Hello. My name is Lisa, and I will be your conference facilitator. At this time, I would like to welcome everyone to the MDU Resources Group 2022 Third Quarter Conference Call. [Operator Instructions] The webcast can be accessed at www.mdu.com under the Investor Relations heading. Select Events and Presentations and click Q3 2022 Earnings Conference Call. After the completion 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 and Chief Financial Officer of MDU Resources Group. Thank you, Mr. Vollmer. You may now begin your conference.

Thank you, Lisa, and welcome, everyone, to our Third Quarter 2022 Earnings Conference Call. You can find our earnings release and supplemental materials for this call on our website at www.mdu.com under the Investor Relations tab. Leading today’s discussion along with me will be Dave Goodin, President and Chief Executive Officer of MDU Resources. Also along with us today to answer questions following our prepared remarks will be 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 our Utility Group; Trevor Hastings, President and CEO of WBI Energy; and Stephanie Barth, Vice President, Chief Accounting Officer and Controller of MDU Resources. During our call this morning, 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. For more information about the risks and uncertainties that could cause actual results to differ 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. As a reminder from our second quarter earnings call, we have previously announced our plan to separate Knife River Corporation, which is expected to be effective through a tax-free spin-off, to MDU Resources shareholders. This transaction is well underway and expected to become complete in 2023. Today, we are also announcing that MDU Resources Board of Directors has authorized management to convince a strategic review intended to separate MDU resources into 2 pure-play publicly-traded entities. One being a regulated energy delivery company, the other a leading construction materials…

Thank you, Jason, and thank you, everyone, for spending time with us today, along with your continued interest in MDU Resources. I’d like to begin with an update regarding our announcement this morning about our goals for the future structure of MDU Resources. In August, we announced our plan to separate the Knife River Corporation, creating 2 publicly-traded companies. Our team has continued working diligently towards completing this separation. As a reminder, this separation of Knife River is expected to be affected as a tax-free spin-off to MDU Resources shareholders and to be completed in 2023. We are pleased with the progress we have made and look forward to further enhancing shareholder value with this transaction. We were also pleased to hear a positive investor feedback to the original announcement. Further, as the next step in our strategic planning process, the Board of Directors has unanimously determined the best way to optimize value would be to create 2 pure-play public companies, a leading construction materials company and a pure-play regulated energy delivery company. To achieve this outcome, we will work to complete the separation of Knife River, and we will commence a strategic review process to explore alternatives for our construction services business. We believe these steps will unlock significant value for MDU shareholders and provide each company with the opportunity to execute on their respective business plans and to achieve industry-leading performance. We intend to discuss, in detail, our long-term company strategy during analyst events in 2023, including Analyst Days for each entity as we near the completion of the Knife River spin transaction. More information regarding event details and presentations will be available on the company’s website when these events are scheduled. Now I’d like to turn to the discussion of our quarterly operating results. Our construction businesses,…

[Operator Instructions] Your first question comes from Brian Russo from Sidoti.

Just quickly on Knife River. What are the regulatory milestones that we should be looking for as we progress into 2023 in terms of the private letter ruling from the IRS, I think, and then any SEC approvals needed? And maybe if we can kind of look at the calendar, are we talking first half 2023 or second half of 2023 completion?

Sure. I understand that question, Brian. I will start and maybe ask Jason to give a little more detail that we can. I would say, in short, we are strong focus internally. We are on track as we’ve laid out our project here, certainly, again, a high priority internally. 2023 is the -- I know it’s a wide window of time, but that’s the window that we provided there. And clearly, there will be some milestones. I’ll turn it over to Jason, while not probably depicting dates, but just to give you some work stream kind of color.

Yes. Thanks, Brian. It’s a great question. And we’re certainly, as Dave mentioned, working quickly towards this. I think what you would see -- what you mentioned were 2 items that really are some of the regulatory workflows I would consider, one being a private letter ruling from the IRS. I mean, that process is well underway here. We’ll be working with the IRS here in the coming months to work through that process. And in addition, I think in the Form 10, which will be the filing with the SEC, we would expect here in the next coming months as well to be filing on a confidential basis, that, with the SEC which we would then work with them to get that to a public document sometime ahead of the spin here as we get into 2023. So not real definitive on dates there, but I think those are 2 of the big milestones that are a little bit outside of our control as far as the timing of the review process, but certainly within our control is how quickly we can get those filed here and get working with those various groups.

