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U.S. Securities and Exchange Commission

SECURITIES AND EXCHANGE COMMISSION

(Release No. 35-27789; 70-10169)

NiSource, Inc., et al.

Order Authorizing Various External and Intrasystem Financing and Related Transactions; Reservations of Jurisdiction

December 30, 2003

NiSource Inc. ("NiSource"), a public-utility holding company registered under the Public Utility Holding Company Act of 1935, as amended ("Act"), and its public-utility company subsidiaries, Northern Indiana Public Service Company ("Northern Indiana"), Kokomo Gas and Fuel Company ("Kokomo"), Northern Indiana Fuel and Light Company, Inc. ("NIFL"), all located at Merrillville, Indiana; Bay State Gas Company ("Bay State"), Northern Utilities, Inc. ("Northern Utilities"), both gas utility companies and both located at Westborough, Massachusetts; 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"), Columbia Gas of Virginia, Inc. ("Columbia Virginia"), all gas utility companies and located at Columbus, Ohio; Columbia Energy Group ("Columbia"), a subsidiary registered public-utility holding company, Merrillville, Indiana; and NiSource's nonutility subsidiaries, NiSource Corporate Services Company ("NiSource Services"), a subsidiary service company, EnergyUSA, Inc., and its subsidiaries, PEI Holdings, Inc. (f/k/a Primary Energy, Inc.), NiSource Capital Markets, Inc. ("Capital Markets"), NiSource Finance Corp. ("NiSource Finance"), Granite State Transmission, Inc., Crossroads Pipeline Company, NiSource Development Company, Inc., and its subsidiaries, NI Energy Services, Inc., and its subsidiaries, NiSource Energy Technologies, Inc., IWC Resources Corporation and its subsidiaries, Columbia Atlantic Trading Corporation, Columbia Deep Water Services Company, Columbia Energy Services Corporation, Columbia Remainder Corporation and its subsidiary, all at Merrillville, Indiana; Columbia Accounts Receivable Corporation, Columbus, Ohio; Columbia Gas Transmission Corporation, Fairfax, Virginia; Columbia Gulf Transmission Company, Houston, Texas; Columbia Network Services Corporation and its subsidiary, both Columbus, Ohio; and NiSource Insurance Corporation Limited (f//a Columbia Insurance Corporation, Ltd.), Hamilton, Bermuda (collectively "Applicants"), have filed with the Securities and Exchange Commission ("Commission") an application-declaration, as amended ("Application"), under sections 6(a), 7, 9(a), 10, 12(b), (c) and (f) and 13(b) of the Act and rules 26(c), 45(a) and (c), 46 and 54 under the Act. The Commission issued a notice of the filing of the Application on November 21, 2003 (Holding Co. Act Release No. 27767).

NiSource and its subsidiaries seek authorization to engage in a program of external and intrasystem financing, to issue guarantees and other forms of credit support, to organize and acquire the securities of specified types of new subsidiaries, to pay dividends out of capital and unearned surplus, to reorganize subsidiaries and to engage in other related transactions through December 31, 2006 ("Authorization Period").1

I. Background

NiSource and its wholly owned subsidiary, Columbia, also a registered public-utility holding company, own ten public-utility company subsidiaries: Northern Indiana, Kokomo, NIFL, Bay State,2 Northern Utilities, Columbia Kentucky, Columbia Maryland, Columbia Ohio, Columbia Pennsylvania and Columbia Virginia (collectively "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 21 counties in the northern part of Indiana.

NiSource also holds, directly or indirectly, numerous nonutility subsidiaries and investments.3 The term "Nonutility Subsidiaries" shall mean each of the direct and indirect nonutility subsidiaries of NiSource (other than Columbia). The term "Nonutility Subsidiaries" also includes any direct or indirect nonutility subsidiary acquired or formed, directly or indirectly, by NiSource after the effective date of the order in this proceeding or in a transaction that is exempt under the Act (specifically, sections 32, 33 and 34) or the rules under the Act (including, specifically, rule 58). The term "Subsidiaries" means the Utility Subsidiaries and the Nonutility Subsidiaries.

