File No. 70-9551
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 7 ON
FORM U-1/A
APPLICATION OR DECLARATION
under the
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
<TABLE>
<CAPTION>
<S> <C> <C>
NiSource Inc. New NiSource Inc. Columbia Energy Group
801 East 86th Avenue 801 East 86th Avenue 13880 Dulles Corner Lane
Merrillville, Indiana 46410-6272 Merrillville, Indiana 46410-6272 Herndon, Virginia 20171-4600
</TABLE>
(Names of companies filing this statement and addresses of
principal executive offices)
None
(Name of top registered holding company parent of each applicant or declarant)
<TABLE>
<CAPTION>
<S> <C>
Mark T. Maassel M. W. O'Donnell
Vice President, Regulatory & Government Policy Senior Vice President and Chief Financial Officer
NiSource Inc. Columbia Energy Group
801 East 86th Avenue 13880 Dulles Corner Lane
Merrillville, Indiana 46410-6272 Herndon, Virginia 20171-4600
</TABLE>
(Names and addresses of agents for service)
The Commission is requested to send copies of all notices, orders and
communications to:
Peter V. Fazio, Jr., Esq. William T. Baker, Jr., Esq.
Schiff Hardin & Waite Thelen Reid & Priest LLP
6600 Sears Tower 40 West 57th Street
Chicago, Illinois 60606-6473 New York, New York 10019
William C. Weeden William S. Lamb, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP Joanne C. Rutkowski, Esq.
1440 New York Avenue, NW LeBoeuf, Lamb, Greene & MacRae LLP
Washington, D.C. 20005 125 West 55th Street
New York, New York 10019-5389
<PAGE>
TABLE OF CONTENTS
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION..................................3
A. INTRODUCTION AND OVERVIEW OF THE TRANSACTION..............................3
1. Principal Terms of the Merger Agreement..............................4
2. Financing of the Offer and Transaction...............................6
3. Accounting Treatment.................................................7
4. Resulting Management.................................................8
5. Benefit Plans........................................................8
B. DESCRIPTION OF THE PARTIES TO THE TRANSACTION.............................8
1. General Description..................................................8
a. NiSource and its Subsidiaries...................................8
b. Columbia and its Subsidiaries..................................15
c. NiSource and Columbia and Their Subsidiaries...................20
2. Description of Utility Facilities...................................20
a. NiSource.......................................................20
i. Natural Gas Facilities......................................20
ii. Electric Utility Facilities................................22
b. Columbia.......................................................23
i. Natural Gas Facilities......................................23
3. Description of Certain Service Arrangements.........................24
4. Exemption of Bay State..............................................25
ITEM 2. FEES, COMMISSIONS AND EXPENSES......................................25
ITEM 3. APPLICABLE STATUTORY PROVISIONS.....................................26
A. LEGAL ANALYSIS...........................................................27
1. Section 9(a)(2).....................................................27
2. Section 10(b).......................................................28
a. Section 10(b)(1)...............................................28
i. Interlocking Relationships..................................28
ii. Concentration of Control...................................28
b. Section 10(b)(2)...............................................31
i. Fairness of Consideration...................................31
ii. Reasonableness of Fees.....................................32
c. Section 10(b)(3)...............................................33
3. Section 10(c).......................................................34
a. Section 10(c)(1), including, by reference, Sections 8 and 11...35
i. Retention of Electric Operations............................35
ii. Non-Utility Businesses.....................................39
b. Section 10(c)(2)...............................................41
i. Efficiencies and Economies..................................41
ii. Integrated Gas Utility System..............................43
4. Section 10(f) - State Laws..........................................47
<PAGE>
ITEM 4. REGULATORY APPROVALS................................................47
ITEM 5. PROCEDURE...........................................................48
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS...................................48
A. EXHIBITS.................................................................48
B. FINANCIAL STATEMENTS.....................................................51
2
<PAGE>
The Application/Declaration filed in this proceeding on September 20, 1999,
as amended by amendments dated October 28, 1999, April 5, 2000, April 14, 2000,
April 28, 2000, July 11, 2000 and September 1, 2000, is hereby amended and
restated in its entirety to read as follows:
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION
A. INTRODUCTION AND OVERVIEW OF THE TRANSACTION
--------------------------------------------
NiSource Inc., an Indiana corporation ("NiSource"), and New NiSource
Inc., a Delaware corporation and a wholly-owned subsidiary of NiSource ("New
NiSource") herein request authority pursuant to the applicable standards of the
Public Utility Holding Company Act of 1935, as amended (the "Act"), for a
proposed business combination and for the related transactions herein described
under the Agreement and Plan of Merger among Columbia Energy Group, a Delaware
corporation ("Columbia") (each of Columbia, NiSource and New NiSource is
referred to as an "Applicant," and are collectively referred to as the
"Applicants"), NiSource, New NiSource, Parent Acquisition Corp., an Indiana
corporation and wholly-owned subsidiary of New NiSource ("Parent Acquisition"),
Company Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of
New NiSource ("Company Acquisition"), and NiSource Finance Corp., an Indiana
corporation and a special purpose financing subsidiary of New NiSource, dated as
of February 27, 2000, as amended and restated as of March 31, 2000 (the "Merger
Agreement"). In the proposed business combination, upon receipt of all
approvals, Parent Acquisition will merge into NiSource, and Company Acquisition
will merge into Columbia. NiSource and Columbia will be the surviving
corporations in those mergers and will become wholly-owned by New NiSource.
Immediately after these mergers, NiSource will merge into New NiSource. New
NiSource will change its name to "NiSource Inc." and serve as a holding company
for Columbia and its subsidiaries and the current subsidiaries of NiSource (the
"Merger Structure"). The proposed business combination is referred to as the
"Transaction."
A diagram showing the Merger Structure is filed as Exhibit E-2(a).
Columbia is a registered holding company under the Act which, through
its subsidiaries, operates an integrated natural gas transmission and
distribution system and engages in exploration and production for natural gas
and oil and other activities. NiSource, currently an exempt holding company
pursuant to an order issued under Section 3(a)(1) of the Act, directly or
indirectly owns all of the issued and outstanding common stock of three public
utility subsidiary companies that provide electric and retail natural gas
service within the state of Indiana and two public utility subsidiary companies
that provide retail natural gas service in the states of Maine, Massachusetts
and New Hampshire.1 Following the completion of the Transaction, NiSource and
Columbia would become subsidiaries of New NiSource, New NiSource will register
with the Securities and Exchange Commission (the "Commission") as a holding
company pursuant to Section 5 of the Act and Columbia will continue as a
registered holding company so as to preserve certain financing and structural
benefits that have already been achieved by Columbia as a registered gas holding
company.
------------------------
1 See NIPSCO Industries, Inc., Holding Co. Act Release No. 26975 (Feb. 10,
1999).
3
<PAGE>
On June 25, 1999, NiSource commenced a tender offer pursuant to the
Securities Exchange Act of 1934, as amended (the "1934 Act"), to purchase all of
the outstanding shares of common stock of Columbia. The tender offer was
subsequently amended and extended, and finally allowed to expire on February 11,
2000. On February 18, 2000, NiSource submitted a proposal to purchase Columbia
and, after negotiations, on February 27, 2000, the NiSource and Columbia boards
of directors each approved, and the two companies entered into, the original
Merger Agreement, which was amended and restated as of March 31, 2000. NiSource
and New NiSource filed a Registration Statement on Form S-4 pursuant to the
Securities Act of 1933, as amended (the "1933 Act"), and an Amendment No. 1 to
such Registration Statement, which registers securities to be issued in
connection with the Transaction and includes the joint proxy statement ("Proxy
Statement") deemed filed pursuant to the 1934 Act which was used in connection
with NiSource's and Columbia's shareholder meetings on June 1, 2000 and June 2,
2000, respectively. See Exhibits C and C-1 hereto. The shareholders of NiSource
and Columbia approved and adopted the Merger Agreement at their respective
shareholder meetings.
Pursuant to Sections 9(a)(2) and 10 of the Act, the Applicants hereby
request authorization and approval of the Commission for the acquisition by New
NiSource of all of the issued and outstanding common stock of NiSource and
Columbia through mergers of separate subsidiaries of New NiSource with and into
each of NiSource and Columbia followed by the merger of NiSource into New
NiSource.
The Applicants believe the Transaction will produce significant
benefits to the public, investors and consumers and will satisfy all of the
applicable standards of the Act. The Applicants expect that the Transaction will
enable them to take advantage of future strategic opportunities in the
increasingly competitive and rapidly evolving markets for energy and energy
services in the United States. Specifically, the Applicants believe that,
following the Transaction, the combined companies will be better positioned to
take advantage of operating economies and efficiencies through, among other
measures, joint management and optimization of their respective portfolios of
gas supply, transportation and storage assets. The Applicants also believe that
the Transaction will provide important strategic benefits to NiSource's
shareholders and Columbia's shareholders, as well as to their respective
employees and customers and the communities in which they provide public utility
service.
NiSource and New NiSource filed a separate Application/Declaration
under the Act, dated May 17, 2000 (File No. 70-9681) with respect to the ongoing
financing activities of New NiSource and its subsidiaries after the merger,
certain affiliate transactions, and other related matters. In addition, Columbia
filed a separate application dated April 17, 2000 (File No. 70-9663), relating
to the solicitation of proxies for its shareholders' meeting relating to the
merger and the Commission issued an order with respect thereto dated April 20,
2000.2
1. Principal Terms of the Merger Agreement
Each of NiSource and Columbia will be merged with a separate,
wholly-owned subsidiary of New NiSource, after which NiSource will merge into
New NiSource. NiSource shareholders will receive one common share of New
------------------------
2 Columbia Energy Group, Holding Co. Act Release No. 27169 (Apr. 20, 2000).
4
<PAGE>
NiSource for each of their NiSource common shares and after the merger the
NiSource shareholders will own no less than 53% of the New NiSource shares.
Columbia shareholders will receive, for each of their Columbia common shares,
either (i) $70 in cash, and $2.60 stated amount of a New NiSource Stock
Appreciation Income Linked SecuritySM ("SAILS"), which is a unit consisting of a
zero coupon debt security and a forward equity contract having the terms
described below, or (ii) if the Columbia shareholder elects, the number of New
NiSource common shares equal to $74 divided by the average trading price of
NiSource common shares for the 30 consecutive trading days ending two trading
days before the completion of the merger, which number may never be more than
4.4848. Stock elections are subject to proration if the elections exceed 30% of
Columbia's outstanding shares. Also, unless Columbia shareholders make stock
elections for at least 10% of Columbia's outstanding shares, all Columbia
shareholders will receive cash and New NiSource SAILS in the merger.
If the merger is not completed by February 27, 2001, Columbia
shareholders will receive, for each of their Columbia common shares, an
additional amount in cash equal to interest at 7% per annum on $72.29 for the
period beginning on February 27, 2001 and ending on the day before the
completion of the merger, less the amount of any cash dividends paid on Columbia
common shares with a record date after February 27, 2001.
Each SAILS is a unit consisting of a share purchase contract and a
debenture. The share purchase contract represents the holder's obligation to
purchase common shares on the fourth anniversary of completion of the merger,
and the debenture is pledged to secure that obligation. Under the share purchase
contract, a holder will receive for each New NiSource SAILS, on the fourth
anniversary of the completion of the merger, the following number of New
NiSource common shares: (1) if the average closing price of the common shares on
the New York Stock Exchange over a 30-day period before the fourth anniversary
equals or exceeds $23.10, the holder will receive 0.1126 common shares; (2) if
the average closing price is less than $23.10 but greater than $16.50, the
holder will receive a number of common shares equal to $2.60 divided by the
average closing price; and (3) if the average closing price is less than or
equal to $16.50, the holder will receive 0.1576 common shares. The debenture
that is initially part of each New NiSource SAILS will have a principal amount
of $2.60. The debenture will not pay interest for the first four years after the
merger.
Unless a holder chooses to make a cash payment of $2.60 to settle the
purchase contract, the debenture that is pledged as collateral will be
remarketed shortly before the fourth anniversary of the merger, and the proceeds
will be used to pay the amount the holder would owe under the purchase contract.
If the remarketing is successful, proceeds from the sale will be delivered to
New NiSource as payment for the common shares. If the remarketing agent cannot
remarket the debentures, New NiSource will exercise its rights as a secured
party and take possession of the debentures. In either case, the holder's
obligation to purchase shares of New NiSource common stock will be fully
satisfied, and the holder will receive New NiSource common shares.
Shareholders of Columbia at the time of the merger who did not vote in
favor of the merger and who made a demand for appraisal of their shares under
the Delaware General Corporation Law (the "DGCL") Section 262 may perfect their
5
<PAGE>
demand for appraisal rights of those shares following the effective date of the
merger in accordance with Section 262 of the DGCL.
The Merger Agreement is filed as Exhibit B-1 hereto.
Consummation of the Transaction is also subject to various regulatory
approvals, including approval of the Commission under the Act.
Upon consummation of the Transaction, Applicant will own an integrated
gas utility system comprised of the gas utility properties of NiSource's
subsidiaries in Indiana, Massachusetts, Maine and New Hampshire and the gas
utility properties of Columbia's subsidiaries in Ohio, Pennsylvania, Maryland,
Kentucky and Virginia. In addition, NiSource's principal operating utility
subsidiary in Indiana will continue to own an integrated electric utility system
in Indiana. Further, New NiSource will own the existing non-utility businesses
of NiSource and Columbia which, with certain exceptions, are retainable under
the standards of Section 11(b)(1) of the Act.
2. Financing of the Offer and Transaction
New NiSource will issue approximately 121.2 million shares of common
stock, par value $.01 per share, in exchange for the outstanding common stock of
NiSource, based on the number of such shares outstanding on June 30, 2000.
Assuming 30% of the outstanding Columbia shares are exchanged for New NiSource
common stock (which NiSource believes is a reasonable assumption), approximately
76.6 million shares of New NiSource common stock will be issued in the merger to
Columbia's shareholders.
In addition, New NiSource will issue SAILS, which will result in the
issuance of between 6.4 million and 9.0 million shares of New NiSource common
stock on the fourth anniversary date of the merger depending on the New NiSource
stock price, assuming 30% of the outstanding shares are exchanged for the stock
consideration.
NiSource estimates that the cash payments to Columbia shareholders in
the merger will range from approximately $4 billion, assuming 30% of the
outstanding Columbia shares are exchanged for the stock consideration, to
approximately $6 billion, if all of the Columbia shares are exchanged for the
cash and SAILS consideration. In addition, NiSource expects approximately $1.9
billion of Columbia's existing debt to remain outstanding after the merger.
NiSource has accepted a commitment letter from Credit Suisse First
Boston Corporation, New York Branch ("Credit Suisse First Boston") and Barclays
Bank PLC ("Barclays", and together with Credit Suisse First Boston, the
"Underwriters"), pursuant to which, subject to specified conditions, the
Underwriters will provide NiSource Finance Corp. a revolving credit facility in
the amount of $6 billion until July 5, 2001, with the option to convert loans
outstanding at the expiration of such period into term loans maturing 364 days
thereafter (the "Facility") to finance the Transaction. A portion of the
Facility may be provided by a syndicate of banks and other financial
institutions arranged by the Underwriters. Credit Suisse First Boston will act
as administrative agent for the Facility; Barclays will serve as documentation
6
<PAGE>
agent for the Facility; and Credit Suisse First Boston and Barclays will act as
lead arrangers and co-syndication agents.
The proceeds of the Facility may be used to finance the cash portion
of the Transaction and to pay related fees and expenses. The proceeds of the
Facility also are permitted to be used to support a commercial paper program
used for these purposes and, if mutually agreed, to refinance certain existing
indebtedness.
Upon the issuance by New NiSource or any of its subsidiaries of any
debt or equity (in each case subject to exceptions to be agreed upon), the
Facility will be reduced by an amount equal to the net cash proceeds of such
debt or equity financing. Loans under the Facility ("Loans") must be repaid on
the date of any such reduction to the extent the amount of outstanding Loans
exceeds the amount of the Facility as so reduced.
The Loans will bear interest at specified spreads above LIBOR
(adjusted for reserves) or Credit Suisse First Boston's base rate or at a
negotiated competitive bid rate. Loans bearing interest at rates based upon
LIBOR will be for interest periods of one, two, three or six months. All
interest will be paid at the end of the applicable interest period or quarterly,
whichever is earlier. In addition, a utilization fee will be payable at a
specified per annum rate on the outstanding principal amount at any time more
than 25% of the commitment has been borrowed, and a facility fee will be payable
at a specified per annum rate on the entire amount of the Facility, whether or
not utilized.
Repayment of the Loans will be unconditionally guaranteed by New
NiSource and, until it is merged into New NiSource, by NiSource.
The credit agreement and related documentation for the Facility are
filed as Exhibit B-2 hereto.
