MDU Resources Group, Inc. (MDU)

MDU 
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MDU Resources Group, Inc. (MDU)

Analyst Meeting Call

March 15, 2012 08:30 ET

Executives

Terry Hildestad – President and Chief Executive Officer

Dave Goodin – President and Chief Executive Officer, Montana-Dakota Utilities, Great Plains Natural Gas, Cascade Natural Gas & Intermountain Gas

Steve Bietz – President and Chief Executive Officer, WBI Holdings

Kent Wells – President and Chief Executive Officer, Fidelity Exploration & Production

John Harp – Chief Executive Officer, Knife River Corporation and MDU Construction Services Group

Doran Schwartz – Vice President and Chief Financial Officer

Analysts

Andy Levi – Caris & Company

Presentation

Terry Hildestad – President and Chief Executive Officer

Good morning everyone. Good morning. Fill your coffee up and grab a chair. We are going to start this right on time this morning, so we keep on schedule. I am Terry Hildestad, President and Chief Executive Officer of MDU Resources. It's a great pleasure to welcome you to the event and open it up. Today, we've really got a great morning plan for you. As you know, our format today will include presentations from each of our business unit Presidents and our CFO.

I'll start out with some introductions. Presenting today, Dave Goodin, Dave is President and CEO of our Utility Group; see Dave and the presenters are in the back of the room there. Dave, raise your hand. Steve Bietz, Steve is the President and CEO of our Pipeline Operation; John Harp, CEO of our Construction Materials and Construction Service Group; and Kent Wells, Kent is the CEO of our E&P business; and Doran Schwartz, you know Doran, Doran is our Chief Financial Officer. Also like to introduce Tom Knudson, Tom is in the front of the room up here, Tom is a four-year director of ours. In Tom's previous life, he was a 30-year ConocoPhillips Senior Vice President. He has number of other positions. Welcome Tom. In addition, we have Nicole Kivisto. Nicole is our Vice President, Controller, and Chief Accounting Officer with us today.

I want to draw your attention before I begin to the forward-looking remarks. We will be making 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 on factors that may cause results to differ referred to Item 1A risk factors of our most recent 10-K, our Form 10-Q and our most recent 8-K. With that behind us, I’d also like to say that following each of the presentations by the business unit Presidents, we'll have Q&A, and with the Q&A, we will make microphones available for you and that's to the benefit of all of you in this room and for those in the audience that are listening through webcast. So, again, we'll have a couple of mikes that will circle around as you need them.

I will be up at the end of the Doran's presentation to take additional questions. So, our format today will go through the presentations and the discussions of the business unit by the Presidents. We'll feel questions at the Presidents' level, and then following Doran, I will be back up here and then we'll continue with that process, Q&A.

So, let's take a quick look and many of you are familiar with our story, not all of you, but as you can see we are a diversified company that provides natural resource products and services essential to energy and infrastructure. We have a unique and balanced portfolio and our portfolio includes reserves of natural gas, oil. We've got 1.1 billion tons of aggregate reserves. We own coal-fired, natural gas-fired, wind, and generating facilities. We have distribution lines supplying that energy to our customers. Our pipeline is the most extensive natural gas transportation system in the Bakken play. We own the largest natural gas storage field in North America. If you know our company, you know we have very solid balance sheet. Our equity position is at 66% at year end and really the core of our company is based around our talented skilled employees.

Our vision statement is the guide to the way we do business at MDU Resources with integrity. We expand in areas, where we have operating expertise. Our goal is to exceed the expectations of our shareholders and our customers. All the while be in mindful of safety. This vision guides the way all of our business units do business.

Now, I mentioned earlier that the business unit Presidents will be talking about their operations. But I'd like to give you a glimpse of what you will hear from them today, some of the highlights. At the utility, Dave will show you how we've successfully grown this business over the years. We just completed our fifth record year, consecutive year of record earnings at utility.

As we look forward, the utility has the highest capital budget in their history, $900 million over the next five years, organic growth opportunities. This unit gives us a platform of stable earnings and cash flow for our corporation. And then we have the upside potential of the non-regulated businesses. Our pipeline has growth opportunities in the Midstream business. Their strategies certainly they have valuable assets related to dry gas. Dry gas right now is challenged as you know. They are looking for opportunities in the liquids-based area, and Steve will talk to you about those. Recently, we announced that we are investigating the possibility of a topping plant to serve the needs of Western North Dakota and the remainder of the Bakken.

