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

Good morning. My name is Dave Goodin, I'm President and CEO of MDU Resources Group. We thank you for the time to join us this morning for this American Gas Association Investor Relations presentation. Joining me today, assisting with some of the technology should there be some questions raised throughout the presentation, is Jason Vollmer, our Vice President and Chief Finance Officer as well. And again, welcome and thank you for making the time to spend with us this morning. I do want to turn your attention to -- we do have a slide deck within the AGA site, and so I will follow along with that slide deck. And again, I invite questions along the way via the chat feature there, and please submit your questions as you seem appropriate. Turning to Slide 2. I certainly want to turn your attention to our forward-looking statements slide. During the course of this presentation, we'll make certain forward-looking statements that fall within the meaning of Section 21E of the SEC Act of 1934. So when you think about MDU Resources, I'd like to characterize MDU Resources on Slide 3 as -- this would be a one-slide summary of our business. We are really a business that's building a strong America. We're very much an infrastructure company, primarily with 2 lines of business, one being regulated energy delivery and the other being construction, both in services and in materials. We've been in business since 1924, headquartered here in Bismarck, but operating actually in 43 of our 50 states. And in peak season, we'll employ somewhere in the range of 15,000 or so employees. Last week, we're actually at 14,300. And I know we haven't hit our peak employment for this construction season ahead. On Slide 4, I talked about our strong infrastructure, we believe is the heart of the American economy. Certainly, those folks with this American Gas Association conference would understand into the natural gas, the pipeline activities that help power industry and business, electricity that lights up our homes and factories, and also, it's the pipes and wires that really connect their homes and factories, bringing them to life. And it's really this infrastructure, along with transportation, of getting goods and services to and throughout the nation, we play a part in that too through our materials business and our services business, again, helps kind of bring to life those same type of facilities. And so we very much affect the American infrastructure through these 2 platforms and 4 business lines. COVID-19 certainly has been unprecedented for the world, America, our business as well. One thing I do want to remind others that all of our products and services really are considered essential. Our operations have really continued to proceed with, of course, taking into effect CDC-recommended guidelines, personnel hygiene, personnel protective equipment. We've implemented that early on for our 14,000-or-so employees. And actually, as of last week, we're at virtually the same employment level on a year-over-year basis across all of our lines of business. We have placed the health safety of employees, along with the course customers and communities as a priority. And have, of course, adhered to various sheltering-in-places depending on the states that we're in. Along with, as we've seen, many of those states have a lifting of those shelter-in-places. And also, our foundation has contributed additional support to those on the front lines, those first responders, the food banks and the homeless shelters have been a priority. Additional donation was given here in light of COVID in addition to our annual donated amount there shown on Page 5. Turning to our financials. I'd like to talk about the first quarter earnings on Slide 6. Here, it shows that earnings are actually off on a year-over-year basis from $40.9 million last year to $25.1 million. On a per share basis, that's $0.21 versus $0.13. We also, in our first quarter update, we talked about our earnings guidance for the year. We have updated our earnings guidance at $1.50 to $1.70. That was as of May 7, again, with a long-term outlook from 5% to 8% compounded annual growth rate target. Our earnings contributions, really, as you can see on Page 8, spread across the nation. And again, 43 of the 50 states. You can see some of the concentration of business that we have in the Upper Midwest, where we'd have overlap with our utility business, both electric and natural gas, along with our pipeline business in that same region. And then more broadly speaking, our materials business is spread really -- think of the Mississippi going West in 15 Western states. And in construction services, we actually do business in about 40-or-so states covering most of the nation, absent some of the Northeastern states. You can also see on Slide 8 the earnings contribution between construction and regulated energy. Last year was actually at a 64%-36% split with EBITDA actually crossing 50% for the first time since I can recall, with construction at 54% and regulated energy at 46%. We've been pretty consistent around the 50-50 contribution in EBITDA between the regulated platform and the construction platform. But last year, we had a very strong year, particularly in construction. Now I'd like to turn to our capital expenditures. As we think about this year remaining and the next couple of years, our CapEx here really for the electric and gas utility is focused on system infrastructure upgrades, along with replacements. We do have identified within our 5-year plan a natural gas simple-cycle turbine that will situate out at the Heskett Station, and it will be a twin to Heskett 3 that's there right now. In our pipeline business, that serves parts of North Dakota, South Dakota, Montana, Wyoming and also Western Minnesota. We also are expanding a specific project out in the Bakken. That will continue to add more gas capability coming off some of the gas processing plants. That continue to address the flaring within the Bakken and working to reduce those flaring percentages. That project will be a 2021 completion project. And in our construction materials and services businesses, I would say, largely this is for equipment and plant upgrades and replacements. And we also are furthering our development of our Honey Creek deposits