Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

MDU Resources Group, Inc. (NYSE:MDU)

Annual Investor Analyst Seminar Conference Call

March 14, 2013, 08:30 am ET

Executives

David Goodin - President & CEO

Frank Morehouse - President & CEO, Montana-Dakota Utilities, Great Plains Natural Gas, Cascade

Natural Gas & Intermountain Gas

Jeff Thiede - President, MDU Construction Services Group

Dave Barney - President, Knife River Corporation

Steve Bietz - President & CEO, WBI Energy

Kent Wells - President & CEO, Fidelity Exploration & Production

Doran Schwartz - Vice President & CFO

Analysts

Timm Schneider - Citigroup

David Goodin

Good morning everyone. How is the mic working; is it okay? Excellent. As we take our seats please be mindful that there is food out in the hallway and for those of you that are dialing in via webcast we would like to get started on time if we could. I appreciate everybody’s making time out of your busy schedules to spend this morning with us. I think certainly I am biased in this, but I think we've got not only a broadcast of our Analyst Day here in New York, we've got all of our business unit presidents here today to dive into each of their businesses one by one and I'll introduce those in just a minute, but please along the way we want to make this as informative as possible for everybody in the room. This will be as I said webcast simultaneous with this meeting and also archived for later playback if so chosen. So please ask questions along the way and the whole idea here is to share our story with all of you, because I think we've got some pretty darn exciting things going on around our various lines of business and some synergies that we’re developing across our business lines as well.

And so I would like to introduce those that are here in attendance today and each of these will have a presentation throughout the morning. We will take a break about mid-morning or so, but there maybe a few new faces here and we've actually spread out around the room, so you get a feel to kind of get to know the management team at the individual tables that we have. So I am going to go around Frank Morehouse; Frank is our President and CEO of our Utility Group of companies that's Intermountain Gas, Cascade Gas, Great Plains Natural Gas and the Legacy Business Montana-Dakota Utilities. Four years prior, Frank had been actually operating in the General Manager, EVP of both Intermountain and Cascade. Before that he was the Montana-Dakota employee and before that he was a Great Plains employee, so we actually acquired Frank in 20 -- he is kind of boots on the ground in all of our utility businesses, so we think Frank’s certainly filling that void that I created however small that was, he has more than filled that at the Utility Group.

Jeff Thiede is President of Construction Services Group. Jeff is based out of the Northwest. The prior he has been in this position about a year actually and prior to that he had been Head of President of Oregon Electric Group. He brings an extensive background in the construction businesses. Dave Barney is President of Knife River Corporation; just recently relocated to Bismarck from Northern California. Dave brings an extensive background in construction businesses as well. They are representing our construction business today. John Harp is just not able to be here today, but we've got each of our company President’s here and they are going to dive into what they are seeing as an inflection point here with some of our construction activities and we want to give you a little preview at what they are kind of viewing at the year or so ahead.

Steve Bietz; Steve, President and CEO of our WBI Energy; so Steve heads up the Pipes Group, the interstate pipeline that's FERC regulated. Steve has been an employee of the corporation for 30 plus years. I am not going to date you Steve, but you must have started when you were about 12, right. Yeah. Over 30 years been with the utility actually with the Pipes Group and if anybody wants to know more about the topping plant, Steve’s your guy to talk to, because he is actually chartered with the task at making sure that comes on time and on budget and certainly he is going to talk about that during his session as well.

And final on our operating companies, Kent Wells, President and CEO of Fidelity. Kent’s coming up on two years now with MDU be this May. Kent’s got an extensive background with some of the majors in kind of all over North America, been international. We're just pleased that Kent joined our team about two years ago and he has got some very exciting things in the Bakken activity. Some of the acreage we have there; the Paradox. He will give you a preview a little bit there and some things that we're doing also down in South Texas and some of the other things that he is looking at. And clearly Kent has formed a team, a management team that we think is really elevated; the expertise at Fidelity with in-house expertise and he will talk about what we're doing there specifically in that regard.

I want to take a look to make sure we all understand we're going to have some forward-looking statements here today and within the context of the Section 21E, we want to make sure that we're making everybody aware of that.

I think I recognized a number of faces in the room, but probably not everybody here. We run a diversified natural resource company and when you think about what we do, we're in not the nice to have businesses; we're kind of in those need to have things so far as building a strong America and you can see our footprint is kind of headquartered more concentrated up in the Northern Midwest states, but clearly we've got some span and reach across most of the U.S.; a little less when you go east of the Mississippi and certainly a little more concentrated when you go west of the Mississippi, but you can see that peak construction time, we don’t have the number up here, we actually employ it last summer at our peak of our construction time, we had about 10,600 employees across all of our business lines that’s between construction services, construction materials, the E&P is a smaller work for us, but very concentrated from a capital needs, Utility Group tends to have a pretty stable work for us, peak shape with summer construction help and in the end Steve’s group on to it as well, over 10,600 employees at the peak of our construction season. End of the year, we are about 7500 employees and so we do vary up and down depending on constructions cycles that we have.

Here is our vision to our company and it's the vision we have had for a number of years and it kind of underpins I would say how we see our corporation and what's going on into the future; what is it, we are going to do business with integrity, we feel we need to create superior shareholder value by expanding upon our expertise; we are going to touch on this today, specifically, what are we doing to help expand our expertise across our business lines; Terry started it, it's one of my initiatives to kind of accelerate, how can we better leverage the strengths and talents of our organizations, so that we are not specific silo-ed organizations within an overall corporation, but how do we kind of cross these organizations where we can kind of leverage our strengths and our talents along with helping our customers get more services that we can provide as a corporation and I know our business company President’s will touch on it; be that supplier of choice in all of our markets where being as safe and great place to work.

So what are the primary focuses? I could have started this by introducing who is Dave; but I know several of you in the room, may be not everybody, maybe I should have started with that, I have been new to this job since January 4th, but I am not new to the corporation. In fact I have 30 years in this coming May, but one question I have been asked more than others even from those that have known as I headed up our Utility Group for the previous five years and I spent really all of my time in our Utility Group of companies, so Dave is your focus, what are you focused on and what is going to be if anything different than when Terry was here?

These would be focal points that I will share with all of you; we are going to continue to conduct our business safely and with that integrity. We want every employee to go home at the end of the work day safe to their loved ones and their family; that 10,600 employees we want to make sure that they return home safe each and every work day. We want to do it with integrity; I think that’s always been with MDU Resources; that’s something we are going to continue with. Number two, I already touched on a little bit, we want to better leverage our strengths and our talents across our organization and we are going to give you some specific examples today on how we are starting to do a little better job of that, but we need to accelerate that process.

Execute our business plan; we are going to talk about some future projects that we have that are in the near term and the mid term and these aren’t just projects that we hope to complete, that we wish we had a good process in place that we think we might have something. These are tangible specific projects like Frank developing generation of the utility, like us doing environmental upgrades at the utility. Like Steve Bietz executing on the joint venture we had last year with the midstream gas processing facility with weighting; like Steve working in the topping facility. When we take a look across our business lines we have got tangible specific projects right in front of us.

Yeah we want to focus on continuous improvement. I touched a little bit on safety here and certainly the goal I said there is more than just kind of a take line, we want to make sure employees do return home safely at the end of the workday, our integrity, I already touched on that a little bit you know it’s a longstanding tradition in our corporation in fact next year in March we are going to be in the business for 90 years; 1924 is when our corporation got started. Coincidentally, right in the middle of what you’d call the Bakken today in Western North Dakota just west of [Watford City] a few miles where the first assets that R.M. Heskett purchased back in 1924 starting a little electric utility and look how we've changed over the last 89 years, 90 to be next year.

I talked a little bit about leveraging our expertise; I don't want to steal too much of the thunder of those that are going to be following me, but I do want to point out that the refinery and Steve’s going to have plenty of talking points here; I think it’s a tremendous example of how we can leverage our strengths across our business lines by putting a topping plant in Western North Dakota. We are going to have an internal hedge on this crude oil that Kent and his group are producing so if the Bakken differential widens that's not necessarily good for Kent’s business, guess what, that's an internal hedge on the refining business that Steve will have. But we are going to take some of Kent’s crude input to that plant eventually.

Frank and his group are going to supply electricity to this plant at fully tariff rates. Steve and Group are going to have natural gas provided by 5000 AMS a day for the plant itself. We've got Dave Barney and his group already involved. They've got some dozers headed to the site as we speak. We can't start ground breaking till March 26th at about 11 o'clock if you want to tune in that's when we are ground breaking, turning shovels on this project, so if you are going to wonder what the financials look like we want to get it constructed first, but we think they look pretty positive; I'll just leave it at that. And then Jeff Thiede and his group have Construction Services Group and they do industrial wiring. So we know we will have some involvement there; so how neat is that? We are going to bear all business lines on the specific project right in kind of our backyard.

And execution, I am kind of all about execution and getting results. We want to think about that rate base growth that Frank’s going to talk about. He is going to talk about $1 billion of investment over the next five years at our regulated legacy business; that business if I went back to 2006 comprised 7% of our corporate earnings, 7% and we are going to continue to grow that thing so we are considerably different than 7% today.

I touched on the midstream presence that Steve’s going to talk about and certainly Kent’s going to give you some oil production forecast. We provided that in our earnings release at the end of the year on February 4th; last year we said, we did grow our oil production in 2012 versus 2011 by 36%. Focus with Kent and his group are looking at oil, if we get some liquids within gas that's kind of a bonus. We are projecting oil growth in ’13 over ’12 of 25% to 30% again. So we've gone from 2011 an actual 36% increase in oil, forecasting 2013, 25% to 30% increase again and Kent’s going to talk about specifically what we are doing there.

And between Jeff and Dave they are going to talk about what we see as a little inflection point where our businesses and our construction group combined in 2007 earned a $120 million. Economy was much different than it is today. Since then actually 2010-2011 as a combined group they earned about $47 million to $48 million; that's kind of the bottom of the trough. Last year as a combined group they earned over $70 million. We're starting to see that move in a positive direction so far as the economy is concerned and what has happened since 2007 to now is between their groups they pulled out anywhere from 25% to 40% of their SG&A cost out of their organization. So a little bit upward movement of revenue can really help so far as translating in better margins and really better translation at the bottom end of that income statement as well; certainly, execution are key to earnings growth.

Continues improvement, we touched on this a little bit; you know, areas that we see that we will focus on improvement, Dave Barney and his group are laser locked on how do we improve returns in the construction materials business. We know we have the amount of money invested there; our returns there. We made as much as $86 million. Last year, we were in the mid-20s. We still are profitable. Last year, well two years ago, last year we were actually about $32 million, again starting to come off that a little bit. We know we got a lot of room there to get back to those times that we had with the lot less SG&A cost with that as well.

Kent will talk about what we're doing to develop this sustainable inventory of E&P drilling well beyond this year and next year and what are we looking at so far as how do we layer in a balance between exploration and development. This year a lot of our capital dollars in Kent’s business are going to be focused specifically on development areas with a little bit of capital allocated for exploration as well and certainly, I talked about those expansion of margins through cost efficiencies particularly at the construction businesses.

When we think about kind of levering our expertise, and I am going to leave this up to the business units to talk about in general terms, we won’t remain customers, but we might talk about regions of the company for instance where may be one of our industrial contracting from electrical perspective, we are working with a major customer and we are on the site and we discover they need a need for aggregates and guess what, we can provide that product too. So we have kind of a natural connection point with the customer, it's up to us to demonstrate that, execute that and certainly deliver value to the customer, but we have examples like that, that are specific that we can’t get into the details, but I can tell you that it really helps to already have some work with it, customer we can add on some other services.

Certainly, we have a strong balance sheet; we are very committed to keeping our credit ratings the way they are, we think that affords us an opportunity from an access to capital perspective along with that some financing options and then we have got some internal hedges. With low natural gas prices certainly that’s not good for Kent’s business. But from Frank’s business on the retail side, he has got 865,000 natural gas customers and they want to use that natural gas product and particularly the industrial customers are coming to us and say, can you expand that gas main several miles over there and pick up some whether it's grain drying, he has got an interesting project they will touch on in Central Washington to the Hanford nuclear site that would increase Cascade’s rate base on one project by 15% and it's offset to other fossil fuels i.e., diesel burning out there and certainly we have got some substantial growth projects that we will talk about.

Here is the cut at the year-to-date returns one-year, 10-year, and 20-year; you can take different cuts things look a little different, but I think overtime, we have certainly provided a good return for our investors. We do know it’s more or like three-year returns, we have been subpar; we recognize that; we know we got things that we can change that with because we have got specific business plans in place.

So here is really the summary I would say to think about, as you think about through the rest of presentations, again I don't want to steal anymore fun than that I already have from our business unit presidents, but think about their messages too and they are going to line up with safety, integrity, what do we do across our business lines, how can we do that better, I think its been largely been untapped resource, a little bit spend there, we are going to talk about what we have done to a certain extent, certainly execution then we continually are going to look at improving that.

And so with that we are going to reserve time at the end of this, if we have it, for Q&A for everybody. I would invite questions of yourselves with each of the business unit leads as you go through it, stop there, kind of clarifying question, please this is to be interactive and so that is my invitation to all of you to don't hesitate, I think I have been here five years previous, so the exposure to this group is going to be too much hesitation, but I just want to make sure that the invitation is open.

Okay, very good, Frank.

Frank Morehouse

Thanks, Dave. Well, good morning everyone, I am definitely one of the new bees you are gong to have three of us here today that are brand new in presenting, but I am excited to be here; welcomed and I am happy to see the good turn out like this. It’s kind of a fun time to be in the utility business from my perspective, natural gas prices are at kind of an all time low, business is good; we have some great growth kind of a red hot economy out here in North Dakota which you wouldn’t have said five years ago, you wouldn’t expect that to happen. Good economy across the other eight states that we operate in. So, we are seeing I think some pretty decent times in the utility business.

Dave mentioned, we have grown substantially over the last few years. We now cover eight states, have 990,000 plus customers. I think about mid-year of this year probably June or July we are going to hit that 1 million customer mark. That's a pretty big event for us. We are pretty excited about that, especially when you go back 90 years ago and you think about where we got started and where we've come to today.

So I'm excited about that. You can see the stats up here. Again, we operate in eight states. We saw a 9% increase in our customer account for electric customers, 7% in natural gas and that's the growth in the Bakken area. So Williston, Dickinson and Minot that area in North Dakota as I said it’s kind of red hot.

We are hitting 130 to 2,000 electric customers now, 3,100 miles of transmission, 4,700 miles of distribution. We've got 544 megawatts of our own generation, most of that is coal. There are some challenges right now with regulations coming out of the EPA but those challenges also equate to good investment for us.

We are going to make some big investments in the generation side and I'll talk about those. 860,000 natural gas customers right now, we've got some big investments going on and betterment of our systems there and every bit of that just means organic growth and rate base increase for the utility.

Our strategy is to grow earnings by 50% in the next five years. And I'm pretty confident that we are going to get that done just simply because of these projects and I'll go into more detail on those here in a bit. We are well positioned for that. We've got organic growth and to me, organic growth is much better than say mergers and acquisitions because we are not paying a premium for those. We get to earn on all the investments that we make when it’s organic.

We need to manage those returns though. We've got challenges when we go before the commissions out there but we've got great working relationships with all of our regulatory bodies across all eight states. They are intuned with elected officials. We stay close to our commissions. We talk to them routinely, have kind of updates and that's important for us because of the regulated utility, we have to have positive relationships with those regulators.

We will continue to pursue mergers and acquisitions but right now we've seen some pretty high premiums paid for utilities that are coming up for sale and things like that. We are still definitely always in the market; always want to look for growth in that avenue but we also feel that our organic growth is as positive as it can be over the next five years.

As Dave mentioned earlier, we've got a $1 billion plan for expansion of utilities and purely organically that doesn't include the M&A. And again, as I mentioned earlier, I really have a high level of confidence that we are going to execute this plan well. We know these projects need to be done. We've got the five-year plan laid out. We know that we've got to be before the regulators and get rate recovery from that but we are pretty confident that all of that's going to occur.

As you can see, we will be investing nearly a $1 billion. You can see the difference between investment and depreciation is pretty substantial. Again, a lot of that is on the electric side, that $1 billion over the next five years about a third of it is purely on electric. The rest of it is system betterment, system growth on the gas side. We got a lot of work going on.

