Utility of the Year: MDU Resources Group, Inc., our choice for 2005 Utility of the Year award

Nancy Spring, managing editor

“Revenues grew by 16 percent in 2004, achieving record earnings…
For the 9 months ended Sept. 30, 2005, earnings per share increased 29 percent…
The company says 2005 should be another outstanding year.”

who is this financial powerhouse?

Meet MDU Resources Group, Inc. (NYSE:MDU), a company built on rock-solid investments in natural resource products and related services that are essential to energy and transportation infrastructure. We are proud to present them with EL&P’s 2005 “Utility of the Year” award.

We chose MDU Resources because the company was built on an electric and gas utility foundation by defining and following a corporate strategy based on integrity and solid, conservative growth. MDU Resources has grown from a small utility to an international enterprise by developing a strong base of reliable earnings. They never strayed into businesses in which they had no expertise. For more than 80 years the company followed its corporate vision and core values, and this dedication to staying the course has paid off handsomely for their shareholders and customers alike.

When MDU Resources talks about diversification, the company isn’t thinking about acquiring a golf resort in Mexico or an auto finance company. This company doesn’t have to backtrack to the basics-MDU Resources never strayed from its stated course of investing in industries in which it had an employee knowledge base. As an electric and gas utility, it was natural to move into natural gas and oil production. In 2004, that business segment accounted for 54 percent of consolidated earnings. When MDU Resources applied its coal mining expertise to the aggregate industry in 1992, the construction materials and mining segment was formed. Today it represents 25 percent of the corporation’s earnings.

But before you say rocks, sand and gravel aren’t exciting enough, listen to this:

“- MDU Resources has increased dividends every year for the past 15 years.
“- They have an unbroken record of consecutive quarterly dividend payments going back to 1937.
“- In 2004, they showed an outstanding one-year total shareholder return of 15 percent. Over the past five years, the total annual return was 19 percent. Compare that with the S&P 500 average return, which was -2 percent.

In the second quarter of 2005, company earnings increased by $21.5 million over the previous year, for a total of $80.0 million. In the third quarter, they showed record consolidated earnings of $87.1 million, up from $71.5 million for third quarter 2004.

The financial community has recognized the company for its stellar performance. Forbes Magazine named MDU Resources to its Platinum 400 list of the best big companies in America for the fifth time this year, rewarding the company for its five-year annualized total return of 17.1 percent. Forbes placed MDU Resources on its Global 2000 list as one of the world’s leading companies based on composite ranking for sales, profits, assets and market value.

Fortune Magazine ranked MDU in April 2005 as No. 1 in the energy sector for profits as a percent of revenues for 2004 and No. 2 for both total return to investors and earnings per share annual growth over a 10-year period through 2004.

business segment snapshot

The Montana-Dakota Utilities Co. was founded in 1924. It quickly expanded its holdings in the natural gas, electric power, coal and oil businesses, until 1985 when it became a division in the newly formed MDU Resources Group, Inc. In 2004, the utility accounted for a mere 7 percent of the company’s consolidated earnings, serving 300,000 customers in five states with electricity and gas, but the other business lines all owe their success to the strategic and managerial expertise gained from this bedrock of the company.

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MDU Resources came through the recent chaos in the energy industry unscathed. While other utility holding companies are still busy cleaning up financial disasters, MDU Resources continues to go about its business: earning money for its shareholders by following its business credo of careful and conservative growth. The company’s strategy centers on strong financial metrics, efficient low-cost operators, diversification, vertical integration, internal growth and accretive acquisitions.

The Natural Gas and Oil Production segment accounted for 54 percent of consolidated earnings in 2004. It’s the 39th largest exploration and production company in America. MDU Resources is currently diversifying outside the Rocky Mountain region.

Construction Materials and Mining mines aggregate and markets crushed stone, sand, gravel and related construction materials. The company focuses on the No.1 or No.2 supplier in markets when looking for acquisitions. It’s now the 10th largest aggregate producer in the United States. This segment accounted for 25 percent of consolidated earnings in 2004.

Independent Power Production currently owns 663 MW of generation and operates 510 MW for others. The fuel mix consists of natural gas, wind and a coal-fired facility under construction. Holdings included a portion of a 220-MW facility in northeastern Brazil that the company recently sold to Petrobras, a Brazilian state-controlled energy firm. MDU Resources netted $15.6 million in earnings from that sale.

