Exhibit D-8
COMMONWEALTH OF KENTUCKY
BEFORE THE PUBLIC SERVICE COMMISSION
In the Matter of:
JOINT APPLICATION OF NISOURCE INC., )
NEW NISOURCE INC., COLUMBIA ENERGY )
GROUP AND COLUMBIA GAS OF ) CASE NO. 2000-129
KENTUCKY FOR APPROVAL OF A MERGER )
I N D E X
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PAGE
OVERVIEW OF THE TRANSACTION....................................................3
STATUTORY STANDARD FOR MERGER..................................................4
MERGER BENEFITS/SYNERGIES......................................................5
RATE CAP COMMITMENT............................................................8
FINANCIAL ISSUES..............................................................10
TRANSACTION COSTS.............................................................12
MOST FAVORED NATIONS CLAUSE...................................................13
MERGER COMMITMENTS............................................................14
REGULATORY CONCERNS...........................................................15
REPORTING ISSUES..............................................................16
GAS SUPPLY BENEFITS OF THE MERGER.............................................17
BENCHMARKING AND BEST PRACTICES...............................................19
SERVICE QUALITY...............................................................20
CUSTOMER SERVICE ISSUES.......................................................21
CREDITWORTHINESS POLICY.......................................................22
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SUMMARY OF FINDINGS...........................................................23
ORDERING PARAGRAPHS...........................................................26
APPENDIX A
APPENDIX B
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COMMONWEALTH OF KENTUCKY
BEFORE THE PUBLIC SERVICE COMMISSION
In the Matter of:
JOINT APPLICATION OF NISOURCE INC., )
NEW NISOURCE INC., COLUMBIA ENERGY )
GROUP AND COLUMBIA GAS OF ) CASE NO. 2000-129
KENTUCKY FOR APPROVAL OF A MERGER )
O R D E R
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On May 1, 2000, NiSource Inc. ("NiSource"), New NiSource Inc. ("New
NiSource"), Columbia Energy Group ("Columbia Energy"), and Columbia Gas of
Kentucky ("Columbia of Kentucky") (collectively "Applicants") filed a joint
application pursuant to KRS 278.020(4) and (5) for approval of the transfer of
ownership and control of Columbia Energy and its subsidiaries, including
Columbia of Kentucky, to New NiSource in accordance with the terms of the
Agreement and Plan of Merger Between Columbia Energy and NiSource, dated
February 27, 2000 as amended and restated on March 31, 2000 ("Merger
Agreement").
NiSource is an energy and utility-based holding company incorporated in
Indiana and exempt from the registration requirements of the Public Utility
Holding Company Act of 1935 ("PUHCA"). Through its utility subsidiaries,
NiSource provides natural gas, electric, and water service to the public in
Indiana and provides natural gas service in Maine, Massachusetts, and New
Hampshire. NiSource also markets utility services and customer-focused resource
solutions along a corridor stretching from Texas to Maine. New NiSource, a
wholly-owned subsidiary of NiSource, is a new corporation organized under the
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laws of the state of Delaware for the purpose of effectuating the proposed
merger.
Columbia Energy is a utility holding company incorporated in Delaware and
registered under PUHCA. Its operating companies engage in the exploration,
production, transmission, storage, and distribution of natural gas, as well as
retail energy marketing, propane and petroleum product sales, and electric power
generation. Columbia of Kentucky, a wholly-owned subsidiary of Columbia Energy,
is a Kentucky corporation. It is engaged in the business of selling and
distributing natural gas to approximately 141,000 retail customers within the
Commonwealth of Kentucky and is regulated by the Commission as a utility under
KRS 278.010(3)(b).
On May 5, 2000, the Commission established a procedural schedule designed
to allow for an investigation of the merits of the merger and the issuance of a
final Order within the 60-day time limit prescribed in KRS 278.020(5). The
procedural schedule provided for two rounds of discovery, an opportunity for
intervenors to file testimony, a public hearing, and an opportunity to file
post-hearing briefs.
The Commission granted full intervention to the following: Attorney
General's Office of Rate Intervention ("AG"); Stand Energy Corporation;
Community Action Counsel for Lexington-Fayette, Bourbon, Harrison and Nicholas
Counties, Inc.; and Paper, Allied-Industrial, Chemical and Energy Workers
International Union, AFL-CIO CLC; PACE Local Union 5-372, United Steelworkers of
America, AFL-CIO CLC, and Utility Workers Union of America, AFL-CIO
(collectively, "Union Intervenors"). The Commission held a public hearing on
June 8-9, 2000 at the Commission's offices in Frankfort, Kentucky. The parties
filed post-hearing briefs on or before June 19, 2000.
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OVERVIEW OF THE TRANSACTION
---------------------------
The merger is intended to position the Applicants to succeed in the
increasingly deregulated and competitive energy marketplace. The Applicants
contend that their proposed combination is a benefit because of the
opportunities for growth in the combined service area and the geographic
diversity and differences in regional economic factors. The Applicants
anticipate that the merger will produce significant savings, but maintain that
merger savings cannot be quantified at this time. They contend, however, that
the customers of Columbia of Kentucky, as well as the Commonwealth of Kentucky,
will benefit from the merger through the commitments made in this proceeding and
through the combined company's larger and stronger presence in the natural gas
market.
Under the terms of the Merger Agreement, NiSource will organize a new
company, New NiSource, which will serve as the holding company for both Columbia
Energy and NiSource after the completion of the transaction. Columbia Energy and
NiSource will each be merged into newly formed acquisition subsidiaries of New
NiSource, and each will become a wholly-owned subsidiary of New NiSource.
NiSource will then merge into New NiSource. New NiSource will then change its
name to "NiSource, Inc." and register as a holding company under PUHCA.
Upon completion of the transaction, each shareholder of Columbia Energy
will receive $70 in cash and a $2.60 face value SAILSsm for each share of
Columbia Energy common stock. The SAILSsm is a zero coupon debt security with a
forward equity contract. Alternatively, Columbia Energy's shareholders may
decline the cash and SAILSsm and elect a tax-free exchange of their shares for
New NiSource shares for up to 30 percent of the outstanding shares of Columbia
Energy common stock. Under the share exchange, each share of Columbia Energy
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will be exchanged for the lesser of $74 in New NiSource stock or 4.4848 shares
of New NiSource stock, depending on the stock's price for 30 days prior to
closing the transaction. NiSource shareholders will receive one share of New
NiSource stock for each share of NiSource common stock that they own.
To finance the cash portion of the purchase price, NiSource intends to sell
$1 billion in non-core assets and has secured a firm commitment from Credit
Suisse First Boston ("Credit Suisse") and Barclays Bank plc ("Barclays") for a
bank facility up to $6 billion. Credit Suisse estimates the cash payments to
Columbia Energy shareholders to be between $3.9 billion [assuming a 30 percent
exchange for New NiSource stock] and $5 billion [assuming no exchange for New
NiSource stock]. The number of Columbia Energy shares exchanged for New NiSource
stock will determine the exact amount of the cash payments.
STATUTORY STANDARD FOR MERGER
-----------------------------
Under KRS 278.020(4), no person may acquire or transfer control of a
utility until the Commission has determined that the acquirer has the financial,
technical, and managerial abilities to provide reasonable service. In addition,
under KRS 278.020(5), no individual may acquire control of a utility unless the
Commission has determined that the acquisition is made in accordance with the
law, for a proper purpose, and is consistent with the public interest.
