Holding Company Act Release 27567
SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27567; 70-9681)
NiSource Inc., et al.
Supplemental Order Authorizing Tax Allocation Agreement; Reservation of Jurisdiction
September 12, 2002
NiSource Inc. ("NiSource"), a registered holding company; its utility subsidiaries: Northern Indiana Public Service Company ("Northern Indiana"); Kokomo Gas and Fuel Company ("Kokomo") and its subsidiary; Northern Indiana Fuel and Light Company ("NIFL") and its subsidiary, all located in Merrillville, Indiana; Bay State Gas Company ("Bay State"); Northern Utilities, Inc. ("Northern Utilities"), both located in Westborough, Massachusetts; Columbia Gas of Kentucky, Inc. ("Columbia Kentucky"); Columbia Gas of Ohio, Inc. ("Columbia Ohio"); Columbia Gas of Maryland, Inc. ("Columbia Maryland"); Columbia Gas of Pennsylvania, Inc. ("Columbia Pennsylvania"); and Columbia Gas of Virginia, Inc. ("Columbia Virginia"), all located in Columbus, Ohio; Columbia Energy Group ("Columbia"), a subsidiary registered holding company of NiSource, Merrillville, Indiana; and NiSource's nonutility subsidiaries: NiSource Corporate Services Company; EnergyUSA, Inc., (an Indiana corporation) and its subsidiaries; Primary Energy, Inc. and its subsidiaries; NiSource Capital Markets, Inc.; NiSource Finance Corp. ("NiSource Finance"); NiSource Pipeline Group, Inc. and its subsidiaries; NiSource Development Company, Inc. and its subsidiaries; NI Energy Services, Inc. and its subsidiaries; NiSource Energy Technologies, Inc.; Columbia Atlantic Trading Corporation; Columbia Energy Group Capital Corporation and its subsidiaries; Columbia Pipeline Corporation and its subsidiaries; Columbia Energy Services Corporation; Columbia Remainder Corporation, all located in Merrillville, Indiana; Columbia Insurance Corporation, Ltd, Hamilton HM CX, Bermuda; Columbia Energy Resources, Inc. and its subsidiaries, Charleston, West Virginia; Columbia Gas Transmission Corporation; Columbia Transmission Communications Corporation, Fairfax, Virginia; IWC Resources Corporation ("IWCR") and its subsidiaries, Indianapolis, Indiana; Columbia Accounts Receivable Corporation; Columbia Service Partners, Inc. and its subsidiaries; Columbia Network Services Corporation and its subsidiary, all located in Columbus, Ohio; Columbia Gulf Transmission Company, Houston, Texas; and Bay State GPE, Inc., both located in Westborough, Massachusetts (collectively, "Applicants"), have filed with the Securities and Exchange Commission ("Commission") a post-effective amendment ("Post-Effective Amendment") under section 12(b) of the Act and rule 45 under the Act to a previously submitted application-declaration ("Application"). The Commission issued a notice of the Application on September 26, 2000.1
NiSource became a registered holding company on November 1, 2000, following the acquisition of Columbia, which is also a registered holding company.2 NiSource owns, directly or indirectly, all of the issued and outstanding common stock of Northern Indiana, Kokomo, NIFL, Bay State, and Northern Utilities, which were the pre-merger public-utility subsidiaries of NiSource; and indirectly through Columbia, all of the issued and outstanding common stock of Columbia Kentucky, Columbia Maryland, Columbia Ohio, Columbia Pennsylvania, Columbia Virginia (collectively, the "Utility Subsidiaries"). Together, the Utility Subsidiaries distribute gas at retail in portions of Indiana, Ohio, Virginia, Maryland, Kentucky, Pennsylvania, Massachusetts, New Hampshire and Maine. Northern Indiana also generates, transmits and sells electricity in a portion of Indiana.
NiSource also holds directly or indirectly numerous non-utility subsidiaries and investments. Its principal non-utility subsidiaries are: NiSource Corporate Services Company, a subsidiary service company; EnergyUSA, Inc., which serves as the holding company for subsidiaries that are engaged in energy marketing and in providing energy management services; Primary Energy, Inc., which develops and invests in cogeneration and other large industrial energy facilities; IWCR, which was previously the holding company for several water distribution companies;3 NiSource Pipeline Group, Inc., which is a holding company for certain of NiSource's interstate pipeline companies; NiSource Development Company, Inc., which holds investments in various businesses, primarily in real estate, that are intended to complement NiSource's energy businesses; Columbia Gas Transmission Corporation and Columbia Gulf Transmission Company, which are interstate pipeline companies; and Columbia Energy Resources, Inc, which, through subsidiaries, explores for, develops, gathers and produces natural gas and oil in the United States and Canada. A more complete description of NiSource and its subsidiaries is contained in the Commission's order, dated October 30, 2000, approving NiSource's acquisition of Columbia.4
By order dated November 1, 2000 in this file ("Financing Order"), the Commission authorized NiSource and its subsidiaries to engage in a program of external financing and intrasystem financing, and other related transactions, for the period through December 31, 2003 ("Authorization Period").5 In the Financing Order, the Commission reserved jurisdiction over, among other things, a proposed tax allocation agreement ("Tax Allocation Agreement") that will allocate the consolidated income tax liability of NiSource among the members of the consolidated group.
