Doran N. Schwartz - MDU Resources Group, Inc. David L. Goodin - MDU Resources Group, Inc. David C. Barney - MDU Resources Group, Inc. Martin A. Fritz - MDU Resources Group, Inc. Nicole A. Kivisto - MDU Resources Group, Inc. Jeffrey S. Thiede - MDU Construction Services Group, Inc..

Matt Tucker - KeyBanc Capital Markets, Inc. Roresa Mojo - D.A. Davidson Companies Christopher R. Ellinghaus - The Williams Capital Group LP.

Good morning. My name is Brent and I will be your conference facilitator. At this time, I would like to welcome everyone to the MDU Resources Group 2016 Third 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 November 17. The conference ID number for the replay is 86987581. Again, the conference ID number for the replay is 86987581. The number to dial for the replay is 1-855-859-2056 or 1-404-537-3406.

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

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

Dave?.

Construction Materials & Services along with Regulated Energy Delivery, which is comprised of our regulated Utility and Pipeline and Midstream operations. These businesses are providing solid results. Our Construction businesses continue to experience strong momentum as the country turns more attention to needed infrastructure improvements.

Our Regulated Energy Delivery businesses are focused on growth, including pipeline expansion projects along with utility system upgrades. These continuing operations delivered strong results for the third quarter. Consolidated earnings from continuing operations were $88.2 million, or $0.45 per share.

This compares with $73.7 million or $0.38 per share for the third quarter of 2015. Year-to-date earnings from continuing operations were $166 million or $0.85 per share. This also compares to $120 million or $0.62 per share, an increase in earnings per share of 37% over 2015.

Results for 2015 do reflect an $8.7 million after-tax impairment of some natural gas gathering assets at our Pipeline and Midstream segment. Our third quarter 2016 increase in earnings was led by the Construction Materials & Service businesses, which generated a combined $76.7 million in earnings for the quarter, up from last year's $73.5 million.

Earnings at the Regulated Energy Delivery business were $6.9 million compared to a loss of $2.9 million in 2015 which, again, included the previously mentioned impairment On a GAAP basis, which includes the discontinued operations of the Exploration and Production and Refining business, we had earnings of $82.8 million, or $0.42 per share.

Last year, we had a loss of $139.6 million – this was after-tax – or $0.72 per share, largely due to the fair value impairment at the discontinued operations of the E&P business. Now, turning back to our continuing operations, our Construction Materials business had a record third quarter earnings for the second consecutive year.

Earnings for the third quarter 2016 were $69.5 million compared to $68.8 million in 2015. Their backlog now stands at $580 million, which is up some 9% from last year.

This, combined with the five-year $305 billion National Transportation Bill and broad-based strength of the markets that we operate in, we expect to see a continued strong bidding environment for this group. Earnings at our Construction Services group were up 53% over last year.

Their backlog at the end of the quarter was also up some 13% from last year, which now totals $518 million. Our Pipeline and Midstream business is proceeding with the Valley expansion project, which is that 38-mile pipeline that will deliver natural gas supply to eastern North Dakota, along with far Western Minnesota.

And our Utility group continues to seek regulatory relief to recover costs associated with our significant investment to upgrade and expand infrastructure to meet current and future customer demands. We've also narrowed our 2016 earnings guidance from continuing operations to now at $1.05 to $1.15 per common share.

We'll continue to focus on and build on the momentum of these streamlined businesses and create long-term value for our shareholders. Now, moving on to our individual business units, I'd like to start with our Construction Materials and Service companies.

As I mentioned, our Construction Materials group, Knife River, had a record third quarter of $69.5 million, breaking last year's record of $68.8 million. This increase was driven by higher construction margins from our increased construction activity, particularly in the Pacific and Northwest regions. This is also combined with lower SG&A expense.

Asphalt, ready-mix concrete and other product line margins were slightly lower than last year. Construction Materials worked through a lot of backlog this past quarter. However, they are still well-positioned with $580 million in backlog as of September 30, which again is 9% higher than last year.

As I mentioned, we expect to see a continued strong bidding environment for this group, particularly with the passage of the National Transportation Bill, which was passed late last year. Our Construction Materials team continues to do an excellent job of focusing on maintaining an efficient cost structure along with a growing profit margin.

Our Construction Service group quarter-over-quarter earnings were up 53% with earnings at $7.2 million this year compared to $4.7 million last year. They had higher inside electric and outside construction workloads and margins in the Western region; however, this was offset by higher SG&A expense and lower equipment sales and rental margins.

Backlog at this business at the end of the third quarter at $518 million is up 13% from $458 million last year. This backlog includes projects from a broad variety of service areas and across geographic regions.

Major projects that demonstrate this business segment's diverse capabilities include a utility-scale solar farm, a government research facility, a 345-kV transmission project, a corporate campus expansion, along with utility maintenance contracts, along with mission-critical projects as well.

