MDU Resources Group - Q4 2022
February 9, 2023
Transcript
Operator (participant)
At this time, I would like to welcome everyone to the MDU Resources Group year-end 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star and then one on your telephone keypad. If you would like to withdraw your question, press star two on the telephone keypad. The webcast can be accessed at www.mdu.com under the investor relations heading. Select Events and Presentations and click Year End 2022 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 and Chief Financial Officer of MDU Resources Group. Thank you, Mr. Vollmer.
You may begin your conference.
Jason Vollmer (VP and CFO)
Thank you, Lisa. Welcome everyone to our year-end 2022 earnings release 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 CEO of MDU Resources. Also with us today to answer questions following our prepared remarks are Dave Barney, 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, 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 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 measure, please refer to our earnings release from this morning. I will start by providing consolidated financial results for 2022 and our initial look at 2023 guidance before handing the call over to Dave Goodin for his formal comments and forward look.
This morning, we announced our 2022 earnings of $367.5 million or $1.81 per share on a GAAP basis compared to 2021 earnings of $378.1 million or $1.87 per share. On an adjusted basis, excluding costs related to our ongoing strategic initiatives, we earned $380.2 million or $1.87 per share in 2022. Our combined utility businesses reported earnings of $102.3 million for 2022 compared to earnings of $103.5 million in 2021. The electric utility segment reported earnings of $57.1 million compared to $51.9 million in 2022. The increase was a result of higher retail sales revenue due to interim rate relief in North Dakota and higher net transmission revenues.
In addition, retail sales volumes increased 2.2% due to colder weather in the Q1 and Q4 of the year. Earnings were favorably impacted by lower O&M expense, partially associated with the Heskett Station and Lewis and Clark Station plant closures. Partially offsetting the increase were lower investment returns of $4.6 million on non-qualified benefit plans, higher interest expense and higher planned maintenance outage costs at the Coyote Station. Our natural gas utility segment reported earnings of $45.2 million in 2022 compared to $51.6 million in 2021. Results were impacted by higher O&M expense, primarily from higher subcontractor costs, lower investment returns of $7 million on non-qualified benefit plans, and higher interest expense, largely related to higher debt balances and higher interest rates.
The decrease in earnings were partially offset by a 13.7% higher natural gas retail sales volumes to all customer classes due to colder weather and approved rate relief in certain jurisdictions. The pipeline business earned $35.3 million in 2022 compared to $40.9 million in 2021. Results were impacted by higher interest expense, lower investment returns of $1.4 million on non-qualified benefit plans, and lower non-regulated project margins resulting from lower revenues. The business benefited from increased transportation revenues due largely to the North Bakken Expansion project, offset in part by lower allowance for funds used during construction and higher depreciation expense. For 2023, we expect earnings from our regulated energy delivery businesses to be in the range of $140 million-$150 million.
Construction Services reported record revenues of $2.7 billion and record earnings of $124.8 million compared to revenues of $2.05 billion and earnings of $109.4 million in 2021. EBITDA increased 14.7% on a year-over-year basis to $193.4 million for 2022. This business has experienced consistent earnings growth over the past five years, growing 18.5% when compounded annually over that time period. Electrical and mechanical services revenues increased 50% for the year, with commercial and renewable projects largely driving the increase. Partially offsetting the higher electrical and mechanical revenues were slightly lower transmission and distribution workloads. This business saw lower margin percentages due mostly to higher operating costs related to inflation, including labor, materials, and equipment costs.
Due to the continuing high demand for construction services, we are establishing the revenue guidance range for 2023 in a range of $2.75 billion-$2.95 billion with higher margins when compared to 2022 and establishing an EBITDA range of $200 million-$225 million for 2022. Our construction materials business also reported record annual revenues of $2.53 billion compared to 2021 revenues of $2.23 billion, and earnings of $116.2 million compared to $129.8 million in the prior year. Revenues grew 14% in 2022, primarily due to higher average material pricing across all product lines in response to recent inflationary pressures, as well as increased contracting revenues of approximately 17% over the previous year.
