Hello. My name is Erica, and I'll 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 speakers' remarks, there will be a question-and-answer period. [Operator Instructions] This call will be available for replay beginning at 5:00 PM Eastern today through 11:59 PM Eastern on November 18. 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 MDU 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 Goodin and I will be leading today's discussion. On the line to answer questions following our prepared remarks are, David 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 $0.68 per share compared to third quarter 2020 earnings of $153.1 million, or $0.76 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. EBITDA of 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…

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 a 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 10-Q that we filed just this morning. We continue preparing to kick-off construction in early 2020 on our Heskett Station Unit 4, which is expected to be in service in early 2023. As a reminder, Heskett IV is a natural gas peaking unit that will aid in partially replacing the generation loss with the pending retirements of our coal-fired Heskett Station Units 1 and Unit 2 and the coal-fired Lewis & Clark Unit 1 that was retired in the first quarter of this year. 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 that fully…

[Operator Instructions] Your first question comes from the line of Dariusz Lozny with Bank of America.

Hey good afternoon guys. Thank you for taking my question. I'd like to just start at the materials segment. I noticed in the Q, it seems like the language around disbursements from the American Rescue Plan Act seems a little it seems like perhaps you have better visibility on a prospective basis than in previous quarters. It sounds like you're saying states are beginning to do allocations now. Can you maybe comment as to when we might see that manifest itself in that segment's result?

Dariusz, I'll start and then ask Dave Barney if he wants to add to that. We're starting to see various state legislators – legislators actually look to deal with some of those funds that are -- have headed their way. And some of those funds actually have a fuse associated with those. So they need to be used up by a certain point in time. And so I would say that's just in the process of, but I think we would start to -- expect to see some of those funds making their ways to the marketplace as early as next year. But Dave Barney would you have any other color you'd want to add to that?

No Dave, I think you covered it. We would definitely expect more -- to see more of it next year in 2022.

Dariusz did we get your question?

You certainly did. No that's very helpful color. If I can stay in the materials segment, I think there was also some additional language in there about you're seeing an increase in bidding opportunities in certain regions related to economic conditions. Could you perhaps elaborate on sort of the delta there or which regions those are? And also what kind of margins you're seeing on those opportunities?

Dave, could you take that question please?

Sure. We're seeing an increased bidding in quite a few of our regions especially in our Idaho, Oregon, Montana they're really strong right now. Even in California a lot of commercial work coming out. So, the margins are tight right now. They're really tight. There's a lot of people bidding on this work, but we'll get our share of it.

Okay. Great. And just if I could ask on -- one on services the guide down on revenue. Is that principally related to the adjustment related to the one contract that you guys called out, or is it perhaps driven by demand?

Yeah. Dariusz, I'll ask Jeff Thiede to respond to that one.

Thanks for the question. It's primarily driven by timing. Some of our mega projects that we are finishing or have finished, have not been replaced right away with other projects. If you take a look at our backlog at $1.27 billion very close to our record backlog of $1.28 billion a year ago. It's just a timing issue on when these projects start some of the projects that we have in that backlog has slipped out into next year.

Dariusz, I know Jeff maybe broke up a little bit there. Did you catch that, that talking about primarily timing and that given the $1.27 billion backlog see it's more of a – again more of a timing issue given our strong current backlog that we have.

I did catch that. Thank you for that detail. And if I could just squeeze in one more briefly. Regarding your 5% to 8% long-term guidance should we think of that – now that you're lower on 2021 should we think of the sort of run rate off of 2021 as potentially being perhaps above or at the high end of that range?

Dariusz, this is Jason. I can weigh on that one quickly here. I mean, 5% to 8% long term we're confident with that. We reiterated that number here again as you saw with the release out last night. That's really based off our $1.95 that we had for 2020, and we feel confident that, we'll be able to see that in a long-term run rate standpoint going forward. And I won't comment on exactly how much we would expect year-over-year based on where we see things here. We need to see how 2021 wraps up here for the rest of the year, but very confident that we'll be able to hit that 5% to 8% range over the long term.

Okay. Thank you very much. I’ll turn it back now.

Yeah. Thank you, Dariusz.

Your next question comes from the line of Ryan Levine with Citi.

Hi. Good afternoon.

Hi, Ryan.

Hi, Dave. In terms of the construction service business, can you elaborate on what drove the $5.5 million estimate change with the construction contract?

I'll just start a little bit and then Jeff can certainly jump in. But it was really – the largest difference, if you will think of on a year-over-year basis again an estimate on a single project. If you look at the run rate third quarter 2020 versus third quarter 2021, it's really the largest difference between the two. And Jeff, maybe you can add a little more color to that particular project.

Sure. Thank you, Dave. And good question, Ryan. This project that Dave referenced is now extended almost one year and three quarters past its original completion date in the baseline schedule. This is significantly impacting labor in a negative way. And also, we have materials that are purchased in a higher cost period later than we had in original estimate. So those are the biggest drivers within that one project. And our team is working through to complete this project and put it behind us.

