MDU Resources Group, Inc.

Hello, my name is Katherine, and I will be your conference facilitator. At this time, I'd like to welcome everyone to the MDU Resources Group 2021 Second Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key on your telephone keypad. This call will be available for replay beginning at 5 p.m. Eastern today to 1159 p.m. Eastern on August 19th. The conference ID number for the replay is 552-7896. Again, the conference ID number for the replay is 552-7896. 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 Jason Vollmer, Vice President and Chief Financial Officer of MDE Resources Group. Thank you, Mr. Vollmer. You may begin your conference.

Thank you, and welcome, everyone, to our second quarter 2021 earnings conference call. You can find our earnings release and materials for this call on our website at www.mdu.com under the Investors tab. Leading our quarterly earnings discussion today are Dave Gooden, President and CEO of MDU Resources, and myself. On the line to answer any questions you may have following our presentations 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 our Utility Group, Trevor Hastings, President and CEO of WBI Energy, and Stephanie Barth, Vice President, Chief Accounting Officer and Controller of MD Resources. During today's discussion, including responses to questions, some comments may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Although the company believes 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, we direct you to our earnings release and to item 1A, risk factors in our most recent form 10K and 10Q. For second quarter of 2021, we delivered earnings of $100.2 million, or $0.50 per share, compared to second quarter 2020 earnings of $99.7 million, or also $0.50 per share. During the quarter, our results were impacted by higher stock-based compensation and health care costs of approximately $4.2 million after tax. Further impacting our second quarter consolidated results was a $5.4 million lower investment returns on certain benefit plans compared to the same quarter in 2020. While these items had an impact on the quarter's results, all of our operations performed very well throughout the first six months of the year, growing consolidated revenues by 3.5%, and increasing earnings $27.5 million year to date. Our utility business earned $9.6 million for the second quarter compared to earnings of $11.2 million in the second quarter of 2020. For the electric utility segment, reported earnings of $10.3 million for the quarter compared to $12.2 million for the same period in 2020. Higher operation and maintenance expense, largely the result of higher labor-related costs, including the increased stock-based compensation expense and healthcare costs, as we previously discussed, as well as increased generating station expenses, drove the decrease in earnings. Lower benefit plan investment returns also negatively impacted the results. Partially offsetting the decrease was higher adjusted gross margin driven by a 6.9% increase in retail sales volumes. Sales volumes increased for industrial and commercial customers during the quarter and were offset in part by lower residential volumes as the impacts of the COVID-19 pandemic started to reverse and individuals are returning to work as businesses reopen. Higher demand revenues and higher revenues associated with transmission interconnect projects also had a positive impact on the adjusted gross margin. Our natural gas utility segment reported a seasonal loss of $700,000, improved from a seasonal loss of $1 million for the same period in 2020. Adjusted gross margin increased during the quarter from approved rate recovery and 2% customer growth. Transportation revenues also increased from higher volumes transported to the company's electric generation customers. Partially offsetting the decreased loss was higher operation and maintenance expense, primarily labor-related costs, as previously discussed, as well as lower returns on certain benefit plan investments. The pipeline business had earnings of $9.2 million in the second quarter compared to $9 million in the second quarter of 2020. Higher non-regulated project revenues and increased allowance for funds used during construction were the primary drivers of the increase in earnings. Partially offsetting this was higher operational maintenance expense relating to the previously mentioned increase in non-regulated projects as well as higher payroll. Now turning to the construction businesses, construction services reported record second quarter earnings of $28.9 million compared to the prior year's record of $27.9 million. Revenues increased 6% on a year-over-year basis to a second quarter record of $525.6 million. Demand for construction services remains high for both the inside and outside specialty contracting. Inside specialty contracting saw strong demand for commercial and industrial work, specifically in the manufacturing industry, and outside contracting workloads increased with high demand from the utility industry. Lower depreciation, depletion, and amortization expense, resulting from decreased intangible amortization related to prior acquisitions, also contributed to the increase in earnings. Our construction materials business reported second quarter earnings of $51.4 million compared to the prior year's $53 million in the second quarter. Revenues increased 2% to $633.8 million. The decrease in earnings was primarily the result of higher selling, general, and administrative expenses from increased labor-related costs as we have previously discussed. Lower returns on certain benefit plans also impacted the quarter. Partially offsetting these items was lower interest expense due to lower average interest rates. That summarizes the financial highlights for the quarter, and now I'll turn the call over to Dave for his formal remarks.

