Q3 2020 MDU Resources Group Inc Earnings Call
[music].
Hello, My name is Maria and I'll be your conference facilitator at.
At this time I would like to welcome everyone to the M.D. resources group 2023rd 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.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
If you would like to withdraw your question press the pound key on your telephone keypad.
This call will be available for replay beginning at five PM Eastern today through 11, 59, P.M. Eastern on November 19th.
The conference I'd number for the replay is 1654638.
Again, the conference I'd number for the replay is 1654638.
The number $2 for the replay is 18558592 056 or 4045373 406.
I would now like to turn the conference over to Jason Volner, Vice President Chief Financial Officer, and Treasurer of MD, you resources group.
Thank you Mr. Palmer you may begin your conference.
Thank you Maria and welcome everyone to our third quarter 2020, <unk> earnings Conference call or conference call is being broadcast live to the public over the Internet and slides will accompany our remarks.
I would like to view the slides you can find them on the events and presentations page under the investors tab of our website at Www Dot M.B.U. Dot com.
Our news release detailing our third quarter results 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 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 one a risk factors in our most recent form 10-Q and 10 gig.
You also referenced certain non-GAAP measures during the call such as EBITDA on our construction operations and adjusted gross margin for our utility businesses.
Definitions and reconciliations of non-GAAP measures to the nearest GAAP measure can be found in our earnings release issued last night.
Today I will start by briefly covering this quarter's financial results and then turn the presentation over to Dave Goodin, President and CEO will then be resources for an update on our forecast for the remainder of 2020 and beyond.
After Dave's remarks, we will open the line for questions.
In addition to Dave and myself members of our management team, who will be available to answer questions. Today include 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 our utility group, Trevor Hastings, President and CEO of WB, <unk> energy and Stephanie Barth, Vice President Chief Accounting Officer, and controller of MD resources.
Yesterday, we announced record third quarter earnings of 153.1 million or 76 cents per share compared to third quarter 2019 earnings of 137.6 million or 69 cents per share.
This is an increase of 11% year over year, the majority of which was organic growth.
Based on our company's year to date performance on our strong outlook for the remainder of this year. We are again, increasing our 2020 earnings per share guidance now.
Now predicting it will be in the range of $1.80 to $1.90 per share.
This is an increase from our previous range of $1.65 to $1.85 per share.
Now moving on to results achieved by each of our business segments.
Our combined utility business reported a net loss of $800000 for the quarter down from earnings of 700000 in the third quarter of 2019.
We experienced a seasonal loss of $17.6 million in our natural gas utility segment, which was $2 million higher loss than previous year.
We expect a loss of this business segment in the third quarter each year due to seasonal impacts on customers natural gas usage.
Our natural gas segment had higher higher operation and maintenance costs and higher depreciation and amortization expense in the quarter, partially offsetting these decreases was higher adjusted gross margin from approved rate recovery in certain jurisdictions.
The electric utility segment reported a strong third quarter earnings of $16.8 million compared to $16.3 million for the same period in 2019.
A 14% increase in residential sales volumes led to higher adjusted gross margin.
This volume increase was partially offset by decreased industrial and commercial volumes attributable to the slowdowns from the Golden 19 pandemic.
The pipeline business had earnings of 8 million in the third quarter compared to $7.7 million in the third quarter of 2019 higher transportation revenues from organic growth projects that were placed in service in 2019, and early 2020 as well as stronger demand for the company's storage services were the primary drivers behind the earnings increase.
These increases were partially offset by lower nonregulated project revenues.
Turning to our construction businesses construction services reported record third quarter earnings of 29.8 million compared to $21.1 million in the third quarter of 2019. This.
This is an increase of over 41%.
Construction services also reported record third quarter revenues of 551 million up from third quarter 2019 revenues of 479.6 million.
EBITDA at this business also increased in the quarter to 46.8 million an increase of $12.3 million as a result of increased workloads for inside and outside specialty contracting.
Insight, especially contracting workloads increased during the quarter with strong demand for hospitality and high Tech projects, while natural disaster recovery work drove an increase in the outside specialty contracting workloads.
These increases were partially offset by higher selling general administrative costs, primarily an increased allowance run collectable accounts and higher payroll related cost as this business continues to operate at a record employment levels.
Our construction materials business also reported record results for the third quarter was 107.3 million and earnings up from the prior years 102.6 million.
This increase is even more impressive when considering last year's results included gains on the sale of assets, which were approximately 4.4 million higher after tax than the current year.
Revenues at this business were $822.5 million down slightly compared to the $869.5 million for the same period in 2019.
EBITDA at this business increased eight and a half million from the same period in 2000 $19 million to $172.3 million for the quarter.
The increase in earnings and EBITDA were driven by higher margins on the majority of the company's product lines margins from asphalt and asphalt related products were stronger during the quarter as a result of decreased energy related costs as well as favorable weather for these operations are located.
Ready mixed concrete pricing also continues to be strong in most markets. These increases were partially offset by work slowdowns caused by tropical storms and wildfires in certain markets.
That summarizes the financial highlights for the quarter and now I'll turn the call over to Dave for his formal remarks, Dave.
Well, thank you Jason and thank you for listening everyone in spending this time with us today and for your continued interest in AMD you resources.
We hope that you are both safe and healthy.
Our balanced mix of regulated energy delivery and construction materials and services businesses continue to allow us to post strong operating results. Despite the challenges. This pandemic has imposed on our nation.
With the help of our more than 15000 employees, we are able to continue providing essential services to customers across all our business lines. During this challenging time.
As Jason said with strong performance, we saw in the third quarter, including record earnings at both construction companies and strong results from our regulated energy delivery companies.
We are raising our earnings per share target for this year to a range of $1.80 to $1.90 per share loss.
Looking at our forecast for the remainder of 2020 and our performance in the third quarter. We're also narrowing revenue guidance for both construction services and construction materials.
We have increased our expected revenues at construction services to now a range of two to 2.15 billion with margins comparable to or slightly higher than 2019 levels.
And adjusted construction material revenues to a range of $2.15 billion to $2.25 billion with margins higher than what we saw in 2019.
To summarize activity by business unit I will start off with the regulated energy delivery side of our business mix or utility operations had solid performance through the third quarter with earnings at the electric segment muted by a seasonal loss on the natural gas side.
During the quarter, our regulatory team was very active with filings at both utilities segments, producing several positive outcomes.
On October 20, Eightth, the North Dakota Public Service Commission approved a rate increase of 6.3 million for electric transmission rates, which took effect on November onest.
In Minnesota Public Utilities Commission approved a $2.6 million natural gas rate increase with interim rates in effect since January onest of this year.
The effective date for this increase has not yet been determined.
In the Western part of our service territory, the Washington Utilities, and Transportation Commission approved a rate increase of $1.1 million for pipeline replacement projects also effective November onest.
And there is currently a $3.2 million natural gas rate increase request pending before the Oregon Public Utilities Commission.
There are several more natural gas rate increase pending cases before a state utility commissions.
I can read more about these in our 10-Q filed just this morning.
Our pipeline business also performed very well throughout the third quarter. This business continues to benefit from increased revenue as a result of organic growth projects being brought online.
With these recent organic growth projects WB right now is able to move approximately 2.2 billion cubic feet of natural gas through its system each and every day.
The pipeline business also continues to benefit from increased storage balances as customers take advantage of seasonal commodity price differentials.
Preparatory work continues on the North bike and expansion project. This project is scheduled for construction beginning in early 2021 pending regulatory and environmental permitting the project is expected to be online in late 2021, and will add 250 million cubic feet per day of gas.
Pasadena to the existing transmission system.
