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MDU Resources Group, inc (NYSE:MDU) 2021 Third Quarter Earnings Conference Call, November 4, 2021, 2:00 PM Eastern Time
Hi. My name is Erica, and I will be your meeting host. At this time, I would like to welcome everyone to the MDU Resources Group’s third quarter 2021 conference call. [Operator Instructions] This call will be replayed from 5:00 PM Eastern Time today to 11:59 PM Eastern Time on November 18th. The replayed conference ID is 5194306. Similarly, the replayed conference ID number is 5194306. The number to dial for replay is 1-855-859-2056 or 404-537-3406.
I now want to transfer the meeting to Jason Vollmer, Vice President and Chief Financial Officer of MDU Resources Group. Thank you, Mr. Walmer. You can start your meeting.
Jason L. Vollmer - Vice President and Chief Financial Officer
Thank you Erica, and welcome everyone to our third quarter 2021 earnings conference call. You can find the earnings release and supplementary materials of this conference call under the "Investors" tab of our website www.mdu.com. President and CEO Dave Goodin and I will chair today's discussion. Dave Barney, President and CEO of Knife River Corporation, answered questions online after our prepared speech; Jeff Thiede, President and CEO of MDU Construction Services Group; Nicole Kivisto, President and CEO of our Utilities Group; President and Chief of WBI Energy Executive Officer Trevor Hastings; and Stephanie Barth, Vice President, Chief Accounting Officer and Chief Financial Officer of MDU Resources.
Today’s discussion (including answers to questions) may contain 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. In addition, any non-GAAP measures discussed today are consistent with the most directly comparable GAAP measures in our earnings release and SEC filings. Yesterday, we announced third-quarter earnings of US$139.3 million or US$0.68 per share, while earnings for the third quarter of 2020 were US$153.1 million or US$0.76 per share.
Year-to-date, our earnings were US$291.6 million or US$1.44 per share, compared to US$277.9 million or US$1.39 per share the previous year. Let's start with a quarterly comparison of our construction business and look at some details by department. The construction services company reported revenue of $23.1 million in the third quarter, compared with $29.8 million in the third quarter of the same period last year. The EBITDA of this business decreased by US$10.9 million to US$35.9 million over the same period in 2020. The result was negatively impacted by USD 5.5 million after tax due to the estimated change in construction contracts this quarter.
Due to the lack of available skilled labor, the profit margin of the business has also fallen due to rising staff costs. Although we saw fewer storm recovery jobs this quarter last year, the demand for our general utility jobs remains very strong. The third quarter revenue of our building materials business was 96.3 million U.S. dollars, lower than last year's 107.3 million U.S. dollars. EBITDA decreased by USD 13.4 million from the same period last year to USD 158.9 million. The main drivers of the decline in revenue are the decline in sales and profit margins of asphalt and related products, as well as the decline in contracting revenue.
Compared to the strong third quarter we experienced in 2020, bitumen products and contract margins were affected by the increase in the cost of bitumen oil and diesel fuel and the reduction in available highway paving work in certain regions. Part of these effects are offset by lower sales, and general management expenses mainly come from lower reward accruals and lower benefit-related costs. Turning to our regulated energy delivery business, our United Utilities business reported a net income of US$5.2 million for the quarter, and a net loss of US$800,000 for the third quarter of 2020. The electric utility sector reported a profit of US$20.6 million in the third quarter, compared with US$16.8 in 2020 and 1 million in the same period in 2020.
Due to the impact of the pandemic, compared with last year, the warmer weather promoted an 11.1% increase in electricity retail sales and more businesses opened. The increase in MISO revenue and the upgrade of transmission interconnection also have a positive impact on the revenue of the business. Our natural gas division reported an estimated seasonal loss of US$15.4 million for the quarter, an increase of US$2.2 million from the previous year. Higher adjusted gross margins brought about by rate reductions and a 2% increase in retail and natural gas sales contributed to the reduction in losses, partially offset by higher O&M expenses.