The Facility represents interim acquisition financing for the
Transaction. The combined cash flow of NiSource and Columbia is expected to be
adequate to service the interest requirements of the Facility without adverse
impact on any of the Applicants' utility subsidiaries. The Applicants anticipate
that the Facility will be repaid with internally generated funds, including
those generated by Columbia and its subsidiaries, and from the proceeds of sales
of non-core assets and/or the issuance of equity and other securities. See
Subsection A.2.c. of ITEM 3, below, for information relating to the capital
structure of the combined systems after the merger, as well as the
Application/Declaration (File No. 70-09681) filed under the Act with respect to
the issuance of equity and other securities for the purposes of refinancing the
Facility and with respect to other proposed financing activities of New
NiSource.
3. Accounting Treatment
The Transaction will be accounted for as a purchase of Columbia by New
NiSource. As a result, the consolidated financial statements of New NiSource
after the merger will reflect the assets and liabilities of Columbia at fair
value with the excess of the purchase price over such fair value being allocated
to goodwill. Pushdown accounting will not be applied to Columbia, which has
publicly-held debt. The application of pushdown accounting is addressed in a
letter to the Commission filed as Exhibit J-1 hereto.
7
<PAGE>
The purchase contracts included in the New NiSource SAILS will be
forward transactions in New NiSource's common shares. Upon settlement of a
purchase contract four years after completing the merger, New NiSource will
receive the stated amount of $2.60 on the purchase contract and will issue the
agreed number of New NiSource common shares. The amount received will be
credited to shareholders' equity and allocated between the common shares and
paid-in capital accounts.
Prior to the issuance of New NiSource common shares upon settlement of
the purchase contracts, New NiSource expects that the SAILS will be reflected in
its diluted earnings per share calculations using the treasury stock method.
Under this method, the number of common shares used in calculating diluted
earnings per share is deemed to be increased by the excess, if any, of the
number of shares issuable upon settlement of the purchase contracts over the
number of shares that could be purchased by New NiSource in the market at the
average market price during the period using the proceeds receivable upon
settlement. As a result of the accounting treatment of the SAILS, New NiSource
expects there will be no dilutive effect on its earnings per share except during
periods when the average market price of the common shares is above $23.10.
4. Resulting Management
After the merger, the Board of Directors of New NiSource will consist
of those persons who serve as directors of NiSource immediately preceding the
merger. Mr. Gary L. Neale, the Chairman, President and Chief Executive Officer
of NiSource, will serve after the merger as Chairman of the Board, President and
Chief Executive Officer of New NiSource.
5. Benefit Plans
Information regarding the effect of the Transaction on the stock-based
employee benefit and shareholder benefit plans of NiSource and Columbia is
provided in the separate Application/Declaration on Form U-1 filed by NiSource
and New NiSource on May 17, 2000 (File No. 70-09681) relating to the ongoing
financing requirements of the new system after the merger.
B. DESCRIPTION OF THE PARTIES TO THE TRANSACTION
---------------------------------------------
1. General Description
a. NiSource and its Subsidiaries
NiSource, formerly NIPSCO Industries, Inc.,3 an Indiana corporation,
was incorporated in 1987 to serve as the holding company for Northern Indiana
Public Service Company ("Northern Indiana"), which is a public utility under the
Act, and various non-utility subsidiaries. NiSource has four additional, direct,
or indirect, public utility subsidiaries, Kokomo Gas and Fuel Company ("Kokomo
------------------------
3 On April 14, 1999, NiSource announced that its shareholders approved
changing its name from NIPSCO Industries, Inc. to NiSource Inc.
8
<PAGE>
Gas"),4 Northern Indiana Fuel and Light Company, Inc. ("NIFL"),5 Bay State Gas
Company ("Bay State")6 and Northern Utilities, Inc. ("Northern"). NiSource is
currently an exempt holding company pursuant to an order under Section 3(a)(1)
of the Act.7 As of June 30, 2000, NiSource had 121,183,197 shares of common
stock issued and outstanding. NiSource's common stock is listed on the New York
Stock Exchange, the Pacific Stock Exchange and the Chicago Stock Exchange.
Northern Indiana, NiSource's largest subsidiary, is a combination gas
and electric utility company which operates in 30 counties in the northern part
of Indiana, serving an area of about 12,000 square miles with a population of
approximately 2,200,000. Northern Indiana distributes gas to approximately
677,900 residential, commercial and industrial customers and generates,
purchases, transmits and sells electricity to approximately 426,000 electric
customers. Kokomo Gas supplies natural gas to approximately 34,400 customers in
a six-county area of north central Indiana having a population of approximately
100,000. The Kokomo Gas service territory is contiguous to Northern Indiana's
gas service territory. NIFL supplies natural gas to approximately 35,800
customers in five counties in the northeast corner of Indiana having a
population of approximately 66,700. The NIFL service territory is also
contiguous to Northern Indiana's gas service territory and overlaps Northern
Indiana's electric service territory. Northern Indiana has initiated a
multi-phase customer choice program to allow residential and small commercial
customers the right to choose alternative gas suppliers. The three Indiana
operating utility subsidiaries of NiSource are subject to regulation by the
Indiana Utility Regulatory Commission ("IURC") as to rates, service and other
matters.
Bay State provides gas service to approximately 269,900 residential,
commercial and industrial customers in three separate areas of Massachusetts
covering approximately 1,344 square miles and having a combined population of
approximately 1,340,000. These include the greater Springfield area in western
Massachusetts, an area southwest of Boston that includes the cities of
Attleboro, Brockton and Taunton, and an area north of Boston extending to the
New Hampshire border that includes the city of Lawrence. Bay State initiated a
multi-phase customer choice program to allow residential and commercial
customers the right to choose alternative gas suppliers. In November 1998, the
Massachusetts Department of Telecommunications and Energy ("MDTE") issued a
generic order implementing statewide customer choice for gas customers. Bay
State is complying with this order. Bay State is subject to regulation by the
MDTE as to rates, service and other matters.
------------------------
4 The Commission authorized NiSource to acquire all of the issued and
outstanding common stock of Kokomo Gas in 1992. See NIPSCO Industries,
Inc., Holding Co. Act Release No. 25470 (Feb. 3, 1992).
5 The Commission authorized NiSource to acquire all of the issued and
outstanding common stock of NIFL in 1993. See NIPSCO Industries, Inc.,
Holding Co. Act Release No. 25766 (Mar. 25, 1993).
6 The Commission authorized NiSource to acquire all of the issued and
outstanding common stock of Bay State in February 1999. Northern is a
wholly-owned subsidiary of Bay State. See NIPSCO, Industries, Inc., Holding
Co. Act Release No. 26975 (Feb. 10, 1999).
7 Id.
9
<PAGE>
Northern provides gas service to approximately 47,700 residential,
commercial and industrial customers in an area of approximately 808 square miles
in New Hampshire and Maine having a population of approximately 450,000.
Northern's service area extends north from the Massachusetts-New Hampshire
border to the Portland/Lewiston area in Maine. Northern is subject to regulation
by the New Hampshire Public Utilities Commission ("NHPUC") and the Maine Public
Utilities Commission ("MPUC") as to rates, service and other matters. At this
time, Northern remains an indirect subsidiary of NiSource, through Bay State,
pending consummation of the Transaction and registration by New NiSource, and it
is expected to continue to be an indirect subsidiary of New NiSource after the
merger with Columbia.
For the twelve months ended June 30, 2000, the gas and electric public
utility subsidiaries of NiSource reported operating income of $508.9 million
($134.2 million gas and $374.7 million electric) on combined operating gas and
electric utility revenues of approximately $2.3 billion. Gas sales (including
transportation revenues) accounted for approximately 52% and electric sales
accounted for approximately 48% of NiSource's gross utility revenues. For the
twelve months ended June 30, 2000, the consolidated operating revenues of
NiSource and its subsidiaries was approximately $3.6 billion, including
approximately $1.2 billion gas and $1.1 billion electric. Consolidated assets of
NiSource and its subsidiaries as of June 30, 2000, were approximately $7.2
billion, consisting of $5.5 billion in gas and electric utility assets ($2.7
billion gas and $2.8 billion electric) and $1.7 billion in other non-utility
assets. The consolidated operating revenues and assets of the combined Columbia
and NiSource companies, as of and for the twelve months ended June 30, 2000, may
be approximated by combining their income statements, balance sheets and
purchase adjustments, which results in operating revenues of $6.2 billion ($3.6
billion NiSource and $2.6 billion Columbia) and assets of $17.8 billion ($7.2
billion NiSource, $6.8 billion Columbia and $3.8 billion goodwill).
NiSource owns all of the outstanding common stock of NiSource Pipeline
Group, Inc. ("NPG"), which in turn owns all of the outstanding common stock of
Granite State Gas Transmission, Inc. ("Granite State") and PNGTS Holding Corp.
("PNGTS Holding"). Crossroads Pipeline Company ("Crossroads"), a wholly-owned
direct subsidiary of NI Energy Services, Inc., which in turn is a wholly-owned
direct subsidiary of NiSource, is a natural gas transportation company that was
certificated by the Federal Energy Regulatory Commission ("FERC") in May 1995 to
operate as an interstate pipeline.8 Crossroads owns and operates a 201-mile,
20-inch diameter pipeline that extends from Schererville, Indiana, in the
northwestern corner of Indiana, to Cygnet, Ohio, which is located in
northwestern Ohio. At Cygnet, Crossroads' facilities interconnect with those of
Columbia Gas Transmission Corporation ("Columbia Transmission"). Crossroads
receives gas from Natural Gas Pipeline Company of America ("NGPL"), Trunkline
Gas Company ("Trunkline") and Panhandle Eastern Pipeline Company ("Panhandle
Eastern"). Crossroads delivers gas to Northern Indiana, Ohio Gas Company, NIFL,
Columbia Transmission and KNG Energy Incorporated.
Granite State owns and operates a 105-mile, 6 to 12-inch diameter,
interstate pipeline that extends from Haverhill, Massachusetts, where it
interconnects with the facilities of Tennessee Gas Pipeline Company ("Tennessee
Gas"), to a point near Westbrook, Maine, where it interconnects with Portland
------------------------
8 See Crossroads Pipeline Co., 71 FERCP. 61,076 (1995).
10
<PAGE>
Natural Gas Transmission System ("PNGTS"). PNGTS Holding, together with Granite
State, hold a 19.06% interest in PNGTS. PNGTS is a 292-mile, 24 to 30-inch
diameter, natural gas transmission line that provides New England access to
Michigan Storage fields 9, the Western Canada supply basin supply and the
Chicago market center. PNGTS interconnects with the Tennessee Gas pipeline
facilities near Dracut, Massachusetts, Northern and Granite State at locations
in Maine and New Hampshire, and Trans Quebec Maritimes Pipeline Incorporated at
Pittsburgh, New Hampshire.
EnergyUSA, Inc. (IN) ("EnergyUSA (IN)"), a wholly-owned subsidiary of
NiSource, serves as an intermediate holding company for many of NiSource's
non-utility businesses and coordinates the energy-related diversification
efforts of NiSource. Through subsidiaries, EnergyUSA owns businesses engaged in
the following activities:10
o Energy Marketing: EnergyUSA (IN), through its wholly-owned direct
subsidiary, EnergyUSA-TPC Corp. ("TPC"), markets gas to
commercial and industrial entities, on a national basis,
including customers in areas served by NiSource's gas
distribution utilities and provides gas asset management and
optimization to gas utilities. EnergyUSA (IN) also provides gas
supply services to other NiSource affiliates, including Kokomo
Gas and NIFL. TPC was acquired on April 1, 1999 by EnergyUSA
(IN). The significant assets of TPC consist of: (i) gas marketing
contracts; (ii) asset management and optimization contracts; and
(iii) computer systems and equipment to support the
aforementioned activities.11
o Residential/Small Commercial Gas and Propane Marketing; Appliance
Leasing: EnergyUSA Retail, Inc. ("EnergyUSA Retail") provides gas
------------------------
9 The Michigan Storage fields have played an increasingly important role in
the natural gas portfolio for upper Midwest market participants. Their
geographical location is strategic in accessing Gulf Coast, Mid-continent
and Chicago market centers, Western Canada supply basins and local
production in the state of Michigan. Michigan Storage is interconnected
with major interstate and intrastate transmission systems which serve
markets located in Iowa, Minnesota, Wisconsin, Illinois, Indiana, Ohio and
the New England areas. Pipeline interconnects accessing Michigan Storage
include, among others, ANR Pipeline Company ("ANR"), Panhandle Eastern,
Trunkline and Vector Pipeline Limited Partnership ("Vector").
10 EnergyUSA (MA), a wholly-owned subsidiary of EnergyUSA (IN), sells propane
to residential and commercial customers. Savage ALERT, Inc. ("Savage
ALERT"), is a wholly-owned subsidiary of EnergyUSA (MA). Alert Air Systems,
Inc. and Alert Mechanical Services, Inc., each a wholly-owned subsidiary of
Savage ALERT provide heating, ventilation and air-conditioning contracting
services. Alert, Inc., a wholly-owned subsidiary of Savage ALERT, provides
design and construction management services. Savage-Engineering, Inc., a
wholly-owned subsidiary of Savage ALERT, provides engineering services.
EnergyUSA (MA), Savage ALERT, Alert Air Systems, Inc, Alert Mechanical
Services, Inc., Alert, Inc. and Savage-Engineering, Inc. are in the process
of being sold.
11 With the exception of its subsidiary company, MS-1 Distribution and Storage
Corporation ("MS-1"), Market Hub Partners, Inc., which, together with its
direct and indirect subsidiary companies (collectively, "MHP"), were
subsidiary companies of TPC, were sold to a non-affiliated third party on
September 18, 2000. MS-1 will be sold. MS-1 is primarily a water utility
company with natural gas distribution activities in Mississippi. By virtue
of Rule 7 under the Act, MS-1, with an average of gas utility revenues over
the last three calendar years of significantly less than $5,000,000, is not
a "public-utility company" under the Act.
11
<PAGE>
and other energy-related products and services to residential and
small commercial customers of utilities that allow competitive
suppliers to market in their service territories. EnergyUSA
Retail provides certain of Bay State's, Columbia's and Northern
Indiana's customers with natural gas. EnergyUSA Retail also sells
propane and leases water heaters to customers in New England
through its wholly-owned holding company subsidiary, EnergyUSA
Consumer Products Group, Inc.12
o Oil and Gas Exploration and Production: EnergyUSA (IN) has equity
interests in a domestic oil and gas producer with properties
located in Texas, Oklahoma and Louisiana.
o Energy Management Services: EnergyUSA Commercial Energy Services,
Inc. provides traditional energy management services, including
power quality consulting and energy management, to commercial and
industrial entities.13
o EnergyUSA (IN) is a minority owner of MOSAIC Energy, LLC, a new
venture created to develop and market proprietary fuel cell
distributed generation technology.
Primary Energy, Inc. ("Primary"), a wholly-owned subsidiary of
NiSource, arranges energy-related projects for large energy-intensive industrial
facilities. Primary offers expertise to large energy customers in managing the
engineering, construction, operation and maintenance of these energy-related
projects. These customers are electric customers of Northern Indiana and their
facilities are within Northern Indiana's service territory.
o Primary's wholly-owned subsidiary, Harbor Coal Company ("Harbor
Coal"), invested in a partnership to finance, construct, own and
operate a $65 million pulverized coal injection facility, which
began commercial operation in August 1993. The facility receives
raw coal, pulverizes it and delivers it to Ispat Inland, Inc.
("Ispat") for use in the operation of blast furnaces for
manufacturing operations at the Ispat plant site referred to in
the following paragraph. Harbor Coal is a 50% partner in the
project with an Ispat affiliate. NiSource guarantees the payment
and performance of the partnership's obligations under a sale and
leaseback of a 50% undivided interest in the facility.
o North Lake Energy Corporation ("North Lake"), a wholly-owned
subsidiary of Primary, entered into a lease for the use of a
75-megawatt energy facility located at Ispat. The facility uses
steam generated by Ispat to produce electricity which is
delivered to Ispat. The facility began commercial operation in
May 1996. NiSource guarantees North Lake's obligations relative
to the lease and certain obligations to Ispat relative to the
project.
------------------------
12 EnergyUSA Retail and EnergyUSA Consumer Products Group, Inc. are in the
process of being sold.
13 EnergyUSA Commercial Energy Services, Inc. is in the process of being sold.
12
<PAGE>
o Lakeside Energy Corporation ("LEC"), a wholly-owned subsidiary of
Primary, entered into a lease for the use of a 161-megawatt
energy facility located at USS Gary Works. The facility processes
high-pressure steam into electricity and low-pressure steam for
delivery to USX Corporation-U.S. Steel Group ("U.S. Steel"). A
15-year tolling agreement with U.S. Steel commenced on April 16,
1997 when the facility was placed in commercial operation.
