John Henson - Unidentified Company

Good morning. My name is Sarah, and I will be your conference facilitator. At this time, I would like to welcome everyone to the MDU Resources Group 2010 year-end and 2011 guidance conference call. All lines have been placed on mute to prevent any background noise. (Operator Instructions) This call will be available for replay beginning at 2:00 pm Eastern Time today, through 11:59 pm Eastern Time on February 17. The conference ID number for the replay is 1-800-642-1687 or 706-645-9291. The conference ID number for the replay is 344-80-118. Again the conference ID number for the replay is 344-80-118. I would now like to turn the conference over to Doran Schwartz, Vice President and Chief Financial Officer of MDU Resources Group. Thank you. Mr. Schwartz, you may begin your conference.

Thank you, and welcome to our earnings release conference call. And before I turn the presentation over to Terry Hildestad, our President and Chief Executive Officer, I would like to mention that this conference call is being broadcast live to the public over the Internet and slides will accompany our remarks. If you’d like to view the slides, go to our website at www.mdu.com and follow the link to the conference call. Our earnings release is also available on our website. Now, during the course of this presentation, we will make certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Although the company believes that its expectations and beliefs are based on reasonable assumptions, actual results may differ materially. For a discussion of factors that may cause actual results to differ, refer to Item 1A Risk Factors in our most recent Form 10-K, as well as our Form 10-Q and the risk factors section in our most recent Form 8-K. Our format today will include formal remarks by Terry, followed by a Q-&-A session. Other members of our management team who will be available to answer questions during the Q-&-A session of the conference call today are; Steve Bietz, President and CEO of WBI Holdings; Dave Goodin, President and CEO of Montana-Dakota Great Plains Natural Gas, Cascade Natural Gas, and Intermountain Gas; Bill Schneider, President, CEO of Knife River Corporation; John Harp, President and CEO of MDU Construction Services Group; and Nicole Kivisto, Vice President, Controller, and Chief Accounting Officer for MDU Resources. And with that, I'll turn the presentation to Terry for his formal remarks. Terry.