The electric and natural gas distribution utility is a low-risk regulated enterprise, with 80 percent of the customer base being residential and small commercial. They have 474 MW of rate-based generation and purchase an additional 129 MW. Currently, the company is looking at new coal-fired facilities. Earnings were $1.8 million for the second quarter of 2005, compared with $700,000 for the same period last year.

Pipeline and Energy Services accounted for 4 percent of consolidated earnings in 2004. MDU Resources has the largest natural gas storage field in North America, the second largest in the world.

The Utility Services unit has been struggling but earnings improved in the second quarter of 2004 by $6.0 million, up from a $2.3 million loss in the same quarter last year to $3.7 million in earnings this year. This business segment deals with electric, communication and gas utility construction.

Today, the company has expanded far outside its birthplace in America’s heartland. MDU Resources has construction materials and mining operations in Alaska and Hawaii; Pipeline and Energy services in England; and an IPP operation in Tobago-Trinidad. In May, it acquired natural gas and oil-producing assets in South Texas, and in June it bought the largest electrical contactor in the Las Vegas, Nev., area. The company is also starting to look at possibilities in the water industry.

The executive reins will change hands next year. Terry Hildestad, who became president and chief operating officer of the company in May, is slated to take over as CEO and president when Martin White retires in August 2006. Hildestad has been with the company for more than 30 years, starting his career as an assistant foreman at a North Dakota coal mine.

As we talked with Hildestad, the values of the company came through loud and clear. We can expect to see MDU Resources maintain its successful growth strategy and core values, the basic tenets that have made the company the rock solid investment it is today.

EL&P: Many companies profess to be going “back to the basics” but it appears that MDU Resources’ strategy never wavered from that course. That’s one of the hallmarks of your success, isn’t it?

Hildestad: I agree. We’ve been focused on the basics since the very beginning of our corporation. Our vision statement is, “With integrity create superior shareholder value by expanding on our expertise.” During our 81-year history we’ve grown our businesses in areas where we had expertise from the employees. That’s been key to our success as we provided essential products and services that our country needs.

When our forefathers needed gas to run the gas generators to produce electricity early in the history of our company they drilled for gas, and they hit gas and oil in eastern Montana. Through the years we grew that business to be a significant player in natural gas and oil production. We transported that gas to not only our generating plants but also to serve the communities in which we operate, and we grew that expertise to a pipeline gathering and transportation business. On the same line, when we needed coal we bought the coal supplier in 1945. That was Knife River, which was started in 1917. We had the mining expertise there and then gradually through the years we decided to grow and expand the business based on that expertise of our employees. We got into mining construction materials and we’ve grown that business. Now it’s the 10th largest aggregate producer in the U.S.

EL&P: MDU Resources recently sold the power plant it owned in Brazil. What kind of lessons did you learn?

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Hildestad: We confirmed that if we stick to what we know we can be profitable and build value for the shareholders. We focus on areas where we have the expertise and maintain our disciplined approach to growth. By sticking to our conservative financial approach, we are not going to pay too much for properties. We also found that if we were going to do business in Brazil, we would need to understand the business environment, so we formed an excellent Brazilian advisory board that worked closely with us as we developed our business plan. We still have that advisory board in place. As we moved into investing in Brazil, we were cautious and careful. That assisted a lot in our success. Our investment in the 220 MW plant in Brazil provided excellent returns for our shareholders.

EL&P: Will overseas investments still play a role at MDU Resources?

Hildestad: If the right opportunity exists we’re very willing to continue to invest where our shareholders can receive a benefit.

EL&P: MDU Resources has acquired 100 companies since 1992. Will the recent repeal of PUHCA have any effect on your growth strategy? Are you concerned about takeover efforts?

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Hildestad: We are studying the potential impact of the repeal of PUHCA right now on our business units. There may be some opportunities to reduce some of the complexity in our structure. We’re still evaluating that. Are we concerned about takeover efforts? We have provided excellent short- and long-term returns for our shareholders, and I think that’s the best defense against a takeover attempt. Our stock price is performing very well, and our shareholders have benefited. If we continue to perform well, I don’t think anybody will be interested in seeing the ownership of our company change.

EL&P: Do you expect to see earnings increase at Construction Materials & Mining and Utility Services because of the massive rebuilding needed in areas of the country impacted by this year’s hurricanes?