NiSource Capital Markets Inc. ("Capital Markets"), a wholly-owned
financing direct subsidiary of NiSource, guarantees certain
limited LEC obligations to the lessor.
o Portside Energy Corporation ("Portside"), a wholly-owned
subsidiary of Primary, operates a 63-megawatt energy facility at
the Midwest Division of National Steel Corporation ("National")
to process natural gas into electricity, steam and heated water
to be provided to National for a 15-year period. Portside entered
into a lease for use of the facility. Capital Markets guarantees
certain Portside obligations to the lessor. The facility began
commercial operation on September 26, 1997.
o Primary's wholly-owned subsidiary, Cokenergy, Inc. ("CE"),
operates an energy facility at Ispat's Indiana Harbor Works to
scrub flue gases and recover waste heat from the coke facility
constructed by Indiana Harbor Coke Company, LP ("Harbor Coke")
and to produce steam and electricity from the recovered heat
which is then delivered to Ispat. CE leases these facilities from
a third party. CE has a 15-year service agreement and a related
15-year fuel supply agreement with Ispat and Harbor Coke. Capital
Markets guarantees certain CE obligations relative to the lease.
o Primary's wholly-owned subsidiary, Whiting Clean Energy, Inc.
("Whiting"), has an electric facility currently under
construction which is expected to be an Exempt Wholesale
Generator within the meaning of Section 32 of the Act ("EWG") and
sell power into the wholesale market. In 1999, Whiting signed an
agreement with BP Amoco Oil Company ("BP Amoco") for the lease,
operation and maintenance of the facility, a net 525 MW natural
gas-fired cogeneration plant, on land adjacent to BP Amoco's
refinery in Whiting, Indiana. The plant will provide process
steam to BP Amoco's refinery operations and sell power into
competitive wholesale markets. Completion of the plant is
expected by the third quarter of 2001. Capital Markets has
guaranteed certain Whiting obligations to the owner/lessor and to
BP Amoco.
o Primary's wholly-owned subsidiary, Ironside Energy LLC
("Ironside"), acting as agent for a third party owner/lessor, has
entered into contracts for the construction of a 50 megawatt
cogeneration plant. The facility is to be located in LTV Steel
Company, Inc's ("LTV") Indiana Harbor Works plant in northwest
Indiana. Ironside intends to enter into an agreement to lease the
facility from the owner/lessor upon completion of construction.
Ironside will sublease the facility to LTV and LTV will utilize
the facility to produce high-pressure steam and electricity upon
completion of construction, presently anticipated to occur in the
13
<PAGE>
third quarter of 2001. Certain Ironside obligations to the
owner/lessor and to LTV are guaranteed by Capital Markets.
Miller Pipeline Corporation ("Miller"), a wholly-owned subsidiary of
NiSource, installs, repairs and maintains underground pipelines used in gas and
water transmission and distribution systems. Miller also sells products and
services related to infrastructure preservation and replacement. Miller is in
the process of being sold.
NiSource, through an intermediate holding company, IWC Resources
Corporation ("IWCR"), owns all of the stock in six water companies (Indianapolis
Water Company, Harbour Water Corporation, Liberty Water Corporation, Irishman's
Run Acquisition Corp., The Darlington Water Works Company and IWC Morgan Water
Corporation) and has an operating agreement with the City of Lawrence, Indiana,
which is being treated as a purchase by IWCR in accordance with generally
accepted accounting principles (collectively, the "Water Utilities"). The Water
Utilities supply water to residential, commercial and industrial customers and
for fire protection service in Indianapolis, Indiana and surrounding areas. The
territory served by the Water Utilities covers an area of approximately 650
square miles in seven counties of central Indiana and the Water Utilities serve
approximately 275,000 customers. As of June 30, 2000, assets of the Water
Utilities amounted to $704.9 million, and revenues of the Water Utilities for
the twelve months then ended, amounted to $101.6 million.
SM&P Utility Resources, Inc. ("SM&P"), a wholly-owned direct
subsidiary of NiSource, and its subsidiaries, Colcom Incorporated ("Colcom") and
Underground Technology, Inc. ("UTI") are to be sold. These companies locate
underground facilities for utilities throughout the United States. During 1999,
SM&P, Colcom and UTI performed approximately 6.6 million line locates.
NiSource Development Company, Inc. ("Development") has investments in
various activities, primarily in real estate, intended to complement NiSource's
utility and energy businesses. These investments are hereinafter discussed in
ITEM 3, below. South Works Power Company ("South Works"), a wholly-owned
subsidiary of Development, leases electric generating and transmission
facilities owned by U.S. Steel and located in south Chicago, Illinois. The
facilities, which are presently not in operation, are indirectly interconnected
with the electric transmission system of Northern Indiana.
Capital Markets provides financing for certain of NiSource's
subsidiaries other than Northern Indiana. Capital Markets has entered into
revolving credit agreements for $200 million. These agreements provide financing
flexibility to Capital Markets and may be used to support the issuance of
commercial paper. At June 30, 2000, Capital Markets had issued $186.0 million in
commercial paper but there were no borrowings outstanding under the revolving
credit agreements. Capital Markets also has $178.0 million available in money
market lines of credit with $141.5 million of borrowings outstanding as of June
30, 2000. For the same period, Capital Markets had $450 million in long-term
debt outstanding.
The financial obligations of Capital Markets are subject to a support
agreement ("Support Agreement") between NiSource and Capital Markets which
provides that NiSource make payments of interest and principal on Capital
Markets' obligations in the event of a failure to pay by Capital Markets.
14
<PAGE>
NiSource Corporate Services Company ("Corporate Services") provides
management, administrative, gas portfolio management, accounting and other
services to the various NiSource companies. Hamilton Harbour Insurance Services,
Ltd., a wholly-owned direct subsidiary of NiSource, acts as an agent in
obtaining insurance for the NiSource companies.
The non-utility assets of NiSource comprised, as of June 30, 2000, 24%
of the consolidated assets of NiSource. As a result of the sale of MHP, and
anticipated sales of other non-utility assets and companies, this percentage is
being substantially reduced.
As of June 30, 2000, NiSource owned, through subsidiaries, interests
in EWGs and FUCOs totaling $177,000 in the aggregate and, assuming the merger
were effective as of June 30, 2000, no aggregate investment in EWGs and FUCOs,
as defined in Rule 53.
b. Columbia and its Subsidiaries
Columbia, formerly The Columbia Gas System, Inc., and its subsidiaries
comprise an integrated natural gas system engaged in natural gas transmission,
natural gas distribution and exploration for and production of natural gas and
oil. Columbia is currently exiting most of its other related energy businesses
that include the distribution of propane and petroleum products, marketing of
natural gas and electricity and the generation of electricity, primarily fueled
by natural gas. As a registered holding company, Columbia derives substantially
all its revenues and earnings from the operating results of its 20 direct
subsidiaries. Columbia owns all of the securities of these direct subsidiaries.
As of June 30, 2000, Columbia had 79,512,479 shares of common stock issued and
outstanding. Columbia's common stock is listed on the New York Stock Exchange.
Distribution Utilities: Columbia provides natural gas distribution
services in a five-state region in the Midwest and mid-Atlantic United States
through its five wholly-owned public utility subsidiaries: Columbia Gas of
Kentucky, Inc. ("Columbia Kentucky"), Columbia Gas of Maryland, Inc. ("Columbia
Maryland"), Columbia Gas of Ohio, Inc. ("Columbia Ohio"), Columbia Gas of
Pennsylvania, Inc. ("Columbia Pennsylvania") and Columbia Gas of Virginia, Inc.
("Columbia Virginia"). Columbia's five distribution subsidiaries provide natural
gas service to nearly 2.1 million residential, commercial and industrial
customers in Kentucky, Maryland, Ohio, Pennsylvania and Virginia. Approximately
32,400 miles of distribution pipelines serve these major markets. The
distribution subsidiaries have initiated transportation programs that allow
residential and small commercial customers the opportunity to choose their
15
<PAGE>
natural gas suppliers and to use the distribution subsidiaries for
transportation service. This ability to choose a supplier was previously limited
to larger commercial and industrial customers.
Columbia Kentucky supplies natural gas to approximately 142,900 retail
customers in a 31-county area of central and eastern Kentucky having a
population of approximately 965,000. Columbia Kentucky is subject to regulation
by the Kentucky Public Service Commission ("KPSC") as to rates, service and
other matters.
Columbia Maryland supplies natural gas to approximately 32,100 retail
customers in a three-county area of western Maryland having a population of
approximately 227,000. Columbia Maryland is subject to regulation by the
Maryland Public Service Commission ("MPSC") as to rates, service and other
matters.
Columbia Ohio supplies natural gas to approximately 1,357,800 retail
customers in a 53-county area of north central and southeastern Ohio having a
population of approximately 6,700,000. Columbia Ohio is subject to regulation by
the Public Utilities Commission of Ohio ("PUCO") as to rates, service and other
matters.
Columbia Pennsylvania supplies natural gas to approximately 391,800
retail customers in a 26-county area of central and southwestern Pennsylvania
having a population of approximately 2,380,000. Columbia Pennsylvania is subject
to regulation by the Pennsylvania Public Utility Commission ("PPUC") as to
rates, service and other matters.
Columbia Virginia supplies natural gas to over 187,900 retail
customers throughout Virginia. Columbia Virginia is subject to regulation by the
Virginia State Corporation Commission ("VSCC") as to rates, service and other
matters.
Transmission and Storage Operations: Columbia's two interstate
pipeline subsidiaries, Columbia Transmission and Columbia Gulf Transmission
Company ("Columbia Gulf"), own a pipeline network of approximately 16,250 miles
extending from offshore in the Gulf of Mexico to Lake Erie, New York and the
eastern seaboard. In addition, Columbia Transmission operates one of the
nation's largest underground natural gas storage systems. Together, Columbia
Transmission and Columbia Gulf serve customers in fifteen northeastern,
mid-Atlantic, midwestern and southern states and the District of Columbia.
Columbia Gulf's pipeline system extends from offshore Louisiana to West Virginia
and transports a major portion of the gas delivered by Columbia Transmission. It
also transports gas for third parties within the production areas of the Gulf
Coast. Columbia Transmission and Columbia Gulf provide an array of competitively
priced natural gas transportation and storage services for local distribution
companies and industrial and commercial customers who contract directly with
producers or marketers for their gas supplies.
In 1999, Columbia Transmission completed construction of the largest
expansion of its storage and transportation system in its history. The expansion
adds approximately 500,000 Mcf per day of firm storage to 23 customers. Columbia
Transmission is also participating in the proposed 442-mile Millennium Pipeline
Project that has been submitted to FERC for approval. As proposed, the project
will transport approximately 700,000 Mcf per day of natural gas from the Lake
Erie region to eastern markets. On June 28, 2000, Millennium filed an
16
<PAGE>
application with the FERC to amend the proposed route for the pipeline through
Westchester County, New York. This revision to the pipeline route does not have
a significant impact on the total mileage for the proposed pipeline. The
certificate application for the project is still awaiting approval from the
FERC.
Columbia Gulf has announced its participation in the proposed 160
mile, 24-inch diameter, Volunteer Pipeline Project ("Volunteer"). As proposed,
the project will transport approximately 250,000 Mcf per day from Portland,
Tennessee to a point near Chattanooga, Tennessee. In May, 1999, Volunteer
concluded an open season in which nearly a dozen companies requested more than
440,000 Mcf per day of capacity. Following the conclusion of the open season,
several power developers in Georgia also expressed interest in obtaining
capacity in the Volunteer pipeline. Based upon this interest, the design of the
proposed project has been expanded to an approximately 210 mile, 24-inch
diameter pipeline that would extend from Portland, Tennessee to a point located
north of Rome, Georgia. The proposed design capacity of the pipeline is now
approximately 550,000 Mcf per day. Volunteer expects to provide firm natural gas
transportation from the mid-continent into the Atlanta, Georgia, and other
southeastern markets. Volunteer is currently in the process of negotiating with
potential shippers, and the timing of a FERC construction application is
contingent upon a final determination of market demand based upon these
negotiations. Volunteer is exploring several construction options and timelines
that would have the pipeline in place to meet market demand as it evolves.
Columbia Gulf also announced plans in September 1998 to consider an
expansion of its onshore East Lateral system to add approximately 600,000 Mcf
per day of incremental firm gas transportation capacity. Columbia Gulf is also
participating in the proposed SunStar Pipeline project, a 56-mile offshore
pipeline project with a capacity of 660,000 Mcf of natural gas per day from the
Gulf of Mexico to its onshore lateral. Columbia Gulf is continuing to explore
various options for the proposed SunStar pipeline and the expanded East Lateral
system through discussions with potential shippers. Columbia Gulf and potential
shippers have signed no precedent agreements; neither have any FERC applications
been filed nor environmental permit applications been prepared.
Effective November 30, 1999, Columbia Gulf sold its 33% interest in
the Trailblazer Pipeline, a 350-mile natural gas pipeline that extends from
northeast Colorado to Gage County in Nebraska.
Columbia Pipeline Corporation and its wholly-owned subsidiary,
Columbia Deep Water Services Company, were formed to operate pipeline and
gathering facilities that are not regulated by FERC.
The non-utility operations of Columbia have been previously authorized
under the Act or have been established under a rule or statutory exemption.
Exploration and Production Operations: Through its wholly-owned
subsidiaries, Columbia's exploration and production subsidiary, Columbia Energy
Resources, Inc. ("Columbia Resources"), explores for, develops, gathers and
17
<PAGE>
produces natural gas and oil in Appalachia and Canada.14 As of December 31,
1999, Columbia Resources' subsidiaries held interests in approximately 3.9
million net acres of gas and oil leases and had proved gas reserves of 965.8
billion cubic feet of natural gas equivalent. Columbia Resources' subsidiaries
own and operate 8,188 wells and 6,069 miles of gathering facilities and have
expanded their reserve base and production through an aggressive drilling and
acquisition program. During 1999, Columbia Resources' subsidiaries purchased 800
wells, gathering assets and approximately 800,000 undeveloped acres in the U.S.
and Canada. Through its subsidiaries' operations in north-central West Virginia,
southern Kentucky, northern Tennessee and New York, Columbia Resources is one of
the largest-volume independent natural gas and oil producers in the Appalachian
Basin.
Energy Marketing Operations: Columbia Energy Services Corporation
("Columbia Energy Services") and its subsidiaries conduct Columbia's
non-regulated natural gas and electric power marketing operations and provide
service to residential and small commercial customers as a result of the
unbundling of services that is occurring at the local distribution level.
Columbia Energy Services, through its subsidiary, Columbia Service Partners,
Inc., provides a variety of energy-related services to both homeowners and
businesses. Columbia Energy Services sold its wholesale gas and electric trading
operations at year-end 1999 and has recently sold its retail mass marketing
business. Columbia Energy Services is also exiting its major accounts business.
These businesses are reported as discontinued operations.
Columbia Propane Corporation ("Columbia Propane") sells propane at
wholesale and retail to more than 350,600 customers in 31 states and the
District of Columbia. Columbia Petroleum Corporation ("Columbia Petroleum") owns
and operates petroleum assets that serve approximately 42,000 customers in five
states. Columbia has been evaluating the appropriateness of remaining in some of
its businesses, given the rapidly changing energy industry and its pending
merger with NiSource, and has determined to exit its energy marketing
operations. Consequently, Columbia has decided to sell Columbia Propane and
Columbia Petroleum. These businesses are currently being offered for sale and
are being reported as discontinued operations.
Power Generation, LNG and Other Operations: Columbia Electric
Corporation's ("Columbia Electric") primary focus has been the development,
ownership and operation of natural gas-fueled power plants. Columbia Electric is
part owner in three operating cogeneration projects. These facilities produce
both electricity and useful thermal energy and are fueled principally by natural
gas. Columbia Electric holds various interests in these facilities, which have a
total capacity of approximately 248 megawatts.15
In June 1998, Columbia Electric and LG&E Power Inc., a subsidiary of
LG&E Energy Corporation, announced an agreement for Columbia to participate in
the development of a gas-fired cogeneration project that would have a total
------------------------
14 In 1997, Columbia Transmission sold 2,700 miles of gathering lines to
Columbia Resources. Effective January 1999, Columbia Transmission sold an
additional 750 miles of gathering facilities to Columbia Resources.
15 Columbia has announced the sale to a non-affiliated third party.
18
<PAGE>
equivalent capacity of approximately 550 megawatts.16 The facility will provide
steam and electric services to a Reynolds Metals plant in Gregory, Texas and
will also provide electricity to the Texas energy market. Construction began in
August 1998 and the facility commenced operations in July of 2000.15
Under PURPA and its implementing regulations, no more than 50% of the
equity interests in a qualifying facility ("QF") may be held by a company that
is an electric utility or an electric utility holding company or any combination
of such companies. Electric utility holding companies now own up to
approximately 50% of the equity interests in each of the four QFs referred to in
the two preceding paragraphs in which Columbia holds an interest. Columbia
currently is not an electric utility holding company, but its interest in QFs
would be held by an electric utility holding company as a result of the merger
with NiSource. Consequently, the 50% limitation on total interests held by
electric utility holding company affiliates would be exceeded. To avoid
jeopardizing the QF status of the projects and to comply with Columbia's
obligations to other participants in the projects, Columbia has agreed to sell
its interests in and has completed the sale of the four QFs.