Okay. And I guess on the follow-up to that, given the higher costs in Construction Services, if I understood correctly previously some of your contracts have cost pass-throughs and inflation provision. Is there anything that happened this quarter that prevented some of those mechanisms to work or reason why we should not expect further deterioration of margin in the service business in light of some of these inflationary pressures?

Yeah. Some contracts have those pass-through provisions as you mentioned, but others do not. And we've seen impact to productivity given the pandemic, and also to supply chain availability. A year ago, we thought, we'd have more supply chain issues, but inventory levels were still relatively high and provide a drop with materials we need this year. We're really seeing whether it's light fixtures, or piping underground PVC piping, electronic components, we are seeing those impacts.

Okay. And then shifting gears to the North Bakken Expansion. In light of some of the federal policy conversations around methane emission are seeing any added interest in expansion opportunities on that pipeline?

Thanks, Ryan. This is Trevor. We continue to see increased activity in the Bakken itself in the last six to 12 months in particular. As it relates to the new methane rules that just came out this week. We are evaluating that. One would think on its face, it should add additional pressures for people to capture and move that gas to market. So it should. We haven't seen anything in the last week but we have seen increased interest in, overall, just in the Bakken in terms of projects and opportunities to get natural gas out of the basin.

And does that project have capability to take any hydrogen as well to blend it into the pipe?

Not as currently designed. I mean, moving hydrogen through carbon steel pipe is being evaluated in different parts of the world. There are different studies going on in terms of the ability to blend a certain portion of hydrogen into a natural gas stream. So we continue to watch those, but not as it's originally designed, it's designed to basically move pipeline quality gas.

Appreciate the color. Thank you.

Ryan, I'm going to just follow on a little bit from where Trevor left off. You asked about, kind of, activity in the Bakken and the ability to potentially expand that pipe. Another dynamic that we're seeing and it's actually being amplified by the North Dakota pipeline authorities, the gas/oil ratio continues to climb as the producers produce oil. And so that, actually, will I think bode well for our future potential here so far as overall natural gas production, even at current oil levels will likely increase, given where the trajectory of the gas oil ratio is. But a little more detail there, but again I think it bodes well just for our pipeline and where it's positioned.

Great. And then one last question. In terms of the undergrounding opportunity on the West Coast, has MDU had face-to-face conversations with the large potential customer in California?

Jeff, do you want to take that one?

You bet. We have. We're very well positioned to be a part of this work, which we understand to be a multi-year effort to underground approximately 10,000 miles of power lines, which is the largest commitment to reduce wildfire risk in the whole country. We've submitted our qualifications with PG&E, which is a long-standing customer for us. We've also performed this type of work for PG&E in the past. And given our talented team, our experience, our performance, we expect to capture part of this opportunity once the engineering, the permits and the procurement process lead to bidding opportunities.

Thank you.

Thank you, Ryan

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

Hi, Chris.

Hi, guys. Hey, guys, how are you?

Good.

You mentioned being below expectations for the quarter. I assume that principally that is the labor and petroleum product cost pressures. Is this a function of not being contractually hedged on the petroleum product side in great detail? And is that something that, as you go through the next contracting cycle, will reverse, or was this sort of a special situation for these last couple of quarters?

Yes. Very fair question, Chris. And so, the answer is part yes and part no. And let me break down for you and others maybe a few of the -- just a few of the major parts. Again, when I think of CSG quarter-over-quarter is really the estimate on the one large project, on a year-over-year basis there. But your comment about petroleum or petroleum hedges, if we think quarter-over-quarter, we had roughly about a $4 million after-tax impact on diesel alone for the quarter within materials. And then the other one that I said is part yes and part no, it's really in the asphalt and asphalt oil-related areas. And I'll say, while still a very good business for us, we didn't enjoy,, if you will, the low commodity prices of a year ago. And combined between asphalt and asphalt oil was about a $10 million after-tax delta between those two. And so -- to your point some of that does become hedge, but also some of it is the escalation of inflation that we saw on a quarter-over-quarter basis. So believe we've captured it. It's captured in our forward guidance. As we look through the remainder of the year we feel good about these businesses. It was just more of a one-quarter occurrence.

Okay. So really depending on, how you bid your contract this was an unanticipated spike in the oil prices that next year you will be able to anticipate as you're contracting?

I would say that's certainly true for the diesel and diesel-related products. I think for the asphalt and asphalt-oil it also becomes a product of what's out in the marketplace and what's available from what others are providing. And so, again we enjoyed some record high margins in that business, a year ago very solid margins this year, but off some record high margins that we had a year ago.

Okay. And you also sort of mentioned that volumes on road work might have been down. Was that a function of some customers trying to anticipate that surge in asphalt-oil cost and maybe postponing work, or what led to that volumetric decline you think?

