Attached are the Comments of the Energy Division of the Minnesota Department of Commerce (Department) in the following matter:

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1 85 7 th Place East, Suite 500 St. Paul, Minnesota FAX TTY December 18, 2006 Burl W. Haar Executive Secretary Minnesota Public Utilities Commission 121 7th Place East, Suite 350 St. Paul, Minnesota RE: Comments of the Minnesota Department of Commerce Docket No. G004/PA Dear Dr. Haar: Attached are the Comments of the Energy Division of the Minnesota Department of Commerce (Department) in the following matter: In the Matter of a Request for the Approval of the Acquisition by MDU Resources Group, Inc., and Its Division, Great Plains Natural Gas Co., of Cascade Natural Gas Corporation The petition was filed on November 17, 2006 by: Donald R. Ball Vice President-Regulatory Affairs Great Plains Natural Gas Co. 400 North 4th Street Bismarck, ND The Department recommends approval with conditions and is available to answer any questions that the Commission may have. Sincerely, /s/ MARLON GRIFFING Financial Analyst MG/sm Attachment Market Assurance: Energy Information: Licensing: Unclaimed Property: An Equal Opportunity Employer

2 BEFORE THE MINNESOTA PUBLIC UTILITIES COMMISSION COMMENTS OF THE MINNESOTA DEPARTMENT OF COMMERCE DOCKET NO. G004/PA I. SUMMARY OF THE PETITION A. SUMMARY OF THE ACQUISITION AND APPROVALS NECESSARY On November 17, 2006, MDU Resources Group, Inc. (MDU) and its division Great Plains Natural Gas Co. (Great Plains) filed a petition pursuant to Minn. Stat. 216B.50 and Minnesota Rule with the Minnesota Public Utilities Commission (Commission) for approval of the acquisition of Cascade Natural Gas Corporation (Cascade) according to the Agreement and Plan of Merger dated July 8, 2006 (Agreement) by and among MDU, its acquisition subsidiary, Firemoon Acquisition, Inc., (Merger Sub) and Cascade. Upon closing of the transaction, Merger Sub will merge with and into Cascade, with Cascade continuing in existence as the surviving corporation. Thereafter, Cascade will be a direct, wholly owned subsidiary of MDU. The transaction will be accounted for under the purchase method of accounting. Great Plains has natural gas operations in Minnesota, and North Dakota. Cascade has natural gas operations in Washington and Oregon. The merger will occur immediately upon regulatory approval from the Minnesota, North Dakota, Washington, and Oregon regulatory commissions. MDU and Great Plains are requesting that the Commission approve the acquisition of Cascade on or before March 8, The Agreement has been duly authorized by the Boards of Directors of MDU and Cascade. Cascade shareholders approved the Agreement on October 27, MDU shareholder approval is not required. The Agreement contains a conditional provision that the transaction may be terminated if not consummated by April 8, The date may be extended if the only unfulfilled conditions are approval from the Washington and Oregon commissions.

3 Page 2 The Petition states that the acquisition of Cascade by MDU is being undertaken for strategic reasons. Cascade has been a growing public utility. MDU asserts its size and financial strength will provide Cascade with enhanced access to capital markets. Great Plains customers will not be adversely affected from either a quality or cost of service perspective as a result of the transaction. Consequently, MDU and Great Plains request that the Commission approve the merger, finding that it is consistent with the public interest pursuant to Minn. Stat. 216B.50. B. BACKGROUND OF THE COMPANIES IN THE ACQUISITION MDU is an investor-owned company incorporated in the state of Delaware with its headquarters in Bismarck, North Dakota. Two of MDU s operating divisions are Montana-Dakota Utilities Co. (Montana-Dakota) and Great Plains. Montana-Dakota provides natural gas and electric utility services in parts of Montana, North Dakota, South Dakota, and Wyoming. Montana- Dakota currently has approximately 228,000 natural-gas customers in this territory. Great Plains provides natural-gas local distribution services to about 21,000 customers in Minnesota and about 2,000 customers in North Dakota. Cascade is an investor-owned natural-gas local distribution company with headquarters in Seattle, Washington. Cascade s approximately 235,000 customers are located in 93 communities in Washington and Oregon. MDU will continue to maintain its headquarters in North Dakota. Great Plains (and Montana- Dakota) will remain a division of MDU, with its operational headquarters in Minnesota. Cascade will be a direct subsidiary of MDU; its operational headquarters will remain in Washington. Cascade s management will report to Montana-Dakota s Chief Executive Officer, according to the Petition. However, this reporting relationship is not necessarily consistent with the reporting relationship indicated by the Post-Acquisition Summary Organizational Chart in Exhibit 4 of the Petition. The Department requests that MDU and Great Plains clarify the reporting relationship that will be adopted after the acquisition. C. ASPECTS OF THE ACQUISITION In the Petition, MDU provides both its reasons and Cascade s reasons for entering into the transaction, characterizing them as strategic. The cited reasons include: Cascade is a growing public utility that fits MDU s plan to grow its utility business. Cascade s customer base has grown between 3 and 5 percent in the last five years, significantly greater than the national average growth rate and higher than the growth rate for either Montana-Dakota or Great Plains.