Construction of the Liberty Electric Project, a gas-fired electric
generation plant which is expected to provide approximately 568 megawatts of
electricity, commenced in early 2000 in Eddystone, Pennsylvania. Columbia
currently owns 100% of the Liberty Electric Project, which is anticipated to
commence operations in early 2002.15 17
Construction of the Ceredo Generating Station, a gas-fired electric
generation peaking plant which is expected to provide approximately 500
megawatts of electricity, commenced in July 2000 in Ceredo, West Virginia
("Ceredo Project"). Columbia currently owns 100% of the Ceredo Project, which is
anticipated to commence operations in the summer of 2001.15
In December 1999, a limited partnership company established between
Columbia Electric and Atlantic Generation, Inc. completed a transaction
terminating a long-term power purchase contract. Columbia Electric's portion was
approximately $71 million pre-tax under the terms of the buyout. The partners
will continue to operate the facility as a merchant power plant.17
Columbia LNG Corporation ("Columbia LNG") provides transition services
related to a liquefied natural gas facility located in Cove Point, Maryland,
which is one of the largest natural gas peaking and storage facilities in the
United States. The facility has the capacity to liquefy natural gas at a rate of
15,000 Mcf per day. The facility enables liquefied natural gas to be stored
until needed for the winter peak-day requirements of utilities and other large
gas users. The Columbia partnership that owned the facility was sold in June
2000 to subsidiaries of the Williams Company.
------------------------
16 The project was certified as a "qualifying facility" under the Public
Utility Regulatory Policies Act of 1978, as amended ("PURPA"). See Gregory
Power Partners L.P., 87 F.E.R.C. P. 62,048 (Apr. 12, 1999).
17 The Liberty Electric Project will seek EWG certification.
19
<PAGE>
Telecommunications: Columbia Transmission Communications Corporation,
a wholly-owned subsidiary of Columbia, and its subsidiaries provide
telecommunications and information services and assist personal communications
services and other microwave radio service licensees in locating and
constructing antenna facilities. Columbia Transmission Communications
Corporation also is involved in the development of a dark fiber optics network
for voice and data communications.
For the twelve months ended June 30, 2000, the utility subsidiaries of
Columbia reported operating income of $245.4 million on utility revenues of
approximately $1.7 billion. Columbia's consolidated revenues for the same period
were approximately $2.6 billion. Consolidated assets of Columbia and its
subsidiaries were approximately $6.8 billion at June 30, 2000, consisting of
$2.6 billion in gas utility assets and $4.2 billion in other non-utility assets.
As a registered holding company, Columbia and its utility subsidiary
companies are an integrated gas utility system under the Act. The non-utility
companies in the Columbia System are related to, and supportive of, its utility
operations and, by virtue of continued operations, retainable under the
standards of the Act.
c. NiSource and Columbia and Their Subsidiaries
Reference is made to Exhibit J-2 for information with respect to
customers, assets and revenues, as of June 30, 2000, of (1) NiSource
consolidated, (2) Columbia consolidated, (3) NiSource and Columbia pro forma
combined, (4) NiSource's and Columbia's "public-utility" company subsidiaries,
(5) Columbia Transmission, (6) Columbia Gulf and (7) other non-utility
subsidiary companies.
2. Description of Utility Facilities
a. NiSource
i. Natural Gas Facilities
The NiSource gas distribution system in Indiana includes approximately
13,924 miles of distribution mains to serve 748,300 customers. In addition,
Northern Indiana owns and operates underground gas storage facilities located at
Royal Center, Indiana with a storage capacity of 6.75 billion cubic feet (Bcf),
and a liquefied natural gas ("LNG") plant in LaPorte County, Indiana having a
storage capacity of 4.0 Bcf, which is used for system pressure maintenance and
peak season (November-March) deliveries. Northern Indiana also holds under
long-term contract storage capacity totaling approximately 9.11 Bcf in the
Markham, Moss Bluff and Egan salt-dome storage caverns in Texas and Louisiana
and the Rotherwood Facility in Texas.
These facilities, which provide Northern Indiana with a significant
amount of "high deliverability" storage capacity,18 are located at two of the
industry recognized and acknowledged market centers and gas trading points which
------------------------
18 "High deliverability," which is an operational characteristic of salt-dome
storage caverns, means the ability to inject and withdraw gas on a frequent
(i.e., daily) basis, year-round and at a high rate of flow. Utilization of
the capacity of such facilities is measured in terms of both their storage
volume and frequency of the injection/withdrawal cycle (i.e., cycling). In
contrast, Northern Indiana's underground storage facilities in Indiana only
allow for gas injection and withdrawal on a seasonal basis. The "high
deliverability" facilities in Texas and Louisiana provide Northern Indiana
with added flexibility in managing deliveries to and from interstate
pipelines, which, in turn, allows Northern Indiana to take advantage of
price volatility and to balance its system load requirements on a daily
basis.
20
<PAGE>
provide buyers and sellers supply basin and transportation capacity choice.
These market centers and gas trading points are formed at locations where
interstate pipelines serving the upper Midwest, Northeast, Gulf Coast,
mid-Atlantic and Ohio Valley intersect.
NiSource's New England gas distribution utilities includes 5,450 miles
of distribution mains, 116 miles of transmission lines, and customer connections
to serve 317,500 customers. Bay State and Northern also own and operate LNG
liquefaction, vaporization and storage facilities and propane storage tanks used
to store supplemental and peak shaving supplies. NiSource's combined gas system
consisted of 19,374 miles of distribution mains, together with associated
compressing and regulating stations, LNG liquefaction, vaporization and storage
facilities, propane storage tanks and 1,065,600 customers.
Currently, NiSource's Midwest and New England utilities purchase
approximately 50% of their total system gas requirements from production in the
Gulf Coast Basin (onshore and offshore Texas and Louisiana producing areas),
approximately 42% from production in the Mid-Continent (Oklahoma, Kansas and
Arkansas) and Permian (West Texas) supply basins, and 8% from production in the
Western Canada supply basin. By the 2000-2001 winter heating season, new
interstate pipeline capacity in New England and the upper Midwest states of
Illinois, Indiana and Michigan will provide for further diversification of
NiSource's Midwest and New England gas portfolios and for access to gas supplies
sourced from multi-regional supply basins, market centers and gas trading
points.
NiSource's gas distribution subsidiaries have currently contracted for
"firm" capacity and storage service on ten different long-haul interstate
pipelines: ANR, NGPL, Panhandle Eastern, PNGTS, Tennessee Gas, Midwestern Gas
Transmission ("Midwestern"), Texas Eastern Transmission Corp. ("Texas Eastern"),
Texas Gas Transmission Corp. ("Texas Gas"), Transco and Trunkline. NiSource's
subsidiaries also have firm transportation capacity agreements with TransCanada
PipeLines Limited ("TransCanada"), a Canadian interprovincial pipeline, and with
several other regional pipelines, such as Algonquin Gas Transmission Company
("Algonquin"), Crossroads, Granite State and National Fuel Gas Supply Company
("National Fuel").
NiSource expects that, as areas in New England begin to experience gas
portfolio restructuring similar to that experienced in the Midwest beginning in
1995 and transmission constraints are eliminated as new pipeline capacity begins
commercial service, the NiSource gas distribution utilities will be
well-positioned to create opportunities to supplement their gas portfolios with
surplus from additional multi-regional supply basins and market centers,
including the Western Canada supply basin, Appalachian basin and Michigan
Storage fields. NiSource's Midwest and New England and Columbia's gas
distribution utilities' portfolios will interact at market centers and gas
trading points directly through existing and new pipelines, such as PNGTS,
Northern Border, Vector and Alliance Pipeline Ltd., as well as indirectly by
means of any one of several existing pipeline interconnections between
21
<PAGE>
Crossroads and Columbia Transmission; Tennessee Gas and PNGTS; Tennessee Gas and
Columbia Transmission; Vector, Millennium, Algonquin and Columbia Transmission;
and Northern Border, Vector, ANR and NGPL.
ii. Electric Utility Facilities
Northern Indiana owns and operates four coal-fired electric generating
stations with an aggregate net capability of 3,179 MW, two hydroelectric
generating plants with an aggregate net capability of 10 MW, and four gas-fired
combustion turbine generating units with an aggregate net capability of 203 MW,
for a total system net capability of 3,392 MW. During the year ended December
31, 1999, Northern Indiana generated 89.9% and purchased 10.1% of its electric
requirements.
Northern Indiana's transmission system consists of 3,068 circuit miles
of lines with voltages ranging from 34.5 kV to 345 kV. Northern Indiana's
electric distribution system extends into 21 counties in the northern third of
Indiana and consists of 7,800 circuit miles of overhead and 1,571 cable miles of
underground primary distribution lines operating at various voltages ranging
from 2.4 to 12.5 kV.
Northern Indiana's electric control area peak load (the highest level
of electrical utility usage in the control area) of 3,307 MW was set on July 30,
1999. Northern Indiana's electric control area includes Northern Indiana, Wabash
Valley Power Association, Inc. ("WVPA") and Indiana Municipal Power Agency
("IMPA"). Northern Indiana's internal peak load, which excludes WVPA and IMPA,
of 2,962 MW, was also set on July 30, 1999.
Northern Indiana's electric system is interconnected with the systems
of American Electric Power, Commonwealth Edison Company, Cinergy Corp.,
Consumers Energy and Ameren Corporation, formerly Central Illinois Public
Service Company. Electric energy is purchased from, sold to, or exchanged with
various other utilities and power marketers under Northern Indiana's power sales
and open access transmission tariffs.
Northern Indiana provides WVPA with transmission and distribution
service, operating reserve requirements and capacity deficiency service, and
provides IMPA with transmission service, operating reserve requirements and
capacity deficiency service in Northern Indiana's control area. Northern Indiana
also engages in sales and services under interconnection agreements with WVPA
and IMPA. WVPA supplies electricity to 12 distribution membership cooperatives
located in Northern Indiana's control area. IMPA provides service to the
municipal electric system of the city of Rensselaer located in Northern
Indiana's control area. Northern Indiana and WVPA have executed a supplemental
agreement for unit peaking capacity and energy. Unit peaking capacity is the
capacity used to serve peak demand from a specific peaking generation unit.
Pursuant to this agreement, which runs through December 2001, WVPA purchases 90
MW of capacity per month.
Northern Indiana also serves the Town of Argos as a full requirements
customer and provides network integration service to seven other municipal
wholesale customers.
22
<PAGE>
Northern Indiana is a member of the East Central Area Reliability
Coordination Agreement ("ECAR"). ECAR is one of nine regional electric
reliability councils established to coordinate planning and operations of member
electric utilities regionally and nationally.
Fuel Supply: The generating units of Northern Indiana are located at
the Bailly, Mitchell, Michigan City and Schahfer Generating Stations. Coal is
the primary source of fuel for 10 of Northern Indiana's 13 steam generating
units; natural gas is the primary fuel for the other three. Northern Indiana's
four combustion turbine generating units are also fired by gas. Fuel
requirements for Northern Indiana's generation for 1999 were supplied as
follows:
Coal 97.9%
Natural Gas 2.1%
b. Columbia
i. Natural Gas Facilities
Columbia's five natural gas public utility subsidiaries own a total of
32,403 miles of distribution pipeline and customer connections to serve
approximately 2.1 million customers, as detailed by state in the table below:
Distribution Distribution
Pipeline (miles) Customers
--------------- ---------
Columbia Kentucky 2,433 142,900
Columbia Maryland 601 32,100
Columbia Ohio 18,387 1,357,800
Columbia Pennsylvania 6,961 391,800
Columbia Virginia 4,021 189,900
Columbia's natural gas public utility subsidiaries receive their
natural gas supplies through Columbia's two wholly-owned interstate pipelines,
Columbia Transmission and Columbia Gulf, major non-affiliated pipelines such as
Transco, ANR, Panhandle Eastern, Tennessee Gas and Texas Eastern, and regional
pipelines such as CNG Transmission Corporation and National Fuel. In addition to
receiving supplies from the Gulf Coast Basin from Columbia Gulf, Columbia
Transmission transports gas sourced from supply basins and/or trading centers
which access the Mid-Continent and Western Canada supply basins through
interconnections with ANR, Panhandle Eastern, Tennessee Gas, Texas Eastern,
Transco and Crossroads. Columbia Transmission also transports Appalachian gas
produced by Columbia's exploration and production subsidiaries.
Columbia's natural gas public utility subsidiaries have long-term firm
transportation contracts with Columbia Gulf, Columbia Transmission, Panhandle
Eastern, Tennessee Gas, Texas Eastern, Transco, CNG Transmission Corporation,
ANR and National Fuel to meet the peak day needs of their customers. In
addition, the gas utilities have contractual access to the natural gas storage
owned by Columbia Transmission. Columbia Pennsylvania is the only gas utility to
own underground storage, supported by eight wells on 3,300 acres. Columbia
23
<PAGE>
Virginia and other unaffiliated local distribution utilities subscribe to LNG
storage services provided by Columbia Transmission from a facility located in
Chesapeake, Virginia.
For the year 1999, Columbia's natural gas public utility subsidiaries
purchased, on a weighted average basis, approximately 90% of their natural gas
supplies from the Gulf Coast Basin, and the remaining 10% from the Appalachian,
Mid-Continent and Mobile Bay basins.
3. Description of Certain Service Arrangements
Corporate Services currently provides management, financial,
accounting, general administrative, budgeting, business development, systems and
procedures, training, gas supply and other services to NiSource as well as to
certain of the public utility and non-utility subsidiaries of NiSource pursuant
to cost-based arrangements. In addition, Bay State provides some of these same
services to its subsidiaries under cost-based agreements that predate NiSource's
acquisition of Bay State. On or before March 31, 2001, NiSource will file a
separate application with the Commission in which it will seek authorization to
form a new service company, or it may designate Corporate Services, to
consolidate service functions now provided by Corporate Services and Bay State.
That filing will also contain the proposed forms of service agreements, policies
and procedures, and the cost allocation methods to be used by the new service
company. Further, that filing will address the continuing role of Columbia
Energy Group Service Corporation ("Columbia Services"), the current service
company subsidiary of Columbia. Specifically, it is contemplated that many of
the services now provided by Columbia Services may be transferred to the
designated NiSource system service company. This will allow NiSource and
Columbia a practical and efficient means to implement their transition to a
centralized and unified service company. Subject to receiving all required
regulatory approvals, NiSource will finalize the structures of Corporate
Services, Columbia Services and the new service company, and implement, subject
to regulatory approvals, the new service company arrangements, within one year
after the Transaction.
During the transition period, Corporate Services will continue to
provide services to NiSource and to NiSource's current utility and non-utility
subsidiaries, and Columbia Services will continue to provide services to its
associate companies in the Columbia system pursuant to the service company
arrangements that have been approved by the Commission. Corporate Services will
enter into an interim service agreement, substantially in the form of Exhibit
B-3 hereto, with each client company (including NiSource). In addition, in order
to assure that an allocable portion of certain services to be provided by
Corporate Services (e.g., executive services) are properly charged or allocated
to all of NiSource's subsidiaries after the merger, Corporate Services will also
enter into a service agreement with Columbia Services. Any charges by Corporate
Services to Columbia Services will in turn be assigned and allocated to Columbia
and its subsidiaries in accordance with the terms of the existing Columbia
system service agreements.
The amended service agreement sets forth methodologies to ensure that
all client companies (including NiSource) will reimburse Corporate Services for
the cost of all services, computed in accordance with the applicable rules and
regulations (including, but not limited to, Rules 90 and 91) under the Act and
appropriate accounting standards. Where more than one client company (including
24
<PAGE>
NiSource) is involved in or has received benefits from a service performed by
Corporate Services, the amended service agreement provides that client companies
will pay their fairly allocated pro rata share in accordance with the methods
set out in the appendix to the amended service agreement. Thus, charges for all
services provided by Corporate Services to associate utility companies and
non-utility companies will be on an "at cost" basis as determined under Rules 90
and 91 under the Act.
No material change in the organization of Corporate Services, the
methods of allocating cost to associate companies, or in the scope or character
of the services to be rendered by Corporate Services, subject to Section 13 of
the Act, or any rule, regulation or order thereunder, shall be made unless and
until Corporate Services shall first have given the Commission written notice of
the proposed change not less than 60 days prior to the proposed effectiveness of
any such change. If, upon the receipt of any such notice, the Commission shall
notify Corporate Services within the 60-day period that a question exists as to
whether the proposed change is consistent with the provisions of Section 13 of
the Act, or of any rule, regulation or order thereunder, then the proposed
change shall not become effective unless and until Corporate Services shall have
filed with the Commission an appropriate declaration regarding such proposed
change and the Commission shall have permitted such declaration to become
effective.