Thank you, Doran, and good morning. Thank you for joining us today to discuss our results for 2010 and our 2011 outlook. I’m pleased with the performance of our business units this year. Our business unit Presidents and their teams delivered in a tough environment. In addition to generating consolidated earnings of $240 million or $1.27 per share, we accomplished several key strategic initiatives in 2010, including positioning ourselves for future growth through the entry into exciting, exploratory including the Stark County acreage in North Dakota’s Bakken, the Niobrara in Wyoming. We also added natural gas properties in the Green River Basin. We generated approximately $700 million in cash from operations and asset sales, including de-risking our investment in the Niobrara properties while maintaining a significant operated interest in that acreage. Our pipeline set another record for natural gas storage balances. We had record earnings and continued customer growth at our utility. The disciplined approach to cost controls and project bidding at our construction operations continued. We strengthened our balance sheet and continued to have access to significant liquidity, and we increased our dividend for the 20th consecutive year this past November. As we transition from 2010 into 2011, we are well positioned for, and we are focused on growth in all of our business units. I’ll start with the natural gas and oil operations; they produced solid financial results for the year. We deployed approximately 356 million into this business in 2010 including the Green River Basin, our Stark County acquisition and our Niobrara acquisition. Oil production grew 5% over 2009 levels, now represents 28% of our overall production. In today’s commodity price environment our strategy is to maximize returns for our shareholders by increasing our oil and liquids production. This will occur even more in 2011. In the near future, the Stark County, the Niobrara and the Health Shale oil prospects will compliment this strategy as we develop these plays. In the Bakken area, we drilled eight wells on our Mountrail County acreage last year. Production increased 41% over 2009 levels with production averaging approximately 3700 net barrels per day. We are pleased with these results; we’ve identified over 50 future middle Bakken in-fill and Three Forks well sites in our Mountrail County acreage. This year, we expect to drill 13 operated wells and participate in various non-operated wells investing about $52 million in this Mountrail County acreage. We acquired approximately 50,000 net acres in Stark Country last year where we are targeting the Three Forks formation. We drilled our first discovery well, the Kostelecky 31-6H. We have a 94.5% working interest in this well, we drilled it to a depth of 10,220 feet with a 4226 foot horizontal lateral, was completed with 16 stage frac, it tested at a 24 hour rate of 1343 barrels of oil equivalents. This initial flow rate was very positive. Our second test well the Oukrop was just completed. While, it’s not been production tested initial pullback of fuel is less than expected. Our last test well, the Wock well is drilled and currently waiting on completion. We plan to drill an additional six operated wells and participate in various non-operated wells on the Stark County acreage this year. Our initial capital expenditures in this area are forecasted in the $37 million range. While it’s early in our evaluation of this acreage we are optimistic about the play. We estimate there to be about 75 drill sites based on 640 acre spacing. Our drilling plan for 2011 also includes the addition of a second rig in the Bakken and we anticipate this will come online in the second quarter. In early 2010, we secured a significant position in the Niobrara play, most of our lease terms are for five years, with five-year extension options. After the sale of a 25% working interest in the acreage to a well-capitalized partner, we maintain an approximate 65,000 net acre position. We are currently performing seismic and have plans to drill two exploratory wells on this acreage this year. If successful we plan to initiate a drilling program of approximately 12 wells annually. We have more than 100 future drilling locations on this acreage based on 640 acre spacing. We also hold approximately 80,000 net exploratory leasehold acres in the Health Shale oil prospect in North Central Montana. We plan to drill our first test wells this year. Last spring, we added producing natural gas properties in Southwest Wyoming, the Green River Basin assets. These properties are performing well, we expect solid long-term results from this field. Our proved reserves at the end of the year were 646 billion cubic feet equivalents. And keep in mind our reserve figure does not include our recently sold acquisitions because of the exploratory nature of these plays. As we highlighted in our press release yesterday, we have a multi-year drilling program that we believe will lead to growth in future reserves and production. We are making substantial investments in this core business, in total we expect to invest approximately $300 million into our E&P business in 2011, which includes $50 million for additional leaseholds. Any potential acquisition of producing properties would be incremental to this total. In order to mitigate price risk, we continue our hedging strategy. Our hedged position for the year is now 45% to 50% of our estimated natural gas production and 60% to 65% of our planned oil production. The long-term fundamentals of both natural gas and oil remain strong. We believe the combination of further development drilling, leasehold additions and acquisition opportunities provide our business with a number of growth prospects both in the near and long term. Next, I want to move to our pipeline operations; they experienced record natural gas storage balances during the year, building on the previous record set in 2009. 2010 earnings, excluding third quarter $16.5 million arbitration charge were $39.7 million. This was also at a record pace. Our storage service remain an integral part of this business, and we are moving forward this year with the first phase of the storage expansion to add firm deliverability to our Baker storage field. This business also befitted from activity in the Bakken with its extensive pipeline system in this area, 11 different proceed points available to receive associated Bakken gas. Customer interest is currently being solicited for a 27 million cubic foot a day capacity expansion in the Bakken production area, also construction on a 12 mile high pressure pipeline providing take-away capacity for processed natural gas is expected to begin late this summer with completion targeted for the fourth quarter. This pipe will transfer gas from a plant in North Western, North Dakota to a new delivery point on northern borders pipeline. We continue to evaluate other facility and service opportunities and expanding energy development areas. Our pipeline is well positioned to grow organically and through acquisitions, and we expect a solid year for this group. Our utility operations represent a strong foundation of earnings and cash flow for MDU Resources. This business had record earnings in 2010. We are seeing growth in both electric utility business led by the expansion in Western North Dakota, as well as growth in our natural gas distribution operations. A rate increase in Wyoming took effect in May, and a mid-June interim rate increase in North Dakota also helped improve electric earnings. We added 55 megawatts of rate base generation last year, 25 megawatts of generation was added in April with the purchase of Y gen3 [ph] for our Wyoming customers. Two wind farm projects in North Dakota and Montana came online in June adding 30 megawatts of renewable generation and we developed a 2000 dekatherm waste generating plant in Montana that became operational this last December. Overall, our customer base increased 1.3% over last year and we continue the successful integration of our four utilities into one. Our employee count is 17% lower than it was in 2008 when we initiated our integration efforts. We continue to work with the North Dakota PSC on our electric rate case, which we filed last year, our current request for $8.8 million annually is in the PSC review process. Briefings were held in January, we anticipate an order in the first quarter. A hearing will be held later this month in our Montana electric rate case, we are requesting $5.5 million annually. Looking forward, we see opportunities for the development of high voltage transmission lines and system enhancements and we are pursuing opportunities to invest in additional rate base generation to replace purchase power and maintain a reliable supply of electricity. Now moving to the construction groups, the economy continues to effect volumes and margins for our construction businesses. However we believe these businesses are good long-term solid fundamental businesses. Overall volumes at our construction material segment are down for the year. Aggressive cost cutting measures along with the focus on gaining efficiency decreased SG&A cost. Costs were 38% lower in 2010 compared to our peak earning period of 2006. Passing a major multiyear transportation bill is key for the potential upside of this business. The current funding has been extended until March 4. While the 2011 outlook for construction material business will be challenged, we are seeing significant multi-year bid letting opportunities. We were excited recently to receive word that our joint venture is the apparent low bidder on the Port of Long Beach, Middle Harbor Phase 1 project. We expect our portion of this phase of the project to exceed $30 million. In addition, Honolulu’s $5.5 billion Light Rail project has the green light to begin construction. 20 miles of elevated rail track and 21 stations will be completed in 9 phases over the next 8 years. Estimated at about 60 to 70 thousand cubic yards of concrete will be needed annually just for the rail portion. Additionally, projections are that another $25 billion to $30 billion in residential and commercial projects will be constructed along the line. As many of you know, we’re the primary cement supplier in Hawaii and we’ll also supply a portion of the concrete to the project beginning in the third quarter. We’ve been meeting with major contractors associated with projects planned on the military base in Texas. Bid letting for a $700 million project is anticipated in the next couple of months. We’re also pursuing opportunities to grow our higher margin asphalt oil operations. We’re building the new terminal in Cheyenne. We expect this to be placed in service later this year. We look forward to significant participation in building up our nation’s infrastructure. Our low cost structure and our asset base of 1.1 billion tons of aggregate, position us well to benefit from volume growth as the economy continues to recover. Our construction service group ended the year strong with improved earnings in the fourth quarter related to higher construction workloads and margins in the western region. Our industrial operations completed the first part of its multi-phase turnaround refinery work in November. The project went well. We expect the second phase to begin in a couple weeks. A separate turnaround project is scheduled for March. The December 31 backlog is up over last quarter by about $56 million. This includes over $30 million in solar work with additional solar projects available to bid in the Nevada, California area. We continue to target these opportunities as they become available. We’re also gearing up for a 50-mile, 345 kilovolt transmission line in Texas, sorry in Kansas, excuse me. The economic climate will present challenges to this construction business in 2011. However, we’re optimistic that our margins will remain stable this year, and we’re encouraged by the opportunity for transmission, wastewater, health care and technology and industrial projects. We’re positioned very well as our SG&A costs are 31% below our 2008 levels. Our people, this business’s biggest asset, have the skill, have the expertise and the drive needed to maintain profitability in the successful business. We’re initiating our 2011 EPS guidance in the range of $1.5 to $1.30. This range factors in the uncertainties presented by the continued low private construction spending and funding for public work projects, as well as continued low natural gas prices. However, we’re excited about the potential of our exploratory drilling program in the organic growth opportunities at our regulated operations. We’ll monitor our markets. We’ll update our guidance as the year progresses. MDU resources is in a strong position, the fundamentals of our business are strong. We have a valuable asset base. At year-end we had $222 million in cash. We have access to $610 million in available liquidity from our credit programs. We generated significant cash from operations, our balance sheet is strong, we’re well positioned to pursue acquisitions as well as grow our operations organically. We have implemented efficiencies across our companies, we’ve decreased our controllable cost and we are certainly leveraged to an economic recovery. Now with that, I want to thank you for your time today and we’d be happy to open the lines up to questions. Operator.

