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

Vikram Bagri - Citigroup Global Markets, Inc. (Broker) Christopher R. Ellinghaus - The Williams Capital Group LP Sarah Elizabeth Akers - Wells Fargo Securities LLC.

Good morning. My name is Shelby, and I will be your conference facilitator. At this time, I would like to welcome everyone to the MDU Resources Group 2017 Second 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 session.

This call will be available for replay beginning at 5:00 p.m. Eastern Time today through 11:59 p.m. Eastern Time on August 16. The conference ID number for the replay is 40930145. Again, the conference ID number for the replay is 40930145. The number to dial for the replay is 1-855-859-2056, 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..

Thank you, Shelby, and welcome to our second quarter earnings release conference call. This conference call is being broadcast live to the public over the Internet and slides will accompany our remarks. If you'd like to view the slides, please go to our website at www.mdu.com and follow the link to the conference call.

Our earnings release is also available on our website. During the course of this presentation, 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 a discussion of factors that may cause actual results to differ, refer to Item 1A, Risk Factors, in our most recent Form 10-K.

Our format today will include formal remarks by Dave Goodin, President and CEO of MDU Resources and WBI Energy, followed by a Q&A session.

Other members of our management team who will be available to answer questions during the Q&A session of today's conference call are 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, Great Plains Natural Gas, Cascade Natural Gas and Intermountain Gas; 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?.

Thank you, Doran, and good afternoon. Thank you for your interest in MDU Resources and for taking the time to join us today to discuss our second quarter results. In the second quarter our continuing operations reported earnings of $43.8 million, or $0.22 per share, compared to $46.1 million, or $0.24 per share in the second quarter of 2016.

On a consolidated basis, earnings were $40.6 million, or $0.21 per share, compared to a loss of $109.3 million, or $0.56 per share last year.

Our second quarter results show the strength of our two-platform business model, as higher earnings at the utility and construction services businesses helped to offset the impacts of weather-related delays and increased competition at our construction materials business.

Our combined utility business reported earnings of $5 million for the quarter, up from $200,000 for the comparable quarter in 2016. While our natural gas utility group experienced a normal seasonal loss of $2.8 million, this is significantly less than the loss of $7.8 million we saw in the second quarter last year.

This decrease in the seasonal loss was largely due to colder weather across our service territory, which resulted in 19% higher natural gas retail volumes across all service territories and higher natural gas retail sales margins in those jurisdictions that we do not have weather normalization or decoupling mechanisms in place.

In addition, our regulatory activity continues to contribute to both earnings growth at this business. At our electric utility, we had earnings of $7.8 million, compared to $8 million in 2016.

The electric business saw an approximate 2% decline in sales volumes and recorded a true-up of interim rates stemming from the finalization of a regulatory case here in North Dakota. These impacts were partially offset by approved rate recovery.

The interim rate true-up affected second quarter only and the approved rate recovery will generate incremental revenue on a go-forward basis. Our staff remains focused on regulatory recovery of our investments, which we make to ensure that we can safely serve our growing customer base.

Since January 1, 2017, utility has received approval on final rate increases now totaling $33 million in annual revenue. In addition to these finalized rates, the utility has $13.9 million of rate relief in pending cases.

Over the next five years, utility expects its 1.1 million customer base to grow between 1% and 2% annually and also plans to invest nearly $1.2 billion across our eight-state service territory. This will result in rate-based growth of approximately 4% compounded annually over the next five years.

It's truly an exciting time for utility business, where we have many line-of-sight investment opportunities for long-term growth and we'll continue to focus on providing safe and reliable service to our customers at economical rates, while obtaining timely rate recovery.

The natural gas utility will continue to focus on pipeline projects to enhance system reliability, safety, along with deliverability. The electric utility plans to finish construction in 2019, on the 160-mile FERC-regulated 345-kV transmission line, that starts at Ellendale, North Dakota down to Big Stone City, South Dakota.