4. Exemption of Bay State
As indicated above, Bay State owns all of the issued and outstanding
common stock of Northern. Bay State is therefore a "holding company" within the
meaning of the Act. Bay State currently claims an exemption as a holding company
under Section 3(a)(2) of the Act and Rule 2 thereunder 19 and intends to
maintain that exemption following the merger for so long as Northern remains a
subsidiary. NiSource acknowledges that, following the merger, Bay State's status
as an exempt holding company will not relieve Bay State or any of Bay State's
subsidiaries from any of the requirements of the Act that would otherwise apply
to them as subsidiary companies or affiliates of a registered holding company.
ITEM 2. FEES, COMMISSIONS AND EXPENSES
It is currently estimated that the fees, commissions and expenses paid
or incurred, or to be paid or incurred, directly or indirectly, in connection
with the Transaction, including the Commission's filing fees under the
Securities Act of 1933 and expenses associated with soliciting proxies, will
total approximately $50 million. The following is a detailed breakdown of these
fees, commissions and expenses:
------------------------
19 See Statement of Bay State on Form U-3A-2, File No. 69-340.
25
<PAGE>
Commission filing fee for Registration Statement on Form S-4..........$1,500,000
Accountants' fees......................................................1,000,000
Legal fees and expenses relating to the Act..............................700,000
Other legal fees and expenses..........................................7,000,000
Shareholder communications and proxy solicitation........................500,000
NYSE listing fee.........................................................300,000
Exchanging, printing and engraving of stock certificates...............3,700,000
Investment bankers' fees and expenses.................................35,000,000
Consulting fees related to the Transaction................................30,000
Miscellaneous.............................................................20,000
TOTAL................................................................$50,200,000
ITEM 3. APPLICABLE STATUTORY PROVISIONS
The following sections of the Act are, or may be, directly or
indirectly, applicable to the proposed Transaction:
Section of
the Act Transactions to which section is, or may be, applicable:
---------- -------------------------------------------------------
4 and 5 Registration of New NiSource as a holding company
following consummation of the Transaction
6(a) and 7 Issuance by New NiSource of common stock and
SAILS, and, if applicable, by NiSource Finance
Corp. of notes under the Facility
9 and 10 Acquisition of Columbia's common stock and common
stock of NiSource's public utility subsidiary
companies
8 and 11(b) Retention by New NiSource of Northern Indiana's
electric operations and various of NiSource's and
Columbia's non-utility businesses and investments
12(b) Guaranty, if applicable, by New NiSource of the
obligations of NiSource Finance Corp. under the
Facility
13 Services by Corporate Services
To the extent that other sections of the Act or the Commission's rules
thereunder are deemed applicable to the Transaction, such sections and rules are
hereby incorporated into this ITEM 3.
26
<PAGE>
A. LEGAL ANALYSIS
--------------
1. Section 9(a)(2)
Section 9(a)(2) makes it unlawful, without approval of the Commission
under Section 10, "for any person ... to acquire, directly or indirectly, any
security of any public utility company, if such person is an affiliate of such
company and of any other public utility or holding company, or will by virtue of
such acquisition become such an affiliate." 15 U.S.C. Section 79i(a)(2). Under
the definition set forth in Section 2(a)(11), an "affiliate" of a specified
company means "any person that directly or indirectly owns, controls, or holds
with power to vote, 5 per centum or more of the outstanding voting securities of
such specified company", and "any company 5 per centum or more of whose
outstanding voting securities are owned, controlled, or held with power to vote,
directly or indirectly, by, such specified company." 15 U.S.C. Section
79b(a)(11)(A)-(B).
Columbia Kentucky, Columbia Maryland, Columbia Ohio, Columbia
Pennsylvania and Columbia Virginia are public utility companies as defined in
Section 2(a)(5) of the Act. Because Applicant will indirectly acquire (through
its acquisition of Columbia) more than 5% of the voting securities of each of
Columbia Kentucky, Columbia Maryland, Columbia Ohio, Columbia Pennsylvania and
Columbia Virginia as a result of the Transaction, Applicant must obtain the
approval for the Transaction under Sections 9(a)(2) and 10 of the Act. The
statutory standards to be considered by the Commission in evaluating the
proposed Transaction are set forth in Sections 10(b), 10(c) and 10(f) of the
Act.
As set forth more fully below, the Transaction complies with all of
the applicable provisions of Section 10 of the Act and should be approved by the
Commission:
o the consideration to be paid in the Transaction is fair and
reasonable;
o the Transaction will not create detrimental interlocking
relations or concentration of control;
o the Transaction will not result in an unduly complicated capital
structure for the New NiSource system;
o the Transaction will not be unlawful under the provisions of
Sections 8 of the Act or detrimental to the carrying out of the
provisions of Section 11 of the Act;
o the Transaction will have the integrating tendencies required by
Section 10(c)(2) of the Act and will be in the public interest
and the interests of investors and consumers; and
o the Transaction will comply with all applicable state laws.
27
<PAGE>
2. Section 10(b)
Section 10(b) provides that, if the requirements of Section 10(f) are
satisfied, the Commission shall approve an acquisition under Section 9(a)
unless:
o such acquisition will tend towards interlocking relations or the
concentration of control of public utility companies, of a kind
or to an extent detrimental to the public interest or the
interests of investors or consumers;
o in case of the acquisition of securities or utility assets, the
consideration, including all fees, commissions, and other
remuneration, to whomsoever paid, to be given, directly or
indirectly, in connection with such acquisition is not reasonable
or does not bear a fair relation to the sums invested in or the
earning capacity of the utility assets to be acquired or the
utility assets underlying the securities to be acquired; or
o such acquisition will unduly complicate the capital structure of
the holding company system of the applicant or will be
detrimental to the public interest or the interests of investors
or consumers or the proper functioning of such holding company
system.
15 U.S.C. Section 79j(b).
a. Section 10(b)(1)
i. Interlocking Relationships
Although any merger results in new links between heretofore unrelated
companies, as discussed in ITEM 1, the relationships that will result from the
Transaction are not the types of interlocking relationships prohibited by
Section 10(b)(1), which was primarily aimed at preventing business combinations
unrelated to operational and economic benefits to the integrated utility system.
See Northeast Utilities, Inc., 50 S.E.C. 427, 443 (1990) ("Northeast
Utilities"), as modified, 50 S.E.C. 511 (1990), aff'd sub nom., City of Holyoke
v. SEC, 972 F.2d 358 (D.C. Cir. 1992) (finding that interlocking relationships
are necessary to integrate the two merging entities).
ii. Concentration of Control
Section 10(b)(1) is intended to avoid "an excess of concentration and
bigness" while preserving the "opportunities for economies of scale, the
elimination of duplicate facilities and activities, the sharing of production
capacity and reserves and generally more efficient operations" afforded by the
coordination of local utilities into an integrated system. American Electric
Power Company, Inc., 46 S.E.C. 1299, 1309 (1978) ("AEP"). In applying Section
10(b)(1) to utility acquisitions, the Commission must determine whether the
acquisition will create "the type of structures and combinations at which the
Act was specifically directed." Vermont Yankee Nuclear Power Corp., 43 S.E.C.
693, 700 (1968). As discussed below, the Transaction will not create a "huge,
complex, and irrational system," but rather will afford the opportunity to
28
<PAGE>
achieve economies of scale and efficiencies which are expected to benefit
investors and consumers. AEP, 46 S.E.C. at 1307.
Size: If approved, the New NiSource gas utility system will serve
approximately 3.2 million gas customers in nine states and 426,000 electric
customers in Indiana. As a result of the Transaction, excluding any non-core
asset sales, and taking into account required accounting adjustments, the
combined NiSource/Columbia system would have, on a pro forma basis as of
December 31, 1999, total assets of approximately $18.1 billion and operating
revenues of approximately $6.3 billion. By comparison, there are several holding
company systems that are significantly larger than the combined NiSource and
Columbia system following the Transaction. The tables attached as Exhibit J-3 to
this Application/Declaration show the combined system's relative size as
compared to other electric and gas systems in terms of operating revenues,
assets and customers, on both a regional and a national basis. As illustrated by
the tables in Exhibit J-3, the combined NiSource and Columbia system will be
smaller, both on a regional and national basis, than the new Dominion Resources,
Inc. registered holding company system approved by the Commission in 1999. See
Dominion Resources, Inc., Holding Co. Act Release No. 27113 (Dec. 15, 1999). On
a national basis, the new combined system will be smaller than the new
registered Xcel Energy, Inc. system recently approved by the Commission. See New
Century Energies, Inc., Holding Co. Act Release No. 27212 (Aug. 16, 2000). In
addition, as the tables in Exhibit J-3 illustrate, the combined NiSource and
Columbia system will be smaller, on a regional and national basis than systems
to be created as a result of other proposed mergers pending before the
Commission and involving the formation of registered holding companies,
including Consolidated Edison Company, Inc./Northeast Utilities, Inc. and First
Energy Corporation/GPU, Inc. As such, the operations of the combined NiSource
and Columbia system would not exceed the economies of scale of current and
developing holding company systems or provide undue power or control to New
NiSource in the regions in which it will provide service.
Efficiencies and Economies: In addition to analyzing the size of the
utility system, the Commission must also assess the efficiencies and economies
that can be achieved through the integration and coordination of utility
operations. As the Commission has stated, a "determination of whether to
prohibit enlargement of a system by acquisition is to be made on the basis of
all the circumstances, not on the basis of size alone." Centerior Energy Corp.,
49 S.E.C. 472 at 475 (1986) ("Centerior Energy Corp."). By enhancing the size
and geographic diversity of NiSource's existing gas system and combining
NiSource's electric business with Columbia's gas business, the Transaction will
significantly enhance each company's competitive position in an increasingly
competitive energy market. The electric and gas utility industries are merging
in order to provide greater value to customers and, thus, allow companies to
compete effectively in the increasingly competitive business environment.
In Consolidated Natural Gas Co., Holding Co. Act Release No. 26512
(Apr. 30, 1996), the Commission recognized that "fundamental changes in the
energy industry are leading to an increasingly competitive and integrated
market, in which marketers deal in interchangeable units of energy expressed in
British thermal unit values, rather than in natural gas or electricity. To
retain and attract wholesale and industrial customers, utilities need to provide
competitively priced power and related customer services. . . . It appears that
the restructuring of the electricity industry now underway will dramatically
affect all United States energy markets as a result of the growing
interdependence of natural gas transmission and electric generation, and the
29
<PAGE>
interchangeability of different forms of energy, particularly gas and
electricity." The combination of NiSource and Columbia will offer the same type
of synergies and efficiencies that the Commission has recognized in approving
the creation of other combination holding company systems, some of which have
registered under the Act. See, e.g., TUC Holding Co., supra; Houston Industries,
Inc., supra; Sempra Energy, supra; Dominion Resources, Inc., supra; and SCANA
Corp., Holding Co. Act. Release No. 27133 (Feb. 9, 2000) ("SCANA Corp.").
For further information concerning economies and efficiencies which
are expected to result from the Transaction, see Subparagraph A.3.b.i, of ITEM
3, below.
Competitive Effects: As the Commission noted in Northeast Utilities,
supra, at 445, the "antitrust ramifications of an acquisition must be considered
in light of the fact that public utilities are regulated monopolies and that
federal and state administrative agencies regulate the rates charged consumers."
On July 19, 1999, NiSource filed the Notification and Report Forms with the
Department of Justice ("DOJ") and Federal Trade Commission ("FTC") required by
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. Section
1311, et seq. ("HSR Act") describing the Transaction. The applicable waiting
period expired on August 4, 1999 and NiSource's clearance to complete an
acquisition of Columbia remained valid only until August 4, 2000. A new filing
by the parties under the HSR Act was deemed filed on June 9, 2000. The
applicable waiting period expired on July 10, 2000, giving NiSource until July
9, 2001 to complete the acquisition.
The competitive effects of the Transaction have also been reviewed by
the FERC, which has jurisdiction under Section 203 of the Federal Power Act over
the change in ownership of jurisdictional facilities controlled by Northern
Indiana and two other subsidiaries of NiSource that have authority from FERC to
sell wholesale power at market-based rates and the change of control of
Columbia's power marketing subsidiary.
NiSource and Columbia included expert economic testimony in their
Section 203 application filed at the FERC that discussed the effect of the
merger on competition. Such testimony, which was not contested by any party to
the FERC proceeding and was in the record approved by the FERC, showed that
there would be no merger-induced increases in generation market concentration
that exceed the thresholds specified by the FERC in its Merger Policy Statement.
The testimony also showed that because Columbia does not own any electric
transmission assets, the Transaction would not affect NiSource's ability to use
control over electric transmission facilities to affect electricity prices.
The expert witness also discussed the possibility that the merger
might create or enhance the incentive and ability of NiSource to increase
electricity prices by restricting access of potential competitors to supplies of
natural gas or raising the price of natural gas to competitors. The testimony
showed that natural gas is used to produce only a de minimis amount of
electricity in relevant geographic markets, and is used to establish the
competitive price of electricity in the East Central Area Reliability Council
(the region served by Columbia) less than one percent of the time. The FERC
concluded that because natural gas has a very limited role in determining
electricity prices in relevant markets, there was little concern that the
Transaction would create or enhance the ability of NiSource to adversely affect
electricity prices or output by raising rivals' costs or foreclosure.
30
<PAGE>
The expert witness also noted that at the present time, neither
Northern Indiana nor Columbia delivers natural gas to a significant share of
generating capacity within the East Central Area Reliability Council. He
explained that there are eight natural gas pipelines in Indiana and seven
natural gas pipelines in Ohio that are capable of serving merchant generators,
and there is substantial transportation capacity available on these pipelines.
He further explained that firm transportation customers on pipelines in Ohio,
including customers of Columbia, release substantial quantities of capacity into
secondary markets, especially during the summer months when demand for
electricity is at its peak. Accordingly, potential new competitors of NiSource
have several alternatives to acquire natural gas that do not involve facilities
controlled by either Northern Indiana or Columbia.
In any event, he observed that most of the generation capacity owned
by Northern Indiana is needed to serve its wholesale and retail requirements
customers, and therefore that it has relatively little electricity to sell into
the wholesale market at market-determined prices. He suggested that, for that
reason, Northern Indiana would not benefit significantly from higher market
prices of electricity.
The witness concluded that for these reasons, NiSource would have
little if any ability or incentive to affect the market price of electricity by
raising costs of competitors, and that the Transaction creates little added
incentive to do so.
b. Section 10(b)(2)
i. Fairness of Consideration
Section 10(b)(2) requires the Commission to determine whether the
consideration to be given to the holders of Columbia common stock in connection
with the Transaction is reasonable and whether it bears a fair relation to
investment in and earning capacity of the utility assets underlying the
securities being acquired. The Commission has found "persuasive evidence" that
the standards of Section 10(b)(2) are satisfied where, as here, the agreed
consideration for an acquisition is the result of arms-length negotiations
between the managements of the companies involved, supported by opinions of
financial advisors. See Entergy Corp., 51 S.E.C. 869 at 879 (1993) ("Entergy
Corp."); Southern Company, Holding Co. Act Release No. 24579 (Feb. 12, 1988)
("Southern Company").
The merger consideration was the product of extensive and vigorous
arms-length negotiations between Columbia and NiSource following a period of
nine months in which NiSource had made a formal invitation for tenders from
Columbia's shareholders. During this period, Columbia also considered potential
business combinations with other companies. The negotiations that culminated in
the Merger Agreement were preceded by intensive due diligence, analysis and
evaluation of the assets, liabilities and business prospects of each of the
respective companies. As recognized by the Commission in Ohio Power Co., 44
S.E.C. 340, 346 (1970), prices arrived at through arms-length negotiations are
particularly persuasive evidence that Section 10(b)(2) is satisfied.
Nationally-recognized investment bankers for Columbia and NiSource
have reviewed extensive information concerning the companies, analyzed the
merger consideration employing a variety of valuation methodologies, and opined
31
<PAGE>
that the merger consideration is fair, from a financial point of view, to the
holders of Columbia common stock and to NiSource as of February 27, 2000 and
April 24, 2000. See Exhibits G-4, G-5, G-6, G-7 and G-8 hereto. The assistance
of independent consultants in establishing the agreed-upon consideration has
been recognized by the Commission as evidence that the requirements of Section
10(b)(2) have been met. Southern Company, supra.
ii. Reasonableness of Fees
Another consideration under Section 10(b)(2) is the overall fees,
commissions and expenses to be incurred in connection with the Transaction.
NiSource believes that these items will be reasonable and fair in light of the
size and complexity of the Transaction relative to other utility mergers and
acquisitions, and that the anticipated benefits of the Transaction to the
public, investors and consumers are consistent with recent precedents and meet
the standards of Section 10(b)(2).
