MDU Resources Group (MDU) owns and operates public utilities distributing natural gas and electricity to over 350,000 customers in 7 states in the Western U.S. MDU also explores for and produces natural gas and oil in the U.S and provides construction contracting services to the natural gas industry and construction materials to industries across the country. MDU competes against companies in the Diversified Utilities industry, such as Puget Sound Energy (PSD) and Atmos Energy (ATO), as well as companies in the Oil & Gas Pipelines industry, such as Williams Companies (WMB) and El Paso (EP).
MDU's four distinct operating segments reduce its exposure to risks experienced in just one of its industries. For example, in the first quarter of 2008, decreased home construction caused MDU's building materials segment profits to plummet. In 2008, MDU's construction materials and contracting segment decreased its production by $17.5M, or 13%, due to lower volumes in its sales of materials and contracting services.The company posted large increases in net income, however, due to increases in its natural gas and oil production segment which offset the declines in the construction segment. The demand for natural gas in the United States directly affects MDU's performance, however. Almost all MDU's business segments are centered around the natural gas industry, either producing, transporting, consuming or building infrastructure for natural gas. As demand for natural gas increases, revenues at its natural gas distribution, pipeline and natural gas production segments increase as natural gas prices and volumes transported rise. The price of natural gas has declined slightly in the past two years, down 5% since a record high in 2005, though the price is still up 43% since 2002.
MDU's natural gas and electric utilities are regulated by the state governments in which they operate and MDU's pipeline segment is regulated by the Federal Energy Regulatory Commission, FERC. To date, 24 states have adopted renewable portfolio standards, which require power companies to purchase a certain percentage of their electricity from renewable sources by a certain date (percentages and dates vary from state to state).
MDU operates six separate and distinct business segments, with a central focus on energy, particularly the natural gas industry.
The company provides retail electric services to residential and commercial customers. This unit operates four principal power generating stations, all of which use coal for fuel. It also owns 4500 miles of distribution lines, used to transmit power produced at its generators to end consumers. Income is affected by the price of gas used in its generators and rates it can charge its customers. In 2007 the electric generation division finished a large wind farm in Minnesota, representing the company's first movement into the renewable energy market. From 2006 to 2007, revenue to the Electric Generation segment increased 3.2%.
MDU owns 11,000 miles of intrastate distribution pipeline it uses to deliver natural gas at retail to over 450,000 residential, commercial and industrial customers. MDU's gas distribution segment is regulated by the states in which it operates. Regulations include the rates it can charge customers and which expansion projects it can undertake. Examples of projects in this segment include a natural gas pipeline built in 2007 that will supply the ethanol to a new 55 million gallon a year ethanol plant in Minnesota, which begin operation in early 2008. From 2006 to 2007, revenue to the Natural Gas Distribution segment increased 51.4%.
The company focuses on construction of energy related infrastructure, including natural gas pipelines, electrical distribution lines and inside electrical wiring. This segment has been a driver of company net income growth; in 2007 construction services saw a 60% gain in net income, the largest gain of any of the company’s business segments. As of December 31st 2007 the company had a backlog of $837M in development projects. The main driver of revenue growth in this segment is demand for electrical infrastructure. MDU reports that electric companies are expected to spend $44B over the next three years expanding infrastructure. From 2006 to 2007, revenue to the Construction Services segment increased 11.7%.
The company owns and operates 3,700 miles of natural gas pipelines and three underground natural gas storage facilities. The operation of this business segment is regulated by the Federal Energy Regulatory Commission (FERC), a federal regulatory agency. This commission sets the rates MDU can charge on its pipeline business, providing income stability but little room for earning above average returns. Because rates are fixed, revenue growth at MDU's pipeline segment requires an increase in volumes transported, either through increasing market share or increasing demand for natural gas. The stable income generated from MDU's pipeline segment helps the company to expand in other areas however, as it can use the pipelines constant revenue to fund high debt service payments. From 2006 to 2007, revenue to the Pipelines segment increased 0.75%.
MDU explores for and produces natural gas and oil in the United States. MDU earns revenue in this segment by selling the natural gas and oil it produces. Income in this segment depends on MDU's ability to find undiscovered reserves of oil and natural gas, extract them at a cost effective basis and sell them at a high price. In 2007, 73% of revenues in this business segment came from the sale of natural gas. From 2006 to 2007, revenue to the Natural Gas and Oil Production segment increased 6.4%.
It takes 22,000 pounds of sand, gravel and stone per person, per year, to maintain the United States' roads, sidewalks, buildings and other infrastructure. MDU´s materials and contracting segments helps to fill that need, selling rock, cement, asphalt and concrete, its extracts from company owned rock pits and quarries. In the long run, MDU estimates that the demand for these materials will increase 20% by 2020, a need which the company will be able to meet with 1.2B tons of reserves. In the short run, however, demand for MDU's construction materials has declined due to the slowdown in the U.S. Housing Market. This slowdown has decreased the demand for MDU's building materials, and lowered revenues and income at the segment. The company intends to offset this slowdown by providing materials to the growing energy construction industry. From 2006 to 2007, revenue to the Construction Materials and Contracting segment decreased 6.2%.
From 2006 to 2007, MDU revenue increased 6.1%, operating income increased 6.5%, and total cost increased 6.0%. Revenue increased primarily due to an acquisition in the company's Natural Gas Distribution segment.MDU 2007 Form 10-K Page 51</ref> Operating income also increased due to decreased expenses in the company's construction services segment, and increased earnings from the company's natural gas distribution segment.
