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…

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.