MDU Resources Group, Inc.

Hello, my name is Erica, and I will be your conference facilitator. At this time, I would like to welcome everyone to the MDU Resources Group 2021 third 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 would 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 Time today through 1159 p.m. Eastern Time on November 18th. The conference ID for the replay is 5194306. Again, the conference ID number for the replay is 5194306. 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 NDU Resources Group. Thank you, Mr. Vollmer. You may begin your conference.

Thank you, Erica. And welcome, everyone, to our third quarter 2021 earnings conference call. You can find our earnings release and supplemental materials for this call on our website at www.mdu.com under the Investors tab. President and CEO Dave Gooden and I will be leading today's discussion. On the line to answer questions following our prepared remarks 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 MDU Resources. Today's discussion, including responses 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 could differ materially. In addition, any non-GAAP measures discussed today are reconciled to the most directly comparable GAAP measure in our earnings release and SEC filings. Yesterday, we announced third quarter earnings of $139.3 million, or 68 cents per share, compared to third quarter 2020 earnings of $153.1 million, or 76 cents per share. On a year-to-date basis, we have earned $291.6 million, or $1.44 per share, compared to the prior year's $277.9 million, or $1.39 per share. Let's look at some of the details by segment, starting with the quarterly comparison of our construction operations. Construction services reported third-quarter earnings of $23.1 million, compared to the prior year's record third-quarter earnings of $29.8 million. Epidot this business decreased $10.9 million from the same period in 2020 to $35.9 million. Results were negatively impacted by $5.5 million after tax for changes in estimates on a construction contract during the quarter. This business also had decreased margins from higher employee costs attributed to a shortage of available skilled labor. While we saw less storm recovery work this quarter than the prior year, the demand for our general utility workers remained very strong. Our construction materials business reported earnings of $96.3 million for the third quarter, down from the prior year's $107.3 million. EBITDA decreased $13.4 million from the same period last year to $158.9 million. The primary drivers behind the decreased earnings were lower asphalt and related product sales and margins, as well as lower contracting revenues. Asphalt products and contracting margins were impacted by an increase in asphalt oil and diesel fuel costs, as well as less available highway paving work in certain regions when you compare that to the strong third quarter we experienced in 2020. Partially offsetting these impacts were lower selling general administrative expense, primarily from lower incentive accruals and lower benefit-related costs. Referring to our regulated energy delivery business, our combined utility business reported net income of $5.2 million for the quarter compared to a net loss of $800,000 in the third quarter of 2020. The electric utility segment reported strong third quarter earnings of $20.6 million compared to $16.8 million for the same period in 2020. Warmer weather helped drive an 11.1% increase in electric retail sales volumes, along with more businesses being open when compared to last year due to pandemic-related impacts. Increased MISO revenues and transmission interconnect upgrades also had a positive impact on earnings at this business. Our natural gas segment reported an expected seasonal loss of $15.4 million for the quarter, which was a $2.2 million improvement from the previous year. Higher adjusted gross margin from rate relief and a 2% increase in retail natural gas sales volumes drove the decreased loss, partially offset by a higher O&M expense. The pipeline business had earnings of $10.6 million in the third quarter compared to $8 million in the third quarter of 2020, primarily from higher AFUGC on the company's North Bakken expansion project. Also during the quarter, MDU Resources experienced lower income tax benefits of approximately $4.6 million when compared to the third quarter of 2020 related to the timing of recognition of our consolidated annualized estimated tax rate. That summarizes the key financial highlights from the quarter, and now I'd like to turn the call over to Dave for his formal remarks. Dave?

