Mdu Resources Group Inc Q1 FY2025 Earnings Call

Hello. My name is Ina, and I will be your conference facilitator. At this time, I would like to welcome everyone to the MDU Resources Group 2025 First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question-and-answer period. The webcast can be accessed at www.mdu.com, under the Investors heading. Select Events & Presentations and click Q1 2025 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, Chief Financial Officer of MDU Resources Group. Thank you, Mr. Vollmer. You may begin your conference.

Thank you, operator, and I would like to welcome everyone to our first quarter 2025 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 along with me is Nicole Kivisto, President and CEO of MDU Resources. During our call, we will make certain forward-looking statements within the meaning of the securities laws, federal securities laws. For more information about the risks and uncertainties that could cause our actual results to vary from any forward-looking statements, please refer to our most recent SEC filings. I'll provide consolidated financial results later during the call, but first, we'll turn the call over to Nicole for her remarks. Nicole?

Thank you, Jason, and thank you, everyone, for joining us today and for your continued interest in MDU Resources. We are off to a strong start in 2025. This morning, we reported income from continuing operations of $82.5 million or $0.40 per share for the first quarter, a 10.4% increase compared to this time last year. Our Pipeline and Natural Gas Distribution segments grew earnings by 13.9% and 11.5% respectively, year-over-year, driving our solid first quarter performance. I am extremely proud of our employees whose dedication to our core strategy continues to deliver exceptional performance and positions MDU Resources with compelling long-term growth prospects. Our utility experienced 1.4% combined retail customer growth compared to a year ago, which is in line with our 1% to 2% annual projected growth rate. This growth reinforces our need to invest in our utility infrastructure to meet the demands of our growing customer base. At our electric segment, we signed a purchase agreement to acquire a 49% ownership interest in the Badger Wind Farm during the quarter, which equates to 122.5 megawatts of the project's total 258 megawatts of generation capacity. The purchase is contingent on certain regulatory approvals and we have filed an advance determination of prudence with the North Dakota Public Service Commission for this project. We also anticipate filing general rate cases in Montana and Wyoming at our electric segment yet this year. From a legislative perspective, wildfire prevention and liability limitation bills have passed in three of our four electric states: Wyoming, North Dakota, and Montana. While we remain focused on designing processes to prevent wildfires in our service territory, this legislation provides greater certainty going forward and limits liability. We continue to see data center opportunities, including the 580 megawatts of data center load we have under signed electric service agreements. Of that total, 180 megawatts is currently online, with an additional 100 megawatts expected to come online late this year, and the balance expected to continue through the next few years. Our current approach is to serve these large customer opportunities with a capital-light business model, which not only benefits our earnings and returns, but also provides cost savings to our other retail customers. At our natural gas distribution segment, rate relief was a strong contributor to the quarterly results. In Washington, we received a final order approving our multi-year rate case, with year one rates effective March 5, 2025, and year two rates effective March 1, 2026. Subsequently, we did file a revision to decrease revenues slightly due to forecasted plant that was not placed in service by December 31, 2024. In Montana, we received approval of interim rates effective February 1, and also filed a settlement agreement on April 3, 2025. In Wyoming, we have reached a settlement in principle in our rate case there and anticipate filing that settlement in the near term. We also anticipate filing a general rate case in Idaho yet in the second quarter. Moving on to our pipeline segment, we achieved record first quarter earnings, up 13.9% from the first quarter of 2024. The segment is executing well on our core strategy and delivering strong results, driven by strategic expansion and increased demand for transportation and storage services. 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. In January 2025, we completed a non-binding open season for our proposed Bakken East pipeline project that could run approximately 375 miles from the Bakken region to eastern North Dakota. This project would provide much-needed takeaway capacity to meet the forecasted natural gas production growth in the region and provide natural gas transportation service to industrial, power generation, and local distribution companies. Currently, we are engaged in planning and discussions with potential customers and landowners along the proposed route and we are targeting an in-service date of late 2029 for the first phase of this project and late 2030 for the second phase. As a reminder, this project is not currently in our five-year capital forecast and would be incremental should we determine to proceed. Additionally, in April, we announced a binding open season for the Baker Storage Field Enhancement and transportation expansion project. The proposed project could add 72 million cubic feet per day of new firm natural gas storage deliverability and transportation service. The open season runs through May 20, 2025. Looking at the full year for MDU Resources, we are affirming our earnings per share guidance in the range of $0.88 to $0.98 per share. This range reflects continued strong performance across our segments coming off a strong first quarter. As we look ahead, we are focused on our core strategy, which emphasizes customers and communities, operational excellence, returns focused and employee-driven. We believe we are well-positioned for growth into the future with anticipated capital investment of $3.1 billion over the next five years, 7% to 8% compound annual utility rate base growth, and customer growth expected in the 1% to 2% range annually. We also anticipate a long-term EPS growth rate of 6% to 8%, while targeting a 60% to 70% annual dividend payout ratio. As always, MDU Resources is committed to operating with integrity and with a focus on safety. We remain dedicated to delivering value as a leading energy provider and employer of choice. I will now turn the call back over to Jason for the financial update.