that we acquired a year ago. That's got approximately a 40- to 50-year life of those deposits that will supply our Texas market with high-quality aggregates. Really we're focused on line-of-sight opportunities at all of our businesses, and any M&A or acquisitions would be above and beyond this 5-year CapEx. And I won't go through column by column there on Page 9, but you get a sense on a year-over-year what our capital is focused at. I do think it's noteworthy -- turning to Slide 10 -- particularly in times where there's financial distress in the markets and the banking industry. We have an exceptionally strong financial position, both from a liquidity as well as a capitalization ratio. You get a sense of our liquidity position there at the end of the first quarter of about $116 million of cash on the books. We've got availability of our revolver credit backstop, which is actually extended through 2024, and that balance remaining on that was $431 million. And then our capitalization ratio is actually a 54% equity, very consistent where we were at a year ago, along with our investment-grade ratings both at Fitch and S&P standing at BBB+. Slide 11, I do want to turn your attention to our dividend growth. We've paid uninterrupted now dividends for 82 consecutive years, something we're quite proud of, and we've actually been increasing that dividend over the last 29 years. As you can see now, on an annualized basis, we're standing at about $0.83 per share, again, on an annualized basis. We are a member of the S&P High-Yield Dividend Aristocrats index as well. Okay, getting some feedback there, sorry about that. So that's a high-level overview of the corporation. I do want to dive into each of the business lines, and I'll start, given this is a natural gas conference, with our utility, electric and natural gas business. Slide 13 would show our 8 state footprint. We believe there's good regulatory diversity over those 8 states. We do get some weather diversity over these 8 states. It is a total of actually 13 electric- and gas-combined jurisdictions over those 8 states, but you get a sense of -- they're at 1.125 million customers. We're vertically integrated on the electric side where we own about 800 megawatts of generation, and over 8,000 miles of transmission along with distribution. We have about 1,600 employees in this business. Our customer growth rates on Slide 14, you can see we're at about a 1.3% compounded 5-year growth rates so far as customer additions, and we see that spread throughout our service territory. A number of years ago, strong growth in Western North Dakota with the Bakken. While that's tempered, we've seen that offset by increased growth, particularly in the Idaho and Washington markets. In this area, turning to Slide 15, I do want to note some regulatory updates as to -- we do have great pending cases in Minnesota. There we have interim relief. That case will be ongoing. We have, in North Dakota, an advanced determination of prudence where the hearing was held just recently here on April 30. We do have a settlement with staff there. We are waiting decision from the North Dakota Public Service Commission. And in Oregon, we filed recently, March 31, for a natural gas general rate increase there, sensitive to the COVID situation yet knowing that it will take a number of months before that matter will be fully addressed by the POC there as well. And we have filed accounting orders actually in 7 of our 8 states for deferred accounting treatment. Us like all other -- virtually all other utilities in electric and gas across the U.S. suspending disconnects, along with the late payment fees. We have filed for deferred accounting orders for treatment of those expenses at a future date. Turning to Slide 16. On the electric side, I do want to note how we continue to reduce our carbon footprint in our generation fleet. You can see there, adventing from 2013 to here more recently in 2018 to then 2023, how the shift has occurred with the addition of more renewables. We have an excellent wind resource in our backyard, and we don't have to ship that very far. We can kind of connect it right into our existing transmission system. So simplification there is good and it's very economical. And then we backstop that with some of our natural gas simple-cycle turbines, and we do have some coal within our fleet in the form of 2 baseload units. We are in the midst of retiring 3 of our smaller coal fleet. That will be retired over the next 2 years. Our outlook in our electric and natural gas business, turning to Slide 17, is really very straightforward. Our purpose there is to really safely meet customer demand by upgrading and expanding infrastructure and facilities. We do expect customer growth to be between 1% and 2% annually. Our rate base, given our 5-year CapEx forecast, actually is projected to be at a 5% CAGR over the next 5 years. It's actually coming off, looking back at the last 5 years, at about a 12% CAGR, but we're starting at a higher dollar value of base -- rate base in effect right now. We're certainly focused on timely regulatory recovery, shortening regulatory lag. And when you think about -- I've already mentioned our aging coal fleet, our smaller units that we look to retire by 2021 and 2022. The other business part of our regulated set of companies is our pipeline business, turning to Slide 19. You get a sense of our footprint. I'd indicated earlier, the 5 states in which we operate. You get a sense of the proximity that we have relative specifically to the Bakken oil play. We overlay it very well. And it's provided an opportunity for us for investment under regulated-like projects. Slide 20, you get a sense of where the Bakken is actually at. You can see we serve really the majority of the natural gas processing plants at 24 of the 31 plants. Here, what we provide service for is typically take-or-pay contracts, 10-year terms for gas plants to bring their process to residual pipeline quality gas to markets. We're not providing service on the inlet side to that plant, more on the exit side of that plant, and done under take-or-pay contracts. So we term those as regulated-like opportunities. On Slide 21, I talked about some of the recent projects that we've done. You can see, 2019 was quite active. We completed the Demicks Lake. Demicks Lake expansion was actually completed here early in 2020. Those are on the producer side of the equation. We also have, on the consumer side, Line Section 22, south of billings, needed expansion to serve the growing consumer needs in the greater billings area. And then upcoming major project for us will be our North Bakken Expansion, which is a 60-plus mile pipeline that we plan to run through the heart of the Bakken. That will be -- have firm commitments of take-or-pay type contracts with a number of producers that we've also got -- already have sufficient commitments in which to make that project a reality. 