(Operators Instructions) Your first question comes from the line of Chris Ellinghaus with Willington Shields.

Hey guys, how are you?

Good. Good morning, Chris.

Can you give us a little color on the strength and construction services in the fourth quarter?

Sure. John, do you want to take that?

Yes Chris. Actually, unlike our fourth quarter which is stronger than the last fourth quarter, on those sort of the transition work, forward work (ph), (Inaudible), football stadium completion, and (Inaudible) I thought the projects they were multi-year with 400 and most for the improvement on margins as the projects is ramping up. So we’re very pleased with how we finished the year and we’re optimistic that we could continue that into next year. We still face a lot of challenges, but as I’ve said before we’ve got people and they certainly execute in the fourth quarter.

Okay. Great guys. And can you give me a little color on the improvement year-over-year in construction materials in the fourth quarter?

Same thing Chris, because we have a couple of good jobs in the fourth quarter. The Walmart project in Oregon, but also we’re really geared up on Port of Los Angeles B2B projects. That’s a big riprap quarry work. It’s good margin work and those two projects we’ll have to start in the fourth quarter.

Okay, super. And the gas utility was also very strong, but the degree-days in a number of locations were not favorable. Can you give me a little color on that? Is it related to integration?

Chris, this is Dave Goodin. I think you hit it right on the nose, Chris. If you take a look some of our O&M, you can see that dripping down in our gas business and with the weather being off some from normal and certainly year-over-year off some, you could see that would translate into reduced margins, but the internal savings more than offset that.

Yes, apparently. Okay, super. And one last question, are you guys funding any acquisition opportunities at this point in the construction businesses?

Chris, William Schneider here, I’ll jump in. There are a lot of deals out here and frankly there are not very many buyers, so substantially lesser portion of good buyers. We’ll really maintain our discipline, but we’ve got our eye on a few Texas candidates and we’ll be surprised if we do these deals in 2011.

All right great. Thanks a lot for the color. I appreciate it.

Thanks, Chris.

Your next question comes from the line of Holly Stewart with Howard Weil.

Good morning, gentlemen.

Good morning, Holly.

Just a couple of quick ones here. First on the Balkan, thanks for the additional detail within the release, but can you give us just a little bit of further information on your services. I believe the last time we talked about kind of completion services within the Balkan, you guess were using Halliburton about one day a month considering that you’ve got another rig coming in, in the second quarter. How are services looking for you guys right now?

Hi, this is Steve. Services continue to be tough and we’re focused on certainly with the ramp up in activity in the Balkan and look at some of the large transactions that occurred. If you’re going to see I think that rig count continue to grow, which is going to leave some pressures on completion and kind of all services across the drilling and completion area. I guess where we sit today we’ll use a couple of different parties to do some of our completions. We continue to work with those and we can schedule services the best we can. As we sit here today, I guess we may be disappointed we don’t get some of our wells completed as quickly as we’d like to. As we sit here today we’ve got one well that’s waiting on completion. So I think that our guys have done a pretty good job of trying to minimize the effect of that.

So you don’t have any long-term service contracts lined up at this point?

No, no firm contracts at this point. No.

What do you see in terms of cost escalation there?

We’re seeing costs go up some. Really, I’m going to say in most of our services we’ve got a longer term contract with some of our drilling, our drilling service. But other related services we’re seeing some upward pressures.

Okay, great. And then can you just talk a little bit Steve about your opportunities in Texas that you mentioned within the release?

I’m sorry. I didn’t hear you Holly. Could you…

Your opportunities in Texas?

I guess relative to - I guess we disclosed that we’ve got about $40 million I believe allocated to some of our Texas properties. Those are really existing properties, primarily drilling some of our South Texas stuff where we see the liquid content a bit higher than some of our other areas. So we’ve got fair number of dollars dedicated there. And then we’ve got another area we try and call Central Texas that we’ve got some drilling planned as well.

Any shale opportunities there?

Opportunities for additional kind of properties, certainly we are looking for those.

Any shale.

Oh, Shale? At this point we don’t have any shale opportunities other than our properties in East Texas, in Rusk County. There is some potential shale below that. We’ve got below our Cotton Valley, we have not done anything to evaluate at this point, but something that’s certainly on our radar screen.

Okay. And then just a follow-up on the Construction Materials quarter, you mentioned within the release that there was an asset sales gain on PP&E. Can you talk about that and just quantify it?

Yes, Holly, there was only about $2.6 million in asset sale gains in the fourth quarter.

Okay, so minimal. Okay. Great. Thanks guys.

Thank you Holly.

Your next question comes from the line of Tim Snyder with Citigroup.

Hey, guys. How is it going?

Good, Tim.

First question is on the ENP segment. Was there a difference as far as the completion method goes on the alcra valve versus the carsolekhi?

No, our activities were virtually the same. I think we did a 16-stage sliding sleeve completion of both wells.

Got it. And then, can you talk about the timing of the exploration wells in the Niobrara and also the Heath?

For both areas we’re looking kind of some time in the second half of the year relative to the Niobrara, we’re evaluating some seismic. We shot some 3D in there. We need to shoot some additional. I think we determine - that’s pretty critical to placing our wells. There is a fair amount of faulting in the area, so that’s something we want to get evaluated before we start drilling. The Heath Shale, we’re also looking kind of the last half of the year to start with that.

