MDU Resources Group, Inc.

Hello, my name is Lynette and I will be your conference facilitator. At this time, I would like to welcome everyone to the MDU Resources Group's 2023 second 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, please press the star key followed by the digit 1 in your telephone keypad. If you would like to withdraw your question, press star 2. The webcast can be accessed at www.mdu.com under the Investor Relations heading. Select Events and Presentations and click Q2 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, Chief Financial Officer, and Treasurer of MDU Resources Group. Please go ahead, sir.

Thank you, Lynette, and welcome everyone to our second 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. Leading today's discussion along with myself will be Dave Gooden, President and CEO of MDU Resources. Also with us today to answer questions following our prepared remarks will be Stephanie Barth, Vice President, Chief Accounting Officer and Controller of MDU Resources. Nicole Cavisto, President and CEO of our Utility Group, Rob Johnson, President of WBI Energy, and Jeff Thede, President and CEO of MDU Construction Services 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 result or 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 the earnings news release. I'll provide consolidated financial results for the second quarter before handing the call over to Dave for his formal comments and forward look. This morning we announced second quarter earnings of 130.7 million or 64 cents per share on a gap basis compared to second quarter 2022 gap earnings of 70.7 million or 35 cents per share. Second quarter income from continuing operations was 147.6 million or 72 cents per share. It's important to note that with the spinoff of Knife River being completed during the quarter, Knife River's results and other related impacts are reported as discontinued operations in our gap-based results for the current and prior year. As such, with the completion of the spinoff and work continuing with the tax advantage separation of our construction services business, we are also reporting adjusted income from continuing operations to provide financial results that more closely correlate to and better outline the strength of our ongoing business operations. These adjustments reflect the May 31st spinoff of approximately 90% of the outstanding shares of Knife River Corporation, including the unrealized gain on the retained shares, as well as any other items related to our strategic initiatives. For more information on these adjustments, please see the table provided on page seven of our earnings news release. We experienced outstanding results from our businesses in the second quarter, with adjusted income from continuing operations of 60 million, or 29 cents per share, compared to second quarter 2022 adjusted income from continuing operations of 36.1 million, or 18 cents per share. As we look at the individual businesses, our combined utility business reported earnings of 13.1 million for the quarter, compared to a loss of 2.9 million in the second quarter of 2022. The electric utility reported second quarter earnings of 16.3 million, compared to 4.6 million for the same period in 2022. The increase was largely the result of higher retail sales due to interim rate relief in North Dakota and Montana, and a 31.4% increase in commercial and residential volumes. The volume increase is primarily the result of warmer weather and an electric service agreement to provide power to a data center near Ellendale, North Dakota. Also driving the increase in earnings was lower operation and maintenance expense, largely related to the absence of a prior year planned maintenance outage at one of our generating stations, and lower payroll-related costs. This business also experienced higher investment returns on non-qualified benefit plans. Our natural gas utility reported a seasonal loss of $3.2 million in the second quarter compared to a loss of $7.5 million in the second quarter of 2022. Revenues increased primarily from higher basic service charges and approved rate relief in Washington and Idaho. The business also benefited from increased investment returns on non-qualified benefit plans during the quarter. Warmer spring weather led to a 12.5% decrease in retail sales volumes to all customer classes during the quarter, which was partially offset by weather normalization and decoupling mechanisms. Increased operation and maintenance expense, primarily higher payroll-related costs, as well as higher interest expense added to the seasonal loss, which was partially offset by increased interest income associated with higher purchased gas cost adjustment balances. The pipeline business earned $8.7 million in the second quarter compared to $7.1 million from this time last year. The improvement in earnings was driven by higher transportation and storage-related revenues. This business experienced record quarterly transportation volume largely due to the increased contracted volume commitments from the North Bakken expansion project. The pipeline business also benefited from non-regulated projects revenue and increased investment returns on non-qualified benefit plans during the quarter. The increase was partially offset by higher operation and maintenance expense, primarily due to higher payroll-related costs and non-regulated project costs. In addition, interest expense increased as a result of higher interest rates and higher debt balances. Construction services reported record second quarter revenue of $747 million, and record second quarter earnings of $38.6 million, compared to revenue of $685.4 million and earnings of $34.5 million for the same period in 2022. EBITDA increased $10.6 million in the second quarter compared to the prior year. Commercial, utility, industrial, and institutional workloads all increased for the quarter, which drove the record second quarter revenue. Gross profit increased largely due to product mix in the commercial, industrial, and institutional markets, offset in part by lower renewable project revenue and gross profit. This business also saw higher selling general and administrative costs, largely higher payroll-related costs, and interest expense from increased working capital needs and higher interest rates. As I mentioned, results in each of our businesses were positively impacted in the second quarter on a non-cash basis by higher investment returns on non-qualified benefit plans. Collectively, the positive earnings variance was approximately 8.4 million, or 4 cents per share, when compared to the second quarter of 2022. This change in investment