NiSource organized NiSource Finance to facilitate financing the cash portion of the consideration paid to Columbia's shareholders in the merger. At the closing of the merger, NiSource Finance issued $4,144,501,483 of commercial paper, back-stopped by a 364-day revolving credit facility, to finance the cash portion of the merger consideration and other related costs of the transaction.
Subsequently, between November 14, 2000 and April 6, 2001, NiSource Finance issued and sold a total of $2.95 billion of senior unsecured notes with varying maturities between April 15, 2003 and November 15, 2010. On November 27, 2000, NiSource issued 11.5 million shares of common stock and used the net proceeds ($280.9 million) to reduce the outstanding amount of commercial paper issued by NiSource Finance.
NiSource guarantees NiSource Finance's commercial paper and senior unsecured notes.6
NiSource also issued to Columbia's shareholders equity-linked securities called "SAILS" that consist of a zero-coupon debenture coupled with a forward equity contract requiring the holder to purchase common stock of NiSource on the fourth anniversary of the closing of the merger. The aggregate face amount of the debentures embedded in the SAILS was approximately $114.4 million at the time of issuance. Under the Internal Revenue Code, the difference between the face amount of the debenture at maturity ($2.60 per unit) and the fair market value of the debenture on the date of issuance is treated as original issue discount ("OID"). The OID is reported as taxable income by the holders of the SAILS and as a deductible interest expense by NiSource on a yield-to-maturity basis during the four-year period that the SAILS are outstanding.
The term "Acquisition Debt," used below, includes the senior unsecured notes issued by NiSource, as described above, the debentures embedded in the SAILS, and that portion (approximately $913.6 million at December 31, 2001) of the commercial paper issued at closing that was not subsequently retired or refinanced with the proceeds of common stock and senior unsecured notes. The term also includes indebtedness that may be incurred by NiSource or NiSource Finance during the Authorization Period for the purpose of refinancing any of this indebtedness. The remaining amount of outstanding floating rate Acquisition Debt has been further reduced since December 31, 2001 through the application of the net cash proceeds of the sale of the assets or securities of certain non-utility subsidiaries of NiSource, including, principally, the assets of IWCR and its subsidiaries, which were sold on April 30, 2002. At June 30, 2002, the floating rate portion of the Acquisition Debt was $515.6 million.
The interest expense on the Acquisition Debt in 2001 was $253.8 million. NiSource estimates that the annual interest expense on the Acquisition Debt in 2002 and subsequent years, assuming no further reductions in the amount outstanding and no change in short-term interest rates, will be approximately $248 million. Because NiSource and its consolidated subsidiaries will file a consolidated income tax return, the interest expense on the Acquisition Debt will offset the group's consolidated taxable income and therefore reduce the overall tax liability of the group. NiSource estimates that the interest expense on the Acquisition Debt in 2001 will reduce the group's tax liability by about $88 million.7 However, as discussed below, unless the relief requested in this post-effective amendment is granted, NiSource would not be able to retain, or share in, the tax benefit (i.e., the reduction in the group's income tax liability) that is associated with the interest it pays on the Acquisition Debt. Rather, under rule 45(c), the benefit of the interest expense would have to be allocated to other members of the group with a positive allocation of tax (primarily the Utility Subsidiaries and the large pipeline subsidiaries).
II. Tax Allocation Agreement
Applicants request that the Commission issue a supplemental order releasing jurisdiction of the Tax Allocation Agreement reserved over in the Financing Order. Applicants propose to allocate their consolidated income tax liability in accordance with the Tax Allocation Agreement through December 31, 2003, the end of the authorization period of the Financing Order.8
Section 12(b) of the Act and rule 45(a) under the Act prohibit a registered holding company or any of its subsidiaries from lending to, extending its credit in any manner to, indemnifying, or making a donation or capital contribution to any company in the same holding-company system without prior Commission approval.