And the second rig you guys are going to be getting in Q2, is that headed to Stark County?

Most likely, yes. We could take it up in the Montreal County for a well or two and then bring it down. I think your guys are just kind of evaluating that. But likely it will be in Stark County.

And then what were the differentials in the quarter to WTI and where do you see those going longer term?

Those differentials have kind of maintained that $10 or $11, $12 range, somewhere in there. And I guess indications that we have, hoping they stay in that range. I think if you look at all of last year they did shrink up at different times in 2010, but currently we’ve been standing that $10 to $12 range.

Okay, thank you guys.

Thanks Tim.

Your next question comes from the line of Paul Ridzon with KeyBanc.

Good morning.

Good morning, Paul.

Your commentary on construction materials adjusted flat volumes and flat margins, but construction services just hit flat margins. Where do you see volumes?

Well, you know, I don’t know, I’ll take a shot at it and then you can add in. It’s early to tell. You can see the backlog on both of those. Actually the backlog at the construction materials was down slightly, didn’t include that recent project in the Port of Long Beach. Third quarter to the end of the year, we are fortunate in the construction service group to be up a bit in backlog as we noted in there. I don’t know John, Bill, you want to give any color to that.

The one thing I would say because of our focus in on higher margin work, even though our backlog is down somewhat if the margin in that backlog is up.

Okay. And just on your income statement for gas utility, looks like other taxes is down almost $8 million, kind of - is that structural change, is that a one-time thing?

Are you talking about the income tax change that we disclosed and income tax benefit?

Taxes other than income is down about $7.9 million. It went from 55 to 47?

Yes, I don’t - I think basically there is nothing in particular driving that, I don’t have any comment to add there, I would think we would continue to see that on a go forward.

The 47 on a go forward?

I think the decrease is probably in line with, for example, the revenue decrease and then I think other taxes evolved through there would be payroll taxes for example on the days that integration wise we did a nice job of integrating those utilities and so that would also be reflected in that line item.

And where was the $4.8 million income tax, was that at the gas utility?

Yes, it was -

Yes, now related to a reduction in our deferred income taxes. If you take that out and net that out, basically our run rate, on the effective tax rate would be similar to prior years in the 34% and 36% range, that’s how you’d want to look at that on a go forward basis.

And then Terry, can you just give some color as to what you are hearing as far as the prospects for the transportation bill?

Well, I’ll let Bill answer that. He is very involved with that.

Yes Paul, unfortunately or fortunately I’m Chairman of the National Zone Association this year, so I’ve been active in the lobbying and effort. The industry is very, very well organized and we’ve been lobbying like crazy to get a multi-year bill. But frankly with the republicans taken over on the house side is their focus of course is on the deficit. So right now we are living under this extension that Terry mentioned earlier till March 4. We are trying to get where our six year bill, but more than likely it’s going to be less than a six year bill. And the other thing we lobby for an increase and more than likely it will be flat, would be the best-case scenario at this point. But right now we cannot give you a specific timetable when reauthorization is going to occur.

The thread of a reduction is probably off the table.

You know there will be a possibility that they could reduce the funding to us slightly and we don’t think it would be a big haircut, but there’s been rumors that that would be a part of the overall deficit reduction strategy. But it’s really too early to tell. We’re in very close contact with Chairman Michael. We’ve had a very good relationship with him. I think he is a very strong supporter, and whether or not he is going to rule the day or the speaker of the house being and his focus on the deficit.

Okay, thank you very much.

Your next question comes from the line of Monroe Helm with Barrow Hanley.

Thanks a lot. You guys haven’t heard the SCCPV10 number for your reserves at the end of the year?

We’ll see if we have those. Just give me a second here, I’ll - I think I have that with me, but your going to have to give me a minute.

Sure, that’ll be great. Just, I wanted to see if you could give just a little bit more color on the Texas properties, because yours been a meaningful amount there. You say that’s focused on Liquids and South Texas and Central Texas, can you talk a little bit more about what play times you are targeting there?

Sure, we are involved in the - we’ve got some properties in South Texas, focusing primarily on Frio and Vicksburg formations. Again, they tend to have a little higher liquid content than some oil. That’s where a fair amount of that is kind of dedicated to as we look into next year. Much of that - I guess, essentially all of that we currently have under lease and we look to develop that on our acreage.

