MDU Resources Group, Inc. (MDU) Earnings Call Transcript & Summary

Good morning. My name is Dave Goodin. I am President and Chief Executive Officer of MDU Resources Group. Before officially opening this annual stockholders' meeting of MDU Resources Group, Inc., I would like to extend a warm welcome to each of you. Because concerns for your health of our shareholders, particularly our many faithful retirees as well as our directors, officers and other attendees that typically attend our annual meeting, we are webcasting this meeting to allow participation remotely without endangering your health and the health of others. Despite these unusual and difficult circumstances, I am pleased that so many of you have chosen to participate in our annual meeting remotely. Now let me introduce the company representatives joining me in person here today. They are Dennis Johnson, Dan Kuntz and Jason Vollmer. Dennis is the Chair of our Board, Dan is our General Counsel and Corporate Secretary and Jason is our Chief Financial Officer and Treasurer. In addition to Chair Dennis Johnson, who will conduct the meeting, we are pleased to have other members of our Board of Directors participating with us through the webcast of the meeting. They are Thomas Everist, Karen B. Fagg, Mark A. Hellerstein, Patricia L. Moss, Edward A. Ryan, David M. Sparby, Chenxi Wang and John K. Wilson. Biographies and other information about the directors and director nominees currently up for election were included in the proxy statement. We also have presidents of each of our business segments participating through the webcast, and I want to recognize them for their leadership of our business units. Representing Knife River Corporation and its group of companies is Dave Barney. Representing the utility group, which includes Montana-Dakota Utilities Co., Cascade Natural Gas Corporation and Intermountain Gas Company, is Nicole Kivisto. Jeff Thiede represents the Construction Service Group of companies. And finally, WBI Energy is represented by Trevor Hastings. Jason Flynn and Michelle King, who are representatives of our independent registered public accounting firm, Deloitte & Touche, are participating through the webcast. Mr. Flynn and Ms. King are available to respond to any appropriate questions, should a shareholder have one. Now I will turn this over to our Chair, Dennis Johnson.

