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

Hello, this is Brian Russo, Equity Research Analyst at Sidoti. I will be the moderator for today's MDU Resources presentation. [Operator Instructions] So joining us is MDU's CEO, Dave Goodin and CFO, Jason Vollmer. There are also other members of the MDU team on this presentation. And with that, Jason and Dave, I'll hand it over to you.

Great. Thank you, Brian, and welcome, everyone, to the MDU Resources Investor Presentation. I appreciate you making your time to listen to our story. I would invite questions here at the end of the presentation, and we appreciate your interest in our great company. Next slide, Kayla. Certainly, we've got -- we're going to confined within the meaning of the SEC forward-looking statement slide. So I'm sure all of you are familiar with this one, I won't read it to you, but we'll move on to the next slide. I think every company should start their presentation with what is our vision, our mission along with the values. And you can see what MDU Resources holds near and dear to our heart so far as from this slide with integrity, we are building a strong America while being a great and safe place to work that ties in with the essential service functions of what our company does. And certainly, we want to deliver superior value to our stakeholders by providing those essential infrastructure and services to America. And as I walk through our various business lines, I think they speak volumes as to really following what that mission is as well. And you can see on the bottom there, our 8 values that we have starting really with integrity and the others as well. So next slide, Kayla. If we take a look at our results of '21 versus '22, you can see your operating revenues went up nicely on a year-over-year basis. Some of this was inflation and responding to certainly to inflation. You can see our EBITDA grew on a year-over-year basis as well nicely. However, you can see adjusted net income, and I say adjusted net income is virtually flat on a year-over-year basis, up slightly. We have adjustments here. We make some reconciliations towards the other presentation, but the adjustments are really due to some of the transactional costs that we're incurring from some of our strategic initiatives that are underway. And so I will be talking about what those strategic initiatives are both within our materials business and our construction service business as well. On the bottom right, you can get a sense, again, adjusted earnings on $1.87 flat year-over-year. I think noteworthy though is how we ended the year last year, particularly the back half of the year and accelerating here in the fourth quarter going from $0.42 per share to $0.61 per share on a quarter-over-quarter basis between '21 and 2022. Next slide, Kayla. So as we think about our businesses that we have today, and I say today, because we are going through some strategic review in one of our businesses, and we also have announced our intent to separate in a tax-free transaction, our Knife River Materials business, which I'll talk about later. But as we think about our businesses today, we have really 2 platforms of business, one being regulated energy delivery, and also in the construction business. And you get a sense of kind of how the pie chart is on an EBITDA as well as an earnings basis based on the various components of the business. In the regulated business, we really grow that business primarily by investing in the safe and reliable operation of our 8 state utility footprint, serving those 1.2 million customers, both electric and on the natural gas side. We're vertically integrated on the electric side. We're an LDC on the natural gas distribution side. Also, we have a pipeline business that's in 5 states, covering Western Minnesota, the Dakotas, Montana and Wyoming. And it serves kind of bringing gas to the city gate to much of those same LDC communities, along with serving some of the third-party gas needs that the Bakken produces getting that gas to market as well. And you can see the component there is the orange component within EBITDA as well as earnings. The construction side of the business are really 2 businesses that we have grown through M&A roll-up in the last 25 to 30 years, both in the material space and in the construction service space. And I think there, again, they are meaningful cash flow providers to the full organization, and they do pretty well from both an EBITDA and earnings perspective and have created value for our shareholders. Next slide, Kayla. We did a little bit different approach to our guidance for 2023 as opposed to prior years, given that we have the strategic review and our intent to look to separate Knife River here in the second quarter, actually we've defined in 2023. And so we thought more meaningful was some guidance by business segment as we look to -- the future look at our corporation, we believe, will look different as we start the year versus as we end the year. We did -- on a combined basis, our regulated energy delivery business, and this is all going back to February 9. We believe earnings in the range of $140 million to $150 million. We think PE is the way most folks look to value that line of business. In the services area, construction services, here, typically, we would provide revenue guidance, and we do $2.75 to $2.95 billion, that's up from about $2.7 billion in revenue is when we ended 2022. So you can see growth and then about $200 million above that from a revenue. And I think as are more important, we also know that it's higher margins are expected compared to 2022. I mean they were also guiding EBITDA range between $200 million to $225 million. Our EBITDA last year in this business was roughly $193 million. And so I think we're guiding to growth in services, topline, margin wise and also EBITDA perspective. In Construction Materials, we ended last year at about $2.5 billion. So you can see that's our starting point for 2023, and growing to somewhere plus-or-minus $200 million in revenue throughout the year. We're here again though, we also expect higher margins than what we saw in 2022. And we're not qualifying that as slightly higher or comparable. We do believe it will be higher. And our EBITDA range here is $300 million to $350 million. We ended last year to roughly $306 million in EBITDA in our Materials business. So again, guiding at that level and growing potentially up to $350 million in 2023. Next slide, Kayla. So far as our strategic initiatives, I noted this earlier, but I think very important to talk about is we announced to the world publicly in August 4 of last year. The Board's unanimous decision to direct management to move forward with a plan to look to separate Knife River, our Materials business and a tax-free transaction. At that time, we said sometime in 2023, we narrowed that time frame to the second quarter of '23 when we announced that about mid-December of last -- of 2022. And so that's a heavy focus of our work stream that we're doing as Knife River, and I'll talk about a little more specifics to that in some later slides. We also announced in early November about our intention to have a strategic review of Construction Services Group. The strategic review, we were asked at our earnings call, what does that mean, Dave. I said it's a review of the business. We do believe that our future state at MDU at some point in the future will be a pure-play regulated utility, electric gas along with a FERC-regulated pipeline. But then we also view that services while top-performing business, the review could result in a sale, could result in a spin, could result in a