MDU Resources Group, Inc.
MDU RESOURCES GROUP INC (Form: 10-K, Received: 02/24/2017 10:56:37)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $1.00
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock, par value $100
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o No ý .
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes  o No ý .
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 .
State the aggregate market value of the voting common stock held by nonaffiliates of the registrant as of June 30, 2016 : $4,687,305,024 .
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of February 16, 2017 : 195,304,376  shares.
DOCUMENTS INCORPORATED BY REFERENCE
Relevant portions of the registrant's 2017 Proxy Statement are incorporated by reference in Part III, Items 10, 11, 12, 13 and 14 of this Report.



Contents
 

 
 
 
 
 
 
 
Items 1 and 2   Business and Properties
 
 
 
 
Pipeline and Midstream
 
 
 
Discontinued Operations
 
 
 
Item 1A
 
 
 
Item 1B
 
 
 
Item 3  
 
 
 
Item 4  
 
 
 
 
 
 
 
Item 5
 
 
 
Item 6
 
 
 
Item 7
Management's Discussion and Analysis of
 
 
 
Item 7A
 
 
 
Item 8
 
 
 
Item 9
on Accounting and Financial Disclosure
 
 
 
Item 9A
 
 
 
Item 9B
 
 
 
 
 
 
 
Item 10
 
 
 
Item 11
 
 
 
Item 12
and Management and Related Stockholder Matters
 
 
 
Item 13
 
 
 
Item 14
 
 
 
 
 
 
 
Item 15
 
 
 
 
 
 
 
 

 
2 MDU Resources Group, Inc. Form 10-K



Definitions
 

The following abbreviations and acronyms used in this Form 10-K are defined below:
Abbreviation or Acronym
 
AFUDC
Allowance for funds used during construction
Army Corps
U.S. Army Corps of Engineers
ASC
FASB Accounting Standards Codification
ATBs
Atmospheric tower bottoms
BART
Best available retrofit technology
Bcf
Billion cubic feet
Bicent
Bicent Power LLC
Big Stone Station
475-MW coal-fired electric generating facility near Big Stone City, South Dakota (22.7 percent ownership)
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
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
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's Consolidated EBITDA
Centennial's consolidated net income from continuing operations plus the related interest expense, taxes, depreciation, depletion, amortization of intangibles and any non-cash charge relating to asset impairment for the preceding 12-month period
Centennial Resources
Centennial Energy Resources LLC, a direct wholly owned subsidiary of Centennial
CERCLA
Comprehensive Environmental Response, Compensation and Liability Act
Clean Air Act
Federal Clean Air Act
Clean Water Act
Federal Clean Water Act
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
EBITDA
Earnings before interest, taxes, depreciation, depletion and amortization
EIN
Employer Identification Number
EPA
United States Environmental Protection Agency
ERISA
Employee Retirement Income Security Act of 1974
ESA
Endangered Species Act
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
GVTC
Generation Verification Test Capacity
IBEW
International Brotherhood of Electrical Workers

 
MDU Resources Group, Inc. Form 10-K 3



Definitions
 

ICWU
International Chemical Workers Union
IFRS
International Financial Reporting Standards
Intermountain
Intermountain Gas Company, an indirect wholly owned subsidiary of MDU Energy Capital
IPUC
Idaho Public Utilities Commission
Item 8
Financial Statements and Supplementary Data
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
K-Plan
Company's 401(k) Retirement Plan
kW
Kilowatts
kWh
Kilowatt-hour
LWG
Lower Willamette Group
MBbls
Thousands of barrels
MBOE
Thousands of BOE
Mcf
Thousand cubic feet
MD&A
Management's Discussion and Analysis of Financial Condition and Results of Operations
Mdk
Thousand dk
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.
MMBOE
Millions of BOE
MMBtu
Million Btu
MMcf
Million cubic feet
MMdk
Million dk
MNPUC
Minnesota Public Utilities Commission
Montana-Dakota
Montana-Dakota Utilities Co., a public utility division of the Company
Montana DEQ
Montana Department of Environmental Quality
Montana Seventeenth Judicial
District Court
Montana Seventeenth Judicial District Court, Phillips County
MPPAA
Multiemployer Pension Plan Amendments Act of 1980
MTPSC
Montana Public Service Commission
MW
Megawatt
NDPSC
North Dakota Public Service Commission
NGL
Natural gas liquids
Oil
Includes crude oil and condensate
Omimex
Omimex Canada, Ltd.
OPUC
Oregon Public Utility Commission
Oregon DEQ
Oregon State Department of Environmental Quality
PCBs
Polychlorinated biphenyls
Pronghorn
Natural gas processing plant located near Belfield, North Dakota (WBI Energy Midstream previously held a 50 percent non-operating ownership interest)
Proxy Statement
Company's 2017 Proxy Statement
PRP
Potentially Responsible Party
PUD
Proved undeveloped
RCRA
Resource Conservation and Recovery Act
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

 
4 MDU Resources Group, Inc. Form 10-K



Definitions
 

Securities Act
Securities Act of 1933, as amended
Securities Act Industry Guide 7
Description of Property by Issuers Engaged or to be Engaged in Significant Mining Operations
Sheridan System
A separate electric system owned by Montana-Dakota
South Dakota DENR
South Dakota Department of Environment and Natural Resources
Stock Purchase Plan
Company's Dividend Reinvestment and Direct Stock Purchase Plan which was terminated effective December 5, 2016
Tesoro
Tesoro Refining & Marketing Company LLC
Tesoro Logistics
QEP Field Services, LLC doing business as Tesoro Logistics Rockies LLC
Thurston County Superior Court
State of Washington Thurston County Superior Court
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
Wygen III
100-MW coal-fired electric generating facility near Gillette, Wyoming (25 percent ownership)
WYPSC
Wyoming Public Service Commission
ZRCs
Zonal resource credits - a MW of demand equivalent assigned to generators by MISO for meeting system reliability requirements

 
MDU Resources Group, Inc. Form 10-K 5



Part I
 


Forward-Looking Statements
This Form 10-K contains forward-looking statements within the meaning of Section 21E of the Exchange Act. Forward-looking statements are all statements other than statements of historical fact, including without limitation those statements that are identified by the words "anticipates," "estimates," "expects," "intends," "plans," "predicts" and similar expressions, and include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions (many of which are based, in turn, upon further assumptions) and other statements that are other than statements of historical facts. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature, including statements contained within Item 7 - MD&A - Prospective Information.
Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties. Nonetheless, the Company's expectations, beliefs or projections may not be achieved or accomplished.
Any forward-looking statement contained in this document speaks only as of the date on which the statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances that occur after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all of the factors, nor can it assess the effect of each factor on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. All forward-looking statements, whether written or oral and whether made by or on behalf of the Company, are expressly qualified by the risk factors and cautionary statements in this Form 10-K, including statements contained within Item 1A - Risk Factors.
Items 1 and 2. Business and Properties
General
The Company is a regulated energy delivery and construction materials and services business, which was incorporated under the laws of the state of Delaware in 1924. Its principal executive offices are at 1200 West Century Avenue, P.O. Box 5650, Bismarck, North Dakota 58506-5650, telephone (701) 530-1000.
Montana-Dakota, Great Plains, Cascade and Intermountain comprise the natural gas distribution segment. Montana-Dakota also comprises the electric segment.
The Company, through its wholly owned subsidiary, Centennial, owns WBI Holdings, Knife River, MDU Construction Services, Centennial Resources and Centennial Capital. WBI Holdings is comprised of the pipeline and midstream segment and Fidelity, formerly the Company's exploration and production business. Knife River is the construction materials and contracting segment, MDU Construction Services is the construction services segment, and Centennial Resources and Centennial Capital are both reflected in the Other category.
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 its oil and natural gas 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 Item 8 - Notes  2 and 13 .
As of December 31, 2016 , the Company had 9,598  employees with 138 employed at MDU Resources Group, Inc., 1,030 at Montana-Dakota, 35 at Great Plains, 342 at Cascade, 236 at Intermountain, 342 at WBI Holdings, 3,099 at Knife River and 4,376 at MDU Construction Services. The number of employees at certain Company operations fluctuates during the year depending upon the number and size of construction projects. The Company considers its relations with employees to be satisfactory.
The following information regarding the number of employees represented by labor contracts is as of December 31, 2016 .

 
6 MDU Resources Group, Inc. Form 10-K



Part I
 

At Montana-Dakota and WBI Energy Transmission, 359 and 68 employees, respectively, are represented by the IBEW. Labor contracts with such employees are in effect through April 30, 2018, and March 31, 2018, respectively.
At Cascade, 195 employees are represented by the ICWU. The labor contract with the field operations group is effective through March 31, 2018.
At Intermountain, 127 employees are represented by the UA. Labor contracts with such employees are in effect through September 30, 2019.
Knife River operates under 43 labor contracts that represent 505 of its construction materials employees. Knife River is in negotiations on seven of its labor contracts.
MDU Construction Services has 142 labor contracts representing the majority of its employees. MDU Construction Services is in negotiations on five of its labor contracts.
The majority of the labor contracts contain provisions that prohibit work stoppages or strikes and provide for binding arbitration dispute resolution in the event of an extended disagreement.
The Company's principal properties, which are of varying ages and are of different construction types, are generally in good condition, are well maintained and are generally suitable and adequate for the purposes for which they are used.
The financial results and data applicable to each of the Company's business segments, as well as their financing requirements, are set forth in Item 7 - MD&A and Item 8 - Note  13 and Supplementary Financial Information.
The operations of the Company and certain of its subsidiaries are subject to federal, state and local laws and regulations providing for air, water and solid waste pollution control; state facility-siting regulations; zoning and planning regulations of certain state and local authorities; federal health and safety regulations and state hazard communication standards. The Company believes that it is in substantial compliance with these regulations, except as to what may be ultimately determined with regard to items discussed in Environmental matters in Item 8 - Note  17 . There are no pending CERCLA actions for any of the Company's properties, other than the Portland, Oregon, Harbor Superfund Site and the Bremerton Gasworks Superfund Site.
The Company produces GHG emissions primarily from its fossil fuel electric generating facilities, as well as from natural gas pipeline and storage systems, and operations of equipment and fleet vehicles. GHG emissions also result from customer use of natural gas for heating and other uses. As interest in reductions in GHG emissions has grown, the Company has developed renewable generation with lower or no GHG emissions. Governmental legislative and regulatory initiatives regarding environmental and energy policy are continuously evolving and could negatively impact the Company's operations and financial results. Until legislation and regulation are finalized, the impact of these measures cannot be accurately predicted. The Company will continue to monitor legislative and regulatory activity related to environmental and energy policy initiatives. Disclosure regarding specific environmental matters applicable to each of the Company's businesses is set forth under each business description later. In addition, for a discussion of the Company's risks related to environmental laws and regulations, see Item 1A - Risk Factors.
This annual report on Form 10-K, the Company's quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through the Company's Web site as soon as reasonably practicable after the Company has electronically filed such reports with, or furnished such reports to, the SEC. The Company's Web site address is www.mdu.com. The information available on the Company's Web site is not part of this annual report on Form 10-K.
Electric
General   Montana-Dakota provides electric service at retail, serving 142,948 residential, commercial, industrial and municipal customers in 178 communities and adjacent rural areas as of December 31, 2016 . For more information on the customer classes served, see the table below. The principal properties owned by Montana-Dakota for use in its electric operations include interests in 13 electric generating facilities and three small portable diesel generators, as further described under System Supply, System Demand and Competition, approximately 3,100 and 4,800 miles of transmission and distribution lines, respectively, and 74 transmission and 316 distribution substations. Montana-Dakota has obtained and holds, or is in the process of renewing, valid and existing franchises authorizing it to conduct its electric operations in all of the municipalities it serves where such franchises are required. Montana-Dakota intends to protect its service area and seek renewal of all expiring franchises. At December 31, 2016 , Montana-Dakota's net electric plant investment was $1.3 billion, and the rate base was $1.0 billion.