Thank you, Dave. I now call the meeting to order and request that Dan act as the Secretary of this meeting. MDU Resources bylaws provide that the annual meeting of stockholders is to be held on the fourth Tuesday of April, each year at 11:00 a.m., or at such other date and time as shall be designated from time to time by the Board of Directors. At its meeting on May 8, 2019, the Board of Directors designated today, May 12, as the date for the 2020 Annual Meeting. Under the bylaws, the holders of a majority of the stock issued outstanding and entitled to vote, constitute a quorum for the annual meeting. Each stockholder is entitled to 1 vote for each share of common stock owned. You may vote each common share you own on each matter presented at the meeting. I am advised the number of shares of common stock outstanding at the close of business on the record date, March 13, 2020, is 200,522,277. The number of common shares represented by proxy is 175,384,693. And the percentage of all shares outstanding, which is represented at this meeting by proxy, is 87.46%. As the holders of more than a majority of the shares of stock outstanding and entitled to vote at the meeting are present in person or by proxy, I declare that a quorum is present. In accordance with Delaware Law and the bylaws of MDU Resources, a list of stockholders entitled to vote at this meeting has been prepared. That list has been available for 10 days before this meeting. It will be kept in this meeting room during our entire meeting, and any stockholder may examine the list. We have also received an affidavit of distribution from Broadridge Financial Solutions that the notice of the annual meeting was sent by mail or by notice of Internet availability of proxy materials to each stockholder of record between March 27 and April 9, 2020. This year, we will have 3 matters before the stockholders requiring a vote. First, you decide to whom you will entrust the governance of your company by electing directors. All directors elected at this 2020 Annual Meeting of Stockholders will serve 1-year terms. This year, there are 10 nominees. At this meeting, you will also vote on an advisory vote to approve the compensation paid to the company's named executive officers and to ratify the appointment of Deloitte & Touche LLP as the company's independent registered public accounting firm for 2020. An explanation of each item to be voted upon was included in the proxy statement. The company's bylaws provide that for a stockholder to bring nominations or business before the annual meeting of stockholders, written notice must have been delivered to the secretary not less than 90 days prior to the first anniversary of the preceding year's annual meeting. To be considered, any nomination or proposal should have been submitted by February 7, 2020. In addition, for a stockholder proposal to be included in our proxy statement under the SEC's proxy rules, it must have been received not less than 120 days prior to the first anniversary of the mailing date of the proxy statement for the preceding year's annual meeting. No stockholder nominations or proposals were received, therefore, no additional nominations or proposals will be considered at this meeting. The first order of business is the election of candidates for the Board of Directors. The Board of Directors has nominated 10 candidates for election to the Board of Directors for a 1-year term as listed in the proxy statement. They are Thomas Everist, Karen B. Fagg, David L. Goodin, Mark A. Hellerstein, Dennis W. Johnson, Patricia L. Moss, Edward A. Ryan, David M. Sparby, Chenxi Wang and John K. Wilson. I hereby declare that the nominations are closed and Item #1, as set forth in the proxy statement, is properly before the stockholders for a vote. The second order of business is an advisory vote to approve the compensation paid to the company's named executive officers as disclosed in the proxy statement. The Compensation Committee and Board of Directors believe that the company's current executive compensation program directly linked the compensation of our named executive officers to the company's financial performance and aligns the interest of the named executive officers with those of our stockholders. The Compensation Committee and Board of Directors also believe the executive compensation program provides the named executive officers with a balanced compensation package that includes an appropriate base salary, along with competitive annual and long-term incentive compensation targets. These incentive programs are designed to reward the named executive officers on both an annual and long-term basis if they attain specified goals. As this is an advisory vote, the results will not be binding on the company, the Board of Directors or the Compensation Committee and will not require any action. The final decision on the compensation of the named executive officers remains with the Compensation Committee and the Board of Directors, although the Board and Compensation Committee will consider the outcome of this vote when making future compensation decisions. The Board of Directors recommends a vote for the approval on a nonbinding advisory basis of the compensation of the company's named executive officers as disclosed in the proxy statement. I declare that Item #2, as set forth in the proxy statement, is properly before the stockholders for a vote. The third order of business is to ratify the appointment of Deloitte & Touche LLP as the company's independent registered public accounting firm for 2020, our independent auditors. The Audit Committee at its February 2020 meeting appointed Deloitte & Touche LLP as the company's independent auditors for fiscal year 2020. Deloitte & Touche LLP has served as the company's independent auditor since 2002. Although the stockholders' ratification vote will not affect the current year's appointment or retention, the Audit Committee will consider the stockholders' vote in determining its appointment of the company's independent auditors for the next fiscal year. As discussed in the proxy statement, the Board of Directors recommends a vote for this proposal. I declare that Item #3, as set forth in the proxy statement, is properly before the stockholders for a vote. The polls are now open. If you are a stockholder of record, meaning the stock appears in your name on our records, and you submitted a proxy, there is no need for you to vote by ballot here today. Any person present who has previously submitted a proxy for use at this meeting may revoke it by submitting a written instrument of revocation to Dan, or by advising Dan now that the stockholder wishes to revoke the proxy. After revocation of the proxy, the stockholder may then vote the shares in person. Any person present who has not previously submitted a letter, telephone or Internet proxy also may vote by ballot at this time. If you hold your stock in the name of your bank or broker, commonly called street name, you must have a legal proxy from your bank or broker, which identifies you, states the number of shares you owned as of the record date and gives you the right to vote those shares at this time. This legal proxy is necessary because without it we cannot identify you as a beneficial owner of the shares or know how many shares you have to vote. Ballots have been prepared for those stockholders wishing to vote in person, and we will distribute them upon request. If you desire a ballot, please raise your hand and Dan will see that you are provided one. In accordance with Delaware Law, the Board of Directors at its meeting on February 13, 2020, appointed Jason L. Vollmer of the company and Kristine Sundberg of the Carideo Group as the Inspectors of Elections. Briefly, their duties include asserting the number of shares outstanding and their voting power, determining the shares represented at the meeting and the validity of proxies and ballots. Counting all votes and ballots, certifying the number of shares represented and there counted the votes and ballots and certain record-keeping duties. The polls are now closed. While we're waiting for the election results, Dave Goodin will comment on our operations. Mr. Goodin?