And here in just in June of 2017, the electric utility filed our 2017 North Dakota Electric Integrated Resource Plan. This plan includes the purchase of the Thunder Spirit Wind farm expansion project, along with development and design of a large combined cycle natural gas-fired facility.

Here in December of 2016, the company signed a 25-year agreement to purchase the power from an expansion to our existing Thunder Sprit farm, this agreement included an option to buy the project at the close of the construction.

At the end of the second quarter, MDU filed with the North Dakota Public Service Commission an advance determination of prudence to purchase the expansion. We're excited about moving forward with the purchase option as this expansion will increase the company's renewable portfolio from currently at 22% expanding that and then 27%.

Now, I'd like to turn to the pipeline and midstream business. In May, we announced that Martin Fritz, President and CEO of WBI Energy, resigned; and since then, the leadership team at WBI has been reporting directly to me. I can tell you we have a talented, stable and strong team and things are working there very well.

Earnings at our pipeline and midstream business were at $5.3 million compared to last year's second quarter earnings of $6.3 million. The decrease in earnings reflects the absence of earnings from the Pronghorn assets that were sold earlier this year for approximately $100 million in net proceeds.

The decrease was partially offset by a lower interest expense due to repayment of some long-term debt as well. In October 2016, WBI Energy received FERC approval on its pre-filing for the Valley Expansion project. This pipeline project is approximately 38 miles and 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 existing pipeline near Mapleton, North Dakota. And it is designed to transport some 40 million cubic feet of natural gas per day. The cost of the expansion is estimated at between $55 million and $60 million.

Our pipeline and midstream company filed its FERC certificate application of the Valley Expansion project in the first quarter of this year. Following the receipt of necessary permits and regulatory approvals, construction on this project is expected to begin early next year with completion slated in late 2018.

And on June 29, we announced that our pipeline group plans to expand its Line Section 27 natural gas transmission system. This is a $27 million to $30 million expansion project that will involve construction of some 13 miles of pipeline along with associated facilities.

As designed, this expansion will increase the capacity of Line Section by over by over 200,000 dekatherms per day, bringing the total capacity to over 600,000 dekatherms per day. The company has long-term commitments supporting this expansion and expects the project to be online in later 2018. Now, let's move on to our construction businesses.

I am pleased to report that our construction services business experienced exceptional earnings growth in the second quarter, compared to a year ago, increasing $5.4 million to reach a total of $12.4 million for the quarter. This is a 77% increase in earnings on 18% revenue growth.

With record year-to-date revenues of $635 million, we have increased our 2017 revenue guidance for the year at construction service business to now the range of $1.2 billion to $1.3 billion.

This quarter's increase in earnings reflects higher earnings in all service lines, particularly in inside work where the company saw higher workloads along with margins. Construction services worked through backlog during the quarter that resulted in revenue growth, while also winning bids that increased backlog by 17%.

And our backlog now stands at $596 million. Second quarter activity at our construction materials business got off to a slower start due to weather impacts across many of the areas where we operate. In the second quarter, this business reported earnings of $21.2 million, compared to record second quarter earnings of $33.7 million in 2016.

Delays impacted product sales volumes, particularly, asphalt products and project margins. Despite the harsh weather, construction materials reported the second best quarterly results for the second quarter since 2007. We continue to be excited about the long-term prospects of this business and are aggressively bidding good quality projects.

Due to a slower start of the year than originally expected, we have lowered our revenue outlook in this business to a range of $1.8 billion to now $1.9 billion. Construction materials backlog at the end of the second quarter stands at $776 million, down from the $805 million last year.

You might recall that last quarter our backlog was down over $100 million quarter-over-quarter. But thanks to a strong bidding environment in many of our markets, we were able to narrow this gap and ended the quarter down only $40 million compared to last year.

We continue to be optimistic about the opportunities in front of us and believe that our 1 billion tons of aggregate reserves located in strong markets across the country makes us well-positioned for any infrastructure upside we may see in the future.