Okay. Great. And then on the construction services segment, the strategic alternatives, what are those alternatives? Is it outright sale and/or a spin-off similar to Knife River? And when do you think you might conclude the review and provide an update?

Yes. No, I appreciate that question, Brian. I -- actually, I think that question, I’ll expand on it maybe just a little bit, but I thought it might be more why didn’t we announced this back in August or why now, why not then, and just kind of the separation. And I’ll get to your question. But really, I would say we’ve always said that the Board continually evaluates our portfolio of businesses to really make sure that the company is best positioned to unlock value for our shareholders. And -- going back to our August announcement, at that time, we were really able to make clear 2 specific decisions, one that we really felt that Knife River would be better positioned to create value for our shareholders really as a -- I’ll say, as a stand-alone company. And also, we didn’t feel and we voiced this that it didn’t make sense, probably industrial logic, to really spin Knife River and CSG as a combined entity. So hence, the announcement back in August. And so as our Board and management have been working through how our shareholders are best served by keeping CSG with regulated energy or exploring other alternatives for CSG, we really felt that, as we continued to analyze CSG, we felt really the most desirable outcome is to move towards this 2 pure-play publicly-traded company structure that we announced here just today. One being regulated energy, our utility companies, combined with our pipeline business, along with the construction materials being the other one. And so confident of that structure. Going to your question though, it’s really the start of the review, if you will, so far as the strategic review and looking at the various options with our announcement today, we will be looking at all alternatives and ways in which to maximize value here. I feel very strongly, CSG is a very valuable business. If you look at all the financial metrics, whether it’s year-to-date net income at record levels. If you look at employment levels at 9,100 employees, if you look at backlog up some 50% on a year-over-year basis, it’s really a high-performing business. And so we’re going to be very judicious in our review as we look at alternatives to really maximize or optimize the value of our CSG business.

Okay. One last question on the utility. It seems like you have a very active regulatory calendar with rate cases pending or expected to be filed. I’m sensing you’re under earning basically in 2022, which is why you’re filing these cases. When we look forward, assuming manageable equity needs, right, and your reaffirmation of the 5% rate base CAGR, can we see the utility growing earnings at a consistent rate with the rate base growth rate of 5%? Is that realistic in the near term?

Yes, Brian. I mean, as utilities make investments for that safe and reliable service, clearly, then we look to the regulators to go through that rate making process to make everything is reasonable and prudent, but that rate base growth should translate to some correlation to earnings growth. Certainly, subject to regulatory lag, subject to making sure that our investments were truly reasonable and prudent as well. I think given we are outspending, if you will, our depreciation rates at our utilities, so we’re growing rate base at that 5% compounded annual growth, there’s kind of an inherent regulatory lag in that process because we’re outspending, if you will, the depreciation rate. So what you noted for an expectation would clearly be an expectation I would have. It might be choppy only because rate cases come every 9 to 12 months as we -- from a regulatory cycle there. But you can clearly see, Nicole and her team are very focused on closing that regulatory gap. And as we think about the number of cases that were just filed. And I think, I probably answered the question. I’m looking at Nicole, if anything to add there, but I probably -- I think, I got it all, unless you have a follow-up, Brian.

Your next question comes from Ryan Levine with Citibank.

In terms of the strategic announcement or potential strategic review that you initiated this morning, is -- to the extent it’s not successful, what entity would construction service remain with? And then to the extent you go forward with the potential transaction, curious as to how the capital structure would travel with the assets and how you’re envisioning financing attributes of this package of -- or this portfolio of assets?

Sure. So both kind of future questions to be answered if you think of it that way, Ryan. Clearly, the strategic review, we’re going to look at all options here to look to optimize the value of the business that could be in the form of a number of different types of transactions, whether it’s a sale, whether it’s a spin, whether it’s a merger, whether it’s a combination of those or some other type of structure. And so that will be part of the review. And no doubt, the results of that outcome will then lead into the second part of your question as to capital structure or use of whether there will be proceeds or ultimately shareholder value creation here and how we best deploy that for our 2 pure-play businesses. Jason?

Yes, I would just add to, I think your -- part of your original question, Ryan, was where would services lie here. I think, I just want to come back to the focus. So we’re diligently working towards the separation of Knife River into a stand-alone company. That’s really what we’ve been working on here for quite some time. We will be looking through strategic alternatives for the services business here as well, but that will be kind of a separate process in that piece. And we haven’t really been definitive on a timeline with that here at this point either. So I think it’s a little early to hypothesize, I guess, maybe where things would end up after the fact, but just want to be focused on the fact that we really are seeing Knife River as a stand-alone pure-play materials company, and the future state for MDU Resources will be a stand-alone pure-play regulated energy delivery company.

