Filed by: NiSource Inc.
Pursuant to Rule 425 under the Securities Act of 1933
Subject Company: Columbia Energy Group
Registration Statement File No. 333-33896
On April 28, 2000, NiSource Inc. added to its web site a video
recording of an analyst presentation it made on April 26, 2000. The
transcript of the video recording of the analyst presentation is set
forth below.
Transcript of Video Recording of Analyst Presentation
April 28, 2000
Good afternoon, my name is Dennis Senchak. I am
the Assistant Treasurer of NiSource, and, as many
of you know, I am the financial spokesperson for
the corporation. And, on behalf of NiSource and,
obviously, Columbia, we are pleased that you took
the time out of your schedule to be with us today.
We have a long program today. If you'll bear with
us, the intent is to give you the specifics
relative to NiSource and Columbia which is a great
transaction. We are very much looking forward to
sharing with you all of the ideas on the various
pieces of the business today. I wanted to make a
comment. There should be at your seat, the
analyst presentation booklet. If any of you have
not received this, or if it is not at your seat,
there are some copies on the chairs around you.
Please feel free to grab that. And, in addition
to that, we've released earnings yesterday. You
should have also received a copy of the earnings
update yesterday. We'll head right to the
program. Again, we very much appreciate you being
with us today. It is my pleasure to begin this
program to introduce Gary Neale, the Chairman,
President and Chief Executive Officer of NiSource.
Mr. Neale: Thank you Dennis. I'm delighted to see the house
so full. After the March meeting, this is a
growing population. So, we are delighted that
you're here today. We call this a second in a
series of an exciting update from Wall Street on
what's going on with the merger. And, we promised
you in March that we would keep you informed on
every step all the way through this merger and
what was happening and what our sites were looking
like at and where we were going. On March 2, we
spent most of the day talking about the structure
of the deal so that everyone could understand the
deal. What we would like to do today, is we would
like to review that strategy for those people that
are new to this meeting. We'll spend just a few
minutes reviewing the highlights of the structure
of the deal and where we're going. We'll give you
a regulatory update and Rick Richard, who was
supposed to be here today, for the regulatory
update, and he's been working very hard on the
regulatory approval side of it. But he had a
death in the family just two days ago and the
funeral was today, so we apologize and I'm sure
that Mike O'Donnell will fill in his shoes. Mike
is the Chief Financial Officer and will fill in
for Rick in that area. And then we want to take
an in-depth look at Columbia assets. There are a
lot of questions on why NiSource wanted this
company and the real reason was that the value of
these assets and speaking on the value of the
assets, we have Cathy Good Abbott, who is the
President of the Transmission Group, for both
pipelines. And we'll talk about not only
pipelines but stories and opportunities and where
she believes this is going and I would say that
many of her comments are already in conjunction
with where we believe we want to go. So, we're
already moving strategically in the right
direction and next we'll hear, I think an
exciting update in Bob Skaggs on their LDC's and
the progress that their LDC's have made even in
the last year, moving into a top tier operations
and what the prospect is for the future. We had a
lot of questions in the March meeting about
optionality when we put a slide up and said we
were going to make money on optionalities. So, we
brought Pat Mulchay here today, who is the
President of NIPSCO to talk about some examples of
use of optionality, both on the electric and gas
side of the business, that allows you to grow
earnings faster than you can on just a standard
regulated environment. And then we will finish up
with a quick discussion on distributed generation
and I think that you'll find that it layers on
very nicely on its assumptions on what we can do
for the future and where this company can go.
With me of course, included in the group is Steve
Adik. I think everyone knows Steve, who is the
Senior Executive Vice President and Chief
Financial Officer of NiSource. In the audience is
Jim Clark who is our Risk Officer, Jim raise your
hand wherever you are, back in back. We've got
Dr. Bob Kramer, back in the back, who is the Chief
Scientist from NiSource, who's our head project
leader on distributed generation both combined
heat and power units, and fuel cells. So, we've
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got our expert with us today in case there is any
questions that the management team can't handle,
we always turn it to Bob. And, we've got Tom
Hughes, who is the Vice President of Investor
Relations, I think everyone knows that. So, we've
got a full team here today to try to give you the
information that you need. So, let me turn now to
going back and reviewing just a little bit of the
highlights of what we hit on March 2nd, for those
people who were not at that meeting as a basis of
review. [Dennis, do we have this turned on? It's
not working.]
The long-term strategy for NiSource has always
been to transform the company. And the
transformation that we look for was looking at new
markets and three years ago, we sat back and said
how can we move this company into what we think is
going to be the new markets in this industry. The
new market for us was both geographic and the type
of energy service that a customer would demand.
So, the first thing we said was, the geographic
approach to it was capitalizing on an energy
corridor. And this corridor really represents a
major part of the United States from the Gulf to
New England and from Chicago to the East Coast and
this corridor highlights its 40% of the U.S.
energy consumption, 30% of the U.S. population,
127,000 megawatts of new gas power generation
either being built or planned, 24 bcf of new
interstate gas pipe line capacity, bcf per day.
They have some other characteristics too, which
some of the electric analysts, I think in the
audience know, and that is that it has congested
electric transmission grids being more congested
every day. The opportunity to move power over
these grids is diminishing because of the
congestion. And last, but not least, it has full
pipes going to the east and lots of excess gas
capacity in Chicago which leads to an interesting
set of circumstances if you look at it
strategically. Strategically, it says that gas
will move from Chicago east because that's where
it's cheap and that's where it's abundant. The
east coast is short of gas. That's where it's
needed, that's where the price is high. With
congested transmission, the only alternative is to
built generation near the load centers which is
the urban areas which leads to distributed
generation and a whole bunch of gas opportunities.
So, it's a marketplace that's not only large, it
represents a large part of the consumption in the
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United States. But it has unique changing
characteristics which, we believe, will create the
opportunities, that we'll announce strategically
in the future. So we believe that what we're
talking about here is the opportunity to move the
slide! (laughing) We're frozen for destiny here.
Let's go to the third page in the book there and I
think while Dennis figures out how to technically
work the system. What we're talking about here is
a regional powerhouse or the premier competitor,
which has been created as a result of this merger.
This is very important for you to understand and
think about. This is a market approach to merger.
Not a size approach. It would be not trying to
create, just the right number of assets or
whatever. It's a market approach, it's
establishing yourself in a key market. And, as we
talked about, there's some characteristics in that
market that's very important. First of all, if
you read any of the recent gas reports or
forecasts for gas usage in the future, you'll come
up with estimates of a 35 TCF gas market. And it
could come whether it's the National Petroleum
Counsel or the AGA Forecast or whatever. So, and
most of you have heard these forecasts. That's a
60% growth, and a 40% of that growth is going to
occur in this core. That's all we need to know.
That's 13 TCF gas and 40% of that is a significant
number. So, we're 5 TCF gas growth in this
marketplace. NIPSCO's position in this
marketplace to start with is that it had five
interstate pipeline interconnects in the Chicago
area. It was an electric hub within this
marketplace and we'll talk more about that later
on in the day. It had Crossroads Pipeline which
links Chicago to Sydney, Ohio, as a matter of
fact, interconnects with Columbia's system. It
has TPC and MHP, which is storage and storage
training operations in Texas, at the southern end,
which you'll see those dots and we'll talk about
those today as it relates to the pipeline. Bay
State Gas in New England and then the tie in with
the Columbia assets as you'll see it on this
chart. So, this is a major move from the
standpoint of trying to create something that's
regional, that has regional strengths in a key
market. And I will underline that for the rest of
the afternoon. We'll move to the next page, what
we're trying to do is create something unique.
We're building for tomorrow. We're trying to
create a strategic position, a broad platform that
represents 4.1 million customers. Why is that
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important? We'll talk about that later on. And
what do you do with 4.1 million customers. Gas
distribution in nine states, pipeline operations
in 16 states, 700 bcf of storage for building for
tomorrow. That's the strategy here and the other
part of the strategy is these are all connected
assets. These are not assets that are sprinkled
all over the United States that are not
interrelated or you can't do something with. The
opportunity here is to do something because the
assets are interconnected. The center of the
strategy is the commodity distribution business
with regulated utilities, customer growth, very
low risk in today's marketplace. Very reasonable
returns. In fact, the returns on these gas
companies are getting better all the time and a
solid cash flow. That's the center of the
universe. When you go upstream now, you come up
with a pipeline with 19,000 miles of pipe. The
700 bcf of storage, marketing services and gas and
electric optionality upstream and we'll talk about
that and give you some examples of that.
Downstream we have co-generation opportunities,
inside the fence. Co-generation ..., you're back
with me, Dennis. Congratulations! (laughing)
Gary Neale: The opportunity for distributed generation, you've
got 4.1 million customers and you believe you can
create a new electric industry through distributed
generation then owning 4.1 million customers is
the place to be. You become the new electric
supplier to those 4.1 million customers with
distributed generation and I want to talk about
that and where we want to go with that. All types
of energy related products and commodity
conversions so that the opportunity is for revenue
growth downstream, utilizing the regulated assets.
That's what's unique about the strategy because
most other companies, I believe, are not creating
a regulated strategy but creating a mass to create
an unregulated strategy. Here, we're talking
about the value of putting together the regulated
stream. The reason we're doing it obviously is to
create shareholder value. To create a company
with low risk and high returns. 85-90% of the
revenue is regulated and the returns are regulated
and the add-ons give us the growth that we're
looking for. Both you see in these two
businesses. These are two very good businesses.