Rate base growth leads to earnings. As you can see, we’ve tripled our rate base in 2006 and that was mostly through M&A. Some organic expansion, we got a projected 6% compounded annual growth rate over that five-year period for any utility across the US. That’s a pretty impressive growth rate.

We're excited about it and again if you went back five years ago, you wouldn't have looked at North Dakota, South Dakota, Montana, the Pacific Northwest and (inaudible) good growth but today we're seeing that and a lot of that has to do with what's going on up there at the Bakken.

Our growth rate, the rate base will grow by $400 million with it's investment over that period of time and that kind of perspective, that rate base growth is about equal to what we grew our rate base and our earnings capability. When we acquire Cascade and Intermountain combine and so organically now, we're going to grow the utility in five years at some amount. To me, that’s pretty exciting story.

Some of that organic growth, natural gas turbine addition, we're going to put 88 megawatt gas fired simple cycle, turbine in right at our Heskett plant which is in Mandan, North Dakota. We got a coal fired facility there right now. The property we own will put a footprint there. We're going to build a gas pipeline down to it $86 million for 88 megawatt unit. That’s a big investment. We got advanced determination and prudency on that.

So when we went to the regulators they said, yes that looks like a smart thing, to us that gives us a high level of confidence that when we go in, and we do file a rate case for recovery on that investment that we will get the recoveries that we desire.

Environmental upgrades, we are partner in the Big Stone plant there, big coal fired facility there in South Dakota. We have got some air quality control standards that we have to install. Our portion of that is about a $125 million; BART best available retrofit technology is the term that we use for that.

But again that's about $490 million is the investment in that plant for air quality control standards and our portion is $125 million again we filed for advance determination of prudency receive that. So again a high level of confidence that we will receive approval with our regulators for return on that particular investment.

Again, we expect completion in 2015. The project is in permitting and engineering and all of that stuff right now. It's going along really well. We have got our Big Stone to Allendale; this is a big transmission project. Our portion $150 million [global] project $300 million to 340 million, it's a 50-50 partnership between us and (inaudible) Power. This is part of the MISO which is the Midwest independent system operator, the transmission grid if you will. It's kind of a neat project. We will invest $150 million; we will receive FERC approval and return on that investment of 10% or so.

The neat part is only about 1% of that goes to our customers, the rest of it is kind of I will call it socialize rate making across the grid. And so these are some big projects they call them multi-value projects MVPs across the MISO grid. We are excited to see this one come.

Dave mentioned the Hanford project; this alone is increasing in price all the time or investment may be I should say, we originally bought it to be about $30 million to $35 million. We think it’s more in the $45 million range now, but it’s a gas pipeline out to the Hanford Nuclear Site. They have some hazardous nuclear liquid waste out there; they called it a vitrification plant. They literally convert the liquid nuclear waste to glass rods if you will. And originally they had planned to use diesel fuel for the firing out there. We are going to build a 30 mile pipeline supply natural gas for that facility. 15% increased in rate base we are the Cascade Company alone. So, we are very excited about that project.

Bakken, you know, you’ll hear the Bakken a number of times today, I am sure but we have invested $75 million in 2012 in our rate base expansion of both gas and electric whether its substations, transmission lines, gas pipelines, new gas looping, so that we can provide services those expanding communities up there, its just a tremendous population growth. We got plan $70 million of investment here in 2013 up in the area.

Those are driving some rate cases; we are going to have also file soon and quick recovery here in North Dakota for those. Again, it’s been phenomenal growth and I look back five years ago and native in North Dakota (inaudible) never expected to say, we have got a 9% growth rate of electric customers in North Dakota, a 7% again population going to increase, 52% in some of those communities up there little tiny towns you know.

Doran is from Watford City and Watford City was a little community for years and years and years and it’s doubled in population here in just the last five years. It’s phenomenal.

In summary, we do plan to invest a $1 billion in the next five years. We expect that rate base to grow 6% compounded annual growth, $86 million in that gas fired turbine there at Heskett, $325 million at Big Stone, $70 million in the infrastructure alone at the Bakken.

We've got potential projects in industrial and Ag. We just signed a contract out there in Cascade for a new mint farm. Literally, they harvest mint and they ferment it and you know the mint that goes in the peppermint gum and mint extract and things like great new industrial load that's coming on. Many of those used to be propane fired, some of them were oil fired but we are getting those now as natural gas with these good whole stable prices for natural gas.

We do have to manage these regulated returns. We are going to be in front of those commissions out there. Probably over the next three or four years, we will be in front of every one of them in every one of our states. But again, I think the positive relationships that we have with those are going to lead to good results. Right now, we have two rate cases filed, one in Montana, one in South Dakota, $5 million there of potential earnings again going along well.

In fact it’s almost strange we haven't had a single information request from the South Dakota Commission so far and that usually doesn't happen, but again it leads us to believe we got some pretty positive response to what we filed down there.

We will continue to look for potential mergers and acquisitions. And like I said, there are some big premiums we need to pay out there right now and we all know we are very pretty conservative. If we can't the numbers work, we are not going to do one of those but if we find one that works, we will continue to grow that way.

And again, I look at the utility group, we are kind of steady Eddie if you, it’s will reliable earnings where this corporation started with the utility. We grew into something much larger but it’s a great place to be. So questions that I can answer for anyone?

Question-and-Answer Session

Unidentified Analyst

(Question Inaudible)

Frank Morehouse

Sure, there in Montana, we filed for a $3.5 million increase on our rate base there, our returns. We are in the middle of that process. I expect probably a decision in six to nine months. Again, that's just an estimate. We filed for $1.5 million in South Dakota. That's a rather unique one. In South Dakota, we had two different jurisdictions if you will.

We had East River which had one set of rates and we have the Black Hills that had another set and in that particular case we've rolled both together and we ask that we have the same rates across both areas, a slight decrease for the East River which would be Mobridge and Peer and a slight increase where the folks were in the Black Hills and again we expected determination on that probably in the next six months.

Unidentified Analyst

(Question Inaudible)

Frank Morehouse

10.5%. We ask for 10.5 in both, yes.

Unidentified Analyst

You have a very strong economy in the area, relative to the rest of the country and I am just curious. If you are looking for acquisitions, mergers or acquisitions, what kind of returns are you looking at because obviously you know, the economy is growing and you might be able to get a better return in other places in the country. So I am just wondering what your thought process are there?

Frank Morehouse

You know, again, there are several ways to look at that. When you look at a return on invested capital, of course you absolutely have to have a return that beats your cost of capital and that’s the biggest measure we have. Regardless of what the regulated returns are, you know, if they are making 10, 9, 10.5, 11, that’s one side of it.

When you make that investment and you pay a premium, you better get your cost of capital back out of that plus and you know, to answer specifically, that’s a little tough to do. We go through quite a process and when we get all done at the end of the day, we take before our board of directors and if we know our cost of capital and I am going to use some fictitious numbers here, but if our cost of capital is 5% and we can’t make 5 plus and show that to grow over the next four or five years, we're probably not going to do that deal and then right now those are tough to come by.

It's really tough to make the numbers work right now. We are seeing one good ratio of valuing a utility would be an equation of EBITDA and you look back at few years ago you might have done all the six, seven, eight times EBITDA. Today, we are seeing some of these transactions happen in 10 and 12 times EBITDA.

We can't make the number work on 10 or 12 times EBITDA. So we are going to continue to look and we are going to continue to be aggressive along those lines but we are also going to be pretty darn conservative about how we acquire another company.

Unidentified Analyst

Yeah. As you are looking for acquisitions, would they take place in your current service territories or would you do any step out acquisitions and if so?

Frank Morehouse

Great question. We have always felt that our strategy was best to do something close. You rather buy the neighbour’s farm and buy the farm across the county from, and we still have that strategy in mind. Not saying that we wouldn’t work elsewhere, but it just makes more sense to us when you can find some synergies and operating, some facility to reduce cost across the overhead things like that. It makes a lot more business sense to keep it close in the geographical area.

Unidentified Analyst

(Question Inaudible)

Frank Morehouse

Right now, you are correct. We do have two different wind farms if you will make up about 10% of our energy delivery right now to our system. Right now, we have met all of our renewable portfolio standards requirements in the eight states that we operate in. Montana is the only one who really within our (inaudible) out there. So we don't have anything on the immediate horizon for additional expansion into wind or other alternative energy but we continue to look at those opportunities.

Unidentified Analyst

You have experience as you have said growth in terms of your customer phase say over the last three or four years and you have tremendous opportunities, then going through the numbers over the past three to four years, it really hasn't translated into net income its earnings. I wonder if you can talk about that, I mean we (inaudible) a few years ago or you know why hasn’t the growth on the top line or at least in the customer base translated into increased earnings?

Frank Morehouse

Great question and you are correct. We have very, very good year in 2011 as utility mostly weather driven. We had on the gas side very cold weather in the winter months; we have very warm weather in the summer months. 2012 weather didn't cooperate with us as well. We had about $60 million.

Unidentified Analyst

(Question Inaudible)

Frank Morehouse

Sure, kind of a lead lag proposition with regulations that's why we filed the rate case in Montana. We filed one in South Dakota. We have one on paper right now for North Dakota. We planned later this year early next year Washington, the following year Idaho.

So we definitely have some lags right now with us to grow in investments but that's pretty typical of the way utility works. Most of our jurisdictions already look back instead of a look forward test here and that what's obvious right now. We are in that process as we go look forward. Sure.

Unidentified Analyst

(Question Inaudible)

Frank Morehouse

On the pipeline side we have staffed up if you will, we put new positions within the utility called pipeline safety specialists. We are doing self audits on our system. They have a couple of different terms out there transmission, integrity management program. Distribution and integrity management program. We have evaluated our entire systems. We know where the areas are. I talk about that $1 billion investment, most of that again a third of it or so is electric, two-thirds is on the gas side, and most of that is management of our system, system betterments, looping the systems, replacing the pipeline, things of that nature.

We have one pipeline project here in 2013 on Idaho part of our evaluation of our systems. We identified an area that we had some pipeline wells. So we are what we should expect for integrity; and so we are going to replace that entire pipeline and that's $10.8 million project right there. So, definitely on our scope of things to get done in the next [filing].

Unidentified Analyst

Hi, to continue with some of the questions on translating rate based growth to earnings. First I was wondering if you could just tell us what the breakdown is on this chart between electric and gas rate base at year end 2012. But then more important on the topic of regulatory lag, you've got all these projects coming online, a lot of capital being spent on multi-year projects.

If you factor in regulatory lag particularly I think you made a statement that you are going to commissions afterwards. What kind of lag are we looking at in terms of - are you getting any kind of return on the construction deployment or is it all going to be after its built, you got to go back and I was hoping how many years are we talking about before you start seeing the capital deployed reflect in earnings on the new project.

Frank Morehouse

Great question. We actually do on most of our major projects have construction work in progress recovery. Again that comes along with the advanced determination of prudence. For 2013 we've got $67 million based on normal weather planned for our 2013 year. By 2017 we plan to have that growth at $87 million. So it’s a considerable growth in earnings. Regulatory lag I'm going to say is in the range of 9 to 15 months, and it depends on which jurisdiction you are in and whether they will have a historic test year or a forecasted test year. But again 9 to 15 months I think is a pretty accurate from the time we deployed the capital until we make a return.

There are some of our jurisdictions that we are still earning over what would normally be expected, and so as we make these investments its bringing back return on a percentage basis down and we are pretty confident as we look forward as to when we need to make those rate cases filing to assure our acceptable returns come to us as we need to.

Right now electric versus gas is about 40% electric, 60% gas. As we get to 2017 it turns around, probably 60% electric and 40% gas, and that's based on some of these major projects that I’ve laid out here?

Unidentified Analyst

What's the effect on customer rates percentage wise, out of the two cases that are now in process or what do you see happening as you look at business coming down to. We're talking about 2% to 3% or 8% to 10%.

Frank Morehouse

Carl you hit it right on the head, about 3% increase in rate. We also see above that when we file for the electric side with those investments in the future. We're of the mine that we’d rather see a smaller increase more frequent than people with an 8% to 10% increase every four or five years.

Unidentified Analyst

We hear all these stories about how difficult it is to get labor thanks to all the good fortune of the Bakken and also how expensive it is. Maybe this is true for all of (inaudible) business leaders. Are you having a problem and are you able to staff up and is it costing a lot more can you tell us about that?

Frank Morehouse

You know, it is quite a challenge. One of the things I would say, perhaps unique to the utility and what the other guys talk about it. We look for people to come to work for the utility that are looking for a career, not a job that last two or three years and they make some big buck and go home. And so it's definitely a challenge. We have done things like set up our trailer park, if you will we put mobile homes in our own property and we provide that housing to our employees up there at a reasonable rate.

You moved into [Willis] and North Dakota and you wanted to rent a mobile home, you might be looking at a couple of thousand dollars a month in rent. These guys are not going to make that kind of money up there, and so we will make that investment ourselves we will provide that mobile home to all they can come out there and live, bring their families with them things like that. And we will provide that amount what we think is reasonable rate and $700 a month versus a couple of thousand.

We have got great benefits, we have kind of great interest, we offer a whole package, because truly what we are looking for is career oriented employees. There has been some big turnover up there. We have not lost our employees to the big dollars out in the oil field, if we lose employees that’s because they leave where they are living, they want to go back to a smaller real community or move away from the hectic paces that they are seeing up there.

All-in-all I think we are doing pretty well. It took us a while to take there and we have to be creative along the way, but again we want career oriented employees and I think we have been pretty successful doing at doing that.

Unidentified Analyst

I think you have talked about the compound growth of rate base being 6 and then the compounded earnings growth is 50%. So what's just the delta between those? How is earnings growing materially faster than rate base, what's the key reconciling item?

Frank Morehouse

Well again, simply said when you put a 6% compound of annual growth rate on your rate base over the next five years that’s about $400 million of rate base that we can earn on and in simple terms if you take 400 half of that would be equity 200 million; at 10% return 20 million. So you go from 67 million to 87 million in earnings. That answers what you asked.

Unidentified Analyst

(Question Inaudible)

Frank Morehouse

Yeah, the 50% definitely is our strategy, and we’ve got a little bit more to go there then what I just laid out at $400 million and 50% equity and 10% return on that. We definitely have to find some more opportunities out there. We’ve got some potential opportunities, the Intermountain Gas Company has an LNG plants back in the 70s that was built, liquefies, takes natural gas chills it to minus 230 degrees turns into the liquid stored in the tank. We are finding some potential marketing opportunities for that. So we definitely have to execute on some new ideas and some new places to continue that growth.

Unidentified Analyst

(Inaudible) if you look at the earnings and you look at the equity, utilities it seems like the rate of return last year is somewhere between 7.5% and 8%, which is pretty good but a lot less than the 9% and 10% that you have been mentioning. I wonder that when you do the rate, when the rates are made, is it an absolute rate of return or is it indexed to something like treasuries which if they really will tend to depress the rates.

Frank Morehouse

That gets into some real weed as far as the

Unidentified Analyst

I just wanted a big picture.

Frank Morehouse

Big picture we look at it and say we think our shareholders ought to earn and again our target is about 10%. The regulators will definitely look at things like that and say oh, your cost of capital is low right now, it’s one of the best times in modern history to be borrowing money and so that return ought to be 7% or 8% very much a negotiated settlement occurs but again that's our desire. We think 10% is where we ought to be.

With that I'll turn it over to Jeff.

Frank Morehouse

Maybe just to follow on question to the utility earnings over the last several years; last year due to weather primarily, we had an off year in our utility. Set that aside we had five years of successive record earnings over the previous five years to that and so clearly last year was driven largely by weather. We went from $67 million in ’11 to $60 million in ’12 so we went backwards but if you took ’11 and went back for five years we had five successive record years within the utility group.

Jeff Thiede

Good morning everybody. My name is Jeff Thiede, I am with MDU Construction Services Group and President and I appreciate your time and attention this morning. I also appreciate the efforts of our people in the field, our field professionals, our support staff and our really tremendous great Presidents and Executive Vice Presidents, leadership at our companies. It’s because of their success, it’s because of what they've done is why I'm here to tell you a good story, this morning about MDU CSG.

