Q3 2019 Earnings Call

Oh No my name is Jessa and I'll be your conference facilitator at this time I would like to welcome everyone to the end do you resources Group 2019 third quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you like to ask a question. During this time simply press Star then the number one on your tell us.

Keypad, if you'd like to withdraw your question. Please press the pound key this call will be available for replay beginning at five PM Eastern time today through 11, 59 PM Eastern time on November 13th the conference I'd number for the replay is one of 536787 again the conference I'd number for the replay is one of five three.

6787, the number to dial for the replay is 18558 fivenine to 056 or 4045373 406 I.

I would now like to turn the conference over to Jason former Vice President Chief Financial Officer, and Treasurer of empty you resources group. Thank you Mr. Vollmer you may begin your conference.

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Thank you drill so I want to welcome everyone to our third quarter 29 to your earnings Conference call. This conference call being broadcast wanted to the public over the Internet <unk> company your remarks.

Good luck it was largely been four of them on events and presentations page under the investors tab of our website at Www Dot MD you Dot com.

Turning to waste is also available on our website.

During the course of this presentation, we will make certain forward looking statements within the meaning of section 20, Onee Securities Exchange Act at 934.

Although the company believes its expectations and beliefs are based on a reasonable assumptions actual results may differ materially.

For a discussion of factors that may cause actual results to differ please refer to item one a risk factors in our most recent Form 10-K .

Our call today I will discuss the key financial highlights and then turn the presentation over to Dave Goodin, President and CEO of new resources for his formal remarks.

After Dave's remarks, we will open the line for questions.

In addition to David myself members of our management team, who will be available to answer questions today, our Dave Barney President and CEO of Knife River Corporation, Jeff Thiede, President and CEO of MD, you construction services group, Nicole Kivisto, President and CEO of Cascade natural gas inner mountain gas in Montana Dakota utilities.

<unk>, President and CEO of W. Guy energy, and Stephanie Barth, Vice President Chief Accounting Officer controller of MD resources.

Yesterday, we announced third quarter earnings of 137.6 million were 69 cents per share compared to third quarter 2018 earnings of 107.3 million or 55 cents per share.

Our combined utility business reported earnings of 700000 for the third quarter down from 3.4 million in the third quarter of 2018.

The electric utility segment reported earnings of $16.3 million for the quarter compared to 15.3 million in 2018.

This increase in earnings was largely result of higher adjusted gross margin from the absence of an adjustment related to the Big Stone South Ellendale project that was realized in the prior quarter in 2018.

Great recovery from interim infinite and final rates implemented in the state of Montana also increased adjusted gross margin in the quarter.

Partially offsetting the increase was a 6% decrease in electric sales volumes.

This volume decrease was largely due to mild summer temperatures across our service territory.

Higher depreciation depletion and amortization expense and higher operation and maintenance expense also had a negative impact on results.

Our natural gas utility segment had a seasonal lots of 15.6 million for the quarter compared to a loss of 11.9 million in the prior year.

The increase loss was the result of higher operation and maintenance expense, mainly payroll related costs as well as higher depreciation depletion and amortization expense from increased property plan equipment balances and increased property taxes.

Partially offsetting the higher cost was an increase in adjusted gross margin from approved rate recovery in certain jurisdictions.

The 4% increase in retail sales volumes was offset by weather normalization and conservation adjustments in the quarter.

The pipeline and midstream business had earnings of 7.7 million in the third quarter compared to 11 million in 2018.

The decrease in earnings is largely related to the absence of a $4.2 million tax benefit that was recognized in the third quarter of 2018.

This tax benefit as outlined in our third quarter 2018 release was the result of regulatory liability reversal.

Higher depreciation depletion and amortization expense due to higher depreciation rates from a recent FERC rate case as well as increased property plant and equipment from organic growth projects also contributed to the decrease in earnings.

Record transportation volumes, primarily related to organic growth projects that were placed into service in the second half of 2018 and higher customer rates from the previously mentioned FERC rate case added it had a positive impact on the quarter.

Our construction services business reported record third quarter earnings of 21.1 million compared to 9.3 million in 2018 and record third quarter revenues of 479.6 million up 45% from the third quarter 2018 revenues of 330.4 million.

These increases were driven by higher workloads at both the inside and outside specialty contracting lines.