 
MDU Resources Group, Inc. Form 10-K 7



Part I
 

Montana-Dakota's customers served and revenues by class are as follows:
 
2016
2015
2014
 
Customers
Served

Revenues

Customers
Served

Revenues

Customers
Served

Revenues

 
(Dollars in thousands)
Residential
118,483

$
117,014

118,413

$
107,767

115,164

$
109,279

Commercial
22,693

135,390

22,423

121,463

21,890

118,026

Industrial
244

31,913

240

32,786

245

30,457

Other
1,528

7,580

1,511

6,791

1,497

6,750

 
142,948

$
291,897

142,587

$
268,807

138,796

$
264,512

The percentage of Montana-Dakota's retail electric utility operating revenues by jurisdiction is as follows:
 
2016

2015

2014

North Dakota
68
%
65
%
64
%
Montana
19
%
21
%
21
%
Wyoming
8
%
9
%
10
%
South Dakota
5
%
5
%
5
%
Retail electric rates, service, accounting and certain security issuances are subject to regulation by the NDPSC, MTPSC, SDPUC and WYPSC. The interstate transmission and wholesale electric power operations of Montana-Dakota also are subject to regulation by the FERC under provisions of the Federal Power Act, as are interconnections with other utilities and power generators, the issuance of securities, accounting and other matters.
Through MISO, Montana-Dakota has access to wholesale energy, ancillary services and capacity markets for its interconnected system. MISO is a regional transmission organization responsible for operational control of the transmission systems of its members. MISO provides security center operations, tariff administration and operates day-ahead and real-time energy markets, ancillary services and capacity markets. As a member of MISO, Montana-Dakota's generation is sold into the MISO energy market and its energy needs are purchased from that market.
System Supply, System Demand and Competition   Through an interconnected electric system, Montana-Dakota serves markets in portions of western North Dakota, including Bismarck, Mandan, Dickinson, Williston and Watford City; eastern Montana, including Sidney, Glendive and Miles City; and northern South Dakota, including Mobridge. The maximum electric peak demand experienced to date attributable to Montana-Dakota's sales to retail customers on the interconnected system was 611,542  kW in August 2015. Montana-Dakota's latest forecast for its interconnected system indicates that its annual peak will continue to occur during the summer and the sales growth rate through 2021 will approximate two percent annually. The interconnected system consists of 12 electric generating facilities and three small portable diesel generators, which have an aggregate nameplate rating attributable to Montana-Dakota's interest of 704,143  kW and total net ZRCs of 521.0 in 2016 . ZRCs are a MW of demand equivalent measure and are allocated to individual generators to meet planning reserve margin requirements within MISO. For 2016 , Montana-Dakota's total ZRCs, including its firm purchase power contracts, were 559.7 . Montana-Dakota's planning reserve margin requirement within MISO was 559.7 for 2016 . Montana-Dakota's interconnected system electric generating capability includes five steam-turbine generating units at four facilities using coal for fuel, three combustion turbine peaking stations, three wind electric generating facilities, two reciprocating internal combustion engines at one facility, a heat recovery electric generating facility and three small portable diesel generators.
In June 2016, Montana-Dakota and a partner began building a 345-kilovolt transmission line within the footprint of MISO from Ellendale, North Dakota, to Big Stone City, South Dakota, a distance of about 160 miles, which will facilitate public policy goals and objectives, including delivery of renewable wind energy from North Dakota to eastern markets. The project has been approved as a MISO multivalue project. Approximately 97 percent of the necessary easements have been secured. The Company expects the project to be completed in 2019.
In December 2016, Montana-Dakota signed a 25-year agreement to purchase the power from a wind farm expansion in southwest North Dakota. The agreement also includes an option to buy the project at the close of construction. The expansion of the wind farm will boost the combined production at the wind farm to approximately 150 MW of renewable energy and will increase Montana-Dakota's nameplate generation portfolio from approximately 22 percent renewables to 27 percent. The original 107.5-MW wind farm includes 43 turbines; it was purchased by Montana-Dakota in December 2015. The expansion includes 13 to 16 turbines, depending on the turbine size selected. It is expected to be online in December 2018. Construction costs for the project are estimated to be $85 million. Additional energy will be

 
8 MDU Resources Group, Inc. Form 10-K



Part I
 

purchased as needed, or if more economical, from the MISO market. In 2016 , Montana-Dakota purchased approximately 26 percent of its net kWh needs for its interconnected system through the MISO market.
Through the Sheridan System, Montana-Dakota serves Sheridan, Wyoming, and neighboring communities. The maximum peak demand experienced to date attributable to Montana-Dakota sales to retail customers on that system was approximately 61,501 kW in July 2012. Montana-Dakota has a power supply contract with Black Hills Power, Inc. to purchase up to 49,000 kW of capacity annually through December 31, 2023. Wygen III serves a portion of the needs of its Sheridan-area customers.
The following table sets forth details applicable to the Company's electric generating stations:
Generating Station
Type
Nameplate Rating (kW)

2016 ZRCs

(a) 
2016 Net Generation (kWh in thousands)

Interconnected System:
 
 
 
 
 
North Dakota:
 
 
 
 
 
Coyote (b)
Steam
103,647

80.6

 
615,730

Heskett
Steam
86,000

87.3

 
458,788

Heskett
Combustion Turbine
89,038

57.0

 
2,868

Glen Ullin
Heat Recovery
7,500

4.2

 
39,383

Cedar Hills
Wind
19,500

4.9

 
60,790

Diesel Units
Oil
5,475

3.8

 
9

Thunder Spirit
Wind
107,500

17.2

 
427,960

South Dakota:
 
 
 
 
 
Big Stone (b)
Steam
94,111

99.7

 
440,834

Montana:
 
 
 
 
 
Lewis & Clark
Steam
44,000

51.9

 
261,058

Lewis & Clark
Reciprocating Internal Combustion Engine
18,700

14.1

 
11,918

Glendive
Combustion Turbine
75,522

72.5

 
6,277

Miles City
Combustion Turbine
23,150

21.6

 
712

Diamond Willow
Wind
30,000

6.2

 
100,119

 
 
704,143

521.0

 
2,426,446

Sheridan System:
 
 

 

 
 

Wyoming:
 
 
 
 
 

Wygen III (b)
Steam
28,000

N/A

 
200,317

 
 
732,143

521.0

 
2,626,763

(a)
Interconnected system only. MISO requires generators to obtain their summer capability through the GVTC. The GVTC is then converted to ZRCs by applying each generator's forced outage factor against its GVTC. Wind generator's ZRCs are calculated based on a wind capacity study performed annually by MISO. ZRCs are used to meet supply obligations within MISO.
(b)
Reflects Montana-Dakota's ownership interest.
 
Virtually all of the current fuel requirements of the Heskett and Lewis & Clark stations are met with coal supplied by subsidiaries of Westmoreland Coal Company under contracts that expire in December 2021 and December 2017, respectively. The Heskett and Lewis & Clark coal supply agreements provide for the purchase of coal necessary to supply the coal requirements of these stations at contracted pricing. Montana-Dakota estimates the Heskett and Lewis & Clark coal requirement to be in the range of 425,000 to 460,000 tons and 250,000 to 350,000 tons per contract year, respectively.
The owners of Coyote Station, including Montana-Dakota, have a contract with Coyote Creek for coal supply to the Coyote Station that expires December 2040. Montana-Dakota estimates the Coyote Station coal supply agreement to be approximately 2.5 million tons per contract year. For more information, see Item 8 - Note  17 .
The owners of Big Stone Station, including Montana-Dakota, have coal supply agreements, which meet a portion of the Big Stone Station's fuel requirements, for the purchase of 750,000 tons in 2017 from Alpha Coal Sales Co., LLC at contracted pricing. The remainder of the Big Stone Station fuel requirements will be secured through separate future contracts.
Montana-Dakota has a coal supply agreement with Wyodak Resources Development Corp., to supply the coal requirements of Wygen III at contracted pricing through June 1, 2060. Montana-Dakota estimates the maximum annual coal consumption of the facility to be 585,000 tons.

 
MDU Resources Group, Inc. Form 10-K 9



Part I
 

The average cost of coal purchased, including freight, at Montana-Dakota's electric generating stations (including the Big Stone, Coyote and Wygen III stations) was as follows:
Years ended December 31,
2016

2015

2014

Average cost of coal per MMBtu
$
1.89

$
1.75

$
1.74

Average cost of coal per ton
$
27.45

$
25.41

$
25.11

Montana-Dakota expects that it has secured adequate capacity available through existing baseload generating stations, renewable generation, turbine peaking stations, demand reduction programs and firm contracts to meet the peak customer demand requirements of its customers through mid-2022. Future capacity that is needed to replace contracts and meet system growth requirements is expected to be met by constructing new generation resources, or acquiring additional capacity through power purchase contracts or the MISO capacity auction. For more information regarding potential power generation projects, see Item 7 - MD&A - Prospective Information - Electric and natural gas distribution.
Montana-Dakota has major interconnections with its neighboring utilities and considers these interconnections adequate for coordinated planning, emergency assistance, exchange of capacity and energy and power supply reliability.
Montana-Dakota is subject to competition in varying degrees, in certain areas, from rural electric cooperatives, on-site generators, co-generators and municipally owned systems. In addition, competition in varying degrees exists between electricity and alternative forms of energy such as natural gas.
Regulatory Matters and Revenues Subject to Refund   In North Dakota, Montana-Dakota's results of operations reflect monthly increases or decreases in fuel and purchased power costs (including demand charges) and is deferring those electric fuel and purchased power costs that are greater or less than amounts presently being recovered through its existing rate schedules. In Montana, a monthly Fuel and Purchased Power Tracking Adjustment mechanism allows Montana-Dakota's results of operations to reflect 90 percent of the increases or decreases in fuel and purchased power costs (including demand charges) and Montana-Dakota is deferring 90 percent of costs that are greater or less than amounts presently being recovered through its existing rate schedules. A fuel adjustment clause contained in South Dakota jurisdictional electric rate schedules allows Montana-Dakota's results of operations to reflect monthly increases or decreases in fuel and purchased power costs (excluding demand charges). In Wyoming, an annual Electric Power Supply Cost Adjustment mechanism allows Montana-Dakota's results of operations to reflect increases or decreases in purchased power costs (including demand charges) related to power supply and Montana-Dakota is deferring costs that are greater or less than amounts presently being recovered through its existing rate schedules. Such orders generally provide that these amounts are recoverable or refundable through rate adjustments which are filed annually. As of March 1, 2017, Montana-Dakota's results of operations will reflect 95 percent of the increases or decreases from the base purchased power costs and in addition will also reflect 85 percent of the increases or decreases from the base coal price, which will also be recovered through the Electric Power Supply Cost Adjustment. For more information, see Item 8 - Note  4 .
In North Dakota, Montana-Dakota recovers in rates the costs associated with environmental upgrades at Big Stone Station and Lewis & Clark Station. Montana-Dakota will maintain a tracker account until all costs are recovered or until the associated costs are reflected in base rates as a part of a general rate case.
In North Dakota, Montana-Dakota has the ability to recover the costs associated with new generation through a rider mechanism. Montana-Dakota will utilize this rider mechanism for new generation until such time as the costs and investment are included in base rates. For the Thunder Spirit Wind project, Montana-Dakota implemented a renewable resource cost adjustment rider. Montana-Dakota also has in place in North Dakota a transmission tracker to recover transmission costs associated with MISO and the Southwest Power Pool, regional transmission systems serving Montana-Dakota, along with certain of the transmission investments not recovered through retail rates. The tracking mechanism has an annual true-up.
In South Dakota, Montana-Dakota recovers the South Dakota investment in the Thunder Spirit Wind project through an Infrastructure Rider tracking mechanism that is subject to an annual true-up. Montana-Dakota also has in place in South Dakota a transmission tracker to recover transmission costs associated with MISO and the Southwest Power Pool, regional transmission systems serving Montana-Dakota, along with certain of the transmission investments not recovered through retail rates. The tracking mechanism has an annual true-up.
For more information on regulatory matters, see Item 8 - Note  16 .
Environmental Matters   Montana-Dakota's electric operations are subject to federal, state and local laws and regulations providing for air, water and solid waste pollution control; state facility-siting regulations; zoning and planning regulations of certain state and local authorities; federal health and safety regulations; and state hazard communication standards. Montana-Dakota believes it is in substantial compliance with these regulations.