Thanks, Nicole. And I'm pleased to share the details of our first quarter results. This morning, we announced first quarter earnings of $82 million or $0.40 per diluted share compared to first quarter 2024 earnings of $100.9 million or $0.49 per diluted share. First quarter income from continuing operations was $82.5 million or $0.40 per share, compared to $74.7 million or $0.37 per share in the prior year. As we look at our individual businesses, our electric utility reported first quarter earnings of $15 million, compared to $17.9 million for the same period in 2024. Retail sales revenue increased due to higher volumes for residential customers from colder weather and from higher data center volumes. This increase was more than offset by higher operation and maintenance expenses, largely from higher contract services for outage-related costs at two electric generating stations, increased software and insurance expenses, and higher payroll-related costs. Lower returns on non-qualified benefit plan investments also impacted results. Our Natural Gas Utilities segment reported earnings of $44.7 million in the first quarter, an 11.5% increase over the first quarter of 2024, which was $40.1 million. The improvement was largely due to higher retail sales revenue from rate relief in Washington, Montana, and South Dakota, as well as increased volumes from colder weather. These increases were partially offset by higher operation and maintenance expenses and lower investment returns on non-qualified benefit plans. The pipeline segment posted record first quarter earnings of $17.2 million, compared to $15.1 million in the first quarter last year. The earnings increase was driven by growth projects placed in service throughout 2024 and customer demand for short-term firm capacity contracts. Higher storage-related revenue further drove the increase. Partially offsetting the increase was higher operation and maintenance expenses, primarily higher payroll-related costs. The business also incurred higher depreciation expenses due to the growth projects we previously discussed and lower investment returns on non-qualified benefit plans. Finally, MDU Resources continues to manage a strong balance sheet and maintain ample access to working capital to finance its operations throughout our peak seasons. While we have no equity needs in 2025 based on our current capital plan, our $3.1 billion capital investment program over the next five years will likely require some access to the equity capital markets. As such, we plan to reestablish an ATM program in the near term to meet those future needs. Business momentum is strong as we close out the first quarter of 2025, and we will continue to provide updates regarding our 2025 guidance and outlook as we progress throughout the year. That summarizes the financial highlights for the quarter. We appreciate your interest in and commitment to MDU Resources and ask that we now open the line for questions.

Your first question comes from the line of Chris Ellinghaus from Siebert Williams Shank.

Nicole, is the large customer load strategy you are implementing, which is capital light, resulting in the rates or tariffs you are seeing from large customers not being beneficial for new resources?

Yeah. Good afternoon, Chris, and thanks for the question. So, as we think about our opportunity on the data center front, I would describe what we have right now in terms of the 580 megawatts of ESAs. 530 megawatts of that is in our Ellendale location, and there was really a unique opportunity there to serve that load in a capital-light manner because we had a situation where there was basically constrained area or pocket within our system where there was generation that was not getting to market. So, how I would describe that opportunity is it was best for us to think about that in a capital-light manner because, one, it was accretive incrementally right away, as I mentioned in the script, to our earnings and return on equity, but also provided benefit because that transmission cost was shared with this large customer, and that benefit then went back to our retail customer base. So, that strategy in that particular pocket was the right strategy for that time. What I will say is we continue to evaluate in conversations with other customers if it would make sense to look at incremental generation. Of course, that is going to have to make sense for us financially. It will have to make sense for our regulators and also certainly not have an impact on our overall retail customer base. So, we continue to look for opportunities to think differently going forward, but currently today we like the model that we have.

