MDU Resources Group, Inc. (MDU) Q3 2008 Earnings Report, Transcript and Summary

Good afternoon. My name is Kara and I will be your conference facilitator. At this time, I would like to welcome everyone to the MDU Resources Group Third Quarter 2008 Earnings results 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 November 14th. The conference ID number for the replay is 649-79-554. Again, the conference ID number for the replay 649-79-554. 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 Vernon Raile, Executive Vice President, Treasurer and Chief Financial Officer of MDU Resources Group. Thank you. Mr. Raile, you may begin your conference.

Welcome to our earnings release conference call. 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 would like to view the slides, go to our website at www.mdu.com and follow the link to the conference call. During the course of this presentation, we will be making certain forward-looking statements within the meaning of Section 21E of the Securities and 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 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; Bill Schneider, President and CEO of Knife River Corporation; John Harp, President and CEO of MDU Construction Services Group; Dave Goodin, President and CEO of Montana-Dakota, Great Plains Natural Gas and Cascade Natural Gas and Intermountain Gas; and Doran Schwartz, Vice President and Chief Accounting Officer, MDU. With that, I'll turn the presentation over to Terry for his formal remarks. Terry?

Thank you, Vern. Good afternoon, I would like to thank all of you for joining us today for a discussion of MDU Resources' record third quarter results. We recorded consolidated earnings from continuing operations of $118.2 million, a $13.9 million increase from a year ago. Earnings per common share from continuing operations increased 12% to $0.64. This quarter's results and our year-to-date performance are outstanding. Our strong financial position reinforces the value of our diversified business strategy and disciplined financial management, especially at a time when our nation is facing serious economic challenges. Our Natural Gas and Oil segment, reported record third quarter earnings of $57.5 million, a 73% increase over last year's results. Contributing to their earnings improvement were realized natural gas prices that were 37% higher and 53% higher oil prices as well as a 7% increase in combined production. Our production has been impacted by the September hurricanes. The hurricanes caused significant damage to some of our non-operated offshore properties. In addition, our operated Texas properties as well as some of our non-operated onshore properties reported loss production as a result of temporary power outages and flooding. We estimate the third quarter loss production impact was approximately 500 million cubic feet equivalents. We are estimating total loss production for 2008 related to the hurricanes to be approximately 1.5 billion cubic feet equivalents considering the remaining production shut-ins in the Gulf. While it's too early to determine when the production will all be back on line, we are estimating that about 75% of the production will be back on line by year-end. During the quarter, we continued our exploration efforts in the exciting Bakken play. Despite the recent decline in oil prices, we continue to be very optimistic about this play. We consider our interest in the Bakken to be a long-term play capable of generating solid economic returns and cash flows. In our Southern acreage block, our estimated ultimate recovery reserves would continue to provide economic returns at approximately $50 a barrel. In total, we have spud 22 operated wells to date with 17 wells producing in the Bakken. The remaining wells are in various stages of drilling and completion. These wells are producing a total of approximately 1000 barrels of oil per day on a net basis. We have an additional 300 to 400 barrels of oil per day on a net basis from our non-operated wells. Our current producing wells... of the current producing wells, eight of the wells are in our Northern Bakken acreage in Burke County. These wells were completed in the Bakken formation. The initial production on these wells was lower than we had anticipated with average flow rate of 175 barrels per day for the first 30 days. We're evaluating the economics of continued drilling in the Northern acreage targeting the Bakken formation. However, we're also assessing our Three Forks/Sanish potential in this acreage block. Based on the technical data from our initial pilot holes there are indications that Three Forks/Sanish formation looks to have similar potential in this area as our Southern block. Our first Three Forks/Sanish target in the Northern block is currently drilling. Our efforts to explore the Three Forks/Sanish formation is continuing across all of our acreage. As we reported in July, our first Three Forks/Sanish formation well in our Southern acreage block, the Domaskin 11-29 had average production over the first five days following fracture stimulation