MDU CSG is broken down into four areas, our inside businesses, our outside businesses, our industrial and our equipment manufacturing and supply. We have 17 companies and we are located in about 30 cities across United States. We are not everywhere across the United States, but I think we are strategically positioned. And when we have an opportunity to go to another state, if our expertise and our capacity and our customers need match, we will go and travel. We've done that, we've gone to Idaho, we've had one of our industrial companies travel up to Montana. We are in the Bakken. We have an office there.

So we are not everywhere, but I think where we go we are very deliberate and we try to be disciplined on executing as Dave mentioned. We think we have four key differentiating factors that differentiate us from our competition, the first is value, most of our work is procured on a price basis. Price is always important, but there's a lot of examples and a lot of situations where we get selected and evaluated based on price and non-price characteristics of our company. They want to buy our team. A lot of our customers see that our field people are key to being able to execute a job in addition to our support staff.

Our financial strength being part of MDU is it’s noticed by our customers. It’s a strength for operating companies. Being part of MDU is it's noticed by our customers. It's a strength of our operating companies, when they are out trying to get work. It's also important to attract to retaining our people, because MDU is a positive. It's a great attribute for our company.

Our resources, not just physical assets but it's also our ideas. We collectively share ideas across our company lines and if it's a pre-fabrication idea in one area of one office and that share to another office, it helps us to be more competitive and safer. In our experience, we got great people at MDU CSG, many of who come out of the field and come in to management leadership positions.

We have four critical success factors. There is a lot of stuff in our industry, there are specifications, there is local codes, there is national codes. So if everything is important, then nothing is important. So we try to break what's most important down to four key areas. We call those a critical success factor. The first one is safety. The second one is financial success. The third one is employee satisfaction and the fourth one is customer satisfaction.

When a customer see this, why didn’t we come before and we certainly recognize our customers, nothing happens unless we get an order from our customers. But we got to be say, 80% of our employees are working in an environments, operating factories, refineries, up and down ladders, run scissor lifts, we're in trenches, we are climbing poles. 80% of our people are craft. We got to be able to retain and attract top people. If we're hurting, we don’t have a good safety record, we're not going to be able to have the best in the industry and I think we got some exceptional people working in the field.

Of course, we always got a make a return for our shareholders and we do this through operational excellence, executing our project is key, planning our work is instrumental and making sure that we are not only safe but we are also productive in the field. You take a look at our safety and our financial, those two go hand in hand, look across our divisions in our companies and there is a relationship there.

When you are planning for safety, you are also planning for productivity and you can have a better chance of being successful on that job. Our employees are key, we’ve got our 3500 employees at MDU CSG and every one of them has to be deliberate, disciplined to carry out their test because when they have their best days and they are the best version of themselves then MDU CSG is the best version of itself.

And of course our customers, we’ve got to preserve and protect our best customers but also if we execute and do the first three things right and our customers are not only going to respect us, but I believe that they are also going to like us and want us continue to do work with them.

We started 2013 with a strategic plan and that strategic plan is broken into the four critical success factors. On our safety we have the lagging indicators, we are moving more towards leading indicators, trying to see and forecast where our highest risks are when it comes to safety. We are looking that for next nugget to be able to take us to a new level.

Last year we had our best year along the recordable rate, we had a lowest recordable rates CSG in recent history. And of course, we are not going to rest on our laurels there and we are not going to be satisfied with the status quo. We are looking at human performance impact which we’ve launched this year to our operating companies and it sounds like it’s a soft side of our business, but there is a lot that goes to the soft side of our business when somebody is making a decision on whether or not to go back after their truck, to get that eight foot ladder instead of using a six foot ladder properly.

On the financial side, we have all the statistics and the revenue and the margins and we do look at our forecast and see not only where we have been, but where we going on our margins. Our top performance; we’ve got our top performers and of course we’ve got our middle, we’ve got the ones that are having some difficult times. And I think because we are so diversified which you will see more examples up here that’s a strength for us.

On the top performer side, we are taking to look at our equipment company. Not only are we looking at more than doubling the size of the manufacturing facility, we are also looking at expanding into another geographical region that’s going to help us with our earnings. And then the ones that are struggling, we take the initiative and not just let it happen but also come up with corrective action items and take a look at how we need to adjust our business going forward.

As far as acquisitions I was looking for good deals to grow the business. Sometimes it’s a premium like Frank mentioned on that. We will also have some partnering opportunity, and one of our Midwest inside businesses partnered with a company that’s not owned by MDU CSG on a project that's in northern California. That’s going to be a good project for us, we have very risk and we have some decent reward. That partnering is outside of our company with another contractor. In addition, we are looking at North Dakota with a company to partner on a particular project, and so whether it’s an acquisition or whether partnership opportunity this will help grow our business.

We have to look towards the future, of course a lot of it is about this quarter and this year, but we are succession planning, we are providing that bench and that leadership for the years beyond, that's going to get our people energized. People want to come to work for MDU CSG because they know they've got an opportunity to make a difference.

And of course on our customers, we look at where we have produced the most revenue, also the best margin and we also go back and look at feedback, we don't just go and get our surveys and our feedback from our customers where we've done exceptionally well. We want good candidate feedback to help us get better and be able to adjust.

Let's take a look at our earnings momentum. This is a good looking chart here especially on the lines and the growth that we've seen in our earnings. Last year we had a very, very strong year. It was due to many factors. Most notably, our equipment and our equipment company did very well. They had a record year in earnings and we also had an inside business that had a very strong year in the Pacific Northwest. There are a couple of other companies like our underground and utility company that had a record year as well. And so with that the stars align so to speak on 2012 for us. One of our Midwest companies traveled to this area, to respond take the call on the Sandy Storm work. That had not only a good impact to our business; we were able to help restore power and electric services to the customers and the users to get people back in their home sooner.

Our margin and revenue expansion if you take a look at our earnings, we grew our earnings by 78% while our revenue grew by 10%. So that's good, but we also have to make sure that we are keeping our cost structure which is less than it was when we peaked in 2008. So our people are doing more with less. We always have to challenge ourselves to be able to plan our work, to be able to be productive and to try to find ways to be more efficient. We've looked at a couple of and saw back of house consolidation opportunities. We've looked at always growing, but also seeing how we could keep our cost structure down.

Our backlog is about 5.5% higher going into 2013 and was going into 2012. We've got a significant transmission project in this backlog. We also see the Southern Nevada, Las Vegas market picking up there is more opportunities there which is good. We also have as I mentioned there is projects that are not just price based, but price and non-price based. We have a nice project in the Pacific Northwest that we are about 20% complete on, so our backlog certainly has increased. If you take a look at where our backlog has increased in those four business lines, every one of them has better backlog going into 2013 that they did going into 2012 except the inside businesses. The inside businesses backlog is a little bit less going into 2013, but like I mentioned, Las Vegas looks to be improving and there is a couple of other pending opportunities and projects that we have I think are going to help the backlog for the inside businesses.

You take a look at our ability to adapt to changing markets, look at the inside businesses here; it wasn’t always this way. The inside businesses have grown and we've been able to adapt, take a look at our return on invested capital; that's a very important number. That is not indicated here. Why I bring that up is because if you take the top four MDU CSG return on invested capital companies, we’ve got one from the equipment business, one from the industrial business, one from the outside and one from the inside. That’s a good example of diversification.

If we take a look at the organic growth opportunities and expanding our footprint in the markets that we're currently in and becoming more efficient in the projects that are in our geographical areas of strength, that’s always our first choice, but again we do look for acquisition and partnering opportunities if it's set up to meet our resources and expertise. We see that Pacific Northwest market is doing very well. You take a look at the hospitality and gaming area in Las Vegas and how we've been able to draw that expertise out into Ohio, we have a great example of project that we finished last year in Cleveland and that we had combined forces from two of our operating companies work on that project and that was a successful project; that’s the idea of moving and transferring our resources. We don’t do a lot of that, but when the expertise is available and affordable, we move that to those areas and we did that in Ohio.

Our people make a difference for us; we have a lot of deeply routed relationships, not just from the field level, but also project managers, division managers and also our operating presidents. This is really a key on getting on a select bid risk in being selected for a project. Our equipment sales and supply as I mentioned earlier, we are looking at geographically expanding our manufacturing company. We have also taken a look at our market share from that group, and that group has done tremendously well. And you look at our supply company in Las Vegas, we had headquartered that company, but in the last couple of years, we have expanded with three other offices; one in New Mexico, one in Texas and one in Williston. And those companies are showing better margins as we see Las Vegas picking up, we think we have got good opportunity.

We are in the Bakken and there is a question on labor in the Bakken and it's a tough place to be able to get people to be and do work in the Bakken, so having the sister company or the resources to be able to have the availability to park a trailer, to be able to attract our people, to be able to do the work that we need to do in the Bakken is a positive. We finished a sub-station and the Bakken in Williston, a very good job for us; it’s actually grown our work on our dock work, work with utilities, so working for our sister companies, but also outside.

Our refinery turnaround business has done tremendously well; it's one of our highest return on invested capital companies and what we are doing instead of just the turnarounds is we expanded into capital projects and what this will do is help us level out the peaks and valleys of that labor force which could go from 50 to 300 plus in a matter of two weeks, so by expanding and doing more capital projects also looking at some of these other areas and additional customers we see a good opportunity for a turnaround mechanical company.

A lot of indicators are out there and I read those, and I pay attention to them, we really take a look at the local companies and the operating companies and listen to our presidents and the people that are going out for projects. Its good news that in February construction industry added 48,000 jobs, its good news that our unemployment and our construction in the street has decreased, but if you look at the Bureau of Labor and Industries Report, the highest unemployment is in the construction industry. So my point is that we still have capacity and the competition is pretty stiff, so our answer to that is operational excellence; our answer to that is planning our work and using technology and also planning with our building information modeling to be able to be more efficient, to be able to put work in place for less dollars without compromising safety.

Equipment rentals and sales were up to a good start; our inside mechanical and electrical fire protection and underground companies are positioned well; a couple of meds in tough years, but to be able to right through some of the toughest times in our construction industry, I think it is the accomplishment for MDU CSG and I know that somebody mentioned that topping plant, you are going to hear about more about, we are focused on that our approach is; we are going to earn that business and we are going to put a really good team together to be able to participate in that project and we are looking forward to that Dakota Prairie refinery project which Steve will talk more about.

In summary, we've got a lot of different brands in each regional market and our customers buy that way. That doesn't mean that we don't share ideas and our customers do know more about MDU than they have in the past. We have a Midwest customer that we are doing work in three different regions; we've got a sharing of resources to be able to leverage that intellectual capital not just from an opportunity basis, but on an execution and best practices.

If you go to one of our offices sometimes you will see people from another region, from another office. We don't do a lot of that, but when we do it allows us to be able to allocate the resources where possible, move the expertise like we did from Nevada to Ohio and to be more competitive.

And we work together internally; we are stronger and we share those ideas and when we work with Knife River which we have in the Bakken, we also can be stronger and we can add that value to our shareholder and when we work on a diesel refinery project, I think that's a good example where we could be competitive, earn the business and continue to be successful with good returns.

Do you have any questions?

Question-and-Answer Session

Unidentified Analyst

(Inaudible) 3500 employees you also talk about companies plural, and I wanted to, how are the companies divided, how many companies are there and what, like you mentioned on in one case that 300 employees and refinery turnaround, it sounds like a very small amount relative to 3500 total. How do you divide these things so that we get some pictures there, where you've got your people and what do you expect from those individual efforts?

Jeff Thiede

Okay. If you look at the revenue graph here that's almost proportionate to where our people are, so at the inside businesses in the last two years we've had probably the most of our employees within the inside businesses and you saw where the equipment manufacturer, company and the industrial we had well less revenue and less people. That's a good rule of thumb to use. One of our companies had about 1,000 employees, that was the largest single company that we had, but the rest of them were in at anywhere from 50 to 400, so the amount of employee is a good question, and we also look at what kind of returns do we get per employee and so not just the quantity employees is important but what kind of returns are we getting from those employees. So if you look at that graph that we showed on the revenue side that's a pretty good idea of where how that distribution breaks down.

Unidentified Analyst

Do you move people around between companies?

Jeff Thiede

We can. Typically we hire locally. And so when we move up, we would partner with the IBW and for inside businesses and our outside businesses, our manufacturing company, we draw people in and out locally, and there are cases where a small percentage, but significant talent that we move from one company to the other.

Unidentified Analyst

Looking at the chart at the beginning of your presentation and the map of the chart, it seems to me that as the area of strong growth that where you don't serve, that's the Southeast and up the East Coast; is there any particular reason of why you are not there or so could I know what it is?

Jeff Thiede

We're just not there yet. So we have been in the past. The acquisitions haven't lined up for us and I would tell you looking ahead, we're looking in the South, maybe not in the Southeast yet, but we have to make sure we’ve got a good cultural fit, the dollars work and the capital is available to be able to grow that part. Our first choice is to grow and expand our market shares in the areas that we currently are in. We’re not there yet.

Unidentified Analyst

A few questions on refinery capital projects, how recently did you start pursuing those? How successful have you been? Give us a sense of what types, size, geographies, pursuing those projects and are those predominantly fixed price and if so, how you are thinking about labor cost in areas like the Bakken and the Gulf Coast if you are working down there?

Jeff Thiede

Good question. We just recently won a refinery project with the same general contractor that is building the MDU Calumet project. So that job was procured on a specific scope of work. The design is not completely done and so there are some competitive rates that we negotiated to be able to get people on site, get the job set up and get it moving. So that particular job just recently awarded one of our industrial companies is not the first one that we've done. So we have specialized industrial companies that always work in the refineries. So the safety is different and of course with our turnaround company, there is a group of about 300 core people that followed our leader and he is maintaining that position when the work is not there. They will take some time off and they will back on so we have got a good core group of people, we do hire out of the hiring hauls in some areas in the South, we have got a good core group of about 300 people.

Unidentified Analyst

(Question Inaudible)

Jeff Thiede

Most of it is; but not 100%. Yes.

Unidentified Analyst

Can you tell us a little bit about what you are seeing in Vegas and the Echelon project in particular?

Jeff Thiede

Yeah. We are excited about that and we think that sale by Boyd Gaming is nice to see that project come back to live. So we haven’t been contacted yet, we are pursuing it and that job will be done in 2016. I think the job is taking on a little different shape, originally it was five buildings and 5000 rooms, I think its 3500 rooms instead; we are so uniquely positioned in Las Vegas and we are not the only contractor there but we are the contractor of choice on the electrical, mechanical, fire protection and also supply. So we have done of a lot of work in that area for our customers on a documented cost basis and we have also done lump sum projects so that is a good sign and our Presidents are real excited about it and I think position very well.

Unidentified Analyst

And it is safe to say there is nothing in the backlog yet proved for that project?

Jeff Thiede

Absolutely not; I don't think the design is done on that project yet.

Unidentified Analyst

And anything else going on in Vegas that we should know about?

Jeff Thiede

Yeah, there is [Sahara] project and there is a couple other casino projects that we are very close to landing, so…..

Unidentified Analyst

You mentioned that your top performing business are kind of spread out, you also mentioned there are some businesses that could be performing better; are those concentrated in any one area and what do you think, you could be doing better there?

Jeff Thiede

I actually want to go one of the companies today and we are working on just making sure that the jobs, the company is sized correctly and that we are focused on, we do a lot of things so we got to make sure, we are focused on the key elements. They are not concentrated in one area and we have also seen companies where we put a good plan together, they come out and they come out and they are able to sustain growth. So we just have to size the businesses to the right size to get through tough times and continue to stay in the market and that’s one of the things that having the backing from MDU we have to plan that return, but there is a couple of areas that we are able to hold our breath longer than the competition because we are so diversified.

Unidentified Analyst

Did you say how many companies you have and is the history of this that small companies were acquired by you and the management was maintained; I mean is this how it’s happened and I wonder about the fragmentation and how you watch so many companies and what your system is for doing that and if there any occasion for consolidating companies and make it for effective or is there a problem with these people wanting their own system as they came in; I am trying to get some vision of how this all works, it sounds very complicated?

Jeff Thiede

It’s a good question. So when the companies are acquired, the strategy is to make sure that we are also not only buying the physical assets but the people and so the companies that have been acquired are successful and they have been started mostly by entrepreneurs.