merger, combination of those or some other type of transaction as well. And so I'll touch on that in just a few minutes. Next slide, Kayla. We think it's important for investors to get a sense of, again, the earnings contribution, the EBITDA contribution. And also what businesses are needing and deploying capital in their business because we have some more capital-intensive businesses like our Utility business and more capital-light businesses like our Services business. And so I won't go through these numbers one by one, but you get a sense that some of the balance that we have currently. But then as we migrate in this slide is after the Knife River separation, you can see how CapEx becomes roughly 80% of the utility add in the pipeline. It's over 90% of our expected forward CapEx. And yes, here is if we think about as a future pure-play post-construction services, you get a sense that it's about 1/4, 3/4 on an earnings potential so far as the business is at the regulated pure-play would be, again, capital about 86%, 14% between the utility and the pipeline business as well. And you get a sense of the EBITDA split about 80-20 as well. Next slide, Kayla. Talking about the segments in particular. Here's our electric and gas footprint for our Utility business, roughly 1.2 million customers over this service territory from Western Minnesota to the Puget Sound. We have electric business in North and South Dakota, Montana and Wyoming, and we have natural gas in all 8 of those states. You get a little bit of the metrics. We are vertically integrated on the electric side. Own self generation, transmission and also the town distribution. And then you get a sense, I think, in particular, the rate base that we have between both -- this is roughly $3 billion of rate base across this footprint for electric and gas utility. And you get segment EPS based on our current outstanding shares so far as last year right at about $0.50. I think importantly, too, in 2027, if you roll forward, we've put our 5-year CapEx. Refresh that back in November roughly, we have $3.5 billion across the corporation, of which this segment is earmarked for about $2.1 billion of CapEx over the next 5 years, which then net of depreciation would yield a little over $4.1 billion in rate base at the Utility business. Next slide. Last year, we had a year that was essentially flat in earnings on a year-over-year basis despite about 1.6% customer growth and we did grow some of our rate base. The third bullet there does talk about, we had an offset of about $0.05 per share, about $11 million. So from a mark-to-market, it's a noncash issue, but it is a mark-to-market on some nonqualified benefit plans that I think had a fairly material effect on a year-over-year basis. We know, again, it was noncash, but we had to mark those to market. We saw -- given what the markets did last year, we're probably not alone in that regard, but it didn't trigger any sort of cash call from a typical pension planning and really it's a mark-to-market. We did have higher retail sales, which was positive in the year. And we also had some regulatory outcomes we thought that were fair and decent. But again, we had some headwinds really on the investment return side that really resulted in a flat year, year-over-year. Next slide. Part of our energy transition at our utility, certainly, like many other utilities across the nation is as we move to a less of a carbon footprint across our generation mix. You can see we're roughly about 1/3 natural gas today, about 1/3 renewables and about 1/3 coal. And that's evolved over time where we were the majority coal, not that many years ago, supplemented by some natural gas peaking and then we started adding renewables into our fleet in the mid-2000s, 2006, 2007 era. And again, today, we're roughly about 1/3, 1/3, 1/3. And so you get idea we've actually -- I think the next slide, Kayla, if you turn to that one. Some of our growth here, certainly as we retired some of our wholly-owned coal plants, both Heskett-1, Heskett-2 and Lewis & Clark. You get a sense from our rate base, customer growth is about 2% annually. If we look backwards, we're forecasting between 1% and 2%. It was 1.6% last year. So that really compares, I think, pretty favorably across the nation from a customer growth perspective, which I think underpins that need to add to the rate base just to serve those new customers. You get a sense so far as our rate base projection, we did up this with a $2.1 billion forecast of capital for this business back in November. If you roll that forward, it's roughly a 6.5%, 6.7% CAGR of rate base between now through that 5-year period, which, again, we would expect there'd be some correlation to rate base growth to earnings growth with proper regulatory activity to kind of tie that regulatory lag together. Next slide. We think we do have constructive regulatory mechanisms and also relationships across our 8 states. You get a sense of what our earnings growth has been. If we go back to 2007, which was a time actually, I became President of the Utility and then Nicole has been President of the Utility since actually 2015, and you can see that's been continued that growth over that period of time. We do have a number of trackers. We have PGAs across all 8 states. We have fuel clause adjustments on the electric side. We have some states that have pipeline trackers, both Washington and Minnesota have that. We have other states that have renewable riders, transmission riders, generation riders in the form of adding more renewables into the fleet as well. And so kind of a number of regulatory mechanisms, and we look to add more with each of our general rate cases that we file. Next slide. The CapEx, really, I touched on this earlier. Again, roughly $2.1 billion over the next 5 years. You can see here, we're kind of focused on '23, and you get a sense where our historical capital has gone just to give a kind of a balance there of what we've been investing capital. But clearly, we see increased CapEx opportunities over the next 5 years. Front and center for us is a Heskett Unit 4, which we've named this 88-megawatt simple-cycle gas turbine. We expect that to be online this summer. Again, it's natural gas. Yes, I acknowledge that. It does burn fossil fuel, I acknowledge that, but it will be run simply when the hottest of summer days, coldest of winter nights from a reliability perspective and all of our regulators are quite supportive of energy reliability. So it's a nice complement to our existing fleet. Next slide, Kayla. Certainly, we have an environmental focus. I talked about reducing our greenhouse gas reduction. You can see we really achieved about a 40% reduction in our intensity since 2005 levels to last year. Our stated goal in this area is a 45% reduction. In addition to this, we have baseline our scope 1 and scope 2 carbon emissions here in 2022. And look for us to do an analysis of that and come out publicly more later this summer in our sustainability report on how we view our path forward so far as from a reducing our carbon footprint and our carbon intensity as well. Some of our activities I noted earlier about the retirement of some of our coal facilities. I've already touched on those. And as we've talked about renewable energy, I think I already touched on, it's a significant portion of our fleet today, and we really see probably, probably most likely a combination of wind resources tend to work best in our service territory, given our part of the country that we're in, along with probably backed up by firming by peaking gas as to help firm up those intermittent resources. Next slide. An area that we've moved into more heavily recently, although we've been in the renewable natural gas business for about a dozen years. We actually have owned a facility in Billings, Montana. It's part of our -- we own that facility in partnership with the city of Billings. But more recently, we continue to add third-party natural gas producer, renewable natural gas producers particularly out west, in Washington, Oregon and also Idaho. Here are some examples of third parties entering our system. Some of these we take a portion of their natural gas produced under long-term contracts. Other cases, we may be actually moving their gas to other markets. We do look for opportunities to actually own some renewable natural gas, particularly out west, where we have a favorable regulatory environments for kind of deep decarbonizing or reducing the carbon intensity of our natural gas stream. And so look for more opportunities in renewable natural gas as we look to kind of take advantage of the regulatory signals that we're getting from those particular commissions. Next slide. Our pipeline business, I mentioned the 5 states that we're in. We -- at one time, we're part of the same LDC that we have separated out the Montana, Dakota. We separated those about 35 years ago. You can see we've got access and own North America's largest storage field, which I think is very strategically located right next to the Bakken production. You can see that in the dot there between the Montana and North Dakota line. Here, we have about $750 million of rate base. If I add that to the $3 billion that the utility has, about $3.7 billion of current rate base end of year. And if you add the 2 together, over the next 5 years, it will be slightly north of $5 billion in rate base as we think about the future state of MDU Resources and you get a sense what our segment EPS there as well. Next slide, Kayla. Pipeline earnings were actually off last year on a year-over-year basis. Some of this was, as we brought our North Bakken pipeline on. We knew we had a ramp in year, year 1. That was some of the results of some of the lower negative oil prices we saw in early 2020, but to keep our shipper group together, we lowered our first year volume needs, and then we extended out the contract. So basically, there were on a discounted cash flow kind of held harmless on one, but we got an extra year, maybe a little higher rates from others. And so we had a ramp in year, added depreciation there. We certainly expect to have a little different outcome as we think about our overall guidance between the electric and gas utility in the pipeline that I mentioned earlier. Like the fact that North Bakken is in service, it provides some upside possibilities for us. We did have record transport volumes across our system last year, and I think we expect that trend to likely continue as well. And then in '21, we did have the benefit of the AFUDC as we're putting that pipe into service. So some of the subtle differences there, but net income-wise under GAAP, we had a decline, but for the added depreciation and absence of AFUDC primarily. Next slide, Kayla. CapEx in this business, you can see in '21, that was the North Bakken expansion, which was roughly $260 million or so investment. You can see going into '23 that we are, we're -- have a stronger investment that some of those 4 projects and parts of those 4 projects that I mentioned earlier. But you get a sense that we have project specific, we really lean into those projects. In other years, we have maybe modest CapEx needs. But again, it's based on opportunity set that we have. Next slide, please. Here's a sense as we evolve our business for WBI. We've been in the gathering business. We've been in the processing business. We just felt overall, we wanted to be at the in the shipper business, the pipeline business and the storage business. And that's really where we're at today, about over 90% of our business comprises our transport and our storage services. And then we have a little bit of some nonregulated projects there, but that's a pretty small slice at about 8%. Kayla? I talked about some of these projects earlier. So in the efforts of time here, I won't belabor these, but you get a sense just that's some more detail if you like to read those. Certainly, sustainability is important in this business. Lots of words on this slide. If you'd like to go through those, I'd point your attention to the one future that we joined. That's really the lot of the natural gas pipelines across the country pledging to do better so far as methane releases, and we think that's good for the long-term benefits of the industry. We joined that last year and doing our part there as well. Kayla? Now I'd like to talk about Construction Services. So Services is a business we started 25 years ago. Fast forward to last year, it was our strongest earning business at $124 million, $193 million of EBITDA. It's a capital-light business and employee-strong. You could see almost 9,000 employees at peak season. And you get a sense from the bar charts below that you can see the kind of nice growth we've seen both in backlog in this business, segment earnings in this business and also EBITDA in this business. And we ranked #12 on ENR's top 600 specialty contractors. I think we're probably more importantly, we're ranked #5 nationally as an electrical contractor, which is what we think we do pretty well. So next slide. Earnings in this business, I noted the $15 million increase in earnings on a year-over-year basis. Really, again, record revenues, record net income, record EBITDA and record employment levels and record backlog ending the year at $2.1 billion, which I think helps kind of set us up for what we think will be a nice favorable 2023. Next slide, Kayla. Certainly, we think we're a market leader. We give some keynote projects here. I'll leave you to read those MSG Sphere in the Vegas area, Resorts World in Vegas, large-scale solar. We've got a number of states that were in there as well. You can see some of the brands that we do our business under here as well. But certainly, our ability to do this work is really contingent on what we've done for those same or other owners in the past. So the last good project you complete help set you up for the next project for you to be able to bid on. Next slide. A couple of slides left. Construction Materials, here are the 14 states that we operate in. This was a roll-up strategy started 30 years ago, and this is the business we are looking to, and Board's authorized a plan to separate in a tax-free transaction to our shareholders here in the second quarter. You get a sense of the footprint we're in. We like the geographic diversity. We have 1.1 billion tons under reserves, and we produce that from some 188 sites across this 14 state footprint. You can see revenue at $2.5 billion. EBITDA, around $300 million in this business, and we're certainly a top 10 aggregate producer across the nation. Next slide. Last year, earnings were down. Some of that was due to inflation definitely. And I would say the front half of the year in 2022, we were still catching up with our inflationary costs and our price increases were not offsetting that. The back half of the year, a much different story, which led as we saw in the fourth quarter, that $0.42 per share to $0.61 per share consolidated was really also help, Materials division did their help to really self-support that EPS growth in the fourth quarter. Next slide. That is -- I know that was a lot. We're really proud of our businesses at MDU, but I would like to open it up. I see we've we got 5 minutes or so left for questions that you might have. Brian?