There is an awful lot of potential disruption to the economy. Have you got any thoughts that certainly there is some potential disruption to the Bakken, certainly with the oil prices, where they are, and the type of oil resource that the Bakken is. Have you got any thoughts on how it might affect, particularly North Dakota?

Yes. I would say, overall, Chris, the way we look at the Bakken play is, this is a long-term play, and I guess, what I would describe as a couple of things, in terms of how that relates to MDU Resources in total. One would be, and we've shared in the past with investors how you look at that gas to oil ratio increasing over time. It certainly is an oil play. It's very important to the state of North Dakota. And so, as you can imagine, the state is very interested in the Bakken region in totality. But as it relates specifically to MDU Resources, one of the things that we see is that there is more need for takeaway capacity, and we've talked to investors about that in the past, and that one of the drivers is because the gas to oil ratio has been increasing over time. So, yes, the pricing environment does ebb and flow, but we do believe long-term in what's happening in the Bakken and believe that there are long-term benefits on not only producer push benefits from but customer pull. Industrial demand has increased. We've talked about natural gas-fired generation being a driver for growth in the future. All of those fundamentals we still think hold.

Okay. So, your idea is that the gas market serves as a counterbalance to any short-term pressures on oil in the long run?

Yes, for the most part, I would say you summarized that right. I mean, yes, go ahead. Jason, were you going to add to that?

Yes, I was going to say, certainly, even if the projections that we see from whether it's North Dakota Pipeline Authority or other places would show that even if oil stays relatively flat. So, again, not a lot of drilling, but you're going to see the gas to oil ratio continue to climb where gas continues to be a benefit here. And again, gas is not the target and the Bakken oil is the target. So, that does have some impact on the capital dollars flowing into drilling opportunities. But gas is an ever-increasing commodity being produced in the Bakken, and we think that's going to provide long-term benefits, both for our pipeline business and our utility customers with a low-cost source of natural gas.

Sure. There is also some concern about sort of housing starts, and I guess, that's really more of a residential type of concern. So, just thinking about your service areas and what might be impacted, I was kind of curious your thoughts on this. One of your higher growth areas is Boise. And just given the type of economic development in Boise, would you be thinking that that area is somewhat insulated from economic sensitivity, given the types of large customer growth that is taking place there and therefore the residential growth that you benefit from might be more or less economically sensitive?

Yes, I believe that's accurate. Chris, when considering the customer growth rate over time, we have generally maintained a range of 1% to 2%, which has persisted through both slow and accelerating periods. Economic conditions certainly play a role, but we've managed to stay within that range. Regarding Idaho specifically, you're right. We've recognized that market as one of the fastest-growing areas in our service territory. While there have been fluctuations, it continues to lead in customer additions. However, it's important to remember that the rate base is a key factor in assessing our earnings potential within the utility. As we aim for growth in our rate base, we remain committed to achieving a 7% to 8% rate base growth, which will ultimately influence our earnings growth moving forward.

Jason, can I ask you sort of an accounting question here? In your restated number versus last year's reported, obviously, you're pulling out construction services as discontinued, but what else goes in there? I mean, we can do the math of pulling out what you reported for construction services last year, but it's incremental to that. What's the incremental part versus what you were on a reported basis last year?

Yeah. So if we look back to last year, there's a couple of things. When you look at the restated number, so it would be accounting for, as you mentioned, Everest being pulled out as a discontinued operation. We would also have probably some costs still continuing as we went through the process of separating Knife River the year before, that some of that would flow through as discontinued operations in the prior year, and even going back as far as when we separated previous businesses before, like Fidelity, if you remember that part of the business in the past, there are a few things that end up in discontinued operations that flow through those numbers. The bulk of what's there is going to be Everest-related. I think if you look at just the regulated energy delivery earnings we posted last year and divide that out by our number of shares, it would have gotten you in that probably $0.35, $0.36 range per share. Our number that we're showing now is $0.37 for the prior year, so there's not a lot of impacts in there outside of the Everest transaction would be the biggest piece of it.