As a pandemic continues to impact our nation there have been demand decreases in pricing impacts that are delaying forecasted Bakken oil and associated natural gas production.
While the long term outlook for Bakken gas production is strong the company is negotiated adjustments to certain customer contracts and a portion of the first year committed volumes from these customers has been delayed one year.
However, through a combination of rate volume and or term adjustments. The overall financial returns of this project really remain unchanged.
Our customer contracts support the design capacity of 200 million cubic feet per day, and the long term viability of this project, which can be readily expanded in the future when forecasted production growth levels rebound.
Now I'd like to move on to our construction platform starting with our construction services.
At construction services continues its run of outstanding performance with record revenues record earnings and record backlog for the quarter.
Opportunities for both inside and outside specialty contracting remain high with strong demand for hospitality, Hi Tech and natural disaster recovery work.
CSG ended the quarter with record backlog of nearly 1.3 billion showing the strength of the bidding opportunities across this business is footprint.
As a reminder, we are increasing revenue guidance in this business to a range of $2 billion to $2.15 billion with margins comparable to or slightly higher than 2019 levels.
And finally, turning to our construction materials business, our third quarter has historically been the strongest quarter for this business and 2020 was no exception with record earnings of a 107.3 million this year.
Construction materials backlog was 571 million at the end of the quarter down from the prior years for $747 million.
As we discussed in our news release and on last quarter's call. We have seen a delay and some new projects being awarded specifically in the public sector, which we believe can be attributed to the COVID-19 pandemic.
Fortunately, we now have more clarification on the fast Act, which has been extended for one year and includes an additional 13.6 billion into the Highway Trust fund and maintains funding levels of $47.1 billion for highway programs, along with another $12.3 billion for.
Transit programs through 2021.
We are optimistic that this extension will allow the states, where we operate to evaluate their budgetary needs and dedicate dollars to much needed surface and transportation updates.
On an overall basis, India resources, and our companies had very strong results reporting combined record third quarter earnings all why operating under new protocols and safety measures related to the Kobe 19 pandemic.
We added to our workforce over the quarter and are now operating with record employment of more than 15600 employees.
With the help of each of our employees and our balanced mix of business regulated energy delivery and construction, we have been able to continue providing the infrastructure support that our nation needs.
As always India resources committed to operating with integrity and with a focus on safety, while creating superior shareholder value.
As we continue providing the essential services to our customers.
I appreciate your interest in and commitment to EMEA resources and as now that we open the line to questions.
Operator.
At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.
If you would like to withdraw your question press the pound key on your telephone keypad.
If you're on a speakerphone please pick up your handset before entering your request.
Pause for just a moment to compile the Q and a roster.
Our first question coming from the line of Ryan Levine of Citi.
Good afternoon.
Hi, Ryan good afternoon.
How are you.
Good first.
First question on the pipeline segment.
Exactly what were the dynamics and how the contract changes related to the to the one year delay for certain customers.
Okay.
Sure Ryan I'll ask Trevor Hastings to kind of outline what we're seeing today with north Bakken and just maybe a broad overview of the project because it's really a keynote project for Debbie I as we think about 2021 and beyond Trevor Thanks, Dave Thanks, Ryan.
We remain excited about the project as Dave noted.
We anticipate our FERC approval early in 2021.
Construction to follow that with an in service date, that's unchanged to November of 2021.
As we went through the kind of pandemic related production declines in the Bakken.
From March through the summer.
We had had various conversations with our six customers and offered.
A first year delay in a portion of their volumes and then as Dave noted in his opening remarks, basically we kept each of those customers contracts on net present value basis Hall by then adjusting either some combination of rate volume or term yeah.
At the conclusion of those.
Negotiations or conversations with customers three customers elected to take a reduced volume and then offset that impact in the first year with either an additional year in term or higher volume or a rate increase and so over the look of the whole project from kind of a.