A rated credits coming together and creating an
opportunity for growth. Both companies have very
positive regulatory relationships, I'll talk more
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about that later, but I have been absolutely
pleased beyond belief and meeting with all of
Columbia's regulators. (beeping noise). This is
not meant to be today Dennis. (laughing) O.K.
I think that most of you know that NIPSCO has been
very aggressive in its cost efficiencies and what
we've done over the years. NIPSCO, for example,
right now, is a company that's gone from 6500
employees to 3500 employees over the last ten
years. We have grown that company at a 68% rate
for a number of years. We know how to run LDC
properties. We know how to run regulated
properties and what we've met is a management team
that you'll see today from Columbia that also
knows how to do that. So, this is a marriage of
culture that I think will work. All of us are
pursuing incentive opportunities, whether it's the
alternative rate proposal in Indiana that
unbundled or Columbia's creating program that Bob
will talk about that creates ways to work with the
regulators and actually make a better return for
the gas companies. Even in an unbundled
environment. Related to diversification creates
value because it's tied back to the regulatory
assets and what we're doing is leveraging the
asset base with knowledge-based business.
Public Address [May I have you attention, may I have your
System attention please, the hotel fire alarm has been
(background) activated and are currently investigating the
call. Please remain where you are and further
instructions will be repeated.]
Gary Neale: Do not move. (laughing). It's the only way to
keep an audience. (laughing)
Integrating these existing business into growth
markets. You know, just taking this market, going
back to this concept of the 35 TCF market
(beeping). (beeping)
Dennis Senchak: See if you can talk over it.
Gary Neale: Let me just keep talking. Creating a new business
opportunity and growth markets and we'll talk
about asset optionality and distributed generation
but those are the two areas that really create
opportunities for us to do something above and
beyond the regulated business and you know, we
want to make sure you understand that today before
you leave and the bottom line for us as a combined
company is to maintain a solid investment parade
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as we go through. We're not interested in taking
the company beyond solid investment grade and we
believe that we have the opportunity to do that.
So the key slide, this is the key slide that many
of you saw in March 2nd's is really the right
assets. With the right assets and the right
market, this is a growth story. This is a growth
opportunity that's unique and different than I
think anyone else is talking about and the key to
it is understanding that the blue section is the
regulated properties. The regulated properties
continue to grow at a 6-8% rate. And you say,
well how do you get to the 15% growth that you're
talking about? And that's you layer on gas
optionality, electric optionality and distributed
generation and what it creates for you. You know,
this is why we did the deal. This is our view of
the future, strategically and what was going to be
available in these marketplaces as the industry
changed. It's taking regulated assets and doing
something with it.
Public Address [May I have your attention, may I have your
System attention please, the hotel fire alarm has been
(background) activated and are currently investigating the
call. Please remain where you are and listen for
further instructions on the PA system. Thank
you.]
Gary Neale: So what we would like to do with the rest of this
presentation is talk about the components of this
growth curve that you see here. We'll talk about
not only the growth in regulated assets, but we'll
talk about the issues of optionality and
distributed generation as we go through. It's a
good transaction and it's a great transaction if
you want to look at it in any terms. Our current
estimate now is that we will be over-subscribed on
the equity offering of the maximum of 30% which
reduces initial leverage even further. The
numbers that you saw in March are based on an
assumption of a 21% conversion on equity. So it
will be a higher conversion on equity right now.
Not only are the small shareholders taking
advantage of a tremendous opportunity of a tax
free exchange and a significant increase in
dividend but we think some of the institutional
investors will also take that opportunity. We're
still committed to the asset sales to reduce
leverage. We've identified a billion dollars in
asset sales and those asset sales are underway
and, you'll be seeing announcements on those asset
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sales even in the next month as we progressively
go through.
Public Address [May I please have your attention, may I please
System have your attention ...]
(background)
Gary Neale: We've identified, we originally said we've
identified a half a billion dollars in assets to
be sold by year end and we now think that figure
can be higher and then we can exceed the billion
dollars in sales slightly in the time frame that
was laid out.
Public Address [May I please have your attention, may I please
System have your attention, the hotel fire alarm has been
(background): activated and are currently investigating the
call. Please remain where you are and listen for
further instructions on the PA system. Thank
you.]
Gary Neale: We're committed to the dividend policy that
currently exists at NiSource which is a 60% payout
at a dividend growth, it grows along with net
income. The transaction structure is basically
the same as you saw the last time around and what
we try to show here is where the debt would be and
what we believe we'll end up with in the way of
credit ratings which keeps us at investment grade
and it is basically a low risk business. If you
turn to the synergies page, the realizable
synergies, these are the same numbers that we put
out in March. Obviously, we're further along on
the transaction in meeting with the Columbia
people in depth. The integration teams have
started and we're not ready to release new numbers
yet until we get a full integration team and we
look at the numbers and that would probably be
early September before we will either raise or
lower any of these numbers. We're still willing
to stick with these numbers. I think it's
important to look at though, one of the things
that we highlighted in March was the fact that
this is not a give back opportunity in the form of
synergies. Very little of the synergies are
coming from the regulated properties. So it's not
a matter of going to the commissions and saying,
you know, how much are you willing to give back.
All of our filings call for a rate freeze with the
states and, we believe, that that's where we'll
end up and not in a form of a give back and most
of it will come from corporate synergies and
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shared services that we plan on implementing. In
fact, both companies have already implemented
those opportunities. If you look at it another
way, the synergies that we were expecting is 6-9%
of combined non-fuel O&M. These are not excessive
promises.
Public Address [Can I please have your attention, can I please
System have your attention, we have found the cause of
(background): the alarm and we have corrected the situation,
everything is normal at this time, please excuse
the interruption. I repeat, everything is normal
at this time, the situation is all clear. Please
excuse this interruption. Thank you.]
Gary Neale: Except for the time for this presentation. What
we're all bad at is minimizing risk. We focused
on retail shareholders obviously by offering the
exchange program and creating a holding company so
we could get a tax free exchange for those people
taking stock and a significant dividend accretion.
In fact, Mike O'Donnell calculated for me and says
it's 5 times the current for Columbia
shareholders. That's a pretty big dividend jump
in anyone's definition. We're finding now, as I
said, the institutional expectation exceeds our
original expectations. Minimum regulatory risk
Columbia management has been spearheading this
transition process with the regulators and I can't
tell you how impressed I am with the
communications, the open communications they have
with their regulators and the high esteem that
Columbia people are held by the regulators and I
think this is going to be a very, very straight-
forward process. I'll talk more about where we're
at exactly. Now remember that Dominion/CNG
completed it in 8-1/2 months, we intend to beat
their track record in bringing this merger
together and having been out personally and met
with every commissioner in every state, I believe
it can be done. We have low rate, strong
regulatory settlements in all of our properties,
existing customer choice and open access programs
which makes it a lot easier to go to the state
regulators and get approval. A lot easier. It's
not an electric merger, for some of you that are
electric analysts. This is a totally different
world when you get in the gas business and start
talking with the regulators about a merger. And,
I might add, a much nicer world. Our pro forma
credit profile is similar to Dominion/CNG, similar
to Texas Utilities, similar to a lot of other
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companies that are in the 65% debt/35% equity
range and think we can pro-actively manage our
interest exposure and keep our business profile
very low, business risk profile very low, as I
said, a high percentage of our income comes from
other sources. At this time, I was to turn it
over to Rick Richard to talk about where were at
on the regulatory process and regulatory approvals
but let me do that and turn it to Mike O'Donnell
to take his part of the presentation. This is the
timetable for filing that we set out in April. On
the regulatory process, we started by Rick and I
personally met with all of the regulators in all
the states and with many of the commissioners at
the FERC and with staff at the SEC and we did
that, we had those meetings prior to filing in all
cases. And I would tell you where we're at today,
I think is pretty exciting. We have filed in
every state with every federal, with the FERC,
with the SEC and with the exception of Kentucky
and Kentucky has an agreement to file on May 1st
and Kentucky has a 60 day requirement that they
have to be back and give you an answer within 60
days. Kentucky is a little stuffed up right now
with the Power Gen and Louisville Gas and Electric
merger with a small staff, so they asked us to
wait until May 1st. All the other states that
require filing, we have filed. We think that the
indications are now that there is a good chance
that we'll have state regulatory approvals done by
the end of July or into the first couple of weeks
into August at the latest. So, we're very
optimistic, we're optimistic about the FERC filing
that we can get that done timely and expect to
have it into the SEC no later than September 1st,
for a 60-day time period with the SEC which takes
us out, we believe, to a closure sometime at the
end of October. And that would be our current
time scale and, as I said, I think we're more
optimistic about that then we've ever been. At
this point, let me turn over to Mike O'Donnell, oh
excuse me, before we do that, I ..., just to
highlight where we're at on our earnings, you saw
the earnings that came out yesterday. The only
comment I would make is that the warmest winter in
history cost us about 8 cents a share from normal
in the Midwest. So you can look at earnings that
should have been 72 cents on normal weather and came
out 64 cents at, you know, that was a hard winter to
overcome. Usually, you expect from NiSource and
NIPSCO, that we can always overcome the weather
but when it gets to be the warmest winter on
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record, it's just about impossible to totally
overcome it. So, we were pretty pleased with
first quarter results and believe that we are
still in very good shape for the year. Mike.