MERGER BENEFITS/SYNERGIES
-------------------------
The Applicants have stressed that, unlike other mergers approved by this
Commission, this is a merger of convergence and, therefore, will not produce
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significant savings at the distribution company level.1 Because NiSource and
Columbia Energy have no overlap in their service territories, they state that
there will be no immediate cost savings attributable to the elimination of
operational redundancies, which can be shared with ratepayers at this time.2
Rather, any such savings will be due to implementing a shared services program
that will result in savings at the corporate service company level. However, the
Applicants claim that these savings will occur over time, with the first year
earnings after the merger expected to be dilutive.3
In an April 26, 2000 Analyst Presentation entitled, "Creating Value in the
Energy Corridor," NiSource estimated the annual synergies that it expected to
realize between 2001 and 2005 as a result of the merger. NiSource stated that
these estimated realizable synergies are based on industry benchmarks and not on
a detailed study of the operations of Columbia Energy.4
The AG contends that NiSource's analysis of estimated synergies represents
a quantification of anticipated merger benefits. The AG argued that if a
mechanism to share those quantified benefits is not made a condition of the
merger, the principle of retroactive rate-making will preclude ratepayers from
sharing in those benefits in the future. The AG further argued that although the
Applicants have maintained that the ratepayers will not directly or indirectly
pay for the acquisition fees, if the merger benefits are not considered until
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1 Application at 12.
2 Response to Item 7(a) of the Commission's May 22, 2000 Order.
3 Id., Response to Item 8.
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4 Response to Item 75(a) of the Commission's May 10, 2000 Order.
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2004, the ratepayers will have indirectly paid the acquisition fees through
foregone savings.5
The Applicants' position is that there is uncertainty surrounding the
synergies contained in their analysis, specifically in the timing and exact
amounts of those synergies. The Applicants argued that if they are required to
share those synergies, then the costs of achieving those synergies should also
be shared.6 Further, they asserted that the appropriate time to review merger
savings is in the rate case to be initiated in 2004 as part of the review of
Columbia of Kentucky's Customer Choice Plan.
The Commission does not agree with the Applicants' argument that sharing
the merger savings with ratepayers should be deferred for 4 years because the
savings are not quantified at this time and the merger will have a dilutive
effect on earnings in the initial year. The savings quantified in the Analyst
Presentation were characterized by NiSource as a reasonable estimate of the
anticipated savings and they have been presented to financial analysts and
lenders to demonstrate the feasibility of this merger.7 In other mergers
approved by this Commission, preliminary estimates of net savings (i.e., gross
merger savings less the costs to achieve the savings) were flowed through to
customers in the initial years after the merger. In this case the Applicants
have consistently objected to any immediate flow through of net savings.
With regard to the dilutive effect on earnings in the first year after the
merger, the Applicants indicated that net savings would be realized even in the
first year after the merger if the amortization of the acquisition premium, the
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5 Post-Hearing Brief of the AG at 5 and 6.
6 Transcript of Evidence ("T.E."), Vol. 1, at 205.
7 Id. at 173.
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costs to achieve the merger, and the change of control payments are not
considered as an offset to savings.8 Columbia of Kentucky has committed that
none of these costs will be borne by its customers. Consequently, it is
inappropriate to argue that no savings should be passed on to consumers in the
initial years following the merger. Therefore, the Commission finds that merger
savings and the costs to achieve those savings should be captured for accounting
purposes and deferred for future rate-making purposes to be considered in
Columbia of Kentucky's next rate case.
The Commission further finds that deferring consideration of merger savings
until 2004 will result in ratepayers indirectly paying for the merger
transaction fees through foregone merger savings. This result is not consistent
with the Applicants' commitment to not pass the merger costs through to
ratepayers. Recognizing the Applicants' inability to now project savings that
they will commit to share with the ratepayers, the Commission finds that the
Applicants should develop a mechanism to track the achieved merger savings and
associated costs and a methodology to allocate a proportionate share of the
savings and costs to Columbia of Kentucky. By November 30, 2000, Columbia of
Kentucky should file with the Commission the tracking mechanism and the
allocation methodology. Columbia of Kentucky should record these savings and
costs in a deferred account that will be reviewed and considered in its next
rate case.
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8 T.E., Vol. II, at 64 and Response to Hearing Information Request filed
June 16, 2000.
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RATE CAP COMMITMENT
-------------------
The Applicants committed to cap Columbia of Kentucky's current base rates
through October 31, 2004, asserting that this provides real value to ratepayers,
rather than requiring an immediate sharing of potential, but unrealized, merger
savings. Under the terms of the rate cap, Columbia of Kentucky would not propose
to increase its base rates prior to October 31, 2004 unless it experienced an
extraordinary change in circumstances, such as a change in tax rates
significantly increasing its tax liability or a 7 percent annual rate of
inflation sustained over a period of not less than 15 consecutive months.9
The Applicants selected this timeframe for the base rate cap to coincide
with its 4-year pilot plan, approved in Case No.99-165, allowing customers to
choose an alternative gas supplier.10 The Applicants asserted that since the
Commission intends to review all aspects of Columbia of Kentucky's rates at the
conclusion of the 4-year pilot, that review is the most efficient and timely
means of ensuring that merger savings are properly identified and reflected in
rates.11
The AG argued that the proposed rate cap is meaningless because Columbia of
Kentucky's current rates which became effective in 1996 consistently produced
rates of return that are well above those found reasonable by the Commission in
recent years. The AG further argued that, under the terms proposed by the
Applicants, the rate cap commitment is nothing more than a lock-in of
over-earnings for Columbia of Kentucky and is therefore inconsistent with the
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9 Prepared Direct Testimony of Gary L. Neale at 11.
10 Case No. 99-165, The Tariff Filing of Columbia Gas of Kentucky, Inc. to
Implement a Small Volume Gas Transportation Service, to Continue its Gas Cost
Incentive Mechanisms, and to Continue its Customer Assistance Program, Order
dated January 27, 2000.
11 Prepared Direct Testimony of Gary L. Neale at 11.
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public interest.12 For this reason, the AG requests that an immediate
examination of Columbia of Kentucky's rates should be a condition of the
merger.13
While the Commission recognizes that this is a merger proceeding, not a
rate case, the limited evidence on Columbia of Kentucky's recent earnings seems
to indicate a trend of possible over-earning. For this reason a 4-year cap on
Columbia of Kentucky's rates is not consistent with the public interest.
However, the Commission also recognizes that its decisions in Case No. 99-165
could impact Columbia of Kentucky's future earnings, but that impact has not
been quantified at this time. Considering these factors and the introduction
later this year of the Customer Choice Plan, the Commission finds that an
immediate review of Columbia of Kentucky's rates may not present an accurate
assessment of its earnings and would therefore be premature.
To better evaluate Columbia of Kentucky's earnings as impacted by the
merger, as well as its Customer Choice Plan, the Commission finds that the
merger will be in the public interest only if Columbia of Kentucky files a rate
case by the earlier of 18 months after consummation of the merger or September
30, 2002. The rate case filing must include the statutory filing requirements as
well as a cost-of-service study, an estimate of future net merger savings, and a
mechanism to reflect on ratepayers' bills future merger savings and the net
deferred merger savings. Since this rate case will include a cost-of-service
study, this obviates the need for such a study by a Commission consultant in
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12 Post-Hearing Brief of the AG at 1-4.
