Doran Schwartz - Vice President and Chief Financial Officer David Goodin - President and Chief Executive Officer David Barney - President and Chief Executive Officer, Knife River Corporation Steven Bietz - President and Chief Executive Officer, WBI Energy Frank Morehouse - President and Chief Executive Officer, Montana-Dakota Utilities, Great Plains Natural Gas, Cascade Natural Gas and Intermountain Gas Jeffrey Thiede - President and Chief Executive Officer, MDU Construction Services Group, Inc.

Kent Wells - Vice Chairman and President and Chief Executive Officer, Fidelity Exploration and Production Co. Nathan Ring - Vice President, Controller and Chief Accounting Officer.

Brent Thielman - D.A. Davidson Matt Tucker - KeyBanc Capital Markets.

Good morning. My name is Shirley, and I will be your conference facilitator. At this time, I would like to welcome everyone to the MDU Resources Group first quarter 2014 conference call. (Operator Instructions) This call will be available for replay beginning at 1 PM Eastern Time today through 11:59 PM Eastern on May 15.

The conference ID number for the replay is 23827719. Again, the conference ID number for the replay is 23827719. The number to dial for the replay is 1-855-859-2056 or 404-537-3406. I would now like to turn the call over to Doran Schwartz, Vice President and Chief Financial Officer of MDU Resources Group. Thank you, Mr. Schwartz.

You may begin your conference..

Dave Barney, President and CEO of Knife River Corporation; Steve Bietz, President and CEO of WBI Energy; Frank Morehouse, President and CEO of Montana-Dakota, Great Plains Natural Gas, Cascade Natural Gas and Intermountain Gas; Jeff Thiede, President and CEO of MDU Construction Services Group; Kent Wells, Vice Chairman of the Corporation and President and CEO of Fidelity Exploration and Production; and Nathan Ring, Vice President, Controller and Chief Accounting Officer for MDU Resources.

And with that, I'll turn the presentation over to Dave for his formal remarks.

Dave?.

Well, thank you, Doran, and good morning. Thank you for your interest in MDU Resources and for taking the time to join us today to discuss our first quarter results. Our business has performed well throughout the quarter and we are pleased with the results.

Some highlights include, achieving a new quarterly earnings record at construction services of $16.6 million, realizing oil production growth of 14%, despite a slow start in our Bakken acreage and we are pleased with our first quarter acquisition of our oil-focused acreage in the part of Powder River Basin of Congress County, Wyoming.

Our investments and customer growth continue to meet increasing electric sales and drive earnings growth. And our pipeline business experienced earnings growth from 2012 acquisition of the Pronghorn natural gas processing and oil gathering facilities. Our construction materials business had built its largest first quarter backlog since 2007.

And at the Natural Gas Distribution business, 2013 benefited from a $2.9 million gain on the sale of our preferred service business. And 2014 generally reflects normalization in our service territories, where it was colder and warmer weather in areas where we were not normalized.

This business is performing well and in a longer-term investment in customer growth prospects are very bright.

So while there were some challenges in the first quarter, our business units and their teams continued to execute and take advantage of opportunities, which is reflected in our consolidated adjusted earnings for the quarter of $60.8 million or $0.32 per share. This compares with $60.1 million or $0.32 per share in the first quarter of 2013.

Our construction groups had another solid quarter, achieving year-over-year earnings improvement for the 10th consecutive quarter. On a combined basis, results improved by $1.9 million compared to the same period a year ago. On a trailing-12 month basis combined earnings are now at $105 million compared to the trough of $48 million just in 2011.

Our services group earned record quarterly earnings of $16.6 million, which is actually a 42% increase over last year. This improvement was largely the result of strong growth at our outside Electric division, which performs power line and substation construction.

Our construction materials business had a normal seasonal loss of $23.6 million this quarter. And now looking forward, our companies are seeing strong bidding opportunities in a number of our markets as well. We have a combined backlog totaling now at $1.05 billion at March 31, and additional backlog has been secured in just this past month.

The $653 million we have in the backlog in our materials group is the highest first quarter backlog we've seen since 2007. This higher backlog includes the large $55 million bypass project near Rockford City in the Bakken area. This is the largest individual contract in the history of our construction materials company.

Part of our story here is certainly attributable to the Bakken, as our combined North Dakota backlog is approximately $125 million compared to only $67 million just a year ago. However, we are seeing stronger prospects in a number of our markets.

A sound cost structure, good backlogs and continued positive indicators in many of the markets we participate have us confident in a good year for our construction group as we kick off the construction season. Now, I'd like to move on to our E&P business.

