Definitions
The following abbreviations and acronyms used in this disclosure statement are defined
below:
Clean Air Act - Federal Clean Air Act
Company - MDU Resources Group, Inc. (formerly known as MDUR Newco), which, as the context
requires, refers to the previous MDU Resources Group, Inc. prior to January 1, 2019, and the new
holding company of the same name after January 1, 2019
ERISA - Employee Retirement Income Security Act of 1974
FERC – Federal Energy Regulatory Commission
FIP - Funding Improvement Plan
GHG - Greenhouse gas
Holding Company Reorganization – The internal holding company reorganization completed on
January 1, 2019, pursuant to the agreement and plan of merger, dated as of December 31, 2018, by and
among Montana-Dakota, the Company, and MDUR Newco Sub, which resulted in the Company becoming a
holding company and owning all the outstanding capital stock of Montana-Dakota
MEPP – Multiemployer pension plan
MISO – Midcontinent Independent System Operator, Inc.
Montana-Dakota - Montana-Dakota Utilities Co., (formerly known as MDU Resources Group, Inc.)
a public utility division of the Company prior to the closing of the Holding Company Reorganization
and a direct wholly owned subsidiary of MDU Energy Capital as of January 1, 2019.
MPPAA - Multiemployer Pension Plan Amendments Act of 1980
NERC – North American Electric Reliability Corporation
NGL - Natural Gas Liquids
Oil – Includes crude oil and condensate
RCRA - Resource Conservation and Recovery Act
RP - Rehabilitation Plan
SEC – United States Securities and Exchange Commission
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 results or outcomes
for the Company to differ materially from those discussed in the forward-looking statements
included elsewhere in this document. If any of the risks described below actually occur, the
Company's business, prospects, financial condition or financial results could be materially
harmed.
Economic Risks
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's electric
and natural gas transmission and distribution businesses are subject to comprehensive regulation
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, customer
service, health care coverage and cost, income taxes, property and other taxes, franchises;
recovery of purchased power and purchased natural gas costs; construction and siting of
generation and transmission facilities. 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 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.
There can be no
assurance that applicable regulatory commissions will determine that the Company's electric and
natural gas transmission and distribution businesses' costs have been prudent, which could
result in disallowance of costs. Also, the regulatory process for approving rates for these
businesses may not allow us full recovery of the costs of providing services or a return on the
Company's invested capital. Changes in regulatory requirements or operating conditions may
require early retirement of certain assets. While regulation typically provides relief for these
types of retirements, there is no assurance that regulators will allow full recovery of all
remaining costs, which could leave stranded asset costs. Rising fuel costs could increase the
risk that the utility businesses will not be able to fully recover those fuel costs from
customers.
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, which may deter potential acquirers from approaching the
Company or impact the Company's ability to pursue acquisitions.
Economic
volatility affects the Company's operations, as well as the demand for its products and
services.
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 general economy.
State and federal budget issues affect the funding available for infrastructure spending.
Economic
conditions and population growth affect the electric and natural gas distribution businesses'
growth in service territory, customer base and usage demand. Economic volatility in the markets
served, along with economic conditions such as increased unemployment which could impact the
ability of our customers to make payments, could adversely affect the Company's results of
operations, cash flows and asset values. Further, any material decreases in customers' energy
demand, for economic or other reasons, could have a material adverse impact on the Company's
earnings and results of operations.
The Company's
operations involve risks that may result from catastrophic events.
The Company's
operations, particularly those related to natural gas and electric transmission and
distribution, include a variety of inherent hazards and operating risks, such as product leaks,
explosions, mechanical failures, vandalism, fires, acts of terrorism and acts of war, which
could result in loss of human life; personal injury; property damage; environmental pollution;
impairment of operations; and substantial financial losses. The Company maintains insurance
against some, but not all, of these risks and losses. A significant incident could also increase
regulatory scrutiny and result in penalties and higher amounts of capital expenditures and
operational costs. Losses not fully covered by insurance could have a material effect on the
Company’s financial position, results of operations and cash flows.
A disruption
of the regional electric transmission grid or interstate natural gas infrastructure could
negatively impact our business and reputation. Because the Company's electric and natural gas
utility and pipeline systems are part of larger interconnecting systems, a disruption could
result in a significant decrease in revenues and system repair costs which could have a material
impact on the Company's financial position, results of operations and cash flows.
The Company
is subject to capital market and interest rate risks.
