MDU Resources Group, Inc. (NYSE:MDU) Q3 2023 Earnings Call Transcript
MDU Resources Group, Inc. (NYSE:MDU) Q3 2023 Earnings Call Transcript November 2, 2023
MDU Resources Group, Inc. beats earnings expectations. Reported EPS is $0.38, expectations were $0.25.
Operator: Hello. My name is Cynthia, and I will be your conference facilitator. At this time, I would like to welcome everyone to the MDU Resources Group 2023 Third Quarter Conference Call. All lines have been placed on mute to prevent background noise. After the speakers remarks there will be a question and answer period. [Operator Instructions]. The webcast can be accessed at www.mdu.com under the Investor Relations heading. Select Events and Presentations and click Q3 2023 Earnings Conference Call. After the conclusion of the webcast, a replay will be available at the same location. I would now like to turn the conference 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, Cynthia, and welcome, everyone, to our third quarter 2023 earnings conference call. You can find our earnings release and supplemental materials for this call on our website at www.mdu.com under the Investor Relations tab. Leading today's discussion along with me will be Dave Goodin, President and CEO of MDU Resources. Also with us today to answer questions following our prepared remarks are Stephanie Barth, Vice President, Chief Accounting Officer and Controller of MDU Resources; Nicole Kivisto, President and CEO of our Utility Group; Rob Johnson, President of WBI Energy; and Jeff Thiede, President and CEO of MDU Construction Services Group. During our call, 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 more information about the risks and uncertainties that could cause our results to vary from any forward-looking statements, please refer to our most recent SEC filings. We may also refer to certain non-GAAP information. A reconciliation of any non-GAAP information to the appropriate GAAP measure, please reference our earnings news release. Along with our earnings release this morning, we announced in a separate news release that our Board of Directors approved a plan to spin off our Construction Services business to the shareholders of MDU Resources, which will result in 2 independent publicly traded companies.
The spin-off is expected to be tax-free to MDU Resources and its shareholders and be complete in late 2024. You can also find this release on our website at www.mdu.com. Dave will provide additional information on the spin-off later during the call. Prior to handing the call over to Dave for his formal comments and his forward look, I will provide consolidated financial results for the third quarter. This morning, we announced third quarter earnings of $74.9 million or $0.37 per share on a GAAP basis compared to third quarter 2022 GAAP earnings of $147.9 million or $0.73 per share. Third quarter income from continuing operations was $78.2 million or $0.38 per share compared to $42.3 million or $0.21 per share in 2022. It's important to note that with the spinoff of Knife River being completed, Knife River's results and other related impacts are reported as discontinued operations in our GAAP-based results for the current and prior year.
As such, with the completion of the Knife River spin-off and work continuing on the Construction Services spin-off, we are also reporting adjusted income from continuing operations to provide financial results that more closely correlate to and better outline the strength of our ongoing business operations. These adjustments reflect the May 31 spin-off of approximately 90% of the outstanding shares of Knife River Corporation including the unrealized gain on the retained shares as well as other items related to our strategic initiatives. For more information on these adjustments, please see the table provided on Page 7 of our earnings news release. We experienced very strong results from all of our businesses in the third quarter with adjusted income from continuing operations of $58.6 million or $0.29 per share compared to third quarter 2022 adjusted income from continuing operations of $42.3 million or $0.21 per share.
Turning to our individual businesses. Our combined Utility business reported earnings of $3.2 million for the quarter compared to earnings of $3.5 million in the third quarter of 2022. The Electric Utility segment reported third quarter earnings of $20.9 million compared to $21.6 million for the same period in 2022. The decrease was largely a result of lower residential volumes due to cooler weather and higher operation and maintenance expense, primarily payroll-related costs. Partially offsetting the decrease were higher retail sales revenue due to rate relief in North Dakota and Montana and an electric service agreement to provide power to a data center near Ellendale, North Dakota and also higher transmission revenue. Our Natural Gas utility reported a seasonal loss of $17.7 million in the third quarter compared to a loss of $18.1 million in the third quarter of 2022.
