MDU Resources Group, Inc.

Hello, my name is Jamaria and I will be your conference facilitator. At this time, I would like to welcome everyone to the MDU Resources Group 2022 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 in 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 5 p.m. Eastern Time today through 1159 p.m. Eastern Time on May 19th. The conference ID number for the replay is 218-8415. Again, the conference ID number for the replay is 218-8415. 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, and welcome, everyone, to our first quarter 2022 earnings conference call. You can find our earnings release and supplemental materials for this call on our website at www.mdu.com under the Investor Relations tab. Leading today's discussion along with me will be Dave Gooden, President and CEO of MDU Resources. Also with us today to answer questions following our prepared remarks are 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. During our call, we will 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 about 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 make reference to certain non-GAAP information. For reconciliation of any non-GAAP information to appropriate GAAP metrics, please refer to our earnings release. I will start by providing consolidated financial results for the first quarter before handing the call over to Dave Gooden for his comments and his forward look. Yesterday we announced first quarter earnings of $31.7 million, or $0.16 per share, compared to first quarter 2021 earnings of $52.1 million, or $0.26 per share. Our combined utility business reported net income of $47.6 million for the quarter compared to $46.9 million for the first quarter of 2021. The electric utility segment reported strong first quarter earnings of $11.3 million compared to $10.7 million for the same period in 2021. Driving the results was a 2.5% increase in electric retail sales volumes, primarily from colder weather and higher transmission revenues. Results of this business were impacted by lower investment returns on certain benefit plan investments. Our natural gas segment also reported strong first quarter earnings of $36.3 million, slightly higher than the previous year. A 9% increase in retail natural gas sales volumes across all customer classes, which of course were partially offset by weather normalization and decoupling mechanisms, along with approved rate relief in certain jurisdictions, positively impacted earnings for the quarter. Partially offsetting these increases were higher operational maintenance expense and, again, lower investment returns on certain benefit plans. The pipeline business earned $7.3 million in the first quarter compared to $8.9 million in the first quarter of 2021. The North Bakken expansion project, placed in service on February 1st, drove higher transportation revenue, which had a positive impact to earnings for the quarter. However, this was more than offset by higher operating expenses, lower storage-related revenue, and lower investment returns on benefit plans. Now turning to our construction businesses, our construction services group had record revenues in the first quarter of $552.6 million and reported first quarter earnings of $21.3 million. This is compared to the prior year's first quarter revenue of $518.5 million, which also included last year's record first quarter earnings of $29.8 million. Increased volumes in utility-related transmission and distribution work, along with a larger volume of work in the renewable and commercial markets, were offset by a reduction in the amount of higher margin storm repair and fire hardening power line work. Lower industrial margins due to the timing of projects were partially offset by higher commercial margins at the electrical and mechanical portion of this business. Our construction materials business also had a record first quarter revenue of $310 million and reported a seasonal loss of $40 million compared to prior year first quarter revenues of $265.7 million and a seasonal loss of $30.8 million. Higher average product pricing and higher volumes across all product lines drove top line growth. However, higher fuel, repair and maintenance, and labor related costs more than offset the increase. Also negatively impacting the quarter were higher selling general administrative expenses, primarily from higher payroll-related costs, less bad debt recovery than the prior year, and lower investment returns on benefit plans. As I mentioned in the segment discussions, our companies were impacted by lower investment returns on certain non-qualified benefit plans. In total, that impact was $6.2 million after tax when compared to the first quarter of 2021. Finally, the company continues to maintain a strong balance sheet and ample access to working capital to finance our operations as we get into the peak seasons ahead of us. That summarizes our financial highlights for the quarter, and now I'll turn the call over to Dave for his formal remarks. Dave?

