MDU Resources Group Inc. Q1 2010 Earnings Call Transcript

Apr.30.10 | About: MDU Resources (MDU)

MDU Resources Group Inc. (NYSE:MDU)

Q1 2010 Earnings Call Transcript

April 30, 2010 1:00 pm ET

Executives

Doran Schwartz – VP and CFO

Terry Hildestad – President and CEO

Steve Bietz – President and CEO of WBI Holdings Inc.

John Harp – President and CEO of MDU Construction Services Group Inc.

Bill Schneider – President and CEO of Knife River Corp.

Dave Goodin – President and CEO of Montana-Dakota, Great Plains Natural Gas, Cascade Natural Gas and Intermountain Gas.

Analysts

Paul Patterson – Glenrock Associates

Holly Stewart – Howard Weil

Becca Followill – Tudor Pickering Holt

Jim Harmon – Barclays Capital

Chris Ellinghaus – Wellington Shields

Tim Schneider [ph] – Citigroup

James Bellessa – D.A. Davidson & Company

Paul Ridzon – KeyBanc

Operator

Good afternoon. My name is Casey and I will be your conference facilitator. At this time, I would like to welcome everyone to the MDU Resources Group 2010 first quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions)

This call will be available for replay beginning at 4 PM Eastern Time today through 11:59 PM Eastern Time on May 14. The conference ID number for the replay is 66644257. Again, the conference ID number for the replay is 66644257. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. 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.

Doran Schwartz

Thank you. Welcome to our earnings release conference call and before I turn the presentation over to Terry Hildestad, our President and Chief Executive Officer, I’d 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 slide, go to the website at www.mdu.com and follow the links 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 discussion of facts that may cause actual results to differ, refer to item IA, risk factors, in our most recent Form 10-K as well 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 Dave Goodin, President and CEO of Montana-Dakota Great Plains Natural Gas, Cascade Natural Gas, and Intermountain Gas; Steve Bietz, President and CEO of WBI Holdings; Bill Schneider, President and CEO of Knife River Corporation; John Harp, President and CEO of MDU Construction Services Group and Nicole Kivisto, Vice President and Controller and Chief Accounting Officer for MDU Resources. And with that, I'll turn the presentation over to Terry for his formal remarks. Terry?

Terry Hildestad

Thank you, Doran. Good afternoon. Thank you all for joining us today. We appreciate your interest in MDU Resources. Consolidated earnings for the first quarter of 2010 were $41.6 million or $0.22 per common share. That compares to the first quarter of 2009 earnings of $40.4 million or $0.22 cents per share, excluding an after tax non-cash charge of $384.4 million related to low energy prices on March 31 of last year.

These results underscore the value of our industry and geographical diversification strategy, the regulated utility and pipeline and energy service businesses both had record first quarters. They helped mitigate the effect of weather and the country’s weak economy on our construction businesses.

In addition, all of our businesses are continuing to focus on aggressively managing their costs; as a result, we finished the first quarter ahead of where we were at this time in 2009. I'll discuss our individual company results and their outlook.

Again, with the utility business, again they reported record first quarter earnings of $29.2 million compared to earnings of $29 million for the same period in 2009. The increase reflects lower operating maintenance expense as a result of continued integration and efficiency efforts at that business unit.

These results were partially offset by a decline of 13% in retail natural gas sales volumes because of significantly warmer temperatures. Our west coast states experienced 10% to 20% warmer weather than last year.

We continue to pursue new rate based generation to accommodate our load growth and replace our purchase power on April 1, Wygen III began commercial operation, added 25 megawatts to our generation ownership. Last year, we filed an application with Wyoming PSC for an electric rate case primarily to recover the cost of Wygen III. On April 27, the Commission approved an increase of $2.1 million annually or 13.1%, that's effective the 1st of May.

With respect to our renewable projects, construction on our 19.5 megawatt wind generating facility in southwest North Dakota and 10.5 megawatt expansion of our wind facility near Baker, Montana continues. With turbine assemblies in process, we expect both projects to be commercial midyear.

Earlier this month, we filed an application with the North Dakota Public Service Commission for an electric rate case of $15.1 million. This increase is to recover the costs associated with investments in inner infrastructure upgrades, the recent investment in our renewable energy generation and recovery of costs associated with the canceled Big Stone II project.

We are also developing a landfill methane gas recovery project in Billings, Montana. Installation of the gas processing facility is scheduled for this summer with production to begin in the third quarter. Upon total phase in, the project is expected to recover up to 2,500 decatherms per day.

The regulated utility provided solid first quarter results. We are continuing to look for opportunities to grow including reviewing possibilities associated with high-voltage transmission lines and system enhancements targeted at delivering renewable energy from our service territory to the major metropolitan areas. We look forward to this unit’s continued contribution of strong steady dependable earnings and cash flow.

