
288,537

Operating expenses
230

478,798

513,756

1,565,579

Operating loss
(68
)
(338,370
)
(390,862
)
(1,277,042
)
Other income
375

298

762

2,758

Interest expense

703

1,753

1,221

Income (loss) from discontinued operations before income taxes
307

(338,775
)
(391,853
)
(1,275,505
)
Income taxes
5,707

(115,663
)
(92,315
)
(458,988
)
Loss from discontinued operations
(5,400
)
(223,112
)
(299,538
)
(816,517
)
Loss from discontinued operations attributable to noncontrolling interest

(9,778
)
(131,691
)
(21,060
)
Loss from discontinued operations attributable to the Company
$
(5,400
)
$
(213,334
)
$
(167,847
)
$
(795,457
)
The pretax income (loss) from discontinued operations attributable to the Company, related to the operations of and activity associated with Dakota Prairie Refining, were $935,000 and $(8.6) million for the three months ended and $(253.0) million and $(18.4) million for the nine months ended September 30, 2016 and 2015, respectively.
Note 11 - Goodwill and other intangible assets
The changes in the carrying amount of goodwill were as follows:
Nine Months Ended September 30, 2016
Balance as of
January 1, 2016

*
Goodwill Acquired
During the Year

Balance as of
September 30, 2016

*
 
(In thousands)
Natural gas distribution
$
345,736

 
$

$
345,736

 
Pipeline and midstream
9,737

 

9,737

 
Construction materials and contracting
176,290

 

176,290

 
Construction services
103,441

 
6,323

109,764

 
Total
$
635,204

 
$
6,323

$
641,527

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

18



Nine Months Ended September 30, 2015
Balance as of
January 1, 2015

*
Goodwill Acquired
During the Year

Balance as of
September 30, 2015

*
 
(In thousands)
Natural gas distribution
$
345,736

 
$

$
345,736

 
Pipeline and midstream
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 midstream segment, which occurred in prior periods.

Year Ended December 31, 2015
Balance as of
January 1, 2015

*
Goodwill Acquired
During the Year

Balance as of
December 31, 2015

*
 
(In thousands)
Natural gas distribution
$
345,736

 
$

$
345,736

 
Pipeline and midstream
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 midstream segment, which occurred in prior periods.
 
Other amortizable intangible assets were as follows:
 
September 30, 2016

September 30, 2015

December 31, 2015

 
(In thousands)
Customer relationships
$
17,145

$
20,975

$
20,975

Accumulated amortization
(13,524
)
(16,455
)
(16,845
)
 
3,621

4,520

4,130

Noncompete agreements
2,430

4,409

4,409

Accumulated amortization
(1,622
)
(3,632
)
(3,655
)
 
808

777

754

Other
7,764

8,300

8,304

Accumulated amortization
(5,664
)
(5,689
)
(5,846
)
 
2,100

2,611

2,458

Total
$
6,529

$
7,908

$
7,342

Amortization expense for amortizable intangible assets for the three and nine months ended September 30, 2016, was $600,000 and $1.9 million, respectively. Amortization expense for amortizable intangible assets for the three and nine months ended September 30, 2015, was $600,000 and $2.0 million, respectively. Estimated amortization expense for amortizable intangible assets is $2.5 million in 2016, $2.2 million in 2017, $1.2 million in 2018, $1.0 million in 2019, $500,000 in 2020 and $1.0 million thereafter.
Note 12 - 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, 2016, the Company had no outstanding commodity, 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 September 30, 2015, Fidelity held oil swap agreements with total forward notional volumes of 552,000 Bbl and natural gas swap agreements with total forward notional volumes of 920,000 MMBtu. At September 30, 2016 and December 31, 2015, Fidelity had no outstanding derivative agreements. Fidelity historically utilized 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 realized and unrealized gains and losses on the commodity derivative instruments, which were not designated as hedges, were both included in loss from discontinued operations and the associated assets and liabilities were classified as held for sale.

