Executive Summary / Key Takeaways

• Strategic Metamorphosis Complete: MDU Resources has fully transformed from a diversified conglomerate into a pure-play regulated energy delivery company following its October 2024 Everus spin-off, creating a cleaner earnings profile with 87 years of uninterrupted dividend history now backed entirely by stable utility cash flows.

• Pipeline Segment as Stealth Growth Engine: The Pipeline business delivered record third-quarter 2025 earnings of $16.8 million, up 11.3% year-over-year, driven by strategic capacity additions totaling 339 MMcf/day since March 2024, positioning WBI Energy to capture surging Bakken natural gas production and industrial demand.

• Capital-Light Data Center Arbitrage: MDU has secured 580 MW of data center load under electric service agreements, with a unique capital-light model that leverages existing transmission capacity in the Bakken region, generating immediate earnings accretion while competitors face multi-billion dollar grid upgrades to serve similar loads.

• Regulatory Tailwinds and Rate Base Acceleration: The company is simultaneously pursuing $34.4 million in annual rate increases across six states while investing $3.1 billion over five years to drive 7-8% compound rate base growth, creating a visible earnings trajectory rare among mid-cap utilities.

• Execution Risks at Inflection Point: While the strategic positioning is compelling, MDU faces material execution risks including Intermountain's covenant compliance issues, potential $50+ million in environmental compliance costs at Coyote Station, and the challenge of ramping 400 MW of new data center load by 2027 without compromising system reliability.

Setting the Scene: The Making of a Pure-Play Energy Utility

MDU Resources Group, Inc. traces its roots to 1924 when Montana-Dakota Utilities Co. was incorporated, but the modern investment story begins on January 1, 2019. That day, a holding company reorganization established MDU Resources Group, Inc. as the Delaware-incorporated parent, setting the stage for a deliberate strategic narrowing that would take five years to complete. The company, headquartered in Bismarck, North Dakota, spent decades as a diversified conglomerate blending regulated utilities with construction materials and services businesses. This diversification provided stability but masked the true value of its core energy delivery franchises.

The transformation accelerated in May 2023 with the tax-free spin-off of Knife River (KNF), the construction materials subsidiary. Management then delivered the final pivot on October 31, 2024, separating Everus Construction Group in a tax-free distribution of one Everus share for every four MDU shares. These divestitures were not merely portfolio pruning; they fundamentally restructured MDU's earnings quality, eliminating cyclical construction exposure and creating a pure-play regulated utility with three distinct but complementary segments: Electric, Natural Gas Distribution, and Pipeline. The "why this matters" is stark: utility investors can now value MDU on traditional regulated metrics—predictable rate base growth, allowed returns, and dividend sustainability—without applying a conglomerate discount.

The industry backdrop could not be more favorable for this focused strategy. The Rocky Mountain and Northern Great Plains regions are experiencing simultaneous demand drivers: record Bakken natural gas production, electrification of industrial processes, and an unprecedented data center build-out. MISO and NERC have issued stark warnings about grid reliability as load growth from data centers outpaces utility capacity planning. MDU's service territory sits at the epicenter of this transformation, with low-cost natural gas, available land, and favorable regulatory environments attracting hyperscale computing investments. Unlike coastal utilities facing renewable mandates and land constraints, MDU operates in a region where natural gas generation remains economically and politically viable, creating a strategic moat around its integrated generation and pipeline assets.

Technology, Strategy, and the Capital-Light Differentiation

MDU's competitive positioning hinges on a capital-light business model for serving large customers that defies utility industry convention. The company has signed electric service agreements for 580 MW of data center load near Ellendale, North Dakota, with 180 MW currently online. The remaining 400 MW ramps in stages: 100 MW by late 2025, 150 MW in 2026, and the final 150 MW in 2027. What makes this remarkable is the approach. Rather than building dedicated transmission infrastructure that would require multi-year regulatory approvals and billions in capital, MDU is leveraging existing capacity in a constrained corner of its system where generation was previously unable to reach market.

This strategy delivers three distinct advantages. First, it generates immediate earnings accretion because the transmission costs are shared with the data center customer, benefiting both parties. Second, it provides cost savings to other retail customers by spreading fixed transmission costs across a larger load base. Third, it avoids the regulatory lag that plagues traditional utility investments, with earnings recognition beginning as soon as load comes online. The "so what" for investors is a utility that can grow earnings at 6-8% annually while deploying significantly less capital than peers serving similar data center demand. Xcel Energy (XEL), by contrast, has announced $4+ billion transmission projects specifically to serve data center load in Minnesota, highlighting MDU's structural cost advantage.

