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MDU Resources Group Inc  (NYSE:MDU)
Q3 2018 Earnings Conference Call
Nov. 01, 2018, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello. My name is Regina, and I will be your conference facilitator. At this time, I would like to welcome everyone to the MDU Resources Group 2018 Third 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. (Operator Instructions) This call will be available for replay beginning at 5 PM Eastern Time today, through 11:59 PM Eastern Time on November 15th. The conference ID number for the replay is 2136759. Again, the conference ID number for the replay is 2136759. The number to dial for the replay is 1 (855) 859-2056 or (404) 537-3406.

I would now like to turn the conference over to Jason Vollmer, Vice President, Chief Financial Officer and Treasurer of MDU Resources Group. Thank you Mr. Vollmer, you may begin your conference.

Jason L. Vollmer -- Vice President, Chief Financial Officer & Treasurer

Thank you, Regina and welcome to our third quarter 2018 earnings release conference call. This conference call is being broadcast live to the public over the Internet, and slides will accompany our remarks. If you'd like to view the slides, please go to our website at www.mdu.com and follow the link to the conference call. Earnings release is also available on our website.

During the course of this presentation, we will make certain forward-looking statements within the meaning of Section 21E of the Securities and 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 1A, Risk Factors, in our most recent Form 10-K.

For our call today, I will discuss key financial highlights and then turn the presentation over to Dave Goodin, President and CEO of MDU Resources, for his formal remarks. 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 are Dave Barney, President and CEO of Knife River Corporation; Jeff Thiede, President and CEO of MDU Construction Services Group; Nicole Kivisto, President and CEO of Cascade Natural Gas, Great Plains Natural Gas, Intermountain Gas and Montana-Dakota Utilities; Trevor Hastings, President and CEO of WBI Energy; and Stephanie Barth, Vice President, Chief Accounting Officer and Controller of MDU Resources.

Yesterday, we announced our third quarter earnings from continuing operations of $107.4 million or $0.55 per share compared to $89.6 million or $0.46 per share in 2017. On a consolidated basis, earnings were $107.3 million or $0.55 per share compared to $87.4 million or $0.45 per share in 2017. Our construction materials business reported a record third quarter earnings of $78.9 million compared to $63.2 million for the same period in 2017, and revenues of $743.9 million, up from $686.1 million in 2017.

The increase in earnings was mainly the result of lower income tax expense due to the Tax Cuts and Jobs Act. The business had higher sales volumes in most product lines and reported higher asphalt product margins and volumes as well as higher construction revenues and margins. Partially offsetting the increase was higher selling, general and administrative expenses primarily related to payroll costs.

Our construction services business reported third quarter earnings of $9.3 million compared to $13.1 million in 2017. Changes in estimates on certain construction projects resulted in a $7.2 million negative impact to earnings, partially offsetting the decrease were lower income taxes, higher outside construction equipment sales and rentals and lower selling, general and administrative expenses primarily payroll related.

At our pipeline and midstream business, earnings were $11 million in the quarter compared to $6 million for the third quarter of 2017. The increase in earnings was driven by a final accounting order recently issued by the Federal Energy Regulatory Commission or FERC that resulted in a $4.2 million tax benefit in the quarter. Also contributing were higher revenues and transportation volumes from new projects. Higher earnings were partially offset by higher operation and maintenance expense.

For the quarter, our combined utility business reported earnings of $3.4 million compared to $4.8 million in the third quarter of 2017. The electric utility segment earned $15.3 million for the quarter compared to $15.7 million in the prior year. This increase was driven by lower electric margins, primarily the result of the transmission rate adjustment due to lower estimated cost on our 345-kilovolt Big Stone South-to-Ellendale transmission project. Partially offsetting the decrease was lower operation and maintenance expense largely related to payroll costs.

Our natural gas utility segment reported seasonal loss of $11.9 million for the quarter compared to a loss of $10.9 million for the same period in 2017. This increased loss resulted from higher operation and maintenance expense and higher depreciation, depletion and amortization expense. Partially offsetting the decrease were higher natural gas retail margins from increased rate relief and conservation revenues.

I'll now turn the call over to Dave for his formal remarks. Dave?

David L. Goodin -- President & Chief Executive Officer

Well, thank you, Jason and good afternoon, everyone. Thank you for your interest in MDU Resources and for taking the time to join us today to discuss our third quarter results. We released our third quarter earnings after the stock market closed yesterday. All of our businesses continue to build off the momentum we saw in the first half of the year. I am pleased with our solid execution during the third quarter and the progress we have made on our growth strategy, both organically and through strategic acquisitions.

Now I'd like to go through our two platform business model, starting with the construction businesses. Our Construction Materials business had record third quarter earnings, seeing increased sales volumes on most of our product lines. Backlog numbers are strong as of the end of the quarter at this business at $590 million, up from $520 million in 2017.

In October, we announced our fourth Construction Materials acquisition of the year with the purchase of Sweetman Construction Company, a leading provider of aggregates, asphalt and ready-mix in the Sioux Falls market of South Dakota. We welcome the employees of Sweetman Construction to the MDU family and continue to evaluate additional acquisition opportunities at this business.

Construction Services is having a strong year with year-to-date revenues as of September 30th, only 2% behind last year's record and record backlog at $896 million at the end of the third quarter, which is up 33% over the third quarter of 2017. This business continues to perform high volumes of inside specialty contracting work, specifically in the high-tech and hospitality sectors as well as outside power, communications and gas specialty work.

This business is engaged in power line repair work in areas recently impacted by hurricanes. This business is also exploring acquisition and organic growth opportunities. Combined, our construction companies ended the quarter with record revenues, earnings and backlog and we are anticipating 2018 revenues between $3.15 billion and $3.4 billion. We are truly excited about the opportunities for these businesses going forward.

Now turning to our regulated energy platform. Here, our pipeline business continues to perform very well and is busy executing on several organic growth opportunities. For the fifth consecutive quarter, the company transported a record amount of natural gas through its system. Partially due to completing 2 expansion projects in 2017 and the 13-mile Line Section 27 Expansion that we completed here just in mid-September. With natural gas production at record levels in the Bakken region, there is continued demand for additional transportation capacity.

We're also excited to announce today that the 38-mile Valley Expansion Project was actually put into commercial operation. This project will help bring much needed gas capacity to Eastern North Dakota combined Line Section 27 and Valley Expansion will bring our total capacity to over 1.8 BCF per day. Yesterday, our pipeline business also filed a rate increase request with the FERC in accordance with our company's rate settlement agreement back from 2014 with FERC and our customers.

Looking forward, our pipeline business is working on finalizing construction plans for 2 additional growth -- organic growth opportunities, supported by long-term customer commitments. Demicks Lake, a 14-mile, 20-inch pipeline in McKenzie County, North Dakota and Line Section 22 Expansion in the Greater Billings, Montana area. We expect to start constructing both projects early next year with expected in-service dates late in 2019.

Our natural gas utility reported 1.5% higher natural gas sales volumes for the third quarter and continues to focus on pipeline projects that will enhance system reliability, safety, along with deliverability. And just yesterday, our electric utility announced that we have completed the purchase of the Thunder Spirit Wind Farm expansion in Southwest North Dakota. This expansion increases production capacity at the wind farm to approximately 155 megawatts. Construction on the Big Stone South-to-Ellendale, 345 kV transmission line is also progressing on schedule, with completion anticipated in the first quarter of 2019.

Over the next 5 years, our utility expects its 1.1 million customer base to grow between 1% and 2% annually. This completes our individual business unit discussion and as we look to the overall corporation, I would reiterate that we are on track with our current year expectations. After looking at the third quarter results, we are reaffirming our earnings guidance range of $1.25 to $1.45 for the year, with the long-term compounded annual growth rate between 5% and 8%.