 
10 MDU Resources Group, Inc. Form 10-K



Part I
 

Montana-Dakota's electric generating facilities have Title V Operating Permits, under the Clean Air Act, issued by the states in which they operate. Each of these permits has a five-year life. Near the expiration of these permits, renewal applications are submitted. Permits continue in force beyond the expiration date, provided the application for renewal is submitted by the required date, usually six months prior to expiration. The Title V Operating Permit renewal application for Big Stone Station was submitted timely to the South Dakota DENR in November 2013. Big Stone Station continues to operate under conditions of the Title V Operating Permit issued by the South Dakota DENR in June 2009. It is expected that a final renewed permit will be issued in 2017 as the South Dakota DENR incorporates the completed BART air quality control system into the permit. Wygen III is allowed to operate under the facility's construction permit until the Title V Operating Permit is issued by the Wyoming Department of Environmental Quality. The Title V Operating Permit application for Wygen III was submitted timely in January 2011, with the permit expected to be issued in 2017. An application to modify the Title V Operating Permit for incorporation of two new natural gas-fired engines at Lewis & Clark Station was submitted to the Montana DEQ timely in December 2016, with a final permit expected to be issued in 2017. The Title V Operating Permit applications for the Miles City and Glendive stations were submitted timely in 2016 and final permits were issued by the Montana DEQ for each facility in August 2016 and July 2016, respectively.
State water discharge permits issued under the requirements of the Clean Water Act are maintained for power production facilities on the Yellowstone and Missouri rivers. These permits also have five-year lives. Montana-Dakota renews these permits as necessary prior to expiration. Other permits held by these facilities may include an initial siting permit, which is typically a one-time, preconstruction permit issued by the state; state permits to dispose of combustion by-products; state authorizations to withdraw water for operations; and Army Corps permits to construct water intake structures. Montana-Dakota's Army Corps permits grant one-time permission to construct and do not require renewal. Other permit terms vary and the permits are renewed as necessary.
Montana-Dakota's electric operations are conditionally exempt small-quantity hazardous waste generators and subject only to minimum regulation under the RCRA. Montana-Dakota routinely handles PCBs from its electric operations in accordance with federal requirements. PCB storage areas are registered with the EPA as required.
Montana-Dakota incurred $14.2 million of environmental capital expenditures in 2016 , mainly for ash management projects at Lewis & Clark Station and air emission control projects at Heskett Station and Coyote Station. Environmental capital expenditures are estimated to be $3.5 million, $9.0 million and $6.5 million in 2017 , 2018 and 2019 , respectively, for various environmental upgrades and improvements for air emission and water and coal ash management at power plants. Montana-Dakota's capital and operational expenditures could also be affected by future air emission regulations and coal ash management requirements, including the Clean Power Plan rule published by the EPA in October 2015. The Clean Power Plan requires existing fossil fuel-fired electric generation facilities to reduce carbon dioxide emissions. Montana-Dakota is evaluating the Clean Power Plan and has not included estimates for capital expenditures in 2017 through 2019 for potential compliance requirements. On February 9, 2016, the United States Supreme Court granted an application for a stay of the Clean Power Plan pending disposition of the applicants' petition for review in the D.C. Circuit Court and disposition of the applicants' petition for a writ of certiorari if such a writ is sought.
Natural Gas Distribution
General   The Company's natural gas distribution operations consist of Montana-Dakota, Great Plains, Cascade and Intermountain, which sell natural gas at retail, serving 922,408 residential, commercial and industrial customers in 335 communities and adjacent rural areas across eight states as of December 31, 2016 , and provide natural gas transportation services to certain customers on the Company's systems. For more information on the customer classes served, see the table below. These services are provided through distribution systems aggregating approximately 19,400 miles. The natural gas distribution operations have obtained and hold, or are in the process of renewing, valid and existing franchises authorizing them to conduct their natural gas operations in all of the municipalities they serve where such franchises are required. These operations intend to protect their service areas and seek renewal of all expiring franchises. At December 31, 2016 , the natural gas distribution operations' net natural gas distribution plant investment was $1.5 billion, and the rate base was $868 million.
The customers served and revenues by class for the natural gas distribution operations are as follows:
 
2016
2015
2014
 
Customers
Served

Revenues

Customers
Served

Revenues

Customers
Served

Revenues

 
(Dollars in thousands)
Residential
818,163

$
429,828

803,846

$
455,301

791,870

$
513,373

Commercial
103,438

253,333

101,688

277,022

100,288

324,203

Industrial
807

23,337

811

26,568

756

30,917

 
922,408

$
706,498

906,345

$
758,891

892,914

$
868,493


 
MDU Resources Group, Inc. Form 10-K 11



Part I
 

The percentage of the natural gas distribution operations' natural gas utility operating sales revenues by jurisdiction is as follows:
 
2016

2015

2014

Idaho
34
%
32
%
29
%
Washington
26
%
26
%
25
%
North Dakota
13
%
15
%
16
%
Montana
8
%
8
%
9
%
Oregon
8
%
8
%
8
%
South Dakota
6
%
6
%
7
%
Minnesota
3
%
3
%
4
%
Wyoming
2
%
2
%
2
%
The natural gas distribution operations are subject to regulation by the IPUC, MNPUC, MTPSC, NDPSC, OPUC, SDPUC, WUTC and WYPSC regarding retail rates, service, accounting and certain security issuances.
System Supply, System Demand and Competition The natural gas distribution operations serve retail natural gas markets, consisting principally of residential and firm commercial space and water heating users, in portions of Idaho, including Boise, Nampa, Twin Falls, Pocatello and Idaho Falls; western Minnesota, including Fergus Falls, Marshall and Crookston; eastern Montana, including Billings, Glendive and Miles City; North Dakota, including Bismarck, Mandan, Dickinson, Wahpeton, Williston, Watford City, Minot and Jamestown; central and eastern Oregon, including Bend, Pendleton, Ontario and Baker City; western and north-central South Dakota, including Rapid City, Pierre, Spearfish and Mobridge; western, southeastern and south-central Washington, including Bellingham, Bremerton, Longview, Aberdeen, Wenatchee/Moses Lake, Mount Vernon, Tri-Cities, Walla Walla and Yakima; and northern Wyoming, including Sheridan and Lovell. These markets are highly seasonal and sales volumes depend largely on the weather, the effects of which are mitigated in certain jurisdictions by a weather normalization mechanism discussed in Regulatory Matters. In addition to the residential and commercial sales, the utilities transport natural gas for larger commercial and industrial customers who purchase their own supply of natural gas.
Competition in varying degrees exists between natural gas and other fuels and forms of energy. The natural gas distribution operations have established various natural gas transportation service rates for their distribution businesses to retain interruptible commercial and industrial loads. These services have enhanced the natural gas distribution operations' competitive posture with alternative fuels, although certain customers have bypassed the distribution systems by directly accessing transmission pipelines within close proximity. These bypasses did not have a material effect on results of operations.
The natural gas distribution operations and various distribution transportation customers obtain their system requirements directly from producers, processors and marketers. The Company's purchased natural gas is supplied by a portfolio of contracts specifying market-based pricing and is transported under transportation agreements with WBI Energy Transmission, Northern Border Pipeline Company, Northwest Pipeline LLC, Northern Natural Gas, Gas Transmission Northwest LLC, Northwestern Energy, Viking Gas Transmission Company, Westcoast Energy Inc., Ruby Pipeline LLC, Foothills Pipe Lines Ltd. and NOVA Gas Transmission Ltd. The natural gas distribution operations have contracts for storage services to provide gas supply during the winter heating season and to meet peak day demand with various storage providers, including WBI Energy Transmission, Questar Pipeline Company, Northwest Pipeline LLC and Northern Natural Gas. In addition, certain of the operations have entered into natural gas supply management agreements with various parties. Demand for natural gas, which is a widely traded commodity, has historically been sensitive to seasonal heating and industrial load requirements as well as changes in market price. The natural gas distribution operations believe that, based on current and projected domestic and regional supplies of natural gas and the pipeline transmission network currently available through their suppliers and pipeline service providers, supplies are adequate to meet their system natural gas requirements for the next decade.
Regulatory Matters The natural gas distribution operations' retail natural gas rate schedules contain clauses permitting adjustments in rates based upon changes in natural gas commodity, transportation and storage costs. Current tariffs allow for recovery or refunds of under- or over-recovered gas costs through rate adjustments which are filed annually.
Montana-Dakota's North Dakota and South Dakota natural gas tariffs contain weather normalization mechanisms applicable to certain firm customers that adjust the distribution delivery charge revenues to reflect weather fluctuations during the November 1 through May 1 billing periods.
On December 28, 2015, the OPUC approved an extension of Cascade's decoupling mechanism until January 1, 2020, with an agreement that Cascade would initiate a review of the mechanism by September 30, 2019. Cascade also has an earnings sharing mechanism with respect to its Oregon jurisdictional operations as required by the OPUC.

 
12 MDU Resources Group, Inc. Form 10-K



Part I
 

On July 7, 2016, the WUTC approved a full decoupling mechanism where Cascade is allowed recovery of an average revenue per customer regardless of actual consumption. The mechanism also includes an earnings sharing component if Cascade earns beyond its authorized return. The decoupling mechanism will be reviewed following the end of 2019.
On December 22, 2016, the MNPUC approved a request by Great Plains to implement a full revenue decoupling mechanism pilot project. The decoupling mechanism will reflect the period October 1 through September 30 with the first adjustment to be billed to customers effective December 1 each year for the 3 year pilot project.
For more information on regulatory matters, see Item 8 - Note  16 .
Environmental Matters   The natural gas distribution operations are subject to federal, state and local environmental, facility-siting, zoning and planning laws and regulations. The natural gas distribution operations believe they are in substantial compliance with those regulations.
The Company's natural gas distribution operations are conditionally exempt small-quantity hazardous waste generators and subject only to minimum regulation under the RCRA. Certain locations of the natural gas distribution operations routinely handle PCBs from their natural gas operations in accordance with federal requirements. PCB storage areas are registered with the EPA as required. Capital and operational expenditures for natural gas distribution operations could be affected in a variety of ways by potential new GHG legislation or regulation. In particular, such legislation or regulation would likely increase capital expenditures for energy efficiency and conservation programs and operational costs associated with GHG emissions compliance. Natural gas distribution operations expect to recover the operational and capital expenditures for GHG regulatory compliance in rates consistent with the recovery of other reasonable costs of complying with environmental laws and regulations.
The natural gas distribution operations did not incur any material environmental expenditures in 2016 . Except as to what may be ultimately determined with regard to the issues described in the following paragraph, the natural gas distribution operations do not expect to incur any material capital expenditures related to environmental compliance with current laws and regulations through 2019 .
Montana-Dakota and Great Plains have ties to six historic manufactured gas plants as a successor corporation or through direct ownership of the plant. Montana-Dakota is investigating one of these former manufactured gas plant sites and providing input on another site investigation conducted by a third party. To the extent not covered by insurance, Montana-Dakota will seek recovery in its natural gas rates charged to customers for any investigation and remediation costs incurred for these sites. Cascade has ties to nine historic manufactured gas plants as a successor corporation or through direct ownership of the plant. Cascade is involved in the investigation and remediation of three of these manufactured gas plants in Washington and Oregon. See Item 8 - Note  17 for a further discussion of these three manufactured gas plants. To the extent not covered by insurance, Cascade will seek recovery of investigation and remediation costs through its natural gas rates charged to customers.
Pipeline and Midstream
General   WBI Energy owns and operates both regulated and nonregulated businesses. The regulated business of this segment, WBI Energy Transmission, owns and operates approximately 4,000 miles of transmission, gathering and storage lines in Montana, North Dakota, South Dakota and Wyoming. Three underground storage fields in Montana and Wyoming provide storage services to local distribution companies, industrial customers, natural gas marketers and others, and serve to enhance system reliability. Its system is strategically located near five natural gas producing basins, making natural gas supplies available to its transportation and storage customers. The system has 13 interconnecting points with other pipeline facilities allowing for the receipt and/or delivery of natural gas to and from other regions of the country and from Canada. Under the Natural Gas Act, as amended, WBI Energy Transmission is subject to the jurisdiction of the FERC regarding certificate, rate, service and accounting matters, and at December 31, 2016 , its net plant investment was $388.0 million.
The nonregulated business of this segment owns and operates gathering facilities in Montana and Wyoming. In total, facilities include approximately 800 miles of operated field gathering lines, some of which interconnect with WBI Energy's regulated pipeline system. The nonregulated business provides natural gas gathering services and a variety of other energy-related services, including cathodic protection, contract compression operations, measurement services, and energy efficiency product sales and installation services to large end-users. In November 2016, the Company entered into an agreement to sell its ownership in the Pronghorn assets, which included a 50 percent undivided interest in a natural gas processing plant, both oil and gas gathering pipelines, an oil storage terminal and an oil pipeline in western North Dakota. The transaction closed in January 2017.
A majority of its pipeline and midstream business is transacted in the northern Great Plains and Rocky Mountain regions of the United States.
For information regarding natural gas gathering operations litigation, see Item 8 - Note  17 .