So they have a good buyout strategy to keep those people engaged in the business. This is something that's been done and been done very well. As far as the quantity of companies in the Nevada area, we've got one regional president that oversees the five companies even though they are uniquely different with fire protection and supply and mechanical, they share a lot of ideas, they share customer leaves and the idea is to be able to get multiple of our companies on the same job.

And then in Ohio, we have two companies that are underneath one regional president. So we've done a little bit of leadership consolidation and I think that's helped us to be able to keep the focus as we are spread out.

Yeah, and so what we've done in the last couple of years also is standardized are Dexter and Chaney spectrum which is our accounting software. And so that has been helped and we've also taken our IT migrated that to Bismarck. So we've got more robust systems for disaster recovery. So those are the backup house operations and then we've also looked at just trying to create some of the same methodology for our accounting practices and our operation practices. Yes.

Unidentified Analyst

(Question Inaudible)

Jeff Thiede

That is correct, right, right and so we have to tell our story, if you go to our website it seems like we've got a lot of different brands but again our customers buy locally, the fact that some of our customers do an evaluation and they know who owns MDU Construction Services Group and that's very important, that's the strength. Yes.

Unidentified Analyst

Hi, if you were to back out the contribution from the equipment business, what would the earnings and margins picture look like, just backing that out for the rest of the businesses within your group?

Jeff Thiede

It would be less; it could also take out some of the Bakken producers. I don't have…

Unidentified Analyst

I am trying to get a gauge of earnings contribution from equipment versus earnings contribution from other…

Jeff Thiede

Strong, strong, a good percentage. If I give you exact percentage and I think we just, it was a strong contributor.

Unidentified Analyst

And would your margins look flat without or down or are you making money without the equipment?

Jeff Thiede

Still making money without the equipment. We do that analysis too. We take a look at okay how healthy is our business without maybe the stars aligning approach on the top side but also on the bottom side too. So…

Unidentified Analyst

(Question Inaudible)

Dave Barney

Good morning. I am Dave Barney. I have been Knife River for 20 years as with the company, they acquired in 1993. I’ve been in the industry for 30 years. As Dave said, I recently moved from California to Bismarck, North Dakota, Northern California.

Today I want to give you an outlook on or an update on what we did in 2012 and outlook for 2013. I wanted to give a feel for who Knife River is. Knife River is a vertically integrated construction materials company. We are the fifth largest ready-mixed producers in the United States; we are the fifth largest agri producer and the ninth largest ready-mixed producer.

We have a billion tonnes of agri reserves that are very important to all aspects of our operations and then on our peak we will have 5,000 employees and off-peak about 2,500 employees. Our strategy, the most important part of our strategy is to retain and keep our customer or employees competitive to give a good quality product and continue to improve on that product and to make sure we keep our customers competitive.

We are going to reinvest, where we are getting our best returns like we did this year in North Dakota and with a refinery, liquid asphalt refinery in Cheyenne. We are going to continue to grow our reserves. We have a billion tonnes of reserves like I said they are very important to our company, we are going to continue to grow our reserves really make sense when we get a good return.

We are diversified, we are well integrated in our products in our markets and well-diversified, we have got a good cost structure right now. We got one of the best safety programs in the industry and we are going to continue to improve on that.

And if we can execute on those strategies like we got good potential earnings going forward. Some of our product lines we are in, we produce and sell a lot of different products. We have a lot of different crushed stones, ag base, hot-mixed asphalt, ready-mixed concrete. We also supply cement liquid asphalt and various other products in the construction industry.

On the construction side, we will take work of a general contractor and do work from $35 million to $50 million. We will do work as a sub for other contractors. We do underground work, we got the ability to go in and do return key sub divisions start to the finish and we have the reconstruction business in Southern California.

Our diversification has worked really well for us over the year, we are well diversified but it’s really help in the last few years and its challenging and more economy. We have always had a few right spots to offset and down spot, so our diversification has worked really well for Knife Rivers in the US.

And as I said, we are one of the industry leaders on the safety and last year we had a 2.31 incident rate which was 41% better than industry. We are 80% better than industry in our last time rig, but we were really happy with the Knife River, we dropped the last time rig from 2012 to 2011 in a Knife River by 50% and as Tom has said severity for action is last not the good thing.

Our workers and comp cost came down in 2012 to 2013 by 60%. We are in the right direction I think. We had a good year 2012 over highlights our earnings were up, revenues were up, and revenues are up by 7% earnings by 23%, we increased our margins, we increased our backlog, we had product growth in every product except for two. So we grew our product. We grew our market. We expanded in North Dakota. We added a ready mix plant in Dickinson. We added a ready mix plant in Watford City. We had a pre-stressed plant in Williston, North Dakota and we've put in a new asphalt terminal in Cheyenne, Wyoming.

Slow growing organically but we are growing. Last year earnings $32 million, we had a good year at $32 million compared to $26 million in 2011. We dropped our SG&A by 40% from its peak. We saw our private market grow and if that continues to go, the private market continues to go, we will get our earnings and margins up and we optimistic that will happen.

Our backlog you can see our backlog from 2011 to 2012, we've improved our backlog and what we are most excited about is our private backlog increase. And if we are going to get our earnings up and we are going to get our margins up but we have to see this private backlog increase and we are pretty optimistic that's going to happen in 2013.

The housing starts, for the last two or three years we've talked about all we've come off the bottom of the housing starts and then it flattens off. We talked about again and it flattens off. For 2012, we've seen the housing market take up and it continue to do that right through 2013 and we think the housing market will continue to grow in 2013 and that's very important for our industry that drives the construction business. We need to see that housing market take up and we are going to see better earnings and better growth. We need that housing market to take up and we believe that's going to continue through 2013 and beyond.

Public funding the slide before you saw in the backlog, we still do a lot of agency work, public work. This year, we got a two-year transportation bill passed after many years of short-term extensions. We definitely need a five or six year bill passed but in the meantime we got two years to get that done and so we feel good about the two-year transportation bill that we did get passed.

Some of the states that we do work in, North Dakota continues to spend on their infrastructure and on their highways. Wyoming just passed a fuel tax all money into $0.24 gallon tax goes to road infrastructures and tax (inaudible) increase their (inaudible) spending by $3 million.

Our outlook, we are excited about our outlook. It’s positive we haven't seen things this good in a few years. Our backlog is up more importantly, our private backlog is up and that's key to our business. We expanded organically. We are going to continue to do that. We are going to continue to look for new opportunities, new markets. So we are excited about our outlook for 2013 and beyond.

And as Jeff talked about and Dave we are working together, we have our Idaho team taking a lead on the refinery in Dickinson. They are going to be backed up by the North Dakota and Minnesota group and we've been doing pad work for Fidelity and Kent’s team, this last year and continuing this year and so that's a good thing for us, a good project. I know we're going to improve on these things and get better as we go in the future.

Thank you. Any question?

Question-and-Answer Session

Timm Schneider - Citigroup

It's Timm Schneider from Citigroup. First question is what's driving that strength in the private market and what kind of areas of the country geographically are the strongest at this point?

Dave Barney

North Dakota is their strongest market right now but we're seeing good housing starts in California, Montana, Hawaii, Idaho, in certain areas and that’s what we're excited about. Even in Portland, we're seeing the housing and we think that’s what's going to grow most of this type of work.

Timm Schneider - Citigroup

And quick follow-up, when you guys go and do a project for the E&P company or the electric utility, is that a competitive bid process or do you have an agreement with them in place where you, it's just kind of understood that you do it for them as kind of an intercompany?

Dave Barney

No. It's competitive bid. Beginning stages of the refinery that was negotiated. You have to get going on and on, very small portion of it, rest of we will have to (inaudible) for possibly negotiate. And everything else is…

Unidentified Analyst

I have a couple of questions with regard to the sales of this particular division, how much of it goes to backlog and how much of it is actually on a fairly short-term basis and not reflected in backlog? And with regard to skilled labor, do you say something about the supply and your access to it, since this is a constringent in quite a few areas now?

Dave Barney

On our labor, we are going to continue to have a hard time getting skilled labor going forward, We have a hard time as they talk about in the North Dakota retaining and keeping our employees there, it's going to be a challenge, it's going to be a bigger challenge this economy gets better, people kind of want to move back where they came from. As far as your first question, it was positive, what's that question was?

Unidentified Analyst

Let me repeat it. You have some figures that for backlog and how much of your sales actually or revenues actually flow through the backlog as opposed to not be reflected in backlog because of they are being short-term in nature? Like a paying job.

Dave Barney

Almost all are backlog; our sales are in our backlog, except for that construction backlog not if you are talking about aggregate or asphalt nothing part of construction backlog.

Unidentified Analyst

(Question Inaudible)

Dave Barney

Yeah. Current year.

Unidentified Analyst

You mentioned the series of small, it sounded, its like fairly small projects like there is asphalt thermal projects, can you just talk about sort of the returns on those, how you make those predications, what’s payback period is?

Dave Barney

I mean, and like I said we are going to put the money back towards getting our best returns, and our asphalt, liquid asphalt is we are getting some of the best return and we don't talk about margin but it is private place (inaudible).

Unidentified Analyst

I have the mic already, question on your acquisitions and Knife River was strong pretty substantially your acquisitions on the past most recently it’s the organic growth, what's your sense as far as growth for acquisitions and maybe you can and you came out one of those acquisitions give us a little color on what MDU or what Knife River brings as far to the table as far as acquisitions or actually someone join your team?

Dave Barney

Well, its really good ride for me. It’s a good company, good strong financial company work for --- that they have good processes and procedures as far as growing we are probably going to do more organic growth going forward putting our money back to where like I said we are going to get our best returns, if there is something out there we might grow into new area that make sense right now, its pretty tough to do out by company they are still not reasonable on what they want and we don't see returns on.

So we see we get our best returns on organic growth, we can put those companies right with existing managements we have and not have other costs. Over the past several buying companies, most of the company we bought was well, most of the owners stayed well on with us for quite a bit, quite a few years you know, stayed with us and I think most of the transition is going well.

Unidentified Analyst

I have a dumb question and it doesn't relate directly to your business but we've got some major problems here in the East as a result of Super storm Sandy. It seems to be there's going to be a lot of construction work, a lot of buying of materials, etcetera, etcetera, and it’s not going to benefit you because you are not here, but it will benefit somebody. So I would like to get your drag on how long does something like this, what happened down in the Gulf Coast, were you down there but you don't have an office in Louisiana but you are not there either.

So what happens, have you any idea time wise as to how long is the recovery period that influences companies like these or like yours. I guess you are aware maybe with a Tornado occasionally, where there’s a lot of work. How long does that work last and then the dumbest part of the whole question because I know nothing about it, what's the difference between concrete and cement?

Dave Barney

Well, I'll answer that one first because that's an easy one. Cement is a product that you put into concrete and ready mix and that's what gets - ready mix is sand, gravel, water and cement. Without the cement a product doesn't get hard. So cement is a byproduct of ready mix. You know we haven't really been involved in it, I really haven't seen what a Super storm Sandy would do for our business. It hasn't helped our business and it hasn't hurt our business if anything it might take deliver skilled labor force and move them there, but that's the only thing I can see possibly expecting of us.

Unidentified Analyst

Do you recall back in 2008 what the public private mix looked like in the backlog.

Dave Barney

2008 I couldn’t tell you. I know at one point our highest private was about 40% to 60% public, but I couldn’t tell you if that was 2008.

Unidentified Analyst

Okay, the diesel plant in North Dakota can you just talk about how you are going to participate in that.

Dave Barney

We are starting off on the civil side, moving to dirt and getting it going so we get the project off right away. We plan to do concrete or whatever else we can do on the job as far as paving, subways, but right now we are just getting the site ready.

Unidentified Analyst

In the past there's been some talk about bifurcating the sale between construction and materials and supposed to I know you primarily and historically have sold an integrated product. Is there been any additional movement towards that, are you selling your materials separately from the services or does it look like we will continue to do, the trend will continue or you let them continue with an integrated service.

Dave Barney

Selling to third parties is that what…

Unidentified Analyst

Selling materials to third parties yeah.

Dave Barney

Yeah, definitely, you know we established a strategy that we’d want to be the biggest of the big dog on the block and we've been the job as the general and didn't really want to bid to other people. We completely went away from that and said we’ll bid as a general, we’ll bid as a sub, we’ll bid it as a producer whether it’s hot mix or aggregate. So its working, its come along, its going to take a while for our competitors to trust us on that, but they are starting to do that and they are starting to move ahead, and we are doing a better job of it.

Unidentified Analyst

What is the trend that, depreciation and amortization, both bending downwards and also what is turning some equity in terms of estimates.

David Goodin

He is asking, Dave, about earnings from equity method investment which gets back to I think the job that we had at the port of Long Beach?

Dave Barney

The Little Harbor job.

David Goodin

Where we had a JV partner on that.

Dave Barney

The percentage of what we have there. We have three, Little Harbor, we have three phases on that Little Harbor and I can’t remember the breakup on all three phases on that joint venture we have with the management.

Unidentified Analyst

(Question Inaudible)

Dave Barney

It's ongoing. We still have the second third phase going and the first phase is pretty much closed out.

Unidentified Analyst

(Inaudible) amortization has been trending down. You are at the year and is that the way it continues to go?

Dave Barney

Yes.

David Goodin

Yeah, I would just say on that, obviously our capital has been lower than the depreciation rate. I think it's running right now around 75 million a year, give or take, plus or minus. CapEx is below that. This business is generating a significant amount of free cash flow over the next five years. We do supplement our fleet though and our focus on the quality of our fleet with operating leases and so we are definitely maintaining our fleet even with the CapEx below our depreciation rate.

Unidentified Analyst

Just along those lines I mean over the past four years the CapEx has come down relative to the peak time, in this business and its been probably running it very judiciously for cash flow to some degree. How much longer could you sustain those levels you know running at a lower level of CapEx relative to depreciation before things either become absolutely to really start wearing down and you need to pump more money in order to keep things going at a reasonable level.

Dave Barney

Yeah we have our CapEx. It’s been coming down. Utilization has gone up but we still do a lot of short term rental leases and so we have a fleet that's okay by doing leases in short term rentals instead of going on but something that we might not need for five to 10 years so we are looking at the fleets and rentals.

David Goodin

Hey, great looks like we are out of questions for now. I am looking at my watch and it’s about 10.18 or so in my watch. We can take a break and try and be back in lets say 10.30. I know that’s only 12 minutes. If you can get a stretch. We still got three presenter; we’ve got Steve Bietz, Kent Wells as we are going to talk about top (inaudible). So try to be back by 10.30.

[Breakout Session]

David Goodin

Next on our agenda as I mentioned just before we took break, Steve Bietz. Steve heads up WBI Energy which is our interstate FERC regulator pipeline, also has some gathering assets, made a move into the midstream business last year and continuing in that. We are looking at putting in a refinery in North Dakota that I don't want to steal all your thunder Steve, but we are very excited about. Steve Bietz

Steve Bietz

Good morning everyone and let me add my welcome to all of you here with us today. And also those that are joining us via the webcast.

Dave said, we have got some exciting opportunities and projects that we are going to talk about today and some opportunities kind of as we go forward. So I want to share those with you. Just a quick kind of update on who we are, we really operate under the logo of WBI Energy, that’s actually new this year. We rebranded ourselves if you will both on the transmission side as well as in the midstream side. And how do we think ourselves, we think ourselves as really a full service provider, really from the well head all the way to the market place, and in that space trying to provide solutions to our customers.

In terms of assets we have regulated assets as well as non-regulated assets. On regulated sites some 3800 miles of pipeline going through Montana, North Dakota, South Dakota, Wyoming. With through that system we are capable of moving about a Bcf or little over a Bcf on a day, or on a peak day, so a lot of capabilities. With that we have got 13 different interconnects with other pipelines. So we tie into a number of different pipelines that gives us the capabilities of moving gas, indoor system as well as moving gas off our system or to our on system customers.

Additionally we provide storage service to our customers, 193 Bcf of working gas capacity and it includes the largest storage field in North America our Baker storage field, it’s kind of right up the middle of our pipeline system. And those storage services get used at different times certainly the meet winter time load up here in the North Country.

