MDU Resources Group, Inc.

Hello, my name is Marjorie and I'll be your conference facilitator. At this time, I'd like to welcome everyone to the MDU Resources Group 2023 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 keypads. If you would like to withdraw your question, please press star two on your telephone keypad. The webcast can be accessed at www.mdu.com under the Investor Relations heading. Select Events and Presentations and click Q1 2023 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.

Thank you, Marjorie, and thanks, everyone, for joining us on our first quarter 2023 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 CEO of MDU Resources. Also with us today to answer questions following our prepared remarks are Stephanie Barth, Vice President, Chief Accounting Officer and Controller of MDU Resources, Brian Gray, President and CEO of Knife River Corporation. Jeff Thede, President and CEO of MDU Construction Services Group. Trevor Hastings, President and CEO of WBI Energy. And Nicole Cavisto, President and CEO of our Utility Group. 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 refer to certain non-GAAP information. For reconciliation of any non-GAAP information to the appropriate GAAP metric, please reference our earnings release. This morning we announced that MDO Resources Board of Directors approved the previously announced spin-off of Knife River effective May 31st. Dave will provide more details of the separation later in the call, and additional information can be accessed on our website. It's an exciting time for both Knife River and MDU Resources as we progress towards our objective of creating two pure play publicly traded companies. I'll provide consolidated financial results for the first quarter before handing the call over to Dave Gooden for his comments, forward look, and update on our strategic initiatives. This morning we announced our first quarter earnings of $38.3 million or $0.19 per share on a GAAP basis with adjusted earnings of $46.6 million or $0.23 per share compared to first quarter 2022 GAAP earnings of $31.7 million or $0.16 per share. With the announcement of Knife River separation and continued work on the strategic review of our construction services business, we are reporting adjusted earnings that exclude costs related to these strategic initiatives. Our combined utility business reported earnings of $55.5 million for the quarter compared to earnings of $47.6 million for the first quarter in 2022. The electric utility segment reported first quarter earnings of $16.6 million compared to $11.3 million for the same period in 2022. The increase was largely the result of interim rate relief in North Dakota and Montana and lower operation and maintenance expense associated with the closure of coal-fired generating units 1 and 2 at Heskett Station in early 2022. Business also experienced higher investment returns on non-qualified benefit plans. Our natural gas utility segment reported first quarter earnings of $38.9 million compared to $36.3 million in the first quarter of 2022. Revenues increased primarily as a result of approved rate relief in Washington and a 4.2% increase in retail sales volumes to all customer classes due to colder weather. Weather impacts were partially offset by weather normalization and decoupling mechanisms, and a gas cost-sharing mechanism in Oregon. The business also benefited from increased investment returns on non-qualified benefit plans during the quarter, partially offset by higher operation and maintenance expense and higher net interest expense. The pipeline business earned $8.3 million in the first quarter, compared to $7.3 million in the first quarter of 22. The improvement was driven by higher transportation revenue, largely due to a full first quarter of benefit from the North Bakken expansion project It was placed in service in February of 2022, as well as its increased contracted volume commitment starting February of this year. The business experienced record first quarter transportation volumes. The increase was offset, in part, by higher operation and maintenance expense due to payroll-related costs and legal fees associated with the pending FERC rate case. In addition, interest expense and depreciation expense increased largely related to the North Bakken expansion project. Construction services reported all-time record quarterly revenue of $754.3 million in the first quarter and first quarter earnings of $26.1 million, compared to revenue of $552.6 million and earnings of $21.3 million for the same period in 2022. EBITDA increased $8.7 million in the first quarter compared to last year. Business saw increased electrical and mechanical revenue due to increased commercial, industrial, and institutional workloads. Transmission and distribution revenues increased slightly year over year, primarily related to storm work, and were partially offset by lower transportation workloads, in particular for street lighting projects. While revenues increased, the business experienced a decrease in margins due to higher overall operating costs, largely related to inflationary pressures, including costs for labor, subcontractors, and equipment. In addition, margins were impacted by losses on certain projects. Finally, our construction materials business reported first quarter revenue of $307.9 million and a seasonal loss of $41.3 million, compared to prior year first quarter revenue of $310 million and a seasonal loss of $40 million. EBITDA increased $4.1 million in the first quarter compared to 2022. In response to inflation, the business has raised average product pricing across its product lines, which contributed to increased margins. The business was negatively impacted by unfavorable weather across most regions, and in particular the Pacific region, resulting in decreased volumes for certain products, including ready-mix concrete and asphalt. Increased aggregate revenue and margins offset some of the weather impacts, largely due to higher average selling prices and higher demand in the Northwest region. The business continues to be impacted by inflation across all regions, with the largest impacts from cement, labor, natural gas, and diesel. Results of each of our businesses were positively impacted in the first quarter on a non-cash basis by higher investment returns on non-qualified benefit plans. Collectively, the positive earnings variance was approximately $9.1 million, or $0.04 per share, compared to first quarter of 2022. This change in investment returns is due to fluctuations in the financial markets. That summarizes the financial highlights for the first 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 are pleased with our strong first quarter results. Our utility and natural gas pipeline businesses continue to perform well. The utility business was positively impacted by rate relief and higher natural gas volumes due to colder weather in many of its regions. While the colder weather was a benefit to the regulated businesses and construction services experienced increased workloads from storm-related work, our construction materials businesses experienced unfavorable weather throughout the first quarter, which delayed the start of our construction season in many parts. We are beginning to see the benefits from price increases, which is helping offset