Looking ahead, our two Construction businesses have a combined backlog now at $1.1 billion. For the year, we forecast that margins in 2016 are expected to be slightly higher at Construction Materials and slightly lower at Construction Service when we compare them with last year. Now, I'd like to turn to our Regulated Energy Delivery group.

Here, earnings for the third quarter at our Pipeline and Midstream business stood at $6.7 million compared to that loss of $3.2 million in 2015. Earnings were 21% higher than last year when we exclude the effects of that prior year $8.7 million after-tax impairment on certain natural gas gathering assets.

Earnings reflect lower O&M expense, primary lower material costs and contract services along with lower depreciation expense. Higher storage service earnings also contributed to the earnings increase. Offsetting the increases were lower gathering volumes, primarily due to the prior year sale of those certain natural gas gathering assets.

Here recently in September, the company secured sufficient capacity commitments and now have started survey work on the previously announced Valley Expansion project that 38-mile pipeline that will deliver natural gas supply to eastern North Dakota and far Western Minnesota.

This project will connect the Viking Gas Transmission Company pipeline near Felton, Minnesota to our company's existing pipeline near Mapleton, North Dakota. Cost of the expansion is estimated at $55 million to $60 million.

The project, which is designed to transport some 40 million cubic feet of natural gas per day, is under the jurisdiction of the Federal Energy Regulatory Commission. In October, we did receive FERC approval on our pre-filing for the Valley Expansion project.

With minor enhancements, the pipeline will be able to transport significantly more volume, if required, based on capacity requested or as needed in the future as the region's demand grows.

Following receipt of the necessary permits and regulatory approvals, construction is expected to begin in early 2018 with completion expected late in that same year.

The Pipeline and Midstream group also signed an agreement to complete the Charbonneau and Line Section 25 expansion project, which will include a new compressor station as well as other compression modifications and this project is expected to be in service here in the second quarter of 2017.

The company also completed their North Badlands project, which included a 4-mile looping of our Garden Creek pipeline segment along with other ancillary facilities. This was placed into service here this past August 1.

The Northwest North Dakota project, which includes modification of the existing compression, along with a new compression unit and re-cylindering, was put into service here just in June 2016. As a result of lower natural gas prices and wider seasonal spreads, interruptible storage service injections also increased in the first and second quarters.

Storage balances are up some 83% from last year. Now turning to our Utility group. Our electric utility had record earnings of $12.7 million, a slight increase over last year.

This segment had higher electric retail sales margins due to successful rate recovery, along with cost tracking mechanisms in part by the – this was partly offset though by decreased electric sales volumes to all customer classes.

Decreased allowance for funds used during construction, higher depreciation expense from increased plant additions and higher interest expense along with higher O&M expense, partially offset the earnings increases. At our natural gas utility business, we had a normal seasonal loss of $12.5 million compared to a loss of $12.3 million last year.

This loss was largely the result of higher O&M expense related to higher payroll and increased contract services, and higher depreciation expense due to increased plant additions.

Higher natural gas retail sales margins resulting from final and interim rate increases and increased retail sales volumes partially offset the decrease in earnings at the natural gas utility. Our regulatory staff has pursued recovery of our investments, which were made to serve our growing customer base.

Last year the Utility invested a record $464 million and it is expected to invest approximately $261 million this year. Since January 1st of 2015, the Utility has implemented some $45.6 million in final rate relief and they currently have requested $59.2 million of rate relief in pending cases.

This does include $31.6 million in implemented interim rates. Recently filed cases do include a natural gas rate increase application in Idaho for $10.2 million or 4.1% over current rates. This is the first general rate case filing by the company in Idaho since 1985.

And an application for an electric increase in North Dakota for $13.4 million or 6.6% above current rates was recently made as well. The company is seeing the benefits of its regulatory recovery efforts. Year-to-date our combined Utility had earnings of $36.7 million, a 20% increase over year-to-date 2015 earnings of $30.6 million.

And looking ahead Utility expects its 1,050,000 customer base to grow by some 1% to 2% on an annual basis. The Utilities investments on a forward look include 160-mile, 345 kV-transmission project that is expected to be completed here in 2019. Construction on his project began in June of this year.

Other investments include additional generation and pipeline projects to enhance both the reliability and the deliverability on its system.

The electric utilities is in the process of completing its 2017 Integrated Resource Plan and is evaluating its future generation and power supply portfolio options as well as the potential impact of the Clean Power Plan, if upheld by the courts. This IRP plan will be finalized and filed by mid-2017.

The company will continue to seek regulatory relief due to its ongoing significant investment in rate base. Now, I'd like to turn to our earnings guidance. With the recent sales of our Exploration and Production and Refining businesses, results from these operations have been reported as discontinued operations.

