Columbia Energy Group shareholders today are expected to approvethe company’s proposed merger with NiSource Inc., which wouldcreate a mega energy powerhouse serving nine states and more than 4million customers, stretching from Chicago in the west to NewEngland in the east and south to the Gulf of Mexico. NiSourceshareholders gave a thumbs up yesterday, with nearly 65% of theoutstanding shares in approval, representing 80% of the sharesvoted.

Even if Columbia shareholders vote to approve the proposal asexpected today in a special meeting, the merger still has to jump somemajor hurdles before it is approved. Yesterday, three Ohio groups,which make up 115 school districts in the northern part of the state,filed a lawsuit asking the Public Utilities Commission of Ohio (PUCO)to reconsider its May 2 approval. The lawsuit, which was filed by theOhio Schools Council, Bay Area Council of Governments and the LakeErie Regional Council of Governments, requests a rehearing on the PUCOorder in which it issued a letter to the Securities and ExchangeCommission approving the merger. The City of Toledo also has filed insupport of a petition filed earlier by the groups asking PUCO for areview. The petition is now pending (see Daily GPI, May 8).

Dismissing the Ohio groups’ lawsuit, NiSource chairman, Gary L.Neale said the merger remains “on track” to be completed by the endof the year. He said that a filing with the U.S. Department ofJustice under the required Hart-Scott-Rodino Act is scheduled fornext week.

The agreement, hammered out by board members of both companies inFebruary (see Daily GPI, Feb. 29), callsfor Columbia shareholders to receive $70/share in cash plus a $2.60face value SAILS(SM) (a unit consisting of a zero coupon debt securitywith a four-year forward equity contract). Columbia shareholders alsohave the option to receive new holding company stock in a tax-freeexchange, for up to 30% of the outstanding Columbia shares. Under thecommon stock option, each Columbia share will be exchanged for $74 innew holding company stock subject to a collar. If the average NiSourceshare price during the 30 days prior to closing of the transaction is$16.50 or below, Columbia shareholders will receive 4.4848 shares ofnew holding company stock for each Columbia share.

Neale, who pursued Columbia in a fierce battle that turned intoa friendly takeover, told shareholders yesterday the vote”demonstrates growing investor confidence in our plan to transformNiSource from a solid regional player into the…nation’s largestnatural gas distribution company east of the Rockies.” The Columbiamerger “creates a powerful platform for growing shareholder value,accessing 30% of the nation’s population and 40% of U.S. energydemand.”

Neale pointed to statistics that show a projected growth in themarkets of 60% to 35 TCF by 2020. “Nearly half of that demandgrowth will be located in the energy corridor from the Gulf ofMexico to New England, and will be driven by new technologies weare pioneering, such as distributed generation.”

The $6.1 billion merger will be financed with approximately $3.1billion in debt, $1 billion in non-core asset sales from bothorganizations, and nearly $2 billion in common equity andSAILS(SM). Columbia shareholder interest in receiving NiSourcestock has resulted in an increase in the projected common equityportion of the purchase from 23% to the maximum of 30%, reducingthe amount of debt financing required.

When combined, Neale said the company would realize synergiesranging from $98 million in 200l to $185 million in 2005, primarilyby implementing shared services for corporate functions andimplementing best practices across the organization. Uponcompletion of the transaction, Columbia Energy Group and NiSourcewill become wholly owned subsidiaries of a new holding company. Theseparate companies’ corporate headquarters — NiSource inMerrillville, IN, and Columbia in Herndon, VA — are expected tobe retained.

Still, Ohio Schools Council Executive Secretary Joe Lesakpromises to take his groups’ lawsuit all the way to the OhioSupreme Court, if necessary. Lesak said in May that the mergerwould “negatively impact tax revenues for Ohio, and said thatNiSource would raise its rates and cut the workforce.

“We are hopeful the PUCO will grant our rehearing and conduct afull review of the concerns the schools and the City of Toledo haveraised with this merger,” Lesak said. “The schools are concernedabout the lack of any of the $100-plus million annual mergerbenefits being passed on to Columbia Gas of Ohio ratepayers;exorbitant transaction fees and golden parachute pay outs toColumbia executives; over $8 billion of debt being assumed byNiSource and the adverse financial effect of that debt cost onColumbia Gas ratepayers, the potential loss of tax revenues to Ohioschools; NiSource’s problematic utility service record in Indianaand other important issues. We believe the PUCO needs to conduct aformal proceeding to review all of these issues because there areno benefits to Ohio schools and other ratepayers from this merger.”

The rehearing application filing with PUCO is the first stepbefore filing an appeal with the Ohio Supreme Court, a move Lesaksaid his groups are prepared to do. PUCO has not scheduled thegroups’ earlier request yet, and had no comment on the rehearingapplication.

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