treatment of 634 barrels of oil per day. We have plans to spud additional wells in the Three Forks/Sanish formation this year. In total, we expect to participate in 50 to 60 wells this year within our Bakken acreage, roughly half of these wells will be operated-wells. Now turning to the Paradox Basin, we continue to be excited about our exploration activities in this area, and if long-term potential. We're producing approximately 525 barrels of oil per day on a net basis in this basin. The region is primarily an exploratory play with multi-zone potential. We expect to spud our six wells yet this year which will be located in our Northern acreage block. In the Rocky Mountain region, we recently received permits from the Bureau of Land Management to drill on our federal coal bed acreage in Montana. We expect to drill approximately 15 wells yet this year. Primarily driven by the recent hurricanes in a lower short-term growth expectations from the northern portion of our Bakken acreage, we have decreased our combined natural gas and oil production growth guidance for 2008 to a range of 7% to 9%. With natural gas representing about 80% of our annual production, approximately one half of our natural gas is hedged for the remainder of this year. The pricing levels are attractive with a weighted average swap price of $8.91 and weighted average collar floor of $7.41 in a ceiling of $8.71. Less than 5% of our estimated oil production is hedged because of the lack of correlation with the indices. It's our philosophy to conduct natural gas and oil swap and collar derivative instruments with A-rated counterparties, and we currently have positions with five different parties. The growth potential of our natural gas and oil production operations is strong. We have over 800 billion cubic feet equivalent of proved reserves. In mid-September, we announced our estimated probable and possible natural gas and oil reserves had increased 19% to 950 billion cubic feet equipment. We hold over 1.8 million gross acres of leaseholds. In general, our properties are low-cost properties allowing for good economics. We're well positioned for long-term growth. Next, our pipeline and energy services group reported earnings of $5.7 million for the quarter. The decrease in quarter-over-quarter earnings is a result of lower storage services revenue as a result of a 28% decline in volumes transported to storage. This is partially offset by declining... these declines were partially offset with increased gathering volumes. Our pipeline group is moving forward on a number of growth initiatives. We're on schedule to increase firm capacity in eastern North Dakota by 10 million cubic feet per day. This expansion is fully subscribed and expected to be in service mid-November. We're currently adding compression and new interconnections with the northern border in the Bakken area in Northwestern North Dakota. This expansion had 32 million cubic feet of capacity per day. We expect this to be completed before the end of the year. As we announced in August, we're expanding our Grasslands Pipeline by 75 million cubic feet a day. Strong customer demand boosted the project to its full capacity of 213 million cubic feet a day. We expect this to be in service in August of 2009 at a cost of approximately $28 million. These are all examples of solid growth, organic growth opportunities. Our Interstate Pipeline system runs through the heart of the active energy producing regions. This group is very focused on capitalizing on opportunities in the region. Our construction materials and contracting business continues to be affected by the economic downturn, primarily as it relates to the residential market. Earnings for the third quarter were $33.6 million, compared to $50.4 million reported one year ago. In response to the residential market decline effects on its business, this group has been able to adjust its cost structure. They are focused on finding the best opportunities and shifting resources to optimize our workforce and our equipment usage. The group has shifted resources to niche work providing products and services for energy projects. We have several infrastructure projects for wind farms, refineries, geothermal plants and power plants, where we provide concrete and other aggregate products and services. Couple of examples of energy work of the group is doing work for a large refinery in Port Arthur, Texas where they're utilizing several ready-mix trucks from other regions of the company. They've also recently completed a 6000 cubic yard pour at the main Dakota Power Cooperative station in North Dakota. We are pleased that our backlog position of $557 million has improved from a year ago. With the decline in available private work, our mix of business has changed. At year-end 2006, 60% of our backlog was public work. As September 30th, public work represented 78% of our backlog total. Certainly Federal and State funding is a key ingredient in driving public infrastructure spending. We were quite pleased that the State of Minnesota recently approved the bill adding $650 