The Applicants estimate that a combined total of approximately $50.2
million will be incurred in fees, commissions and expenses in connection with
the Transaction. By comparison, American Electric Power Company, Inc. and
Central and South West Corporation have represented that they expect to incur
total transaction fees and regulatory processing fees of approximately $53
million in connection with their proposed merger. Dominion Resources, Inc. and
Consolidated Natural Gas Company estimated fees and other merger expenses
aggregating $55.5 million in their recent merger; Cincinnati Gas and Electric
Company and PSI Resources incurred $47.12 million in fees in connection with
their combination in 1994 as subsidiaries of Cinergy Corp., and Northeast
Utilities, Inc. alone incurred $46.5 million in fees and expenses in connection
with its acquisition in 1990 of Public Service of New Hampshire Company, Inc. -
which amounts all were approved as reasonable by the Commission. See Dominion
Resources, Inc., supra; CINergy Corp., Holding Co. Act Release No. 26146 (Oct.
21, 1994); Northeast Utilities, Inc., Holding Co. Act Release No. 25548 (June 3,
1992); and American Electric Power, Inc., Holding Co. Act Release No. 27186
(June 14, 2000).
The Applicants believe that the estimated fees and expenses in this
matter bear a fair relation to the value of their respective companies and the
benefits to be achieved by the Transaction, and further that the fees and
expenses are fair and reasonable in light of the size and complexity of the
Transaction. The aggregate consideration to be given in exchange for Columbia's
common stock is valued at approximately $6 billion, based on certain
assumptions. The total estimated fees and expenses of approximately $50 million
represent approximately 0.83% of the value of the consideration to be paid. This
is consistent with (and in fact generally lower than) percentages previously
approved by the Commission. See, e.g., Entergy Corp., supra (fees and expenses
represented approximately 1.7% of the value of the consideration paid to the
shareholders of Gulf States Utilities Company); Dominion Resources, Inc., supra
(fees and expenses represented approximately 0.87% of the estimated total
consideration to be paid to shareholders of Consolidated Natural Gas Company).
32
<PAGE>
c. Section 10(b)(3)
Section 10(b)(3) requires the Commission to determine whether the
Transaction will "unduly complicate the capital structure" or be "detrimental to
the public interest or the interest of investors or consumers or the proper
functioning" of the Applicant's system.
The capital structure of the Applicant's system will be similar in
most respects to the capital structures approved by the Commission in other
recent orders. See, e.g., Dominion Resources, Inc., supra; Southern Company,
Holding Co. Act Release Nos. 27061 and 27134 (Aug. 18, 1999 and Feb. 9, 2000);
and The National Grid Group plc, Holding Co. Act Release No. 27154 (Mar. 15,
2000) ("The National Grid Group plc"). NiSource shareholders will receive common
stock of New NiSource and Columbia's shareholders will receive, initially, a
combination of cash and New NiSource's SAILS, which will automatically result in
the issuance of New NiSource's common stock on the fourth anniversary of the
merger, and may receive shares of New NiSource common stock. New NiSource will
own, directly or indirectly, 100% of the common stock of all of the gas utility
subsidiaries of NiSource and Columbia and of the electric utility subsidiary of
NiSource. Hence, the Transaction will not create any publicly-held minority
stock interest in any public utility company. The only voting securities that
will be publicly held after the Transaction will be New NiSource's common stock.
The continued existence of Columbia as a secondary holding company in
the same holding company system will not unduly complicate Applicant's capital
structure. In this regard, the Commission has permitted the continued existence
of a secondary holding company where it appeared that the overall benefits of an
acquisition would outweigh any historical preference for a single holding
company structure. See Dominion Resources, Inc., supra; and The National Grid
Group plc, supra. As was true in Dominion Resources, Inc., where the Commission
allowed the continued existence of Consolidated Natural Gas Company as a
secondary holding company, the continued existence of Columbia will preserve
certain financing and structural benefits that have already been achieved by
Columbia as a registered gas holding company.
Moreover, the incurrence by New NiSource of indebtedness to finance
the cash portion of the purchase price will not result in an unduly complicated
capital structure for the resulting New NiSource system. Interim acquisition
financing of the type contemplated by New NiSource is expressly permitted by
Section 7(c)(2)(A) of the Act, and the combined cash flow of NiSource and
Columbia is expected to be adequate to service the interim acquisition financing
interest requirements without adverse effect upon any of the Applicant's utility
subsidiaries. As addressed in detail in the separate application dated May 17,
2000 (File No. 70-09681) New NiSource intends to refinance the acquisition debt
following the merger through the issuance of longer term securities, additional
equity issuances, using proceeds from the sale of certain non-core assets and/or
internally generated cash flow. The Commission has previously authorized
registered holding companies to issue debt to finance an acquisition under
similar circumstances. See Dominion Resources, Inc., supra; SCANA Corp., supra;
and The National Grid Group plc, supra. New NiSource also intends to refinance a
portion of the acquisition debt through the issuance by NiSource Finance Corp.,
of longer term debt securities, consistent with recent Commission authority. See
Southern Company, Holding Co. Act Release No. 27134 (Feb. 9, 2000).
33
<PAGE>
Finally, the issuance of the SAILS will not represent a permanent
component of Applicant's capitalization. As previously explained, the stock
purchase contracts included in the SAILS automatically settle for New NiSource's
common stock on the fourth anniversary of the merger without any further action
by the holders of the SAILS or Applicant. Moreover, from the date of the initial
issuance, the SAILS will be afforded a significant amount of equity credit by
the credit rating agencies for the purpose of Applicant's consolidated
capitalization.
In connection with the merger, NiSource may incur, at a maximum, up to
$6 billion of additional short-term debt. NiSource expects that NiSource Finance
Corp. will be the issuer of this additional short-term debt. This maximum
assumes that no shares of common stock of Columbia are exchanged for New
NiSource shares. NiSource believes that holders of the maximum number of
Columbia's shares (30%) will elect to exchange their stock for NiSource stock,
given the Columbia shareholder profile, the tax-free nature of the proposed
share exchange, the dividend expected to be paid on the New NiSource shares and
the adverse tax consequences of original issue discount in the SAILS in case the
holder does not elect to be, and is not, paid in stock. In this event, and upon
the completion in 2000, of the sales of certain non-core assets of NiSource and
Columbia and, if required, sales of additional shares of New NiSource common
stock, the Applicants commit that pro forma consolidated common stock equity of
the combined system will be no less than 28.5% of pro forma combined
capitalization. In addition, the Applicants commit that within two years after
the date of the Commission's order, the pro forma combined consolidated
capitalization of the new system will include no less than 30% common equity.
Based on similar circumstances, the Commission has previously held that such pro
forma consolidated capitalization will satisfy the requirements of Section
10(b)(3). See The National Grid Group plc, supra; and Northeast Utilities, Inc.,
Holding Co. Act Release No. 25221 (Dec. 21, 1990). In addition, the Applicants
commit that during the period until consolidated capitalization reaches 30% of
common equity, each of the "public-utility" subsidiary companies in the New
NiSource system will maintain a capital structure consisting of not less than
30% common equity.
3. Section 10(c)
Section 10(c) of the Act provides that, notwithstanding the provisions
of Section 10(b), the Commission shall not approve:
o an acquisition of securities or utility assets, or of any other
interest, which is unlawful under the provisions of section 8 or
is detrimental to the carrying out of the provisions of section
11; or
o the acquisition of securities or utility assets of a public
utility or holding company unless the Commission finds that such
acquisition will serve the public interest by tending towards the
economical and the efficient development of an integrated public
utility system.
15 U.S.C. Section 79j(c).
34
<PAGE>
a. Section 10(c)(1), including, by reference, Sections 8 and 11
Section 10(c)(1) requires that an acquisition be lawful under Section
8 of the Act. Section 8 prohibits registered holding companies from acquiring,
owning interests in or operating both a gas and an electric utility serving
substantially the same area if it is prohibited by state law. As discussed
below, the Transaction does not raise any issues under Section 8 of the Act.
Indeed, Section 8 indicates that a registered holding company may own both gas
and electric utilities where the relevant state utility commission supports such
an arrangement.
Section 10(c)(1) also requires that the transactions not be
detrimental to carrying out the provisions of Section 11 of the Act. Section
11(a) of the Act requires the Commission to examine the corporate structure of
registered holding companies to ensure that unnecessary complexities are
eliminated and voting powers are fairly and equitably distributed. As described
above in ITEM 3. A.2, the Transaction will not result in unnecessary
complexities or unfair voting powers.
Section 11(b)(1) of the Act generally requires a registered holding
company system to limit its operations "to a single integrated public-utility
system, and to such other businesses as are reasonably incidental, or
economically necessary or appropriate to the operations of such integrated
public-utility system." 15 U.S.C. Section 79k(b)(1). However, Section 11(b)(1)
further provides that "one or more additional integrated public-utility systems"
may be retained if certain criteria are met. Id. Section 11(b)(2) directs the
Commission "to ensure that the corporate structure or continued existence of any
company in the holding-company system does not unduly or unnecessarily
complicate the structure, or unfairly or inequitably distribute voting power
among security holders, of such holding-company system." 15 U.S.C. Section
79k(b)(2).
As detailed below, the Transaction is lawful under Section 8 and is
not detrimental to carrying out the provisions of Section 11.
i. Retention of Electric Operations
The retention of the electric operations of Northern Indiana by
Applicant is lawful under Section 8 of the Act and is not detrimental to
carrying out the provisions of Section 11 of the Act.
Section 8 of the Act provides that:
Whenever a State law prohibits, or requires approval or authorization
of, the ownership or operation by a single company of the utility
assets of an electric utility company and a gas utility company
serving substantially the same territory, it shall be unlawful for a
registered holding company, or any subsidiary company thereof . . .
(1) to take any step, without the express approval of the State
35
<PAGE>
commission of such State, which results in its having a direct or
indirect interest in an electric utility company and a gas company
serving substantially the same territory; or (2) if it already has any
such interest, to acquire, without the express approval of the State
commission, any direct or indirect interest in an electric utility
company or gas utility company serving substantially the same
territory as that served by such companies in which it already has an
interest.
15 U.S.C. Section 79h. A plain reading of Section 8 indicates that, with the
support of the relevant state utility commissions (in this case the IURC), a
registered holding company can include both electric and gas utility systems. A
more detailed examination of Section 8 in light of its legislative history
indicates that the purpose of this section is to preclude ownership by a
registered holding company of separate gas and electric utility companies with
overlapping service territories in an attempt to circumvent state law
restrictions that preclude ownership of gas and electric assets by the same
company.20
Section 8 of the Act and the public interest both permit Applicant's
retention of Northern Indiana electric operations upon completion of the
Transaction and Applicant's registration as a holding company. Northern
Indiana's existing gas and electric operations in Indiana, which are in
overlapping service territories, are in conformity with Indiana law. These
utility operations will not change as a result of the Transaction. Consequently,
Applicant is not using its holding company structure to circumvent state
regulation. The IURC currently exercises, and will continue to exercise,
jurisdiction over Applicant's Indiana gas and electric operations. See Exhibit
D-15 hereto.
In addition to Section 8 of the Act, Section 11 contains provisions
that permit the retention by Applicant of Northern Indiana's electric
operations. Section 11(b)(1) of the Act permits a registered holding company to
control one or more additional integrated public utility systems, i.e., electric
as well as gas utility systems, if:
o each of such additional systems cannot be operated as an
independent system without the loss of substantial economies
which can be secured by the retention of control by such holding
company of such system;
o all of such additional systems are located in one state,
adjoining states, or a contiguous foreign country; and
o the continued combination of such systems under the control of
such holding company is not so large (considering the state of
the art and the area or region affected) as to impair the
advantages of localized management, efficient operation, or the
effectiveness of regulation.
15 U.S.C. Section 79k(b)(1).
------------------------
20 The Report of the Committee on Interstate Commerce, S. Rep. No. 621 at 29
(1935) (Section 8 of the Act "is concerned with competition in the field of
distribution of gas and electric energy, a field which is essentially a
question of State policy, but which becomes a proper subject of Federal
action where the extra-State device of a holding company is used to
circumvent state policy.").
36
<PAGE>
These three subsections of Section 11(b)(1) are frequently referred to
as the "ABC Clauses" and each clause is addressed separately below.
Clause A: The Commission has interpreted Clause A "to require an
affirmative showing by a registrant that an additional system could not be
operated under separate ownership without a loss of economies which are `so
important as to cause a serious impairment of that system' and `substantial in
the sense that they were important to the ability of the additional system to
operate soundly.'" New Century Energies, Inc., Holding Co. Act. Release No.
26748 (Aug. 1, 1997) ("New Century Energies, Inc."), quoting New England
Electric System, 41 S.E.C. 888, 892-3 (1964) ("NEES"). A registered holding
company generally satisfies the requirements of Clause A by preparing a
"divestiture" or "severance" study which examines the estimated loss of
economies precipitated by a hypothetical divestiture "expressed in terms of the
ratio of increased expenses to the system's total operating revenues, operating
revenue deductions (excluding federal income taxes), gross income and net income
before federal income taxes." Id. In an early leading decision, the Commission
found that cost increases which resulted in a 6.78% loss of operating revenues,
a 9.72% increase in operating revenues deductions, a 25.44% loss of gross income
and a 42.46% loss of net income provided an "impressive basis for finding a loss
of substantial economies." Engineers Public Service Co., 12 S.E.C. 41, 59 (1942)
rev'd on other grounds and remanded, 138 F.2d 936 (D.C. Cir. 1943), vacated as
moot, 332 U.S. 788 (1947).21
The Applicants have filed as Exhibit I-1 hereto a study of the lost
economies that would result if the Commission were to direct the divestiture of
Northern Indiana's electric utility operations. These lost economies will result
primarily from the need to replicate corporate and administrative services, loss
of scale, and increased operating costs, and would satisfy the threshold
established by Commission precedent.22
In addition to quantitative factors, the Commission also considers
qualitative factors in its determination under Clause A. First, the Commission
in recent decisions has approved the retention by new registered electric
utility holding companies of relatively small gas systems because "separation of
gas and electric businesses may cause the separated entities to be weaker
competitors than they would be together." See New Century Energies, Inc., supra;
CINergy Corp., Holding Co. Act Release No. 26934 (Nov. 2, 1998); and WPL
Holdings, Inc., Holding Co. Act Release No. 26856 (Apr. 14, 1998) ("WPL Holding,
Inc."), aff'd sub nom., Madison Gas & Electric Co. v. SEC, 168 F.3d 1337 (D.C.
Cir. 1999).23 The logic of these cases has been extended in recent cases
------------------------
21 The Commission also noted, in its recent Dominion Resources, Inc. decision,
supra, that, citing NEES, supra, cost increases resulting in a 4.8% loss of
operating revenues, a 6% increase in operating revenue deductions
(excluding federal income tax), a 23.3% loss of gross income (before income
taxes) and a 29.9% loss of net income (before federal taxes) would afford
an "impressive basis for finding a loss of substantial economies."
22 The projected $68,000,000 in lost economies would satisfy the thresholds
established in Commission precedent. These lost economies would represent
6.14% of electric operating revenue, 7.91% of electric operating revenue
deductions, 27.39% of electric gross income, and 45.65% of electric net
income.
23 In New Century Energies, Inc., the Commission further noted that the
"empirical basis" for the assumptions underlying its decision in New
England Electric System., 41 S.E.C. 888 (1964), rev'd, SEC v. New England
Electric System, 346 F.2d 399 (1st Cir. 1965), rev'd and remanded, 384 U.S.
176 (1966), on remand, 376 F.2d 107 (1st Cir. 1967), rev'd, 390 U.S. 207
(1968) was "rapidly eroding."
37
<PAGE>
involving acquisitions by electric utility holding companies of neighboring gas
utility systems. See Dominion Resources, Inc., supra; SCANA Corp., supra; and
Northeast Utilities, Holding Co. Act Release No. 27127 (Jan. 31, 2000). Like
these other companies, Applicant's competitive position in the market would
suffer if it were directed to divest Northern Indiana's electric operations
because, as the utility industry moves toward a complete energy services
concept, energy suppliers must be able to offer customers a total range of
energy options to meet their energy needs. The combination of electric and gas
operations in a single company offers that company a means to compete more
effectively in the emerging energy services business. Accordingly, the
Transaction should be evaluated in light of the evolutionary changes taking
place in the utility industry.
The Commission has also noted that the DOJ and FERC typically have
concomitant jurisdiction over public utility mergers and typically consider
anticompetitive consequences of any proposed transactions. New Century Energies,
Inc., supra. In this case, the Transaction is subject to the notification and
report procedures under the HSR Act and approval by FERC under the Federal Power
Act. Thus, to the extent that there are remaining concerns about the effects on
competition of common ownership of both gas and electric businesses in the same
holding company system, such concerns were considered by other regulatory
agencies.
In addition, in its analysis of the requirements of Clause A, the
Commission considers whether the electric and gas utilities have long been under
common control and whether retention would alter the status quo with respect to
utility operations. Northern Indiana's electric and gas operations have been
under common control since 1926 and permitting the retention of Northern
Indiana's electric business would not alter the status quo with respect to its
utility operations. Finally, the Commission determines whether the proposed
acquisition has not "elicited any adverse reaction from interested state
commissions." Id. This factor should not present a problem because the
Applicants have received all necessary regulatory approvals from relevant state
commissions.