Okay, are you the operators on those properties?

For the majority of it we are. We operated in Tabasco and Texan Gardens fields. We do have stuff in the Flories Field, but we are not the operator.

Okay. So who would be your partners there?

I believe the operator of the Flories now is Apache.

Okay. And Central Texas, can you talk about that just a bit more?

That’s the new area that we’ve kind of recently started to drill a couple wells this past year, that’s a pretty good success. I don’t have a lot of details for you, but we have, the two initial wells we drilled in the area were pretty successful and so we’ve added to our leased position down there and are looking to add some wells this year.

Okay. Do you have a handle on what the lease hole position is in both these Texas plays versus South Texas and Central Texas?

I don’t have that off the top of my head, no.

Okay, not a problem. As we look into the second well you’re drilling here in Start County, when do you think we might have some actual drilling results from that well? And would do you pressurize when it happens?

In terms of - I think we’ll probably turn that over to production in the next week or so. And then the third well, we’re waiting on completion, I’m not sure, I can’t give you a specific date, we’d certainly believe that’s going to happen in the first quarter, and then certainly as time goes on, whether we do news release or somehow provide information, we’ll update you at some point.

Okay. And you have a 30-day production rate yet on the first well, how long has that been on production? And can you tell us what it’s producing today and how long it’s been on production.

It’s been on production, I’m going to guess here, I don’t have the specific date, but about seven, eight days.

Okay.

So we’re pretty early on. I guess, what I can tell you, it’s maintained its production level kind of consistent with what we see in our other Balkan wells. Last report I got, we are probably in the 600-barrel a day range.

Okay.

As far as your MTV10 number, if you look at our total reserves this would be before income taxes. It’d be $1,130 million.

Okay. All right, I appreciate your interest. Thanks a lot.

Thank you.

Your next question comes from the line of John Henson - Unidentified Company.

Good morning.

Good morning John.

I just want to follow up, you mentioned some thing about working on generation for rig base. Are we’re going back to the coal plant or what kind of thoughts do you have around what that might be?

Hi john, this is Dave.

Good morning.

Good morning. John, we’re analyzing our various options. Certainly you mentioned about going back to the coal plant that might have been a reference to our Big Stone two projects that we stopped the project here. I think it was November of 2009. If I were to say to Dave, John and get him going through and analyzing various options, most likely in today’s environment we’ll be looking at gas-fire generation whether it’s simple cycle, combustion or the combined cycle would be something kind of details to work out, I would anticipate we’ll be making some decisions in that, probably late 2011, probably at the latest early 2012, because our current contracts that we will be looking to replace expire in May of 2015 and it requires about a 30 to 36 month bill period. But that’s not written and installed right now, but that’s probably the most likely scenario.

Okay, good. Thanks. Let me just follow up on one thing on the highway? I think I’ve got most the questions were asked earlier, but what about asphalt. I’ve seen another player here today talk about prices for asphalt. They are able to get - are not up that much, but their costs are up quite a bit. I know you guys play in a different part of the market.

Well on the asphalt side, we reported in asphalt oil business, we have four terminals presently and we’re building our fifth terminal as we speak in Cheyenne, Wyoming. Right now there has been a little volatility in the price side of things in the last 12 months, but we don’t really see that on a go forward basis in 2011. We’ll find our winter field right now and we don’t think it’s going to be as big of issue as it was in 2010.

Great. Thanks.

Your next question comes from the lines of James Bellessa with DA Davidson and Company.

Good morning.

Good morning, Jim.

On the utility side you indicate that there were a higher non-regulated energy related service revenues or activities. What is this non-regulated and related services?

Jim, we have various value services across our service territory, some of that is beyond the meter into the customer’s home and another significant part is doing pipeline activity throughout this. We had a project that we extended a pipeline for a third party that really was for their, self build on a gas combustion turbine and that was included in our earnings last year.

In the oil and gas side, is there anything in the next three to five years where you see production of natural gas rising or…?

Jim, I guess if you look at our strategy, as we see it today we are focused on margins, where we are going to get our best margin, where we are going to get our best return. We’ve got an objective of trying to better balance our portfolio between oil and gas so that depending on the market, depending on the year we can add or deploy our capital into one or the other or both dependent on the situation. I guess, I don’t want to leave you with the impression. We are not interested in natural gas. I think long-term natural gas has a very bright future. We think now might be a good opportunity, not so much to spend money to drill today, but maybe if we could acquire some properties at a reasonable price and then look to add value over a longer term in a higher priced environment.