The impact of recently completed acquisitions had a positive impact on earnings. EBITDA, this business increased 4.5% to $306.7 million. Margins decreased as higher operating costs, mostly due to inflation, outpaced pricing increases in the first half of the year. In addition, increased interest expense and lower investment returns of $6.1 million on non-qualified benefit plans also had a negative impact on the year. Looking forward to 2023, given the strong backlog and continued strong demand for construction materials, we expect revenues in the range of $2.5 billion-$2.7 billion, with margins higher when compared to 2022, and EBITDA in the range of $300 million-$350 million for this business.
As mentioned in the segment discussions earlier, our companies were impacted on a non-cash basis by lower returns on non-qualified benefit plan investments. In total, the impact on a year-over-year basis was approximately $21 million or $0.10 per share when compared to the prior year results. The company attributed the change in investment returns to significant fluctuations experienced in the financial markets in 2022. Finally, the company continues to maintain a strong balance sheet and ample access to working capital to finance operations through our peak seasons. We continue to make great progress on our strategic initiatives that we announced during 2022. Business momentum is strong as we head into 2023, and we'll continue to provide updates regarding our guidance and outlook as we progress through the year.
That summarizes the financial highlights for the quarter and the year, and now I'll turn the call over to Dave Goodin for his formal remarks. Dave?
Dave Goodin (President and CEO)
Thank you, Jason, and thank you everyone for spending time with us today and for your continued interest in MDU Resources. Our construction businesses each reported record annual revenues, and our construction services business also reported record annual earnings in 2022. As expected, we experienced inflationary pressures and also had weather impacts throughout the year. However, we finished the year very strong as pricing increases and other operational adjustments offset inflationary pressures. We are excited by our combined all-time record construction backlog now standing at over $3.1 billion, up 46.5% from 2021, and various growth opportunities at our regulated businesses. We see this momentum continuing into 2023 as we remain focused on safely and efficiently providing essential products and services to our customers while making great progress on our strategic initiatives to create two pure play publicly traded companies.
To summarize activity by business unit, I'll start off with our regulated businesses. Natural gas retail sales volumes increased 13.7%. Electric retail sales volumes increased 2.2% in 2022. In addition to volume increases, higher rate relief has a positive impact on the results. The utility saw a rate base growth of approximately 7.8%, along with customer growth of about 1.6%. There are three rate cases pending before regulatory agencies. We anticipate filing four additional rate cases in 2023. The pipeline business had record transportation volumes now for the sixth consecutive year, largely from ongoing system growth and steady demand for its services.
Higher transportation revenues were largely attributable to the North Bakken Expansion project that was placed into service early in 2022. In 2023, revenues are expected to increase from the North Bakken Expansion project by approximately $10 million, largely due to contracted volume commitment increases of approximately 70% to now 215 million cubic feet per day. On January 27th, the company filed a rate case with the Federal Energy Regulatory Commission seeking rate increases for its transport and storage services. The business continues to work on a number of expansion projects that are expected to add incremental natural gas transportation capacity of more than 300 million cubic feet per day as they are completed later in 2023 and into 2024, pending regulatory approvals. I'd like to move on to our construction businesses.
Our Construction Services Group had record revenues in 2022, with growth in nearly all of its business lines, highlighting this business's capabilities to perform a diverse range of projects. We experienced strong demand for electrical and mechanical-related work, with a 50% increase in revenue for the year. Specifically for commercial and renewable projects. We are also encouraged by the increasing demand for utility-related transmission and distribution work. Construction Services ended the year with an all-time record backlog of $2.13 billion, up 54% from the prior year, and we have several large projects underway across all of our markets. With our ability to successfully attract and retain a skilled workforce of over 8,900 employees across our footprint, we feel we are well positioned to complete these projects safely and efficiently.Earnings momentum is expected to continue into 2023 as sales and margin guidance are higher on a year-over-year basis. At our construction materials business, we also had record annual revenues, largely driven by increased product pricing. As Jason mentioned earlier, this business experienced inflationary pressures throughout 2022. While performance improved in the second half of the year as pricing increases in response to inflationary pressures took effect, Knife River's full-year margins decreased because of higher costs on asphalt oil, labor, fuel, and cement, along with higher interest expense. The company also experienced unfavorable weather early in the year and during the Q4, effectively shortening the construction season in several Knife River's key markets. We expect to see the benefits from price increases to continue into 2023.