The pipeline business’s revenue in the third quarter was US$10.6 million, and the revenue in the third quarter of 2020 was US$8 million, mainly from the higher AFUDC of the company’s North Bakken Expansion project. Also in this quarter, compared with the third quarter of 2020, MDU Resources received a lower income tax concession of approximately US$4.6 million, which is related to the timing of the confirmation of our consolidated annual estimated tax rate.
This summarizes the main financial highlights of the quarter. Now I want to transfer the call to Dave so that he can make an official speech. Dave?
David L. Goodin - President and Chief Executive Officer
Thank you, Jason, and thank you all for spending time with us today, and thank you for your continued interest in MDU resources. The advantages of our two-platform business model were evident in the third quarter, as the strong performance of our regulated energy delivery business helped offset some of the headwinds faced by our construction business. MDU Resources is still in a good position to achieve strong results in 2021 and beyond. In order to summarize the activities by business unit, I will start with the regulated energy transmission business. Highlights of our utility operations in the third quarter include a year-on-year increase in revenue.
The utility company will continue to seek regulators to recover the costs associated with providing safe and reliable electricity and natural gas services to our growing customer base. Taken together, since the same period in 2020, our customers have increased by 1.7%, and in the third quarter, our natural gas utility company resubmitted an annual rate increase of $13.7 million in Washington State, which is currently pending. You can read more about these and other regulatory documents in our 10-Q filed this morning. We continue to prepare to start construction of our Hesket Station Unit IV in early 2020, and it is expected to be put into use in early 2023.
As a reminder, Hesket IV is a natural gas peak shaving device that will help partially compensate for our coal-fired Hesket Station Units I and Unit II and the decommissioned coal-fired Lewis & Clark Unit I. The power generation loss will be in the first quarter of this year . Our pipeline business also performed well throughout the third quarter, with reported earnings slightly lower than the record in the third quarter of 2018. The construction of the North Bakken Expansion project is progressing smoothly. We expect that this fully-subscribed project will be put into use in early 2022 and can deliver 250 million cubic feet of natural gas per day for our customers.
Although part of the first year customer commitments we discussed last time was delayed by one year-at this time last year, the project was in a vantage point of Bakken and could be easily expanded in the future for projected natural gas production growth. I recently had the opportunity to visit a construction site in northwestern North Dakota with other members of our management team. I can tell you directly that it’s impressive to see more than 700 employees and contractors doing this work together safely and effectively. Profound 260 million dollar project.
Our pipeline business also received FERC approval in the third quarter to use the pre-filing review procedure for its Wahpeton expansion project. The project involved the construction of approximately 60 miles of 12-inch pipeline from our existing facility in Mapleton, North Dakota, extending to Wahpeton, North Dakota. It will increase natural gas production capacity by 20 million cubic feet per day and is expected to cost approximately US$75 million. According to regulatory approval, construction is expected to start in early 2024 and be completed later in the same year.
When the North Bakken and Wahpeton expansion projects are completed, WBI’s total system capacity will exceed 2.4 billion cubic feet of natural gas per day, which will help reduce natural gas combustion in the region and allow producers to deliver more natural gas to the market. Now I want to switch to our build platform. Our construction services group performance was affected by changes in construction project contract estimates and the increase in labor costs this quarter. In 2021, there will be a labor shortage in the market in which construction services are operated, which in turn will lead to an increase in employee-related costs, as we will continue to focus on attracting and retaining skilled professional labor.
Compared with last year, the storm-related utility maintenance work has decreased, but we continue to see strong overall demand for utility-related work. Demand for sales and leasing of transmission line equipment manufactured by this business remains high. Coupled with the strong capital expenditure budgets we see across the utility industry, we remain optimistic about the prospects for external professional contracting. There are also great opportunities for in-house professional contracting, especially in the commercial sector. Construction services had a backlog of US$1.27 billion at the end of the quarter, slightly lower than the record of US$1.28 billion in the third year of last year.
Bidding remains competitive in the entire company's footprint, and we really hope that our relationship with existing customers, coupled with our high-quality services and effective cost management, will continue to help us obtain profitable projects. Although construction services performed very strongly in the first half of the year, we have adjusted the revenue and profit margin guidance for this division to reflect the impact of the third quarter. We now expect revenue to be between US$2 billion and US$2.2 billion, with profit margins comparable to 2020 levels.
