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

Joining us today is MDU's CEO, David Goodin; and CFO, Jason Vollmer. And as a reminder, for the participants, if you would like to ask a question, please use the Q&A function at the bottom of the screen, and we will try to address these questions at the end of the 30-minute presentation. And with that, Dave, Jason, you can begin.

Well, thank you, Brian, and welcome, everyone. We appreciate you making time to hear about MDU Resources. Again, my name is Dave Goodin, I'm President and CEO of the company. And also joining me today is Jason Vollmer, our Vice President and Chief Finance Officer. So we'll run through a slide deck here for the first 20, 25 minutes, and then hopefully have at least 5 to 10 minutes or so for some Q&A that each of you might have. We invite you to have your questions for us because we're delighted to talk about our company. At MDU Resources, we are building a strong America as you see what our tagline here is. We'll talk about that here over the next 20 or so minutes. Brian next slide. Certainly, I want to start with our forward-looking statement slide, and I'm sure all of you know what that is. We will spend won't lot of time on that. Let's move on to the next slide so far as talking about our vision, mission and our values associated with MDU Resources. You can see our vision there is, with integrity building a strong America while being a great and safe place to work. Again, our tagline is building a strong America. . I'll talk about this and how we do this through our 2 platforms of business, one being regulated energy and also our construction platform of businesses. Our mission is certainly delivering superior value to stakeholders by providing essential infrastructure and services to America. Never more underscored that was during the pandemic that we've all experienced firsthand about those companies that are doing essential services at all of our lines of business are essential to our economy as well. And then you can see what we deem as internal values associated with our organization. We have 8 specific values, all listed on the bottom of that page that are very near and dear to our operations and to our people as well. Next slide. So here would be some of our key performance indicators financially here year-to-date as of September this year. You can see operating revenues are up nicely on a year-over-year basis. There certainly has some influence so far as some inflationary pricing adjustments that we have particularly in our construction businesses. Offsetting that, you can see net income is actually down on a year-over-year basis. Again, some of that inflationary pressures that we have seen in our construction particular construction materials business and really, to a lesser extent, our construction services business. And then you can see what our EBITDA is, is nearly flat on a year-over-year basis as we think about -- again, this is on the first 9 months of the year. The lower right-hand slide, though, portion of this, you can see that for the most recent quarter, Actually, our earnings per share is up on a year-over-year basis. And you would not have seen that quarters 1 and quarters 2, we actually were trailing on a year-over-year basis. And so I view this as an inflection point, if you will, that we've made pricing increases, particularly in our Construction and Construction Materials businesses as we look to offset some of those inflationary pressures, both from a labor and a cost of goods perspective. And then you can see on a year-to-date basis, we are still behind on earnings per share. But again, for the most recent quarter, we actually were up $0.05. And in fact, we had an adjustment there with some out-of-period expenses with -- really would have added $0.02 there on a non-GAAP basis. Brent, next slide. So we really are an infrastructure business, building a strong America. I noted earlier about the essential services that all of our businesses provide. You can see it's just blocking and tackling, helping the economy, whether it's transportation sector, whether it's data infrastructure, whether it's airports, building roads, office buildings, electrification of the economy in general, -- and then hitting those homes and businesses through our utility of nearly 1.2 million customers as well. We've got a little recap of our various 4 lines of business. Here, you can see both revenue, EBITDA, earnings and also our CAGR of earnings over the last 5 years. We've grown earnings nicely, nearly 11% on a compounded annual basis on a year-over-year basis. And you can see what we've invested nearly $600 million in incremental capital specific to M&A activity. Again, and our construction services and materials businesses really are products of an internal growing these businesses through M&A and organic growth materials for the last 30 years and actually services for the last 25 years as part of an overall roll-up strategy for -- specific to the materials business and also into