-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BfYt/kv517Yj+uSCIfLHdjWR+jW/tvel/o8T1zyzD7PUdHPqW3L2acahRf5So60X US1kNaUVm1olF9snQS3qIA== /in/edgar/work/0000950120-00-000171/0000950120-00-000171.txt : 20000712 0000950120-00-000171.hdr.sgml : 20000712 ACCESSION NUMBER: 0000950120-00-000171 CONFORMED SUBMISSION TYPE: U-1/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 20000711 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NISOURCE INC CENTRAL INDEX KEY: 0000823392 STANDARD INDUSTRIAL CLASSIFICATION: [4931 ] IRS NUMBER: 351719974 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: U-1/A SEC ACT: SEC FILE NUMBER: 070-09551 FILM NUMBER: 671219 BUSINESS ADDRESS: STREET 1: 801 E 86TH AVENUE CITY: MERRILLVILLE STATE: IN ZIP: 46410 BUSINESS PHONE: 2198535200 MAIL ADDRESS: STREET 1: 5265 HOHMAN AVENUE CITY: HAMMOND STATE: IN ZIP: 46320-1775 FORMER COMPANY: FORMER CONFORMED NAME: NIPSCO INDUSTRIES INC DATE OF NAME CHANGE: 19920703 U-1/A 1 0001.txt AMENDMENT NO. 5 TO FORM U-1 File No. 70-9551 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 5 ON FORM U-1/A APPLICATION OR DECLARATION under the PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 NiSource Inc. New NiSource Inc. 801 East 86th Avenue 801 East 86th Avenue Merrillville, Indiana 46410-6272 Merrillville, Indiana 46410-6272 (Names of companies filing this statement and addresses of principal executive offices) None (Name of top registered holding company parent of each applicant or declarant) Mark T. Maassel Vice President, Regulatory & Government Policy NiSource Inc. 801 East 86th Avenue Merrillville, Indiana 46410-6272 (Name and address of agent for service) The Commission is requested to send copies of all notices, orders and communications to: Peter V. Fazio, Jr., Esq. William T. Baker, Jr., Esq. Schiff Hardin & Waite Thelen Reid & Priest LLP 6600 Sears Tower 40 West 57th Street Chicago, Illinois 60606-6473 New York, New York 10019 William C. Weeden William S. Lamb, Esq. Skadden, Arps, Slate, Meagher & Flom LLP Joanne C. Rutkowski, Esq. 1440 New York Avenue, NW LeBoeuf, Lamb, Greene & MacRae LLP Washington, D.C. 20005 125 West 55th Street New York, New York 10019-5389 TABLE OF CONTENTS ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION..................................3 A. INTRODUCTION AND OVERVIEW OF THE TRANSACTION..............................3 1. Principal Terms of the Merger Agreement..............................4 2. Financing of the Offer and Transaction...............................6 3. Accounting Treatment.................................................7 4. Resulting Management.................................................8 5. Benefit Plans........................................................8 B. DESCRIPTION OF THE PARTIES TO THE TRANSACTION.............................8 1. General Description..................................................8 a. NiSource and its Subsidiaries...................................8 b. Columbia and its Subsidiaries..................................14 2. Description of Utility Facilities...................................19 a. NiSource.......................................................19 i. Natural Gas Facilities......................................19 ii. Electric Utility Facilities................................20 b. Columbia.......................................................21 i. Natural Gas Facilities......................................21 ITEM 3. APPLICABLE STATUTORY PROVISIONS.....................................22 A. LEGAL ANALYSIS...........................................................23 1. Section 9(a)(2).....................................................23 2. Section 10(b).......................................................24 a. Section 10(b)(1)...............................................24 i. Interlocking Relationships..................................24 ii. Concentration of Control...................................24 b. Section 10(b)(2)...............................................27 i. Fairness of Consideration...................................27 ii. Reasonableness of Fees.....................................27 c. Section 10(b)(3)...............................................28 3. Section 10(c).......................................................30 a. Section 10(c)(1), including, by reference, Sections 8 and 11...30 i. Retention of Electric Operations............................31 ii. Non-Utility Businesses.....................................34 b. Section 10(c)(2)...............................................39 i. Efficiencies and Economies..................................39 ii. Integrated Gas Utility System..............................42 4. Section 10(f) - State Laws..........................................45 ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS...................................45 A. EXHIBITS.................................................................45 B. FINANCIAL STATEMENTS.....................................................47 2 The Application/Declaration filed in this proceeding was filed on September 20, 1999, as amended by amendments dated October 28, 1999; April 5, 2000, April 14, 2000 and April 28, 2000. Items 1, 3 and 6 are hereby amended and restated in their entirety to read as follows: ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION A. INTRODUCTION AND OVERVIEW OF THE TRANSACTION -------------------------------------------- NiSource Inc., an Indiana corporation ("NiSource"), and New NiSource Inc., a Delaware corporation and a wholly-owned subsidiary of NiSource ("New NiSource") (each of New NiSource and NiSource is referred to as an "Applicant," and are collectively referred to as the "Applicants"), herein request authority pursuant to the applicable standards of the Public Utility Holding Company Act of 1935, as amended (the "Act"), for a proposed business combination and for the related transactions herein described under the Agreement and Plan of Merger among Columbia Energy Group, a Delaware corporation ("Columbia"), NiSource, New NiSource, Parent Acquisition Corp., an Indiana corporation and wholly-owned subsidiary of New NiSource ("Parent Acquisition"), Company Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of New NiSource ("Company Acquisition"), and NiSource Finance Corp., an Indiana corporation, dated as of February 27, 2000, as amended and restated as of March 31, 2000 (the "Merger Agreement"). In the proposed business combination, upon receipt of all approvals, Parent Acquisition will merge into NiSource, and Company Acquisition will merge into Columbia. NiSource and Columbia will be the surviving corporations in those mergers and will become wholly-owned by New NiSource. Immediately after these mergers, NiSource will merge into New NiSource. New NiSource will then change its name to "NiSource Inc." and serve as a holding company for Columbia and its subsidiaries and the current subsidiaries of NiSource (the "Merger Structure"). The proposed business combination is referred to as the "Transaction." A diagram showing the Merger Structure is filed as Exhibit E-2(a). Columbia is a registered holding company under the Act which, through its subsidiaries, operates an integrated natural gas transmission and distribution system and engages in exploration and production for natural gas and oil and other activities. NiSource, currently an exempt holding company pursuant to an order issued under Section 3(a)(1) of the Act, directly or indirectly owns all of the issued and outstanding common stock of three public utility subsidiary companies that provide electric and retail natural gas service within the state of Indiana and two public utility subsidiary companies that provide retail natural gas service in the states of Maine, Massachusetts and New Hampshire.1 Following the completion of the Transaction, NiSource and Columbia would become subsidiaries of New NiSource, and New NiSource will register with the Securities and Exchange Commission (the "Commission") as a holding company pursuant to Section 5 of the Act. On June 25, 1999, NiSource commenced a tender offer pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"), to purchase all of the outstanding shares of common stock of Columbia. The tender offer was - ------------------------ 1 See NIPSCO Industries, Inc., Holding Co. Act Release No. 26975 (Feb. 10, 1999). 3 subsequently amended and extended, and finally allowed to expire on February 11, 2000. On February 18, 2000, NiSource submitted a proposal to purchase Columbia and, after negotiations, on February 27, 2000, the NiSource and Columbia boards of directors each approved, and the two companies entered into, the original Merger Agreement, which was amended and restated as of March 31, 2000. NiSource and New NiSource filed a Registration Statement on Form S-4 pursuant to the Securities Act of 1933, as amended (the "1933 Act"), and an Amendment No. 1 to such Registration Statement, which registers securities to be issued in connection with the Transaction and includes the joint proxy statement ("Proxy Statement") deemed filed pursuant to the 1934 Act which was used in connection with NiSource's and Columbia's shareholder meetings on June 1, 2000 and June 2, 2000, respectively. See Exhibits C and C-1 hereto. The shareholders of NiSource and Columbia approved and adopted the Merger Agreement at their respective shareholder meetings. Pursuant to Sections 9(a)(2) and 10 of the Act, the Applicants hereby request authorization and approval of the Commission for the acquisition by New NiSource of all of the issued and outstanding common stock of NiSource and Columbia through mergers of separate subsidiaries of New NiSource with and into each of NiSource and Columbia followed by the merger of NiSource into New NiSource. The Applicants believe the Transaction will produce significant benefits to the public, investors and consumers and will satisfy all of the applicable standards of the Act. The Applicants expect that the Transaction will enable them to take advantage of future strategic opportunities in the increasingly competitive and rapidly evolving markets for energy and energy services in the United States. Specifically, the Applicants believe that, following the Transaction, the combined companies will be better positioned to take advantage of operating economies and efficiencies through, among other measures, joint management and optimization of their respective portfolios of gas supply, transportation and storage assets. The Applicants also believe that the Transaction will provide important strategic benefits to NiSource's shareholders and Columbia's shareholders, as well as to their respective employees and customers and the communities in which they provide public utility service. The Applicants filed a separate Application/Declaration under the Act, dated May 17, 2000 (File No. 70-9681) with respect to the ongoing financing activities of New NiSource and its subsidiaries after the merger, certain affiliate transactions, and other related matters. In addition, Columbia filed a separate application dated April 17, 2000 (File No. 70-9663), relating to the solicitation of proxies for its shareholders' meeting relating to the merger and the Commission issued an order with respect thereto dated April 20, 2000.2 1. Principal Terms of the Merger Agreement Each of NiSource and Columbia will be merged with a separate, wholly-owned subsidiary of New NiSource, after which NiSource will merge into New NiSource. NiSource shareholders will receive one common share of New NiSource for each of their NiSource common shares and after the merger the - ------------------------ 2 Columbia Energy Group, Holding Co. Act Release No. 27169 (Apr. 20, 2000). 4 NiSource shareholders will own no less than 53% of the New NiSource shares. Columbia shareholders will receive, for each of their Columbia common shares, either (i) $70 in cash, and $2.60 stated amount of a New NiSource Stock Appreciation Income Linked SecuritySM ("SAILS"), which is a unit consisting of a zero coupon debt security and a forward equity contract having the terms described below, or (ii) if the Columbia shareholder elects, the number of New NiSource common shares equal to $74 divided by the average trading price of NiSource common shares for the 30 consecutive trading days ending two trading days before the completion of the merger, which number may never be more than 4.4848. Stock elections are subject to proration if the elections exceed 30% of Columbia's outstanding shares. Also, unless Columbia shareholders make stock elections for at least 10% of Columbia's outstanding shares, all Columbia shareholders will receive cash and New NiSource SAILS in the merger. If the merger is not completed by February 27, 2001, Columbia shareholders will receive, for each of their Columbia common shares, an additional amount in cash equal to interest at 7% per annum on $72.29 for the period beginning on February 27, 2001 and ending on the day before the completion of the merger, less the amount of any cash dividends paid on Columbia common shares with a record date after February 27, 2001. Each SAILS is a unit consisting of a share purchase contract and a debenture. The share purchase contract represents the holder's obligation to purchase common shares on the fourth anniversary of completion of the merger, and the debenture is pledged to secure that obligation. Under the share purchase contract, a holder will receive for each New NiSource SAILS, on the fourth anniversary of the completion of the merger, the following number of New NiSource common shares: (1) if the average closing price of the common shares on the New York Stock Exchange over a 30-day period before the fourth anniversary equals or exceeds $23.10, the holder will receive 0.1126 common shares; (2) if the average closing price is less than $23.10 but greater than $16.50, the holder will receive a number of common shares equal to $2.60 divided by the average closing price; and (3) if the average closing price is less than or equal to $16.50, the holder will receive 0.1576 common shares. The debenture that is initially part of each New NiSource SAILS will have a principal amount of $2.60. The debenture will not pay interest for the first four years after the merger. Unless a holder chooses to make a cash payment of $2.60 to settle the purchase contract, the debenture that is pledged as collateral will be remarketed shortly before the fourth anniversary of the merger, and the proceeds will be used to pay the amount the holder would owe under the purchase contract. If the remarketing is successful, proceeds from the sale will be delivered to New NiSource as payment for the common shares. If the remarketing agent cannot remarket the debentures, New NiSource will exercise its rights as a secured party and take possession of the debentures. In either case, the holder's obligation to purchase shares of New NiSource common stock will be fully satisfied, and the holder will receive New NiSource common shares. Shareholders of Columbia at the time of the merger who did not vote in favor of the merger and who made a demand for appraisal of their shares under the Delaware General Corporation Law (the "DGCL") Section 262 may perfect their 5 demand for appraisal rights of those shares following the effective date of the merger in accordance with Section 262 of the DGCL. The Merger Agreement is filed as Exhibit B-1 hereto. Consummation of the Transaction is also subject to various regulatory approvals, including approval of the Commission under the Act. Upon consummation of the Transaction, Applicant will own an integrated gas utility system comprised of the gas utility properties of NiSource's subsidiaries in Indiana, Massachusetts, Maine and New Hampshire and the gas utility properties of Columbia's subsidiaries in Ohio, Pennsylvania, Maryland, Kentucky and Virginia. In addition, NiSource's principal operating utility subsidiary in Indiana will continue to own an integrated electric utility system in Indiana. Further, Applicant will own the existing non-utility businesses of NiSource and Columbia which, with certain exceptions, are retainable under the standards of Section 11(b)(1) of the Act. 2. Financing of the Offer and Transaction New NiSource will issue approximately 124.7 million shares of common stock, par value $.01 per share, in exchange for the outstanding common stock of NiSource, based on the number of such shares outstanding on February 29, 2000. Assuming 30% of the outstanding Columbia shares are exchanged for New NiSource common stock (which NiSource believes is a reasonable assumption), approximately 109.2 million shares of New NiSource common stock will be issued in the merger to Columbia's shareholders. In addition, New NiSource will issue SAILS, which will result in the issuance of between 6.4 million and 9.0 million shares of New NiSource common stock on the fourth anniversary date of the merger depending on the New NiSource stock price, assuming 30% of the outstanding shares are exchanged for the stock consideration. NiSource estimates that the cash payments to Columbia shareholders in the merger will range from approximately $4 billion, assuming 30% of the outstanding Columbia shares are exchanged for the stock consideration, to approximately $6 billion, if all of the Columbia shares are exchanged for the cash and SAILS consideration. In addition, NiSource expects approximately $2.4 billion of Columbia's existing debt to remain outstanding after the merger. NiSource has accepted a commitment letter ("Commitment Letter") from Credit Suisse First Boston Corporation, New York Branch ("Credit Suisse First Boston") and Barclays Bank PLC ("Barclays", and together with Credit Suisse First Boston, the "Underwriters"), pursuant to which, subject to specified conditions, the Underwriters agree to provide the NiSource borrower a 364-day revolving credit facility from the date of the Commitment Letter in the amount of $6 billion, with the option to convert outstanding loans at the expiration of such period into term loans maturing 364 days thereafter (the "Facility") to finance the Transaction. A portion of the Facility may be provided by a syndicate of banks and other financial institutions arranged by the Underwriters. Credit Suisse First Boston will act as administrative agent for 6 the Facility; Barclays will serve as documentation agent for the Facility; and Credit Suisse First Boston and Barclays will act as lead arrangers and co-syndication agents. The proceeds of the Facility may be used to finance the cash portion of the Transaction, to refinance existing indebtedness and to pay related fees and expenses. The proceeds of the Facility also are permitted to be used to support a commercial paper program used for these purposes. Upon the issuance by the Applicant or any of its subsidiaries of any debt or equity (in each case subject to exceptions to be agreed upon), the Facility will be reduced by an amount equal to the net cash proceeds of such debt or equity financing. Loans under the Facility ("Loans") must be repaid on the date of any such reduction to the extent the amount of outstanding Loans exceeds the amount of the Facility as so reduced. The Loans will bear interest at specified spreads above LIBOR (adjusted for reserves) or Credit Suisse First Boston's base rate or at a negotiated competitive bid rate. Loans bearing interest at rates based upon LIBOR will be for interest periods of one, two, three or six months. All interest will be paid at the end of the applicable interest period or quarterly, whichever is earlier. In addition, a utilization fee will be payable at a specified per annum rate on the outstanding principal amount at any time more than 25% of the commitment has been borrowed, and a facility fee will be payable at a specified per annum rate on the entire amount of the Facility, whether or not utilized. The credit agreement and related documentation for the Facility are filed as Exhibit B-2 hereto. The Facility represents interim acquisition financing for the Transaction. The combined cash flow of NiSource and Columbia is expected to be adequate to service the interest requirements of the Facility without adverse impact on any of the Applicant's utility subsidiaries. The Applicants anticipate that the Facility will be repaid with internally generated funds, including those generated by Columbia and its subsidiaries, and from the proceeds of sales of non-core assets and/or the issuance of equity and other securities. See Subsection A.2.d. of ITEM 3, below, for information relating to the capital structure of the combined systems after the merger, as well as the Application/Declaration (File No. 70-09681) filed under the Act with respect to the issuance of equity and other securities for the purposes of refinancing the Facility and with respect to other proposed financing activities of the Applicant. 3. Accounting Treatment The Transaction will be accounted for as a purchase of Columbia by Applicant. This accounting treatment is based on various factors present in the merger, including the majority ownership of the combined company by NiSource's shareholders and the role of NiSource's management following the merger. As a result, the consolidated financial statements of Applicant after the merger will reflect the assets and liabilities of NiSource at book value and the assets and liabilities of Columbia at fair value. 7 The purchase contracts included in the New NiSource SAILS will be forward transactions in New NiSource's common shares. Upon settlement of a purchase contract four years after completing the merger, New NiSource will receive the stated amount of $2.60 on the purchase contract and will issue the agreed number of New NiSource common shares. The amount received will be credited to shareholders' equity and allocated between the common shares and paid-in capital accounts. Prior to the issuance of New NiSource common shares upon settlement of the purchase contracts, New NiSource expects that the SAILS will be reflected in its diluted earnings per share calculations using the treasury stock method. Under this method, the number of common shares used in calculating diluted earnings per share is deemed to be increased by the excess, if any, of the number of shares issuable upon settlement of the purchase contracts over the number of shares that could be purchased by New NiSource in the market at the average market price during the period using the proceeds receivable upon settlement. As a result, New NiSource expects there will be no dilutive effect on its earnings per share except during periods when the average market price of the common shares is above $23.10. 4. Resulting Management After the merger, the Board of Directors of New NiSource will consist of those persons who serve as directors of NiSource immediately preceding the merger. Mr. Gary L. Neale, the Chairman, President and Chief Executive Officer of NiSource, will serve after the merger as Chairman of the Board, President and Chief Executive Officer of New NiSource. The New NiSource Board of Directors will elect the remaining officers of New NiSource. 5. Benefit Plans Information regarding the effect of the Transaction on the stock-based employee benefit and shareholder benefit plans of NiSource and Columbia is provided in the separate Application/Declaration on Form U-1 filed by the Applicants on May 17, 2000 (File No. 70-09681) relating to the ongoing financing requirements of the new system after the merger. B. DESCRIPTION OF THE PARTIES TO THE TRANSACTION --------------------------------------------- 1. General Description a. NiSource and its Subsidiaries NiSource, formerly NIPSCO Industries, Inc.3, an Indiana corporation, was incorporated in 1987 to serve as the holding company for Northern Indiana Public Service Company ("Northern Indiana"), which is a public utility under the Act, and various non-utility subsidiaries. NiSource has four additional, direct, or indirect, public utility subsidiaries, Kokomo Gas and Fuel Company ("Kokomo - ------------------------ 3 On April 14, 1999, NiSource announced that its shareholders approved changing its name from NIPSCO Industries, Inc. to NiSource Inc. 8 Gas"),4 Northern Indiana Fuel and Light Company, Inc. ("NIFL"),5 Bay State Gas Company ("Bay State")6 and Northern Utilities, Inc. ("Northern"). NiSource is currently an exempt holding company pursuant to an order under Section 3(a)(1) of the Act.7 Northern Indiana, NiSource's largest subsidiary, is a combination gas and electric utility company which operates in 30 counties in the northern part of Indiana, serving an area of about 12,000 square miles with a population of approximately 2,200,000. Northern Indiana distributes gas to approximately 681,100 residential, commercial and industrial customers and generates, purchases, transmits and sells electricity to approximately 426,000 electric customers. Kokomo Gas supplies natural gas to approximately 34,500 customers in a six-county area of north central Indiana having a population of approximately 100,000. The Kokomo Gas service territory is contiguous to Northern Indiana's gas service territory. NIFL supplies natural gas to approximately 35,500 customers in five counties in the northeast corner of Indiana having a population of approximately 66,700. The NIFL service territory is also contiguous to Northern Indiana's gas service territory and overlaps Northern Indiana's electric service territory. Northern Indiana has initiated a multi-phase customer choice program to allow residential and small commercial customers the right to choose alternative gas suppliers. The three Indiana operating utility subsidiaries of NiSource are subject to regulation by the Indiana Utility Regulatory Commission ("IURC") as to rates, service and other matters. Bay State provides gas service to approximately 271,900 residential, commercial and industrial customers in three separate areas of Massachusetts covering approximately 1,344 square miles and having a combined population of approximately 1,340,000. These include the greater Springfield area in western Massachusetts, an area southwest of Boston that includes the cities of Attleboro, Brockton and Taunton, and an area north of Boston extending to the New Hampshire border that includes the city of Lawrence. Bay State initiated a multi-phase customer choice program to allow residential and commercial customers the right to choose alternative gas suppliers. In November 1998, the Massachusetts Department of Telecommunications and Energy ("MDTE") issued a generic order implementing statewide customer choice for gas customers. Bay State is complying with this order. Bay State is subject to regulation by the MDTE as to rates, service and other matters. Northern provides gas service to approximately 48,100 residential, commercial and industrial customers in an area of approximately 808 square miles in New Hampshire and Maine having a population of approximately 450,000. Northern's service area extends north from the Massachusetts-New Hampshire border to the Portland/Lewiston area in Maine. Northern is subject to regulation - ------------------------ 4 The Commission authorized NiSource to acquire all of the issued and outstanding common stock of Kokomo Gas in 1992. See NIPSCO Industries, Inc., Holding Co. Act Release No. 25470 (Feb. 3, 1992). 5 The Commission authorized NiSource to acquire all of the issued and outstanding common stock of NIFL in 1993. See NIPSCO Industries, Inc., Holding Co. Act Release No. 25766 (Mar. 25, 1993). 6 The Commission authorized NiSource to acquire all of the issued and outstanding common stock of Bay State in February 1999. Northern is a wholly-owned subsidiary of Bay State. See NIPSCO, Industries, Inc., Holding Co. Act Release No. 26975 (Feb. 10, 1999). 7 Id. 9 by the New Hampshire Public Utilities Commission ("NHPUC") and the Maine Public Utilities Commission ("MPUC") as to rates, service and other matters. At this time, Northern remains an indirect subsidiary of NiSource, through Bay State, pending consummation of the Transaction and registration by New NiSource, and it is expected to continue to be an indirect subsidiary of New NiSource after the merger with Columbia. For the twelve months ended December 31, 1999, the gas and electric public utility subsidiaries of NiSource reported operating income of $467.6 million ($113.0 million gas and $354.6 million electric) on combined operating gas and electric utility revenues of approximately $2.1 billion. Results for this period included eleven months of combined operations with Bay State and Northern. Gas sales (including transportation revenues) accounted for approximately 52% and electric sales accounted for approximately 48% of NiSource's gross utility revenues. Consolidated assets of NiSource and its subsidiaries as of December 31, 1999, were approximately $6.8 billion, consisting of $5.2 billion in gas and electric utility assets ($2.4 billion gas and $2.8 billion electric) and $1.6 billion in other non-utility assets. NiSource owns all of the outstanding common stock of NiSource Pipeline Group, Inc. ("NPG"). NPG consists of Granite State Gas Transmission, Inc. ("Granite State") and PNGTS Holding Corp. ("PNGTS Holding"). Crossroads Pipeline Company ("Crossroads"), a subsidiary of NI Energy Services, Inc., which in turn is a direct subsidiary of NiSource, is a natural gas transportation company that was certificated by the Federal Energy Regulatory Commission ("FERC") in May 1995 to operate as an interstate pipeline.8 Crossroads owns and operates a 201-mile, 20-inch diameter pipeline that extends from Schererville, Indiana, in the northwestern corner of Indiana, to Cygnet, Ohio, which is located in northwestern Ohio. At Cygnet, Crossroads' facilities interconnect with those of Columbia Gas Transmission Corporation ("Columbia Transmission"). Crossroads receives gas from Natural Gas Pipeline Company of America ("NGPL"), Trunkline Gas Company ("Trunkline") and Panhandle Eastern Pipeline Company ("Panhandle Eastern"). Crossroads delivers gas to Northern Indiana, Ohio Gas Company, NIFL, Columbia Transmission and KNG Energy Incorporated. Granite State owns and operates a 105-mile, 6 to 12-inch diameter, interstate pipeline that extends from Haverhill, Massachusetts, where it interconnects with the facilities of Tennessee Gas Pipeline Company ("Tennessee Gas"), to a point near Westbrook, Maine, where it interconnects with Portland Natural Gas Transmission System ("PNGTS"). PNGTS Holding, together with Granite State, hold a 19.06% interest in PNGTS. PNGTS is a 292-mile, 24 to 30-inch diameter, natural gas transmission line that provides New England access to Michigan Storage fields9, the Western Canada supply basin supply and the Chicago market center. PNGTS interconnects with the Tennessee Gas pipeline facilities near Dracut, Massachusetts, Northern and Granite State at locations in Maine and - ------------------------ 8 See Crossroads Pipeline Co., 71 FERCP. 61,076 (1995). 9 The Michigan Storage fields have played an increasingly important role in the natural gas portfolio for upper Midwest market participants. Their geographical location is strategic in accessing Gulf Coast, Mid-continent and Chicago market centers, Western Canada supply basins and local production in the state of Michigan. Michigan Storage is interconnected with major interstate and intrastate transmission systems which serve markets located in Iowa, Minnesota, Wisconsin, Illinois, Indiana, Ohio and the New England areas. Pipeline interconnects accessing Michigan Storage include, among others, ANR Pipeline Company ("ANR"), Panhandle Eastern, Trunkline and Vector Pipeline Limited Partnership ("Vector"). 10 New Hampshire, and Trans Quebec Maritimes Pipeline Incorporated at Pittsburgh, New Hampshire. EnergyUSA, Inc. ("EnergyUSA"), a wholly-owned subsidiary of NiSource, serves as an intermediate holding company for many of NiSource's non-utility businesses and coordinates the energy-related diversification efforts of NiSource. Through subsidiaries, EnergyUSA owns businesses engaged in the following activities: o Energy Marketing: Through various subsidiaries, EnergyUSA markets gas to commercial and industrial entities, on a national basis, including customers in areas served by NiSource's gas distribution utilities and provides gas asset management to gas utilities. EnergyUSA also provides gas supply services to other NiSource affiliates, including Kokomo Gas and NIFL. EnergyUSA-TPC Corp. ("TPC") was acquired on April 1, 1999 by EnergyUSA. TPC operates gas marketing and gas asset management and optimization businesses. The significant assets of TPC consist of: (i) gas marketing contracts, (ii) asset management and optimization contracts, (iii) computer systems and equipment to support the aforementioned activities and (iv) various parcels of land adjacent to, or in proximity to, the gas storage facilities owned by Market Hub Partners, L.P. ("MHP"). o Storage: NiSource, through EnergyUSA subsidiaries and other subsidiaries, indirectly owns 100% of MHP, which develops and operates underground gas storage facilities. Through MHP and various other subsidiaries, NiSource provides gas storage services to a number of utilities, gas marketers and other customers, including Northern Indiana. o Residential/Small Commercial Gas and Propane Marketing; Appliance Leasing: EnergyUSA Retail, Inc. provides gas and other energy-related products and services to residential and small commercial customers of utilities that allow competitive suppliers to market in their service territories. EnergyUSA Retail, Inc. provides certain of Bay State's, Columbia's and Northern Indiana's customers with natural gas. EnergyUSA Retail also sells propane and leases water heaters to customers in New England. o Oil and Gas Exploration and Production: EnergyUSA has equity interests in a domestic oil and gas producer with properties located in Texas, Oklahoma and Louisiana. o Energy Management Services: EnergyUSA Commercial Energy Services, Inc. provides traditional energy management services, including power quality consulting and energy management, to commercial and industrial entities. o EnergyUSA is a partner in Mosaic Energy LLC, a new venture created to develop and market proprietary fuel cell distributed generation technology. Primary Energy, Inc. ("Primary"), a wholly-owned subsidiary of NiSource, arranges energy-related projects for large energy-intensive industrial facilities. Primary offers expertise to large energy customers in managing the 11 engineering, construction, operation and maintenance of these energy-related projects. o Primary's wholly-owned subsidiary, Harbor Coal Company ("Harbor Coal"), invested in a partnership to finance, construct, own and operate a $65 million pulverized coal injection facility, which began commercial operation in August 1993. The facility receives raw coal, pulverizes it and delivers it to Ispat Inland, Inc. ("Ispat") for use in the operation of blast furnaces for manufacturing operations. Harbor Coal is a 50% partner in the project with an Ispat affiliate. NiSource guarantees the payment and performance of the partnership's obligations under a sale and leaseback of a 50% undivided interest in the facility. o North Lake Energy Corporation ("North Lake"), a wholly-owned subsidiary of Primary, entered into a lease for the use of a 75-megawatt energy facility located at Ispat. The facility uses steam generated by Ispat to produce electricity which is delivered to Ispat. The facility began commercial operation in May 1996. NiSource guarantees North Lake's obligations relative to the lease and certain obligations to Ispat relative to the project. o Lakeside Energy Corporation ("LEC"), a wholly-owned subsidiary of Primary, entered into a lease for the use of a 161-megawatt energy facility located at USS Gary Works. The facility processes high-pressure steam into electricity and low-pressure steam for delivery to USX Corporation-U.S. Steel Group ("U.S. Steel"). A 15-year tolling agreement with U.S. Steel commenced on April 16, 1997 when the facility was placed in commercial operation. NiSource Capital Markets Inc. ("Capital Markets"), a wholly-owned financing subsidiary of NiSource, guarantees certain limited LEC obligations to the lessor. o Portside Energy Corporation ("Portside"), a wholly-owned subsidiary of Primary, operates a 63-megawatt energy facility at the Midwest Division of National Steel Corporation ("National") to process natural gas into electricity, steam and heated water to be provided to National for a 15-year period. Portside entered into a lease for use of the facility. Capital Markets guarantees certain Portside obligations to the lessor. The facility began commercial operation on September 26, 1997. o Primary's wholly-owned subsidiary, Cokenergy, Inc. ("CE"), operates an energy facility at Ispat's Indiana Harbor Works to scrub flue gases and recover waste heat from the coke facility constructed by Indiana Harbor Coke Company, LP ("Harbor Coke") and to produce steam and electricity from the recovered heat which is then delivered to Ispat. CE leases these facilities from a third party. CE has a 15-year service agreement and a related 15-year fuel supply agreement with Ispat and Harbor Coke. Capital Markets guarantees certain CE obligations relative to the lease. 12 o Primary's wholly-owned subsidiary, Whiting Clean Energy, Inc. ("Whiting"), has an electric facility currently under construction which is expected to be an Exempt Wholesale Generator within the meaning of Section 32 of the Act ("EWG") and sell power into the wholesale market. In 1999, Whiting signed an agreement with BP Amoco Oil Company ("BP Amoco") for the lease, operation and maintenance of a net 525 MW natural gas-fired cogeneration plant on land adjacent to BP Amoco's refinery in Whiting, Indiana. The plant will provide process steam to BP Amoco's refinery operations and sell power into competitive wholesale markets. Completion of the plant is expected by the second quarter of 2001. Capital Markets has guaranteed certain Whiting obligations to the owner/lessor and to BP Amoco. o Primary's wholly-owned subsidiary, Ironside Energy LLC ("Ironside"), acting as agent for a third party owner/lessor, has entered into contracts for the construction of a 50 megawatt cogeneration plant. The facility is to be located in LTV Steel Company, Inc's ("LTV") Indiana Harbor Works plant in northwest Indiana. Ironside intends to enter into an agreement to lease the facility from the owner/lessor upon completion of construction. Ironside will sublease the facility to LTV and LTV will utilize the facility to produce high-pressure steam and electricity upon completion of construction, presently anticipated to occur in August, 2001. Certain Ironside obligations to the owner/lessor and to LTV are guaranteed by Capital Markets. SM&P Utility Resources, Inc. ("SM&P"), Colcom Incorporated ("Colcom") and Underground Technology, Inc. ("UTI") (of which NiSource owns 50%) perform underground facilities locating for utilities throughout the United States. During 1999, SM&P, Colcom and UTI performed approximately 6.6 million line locates. Miller Pipeline Corporation ("Miller") installs, repairs and maintains underground pipelines used in gas and water transmission and distribution systems. Miller also sells products and services related to infrastructure preservation and replacement. NiSource, through an intermediate holding company, IWC Resources Corporation ("IWCR"), owns all of the stock in six water companies (Indianapolis Water Company, Harbour Water Corporation, Liberty Water Corporation, Irishman's Run Acquisition Corp., The Darlington Water Works Company and IWC Morgan Water Corporation) and has an operating agreement with the City of Lawrence, Indiana, which is being treated as a purchase by IWCR in accordance with generally accepted accounting principles (collectively, the "Water Utilities"). The Water Utilities supply water to residential, commercial and industrial customers and for fire protection service in Indianapolis, Indiana and surrounding areas. The territory served by the Water Utilities covers an area of approximately 650 square miles in seven counties of central Indiana and the Water Utilities serve approximately 275,000 customers as of December 31, 1999. As of December 31, 1999, assets of the Water Utilities amounted to $685.3 million, and revenues of the Water Utilities for the twelve months then ended, amounted to $98 million. NiSource Development Company, Inc. ("Development") has investments in various activities, primarily in real estate, intended to complement NiSource's energy businesses. These investments are hereinafter discussed in ITEM 3, below. South Works Power Company ("South Works"), a 13 wholly-owned subsidiary of Development, leases electric generating and transmission facilities owned by U.S. Steel and located in south Chicago, Illinois. The facilities, which are presently not in operation, are indirectly interconnected with the electric transmission system of Northern Indiana. Capital Markets provides financing for certain of NiSource's subsidiaries other than Northern Indiana. Capital Markets has entered into revolving credit agreements for $200 million. These agreements provide financing flexibility to Capital Markets and may be used to support the issuance of commercial paper. At December 31, 1999, Capital Markets had issued $137.0 million in commercial paper but there were no borrowings outstanding under the revolving credit agreements. Capital Markets also has $163.0 million available in money market lines of credit with $142.5 million of borrowings outstanding as of December 31, 1999. For the same period, Capital Markets had $450 million in long-term debt outstanding. The financial obligations of Capital Markets are subject to a support agreement ("Support Agreement") between NiSource and Capital Markets which provides that NiSource make payments of interest and principal on Capital Markets' obligations in the event of a failure to pay by Capital Markets. Restrictions in the Support Agreement prohibit recourse on the part of Capital Markets' creditors against the stock and assets of Northern Indiana which are owned by NiSource. Under the terms of the Support Agreement, in addition to the cash flow from cash dividends paid to NiSource by any of its consolidated subsidiaries, the assets of NiSource, other than the stock and assets of Northern Indiana, are available as recourse for the benefit of Capital Markets' creditors. The carrying value of the assets of NiSource, other than the assets of Northern Indiana, as reflected in the consolidated financial statements of NiSource, was approximately $3.2 billion at December 31, 1999. NiSource Corporate Services Company ("Corporate Services") provides management, administrative, gas portfolio management, accounting and other services to the various NiSource companies. Hamilton Harbour Insurance Services, Ltd. provides various insurance services to the NiSource companies. The non-utility assets of NiSource comprised, as of December 31, 1999, 24% of the consolidated assets of NiSource. b. Columbia and its Subsidiaries Columbia, formerly The Columbia Gas System, Inc., and its subsidiaries comprise an integrated natural gas system engaged in natural gas transmission, natural gas distribution and exploration for and production of natural gas and oil. Columbia is also engaged in related energy businesses including the distribution of propane and petroleum products, marketing of natural gas and electricity and the generation of electricity, primarily fueled by natural gas. As a registered holding company, Columbia derives substantially all its revenues and earnings from the operating results of its 20 direct subsidiaries. Columbia owns all of the securities of these direct subsidiaries except for approximately 8% of the stock in Columbia LNG Corporation. Distribution Utilities: Columbia provides natural gas distribution services in a five-state region in the Midwest and mid-Atlantic United States through its five wholly-owned public utility subsidiaries: Columbia Gas of 14 Kentucky, Inc. ("Columbia Kentucky"), Columbia Gas of Maryland, Inc. ("Columbia Maryland"), Columbia Gas of Ohio, Inc. ("Columbia Ohio"), Columbia Gas of Pennsylvania, Inc. ("Columbia Pennsylvania") and Columbia Gas of Virginia, Inc. ("Columbia Virginia"). Columbia's five distribution subsidiaries provide natural gas service to nearly 2.1 million residential, commercial and industrial customers in Kentucky, Maryland, Ohio, Pennsylvania and Virginia. Approximately 32,400 miles of distribution pipelines serve these major markets. The distribution subsidiaries have initiated transportation programs that allow residential and small commercial customers the opportunity to choose their natural gas suppliers and to use the distribution subsidiaries for transportation service. This ability to choose a supplier was previously limited to larger commercial and industrial customers. Columbia Kentucky supplies natural gas to approximately 142,000 retail customers in a 31-county area of central and eastern Kentucky having a population of approximately 965,000. Columbia Kentucky is subject to regulation by the Kentucky Public Service Commission ("KPSC") as to rates, service and other matters. Columbia Maryland supplies natural gas to approximately 31,800 retail customers in a three-county area of western Maryland having a population of approximately 227,000. Columbia Maryland is subject to regulation by the Maryland Public Service Commission ("MPSC") as to rates, service and other matters. Columbia Ohio supplies natural gas to approximately 1,309,200 retail customers in a 53-county area of north central and southeastern Ohio having a population of approximately 6,700,000. Columbia Ohio is subject to regulation by the Public Utilities Commission of Ohio ("PUCO") as to rates, service and other matters. Columbia Pennsylvania supplies natural gas to approximately 390,000 retail customers in a 26-county area of central and southwestern Pennsylvania having a population of approximately 2,380,000. Columbia Pennsylvania is subject to regulation by the Pennsylvania Public Utility Commission ("PPUC") as to rates, service and other matters. Columbia Virginia supplies natural gas to over 177,000 retail customers throughout Virginia. Columbia Virginia is subject to regulation by the Virginia State Corporation Commission ("VSCC") as to rates, service and other matters. Transmission and Storage Operations: Columbia's two interstate pipeline subsidiaries, Columbia Transmission and Columbia Gulf Transmission Company ("Columbia Gulf"), own a pipeline network of approximately 16,250 miles extending from offshore in the Gulf of Mexico to Lake Erie, New York and the eastern seaboard. In addition, Columbia Transmission operates one of the nation's largest underground natural gas storage systems. Together, Columbia Transmission and Columbia Gulf serve customers in fifteen northeastern, mid-Atlantic, midwestern and southern states and the District of Columbia. Columbia Gulf's pipeline system extends from offshore Louisiana to West Virginia and transports a major portion of the gas delivered by Columbia Transmission. It also transports gas for third parties within the production areas of the Gulf Coast. Columbia Transmission and Columbia Gulf provide an array of competitively priced natural gas transportation and storage services for local distribution 15 companies and industrial and commercial customers who contract directly with producers or marketers for their gas supplies. In 1999, Columbia Transmission completed construction of the largest expansion of its storage and transportation system in its history. The expansion adds approximately 500,000 Mcf per day of firm storage to 23 customers. Columbia Transmission is also participating in the proposed 442-mile Millennium Pipeline Project that has been submitted to FERC for approval. As proposed, the project will transport approximately 700,000 Mcf per day of natural gas from the Lake Erie region to eastern markets. Columbia Gulf has announced its participation in the proposed 160 mile, 24-inch diameter, Volunteer Pipeline Project ("Volunteer"). As proposed, the project will transport approximately 250,000 Mcf per day from Portland, Tennessee to a point near Chattanooga, Tennessee. In May, 1999, Volunteer concluded an open season in which nearly a dozen companies requested more than 440,000 Mcf per day of capacity. Potentially expandable to approximately 500,000 Mcf per day, Volunteer expects to provide firm natural gas transportation from the mid-continent into the Atlanta, Georgia, and other southeastern MARKETS. The timing of a FERC construction application is contingent upon a final determination of market demand. Columbia Gulf also announced plans in September 1998 to consider an expansion of its onshore East Lateral system to add approximately 600,000 Mcf per day of incremental firm gas transportation capacity. Columbia Gulf is also participating in the proposed SunStar Pipeline project, a 56-mile offshore pipeline project with a capacity of 660,000 Mcf of natural gas per day from the Gulf of Mexico to its onshore lateral. Effective November 30, 1999, Columbia Gulf sold its 33% interest in the Trailblazer Pipeline, a 350-mile natural gas pipeline that extends from northeast Colorado to Gage County in Nebraska. Columbia Pipeline Corporation and its wholly-owned subsidiary, Columbia Deep Water Services Company, were formed to operate pipeline and gathering facilities that are not regulated by FERC. Exploration and Production Operations: Through its wholly-owned subsidiaries, Columbia's exploration and production subsidiary, Columbia Energy Resources, Inc. ("Columbia Resources"), explores for, develops, gathers and produces natural gas and oil in Appalachia and Canada.10 As of December 31, 1999, Columbia Resources' subsidiaries held interests in approximately 3.9 million net acres of gas and oil leases and had proved gas reserves of 965.8 billion cubic feet of natural gas equivalent. Columbia Resources' subsidiaries own and operate 8,188 wells and 6,069 miles of gathering facilities and have expanded their reserve base and production through an aggressive drilling and acquisition program. During 1999, Columbia Resources' subsidiaries purchased 800 wells, gathering assets and approximately 800,000 undeveloped acres in the U.S. and Canada. Through its subsidiaries' operations in north-central West Virginia, - ------------------------ 10 In 1997, Columbia Transmission sold 2,700 miles of gathering lines to Columbia Resources. Effective January 1999, Columbia Transmission sold an additional 750 miles of gathering facilities to Columbia Resources. 