The Company's
operations, particularly its electric and natural gas transmission and distribution businesses,
require significant capital investment. Consequently, the Company relies on financing sources
and capital markets as sources of liquidity for capital requirements not satisfied by its cash
flows from operations. If the Company is not able to access capital at competitive rates, the
ability to implement its business plans, make capital expenditures or pursue acquisitions that
the Company would otherwise rely on for future growth may be adversely affected. Market
disruptions may increase the cost of borrowing or adversely affect the Company's 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.
- Cyberattacks.
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, could have a
dilutive effect on shareholders and/or may adversely affect the market price of the Company's
common stock. Higher interest rates on borrowings could also have an adverse effect on the
Company's operating results.
Financial
market changes could impact the Company’s pension and postretirement benefit plans and
obligations.
The Company
has pension and postretirement defined benefit plans for some of its employees and former
employees. Assumptions regarding future costs, returns on investments, interest rates, and other
actuarial assumptions have a significant impact on the funding requirements relating to these
plans. Changes in economic indicators, such as consumer spending, inflation data, interest rate
changes, political developments and threats of terrorism, among other things, can create
volatility in the financial markets. Deteriorating financial market conditions could change
these estimates and assumptions and negatively affect the 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 for those plans.
Significant
changes in energy prices could negatively affect the Company's businesses.
Fluctuations
in oil, NGL and natural gas production and prices; fluctuations in commodity price basis
differentials; supplies of domestic and foreign oil, NGL and natural gas; political and economic
conditions in oil-producing countries; actions of the Organization of Petroleum Exporting Countries;
demand for oil due to economic slowdowns associated with the COVID-19 pandemic; and other
external factors impact the development of oil and natural gas supplies and the expansion and
operation of natural gas pipeline systems. The Company has continued to experience the effect
of associated natural gas production in the Bakken, which has provided opportunities for organic
growth projects and increased demand at the pipeline business. However, depressed oil and
natural gas prices is putting pressure on customers' ability to meet credit requirements and will
continue to be a challenge the longer prices remain depressed. Demand from certain industrial
customers of the electric business have also been impacted by the depressed prices. Additionally,
these impacts could extend to commercial and residential customers of the electric and natural gas
distribution businesses located in service areas impacted by decreased oil and natural gas
exploration and production activity. Prolonged depressed prices for oil, NGL and natural gas could
negatively affect the growth, results of operations, cash flows and asset values of the Company's
electric, natural gas distribution and pipeline businesses.
If oil and
natural gas prices increase significantly, customer demand for utility, pipeline and construction
materials could decline, which could have a material impact on the Company's results of operations
and cash flows. While the Company has fuel clause recovery mechanisms for its utility operations
in all of the states in which it operates, higher utility fuel costs could significantly impact results of
operations if such costs are not recovered. Delays in the collection of utility fuel cost recoveries,
as compared to expenditures for fuel purchases, could have a negative impact on the Company's
cash flows. High oil prices also affect the cost and demand for asphalt products and related
contracting services.
Reductions in
the Company's credit ratings could increase financing costs.
There is no
assurance that the Company's current credit ratings, or those of its subsidiaries, will remain
in effect or that a rating will not be lowered or withdrawn by a rating agency. Events affecting
the Company's financial results may impact its cash flows and credit metrics, potentially
resulting in a change in the Company's credit ratings. The Company's credit ratings may also
change as a result of the differing methodologies or changes in the methodologies used by the
rating agencies. A downgrade in credit ratings could lead to higher borrowing costs.
Increasing
costs associated with health care plans may adversely affect the Company's results of
operations.
The Company's
self-insured costs of health care benefits for eligible employees continues to increase.
Increasing quantities of large individual health care claims and an overall increase in total
health care claims could have an adverse impact on operating results, financial position and
liquidity. Legislation related to health care could also change the Company's benefit program
and costs.
The Company
is exposed to risk of loss resulting from the nonpayment and/or nonperformance by the
Company's customers and counterparties.
If the
Company's customers or counterparties experience financial difficulties, the Company could
experience difficulty in collecting receivables. Nonpayment and/or nonperformance by the
Company's customers and counterparties, particularly customers and counterparties of the
Company’s construction materials and contracting and construction services businesses for large
construction projects, could have a negative impact on the Company's results of operations and
cash flows. The Company could also have indirect credit risk from participating in energy
markets such as MISO in which credit losses are socialized to all participants.