Any continuing results, such as certain general and administrative expenses along with interest cost from remaining debt from the Exploration and Production and Refining businesses have been included in continuing operations in the Other category until it's been fully repaid.

To reflect this change, MDU Resources is providing guidance in two GAAP-based formats. One guidance range reflects only continuing operations and the other is all in, and also includes discontinued operations, reflecting the results from the recently exited E&P and Refining businesses.

As we're narrowing our guidance earnings range, we've increased the bottom of that range by $0.05 per common share while maintaining the top end of the range. Earnings from continuing operations are expected to be in the range of $1.05 to $1.15 per share for 2016.

Including discontinued operations, earnings per share for 2016 are expected to be in the range of $0.20 to $0.30. With the sale of the E&P and Refining businesses and our continued focus are on two primary business lines, I am confident that MDU resources is positioned well for long-term growth.

Our $354 million capital investment plan for this year, which includes $261 million at the Utility, won't require issuing any equity. We're currently working through an updated five-year capital expenditure forecast to include the years 2017 through 2021 and expect to provide that information in just a few weeks.

And we also have continued to maintain a strong balance sheet and have a good liquidity position as well. And I'd like to remind folks that we've paid a dividend for the past 78 straight years and have increased it for the last 25 consecutive years.

In today's low interest rate environment and investors search for yield, our dividend is as important as ever as a source of value to shareholders, complementing stock price appreciation through our focus on growth in our both earnings and cash flows.

And we do remain committed to operating with integrity and continue to focus on safety while creating superior shareholder value. I certainly appreciate your interest and commitment to MDU Resources. And at this point, we'd be happy to open the lines to any questions that you might have.

Operator?.

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

Hi, good morning..

Hey, good morning, Matt..

I guess I'll just start out at the Construction Materials segment. I'm just curious; the top line was down a little bit year-over-year. Some of your peers were impacted by a pretty unfavorable weather in Texas. Curious how much that was a factor, or any other factors that may have impacted the revenue trajectory there.

And also, were you helped by pricing at all in the quarter?.

Yes, thanks Matt, great question. Dave Barney can't wait to talk about his record third quarter..

Hi, Matt. Good morning. Now we price our products in Construction Services based on margin over cost and that significantly lower cost resulted in lower revenues this year.

Are there other parts to your question that I missed?.

I was just – I was curious, if you were impacted by weather in Texas, if that was material at all..

We definitely were impacted in weather in Texas and in North Dakota and parts of Montana..

Yes, Matt. We are just starting to see the increase in DoT spending in most of our states and we contributed that to the FAST Act and we think that's going to get stronger through 2017 and beyond and I do want to remind of our $580 million backlog its 9% higher than last year. And last year was record backlog..

You know it's really hard to tell which jobs are from the FAST Act – they really don't say – when they put the job workout that this is a FAST Act job or just normal DoT's,- DoT job. So what we're seeing is an increased spending in most of our states and DoT work and we contributed to that to the fact..

Thanks, Dave, and maybe one on the Pipeline and Midstream side, the gathering volumes have started ticking up slightly quarter-to-quarter this year.

Have we seen bottom there or kind of what are your expectations going forward?.

Yes. Thanks, Matt, for the question. I'll turn it over to Martin here for a little more detail on that..

Matt, we're seeing some still – in the core counties processing plants and others coming online and so we're seeing those volumes at this point. I think folks I long ago learned not to predict prices.

We're seeing some – recently a couple of rig counts pickup but that can go either way at this point, So but the thing I would come back to is over 80% to 85% of our stuff is on take-or-pay agreements, so we're not a lot very volume sensitive and the only reason that moves a little is because of our interruptible storage..

Got it. Thanks, Martin.

And then I guess maybe I guess how much of a preview are you willing to give us on the roll forward of the five-year outlook? I assuming you're not going to give any numbers, but just kind of what are the key moving pieces that we should be thinking about?.

Yes, Matt. We talk about – we will have a November meeting with our Board of Directors here in just a week and a half or so and we'll be bringing a refreshed five-year roll forward on our CapEx. And that's why we really emphasize how we will wrap up we believe 2016.

And similar what we've done in other years on the heels of that board meeting, we would expect to provide into the market what the next five year forward looks like. And so, I don't want to get ahead of where our board meeting will be at this point in time.

But I will commit that we'll be transparent into the marketplace right on the heels of that board meeting is what our roll forward will look like..

Thanks, Dave. And just last one on the Utility side. You are up nicely year-to-date kind of surprised about the lack of earnings over the past couple of quarters.

Would you attribute that to regulatory lag that's going to be addressed by the rate cases you currently have pending or are there things you can do on the cost side to get the trajectory back to growth going forward?.

Yes. Thanks for the question, Matt.