Earnings increased due to short-term debt interest recovery in Idaho, great relief in Idaho and Washington, which were partially offset by higher operation and maintenance expense, primarily payroll-related costs. Business also experienced a 9.3% decrease in retail sales volumes to all customer classes due to seasonal weather patterns, which was partially offset by our weather normalization and decoupling mechanisms. The pipeline business earned record third quarter earnings of $11.9 million compared to $9.8 million in the third quarter last year. The earnings increase was driven by higher transportation revenue primarily the result of increased contracted volume commitments from the North Bakken Expansion project as well as higher storage-related revenue and new transportation and storage service settlement rates that were effective August 1.
The increase was offset in part by higher operation and maintenance expense, primarily payroll-related costs. Interest expense also increased as a result of higher rates and higher debt balances. Construction services reported record third quarter earnings of $36 million compared to earnings of $28 million for the same period in 2022. EBITDA for the quarter increased $14.1 million compared to the prior year to a third quarter record of $58 million. Gross profit increased due to project mix in the commercial, renewable, institutional and utility markets, offset in part by lower industrial gross profit. This business also had higher selling, general and administrative costs, largely higher payroll-related expenses and higher interest expense from increased working capital needs and higher interest rates.
That summarizes the financial highlights for the quarter. And now I'd like to turn the call over to Dave for his formal remarks. Dave?
Dave Goodin: Thank you, Jason, and thank you, everyone, for spending time with us today and for your continued interest in MDU Resources. Today is an exciting day for our company, as we announced our plan to spin off Construction Services business from MDU Resources. Back on November 3 of last year, we announced the undertaking of a strategic review of this business and completed that review with the subsequent announcement on July 10 this year that we would pursue a tax advantage separation of the business. At that time, we mentioned our focus was determine the best method and timeline to effectuate a separation, which we are excited to announce today. We expect this spin-off to significantly enhance the value within our businesses and achieved our stated goal of transforming MDU Resources into a pure-play regulated energy delivery business.
I'd like to start by discussing our third quarter results and outlook at each of our businesses before providing an overview of the spin-off announcement. Our strong third quarter results continue the trend we have seen throughout 2023 of outstanding performance from all of our companies. We have had an active regulatory schedule in 2023 for our regulated energy delivery businesses and have seen the benefits of new rate implementations at our Electric, Natural Gas and Pipeline businesses. Our Construction Service business continues to report record results and has a strong backlog moving into the end of the year. And all of our businesses have exciting opportunities as we look to the future. At our Utility business, electric retail sales volumes for the third quarter were 36.6% higher than last year, and year-to-date are 23% higher than this time in 2022.
This quarterly increase is largely from serving a data center customer that was brought online here in the second quarter of '23. We have also filed a request with the North Dakota Public Service Commission to serve another data center that is expected to come online in 2024. We expect Heskett Unit IV to be operational before the end of this year, as construction is largely completed on the 88-megawatt natural gas-fired electric generating facility located near Mandan, North Dakota. It is currently undergoing performance and environmental testing. We also continue to expect to grow our rate base at our electric and gas business between 6% and 7% compounded annually over the next 5 years. This is driven primarily by investments in system infrastructure upgrades and replacements to safely meet customer demand.
We received approval in August on a settlement in our Montana electric case and rates took effect there on October 1. Also in August, we filed an electric rate case and a natural gas rate case, both in South Dakota. We also filed a natural gas rate case in North Dakota just earlier this week on November 1. Our Utility continues to seek timely regulatory recovery for investments associated with providing safe and reliable electric and natural gas service to our growing customer base, including a multiyear case that we expect to file in the first quarter of 2024 for the state of Washington. At our Pipeline business, here, we had a record quarter of earnings and year-to-date earnings, which are 19% higher than this time last year. This business also saw another record quarter of Natural Gas transportation volumes largely from increased contracted volume commitments on our North Bakken expansion project.
In August, the company settled its rate case with its customers and FERC staff. The new transportation and storage service rates, which are pending final FERC approval took effect here on August 1. And are expected to result in a 7% revenue increase or approximately $10 million on an annual basis. We began construction in the second quarter of this year on 3 natural gas Pipeline Expansion projects. Two of these projects were placed into service on November 1 and will add additional Natural Gas transportation capacity of 119 million cubic feet per day. The third project is expected to be completed here in early 2024, and will add an additional Natural Gas transportation capacity of 175 million cubic feet per day. On October 19, WBI also received FERC approval for its Wahpeton Expansion project slated for Eastern North Dakota.