Kent will talk to you about how is growing our E&P business. We have a very strong set of assets to exploit. Obviously, oil economics are robust today. We are adding oil assets. We announced early this week that we added to our position in the Bakken. Currently we have a 124,000 net acres in the Bakken. We substantially increased the capital into this line of business. Kent will update to you on that.

And we announced late last year that our construction business has been combined under the leadership John Harp. John is a proven leader. He has got a track record of success in the construction businesses. Restructure and the combination of these businesses will allow us to capture additional opportunities and streamline the cost structure in these businesses. We have a number of higher margin projects in the backlog. John will update to you on that.

I want to mention the Bakken and certainly that’s in the news. We believe the Bakken can be a needle mover for our company. It presents opportunities at each business unit. That reason we have assigned an Executive Vice President to coordinate our activities of our business in the Bakken, Bill Schneider many of you know Bill. Bill is taking that responsibility and he is doing a great job in that area. We think we can better leverage our capabilities in the region as we are a vertically integrated company.

As you know the utility have seen some significant growth in the Bakken. Our E&P business is exploiting their reserves in the Bakken. Our construction group has expanded organic opportunities in the Bakken in both materials and supply and our pipeline is looking again to develop more opportunities in the Bakken, again investigating this topping facility.

To give you a flavor of some of the drivers to why we are investigating a diesel topping plant, I think it will help you understand just how dramatic the growth in the Bakken is. By looking at the diesel consumption, it’s estimated that the oil patch is consuming 50,000 barrels of diesel daily. The Bakken related activities 50,000 barrels daily. Consumption has jumped over 50% in that part of the state in the last three years. Currently North Dakota has one refinery. It produces 17,000 barrels of diesel. So, you can see we import the remainder. You can see that this one of the reasons, why we are investigating growing in this area.

Now along with growth comes increased capital and you can see on the slide that our capital expenditure program over the next five years, $3.7 billion, that's up 37% from the previous five-year period. These are primarily organic growth opportunities.

Another important factor, remember is based on our forecast, we can do this. We can achieve this capital expenditure growth without having to issue equity based on our assumptions in here. We believe we can drive value to the shareholders by growing our base of accretive earnings while paying a competitive dividend. We certainly as we have in the past look for opportunities for acquisitions. If we find acquisitions, they would be incremental to this $3.7 billion. Our number one focus is creating value for the shareholder. We continue to provide our shareholders a competitive dividend and a solid long-term return. As you can see on the chart for 2011, the shareholder – total shareholder return was 9% significantly outperformed the S&P 400 and the S&P 500. Over the longer term, 10-year period, 9% compounded annually again outperforming the S&P 400, the S&P 500. And in fact if you followed our company for a longer period of time, the 20-year return, compounded annual return over 20 years, 12%.

So, finally before I turn this over to our business unit Presidents, I want to summarize a couple of highlights. The utility, we have a platform of growth. We have specific organic projects that are ongoing. This group again serves as a solid base of earnings for the corporation. The pipeline has growth opportunities associated with the midstream business surrounding the liquid area and we are adding pipeline into the Bakken. Steve will talk to you about that. At the E&P, strong group of assets, increased capital into this business forecasting significant liquids growth, and our construction group has opportunities in the Bakken region that we have talked about as well as other areas.

So, with that, I am going to turn the podium over to Dave Goodin, the Head of our Utility Group. I want to thank you again for taking time out of our schedules to join us. Following Dave, we will have Q&A following each of the business unit presentations, Q&A I'll be up here at the end of the program. Dave?

