Q2 2023 MDU Resources Group Inc Earnings Call
Yes.
[music] standby were about to begin.
Hello, My name is going out and I will be your conference facilitator at this time I would like to welcome everyone to the MDU Resources Group 2023 second 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. Please.
A press the star key followed by the digit one on your telephone keypad. If you would like to withdraw your question Press Star two.
Webcast can be.
At Www Dot M D U dot com under the Investor Relations heading.
Select events and presentations.
And click Q2 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. Please go ahead Sir.
Thank you and welcome everyone to our second quarter 2023 earnings Conference call.
You can find our earnings release and supplemental materials for this call on our website at Www Dot MDU dot com under the Investor Relations tab.
Leading today's discussion along with myself will be Dave Goodin, President and CEO of MDU resources also with US today to answer questions. Following our prepared remarks will be Stephanie Barth, Vice President Chief Accounting Officer, and controller of MDU resources.
Cologuard Bristow, 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 21 E of the Securities Exchange Act of 1034.
While 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 result, where cause our actual 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 for a reconciliation of any non-GAAP information to the appropriate GAAP metric. Please reference the earnings news release.
I'll provide consolidated financial results for the second quarter before handing the call over to Dave for his formal comments on forward look.
This morning, we announced second quarter earnings of $137 million or <unk> 64 per share on a GAAP basis compared to second quarter 2020 to GAAP earnings of $70 7 million or <unk> 35 per share.
Second quarter income from continuing operations was $147 6 million or <unk> 72 per share.
It's important to note that with the spinoff of knife River being completed during the quarter <unk> 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 spin off and we're continuing with the tax advantage separation of our construction services business.
We are also reporting adjusted income from continuing operations to provide financial results that more closely correlate to better outline the strength of our ongoing business operations.
These adjustments reflect the May 31 spinoff of approximately 90% of the outstanding shares of Knife River Corporation, including the unrealized gain on the retained shares as well as any other items related to our strategic initiatives.
For more information on these adjustments. Please see the table provided on page seven of our earnings news release.
We experienced outstanding results from our businesses in the second quarter with adjusted income from continuing operations of $60 million or <unk> 29 per share compared to second quarter 2022, adjusted income from continuing operations of $36 1 million or <unk> 18 per share.
As we look at the individual businesses, our combined utility business reported earnings of $13 1 million for the quarter compared to a loss of $2 9 million in the second quarter of 2022.
The electric utility reported second quarter earnings of $16 3 million compared to $4 6 million for the same period in 2022.
The increase was largely the result of higher retail sales due to interim rate relief in North Dakota, and Montana, and a 31, 4% increase in commercial and residential volumes.
The volume increase is primarily the result of warmer weather and an electric service agreement to provide power to a data center near <unk> North Dakota.
Also driving the increase in earnings was lower operation and maintenance expense largely related to the absence of a prior year planned maintenance outage at one of our generating stations.
And lower payroll related costs.
This business also experienced higher investment returns on nonqualified benefit plans.
Our natural gas utility reported a seasonal loss of $3 2 million in the second quarter compared to a loss of $7 5 million in the second quarter of 2022.
Revenues and increased excuse me revenues increased primarily from higher basic service charges and approved rate relief in Washington, and Idaho.
The business also benefited from increased investment returns on nonqualified benefit plans during the quarter.
Warmer spring weather led to a 12, 5% decrease in retail sales volumes to all customer classes during the quarter.
Which was partially offset by weather normalization and decoupling mechanisms.
Increased operation and maintenance expense, primarily higher payroll related costs as well as higher interest expense added to the seasonal loss, which was partially offset by increased interest income associated with higher purchased gas cost adjustment balances.
The pipeline business earned $8 7 million in the second quarter compared to $7 1 million from this time last year.
The improvement in earnings was driven by higher transportation and storage related revenues.
This business experienced record quarterly transportation volume largely due to the increased contracted volume commitments from the North Bakken expansion project.
The pipeline business also benefited from nonregulated projects revenue and increased investment returns on nonqualified benefit plans during the quarter.