Now, I want to turn to the pipeline and energy service operations. This business experienced record first quarter earnings of $8.8 million and 38% increase over 2009 earnings. The increase in earnings is a result of higher storage service revenue, customer storage balances were nearly doubled the same period in 2009 and operating and maintenance expenses were 14% lower.

During the quarter, we initiated an open season to increase firm deliverability from our Baker storage field. This is the largest storage field in North America. While there was considerable customer interest, the dynamics of the current pricing environment have caused us to evaluate a phased development of this project. We are currently working with customers who have expressed interest to secure precedent agreements and to move forward on the phased project.

The group will continued to pursue expansion of facilities and services offered to our customers. We expect ongoing energy development within our geographic region to present many benefits for this business.

Now, moving onto our natural gas and oil production segment, they reported earnings of $22.2 million in the first quarter of 2010 that compares to $11.1 million in 2009 excluding the fact that there was a $384.4 million after-tax non-cash charge last year.

The business benefited from average realized oil prices that doubled from a year ago as well as a 3% increase in oil production. Lower DD&A expense as well as a decline in lease operating expenses also contributed to the year-over-year increase. These increases were partially offset by a 21% decline in natural gas production and a decrease in average realized natural gas prices of 11%.

I’m excited to announce that we have signed agreements to acquire additional acreage in emerging Niobrara play resulting in a total position of over 80,000 net acres. The Niobrara shale play in southeastern Wyoming and the north central parts of the Colorado, these are in Laramie and Goshen counties, utilized horizontal drilling and stage completion, they are similar to the technology deployed in the Bakken play in North Dakota.

The activity in this area looks to be very encouraging. We have five year preliminary terms, primary terms on the leases with options to extend.

Early this year, we added approximately 40,000 net acres in North Dakota’s Bakken area. This brings our total 56,000 net acres in this area. Our expanded acreage is targeting the three Forks/Sanish formations, the terms here are between three and five years with an option to extend the three-year leases another couple of years.

We do intend to drill a couple of wells on this acreage yet this year. In addition, yesterday, we closed the producing natural gas properties in the Green River Basin, of Wyoming. In line with our expectations these properties add 12 million cubic feet a day of production. Properties include over 60 billion cubic feet of proved reserves, of which, 80% are proved developed.

We also believe there is an estimated unproven reserve potential of upto 190 billion cubic feet based on in field drilling opportunities. Approximately, 90% of this estimated natural gas production for the Green River is hedged out through 2012 at attractive prices. Our natural gas and oil business has had a busy quarter. In addition to these acquisitions, the operations of our existing properties remain strong.

We drilled a test well within our existing acreage in the middle Bakken formation, 500 feet from and parallel to an existing Three Forks horizontal well that was drilled in 2008. That was (inaudible) 1129 well. Our middle Bakken well is spaced on 640 acres, it’s drilled to a depth of 10,528 feet. It has a horizontal/lateral of 4,792 feet. We are waiting for completion on this.

We expect to use the nine stage frac for completion. We’re looking to gather and analyze critical data as we complete the well. And we believe, it will provide the input information about whether there is communication between the Three Forks and the Bakken reserves.

In February, we completed our first infill well in the middle Bakken. This was completed in a 12 stage frac. Our 30 day production rate was 547 barrels of oil. This was higher rate than the two offset wells, we are very encouraged by these results. We are optimistic about our infill drilling program in the Bakken.

Currently, net production for both our operated and non-operated interest in the Bakken is approximately 2,900 barrels of oil per day. That’s our net production. In our Texas properties, we’ve experienced significant delays in obtaining well completion and frac services because of the level of activity occurring in a couple of the shale plays in that area. Service companies are fully employed. It’s becoming increasingly difficult to get our wells scheduled for service and brought online as planned.

Given the lower natural gas prices experienced in the first quarter and with the lower natural gas prices projected to continue for the remainder of the year, we revisited our 2010 drilling program. Our total capital expenditures for this business are still forecasted to be approximately $375 million. However, we are shifting some of our capital from certain natural gas development activities to our oil shale leasehold acquisitions.

This is impacting current year production levels. Production in 2010 is projected to be down from the preceding years as a result of the lower levels of capital investment in 2009 and the reduced forecast for 2010 capital expenditures, as well as some of the delays were experiencing in the frac services in South Texas.

We now expect our combined production to be 3% to 6% below 2009 levels. We believe this decision to provide greater long-term benefits for the company. We continue to go forward with our strategy of up to 50% of our natural gas and oil hedging program.

For 2010, we have hedged approximately 50% of both our natural gas and oil production. For 2011, approximately 10% to 15% of our estimated natural gas production is hedged and 20% to 25% of our oil production is hedged.

As we look to the future, the acreage acquired this quarter in the Niobrara and the Bakken broadened the company’s long-term growth potential with additional exposure to oil. This provides us upside considering the oil price premium to natural gas. It also adds more balance to our overall portfolio.