services. You can see the pie chart on the right, so far as the contribution of earnings between the pipeline utility services and materials and also the EBITDA split that we have there as well. Next slide, Brent? I think important at this conference is to talk about the future of MDU Resources. And as we've grown our construction businesses literally over the last 30 years for construction materials, we announced in August that our Board has unanimously approved a plan to spin Knife River tax-free from the company in 2023. This is a business that we really started 30 years first aggregate acquisition. We really were at that point in time, several of my predecessors ago decided that -- we're a coal mining company at that time, and we should think about pivoting from mining coal and selling that to power plant customers to actually mining aggregate and then looking how to add value to that. And actually, there's a fair amount of parallels of extracting a heavy material from the ground, handling it efficiently, getting it to product and all the environmental and permitting associated with that. And so that was the start of the impetus of what we pivoted Knife River coal mining into Knife River materials to the business that we have today. And so I'll touch a little bit about Knife River business later, but I think that's an important announcement that the market understood back on August 4 of our intent of a plan to proceed on separating the Knife River business in 2023. Next slide. We also announced here this third quarter release on November 3 of our plan to determine the best way to optimize the value of our businesses, we believe we'll be able to create 2 pure-play companies, one being a regulated energy delivery business, that will be our electric company, our gas utility and our pipeline business. That will be a regulated energy company under the MDUR ticker. Separately, we'll have a pure-play materials business in the form of Knife River when we spin that and separate that business off. And then similarly, our Construction Services group we announced on November 3 that we look to undertake a strategic review of this business and look for ways that we can optimize the value associated with construction services. And so again, creating 2 pure-play businesses, again, and then looking to optimize the value associated with construction services, and that is ongoing work streams, the separation of the Knife River activity and the more recently announced strategic review of Construction Services. Next slide. I think it's helpful for investors to think about current kind of pro forma earnings, EBITDA and CapEx as we have it here on the left side of this slide. And if we think about the Knife River separation, here's what the breakdown would look like with Knife River being a separate public company. And so what's remaining here would be the electric business, the natural gas business and the pipeline, and in addition, would also have construction services as part of this scenario to give you a sense of what the breakdown would be. What we would see here roughly is that about 70% of EBITDA, more than 90% of CapEx and more than -- slightly more than 50% of earnings would come from the regulators side of the business in this situation and the remainder would come from construction services. You can kind of quickly gather from this, construction services has a strong earning, strong EBITDA business with actually relatively low CapEx. So it has different kind of investment characteristics, if you will, because it's a relatively low CapEx business when you particularly stand it side-by-side from our regulated electric gas and pipeline business. On next slide, Brian. Taking then the next step, and again, we're doing these in parallel, both the Knife River separation and the strategic review of Construction Services, just to give you another sense of what the future state of MDU will look like, again, between the utility, that's electric and gas and the pipeline, you can see the split between the pipeline business and the utility business, both from capital, earnings and EBITDA. And so you can see that the pipeline has a portion of it certainly the majority of the business will be a pure-play electric and gas state regulated business over 8 different states from Western Minnesota to the Puget Sound area, but we also have this 5-state more regional pipeline business that really functions hand in glove with our electric and gas business. In fact, the two were the in the same organization for the first 60 years of their existence from the late '20s to 1985 until we split out our pipeline business from our state-regulated LDC business and had it solely regulated by the FERC. Next slide, Brian. You can see our EBITDA mix over time dating back to -- going back to 2007 here. We have undergone a number of changes to the organization over this time frame. I've been having the opportunity to serve as the corporate CEO for the last nearly now 10 years. We did undergo some changes back