Changes in
tax law may negatively affect the Company's business.
The TCJA
significantly reformed the Internal Revenue Code of 1986, as amended. The TCJA, among other
things, includes reductions to United States federal tax rates, repeals the domestic production
deduction, disallows regulated utility property for immediate expensing, and modifies or repeals
many other business deductions and credits. Any future guidance, regulation and interpretations
to the Internal Revenue Code could have an adverse impact on the Company.
Other
changes to federal and state tax laws have the ability to benefit or adversely affect the
Company's earnings and customer costs. Significant changes to corporate tax rates could result
in the impairment of deferred tax assets that are established based on existing law at the time
of deferral. Changes to the value of various tax credits could change the economics of resources
and the resource selection for the electric generation business. Regulation incorporates changes
in tax law into the rate-setting process for the regulated energy delivery businesses and
therefore could create timing delays before the impact of changes are realized.
The Company's
operations could be negatively impacted by import tariffs and/or other government
mandates.
The Company
operates in or provides services to capital intensive industries in which federal trade policies
could significantly impact the availability and cost of materials. Imposed and proposed tariffs
could significantly increase the prices and delivery lead times on raw materials and finished
products that are critical to the Company and its customers, such as aluminum and steel.
Prolonged lead times on the delivery of raw materials and further tariff increases on raw
materials and finished products could have a material adverse effect on the Company's business,
financial condition and results of operations.
Operational Risks
Significant portions
of the Company’s natural gas pipelines and power generation and transmission facilities are
aging. The aging infrastructure may require significant additional maintenance or
replacement that could adversely affect the Company’s results of operations.
The Company’s
energy delivery infrastructure is aging, which increases certain risks, including breakdown or
failure of equipment, pipeline leaks and fires developing from power lines. Aging infrastructure
is more prone to failure which increases maintenance costs, unplanned outages and the need to
replace facilities. Even if properly maintained, reliability may ultimately deteriorate and
negatively affect the Company’s ability to serve its customers which could result in increased
costs associated with regulatory oversight. The costs associated with maintaining the aging
infrastructure and capital expenditures for new or replacement infrastructure could cause rate
volatility and/or regulatory lag in some jurisdictions. If, at the end of its life, the
investment costs of a facility have not been fully recovered the Company may be adversely
affected if commissions do not allow such costs to be recovered in rates. Such impacts of an
aging infrastructure could have a material adverse effect on the Company’s results of operations
and cash flows.
Additionally,
hazards from aging infrastructure could result in serious injury, loss of human life,
significant damage to property, environmental impacts, and impairment of operations, which in
turn could lead to substantial losses. The location of distribution mains and storage facilities
near populated areas, including residential areas, business centers, industrial sites, and other
public gathering places, could increase the level of damages resulting from these risks. A major
domestic incident involving natural gas systems could lead to additional capital expenditures,
increased regulation, and fines and penalties on natural gas utilities. The occurrence of any of
these events could adversely affect the Company’s results of operations, financial position, and
cash flows.
The Company's utility
and pipeline operations are subject to planning risks.
Most electric
and natural gas utility investments, including natural gas pipeline investments, are made with
the intent of being used for decades. In particular, electric transmission and generation
resources are planned well in advance of when they are placed into service based upon resource
plans using assumptions over the planning horizon; including sales growth, commodity prices,
equipment and construction costs, regulatory treatment, available technology and public policy.
Public policy changes and technology advancements related to areas such as energy efficient
appliances and buildings, renewable and distributive electric generation and storage, carbon
dioxide emissions, electric vehicle penetration, and natural gas availability and cost may
significantly impact the planning assumptions. Changes in critical planning assumptions may
result in excess generation, transmission and distribution resources creating increased per
customer costs and downward pressure on load growth. These changes could also result in a
stranded investment if the Company is unable to fully recover the costs of its
investments.
The regulatory
approval, permitting, construction, startup and/or operation of pipelines and power
generation and transmission facilities may involve unanticipated events, delays and
unrecoverable costs.
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.
Additionally,
operating or other costs 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 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.
The backlogs at the
Company's construction materials and contracting and construction services businesses may
not accurately represent future revenue.
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. The timing of contract awards, duration of large new contracts and the mix of services
can significantly affect backlog. Backlog at any given point in time may not accurately
represent the revenue or net income that is realized in any period, and the backlog as of the
end of the year may not be indicative of the revenue and net income expected to be earned in the
following year and should not be relied upon as a stand-alone indicator of future revenues or
net income.