Okay. Because that envision -- there’s a possibility to take -- there could be 3 stand-alone public companies as an outcome of the strategic review? Or is it focused more around attracting third-party strategic or financial buyers?

I think all options are on the table as we think about that, Ryan. And so I wouldn’t preclude anything at this point. Again, our announcement today is really letting the world know of what our future plans and structure as we see it. And certainly, we’ll look to, again, optimize the value of Construction Services Group, a very valuable company, as it’s performing today.

Okay. And given there’s a number of potential transactions in the works over the next, call it, 12 months, how are you looking to evolve current M&A or transaction strategy in terms of bolt-on acquisitions between the 3 key business units?

Yes. Certainly, that’s part of our DNA, Ryan, as we look -- I mean, that’s really what has grown our materials business into what it is today and what we intend it to be, down the road, a stand-alone public company, a top-performing materials business. And -- it’s also in the DNA of construction services and into the valuable business, as I noted today. I think that’s still part of what we would continue to look at. Clearly, we have other major work streams undergoing as well. But I wouldn’t preclude that. At the same time, we’ve been very successful at organic growth in these businesses as well. So I think there’s optionality we have in each of those construction lines.

Okay. And then -- in terms of construction services, historically, you’ve been reluctant to part ways with that asset because of the tax basis issues and certain strategic and commercial benefits. What’s changed on that front? And are there any dis-synergies that you would envision with any separation of that business?

Yes. Certainly, that will be part of this analysis as we think about the various transactions and the types that I outlined earlier. Those all will be considerations when we think about that. But again, it’s a strong performing business today, and we think there will be likely a reaction to our announcement today. And again, we’re starting that process right now.

Okay. And then one on the utility. I think in your prepared comments, you highlighted some other funded pension or certain obligation there. Can you elaborate on where you sit from that standpoint and how that could impact your outlook?

I think what you’re noting is some of our non-qualified benefit plans. We’ve noted in throughout the year, given the markets this year and kind of the no-place-to-hide kind of thing, I think it’s roughly $20 million or about $0.10 per share on a year-over-year basis. But maybe just a little background, Jason, as to that. We just want that be known because it’s a large enough number investors should know that.

Yes. This is -- to your question, Ryan, here, as far as pension, this is a little bit different than kind of our traditional pension here. This is really the non-qualified programs that we have. And these assets, as they’re non-qualified, we have liabilities certainly on our balance sheet for that. We have funded some assets to offset those liabilities. And those assets are actually mark-to-market on a monthly basis. So these are all non-cash, unrealized gains and losses that have been -- or losses this year, I guess, as you would say that we’ve experienced on these assets here. Don’t expect this to have a significant impact on ongoing future benefit expense or anything along that line. This is really related to these non-qualified plans, not getting into kind of the traditional defined benefit pension plans that we have at our various businesses. And those plans, just as a refresher, we have frozen all of our defined benefit pension plans as well across the corporation many years ago as they’re really kind of in a liability-reduction mode at this point in time versus something that’s large ongoing cost of the company.

[Operator Instructions] Your next question comes from Dariusz Lozny with Bank of America.

Can I just maybe start with thinking about the growth rate at the RemainCo after the 2 processes that you have ongoing are concluded. I think in the past, you framed your 5% to 8% long-term CAGR as sort of on the low end are the utilities and the upside there towards the 8% is driven by the construction businesses. Post these 2 transactions, would you -- do you envision having any latitude to accelerate that rate base growth and, correspondingly, the EPS growth at the RemainCo?

Yes. Great question, Dariusz. Yes, I mean the 5% to 8% is our long-term EPS growth as MDU Resources as we see that today. I know we had countless meetings with you and other investors kind of walk us through how each of the businesses contribute to that 5% to 8% and how we think about that. As you’re describing this pure-play regulated business, our future state as we envision. Today, we talked about a 5% CAGR in rate base growth, certainly at our utility business. That’s really coming off about a 7% CAGR over the prior 5 years. And if it went back 2 years before that, the prior 5 years were more like a 12% CAGR. So it’s been growing quite nicely over time. Certainly, it’s currently at a 5%. I would say, look forward as we think about our CapEx discussion with our board here in a couple of weeks, and we would be expecting to let the market know what the refresh on our 5-year looks like, probably that week of Thanksgiving or so, just to give a sense there. So I think that’s probably a contributor. Certainly, the pipeline business would have experienced a stronger CAGR than that over the recent years, which I think would tend to elevate that EPS. And then if you think about the projects that I noted in my comments, the multiple projects, the $300,000 a day of commitments from customers that Trevor and his group have signed up, if you will, between -- that’s 2023, 2024 projects, very line of sight. I would expect that would be more on the high end of that range, if not lifting that of sorts. So -- but that’s as we see it today. I think the other part of this is the pure-play, we also think we’ll have a certain appeal in the marketplace as a pure-play regulated business as we think about that. And then we’ll also be really defined capital structure and also capital allocation will be very focused as we think about that management team that’s dialed in, in that business as well. And so I think those are all attributes to be thinking about as we described the future state of MDU Resources, particularly to the regulated energy business. Sorry for the long answer.