in -- announced in 2014, ultimately exited oil and gas in early 2016. We had a business that was in the refining products. We exited that business, and we also did some natural gas processing along the way. That would have changed some of our regulated energy mix. In fact, you can see oil and gas comprised 41% of our business back in 2007, and it's gone, right? And so -- we have actually more than replaced that when you think about the growth of our regulated energy delivery business, along with our construction business. And so you can see the 46-54 split that we have today on EBITDA. That will obviously change if you reflect that on the prior slide, that I gauged so far is the separation of Knife River sometime in 2023 and as we look to optimize the value of construction services. On next slide, Brian. One of the long-standing activities that we've done, in fact, now as effective as of our Board meeting just a couple of weeks ago, we increased our dividend for the 32nd year -- consecutive year. We're a dividend aristocrat. We've had 85 years uninterrupted of paying quarterly dividend payments. We think it's an important way to return some capital back to shareholders. In a relatively modest way, you can see our payout ratio has declined over time as we're exiting oil and gas that have been the 2015/2016 era, and you can see declining to where we're at today is just a little under 50% from a payout ratio. And we think that kind of represents, if you will, a representative dividend relative to our business mix as we see it today. And again, we've been a longtime member of the S&P 500 Dividend Aristocrat category. Next slide, Brian. We think about our third quarter earnings, I mentioned earlier about this seeing an inflection point where the back half of 2021, we saw declining year-over-year earnings the first half of 2022 more of the same, catching up with some inflation. Here in the third quarter, we saw that an increase for both the GAAP and I'll say in adjusted EPS on a year-over-year basis. And you can see the difference growing by $0.05 here on the GAAP basis on a year-over-year basis. Brian? Thank you. So here in November, our Board met and then we released the week after the week of Thanksgiving, what our 5-year roll forward CapEx plan is. And in that new refresh look at capital for the next 5 years. Our board approved at the November 2023 capital and also the subsequent -- the forward look for the 4 remaining years. I think important as part of the CapEx summary is that we actually increased our capital from around $3 billion to $3.5 billion over this next 5-year cycle. And in particular, you would see that there was an added emphasis in the regulated space, particularly the electric and gas business, whereby our CAGR, if you will, compound annual growth rate for rate base growth prior to this was forecasted to be at a 5% annual basis is now actually forecasted to be -- we say between 6% and 7%. It's really 6.5%, but it's substantial over the 5-year period as it tends to accumulate over that period of time. So roughly [ 2.5, 2.6 ] rounded billion will be in the regulated space and just under $1 billion will be in both Construction Materials and Construction service. You can see some of -- where the activities -- and we'll talk about some of the specifics as we get into the business-by-business discussion. Next slide. Here's the guidance we provided here as most recently as of November 3. I think noteworthy here is construction services. We actually increased guidance by $100 million on both ends of the range. Part of this, it was 2.4 to 2.6, now it's 2.5 to 2.7. We maintained our revenue guidance for materials. We do note margins are either slightly lower or lower on a year-over-year basis. But again, even on services where -- we say margins are lower. We're offsetting some of that, certainly by increased revenue. And then you see that we reinforced our EPS at $1.75 to $1.90. Again, this is as of November 3, and our EBITDA kind of bounced around $900 million plus or minus, $875 million to $9.25 million. And our CapEx for the year is right at $700 million is what we're projecting -- and we also talked about our 5% to 8% long-term EPS growth rate. Brian? I mentioned this in the earlier slide yet, we can dive right into the segment review here. I want to make sure I'll leave a little bit of time for some Q&A. Let's dive right into the electric and gas segment. So here's our footprint over our 8 states. 