million per year in infrastructure spending; that's a ten-year program. We are hopeful more states will follow. On the federal front, the six-year $286 billion federal bill Safety Lieu [ph] is set to expire in September of 2009. Work has already begun on its replacement. As has been the historical trend, it is expected that the new federal transportation bill will be larger than the current bill, which was 31% higher than the predecessor bill. Typically, during recessionary periods, the Federal Government tends to inject more dollars into infrastructure and transportation funding as stimulus for job creation and an economic boost. Our understanding is that there are already serious discussions on a second stimulus bill that would place a heavy focus on infrastructure. This group completed one acquisition this past quarter, acquiring Ideal Contractors in September. Ideal is a producer of construction aggregates and is a construction contractor headquartered in Idaho Falls, Idaho. This acquisition complements our existing operations in Boise. In total, our construction materials has approximately 1.2 billion tons of strategically located aggregate reserves. These assets are necessary for America's future infrastructure needs and will provide long-term value for our company and shareholders. Now turning our attention to the exceptional performance by our construction services segment, earnings for the quarter were $16.3 million, a 19% increase over quarterly earnings record from year ago. This group continues to successfully execute on its strategy utilizing the talent and expertise of their employees as they focus niche markets and projects that provide solid returns. This past quarter, 125 employees from the construction services group traveled to Texas and Louisiana to help our restore power after the hurricane. September 30, work backlog of $608 million is off some from last year's backlog of $826 million which was near record levels. We're pleased that this group added a couple of large jobs into backlog this past quarter; one project involves work on the Right Peterson Air force Base Human Performance Wing in Dayton, Ohio. The second large contract is a data center near Kansas City for a major bank. These are quality jobs that have the necessary funding in place. On a year-to-date basis, construction services earnings have improved by 21% compared to a year ago. Our construction services group's disciplined business focus on monitoring its markets and its cost and looking forward to identify the most profitable niche opportunities is reflected in these strong results. Our team of employees are our continuing this razor-like focus to best position themselves for the future. Next, our electric and natural gas utilities reported earnings of $3.4 million compared to earnings of $1.2 million for the same period in 2007. The earnings growth primarily reflects higher electric retail sales margins and energy-related service margins. We're very pleased that on October 1st, our utility group completed the acquisition of Intermountain Gas Company. Intermountain Gas currently serves more than 300,000 customers in 74 communities in Idaho. This business is a great fit for our utility operation and offers additional growth opportunities. Recent customer growth in this area has been approximately 4.5%. This group has grown substantially. Just two years ago, we served approximately 370,000 customers in five states and had a rate base of approximately $350 million. Our utility customer base now is approximately 930,000 customers in eight states and our net investment and rate base has almost tripled to nearly $1 billion. Our utility operations continue to play a critical role in our corporation providing reliable and steady earnings and cash flow. MDU Resources continues to be financially sound. Our balance sheet is in excellent condition. Cash flows from operations have been strong. We do not currently have plans to issue equity through a public offering for the remainder of the year. This past August, we increased our quarterly common stock dividend by 6.9% to $15.05 per share or $0.62 on an annualized basis. This is the 18th consecutive year of dividend increases and accomplishment matched by only 3% of U.S. companies. We are very proud of our long history of consistently rewarding our shareholders with a growing dividend while also retaining earnings to fund growth. Primarily as the result of significant decreases in natural gas and oil prices, we have lowered our 2008 earnings per share guidance to a range $1.95 to $2.10. We continue to expect 2008 to be a very successful year for MDU Resources. MDU Resources has been providing goods and services essential to our country for 84 years. We have weathered previous economic downturns coming out stronger than when we said before. Our unique and balanced portfolio of assets coupled with our team of talented employees positions us well for a long-term growth and stability. Thank you for your time today, and we'd be happy to open the lines up for questions, at this time. Operator? Question And Answer

