Q3 2024 MDU Resources Group Inc Earnings Call

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Todd: Hello, my name is Todd and I will be your conference facilitator. At this time, I would like to welcome everyone to the MDU Resources Group 2024 Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise.

Todd: After the speaker's 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 1 on your telephone keypad. If you would like to withdraw your question, please press star 2 on your telephone keypad.

Todd: The webcast can be accessed at www.mdu.com under the Investors heading.

Todd: Select Events and Presentations and click Q3 2024 Earnings Conference Call.

Speaker Change: I would now like to turn the conference over to Jason Vollmer, Vice President, Chief Financial Officer, and Treasurer of NDU Resources Group.

Thank you. Mr. Vollmer, you may begin your conference.

Todd: Thank you, Todd, and welcome, everyone, to our third quarter 2024 earnings conference call. You can find our earnings release and supplemental materials for this call on our website at www.mdu.com under the Investors tab.

Todd: Meeting today's discussion along with me is Nicole Kivisto, President and CEO of MDResources. Also with us today to answer questions following our prepared remarks are...

Stephanie Siebert, Vice President, Chief Accounting Officer and Controller of MD Resources Rob Johnson, President of WBI Energy and Garrett Singer, our Chief Utilities Officer

During our call, 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 are based on reasonable assumptions, actual results may differ materially. For more information about the risks and uncertainties that could cause our actual results to vary from any forward-looking statements, please refer to our most recent SEC filings.

Todd: We may also refer to certain non-GAAP information. For reconciliation of any non-GAAP information to the appropriate GAAP metric, please refer to our earnings release.

Todd: With the completion of the Everest Construction Group spin-off occurring on October 31, third-quarter results for Everest are included in MD Resource's quarterly results.

Todd: However, we will be focusing our discussion on our remaining utility and pipeline business results for the quarter.

Todd: Ambrose hosted a call earlier today, during which they discussed their quarterly results, and I will refer you to their replay and transcript for further details.

Todd: I will provide consolidated financial results later during the call, but first we'll turn the call over to Nicole for her formal remarks. Nicole?

Nicole: All right. Thank you, Jason, and thank you, everyone, for spending time with us today and for your continued interest in MD resources.

Nicole: As I reflect on the last few years, it is phenomenal how much has been accomplished.

Todd: We are well positioned for growth into the future, with anticipated customer growth of 1-2% annually and expected long-term EPS growth of 6-8%, while targeting a 60-70% annual dividend payout ratio.

Todd: Our third quarter results maintain the positive momentum we have experienced throughout 2024. Notably, at our utility business, we have demonstrated solid results driven by strategic rate adjustments and expanding infrastructure investments.

Todd: These achievements across our businesses underscore our unwavering commitment to delivering safe and reliable service and sustainable growth, with our dedicated employees playing a pivotal role in our continued success.

Our business remains poised for compelling long-term growth prospects.

Todd: Our combined retail customer base grew by 1.5%, which reinforces our company's need to proactively manage our utility infrastructure to meet the demands of our growing customer base.

Todd: On the regulatory front, it certainly was a busy quarter at our utility business.

Todd: Moving to the data center front, we filed an electric service agreement with the South Dakota Public Utilities Commission to serve a 50-megawatt data center that will be located near Leola, South Dakota.

Todd: to 350 megawatts, including the existing data center we serve, we now have 580 megawatts of data center load under signed electric service agreements.

Todd: Of that total, 180 megawatts are currently online with a balance starting to come online next year and continuing through the next few years.

Todd: We also had some additional regulatory activity over this past week. On October 30th, we provided notice to the Administrative Law Judge that a settlement in principle has been reached in our Washington multi-year rate case.

Todd: At our pipeline business, we achieved record third quarter earnings, up 27% from the third quarter of 2023. This segment is executing well on our core strategy and delivering strong results.

Todd: We remain committed to investing in future expansion projects to meet increasing customer demand for services, including strong interest from industrial customers and power generation projects.

Todd: Our Line Section 28 Expansion Project, placed in service during the quarter, added 137 million cubic feet of natural gas transportation capacity per day to our system.

Todd: Construction continues on our Wahpeton expansion project in eastern North Dakota, which will provide approximately 20 million cubic feet of natural gas transportation capacity per day and is anticipated to be in service in the fourth quarter of 2024.

Todd: and the strong performance of our pipeline, with additional expansion projects underway, as well as the consistent demand for pipeline services, are all promising as we finish out 2024.

