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Earnings call: MDU Resources posts Q3 results post-Everus spinoff

EditorNatashya Angelica
Published 11/08/2024, 10:37 PM
MDU
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MDU Resources Group (MDU) announced its third-quarter earnings on November 1, 2024, revealing a decrease in earnings compared to the same quarter last year. The company, which has recently completed the spinoff of Everus Construction Group, reported earnings of $64.6 million, down from $74.9 million in Q3 of 2023.

Despite this, adjusted income from continuing operations increased to $65.5 million. MDU Resources raised its full-year earnings guidance for regulated energy delivery and reported record earnings in its pipeline business due to increased transportation volumes and service rates.

Key Takeaways

  • MDU Resources Group reported a decrease in third-quarter earnings to $64.6 million from $74.9 million in the same period last year.
  • Adjusted income from continuing operations was up, reaching $65.5 million.
  • The utility segment's earnings increased to $6.8 million, while the pipeline business achieved record earnings of $15.1 million.
  • The company raised its 2024 earnings guidance for regulated energy delivery to $180 million to $185 million.
  • Regulatory filings included a natural gas rate case in Montana and a rate increase request in Wyoming.
  • MDU announced plans for a new data center and increased service agreements for existing data centers.
  • Operational and maintenance expenses increased, primarily due to higher payroll and materials costs.
  • The company completed a strategic pipeline acquisition expected to generate $3 million in annual earnings.
  • MDU Resources remains optimistic about future growth, focusing on organic growth and strategic acquisitions.

Company Outlook

  • MDU Resources anticipates 1% to 2% annual customer growth.
  • Long-term EPS growth is projected at 6% to 8%, with a target dividend payout ratio of 60% to 70%.
  • The company plans to focus on organic growth and strategic acquisitions, particularly in the midstream sector.
  • Strong demand for gas storage services is expected to continue into 2025.

Bearish Highlights

  • Third-quarter earnings showed a decrease from the previous year.
  • Increased operational and maintenance expenses were reported, impacting profitability.

Bullish Highlights

  • The utility segment and pipeline business both reported increases in earnings.
  • The pipeline business achieved a 27% increase in earnings year-over-year.
  • MDU Resources raised its full-year earnings guidance for regulated energy delivery.

Misses

  • There was no specific mention of contributions from gas storage assets to the quarter's earnings.

Q&A Highlights

  • Management emphasized a focus on organic growth and the potential for strategic pipeline acquisitions.
  • Strong customer demand in the Bakken region was noted as a driver for organic growth.
  • Various projects, including data centers and power generation, are being explored.
  • Guidance for 2025 will be provided in February 2025.

MDU Resources Group remains committed to delivering value to shareholders while ensuring safe and reliable service. With a robust balance sheet and strong business momentum, the company is poised for future growth as it continues to execute its strategy in the regulated energy delivery market.

InvestingPro Insights

MDU Resources Group's recent financial performance and strategic moves are reflected in several key metrics and insights from InvestingPro. The company's market capitalization stands at $3.57 billion, indicating its significant presence in the utility sector.

One of the most striking InvestingPro Tips is that MDU has maintained dividend payments for 54 consecutive years, underscoring its commitment to shareholder returns even in challenging times. This aligns with the company's stated target dividend payout ratio of 60% to 70% and supports its appeal to income-focused investors.

The company's P/E ratio of 8.76 suggests that it's trading at a relatively low earnings multiple, which could be attractive to value investors. This is particularly interesting given that MDU's stock is trading near its 52-week high, with a strong return of 77.54% over the past year. These metrics indicate that despite the recent price appreciation, the stock may still offer value.

InvestingPro Data shows that MDU's revenue for the last twelve months as of Q3 2024 was $4.45 billion, with a gross profit margin of 19.37%. While the company experienced a revenue decline of 8.2% over this period, it's worth noting that the quarterly revenue growth for Q3 2024 was positive at 4.97%, suggesting a potential turnaround in top-line performance.

The company's profitability is further emphasized by its operating income margin of 10.38% and a return on assets of 4.95%. These figures support management's optimistic outlook and the raised earnings guidance for the regulated energy delivery segment.

For investors seeking more comprehensive analysis, InvestingPro offers additional tips and insights. In fact, there are 13 more InvestingPro Tips available for MDU Resources Group, providing a deeper understanding of the company's financial health and market position.

Full transcript - MDU Res Group Inc (MDU) Q3 2024:

Operator: 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. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] The webcast can be accessed at www.mdu.com, under the Investors heading, select Events & Presentations and click Q3 2024 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. Thank you. Mr. Vollmer, you may begin your conference.