Knife River increased backlog 32% from the prior year, standing at year-end at $935.4 million. Looking forward, both of our construction businesses are well positioned to benefit from increased bidding opportunities. The U.S. national infrastructure is in need of improvement as it received a C-minus grade from the American Society of Civil Engineers here in 2021. With the funding from the Infrastructure Investment and Jobs Act and the Inflation Reduction Act, along with additional state-level funding, demand for our work construction businesses excel in completing look strong as we look to 2023 and beyond. This completes our individual business unit discussion. Looking ahead, we are pleased with the substantial progress we have made towards our strategic initiatives of creating two pure-play publicly traded companies.
The tax-free spin-off of Knife River is expected to be completed in the Q2 here in 2023. In addition, we are well underway with the strategic review of our construction services business, which we also expect to complete in the Q2. We expect to grow our rate base between 6% and 7% compounded annually over the next five years, driven primarily by investments in system infrastructure upgrades and replacements to safely meet growing customer demand. We are encouraged by the robust set of projects at our pipeline business as well, including ongoing system growth and steady demand for pipeline services. Overall, we have $2.5 billion in capital investments planned within our regulated energy delivery business over the next five years.
As always, MDU Resources is committed to operating with integrity and with a focus on safety while creating superior shareholder value as we continue providing those essential services our customers need while being both a great and safe place to work. I appreciate your interest in and commitment to MDU Resources and ask now that we open the line to questions. Operator?
Operator (participant)
At this time, I would like to remind everyone, if you would like to ask a question, please press star and then one on your telephone keypad. If you'd like to withdraw your question, press star two on your telephone keypad. If you are a speaker on the phone, if you're on a speakerphone, please pick up your handset before entering your request. We will pause for just a moment to compile our Q&A roster. Your first question comes from Dariusz Lozny, Bank of America. Please go ahead, sir. Your line is open.
Dariusz Lozny (Senior Investment Analyst)
Hey, guys. Good afternoon. Thanks for taking my question.
Dave Goodin (President and CEO)
Good afternoon, Dariusz.
Dariusz Lozny (Senior Investment Analyst)
Maybe just starting on your 2023 guidance for the energy delivery segment, the range of $140 million-$150 million in earnings, it implies a fairly wide year-over-year rate of change of could be +2% or up to +9%. Just given that you've got the rate base growth that you cited from the higher capital plan that you released last year, absence of drag, presumably from the non-qualified plan, some new rates in place that you alluded to, can you maybe talk about some of the offsets there that might potentially put you at the lower end of that range? Alternatively, what are the factors that could take you to the upper end of that range?
Dave Goodin (President and CEO)
Sure.
Dariusz Lozny (Senior Investment Analyst)
if you could?
Dave Goodin (President and CEO)
Yep. No, understand the question. I'll ask Jason to maybe start, and I can add to it.
Jason Vollmer (VP and CFO)
Yeah, certainly. Thanks, Darius. Thanks for the question. Yeah, there is a little bit of a wide range. To your point, as you've looked at there, I think the, you know, the low end of that would, yeah, include a, you know, smaller amount of growth. If you kind of take the midpoint of there, I think it's kind in line with historically what we've guided to for the most part. Items that could push us, you know, above or below, I guess, kind of.