19



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, 2016 and 2015, and December 31, 2015, Centennial had no outstanding interest rate swap agreements.
Fidelity and Centennial
The gains and losses on derivative instruments were as follows:
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2016

2015

2016

2015

 
(In thousands)
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
$
92

$
100

$
275

$
299

Commodity derivatives not designated as hedging instruments:
 
 
 
 
Amount of gain (loss) recognized in discontinued operations, before tax

9,607


(9,702
)
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 September 30, 2015

 
 
(In thousands)
Not designated as hedges:
 
Commodity derivatives
Current assets held for sale
$
8,633

Total asset derivatives
 
$
8,633

All of the Company's commodity derivative instruments at September 30, 2015, 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 instruments are presented gross on the Consolidated Balance Sheets. The gross derivative instruments (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 are presented in the following table:
September 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
$
8,633

$

$
8,633

Total assets
$
8,633

$

$
8,633

Note 13 - 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 $72.8 million, $66.5 million and $67.5 million, at September 30, 2016 and 2015, and December 31, 2015, respectively, are classified as investments on the Consolidated Balance Sheets. The net unrealized gains on these investments were $1.4 million and $5.3 million for the three and nine months ended September 30, 2016. The net unrealized loss on these investments was $1.7 million for the three months ended September 30, 2015, and the net unrealized gain on these investments was $700,000 for the nine months ended September 30, 2015. 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.

20



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, 2016
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Value

 
(In thousands)
Mortgage-backed securities
$
9,882

$
43

$
(17
)
$
9,908

Total
$
9,882

$
43

$
(17
)
$
9,908

September 30, 2015
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Value

 
(In thousands)
Mortgage-backed securities
$
7,843

$
29

$
(18
)
$
7,854

U.S. Treasury securities
2,324

4

(4
)
2,324

Total
$
10,167

$
33

$
(22
)
$
10,178

December 31, 2015
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Value

 
(In thousands)
Mortgage-backed securities
$
9,128

$
19

$
(49
)
$
9,098

U.S. Treasury securities
1,315


(6
)
1,309

Total
$
10,443

$
19

$
(55
)
$
10,407

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 are valued at the net asset value of shares held at the end of the quarter, based on published market quotations on active markets, or using other known sources including pricing from outside sources.
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.
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, 2016 and 2015, there were no transfers between Levels 1 and 2.

21



The Company's assets and liabilities measured at fair value on a recurring basis were as follows:
 
Fair Value Measurements at September 30, 2016, 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, 2016

 
(In thousands)
Assets:
 
 
 
 
Money market funds
$

$
2,284

$

$
2,284

Insurance contract*

72,818


72,818

Available-for-sale securities:
 
 
 
 
Mortgage-backed securities

9,908


9,908

Total assets measured at fair value
$

$
85,010

$

$
85,010

* The insurance contract invests approximately 65 percent in fixed-income investments, 18 percent in common stock of large-cap companies, 9 percent in common stock of mid-cap companies, 6 percent in common stock of small-cap companies, 1 percent in target date investments and 1 percent in cash equivalents.
 
 
Fair Value Measurements at September 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 September 30, 2015

 
(In thousands)
Assets:
 
 
 
 
Money market funds
$

$
1,219

$

$
1,219

Insurance contract*

66,464


66,464

Available-for-sale securities:
 
 
 
 
Mortgage-backed securities

7,854


7,854

U.S. Treasury securities

2,324


2,324

Total assets measured at fair value
$

$
77,861

$

$
77,861

* The insurance contract invests approximately 65 percent in fixed-income investments, 18 percent in common stock of large-cap companies, 9 percent in common stock of mid-cap companies, 6 percent in common stock of small-cap companies, 1 percent in target date investments and 1 percent in cash equivalents.
 
 
Fair Value Measurements at December 31, 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 December 31, 2015

 
(In thousands)
Assets:
 
 
 
 
Money market funds
$

$
1,420

$

$
1,420

Insurance contract*

67,459


67,459

Available-for-sale securities:
 
 
 
 
Mortgage-backed securities

9,098


9,098

U.S. Treasury securities

1,309


1,309

Total assets measured at fair value
$

$
79,286

$

$
79,286

* The insurance contract invests approximately 63 percent in fixed-income investments, 19 percent in common stock of large-cap companies, 9 percent in common stock of mid-cap companies, 7 percent in common stock of small-cap companies, 1 percent in target date 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.

