First Quarter 2009:
For first quarter 2009, absent a noncash charge, the company reported consolidated earnings of $40.4 million, or 22 cents per common share. This compares with earnings of $70.9 million for first quarter 2008, or 39 cents per common share.
Including the effect of a $384.4 million after-tax noncash charge attributable to low energy prices on March 31 at its natural gas and oil operations, the company reported a consolidated loss of $344.0 million, or $1.87 per common share.
Highlights:
Strong cash flows from operations of $248 million.
Solid balance sheet with equity of nearly 60% of total capital.
Reaffirms earnings guidance for 2009 of $1.05 to $1.30 per common share, excluding a first quarter noncash charge of $2.09 per common share. (Including the noncash charge, guidance for 2009 is a loss of $.79 to $1.04 per common share.)
The electric and natural gas utility business had record first quarter earnings of $29 million as a result of the acquisition of Intermountain Natural Gas Company last October. For the 12 months ended March 31, 2009 this growing utility business contributed $60 million in earnings. The utility is continuing to focus on acquiring rate-based generating capacity needed to serve future load growth. In April 2009 it purchased a 25% ownership interest in the 100-megawatt Wygen III power generation plant that is under construction in Wyoming.
Lower construction workloads contributed to an earnings decrease at the construction services business. However, the business continues to focus on costs and improved margins over the comparable period. Although the Las Vegas market has slowed recently, this business is finding opportunities in its other markets.
The natural gas and oil production business experienced significantly lower natural gas and oil prices, and a decline in natural gas production, compared to the first quarter of 2008. Oil production increased 19%, reflecting successful development of the company’s Bakken acreage. The company’s proved natural gas and oil reserves grew to record levels in 2008, which will provide long-term value for our shareholders.
The company, like many independent exploration and production companies, uses the full-cost method of accounting for its natural gas and oil production activities. Under this method, the company is required to perform quarterly “ceiling tests” to compare the present value of future net cash flow from proved reserves based on spot market prices that exist on the last day of the period (cost ceiling) to the book value of those reserves at the balance sheet date. If the book value of the reserves exceeds the cost ceiling, a permanent noncash charge must be recorded. The significant decline in natural gas and oil prices as of March 31 resulted in the charge.
The Securities and Exchange Commission has issued new rules regarding “ceiling test” pricing, which use 12 month-average pricing rather than single point-in-time period end pricing. The new rules are effective for reports filed on or after Jan. 1, 2010. Under the new rules, the company’s future net cash flows from proved reserves would have greatly exceeded the book value of the reserves and a noncash charge would not have been recorded.
The pipeline and energy services business benefitted from capacity expansions completed in 2008. Total throughput increased 14% compared to the first quarter of last year, primarily the result of higher volumes transported to storage and off-system transportation volumes. The regulated pipeline business is in the process of an incremental expansion of the Grasslands system and has capacity to meet the current demand levels for natural gas storage services.
Cost reductions implemented by the construction materials and contracting business resulted in an earnings improvement compared to first quarter of 2008. The business is beginning to see increased government spending activity in some markets as federal stimulus money becomes available.
“Our diversification strategy continues to be effective with strong operating cash flows reported in the first quarter,” said Terry D. Hildestad, president and chief executive officer of MDU Resources. “We have continued our focus on closely managing costs to enhance results and have aligned our capital spending with cash generated by operations. We are optimistic about our ability to meet our guidance targets and have reaffirmed our earnings per share guidance range for the year.”
Hildestad added, “It is important to note that the noncash charge is essentially an acceleration of depreciation, depletion and amortization expense. It reduces future DD&A expense on our present investment in natural gas and oil properties, and assuming all other things being equal, increases future earnings.”
“We continue to have the potential to provide long-term growth and exceptional results for our investors,” Hildestad said. “We are in businesses that provide essential products and services that are critical to the ability of our economy to compete in the global marketplace. We have a strong balance sheet, solid financial metrics, strong cash flows sufficient to fund our capital expenditure requirements and adequate liquidity. We anticipate there will be growth opportunities for well-positioned companies such as ours during the current economic environment.”