 
MDU Resources Group, Inc. Form 10-K 13



Part I
 

System Supply, System Demand and Competition Natural gas supplies emanate from traditional and nontraditional production activities in the region from both on-system and off-system supply sources. New incremental supply from nontraditional sources have developed, such as the Bakken area in Montana and North Dakota, which has helped offset declines in traditional regional supply sources and supports WBI Energy Transmission's transportation and storage services. In addition, off-system supply sources are available through the Company's interconnections with other pipeline systems. WBI Energy Transmission will continue to look for opportunities to increase transportation, gathering and storage services through system expansion and/or other pipeline interconnections or enhancements that could provide substantial future benefits.
WBI Energy Transmission's underground natural gas storage facilities have a certificated storage capacity of approximately 353 Bcf, including 193 Bcf of working gas capacity, 85 Bcf of cushion gas and 75 Bcf of native gas. These storage facilities enable customers to purchase natural gas throughout the year and meet winter peak requirements.
WBI Energy Transmission competes with several pipelines for its customers' transportation, storage and gathering business and at times may discount rates in an effort to retain market share. However, the strategic location of its system near five natural gas producing basins and the availability of underground storage and gathering services, along with interconnections with other pipelines, serve to enhance its competitive position.
Although certain of WBI Energy Transmission's firm customers, including its largest firm customer Montana-Dakota, serve relatively secure residential and commercial end-users, they generally all have some price-sensitive end-users that could switch to alternate fuels.
WBI Energy Transmission transports substantially all of Montana-Dakota's natural gas, primarily utilizing firm transportation agreements, which for 2016 represented 39 percent of WBI Energy Transmission's subscribed firm transportation contract demand. The majority of the firm transportation agreements with Montana-Dakota expire in June 2022. In addition, Montana-Dakota has contracts with WBI Energy Transmission to provide firm storage services to facilitate meeting Montana-Dakota's winter peak requirements expiring in July 2035.
The nonregulated business competes with several midstream companies for existing customers, the expansion of its systems and the installation of new systems. Its strong position in the fields in which it operates, its focus on customer service and the variety of services it offers, along with its interconnection with various other pipelines, serve to enhance its competitive position.
Environmental Matters   The pipeline and midstream operations are generally subject to federal, state and local environmental, facility-siting, zoning and planning laws and regulations. The Company believes it is in substantial compliance with those regulations.
Ongoing operations are subject to the Clean Air Act, the Clean Water Act, the RCRA and other state and federal regulations. Administration of many provisions of these laws has been delegated to the states where WBI Energy and its subsidiaries operate. Permit terms vary and all permits carry operational compliance conditions. Some permits require annual renewal, some have terms ranging from one to five years and others have no expiration date. Permits are renewed and modified, as necessary, based on defined permit expiration dates, operational demand and/or regulatory changes.
Detailed environmental assessments and/or environmental impact statements as required by the National Environmental Policy Act are included in the FERC's environmental review process for both the construction and abandonment of WBI Energy Transmission's natural gas transmission pipelines, compressor stations and storage facilities.
The pipeline and midstream operations did not incur any material environmental expenditures in 2016 and do not expect to incur any material capital expenditures related to environmental compliance with current laws and regulations through 2019 .
Construction Materials and Contracting
General   Knife River operates construction materials and contracting businesses headquartered in Alaska, California, Hawaii, Idaho, Iowa, Minnesota, Montana, North Dakota, Oregon, Texas, Washington and Wyoming. These operations mine, process and sell construction aggregates (crushed stone, sand and gravel); produce and sell asphalt mix and supply ready-mixed concrete for use in most types of construction, including roads, freeways and bridges, as well as homes, schools, shopping centers, office buildings and industrial parks. Although not common to all locations, other products include the sale of cement, liquid asphalt for various commercial and roadway applications, various finished concrete products and other building materials and related contracting services.
The construction materials business had approximately $538 million in backlog at December 31, 2016 , compared to $491 million at December 31, 2015 . The Company anticipates that a significant amount of the current backlog will be completed during 2017 .

 
14 MDU Resources Group, Inc. Form 10-K



Part I
 

Competition   Knife River's construction materials products are marketed under highly competitive conditions. Price is the principal competitive force to which these products are subject, with service, quality, delivery time and proximity to the customer also being significant factors. The number and size of competitors varies in each of Knife River's principal market areas and product lines.
The demand for construction materials products is significantly influenced by the cyclical nature of the construction industry in general. In addition, construction materials activity in certain locations may be seasonal in nature due to the effects of weather. The key economic factors affecting product demand are changes in the level of local, state and federal governmental spending, general economic conditions within the market area that influence both the commercial and residential sectors, and prevailing interest rates.
Knife River is not dependent on any single customer or group of customers for sales of its products and services, the loss of which would have a material adverse effect on its construction materials businesses.
Reserve Information Aggregate reserve estimates are calculated based on the best available data. This data is collected from drill holes and other subsurface investigations, as well as investigations of surface features such as mine high walls and other exposures of the aggregate reserves. Mine plans, production history and geologic data also are utilized to estimate reserve quantities. Most acquisitions are made of mature businesses with established reserves, as distinguished from exploratory-type properties.
Estimates are based on analyses of the data described above by experienced internal mining engineers, operating personnel and geologists. Property setbacks and other regulatory restrictions and limitations are identified to determine the total area available for mining. Data described previously are used to calculate the thickness of aggregate materials to be recovered. Topography associated with alluvial sand and gravel deposits is typically flat and volumes of these materials are calculated by applying the thickness of the resource over the areas available for mining. Volumes are then converted to tons by using an appropriate conversion factor. Typically, 1.5 tons per cubic yard in the ground is used for sand and gravel deposits.
Topography associated with the hard rock reserves is typically much more diverse. Therefore, using available data, a final topography map is created and computer software is utilized to compute the volumes between the existing and final topographies. Volumes are then converted to tons by using an appropriate conversion factor. Typically, 2 tons per cubic yard in the ground is used for hard rock quarries.
Estimated reserves are probable reserves as defined in Securities Act Industry Guide 7. Remaining reserves are based on estimates of volumes that can be economically extracted and sold to meet current market and product applications. The reserve estimates include only salable tonnage and thus exclude waste materials that are generated in the crushing and processing phases of the operation. Approximately 911 million tons of the 989 million tons of aggregate reserves are permitted reserves. The remaining reserves are on properties that are expected to be permitted for mining under current regulatory requirements. The data used to calculate the remaining reserves may require revisions in the future to account for changes in customer requirements and unknown geological occurrences. The years remaining were calculated by dividing remaining reserves by the three-year average sales from 2014 through 2016 . Actual useful lives of these reserves will be subject to, among other things, fluctuations in customer demand, customer specifications, geological conditions and changes in mining plans.

 
MDU Resources Group, Inc. Form 10-K 15



Part I
 

The following table sets forth details applicable to the Company's aggregate reserves under ownership or lease as of December 31, 2016 , and sales for the years ended December 31, 2016 , 2015 and 2014 :
 
Number of Sites
(Crushed Stone)
 
Number of Sites
(Sand & Gravel)
 
Tons Sold (000's)
Estimated Reserves
(000's tons)

Lease Expiration
Reserve
Life
(years)

Production Area
owned

leased

 
owned

leased

 
2016

2015

2014

Anchorage, AK


 
1


 
1,343

1,837

1,665

15,972

N/A
10

Hawaii

6

 


 
1,901

1,892

1,840

52,091

2017-2064
28

Northern CA


 
9

1

 
1,604

1,580

1,340

46,411

2018
31

Southern CA

2

 


 
224

118

147

91,622

2035
Over 100

Portland, OR
1

3

 
5

3

 
4,044

3,562

3,244

217,712

2025-2055
60

Eugene, OR
3

4

 
7


 
662

819

928

155,090

2021-2046
Over 100

Central OR/WA/ID

1

 
6

2

 
1,685

1,493

1,254

88,467

2020-2077
60

Southwest OR
5

6

 
11

7

 
2,689

1,872

1,624

102,151

2017-2053
50

Central MT


 
3

2

 
1,135

1,383

1,260

29,310

2023-2027
23

Northwest MT


 
8

2

 
1,514

1,423

1,486

66,287

2017-2020
45

Wyoming


 
1

2

 
742

888

952

9,988

2019
12

Central MN

1

 
37

12

 
2,831

2,556

1,674

52,087

2017-2028
22

Northern MN
2


 
14

7

 
537

595

491

24,887

2017-2021
46

ND/SD


 
2

22

 
1,643

1,959

2,377

26,108

2017-2031
13

Texas
1

2

 
1


 
1,243

1,138

903

10,901

2022-2029
10

Sales from other sources
 
 
 
 
 
 
3,783

3,844

4,642

 
 
 
 
 
 
 
 
 
 
27,580

26,959

25,827

989,084

 
 
The 989 million tons of estimated aggregate reserves at December 31, 2016 , are comprised of 467 million tons that are owned and 522 million tons that are leased. Approximately 31 percent of the tons under lease have lease expiration dates of 20 years or more. The weighted average years remaining on all leases containing estimated probable aggregate reserves is approximately 21 years, including options for renewal that are at Knife River's discretion. Based on a three-year average of sales from 2014 through 2016 of leased reserves, the average time necessary to produce remaining aggregate reserves from such leases is approximately 52 years. Some sites have leases that expire prior to the exhaustion of the estimated reserves. The estimated reserve life assumes, based on Knife River's experience, that leases will be renewed to allow sufficient time to fully recover these reserves.
The changes in Knife River's aggregate reserves for the years ended December 31 were as follows:
 
2016

2015

2014

 
 
(000's of tons)

 
Aggregate reserves:
 
 
 
Beginning of year
1,022,513

1,061,156

1,083,376

Acquisitions
24,993

7,406

12,343

Sales volumes*
(23,797
)
(23,115
)
(21,185
)
Other**
(34,625
)
(22,934
)
(13,378
)
End of year
989,084

1,022,513

1,061,156

*
Excludes sales from other sources.
**
Includes property sales, revisions of previous estimates and expiring leases.
 
