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DCR Assigns New CP Rating to Centennial Energy Holdings, Inc.

CHICAGO, Aug. 20 /PRNewswire/ -- Duff & Phelps Credit Rating (DCR) has assigned an initial commercial paper rating of 'D-1' (D-One) to Centennial Energy Holdings, Inc. (CEH). CEH's newly initiated $150 million commercial paper facility will be completely backed by a $150 million unsecured revolving credit facility. Proceeds from CEH's commercial paper program will be used for working capital requirements and as bridge financing for future acquisitions.

CEH is a wholly owned subsidiary and intermediate holding company for MDU Resources Group, Inc.'s (MDU) nonutility businesses. MDU's senior secured debt and commercial paper is currently rated 'A' (Single-A) and 'D-1' (D-One) respectively by DCR.

CEH's ratings consider MDU's implicit support for CEH and its subsidiaries Fidelity Oil Group (FID), Williston Basin Interstate Pipeline Co. (WB), Knife River Corp. (KR), and Utility Services (US) either through direct equity infusion and/or via a conservative upstream dividend policy from these subsidiaries to MDU. DCR also notes that the higher business-risk credit quality (particularly KR, FID, US) of CEH and its underlying subsidiaries have sustained good and improving credit fundamentals over the last several years. Based on discussions with the senior management of MDU, financial management and credit quality of these expanding businesses is expected to be maintained at or near current levels. CEH also benefits from MDU's successfully executed growth strategy that emphasizes conservative-risk opportunities in diverse, nonregulated businesses.

The EBITDA and asset breakdown of CEH's business units at yearend 1997 consisted of the following: FID, 44 percent of EBITDA and 31 percent of assets; WB, 31 percent of CEH's EBITDA and 37 percent of assets; KR, 23 percent of EBITDA and 31 percent of assets; and US, 2 percent of EBITDA and less than 1 percent of assets.

FID's growth strategy focuses on the acquisition, exploration and development of producing oil and natural gas in U.S.- and Canadian-based properties. The oil and natural gas concern employs a strategy based on a balanced oil and natural gas production and reserve portfolio. FID's exploration and production plays benefit from FID's consistent and disciplined strategy of taking minority participation stakes with experienced players. Despite a relatively aggressive growth by the acquisition strategy, FID remains prudently managed. For example, in 1997, speculation of higher oil prices made acquisition plays uneconomic. Alternatively, the company used its free cash flow that would of otherwise been deployed for acquisitions for debt reduction.

As a result of low oil prices, FID's operating margins have declined. More efficient production operations and some hedging of production have helped to offset this decline somewhat. FID's second quarter 1998 $20 million write-down of its oil and natural gas production activities represented a non- cash charge; the associated DD&A reduction will have a minimal impact on cash flows going forward. The write-off also indicates FID's susceptibility to the both the commodity price risk and the related adverse effect on cash flows, as well as balance-sheet exposure. Approximately 15-20 percent of FID's production is hedged at fixed prices; the remainder is exposed to spot volatility.

Success rates are enhanced by the high success rates in the Cedar Creek Anticline properties in southeastern Montana, which represent 58 percent of oil reserves and 3 percent of natural gas reserves. FID's current risk profile remains reasonable. Investments by FID are projected to average $60 million over the next five years.

WB is strategically positioned and maintains 3,600 miles of transmission, gathering and storage lines with interconnects to seven pipelines. WB is also located near five natural gas producing basins and has total underground storage capacity of 353 MMcf. WB enjoys the benefits of its interconnection with a Canadian pipeline, providing low-cost firm access for up to 10 MMcf per day, and the potential for additional interruptible gas supply. Approximately 91 percent of WB's firm transportation is subscribed by MDU's electric and natural gas distribution subsidiary, Montana-Dakota Utilities Co., for the next five years. Capital expenditures are projected to remain below depreciation levels over the next five years reflecting, in large part, the buildout of WB's production facilities, compressor stations and pipeline replacement, and the buildout of WB's pipeline transmission system.

A key factor in MDU's long-term growth strategy lies within WB's large storage capability and access to Canadian gas supplies. Regional natural gas supplies are decreasing, resulting in the region's net-importer status and increased dependence on off-system supply. WB is well-positioned to capitalize on this trend through enhanced storage capability and higher storage delivery volumes.

KR has transformed itself into a rapidly growing coal and aggregate mining and construction materials business via a string of acquisitions. These acquisitions have been in line with DCR's expectations and MDU's current diversification strategy, and complement existing construction materials and mining operations. Proximity to the strong economic regions of the Northwest, which are experiencing higher-than-average population growth rates and construction activity, will provide near-term stability to these businesses. The continued expansion of the aggregate, construction and related materials and mining business will more than offset the anticipated and continued reduction in coal mining volumes. Capital expenditures are manageable; additional future investments in similar construction businesses may materialize over the next few years. Overall, KR's strategy is reasonable; the construction materials business growth should continue to be a strong contributor to KR's aggregate profitability. From a credit perspective, the cyclicality and increased business risk associated with these businesses will somewhat offset increasing operating profits.

US represents a small, but growing segment for both MDU and CEH. The company's primary business includes installing and repairing transmission and distribution power lines and related equipment provider. Recent acquisitions include International Line Builders, Inc., High Line Equipment, Inc, Pouk & Steinle Inc., Harp Line Constructors Co. and Harp Engineering Inc.

MDU is a diversified energy company with headquarters in Bismark, N.D. The company's regulated operations include an electric-gas utility, Montana- Dakota Utilities Co., that provides service at retail to communities in North Dakota and parts of Montana, South Dakota and Wyoming. The company, through its wholly owned subsidiary, Centennial Energy Holdings, Inc., owns a regulated interstate pipeline and underground storage facility (Williston Basin Interstate Pipeline Co.); a coal, aggregate mining and construction materials subsidiary (Knife River Corp.); an oil and gas exploration and production company (Fidelity Oil Group); and a servicer of transmission and distribution power lines and related equipment provider (Utility Services, Inc.)

SOURCE Duff & Phelps Credit Rating Co.
 -0- 08/20/98


/CONTACT: John W. O'Connor, 312-368-2059, oconnor@dcrco.com, or Brian M. Youngberg, CFA, 312-368-3332, youngberg@dcrco.com, both of Duff & Phelps/

(DCR MDU) CO: Centennial Energy Holdings, Inc. ST: IN: OIL SU: RTG

EG -- NYTH083 -- 9410 08/20/98 16:40 EDT http://www.prnewswire.com
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