Our focus at MDU Resources has been to produce significant long-term value as we execute our business plans, organic growth projects and targeted acquisitions and we're doing just that. We continue to maintain a strong balance sheet with solid credit ratings, along with a good liquidity position, and for 80 consecutive years we provided a competitive dividend for our shareholders. As always, MDU Resources is committed to operating with, both integrity and a focus on safety, while creating superior shareholder value as we continue to as our tag line would say, building a strong America.

I appreciate your interest in and commitment to MDU Resources, and ask that we now open the line to questions. Operator?

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Paul Ridzon with KeyBanc. Please go ahead.

Paul Ridzon -- KeyBanc Capital Markets -- Analyst

Good afternoon.

David L. Goodin -- President & Chief Executive Officer

Hi, Paul. Good afternoon.

Paul Ridzon -- KeyBanc Capital Markets -- Analyst

(Inaudible)

David L. Goodin -- President & Chief Executive Officer

It's been kind of slow lately. How about your direction?

Paul Ridzon -- KeyBanc Capital Markets -- Analyst

I pulled my board out, so it's going to be a long winter, anyway. You've been active in the M&A market. Do you think that market is pretty opportunity-rich for potential further deals?

David L. Goodin -- President & Chief Executive Officer

Yeah, great question, Paul. I'm going to split that answer between both Dave Barney and Jeff Thiede which is really probably more we're targeting some of the M&A activity at and particularly with Dave having closed 4 deals earlier this year. I'll start with Dave.

David C. Barney -- President & Chief Executive Officer

Hi, Paul. Yeah, the M&A market looks really strong, there is a lot of private companies out there. We have a long list of companies we're looking at. We have prioritized them. Though we're very optimistic, we'll be announcing some more deals in the near future and I think it looks good for us going forward in the M&A market.

Jeffrey S. Thiede -- President & Chief Executive Officer

Hey, Paul, this is Jeff and we're seeing a lot of opportunities for companies to be brought into Construction Services Group. We've added Bill Connors to our efforts in M&A and we believe that we'll be able to be announcing some additions to our team in the future, we'll keep you posted. We like the opportunities of these companies and we're looking for fits geographically as well as adding to the services that we currently provide.

Paul Ridzon -- KeyBanc Capital Markets -- Analyst

And the estimate change for project costs at Construction Services. It looks like it masks some strength in that segment. But what's driving that? Is that kind of the labor tightness we're hearing about?

Jeffrey S. Thiede -- President & Chief Executive Officer

Paul, that's one of the contributors. We had a collection of jobs just several jobs that had impacts obviously significant due to the results. We see this as an anomaly we rarely seen this happened in the history of CSG and we don't expect this going forward in the future.

Paul Ridzon -- KeyBanc Capital Markets -- Analyst

Can you kind of give more flavor as to what that dollar amount is composed of?

David L. Goodin -- President & Chief Executive Officer

Paul, you just broke up a little bit on that. If you could repeat the question?

Paul Ridzon -- KeyBanc Capital Markets -- Analyst

Sure. Could you just give a little more flavor as to what composes those dollars?

Jason L. Vollmer -- Vice President, Chief Financial Officer & Treasurer

Yeah, Paul this is Jason, I'll try to give a little more clarity on that. So we've got various estimates that are involved as we go through many of these projects that we work on here and as we received new information that helps us true up some of those estimates, then we'll make changes on that. As Jeff mentioned, this was a little bit more significant this quarter as we adjusted a couple of contracts here, I would say, this is a handful rather than the majority of contracts.

But we certainly do see this on a regular basis as far as adjustments that were just more significant in the quarter one that highlighted. As far as what makes that up, it's kind of -- there's a lot of moving pieces there. So really can't get into a lot of detail on that, but something that as Jeff mentioned, it seems like it's more of an anomaly for us this quarter than anything else. But you're spot on with your analysis of looking at the quarter, absent that, I mean, the quarter that Jeff's business has had in the year-to-date performance for that business has just been exceptional.