Environmental Matters   Knife River's construction materials and contracting operations are subject to regulation customary for such operations, including federal, state and local environmental compliance and reclamation regulations. Except as to the issues described later, Knife River believes it is in substantial compliance with these regulations. Individual permits applicable to Knife River's various operations are managed largely by local operations, particularly as they relate to application, modification, renewal, compliance and reporting procedures.
Knife River's asphalt and ready-mixed concrete manufacturing plants and aggregate processing plants are subject to Clean Air Act and Clean Water Act requirements for controlling air emissions and water discharges. Some mining and construction activities also are subject to these laws. In most of the states where Knife River operates, these regulatory programs have been delegated to state and local regulatory authorities. Knife River's facilities also are subject to the RCRA as it applies to the management of hazardous wastes and underground

 
16 MDU Resources Group, Inc. Form 10-K



Part I
 

storage tank systems. These programs also have generally been delegated to the state and local authorities in the states where Knife River operates. Knife River's facilities must comply with requirements for managing wastes and underground storage tank systems.
Some Knife River activities are directly regulated by federal agencies. For example, certain in-water mining operations are subject to provisions of the Clean Water Act that are administered by the Army Corps. Knife River operates several such operations, including gravel bar skimming and dredging operations, and Knife River has the associated permits as required. The expiration dates of these permits vary, with five years generally being the longest term.
Knife River's operations also are occasionally subject to the ESA. For example, land use regulations often require environmental studies, including wildlife studies, before a permit may be granted for a new or expanded mining facility or an asphalt or concrete plant. If endangered species or their habitats are identified, ESA requirements for protection, mitigation or avoidance apply. Endangered species protection requirements are usually included as part of land use permit conditions. Typical conditions include avoidance, setbacks, restrictions on operations during certain times of the breeding or rearing season, and construction or purchase of mitigation habitat. Knife River's operations also are subject to state and federal cultural resources protection laws when new areas are disturbed for mining operations or processing plants. Land use permit applications generally require that areas proposed for mining or other surface disturbances be surveyed for cultural resources. If any are identified, they must be protected or managed in accordance with regulatory agency requirements.
The most comprehensive environmental permit requirements are usually associated with new mining operations, although requirements vary widely from state to state and even within states. In some areas, land use regulations and associated permitting requirements are minimal. However, some states and local jurisdictions have very demanding requirements for permitting new mines. Environmental impact reports are sometimes required before a mining permit application can even be considered for approval. These reports can take up to several years to complete. The report can include projected impacts of the proposed project on air and water quality, wildlife, noise levels, traffic, scenic vistas and other environmental factors. The reports generally include suggested actions to mitigate the projected adverse impacts.
Provisions for public hearings and public comments are usually included in land use permit application review procedures in the counties where Knife River operates. After taking into account environmental, mine plan and reclamation information provided by the permittee as well as comments from the public and other regulatory agencies, the local authority approves or denies the permit application. Denial is rare, but land use permits often include conditions that must be addressed by the permittee. Conditions may include property line setbacks, reclamation requirements, environmental monitoring and reporting, operating hour restrictions, financial guarantees for reclamation, and other requirements intended to protect the environment or address concerns submitted by the public or other regulatory agencies.
Knife River has been successful in obtaining mining and other land use permit approvals so sufficient permitted reserves are available to support its operations. For mining operations, this often requires considerable advanced planning to ensure sufficient time is available to complete the permitting process before the newly permitted aggregate reserve is needed to support Knife River's operations.
Knife River's Gascoyne surface coal mine last produced coal in 1995 but continues to be subject to reclamation requirements of the Surface Mining Control and Reclamation Act, as well as the North Dakota Surface Mining Act. Portions of the Gascoyne Mine remain under reclamation bond until the 10-year revegetation liability period has expired. A portion of the original permit has been released from bond and additional areas are currently in the process of having the bond released. Knife River's intention is to request bond release as soon as it is deemed possible.
Knife River did not incur any material environmental expenditures in 2016 and, except as to what may be ultimately determined with regard to the issues described in the following paragraph, Knife River does not expect to incur any material expenditures related to environmental compliance with current laws and regulations through 2019 .
In December 2000, Knife River - Northwest was named by the EPA as a PRP in connection with the cleanup of a commercial property site, acquired by Knife River - Northwest in 1999, and part of the Portland, Oregon, Harbor Superfund Site. For more information, see Item 8 - Note  17 .
Mine Safety   The Dodd-Frank Act requires disclosure of certain mine safety information. For more information, see Item 4 - Mine Safety Disclosures.
Construction Services
General   MDU Construction Services provides utility construction services specializing in constructing and maintaining electric and communication 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. These services are provided to utilities and large manufacturing, commercial, industrial, institutional and government customers.

 
MDU Resources Group, Inc. Form 10-K 17



Part I
 

Construction and maintenance crews are active year round. However, activity in certain locations may be seasonal in nature due to the effects of weather.
MDU Construction Services operates a fleet of owned and leased trucks and trailers, support vehicles and specialty construction equipment, such as backhoes, excavators, trenchers, generators, boring machines and cranes. In addition, as of December 31, 2016 , MDU Construction Services owned or leased facilities in 16 states. This space is used for offices, equipment yards, manufacturing, warehousing, storage and vehicle shops.
MDU Construction Services' backlog is comprised of the uncompleted portion of services to be performed under job-specific contracts. The backlog at December 31, 2016 , was approximately $475 million compared to $493 million at December 31, 2015 . MDU Construction Services expects to complete a significant amount of this backlog during 2017 . Due to the nature of its contractual arrangements, in many instances MDU Construction Services' customers are not committed to the specific volumes of services to be purchased under a contract, but rather MDU Construction Services is committed to perform these services if and to the extent requested by the customer. Therefore, there can be no assurance as to the customers' requirements during a particular period or that such estimates at any point in time are predictive of future revenues.
MDU Construction Services works with the National Electrical Contractors Association, the IBEW and other trade associations on hiring and recruiting a qualified workforce.
Competition   MDU Construction Services operates in a highly competitive business environment. Most of MDU Construction Services' work is obtained on the basis of competitive bids or by negotiation of either cost-plus or fixed-price contracts. The workforce and equipment are highly mobile, providing greater flexibility in the size and location of MDU Construction Services' market area. Competition is based primarily on price and reputation for quality, safety and reliability. The size and location of the services provided, as well as the state of the economy, will be factors in the number of competitors that MDU Construction Services will encounter on any particular project. MDU Construction Services believes that the diversification of the services it provides, the markets it serves throughout the United States and the management of its workforce will enable it to effectively operate in this competitive environment.
Utilities and independent contractors represent the largest customer base for this segment. Accordingly, utility and subcontract work accounts for a significant portion of the work performed by MDU Construction Services and the amount of construction contracts is dependent to a certain extent on the level and timing of maintenance and construction programs undertaken by customers. MDU Construction Services relies on repeat customers and strives to maintain successful long-term relationships with these customers.
Environmental Matters MDU Construction Services' operations are subject to regulation customary for the industry, including federal, state and local environmental compliance. MDU Construction Services believes it is in substantial compliance with these regulations.
The nature of MDU Construction Services' operations is such that few, if any, environmental permits are required. Operational convenience supports the use of petroleum storage tanks in several locations, which are permitted under state programs authorized by the EPA. MDU Construction Services has no ongoing remediation related to releases from petroleum storage tanks. MDU Construction Services' operations are conditionally exempt small-quantity waste generators, subject to minimal regulation under the RCRA. Federal permits for specific construction and maintenance jobs that may require these permits are typically obtained by the hiring entity, and not by MDU Construction Services.
MDU Construction Services did not incur any material environmental expenditures in 2016 and does not expect to incur any material capital expenditures related to environmental compliance with current laws and regulations through 2019 .
Discontinued Operations
General   Discontinued operations includes the results of Dakota Prairie Refining and Fidelity other than certain general and administrative costs and interest expense . In the second quarter of 2016, the Company sold all of the outstanding membership interests in Dakota Prairie Refining. Between September 2015 and March 2016, the Company entered into purchase and sale agreements to sell all of Fidelity's oil and natural gas assets. The completion of these sales occurred between October 2015 and April 2016. For more information on discontinued operations, see Item 8 - Note  2 and Supplementary Financial Information.
Item 1A. Risk Factors
The Company's business and financial results are subject to a number of risks and uncertainties, including those set forth below and in other documents that it files with the SEC. The factors and the other matters discussed herein are important factors that could cause actual

 
18 MDU Resources Group, Inc. Form 10-K



Part I
 

results or outcomes for the Company to differ materially from those discussed in the forward-looking statements included elsewhere in this document.
Economic Risks
The Company's pipeline and midstream business is dependent on factors, including commodity prices and commodity price basis differentials, that are subject to various external influences that cannot be controlled.
These factors include: fluctuations in oil, NGL and natural gas production and prices; fluctuations in commodity price basis differentials; domestic and foreign supplies of oil, NGL and natural gas; political and economic conditions in oil producing countries; actions of the Organization of Petroleum Exporting Countries; and other risks incidental to the development and operations of natural gas pipeline systems. Continued prolonged depressed prices for oil, NGL and natural gas could impede the growth of the pipeline and midstream business, and could negatively affect the results of operations, cash flows and asset values of the Company's pipeline and midstream business.
The regulatory approval, permitting, construction, startup and/or operation of pipelines and power generation and transmission facilities may involve unanticipated events or delays that could negatively impact the Company's business and its results of operations and cash flows.
The construction, startup and operation of pipelines and power generation and transmission facilities involve many risks, which may include: delays; breakdown or failure of equipment; inability to obtain required governmental permits and approvals; inability to obtain or renew easements; public opposition; inability to complete financing; inability to negotiate acceptable equipment acquisition, construction, fuel supply, off-take, transmission, transportation or other material agreements; changes in markets and market prices for power; cost increases and overruns; the risk of performance below expected levels of output or efficiency; and the inability to obtain full cost recovery in regulated rates. Such unanticipated events could negatively impact the Company's business, its results of operations and cash flows.
Economic volatility, including volatility in North Dakota's Bakken region, affects the Company's operations, as well as the demand for its products and services and the value of its investments and investment returns including its pension and other postretirement benefit plans, and may have a negative impact on the Company's future revenues and cash flows.
The global demand and price volatility for natural resources, interest rate changes, governmental budget constraints and the ongoing threat of terrorism can create volatility in the financial markets. Unfavorable economic conditions can negatively affect the level of public and private expenditures on projects and the timing of these projects which, in turn, can negatively affect the demand for the Company's products and services, primarily at the Company's construction businesses. The level of demand for construction products and services could be adversely impacted by the economic conditions in the industries the Company serves, as well as in the economy in general. State and federal budget issues may negatively affect the funding available for infrastructure spending. The ability of the Company's electric and natural gas distribution businesses to grow service territory and customer base is affected by the economic environments of the markets served. This economic volatility could have a material adverse effect on the Company's results of operations, cash flows and asset values.
Changing market conditions could negatively affect the market value of assets held in the Company's pension and other postretirement benefit plans and may increase the amount and accelerate the timing of required funding contributions.
The Company relies on financing sources and capital markets. Access to these markets may be adversely affected by factors beyond the Company's control. If the Company is unable to obtain cost effective financing in the future, the Company's ability to execute its business plans, make capital expenditures or pursue acquisitions that the Company may otherwise rely on for future growth could be impaired. As a result, the market value of the Company's common stock may be adversely affected. If the Company issues a substantial amount of common stock it could have a dilutive effect on its existing shareholders.
The Company relies on access to short-term borrowings, including the issuance of commercial paper, long-term capital markets and asset sales as sources of liquidity for capital requirements not satisfied by its cash flow from operations. If the Company is not able to access capital at competitive rates, the ability to implement its business plans may be adversely affected. Market disruptions or a downgrade of the Company's credit ratings may increase the cost of borrowing or adversely affect its ability to access one or more financial markets. Such disruptions could include:
A significant economic downturn
The financial distress of unrelated industry leaders in the same line of business
Deterioration in capital market conditions
Turmoil in the financial services industry
Volatility in commodity prices
Terrorist attacks

