MDU
#Thank you, and welcome to our first quarter 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.
Our 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 Exchange Act of 1934.
Although the Company believes that its expectations and beliefs are based on reasonable assumptions, actual results may differ materially.
And for a discussion of factors that may cause actual results to differ, refer to item 1A, risk factors, in our most recent Form 10-K and Form 10-Q and the risk factors section in our most recent Form 8-K.
Our format today will include formal remarks by <UNK> <UNK>, President and CEO of MDU Resources, followed by a Q&A session.
Other members of our management team who will be available to answer questions during the Q&A session of the conference call today are <UNK> <UNK>, President and CEO of Knife River Corporation; <UNK> <UNK>, President and CEO of Montana-Dakota, Great Plains Natural Gas, Cascade Natural Gas, and Intermountain Gas; <UNK> <UNK>, President and CEO of WBI Energy; <UNK> <UNK>, President and CEO of MDU Construction Services Group; and Jason Vollmer, Vice President and Chief Accounting Officer and Treasurer for MDU Resources.
And with that, I'll turn the presentation over to <UNK> for his formal remarks.
<UNK>.
Thank you, <UNK>, and good morning everyone.
We appreciate you joining us today to discuss our first quarter results.
We're off to a good start in 2016.
On a GAAP basis, we had earnings of $24.7 million or $0.13 per share.
That's a significant turnaround from last year when we had a loss of $306.1 million or $1.57 per share, largely due to a non-cash write-down at the E&P business that we have sold since then.
Consolidated adjusted earnings were $32.6 million or $0.17 per share compared to $20.9 million or $0.11 per share for the first quarter in 2015.
Adjusted earnings do not include our refining segment or discontinued operations.
Our work to restore earnings to a satisfactory level is beginning to produce results.
Our utility group is seeing benefits of their record level investment to serve customers.
Utility earnings increased by 22% over last year and the electric utility group had a record first quarter.
Our construction materials business is off to their best start in nine years from an earnings standpoint and has a record first-quarter backlog at now $831 million.
Our construction services group has been successful at rebuilding their backlog as well, which at the end of the quarter stood at $530 million, a 65% increase from last year.
Our combined construction businesses have built an impressive backlog now of nearly $1.4 billion, which is 38% increase from first quarter of 2015.
And at our pipeline business, we recorded record transportation volumes for this first quarter.
And as we announced last month, we have completed the sale of our marketed Fidelity oil and natural gas production assets.
Aggregate sale proceeds from and related tax benefits were approximately $500 million.
More importantly exiting the E&P business lowers our risk profile and allows us to focus more on growing our other lines of business.
The principal disappointment for the quarter is that market conditions continue to challenge our investment at the Dakota Prairie Refinery.
I will talk about this more in just a few minutes.
And as we look ahead, we will continue to build on the momentum at our business units by focusing on the factors that we can most directly influence, controlling costs, expanding margins and growing earnings.
So let's take a look at how our individual businesses performed this past quarter.
Our utility business reported earnings of $36.3 million, a 22% increase over last year.
A big factor in the success of our regulatory staff in pursuing recovery of investments made to serve a growing customer base.
Last year alone, the utility invested a record $464 million.
Since January 1 of 2015, the utility has implemented now $73.2 million in final and interim rate relief.
They currently have requested $49.7 million of rate relief in pending cases and this includes $37.3 million in implemented interim rates and $12.4 million in rate relief from additional pending cases.
The electric utility had a record first quarter and revenue increased 15%, even though retail sales volumes declined by 5%.
Regulatory recovery was a factor along with production tax credits associated with the newly installed 107.5 megawatt Thunder Spirit Wind Farm that went into operation late last year.
With that addition, our renewable energy now accounts for 20% of the utility's electric generation capacity.
At the natural gas utility, retail sales volumes increased by about 3% year over year.
In addition to rate recovery weather played a factor.
Temperatures in Idaho, Oregon and Washington were 11% colder than the first quarter of 2015.
This [low] was offset in our eastern service territory where temperatures were about 9% warmer than the prior year.
Overall, our weather was 5% to 19% warmer than normal this quarter.
These factors were partially offset by higher O&M, depreciation, depletion, as well as amortization costs.
Looking ahead, the utility expects their 1.05 million customer base to continue growing between 1.5% and 2% annually.
Over the next five years, they expect to invest nearly $1.5 billion to maintain safe and reliable service across our eight-state service territory.
As a result, they expect their rate base to grow by about 7% compounded annually over the next five years.
Their anticipated investments include 160 miles 345 KV transmission line that is expected to be completed in 2019.
Along with this, additional generation and pipeline projects to enhance the reliability also with deliverability of it on the system.
It does not include any impact from the clean power plan given the uncertainties surrounding the plant.