Finally, our building materials business; Knife River performed solidly in the third quarter, but it was lower than last year's record third-quarter earnings. The main impact on the profitability of this business is the increase in the cost of asphalt oil and diesel fuel, as commodity costs have returned to near 2019 levels. You may remember that the decline in energy-related costs pushed up the profitability of our asphalt and asphalt-related product lines to almost a record high last year. As the COVID-19 pandemic has exacerbated previous and existing labor shortages, Knife River has also been affected by labor restrictions that primarily target truck drivers.
Although labor challenges continue to affect many construction companies, Knife River is actively working to attract the next generation into the construction industry. The company is about to build a training center on 270 acres of land in the Pacific Northwest. Its purpose is to improve the skills of existing employees and partner organizations and provide training for newcomers in the industry. The Knife River Training Center has an 80,000 square foot indoor heated space for training trucks and heavy equipment, and a 16,000 square foot office with classroom and laboratory facilities.
The center is already holding courses to help students develop marketable skills through classroom education and practical experience. In addition to cultivating personal talents, the goal of the center is to demonstrate architecture as a true career choice. These facilities and courses are open to all construction companies, including Knife River. In view of the results of the third quarter, we have adjusted the profit margin guidance for this business. Expected revenue will still be between 2.1 billion and 2.3 billion US dollars. However, the profit margin is now expected to be slightly lower than the 2020 level. As of September 30, Knife River's backlog of orders was US$651.7 million, an increase of 14% from US$571.3 million in the previous year.
Due to strong economic conditions, we have seen more bidding opportunities in certain regions. We have excellent employees from entry level to management level, and many of our employees have spent their entire careers in this industry. I believe our management team will continue to deal with the workforce challenges we face. In the past year and a half, our team has overcome many challenges brought about by the COVID-19 pandemic, and we continue to achieve solid results. Overall, MDU Resources and our company performed well in the third quarter. Although the performance did not reach the level we expected, our operations will continue to operate safely and efficiently.
Based on our third quarter results, we have adjusted our earnings per share guidance to the current range of US$1.90 to US$2.05 per share. Looking to the future, our building materials and building services businesses are in a good position to benefit from the allocation of funds under the US Rescue Program Act and the federal infrastructure program. With the advancing of the bipartisan bill and the focus on traditional infrastructure projects, including road and bridge construction, electric vehicles and broadband construction, the upgraded power infrastructure will provide our construction companies with huge advantages.
We will also provide financial certainty for our customers and the next few years. We also continue to seek acquisition opportunities to increase the market share of our construction business. As always, MDU Resources is committed to operating with integrity, focusing on safety, and at the same time creating outstanding shareholder value, because we will continue to provide basic services to our customers and fulfill our slogan of building a strong America.
I thank you for your interest and commitment to MDU resources, and we are now open to ask questions. operator?
[Operator Instructions] Your first question comes from the line between Dariusz Lozny and Bank of America.
Dariusz Lozny - Bank of America Securities - Analyst
Hey, good afternoon guys. Thank you for answering my question. I want to start with the material part. I noticed in Q that the language on expenditures in the American Rescue Plan Act seems a bit like you have better visibility on a future basis than in previous quarters. It sounds like you are saying that the states are now beginning to allocate. Can you comment on when we will see this in the results of this segment?
David L. Goodin - President and Chief Executive Officer
Dariusz, I start first, and then ask Dave Barney if I want to add something. We are beginning to see legislators in various states — legislators actually want to deal with some of the funds — have gone their way. Some of these funds actually have a fuse associated with these. So they need to be used up at some point. So I would say this is just in the process, but I think we will start-expect to see some of these funds enter the market as early as next year. But Dave Barney, do you have any other colors you want to add?
David C. Barney - President and Chief Executive Officer of Knife River Corporation
No, Dave, I think you covered it. We will definitely look forward to more-see more next year in 2022.
David L. Goodin - President and Chief Executive Officer
Dariusz, have we received your question?