On the non regulated side we have got 1700 miles of operating gathering systems where you basically, that is primarily gathering dry gas. In addition we have expanded into more of the liquid side, with our investments we are involved in gathering oil as well as wet gas, we are involved in processing and then we also provide a number of kind of producer related services, we operate compression maybe measurement services and we provide methodic protection services to various companies. And finally we also have a marketing group at markets fidelities natural gas produced up in this area.

What’s our strategy, what are we looking to accomplish. It’s fairly straight forward; we are looking to double our size over a five year period. In doing we are focused on investing in infrastructure and that infrastructure can either be on our existing systems and expanding our existing systems or as we expand into the midstream side those are the two areas we are looking to replace our capital. In doing so we got to exceed our targeted returns, we are going to stay focused in the Rockies that where we’ve always operated, that's where we know how to operate.

We are going to leverage what we do well, really our integrity. Dave talked about how we treat our customers, our technical competency and really our reputation for providing high value reliable services to our customers. And finally we are going to operate safely; we want our employees to go home each and every evening same condition they came in the morning. That's our goal.

So that's what we are looking to accomplish. One of the things that gives us a lot of optimism is all the activity right in our backyard in the Bakken area, and so this is a forecast. The red line here represents oil and gas production growth over the last six years and then in the projections this happens to be tied to Bentek, we did a study for the North Dakota Pipeline Authority and you can see both oil and gas are forecasted to increase significantly really providing lots of opportunities kind of for our business.

Now going back and looking at 2012 a bit where we're looking to invest in infrastructure. Here's a few things we did on our existing system, we did add a short 12 mile pipeline to connect the state line plant a new processing plant in north western, North Dakota to the northern border pipeline. With that that increased our capabilities of moving gas out of the Bakken to 440,000 mcf per day, that's up about four times from what it was three years ago. And it allowed us to achieve one of our goals of being 1 bcf pipeline. With that addition we are now over 1 bcf per day.

Frank talked a little bit about some of the growth in north western North Dakota. We've also done a project and are kind of still wrapping it up here. They had 18,000 mcf per day of capacity firm capacity for customers in northwestern North Dakota. We did this by adding a little bit of work at one of our compressor stations and doing some work at several of our town border stations where we interconnect with Montana-Dakota utilities.

Additionally there's a new gas wire generation plant that's being built in northwestern North Dakota, we will serve that off of our pipeline system. So that's some of the things we did on our existing system. Now we will talk a little bit about the midstream side this past year. Back in May we announced the acquisition of a 50% interest in midstream assets from Whiting Oil and Gas Company. This is a little map of what we acquired and the original acquisition price I think was $66 million but through additional investment over the year right at about $100 million invested at the end of 2012.

To kind of put this in perspective, here's Dickinson North Dakota, here's Belfield North Dakota. This is about 22 miles. As part of the acquisition there's a gas kind of state-of-the-art gas processing facility, capable of processing 35,000 mcf per day. The residue of that plant is tied into our existing pipeline system. So it moves into WBI transmission system. Additionally here's the lines, not all of these trunk lines are built today, but as the development occurs this is the plan.

In these trenches there's not only a gas line, there's also an oil line. That oil is all brought up to this oil terminal and then tied into the Bridger Pipeline system where the oil can go west. It can also come back in this direction right down here there's a rail facility just outside of Dickinson happens to be across the road from where our refinery is planned. So there is an excluding pipeline to bring oil to that direction.

As we think about this investment, we view it as really kind of continuing to grow. It’s not at full capacity today as wells are brought online we will see increased revenues associated with the plant. We will also see a full year from the investment as we acquired it in the middle of May this past year. And really what's fuelling it, is part of the acreage that’s tied to this plant is Fidelity’s acreage. The rest is Whiting’s. So really two big producers in this area that are supplying both gas and oil to the facilities and helps us really extract additional value, I'll say from some of [Kansas] oil production in [Star] County.

We will move on to kind of the newer project here, our refinery project. Just a quick reminder kind of what the project is. Basically it's a topping plant designed to take 20,000 barrels a day of Bakken crude, converting that basically in to three products. One is diesel fuel, one is naphtha, and is heavier oils or ATBs Atmospheric [tele] bottoms. Each of those three categories, about one-third of every barrel be converted in to those three products. Diesel fuel, we're looking to sell locally. Some statistics up here, production in North Dakota over the last four years has grown like by 75%. Some 53,000 barrels of diesel fuel are consumed in the state of North Dakota. Right now, our only refinery in the state produces about 22,000. So the rest is brought in to the state.

If you look at the Dickinson area itself, there are no pipelines that serve diesel to that area. The closest is about a 100 miles. The one refinery in North Dakota is in Bismarck is about 100 miles away. Glendive, Montana, there is a diesel line or a products line that delivers diesel fuel. So there is kind of a 100 mile radius if you will around our plant that we’ll look to serve the diesel that we produce.

In terms of naphtha, that’s a kind of little octane gasoline if you will. The plans are to rail that up in to Canada and further be used as daily one up there for some of the heavier crude. Certainly the key stone excel project would be a positive project in terms of our naphtha sales. And then the heavier ATBs, the plan would, we will get the best price we can, but likely they will go to Calumet our partner in this project they are 50% owner. Calumet is a specialty products refinery, they do a lot of different things, with lubricating oils, waxes, from different things and what's left in the Bakken barrel here is really ideal fuel stock for some of their processes.

So that’s what we plan to see that go. Where we are at in the project, we’ve made a lot of progress in a relatively short period of time. We started talking about this may be 14, 15 months ago. Since then we have acquired the site 318 acres just south and west of Dickinson if you remember the map I just showed. We formed the LLC with Calumet again a 50-50 partnership in that LLC. We filed for air quality permit to construct the plant. We have received that permit; I think we received that in February 22nd in our office. We are very excited about that that really paves the way to move forward with this project.

We got a lot of engineering kind of ongoing here more detailed engineering. We certainly have designed the plant, but some of the more detailed stuff we are working on. We just had a meaning with our contractors as well as a number of engineers last week. In Bismarck there are probably 15 folks or so that attended that. We got a ground breaking plan for March 26. We got quite a group coming to that including our governor and our Washington delegation. It will certainly be a festival event I think or a happy event.

So as Dave said earlier really now the time is to execute, and to execute here we’ve got to bring this project online and our kind of planned 20 months period. So by the end of 2014 we are up and running. We’re going to hit our capital planned expenditure of $280 million to $300 million and that’s really where the focus and the attention is turned to.

Dave talked about really the strength of MDU resources and kind of touched on some of this? Got to tell you that from my perspective this is probably the posture child for what can come from our Corporation and the diversity and the strength within our Corporation. Before I touch on these I can tell you as we have gone through this period, we tapped on a number of shoulders as we put this project together there is a few folks at Jebreal, which is a Knife River company that’s been involved in asphalt oil activity over the years.

Certainly buying asphalt from refineries. That individual has been really on our team from day one helping work through this project, they built two terminals I believe, one of the individuals with the terminals are a number of storage tanks, we need to take 22 storage tanks at the refinery, we really tapped on the expertise at Jebreal and kind of helping us, think about those, design those, work with our engineers. So we bring a lot of kind of expertise across the corporation. We’ve talked to the engineering group on the electric side at Montana Dakota utilities they help designed how we are going to get power there, sub stations what have you, so really tapped on a number of shoulders as we sit here today, WBI will serve the gas load about 5000 mcf per day; Montana-Dakota has been approved to supply the electric load of about 5 megawatts and about a 5 megawatt load as you've heard Knife River has been selected to do some of the site work. Equipment is being moved on as we speak and we will be turning dirt here very, very soon.

As Jeff mentioned, construction services, we don't have all of our design and engineering work done but as that goes certainly they expect they will participate in the substation potentially in some of the inside electrical one of their services they might be able to provide. And then down the road a bit Fidelity has this plant’s up and running would be producer to supply Bakken crude to the facility and as was mentioned earlier really it’s kind of a natural hedge for our corporation, so if the differential narrows up it doesn't help the refinery, but it helps our existing production in the State of North Dakota and if it goes the other way it helps the refinery, but hurts our production price a bit.

So siding project, a lot of opportunity and we will just kind of look out little further there maybe things that aren’t on the drawing board quite yet and if you look at this is a map of kind of the Bakken area and go back to my earlier forecast of gas production in the State of North Dakota, its going to continue to grow and there is going to be a need for take away capacity out of the area. One of the big, in addition to markets on our system one of the big loads is Northern border that goes down to the vent market. That pipeline is essentially full today. Alliance is over here. That pipeline is essentially full today or near full. So as production grows there's going to be a need for some additional Bakken takeaway; we think that fits well with kind of our business and certainly we are looking at opportunities there.

One of the things that we’ve recently kind of landed is a small little project. Its really the third one of these projects, that's a part of I think 11 or 12 mile pipeline to tie in One Oaks Garden Creek II and Garden Creek III processing plant that they've announced in Northwestern North Dakota to the northern border pipeline. I think it’s a $12 million investment, but it’s a nice little addition to our pipeline system.

Another project that we are interested in and provides some opportunity for us is there is a fertilizer facility that's being planned for Spiritwood, North Dakota. This is Bismarck right here. Spiritwood is about 110 miles directly East of Bismarck. That plant is being designed and if it were to go forward CHS has announced this it would probably be in the neighborhood of 90,000 mcf per day of load. So it’s going to need some pipeline to be built to serve that load. We see that as an opportunity as we go forward.

On the midstream side, we will continue to look at gathering and processing opportunities with the Bakken. There is some discussion about maybe an ethane line for some of the processing facilities that take some ethane that's not working a lot today, but take it through an ethane line that's planned to go kind of North into Canada. The Paradox Basin area, Kent will talk about that in a bit, but there is a need for a gas pipeline in that area so we are working with Fidelity and seeing what makes sense in terms of building some pipe to move gas out of that play.

Certainly, as you think about our refinery, we view Calumet as a very strategic partner and their potential for a number of related projects with them, so we will kind of keep that in mind as we go forward and then there is also the LNG market. We're not looking to export LNG. Our focus here more is that will there be LNG consumed in our area, being a natural gas pipeline, bringing gas to an LNG facility, potentially investing in it and certainly as a pipeline, we want to understand where we're headed with LNG, whether it's to fuel railcar, whether it's the fuel vehicles or some of the drilling and completion activity in North Dakota. Those are some of the things that we seek as we look out today.

From a capital investment perspective, if you see just about doubling our capital investment over the next five years as compared to what we did the previous five years, just a reminder in this number is about $100 million associated with the Pronghorn investment, so if you pull that out, you can see we're stepping up our capital investment pretty significantly. And kind of a whole lot goal here of doubling our size over a five-year period, this is where we sat at the end of 2011. We had it in Pronghorn; we had on the Dakota Prairie refining; we also had the other projects we’ve got planned in our capital budget. You can see we hit our goal of doubling our size. That’s all fine, but the important part is we got to hit our target of returns. If we hit our target of returns, we're going to see increased earnings and obviously that’s positive for our shareholders. So that’s really what this investment is all about, to see our targeted returns and grow our earnings.

So that’s kind of run down of where we are headed at our Pipeline Energy Service business; I would be happy to answer your questions you have.

Question-and-Answer Session

Unidentified Analyst

Thank you. Two questions really relating to rate of return; one perhaps, with regard to the refinery, where is your projected rate of return on the investment you are making and early in the presentation, you also made a statement about exceeding targeted returns and could you attach some numbers to that please?

Steve Bietz

When we look at different projects really risk-adjust each of those projects and a project in the refinery space is much different than on the regulated side, so really got to kind of take out on a project by project basis. What I can tell you is when you risk adjust for a refinery we exceed kind of what our typical or historical returns are on the regulated side, we are probably in that 12% range today, 12% ROE in terms of regulated; we need to be north of that I guess, what I can say today. I mean we are kind of two years out, but what I can tell you today is our return there should be double-digit type returns on an ROIC basis. What was the other question?

Unidentified Analyst

Early in your presentation, you had an item that said exceed targeted returns and could you attach some numbers to that; I mean what do you mean by exceeding targeted returns?

Steve Bietz

Really, let’s talk on the regulated side, probably at the FERC level today, 10% to 12% is what's being allowed on an ROE basis where we got opportunities if we manage our business, to wanted to meet those returns and exceed those when we can, we have different times during different times the storage activity different things have occurred, so our goal is to hit and exceed those targeted returns.

Unidentified Analyst

Actually that was my original question, but I have run that a little bit. There seems to be ongoing, a noise coming out, I am speaking on another mic, would you like me to move over there and sit next to you, thank you. With some activity lately in Washington at least the noise if not activity, about FERC looking at returns that have been allowed in various areas and thinking that perhaps a little bit on the higher side given the current cost of capital, have you got any comments on that, are you seeing anything, do you have to go to them and ask specifically on this project or any projects that you do for determination of return?

Steve Bietz

Anytime we would file a rate case we would go to them and request the certain return on equity; we had not filed a case since 1999 so it’s been quite a while since we have been out of that. In terms of maybe some of what you are referring to there has been different times, there has been companies have been called in for I’ll over running their ability to what I call section five proceeding, if you look at some of those returns, some of those have been north of 20%, kind of based on what they publish, generally the FERC and those companies have worked something out whether they’ve adjusted rates, whether its planned investment that’s going to consume some of that, each one kind of different, it seems like the last three years they've kind of brought people in, so certainly that's just really under their regulatory regime, they are able to do that and we've not been brought in.

Unidentified Analyst

Would your new project require a FERC……?

Steve Bietz

The refinery?

Unidentified Analyst

Yeah.

Steve Bietz

No. The refinery will not be, is not really under the regulated pipeline side; it’s totally non-regulated so…

Unidentified Analyst

Steve, looking at your chart with the multi color bars on it, based on your return expectations, you've got off of albeit a low 2012 base, the opportunity to grow earnings several folds for the next few years on these midstream assets. And it looks like your other sort of undeclared projects of a similar scale, does that include the regulated, is that more physical midstream, can you give us a little color on sort of timing on those?

Steve Bietz

Sure; what we've assume there basically the refinery some additional investments in Pronghorn; we are adding a fractionation facility there, it could be up and running this year. We are adding two additional compressor units there. Much of that would be paid for this year. The refinery is in there, so in total that's a $150 million that's going to have on my chart. The balance of that I guess would be more, there is several I'll say smaller regulated type investments kind of like the Garden Creek facility 10 to 12 kind of smaller expansions that we kind of targeted as well as we've got about $150 million in kind of the last three years for midstream kind of unidentified things that are built in there.

Unidentified Analyst

Thank you. It’s more of a curiosity, but your slide on the refinery with the three products out of the barrel, you had diesel and the other two, what are the end markets for those other two products?

Steve Bietz

The naphtha is the end market is likely Canada to be really used as a daily -- I mean mixed with the heavier crude there. So we are able to move through a pipeline. That could also go to cracker and it could potentially make additional gasoline and potentially some diesel through that process. We won’t have that capabilities at our facilities. The ATB is again those like who go to Calumet for some of their specialty products, got a fairly high amount of Paraffin in what's left in that barrel so that works on some of their specialty products. There is also a very low content of metallic or metals if you will within that remaining and that's a positive too for lubricating oil and those types of things.

Unidentified Analyst

And you indicated you are going to rail those out so to other refiners?

Steve Bietz

Yes.

Unidentified Analyst

Given the fact that there's a lot of need for pipelines to takeaway gas; ONEOK Partners earlier this year canceled a project to take away oil, is the rail system good enough or are you going to see opportunities to take oil away later on?

Steve Bietz

I think we will keep our eyes open for oil. That was a big project and I think it’s well over $1 billion project and at the end of the day as I understand it they didn't get enough subscription from producers. Today, actually rail is, a lot of rail capabilities in North Dakota and more being added. Today's market, that's a pretty good market; if you are railing the oil out; longer term, I guess time will tell. We will certainly keep our eyes open, but we're probably more of a long haul gas pipeline than a longer haul oil pipeline, but maybe there would be opportunities for us to partner with someone or look for something.

Unidentified Analyst

Okay. And then secondly, I was just wondering, I was looking at the volumes for your business sort of declining since 2009, 2010. Can you give me a flavor as to why that is and give me some background on that?