The increase was partially offset by higher operation and maintenance expense.
Primarily due to higher payroll related costs and nonregulated project costs.
In addition interest expense increased as a result of higher interest rates and higher debt balances.
Construction services reported record second quarter revenue of $747 million and record second quarter earnings of $38 6 million.
Compared to revenue of $685 4 million and earnings of $34 5 million for the same period in 2022.
EBITDA increased $10 6 million in the second quarter compared to the prior year.
Commercial utility industrial and institutional workloads, all increased for the quarter, which drove the record second quarter revenue.
Gross profit increased largely due to product mix in the commercial industrial and institutional markets offset in part by lower renewable project revenue and gross profit.
This business also saw higher selling general and administrative costs, largely higher payroll related costs and interest expense from increased working capital needs and higher interest rates.
As I mentioned results in each of our businesses were positively impacted in the second quarter on a noncash basis by higher investment returns on nonqualified benefit plans.
Collectively the positive earnings variance was approximately $8 4 million or <unk> <unk> per share when compared to the second quarter of 2022.
This change in investment returns due to fluctuations in the financial markets.
That summarizes the financial highlights for the quarter and now I will turn the call over to Dave for his formal remarks, Dave.
Well, thank you Jason and thank you everyone for spending time with us today and for your continued interest in MDU resources.
This second quarter was historic for our company as we completed the separation of Knife River Corporation on May 31, and.
An experienced outstanding performance from all of our remaining businesses during the quarter.
The knife River separation was monumental achievement for both our company and knife River and to add record results across our remaining businesses. During the quarter makes me extremely proud of and grateful for our hardworking and dedicated employees.
Our utility and our natural gas pipeline businesses continued to perform well the utility was positively impacted by rate relief and higher electric retail sales volumes during the quarter.
The pipeline business had record quarterly transportation volumes as we continue to see the benefit of increased contracted volume commitments, particularly around our north Bakken expansion project.
Construction services had record second quarter revenues second.
Second quarter earnings and second quarter, EBITDA, all driven by increased workloads and increased gross profit.
While completing this record amount of work construction services continues to see strong demand and secure additional projects to replace its completed or nearly completed projects ending the quarter with record second quarter backlog.
To summarize activity by business segment, I'll start off with the regulated energy delivery businesses.
The utility reported increased earnings on a combined basis for the quarter driven by rate relief in certain electric and natural gas jurisdictions.
Electric retail sales were 31, 4% higher which was due in part to warmer temperatures that increased customer usage, but also due to bringing on a new large volume customer during the quarter.
We expect our heskett unit four to be operational here later this year as we finish construction on the 88 megawatt natural gas fired generating facility located across the river here just in North Mandan.
We also continue to expect rate base growth to grow between six and 7% compounded annually over the next five years, driven primarily by investments in system infrastructure upgrades and replacements to safely meet customer demand.
We have received approvals on settlements in North Dakota Electric and Idaho natural gas rate cases, with new rates effective July one in both cases.
And we filed an all party settlement and the Montana Electric case as well.
Our utility continues to seek timely regulatory recovery for the investments associated with providing safe and electric and reliable natural gas and electric service to our growing customer base as.
As we expect to file three additional general rate cases, yet this year and one more in early 2024.
Our pipeline business performed very well during the quarter as Jason noticed this business recorded higher transportation and storage related revenues during the quarter and had record quarterly natural gas transportation volumes and.
In January of 2023, WBI energy filed a general rate case with the federal Energy regulatory Commission for increases in its transportation and storage service rates. These rates take effect on August 1st.
Subject to refund in the event of a rate case settlement agreement of which the company is in active discussions with the FERC and its customers on the.
The rates outlined in the settlement agreement would take effect in August of 2023.
We began construction in the second quarter here on three natural gas pipeline expansion projects that are anticipated to be in service here, yet in 2023 as well.
These projects will add approximately 300 million cubic feet per day of incremental capacity, increasing the total system capacity from $2 7 billion to 2.24 to $2 two 7 billion cubic feet per day.