Hildestad: MDU Resources doesn’t directly serve the impacted areas with our Construction Materials division. Our Utility Services business provided some electrical line crews to the damaged areas. They subcontracted those out to some of the companies doing the work down there, but we didn’t have a great involvement in that because our crews were fully deployed in other parts of the country. We had 37 employees and some trucks down there.

The area we really think may have a greater impact on the construction materials business is related to the recent passage of the federal highway bill. That legislation has earmarked $286.4 billion to be spent on transportation infrastructure over a 6-year period. That’s a 31 percent increase over the previous bill.

Our construction materials division is located across 11 states – actually 15 with our most recent acquisitions this quarter. About 65 percent of our work volume is related to public projects; last year that was $1.3 billion in revenue. We see the highway bill as causing increased opportunity for that business unit. We think our company will benefit from that rather than from the unfortunate tragedy of the hurricanes.

EL&P: Are you considering more activity in the IPP area?

Hildestad: We’re looking at opportunities in the IPP area, both domestically and internationally. We are currently finishing the construction of a 116-MW coal-fired facility in Hardin, Montana, that we hope will be in operation by year-end. We have the output of the plant under contract with Powerex currently. It’s a nice-sized coal plant. It’s the first one built in Montana in nearly 20 years.

EL&P: What plans does Montana-Dakota Utilities Co. have for new services and products?

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Hildestad: One of the things we are going to do at the utility is begin promoting EnergyStar appliances early next year. These are appliances that are energy efficient models that have been approved by the Energy Star association, which is an appliance industry group. They cover a broad range of products, from industrial products to kitchen units. That would be one area where we will be providing new services and products.

EL&P: One of the hallmarks of a successful electric or gas utility is a good regulatory relationship. Do you feel that you have that in the states you serve?

Hildestad: Yes, our relationship with state regulatory agencies has always been one of respect and cooperation. We’re persistent on earning our allowed rate of return and they’re tough on our expenses, depreciation and overall returns. But the relationships are characterized by mutual respect.

EL&P: Will coal continue to play a major role in the utility’s generation mix? What factored into MDU Resources’ decision to sell its coal mines?

Hildestad: Coal will continue to be a major source of generation for us near term and long term. We’re required to offer a high degree of reliability to our customers. Right now that can only be supplied by coal for baseload, with gas and diesel plants used for peaking. We’re in negotiations for coal-fired generation stations right now, and we will select a new generating station site within the next year.

We sold our coal mines because the coal business had been such a small piece of Knife River’s operation that we decided it wasn’t cost effective to continue to direct that part of the business. We had looked at acquiring other coal properties but we were unsuccessful. We had grown the construction materials businesses so we elected to focus on that line of business rather than stay in both of them.

EL&P: MDU Resources has the largest natural gas storage field in North America. On the regulated utility side, will this help offset the impact of high costs this winter for consumers?

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Hildestad: We have storage fields in Baker and Elk Basin and our subsidiary WBI Holdings has storage fields. Montana-Dakota Utilities Co., our utility division, is just one of many companies that have capacity in those storage fields. We bought gas all summer, but it was expensive because commodity prices remained high all year round. Traditionally we use about 40 percent gas storage and 60 percent of the gas comes from our traditional supplies. Historically that’s helped offset the impact, but it will be a challenge this year. We’re forecasting gas prices to be higher than they’ve historically been. While stored gas will help temper that rate increase, the rates will be at higher levels.

EL&P: You are slated to take over as CEO in August 2006. Would you speak about the company’s stated plan to diversify and expand its asset base?

Hildestad: Geographic business mix and economic diversity have worked well for our operations through the years. Historically, when one of our business units has a challenge, others are able to step in and fill the shortfall. We will continue to look for diversification opportunities in our existing businesses in areas that fit our strategy. That’s part of our basic strategy, diversification. But we’ll stick to our vision, to expand in areas where we have our expertise.

EL&P: How do you attract talented people to North Dakota?

Hildestad: We think Bismarck is a beautiful city and an excellent place to live. Right now we’re in the process of constructing a new corporate office campus here that demonstrates our commitment to the area and its people. And MDU Resources is really a great place to work; we focus on that. We’ve attracted talented people from this part of the country and people from all around the country have joined our team. And when they come here it isn’t long until they fall in love with the North Dakota area. We think it’s got a lot of advantages.

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The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at Jennifer.Runyon@ClarionEvents.com.

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