Dariusz Lozny - Bank of America Securities - Analyst
You did it. No, that is a very useful color. If I can stay in the material field, I think there are some additional languages there, regarding you seeing an increase in bidding opportunities in certain areas related to economic conditions. Can you elaborate on the deltas or those areas there? And what is the profit margin you see on these opportunities?
David L. Goodin - President and Chief Executive Officer
Dave, can you answer this question?
David C. Barney - President and Chief Executive Officer of Knife River Corporation
certainly. We are seeing an increase in bids in many regions, especially in our states of Idaho, Oregon and Montana, which are very strong now. Even in California, there are many commercial works. Therefore, the profit margin is tight now. They are really tight. There are many people bidding for this job, but we will get our share.
Dariusz Lozny - Bank of America Securities - Analyst
Okay, great. If I can ask-a guide on services to reduce income. Is this mainly related to a contract-related adjustment you proposed, or maybe it is driven by demand?
David L. Goodin - President and Chief Executive Officer
Yes. Dariusz, I will ask Jeff Thiede to respond to this.
Jeffrey A. Thiede - President and CEO of MDU Construction Services Group, Inc.
Thank you for your question. It is mainly driven by time. Some large-scale projects that we are completing or have completed were not immediately replaced by other projects. If you look at our backlog of US$1.27 billion, it is very close to our record backlog of US$1.28 billion a year ago. It's just a matter of when these projects will start. Some of our projects in the backlog have been postponed to next year.
David L. Goodin - President and Chief Executive Officer
Dariusz, I know Jeff may have broken up a bit there. Have you noticed that this is mainly talking about time, considering the backlog of $1.27 billion, this is more like a-considering the strong backlog we currently have, this is more of a matter of time.
Dariusz Lozny - Bank of America Securities - Analyst
I did catch that. Thank you for being so detailed. If I can squeeze in one more briefly. Regarding your long-term guidance of 5% to 8%, should we think about it-since you are lower in 2021, should we think that the operating rate in 2021 may be higher or in the high-end range?
Jason L. Vollmer - Vice President and Chief Financial Officer
Dariusz, this is Jason. I can quickly weigh it here. I mean, 5% to 8% of the long term we are confident about it. As you saw in the version released last night, we reiterate this number here again. This is actually based on our $1.95 in 2020, and we are confident that we will be able to see this from the perspective of long-term operating rates. And I will not comment on our expectations for each year based on what we see here. We need to see how 2021 will end for the rest of the year, but we are very confident that we will be able to reach the 5% to 8% range in the long term.
Dariusz Lozny - Bank of America Securities - Analyst
OK. thank you very much. I will turn it back now.
David L. Goodin - President and Chief Executive Officer
Your next question comes from the cooperation between Ryan Levine and Citigroup.
Ryan Levine - Citigroup Global Markets - Analyst
David L. Goodin - President and Chief Executive Officer
Ryan Levine - Citigroup Global Markets - Analyst
Hi Dave. In the construction services business, can you elaborate on what is driving the estimated change in the construction contract of USD 5.5 million?
David L. Goodin - President and Chief Executive Officer
I just start a little bit, and then of course Jeff can join. But this is indeed the biggest difference, if you again consider the year-on-year estimates for a single project. If you look at the run rate for the third quarter of 2020 and the third quarter of 2021, this is indeed the biggest difference between the two. Jeff, maybe you can add more colors for this particular item.
Jeffrey A. Thiede - President and CEO of MDU Construction Services Group, Inc.
certainly. Thank you, Dave. Good question, Ryan. The project Dave mentioned is now nearly a year and three-quarters longer than the original completion date in the baseline plan. This has had a significant negative impact on the labor force. Moreover, we have some materials purchased later than we initially estimated. Therefore, these are the biggest driving factors in this project. Our team is working hard to complete this project and put it behind us.
Ryan Levine - Citigroup Global Markets - Analyst
OK. I think next, given the high cost of construction services, if I understood correctly, some of your contracts have cost pass-through and inflation clauses. Has anything happened this quarter that prevented some of these mechanisms from working, or considering some of these inflationary pressures, we should not expect the profit margins of the service business to deteriorate further?