With a strong start to the year for our regulated energy delivery business. We are increasing earnings guidance for the regulated businesses to now a range of $150 million to $160 million up $10 million from our previous range of $1 $40 million to $150 million.
Now I'd like to move onto our construction services business as I mentioned.
<unk> previously demand remains strong for our construction business services evidenced by our record second quarter revenue earnings and EBITDA, along with our backlog.
We are well positioned to complete these projects safely and efficiently with our ability to attract and retain a skilled workforce of 8500 employees across our 40 plus state footprint.
We are affirming our 2023 revenue guidance to be in the range of two $8 billion to $3 billion, and we expect slightly higher margins compared to 2022 and EBITDA in the range between 200 million to $225 million.
On July 10th we announced that our board of directors determined that we will pursue a potential tax advantage separation of our construction services business.
After an extensive strategic review the board determined that this was the best path forward to optimize value for our shareholders, while achieving our objective of becoming a pure play regulated company we.
We are focused on determining the best method and timeline to affect a separation and we'll keep you updated as we proceed.
Looking forward, our construction services business is well positioned to benefit from increased bidding opportunities as well.
With the funding from the infrastructure investment and jobs Act and the inflation reduction Act. Our construction services business will see increased demand in 2023 and beyond for the work it already excels in.
Overall as we look ahead, we are encouraged by our opportunities for ongoing customer and system growth in our electric and natural gas utilities.
Our robust slate of pipeline expansion projects and the steady demand for pipeline services, along with the high demand we're seeing for construction services.
We also announced today that the board of directors declared a quarterly dividend on the Companys common stock of $12 five per share.
This change in dividend reflects our intent to align our payout relative to the regulated energy delivery earnings with pure play regulated peer companies. The dividend is payable October one to stockholders of record on September 14th.
Along with this announcement, we establish a new dividend payout ratio target of 60% to 70% of our regulated energy delivery earnings. We are proud of our 85 year history of returning capital to our shareholders through the dividend and feel this new target payout ratio will allow us to continue this practice.
While reinvesting in the growth of our regulated operations as we progress on our strategic path to becoming a pure play regulated company.
As always MDU resources is committed to operating with integrity and with a focus on safety, while creating superior shareholder value as.
As we continue to providing essential products and services to our customers and communities, while being a great and safe place to work.
I appreciate your interest in and commitment to resources and ask now that we open the line for further questions and turn it over to you operator.
Thank you at this time I would like to remind everyone. If you'd like to ask a question. It is with Turkey, followed by the tier one AC.
Your question has been answered you may remove yourself from the queue by pressing the star Kian.
We do ask that you. Please pickup your handset before entering your request.
We will pause for just a moment to compile the Q&A roster.
Okay.
We will take your first question from Daria <unk> from Bank of America. Please go ahead.
Hey, guys. Good afternoon, and thank you for taking my question, maybe just starting off on the <unk> transaction can you.
Discuss at all the specific methods or perhaps when you might be able to update the market as far as what you are considering and timeline for the transaction.
Yep.
Certainly Darius I appreciate calling in and certainly your question is top of mind for here as well.
I'll, just maybe step back for a moment certainly our main focus here is how do we optimize the value here for our shareholders I think that is very central.
Our thinking CST is certainly of a great performing business, that's evidenced again by the second quarter results that we that we just posted here and when do we think of the backlog at a record level, even with record levels of revenue.
We think it's performing very well.
Certainly as we think about that business.
Certainly we've done recently has been with our knife river and that could be a net tax advantaged category as well, but we're also looking at other alternatives here as well.
So far as of timeline is concerned I would say there's been no final determination on the means of the tax advantaged separation certainly update you in the market as we go along I just would remind you that we're going to be very diligent here, but I think we've also demonstrated also our ability to do this kind of thing and.
With that I'll, just stop there, but we'll certainly update the market along the way.
Okay got it. Thank you certainly appreciate that color.
Maybe one on the updated guidance range for the year can you unpack or quantify at all the relative contributions to the higher guidance range from.
You've obviously got a tailwind from the Nonqualified plan, you've got the new large customer that you mentioned that the electric utility.