The Green River acquisition fits nicely with our existing natural gas properties and our experience in the Rocky Mountain area. The business development team continues to evaluate opportunities in both our existing and new areas. We’re well positioned to continue to expand our portfolio of long-term properties.

Now, moving to the construction businesses, the construction materials and contracting business experienced a seasonal first quarter loss of $20.1 million, lower product volumes, margins, including the effects of weather-related delays contributed to the year-over-year loss. However, with the strong emphasis on operating efficiencies and cost reduction measures, we were able to lower our selling general and administrative costs again for this business unit.

We’re pleased with the passage of the HIRE Act last month and expect that the government leaders will continue to play strong emphasis on transportation funding. SAFETEA-LU is now extended to the end of this year that provides up to $42 billion for the 2010 federal highway program.

The continued federal stimulus spending is key for the construction materials business. As of late March, 74% or $5.8 billion of the federal transportation stimulus funds directed to our states of operation had yet to be spent. It’s estimated that three-fourths of the total stimulus dollars in the states we operate in is for asphalt work.

We’re very strong in this area. We have our own liquid asphalt division, which add value and differentiates us from our peers. Competitive pressures are strong for the available public sector work. We are pleased with the contracts in our backlog. As of March 31, our backlog was $568 million. This excludes a couple of significant contracts we picked up in April. We added over $60 million in backlog in the month of April.

We’ve seen later bidding this season and this year. This should result in some more robust bidding occurring in June and July. The business has a competitive advantage of being vertically integrated. It allows the use of our own products from the initial input to the final phase of completion.

We use 80% of the asphalt we produce in-house. We use 40% of the aggregates we mine and we use 30% of own asphalt oil. With our strategically-located aggregate reserves, we’re well positioned in our markets and we’re pursuing opportunities to expand the business both organically and through acquisition growth.

Now, moving on to the Construction Services, first quarter earnings reflect the continued strain of the economy on the construction market. On a positive note, the specialty equipment materials portion of this business is currently seeing a strong market. We manufacture and supply a large amount of specialized equipment for transportation and distribution puts us in a good position to benefit from the increased need to re-build transmission and distribution systems across the country.

The Group is forecast – is redefining itself really to take advantage of opportunities available that we’re seeing in the market in the areas of transmission renewables. We’re doing some work in military installations and wastewater systems.

On the transmission front, pre-construction work continues on the MATL [ph] line where we are the EPC contractor. We’re building three substations on this 214-mile line. Construction on this project is expected to start later this quarter.

On the renewable front, we continue to pursue solar and wind projects. We have several wastewater opportunities and are currently working on the North Las Vegas Water Reclamation Facility. The Group also has opportunities to assist in storm restoration work here in North Dakota. Earlier in the month, we had a wet snow fall and high winds that damaged an estimated 12,000 transmission poles, bulk of these were owned by the rural cooperatives.

We currently have about 140 people working in the area of restoring power and replacing poles, they should come in the second quarter. The business will continue to face challenged markets as we move through the year. The Group will keep a keen eye on costs as well as our bidding discipline.

Our backlog as of March 31st was $400 million, up from $383 million at December 31st. Our diversified portfolio of businesses provided solid results for the quarter, the regulated operations provided a solid foundation of earnings and continue to work on a number of projects we talked about that will build their rate base.

Our E&P business expanded their operations with the new properties, which we believe are adding long-term value for the corporation. Our construction companies work diligently to pick up quality projects.

We are pleased to maintain a solid balance sheet and good liquidity and puts us in a good position to take advantage of opportunities as they arise in all the lines of our businesses and we believe we are in the right businesses.

Our companies are well positioned to grow as this economy begins to expand. We continue to provide shareholders with a strong long and short-term performance with combined dividend payments and price appreciation.

Total average shareholder return at March 31 on a one year basis was 38%. Our 10 year return was 12% which exceeded that of the S&P 500, the S&P Mid Cap 400 and our peer group. Based on our first quarter results and our forecast for the remaining part of the year, we are reiterating earnings guidance in the range of a $1.10 to a $1.35.

Thank you for your time today. We’ll open the lines up for questions at this time. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from Paul Patterson from Glenrock Associates.

Paul Patterson – Glenrock Associates

Good morning.

Terry Hildestad

Good morning, Paul.

Paul Patterson – Glenrock Associates

I want to touch base on the production growth. You mentioned the short-term impact that you – that you’re dealing with as you also mentioned greater long-term benefits. I was wondering if you could elaborate a little bit on that.

Steve Bietz

Sure Paul. This is Steve Bietz. We have diverted some of our drilling capital and some of our activities to really invest more for the long-term in some of these acreage positions. We think that those provide a good deal of upside value for our company and for our shareholders and we’re going to look to really develop those as we go into the future.

Paul Patterson – Glenrock Associates

Okay. So, when you are thinking about production growth in 2011, will it catch-up for this decrease that we’re seeing in 2010? I mean how should we think about -- can you quantify the expectation for long-term growth as a result of this strategic change?