This project will allow for an additional 20 million cubic feet of Natural Gas transportation capacity per day to the region and is supported by long-term customer commitments. Total cost for this project is approximately $75 million and is expected to be in service in late 2024. With the strong start to the year for our regulated energy delivery businesses, we are increasing earnings guidance for these businesses to now a range of $155 million to $165 million, up $5 million from our previous range of $150 million to $160 million. As I mentioned previously, our Construction Services business continues to see record results and strong ongoing demand for its services. We saw a record third quarter earnings and EBITDA and year-to-date earnings and EBITDA are up 20% and 21%, respectively, when compared to the same time last year.
Gross profit was up in the quarter for both our E&M and our T&D business lines and backlog remains strong at $1.85 billion. We are well positioned to complete these projects safely and efficiently with our ability to attract and retain a skilled workforce of over 8,000 employees across our footprint. We are affirming our 2023 revenue guidance to be in the range of $2.8 billion to $3 billion, and we expect now higher margins compared to 2022. We are increasing and narrowing our EBITDA guidance to a range of $210 million to $230 million from our prior range of $200 million to $225 million. Looking forward, our Construction Service business is well positioned to benefit from increased bidding opportunities, with the funding from the Infrastructure Investment and Jobs Act and the Inflation Reduction Act, our Construction Services business expect to see increased demand in 2023 and beyond.
Overall, as we look ahead, we are encouraged by our opportunities for ongoing customer and system growth in our electric and natural gas utilities; a robust slate of pipeline expansion projects and steady demand for its pipeline services, along with high demand for our construction services. Now I'd like to turn back to our earlier announcement made today and our plan to spin off our wholly owned Construction Services business. MDU Construction Service Group to form into 2 independent publicly traded companies. This separation will allow each company to enhance its strategic focus to pursue individualized industry-specific opportunities and use equity tailored to each business to enhance acquisition programs and retention and hiring. Both companies will benefit from distinct capital structures and financial policies in line with their business profiles and needs.
Each company will have enhanced flexibility to deploy capital toward their specific growth opportunities through tailored capital allocation strategies. We believe this separation will provide investors with 2 compelling investment opportunities and the investment community will be able to better assess the value of each business based on its respective operational and financial characteristics. MDU Resources is committed to establishing strong capital allocation strategies for each business that align with each business long-term goals. Post spinoff, MDU Resources intends to maintain a long-term dividend payout ratio target of 60% to 70% of regulated energy delivery earnings as we announced earlier this year. MDU Construction Services Group dividend policy will be determined on a future, consistent with the company's stated capital allocation strategies.
Further details about capital structure, governance and other elements of the spin-off will be announced later. When the spin-off is complete, it is expected that MDU Resources shareholders will retain their current shares of MDU Resources stock and receive a pro rata distribution of shares of MDU Construction Service Group stock. We expect the spinoff to be completed in late 2024, subject to certain conditions that are described in the news release. Further details on the transaction will be provided at a later date as we continue working diligently to the spin-off process. In light of today's announcement and in order to provide a more fulsome update to the Construction Service spinoff as well as our pure-play regulated energy delivery strategy, we're also rescheduling our Investor Day to the first quarter of 2024.
As always, MDU Resources is committed to operating with integrity and with a focus on safety while creating superior shareholder value, as we continue providing essential products and services to our customers and our communities while being a great and safe place to work. One final item that I'd like to touch on, is the announcement of my retirement as President and CEO noted in early January in a prior release, along with Nicole Kivisto being named my successor. First, I believe Nicole will do an excellent job in this role and have full confidence in her ability to lead in MDU Resources moving forward. With our future state as a pure-play regulated entity, her strategic leadership and experience will serve the company well. As for myself, it has been a great honor to be part of this organization for the last 40 years and to work with so many wonderful people.
I am very proud of everything that we have accomplished and I'm confident that MDU Resources is positioned well for continued expense. I plan to run through the finish line of January 5. But with this being in mind in my last quarterly earnings call prior to that date, I'd just like to wrap up by saying thank you to all of you that have I have the pleasure to work with and meet over this career. So with that, I appreciate your interest in and commitment to MDU Resources and ask now -- we open the line for other questions. Operator, Cynthia?
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