Mike O'Donnell: Thanks Gary. Gary and I are filling in for Rick
today and I'm going to do the last three slides
that Rick had intended to present and I'll go
through those pretty quickly today. And I thought
I'd start with the earnings for the first quarter
because while there is a lot of focus on closing
the deal and working on the integration of the two
companies, you have to maintain focus on the
business as well and I think the best way to
illustrate that is with Columbia's results in the
first quarter. And, as you can see from the
slide, Columbia's operating income adjusted for a
one time item that we had in 1999, operating
income was up $31 million in the first quarter
compared to this quarter last year, which is an
increase of 12-1/2%, keep in mind as you think
about that, that the weather was 14% warmer than
normal and that cost about $15 million in
operating income for the distribution segment.
So, in addition to making up that very, the effect
from very warm weather, we're able to increase
operating income by $31 million. That was driven
by a very strong, continued strong performance in
the transmission and the distribution segments.
But also the E&P segment was up $15 million this
quarter over the same quarter last year. On a
very strong production increase of about 3-1/2 bcf
and much higher prices, about 90 cents in ncf higher
than the same quarter last year, up to $3.34 in
ncf, that increased operating income by $15
million. Also, our marketing segment was up
period to period by about $10 million based on
higher propane sales and lower customer
acquisition costs. So, all and all, I think we
had a very good first quarter, which bodes well
for the Columbia numbers for the rest of the year.
Earnings per share were up 16 cents which is a 10%
increase over the same quarter last year to a
$1.83 for the first quarter. So, we're pleased
with those results. This next chart shows
Columbia's stock price performance since the end
of 1995. Basically the period of time that
Columbia's been under Rick's leadership. And, as
you can see, the Columbia numbers compare well to
the S&P 500 and to the S&P Natural Gas Index which
both had very strong performance during this time
period. And finally, the next line shows the
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Columbia stock price in an absolute basis during
the same time period. And, you can see that it's
up 148% which is a compound annual growth rate of
about 19.9% over the basic 5 year period and we've
extrapolated it out to the closing of the merger
later this year. We think that's pretty good
results and I think that the next two speakers
will be focusing on why those results are what
they are. I think the turn around at Columbia
during this time period was from late 1995 to now
that Columbia has gone from a middle of the road
operator of regulated assets to one of the better
performers. Most of our transmission and
distribution companies are in now approaching the
top quartile performance and frankly joining
NiSource. So, the combination of NiSource and
Columbia going forward, offers the prospect, I
think, of being one of or the premier operator of
regulated assets in the country. We'll start that
off with the Columbia review with Cathy Abbott and
Cathy is the President and CEO of Columbia Gas
Transmission Corporation and the Columbia Gulf
Transmission Company. She is going to review the
transmission segment and talk a little bit about
our fiber optics project. Cathy.
Cathy Good Abbott: I'm going to start with the transmission segment
and really review, very briefly for those of you
who haven't followed us, our track record which we
think is very strong. Second, talk a little bit
about the demand pulls, supply portions the topic
that creates a lot of optionality in the system,
which Pat is going to talk about. And also
discuss with you a few of the projects that we
have in the pipeline that I think will lead to
considerable growth. Those of you who are
familiar with our operating track record, know
that it's strong. We have normalized these
numbers up in '96 and '97 for one time items that
have pulled our earnings down and down, as you'll
see shown here for one time items. So you get a
really good sense of the ongoing operating income
going from $243 million to $314 million, which is
30% of its three year period or average about 9%
per year. We have grown it on the revenue side,
about 55% is due to revenue increases and 45% due
to cost reductions. We've taken a look at the
numbers that Steve and Gary worked up for cost
reductions that we've been assigned as a part of
the transaction, we think those targets are
readily achievable. We have just completed a
voluntary retirement program. We reduced our work
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complement on a permanent basis, this is the net
numbers and close to 500 people, took 42%
reduction in management staff and that will begin
generating about $30 million in ongoing savings in
2001 and beyond. In addition, we have underway
efforts to improve our work practices which will
be third-party costs as opposed to labor costs and
we're going to be able to reduce beginning with $3
million now, going to $10 million over the next
few years of additional savings and this is from
items that we have already identified. You can
see the corresponding improvement in our rate of
return. Mike talked about historically for TCO
and GULF, we've used a 11-12% return as being what
was achievable and we've seen how we've really
moved that up since 1996 and really moved into top
quartile performance here. Many of you probably
saw the recent WALL STREET JOURNAL article that
raised a question about contractor turn back and
what that might do to pipeline earnings. We're in
the somewhat fortunate position that the vast
majority of our contract extend out to 2004 so
that is not a near term issue for us. In
addition, as I'm going to discuss in a minute,
both pipelines have recently withstood and passed
with flying colors market tests. So, it is
believed that continuing to perform in this top
quartile is a realistic goal for the transmission
segment. We show here, our platform for growth.
Market expansion for TCO was a project that we
marketed in '95 and '96, we were competing against
every other single pipeline in our area regulated
and unregulated storage providers. We won 500 a
day worth of markup. Our nearest competitor got
70 a day. More than 80% of the services we sold
were storage or storage related. You're going to
see storage as a key theme running through because
it's one of the key things that we have to market.
We've just completed the construction, the three
year construction, after an on market expansion
for TCO in 1999. Mainline 99 was a corresponding
Gulf project, again competing against everybody,
we had the lowest cost expansibility out of the
Gulf. It got 316 a day of market and intriguingly
there, we offered our existing customers, the
opportunity to turn back their capacity. We had
only 12 a day turned back, which we were able to
place as part of the open season. So, we
withstood a market test, on both pipelines here
recently, and really believe we were marketable
going forward into the future. Let me then turn
to the rest of the projects to show the kind of
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growth platform if you will, projects in the
pipeline that we've generated that we think give
us a very strong outlook for growth. Many of you
are familiar with Millennium, who'd been following
Columbia, I've got the key statistics here, for
those of you who haven't been following
Millennium. It's a project that actually begins
in the middle of Lake Erie, our partners will
built from Dawn to the middle of the lake, so we
don't have to cross an international border and
extend in the redline across to New York. It's a
700 a day project. Also note where we show
Independence, which is really three related
projects, we'll talk about in a minute, that goes
directly from Chicago to New York. Now also
importantly note the Vector Pipeline which is now
going to be built, will be in service by November,
2000 that moves gas from Chicago to Dawn. Many of
you are aware that one of the big impetuses is the
supply push of, this year we've had 700 a day of
Northern Border gas showing up in Chicago and in
November of 2000 we will have an additional 1.2
bcf a day through the Alliance project showing up
in Chicago. So you have a real supply push coming
out of Canada. Advantages Millennium has, those
of you who follow the FERC closely know that
yesterday the Commission acted on the hearing of
the three Independence related projects. For the
two western components, Supply Link and
Independence, the Commission affirmed their
earlier, very problematic order for Independence
and told the project sponsors, they had 60 days to
come up with contracts from non-affiliated parties
for 30% of capacity and if they did not achieve
that, their application would be dismissed. The
eastern link here, which is called Market Link,
which is sponsored by Transco, goes from the
Lighting hub east and that project certificate was
approved. However, they may not begin
construction until they get 100% of the volumes
contracted for. This puts market link in the
somewhat problematic position of being a pipeline
that begins at Lighting where there is no excess
capacity, and move 700 a day east. So the real
question remains will any of their current
contracting parties that are not affiliated be
willing to sign up for those contracts in the wake
of having no incremental upstream capacity coming
into Lighting. We think this represents a
formidable challenge for the Market Link project.
As I mentioned earlier, the fact that Vector is a
go now, moves our pricing point from Chicago to
-14-
Dawn. This gives us an effective 15 cents advantage
compared to the Independence series of projects.
Another key advantage that Millennium has is that
only 7% of the right-of-way is virgin right-of-
way. This is given us a much reduced landowner
and environmental concerns. Finally, from a
market standpoint, we are the only pipeline that
serves the Bowline facility, 1200 megawatt
existing facility, which has requested a 300 a day
interconnect from us. And that project can not be
served, it's shown on the blue star Millennium
pipeline in this chart and that project cannot be
served by Market Link, they don't get up to that
area. We show here the demand pull that we are
responding to in proposing the Millennium project.
This demand pull occurs in the 2002-2003 time
frame. I've shown you 4 key areas which are the
most active areas for power plant developers.
These are players, are name brands, they are real
projects, real sites, and there are, you see the
number of players that are operating in each
distinct region ranging from four to six. There
are 14,000 megawatts that have been proposed and
we believe that roughly half of these 7500
megawatts will actually get built in the 2002-2003
time frame and if that happens, that's 1.2 bcf a
day of demand coming on in this eastern quarter at
the far end of our system. Our negotiations with
these developers are well along in the process
ranging from preceding agreements to actually
doing the engineering work for the connection. I
mentioned that Bowline is not accessible to our
competitor. I think another important thing to
note here in the orange star is the location of
NiSource's Tioga salt dome storage project. There
has been a lot of interest from our customers in
storage to market services because a lot of these
plants are combined cycle, they are 75-80% load
factor and they have a very strong pull. I've
also noted in yellow, the storage assets on our
system. And Pat is going to talk about how this
kind of optionality from storage is going to be
key to markets going forward. Moving to Columbia
Gulf, we also see strong power demand growing at
Columbia Gulf. In the lightest shadings, I've
shown you the power plant projects that we've
already attached. This is seven plants
representing a peak load of close to 1/2 to 1 bcf
a day. In red, we show you the existing
facilities that are adjacent to the pipeline and
then in yellow, we show you both for Columbia Gulf
and for a proposed pipeline Volunteer pipeline,
-15-
which is a way of moving gas out of Chicago via
back whole on the Midwestern system and then a new
pipeline going to Tennessee to this power rich
corridor. Volunteer is still at the early stages
of its development but we are getting quite a bit
of interest in it. We are well along with respect
to two facilities in adding two additional power
plants to Columbia Gulf. I've also shown you in
the blue triangle at the bottom left-hand corner
of this chart, the Egan Storage Facilities that
NiSource owns, up and operating. We have a
current interconnect there of 300 a day and we
will be expanding up to 400 a day by midsummer.
Salt domes, as I've mentioned, provide wonderful
optionality to serve particularly the peaking
electric markup. Columbia Gulf, we also have a
supply push coming from deep water developments.
We're focusing on three areas there, beginning on
the right is the Mississippi Canyon area and I've
outlined on the right-hand side of the chart here
in red our Sun Star Project. We're working with
a major producer here and in the deep water, the
play is for gas transportation access and also
importantly liquids access. What producers want
to do is get this gas rich gas to underutilize the
processing facility and we have a real locational
advantage to some of the processing plants that
are underutilized right now. We expect the first
phase of this project to be early 2001, late 2001
or early 2002 time frame. Moving to the left, our
second most farthest along project, is we're
working with two producers on the Western Garden
Bank area. We have underutilized pipeline
capacity and there is underutilized processing
capacity on shore that makes that a very
attractive route for producers to take. And then
finally, in the middle of the Green Canyon area,
is the third most prolific area. These three
areas are expected to increase deliverability by
3.4 bcf a day by 2005. This is a very active area
for the majors. Turning now to the north in
Chicago, we see the intersection of our short
storage access shown here in yellow. Again, Tioga
is in the star over on the right-hand side with
our western markets, in yellow, is the Crossroads
Pipeline and in purple, is the NIPSCO Service
Territory. In the Ohio Valley, in the last year,
we have gone from essentially no activity in terms
of power plant developments to having 9000
megawatts being proposed at 22 locations. This
desire for incremental peaking capacity of forces
been driven by the very high summer peaking prices
-16-
that you've seen in these market areas which Pat
is going to talk about how NiSource has been able
to take advantage of that. Although not all of
these projects we expect to be built, if only half
of the currently proposed projects that are built
will increase gas demand on a peak day in the
summer in the Ohio Valley by close to 1 bcf a day.
First Energy, which is a major customer of ours,
up in this area, recently received Ohio's siting
approval for a 645 megawatt peaking facility
outside Cleveland. We finished our open season
for this facility for 140 a day of summer firm
load. Crossroads asset allows NIPSCO to move
their transportation and storage assets that they
have under contract to serve the NIPSCO market,
over to this area. And we think there is some
wonderful arbitrage play, storage plays,
optionality plays and what's important here is
because it's very important for these peaking
facilities to come on quickly to hit those summer
markets, the existing players in the market, have
a real competitive advantage in terms of serving
this new load. We also have very low cost
expansibility in our western storage fields as
well. So, to summarize, we have strategically
located assets between the supply push and the
demand pull - creates an increasing volatile
market for the kind of optionality thinking
NiSource has been doing is going to come into
important plays. Uniquely, as the combined
company have three different ways of moving gas
out of the Chicago hub, Crossroads into the Ohio
Valley, Volunteer into the southeast, Vector to
Millennium to the northeast. So, we have a unique
set of assets here that give us ability to do this
kind of play. We expect that this platform for
growth is going to give us a strong potential
you've seen how we've grown today. We would
expect over the next three years that we would
continue to grow, operating income at a compound
rate of 5% per year, including only Millennium,
the other projects our upside beyond that. Let me
turn now, briefly, to our new platform for
unregulated growth, which is the Columbia
TransCom. Those of you that follow Columbia know
that a year ago, we announced that we were
entering the dark fiber business, essentially
moving from a wholesale transportation of gas to
the wholesale transportation of data, voice and
video. The natural step out, because more than
half of the competencies required to build dark
fiber networks are things we already know how to
-17-
do which is construction and right-of-way
acquisitions. We provide dark fiber, our
customers put on the electronics and essentially
light the network. So, we are at a different
point in the value chain then some of our
competitors. Our initial review of this business
line with Gary and Steve has been very positively
received. We've been very glad to be working with
them. It fits within their concept of leveraging
the existing asset base to go into those
knowledge-based businesses with higher returns.
Our initial build shown in red here, from
Washington, D.C. to New York City, has progressed
very well. It's a 260 mile route and it
represents 15% of U.S. traffic. On the next line,
you see the key statistics of where we are. Our
initial pull is a 432 fibers, more than 70% of
which is contracted, there is very strong interest
in selling out the remaining fibers. A key
NiSource theme today will be optionality, we are
pulling fiber through only one of four conduits
that we are laying. Steve Adik likes to talk
about this building the initial route, you get
your capital back very, very quickly. You see
here, that we expect to get our capital back by a
year from now and what it essentially means is
that you have the option to pull those remaining
three conduits where the strike price is only the
cost of the fiber itself. So incredibly
inexpensive optionality to move into this market.
We'll be hitting on regulated operating income of
$8 million by 2001 and we should be in service by
the middle of this year. Turning back to the last
slide and we will talk a little bit (next slide --
other way -- thank you). In yellow, you see what
would be the next natural step out for us, which
is to build the 1,575 mile mid-Atlantic expansion.
This gives us a good broad network. It gives us
root diversity. We have so strong interest from
our customers in signing up for contracts for this
segment that we have been chatting very actively
with Steve and Gary. This would be a demand pull.
We have customers ready to sign and we are
considering committing to this summer, working
very closely with the NiSource team. But we think
it's a really good option going forward and what
it really plays on is the same key things that
makes our transmission segment attractive. Moving
to the final slide, the same key things apply,
it's location value of our assets that's really
driving the whole strategy of this merger. We
believe it's a business line that does fit
-18-
NiSource's strategy, gives us an unregulated
earnings platform and that key optionality for
inexpansive, expansion beyond that. And, what's
nice about it, given the structure of how pay for
capacity in this business, you get your capital
back very quickly at a very attractive return.
So, we believe that this represents a very strong
growth platform for the company. Thank you. And
with that, I introduce my largest and most
favorite customer Bob Skaggs.
Bob Skaggs: I thought you were going to give the introduction.
Bob Skaggs: To start out with a bit of prospective on the
Columbia distribution properties, maybe we can
show you the map of the way the five companies are
aligned and I'd as you to recall the map that Gary
showed. I'd also ask you to recall the maps that
Cathy has shown. You'll see on the west Indiana
and obviously on the east New England and that
terrific infrastructure that supports these five
distribution companies. Couple of vital
statistics, big, big properties. 2.1 million
customers across that service territory. Again
five states. Our deliveries amount to over half
the tcf of through put and these markets are
vital, robust, strong and the economies are really
doing quite well. Briefly, Virginia's golden
crescent that we serve, northern Virginia to
Richmond to the tide water. You go to
Pennsylvania, York which is a growing area to
western PA that's also doing quite well. You go
to Kentucky, it's the Lexington, Georgetown,
Toyota quarter that, again, is doing very, very
well. And then the center of gravity is really
Ohio, 1.2 million customers in Ohio, Columbus,
Toledo, western Cleveland is really where we
operate. Again, it's very vital, very strong and
growing, growing significantly across the blue
industrial, commercial, and residential and as
Gary mentioned we're proud of the regulatory
relationships that we've got throughout all of
those areas. We're going to talk a little bit
about how we leverage those relationships.
Last, but not least, before we leave this map,
what is now shown on the map are the gas supply
assets that really support those properties and by
many observers they're probably some of the most
valuable gas supply assets because they are
located in this market area that again is so
robust we have the ability to move the capacity to
-19-
the Midwest or to the east depending on
conditions. As both Gary and Mike alluded to
these properties are now really, really humming.
Operationally they're hitting on all cylinders and
I think also in terms of attitude. The
performance mentality that we've been able to
instill has shown up in the results. And as Mike
indicates since the early '90s we've really,
really turned the properties around completely and
what these numbers show is across the board we're
beginning to post really impressive results. And
if you look on the cost side of the business, O&M,
Cap/Ex down 20% and 11% respectively. Staffing in
the organization we're down 1,800 positions, about
30%, 36% of the organization. If you turn to the
revenue side, I've mentioned the gas supply assets
that we're now able to manage and capture that
value, that line of business without any
investment has gone from zero in '95 to $70 to 71
million pre-tax again all captured under our
regulatory deals. And then financially, you can
see the statistics there. We've turned the
company from a cash drain in the early to mid '90s
to generating solid cash flow. Again Gary and
Mike have mentioned that. And then the returns.