Steve Bietz

I think it’s probably a little early to really give guidance or talk about 2011. Certainly, as we experienced success in those properties, we’re going to see some increased production coming from that. We liked the idea that gives us more exposure to oil as well kind of balances our portfolio. So, yeah we view this as a very positive step from our perspective.

Paul Patterson – Glenrock Associates

Okay. Okay. When we’re looking at the gathering of the pipeline, the gathering – the decrease in lower gathering volumes, how should we think about what’s occurring there and what the outlook is about?

Steve Bietz

I think lot of our gathering properties, Paul, experience things, kind of across the industry where we saw a slowdown in drilling. So, with that slowdown in drilling we just kind of see natural declines associated with some of our properties in which we gather. We are seeing some of that, maybe loosen up a little bit. I think in Colorado, there is a fair amount of talking, but some additional drilling down in those properties. So, I think it's a bit of a blip here based on drilling activity last year and kind of the first part of this year.

Paul Patterson – Glenrock Associates

Okay. So that is a long-term trend, you don’t see that as basically being a short-term occurrence?

Steve Bietz

Yes.

Paul Patterson – Glenrock Associates

Okay. And then production of property taxes seemed to go up in that business?

Steve Bietz

I think, Paul, the big driver there in terms of production taxes, I mean those are really a function of revenues. And you need to look at our prices absent the effect of hedges, when you look at that and that's the primary driver of that.

Paul Patterson – Glenrock Associates

Okay. And finally, with the Construction Services business, I mean you guys mentioned sort of you are well positioned with respect to the stimulus and what have you, should we see a substantial up-tick in that – how should we think about that flowing-in in the next few quarters?

John Harp

Paul, I think maybe you have meant that for Knife River.

Paul Patterson – Glenrock Associates

Right.

John Harp

With the passage of the HIRE Act that Terry mentioned, that stabilizes the normal federal highways spending. Now with the stimulus moneys, it definitely is going to be about 55% of the remaining balance will be spent in 2010 and then the 45% remaining next year. The focus, of course, right now is getting the full six year bill reauthorized, which we hope to do, after it expires at the end of this year.

Paul Patterson – Glenrock Associates

Okay. And I appreciate that. I did mean it to you. I also mean it for the Construction Services business, because they also mentioned, as they – that you are well positioned to take advantage of that. How should we think of it?

Steve Bietz

Well, as far as the stimulus package, actually the MATL line that we are awarded here a few months ago actually came out of the stimulus funding itself and both WAPA, Western Area Power Administration and Bonneville Power Administration, both got stimulus money for upgrades to the grid, the transmission grid that we’ll have opportunities to bid on here in the near future.

Paul Patterson – Glenrock Associates

So, we should think of this quarter as being probably the low point? Is that the way to think of it?

Steve Bietz

Well, obviously you look at our numbers and they tell a story as our revenue numbers have dropped, that’s a concern of ours. So, we’re obviously trying to offset that as much as we can by managing our cost and being pretty selective on what we’re going after. We’re – like Terry mentioned, we’re looking at some other markets that we have been in the past and trying to be more of an EPC contractor looking at waste water, military sites, obviously the transmission wind and solar.

So, we’re really trying to redirect our focus to new markets, because of some of our existing markets quite frankly have, are really having some difficult traction right now as far as bidding and exactly where some of our customers are in the economy as we see it today.

Paul Patterson – Glenrock Associates

Okay. Thanks a lot guys.

Terry Hildestad

Thanks Bob.

Operator

Our next question will come from Holly Stewart from Howard Weil.

Holly Stewart – Howard Weil

Good afternoon. Couple of quick questions for you, I guess, first following along Paul’s question on production for the year. Can you just help us I guess better understand the split for the rest of the year? So, I’m thinking about your moving capital away from gas, but you had an acquisition that just closed, you are also moving capital towards your oil developments. So, can you just help us better understand how you are thinking about how the split going forward from quarter-to-quarter, just thinking about 2010?

Steve Bietz

Do you mean in terms of production or you talking about capital?

Holly Stewart – Howard Weil

I was talking about production. We are just looking at the first quarter production numbers and trying to think about how you’re getting to your 3 to 6% guide down range. How we should be modeling that from a split between oil and gas going forward?

Steve Bietz

Sure. I guess you are right. With the acquisition that Terry mentioned, we’re going to add about 12 million a day of gas production, that’s primarily gas. There is some liquids associated with that that will take effect really starting today, as we just closed on that transaction yesterday. If you look in some of our other properties, there are some activities that we had in East Texas that we had – was primarily all of gas drilling. We’re kind of moving some of that around down there to take advantage of some areas that are higher saturated in some liquids.