And also it looks like some some pretty constructive execution on the regulatory front can you.
Maybe it all rank how each of those or perhaps other factors contributed to the guide up.
Yes, no I appreciate you, noting that certainly are we're guiding up basically 7% if <unk> midpoint to midpoint from prior range. The new range. If you just kind of quantify that I would say the things. You noted there are all contributory to that certainly we've had favorable weather in the first part of the year.
We saw that with a strong winter volumes. If you will and then we went quickly from winter to an extended.
Late winter right into summer, which helped some of the electric volumes there.
So we saw that.
The large volume customers certainly as incremental too as we think about the year its large volume low margin, but at the same time additive and then certainly the regulatory activity that Nicole and her team have done with the completion, both North Dakota, and Idaho, and then an all party settlement.
Montana.
Those all have contributed in addition to Rob ramping up on North Bakken expansion, which we had expected frankly year over year. So we're very pleased with the progress.
Raising the guidance for the back half so I think youre spot on to quantify those they all contributed I would say.
Okay, great. Thank you, Dave one more if I can.
Just wanted to ask about the.
Segment level guidance for <unk>, specifically, you guys are pointing to interest expense of $15 million for the full year and it looks like it's.
It's pretty modest for the first half of the year are you expecting to issue some debt at that segment in the second half of the year.
Yes.
I'll ask adjacent since it's kind of a financing question that you've yet, but as a reminder, again, we're holding our guidance from our we raised guidance on the revenue side at the end of first quarter by $50 million, we're holding that two eight to three O for the remainder of the year and noting margins to be slightly higher on a year over year, but I think your question is more <unk>.
And then on interest expense and what were thinking there correct. They just want to make sure. We're answering your question.
Yes, that's correct the guidance implies.
An uptick in the second half of the year. So I was just wondering if there is implicit in that is an issuance of some incremental debt at that segment. Thank you.
Yes, I can I can jump in that area is thank goodness. This is Jason I think from our perspective as we look at this I mean, we really are focused on the guidance range that we've put out there for the revenue and the EBITDA.
Are things Thats really where were putting most of our focus at obviously with the EBITDA. We reconcile back to a earnings number which is probably where youre referencing some of those add backs I think throughout that process.
As we look at it as a range of outcomes. There I think that we could see we arent looking specifically at any additional debt issuance. There what we have seen with <unk> as we mentioned higher financing costs higher interest expense even here in the first quarter is that working capital numbers have been a little bit higher with this business as we've seen the vast amount of work that they've been working through here and the increase in backlogs.
Along the way that along with higher interest rates that we have seen have had an impact there as well so really what were kind of pointing to at this point is the expectation that we would see some of that persist here into the second half of the year I won't get specific on interest cost itself, we really don't give guidance at that level, but there is.
Some impact I think as we look at just kind of the balances that we see here today.
Say Darius.
Maybe tied into that but it's more of a question for you would be interested in hearing from Jeff Thiede more operationally I always thinking about the business, particularly the back half of the year.
Certainly that would be very helpful.
Yes, Jeff good UA and given what youre seeing on the ground there.
Absolutely.
Continuing to see strong demand for our services.
As reflected in our record Q2 backlog in.
That is also complemented by our record second quarter revenues.
Second quarter earnings our backlog is very broad based.
On the other hand, it's very diversified.
Building some of the most innovative and largest projects in multiple geographic regions across the country in the markets that we serve.
Several of those projects a portion Las Vegas headliner type projects that are well underway.
There are more projects ahead on our radar for the future.
When you look at our T&D side, and we have a lot of our service agreements or Msas.
That have been negotiated and renewed reflected our updated labor material and equipment costs, that's going to be a contributing factor to our success going forward. In addition, we've got some exciting projects in our T&D sector were underway and Kansas City on M Street power extent.
<unk> project and use 69 expressway. So this illustrates our diversification as a company and how we're able to capitalize on current markets and pivot to expanding markets for continued success.
Okay.
Great. Thank you team for the detail I'll pass it along here.