[Operator Instructions] Your first question comes from the line of Paul Patterson with Glenrock Associates. Mr. Patterson, your line is open.

I am sorry; can you here me now?

Yes we can, Paul.

Okay. Just on the decrease in E&P production forecast, how much of that because of the hurricane and how much would you say is that because of the exploration? I guess it's pretty much the Northern Bakken as well as, it sounds like to me and if you could elaborate a little bit more on the exploration impact. I mean is the hurricane impact all gone, is it behind of us now or is there some lingering effect on that?

Paul, this is Steve Bietz running after your question. Regarding the third quarter we had effect for us maybe around half a Bcf that we lost as a result of the hurricane. For the entire year, we're down about one and half Bcf equivalent. So, if you kind of look at our adjustment in our guidance, probably about two-thirds of that is related to the hurricanes and the balance would be associated some of our exploration activities and then just some other adjustments along the way. The other thing, you'd ask me about the... I am forgetting your question. Did I catch your call, or...

Of the hurricane impact going forward, I guess is it finished? Is it done?

Yes, no we've got the amount of Bcf plan for the third quarter... by the end... for the fourth quarter and then by the end of the year we're expecting about 25% of that production would still be offline.

Okay. I guess what I am wondering is going forward into 2009 and beyond. What are you guys thinking is now the production outlook? It would seem to me that the hurricane stuff will come back online and that's... I mean, tell me if I am wrong but that would be sort of a temporary interruption in terms of your production growth. Whereas the other issue of what you're seeing exploration wise, maybe not looking as positive as it was before, what is that due to production growth going forward?

Paul, I think kind of look short-term and long-term. If you look at over the long term we've been successful growing production somewhere in the range of 9% annually over the last 10 years. We're certainly looking to continue to target growth in that 7% to 10%. That being said, it could be lumpy kind from year-to-year depending on opportunities and expenditures and so forth. So I guess longer term, we are still looking for that type of growth.

Okay. But in the short term other than the hurricane, this offset and then I guess it's pretty much the Northern Bakken, is there something else I am missing in terms of what the other exploration issues they have developed in the near term are.

Closer to UTI [ph].

Okay. And in terms of that impact, I mean how much I guess should we be now thinking because of the less... less optimistic outlook in the Northern Bakken? Should we be basically looking as not showing up in the near term now going forward?

Paul, I would say that we're working on some of our guidance for next year. That work is ongoing and we will be looking to provide that later on.

Okay. In terms of the construction outlook for 2008... going out a little bit, with the mix of business that you are seeing now and with the economic downturn, when we look at the backlog this time, this year as opposed to last year or basically 2008-2009, is what I am really sort of thinking about, should we still expect to decrease in margin just sort of that what are we... what are you looking at there in terms of the margin outlook with what you are seeing out there in terms of the business that you guys are backlogging, et cetera?

Paul, this is Bill. What we have seen in 2008 was a big transition of... as Terry mentioned in his opening remarks, switching more of our business revenues to the public arena. And consequently in 2009, we will continue to see the major revenue coming from that sector with the private work we have done as you know. So we don't think that we will see that much of a deterioration. We think that there is a big adjustment that we had, took place this year. As we go forward, we'll see much more stable margins, and I would say for not only the next year but for 2010 as well.

Okay, great. And then just in terms of CapEx, we are hearing a lot companies out there that are reducing their CapEx plans, as a perceptional contingency or what have you, do you guys have any outlook on that? Is there anything that you think that, you might scale back on? Just any thought there in terms of flexibility or thought process on that?

Okay, Paul. We certainly understand and are realistic about the challenges in the current market but our company through the years we have got a history of providing strong cash flows from operations. And in fact, if you were to look at the end of September 2008, we have an excess of $700 million in cash flows. So we certainly are... there are deals out there, we're looking at them but we'll stay... we have the cash flow necessary to run a good strong capital program next year. We'll be very opportunistic as far as growth opportunities for acquisitions. We're going to be financially disciplined and we're committed to this strong balance sheet. I don't know if that answers your question but...

No. It does, I appreciate, just wanted to get a little bit of the feel there and to what you're seeing. Okay, thank you very much.

Thank you, Paul.

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

Question, yesterday on Northwestern's call they talked about some pay-as-you-go Montana pension funding requirements. I am wondering if you have that issue as well.

It's Vern Raile here. No, we do not. We get recovery for our FAS 106 accruals from the stage in which we operate. And so we don't see any particular issues in that regard.

And then just Terry, you've got a balance sheet, there's got to be a lot of smaller companies struggling out there. What are you seeing in the way of opportunities and kind of where you're seeing those opportunities?