The Pipeline segment embodies MDU's organic growth philosophy through WBI Energy. Since March 2024, the company has placed four expansion projects into service: Line Section 27 (175 MMcf/day), Line Section 28 (137 MMcf/day), Wahpeton (20 MMcf/day), and Minot (7 MMcf/day). These projects are not speculative bets on future demand; they respond to existing customer commitments and record transportation volumes. The Bakken region's natural gas production is at or near record levels, with gas-to-oil ratios continuing to climb even if oil prices remain flat. This creates a self-reinforcing cycle: more associated gas production requires more pipeline capacity, which WBI Energy is uniquely positioned to provide given its existing right-of-way and FERC-regulated status.

Looking ahead, the Line Section 32 Expansion Project targets completion in late 2028 with a FERC application planned for Q1 2026, while the Bakken East Pipeline project—potentially 350-375 miles from western to eastern North Dakota—represents a $50 million annual revenue opportunity if the binding open season in Q1 2026 succeeds. These projects are not in the current $3.1 billion capital forecast, meaning they represent pure upside to the 7-8% rate base growth target. The strategic positioning is clear: MDU is building a natural gas transportation monopoly in the most productive shale basin in the United States, with regulatory approvals and customer commitments already secured.

Financial Performance: Evidence of Strategic Execution

Third-quarter 2025 results validate the pure-play transformation thesis. Consolidated income from continuing operations reached $18.4 million ($0.09 per share), up $2.8 million year-over-year, driven entirely by the Pipeline segment's record performance. This matters because it demonstrates that the remaining business can generate earnings growth even as the Electric segment faces cost pressures and Natural Gas Distribution reports seasonal losses. The composition of earnings has shifted decisively toward the highest-growth, highest-margin segment.

The Pipeline segment's $16.8 million in third-quarter earnings represents an 11.3% increase, powered by higher transportation revenue from growth projects placed in service in late 2024 and strong demand for short-term firm contracts. For the nine months ended September 30, 2025, Pipeline earnings grew 4.0% to $49.4 million despite higher O&M expenses and the absence of a $1.5 million prior-year customer settlement. The segment's operating revenues jumped 9.4% to $170.4 million, demonstrating pricing power and volume growth in a FERC-regulated environment where returns are formula-driven. This consistency provides the foundation for MDU's dividend sustainability and capital deployment flexibility.

The Electric segment tells a different story, one of near-term margin pressure from strategic investment. Third-quarter earnings declined $2.8 million to $21.5 million due to higher operation and maintenance expenses—specifically payroll-related costs and generation station outage expenses—plus increased depreciation from capital projects. Nine-month earnings fell 18.7% to $46.9 million. While this appears concerning, the context reveals a deliberate strategy: MDU is incurring maintenance costs now to prepare for the 400 MW data center ramp and to integrate the Badger Wind Farm acquisition. The Montana rate case requesting a $14.1 million annual increase, including recovery of the Badger investment, demonstrates that these costs will be recovered with allowed returns. The "so what" is temporary margin compression in exchange for multi-year earnings growth from rate base additions.

Natural Gas Distribution reported a seasonal loss of $18.2 million in Q3, modestly worse than the prior year's $17.5 million loss, but nine-month earnings improved 8.5% to $19.1 million. The segment benefits from rate relief in Washington, Montana, and Wyoming, with settlement agreements adding $20.3 million in annual revenue effective between November 2025 and January 2026. This segment provides stable cash flows during heating seasons and benefits from customer growth averaging 1-2% annually, supporting the overall dividend payout ratio target of 60-70%.

The balance sheet reflects utility-grade strength with strategic flexibility. As of September 30, 2025, MDU held $75.9 million in cash and $430.7 million in available credit capacity. Total equity stands at 54% of capitalization, within the target range for a capital-intensive business. However, the Intermountain subsidiary's breach of minimum interest coverage covenants triggered cross-default provisions, requiring waivers that management expects to resolve by year-end. While this creates near-term noise, the company secured a $250 million senior note issuance in October 2025 and re-established a $400 million ATM equity program in August 2025, ensuring access to capital for the $531.7 million 2025 capital expenditure plan.

Outlook and Guidance: The Path to 6-8% EPS Growth

Management's revised 2025 EPS guidance of $0.90-$0.95, raised from $0.88-$0.95 after Q3 results, reflects confidence in the underlying business momentum. This guidance assumes normal weather and operating conditions in Q4, which is critical given the Natural Gas segment's weather sensitivity. The $0.04 per share impact from 2024's non-recurring items and 2025's dis-synergies from the Everus spin-off has been absorbed, establishing a clean baseline for future growth.