These companies traditionally ran at low single-
digit return on invested capital. We now have the
companies, despite some of the warmest weather
that we've ever encountered, they're up at 18-1/2,
couple of the companies have pierced 20%, and
again despite warmer than normal weather.
The next slide really shows the targets that
supported this dramatic improvement and I'm going
to talk about new aspirations in terms what we've
accomplished, but also in terms of our
relationship with NiSource and what these
companies can generate. Again, financially, like
NiSource, straight-forward, very focused and they
require a lot of discipline but they are
aggressive numbers that we've been using, you can
see robust growth and Gary mentioned the 6 to 8
percent bogey on operating income growth and
obviously top quartile returns. To compliment
operationally, I want to emphasize that our push
on customer choices premised on doing that
profitably and I go back to the slide that I
mentioned before about $70 million pre-tax, there
really is the premise of choice expanded but do it
profitably. Customer satisfaction in 95% and as
Gary mentioned, one of the cornerstones for this
business and doing it successfully are strong
-20-
regulatory relationships that allow us to do deals
and capture the returns from those deals. And
again, I'm going to revisit these goals in a few
minutes.
As I noted, like NiSource we've delivered, and
we've delivered against these vectors that are
pretty aggressive and just to give you a flavor,
we've moved operating income from these properties
from 100 million to well over 200 million dollars
over the decade of the '90s and like NiSource
we've adopted a no excuses sort of mentality, we
deliver these results regardless of the weather
and you can see I've layered on, if we had had
normal weather we would have gone past these
curves by a considerable margin. Now what really
is the key to driving these sorts of results,
there are two of them. And I've already talked a
little bit about one of them but it's gas
management revenues, using assets that we have
under contract with Cathy and Columbia
Transmission, using those assets and leveraging
them and the approach that we have used is
profitable unbundling. Roll out customer choice,
strike a regulatory deal, capture the value of
those underlying assets and literally what that's
enabled us to do is start a new line of business
built on off-system sales, capacity release,
parking, lending, optionality and capturing that
value through regulatory deals. And again what I
would emphasize, all of this drops to the bottom
line under the regulatory deals that we have. The
other thing is with more aggressive management of
these assets, coupled with NiSource's influence,
I'm suggesting that we think that there is more
up-side from these deals and from the assets that
we have under contract.
The second key value driver for us is nothing but
pure aggressive management of our operations. In
1996 we started the wave of aggressive cost
reductions, we are now in another wave, literally
in the midst of another wave, complete
restructuring of our field operations, complete
restructuring of our shared services unit. That
effort was launched in January, it's going to be
completed in June so it's a very quick, aggressive
hit at the cost structure. And like Cathy
suggested, we're seeing some pretty amazing
results and here are the numbers, pure and simple.
Again the caveat is - completed in June and these
are reductions in value we're going to capture
-21-
pre-NiSource. The size of the organization, we're
going to be down 700 positions by June - 18%. And
like Cathy mentioned on the cost side we're going
to be down 40 million dollars, 12% of our cost
structure. And again it's a combination of
aggressive operations and regulatory arrangements
that let us capture all of that value. And again
it all drops to the bottom line, so we're
literally transforming this company over the
course of 6 to 9 months which brings me back to
targets. And the message I want to leave with you
is despite the turn around, despite the aggressive
numbers we're now beginning to post, I'm convinced
that there's a lot more that we can do. Again, we
have across-the-board strength, operations,
regulatory, financial with our customers but what
we've done is we've poised it to grow this even
more over the next couple of years and aspire to
top this all sorts of results. Again, similar to
what NiSource is doing. What we're going to try
to leverage is the gas supply deal that I
mentioned, we're also obviously going to try to
leverage our operations.
Just to give you a couple of examples: Cap/Ex,
we're already approaching the top portal, in fact,
in Ohio we're top decile but there is more room to
go to the top of the class on Cap/Ex. We've shown
that we can move those numbers and we can do it
relatively quickly. O&M per customers, very
similar story. In fact, Ohio has moved from the
middle of the pack to the top quartile, we think
we can move the other companies there and again we
think top decile is within reach and we again
we've done it and we think we can continue to do
it, particularly with NiSource. And last but not
least, the returns. We've seen terrific, terrific
performance and just to give you an idea: last
year 6% warmer than normal weather, Kentucky was
plus 22%, Ohio and Pennsylvania were plus 18-1/2%.
So we're closing in on 20%. The message is, I
think again, we're top decile but we can go north
from where we're at right now. With that I want
to ask Pat Mulchay to join us. Pat's President
and CEO of NIPSCO.
Pat Mulchay: Thanks. Thanks Bob and good afternoon. You all
seem kind of tight out there, we need the fire
alarm to get in here. Cathy and Bob have talked a
lot about asset and asset performance and that's a
key ingredient and the topic I'd like to spend the
next ten minutes on. It's a topic that I can get
-22-
excited about because we've got some very positive
experiences with optionality over the last ten, or
the last two years. And what I'd like to do is
take the time to share some of our thoughts and
our experiences by talking through some real
examples of creating additional value from
existing assets. If you ask me to define
optionality, it is simply a choice to employ an
asset in the market of choosing when that
marketplace provides the highest value. Now where
does this optionality come from? And I'll offer
to you that there's a good deal of optionality
buried and embedded within the traditional assets.
Those assets are designed for a legacy business, a
regulated business. Because of the evolving
market place there are opportunities being
presented to identify that unused capacity or that
optional capacity and move it to the market for
greater value. What's happening in the market
place? Several things. Electric deregulation,
gas unbundling, the evolution of the bulk power
markets, the coming of the regional transmission
organizations that are going to provide broad
markets, the choice of natural gas for power
generation and distributed generation. All of
those are combining to create a new market place
out there and what we want to do is look to the
market place for that value and ask the market
place to give us guidance on how best to employ
those assets.
We use a process that simply combines operational
and financial expertise in assessing the assets
that we have and looking to the market place for
the value of those assets and then using that
information to decide on what the appropriate
action is. When we assess the assets we look at
the assets, what do we have? How responsive is
it? How flexible is it? Can we get it to the
marketplace to meet the demand in the market
place? What is the value of that asset? And we
again look to the market and the value is based on
the demand and the timing and our ability to
deliver it there. It's also a function of our
cost basis and you've heard a lot of talk about
asset performance and efficiency and that again is
a key ingredient because the less your cost basis
the better the value is for you. And then we make
that decision. Do we trade it? Do we market it?
Do we buy it? Do we sell it? Do we hold it?
Each of those events has some value depending on
the existing marketplace at that time. And it is
-23-
not a decision you make in a five-year plan. It's
not a one-year decision. It's a day-to-day
decision and it's becoming an hour-by-hour
decision and as this market grows and the use of
both gas and electricity change over time, we'll
be making those decisions on perhaps a half-hour
basis.
NiSource alone, and NiSource in combination with
Columbia possesses some locational edges. Cathy
talked a lot about the edges that she sees in her
market place. One of those edges is, of course,
moving natural gas from the Chicago market to the
east and let's talk specifically about this new
generation wave that is projected to come on.
Cathy talked about 7500 megawatts in the eastern
side of the Columbia territory. The ECAR
reliability group is talking about 10,000 new
megawatts of gas-fired generation. Much of that
is going to be located in the Ohio valley. We
have the opportunity with NIPSCO connected to four
interstate pipelines today, and will soon be
interconnected to two more, Northern Border and
Vector, Vector goes right through our service
territory and Cathy has talked yet about a couple
of more pipelines to move that capacity to the
east. If you couple the 700 bcf of storage to
that capacity and you put yourself in the mind of
a generator operator who's going to build this
plant, he's going to want to exercise his
optionality, he's going to want to choose his
market, he's going to want to choose his timing
when he gets the best value for that. Now what
that means is that his fuel choice will have to
provide him the flexibility and the responsiveness
to do that because there is no storage for
electricity. So he's going to need a supplier
that is responsive, that is cost effective, has
efficient assets and provide the flexibility he
needs and I think we're uniquely positioned with
our combined assets to deliver that value to him
and the market place is going to place a very high
value on those efficient assets and that storage
capability.
Another area we've had some positive experience in
the last two years is the ability to monetize the
volatility of the regional electric markets. We
have significant opportunity in those markets,
we're geographically positioned in the ECAR
reliability area to capture that significant
value, not from one market, but from multiple
-24-
markets. If we look at the map, the area in red
is NIPSCO's service territory. We are in the ECAR
reliability region, the most volatile reliability
region in the country today. Within that red
boundary exists 3400 megawatts of capacity. It's
also connected to a very robust transmission
system that's interconnected with the ECAR
reliability network. We enjoy direct
interconnects with Commonwealth Edison, with the
Michigan market, and the most liquid hub in the
electric business, the Cinergy hub. We have the
capability to pick and choose a market with
optional capacity that we have been able to
identify on our system. And in doing that over
the past two years we have delivered approximately
$20 million per year in incremental revenue, or
excuse me, incremental margin as a result of being
able to monetize this optionality. Another
example of using our combined gas assets, we had
the combined assets between Columbia and NiSource
to move gas to markets. If you couple that with
our storage optionality for both for us and our
customers it allows us to meet market demand and
you factor into that equation the behind the fence
co-generation facility that has optional electric
capacity you suddenly get cross commodity
optionality. Now that co-gen facility is real.