16 southern Kentucky, northern Tennessee and New York, Columbia Resources is one of the largest-volume independent natural gas and oil producers in the Appalachian Basin. Energy Marketing Operations: Columbia Energy Services Corporation ("Columbia Energy Services") and its subsidiaries conduct Columbia's non-regulated natural gas and electric power marketing operations and provide service to residential and small commercial customers as a result of the unbundling of services that is occurring at the local distribution level. Columbia Energy Services, through its subsidiary, Columbia Service Partners, Inc., provides a variety of energy-related services to both homeowners and businesses. Columbia Energy Services recently sold its wholesale gas and electric trading operations and decided to exit its major accounts business. Columbia Propane Corporation ("Columbia Propane") sells propane at wholesale and retail to more than 350,600 customers in 31 states and the District of Columbia. Columbia Petroleum Corporation ("Columbia Petroleum") owns and operates petroleum assets that serve approximately 42,000 customers in five states. Columbia has been evaluating the appropriateness of remaining in some of its businesses, given the rapidly changing energy industry and its pending merger with NiSource, and has determined to exit its energy marketing operations. Consequently, Columbia has decided to sell Columbia Propane and Columbia Petroleum. These businesses are currently being prepared for sale and are being reported as discontinued operations. Power Generation, LNG and Other Operations: Columbia Electric Corporation's ("Columbia Electric") primary focus has been the development, ownership and operation of natural gas-fueled power plants. Columbia Electric is part owner in three operating cogeneration projects. These facilities produce both electricity and useful thermal energy and are fueled principally by natural gas. Columbia Electric holds various interests in these facilities, which have a total capacity of approximately 248 megawatts. In June 1998, Columbia Electric and LG&E Power Inc., a subsidiary of LG&E Energy Corporation, announced an agreement for Columbia to participate in the development of a gas-fired cogeneration project that would have a total equivalent capacity of approximately 550 megawatts.11 The facility will provide steam and electric services to a Reynolds Metals plant in Gregory, Texas and will also provide electricity to the Texas energy market. Construction began in August 1998 and the facility is anticipated to start operations in July of 2000. Under PURPA and its implementing regulations, no more than 50% of the equity interests in a qualifying facility ("QF") may be held by a company that is an electric utility or an electric utility holding company or any combination of such companies. Electric utility holding companies now own up to approximately 50% of the equity interests in each of the four QFs referred to in the two preceding paragraphs in which Columbia holds an interest. Columbia currently is not an electric utility holding company, but its interest in QFs would be held by an electric utility holding company as a result of the merger with NiSource. Consequently, the 50% limitation on total interests held by electric utility holding company affiliates would be exceeded. To avoid jeopardizing the QF status of the projects and to comply with Columbia's - ------------------------ 11 The project was certified as a "qualifying facility" under the Public Utility Regulatory Policies Act of 1978, as amended ("PURPA"). See Gregory Power Partners L.P., 87 F.E.R.C.P. 62,048 (Apr. 12, 1999). 17 obligations to other participants in the projects, Columbia is in the process of divesting its interests in the four QFs. Columbia plans to relinquish its ownership interests in the four QFs before the merger closes in order to maintain their QF status. Construction of the Liberty Electric Project, a gas-fired electric generation plant which is expected to provide approximately 568 megawatts of electricity, commenced in early 2000 in Eddystone, Pennsylvania. Columbia currently owns 100% of the Liberty Electric Project, which is anticipated to commence operations in early 2002.12 Construction of the Ceredo Generating Station, a gas-fired electric generation peaking plant which is expected to provide approximately 500 megawatts of electricity, commenced in July 2000 in Ceredo, West Virginia ("Ceredo Project"). Columbia currently owns 100% of the Ceredo Project, which is anticipated to commence operations in the summer of 2001. In December 1999, a limited partnership company established between Columbia Electric and Atlantic Generation, Inc. completed a transaction terminating a long-term power purchase contract. Columbia Electric's portion was approximately $71 million pre-tax under the terms of the buyout. The partners will continue to operate the facility as a merchant power plant. Columbia LNG Corporation ("Columbia LNG") provides transition services related to a liquefied natural gas facility located in Cove Point, Maryland, which is one of the largest natural gas peaking and storage facilities in the United States. The facility has the capacity to liquefy natural gas at a rate of 15,000 Mcf per day. The facility enables liquefied natural gas to be stored until needed for the winter peak-day requirements of utilities and other large gas users. The Columbia partnership that owned the facility was sold in June 2000 to subsidiaries of the Williams Company. Telecommunications: Columbia Transmission Communications Corporation, a wholly-owned subsidiary of Columbia, and its subsidiaries provide telecommunications and information services and assist personal communications services and other microwave radio service licensees in locating and constructing antenna facilities. Columbia Transmission Communications Corporation also is involved in the development of a dark fiber optics network for voice and data communications. As a registered holding company, Columbia and its utility subsidiary companies are an integrated gas utility system under the Act. The non-utility companies in the Columbia System are related to, and supportive of, its utility operations and, by virtue of continued operations, retainable under the standards of the Act. - ------------------------ 12 The Liberty Electric Project will seek EWG certification. 18 2. Description of Utility Facilities a. NiSource i. Natural Gas Facilities At December 31, 1999, the NiSource gas distribution system in Indiana included approximately 13,924 miles of distribution mains to serve 751,100 customers. In addition, Northern Indiana owns and operates underground gas storage facilities located at Royal Center, Indiana with a storage capacity of 6.75 billion cubic feet (Bcf), and a liquefied natural gas ("LNG") plant in LaPorte County, Indiana having a storage capacity of 4.0 Bcf, which is used for system pressure maintenance and peak season (November-March) deliveries. Northern Indiana also holds under long-term contract storage capacity totaling approximately 9.11 Bcf in the Markham, Moss Bluff and Egan salt-dome storage caverns in Texas and Louisiana and the Rotherwood Facility in Texas. These facilities, which provide Northern Indiana with a significant amount of "high deliverability" storage capacity,13 are located at two of the industry recognized and acknowledged market centers and gas trading points which provide buyers and sellers supply basin and transportation capacity choice. These market centers and gas trading points are formed at locations where interstate pipelines serving the upper Midwest, Northeast, Gulf Coast, mid-Atlantic and Ohio Valley intersect. At December 31, 1999, NiSource's New England gas distribution utilities included 5,450 miles of distribution mains, 116 miles of transmission lines, and customer connections to serve 320,000 customers. Bay State and Northern also own and operate LNG liquefaction, vaporization and storage facilities and propane storage tanks used to store supplemental and peak shaving supplies. At December 31, 1999, NiSource's combined gas system consisted of 19,374 miles of distribution mains, together with associated compressing and regulating stations, LNG liquefaction, vaporization and storage facilities, propane storage tanks and 1,071,221 customers. Currently, NiSource's Midwest and New England utilities purchase approximately 50% of their total system gas requirements from production in the Gulf Coast Basin (onshore and offshore Texas and Louisiana producing areas), approximately 42% from production in the Mid-Continent (Oklahoma, Kansas and Arkansas) and Permian (West Texas) supply basins, and 8% from production in the Western Canada supply basin. By the 2000-2001 winter heating season, new interstate pipeline capacity in New England and the upper Midwest states of Illinois, Indiana and Michigan will provide for further diversification of - ------------------------ 13 "High deliverability," which is an operational characteristic of salt-dome storage caverns, means the ability to inject and withdraw gas on a frequent (i.e., daily) basis, year-round and at a high rate of flow. Utilization of the capacity of such facilities is measured in terms of both their storage volume and frequency of the injection/withdrawal cycle (i.e., cycling). In contrast, Northern Indiana's underground storage facilities in Indiana only allow for gas injection and withdrawal on a seasonal basis. The "high deliverability" facilities in Texas and Louisiana provide Northern Indiana with added flexibility in managing deliveries to and from interstate pipelines, which, in turn, allows Northern Indiana to take advantage of price volatility and to balance its system load requirements on a daily basis. 19 NiSource's Midwest and New England gas portfolios and for access to gas supplies sourced from multi-regional supply basins, market centers and gas trading points. NiSource's gas distribution subsidiaries have currently contracted for "firm" capacity and storage service on nine different long-haul interstate pipelines: ANR, NGPL, Panhandle Eastern, PNGTS, Tennessee Gas, Midwestern Gas Transmission ("Midwestern"), Texas Eastern Transmission Corp. ("Texas Eastern"), Texas Gas Transmission Corp. ("Texas Gas"), Transco and Trunkline. NiSource's subsidiaries also have firm transportation capacity agreements with TransCanada PipeLines Limited ("TransCanada"), a Canadian interprovincial pipeline, and with several other regional pipelines, such as Algonquin Gas Transmission Company ("Algonquin"), Crossroads, Granite State and National Fuel Gas Supply Company ("National Fuel"). NiSource expects that, as areas in New England begin to experience gas portfolio restructuring similar to that experienced in the Midwest beginning in 1995 and transmission constraints are eliminated as new pipeline capacity begins commercial service, the NiSource gas distribution utilities will be well-positioned to create opportunities to supplement their gas portfolios with surplus from additional multi-regional supply basins and market centers, including the Western Canada supply basin, Appalachian basin and Michigan Storage fields. NiSource's Midwest and New England and Columbia's gas distribution utilities' portfolios will interact at market centers and gas trading points directly through existing and new pipelines, such as PNGTS, Northern Border, Vector and Alliance Pipeline Ltd., as well as indirectly by means of any one of several existing pipeline interconnections between Crossroads and Columbia Transmission; Tennessee Gas and PNGTS; Tennessee Gas and Columbia Transmission; Vector, Millennium, Algonquin and Columbia Transmission; and Northern Border, Vector, ANR and NGPL. ii. Electric Utility Facilities Northern Indiana owns and operates four coal-fired electric generating stations with an aggregate net capability of 3,179 MW, two hydroelectric generating plants with an aggregate net capability of 10 MW, and four gas-fired combustion turbine generating units with an aggregate net capability of 203 MW, for a total system net capability of 3,392 MW. During the year ended December 31, 1999, Northern Indiana generated 89.9% and purchased 10.1% of its electric requirements. Northern Indiana's transmission system consists of 3,068 circuit miles of lines with voltages ranging from 34.5 kV to 345 kV. Northern Indiana's electric distribution system extends into 21 counties in the northern third of Indiana and consists of 7,800 circuit miles of overhead and 1,571 cable miles of underground primary distribution lines operating at various voltages ranging from 2.4 to 12.5 kV. Northern Indiana's electric control area peak load (the highest level of electrical utility usage in the control area) of 3,307 MW was set on July 30, 1999. Northern Indiana's electric control area includes Northern Indiana, Wabash Valley Power Association, Inc. ("WVPA") and Indiana Municipal Power Agency ("IMPA"). Northern Indiana's internal peak load, which excludes WVPA and IMPA, of 2,962 MW, was also set on July 30, 1999. 20 Northern Indiana's electric system is interconnected with the systems of American Electric Power, Commonwealth Edison Company, Cinergy Corp., Consumers Energy and Ameren Corporation, formerly Central Illinois Public Service Company. Electric energy is purchased from, sold to, or exchanged with various other utilities and power marketers under Northern Indiana's power sales and open access transmission tariffs. Northern Indiana provides WVPA with transmission and distribution service, operating reserve requirements and capacity deficiency service, and provides IMPA with transmission service, operating reserve requirements and capacity deficiency service in Northern Indiana's control area. Northern Indiana also engages in sales and services under interconnection agreements with WVPA and IMPA. WVPA supplies electricity to 12 distribution membership cooperatives located in Northern Indiana's control area. IMPA provides service to the municipal electric system of the city of Rensselaer located in Northern Indiana's control area. Northern Indiana and WVPA have executed a supplemental agreement for unit peaking capacity and energy. Unit peaking capacity is the capacity used to serve peak demand from a specific peaking generation unit. Pursuant to this agreement, which runs through December 2001, WVPA purchases 90 MW of capacity per month. Northern Indiana also serves the Town of Argos as a full requirements customer and provides network integration service to seven other municipal wholesale customers. Northern Indiana is a member of the East Central Area Reliability Coordination Agreement ("ECAR"). ECAR is one of nine regional electric reliability councils established to coordinate planning and operations of member electric utilities regionally and nationally. Fuel Supply: The generating units of Northern Indiana are located at the Bailly, Mitchell, Michigan City and Schahfer Generating Stations. Coal is the primary source of fuel for 10 of Northern Indiana's 13 steam generating units; natural gas is the primary fuel for the other three. Northern Indiana's four combustion turbine generating units are also fired by gas. Fuel requirements for Northern Indiana's generation for 1999 were supplied as follows: Coal 97.9% Natural Gas 2.1% b. Columbia i. Natural Gas Facilities At December 31, 1999, Columbia's five natural gas public utility subsidiaries owned a total of 32,403 miles of distribution pipeline and customer connections to serve approximately 2.1 million customers, as detailed by state in the table below: Distribution Distribution Pipeline (miles) Customers ---------------- --------- Columbia Kentucky 2,433 141,817 21 Columbia Maryland 601 31,934 Columbia Ohio 18,387 1,347,671 Columbia Pennsylvania 6,961 389,574 Columbia Virginia 4,021 177,945 Columbia's natural gas public utility subsidiaries receive their natural gas supplies through Columbia's two wholly-owned interstate pipelines, Columbia Transmission and Columbia Gulf, major non-affiliated pipelines such as Transco, ANR, Panhandle Eastern, Tennessee Gas and Texas Eastern, and regional pipelines such as CNG Transmission Corporation and National Fuel. In addition to receiving supplies from the Gulf Coast Basin from Columbia Gulf, Columbia Transmission transports gas sourced from supply basins and/or trading centers which access the Mid-Continent and Western Canada supply basins through interconnections with ANR, Panhandle Eastern, Tennessee Gas, Texas Eastern, Transco and Crossroads. Columbia Transmission also transports Appalachian gas produced by Columbia's exploration and production subsidiaries. Columbia's natural gas public utility subsidiaries have long-term firm transportation contracts with Columbia Gulf, Columbia Transmission, Panhandle Eastern, Tennessee Gas, Texas Eastern, Transco, CNG Transmission Corporation, ANR and National Fuel to meet the peak day needs of their customers. In addition, the gas utilities have contractual access to the natural gas storage owned by Columbia Transmission. Columbia Pennsylvania is the only gas utility to own underground storage, supported by eight wells on 3,300 acres. Columbia Virginia and other unaffiliated local distribution utilities subscribe to LNG storage services provided by Columbia Transmission from a facility located in Chesapeake, Virginia. For the year 1999, Columbia's natural gas public utility subsidiaries purchased, on a weighted average basis, approximately 90% of their natural gas supplies from the Gulf Coast Basin, and the remaining 10% from the Appalachian, Mid-Continent and Mobile Bay basins. ITEM 3. APPLICABLE STATUTORY PROVISIONS The following sections of the Act are, or may be, directly or indirectly, applicable to the proposed Transaction: Section of the Act Transactions to which section is, or may be, applicable: - ---------- ------------------------------------------------------- 4 and 5 Registration of New NiSource as a holding company following consummation of the Transaction 9 and 10 Acquisition of Columbia's common stock and common stock of NiSource's public utility subsidiary companies 8 and 11(b) Retention by New NiSource of Northern Indiana's electric operations and various of NiSource's and Columbia's non-utility businesses and investments 22 To the extent that other sections of the Act or the Commission's rules thereunder are deemed applicable to the Transaction, such sections and rules are hereby incorporated into this ITEM 3. A. LEGAL ANALYSIS -------------- 1. Section 9(a)(2) Section 9(a)(2) makes it unlawful, without approval of the Commission under Section 10, "for any person ...to acquire, directly or indirectly, any security of any public utility company, if such person is an affiliate of such company and of any other public utility or holding company, or will by virtue of such acquisition become such an affiliate." 15 U.S.C. Section 79i(a)(2). Under the definition set forth in Section 2(a)(11), an "affiliate" of a specified company means "any person that directly or indirectly owns, controls, or holds with power to vote, 5 per centum or more of the outstanding voting securities of such specified company", and "any company 5 per centum or more of whose outstanding voting securities are owned, controlled, or held with power to vote, directly or indirectly, by, such specified company." 15 U.S.C. Section 79b(a)(11)(A)-(B). Columbia Kentucky, Columbia Maryland, Columbia Ohio, Columbia Pennsylvania and Columbia Virginia are public utility companies as defined in Section 2(a)(5) of the Act. Because Applicant will indirectly acquire (through its acquisition of Columbia) more than 5% of the voting securities of each of Columbia Kentucky, Columbia Maryland, Columbia Ohio, Columbia Pennsylvania and Columbia Virginia as a result of the Transaction, Applicant must obtain the approval for the Transaction under Sections 9(a)(2) and 10 of the Act. The statutory standards to be considered by the Commission in evaluating the proposed Transaction are set forth in Sections 10(b), 10(c) and 10(f) of the Act. As set forth more fully below, the Transaction complies with all of the applicable provisions of Section 10 of the Act and should be approved by the Commission: o the consideration to be paid in the Transaction is fair and reasonable; o the Transaction will not create detrimental interlocking relations or concentration of control; o the Transaction will not result in an unduly complicated capital structure for the New NiSource system; o the Transaction will not be unlawful under the provisions of Sections 8 of the Act or detrimental to the carrying out of the provisions of Section 11 of the Act; o the Transaction will have the integrating tendencies required by Section 10(c)(2) of the Act and will be in the public interest and the interests of investors and consumers; and 23 o the Transaction will comply with all applicable state laws. 2. Section 10(b) Section 10(b) provides that, if the requirements of Section 10(f) are satisfied, the Commission shall approve an acquisition under Section 9(a) unless: o such acquisition will tend towards interlocking relations or the concentration of control of public utility companies, of a kind or to an extent detrimental to the public interest or the interests of investors or consumers; o in case of the acquisition of securities or utility assets, the consideration, including all fees, commissions, and other remuneration, to whomsoever paid, to be given, directly or indirectly, in connection with such acquisition is not reasonable or does not bear a fair relation to the sums invested in or the earning capacity of the utility assets to be acquired or the utility assets underlying the securities to be acquired; or o such acquisition will unduly complicate the capital structure of the holding company system of the applicant or will be detrimental to the public interest or the interests of investors or consumers or the proper functioning of such holding company system. 15 U.S.C. Section 79j(b). a. Section 10(b)(1) i. Interlocking Relationships Although any merger results in new links between heretofore unrelated companies, as discussed in ITEM 1, the relationships that will result from the Transaction are not the types of interlocking relationships prohibited by Section 10(b)(1), which was primarily aimed at preventing business combinations unrelated to operational and economic benefits to the integrated utility system. See Northeast Utilities, Inc., 50 S.E.C. 427, 443 (1990) ("Northeast Utilities"), as modified, 50 S.E.C. 511 (1990), aff'd sub nom., City of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir. 1992) (finding that interlocking relationships are necessary to integrate the two merging entities). ii. Concentration of Control Section 10(b)(1) is intended to avoid "an excess of concentration and bigness" while preserving the "opportunities for economies of scale, the elimination of duplicate facilities and activities, the sharing of production capacity and reserves and generally more efficient operations" afforded by the coordination of local utilities into an integrated system. American Electric Power Company, Inc., 46 S.E.C. 1299, 1309 (1978) ("AEP"). In applying Section 10(b)(1) to utility acquisitions, the Commission must determine whether the acquisition will create "the type of structures and combinations at which the Act was specifically directed." Vermont Yankee Nuclear Power Corp., 43 S.E.C. 24 693, 700 (1968). As discussed below, the Transaction will not create a "huge, complex, and irrational system," but rather will afford the opportunity to achieve economies of scale and efficiencies which are expected to benefit investors and consumers. AEP, 46 S.E.C. at 1307. Size: If approved, the New NiSource gas utility system will serve approximately 3.2 million gas customers in nine states and 426,000 electric customers in Indiana. As a result of the Transaction, excluding any non-core asset sales, and taking into account required accounting adjustments, the combined NiSource/Columbia system would have, on a pro forma basis as of December 31, 1999, total assets of approximately $18.1 billion14 and operating revenues of approximately $6.3 billion. By comparison, the Commission has approved mergers resulting in similarly sized and considerably larger combination gas and electric utility holding companies. See, e.g., TUC Holding Co., Holding Co. Act Release No. 26749 (Aug. 1, 1997) ("TUC Holding Co.") (acquisition by Texas Utilities Company of ENSERCH Corp. resulting in a system having pro forma combined assets of over $21 billion); and Dominion Resources, Inc., Holding Co. Act Release No. 27113 (Dec. 15, 1999) ("Dominion Resources, Inc.") (acquisition by Dominion Resources, Inc. of Consolidated Natural Gas Company resulting in a system having pro forma combined assets of approximately $29.0 billion). See also Houston Industries, Inc., Holding Co., Act Release No. 26744 (July 24, 1997) ("Houston Industries, Inc.") (granting exemption to combination gas and electric holding company system which, as of December 31, 1998, had total assets of $19.138 billion and total revenues of $11.488 billion). In addition, in terms of number of customers, New NiSource will be significantly smaller than Sempra Energy, which had 5.4 million gas and 1.2 million electric customers as of the date the Commission approved the merger of Pacific Enterprises and Enova Corp. to form Sempra. See Sempra Energy, Holding Co. Act Release No. 26890 (June 26, 1998) ("Sempra Energy"). As the foregoing demonstrates, following the consummation of the Transaction, New NiSource will be within the size range of existing registered and exempt holding companies with which it will compete as a total energy supplier, including, in particular, Dominion Resources, Inc., whose gas transportation and distribution systems operate in substantially the same areas as NiSource's and Columbia's gas transportation and distribution systems. As such, its operations would not exceed the economies of scale of current and developing holding company systems or provide undue power or control to New NiSource in the regions in which it will provide service. Efficiencies and Economies: In addition to analyzing the size of the utility system, the Commission must also assess the efficiencies and economies that can be achieved through the integration and coordination of utility operations. As the Commission has stated, a "determination of whether to prohibit enlargement of a system by acquisition is to be made on the basis of all the circumstances, not on the basis of size alone." Centerior Energy Corp., 49 S.E.C. 472 at 475 (1986) ("Centerior Energy Corp."). By enhancing the size and geographic diversity of NiSource's existing gas system and combining NiSource's electric business with Columbia's gas business, the Transaction will significantly enhance each company's competitive position in an increasingly competitive energy market. The electric and gas utility industries are merging - ------------------------ 14 Pro Forma total assets includes an adjustment of approximately $3.8 billion to reflect the premium paid for Columbia's common stock and estimated merger costs. 25 in order to provide greater value to customers and, thus, allow companies to compete effectively in the increasingly competitive business environment. In Consolidated Natural Gas Co., Holding Co. Act Release No. 26512 (Apr. 30, 1996), the Commission recognized that "fundamental changes in the energy industry are leading to an increasingly competitive and integrated market, in which marketers deal in interchangeable units of energy expressed in British thermal unit values, rather than in natural gas or electricity. To retain and attract wholesale and industrial customers, utilities need to provide competitively priced power and related customer services. . . . It appears that the restructuring of the electricity industry now underway will dramatically affect all United States energy markets as a result of the growing interdependence of natural gas transmission and electric generation, and the interchangeability of different forms of energy, particularly gas and electricity." The combination of NiSource and Columbia will offer the same type of synergies and efficiencies that the Commission has recognized in approving the creation of other combination holding company systems, some of which have registered under the Act. See, e.g., TUC Holding Co., supra; Houston Industries, Inc., supra; Sempra Energy, supra; Dominion Resources, Inc., supra; and SCANA Corp., Holding Co. Act. Release No. 27133 (Feb. 9, 2000) ("SCANA Corp."). For further information concerning economies and efficiencies which are expected to result from the Transaction, see Subparagraph A.3.b.i, of ITEM 3, below. Competitive Effects: As the Commission noted in Northeast Utilities, supra, at 445, the "antitrust ramifications of an acquisition must be considered in light of the fact that public utilities are regulated monopolies and that federal and state administrative agencies regulate the rates charged consumers." On July 19, 1999, NiSource filed the Notification and Report Forms with the Department of Justice ("DOJ") and Federal Trade Commission ("FTC") required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. Section 1311, et seq. ("HSR Act") describing the Transaction. The applicable waiting period expired on August 4, 1999 and NiSource's clearance to complete an acquisition of Columbia remained valid only until August 4, 2000. A new filing by the parties under the HSR Act was deemed filed on June 9, 2000. The applicable waiting period expired on July 10, 2000, giving NiSource until July 9, 2001 to complete the acquisition. The competitive effects of the Transaction will also be reviewed by the FERC, which has jurisdiction under Section 203 of the Federal Power Act over the change in control of Northern Indiana and the two other subsidiaries of NiSource that have authority from FERC to sell wholesale power at market-based rates and the change in control of Columbia's power marketing subsidiary. The FERC's Merger Policy Statement provides that its public interest analysis of a merger will focus on three factors: the effect of the merger on competition; the effect of the merger on ratepayers; and the effect of the merger on regulation. NiSource and Columbia submitted expert economic testimony in support of their Section 203 application. The economic expert concluded that the proposed merger will not adversely impact competition in any relevant product and geographic markets. The economic expert also concluded that the merger does not present the potential for the exercise of horizontal or vertical market power. 26 b. Section 10(b)(2) i. Fairness of Consideration Section 10(b)(2) requires the Commission to determine whether the consideration to be given to the holders of Columbia common stock in connection with the Transaction is reasonable and whether it bears a fair relation to investment in and earning capacity of the utility assets underlying the securities being acquired. The Commission has found "persuasive evidence" that the standards of Section 10(b)(2) are satisfied where, as here, the agreed consideration for an acquisition is the result of arms-length negotiations between the managements of the companies involved, supported by opinions of financial advisors. See Entergy Corp., 51 S.E.C. 869 at 879 (1993); ("Entergy Corp.") Southern Company, Holding Co. Act Release No. 24579 (Feb. 12, 1988) ("Southern Company"). The merger consideration was the product of extensive and vigorous arms-length negotiations between Columbia and NiSource following a period of nine months in which NiSource had made a formal invitation for tenders from Columbia's shareholders. During this period, Columbia also considered potential business combinations with other companies. The negotiations that culminated in the Merger Agreement were preceded by intensive due diligence, analysis and evaluation of the assets, liabilities and business prospects of each of the respective companies. As recognized by the Commission in Ohio Power Co., 44 S.E.C. 340, 346 (1970), prices arrived at through arms-length negotiations are particularly persuasive evidence that Section 10(b)(2) is satisfied. Nationally-recognized investment bankers for Columbia and NiSource have reviewed extensive information concerning the companies, analyzed the merger consideration employing a variety of valuation methodologies, and opined that the merger consideration is fair, from a financial point of view, to the holders of Columbia common stock and to NiSource as of February 27, 2000 and April 24, 2000. See Exhibits G-4, G-5, G-6, G-7 and G-8 hereto. The assistance of independent consultants in establishing the agreed-upon consideration has been recognized by the Commission as evidence that the requirements of Section 10(b)(2) have been met. Southern Company, supra. ii. Reasonableness of Fees Another consideration under Section 10(b)(2) is the overall fees, commissions and expenses to be incurred in connection with the Transaction. NiSource believes that these items will be reasonable and fair in light of the size and complexity of the Transaction relative to other utility mergers and acquisitions, and that the anticipated benefits of the Transaction to the public, investors and consumers are consistent with recent precedents and meet the standards of Section 10(b)(2). The Applicants estimate that a combined total of approximately $50 million will be incurred in fees, commissions and expenses in connection with the Transaction. By comparison, American Electric Power Company, Inc. and Central and South West Corporation have represented that they expect to incur total transaction fees and regulatory processing fees of approximately $53 million in connection with their proposed merger. Dominion Resources, Inc. and 27 Consolidated Natural Gas Company estimated fees and other merger expenses aggregating $55.5 million in their recent merger; Cincinnati Gas and Electric Company and PSI Resources incurred $47.12 million in fees in connection with their combination in 1994 as subsidiaries of Cinergy Corp., and Northeast Utilities, Inc. alone incurred $46.5 million in fees and expenses in connection with its acquisition in 1990 of Public Service of New Hampshire Company, Inc. - which amounts all were approved as reasonable by the Commission. See Dominion Resources, Inc., supra; CINergy Corp., Holding Co. Act Release No. 26146 (Oct. 21, 1994); Northeast Utilities, Inc., Holding Co. Act Release No. 25548 (June 3, 1992); and American Electric Power, Inc., Holding Co. Act Release No. 27186 (June 14, 2000). The Applicants believe that the estimated fees and expenses in this matter bear a fair relation to the value of their respective companies and the benefits to be achieved by the Transaction, and further that the fees and expenses are fair and reasonable in light of the size and complexity of the Transaction. The aggregate consideration to be given in exchange for Columbia's common stock is valued at approximately $6 billion, based on certain assumptions. The total estimated fees and expenses of approximately $50 million represent approximately 0.83% of the value of the consideration to be paid. This is consistent with (and in fact generally lower than) percentages previously approved by the Commission. See, e.g., Entergy Corp., supra (fees and expenses represented approximately 1.7% of the value of the consideration paid to the shareholders of Gulf States Utilities Company); Dominion Resources, Inc., supra (fees and expenses represented approximately 0.87% of the estimated total consideration to be paid to shareholders of Consolidated Natural Gas Company). c. Section 10(b)(3) Section 10(b)(3) requires the Commission to determine whether the Transaction will "unduly complicate the capital structure" or be "detrimental to the public interest or the interest of investors or consumers or the proper functioning" of the Applicant's system. The capital structure of the Applicant's system will be similar in most respects to the capital structures approved by the Commission in other recent orders. See, e.g., Dominion Resources, Inc., supra; Southern Company, Holding Co. Act Release Nos. 27061 and 27134 (Aug. 18, 1999 and Feb. 9, 2000); and The National Grid Group plc, Holding Co. Act Release No. 27154 (Mar. 15, 2000) ("The National Grid Group plc"). NiSource shareholders will receive common stock of New NiSource and Columbia's shareholders will receive, initially, a combination of cash and New NiSource's SAILS, which will automatically result in the issuance of New NiSource's common stock on the fourth anniversary of the merger, and may receive shares of New NiSource common stock. New NiSource will own, directly or indirectly, 100% of the common stock of all of the gas utility subsidiaries of NiSource and Columbia and of the electric utility subsidiary of NiSource. Hence, the Transaction will not create any publicly-held minority stock interest in any public utility company. The only voting securities that will be publicly held after the Transaction will be New NiSource's common stock. The continued existence of Columbia as a secondary holding company in the same holding company system will not unduly complicate Applicant's capital structure. In this regard, the Commission has permitted the continued existence 28 of a secondary holding company where it appeared that the overall benefits of an acquisition would outweigh any historical preference for a single holding company structure. See Dominion Resources, Inc., supra; and The National Grid Group plc, supra. As was true in Dominion Resources, Inc., where the Commission allowed the continued existence of Consolidated Natural Gas Company as a secondary holding company, the continued existence of Columbia will preserve certain financing and structural benefits that have already been achieved by Columbia as a registered gas holding company. Moreover, the incurrence by New NiSource of indebtedness to finance the cash portion of the purchase price will not result in an unduly complicated capital structure for the resulting New NiSource system. Interim acquisition financing of the type contemplated by New NiSource is expressly permitted by Section 7(c)(2)(A) of the Act, and the combined cash flow of NiSource and Columbia is expected to be adequate to service the interim acquisition financing interest requirements without adverse effect upon any of the Applicant's utility subsidiaries. As addressed in detail in the separate application dated May 17, 2000 (File No. 70-09681) New NiSource intends to refinance the acquisition debt following the merger through the issuance of longer term securities, additional equity issuances, using proceeds from the sale of certain non-core assets and/or internally generated cash flow. The Commission has previously authorized registered holding companies to issue debt to finance an acquisition under similar circumstances. See Dominion Resources, Inc., supra; SCANA Corp., supra; and The National Grid Group plc, supra. New NiSource also intends to refinance a portion of the acquisition debt through the issuance by NiSource Finance Corp., of longer term debt securities, consistent with recent Commission authority. See Southern Company, Holding Co. Act Release No. 27134 (Feb. 9, 2000). Finally, the issuance of the SAILS will not represent a permanent component of Applicant's capitalization. As previously explained, the stock purchase contracts included in the SAILS automatically settle for New NiSource's common stock on the fourth anniversary of the merger without any further action by the holders of the SAILS or Applicant. Moreover, from the date of the initial issuance, the SAILS will be afforded a significant amount of equity credit by the credit rating agencies for the purpose of Applicant's consolidated capitalization. In connection with the merger, NiSource may incur, at a maximum, up to $6 billion of additional short-term debt. NiSource expects that NiSource Finance Corp. will be the issuer of this additional short-term debt. This maximum assumes that no shares of common stock of Columbia are exchanged for New NiSource shares. NiSource believes that holders of the maximum number of Columbia's shares (30%) will elect to exchange their stock for NiSource stock, given the Columbia shareholder profile, the tax-free nature of the proposed share exchange, the dividend expected to be paid on the New NiSource shares and the adverse tax consequences of original issue discount in the SAILS in case the holder does not elect to be, and is not, paid in stock. In this event, and assuming sales of certain non-core assets of NiSource and/or Columbia, the Applicants commit that pro forma consolidated common stock equity of the combined system will be no less than 28.5% of pro forma combined capitalization at the earlier of November 1, 2000 or the date of the Commission's order with respect to this Application-Declaration on Form U-1. In addition, the Applicants commit that within two years after the date of the Commission's order, the combined consolidated capitalization of the new system will include no less than 29 30% common equity. Based on similar circumstances, the Commission has previously held that such pro forma consolidated capitalization will satisfy the requirements of Section 10(b)(3). See The National Grid Group plc, supra; and Northeast Utilities, Inc., Holding Co. Act Release No. 25221 (Dec. 21, 1990). 