Thank you, Jason, and thank you, everyone, for spending time with us today and for your continued interest in MDU resources. We've had a solid start to the year, reporting top-line revenue growth across all segments, with both of our construction businesses reporting record first quarter revenues. As expected, we did experience and continue to experience inflationary pressures. However, we are encouraged by record construction backlog and the various growth opportunities at our regulated businesses. We are proud of our team's ability to continue to execute on its business plans to provide strong results while navigating through inflationary and supply chain challenges. To summarize activity by business segment, I'll start off with the regulated energy delivery businesses. The utility reported higher earnings on a combined basis for the quarter as it continues to experience strong customer growth across the service territory. Our customer base grew 1.7% on a year-over-year basis, and we expect this growth to continue at a pace between 1% and 2% compounded annually over the next five years. We also expect rate-based growth at 5% compounded annually over the next five years as well. And this is driven primarily by investments in system infrastructure upgrades and replacements to safely meet customer demand. This business continues to seek regulatory recovery for the investments associated with providing safe and reliable electric and natural gas service to our growing customer base. In March, our natural gas utility filed a multi-party natural gas rate settlement in the state of Washington that would increase revenue by approximately $10.7 million annually, which is approximately 4% higher than current rates. A hearing on the settlement is set for June 1st. You can read more about this and our other regulatory filings in our Form 10-Q filed this morning. At our electric utility, construction is soon to commence on Heskett Station Unit 4, which is expected to be in service during the first half of 2023. Heskett 4, as a reminder to those, is a natural gas peaking unit that will aid in partially replacing needed capacity with the retirement of our coal-fired Heskett Station Units 1 and Unit 2. which in the first quarter this year were retired, and the coal-fired Lewis and Clark Unit No. 1, which was retired in the first quarter of last year. I would also like to recognize the efforts of our many employees who worked tirelessly to restore power to customers in northwest North Dakota who were impacted by the recent major snow and ice storms. These storms caused widespread power outages and significant damage to the company's electric transmission and distribution system, and we had at one point over 18,000 customers out of service. Our teams have restored power to all communities as of last weekend and continue with storm damage repair and cleanup activities. Again, we thank our employees for their hard work, and our thoughts are also with our customers impacted by this event. At our pipeline business, we also had a solid quarter. As Jason noted, this business recorded higher transportation revenues related to the North Bakken expansion that was placed into service here just on February 1st. This project is well positioned in the Bakken and can be readily expanded in the future for forecasted natural gas production growth. In addition to that opportunity, we are excited about the multiple pipeline expansion projects on the horizon such as the Wapiton Expansion Project in eastern North Dakota, which is expected to be in service in 2024, pending regulatory approval. This project involves constructing approximately 60 miles of 12-inch pipeline from our existing facilities at Mapleton, North Dakota, down to Wapiton, North Dakota. It will add some 20 million cubic feet per day of natural gas capacity, as expected to cost approximately $75 million. In the more near term, this business has entered into long-term customer agreements for four additional projects. Pending regulatory approval, these projects are expected to be completed here in later 2022 and into 2023, and combining to add some incremental 300 million cubic feet per day of natural gas transport capacity to the system. Now I'd like to move on to our construction platform. At our construction services group, we had record revenues during the quarter, with growth at nearly all its business lines, underscoring this business's capabilities to perform a diverse range of projects. We continue to see strong demand for utility-related work as initiatives for grid hardening and optimization projects take shape. We're also excited about the increasing demand for renewable projects, as well as higher institutional demand in the education and government sectors. Although earnings were down during the quarter compared to the prior year's record first quarter earnings, we're also optimistic about the rest of 22 and beyond. Construction services ended the quarter with an all-time record backlog, now standing at $1.67 billion. This is up 31% from the prior year. And we have numerous projects underway across all of our markets, which are expected to contribute to the 2022 results. We expect revenues at this business to be in the range of $2.2 to $2.4 billion, with margins comparable to 2021 levels. And with our ability to successfully attract and retain a skilled workforce, which now numbers over 8,300 employees across the footprint, which is up nearly 900 from the same time a year ago. We are well positioned to complete these projects safely, efficiently, on budget, and on time. And finally, turning to our construction materials business, we also had record revenues in this business, in part from contributions from recent acquisitions and increased product pricing. However, this business recorded a larger seasonal loss reflecting higher fuel, materials, and labor-related costs across all product lines. As the company continues to experience inflationary headwinds during the first quarter. As previously mentioned, this business is increasing pricing to offset these inflationary pressures, and while the impacts to those increases were somewhat muted due to the typical low sale volumes during the first quarter, we expect to see the benefits from higher prices as the construction season progresses throughout the year and sales volumes ramp up, especially in our northern tier markets. Through its successful first quarter bidding season, Knife River increased backlog 15% from the prior year to now standing at $940 million. Given the strong backlog and record first quarter revenues, we are increasing the revenue guidance by $150 million to now a range of $2.45 billion to $2.65 billion, with margins slightly lower than 2021, reflecting the current inflationary environment. Knife River is working hard to attract and retain a strong, skilled workforce, and through the use of its 270-acre training center in the Pacific Northwest, is providing training needed for new entrants to the construction industry, as well as continuing education for industry veterans. The Knife River Training Center, which celebrated its grand opening just last Thursday on April 28th, features an 80,000-square-foot heated indoor arena for training on trucks and heavy equipment, and an attached 16,000-foot square office classroom and lab facility. The accreditation program for the CDL Driving School at this facility is complete, which will provide much-needed professional drivers for our operations. Turning and looking forward, both our construction materials and construction services business are very well positioned to benefit from the Infrastructure Investment and Jobs Act, which we anticipate will begin to positively impact bidding opportunities here later in 2022 and going forward. Both of these businesses are also actively seeking acquisition opportunities that are complementary to our existing businesses and to increase market presence. Future acquisitions are not included in our stated guidance and would be incremental to our 2022 results. This completes our individual business unit discussion. Now looking ahead, we are affirming our 2022 earnings guidance in the range of $2 to $2.15 per share with EBITDA guidance in the range of $900 to $950 million. We have a robust capital plan with $770 million planned for 2022 and nearly $3.1 billion over the next five years. These capital expenditures include line-of-sight opportunities, such as the Heskett Station and other infrastructure development at the utility, expansion projects at the pipeline, and ongoing equipment replacements at our construction businesses. As always, MDU Resources is committed to operating with integrity and with a focus on safety while creating superior shareholder value as we continue providing essential services to our customers and delivering on our mission of building a strong America while being a great and safe place to work. I appreciate your interest in and commitment to MDU Resources and ask now that we open the line to questions. Operator?