Steve Bietz

If you look at the gathering volume and that’s probably what you are referring to, the gathering volumes, basically a lot of the areas that we gather gas, its dry gas with a low gas prices, there has been just a lack of drilling. Here you see natural declines and we're kind of following those declines. There is also some producers have shut in some of their production or curtailed some production. So we're seeing the effects of that. I think if you look at the transmission side, we actually are up with some of the projects that we move for some of the Bakken gas out of the area, I believe our transmission volumes are a bit on an uphill if I remember my numbers correctly.

Unidentified Analyst

I just had a question on the refinery; you know, on your chart, you said that diesel consumption in North Dakota has been up 74% in the past four years. I wonder where is the consumption increase and in what area? Along these lines, it seems your project makes a lot of sense because Bakken crude is trading at a discount and then you are saying that a lot of diesel has to be brought back in. So it seems like there are too – that people are paying a premium for the diesel and you know they are using other crude, which you can supply at a discount. So I just wonder how much the diesel cost up in North Dakota, you know, on a per barrel or per gallon basis, so you could get some magnitude of the current differentials and how long do you expect kind of that to last?

Steve Bietz

I think if you look at a number of things that you mentioned. First of all, relative to diesel prices, I think if you go to some of the rack prices you can go out to different publications and find those as opposed in the refinery in (inaudible) and there is a I think a traded point in Glendale and probably somewhere in the neighbourhood of as on the time 3.20 to 3.50, 3.60 per gallon for diesel that’s at the rack, that’s before taxes and so forth. In terms of your observation, we are I think in a bit of a benefit in terms of just kind of double transportation is happening here, you got to haul the crude away and you got to bring the diesel back, we are going to certainly a shorter transport to our refinery in a shorter transport back to the diesel market. So that’s a positive.

Unidentified Analyst

(Question Inaudible)

Steve Bietz

Demand-wise, a lot of demand has come from the oil activity, whether it be the trucks, whether it be the drilling rigs as well as some of the completion activity; I think if you look at agricultural demand it's got up some, but not a lot, it's stayed probably a little more flat, it's been more on kind of the industrial side.

Unidentified Analyst

As you build out the footprint for this segment, is there lets say a tipping point where you might consider an MLP?

Steve Bietz

That’s something that’s always an option, and you look today probably it doesn’t make -- we are not the size that makes a lot of sense to do an MLP, but as we go forward, that’s kind of something that’s within MDU Resources so that may or not happen down the road, its out there.

Unidentified Analyst

What are the M&A opportunities on the midstream side, you did that way in transaction E&P guys can you just cash once in a while?

Steve Bietz

That’s one of the ways to do it and certainly we brought something to the table really again kind of going back to what Dave talked about is our overall corporate kind of diversification, what we brought to that plant was a lot of acreage and made a natural partner for us and Whiting and Fidelity and there are other producers that have midstream kind of assets in North Dakota, so that’s an option. What I can tell you is what we’ve looked at today from the multiples out there don't make a lot of sense for us. So it’s a little challenging that way, so we are going to keep kicking the tires and trying to find some on the M&A side.

Unidentified Analyst

Can you talk a little bit about how your business mix between regulated and non-regulated might change over the next couple of years; I mean it sounds you are replacing the gathering losses with new projects. But on the regulated side you alluded to it earlier how you had some follow-ups in the transmission and storage business and might look if it is coming back on. How do you expect that develop overtime with respect to returns on pipeline capacity and also storage dynamics given the summer and winter spreads; how those are evolving?

Steve Bietz

Yeah, I think we probably in some ways our regulated business is maybe a way to think about; we’re probably more like the utility if you will kind of a regulated rate base; allowed to earn a return and we have had times; if you go back a few years, storage different things that have gone on our system really have allowed us to exceed some of those levels kind of on a regulated return basis. As we think about going forward, you are going to see depending on where we invest our capital is where you are going to see kind of regulated versus non-regulated activity going.

Certainly with Pronghorn, with our refineries those are outside the regulated world. Those earnings move up that's going to be a bigger and bigger chunk of our activity. Go back to my slide just kind of where our opportunities. If we are able to serve the fertilizer facility we do some take away out of the Bakken and that will likely be on the regulated side and other things would be of course on the non-regulated side. So we don't have any preconceived we need to be this mix or that mix. We are going to look for opportunities if we can earn good return, we are going to move forward with those kind of projects.

Unidentified Analyst

Maybe I should rephrase my question, how do you think the regulator business is going to do going forward?

Steve Bietz

I think its going to be a solid business as we are looking at it there's need for some additional expansions be it small but there are some needs that into the (inaudible) market, into the South Dakota market, those will be relatively small projects now if we are able to build a much bigger pipeline to move Bakken gas that would be a much larger investment and that would move that up much more dramatically. Otherwise, it’s probably more kind of moderate kind of growth.

Unidentified Analyst

And volumes?

Steve Bietz

Volume wise, I think you are going to continue to see volumes move higher and higher largely because of the Bakken with the two little pipelines we built two pipelines we are moving about 100,000 Mcf a day through both of those. One of them has been built for 200,000 so you are going to see those volumes increase. The third pipeline I mentioned that's being built for about 200,000 Mcf a day so as that builds up you should see those volumes kind of keep moving up.

Unidentified Analyst

What's the number one risk to the refinery project outside of execution?

Steve Bietz

Execution is a big one. I mean that's what we are really focused on. Outside of that I think kind of going into the project one of our concerns was that the permitting and the timing of that we could cross that hurdle. So kind of on a go forward basis, its what's going to drive results from that, its going to be the acquisition of crude, diesel and those diesel naphtha and ATB market. I mean that's really where the margin is going to be at.

Unidentified Analyst

Just to expand on that, I'm sure you are reluctant to go into specific return parameters on the refinery with pricing and so on but you must have run some case let's say based on 2012 prices and actual situations I mean what kind of return are we talking about? You said its higher than the 12% but its double digit, is it twice as high I mean, there's got to be a number that you ran that achieved some hurdle rate that you are looking at?

Steve Bietz

We've looked at a lot of scenarios. You are exactly right. It’s just an area that we are going to kind of continue to work through the project and not sure those specifics today.

David Goodin

I think that's a great question to move into Kent Wells next. Yeah, we've had that question a number of times and clearly we want to get some [shovels] turned and plant up and running but clearly we think it’s a good project and we will just leave it at that for the day. Is there is one more question for Steve I didn't mean to cut him off entirely but.

Great we want to make some room for Kent Wells. Thank you, Steve. Kent Wells, President and CEO of Fidelity and again Kent’s been with MDU and Fidelity for coming up on two years but he brings over 34 years experience in the Americas, in Canada and international. So, Kent?

Kent Wells

Thanks, Dave. Good morning everyone. You have very earnestly listened to all my colleagues talk today and I am sure you have picked up, we have two common themes. One of growth. We have growth in all of our business lines and I want to continue that theme and then also the theme of how do we actually create more new business for each other by working together and I think we're just really starting to see the real potential of that.

You’ve heard some very specific examples and it's all about how do we capture more of the value chain and then how do we, as a customer to each other, help educate how to better serve that customer and create more business and I think that is just a piece of magic.

We're just starting to discover but it's really working well. I am not going to focus as much on that because you already heard all them talk about. Now it would just be repeating things you’ve already heard but I will keep the theme of growth going in my presentation.

So I know most of you are quite familiar with us. We operate in seven different states. We're really Rockies player and a Texas player. 75% of our businesses in the six Rockies state and then about 25% is in Texas. We're headquartered in Denver, Colorado. I always get asked why Denver. One of the things you want to do is be able to attract great people. You can attract great people to come and live in Denver, Colorado and those of you that have lived know why that’s the case.

In terms of our business, like most E&P companies were moving from a predominantly gas company to an oil company where I will show you some slides on that. We're about 18 months into that process and finally in 2012, we're really starting to hit our stride on that. 44% of our production in the fourth quarter last year was oil, 8% natural gas liquid and the remainder natural gas. Approved reserves 81 million barrels and 42% of that is oil. We have got just under a million acres spread across the southern states.

Year ago, we are here, we talked about our new strategy, strategy hasn’t changed this one refinement a year ago we have talked about growing liquids production and I think as we have all seen how NGL has deviated from oil in terms of price in return. We are focused on oil and we will evolve back into NGL and gas as the prices dictate us to do that.

But right now we are really driven by focusing on our oil assets. We are going to continue to grow in the areas that we have become good at and we will look to expand from that, you shouldn’t expect to see us make any big leaps to countries of far.

I think we have found our niche in the onshore US but the border to our North shouldn’t be a barrier in the longer term, but in the short-term we are going to stay in the areas that we are we have got in good at. And it's all about horizontal drilling technique that’s what we have become good at. We worked on it in the Bakken. We have been able to expand it to the Paradox and we are looking to expand it to other places.

And the key for us like you heard from everybody, we are going to drive returns through exceptional execution and I will show you some things and what we have been able to do over the course of last year to improve that. As we look forward, we are going to invest $400 million in this business this year. We are projecting 25% to 30% oil growth. Last year, we are projecting 25% to 30% oil growth.

Last year, we were projecting 20% to 30% growth in liquids. We actually grew 29%. We did that differently at the end of the year than we intended to do because we are going to focus more on NGL to some extend which we quickly get off and that's why we had the 36% oil growth, and last year we have also invested $550 million to get the 36% growth.

We believe we have the solid set of assets to grow from. We see the potential in 100 million to 200 million barrels when we look at across our assets and we see our oil production going beyond 50% in the current price environment or [just] continue to grow that. We are looking to selectively add some new oil assets, I think we learned from our exploration efforts last year, that it’s not only been in the right price, its been the right places and the right play.

And in some cases we are in the right place but we weren't in the plays and we are going to make sure we are far more selective in which acreage we get into and in which price. I am going to talk you little bit about what we have done over the year in terms of improving our capital efficiency and how we drill wells and we’ve made some dramatic improvements and we really believe that’s the competitive advantage in this business.

So here is a little bit of our track record. This is looking at our oil production by quarter for the years ‘10, ‘11 and ‘12 and basically you can see in ‘10 and ‘11 we were pretty much flattish, didn't grow much but you see quite a dramatic shift in 2012, and particularly in the fourth quarter where we actually grow our production 59% versus the previous quarter and 25% versus the third quarter.

So really had our stunning quarter in fourth quarter, I would love to say and we will continue that trend forever but I think that's a difficult hurdle to reach. And if we look at our reserve replacement on just the oil reserves we replaced 267% of our oil production last year and I've got a slide towards the end where I'll talk more about our reserve picture.

So now I want to dive into the plays that really make a difference for us and the first one for us and the biggest one today is the Bakken play. Last year, we produced 2.1 million barrels of oil there. We've got 127,000 net acres in three different counties inside the play.

We grew oil production 77% last year in the Bakken. So obviously this has been a key part of our growth and we will continue to be this year as well. Half of the capital that we are going to invest this year will go into the Bakken asset.

If we start with Montreal County, we are currently running two rigs there. That's varied from two to three rigs, over the last little bit of time. We are finding as we become more efficient we actually need less rigs to accomplish the same objectives.

And there were almost exclusively been drilling middle Bakken. Other operators have moved into the Three Forks and done quite a significant amount of development. We are a little bit behind but we are going to look to catch up in the next year or so in terms of Three Forks it's becoming clear that the Three Forks has significant potential there as well.

In Stark County, we are also running two rigs and that is the Three Forks play. We drilled our first wells there a couple of years ago and we really started hitting our stride in the second half of last year and hitting the well cost down and drilling better wells and I think you've seen from our news release for the fourth quarter last year some of the wells in Stark County their initial rates are as good as the ones in Montreal County. So it’s really starting to improve.

And then the area that's got the biggest upside for us is in Richland County, Montana. We've got 60,000 acres there. It’s slightly different, we actually are completing in the upper Bakken Shale and we've got two issues. The last well we drilled there ironically was called the close well because it was very close to being, hitting the economic hurdles we are looking for, but there's two hurdles in our way.

We have not been able to successful drill a two mile lateral, a 1280 which is what we do in Montreal and Stark and it’s about whole stability. So we've got a task force that's working on that and we are getting close to figuring out what we are going to have to do different as we drill those wells. And then the second piece is we also believe we need to do a different frac technique.

We took the approach that we were using in Montreal and Stark County in spite of the upper Bakken shale and its not given us the production that we need and so we've got another task force that I think has come up with an opportunity there that some other operators are using a little bit to the north and east of us there.

So what we are planning to do is in second quarter we've got two wells that we drilled but we didn't complete, we'll do those and then based on that we will drill two wells probably in the third maybe fourth quarter looking to drill two mile laterals and do the completion technique. So we hope to get that project catching up into full swing before the end of the year.

Now let me move on to the Paradox Basin. It’s applicably named for many reasons. Our industry was first (inaudible) drilling in the 60s and every time progress was made a new hurdle showed up and it was always a Paradox to figure it out and I would like to think we are really, really close if not there already on having finally figured this play out.

I know, we're the only ones talking about it. We've got some competitors to the north and it's not working up there and there are competitors to the South and it's not working down there. I said you need to be in the right place and the right play, and I think in this play, we're in the right place and the right play.

And why do I say that, so clearly. So last fall we completed a well. It’s our 1201 well. These wells, one of the things we had to learn is you don’t do it like a Bakken or you just turn it all full pay. We have to almost baby it at over a month to get it up to right.

In middle of October, we maxed it out at 1,500 barrels a day. When I say, maxed it out that was the maximum we would chose to take the rate to. It significantly choked back and to this day, it's still producing 1,500 barrels a day. So five months later, we're producing 1,500 barrels a day and the flowing tubing pressure is 2000 pound.

So we will find another well like that in the US onshore. I think when we actually sum up all the 20,000 wells that were drilled in the US onshore last year and you said how much production was produced in the first six months, this well is going to be with the elite wells.

Clearly, some wells come on, you go down to the Eagle Ford, 6,000 barrels a day. So there is a bit of tortoise and hare affect here and we've got the tortoise but it hangs in there. You don’t have those wells that are still producing 1,500 barrels a day, five months later.

So I think we've established the potential here. The real challenge for us is about repeatability. I look forward when we communicate our first quarter earnings. We just completed another well and we're in the process of ramping up and I look forward to sharing those results with you in. I think we announced our earnings on May 1 and I am sure that’s the time we will talk about that.

So this is the big growth area for us. We've got 92,000 acres plus we got another 20,000 acres that we have an option on we just need to drill our way into that one. So we have got 110,000 acres there in my mind. We have actually been focused on a very small area of the place so far. 3D seismic is absolutely critical to display and this outline here shows the existing 3D seismic that we have and you can see all of our activities been inside of that.

Two months ago, we finish completing this bigger seismic area; we are in the middle of processing it. So it is about twice the size is of the first one. So in a few more months our playing field is triple of what it used to be and that will make a big difference for us.

We are planning on spending $70 million this year here, one rig you might question kind of you think so much of it, why don't you want to go to more rigs. In all the time, one of things I have discovered, if you go faster then you can learn, you waste a lot of money. So when we are really confident that we completely figured out all the issues here, we will go to a multiple rig program.

But for now in our plan we are going to stick with one rig for the rest of the year. The bottom I said, wells can average EURs anywhere from 250,000 barrels to a million plus and I want to stress the plus. When we first estimated the reserves for the 1201 well it was a smaller number than what we are currently thinking today and its well North of a million barrels of that well, which is very exciting.

Now, here’s the other reason we get really excited about this play. Today, we are only looking at this bottom member the Cane Creek member there is actually 30 classics in this south section, we have spent the last six months working on it, because guess what we drilled through all of those every time we drill a well and so we have gathered data on those.

We actually believe 10 of them are prospective and we have narrowed that down to a further four. So in the next 18 months we will be looking to do some selective testing on those four high graded (inaudible) that we want go after and so then we will have five horizons as opposed to just one to be looking at.

And one of the things as we develop, this is a very high pressure in here which is great which is why the production rates are so good. We need to be careful depleting up holes zones before the bottom holes zone (inaudible) really picking to drill through. So we are trying to think about this over the next several decades and how best to exploit this.

Just to give you some idea of the potential here and of course its very early days in, I am going to talk about 3P reserves at our P90 case and what the P90 means is there is the 90% chance the reserves there are greater than that number and only a 10% chance that they are less than that number.