In South Texas, we’re going to move a few of those wells, discontinue or not drill those wells. Again based on gas prices kind of based on opportunities on the oil side to help fund some of that, some of our non-operative properties again kind of gas directed, we would fall off there. I don’t have a specific allocation or percentage of oil and gas as we go forward, but other than I guess as I think about going forward we’re going to have the acquisition the benefits of that.

And then we are drilling in Baker, we’re drilling in Bedouin and some of that. So, we’ll see some pickup in gas the rest of the year and the other properties are kind of mixed between oil and gas.

Holly Stewart – Howard Weil

Okay. So, we should kind of think about this maybe a slight up-tick quarter-over-quarter in gas and then oil kind of continuing on the same path?

Steve Bietz

Yeah. Probably a little bit of up-tick in oil, yeah.

Holly Stewart – Howard Weil

Okay. And then just thinking about the new acreage position that both in the Bakken and Niobrara. Can you talk about development there and if you’re increasing rig count kind of how you’re thinking about that going forward?

Steve Bietz

Sure in the – let’s start with the Bakken, we picked up around 40,000 acres. Our plans right now, Holly, would be to try to drill two maybe three wells on that acreage. This year plans right now, we’d look to probably move our existing rig, however those are things that we continue to evaluate whether we would add a rig there, but we are going to do some drilling up there one way or the other. So, that will probably happen late summer or this fall. And as you think about Niobrara, we’re certainly working on kind of our plans and development and securing services and all those types of things. Probably, optimistically, we could start some drilling at the end of this year, but more likely it’ll occur sometime next year.

Holly Stewart – Howard Weil

Okay. And then I guess finally on construction materials. I know this is probably hard to do, but can you kind of give us an idea of the weather impact during the quarter just so we can think about kind of how we should model it over the rest of the year?

John Harp

Yeah, Holly, obviously first quarter is our slow quarter, but particularly down in Texas and the mountain in Northwest, we had a lot of moisture higher than normal, but we don’t think that it should carry through for the rest of year.

Holly Stewart – Howard Weil

Okay. Great. Thanks guys.

John Harp

Thanks, Holly.

Operator

Our next question will come from Becca Followill from Tudor Pickering Holt.

Becca Followill – Tudor Pickering Holt

Good afternoon, guys. First question is for John Harp. On the Construction Services business, as you work to reinvent yourself, how long should we see the more depressed level of earnings? This is several years to reinvent yourself; do you have some visibility on projects? That’s kind of what I’m looking for.

John Harp

First and foremost, the biggest impact, quite frankly we have looking forward is how this economy recovers. I mean that’s the driver here. I mean construction is an outlook of people being on a positive and optimistic about the future and they’re willing to invest in building facilities and building some power plants and refineries and transmission lines. So, as the economy gradually turns obviously, we’ll benefit from that. But at the same time while that’s going on we’ve recognized that some of the markets that we have been in for the last four, five years are under a lot of pressure. And that’s why here just recently when we announced the MATL project where for the first time we winning as a EPC contractor we’re looking at that same type of model for some renewable work that we’re looking at both in wind and solar to where we there is a better opportunity.

And quite frankly, we need to look at project size a little differently in the past; there are a lot of competition for projects that are between the 1 and $5 million range. You might have as many as 20 or -- 20 bidder showing up to one bid opening just because of the economy. So we need to move our model up to some larger dollars to obviously have fewer players at the table and then really target those markets. And I think Terry mentioned it, we’re obviously interested in the transmissions, the renewables. We’re working on the military basis quite a bit and the wastewater.

The other thing that we’re doing is looking at some wind projects where if you look at a wind project and you kind of break it down into the different construction deals and the materials side of the business between Knife River and CSG, we think we could manage and self perform about 70% of that type of work.

So Bill Schneider and myself have been actively looking at some opportunities as possibly being a general contractor on some wind farm developments. And we’re working on a couple proposals right now, but we recognize collectively maybe if we work together, we may be able to break into the some deals that quite frankly we’ve never been in before and we think that’s a good opportunity.

But there is no question; we’re under a lot of pressure. We had a very good run the last four, five years. The interesting thing we still have the same people, who performed in good times. We have good people who have managed through this tough time and the long-term outlook is very favorable.

Becca Followill – Tudor Pickering

But in terms of additional projects like this transmission line, is there any visibility on other big projects that you’re bidding on or is it just trying to grab whatever you can at this point?

John Harp

No. I mean we’re in negotiations on a couple of projects. I’m very – I’m somewhat sensitive to how much I can tell you. The proof is in the pudding, let’s see if we deliver. But I can tell you that we’re actively looking at these markets and obviously trying to leverage our expertise and the people that we have. And I think the combination of Bill’s group and our group collectively on a couple items might be an interesting mix that we never used before. But in these days you know what, you’ve got to look at things completely different than you looked at that two, three years ago.

Becca Followill – Tudor Pickering

Okay. Thank you. And I’ll let that one drop. Overall no change in guidance for the year despite lower production and lower expected commodity prices. Does this mean that you guys are probably looking at hitting towards the lower end of the range or is there something that is offsetting?

Terry Hildestad

No, Becky. Really when you take a look at is we’re in the range of where we were started the year. The first quarter is traditionally we haven’t moved guidance. It’s early in the year, it’s early in the construction businesses. Both John Harp’s group actually construction services and Knife’s Group, their backlog if you compare it to where we were last year, they are flat or up a little bit. And it’s just too early to tell. We were a little disappointed in the weather impact on utility business. But we still had record earnings there. So we’re okay with our guidance at this time.

Becca Followill – Tudor Pickering

Okay. And then finally on the E&P side, can you guys disclose where your Niobrara acreage is and how much you paid per acre? And then how many wells you would need to drill to hold that acreage?

Steve Bietz

Becca, this is Steve. As far as we’ve identified we’re in Laramie and Goshen counties. And beyond that we really haven’t disclosed the exact acreage, it’s still a very active and competitive lease situation down there and for those reasons we’re going to really stand away from that right now.

In terms of kind of drilling and drilling requirements pretty favorable lease terms down there. These are basically five year leases, they’ve got some kickers to extend those, many of those an additional five year potential. As far as drilling commitments, no drilling commitments associated with that acreage. So we’ve got really the life of the lease to do that. I think -- did I answer your question? I think I touched on everything you had asked, Becca.

Becca Followill – Tudor Pickering

You did. And just in trying to look at your long-term production growth rate of 7 to 9%, does the acreage that you’ve picked up in Bakken and in Niobrara give you the ability to do that or do you guys still need to buy something else in order to get there?

Steve Bietz

I think it gives us a lot of potential growth there, Becca. I mean probably with our acreage in Niobrara. It’s early but we’ve got probably 120 some potential drill sites there. Assuming kind of 640 acre spacing, we got about half of that up in the Bakken area. And again I think both of those provide an opportunity to add some production growth in the future and kind of repeatable drilling scenario based on kind of the formations there. So we think those really help us with that growth.

Becca Followill – Tudor Pickering

Okay. Thank you.

Terry Hildestad

Thanks, Becca.

Operator

Our next question will come from Jim Harmon from Barclays Capital.

Jim Harmon – Barclays Capital

Good afternoon.

Terry Hildestad

Hi, Jim.

Jim Harmon – Barclays Capital

How are you? Okay, relating to gas production on the well completion frac services, when do you expect that problem to moderate and how many wells do you have in inventory to complete?

Steve Bietz

What we’re seeing, the biggest effect is down in our Texas properties with the various Haynesville and Eagle Ford. It’s been challenging getting crews and I think we’ve got five wells right now that are drilled that are winning on completions.

In terms of timing, it’s kind of difficult to say. I think we, over time, we certainly would expect that to -- more services to be available. But it takes people, it takes equipment. So, timing is kind of difficult. We’ve looked at our plans going forward and it kind of builds in some delays for the remaining wells we’ve got planned down there as well because of the current situation.

Jim Harmon – Barclays Capital

Okay. Second question if gas stays at $4, what does it do to your CapEx budget? You eventually move it all towards oil or you cut it? The other related to that is what portions of your portfolio are economic to produce at $4 on the gas side?

Terry Hildestad

We’ve kind of looked at our drilling programs in all of our areas and we’ve kind of modeled it, even we’ve looked at around $4.50 first year price and 5.50 second year and kind of modeled it going out that way. Generally, we kind of continue with our drilling programs that we’ve got identified right now. A couple of more gas areas probably, some of our coalbed area, maybe some of our East Texas would be areas that we could slow down. And at this point, if we did that, we would redirect those dollars to oil probably but that would be something we’d have to decide kind of at the time.

Jim Harmon – Barclays Capital

Okay. And then I have a question for Bill Schneider.

Bill Schneider

Yeah.

Jim Harmon – Barclays Capital

I want to rephrase what Holly asked you, what was the weather impact on construction during the first quarter as compared to last year. Was the total decline due to weather or was this something else?

Bill Schneider

Well, I would say it was a mixture of the weather plus of the decline in the volumes, Jim.

Jim Harmon – Barclays Capital

Great. Thank you.

Bill Schneider

You bet.

Operator

Our next question will come from Chris Ellinghaus from Wellington Shields.

Chris Ellinghaus – Wellington Shields

Hey, everybody. How are you?

Terry Hildestad

Fine, Chris.

Chris Ellinghaus – Wellington Shields

Steve, when I look at the E&P business, it seems as if you’ve got higher oil revenues, lower gas revenues and you’re getting some offset from lower operating expenses. As we go through the year, how should we think about operating expenses and certainly the new properties that you’ve acquired? Should we be seeing some seasonal escalation going forward for the rest of the year?