3. Section 10(c) Section 10(c) of the Act provides that, notwithstanding the provisions of Section 10(b), the Commission shall not approve: o an acquisition of securities or utility assets, or of any other interest, which is unlawful under the provisions of section 8 or is detrimental to the carrying out of the provisions of section 11; or o the acquisition of securities or utility assets of a public utility or holding company unless the Commission finds that such acquisition will serve the public interest by tending towards the economical and the efficient development of an integrated public utility system. 15 U.S.C. Section 79j(c). a. Section 10(c)(1), including, by reference, Sections 8 and 11 Section 10(c)(1) requires that an acquisition be lawful under Section 8 of the Act. Section 8 prohibits registered holding companies from acquiring, owning interests in or operating both a gas and an electric utility serving substantially the same area if it is prohibited by state law. As discussed below, the Transaction does not raise any issues under Section 8 of the Act. Indeed, Section 8 indicates that a registered holding company may own both gas and electric utilities where the relevant state utility commission supports such an arrangement. Section 10(c)(1) also requires that the transactions not be detrimental to carrying out the provisions of Section 11 of the Act. Section 11(a) of the Act requires the Commission to examine the corporate structure of registered holding companies to ensure that unnecessary complexities are eliminated and voting powers are fairly and equitably distributed. As described above in ITEM 3. A.2, the Transaction will not result in unnecessary complexities or unfair voting powers. Section 11(b)(1) of the Act generally requires a registered holding company system to limit its operations "to a single integrated public-utility system, and to such other businesses as are reasonably incidental, or economically necessary or appropriate to the operations of such integrated public-utility system." 15 U.S.C. Section 79k(b)(1). However, Section 11(b)(1) further provides that "one or more additional integrated public-utility systems" may be retained if certain criteria are met. Id. Section 11(b)(2) directs the Commission "to ensure that the corporate structure or continued existence of any company in the holding-company system does not unduly or unnecessarily complicate the structure, or unfairly or inequitably distribute voting power among security holders, of such holding-company system." 15 U.S.C. Section 79k(b)(2). 30 As detailed below, the Transaction is lawful under Section 8 and is not detrimental to carrying out the provisions of Section 11. i. Retention of Electric Operations The retention of the electric operations of Northern Indiana by Applicant is lawful under Section 8 of the Act and is not detrimental to carrying out the provisions of Section 11 of the Act. Section 8 of the Act provides that: Whenever a State law prohibits, or requires approval or authorization of, the ownership or operation by a single company of the utility assets of an electric utility company and a gas utility company serving substantially the same territory, it shall be unlawful for a registered holding company, or any subsidiary company thereof . . . (1) to take any step, without the express approval of the State commission of such State, which results in its having a direct or indirect interest in an electric utility company and a gas company serving substantially the same territory; or (2) if it already has any such interest, to acquire, without the express approval of the State commission, any direct or indirect interest in an electric utility company or gas utility company serving substantially the same territory as that served by such companies in which it already has an interest. 15 U.S.C. Section 79h. A plain reading of Section 8 indicates that, with the support of the relevant state utility commissions (in this case the IURC), a registered holding company can include both electric and gas utility systems. A more detailed examination of Section 8 in light of its legislative history indicates that the purpose of this section is to preclude ownership by a registered holding company of separate gas and electric utility companies with overlapping service territories in an attempt to circumvent state law restrictions that preclude ownership of gas and electric assets by the same company.15 Section 8 of the Act and the public interest both permit Applicant's retention of Northern Indiana electric operations upon completion of the Transaction and Applicant's registration as a holding company. Northern Indiana's existing gas and electric operations in Indiana, which are in overlapping service territories, are in conformity with Indiana law. These utility operations will not change as a result of the Transaction. Consequently, Applicant is not using its holding company structure to circumvent state regulation. The IURC currently exercises, and will continue to exercise, jurisdiction over Applicant's Indiana gas and electric operations. See Exhibit D-15 hereto. - ------------------------ 15 The Report of the Committee on Interstate Commerce, S. Rep. No. 621 at 29 (1935) (Section 8 of the Act "is concerned with competition in the field of distribution of gas and electric energy, a field which is essentially a question of State policy, but which becomes a proper subject of Federal action where the extra-State device of a holding company is used to circumvent state policy."). 31 In addition to Section 8 of the Act, Section 11 contains provisions that permit the retention by Applicant of Northern Indiana's electric operations. Section 11(b)(1) of the Act permits a registered holding company to control one or more additional integrated public utility systems, i.e., electric as well as gas utility systems, if: o each of such additional systems cannot be operated as an independent system without the loss of substantial economies which can be secured by the retention of control by such holding company of such system; o all of such additional systems are located in one state, adjoining states, or a contiguous foreign country; and o the continued combination of such systems under the control of such holding company is not so large (considering the state of the art and the area or region affected) as to impair the advantages of localized management, efficient operation, or the effectiveness of regulation. 15 U.S.C. Section 79k(b)(1). These three subsections of Section 11(b)(1) are frequently referred to as the "ABC Clauses" and each clause is addressed separately below. Clause A: The Commission has interpreted Clause A "to require an affirmative showing by a registrant that an additional system could not be operated under separate ownership without a loss of economies which are `so important as to cause a serious impairment of that system' and `substantial in the sense that they were important to the ability of the additional system to operate soundly.'" New Century Energies, Inc., Holding Co. Act. Release No. 26748 (Aug. 1, 1997) ("New Century Energies, Inc."), quoting New England Electric System, 41 S.E.C. 888, 892-3 (1964). A registered holding company generally satisfies the requirements of Clause A by preparing a "divestiture" or "severance" study which examines the estimated loss of economies precipitated by a hypothetical divestiture "expressed in terms of the ratio of increased expenses to the system's total operating revenues, operating revenue deductions (excluding federal income taxes), gross income and net income before federal income taxes." Id. In an early leading decision, the Commission found that cost increases which resulted in a 6.78% loss of operating revenues, a 9.72% increase in operating revenues deductions, a 25.44% loss of gross income and a 42.46% loss of net income provided an "impressive basis for finding a loss of substantial economies." Engineers Public Service Co., 12 S.E.C. 41, 59 (1942) rev'd on other grounds and remanded, 138 F.2d 936 (D.C. Cir. 1943), vacated as moot, 332 U.S. 788 (1947). The Applicants will prepare and by amendment file as Exhibit I hereto a study of the lost economies that would result if the Commission were to direct the divestiture of Northern Indiana's electric utility operations. These lost economies will result primarily from the need to replicate corporate and administrative services, loss of scale, and increased operating costs. In addition to quantitative factors, the Commission also considers qualitative factors in its determination under Clause A. First, the Commission in recent decisions has approved the retention by new registered electric utility holding companies of relatively small gas systems because "separation of gas and electric businesses may cause the separated entities to be weaker 32 competitors than they would be together." See New Century Energies, Inc., supra; CINergy Corp., Holding Co. Act Release No. 26934 (Nov. 2, 1998); and WPL Holdings, Inc., Holding Co. Act Release No. 26856 (Apr. 14, 1998) ("WPL Holding, Inc."), aff'd sub nom., Madison Gas & Electric Co. v. SEC, 168 F.3d 1337 (D.C. Cir. 1999).16 The logic of these cases has been extended in recent cases involving acquisitions by electric utility holding companies of neighboring gas utility systems. See Dominion Resources, Inc., supra; SCANA Corp., supra; and Northeast Utilities, Holding Co. Act Release No. 27127 (Jan. 31, 2000). Like these other companies, Applicant's competitive position in the market would suffer if it were directed to divest Northern Indiana's electric operations because, as the utility industry moves toward a complete energy services concept, energy suppliers must be able to offer customers a total range of energy options to meet their energy needs. The combination of electric and gas operations in a single company offers that company a means to compete more effectively in the emerging energy services business. Accordingly, the Transaction should be evaluated in light of the evolutionary changes taking place in the utility industry. The Commission has also noted that the DOJ and FERC typically have concomitant jurisdiction over public utility mergers and typically consider anticompetitive consequences of any proposed transactions. New Century Energies, Inc., supra. In this case, the Transaction is subject to the notification and report procedures under the HSR Act and approval by FERC under the Federal Power Act. Thus, to the extent that there are remaining concerns about the effects on competition of common ownership of both gas and electric businesses in the same holding company system, such concerns will be addressed by other regulatory agencies. In addition, in its analysis of the requirements of Clause A, the Commission considers whether the electric and gas utilities have long been under common control and whether retention would alter the status quo with respect to utility operations. Northern Indiana's electric and gas operations have been under common control since 1926 and permitting the retention of Northern Indiana's electric business would not alter the status quo with respect to its utility operations. Finally, the Commission determines whether the proposed acquisition has not "elicited any adverse reaction from interested state commissions." Id. This factor should not present a problem because the Applicants anticipate receiving all necessary regulatory approvals from relevant state commissions. Clause B: The requirements of Clause B are met because Northern Indiana's electric operations are located in the same state as its gas operations (Indiana). Clause C: The requirements of Clause C are met because the continued combination of the electric and gas operations under Applicant is not so large (considering the state of the art and the area or region affected) as to impair the advantages of localized management, efficient operation or the effectiveness of regulation. Northern Indiana's electric system is confined to a relatively small geographic area. Applicant will maintain management of electric operations geographically close to Northern Indiana's electric operations, thereby preserving the advantages of localized management. Northern Indiana's electric - ------------------------ 16 In New Century Energies, Inc., the Commission further noted that the "empirical basis" for the assumptions underlying its decision in New England Electric System., 41 S.E.C. 888 (1964), rev'd, SEC v. New England Electric System, 346 F.2d 399 (1st Cir. 1965), rev'd and remanded, 384 U.S. 176 (1966), on remand, 376 F.2d 107 (1st Cir. 1967), rev'd, 390 U.S. 207 (1968) was "rapidly eroding." 33 operations will also remain subject to the IURC's jurisdiction, thereby maintaining the effectiveness of regulation. Finally, Northern Indiana's electric operations will continue to enjoy substantial economies as part of Applicant's system, and will realize additional economies as a result of the Transaction from becoming part of a combined NiSource/Columbia system. Far from impairing the advantages of efficient operation, the continued combination of Northern Indiana's electric and gas operations will continue to facilitate and enhance efficiency. ii. Non-Utility Businesses Section 11(b)(1) limits the non-utility interests of a registered holding company to "interests that are `reasonably incidental, or economically necessary or appropriate to the operations of such integrated public-utility system,' on a finding by the Commission that such interests are `necessary or appropriate in the public interest or for the protection of investors or consumers and not detrimental to the proper functioning' of the integrated system." New Century Energies, Inc., supra. "The Commission has interpreted these provisions to require the existence of an operating or functional relationship between the utility operations of the registered holding company and its non-utility activities." Id. All of the non-utility businesses and investments currently held by the Applicants, with certain exceptions, are retainable under this test. Several of the subsidiaries of NiSource and Columbia are exempt under the Act, including the integration standards of Section 11(b)(1), pursuant to Sections 32, 33 or 34. Many of Columbia's existing non-utility investments were the subject of specific approvals granted by the Commission. In addition, Rule 58 provides exemptions for investments by registered gas utility holding companies in certain "energy-related" companies (subject to a limit on aggregate investment equal to 15% of the consolidated capitalization) and "gas-related" companies (which is not subject to any limitation on the amount invested). 17 C.F.R. Section 250.58. Further, the Commission has determined that existing investments in "energy-related" companies (as of the date of the consummation of the merger) of an exempt holding company which became a registered holding company as a result of the merger should be disregarded for purposes of calculating the dollar limitations imposed by Rule 58. See New Century Energies, Inc., supra; and Conectiv, Inc., Holding Co. Act Release No. 26832 (Feb. 25, 1998) ("Conectiv, Inc."). NiSource is currently a holding company that is exempt from the registration requirements of the Act.17 As an exempt holding company, NiSource has been free to invest in a variety of non-utility businesses and activities without the need to obtain prior Commission approval under Section 9(a) of the Act. The Transaction will result in New NiSource becoming a registered holding company. Therefore, it is necessary to evaluate each of NiSource's non-utility business activities within the retention restrictions of the Act and the Commission's rules promulgated thereunder. Columbia has been subject to regulation as a registered holding company for an extended period. Therefore, Columbia's ability to engage in non-utility businesses has been subject to the approval requirements of Section 9, and each of Columbia's existing non-utility businesses has been either approved by the Commission or falls within the exemptions of Sections 32, 33 and 34 under the Act or Rule 58. Consequently, the - ------------------------ 17 See NIPSCO Industries, Inc., Holding Co. Act Release No. 26975 (Feb. 10, 1999). 34 discussion below focuses on the retention of NiSource's non-utility businesses as appropriate either under the exemptions of Rule 58 or prior Commission precedent. Natural Gas Pipeline, Storage and Gathering: NiSource has two wholly-owned interstate natural gas pipeline subsidiaries. Crossroads operates an interstate pipeline from Indiana to Ohio connecting NGPL, Trunkline and Panhandle Eastern with Columbia Transmission and gas utility customers in Ohio and Indiana. Granite State operates an interstate pipeline extending from Massachusetts, where it interconnects with Tennessee Gas, through New Hampshire and into Maine, where it interconnects at several points with PNGTS. Granite State serves Northern and Bay State in all three states. In addition, NiSource indirectly owns an interest in a pipeline in northern New England (PNGTS), an intrastate natural gas pipeline in Texas and indirectly owns natural gas salt cavern storage facilities in Texas, Louisiana and a facility under development in Pennsylvania. These companies engage in "gas-related activities" under Section 2(a) of the Gas-Related Activities Act of 1990 ("GRAA"), and registered gas utility holding companies may acquire the securities of such companies without Commission approval pursuant to Rule 58(b)(2)(i). Exploration and Production Operations: EnergyUSA has equity interests in a domestic oil and gas producer with properties located in Texas, Oklahoma and Louisiana. The exploration of natural resources or the holding of rights to such resources are "gas-related activities" under Section 2(b) of the GRAA, and registered gas utility holding companies may acquire the securities of such companies without Commission approval pursuant to Rule 58(b)(2)(ii). Energy Marketing: Through direct and indirect subsidiaries, NiSource provides natural gas sales and management services to industrial and commercial customers and to affiliated and non-affiliated gas distribution utilities. The ownership of businesses engaged in the brokering and marketing of energy commodities is specifically authorized under Rule 58(b)(1)(v) and the retention of such businesses has routinely been permitted in prior Commission orders approving mergers and the creations of new registered holding companies. WPL Holdings, Inc., supra; Conectiv, Inc., supra; and New Century Energies, Inc., supra. Energy-Related Projects: NiSource's subsidiary, Primary, arranges energy-related projects for large energy-intensive facilities through Harbor Coal, North Lake, LEC, Portside, CE, Whiting and Ironside. The Commission Staff issued a no-action letter concurring with NiSource that North Lake is not an "electric utility" under Section 2(a)(3) of the Act with respect to its involvement in the processing of steam into electricity which is owned and used solely by Ispat in its manufacturing operations. NIPSCO Industries, Inc., 1996 SEC No-Act. LEXIS 541 (Jan. 19, 1996). LEC, Ironside, Portside and CE process steam into electricity under similar circumstances to North Lake. Whiting recently announced an agreement with Amoco Oil Company to lease and operate a net 525 MW natural-gas fired cogeneration facility adjacent to Amoco's refinery in Whiting, Indiana. None of Primary's subsidiaries engages in activities that would cause it to be a public utility company under the Act. The Commission has permitted registered gas utility holding companies to invest in subsidiaries 35 engaged in providing similar energy and energy management services. See Columbia Energy Group, et al., Holding Co. Act Release No. 26868 (May 6, 1998). In addition, the operation and maintenance of power plants are "energy-related" activities permitted under Rule 58(b)(I)(vii) and Rule 58(b)(I)(viii), as applicable. Energy Management: EnergyUSA Commercial Energy Services, Inc., along with its affiliates, provide energy management services, to industrial and large commercial customers, which enhance competitiveness through cost reductions, modernizing infrastructure and improving cost accountabilities. Rule 58(b)(1)(i) specifically permits registered holding companies to invest in a business that derives substantially all of its revenues from "the rendering of energy management services and demand-side management services." HVAC Services: Two subsidiaries of EnergyUSA provide HVAC services to industrial and commercial customers. The Commission has permitted wholly-owned subsidiaries of registered holding companies to provide services to system utilities and non-affiliates related to heating, ventilation, and air conditioning. Conectiv, Inc., supra and CINergy Corp., Holding Co. Act Release No. 26662 (1997). In addition, these activities are permitted under Rule 58(b)(1)(iv). Customer Information Services ("CIS"): Customer Information Services, Inc., a wholly-owned subsidiary of Development, participates with IBM in a joint venture to enhance a CIS system (and training for the system) which it markets to other utilities. The Commission has permitted retention by registered holding companies of a business that provides technical and consulting services, including billing services and information systems or data processing, to affiliated and non-affiliated companies. Conectiv, Inc., supra (consulting services related to information system/data processing); New Century Energies, Inc., supra (intellectual property owned or developed in the course of utility operations); Central and South West Services, Inc., Holding Co. Act Release No. 25132 (Aug. 10, 1990) (licensing and sale of computer programs developed in the course of utility business). In addition, these services are expressly permitted under Rule 58 (b)(l)(vii), since they involve technical expertise developed in the course of utility operations. Utility Related Services: SM&P, Colcom and UTI provide underground utility locating and marking services in Indiana and other states. Miller installs, repairs and maintains underground pipelines used in gas, water and sewer transmission and distribution systems. The locating subsidiaries provide services to four utility industries: telephone, gas, electricity and water. Miller provides services to both gas and water utilities. The Commission has approved a registered holding company's ownership of a business engaged in providing construction, engineering and operation and maintenance services primarily to nonaffiliates. Central and South West Services, Inc., Holding Co. Act Release No. 26280 (Apr. 26, 1995) (provisions of engineering and construction services to nonaffiliates); Entergy Corp., Holding Co. Act Release No. 26322 (June 30, 1995) (provision of development, design, engineering, construction and maintenance and management services to domestic and foreign power projects); New England Electric System, Holding Co. Act Release No. 26017 (Apr. 1, 1994) (provision of consulting services, including engineering, design and construction, to nonaffiliates); General Public Utilities Corp., Holding Co. Act Release No. 25108 (June 26, 1990) (provision of engineering and management services in connection with investments in power production facilities and 36 related projects); New Century Energies, Inc., supra (engineering, construction and related services primarily to non-affiliates). Financing: Capital Markets provides financing for NiSource's non-utility subsidiaries and certain utility subsidiaries. The Commission has on a number of occasions authorized registered holding companies to own subsidiaries that provide financing and related financial services to their affiliated companies. See Southern Company, Holding Co. Act Release No. 27134 (Feb. 9, 2000); Allegheny Power System, Inc., Holding Co. Act Release No. 26401 (Oct. 27, 1995); and CSW Credit, Inc., Holding Co. Act Release No. 26437 (Dec. 22, 1995). Real Estate: NiSource and its subsidiaries have invested in several different types of real estate ventures. These fall into several different categories, as described below. o A wholly-owned subsidiary of Development manages or sells off excess real estate owned by Development and other NiSource subsidiaries. These investments are functionally related to the activities of system utilities and therefore, under Commission precedent, Applicant should be allowed to retain the investment after NiSource becomes a registered holding company. See, e.g., Conectiv, Inc., supra; Unitil Corp., Holding Co. Act Release No. 25524 (Apr. 24, 1992) ("Unitil Corp."); WPL Holdings, Inc., supra. o JOF Transportation Company, a wholly-owned subsidiary of Development, owns a 40% passive interest in railroad assets in the vicinity of several electric generating plants owned by Northern Indiana and which Northern Indiana currently uses to deliver coal to its electric generating plants. Retention of NiSource's interest would enable Applicant to construct additional power lines or gas pipelines in the future and to ensure continued access to tracks needed to deliver coal to electric generating plants owned by Northern Indiana. The Commission has held that a registered public utility holding company may hold property that will be needed in the future to support operations of the utility company. See New Century Energies, Inc., supra (water rights held in connection with the future addition of generation capacity); WPL Holdings, Inc. (undeveloped property for the future development of utility-related assets). The Commission has also allowed subsidiaries of registered public utility holding companies to acquire or maintain rail lines and rolling stock for the benefit of system utilities. See Southern Company, Holding Co. Act Release No. 25734 (Jan. 13, 1993); North American Co., Holding Co. Act Release No. 3405 (Apr. 15, 1942); New Century Energies, Inc., supra (railroad maintenance facility); and WPL Holdings, Inc. supra (ownership and operation of rail lines). o NDC Douglas Properties, Inc., a wholly-owned subsidiary of Development, has 15 passive interests in multiple-family residential developments, most of which are in the service territory of NiSource's utility subsidiaries. These investments are divided into six limited partnerships and nine limited liability companies and are held by NiSource in order to generate low-income housing tax benefits under Section 42 of the Internal 37 Revenue Code. The investments are part of the continued commitment by NiSource to provide high quality, energy efficient, affordable housing to the residents of various geographic and economic regions served by its utilities. The Commission has allowed subsidiaries of registered holding companies to invest in low income housing provided that the holding company is a passive investor and that the purpose of the investment is to obtain federal and state income tax credits as well as fulfilling civic responsibilities. See Ameren Corp., Holding Co. Act Release 26809 (Dec. 30, 1997) ("Ameren Corp."); and Georgia Power Co., Holding Co. Act Release No. 26220 (Jan. 24, 1995). o KOGAF Enterprises, Inc. ("KOGAF"), a wholly-owned subsidiary of Development, has invested in a project to revitalize downtown Kokomo, Indiana, which is in the service territory of Kokomo Gas. KOGAF has a passive interest in a limited partnership which is conducting the revitalization project. KOGAF's total investment in the project is less than $100,000. Under Rule 40(a)(5), registered holding companies are permitted to invest up to $5 million annually in qualified state sponsored industrial development companies and up to $1 million annually in other local industrial or non-utility enterprises. 18 C.F.R. Section 250.40(a)(5). See Ameren Corp., supra; Ohio Power Co., Holding Co. Act Release No. 25604 (Aug. 11, 1992). o Lake Erie Land Company ("Lake Erie"), a wholly-owned subsidiary of Development, owns wetlands that can be used as offsets to enable developers to obtain approval for projects that require filling of wetlands. These offsets could be used for construction projects by Applicant system utilities and are also sold to other developers in need of offsets. Because it is difficult and economically inefficient to identify discrete, small tracts of wetlands to be restored each time a need for a small amount of offsets arises, it is beneficial to have a large bank of restored wetlands available to serve these needs as they arise and to sell the offsets to third parties to the extent that the available bank exceeds near term utility system needs. Commission precedent supports the retention of property held for future utility needs. WPL Holdings, Inc., supra. Furthermore, larger tracts of wetlands are environmentally preferable to smaller tracts that collectively comprise the same number of acres. Thus, Applicant will be able to serve as a good environmental citizen as well as meeting its system utility needs for wetlands offsets by holding tracts of restored wetlands larger than the minimum necessary for the foreseeable needs of its system utilities. Divestiture of these assets would impose an economic hardship because of the difficulty and expense Applicant would incur if it had to purchase wetlands each time it needed wetlands offsets for utility development. o Lake Erie and a subsidiary also develop and operate tracts of land within the service territories of NiSource utility subsidiaries into model communities that serve community development and environmental interests. In order to assure the developments meet NiSource's goals for architectural, urban 38 planning, and environmental considerations, NiSource has made an active investment in these projects. These investments, however, represent just over 1% of NiSource's net assets, and they are managed by a subsidiary that is separate from the system utility companies, so that any losses from these projects will have no adverse impact on the utilities or their ratepayers. The Applicants request that the Commission permit retention of this investment, given that these projects impose no significant risks on ratepayers and taking into consideration the limitations that Applicant would incur if it were required to divest itself of these projects after the substantial commitments it has made to ensure that the developments meet the established community development, urban planning and environmental goals. The Commission has allowed retention of real estate operations created by exempt holding companies before becoming registered even though such operations were not strictly related to utility operations. WPL Holdings, Inc., Holding Co. Act Release No. 26856 (Apr. 14, 1998); Conectiv, Inc., supra; Ameren Corp., supra; and New Century Energies, Inc., supra. The Commission has also authorized real estate investments where they benefited utility operations. Unitil Corp., supra; and American Electric Power Co., Holding Co. Act Release No. 21898 (Jan. 27, 1981). Water Utilities: The Water Utilities supply water for residential, commercial and industrial uses in Indianapolis, Indiana and surrounding areas and were acquired beginning in 1997. The Water Utilities are not part of a unified utility franchise and do not share a common utility customer base with any of NiSource's public utility companies. Moreover, they were acquired and are maintained as a distinct business unit and represent a significant investment of NiSource. See Subparagraph B.1.a of ITEM 1, above. If the Commission determines that NiSource may not retain the Water Utilities under Section 11(b)(i) of the Act and therefore must divest the Water Utilities, the Applicants request that the Commission include in its order with respect to this Transaction statements that (a) a sale of all of the stock of the Water Utilities for cash is necessary or appropriate to effectuate the provisions of Section 11(b) of the Act; (b) the Applicants will sell all of the stock of the Water Utilities within two years of the date of the Commission's order either (i) by a direct sale of that stock, (ii) by the sale of all of the stock of IWCR, (iii) by the sale of all the stock of a newly constituted entity that at the time of the sale owns the stock of one or more of the Water Utilities or (iv) by some combination of the transactions described in (i), (ii) and (iii); and (c) all of the net proceeds from the sale of the Water Utilities must be contributed to the capital of NiSource Finance Corp., a new system finance subsidiary, within ninety days of such sale. b. Section 10(c)(2) The Transaction will tend toward the economical and efficient development of an integrated public utility system, thereby serving the public interest, as required by Section 10(c)(2) of the Act. i. Efficiencies and Economies The Applicants expect to achieve substantial economic benefits from the merger. 39 The Applicants' best current estimate is that they should realize potential cost savings and revenue enhancements, on a pre-tax basis, of approximately $98 million in the first year following the merger, increasing to approximately $185 million in the fifth year, from the elimination of redundant management functions and other administrative overhead and revenue enhancements. In addition, the Applicants believe that the merger will create a significantly larger and more diverse energy company that will have strategic and operational opportunities that would not be available to either NiSource or Columbia as separate systems. In particular, the Applicants believe that the combined company will have three elements that are key to success in the increasingly deregulated and competitive energy marketplace: (1) increased size, scope and scale, (2) access to strategic geographic markets, and (3) a broad range of complementary assets. Increased Size, Scope and Scale, Diversity: The combined company will have the size, scope and scale necessary to compete more effectively. o The merger of NiSource and Columbia will create a super-regional energy company serving more than 3.6 million gas and electric utility customers located primarily in nine states. o Increased volumes of gas throughput and gas sales, along with more extensive local delivery systems, pipeline assets and a variety of gas storage facilities, should increase the flexibility and efficiency of the combined systems in delivering gas. o The merger will result in a company with pro forma 1999 operating revenues of $6.3 billion from a substantially larger and more diverse customer base. o The broader geographic range of the market areas served by the NiSource and Columbia utility companies distributing gas and electricity should moderate the risk that unseasonably warm winters or cool summers in one area will adversely affect the entire company at any particular time. Access to Strategic Markets: o The merger advances NiSource's previously announced strategy for expanding its presence within a natural gas distribution corridor stretching from Texas, through Chicago, to Maine. After the merger, the additional Columbia gas storage assets, pipeline assets and customers also fall along this corridor, linking NiSource's existing assets and allowing for better utilization of all of the combined systems' assets. o Pipelines from Canada and the Gulf of Mexico to the Chicago market have made natural gas plentiful and relatively inexpensive in Chicago and northern Indiana. In contrast, in the Northeast, constrained pipeline capacity has resulted in higher gas prices and low usage of natural gas. With significant natural gas reserves and storage capacity, 19,000 miles of gas pipeline from 40 Texas to Maine and an extensive local distribution network, the Applicants believe the combined system will be able to deliver lower cost gas to a Northeast market that has the potential for growth as an increasing number of customers, including power plant operators, switch to clean natural gas as their fuel of choice. o The broader geographic coverage of the combined system, including Columbia's natural gas distribution territory and its pipeline systems, will also provide more opportunities to expand NiSource's electric cogeneration business for industrial customers. Broad Range of Complementary Assets: o The merger will enable the combined system to use strong local utility brand names to offer customers a broader mix of products and services than either system alone could offer. For example, the combined system will be able to offer more competitive management of customers' complete gas supply needs to a broader group of customers by combining NiSource's supply area gas storage with Columbia's market area gas storage and combining high deliverability storage for peak needs with standard storage for baseload needs. o The merger will permit the combined system to offer a broader range of energy products and services and will reduce the risk presented by NiSource's dependence on sales of gas and electricity to large industrial customers in northwest Indiana. o The merger should allow the combined system to take advantage of arbitrage opportunities that may exist among natural gas, coal and electricity. Similar opportunities may be available based on differences in weather, time of day, geographic location of customers, and physical location of fuel supplies and gas storage along the Texas-to-Maine corridor. As an example, the combined system will be able to choose how best to use natural gas supplies, whether by selling the gas on the open market, swapping it, transporting it for sale in another market, putting it into storage for future use or sale, or using it to produce electricity in its own power plants. o The merger will add key members of Columbia's operating management team, which has successfully managed its company during a period of deregulation in multiple states, increased competition and rapid change in the gas industry, to NiSource's management team, which has skills and experience in efficiently managing assets and delivering energy products and services. Although some of the anticipated economies and efficiencies will be fully realizable only on a long-term basis and some of the potential benefits cannot be precisely estimated, they are properly considered in determining 41 whether the standards of Section 10(c)(2) have been met. See AEP at 1320-21 (1978); Centerior Energy Corp. at 480 (1986) ("[S]pecific dollar forecasts of future savings are not necessarily required; a demonstrated potential for economies will suffice even when these are not precisely quantifiable.") (footnote omitted). See also Energy East Corp., Holding Co. Act Release No. 26976 (Feb. 12, 1999) (authorizing acquisition based on strategic benefits and potential but presently unquantifiable savings); and The National Grid Group plc, supra. There is no requirement in Section 10(c)(2) that the specific dollar estimates of future savings be large in relation to the gross revenues of the companies involved. See American Natural Gas Co., 43 S.E.C. 203 (1966) ("American Natural Gas Co."). ii. Integrated Gas Utility System Under Section 10(c)(2), the Commission must affirmatively find that the Transaction "will serve the public interest by tending towards the economical and the efficient development of an integrated public-utility system." 15 U.S.C. Section 79j(c)(2). An "integrated public-utility system" is defined in Section 2(a)(29), 15 U.S.C. Section 79j(c)(2) to mean: (B) As applied to gas utility companies, a system consisting of one or more gas utility companies which are so located and related that substantial economies may be effectuated by being operated as a single coordinated system confined in its operations to a single area or region, in one or more States, not so large as to impair (considering the state of the art and the area or region affected) the advantages of localized management, efficient operation, and the effectiveness of regulation; provided, that gas utility companies deriving natural gas from a common source of supply may be deemed to be included in a single area or region.18 The combination of Columbia's gas utility operations and NiSource's gas utility operations will create an integrated gas-utility system within the meaning of Section 2(a)(29)(B) of the Act. Indeed, because Columbia's integrated transmission, storage and distribution system forms a bridge between the Midwest and the mid-Atlantic and northeast regions, the Transaction will forge an even more substantial link between NiSource's Midwestern and New England operations than the link that this Commission noted in 1999 in approving NiSource's acquisition of Bay State. Single Area Or Region: The gas utility system resulting from the Transaction will include eight gas utilities located in the contiguous states of Indiana, Kentucky, Ohio, Pennsylvania, Virginia and Maryland and two gas utilities located in the contiguous states of Massachusetts, New Hampshire and Maine. The utilities located in contiguous states will be directly interconnected by affiliated and non-affiliated interstate pipelines and storage. All of the utilities will be effectively connected by industry-recognized trading centers and market hubs. The entire system will - ------------------------ 18 Unlike the definition of an "integrated electric utility system" in Section 2(a)(29)(A) of the Act, physical interconnection of the component parts of a gas utility system is not required. Further, the Commission has previously recognized that "integrated or coordinated operations of a gas system under the Act may exist in the absence of [physical] interconnection." American Natural Gas Co., 43 S.E.C. at 207, n.5. 42 integrate its process of portfolio management and efficiently and economically deploy its pipeline and storage capacity and supply sources through these direct and indirect interconnects and market centers. Section 2(a)(29)(B) specifically contemplates that "gas utility companies deriving natural gas from a common source of supply may be deemed to be included in a single area or region." 