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

Good afternoon. My name is Brian Russo. I'm an equity research analyst at Sidoti. I want to thank everyone for joining us today for the MDU Resources presentation. Here with us is MDU's CEO, Dave Goodin; and CFO, Jason Vollmer. As a reminder, if you'd like to ask a question, please utilize your Q&A icon at the bottom of your screen. We'll leave 10, 15 -- 10 minutes-or-so at the end of the presentation to address the Q&A. And with that, I'll hand it over to Dave and Jason. Go ahead.

Thank you, Brian, and I appreciate others participating here on the webinar today. My name is Dave Goodin, President and CEO of MDU Resources Group. And then joining me also is our Vice President and Chief Financial Officer, Jason Vollmer as well. My intention today is to really give an overview of our company. Not to do a page turn of our presentation, we provided that to the Sidoti folks. And so I know those materials are available for your reference, if you will. But my purpose would be to really try to give an overview of the corporation, what I think are some of the key elements I'd like investors to understand about our business and what we see as some of the business opportunity set looking ahead. When I think of MDU Resources, and I think as we position our company, it's really an infrastructure business and we do this through two platforms of business; one being regulated energy delivery that we do through a regulated electric and gas utility that spans over 8 states from Western Minnesota out to the Pacific and we also have an interstate natural gas pipeline business that serves many of those communities over parts of those 5 states actually within our utility group; our other platform of business that we operate is really construction related and we do this through 2 business lines: one being construction materials; and the other being construction services. Both of these businesses are really spawned out of a roll-up strategy within our overall corporation. Our construction materials group started nearly 30 years ago, looking to pivot from coal mining and moved into the aggregate space. And today is a top 10 aggregate producer in 14 of our Western states, and we also produce materials in addition to sand, aggregate, gravel, but we also do ready-mix and asphalt and asphalt oil, bridge girders, tilt-up walls to buildings and a variety of other materials that go into industrial, commercial and residential buildings. Our other business in construction is construction services. Construction Services Group was also spawned as a roll-up opportunity out of our utility group some nearly 25 years ago. Today is a #4 electrical contractor in the U.S. We're #10 or 11 depending on the year of a specialty contractor status in the United States through engineering news record. This business, we've grown to over $2 billion in revenue and the last couple of years has exceeded over $100 million in earnings contribution to the overall corporation. What we do at construction services tends to wrap around the electrical industry, whether it's T&D work for other utilities, [ G&Ts ], cooperatives, kind of in parts of those 43 states or the inside electrical needs that industrial, commercial customers need. We do everything from sporting venues to mission-critical to chip manufacturing to server farms to, I'll say, search engine companies and also e-commerce business in addition to our more traditional institutional and large commercial and industrial customers. That's our 2 platforms of business. That's all deemed essential services to what America needs. Hence, our tagline of Building a Strong America. So when I look at the financial performance between these 2 lines of business, there's actually some balance between them. Again, contained within our materials would show the EBITDA contribution last year was about 46% EBITDA coming from our regulated set of companies, about 54% coming from our construction businesses. If I went back several years, it actually been more than 50% coming from our regulated, but given strong growth in our construction businesses has been growing EBITDA at a stronger pace than some of our regulated businesses. And so why do we have these 2 businesses together? I think I can summarize that best and that it's there's some financial benefits that each can play on the other. And I'll give you some examples. One, the steady predictable cash flow that we have coming from the electric and gas utility business in addition to the kind of FERC fee-based transportation that we have under take-or-pay contracts or long-term firm commitments at our pipeline business, kind of has a reliable and predictable cash flow associated with that and helps to underpin our overall credit ratings, which are BBB+ in both S&P and Fitch, along with a