The long-term outlook centers on three pillars. First, the $3.1 billion capital investment program over five years targets 7-8% compound annual rate base growth, which historically translates to 6-8% EPS growth given allowed ROEs of 9-10% in MDU's jurisdictions.

Second, customer growth of 1-2% annually provides organic revenue expansion beyond rate base additions. Third, the data center load ramp delivers incremental earnings without corresponding capital investment, creating operating leverage that could drive EPS toward the high end of the target range.

The data center timeline represents the most visible near-term catalyst. With 180 MW online and 100 MW expected by late 2025, investors should see material revenue contribution in Q4 2025 and Q1 2026. The remaining 300 MW through 2027 provides a multi-year earnings bridge as traditional rate base investments mature. Management's willingness to consider capital investment in new generation and transmission for incremental data center opportunities beyond the current 580 MW suggests the pipeline of potential deals remains robust.

Pipeline expansion projects offer additional upside not reflected in guidance. The Line Section 32 project, targeting 2028 completion, and the Bakken East pipeline, with its potential $50 million annual revenue commitment, represent call options on continued Bakken production growth. The North Dakota Industrial Commission's selection of Bakken East for firm capacity commitments signals strong regulatory support, de-risking the project relative to typical greenfield developments.

Risks and Asymmetries: What Could Break the Thesis

The Intermountain covenant compliance issue represents the most immediate risk to the investment case. While management obtained waivers and expects compliance by December 31, 2025, the breach signals potential stress in the capital structure. If the company cannot cure the default, it could face accelerated debt repayment or restricted access to capital markets precisely when it needs to fund the $3.1 billion capital program. The severity is moderate—utilities routinely manage covenant issues—but the timing is unfortunate given the data center ramp requires financial flexibility.

Environmental compliance costs at Coyote Station pose a material, unquantified risk. The EPA's May 2024 final rules on GHG and mercury emissions for coal-fired units could require significant investment in the 35-year-old plant. As one of four owners, MDU cannot unilaterally decide the plant's future and may be forced to absorb costs if other owners choose to invest rather than retire the unit. While management states compliance costs would be passed through to customers, the timing lag between incurring expenses and regulatory recovery could pressure operating cash flow by $10-20 million annually during the transition.

The data center capital-light model, while advantageous, carries execution risk. Serving 580 MW—representing 28% of MDU's generation portfolio—through existing infrastructure strains system reliability. Any transmission constraints or generation outages could trigger penalties or damage the company's reputation with a customer segment that represents the future growth engine. The "so what" is that MDU must flawlessly execute load ramping while maintaining service to traditional customers, a operational challenge that scales non-linearly with data center concentration.

Regulatory disallowance risk intensifies as environmental pressures mount. Washington State's Building Code Council amendments limiting natural gas use face legal challenges, but if upheld, could reduce gas distribution growth prospects. Similarly, Montana's regulatory environment, while currently supportive, could shift with changing political dynamics, threatening the timely recovery of the $294 million Badger Wind Farm investment. The company's 87-year dividend history provides some regulatory goodwill, but utilities nationwide face pressure to accelerate decarbonization timelines that may not align with MDU's gas-heavy infrastructure.

Geographic concentration amplifies these risks. With approximately 70% of utility revenue derived from Montana and North Dakota, MDU is exposed to regional economic downturns, commodity price volatility, and single-state regulatory decisions. A severe recession in the Bakken region or adverse legislation in either state could impact revenue by 10-15%, far exceeding the diversification benefits enjoyed by Xcel Energy or Black Hills Corporation (BKH).

Competitive Context and Relative Positioning

MDU's pure-play transformation creates a cleaner comparison set against regional utilities but also highlights scale disadvantages. Xcel Energy, with its $45.7 billion market cap and 3.7 million electric customers, operates at nearly 25 times MDU's electric customer base. XEL's 26.6% operating margin and 9.45% ROE exceed MDU's 12.8% and 6.4%, respectively, reflecting superior scale economies and a more modern generation fleet. However, XEL must invest billions in transmission to serve data centers, while MDU's capital-light approach yields faster returns on invested capital for this specific opportunity.

Black Hills Corporation presents the most direct comparison as a similarly sized regional utility with gas and electric operations in overlapping territories. BKH's $5.3 billion market cap, 18.3% operating margin, and 7.92% ROE are roughly comparable to MDU's financial profile. However, BKH lacks MDU's integrated pipeline segment, which provides a natural hedge against gas price volatility and captures midstream margins that BKH must cede to third-party transporters. MDU's 0.8 Bcf/day of pipeline capacity creates a strategic moat in the Bakken that BKH cannot replicate.

