MDU Resources Group, Inc.
Q1 2016 Earnings Call Transcript

Published: 4 May 2016

[Operator:]

I'd like to welcome everyone to the MDU Resources Group 2016 First Quarter 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 1

[Doran N. Schwartz:]

Thank you, and welcome to our first 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 like to view the slides, please go to our website at www.mdu.com and follow the link for 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. And 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 and Form 10-Q and the Risk Factors section in our most recent Form 8-K. Our format today will include formal remarks by Dave Goodin, President and CEO of MDU Resources, followed by a Q&A session. Other members of our management team who will be available to answer questions during the Q&A session of the conference call today are

[David L. Goodin:]

Well, thank you, Doran and good morning everyone. We appreciate you joining us today to discuss our first quarter results. We're off to a good start in 2016. On a GAAP basis, we had earnings of $24.7 million or $0.13 per share. That's a significant turnaround from last year when we had a loss of $306.1 million or $1.57 per share largely due to a non-cash write-down at the E&P business that we have sold since then. Consolidated adjusted earnings were $32.6 million or $0.17 per share compared to $20.9 million or $0.11 per share for the first quarter in 2015. Adjusted earnings do not include our refining segment or discontinued operations. Our work to restore earnings to a satisfactory level is beginning to produce results. Our utility group is seeing benefits of their record level investment to serve customers. Utility earnings increased by 22% over last year and the electric utility group had a record first quarter. Our construction materials business is off to their best start in nine years from an earnings standpoint and has a record first quarter backlog at now $831 million. Our construction services group has been successful at rebuilding their backlog, as well, which at the end of the quarter, stood at $530 million, a 65% increase from last year. Our combined construction businesses have built an impressive backlog now of nearly $1.4 billion which is 38% increased from first quarter of 2015. And at our pipeline business, we recorded record transportation volumes for this first quarter. And as we announced last month, we have completed the sale of our marketed Fidelity oil and natural gas production assets. Aggregate sales proceeds and related tax benefits were approximately $500 million. More importantly, exiting the E&P business lowers our risk profile and allows us to focus more on growing our other lines of business. The principal disappointment for the quarter is that market conditions continue to challenge our investment at the Dakota Prairie Refinery. I will talk about this more in just a few minutes. And as we look ahead, we will continue to build on the momentum at our business units by focusing on the factors that we can most directly influence

[Operator:]

Thank you. Your first question comes from the line of Matt Tucker with KeyBanc Capital Markets. Please go ahead.

[Matt Tucker:]

Good morning. Congrats on a nice quarter.

[David L. Goodin:]

Good morning, Matt. Thank you very much.

[Matt Tucker:]

I wanted to ask about the refinery first and the change in the expected utilization. I guess, could you just provide some color on why that seems to be the best strategy now?

[Martin A. Fritz:]

Hey, Matt. This is Martin. Hey. Currently, obviously, the market pricing for the diesel and naphtha is very depressed. So, given where the margins are, it makes more sense to run it at a lower volume. And currently, the plant – the lowest we can run without causing problems is between 14,000 and 15,000 barrels per day, and so that's why we're operating in that range.

[Matt Tucker:]

Thanks, Martin. I guess, I think at the Analyst Day, you seem to plan to keep running at closer to full utilization. So, I guess, a) what's kind of changed in your thinking there? And then b) were the first quarter results at the refinery in line with your expectations?

[Martin A. Fritz:]

Yes. The first quarter results were in line with our expectations, but pricing has continued to decrease through the first quarter in terms of diesel and naphtha with the slowdown especially in the rig count. I mean, we were over 85 last year. The last I looked, we're down to 26 rigs. So, obviously, a lot of the production especially on the diesel side is very Bakken dependent. And so it moves with that. And so with the decrease in rig count, we've seen that continue to be challenging.

[Matt Tucker:]

Got it. Thanks, Martin. And while I've got you, maybe just a couple on the pipeline in midstream side. Could you talk about the outlook for gathering volumes for the rest of the year? And does this new well pad imply that you'll see rebound here in second quarter or when those come online? And secondly, could you talk about what's driving the strong transportation volumes you saw in the quarter?

[Martin A. Fritz:]

Yes. A couple of things now, Matt. On the midstream side with Pronghorn, you're going to see a pickup in the next quarter with the new well pad and the wells that we're shutting and coming back online. So, we think we're online with that through the rest of the year. On the transmission side, given where our pipe is located in kind of the key counties giving the (17

[Matt Tucker:]

Great. Thanks. And just last question maybe for Jeff on the services side. The margins were a little bit lower year-over-year. I mean obviously, nice backlog, nice earnings rebound. But in thinking about margins have been higher this year overall versus last year, is that more driven by operating leverage or are the margins in backlog actually stronger as well?

[Jeffrey S. Thiede:]

Hey, Matt. This is Jeff. The margins in our backlog are close to what they've been in historical past. Execution is going to be key. Some of higher volume areas in our business such as our service work, our non-backlog areas, our equipment sales and rental have been temporarily slow. We've had a little bit of additional competition in those areas. But we're feeling confident in our backlog, the margins we have and well-positioned to be able to focus on our execution and bringing those margins at or above our plan.

[Matt Tucker:]

Thanks, Jeff. Just a follow-up to that. If I recall, the equipment sales and rental business is largely tied to electric transmission. Is the slowness there indicative of any kind of trend you're seeing in that market or is it kind of quarterly lumpiness?