Thank you to areas I appreciate the questions.
Your next question will come from the line of Chris Allen from Siebert Williams.
Hey, everybody.
Hey, Chris.
Yes.
Discontinued operations number I'm really thinking from the other segment I presume Thats all knife River is there anything else included in that number.
Yes, Chris I might ask Stephanie Barth here, our chief accounting officer to maybe walk through a little bit. What's included there to help you and others. We know its a noisy quarter. When you think of that hence the discontinued operations and also the adjusted earnings on a year over year. So Stephanie Yeah, you bet, Chris one.
Keep in mind is we only had knife river's operations for two months.
In 2023 here in the second quarter compared to three months last year, and then I would say the other large contributor there would be the separation cost of some of the transaction related costs that.
We incurred.
Sure.
Professional advisors out there related to the transaction.
So the $14 $1 million loss.
As.
Purely knife river operational that doesn't include any.
Nate reverse specific transaction.
<unk> expenses.
No that would actually include the knife river transaction related cost okay.
Okay. So that.
The operational plus their share of Fiat Cheesecake initiatives, Okay got you.
Yes.
So.
You gave us the higher utility guidance, but given that knife river has been spun off in that.
<unk> construction services is still around for.
Certainly the vast majority of the year and through the.
Heavy construction season.
Why did you decide not to do consolidated guidance at this point.
Yes.
I would say it really goes back to a point that when we started the year, Chris about being more granular within each of the businesses providing guidance given the timing uncertainty with knife River, which grant you is in our <unk>.
Rearview mirror now, but I also think for investors. It's it's good to have more granular knowledge within each of the businesses as we think about them in.
I also would guide you and others to say that we do see ourselves as a future pure play regulated business at some point and so certainly I think as we think about our dividend as we announced here today as well that aligns with a payout ratio consistent with regulated pure play businesses. So.
We still think the guidance Meaningly represents what we view as a forward look in the business and I think from an investor point.
Should be meaningful from their eyes, too, but anything to add to that Jason just from a as you listen to Chris's question, Chris. Thanks for the question. The only other thing I would add is.
We also have the retained stake of nine forever as part of the organization here, yet as well and you'll see I think through a lot of the disclosures here and again as Dave mentioned, a little bit of a noisy quarter on some of that we had some unrealized gains on that kind of throughout the year that will be continuing operations. So even though it's part of a knife River thats.
That's been spun out that will continue to move around a little bit honest. So I think just to kind of put together a consolidated continuing operations number there's a lot of moving factors. There. So we just felt like it was more useful to stick with the segment specific guidance and kind of stay closer to that or the regulated energy delivery and then <unk>.
<unk> separately.
Okay.
Dave you talked about the dividend.
Youre going to end up.
Boldly.
Certainly maybe at the lower end of the new payout.
Four.
Maybe for 2024 can you give us some thoughts about.
Whats your thinking in terms of how that dividend growth will progress and how you see the payout evolving over time.
Yep.
Spot on question Chris.
<unk>.
Providing a.
Kind of a targeted or expected payout ratio that we just did here today is actually something new for us I mean thinking prior to our more diversified business model, yet, we always kind of talked about a long rich history of which we reinforced today of 85 years.
But certainly guiding folks towards actually starting in May we put out a release that we would expect our future dividends to reflect more of a pure play regulated business consistent with peers in that business. So I mean, thats kind of the underpins and then as we look to this 60 to 70 payout ratio.
Your question is so how do we see that over time, I think that that percentage ratio is appropriate.
Certainly thats based on earnings and also we would expect our earnings to.
I think rate base growth would be a proxy if you will for them from an earnings on a year over year basis, so rate base growth with proper regulatory tie.
Timely recovery the two should have a relationship and so that would be my expectation and then having said all that it is.
Obviously up to our board every quarter as we vet the.
The dividend discussion and all of these factors come into play, but that would be my expectation that it would have some replication of our proxy to basically rate base growth.
Okay.
One more question for Jeff.
Dave sort of touched on this about.
Sort of expecting some pickup in <unk>.