Jeffrey A. Thiede - President and CEO of MDU Construction Services Group, Inc.
Yes. As you mentioned, some contracts have these pass-through clauses, but others do not. We have seen the impact of the pandemic on productivity and supply chain availability. A year ago, we thought that we would have more supply chain issues, but the inventory level is still relatively high, and we need less materials this year. We have really seen these effects whether it is lamps, underground PVC pipes, and electronic components.
Ryan Levine - Citigroup Global Markets - Analyst
OK. Then turn to North Bakken to expand. Given some federal policy conversations about methane emissions, has there been any additional interest in the pipeline's expansion opportunities?
Trevor J. Hastings - President and Chief Executive Officer of WBI Holdings, Inc.
Thanks, Ryan. This is Trevor. Especially in the past 6 to 12 months, we continue to see an increase in the activities of Bakken itself. Because it is related to the new methane regulation just released this week. We are evaluating this. On the surface, people would think that it should put additional pressure on people to obtain this natural gas and bring it to the market. So it should. We didn't see anything last week, but overall, in terms of projects and opportunities to extract natural gas from the basin, we saw an increase in interest in Bakken.
Ryan Levine - Citigroup Global Markets - Analyst
Does the project have the ability to mix any hydrogen into the pipeline?
Trevor J. Hastings - President and Chief Executive Officer of WBI Holdings, Inc.
Unlike the current design. I mean, all parts of the world are evaluating the delivery of hydrogen through carbon steel pipes. Regarding the ability to mix a certain proportion of hydrogen into the natural gas stream, different studies are underway. So we continue to pay attention to these, but not as originally designed, it is basically designed to transport pipeline quality natural gas.
Ryan Levine - Citigroup Global Markets - Analyst
Appreciate the colors. Thank you.
David L. Goodin - President and Chief Executive Officer
Ryan, I will continue from where Trevor left. You asked about some of Bakken's activities and the ability to expand the pipeline. Another development we saw was actually amplified by the North Dakota pipeline authority. As producers produce oil, the gas/oil ratio continues to climb. So, in fact, considering the trajectory of the gas-to-oil ratio, in terms of overall natural gas production, even at the current oil level, I think this bodes well for our future potential. But there are more details there, but again I think this bodes well for our pipeline and its location.
Ryan Levine - Citigroup Global Markets - Analyst
great. Then there is the last question. In terms of underground opportunities on the West Coast, did MDU have face-to-face conversations with large potential customers in California?
David L. Goodin - President and Chief Executive Officer
Jeff, do you want to take that?
Jeffrey A. Thiede - President and CEO of MDU Construction Services Group, Inc.
you bet. We have. We are fully capable of participating in this work, and we know that this is a multi-year effort to bury approximately 10,000 miles of power lines underground, which is the biggest promise to reduce the risk of wildfires across the country. We have submitted our qualifications to PG&E, and PG&E is our long-term customer. In the past, we have also performed this type of work for PG&E. Given our talented team, our experience, and our performance, once the engineering, permitting and procurement processes bring bidding opportunities, we hope to seize part of this opportunity.
Ryan Levine - Citigroup Global Markets - Analyst
David L. Goodin - President and Chief Executive Officer
Your next question comes from the series of Chris Ellinghaus and Siebert Williams.
David L. Goodin - President and Chief Executive Officer
Christopher Ellinghaus - Siebert Williams Shank - Analyst
Hi, everybody. Hey guys, how are you guys?
David L. Goodin - President and Chief Executive Officer
Christopher Ellinghaus - Siebert Williams Shank - Analyst
You mentioned that it was lower than expected this quarter. I think this is mainly due to labor and petroleum product cost pressures. Is this not the function of contract hedging in petroleum products? When you go through the next contract cycle, will this be reversed, or is this a special situation in the past few quarters?