Thank you, Dennis. We have posted to our website a series of slides for our presentation here during the shareholder meeting. And so I would turn your attention to that if you have that capability. Otherwise, I will describe those as I go through this presentation. We do have our forward-looking safe harbor statement there, that my comments will be within the meaning of Section 21E of the Securities and Exchange Act of 1934. When I think about MDU Resources, certainly, it starts with our vision, and that is on Slide 3. It's with integrity, create superior shareholder value by expanding upon our expertise to be the supplier of choice in all of our markets, while being both a safe and great place to work. And when I think about 2019, I'm very pleased that our performance in 2019, Slide 4 shows a summary of our financial results for the year, we grew earnings per share from $1.39 in 2018 to $1.69 in 2019. That really comprised between our regulated energy delivery earnings of $123.9 million. Those earnings were really driven by natural gas sales, up almost 9.9% on a year-over-year basis, along with rate recovery in the state of Montana. At our pipeline business, WBI Energy, we completed several organic growth projects, and again, we transported record volumes of natural gas on a quarter-over-quarter basis throughout the year. At our unregulated construction services and materials businesses, we had earnings of $213.4 million. At Construction Service Group, we had both record revenues and record earnings, a truly outstanding year for Construction Services Group. And at Knife River, we had record revenues and near-record profitability at Knife River as well. The next slide, Slide 5, would show graphically our earnings growth on a year-over-year basis, again, growing from $272 million or $1.39 per share, to $235.5 million or $1.69 per share. Those are my brief comments for 2019. Clearly, a very strong year for MDU Resources, thanks to the underpinning of our 2 platform business, being both regulated energy delivery and construction, both in materials and services. Just last week, we released our first quarter earnings, I'll turn to Slide 6 and show that graphically. Our earnings were actually off on a year-over-year basis from $40.9 million in 2019, to $25.1 million here in 2020. And on an earnings per share basis that is from $0.21 per share a year ago to $0.13 here in 2020. The major moving parts within that, starting with our electric and gas utility on Slide 7. Here, we had earnings of $43.7 million, that decrease in earnings from $52 million of a year ago was really driven by lower investment returns related to certain benefit plans, along with a warmer-than-normal winter weather that saw a 7% decrease in electric sales volumes and a 10.9% decrease in natural gas sales volumes. Weather across the 8 state service territory was anywhere from 7% to 21% warmer than normal, and we did have what we would expect normal customer conservation. We did have some approved rate recovery in certain jurisdictions that helped offset some of both investment returns and the weather normalization that we had. At our utility group, one of the forward-looking things I do want to note is that we do expect to retire, and we announced this actually a little over a year ago, to retire our Lewis & Clark generating station by the end of March of 2021, and our Heskett Units 1 and 2 by the end of March 2022. We do plan to replace part of that generation capacity by a 88-megawatt natural gas peaking unit at our Heskett site, we'll call that Heskett Unit 4. We just went through an advanced determination of prudency hearing here in North Dakota recently and expect to get the outcome from the Public Service Commission here in the not-so-distant future. We would anticipate commissioning that unit by about mid-2023. Now moving on to our pipeline for the first quarter. Here, we grew earnings on a quarter-over-quarter basis, on a year-over-year basis, from $6.8 million to $7.4 million. This was really driven by, again, record transportation volumes from our organic growth projects that this business unit completed late last year and early in 2020. And the earnings also grew from higher transportation rates from our FERC-approved rate case that was completed and put into place May of last year. A key project for WBI Energy will be the North Bakken Expansion, I'm now on Slide 10. This project that we announced last year will add approximately nearly of 350 million cubic feet per day, bringing our natural gas pipeline system capacity to nearly 3.6 billion cubic feet per day. We do anticipate this year to be a citing and permitting process, with construction expected to start early in 2021, with service targeted in date late 2021. At our other platform of business, starting with construction services on Slide 11. Here, earnings were off on a year-over-year basis, although at $16.8 million versus $20 million of a year ago. Here, we had a $6.7 million out-of-period adjustment to correct revenue recognition on a construction contract from the prior year. We do have very strong workloads in this business segment, both inside and outside specialty contracting, with record quarterly revenues of $514.7 million, up actually 22% from 2019. Turning to Slide 12. We also talk about our record backlog at this business, which now stands at $1.27 billion, up from $1.02 billion a year ago. Again, backlog are those contracts that are signed and in hand that commit us and the project owner to move forward. At construction materials, our first quarter earnings were a normal seasonal loss, although this year, slightly larger of a loss than last year at $38.2 million versus $34.4 million a year ago. Some of this additional loss was driven by lower investment returns of $2.4 million and higher payroll-related costs. We did have record first quarter revenues of $262.2 million, which is actually up 15% from 2019. This was driven by a moderate winter and our ability to get out in the field particularly more on our West Coast operations. Here at Knife River, we do have a strong backlog, starting the year at the end of March, we were at $905 million, down slightly from last year's record of $943 million. I think an important consideration for the times that we're in, in particular, is to highlight our strong financial position we have as an organization. Slide 15 talks about our liquidity, which is obviously very important in times that we're experiencing now. We have a strong liquidity position. We did note this in our release last week, but I'd just like to highlight that again here today that we have about $116 million of cash on our books at the end of the quarter. In addition to that, we've got strong financial borrowing capacity of $431.8 million at the end of March. We have certain lines of credit that are actually extended through 2024. In addition to that, we also issued $75 million on a term loan in April for added flexibility of financing throughout our utility group of companies. We are at a very strong capitalization rate of 54% equity, virtually at the same point that we were a year ago, and we continue with investment-grade credit ratings at both Fitch and S&P, both rating us at BBB+. I would like to make some comments so far as COVID-19, and the situation that's placed not only our company but our country in. We are an essential products and services business, whether it be our utility with electricity and natural gas service; whether it's our pipeline bringing natural gas to homes, businesses and industries; along with our construction activities, whether it be in the materials or services business. Certainly, that's continued us to continue operating across our footprint, albeit with certain safety and Center for Disease Control guidelines. Our top priority is the health and safety of our employees, customers and our communities. We did ramp up at -- from work-at-home activities, moving from several hundred employees prior to the pandemic being announced to now having about 3,500 employees that are regularly working from home, continuing to move the enterprise forward. We've implemented social distancing on our construction projects in adherence with CDC guidelines, and also in -- for our customers at the utility, we have suspended late payment fees and service disconnects for those customers, recognizing some of the financial hardships of our customers, knowing that we will work with them on a case-by-case basis. We do believe there is some uncertainty regarding economic recovery as we look to the rest of the year, as well might wonder how we recover and respond to this pandemic. We have lowered our revenue guidance at our materials business by $100 million, moving it from $2.2 billion to $2.4 billion, to $2.1 billion to $2.3 billion, lower that $100 million. We have maintained our guidance at our construction services business at $1.85 billion to $2.05 billion. And we have removed our margin guidance for our construction businesses, while we have comparable margins at the end of the first quarter, there's certainly some uncertainty as how this economy rebounds as we start to see the various shelter-in-place orders being eased at a number of states across our service territory. At our regulated businesses, I would say we're near-normal operations there, albeit implementing appropriate CDC guidelines and social distancing, along with working from home wherever that's possible. On Slide 17, I do highlight our updated earnings guidance for the year. We announced last week our earnings guidance would be from $1.50 to $1.70 per share as of May 7, 2020, and we did reiterate our 5% to 8% long-term compounded annual growth rate as well. I do want to remind our faithful investors of our strong heritage relative to dividends. We have actually gone through now 82 consecutive years of quarterly dividend payments. We've actually increased our dividend as we did in 2019, making 29 consecutive years of increases, putting us in a Dividend Aristocrat category. We've got an annualized dividend of $0.83 per share. And as I noted there, we are a member of the S&P High-Yield Dividend Aristocrat Index. And with that, Mr. Chairman, I wanted my comments to be brief, but thank you for the opportunity to highlight the operations across the MDU Resources.

