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

Ladies and gentlemen, thank you for joining us, and welcome to the MDU Resources Group, Inc. Q2 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Brent Miller, Treasurer of MDU Resources Group. Brent, please go ahead.

Thank you, and welcome, everyone, to the MDU Resources Group Second Quarter 2026 Earnings Conference Call. Our earnings release and supporting materials for this call are available on our website at mdu.com under the Investors section. Leading today's call are Nicole Kivisto, President and Chief Executive Officer; and Jason Vollmer, Chief Financial Officer of MDU Resources Group. During today's call, we will make certain forward-looking statements within the meaning of the federal securities laws. Please refer to our SEC filings for a discussion of risks and uncertainties that could cause actual results to differ. I will now turn the call over to Nicole for her prepared remarks. Nicole?

Thank you, Brent, and good afternoon, everyone. We appreciate you joining us today and for your continued interest in MDU Resources. This morning, we reported second quarter 2026 earnings of $21.3 million or $0.10 per share. Our results reflected continued execution across our regulated utility and pipeline businesses. New rates, customer growth, investments such as Badger Wind Farm and higher retail sales volumes helped drive the results. We delivered solid results while also continuing to advance strategic infrastructure opportunities that continue to support long-term growth. A key highlight for the quarter was certainly the continued advancement of the proposed Bakken East pipeline project. With recently signed precedent agreements, we now have executed agreements with all customers that submitted binding open season interest, totaling nearly 1.2 billion cubic feet per day of transportation capacity with a negotiated option in place that may increase contracted volumes to nearly all of the original interest from our binding open season. We continue to design the project for 1.4 billion cubic feet per day of transportation capacity. Overall project design is being finalized based on confirmed customer volumes and delivery locations before a final investment decision is made, which is expected ahead of a FERC 7(c) filing. This application is now anticipated to be filed in the fourth quarter of 2026. The proposed in-service dates of Phase 1 in late 2029 and Phase 2 in late 2030 remain unchanged. As development progresses, we continue to evaluate financing, partnership and other commercial options to support the projected $2.7 billion to $3.2 billion project. The potential Bakken East investment remains incremental to our current capital program. We also continue to see encouraging development activity across our service territory, including data center opportunities and broader infrastructure demand. Our approach to serving data centers is grounded in protecting existing customers and ensuring that growth creates value for the communities we serve. Data center customers are responsible for paying the costs associated with connecting to and being served by the electric system, including infrastructure and energy-related expenses. At the same time, the additional revenue generated from serving these customers can help support the electric system and contribute to reducing certain fixed costs for existing retail customers by allocating them across a broader customer base. This current approach creates benefits for all customers. During the quarter, we did enter into an electric service agreement with Applied Digital to serve Polaris Forge 3, an AI factory near Center, North Dakota. At full capacity, the campus would require 430 megawatts of electricity. Approval of the ESA and other regulatory filings by the North Dakota Public Service Commission is pending. We now have over 1 gigawatt of data center load under signed ESAs with approximately 240 megawatts currently online with additional volumes expected over the next few years as additional buildings are constructed. On the electric regulatory front, we did file a North Dakota general rate case on June 30, 2026, requesting an annual revenue increase of approximately $34.5 million with interim rates of approximately $26.3 million requested to begin on September 1 of this year. The filing reflects electric infrastructure investments, normal depreciation, reliability improvements, system safety and higher operation and maintenance expense. In Montana, interim rates reflecting an annual increase of approximately $10.4 million remain in effect subject to refund and a settlement agreement of $10 million has been filed in its pending commission approval. In Wyoming, our general rate case settlement was approved for an annual increase of $5.8 million with rates effective April 1, 2026. Also in June, the North Dakota Public Service Commission approved the route permit for the Jamestown-to-Ellendale transmission project. This project is expected to enhance reliability, improve resiliency, reduce transmission congestion and support access to lower-cost energy across the region. At our natural gas distribution segment, positive regulatory outcomes in Idaho, Washington, Montana and Wyoming, as well as higher retail sales volumes and continued customer growth supported improved year-over-year results. In Washington, we did file a multiyear natural gas case requesting an annual revenue increase of $25.1 million in year 1 and $18.1 million in year 2. Our Oregon general rate case remains pending with a multiparty settlement agreement, which was filed on July 31, 2026, with a requested annual increase of approximately $12.2 million. We also do anticipate filing a Minnesota general rate case later this year. At our pipeline segment, strategic growth initiatives continue to advance. The Line Section 32 expansion project remains on schedule following our FERC Section 7(c) application filing in March of 2026 and continues to target a late 2028 in-service date, subject to regulatory approvals. Development activities for the potential mine and industrial project also continue under agreements currently extended through late 2026. In addition, our pipeline business filed a FERC rate case on May 29 of this year, requesting a $31 million annual revenue increase. Approximately 30% of the requested revenue increase is due to proposed new depreciation and amortization rates. FERC accepted and suspended the proposed rates on June 30, with rates to become effective December 1, 2026, subject to refund and the outcome of hearing procedures if a settlement with our customers and FERC is not reached. Looking ahead, we are reaffirming our 2026 earnings per share guidance range of $0.93 to $1. This guidance is based on assumptions, including normal weather, economic and operating conditions for the remainder of the year, continued customer growth, successful execution of approved capital investment programs and constructive regulatory outcomes. Our long-term earnings per share growth objective remains at 6% to 8%. Our capital program for 2026 through 2030 totals approximately $3.1 billion, with planned investments of approximately $1.1 billion in our electric business, $1.4 billion at our natural gas distribution business and $643 million at our pipeline. We remain focused on disciplined execution of this plan while advancing additional infrastructure opportunities that support customers, communities and stockholders. As always, MDU Resources is committed to operating with integrity and with a focus on safety. We remain dedicated to delivering safe, reliable, cost-effective and environmentally responsible energy services while positioning the company for compelling long-term growth. And with that, I will now turn the call over to Jason for the financial update. Jason?

