Hello. My name is Shelby, and I’ll be your conference facilitator. At this time, I would like to welcome everyone to the MDU Resources Group 2018 Second Quarter Conference Call. [Operator Instructions] This call will be available for replay beginning at 5:00 pm Eastern Time today through 11:59 pm Eastern Time on August 15. The conference ID number for the replay is 2767248; again the conference ID number for the replay is 2767248. The number to dial for the replay is 1855-859-2056 or 404-537-3406. I would now like to turn the call over to Jason Vollmer, Vice President, Chief Financial Officer and Treasurer of MDU Resources Group. Thank you. Mr. Vollmer, you may begin your conference.

Thank you, Shelby, and welcome everyone to our second quarter 2018 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 would 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 and 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, please refer to Item 1A, Risk Factors, in our most recent Form 10-K. For our call today, I will discuss key financial highlights from the quarter and then turn the presentation over to Dave Goodin, President and CEO of MDU Resources, for his formal remarks. After Dave’s remarks, we’ll open the line for questions. In addition to Dave and myself, members of our management team who will be available to answer questions today 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 Cascade Natural Gas, Great Plains Natural Gas, Intermountain Gas and Montana-Dakota Utilities; Trevor Hastings, President and CEO of WBI Energy; and Stephanie Barth, Vice President, Chief Accounting Officer and Controller for MDU Resources. Yesterday, we announced our second quarter earnings from continuing operations of 44.1 million or $0.22 per share compared to 43.8 million or $0.22 per share in 2017. On a consolidated basis, earnings were 43.8 million or $0.22 per share compared to 40.6 million or $0.21…

Well, thank you, Jason and good afternoon, everyone. Thank you for your interest in MDU Resources and for taking the time to join us today to discuss our second quarter results. We released our second quarter earnings after the stock market closed yesterday. All of our businesses continued to build up the momentum we saw in the first quarter this year and I am pleased with our solid execution during the second quarter and the progress we've made on multiple growth projects. I'd like to start with our construction platform. At our construction services group, they continue to deliver exceptional growth, reporting year to date earnings nearly 50% higher than last year. This business continued to see strong performance from its outside companies who provide electrical transmission, distribution along with substation work in addition to engineering and manufacturing equipment and tools for rentals and sales. Construction services continues to perform high volumes of specialty contracting work, particularly for high-tech healthcare and higher education customers. Backlog at this business is at a record level of 888 million, which is 49% higher than just a year ago. As construction services continues to excel across its service territories, we are seeing a large increase in projects from all revenue streams, with the most noticeable pickup in the northwest, the southwest and Midwest markets. At our construction materials business, we also reported a solid work backlog of 731 million compared to our backlog of 766 million one year ago. This was up from our March 31 backlog of 692 million. Earlier this month, we announced our third construction materials acquisition of the year with the purchase of Molalla Redi-Mix and Rock Products. This acquisition will enhance and expand our strong construction materials position in the Portland metro market. Our business development teams continue to…

[Operator Instructions] Your first question comes from Chris Ellinghaus of Williams Capital.

First question, I assume the market is a little disappointed in earnings today. With your guidance and with the backlog being so particularly strong, would it be fair to imply or infer from your guidance that there's a pretty strong construction outlook for the third and fourth quarters?

Yeah. Chris, this is Dave. So you’ve followed us for some time and know that the third quarter is a particularly strong quarter for us, given our northern tier exposure in our construction business especially. And so, yes, you're correct, absolutely spot on with the record 1.6 billion of backlog combined between the two construction companies. We certainly feel good about that. We also note that the construction company’s margins year-over-year to be -- we expect them comparable to slightly increasing, notwithstanding any Tax Cuts and Jobs Act benefit that might be sought on the income statement. So I think it's a valid point you raise, so far, there is clearly a lot of work that’s remaining in this year as we see again. Third quarter has historically been a very strong quarter for our northern tier exposed construction companies and so I think you’ve really framed it up.

Okay. In the second quarter, you said that volumes were up on the gas side, but did weather have any positive or negative impact on the gas utilities?

Chris, I'll turn that over. Nicole is in the room. She can address that.

Yeah. So for the second quarter, Chris, our volumes were up just slightly, but weather does not have an material impact, really considering the fact that we do have weather normalization or de-coupling in almost all of our states, essentially we're down to Montana and Idaho where we don't have those types of mechanisms and so weather was not a significant factor for the quarter on the gas side.

I’m not sure whether this should be for Dave or for Jeff, in Vegas, there sure are a lot of projects that are in the works at the moment ongoing, could you just talk about what successes you might be having, particularly on like the stadium and there's a couple of significant projects on the strip.

Thank you, Chris. Jeff will take that one. That's where we have the presence with the CSG companies.