Speaker Change: Thanks, Nicole. I'm pleased to share the details of our third quarter results. As a reminder, with the Everest spinoff occurring on October 31st, third quarter results from Everest are included in the following numbers. In future reporting periods, Everest results will be reclassified as discontinued operations and comparative data will be recast.

Speaker Change: Third quarter income from continuing operations was $62.2 million, or $0.31 per share, compared to $78.2 million, or $0.38 per share, in 2023.

Todd: It's important to note that certain costs associated with the spinoff of Knife River last year are reported as discontinued operations in our gap-based results for the prior year. In addition, we experienced an unrealized gain on the retained shares of Knife River in the third quarter of 2023. This gain was $22.8 million net of tax and was reported in continuing operations for 2023.

Todd: With the completion of the KnifeRiver spinoff and work performed on the Everest spinoff, we are also reporting adjusted income from continuing operations to provide financial results that more closely correlate with and better outline the strength of our ongoing business operations.

Todd: For more information on these adjustments, please see the first table in our earnings release.

Todd: We experienced solid results from all of our businesses in the quarter with adjusted income from continuing operations of $65.5 million, or $0.32 per share, compared to third quarter 2023 adjusted income from continuing operations of $58.6 million, or $0.29 per share.

Todd: As we turn to our individual businesses, our utility business reported earnings of $6.8 million for the quarter, compared to earnings of $3.2 million in the third quarter of 2023.

Todd: Electric Utility reported third quarter earnings of $24.3 million compared to $20.9 million for the same period in 2023.

Todd: The increase was largely the result of higher retail sales revenue from rate relief and higher volumes to residential and commercial customers largely due to warmer weather.

Todd: The National Gas Utility reported a seasonal loss of $17.5 million in the third quarter, compared to a loss of $17.7 million in the third quarter of 2023.

Todd: Improvement was largely the result of higher retail sales revenue due to rate relief in certain jurisdictions and higher investment returns on non-qualified benefit plans.

Todd: These increases were largely offset by the absence of recovery of interest expense in Idaho related to gas costs in 2023.

Todd: The pipeline business posted record third quarter earnings of $15.1 million compared to $11.9 million in the third quarter last year.

Todd: Earnings increase was driven by record third-quarter transportation volumes, primarily from organic growth projects placed in service in late 2023 and throughout 2024.

Todd: Higher storage-related revenue and new transportation and storage service rates that were effective as of August 1st of 2023 also drove the increase in earnings.

Todd: Increase was offset in part by higher operation and maintenance expense, primarily payroll-related costs and higher materials and contract services.

Todd: The business also incurred higher depreciation expense due to organic projects placed in service.

Todd: Business momentum is strong as we close out the third quarter of 2024. We will continue to provide updates as we close out the rest of this year.

Todd: That summarizes the financial highlights for the quarter. We appreciate your interest and commitment in MDR resources and now ask that we open the line to questions. Operator?

Speaker Change: At this time, I would like to remind everyone, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, please press star 2 on your telephone keypad.

Speaker Change: If you are on a speakerphone, please pick up your handset before entering your request. We will pause just a moment to compile the Q&A roster.

Speaker Change: Again that's star 1 to ask a question. Your first question will come from Chris Ellinghouse with Siebert Williams Schenck. Please go ahead.

Can you hear me?

Chris Ellinghouse: Good afternoon, Chris. We can hear you. Hey, Nicole. Hello. The increase in the guidance, have you got any color you want to add to it? Was it, you know, the weather was good in the quarter, so was that a big piece of the guidance? Or, you know, what are the pieces you're thinking about?

Speaker Change: You know, some weather-related impacts, as you already highlighted, in the quarter, as well as the very strong momentum we're seeing at the pipeline this year. And we've got that also kind of laid out in the news release as well.

Speaker Change: Yeah, was the, was, were the pipeline results better than you expected and why would that be?

Speaker Change: But we are seeing year-over-year impact from that. But we are also seeing record transportation. And in addition to that, storage was certainly much stronger than we expected this year. But, Rob, any other color you would provide there?

Speaker Change: No, Nicole, I think you summarized it well. Storage was a primary driver, you know, the growth projects we expected and we expect to continue, but storage market has just been extremely strong and the primary driver for that increase.

Speaker Change: Okay, great. Can you provide any color on the pipeline acquisition? What was, you know, what was your thinking there? Volumes.