Finally, I think it's important to spend some time discussing the upcoming infrastructure opportunities at construction materials. Earlier this year, California approved the Road Repair and Accountability Act of 2017. Over the next 10 years, this bill is expected to raise $52.4 billion to fund road maintenance and rehabilitation.

And we believe Knife River operations in California are well-positioned to benefit from this bill. And the State of Oregon approved a $5.3 billion 10-year transportation package designed to target congestion, increased transit spend, and upgrade cycling infrastructure.

The congestion relief efforts in this package include plans to widen freeways, upgrade the roads and the bridges and improving miles of sidewalks and bike lanes. There has been a continued focus on infrastructure spending on a federal level over last year.

We're encouraged by the talks in Washington about the need for investment in our nation's infrastructure. While we have not included this in our outlook, we believe an increase in federal infrastructure spending has the potential to drive demand for construction materials both in the near and the long term.

And so to wrap up, we are pleased with our second quarter's results. As we look forward, each of our business lines has a bright future.

Thinking about our electric and gas utility and safely serving an increasing base of customers, while executing on its $1.2 billion five-year capital program, we'd expect to drive about 4% average compounded annual growth on our rate base.

Our construction businesses have a combined backlog of $1.4 billion, and they're focused on adding high-margin projects through the infrastructure spending packages we have seen introduced in many states where we operate.

We're also pleased about the continued returns to our shareholders through dividend payments as we have paid a dividend now for 79 straight years and increased it for the last 26 consecutive years.

We remain committed to maintaining a strong balance sheet, currently with equity at 57% of total capital, which is stronger than the 53% level we were at the same time last year. Based on our second quarter results and our forecast for the remainder of the year, we are reaffirming earnings guidance in the range of a $1.10 to $1.25 per share.

At MDU Resources, we are committed to operating with integrity and continue to focus on safely and creating superior shareholder value, while building a strong America. I certainly appreciate all of your interest and commitment to MDU Resources. And now I ask that we open the lines to questions that you may have.

Operator?.

And your first question comes from Vikram Bagri of Citi..

Hi. Good afternoon..

Good afternoon, Vikram..

I'm trying to better understand the impact of weather versus – you mentioned increased competition in some of the markets where you operate the aggregates business. I was wondering if you can provide more color on where you saw increased competition and help us somehow quantify the impact due to that..

Sure, Vikram. I'll turn that over to Dave Barney. He's in the room. He can give you some details there..

Good morning, Victor (sic) [Vikram]. Where we've seen most of our increase in competition has been in our energy states, North Dakota, Alaska. But with North Dakota being down, we've had a lot of competition come over from the Minnesota or North Central Area, Minnesota come over. And so we've seen more competition even in the Minnesota market.

But most of our competition we're seeing is because of the lower DOT spendings in the energy states. So we're seeing more and more people bid on different jobs, but that's where we're seeing most of the competition..

Thanks. And as a follow-up, it appears that the revenue guidance decrease in the aggregates segment was more than the miss in 2Q.

Are you baking in some sort of a conservatism in the guidance? Or in other words, how much – is that an upside from drier, longer season in back half of the year as some your peers are guiding?.

If I'm understanding you right, our revenue's down and if we're going to be able to make up that revenue for the rest of the year?.

Yeah.

I was wondering if there is some sort of conservatism in the guidance for back half of the year, and if a drier longer season in second half of 2017 has some upside in revenue numbers?.

We're definitely excited about the second half of the year. We've got a good backlog. Our prices continue to stick. We keep getting price increases on our materials. And most of them are sticking.

We expect our construction margins to stay about flat from last year, but we expect that to continue to grow as we see more and more of these initiatives that Dave talked about in California and over again. So we're excited about next year. We're excited about this year and next year.

But we definitely think the second half of the year as long as we don't get early weather in October that we're going to have a strong second quarter..

Great. And then, one last one if I may..

...or third quarter or fourth....