Clause B: The requirements of Clause B are met because Northern
Indiana's electric operations are located in the same state as its gas
operations (Indiana).
Clause C: The requirements of Clause C are met because the continued
combination of the electric and gas operations under Applicant is not so large
(considering the state of the art and the area or region affected) as to impair
the advantages of localized management, efficient operation or the effectiveness
of regulation. Northern Indiana's electric system is confined to a relatively
small geographic area. Applicant will maintain management of electric operations
geographically close to Northern Indiana's electric operations, thereby
preserving the advantages of localized management. Northern Indiana's electric
operations will also remain subject to the IURC's jurisdiction, thereby
maintaining the effectiveness of regulation. Finally, Northern Indiana's
electric operations will continue to enjoy substantial economies as part of
Applicant's system, and will realize additional economies as a result of the
Transaction from becoming part of a combined NiSource/Columbia system. Far from
impairing the advantages of efficient operation, the continued combination of
Northern Indiana's electric and gas operations will continue to facilitate and
enhance efficiency.
38
<PAGE>
ii. Non-Utility Businesses
Section 11(b)(1) limits the non-utility interests of a registered
holding company to "interests that are `reasonably incidental, or economically
necessary or appropriate to the operations of such integrated public-utility
system,' on a finding by the Commission that such interests are `necessary or
appropriate in the public interest or for the protection of investors or
consumers and not detrimental to the proper functioning' of the integrated
system." New Century Energies, Inc., supra. "The Commission has interpreted
these provisions to require the existence of an operating or functional
relationship between the utility operations of the registered holding company
and its non-utility activities." Id. All of the non-utility businesses and
investments currently held by the Applicants, with certain exceptions, are
retainable under this test.
Several of the subsidiaries of NiSource and Columbia are exempt under
the Act, including the integration standards of Section 11(b)(1), pursuant to
Sections 32, 33 or 34. Many of Columbia's existing non-utility investments were
the subject of specific approvals granted by the Commission. In addition, Rule
58 provides exemptions for investments by registered gas utility holding
companies in certain "energy-related" companies (subject to a limit on aggregate
investment equal to 15% of the consolidated capitalization) and "gas-related"
companies (which is not subject to any limitation on the amount invested). 17
C.F.R. Section 250.58. Further, the Commission has determined that existing
investments in "energy-related" companies (as of the date of the consummation of
the merger) of an exempt holding company which became a registered holding
company as a result of the merger should be disregarded for purposes of
calculating the dollar limitations imposed by Rule 58. See Energy East Corp.,
Holding Co. Act Release No. 27224 (Aug. 31, 2000); New Century Energies, Inc.,
supra; and Conectiv, Inc., Holding Co. Act Release No. 26832 (Feb. 25, 1998)
("Conectiv, Inc.").
NiSource is currently a holding company that is exempt from the
registration requirements of the Act.24 As an exempt holding company, NiSource
has been free to invest in a variety of non-utility businesses and activities
without the need to obtain prior Commission approval under Section 9(a) of the
Act. The Transaction will result in New NiSource becoming a registered holding
company. Therefore, it is necessary to evaluate each of NiSource's non-utility
business activities within the retention restrictions of the Act and the
Commission's rules promulgated thereunder. Columbia has been subject to
regulation as a registered holding company for an extended period. Therefore,
Columbia's ability to engage in non-utility businesses has been subject to the
approval requirements of Section 9, and each of Columbia's existing non-utility
businesses has been either approved by the Commission or falls within the
exemptions of Sections 32, 33 and 34 under the Act or Rule 58. Exhibit I-2 filed
hereto contains a comprehensive listing of all non-utility subsidiary companies
of NiSource, with the exception of (i) the Water Utilities and IWCR referred to
in the following paragraph, (ii) SM&P and its subsidiaries, Colcom and UTI,
which are being sold, and (iii) other non-utility subsidiary companies recently
sold or being sold, and sets forth the bases for their retention by New NiSource
after the Transaction.
------------------------
24 See NIPSCO Industries, Inc., Holding Co. Act Release No. 26975 (Feb. 10,
1999).
39
<PAGE>
Water Utilities: The Water Utilities, which are held through IWCR,
supply water for residential, commercial and industrial uses in Indianapolis,
Indiana and surrounding areas and were acquired beginning in 1997. The Water
Utilities are not part of a unified utility franchise and do not share a common
utility customer base with any of NiSource's public utility companies. Moreover,
they were acquired and are maintained as a distinct business unit and represent
a significant investment of NiSource. See Subparagraph B.1.a of ITEM 1, above.
If the Commission determines that New NiSource, or its direct or indirectly
wholly owned subsidiaries, may not retain the stock or operating assets of the
Water Utilities under Section 11(b)(1) of the Act and therefore must divest of
the stock or assets of the Water Utilities, the Applicants request that the
Commission include in its order with respect to this Transaction statements that
(a) within three years following the date of the Transaction either (1) New
NiSource will take all appropriate action to effect the sale of all of its
right, title and interest in and to the stock or assets of IWCR for cash (it
being expressly understood that the sale of the stock or assets of IWCR will
occur only when substantially all of the assets of IWCR will consist of stock of
the Water Utilities), (2) each of the Water Utilities will take all appropriate
action to effect the sale of all of its right, title and interest in its assets
(net of associated liabilities) for cash or (3) New NiSource and/or its
subsidiaries will effectuate the consummation of a combination of the
transactions described in (1) or (2); (b) the disposition of stock and/or assets
described in (a) above is necessary and appropriate to integrate and simplify
the holding company system of which New NiSource is a member and to effectuate
the provisions of section 11(b)(1) of the Act; (c) all of the net proceeds from
the disposition of stock and/or assets described in (a) above (for this purpose,
a party selling the stock or assets pursuant to the order shall be referred to
as a "Transferor") must be contributed to the capital of NiSource Finance Corp.
by New NiSource and any other Transferor within ninety days of receipt of cash
in connection with such sales and (d) such capital contributions are necessary
and appropriate to integrate and simplify the holding company system of which
New NiSource is a member.25
Reference is also made to Lake Erie Land Company and its subsidiary,
SCC Services, Inc., in Exhibit I-2 hereto.
b. Section 10(c)(2)
The Transaction will tend toward the economical and efficient
development of an integrated public utility system, thereby serving the public
interest, as required by Section 10(c)(2) of the Act.
i. Efficiencies and Economies
The Applicants expect to achieve substantial economic benefits from
the merger.
The Applicants' best current estimate is that they should realize
potential cost savings and revenue enhancements, on a pre-tax basis, aggregating
approximately $950 million in the first five years following the merger, from
the elimination of redundant management functions and other administrative
overhead and revenue enhancements.
In addition, the Applicants believe that the merger will create a
significantly larger and more diverse energy company that will have strategic
and operational opportunities that would not be available to either NiSource or
------------------------
25 The Commission has ordered divestiture of water properties by, or
considered divestiture of such properties necessary for, a registered
holding company when there is no functional or operating relationship
between the principal electric or gas utility system and the water
properties. See The North American Company, Holding Co. Act Release No.
10320 (December 28, 1950); See, also, e.g., Federal Water and Gas
Corporation, Holding Co. Act Release No. 4113 (February 11, 1943); and cf.
--
Union Electric Company, Holding Co. Act Release No. 18368 (April 10, 1974),
aff'd. sub nom., City of Girardeau v. SEC, 521 F.2d 324 (D.C. Cir. 1975).
------------------------
The Commission has recently supported retention of water properties when
they are relatively small in size, operated in conjunction with gas or
electric utility systems, including in municipalities, and owned for
significant periods of time. See WPL Holdings, Inc., Holding Co. Act
Release No. 26856, (April 14,1968), aff'd. sub nom. Madison Gas & Electric
----------------------
Co. v. SEC, (168 F.3d 1337 (D.C. Cir. 1999) (water properties which are
----------
small in size and operated for 60 years and are closely associated to gas
operations, including in municipalities, may be retained); and New Century
Energies, Inc., Holding Co. Act Release No. 26748 (August 1, 1997) (small
water and ditch companies may be retained where water is used at a
hydro-electric station or for cooling of generating facilities). In the
proposed transaction, the water properties are neither small by comparison,
nor part of unified or coordinated electric and gas utility operations, and
were recently acquired.
40
<PAGE>
Columbia as separate systems. In particular, the Applicants believe that the
combined company will have three elements that are key to success in the
increasingly deregulated and competitive energy marketplace: (1) increased size,
scope and scale, (2) access to strategic geographic markets, and (3) a broad
range of complementary assets.
Increased Size, Scope and Scale, Diversity: The combined company will
have the size, scope and scale necessary to compete more effectively.
o The merger of NiSource and Columbia will create a super-regional
energy company serving more than 3.6 million gas and electric
utility customers located primarily in nine states.
o Increased volumes of gas throughput and gas sales, along with
more extensive local delivery systems, pipeline assets and a
variety of gas storage facilities, should increase the
flexibility and efficiency of the combined systems in delivering
gas.
o The merger will result in a company with pro forma 1999 operating
revenues of $6.3 billion from a substantially larger and more
diverse customer base.
o The broader geographic range of the market areas served by the
NiSource and Columbia utility companies distributing gas and
electricity should moderate the risk that unseasonably warm
winters or cool summers in one area will adversely affect the
entire company at any particular time.
Access to Strategic Markets:
o The merger advances NiSource's previously announced strategy for
expanding its presence within a natural gas distribution corridor
stretching from Texas, through Chicago, to Maine. After the
merger, the additional Columbia gas storage assets, pipeline
assets and customers also fall along this corridor, linking
NiSource's existing assets and allowing for better utilization of
all of the combined systems' assets.
o Pipelines from Canada and the Gulf of Mexico to the Chicago
market have made natural gas plentiful and relatively inexpensive
in Chicago and northern Indiana. In contrast, in the Northeast,
constrained pipeline capacity has resulted in higher gas prices
and low usage of natural gas. With significant natural gas
reserves and storage capacity, 19,000 miles of gas pipeline from
Texas to Maine and an extensive local distribution network, the
Applicants believe the combined system will be able to deliver
lower cost gas to a Northeast market that has the potential for
growth as an increasing number of customers, including power
plant operators, switch to clean natural gas as their fuel of
choice.
41
<PAGE>
o The broader geographic coverage of the combined system, including
Columbia's natural gas distribution territory and its pipeline
systems, will also provide more opportunities to expand
NiSource's electric cogeneration business for industrial
customers.
Broad Range of Complementary Assets:
o The merger will enable the combined system to use strong local
utility brand names to offer customers a broader mix of products
and services than either system alone could offer. For example,
the combined system will be able to offer more competitive
management of customers' complete gas supply needs to a broader
group of customers by combining NiSource's supply area gas
storage with Columbia's market area gas storage and combining
high deliverability storage for peak needs with standard storage
for baseload needs.
o The merger will permit the combined system to offer a broader
range of energy products and services and will reduce the risk
presented by NiSource's dependence on sales of gas and
electricity to large industrial customers in northwest Indiana.
o The merger should allow the combined system to take advantage of
arbitrage opportunities that may exist among natural gas, coal
and electricity. Similar opportunities may be available based on
differences in weather, time of day, geographic location of
customers, and physical location of fuel supplies and gas storage
along the Texas-to-Maine corridor. As an example, the combined
system will be able to choose how best to use natural gas
supplies, whether by selling the gas on the open market, swapping
it, transporting it for sale in another market, putting it into
storage for future use or sale, or using it to produce
electricity in its own power plants.
o The merger will add key members of Columbia's operating
management team, which has successfully managed its company
during a period of deregulation in multiple states, increased
competition and rapid change in the gas industry, to NiSource's
management team, which has skills and experience in efficiently
managing assets and delivering energy products and services.
Although some of the anticipated economies and efficiencies will be
fully realizable only on a long-term basis and some of the potential benefits
cannot be precisely estimated, they are properly considered in determining
whether the standards of Section 10(c)(2) have been met. See AEP at 1320-21
(1978); Centerior Energy Corp. at 480 (1986) ("[S]pecific dollar forecasts of
future savings are not necessarily required; a demonstrated potential for
economies will suffice even when these are not precisely quantifiable.")
(footnote omitted). See also Energy East Corp., Holding Co. Act Release No.
26976 (Feb. 12, 1999) (authorizing acquisition based on strategic benefits and
potential but presently unquantifiable savings); and The National Grid Group
42
<PAGE>
plc, supra. There is no requirement in Section 10(c)(2) that the specific dollar
estimates of future savings be large in relation to the gross revenues of the
companies involved. See American Natural Gas Co., 43 S.E.C. 203 (1966)
("American Natural Gas Co.").
ii. Integrated Gas Utility System
Under Section 10(c)(2), the Commission must affirmatively find that
the Transaction "will serve the public interest by tending towards the
economical and the efficient development of an integrated public-utility
system." 15 U.S.C. Section 79j(c)(2). An "integrated public-utility system" is
defined in Section 2(a)(29), 15 U.S.C. Section 79j(c)(2) to mean:
(B) As applied to gas utility companies, a system consisting of one or
more gas utility companies which are so located and related that
substantial economies may be effectuated by being operated as a single
coordinated system confined in its operations to a single area or region,
in one or more States, not so large as to impair (considering the state of
the art and the area or region affected) the advantages of localized
management, efficient operation, and the effectiveness of regulation;
provided, that gas utility companies deriving natural gas from a common
source of supply may be deemed to be included in a single area or region.26
The combination of Columbia's gas utility operations and NiSource's
gas utility operations will create an integrated gas-utility system within the
meaning of Section 2(a)(29)(B) of the Act. Indeed, because Columbia's integrated
transmission, storage and distribution system forms a bridge between the Midwest
and the mid-Atlantic and northeast regions, the Transaction will forge an even
more substantial link between NiSource's Midwestern and New England operations
than the link that this Commission noted in 1999 in approving NiSource's
acquisition of Bay State.
Single Area Or Region: The gas utility system resulting from the
Transaction will include eight gas utilities located in the contiguous states of
Indiana, Kentucky, Ohio, Pennsylvania, Virginia and Maryland and two gas
utilities located in the contiguous states of Massachusetts, New Hampshire and
Maine. The utilities located in contiguous states will be directly
interconnected by affiliated and non-affiliated interstate pipelines and
storage. All of the utilities will be effectively connected by
industry-recognized trading centers and market hubs. The entire system will
integrate its process of portfolio management and efficiently and economically
deploy its pipeline and storage capacity and supply sources through these direct
and indirect interconnects and market centers.
Section 2(a)(29)(B) specifically contemplates that "gas utility
companies deriving natural gas from a common source of supply may be deemed to
be included in a single area or region." 15 U.S.C. Section 79b(a)(29)(B).
------------------------
26 Unlike the definition of an "integrated electric utility system" in Section
2(a)(29)(A) of the Act, physical interconnection of the component parts of
a gas utility system is not required. Further, the Commission has
previously recognized that "integrated or coordinated operations of a gas
system under the Act may exist in the absence of [physical]
interconnection." American Natural Gas Co., 43 S.E.C. at 207, n.5.
43
<PAGE>
Moreover, in considering whether an "area or region" is so large as to impair
"the advantages of localized management, efficient operation, and the
effectiveness of regulation," the Commission must consider the "state of the
art" in the industry. Id.
The integration of NiSource's Massachusetts, New Hampshire and Maine
gas utility operations and its Indiana gas utility operations has already been
established. This was an essential finding in the Commission order approving
NiSource's acquisition of Bay State. NIPSCO Industries, Inc., Holding Co. Act
Release No. 26975 (Feb. 10, 1999). With the exception of NiSource's New England
operations, the gas distribution operations of Columbia and NiSource are in
contiguous states and, given their location and reliance on many of the same
interstate pipelines, are readily susceptible to being operated as an integrated
system.
Common Source Of Supply and Coordination Of Operations: Historically,
in determining whether two distant gas companies share a "common source of
supply," the Commission has placed primary importance on whether the gas supply
of the two companies is derived from the same gas producing areas (or basins),
recognizing that the most significant economies and efficiencies that two gas
utilities can achieve is through the coordination and management of gas supply.
The Commission has also considered whether the two companies hold capacity on
one or more common pipelines, although the separation of the merchant and
transportation functions of the pipelines and the trend towards greater reliance
by local distribution companies on short-term transportation obtained in the
capacity release market, giving rise to what FERC now refers to as "virtual
pipelines,"27 has arguably made the existence of long-term (or "firm")
transportation arrangements on the same pipeline(s) much less important.
In its more recent decisions, the Commission has held that "[t]he
concept of a `common source of supply' is susceptible of a different
understanding today than in 1935, when the `single area or region' was generally
defined in terms of the pipeline delivery points (i.e., the city-gate) where the
local distribution companies purchased their gas." NIPSCO, supra. The
Commission's inquiry now focuses upon whether the combined utilities purchase
substantial quantities of gas produced in the same supply basins and upon
whether that gas is "deliverable" on the interstate pipeline network on an
economical and reliable basis. Id. In this regard, the Commission has also
recognized that, in today's gas market, purchases from the same supply basins
are facilitated by the availability of a variety of services (e.g., gas parking,
lending, and pooling) at market centers, hubs and pooling points which have
developed throughout the United States and Canada.