Activity from the various legislation.
What are you seeing on the clean energy side going forward are you seeing incremental business and is any of that really showing up in the backlog yet or is that sort of what's going to be a pretty sizable driver for you going forward.
I think more of a driver for us going forward and we haven't seen projects directly funded through the.
Infrastructure investment and jobs act or the inflation reduction yet in our backlog and these opportunities youre going to provide a tailwind for the future, we're very well positioned across to capture some of these projects due to our experience.
With this type of work and the services that we provide.
Highways bridges ports and airports and water systems I mentioned, the Kansas City Street car extension in the U F 16, I Expressway those are two projects, we're real excited about.
We're going to build upon our recent project completion and opening of the Kansas City Airport.
Yeah.
<unk> works at the Portland International Airport.
Of course, our experience in the renewable space, whether it's electric vehicles EV charging stations and solar work.
And it put us in a good position for future projects in this area contract awards, which just ended.
Course contribute too.
The momentum of our records.
Q2 backlog in an earnings we've got a great team and were well positioned in those type of projects that are on our radar.
Okay, great. Thanks, everybody appreciate the time.
Yes. Thank you Chris I appreciate the questions.
As a reminder, that is with Turkey, followed by the digit wanted you have a question or comment.
Starting with your question has been answered we will hear next from Ryan Levine from Citi.
And Hello, everybody in terms of day Ryan guidance.
Hey, Dave.
Guidance for the regulated business is there embedded any assumption around an outcome with the pipeline.
Coming settlement.
Any color you could share around.
Assumptions or potential upside to <unk>.
Current year guidance based on upcoming regulatory outcomes.
Yes, certainly we we put those factors and as we best see the future here I would say one of the other items that.
In addition, with items you mentioned would be we expect normal weather I mean, thats, how we look at normal degree days normal cooling degree days and factor that out throughout the year and certainly.
Timely recovery and then we risk factor that as well all of those come into play with the with the increased guidance that we're reflecting for the for the full year.
Okay.
Appreciate the updated.
Color around dividend policy.
Reflecting payout ratios and rate base growth I guess on that.
Follow up to that comment.
Is there any proceeds.
Or is there any potential change.
At the upcoming potential spin.
Could do to the dividend policy or should we look at the reestablish dividend dividend as a floor to grow from there.
<unk>.
The outcome of the upcoming ESG substantial transaction.
Yes, yes, no great question so.
Part of our purpose again signaling going back to May about we'd expect our future dividends will be aligned with peers as a regulated peer play business in that.
At some point, we'd look at opt.
Optimize the value of CST and a a tax advantaged type transaction that we announced here more recently so to your point. So we're kind of taking <unk> out of the dividend equation as we think about that.
Peers in that business, often do not have dividends and so we thought.
As we think about the underlying long term kind of future state of the company I think to your point, we are and we're being very specific on target ratio payouts here and it's specific to the regulated earnings I think you are spot on as we think kind of a baseline premier to growth.
Okay great.
And then in terms of the potential transactions that are being considered.
Is ending.
Thats getting the most attention youre looking at reverse Morris Trust type transactions or any other color around options that may be on the table.
As the company EMCORE evaluate potential alternatives.
Yep Yep so.
The short answer would be no.
Those would be options and there may be more in addition to those in a tax advantage means.
I wasn't sure that we did a market check point for this business and just felt where the market was that and given the relatively low tax basis of this business. We just felt that we could better optimize value of the business by a more tax advantaged separation and so.
I think that should give you some color as to what our thinking here is and then more as a reminder to you and others.
Just went through a full blown spin with named forever that.
In my humble opinion, I think created a tremendous amount of shareholder value certainly we've got some new institutional knowledge that we did not have a year ago is specific to a spin I don't want to over emphasize the spin here, but clearly we've got some experience there that we can draw and if it's the spin or some other means to find a tax advantaged way to <unk>.
Right the high performing business that it is today.
Okay, and then last question for me in terms of upcoming regulatory.
Bands outside.
Pipeline chart decision.
Can you refresh us as to.