Thank you, Dave. I will now call upon Kristine Sundberg, on behalf of the inspectors of elections to announce the preliminary results of the voting. The final results will be filed with the minutes of this meeting and reported on Form 8-K filed with the SEC. Ms. Sundberg?

Mr. Chair, I hereby announce that Thomas Everist, Karen B. Fagg, David L. Goodin, Mark A. Hellerstein, Dennis W. Johnson, Patricia L. Moss, Edward A. Ryan, David M. Sparby, Chenxi Wang and John K. Wilson, the 10 directors nominated by the Board for election, each received no less than 140,345,022 votes in favor or 96.21% of the votes cast. I hereby announce that 139,134,107 votes or 95.1% of the company's common stock present in person or represented by proxy and entitled to vote were cast in favor of approval on an advisory vote to approve the compensation paid to the company's named executive officers. I hereby announce that 173,008,733 votes or 98.64% of the company's common stock present in person or represented by proxy and entitled to vote were cast in favor of ratification of the appointment of Deloitte & Touche LLP, as the company's independent registered public accounting firm for 2020.

Thank you. After hearing the results of the voting, I declare that Thomas Everist, Karen B. Fagg, David L. Goodin, Mark A. Hellerstein, Dennis W. Johnson, Patricia L. Moss, Edward A. Ryan, David M. Sparby, Chenxi Wang, and John K. Wilson are each elected to the Board of Directors for a term of 1 year. I declare that the compensation paid to the company's named executive officers has been approved on an advisory vote. I declare that the proposal to ratify the appointment of Deloitte & Touche LLP as the company's independent registered public accounting firm for 2020 has been approved. I direct the secretary to insert a copy of the following documents in the corporate minute book, notice of annual meeting and proof of mailing, form of proxy, votes of inspectors of elections, certificate and written report of inspectors of elections, ballot of proxy committee. There being no other business to come before the meeting, the meeting is adjourned. We're hopeful that next year, we'll be able to resume our normal meetings and be able to meet in person. Thank you.

With that, that completes our 2020 Shareholder Meeting. We thank everyone for joining us on the webcast here today. And again, we would hope and look forward that next year, we could have a typical meeting in person and see many of our familiar faces there. Thank you all. And with that, we will sign off from this end. Bye now.