Environmental and Regulatory Risks
The
Company's operations could be adversely impacted by climate change.
Severe
weather events, such as tornadoes, rain, ice and snow storms and high and low temperature
extremes, do occur in regions in which the Company operates and maintains infrastructure.
However, climate change could possibly change the frequency and severity of these weather
events. Climate change may create physical and financial risks to the Company. Such risks could
have an adverse effect on the Company's financial condition, results of operations and cash
flows.
Utility
customers’ energy needs vary with weather conditions, primarily temperature and humidity. For
residential customers, heating and cooling represent the largest energy use. To the extent
weather conditions are affected by climate change, customers’ energy use could increase or
decrease. Increased energy use by its utility customers due to weather may require the Company
to invest in additional generating assets, transmission and other infrastructure to serve
increased load. Decreased energy use due to weather may result in decreased revenues. Extreme
weather conditions, such as uncommonly long periods of high or low ambient temperature, in
general require more system backup, adding to costs, and can contribute to increased system
stress, including service interruptions. Weather conditions outside of the Company's service
territory could also have an impact on revenues. The Company buys and sells electricity that
might be generated outside its service territory, depending upon system needs and market
opportunities. Extreme temperatures may create high energy demand and raise electricity prices,
which could increase the cost of energy provided to customers.
Severe
weather events may damage or disrupt the Company's electric and natural gas transmission and
distribution facilities, which could increase costs to repair facilities and restore service to
customers. The cost of providing service could increase to the extent the frequency of severe
weather events increases because of climate change or otherwise. The Company may not recover all
costs related to mitigating these physical risks.
Severe
weather may result in disruptions to the pipeline and midstream business's natural gas supply
and transportation systems, potentially increasing the cost of gas and the ability to procure
gas to meet customer demand. These changes could result in increased maintenance and capital
costs, disruption of service, regulatory actions and lower customer satisfaction.
Increases in
severe weather conditions or extreme temperature may cause infrastructure construction projects
to be delayed or canceled and limit resources available for such projects resulting in decreased
revenue or increased project costs at the construction materials and contracting and
construction services businesses. In addition, drought conditions could restrict the
availability of water supplies, inhibiting the ability of the construction businesses to conduct
operations.
Climate
change may impact a region’s economic health, which could impact revenues at all of the
Company's businesses. The Company's financial performance is tied to the health of the regional
economies served. The Company provides natural gas and electric utility service, as well as
construction materials and services, for some states and communities that are economically
affected by the agriculture industry. Increases in severe weather events or significant changes
in temperature and precipitation patterns could adversely affect the agriculture industry and,
correspondingly, the economies of the states and communities affected by that industry.
The Company
may also be subject to litigation related to climate change. Costs of such litigation could be
significant, and an adverse outcome could require substantial capital expenditures, changes in
operations and possible payment of penalties or damages which could affect the Company's results
of operations and cash flows if the costs are not recoverable in rates.
The price of
energy also has an impact on the economic health of communities. The cost of additional
regulatory requirements to combat climate change, such as regulation of carbon dioxide emissions
under the Clean Air Act, or other environmental regulation could impact the availability of
goods and prices charged by suppliers, which would normally be borne by consumers through higher
prices for energy and purchased goods. To the extent financial markets view climate change and
emissions of GHGs as a financial risk, this could negatively affect the Company's ability to
access capital markets or cause less than ideal terms and conditions.
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 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. Environmental laws and regulations can also
require the Company to install pollution control equipment at its facilities, clean up spills
and other contamination and correct environmental hazards, including payment of all or part of
the cost to remediate sites where the Company's past activities, or the activities of other
parties, caused environmental contamination. These laws and regulations generally require the
Company to obtain and comply with a variety of environmental licenses, permits, inspections and
other approvals and may cause the Company to shut down existing facilities due to difficulties
in assuring compliance or where the cost of compliance makes operation of the facilities no
longer economical. 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. Some of the Company's coal fired electric
generating facilities are subject to this rule. Company facilities where there are ash
impoundments and landfills are conducting ground water evaluations and may need to implement
projects to meet rule requirements.