8 states is a nice sized geographic area. It helps to diversify our regulatory exposure here as well. At the same time, it's certainly added workload for our regulatory environment, but also we don't have all eggs in 1 basket. You can see a little bit of concentration serving North Dakota, geographic-wise, we both have electric and gas there. We have electric and gas in Montana, Wyoming and South Dakota as well. We're straight gas in Minnesota, Idaho, Oregon and Washington, and again, we serve gas to all 8 states and electric to 4 of the 8 states. We do this with about 1,600 employees, and you can see what are rate bases grown nicely over the last number of years, you can see what is projected to be on the outskirts of the next 5-year forecast slightly over nearly $5.1 billion in rate base for energy delivery. And so -- and you can see what our EPS segment contribution would be. Next slide. Third quarter earnings really is such that our electric earnings are largely offset by natural gas losses, natural gas business, very cyclical, as I'm sure you all know, first quarter and fourth quarter, you do well because of our cold climate that we're in, and second and third quarter tend to be lost quarters and not more offsetting some of our electric business. Really, a little bit of depreciation difference on a year-over-year basis and obviously some short-term debt interest expense here, a slight difference on a year-over-year. But small numbers to look at from one to the next, certainly, the first and fourth quarter are most prominent quarters that we have in this business. Brian? Rate base growth, though, I think, is something to keep an eye on, if you will. We've got $2.1 billion now over the next 5 years of investment. You can see that relates to about 6.5% on an annual CAGR basis. Some of the changes here actually relate to our added MISO project that we've got so far as an additional 345 line going in the Eastern part of our system from Jamestown to Ellendale, North Dakota, along with some additional pipeline integrity projects that we have planned in throughout the 5-year period of time. Next slide, Brian. Here's a snapshot of our pipeline business. Again, interstate pipe regulated by FERC, just under 4,000 miles of pipe, relatively smaller workforce, a little over 300. We also have the largest storage field in North America. It sits kind of right in our backyard in Eastern Montana, serves our Montana, Dakota would be the primary customer that serves our heating needs partially throughout the winter season and also allows us to kind of physical hedge and buy gas there year round and put it in the storage and then pull it out later. Same slide below, you can see the combined regulated energy rate base growth. We're currently $3.7 billion, projecting that to go to about $5.1 billion in 2027. On next slide, pipeline business on a year-over-year basis, I'd say it was quite similar, had some added depreciation with our North Bakken expansion project, which is in year 1 of a ramp in period. Year 2, will nearly double the capacity commitments and then that will stay at that level for years 2 through 11, if you will. And we had some higher interest expense with some -- at a slight negative for the quarter-over-quarter comparison. Next slide, Brian. Here's Construction Services roll-up strategy here. Over 9,000 employees, again, under strategic review. We could see we have nearly a nationwide footprint, all but 7 of 8 states -- 7 of 50 states that were doing business in. We do outside T&D. We do insight, electrical and mechanical as well. We're #12 on the top 600 specialty contractor list noted in here, I should note it. We're actually #4 electrical contractor in the U.S., too, and that tends to be most of what we do in this business. You can see the nice growth we've seen so far as revenue and also segment EBITDA contribution over the last 15 years. Brian? Here, we saw an increase in earnings year-over-year. In fact, I think 21% increase going from $23 million to $28 million. You can see workloads are up. We are at all-time employment levels in this business. We are at record levels of net income through the first 9 months of the year, record levels of EBITDA as well. And also as we think about backlog standing at roughly $2 billion in this business, a very strong position to be as we think about our entire review of the business. Brian? Construction Materials, again, this is the business we're planning to spin in a tax-free transaction sometime in 2023. But you get the size of the business we're in 14 states in Mississippi and Look West. We're vertically integrated, where we produce aggregates. We've got 1.2 billion tons under reserve. That's over 200 pits, if you will. We're a top 10 producer, more probably close to that top 5 area. But we also do some construction activities that surround that so far as lay down services of whether it's ready-mix, whether it's asphalt, whether it's roads and bridges construction, subdivision work, work for our large commercial industrial customers as well. You get a sense of the revenue and backlog on the slide below, I won't go into those details and it's minus a $300 million in EBITDA business as we think about it currently. Brian? Here materials was up 7% in earnings year-over-year as we think about that inflection point. Certainly, this contributed to it as well. And you get a sense that we're at an all-time level of revenue at just under $1 billion for the quarter, up quite nicely. [ 839 ] Okay. I did my best. I know we left a little bit of time here, but Brian, I'll turn it back to you. .