Sorry, Vikram. You crossed over each other there.

Did you have a follow-on question?.

Yeah. One last one, if I may, on midstream and pipelines. The Valley pipeline expansion, it can be expanded using compression.

I was wondering how much can you expand it by and what the drivers for that expansion would be? And if the Line Section 27 expansion helps you in expanding the Valley pipeline further going forward?.

So maybe I'll just back up a little bit. So Valley Expansion would be centered in Eastern North Dakota and I'll get back to that. Line Section 27 is actually more in the heart of the Bakken, the Tier 1 acreage in Western North Dakota. And so there'll be separate projects that would not have influences on the pipeline between the two.

I think your initial question, Vikram, was about expandable capability with Valley. Again, 40,000 a day or 40 million cubic feet a day will be, I'll say, the initial design parameters. We could see market improvement on that with added compression.

Maybe, as a reminder on that, we've stated publicly earlier and I'd reaffirm that today, we have certainly sufficient commitments on that pipe today so far as going forward with it. And I think additional commitments over time as the pipe is under construction or being built would only add to the economics that we see as sufficient today.

And so I like those markets in Eastern North Dakota that some are underserved and back there's quite a number of communities maybe not exactly adjacent to the pipeline that are actually not served with natural gas.

So I think there's some longer-term benefits there in addition to more security and secondary source to some of our Eastern North Dakota markets. So that kind of thinks about how we think about the Valley Expansion project. To your question on Line Section 27, it's really in the heart of the Bakken. It's a Tier 1 acreage.

It's incremental production that this will be planned for. We don't reveal counterparties in here due to confidentiality agreements in place, but it's really an incremental production coming out of the Bakken, which we continue to see upticked month-to-month from the North Dakota Minerals Group, their directors' cut.

And you would see that as public information too. And so we're under fairly short timeframe for this, be in service later in 2018. Again, sufficient commitments that are long-term will support that expansion. I want....

Great. Thank you. That's all I had..

Okay. Thank you..

Your next question comes from the line of Chris Ellinghaus with Williams Capital..

Guys, how are you?.

Hi, Chris. We're doing good.

How are you doing?.

Not too bad. It looks like it's going to rain, so construction won't be too good outside my window pretty shortly..

Yeah. That's been our story for some of our key markets; that's for sure..

Well, let me ask you about that.

Where was weather most impacted in the quarter?.

Chris, this is Dave. Well, we really got hit hard into California especially in April, but where it really affected us the most is that Portland, Idaho, even our Montana markets where last year we got out to a good early start in February. And we really didn't even get going in those markets until about June this year.

So we got hurt hard in the second quarter in those Western states and Montana..

Okay.

But it started to dry out sometime in like May, right?.

Yeah. It did but we kept getting pretty steady rain in Portland and even Idaho where it stops and starts a couple days and then that just shuts us down and gets us going. And you start and stop and it's tough on getting production and going. So It hurt us in Idaho, it hurt us in Montana and definitely in Portland.

And in April, we got hurt in California also..

Okay. I think you said you were expecting materials to sort of have flat margins for the year..

Yeah, Chris, this is Doran. We changed a couple of different guidance ranges at the construction materials business. One was the revenue that David mentioned in his prepared remarks, and then margins at construction materials are estimated to be slightly down this year versus last year.

At the construction services business, we actually upgraded revenue guidance by a couple hundred million to $1.2 billion, $1.3 billion, and left margin guidance alone at this point at comparable to prior year..

I'm sorry, you cut out a little bit. So what I was curious about here is if margins look like they might be flatter as opposed to up somewhat, Dave was also saying that he was seeing some pricing power in materials.

If materials is having some pricing power on the raw materials, where is that getting offset?.

This is Dave again, Chris. In the first half, we got hurt on our margins. We're expecting to make up quite a few of those margins in the second half as we get better production in our aggregate pits and then on our asphalt and laydown. And we get better volumes out there.