4 Page 3 Cascade concluded that the costs of maintaining public company status and complying with federal securities laws for a company its size made the transaction advisable. Cascade believes MDU will continue Cascade s commitment to safe and reliable service, while providing it access to capital for operations and expansion. II. DEPARTMENT ANALYSIS A. OVERVIEW The Department s analysis begins with a review of legal and procedural issues followed by the accounting for the acquisition. The final section of the analysis will address the effect of the transaction on the cost of capital. B. LEGAL AND PROCEDURAL ISSUES 1. Filing Requirements MDU and Great Plains request that the Commission approve the acquisition of Cascade by MDU under Minn. Stat. 216B.50 and Minnesota Rule In the petition, MDU and Great Plains state that the opinion letters of counsel required by Minn. Rules (I) will be filed at the time securities are issued in connection with the transaction. Otherwise, the Department believes MDU and Great Plains have substantially complied with all of the requirements of Minn. Rule pts Criteria for Assessing the Acquisition Under Minn. Stat. 216B.50, the Commission must determine whether the proposed acquisition is consistent with the public interest. The Commission has stated that [t]his standard does not require an affirmative finding of public benefit, just a finding that the transaction is compatible with the public interest. Order Approving Merger, page 4, Docket No. G008/PA The Commission affirmed this interpretation of the standard when it stated that The statute does not require that the proposed merger affirmatively benefit ratepayers or the public, or otherwise promote the public interest. The merger may not contravene the public interest, however, and must be shown to be compatible with it. Order Approving Merger Subject to Conditions, page 3, Docket No. G002/PA

5 Page 4 C. PUBLIC INTEREST ANALYSIS The Commission has historically used a balancing test to determine if a transaction is consistent with the public interest, weighing detriments against benefits. The factors considered are: effects on operation change, market power, costs, and the Commission s authority to regulate the utility. 1. Effect on Operations, Market Power, and Costs No operational changes are proposed for MDU, Great Plains, or Cascade as a result of the merger. Great Plains customer will continue to be served by the Great Plains operating unit and no reductions in customer service will occur, according to the Petition. The acquisition does not create any market power issues because the operating units involved are relatively modest in size. The transaction is expected to have a modest effect on costs to the benefit of Great Plains. MDU anticipates Great Plains, Montana-Dakota, and Cascade will consolidate certain functions, with the total costs expected to be somewhat less than the sum of pre-acquisition costs for the three operating units. MDU has not had the opportunity to quantify the potential savings. The Petition states the savings to Great Plains are not expected to be material and will benefit Great Plains customers by reducing the need for future rate increases. The Petition does not mention transaction or transition costs associated with the acquisition other than in the context of savings, saying that the savings are expected to be modest even before factoring in these costs. Given that the savings are expected to be modest, the Department recommends that the acquisition costs should be reflected below-the-line in Account Other Deductions, as incurred. MDU and Great Plains state that no rate changes for Great Plains are proposed as a result of the acquisition. Requiring that the transaction and transition costs be treated in this manner simply reinforces this statement. 2. Effect of the Acquisition on the Commission s Regulatory Authority MDU and Great Plains indicate the regulatory environment for Great Plains will not be affected by the acquisition. The Petition states that Great Plains revenues and expenses will continue to be accounted for separately. MDU and Great Plains further state Minnesota regulators access to Great Plains books, records, other information, and regulatory personnel will be unimpeded. Moreover, cost assignments for services will be reviewed by the Department during the normal regulatory process. Therefore, the Department is satisfied that the Commission s regulatory authority over Great Plains operations in Minnesota will not be affected by the acquisition. D. ACCOUNTING FOR THE ACQUISITION The Petition states that the transaction will be accounted for under the purchase method of accounting. Therefore, identifiable assets and liabilities of Cascade, the acquired company, will be revalued to fair market value based on the purchase price at the time of the merger. Any