Here we boost our oil production 14% quarter-over-quarter, despite some very challenging weather-related conditions in the Bakken. The oil production increased along with substantially higher realized natural gas prices, resulted in adjusted earnings for the quarter of $25.2 million compared to $24 million back in 2013.

We continue to have good results in the Paradox Basin, where oil production grew 121% compared to last year. This play is a key part of our oil and gas portfolio and now represents approximately one-fourth or a quarter of our total oil production up from 13% a year ago.

We have about 130,000 net acres, including the recent acquisition of 35,000 additional net acres with the potential of another 20,000 acres that is under option. Compared to our acreage position of three years ago, we have nearly doubled that position. We currently have two rigs running in the area.

One rig is focused on development and the other rig is moving into the up-hole clastics we'd like to test as well as the newer areas, where we have recently run our 3D seismic.

Well cost in the Paradox are in the $9 million to $12 million range, but with the higher cost come greater potential and the EURs that have an upper range of about 1.5 million barrels. Our Cane Creek 12-1 well is approaching 700,000 barrels produced in just its 20 month life span.

It's still generating free flow production of approximately 1,000 barrels per day. We see our capital expenditures in the Paradox expected to total 180 million in 2014. Of course, the Bakken is still our largest producing asset accounting for over one-half of our total oil production.

I mentioned just a moment ago that winter conditions in the Bakken were challenging. Our production was certainly impacted by the conditions, as we saw minimal oil production growth year-over-year. We currently have two rigs running in the Bakken with one each in Montreal and Stark counties.

We expect to invest approximately $130 million in the Bakken this year, as we continue to develop our acreage and test new completion designs and techniques, which we expect to be finalized later in 2014. We are excited about our addition of the Powder River Basin, the third leg of our oil growth story.

Here we purchased approximately 24,500 net acres and what we believe will be the sweet spot of the Frontier Play. One thing we like about this area is that it's stack pay, where we have more than one horizon to develop. We're in primarily a non-operator position at this point in time.

The operators in place are companies that we have been in business, since seen in business a long time, and that we do trust. We anticipate two to three rigs drilling during the third and fourth quarters, as operators' ramp up for upcoming drilling season.

Also including our acquisition cost related closing adjustments, we plan to invest approximately $270 million in the Powder River Basin in 2014. Total projected CapEx for E&P group for the year is estimated at $670 million, which should be partially offset by planned asset sales of some non-strategic properties later this year.

So despite a slow start to the year in the Bakken, we are confident we'll achieve our revised target of 15% to 20% oil production growth for 2014. Our E&P segment is positioned well for continued growth. Now, turning to our utility business. Our utility business had a solid quarter, earning $38.3 million compared to $42.3 million in 2013.

The decrease reflects higher operation and maintenance expenses as well as the absence of $2.9 million after-tax gain on the sale of our Montana-Dakota's non-regulated appliance service and repair business.

Partially offsetting the decrease were higher electric retail sales and margins, including 10% higher sales volumes and higher natural gas retail sale margins driven by rate relief.

Temperatures were no doubt colder in the plain states of our service territory this quarter, but when combined with warmer weather in our Idaho utility service territory, we netted a minimal increase in natural gas sales on a combined basis.

We did achieve record electric retail sales volumes for the second consecutive quarter, thanks in large part to continued economic growth in the Bakken area, whereas we are seeing sustained customer growth.

Our outlook for our utilities business plans include investing $1.3 billion over the next five years with a projected rate base growth of 9% annually. A quick update on a couple of our larger projects. Construction of our 88-megawatt natural gas turbine continues to be on schedule with the projected in line service date of the third quarter this year.

We have filed for a $7.4 million generation tracker recovery here in North Dakota. The Big Stone Station environmental upgrades are well underway with expected completion later this year. Here, our portion of the project is now estimated at $90 million of rate base investment.

These are dynamic times for our utility group considering the many organic growth opportunities in front of us that are included in its record five-year capital forecast of $1.3 billion.

Next, moving on to our Pipeline and Energy Service Group, where we had earnings of $4.3 million compared to $2.3 million, just a year ago, reflecting higher earnings levels from our interest in our Pronghorn natural gas and oil midstream assets. Here transportation volumes were also 43% higher when compared with the same period just a year ago.

Principally related to this were volumes associated with the Bakken natural gas processing facilities. We have an aggressive goal to double our capital investment and as a result earnings in this group in the next five years. Our jointly-owned $350 million Dakota Prairie Refinery is approximately now 55% complete.