Those are couple factors as you mentioned on year-to-date basis I think we're up pretty good, but as you look at that you also got to think about when we're implementing the rate cases a lot of the – when we disclose the amount that we've got final approval on that $45.6 million, some of that has not been fully implemented on a year-over-year basis.

So, in other words, depending on when we got the implementation date, we don't have a full year effect on that. In addition to that, weather does play a factor. As you know, in the quarter here our electric volumes are off due to weather, and so you got to kind of look at the weather impact that's going on in each quarter or on a year-to-date basis.

And then finally, as you do mention, as we grow the business and capital is being spent above depreciation levels, coupled with O&M, we will see some regulatory lag.

And we are doing our best to put in trackers and certain mechanisms from a regulatory perspective to slow that down or to reduce that lag, but we will see that as we really only have two states, North Dakota and Minnesota, that allow fully-forecasted test periods..

Got it. Thanks, Nicole. I'll leave it there..

Thank you, Matt..

Your next question comes from the line of Roresa Mojo with D.A. Davidson. Please go ahead..

Good morning..

Hey, good morning..

So, more on Construction Materials, can you talk about just the general market activity and trends that you're seeing on a regional basis?.

The question was more on a regional basis what are we seeing from a trend perspective?.

Yes..

Okay. Great..

On a regional basis, most of our regions are definitely seeing improvement (27:29) scheduled out there (27:31) – mic not on.

Did you hear any of that?.

No. I didn't..

Okay. Sorry about that; my mic wasn't on. Like I said, we're seeing most – a big improvement – an improvement in most of our states in the DoT spending that we contribute to the DoT Act – or the FAST Act. As the economy continues, we expect our backlog to increase and our margins to follow..

Okay. Okay.

And I guess, can you guys talk about – you mentioning backlog, can you talk about backlog on the Construction Service side – you guys earlier talked about the composition – and maybe any favorable mix?.

You broke up a little bit there, but I think the question was, relative to Construction Services, try to give a feel or flavor for the mix in the backlog of the $518 million.

Did I capture that right?.

Yes. Correct, yes..

Okay..

Yes, thanks. This is Jeff. Our inside businesses – our electrical is a primary driver in our backlog, in addition to our mechanical and fire protection.

But our inside businesses, and that has a lot to do in the healthcare, the mission-critical markets and where we are with our people and our processes, very confident going forward executing that backlog safely and profitably..

Right. Thank you..

Thank you for the questions..

And your next question comes from the line of Chris Ellinghaus with Williams Capital. Please go ahead..

Hi, guys.

How are you?.

Hey, Chris. Good morning. We're good.

How are you?.

I'm good. Thanks.

Can you give us any color on what you're seeing in the non-public construction market?.

Your question is relative to the private market?.

Private construction..

Yes, Construction Services, Materials – let's start with Materials with Mr. Barney..

Hi, Chris. You know it varies by – region by region. Right now our Pacific region, which is California, Alaska, Hawaii, what we're seeing – a very strong private market, especially in that Stockton-Tracy area where we're seeing very large warehouses that we've been successful in landing quite a few of those jobs.

And in our Northwest market, which is Oregon – the private side has really driven our earnings there in Oregon..

Okay. Great..

And if you look at Texas, then it's going to be more of the DOT work..

Yes, our mix there overall is about a 90%-10% public-private mix when we think about the business. But, again, Dave talked about some of the – what we're seeing in current stronger markets..

And we do more private work than public work and I would say that our strongest markets are the mission-critical and also the institutional work, healthcare. We're seeing a lot of universities still continue to expand and renovate. We're well-positioned there.

In addition to renewables, we're seeing a continued strong involvement in that market as well..

Okay. Great.

Can you provide any additional color on what the continuing trend seems to be in the equipment sales and rentals?.

Yes. This is Jeff again. So right now we've experienced a slower period with our customers on our equipment rental sales. We're well-positioned in that market as well. We've increased our manufacturing capabilities. We're starting to see more activity, bidding activity. We're very close to our customers.

And we've got a strong line of equipment we think the strongest in the industry. And so we will continue to see improvements as the market improves..

Okay. Great. Thanks for the color, guys. See you soon..

Yes. Thanks, Chris..

This call will be available for replay beginning at 1:00 PM Eastern today till 11:59 PM Eastern on November 17. The conference ID number for the replay is 86987581. Again, the conference ID number for the replay is 86987581. And at this time there are no further questions. I'd now like to turn the conference back over to management for closing remarks..

Thank you, operator. As noted earlier, our continuing operations delivered strong results for the third quarter of 2016. We're committed to continuing building on this momentum by focusing on the factors that we can most directly influence, those being controlling costs, expanding margins and growing earnings.

We, again, appreciate your participation on the call today and we thank you for your continued interest in MDU Resources. Thanks, again, for participating, and with that, I'll turn it back to the operator..

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