MDU Resources Group's CEO David Goodwin on Q3 2017 Results - Earnings Call Transcript

MDU Resources Group Inc (NYSE:MDU) Q3 2017 Earnings Conference Call November 2, 2017 2:00 PM ET

Executives

David Goodwin - President and Chief Executive Officer

Jason Vollmer - Vice President, Chief Financial Officer and Treasurer

Operator

Hello, my name is Shelby, and I'll be your conference facilitator. At this time, I would like to welcome everyone to the MDU Resources Group 2017 Third Quarter Conference Call. [Operator Instructions] This call will be available for replay beginning at 5 PM Eastern Time today through 11:59 PM Eastern Time on November 16. The conference ID number for the replay is 88177171. The number to dial for the replay is 855-859-2056 or 404-537-3406.

I would now like to turn the call over to Jason Vollmer, Vice President, Chief Financial Officer and Treasurer of MDU Resources Group. Thank you. Mr. Vollmer, you may begin your conference.

Jason Vollmer

Thank you, Shelby. Welcome to our third quarter earnings release conference call. This conference call is being broadcast live to the public over the Internet, and slides will accompany our remarks. If you'd like to view the slides, please go to our website at www.mdu.com and follow the link to the conference call. Our earnings release is also available on our website.

During the course of this presentation, we will make certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Although the company believes that its expectations and beliefs are based on reasonable assumptions, actual results may differ materially. For a discussion of factors that may cause actual results to differ, please refer to Item 1A, Risk Factors, in our most recent Form 10-K.

For our call today, I will discuss the key financial highlights for the quarter, and then turn the presentation over to Dave Goodin, President and CEO of MDU Resources, for his formal remarks.

Members of our management team who will be available to answer questions during the Q&A session today are: Dave Barney, President and CEO of Knife River Corporation; Jeff Thiede, President and CEO of MDU Construction Services Group; Nicole Kivisto, President and CEO of Cascade Natural Gas, Great Plains Natural Gas, Intermountain Gas and Montana-Dakota Utilities; Trevor Hastings, President and CEO of WBI Energy; and Stephanie Barth, Vice President, Chief Accounting Officer and Controller for MDU Resources.

Yesterday, we announced third quarter earnings of $89.6 million or $0.46 per common share from our continuing operations compared to $88.2 million or $0.45 per share in the third quarter of 2016. Our combined utility business reported $4.8 million for the quarter, up from $200,000 for the comparable quarter in 2016.

Our electric utility segment reported earnings of $15.7 million, which is an increase of $3 million over the third quarter of 2016. This business had higher electric retail sales margins from successful rate recovery and cost tracking mechanisms as well as increased sales volumes to all customer classes.

Increased operations and maintenance expense and contract service spending, partially offset this earnings increase. While our natural gas utility segment experienced a normal seasonal loss of $10.9 million for the quarter, this is an improvement over the $12.5 million loss we saw in the third quarter of last year.

The decrease in the loss was largely due to higher natural gas retail sales margins resulting from rate recovery, weather normalization, conservation adjustments as well as 2% higher retail sales volumes.

Earnings at our pipeline and midstream business were $6 million for the quarter compared to last year's third quarter earnings of $6.7 million. The decrease in the earnings reflects the absence in earnings from our investment in the Pronghorn assets, which were sold in early January of 2017.

Partially offsetting the decrease in earnings was revenues from record transportation volumes, primarily from increased off-system transformation related to our recently completed organic growth projects of that business.

Moving to our construction operations, our construction services business continues to produce exceptional earnings growth with earnings of $13.1 million in the third quarter. This is an 82% increase in earnings compared to last year on 33% higher revenues.

This quarter's increase reflects higher outside construction margins largely from construction work in areas impacted by hurricane activity. The third quarter earnings were also positively impacted by higher equipment sales and rentals and higher inside construction margins.

While achieving record revenues in the quarter, the construction services business also increases its backlog by more than 31% over last year, ending the quarter with $676 million in backlog.