15 U.S.C. Section 79b(a)(29)(B). Moreover, in considering whether an "area or region" is so large as to impair "the advantages of localized management, efficient operation, and the effectiveness of regulation," the Commission must consider the "state of the art" in the industry. Id. The integration of NiSource's Massachusetts, New Hampshire and Maine gas utility operations and its Indiana gas utility operations has already been established. This was an essential finding in the Commission order approving NiSource's acquisition of Bay State. NIPSCO Industries, Inc., Holding Co. Act Release No. 26975 (Feb. 10, 1999). With the exception of NiSource's New England operations, the gas distribution operations of Columbia and NiSource are in contiguous states and, given their location and reliance on many of the same interstate pipelines, are readily susceptible to being operated as an integrated system. Common Source Of Supply: Historically, in determining whether two distant gas companies share a "common source of supply," the Commission has placed primary importance on whether the gas supply of the two companies is derived from the same gas producing areas (or basins), recognizing that the most significant economies and efficiencies that two gas utilities can achieve is through the coordination and management of gas supply. The Commission has also considered whether the two companies hold capacity on one or more common pipelines, although the separation of the merchant and transportation functions of the pipelines and the trend towards greater reliance by local distribution companies on short-term transportation obtained in the capacity release market, giving rise to what FERC now refers to as "virtual pipelines,"19 has arguably made the existence of long-term (or "firm") transportation arrangements on the same pipeline(s) much less important. In its more recent decisions, the Commission has held that "[t]he concept of a `common source of supply' is susceptible of a different understanding today than in 1935, when the `single area or region' was generally defined in terms of the pipeline delivery points (i.e., the city-gate) where the local distribution companies purchased their gas." NIPSCO, supra. The Commission's inquiry now focuses upon whether the combined utilities purchase substantial quantities of gas produced in the same supply basins and upon whether that gas is "deliverable" on the interstate pipeline network on an economical and reliable basis. Id. In this regard, the Commission has also recognized that, in today's gas market, purchases from the same supply basins are facilitated by the availability of a variety of services (e.g., gas parking, lending, and pooling) at market centers, hubs and pooling points which have developed throughout the United States and Canada. - ------------------------ 19 See Regulation of Short-term Natural Gas Transportation Services, and Regulation of Interstate Natural Gas Transportation Services, Order No. 637, 65 FR 10156 (Feb. 25, 2000). As explained by FERC, "[a] virtual pipeline can be created when a marketer or other shipper acquires capacity on interconnecting pipelines and can schedule gas supplies across the interconnect, creating in effect a new pipeline between receipt and delivery points that are not physically connected under a single pipeline management." 65 FR at 10162. 43 As indicated above, the gas portfolios of Columbia and NiSource overlap substantially with respect to sources of supply. Both companies now purchase and will continue to purchase most of their gas from the Gulf Coast Basin (onshore and offshore Texas and Louisiana producing region). Moreover, they will each have enhanced opportunities to increase their respective purchases of gas produced in the Mid-Continent and Western Canada supply basins. The NiSource and Columbia gas utility systems also currently hold firm transportation service agreements on a number of the same interstate pipelines, including ANR, Panhandle Eastern, Tennessee Gas, Texas Eastern and Transco. The NiSource midwestern gas utilities are physically linked through Crossroads' interconnections with Columbia Transmission, Trunkline and Panhandle Eastern with a common interstate transmission system (Columbia Transmission) that serves each of the Columbia gas distribution utilities. The Columbia and NiSource gas distribution utilities also make use of other regional pipelines to transport and deliver Gulf Coast, Mid-Continent, Canadian and Appalachian-sourced supplies, including Crossroads, National Fuel and CNG Transmission Corp. In addition, gas purchased by the unregulated marketing affiliate of NiSource is transported by NiSource subsidiary, Crossroads, and Columbia subsidiary, Columbia Transmission, for further delivery to utility customers served by NiSource's and Columbia's gas public utilities located in Indiana, Ohio and Pennsylvania. These links, and the increased presence which the combined NiSource and Columbia utilities will have in both upstream (i.e., producing area) and downstream (i.e., market area) trading hubs and market centers, will facilitate coordinated management of interstate transportation, storage and gas supplies. Additional efficiencies and arbitrage opportunities can be realized over time through the combined companies' use of a single data management system to record gas transaction data, single distribution "send-out" models which help design the portfolio to meet requirements and single e-commerce trading systems which are experiencing increasing growth in industry portfolios. Gas trading points and market centers, trading "hubs" and market centers have rapidly grown in importance as a result of the construction of new pipeline capacity, the unbundling of interstate transportation from gas sales mandated by FERC Orders 436 and 636,20 the development of high deliverability salt cavern gas storage facilities and local distribution companies' "de-contracting" of firm pipeline and storage capacity. Trading hubs and market centers now provide market participants with access to gas supplies sourced from multiple, widely separated producing areas and transportation capacity, by way of any number of interconnected interstate pipeline facilities at a manageable number of common geographic points. These hubs and centers have contributed to the establishment of a fully integrated, competitive marketplace in which real-time pricing is available.21 Using many of the same hubs and market centers, the NiSource and Columbia gas public utilities and their affiliates will have opportunities to coordinate and manage their gas supply and transportation portfolios. This can lead to increased efficiencies and economies over time in areas of coordinated gas supply, optimized use of transportation - ------------------------ 20 Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, Order No. 436, 50 FR 42408 (Oct. 18, 1985); and Pipeline Service Obligation and Revisions to Regulations Governing Self-Implementing Transportation Under Part 284 of the Commission's Regulations, Order No. 636, 57 FR 13267 (Apr. 16, 1992). 21 As a result of the evolution of an integrated, competitive marketplace for both supply and transportation, the duration of contracts has shortened considerably. 44 capacity, ability to take advantage of geographic diversity between NiSource's and Columbia's core markets, more efficient use of gas storage facilities and enhanced ability to benefit from new supply contracts. No Impairment: The resulting integrated gas system to be formed by the combination of Columbia's gas properties with those of NiSource will not be "so large as to impair (considering the state of the art and the area or region affected) the advantages of localized management, efficient operation, and the effectiveness of regulation." In this case, the separate corporate identity and current headquarters of each of Columbia's five natural gas public utility subsidiaries will be maintained. Further, following the Transaction, each of the Columbia and NiSource public utilities will remain subject to regulation as to rates, service, and other matters by the regulatory agencies in each of the states in which they provide public utility services. 4. Section 10(f) - State Laws Section 10(f) of the Act provides that: The Commission shall not approve any acquisition as to which an application is made under this section unless it appears to the satisfaction of the Commission that such State laws as may apply in respect to such acquisition have been complied with, except where the Commission finds that compliance with such State laws would be detrimental to the carrying out of the provisions of section 11. 15 U.S.C. Section 79k(f). As described in ITEM 4, the Applicants will comply with all applicable state laws related to the Transaction. ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS A. EXHIBITS -------- A-1 Amended and Restated Articles of Incorporation of NiSource dated as of May 13, 1998, as amended on April 14, 1999 and March 2, 2000. (Incorporated by reference to Exhibit 3 to the NiSource Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, and Exhibits 3.2 and 3.3 to the NiSource Annual Report on Form 10-K for the year ended December 31, 1999). A-2 Amended and Restated By-Laws of NiSource Inc. effective January 29, 2000. (Incorporated by reference to Exhibit 3.4 to the NiSource Annual Report on Form 10-K for the year ended December 31, 1999). A-3 Amended and Restated Certificate of Incorporation of Columbia effective January 16, 1998, as amended on June 1, 1999. (Incorporated by reference to Exhibit 3-A to Columbia Gas System, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 1-1098), and Exhibit 3-D to Columbia's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (as corrected in Exhibit 4-A-3 to Columbia's Registration Statement on Form S-8, filed with the Commission on June 16, 1999 (File No. 333-80797)), and 45 Exhibit 3-D to Columbia's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999). A-4 Amended and Restated By-Laws of Columbia dated as of February 22, 2000. (Incorporated by reference to Exhibit 3-D to the Columbia Annual Report on Form 10-K for the year ended December 31, 1999). A-5 Articles of Incorporation of New NiSource. (See Exhibit 3.3 to Exhibit C hereto). A-6 By-Laws of New NiSource. (Previously filed). B-1 Agreement and Plan of Merger between Columbia, NiSource, New NiSource, Parent Acquisition, Company Acquisition and NiSource Finance Corp. dated as of February 27, 2000, as amended and restated as of March 31, 2000. (Incorporated by reference to Exhibit 2.1 to the NiSource Current Report on Form 8-K dated March 31, 2000). B-2 Credit Agreement and related documentation. (To be filed by amendment). C Registration Statement of New NiSource and NiSource on Form S-4 (including joint proxy statement of NiSource and Columbia). (Filed with the Commission on April 3, 2000, File No. 333-33896 and incorporated by reference herein). C-1 Amendment No. 1 to Registration Statement of New NiSource and NiSource on Form S-4 (including joint proxy statement of NiSource and Columbia.) (Filed with the Commission on April 24, 2000, File No. 333-33896 and incorporated by reference herein). D-1 Application to the FERC under the Federal Power Act. (Previously filed). D-2 Order of the FERC. (To be filed by amendment). D-3 Application to the VSCC. (Included as Exhibit G to Exhibit D-1). D-4 Order of the VSCC. (To be filed by amendment). D-5 Application to the PPUC. (Included as Exhibit G to Exhibit D-1). D-6 Order of the PPUC. (To be filed by amendment). D-7 Application to the KPSC (Filed herewith). D-8 Order of the KPSC. (Filed herewith). D-9 Application to the MPUC. (Previously filed). D-10 Order of the MPUC. (Filed herewith). D-11 Application to the NHPUC (Previously filed). D-12 Order of the NHPUC (Filed herewith). D-13 Application to the FCC. (To be filed by amendment) D-14 Order of the FCC. (To be filed by amendment). D-15 Letter of the IURC. (Filed herewith). 46 D-16 Letter of the PUCO. (Filed herewith). D-17 Letter of the MPSC. (Filed herewith). D-18 Letter of the MDTE. (Filed herewith). E-1 Map of service territories of subsidiaries of NiSource and Columbia and common pipelines. (To be filed by amendment). E-2 Corporate Organization Chart of companies after merger. (To be filed by amendment). E-2(a) Merger Structure Diagram. (To be filed by amendment). F Opinions of Counsel. (To be filed by amendment). G-1 Annual Report of NiSource on Form 10-K for the year ended December 31, 1999. (Filed with the Commission on March 30, 2000, File No. 1-9776 and incorporated by reference herein). G-2 Annual Report of Columbia on Form 10-K for the year ended December 31, 1999. (Filed with the Commission on March 2, 2000, File No. 1-1098 and incorporated by reference herein), as amended by the Amended Annual Report on Form 10-K/A (Filed with the Commission on March 3, 2000, File No. 1-1098 and incorporated by reference herein). G-3 Form U5S of Columbia for the year ended December 31, 1999. (Filed with the Commission on April 28, 2000, File No. 1-1098 and incorporated by reference herein). G-4 Opinion of Credit Suisse First Boston Corporation. (Included as Annex III to Exhibit C). G-5 Opinion of Morgan Stanley & Co. Incorporated. (Included as Annex IV to Exhibit C-1). G-6 Opinion of Salomon Smith Barney Inc. (Included as Annex V to Exhibit C-1). G-7 Opinion of Morgan Stanley & Co. Incorporated (Incorporated by reference to Exhibit 99(a) to the Columbia Current Report on Form 8-K dated April 24, 2000). G-8 Opinion of Salomon Smith Barney Inc. (Incorporated by reference to Exhibit 99(b) to the Columbia Current Report on Form 8-K dated April 24, 2000). H Proposed Form of Notice. (Filed herewith). I Electric Divestiture Study of Northern Indiana. (To be filed by amendment). B. FINANCIAL STATEMENTS -------------------- FS-1 New NiSource Unaudited Pro Forma Combined Condensed Consolidated Balance Sheet as of December 31, 1999. (Included in Exhibit C). FS-2 New NiSource Unaudited Pro Forma Combined Condensed Consolidated Statement of Income from Continuing Operations for the twelve months ended December 31, 1999. (Included in Exhibit C). FS-3 Notes to New NiSource Unaudited Pro Forma Condensed Consolidated Financial Statements. (Included in Exhibit C). 47 FS-4 NiSource Consolidated Balance Sheet as of December 31, 1999. (Included in Exhibit G-1). FS-5 NiSource Consolidated Statement of Income for the twelve months ended December 31, 1999. (Included in Exhibit G-1). FS-6 Columbia Consolidated Balance Sheet as of December 31, 1999. (Included in Exhibit G-2). FS-7 Columbia Consolidated Statement of Income for the twelve months ended December 31, 1999. (Included in Exhibit G-2). 48 SIGNATURES Pursuant to the requirements of the Public Utility Holding Company Act of 1935, as amended, each of the undersigned companies has duly caused this Amendment filed herein to be signed on its behalf by the undersigned thereunto duly authorized. NISOURCE INC. /s/ Gary L. Neale --------------------------------------- Name: Gary L. Neale Title: Chairman, President and Chief Executive Officer NEW NISOURCE INC. /s/ Gary L. Neale --------------------------------------- Name: Gary L. Neale Title: Chairman, President and Chief Executive Officer Date: July 11, 2000 49 EX-99 2 0002.txt EXHIBIT D-7 EXHIBIT D-7 COMMONWEALTH OF KENTUCKY BEFORE THE PUBLIC SERVICE COMMISSION IN THE MATTER OF: JOINT APPLICATION OF NISOURCE INC., NEW ) NISOURCE INC., COLUMBIA ENERGY GROUP AND ) CASE NO. 2000-129 COLUMBIA GAS OF KENTUCKY, INC. FOR ) APPROVAL OF A MERGER. ========================================== JOINT APPLICATION ========================================== NiSource Inc. ("NiSource"), New NiSource Inc. ("New NiSource"), Columbia Energy Group ("Columbia Energy") and Columbia Gas of Kentucky, Inc. ("Columbia Gas of Kentucky") (collectively referred to as "Applicants") hereby request that the Public Service Commission of Kentucky ("Commission") approve a transaction that will result in the transfer of ownership and control of Columbia Energy and Columbia Gas of Kentucky all in accordance with the terms of the Agreement and Plan of Merger Between Columbia Energy Group and NiSource Inc., dated February 27, 2000 as amended and restated on March 31, 2000 ("the Agreement"). A copy of the Agreement is attached hereto as Attachment A. This Joint Application is filed with the Commission pursuant to Kentucky Revised Statutes ss. 278.020(4) and (5). I. APPLICANTS 1. NiSource is a corporation organized under the laws of the state of Indiana. The post office address for NiSource is 801 East 86th Avenue, Merrillville, IN 46410. A certified copy of NiSource's Certificate of Incorporation and all amendments thereto is attached hereto as Attachment B. NiSource is an energy and utility-based holding company that provides natural gas, electricity and water to the public for residential, commercial and industrial uses in the Midwest and Northeast United States. NiSource also markets utility services and customer-focused resource solutions along a corridor stretching from Texas to Maine. NiSource has five energy utility subsidiaries: Northern Indiana Public Service Company, Kokomo Gas and Fuel Company and Northern Indiana Fuel and Light Company, Inc., all of which serve customers in Indiana; Bay State Gas Company serving natural gas customers in Massachusetts; and Northern Utilities, Inc. serving natural gas customers in New Hampshire and Maine. NiSource is a public utility holding company, but it is currently exempt from registration with the United States Securities and Exchange Commission ("SEC") under Section 3(a)(1) of the Public Utility Holding Company Act of 1935 ("the 1935 Act") pursuant to an order dated February 10, 1999. This order exempts NiSource from most of the provisions of the 1935 Act. Neither NiSource nor any of its direct or indirect subsidiaries is a utility regulated by the Commission pursuant to KRS ss. 278.010(3). 2. New NiSource is a corporation organized under the laws of the state of Delaware. The post office address for New NiSource is 801 East 86th Avenue, Merrillville, IN 46410. A certified copy of New NiSource's Certificate of Incorporation and all amendments thereto is attached hereto as Attachment C. New NiSource was organized as a wholly-owned subsidiary of NiSource. Following completion of the merger, New NiSource will register as a holding company under the 1935 Act. New NiSource is not a utility regulated by the Commission pursuant to KRS ss. 278.010(3). 2 3. Columbia Energy (formerly known as The Columbia Gas System, Inc.) is a corporation organized under the laws of the state of Delaware. The post office address for Columbia Energy is 13880 Dulles Corner Lane, Herndon, VA 20171-4600. A certified copy of Columbia Energy's Restated Certificate of Incorporation and all amendments thereto is attached hereto as Attachment D. Columbia Energy's operating companies engage in all phases of the natural gas business including exploration and production, transmission, storage and distribution, as well as retail energy marketing, propane and petroleum product sales, and electric power generation. In addition to Columbia Gas of Kentucky, Columbia Energy's natural gas distribution subsidiaries serve customers in Maryland, Ohio, Pennsylvania and Virginia. Columbia Energy is a holding company registered under the 1935 Act and is subject to all regulatory requirements applicable to such companies under the 1935 Act. Columbia Energy is not a utility regulated by the Commission pursuant to KRS ss. 278.010(3). 4. Columbia Gas of Kentucky is a corporation organized under the laws of the Commonwealth of Kentucky. The post office address for Columbia Gas of Kentucky is 2001 Mercer Road, P.O. Box 14241, Lexington, KY 40512-4241. A certified copy of Columbia Gas of Kentucky's Articles of Incorporation and all amendments thereto is attached hereto as Attachment E. Columbia Gas of Kentucky is a utility regulated by the Commission under KRS ss. 278.010(3), and presently serves over 141,000 customers in 31 Kentucky counties. 5. The current organizational structure of both NiSource and Columbia Energy is depicted in the chart attached hereto as Attachment F. 3 II. THE TRANSACTION 6. On February 27, 2000, the Boards of Directors of NiSource and Columbia Energy held meetings and each approved the Agreement. The Agreement was amended and restated on March 31, 2000. The Agreement provides for a business combination of NiSource and Columbia Energy involving the creation of a new holding company by NiSource, currently named New NiSource. New NiSource has formed two subsidiaries, Parent Acquisition Corporation and Company Acquisition Corporation. Under the Agreement, Parent Acquisition Corporation and Company Acquisition Corporation will be merged with and into NiSource and Columbia Energy, respectively. After the merger, NiSource and Columbia Energy will become wholly owned subsidiaries of New NiSource. Immediately after these mergers, NiSource will merge into New NiSource. New NiSource will then change its name to "NiSource Inc." and serve as a holding company for Columbia Energy and the current subsidiaries of NiSource. This post-merger corporate structure is depicted in the chart attached hereto as Attachment G. An alternative structure is described in paragraph 9 of this Joint Application. Under either structure, Columbia Gas of Kentucky will remain a wholly owned subsidiary of Columbia Energy, and will continue to be headquartered in Lexington, Kentucky. 7. In consideration of the merger, and with the approval of a majority of NiSource's shareholders, Columbia Energy shareholders will receive, for each Columbia Energy share of common stock, $70 in cash plus a $2.60 face value SAILSSM (a unit consisting of a zero coupon debt security with a forward equity contract). In lieu of the cash and SAILSSM, subject to the terms and limitations set forth in the Agreement, Columbia Energy shareholders may elect to receive New NiSource stock in a tax-free exchange, for up to thirty percent of the outstanding Columbia Energy shares. If the number of shares for which such an election is made exceeds thirty percent, the number of shares to be exchanged 4 for each electing shareholder shall be prorated. Under this common stock alternative, each Columbia Energy share will be exchanged for $74 in New NiSource stock, subject to a collar, such that if the average NiSource share price during the thirty days prior to closing of the transaction is greater than $16.50, Columbia Energy shareholders will receive shares in New NiSource valued at $74 for each Columbia Energy share. If the average NiSource share price during the thirty days prior to closing of the transaction is $16.50 or less, Columbia Energy shareholders will receive 4.4848 shares of New NiSource stock for each Columbia Energy share. If Columbia Energy shareholders do not make stock elections for at least ten percent of the outstanding Columbia Energy common shares, then no Columbia Energy shares will be converted into New NiSource stock, and all Columbia Energy shares will be converted into the cash and SAILSSM consideration. 8. Upon consummation of the merger, Columbia Gas of Kentucky will remain a wholly owned subsidiary of Columbia Energy. Columbia Energy will be a wholly owned subsidiary of New NiSource, which the Applicants expect will become a registered holding company under the 1935 Act.. Columbia Gas of Kentucky and Columbia Energy's other operating subsidiaries will retain their separate corporate identities, assets and liabilities, franchises and certificates of public convenience and necessity. 9. The shareholders of NiSource will vote on whether to approve the merger. Their favorable vote in this regard is necessary in order for the preferred structure of the transaction to proceed, whereby New NiSource stock will be used as partial consideration for the merger. If Columbia Energy's shareholders approve the transaction, but NiSource's shareholders do not vote in favor of the transaction, the transaction automatically will be restructured so that Columbia Energy will become a wholly owned subsidiary of NiSource. In that event, Columbia Energy shareholders will receive $70 in cash plus a $3.02 face 5 value SAILSSM unit of NiSource, with no option for Columbia shareholders to receive New NiSource stock. Under this alternative structure as well, Columbia Gas of Kentucky will remain a wholly owned subsidiary of Columbia Energy. This post-merger corporate structure is depicted on the chart attached hereto as Attachment H. Under this alternative structure NiSource will register as a public utility holding company under the 1935 Act. Columbia Gas of Kentucky and Columbia Energy's other operating subsidiaries will retain their separate corporate identities, assets and liabilities, franchises and certificates of public convenience and necessity. 10. The merger will result in a change in the ultimate corporate ownership of Columbia Gas of Kentucky, but will not change the manner in which Columbia provides gas sales and distribution service within the Commonwealth. The merger will be transparent to Columbia Gas of Kentucky's customers. III. STATUTORY CRITERIA FOR APPROVAL OF THE MERGER 11. KRS ss.278.020(4) provides that: No person shall acquire or transfer ownership of, or control, or the right to control, any utility under the jurisdiction of the commission by sale of assets, transfer of stock, or otherwise, or abandon the same, without prior approval by the commission. The commission shall grant its approval if the person acquiring the utility has the financial, technical, and managerial abilities to provide reasonable service. KRS ss. 278.020(5) further provides, in pertinent part, that, "[t]he commission shall approve any proposed acquisition when it finds that the same is to be made in accordance with law, for a proper purpose and is consistent with the public interest." As demonstrated below, the proposed merger between NiSource and Columbia Energy satisfies these statutory criteria. 6 A. THE MERGER IS IN ACCORDANCE WITH LAW 12. The merger will close only after NiSource and Columbia Energy have obtained all necessary state and federal regulatory approvals, and the Agreement will be consummated in a manner that is consistent with all applicable laws. 13. Columbia Energy's shareholders must approve the merger. NiSource's shareholders will also vote on the merger. 14. Applicants also must receive approval of the merger from the Federal Energy Regulatory Commission ("FERC"). Section 203(a) of the Federal Power Act requires FERC authorization before a public utility may dispose of its jurisdictional facilities, merge or consolidate its jurisdictional facilities with the jurisdictional facilities of another person or purchase any security of another public utility. Under section 203(a), the FERC asserts jurisdiction over transactions involving a change in control over public utility facilities which are subject to the FERC's jurisdiction under the Federal Power Act. Under section 203(a), the FERC must approve a proposed merger if it finds that the merger will be consistent with the public interest. In making this determination, FERC will generally take account of three factors: (1) the effect on competition; (2) the effect on rates; and (3) the effect on regulation. NiSource and Columbia Energy filed the necessary application with the FERC on April 10, 2000. 15. Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the merger cannot be completed until NiSource and Columbia Energy have submitted certain information to the Antitrust Division of the Department of Justice and the Federal Trade Commission, and have satisfied the statutory waiting period requirements. In connection with NiSource's 1999 unconsummated tender offer for the common stock of Columbia Energy, NiSource made the necessary submissions under the Hart-Scott-Rodino Act, and the applicable waiting period expired on 7 August 4, 1999, without NiSource receiving any request to provide additional information. However, NiSource's clearance under the Hart-Scott-Rodino Act to complete an acquisition of Columbia Energy will remain valid for only one year from the expiration of the waiting period. Because the merger is not expected to be completed until after that date, NiSource and Columbia Energy will need to submit new information to the Department of Justice and the Federal Trade Commission, and a new Hart-Scott-Rodino Act waiting period will begin. The expiration or earlier termination of the waiting period will not prevent the Department of Justice or the Federal Trade Commission from challenging the merger on antitrust grounds. 16. The merger must also be approved by the SEC under the 1935 Act. Under Section 9(a)(2) of the 1935 Act it is unlawful for a person that is an affiliate of a public utility company to become the affiliate of another public utility company unless the acquisition has been approved by the SEC under the standards of Section 10 of the 1935 Act. NiSource's acquisition of Columbia Energy results in the indirect acquisition of affiliate interests in Columbia Energy's public utility companies, including Columbia Gas of Kentucky. In reviewing a proposed acquisition under Section 10 of the 1935 Act, the SEC considers generally the public interest and the interest of investors and consumers. In particular, the SEC will consider the potential anticompetitive effects of the transaction, the adequacy of the consideration, and the effect of the acquisition upon the capital structure of the resulting holding company system. The SEC also considers whether the acquisition tends toward the economical and efficient development of an integrated public-utility system. The SEC may not approve an acquisition unless it is satisfied that the transaction is in compliance with all applicable state laws. As a result of the merger, New NiSource (or under the alternative structure of the merger, NiSource) will register as a public utility 8 holding company under section 5 of the 1935 Act. NiSource and New NiSource filed an amended application with the SEC on April 14, 2000. 17. The Federal Communications Commission ("FCC") must also approve the transfer of control of the radio licenses currently held by: (a) Columbia Energy and NiSource subsidiaries to New NiSource in the preferred structure of the transaction, or; (b) Columbia Energy subsidiaries to NiSource in the alternative structure of the transaction. The merger transaction will change the control of said licenses, and Section 310(d) of the Communications Act of 1934, as amended, requires the FCC's consent to that transfer of control. In order to transfer the licenses, the FCC must find that the transfer serves the public interest, convenience and necessity. 18. While the merger will change the identity of the corporation ultimately owning Columbia Gas of Kentucky, it will not impair or adversely affect the manner in which Columbia Gas of Kentucky provides service to customers. Potential improvements in service are outlined in this Joint Application. The merger will not diminish the Commission's regulatory authority over Columbia Gas of Kentucky in any way. Accordingly, Columbia Gas of Kentucky will continue to provide service under the tariffs it has on file with the Commission, and will continue to be governed by all applicable rules and regulations of the Commission. B. THE MERGER IS FOR A PROPER PURPOSE 19. The purpose of the merger is to create a combined enterprise well positioned to serve the energy needs of the Commonwealth of Kentucky, as well as millions of other customers in the Midwest and Northeast United States, in an increasingly competitive energy industry. The combination of NiSource and Columbia Energy establishes a powerful platform for growth with access to thirty percent of the country's population and forty percent of the nation's energy 9 consumption in growing markets. The combined company will have over 3.6 million gas and electric customers located in nine states. The combined company will be a super-regional energy company with complementary market areas and no asset overlap. (See the map attached hereto as Attachment I.) It will be the largest gas company east of the Rocky Mountains based on number of customers. It will be the second largest natural gas company in the United States. The combined company will have the nation's second largest volume of gas throughput with 911 million cubic feet per day and have the largest gas storage assets with over 700 billion cubic feet of storage capacity. 20. The merger is one of convergence, driven by the Applicants' shared vision of the future of the energy industry. The Applicants recognize that the energy industry is in an era of constant change, and have concluded that consolidation is beneficial for the continued and increased success of NiSource and Columbia Energy. The combined company will have three key elements necessary to succeed in the competitive energy marketplace: (1) increased size, scope and scale; (2) access to strategic geographic markets; and (3) broad range of complementary assets. Columbia Gas of Kentucky will benefit by sharing in the opportunities created by the merger and will continue to be a regulated utility with a focus on serving customers in Kentucky and developing the economy of Kentucky. The merger is therefore for a proper purpose. C. THE MERGER IS CONSISTENT WITH THE PUBLIC INTEREST 21. The merger will have no detrimental impact on Kentucky or Kentucky consumers because it is a parent company merger, accomplished through a stock transfer, that does not contemplate changes to Columbia Gas of Kentucky's operations. Thus, the merger will not result in any change to the rates, terms, or conditions of Columbia Gas of Kentucky's services, the quality of those 10 services, or the Commission's regulatory authority over Columbia Gas of Kentucky. 22. Columbia Gas of Kentucky's headquarters will remain in Lexington, and key management personnel will be retained. Decision-making authority for Columbia Gas of Kentucky will continue to reside with the Lexington management. Local operations and the employee workforce will be retained, in accordance with Columbia Gas of Kentucky's plans for operations and workforce before the announcement of the merger. Columbia Gas of Kentucky's collective bargaining agreement will be honored. Thus, the merger is not expected to have any material impact on employment. 23. The merger will permit Columbia Gas of Kentucky to continue, and to expand, its efforts to provide high-quality, reliable and economical service in an efficient manner. 24. Scale and geography are critical to success in the evolving competitive energy market. The combined company will have the size and scope necessary to compete, and the merger eventually will permit the Applicants to achieve further economies of scale in utility operations, product development, advertising, purchasing and corporate services. In addition, the combined company will enjoy a substantially larger and more diverse customer base, thereby adding stability from both an economic and operational standpoint. 25. Columbia Gas of Kentucky intends to continue to provide charitable contributions and community support within its service area at levels substantially comparable to the levels of charitable contributions and community support provided before the merger. 26. Columbia Gas of Kentucky will continue to support economic development within its service area and throughout the Commonwealth. Columbia Gas of 11 Kentucky currently works closely with state and local economic development agencies to attract or retain business and jobs in the Commonwealth, and this working relationship will continue after the merger. 27. NiSource has no operating company in Kentucky, and Columbia Gas of Kentucky is not being combined with any NiSource operating affiliate. This merger of geographically diverse entities thus has no negative impact on competition. More importantly, however, the combined company is committed to attempting to initiate Columbia Gas of Kentucky's Customer ChoiceSM1 Program, as requested in Case No. 99-165 currently pending before the Commission. The combined company is committed to working with marketers as trade allies to deliver enhanced benefits of competition to Kentucky consumers. 28. The merger is driven by a convergence strategy rather than by cost synergies, and is not expected to produce significant savings at the operating levels. Net savings, if any, that subsequently may be achieved at the corporate level by the elimination of redundancies ultimately will be reflected in the service company charges distributed among the operating companies, and will be considered when Columbia Gas of Kentucky's base rates are reviewed pursuant to any rate review scheduled by the Commission as part of its Orders in Case No. 99-165. D. THE COMBINED COMPANY HAS THE FINANCIAL ABILITY TO PROVIDE REASONABLE SERVICE 29. Columbia Gas of Kentucky will not issue any equity or indebtedness to effect, or as a result of, the merger. - ------------------------ 1 Customer CHOICESM is a service mark of Columbia Gas of Ohio, Inc. and its use has been licensed by Columbia Gas of Kentucky, Inc. CHOICE(R)is a registered service mark of Columbia Gas of Ohio, Inc. and its use has also been licensed by Columbia Gas of Kentucky, Inc. 12 30. Following the merger, Columbia Gas of Kentucky will continue to benefit from NiSource's policy of attaining and maintaining investment grade credit ratings for its subsidiaries. Columbia Gas of Kentucky will also continue to benefit from NiSource's management and operational policies to minimize costs while maintaining safe, reliable customer service, as well as NiSource's policy to make capital available at favorable terms to fund Columbia Gas of Kentucky's total capital requirements as necessary. 31. The combined company's significantly larger market capitalization will permit the company to weather adverse economic conditions and to better absorb risks. The increased scale of the combined company should, over time, lead to more efficient operations. 32. Following the merger, the combined company expects to maintain a capital structure consistent with the capital structures of utilities of similar size. New NiSource and its subsidiaries are to expected to remain investment grade, with long-term debt rated BBB or better. 33. The merger will allow the combined company to participate in the growing energy convergence marketplace by exploiting arbitrage opportunities that may exist among natural gas, coal and electricity. Further opportunities may be available given the differences in weather, time, geographic location of customers, and physical location of fuel supplies and gas storage across the Texas-to-Maine corridor. These opportunities will exist as the combined company leverages its ownership, control and optimization of related, strategically positioned physical assets. E. THE COMBINED COMPANY HAS THE TECHNICAL ABILITY TO PROVIDE REASONABLE SERVICE 34. Both NiSource and Columbia Energy are well respected in the utility industry for their technical expertise. The merger will enable the combined company to leverage strong utility brands while offering customers access to a 13 comprehensive choice of products and services, a product mix broader than either company alone could offer and one competitive with the largest and most recognized diversified energy companies in the country. The merged company will implement the best practices of each company, resulting in a more efficient merged company that will provide better service to all customers. 35. The combined base of electric and gas assets resulting from the merger will enhance the marketing and delivery of complementary energy products and services through assured energy supplies, broad knowledge of a wide range of energy products, even greater credibility with customers and opportunities to coordinate business activities of each company's energy marketing ventures. 36. The merger creates potential for lower gas costs. The merger positions the combined company to take advantage of economies and efficiencies over time in areas of coordinated gas supply, optimized use of transportation capacity, ability to take advantage of geographic diversity between NiSource's and Columbia Energy's core markets, more efficient use of gas storage facilities, and enhanced ability to benefit from new supply projects.2 These enhancements - ------------------------ 2 The proposed merger will not impact Columbia Gas of Kentucky's ability to continue to provide reliable natural gas supplies to its customers. However, the merger will create the opportunity to acquire these supplies at lower costs. The merger positions the combined company to take advantage of economies and efficiencies over time in areas of coordinated gas supply, optimized use of transportation capacity, ability to take advantage of geographic diversity between NiSource's and Columbia Energy's core markets, more efficient use of gas storage facilities, and enhanced ability to benefit from new supply projects. NiSource and Columbia Gas of Kentucky currently procure gas and services from common industry providers. Combining the separate transactional activities of the two companies should lead to greater gas purchase efficiency. For example, over ninety-six percent (96%) of Columbia Gas of Kentucky's gas supply is obtained from the onshore and offshore Texas and Louisana supply basins. The current NiSource affiliates currently purchase over fifty percent (50%) of their gas supply from the same supply basins. The combined company will have a larger presence in this competitive supply basin, and should be able to procure supplies at prices lower than the prices that either company could obtain acting separately. The opportunity will exist for the combined company to dispatch unutilized portions of their portfolio assets to nationally recognized common trading centers - market hubs. Through this common, industry-recognized practice, the combined company will be able to introduce supply diversity to customers at lower costs as they will now control sufficient assets to arrange this practice without acquiring the service from independent marketers. The combined company's customers are located in geographically diverse regions of the country. Opportunities may exist for the combined company to further optimize contracted and owned storage and transportation assets and potentially eliminate duplication of transportation, storage and supply services. The transactional economies of scale and the potential elimination of duplicative portfolio assets may result in gas cost savings that will flow to all the sales customers of the operating subsidiaries, and will help to ensure that Columbia Gas of Kentucky's customers continue to see competitive gas costs in the rapidly changing gas supply market. Any such gas cost savings will be reflected in Columbia's future Gas Cost Adjustment filings. 