Business Overview and History
MDU Resources Group, Inc. (MDU) is a diversified energy infrastructure and services company that has been delivering essential products and solutions to customers for over 95 years. Headquartered in Bismarck, North Dakota, MDU Resources operates through four primary business segments: electric, natural gas distribution, pipeline, and construction services.
MDU Resources was incorporated in 1924 under the state laws of Delaware and has since grown to become a leading provider of regulated energy delivery and construction services across the United States. The company's roots can be traced back to the 1920s when it was established as Montana-Dakota Utilities, initially focused on providing electricity and natural gas services in the Upper Midwest region.
Over the decades, MDU Resources has strategically expanded its operations through organic growth and targeted acquisitions, diversifying its portfolio and strengthening its market position. In 1997, the company acquired Cascade Natural Gas Corporation, expanding its natural gas distribution footprint into the Pacific Northwest. In 2008, MDU Resources established its construction services segment with the acquisition of Fargo, North Dakota-based construction firm MDU Construction Services Group.
In 2018, the company underwent an internal holding company reorganization, resulting in Montana-Dakota becoming a subsidiary of the newly formed MDU Resources Group. This restructuring allowed for greater operational flexibility and streamlined management of the company's diverse business segments.
Throughout its history, MDU Resources has faced various challenges, including inflationary pressures, supply chain disruptions, and changing environmental regulations impacting its utility and pipeline operations. The company has consistently worked to proactively manage these external factors and maintain reliable service for its customers.
In 2023, MDU Resources completed the spinoff of its former construction materials and contracting business, Knife River Corporation, into a separate publicly traded company. This transformative move was executed as a tax-free spinoff transaction for MDU Resources' shareholders and aligned with the company's long-term strategy to become a pure-play regulated energy delivery business, positioning it for sustained growth and value creation.
MDU Resources continues to invest in upgrading and expanding its electric, natural gas, and pipeline infrastructure to meet the evolving needs of its growing customer base across eight states. The company's diversified business model and focus on regulated energy delivery have been key factors in its longevity and success over the past 86 years.
Financial Performance and Ratios
MDU Resources has demonstrated a consistent track record of financial stability and growth. As of the company's most recent fiscal year ended December 31, 2023, MDU Resources reported annual revenue of $4.66 billion, net income of $414.71 million, and operating cash flow of $332.63 million. However, the company's free cash flow for the year was negative at -$187.10 million.
For the second quarter of 2024, MDU Resources reported revenue of $1.05 billion, net income of $60.44 million, operating cash flow of $301.57 million, and free cash flow of $19.23 million. Compared to the same quarter in 2023, revenue decreased by 3.67%, and net income declined by 53.70%. The significant decrease in net income was primarily due to the absence of a $90.80 million unrealized gain on the company's retained interest in Knife River, which was recorded in Q2 2023. This was partially offset by the absence of the Q2 2023 loss from discontinued operations related to the Knife River spinoff.
Liquidity
The company's balance sheet remains strong, with a debt-to-equity ratio of 0.80 as of June 30, 2024. MDU Resources' liquidity position is solid, with cash, cash equivalents, and restricted cash totaling $94.44 million as of June 30, 2024. Additionally, the company has $502.20 million in available borrowing capacity under its outstanding credit facilities.
The current ratio stands at 1.21, and the quick ratio is 1.15, indicating a healthy short-term liquidity position. MDU Resources' return on equity stood at 13.96% in 2023, showcasing its ability to generate solid returns for its shareholders.
Quarterly Performance and Outlook
For the second quarter of 2024, MDU Resources reported earnings of $60.4 million, or $0.30 per share, compared to $130.7 million, or $0.64 per share, in the same period of 2023. The year-over-year decrease was primarily due to the absence of a $90.8 million unrealized gain on the company's retained interest in Knife River, which was recognized in the prior-year quarter.