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 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 46 percent of Montana-Dakota's owned generating capacity and approximately 79
percent of the electricity it generated in 2018 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. The
EPA filed a motion with the D.C. Circuit Court on March 28, 2017, requesting the Clean Power
Plan's case be held in abeyance, which was granted. The D.C. Circuit Court has continued to
issue orders holding the case in abeyance and requiring the EPA to file ongoing status reports.
In parallel, the EPA published a proposal on October 16, 2017, to repeal the Clean Power Plan in
its entirety and published the proposed Affordable Clean Energy rulemaking to revise the Clean
Power Plan. The proposed revised rule would require states to conduct a review of heat rate
improvement projects that could be implemented at each individual coal-fired electric generating
facility and determine, using a multi-factor analysis, which projects a facility would need to
implement. The state would establish a standard of performance for carbon dioxide emissions for
each facility based on the heat rate improvement projects required to be implemented. Compliance
costs will become clearer as the EPA completes new rulemaking.
On January
14, 2015, the federal government announced a goal to reduce methane emissions from the oil and
natural gas industry by 40 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. WBI Energy is currently complying with the rules
impacting new and modified sources. 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 oil
and gas facility operators, including WBI Energy, to begin the process of existing source rule
development. On March 7, 2017, the EPA published notice of withdrawal of the Information
Collection Request.
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 asserted that the Washington DOE undertook
this rulemaking without the requisite statutory authority. On December 15, 2017, the Thurston
County Superior Court vacated the Clean Air Rule and Washington DOE suspended the rule’s
compliance obligations on December 21, 2017. On May 16, 2018, Washington DOE appealed the lower
court ruling to the Supreme Court for the State of Washington and oral argument is scheduled for
March 19, 2019. Litigation in the United States District Court for the Eastern District of
Washington continues to be held in abeyance.
Treaties,
legislation or regulations to reduce GHG emissions in response to climate change may be adopted
that affect the Company's utility operations by requiring additional energy conservation efforts
or renewable energy sources, limiting emissions, imposing carbon taxes or other compliance
costs; 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.
Significant reductions in demand for the Company's utility services as a result of increased
costs or emissions limitations could also 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.
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.
Other Risks
The Company's
various businesses are seasonal and subject to weather conditions that 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 and affect the price of energy commodities.
Utility operations have historically generated lower revenues when weather conditions are cooler
than normal in the summer and warmer than normal in the winter particularly in jurisdictions
that do not have decoupling mechanisms in place. Where decoupling mechanism are in place, there
is no assurance the Company will continue to receive such regulatory protection from adverse
weather in future rates.
Adverse
weather conditions, such as heavy or sustained rainfall or snowfall, storms, wind, and colder
weather may affect the demand for products and the ability to perform services at the
construction businesses and affect ongoing operation and maintenance and construction activities
for the electric and natural gas transmission and distribution businesses. In addition, severe
weather can be destructive, causing outages, and/or property damage, which could require
additional remediation costs. The Company could also be impacted by drought conditions, which
may restrict the availability of water supplies and inhibit the ability of the construction
businesses to conduct operations. As a result, unusually mild winters or summers or 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.
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 competitive forces
such as price, service, delivery time and proximity to the customer. The electric utility and
natural gas industries also experience 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 for gathering, transportation and
storage business. New acquisition opportunities are subject to competitive bidding environments
which impacts prices the Company must pay to successfully acquire new properties to grow its
business. Competition could negatively affect the Company's results of operations, financial
position and cash flows.
The Company's
operations may be negatively affected if it is unable to obtain, develop and retain key
personnel and skilled labor forces.
The Company must attract, develop and retain executive officers and other professional,
technical and skilled labor forces with the skills and experience necessary to successfully
manage, operate and grow the Company's businesses. Competition for these employees is high, and
in some cases competition for these employees is on a regional or national basis. A shortage in
the supply of skilled personnel creates competitive hiring markets and increased labor expenses,
decreased productivity and potentially lost business opportunities. Additionally, if the Company
is unable to hire employees with the requisite skills, the Company may be forced to incur
significant training expenses. As a result, the Company's ability to maintain productivity,
relationships with customers, competitive costs, and quality services is limited by the ability
to employ the necessary skilled personnel and could negatively affect the Company's results of
operations, financial position and cash flows.
The Company's
construction materials and contracting and construction services businesses may be exposed
to warranty claims.