returns is due to fluctuations in the financial markets. That summarizes the financial highlights for the quarter, and now I'll turn the call over to Dave 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. This second quarter was historic for our company. as we completed the separation of Knife River Corporation on May 31st and experienced outstanding performance from all of our remaining businesses during the quarter. The Knife River separation was a monumental achievement for both our company and Knife River, and to add record results across our remaining businesses during the quarter makes me extremely proud of and grateful for our hardworking and dedicated employees. Our utility and natural gas pipeline businesses continue to perform well. The utility was positively impacted by rate relief and higher electric retail sales volumes during the quarter. The pipeline business had record quarterly transportation volumes as we continue to see the benefit of increased contracted volume commitments, particularly on our North Bakken expansion project. Construction services had record second quarter revenues, second quarter earnings, and second quarter EBITDA, all driven by increased workloads and increased gross profit. While completing this record amount of work, construction services continues to see strong demand and secure additional projects to replace its completed and nearly completed projects, ending the quarter with record second quarter backlog. 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. Electric retail sales were 31.4% higher, which was due in part to warmer temperatures that increased customer usage but also due to bringing on a new large volume customer during the quarter. We expect our Hesket Unit 4 to be operational here later this year as we finish construction on the 88 megawatt natural gas fire generating facility located across the river here just in North Mandan. We also continue to expect rate-based growth 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. We have received approvals on settlements in North Dakota Electric and Idaho Natural Gas rate cases, with new rates effective July 1st in both cases. And we filed an all-party settlement in the Montana Electric case as well. Our utility continues to seek timely regulatory recovery for the investments associated with providing safe and electric and reliable natural gas and electric service to our growing customer base. As we expect to file three additional general rate cases yet this year and one more in early 2024. Our pipeline business performed very well during the quarter. As Jason noticed, this business recorded higher transportation and storage-related revenues during the quarter and had record quarterly natural gas transportation volumes. In January of 2023, WBI Energy filed a general rate case with the Federal Energy Regulatory Commission for increases in its transportation and storage service rates. These rates take effect on August 1st, subject to refund. In the event of a rate case settlement agreement, of which the company is in active discussions with the FERC and its customers on, the rates outlined in the settlement agreement would take effect in August of 2023. We began construction in the second quarter here on three natural gas pipeline expansion projects that are anticipated to be in service here yet in 2023 as well. These projects will add approximately 300 million cubic feet per day of incremental capacity increasing the total system capacity from 2.4 to 2.7 billion cubic feet per day. With a strong start to the year for our regulated energy delivery business, we are increasing earnings guidance for the regulated businesses to now a range of $150 to $160 million, up $10 million from our previous range of $140 to $150 million. Now I'd like to move on to our construction services business. As I mentioned previously, demand remains strong for our construction business services, evidenced by our record second quarter revenue, earnings, and EBITDA, along with our backlog. We are well positioned to complete these projects safely and efficiently with our ability to attract and retain a skilled workforce of 8,500 employees across our 40-plus state footprint. We are affirming our 2023 revenue guidance to be in the range of $2.8 to $3 billion, and we expect slightly higher margins compared to 2022, and EBITDA in the range between $200 million to $225 million. On July 10th, we announced that our board of directors determined that we will pursue a potential tax advantage separation of our construction services business. After an extensive strategic review, the board determined that this was in the best path forward to optimize value for shareholders while achieving our objective of becoming a pure play regulated company. We are focused on determining the best method and timeline to affect the separation and will keep you updated as we proceed. Looking forward, our construction services business is well positioned to benefit from increased bidding opportunities as well. With the funding from the Infrastructure Investment and Jobs Act and the Inflation Reduction Act, our construction services business will see increased demand in 2023 and beyond for the work it already excels in. Overall, as we look ahead, we are encouraged by our opportunities for ongoing customer and system growth in our electric and natural gas utilities, our robust slate of pipeline expansion projects, and the steady demand for pipeline services, along with the high demand we are seeing for construction services. We also announced today that the Board of Directors declared a quarterly dividend on the company's common stock of 12.5 cents per share. This change in dividend reflects our intent to align our payout relative to the regulated energy delivery earnings with pure play regulated peer companies. The dividend is payable October 1st to stockholders of record on September 14th. Along with this announcement, we established a new dividend payout ratio target of 60 to 70% of our regulated energy delivery earnings. We are proud of our 85-year history of returning capital to our shareholders through the dividend and feel this new target payout ratio will allow us to continue this practice and while reinvesting in the growth of our regulated operations as we progress on our strategic path of becoming a pure play regulated company. 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 products and services to our customers and communities while being a great and safe place to work. I appreciate your interest in and commitment to resources and ask now that we open the line for further questions. Turn it over to you, operator.