Towards the outlying ends of that range. I think when you think about as we go through the year and some of the strategic initiatives that we have underway, we've quantified a little bit of some potential dis-synergy costs for part of a year that we've built into our forecast as we think through the year. We've also built in some higher than what we've typically seen, probably interest costs, built into some of those numbers as well. There's some impacts that we're seeing there. To the extent that those costs may come in a bit different than what we've built into our assumptions, I think it could push you to the lower or higher end of that range, depending on the directionality of that. That's just a couple of the variables that are there.
I mean, obviously, you have timing, impacts as you think about, rate cases we have underway and when those could get resolved and some of the items that maybe aren't, you know, certain as far as, when the impacts would hit during the year. As we go throughout the year, we'll continue to narrow that up and give a better view of things as we see more clarity, later in the year.
Dariusz Lozny (Senior Investment Analyst)
Great. Thank you. That's very helpful. If I could ask another one. Now looking at, the Knife River results from Q4, you delivered higher margins, but some of the volumes look like they ticked a little bit lower. Can you maybe discuss that a little bit? Was there any kind of weather impact? Are you perhaps seeing, different bidding activity from customers? Maybe talk a little bit about how you're seeing volumetric trends potentially trend into next year.
Dave Goodin (President and CEO)
Yeah. I'll maybe just start, Dariusz, but then I'll look for Dave Barney, if he'd like to add to it. You know, in my more formal comments earlier, I talked about the shortened construction season. We saw that really, you know, early on in the year with the April and May kind of northern tier blizzards that really, you know, kind of limited construction activity till well into June. We really saw some kind of early winter set in on the northern tier as well. That certainly was one of the factors. Dave Barney, would you like to add to that, or do you think that really? That was kind of the bulk of it, but Dave, anything to add?
Dave Barney (CEO)
Dave, you covered most of it. I mean, our record backlog, we've got a good bid schedule. Volumes look good for next year. Our volumes are down, when you look at our pricing, it's quite a bit up over the beginning of the year. It looks good for us for 2003 for volumes. We're a little low on ready-mix volumes, that's probably due more to the slowdown in the housing market, everything else looks strong.
Dave Goodin (President and CEO)
Thank you, Dave. Dariusz?
Dariusz Lozny (Senior Investment Analyst)
Great. Thank you for that. Really helpful. If I could sneak in one more here. This is just on some of the language that you used in your 2023 guidance. I know in the past when you guys have adjusted guidance mid-year, you've used the terminology slightly higher or slightly lower with respect to margins. This time around, you're saying you're expecting higher margins both at Knife River and the services group. Is there any possibility to quantify that? Does higher imply 1% or more, and slightly higher would be perhaps 0%-1%? Or any possibility to give a range around what that language entails?
Dave Goodin (President and CEO)
Yep. Yep. No, I understand the question, Darius, and I think, you know, noteworthy for us is the language was different when we said higher year-over-year, both at services and at materials, noting that, you know, other years we've said comparable to slightly increasing or. In short, I'm not going to define what higher means. It's just obviously something that's incremental to what we've said in the past. I think that also gives us some confidence as we look into 2023. You combine that with over $3.1 billion in backlog between the two businesses, it kind of gives us some visibility into 2023 and then the margins being higher on a year-over-year.
Dariusz Lozny (Senior Investment Analyst)
Okay, great. Thank you for all the responses. I'll pass it along here.
Dave Goodin (President and CEO)
Thank you, Dariusz.
Operator (participant)
Your next question comes from the line of Brian Russo with Sidoti. Please go ahead, sir.
Brian Russo (Analyst-Equity)
Hi, good afternoon.
Dave Goodin (President and CEO)
Hi, Brian. Good afternoon to you.
Brian Russo (Analyst-Equity)
Just, you know, the 2023 guidance and energy delivery, you noted the range. You have three rate cases ongoing, one in North Dakota, Montana, and Idaho. Any idea when new rates will be effective in those three jurisdictions? Then, secondly, what jurisdictions are the four rate cases you alluded to going to be filed in 2023 and when? Trying to get a sense of, you know, where we could see a full year of rate relief, which seems to be, you know, nearly all of your jurisdictions by 2024.
