MDU Resources Group, Inc.

Hello, my name is Mike and I will be your conference facilitator. At this time, I would like to welcome everyone to the MDU Resources Group 2020 first quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key on your telephone keypad. This call will be available for replay beginning at 2 p.m. Eastern time today through 1159 p.m. Eastern on May 22nd. The conference ID number for the replay is 498-1249. Again, the conference ID number for the replay is 498-1249. The number to dial for the replay is 1-855-9000. 859-2056 or 404-537-3406. I would now like to turn the conference over to Jason Vollmer, Vice President, Chief Financial Officer and Treasurer of MDU Resources Group. Thank you, Mr. Vollmer. You may begin your conference.

Thank you, Mike. Good morning, everyone, and welcome to our first quarter 2020 earnings conference call. I hope you and your families are safe, and I thank you for joining us this morning. This conference call is being broadcast live to the public over the Internet, and slides will accompany our remarks. If you would like to view the slides, you can find them on the Events and Presentations page under the Investors tab of our website at www.mdu.com. Our earnings release is also available on our website. During the course of this presentation, we will make certain forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934. Although the company believes that its expectations and beliefs are based on reasonable assumptions, actual results may differ materially. For discussion of factors that may cause actual results to differ, refer to Item 1A, Risk Factors, in our most recent Form 10-K and our Form 10-Q, which was filed this morning. Given the current economic environment, our call this quarter will be slightly different from our previous discussions. In addition to covering our quarterly results, we will also plan to address our response to the COVID-19 global pandemic, how our businesses are performing in the current environment, and potential impacts that we are monitoring at each of our business lines. I will start by briefly covering this quarter's earnings results and then turn the presentation over to Dave Gooden, President and CEO of MDU Resources, for an update on our revised guidance and future outlook. After Dave's remarks, we will open the line for questions. In addition to Dave and myself, members of our management team who will be available to answer questions today and dialing in from multiple locations are Dave Barney, President and CEO of Knife River Corporation, Jeff Thiede, President and CEO of MDU Construction Services Group, Nicole Kivisto, President and CEO of our Utility Group, Trevor Hastings, President and CEO of WBI Energy, and Stephanie Barth, Vice President, Chief Accounting Officer and Controller of MDU Resources. Yesterday, we announced first quarter earnings of $25.1 million, or $0.13 per share, compared to first quarter 2019 earnings of $40.9 million, or $0.21 per share. Our combined utility business reported earnings of $43.7 million, down from $52 million in the first quarter of 2019. The electric utility segment reported earnings of $11.4 million for the quarter, compared to $15.5 million in 2019. This decrease in earnings was largely the result of a $2.2 million negative impact from lower investment returns on certain benefit plans and a 7.1% decrease in electric sales volumes driven largely by warmer winter weather. Higher depreciation, depletion, and amortization expense also contributed to the decrease. Partially offsetting the decrease was rate recovery in Montana. Our natural gas utility segment reported a net income of $32.3 million for the quarter compared to $36.5 million in the prior year. Net income was negatively impacted by lower investment returns of $3 million on certain benefit plans compared to the prior year and a 10.9% decrease in retail sales volumes, which impacted jurisdictions without weather normalization mechanisms in place. Higher depreciation, depletion, and amortization expense from increased property, plant, and equipment balances also contributed to the decrease. Approved rate recovery in certain jurisdictions partially offset the decrease. The pipeline business had earnings of $7.4 million in the first quarter compared to $6.8 million in 2019. This business saw increased transportation volumes and revenues in the quarter, primarily related to organic growth projects previously placed into service, and higher transportation rates associated with a FERC rate case that was settled in 2019. Partially offsetting the increase were higher depreciation, depletion and amortization expense from higher depreciation rates in the FERC rate case and higher property, plant and equipment balances. Lower investment returns on certain benefit plans were an offset in the quarter. Our construction services business reported first quarter net income of $16.8 million compared to $20 million in 2019 and record quarterly revenues of $514.7 million, up 22% from first quarter 2019 revenues of $420.9 million. First quarter net income was negatively impacted by a $6.7 million out-of-period adjustment. This adjustment was to correct revenue recognition on a construction contract. Higher selling, general and administrative expenses, primarily office and payroll costs, also had a negative impact in the quarter. This business continued to see increased workloads at both inside and outside specialty contracting lines. Inside specialty