When you first introduced this Stark County activity, you called that Heart River, are going away from that nomenclature and just calling it Stark County activity.

Yes Jim, I think there are a lot of names going around, and we thought Stark County maybe is the best one. So we try to reference this as Stark now.

And what is the lapse time between completing wells, drilling and then actual production?

Jim, drilling, once you release the rig, completion services can be as quickly as a week or so. It can be as long as maybe two or three months. So, it just depends upon service availability. The time to do the completion using our technology, we are probably talking of I use a range here, maybe 24 to 48 hours at the most. And then, generally you pull back some of the frac fluids, that will depend a little bit on timing, but on the individual well I mean, but that might take a week plus or minus. And at that point, assuming you’ve got production facilities constructed, you’d be ready to turn it over to production.

And is that what was taking, maybe three months at the Stark County activities?

Probably, most of our time delay there has been waiting to get the well frac or completed.

And then, over the weekend I was driving between Shelby and Cut Bank, Montana on Highway two, never did see were the Madeline cuts across that Highway from the Morias Substation. The first staging area, are you not yet putting up poles in that area? David Goodin Actually, we’ve got poles from the Morias Sub to almost the Canadian boarder, I think we’ve got that five structured right now as we’re speaking, we’re putting foundation tiers in those five locations. So, that line is up in that piece Jim. And then, actually we’ve got about 40 men working in Montana right now, stringing wire. We’ve got about 60 miles of wire off the Morias heading to the Northern border. I’ve got 42 men up in Canada today and we are studying and ground framing up there right now.

I pulled in your parking lot and cut bank; saw out of 23 rigs sitting there over the weekend. It looked impressive to me that I see that many trucks and pickup trucks and SUVs. Would that be a normal number of vehicles that you would be using the service activity like this?

Well, I got over 40 men working there off and on 45. And this weekend, we also had some issues with some high-wind and we were actually not stringing wire, I do not know if you noticed, we had a helicopter up there that was stringing and wire from the Morias up to the Canadian border.

Thank you very much.

Your next question comes from the line of Tim Schneider with Citigroup.

Hey, guys. Quick follow-up on the construction materials. Obviously, diesel costs are up pretty significantly sequentially year-over-year. Just wondering what those cost increases had as far as the impact goes for the quarter and how are you going to deal with those going forward?

Yes, Tim, our fuel was up last year and of course we’ve got a close eye on that. How we handle that, Tim is there is a couple of different ways. One is, we do a fixed contract, we buy contracts with 44000-gallon increments. We also have some national diesel suppliers that can move our product to 17 or 18 states that we have. And that of course, we get a fixed rack prices as well, but generally speaking our cost last year about $54 million.

Okay, got it. Thank you.

Your next question comes from the line of Jim Harmon with Barclays.

Good morning.

Good morning Jim.

Four quick questions, the insurance recovery at pipeline and your services, could someone quantify that please?

Jim, that related to, really a confidential settlement that we had with our insurance companies related to gas stored kind of the Elk Basin Storage that we’ve talked about some of the past years. If you look at it, and kind of look at some other costs we incurred associated with that really is not material to our operations.

Okay. The$ 2.6 million the Bill referenced earlier, was that a pre-tax or after-tax gain? Doran Schwartz After-tax.

After-tax. That’s after-tax.

Okay. And to you Bill, the question is you have done a great job dialing down O&M expenses, but what’s your threshold for lowering that line item before you start cutting in the muscle?

Well, as answer to this question, and if you asked us three years ago if we would be able to continue get the costs out the organization then we have been, I would’ve said at this point, no, it wouldn’t happen. But we’ll continue to look at individual plants, the padlock plants, there’s not a volume or profitability there. We look at our indirect costs as well as our SG&A. And I will tell you, that we have our eye on significant amount of cost cut in beginning 2011. So, we’re not done.

And then for John Harp. You’ve businesses has transformed itself a couple of times. One in your watch when you wanted into Vegas, from a - from the Internet, and as you move into renewable, could you quantify maybe the size of that market relative to Vegas or maybe describe the potential opportunity there? At what stage should we be watching for?

