Doran N. Schwartz - Chief Financial Officer & Vice President David L. Goodin - President, Chief Executive Officer & Director Martin A. Fritz - President & Chief Executive Officer, WBI Holdings, Inc., MDU Resources Group, Inc. Jeffrey S. Thiede - President & Chief Executive Officer, MDU Construction Services Group, Inc. Nicole A.

Kivisto - President and CEO, Utility Group, MDU Resources Group, Inc. David C. Barney - President & Chief Executive Officer, Knife River Corporation, MDU Resources Group, Inc..

Matt Tucker - KeyBanc Capital Markets, Inc. Peter F. Flynn - Wells Fargo Securities LLC.

I'd like to welcome everyone to the MDU Resources Group 2016 First Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. This call will be available for replay beginning at 1:00 PM Eastern today through 11:59 PM Eastern on May 18th.

The conference ID number for the replay is 77094219. Again, the conference ID number for the replay is 77094219. The number to dial for the replay is 855-859-2056 or 404-537-3406. I would now like to turn the conference over to Doran Schwartz, Vice President and Chief Financial Officer of MDU Resources Group. Thank you. Mr.

Schwartz, you may begin your conference..

Dave Barney, President and CEO of Knife River Corporation; Nicole Kivisto, President and CEO of Montana-Dakota, Great Plains Natural Gas, Cascade Natural Gas and Intermountain Gas; Martin Fritz, President and CEO of WBI Energy; Jeff Thiede, President and CEO of MDU Construction Services Group; and Jason Vollmer, Vice President and Chief Accounting Officer and Treasurer for MDU Resources.

And with that, I'll turn the presentation over to Dave for his formal remarks.

Dave?.

controlling costs, expanding margins and growing earnings. So, let's take a look at how our individual businesses performed this past quarter. Our utility business reported earnings of $36.3 million, a 22% increase over last year.

A big factor in the success of our regulatory staff and pursuing recovery of investments made to serve our growing customer base. Last year alone, utility invested a record $464 million. Since January 1st of 2015, the utility has implemented now $73.2 million in final and interim rate relief.

They currently have requested $49.7 million of rate relief in pending cases and this includes $37.3 million in implemented interim rates and $12.4 million in rate relief from additional pending cases. The electric utility had a record first quarter, and revenue increased 15% even though retail sales volumes declined by 5%.

Regulatory recovery was a factor along with production tax credits associated with the newly installed 107.5-megawatt Thunder Spirit Wind Farm and went into operation late last year. With that addition, our renewable energy now accounts for 20% of the utility's electric generation capacity.

At the natural gas utility, retail sales volumes increased by about 3% year-over-year. In addition to rate recovery, weather played a factor. Temperatures in Idaho, Oregon and Washington were 11% colder than the first quarter of 2015. This, though, was offset in our eastern service territory where temperatures were about 9% warmer than the prior year.

Overall, our weather was 5% to 19% warmer than normal this quarter. These factors were partially offset by higher O&M and depreciation, depletion, as well as amortization costs. Looking ahead, the utility expects their 1.50 million customer base to continue growing between 1.5% and 2% annually.

Over the next 5 years, they expect to invest nearly $1.5 billion to maintain safe and reliable service across our eight-state service territory. As a result, they expect their rate base to grow by about 7% compounded annually over the next 5 years.

Their anticipated investments include 160-mile, 345 KV transmission line that is expected to be completed in 2019. Along with this additional generation and pipeline projects to enhance the reliability and also with deliverability of it on the system. It does not include any impact from the Clean Power Plan, given the uncertainty surrounding the plan.

Now, turning to our Pipeline & Midstream business. Earnings here for the quarter were $5.3 million, down from last year's first quarter.

The principal reasons for the decline are lower gathering and processing volumes at our Pronghorn facility, in which we have a 50% interest, and lower gathering volumes due to the sale of certain non-strategic gathering assets that we sold last year.