13 Id. at 5.
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conjunction with the review of the Customer Choice Plan in 2004. However, the
Commission will still review the Customer Choice Plan and its impact on rates in
2004, as discussed in the January 27, 2000 Order in Case No.99-165.
FINANCIAL ISSUES
----------------
The Applicants have made numerous commitments relating to financial issues.
Due to the importance of maintaining a strong financial condition for Columbia
of Kentucky, significant portions of Appendix A to this Order address financial
issues. While there are narratives contained therein, the Commission finds that
several of these significant issues warrant discussion here.
NiSource, Columbia Energy, and Columbia of Kentucky, through various
statements, have committed that Columbia of Kentucky ratepayers will incur no
additional costs, liabilities, or obligations as a result of the acquisition.
These commitments have been incorporated into the conditions in Appendix A.
An issue of particular concern is "push down" accounting which would
require Columbia of Kentucky to record a portion of the acquisition premium
resulting from the excess paid by NiSource over the book value of the Columbia
Energy stock. Applicants have not determined if the Securities and Exchange
Commission ("SEC") will require the use of push down accounting of the actual
amount of the acquisition premium.14 However, NiSource did estimate the
acquisition premium to be somewhere between $3.5 to $4 billion.15 Considering
the significant amount of the acquisition premium, the Commission strongly
opposes the push down accounting treatment in this instance due to the potential
------------------------
14 Response to Items 49(c) and 49(d) of the Commission's May 10, 2000
Order.
15 T.E., Vol. I, at 190.
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adverse financial impact on the ratepayers of Columbia of Kentucky. Furthermore,
the acquisition premium results in an immediate and direct financial benefit to
the shareholders of Columbia Energy stock, but results in no direct benefit to
the customers of Columbia of Kentucky.
According to the Applicants, SEC Staff Accounting Bulletin No. 54 requires,
in some instances, the use of push down accounting in the financial statements
that are filed with the SEC.16 In the future, if outside public financing is
obtained by Columbia of Kentucky, then the SEC would require the use of push
down accounting to the distribution company level.17 However, NiSource has
committed that the acquisition premium paid for the Columbia Energy stock will
not be pushed down to Columbia of Kentucky for rate-making18 and Commission
reporting purposes.19 The Commission believes that this condition is essential
to a finding that the merger is in the public interest. Therefore, this
commitment has been restated in Appendix A.
Included in Appendix A of this Order is the Applicants' commitment to
adequately fund and maintain Columbia of Kentucky's transmission and
distribution systems. This issue is further discussed in conjunction with the
section on Customer Service Issues. Columbia of Kentucky is now a small portion
of Columbia Energy and it will become an even smaller portion of the merged
system. For this reason, the Commission is concerned that the capital needs of
Columbia of Kentucky may not receive the proper precedence in the capital
budgeting process and capital investment allocation at NiSource. To properly
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16 Response to Item 35 of the Commission's May 22, 2000 Order.
17 Id., Response to Item 37.
--
18 Id., Response to Item 62(e).
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19 T.E., Vol. II, at 216.
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monitor the Applicants' commitment in this area, the Commission finds that
Columbia of Kentucky should annually file its current 3-year capital and O&M
budgets. This filing will be due on or before March 31 of each year, and shall
include an explanation for any reductions in each capital budget item that
exceeds a 10 percent change from the prior year.
TRANSACTION COSTS
-----------------
The Applicants have committed that, "All transaction-related costs,
including the cost of purchase and the premium paid for the Columbia Energy
transaction, shall be excluded for rate-making purposes and from the rates of
Columbia of Kentucky."20 The Commission finds it reasonable for Columbia of
Kentucky to file information sufficient to allow adequate monitoring of the
costs associated with this acquisition.
As of April 30, 2000, NiSource had incurred acquisition costs of
$17,663,36621 and Columbia Energy had incurred acquisition costs of $17,007,949
through May 10, 2000.22 To properly monitor the acquisition costs, the
Commission finds that NiSource should file a schedule of its actual acquisition
costs to date, at the level of detail shown in its response to Item 18(a) of the
Commission's May 10, 2000 Order. NiSource should specifically identify any costs
that have been allocated to Columbia Energy. Columbia Energy should file a
schedule of its actual acquisition costs to date, including any costs allocated
to it by NiSource, at the level of detail shown in its response to Item 5(a) of
the Commission's May 22, 2000 Order. Columbia Energy should identify any costs
------------------------
20 Response to Item 62(e)(4) of the Commission's May 22, 2000 Order.
21 Response to Item 18(a) of the Commission's May 10, 2000 Order.
22 Response to Item 5(a) of the Commission's May 22, 2000 Order.
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allocated to a subsidiary or affiliate, provide the name of the subsidiary or
affiliate and the accounting entries made on its books, and identify the basis
for the allocation. NiSource and Columbia Energy should file this information
for the six-month periods ending June 30 and December 31. The first report will
be due on August 15, 2000, and all subsequent reports will be due 45 days after
the end of the reporting period. These reports should be filed until all
transaction costs have been incurred. The costs that are allocated to the
Columbia of Kentucky level should be fully documented and included in detail in
the rate case filing that is to be made 18 months after the merger is
consummated, pursuant to this Order.
MOST FAVORED NATIONS CLAUSE
---------------------------
NiSource claims that most favored nations clauses do not appropriately
account for unique differences between regulatory frameworks or operating rules
affecting utilities located in different states. NiSource added that such
clauses can have unintended consequences when changes in presumed general
economic conditions occur. For these reasons, NiSource does not support the
inclusion of a most favored nations clause as a condition of the merger.23
The Commission finds that since NiSource operates in numerous
jurisdictions, a most favored nations clause would ensure that the ratepayers of
Columbia of Kentucky receive all of the merger benefits that the Applicants make
available to ratepayers in other jurisdictions. Therefore, the Commission finds
it reasonable to condition the merger on the Applicants' commitment that if in
connection with this merger, any state or federal regulatory commission imposes
conditions on the Applicants that would benefit ratepayers in any other
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23 Response to Item 71(c)(3) of the Commission's May 10, 2000 Order.
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jurisdiction, proportionate net benefits and conditions will be extended to
Columbia of Kentucky ratepayers.
MERGER COMMITMENTS
------------------
Throughout this proceeding, the Applicants have made numerous commitments
relating to their operations after the merger. The Applicants were requested to
comment upon the commitments from Case No. 2000-095,24 which the Commission
believed to be applicable to circumstances of this merger. In their response,
the Applicants either accepted or accepted with revision the applicable
commitments from Case No. 2000-095.25 Through these commitments, the Applicants
have attempted to address many of the concerns that were expressed and implied
by the Commission and intervenors. At the hearing, NiSource's Chief Executive
Officer ("CEO") accepted and agreed to be bound by those commitments.26
The Commission has reviewed all of the Applicants' proposed commitments,
and has determined that several deal with concerns that should be expressed
specifically in this Order. The Commission has modified or refined several of
the Applicants' commitments to reflect concerns that we have, and several of
these concerns are discussed elsewhere in this Order. Appended hereto as
Appendix A is a listing of commitments identified by the Commission as
addressing significant concerns and issues raised by the NiSource acquisition.