Well we're seeing opportunities actually across the broad spectrum of businesses, everyone of our business units are seeing opportunities. We've received a few phone calls. We have a strong balance sheet, but we are going to stay very disciplined financially. So this is the different environment we are dealing in. I think that people are going to have to recognize that prices for these type of acquisitions are going to have to come down. So if they make sense for us in this environment, interest rates certainly are higher, we'll look at, but again, they've got stand on their merits and meet all of our financial criteria. Yes, there are opportunities out there.

Okay. Just kind of from an internal planning perspective, what are you envisioning as kind of the bottoming of the market here, how far else could that be?

Paul, that's a hard one to answer. I mean the beauty of our company is the diversification. We've got the energy group, and it's certainly performed well record earnings. It's negatively impacted the construction materials, energy prices are starting to come down now. We expect that, that may benefit some of the cost structure and other business units. The construction services group, we've got a strong backlog there. Our earnings are running at a record level. And we're taking advantage in niche opportunity there. So, it's great to be diversified.

Okay. And Just weren't trying on giving '09 guidance?

And I was going to address that later. '09 guidance typically we give in December. This year due to the volatility primarily in our commodity markets, we're looking at providing our 2009 guidance when we release our earnings in January, our year-end earnings report January will be given 2010 guidance at that time.

Just given how strong the first half of '08 was, and then current outlook, I mean directionally, do you think you can show growth next year?

Well, we are putting that together right now. That Paul, we will do it when we give our guidance.

Thank you very much

Thank you, Paul.

Your next question comes from the line of Sarah Nasadae [ph] with Millennium Partners.

Good afternoon, it's actually Mark Caruso, how are you? I just had two quick questions, one was a follow up to Paul's question on the Gulf of Mexico. At this point I know you said that you hope that 75% comes back by year-end. But is there production that you think has a potential to not come back whether if it's not really covered insurance or the economics aren't there in the lower price environment. I just want to get a better feel for that.

We've got estimates [ph], so we've got about 2 to 3 million a day that may be off permanently with the substantial damage that occurred, had a couple, I think the one platform that may not be back. So that still remains to be determined yet.

Got you. And then the other question was, I know already you've mentioned Minnesota, such on tip [ph] but I want to see how quickly could that potentially get dispersed and help you guys out and what other states have that potential, because it seems... to your point, it's a good opportunity to create jobs in a rather quick fashion. And you guys are in place to benefit from that. So I'm just trying to get a sense of... is Minnesota sort of a leading indicator of more to come or is it going to take the federal funding to push that along?

This is Bill. We expect in terms of... first part of your question, Minnesota will really see a ramp up in that additional $650 million worth of revenue that should take place next year. Although the legislature over up road, Governor Paulin's veto back here many months ago, they really didn't ramp up in terms of the bid schedules for this year. So we already have a lot of the work targeted for the bidding this winter that will, of course, start in the spring time. As far as the other states go, it's really a mixed bag. Some of the energy states like our home state, here North Dakota are dealing with surpluses. On the other side, of course, California's got budget struggles that you should have read about. We do think, of course, the election next week will be very instrumental in terms of the amount infrastructure spending that we'll see. But as Terry mentioned, we're very optimistic to this second stimulus bill that was actually discussed. Actually there was testimony on it Wednesday this week. It's going to have a large infrastructure component. So, we're optimistic that the federal spending will be above just what we get out of the Highway Bill. So we're very optimistic on a go forward basis.

Great. Thanks so much.

Thank you.

Your next question comes from the line Becca Followill with Tudor Pickering. Becca Followill - Tudor, Pickering, Holt & Co., LLC: Good afternoon. Going back to Bakken, can you guys walk me through that... the things in Burke County, the wells there, you're evaluating the economics, but you're still evaluating the Three Forks/Sanish, is that correct?