Well, thanks, Dave. [Operator Instructions] So Dave, maybe I'll start off and considering the Knife River is moving forward with the plant spin sometime in the second quarter. Could you just elaborate on the competitive strengths of Knife River maybe relative to other peers, whether it's geographic diversification, end market mix? And I think just as important as the vertical integration business model.

Absolutely. So Knife River, it really starts with the aggregates at 1.1 billion tons of reserves that underpins really all of our operations, and then we take that aggregate and we convert it into just base rock possibly or we move it and add some cement and sand and water and make ready-mix or asphalt oil and have an asphalt product for roads and parking lots and things like that. For us, we like the 14 states that provide some geographic diversity. Much of our competition tends to be, I'll say, small to medium private companies. We don't come -- we have some interface with some of the publics out there, but much less so than probably than if we were in the South or Southeast, if you will. I mean, Texas, we certainly have some overlap. Northern California, we do as well. But at the same time, we like that we -- it starts with our rock, and we do like our downstream activity so far as adding construction. Now we are a materials-based and materials-led business, about 62% of our revenues last year at Knife River, came from materials. About 38% was construction. So I think -- materials-led is also represented by our revenue and then we could break down that 62% into, again, base rock, ready-mix, asphalt, other products like asphalt oil, prestress products that go into building materials and bridges and girders and things like that. But it's very much materials-led, and I think that really underpins some of its competitive advantages.

