Hello. My name is Catherine and I will be your conference facilitator. At this time, I'd like to welcome everyone to the MTU Resources Group 2021 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.
21. This call will be available for replay beginning at 5 pm Eastern today to 11:59 pm Eastern on August 19. The conference ID number for the replay is 5,52, 7,896. Again, the conference ID number for the replay is 5,52, 7,896. The number to dial for the replay is 1-eight fifty five 859-2056 or 404-537 3406.
I would now like to turn the conference over to Jason Vollmer, Vice President and Chief Financial Officer of MDU Resources Group. Thank Thank you, Mr. Vollmer. You may begin your conference.
Thank you, and welcome, everyone, to our Q2 2021 earnings conference call. 1. You can find our earnings release and materials for this call on our website at www.mdu.com under the Investors tab. Leading our quarterly earnings discussion today are Dave Goodin, President and CEO of MDU Resources and myself. On the line to answer any questions you may have following our Presentations are Dave Barney, President and CEO of Knife River Corporation Jeff Thiede, President and CEO of MDU Construction Services Group Nicole Covisto, President and CEO of our Utility Group Trevor Hastings, President and CEO of WBI Energy and Stephanie Barth, Vice President, Chief Accounting Officer and Controller of MDU Resources.
During today's discussion, including responses to questions. Some comments may contain forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Although the company believes that its expectations and beliefs are based on reasonable assumptions, actual results may differ materially. For a discussion of factors that may cause actual results to differ, We direct you to our earnings release and to Item 1A Risk Factors in our most recent Form 10 ks and 10 Q. Q2 2020 earnings of $99,700,000 or also $0.50 per share.
During the quarter, our results were impacted by higher stock based compensation and healthcare costs of approximately $4,200,000 after tax. Further impacting our 2nd quarter consolidated results While these items had an impact on the quarter's results, all of our operations performed very well throughout the 1st 6 months of the year, growing consolidated revenues by 3.5% percent increase in earnings $27,500,000
year to date.
Our utility business earned $9,600,000 for the 2nd quarter compared to earnings of $11,200,000 in the Q2 of 2020. For the Electric Utilities segment, reported earnings of $10,300,000 for the quarter compared to $12,200,000 for the same period in 2020. Higher operation and maintenance expense largely the result of higher labor related costs Including the increased stock based compensation expense and healthcare costs as we previously discussed as well as increased generating station expenses drove the decrease in earnings. 1. Lower benefit plan investment returns also negatively impacted the results.
Partially offsetting the decrease Higher adjusted gross margin driven by a 6.9% increase in retail sales volumes. Sales volumes increased for industrial and commercial customers during the quarter 1. And we're offset in part by lower residential volumes as the impacts of the COVID-nineteen pandemic start to reverse and individuals are returning to work as businesses reopen. 1. Higher demand revenues and higher revenues associated with transmission interconnect projects also had a positive impact on the adjusted gross margin.
Our natural gas utility segment reported a seasonal loss of $700,000 improved from a seasonal loss of $1,000,000 for the same period in 2020. 1. Adjusted gross margin increased during the quarter from approved rate recovery and 2% customer growth. Transportation revenues also increased from higher volumes transported to the company's electric generation customers. Partially offsetting the decreased loss was higher operation and maintenance expense, primarily labor related costs as previously discussed as well as lower returns on certain benefit plan investments.
The pipeline business had earnings of $9,200,000 in the Q2 compared to $9,000,000 in the Q2 of 2020. Higher non regulated project revenues and increased allowance Funds used during construction were the primary drivers of the increase in earnings. Partially offsetting this was higher operational maintenance expense relating to the previously mentioned increase and non regulated projects as well as higher payroll. Now turning to the construction businesses. Construction Services reported record second quarter earnings of $28,900,000 compared to the prior year's record of $27,900,000 Revenues increased 6% on a year over year basis to a second quarter record of 525,600,000 Demand for construction services remains high for both the inside and outside specialty contracting.