That's correct. We're looking at the Bakken formation, they're evaluating that, just a little bit of a of great zoning up there and look down south [ph] and builds on that acreage. And we've moved over rig back up to do a do Sanish task up there, as Terry mentioned, two of our initial wells drilled up there, we drilled some pilot holes, we've got down into the Three Forks formation. And we're very encouraged by some of the technical data we collected. And they look very similar to what we've seen down south compared to Three Forks. So that's kind of our plan to drill through that wells. We have also got another Three Forks test that we've got plans before the end of the year. And that would be on 1280 acres space up in the northern acreage wells. And we have to see what the results are from those two wells, just kind of [indiscernible]. Becca Followill - Tudor, Pickering, Holt & Co., LLC: So at this 50-60 wells that you've planned to participate in 2008. And how many are in the northern part of or in Burke county?

In the northern part we have got, I believe is eight wells that we drilled into the Bakken formation and one of those drilled into the Three Forks. Becca Followill - Tudor, Pickering, Holt & Co., LLC: And then you plan to drill one more.

Correct. Becca Followill - Tudor, Pickering, Holt & Co., LLC: Okay. And then of the 22 operating or the 17 wells that are producing right now on a 1000 net barrels of oil per day. What's your average working interest in this these wells?

It varies by well but I would say that the average is somewhere around 45% to 50% of those wells. Becca Followill - Tudor, Pickering, Holt & Co., LLC: Okay. And the last Bakken question for you, of your acreage what percent is in Burke county?

In Burke county Becca I don't have that percentage, so I would have to take a little closer look at that. Becca Followill - Tudor, Pickering, Holt & Co., LLC: Okay. Thank you and then the last question is about construction and mining and maybe I am looking at the class that form is just half empty but it looks on the back log it's the first year-over-year increase in backlog that I have seen in seven quarters. And am I waiting too much into... I know the economy is still extremely weak that but you guys were seeing the impacts of the housing market a while ago. And so are we reading too much into it -- just to look at that increase, and say maybe it's a positive sign?

No, I think you are right, Becca and thank you for bringing that up. We have been some large interstate projects around the country and we just landed a beautiful $46 million interstate 80 project in Southwest, Wyoming with that's I think the third I-80 project that we have. And we have got interstate... well we're going on in almost every state that we operate in. And that's of course because of the strong Federal highway funding but that's a space that we love to compete and particularly in the more medium to larger size projects from $25 million on up. We got the resources with the Knife River it is to gear up whether its with mobile asphalt plants and crews as to really attack those jobs so. Yes we are going to be hitting that space a real hard here in the next year or two. Becca Followill - Tudor, Pickering, Holt & Co., LLC: Thank you.

Thank you Becca.

Your next question comes from Faisel Khan with Citi.

Good afternoon.

Hi Faisel.

The question on the first, your hedging activity, has any of that changed at all in terms of the way, the way you think about your hedging activity over the last quarter, the last quarter or two or it is still pretty much consistent what you guys have done in the past.

Our hedging strategy is pretty much same as it's been in the past and look on there new changes.

Okay and then the $50 oil price as you guys had talked about in being able to make a healthy return in the backend was that kind of WTI price or was that kind net to the oil price?

That would be more of a WTI.

Okay. And then I think this is but the timing of your Three Forks/Sanish well I think that your said your drilling the fourth quarter what is the timing on that?

We got right now we're drilling Grove 1136 well. I don't recall of that amount well. I think we're viewing or getting along with that well quite ways. And then we expect to spud the Paulson well which would be a three-fourth shift as well. Probably at the end of this year.

And what about the Paradox, what is volume look like kind of that... of that basic figures?

No, as Terry mentioned we're well over 500 barrels a day kind of average, and that would be our net production. Since our plans there are to spud about six wells as we get into that play, that well is planned in north of where our existing wells are, and that would be moving up in the areas... that's probably a little bit more gas, less oil associated with that up in that area, and we're working to put that given this year.

Okay, got you. On the construction material side, I think you just talked the higher diesel cost in the quarter. Can you just remind us what the magnitude of those either cost driving now is pushed in prices obviously that are materially way below at where they where at the second quarter, I am trying to figure out the magnitude in there.

Magnitude,are you asking for the magnitude of the diesel impact?