David L. Goodin - President and Chief Executive Officer
Yes. Very fair question, Chris. Therefore, the answer is partly yes and partly no. Let me break down a few of them for you and others-just the main parts. Similarly, when I think of CSG’s quarter-over-quarter ratio, it’s actually an estimate of a large-scale project, based on a year-on-year basis there. But your comment on oil or oil hedging, if we think quarter-on-quarter, our after-tax impact on diesel in this quarter is about $4 million. Then the other one I said is partly yes and partly not, it is actually in the field of bitumen and bituminous oil.
I would say that although it is still a very good business for us, we did not enjoy the low commodity prices a year ago. Asphalt and bituminous oil add up, the after-tax difference between the two is about 10 million U.S. dollars. So-in your opinion, some of them do become hedges, but some are the inflation escalations that we see quarter-to-quarter. So believe we have caught it. This is reflected in our forward-looking guidance. When we look back at the rest of the year, we feel good about these businesses. This is only a quarter more.
Christopher Ellinghaus - Siebert Williams Shank - Analyst
OK. So it really depends on how you bid for your contract. This is an unexpected spike in oil prices. Next year you will be able to predict when signing the contract?
David L. Goodin - President and Chief Executive Officer
I would say that of course this is true for diesel and diesel-related products. I think for bitumen and bituminous oil, it has also become a product on the market and a product provided by other suppliers. As a result, we once again enjoyed record high profit margins in this business, which was very stable this year a year ago, but compared with some record high profit margins a year ago.
Christopher Ellinghaus - Siebert Williams Shank - Analyst
OK. And you also mentioned that the number of road projects may have fallen. Is this a function that some customers are trying to predict the sharp increase in asphalt oil costs and may postpone work, or do you think it is the cause of the decrease in volume?
David L. Goodin - President and Chief Executive Officer
So I will say that it is more specific for a few areas, and then Dave Barney, if you want to add to this area of Hawaii, for example, considering the more restrictive blockade of the islands. We once again have a strong influence on the entire island. This of course has an impact on the amount of work we can work on the island. Then there is our second area, I would say we fell more year-on-year, but actually saw it drop more for a year, because next year’s forecast looks more promising.
This is ours-our Minnesota and North Minnesota regions happen to be a closed year, and if you want, we usually see something in certain highway asphalt and asphalt-related coverage type activities. So these will be the key areas we see. In other areas, we are still very strong overall, but it is also due to some COVID activities, and more from the perspective of bidding time. Dave Barney, is there anything to add or more details you might have?
David C. Barney - President and Chief Executive Officer of Knife River Corporation
It's only working time now. We just didn't see a lot-we saw enough asphalt pavement works, but we didn't see what we saw in the past. We expect this situation to get better. As Dave said, for our business in Minnesota, we know that their asphalt paving work may decline this year. In some other areas, asphalt paving is used. We expect this situation to be reversed in 2022. But on the other hand, Chris, we have a fixed forward contract for fuel, but we can only complete about 50% of it.
Christopher Ellinghaus - Siebert Williams Shank - Analyst
OK. In terms of construction, there may be some suppressed backlogs, which are not technically in your backlog, but for renewable projects and power transmission projects, perhaps port work is emerging. Do you see some suppressed demand? You expect to gain more momentum next year, because we see the number of legislation, maybe some details of legislation are helpful, and some of these items? Obviously the port is indeed restricted. So what do you see in some of these areas?
David L. Goodin - President and Chief Executive Officer
Yes, Chris, thank you for this great question. Jeff, do you want to start with some of our renewable activities?
Jeffrey A. Thiede - President and CEO of MDU Construction Services Group, Inc.
Absolutely. We are carrying out distribution work for public utility customers in some parts of the country to meet the demand for electric vehicles and charging stations. We also install charging stations in many places. We see more opportunities in this market. We are working for a large electric car manufacturer. We are having a conversation with another person in order to work in their facility. We continue to see more opportunities brought by renewable energy.
We recently awarded two projects, one at around US$30 million and one at around US$40 million. One of them is from the southwest and the other is located in the Pacific Northwest. We also worked with a confidential client to use our experience and performance to build more foundations for renewable energy sites across the country. As for the port, we just took some jobs at the Port of Long Beach. And, of course, the airport we now have two airports that are growing. We have a wealth of experience and are able to use the expanded infrastructure of our market transportation part in the future.