stable outlook there. That access to low-cost capital really enhances the working capital cost, if you will, at our 2 construction companies, whereas the working capital needs there ebb and flow throughout the year as the year ramps up and as we come out of winter in our northern tier states, obviously, those cash needs from our working capital continue to grow. We can lever some of the low-cost commercial paper in that business. There's also bonding and surety bond needs that we have from a construction project. That is somewhat supported and underpinned by that strong credit rating that we have at both Standard & Poor's and Fitch really from the regulated set of companies. And then we have things like we can spread our cybersecurity costs over a larger group of companies. We have, in addition to the bonding insurance help, and we obviously do all cash management out of one part of the organization that's actually under Jason's purview as well and so we can efficiently manage cash across the businesses. And there's some cyclicality in our construction business that again is actually offset, if you will, by some of the more predictability within both electric and gas and our pipeline business. That's a broad overview of the corporation. Now I'll give you a little bit of sense of some of the individual movers within each of those lines of business. Key from my role in my position is a couple of different things. One is getting the right people in the right places of the management team and who's running the business. And the second would be capital allocation and how we determine where capital is allocated, who receives capital for what projects, what are we interested organically or through M&A at each of the businesses. And so I'll start without our 5-year CapEx overall in the corporation is at $3 billion. $3 billion, that's divided between about 2/3 of that is earmarked for our electric and gas utility at $1.6 billion; about $400 million at our pipeline business, so roughly $2 billion of the $3 billion goes to the regulated set of companies; and the remaining $1 billion is split roughly 80% of that is going to the materials business and about 20% is going to the services business. So that's how we view kind of our baseline CapEx budget as we look at it for the next 5 years. It's not, I'll say, very materially different than our last 5-year look, as we look a year back and we continue to roll this plan forward, it's up a little bit. But also it's kind of in the ballpark, if you will, of our organic kind of baseline capital needs. In addition to that, we also are active in the M&A area, particularly in our construction set of companies. We've been successful, particularly on the material side, since we resumed our M&A activity in 2016 that we've had 1, 2, 3 acquisitions-or-so annually in that business. Our most recent acquisition was a couple of acquisitions in the Oregon area, Oregon Mainline Paving and also Baker Rock Resources, we acquired those businesses here in around Thanksgiving time of 2021. Construction Services, our baseline budget there does not include any M&A activity. We have development teams active there as well. Although we already have a nearly nationwide footprint in construction services at 43 of the 50 states that we cover there. So that gives you an idea where our capital is being allocated. We do not include in our 5-year CapEx any unidentified capital for unidentified acquisitions, that would be above and beyond our 5-year, our $3 billion CapEx budget. I would also note that as we think about our financing needs this year and if you have further questions, no doubt, Jason will be here to answer those. Right now, we're viewing that 2022, we don't anticipate any equity issuances as we think about this year. We really plan to fund that primarily through operating cash flow and then maybe a modest amount of debt. But if we do some M&A activity that's above and beyond that, we'd obviously look at that and how we best finance that at a point in time. So some moving parts within each of the businesses that I think are important to understand. Starting at our electric and gas utility, that $1.6 billion capital investment over the next 5 years, we would anticipate that would grow rate base by 5% compounded annually. The year we're in right now is about 400 of that 1 -- $400 million of that $1.6 billion, we're right in the throes of getting going on a natural gas peaking turbine to be put in most of this year, it will be put into service the first half of 2023. But that 5 years would expect to grow that 5% compounded annual growth rate. So certainly, our expectations would be is that there would be an earnings growth that would be commensurate, if you will, from that rate-based investment growth, again, going through a regulatory process in all 8 states that