Inside specialty contracting saw strong demand for commercial and industrial work, Specifically in the manufacturing industry and outside contracting workloads increased with high demand from the utility industry. Lower depreciation, depletion and amortization expense resulting from decreased intangible amortization related to prior acquisitions also contributed to the increase in earnings. 1. Construction Materials business reported 2nd quarter earnings of $51,400,000 compared to the prior year's $53,000,000 in the 2nd quarter. 1.
Revenues increased 2 percent to $633,800,000 The decrease in earnings was primarily the result of higher selling, general and administrative expenses from increased labor related costs as we have previously discussed. Lower returns on certain benefit plans also impacted the quarter. Partially offsetting these items was lower interest expense due to lower average interest rates. That summarizes the financial highlights for the quarter. And now I'll turn the call over to Dave for his formal remarks.
Dave?
1. Great. And thank you, Jason. And thanks to those of you listening in and spending some time with us today and for your continued interest in MDU Resources. 1.
Today, I'll walk through each of our business lines to highlight some notable drivers in the quarter and go into greater detail about some of the organic growth items covered in yesterday's news release. Starting with our regulated energy delivery platform. We now have approximately 1,150,000 customers across our electric and natural gas utility businesses. 1. Enter Utility employees remain focused on organic growth and infrastructure improvements that help to safely and efficiently serve our customers.
1. We continue to expect strong customer growth across our service territory outpacing the national average and in the range between 1% 2% compounding annually. The electric utility finished the pre commissioning decommissioning activities on the coal fired Unit 1 at the Lewis and Clark to retire Units 12 at Heskett Station near Mandan, North Dakota early next year, which are the last of the company's wholly owned coal fired facilities. Our generation portfolio in regards to nameplate capacity prior to the commencement of the retirements, one. These retirements was 48% coal and will decrease to 31% in 2023 upon completion of the proposed Heskett 4 Natural Gas Fired Peaking Unit.
Our natural gas utility along with our pipeline business WBI Energy recently announced a project That will increase natural gas service to Wahpeton, North Dakota, while also being able to offer natural gas service for the first time to Kindred, North Dakota. 20 The project involves constructing approximately 60 miles of 12 inches pipeline from our existing facilities at Mapleton, North Dakota 2 Wapentin. It will add 20,000,000 cubic feet per day of natural gas capacity and is expected to cost approximately 75,000,000 1. Depending on regulatory approvals, construction is expected to begin in early 2024 with a completion date later that year. 1.
Speaking of our pipeline business, we're excited that in early July, WBI Energy received final FERC approval, allowing construction to begin on the North Bakken Expansion Project in Western North Dakota. This $260,000,000 project will add 250,000,000 cubic feet of daily natural gas transportation capacity to our system, bringing WBI's total pipeline capacity to more than 2.4 Bcf per day while helping to reduce natural gas blaring in the region 21. And allowing Bakken producers to move natural gas to market. Construction began here in mid July and with favorable weather during the construction season. We expect the project to be in service by end of this year.
Now moving on to construction. Our construction services group had an outstanding 2019. Standing 2nd quarter as demand for both inside and outside specialty contracting remains very strong. CSG reported record second quarter revenues and earnings and an all time record backlog Now standing at $1,320,000,000 as of the end of June. Bidding remains highly competitive in all areas, but we are confident That our relationships with existing customers, our skilled workforce and our high quality of service will aid In securing and executing on profitable projects.
As a reminder, revenue guidance at this business for 2021 Continues to be in the range of $2,100,000,000 to $2,300,000,000 with margins comparable to or slightly higher than 2020 levels. 1. And finally, at our Construction Materials business, while earnings were down slightly year over year, Knife River is operating at near record levels, 1, falling just short of the prior year's record Q2 earnings while continuing to produce record revenues. Demand and pricing for aggregates and ready mix concrete is strong across a number of markets. Construction Materials reported backlog at the end of the quarter $912,000,000 an increase of over 4% from the prior year.
1. Revenue guidance for this business is also in the range of $2,100,000,000 to $2,300,000,000 with margins comparable to our 2020 levels. We remain optimistic about our construction businesses and continue to evaluate strategic acquisition opportunities that will enhance our existing footprint And appropriately expand our business all while earning attractive returns on invested capital. As mentioned in our news release yesterday, We feel very positive about the conversation surrounding infrastructure funding packages at the federal level as well as at various state levels across our footprint. 1.
