MDU Resources Group, Inc.

Hello, my name is Lisa and I will be your conference facilitator. At this time, I would like to welcome everyone to the MDU Resource Group 2022 third 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 star then the number two on the telephone keypad. The webcast can be accessed at www.mdu.com under the Investor Relations heading. Select Events and Presentations and click Q3 2022 Earnings Conference Call. After the conclusion of the webcast, a replay will be available at the same location. I would now like to turn the conference over to Jason Vollmer, Vice President and Chief Financial Officer of MDU Resource Group. Thank you, Mr. Vollmer. You may now begin your conference.

Thank you, Lisa, and welcome, everyone, to our third 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. Meeting today's discussion along with me will be Dave Gooden, President and Chief Executive Officer of MDU Resources. Also along with us today to answer questions following our prepared remarks will be 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 this morning, 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 actual results to differ from any forward-looking statements, please refer to our most recent SEC filings. We may also refer to certain non-GAAP information. For reconciliation of any non-GAAP information to the appropriate GAAP metric, please reference our earnings release. As a reminder from our second quarter earnings call, we have previously announced our plan to separate Knife River Corporation, which is expected to be affected through a tax-free spinoff to MDU Resources shareholders. This transaction is well underway and expected to become complete in 2023. Today we are also announcing that MDU Resources Board of Directors has authorized management to commence a strategic review intended to separate MDU Resources into two pure-play publicly traded entities, one being a regulated energy delivery company, the other a leading construction materials company. MDU Resources remains committed to managing its business to deliver best-in-class operating performance and value for all stakeholders. Dave will provide additional information on our strategy during his remarks later this morning. Prior to handing the call over to Dave for his comments and forward look, I will provide an overview of the consolidated financial results for the third quarter. This morning we announced third quarter earnings of $147.9 million, or $0.73 per share, on a gap basis, with adjusted earnings of $152 million, or $0.75 per share, compared to third quarter 2021 earnings of $139.3 million, or $0.68 per share. Due to the previously announced plan to separate Knife River, We are reporting adjusted earnings that excludes costs related to the anticipated separation transaction. Our combined utility business reported earnings of $3.5 million for the quarter compared to earnings of $5.2 million in the third quarter of 2021. The electric utility segment reported third quarter earnings of $21.6 million compared to $20.6 million for the same period in 2021. This increase was largely the result of lower operation and maintenance expense due to lower payroll-related and materials costs partially associated with the coal-fired Heskett Station and Lewis and Clark Station plant closures, as well as the absence of costs from a planned outage at Big Stone Station during 2021. Higher revenues associated with North Dakota interim rate relief were offset by decreased retail sales volumes. Our natural gas utility segment reported a third-quarter seasonal loss of $18.1 million compared to a loss of $15.4 million in the third quarter of 2021. Results were impacted by increased operating expense, including higher subcontractor costs and depreciation expense. Also contributing to the loss was increased interest expense as a result of increased debt balances to fund capital expenditures and higher average interest rates. Partially offsetting these higher costs was higher rate recovery through decoupling mechanisms. The pipeline business earned $9.8 million in the third quarter compared to $10.6 million in the third quarter of 2021. The company experienced higher transportation revenues and record transportation volumes during the quarter, with growth largely attributed to the North Bakken expansion project that was placed in service earlier this year. The increase in revenues was offset in part by lower allowance for funds used during construction, which is reflected in other income, and higher depreciation expense associated primarily with the North Bakken project. Further offsetting the increase was higher interest expense. As we've noted in the past, 2022 includes a delay on a portion of the North Bakken expansion projects committed volumes, and we expect to see increased benefit from this project in 2023 based on contracted volume commitments. Construction services business reported all-time record quarterly revenue of $737 million and earnings of $28 million, compared to revenue of $514.8 million and earnings of $23.1 million for the same period in 2021. Record revenues were primarily driven by approximately 70% higher electrical and mechanical workloads. Commercial workloads were favorably impacted by the progress on large hospitality projects and a number of data center projects started during the quarter. The industrial and institutional business lines also benefited from the mix of projects during the quarter. This business saw a lower margin percentage on record revenues for the quarter, attributed mostly to higher operating costs related to inflation, including material and labor costs. Earnings for the quarter were negatively impacted by $7.5 million after-tax due to adjustments made to estimates on certain construction contracts, compared to a negative impact of $5.5 million after-tax in Q3 of 2021 for similar adjustments. Our construction materials business reported all-time record quarterly revenue of $975.4 million and earnings of $102.8 million, compared to the prior year third quarter revenue of $831.3 million and earnings of $96.3 million. Higher contracting workloads and price increases across all product lines drove the top-line revenue growth up 17% from the third quarter in 2021, largely as a result of strong demand in most markets and the impacts of recent acquisitions. This business saw slightly lower margin percentages on record revenues for the quarter, primarily due to higher operating costs related to inflation, including higher diesel fuel, materials costs, labor, equipment, and transportation costs. Also impacting the quarter was higher interest expense as a result of higher average debt balances and higher rates, as well as higher selling general administrative costs, largely due to labor-related expenses. Results at each of MDU Resources' businesses have been negatively impacted on a non-cash basis by lower unrealized investment returns on non-qualified benefit plans. Collectively, the negative earnings variance in the third quarter compared to last year was approximately $2.5 million, or one cent per share. The company attributes this change in investment returns to significant fluctuations in the financial markets that have been experienced during 2022. The company continues to maintain a strong balance sheet and ample access to working capital to finance our operations through their peak seasons. That summarizes the 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, along with your continued interest in MDU Resources. I'd like to begin with an update regarding our announcement this morning about our goals for the future structure of MDU Resources. In August, we announced our plan to separate the Knife River Corporation, creating two publicly traded companies. Our team has continued working diligently towards completing this separation. As a reminder, this separation of Knife