<unk>.
And the team is spending their time across all your service territories.
In my comments I noted that we've got three cases that were planning for here yet this year I'll ask Nicole to touch on that and then one early in 2024, but she is clearly clearly closer to the activity that I am Nicole yes. So we're right now working through and had filed an all party settlement.
In Montana Electric case, there. So that was filed in June and we're waiting for an outcome from the commission on that one and then as we look to the remainder of the year, which I think is more of your question. We are intending to file in South Dakota on the electric and gas side in August and then file in North Dakota gas case later this year and then as we look ahead to next year.
Tension will be to file a multi year rate case in Washington early next year.
Thank you for the color.
Thank you Ryan appreciate those questions.
We'll hear next from the line of Brian Russo from Sidoti.
Hi, good afternoon.
Hi, Bryan good afternoon to you too.
Should we.
Use the updated.
Energy deliveries 2023 guidance as the base year.
To grow.
As you mentioned earlier, where your target to be 5% to 7%.
Which would be consistent with the rate base growth.
Yes, I'll ask Jason Vollmer to touch on that one.
Yes, thanks, Brian its a great question I think as we look at the dividend and how we are looking at that so as you mentioned, we increased our regulated energy delivery earnings guidance from what was $140 million to $150 million by $10 million of the new range of $1 50 to 160.
So we're excited about that portion of it if we think about the guidance.
We're looking guidance that we're giving now on it.
A targeted payout ratio of 60% to 70%.
I think when you think about that think about the midpoint of the guidance range that we have you can kind of do the math on that you'd see that we're right at that kind of $65, 66% payout ratio for the current year guidance, so that kind of echo what David said earlier, we really feel like this is a.
Based on the current forecast that we see it in our base to grow off of as we look forward.
As we look at the rate base growth I think you mentioned five to seven were actually in that 6% to 7% range to think about that so even a little bit higher than that as.
As we look back at the mid point of the guidance range for the utility right now compared to where we were or excuse me the regulated group compared to where we were a year ago were actually up in that 11%, 12% range on a year over year basis. So we feel very good about the trajectory of where this is going and we think that on a go forward basis. It's really does set us up very well to be able to grow off the base that we're establishing here today.
Okay, great and.
It seems as if.
By sometime in 2024, you will have basically filed and.
Concluded rate cases, and nearly all of your jurisdictions.
Should we.
Will there be a time, where.
You'll you'll be earning your allowed ROE or will there always be.
Some sort of regulatory lag just based on.
Test years et cetera, and is there any sort of like natural inherent lag in the utility businesses.
Yes, Brian I'll ask Nicole again, maybe with some details but kind of on a macro level. If we think about overall capex at her business along with <unk>, we are forecasting.
$2 5 billion over the next five years, which is in excess of depreciation and so kind of by its very nature, there is going to be some.
Regulatory lag there if you think of it that way but.
Anything to add to that Nicole I know, we're tightening up that that lag, but at the same time.
Because we are growing rate base at that 6% to 7% that Jason noted and we've touched on earlier there will be some inherent lag in there some jurisdictions longer than others based on forward looking or or rear looking test periods anything to add Nicole I didn't want to take the whole question, but I kind of did yes, no I think you summarized it well.
Hey, Phil.
Just what he said I mean, the punch line is that the rate of growth that we are a.
Achieving and expecting to get we are going to have some inherent lag cell.
Got the general rate case process that we do in all of our states and we'll continue to monitor our returns and file as appropriate the other thing that I would add to Dan's comments Selwyn.
Certain of our states, we have the ability to use tracker mechanisms sell in as an example in the state of Washington, We have a pipeline track on the state of Minnesota, We have a pipeline tracker in the state of North Dakota, we have various tracker mechanisms on the electric side, while we can do annual filings.
To reduce regulatory lag on certain of our investment opportunity. So we're going to do though is where we can and then manage our filings. According to growth in the other states where we're following underneath are allowed so I guess the punch line is what the growth rate. We have we will continue to have to.
B in the regulatory arena.
Okay, Great and then just on.
C S G.