Inside specialty contracting company saw higher workloads from increased customer demand for projects in the hospitality and high Tech industries.

Outside specialty contracting workloads increased due to continued high demand for utility industry construction projects.

Partially offsetting the increase in earnings was higher selling general and administrative expense, primarily payroll related costs due to the increased workloads with this business is experiencing.

Results in 2018 included a 7.2 million dollar charge from changes in estimates on certain construction contracts.

Our construction materials business reported record earnings of 102.6 million in the third quarter compared to $78.9 million for the same period in 2018.

This business also reported record third quarter revenues of 869.5 million up 17% from third quarter 2018 revenues of 743.9 million.

Higher revenues from contracting services and material sales along with higher gross margins as a result of strong economic conditions seen across many of our states of operation drove the increase in earnings.

Additional material sales volumes from acquisitions made over the last 12 months and asset sales gains that were approximately 5 million higher than the prior year also had a positive impact on the quarter.

Partially offsetting the increase in earnings were higher interest expense and higher selling general and administrative expense largely related to companies that were acquired since the third quarter of 2018.

We also experienced higher payroll related costs.

That summarizes the financial highlights for the quarter and now I'd like to turn the call it over to Dave for his formal remarks, Dave.

Well, thank you, Jason and good afternoon, everyone.

Yesterday, we reported third quarter earnings of 69 cents per share compared to 55 cents per share last year.

Our year to date earnings are up 24% higher than this time last year, and we are on track and well position to deliver earnings within our narrowed 2019 guidance of $1.50 to $1.60 earnings per share.

This strong performance is a direct example of the value of our two platform business model. During the quarter are more than 15000 employees came together and helped us to execute on our operating plan.

And report strong operational and financial results.

With these employees are companies continue to complete infrastructure projects across various industries and geographic markets.

Not only do our shareholders benefit as we continue building a strong America, but so does our nation because a strong infrastructure is the heart of our economy.

We continue to focus on organic growth and infrastructure improvements at our regulated energy delivery companies.

Our utility had a full quarter seeking and implementing regulatory recovery for costs associated with upgrading and expanding our facilities to safely serve our growing customer braid base.

The third quarter, the electric utility implemented new rates in the state of Montana.

This settlement finalized earlier this year will increase annual revenues by a total of 9.3 million with 9 million, which became effective in September of this year and the balance effective one year later.

We also received approval from the state of North Dakota for an increase to our transmission cost adjustment rate.

Our electric utility completed its filing for an advanced determination of prudence with the state of North Dakota to own and operate and 88 megawatts simple cycle natural gas fired combustion term in.

This facility if approved will be in service by 2023 and is expected to cost approximately $73 million to construct.

The natural gas utility filed for a rate increase with the state in Minnesota and filed a joint settlement agreement related to a previously filed case in the state of Washington.

At our pipeline business, we reported our 11th consecutive quarter of record transportation volumes and with natural gas production remaining at record levels in the Bakken, we continue to grow organically to handle the increase production volumes.

During the quarter the pipeline group placed into service the Demicks Lake project in Northwestern North Dakota and continued construction on line section 22 project near Billings Montana.

Together. These two projects will add approximately 200 million cubic feet per day of natural gas transportation capacity.

Construction on the Demicks Lake expansion project is expected to begin here in November .

This project will add another 175 million cubic feet of capacity per day and is expected to be in service early in 2020.

This business is also in the process of working with FERC.

National Environmental Policy Act pre filing review process for its north bike and expansion project.

We announced in our release yesterday that based on long term customer commitments and the continued record levels of natural gas production in the Bakken we are increasing the design capacity of this project for the second time.

This project, which had an original design capacity of 200 million cubic feet per day of transportation capacity has now been increased to 350 million cubic feet per day.

Now I'd like to turn to our construction platform.

We're pleased with a continued momentum were seeing at our construction businesses.

Third quarter backlog is at record levels at both materials and services businesses with a combined backlog now standing at 1.95 billion, some 461 million higher than this time last year.

The construction materials business reported record third quarter revenues earnings and backlog. This strong performance led us to narrow the 2019 revenue guidance at that business to now range of 2.1 to 2.2 billion.

Given the strong economic environments, we are seeing across our footprint.