So these are call it very conservative estimates but remember we haven't even completed any of the (inaudible), but if we look at our current seismic area, we see 13 million barrels there and the additional seismic area which we’ve risked more because we don't have any wells in that area, we see 15 million barrels there, where we have the 20,000 acres under option, we see another 9 million barrels and then we will take all of the (inaudible) across all of those areas that is another 70 million barrels. So there is over a 100 million barrels just in the Paradox and we have all this at 100% and with the exception of Hatch Point unit which will be at as we earn our way in we won't be at the 100% but it will be at 75% and 25%.

Moving onto South Texas, which is the other area that we are continuing to develop. South Texas is a combination of oil, liquid, gas play. So there's two reasons that we are continuing to pursue this in this environment. First of all the economics are really good and second of all we've got urban sprawl coming our way and we need to get these wells drilled or its going to get really difficult to drill those wells and so we are pursuing. This is I call this field the little engine that could. It’s like many Gulf Coast plays, all broken up, all blocks and we've got a couple of really talented geoscientists and geophysicists that just keep finding additional oil blocks for us to go develop and great rates of return on this business.

Now, the plays that we used to talk and having been talking about a lot and are investing I think it’s worthwhile as to where are those. So in Heath Shale which is in Montana we drilled five wells out there. We got decent production, but we weren't able to get the rate and reserves for the well costs that we needed to hit our economic hurdle. We still think that this play has some potential to it; a couple of other operators are going to be doing some activity this year.

Once again we weren't able to drill 1280 laterals and we don't believe our frac design is right. So we've got, we are studying this and we haven't completely given up on it, but we now got pretty more capital in it till we figure out what it is that's going to make a difference and it could be some of our industry colleagues are going to help us on that. I hope there's success, but we are working together to sort of share the technology to try to make this play work.

In Central Texas we drilled four wells there. We did hit production. It looked to us like it was never going to be material enough for us and we are going to divest our way out. There's other people that have some other acreage that would be a good bolt-on for them so this will be work more to others than it will be to us. In the Niobrara, this is where we were in the wrong place in the right play, the Niobrara works to the south and east of us. It works far north of us but no one’s been able to make it work in our area. But what we are also looking at now is the [Kodel] zone that's there and other people are already drilling it today. We are going to once again wait and we've got time on our acreage, we don't have an expiry issue there and we will see where that goes.

And then the only exploration activity going on is in Nebraska where we are in the midst of drilling our first horizontal well there and the play there. So the key for us is how do we continue to improve on our returns. Obviously it’s about being in the right place, but it’s also about capital efficiencies. As I look at 2012 it was kind of a year or two as the first half, quite frankly our performance was not great as we ramped up our activity. We were inefficient. We had a number of the issues and our well cost ser high, and if we look at the Bakken in the first quarter of last year we were drilling wells from anywhere between $8.5 million to $9.5 million.

Clearly some people were more than that. Some were clearly less. I can tell you right now we are drilling between $7 million and $7.5 million and we've done that by focusing on everything. We drill them much faster. We've got different contracts. We don't have as many issues and that makes a huge difference to our return. In the Paradox likewise we've made some reductions when I put $8 million plus there was a couple of wells we drilled early on that were well above that number. It’s a really difficult place to drill but we've finally figured out. The drilling I feel comfortable with, the team has really done a fantastic job on that. We've got those wells down between 7.5 million and 8 million but once we start to go to the second, third, fourth, fifth well on a pad, which we will, the cost dropped dramatically down to $6 million and perhaps below because we no longer need to drill the pilot hole, which is the expensive part of the well.

And I said I come back to our reserves and I think this deserves a little conversation because if you look at just the bottom line reserves, our reserves were less at the end of 2012 than they were at the end of 2011 and that is never a good thing in our business. It's got to do with what happened from a gas price perspective and shifting from gas to oil. So there is three numbers that really matter here in my opinion. First of all, we produced 10 million barrel equivalent throughout the year. We added 15. So that’s good on a total basis, a 150 percent reserve replacement.

The key was as a result of the gas price drop and the fact that four reserves and valuations were used the previous 12 month price, we lost 20 million barrels of revisions. Well, they didn’t go anywhere. They were off our book. Those reserves were still there. As gas prices recovered and we're committed to drilling those wells because many of them were puds, we will look to put those back on the books. But in terms of our reserve book, it's not a pretty picture. But I do want to stress that we replaced 267% of our oil production. We placed 219% of our NGL production it was where the gas side were where we didn’t.

And then in terms of our outlook we are just going to continue to look at accelerating oil growth, I think we’ve got a bit of a track record going on that now. It's going to be led by what's going on in the Bakken and the Paradox. NGL production will be probably flattish and we will see natural gas production probably decline 15% to 25%. What could change that if gas prices recover, we actually have about 20 million cubic feet a day shut-in that we have chosen to shut-in. And we shut it last night when the price dropped around $2, we have not turned to back on, it would be cash flow positive, significantly cash flow positive even if we turned it on today, but we sort of feel, we feel good about the decision, we took to shut it in because the margin jumps a lot more than just the price. And so probably as gas prices approaches $4, we will look to turn that back on which could happen this year.

And then our capital I think I have already talk you about it's mainly about the Bakken and the Paradox but also South Texas. Our hedges we pay a lot of attention to our hedges we believe hedges are important to minimizing our risks. I feel very good about our hedges in 2013. We are working on our 2014 hedges probably look to two more on the gas side now, oil [features] where it kind of drops off. We’ve got 2000 barrels a day hedged in the first half of 2014 and we’ve got 10 million of gas hedged in 2014, and we’ll look to build upon that over the next six to eight months.

Questions? I am just going to wait till you get a microphone. So that people online, here we go.

Question-and-Answer Session

Unidentified Analyst

Yeah. Hi Kent, thank you. First on the reserves what natural gas price do you need on kind of 12 month roll to bring those back? That’s the first question.

Kent Wells

Yeah. So I was afraid you are going to do the old multiple. I thank you for bringing that.

Unidentified Analyst

No, no. one at a time.

Kent Wells

So they will come back on almost at the same way they went off. So we need the 12 months price to get back, and once it starts getting above $4 then we have the opportunity to bring out. There is one other hurdle we must cross; we also must be committed to drilling those wells in the next five year period. In order for that to do it it’s got to become competitive with the oil opportunities. So we may not bring those on as quickly as they came off because we might say gee, we still got enough oil assets gas puds will never complete with those, so we may not bring them up, but it should be in that range.

Unidentified Analyst

The price, the pud is a separate decision versus your alternate. The price is higher than the current kind of 360?

Kent Wells

Yeah, we would not be out there drilling those puds today, but we clearly could be turning that production back on.

Unidentified Analyst

Right they will shut in. My second question is actually on Kansas [chart], but it’s about the Bakken. I mean (inaudible) sorry, where it has 800 million a day gas production going to 2.5 billion a day out of the Bakken. Yet to my knowledge (inaudible) at Bakken is looking for oil. So is that also share to gas and if it is how much associate gas is with your production or other companies that are producing natural gas out there?

Kent Wells

No, the Bakken is essentially all oil, its associated gas [GORs] round number is a 1000. For every barrel of oil you produce a 1000 cubic feet of gas.

Unidentified Analyst

Are you selling that gases today, are you burning it or?

Kent Wells

In Montreal County all of our gas is being collected and we are getting paid for that. In Stark County one of the reasons we made the move, we did in the Pronghorn was to make sure all our gas gets collected, and as Steve said not all those trump lines have been put in place and its not because Whiting isn't moving out there. It’s just some permit that has held them up, but we would expect this year that a very, very high percentage of our gas would all be collected into the Pronghorn plant in Stark County. Richland County we are flaring there but we've only got a couple of wells out there.

Unidentified Analyst

Couple of questions if I might. You referred to what seems like rather rapid pressure declines in the Eagle Ford, what are pressure declines in the Bakken like and two, I remember that last year if I remember accurately it was costing about $12 a barrel of oil to move oil from the Bakken down to the Gulf Coast, could you give a comparative figure for the current in your experience.

Kent Wells

Sure. So on the first one and great point I didn't want to pick on the Eagle Ford play because I think the Eagle Ford is a fantastic discovery for our industry and this country. The Bakken is very similar to the Eagle Ford in that we have hyperbolic declines which means the well’s decline very rapidly over the first six months period and then over time to go on very, very shallow decline for years and years to come. And the Bakken is very similar to the Eagle Ford in that extent.

Unidentified Analyst

When you say very rapid, could you give a percentage please?

Kent Wells

No, it does vary but it’s not uncommon for the initial 24 hour rate to be half that number in a month or two. That's pretty steep. Your second question was on the cost of moving crude oil, and so round numbers I'd sort of say you can move it by pipeline for $5 to $7 a barrel. You can move it by rail dependent upon where you are going $13 to $17. So then the question was why would you ever move it by rail if it’s more expensive because you can get it to a different market and so today we use two marketers to move our oil for competitive reasons we do this. 85% of our production is moving by rail and I'm thrilled about that. A year ago it was the opposite.

Unidentified Analyst

Are there any blocks of acreage that you have to drill on to keep the lease, in other words there's drill on within the next year or so.

Kent Wells

I'd talk about those in terms of expiries. I'm not worried of any expiries this year. In ’14 and ’15 we started having a few. I think we are well ahead of that. So I'm not really worried about any expiries we have. There is one play that we are going to divest our way out of that has some but we are not worried about that.

Unidentified Analyst

Just two questions in the Paradox, have you booked any reserves yet and secondly is it too early to talk about spacing or can you?

Kent Wells

Great question. So at the end of the year we only had in round numbers a couple of million barrels on the books. We haven't booked any pud reserves there. We just want to make sure we really understand it. We see huge potential to ramp up the reserves in the Paradox. Once we can prove to ourselves and at the same time prove to you that we know consistently how to do this so it’s big reserves to be added there. In terms of spacing, that's part of the reserves issue. So one of the keys here is getting connected into the natural fracture systems and then how far does that go and we are trying to, particularly with our new seismic, we got better quality seismic in our second shoot and we're hopeful that we can start to see something that will help us understand where those fractured trends are and they are kind of macro fractures. We can see the big faults. That’s not a problem but that’s not what's contributing to the productivity. So the jury is still out on what the spacing is there.

Unidentified Analyst

You have a major oil company background and now you are now with about three years in to this. What structural changes do you made within MDU’s as far as EMP strategy, your people’s strategy etcetera?

Kent Wells

Okay, well, when we were here a year or so ago, we talked about, I think the big shift was to move from predominantly gas to predominantly oil and our balance but right now it's looking predominantly oil in the near-term at least. In terms of people, in order to get the execution efficiency that I showed you, you got to have amongst the best the industry has got and so we worked really hard on bringing in just a crack team. I mean we had some really good people inside a Fidelity before I got there but we've added significantly. We only had 208 people in the company. We hired 60 people last year and so we focused on bringing in the top talent that we can get and I think the results speak for themselves.

Unidentified Analyst

Can you give us an update what you are drilling inventory looks like?

Kent Wells

Sure. In the paradox, it feels like its analyst. It really does. In the Bakken, in Montreal County, middle Bakken wells probably a year of drilling. Three folks assuming that we, it can be what we think it could be multiple years there. Stark county, we clearly identified a sweet spot that’s probably got a year’s worth of drilling but we’ve got another area that this is rapidly becoming part of the first lead spot, which would once again put us into more that one’s a little less to find, and then Richland County, when we crack that code we have got multiple years in Richland County and that’s why it's important for us to those two study teams to come through forward.

Unidentified Analyst

Can you put that into more sort of well terms?

Kent Wells

Well, we have got 60,000 acres and if you are drilling 320 acres spacing I am hesitant to do the math I think that’s 200 wells.

Unidentified Analyst

Hello?

Kent Wells

Sorry.

Unidentified Analyst

Could you talk about the labor situation there and what's happening to the cost of labor the availability of labor as it gets hotter and also how big a feature is that to the cost of drilling a well? And could you also talk about, I don't know whether you can, competitive cost of drilling wells in the same area, another words or you at the high-end of the cost of drilling a well low, middle, do you know?

Kent Wells

Okay. Alright, so I assume you are talking about in the Bakken.

Unidentified Analyst

I am.

Kent Wells

Okay. So in the Bakken, so let me almost go from the end and forward so we absolutely know we are on the competitive curve, I think you will be hard pressed to find any operators that are drilling and completing wells for much less than the 7 to 7.5 and clearly put this in top quartile now, we were average to below our below on a last year in the first part of the year really improve and so we do pay attention to that. Part of that cost was how we, we now are record well, we have drilled the 1280 well and 17 days from spud to rig release, hard to find many better than that, so its about time, we have done some things is to work on the cost structure.

In terms of labor is type but our big cost come in two things, there is the drilling rig which there is labor component but we don't deal with that specifically we contract. So we have done what we can do recontract with rig as the rigs drop from 200 down to 180 and it sound like a lot, but it helps and then the second big piece is on the tracking side and once again there is now an over supply of fracking equipment for the work to be done and we have been able to negotiate significant savings on that, so it’s the combination of more efficiently and effectively drilling wells, lower cost structure on the services.

So I would say labor cost is not a huge issue for us in our big cost, now in terms of the few people that we have out there, we need to take care of them very valuable people, how the important operations and we make sure that we take care of them.

Unidentified Analyst

Did you turn over in that?

Kent Wells

Very little because turn over is a real problem and it is hard to find someone as good as you just left lost and so we are hopefully doing the right things and they are listening and I am sure I am going to cost me little more.

Unidentified Analyst

Yeah, could you say something about the cost of fracking sand is it flat is going up declining much?

Kent Wells

Yeah, and I think so; if we talk about it on a profit basis because there's sand and then there's ceramics and high strength proppants and to be honest I don't know for sure but I haven't heard one way or the other that it's going up or going down so I'm assuming its fairly flat but I'll be honest. I can't answer your question. I don't know for sure. Last question?

Unidentified Analyst

I don't make it account then. Given your projections for how you intend to deal with reserve replacement and looking out two, three, four years in the future, it raises the natural question about potential for acquisitions, could you talk a little bit about how acquisitions and if they figure significantly in your longer term strategy and if so what you are seeing out there in the market and your sense of the current acquisition market?

Kent Wells

Okay, so not sure why I'd make a gas acquisition today when oil acquisitions are really expensive. So what we are trying, but we are looking at but we try to look at it from what's the unique opportunity. What is that we bring to someone that they need that they would prefer to work with us? Nebraska is a classic example. We got that play because they needed an operator they saw what we were capable of and what else we brought with the pipeline company etcetera and so that worked.

We are looking for those unique opportunities to not necessarily buy but I'll call it JV our way in and that's how we think we will get in. If things change and we can flat out buy, we will but it just looks too expense to me unless you are prepared to take on a lot of risks and we are not.

David Goodin

Thank you, Kent. We are going to ask Doran Schwartz, he is our Vice President, Chief Financial Officer to do a consolidated overview here and we have a few questions and then we are still mindful of the time and so we want to make sure we have time available for lunch.

Again all the executives will be available throughout lunch. We are going to stick around and we are going to spread out around the lunchroom as well and so feel free to make yourself available and ask questions and you can clearly see there are some more key questions. You probably won't get a more finite answer in a small group you can certainly ask it again.

Doran Schwartz

Thank you, Dave. Everybody hear me okay. Okay, some from a consolidated standpoint just to tie everything together here today from what you've heard from the business units, here's our results from 2012. You can see on an adjusted basis a $1.15 a share and what we did there is we netted out a few things. We took discontinued operations out. We took the arbitration reversal at the pipeline that went in our favor, $15 million; we took that out at the pipeline.

We netted out the non-cash effects of the ceiling test. Right now the oil and gas business has come up with $1.15 and so you compare that against apple-to-apple $1.19 from 2011 and I guess couple of things that I would say from our perspective with the company we are certainly there are some things in 2012 that went pretty well.

There are some things that were certainly challenging 2012. We are not satisfied with $1.15 we are drilling I think when you think about the earnings guidance that we not here reaffirmed here today we will do that with the first quarter earnings call but when we came out with that on February 4, and included in our Form 10K filings still $1.20 to $1.35.