Now turning to our pipeline and midstream business, earnings here for the quarter were $5.3 million, down from last year's first quarter.
The principal reasons for the decline are lowering gathering and processing volumes at our Pronghorn facility in which we have a 50% interest and lower gathering volumes due to the sale of certain nonstrategic gathering assets that we've sold last year.
The Pronghorn volumes were affected by a number of wells that were temporarily shut in to facilitate the addition of a new six-well pad.
These results were partially offset by lower depreciation, depletion and amortization costs and a lower O&M as well.
In addition though, total transportation volumes increased 11% for a first-quarter record.
Looking ahead the pipeline and midstream group has three expansion projects currently underway here in North Dakota.
Two of them are expected to be completed this year.
Our North Badlands, which has about 70,000 dekatherms per day of capacity under contract along with Northwest, North Dakota.
They also are working on a line Section 25 expansion involving additional compression.
This incrementally will add another 22,000 dekatherms per day of capacity and is scheduled completion in the summer of 2017.
As a result of lower natural gas prices and wider seasonal spreads, interruptible storage service injections have now increased to 4.7 million dekatherms.
This is a significant increase from the 344,000 dekatherms we saw last year and we expect this trend to continue into the second quarter.
The group is also assessing additional potential projects and will continue to look at potential opportunities that might allow them to apply their expertise outside their traditional northern Rockies base.
At our construction materials group, Knife River narrowed its normal seasonal loss to $14.5 million, the best first quarter in nine years.
The group experienced higher construction revenues and margins partially offset by lower aggregate margins and the effect of a large precast project that we had in 2015.
You might recall that Knife River finished 2015 with a record year-end backlog.
They have kept up this momentum with a record first-quarter backlog now standing at $831 million.
This is 25% higher than the first quarter of last year.
Our construction services group increased earnings to $6 million this quarter.
They had higher inside construction workloads and margins, partially offset by lower equipment sales and rental margins as well as lower industrial construction workloads and margins.
This group is successfully rebuilding backlog now ending the first quarter at $530 million, up 65% from the $321 million of last year.
So looking ahead between our two construction businesses, we now have a combined backlog of nearly $1.4 billion, and that's 38% higher than last year.
So clearly, they're off to a great start here in 2016.
The construction materials group this year has been awarded major projects that include a $63.4 million, I-29 project in Iowa, along with this a $30.5 million bypass in Oregon and a $25 million I-35 projects in Minnesota as well.
The construction services backlog demonstrates this group's diverse capabilities.
Confidentiality agreements prevent me from naming specific customers but the work involves a utility-scale solar farm, a government research facility, a 345 transmission project along with a corporate campus expansion and utility maintenance contracts.
As we said on our February conference call, both groups expect margins also to be slightly higher this year.
At our refining segment, we experienced a $7.2 million loss associated with our 50% interest in the Dakota Prairie Refinery.
The refinery began operating just one year ago today and since then commodity market conditions have considerably deteriorated.
The Bakken basis differential from WTI pricing has narrowed, which increases the refinery's cost for crude oil feedstock.
In addition, the demand for diesel and naphtha has declined.
Due to current market conditions, we have lowered our assumption for the refinery utilization this year to about 75% of capacity down from our earlier assumption of about 90% and we're currently processing approximately 15,000 to 16,000 barrels per day at the plant.
In light of current market conditions, we are assessing various options with respect to our ownership interest in the refinery as well.
Now I'd like to turn to our earnings guidance and based on our first-quarter results, we are reaffirming our guidance for 2016 earnings.
On a GAAP basis, earnings per share are expected to be in the range of $0.85 to $1.10 and adjusted earnings are expected to be in the range of $1 to $1.15 per share.
And so to wrap things up, we are firmly focused on continuing to improve our financial performance to grow our businesses and we are off to a good start this year.
The combined backlog at our construction businesses is approximately $1.4 billion on a combined basis, up 30% from last year.
Our utility group is working hard to recover its investments to serve our customers with $73.2 million of rate relief implemented since January 1 of 2015.
Our $355 million capital investment plan for the year does include $260 million at the utility which won't require issuing equity.
And last week, our Board of Directors approved a quarterly dividend, a commitment that we have been paying uninterrupted dividends now for 78 years and increasing them for the past 25 years.
I very much appreciate your interest and commitment to MDU Resources and we'd be happy to open the line at this time.
Operator.
Good morning, <UNK>.
Thank you very much.
Hey, <UNK>.
This is <UNK>.
Currently obviously the market pricing for diesel and naphtha is very depressed.
So given where the margins are, it makes more sense to run at a lower volume.
And currently the plant, the lowest we can run without causing problems is between 14,000 and 15,000 barrels per day, and so that's why we're operating in that range.