Dave? Great and thank you Jason and thanks to those of you listening in and spending some time with us today and for your continued interest in MDU resources. Today I'll walk through each of our business lines to highlight some notable drivers in the quarter and go into greater detail about some of the organic growth items covered in yesterday's news release. Starting with our regulated energy delivery platform. We now have approximately 1.15 million customers across our electric and natural gas utility businesses. And our utility employees remain focused on organic growth and infrastructure improvements that help to safely and efficiently serve our customers. We continue to expect strong customer growth across our service territory, outpacing the national average and in the range between 1 and 2 percent compounded annually. The electric utility finished the pre-commissioning, decommissioning activities on the coal-fired Unit 1 at the Lewis and Clark Generating Station here in the second quarter and commenced decommissioning here in July. We expect to retire Units 1 and 2 at Heskett Station near Mandan, North Dakota, early next year, which are the last of the company's wholly owned coal-fired facilities. Our generation portfolio in regards to nameplate capacity prior to the commencement of these retirements was 48% coal and will decrease to 31% in 2023 upon completion of the proposed Heskett IV natural gas fired peaking unit. Our natural gas utility, along with our pipeline business, WBI Energy, recently announced a project that will increase natural gas service to Wahpeton, North Dakota while also being able to offer natural gas service for the first time to Kindred, North Dakota. This project is driven by customer contracts requiring more firm natural gas supply than our current infrastructure can provide to eastern North Dakota. The project involves constructing approximately 60 miles of 12-inch pipeline from our existing facilities at Mapleton, North Dakota, to Wahpeton. It will add 20 million cubic feet per day of natural gas capacity and is expected to cost approximately $75 million. Depending on regulatory approvals, construction is expected to begin in early 2024 with a completion date later that year. Speaking of our pipeline business, we're excited that in early July, WBI Energy received final FERC approval allowing construction to begin on the North Bakken expansion project in Western North Dakota. This $260 million project will add 250 million cubic feet of daily natural gas transportation capacity to our system, bringing WBI's total pipeline capacity to more than 2.4 BCF per day while helping to reduce natural gas flaring in the region and allowing Bakken producers to move natural gas to market. Construction began here in mid-July and with favorable weather during the construction season, we expect the project to be in service by end of this year. Now moving on to construction, our Construction Services Group had an outstanding second quarter as demand for both inside and outside specialty contracting remains very strong. CSG reported record second quarter revenues and earnings and an all-time record backlog Now standing at $1.32 billion as the end of June. Bidding remains highly competitive in all areas, but we are confident that our relationships with existing customers, our skilled workforce, and our high quality of service will aid in securing and executing unprofitable projects. As a reminder, revenue guidance at this business for 2021 continues to be in the range of $2.1 to $2.3 billion with margins comparable to or slightly higher than 2020 levels. And finally, at our construction materials business, while earnings were down slightly year over year, Knife River is operating at near record levels, falling just short of the prior year's record second quarter earnings while continuing to produce record revenues. Demand in pricing for aggregates and ready mix concrete is strong across a number of markets. Construction materials reported backlog at the end of the quarter at 912 million, an increase of over 4% from the prior year. Revenue guidance for this business is also in the range of $2.1 to $2.3 billion, with margins comparable to our 2020 levels. We remain optimistic about our construction businesses and continue to evaluate strategic acquisition opportunities that will enhance our existing footprint and appropriately expand our business, all while earning attractive returns on invested capital. As mentioned in our news release yesterday, we feel very positive about the conversation surrounding infrastructure funding packages at the federal level, as well as at various state levels across our footprint. With combined construction backlog and an all-time record at $2.23 billion as of June 30th, we believe we're well-positioned to take advantage of these multi-year growth opportunities. While we believe these infrastructure proposals will provide additional opportunities to some of our core areas of business, such as surface transportation improvements, renewable energy, power grid modernization, broadband, and much more, These infrastructure proposals are not included in our earnings per share guidance of $2 to $2.15 for this year of 2021 or in our five-year capital investment plan for that matter as well. Overall, we are very pleased with our performance throughout the first half of the year. Our focus at MDU Resources has been and continues to be to produce significant long-term value as we execute on our business plans Our organic growth projects and our targeted acquisitions. We continue to maintain a strong balance sheet, solid credit ratings, and a good liquidity position. For the last 83 consecutive years, we provide a competitive dividend for our shareholders and have been increasing it for the last 30 years. As always, MDA Resources is committed to operating with integrity and a focus on safety while creating superior shareholder value. and we continue to act along our tagline of building a strong America. And with that, operator, we'll open it up for questions.