This project remains on schedule to begin testing later this fall and have at in-service by the end of the year. To date, more than 620,000 man-hours have been worked since we broke around just a little bit more than a year ago. And I'm also happy and very pleased to report that there have been no lost-time accidents on this very major project.

Currently, we have over 300 workers onsite and will reach a peak of around 450 workers later this summer. We have already hired our key management team and we're nearly fully-staffed with all of our operators.

And again, we have indicated previously, that our first year EBITDA projections for the plant are expected to be between $70 million and $90 million of which our share would be one-half. Our capital projections do not include the proposed 375-mile natural gas Dakota pipeline for which open season is now well underway.

Reaction to the project from producers, suppliers and marketers has been positive thus far. However, signed commitments are generally not made until the very end of the open season window.

So when that 120-day period concludes at the end of May, we'll certainly have to evaluate our results and we expect to make a decision as to whether we move forward with the project within a couple of months after the open season closes. In regards to our FERC rate case filed last October, a settlement in principal was reached just late yesterday.

So we'll be working through the details and plan to file new rates early next week, which will be effective as of today. We're optimistic about the future of our pipeline business, given the projects at-hand and its proximity to the abundant growth taking place in the Rocky Mountain region energy plays.

Now, returning to back to a consolidated discussion. We're pleased again with our first quarter solid results. As we look forward, each of our business lines has a bright near and long-term future. When we think about our construction group, we're seeing economic recovery underway that has also we've got capacity to continue growing our earnings there.

Our E&P recently added the third lake to its oil growth strategy and continues to enhance the value of its existing assets. And our utility is projecting that 9% annual rate base growth over the next five years, which maybe one of actually the fastest growing utilities in the country right now.

And our pipeline will be brining an outstanding project online in our diesel refinery later this year. And again is on the midst of an open season of our proposed Dakota pipeline, which will dramatically expand our pipeline system. Funding our future in a responsible manner and maintaining a healthy balance sheet also remains a top priority for us.

Our five-year capital program calls for an investment of $4.6 billion, including $1.2 billion here in 2014. In addition to operating cash flows, debt and non-strategic assets sales equity will also be raised to help provide this funding.

Our current equity projection continues to be in the range of $250 million to $300 million, dependent on other funding sources such as asset sale levels. The equity is funding accretive projects including rate base growth at our utility, the diesel refinery and drilling and acquisition growth at our oil and gas business as well.

We are excited about what we've returned to our shareholders in this past, through stock price appreciation as well as dividend payments. Our one-year total shareholder return as of March 31 was 41%, which is substantially higher in the indices we compare ourselves with as well as our peer group.

Besides, we continue our focus on creating shareholder value and we also have increased our earnings guidance, a $0.05 to the range now of a $1.50 to $1.65 per share. We're off to a good start for the year and look forward to carrying on this momentum Now, I would like to thank you again for your time today.

And we'll be happy to answer any questions that you might have..

(Operator Instructions) Our first question comes from the line of Brent Thielman with D.A. Davidson..

Nice quarter in construction services.

Is the margin expansion more of a function of mix of work or improving pricing environment?.

I'm going to ask Jeff Thiede to take on that one..

We had a few large projects ramp up faster than anticipated. We had favorable conditions in weather. And we're still anticipating good performance going forward. If you take a look at our outside businesses, we had a strong first quarter. But also contributions from our industrial, our equipment rental and supply and the Vegas markets is improving.

We're well-positioned with our electrical, mechanical, fire protection, excavation and supply companies. And we're looking forward to a good rest of the year..

And kind of on that, it sounds like you've been able to build on the backlog at the end of quarter, in what areas are you seeing the most strength in?.

We're really seeing strength in all of our business volumes. Our industrial companies have had a good first quarter. And as the weather breaks we see additional volumes there. Our outside line companies have decent backlog.

And even though our backlog is down, we've got several pending projects, primarily in our inside businesses that will help bring those levels up..

And then just lastly, can you help me with some of the puts and takes for the flat margin expectations for construction this year? Are there some headwinds this year that will make it a little more challenging to exceed last year's levels?.

Brent, I missed the first part of your question there, if you could just repeat. I think I got the last part as to wondering about margins in construction materials. But you just broke up a little bit on the first part..

Just wondering what kind of some of the puts and takes are for the flat margin expectations for construction this year?.

On the construction material side, our backlog margins are about flat compared to last year. However, with our higher backlog that we have, we're expecting to increase some margins on the backlog as we go forward in the second, third quarters..

Our next question comes from the line of Matt Tucker from KeyBanc Capital Markets..

First question on the guidance revision.

Can you just talk a little bit more about what more specifically drove the higher guidance? Did first quarter earnings come in above your expectations? Was it the PRB acquisition or combination?.