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24 Case No. 2000-095, Joint Application of PowerGen plc, LG&E Energy Corp.,
Louisville Gas and Electric Company, and Kentucky Utilities Company for Approval
of a Merger, final Order dated May 15, 2000.
25 Response to Item 62 of the Commission's May 22, 2000 Order.
26 T.E., Vol. I, at 173.
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The Commission's approval of the acquisition will be conditioned upon the
Applicants' written acceptance of the commitments in Appendix A.
REGULATORY CONCERNS
-------------------
In previously approving the creation of holding companies for other
utilities, the Commission's Orders included extensive discussions of the
concerns and objectives with regard to the protection of ratepayer interests.
These concerns related generally to three areas:
1. The protection of utility resources;
2. The ability to adequately monitor the corporate activities of the
utility, the holding company, and any other subsidiaries established
by the holding company; and
3. The establishment of reporting requirements to assist the Commission
in monitoring activities.
Those prior Orders also contained a detailed list of the conditions and
requirements necessary to protect ratepayers' interests.
The concerns for the protection of Columbia of Kentucky's ratepayers remain
the same as those expressed in previous Commission Orders approving other
mergers. Therefore, the Commission will require as a condition of the merger
that NiSource, Columbia Energy, and Columbia of Kentucky comply with the
conditions and requirements previously included in the Orders in Case Nos.
99-14927 and 2000-095. These concerns, conditions, and requirements are set
forth in Appendix B to this Order. The Commission also notes that, effective
July 14, 2000, House Bill 897 will impose cost allocation requirements and a
code of conduct on Columbia of Kentucky. In any instance in which the conditions
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27 Case No. 99-149, Joint Application of Kentucky Power Company, American
Electric Power Company, Inc. and Central and South West Corporation Regarding a
Proposed Merger, final Order dated June 14, 1999.
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and requirements expressed in Appendix B are not superseded by the provisions of
House Bill 897 or the rules of the SEC, the conditions and requirements in
Appendix B will control.
REPORTING ISSUES
----------------
The Commission has previously recognized in cases involving registered
holding companies that SEC reports may satisfy many of our filing requirements.
In such cases the SEC reports are acceptable substitutes. The Applicants should
file an analysis of the reporting requirements contained in this Order and the
information contained in their SEC reports, indicating areas that may be
duplicative. The Commission will then determine whether the identified SEC
reports adequately satisfy the Commission's information requirement. The
Applicants' analysis should be filed within 90 days of completing the
acquisition.
GAS SUPPLY BENEFITS OF THE MERGER
---------------------------------
One of the merger benefits cited by the Applicants is the increased
opportunity to acquire reliable gas supplies at competitive cost through
combining the separate transactional activities of the two systems. The
Applicants contend that portions of the contracted pipeline capacity of the
NiSource and Columbia Energy distribution companies will become redundant when
the combined company begins coordinating gas supply portfolios. It should then
be possible to reduce transportation capacity requirements for the combined
company that will result in reduced capacity costs. In addition, the Applicants
expect that the geographic diversity of the combined company will allow them to
take advantage of non-coincident peaks by sharing capacity among the
distribution companies on an as-needed basis.
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Aggregating the gas supply needs of the combined company in purchasing gas
at common market hubs and supply basins along with optimizing common gas storage
assets is expected to reduce the per unit cost of the gas purchased for Columbia
of Kentucky and other distribution companies of the two systems.28 In addition,
the fact that the two systems' customers are located in geographically diverse
regions may create opportunities for the combined company to further optimize
contracted and owned storage and transportation assets that can result in gas
cost savings to sales customers of all the combined system's distribution
combinations. Any such savings will be captured in Columbia of Kentucky's future
Gas Cost Adjustment filings.
A related benefit, cited by the Applicants, is that NiSource has the same
level of commitment to customer choice as does Columbia of Kentucky. NiSource
cites the fact that its distribution utilities were the first to allow customers
to choose a gas supplier in both Indiana and Massachusetts. The Applicants state
that the combined company is committed to working with marketers to deliver the
enhanced benefits of competition to Kentucky consumers. Applicants contend that,
either through customer choice or reductions in gas supply costs achievable by
the combined company, customers will benefit in the form of reduced gas costs as
a result of the merger.
The Commission is encouraged by the opportunity for customers to realize
reductions in their gas supply costs, particularly since Columbia of Kentucky's
gas costs are among the highest in the Commonwealth.29 This is likely one area
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28 Columbia of Kentucky obtains over 96 percent of its gas supply from the
Texas and Louisiana supply basins while NiSource affiliates purchase over 50
percent of their gas supply from the same supply basins. The combination of the
two systems will result in a larger presence in this large and competitive
supply basin which is expected to result in obtaining gas supplies at lower
prices than either system could obtain acting independently of each other.
29 T.E., Vol. I, at 131-134.
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of operations where the increased scale and scope of the combined company will
almost assuredly be beneficial to customers. The Commission will closely monitor
Columbia of Kentucky's gas supply costs to ensure that all cost reductions are
properly flowed through to customers through the Gas Cost Adjustment filings.
This will avoid the potential for the Customer Choice Plan to seem more
attractive to customers than it truly is. We anticipate a market developing in
the manner described by NiSource where reductions in gas cost for the combined
companies will put competitive pressure on marketers to reduce their gas prices,
thereby resulting in lower gas costs for all consumers, both sales customers and
choice customers.30
BENCHMARKING AND BEST PRACTICES
-------------------------------
The Applicants state that there will be an ongoing review of their
operations utilizing various methods of benchmarking, all designed to improve
and increase the efficiency of their operational processes. This process is
referred to as "world-class best practices" and can lead to cost savings, more
competitive customer prices, and improved customer service and customer
satisfaction. By applying best practices, the utility seeks out other companies
who perform similar types of functions or tasks to ascertain how the process
operates and whether or not there are techniques that can be adopted or modified
and applied to its own processes. For example, both NiSource and Columbia Energy
utilize the American Gas Association's annual "Best Practices Benchmarking"
study to identify utility practices that can be improved or modified.
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30 Id. at 136-138.
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Columbia of Kentucky is already familiar with business improvement
processes and has been applying those techniques since 1998.31 It provided
examples of its improvement programs, including Continuous Improvement ("CI"),
Total Quality Management ("TQM"), and Opportunity for Improvement ("OFI"). The
OFI program utilizes teams of employees to study areas of opportunity that could
lead to more efficient and effective operations and track savings where
possible. Similarly, NiSource's gas distribution utilities utilize various forms
of internal benchmarking and industry-wide best practices comparisons.
The Commission encourages the Applicants' efforts to apply best practices
to their operations. Considering Columbia of Kentucky's experience with
successfully implementing CI, TQM, and OFI, documenting and tracking team
initiatives, and reporting results to management, Columbia of Kentucky is well
positioned to implement a similar procedure to be applied to the best practices
implementation process. To enable the Commission to track the use of best
practices, Columbia of Kentucky should file semi-annual progress reports. For
each area reviewed for application of best practices at Columbia of Kentucky or
an affiliate whose costs are charged to Columbia of Kentucky, the progress
report should document the investigating team, its mission and area of
investigation, current status, estimated costs, expected results including
savings, and all results actually achieved.