14 and associated savings will flow to all the sales customers of the operating subsidiaries, and will help to ensure that Columbia Gas of Kentucky's customers continue to see competitive gas costs in the rapidly changing gas supply market. F. THE COMBINED COMPANY HAS THE MANAGERIAL ABILITY TO PROVIDE REASONABLE SERVICE 37. NiSource and Columbia Energy will be able to draw upon the expertise and abilities of a larger and more diverse of management pool and employee pool, and should be better able to attract and retain the most qualified employees. The employees of the combined company also should benefit from new career opportunities in the expanded organization to lead the companies forward in the increasingly competitive energy industry. IV. TESTIMONY 38. The following witnesses are filing testimony in support of this Joint Application: Mark T. Maassel, Vice President, Regulatory and Government Policy of NiSource; Joseph W. Kelly, Vice President and Chief Operating Officer of Columbia Gas of Kentucky; and, Jamie Welch, Director, Global Energy and Project Finance Group, Credit Suisse First Boston. V. SERVICE ADDRESSES 39. Correspondence, notices, pleadings and Commission Orders relating to this Joint Application should be served on the Applicants as follows: 15 For NiSource: ------------- Hon. Mark T. Maassel 801 East 86th Avenue Merrillville, IN 46410 Hon. Peter V. Fazio, Jr. Hon. Carrie J. Hightman Hon. Allan Horwich Schiff Hardin & Waite 6600 Sears Tower Chicago, IL 60606 For New NiSource: ----------------- Hon. Mark T. Maassel 801 East 86th Avenue Merrillville, IN 46410 Hon. Peter V. Fazio, Jr. Hon. Carrie J. Hightman Hon. Allan Horwich Schiff Hardin & Waite 6600 Sears Tower Chicago, IL 60606 For Columbia Energy: -------------------- Hon. Sharon B. Heaton Hon. Benga L. Farina Columbia Energy Group 13880 Dulles Corner Lane Herndon, VA 20171-4600 For Columbia Gas of Kentucky: ----------------------------- Mr. Joseph W. Kelly Columbia Gas of Kentucky, Inc. 2001 Mercer Road P.O. Box 14241, Lexington, KY 40512-4241 16 Hon. Stephen B. Seiple Columbia Gas of Kentucky, Inc. 200 Civic Center Drive P.O. Box 117 Columbus, OH 43216-0117 Hon. Richard S. Taylor 315 High Street Frankfort, KY 40601 VI. CONCLUSION 40. The proposed merger is to be made in accordance with law, is for a proper purpose, and is consistent with the public interest. Furthermore, the combined company will have the financial, technical and managerial abilities to provide reasonable service. Therefore, the Commission should approve the proposed merger pursuant to KRS ss. 278.020(4) and (5). WHEREFORE, NiSource Inc., New NiSource Inc., the Columbia Energy Group and Columbia Gas of Kentucky, Inc. respectfully request that the Public Service Commission of the Commonwealth of Kentucky: 1. Issue an Order approving the merger, and finding that the merger is in accordance with the law, is for a proper purpose and is consistent with the public interest pursuant to KRS ss. 278.020(5); 2. Issue an Order approving the merger, and finding that upon consummation of the merger Columbia Gas of Kentucky will retain the technical, financial and managerial ability to provide reasonable service in the Commonwealth pursuant to KRS ss. 278.020(4); 3. Issue an Order approving the merger as described in Section III of this Joint Application, in both its preferred form as described in paragraphs 6-8, and the alternative form described in paragraph 9 herein; 17 4. Issue an Order granting the Applicants all additional authorizations and relief required for the consummation of the merger; and, 5. Issue an Order granting the Applicants all other relief to which they may be entitled. Dated at Columbus, Ohio, this 1st day of May, 2000. Respectfully submitted, COLUMBIA GAS OF KENTUCKY, INC. By: ------------------------------------ Stephen B. Seiple Senior Attorney Andrew J. Sonderman, General Counsel Stephen B. Seiple, Senior Attorney 200 Civic Center Drive P.O. Box 117 Columbus, Ohio 43216-0117 Telephone: (614) 460-4648 Fax: (614) 460-4648 Email: sseiple@ceg.com Richard S. Taylor 315 High Street Frankfort, Kentucky 40601 Telephone: (502) 223-8967 Fax: (502) 226-6383 Attorneys for NEW NISOURCE INC. NISOURCE INC. THE COLUMBIA ENERGY GROUP COLUMBIA GAS OF KENTUCKY, INC. 18 EX-99 3 0003.txt EXHIBIT D-8 Exhibit D-8 COMMONWEALTH OF KENTUCKY BEFORE THE PUBLIC SERVICE COMMISSION In the Matter of: JOINT APPLICATION OF NISOURCE INC., ) NEW NISOURCE INC., COLUMBIA ENERGY ) GROUP AND COLUMBIA GAS OF ) CASE NO. 2000-129 KENTUCKY FOR APPROVAL OF A MERGER ) I N D E X --------- PAGE OVERVIEW OF THE TRANSACTION....................................................3 STATUTORY STANDARD FOR MERGER..................................................4 MERGER BENEFITS/SYNERGIES......................................................5 RATE CAP COMMITMENT............................................................8 FINANCIAL ISSUES..............................................................10 TRANSACTION COSTS.............................................................12 MOST FAVORED NATIONS CLAUSE...................................................13 MERGER COMMITMENTS............................................................14 REGULATORY CONCERNS...........................................................15 REPORTING ISSUES..............................................................16 GAS SUPPLY BENEFITS OF THE MERGER.............................................17 BENCHMARKING AND BEST PRACTICES...............................................19 SERVICE QUALITY...............................................................20 CUSTOMER SERVICE ISSUES.......................................................21 CREDITWORTHINESS POLICY.......................................................22 SUMMARY OF FINDINGS...........................................................23 ORDERING PARAGRAPHS...........................................................26 APPENDIX A APPENDIX B COMMONWEALTH OF KENTUCKY BEFORE THE PUBLIC SERVICE COMMISSION In the Matter of: JOINT APPLICATION OF NISOURCE INC., ) NEW NISOURCE INC., COLUMBIA ENERGY ) GROUP AND COLUMBIA GAS OF ) CASE NO. 2000-129 KENTUCKY FOR APPROVAL OF A MERGER ) O R D E R --------- On May 1, 2000, NiSource Inc. ("NiSource"), New NiSource Inc. ("New NiSource"), Columbia Energy Group ("Columbia Energy"), and Columbia Gas of Kentucky ("Columbia of Kentucky") (collectively "Applicants") filed a joint application pursuant to KRS 278.020(4) and (5) for approval of the transfer of ownership and control of Columbia Energy and its subsidiaries, including Columbia of Kentucky, to New NiSource in accordance with the terms of the Agreement and Plan of Merger Between Columbia Energy and NiSource, dated February 27, 2000 as amended and restated on March 31, 2000 ("Merger Agreement"). NiSource is an energy and utility-based holding company incorporated in Indiana and exempt from the registration requirements of the Public Utility Holding Company Act of 1935 ("PUHCA"). Through its utility subsidiaries, NiSource provides natural gas, electric, and water service to the public in Indiana and provides natural gas service in Maine, Massachusetts, and New Hampshire. NiSource also markets utility services and customer-focused resource solutions along a corridor stretching from Texas to Maine. New NiSource, a wholly-owned subsidiary of NiSource, is a new corporation organized under the laws of the state of Delaware for the purpose of effectuating the proposed merger. Columbia Energy is a utility holding company incorporated in Delaware and registered under PUHCA. Its operating companies engage in the exploration, production, transmission, storage, and distribution of natural gas, as well as retail energy marketing, propane and petroleum product sales, and electric power generation. Columbia of Kentucky, a wholly-owned subsidiary of Columbia Energy, is a Kentucky corporation. It is engaged in the business of selling and distributing natural gas to approximately 141,000 retail customers within the Commonwealth of Kentucky and is regulated by the Commission as a utility under KRS 278.010(3)(b). On May 5, 2000, the Commission established a procedural schedule designed to allow for an investigation of the merits of the merger and the issuance of a final Order within the 60-day time limit prescribed in KRS 278.020(5). The procedural schedule provided for two rounds of discovery, an opportunity for intervenors to file testimony, a public hearing, and an opportunity to file post-hearing briefs. The Commission granted full intervention to the following: Attorney General's Office of Rate Intervention ("AG"); Stand Energy Corporation; Community Action Counsel for Lexington-Fayette, Bourbon, Harrison and Nicholas Counties, Inc.; and Paper, Allied-Industrial, Chemical and Energy Workers International Union, AFL-CIO CLC; PACE Local Union 5-372, United Steelworkers of America, AFL-CIO CLC, and Utility Workers Union of America, AFL-CIO (collectively, "Union Intervenors"). The Commission held a public hearing on June 8-9, 2000 at the Commission's offices in Frankfort, Kentucky. The parties filed post-hearing briefs on or before June 19, 2000. 2 OVERVIEW OF THE TRANSACTION --------------------------- The merger is intended to position the Applicants to succeed in the increasingly deregulated and competitive energy marketplace. The Applicants contend that their proposed combination is a benefit because of the opportunities for growth in the combined service area and the geographic diversity and differences in regional economic factors. The Applicants anticipate that the merger will produce significant savings, but maintain that merger savings cannot be quantified at this time. They contend, however, that the customers of Columbia of Kentucky, as well as the Commonwealth of Kentucky, will benefit from the merger through the commitments made in this proceeding and through the combined company's larger and stronger presence in the natural gas market. Under the terms of the Merger Agreement, NiSource will organize a new company, New NiSource, which will serve as the holding company for both Columbia Energy and NiSource after the completion of the transaction. Columbia Energy and NiSource will each be merged into newly formed acquisition subsidiaries of New NiSource, and each will become a wholly-owned subsidiary of New NiSource. NiSource will then merge into New NiSource. New NiSource will then change its name to "NiSource, Inc." and register as a holding company under PUHCA. Upon completion of the transaction, each shareholder of Columbia Energy will receive $70 in cash and a $2.60 face value SAILSsm for each share of Columbia Energy common stock. The SAILSsm is a zero coupon debt security with a forward equity contract. Alternatively, Columbia Energy's shareholders may decline the cash and SAILSsm and elect a tax-free exchange of their shares for New NiSource shares for up to 30 percent of the outstanding shares of Columbia Energy common stock. Under the share exchange, each share of Columbia Energy 3 will be exchanged for the lesser of $74 in New NiSource stock or 4.4848 shares of New NiSource stock, depending on the stock's price for 30 days prior to closing the transaction. NiSource shareholders will receive one share of New NiSource stock for each share of NiSource common stock that they own. To finance the cash portion of the purchase price, NiSource intends to sell $1 billion in non-core assets and has secured a firm commitment from Credit Suisse First Boston ("Credit Suisse") and Barclays Bank plc ("Barclays") for a bank facility up to $6 billion. Credit Suisse estimates the cash payments to Columbia Energy shareholders to be between $3.9 billion [assuming a 30 percent exchange for New NiSource stock] and $5 billion [assuming no exchange for New NiSource stock]. The number of Columbia Energy shares exchanged for New NiSource stock will determine the exact amount of the cash payments. STATUTORY STANDARD FOR MERGER ----------------------------- Under KRS 278.020(4), no person may acquire or transfer control of a utility until the Commission has determined that the acquirer has the financial, technical, and managerial abilities to provide reasonable service. In addition, under KRS 278.020(5), no individual may acquire control of a utility unless the Commission has determined that the acquisition is made in accordance with the law, for a proper purpose, and is consistent with the public interest. MERGER BENEFITS/SYNERGIES ------------------------- The Applicants have stressed that, unlike other mergers approved by this Commission, this is a merger of convergence and, therefore, will not produce 4 significant savings at the distribution company level.1 Because NiSource and Columbia Energy have no overlap in their service territories, they state that there will be no immediate cost savings attributable to the elimination of operational redundancies, which can be shared with ratepayers at this time.2 Rather, any such savings will be due to implementing a shared services program that will result in savings at the corporate service company level. However, the Applicants claim that these savings will occur over time, with the first year earnings after the merger expected to be dilutive.3 In an April 26, 2000 Analyst Presentation entitled, "Creating Value in the Energy Corridor," NiSource estimated the annual synergies that it expected to realize between 2001 and 2005 as a result of the merger. NiSource stated that these estimated realizable synergies are based on industry benchmarks and not on a detailed study of the operations of Columbia Energy.4 The AG contends that NiSource's analysis of estimated synergies represents a quantification of anticipated merger benefits. The AG argued that if a mechanism to share those quantified benefits is not made a condition of the merger, the principle of retroactive rate-making will preclude ratepayers from sharing in those benefits in the future. The AG further argued that although the Applicants have maintained that the ratepayers will not directly or indirectly pay for the acquisition fees, if the merger benefits are not considered until - ------------------------ 1 Application at 12. 2 Response to Item 7(a) of the Commission's May 22, 2000 Order. 3 Id., Response to Item 8. -- 4 Response to Item 75(a) of the Commission's May 10, 2000 Order. 5 2004, the ratepayers will have indirectly paid the acquisition fees through foregone savings.5 The Applicants' position is that there is uncertainty surrounding the synergies contained in their analysis, specifically in the timing and exact amounts of those synergies. The Applicants argued that if they are required to share those synergies, then the costs of achieving those synergies should also be shared.6 Further, they asserted that the appropriate time to review merger savings is in the rate case to be initiated in 2004 as part of the review of Columbia of Kentucky's Customer Choice Plan. The Commission does not agree with the Applicants' argument that sharing the merger savings with ratepayers should be deferred for 4 years because the savings are not quantified at this time and the merger will have a dilutive effect on earnings in the initial year. The savings quantified in the Analyst Presentation were characterized by NiSource as a reasonable estimate of the anticipated savings and they have been presented to financial analysts and lenders to demonstrate the feasibility of this merger.7 In other mergers approved by this Commission, preliminary estimates of net savings (i.e., gross merger savings less the costs to achieve the savings) were flowed through to customers in the initial years after the merger. In this case the Applicants have consistently objected to any immediate flow through of net savings. With regard to the dilutive effect on earnings in the first year after the merger, the Applicants indicated that net savings would be realized even in the first year after the merger if the amortization of the acquisition premium, the - ------------------------ 5 Post-Hearing Brief of the AG at 5 and 6. 6 Transcript of Evidence ("T.E."), Vol. 1, at 205. 7 Id. at 173. -- 6 costs to achieve the merger, and the change of control payments are not considered as an offset to savings.8 Columbia of Kentucky has committed that none of these costs will be borne by its customers. Consequently, it is inappropriate to argue that no savings should be passed on to consumers in the initial years following the merger. Therefore, the Commission finds that merger savings and the costs to achieve those savings should be captured for accounting purposes and deferred for future rate-making purposes to be considered in Columbia of Kentucky's next rate case. The Commission further finds that deferring consideration of merger savings until 2004 will result in ratepayers indirectly paying for the merger transaction fees through foregone merger savings. This result is not consistent with the Applicants' commitment to not pass the merger costs through to ratepayers. Recognizing the Applicants' inability to now project savings that they will commit to share with the ratepayers, the Commission finds that the Applicants should develop a mechanism to track the achieved merger savings and associated costs and a methodology to allocate a proportionate share of the savings and costs to Columbia of Kentucky. By November 30, 2000, Columbia of Kentucky should file with the Commission the tracking mechanism and the allocation methodology. Columbia of Kentucky should record these savings and costs in a deferred account that will be reviewed and considered in its next rate case. - ------------------------ 8 T.E., Vol. II, at 64 and Response to Hearing Information Request filed June 16, 2000. 7 RATE CAP COMMITMENT ------------------- The Applicants committed to cap Columbia of Kentucky's current base rates through October 31, 2004, asserting that this provides real value to ratepayers, rather than requiring an immediate sharing of potential, but unrealized, merger savings. Under the terms of the rate cap, Columbia of Kentucky would not propose to increase its base rates prior to October 31, 2004 unless it experienced an extraordinary change in circumstances, such as a change in tax rates significantly increasing its tax liability or a 7 percent annual rate of inflation sustained over a period of not less than 15 consecutive months.9 The Applicants selected this timeframe for the base rate cap to coincide with its 4-year pilot plan, approved in Case No.99-165, allowing customers to choose an alternative gas supplier.10 The Applicants asserted that since the Commission intends to review all aspects of Columbia of Kentucky's rates at the conclusion of the 4-year pilot, that review is the most efficient and timely means of ensuring that merger savings are properly identified and reflected in rates.11 The AG argued that the proposed rate cap is meaningless because Columbia of Kentucky's current rates which became effective in 1996 consistently produced rates of return that are well above those found reasonable by the Commission in recent years. The AG further argued that, under the terms proposed by the Applicants, the rate cap commitment is nothing more than a lock-in of over-earnings for Columbia of Kentucky and is therefore inconsistent with the - ------------------------ 9 Prepared Direct Testimony of Gary L. Neale at 11. 10 Case No. 99-165, The Tariff Filing of Columbia Gas of Kentucky, Inc. to Implement a Small Volume Gas Transportation Service, to Continue its Gas Cost Incentive Mechanisms, and to Continue its Customer Assistance Program, Order dated January 27, 2000. 11 Prepared Direct Testimony of Gary L. Neale at 11. 8 public interest.12 For this reason, the AG requests that an immediate examination of Columbia of Kentucky's rates should be a condition of the merger.13 While the Commission recognizes that this is a merger proceeding, not a rate case, the limited evidence on Columbia of Kentucky's recent earnings seems to indicate a trend of possible over-earning. For this reason a 4-year cap on Columbia of Kentucky's rates is not consistent with the public interest. However, the Commission also recognizes that its decisions in Case No. 99-165 could impact Columbia of Kentucky's future earnings, but that impact has not been quantified at this time. Considering these factors and the introduction later this year of the Customer Choice Plan, the Commission finds that an immediate review of Columbia of Kentucky's rates may not present an accurate assessment of its earnings and would therefore be premature. To better evaluate Columbia of Kentucky's earnings as impacted by the merger, as well as its Customer Choice Plan, the Commission finds that the merger will be in the public interest only if Columbia of Kentucky files a rate case by the earlier of 18 months after consummation of the merger or September 30, 2002. The rate case filing must include the statutory filing requirements as well as a cost-of-service study, an estimate of future net merger savings, and a mechanism to reflect on ratepayers' bills future merger savings and the net deferred merger savings. Since this rate case will include a cost-of-service study, this obviates the need for such a study by a Commission consultant in - ------------------------ 12 Post-Hearing Brief of the AG at 1-4. 13 Id. at 5. -- 9 conjunction with the review of the Customer Choice Plan in 2004. However, the Commission will still review the Customer Choice Plan and its impact on rates in 2004, as discussed in the January 27, 2000 Order in Case No.99-165. FINANCIAL ISSUES ---------------- The Applicants have made numerous commitments relating to financial issues. Due to the importance of maintaining a strong financial condition for Columbia of Kentucky, significant portions of Appendix A to this Order address financial issues. While there are narratives contained therein, the Commission finds that several of these significant issues warrant discussion here. NiSource, Columbia Energy, and Columbia of Kentucky, through various statements, have committed that Columbia of Kentucky ratepayers will incur no additional costs, liabilities, or obligations as a result of the acquisition. These commitments have been incorporated into the conditions in Appendix A. An issue of particular concern is "push down" accounting which would require Columbia of Kentucky to record a portion of the acquisition premium resulting from the excess paid by NiSource over the book value of the Columbia Energy stock. Applicants have not determined if the Securities and Exchange Commission ("SEC") will require the use of push down accounting of the actual amount of the acquisition premium.14 However, NiSource did estimate the acquisition premium to be somewhere between $3.5 to $4 billion.15 Considering the significant amount of the acquisition premium, the Commission strongly opposes the push down accounting treatment in this instance due to the potential - ------------------------ 14 Response to Items 49(c) and 49(d) of the Commission's May 10, 2000 Order. 15 T.E., Vol. I, at 190. 10 adverse financial impact on the ratepayers of Columbia of Kentucky. Furthermore, the acquisition premium results in an immediate and direct financial benefit to the shareholders of Columbia Energy stock, but results in no direct benefit to the customers of Columbia of Kentucky. According to the Applicants, SEC Staff Accounting Bulletin No. 54 requires, in some instances, the use of push down accounting in the financial statements that are filed with the SEC.16 In the future, if outside public financing is obtained by Columbia of Kentucky, then the SEC would require the use of push down accounting to the distribution company level.17 However, NiSource has committed that the acquisition premium paid for the Columbia Energy stock will not be pushed down to Columbia of Kentucky for rate-making18 and Commission reporting purposes.19 The Commission believes that this condition is essential to a finding that the merger is in the public interest. Therefore, this commitment has been restated in Appendix A. Included in Appendix A of this Order is the Applicants' commitment to adequately fund and maintain Columbia of Kentucky's transmission and distribution systems. This issue is further discussed in conjunction with the section on Customer Service Issues. Columbia of Kentucky is now a small portion of Columbia Energy and it will become an even smaller portion of the merged system. For this reason, the Commission is concerned that the capital needs of Columbia of Kentucky may not receive the proper precedence in the capital budgeting process and capital investment allocation at NiSource. To properly - ------------------------ 16 Response to Item 35 of the Commission's May 22, 2000 Order. 17 Id., Response to Item 37. -- 18 Id., Response to Item 62(e). -- 19 T.E., Vol. II, at 216. 11 monitor the Applicants' commitment in this area, the Commission finds that Columbia of Kentucky should annually file its current 3-year capital and O&M budgets. This filing will be due on or before March 31 of each year, and shall include an explanation for any reductions in each capital budget item that exceeds a 10 percent change from the prior year. TRANSACTION COSTS ----------------- The Applicants have committed that, "All transaction-related costs, including the cost of purchase and the premium paid for the Columbia Energy transaction, shall be excluded for rate-making purposes and from the rates of Columbia of Kentucky."20 The Commission finds it reasonable for Columbia of Kentucky to file information sufficient to allow adequate monitoring of the costs associated with this acquisition. As of April 30, 2000, NiSource had incurred acquisition costs of $17,663,36621 and Columbia Energy had incurred acquisition costs of $17,007,949 through May 10, 2000.22 To properly monitor the acquisition costs, the Commission finds that NiSource should file a schedule of its actual acquisition costs to date, at the level of detail shown in its response to Item 18(a) of the Commission's May 10, 2000 Order. NiSource should specifically identify any costs that have been allocated to Columbia Energy. Columbia Energy should file a schedule of its actual acquisition costs to date, including any costs allocated to it by NiSource, at the level of detail shown in its response to Item 5(a) of the Commission's May 22, 2000 Order. Columbia Energy should identify any costs - ------------------------ 20 Response to Item 62(e)(4) of the Commission's May 22, 2000 Order. 21 Response to Item 18(a) of the Commission's May 10, 2000 Order. 22 Response to Item 5(a) of the Commission's May 22, 2000 Order. 12 allocated to a subsidiary or affiliate, provide the name of the subsidiary or affiliate and the accounting entries made on its books, and identify the basis for the allocation. NiSource and Columbia Energy should file this information for the six-month periods ending June 30 and December 31. The first report will be due on August 15, 2000, and all subsequent reports will be due 45 days after the end of the reporting period. These reports should be filed until all transaction costs have been incurred. The costs that are allocated to the Columbia of Kentucky level should be fully documented and included in detail in the rate case filing that is to be made 18 months after the merger is consummated, pursuant to this Order. MOST FAVORED NATIONS CLAUSE --------------------------- NiSource claims that most favored nations clauses do not appropriately account for unique differences between regulatory frameworks or operating rules affecting utilities located in different states. NiSource added that such clauses can have unintended consequences when changes in presumed general economic conditions occur. For these reasons, NiSource does not support the inclusion of a most favored nations clause as a condition of the merger.23 The Commission finds that since NiSource operates in numerous jurisdictions, a most favored nations clause would ensure that the ratepayers of Columbia of Kentucky receive all of the merger benefits that the Applicants make available to ratepayers in other jurisdictions. Therefore, the Commission finds it reasonable to condition the merger on the Applicants' commitment that if in connection with this merger, any state or federal regulatory commission imposes conditions on the Applicants that would benefit ratepayers in any other - ------------------------ 23 Response to Item 71(c)(3) of the Commission's May 10, 2000 Order. 13 jurisdiction, proportionate net benefits and conditions will be extended to Columbia of Kentucky ratepayers. MERGER COMMITMENTS ------------------ Throughout this proceeding, the Applicants have made numerous commitments relating to their operations after the merger. The Applicants were requested to comment upon the commitments from Case No. 2000-095,24 which the Commission believed to be applicable to circumstances of this merger. In their response, the Applicants either accepted or accepted with revision the applicable commitments from Case No. 2000-095.25 Through these commitments, the Applicants have attempted to address many of the concerns that were expressed and implied by the Commission and intervenors. At the hearing, NiSource's Chief Executive Officer ("CEO") accepted and agreed to be bound by those commitments.26 The Commission has reviewed all of the Applicants' proposed commitments, and has determined that several deal with concerns that should be expressed specifically in this Order. The Commission has modified or refined several of the Applicants' commitments to reflect concerns that we have, and several of these concerns are discussed elsewhere in this Order. Appended hereto as Appendix A is a listing of commitments identified by the Commission as addressing significant concerns and issues raised by the NiSource acquisition. - ------------------------ 24 Case No. 2000-095, Joint Application of PowerGen plc, LG&E Energy Corp., Louisville Gas and Electric Company, and Kentucky Utilities Company for Approval of a Merger, final Order dated May 15, 2000. 25 Response to Item 62 of the Commission's May 22, 2000 Order. 26 T.E., Vol. I, at 173. 14 The Commission's approval of the acquisition will be conditioned upon the Applicants' written acceptance of the commitments in Appendix A. REGULATORY CONCERNS ------------------- In previously approving the creation of holding companies for other utilities, the Commission's Orders included extensive discussions of the concerns and objectives with regard to the protection of ratepayer interests. These concerns related generally to three areas: 1. The protection of utility resources; 2. The ability to adequately monitor the corporate activities of the utility, the holding company, and any other subsidiaries established by the holding company; and 3. The establishment of reporting requirements to assist the Commission in monitoring activities. Those prior Orders also contained a detailed list of the conditions and requirements necessary to protect ratepayers' interests. The concerns for the protection of Columbia of Kentucky's ratepayers remain the same as those expressed in previous Commission Orders approving other mergers. Therefore, the Commission will require as a condition of the merger that NiSource, Columbia Energy, and Columbia of Kentucky comply with the conditions and requirements previously included in the Orders in Case Nos. 99-14927 and 2000-095. These concerns, conditions, and requirements are set forth in Appendix B to this Order. The Commission also notes that, effective July 14, 2000, House Bill 897 will impose cost allocation requirements and a code of conduct on Columbia of Kentucky. In any instance in which the conditions - ------------------------ 27 Case No. 99-149, Joint Application of Kentucky Power Company, American Electric Power Company, Inc. and Central and South West Corporation Regarding a Proposed Merger, final Order dated June 14, 1999. 15 and requirements expressed in Appendix B are not superseded by the provisions of House Bill 897 or the rules of the SEC, the conditions and requirements in Appendix B will control. REPORTING ISSUES ---------------- The Commission has previously recognized in cases involving registered holding companies that SEC reports may satisfy many of our filing requirements. In such cases the SEC reports are acceptable substitutes. The Applicants should file an analysis of the reporting requirements contained in this Order and the information contained in their SEC reports, indicating areas that may be duplicative. The Commission will then determine whether the identified SEC reports adequately satisfy the Commission's information requirement. The Applicants' analysis should be filed within 90 days of completing the acquisition. GAS SUPPLY BENEFITS OF THE MERGER --------------------------------- One of the merger benefits cited by the Applicants is the increased opportunity to acquire reliable gas supplies at competitive cost through combining the separate transactional activities of the two systems. The Applicants contend that portions of the contracted pipeline capacity of the NiSource and Columbia Energy distribution companies will become redundant when the combined company begins coordinating gas supply portfolios. It should then be possible to reduce transportation capacity requirements for the combined company that will result in reduced capacity costs. In addition, the Applicants expect that the geographic diversity of the combined company will allow them to take advantage of non-coincident peaks by sharing capacity among the distribution companies on an as-needed basis. 16 Aggregating the gas supply needs of the combined company in purchasing gas at common market hubs and supply basins along with optimizing common gas storage assets is expected to reduce the per unit cost of the gas purchased for Columbia of Kentucky and other distribution companies of the two systems.28 In addition, the fact that the two systems' customers are located in geographically diverse regions may create opportunities for the combined company to further optimize contracted and owned storage and transportation assets that can result in gas cost savings to sales customers of all the combined system's distribution combinations. Any such savings will be captured in Columbia of Kentucky's future Gas Cost Adjustment filings. A related benefit, cited by the Applicants, is that NiSource has the same level of commitment to customer choice as does Columbia of Kentucky. NiSource cites the fact that its distribution utilities were the first to allow customers to choose a gas supplier in both Indiana and Massachusetts. The Applicants state that the combined company is committed to working with marketers to deliver the enhanced benefits of competition to Kentucky consumers. Applicants contend that, either through customer choice or reductions in gas supply costs achievable by the combined company, customers will benefit in the form of reduced gas costs as a result of the merger. The Commission is encouraged by the opportunity for customers to realize reductions in their gas supply costs, particularly since Columbia of Kentucky's gas costs are among the highest in the Commonwealth.29 This is likely one area - ------------------------ 28 Columbia of Kentucky obtains over 96 percent of its gas supply from the Texas and Louisiana supply basins while NiSource affiliates purchase over 50 percent of their gas supply from the same supply basins. The combination of the two systems will result in a larger presence in this large and competitive supply basin which is expected to result in obtaining gas supplies at lower prices than either system could obtain acting independently of each other. 29 T.E., Vol. I, at 131-134. 17 of operations where the increased scale and scope of the combined company will almost assuredly be beneficial to customers. The Commission will closely monitor Columbia of Kentucky's gas supply costs to ensure that all cost reductions are properly flowed through to customers through the Gas Cost Adjustment filings. This will avoid the potential for the Customer Choice Plan to seem more attractive to customers than it truly is. We anticipate a market developing in the manner described by NiSource where reductions in gas cost for the combined companies will put competitive pressure on marketers to reduce their gas prices, thereby resulting in lower gas costs for all consumers, both sales customers and choice customers.30 BENCHMARKING AND BEST PRACTICES ------------------------------- The Applicants state that there will be an ongoing review of their operations utilizing various methods of benchmarking, all designed to improve and increase the efficiency of their operational processes. This process is referred to as "world-class best practices" and can lead to cost savings, more competitive customer prices, and improved customer service and customer satisfaction. By applying best practices, the utility seeks out other companies who perform similar types of functions or tasks to ascertain how the process operates and whether or not there are techniques that can be adopted or modified and applied to its own processes. For example, both NiSource and Columbia Energy utilize the American Gas Association's annual "Best Practices Benchmarking" study to identify utility practices that can be improved or modified. - ------------------------ 30 Id. at 136-138. -- 18 Columbia of Kentucky is already familiar with business improvement processes and has been applying those techniques since 1998.31 It provided examples of its improvement programs, including Continuous Improvement ("CI"), Total Quality Management ("TQM"), and Opportunity for Improvement ("OFI"). The OFI program utilizes teams of employees to study areas of opportunity that could lead to more efficient and effective operations and track savings where possible. Similarly, NiSource's gas distribution utilities utilize various forms of internal benchmarking and industry-wide best practices comparisons. The Commission encourages the Applicants' efforts to apply best practices to their operations. Considering Columbia of Kentucky's experience with successfully implementing CI, TQM, and OFI, documenting and tracking team initiatives, and reporting results to management, Columbia of Kentucky is well positioned to implement a similar procedure to be applied to the best practices implementation process. To enable the Commission to track the use of best practices, Columbia of Kentucky should file semi-annual progress reports. For each area reviewed for application of best practices at Columbia of Kentucky or an affiliate whose costs are charged to Columbia of Kentucky, the progress report should document the investigating team, its mission and area of investigation, current status, estimated costs, expected results including savings, and all results actually achieved. SERVICE QUALITY --------------- The Union Intervenors expressed concern that Columbia of Kentucky's current staffing levels put both its employees and customers at risk. The Union Intervenors state that current staffing levels are barely enough to maintain - ------------------------ 31 Response to Item 85 of the Commission's May 10, 2000 Order. 19 safe and reliable service. Furthermore, they believe additional staffing is necessary to meet the future demand for gas service and distributed generation. The Commission finds that Columbia of Kentucky has historically provided a high level of customer service and safety, which must be maintained after the merger. Absent extraordinary circumstances, it is not the Commission's function to establish staffing levels for a utility. The evidence of record does not persuade us to find that current staffing levels are too low. Both NiSource and Columbia Energy have committed to maintaining high quality service for their Kentucky natural gas customers.32 Columbia Energy further committed to ensuring that an appropriate workforce level is maintained after the merger is consummated.33 The Commission expects the Applicants to continue to allocate adequate resources to Kentucky operations to maintain and improve the existing high level of service quality and safety. CUSTOMER SERVICE ISSUES ----------------------- Since 1996, Columbia of Kentucky has utilized the services of Strategic Marketing & Research Inc. ("SMRI") to conduct quarterly customer satisfaction surveys. SMRI surveys a variety of subjects, with focus given to call center contacts and in-person follow-up contacts. Columbia of Kentucky uses the results of these surveys to set operational excellence objectives.34 According to the - ------------------------ 32 Response to Item 62(n)-(r) of the Commission's May 22, 2000 Order. 33 T.E., Vol II, June 9, 2000, at 125. 34 Id. at 152. -- 20 objectives provided by Columbia of Kentucky, it currently meets five of its seven objectives.35 The Commission encourages Columbia of Kentucky, under the leadership of NiSource, to continue its relationship with SMRI or develop a similar customer satisfaction survey. The surveys provide an important measure of the utility's success or failure to adequately serve its customers. Columbia of Kentucky should file its most recent SMRI reports with the Commission on a semi-annual basis. While the SMRI surveys represent an adequate view of customer satisfaction, the Commission is concerned that the operational excellence objectives that are based upon the SMRI survey do not sufficiently reflect excellent service. For instance, Columbia of Kentucky stated that if it cancels a service appointment just hours before the scheduled time, it is not recorded as a missed appointment if the customer is notified.36 Columbia of Kentucky should meet with Commission Staff and interested parties by September 30, 2000 to discuss the operational excellence objectives and the parameters of the SMRI survey. The goal of this meeting will be to ensure the methodology utilized by Columbia of Kentucky to determine operational excellence objectives is sound. - ------------------------ 35 Response to Item 97 of the Commission's May 10, 2000 Order. Through April 2000, 4.32 percent of Columbia of Kentucky's customers calling the Customer Satisfaction Center ("CSC") hang up before speaking to a representative. Columbia of Kentucky's goal is 4 percent or lower. Through April 2000, the average time in which the CSC answers a call is 23.6 seconds. Columbia of Kentucky's goal is 20 seconds or less. 36 T.E., Vol. II, June 9, 2000, at 131. 21 CREDITWORTHINESS POLICY ----------------------- Stand Energy is a marketer of natural gas that anticipates being a supplier of choice to current customers of Columbia of Kentucky once its Customer Choice Plan is implemented. Stand Energy asserted that a change in Columbia of Kentucky's creditworthiness policy for alternative suppliers can have an adverse impact on the development of a competitive gas supply under the Customer Choice Plan. More specifically, Stand Energy claimed that the creditworthiness policy affects the capital cost of alternative suppliers and, with thin profit margins in retail choice plans, onerous credit requirements can make the choice plan economically unviable for marketers. For this reason, Stand Energy requested the Commission to create a remedy, such as conditioning the merger on the right of alternative suppliers to appeal credit disputes to the Commission or for the Commission Staff to mediate any credit disputes.37 The provisions of Columbia of Kentucky's Customer Choice Plan, including a creditworthiness policy, are contained in its tariffs that are on file with the Commission. If Columbia of Kentucky chooses to revise the creditworthiness policy in its Customer Choice Plan, it will have to file a new tariff with the Commission. At that time interested parties will have the opportunity to object. Therefore, Stand Energy has an adequate and complete remedy for the issue it raised and there is no reason to condition the merger as it requested. SUMMARY OF FINDINGS ------------------- The Commission, after considering the evidence of the record and being advised, finds that: - ------------------------ 37 Post-Hearing Brief of Stand Energy at 2-4. 22 1. NiSource, Columbia Energy, and Columbia of Kentucky will, after the consummation of the merger, have the financial, technical, and managerial abilities to provide reasonable utility service. 2. NiSource will not, by reason of its ownership of all outstanding shares of common stock of Columbia Energy, be a utility as defined in KRS 278.010(3). 3. Columbia Energy will not, by reason of its ownership of all outstanding shares of common stock of Columbia of Kentucky, be a utility as defined in KRS 278.010(3). 4. The proposed acquisition of Columbia Energy and the transfer of control of Columbia of Kentucky to a newly constituted NiSource, is in accordance with law, for a proper purpose, and will be consistent with the public interest only if the Applicants accept and agree to the commitments and conditions set forth in Appendices A and B, attached hereto and incorporated herein by reference. 5. The Commission will certify to the SEC pursuant to Section 33(a)(2) of PUHCA that, with the Applicants' acceptance of the commitments in Appendices A and B, the Commission has the authority and resources to protect Columbia of Kentucky's ratepayers subject to its jurisdiction and that it intends to exercise this authority. 6. The merger should be approved upon the condition that the CEOs of each Applicant file within 7 days of the date of this Order a written acknowledgement accepting, and agreeing to be bound by, the commitments set forth in Appendices A and B to this Order. 7. Columbia of Kentucky should provide copies of the applications, notices, final approval orders, or other regulatory notifications received from the Federal Energy Regulatory Commission ("FERC"), the SEC, the Federal 23 Communications Commission ("FCC"), the Department of Justice, and any state regulatory authority with jurisdiction over this merger, to the extent these documents have not already been provided in this case. 8. Columbia of Kentucky should file within 90 days of closing the merger an analysis of the reporting requirements contained in this Order and the requirements of the SEC, identifying those SEC reports that may satisfy the Commission's requirements. 9. The Applicants should notify the Commission in writing of any material change in Columbia of Kentucky's participation in, or funding for, research and development 30 days prior to any proposed change. 10. Columbia of Kentucky should file annually its service outage reports as described in this Order. 11. The Applicants should file semi-annually a report detailing the adoption and implementation of best practices at Columbia of Kentucky. The report should be filed 45 days after the close of the reporting period. 12. Within 30 days of the date of this Order, Columbia of Kentucky should file a report detailing its actual expenditure levels for economic development activities and civic and charitable activities for the past 3 calendar years. 13. Columbia of Kentucky should report annually its economic development activities and its actual expenditures for economic development activities and civic and charitable activities. 