With combined construction backlog at an all time record at $2,230,000,000 as of June 30, The proposals will provide additional opportunities to some of our core areas of business such as surface transportation improvements, Thanks for sharing guidance of $2 to $2.15 for this year of 2021 or in our 5 year capital investment plan for that matter as well. Overall, we are very pleased with our performance throughout the first half of the year. Our focus at MDU Resources has been and continues to be to produce significant long term value as we execute on our business plans, Our organic growth projects and our targeted acquisitions. We continue to maintain a strong balance sheet, solid credit ratings and a good liquidity position. For the last 83 consecutive years, we provide a competitive dividend for our shareholders 2019 and have been increasing it for the last 30 years.
As always, MDU Resources is committed to operating with integrity and a focus on safety
21. 21. And your first question comes from the line of Chris Ellington with Cybert William Shanks.
Hey, everybody. How are you?
Hi, Chris. Good afternoon.
Good afternoon, sir. Can the guys sort of just talk about what the construction season in the second quarter look like and how
20
Service is coming off the record second quarter that they just posted. Go ahead, Jeff.
All right. Thanks for the question, Chris. Our bidding opportunities are strong in all of our markets and there continues to be demand for our services that we provide. Competitive markets and we secure many of our project awards based upon a price and non price criteria for best value one. And that helps us continue to perform at good margins.
And some of our markets have experienced some increased competition. However, the strength of 21. People and attention to meeting or exceeding our expectations in safety and production quality that resulted in strong backlog and performance one through Q2 this year. And we are seeing some projects, large projects get completed. We were still seeing good bidding opportunities going forward.
And Thank you. Go ahead.
I just wanted to ask
Go ahead, Chris.
Weather was for the construction season. Was it favorable?
I think it's favorable. Yes?
Yes. Okay.
Absolutely. Yes.
Chris, should we turn to Dave Barney?
Sure.
Conference call.
Yes. So Dave, you want to talk about the Q2 just a bit and certainly highlight the $912,000,000 you have in backlog here at the end of the second quarter?
Going into the next two quarters, we're happy where we're at with our backlog. Margins We're very strong for us and continue to grow. We've had some definitely increases in products. We've been able 21. To pass along, the second quarter was a great quarter.
Year over year, our margins on all materials are up. We expect That to continue throughout the year. July, we did have some hot weather, some days out there that We're over 100 degrees that slowed us down a little bit, but we believe July and the rest of the year is still going
to be strong for us.
1. Okay. For the 2 construction businesses, have you guys evaluated where the infrastructure bill stands 21. And have you got any thoughts on how that might impact you? And sort of as an aside question, you're already Pretty well strained in terms of construction capacity.
How do you envision an influx of infrastructure 20 1. Projects over the next couple of years, margins and labor capacity and things like that.
Chris, I'll start and then both Dave and Jeff can give a little maybe detail With their respective businesses. But as we've reviewed the current infrastructure package that's under debate in the Senate, 21. On the incremental new dollars associated with that and if you look at the large buckets, whether it be transportation, 20 1. Roads, bridges, kind of traditional transportation, highway infrastructure, broadband, There's some EV dollars in there for EV network. You've also got, I'll say, power delivery, energy delivery percent.
Sure plan fit right in the wheelhouse of what we do between our materials and services business. And Again, that's broad based, but when we look at the big buckets, we get quite excited in the fact that those are new dollars flowing into industries that we Perform and I think we performed very well. Now obviously the devil is in the details and what the final bill is produced 2. And back over in the house and through a conference committee, etcetera. But certainly what indicates today is it's a lot of what we do today.
And so that might be a suffice answer for you at the moment, but I think you also wondered about how we would handle the additional work and workload Opportunities at each of services and materials. And maybe for that, I'll kick it over to Jeff. Jeff, can you Kind of touch on that in light of again, we see this beyond 2021. This is 2022 and beyond, I mean, from a timing perspective. But just maybe help Chris out with Some of your thinking.