Our construction materials business had a solid third quarter with earnings of $63.2 million, down slightly from last year's record of $69.5 million. The decrease in earnings reflects lower asphalt product margins due to increased competition in certain regions, resulting in lower volumes and lower construction margins due to less available work in our energy-producing states.

Construction materials backlog at the end of the third quarter was $520 million, down from $580 million last year.

Now I'll turn the call over to Dave for his formal remarks. Dave?

David Goodwin

Thank you, Jason, and good afternoon, everyone. Thank you for your interest in MDU Resources and for taking time to join us today to discuss our third quarter results.

We released third quarter 2017 earnings yesterday after the market closed. We had a solid third quarter and reported a $0.01 increase in earnings per share from our continuing operations compared to 2016.

Our third quarter results continue to show the strength of our two-platform business model as higher earnings at the utility and construction services businesses helped to offset the impacts of a shortened construction season at our construction materials business.

Third quarter highlights for our utility companies include significantly higher earnings year-over-year due to implemented rate relief, higher electric and natural gas sales volumes as well as conservation adjustments and weather normalization.

Our utility continues to seek regulatory recovery for costs associated with upgrading and expanding our facilities, so we can safely meet our growing customer demand. In the third quarter, our natural gas utility filed rate proceedings in Montana, North Dakota and Washington.

On a combined basis, in January 1, our utility has received and implemented final rate increases totaling $37.3 million in revenue. In addition to these finalized rates, the utility has $15.4 million of rate relief in pending cases.

Looking ahead, the utility expects its 1.1 million customer base to continue to grow by 1% to 2% annually. The natural gas utility will continue to focus on pipeline projects to enhance system reliability, safety as well as deliverability. The electric utility plans to finish construction in 2019 on our 160-mile FERC regulated 345 kv transmission line from Ellendale, North Dakota to Big Stone City, South Dakota.

The electric utility is filed in 2017, our North Dakota Electric Integrated Resource Plan and its 2017 Montana IRP as well. These plans include the proposed purchase of the Thunder Spirit Wind farm expansion project, along with the development and design of a large combined cycle natural gas-fired facility expected in the 2025 time frame.

With regard to the Thunder Spirit Wind farm expansion, in December of 2016, we signed a 25-year agreement to purchase the power from the project, which is being built by a third party and expands our existing Thunder Spirit Wind farm to approximately 150 megawatts. The agreement included an option to buy the project at the close of construction. The original Thunder Spirit Wind farm purchased in December of 2015 includes 43 turbines and this expansion will include 16 additional turbines.

Near the end of the second quarter, we filed a request with the North Dakota Public Service Commission for an advance determination of prudence with regard to the purchase option. We are excited about moving forward with the purchase option if approved by the North Dakota PSC, as the expansion will continue to increase our renewable generation portfolio from currently 22% to then will be 27% of our nameplate capacity.

At our pipeline business, we also had a solid quarter, with record transportation volumes helping to offset the absence of earnings from the Pronghorn assets that were sold in early January for approximately $100 million in proceeds.

We recently announced that Trevor Hastings is now President and CEO of WBI Energy as well. Trevor is an outstanding leader who has been with the company for 21 years and has an excellent understanding of our corporation and is ideally suited to lead the pipeline group's continuing success.

As you may recall, the Charbonneau and Line Section 25 expansion projects, which include a new compressor station as well as other compression additions and enhancements, were placed into service in the second quarter. It is organic growth projects like these that will allow the pipeline group to increase transportation volumes that will, over the long term, equate into earnings growth.

Other long-term growth opportunities for the pipeline business include the Valley Expansion Project. In October of last year, WBI Energy received FERC approval on its prefiling for the Valley Expansion Project.

As you'll recall, this pipeline project is approximately 38 miles and will deliver natural gas supply to Eastern North Dakota and far Western Minnesota. It will connect the Viking Gas Transmission Company pipeline near Felton, Minnesota to our existing pipeline near Mapleton, North Dakota. And it is designed to transport 40 million cubic feet of natural gas per day.

The cost of the expansion project is estimated at $55 million to $60 million. WBI Energy filed its FERC certificate application for the Valley Expansion Project in the first quarter of this year. After we receive the necessary permits and regulatory approvals, construction on the project is expected to begin early next year with completion slated for late 2018.