Yes, looking at your operating cost, by how much is fuel,

Okay.

Given yourconstruction materials?

Yes, I didn't hear your question initially. For the third quarter our diesel costs were about $6 million bucks over the 2007 and year-to-date they are about $16 million bucks higher than last year. Now, the good news is as the diesel prices have come down actually since July, the prices are down more than the dollar gallon. So... and we think that's going to continue in the next year, so that's obviously real pick up for us.

Okay. And then, in your earlier questions sort of I noticed the backlog that was just up over last year, but was any of the backlog up as a result of the acquisitions that you guys have made in the third quarter?

No.

Okay. So it was real growth in your backlog, it was result of acquisition.

Yes. And as I mentioned to Becca's question, it's really coming in the larger interstate projects that we've been picking up here the last quarter.

Okay. I understood. Than on the construction services side, the backlog there is the been 20 to 20 down sequentially over the quarter. But your margins, your operating income was up, kind of year-over-year. Just trying to figure out how to think about... how that backlog gets rebuilt again or is it or not?

Well, this is John Harp, we're comfortable with our backlog and the opportunity to make a buck on our margins. We recognized our backlogs are up, but also we think our quality of backlog is in good shape. So we're looking forward to next year.

Can you comment on the levels activity of your customers in the construction services side?

Well itkind of varies from market-to-market, obviously we are seeing some slowdown in the Vegas market, but we are seeing some other things pick up for some of our bigger projects in the Midwest. We have been very active. And then we were working at lot of renewable resource jobs, wind farms and transmission lines that tie to those new infrastructures. So we see some other places where we may be shifting some of our focus. And one thing we try to be is a very flat organization manage our cost and our overheads and try to respond to the market we are very nimble.

Okay. And then just going back to the comments made about that you guys not needing to do equity raising equity this year... would that be more of a permanent decision? I mean you said you have a strong balance sheet and assets. I think you guys are top of the capitalized, but how are you looking at that issue into kind of in the future as the markets do recover?

FaiselVern Raile here, I mean as Terry indicated for the balance of the year we don't see issuing any equity in the public markets. It's something we constantly evaluate and it's going to move in the kind of turn in terms of the level of acquisitions and other type growth projects. I think in large part we are going to generally try and get our CapEx close to our cash flows, our cash flows are strong, but certainly evaluate on a continuing basis going forward. It's going to be dependent exactly what type of growth we have on organic growth projects as well as acquisitions.

Are you guys at on a famous mine [ph] going to next year, I mean everybody seems to be talking about it now with the sort of economic slowdown reducing CapEx and keeping more cash on the books because... and also the constraints in the credit markets, is that something that you guys are kind of thinking about the same way too?

Well, I think in terms of the credit market as Terry indicated, we've got a very good balance sheet, strong balance sheet. We have not had any issues with respect in terms of our credit that we can access and the like and granted, I mean world has kind of changed but it's really not presenting any challenges to us at the present.

Okay fair enough, thanks guys.

Your next question comes to line of Jim Harmon with Barclays Capital.

Hi Jim.

Two follow-ups to what Faisel asked but long does it take for the effect of lower fuel prices to go through your segments? Is it sort of real-time, or is there a lag given the contracts might be in place?

For the most part, Faisel it depends upon the projects but... this is Jim?

It is.

Okay. Jim it's a really time savings, when those prices go down we can realize that right away really across all of our businesses. Some of the contracts that Bill has and then he can address this in more detail, we've locked in the prices along with the bid and that would be more in the area of asphalt oil rather than the diesel.

Okay. Maybe question for John. What is going on in Vegas these days, I mean in every incremental information I get shows that they are going to have some difficulty rolling at the rate that they have? And maybe what's the relative size of the Vegas market compared some of the other areas that you are servicing?