22



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.
During the third quarter of 2015, the Company was negotiating the sale of certain non-strategic natural gas gathering assets at the pipeline and midstream segment and as a result these assets were found to be impaired and were written down to their estimated fair value using the market approach. The estimated fair value of natural gas gathering assets that were impaired at September 30, 2015, was largely determined by agreed upon pricing in a purchase and sale agreement that the Company was negotiating, and these assets were sold in the fourth quarter of 2015. At September 30, 2015, natural gas gathering assets were written down to the nonrecurring fair value measurement of $10.8 million.
The fair value of these natural gas gathering assets have been categorized as Level 3 in the fair value hierarchy.
The Company performed fair value assessments of the assets and liabilities classified as held for sale. For more information on these Level 3 nonrecurring fair value measurements, see Note 10.
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, 2016
$
1,901,948

$
2,047,339

Long-term debt at September 30, 2015
$
2,200,773

$
2,277,074

Long-term debt at December 31, 2015
$
1,796,163

$
1,819,828

The carrying amounts of the Company's remaining financial instruments included in current assets and current liabilities approximate their fair values.
Note 14 - Long-term debt
On September 23, 2016, Centennial amended its revolving credit agreement to decrease the borrowing limit by $150.0 million to $500.0 million and extend the termination date to September 23, 2021. 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 restricted payments, 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 obligations, 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, the revolving credit agreement will be in default.

23



Note 15 - Equity
A summary of the changes in equity was as follows:
Nine Months Ended September 30, 2016
Total Stockholders' Equity

Noncontrolling Interest

Total
Equity

 
(In thousands)
Balance at December 31, 2015
$
2,396,505

$
124,043

$
2,520,548

Net loss
(1,297
)
(131,691
)
(132,988
)
Other comprehensive loss
(743
)

(743
)
Dividends declared on preferred stocks
(514
)

(514
)
Dividends declared on common stock
(109,858
)

(109,858
)
Stock-based compensation
2,955


2,955

Issuance of common stock upon vesting of stock-based compensation, net of shares used for tax withholdings
(323
)

(323
)
Net tax deficit on stock-based compensation
(1,664
)

(1,664
)
Contribution from noncontrolling interest

7,648

7,648

Balance at September 30, 2016
$
2,285,061

$

$
2,285,061

Nine Months Ended September 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
(674,969
)
(21,060
)
(696,029
)
Other comprehensive income
2,259


2,259

Dividends declared on preferred stocks
(514
)

(514
)
Dividends declared on common stock
(106,714
)

(106,714
)
Stock-based compensation
2,266


2,266

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

(1,632
)
Issuance of common stock
21,894


21,894

Contribution from noncontrolling interest

52,000

52,000

Distribution to noncontrolling interest

(8,443
)
(8,443
)
Balance at September 30, 2015
$
2,376,631

$
138,240

$
2,514,871

Note 16 - 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 midstream segment provides natural gas transportation, underground storage, gathering and processing 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.
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 other supplies.
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

24



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 the refining business and Fidelity and do not meet the criteria for income (loss) from discontinued operations. The Other category also includes Centennial Resources' former investment in the Brazilian Transmission Lines.
Discontinued operations includes the results and supporting activities of Dakota Prairie Refining and Fidelity other than certain general and administrative costs and interest expense as described above. Dakota Prairie Refining refined crude oil and produced and sold diesel fuel, naphtha, ATBs and other by-products of the production process. In the second quarter of 2016, the Company sold all of the outstanding membership interests in Dakota Prairie Refining. Fidelity engaged in oil and natural gas development and production activities in the Rocky Mountain and Mid-Continent/Gulf States regions of the United States. Between September 2015 and March 2016, the Company entered into purchase and sale agreements to sell all of Fidelity's marketed oil and natural gas assets. The completion of these sales occurred between October 2015 and April 2016. For more information on discontinued operations, see Note