The Pronghorn volumes were affected by a number of wells that were temporarily shut-in to facilitate the addition of a new six-well pad. These results were partially offset by lower depreciation, depletion and amortization costs and lower O&M as well. In addition though, total transportation volumes increased 11% for a first quarter record.

Looking ahead, the Pipeline & Midstream group has three expansion projects currently underway here in North Dakota. Two of them are expected to be completed this year. Our North Badlands, which has about 70,000 dekatherms per day of capacity under contract, along with Northwest North Dakota.

They also are working on a line section 25 expansion, involving additional compression. This incrementally will add another 22,000 of dekatherms per day of capacity, and is scheduled completion in the summer of 2017.

As a result of lower natural gas prices and lighter seasonal spreads, interruptible storage service injections have now increased to 4.7 million dekatherms. This is a significant increase from the 344,000 dekatherms we saw last year and we expect this trend to continue into the second quarter.

The group is also assessing additional potential projects and will continue to look at potential opportunities that might allow them to apply their expertise outside their traditional Northern Rockies base. At our construction materials group, Knife River narrowed its normal seasonal loss to $14.5 million. The best first quarter in 9 years.

The group experienced higher construction revenues and margins partially offset by lower aggregate margins and the effect of a large precast project that we had in 2015. You might recall that Knife River finished 2015 with a record year-end backlog. They have kept up this momentum with a record first quarter backlog now standing at $831 million.

This is 25% higher than the first quarter of last year. Our construction services group increased earnings to $6 million this quarter. They had higher inside construction workloads and margins partially offset by lower equipment sales and rental margins as well as lower industrial construction workloads and margins.

This group is successfully rebuilding backlog now ending the first quarter at $530 million up 65% from the $321 million of last year. So, looking ahead between our two construction businesses, we now have a combined backlog of nearly $1.4 billion and that's 38% higher than last year. So, clearly, they're off to a great start here in 2016.

The construction materials group this year has been awarded major projects that include a $63.4 million I-29 project in Iowa. Along with this, a $30.5 million bypass in Oregon and a $25 million I-35 project in Minnesota as well. The construction services backlog demonstrates this group's diverse capabilities.

Confidentiality agreements prevent me from naming specific customers, but the work involves a utility scale solar farm, a government research facility, a 345 transmission project, along with a corporate campus expansion and utility maintenance contracts.

As we said on our February conference call, both groups expects margins also to be slightly higher this year. At our refining segment, we experienced a $7.2 million loss associated with our 50% interest in the Dakota Prairie Refinery.

The refinery began operating just one year ago today and since then commodity market conditions have considerably deteriorated. The Bakken basis differential from WTI pricing has narrowed which increases the refinery's cost for crude oil feedstock. In addition, the demand for diesel and naphtha has declined.

Due to current market conditions, we have lowered our assumption for the refinery utilization this year to about 75% of capacity, down from our earlier assumption of about 90%. And we are currently processing approximately 15,000 to 16,000 barrels per day at the plant.

In light of current market conditions, we are assessing various options with respect to our ownership interest in the refinery as well. Now, I'd like to turn to our earnings guidance and based on our first quarter results we are reaffirming our guidance for 2016 earnings.

On a GAAP basis, earnings per share are expected to be in the range of $0.85 to $1.10 and adjusted earnings are expected to be in the range of $1 to $1.15 per share. And so to wrap to things up, we are firmly focused on continuing to improve our financial performance to grow our businesses and we're off to a good start this year.

The combined backlog at our construction businesses is approximately $1.4 billion on a combined basis, up 30% from last year. Our utility group is working hard to recover its investments to serve our customers with $73.2 million of rate relief implemented since January 1st of 2015.

A $355-million capital investment plan for the year does include $260 million at the utility which won't require issuing equity. And last week, our Board of Directors approved the quarterly dividend, a commitment that we have been paying uninterrupted dividends now for 78 years and increasing them for the past 25 years.

I very much appreciate your interest and commitment to MDU Resources and we'd be happy to open the lines at this time.

Operator?.