NorthWestern Corporation (NWE)'s Montana-centric operations overlap directly with MDU's electric territory. NWE's 22.4% operating margin and 7.62% ROE suggest superior operational efficiency, likely driven by its hydroelectric-heavy generation mix that provides lower-cost power than MDU's thermal fleet. However, NWE's concentration in a single state (Montana represents over 60% of revenue) creates regulatory risk that MDU diversifies across eight states. MDU's pipeline and gas distribution segments provide earnings stability that NWE's pure electric model lacks during mild weather years.

Quanta Services (PWR), while no longer a direct competitor following the Everus spin-off, remains relevant as a benchmark for infrastructure execution. PWR's 15% revenue growth and $30 billion backlog demonstrate the scale of national T&D investment that MDU now accesses only as a customer rather than a participant. This separation allows MDU to focus on its CORE strategy but eliminates the vertical integration that previously enabled cost savings on internal projects. The "so what" is that MDU must now compete for engineering services in an overheated market where PWR's national scale commands premium pricing and priority scheduling.

Valuation Context: Pricing a Transformed Utility

At $19.26 per share, MDU trades at 21.4 times trailing earnings and 12.8 times EV/EBITDA, positioning it at a modest discount to Xcel Energy (23.5x P/E, 14.1x EV/EBITDA) but a premium to Black Hills (17.7x P/E, 12.0x EV/EBITDA). The 2.91% dividend yield sits below BKH's 3.87% and NWE's 4.03%, reflecting MDU's lower payout ratio (58.9% vs. peers at 67-75%) and management's preference for reinvesting in growth projects.

The valuation multiple appropriately reflects MDU's transitional status. The 6.4% ROE trails all major peers, evidence of the margin compression from data center infrastructure investments and generation outage costs that have not yet been recovered through rates. However, the forward P/E of 15.8-17.2 based on 2025 EPS guidance of $0.90-$0.95 suggests the market is pricing in earnings recovery as rate cases are resolved and data center load ramps.

Balance sheet metrics support the valuation. Debt-to-equity of 0.86 is conservative for a capital-intensive utility, and the 54% equity capitalization provides ample cushion for the $3.1 billion capital program. The current ratio of 0.75 and quick ratio of 0.31 reflect typical utility working capital management, with cash flow from operations ($502 million TTM) covering dividend payments ($116 million) and a portion of capital expenditures ($380 million nine-month capex). The negative free cash flow (-$20.5 million TTM) is expected during heavy investment cycles and should inflect positive as data center contributions accelerate.

Comparative valuation must account for the data center optionality. None of MDU's traditional utility peers have secured 580 MW of capital-light load growth, representing approximately $30-40 million in incremental annual earnings once fully ramped. This embedded growth justifies a modest premium to historical utility multiples (15-16x P/E) while remaining below the 25x+ multiples commanded by pure-play data center REITs. The pipeline segment's record earnings and expansion projects further support a higher multiple than traditional distribution-only utilities.

Conclusion: A Utility at the Right Place, Right Time

MDU Resources has completed a strategic transformation that positions it uniquely among regional utilities. The pure-play regulated energy delivery model provides the earnings predictability and dividend stability that utility investors demand, while the pipeline segment and capital-light data center strategy offer growth rates typically associated with mid-cap industrial companies. The 6-8% long-term EPS growth target is credible, supported by 7-8% rate base expansion, 1-2% customer growth, and the underappreciated data center earnings lever.

The investment thesis hinges on two variables: successful execution of the 400 MW data center ramp by 2027, and resolution of the Intermountain covenant issues without disrupting the capital program. If MDU delivers on both, the stock's 21.4x P/E will compress rapidly as earnings grow into the valuation. The pipeline expansion projects and potential Bakken East pipeline provide additional upside not reflected in current guidance, creating a favorable risk-reward asymmetry.

The primary risk is that management's capital-light model, while brilliant in theory, strains operational reliability when serving 28% of its generation portfolio to a single customer segment. Any misstep in load ramping or transmission planning could damage the company's reputation and growth trajectory. However, MDU's 87-year dividend history, strong regulatory relationships, and strategic positioning in the heart of the data center boom suggest these risks are manageable.

Trading at $19.26, MDU offers investors a rare combination: utility-grade income stability, mid-cap growth optionality, and a management team that has proven its ability to reshape the business for the energy transition. The valuation does not yet reflect the full earnings power of the data center strategy or the pipeline segment's record performance, creating an attractive entry point for long-term investors willing to tolerate near-term execution risk.