Okay. Great. And then maybe similar question on the construction services side. If you could just -- given that strategic review is ongoing. What are the competitive strengths of that?

So our services business has evolved over time. It's a mix of businesses today, about 1/3 I will say, be more T&D related that we have utility or utility-like customers in that space. And so we know that space well because of our regulated lineage within MDU. But about 1/3 of our business last year was in the T&D space. The other 2/3 was in the E&M space, and I would say it's kind of big E, small M, meaning it's kind of dominated by electrical. We do some mechanical, but it's very much electrical base. Again, I think that goes to why we are the #5 electrical contractor by revenue across the U.S. That affords us a certain amount of scale and affords us also a certain amount of ability to do larger projects like the several that I showed in the slide earlier, some of the pictures of MSG Sphere, Resorts World or some of the solar work that we do as well. And so it kind of allows us, if you will, that we are able to do projects of commercial/industrial size up to more hyper projects and the whole movement of kind of electrification of the economy, I think it bodes very well for this business and what it does.

Okay. Great. And then lastly and real quickly because we're just about out of time. What are the advantages of operating a multi-state utility? Whether it's from a regulatory perspective, weather perspective or local economy sensitivity?

Yes. Yes. We -- it certainly provides us some regulatory diversity. We don't have all eggs in one basket, given a pending general rate case and it's -- all of them are important, don't get me wrong, but as we have our rate base spread out over those 8 states, all are meaningful, but they aren't like -- we're only in one state, so it's kind of a make-or-break kind of thing. Also, we like the fact that our markets that we're in have experienced nice customer growth, 1.6% customer growth last year, 2% historically over the last 5 years. You can see that our service territory continues to gain customers and not all utilities can say that as well. And so yes, there's weather differences. We can have weather patterns warmer than normal, colder than normal over those 8 states as well. We do have mechanisms in place, normalization, some decoupling some that are higher kind of base rates that kind of normalize that. So we like the multiple state. It's more work, certainly regulatory-wise but it's again, adds to that whole kind of geographic and regulatory diversity.

Okay. Well, we are out of time. So I'm going to thank Dave and the MDU team for participating at the Sidoti conference today and all the participants involved. Thank you. That concludes today's presentation.

Thank you, Brian. Thanks, everybody. Bye now.