Fitch Downgrades MDU's S-T Ratings; Affirms L-T Ratings; Revises Outlook to Negative

Fitch has taken the following rating actions:

MDU Resources Group

--Long-term Issuer Default Rating (IDR) affirmed at 'A-';

--Short-term IDR downgraded to 'F2' from 'F1';

--First Mortgage bonds affirmed at 'A+';

--Senior Unsecured affirmed at 'A';

--Preferred stock affirmed at 'A-';

--Commercial Paper downgraded to 'F2' from 'F1'.

Centennial Energy Holdings, Inc.

--Long-term IDR affirmed at 'A-';

--Short-term IDR downgraded to 'F2' from 'F1';

--Senior Unsecured affirmed at 'A-';

--Commercial Paper downgraded to 'F2' from 'F1'.

Cascade Natural Gas Co.

--Long-term IDR affirmed at 'A-';

--Short-term IDR downgraded to 'F2' from 'F1';

--Senior Unsecured affirmed at 'A'.

The downgrade of the short-term ratings reflects a more typical long-term/short-term rating notching alignment for industrial companies combined with expected lower levels of cash flows, reflecting weakening operating performance measures. Rating assignments for MDU and its units reflect a consolidated financial analysis in part reflecting its divisional structure, moderate degree of vertical integration, and financial correlations across its business portfolio.

While depressed energy prices and weakness across MDU's economically sensitive businesses will dampen 2009 results, Fitch has affirmed the long-term ratings, reflecting credit metrics in 2009 that are expected to remain at or above industry peer and rating category guidelines. MDU's credit profile benefits from conservative financial policies that incorporate a low level of leverage and energy hedges that moderate cash flow volatility coupled with a successful diversification program, which has extended the legacy regulated utility operations into upstream energy production, pipelines, aggregates and construction materials, and construction services. Nonutility operations are conducted through Centennial.

Despite rapidly declining energy prices beginning in the summer of 2008, MDU's financial results stayed strong, reflecting a policy of hedging up to 50% of the next 12 months of production; thus MDU is realizing substantially higher prices for natural gas and oil than current market prices. Key credit metrics, including Ebitda to Interest, exceeding 11.0 times (x), and Debt to Ebitda at 1.7x for the period ending Dec. 31, 2008, compare well to prior year levels. Hedges for approximately 40% to 45% of natural gas production in 2009 are at prices that are well above market with swaps averaging approximately $8.73 per thousand cubic feet (Mcf) and collars ranging between $8.52 per Mcf and $9.56 per Mcf. Consequently hedges effectively insolate overall financial performance from depressed energy prices for the remainder of the year. Even utilizing Fitch's stressed natural gas price deck ($3.50 per Mcf), Fitch expects 2009 Ebidta to Interest to remain comfortably above 8.0x.

The Negative Outlook reflects the reduced visibility afforded in 2010 cash flows as most energy hedges expire in 2009. A period of sustained low energy prices and/or a prolonged economic downturn would likely result in a downgrade of long-term ratings.

Over the last few years, MDU has repositioned its business portfolio by selling its Independent Power Production business and acquiring two regulated natural gas local distribution companies, Cascade, based in Oregon and Washington, in 2007 and Intermountain Gas Co., based in Idaho, in 2008. MDU's regulated utilities now serve portions of eight contiguous states from Minnesota to the Pacific Coast. Regulated MDU utilities and regulated pipeline operations provide a stable financial base and predictable cash flow stream.

MDU has slashed its capex budget for 2009, particularly in its upstream energy exploration and production operations. Consequently, cash flow is expected to be at least breakeven in 2009, but at these reduced capex levels, MDU is unable to sustain oil and gas production at 2008 levels. MDU does not face any significant near-term debt maturities, although it is an active user of commercial paper to fund its varied businesses. Both MDU and Centennial maintain commercial paper programs. Liquidity overall is considered satisfactory. MDU's two most economically sensitive businesses, Construction Materials and Construction Services, have modest capex requirements, are scaleable and can be downsized to meet current market conditions and weak demand. While these operations may benefit from the Stimulus Package, any such financial benefit does not weigh heavily in Fitch's analysis.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

SOURCE: Fitch Ratings

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