The Company,
particularly its construction businesses, may provide warranties guaranteeing the work performed
against defects in workmanship and material. If warranty claims occur, they may require the
Company to re-perform the services or to repair or replace the warranted item, at a cost to the
Company and could also result in other damages if the Company is not able to adequately satisfy
warranty obligations. In addition, the Company may be required under contractual arrangements
with customers to warrant any defects or failures in materials the Company purchased from third
parties. While the Company generally requires suppliers to provide warranties that are
consistent with those the Company provides to customers, if any of the suppliers default on
their warranty obligations to the Company, the Company may nonetheless incur costs to repair or
replace the defective materials. Costs incurred as a result of warranty claims could adversely
affect the Company's results of operations, financial condition and cash flows.
The Company
is a holding company and relies on cash from its subsidiaries to pay dividends.
The Company
is a holding company as a result of the Holding Company Reorganization. Its investments in its
subsidiaries comprise the Company's primary assets. The Company depends on earnings, cash flows
and dividends from its subsidiaries to pay dividends on its common stock. The Company's
subsidiaries are separate legal entities that have no obligation to pay any amounts due on its
obligations or to make funds available to pay dividends on common stock. Regulatory, contractual
and legal limitations, as well as their capital requirements, affect the ability of the
subsidiaries to pay dividends to the Company and thereby could restrict or influence the
Company's ability or decision to pay dividends on its common stock which could adversely affect
the Company's stock price.
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 70 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 30 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 participation 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; newly-enacted government law or regulations and the
actual return on assets held in the plans; among others. The Company could experience increased
operating expenses as a result of required contributions to MEPPs, which could 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. 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.
Information
technology disruptions or cyberattacks could adversely impact the Company's
operations.
The Company
uses technology in substantially all aspects of its business operations and requires
uninterrupted operation of information technology systems and network infrastructure. While the
Company has policies, procedures and processes in place designed to strengthen and protect these
systems, they may be vulnerable to failures or unauthorized access, including disaster recovery
and backup systems, due to hacking, human error, theft, sabotage, malicious software, acts of
terrorism, acts of war, acts of nature or other causes. If these systems fail or become
compromised, and they are not recovered in a timely manner, the Company may be unable to fulfill
critical business functions. This may include interruption of electric generation, transmission
and distribution facilities, natural gas storage and pipeline facilities and facilities for
delivery of construction materials or other products and services, any of which could have a
material adverse effect on the Company's reputation, business, cash flows and results of
operations or subject the Company to legal or regulatory liabilities and increased costs.
The
Company’s accounting systems and its ability to collect information and invoice customers for
products and services could also be disrupted. If the Company’s operations were disrupted, it
could result in decreased revenues or significant remediation costs that have a material adverse
effect on the Company's results of operations and cash flows. Additionally, because electric
generation and transmission systems and natural gas pipelines are part of interconnected systems
with other operators’ facilities, a cyber-related disruption in another operator’s system could
negatively impact the Company's business.
The Company
is subject to cyber security and privacy laws and regulations of many government agencies,
including FERC and NERC. NERC issues comprehensive regulations and standards surrounding the
security of bulk power systems and is continually in the process of updating these requirements
as well as establishing new requirements with which the utility industry must comply. As these
regulations evolve, the Company will experience increased compliance costs and be at higher risk
for violating these standards. Experiencing a cybersecurity incident could cause the Company to
be non-compliant with applicable laws and regulations, causing the Company to incur costs
related to legal claims or proceedings and regulatory fines or penalties.
The Company,
through the ordinary course of business, requires access to sensitive customer, employee and
Company data. While the Company has implemented extensive security measures, a breach of its
systems could compromise sensitive data and could go unnoticed for some time. In addition, there
has been an increase in the number and sophistication of cyber-attacks across all industries
worldwide and the threats are continually evolving. Such an event could result in negative
publicity and reputational harm, remediation costs, legal claims and fines that could have an
adverse effect on the Company's financial results. Third-party service providers that perform
critical business functions for the Company or have access to sensitive information within the
Company also may be vulnerable to security breaches and information technology risks that could
have an adverse effect on the Company.
The
Company’s information systems experience on-going and often sophisticated cyber-attacks by a
variety of sources with the apparent aim to breach our cyber-defenses. As cyber-attacks continue
to increase in frequency and sophistication, the Company may be unable to prevent all such
attacks in the future. The Company is continuously reevaluating the need to upgrade and/or
replace systems and network infrastructure. These upgrades and/or replacements could adversely
impact operations by imposing substantial capital expenditures, creating delays or outages, or
experiencing difficulties transitioning to new systems. Systems implementation disruption and
any other information technology disruption, if not anticipated and appropriately mitigated,
could have an adverse effect on the Company.
