20080825_2341.pdf

DECISION MEMORANDUM
TO:COMMISSIONER REDFORD
COMMISSIONER SMITH
COMMISSIONER KEMPTON
COMMISSION SECRETARY
COMMISSION STAFF
FROM:DON HOWELL
DEPUTY ATTORNEY GENERAL
DATE:AUGUST 22, 2008
SUBJECT:MDU RESOURCES GROUP'S PURCHASE OF INTERMOUNT AIN
INDUSTRIES (INCLUDING INTERMOUNTAIN GAS COMPANY)
On July 9, 2008 MDU Resources Group and Intermountain Gas Company
(Intermountain or IGC) filed a "Notification of Change in Control" regarding MDU's purchase
of IGC's parent , Intermountain Industries. Briefly, MDU is purchasing "all the outstanding
shares of capital stock of Intermountain Gas Company. Intermountain would thereafter become
a wholly owned subsidiary of MDU Resources." Notification at 1. This Memorandum reviews:
the purchase transaction; "ring-fencing" safeguards that the Staff and the parties have agreed to
in a "Memorandum of Understanding" dated August 21 , 2008; and the Commission s authority
over such transaction.
DET AILS OF THE TRANSACTION
On July 1 , 2008, MDU Resources Group and Intermountain Industries executed a
Stock Purchase Agreement" (the Agreement)) whereby MDU purchases all the outstanding
stock of Intermountain Industries for approximately $328 million. Through various subsidiaries
and divisions, MDU Resources currently provides electric and natural gas distribution services to
more than 630 000 customers in the states of North Dakota, South Dakota, Minnesota, Montana
Wyoming, Oregon and Washington. Intermountain Gas Company (IGC) is a wholly owned
subsidiary of privately-held Intermountain Industries and serves about 300 000 customers.
Notification at 4-5. IGC is subject to the Commission s regulatory authority pursuant to Idaho
Code 9 61-129.
1 The parties submitted a copy of the "Stock Purchase Agreement" as a confidential and trade secret document
pursuant to the Commission s Rules of Procedure and Idaho Code 99 9-340C and 9-340D.
DECISION MEMORANDUM
The parties generally assert that the transaction is not subject to the Commission
review and approval given the nature of the wholesale stock transaction. Nevertheless, the
parties have provided the Commission with the confidential Stock Purchase Agreement
(Agreement or SPA), met with the Staff on several occasions, and have entered into a
Memorandum of Understanding discussed in greater detail below. The parties concede that IGC
will remain subject to the Commission s regulation. SP A 9 3.17. Intermountain Gas shall
continue to operate under its own name. Id. 9 5.11. The Agreement contemplates that the
Commission will complete its review of the parties' Notification filing and advise the parties in
writing that it has completed its review. Id. 9 6.1 (c).
The parties expect the transaction to close on or about October 1 , 2008. As indicated
in the Agreement, the parties anticipate that they will acquire the approval of various regulatory
entities including FERC, the Minnesota PUC, and the North Dakota PSC. The parties have also
made informational notifications to the Washington and Oregon Commissions. Agreement Exh.
A. The Purchaser
MDU Resources was incorporated in 1924 and has been engaged in the regulatory
utility business for more than 80 years. Its utility division (Montana-Dakota Utilities) provides
natural gas and electric service to customers in North Dakota, South Dakota, Montana and
Wyoming. In July 2000, MDU acquired Great Plains Natural Gas Company which serves
000 in western Minnesota and southeastern North Dakota. In 2007, MDU acquired Cascade
Natural Gas Corporation which serves more than 250 000 customers in Oregon and Washington.
The Company also owns four electric generating plants and has an ownership interest in two
additional plants. Notification at 5.
The Company also owns interstate natural gas pipelines and storage facilities as well
as natural gas production properties. "Williston Basin Interstate Pipeline Company operates over
350 miles of interstate natural gas pipeline and 340 miles of natural gas field and gathering
lines within various production areas in North Dakota, South Dakota, Montana, and Wyoming.
Its storage fields have a working capacity of approximately 193 billion cubic feet of natural gas.
Notification at 8.
MDU's assets exceed $5.8 billion and its operating revenues for the 12 months
ending March 31 , 2008 total approximately $4.6 billion. MDU reports it had operating income
DECISION MEMORANDUM
of $457 million. MDU is a publicly-traded company on the New York Stock Exchange with its
principal headquarters in Bismarck, North Dakota. Notification at 5. MDU reports in the
Notification that its corporate credit is currently rated BBB+ by Standard & Poor , A3 by
Moody , and A- by Fitch. Id. at 6.
B. Plans for Intermountain
MDU states in the Notification that it "plans to own Intermountain (Gas) for the long
term, and because of the nature of the stock purchase, will continue to operate Intermountain
under the name Intermountain Gas Company." Notification at 10. MDU intends to maintain the
continuity of IGC operations including maintaining the "operational headquarters of
Intermountain in Boise.Id. The parties do acknowledge that several corporate functions and
administrative functions may be consolidated at MDD.However
, "
the management of
Intermountain will remain located in Idaho, and Idaho personnel will be authorized to represent
and bind Intermountain in its dealings with customers, regulators and suppliers.Id.
The parties maintain that MDU's acquisition ofIGC is in the public interest and will
provide benefits to IGC's customers. In particular , the Notification cites that IGC customers will
benefit from: (1) the financial strength of MDU Resources; (2) effective consolidation of
corporate functions and approved purchase power "should lead to prices that are lower than they
otherwise would have been without the consolidation ; (3) IGC will continue to operate in much
the same way as it does today; and (4) MDU Resources will maintain and enhance IGC'
commitment to its employees and the communities it services. Id. at 11-12.
The Notification indicates that MDU intends to honor all existing agreements with
IGC employees and "work to maintain and expand constructive relationships with labor unions
representing Intermountain s employees, including safety and training initiatives.Id. at 14.
MDU indicates that it has not experienced a union work stoppage in more than 30 years.
The Notification asserts that IGC "will not request rate recovery of the transaction
costs associated with the acquisition nor will it seek recovery of the purchase premium except to
the extent integration synergies from the transaction are also passed through retail rates.Id.
14. MDU also pledges that IGC's customers will not be exposed to the financial risks ofMDU'
other businesses. The Notification indicates that MDU will position IGC as a subsidiary of
MDU Resources "which will protect Intermountain from the risks associated with the operations
DECISION MEMORANDUM
of MDU Resources' unregulated operations which are held by a separate subsidiary - Centennial
Energy Holdings, Inc.Id. at 15.
RING-FENCING SAFEGUARDS
To more clearly delineate conditions that will protect Intermountain customers from
unreasonable risks, MDU, IGC and the Commission Staff entered into a Memorandum of
Understanding (MOU) on August 21 , 2008. As in other recent acquisition transactions, the
Commission Staff sought to memorialize ring-fencing safeguards to protect IGC customers and
to ensure the continued access to the books and records ofIGC and MDU Resources that pertain
to IGC. Accordingly, the MOU parties agreed on 17 commitments included in the MOD. See
attached MOD. Included among the 17 commitments are the following safeguards:
. The common stock of Intermountain will be transferred from MDU
Resources to Prairie Intermountain Energy Holdings. MDU Energy
Capital will own 100% of Prairie Intermountain and MDU Resources will
own 100% of the stock of MDU Energy Capital. This structure will result
in the assets, liabilities and equity of Intermountain remaining as presently
recorded. In addition, IGC debt will be maintained separately from the
financial securities of MDU Resources and its affiliates. ,-r 1.
. Intermountain will not make loans to MDU Resources or its respective
subsidiaries, or assume any obligation or liability as guarantor, endorser
surety or otherwise for MDU Resources or its respective subsidiaries
without the specific approval of the Commission. MDU Resources and
IGC will not pledge any of the assets of the business of Intermountain as
backing for any securities which MDU Resources or its respective
subsidiaries, but excluding Intermountain, may issue. ,-r 1 (e).
. Intermountain will maintain its own accounting documents and its
financial books and records which will continue to be maintained
Intermountain s Boise, Idaho office. Documents will be available to the
Commission Staff upon request. ,-r,-r 3-
MDU Resources and Intermountain will provide the Commission access
to all books of accounts, as well as all documents, data, and records of
their affiliated interests, which pertain to transactions between
Intermountain and other affiliates. ,-r 5.
MDU Resources and Intermountain will provide the Commission access
to those portions of corporate minutes including Board of Directors
minutes that may lead to relevant information regarding Intermountain
business and associated risk analysis. ,-r 6.
DECISION MEMORANDUM
. Intermountain or MDU Resources will notify the Commission of certain
transactions and credit agency news releases regarding MDU Resources.
,-r,-r 8-10.
. Intermountain and MDU Resources commit that Intermountain will not
make any dividends that will reduce Intermountain s common equity
capital below 35% without Commission approval through 2018.
Intermountain will provide notice to the Commission if dividend payment
increases by 10% or more. ,-r 11.
. Cost allocation between Intermountain and MDU Resources will be based
upon general acceptable accounting standards. ,-r 13.
. The premium paid by MDU Resources for Intermountain will be excluded
from the utility accounts of Intermountain. Intermountain will not request
rate recovery of the transaction costs associated with the acquisition nor
will it seek recovery of the purchase premium except through the
integration synergies from the transactions are also passed through retail
rates. ,-r 15.
Consistent with other ring-fencing safeguards, the Staff believes that the
commitments in the MOU provide additional protections for ratepayers. The Staff asserts these
commitments are in the public interest.
COMMISSION AUTHORITY OVER THE TRANSACTION
As set out above, MDU and IGC contemplate that this is a stock purchase agreement
where MDU is acquiring all the stock of privately-held Intermountain Industries. As such, this
transaction is taking place at the holding company level. Because MDU will continue to operate
Intermountain Gas as a separate operating utility, IGC's Certificate will not be transferred to
another entity.
Given the structure of this transaction, the Commission does not exercise authority to
approve or disapprove of this transaction. Unlike the Commission s authority over similar
transactions involving electric public utilities under Idaho Code 9 61-328, there is not a similar
provision granting the Commission jurisdiction over the sale of natural gas utilities. The present
transaction is similar to other holding company purchases of utilities where the Commission did
not exercise jurisdiction. For example, similar transactions occurred in 1999 when United Water
Resources (the holding company for United Water) merged with Lyonniase to form Suez. In
November 2006, Suez merged with France s GdF without Commission oversight. The Staff
believes the same treatment applies in this case.
DECISION MEMORANDUM
COMMISSION DECISION
Does the Commission wish for me to advise the parties to the Agreement that the
Commission has completed its review of the Notification filing and shall not condition the
transaction?
f)~
Don Howell
Deputy Attorney General
bls/MMDU Purchase IGC
DECISION MEMORANDUM
MEMORANDUM OF UNDERSTANDING
On July 9 , 2008 , Intermountain Gas Company ("Intermountain ) and MDU
Resources Group, Inc. ("MDU Resources ) filed a Joint Notification with the Idaho
Public Utilities Commission ("IPUC") notifying the IPUC that on July 1 , 2008 MDU
Resources agreed to acquire from Intermountain Industries , Inc., effective upon closing
of the transaction , all of the outstanding shares of capital stock of Intermountain.
Intermountain would thereafter become a wholly-owned subsidiary of MDU Resources.
The corporate organizational structure that MDU Resources anticipates after closing of
the stock acquisition as it pertains to Intermountain is set forth in the organizational
chart attached herein.
MDU Resources and the Staff of the IPUC enter into this Memorandum of
Understanding to more clearly delineate those "Conditions to protect Intermountain
Customers" as described on pages 13 through 15 of the above noted Joint Notification
including the manner in which MDU Resources intends to establish Intermountain as a
ring-fenced" subsidiary. By execution of this Memorandum of Understanding, MDU
Resources agrees to perform all of the commitments as set forth herein.
1. Without regard to the possible use of short-term bridge financing (which if used
would be repaid at the time permanent financing is put in place), the following
describes the manner in which MDU Resources intends to establish Intermountain
as a "ring-fenced" subsidiary:
MDU Resources will either issue new common equity or utilize other
available capital resources to fund a portion of the purchase of the
Intermountain stock. MDU Energy Capital , LLC , will obtain additional
funds through long-term debt financing to complete the funding of the
purchase of the Intermountain stock. The existing debt of
Intermountain will remain at Intermountain and be unaffected by the
acquisition.
Upon completion of the acquisition transaction , the common stock of
Intermountain will be transferred from MDU Resources to Prairie
Intermountain Energy Holdings , LLC ("Prairie Intermountain
).
MDU
Energy Capital , LLC will own 100 percent of the stock of Prairie
Intermountain. MDU Resources will own 100 percent of the stock of
MDU Energy Capital , LLC.
The above-described structure results in the assets, liabilities, and
equity of Intermountain remaining as presently recorded.
Intermountain s debt will be maintained separate from the financial
securities of MDU Resources and its affiliates.
Intermountain will not make loans to MDU Resources or its respective
subsidiaries, or assume any obligation or liability as guarantor
endorser, surety or otherwise for MDU Resources or its respective
subsidiaries without the specific approval of the Idaho Public Utilities
Commission; provided that this condition will not prevent
Intermountain , to the extent allowed by law, from making loans or
transferring funds to a subsidiary of Intermountain or assuming any
obligation or liability on behalf of a subsidiary of Intermountain. MDU
Resources and Intermountain will not pledge any of the assets of the
business of Intermountain as backing for any securities which MDU
Resources or its respective subsidiaries , but excluding Intermountain
may issue.
2. MDU Resources will file a Notification with the IPUC within thirty days of when
the short-term bridge financing and the permanent debt financing, as described
in paragraph 1 , is complete. Intermountain and MDU Resources will file a Joint
Notification with the IPUC within sixty days of when the permanent financing,
including the repayment of short-term bridge financing, as described
paragraph 1 , is complete. The joint notification shall provide the accounting
details for the permanent financing.
3. Intermountain will maintain its own accounting documentation and its financial
books and records, and state and federal utility regulatory filings and documents
will continue to be maintained at Intermountain s Boise, Idaho office consistent
with current practice and will be available to the IPUC Staff upon request.
4. Financial statements and other financial books and records of Intermountain shall
be maintained separate from the books and records of MDU Resources. The
assets of Intermountain will be accounted for separately from the assets of MDU
Resources and its other subsidiaries , divisions, and affiliates. This will not
prevent the maintenance of books and records of Intermountain , MDU
Resources , or their affiliates on or through a common computer accounting
platform. This will also not prevent the consolidated treatment or reporting of
financial statements, financial results , and other financial books and records of
Intermountain , MDU Resources , or their subsidiaries and affiliates for financial
reporting, tax, or other purposes.
5. MDU Resources and Intermountain will provide the Commission access to all
books of account, as well as all documents , data , and records of their affiliated
interests , which pertain to transactions between Intermountain and its affiliated
interests or which are otherwise reasonably calculated to lead to discoverable
information regarding Intermountain.
6. MDU Resources and Intermountain will provide the Commission access to those
portions of corporate minutes including Board of Directors' minutes , all committee
and subcommittee minutes , along with any related reports and source
documents that may lead to relevant information regarding Intermountain
business and associated risk analysis.
