MDU Resources Group, Inc.

Hello, my name is Erica, and I will be your conference facilitator. At this time, I would like to welcome everyone to the MDU Resources Group 2021 Year-End Earnings Results and 2022 Guidance 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. This call will be available for replay beginning at 5 p.m. Eastern Time today through 1159 p.m. Eastern Time on February 24th. The conference ID number for the replay is 1077076. Again, the conference ID number for the replay is 1077076. The number to dial for the replay is 1-855-859-2056 or 404-537-3406. I would now like to turn the conference over to Jason Vollmer, Vice President and Chief Financial Officer of MDU Resources Group. Thank you, Mr. Vollmer. You may begin your conference.

Thank you, Erica. Good afternoon, everyone, and welcome to the MDU Resources 2021 Earnings and 2022 Guidance Conference Call. With me today are Dave Gooden, President and CEO of MDU Resources, Dave Barney, President and CEO of Knife River Corporation, Jeff Thede, President and CEO of MDU Construction Services Group, Nicole Cavisto, 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 after market, we issued our 2021 earnings news release. You can find the release and accompanying information at www.mdu.com in the investor relations section under the financial section. During our call, we'll make certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Although the company believes that its expectations and beliefs are based on reasonable assumptions, actual results may differ materially. For more information on the risks and uncertainties that could cause our actual results to vary from any forward-looking statements, please refer to our most recent SEC filings. We may also refer to certain non-GAAP measures. For reconciliation of any non-GAAP information to the appropriate GAAP metric, please reference our earnings release. I will start this afternoon by providing consolidated financial results for 2021, discussing individual business unit results, and providing an update on our financing plans for 2022, before handing the call over to Dave for his full year comments and his forward look. Yesterday we announced 2021 earnings of $378.1 million, or $1.87 per share, compared to 2020 earnings of $390.2 million, or $1.95 per share. EBITDA from continuing operations for the year increased $3.1 million to $859.8 million. During the year, MDU resources experienced approximately 10% higher health care costs, which impacted each of our business lines. On a consolidated basis, this increase was impacted by $0.02 to $0.03 per share. The increased costs, including COVID-related claims as well as general health care costs for our employees, were the driver of this result. Now for our individual business unit results. Our construction materials business reported earnings of $129.8 million for the year, down from the prior year's record of $147.3 million. EBITDA business decreased $11.5 million from last year to $293.4 million. Results were impacted by increased material costs on asphalt oil as well as higher fuel costs across all of our product lines. Contracting revenues and margins decreased from less available paving work in certain states and the absence of a few large jobs which were completed in the prior year. Asphalt volumes decreased 1.4% on less available paving work, impacting gross margin, which decreased $4.9 million from the prior year. Partially offsetting these decreases is the ready-mix product line, where gross margin increased $7.7 million from volume increases in nearly all of the company's markets due to strong demand and average selling price increases of 2.3%. Aggregate volumes increased over 8% from the prior year on strong private and public sector demand. However, the construction industry slowdowns in Hawaii, material costs in Alaska, and quarry development costs in Texas drove a $2.8 million decrease in the gross margin for the aggregate group. Labor constraints, especially for truck drivers, resulted in isolated project delays and staffing inefficiencies across the business. Turning to construction services, results were comparable to 2020 with net income of $109.4 million for the year. Electrical and mechanical operations results, which were previously referred to as inside specialty contracting, were impacted by lower commercial and institutional workloads, which were offset in part by strong demand in the industrial and service markets. Gross margins of this business line increased $7.5 million as commercial and industrial markets benefited from favorable change orders and successful project execution. Institutional revenues and margins decreased during the year as projects were impacted by labor and material inefficiencies. Transmission and distribution operations, which were previously referred to as our outside specialty contracting business, reported gross margin of $104.3 million for the year, a decrease of $17.9 million from 2020, reflecting the absence of higher margin storm repair and fire hardening work that was completed in the prior year. Workloads at this business line increased from strong utility demand, including substation and power line repair projects. And now turning to our regulated energy delivery businesses. Our combined utility business reported a record net income of $103.5 million for the year compared to $99.6 million in 2020. Our natural gas segment was the driver behind the increase in combined earnings, reporting $51.6 million for the year a $7.6 million improvement over 2020, which was driven by an increase in retail sales margins from implemented rate relief in several states. Partially offsetting these increases was increased operational maintenance expense, primarily higher payroll-related costs as well as healthcare costs we previously mentioned, and decreased credits for costs associated with meter installation due to pandemic-related replacement delays. The electric utility segment reported earnings of $51.9 million compared to $55.6 million in 2020. Results reflect increased depreciation, depletion, and amortization expense from higher property, plant, and equipment balances relating to transmission projects placed into service as well as higher operation and maintenance expense. These decreases were offset in part by increased electric retail sales margins. The pipeline business reported strong results with earnings of $40.9 million or an increase of 11% over the prior year. This was driven by a $7 million benefit after tax from the allowance refund used during construction related primarily to the North Bogot expansion project, as well as a 7.4% increase in transportation volumes and increased non-regulated project work at this business. As a reminder, the pipeline business divested of its natural gas gathering assets in late 2020. Current year results are absent the gains on sale of the company's gas gathering assets of approximately 3.1 million, as well as prior year gas gathering earnings. And finally, as we look to 2022 financing plans, the company expects to fund its over $700 million planned capital expenditures in 22 through a combination of operating cash flows and the issuance of long-term debt. The company does not currently expect to issue any external equity in 22, unless needed to fund future acquisition growth. And now I'd like to turn the call over to Dave for his formal remarks. Dave?

And thank you, Jason, and good afternoon, everyone, and thank you for joining us here today. We are proud to be able to report the third best year of earnings in MDU resources history, although those results unfortunately did not meet our initial forecasts or expectations. Our performance throughout 2021 is a testament to our employees' commitment to delivering solid performance while facing headwinds such as pandemic-related disruptions, supply chain challenges, and inflation, all while safely and effectively providing the essential services needed across our country. Our 98-year history as an organization shows our dedication to responsible fiscal management that our combination of businesses center on providing essential services and offer strong advantages when it comes to access to capital along with steady cash flows. Our highly skilled and exceptionally dedicated workforce will continue executing on our growth strategy while adhering to our tagline of building a strong America. Starting our 2021 review with our construction material operations, Revenues at this business increased 2.3% from the prior year, the result of strong demand for our aggregate and ready-mix products. Our products and contracting services are in high demand for both private and public sector work, with airport, healthcare, and commercial projects driving increases in aggregate and ready-mix volumes this year, which in turn allowed us to successfully increase average selling prices for these materials. Knife River reported $708 million in backlog as of the end of the year and currently expects over 90% of this work will be completed in the next 12 months. With the acquisitions completed in 2021, Knife River now has over 1.2 billion tons of aggregate reserves across its footprint that are estimated to last several decades. Knife River will continue to maintain an efficient cost structure and work diligently on increasing product line margins while providing the high-quality materials and services that we are known for. Having skilled employees is key to successful construction operations, and Knife River has built a state-of-the-art training center in the Pacific Northwest to hone the skills of existing team members as well as develop prospective construction employees through both classroom and hands-on training. The accreditation program for the CDL driving school at the facility, it's nearly complete, which will help provide much needed professional drivers for our operations. The construction services group had another strong year, reporting earnings comparable to those in 2020. Job mix was the primary driver behind the slight decrease in earnings at this business, as several large jobs in the Las Vegas market were completed in 2020 and in early 2021. Our offerings at this business continue to be in high demand across many of our end markets, including substation and power line repair projects for our transmission and distribution operations, along with the repair and maintenance of electrical, mechanical, and fire suppression systems at Electrical and Mechanical Group. We've seen a notable increase in demand for our renewable offerings, which includes electrical vehicle infrastructure, solar power, and