Dave Goodin – President and Chief Executive Officer, Montana-Dakota Utilities, Great Plains Natural Gas, Cascade Natural Gas & Intermountain Gas

Well, thank you, Terry. The sound check, sound in the back, a little echo, maybe just little bit down, thank you. Well, good morning everybody. It's certainly a pleasure to be here this morning and also a pleasure to kind of get reacquainted with a few of you that I recalled from seeing some of the previous either be an onsite analyst visit or our previous March hitting that we have had here in this March as well. It's been my pleasure to help, I'll say lead the utility group for the last four years and I think we've got some continued good exciting news for everybody to share today, shouldn't be all new news here that I think we kind of provide a regular, I'll say ongoing dialog with projects that we are doing at the facility, but would like to talk specifically about some projects that we are doing and kind of highlighting what I say, what Terry just talked about the solid earnings contributor that we have to the overall MDU Resources Corporation.

Just by way of background, for those of you that may be aren't just familiar with our utility operations, we are a four-brand in utilities, operating in eight states from western Minnesota to the Pacific. You can get an idea of what our service territory is here. We don't serve all of that area, but we serve parts of those various eight states somewhat electric generation, transmission distributions along on the natural gas side, a little bit of transmission, but a lot of distributions throughout those various communities that we serve. If you take a look under the Montana, Dakota and Great Plains brand, you can see we are approaching almost 400,000 customers today, 278 communities that we serve really between Minnesota and North Dakota, South Dakota, and Montana and Wyoming.

Moving further to the west, we have Intermountain Gas, 315,000 customers there had evolved in the Snake River Plain in southern Idaho, a company we acquired actually October 1, 2008. Cascade Natural Gas has 262,000 gas customers between Oregon and Washington company that we acquired back on July 2, 2007. So, we internally we really kind of frame up our utility group is four brands working as one utility over eight-phase.

So, what’s the success then? Terry did mentioned I’ll just reinforce that we actually had our fifth year of record earnings last year kind of a ascending year-over-year gain whether it be through increased rate base, through acquisitions, or through internal organic projects that have increased rate base and we start recovery of that are now certainly in our customers' rate. Last year at $67.7 million, actually about 30% of our corporate earnings come from our regulated business between our electric and gas distribution businesses.

So, what are we going to do next step so far as future growth is concerned? Terry touched on this, but in 2012 specifically, we have the largest capital expenditure budget in our corporation, our utility group history, and we have been in business for about 88 years to-date. Though we have $218 million today targeted for reinvestment into our business and I’ll go through what we have specifically identified for some of the major moving parts of that investment. Carrying it beyond 2012 looking out for the next five years we’ve got little over $900 million targeted also for organic growth within our existing eight-phase footprint.

Overall, between the depreciation and deferred income taxes, this would have a net effect of an earnings or a rate based growth of $370 million over the five-year period. The major projects that we have I’ll say identified in that are either in different stages or that are already started or it's starting a preliminary regulatory processes. On our electric generation, we have identified today about three quarters of our generation is we own and about one-fourth of our generation we actually contract with third-party for basic capacity to meet our customers' needs on those hottest days and coldest of days. We are looking at replacing some of that purchase capacity with owned generation and the project that we have identified we have started a regulatory process already for an Advanced Determination of Prudence. And we’ve got situated and sighted already chosen just on our sister city across from Bismarck, which is our headquartered town in north of Mandan, where we already have coal-fired generation and very good transmission access.

So far as continued EPA and environmental compliance we have identified in our Big Stone power plant, we are through starting an Advanced Determination of Prudence process there with our North Dakota Commission. We have identified, we’ve provided to the EPA and we have got basically a state improvement plan for South Dakota. That alone is about $125 million of investments that we will need to put into the Big Stone unit to comply with regional haze rules.

Transmission wise, we’ve got our Merricourt project, which is allowing third-party wind farms to interconnect to our eastern part of our grids. We’ve got to contract with them. They are in the process of situating their side and we are upgrading our 230 facilities to really take care of that interconnect.

Turning ahead to some of the pipe projects that we have got on the natural gas side, we continue to see need for pipeline reinforcement, and this is because of customer growth that we are seeing in various parts of our areas. I think a very interesting project is the Hanford nuclear waste site came to us through the Cascade organization. We have now situated actually our Cascade headquarters from Seattle to the Tri-Cities. And just outside of the Tri Cities of Washington, there is a nuclear reservation that the government established there basically back to World War II as part of the nuclear development program. Well, that state does not have natural gas situated on it and the U.S. government is looking at a way to really convert millions of gallons, I’ll say nuclear waste from a liquid form put it into a glass form.

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