contracting remains very busy with hospitality and high-tech work and outside contracting workloads increased from high demand in the utility industry. Increased outside workloads were partially offset by a decrease in equipment sales and rentals in the quarter. Our construction materials business reported a seasonal loss of $38.2 million in the first quarter compared to a loss of $34.4 million in the same period of 2019. and also reported record first quarter revenues of $262.2 million up from first quarter 2019 revenues of $227.2 million. The increased loss was driven by a $2.4 million negative impact from lower investment returns on certain benefit plans and higher selling general and administrative expense largely the result of increased payroll related costs. Partially offsetting these impacts were higher construction and materials revenues as well as gross margins due to an earlier start to the construction season in some of our regions. Now I'd like to switch gears and discuss our corporate liquidity status. Given the uncertainty surrounding COVID-19 and any potential financial impacts, we have made liquidity management a priority for the company. As of March 31, the company had $116.5 million cash on the balance sheet and $431.8 million of credit facility capacity available to continue to provide essential services to our customers and fund our 2020 capital program. As noted in the news release shared yesterday, we do not have any revolving credit facilities maturing until 2024 and have no significant long-term debt maturities until 2022. In addition, one of our utility subsidiaries, Montana Dakota Utilities, entered into a $75 million term loan agreement in early April that was used to repay outstanding borrowings and free up additional credit capacity. Although there have been disruptions in the commercial paper markets, our backstop credit facilities have performed exactly as expected. From an equity perspective, we mentioned in the release, we have no current plans to issue equity under our ATM program in 2020, given our liquidity position and operating cash flow forecasts. We pride ourselves in being dedicated to a strong balance sheet and will remain disciplined in that approach as we navigate through this current pandemic. That summarizes the financial highlights for the quarter, and now I'd like to turn the call over to Dave for his formal remarks.

Dave? And thank you, Jason. Good morning, everyone. Let me start by expressing my sincere hope that everyone who joined us on this call is safe and healthy, and I want to thank you for your interest in MDU Resources. I would also like to acknowledge the unprecedented time that we're in and say that we have great respect and appreciation for those on the front lines fighting this pandemic and providing care for those who are sick. I would also recognize those in the workforce, like our own employees, for providing essential services each and every day, such as keeping the lights on, the gas flowing, and helping to construct America's infrastructure. I am honored to be part of an organization that has shown incredible spirit and strength in the face of this adversity. I cannot be more proud of our employees and how well our team members have stepped up to help provide essential services to the nation. in these challenging circumstances. COVID-19 is impacting all of us, both professionally and personally. For those MDU Resources employees personally affected by the virus, we've implemented supportive policies to protect their pay and benefits and allow them to take care of themselves along with their families. To date, we have nine known cases of COVID-19 affecting our workforce, and our thoughts are with these employees and their families as they work to recover. We continue to assess the safety of our employees and facilities to ensure their well-being. We are very fortunate that our products and services are considered essential to this country and our communities, so operations generally have been permitted to proceed, albeit with increased social distancing measures and recognition of other guidelines from the CDC and state and local governments for our various workplace settings. As of March 31st, our employee count was slightly over 14,000, up actually 1,500 over the same time period compared to 2019. This allows us to continue building a strong America as we provide the electricity, natural gas, and construction materials and services that are essential to daily life. All our businesses remain committed to the health and safety of our employees, customers, and our communities. Now I'd like to give some additional color on our first quarter results. As noted in the news release, mild winter weather ranging from 7 to 21 percent warmer than last year across our utility service territories had negative impacts on both our electric and natural gas sales volumes in the first quarter. Our utility business remains committed to providing safe and reliable service throughout this pandemic. To help ensure the safety of our employees and customers while providing this critical support during this challenging time, our utility companies have reduced the types of service orders being performed, including discontinuing disconnections of service. Late payment fees were also eliminated effective April 1st. These payment arrangements relate to those experiencing financial difficulties as a result of the pandemic. Moving on to our pipeline business, as Jason mentioned