Steve Bietz

Chris, I think our lease operating costs for the quarter came in, I believe it was $0.90, I think – I think that’s what it came in at. I’ll just check that number here, $0.94. Kind of looking at the balance of the year, I would – certainly we’re targeting to keep that in that same range. So I don’t see a lot of increase. I guess one thing that could drive that looking quarter-to-quarter could be how much kind of workover activity do we do, that can influence lease operating costs kind of quarter to quarter

Chris Ellinghaus – Shields & Company

Okay. And sort of looking at the trend on gas production, it’s a pretty ugly accelerating depletion trend. Can you give us a little color on what gives you confidence for the rest of the year with lower CapEx that you’re going to start to see that reverse or decelerate?

Steve Bietz

I think if you look at the gas side, Chris, you’re right. We’ve seen some declines, but I think you’ve got to look at the activity that we’ve undertaken the last nine months or so and there are very few gas wells that we brought on. So, we’re kind of coming off a period where we did some drilling, some of those new wells came on, they fell a lot faster, so you’re kind of seeing that from first quarter last year to say first quarter of this year. And that stuff will flatten out and that decline will flatten out some, but with the drilling that we’ve got planned, Chris, that’s really where we’re going to see some of the acceleration in kind of daily production on our gas side. And until we start that, we’re not going to see the increase. The other piece of that, of course, would be the acquisition that we’ve talked about already with Green River Basin.

Chris Ellinghaus – Shields & Company

Thanks Steve. Bill, given the billions of dollars of stimulus funding out there and sort of your expectation for a significant success rate, I was kind of expecting that we might get some improvement in the backlog and I think Terry said that there was some more success in April but should we be expecting the backlog to be growing year-over-year at some point or is that, how are the contracts working such that maybe is backlog not a good indicator of what your activity levels will look like?

Bill Schneider

No. I think it is a good indicator, Chris. I think the best way for you to view it is, of course, as has been mentioned earlier today is the overall construction market continues to decline. So, we if we are holding our own where our backlogs are maintaining at the same levels as last year, you can assume from that is that we are picking up market share and we are doing – we are outperforming the market in other words. So, right now we are – and plus I think we are going to see a good bid calendar coming up here in the next two or three months. Right now, I think if you watch and see what’s happened with our publicly traded competition, I think, we are doing quite well.

Chris Ellinghaus – Shields & Company

Okay. And John, can you give us any color, obviously Las Vegas is really an important market for you, can you give us any color for what, what’s being going on?

John Harp

Well, there is no secret that Las Vegas market is in a severe recession, but one other things that we are doing in Las Vegas that’s very positive is this waste water plant that we’ve picked up about a year and half ago, I can tell you right now that that project is doing very well. We’re happy the way that thing is being projected and the other thing that we’re actively doing and picking up additional work is in the solar side of the business in Las Vegas.

So, again as we stated in our press release, lot of ways we’re kind of redefining ourselves is trying to look for other markets, but right now as far as the casinos and room rates and there is an overabundance of rooms especially there and it’s going to be – it’s going to be that way for a while. So we just kind of hunkered down and managed through this thing and continue to look at our costs (inaudible) economy gets better.

Chris Ellinghaus – Shields & Company

All right. Thanks a lot everybody.

Doran Schwartz

Thanks, Chris.

Operator

Our next question will come from Faisel Khan from Citigroup.

Tim Schneider – Citigroup

Hey guys. It’s Tim Schneider [ph] for Faisel actually. Just two quick questions on the Bakken. Number one is what are the differentials right now and where do you see those kind of headed over next year? And the other one is could you just remind me again what the timing is of that middle Bakken test?

John Harp

As far as the differentials, Tim, I think most recently we’ve found them between $7 and $10, kind of ranging there, at least for the last three months. I think there has been an increase or there has been an increase in capacity out of the area. It’s hard to predict but our view is that we probably stay in the same range as we are today. Regarding, the timing of – I think you asked on our Three Forks Bakken test, that well has been drilled. It’s I think currently scheduled to be fraced later second quarter and so hopefully we would have the results of that here before the end of the second quarter.

Tim Schneider – Citigroup

Fine. Thank you.

Operator

Our next question will come from James Bellessa from D.A. Davidson & Company.

James Bellessa – D.A. Davidson & Company

Good afternoon.

Terry Hildestad

Good afternoon, Jim.

James Bellessa – D.A. Davidson & Company

The acquisition that was completed yesterday, are the hedges that you said that were on that business included in the table that’s in the press release?

Terry Hildestad

They were. Yes, Jim they were.

James Bellessa – D.A. Davidson & Company

And Steve was talking about $12 million increase due to the acquisition, but what are the units are we talking about 12 million per day MCS, what are we talking about?

Terry Hildestad

It’ll be 12 million cubic feet per day of production – of gas production equivalent.

James Bellessa – D.A. Davidson & Company

Okay. And we’ve had a major economic or environmental disaster in the Gulf of Mexico. In the previous call, I think you said that you had an interest in selling your interest in non-operating businesses in the Gulf of Mexico. Is this reducing the value – potential value of those properties or alternatively if we reduce the offshore drilling activities of our nation because of it, does it increase the value of the properties?