Also on June 29, WBI Energy announced plans to expand its Line Section 27 natural gas transportation system located in Northwestern North Dakota. This $27 million to $30 million project involves constructing approximately 13 miles of new pipeline and associated facilities.

As designed, the expansion will increase the capacity of the Line Section by more than 200 million cubic feet per day, bringing the total capacity to over 600 million cubic feet per day. The company already has long-term commitment supporting this expansion, and we expect the project to be in line in 2018 as well.

Now I'd like to turn over to our construction businesses and talk about them for a little bit. At MDU Construction Services Group, they continue to produce exceptional earnings growth with an 82% earnings increase quarter-over-quarter on record revenues. This business continues to see demand for its high-tech mission-critical work, and in the third quarter, we saw stronger equipment sales and performed emergency power line repair work in areas impacted by hurricane activity.

After a second consecutive quarter of record revenues, we have increased our 2017 revenue guidance for the construction services business to a range now of $1.25 billion to $1.35 billion. Backlog now stands at $676 million at the end of the third quarter, and we are excited about the opportunities this business has on a go-forward basis.

On the construction materials side, we continue to be optimistic about the opportunities in front of our business and believe that our 1 billion tons of aggregate reserves located in strong markets across the country makes us well positioned for any infrastructure upside we may see in the future.

Knife River's operations are well positioned to benefit from those states such as: in California, the California Road Repair and Accountability Act of 2017, which over the next 10 years is expected to raise $52.4 billion to fund road maintenance and rehabilitation; and also in Oregon, House Bill 2017 is an approved $5.3 billion, 10-year transportation package that is designed to relieve congestion, increase transit spending and upgrade cycling infrastructure as well.

The congestion relief efforts in this package includes plans to widen freeways, upgrade roads and bridges and improve miles of sidewalks and bike lanes. And in Minnesota, the annual bonding bill may be also a benefit. This is a $988 million bill that will fund public works projects, including investments in state universities, hospitals, water infrastructure and local road improvements.

Knife River had a solid third quarter, although down from last year's record earnings. Due to a shortened construction season, we have lowered our revenue outlook at this business to a range of $1.7 billion to $1.8 billion.

With a strong backlog at $520 million, we're optimistic about this business going forward, and we're well positioned to take advantage of infrastructure spending projects as they are released at the state as well as the federal level.

Before I conclude and move on to our Q&A session, I do want to express my condolences to victims of the natural disasters and other tragedies that have hit many areas of our country this year. Some of the areas we serve and that our employees call home were particularly hard-hit, including hurricanes near the Gulf Coast, fires across the West Coast as well as the tragic concert incident in Las Vegas.

While our employees are all safe and accounted for, a number lost their homes to flooding or fires. Our thoughts continue to be with our employees and communities as we find ways to help.

And so, to conclude, I want to reiterate that we're pleased with our third quarter results. And based on these results and our forecast for the remainder of the year, we are narrowing our earnings guidance to a range of $1.10 to $1.20 per share.

We're also pleased about the continued returns to our shareholders, including our dividend that we have paid for in the last 79 straight years uninterrupted and increased it for the last 26 consecutive years.

At MDU Resources, we are committed to operating with integrity and a focus on safety while creating superior shareholder value. This is why we continue to build a strong America.

I appreciate your interest and commitment to MDU Resources and ask that we open the lines to questions at this time. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] This call will be available for replay beginning at 5 PM Eastern Time today through 11:59 PM Eastern Time on November 16. The conference ID number for the replay is 88177171.

And at this time, we have no questions in queue. I would now like to turn the conference back over to management for closing remarks.

David Goodwin

Thank you, Shelby. And as I said earlier, our continuing operations delivered strong results for the third quarter of 2017. At MDU Resources, we're committed to building a strong America and are optimistic about our opportunities for the rest of this year as well as beyond. We appreciate your participation on the call today, and thank you for your continued interest in MDU Resources. Shelby?

Operator

This concludes today's MDU Resources Group conference call. Thank you for your participation. You may now disconnect.