SERVICE QUALITY
---------------
The Union Intervenors expressed concern that Columbia of Kentucky's current
staffing levels put both its employees and customers at risk. The Union
Intervenors state that current staffing levels are barely enough to maintain
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31 Response to Item 85 of the Commission's May 10, 2000 Order.
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safe and reliable service. Furthermore, they believe additional staffing is
necessary to meet the future demand for gas service and distributed generation.
The Commission finds that Columbia of Kentucky has historically provided a high
level of customer service and safety, which must be maintained after the merger.
Absent extraordinary circumstances, it is not the Commission's function to
establish staffing levels for a utility. The evidence of record does not
persuade us to find that current staffing levels are too low.
Both NiSource and Columbia Energy have committed to maintaining high
quality service for their Kentucky natural gas customers.32 Columbia Energy
further committed to ensuring that an appropriate workforce level is maintained
after the merger is consummated.33 The Commission expects the Applicants to
continue to allocate adequate resources to Kentucky operations to maintain and
improve the existing high level of service quality and safety.
CUSTOMER SERVICE ISSUES
-----------------------
Since 1996, Columbia of Kentucky has utilized the services of Strategic
Marketing & Research Inc. ("SMRI") to conduct quarterly customer satisfaction
surveys. SMRI surveys a variety of subjects, with focus given to call center
contacts and in-person follow-up contacts. Columbia of Kentucky uses the results
of these surveys to set operational excellence objectives.34 According to the
------------------------
32 Response to Item 62(n)-(r) of the Commission's May 22, 2000 Order.
33 T.E., Vol II, June 9, 2000, at 125.
34 Id. at 152.
--
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objectives provided by Columbia of Kentucky, it currently meets five of its
seven objectives.35
The Commission encourages Columbia of Kentucky, under the leadership of
NiSource, to continue its relationship with SMRI or develop a similar customer
satisfaction survey. The surveys provide an important measure of the utility's
success or failure to adequately serve its customers. Columbia of Kentucky
should file its most recent SMRI reports with the Commission on a semi-annual
basis.
While the SMRI surveys represent an adequate view of customer satisfaction,
the Commission is concerned that the operational excellence objectives that are
based upon the SMRI survey do not sufficiently reflect excellent service. For
instance, Columbia of Kentucky stated that if it cancels a service appointment
just hours before the scheduled time, it is not recorded as a missed appointment
if the customer is notified.36 Columbia of Kentucky should meet with Commission
Staff and interested parties by September 30, 2000 to discuss the operational
excellence objectives and the parameters of the SMRI survey. The goal of this
meeting will be to ensure the methodology utilized by Columbia of Kentucky to
determine operational excellence objectives is sound.
------------------------
35 Response to Item 97 of the Commission's May 10, 2000 Order. Through
April 2000, 4.32 percent of Columbia of Kentucky's customers calling the
Customer Satisfaction Center ("CSC") hang up before speaking to a
representative. Columbia of Kentucky's goal is 4 percent or lower. Through April
2000, the average time in which the CSC answers a call is 23.6 seconds. Columbia
of Kentucky's goal is 20 seconds or less.
36 T.E., Vol. II, June 9, 2000, at 131.
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CREDITWORTHINESS POLICY
-----------------------
Stand Energy is a marketer of natural gas that anticipates being a supplier
of choice to current customers of Columbia of Kentucky once its Customer Choice
Plan is implemented. Stand Energy asserted that a change in Columbia of
Kentucky's creditworthiness policy for alternative suppliers can have an adverse
impact on the development of a competitive gas supply under the Customer Choice
Plan. More specifically, Stand Energy claimed that the creditworthiness policy
affects the capital cost of alternative suppliers and, with thin profit margins
in retail choice plans, onerous credit requirements can make the choice plan
economically unviable for marketers. For this reason, Stand Energy requested the
Commission to create a remedy, such as conditioning the merger on the right of
alternative suppliers to appeal credit disputes to the Commission or for the
Commission Staff to mediate any credit disputes.37
The provisions of Columbia of Kentucky's Customer Choice Plan, including a
creditworthiness policy, are contained in its tariffs that are on file with the
Commission. If Columbia of Kentucky chooses to revise the creditworthiness
policy in its Customer Choice Plan, it will have to file a new tariff with the
Commission. At that time interested parties will have the opportunity to object.
Therefore, Stand Energy has an adequate and complete remedy for the issue it
raised and there is no reason to condition the merger as it requested.
SUMMARY OF FINDINGS
-------------------
The Commission, after considering the evidence of the record and being
advised, finds that:
------------------------
37 Post-Hearing Brief of Stand Energy at 2-4.
22
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1. NiSource, Columbia Energy, and Columbia of Kentucky will, after the
consummation of the merger, have the financial, technical, and managerial
abilities to provide reasonable utility service.
2. NiSource will not, by reason of its ownership of all outstanding
shares of common stock of Columbia Energy, be a utility as defined in KRS
278.010(3).
3. Columbia Energy will not, by reason of its ownership of all
outstanding shares of common stock of Columbia of Kentucky, be a utility as
defined in KRS 278.010(3).
4. The proposed acquisition of Columbia Energy and the transfer of
control of Columbia of Kentucky to a newly constituted NiSource, is in
accordance with law, for a proper purpose, and will be consistent with the
public interest only if the Applicants accept and agree to the commitments and
conditions set forth in Appendices A and B, attached hereto and incorporated
herein by reference.
5. The Commission will certify to the SEC pursuant to Section 33(a)(2) of
PUHCA that, with the Applicants' acceptance of the commitments in Appendices A
and B, the Commission has the authority and resources to protect Columbia of
Kentucky's ratepayers subject to its jurisdiction and that it intends to
exercise this authority.
6. The merger should be approved upon the condition that the CEOs of each
Applicant file within 7 days of the date of this Order a written acknowledgement
accepting, and agreeing to be bound by, the commitments set forth in Appendices
A and B to this Order.
7. Columbia of Kentucky should provide copies of the applications,
notices, final approval orders, or other regulatory notifications received from
the Federal Energy Regulatory Commission ("FERC"), the SEC, the Federal
23
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Communications Commission ("FCC"), the Department of Justice, and any state
regulatory authority with jurisdiction over this merger, to the extent these
documents have not already been provided in this case. 8. Columbia of Kentucky
should file within 90 days of closing the merger an analysis of the reporting
requirements contained in this Order and the requirements of the SEC,
identifying those SEC reports that may satisfy the Commission's requirements.
9. The Applicants should notify the Commission in writing of any material
change in Columbia of Kentucky's participation in, or funding for, research and
development 30 days prior to any proposed change.
10. Columbia of Kentucky should file annually its service outage reports
as described in this Order.
11. The Applicants should file semi-annually a report detailing the
adoption and implementation of best practices at Columbia of Kentucky. The
report should be filed 45 days after the close of the reporting period.
12. Within 30 days of the date of this Order, Columbia of Kentucky should
file a report detailing its actual expenditure levels for economic development
activities and civic and charitable activities for the past 3 calendar years.
13. Columbia of Kentucky should report annually its economic development
activities and its actual expenditures for economic development activities and
civic and charitable activities.