Thank you, Jason, and thank you to everyone listening for spending time with us here today and for your continued interest in MDU Resources. The strength of our two-platform business model was evident during the third quarter as the strong results from our regulated energy delivery business helped offset some of the headwinds our construction businesses faced. MDU Resources remains well-positioned for a strong end to 2021 and beyond. To summarize activity by business unit, I'll start off with the regulated energy delivery businesses. Third quarter highlights for our utility operations include significantly high earnings on a year-over-year basis. The utility continues to seek regulatory recovery for the costs associated with providing safe and reliable electric and natural gas service to our growing customer base. On a combined basis, we saw 1.7% customer growth since the same period in 2020. And in the third quarter, our natural gas utility refiled in the state of Washington for a $13.7 million annual rate increase that is currently pending. You can read more about these and other regulatory filings in our 10Q that we filed just this morning. We continue preparing to kick off construction in early 2020 on our Hesket Station Unit 4, which is expected to be in service in early 2023. As a reminder, Hesket 4 is a natural gas peaking unit that will aid in partially replacing the generation loss with the pending retirements of our cold-fired Hesket Station Units 1 and Unit 2 and the coal-fired Lewis and Clark Unit 1 that was retired in the first quarter of this year. And our pipeline business also performed very well throughout the third quarter and reported earnings just shy of its third quarter 2018 record. Construction is well underway on the North Bakken expansion project. We expect this fully subscribed project will be in service in early 2022. with capacity to transport 250 million cubic feet of natural gas per day for our customers. While a portion of the first-year customer committed volumes are delayed one year, as we discussed last year at this time, the project is well positioned in the Bakken and can be readily expanded in the future for forecasted natural gas production growth. I recently had the opportunity to visit the construction site in northwestern North Dakota with other members of our management team, and I can tell you firsthand it was impressive to see over 700 employees and contractors are safely and efficiently working together to complete this $260 million project. Our pipeline business also received FERC approval during the third quarter to use the pre-filing review process for its Wahpeton Expansion Project. This project involves constructing approximately 60 miles of 12-inch pipeline from our existing facilities at Mapleton, North Dakota, extending to Wahpeton, North Dakota. It will add 20 million cubic feet per day of natural gas capacity, as expected to cost approximately $75 million. Depending on regulatory approvals, construction is expected to begin in early 2024 with the completion date later that same year. When the North Bakken and Wampanoag expansion projects are complete, WBI's total system capacity will be more than 2.4 billion cubic feet of natural gas per day, which will help to reduce natural gas flaring in the region and allow producers to move more natural gas to markets. Now I'd like to move on to our construction platform. Our construction services group results were impacted by changes in estimates on a construction project contract as well as higher labor costs for the quarter. In 2021, the markets where construction services operates have experienced labor shortages that have in turn caused the increased employee-related costs as we continue to focus on the attraction and the retention of skilled specialized labor. Storm-related utility repair work was down compared to last year, but we continue to see strong demand overall for utility-related work. Demand for sales and leasing of the transmission line equipment that this business manufactures remains very high. Coupled with the strong CapEx budgets that we see across utility industry, Our outlook for the outside specialty contracting remains positive. Opportunities for inside specialty contracting also remain high, especially in the commercial sector. Construction services ended the quarter with a backlog of $1.27 billion, down just slightly from the prior year's third-year record of $1.28 billion. Bidding remains competitive across the company's footprint. and we do expect that our relationships with existing customers combined with our high quality of service and effective cost management will continue to aid us in securing profitable projects. While construction services had a very strong first half of the year, we have adjusted our revenue and margin guidance for this segment to reflect the impacts of here in the third quarter. We now expect revenues to be in the range of $2.0 to $2.2 billion, with margins comparable to 2020 levels. And finally, our construction materials business. Knife River had a solid third quarter, although down from last year's record third quarter earnings. The primary impacts to earnings at this business were higher costs for asphalt oil and diesel fuel. as commodity costs returned to levels closer to what we saw in 2019. As you may remember, decreased energy-related costs pushed our asphalt and asphalt-related product line margins to a near all-time high last year. Knife River has also been impacted by labor constraints, largely for truck drivers, as the COVID-19 pandemic amplified a prior and existing labor shortage. While labor challenges continue to impact many construction companies, Knife River is actively engaged in attracting the next generation to the construction industry. The company is nearly finishing building a training center on a 270 acre tract of property in the Pacific Northwest that is designed to enhance the skills of its current employees and those of partner organizations as well as provide training to newcomers to the industry. The Knife River Training Center features an 80,000 square foot heated indoor arena for training on trucks and heavy equipment and an attached 16,000 square foot office with classroom and lab facility. The center already is holding classes, helping students build marketable skills through both classroom education and hands-on experience. In addition to developing individual talents, The goal of the center is to showcase construction as a true career of choice. The facilities and classes are open to all construction companies beyond even Knife River.