24 14. Columbia of Kentucky should annually file its current 3-year capital and O&M budgets, including an explanation for any reductions in a budget item greater than 10 percent. 15. NiSource and Columbia Energy should, every 6 months, provide reports on the actual costs of the Columbia Energy acquisition, as described in this Order. The reports should be as of June 30 and December 31, with the first report due on August 15, 2000 and all subsequent reports due 45 days after the end of the reporting period. NiSource and Columbia Energy should continue to provide these reports until all transaction costs have been incurred. 16. In the event Columbia of Kentucky requests the SEC or FERC for an exemption or change to the current dividend requirements, a copy of such request should be filed with the Commission 30 days prior to its submission to the SEC or FERC. 17. Columbia of Kentucky should file by November 30, 2000 a proposed mechanism to track the merger savings and the associated costs and should include NiSource's proposed methodology to allocate the merger savings and associated costs to Columbia Energy and Columbia of Kentucky. IT IS THEREFORE ORDERED that: 1. The transfer of ownership of Columbia of Kentucky through the acquisition of ownership and control of Columbia Energy by NiSource is approved, subject to the filing within 7 days of the date of this Order of the written acknowledgements described in Finding 6 above. 25 2. NiSource and Columbia Energy shall not impair the capacity of Columbia of Kentucky to meet its obligations to provide adequate, efficient, and reasonable utility service. 3. Columbia of Kentucky is prohibited from guaranteeing the debt of NiSource, Columbia Energy, and related affiliates and subsidiaries of NiSource and Columbia Energy, without the prior approval of the Commission. 4. The Applicants shall comply with all reporting and filing requirements described herein. Unless otherwise noted, all quarterly reports shall be filed within 45 days of the close of the reporting quarter, while all annual reports shall be filed by March 31 of the year following the reporting period. 5. Access to the books and records of NiSource and Columbia Energy and its related affiliates and subsidiaries shall be provided as described in Appendix B. 6. Columbia of Kentucky shall file copies of the applications, notices, final approval orders, or other regulatory notifications received from the FERC, the SEC, the FCC, the Department of Justice, and any state regulatory authority with jurisdiction over this merger, to the extent these documents have not already been provided in this case, within 10 days of their filing or receipt. 7. Within five days of the consummation of the merger, Columbia of Kentucky shall file a written notice setting forth the date of merger. 26 Done at Frankfort, Kentucky, this 30th day of June, 2000. By the Commission ATTEST: /s/ Illegible - ----------------------------- Executive Director 27 APPENDIX A APPENDIX TO AN ORDER OF THE KENTUCKY PUBLIC SERVICE COMMISSION IN CASE NO. 2000-129 DATED JUNE 30, 2000 The approval of the merger of NiSource, Columbia Energy, and Columbia of Kentucky is subject to the written acceptance by NiSource, Columbia Energy, and Columbia of Kentucky of the following commitments and assurances: OPERATIONS AND FINANCIAL ------------------------ 1. The books and records of Columbia of Kentucky will be accessible to the Commission and its Staff during reasonable business hours. Should the books and records of its parent company or of any other company with the group created by the merger become relevant to the jurisdictional rates or tariffed services of Columbia of Kentucky, such relevant books and records will also be made accessible to the Commission and its Staff at such time and place as it designates. 2. NiSource, Columbia Energy, and Columbia of Kentucky commit not to assert that the SEC's jurisdiction legally preempts the Commission from disallowing recovery in retail rates for the cost of goods and services that Columbia of Kentucky obtains from or transfers to an associate, affiliate, or subsidiary in the same holding- company system. This assertion shall also apply to any claim under the Ohio Power vs. FERC decision. However, Columbia of Kentucky shall retain the right to assert that the charges are reasonable and appropriate. 3. Columbia of Kentucky will not seek to overturn, reverse, set aside, change or enjoin a decision of the Kentucky Commission that pertains to recovery, disallowance, allowance, deferral or rate-making treatment of any expense, charge, cost, or allocation incurred or accrued by Columbia of Kentucky as a result of any contract, agreement, arrangement, or transaction with any 1 affiliate, associate, holding mutual service or subsidiary company on the basis that such expense, charge, cost or allocation has itself been filed with or approved by the SEC, or was incurred pursuant to a contract, arrangement, agreement or allocation which was filed with or approved by the SEC. 4. NiSource, Columbia Energy, and Columbia of Kentucky commit to provide the Commission with notice 30 days prior to any SEC filing that proposes new allocation factors. The notice need not be in precise form of the final filing but will include, to the extent information is available, a description of the proposed factors and the reasons supporting such factors. NiSource, Columbia Energy, and Columbia of Kentucky commit to make a good faith attempt to resolve differences, if any, with the Commission in advance of filing with the SEC. 5. NiSource, Columbia Energy, and Columbia of Kentucky commit that NiSource's acquisition will have no impact on the base rates or the operation of the gas supply clause of Columbia of Kentucky. 6. NiSource, Columbia Energy, and Columbia of Kentucky commit that Columbia of Kentucky, and its ratepayers, directly or indirectly, shall not incur any additional costs, liabilities, or obligations in conjunction with the acquisition of Columbia Energy by NiSource including, but not limited to, the following: a. Columbia of Kentucky shall not incur any additional indebtedness, issue any additional securities, or pledge any assets to finance any part of the purchase price paid by NiSource for the Columbia Energy stock. 2 b. The payment for the Columbia Energy stock shall be recorded on NiSource's books, not the books of Columbia of Kentucky. c. The premium paid by NiSource for the Columbia Energy stock, as well as any other associated costs, shall not be "pushed down" to Columbia of Kentucky for rate-making purposes and Commission reporting purposes. d. All transaction-related costs, including the cost of purchase and the premium paid for the Columbia Energy transaction, shall be excluded for rate-making purposes and from the rates of Columbia of Kentucky. e. Columbia of Kentucky shall not seek a higher rate of return on equity in future rate cases than would have been sought if no merger had occurred. f. The accounting and rate-making treatments of Columbia of Kentucky's excess deferred income taxes shall not be affected by the merger of NiSource and Columbia Energy. g. No change in control payments will be allocated to the ratepayers of Columbia of Kentucky. h. If early termination costs are incurred for employees of Columbia Energy or Columbia of Kentucky, none of these costs will be allocated to Columbia of Kentucky. i. Any additional administrative costs incurred in order to comply with the financial and accounting standards associated with the merger will not be borne by Columbia of Kentucky. 3 7. The Applicants commit that the merger will not have a negative impact on the balances of deferred taxes that are currently recorded on the books of Columbia of Kentucky. 8. Columbia of Kentucky commits to file by November 30, 2000 a proposed mechanism to track the merger savings and associated costs and a detailed description of NiSource's proposed methodology to allocate merger savings and associated costs to Columbia Energy and Columbia of Kentucky. 9. Columbia of Kentucky commits to record the merger savings and associated costs in a deferred account that will be reviewed and considered in its next rate case. 10. Columbia of Kentucky commits to file by the earlier of September 30, 2002 or 18 months after consummation of the merger, a rate case including the statutory filing requirements, a cost-of-service study, an estimate of future net merger savings, and a mechanism to reflect on ratepayers' bills future merger savings and the net deferred merger savings. 11. The Applicants commit that the corporate officers of Columbia Energy and Columbia of Kentucky shall maintain their current titles and responsibilities as officers unless and until otherwise determined by either of their respective Boards of Directors. The Applicants will maintain the highest level of management experience within Columbia Energy and Columbia of Kentucky and will provide an opportunity to broaden that experience by exchanging positions with other managers in NiSource's organization. 4 12. NiSource, Columbia Energy, and Columbia of Kentucky commit to advising the Commission at least annually on the adoption and implementation of best practices at Columbia of Kentucky following the consummation of the merger. 13. NiSource, Columbia Energy, and Columbia of Kentucky commit to obtaining Commission approval prior to transfer of any Columbia of Kentucky asset with an original book value in excess of $1,000,000. 14. NiSource will support Columbia of Kentucky's decision to utilize collaborative approaches to regulatory proceedings in the effort to find "win-win" solutions for all stakeholders; and its commitment to Customer Choice in Kentucky. 15. NiSource agrees that Columbia of Kentucky will continue charitable, cultural and civic contributions at levels consistent with past practice. 16. NiSource agrees that Columbia of Kentucky will continue its economic development efforts at levels equal to those currently maintained. 17. NiSource will retain separate books for each corporate entity and follow SEC and state cost allocation guidelines, as well as all applicable codes of conduct. 18. NiSource will abide by SEC dividend policies. NiSource will have a consolidated capital structure of not less than 30 percent common equity within two years following the close of merger. REPORTING --------- 1. If new debt or equity in excess of $100 million is issued, NiSource commits to notify the Commission as soon as practicable prior to the issuance, and Columbia of Kentucky commits to notify the Commission, 30 days prior to the issuance. 2. NiSource commits to notifying the Commission subsequent to its board approval and as soon as practicable following any public announcement of any 5 acquisition of a regulated or non-regulated business representing 5 percent or more of NiSource's market capitalization. 3. NiSource commits to providing an annual report to the Commission detailing Columbia Energy's and Columbia of Kentucky's proportionate share of NiSource's total assets, total operating revenues, operating and maintenance expenses, and number of employees. 4. NiSource commits to notifying the Commission 5 days after paying any dividend or transferring more than 5 percent of the retained earnings of Columbia of Kentucky to Columbia Energy or NiSource. 5. NiSource commits to filing with the Commission a copy of its annual report to its shareholders. 6. NiSource commits to filing with the Commission such additional financial reports as the Commission, from time to time, reasonably determines to be necessary for it to effectively regulate the operation of Columbia of Kentucky. However, if the preparation of the report is considered burdensome, NiSource will agree to develop with the Commission a cost-effective alternative. 7. NiSource agrees to provide to the Commission any merger-related documents that are filed with the SEC. SERVICE QUALITY AND RELIABILITY ------------------------------- 1. NiSource, Columbia Energy, and Columbia of Kentucky commit that Columbia of Kentucky customers will experience no material adverse change in utility service due to the merger. 2. NiSource, Columbia Energy, and Columbia of Kentucky commit to: a) adequately funding and maintaining Columbia of Kentucky's transmission and 6 distribution systems; b) complying with all Commission regulations and statutes; and c) supplying Columbia of Kentucky's customers' service needs. 3. When implementing best practices, NiSource, Columbia Energy, and Columbia of Kentucky commit to taking into full consideration the related impacts on the levels of customer service and customer satisfaction, including any negative impacts resulting from workforce reductions. 4. NiSource commits that it will minimize, to the extent possible, any negative impacts on levels of customer service and customer satisfaction resulting from workforce reductions. 5. Columbia of Kentucky commits to periodically filing the various reliability and service quality measurements it currently maintains, to enable the Commission to monitor its commitment that reliability and service quality will not suffer as a result of the merger. 6. NiSource, Columbia Energy, and Columbia of Kentucky commit to notifying the Commission in writing 30 days prior to any material changes in their participation in funding for research and development. The possible changes include, but are not limited to, any change in funding equal to or greater than 5 percent of the previous year's budget for research and development. The written notification shall include an explanation and the reasons for the change in policy. 7. NiSource, Columbia Energy, and Columbia of Kentucky commit that Columbia of Kentucky shall continue to operate through regional offices with local service personnel and field crews. 7 OTHER COMMITMENTS AND ASSURANCES -------------------------------- 1. In the event of a subsequent merger over which the Commission would not have jurisdiction, NiSource commits to discuss with the Commission the issue of whether there would be any synergies resulting from that merger that could be appropriately shared with Kentucky ratepayers. 2. NiSource, Columbia Energy, and Columbia of Kentucky commit that either NiSource or Columbia Energy shall hold 100 percent of the common stock of Columbia of Kentucky and that Columbia Energy shall not transfer any of that stock without prior Commission approval even if the transfer is pursuant to a corporate reorganization as defined in KRS 278.020(6)(b). 3. NiSource, Columbia Energy, and Columbia of Kentucky commitment that if in connection with this merger, any state or federal regulatory commission imposes conditions on the Applicants that would benefit ratepayers in any other jurisdiction, proportionate net benefits and conditions will be extended to Columbia of Kentucky ratepayers. 4. NiSource agrees to periodically meet with the Commission Staff to discuss the current status of the Applicants' Project Compass efforts. 5. Columbia of Kentucky will continue as a corporation organized under Kentucky law, with its headquarters in Lexington; decision-making affecting its operations will continue to be made at the local level and it will retain its current name. 6. No material reductions in the operations workforce will be made as a result of the merger, and Columbia of Kentucky will continue to honor its collective bargaining agreement with union-represented employees. 8 7. Employees of Columbia of Kentucky will continue to be provided with benefits under employee benefit plans that are no less favorable than the greater of those provided by Columbia Energy and its subsidiaries to such employees and those provided by NiSource and its subsidiaries during the period ending on the third anniversary of the effective date of the merger. 9 APPENDIX B APPENDIX TO AN ORDER OF THE KENTUCKY PUBLIC SERVICE COMMISSION IN CASE NO. 2000-129 DATED JUNE 30, 2000 In the Orders approving the creation of holding companies, as well as those approving the merger of those holding companies, the Commission expressed numerous regulatory concerns and required certain information of the utilities, and their respective holding companies. As these subjects are applicable to the proposed merger of Columbia Energy with NiSource, those regulatory concerns and information requirements are restated below. PROTECTION OF UTILITY RESOURCES ------------------------------- Accounting Procedures and Controls - ---------------------------------- A primary concern related to the issue of diversification is the potential for subsidization of non-regulated activities by the regulated company. Three major areas that can be readily identified for potential cross-subsidization are accounting, cost allocation methodologies, and pricing of intercompany transactions. The accounting and reporting system used by Columbia of Kentucky should be adequate to provide assurance that directly assignable utility and non-utility costs are accounted for properly and that reports on the utility and non-utility operations are accurately presented. Columbia of Kentucky should implement and maintain cost allocation procedures that will accomplish the objective of preventing cross-subsidization, and be prepared to fully disclose all allocated costs, the portion allocated to each subsidiary of Columbia Energy, complete details of the allocation methods, and justification for the amount and the method. Columbia of Kentucky should continue to comply with any policies or guidelines that would govern any intercompany transactions, as well as employing other procedures and controls related to sales, transfers, and cost allocation to ensure and facilitate full review by the Commission and protect against cross-subsidization. PRIORITY OF UTILITY OPERATIONS ------------------------------ While it is in the best interests of Columbia Energy, NiSource, and its shareholders to secure the most skilled management available, Columbia of Kentucky personnel should not be diverted to a non-utility affiliate if it threatens the utility's continued efficient operations. Similarly, Columbia of Kentucky should not be the employer or purchaser of last resort for employees, assets, and products associated with failed or troubled affiliate ventures. Utility operations should continue to be a priority and should not be used to solely benefit non-utility affiliates. Financial Resources - ------------------- A concern exists that Columbia Energy or NiSource may divert Columbia of Kentucky's financial resources to benefit the activities of non-regulated affiliates at the expense of utility ratepayers. There are four main areas of concern: 1. Attempts by Columbia Energy or NiSource to adjust Columbia of Kentucky's capital structure could adversely affect Columbia of Kentucky's cost of capital and financial integrity. The Commission believes that Columbia Energy and NiSource should assist Columbia of Kentucky in maintaining a balanced capital structure. 2. The dividend policy of Columbia of Kentucky could adversely affect Columbia of Kentucky's financing requirements and capabilities. The dividend policy must not adversely affect ratepayers, and Columbia of Kentucky, through its board of directors, has the responsibility to use its dividend policy consistent with preserving its financial strength. 2 3. Unwillingness on the part of Columbia Energy or NiSource to provide necessary capital to Columbia of Kentucky could severely impair its ability to provide utility services, as is its statutory obligation. Any action or decision by the board of directors of Columbia Energy or NiSource, including the unwillingness to provide adequate capital to Columbia of Kentucky, that, in any way, impairs Columbia of Kentucky's ability to provide adequate, efficient, and reasonable utility service, will be in direct violation of KRS 278.030(2). 4. A guarantee of the debt of non-utility affiliates of Columbia Energy or NiSource by Columbia of Kentucky could unnecessarily place in jeopardy the financial position and resources of Columbia of Kentucky. Pursuant to KRS 278.300, Columbia of Kentucky is prohibited from guaranteeing debt without prior Commission approval. 5. For rate-making purposes, the Commission has jurisdiction over Columbia of Kentucky's capital structure, financing, and cost of capital. The Commission will continue to exercise this jurisdiction. Divestiture - ----------- Consideration must be given to the worst case situation of a failed or failing unregulated affiliate and its effect on the operations of Columbia of Kentucky. If circumstances dictate that the only reasonable course of action is divestiture, including that of Columbia of Kentucky, it will be the responsibility of NiSource's and Columbia Energy's management to ensure that divestiture takes place. MONITORING THE HOLDING COMPANY AND THE SUBSIDIARIES --------------------------------------------------- Among the regulatory safeguards necessary in cases of utility reorganization, the most basic and indispensable requirement is open access to all books, records, and personnel of the holding company and each subsidiary. The Commission must have the ability to pursue any problems perceived in the 3 operations of the utility through access to the books and records of the holding company and affiliates. During formal proceedings, it may also be necessary to cross-examine personnel of the unregulated entities to effectively monitor the relationship among Columbia of Kentucky, its parent, and affiliates. The Commission will have access, as necessary in the exercise of its statutory duties, to the books and records of Columbia Energy and NiSource and its other affiliates and subsidiaries as the books and records may be related to transactions with Columbia of Kentucky. If the subsidiaries or affiliates of Columbia Energy or NiSource do not transact business with Columbia of Kentucky, the utilities will verify, if necessary, the lack of such transactions through independent sources. At the time of completion, the Commission will also monitor significant transfers of utility assets, business ventures of Columbia Energy and NiSource, and other major transactions. REPORTING REQUIREMENTS ---------------------- In order for the Commission to effectively monitor the activities of Columbia of Kentucky, Columbia Energy, NiSource, and its related subsidiaries, and to ensure ratepayer protection, certain additional reports shall be required of Columbia of Kentucky. To Be Filed Annually: - -------------------- 1. The annual financial statements of Columbia Energy and NiSource, including consolidating adjustments of Columbia Energy, NiSource, and its subsidiaries, with a brief explanation of each adjustment and all periodic reports filed with the SEC. 2. The annual balance sheets and income statements of any non-consolidated subsidiary of Columbia Energy or NiSource. 4 3. A general description of the nature of intercompany transactions, with specific identification of major transactions, and a detailed description of the basis upon which cost allocations and transfer pricing have been established. Included will be the cost allocation factors in use including a discussion of the methods used to update or revise any cost allocation factors that have been updated or revised. 4. A report that identifies professional personnel transferred from Columbia of Kentucky to Columbia Energy, NiSource, or any of the non-utility subsidiaries. Included should be a brief description of the duties performed while employed by Columbia of Kentucky and those to be performed subsequent to transfer. This report will also include the years of service at Columbia of Kentucky and the salaries of professional employees transferred from Columbia of Kentucky to Columbia Energy, NiSource, or its subsidiaries. 5. A report containing the same information as contained in the SEC's Form U-3A-2 for Columbia Energy. 6. A detailed organization chart as of the end of the calendar year showing all subsidiaries referenced in the SEC U-3A-2 filing. To Be Filed Quarterly: - ---------------------- 1. A report detailing the proportionate shares of Columbia of Kentucky in Columbia Energy's total operating revenues, operating and maintenance expenses, and number of employees. 2. The number of employees of Columbia Energy and each subsidiary on the basis of payroll assignment. 5 3. Twelve-month income statements and balance sheets. Columbia of Kentucky will separately report Kentucky jurisdictional operations and other jurisdictional operations. Other Filings: - ------------- 1. Columbia of Kentucky shall file any contracts or other agreements concerning the transfer of utility assets or the pricing of intercompany transactions with the Commission at the time the transfer occurs and in accordance with any policies or guidelines that would govern any intercompany transactions. 2. As the studies are performed and completed, Columbia of Kentucky shall file summaries of any cost allocation studies conducted and the basis for the methods used to determine the cost allocation in effect. 3. As such situations occur, Columbia of Kentucky shall file copies of the Articles of Incorporation and bylaws of affiliated companies that will be in businesses related to the electric or gas industry or that will be doing business with Columbia of Kentucky. 4. As such situations occur, Columbia of Kentucky shall file copies of the Articles of Incorporation of affiliated companies involved in non-related business. 6 EX-99 4 0004.txt EXHIBIT D-10 Exhibit D-10 - -------------------------------------------------------------------------------- STATE OF MAINE PUBLIC UTILITIES COMMISSION Docket No. 2000-322 June 30, 2000 NORTHERN UTILITIES, INC., ORDER Request for Approval of Reorganization (Merger and Related Transactions) Welch, Chairman; Nugent and Diamond, Commissioners - -------------------------------------------------------------------------------- I. SUMMARY OF ORDER We approve the reorganization of Northern Utilities, Inc. (Northern) involving the merger of its corporate parent, NiSource, Inc. (NiSource), with Columbia Energy Group (Columbia), subject to the conditions described in this order. We also direct Staff to recommend an appropriate penalty for Northern's failure to comply with our order in Docket No. 98-216 or to request modification of that order. Finally, within one year, we will determine whether to open an investigation into whether Northern's service monitoring criteria are adequate and whether any service quality assurance mechanisms or penalties should be imposed. II. BACKGROUND A. Corporate Affiliations ---------------------- This reorganization involves the merger of Northern's corporate parent, NiSource, an Indiana corporation that is exempt from most provisions of the Public Utility Holding Company Act of 1935 as amended, and Columbia, a registered public utility holding company that owns no public utilities within Maine. NiSource wholly-owns Bay State Gas Company (BSG), a Massachusetts natural gas distribution company, which wholly owns Northern, making these entities affiliates pursuant to 35-A M.R.S.A. ss. 707. In addition, NiSource owns 19.06 percent of Portland Natural Gas Transmission System (PNGTS), an interstate pipeline regulated by the Federal Energy Regulatory Commission (FERC). PNGTS is an affiliate of Northern pursuant to 35-A M.R.S.A. ss.ss. 102 and 707. NiSource is also the parent company of two utilities providing gas service in Indiana, Kokomo Gas and Fuel Company and Northern Indiana Fuel and Light Company, and one utility that provides both gas and electric service in Indiana, Northern Indiana Public Service Company (NIPSCO). ORDER -2- Docket No. 2000-322 - -------------------------------------------------------------------------------- Columbia is a Delaware corporation subject to the regulatory requirements of the Public Utility Holding Company Act (PUHCA). Columbia's subsidiaries are engaged comprehensively in the natural gas business, including exploration and production, transmission, storage, and distribution, as well as retail energy marketing, propane and petroleum product sales, and electric power generation. These subsidiaries provide gas utility service in Kentucky, Maryland, Ohio, Pennsylvania, and Virginia. Columbia also owns a 10 percent interest in the CEC Rumford Cogeneration Plant in Maine.1 Columbia reportedly also owns two unregulated business ventures, LewBgas in Lewiston and Farmington and a facility in Oxford.2 B. Procedural History ------------------ Northern filed a petition on April 10, 2000 requesting approval of a proposed reorganization pursuant to 35-A M.R.S.A. ss. 708. Additionally, if required, Northern requests approval pursuant to 35-A M.R.S.A. ss.ss. 1101(3) and 1103(1). Northern also requested that the Commission exempt PNGTS from any provisions of the Maine statutes that might apply with respect to this merger because of FERC jurisdiction. Finally, Northern requested expeditious approval of its petition, by June 1, 2000 if possible. On April 14, 2000, the Commission issued a Notice of Proceeding to the service lists in Northern's last merger proceeding and in its recent rate design case and published notice in newspapers of general circulation in areas Northern is serving. Also on that date, Northern prefiled the testimony of Mark T. Maassel, Vice President, Regulatory and Government Policy for NiSource, and a copy of the Agreement and Plan of Merger for the proposed NiSource/Columbia merger. The Office of the Public Advocate (OPA) filed a petition to intervene, and Maine Natural Gas, L.L.C. (MNG) filed a petition for limited intervention. The Hearing Examiner granted both petitions, the latter over Northern's objection, on May 11, 2000. The Hearing Examiner granted confidential treatment to competitively sensitive information, such as presentations to bond rating agencies or equity analysts, estimated tax effects, and financial analyses of the merger prepared by NiSource and its legal and financial advisors. See - ------------------------ 1 This plant is defined to be an "excluded electric plant," not a public utility, under Maine law. 2 This is based on information published in the Lewiston Sun Journal on 6/3/2000. ORDER -3- Docket No. 2000-322 - -------------------------------------------------------------------------------- (Temporary) Protective Order Nos. 1 and 2 dated May 19, 2000 and June 2, 2000 respectively. Parties and Advisory Staff conducted discovery at a technical conference on May 22 on the following company witnesses: Mark T. Maassel, Vice President, Regulatory and Government Policy, NiSource; Thomas Sherman, Chief Financial Officer, Bay State Gas Company; Scott MacDonald, Vice President; Finance and Strategy, Bay State Gas Company; Rick Cencini, Vice President, Regulatory Affairs, Northern; Dan Cote, Vice President, Operations, Northern; and David Deans, Regulatory Policy Specialist, Northern. On May 31, the OPA and Northern filed comments on what further process would be necessary in this proceeding. The Advisory Staff held a second technical conference on June 2 at which company witnesses Dan Cote, Rick Cencini, and Thomas Sherman were present. Mark Maassel participated as a witness by telephone, as did Marie Walker and Bob Barnes, Customer Service managers for BSG and Northern. In addition to further discovery, parties discussed possible conditions for approval of the merger and the schedule for the remainder of the proceeding. Northern filed proposed conditions for the merger on June 8. OPA filed responsive comments on June 9. The Hearing Examiner held a conference of counsel on June 12 to indicate the remaining conditions that Advisory Staff would recommend to the Commission and to establish the final process for presenting this matter for decision. The parties waived their right to a written Examiner's Report and were allowed until close of business on June 14 to indicate any further concerns with the Advisory Staff's proposed conditions. Northern filed proposed modifications for some of Staff's proposed conditions that it characterized as largely non-substantive. OPA filed a letter urging us to open a proceeding to establish service quality benchmarks for Northern as a condition of merger approval. C. Description of Proposed Merger ------------------------------ The Company's petition indicated that the proposed merger could have been consummated using either of two possible structures. NiSource referred to these as the "Preferred" and "Alternative" structures. On June 1 NiSource shareholders elected to approve the merger agreement as proposed by management, thereby selecting the "preferred" structure. On June 2 Columbia shareholders also approved the merger under the preferred structure. The preferred structure will result in the creation of a new holding company ("New NiSource") that will be the parent entity for all existing NiSource and Columbia operating companies. It is expected that New NiSource will be registered as a public utility holding ORDER -4- Docket No. 2000-322 - -------------------------------------------------------------------------------- company under PUHCA. The Maine operation will be only a small fraction of the merged corporation, approximately 0.6% of total revenues. Current NiSource shareholders will receive one common share of New NiSource for each existing common share. Individual Columbia shareholders may choose between two options. The first option allows each common share of Columbia stock to be converted into $70.00 cash plus a New NiSource SAIL instrument with a face value of $2.60. A SAIL instrument consists of a zero-coupon debt security and a forward equity contract, which is similar to a long-term stock option. The second option allows Columbia shareholders to receive up to 4.4848 shares of New NiSource common stock calculated by dividing $74.00 by the average share price of existing NiSource stock for the 30 consecutive trading days ending two trading days prior to closing. This option is subject to three limitations. First, because Columbia shareholders cannot receive more 4.4848 New NiSource common shares for each Columbia common share it is possible that Columbia shareholders could receive less than $74.00 for each existing Columbia share. This occurs if the price of existing NiSource common shares drops below $16.50 per share.3 For example, if the market price for existing NiSource shares fell to $15.00 per share, Columbia shareholders would receive only $67.27 for each Columbia share ($15 x 4.4848 shares.) Second, the exchange of Columbia common shares for New NiSource shares is limited to a maximum of 30% of Columbia's outstanding common shares. If more than 30% of the outstanding common shares are tendered for exchange by Columbia shareholders, they will all receive a prorated amount, with the remainder being paid in cash and SAILs. Finally, if Columbia shareholders as a group do not make New NiSource stock elections for at least 10% of the outstanding shares, all Columbia shares will be exchanged for cash and SAILs as described above. Columbia's shareholders are not required to make their elections until two business days before the scheduled closing date. The petition states that the "merger will provide new strategic and operational opportunities to NiSource through its ownership of a significantly larger and more diverse group of operating energy companies," comprising both regulated and unregulated ventures. Northern further represents that the merger will not result in any change in the current ownership and control of Northern, any changes in the management of Northern or Bay State, or have any material impact on the local operations of Northern. In particular, Northern asserts that the merger will not cause its rates for service to increase or cause any acquisition premium to be allocated to Northern. - ------------------------ 3 NiSource's closing price on June 12, 2000 was $18.0625. Its 52-week high was $27.625 (in June 1999) and its 52-week low was 12.875 (in March 2000). ORDER -5- Docket No. 2000-322 - -------------------------------------------------------------------------------- The Company asserts that operational savings are not the primary reason for the NiSource/Columbia merger. Rather, Northern claims that the merger will provide a number of affirmative ratepayer benefits including the acquisition by Northern's parent company of significant assets that will better enable to Northern to serve the needs of its customers. Specifically, it states that "the merger will provide the opportunity for Northern's ratepayers to realize certain long-term advantages through the efficient use of combined pipeline and storage assets of its parent company, plus the ability to best use natural gas supplies across time, weather, and geography." Petition at 5. In addition, Northern asserts that the merger will facilitate the provision of new products and services to Northern's customers, will enhance Northern's efforts to maintain operational excellence through technological improvements, process enhancements, and effective cost management. Id. III. LEGAL STANDARDS The proposed merger constitutes a reorganization pursuant to 35-A M.R.S.A. 708 and thus requires Commission approval. Under this section, the Commission may approve a reorganization only if the applicant establishes that approval is consistent with the interests of a utility's ratepayers and investors. The Commission has previously found that the approval requirements of section 708 are met if the rates or services to customers of the former utility will not be adversely affected by the transaction, See e.g., Consumers Maine Water Co., Request for Approval of Reorganization Due to Merger with Philadelphia Suburban Corp., Docket No. 98-648 (Jan. 12, 1999); New England Telephone & Telegraph Company and NYNEX Corp., Reorganization Intended to Effect the Merger with Bell Atlantic, Docket No. 96-388 (Feb. 6, 1997); Bangor Hydro-Electric Company and Stonington and Deer Isle Power Company, Joint Application to Merge Property, Franchises and Permits and for Authority to Discontinue Service, Docket No. 87-109, Order Approving Stipulation and Merger (Nov. 10, 1987); and Greenville, Millinocket and Skowhegan Water Company, Joint Application to Sell Utility Property to Wanakah Water Company and to Discontinue Service, Docket No. 92-250, Order Approving Stipulation (Dec. 15, 1992). Thus, the merger should be approved if the total benefits flowing from the merger are equal to or greater than the detriments or risks resulting from the transaction for both ratepayers and shareholders. See Bell Atlantic at 8. The burden of proof is on the applicant to make this showing. 35-A M.R.S.A. 708(2) (no reorganization may be approved unless it is established by the applicant that the reorganization is consistent with the interests of ratepayers and investors). Given these standards, we must review the evidence presented by the petitioners and the other parties and determine whether the benefits of the merger put forth by the petitioners are at least equal to any likely risks, to ORDER -6- Docket No. 2000-322 - -------------------------------------------------------------------------------- ensure no harm to ratepayers and shareholders. Furthermore, section 708 provides that if we grant approval, we shall impose such conditions as "are necessary to protect the interests of ratepayers." Thus, in weighing the risks, it is appropriate for us to consider the mitigating effects of any such conditions. Finally, because their right to vote to approve the merger protects shareholders, we will review the impact of the reorganization only on ratepayers. V. ISSUES AND ANALYSIS Four areas of concern were raised at the technical conferences in this case: 1) the degree of financial risk associated with the merger and the potential adverse impacts on Northern of that financial risk; 2) the possibility that the merger could lead to diminished service for Northern's customers; 3) the possibility that the merger could result in lower system maintenance expenditures for Northern; and 4) the level of management services charges assessed to Northern by the other members of the NiSource corporate family under the new corporate structure. A. Financial Risk -------------- The Wall Street analysts that have evaluated the merger focus on the fact that it will be financed through issuance of between $3 and $6 billion in new debt, creating a significantly more leveraged combined company.4 In fact, Standard & Poor's (S&P) predicted that if the merger is completed, Columbia's current BBB+ credit ratings could be lowered. See Standard & Poor's Utilities and Perspectives, June 5, 2000 at 5 ("Unfavorable regulatory events").5 The exact amount of new debt, and thus the degree of financial leverage for New NiSource, depends on the proportion of existing Columbia shareholders who opt for cash rather than a share exchange, and, to a lesser degree, NiSource's ability generate cash by selling off certain assets. The merger prospectus states that if 30% of outstanding Columbia shares are exchanged for New NiSource shares, and if NiSource is able to raise $900 million through the sale of assets, then New NiSource will have a capital structure of 28.5% common equity and 66.3% debt (with the remainder in SAILs, preferred stock and other hybrid securities). This highly leveraged capital structure is also the most optimistic outcome anticipated by NiSource. - ------------------------ 4 In its response to Staff Data Request No. 1-17, Northern provided numerous reports from equity and bond rating agencies regarding the NiSource/Columbia merger. 