we're in. On the pipeline side, we're just coming off the virtual largest pipeline project we've ever done at WBI Energy, and that's our North Bakken expansion. Roughly a $260 million investment done mostly in 2021. It just came online service here, February 1 here, 1.5 months ago now. That is underpinned by firm precedent agreements from 6 different producer groups under take-or-pay contracts. It's very much complementary to other pipeline projects we've had within the Bakken. We -- the Bakken is right in our backyard. So our pipeline business model is roughly 3/4 of the revenue comes from firm transportation agreements with LDCs, of which our utility would be one of those. And the other 25% comes from firm take-or-pay contracts from producers, getting that dry process residual gas to market. And so we move well over half of the Bakken gas today. We serve well over 3/4 of the gas processing plants within the Bakken. On the tailpipe services, we do not do gathering at the wellhead to the processing plant, but we'll take the pipeline quality gas from the gas processing plant and get that to market. So there's certainly a environmental component here about our role in helping to reduce flaring out in the Bakken. And the Bakken activity is at an elevated level today than what we've seen here, certainly at the early days of the pandemic and it's at a modest level of actually 33 rigs are operating out there as of last week. Turning to the construction side. I think a few things that I'd like to comment on. In Construction Materials, again, it starts with the aggregate in that business. We have 1.2 billion tons under reserve or ownership. That's consistent and slightly increased from 10 years ago, so we continue to reinvest in this business. Key to this business is, whether it's state or local funding and also just general business economic activity. And I could say that it's a quite strong outlook as we think about 2022. We're starting the year at a record amount of backlog at slightly over $700 million to start the year out. But we actually tend to peak out in backlog at this business at the end of the second quarter on June 30 because again, we bid projects early in the year. And then we tend to work off 85%, 90% of that work as we go through that year. Sometimes there's multiyear projects there. But more often than not, they're same-year projects or -- and then -- or we could have an early winter, maybe bring some projects into the next year. But we are -- we were guiding The Street when we gave our view of the year starting back in February to be somewhere between $2.3 billion to $2.5 billion in revenue in this business. That's up from $2.2 billion that they ended last year with. And we're also saying that we expect margins to actually be comparable on a year-over-year basis, notwithstanding, obviously, inflation is on everybody's mind, and that's something that's really key and honed in with our business manager operations folks within materials. In Construction Services, that we're starting at an all-time record of backlog of work for that business. At the end of the year, we reported just shy of $1.4 billion in backlog, that's an all-time record at any point in time, not just at the end of the year and I think it really goes to show the kind of work we do at services has probably never been more stronger in demand. The electrification of the economy that we're also accustomed to now through the pandemic, e-commerce activities, computing, moving to the cloud, reliance on online retailers. We're used to this 2-day delivery to our doorstep. And the computing power needed for that, the chip manufacturers that were all sensitive to now, whether it's the transportation sector with empty car lots, but chip manufacturing in the U.S. are long-time customers of ours. And then I've mentioned social media and search engine companies, in addition to the more traditional electrical functions that we do, again, at larger commercial, industrial, sporting venues, gaming facilities, institutions like hospitals and higher ed as well. And so -- that's kind of a broad overview of the company. We've been a dividend aristocrat now for a number of years. We have been increasing our dividend for the past 31 years, we've been paying a dividend actually uninterrupted for 84 years. And so we've got a long rich history of dividends. It's -- our payout ratio is 40-some percent last year, allowing us some room so far as CapEx and funding that CapEx. But also, we view it as a way to return shareholder cash back to our shareholders and they're allowing us to use their capital to help to grow our business. And so I'm going to just pause there for a moment. I'm looking to Jason here. He can fill in after hearing the story a few times from me, but if there are some elements, you would like to add to that.