Thank you, Nicole. As Nicole mentioned, we announced this morning, second quarter earnings of $21.3 million or $0.10 per share compared to $13.7 million or $0.07 per share for the second quarter of 2025. On a year-to-date basis, earnings were $102.1 million or $0.49 per share compared to $95.7 million or $0.47 per share for the first 6 months of last year. Turning to our individual businesses. Our electric utility reported second quarter earnings of $14.7 million compared to $10.4 million for the same period in 2025. Results benefited from higher retail sales revenue, including recovery mechanisms associated with renewable investments such as the Badger Wind Farm, which contributed $3.3 million in earnings during the quarter. Interim rates in Montana and new rates in Wyoming, along with higher retail sales volumes across all major customer classes also contributed to the increase. Our natural gas distribution segment reported a seasonal second quarter loss of $3.9 million compared to a seasonal loss of $7.4 million in the second quarter of 2025. The improved year-over-year results was primarily driven by new rates in Idaho, Washington, Montana and Wyoming, as well as higher retail sales volumes across all customer classes. Retail sales volumes increased 6.7% and customer growth was 1.6% year-over-year. These benefits were partially offset by higher interest expense resulting from higher long-term debt balances. The pipeline segment earned $14.4 million in the second quarter compared to $15.4 million in the same period in 2025. The decrease was driven by lower other income and higher depreciation and amortization expense from a growth project placed in service. These impacts were partially offset by continued customer demand for short-term natural gas transportation contracts and interruptible storage services, along with contributions from previously constructed growth projects, including a contracted volume increase. The other category reported a second quarter net loss of $3.9 million compared to a net loss of $4.7 million in the same period last year. The year-over-year improvement was primarily due to discontinued operations and associated with a $1.5 million tax benefit related to strategic initiative costs. We continue to maintain a strong balance sheet and ample access to working capital to finance operations through our peak periods. That summarizes our financial highlights for the quarter. We appreciate your interest in MDU Resources, and ask now that we open the line for questions. Operator?

[Operator Instructions] Your first question comes from the line of Constantine Lednev with Wells Fargo.

Actually, it's [ Andrew Kadavy ] on for Constantine right now. Maybe on the financing options for Bakken East. We've seen some peers use a variety of instruments to finance these bigger projects. Are you seeing any favorable markets out there that could help you efficiently finance the project?

Yes. Certainly, this is Jason. I can field that one. I think, again, as we've stated before, at this point, we're very excited to have reached executing all of the present agreements we have in place as we've been working towards that progress. We continue to look at all options as we think about financing a project of this size and scope. And I think, as you mentioned, we've seen others out there. So we've been very focused on getting these present agreements signed and getting to a point of a decision. And of course, you need to get in front of our Board to look at a final investment decision on this project. So I think it's safe to say we'll look at all options out there. We feel very confident in the ability to finance a project like this and certainly some good appetite out there for these types of assets today.