 
MDU Resources Group, Inc. Form 10-K 19



Part I
 

Cyberattacks
Economic turmoil, market disruptions and volatility in the securities trading markets, as well as other factors including changes in the Company's results of operations, financial position and prospects, may adversely affect the market price of the Company's common stock.
The issuance of a substantial amount of the Company's common stock, whether issued in connection with an acquisition or otherwise, or the perception that such an issuance could occur, may adversely affect the market price of the Company's common stock.
The Company is exposed to credit risk and the risk of loss resulting from the nonpayment and/or nonperformance by the Company's customers and counterparties .
If the Company's customers or counterparties were to experience financial difficulties or file for bankruptcy, the Company could experience difficulty in collecting receivables. The nonpayment and/or nonperformance by the Company's customers and counterparties could have a negative impact on the Company's results of operations and cash flows.
The backlogs at the Company's construction materials and contracting and construction services businesses are subject to delay or cancellation and may not be realized.
Backlog consists of the uncompleted portion of services to be performed under job-specific contracts. Contracts are subject to delay, default or cancellation and the contracts in the Company's backlog are subject to changes in the scope of services to be provided as well as adjustments to the costs relating to the applicable contracts. Backlog may also be affected by project delays or cancellations resulting from weather conditions, external market factors and economic factors beyond the Company's control. Accordingly, there is no assurance that backlog will be realized.
Environmental and Regulatory Risks
The Company's operations are subject to environmental laws and regulations that may increase costs of operations, impact or limit business plans, or expose the Company to environmental liabilities.
The Company is subject to environmental laws and regulations affecting many aspects of its operations, including laws and regulations regarding air and water quality, waste management and other environmental considerations. These laws and regulations can increase capital, operating and other costs, cause delays as a result of litigation and administrative proceedings, and create compliance, remediation, containment, monitoring and reporting obligations, particularly relating to electric generation and natural gas gathering, transmission and storage operations. These laws and regulations generally require the Company to obtain and comply with a variety of environmental licenses, permits, inspections and other approvals. Although the Company strives to comply with all applicable environmental laws and regulations, public and private entities and private individuals may interpret the Company's legal or regulatory requirements differently and seek injunctive relief or other remedies against the Company. The Company cannot predict the outcome, financial or operational, of any such litigation or administrative proceedings.
Existing environmental laws and regulations may be revised and new laws and regulations seeking to protect the environment may be adopted or become applicable to the Company. These laws and regulations could require the Company to limit the use or output of certain facilities, restrict the use of certain fuels, retire and replace certain facilities, install pollution controls, remediate environmental impacts, remove or reduce environmental hazards, or forego or limit the development of resources. Revised or new laws and regulations that increase compliance costs or restrict operations, particularly if costs are not fully recoverable from customers, could have a material adverse effect on the Company's results of operations and cash flows.
On April 17, 2015, the EPA published a rule, under the RCRA, for coal combustion residuals that regulates coal ash as a solid waste and not a hazardous waste. The rule requires ground water and location restriction evaluations to be conducted by October 2017 at ash impoundments and landfills not located at coal mines. In 2015, one ash impoundment at Lewis & Clark Station was replaced with a new concrete basin. Additional site and groundwater analyses may identify the need to upgrade or close additional impoundments or the Company may need to install replacement ash management systems. The cost of replacement ash impoundments or landfills may be material. If these costs are not fully recoverable from customers, they could have a material adverse effect on the Company's results of operations and cash flows.
On August 15, 2014, the EPA published a rule under Section 316(b) of the Clean Water Act, establishing requirements for water intake structures at existing steam electric generating facilities. The purpose of the rule is to reduce impingement and entrainment of fish and other aquatic organisms at cooling water intake structures. The majority of the Company's electric generating facilities are either not subject to the rule or have completed studies that project compliance expenditures are not material. The Lewis & Clark Station will complete a study that will be submitted to the Montana DEQ by July 31, 2019, to be used in determining any required controls. It is unknown at this time

 
20 MDU Resources Group, Inc. Form 10-K



Part I
 

what controls may be required at this facility or if compliance costs will be material. The installation schedule for any required controls would be established with the permitting agency after the study is completed.
Initiatives to reduce GHG emissions could adversely impact the Company's operations.
Concern that GHG emissions are contributing to global climate change has led to international, federal and state legislative and regulatory proposals to reduce or mitigate the effects of GHG emissions. The Company’s primary GHG emission is carbon dioxide from fossil fuels combustion at Montana-Dakota's electric generating facilities, particularly its coal-fired facilities. Approximately 50 percent of Montana-Dakota's owned generating capacity and approximately 75 percent of the electricity it generated in 2016 was from coal-fired facilities.
On October 23, 2015, the EPA published the Clean Power Plan rule that requires existing fossil fuel-fired electric generating facilities to reduce carbon dioxide emissions. On February 9, 2016, however, the United States Supreme Court granted an application for a stay of the Clean Power Plan pending disposition of the applicants' petition for review in the D.C. Circuit Court and disposition of the applicants' petition for a writ of certiorari if such a writ is sought. As published, the rule required that by September 6, 2016, states submit to the EPA either a request for a two-year extension to submit a final state plan or a final plan demonstrating how emissions reductions will be achieved including emission limits in the form of an annual emission cap or an emission rate that will be applied to each fossil fuel-fired electric generating facility within the state starting in 2022. Emissions limits become more stringent from 2022 to 2030, with the 2030 emission limits applying thereafter. It is unknown at this time what each state will require for emissions limits or reductions from each of Montana-Dakota's owned and jointly owned fossil fuel-fired electric generating units. Compliance costs will become clearer as final state plans are submitted to the EPA. The effective date and compliance dates in the rule are expected to be addressed in a future decision made by the United States Supreme Court.
On January 14, 2015, the federal government of the United States announced a goal to reduce methane emissions from the oil and natural gas industry by 40 percent to 45 percent below 2012 levels by 2025. On June 3, 2016, the EPA published a rule updating new source performance standards for the oil and natural gas industry. The rule builds on 2012 requirements to reduce volatile organic compound emissions from oil and natural gas sources by establishing requirements to reduce methane emissions from previously regulated sources, as well as adding volatile organic compound and methane requirements for sources previously not covered by the rule. The rule impacts new and modified natural gas gathering and boosting stations and transmission and storage compressor stations. WBI Energy is developing implementation plans for complying with the rule. In addition, on March 10, 2016, the EPA announced plans to reduce emissions from the oil and natural gas industry by moving to regulate emissions from existing sources. On November 10, 2016, the EPA issued an Information Collection Request to gather information on existing sources of methane emissions, technologies to reduce emissions and the costs of those technologies in the oil and natural gas industry. Several companies, including WBI Energy, were selected to respond to the Information Collection Request. The information collected will be used to develop comprehensive regulations to reduce methane emissions from existing sources. It is unknown at this time how the Company will be impacted or if compliance costs will be material.
On September 15, 2016, the Washington DOE issued a Clean Air rule that requires carbon dioxide emission reductions from various industries in the state, including emissions from the combustion of natural gas supplied to end-use customers by natural gas distribution companies, such as Cascade. In 2017, the rule requires Cascade to hold carbon dioxide emissions to a baseline, equal to the average emissions in 2012 to 2016. Beginning in 2018, annual carbon dioxide emissions are reduced by an additional 1.7 percent of the baseline from the previous year's emissions. Compliance for natural gas suppliers is to be achieved through purchasing emissions credits from projects located within the state of Washington and, to a limited and declining extent, out-of-state allowances. Purchasing emissions credits and allowances will increase operating costs for Cascade. If Cascade is not able to receive timely and full recovery of compliance costs from its customers, such costs could adversely impact the results of its operations. On September 27, 2016 and September 30, 2016, Cascade and three other natural gas distribution utility companies jointly filed complaints in the United States District Court for the Eastern District of Washington and the Thurston County Superior Court, respectively, asking the courts to deem the rule invalid. The companies assert that the Washington DOE undertook this rulemaking without the requisite statutory authority. The Thurston County Superior Court is scheduled to hear oral arguments on April 14, 2017, while litigation in the United States District Court for the Eastern District of Washington has been held in abeyance until there is a ruling in the Thurston County Superior Court.
Additional treaties, legislation or regulations to reduce GHG emissions may be adopted that affect the Company's utility operations by requiring additional energy conservation efforts or renewable energy sources, as well as other mandates that could significantly increase capital expenditures and operating costs or reduce demand for the Company's utility services. If the Company’s utility operations do not receive timely and full recovery of GHG emission compliance costs from customers, then such costs could adversely impact the results of its operations and cash flows.
The Company monitors, analyzes and reports GHG emissions from its other operations as required by applicable laws and regulations. The Company will continue to monitor GHG regulations and their potential impact on operations.

 
MDU Resources Group, Inc. Form 10-K 21



Part I
 

Due to the uncertain availability of technologies to control GHG emissions and the unknown obligations that potential GHG emission legislation or regulations may create, the Company cannot determine the potential financial impact on its operations.
The Company is subject to government regulations that may delay and/or have a negative impact on its business and its results of operations and cash flows. Statutory and regulatory requirements also may limit another party's ability to acquire the Company or impose conditions on an acquisition of or by the Company.
The Company is subject to regulation or governmental actions by federal, state and local regulatory agencies with respect to, among other things, allowed rates of return and recovery of investment and cost, financing, rate structures, health care coverage and cost, taxes, franchises and recovery of purchased power and purchased gas costs. These governmental regulations significantly influence the Company's operating environment and may affect its ability to recover costs from its customers. The Company is unable to predict the impact on operating results from the future regulatory activities of any of these agencies. Changes in regulations or the imposition of additional regulations could have an adverse impact on the Company's results of operations and cash flows. Approval from a number of federal and state regulatory agencies would need to be obtained by any potential acquirer of the Company as well as for acquisitions by the Company. The approval process could be lengthy and the outcome uncertain.
The Company's electric and natural gas transmission and distribution operations involve risks that may result in accidents. These events and pipeline safety regulation costs could adversely affect the Company’s business and its results of operations and cash flows.
The Company's electric and natural gas transmission and distribution activities include a variety of operating risks, such as leaks, explosions and mechanical problems, which could result in loss of human life, personal injury, property damage, environmental pollution, impairment of operations and substantial losses. The Company maintains insurance against some, but not all, of these risks and losses. The occurrence of these losses not fully covered by insurance could have a material effect on the Company’s financial position, results of operations and cash flows.
Additionally, the operating or other costs that may be required to comply with current pipeline safety regulations and potential new regulations under various agencies could be significant. The regulations require verification of pipeline infrastructure records by pipeline owners and operators to confirm the maximum allowable operating pressure of certain lines. Increased emphasis on pipeline safety issues and increased regulatory scrutiny may result in penalties and higher costs of operations. If these costs are not fully recoverable from customers, they could have a material adverse effect on the Company’s results of operations and cash flows.
Other Risks
Weather conditions can adversely affect the Company's operations, revenues and cash flows.
The Company's results of operations can be affected by changes in the weather. Weather conditions influence the demand for electricity and natural gas, affect the price of energy commodities, affect the ability to perform services at the construction materials and contracting and construction services businesses and affect ongoing operation and maintenance and construction activities for the pipeline and midstream business. In addition, severe weather can be destructive, causing outages, and/or property damage, which could require additional costs to be incurred. As a result, adverse weather conditions could negatively affect the Company's results of operations, financial position and cash flows.
Competition exists in all of the Company's businesses.
All of the Company's businesses are subject to competition. Construction services' competition is based primarily on price and reputation for quality, safety and reliability. Construction materials products are marketed under highly competitive conditions and are subject to such competitive forces as price, service, delivery time and proximity to the customer. The electric utility and natural gas industries also are experiencing increased competitive pressures as a result of consumer demands, technological advances and other factors. The pipeline and midstream business competes with several pipelines for access to natural gas supplies and gathering, transportation and storage business. Competition could negatively affect the Company's results of operations, financial position and cash flows.
The Company could be subject to limitations on its ability to pay dividends.
The Company depends on earnings from its divisions and dividends from its subsidiaries to pay dividends on its common stock. Regulatory, contractual and legal limitations, as well as capital requirements and the Company's financial performance or cash flows, could limit the earnings of the Company's divisions and subsidiaries which, in turn, could restrict the Company's ability to pay dividends on its common stock and adversely affect the Company's stock price.