5 S&P also seems to hold a dim view of the Ohio Public Utilities Commission's statement to the SEC that the proposed merger would have no effect on its ability to protect the interests of Ohio ratepayers, reporting it as an "unfavorable regulatory event." Id. -- ORDER -7- Docket No. 2000-322 - -------------------------------------------------------------------------------- The worst-case outcome, where no Columbia shares are exchanged for New NiSource shares and NiSource is unable to sell any of its assets, results in a capital structure of approximately 11.3% common equity and 83.9% debt (with the remainder in SAILs, preferred stock and other hybrid securities). At the technical conference, Northern asserted that the worst-case outcome was unlikely and that it expected that at least 30% of Columbia shares would be exchanged for NiSource stock. Mr. Maassel, on behalf of Northern, testified that a large portion of the existing NiSource and Columbia shares are held by institutional investors and that a number of those investors have indicated a preference for NiSource stock because that option would allow deferral of the income taxes which would be payable if they opted for a cash payment. High levels of financial leverage raise two concerns. First, as indicated by S&P, high levels of debt will likely lead to lower bond ratings and, by extension, higher borrowing costs and/or difficulties in accessing capital markets. High financial leverage can also result in weaker cash flow, lower levels of interest coverage and, a reduced capacity to withstand unforeseen contingencies. Offsetting this, NiSource maintains that it will be able to achieve operating cost savings and revenue enhancements of $98 million in the first full year after the merger, rising to $185 million in the fifth year. If for any reason these savings are not obtained, NiSource could face additional financial stress. Furthermore, we note that although Mr. Maassel testified that a number of Columbia's institutional investors would opt for NiSource stock even if the price dropped below $16.50, he could not predict how far the price would have to drop before significant numbers of investors switched to opting for the cash payment. Undoubtedly, there is some price at which investors' interest in NiSource stock would drop below the 10% threshold. Consequently, Mr. Maassel's observation does not ensure that the worst-case scenario would not occur. One possible consequence for a highly leveraged, financially stressed holding company could be increased pressure to reduce the capital and operating budgets of Northern (as well as other utility subsidiaries) below reasonable levels, resulting in inadequate service. While we recognize that such problems represent risks, rather than certainties, we must consider whether it is necessary to require certain conditions to protect Northern's Maine customers. While we might simply approve this reorganization subject to the requirement that NiSource maintain a minimum equity level of 28.5% at the consolidated parent level to ensure at least that degree of financial security, we recognize that this would be impractical given the complexities it would present for this transaction. The Company asserts that such a condition ORDER -8- Docket No. 2000-322 - -------------------------------------------------------------------------------- would be "a deal breaker" in that the SEC might not look favorably on this contingency. Northern also argued that such a condition could exceed our regulatory jurisdiction. Moreover, while it is not a certainty, Northern has represented that it expects the SEC to impose substantially the same requirement as part of its own approval process. Finally, Mr. Maassel has testified that NiSource would not pay any common dividends if its common equity ratio falls below 28.5%. Q. How critical is your ability to find one to 200 million dollars in revenue enhancements and cost savings to get back down to -- to get up to a 30% equity level? A. To get to the equity, I don't think that it's particularly critical. The commitment that we have made is that we will be there and will make that to the SEC, we've made it to the rating agencies. There is no doubt we're going to have to be at 30%. So, what you're asking me is given my choice between paying a dividend to the shareholder and getting to 30% equity ratio, I have no choice. We've got to get to the 30% equity ratio. To the extent we fall short, then, on getting the synergies, it comes out of the shareholder pocket. Tr. A at 103-104. OPA urged us to carefully review the need for financial conditions and deferred to our Staff's proposed conditions. In summary, we have two concerns. The first is that at best, New NiSource will be a heavily leveraged company that could be forced to impose higher costs on its operating subsidiaries, perhaps forcing them to provide lower quality of service to their customers. The second is that the degree of leverage would become extremely high if few or no Columbia shareholders opt for NiSource shares in lieu of cash, which will depend largely on the price of NiSource stock shortly before the merger is finalized. While NiSource may well be able to attain its best-case common equity ratio at closing, there is no certainty that it will be able to do so. Consequently, we conclude that it is necessary to impose conditions that are adequate to protect Maine ratepayers from any adverse effects of high financial leverage at the parent level. These conditions are as follows: 1. If the new parent corporation's bond rating drops below investment grade, the Commission may open an investigation to determine whether it is necessary to modify Northern's capital structure, to restrict dividends, or to take any other steps that it deems are ORDER -9- Docket No. 2000-322 - -------------------------------------------------------------------------------- warranted to protect Northern and its ratepayers from adverse financial or operational effects of the NiSource/Columbia merger;6 2. Northern is required to maintain a capital structure that includes a minimum common equity component of 40% (including short-term debt, current maturities of long-term debt, and capital leases). Common equity shall be defined as reflected in the PUC annual report, and compliance will be determined by the lesser of the average common equity ratio for the year or the common equity ratio at fiscal year end. This requirement shall remain in effect for five years from the date the merger is consummated unless modified by order of the Commission; 3. In lieu of prescribed restrictions on Northern's dividend policy, we require Northern to notify the Commission within 30 days if it pays a dividend to the Public Utility Holding Company (NiSource) or to any other affiliate that is more than 100% of income available for common dividends, calculated on a 2-year rolling average basis beginning with the first quarter following the closing of the merger. This notice should inform the Commission of Northern's financial condition and provide justification for the dividend payment. The Commission reserves the right in the future, should financial circumstances warrant, to impose limitations on the dividend policy of Northern, the regulated local distribution company; 4. In recognition of the fact that Northern and Bay State Gas Company (which wholly owns Northern) function as an integrated borrowing unit and to protect Northern against adverse impacts of this reorganization, the Commission may impute a bond rating to Northern equivalent to Bay State Gas Company's current Standard & Poors (S&P) bond rating (which is A) in any future rate case or other investigation for Northern, unless the Commission determines that the change in bond rating does not result from the merger.7 This provision shall remain in effect for five years from the date the merger is consummated unless modified by order of the Commission; and 5. Northern shall provide the Commission with copies of any filings to the Securities and Exchange Commission (SEC) made by or related to Northern, and any waiver requests made by NiSource or Bay State Gas Company. - ------------------------ 6 We reject Northern's suggestion to modify this provision to require the bond rating to drop below investment grade for a period of six months because it is unnecessarily restrictive. Moreover, ratings changes by their nature lag the course of events. Finally, a drop in bond rating provides a precondition for regulatory action but does not compel it. We will use our discretion to determine when action is warranted. 7 The utility has the burden of proof on this point. ORDER -10- Docket No. 2000-322 - -------------------------------------------------------------------------------- Finally, we note that we have not incorporated Northern's suggested language stipulating that our actions under these conditions will be "subject to Northern's substantive and procedural rights under all applicable provisions of law" because nothing we would (or could) do by this Order would have the effect of foreclosing Northern from pursuing its lawful rights. B. State Regulatory Issues ----------------------- 1. Corporate Structure ------------------- Two years ago, we approved a reorganization for Northern that involved the merger of Northern's corporate parent, Bay State Gas Company, with NIPSCO Industries, Inc. (NIPSCO).8 Northern Utilities, Inc., Request for Approval of Reorganization - Merger with NIPSCO Industries, Docket No. 98-216, Order Approving Stipulation and Merger (June 12, 1998). We approved alternate merger plans, one in which Northern would exist as a direct subsidiary of NIPSCO and one in which both Bay State and Northern would be merged into NIPSCO's largest public utility subsidiary, Northern Indiana, to operate as separate divisions.9 When the instant reorganization petition was filed, the Commission learned that Northern had remained a subsidiary of Bay State, and had not been reorganized as a direct subsidiary of NiSource. Bay State exists directly under NiSource in the corporate structure. Thus, Northern has two layers above it in the corporate structure, rather than one as was originally proposed by Northern and approved by us in Docket No. 98-216. This circumstance causes two concerns. First, Northern, Bay State, and NiSource did not carry out the reorganization that was represented to us and which we approved, nor did they seek modification of our Order to allow for the current structure. This constitutes a failure both to comply with our Order and to bring their proposed modification before us. We cannot simply overlook failures by public utilities to comply with Maine law. It is incumbent upon us to enforce our orders and to uphold the statutory requirements for utilities. Chapter 15 of Title 35-A, the laws governing our regulation of public utilities, establishes that acts, omissions, and failures of public utilities to - ------------------------ 8 NIPSCO stands for Northern Indiana Public Service Company. NIPSCO Industries, Inc. was an Indiana corporation owning all of the common stock of several regulated and unregulated subsidiaries, exempt from most provisions of the Public Utility Holding Company Act of 1935 as amended. This corporate family is now called NiSource. 9 Northern Indiana was a public utility operating company supplying natural gas and electric energy to the public. ORDER -11- Docket No. 2000-322 - -------------------------------------------------------------------------------- comply with lawful requirements or orders of the commission are subject to civil penalties. We find that violations have occurred but reserve the question of what sanction is warranted pending further review of the matter. We direct our Staff to present the range of possible penalties that we may impose and to recommend an appropriate penalty for the Company for these actions. Second, because we did not consider the present corporate structure in the prior reorganization docket, we have not determined whether it is consistent with the interests of Northern's ratepayers and investors, as required by statute. We are concerned that the layered corporate structure may unreasonably increase the number of management service charges that are levied upon Northern. We are also concerned that the more complicated corporate structure may limit our ability to effectively assess and limit costs passed down to Northern from multiple parents, especially where those parents are not within our regulatory jurisdiction. The Company states that the reason Northern was not established as a separate subsidiary of NiSource was that the Company subsequently discovered that there would be adverse tax consequences of doing so. It determined that the benefits of setting up Northern as originally proposed do not outweigh the adverse tax impacts. The Company argues that this structure retains the historic corporate relationship between Northern and Bay State and reflects their combined operational and managerial natures. In that regard, they argue that keeping Northern in its position as a subsidiary of Bay State is in the interests of Northern's ratepayers and shareholders. Our review of this aspect of the NiSource family corporate structure has been limited by Northern's request for an expeditious disposition of the present reorganization involving primarily the NiSource/Columbia merger. The Company's failure to report to us that it did not reorganize as it had proposed and the reasons for changing its approach is troublesome. It is difficult to make a final determination about the current corporate structure in the context of an expeditious review of this reorganization. However, while we might prefer to reserve judgment on the matter to a later time when we have had an opportunity to gather better information on it, the statute directs that proposed reorganizations be reviewed and approved to be effective. Thus, we will address the matter herein. On the basis of the limited record before us, this corporate structure does not appear inconsistent with the interests of ratepayers or shareholders. In fact, Northern's management and operation is, and has long been, integrally connected with that of Bay State. The primary difference is that Northern now has a second corporate layer above it. We are concerned that corporate layering could lead to excessive management service charges upon the ORDER -12- Docket No. 2000-322 - -------------------------------------------------------------------------------- utility subsidiary. We believe, however, that we can establish protective conditions in this order that will work to protect ratepayers against the possible adverse consequences of this layered corporate structure. These conditions involve our authority to review and disallow management service fees if we determine them to be unreasonable, as more fully explained in the next section of this order. Further, Northern has indicated that it will file revised management service contracts for our review and approval within the next year. Northern also asserts that all management service transactions to date are in accordance with Chapter 820 of our rules because services between affiliates are billed at cost.10 Finally, our approval of the current corporate structure is explicitly subject to later revision if upon further information and review we determine that it is warranted. We reserve our authority to require Northern to conform to the corporate structure that we approved in Docket No. 98-216 should we determine it to be warranted. 2. Management Service Contracts and Charges ---------------------------------------- We impose conditions on our approval of the current structure because this structure could obscure or obstruct our review of the reasonableness of management service charges between Northern and its affiliates. Specifically, we require that the Company request acknowledgement in any SEC order approving the NiSource/Columbia merger that the Maine Commission intends to retain the right to review, and to disallow, as warranted, any service charges rendered by or to Northern in the NiSource corporate system that may be subject to recovery in rates. The Company has agreed to make this request of the SEC and has agreed to waive any claim or defense that the Commission's jurisdiction over affiliate transactions (as defined by Maine law) and the Commission's rate-making authority, as it relates to cost allocations among affiliates, is preempted by PUHCA or any other federal statute. These are protections that we have previously ordered in reorganizations involving multi-jurisdictional corporate structures. See CMP Group, Inc. et al, Request for Approval of Affiliated Interest Transactions, Docket No. 99-411, Order (Jan. 4, 2000) (Energy East) at 26-27. Moreover, Northern and its affiliates acknowledge and agree that any future management service contracts between Northern and any affiliate must comply with all applicable provisions of law, including Chapter 820 of the Commission's regulations. - ------------------------ 10 We have not had sufficient opportunity to confirm Northern's assertion here and will reserve that judgment for a future case. ORDER -13- Docket No. 2000-322 - -------------------------------------------------------------------------------- With these conditions, we see no reason at this time to require that Northern be established as a separate subsidiary of NiSource as was initially proposed and approved in Docket No. 98-216. 3. Access to Books and Records --------------------------- As with similar reorganizations we have approved, we condition our approval of this reorganization on having access to the books and records of NiSource and all of its affiliates whose activities relate to, or in any way impact, the operations, costs or revenues of Northern in Maine, to the same extent as the Commission has authority to obtain such information from a utility pursuant to 35-A M.R.S.A. ss. 112. See Energy East at 26-27. See also, Bell Atlantic Maine, Notice of Merger with GTE Corp., Docket No. 98-808, (Dec. 2, 1999). The determination of whether the affiliates' activities relate to or in anyway impact the operation, costs or revenues of Northern will be in the sole discretion of the Commission. This condition will allow us to monitor activities and to determine whether any improper affiliate transactions or other abuses are occurring. The NiSource affiliates must provide this access in a reasonable and timely manner. At the Commission's request, this access must be available in Maine. Detailed information pertaining to any proposed transaction impacting Northern must be available to us. 4. Operational Safeguards ---------------------- The system operation and maintenance and service quality of a public utility can suffer when cash that would otherwise be dedicated to these aspects of the business is diverted to a parent or when capital is depleted. To hedge against such potential adverse impacts that could result from this merger, we require the following maintenance and service reporting requirements as conditions of our approval. a. System Maintenance ------------------ System maintenance is integral to the provision of safe and adequate service. Commissions sometimes order utilities to maintain a particular annual system maintenance spending level in an attempt to ensure that adequate maintenance will continue into the future. We have rejected spending targets and recognize that such an approach can create a perverse incentive for the utility that is ordered to spend those dollars within the allotted time. See Energy East at 25. We do not wish to see ratepayer funds needlessly spent so will not impose such a condition on Northern. Instead, we will require Northern to work with our Gas Safety Inspector to assess the condition of certain vulnerable parts of its system, and to develop and implement a reasonable program for needed replacements. ORDER -14- Docket No. 2000-322 - -------------------------------------------------------------------------------- In particular, we require Northern to evaluate the condition of its bare steel and small diameter (under 8 inches) cast iron pipes. Bare steel pipe and small diameter cast iron pipes are components of natural gas pipeline systems that are susceptible to deterioration over time. These materials, installed years ago, prior to Northern's ownership and during the age of manufactured gas systems, generally are targeted for replacement with newer, more recommended materials. For the last several years, Northern has replaced these materials when necessary or convenient. We wish to determine whether that program is sufficient; it would be wise to assess these facilities to determine their condition. To ensure that this program does not suffer from lack of attention or diverted funds, we require this evaluation as a condition of this reorganization. Following the analysis, Northern shall work with our Safety Inspector to develop a reasonable program to replace bare steel and small diameter (under 8 inches) cast iron facilities as safety and prudence dictate. Disagreements with respect to the reasonable terms of such a replacement and maintenance program and of reporting requirements shall be presented to the Commission for resolution.11 b. Customer Service Quality ------------------------ Customer service quality can also suffer when utility funds are short or when management's interest in this aspect of a utility subsidiary is diluted after a merger. In Bell Atlantic-Maine Notice of Merger with GTE Corporation, Docket-No. 98-808, Order on Reconsideration (Aug. 25, 1999) (noting decline in quality of service and management attention), we observed that service quality may deteriorate when a Maine utility becomes part of a larger, multi-state firm. Such a decline is unacceptable and we will guard against it. In other reorganizations, we have implemented service standards and related penalties to assure that customer service quality is maintained. See Energy East at 13, 24-25. In Energy East, we extended service quality benchmarks post-merger. Here, we have no pre-developed service quality parameters. The short time frame of this case does not allow their development. We will, then, require Northern to provide to us all historic records in its possession for the service quality criteria listed below, and to report to us on these criteria annually thereafter beginning with - ------------------------ 11 We have incorporated some of Northern's comments filed June 14, 2000 on this issue but we decline to adopt them in full. ORDER -15- Docket No. 2000-322 - -------------------------------------------------------------------------------- 2000.12 We will act as necessary should we find that service quality is inadequate. Northern shall report annually to the Commission, on a percentage basis, for the Maine division, the following measures as overall indicators of service quality: 1) "Service appointments completed on the scheduled day," indicates how often Northern has made a service or meter call on the same day as the appointment was scheduled with the customer. 2) "PUC complaints per 1000 customers" indicates the number of Northern Maine division customer complaint cases per 1000 residential customers that have been filed with the Commission. 3) "Lost time incidents per 100 employees," a standard OSHA safety measure, indicates the number of workplace accidents that resulted in lost work time per 100 employees. 4) "One hour responses to odor calls" indicates how often Northern has responded within one hour to a telephone call to the Company reporting a gas leak or odor.13 5) "Main and service damage not the fault of third parties" indicates how often mains and services are damaged by a third party as a result of incorrect locating by Northern or its agents, rather than due to the fault of the third party (such as when an excavator damages correctly-marked facilities or fails to notify Dig Safe before commencing work). 6) "Actual on-cycle meter reads" indicates how often Northern records the actual reading of customer meters within the scheduled grouping of meters, instead of estimating customers' consumption. 7) "Telephone response time for billing and service calls" indicates how often the Company answers customer calls for billing and service-related requests within 30 seconds after the call enters the queue.14 - ------------------------ 12 The Company testified that it has approximately two to three years of data on most of these service quality criteria. 13 This should be expressed as a percentage using as a denominator the total number of calls reporting a gas odor or leak annually. 14 Due to consolidated call center operations, measures 7 and 8 will be reported on a Company-wide basis (includes Northern's Maine and New Hampshire Divisions as well as Bay State Gas Company). ORDER -16- Docket No. 2000-322 - -------------------------------------------------------------------------------- 8) "Telephone response time for emergency calls" indicates how often the Company answers customer calls into the emergency leak line within 30 seconds after the call enters the queue. Any change in reporting criteria must be approved by the Director of the Consumer Assistance Division, provided that any issues that cannot be resolved will be presented to the Commission for resolution. At the end of five years, Northern may petition the Commission to remove this service criteria reporting requirement. We recognize that this reporting requirement does not provide assurance that service to Northern's customers will be adequate. We do not have an adequate record in this case to determine whether these particular criteria provide sufficient information to comprehensively monitor Northern's service quality. Further, we are aware that Northern has been experiencing billing and call center service problems in recent months. Consequently, within one year of the date of this order we will determine whether to open an investigation to review the adequacy of Northern's service quality reporting criteria and to determine whether we should adopt any mechanisms, programs, standards, or penalties to ensure that Northern provides adequate service quality to its customers. Consistent with our general authority, in the event that Northern's service quality is inadequate, we will order an appropriate remedy, one that could include financial directives or instituting a performance based regulatory mechanism. 5. Exemption --------- Northern requested that we exempt PNGTS, also an affiliate, from the review and approval requirements of Maine law. While we do not have authority to waive a statutory requirement, the statute allows us to exempt reorganizations by rule or order. We have reviewed the transaction for its impact on the local distribution utility subject to regulation in Maine and have conditioned our approval to protect the interests of ratepayers. Because the NiSource/Columbia transaction is also subject to the review and approval of FERC, the agency with direct jurisdiction over PNGTS as an interstate facility, we exempt PNGTS from state review in this instance. Finally, to the extent 35-A M.R.S.A. ss.ss.1101(3) and 1103(1) are applicable to this transaction, we give our approval. ORDER -17- Docket No. 2000-322 - -------------------------------------------------------------------------------- Accordingly, we O R D E R 1. That Northern Utilities, Inc.'s proposed reorganization involving the merger of NiSource, Inc. and Columbia Energy Group is approved pursuant to 35-A M.R.S.A. ss.ss.708, 1101(3), and 1103(1), subject to the financial and operational conditions established in this Order; 2. That Staff shall recommend a penalty for Northern for its failure to comply with our Order in Docket No. 98-216 dated June 12, 1998 or to propose a modification of that Order, for our consideration; and 3. That within one year, we will determine whether to open an investigation on the adequacy of Northern's customer service monitoring criteria and on what measures or programs we may adopt to ensure that the service Northern provides its customers is adequate. Dated at Augusta, Maine, this 30th day of June, 2000. BY ORDER OF THE COMMISSION /s/ Dennis L. Keschl ----------------------------------------- Dennis L. Keschl Administrative Director COMMISSIONERS VOTING FOR: Welch Nugent Diamond ORDER -18- Docket No. 2000-322 - -------------------------------------------------------------------------------- NOTICE OF RIGHTS TO REVIEW OR APPEAL 5 M.R.S.A. ss. 9061 requires the Public Utilities Commission to give each party to an adjudicatory proceeding written notice of the party's rights to review or appeal of its decision made at the conclusion of the adjudicatory proceeding. The methods of review or appeal of PUC decisions at the conclusion of an adjudicatory proceeding are as follows: 1. Reconsideration of the Commission's Order may be requested under --------------- Section 1004 of the Commission's Rules of Practice and Procedure (65-407 C.M.R.110) within 20 days of the date of the Order by filing a petition with the Commission stating the grounds upon which reconsideration is sought. 2. Appeal of a final decision of the Commission may be taken to the -------------------------- Law Court by filing, within 30 days of the date of the Order, a Notice of Appeal with the Administrative Director of the Commission, pursuant to 35-A M.R.S.A. ss. 1320(1)-(4) and the Maine Rules of Civil Procedure, Rule 73, et seq. 3. Additional court review of constitutional issues or issues ----------------------- involving the justness or reasonableness of rates may be had by the filing of an appeal with the Law Court, pursuant to 35-A M.R.S.A.ss. 1320(5). Note: The attachment of this Notice to a document does not indicate - ---- the Commission's view that the particular document may be subject to review or appeal. Similarly, the failure of the Commission to attach a copy of this Notice to a document does not indicate the Commission's view that the document is not subject to review or appeal. EX-99 5 0005.txt EXHIBIT D-12 EXHIBIT D-12 STATE OF NEW HAMPSHIRE PUBLIC UTILITIES COMMISSION 8 Old Suncook Road Concord, N.H. 03301-7318 June 6, 2000 Mr. Edward R. Hill, Jr. Robin & Rudman LLP 50 Rowes Wharf Boston, MA 02110-3319 RE: DOCKET DG 00-086, NORTHERN UTILITIES, INC. PETITION FOR A DETERMINATION THAT THE COMMISSION'S APPROVAL IS NOT REQUIRED WITH RESPECT TO, OR FOR APPROVAL OF A MERGER AND RELATED TRANSACTIONS Dear Mr. Hill: On February 28, 2000, NiSource Inc. (NiSource), the ultimate corporate parent of Northern Utilities, Inc. (Northern)1 a New Hampshire jurisdictional gas utility, and Columbia Energy Group (Columbia) announced the approval by their respective boards of directors of a definitive merger agreement under which NiSource will acquire all of the outstanding shares of Columbia. Upon completion of the transaction, Columbia and NiSource will become wholly owned subsidiaries of a new holding company and the transaction will be accounted for as a purchase. If NiSource shareholder approval is not received, the transaction will automatically be restructured as a purchase of Columbia. On April 12, 2000, Northern filed a Petition for a Determination that the Commission's Approval Is Not Required with Respect To, or for Approval of a Merger and Related Transactions (Petition) regarding the proposed acquisition/merger of Columbia by/with NiSource. The Petition included a copy of the Agreement and Plan of Merger dated as of February 27, 2000, Amended and Restated as of March 31, 2000, the Direct Testimony of Mark T. Maassel, Vice President, Regulatory and Government for NiSource, and several exhibits depicting the Pre-Merger, Planned and Alternative Organizational Structures. Northern avers that the subject merger does not require approval under RSA 374:33 or, if it does, is consistent with RSA 369:8. For the reasons indicated below, the Commission believes that the instant merger is subject to - ------------------------ 1 NiSource, known formerly as NIPSCO Industries, Inc., acquired Northern indirectly through its acquisition of Bay State Gas Company (Bay State) approved by the Commission in Northern Utilities, Inc. 83 NH PUC 401 (1998) Mr. Edward R. Hill, Jr. Page 2 June 6, 2000 Commission jurisdiction pursuant to RSA 374:33, and, therefore, is subject to review pursuant to RSA 369:8. According to the Petition, pursuant to the Merger Agreement, New NiSource Inc. (New NiSource) has been organized under the laws of Delaware, and is interposed between NiSource and its existing shareholders. New NiSource will effect the merger and acquisition of Columbia through two wholly-owned subsidiaries. A wholly-owned subsidiary of New NiSource will merge with and into Columbia, as a result of which Columbia will become a wholly-owned subsidiary of New NiSource. Another wholly-owned subsidiary of New NiSource will merge with and into NiSource. NiSource will become a wholly-owned subsidiary of New NiSource. All of the prior subsidiaries of NiSource, including Bay State and, therefore, Northern, will become subsidiaries of New NiSource. NiSource will then merge into New NiSource and New NiSource will be renamed NiSource. Under neither the Preferred Plan nor the Alternative Plan will any stock of any New Hampshire public utility be acquired. Both the Petition and the Testimony of Mr. Maassel represent that the proposed merger will have no adverse or material effect on rates, terms, service, or operation of Northern within New Hampshire. Mr. Maassel states that 1. The merger will in no manner affect the jurisdiction of the Commission over Northern's current operations. 2. The merger will not result in a change in the management of Northern or Bay State, and thus the merger will have no material impact on the local operations of Northern. 3. The merger will not result in any change in the current ownership or control of Northern. 4. The merger will not cause Northern's rates for service to increase, nor will it require any "acquisition premium" to be allocated to Northern. According to the Petition, the merger is expected to provide a number of affirmative ratepayer benefits, including the acquisition by Northern's ultimate parent company of significant assets, and enable Northern to better serve the needs of its customers. The Petitioners claim that the merger will provide the opportunity for Northern's ratepayers to realize certain long-term advantages through the efficient use of the combined pipeline and storage assets of its ultimate parent company, plus the ability to best use natural gas supplies across time, weather, and geography (which ability is expected to increase over time as existing resource commitments expire). They also claim the merger will facilitate the provision of new products and services to Northern's Mr. Edward R. Hill, Jr. Page 3 June 6, 2000 customers and facilitate the development of new technological processes and systems in the future. Further, the merger is expected to enhance Northern's efforts to maintain operational excellence through technological improvements, process enhancements, and effective cost management by allowing all the subsidiaries to implement the best practices of each, for their mutual benefit. Finally, the merger is expected to improve the marketing and delivery of complementary energy products and services through assured energy supplies, broad knowledge of a wide range of energy products, greater credibility with customers, and opportunities to utilize the complementary business activities of each company. RSA 374:33. Acquiring Stocks, etc. provides: No public utility or public utility holding company as defined in section 2(a)(7)(A) of the Public Utility Holding Company Act of 1935 shall directly or indirectly acquire more than 10 percent, or more than the ownership level which triggers reporting requirements under 15 U.S.C., section 78-P, whichever is less, of the stocks or bonds of any other public utility or public utility bolding company incorporated in or doing business in this state, unless the commission finds that such acquisition is lawful, proper and in the public interest. Nothing in this section shall prevent a public utility being in fact the owner on June 1, 1911, of the majority of the capital stock of any other public utility, or leasing or operating such other public utility, from acquiring the balance or all of the outstanding capital stock of such other public utility a majority of which stock is so owned or which is so leased or operated. Northern admits in its Petition that only under the Preferred Plan would any stock of such a public utility holding company possibly be acquired, and thus, only under the Preferred Plan could the Commission's approval of the subject merger under RSA 374:33 possibly be required. However, Northern goes on to state that the Commission should find that its approval of the subject merger is not required because such approval would be required only if the transactions thereunder would constitute the "acquisition" of an ownership interest in an "other" public utility holding company. The proposed transactions, as noted above, would merely serve to interpose a holding company (New NiSource) between NiSource and its shareholders, and then only temporarily. According to Northern, only under the most literal interpretation of such transactions would there be any "acquisition" of NiSource stock, and then only by New NiSource, which is not an "other" holding company but is merely a subsidiary of NiSource established to effectuate the subject merger and acquisition of Columbia, a non-New Hampshire entity. The Commission, however, believes that the proposed transaction is subject to Commission jurisdiction under RSA 374:33 and, therefore, RSA 369:8. NiSource will be merged first into a subsidiary of New NiSource and then into Mr. Edward R. Hill, Jr. Page 4 June 6, 2000 New NiSource and, as the Petitioners note, a literal interpretation of the transaction makes RSA 374:33, and, therefore, RSA 369:8, applicable. In Order, No. 23,470, in Docket DG 99-193 approving the proposed merger of EnergyNorth, Eastern Enterprises and KeySpan Corporation, EnergyNorth Natural Gas, Inc. (May 8, 2000), and Order No. 23,308, in Docket DE 99-035, approving the proposed merger of New England Electric System and National Grid Group plc, New England Electric System, (October 4, 1999), we discussed at some length the statutory framework within which the Commission must act in considering acquisitions of New Hampshire public utilities and/or their parent companies. The Commission determined that mere representations are not sufficient to satisfy the statutory requirement of RSA. 369:8, II; the Commission must independently verify that no adverse effect on the rates, terms, service, or operation of the utility to be acquired will occur. Under the public interest standard of RSA 374:33 and the "no adverse effect" standard of RSA 369:8 to be applied by the Commission where a utility or public utility holding company seeks to acquire, directly or indirectly, a jurisdictional utility, the Commission must determine that the proposed transaction will not harm ratepayers. New NiSource is only a temporary shell. Once the transaction is complete, the result would be no different from the situation in which NiSource buys Columbia outright, a transaction over which the Commission would have no jurisdiction. The use of the New NiSource Shell to accomplish the Columbia purchase has no adverse impact on customers of Northern. After careful review of the Petition, accompanying Direct Testimony of Mr. Maassel and the representations of the Petitioner noted herein, the Commission has determined that the transaction is reasonable, lawful, proper and in the public interest and will not have an adverse effect on the rates, terms, service or operation of Northern. Subsequent to the merger, the Commission will continue to exercise regulatory jurisdiction over the rates, services, and operations of Northern following completion of the subject merger. However, Northern is hereby placed on notice that the Commission expects Northern, pursuant to RSA 374:4, to provide the Commission Staff thirty (30) days notice in advance of any changes in any operating areas that may result from the adoption of any "best practices" as a result of the merger or otherwise. Very truly yours, /s/ Thomas B. Getz Thomas B. Getz Executive Director & Secretary cc: Service List EX-99 6 0006.txt EXHIBIT D-15 Exhibit D-15 STATE OF INDIANA ========================================= INDIANA UTILITY REGULATORY COMMISSION 302 W. WASHINGTON STREET, ROOM E306 June 23, 2000 Jonathan G. Katz, Secretary Securities and Exchange Commission 450 5th Street, N.W. Washington, D.C. 20549 RE: NISource, Inc. and Columbia Energy Group ---------------------------------------- Dear Mr. Katz: The Indiana Utility Regulatory Commission (IURC) received an inquiry regarding our ability to continue to monitor possible cross-subsidization issues between NISource's subsidiary Northern Indiana Public Service Company (NIPSCO) and Columbia Energy Group (Columbia) as a result of the acquisition of Columbia by NISource. The IURC believes based on Indiana Code 8-1-2-49, that NIPSCO and Columbia are "affiliated interests" and, as such, NIPSCO must file any contract between it and Columbia. Specifically, Indiana Code 8-1-2-49 provides, in part, that: [I]f it be found that any such contract is not in the public interest, the commission after investigation and hearing is - authorized to disapprove such contract. Based on this statutory authority, and other related statutes, the Commission believes that it has jurisdiction to monitor the activities of NIPSCO to ensure that cross-subsidization between NIPSCO and Columbia or any other affiliate does not occur. The foregoing opinion is given with the understanding that NISource will operate Columbia and NIPSCO as separate subsidiaries of NISource and that Columbia and NIPSCO will not be merged into a single company. The Commission reserves the right to alter this opinion in the event that there are material changes between NIPSCO and Columbia, NISource and its affiliates, or this Commission's statutory authority. Jonathan G. Katz June 23, 2000 Page 2. Finally, the IURC advises that Northern Indiana has operated in Indiana as a combination electric and gas utility, with overlapping service territories, continuously since 1912, and such combined electric and gas operations are in conformity with our policies and Indiana law. Sincerely, /s/ William D. McCarty William D. McCarty Chairman EX-99 7 0007.txt EXHIBIT D-16 EXHIBIT D-16 PUCO The Public Utilities Commission of Ohio September 2, 1999 Jonathan G. Katz Secretary to the Commission Securities and Exchange Commission 450 Fifth Street, NW Washington, DC 20549 Dear Mr. Katz: As requested by the East Ohio Gas Company, the Public Utilities Commission of Ohio has conducted a structural review of the proposed Consolidated Natural Gas (CNG) and Dominion Resources, Inc. (DRI) merger. We recognize that the shareholders of CNG, the parent company of the East Ohio Gas Company, and DRI have approved the merger of the two companies. The Staff of the Commission has negotiated the attached commitments and statements from the companies. In light of the attached commitments, the Commission is satisfied that the merger will not adversely affect Ohio's interests. The Commission certifies that following the merger, it will continue to have jurisdiction over the East Ohio Gas Company. The Commission has the authority and the resources to protect Ohio ratepayers, and intends to exercise that authority and to use those resources to protect those ratepayers. The Commission believes that the merger will have no detrimental effect on the Commission's jurisdiction or an its ability to act to protect Ohio ratepayers. Sincerely, /s/ Alan Schriber Alan Schriber Chairman Public Utilities Commission of Ohio 180 East Broad Street Columbus, OH 432l5-3793 Dear Sirs and Madams: The shareholders of Consolidated Natural Gas Company ("CNG"), the parent company of The East Ohio Gas Company, and those of Dominion Resources, Inc. ("DRI," collectively, the "merging companies"), have approved a merger of CNG and DRI. On its own behalf, and on behalf of the merging companies, East Ohio acknowledges that the Commission has ongoing jurisdiction over East Ohio and its rates, and that that jurisdiction will not be diminished or otherwise affected by the merger. Furthermore, East Ohio has been authorized by the merging companies to make the following commitments and representations to the Commission in connection with its ongoing authority to protect East Ohio's jurisdictional customers. (1) The merging companies' business plan recognizing additional opportunities for the use of storage will not be developed in a manner detrimental to East Ohio's use of storage for the benefit of its commodity customers. CNG and DRI commit that any additional uses of storage (either East Ohio's, CNG's or a third party's) made possible by the merger will not have a detrimental impact on East Ohio's use of such storage to maximize load factor, minimize demand charges, and optimize gas acquisition costs for the benefit of its commodity customers. In addition, East Ohio expects that its expanded Energy Choice program will make the Company's on-system storage available to the suppliers of participating customers in a manner comparable to the current program. East Ohio also will offer suppliers, on a voluntary basis, an assignment of contract storage for use in the program. (2) The merging companies' business plan will create opportunities for the efficient arbitrage of gas and electricity without detriment to East Ohio's commodity customers. These efficiencies will allow the development of gas-fired generation in East Ohio's service territory supporting economic development in the region. CNG's transmission company now has seven months a year of underutilization which coincide effectively with the expected operation of DRI's power generation facilities sited on CNG. The natural gas requirements of those power generation facilities are expected to be met through incremental flowing supplies over that seven month period rather than storage due to the predominately summer period operation of such facilities. Depending on various pricing conditions in the electric power/gas markets, the combined entity will be better able to take advantage of the so-called "spark-spread," as a larger entity with both power generation and gas functions and expertise, than either company could alone. Page 2 of 4 (3) The merging companies do not anticipate any material impact on East Ohio employment levels. About 89% of the jobs presently at East Ohio are related to operations and the physical storage, distribution and customer service systems. These jobs simply cannot be moved out of state, anymore than the pipelines or customers themselves can be. Of the remaining management jobs - and 200 - no present plans exist to move or eliminate positions due to the merger. Nearly 150 of these jobs, although not technically "operations," are closely related to operations, for example, those engaged in field sales (in Ohio) or technical training (working with Ohio employees), and also cannot be effectively performed out-of-state. In fact, because East Ohio is essentially an operating utility subsidiary of CNG, most "corporate" or system managerial jobs are not now done within East Ohio, but at CNG, based in Pennsylvania. (4) The merging companies have no plans to spin-off or sell any operating local distribution companies, other than Virginia Natural Gas ("VNG"). The Virginia SCC staff raised market power issues related to the overlapping service territories of VNG and Virginia Power that were ultimately addressed by DRI's and CNG's agreement to sell or spin off VNG. In Ohio, Pennsylvania and West Virginia, no similar situation exists. The acquisition of those local distribution systems and their customers is a significant factor in the merging companies' rationale for the transaction. (5) Negotiations for a connection with the proposed Independence