We want to get back to growth. And even at the low end of that range, we are telling you that and I think you picked up on some of the optimism from the business unit presidents that we feel like 2013 is where we can get back to the rest to see that we had in 2000 and 2008 we grew our earnings by about 17% per year and our stock price went right along for the ride and we paid a growing dividend each year in the time period and we weathered the storm in the great recession and we came out of that in a stronger financial condition than we went in.

And so we are well prepared for the growth that we see and you heard about today as we go forward. So growth, again back to Kent’s point, one of the big themes from the day, growth and that’s what we see as we go into 2013. So 2012 in review, I would just say, Kent and his team has done a terrific job taking a company that just a few years ago it was about 90% natural gas in the production side to the company that it is today which is obviously much more balanced from a commodity production and reserve profile and that significant obviously in terms of the differentials on margins and profitability of the two commodities today.

Utility, you heard from Frank, really in a great area. We're actually in eight service territory, extending from Minnesota, all the way out to the West Coast. North Dakota and the Bakken is obviously a big deal for us. You can see the customer growth there on the electric and natural gas distribution side but clearly the utility is got significant growth opportunities going forward.

And then at the construction businesses, again we've been a $120 million at the peak, 2007, $48 million at the trough. Last year, it went for $48 million up to $70 million. So we clearly saw an inflection point at the construction company and certainly some optimism, I think that you heard from both Jeff and Dave as we go into 2013 and we increased the dividend last year too. So, back to that recipe of growing our earnings and earnings per share. We're focused on that for 2013, along the way and after 22 straight years, we've increased our dividend, (inaudible) for 75 straight years and I will touch on that little bit later.

So let’s get into some of the individual business units. The performance in ‘11 versus ‘12 utility. Really weather was a significant factor here at the utility. We were between 6% and 16% warmer in the jurisdiction that we are in depending on in 2012 relative to 2011.

But again, I think as you think forward and you heard from Frank $1 billion CapEx program growing the utility and its rate base the equivalent of the rate base that was acquired with Intermountain and Cascade combined and to do that same amount of rate base organically with no premium going forward is I think pretty exciting, with obviously a lot of investment opportunities not only in the Bakken but really are the Hanford facility transmission within the MISO market. I think there is a lot of good opportunities there and I know we have some questions earlier above all, I mean How should we think about the capital that’s deployed there relative to the allowed ROE.

Well I think that our jurisdictions in each of the eight states that we do business in, we have a pretty good relationships with those public service commissions and they treated us pretty well in our regulatory activity with them. And I would say that Frank’s business when you take a look at the performance at the operating company level of Cascade, the operating company level of Intermountain or the five jurisdictions of Montana and Dakota.

We are pretty much at may be a little bit below in the two jurisdictions even for a rate case right now Frankfort, we are really performing well against those are we think about deploying that amount of capital into the utility, we feel good about the return potential of that capital at the utility.

Pipeline energy services again we netted out the arbitration reversal that was $15 million if you include that we are actually up against 2011, and we talked about it clearly this business been impacted by lower natural gas prices, which is reducing on a gas that can be gathered the [fruc] side of this business is performing well relative to its allowed ROE but gathering has certainly been impacted.

So dry natural gas and gathering it what do you do about that? And I think you heard from Steve today his team is really focused on what certainly we have got the Pronghorn acquisition in 2012 that was the mid year, acquisitions of the plant that was basically new and in the beginning stages of starting to fill up and ramp up 35 million a day of capacity on that plant.

And so we will have full year effects of that in 2013, $100 million investment is $66 million to get in but $35 million that we will be investing in that plant here with some of the add on CapEx as Steve talked about. So pretty significant investment for us but we really didn't see a whole bunch of the effects from that in 2012 as that plant again was new ramped up mid year type acquisitions.

We anticipate by the end of 2013 it should be at full capacity and we will see more full year effects, I guess from that acquisitions and then with the diesel topping refinery or plant still very good about that potential of that plant, I think you have heard from Steve although somewhat perfect way.

Exploration production really price, it was a big deal last year in terms of impact. We were down on natural gas prices, we were down on liquids prices, and liquids started the year much stronger as we went through the year quickly dropped off and Kent was able to from the flexibility standpoint redeployed some of this capital back into more oil based opportunities and so down 27% on pricing we are not down 27% on earnings why is that because we were up significantly on the oil side in the fourth quarter alone you saw the slide from Kent. This business has got some momentum going into 2013.

Fourth quarter our loans were up 59% on oil production, up 36% for the year but in the fourth quarter up 59%. Our earnings at this business unit in the fourth quarter were $25 million. So there is some momentum as we go into 2012 with the oil and gas business.

Construction material and services so this is Jeff and Dave I think you heard from them the inflection point, the growth in margins, the growth in earnings, the growth in backlog, the growth in revenues, the growth in the bidding opportunities that we are seeing in key markets right now, like Las Vegas, like the north western part of the country, like North Dakota with the expansion of the DOT transportation budgets.

We are seeing I'd say more optimism with this business going into ’13 than we probably felt for the recent years going into those years. And that's got our earnings are up on a combined basis, 47% on 8% revenue growth. That is in part due to the significant efforts that the construction companies Jeff and Dave leaving the charge that cut the cost 40% we feel like that's scalable so we grow our revenues. We don't have to grow our cost structure at the same pace that by definition expands earnings and cash flows.

This business is a significant contributor to cash flow for the corporation. Free cash flow as we take a look at we talked a little bit earlier about the relationship between CapEx and depreciation and the construction service is not a capital intensive business, construction material is more capital intensive business but I think we've done the right things to manage our capital requirements but still maintain quality for fleet.

We've also got probably some more capacity that we could absorb of 25 million tonnes for example of aggregate production and sales. Right now we are at about little bit north of 45 million tonnes at the peak. So we feel like there's probably still some capacity there with all having to spend some CapEx into that business to keep up with what we see in terms of drills going forward.

So really good to see what we saw in 2012 and then [knowing] that backlogs are off, our revenue guidance that we threw out there for you, hearing about some of the bidding opportunities that we've both included in backlog. Jeff, you talked about some of the bidding opportunities too that are in backlog but that we are pursuing and proximity to the Bakken for example you know all good things.

Other national indicators look good. Housing, you talked about housing that looks good, unemployment coming down. We like that. Two year transportation bill, transportation bill in North Dakota all really good factors. The level of private work which tends to be higher margin in that business of construction material. Also a really good factor of trends that we are following.

Strong financial position. We still have very strong balance sheet. We are 40% debt-to-cap, 60% of our capital is equity at this point you know if we think about two different buckets of categories there in the utility financed around 50-50. So we are more conservatively financed that a largely non-regulated side of the business outside of the utilities.

So the balance sheet is strong going into what we see in terms of growth going forward. So how do we think about I guess how we finance ourselves here in 2013, I guess we get that question a fair amount. So from our perspective, if we think about the sources used across our business units that again construction companies generate a lot of free cash. That's a benefit to the corporation.

E&P business is actually quite close to funding itself. And so really what we are not funding ourselves there is a gap, not material but there is a gap and that's really at the pipeline and at the utility. The two businesses that we see a lot of growth potential around $800 million of consolidated capital that we got in our forecast for 2013. So as we think about our sources, CapEx obviously a piece of that, the dividend another piece.

Now the one thing I would highlight on the dividend is that we paid five dividends in 2012. We accelerated at the January 01, dividend back couple of days because of uncertainty around the potential tax structure around dividends. So that means we will pay three dividends essentially in 2013. That’s another use. So sources uses a little bit of a gap there, largely driven by the growth projects we’ve got at the pipeline and the utility.

So what do we do about that? Well obviously operating cash flows which we forecast to improve and increase of off 2012 operating cash flow levels will be the primary source, and then other sources, we are focused in on, we want to beat our plan. So I just told you that we want to grow up 2012 but we want to beat that plan and that would generate some extra cash. And another thing that we're doing is really focusing on working capital, trying to release some of the cash on our balance sheet as it relates to working capital. We honing on that and actually off to a good start as it relates to that. That generates cash.

As a part of an ongoing process of the company, I think we take a look at asset sales. Are there assets that are part of our corporation and maybe better monetize and redeploy elsewhere in the company and that’s a potential source of cash and we are focused on that. You will probably see we will establish an equity (inaudible) or ATM program here later this year. We don’t want to use it. It will be there just in case we get to fund some of the growth projects but the capital associated with the projects, to talk about these projects would be accretive but we don’t want these. We want to use other sources of cash first use ATM program as a method of last resort, but we will establish one source there.

Credit liquidity, we’ve got a significant amount of liquidity. Now this is as of December 31, the 400 million actually is more like 450 million now. So we’ve improved our liquidity position over the last couple of months from the numbers that you see here on the slide. So I would tell you that one of the benefits of being a diversified group of companies is the access to capital and the cost of it, our E&P company; our construction materials and services company on a standalone basis probably wouldn’t be a triple B plus rating.

But collectively with the pool of cash flows that we have that roll off into the whole (inaudible) above those operating companies, the pipeline construction company, and E&P company, they get investment grade triple B plus access to long term notes and in addition to that because of the investment grade we get access to commercial paper there is not many E&P companies out there right now that (inaudible) businesses aside are getting 40 to 50 basis points commercial paper, but we are and that’s a competitive advantage for our companies.

A lot access to liquidity at a very favourable rate. Dividend again back to the recipe when we talk about growing our earnings and earnings per share and growing our stock prices as a result of that and then paying a dividend along the way. This has been important to us as I said before 75 straight years; we have increased at the last 22. We want to be a dividend paying stocks, and so as we think about it being important to us in the past and we believe it to be important going forward as a way to return value this year fully.

So the outlook, again I would say based on our guidance we established earlier in the year, based on what you heard from the business unit President is it relates to utility growth, largest CapEx program in any single year in their history $252 million this year, $1 billion over the next five, the pipeline opportunity is the key business.

The opportunities in the construction group that we see in terms of bidding opportunities building up the momentum we saw in ‘12 and principal momentum going into ‘13 off to ‘12 in terms of it’s development on oil. Committed to delivering shareholder value, I will finish where Dave started, and this is a slide from Dave back earlier today. Here’s what he is focused on when people are asking him, hey Dave what are you focused on, and the bottom line is that we are focused on delivering shareholder value.

That’s my comment and we will be happy to right after 12, we will be happy to take some questions if you got at this time.

Question-and-Answer Session

Unidentified Analyst

(Inaudible) you are down year, but you still increased the dividend, but you didn't say going forward that we would like to maintain our record of raising the dividend every year, I didn’t hear that. I just heard that we wanted the dividend paying company?

David Goodin

Well, I am a shareholder in the company and I would like to see it continue to grow but I think Rosemarie, we’ve got and we can't guarantee that to you but what I can tell you that as we execute on our business plans, and we deploy capital, a lot of the capital goes in the first couple of years of the five year forecast and then its capital intent the refinery projects gets up a lot of free cash flow.

Utility projects once in place and service kick off a lot of free cash flow. Execution is the key; I mean I think you have heard that a few times. Execution leads to earnings growth, cash flow growth leads to financial flexibility to accomplish the goal that we have around the business.

Unidentified Analyst

As you grow your various businesses forward your capitalization is 50% equity, 40% debt and the question is how far out can you grow your unregulated businesses before you can get hold and improve or what's the threshold percentage wise regulated or unregulated before your credit ratings. I may have some questions.

David Goodin

Well, fair question, I think with S&P right now we are triple B plus with a stable outlook. With (inaudible) higher than that it’s at an A minus. They are focused in on certain key credit metrics around funds from operations, debt-to-capital would be a piece of that, your EBITDA-to-debt, debt-to-EBITDA would be obviously a piece of that. You know we are focused on those things too.

So I think in terms of the amount of leverage that we would, we like our triple B plus rating, we are committed to a strong balance sheet and we are not necessarily looking to offset the apple cart with the rating agency at this point. We like the access to the cost of our debt that we have right now. So I'd say that our metrics look good right now and we are not looking to change it in the near term. We are not going to change that.

Unidentified Analyst

(Question Inaudible)

David Goodin

E&P is at 10 in terms of

Unidentified Analyst

(Question Inaudible)

David Goodin

Well yeah I think clearly E&P would probably be the highest risk business that we have in construction probably less so but still higher risk than a regulated company. The pipeline probably more with its current business mix being largely FERC regulated being lower risk and utility obviously being the lowest risk.

Unidentified Analyst

Given what you were just saying about your credit metrics is there an upper limit, particularly since we don't know and if you want to illuminate us a little bit on what kind of asset sale proceeds you might expect but what kind of upper limit do you feel comfortable with on sort of a debt-to-cap on a consolidated basis.

David Goodin

We are at the utility that's going to be driven really by what your regulator allow you and so we are probably a little bit equity rich right now at utility. So we would probably there will be more comfortable in line with the allowed target which is 50-50 so that's the utility side that's the target on a Centennial side kind of a blend I would say would range between 30% and 35%. You've got a pipeline business largely regulated that maybe a little bit higher debt-to-cap target E&P would obviously be a much lower debt-to-cap target.

David Goodin

Are there any other questions before we are certainly mindful of everybody’s time and as we have (inaudible) lunch is just outside the door here but any other questions anybody may have. We've got the entire executive team here again.

Unidentified Analyst

(Inaudible) through divestitures been off sales if any thoughts on that kind of thing rather than generating cash flow over a period of years you could again telescope that by spending off something, selling something or I don’t know whether that's something think about or ?

David Goodin

Sure that’s something that

Unidentified Analyst

Maybe we should just go to lunch.

David Goodin

Actually, you know, overtime there's been some history of divestitures within corporation not withstanding. Doran talked about some of this near-term stuff we have. So far as kind of looking at our asset mix and taking a look at certain specific assets within our various lines of business. I would say, those are not going to be substantive of nature that I would forecast for this year although it would help feel that gap or cash flows for this year. We do have a history though and we haven’t looked in and actually divested in the mid-2000s of our IPP business at a time when someone asked earlier about balance between our regulated, non-regulated business and it's actually went back to about 2006.

Our electric gas utility earned 7% of our corporate (inaudible) and with some of the underpinnings along with the interstate pipe business helped to support some of the credit ratings, yet it kind of got largely out of proportion and so we took the IPP business, sold it, took those proceed and acquired and actually cascade natural gas and that kind of spring boarded us in the Intermountain gas and good a bit of that balance that we feel is appropriate today, somewhat of a third, a third, a third, depending on how you measure net income EBITDA or the like as you look at 2012.

The long way of saying, I don't see any right angle turns in our near-term future. I think if you take a look at where we put up here for a summary, certainly we can do a better job at leveraging across our businesses and each business unit President has touched on that. I would say, look for that in the future. We're going to talk more about it externally as what we're doing internally. Certainly, it's executing our plan and continues improvement doesn’t sound sexy, but everything you can do incrementally, internally, whether it's reducing SG&A cost at our construction businesses, driving margins up when economy ticks here, taking a look at how we pull back office activities for instance 70 locations we used to payroll Knife River we do in one now.

We do those kind of things one at a time, they generate internal savings that make us either more competitive or help us keep those a lot of returns on a regulated business. So that’s a long answer to say we got a take a fair look at ourselves in the mirror to make sure it's a right business mix. We think it's a right mix we have today, but at the same time, it's an ongoing process.

Unidentified Analyst

(Inaudible) earnings estimates of $1.22 to $1.35 and I got the impression I wrote down on my note that MDU could exceed those estimates based on what I think you were saying today, well and how the construction part of your business, again did I just make that MDU could exceed those estimates or did somebody actually imply this that could happen.

Unidentified Company Representative

I don't know if that was implied or we will probably give you a good update though at the first quarter earnings call.

David Goodin

Yeah. (Inaudible) first when we give you the first quarter and we will do that throughout the year, 1.20 to 1.35 is what we published that in February 4th, we are not here today reaffirming that number. We would tend to want to do that on quarterly updates throughout the year. I think the second half of your thought might have been an inference on your part, but I can only make that conjuncture at this point.

With that as our closing question, thank you very much for everybody’s time. We truly do appreciate you taking the time. I hope you found this valuable. I would ask that you tune into our next earnings call that we would expect on or about, it is May 1st right? Great, thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: MDU Resources Group's CEO Hosts Annual Investor Analyst Seminar Conference (Transcript)
This Transcript
All Transcripts