Dave Goodin (President and CEO)
Right. Right. I'll ask Nicole to go through that because she's really front and center on each of those cases to talk about the three that are currently and then the four that we have planned in addition to that here in 2023. Nicole?
Nicole Kivisto (President and CEO of Utility Group)
Yeah, thanks for the question. Essentially, you alluded to the North Dakota and Montana electric cases and then Idaho gas. Those are the ones we currently have filed. We do have hearing dates for two of those in May and June. You know, depending on the outcomes there, we would hope for final rates following those dates. We do have interim in place in both North Dakota and Montana currently. I think your second question was as it relates to what we are pursuing in 2023 for filings. We are pursuing rate in four of our jurisdictions, basically in line with the rate base growth that you heard Dave comment on.
We've had a historic track record of about 7% growth on a year-over-year basis, and in 2022 alone, 7.8%. Good rate base growth as we look at serving our customers' needs, and that would require then a rate case in South Dakota on the electric and gas side of the business, a North Dakota gas case, and then in Washington, we intend to file a case next year as well.
Brian Russo (Analyst-Equity)
Okay, great. Given the active regulatory calendar, is it fair to say that your guidance for 2023 assumes, you know, meaningful regulatory lag and, you know, once those new rates go into effect, you should see improving earned returns on a higher rate base?
Dave Goodin (President and CEO)
I think the short answer there is, Brian, I would agree with that. I would also point you to the, you know, comments that Jason provided earlier is that we do have, you know, as we go through our strategic initiatives this year, we've, you know, tried to forecast what we believe might be some modest dysenergies and also increased interest expense as well. There's moving parts both directions, I'd like to believe the takeaway here should be is our utility management team is very focused on timely rate recovery given the kind of the frequency and the number of general rate cases being filed.
Brian Russo (Analyst-Equity)
Okay, great. Then quickly on the pipeline, the $10 million of revenue increase related to the North Bakken Expansion.
Dave Goodin (President and CEO)
Expansion project.
Brian Russo (Analyst-Equity)
that is separate from, revenue and/or margin you expect from the FERC rate case?
Trevor Hastings (President and CEO)
Yeah. Brian, this is Trevor. That's correct.
Brian Russo (Analyst-Equity)
Okay.
Dave Goodin (President and CEO)
Those are based on those contracted volumes of increasing our capacity about 70% on that pipe from 2022 levels to 2023.
Brian Russo (Analyst-Equity)
Okay, got it. Switching to the construction materials, you mentioned the unfavorable weather in the early winter. Are you referring to Winter Storm Elliott in the mid and upper Midwest? What was the impact of the well above average precipitation in California during the month of December, where you have a pretty big, vertically integrated footprint?
Dave Goodin (President and CEO)
Yeah. Both of those were key. I'll ask Dave Barney because he actually resides in the Pacific Northwest and experienced those kind of historic rains that we saw too. Dave?
Dave Barney (CEO)
Yep. Yeah, we definitely saw weather impact, just not in December, in October and November. You know, in spite of the poor weather we experienced in most of our markets, we were able to continue to increase our prices in our product line. We also have that record backlog, but the weather really affected almost all of our regions for Knife River in the Q4.
Brian Russo (Analyst-Equity)
Okay, great. You know, the, you know, a lot of news out of California in early January 2023 with the flooding and a lot of infrastructure restoration efforts that will be needed, you know, to the roads, bridges, ports, etc. I'm just wondering, is Knife River and/or CSG seeing, you know, incremental activity because of that, you know, kind of weather impact specifically in California?
Dave Goodin (President and CEO)
Dave, maybe let's start with you. Go ahead.
Dave Barney (CEO)
Yeah. In California, we're definitely starting to see some of this work bid out, and we've already started doing some of the emergency work, and there'll be a lot more work to come out in the future. It's still pretty wet out here, and hard to get to some of these spots. There's definitely gonna be some work from the winter storms. We got 20 in of rain, which was record rain, in California for any month, in the history of California.
Brian Russo (Analyst-Equity)
Okay. Do you see that?