24
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14. Columbia of Kentucky should annually file its current 3-year capital
and O&M budgets, including an explanation for any reductions in a budget item
greater than 10 percent.
15. NiSource and Columbia Energy should, every 6 months, provide reports
on the actual costs of the Columbia Energy acquisition, as described in this
Order. The reports should be as of June 30 and December 31, with the first
report due on August 15, 2000 and all subsequent reports due 45 days after the
end of the reporting period. NiSource and Columbia Energy should continue to
provide these reports until all transaction costs have been incurred.
16. In the event Columbia of Kentucky requests the SEC or FERC for an
exemption or change to the current dividend requirements, a copy of such request
should be filed with the Commission 30 days prior to its submission to the SEC
or FERC.
17. Columbia of Kentucky should file by November 30, 2000 a proposed
mechanism to track the merger savings and the associated costs and should
include NiSource's proposed methodology to allocate the merger savings and
associated costs to Columbia Energy and Columbia of Kentucky.
IT IS THEREFORE ORDERED that:
1. The transfer of ownership of Columbia of Kentucky through the
acquisition of ownership and control of Columbia Energy by NiSource is approved,
subject to the filing within 7 days of the date of this Order of the written
acknowledgements described in Finding 6 above.
25
<PAGE>
2. NiSource and Columbia Energy shall not impair the capacity of Columbia
of Kentucky to meet its obligations to provide adequate, efficient, and
reasonable utility service.
3. Columbia of Kentucky is prohibited from guaranteeing the debt of
NiSource, Columbia Energy, and related affiliates and subsidiaries of NiSource
and Columbia Energy, without the prior approval of the Commission.
4. The Applicants shall comply with all reporting and filing requirements
described herein. Unless otherwise noted, all quarterly reports shall be filed
within 45 days of the close of the reporting quarter, while all annual reports
shall be filed by March 31 of the year following the reporting period.
5. Access to the books and records of NiSource and Columbia Energy and
its related affiliates and subsidiaries shall be provided as described in
Appendix B.
6. Columbia of Kentucky shall file copies of the applications, notices,
final approval orders, or other regulatory notifications received from the FERC,
the SEC, the FCC, the Department of Justice, and any state regulatory authority
with jurisdiction over this merger, to the extent these documents have not
already been provided in this case, within 10 days of their filing or receipt.
7. Within five days of the consummation of the merger, Columbia of
Kentucky shall file a written notice setting forth the date of merger.
26
<PAGE>
Done at Frankfort, Kentucky, this 30th day of June, 2000.
By the Commission
ATTEST:
/s/ Illegible
-----------------------------
Executive Director
27
<PAGE>
APPENDIX A
APPENDIX TO AN ORDER OF THE KENTUCKY PUBLIC SERVICE
COMMISSION IN CASE NO. 2000-129 DATED JUNE 30, 2000
The approval of the merger of NiSource, Columbia Energy, and Columbia of
Kentucky is subject to the written acceptance by NiSource, Columbia Energy, and
Columbia of Kentucky of the following commitments and assurances:
OPERATIONS AND FINANCIAL
------------------------
1. The books and records of Columbia of Kentucky will be accessible to
the Commission and its Staff during reasonable business hours. Should the books
and records of its parent company or of any other company with the group created
by the merger become relevant to the jurisdictional rates or tariffed services
of Columbia of Kentucky, such relevant books and records will also be made
accessible to the Commission and its Staff at such time and place as it
designates.
2. NiSource, Columbia Energy, and Columbia of Kentucky commit not to
assert that the SEC's jurisdiction legally preempts the Commission from
disallowing recovery in retail rates for the cost of goods and services that
Columbia of Kentucky obtains from or transfers to an associate, affiliate, or
subsidiary in the same holding- company system. This assertion shall also apply
to any claim under the Ohio Power vs. FERC decision. However, Columbia of
Kentucky shall retain the right to assert that the charges are reasonable and
appropriate.
3. Columbia of Kentucky will not seek to overturn, reverse, set aside,
change or enjoin a decision of the Kentucky Commission that pertains to
recovery, disallowance, allowance, deferral or rate-making treatment of any
expense, charge, cost, or allocation incurred or accrued by Columbia of Kentucky
as a result of any contract, agreement, arrangement, or transaction with any
1
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affiliate, associate, holding mutual service or subsidiary company on the basis
that such expense, charge, cost or allocation has itself been filed with or
approved by the SEC, or was incurred pursuant to a contract, arrangement,
agreement or allocation which was filed with or approved by the SEC.
4. NiSource, Columbia Energy, and Columbia of Kentucky commit to provide
the Commission with notice 30 days prior to any SEC filing that proposes new
allocation factors. The notice need not be in precise form of the final filing
but will include, to the extent information is available, a description of the
proposed factors and the reasons supporting such factors. NiSource, Columbia
Energy, and Columbia of Kentucky commit to make a good faith attempt to resolve
differences, if any, with the Commission in advance of filing with the SEC.
5. NiSource, Columbia Energy, and Columbia of Kentucky commit that
NiSource's acquisition will have no impact on the base rates or the operation of
the gas supply clause of Columbia of Kentucky.
6. NiSource, Columbia Energy, and Columbia of Kentucky commit that
Columbia of Kentucky, and its ratepayers, directly or indirectly, shall not
incur any additional costs, liabilities, or obligations in conjunction with the
acquisition of Columbia Energy by NiSource including, but not limited to, the
following:
a. Columbia of Kentucky shall not incur any additional indebtedness,
issue any additional securities, or pledge any assets to finance any part of the
purchase price paid by NiSource for the Columbia Energy stock.
2
<PAGE>
b. The payment for the Columbia Energy stock shall be recorded on
NiSource's books, not the books of Columbia of Kentucky.
c. The premium paid by NiSource for the Columbia Energy stock, as
well as any other associated costs, shall not be "pushed down" to Columbia of
Kentucky for rate-making purposes and Commission reporting purposes.
d. All transaction-related costs, including the cost of purchase and
the premium paid for the Columbia Energy transaction, shall be excluded for
rate-making purposes and from the rates of Columbia of Kentucky.
e. Columbia of Kentucky shall not seek a higher rate of return on
equity in future rate cases than would have been sought if no merger had
occurred.
f. The accounting and rate-making treatments of Columbia of
Kentucky's excess deferred income taxes shall not be affected by the merger of
NiSource and Columbia Energy.
g. No change in control payments will be allocated to the ratepayers
of Columbia of Kentucky.
h. If early termination costs are incurred for employees of Columbia
Energy or Columbia of Kentucky, none of these costs will be allocated to
Columbia of Kentucky.
i. Any additional administrative costs incurred in order to comply
with the financial and accounting standards associated with the merger will not
be borne by Columbia of Kentucky.
3
<PAGE>
7. The Applicants commit that the merger will not have a negative impact
on the balances of deferred taxes that are currently recorded on the books of
Columbia of Kentucky.
8. Columbia of Kentucky commits to file by November 30, 2000 a proposed
mechanism to track the merger savings and associated costs and a detailed
description of NiSource's proposed methodology to allocate merger savings and
associated costs to Columbia Energy and Columbia of Kentucky.
9. Columbia of Kentucky commits to record the merger savings and
associated costs in a deferred account that will be reviewed and considered in
its next rate case.