Okay. We've been able to retain our workforce during the Q2 and We've been doing that by focusing on retaining training and attracting industry top talent. Our commitment to safety and treating people with 20 1. Thank you. Thank you.
Thank you. Thank you. Thank you. Thank you. Thank you.
Our next question comes from 20 1. Sure, Bill. Our Insight group has some similar challenge with qualified labor, but our recruitment and training efforts continue Yes, we're very proactive in our respective markets and also industry on recruiting in high schools and STEM programs, women in trades, minority and college groups. So we've been able to recruit the workforce needed to keep up with the demand and to build out our backlog safely, productively and
21. And maybe following on Dave Barney in the materials area.
1. Yes, Chris. Our plant count is about where it was last Sure. We are definitely focused on retaining and recruiting employees. We're in the process of building a world class training center right now in Oregon for all of our companies and not just Knife River for the industry.
We think that will definitely help us Going forward in the future, but it's something we're focused on and we'll continue to focus on, but we definitely think if 21. As this infrastructure bill gets passed, we will see increase in bidding opportunities. And with that, we Expect our margins to continue to go up also. Okay, great. Thanks
for the details guys. I appreciate it.
Thank you, Chris. Appreciate the questions.
Your next question comes from the line of Brian Russo with Sidoti.
Hi, good afternoon.
Hi, Brian. Good afternoon to you.
Hey, I know you touched upon possibly Labor issues as an industry as a whole and raw material inflation. There was a large construction material peer the other day That reported and they noted that higher prices for diesel and liquid asphalt were impacting their margins. And I'm wondering how are you countering that generally speaking and or could you just maybe get a little bit more granular 1. Your cost inputs and how you're managing what seems to be an industry wide issue impacting some companies more or less than
others. Yes, sure. And the question, Brian, is more particular On the material side and you said, for example, others have noted diesel and liquid asphalt is 2 of the drivers. I'll ask Dave Barney to address what he's seeing in his business so far as inflationary pressures and commodity price Like items that you noted. Dave?
Yes, Brian. We definitely are seeing diesel Prices continue to increase. It is a concern going forward. But like I've said before, we continue to push our margins Up on our aggregates, ready mix, even on our construction side, we have seen our AC oil Pricing come down from last year. So we've been able to pretty much hold our margins on that.
We've Lost a little bit on margins in some of our jobs, but most of our jobs, we continue to increase those prices.
Okay, great. And I think maybe it's on the services side, you mentioned strength in manufacturing. Could you just be more specific what submarkets of manufacturing you're seeing that strength?
Certainly. Sure. Jeff? Okay. No, go ahead, Jeff.
Okay. Sorry about that. Manufacturing encompasses the productions of goods and services with confidential clients. Channel. That really sounds like a non answer.
However, we're bound by our confidentiality agreements with these clients. What I can share is that we've been asked to Enter a new geographic market with a satellite office for a couple of our clients to serve them for another large build that's just getting started. Successfully completed and are completing for nearly 3 decades of this client that we've had.
1. Okay, great. And is your construction services business and or the material side involved in undergrounding of transmission and distribution?
We are. Yes, Jeff.
Yes. If you're talking about what's been published by Pacific Gas and Electric, that's one of our largest customers and that It is an area of work that is right in our wheelhouse. We're doing distribution and transmission for this client and we also do underground work. One. So combined with our expertise in the market that we're serving for PG and E plus adding to that With some of our sister companies, we see that as a great opportunity to serve our client in this area.
1. Okay, great. And just on the pipeline side, the $75,000,000 expansion project, I'm just curious why is construction not until 20
24. Yes. Brian, I'll just touch on that. Trevor is here to give you more details. But really that's the timing to go through the full regulatory process, the full siting and just we just kind of went through this process preceding our North Bakken expansion Project.
So we've got a pretty good feel for that. Anything Trevor to add to that? That's it. Okay. 1.
Okay. Understood. So it sounds like that that's kind of an organic growth opportunity for the pipeline segment. 21. Can you quantify or put some numbers behind kind of the size of that opportunity one for expansion.
Sure. This is Trevor. At this point, we haven't disclosed 2018. Any of the financial numbers around it. We're in the front end work getting ready for the pre filing process that Dave referenced later this fall.
1. Generally, if you take the $75,000,000 capital budget, our FERC Capital. Cap structure is 60% equity and imply a FERC return. You get in the wheelhouse of kind of what the earnings impact of the project could be.
Okay, got it. And when can we expect the IRP to be filed at the electric utility?
Certainly, Nicole can touch on that. That was actually filed here just recently Mid year, but Nicole, any more details on the IRP?
No, you hit it Dave. Yes, we filed that in the State of North Dakota here in July.
Strategy, do you have any plans to file any rate cases in any of your jurisdictions?
Yes, certainly, as you're most likely aware, we monitor this on a very regular basis. And what we're looking at right now as we look ahead is probably one. Some evaluation around our electric segment in terms of timing of those rate cases. So again, we haven't made any final decisions there, 21. But are evaluating timing on a few states for on the electric side of our business.
We just recently implemented final rates for several jurisdictions On the gas side of the business, North Dakota, Montana and Minnesota. And then the last one that I would touch on is in the state of Washington, Following the outcome we just had, we are currently contemplating a limited issue case to recover some of the 2020 1. Additions as well as 2021 wage increases. So that would be top of the wave some of the key activities we're focused on right now.
This marks the last call for questions. This call will be available for replay beginning at 5 p. M. Eastern today through 11:59 p. M.
Eastern on August 19. The conference ID number for the replay is 5,520,896. Again, the conference ID number for the replay is 5,5, to 7,896. Your last question comes from the line of Ryan Levine with Citi.
Good afternoon.
Hi, Roddie, and good afternoon to you as well. 1.
Hi, Dave. What's the status of the North Falcon expansion conversations for additional customers? And what's the capacity with compression that's still available for sale.
Hey, Ryan, this is Trevor. 1. As we always do, we're in kind of constant contact with customers out in the Bakken. Percent. Gas production in the Bakken is really almost back near to its peak.
I think it's 95% of its Peak production, even though oil is only at 74% of its peak. So we're seeing gas oil ratios in the field 21. Continue to increase. I think they're up 80% over the last 5 years. And the North Dakota Pipeline Now Justin Kringstedt has a new slide deck out where he talks to this and in his outlook continues to stress the need for or the expectation for needing additional gas processing, NGL takeaway as well as natural gas pipeline capacity takeaway.
So with that, our North Bakken pipe is strategically located right through the heart of the Bakken, kind of north to south of Lake Sakakawea Interconnecting with Northern Border. So we think we're well situated as the 20. Bakken continues to regain its footing in terms of drilling and production and we'll be able to 2018. There's a lot of variables that go into how far how much additional, but it Could be in the range of 600,000 Mcf a day of potential total capacity. And right now, we're contracted.
2018. When we get to full year volumes, it will be 245,000.
Thanks. And then one for probably 1. Cole, it seems like the electric load was pretty strong this quarter. Wondering how much of that was weather related 1. And first, more organic volume growth.
And then as you look at your planning forecast through 2,030, What's embedded in that from an EV or transportation demand for electricity And how does that compare with some of the federal announcements this morning for 50% new vehicle electric sales by 2,030? 1.
Okay. Let me start with the thanks for the question. I'll start with the volumes really. When you look at the quarter, what we I would characterize more as a getting back to post pandemic levels. So what we saw really was, 1.
As was mentioned, an increase on our commercial industrial side, and that was offset by actually lower volumes on the residential side for the quarter. I will acknowledge as most people are aware with the heat waves we've seen in our territory in June, we did see higher residential. But when you look at the quarter in total, 1. Really, it was driven by higher volumes industrial commercial, and we feel that was largely driven by kind of again the post pandemic in terms of businesses reopening and getting back to full volume there. 21.