Thank you. Your first question comes from the line of Matt Tucker with KeyBanc Capital Markets. Please go ahead..

Good morning. Congrats on a nice quarter..

Good morning, Matt. Thank you very much..

I wanted to ask about the refinery first and the change in the expected utilization.

I guess, could you just provide some color on why that seems to be the best strategy now?.

Hey, Matt. This is Martin. Hey. Currently, obviously, the market pricing for the diesel and naphtha is very depressed. So, given where the margins are, it makes more sense to run it at a lower volume.

And currently, the plant – the lowest we can run without causing problems is between 14,000 and 15,000 barrels per day, and so that's why we're operating in that range..

Thanks, Martin. I guess, I think at the Analyst Day, you seem to plan to keep running at closer to full utilization.

So, I guess, a) what's kind of changed in your thinking there? And then b) were the first quarter results at the refinery in line with your expectations?.

Yes. The first quarter results were in line with our expectations, but pricing has continued to decrease through the first quarter in terms of diesel and naphtha with the slowdown especially in the rig count. I mean, we were over 85 last year. The last I looked, we're down to 26 rigs.

So, obviously, a lot of the production especially on the diesel side is very Bakken dependent. And so it moves with that. And so with the decrease in rig count, we've seen that continue to be challenging..

Got it. Thanks, Martin. And while I've got you, maybe just a couple on the pipeline in midstream side.

Could you talk about the outlook for gathering volumes for the rest of the year? And does this new well pad imply that you'll see rebound here in second quarter or when those come online? And secondly, could you talk about what's driving the strong transportation volumes you saw in the quarter?.

Yes. A couple of things now, Matt. On the midstream side with Pronghorn, you're going to see a pickup in the next quarter with the new well pad and the wells that we're shutting and coming back online. So, we think we're online with that through the rest of the year.

On the transmission side, given where our pipe is located in kind of the key counties giving the (17:46) rigs we continue to, I believe, we'll see increased volumes.

And then, the other thing we've got going is storage spreads have picked up so, we've got a lot of folks transporting to storage and we continue to believe we'll see that at least through the second quarter here, and will remain, obviously, that is spread-dependent..

Great. Thanks. And just last question maybe for Jeff on the services side. The margins were a little bit lower year-over-year. I mean obviously, nice backlog, nice earnings rebound.

But in thinking about margins have been higher this year overall versus last year, is that more driven by operating leverage or are the margins in backlog actually stronger as well?.

Hey, Matt. This is Jeff. The margins in our backlog are close to what they've been in historical past. Execution is going to be key. Some of higher volume areas in our business such as our service work, our non-backlog areas, our equipment sales and rental have been temporarily slow. We've had a little bit of additional competition in those areas.

But we're feeling confident in our backlog, the margins we have and well-positioned to be able to focus on our execution and bringing those margins at or above our plan..

Thanks, Jeff. Just a follow-up to that. If I recall, the equipment sales and rental business is largely tied to electric transmission.

Is the slowness there indicative of any kind of trend you're seeing in that market or is it kind of quarterly lumpiness?.

I think it's just the temporary slowdown. We're seeing strong signs from our customers in that industry on it improving through 2020. Our volumes are slightly lower. But we've made a capital investment in this area – in our company. It's going to pay off.

We're adjusting some internal processes to make our business more competitive, but also improving on our successful reputation we've earned through our relationships and our people. And we're providing great equipment and tools and service for this area.

And we've made some adjustments for this temporary period that we think it's going to be, again, one of our strongest areas of our company..

Thanks for the color, gentlemen. I'll jump back in the queue..

Thank you very much, Matt..

You have a follow-up question from the line of Matt Tucker with KeyBanc Capital Markets. Please go ahead..

I really just had one final follow-up.

Would you be able to quantify the impact of the warmer weather versus normal at utilities during the quarter?.

Yeah, Matt. This is Nicole.