earlier, this business saw an increase in earnings year over year, really largely due to the organic growth projects this business has put into service in the second half of 2019. Currently, preparatory work on the North Bakken expansion project is well underway. The company filed its FERC application for the project here in February of 2020, and anticipates FERC approval of the project in early 2021. Construction is expected to begin in 2021 with a completion date later that year, dependent on regulatory along with environmental permitting. While a decrease in oil prices has slowed drilling activity, we continue to benefit from natural gas production in the Bakken and the low natural gas pricing environment is providing organic growth opportunities for industrial growth projects adjacent to our existing system. Our construction companies are also essential service providers. While both companies have experienced some inefficiencies as a result of social distancing measures and other CDC state and local guidelines, they have been able to continue their business operations without, say, minimal interruption. Construction Services reported record quarterly revenue of approximately $515 million for the quarter, up 22% on a year-over-year basis, and now stands at an all-time record backlog of nearly $1.3 billion as of March 31st. Big bidding environments across our footprint have been strong in the first quarter, and we're optimistic that our high quality of service and skilled workforce, which actually increased year over year, will help us to continue to aid in securing new jobs. Looking at our operating environment, our crews are still working hard at both inside and outside contracting lines, albeit with necessary changes as a result of this pandemic. At construction materials, We reported a normal seasonal loss slightly higher than the prior year and backlog that was just shy of last year's record with $905 million here standing at the end of the first quarter. The warmer winter weather that had negative impacts on our utility business in the first quarter allowed our construction material crews to get out and begin work earlier this season. One of the COVID-related risks that we are monitoring at this business is the decrease in fuel consumption and the result of many stay-at-home orders. Many states, cities, and counties across the country have also been impacted by lower sales tax and other revenues as a result of the pandemic. These decreased tax collections could impact funds available for state infrastructure projects. As you heard from Jason, our first quarter operations were solid, but our earnings were disappointing, driven by three primary factors. The first one being impacts from warmer weather across our utility operational footprint. That's 7% to 21% warmer than normal. Two, we had an out-of-period adjustment on a project at Construction Services Group. and three, we had much lower investment returns on certain benefit plans at all of our businesses. As we looked ahead, due to potential impacts from COVID-19 related disruptions, combined with a dramatic decrease in the demand and prices for oil and related projects, and pairing this with our lower than expected first quarter results, we are lowering our 2020 earnings per share guidance to a range now at $1.50 to $1.70, but expect our long-term compounded annual earnings per share growth to remain between 5% and 8%. As you will note in the capital expenditures section of our news release, we have also decreased our planned CapEx as a result of economic uncertainties surrounding COVID-19 pandemic. Looking forward, We are confident that our companies will be able to continue providing the company with essential services for the remainder of the year and beyond. We are affirming the Construction Services Group revenue guidance in the range of $1.85 to $2.05 billion and are slightly decreasing the revenue guidance at construction materials to a range of $2.1 to $2.3 billion for the year. As always, we will continue to provide updates to our guidance estimates as we go throughout the year. In closing, while our backlog at the end of the first quarter is strong, we do anticipate that with the uncertainty related to COVID-19, there will be increased pressure on revenues and margins for future work as our economy gradually reopens. Our workforce levels continue to be quite consistent on a year-over-year basis, and as of just last week, our workforce at the services business was actually approximately 4% higher than the same time last year. And our workforce at our materials business stood at 98% of last year's levels. As for the communities where employees live and work, we recently announced that MDU Resources, through our foundation, donated 500,000 to a variety of organizations to support coronavirus relief efforts. This is in addition to the 2.2 million that the MD Resources Foundation had already committed to charitable organizations here in the 2020 calendar year. I offer my sincere thanks to our employees and our customers for doing their part to stay healthy and safe during this crisis. Your well-being is, above all, the most important thing As always, MDA Resources is committed to operating with integrity and a focus on safety while creating superior shareholder value as we continue to act on our tagline of building a strong America. I appreciate your interest in and commitment to MDA Resources and ask now that we open the line to questions. Operator?