As indicated above, the gas portfolios of Columbia and NiSource
overlap substantially with respect to sources of supply. Both companies now
purchase and will continue to purchase most of their gas from the Gulf Coast
Basin (onshore and offshore Texas and Louisiana producing region). Moreover,
------------------------
27 See Regulation of Short-term Natural Gas Transportation Services, and
Regulation of Interstate Natural Gas Transportation Services, Order No.
637, 65 FR 10156 (Feb. 25, 2000). As explained by FERC, "[a] virtual
pipeline can be created when a marketer or other shipper acquires capacity
on interconnecting pipelines and can schedule gas supplies across the
interconnect, creating in effect a new pipeline between receipt and
delivery points that are not physically connected under a single pipeline
management." 65 FR at 10162.
44
<PAGE>
they will each have enhanced opportunities to increase their respective
purchases of gas produced in the Mid-Continent and Western Canada supply basins.
The NiSource and Columbia gas utility systems also currently hold firm
transportation service agreements on a number of the same interstate pipelines,
including ANR, Panhandle Eastern, Tennessee Gas, Texas Eastern and Transco. The
NiSource midwestern gas utilities are physically linked through Crossroads'
interconnections with Columbia Transmission, Trunkline and Panhandle Eastern
with a common interstate transmission system (Columbia Transmission) that serves
each of the Columbia gas distribution utilities. The Columbia and NiSource gas
distribution utilities also make use of other regional pipelines to transport
and deliver Gulf Coast, Mid-Continent, Canadian and Appalachian-sourced
supplies, including Crossroads, National Fuel and CNG Transmission Corp. In
addition, gas purchased by the unregulated marketing affiliate of NiSource is
transported by NiSource subsidiary, Crossroads, and Columbia subsidiary,
Columbia Transmission, for further delivery to utility customers served by
NiSource's and Columbia's gas public utilities located in Indiana, Ohio and
Pennsylvania. These links, and the increased presence which the combined
NiSource and Columbia utilities will have in both upstream (i.e., producing
area) and downstream (i.e., market area) trading hubs and market centers, will
facilitate coordinated management of interstate transportation, storage and gas
supplies.
Gas trading points and market centers, trading "hubs" and market
centers have rapidly grown in importance as a result of the construction of new
pipeline capacity, the unbundling of interstate transportation from gas sales
mandated by FERC Orders 436 and 636, 28 the development of high deliverability
salt cavern gas storage facilities and local distribution companies'
"de-contracting" of firm pipeline and storage capacity. Trading hubs and market
centers now provide market participants with access to gas supplies sourced from
multiple, widely separated producing areas and transportation capacity, by way
of any number of interconnected interstate pipeline facilities at a manageable
number of common geographic points. These hubs and centers have contributed to
the establishment of a fully integrated, competitive marketplace in which
real-time pricing is available.29 Using many of the same hubs and market
centers, the NiSource and Columbia gas public utilities and their affiliates
will have opportunities to coordinate and manage their gas supply and
transportation portfolios. This can lead to increased efficiencies and economies
over time in areas of coordinated gas supply, optimized use of transportation
capacity, ability to take advantage of geographic diversity between NiSource's
and Columbia's core markets, more efficient use of gas storage facilities and
enhanced ability to benefit from new supply contracts.
Additional efficiencies and arbitrage opportunities will be realized
over time through the combined companies' use of a single data management system
to record gas transaction data, single distribution "send-out" models which help
------------------------
28 Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, Order
No. 436, 50 FR 42408 (Oct. 18, 1985); and Pipeline Service Obligation and
Revisions to Regulations Governing Self-Implementing Transportation Under
Part 284 of the Commission's Regulations, Order No. 636, 57 FR 13267 (Apr.
16, 1992).
29 As a result of the evolution of an integrated, competitive marketplace for
both supply and transportation, the duration of contracts has shortened
considerably.
45
<PAGE>
design the portfolio to meet requirements and single e-commerce trading systems
which are experiencing increasing growth in industry portfolios. NiSource and
Columbia collectively operate ten (10) local distribution companies ("LDC's") in
nine (9) states. Each of NiSource and Columbia operates a single, integrated gas
supply department which, on behalf of each individual LDC, designs, acquires,
and manages the respective gas portfolios to meet the individual LDC's ongoing
operating service requirements. Both gas supply departments operate a single gas
data management information system to gather, maintain and facilitate the data
associated with each individual LDC portfolio.
The NiSource and Columbia gas supply departments are nearly identical
in organizational structure and portfolio management processes. The difference
between the two companies' single gas supply departments resides in the
respective dispatch and control functions of the LDC's distribution
systems--commonly referred to as the "Gas Control" function. The individual
NiSource LDC's have separate Gas Control departments and are responsible for the
management of their own LDC's system. Each individual NiSource LDC has a
separate Supervisory Control and Data Acquisition ("SCADA") system, which
electronically monitors the physical operating conditions of its distribution
systems. The Gas Control functions for all five (5) Columbia LDC systems are
integrated into a single department and managed by a single SCADA system.
New NiSource plans to have a single, centrally located, fully
integrated department which will perform the gas supply portfolio management and
gas control functions for all New NiSource LDC's. The gas supply and Gas Control
functions will be managed by a single gas data management system and SCADA
system for all New NiSource LDC's. Current integration plans propose initiation
of the steps toward physical integration into a single location commencing
shortly after the merger. The new single department will utilize the existing
pre-merger gas data management systems and SCADA systems while single systems
can be developed and become fully operational.
The timing of the integration into a single department is staggered to
avoid any interruption of the gas portfolio and system operations of the
respective LDC's during the winter season months of November through March. The
timing of full integration of personnel into a centrally located, single gas
supply and Gas Control function is timed to coincide with fully operational
single data management and SCADA systems. The development of single data
management and SCADA systems will commence immediately and become operational
only when the integrity and safety of the respective LDC systems will not be
compromised. Upon completion, the single integrated department will be fully
coordinated.
No Impairment: The resulting integrated gas system to be formed by the
combination of Columbia's gas properties with those of NiSource will not be "so
large as to impair (considering the state of the art and the area or region
affected) the advantages of localized management, efficient operation, and the
effectiveness of regulation."
In this case, the separate corporate identity and current headquarters
of each of Columbia's five natural gas public utility subsidiaries will be
maintained. Further, following the Transaction, each of the Columbia and
NiSource public utilities will remain subject to regulation as to rates,
46
<PAGE>
service, and other matters by the regulatory agencies in each of the states in
which they provide public utility services.
4. Section 10(f) - State Laws
Section 10(f) of the Act provides that:
The Commission shall not approve any acquisition as to which an application
is made under this section unless it appears to the satisfaction of the
Commission that such State laws as may apply in respect to such acquisition
have been complied with, except where the Commission finds that compliance
with such State laws would be detrimental to the carrying out of the
provisions of section 11. 15 U.S.C. Section 79k(f).
As described in ITEM 4, the Applicants will comply with all applicable
state laws related to the Transaction.
ITEM 4. REGULATORY APPROVALS
Certain aspects of the Transaction are, or may be, subject to approval
by the public utility commissions of Virginia, Pennsylvania, Kentucky, Maine and
New Hampshire. On July 14, 2000, the Virginia State Corporation Commission
issued an order authorizing the Merger. On July 13, 2000, the Pennsylvania
Public Utility Commission issued an order authorizing the Merger. On June 30,
2000 the Kentucky Public Service Commission issued an order authorizing the
Merger. On June 30, 2000, the Maine Public Utility Commission issued an order
authorizing the Merger. On June 6, 2000 the New Hampshire Public Utility
Commission issued an order authorizing the Merger. Furthermore, certain aspects
of the Transaction are subject to the jurisdiction of FERC under the Federal
Power Act, as amended, and of the Federal Communications Commission ("FCC")
under the Communications Act of 1934, as amended. On July 26, 2000, FERC issued
an order authorizing the Merger. The FCC has issued all necessary orders
approving the Merger. The Transaction is also subject to the notification and
reporting requirements of the HSR Act. No other state or federal commission
approvals of the Transaction are necessary with respect to the public-utility
companies, as defined under the Act, of NiSource and Columbia as a result of the
Transaction.
In addition, pursuant to the order of the Maine Public Utility
Commision, the Applicants respectfully request that the Commission, in its order
approving the Transaction, acknowledge that the Maine Public Utility Commission
intends to retain the right to review, and to disallow, as warranted, any
service charges rendered by or to Northern in the NiSource corporate system that
may be subject to recovery in rates.
ITEM 5. PROCEDURE
The Applicants respectfully request the Commission to expedite its
approval of this Application/Declaration. A proposed form of notice is attached
hereto as Exhibit H-1. The Applicants hereby waive a recommended decision by a
hearing officer or any other responsible officer of the Commission, request that
there be no thirty-day waiting period between the issuance of the Commission's
Order and date on which it is to become effective, and consent that the Division
47
<PAGE>
of Investment Management may assist in the preparation of the Commission's
decision and/or order, unless the Division opposes the Transaction.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
A. EXHIBITS
--------
A-1 Amended and Restated Articles of Incorporation of NiSource dated
as of May 13, 1998, as amended on April 14, 1999 and March 2,
2000. (Incorporated by reference to Exhibit 3 to the NiSource
Quarterly Report on Form 10-Q for the quarter ended March 31,
1998, and Exhibits 3.2 and 3.3 to the NiSource Annual Report on
Form 10-K for the year ended December 31, 1999).
A-2 Amended and Restated By-Laws of NiSource Inc. effective January
29, 2000. (Incorporated by reference to Exhibit 3.4 to the
NiSource Annual Report on Form 10-K for the year ended December
31, 1999).
A-3 Amended and Restated Certificate of Incorporation of Columbia
effective January 16, 1998, as amended on June 1, 1999.
(Incorporated by reference to Exhibit 3-A to Columbia Gas System,
Inc.'s Annual Report on Form 10-K for the year ended December 31,
1995 (File No. 1-1098), and Exhibit 3-D to Columbia's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998 (as
corrected in Exhibit 4-A-3 to Columbia's Registration Statement
on Form S-8, filed with the Commission on June 16, 1999 (File No.
333-80797)), and Exhibit 3-D to Columbia's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999).
A-4 Amended and Restated By-Laws of Columbia dated as of February 22,
2000. (Incorporated by reference to Exhibit 3-D to the Columbia
Annual Report on Form 10-K for the year ended December 31, 1999).
A-5 Articles of Incorporation of New NiSource. (See Exhibit 3.3 to
Exhibit C hereto).
A-6 By-Laws of New NiSource. (Previously filed).
B-1 Agreement and Plan of Merger between Columbia, NiSource, New
NiSource, Parent Acquisition, Company Acquisition and NiSource
Finance Corp. dated as of February 27, 2000, as amended and
restated as of March 31, 2000. (Incorporated by reference to
Exhibit 2.1 to the NiSource Current Report on Form 8-K dated
March 31, 2000).
B-2 Form of Credit Agreement and related documentation. (Filed
herewith).
B-3 Form of Interim Service Agreement (Previously filed).
C Registration Statement of New NiSource and NiSource on Form S-4
(including joint proxy statement of NiSource and Columbia).
(Filed with the Commission on April 3, 2000, File No. 333-33896
and incorporated by reference herein).
C-1 Amendment No. 1 to Registration Statement of New NiSource and
NiSource on Form S-4 (including joint proxy statement of NiSource
and Columbia.) (Filed with the Commission on April 24, 2000, File
No. 333-33896 and incorporated by reference herein).
48
<PAGE>
D-1 Application to the FERC under the Federal Power Act. (Previously
filed).
D-2 Order of the FERC. (Previously filed).
D-3 Application to the VSCC. (Included as Exhibit G to Exhibit D-1).
D-4 Order of the VSCC. (Previously filed).
D-5 Application to the PPUC. (Included as Exhibit G to Exhibit D-1).
D-6 Order of the PPUC. (Previously filed).
D-7 Application to the KPSC. (Previously filed).
D-8 Order of the KPSC. (Previously filed).
D-9 Application to the MPUC. (Previously filed).
D-10 Order of the MPUC. (Previously filed).
D-11 Application to the NHPUC (Previously filed).
D-12 Order of the NHPUC. (Previously filed).
D-13 Applications to the FCC. (Paper format filing-Form SE).
D-14 Orders of the FCC. (Paper format filing-Form SE).
D-15 Letter of the IURC. (Previously filed).
D-16 Letter of the PUCO. (Previously filed).
D-17 Letter of the MPSC. (Previously filed).
D-18 Letter of the MDTE. (Previously filed).
E-1 Map of service territories of subsidiaries of NiSource and
Columbia and common pipelines. (Previously filed).
E-2 Combined Company Organizational Chart. (Previously filed).
E-2(a) Merger Structure Diagram. (Previously filed).
E-2(b) Revised Combined Company Organizational Chart. (Paper format
filing - Form SE).
F Opinion of Counsel. (Filed herewith).
G-1 Annual Report of NiSource on Form 10-K for the year ended
December 31, 1999. (Filed with the Commission on March 30, 2000,
File No. 1-9776 and incorporated by reference herein).
G-2 Annual Report of Columbia on Form 10-K for the year ended
December 31, 1999. (Filed with the Commission on March 2, 2000,
File No. 1-1098 and incorporated by reference herein), as amended
by the Amended Annual Report on Form 10-K/A (Filed with the
Commission on March 3, 2000, File No. 1-1098 and incorporated by
reference herein).
49
<PAGE>
G-3 Form U5S of Columbia for the year ended December 31, 1999. (Filed
with the Commission on April 28, 2000, File No. 1-1098 and
incorporated by reference herein).
G-4 Opinion of Credit Suisse First Boston Corporation. (Included as
Annex III to Exhibit C).
G-5 Opinion of Morgan Stanley & Co. Incorporated. (Included as Annex
IV to Exhibit C-1).
G-6 Opinion of Salomon Smith Barney Inc. (Included as Annex V to
Exhibit C-1).
G-7 Opinion of Morgan Stanley & Co. Incorporated (Incorporated by
reference to Exhibit 99(a) to the Columbia Current Report on Form
8-K dated April 24, 2000).
G-8 Opinion of Salomon Smith Barney Inc. (Incorporated by reference
to Exhibit 99(b) to the Columbia Current Report on Form 8-K dated
April 24, 2000).
H Proposed Form of Notice. (Previously filed).
H-1 Proposed Amended Form of Notice. (Previously filed).
I-1 Electric Divestiture Study of Northern Indiana. (Filed herewith).
I-2 Retention of NiSource's Non-Utility Businesses. (Filed herewith).
J-1 Letter regarding Pushdown Accounting. (Filed herewith).
J-2 Tables Providing Information on Customers, Assets and Revenues as
of June 30, 2000 of NiSource, Columbia and Their Subsidiaries and
Pro Forma Combined System. (Filed herewith). J-3 Comparable
Companies Analysis Tables. (Filed herewith).
J-4 Capitalization Tables. (Filed pursuant to Rule 104 on a
confidential basis).
B. FINANCIAL STATEMENTS
--------------------
FS-1 New NiSource Unaudited Pro Forma Combined Condensed Consolidated
Balance Sheet as of December 31, 1999. (Included in Exhibit C).
FS-2 New NiSource Unaudited Pro Forma Combined Condensed Consolidated
Statement of Income from Continuing Operations for the twelve
months ended December 31, 1999. (Included in Exhibit C).
FS-3 Notes to New NiSource Unaudited Pro Forma Condensed Consolidated
Financial Statements. (Included in Exhibit C).
FS-4 NiSource Consolidated Balance Sheet as of December 31, 1999.
(Included in Exhibit G-1).
FS-5 NiSource Consolidated Statement of Income for the twelve months
ended December 31, 1999. (Included in Exhibit G-1).
50
<PAGE>
FS-6 Columbia Consolidated Balance Sheet as of December 31, 1999.
(Included in Exhibit G-2).
FS-7 Columbia Consolidated Statement of Income for the twelve months
ended December 31, 1999. (Included in Exhibit G-2).
51
<PAGE>
SIGNATURES
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, as amended, each of the undersigned companies has duly caused this
Amendment filed herein to be signed on its behalf by the undersigned thereunto
duly authorized.
NISOURCE INC.
/s/ Gary L. Neale
---------------------------------------
Name: Gary L. Neale
Title: Chairman, President and
Chief Executive Officer
NEW NISOURCE INC.
/s/ Gary L. Neale
---------------------------------------
Name: Gary L. Neale
Title: Chairman, President and
Chief Executive Officer
COLUMBIA ENERGY GROUP
/s/ M.W. O'Donnell
---------------------------------------
Name: M.W. O'Donnell
Title: Senior Vice President and
Chief Financial Officer
Date: October 30, 2000
52
