MDU Resources Group, Inc.
Q4 2017 Earnings Call Transcript

Published: 7 Feb 2018

[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 Year-End Results and 2018 Guidance Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. This call will be available for replay beginning at 5

[Jason L. Vollmer:]

Thank you, Shelby. Welcome to our 2017 year-end earnings and 2018 guidance conference call. This conference call is being broadcast live to the public over the Internet and slides will accompany our remarks. If you would 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, refer to item 1A, Risk Factors in our most recent Form 10-K. Through our call today, I will discuss key financial highlights and then turn the presentation over to Dave Goodin, President and CEO of MDU Resources, for his formal remarks. After Dave's remarks, we will open the line for questions. In addition to Dave and myself, members of our management team who are available to answer questions 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 of MDU Resources. Yesterday afternoon, we announced 2017 earnings from continuing operations of $284.2 million or $1.45 per share compared to 2016 earnings from continuing operations of $232.4 million or $1.19 per share. In the fourth quarter, earnings from continuing operations were $115.4 million or $0.59 per share compared to $66.3 million or $0.33 per share in 2016. Accounting rules require the effective tax (00

[David L. Goodin:]

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 results. 2017 really exemplified why we have our tag line of building a strong America. The products and services we provide, whether it's the infrastructure that supports our nation's transportation network or the electrical services that support our nation's grid, down to our commercial customers, or it's the heat and electricity we provide to more than 1 million homes and businesses or the natural gas that we move to market, everything we do helps to build a strong America. I couldn't be more proud of our management teams' and employees' ability to effectively and safely execute their jobs and our 2017 results reflect this success. Our utility companies reported record earnings from implemented rate relief and higher electric and natural gas sales volumes. We continue to experience good customer growth, up about 2% this year to nearly 1.1 million customers, and we expect our utility customer base to continue to grow at a rate between 1% and 2% annually. Our utility segment is focused on a number of organic growth opportunities which are expected to lead to substantial rate base growth. The Thunder Spirit Wind expansion is one of those opportunities. Construction is well underway, and after receiving advanced determination and prudence from the North Dakota Public Service Commission, we expect to have a purchase agreement in place very soon. This previously announced expansion will grow the company's electric generation portfolio to approximately 27% renewables, and should be on line later this year. Another growth opportunity, our Big Stone South to Ellendale, joint venture transmission line, has secured all easements required for construction and is expected to be complete in 2019. Our share of the project cost is estimated to be between $130 million and $150 million. Our utility remains focused on regulatory recovery for cost associated with upgrading and expanding our facilities so we can safely meet the growing customer demand. Our combined utility received substantial rate relief throughout 2017, with the electric utility receiving rate recovery in all jurisdictions, including FERC. Our utility expects rate base growth to continue at 6% compounded annually over the next five years. Our utility operations continue to make a strong contribution to our corporate earnings, and we expect another solid year of performance in 2018. The pipeline business also had a solid 2017, completing two expansion projects in the second quarter that increased natural gas capacity by 62 million cubic feet per day. These projects helped the company move record volumes of natural gas through the system, with transportation volumes 9.6% higher year-over-year. The company expects to complete two additional expansion projects here in 2018; one, the 38-mile, 16-inch Valley expansion project; and two, the 13-mile, 24-inch Line Section 27 expansion project. When these two projects are completed, the company's natural gas transportation capacity will now then exceed 1.8 billion cubic feet per day. This business segment continues to seek additional growth projects to increase transportation capacity, including a continued focus on the Bakken, which is currently producing record volumes of natural gas. Now, I'd like to turn over to our construction businesses. The construction services group continues to produce exceptional earnings growth. Demand remains high for inside specialty contracting work, particularly in the high-tech, mission-critical area, as well as manufacturing and retail sectors. Outside specialty contracting, workloads were also strong, with higher equipment sales and rentals, various transmission line projects along with hurricane recovery work. The construction services team did a great job in controlling costs, while still executing on key contracts in both the inside and outside construction operations, a trend that we also see continuing in 2018. We are confident of continued opportunities for earnings growth at our construction services segment with a backlog now standing at $708 million at the end of 2017. We certainly see that we have momentum that will carry us into 2018. For 2018, we expect construction services revenues to be in the range of $1.45 billion to $1.6 billion with margins comparable to 2017. Now, turning to our other construction business, Construction materials finished the year strong with the fourth quarter increase in earnings from higher aggregate sales volumes along with increased workloads in some states. Better weather in the quarter allowed our teams to successfully execute on several projects which helped offset the weather-related challenges we had at the start of the year when we had well-above average precipitation in all markets and natural disasters in some others. Although we faced challenges early in the year in some of our construction markets, we're confident on our ability to achieve long-term growth. Our backlog at year-end was $486 million which, while lower than last year, is still the third highest year-end level for this business. We're well positioned with nearly 1 billion tons of aggregate reserves in strong markets across the company – country, and we're looking at acquisition opportunities presented by the current market. For 2018, we expect construction material revenues to be in the range of $1.8 billion to $1.9 billion with margins also comparable to 2017. That completes our individual business unit discussion. Now, looking ahead as an overall corporation, we are initiating 2018 earnings guidance in the range of $1.25 to $1.45 per share. This range reflects normal operating conditions and weather, including precip and temperatures across all service areas, an investment expected of $628 million for capital projects and any earnings from acquisitions would be incremental to this range. You may note that this is a wider guidance range that we've traditionally provided. We expect to revise the range as we move through the year and better understand the impacts that tax reform will have on the economy as a whole and the associated impacts to the industries in which we operate, and more specifically to our businesses. MDU Resources performed well in 2017, irrespective of the benefits we saw from tax reform. And I'm optimistic we're well positioned to produce significant long-term value as we execute on our business plans and explore potential acquisitions along with organic growth opportunities. We continue to maintain a strong balance sheet, solid credit ratings and a good liquidity position. And for 80 consecutive years, we have provided a competitive dividend to our shareholders. As always, MDU Resources is committed to operating with high integrity along with a focus on safety, while creating superior shareholder value as we continue to build that strong America. I appreciate your interest in and commitment to MDU Resources, and ask now that we open the lines to questions. Operator?