Dave Goodin (President and CEO)
Jeff, could you respond to Brian's question, but then maybe even more broadly, other storm response work that we've been doing?
Jeff Thiede (President and CEO)
Yes. Thank you, Dave. Thanks for the question, Brian. Yeah, we did redeploy crews that were working on our normal work assignments in California and helped out with restoration of some of the power losses within that state. Of course, we've also deployed in other parts of the country, most notably the eastern part of the United States for other storm work in the past. Our crews in California continue to be really busy, and we work mostly in this Tier 2 elevated and Tier 3 extreme fire threat districts. We've got the equipment, the people, and of course, the experience to take on the work that we have and of course, the upcoming undergrounding work, which is I'd like to give you an update on that.
We're continuing to see packages come out in engineering and right away planning and permitting continues to develop. We are pricing a package now, and we've got a great track record with our utility customer that in the northern part of the state. We're going to get some of that work, and hopefully it'll align up with our resources and our available crews, and it'll contribute to our record backlog in the future. We currently don't have any of the underground work in our backlog today.
Brian Russo (Analyst-Equity)
Okay, great. Then lastly, just on the margins, in the commentary earlier, both on Knife River and CSG. You know, would you characterize the 2023 margins as kind of, you know, normalized margins? Or, you know, do you sense there's still, you know, margin improvement to be captured, you know, above and beyond, you know, what, you know, what your qualitative, you know, direction on those margins?
Dave Goodin (President and CEO)
Sure, sure. Yeah. No, margins are always a key focus in those businesses and, you know, we obviously are very focused on how we can enhance those margins going forward. You know, so what you're seeing as our guidance, just increasing margin in both businesses. You know, Dave Barney touched upon, you know, pricing increases in virtually all product lines, you know, within the aggregates business and the, and the services and the asphalt and et cetera, ready-mix, et cetera there. Obviously, you know, given Jeff's backlog, strong workforce, our ability to bid projects, you know, again, margins being increasing year-over-year is I think also a function of demand that we're seeing out there. It's really a combination of factors.
Brian Russo (Analyst-Equity)
Okay, great. Thank you very much.
Dave Goodin (President and CEO)
thank you, Brian. Appreciate it.
Operator (participant)
Your next question comes to the line of Chris Ellinghaus, Siebert Williams Shank.
Chris Ellinghaus (Managing Director)
Hey, everybody. How are you?
Dave Goodin (President and CEO)
Hi, Chris. Good. How are you doing?
Chris Ellinghaus (Managing Director)
Good. I was just wondering if Jeff could maybe elaborate on, you know, what the T&D weakness last year was from.
Dave Goodin (President and CEO)
T&D weakness, Jeff?
Jeff Thiede (President and CEO)
Yeah. We had a project that for the last couple of years been a struggle. We've got it captured accurately for GAAP standards, and we're working through completing that job. We've got our good documentation and hopeful recovery on that side. In addition, we didn't have as much storm work last year as we did in prior years. Those are the two biggest factors on the T&D side.
Chris Ellinghaus (Managing Director)
Okay, great. You know, going into 23, I'm just kinda thinking about hedging for, you know, petroleum-related products. I wonder if Dave could maybe address, you know, where you stand for 23 hedging.
Dave Goodin (President and CEO)
Yeah. Dave, do you wanna touch on our diesel and our fuel procurement for the fleet there?
Dave Barney (CEO)
Yeah. We've been purchasing in advance fixed forward fuel contracts and asphalt oil, winter asphalt oil buy a lot more this year than we did last year to protect ourselves from the inflation. We've been doing a better job on that. There's been other products, whether it's cement or even on the supply chain, buying parts ahead of the problems we saw last year and have bigger inventory on supply.
Chris Ellinghaus (Managing Director)
Okay. Thanks, Dave. Lastly, you know, Jason, this is a little different, sort of guidance format. Are you thinking that post-separation of Knife River, you'll revert back to EPS guidance, or is this the new normal?