Yes, the first-quarter results were in line with our expectations, but pricing has continued to decrease through the first quarter in terms of diesel and naphtha with the slowdown, especially in the rig count.
I mean, we were at over 85 last year.
[Last I looked] we were down to 26 rigs.
So obviously a lot of production, especially on the diesel side, is very Bakken dependent and so it moves with that.
And so with the decrease in rig count, we've seen that continue to be challenging.
Yes, a couple of things, <UNK>.
On the midstream side with Pronghorn you're going to see a pickup in the next quarter with the new well pad and the wells that were shut in coming back on line.
So we think we're on line with that through the rest of the year.
On the transmission side, given where our pipes are located in kind of the key counties, giving the gas flaring regs, we continue to believe we'll see increased volumes.
And then the other thing we've got going is storage spreads have picked up.
So we've got a lot of folks transporting to storage and we continue to believe we'll see that at least through the second quarter here and it'll remain obviously that is spread dependent.
Hey <UNK>.
This is <UNK>.
Yes, the margins in our backlog are close to what they've been in historical past.
Execution is going to be key.
Some of our higher-volume areas in our business, such as our service work, our non-backlog areas, our equipment sales and rental have been temporarily slow.
We've had a little bit of additional competition in those areas, but we're feeling confident in our backlog, the margins we have and where we are positioned to be able to focus on our execution and bringing those margins at or above our plan.
I think it's just a temporary slowdown.
We're seeing strong signs from our customers in that industry and it improving through 2020.
Our volumes are slightly lower, but we've made capital investment in this area in our Company and it's going to pay off.
We're adjusting some internal processes to make our business more competitive, but also improving on our successful reputation we've earned through our relationships and our people.
And we're providing great equipment and tools and service for this area and we've made some adjustments for this temporary period, but we think it's going to be, again one of our strongest areas of our Company.
Yes, <UNK>.
This is <UNK>.
When you look at the electric side of the business, we did see milder temperatures than we saw last year, which did impact our volumes as you saw.
But on an overall basis, our electric business had a very strong quarter as <UNK> alluded to.
So the volume impact was really offset by the regulatory activity that we saw on the electric side of the business.
So overall, our volume decline was not overly material to the electric side of the business.
And now on the gas side of the business, we really saw a 11% colder than last year weather in the western states of Idaho, Oregon and Washington.
And then, kind of the reverse effect in the Montana-Dakota and Great Plains territory.
So, we haven't really quantified those numbers in total, but both of the businesses are up.
And I guess, what I would comment on is when you look at the temperatures compared to normal phenomena comparing to last year and comparing to normal, we saw a warmer than normal weather.
And so to the extent that we could see normal weather throughout the remainder of the year, obviously that would provide some upside to the earnings.
Hey, <UNK>.
At this time, just kind of ---+ what Calumet said, they put out an 8-K that said they may divest a certain non-core asset, including Dakota Prairie Refinery.
Obviously, we are having ongoing discussions and we're looking at all the options, we're evaluating them at this time.
So not really in a position at this point to give you a clear direction.
We'll keep you in the loop.
I can give you a little color on what we're doing short term.
The team has actually been doing a really good job out there.
Since December 6 we've been running operationally fine.
The other thing we're doing is we're focused on controlling what we can control, obviously the cost to run the process of working with all our vendors to see if we can get to a cash flow break-even with them, providing us some assistance given where we're at.
So hope that helps a little color.
We'll keep you in the loop, but the process is really ongoing right now as we speak.
Okay.
Thank you, <UNK>.
You broke up a little bit there, <UNK>.
Could you repeat the question.
Are you thinking more materials or services or sum of both.
Okay.
We'll start with <UNK> <UNK> talking about his backlog, that $831 million a bit and then we'll move on to <UNK> <UNK>.
Hi, <UNK>.
I would definitely expect our revenues to go up as backlog has gone up.
We are expecting, we've added a lot of backlog to that record backlog we've had in March and we have a good schedule out there.
I expect record backlogs almost every month going through to June.
So, yes, I would expect the revenue to be going up in the construction materials.
I don't know if we're giving guidance on that, but I just did I guess.
Yes, well we are in a sense, but it's early in the year, which is why we held it flat at this point, but clearly backlogs are a nice indicator of what could grow into revenues.
<UNK>.
And for us, we expect most of the projects that we have in our backlog are going to be monetized this year and the key is going to be execution and it's early.
Well, thank you.
And as we noted earlier, our first-quarter results represent a good start here in 2016.
We are committed to continue building on this momentum by focusing in the factors that we can most directly influence, controlling costs, expanding margins, as well as growing earnings.
And again, we appreciate your participation on this call today and thank you again for your continued interest in MDU Recourses.
Operator.