[Jeffrey S. Thiede:]

I think it's just the temporary slowdown. We're seeing strong signs from our customers in that industry on it improving through 2020. Our volumes are slightly lower. But we've made a capital investment in this area – in our company. It's going to pay off. We're adjusting some internal processes to make our business more competitive, but also improving on our successful reputation we've earned through our relationships and our people. And we're providing great equipment and tools and service for this area. And we've made some adjustments for this temporary period that we think it's going to be, again, one of our strongest areas of our company.

[Matt Tucker:]

Thanks for the color, gentlemen. I'll jump back in the queue.

[David L. Goodin:]

Thank you very much, Matt.

[Operator:]

You have a follow-up question from the line of Matt Tucker with KeyBanc Capital Markets. Please go ahead.

[Matt Tucker:]

I really just had one final follow-up. Would you be able to quantify the impact of the warmer weather versus normal at utilities during the quarter?

[Nicole A. Kivisto:]

Yeah, Matt. This is Nicole. When you look at the electric side of the business, we did see milder temperatures than we saw last year, which did impact our volumes as you saw, but on an overall basis our electric business had a very strong quarter, as Dave alluded to so the volume impact was really offset by the regulatory activities that we saw in the electric side of the business. So, overall our volume decline was not overly material to the electric side of the business. And now on the gas side of the business, we really saw 11% colder than last year weather in the Western states of Idaho, Oregon and Washington, and then kind of the reverse effect in the Montana, Dakota Great Plains territory. So, we haven't really quantified those numbers in total, but both of the business are up and what I guess what I would comment is when you look at the temperatures compared to normal, so I am not comparing the last year, but I am comparing the normal, we saw warmer than normal weather. And so to the extent, that we could see normal weather throughout the remainder of the year, obviously that would provide some upside to the earnings.

[Matt Tucker:]

Great. Thanks, Nicole. And just while I am at that. Maybe one more circling back to the refinery. And you mentioned considering strategic options there. I think your partner Calumet said something similar when they reported recently. Could you elaborate on what strategic options you're considering and should we consider that you're looking to sell the refinery?

[Martin A. Fritz:]

Hey, Matt. At this time just to kind of what Calumet said they put out an 8-K that said they may divest a certain non-core asset including Dakota Prairie Refinery. Obviously we're having ongoing discussions and we're looking at all the options. We're evaluating them at this time. So, not really in a position at this point to give you a clear direction. We'll keep you in the loop. I can give you a little color on what we're doing short-term. The team has actually been doing a really good job out there. Since December 6, we've been running operationally fine. The other thing we're doing is we're focused on controlling what we can control, obviously the cost. So, we're in the process of working with all our vendors to see if we can get to cash flow breakeven with them providing us some assistance given where we're at. So, hope that helps a little color. We'll keep you in the loop but the process is really ongoing right now as we speak.

[Matt Tucker:]

Understood. Thanks, Martin. That's it for me.

[David L. Goodin:]

Okay. Thank you, Matt.

[Operator:]

This makes the last call for question. This call will be available 1

[Peter F. Flynn:]

Hey, can you guys hear me?

[David L. Goodin:]

Yes. Good morning, Peter.

[Peter F. Flynn:]

Hey. Good morning. I had question on the construction segment. Should we view the large backlog increases translating to revenue, is that 2017 event considering you guys maintained revenue guidance?

[David L. Goodin:]

You broke up a little bit there, Peter. Could you repeat the question?

[Peter F. Flynn:]

Yes. I'm sorry. Can you hear me?

[David L. Goodin:]

Oh that's better. Thank you.

[Peter F. Flynn:]

Okay. Should we consider the large backlog increases at the construction segment translating to revenue if it's 2017 event considering you maintain 2016 revenue guidance?

[David L. Goodin:]

Are you thinking more materials or services or some of both.

[Peter F. Flynn:]

Both actually.

[David L. Goodin:]

Okay. We'll start with Dave Barney and talking about his backlog that $831 million a bit and then we will move on to Jeff Thiede.

[Peter F. Flynn:]

Okay.

[David C. Barney:]

Hi, Peter. I would definitely expect our revenues to go up as the backlog has gone up. We're expecting – we've added a lot of backlog to that record backlog we've had in March and we have a good schedule out there. I'm expecting record backlog almost every month going through to June. So, yes, I would expect the revenue to be going up in the constructing materials company. I don't know if we're giving guidance on that but I just did I guess.

[David L. Goodin:]

Yes. Well we are, in a sense but it's early in the year which is why held it flat at this point. But clearly backlog is a nice indicator of what could grow into revenues. Jeff?

[Jeffrey S. Thiede:]

Yes. And for us, we expect most of the projects that we have in our backlog and would be monetized this year, key is going to be execution, and it's early.

[Peter F. Flynn:]

Okay. Great. That's all I had. Thanks, guys.

[David L. Goodin:]

Okay. Thank you, Peter.

[Operator:]

At this time, there are no further questions. I'd now like to turn the conference back over to management for closing remarks.

[Doran N. Schwartz:]

Well, thank you. And as we noted earlier, first quarter results represent a good start here in 2016. We are committed to continue building on this momentum by focusing on the factors that we can most directly influence, controlling cost, expanding margins, as well as growing earnings. And again, we appreciate your participation on this call today, and thank you again for your continued interest in MDA Resources. Operator?

[Operator:]

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