[Operator:]

Your first question comes from Paul Ridzon of KeyBanc.

[Paul T. Ridzon:]

Good afternoon.

[David L. Goodin:]

Hello. Hi, Paul. Good afternoon.

[Paul T. Ridzon:]

Congratulations on a solid quarter.

[David L. Goodin:]

Hey, thank you very much.

[Paul T. Ridzon:]

Question on the construction materials backlog being down. Do you get the sense that maybe some projects, people are kind of sitting on their hands waiting to see if there's any federal action?

[David L. Goodin:]

Paul, I'm going to ask Dave Barney to weigh in on that. I know – I'll reinforce. It's the third highest level we've ever had from a record perspective. But Dave can give you more color as to what constitutes the entire backlog.

[David C. Barney:]

I will. On our construction backlog, it's down right now, but we're heading into the main part of the season for us. So, we're not too concerned with the construction backlog. We got a good backlog schedule ahead of us. Our only concern is not having a federal DOT budget passed right now and how that's going to affect DOTs in cities and counties. But, I expect our backlog to pick back up later in through the year.

[Paul T. Ridzon:]

And then, secondly, of the backlogs you've announced, what percent of those do you think was booked before tax reform? In other words, kind of pricing in a 35% tax rate.

[David C. Barney:]

If I had to guess, I would say probably 75% to 80% was booked before tax reform.

[David L. Goodin:]

Paul, ...

[Paul T. Ridzon:]

(00

[David L. Goodin:]

Sorry, Paul. I should – would you like, Jeff Thiede, to weigh in so far CSG's backlog of $708 million as well?

[Paul T. Ridzon:]

That was my next question. Thank you.

[David L. Goodin:]

Okay.

[Jeffrey S. Thiede:]

Hi, Paul. This is Jeff. Yes, most of our $708 million of backlog was booked before implementation of tax reform.

[Paul T. Ridzon:]

Do you have a – lastly, do you have a sense of when you expect to sign the purchase agreement with Thunder Spirit?

[David L. Goodin:]

Paul, I'll ask Nicole to weigh in on that, I would say, shortly, but she can give you more definition on that.

[Nicole A. Kivisto:]

Yeah. As we noted in the news release, we expect that to be soon, so in February, sometime this month.

[Paul T. Ridzon:]

Okay. Thank you very much.

[David L. Goodin:]

Thank you, Paul.

[Operator:]

Your next question from Sarah Akers of Wells Fargo.

[Sarah Elizabeth Akers:]

Hey. Good afternoon.

[David L. Goodin:]

Hi, Sarah. Good afternoon to you as well.

[Sarah Elizabeth Akers:]

Thank you. Dave, when you mentioned challenges at materials early in the year, was that referring to 2017 with the weather or were you referring to 2018?

[David L. Goodin:]

This is Dave Goodin. I'll start and Dave Barney can add in. I was referring to 2017, the challenges we had with near-record precipitation in many of our markets and the late start that we got to 2017. Really, a reversal of that here in the fourth quarter where, again, we actually picked up $10 million in earnings in the fourth quarter quarter-over-quarter between 2017 and 2016, our ability to complete projects really with weather helpful in that quarter.

[Sarah Elizabeth Akers:]

Okay. And then, are you seeing any pickup in bidding opportunities whether that's related to the Federal FAST Act that's been on the books for a while, or any pick up related to the various state transportation funding bills?

[David L. Goodin:]

Sarah, is your question specific to materials or...

[Sarah Elizabeth Akers:]

Yes.

[David L. Goodin:]

Okay. So, Dave Barney.

[David C. Barney:]

Yeah. We've seen a pickup, Sarah, definitely in the FAST Act in itself (00

[Sarah Elizabeth Akers:]

Got it. Thanks a lot.

[David L. Goodin:]

Thank you, Sarah.

[Operator:]

This marks the last call for questions. This call will be available for replay beginning at 5

[David L. Goodin:]

Thank you. As I mentioned earlier, we'll continue to update you on our progress as we better understand how our businesses are impacted by the Tax Cuts and Jobs Act as it relates particularly to our guidance. We are committed to building a strong America along with being optimistic about our opportunities for the rest of the year as well as beyond. And we do appreciate your participation on the call today. And so, with that, I'll turn this back to the operator.

[Operator:]

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