On the renewable, as we mentioned in our release that we’re doing, with both in Nevada and have some opportunities in California and if you look at the renewables in a bigger picture, actually the 214 miles transmission line that we’re building between in Montana and Canada is built for renewables. It was actually two existing wind farms with potential of another two wind farms to be built. That’s something that we talked to maybe six months ago about an opportunity that we might have and being the actual general contractor on one of these wind farms where Bill’s group and my group would get together and put together a proposal on a wind farm. We kind of looked at that and it’s interesting, if you take all of our services and our expertise and roll it all up into one proposal. We basically performed over 70% of that work, the only area that we would -- be out would be the installation of the windmills themselves that we felt comfortable that we could do that. So, as long as the solar and the wind develop continues, obviously there is got to be infrastructure built for those locations and we feel like we’ve been very successful in our solar work in Las Vegas again, Avon [ph] electric, we were not building casinos, so now we’re building solar plants. It’s in a very successful wastewater plant in North Las Vegas another change in another direction. Like I said, we’ve reinvented ourselves a couple of times through that.

Okay, great. Thank you.

(Operator Instructions) Your next question comes from the line of Monroe Helm with Barrow Hanley.

Just a follow-up on the exploration business. I don’t know if you have it handy or not, but I was wondering what the SEC PB10 was for the previous years year-end numbers and while your you looking at that, can you breakdown the capital expenditures for that division for last year between the amount of capital spent through reserve purchases and the amount of capital actually spent for drilling?

Give me one second here. Sorry Monroe, you got to give me a sec here to find it….

Yes. No problem.

As far as the capital expenditures, you asked about for 2010 to kind of give you the breakdown, in terms of acquisitions, we’ve got about $90 million of proved properties and $92 million of unproved properties.

Okay.

Developments about $140 million, and the balance spent about $33 million in exploration.

Okay.

As far as the year end, in PB10 value, again on a before income taxes?

Right.

Is $789 million.

Okay. Do you have a breakdown of your 2000 -- capital spending numbers kind of someway just give us the 2010. I think you said, you sort of said $50 million for unproved property acquisitions. That implies other estimates, I was assuming for exploration developments. So it will be a step-up in your capital spending there we guess. Is that the best way to look at that? Doran Schwartz Yes, what we’ve talked about, we got a total of $306 million in our capital expenditures for next year. If you want to look kind of big pieces in the Balkan area, up in Montreal County we expect to spend about $52 million, Stark County 37, so about $90 million there. That’s close to a third. In Texas, we’ve got $48 million targeted down there. We’ve talked a bit about that. We’ve got $50 million allocated to kind of new leasehold opportunities. I don’t really have an exploration number for you, but we’ve got several exploration wells kind of pant in Niobrara and in the Heath Shale and a couple of other areas that were involved in. I don’t have the specific numbers for you there. And, I guess the balance of it is kind of spread against some of our other properties, whether that be some of our Wyoming stuff and just kind of scattered through other operated properties.

Okay. One other question, I assume that your gas reserves spike continue to decline as you’re cutting back you’re drilling there, but if you execute on your budget as you expect, can we see your reserves. How to expect we’d see reserves on a BOE basis grow in total, by the end of ‘11 over 2010?

I think that’s certainly one of objectives to grow our -- both our oil and gas reserves, but as we are deploying capital we’ve probably seeing all reserves grow at a faster pace.

Okay. Just one last question. What kind of governs how much capital you will spend in this space going forward? I mean, I was, just a functioning of the cash flow, I mean, you out spend the cash flows in your E&P business or how shall we think about future cap spending in this space?

In the current version of our forecast, and you’ll see this in the Form 10-K, you were expected to increase our capital allocated to this business unit. Steve mentioned it’s in the press release about $300 million this year. That grows to -- again based on the current forecast about $360 million. And 2012 and 2013, it goes to about $420 million. So we’re anticipating that we would grow our CapEx as we go forward in this business.

Okay, thanks for your answers.

Thank you Monroe.

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 for participating on our call today. As we look forward, we are really optimistic regarding our growth opportunities. We talked about some of the organic growth opportunity projects that we’re pursuing. But we’re certainly looking to grow through acquisitions as well. As you know, our balance sheet is strong; we are in a good position to fund these acquisitions. As far as guidance is concerned, we’ll update you throughout the year as we always do. In the mean time look forward to visiting with you at some future time. Thank you very much for your interest.

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