IGC MDU_Memorandum of Understanding 8 2008.docx

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 theIPUC 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 enterinto this Memorandum of Understanding to more clearly delineate those “Conditions to protect Intermountain’s 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 (“PrairieIntermountain”). MDU Energy Capital, LLC will own 100 percent of the stock of PrairieIntermountain. 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 in 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 preventthe 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’s 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 Commissionon 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.Intermountain 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.Intermountain and MDU Resources commits that Intermountain will not make any dividends that will reduce Intermountain’s common equity capital below 35% of Intermountain’s Total Adjusted Consolidated Capital (using a purchased accounting approach) without Commission approval. Intermountain’s 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.
13Cost 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 of Intermountain’s or MDU Resources’ right to request confidential treatment for information that is subject to this memorandum.
Dated this _____ day of August, 2008.
MDU Resources Group, Inc.By: Title:
Intermountain Gas Company
By:_______________________
Title:______________________
Idaho Public Utilities Commission StaffBy: Title: