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Rating Action:

MOODY'S UPGRADES RATINGS OF MDU RESOURCES (SR. SEC. TO A2; COMMERCIAL PAPER TO P-1)

29 Jan 1997
MOODY'S UPGRADES RATINGS OF MDU RESOURCES (SR. SEC. TO A2; COMMERCIAL PAPER TO P-1) New York, 01-29-97 -- Moody's Investors Services upgraded the senior secured debt rating of MDU Resources Group, Inc. to A2 from A3 and its rating for commercial paper to Prime-1 from Prime-2 based on the favorable resolution of certain federal tax issues, the likelihood of a significant reduction in off-balance-sheet debt over the next two years, the prospect for continued low operating costs at MDU's electric utility, and Moody's expectation that management will maintain a conservative capital structure at MDU's subsidiaries as it pursues its growth strategy.
Ratings upgraded are MDU's first mortgage bonds and secured medium-term notes to A2 from A3; shelf registration for senior secured debt securities to (P)A2 from (P)A3; counterparty rating to A3 from Baa1; pollution control revenue bonds to A3 from Baa1; preferred/preference stock to "a3" from "baa1"; and rating for commercial paper to Prime-1 from Prime-2.
The resolution of all outstanding issues with the IRS with respect to taxes owed during the period 1983 through 1991 eliminates a significant contingent liability for MDU. In addition, the company's off-balance-sheet debt is expected to decline over the next two years as it pays off debt used to finance inventoried natural gas under a repurchase commitment. Regulators have not allowed MDU's natural gas pipeline subsidiary to recover financing costs associated with this debt, which has caused a drain on its earnings and cash flow.
MDU's electric utility remains one of the lowest-cost utilities in the nation and thus should not suffer from the restructuring of the electric industry. Moreover, only 10% of MDU's electric sales are to the industrial sector, which would be the most affected by increased competition. The utility's costs are likely to remain low due to the availability of low-cost lignite coal and natural gas as fuel sources, efficient operations, and lack of stranded costs.
MDU's non-regulated subsidiaries are involved primarily in oil and gas exploration and production (E&P) and in construction materials and mining. The earnings of these subsidiaries tend to vary more than those of the utility parent. Although MDU maintains strict legal separation of the utility from its subsidiaries, there are no other specific regulatory requirements to protect utility bondholders. However, it is unlikely that the utility would have to support MDU's non-regulated subsidiaries, since they are profitable, are managed conservatively, and have strong balance sheets. Moody's expects MDU to continue to maintain a conservative financial policy as it pursues its growth strategy for exploration and production and for construction materials and mining.
Over the past three years, debt at MDU's subsidiaries has increased to about 47% of the company's consolidated debt. Management plans to continue to issue some additional debt at the subsidiary level to finance acquisitions of construction materials businesses, as well as E&P. However, MDU does not guarantee or support such debt, and the strong financial condition of the subsidiaries, as well as management's statement that it will maintain a conservative financing strategy, reduces the likelihood that lenders at the subsidiary level would need to seek repayment from the utility parent. In addition, although utility bondholders are effectively subordinated to lenders at the subsidiaries, who have first claim on the subsidiaries' cash flow, the utility's strong cash flow relative to its debt makes it unlikely that utility bondholders would need to rely on the cash flow of MDU's subsidiaries for repayment.
Headquartered in Bismarck, North Dakota, MDU Resources, Inc. is an electric and natural gas utility that owns subsidiaries involved in natural gas transmission, oil and gas exploration and production, the manufacture of construction materials, mining, and energy marketing.
No Related Data.
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