Thanks, Dave. And as a reminder, for the participants, if you'd like to ask a question, please put those questions in the Q&A function at the bottom of your screen. So the first question, which, Dave, I think you generally answered is the timing of the split into 2 publicly independently separated companies. And maybe just add what are some of the regulatory milestones that we should be looking towards to track the progress of that.

Sure, sure. So what we've said, public statement has been in 2023, I don't know that's wide bird if you well as we think about this. We announced this on August 4. We did make a note when we released our CapEx release that week of Thanksgiving. we said we plan to do an update into the marketplace mid-December as to our progress associated with us. So look for that in the not-so-distant future. Certainly, spin transaction requires Form 10 formulation. There is a draft Form 10, there's an iterative process there. That could be one of the elements that we do an update on. There's various other regulatory filings that we need to be making. I would say we're all in on this process and look for the update. I know that's not the full answer, but I think will help the market understand that in the not so distant future.

Okay. Great. And then if we could just focus on the pipeline. -- segment for a moment. Could you kind of that supporting expansion and growth in that segment?

Yes, certainly. So our pipeline business is its primary largest customer wise is the -- it's really the sister company, LDC, Montana-Dakota Utilities, of which, again, the 2 are 1 and the same until we split them apart in '85. So that's kind of the firm contractual relationship needed to make sure that the incumbent utility has gas available for that coldest of winter days. That's kind of the one of the primary activities for the pipeline. The other part is, given our proximity to the Bakken production here and it's kind of our -- it's in our backyard, we had kind of a home-field advantage to put pipeline in for others and primarily it's gas processing plants on the tailpipe service from the plant, getting that processed pipeline quality gas to market. We will provide that service. We'll put that pipe in. We'll do it under 10-year minimum take-or-pay contracts, and it's kind of a -- it's that umbilical cord for that gas processor to get their gas processed gas to market. And so -- Bakken now is roughly 43 rigs. It's kind of a healthy amount of activity. I think there is certainly capital discipline as we think about that, but we see a growing gas oil ratio in the Bakken as well, which I think will bode well for opportunities for us. We've got several -- we've got 4 projects over the next couple of years. Some are producer-driven that we've got commitments to put more pipe and compression on new gas plants being built. We also have demand -- power demand and also retail and industrial demand. So we get both opportunities from the production side and the end user side. We get to play that kind of middle part delivery person between the 2. So it's a nice suite of activities we got. We're also expanding in Eastern North Dakota for more agricultural and commercial needs, if you will, to the greater Wahpeton Breckenridge area, that will be a project for us in '24.

Okay. Great. And then just a follow-up on the planned split. Will both entities be self-sufficient from a balance sheet and a cash flow basis?

Yes. So we've announced Knife River is planned to be a spin. And so we believe that will be a separate public company. And so the short answer is yes. Jason would certainly could weigh in so far as we're not previewed any pro forma at this point, but certainly want to make sure these are set for success, if you will. On the services strategic review, we've not defined what that looks like, whether it's a sale, whether it's a spin, whether it's a merger or whether it's a combination of those. But clearly, it's a business operating on all cylinders. I mentioned peak employment, peak net income, peak backlog. It's performing very well. So we'll look to optimize the value of that.

Okay. Great. And maybe, Dave, you could touch upon how you guys are managing supply chain issues, inflationary pressures and rising interest rates. So if you could just touch on each of the segment, which obviously has different exposures to those headwinds that almost every industry is facing.

Yes. Yes. So on the regulated space, it's primarily going back to a general rate case. I mean, when interest rates are just cost of fuel for the fleet or added labor costs. And so -- we've got several general rate cases that we've recently completed and/or initiated. Most recently, Idaho natural gas here just a week or so ago. A few weeks before that, a Montana electric general case as well. We have a North Dakota Electric case that we filed for a couple of months ago, have some interim rates at effect. So there's a number of regulatory activities to look to close that gap from an inflation perspective and reset with the -- get to our allowed ROEs, if you will. On the construction side, I noted that this last quarter was an inflection point. I felt. We've been having regular price increases and materials or ready-mix or asphalt or other products that we sell I feel like we finally caught up and gotten slightly ahead of that. And so I feel better about that today, again, seeing the inflection point here in the third quarter. And clearly, we adjust our pricing and our margins associated in our services business. While we do see margins lower on a year-over-year basis, again, we've seen increase in backlog and I would say the increased backlog is bid with current cost structures in place. And so I think those are all things that we're doing internally because we have different drivers in each business whether it's more petroleum-based, which is the materials business are more labor-based, which tends to be both services particularly, but lesser to extent in materials.

Okay. Great. Well, we are out of time. So I want to thank all the participants on the call, and I want to thank Dave and Jason and the MDU team for participating in today's presentation. That concludes the presentation. Have a nice day.

Yes. Thank you all. Bye now.