Well there is no question, the Vegas market is going to be challenged, but you also have to look what's been done in the Vegas market for the last three years. I mean the amount of the growth, not surprised that that will back and off a little bit. But we are comfortable what we see Vegas for next year 2010, will really kind of depend on financing and where the economics going long-term. But the thing that we are comfortable with again is back to our greatest asset and that's our people. We are still comfortable with the people we have in place, and managed whatever the economics are upturn or downturn. But we are seeing some other parts of our markets actually increasing some backlog and some other cavities as I mentioned in the Midwest, we have had some strong activities and then we are also looking at may be at different business mix. I mentioned about six months ago that we are putting together a heavy transmission group together. And we just picked up our first project, a very small project in Texas but gives us in a market that we were not in before. So we can move to market, we are very quick to respond to the market. We have managed through some tough times before. I mean it was just four years ago this business group was losing millions of dollars. So we know how to manage through tough times.

Okay. John, your business is also a provider of first resort for a lot of folks on there. So can you going... it says in your release that you are going to grow the business. Can you just grow it from hiring people or do you actually have to hire in whole businesses?

I've got very good examples, we just assumed how to keep people and the build an organization around them and we started as a very small greenfield operation and the refinery business a few years ago, that continues to grow for us and we see some more opportunities. So our focus is on the people side and the ability to build around that workforce and the key management. And like Terry mentioned before, one of the duties being part of MDU as a construction company is our diversification, our abilities to stand through these tough times as some of competitors who are standalone construction company only are going to be facing some tough times. And there is no doubt, we got a lot of small operators, if they're working on a line of credit and banks are getting nervous about cash. These are going to be some interesting times in a way, we're actually kind of looking forward to some of these issues that we're facing as a country. And we'll see how we manage them, but we've been through this before Jim. And we'll be fine when we come to on the other end.

Okay. MDU to me has always been a company that's been in good shape. So the question is how do you limit your exposure to other counterparties that may not be as in good shape? Maybe not just for you but all the business sense or maybe a general question for Terry.

Well, Jim we talk about our hedges and I have mentioned in my script that we will... for our long history we have only hedged with A rated banks and our counterparties are strong, continue to be strong. We're watching our receivables and our customers. I think in previous conference calls that we've had, we went through period of time when John for example, John Harp talked about CSG we focus on who we do work for. And we want to get paid for the work we do. So that's what you're referring to, we'll take a really conservative approach to that. As far as utility, utility business as we're in, our customers have a long history of paying their bills. I think we're probably some of the best in the nation now. It's something that we monitor... we monitor it now, but we were monitoring this when times are really good.

Okay, great. Thank you.

Thank you.

[Operator instructions]. Your next question comes from the James Bellessa with Davidson & Co. James Bellessa - DA Davidson & Co.: Good afternoon.

Good afternoon Jim. James Bellessa - DA Davidson & Co.: Most of the questions I had were answered. I guess the one remains on the construction services is about the recent activity. I know when we were in Hawaii it was mentioned that perhaps there was going to be a contract inside... wiring contract for the Kansas Stadium, might you had mentioned and might you had mentioned other contracts that you have been recently booking?

Yes I am aware that what you are talking about Jim. We're fairly close to signing that contract but normally I won't speak about a particular contract or customer until that this time. But, it's still looking favorable that, maybe that' something we can announce on our January call. So that's as far as I can go with that question. James Bellessa - DA Davidson & Co.: Thank you.

[Operator Instructions] This call will be available for replay beginning at 4 PM Eastern Time today to 11:59 PM Eastern Time on November 14. The conference ID number for the reply is 649-79-554. Again, the conference ID number for the replay is 649-79-554. At this time, there are no further questions. I would now like to turn the conference over to management for closing remarks.

Okay, thank you. This has certainly been a difficult time for the financial markets but the fundamentals of our company have not changed. We have a sold base of assets, we'll continue to provide... that will provide opportunities for growth over the long term and then increase value for the shareholders. We talked about this briefly earlier regarding 2009 guidance our past practice has been to initiate this guidance in early December. However considering the uncertainty in the market at this time we plan to initiate our 2009 guidance at the time of our year-end earnings report that's in late January. I think we can give you a better idea at that time. So we're moving our guidance to January. Just like to thank you again for joining us today, and we're looking forward to talking to you at year-end. Thank you very much.

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