Is any portion of that your assessment of the dis-energies of the separation?

No, the dis-energies actually, those are costs that would end up flowing through operation and maintenance on the remaining businesses here. So that actually is in continuing operations and is reflected in the $0.40 that we showed for the quarter here, this 2025.

Your next question comes from the line of Julien Dumoulin-Smith from Jefferies.

It's Brian Russo on for Julien. If we could just focus on the electric segment first. The earnings were down year over year, yet you did report retail electric volumes up 25%. I was just wondering if maybe we could unpack kind of the positive drivers like sales versus some of the negative drivers like the outages and maybe quantify what the lower returns on the non-qualified plans look like. It just seemed like retail volumes were so strong that I'm surprised it was down as much as it was year-over-year.

Thank you, Brian. I'll address some of those points and provide quantification as we move along. Looking at the electric segment year-over-year, we've undergone significant rate case activity in recent years, but there weren't many incremental changes in rates during Q1 of this year as these were mostly established in prior years. Therefore, we did not experience much regulatory rate relief in Q1 compared to the previous year. We did see an increase in operation and maintenance costs, which was expected due to payroll and general cost increases. Some of this O&M was tied to generating station outages, which I can elaborate on shortly. Regarding volume increases, last year in the early part of the year, our data center customer—180 megawatts now in service—was not fully operational at that time due to outages on their side. Hence, a significant portion of the retail electric volume growth can be attributed to that data center being online for the entire first quarter, unlike last year's first and part of the second quarter. We did have a planned outage this year at our Coyote Station, which we anticipated would impact us through the year, and this should largely finish by the end of Q2. An unplanned outage occurred at co-owned facilities with WyeGen, which slightly affected us as well. However, these factors have been included in our guidance, which we reaffirmed today, so I did not foresee a major impact. You also inquired about the non-qualified benefit plan. Last year, equity and debt markets had strong returns, and we have assets set aside to cover liabilities for these non-qualified plans, which can affect our income statement as well. This quarter's investment performance was different from the first quarter of last year, but overall, it didn't significantly impact us. The effect across all segments was probably around $0.01 per share for the whole organization. Overall, it was not drastically different from what we've seen before. I hope that clarifies your questions.

Yes, that's helpful. And then just maybe to follow on, now that you have the 180 megawatts from applied digital online annually for the year, of course. Is North Dakota in the sharing band this year versus not last year, while that ESA volumes ramped up?

Yes. So our ESA does have some band around sharing, and I would hesitate to give you an answer on that right now because it really will depend on how our performance is throughout the year, not just on a quarter-by-quarter basis. So we do an annual filing on that with the state as we look through that piece. So depending on performance of the electric throughout the year, we can probably update you with that later in the year. But we haven't been in a situation in prior years where we have had to share some with the state in North Dakota, which again is a good measure pros that may not be familiar if we get above a 10% return on equity, we end up having to share some of that back with our customers and we get to keep a portion of it as well. So that's a good position to be in, and we have been in that in the past, whether we're going to be in there in 2025 are not yet to be determined.

Okay. Great. Regarding the Bakken East project, are you more confident in its successful development after the open season concluded? What are the next milestones if we assume a late 2029 for Phase I and a 2030 start for Phase II?

Yes. I would describe it as ongoing conversations. As mentioned in last quarter's call, we are continuing discussions with customers, and that remains our focus. These conversations will guide us regarding overall route timing and more. I believe we remain in a similar position as last quarter. We are encouraged by the feedback from customers, but we also want to ensure we collaborate with them on the overall route design. That's my summary. Additionally, I would like to emphasize our strong strategic position concerning our pipeline, access to storage, and other pipelines. We will provide further updates as we gather more information. As I noted earlier, this is not currently included in our five-year capital forecast, but if we receive new information and more clarity, we will definitely share that with investors as we progress.

Your next question comes from the line of Ryan Levine from Citi.