And we're not stopping and starting on our aggregate plants where we're not getting the volumes that we need to lower our cost on our aggregates. And we got some higher asphalt numbers – oil to our asphalt plants this year.

But we're expecting the margins to recover fairly well in the second half of the year and being flat to maybe a little down on the contracting margins..

Okay.

When do you expect some of this California and Oregon money to sort of flow to actual projects?.

I actually believe, it starts in July of this year, but we won't see any of that effect until 2018 and beyond. So we're looking for that to really help us out with our California operations in 2018 and beyond..

Okay. One more question on the construction services side, are there really strong projects that you're seeing where like last year you had the solar project.

Are there any particularly important projects to note?.

Yeah. Chris, this is Jeff. Absolutely. Let's start with Las Vegas. We're seeing a number of projects like the Las Vegas Raiders Stadium, MGM House, many projects coming up, Las Vegas Convention Center.

And you couple that with our four companies that are in Las Vegas, we have electrical, mechanical, fire protection and also underground utility excavation. We're very well positioned there. Also renewables in Southern Nevada, we have completed many projects and we see a good market in that arena.

Other parts of the country, we're very well-positioned in our mission critical work, our high-tech work, gaming and hospitality, healthcare, higher ed. This is just an example of our diversified company. So we're seeing an overall increase in strength in the market throughout the country..

Has there been any movement in terms of new construction in Las Vegas except for some of these peripheral things like the convention center and stadium and whatnot?.

We've seen some remodels with some existing properties. And we're looking forward to the large mega projects to breaking ground within the next six months to eight months..

Okay. Great. Thanks for the help..

Thank you..

Thank you, Chris..

Your next question comes from the line of Sarah Akers of Wells Fargo..

Hey. Good afternoon..

Hi. Good afternoon, Sarah.

How are you?.

Doing fine. Thank you. Just a follow-up question on some of the materials items. The other comment in the release referred to an increase in material costs.

Can you just expand on what specific costs you're seeing inflation on there, and if you expect that trend to stay in longer term?.

Hi, Sarah, it's Dave. Most of our material costs was on our asphalt, oil side – it was higher margin – or higher cost on our hot asphalt mix. And we weren't able to raise our prices to where the increases were. So most of our margins increase were on the asphalt side..

Got it.

And then, just in terms of the lower revenue guidance, lower margin, how should we think about the weather impact versus the impact of the higher competition and the higher cost?.

I would give it about a 90% on – it's the weather. The weather has....

Okay..

definitely hurt us. It's a small amount about the competition, but it's basically weather..

Perfect. And then, just switching quickly on the utility.

Is the assumed purchase of Thunder Wind (sic) [Thunder Spirit Wind] is that now embedded in your CapEx forecast or is that still upside?.

Yeah. Sarah, thanks for the question. This is Nicole. We do not have Thunder Spirit baked into our existing five-year forecast. We did file our IRP as we disclosed in the news release. And what that IRP suggested is that the Thunder Spirit Wind expansion purchase is the best alternative for our customers.

So we have filed in ADP with the State of North Dakota. We also mentioned that on the news release. And so we're waiting what comes out of that ADP, and then, also we'll be evaluating our capital as we always do as a corporation here in November.

And so we would relook at our capital forecast and come to the market with new forecast in November, but it's not specifically identified in the numbers in this news release..

Got it. Thank you..

Thank you, Sarah..

This call will be available for replay beginning at 5:00 p.m. Eastern Time today through 11:59 p.m. Eastern Time on August 16. The conference ID number for the replay is 40930145. Again, the conference ID number for the replay is 40930145. And at this time, there are no further questions.

I would now like to turn the conference back over to management for closing remarks..

Thank you, Shelby. As we noted earlier, our continuing operations delivered strong results for the second quarter of 2017. We are committed to building a strong America and are optimistic about our opportunities in 2017 and beyond. We also appreciate your participation on our call today. And thank you for your continued interest in MDU Resources.

Shelby?.

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