2020 will be a year of siting and permitting and regulatory approvals. We would anticipate beginning construction early in 2021 with completion in the fall of 2021. The pipeline outlook, I think I mentioned most of these projects already, North Bakken, touched on that. We are seeing increasing organic growth opportunities given the low natural gas price deck and at the same time, our proximity to a prolific natural gas field in the Bakken and us being kind of the primary dry gas distributor and those that move that to market. We're well positioned geographically to kind of leverage those capabilities. I do want to think -- turn now to our other platform of our construction activities. Here, we have 2 separate businesses. The first one is -- notice on Page 24 is construction services. This business was really spawned as an idea out of our utility business about 20-or-so years ago. And how we can take some expertise from our ability to build power lines and build pipelines and can we, in fact, do those for others. So that began a roll-up strategy that now fast forward to today is about an employment workforce of about 8,000. Again, we're in 42 different states. We both do inside construction activities, that would be inside industrial and large commercial facilities; and outside construction, doing that building a pipeline or power lines for others. Slide 25 and 26 give you a sense of what the earnings and the revenue growth for this business have been here more recently. You can see revenue growth there quite nicely. In fact, 2020 first quarter was a record quarter for the business. Absent any quarter of the year, that was a record quarter at $514 million. Earnings growth for this business has been an upward trend for the last number of years. You can see in 2020, we're actually at $16.8 million for the first quarter. And then Slide 27, you get a sense of our ability to continue to build our book of business, and that's being our backlog, now standing at the end of the first quarter at nearly $1.3 billion. Those are contracts in hand that we have a commitment from an owner, and we are committed to perform that work. Our outlook for this business is quite bullish. Given our record quarterly revenues that we just had in this first quarter, we're up some 22% over the first quarter in '19. And at the same time, we are continuing -- we affirmed our revenue guidance for this business for the remainder of 2020 here on May 7 at $1.85 billion to $2.05 billion. We are exploring any M&A activity in this business. We did acquire a mid-Atlantic presence for our inside electric business in Fairfax, Virginia, here at the early part of February. We would continue to look for those opportunities, yet remain fiscally disciplined. Our other construction business is construction materials. We do this business under a Knife River Corporation brand. Again, we are Mississippi West in 15 western states. Here we've achieved some critical size and scale where we're a top 5 producer of aggregate sand, gravel. 6,000 is our employees during peak season, and we do have 1.1 billion tons under reserves in our business. Our construction backlog here is off slightly from our year-ago record backlog of $943 million, standing now at $905 million. So we have a very good starting point for this year. Slide 32, you get a sense of what our revenue growth has been over the last number of years. We have some acquisitions that have contributed to this revenue growth, along with organic growth opportunities within the footprint. Slide 33. When I think of the outlook for this business, actually, our first quarter is a record first quarter of revenue for Knife River, up 15% from last year. I mentioned our backlog being off by about 4%. At our last earnings call on May 8, I did note that those projects within our current backlog, we actually had a more slightly better margin in the backlog now than we did a year ago. We are guiding the Street to $2.1 to $2.3 billion in revenue for construction materials. And again, that's underpinned by a 1.1 billion tons of aggregate reserves. Last year, we sold approximately 32 million tons of reserves. And so you get a sense that we have, all things being equal, about a 30-year life if we stay at that run rate of reserves. And so with that, I do want to reserve some time for questions. I'll open it up now. Are there any questions to be submitted?

And I believe on the form -- website, there is a link to questions that can be added, and we can view those here, and we'll certainly read those off and take any questions we receive.

Okay. So with that, the chat is open, if there are any questions to be submitted, we would welcome the opportunity. We'll give one more shot for anyone that would like to submit a question via the chat feature through the portal. We'll give it another minute or 2 here in case anyone would like to submit a question. I want to make sure you have an opportunity. And yet, at the same time, if there are no more questions, we'll consider wrapping this up shortly as well. With that, we'll just give it another minute or 2. I don't see that there are any questions coming in. If you do have some follow-up questions based on the presentation today or if we pique your interest in MDU Resources Group, we would welcome the opportunity to have a follow-up with you. You could reach us via our website. You will see a means in which to -- you can contact the company. We'd be delighted to have a conversation with you on a follow-up question or questions that you might have. And so with that, we will end this call with the American Gas Association Financial conference. We appreciate your interest in MDU Resources, and we wish you safety and good health. Thank you very much. Bye-bye.