7. Intermountain will not own or hold shares of any parent entity, Prairie
Intermountain , MDU Energy Capital , MDU Resources or any other parent entity
that may be formed.
8. Intermountain or MDU Resources will notify the Commission subsequent to MDU
Resources' board approval and as soon as practicable following any public
announcement of: (1) any acquisition of a regulated or unregulated business
representing 5 percent or more of the capitalization of MDU Resources; or (2) the
change in effective control or acquisition of any material part or all of
Intermountain by any other firm , whether by merger, combination , transfer of
stock or assets; or (3) any acquisition of a business with a substantial business
presence in Intermountain s service area that has a value in excess of $100
million or requires notification of the United States Securities and Exchange
Commission.
9. For a period of five years from the acquisition date , and thereafter as requested
by the IPUC, Intermountain will provide the Commission on an information basis
credit agency news releases and final reports regarding MDU Resources when
such reports are known to MDU Resources and Intermountain and are available
to the public.
10.lntermountain will provide the IPUC and Staff with notification of all publicly
announced proposals for divestiture, spin-off, or sale of Intermountain utility
assets where the gross asset value of the assets being disposed of comprises
more than ten percent of Intermountain s original gross utility plant costs.
11.lntermountain and MDU Resources commits that Intermountain will not make any
dividends that will reduce Intermountain s common equity capital below 35% of
Intermountain Total Adjusted Consolidated Capital (using a purchased
accounting approach) without Commission approval. Intermountain Total
Adjusted Consolidated Capital is defined as the common equity, preferred equity,
long-term debt, short-term debt and capitalized lease obligations of both
Intermountain and Intermountain s intermediate holding companies viewed on a
consolidated basis.
12. Through December 31 , 2018 Intermountain will provide notice to the
Commission , when the dividend payment increases by 10% or more than one-
fourth of the dividends paid over the previous 12 months.
13. Cost allocations between Intermountain and MDU Resources, including its utility
divisions and subsidiaries will be based on generally accepted accounting
standards; that is: (a) Costs incurred specifically for a party will be directly
assigned to that party; (b) Costs that are impractical to assign directly but for
which a cost/benefit relationship can be reasonably identified between the
service provided and the recipient, will be assigned a service charge based on a
practical allocation method that allocates the costs equitably and consistently to
the recipient party based on cost driving factors; and (c) Costs that are incurred
for the general benefit of the entire utilities group for which direct assignment or
service charges are not practical , will be allocated to the parties using an
allocation methodology that is established and used consistently from year to
year.
14. Intermountain will provide the Staff with notification of all affiliate transactions
excluding administrative cross charges as provided in paragraph 7, between
Intermountain and MDU and its subsidiaries if the transaction involves a cost of
more than $100 000.
15. MDU Resources will maintain continuity in the operations of Intermountain while
looking for opportunities to improve customer service and to increase efficiencies
through the sharing of "best practices" and the consolidation of certain corporate
and administrative functions. Intermountain will maintain adequate staffing
consistent with the provision of safe and reliable service and cost-effective
operations.
16. The premium paid by MDU Resources for Intermountain (Goodwill or Acquisition
Premium) will be excluded from the utility accounts of Intermountain. Further
Intermountain will not request rate recovery of the transaction costs associated
with the acquisition nor will it seek recovery of the purchase premium except to
the extent integration synergies from the transaction are also passed through
retail rates.
17. Nothing in this Memorandum of Understanding shall be interpreted as a waiver
Intermountain s or MDU Resources' right to request confidential treatment for
information that is subject to this memorandum.
Dated this 2..\ ~~day of August, 2008.
MDU Resources Group, Inc.
By:
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Intermountain Gas Company
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MDU RESOURCES GROUP, INC.
UTILITY DIVISIONS & PRIMARY SUBSIDIARIES
Centennial
Energy Holdings, Inc.
(MDU Subsidiary)
Montana-Dakota
Utilities Co.
(MDU Division)
Great Plains Natural
Gas Co.
(MDU Division)