10. Columbia of Kentucky commits to file by the earlier of September 30,
2002 or 18 months after consummation of the merger, a rate case including the
statutory filing requirements, a cost-of-service study, an estimate of future
net merger savings, and a mechanism to reflect on ratepayers' bills future
merger savings and the net deferred merger savings.
11. The Applicants commit that the corporate officers of Columbia Energy
and Columbia of Kentucky shall maintain their current titles and
responsibilities as officers unless and until otherwise determined by either of
their respective Boards of Directors. The Applicants will maintain the highest
level of management experience within Columbia Energy and Columbia of Kentucky
and will provide an opportunity to broaden that experience by exchanging
positions with other managers in NiSource's organization.
4
<PAGE>
12. NiSource, Columbia Energy, and Columbia of Kentucky commit to advising
the Commission at least annually on the adoption and implementation of best
practices at Columbia of Kentucky following the consummation of the merger.
13. NiSource, Columbia Energy, and Columbia of Kentucky commit to
obtaining Commission approval prior to transfer of any Columbia of Kentucky
asset with an original book value in excess of $1,000,000.
14. NiSource will support Columbia of Kentucky's decision to utilize
collaborative approaches to regulatory proceedings in the effort to find
"win-win" solutions for all stakeholders; and its commitment to Customer Choice
in Kentucky.
15. NiSource agrees that Columbia of Kentucky will continue charitable,
cultural and civic contributions at levels consistent with past practice.
16. NiSource agrees that Columbia of Kentucky will continue its economic
development efforts at levels equal to those currently maintained.
17. NiSource will retain separate books for each corporate entity and
follow SEC and state cost allocation guidelines, as well as all applicable codes
of conduct.
18. NiSource will abide by SEC dividend policies. NiSource will have a
consolidated capital structure of not less than 30 percent common equity within
two years following the close of merger.
REPORTING
---------
1. If new debt or equity in excess of $100 million is issued, NiSource
commits to notify the Commission as soon as practicable prior to the issuance,
and Columbia of Kentucky commits to notify the Commission, 30 days prior to the
issuance.
2. NiSource commits to notifying the Commission subsequent to its board
approval and as soon as practicable following any public announcement of any
5
<PAGE>
acquisition of a regulated or non-regulated business representing 5 percent or
more of NiSource's market capitalization.
3. NiSource commits to providing an annual report to the Commission
detailing Columbia Energy's and Columbia of Kentucky's proportionate share of
NiSource's total assets, total operating revenues, operating and maintenance
expenses, and number of employees.
4. NiSource commits to notifying the Commission 5 days after paying any
dividend or transferring more than 5 percent of the retained earnings of
Columbia of Kentucky to Columbia Energy or NiSource.
5. NiSource commits to filing with the Commission a copy of its annual
report to its shareholders.
6. NiSource commits to filing with the Commission such additional
financial reports as the Commission, from time to time, reasonably determines to
be necessary for it to effectively regulate the operation of Columbia of
Kentucky. However, if the preparation of the report is considered burdensome,
NiSource will agree to develop with the Commission a cost-effective alternative.
7. NiSource agrees to provide to the Commission any merger-related
documents that are filed with the SEC.
SERVICE QUALITY AND RELIABILITY
-------------------------------
1. NiSource, Columbia Energy, and Columbia of Kentucky commit that
Columbia of Kentucky customers will experience no material adverse change in
utility service due to the merger.
2. NiSource, Columbia Energy, and Columbia of Kentucky commit to: a)
adequately funding and maintaining Columbia of Kentucky's transmission and
6
<PAGE>
distribution systems; b) complying with all Commission regulations and statutes;
and c) supplying Columbia of Kentucky's customers' service needs.
3. When implementing best practices, NiSource, Columbia Energy, and
Columbia of Kentucky commit to taking into full consideration the related
impacts on the levels of customer service and customer satisfaction, including
any negative impacts resulting from workforce reductions.
4. NiSource commits that it will minimize, to the extent possible, any
negative impacts on levels of customer service and customer satisfaction
resulting from workforce reductions.
5. Columbia of Kentucky commits to periodically filing the various
reliability and service quality measurements it currently maintains, to enable
the Commission to monitor its commitment that reliability and service quality
will not suffer as a result of the merger.
6. NiSource, Columbia Energy, and Columbia of Kentucky commit to
notifying the Commission in writing 30 days prior to any material changes in
their participation in funding for research and development. The possible
changes include, but are not limited to, any change in funding equal to or
greater than 5 percent of the previous year's budget for research and
development. The written notification shall include an explanation and the
reasons for the change in policy.
7. NiSource, Columbia Energy, and Columbia of Kentucky commit that
Columbia of Kentucky shall continue to operate through regional offices with
local service personnel and field crews.
7
<PAGE>
OTHER COMMITMENTS AND ASSURANCES
--------------------------------
1. In the event of a subsequent merger over which the Commission would
not have jurisdiction, NiSource commits to discuss with the Commission the issue
of whether there would be any synergies resulting from that merger that could be
appropriately shared with Kentucky ratepayers.
2. NiSource, Columbia Energy, and Columbia of Kentucky commit that either
NiSource or Columbia Energy shall hold 100 percent of the common stock of
Columbia of Kentucky and that Columbia Energy shall not transfer any of that
stock without prior Commission approval even if the transfer is pursuant to a
corporate reorganization as defined in KRS 278.020(6)(b).
3. NiSource, Columbia Energy, and Columbia of Kentucky commitment that if
in connection with this merger, any state or federal regulatory commission
imposes conditions on the Applicants that would benefit ratepayers in any other
jurisdiction, proportionate net benefits and conditions will be extended to
Columbia of Kentucky ratepayers.
4. NiSource agrees to periodically meet with the Commission Staff to
discuss the current status of the Applicants' Project Compass efforts.
5. Columbia of Kentucky will continue as a corporation organized under
Kentucky law, with its headquarters in Lexington; decision-making affecting its
operations will continue to be made at the local level and it will retain its
current name.
6. No material reductions in the operations workforce will be made as a
result of the merger, and Columbia of Kentucky will continue to honor its
collective bargaining agreement with union-represented employees.
8
<PAGE>
7. Employees of Columbia of Kentucky will continue to be provided with
benefits under employee benefit plans that are no less favorable than the
greater of those provided by Columbia Energy and its subsidiaries to such
employees and those provided by NiSource and its subsidiaries during the period
ending on the third anniversary of the effective date of the merger.
9
<PAGE>
APPENDIX B
APPENDIX TO AN ORDER OF THE KENTUCKY PUBLIC SERVICE
COMMISSION IN CASE NO. 2000-129 DATED JUNE 30, 2000
In the Orders approving the creation of holding companies, as well as those
approving the merger of those holding companies, the Commission expressed
numerous regulatory concerns and required certain information of the utilities,
and their respective holding companies. As these subjects are applicable to the
proposed merger of Columbia Energy with NiSource, those regulatory concerns and
information requirements are restated below.