pipeline project are underway, and will be successfully concluded when a certificate is received from the Federal Energy Regulatory Commission. The final location of the interconnect will be determined in consultation with the Staff of the Public Utilities Commission of Ohio. If East Ohio requests an interconnect at a point where Independence does not cross existing East Ohio facilities, East Ohio will pay for the cost of any lateral pipeline that might be necessary. The Millennium pipeline project will come across northwestern Pennsylvania and not be geographically proximate to East Ohio's lines. (6) The East Ohio Gas Company, Consolidated Natural Gas Company, and Dominion Resources, Inc. will not seek to overturn, reverse, set aside, change or enjoin, whether through appeal or the initiation or maintenance of any action in any forum, a decision or order of the Public Utilities Commission of Ohio which pertains to recovery, disallowance, allowance, deferral or ratemaking treatment of any expense, charge, cost, or allocation incurred or accrued by the East Ohio Gas Company as a result of a contract, agreement, arrangement, or transaction with any affiliate, associate, holding, mutual service or subsidiary company on the basis that such expense, charge, cost, or allocation has itself been filed with or approved by the Securities and Exchange Commission, or was incurred pursuant to a contract, arrangement, agreement or allocation which was filed with or approved by the Securities and Exchange Commission. (7) The merger is driven by a convergence strategy rather than by cost synergies, and is not expected to produce significant savings at the operating levels. Net savings, if any, that may be achieved at the corporate level by reason of the elimination of redundancies ultimately will be reflected in the service company charges distributed among the operating companies, and Page 3 of 4 will be reflected in the base rates of those companies as such rates may be adjusted from time to time. (8) The merging companies will be part of a registered holding company pursuant to the Public Utility Holding Company Act of 1935 and the Regulations of the Securities and Exchange Commission thereto. There will therefore be no change in the rules governing accounting for affiliate transactions. (9) CNG and DRI are committed to expand the Energy Choice program as soon as the CAMP billing system or a suitable alternative is fully operational. DRI does not have a billing system that can accommodate a gas choice program. East Ohio will make a presentation regarding the CAMP billing system and its other billing options to the Commission at a time to be determined by the Commission. East Ohio's existing sales customers are scheduled to be converted to the CAMP system during the second quarter of 2000, and it is anticipated that the system will be fully operational in time to expand the Choice program to East Ohio's entire service territory by the winter of 2000-2001 without any billing problems. In order to accommodate supplier concerns regarding access in storage, East Ohio will provide injection rights prior to the winter period and/or sell storage in place during the winter period to suppliers. (10) The merged company intends to participate in the retail electric market in Ohio. At a minimum, it will offer retail electric service in the counties in which East Ohio provides gas service. (11) The books and records of East Ohio shall be accessible to the Commission and its Staff during reasonable business hours, in Ohio. Should the books and records of its parent company or of any other company within the system created by the merging companies become relevant to the jurisdictional rates or tariffed services of East Ohio or relevant to material and specific code of conduct complaints brought to the attention of the Commission Staff, or upon a complaint filed at the Commission alleging reasonable grounds pursuant to ss. 4905.26 O.R.C. necessitating their view, such relevant books and records as required by the Commission will also be made accessible to the Commission and its Staff and, if at a location outside Ohio, the reasonable expenses of the Commission incurred in the travel required for its review will be reimbursed by the merging companies. (12) East Ohio shall continue to work with the Commission and its Staff to develop a Standard Operating Procedure ("SOP"), to be referenced in its tariffs, that provides alternate methods governing the extension of East Ohio's facilities and mains, and the methods available for financing such extensions, and agrees to adopt such procedures upon agreement as to the final terms of the SOP with the Staff. It is understood that the SOP will (1) offer customers an additional payment option which reduces their up-front payment for the construction of mainline extensions; (2) incorporate a payment calculation that does not include an additional gross up for federal income taxes on the contribution; (3) require the Company to undertake a canvas of potential Page 4 of 4 customers in adjoining areas; and (4) effectively address other issues raised in the Commission Staff's mid-1998 proposed gas main extension rule. East Ohio will use its best efforts to reach agreement with the Staff on this matter and file the necessary application to amend its tariffs by December 31, 1999. If you have any questions in connection with the foregoing, please contact me directly at (216) 736-6325. Sincerely, Bruce C. Klink Vice President, Rates & Planning EX-99 8 0008.txt EXHIBIT D-17 Exhibit D-17 STATE OF MARYLAND [SEAL] PUBLIC SERVICE COMMISSION May 25, 2000 The Honorable Jonathan Katz Secretary to the Commission Securities and Exchange Commission 450 5th Street, N.W. Washington, D.C. 20549 Re: NiSource/Columbia Energy Merger File No. 70-9551 ---------------- Dear Mr. Katz: This correspondence is in reference to a recent filing by Columbia Energy Group ("CEG") a registered public utility holding company, Columbia Gas of Maryland, Inc. ("CMD"), a wholly owned subsidiary of CEG, has advised the Maryland Public Service Commission ("Commission") that CEG has applied to the Securities and Exchange Commission ("SEC") for approval of a proposed merger of CEG and NiSource, Inc. CMD requested that the Commission certify to the SEC that the proposed merger will not impair the ability of the Commission to regulate CMD or protect its retail customers in Maryland. The Commission hereby certifies that it has the statutory authority and resources to protect the ratepayers subject to its jurisdiction. The Commission intends to exercise that authority to the fullest extent possible under the law. This certification is applicable solely to CEG's application for merger with NiSource. Furthermore, this certification is subject to being revised or withdrawn by the Commission, if it deems that actions to be appropriate. By Direction of the Commission, /S/ Felicia L. Greer Felecia L. Greer Executive Secretary cc: Frances X. Wright, Counsel EX-99 9 0009.txt EXHIBIT D-18 Exhibit D-18 COMMONWEALTH OF MASSACHUSETTS OFFICE OF CONSUMER AFFAIRS AND BUSINESS REGULATION DEPARTMENT OF TELECOMMUNICATIONS & ENERGY ONE SOUTH STATION BOSTON, MA 02110 (617) 305-3500 May 12, 2000 Jonathan G. Katz, Secretary to the Commission Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Sec File No. 70-9551 Proposed Merger of NiSource Inc. and Columbia Energy Group --------------------------------------- Dear Mr. Katz: The Department of Telecommunications and Energy (the "Department") understands that on April __, 2000, NiSource Inc. ("NiSource") and its wholly-owned subsidiary New NiSource, Inc. ("New NiSource") filed an Amendment to an Application-Declaration on Form U-1 with the Securities and Exchange Commission ("SEC") relating to the proposed acquisition by NiSource of Columbia Energy Group ("Columbia") under an Agreement and Plan of Merger, dated as of February 27, 2000 and amended and restated as of March 31, 2000 (the "Merger"). NiSource is the parent holding company of, among other subsidiaries, Bay State Gas Company ("Bay State"). Bay State is a retail gas distribution company and public utility subject to the Department's regulatory authority for ratemaking and other purposes pursuant to chapter 164 of the Massachusetts General Laws. The Department, in Bay State Gas Company, D.T.E. 98-31 (Nov. 5, 1998), approved the merger of Bay State with NIPSCO Industries, Inc. (as NiSource was then known). The Department understands that following the proposed acquisition of Columbia, Bay State will either continue to be a subsidiary of NiSource or will become a subsidiary of New NiSource (which will then change its name to NiSource). Representatives of Bay State have informed the Department that the SEC has requested advice concerning the effects of the Merger on state regulation from agencies which have regulatory jurisdiction over gas distribution companies in the NiSource System. Even after SEC approval of the Merger, Bay State will remain a retail gas distribution company and public utility, subject to the Department's regulatory authority pursuant to Massachusetts General Laws Chapter 164. Please be advised that the Department hereby affirms that it has adequate resources to enforce its statutory authority and thereby protect ratepayers served by Bay State after the Merger is effectuated. Moreover, the Department will continue to exercise its authority over Bay State after the Merger. The Merger should have no detrimental effect on the Department's jurisdiction or its ability to protect Bay State's Massachusetts ratepayers. Should you require any additional information, please do not hesitate to contact my office or the Department's General Counsel, Paul G. Afonso, at 617-305-3500. Very truly yours, /s/ James Connelly James Connelly Chairman EX-99 10 0010.txt EXHIBIT H EXHIBIT H PROPOSED FORM OF FEDERAL REGISTER NOTICE SECURITIES AND EXCHANGE COMMISSION (Release No. 35-_____) Filings under the Public Utility Holding Company Act of 1935, as amended ("Act"). July __, 2000 Notice is hereby given that the following filing(s) has/have been made with the Commission pursuant to provisions of the Act and rules promulgated thereunder. All interested persons are referred to the application(s) and/or declaration(s) for complete statements of the proposed transaction(s) summarized below. The application(s) and/or declaration(s) and any amendments thereto is/are available for public inspection through the Commission's Office of Public Reference. Interested persons wishing to comment or request a hearing on the application(s) and/or declaration(s) should submit their views in writing by August , 2000 to the Secretary, Securities and Exchange Commission, -- Washington, D.C. 20549, and serve a copy on the relevant applicant(s) and/or declarant(s) at the address(es) as specified below. Proof of service (by affidavit or, in case of an attorney at law, by certificate) should be filed with the request. Any request for hearing shall identify specifically the issues of fact or law that are disputed. A person who so requests will be notified of any hearing, if ordered, and will receive a copy of any notice or order issued in the matter. After August , 2000, the application(s) and/or declaration(s), -- as filed or as amended, may be granted and/or permitted to become effective. * * * * * * NISOURCE INC. AND NEW NISOURCE INC. (70-9551) ---------------------------------- NiSource Inc. ("NiSource"), 801 East 86th Avenue, Merrillville, Indiana 46410-6272, and New NiSource Inc. ("New NiSource"), 801 East 86th Avenue, Merrillville, Indiana 46410-6272, have filed a joint application-declaration the ("Application-Declaration") pursuant to Sections 9(a)(2) and 10 of the Public Utility Holding Company Act of 1935, as amended (the "Act"), in which they seek Commission approval for a business combination and for other certain related matters. In the proposed business combination (the "Merger Structure"), upon receipt of all necessary approvals, NiSource and Columbia Energy Group ("Columbia") would become subsidiaries of New NiSource, and New NiSource will register with the Commission as a holding company pursuant to Section 5 of the Act. Specifically, Parent Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of New NiSource, will merge into NiSource, and Company Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of New NiSource, will merge into Columbia. NiSource and Columbia will be the surviving corporations in the merger and will be wholly-owned by New NiSource. Immediately after the merger, NiSource will merge into New NiSource. New NiSource will then change its name to "NiSource Inc." and serve as a holding company for Columbia and the current subsidiaries of NiSource. NiSource, formerly NIPSCO Industries, Inc., an Indiana corporation, was incorporated in 1987 to serve as the holding company for Northern Indiana Public Service Company ("Northern Indiana"), which is a public utility under the Act, and various non-utility subsidiaries. NiSource is currently an exempt holding company pursuant to an order under Section 3(a)(1) of the Act. Northern Indiana, NiSource's largest subsidiary, is a combination gas and electric utility company which operates in 30 counties in the northern part of Indiana, serving an area of about 12,000 square miles with a population of approximately 2,200,000. Northern Indiana distributes gas to approximately 681,100 residential, commercial and industrial customers and generates, purchases, transmits and sells electricity to approximately 426,000 electric customers. NiSource holds all the issued and outstanding common stock of Kokomo Gas and Fuel Company ("Kokomo Gas"), which supplies natural gas to approximately 34,500 customers in a six-county area of north central Indiana having a population of approximately 100,000. The Kokomo Gas service territory is contiguous to Northern Indiana's gas service territory. NiSource holds all the issued and outstanding common stock of Northern Indiana Fuel and Light Company, Inc. ("NIFL"), which supplies natural gas to approximately 35,500 customers in five counties in the northeast corner of Indiana having a population of approximately 66,700. The NIFL service territory is also contiguous to Northern Indiana's gas service territory and overlaps Northern Indiana's electric service territory. NiSource holds all the issued and outstanding common stock of Bay State Gas Company ("Bay State"). Bay State provides gas service to approximately 271,900 residential, commercial and industrial customers in three separate areas of Massachusetts covering approximately 1,344 square miles and having a combined population of approximately 1,340,000. Northern Utilities, Inc. ("Northern") is a wholly-owned subsidiary of Bay State. Northern provides gas service to approximately 48,100 residential, commercial and industrial customers in an area of approximately 808 square miles in New Hampshire and Maine having a population of approximately 450,000. Northern's service area extends north from the Massachusetts-New Hampshire border to the Portland/Lewiston area in Maine. At this time, Northern remains an indirect subsidiary of NiSource, through Bay State, pending the merger and registration by New NiSource, and it is expected to continue to be an indirect subsidiary of New NiSource after the merger with Columbia. For the twelve months ended December 31, 1999, the gas and electric public utility subsidiaries of NiSource reported operating income of $467.6 million ($113.0 million gas and $354.6 million electric) on combined operating gas and electric utility revenues of approximately $2.1 billion. Results for this period included eleven months of combined operations with Bay State and Northern. Gas sales (including transportation revenues) accounted for approximately 52% and electric sales accounted for approximately 48% of NiSource's gross utility revenues. Consolidated assets of NiSource and its subsidiaries as of December 31, 1999, were approximately $6.8 billion, consisting of $5.2 billion in gas and electric utility assets ($2.4 billion gas and $2.8 billion electric) and $1.6 billion in other non-utility assets. NiSource owns all of the outstanding common stock of NiSource Pipeline Group, Inc. ("NPG"). NPG consists of Granite State Gas Transmission, Inc. ("Granite State") and PNGTS Holding Corp. ("PNGTS Holding"). Crossroads Pipeline Company ("Crossroads"), a subsidiary of NI Energy Services, Inc., which in turn 2 is a direct subsidiary of NiSource, is a natural gas transportation company that was certificated by the Federal Energy Regulatory Commission ("FERC") in May 1995 to operate as an interstate pipeline. Crossroads owns and operates a 201-mile, 20-inch diameter pipeline that extends from Schererville, Indiana, in the northwestern corner of Indiana, to Cygnet, Ohio, which is located in northwestern Ohio. At Cygnet, Crossroads' facilities interconnect with those of Columbia Gas Transmission Corporation ("Columbia Transmission"). Crossroads receives gas from Natural Gas Pipeline Company of America, Trunkline Gas Company and Panhandle Eastern Pipeline Company. Crossroads delivers gas to Northern Indiana, Ohio Gas Company, NIFL, Columbia Transmission and KNG Energy Incorporated. Granite State owns and operates a 105-mile, 6 to 12-inch diameter, interstate pipeline that extends from Haverhill, Massachusetts, where it interconnects with the facilities of Tennessee Gas Pipeline Company ("Tennessee Gas"), to a point near Westbrook, Maine, where it interconnects with Portland Natural Gas Transmission System ("PNGTS"). PNGTS Holding, together with Granite State, hold a 19.06% interest in PNGTS. PNGTS is a 292-mile, 24 to 30-inch diameter, natural gas transmission line that provides New England access to Michigan Storage fields, the Western Canada supply basin supply and the Chicago market center. PNGTS interconnects with the Tennessee Gas pipeline facilities near Dracut, Massachusetts, Northern and Granite State at locations in Maine and New Hampshire, and Trans Quebec Maritimes Pipeline Incorporated at Pittsburgh, New Hampshire. NiSource also engages in a variety of non-utility businesses through subsidiaries. EnergyUSA, Inc. ("EnergyUSA"), a wholly-owned subsidiary of NiSource, serves as an intermediate holding company for many of NiSource's non-utility businesses and coordinates the energy-related diversification efforts of NiSource. Its principal subsidiaries and their activities are: EnergyUSA-TPC Corp., which operates gas marketing and gas asset management and optimization businesses; Market Hub Partners, L.P., which develops and operates underground gas storage facilities; EnergyUSA Retail, Inc., which provides gas and other energy-related products and services to residential and small commercial customers of utilities that allow competitive suppliers to market in their service territories; EnergyUSA Commercial Energy Services, Inc., which provides traditional energy management services, including power quality consulting and energy management, to commercial and industrial entities. EnergyUSA is a partner in Mosaic Energy LLC, a new venture created to develop and market proprietary fuel cell distributed generation technology. 3 Additionally, EnergyUSA has equity interests in a domestic oil and gas producer with properties located in Texas, Oklahoma and Louisiana. Primary Energy, Inc. ("Primary"), is a wholly-owned subsidiary of NiSource, and arranges energy-related projects for large energy-intensive industrial facilities. Its wholly-owned principal subsidiaries and their activities in managing the engineering, construction, operation and maintenance of these energy-related project are: Harbor Coal Company, which has invested in a partnership to finance, construct, own and operate a $65 million pulverized coal injection facility; North Lake Energy Corporation, which has entered into a lease for the use of a 75-megawatt energy facility; Lakeside Energy Corporation, which has entered into a lease for the use of a 161-megawatt energy facility; Portside Energy Corporation, which operates a 63-megawatt energy facility; Cokenergy, Inc. which operates an energy facility to scrub flue gases and recover waste heat from the coke facility constructed by Indiana Harbor Coke Company, LP and to produce steam and electricity from the recovered heat; Whiting Clean Energy, Inc. which has an electric facility currently under construction which is expected to be an Exempt Wholesale Generator and sell power into the wholesale market; and Ironside Energy LLC, which, acting as agent for a third party owner/lessor, has entered into contracts for the construction of a 50 megawatt cogeneration plant. SM&P Utility Resources, Inc. ("SM&P"), Colcom Incorporated ("Colcom") and Underground Technology, Inc. ("UTI") (of which NiSource owns 50%) perform underground facilities locating for utilities throughout the United States. During 1999, SM&P, Colcom and UTI performed approximately 6.6 million line locates. Miller Pipeline Corporation ("Miller") installs, repairs and maintains underground pipelines used in gas and water transmission and distribution systems. Miller also sells products and services related to infrastructure preservation and replacement. NiSource, through an intermediate holding company, IWC Resources Corporation ("IWCR"), owns all of the stock in six water companies (Indianapolis Water Company, Harbour Water Corporation, Liberty Water Corporation, Irishman's Run Acquisition Corp., The Darlington Water Works Company and IWC Morgan Water Corporation) and has an operating agreement with the City of Lawrence, Indiana, which is being treated as a purchase by IWCR in accordance with generally accepted accounting principles (collectively, the "Water Utilities"). The Water Utilities supply water to residential, commercial and industrial customers and for fire protection service in Indianapolis, Indiana and surrounding areas. The territory served by the Water Utilities covers an area of approximately 650 square miles in seven counties of central Indiana and the Water Utilities serve approximately 275,000 customers. As of December 31, 1999, assets of the Water Utilities amounted to $685.3 million, and revenues of the Water Utilities for the twelve months then ended, amounted to $98 million. NiSource Development Company, Inc. ("Development") has investments in various activities, primarily in real estate, intended to complement NiSource's energy businesses. South Works Power Company , a wholly-owned subsidiary of Development, leases electric generating and transmission facilities owned by U.S. Steel and located in south Chicago, Illinois. The facilities, which are 4 presently not in operation, are indirectly interconnected with the electric transmission system of Northern Indiana. NiSource Capital Markets Inc. ("Capital Markets"), a wholly-owned financing subsidiary of NiSource, provides financing for certain of NiSource's subsidiaries other than Northern Indiana. Capital Markets has entered into revolving credit agreements for $200 million. These agreements provide financing flexibility to Capital Markets and may be used to support the issuance of commercial paper. At December 31, 1999, Capital Markets had issued $137.0 million in commercial paper but there were no borrowings outstanding under the revolving credit agreements. Capital Markets also has $163.0 million available in money market lines of credit with $142.5 million of borrowings outstanding as of December 31, 1999. For the same period, Capital Markets had $450 million in long-term debt outstanding. The financial obligations of Capital Markets are subject to a support agreement ("Support Agreement") between NiSource and Capital Markets which provides that NiSource make payments of interest and principal on Capital Markets' obligations in the event of a failure to pay by Capital Markets. Restrictions in the Support Agreement prohibit recourse on the part of Capital Markets' creditors against the stock and assets of Northern Indiana which are owned by NiSource. Under the terms of the Support Agreement, in addition to the cash flow from cash dividends paid to NiSource by any of its consolidated subsidiaries, the assets of NiSource, other than the stock and assets of Northern Indiana, are available as recourse for the benefit of Capital Markets' creditors. The carrying value of the assets of NiSource, other than the assets of Northern Indiana, as reflected in the consolidated financial statements of NiSource, was approximately $3.2 billion at December 31, 1999. NiSource Corporate Services Company provides management, administrative, gas portfolio management, accounting and other services to the various NiSource companies. Hamilton Harbour Insurance Services, Ltd. provides various insurance services to the NiSource companies. The non-utility assets of NiSource comprised, as of December 31, 1999, 24% of the consolidated assets of NiSource. Columbia, formerly The Columbia Gas System, Inc., and its subsidiaries comprise an integrated natural gas system engaged in natural gas transmission, natural gas distribution and exploration for and production of natural gas and oil. Columbia is also engaged in related energy businesses including the distribution of propane and petroleum products, marketing of natural gas and electricity and the generation of electricity, primarily fueled by natural gas. As a registered holding company, Columbia derives substantially all its revenues and earnings from the operating results of its 20 direct subsidiaries. Columbia owns all of the securities of these direct subsidiaries except for approximately 8% of the stock in Columbia LNG Corporation. Columbia provides natural gas distribution services in a five-state region in the Midwest and mid-Atlantic United States through its five wholly-owned public utility subsidiaries: Columbia Gas of Kentucky, Inc., 5 Columbia Gas of Maryland, Inc., Columbia Gas of Ohio, Inc., Columbia Gas of Pennsylvania, Inc. and Columbia Gas of Virginia, Inc. Columbia's five distribution subsidiaries provide natural gas service to nearly 2.1 million residential, commercial and industrial customers in Kentucky, Maryland, Ohio, Pennsylvania and Virginia. Approximately 32,400 miles of distribution pipelines serve these major markets. Columbia's two interstate pipeline subsidiaries, Columbia Transmission and Columbia Gulf Transmission Company ("Columbia Gulf"), own a pipeline network of approximately 16,250 miles extending from offshore in the Gulf of Mexico to Lake Erie, New York and the eastern seaboard. In addition, Columbia Transmission operates one of the nation's largest underground natural gas storage systems. Together, Columbia Transmission and Columbia Gulf serve customers in fifteen northeastern, mid-Atlantic, midwestern and southern states and the District of Columbia. Columbia Gulf's pipeline system extends from offshore Louisiana to West Virginia and transports a major portion of the gas delivered by Columbia Transmission. It also transports gas for third parties within the production areas of the Gulf Coast. Columbia Transmission and Columbia Gulf provide an array of competitively priced natural gas transportation and storage services for local distribution companies and industrial and commercial customers who contract directly with producers or marketers for their gas supplies. In 1999, Columbia Transmission completed construction of the largest expansion of its storage and transportation system in its history. The expansion adds approximately 500,000 Mcf per day of firm storage to 23 customers. Columbia Transmission is also participating in the proposed 442-mile Millennium Pipeline Project that has been submitted to FERC for approval. As proposed, the project will transport approximately 700,000 Mcf per day of natural gas from the Lake Erie region to eastern markets. Columbia Gulf has announced its participation in the proposed 160 mile, 24-inch diameter, Volunteer Pipeline Project ("Volunteer"). As proposed, the project will transport approximately 250,000 Mcf per day from Portland, Tennessee to a point near Chattanooga, Tennessee. In May, 1999, Volunteer concluded an open season in which nearly a dozen companies requested more than 440,000 Mcf per day of capacity. Potentially expandable to approximately 500,000 Mcf per day, Volunteer expects to provide firm natural gas transportation from the mid-continent into the Atlanta, Georgia, and other southeastern markets. The timing of a FERC construction application is contingent upon a final determination of market demand. Columbia Gulf also announced plans in September 1998 to consider an expansion of its onshore East Lateral system to add approximately 600,000 Mcf per day of incremental firm gas transportation capacity. Columbia Gulf is also participating in the proposed SunStar Pipeline project, a 56-mile offshore pipeline project with a capacity of 660,000 Mcf of natural gas per day from the Gulf of Mexico to its onshore lateral. Columbia Pipeline Corporation and its wholly-owned subsidiary, Columbia Deep Water Services Company, were formed to operate pipeline and gathering facilities that are not regulated by FERC. 6 Through its wholly-owned subsidiaries, Columbia's exploration and production subsidiary, Columbia Energy Resources, Inc. ("Columbia Resources"), explores for, develops, gathers and produces natural gas and oil in Appalachia and Canada. As of December 31, 1999, Columbia Resources' subsidiaries held interests in approximately 3.9 million net acres of gas and oil leases and had proved gas reserves of 965.8 billion cubic feet of natural gas equivalent. Columbia Resources' subsidiaries own and operate 8,188 wells and 6,069 miles of gathering facilities and have expanded their reserve base and production through an aggressive drilling and acquisition program. During 1999, Columbia Resources' subsidiaries purchased 800 wells, gathering assets and approximately 800,000 undeveloped acres in the U.S. and Canada. Through its subsidiaries' operations in north-central West Virginia, southern Kentucky, northern Tennessee and New York, Columbia Resources is one of the largest-volume independent natural gas and oil producers in the Appalachian Basin. Columbia Energy Services Corporation ("Columbia Energy Services") and its subsidiaries conduct Columbia's non-regulated natural gas and electric power marketing operations and provide service to residential and small commercial customers as a result of the unbundling of services that is occurring at the local distribution level. Columbia Energy Services, through its subsidiary, Columbia Service Partners, Inc., provides a variety of energy-related services to both homeowners and businesses. Columbia Energy Services recently sold its wholesale gas and electric trading operations and decided to exit its major accounts business. Columbia Propane Corporation ("Columbia Propane") sells propane at wholesale and retail to more than 350,600 customers in 31 states and the District of Columbia. Columbia Petroleum Corporation ("Columbia Petroleum") owns and operates petroleum assets that serve approximately 42,000 customers in five states. Columbia has been evaluating the appropriateness of remaining in some of its businesses, given the rapidly changing energy industry and its pending merger with NiSource, and has determined to exit its energy marketing operations. Consequently, Columbia has decided to sell Columbia Propane and Columbia Petroleum. These businesses are currently being prepared for sale and are being reported as discontinued operations. Columbia Electric Corporation's ("Columbia Electric") primary focus has been the development, ownership and operation of natural gas-fueled power plants. Columbia Electric is part owner in three operating cogeneration projects. These facilities produce both electricity and useful thermal energy and are fueled principally by natural gas. Columbia Electric holds various interests in these facilities, which have a total capacity of approximately 248 megawatts. In June 1998, Columbia Electric and LG&E Power Inc., a subsidiary of LG&E Energy Corporation, announced an agreement for Columbia to participate in the development of a gas-fired cogeneration project that would have a total equivalent capacity of approximately 550 megawatts. The facility will provide steam and electric services to a Reynolds Metals plant in Gregory, Texas and will also provide electricity to the Texas energy market. Construction began in August 1998 and the facility is anticipated to start operations in July of 2000. 7 Under PURPA and its implementing regulations, no more than 50% of the equity interests in a qualifying facility ("QF") may be held by a company that is an electric utility or an electric utility holding company or any combination of such companies. Electric utility holding companies now own up to approximately 50% of the equity interests in each of the four QFs referred to in the two preceding paragraphs in which Columbia holds an interest. Columbia currently is not an electric utility holding company, but its interest in QFs would be held by an electric utility holding company as a result of the merger with NiSource. Consequently, the 50% limitation on total interests held by electric utility holding company affiliates would be exceeded. To avoid jeopardizing the QF status of the projects and to comply with Columbia's obligations to other participants in the projects, Columbia is in the process of divesting its interests in the four QFs. Columbia plans to relinquish its ownership interests in the four QFs before the merger closes in order to maintain their QF status. Construction of the Liberty Electric Project, a gas-fired electric generation plant which is expected to provide approximately 568 megawatts of electricity, commenced in early 2000 in Eddystone, Pennsylvania. Columbia currently owns 100% of the Liberty Electric Project. Construction of the Ceredo Generating Station, a gas-fired electric generation peaking plant which is expected to provide approximately 500 megawatts of electricity, commenced in July 2000 in Ceredo, West Virginia ("Ceredo Project"). Columbia currently owns 100% of the Ceredo Project, which is anticipated to commence operations in the summer of 2001. In December 1999, a limited partnership company established between Columbia Electric and Atlantic Generation, Inc. completed a transaction terminating a long-term power purchase contract. Columbia Electric's portion was approximately $71 million pre-tax under the terms of the buyout. The partners will continue to operate the facility as a merchant power plant. Columbia LNG Corporation ("Columbia LNG") provides transition services related to a liquefied natural gas facility located in Cove Point, Maryland, which is one of the largest natural gas peaking and storage facilities in the United States. The facility has the capacity to liquefy natural gas at a rate of 15,000 Mcf per day. The facility enables liquefied natural gas to be stored until needed for the winter peak-day requirements of utilities and other large gas users. Columbia Transmission Communications Corporation, a wholly-owned subsidiary of Columbia, and its subsidiaries provide telecommunications and information services and assist personal communications services and other microwave radio service licensees in locating and constructing antenna facilities. Columbia Transmission Communications Corporation also is involved in the development of a dark fiber optics network for voice and data communications. As a registered holding company, Columbia and its utility subsidiary companies are an integrated gas utility system under the Act. The non-utility companies in the Columbia System are related to, and supportive of, its utility 8 operations and, by virtue of continued operations, retainable under the standards of the Act. Under the terms of the Agreement and Plan of Merger among Columbia, NiSource, New NiSource, Parent Acquisition Corp., Company Acquisition Corp. and NiSource Finance Corp., an Indiana corporation, dated as of February 27, 2000, and as amended and restated as of March 31, 2000 (as so amended, the "Merger Agreement), each of NiSource and Columbia will be merged with a separate, wholly-owned subsidiary of New NiSource, after which NiSource will merge into New NiSource. The shareholders of both NiSource and Columbia have approved the Merger Agreement subject to the satisfaction of various conditions, including receipt of all regulatory approvals. NiSource shareholders will receive one common share of New NiSource for each of their NiSource common shares and after the merger the NiSource shareholders will own no less than 53% of the New NiSource shares. Columbia shareholders will receive, for each of their Columbia common shares, either (i) $70 in cash, and $2.60 stated amount of a New NiSource Stock Appreciation Income Linked SecuritySM ("SAILS"), which is a unit consisting of a zero coupon debt security and a forward equity contract having the terms described below, or (ii) if the Columbia shareholder elects, the number of New NiSource common shares equal to $74 divided by the average trading price of NiSource common shares for the 30 consecutive trading days ending two trading days before the completion of the merger, which number may never be more than 4.4848. Stock elections are subject to proration if the elections exceed 30% of Columbia's outstanding shares. Also, unless Columbia shareholders make stock elections for at least 10% of Columbia's outstanding shares, all Columbia shareholders will receive cash and New NiSource SAILS in the merger. If the merger is not completed by February 27, 2001, Columbia shareholders will receive, for each of their Columbia common shares, an additional amount in cash equal to interest at 7% per annum on $72.29 for the period beginning on February 27, 2001 and ending on the day before the completion of the merger, less the amount of any cash dividends paid on Columbia common shares with a record date after February 27, 2001. Each SAILS is a unit consisting of a share purchase contract and a debenture. The share purchase contract represents the holder's obligation to purchase common shares on the fourth anniversary of completion of the merger, and the debenture is pledged to secure that obligation. Under the share purchase contract, a holder will receive for each New NiSource SAILS, on the fourth anniversary of the completion of the merger, the following number of New NiSource common shares: (1) if the average closing price of the common shares on the New York Stock Exchange over a 30-day period before the fourth anniversary equals or exceeds $23.10, the holder will receive 0.1126 common shares; (2) if the average closing price is less than $23.10 but greater than $16.50, the holder will receive a number of common shares equal to $2.60 divided by the average closing price; and (3) if the average closing price is less than or equal to $16.50, the holder will receive 0.1576 common shares. The debenture that is initially part of each New NiSource SAILS will have a principal amount of $2.60. The debenture will not pay interest for the first four years after the merger. 9 Unless a holder chooses to make a cash payment of $2.60 to settle the purchase contract, the debenture that is pledged as collateral will be remarketed shortly before the fourth anniversary of the merger, and the proceeds will be used to pay the amount the holder would owe under the purchase contract. If the remarketing is successful, proceeds from the sale will be delivered to New NiSource as payment for the common shares. If the remarketing agent cannot remarket the debentures, New NiSource will exercise its rights as a secured party and take possession of the debentures. In either case, the holder's obligation to purchase shares of New NiSource common stock will be fully satisfied, and the holder will receive New NiSource common shares. Shareholders of Columbia at the time of the merger who did not vote in favor of the merger and who made a demand for appraisal of their shares under the Delaware General Corporation Law (the "DGCL") Section 262 may perfect their demand for appraisal rights of those shares following the effective date of the merger in accordance with Section 262 of the DGCL. Upon consummation of the merger, NiSource will own an integrated gas utility system comprised of the gas utility properties of NiSource's subsidiaries in Indiana, Massachusetts, Maine and New Hampshire and the gas utility properties of Columbia's subsidiaries in Ohio, Pennsylvania, Maryland, Kentucky and Virginia. In addition, NiSource's principal operating utility subsidiary in Indiana will continue to own an integrated electric utility system in Indiana. Further, NiSource will own the existing non-utility businesses of NiSource and Columbia which, with certain exceptions, are retainable under the standards of Section 11(b)(1) of the Act. New NiSource will issue approximately 124.7 million shares of common stock, par value $.01 per share, in exchange for the outstanding common stock of NiSource, based on the number of such shares outstanding on February 29, 2000. Assuming 30% of the outstanding Columbia shares are exchanged for New NiSource common stock (which NiSource believes is a reasonable assumption), approximately 109.2 million shares of New NiSource common stock will be issued in the merger to Columbia's shareholders. In addition, New NiSource will issue SAILS, which will result in the issuance of between 6.4 million and 9.0 million shares of New NiSource common stock on the fourth anniversary date of the merger depending on the New NiSource stock price, assuming 30% of the outstanding shares are exchanged for the stock consideration. NiSource estimates that the cash payments to Columbia shareholders in the merger will range from approximately $4 billion, assuming 30% of the outstanding Columbia shares are exchanged for the stock consideration, to approximately $6 billion, if all of the Columbia shares are exchanged for the cash and SAILS consideration. In addition, NiSource expects approximately $2.4 billion of Columbia's existing debt to remain outstanding after the merger. Assuming the sales of certain non-core assets of NiSource and/or Columbia, NiSource commits that pro forma consolidated common stock equity of the combined system will be no less than 28.5% of pro forma combined capitalization at the earlier of November 1, 2000 or the date of the Commission's order with respect to the Application-Declaration. In addition, NiSource commits that within two 10 years after the date of the Commission's order with respect to the Application-Declaration, the combined consolidated capitalization of the new system will include no less than 30% common equity. NiSource has accepted a commitment letter ("Commitment Letter") from Credit Suisse First Boston Corporation, New York Branch ("Credit Suisse First Boston") and Barclays Bank PLC ("Barclays", and together with Credit Suisse First Boston, the "Underwriters"), pursuant to which, subject to specified conditions, the Underwriters agree to provide the NiSource borrower a 364-day revolving credit facility from the date of the Commitment Letter in the amount of $6 billion, with the option to convert outstanding loans at the expiration of such period into term loans maturing 364 days thereafter (the "Facility") to finance the merger. A portion of the Facility may be provided by a syndicate of banks and other financial institutions arranged by the Underwriters. Credit Suisse First Boston will act as administrative agent for the Facility; Barclays will serve as documentation agent for the Facility; and Credit Suisse First Boston and Barclays will act as lead arrangers and co-syndication agents. The merger will be accounted for as a purchase of Columbia by NiSource. The Merger Agreement has been approved by the boards of directors NiSource and Columbia and the shareholders of NiSource and Columbia. Various aspects of the proposed transaction have been submitted for review and approval by the Federal Energy Regulatory Commission, the Virginia State Corporation Commission, the Pennsylvania Public Utility Commission, the Kentucky Public Service Commission, the Maine Public Utility Commission, the New Hampshire Public Utility Commission and the Federal Communications Commission Moreover, views of other affected state commissions on the effects of the merger have been provided to the Commission. Finally, NiSource and Columbia have submitted the required information to the Antitrust Division of the Department of Justice and the Federal Trade Commission and it is a condition to the consummation of the Transaction that the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, have expired or been terminated. The waiting periods have expired and NiSource's clearance to complete an acquisition of Columbia remains valid until July 9, 2001. 11 -----END PRIVACY-ENHANCED MESSAGE-----