Paul Ridzon -- KeyBanc Capital Markets -- Analyst

Okay, thank you very much.

David L. Goodin -- President & Chief Executive Officer

Thank you, Paul.

Operator

Your next question comes from the line of Zane Karimi with DA Davidson. Please go ahead.

Zane Karimi -- D. A. Davidson -- Analyst

Thanks for the clarity so far, guys. First question is kind of more for Knife River. Specifically, how much of the earnings growth and the recent backlog improvement basis for (Technical Difficulty) energy markets kind of versus that compared to the growth in your other project?

David L. Goodin -- President & Chief Executive Officer

So your question, Zane was, what's the contribution relative to more of the energy producing states and how is the recovery there relative to our other markets that we're in?

Zane Karimi -- D. A. Davidson -- Analyst

Yeah, yeah.

David L. Goodin -- President & Chief Executive Officer

Yup, OK. Dave Barney?

David Barney --

Hi, Zane. I can tell you, most of our backlog recovery is not coming from the energy producing states, except for Texas, but we are seeing that uptick in the Alaska, the North Dakota, Northern Minnesota, Wyoming markets. So we're seeing some positive signs of more work coming out. So, but right now, the majority of the uptake is coming from the non-energy states, besides Texas.

Zane Karimi -- D. A. Davidson -- Analyst

Got you. Thank you for that. And then also do you see yourselves in the industry increased practice efficiency -- sufficiently to offset some of these cost headwinds that you're experiencing?

David L. Goodin -- President & Chief Executive Officer

Again, Zane just we must have a little late connection. Could you repeat your question, I think it was related to margins relative to Knife River or just the cost increases?

Zane Karimi -- D. A. Davidson -- Analyst

Yeah. Apologies, is this a better volume?

David L. Goodin -- President & Chief Executive Officer

That's a little bit to better. Yeah.

David Barney --

So if you're looking at -- do you think our margins are going to continue to hold or improve, is what you're looking at, Zane?

Zane Karimi -- D. A. Davidson -- Analyst

Yeah. I'll repeat the question real quick. But do you see yourselves in the industry increasing prices -- sufficiently to offset cost headwinds (Technical Difficulty) Knife River?

David Barney --

I think we'll continue to see what we've seen in the last three years or four years, pricing continue to go up, margins continue to go up. I don't see anything that's going to be stopped that in the near future.

Zane Karimi -- D. A. Davidson -- Analyst

Great, thank you very much. I'll jump back in queue.

David L. Goodin -- President & Chief Executive Officer

Okay. Thank you, Zane.

Operator

(Operator Instructions) Your next question will come from the line of Andrew Levi with ExodusPoint. Please go ahead.

Andrew Levi -- ExodusPoint -- Analyst

Hi, good afternoon. How are you guys doing?

David L. Goodin -- President & Chief Executive Officer

Good afternoon, Andrew. We're doing great. How are you doing?

Andrew Levi -- ExodusPoint -- Analyst

Doing well, the stocks doing well today finally. There was a lot of fear out there with margin structure (ph). I just have two questions. First one, just relating to kind of the hurricane that we saw down south and whether your line business will benefit from that?

David L. Goodin -- President & Chief Executive Officer

Yeah, Andrew, the short answer is, we did some response to those incidents, I'll turn it over to Jeff Thiede to give you a little more detail as well.

Jeffrey S. Thiede -- President & Chief Executive Officer

Thanks for the question, Andrew. Our industry responded and our company responded to safely restore power to those impacted by the hurricanes. We are grateful for all the first responders, including our line industry. We've sent crews to the Northeast to the Carolinas and most recently to Georgia for this year. So we benefited from the opportunity to serve. But our company is not reliant solely on the work of storm -- in storm work for the success of our business. We also have an equipment company that participated in supporting line companies in storm work. Our equipment company also is able to offer tools in addition to the wire stringing equipment which we think is the best in the industry.

Andrew Levi -- ExodusPoint -- Analyst

Okay. And there is no way to kind of quantify I guess in the fourth quarter has a benefit that may be?

Jeff Thiede --

It may be a contribution -- a strong contribution and it was a small part of our success, but it wasn't an overwhelming part of our success.

Andrew Levi -- ExodusPoint -- Analyst

Okay. And then just on the aggregates business. As you guys kind of watched the last month whether it's your stock action or whether standard or some others stocks got badly hit and then there was a lot of fear about margins and pricing and (Technical Difficulty) somewhat. But as you kind of look into 2019, obviously, you haven't given guidance for 2019, but can you kind of just address that and whether the fears are kind of overblown. I mean some of their issues are also related around hurricane, where their aggregates were (Technical Difficulty) kind of address that because it's nice see the stock recovered but stock went from trading at a premium I focus more on the Utility Group, where (Technical Difficulty) sector obviously (Technical Difficulty) as the aggregates --

David L. Goodin -- President & Chief Executive Officer

Yeah, Andrew this is Dave. I'll weigh in on that. We also watch with some of the other peer companies have released in the market here. I can best comment about our company in that. We had a record third quarter at our Materials Group, I mean, very strong quarter. In addition I talked earlier in my comments about moving our backlog up from $520 million to now $590 million. You heard Dave Barney just a few moments ago to an earlier question, talk about margins and where we're expecting those in our guidance, we did talk about comparable to actually slightly increasing margins in our Materials business as well.

So those are all factors that we like, again, commenting about our business, we understand what some of the others in the industry have put out there, we think in our position, I can comment the most about and I feel very good where we're at. In particular, we talked two years ago about getting into the M&A activity and resuming that. Really we did actually two years ago November of 2016. Well, this year we're hitting our stride, if you will, in the materials sector with 4 acquisitions, we've been here very recently. So we feel good where we're at and like how 2019 is starting to shape up.

Andrew Levi -- ExodusPoint -- Analyst

Great, thank you very much. And the stock (Technical Difficulty) --

David L. Goodin -- President & Chief Executive Officer

Yeah, OK. Thank you, Andrew.

Operator

Your next question comes from the line of Zane Karimi with DA Davidson. Please go ahead.

Zane Karimi -- D. A. Davidson -- Analyst

Actually, you guys just answered it. So thank you very much and I look forward to hearing from you guys again.

David L. Goodin -- President & Chief Executive Officer

Okay, thank you very much, Zane.

Operator

This marks the last call for questions. (Operator Instructions) This call will be available for replay beginning at 5:00 PM Eastern Time today through 11:59 PM Eastern Time on November 15th. The conference ID number for the replay is 2136759. Again, the conference ID number for the replay is 2136759. At this time, there are no further questions. I would like to turn the call then back over to management for any closing remarks.

David L. Goodin -- President & Chief Executive Officer

Thank you very much. As I noted earlier, we had another strong quarter and we expect the strong execution throughout the remainder of 2018. At MDU Resources, we are committed to building a strong America, along with being optimistic about our long-term opportunities. We also appreciate your participation on our call today. And again, thank you for your continued interest in MDU Resources. And with that, I'll turn it back over to the operator.

Operator

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

Duration: 24 minutes

Call participants:

Jason L. Vollmer -- Vice President, Chief Financial Officer & Treasurer

David L. Goodin -- President & Chief Executive Officer

Paul Ridzon -- KeyBanc Capital Markets -- Analyst

David C. Barney -- President & Chief Executive Officer

Jeffrey S. Thiede -- President & Chief Executive Officer

Zane Karimi -- D. A. Davidson -- Analyst

David Barney --

Andrew Levi -- ExodusPoint -- Analyst

Jeff Thiede --

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