I would say, you hit a couple of the items, right first off. Clearly, CSG having a record first quarter for us was a nice start to the year there. And you heard Jeff earlier just answer Brent's question about what you're seeing in some of the markets.

And then you couple that to your other point on our entry and acquisition of the 24,500 acres into the Powder River Basin play that we closed on or about, I think March 6, both of those led to, looking at our guidance for the year and raising it by that $0.05. And so clearly there is a lot of the year left.

And there is influences there within our control and outside of our control, from the variability, when you think forward, whether it would be weather, commodity pricing, outside our control.

Inside our control would be things like execution, net backlog of $1.5 billion and construction of things that we've got, as Kent and his team, are learning more about the Powder River Basin play. So those would be kind of a future look. I don't know if that was really a question, but that's why we moved it up a $0.05 at this point..

And then just looking at the Natural Gas Distribution, the O&M there, as you pointed out was up quite a bit year-on-year.

Just talk a little bit about what drove that and also kind of your outlook for the rest of the year there?.

Sure, Matt. I'll turn it over to Frank Morehouse for that one..

Clearly, our driving factor for the increased cost on the gas side is regulatory compliance. We have more and more scrutiny regarding safe operations of our pipelines. We recently have had some reviews of our control room security. So we've had to add gas control facilities, at both the Cascade operation and the Intermountain operation.

And then throughout the entire gas utility, we've added Pipeline Safety Specialist with the increased focus on safe and reliable operation of these pipelines.

I think one of the important factors as we look at those increased costs, as we move forward with our business plans they also include rate recovery of those additional costs as we move forward. And the regulators take a very positive look when you're expending the O&M dollar to increase your safety and reliability of a pipeline.

You get very favorable response from the regulators on that..

I guess from the sound of it, I mean should we be assuming kind of similar growth then for the rest of this year?.

Matt, are you wondering about the growth at the utility business from a throughput and a customer basis?.

I'm sorry, Just on in terms of O&M, in that Natural Gas Distribution business, it sounds like a lot of those additional costs will continue going forward.

So I guess, I'm just curious, should we kind of look at a similar growth rate or magnitude of increase as the year goes on versus last year?.

I think that you can see similar growth in those expenses as we move forward, but that's also coupled directly with the growth of our utility. We see growth of the utility customer base within our gas utility of around 2%. We've got a great growth rate going on with our Electric side, again, recently 10%, we're going to modify that I think a little.

And on the conservative side, I think out for a number of years, we see at least a 5% growth on that. So again, we're very positive about what we see. We've got great regulatory relationships with all of our regulators.

And as we move forward with this, as it's typical of utility business is your cost increase, we'll need to go in for a rate relief on that..

And then just last question. On the PRB, you gave your total CapEx number for the year.

I was hoping you could tell us how much of that would be for drilling CapEx versus the acquisition itself?.

I will turn it over to Kent to talk about our PRB investment. I think we've stated about $250 million to $270 million, but he will add more color to that..

Matt, we're pretty excited about the acquisition we made. We're right on track with where we thought we'd be. We've been focusing on the second bench in the Frontier and it's been coming in like we've expected. In fact, our main operator out there is completing another well right now.

Going forward for the year, we're going to drill in the range of six to nine wells. Right now, they're in, I will call it, a time out period where there is a wildlife stipulations that avoid drilling activity going on. We'll pickup a rig at the end of May, another one in August.

And during the third and fourth quarter, we'll have anywhere between two and three rigs running and we'll expect to focus on not only the second bench in the Frontier, but also the first bench as well. So we could invest anywhere between $50 million to $70 million over this period on top of the acquisition cost.

And we sort of expect EURs in the range of anywhere from 800,000 barrels to 1.2 million barrels, but its early days, we're just really starting to get comfortable with this. But we're encouraged what we're seeing forward at this point. And we expect this to be a part of our important growth portfolio overall the years to come..

This marks the last call for question. (Operator Instructions) This call will be available for replay beginning at 1 PM Eastern Time today through 11:59 PM Eastern Time on May 15. The conference ID number for the replay is 23827719. Again, the conference ID number for the replay is 23827719. At this time, there are no further questions.

I would now like to turn the conference back over to management for closing remarks..

Thank you very much. As you can tell, we're both excited and focused on executing our substantial growth opportunities that are really just right in front of us, folks. And we continue to push forward on better leveraging our expertise across our business lines as well. We do very much appreciate your participation on this call today.

And we pledge to keep you updated, as we move throughout the year. So again, thank you. Thank you very much for your interest in MDU Resources..

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