Thanks for the question, Chris. Our Las Vegas construction market is building momentum and we've seen a significant increase in our workloads. We picked up the fire protection contract for the large stadium project that you referred to. We've security, electrical and mechanical work for a large hospitality gaming project we've been focused on for years and we're pleased to see it get underway. We're also involved in early stages of pre-construction for two more significant projects that we believe will turn into backlog and there are additional projects that we are evaluating on whether or not to pursue, depending upon timing of our resources, the timing is a fit, we will capture that work and we'll take on those opportunities as well. We’re concerned about safety and labor availability, but we've got strong teams and our businesses are growing in Las Vegas.

I assume that the second project you talked about is the one that’s currently under construction?

That's correct. And we have Bombard Electric and Bombard Mechanical contracted for that work.

Your next question comes from Sarah Akers of Wells Fargo.

Can you quantify that one-time adjustment related to the Washington readout?

Nicole will touch on that.

Yes. Thanks, Sarah for the question. During the quarter, we had about a $2 million out of period earnings reduction related to the Washington rate case settlement and order. If I were to quantify that in terms of the pieces of -- over half was related to our assumption on federal tax reform. So in our original filing, we had assumed we could keep the interim benefit between January 1 and when rates would be implemented in August 1 due to the fact that our earnings are below our return. With the order reflecting return of that benefit to customers, we did reserve the year to date impact in the quarter. So that was a significant piece of the $2 million one-time adjustment. The remaining amount relates to O&M with the settlement reflecting the expense -- the expensing of certain items that we had previously deferred. So that in total was about a $2 million impact for the quarter.

And then just sticking with the utility, it looks like combined utility O&M is up over 7% in the first half of the year, are you expecting this level of O&M growth and then how should we think about that cost trend going forward?

Yeah. There's a couple of factors that are hitting our O&M year-over-year in total for our utility that really are outside of what I would consider normal run rate items. So, one of them would be what I just referenced and that would be where we had to take a one-time expense to our O&M on costs, we were previously deferring. In addition to that, due to a change in accounting treatment, we are expensing some conservation type expenses and then we're offsetting that in revenue, where previously the treatment of that was different. So last year's results would not have included that. So when you look at a comparable period, it's really not a fair comparison because of the change in the accounting treatment. So if you were to take those two items out, you would be looking at more of a normal run rate in total for our O&M, including items such as normal payroll increases year-over-year. So really the 7% you're referencing includes two out of, what I would call, one is out of period and one would be just a not comparable. So, we would anticipate more of a normal run rate in O&M.

Great. And then lastly on construction, can you just give more details on what's driving the lower material product margins in the quarter?

Thanks for the question, Sarah. I’ll turn this over to Dave Barney.

We're not really losing any pricing power. Year to date, the material margins are down due to product mix and different and higher earlier season maintenance costs in most of our markets. So we're really not losing margins, in fact, we expect margin to increase throughout the year.

Your next question comes from Paul Ridzon of KeyBanc.

How was weather in the second quarter with regards to the construction businesses, particularly materials?

Thanks for the question, Paul. We'll start with Dave Barney and then we'll move on to Jeff Thiede.

Construction in our Idaho, Oregon, Californian work was better than last year, but we did have some issues in the Midwest market. Our Iowa markets had 18 days of rain. That affected our construction companies there, it affected our asphalt companies. And then when you look at the record snowfall that Montana had and with the melt, it slowed us down. We did have some rain in some of our Minnesota markets. We've got a lot of work built up for the next two quarters and we expect a good second half of the year.

How did July treat you from a weather standpoint?

July was good. I haven’t got numbers on, so I can’t tell you, but we’re on the field, I can tell you July, we’re out there, we're busy, we're going to be busy.

And then just, I always ask this question, just looking for an update, have your customers started to try to claw back the benefit of lower taxes?

Not at all. We haven't seen that anywhere, even in our private side.

Yeah. Paul, let’s transfer that same question over to Jeff Thiede as to customers and looking at their claw back to use your phrase.

We haven't seen any claw backs from our customers as well and we were impacted by some record snow pack in the Rocky Mountains and more impacted by some of the work that got pushed out in Northern California. Back to the weather, some mild impacts in the Midwest, but not significant and now the weather is cooperating, we've got some good work levels in those areas.

What happened in California? Sorry, I missed that.

Work wasn’t released that we were anticipating for one of our large utility contractors, but we’re well positioned, we've got the resources and we're ready and the work is in this next quarter, in the fourth quarter, it will be much higher volumes than we’ve experienced in the first part of the year.

Your next question comes from [indiscernible].

I'll focus on the capital program here, in terms of, just under $2.4 billion. Just looking at the basic consolidated balance sheet, it looks like you are obviously very well capitalized. I'm just wondering in terms of operating cash flows and anything like that, is the program that you have here internally funded just to operating cash and some incremental debt and which is zero equity even through drip or other plans to the forecast.

