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NiSource, Columbia Shareholders Approve Merger

NiSource, Columbia Shareholders Approve Merger

Shareholders of NiSource Inc. and Columbia Energy Group overwhelmingly approved the merger of the two companies, which would create a mega energy powerhouse serving nine states and more than 4 million customers, stretching from Chicago in the west to New England in the east and south to the Gulf of Mexico.

NiSource shareholders gave a thumbs up with nearly 65% of the outstanding shares in approval, representing 80% of the shares voted. More than 66 percent of Columbia shares were voted in favor of the merger, representing a 98% approval of the shares voted.

The merger still has to jump some major hurdles before it is completed. Last week, 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 the Ohio Schools Council, Bay Area Council of Governments and the Lake Erie Regional Council of Governments, requests a rehearing on the PUCO order in which it issued a letter to the Securities and Exchange Commission approving the merger. The City of Toledo also has filed in support of a petition filed earlier by the groups asking PUCO for a review. The petition is now pending (see NGI, May 8).

Dismissing the Ohio groups' lawsuit, NiSource chairman, Gary L. Neale said the merger remains "on track" to be completed by the end of the year. He said that a filing with the U.S. Department of Justice under the required Hart-Scott-Rodino Act is scheduled for next week.

The agreement, hammered out by board members of both companies in February (See NGI, March 6), calls for Columbia shareholders to receive $70/share in cash plus a $2.60 face value SAILS(SM) (a unit consisting of a zero coupon debt security with a four-year forward equity contract). Columbia shareholders also have the option to receive new holding company stock in a tax-free exchange, for up to 30% of the outstanding Columbia shares. Under the common stock option, each Columbia share will be exchanged for $74 in new holding company stock subject to a collar. If the average NiSource share price during the 30 days prior to closing of the transaction is $16.50 or below, Columbia shareholders will receive 4.4848 shares of new holding company stock for each Columbia share.

Neale, who pursued Columbia in a fierce battle that turned into a friendly takeover, told shareholders the vote "demonstrates growing investor confidence in our plan to transform NiSource from a solid regional player into the...nation's largest natural gas distribution company east of the Rockies." The Columbia merger "creates a powerful platform for growing shareholder value, accessing 30% of the nation's population and 40% of U.S. energy demand."

Neale pointed to statistics that show a projected growth in the markets of 60% to 35 TCF by 2020. "Nearly half of that demand growth will be located in the energy corridor from the Gulf of Mexico to New England, and will be driven by new technologies we are pioneering, such as distributed generation."

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

When combined, Neale said the company would realize synergies ranging from $98 million in 200l to $185 million in 2005, primarily by implementing shared services for corporate functions and implementing best practices across the organization. Upon completion of the transaction, Columbia Energy Group and NiSource will become wholly owned subsidiaries of a new holding company. The separate companies' corporate headquarters --- NiSource in Merrillville, IN, and Columbia in Herndon, VA --- are expected to be retained.

Still, Ohio Schools Council Executive Secretary Joe Lesak promises to take his groups' lawsuit all the way to the Ohio Supreme Court, if necessary. Lesak said in May that the merger would "negatively impact tax revenues for Ohio, and said that NiSource would raise its rates and cut the workforce.

"We are hopeful the PUCO will grant our rehearing and conduct a full review of the concerns the schools and the City of Toledo have raised with this merger," Lesak said. "The schools are concerned about the lack of any of the $100-plus million annual merger benefits being passed on to Columbia Gas of Ohio ratepayers; exorbitant transaction fees and golden parachute pay outs to Columbia executives; over $8 billion of debt being assumed by NiSource and the adverse financial effect of that debt cost on Columbia Gas ratepayers, the potential loss of tax revenues to Ohio schools; NiSource's problematic utility service record in Indiana and other important issues. We believe the PUCO needs to conduct a formal proceeding to review all of these issues because there are no benefits to Ohio schools and other ratepayers from this merger."

The rehearing application filing with PUCO is the first step before filing an appeal with the Ohio Supreme Court, a move Lesak said his groups are prepared to do. PUCO has not scheduled the groups' earlier request yet, and had no comment on the rehearing application.

Carolyn Davis, Houston

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