6 Page 5 amount paid above the fair market value for the assets and liabilities will be recorded as goodwill. Regulatory accounting does not allow utilities to adjust the value of assets and liabilities to fair market value. Consequently, the identifiable assets and liabilities of the acquired company are recorded on the purchaser s books at depreciated original cost (book value). The difference between the book value and the fair market value of the acquired identifiable assets and liabilities is then recorded as an acquisition adjustment. The retained earnings of the acquired company do not become part of the combined retained earnings, and the net incomes of the two companies are combined only from the date of the transaction. MDU and Great Plains indicate they will follow these accounting procedures. The Department believes that the accounting for the acquisition is appropriate. Therefore, the Department recommends that the Commission order MDU and Great Plains to file the actual accounting entries to record the transaction within 90 days of the transaction closing. E. EFFECT OF THE ACQUISITION ON THE COST OF CAPITAL The Department reviewed the Petition and related documents in order to identify any significant effects on the cost of capital in Minnesota due to the acquisition. Under the terms of the acquisition, Cascade shareholders will receive $26.50 per share. This purchase of shares will be financed in the following proportions: approximately $237.5 million from MDU internal funds or new common stock issued by MDU; and approximately $67.5 million in new long-term debt issued by Cascade. MDU and Great Plains indicate in the filing that the acquisition is expected to strengthen but not change MDU s credit rating. The Petition further states the acquisition will have no effect on the capital structure or the cost of capital for ratemaking purposes for Great Plains. The Petition notes that MDU uses a capital structure for its regulated activities that is different from the MDU capital structure. The target for this regulated activities capital structure is 50 percent debt, 50 percent equity. 1 The MDU capital structure on June 30, 2006, set forth in Exhibit 5 of the Petition, was 41.1 percent debt, 0.4 percent preferred stock, and 57.5 percent common equity. The Cascade capital structure as of the same date also is presented in Exhibit 5. 1 The capital structure approved in Great Plains last general rate case, Docket No. G004/GR , was percent long-term debt, percent preferred stock, and percent common equity.

7 Page 6 Analysis of the exhibit indicates that if MDU would choose to finance its portion of the acquisition completely through issuance of new common equity and follow through on the plan to have Cascade issue new debt, as described above, the new MDU capital structure would be 43.0 percent debt, 0.4 percent preferred stock, and 56.6 percent common equity. To the extent MDU uses internal funds instead of newly issued common stock, the common equity ratio would be smaller and the debt and preferred stock ratios larger, but none by significant amounts. The Department concludes that the potential change in MDU s capital structure should not affect its ability to follow through on its commitment to not change Great Plains capital structure or cost of capital for ratemaking purposes. III. SUMMARY The Department concludes from its review of the MDU and Great Plains Petition for Approval of the acquisition that: MDU and Great Plains have substantially complied with all of the Minnesota filing requirements; no operational changes are planned for Minnesota; the acquisition will have no significant effect on market power in Minnesota; any changes in Great Plains costs as a result of the acquisition will be small and in favor of Great Plains customers; the Commission s regulatory authority over Great Plains operations in Minnesota will not be affected by the acquisition; the accounting for the acquisition as a purchase is appropriate; and the acquisition will not affect Great Plains capital structure or cost of capital for ratemaking purposes. Therefore, the Department recommends that the Commission approve with conditions the acquisition of Cascade by MDU.

8 Page 7 IV. RECOMMENDATIONS The Department recommends that the Commission approve the proposed acquisition of Cascade by MDU with the following conditions: /sm MDU and Great Plains file the opinion of counsel required by Minnesota Rule (I) as soon as practical; Require that transaction and transition costs of the acquisition be recorded in Account as incurred, and not be recovered in Great Plains rates; MDU and Great Plains file the actual accounting entries to record the transaction within 90 days of the transaction closing; and Require that separate books be maintained for Great Plains Minnesota operations..

9 STATE OF MINNESOTA ) ) ss COUNTY OF RAMSEY ) AFFIDAVIT OF SERVICE I, Sharon Ferguson, being first duly sworn, deposes and says: that on the 18 th day of December, 2006 served Minnesota Department of Commerce Comments DOCKET NO. G004/PA XX XX by depositing in the United States Mail at the City of St. Paul, a true and correct copy thereof, properly enveloped with postage prepaid by electronic filing to all persons on the attached list: see attached list /s/sharon Ferguson

10 G004/PA Burl W Haar Exec Sec MN Public Utilities Commission 350 Metro Square Bldg 121 7th Place E St Paul MN Sharon Ferguson (4) MN Dept of Commerce 85 7 th Place E Ste 500 St Paul MN Julia Anderson Attorney General s Office 1400 Bremer Tower 445 Minnesota St St Paul MN Curt Nelson Attorney General s Office-RUD 900 Bremer Tower 445 Minnesota St St Paul MN Brian M Meloy Leonard Street and Deinard 150 S 5 th St Ste 2300 Minneapolis MN Donald R Ball VP Regulatory Affairs Great Plains Natural Gas Company 400 N 4 th St Bismarck ND 58501