inflationary pressures. Our combined construction businesses reported record first quarter backlog. The businesses have secured additional projects to replace backlog projects that have been completed or nearing the end of their project life cycle. To summarize activity by business segment, I'll start off with the regulated energy delivery businesses. The utility reported increased earnings on a combined basis for the quarter. driven by rate relief in certain electric and natural gas jurisdictions. Natural gas retail sales volumes were 4.2% higher, and electric retail sales volumes were 3.3% higher than the first quarter last year. The company is constructing our Heskett Unit 4, an 88-megawatt natural gas-fired electric generating facility near Mandan, North Dakota, just across the river. and we expect this to be operational this summer. We also continue to expect our rate base to grow between 6% and 7% compounded annually over the next five years, driven primarily by investments in system infrastructure upgrades and replacements to safely meet customer demand. This business reached settlements in the North Dakota electric and Idaho natural gas rate cases and continues to seek regulatory recovery for the investments associated with providing safe and reliable electric and natural gas service to our growing customer base. At our pipeline business, we had record first quarter transportation volumes. As Jason noted, this business recorded higher transportation revenues largely due to the first full quarter of benefit from our North Bakken expansion project which was placed into service in February of 2022, and increased volume commitments, which began here recently in February of 2023. The company filed a rate case on January 27th with the Federal Energy Regulatory Commission in which it is seeking rate increases for its transportation and storage services. The new rates, pending FERC approval, will take effect August 1st. The company expects to be in construction in the second quarter on three natural gas pipeline expansion projects that are anticipated to be in service later in 2023. These will add approximately 300 million cubic feet per day of incremental capacity. Our regulated energy delivery businesses performed well in the first quarter, and we are reaffirming earnings guidance for the regulated businesses to be in the range of 140 million to 150 million. Now I'd like to move on to our construction businesses. Our construction services group had an all time record quarterly revenue. We experienced strong demand for electrical and mechanical related work with an increase in revenues of approximately 50% specifically for high tech and hospitality related construction services during the quarter. Margins were impacted by higher labor costs and higher interest rates negatively impacting results. Construction services ended the quarter with record first quarter backlog. We are well positioned to complete these projects safely and efficiently with our ability to attract and retain a skilled workforce now exceeding 9,000 employees across our footprint. Given the strong start to the year, we are increasing our 2020 through revenue guidance range 50 million on both the bottom and the top end to be now at 2.8 billion to 3 billion. We expect slightly higher margins compared to 2022 and our EBITDA in the range between 200 million to 225 million. At our construction materials business, We increased EBITDA here $4.1 million when compared to the same period in 2022. The business experienced delays from unfavorable weather conditions across the majority of Knife River's markets. However, higher product pricing partially offset these delays. The company reported a record first quarter contracting services backlog, increasing approximately 23% since the same time last year. Given the strong backlog and the successful bidding process, we are affirming the revenue guidance range to be between 2.5 and 2.7 billion here in 2023, with higher margins compared to 2022. We also note that our EBITDA is expected to be in the range between 300 and 350 million. Looking forward, Both of our construction businesses are well positioned to benefit from increased bidding opportunities. With the funding from the Infrastructure Investment and Jobs Act, along with the Inflation Reduction Act and additional state funding, our construction businesses will see increased demand in 2023 and beyond for the work they already excel in doing. Overall, as we look ahead, we are encouraged by our opportunities for customer growth in our electric and natural gas businesses, a robust set of pipeline projects, ongoing system growth, and steady demand for pipeline services, along with high demand, as I've noted, for our construction service business. We are excited to share the news today that the MD Resources Board of Directors approved the separation of Knife River. The spinoff is expected to be completed at 1159 p.m. EDT on May 31. The distribution is expected to be tax-free for MDU Resources stockholders for U.S. federal income tax purposes. Stockholders will retain their current shares of MDU Resources stock and on May 31 will receive a distribution of one share of Knife River stock for every four shares of MDU Resources stock owned as of May 22, 2023, which is the record date for the distribution. Upon completion of the distribution, MDU Resources will continue to trade in the regular way on the New York Stock Exchange under our ticker symbol MDU, and Knife River will trade in the regular way on the NYSC under the ticker symbol KNF. In connection with the anticipated separation of Knife River, an investor day is also planned for May 18th at the Stock Exchange. Knife River management will present Knife River's investment highlights, operations, financial performance, along with growth prospects, along with a question and answer session. The presentation will also be webcast. Please visit the MDU website for more details on the Knife River separation, along with our investor day again planned for this May 18th. In addition to the Knife River separation and to achieve our objective of creating two pure play public companies, we also announced in November last year that the MDU Resources was undertaking a strategic review of our construction service business. We are on track to complete this review here in the second quarter of 2023. We also announced today the Board of Directors declared a quarterly dividend on the company's common stock of 22.14 cents per share, unchanged from the previous quarter. The dividend is payable July 1st to stockholders of record on June 13th. Following the spinoff of Knife River, MDU Resources Board of Directors announced expects to review our dividend practice with the intent to align payout relative to regulated energy delivery earnings with pure play peer companies. Any changes that result from the review will apply to future periods and will not impact the quarterly dividend to be paid here on July 1st. The Board of Directors for Knife River will be responsible for developing any future dividend practice for Knife River. As always, MDU Resources is committed to operating with integrity and with a focus on safely providing 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 your commitment to MDU Resources and ask now that we open the lines to questions. Operator?