Jason Vollmer (VP and CFO)
Yeah. Thanks, Chris. I would say, you know, our long-term goal will still be to give, you know, really kind of similar guidance to what we have previously and really what carries in the industry. As we talk about our future state of being, two pure play public entities, I think each one of those businesses will provide guidance that's in line with what you would see in the industry. From a MDU Resources standpoint, as you think about the forward look, we'll get back to an EPS guidance range at some point. I think that's where, you know, investors value regulated businesses at, is based off the earnings side of things.
With all the moving parts this year with unknown, you know, exact timing of the spin and impacts of what will happen with the strategic review of the services business and timing of all those things. We just didn't really feel like it was a good year to give consolidated guidance to the top level, but we'll definitely get back to that in the future.
Chris Ellinghaus (Managing Director)
Okay, great. Appreciate the color, guys. Appreciate it.
Dave Goodin (President and CEO)
Yep. Thank you, Chris.
Operator (participant)
Your next question comes from the line of Ryan Levine with Citi. Please go ahead, sir.
Ryan Levine (Equity Analyst)
Hi. In terms of ability to transact on the M&A front, historically, you've made a number of acquisitions on both the materials and service side. Is that deal pipeline continuing in light of the potential strategic transactions, or is there more of a pause for 2023 there?
Dave Goodin (President and CEO)
Yeah, Ryan, good question. I would say, you know, we continue to have active business development teams, but at the same time, we're very conscious of the strategic review at CSG along with our work streams associated with the Knife River spin activity. While we've not stopped those activities, I would say it's maybe taken a little bit of a back seat given the other activities going on. Clearly, both of those businesses are a product of ongoing M&A over the years, it's part of the DNA at both organizations.
Ryan Levine (Equity Analyst)
Okay. Within construction service, what's included in the backlog from a T&D perspective, and how are you seeing a meaningful uplift in either of those two areas in recognizing the Northern California undergrounding works outside of backlog?
Dave Goodin (President and CEO)
Sure. Jeff?
Jeff Thiede (President and CEO)
Yeah. Our backlog in the T&D space is a lot lower than it is in the E&M, of course. What we're seeing is still strong opportunities. We're in negotiations on updating our MSAs with several of the utilities. In that, we upgrade our pricing, increase our pricing based upon fuel, labor. We still see a line of sight of strong work opportunities and growth. Our transportation backlog is about the same as it was 12 months prior. Our utility backlog itself is a little bit down, but the work outlook is strong. We expect growth in that area, and that's reflected in the contribution that we have in the forecast in our overall revenue and earnings guidance.
Ryan Levine (Equity Analyst)
Is that growth more geared towards transmission or distribution? Is there a regional focus in terms of where you're seeing the opportunity?
Jeff Thiede (President and CEO)
We're seeing not just the strength in the distribution market, but transmission starting to increase in the Midwest and also in the West. We also see a strong market for communications in Montana, the Rocky Mountain region. We're doing quite a bit of communication work in addition to the distribution work. We also have underground gas services that is still strong despite the challenges and the pressures on gas. We still have a lot of change, upgrades and change outs and services to a number of our customers. We are positioned for the undergrounding work, as I mentioned earlier, and we're doing some undergrounding work in Southern California right now, and we'll look to see if we can add that to our backlog in the future.
Ryan Levine (Equity Analyst)
Thank you. You highlighted the Northern California undergrounding work. Do some of the forecast there have come in a little bit in terms of what they're planning for from a five-year planning for mileage plans? Does that have any implications for MDU? Does that change your bidding strategy as the near-term line of sight may be less than what was anticipated a few months ago?
Jeff Thiede (President and CEO)
Yeah. There's still a tremendous amount of work with that customer, and that undergrounding will be part of our work going forward. We're diversified in not just that market with that utility, but up and down the West Coast. Those changes and updates of work packages coming out is not a concern of ours. We're positioned well to do that work as well as the other work that we're exceptional at doing, and we'll continue to put forward the crews to be able to work safely and productively and with the quality that exceeds our customers' expectations.