And would that, I guess, the financing options would be -- would that be part of the Board's FID decision? And is that selling schedule for the third quarter? Or is that -- were you looking at fourth quarter for that?

Yes. So right now, what we've stated a little bit of a new update in our release this quarter, we are looking to make our 7(c) filing in the fourth quarter. I think we would have previously looked at third quarter based on the schedule. Certainly, some of the present agreement negotiations took a little bit longer. As Nicole mentioned, these have been -- some of these recently signed here. So we will continue to bring our board up to speed on where we're at with the project. They've been certainly involved all the way along. Work is continuing on this project and has continued from the beginning since we started looking at this. So I'm not going to be specific on a time line date yet. I think we need to go through the process of now getting the right information in front of our Board to make a decision in the right manner. But certainly, what happened ahead of the 7(c) filing, which we are now expecting to happen in the fourth quarter.

Your next question comes from the line of Julien Dumoulin-Smith with Jefferies.

It's actually [ Tanner ] on for Julien. Thanks for the new Bakken East disclosures here. Could you maybe provide a little more information on the negotiated option in place, the strategic rationality behind it? And how you would classify the commercial alternatives and not taking the option?

Yes, I can take that. So I appreciate the question. And I guess I just want to start by echoing what Jason said. I really want to give a shout out to the WBI team, extremely proud of the milestone here that we announced today with the recently signed precedent agreements that get us to all customers really that were in the nonbinding open season showed up here. So that's real positive news. We did reference the option, as you mentioned. And essentially, what we've done with that customer is they're working -- all customers are working on timing with their applicable customers. And so we worked an arrangement out where they have an option to essentially add more volumes at an already negotiated agreement. And so essentially, if that happens, what we alluded to in the release is that gets us very close to that open season amount. Now saying that, I will say a key data point that we disclosed here also would be that we still are designing the project at 1.4 Bcf a day. So I feel good about that. And then just highlighting a couple of the other key updates, which Jason alluded to, too, which is with the precedent agreements being recently signed, we did allude to moving that 7(c) filing back to the fourth quarter and note that we would make a final investment decision ahead of that. In service dates, as we mentioned, they'll remain unchanged.

Understood. Great. Is the state backstop a portion of the executed agreements? Or have they or have you found an offtaker to stand in their place?

Yes. The state is part of the precedent agreement that we have signed.

Understood. And then maybe just following up on the Polaris Forge 3 here. You referred to the commission requesting approval. Can you speak to the magnitude of margin uplift here relative to what we're seeing at the Ellendale campus? And maybe zooming out since you've also recently just filed your electric rate case in the state. Does this give you confidence to be able to elongate the period between filings, given the support to earned ROEs from the capital-light ESA?

Yes, absolutely. We certainly are excited about the ESA that we signed as we disclosed, it's 430 megawatts. As you mentioned, rightfully so, we do have this in front of the state of North Dakota for approval. And so as you can imagine, we would be waiting to get the appropriate approvals before we'd contemplate including that in any of our numbers or providing any financial guidance. So right now, that would not be contemplated in what we're talking about from a long-term growth rate perspective. Certainly, the way we are working through these negotiations with data center customers, you've heard us talk about this in the past. We are working under a capital-light model as of today. And so incremental margin on data center load is a benefit to the company, but I would say it's also a benefit to our customers. So we really do feel like it's a win-win. So yes, there is a benefit to the company. But as we've talked about with investors in the past, we are sharing a piece of that margin with our retail customers. So they are getting a credit on their bill as well. And then in addition to that, the data center takes on more of that transmission expense that otherwise would have been allocated to our retail customers. So we're also seeing bill impacts, bill reductions to retail customers because of that. So that kind of gives you -- here's the company side of it, and here's the customer side of it. But the bottom line is the Center ESA right now, we are still waiting for approval and final move forward on that with the state before we would incorporate something like that in our guidance.

Your next question comes from the line of Aidan Kelly with JPMorgan.

Yes, of course. So I just want to hone in on Bakken East again, clearly, strong commercial momentum to date with the 1.2 Bcf secured you mentioned. And you're still kind of designing for 1.4 Bcf. I guess my question is, are there any factors that would cause you to expand the Bakken East pipe. I know in the past, you've kind of spoken to an overbuild scenario as a consideration. So just curious if you could comment on the potential there and your thoughts in general.