At knife River, we are optimistic about how they will finish out to the remainder of 2019.

As construction service our construction service group continues to operate at record levels high demand for both inside and outside contracting service.

Resulted in record third quarter revenues earnings and backlog and for the third consecutive quarter. We are increasing 2019 revenue guidance for this segment to now a range of 1.75 to 1.85 billion.

Construction services announced during the quarter the acquisition of the assets of Pride electric located in headquartered in Redmond, Washington.

This business will operate as a division of OE GE Inc., a subsidiary of them New construction services, which is currently one of the largest electrical contracting companies in the Pacific Northwest.

We are very excited to add pride electric to our team and to strengthening the presence we have in Seattle, Bellevue and Redmond markets.

So to conclude I want to reiterate that we're certainly very pleased with our third quarter results. Our focus at MD resources has been to utilize our two platform business model to produce significant long term value as we execute on our business plans, both organic growth projects and acquisitions and that's just what we are.

Doing.

We are committed to operating with integrity and with a focus on safety. While we continue to act on our tagline of building a strong America.

I certainly appreciate your interest in and commitment to empty resources and asked now that we open the line to questions operator.

Thank you at this time.

Everyone, if you'd like to ask a question. Please.

The number one on your telephone keypad.

A question.

On your telephone keypad. If you are using a speakerphone. Please pick up your handset before entering your request, we will pause for just a moment.

Sure.

Your first question comes from the line of Ryan Levin from Citi. Please go ahead.

Adding and good afternoon.

What percentage of construction material and Sarah as EBITDA year over year growth was driven by acquisition.

I appreciate that question Ryan will start off with a Dave Barney on the materials segment and then after that we'll move over to Jeff and talked about services Dave.

Would you be able to respond to Ryan.

Yes, I can do that they write a dillon.

36% the growth on an EBITDA was.

From new acquisitions.

Jeff Thanks.

Yes, Thanks, Ryan we closed the transaction for prior to September 17, So we essentially add two weeks of their performance. So popular not an impact for this quarter. We're excited about this acquisition, we think it's a great fit as a division of OE GE, Inc.

And we expect successful results from pride electric in the future.

Great.

But to quantify.

Let the longer term financial impact the fight electric deal is very limited in your disclosure.

Yeah, we're not going to disclose at this time and we think it's a great company and the services that they complement us in the Pacific Northwest will will be a contributor that's for sure.

Okay, and then on that vein in construction services, what do you what are the characteristics, you're looking for and potential future acquisitions.

And we have a strategy called go and grow and we look to grow our our company's organically, but as far as acquisitions, which is our second choice. We look for areas of the country that we are not currently located in with services that are the same or similar to what we provide such as mechanical electro.

Recall equipment inside and outside so we've got a lot areas of the country that we cover and we're strategically looking at other markets, where we can find companies that fit our culture and performance.

Is there a certain characteristics size, our scope that would fit in them to you in rolla.

We have a range of companies in the $30 million to $200 million range revenue and of course is going to be about.

Of outperformance safety and their financial as well as the ability to to fit in with our with our team.

Okay, great. Thank you.

Thank you Ryan I appreciate the questions.

At this time I would like to remind everyone. If you ask a question. Please press star one on your telephone keypad.

Great question.

And your telephone keypad.

Ladies and speakerphone, please pick up your handset.

Yes.

This nice to last call for questions. If you would like to ask your question. Please press Star then the number one on your telephone keypad. This call will be available for replay beginning at five PM Eastern time stays with 11 59 PM Eastern time.

13, the conference I'd number for the replay is one of 53677 again the conference I'd number for the replay is 1536787.

Yeah.

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

Oh, Thank you Jess.

Our focus here at MD resources has been to produce significant long term value as we execute on our business plans organic growth projects, along with acquisitions and again, we're doing just that we continue to maintain a strong balance sheet solid credit ratings and a good liquidity position and for eight.

Anyone consecutive years, we have continued to provide a competitive dividend for our shareholders, while increasing it for the last 28 years were committed to building a strong America as well as ensuring the safety of our more than 15000 employees are executing on many many projects and opportunities ahead of us this year and beyond.

We again appreciate your participation on the call today and thank you for your continued interest in M.D. resources operator.

This concludes today's empty you resources Group conference call. Thank you for your participation you may now disconnect.

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