 
22 MDU Resources Group, Inc. Form 10-K



Part I
 

Costs related to obligations under MEPPs could have a material negative effect on the Company's results of operations and cash flows.
Various operating subsidiaries of the Company participate in approximately 75 MEPPs for employees represented by certain unions. The Company is required to make contributions to these plans in amounts established under numerous collective bargaining agreements between the operating subsidiaries and those unions.
The Company may be obligated to increase its contributions to underfunded plans that are classified as being in endangered, seriously endangered or critical status as defined by the Pension Protection Act of 2006. Plans classified as being in one of these statuses are required to adopt RPs or FIPs to improve their funded status through increased contributions, reduced benefits or a combination of the two. Based on available information, the Company believes that approximately 35 percent of the MEPPs to which it contributes are currently in endangered, seriously endangered or critical status.
The Company may also be required to increase its contributions to MEPPs if the other participating employers in such plans withdraw from the plans and are not able to contribute amounts sufficient to fund the unfunded liabilities associated with their participants in the plans. The amount and timing of any increase in the Company's required contributions to MEPPs may also depend upon one or more factors including the outcome of collective bargaining, actions taken by trustees who manage the plans, actions taken by the plans' other participating employers, the industry for which contributions are made, future determinations that additional plans reach endangered, seriously endangered or critical status, government regulations and the actual return on assets held in the plans, among others. The Company may experience increased operating expenses as a result of the required contributions to MEPPs, which may have a material adverse effect on the Company's results of operations, financial position or cash flows.
In addition, pursuant to ERISA, as amended by MPPAA, the Company could incur a partial or complete withdrawal liability upon withdrawing from a plan, exiting a market in which it does business with a union workforce or upon termination of a plan to the extent these plans are underfunded. The Company could also incur additional withdrawal liability if its withdrawal from a plan is determined by that plan to be part of a mass withdrawal.
The Company's operations may be negatively impacted by cyberattacks or acts of terrorism.
The Company operates in industries that require continual operation of sophisticated information technology systems and network infrastructure. While the Company has developed procedures and processes that are designed to strengthen and protect these systems, they may be vulnerable to failures or unauthorized access due to hacking, theft, sabotage, viruses, acts of terrorism, acts of war or other causes. If the technology systems were to fail or be breached and these systems were not recovered in a timely manner, the Company's operational systems and infrastructure, such as the Company's electric generation, transmission and distribution facilities and its natural gas storage and pipeline systems, may be unable to fulfill critical business functions, including an inability to generate or distribute some part of our energy services and other products to customers. Such disruption could result in decreased revenues and/or significant remediation costs which could have a material adverse effect on the Company's results of operations, financial position and cash flows. Additionally, because electric generation and transmission systems and natural gas pipelines are part of an interconnected system with other operators, a disruption elsewhere in the system could negatively impact the Company's business.
The Company's business requires access to sensitive customer, employee and Company data in the ordinary course of business. Despite the Company's implementation of security measures, a failure or breach of a security system could compromise sensitive data. Such an event could result in negative publicity and reputational harm, remediation costs and possible legal claims and fines which could adversely affect the Company's financial results. The Company's third-party service providers that perform critical business functions or have access to sensitive information may also be vulnerable to security breaches and other risks that could have an adverse effect on the Company.
The Company may be subject to potential material liabilities relating to the past sale of assets or businesses, primarily arising from events prior to sale.
The Company previously sold its oil and natural gas assets and its membership interests in Dakota Prairie Refining. The Company may be subject to potential liabilities, either directly or through indemnification of the buyers or others, relating to these transactions or other sales, primarily arising from events prior to the sale, or from breaches of any representations, warranties or covenants in the purchase and sale agreements.

 
MDU Resources Group, Inc. Form 10-K 23



Part I
 

Other factors that could impact the Company's businesses.
The following are other factors that should be considered for a better understanding of the financial condition of the Company. These other factors may impact the Company's financial results in future periods.
Acquisition, disposal and impairments of assets or facilities
Changes in operation, performance and construction of plant facilities or other assets
Changes in present or prospective generation
The ability to obtain adequate and timely cost recovery for the Company's regulated operations through regulatory proceedings
The availability of economic expansion or development opportunities
Population growth rates and demographic patterns
Market demand for, available supplies of, and/or costs of, energy- and construction-related products and services
The cyclical nature of large construction projects at certain operations
Changes in tax rates, policies or tax reform
Unanticipated project delays or changes in project costs, including related energy costs
Unanticipated changes in operating expenses or capital expenditures
Labor negotiations or disputes
Inability of the contract counterparties to meet their contractual obligations
Changes in accounting principles and/or the application of such principles to the Company
Changes in technology
Changes in legal or regulatory proceedings
The ability to effectively integrate the operations and the internal controls of acquired companies
The ability to attract and retain skilled labor and key personnel
Increases in employee and retiree benefit costs and funding requirements
Item 1B. Unresolved Staff Comments
The Company has no unresolved comments with the SEC.
Item 3. Legal Proceedings
For information regarding legal proceedings, see Item 8 - Note  17 , which is incorporated herein by reference.
Item 4. Mine Safety Disclosures
For information regarding mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Act and Item 104 of Regulation S-K, see Exhibit 95 to this Form 10-K, which is incorporated herein by reference.

 
24 MDU Resources Group, Inc. Form 10-K



Part II
 


Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company's common stock is listed on the New York Stock Exchange under the symbol "MDU." The price range of the Company's common stock as reported by The Wall Street Journal composite tape during 2016 and 2015 and dividends declared thereon were as follows:
 
Common
Stock Price
(High)

Common
Stock Price
(Low)

Common Stock Dividends
Declared
Per Share

2016
 
 
 
First quarter

$19.55


$15.57


$.1875

Second quarter
24.01

18.70

.1875

Third quarter
25.79

22.47

.1875

Fourth quarter
29.92

24.49

.1925

 
 
 

$.7550

2015
 
 
 
First quarter

$24.51


$20.01


$.1825

Second quarter
23.12

19.22

.1825

Third quarter
19.73

16.15

.1825

Fourth quarter
19.66

16.26

.1875

 
 
 

$.7350

As of December 31, 2016 , the Company's common stock was held by approximately 12,400 stockholders of record.
The Company depends on earnings from its divisions and dividends from its subsidiaries to pay dividends on common stock. The declaration and payment of dividends is at the sole discretion of the board of directors, subject to limitations imposed by the Company's credit agreements, federal and state laws, and applicable regulatory limitations. For more information on factors that may limit the Company's ability to pay dividends, see Item 8 - Note  9 .
The following table includes information with respect to the Company's purchase of equity securities:
ISSUER PURCHASES OF EQUITY SECURITIES
Period
(a)
Total Number
of Shares
(or Units)
Purchased (1)

(b) 
Average Price Paid per Share
(or Unit)

(c)
Total Number of Shares
(or Units) Purchased
as Part of Publicly
Announced Plans
or Programs (2)
(d)
Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs (2)
October 1 through October 31, 2016

 
 
 
November 1 through November 30, 2016
34,974


$28.30

 
 
December 1 through December 31, 2016
2,244

28.96

 
 
Total
37,218

 
 
 
(1)
Represents shares of common stock purchased on the open market in connection with annual stock grants made to the Company's non-employee directors and for those directors who elected to receive additional shares of common stock in lieu of a portion of their cash retainer.
(2)
Not applicable. The Company does not currently have in place any publicly announced plans or programs to purchase equity securities.
 

 
MDU Resources Group, Inc. Form 10-K 25



Part II
 

Item 6. Selected Financial Data
 
2016

2015

2014

2013

2012

2011

Selected Financial Data
 
 
 
 
 
 
Operating revenues (000's):
 
 
 
 
 
 
Electric
$
322,356

$
280,615

$
277,874

$
257,260

$
236,895

$
225,468

Natural gas distribution
766,115

817,419

921,986

851,945

754,848

907,400

Pipeline and midstream
141,602

154,904

157,292

144,568

142,610

152,972

Construction materials and contracting
1,874,270

1,904,282

1,765,330

1,712,137

1,617,425

1,510,010

Construction services
1,073,272

926,427

1,119,529

1,039,839

938,558

854,389

Other
8,643

9,191

9,364

9,620

10,370

11,446

Intersegment eliminations
(57,430
)
(78,786
)
(136,302
)
(95,201
)
(74,595
)
(68,482
)
 
$
4,128,828

$
4,014,052

$
4,115,073

$
3,920,168

$
3,626,111

$
3,593,203

Operating income (loss) (000's):
 


 

 

 

 

Electric
$
68,497

$
57,955

$
61,331

$
54,274

$
49,852

$
49,096

Natural gas distribution
65,014

53,810

65,633

78,829

67,579

82,856

Pipeline and midstream
43,374

29,988

46,713

20,896

49,139

45,365

Construction materials and contracting
178,719

146,026

86,462

93,629

57,864

51,092

Construction services
53,705

43,376

82,309

85,246

66,531

39,144

Other
(189
)
(8,438
)
(5,366
)
(4,384
)
(5,325
)
(7,079
)
Intersegment eliminations

(2,942
)
(9,900
)
(7,176
)


 
$
409,120

$
319,775

$
327,182

$
321,314

$
285,640

$
260,474

Earnings (loss) on common stock (000's):
 
 
 

 

 

 

Electric
$
42,222

$
35,914

$
36,731

$
34,837

$
30,634

$
29,258

Natural gas distribution
27,102

23,607

30,484

37,656

29,409

38,398

Pipeline and midstream
23,435

13,250

24,666

7,701

26,588

23,082

Construction materials and contracting
102,687

89,096

51,510

50,946

32,420

26,430

Construction services
33,945

23,762

54,432

52,213

38,429

21,627

Other
(3,231
)
(14,941
)
(7,386
)
(10,776
)
(7,209
)
(5,918
)
Intersegment eliminations
6,251

5,016

(6,095
)
(4,307
)


Earnings on common stock before income (loss) from discontinued operations
232,411

175,704

184,342

168,270

150,271

132,877

Income (loss) from discontinued operations, net of tax*
(300,354
)
(834,080
)
109,311

109,615

(151,710
)
79,464

Loss from discontinued operations attributable to noncontrolling interest
(131,691
)
(35,256
)
(3,895
)
(363
)


 
$
63,748

$
(623,120
)
$
297,548

$
278,248

$
(1,439
)
$
212,341

Earnings (loss) per common share before discontinued operations - diluted
$
1.19

$
.90

$
.96

$
.89

$
.80

$
.70

Discontinued operations attributable to the Company, net of tax
(.86
)
(4.10
)
.59

.58

(.81
)
.42

 
$
.33

$
(3.20
)
$
1.55

$
1.47

$
(.01
)
$
1.12

Common Stock Statistics
 
 
 

 

 

 

Weighted average common shares outstanding -diluted (000's)
195,618

194,986

192,587

189,693

188,826

188,905

Dividends declared per common share
$
.7550

$
.7350

$
.7150

$
.6950

$
.6750

$
.6550

Book value per common share
$
11.78

$
12.83

$
16.66

$
15.01

$
13.95

$
14.62

Market price per common share (year end)
$
28.77

$
18.32

$
23.50

$
30.55

$
21.24

$
21.46

Market price ratios:


 
 
 

 

 

Dividend payout**
63
%
82
%
74
%
78
%
84
%
94
%
Yield
2.7
%
4.1
%
3.1
%
2.3
%
3.2
%
3.1
%
Market value as a percent of book value
244.2
%
142.8
%
141.1
%
203.5
%
152.3
%
146.8
%
*
Reflects oil and natural gas properties noncash write-downs of $315.3 million (after tax) and $246.8 million (after tax) in 2015 and 2012, respectively, and fair value impairments of assets held for sale of $157.8 million (after tax) and $475.4 million (after tax) in 2016 and 2015, respectively.
**
Based on continuing operations.
 



 
26 MDU Resources Group, Inc. Form 10-K



Part II
 

Item 6. Selected Financial Data (continued)
 
2016

2015

2014

2013

2012

2011

General
 
 
 
 
 
 
Total assets (000's)
$
6,284,467

$
6,565,154

$
7,805,405

$
7,043,365

$
6,675,609

$
6,539,676

Total long-term debt (000's)
$
1,790,159

$
1,796,163

$
2,016,198

$
1,773,050

$
1,738,833

$
1,418,693

Capitalization ratios:
 


 
 
 
 
Total equity
56
%
58
%
62
%
62
%
60
%
66
%
Total debt
44

42

38

38

40

34

 
100
%
100
%
100
%
100
%
100
%
100
%
Electric
 
 
 
 
 
 
Retail sales (thousand kWh)
3,258,537

3,316,017

3,308,358

3,173,086

2,996,528

2,878,852

Electric system summer and firm purchase contract ZRCs (Interconnected system)
559.7

547.3

584.0

583.5

552.8

572.8

Electric system peak demand obligation, including firm purchase contracts, planning reserve margin requirement (Interconnected system)
559.7

547.3

522.4

508.3

550.7

524.2

All-time demand peak - kW (Interconnected system)
611,542

611,542

582,083

573,587

573,587

535,761

Electricity produced (thousand kWh)
2,626,763

1,898,160

2,519,938

2,430,001

2,299,686

2,488,337

Electricity purchased (thousand kWh)
904,702

1,658,002

1,010,422

971,261

870,516

645,567

Average cost of fuel and purchased power per kWh
$
.021

$
.024

$
.025

$
.025

$
.023

$
.021

Natural Gas Distribution
 
 
 
 

 

 

Sales (Mdk)
99,296

95,559

104,297

108,260

93,810

103,237

Transportation (Mdk)
147,592

154,225

145,941

149,490

132,010

124,227

Degree days (% of normal)
 