As we look ahead here in July, obviously, we've on the residential side, we have continued to see Pretty good volumes relative to what I would characterize as weather now. So back to the is it weather, is it post pandemic? I would say as we look to July, 1. We haven't finalized all this, but we are seeing probably some increased volumes due to weather in that month. 1.
Your next question relates to as we look at our forecasting, for our electric demand going forward, Market that has been happening in other areas of the country. So as of this point in time, I would say that it's really not a significant piece percent of the overall increasing or increase in our demand that we're disclosing in the 10 ks as an example. And I believe I've covered your questions, but any follow-up.
Yes, I appreciate that. In terms of larger transmission projects in the out years, is there any projects that could Potentially be advanced due to the broader mandates or federal policy discussions
Yes. So you bring up a very good point. We are currently, and I was just last week And a meeting with our regional transmission organization, which is MISO, as you know, and they have done several modeling efforts on what the future looks like in percent in terms of scenario planning around individual companies' goals on the renewable focus and decarbonization as well as What could happen, as we think about this more broadly federally. And certainly, transmission is a significant investment As we look forward, in fact, one of their planning scenarios would have called for and again, this is just within the MISO market. So again, this isn't covering the U.
S, But additional build out of $100,000,000,000 And so again, there's multiple scenarios here, but just to level set, that's one example of the amount of one. So first, the question is, can all that be done Within the time frame. And then secondly, the question is what happens with affordability and that sort of thing. So As we look ahead, transmission upgrades, there certainly will be a lot of opportunity there. And what we're looking ahead to is How do you get those permitted, constructed and operating?
So again, these are, again, within the MISO footprint, this isn't necessarily Our company specifically here. So it's more of a broader look. But to get to the question of is there opportunity in transmission going forward, there certainly is.
And then last on the utilities front, do you have any ROPOs or ROPRs related to the any of the build that's incorporated in MISO? And then I guess one on the construction service. Can you speak to some of the cost pressures you're seeing?
Okay. So can you repeat the question on
the Do you have any right of first offer or credit first refusal on Developing any of the transmission that may be developed in MISO within the broader within your footprint?
I guess how I respond to that is it kind of depends on, how they decide to move forward. So As an example, we had we were involved in a multi value project. Previously, it was the Big Stone South to Ellendale project where 1. We then have a FERC transmission facility that's not directly allocated to our customers through state regulation. One.
That would be one example of an opportunity that came out of a multi value project within the MISO market.
Thank you.
Yes. Ryan was then your 2nd part of that was relative to services, but maybe you could repeat the question, so I make sure Jeff gets it. Brian, are you still there?
Okay.
Very good. Maybe we got Ryan's question answered. Back to you, operator. 1. Here comes Ryan.
Yes. I think I got disconnected. In terms of the margin pressures being in construction In service, something you could elaborate on some of the drivers of the cost pressures?
Jeff, could you take that one?
1. Yes. So we think about steel and copper and aluminum and PVC and fuel components that are part of most of the materials we supply, and of course our vehicles, which have had some availability delays. Our teams have been proactive in notifying our customers, while also working with our suppliers to mitigate the impact And mitigating our impact to backlog margins. We've had success in anticipating these increases and availability issues.
1. We've also used our purchasing power and our financial strength to bulk purchase some commodities in some of our markets where it makes sense,
Great. Thank you.
Yes. Ryan, just as a Kind of a top level there. Again, we reiterated on our guidance margins comparable to actually slightly increasing in services. So I think that gives you kind of an overall Direction with regards to margins. So very good.
Back to you, operator.
And at this time, there are no further questions. Earnings. I would now like to turn the conference back over to management for closing remarks.
1. Great. Well, thank you all for taking the time to join us here on our Q2 earnings call. Again, we're certainly pleased with the results percent of the first half of the year and we look forward to a continued strong performance throughout the remainder of 2021. And as such, we are affirming our earnings per share guidance in the range of $2 to $2.15 for 2021.
And again, we appreciate your continued interest in and strong support of MDU Resources as we continue to building a strong America. And so with that, I'll turn it back To the operator.
This concludes today's MDU Resources Group conference call. Thank you for your participation. You may now disconnect.