A couple of questions. On Bakken East, recognizing production outlooks continue to evolve and you did the open season in January. Would there be a more comprehensive or an updated open season anticipated? Or do you think these are bespoke one-off conversations are enough to inform your commercial project?

Yes, Ryan, I can jump in here a little bit, and Nicole can certainly add it along the way, too. I think this is the next step, right? So we are really working with the individuals that respond; the company has responded to our original open season to really understand what's the timing, what's the need, what's the amount that they may be looking at for deliverability, then it would proceed to more of a formal agreement after that. Whether we actually go forward with binding open season or whether we'd actually move forward with impressive agreements in some cases with various parties. Those are things that would happen down the road. So right now, I think this is really setting in the stage, but eventually, we'll want to get to a point where we have a route. We have a design. We have a size. We have kind of a final cost estimate that we'd look at, which gets us to being able to really enter into firm agreements here and then being able to subsequently file FERC approval at some point in the future as well.

And what role do the recent tariffs play in terms of the commercial attractiveness of Bakken East? How material are the current tariff proposals or current tariffs that are in place to the cost structure for that project?

Yes. Currently, it's early in the trade discussion process regarding tariffs. There were some announcements today, but I haven't had a chance to catch up yet on potential deals in specific areas. When considering a large project like this, there are many components involved. We need to secure right-of-way, handle engineering and design; some of this can be managed in-house, while others will require third-party assistance. The materials aspect is certainly significant. Although there may be tariffs on some material components, this will have an impact, but it is something we can plan for and design around. We will be able to finalize numbers to present for approval, so I don't foresee this derailing the projects as we assess the situation today.

Okay. And then unrelated in terms of wildfire legislation in some of the states that you operate, how do you see that impacting your potential legislation impacting future wildfire mitigation plans or any type of de-risking effort that the company may be pursuing?

Yes, great question, Ryan. As I mentioned during the call, we successfully passed legislation in three of our states. Regarding our mitigation plans, the company has been proactive and had strategies in place to prevent issues overall. I believe that the main benefit of this legislation is the opportunity to formally establish these plans with stakeholders. The formalization of the plan varies by state, so I can provide details for each state. After formalization, this demonstrates to the regulatory body that we have fulfilled our responsibilities. Ultimately, this will help limit liability if any incidents occur. However, our top priority remains prevention, and the company is actively engaged in that effort.

Great. And then just two quick clarifying questions. I think you had mentioned the potential ATM filing. Is there a size anticipated? And then in terms of your 6% to 8% EPS growth, but what's your starting point that you're growing off of that? Is that actual at '24? Or could you just clarify the starting point for the long-term growth rate?

Yes. No, it's a great question. Well, I'll start with the ATM question first. So we have not determined the size yet. Again, we are working through that process. We're looking forward to future needs. Again, right now, our current capital plan would show we do not have any equities in 2025. We would see some potentially starting in 2026, as we've talked about before. So as we look through, typically, an ATM program probably got about a three-year time horizon to it. So we try to size it to an appropriate amount to maybe offset our needs during that time period. But that's yet to determine. We'll follow up with public filings on that later this year. And the second question on the 6% to 8% long-term growth rate. Maybe help me with the last part of that question I get, Ryan.

Just to clarify the starting point, was that off of the 2024 estimate or the actual results?

Yes, when we provided that guidance range in February of this year, we based it on our expectations for 2025. This decision was influenced by historical factors, including spin-offs and transaction costs from recent years, which have made the historical data somewhat inconsistent from a public perspective. I believe that the range remains the same if you refer to the adjusted 2024 number. You can rely on either number and arrive at a similar conclusion. Therefore, I am comfortable saying that it is indeed based on the adjusted 2024 number, aligning with the 2025 range we announced this year.

Thank you. At this time, there are no further questions. I would now like to turn the conference back over to management for closing remarks.

All right. Thank you again for joining us today. We appreciate your interest in and support of MDU Resources and look forward to connecting with you throughout the year. And with that, I'll turn the call back over to you, operator.

Thank you. And this concludes today's MDU Resources Group Conference Call. Thank you for your participation. You may now disconnect.