 
 
 

 

 

Montana-Dakota/Great Plains
89
%
88
%
103
%
105
%
84
%
101
%
Cascade
87
%
83
%
89
%
98
%
96
%
103
%
Intermountain
96
%
89
%
95
%
110
%
91
%
107
%
Pipeline and Midstream
 
 
 
 

 

 

Transportation (Mdk)
285,254

290,494

233,483

178,598

137,720

113,217

Gathering (Mdk)
20,049

33,441

38,372

40,737

47,084

66,500

Customer natural gas storage balance (Mdk)
26,403

16,600

14,885

26,693

43,731

36,021

Construction Materials and Contracting
 
 
 
 

 

 

Sales (000's):
 
 
 
 
 
 
Aggregates (tons)
27,580

26,959

25,827

24,713

23,285

24,736

Asphalt (tons)
7,203

6,705

6,070

6,228

5,988

6,709

Ready-mixed concrete (cubic yards)
3,655

3,592

3,460

3,223

3,157

2,864

Aggregate reserves (000's tons)
989,084

1,022,513

1,061,156

1,083,376

1,088,236

1,088,833



 
MDU Resources Group, Inc. Form 10-K 27



Part II
 

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company's strategy is to apply its expertise in the regulated energy delivery and construction materials and services businesses to increase market share, increase profitability and enhance shareholder value through:
Organic growth as well as a continued disciplined approach to the acquisition of well-managed companies and properties
The elimination of system-wide cost redundancies through increased focus on integration of operations and standardization and consolidation of various support services and functions across companies within the organization
The development of projects that are accretive to earnings per share and return on invested capital
Divestiture of certain assets to fund capital growth projects throughout the Company
The Company has capabilities to fund its growth and operations through various sources, including internally generated funds, commercial paper facilities, revolving credit facilities, the issuance from time to time of debt and equity securities and asset sales. For more information on the Company's capital expenditures, see Liquidity and Capital Commitments.
The key strategies for each of the Company's business segments and certain related business challenges are summarized below. For a summary of the Company's businesses, see Item 8 - Note  13 .
Key Strategies and Challenges
Electric and Natural Gas Distribution
Strategy  Provide safe and reliable competitively priced energy and related services to customers. The electric and natural gas distribution segments continually seek opportunities to retain, grow and expand their customer base through extensions of existing operations, including building and upgrading electric generation and transmission and natural gas systems, and through selected acquisitions of companies and properties at prices that will provide stable cash flows and an opportunity for the Company to earn a competitive return on investment.
Challenges  Both segments are subject to extensive regulation in the state jurisdictions where they conduct operations with respect to costs and timely recovery and permitted returns on investment as well as subject to certain operational, system integrity and environmental regulations. These regulations can require substantial investment to upgrade facilities. The ability of these segments to grow through acquisitions is subject to significant competition. In addition, the ability of both segments to grow service territory and customer base is affected by the economic environment of the markets served and competition from other energy providers and fuels. The construction of any new electric generating facilities, transmission lines and other service facilities is subject to increasing cost and lead time, extensive permitting procedures, and federal and state legislative and regulatory initiatives, which will necessitate increases in electric energy prices. Legislative and regulatory initiatives to increase renewable energy resources and reduce GHG emissions could impact the price and demand for electricity and natural gas and could result in the retirement of certain electric generating facilities before they are fully depreciated.
Pipeline and Midstream
Strategy  Utilize the segment's existing expertise in energy infrastructure and related services to increase market share and profitability through optimization of existing operations, internal growth, and investments in and acquisitions of energy-related assets and companies both in its current operating areas and beyond its Rocky Mountain and northern Great Plains base. Incremental and new growth opportunities include: access to new energy sources for storage, gathering and transportation services; expansion of existing storage, gathering and transmission facilities; incremental pipeline projects which expand pipeline capacity; and expansion of the pipeline and midstream business to include liquid pipelines and processing activities.
Challenges   Challenges for this segment include: energy price volatility; basis differentials; environmental and regulatory requirements; securing permits and easements; recruitment and retention of a skilled workforce; and competition from other pipeline and midstream companies.
Construction Materials and Contracting
Strategy  Focus on high-growth strategic markets located near major transportation corridors and desirable mid-sized metropolitan areas; strengthen long-term, strategic aggregate reserve position through purchase and/or lease opportunities; enhance profitability through cost containment, margin discipline and vertical integration of the segment's operations; develop and recruit talented employees; and continue growth through organic and acquisition opportunities. Vertical integration allows the segment to manage operations from aggregate mining to final lay-down of concrete and asphalt, with control of and access to permitted aggregate reserves being significant. A key element of the Company's long-term strategy for this business is to further expand its market presence in the higher-margin materials business (rock, sand, gravel, liquid asphalt, asphalt concrete, ready-mixed concrete and related products), complementing and expanding on the Company's expertise.

 
28 MDU Resources Group, Inc. Form 10-K



Part II
 

Challenges  Recruitment and retention of key personnel and volatility in the cost of raw materials such as diesel, gasoline, liquid asphalt, cement and steel, are ongoing challenges. This business unit expects to continue cost containment efforts, positioning its operations for the resurgence in the private market, while continuing the emphasis on industrial, energy and public works projects.
Construction Services
Strategy  Provide a superior return on investment by: building new and strengthening existing customer relationships; effectively controlling costs; retaining, developing and recruiting talented employees; growing through organic and acquisition opportunities; and focusing efforts on projects that will permit higher margins while properly managing risk.
Challenges  This segment operates in highly competitive markets with many jobs subject to competitive bidding. Maintenance of effective operational and cost controls, retention of key personnel, managing through downturns in the economy and effective management of working capital are ongoing challenges.
For more information on the risks and challenges the Company faces as it pursues its growth strategies and other factors that should be considered for a better understanding of the Company's financial condition, see Item 1A - Risk Factors. For more information on key growth strategies, projections and certain assumptions, see Prospective Information. For information pertinent to various commitments and contingencies, see Item 8 - Notes to Consolidated Financial Statements.
Earnings Overview
The following table summarizes the contribution to consolidated earnings (loss) by each of the Company's businesses.
Years ended December 31,
2016

2015

2014

 
(Dollars in millions, where applicable)
Electric
$
42.2

$
35.9

$
36.7

Natural gas distribution
27.1

23.6

30.5

Pipeline and midstream
23.4

13.3

24.7

Construction materials and contracting
102.7

89.1

51.5

Construction services
33.9

23.8

54.5

Other
(3.2
)
(15.0
)
(7.4
)
Intersegment eliminations
6.3

5.0

(6.2
)
Earnings before discontinued operations
232.4

175.7

184.3

Income (loss) from discontinued operations, net of tax
(300.4
)
(834.1
)
109.3

Loss from discontinued operations attributable to noncontrolling interest
(131.7
)
(35.3
)
(3.9
)
Earnings (loss) on common stock
$
63.7

$
(623.1
)
$
297.5

Earnings (loss) per common share - basic:
 
 
 
Earnings before discontinued operations
$
1.19

$
.90

$
.96

Discontinued operations, net of tax
(.86
)
(4.10
)
.59

Earnings (loss) per common share - basic
$
.33

$
(3.20
)
$
1.55

Earnings (loss) per common share - diluted:
 
 
 
Earnings before discontinued operations
$
1.19

$
.90

$
.96

Discontinued operations, net of tax
(.86
)
(4.10
)
.59

Earnings (loss) per common share - diluted
$
.33

$
(3.20
)
$
1.55

2016 compared to 2015 The Company recognized consolidated earnings of $63.7 million in 2016, compared to a consolidated loss of $623.1 million in 2015. This increase was due to:
Discontinued operations which reflect the absence in 2016 of fair value impairments of the exploration and production business's assets of $475.4 million (after tax) and a noncash write-down of oil and natural gas properties of $315.3 million (after tax) offset in part by a fair value impairment of the refining business of $156.7 million (after tax) in 2016
Higher construction margins and revenues and higher asphalt and aggregate volumes and margins at the construction materials and contracting business
Other loss decreased primarily the result of lower operation and maintenance and interest expense due to the sales of the exploration and production and refining businesses
Higher inside electrical workloads and margins in the Western region offset in part by lower equipment sales and rental margins at the construction services business

 
MDU Resources Group, Inc. Form 10-K 29



Part II
 

Absence in 2016 of impairments of natural gas gathering assets of $10.6 million (after tax) partially offset by a fair value impairment in 2016 of $1.4 million (after tax) associated with the sale of Pronghorn at the pipeline and midstream business
Increased electric retail sales margins, largely due to approved rate recovery, partially offset by higher operation and maintenance expense and higher depreciation, depletion and amortization expense at the electric business
2015 compared to 2014 The Company recognized a consolidated loss of $623.1 million in 2015, compared to consolidated earnings of $297.5 million in 2014. This decrease was due to:
Discontinued operations which had fair value impairments of the exploration and production business's assets of $475.4 million (after tax), a $315.3 million after-tax noncash write-down of oil and natural gas properties, decreased average realized commodity prices and decreased production
Lower workloads and margins in the Western region and lower equipment rental sales and margins at the construction services business
Impairments of natural gas gathering assets of $10.6 million (after tax) at the pipeline and midstream business
Higher depreciation, depletion and amortization expense due to plant additions and lower natural gas sales volumes offset in part by natural gas retail rate increases at the natural gas distribution business
Partially offsetting these increases were higher earnings on all product lines at the construction materials and contracting business.
Financial and Operating Data
Following are key financial and operating data for each of the Company's businesses.
Electric
Years ended December 31,
2016

2015

2014

 
(Dollars in millions, where applicable)
Operating revenues
$
322.3

$
280.6

$
277.9

Operating expenses:
 
 
 

Fuel and purchased power
75.5

86.2

89.3

Operation and maintenance
115.2

87.7

81.1

Depreciation, depletion and amortization
50.2

37.6

35.0

Taxes, other than income
12.9

11.1

11.1

 
253.8

222.6

216.5

Operating income
68.5

58.0

61.4

Earnings
$
42.2

$
35.9

$
36.7

Retail sales (million kWh):
 
 
 
Residential
1,132.5

1,173.9

1,225.3

Commercial
1,491.8

1,499.6

1,471.3

Industrial
544.2

550.3

520.4

Other
90.0

92.2

91.4

 
3,258.5

3,316.0

3,308.4

Average cost of fuel and purchased power per kWh
$
.021

$
.024

$
.025

2016 compared to 2015 Electric earnings increased $6.3 million ( 18  percent) compared to the prior year due to:
Increased electric retail sales margins, largely due to approved final and interim rate increases reduced in part by decreased electric sales volumes of 2 percent, largely decreased residential customer volumes
Favorable income tax changes, which includes $10.1 million due to higher production tax credits
Partially offsetting these increase s were:
Higher operation and maintenance expense of $17.1 million (after tax) primarily due to higher contract services and higher payroll-related costs
Higher depreciation, depletion and amortization expense of $7.8 million (after tax) due to increased property, plant and equipment balances
Lower other income, which includes $7.1 million (after tax) primarily related to AFUDC
Higher interest expense, which includes $4.4 million (after tax) largely the result of higher long-term debt

 
30 MDU Resources Group, Inc. Form 10-K



Part II
 

Certain of the higher operation and maintenance expense, higher depreciation, depletion and amortization expense and higher production tax credits in 2016, due to increased capital investments, are potentially recoverable and/or refundable through the rate recovery process. The previous table also reflects lower average cost of fuel and purchased power per kWh due to no fuel and purchased power costs associated with the Thunder Spirit Wind farm.
2015 compared to 2014 Electric earnings decreased $800,000 (2 percent) compared to the prior year due to:
Higher operation and maintenance expense, which includes $4.3 million (after tax) largely related to higher contract services, primarily related to a planned outage at an electric generation station, and higher payroll and benefit-related costs
Higher depreciation, depletion and amortization expense of $1.6 million (after tax) due to increased property, plant and equipment balances
Higher net interest expense, which includes $1.1 million (after tax) due to higher long-term debt
Partially offsetting these decreases were:
Increased electric retail sales margins, primarily due to rate recovery of new generation
Higher other income, which includes $3.5 million (after tax) primarily related to AFUDC
Natural Gas Distribution
Years ended December 31,
2016

2015