Just on based on your operating statistics it looks like.
Nearly all of the revenue growth is coming from the electrical and mechanical.
Side of the business where of transmission and distribution was flat.
In this June quarter versus.
A year ago, and even when you look at year to date.
23 versus 2022 could you just kind of just discuss what's going on there I see the backlog is up.
On TNT, but it's down on <unk>. So I'm, just I'm curious what kind of dynamics youre seeing in those two.
I would say distinctly different.
And markets.
Sure Brian Jeff can you add some color on that as we think about that on a year over year basis.
Yes, absolutely our T&D sector most of the.
The work is through our MSA, so as I mentioned earlier.
Got updates with our MSA is we're going to see that reflection.
Earnings going forward as we caught up with the updated labor materials fuel and equipment.
Then on our projects in the T&D space that contribute to our backlog.
Our.
Most notably the.
The projects.
Quantify before the Kansas City streetcar extent channel U S 69, but also our wildfire mitigation that we're involved in in addition to the underground for electrical services, Bob Joint Trenching with gas and communications and we're doing this work for our customers and solid.
In California, the California Pacific Northwest Rocky Mountain Midwest, but mostly we're seeing that emphasis in ocala.
California from our utility customer, we have tremendous experience and a relationship with so some of it is timing.
Some of it is yes.
Capex.
<unk> set a released which is beyond our control, but we're incredibly well positioned to be able to capture this work on the T&D side and on the E&S side, we're seeing some of these projects.
<unk> in Las Vegas, but we're also.
Fighting and we're involved in other projects.
Our auto radar that are significant in that market.
Of course, we have expanded.
Into Arizona, because our customer asked us to be there and we're seeing significant contribution.
In that region for Us and there is another project that we're looking at in that area.
We hope to report in future calls here that are going to be contributory factor. So the work still out there still available and we're well positioned with our resources to be able to get the best of it and continue our success.
Okay, Great and then also just the way the the overall ESG business mix has evolved over the years it seems that the.
<unk> side of the business has been growing at a faster at a faster rate.
And maybe it's about <unk>.
Two thirds to three quarters of the topline, but given the margins are lower.
Relative to T&D.
I'm just curious you know.
Do you think you're going to get back to you.
Your historical.
Pre inflationary type margins.
With the new backlog over the next 12 or 24 months.
Jeff do you want to take that one.
Absolutely we want both business to grow limiting factor is really our people and labor very difficult on the T&D side, because the level of available.
Qualified labor, but we have support of our companies through our Capex program through our expansion.
<unk> built a brand new facility in Kansas City.
For our T&D company, there and that company is growing and then of course the.
We see in the future.
With the granting of the electrical services I believe is <unk>.
To help build that backlog and that balance and Meanwhile, with the.
Expansion of the opportunities and the mission critical market.
And we have a couple of healthcare projects that are significant one in the mid Atlantic the other one in Ohio, but we're seeing the.
Faster growth in the opportunities and so we're going to capture the ones that best fit us on our resources and with the customers that align with our values and where we can be most successful.
Alright, Okay. Thank you very much.
Thank you Brian .
Yes.
As a final opportunity, ladies and gentlemen that starkey followed by the digit one if you have a question or comment also please note the webcast can be accessed at www Dot <unk> dot.
Dot com under the Investor relations heading.
The events and presentations in Q2 2023 earnings conference call. After the conclusion of the webcast a replay will be available at the same location.
Well pause for just a moment.
At this time there are no further questions in the queue I would like to turn the conference back over to management for any additional or closing comments.
Thank you Lynette and thank you all for taking time to join US here on our second quarter earnings call.
As you heard earlier, we are optimistic about our growth opportunities and our future regulated energy delivery projects and encouraged by the strong demand and performance of our construction service businesses as well.
We certainly look forward to connecting again as here, we pass and progress through 2023.
And above all we thank you again and we appreciate your continued interest in and support of MDU resources and with that I'll turn it back to you linette.
Thank you. This concludes today's MDU resources Group Conference call. We thank you all for your participation you may now disconnect.