PROTECTION OF UTILITY RESOURCES
-------------------------------
Accounting Procedures and Controls
----------------------------------
A primary concern related to the issue of diversification is the potential
for subsidization of non-regulated activities by the regulated company. Three
major areas that can be readily identified for potential cross-subsidization are
accounting, cost allocation methodologies, and pricing of intercompany
transactions. The accounting and reporting system used by Columbia of Kentucky
should be adequate to provide assurance that directly assignable utility and
non-utility costs are accounted for properly and that reports on the utility and
non-utility operations are accurately presented. Columbia of Kentucky should
implement and maintain cost allocation procedures that will accomplish the
objective of preventing cross-subsidization, and be prepared to fully disclose
all allocated costs, the portion allocated to each subsidiary of Columbia
Energy, complete details of the allocation methods, and justification for the
amount and the method. Columbia of Kentucky should continue to comply with any
policies or guidelines that would govern any intercompany transactions, as well
<PAGE>
as employing other procedures and controls related to sales, transfers, and cost
allocation to ensure and facilitate full review by the Commission and protect
against cross-subsidization.
PRIORITY OF UTILITY OPERATIONS
------------------------------
While it is in the best interests of Columbia Energy, NiSource, and its
shareholders to secure the most skilled management available, Columbia of
Kentucky personnel should not be diverted to a non-utility affiliate if it
threatens the utility's continued efficient operations. Similarly, Columbia of
Kentucky should not be the employer or purchaser of last resort for employees,
assets, and products associated with failed or troubled affiliate ventures.
Utility operations should continue to be a priority and should not be used to
solely benefit non-utility affiliates.
Financial Resources
-------------------
A concern exists that Columbia Energy or NiSource may divert Columbia of
Kentucky's financial resources to benefit the activities of non-regulated
affiliates at the expense of utility ratepayers. There are four main areas of
concern:
1. Attempts by Columbia Energy or NiSource to adjust Columbia of
Kentucky's capital structure could adversely affect Columbia of Kentucky's cost
of capital and financial integrity. The Commission believes that Columbia Energy
and NiSource should assist Columbia of Kentucky in maintaining a balanced
capital structure.
2. The dividend policy of Columbia of Kentucky could adversely affect
Columbia of Kentucky's financing requirements and capabilities. The dividend
policy must not adversely affect ratepayers, and Columbia of Kentucky, through
its board of directors, has the responsibility to use its dividend policy
consistent with preserving its financial strength.
2
<PAGE>
3. Unwillingness on the part of Columbia Energy or NiSource to provide
necessary capital to Columbia of Kentucky could severely impair its ability to
provide utility services, as is its statutory obligation. Any action or decision
by the board of directors of Columbia Energy or NiSource, including the
unwillingness to provide adequate capital to Columbia of Kentucky, that, in any
way, impairs Columbia of Kentucky's ability to provide adequate, efficient, and
reasonable utility service, will be in direct violation of KRS 278.030(2).
4. A guarantee of the debt of non-utility affiliates of Columbia Energy
or NiSource by Columbia of Kentucky could unnecessarily place in jeopardy the
financial position and resources of Columbia of Kentucky. Pursuant to KRS
278.300, Columbia of Kentucky is prohibited from guaranteeing debt without prior
Commission approval.
5. For rate-making purposes, the Commission has jurisdiction over
Columbia of Kentucky's capital structure, financing, and cost of capital. The
Commission will continue to exercise this jurisdiction.
Divestiture
-----------
Consideration must be given to the worst case situation of a failed or
failing unregulated affiliate and its effect on the operations of Columbia of
Kentucky. If circumstances dictate that the only reasonable course of action is
divestiture, including that of Columbia of Kentucky, it will be the
responsibility of NiSource's and Columbia Energy's management to ensure that
divestiture takes place.
MONITORING THE HOLDING COMPANY AND THE SUBSIDIARIES
---------------------------------------------------
Among the regulatory safeguards necessary in cases of utility
reorganization, the most basic and indispensable requirement is open access to
all books, records, and personnel of the holding company and each subsidiary.
The Commission must have the ability to pursue any problems perceived in the
3
<PAGE>
operations of the utility through access to the books and records of the holding
company and affiliates. During formal proceedings, it may also be necessary to
cross-examine personnel of the unregulated entities to effectively monitor the
relationship among Columbia of Kentucky, its parent, and affiliates. The
Commission will have access, as necessary in the exercise of its statutory
duties, to the books and records of Columbia Energy and NiSource and its other
affiliates and subsidiaries as the books and records may be related to
transactions with Columbia of Kentucky. If the subsidiaries or affiliates of
Columbia Energy or NiSource do not transact business with Columbia of Kentucky,
the utilities will verify, if necessary, the lack of such transactions through
independent sources. At the time of completion, the Commission will also monitor
significant transfers of utility assets, business ventures of Columbia Energy
and NiSource, and other major transactions.
REPORTING REQUIREMENTS
----------------------
In order for the Commission to effectively monitor the activities of
Columbia of Kentucky, Columbia Energy, NiSource, and its related subsidiaries,
and to ensure ratepayer protection, certain additional reports shall be required
of Columbia of Kentucky.
To Be Filed Annually:
--------------------
1. The annual financial statements of Columbia Energy and NiSource,
including consolidating adjustments of Columbia Energy, NiSource, and its
subsidiaries, with a brief explanation of each adjustment and all periodic
reports filed with the SEC.
2. The annual balance sheets and income statements of any
non-consolidated subsidiary of Columbia Energy or NiSource.
4
<PAGE>
3. A general description of the nature of intercompany transactions, with
specific identification of major transactions, and a detailed description of the
basis upon which cost allocations and transfer pricing have been established.
Included will be the cost allocation factors in use including a discussion of
the methods used to update or revise any cost allocation factors that have been
updated or revised.
4. A report that identifies professional personnel transferred from
Columbia of Kentucky to Columbia Energy, NiSource, or any of the non-utility
subsidiaries. Included should be a brief description of the duties performed
while employed by Columbia of Kentucky and those to be performed subsequent to
transfer. This report will also include the years of service at Columbia of
Kentucky and the salaries of professional employees transferred from Columbia of
Kentucky to Columbia Energy, NiSource, or its subsidiaries.
5. A report containing the same information as contained in the SEC's
Form U-3A-2 for Columbia Energy.
6. A detailed organization chart as of the end of the calendar year
showing all subsidiaries referenced in the SEC U-3A-2 filing.
To Be Filed Quarterly:
----------------------
1. A report detailing the proportionate shares of Columbia of Kentucky in
Columbia Energy's total operating revenues, operating and maintenance expenses,
and number of employees.
2. The number of employees of Columbia Energy and each subsidiary on the
basis of payroll assignment.
5
<PAGE>
3. Twelve-month income statements and balance sheets. Columbia of
Kentucky will separately report Kentucky jurisdictional operations and other
jurisdictional operations.
Other Filings:
-------------
1. Columbia of Kentucky shall file any contracts or other agreements
concerning the transfer of utility assets or the pricing of intercompany
transactions with the Commission at the time the transfer occurs and in
accordance with any policies or guidelines that would govern any intercompany
transactions.
2. As the studies are performed and completed, Columbia of Kentucky shall
file summaries of any cost allocation studies conducted and the basis for the
methods used to determine the cost allocation in effect.
3. As such situations occur, Columbia of Kentucky shall file copies of
the Articles of Incorporation and bylaws of affiliated companies that will be in
businesses related to the electric or gas industry or that will be doing
business with Columbia of Kentucky.
4. As such situations occur, Columbia of Kentucky shall file copies of
the Articles of Incorporation of affiliated companies involved in non-related
business.
6