Christopher Ellinghaus - Siebert Williams Shank - Analyst
OK. thank you all. Appreciate it.
David L. Goodin - President and Chief Executive Officer
[Operator Instructions] This call can be replayed from today at 5 PM Eastern Time to 11:59 PM Eastern Time on November 18th. The ID number of the replayed conference is 5194306. Similarly, the ID number of the replayed conference is 5194306. Your next question comes from the line of Brian Russo and Sidoti.
Brian Russo - Sidoti & Company, LLC - Analyst
David L. Goodin - President and Chief Executive Officer
Brian Russo - Sidoti & Company, LLC - Analyst
In terms of materials, you talked about labor shortages and rising prices of asphalt oil and diesel. I think your overall colleagues are experiencing the same problems as your material counterparts. So as the industry as a whole, or—is the industry raising prices and/or MDUs raising prices to maintain the profit margins you might see in 2020?
David L. Goodin - President and Chief Executive Officer
Dave, do you want to take that?
David C. Barney - President and Chief Executive Officer of Knife River Corporation
certainly. Yes, Brian, the profit margin of our total premix this year is higher than last year. We can increase the pricing of aggregates and premixes, and we will continue to do so. What's more-this year's major mistakes in asphalt oil, profit margins have dropped a lot. In fact, in the $14 million mistakes, their income was about $11 million. Therefore, our biggest mistake is the bituminous oil business, but we are improving the profit margins of ready-mix and aggregates.
Brian Russo - Sidoti & Company, LLC - Analyst
Okay, got it. Then in terms of services, can you only describe the type of contract or combination of contracts, are you a fixed cost or a cost plus? Then there is the average duration of a project. When you enter a project, if it is less than a year, you can lock in the price of raw materials without facing any risk of inflationary pressure that you may need to use a longer contract to deal with ?
Jeffrey A. Thiede - President and CEO of MDU Construction Services Group, Inc.
certainly. This is Jeff. About 80% of our backlog is in our internal business. Many of our projects are guaranteed through cost plus and guaranteed maximums. We have been providing design assistance services early on. Therefore, we are updating our pricing and making recommendations to our owners or general contractors about locking copper, aluminum, pipes or wires. And this process is endless. As for our utility customers, we also use unified pricing to try to alleviate any commodity purchasing and inflationary pressures that we have particularly seen this year.
Brian Russo - Sidoti & Company, LLC - Analyst
OK. Just to clarify the revised guidance, not only the year-to-date performance or the drop in profit margins you saw in the third quarter, but it also reflects what you experienced in the fourth quarter. Is that accurate?
David L. Goodin - President and Chief Executive Officer
Yes, Brian is accurate. When we end 2021 here, this will be our expectation.
Brian Russo - Sidoti & Company, LLC - Analyst
Okay, great. thank you very much.
David L. Goodin - President and Chief Executive Officer
There are no other questions at this time. I now want to transfer the meeting back to the management to make closing remarks.
David L. Goodin - President and Chief Executive Officer
Thank you operators, and thank you everyone for taking the time to join us on the third quarter earnings conference call. We are optimistic about the near-record construction backlog that we are highlighting here today and the growth opportunities for ongoing and future regulated energy delivery projects. We look forward to contacting again at the end of 2021 and look forward to 2022. Thank you again, we thank you for your continued attention and support to MDU Resources Group. operator?
Jason L. Vollmer - Vice President and Chief Financial Officer
David L. Goodin - President and Chief Executive Officer
David C. Barney - President and Chief Executive Officer of Knife River Corporation
Jeffrey A. Thiede - President and CEO of MDU Construction Services Group, Inc.
Trevor J. Hastings - President and Chief Executive Officer of WBI Holdings, Inc.
Dariusz Lozny - Bank of America Securities - Analyst
Ryan Levine - Citigroup Global Markets - Analyst
Christopher Ellinghaus - Siebert Williams Shank - Analyst
Brian Russo - Sidoti & Company, LLC - Analyst
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