Despite the quarterly decline, MDU Resources' underlying business segments demonstrated resilience. The company's utility operations faced weather-related challenges, but strategic rate relief and ongoing infrastructure investments helped offset the impact. The pipeline segment reported record second-quarter earnings, driven by strong transportation volumes and increased storage revenues. Additionally, the construction services business, now operating as Everus Construction Group, achieved record second-quarter earnings and all-time high backlog levels.
Looking ahead, MDU Resources remains confident in its long-term growth prospects. The company is targeting a 7% compound annual growth rate in its utility rate base over the next five years, supported by planned capital investments of $2.7 billion. Furthermore, the company expects to maintain a dividend payout ratio of 60-70% of its regulated energy delivery earnings, underscoring its commitment to delivering shareholder value.
MDU Resources has reaffirmed its previously communicated regulated energy delivery guidance for 2024 in the range of $170 million to $180 million. For Everus Construction Group, the company revised its revenue guidance to $2.65 billion to $2.85 billion, down from the previous guidance of $2.9 billion to $3.1 billion due to lower revenues experienced on a year-to-date basis largely from the timing of projects. Despite this revision, Everus' EBITDA is still expected to be in the range of $220 million to $240 million.
The company's long-term guidance forecasts $2.7 billion of regulated capital investment, driving a 7% compound annual growth rate on its utility rate base with an anticipated customer growth of 1% to 2% annually. MDU expects this regulated capital investment and customer growth to lead to long-term EPS growth of 6% to 8%, and the company is targeting a 60% to 70% annual dividend payout ratio with no anticipated equity needs until 2027.
Business Segments
MDU Resources operates through four main reportable business segments:
1. Electric and Natural Gas Distribution Segment: This segment generates, transmits, and distributes electricity in Montana, North Dakota, South Dakota, and Wyoming. It also distributes natural gas in those states, as well as in Idaho, Minnesota, Oregon, and Washington. In the first six months of 2024, the electric business saw revenue increase 11% driven by rate relief and higher fuel and purchased power costs, while the natural gas distribution business saw revenue decrease 16% due to lower purchased natural gas costs.
2. Pipeline Segment: This segment provides natural gas transportation, underground storage, and non-regulated energy-related services. In the first six months of 2024, the pipeline segment saw revenue increase 26% driven by higher transportation volumes from organic growth projects and new rates.
3. Construction Services Segment: Operating as Everus Construction Group, this segment provides electrical and mechanical and transmission and distribution specialty contracting services across the United States. In the first six months of 2024, the construction services segment saw revenue decrease 11% due to the timing of projects, but operating income increased 1% as a percentage of revenue.
4. Other: This category includes the activities of Centennial Capital, which insures various risks as a captive insurer for certain subsidiaries, as well as assets, liabilities, and costs associated with the holding company and certain strategic initiatives.
Risks and Challenges
While MDU Resources' diversified business model and strategic initiatives provide a solid foundation for growth, the company is not without its risks and challenges. The regulated nature of its utility operations exposes the company to potential changes in legislative and regulatory environments, which could impact its ability to recover investments and earn authorized returns.
The construction services segment also faces risks related to project variability, labor shortages, and supply chain disruptions, which could affect its operating margins. Additionally, the company's pipeline business is subject to commodity price volatility and fluctuations in natural gas production and demand.
MDU Resources continues to proactively manage these risks through prudent operational and financial strategies, including ongoing infrastructure upgrades, cost control measures, and diversification of its customer and service offerings.
Conclusion
MDU Resources Group has established itself as a leading provider of essential energy infrastructure and services across the United States. With its strategic focus on regulated energy delivery, the company is well-positioned to capitalize on growing demand for reliable and sustainable energy solutions. Despite facing some near-term headwinds, MDU Resources' diversified business model, strong financial position, and long-term growth initiatives make it an intriguing investment proposition for investors seeking exposure to the regulated utility and construction services sectors.
The company's commitment to becoming a pure-play regulated energy delivery business, coupled with its targeted investments in infrastructure modernization and expansion, provides a clear path for future growth. As MDU Resources continues to execute its strategic plan and navigate industry challenges, it remains focused on delivering value to its customers, shareholders, and the communities it serves.