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 Resources Group Year-End 2022 Earnings 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 and then the number 1 on your telephone keypad. If you would like to withdraw your question, press star 2 on the telephone keypad. The webcast can be accessed at www.mdu.com under the Investor Relations heading. Select Events and Presentations and click Year-End 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 Resources Group. Thank you, Mr. Vollmer. You may begin your conference.

Thank you, Lisa, and welcome everyone to our year-end 2022 earnings release 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, 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 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 more information about the risks and uncertainties that could cause 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 information. For a reconciliation of any non-GAAP information to the appropriate GAAP measure, please refer to our earnings release from this morning. I will start by providing consolidated financial results for 2022 in our initial look at 2023 guidance before handing the call over to Dave Gooden for his formal comments and forward look. This morning, we announced our 2022 earnings of $367.5 million, or $1.81 per share on a GAAP basis, compared to 2021 earnings of $378.1 million, or $1.87 per share. On an adjusted basis, excluding costs related to our ongoing strategic initiatives, we earned $380.2 million or $1.87 per share in 2022. Our combined utility businesses reported earnings of $102.3 million for 2022 compared to earnings of $103.5 million in 2021. The electric utility segment reported earnings of $57.1 million compared to $51.9 million in 2022. The increase was the result of higher retail sales revenue due to interim rate relief in North Dakota and higher net transmission revenues. In addition, retail sales volumes increased 2.2% due to colder weather in the first and fourth quarters of the year. Earnings were favorably impacted by lower operation and maintenance expense, partially associated with the Heskett Station and Lewis and Clark Station plant closures. Partially offsetting the increase were lower investment returns of $4.6 million on non-qualified benefit plans, higher interest expense, and higher plant maintenance outage costs at the Coyote Station. Our natural gas utility segment reported earnings of $45.2 million in 2022 compared to $51.6 million in 2021. Results were impacted by higher operation and maintenance expense, primarily from higher subcontractor costs, lower investment returns of $7 million on non-qualified benefit plans, and higher interest expense, largely related to higher debt balances and higher interest rates. The decrease in earnings were partially offset by 13.7% higher natural gas retail sales volumes to all customer classes due to colder weather and approved rate relief in certain jurisdictions. The pipeline business earned $35.3 million in 2022 compared to $40.9 million in 2021. Results were impacted by higher interest expense, lower investment returns of $1.4 million on non-qualified benefit plans, and lower non-regulated project margins resulting from lower revenues. The business benefited from increased transportation revenues due largely to the North Bakken expansion project, offset in part by lower allowance for funds used during construction and higher depreciation expense. For 2023, we expect earnings from our regulated energy delivery businesses to be in the range of $140 million to $150 million. Construction services reported record revenues of $2.7 billion and record earnings of $124.8 million, compared to revenues of 2.05 billion and earnings of 109.4 million in 2021. EBITDA increased 14.7% on a year-over-year basis to 193.4 million for 22. This business has experienced consistent earnings growth over the past five years, growing 18.5% when compounded annually over that time period. Electrical and mechanical services revenues increased 50% for the year, with commercial and renewable projects largely driving the increase. Partially offsetting the higher electrical and mechanical revenues were slightly lower transmission and distribution workloads. This business saw lower margin percentages due mostly to higher operating costs related to inflation, including labor, materials, and equipment costs. Due to the continuing high demand for construction services, we are establishing the revenue guidance range for 2023 in a range of $2.75 billion to $2.95 billion, with higher margins when compared to 2022 and establishing an EBITDA range of $200 million to $225 million for 2022. Our construction materials business also reported record annual revenues of $2.53 billion compared to 2021 revenues of $2.23 billion and earnings of $116.2 million compared to $129.8 million in the prior year. Revenues grew 14% in 2022, primarily due to higher average material pricing across all product lines in response to recent inflationary pressures, as well as increased contracting revenues of approximately 17% over the previous year. The impact of recently completed acquisitions had a positive impact on earnings. EBITDA at this business increased 4.5% to $306.7 million. Margins decrease as higher operating costs, mostly due to inflation, outpaced pricing increases in the first half of the year. In addition, increased interest expense and lower investment returns of $6.1 million on non-qualified benefit plans also had a negative impact on the year. Looking forward to 2023, given the strong backlog and continued strong demand for construction materials, we expect revenues in the range of $2.5 to $2.7 billion, with margins higher when compared to 2022, and EBITDA in the range of $300 to $350 million for this business. As mentioned in the segment discussions earlier, our companies were impacted on a non-cash basis by lower returns on non-qualified benefit plan investments. In total, the impact on a year-over-year basis was approximately $21 million, or $0.10 per share, when compared to the prior year results. The company attributed the change in investment returns to significant fluctuations experienced in the financial markets in 2022. Finally, the company continues to maintain a strong balance sheet and ample access to working capital to finance operations through our peak seasons. We continue to make great progress on our strategic initiatives that we announced during 2022. Business momentum is strong as we head into 2023, and we will continue to provide updates regarding our guidance and outlook as we progress through the year. That summarizes the financial highlights for the quarter and the year, and now I'll turn the call over to Dave Gooden for his formal remarks.

Dave. Well, thank you, Jason, and thank you everyone for spending time with us today and for your continued interest in MDU resources. Our construction businesses each reported record annual revenues and our construction services business also reported record annual earnings in 2022. As expected, we experienced inflationary pressures and also had weather impacts throughout the year. However, we finished the year very strong as pricing increases and other operational adjustments offset inflationary pressures. We are excited by our combined all-time record construction backlog, now standing at over $3.1 billion, up 46.5% from 2021. and various growth opportunities at our regulated businesses. We see this momentum continuing into 2023 as we remain focused on safely and efficiently providing essential products and services to our customers while making great progress on our strategic initiatives to create two pure play publicly traded companies. To summarize activity by business unit, I'll start off with our regulated businesses. Natural gas retail sales volumes increased 13.7%, and electric retail sales volumes increased 2.2% in 2022. In addition to volume increases, higher rate relief has a positive impact on the results. The utility saw rate-based growth of approximately 7.8%, along with customer growth of about 1.6%. 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. There are three rate cases pending before regulatory agencies, and we anticipate filing four additional rate cases in 2023. The pipeline business had record transportation volumes now for the sixth consecutive year. largely from ongoing system growth and steady demand for its services. Higher transportation revenues were largely attributable to the North Bakken expansion project that was placed into service early in 2022. In 2023, revenues are expected to increase from the North Bakken expansion project by approximately $10 million, largely due to contracted volume commitment increases of approximately 70% to now 215 million cubic feet per day. On January 27th, the company filed a rate case with the Federal Energy Regulatory Commission seeking rate increases for its transport and storage services. The business continues to work on a number of expansion projects that are expected to add incremental natural gas transportation capacity of more than 300 million cubic feet per day, as they are completed later in 2023 and into 2024, pending regulatory approvals. Now I'd like to move on to our construction businesses. Our construction services group had record revenues in 2022, with growth in nearly all of its business lines, highlighting this business's capabilities to perform a diverse range of projects. We experienced strong demand for electrical and mechanical related work with a 50% increase in revenue for the year, specifically for commercial and renewable projects. We are also encouraged by the increasing demand for utility related transmission and distribution work. Construction services ended the year with an all-time record backlog of $2.13 billion up 54% from the prior year, and we have several large projects underway across all of our markets. With our ability to successfully attract and retain a skilled workforce of over 8,900 employees across our footprint, we feel we are well positioned to complete these projects safely and efficiently. Earnings momentum is expected to continue into 2023, as sales and margin guidance are higher on a year-over-year basis. At our construction materials business, we also had record annual revenues, largely driven by increased product pricing. However, as Jason mentioned earlier, this business experienced inflationary pressures throughout 2022. While performance improved in the second half of the year as pricing increases in response to inflationary pressures took effect, Knife River's full-year margins decreased because of higher costs on asphalt oil, labor, fuel, and cement, along with higher interest expense. The company also experienced unfavorable weather early in the year and during the fourth quarter, effectively shortening the construction season in several Knife River's key markets. We expect to see the benefits from price increases to continue into 2023. Knife River increased backlog 32% from the prior year, standing at year end at $935.4 million. Looking forward, both of our construction businesses are well positioned to benefit from increased bidding opportunities. The U.S. national infrastructure is in need of improvement as it received a C- grade from the American Society of Civil Engineers here in 2021. With the funding from the Infrastructure Investment and Jobs Act and the Inflation Reduction Act, along with additional state-level funding, demand for our work construction businesses excel in completing Look Strong as we look to 2023 and beyond. This completes our individual business unit discussion. Looking ahead, we are pleased with the substantial progress we have made towards our strategic initiatives of creating two pure-play publicly traded companies. The tax-free spin-off of Knife River is expected to be completed in the second quarter here in 2023. In addition, we are well underway with the strategic review of our construction services business, which we also expect to complete in the second quarter. We expect to grow our rate base between 6% and 7% compounded annually over the next five years, driven primarily by investments in system infrastructure upgrades and replacements to safely meet growing customer demand. We are encouraged by the robust set of projects at our pipeline business as well, including ongoing system growth and steady demand for pipeline services. Overall, we have $2.5 billion in capital investments planned within our regulated energy delivery business over the next five years. 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 those essential services our customers need while being both 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?