It is British Petroleum Amoco's Whiting facility
located in our service territory almost dead on
the state line between Chicago and Illinois, right
next to a huge command area for which we enjoy a
5,000 megawatt interconnect to. If you, well let
me back up a second. That project is basically
two combustion turbines. Its principal function
is to provide steam capability to BP Amoco's
facility. It has the capability of 500 megawatts
of electric capacity. Deduct the 150 to 180
megawatts that Amoco will use and you end up with
300 megawatts of optional capacity. And now all
of a sudden what we have with our combined assets
and this market focus or this market opportunity
is both up stream and down stream optionality
centered around buying and selling the gas supply,
choosing whether to store or not store the market
area storage and down stream capacity in terms of
making a choice or having a choice of whether to
use that fuel to produce electricity or derive
direct value from that fuel by moving it into the
market place. This is a classic example of
opportunities in which you have options that can
create a much greater value than what we're used
to in our legacy business.
-25-
The final example is an example of recovering,
optional capacity to deploy that capacity at
greater value in different markets. We have a
subsidiary, Primary Energy, which is in the
business of putting behind the fence co-generation
facilities in with our large industrial customers,
in this case our steel customers. And since 1996,
Primary Energy has installed 350 megawatts of
behind the fence optional generation or
generation. You add to that the 500 megawatts of
new BP Amoco capacity which will come on line in
June of 2001 and we'll move from our current
optional capacity of 2-1/2 million megawatt
hours a year to 4 million megawatt hours a year.
Now this behind the fence generation, again, these
projects are designed to deliver steam as a
primary product to the steel companies. They also
deliver this option, or this capacity, it doesn't
take care of all of their capacity requirements
but the 350 megawatts it does take care of causes
a displacement back in NIPSCO's system. NIPSCO in
the last couple of years has been able to take
that capacity, move it into these multiple markets
I just described and not only recapture that
margin that was lost in the steel industry but add
an incremental margin to it. The nice thing about
this is our regulated assets in this particular
area get improved earnings and the unregulated
subsidiary, Primary Energy, delivers positive net
income. And the outlook for growth with Primary
Energy in the future as the graph will depict is
very good and Joe has a number, Joe Turner has a
number of projects that he is currently working on
to close.
When I think about the combined capability of
NiSource and Columbia I can't help but think about
all of the embedded assets and all the embedded
optionality in these combined assets and the large
market presence this combined company is going to
make and I firmly believe that within our combined
companies we have the operational and financial
talent to extract greater value, even greater
value going forward.
Thank you very much. I'd like to turn this back
to Gary.
Gary Neale: Thanks, Pat. You've now seen that the three of
the major parts of this growth curve, you go back
to that colored curve, the blue, the brown and the
red and when the last piece was distributed
-26-
generation. Just a couple comments I'd like to
make about distributed generation and what our
thoughts are on distributed generation and where
we're at and by the way, we'll be back to Wall
Street probably early in September with a real
detailed presentation on distributed generation
and what we're going to be doing. We're
approaching distributed generation in two areas
and we believe that as the PC was to mainframe
distributed generation is going to create an
entire new electric industry. We believe that so
strongly that we're spending $6 billion to buy
Columbia and because why else own 4 million
customers, why else do these kinds of things
unless you believe that there's a change coming
and there's tremendous opportunities. There's
opportunities for optionalities, there's
opportunities we believe that this new distributed
generation comes in the form of. It comes in two
places, first is the micro-turbine and combined
heat and power unit as you'll see sitting on top
of the Walgreens' store in Chesterton, Indiana.
Notice this is not just a micro-turbine alone.
The micro-turbine alone runs at about 30%
efficiency and does not compete against a coal-
fired unit or large scale gas combined cycle unit,
but as a combined heat and power unit the
efficiency goes to 70%, right, Dr. Kramer?
Dr. Kramer: Yes.
Gary Neale: And then it gets very competitive, very
competitive with coal-fired units and the
footprint for that now can be a 4 by 8 footprint
sitting on top of that building. That particular
unit, when the store was opened in July of this
year was fired up and was a capstone turbine along
with all the equipment was fired up -- it's been
running continuously, seven days a week, 24 hours
a day since then. It's never been shut down for
turbine failure. So that's the marketplace. From
Walgreens' standpoint they now are independent,
they have a much more reliable source of power
and, last but not least, they get a 10% reduction
in overall energy price for that store because
it's a combined heat and power unit. Now these
units are utilizing known technology on heat
exchangers, known technology all the way through,
the only new piece of technology outside of the
turbine there is a switching device which we hold
a patent on for how to interconnect this to the
grid. This unit is actually synced to the grid so
-27-
if it goes off and the store stays operating. So
we believe the future of this is huge for
commercial buildings like this, 20 to 40 thousand
square feet, independency, independence,
reliability, cost savings -- this is going to be a
demand pull as Cathy likes to talk about, a demand
pull for this industry that we're all going to see
happen very, very rapidly because the technology
is all here today. It's working, it's running and
we intend to put a lot behind this. We're putting
together a joint venture with Capstone to be the
North American distributor on a combined heat and
power unit and will bring in an assembly group who
build the heat exchanges and create this platform
and we'll have this to show in detail, we'll have
four more of these units by fall on Walgreens'
buildings. Walgreens by themself put up 400
stores a year, build 400 stores a year but this is
applicable to anyone in this commercial store
range of 20 to 40 thousand square feet. Once
again, it's not a micro-turbine backup, it's not a
micro-turbine by itself, it's a combined heat and
power unit that competes very effectively against
our coal-fired units. So it is a product of the
future.
The second part of distributed generation in our
opinion is the fuel cell and the fuel cell on a
small scale for residential purposes, we're
talking about 3 kw, now. 6 kw, small fuel cells
that can be put in a home along with a reformer
can be put in a small commercial building along
with a reformer. It takes the natural gas
directly out of the gas meter, breaks down the
hydrogen component and feeds the fuel cell based
on its demands, ramping up and down, creating some
waste material of CO2 and water and heats the
house, electrifies the house, and takes care of
the entire facility. We have a joint ownership of
the patent rights that were developed for a fuel
cell and a reformer developed by IGT. We will
have the fuel cell and reformer operational in a
home at the end of September of this year and
invite anyone out that wants to see it. It'd be a
2,000 square foot house, will be entirely run by
the fuel cell, the waste heat will be used in a
boiler or a heating operation for the home and
we're convinced that this is the right approach.
These two pieces of distributed generation, we
believe, are the future for this operation and
this is what is going to transform the electric
industry. It's going to be the way you build
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generation in the load centers. The load centers
are the urban areas and the opportunities here are
unlimited and we believe that this is going to be
a customer-demanded item, not a technology push on
the part of the local utility. Not a technology
push on the part of plug power or any of the other
inventors, Ballard or anybody else, but a true
consumer demand because of reliability, because of
cost savings, because of the chance to be
independent. And, by the way, if you're an LDC,
guess what not only can you make money with
this, you can finance it, you can lease it, you
can service it, but it spins your meters 12 months
out of the year instead of the 3 months out of the
year the way the local furnace does. So it's a
tremendous increase in capacity utilization as the
local LDC and we were talking to some people this
morning and made the comment as, well, what
happens if competing products come in? Bob Skaggs
would be absolutely delighted if competing
products come in and more distributed generation
was on his LDCs because it spins his meters. So
there's plenty of room in this but the
beneficiaries of distributed generation will not
only be the customers, it can be your local gas
distribution company. I think that's important to
keep in mind. As I said we'll return to that
topic on our next visit to Wall Street.
Let me try to summarize real quickly because we're
holding everybody over, thanks to our fire alarm.
This is a merger to create value and I can't
stress that enough. We spent time, a number of
years looking at strategic positions, we looked at
markets, we looked at primary corridors, we said
that this is the area that we want to operate,
it's market driven, it reflects the changes that
are going on in this industry, where the new
electric business is going to be, that gas is
going to be the fuel if choice, that the gas
business is growing at the rate of 60% a year, or
excuse me, over a 20-year period from 22 tcf to 35
tcf. From a regulated standpoint this is a low
risk business bringing together two good
businesses, low risk -- high returns. Once again,
very positive regulatory relationship as you've
heard today. We're well on our way to beating
Dominion/CNG's approval process, I think,
significantly. Aggressive cost efficiencies,
you've heard it form NIPSCO for years, we have
been very, very impressed with what these people
have done. Decile means something in the way of
-29-
cost efficiencies, NIPSCO has been a decile for
the last five years, not top quartile but top
decile and we know what it means in the way of
return and the management we believe at Columbia
is not only capable but well on their way to that.
That was a very pleasing surprise for us, it's
something that barely came out in the due
diligence, but, boy, the more we got into the
numbers the more impressed we were. There are
incentive opportunities - what Bob has done with
his team in Ohio and getting that incentive
regulation done is just, it's one of the best, I
think, programs that we've seen in the United
States and we intend to utilize that thinking
throughout our operations.
The related diversification that we've talked
about -- it's moving to knowledge-based business.
The people who have presented to you, today, are
the people who are driving this move to knowledge-
based business. The better utilization of these
assets, that's what this new world is all about is
what do you do with these regulated assets. And I
think what I'm proudest of is for the last hour
and 15 minutes no one stood up here and said the
regulators are going to let us do this or not let
us do this or we're worried about the regulators.
This is a business proposition. These are people
looking at markets, market opportunities. This is
a whole new world and I think that if we can get
anything across to you today that's important.
The issue of optionality is real, we've made money
at it, we know we can make money at it, we know we
can drive that curve, we're committing a lot of
our management time and resources to distributed
generation and we're coming at it from an LDC's
perspective, not from a patent-owner's perspective
even though we'll own 50% ownership in a fuel cell
and in the reformer. But it's important because
this is the way the new direction is going to go.
So this is a merger of two strong companies, it's
a start of a new industry, it's something unique,
something transforming and we'll continue to keep
you updated on the progress. Let me throw it open
to questions. Can we use a microphone, David, do
you mind, because this is being taped and will go
out on the web site.
Question: You start out, Gary, stating a very impressive
goal of 15% earnings gains and numbers we've seen
in the past from you is a 10% growth, not 15. Is
this a goal or is this more than a goal?
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Gary Neale: We think it's a plan, we think it's a realizable
objective. From 2002 out.
Question: Do you have details beyond that as to where ... you
gave us broad categories ...
Gary Neale: And, David, we've given you a lot more details
than we did in March and when we come back in
September when we've got a combined plan after the
integration teams have finished and we have a
combined plan we'll give you the details of every
one of those.
Question: It looks like you have major capital investments
or entire returns ...
Gary Neale: Remember, a lot of this is knowledge based, is not
necessarily capital based. Some of Cathy's
projects are capital based but the capital comes
back relatively quickly. A lot of these
optionality, a lot of the distributed generation
is not capital based growth, it is knowledge based
growth and how you position yourself in the market
place. And that's important to remember, you can
... optionality doesn't cost you any capital, it
costs you a lot of bright people like Pat and Jim
Clark and a few other sitting and looking at the
assets and deciding how to run it differently.
Distributed generation, if you're not going to be
manufacturer, which we're not, we're not going to
build a plant, we're going to bring in other
people to build the plant, we're going to be
distributors so the capital required is setting up
the distribution and training the local
distribution people to service those. We already
have service people out there, they're already
servicing furnaces and hot water heaters and
everything else. We are already the local brand
to the customer, the trusted brand, we don't even
have to advertise a brand, all we have to do is
say we're offering this as a local distribution
company through Columbia of Ohio or Columbia
Pennsylvania or anything else. So the capital
cost to get to these things are not as high as you
would think. Knowledge based cost, getting the
right people in place are where the costs are.
Question: Secondly, I'd like to ask about expansion
opportunity where Cathy gives the number that a
year from now you expect to be making $80 million
there, can you help us understand what potential
is that you expand that work and as you look at
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going west and those lines there and also help us
understand how you get paid for the contracts
are.
Cathy Good Abbott: Great question. As we said a year ago the
incremental investment for the next step now would
be the $450 million dollar range. That would
generate incremental operating income of roughly
$60 million by 2004. If you did subsequent polls
you'd sustain a growth rate of and that's a
relatively modest goal of 288 you can grow that
operating income 15-20% a year out through 2015.
So really strong positive upside there. The
structure of the contracts with customers, the
initial contracts that have been signed is
something that's called an indefeasible right to
use or IRU which is the standard structure within
the industry and the reason you get the capital
back so quickly is that they typically pay you on
the in-service or in some cases on one year
anniversary of in-service and you get your capital
back very, very quickly and that's part of why you
get high returns.
Gary Neale: Yeah, there should be better ways to finance that
than purely taking capital out, too, with good
credits.
Question: The Telecomm business? Are you planning to
definitely keep that business or is that part of
any of the likely asset sales? And secondly in
your State of Indiana, how are you feeling about
the rate issue that had come up and the chances of
getting legislation?
Gary Neale: Okay. The Telecom would not be one of our tier 1
sale assets. We think that with the chance for
the kind of returns that we're talking about they
would definitely not be an asset that would be on
the block to be sold. In Indiana right now we
have a consensus among the five electric utilities
for a dereg bill, we've got support of the, of
the ... the REFCs, I'm sorry to introduce a bill
in November, it's a dereg bill that does not call
for stranded costs, it calls for a rate moratorium
or a rate freeze for a period of time up to 5 or 6
years. We believe we have a good chance of
getting that bill passed in this legislative
session, we could freeze existing rates out. The
other part of your question, Steve, was the CAC.
The CAC which is a non-affiliated group have filed
with the Commission on an issue of a rate hearing
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on NIPSCO's electric rates. First of all, the
judge assigned to the case has to hear the case
and that's been delayed because the judge has come
down with cancer and so that's been delayed and
it'll probably be delayed for months right now.
Secondly, we've led a motion to strike about two
thirds of the filing because it's really not
legal. They've asked for the Commission to ask us
to do a full rate case and under the law in
Indiana it's very specifically stated that the
burden of proof is on the people who file with the
Commission which means the burden of proof is
theirs, they have to prove that our rates aren't
fair and just and I don't believe they have the
money to do that. They go door to door, knocking
on doors trying to raise money. This is an issue
we think will be taken care of with the
deregulation bill at this point. Yes, Terry.
Question: If you ...
Gary Neale: We need a microphone, just because we're on TV.
Question: If you could help review with us the numbers
again. You said that we talked about the asset
sales over $900 million after tax proceeds, you
talk about the increased interest in taking
equity, so overall when you, all is said and done
and after the deal closes, the equity ratio, I
think, I believe you said would be comparable to
some of the other companies around 35% or so.
Maybe if you review with us the overall good will
on the balance sheet, where you think the balance
sheet will sort out in terms of equity ratio and
review the interest coverage ratio, some cash
coverage ratio, some of those ratios as well as
financing. I assume the short-term financing is
lined up and then any kind of permanent financing.
Gary Neale: Correct. I will turn over to my expert on that,
Mr. Adik.
Steve Adik: The good will as you know for the organization $90
million a year good will. Financing will be taken
up some time in the first six months after the
deal closes, we've got bridge loans, 60-day bridge
loans, we will take that out. We've been looking
at this point for appropriate times to hedge out
some of the interest rate exposure.
Question: How much would you be taking down in total on the
bridge loan.
-33-
Steve Adik: If we take out the full 30% on roughly $6 billion
at 70% of $6 million so about $4 million in the
bridge loan. We'd be looking to probably take out
about half of that and hedge off the interest rate
exposure.
Steve Adik: We'd like to see ... our planning modules are
looking at all the rates including spreads over,
that's somewhere in the 8-1/4 range, 8-1/4 - 8-
1/2 right now, we could probably hedge out to
about 8.2 give or take. So I think we're
comfortable right now that those are great
interest rates and about the ball park we had in
our models.
Question: And coverage ratio?
Steve Adik: Actually, coverage ratios fairly strong for a
Triple B or Triple B+ credit. Also the credit
risk profile is lower if you use the S&P
methodology for example, NiSource stand alone is a
6 to 7 risk profile because of the amount of the
electric business. Columbia is about 4 risk
profile and the combined company would be about a
4 - 5 so we're equivalent credit ratings would be.
The coverage numbers and equity numbers will be
almost spot on with Dominion/CNG, Texas Utilities,
Reliant Energy, D&P, Central-Southwest, so for
that class of corporation, the coverage would be a
little better that tier of corporation, the credit
profile, that profile will look almost the same.
Question: You were talking about a market for natural gas
and gave us a whole bunch of zeroes that I don't
understand, do you have the reserves in the
country today to achieve that kind of
deliverability and if not, what would it take to
get there and what effect might it have on
crisis...
Gary Neale: We've used the ABA Foundation report that was
done, independent report that was done I think it
was distributed in Wall Street, and if you don't
have a copy I'll be happy to get you a copy now.
That talks about it relative to the 22 tcf to 35
tcf with just a slight increase at the rate of
inflation in the price of natural gas over that
period. It makes some assumption about the
efficiencies of new drilling rigs and how well
they can do in the field and it makes some
assumptions about access to public lands for
drilling purposes which is an assumption that
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we're all working on. It won't limit the growth
in the market place of 22 to 35 during that
period. If they can't get the drilling on public
lands, if you read the report, what it really
means is how much reserves will you have in 2020
and beyond, in other words, instead of having 80
years of reserve you might only have 50 years of
reserves or something like that. But there's no
doubt that the demand will take the market place
to 35 tcf at the rate it's going right now.
Question: What are the pricing assumptions you are making?
Gary Neale: The pricing assumptions are, that are in there are
like 6 to 7% increase per year, something like
that. And for our purposes, the price of natural
gas is not critical because remember, we're a
distributor. We're the ones that transport it,
we're the ones that store it and the variance in
the price of the commodity doesn't necessarily
hurt us.
Question: But it does on the side of the buyer, given other
sources of fuel.
Gary Neale: That's true, but if the other sources of fuel are
coal and the EPA, what it's doing to coal right
now there's not going to be much choice than to go
with natural gas. And natural gas, it's not
going grow any, it's not going to grow faster in
price than the price for oil.
Question: You showed us the mid term and then the heat
exchange, and you've indicated that that would be
price competitive, what assumptions are in there
in terms of paying the utility for back-up standby
power?