Jason Vollmer: 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. Leading today’s discussion with me is Nicole Kivisto, President and CEO of MDU Resources. Also with us today to answer questions following our prepared remarks are Stephanie Sievert, Vice President, Chief Accounting Officer and Controller of MDU Resources; Rob Johnson, President of WBI Energy; and Garrett Senger, 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 risks and uncertainties that could 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 our earnings release. With the completion of the Everus Construction Group spinoff occurring on October 31, third quarter results for Everus are included in MDU Resources quarterly results. However, we will be focusing our discussion on our remaining utility and pipeline business results for the quarter. Everus 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. 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 Kivisto: All right. Thank you, Jason, and thank you, everyone for spending time with us today and for your continued interest in MDU Resources. With the completion of the Everus spinoff on October 31, which followed the spinoff of Knife River last year, we have reached our stated goal of becoming a pure-play regulated energy delivery business. As I reflect on the last few years, it is phenomenal how much has been accomplished. We have transformed our company, created shareholder value and positioned MDU Resources for future success. I am so proud of our employees who have not only dedicated countless hours to these strategic initiatives, but also remain steadfast and focused on the operations and performance of our businesses, which have continued to deliver strong results throughout this period. As we look ahead, we are focused on our core strategy, which emphasizes customers and communities, operational excellence, returns focused and employee-driven. We are well-positioned for growth into the future with anticipated customer growth of 1% to 2% annually and expected long-term EPS growth of 6% to 8%, while targeting a 60% to 70% annual dividend payout ratio. 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. Meanwhile, our pipeline segment again achieved record earnings for the quarter driven by record third quarter transportation volumes and increased storage revenues. 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. In the third quarter, our utility business delivered solid performance, particularly at our electric segment due to rate relief and increased volumes due to warmer weather. 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. On the regulatory front, it certainly was a busy quarter at our utility business. We filed a natural gas rate case in Montana, settled our South Dakota electric and natural gas rate cases and filed an all-party settlement agreement on our North Dakota natural gas rate case, which is now pending before the commission. 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. In addition, we filed an amendment to the electric service agreement that was previously approved by the North Dakota Public Service Commission, increasing the service provided from 225 megawatts to 350 megawatts including the existing data center we serve, we now have 580 megawatts of data center load under signed electric service agreements. Of that total 180 megawatts are currently online with the balance starting to come online next year in continuing through the next few years. We also had some additional regulatory activity over this past week. On October 30, we provided notice to the Administrative Law Judge that a settlement in principle has been reached in our Washington multi-year rate case. The next step will be filing the settlement agreement with the commission in the near-term. In addition, on October 31, we filed a natural gas rate case in Wyoming requesting an annual increase of $2.6 million or 14%. Our focus remains on delivering safe and reliable electric and natural gas services to our expanding customer base with active efforts to seek regulatory recovery for our investments. 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 driven by strategic expansion, increased demand for transportation and storage services, and continued benefit from new transportation and storage rates that were effective August 1, 2023. 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. 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. 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. On November 1, we also closed on the purchase of a 28-mile natural gas pipeline lateral in northwestern North Dakota. This lateral extends our pipeline system to a natural gas processing plant in the Bakken. With our performance seen year-to-date, we now expect to finish the year above the top end of our previous guidance range and are increasing and narrowing our regulated energy delivery earnings guidance for 2024 now to a range of $180 million to $185 million. We are looking forward with great optimism, the prospects for continued customer and system growth in our electric and natural gas utilities 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. As always, MDU Resources is committed to operating with integrity and with a focus on safety. We remain dedicated to creating superior shareholder value as we continue providing essential products and services to our customers while being a great and safe place to work. I will now turn the call back over to Jason for the financial update. Jason?

Jason Vollmer: Thanks, Nicole. I’m pleased to share the details of our third quarter results. As a reminder, with the Everus spin-off occurring on October 31, third quarter results from Everus are included in the following numbers. In future reporting periods, Everus results will be reclassified as discontinued operations and comparative data will be recast. This morning, we announced third quarter earnings of $64.6 million or $0.32 per share on a GAAP basis compared to third quarter 2023 GAAP earnings of $74.9 million or $0.37 per share. 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. It’s important to note that certain costs associated with the spin-off of Knife River last year are reported as discontinued operations in our GAAP 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. With the completion of the Knife River spin-off and work performed on the Everus spin-off, 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. For more information on these adjustments, please see the first table in our earnings release. 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. 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. Electric utility reported third quarter earnings of $24.3 million compared to $20.9 million for the same period in 2023. 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. The natural 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. The 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. These increases were largely offset by the absence of recovery of interest expense in Idaho related to gas costs in 2023. The pipeline business posted record third quarter earnings of $15.1 million compared to $11.9 million in the third quarter last year. The earnings increase was driven by record third quarter transportation volumes, primarily from organic growth projects placed in service in late 2023 and throughout 2024. Higher storage related revenue and new transportation storage service rates that were effective as of August 1 of 2023 also drove the increase in earnings. The increase was offset in part by higher operation and maintenance expense, primarily payroll related costs and higher materials and contract services. The business also incurred higher depreciation expense due to organic projects placed in service. And finally, MDU Resources continues to maintain a very strong balance sheet and ample access to working capital to finance our operations throughout our peak seasons. Business momentum is strong as we close out the third quarter of 2024 and we will continue to provide updates as we close out the rest of this year. That summarizes the financial highlights for the quarter. We appreciate your interest and commitment in MDU Resources and now ask that we open the line to questions. Operator?