The slowdown in the U.S. housing market has created a slowdown in the homebuilding industry. In April of 2008, a survey of The National Association of Home Builders revealed homebuilders were pessimistic about the demand for newly built homes due to tightening credit conditions, increasing defaults and consumer's waiting for housing prices to decline further. In an April conference call, Fitch Ratings Service said they expect the housing market to contract more in 2008 and 2009, further hurting homebuilders. MDU is affected by the slowdown because it supplies construction materials to these homebuilders. In 2008 operating at MDU's construction materials and contracting segment decreased by $17.5M, or 13%, due to lower volumes in its sales of materials and contracting services. The company intends to offset the slowdown in housing by switching its focus to supplying materials in growing energy construction industry.
The price of natural gas has undergone wide fluctuations in the past five years. The price has declined slightly in the past two years, down 5% since a record high in 2005, though the price is still up 43% since 2002. These price fluctuations affect demand for natural gas as other fuels become cheaper substitutes, especially among facilities with the capacity to switch to other types of fuels. For example many electrical power companies, who consumed 32% of all natural gas produced in 2007, switch to coal power during periods of high natural gas prices. The price of coal has risen slower than the price of natural gas, and provides cheaper power during periods of high gas prices. Many industrial users, who used 31% of natural gas produced in 2007, also have built in fuel switching capacities.  While residential and commercial users usually have no built in switching capacity many still conserve energy during periods of high gas prices. When demand for natural gas falls, MDU feels the affects in most of its business segments. In pipelines and natural gas distribution, revenue falls as smaller volumes are transported to end users. Similarly in gas production, smaller volumes demanded can counteract high prices and lead to decreased total revenues. Finally, MDU's construction services and construction materials segments build infrastructure and provide construction materials to the natural gas industry. As demand for natural gas falls construction of new wellheads, processing plants and pipelines slows, lowering revenues at MDU's construction businesses.
Increasing environmental concern has a direct affect on the demand for natural gas. In the long run, increasing consumer concern over Global Climate Change will decrease the demand for natural gas. Already increasing environmental consciousness has led both consumers and electric companies to seek out and invest in renewable energy sources such as nuclear, solar, and wind power to heat homes and generate electricity. To date, 24 states have adopted renewable portfolio standards, which require power companies to purchase a certain percentage of their electricity from renewable sources by a certain date (percentages and dates vary from state to state). As residential customers and electric power plants switch to other forms of energy, the demand for natural gas will fall. However, these renewable sources of energy are not yet developed enough to provide for the majority of energy uses in the United States. In the short run natural gas is one of the cleanest burning fuels in widespread use today. Many electric companies are switching to natural gas as a cleaner alternative to coal and oil power plants. The movement in the United States to combat Global Climate Change and will likely increase the demand for natural gas in the short run, since other, more eco-friendly energy sources are not yet fully developed. This shift in consumer consciousness also affects MDU´s electric utilities. Virtually all of the company´s electric power is generated from coal. Coal combustion produces more Carbon Dioxide, Carbon Monoxide, Nitrogen Oxides, Sulfur Dioxide, Ash and Mercury, all pollutants and contributors to global warming, per billion BTU's of energy produced than either oil or natural gas. Though consumers do not have the choice to purchase electricity from another operator, increasing consumer consciousness about the effects of coal will likely lead many consumers to conserve electricity and lobby for more environmental regulations.
All of MDU´s business segments have some seasonality in revenue. For example, demand for natural gas is highest during the coldest months of winter when it is used to heat homes. Due to the shift towards natural gas for generating electricity, demand for natural gas is also high during the summer months when people are using large amounts of electricity to cool their homes. During the temperate fall and spring seasons demand for natural gas drops sharply. Revenues at MDU's Gas Production, Pipeline, and Distribution segments decline during the spring and fall as producers transport less gas to accommodate low consumer demand. Revenues at MDU´s Electric segment are typically highest during the summer months when consumers use less electricity to heat their homes. Revenues at MDU's Materials and Construction Services segments also vary seasonally. Construction projects increase during the summer due to better weather and decrease during the winter as harsh weather stalls many projects. During 2007 and 2006 MDU´s first quarter (January through March) operating revenues were $790M and $803M respectively. MDU´s third quarter revenues (July through September), however, were $1.2B in both 2007 and 2006 due to the seasonal affects at MDU´s construction, gas, and electrical generation businesses
|Competition||MDU Res Group (MDU)||NiSource, Inc (NI)||Vectren (VVC)||Atmos Energy (ATO)||Puget Sound Energy (PSD)|
|Market Cap $Mil||3,440.00||3,590.00||1,800.00||2,040.00||2,930.00|
|Gross Profit $Mil||1,012.43||1,02.80||515.30||786.90||1,003.26
|Net Profit Margin %||7.60%||3.93%||6.28%||2.86%||5.74%|
|Operating Margin %||13.12%||11.11%||11.42%||6.76%||13.70%|
|Natural Gas Customers||256,000||3,300,000||998,000||3,200,000||730,000|
|Competition||MDU RES GROUP (MDU)||Williams Companies (WMB)||El Paso (EP)||Kinder Morgan Energy Partners, L.P. (KMP)||ENBRIDGE (ENB)||Spectra Energy (SE)||Questar (STR)|
|Market Cap $Mil||3,470.00||10,570.00||5,600.00||13,250.00||11,610.00||11,180.00||4,640.00|
|Gross Profit $Mil||1,012.43||5,437.00||4,403.00||2,145.80||2,909.90||1,926.00||1,394.60|
|Net Profit Margin %||7.60%||8.02%||9.38%||9.52%||6.32%||19.91%||18.61%|
|Operating Margin %||13.12%||17.48%||29.13%||8.76%||9.64%||30.41%||31.10%|
|Miles of Interstate Pipeline||5,600.00||14,200.00||42,000.00||25,000.00||--||--||2,505.00|