Gary Neale: Yeah. The issue of back-up standby - Now, there's
2 issues, Mark, not only that but standby power
but your share of distribution systems. In other
words, every time a customer doesn't go on the
distribution system, or drops out of the
distribution system, there's a concern, monitor
de-reg plan, because the distribution system stays
regulated, but I think my discussion with
regulators - and we discussed this with everyone
of the regulators whom we talked with, the
Columbia regulators, and we've talked in New
England, and we've talked in Indiana, to
regulators about this. There's going to have to
be some kind of a fee that we come up with which
-35-
is a standby charge, if you will, $20-$30 a month
for the residential customer that says you're
connected to the grid and this is just a fixed fee
that you're paying. And when you actually use
power, you're going to - it's going to be
emergency power. You're going to pay a very high
premium for it because you're buying it off the
grid - and whatever the grid price might happen to
be. And that's not a bad way to do it. But I
would tell you that in Pennsylvania, for instance,
the regulators when we told them - we told all the
regulators - when we come, we're coming with
distributed generation for all those customers in
Pennsylvania. And they said "My gosh, we didn't
even think about that when we did the electric de-
reg bill, because what we thought were we'd lose
industrial customers off the distribution system;
we never thought we'd lose the residential
customer. So we've got to go back and rethink
it." But I think they are so anxious to have
distributed generation, whether it's in Virginia,
Pennsylvania, Ohio, every place - they're anxious
to have it. They're going to come up with a
solution for it because it - when you talk to
regulators about distributed generation, they
think it's the only real choice the customer has.
It's a better choice than - than who my electric
supplier is, coming through the same wires that I
had before.
Yes sir?
Question: Right along the same lines -- Are we going to move
to the point anywhere where you can actually sell
some of that into the grid, or is it just not
technologically or regulatorily feasible?
Gary Neale: I will let Dr. Kramer -- would you like to answer
that question?
Dr. Kramer: I think that at this point in time the quickest
and most efficient way is to not sell massive
amounts back into the grid. In the future that's
an option that may become possible as technology
increases. Our approach currently is to look at
this from a product that can be introduced quickly
with as minimum impact on the grid and as many --
as minimum number of hurdles as there's possible
to have. So at this point in time we think it's a
possibility in the future, but we think right now
at this immediate point in time, it's not valid.
-36-
Gary Neale: The exciting thing about that, Steve, while we
were talking this morning down at Merrill Lynch is
that the opportunity to possibly develop or to put
together 40 or 50 homes putting a fuel cell in
each one of the homes and then linking those cells
together to create their own grid, if you think
about it. The 99 cells support the one that goes
down from whatever at any given time because no
one is running into peaks because you created your
grid that with everyone having their own unit and
having it interconnected with their neighbor. If
we get into this new world of electricity, it's
going to change the way everybody thinks about
electricity, the way it's distributed, I
guarantee. And it's going to come on us just as
fast as the PC came on the mainframe because the
technology is here and the consumers are going to
go after it. They want it.
Steve Adik: Remember our goal here basically we fabricate
these assets is that it's our case, it's our
intention to overlay on that gas grid the new
electric system.
Gary Neale: Okay. Carrie?
Question: Just back on this issue of generation fuel cells
in particular without the factoring the heat part,
is it in your line economic because of the plus
power models, when they talk about it, they're
only talking about generating electricity and the
efficiency is low but they can argue that it can
be economic, although it's a finite market. In
your case, do you agree with that point and as far
as technological hurdles, are there any more in
terms of getting it to economic size -- not
whether it would work or not, but whether it can
work economically?
Gary Neale: I think that our approach is always going to be to
provide heat and power and to utilize it in ways
to even get the efficiency up. We can have a
great stand alone units or not, but I want Dr. Bob
to comment on that too.
Dr. Kramer: Yes, we believe that there's a tremendous amount
of benefit from harvesting waste heat. You can
make parking that's back and forth and say well
maybe you do or you don't speckle cases, but what
we do know for certain is that if you do harvest
the waste heat, there's a clear, very clear
benefit to distributed generation to combine heat
-37-
and power. So from Mark's standpoint, we're
looking at base load operations with combined heat
and power, so that we can get the maximum benefit
from a price reliability of power volume.
Gary Neale: And you can bring in partners that are experts in
heat exchanges and that's what this is all about -
- utilize that waste heat. People like Modine and
others that we're working with right now, they see
the opportunity immediately to utilize that waste
heat.
Question: You're really still in testing?
Gary Neale: What we'll have is we'll have a home, have this in
a home, in September. And the units are running.
Now it's a matter of putting the pieces, putting
the individual components together in a home,
which we'll have operational come September.
Yes?
Question: I have two questions, the first is: I understand
your chart of corporate entities in places where
financing is going to be done correctly, are the
initial $4 billion that you're going to raise is
going to be a holding company but the financing
subholding company guarantee the holding company.
Down the road, where do you anticipate some of
this capital being raised that would be required
for some of these expansion opportunities? And
then my other question is sort of unrelated which
is I wanted to understand a little better the $71
million in incremental profitability from the gas
supply business.
Gary Neale: Let's start with Steve and then we'll turn it over
to Bob.
Steve Adik: Our initial, as correctly pointed out, the initial
funding and fee at the subholding company. We are
taking a look at whether it makes sense to
individually capitalize the operating subsidiaries
or alternatively whether it makes more sense to
move capital that's already existing into NiSource
operating subsidiaries under the holding company.
Columbia -- everything is funded basically at the
holding company, so we are evaluating the options
and what we'll be looking for is the lowest cost
option that's comfortable for the regulators.
Gary Neale: Bob, do you want to comment on $71 million?
-38-
Bob Skaggs: Yeah, 71 million is really generated from our
capacity position we control and operate on the
Columbia transmission system, much like what Pat
described, we have the option to use that storage
position, some transportation system, on any given
day, any given month, and so literally what we do
-- they call system sales capacity, Park Gas, Lynn
Gas, we'll enter into almost any transaction you
can imagine, to capture value at any particular
point in time. The inter-relationship with the
regulatory deals is in some states we may have to
share some of that revenue. In Ohio we do not,
but net we will capture $70 million by running the
operation in conjunction with the regulatory
deals.
Steve Adik: This is something that the next time we get back,
we'll go into a little more depth. Bob started it
on a day. Fundamentally, what it is if you're
long the asset, you can do the equivalent of puts
or calls against the asset or synthetically
recreate the asset by a combination of whether you
have long or short calls or long or short puts.
And this is something that we will get back to you
and show how it's been done thus far, how Bob has
put 71 million bucks into the gas supply end of
it, how Pat in last year's on the electric
business has put $20 million a year and growing on
it and how we're building the team to take that to
the next level. But that's something that's a
little bit more complicated to do in a brief
overview like today and what we will do is have a
series of meetings, there will be a series of
meetings, one of the meetings will be basically to
tell you exactly how we're going about doing that.
But just think of it, as I said, if you are long
the asset, then you can either synthetically
recreate the asset or issue puts or calls in and
around the asset.
Question: Which assets are you selling?
Gary Neale: I'm not going to name the assets yet because we
some are going through auction right now and the
employees haven't necessarily been notified, but
we'll come out with it. I think you could sit
down and decide, if we listen to non-core assets,
you heard the strategy here today. What we laid
out for you is the direction we're going and where
the key assets were and all you have to do is to
decide -- you could subtract off those assets that
weren't discussed today as potential sale assets,
-39-
but it's not fair -- you know, over the next 6
months, each, you know, each couple of months
you're going to hear about a sale that's happening
and it's been properly notified to the employees
and properly run through an auction process. And,
you know, half of those assets will come from the
Columbia side right now, and probably half of them
will come from NiSource. Any other questions? If
not, thank you very much for giving us the amount
of time that you did. We apologize for the fire
alarm. I'd like to thank the entire New NiSource
team up here for the presentation.
# # # # # #
This transcript contains certain forward-looking statements
within the meaning of the federal securities laws; these
forward-looking statements are subject to various risks and
uncertainties. The factors that could cause actual results
to differ materially from the projections, forecasts,
estimates and expectations discussed herein may include
factors that are beyond the companies' ability to control or
estimate precisely, such as estimates of future market
conditions, the behavior of other market participants and
the actions of the Federal and State regulators. Other
factors include, but are not limited to, actions in the
financial markets, weather conditions, economic conditions
in the two companies' service territories, fluctuations in
energy-related commodity prices, conversion activity, other
marketing efforts and other uncertainties. Other risk
factors are detailed from time to time in the two companies'
SEC reports. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak
only as of the date of this transcript. The companies do not
undertake any obligation to publicly release any revisions
to these forward-looking statements to reflect events or
circumstances after the date of this press release. Readers
are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date of this
transcript. The companies do not undertake any obligation
to publicly release any revisions to these forward-looking
statements to reflect events or circumstances after the date
of this transcript.
NiSource and the new holding company have filed a
registration statement, which contains a joint proxy
statement/prospectus of NiSource and Columbia Energy, and
other documents with the Securities and Exchange Commission.
Investors and security holders are urged to read the joint
proxy statement/prospectus and any other relevant documents
filed with the SEC when they become available because they
will contain important information. Investors and security
-40-
holders can receive the joint proxy statement/prospectus and
other documents free of charge at the SEC's web site,
www.sec.gov, from NiSource Investor Relations at 801 East
86th Avenue, Merrillville, Indiana 46410 or from Columbia
Investor Relations at 13880 Dulles Corner Lane, Herndon,
Virginia 20171.
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