When you look at the electric side of the business, we did see milder temperatures than we saw last year, which did impact our volumes as you saw, but on an overall basis our electric business had a very strong quarter, as Dave alluded to so the volume impact was really offset by the regulatory activities that we saw in the electric side of the business.

So, overall our volume decline was not overly material to the electric side of the business. And now on the gas side of the business, we really saw 11% colder than last year weather in the Western states of Idaho, Oregon and Washington, and then kind of the reverse effect in the Montana, Dakota Great Plains territory.

So, we haven't really quantified those numbers in total, but both of the business are up and what I guess what I would comment is when you look at the temperatures compared to normal, so I am not comparing the last year, but I am comparing the normal, we saw warmer than normal weather.

And so to the extent, that we could see normal weather throughout the remainder of the year, obviously that would provide some upside to the earnings..

Great. Thanks, Nicole. And just while I am at that. Maybe one more circling back to the refinery. And you mentioned considering strategic options there. I think your partner Calumet said something similar when they reported recently.

Could you elaborate on what strategic options you're considering and should we consider that you're looking to sell the refinery?.

Hey, Matt. At this time just to kind of what Calumet said they put out an 8-K that said they may divest a certain non-core asset including Dakota Prairie Refinery. Obviously we're having ongoing discussions and we're looking at all the options. We're evaluating them at this time. So, not really in a position at this point to give you a clear direction.

We'll keep you in the loop. I can give you a little color on what we're doing short-term. The team has actually been doing a really good job out there. Since December 6, we've been running operationally fine. The other thing we're doing is we're focused on controlling what we can control, obviously the cost.

So, we're in the process of working with all our vendors to see if we can get to cash flow breakeven with them providing us some assistance given where we're at. So, hope that helps a little color. We'll keep you in the loop but the process is really ongoing right now as we speak..

Understood. Thanks, Martin. That's it for me..

Okay. Thank you, Matt..

This makes the last call for question. This call will be available 1:00 pm Eastern today to 11:59 pm Eastern on May 18th. The conference ID number for the replay is 77094219. Again, the conference ID number for the replay is 77094219. Your next question comes from the line of Peter Flynn with Wells Fargo. Please go ahead.

Peter, please make sure that your line is not on mute..

Hey, can you guys hear me?.

Yes. Good morning, Peter..

Hey. Good morning. I had question on the construction segment.

Should we view the large backlog increases translating to revenue, is that 2017 event considering you guys maintained revenue guidance?.

You broke up a little bit there, Peter.

Could you repeat the question?.

Yes. I'm sorry.

Can you hear me?.

Oh that's better. Thank you..

Okay.

Should we consider the large backlog increases at the construction segment translating to revenue if it's 2017 event considering you maintain 2016 revenue guidance?.

Are you thinking more materials or services or some of both..

Both actually..

Okay. We'll start with Dave Barney and talking about his backlog that $831 million a bit and then we will move on to Jeff Thiede..

Okay..

Hi, Peter. I would definitely expect our revenues to go up as the backlog has gone up. We're expecting – we've added a lot of backlog to that record backlog we've had in March and we have a good schedule out there. I'm expecting record backlog almost every month going through to June.

So, yes, I would expect the revenue to be going up in the constructing materials company. I don't know if we're giving guidance on that but I just did I guess..

Yes. Well we are, in a sense but it's early in the year which is why held it flat at this point. But clearly backlog is a nice indicator of what could grow into revenues.

Jeff?.

Yes. And for us, we expect most of the projects that we have in our backlog and would be monetized this year, key is going to be execution, and it's early..

Okay. Great. That's all I had. Thanks, guys..

Okay. Thank you, Peter..

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

Well, thank you. And as we noted earlier, first quarter results represent a good start here in 2016. We are committed to continue building on this momentum by focusing on the factors that we can most directly influence, controlling cost, expanding margins, as well as growing earnings.

And again, we appreciate your participation on this call today, and thank you again for your continued interest in MDA Resources.

Operator?.

This concludes today's MDA Resources Group conference call. Thank you for your participation. You may now disconnect..