Under the Tax Allocation Agreement, the consolidated tax will be allocated among the members of the group in proportion to the separate return tax of each member, provided that the tax apportioned to any subsidiary company of NiSource will not exceed the "separate return tax" of the subsidiary. This is the method of allocation permitted under rule 45(c)(2)(ii). The Tax Allocation Agreement, however, does not qualify for the exemption from the requirements of rule 45(a) because NiSource will retain the benefits, in the form of reductions in consolidated taxes, attributable to the interest expense on the Acquisition Debt.9
Applicants state that the proposed Tax Allocation Agreement assigns the tax benefit associated with the interest expense on the Acquisition Debt to NiSource, the entity that is legally obligated for payment of that interest expense. In addition, the proposed Tax Allocation Agreement will not shift a larger portion of the group's tax liability to any member than the member would otherwise pay on a separate return basis. Exhibit K-1 to the Application illustrates the difference between the rule 45(c) method and the proposed method in the amounts of tax that would be allocated to the members of the NiSource group .10
Applicants state that, for purposes of rule 54, the conditions specified in rule 53(a) are satisfied and that none of the adverse conditions specified in rule 53(b) exist. As a result, the Commission will not consider the effect on the NiSource system of the capitalization or earnings of any NiSource subsidiary that is an exempt wholesale generator or foreign utility company, as those terms are defined in sections 32 and 33 of the Act, respectively, in determining whether to approve the proposed transaction.
The Maine Public Utilities Commission authorized the Tax Allocation Agreement with respect to Northern Utilities. The Pennsylvania Public Utility Commission authorized the Tax Allocation Agreement with respect to Columbia Pennsylvania. The State Corporation Commission of Virginia authorized the Tax Allocation Agreement with respect to Columbia Virginia. In addition, Northern Utilities must file a copy of the Tax Allocation Agreement with the New Hampshire Public Utilities Commission, for notice purposes, within 10 days after the date on which it is executed, and Bay State Gas Company must file a copy of the Tax Allocation Agreement, for notice purposes, with the Massachusetts Department of Telecommunications and Energy. Either commission could, sua sponte, institute a proceeding and hold hearings on the Tax Allocation Agreement. However, NiSource states that neither commission has taken any action.
Except as stated above, no other state commission, and no federal commission, other than this Commission, has jurisdiction over the Tax Allocation Agreement. NiSource estimates that the fees and expenses incurred or to be incurred in connection with its proposal will not exceed $15,000.
Upon the basis of the facts in the record, it is hereby found that the applicable standards of the Act and rules under the Act are satisfied, and that no adverse findings are necessary.
IT IS ORDERED, under the applicable provisions of the Act and rules under the Act, that, except as to those matters over which jurisdiction is reserved, the Application, as amended, be allowed to take effect immediately, subject to the terms and conditions prescribed in rule 24 under the Act; provided that NiSource will file, as an exhibit to its Annual Report on Form U5S, beginning with its Annual Report for 2002, a table in the form of Exhibit L that identifies each component of the Acquisition Debt, the associated interest expense, and the amounts and dates of any prepayments or retirements in the outstanding balance of the Acquisition Debt. Further, NiSource will file, by an amendment to its Annual Report on Form U5S within 30 days of the date on which it files its consolidated tax return, a spreadsheet that shows the actual allocation of income taxes to each of the members of the consolidated group and that portion of tax (or negative tax) that is attributable to the interest expense on the Acquisition Debt.
IT IS FURTHER ORDERED, that jurisdiction continue to be reserved over:
(1) the energy marketing activities by any nonutility subsidiary outside the United States and Canada; (2) the proposed gas exploration and production activities outside the United States and Canada; (3) investments in pipeline and storage facilities outside the United States; and (4) any other energy-related activities of nonutility subsidiaries outside the United States.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
Margaret H. McFarland
1 HCAR No. 27236.
2 The Commission authorized the acquisition by order dated October 30, 2000 (HCAR No. 27263).
3 The principal operating assets of IWCR and its subsidiaries were recently sold in accordance with the Commission's divestiture order under section 11(b)(1) of the Act.
4 HCAR No. 27263.
5 HCAR No. 27265. By supplemental order, the Commission approved an increase in short-term borrowings by NiSource (HCAR No. 27361 (March 21, 2001)).
6 NiSource's commercial paper is rated A-2 by Standard and Poor's ("S&P") and P-3 by Moody's Investor Services ("Moody's"). Its long-term unsecured debt is rated BBB by S&P and Baa3 by Moody's.
7 NiSource calculates this estimate by applying a hypothetical 35% tax rate to the consolidated taxable income of the group.
8 Applicants will file a new application/declaration to extend the period in which they may allocate consolidated income taxes in accordance with the Tax Allocation Agreement past December 31, 2003. This application/declaration will include, among other things, information on the actual and pro forma effect of the proposed tax allocation method on the capitalization and cash flow of the members of the NiSource group for the period covered by any requested extension.
9 An exemption from the requirements of rule 45(a) is not available because rule 45(c)(5) requires NiSource to reallocate these benefits to its subsidiary companies.
10 When Exhibit K-1 was prepared and filed in this proceeding, NiSource assumed that annual interest expense on the Acquisition Debt would be about $280 million. In fact, NiSource states in the Post-Effective Amendment that interest expense on the Acquisition Debt in 2001 was $253.8 million, and is estimated at approximately $248 million in 2002 and later years, assuming no change in interest rates and no further principal repayments.