Return hurdle standpoint, the project really remains fall other than we'll have lower year, one volumes and then actually we will end up with slightly higher year to volumes and a few contracts that will move instead of through year 10 will move into year 11.
What percentage of the overall customer volume expectation.
Great vision.
So our our.
Full year lets call. It second year full volumes will be 245000, Mcf a day the first year volumes will be a 133600 per day.
And we will still be positive from an aunt net income at an EBITDA perspective in that first year.
And then Ryan in Oh go ahead.
Yes, I was just going to.
At the.
And that Apple is shut down.
Does that trigger any events in terms of customer demand this done or have any impact on that project.
Doug.
But it.
Shouldn't directly it hasnt to this point.
I wouldn't foresee that being an issue directly related to this project.
It would have an impact overall to the Bakken potentially.
Okay.
And then.
Shifting gears to the construction materials.
No just the backlog had fallen would you be able to elaborate as to the drivers of that and what how the competition.
Project backlog.
Today, compared to maybe a year ago or prior quarters.
Okay.
Right Brian. Thanks for the question, we had Dave Barney dialed in from another state why don't make sure Dave's here to answer that before he does that I just want to maybe do a quick go back for you.
Your your questions related to north Bakken.
Need to also understand that actually the gas volumes in the Bakken while they knew they did come off on the early days of the pandemic are actually back to about 85% of the volume flow in which we saw pre pandemic and so theres certainly dynamics out there and it's a demand response and drilling activity has has tapered off some.
But certainly theres been a it's largely returned to again nearly pre pandemic levels on gas volumes. So just a I think that goes into context about why we feel confident and excited about this 2021 project. So.
Sorry for that go back, but I think that just helps maybe a little more of the larger picture there and then I'll ask Dave Barney.
Dave hopefully you're still on the on the line I know it was a.
Ryan's question related to our backlog there and how are we thinking about that or what's changed on a year over year basis.
Thanks, Dave Hey, Ryan.
Big portion of our backlog is down this year, Ryan we were able to get up get out earlier weather was favorable early in the year.
A lot of our regions were out.
In February March and the year before it was April may.
Not that concerned about our backlog was a record backlog last year, but if you look at your belt when were in 2018.
And we had record earnings in 2020, most of our work starts maybe in the first five to six months.
This coming year 2021, the bid schedule looks strong in most of our areas. So not really worried about picking up backlog.
Well get our share.
And.
Kevin Hey, we have you noticed any change in the margin profile or for your business.
Sounds like very strong in March.
Third quarter.
You're seeing that.
We really haven't seen any change in March.
Margins are staying strong we're holding our margin.
So no change right now on our margins is still there is still strong and still rising in most areas and some areas of their lives but.
The most markets to continue to hold or increase.
Okay. Appreciate it thank you.
Yes. Thanks for the question on that Ryan you know as we noted in our earnings guidance for construction materials that we do expect.
Margins too is it will be increasing in that in that segment. So.
Thanks for the questions Ryan.
This marks the last call for questions. If he would like to ask a question Press Star then the number one on your telephone keypad.
This call will be available for replay beginning at five PM Eastern today through 11, 59 PM Eastern on November 19th.
The conference I'd number for the replay is 1654638.
Again, the conference I'd number for the replay is 165.
For Sixthree a.
At this time there are no further questions I would like to turn the conference back over to management for closing remarks.
Okay.
Well. Thank you for taking the time to join US on our third quarter earnings call. Today. As a reminder, we were able to post record results at our businesses, while all working under a modified conditions as it relates to the COVID-19 pandemic and.
And given our strong results for the first nine months of the year, we have increased our earnings per share guidance range to $1.80 to $1.90 per share for 2020.
We have increased revenue guidance at our construction service business and expect margins to be higher at our construction materials business than the prior year again. Thank you. Thank you and we appreciate your continued interest in and support of MTO resources operator.
Thank you. This concludes todays MD resources Group conference call. Thank you for your participation you may now disconnect.