No, that’s great and very comprehensive. I appreciate it. One more, if I can, and this relates to your ‘22 guidance. It looks like your revenue guidance for the services business ticked up, but the margin language maybe ticked down a little bit, while the materials, which I think had a weaker first half of the year, seems to be steady state as far as the composition of your guidance. Can you maybe talk a little bit about the dynamics there, what are you seeing specifically on the services relative to the materials? And then also maybe the backlog growth and the services side was very robust. Can you talk a little bit about the dynamics there? And what specifically drove that really strong increase in the backlog?

Absolutely, Dariusz. I’m going to just give a couple of comments, but then I think well served to get more details from each of those business heads. I’ll start with Jeff Thiede and then ask Dave Barney to weigh in on materials. And I mean, clearly, you look at a high level where our activities have been in both of those lines of business, as you note, elevating services by $100 million in revenue guidance. As we think about the year, our backlog growth there has been astounding, if you think of it that way. I’ll have Jeff kind of talk about just the dynamics in that business, which I think also leads to your margin question a little bit as well. Jeff?

Thanks, Dave. We’ve had pressure from inflation, labor, materials, subcontractors. That’s contributed to the margin impact, that supply chain issues, which affects productivity. And as noted in the release, we’ve had a couple of write-downs, given the nature of our work and our historical strong performance, including our record quarter revenue and a record year-to-date earnings. In our Q3 earnings that were 21% higher this year than last year, write-downs are part of our business, and they should be overcome and will be overcome by strong performance on a majority of our projects. We’ve got exceptional teams focused on getting work and being selective. And our backlog remains consistent among our E&M group, which is about 80% of our backlog versus our T&D group, which is about 20%. The largest component of that work is our commercial, which includes hospitality, airport, data center work, industrial. But we’ve got a number of segments that really exemplifies our diverse project offerings and strengthens our business. Included in that is renewables. We’ve got several renewable projects and 2 more pending that we anticipate on getting. We’re also doing electric vehicle charging stations. And we’ve got great growth in our service work and our special projects.

Dariusz, any follow-up for Jeff? Or I’ll go on then to Dave Barney. Just want to make sure, Jeff answered your question.

Yes. Yes. Yes. That was very helpful.

Okay. Very good. Dave Barney, can you just touch on kind of the dynamics that you’re seeing out there and what your team is doing to get ahead of them?

Sure. Dariusz, we had -- as you know, we had record revenue in the quarter due mainly to higher prices in almost every product line, we have a record backlog across almost all our regions. And I can tell you, our bid schedule looks strong. And we’ll continue to pick up work. Demand is strong. Our price increase has largely been accepted by our customers and we continue to raise prices just in October, we implemented another price increase on aggregate. So going forward, we expect our margins to continue to improve. Does that answer your question?

Thank you, Dave. Anything else, Dariusz?

No, I think that’s everything. I appreciate the color.

Excellent. Thank you for calling in and for the questions, Dariusz.

[Operator Instructions] The webcast can be accessed at www.mdu.com under the Investor Relations heading. Select Events and Presentations, and then click Q3 2022 Earnings Conference Call. After the conclusion of the webcast, a replay will be available at the same location. At this time, there are no further questions. I would now like to turn the conference back to management for closing remarks.

Thank you, Lisa, and thank you all for taking the time to join us here on our Third Quarter Earnings Call. We are optimistic about our growth opportunities with record combined construction backlog and our ongoing and future regulated energy delivery projects. We look forward to connecting with you again as we close out the year and prepare for 2023. Again, thank you. We appreciate your continued interest in and support of MDU Resources. And with that, I’ll turn this back to the operator.

This concludes today’s MDU Resources Group Conference Call. Thank you for your participation. You may now disconnect.