River is expected to be affected as a tax-free spinoff to MDU Resources shareholders and to be completed in 2023. We are pleased with the progress we have made and look forward to further enhancing shareholder value with this transaction. We were also pleased to hear a positive investor feedback to the original announcement. Further, as the next step in our strategic planning process, the Board of Directors has unanimously determined the best way to optimize value would be to create two pure play public companies, a leading construction materials company, and a pure-play regulated energy delivery company. To achieve this outcome, we will work to complete the separation of Knife River and we will commence a strategic review process to explore alternatives for our construction services business. We believe these steps will unlock significant value for MDU shareholders and provide each company with the opportunity to execute on their respective business plans and to achieve industry-leading performance. We intend to discuss in detail our long-term company strategy during analyst events in 2023, including analyst days for each entity as we near the completion of the Knife River Spin transaction. More information regarding event details and presentations will be available on the company's website when these events are scheduled. Now I'd like to turn to the discussion of our quarterly operating results. Our construction businesses both reported all-time record quarterly revenues and combined record third quarter backlogs, now standing at $2.9 billion, which is up over 50% from the same time a year ago. Our utility and natural gas pipeline businesses continue to perform well, but have been impacted negatively by higher interest costs. And we also continue to experience and adapt to inflationary pressures across all lines of business. To summarize activity by business segment, I'd like to start off with the regulated energy delivery businesses. At our utility business, here we have grown customer base by 1.6% on a year-over-year basis, and we expect this growth to be between 1% and 2% compounded annually over the next five years. We expect our rate base to grow by 5% compounded annually over the next five years, driven primarily by investments in the system, infrastructure upgrades, and replacements to safely meet this growing customer demand. In August, it was announced that our electric utility, along with Otter Tail Power Company, we plan to jointly develop and construct and own approximately a 95-mile, 345-kV transmission line from Jamestown, North Dakota to Ellendale, North Dakota. This is one of 18 transmission projects recently approved by MISO as part of its first phase of a multi-year, long-range transmission planning initiative. This project allows both companies to create a more resilient regional transmission grid while continuing to provide reliable, affordable electricity to its customers. The transmission line is projected to be in service in late 2028 with a current estimated cost of $439 million. This business continues to seek regulatory recovery for our investments associated with providing that safe and reliable electric and natural gas service to our growing customer base. An interim electric rate increase of 5.3% was implemented here in July, mid-July 15th in North Dakota, appending a decision on the requested increase of 12.3% before the state's Public Service Commission. The Washington Utilities and Transportation Commission approved the utility's request for an approximately 4% natural gas rate increase, which was effective here on September 1st. And now here in the fourth quarter, the utility intends to file a request for an electric rate increase with the Montana Public Service Commission, and a request for a natural gas rate increase with the Idaho Public Utilities Commission. You can read about this and other regulatory filings in our Form 10-Q that was filed this morning. Also, the utility segment began construction here in May of 2022 on Heskett Unit 4, which is on track and expected to be in service during the first half of 2023. At our pipeline business, here we reported earnings of $9.8 million. As Jason noted, this business recorded record higher transportation revenues and record transportation volumes driven primarily by the North Bakken expansion project that was placed in service earlier this year. This project is well positioned in the Bakken and can be readily expanded in the future for forecasted natural gas production growth. The company continues to work on a number of expansion projects across its system that are expected to add incremental natural gas transportation capacity of more than 300 million cubic feet per day, and they are expected to be completed throughout 2023 and 2024, pending regulatory approvals. Now I'd like to switch gears and move on to our construction businesses. At our construction services group, we had all-time record revenue during this quarter, up 43% from a year ago. We experienced strong demand for electrical and mechanical-related work, with an overall increase in revenues of approximately 70%, specifically for hospitality, data center, and renewable projects. We also saw a consistent demand for transmission and distribution-related work, which also contributed to the quarter. Construction services ended the quarter with all-time record backlog of $2 billion, up 57% from the prior year. The company expects to complete approximately 80% of this backlog within the following 12 months. We are very well positioned to complete these projects safely and efficiently. with our ability to successfully attract and retain a skilled workforce of over 9,100 employees across our footprint. Given the successful first three quarters of the year, we have also increased our 2022 revenue guidance range by $100 million to now a range of $2.5 to $2.7 billion, with margins expected lower than 2021, reflecting the current inflationary environment. Now moving on to construction materials, here our construction materials business also had all-time record revenues for the quarter, with increases across all product lines. This business completed a significant portion of work that was delayed earlier in the year due to unfavorable weather conditions, and we benefited by higher average material pricing across its product lines. The company also reported a record third quarter backlog of $895 million, up 37% from the same time last year, and expects to complete an estimated 92% of the backlog on record within the following 12 months. Given the strong backlog and record third quarter revenues, we are affirming the revenue guidance range of $2.45 to $2.65 billion, with margins slightly lower than 2021, reflecting the current inflationary environment. Looking ahead, both our construction services and construction material businesses are really very well positioned to benefit from the Infrastructure Investment and Jobs Act, and the Inflation Reduction Act, which we anticipate will begin to positively impact bidding opportunities here in late 2022 and particularly 2023 and going forward. This completes our individual business unit discussion. Looking ahead, we are very encouraged by the opportunities for customer growth at our utility and electric business, a strong set of pipeline projects across our pipeline business, record levels of construction backlog, and our ability to record and have a skilled employee base as well. We are affirming our 2022 earnings guidance to a range of $1.75 to $1.90 per share, with EBITDA guidance in the range of $875 to $925 million. We have a robust capital plan of $702 million planned for 2022, Our future capital expenditures include line-of-sight opportunities, such as the completion of Heskett Station Unit 4 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 to provide 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?