Ryan Levine (Equity Analyst)
Thank you. Then regarding the diesel comments made earlier, more broadly for margin expectations for 2023, is that a meaningful driver of the improved margin expectations for any of the segments? or how should we be thinking about that as a driver for the outlook?
Dave Goodin (President and CEO)
Yeah. Well, yeah, I would say, Ryan, it's a component of, but it's not the only part of as we think about, our margins on a year-over-year basis. It'd be part of, but again, it kind of goes into our overall bidding strategy that we have put in place as well.
Ryan Levine (Equity Analyst)
Appreciate the color. Thank you.
Dave Goodin (President and CEO)
Yep. Hey, appreciate the questions. Thank you, Ryan.
Operator (participant)
Your next question comes from the line of Brent Thielman with D.A. Davidson. Please go ahead, sir.
Brent Thielman (Managing Director and Senior Research Analyst)
Hey. Thank you. Good afternoon, everybody.
Dave Goodin (President and CEO)
Hey, good afternoon, Brent.
Brent Thielman (Managing Director and Senior Research Analyst)
Hey, thanks for taking the question. Just on CSG, I was wondering if you could talk about, you know, what bottlenecks you may be seeing, or may be seeing abate just related to supply chain. Is it tough to procure what you need? Is any of that contributing to delays or pushouts or, you know, do you feel like the industry is sort of beyond that? Because it seems like there's sort of an incredible amount of demand out there, but still some hiccups in the supply chain. Just be curious if you could comment on that.
Dave Goodin (President and CEO)
Sure. Jeff?
Jeff Thiede (President and CEO)
We're seeing some improvements on supply chain and of course on the utility side where our customers provide most of the materials. We've seen some improvement there, but still impacts with delays or crews being canceled or repositioned to other parts of our areas. On the O&M side, it has gotten better, but we still have issues, and that does and can impact our schedules with delays and could add to trade stacking. Sometimes it's not the materials that we are procuring. It could be another trade on a job site which could impact the labor productivity on a job. It is improving. Overall it's gotten better. Yet it's still not where it was pre-pandemic.
Brent Thielman (Managing Director and Senior Research Analyst)
Yeah. Okay. Appreciate that, Jeff. Just a question on Knife River. I know the housing market isn't an especially big market for the business. Just as we think about the guidance for the business for the year, I mean, any kind of feel for how you're building that into the to your expectations this year?
Jeff Thiede (President and CEO)
Yeah. Dave?
Dave Barney (CEO)
Well, Brent Thielman, about 90% of our backlog is residential. We have a slowdown in-house in which we expect. We've seen a little bit of that. Most of our markets, the housing market is staying strong. If it's slow, it's slowing down a little bit in Oregon and Idaho, but we don't expect that to be a big pact of our next year's earnings. When you look at our large backlog, our record backlog, and 90% or 80% of it is public works, and we continue to pick up work in that sector, I feel good about 2023.
Brent Thielman (Managing Director and Senior Research Analyst)
Okay. Okay, great. Thanks for taking the question.
Dave Goodin (President and CEO)
Perfect. Thank you, Brent, for the questions.
Operator (participant)
That marked the last call for questions. As a reminder, the webcast can be accessed at www.mdu.com under the Investor Relations heading. Select Events and Presentations and click Year End 2022 Earnings Conference Call. After the conclusion of the webcast, a replay will be available at that same location. At this time, there are no further questions. I would like to turn the conference back over to management for closing remarks.
Jeff Thiede (President and CEO)
Perfect. Thank you. Thank you for taking the time to join us on our year-end 2022 earnings call. We are optimistic about our growth opportunities and future regulated energy delivering projects. We also look forward to connecting with you as we progress through 2023. Again, I'd like to thank you and appreciate your continued interest and support of MDU Resources. With that, we'll turn the call back to the operator.
Operator (participant)
This concludes today's MDU Resources Group conference call. Thank you for your participation. You may now disconnect.