energy grid optimization services, all markets where construction services excel. With an all-time record backlog of work as of December 31st of $1.38 billion, we are incredibly excited to see what this next year brings for construction services. Both of our construction companies are well positioned to capitalize on the Infrastructure Investment and Jobs Act, the largest infrastructure investment our nation has made in decades. Construction Materials is currently forecasting revenues to be in the range of $2.3 to $2.5 billion for 2022. And Construction Services is forecasting $2.2 to $2.4 billion or a combined 4.5 to 4.9 billion between the two construction businesses. Now I'd like to turn to our regulated energy delivery platform. Our utility companies reported record earnings for 2021, seeing the benefits of approved rate recovery in several jurisdictions, which reflects the continued investments we're making in our system to provide safe, reliable, and low-cost energy to our customers. Looking ahead, the utility group will begin work on the repowering of the Diamond Willow wind farm in the state of Montana. We plan to repower with new gearboxes and refurbish existing blades versus replacing them. The blades will be removed from the turbines and recoated, saving these fiberglass blades from landfills on top of being a much more affordable option. The cost of investment for the repowering will be offset by the production tax credits received on the project. Hesket 1 and Hesket 2, our coal-fired generation units, are being retired during the first quarter here in 2022, which will then complete the retirements of all of our wholly-owned coal generation units. Utility will begin construction on the Hesket Station Unit 4. This is an 88-megawatt simple-cycle natural gas-fired combustion turbine, which we expect will be in service in early 2023. We continue to see solid customer growth with 1.7% combined customer growth in 2021. And we expect to grow our customer base between 1% and 2% annually looking forward. We also expect rate-based growth to grow 5% compounded annually over the next five years, driven primarily by investments in system infrastructure upgrades and replacements to, again, safely meet customer demand. Our pipeline business had a very strong 2021 and for the fifth consecutive year transported record volumes of natural gas through its pipeline system. This is really a direct result of the organic growth projects the company completed over the last several years. And here recently on February 1st of this year, WBI placed into service its North Bakken expansion project. which has the capacity to transport 250 million cubic feet of natural gas per day and can be increased up to 625 million cubic feet per day through the use of additional compression. This project included approximately 100 miles of pipeline as well as a new compressor station along with the expansion of an existing station. WBI Energy and contractor Michaels Corporation completed a Get this, a 15,426-foot horizontal directional drill of a 24-inch pipeline crossing Lake Sakakawea on the Missouri River here in North Dakota. This crossing of just less than three miles is one of the longest of its kind anywhere. The North Bakken expansion project brings total system capacity to more than 2.4 billion cubic feet of natural gas per day. WBI Energy will continue preparatory work on the Wapiton expansion project that we announced earlier in 2021 and has additional growth organic projects in various stages of development to grow its system as it continues to work to be the pipeline of choice for its customers. Activity here in the Bakken continues to grow with a current rig count of 32 rigs as opposed to even 27 just at the end of the year. along with the ratio of gas production to oil production continuing to increase as the Bakken is being developed. That completes our individual business unit discussion. Now turning ahead and looking ahead as an overall corporation, we are initiating 2022 earnings guidance in the range of $2 to $2.15 per share, along with an EBITDA guidance range of $900 million to $950 million. Future acquisitions are not included in the stated guidance and would be incremental to 2022 results. I am confident in MDU Resources' ability to produce significant long-term value as we execute on our business plans and explore potential acquisitions along with organic growth opportunities. We continue to maintain a strong balance sheet, solid and stable credit ratings, along with a very good liquidity position. And for 84 consecutive years, we have continued to provide a competitive dividend to our shareholders, all while increasing it for the last 31 years. Just today, we also published our Refresh 2020 Sustainability Report, which can be found on our newly redesigned corporate website, located at www.mdu.com. We encourage you to review for more detail on our dedication to sustainability and our plans in this area going forward. As always, MDU Resources is committed to operating with integrity along with a focus on safety, all while creating superior shareholder value as we continue, as our tagline states, to be building a strong America. I appreciate your interest in and your commitment to MDU Resources. and ask now that we open the line to questions. Operator?