Yeah. This is Jason. I can take that question. I think you're right on there as we look at our operating cash flows, you may see from the second quarter release here versus what we disclosed in the first quarter release, we are expecting a little bit higher operating cash flows than what we had originally forecast for the year. So that certainly helps with that. We have seen an uptick in our CapEx as well, which you note in the release here as, we saw some acquisition activity here, which if you followed us for a while, you’d understand, we do not typically build in acquisitions in to our CapEx forecast, those would be incremental to that. As far as equity and we haven't given guidance beyond 2018, but our expectations are for 2018, we would not issue any additional equity. That could of course be driven by acquisition activity. So if we had some acquisitions where it made sense to issue some equity, we could do that. As a matter of fact, in the second quarter, when our Form 10-Q comes out, you'll see we issued a small amount of equity related to an acquisition here in the second quarter at Knife River due to the seller in that case looking for equity as a piece of the consideration.

When you take a look at the utility and the pipeline midstream CapEx program over this period, it's fairly robust. So I'm wondering how you consider that in relation to over your corporate history in terms of looking at acquisitions of various regulated utility properties, be it gas or electric or now fleet, think about pipeline midstream, how do you think about that in relationship to the capital program opportunity you have in front of you.

Yes. Great question. So, as I think about our five year capital program that we've outlined to the external world, I think of it roughly 80% is earmarked and geared towards both of our regulated businesses within that platform, about 1.5 billion to the regulated utility and about 400 million or so to the regulated pipeline and so your question is spot on. What we do not put in that forecast is any acquisition dollars that we would likely see as we've started to see this year related to our two construction businesses. So any CapEx related to acquisitive activity will be incremental to the current five year capital program and so we envision, looking at primarily organic growth opportunities at the regulated platform and yet taking those two construction businesses within our construction platform that have been acquisitive that's how we've grown those about 100 utilities since the early -- 100 different companies since the early 90s, we would envision continuing that as we've again started to see the three acquisitions that we've done at the materials this year.

So, it would seem like that in terms of any increases to the capital program over the horizon, seems, it's more likely to be within the construction business and that the foundation you have in terms of having a large base right now in terms of regulated, both utilities as well as pipeline and midstream and the organic growth there would be where the focus is as opposed to external acquisitions within the utility and pipeline midstream space today?

Yeah. I wouldn't take acquisitive activity on the regulated platform off the table. I would say it's very much line of sight though on an organic basis at both the pipeline and the utility sector. And again while we put in our five year CapEx forecast are those things that we see as greater than a 50% chance or probability of happening. In fact, oftentimes, quite higher probability of that. So we like to believe it's quite line of sight and as in particular, related to the two regulated businesses.

And within the utility and the pipeline midstream area, given both the organic foundation you have, what would you be looking for or what would interest you or entice you in terms of potentially doing an external acquisition within those two businesses as opposed to the construction business?

Yeah. I think it certainly have to make shareholders sense, would there be a means in which we could create shareholder value on a broader base of assets, we certainly track markets in both the utility space and the pipeline space from a deal perspective. As we’ve looked at those over the last number of years, with the low interest rates that we've experienced, certainly, those price multiples have continued to climb. And so I think some of that can be challenging and what we've seen in some of the recent deals, we've been acquisitive in the -- particularly the utility space, three utilities back in the 2007-2008 timeframe, however, we do see that the deal multiples have climbed to levels that are quite challenging to make shareholder value sense.

Paul Ridzon of KeyBanc has another question.

I just had a follow-up for Nicole. I just wanted a clarification that higher -- the accounting changes has no impact on earnings, because it's offset in revenues. Is that what I heard?

That is correct. Let me clarify, the O&M increase related to conservation. So there were two factors that I was explaining that caused the delta year-over-year that would make it a little bit different than our normal run rate. One was the Washington order clarifying the expensing of certain costs we had deferred. That would be a one time hit that we took in the second quarter, but on conservation, you're absolutely right. We see the offset in revenue there, earnings neutral on conservation.

[Operator Instructions] And you do have a question from Carl Seligson of Utility Financial.

I was interested in your comments on acquisition that it's getting harder or more expensive to do them and the like a lot I wonder if you could talk a little bit more about the generality of saying what’s the shareholder interest, what specifically will you be looking at, what’s your regional, it’s got to stay within your current platform, are you going to expand that platform and where are you going from here?

Yeah. Carl, I appreciate the question. When I think about our acquisitive past, it's grown our utility for instance to 1.1 million customers over the 8 states. Certainly, that's been through some acquisitive activity. What I especially appreciate and think about is our utility today is through organic investment, we see over the next five years, growing that utility rate base on a 6% compounded annual growth rate. So I like the line of sight over the next five years, in fact, that's quite front end loaded as we think about the investments that we're making at the utility. I think your question is maybe a little speculative so far as what exactly we might be looking forward would be ways in which we could find a way to create shareholder value that obviously was something that would be a fit for us as well. And so I'm not going to be specific in my responses here because again I think it's somewhat speculative in nature.

At this time, there are no further question. I would now like to turn the conference back over to management for any closing remarks.

Thank you, Shelby and again appreciate everybody participating on the call here today. As we noted earlier, we have solidly executed on the first half of 2018, along with having a number of growth projects underway. We are committed to building a strong America along with being optimistic about our opportunities for the rest of the year and beyond. We appreciate your participation on the call today and thank you for your continued interest in MDU Resources. With that, we’ll close the call and I’ll hand 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.