Speaker Change: increasing to that processing plant that you saw as an opportunity?

Speaker Change: Now we certainly see it as a strategic acquisition here but I can get turn over to Rob for some details there, Chris.

Rob Johnson: Thanks, Chris. This particular pipeline from this processing facility, we currently have a pipeline that runs from this facility.

Rob Johnson: does a couple things. Long term, it's a very strategic fit for assets in the Bakken. This was a smaller acquisition.

Rob Johnson: annually and can expect kind of a normalized per regulated return on those assets.

Great, that's helpful.

Speaker Change: Nicole, the Montana interim increase, have you got any thoughts on that?

Speaker Change: You know, what that tells us about the Montana regulatory climate, at least for you or for GAS or whatever thoughts you might have there.

Speaker Change: It represents about 5% of our overall rate base. So, we continue to like the state of Montana as part of our overall portfolio, but I will say we continue to also appreciate the diversity that we have across our 13 jurisdictions.

Okay. Alright, thanks. I appreciate the details.

Thank you, Chris.

Speaker Change: Thank you. As a reminder, if you would like to ask a question, please press star 1 at this time.

Speaker Change: Your next question comes from the line of Ryan Levine with Citi. Please go ahead.

Hey, everybody.

Speaker Change: Congratulations on the spending complete. I guess it looks like you wasted no time with the first day post-bin to announce this acquisition.

Speaker Change: Should we look for the new MDU to be more focused on acquisitions going forward or any any thoughts that you're able to share around your strategic outlook for M&A?

Speaker Change: I'm sure that I acknowledge the significant and monumental efforts of the team as we've arrived at our future state here. Couldn't be happier with the results in terms of overall shareholder return created. And here we are today now, arrived at where we said we were seeking a couple years back.

Speaker Change: putting us in a place, and you heard me talk about it in the script, where I really believe strongly we've got future organic growth in front of us. So I'm very excited about our future from an organic growth perspective as you look at the capital.

We've got plenty of opportunities to grow organically.

Speaker Change: That being said, we have been acquisitive in the past. We have grown our utility business through acquisition. You just alluded to the pipeline acquisition that we've done here. We will look at opportunities to grow acquisitively as well, but we're only going to do it if it makes sense for shareholders, customers, and our employees.

Speaker Change: Historically, the industry and business hasn't been a focus of M&A. Is that still the case, or is there more commercial opportunities that you see?

Speaker Change: I'm sorry, could you repeat that? Were you saying historically our pipeline, Chris? Is that what you were asking specifically? Yeah, your pipeline, I mentioned business. Yeah, is that an area that you...

see inorganic growth opportunities.

Speaker Change: Yeah, I can let Rob also add some color commentary here, but as we look at our pipeline, I would probably say, you know, kind of summarize it the same way I just summarized our total company. I mean, there's a lot of customer demand projects that are driving organic growth opportunities within our system. Our strategic positioning within the Bakken is certainly a huge value add for our pipeline business. But that being said, just like I reiterated on a total company basis, the pipeline is going to look at opportunities, which could include acquisition of pipe. So Rob, anything further on that?

Rob Johnson: Data centers are part of that, PowerGen, LDC growth, etc. So, really potential projects in kind of all areas of our industry.

Speaker Change: I appreciate the color there. And on the gas storage asset in particular, what was the contribution for that asset this quarter? And given the contract portfolio, is that expected to continue into next year or any?

Speaker Change: that kind of duration that you see in terms of the outperformance there.

Speaker Change: As we think about the outlook, you know, 2025 and beyond, as I'm assuming is kind of what your question is teeing up to, we will certainly be evaluating that and providing our guidance to the market in February for 2025. But it certainly has been, you know, a benefit to 2024.

Great. Thanks for taking my questions.

Thank you.

Speaker Change: Thank you. As a reminder, if you would like to ask a question, please press star 1 at this time. We'll pause just a moment to allow any additional questions to queue.

Speaker Change: At this time there are no further questions. I would now like to turn the conference back over to management for closing remarks.

Speaker Change: Okay, thank you. Thank you everyone for taking the time to join us today for our third quarter 2024 earnings call. As you have probably heard, we are very optimistic about our growth opportunities and future projects as we move forward and execute on our core strategy as a pure play regulated energy delivery business.

Speaker Change: We thank you again, and we appreciate your continued interest and support of MD resources. And with that, I'll turn the call back to you, operator.

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