Dave, I think you covered the story quite well. And I would really love to use the rest of the time here if we can to see if there's any Q&A from investors or from Brian here moderating that as well with, I think that's always beneficial to just have some further discussions. So certainly, any questions you may have.

Perfect.

All right. Great. Well, thank you, David and Jason for the overview. As a reminder, for the participants, if you'd like to ask a question, please enter it into the Q&A using the icon at the bottom of your screen. So maybe I'll start off with the pipeline and the North Bakken expansion project that successfully completed basically on time and on budget. Obviously, you're a big player in that play. With the current geopolitical risks and situation and rising natural gas prices and commodity prices, are there incremental growth opportunities for more demand for domestic gas production that you can capture going forward?

Yes. Yes, certainly, Brian, from a macro perspective, I would share that same view that natural gas has a role and a strong role in our society as an energy source. I would have said that a year ago and 2 or 3 years ago, although I know natural gas has varying degrees of kind of social acceptance at certain times. But I think it's very pronounced now that it's a key to national security, if you will. Certainly, the strip prices we see for natural gas today, I think it makes it even a greater incentive for producers to capture, not flare it. Obviously, there's flaring requirements, but it's -- there's more netbacks to the producer, right? So that's good. And at the same time, the strip price for oil, of course, is obviously where the treasure there is at from producers. And so that's probably some of the reasons we're seeing a bit of an elevated rig count today and our 30-some rigs. I think, ideally, the producers might want to move that up some, but I think there's also challenges just in general labor that the great resignation is affecting the industry as well there. But I like that we've got the pipe in the ground. It's fully permitted. Our first year ramp in volumes on firm are only about 133,000 a day. Year 2 volumes get to like 245,000 a day. We've got this pipe permitted to 250,000 a day, so we kind of fill it up in year 2. It's obviously we're only 6 or 7 weeks into its operation today, but I like it goes right through Tier 1 acreage. And the fact that we kept the pipe size the same, 24-inch, even as we saw producer demand kind of ebb and flow keep this group together, but we can readily, I'll say, increase that pipe from 250 to about 625 through added compression. And so obviously, if we see demand continue to rise on that pipe, I think it's very modest CapEx to get the next lift, if you will, from 250 to 625. And so I think all those kind of bode well for WBI's business outside that's just North Bakken specific, but I will say they're kind of a number of inbound [indiscernible]. I mean as natural gas processors look at enhancing or they might have 1 or 2 trains of natural gas processing in a plant or facility they're looking at adding a third train to that to do another 100,000 a day. And if we're already serving that plant, we're probably in a very good position to pick up additional volumes that way. And we're seeing industrial usage and actually the state of North Dakota is looking for ways to them help and enhance and attract businesses to the general area to use this natural gas resource, so it gets kind of applies economic development to it as well. I know it's a long answer, but it kind of helps shape that for a variety of reasons, we like the fact that the Bakken is right in our backyard.

Okay. Great. And maybe on the same lines, I know you have another pipeline project underway that is due to incremental industrial demand. If you could just comment on that.

Are you referring to the West East project that the state has put out there is to help...

Wahpeton expansion project, I think, is the other one that we've been talking about here.

Wahpeton. Yes.

Oh yes.

So the Wahpeton moving gas, and you're correct. There's some industrial end-use driven there and really a utility end use that kind of comes into play with that particular project there as well. So again, I think just another example of dollars out there that are making a long -- seeing a long-term future of the natural gas industry that we are there to support, and we think the investments we're making will certainly enhance economic development in certain parts that may be are underserved as we see it today.

Okay. So just switching to the electric and gas utilities. Could you -- for the participants on this call, could you just discuss the benefits of an 8-state footprint? Whether it's regulatory diversification, weather diversification or even demographic diversification, what's the benefits of the multistate footprint?

Yes. All of those would come into play, Brian. And certainly, 8 states, so there's just the things you mentioned. You have some regulatory diversity. I mean, between various states we'll be more open to various regulatory mechanisms than maybe others and then others are more open to certain trackers than others are. So we have pipeline trackers in some of our states. We have advanced determination of prudency in some of our states. We have a fuels clause adjustment in all of our states, purchased gas adjustment, whether it's monthly or annual in all of our states. Some of our states have forward-looking test years. Some are totally historic test periods. So there is some -- we don't have all eggs in one basket, i.e., one regulatory outcome, certainly important to us, but also it would weigh on the rest of the utility group if we were centered on just one or two very concentrated states. To your other point, whether we have normalization in a number of our states, we have full decoupling in 3 of our 8 states. We have high -- a more appropriate basic service charge in one of our states that helps kind of insulate us from weatherization, if you will. And again, we have weather normalization in several of our states, too. So there's kind of various mechanisms there. Weather would include that. We've got pipeline trackers in 2 of our states, Washington and Minnesota. We've looked at pipeline trackers in some of our other states. We've not been successful in all cases, but clearly, we made progress in Minnesota and Washington as well. So that all being said, there's more work, if you will, certainly for Nicole Kivisto and who heads up our utility group and the regulatory affairs folks. So we need to be properly staffed there, make sure we've got all the staffing crack relationships. We think we have strong relationships with our commissions. But there's 13 jurisdictions in total. So there's a lot of moving parts there that we need to obviously manage and I think we manage it pretty well.