Operator: [Operator Instructions] Your first question will come from Chris Ellinghaus with Siebert Williams Shank. Please go ahead.

Chris Ellinghaus: Can you hear me?

Nicole Kivisto: Good afternoon, Chris. We can hear you.

Chris Ellinghaus: Hey, Nicole.

Nicole Kivisto: Hello.

Chris Ellinghaus: The increase in the guidance, have you got any color you want to add to? Was it – the weather was good in the quarter, so was that a big piece of the guidance or what are the pieces you’re thinking about?

Nicole Kivisto: Yes, Chris. So essentially, as we looked at our performance on a year-to-date basis and the momentum we have heading into the end of the year here. We looked at the range that we had out there and decided to increase it on an overall basis. Certainly contributing to that increase was 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.

Chris Ellinghaus: Was the – were the pipeline results better than you expected and why would that be?

Nicole Kivisto: So as we think about the pipeline, I can let Rob add some color commentary here. Certainly, the new rates that we put in place, we had those on the radar. Those were implemented last August, and – but we are seeing year-over-year impact from that. But we are also seeing record transportation in addition to that, storage was certainly much stronger than we expected this year. But, Rob, any other color you would provide there?

Rob Johnson: No. Nicole, I think you summarized it well. Storage was a primary driver. 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.

Chris Ellinghaus: Okay, great. Can you provide any color on the pipeline acquisition? What was your thinking there simply the volumes increasing to that processing plant that you saw as an opportunity?

Nicole Kivisto: Yes. We certainly see it as a strategic acquisition here. But I can get – turn it over to Rob for some details there, Chris.

Rob Johnson: Yes. Thanks, Chris. This particular pipeline from this processing facility, we currently have a pipeline that runs from this facility. This additional acquisition does a couple things. Long-term, it’s a very strategic fit for our assets in the Bakken. This was a smaller acquisition. $17 million of capital, another $0.75 million in integrity testing. It’ll generate approximately $3 million in earnings annually and can expect kind of a normalized regulated return on those assets.

Chris Ellinghaus: Great. That’s helpful. Nicole, the Montana interim increase, have you got any thoughts on what that tells us about the Montana regulatory climate, at least for you or for gas or whatever thoughts you might have there?

Nicole Kivisto: Yes. As we look at our request there, Chris, I’m assuming you’re referring to our request for reconsideration on our interim ask there. On an overall basis, I would say, as we look at Montana and our overall portfolio, we’re moving forward with the reconsideration as it relates to the interim request. To just size that maybe for you, though, as we think about that piece of our business, 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.

Chris Ellinghaus: Okay. All right, thanks. I appreciate the details.

Nicole Kivisto: Thank you, Chris.

Operator: Thank you. [Operator Instructions] Your next question comes from the line of Ryan Levine with Citi. Please go ahead.

Ryan Levine: Hi, everybody.

Nicole Kivisto: Good afternoon, Ryan.

Ryan Levine: Congratulations on – good and congratulations on the spin being complete. I guess, it looks like you wasted no time with the first day post spin to announce this acquisition. Should we look for the new MDU to be more focused on acquisitions going forward or any thoughts that you’re able to share around your strategic outlook for M&A?

Nicole Kivisto: Yes. Thanks for the question, Ryan. How I would summarize that is kind of how we’ve talked in the past. I mean, as we think about, first of all, I guess making 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. So 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 that we have and the outlay of capital, how we’ve grown in the past, we’ve got plenty of opportunities to grow organically. 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 that makes sense for shareholders, customers and our employees.

Ryan Levine: Historically, the midstream business hasn’t been a focus of M&A. Is that still the case or is there more commercial opportunities that you see?

Nicole Kivisto: I’m sorry, could you repeat that? What you saying historically, our pipeline, Chris, is that what you were asking specifically?

Ryan Levine: Yes. Your pipeline acquisition business, yes, is that an area that you see in organic growth opportunities?

Nicole Kivisto: Yes. I can let Rob also add some color commentary here, but as we look at our pipeline, I would probably say, kind of summarize it the same way, just summarize 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: No, I think you summarize that as well. It’s – we got supply push projects we’re looking at, a lot of demand projects we’re looking at, data centers are part of that power gen, LDC growth, et cetera. So really, potential projects in kind of all areas of our industry.

Ryan Levine: Appreciate the color there. And then 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 kind of duration that you see in terms of the outperformance there?

Nicole Kivisto: Yes. On the storage side, I don’t – we probably don’t quantify that and break that out specifically in terms of what the incremental add was there. Certainly it was, as we mentioned, outsized relative to what we had anticipated. That being said, I think we do see strong demand for storage services as we look at basis differentials and winter summer differentials going forward. So as we think about the outlook 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 a benefit to 2024.

Ryan Levine: Great. Thanks for taking my questions.

Nicole Kivisto: Thank you.

Operator: Thank you. [Operator Instructions] At this time, there were no further questions. I would now like to turn the conference back over to management for closing remarks.

Nicole Kivisto: 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. We thank you again and we appreciate your continued interest and support of MDU Resources. And with that, I’ll turn the call back to you. Operator?

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

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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