So I will say it was more specific to a couple of areas, and then Dave Barney, if you would like to add to this one area being in Hawaii for instance given more restrictive lockdowns in the islands. And again we have a strong presence throughout the islands. That certainly had an effect on the amount of workload that we were able to work on in the islands. And then our second area that I'd say we were down more on a year-over-year basis but really seeing it more of a one-year down because next year's forecast looks much more promising. It is our -- kind of our Minnesota and Northern Minnesota area just happened to be an off year if you will for some of what we would typically see in some of that highway asphalt and asphalt-related overlay type activity. And so those would be kind of the key areas that we saw. Other areas again we're quite strong in general but again due to some COVID activities and more just from a bid timing perspective. Dave Barney anything to add to that or any more details that you might have?

Now it was just a timing of work. We just didn't see a lot of -- we saw enough asphalt pavement work but we didn't see what we've seen in the past. We expect that to turn around. And as Dave said, our Minnesota operations we knew they might be off a little bit on their asphalt paving work this year. And a few other regions were down on asphalt paving. We expect that to turn around in 2022. But on another note Chris, we do fixed forward contracts on our fuel, but we can only do about 50% of that.

Okay. And on the construction side, presumably, there's some pent-up maybe backlog that's not in your backlog technically, but for renewable projects, for transmission project, maybe for port work kind of coming to the fore. Are you guys seeing some pent-up demand that you're expecting that will gain some greater momentum next year as we see the legislation sort of amount and maybe some details of the legislation helps, some of those kinds of projects? And obviously ports are really constrained. So what are you seeing on the horizon in some of those areas?

Yeah Chris thanks for that great question. Jeff, do you want to touch on that maybe even start with some of our renewable activity.

Absolutely. We're performing distribution work for utility customers in some parts of the country to handle the demand on the electric vehicles and the charging stations. We're also installing charging stations in many of our locations. We see more opportunities in this market. We're working for a large EV vehicle manufacturer. And we're in conversations with another one to work at their facility as well. We continue to see expanded opportunities also with the renewables. We recently awarded two projects one in the mid-$30 million range, one about $40 million. One of those comes in the Southwest and other is in Pacific Northwest. We're also partnering with a confidential client to build upon our experience and performance for additional sites across the country in renewables. As far as the port, we just picked up some work in Port Long Beach. And, of course, airports we've got two airports growing right now. And we have an experience to be able to capitalize on expanded infrastructure work in the transportation part of our markets in the future.

Okay. Thanks guys. Appreciate it.

Thank you Chris.

This marks the last call for questions. [Operator Instructions] This call will be available for replay beginning at 5 PM Eastern Time today through 11:59 PM Eastern Time on November 18th. The conference ID number for the replay is 5194306. Again, the conference ID number for the replay is 5194306. Your next question comes from the line of Brian Russo with Sidoti.

Hi, good afternoon.

Hi Brian.

Just on the materials side, you talked about labor shortages, higher asphalt oil and diesel prices. I suppose that your aggregate peers are also experiencing and material peers are experiencing the same issues. So as the industry as a whole or -- is the industry raising prices and/or is MDU raising prices to sustain margins that you may have seen in 2020?

Dave would you want to take that one please?

Sure. Yeah, Brian, our margins on our aggregate and ready-mix were up this year over last year. We were able to increase our pricing on aggregates and ready-mix and we'll continue to do that. It was more on the -- big miss was on the asphalt oil side this year, margins were quite a bit down. In fact they were about $11 million out of the $14 million miss. So the biggest miss on our side was the asphalt oil side of business, but we are increasing our margins on a ready-mix and aggregate.

Okay, got it. And then just on the services side, could you just characterize the types of contracts or mix of contracts are you fixed cost, cost plus? And then the average duration of a project that when you enter into a project if it's less than a year you can lock in your raw material prices without having risk of any inflationary pressures that you might need to capture with a longer contract?

Sure. This is Jeff. Approximately 80% of our backlog is in our inside businesses and a lot of our projects we secure on a cost plus with a guaranteed max, we brought on early to provide design assist services. So we're updating pricing and we're coming to our owners or general contractors with recommendations on locking in whether it's copper or aluminum or pipe or wire. And that process is ever-going. As far as our utility customers that also is where we work with unitized pricing to try to mitigate any of the procurement for commodity and inflationary pressures that we've seen especially this year.

Okay. And just to clarify on the revised guidance that is not only the year-to-date performance or the weakening of margins you saw in the third quarter, but it's also capturing what you're experiencing in the fourth quarter as well. Is that accurate to say?

Yes Brian that's accurate. That would be our expectation as we finish 2021 here.

Okay, great. Thank you very much.

Thank you Brian.

At this time there are no further questions. I'd now like to turn the conference back over to management for closing remarks.

Thank you operator, and thank you all for taking the time to join us here on this third quarter earnings call. We are optimistic about our growth opportunities with near record construction backlog and the ongoing and future regulated energy delivery projects that we highlighted here today. We look forward to connecting again as we finish out 2021 and look forward to 2022. And again thank you, we appreciate your continued interest in and support of MDU Resources Group. Operator?

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