Okay. Great. Now switching to the construction segments. Maybe first, we could talk more about the services segment. You see, it seems like you might have experience and a niche in undergrounding of utility infrastructure, particularly out West and some of the large utilities have expressed interest in actually made some regulatory filings for undergrounding. And if maybe you could talk about your competitive positioning there?

Absolutely. So yes, I'm sure many are aware of announcements that some of our utility customers have made. I would say the same customers have been customers of ours for quite some time. I'm saying decades actually. So these are not new customers of ours, nor are we new contractors for them. And so whether it be the announced undergrounding, whether it's grid hardening, whether it's just transmission inspection so far as making sure facilities are where they should be. Whether it's extensions into new customer subdivisions, those are all work that we've been doing for the same customer and customers kind of up and down Interstate 5 for quite some time. I mean the same customer, we kept as a customer through their second bankruptcy here not so long ago and we kept working for them all along while there is probably a little bit of accounts receivable uncertainty. We just felt we weren't going to let our customers down when they really needed us the most and we made a commitment to that and we're still doing work for them. So I think it's yet to be seen how much of that work will be successful at getting. I think it will just add to kind of the opportunity set there for work opportunities for us and others. I would expect it's going to take a combination of third-party contractors like ourselves to try to get most of that work done. I don't think any one entity is in a position that they could handle all of that. But I think it just adds to kind of the opportunity set ahead.

Okay. And for both construction segment, obviously, a lot of industry headwinds, whether it's raw material inflation, supply chain issues, labor availability. Could you just maybe highlight the most impactful? Or in terms of commodities like oil, how sensitive the materials segment is to that? And then are there other type headwinds that are impacting the services sector?

Yes. So services briefly, I know we're looking at our time here, but services would have exposure potentially to aluminum, copper, steel, PVC, those kinds of kind of electrical related, electrical mechanical related. We make -- we tie it very closely from what our suppliers are bidding us is what we'll bid to our customers and we match those up. And so we -- those time frames are very much -- they're much tighter today than they've historically done. And so that -- we'll match them up to avoid, if you will, being caught in the middle. So that's kind of a general approach there. On the material side, yes, we have some exposure to the petrochemical industry. We're in asphalt, asphalt oil. We run a large fleet of heavy equipment, earth scrapers, ready-mixed trucks, dump trucks delivery, we have some exposure to that. That's what caught some of our decline in margin last year. Going forward, strip price is important, kind of as we set the plan year. I think we're kind of in that avenue now. It's elevated a little bit. We've got some fixed forwards in there to offset some of that. And oftentimes, actually bids that we're doing for federal and state projects are actually oftentimes indexed at a certain fuel price. So we're bidding the same as our competitors. We're not making an assumption different from what our competitors are. So still some exposure certainly there. Labor, I think all industries are challenged with labor today. Our workforce is approximately the same size as a year ago. But we've not been successful at growing it substantially, but we've also not experienced a rapid decline either. So we'd love to grow it, but again, its ability to find good skilled labor. And I'll just stop there. I think we're about out of time.

Yes, we are at our 30-minute mark. So I want to thank both Dave and Jason and the MDU Resources team for participating in the presentation today. So that concludes the presentation. Everyone, have a nice day.

Thank you, Brian. Bye-bye.