COVID-19 may
have a negative impact on the Company's business operations, revenues, results of operations, liquidity
and cash flows.
In March 2020,
the World Health Organization declared the outbreak of COVID-19 a pandemic, and the President of the
United States declared the COVID-19 outbreak a national emergency. The COVID-19 pandemic has negatively
impacted the global economy, lowered equity market valuations, created significant volatility and disruption
in the financial markets, decreased oil and natural gas prices, increased unemployment levels and disrupted
certain global supply chains and may continue to negatively impact the economy and the financial markets.
To the extent the COVID-19 pandemic adversely affects the Company's business, operations, revenues,
liquidity or cash flows, it may also have the effect of heightening many of the other risks described in Part I,
Item IA. Risk Factors in the 2019 Annual Report. The degree to which COVID-19 will impact the Company will
depend on future developments, including severity and duration of the outbreak, actions taken by
governmental authorities and timing of when relatively normal economic and operating conditions resume.
The regulated
businesses have been deemed essential service providers and have seen some impacts on their businesses;
however, the Company could be materially affected if its businesses were no longer deemed critical. Future
actions of its regulatory commissions on accounting for COVID-19 pandemic impacts may also affect the
Company's future operating results and cash flows. The Company has experienced some impacts to its
commercial and industrial electric and natural gas loads associated with reduced economic demand from its
customers due to the COVID-19 pandemic, partially offset by increased residential demand. Other factors that
could have an impact on the Company's regulated businesses and future operating results, revenues and
liquidity include impacts related to the health, safety, and availability of its employees and contractors; continued
suspended shut-offs of natural gas for nonpayment; continued flexible payment plans for
utility customers; counterparty credit; costs and availability of supplies; capital construction and infrastructure
operation and maintenance programs; financing plans; pension valuations; travel restrictions; and legal and
regulatory matters, including the potential for delayed regulatory filings and recovery of invested capital.
The construction businesses
have generally been deemed essential service providers and have seen some inefficiencies and interruptions on its
businesses; however, the Company could be materially impacted if its businesses were no longer deemed critical. The
Company has experienced some impacts to its public infrastructure work bid-letting, which is believed to be associated
with reduced fuel, sales and other tax collections due to reduced economic activity and fuel consumption. These
businesses could be further impacted in the future by site closures, government shut-down measures, additional
inefficiencies due to compliance with safety and social distancing measures, public and private sector budget changes and
constraints, and the impact of overall macro and local economic conditions on future construction projects. Other
factors that could have an impact on the Company's construction businesses and future operating results, revenues
and liquidity include impacts related to the health, safety, and availability of its employees and contractors;
counterparty credit; costs and availability of supplies; financing plans; pension valuations; and travel restrictions.
The Company's operations
have experienced some disruptions due to its employees or third-party employees being diagnosed with COVID-19
or other illnesses and required quarantine periods for those in close contact to COVID-19. Self-quarantine or actual viral
health issues may have a negative impact on the Company's employees and the ability to continue its work activities under
a normal course of business. Moreover, the diagnosis of COVID-19 or other illnesses could require the Company or its
business partners to suspend projects, quarantine employees or institute more aggressive preventive measures including
closure of job sites. Mandated healthcare protocols could lead to a shortage of employees or altered operations. If a
significant percentage of the Company's workforce are unable to work, because of illness, quarantine or government
restrictions in connection with the COVID-19 pandemic, the Company's operations may be negatively impacted, potentially
materially adversely affecting its business, operations, revenues, liquidity and cash flows.
A portion of the Company's
workforce has been working remotely and the Company has delayed return to work processes for certain office employees
due to the rise in local COVID-19 cases in some operating regions. To date, the Company has not experienced any significant
delays or information technology disruptions. However, the continued shift of a portion of the Company's workforce from an
on-premise model to a remote model, along with the increased amount of social engineering and attacks by bad actors
taking advantage of the virus, could affect the Company's ability to maintain secure operations, communications and
productivity in the future.
Other factors
that could impact the Company's businesses.
The
following are other factors that should be considered for a better understanding of the risks to
the Company. These other factors may materially negatively 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 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.
- 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.
- Losses or costs relating to litigation.
- The inability to effectively integrate the operations and the internal controls of acquired
companies.
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