Terry Hildestad

Jim, I think that’s really tough to say. I think realize that the probably are going on right now is some deep waters, we’re in the shallow waters, it’s a bit of a different situation. But what that might do to some of the offshore activity in properties, I’d not venture to guess right now.

James Bellessa – D.A. Davidson & Company

And are any of your properties or investments in the Gulf disturbed or impacted adversely as a result of the spill that’s occurring?

Terry Hildestad

No, no they are not.

James Bellessa – D.A. Davidson & Company

And then on, a question about the utility business. Weather there was a factor, but there – the economy must be a factor too. How much upside leverage if we get back to normal economy will there be in the utility business?

Dave Goodin

Jim, this is Dave Goodin. I would say really the primary driver that we saw in the first quarter would be weather related. We do follow the economy obviously. First quarter we don’t typically see a lot of new customer activity because of our northern climate as well.

But certainly the weather had an effect on us, particularly when you go west to the Rockies and we shared those degree day information on our news release. You could see we’re actually a 14% under in Oregon, Washington service territories and 5% under normal for Intermountain. So, that was really the primary driver in the first quarter.

James Bellessa – D.A. Davidson & Company

And is there much upside leverage if the economy returns to normal going forward?

Dave Goodin

From the utility business?

James Bellessa – D.A. Davidson & Company

Right.

Dave Goodin

Certainly getting back to historic levels of growth that we’ve seen certainly would be an upside for us. But we’re offsetting what we’re seeing in the slowdown from an internal efficiency and cost saving perspective as of today.

James Bellessa – D.A. Davidson & Company

Thank you very much.

Operator

Our next question will come from Paul Ridzon from KeyBanc.

Paul Ridzon – KeyBanc

Can you quantify what weather was versus normal at the utility, kind of ballpark that?

Dave Goodin

Paul, this is Dave. You know, I’m not really going to ballpark it. I’ll just probably say, it was probably in the – could have been in 5% to 10% range, but that’s not – that’s not defined, because there is a lot of variables, you have industrials that helped to offset that and they’re really non-weather dependent.

But certainly when you look at some of the residential market, you can expect the downturn in volumes to be on the order of degree day difference and I’ll probably leave it at that.

Paul Ridzon – KeyBanc

And then just at construction materials, I guess 5.8 of the 7.9 work in your stage has been – is still open, what – the 2.1 difference there, how much of that business have you won?

Dave Goodin

Let’s see, Paul. On your question, we have 5.8. But give me the second half of your question?

Paul Ridzon – KeyBanc

Well, there is 7.9, 5.8 left, so that means 2.1 has been contracted. How much of that have you won?

Dave Goodin

Yes. Well, 20% of our backlog, construction backlog is stimulus spending. Paul, so that would give you a rough idea, how we’re doing relative to stimulus versus regular federal highway money.

Paul Ridzon – KeyBanc

Do you think given the asphaltiness of the work that you can improve that – that hit ratio?

Dave Goodin

We’re still in the success rate that we’ve mentioned to you before, maybe 20% to 23% success rate. I would say that back to what Terry mentioned earlier, Paul, our vertical integration and the fact that we’ve got the aggregates, the asphalt production and the oil, really this plays into our, I think, into our shrinks. But right now I can’t tell you whether or not we are being more successful than others, but my guess is that’s the case.

Paul Ridzon – KeyBanc

How much of that work did you actually bid on?

Dave Goodin

Well, the stimulus work is in our footprint. We’re bidding on everything. We’re not excluding any of our projects.

Paul Ridzon – KeyBanc

So, you would bid on the entire 7.9?

Dave Goodin

If it's – no, that’s for full states. For example, in the state of California, we primarily work in the northern part of the state with the exception of the work we do in the ports of Los Angeles and Long Beach, and so there is the southern part for example on the highway end of things, we don’t bid in that market. That’s an example.

Paul Ridzon – KeyBanc

Okay. Thank you.

Dave Goodin

Okay.

Terry Hildestad

Thanks Paul.

Operator

This marks the last call for questions. (Operator Instructions) This call will be available for replay beginning at beginning at 4:00 PM Eastern Time today through 11:59 PM Eastern Time on May 14th. The conference ID number for the replay is 66644257. Again, the conference ID number for the replay is 66644257.

Terry Hildestad

With that, thank you for tuning in today and visiting with us about our results. Really, overall, if you look at the company our cost structure is very well positioned as you would expect. Regulated businesses are performing well. We had record earnings in both of those units. The oil and gas, we’re certainly pleased with the expansion into the shale plays. Construction businesses are a difficult economy, but we’re positioned as well as anyone in that group. So, as this economy turns around we’re certainly poised to take advantage of that. We look forward to talking with you again soon. Thank you.

Operator

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

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