Applicants request the following authorizations through the Authorization Period:

  1. For NiSource to increase its capitalization4 by issuing and selling (i) directly, additional shares of Common Stock or options, warrants, forward equity purchase contracts, or other rights that are exercisable or exchangeable for or convertible into Common Stock, equity-linked securities ("Equity-linked Securities") and Preferred Stock, (ii) indirectly, through one or more Financing Subsidiaries, other types of preferred securities (including trust preferred securities) (together "Preferred Securities"), and (iii) directly, or indirectly, through one or more Financing Subsidiaries, unsecured long-term debt securities having maturities of one year or more of up to 50 years ("Long-term Debt") and unsecured short-term indebtedness having maturities of less than one year ("Short-term Debt");
     
  2. For Columbia to increase its capitalization by issuing additional shares to NiSource and/or unsecured long-term debt securities to NiSource or a financing subsidiary ("Financing Subsidiary"), as further defined below in section VII (Financing Subsidiaries), of NiSource or to third party lenders;
     
  3. For Columbia Maryland to issue and sell, and Columbia to acquire, additional shares of Columbia Maryland's common stock and unsecured and secured long-term debt securities;
     
  4. For NiSource, through Nonutility Subsidiaries, to lend at interest rates and maturities designed to provide a return of not less than its effective cost of capital;
     
  5. To continue the Money Pool, as defined below, on terms and conditions previously authorized and to permit additional Nonutility Subsidiaries to participate, as investors only, without further Commission approval;
     
  6. For NiSource, directly or through Financing Subsidiaries, and Columbia to guarantee indebtedness or contractual obligations or provide other forms of credit support ("Parent Guarantees") on behalf of, or for, the Subsidiaries;
     
  7. For Nonutility Subsidiaries to provide guarantees of indebtedness or contractual obligations, or other credit support, on behalf of, or for, the other Nonutility Subsidiaries ("Nonutility Subsidiary Guarantees");
     
  8. For NiSource, Columbia and the Subsidiaries to enter into interest rate hedging transactions ("Interest Rate Hedges") and or anticipatory hedging transactions ("Anticipatory Hedges") with respect to interest rates;
     
  9. For NiSource and the Subsidiaries to change the terms of the authorized capitalization of any Subsidiary;
     
  10. For NiSource to acquire the equity securities of one or more additional Financing Subsidiaries, to guarantee securities issued by Financing Subsidiaries and to issue its unsecured subordinated notes to any Financing Subsidiary;
     
  11. For NiSource to acquire equity securities of intermediate subsidiaries exclusively organized to acquire, finance and hold securities of existing or future Nonutility Subsidiaries, including, but not limited to, EWGs, foreign utility holding companies ("FUCOs"), exempt telecommunications companies ("ETCs") and subsidiaries, the acquisition of which is exempt under rule 58 ("Rule 58 Subsidiaries") (all "Intermediate Subsidiaries"), and to permit the Intermediate Subsidiaries to provide management, administrative, project development and operating services to those entities;
     
  12. For NiSource to reorganize its Nonutility Subsidiaries and their activities and functions;
     
  13. For Nonutility Subsidiaries (including Intermediate Subsidiaries) to expend up to $250 million on preliminary development activities relating to potential nonutility investments;
     
  14. For Nonutility Subsidiaries, under certain circumstances described below, to perform services and sell goods to each other at fair market prices, determined without regard to "cost;"
     
  15. For NiSource, on behalf of Nonutility Subsidiaries, to engage in certain types of nonutility activities outside the United States and to invest in "gas-related" assets (i.e., natural gas transportation and storage facilities and oil and gas exploration and production assets) and, in each case, reserving jurisdiction, pending completion of the record;
     
  16. For Columbia, and for Nonutility Subsidiaries, to pay dividends out of capital and unearned surplus and/or to reacquire shares of its common stock held by NiSource, and by any associate company, respectively; and

Applicants also seek authority to allocate consolidated income tax liabilities, in accordance with their Tax Allocation Agreement, for tax year 2003 and future tax years.

II. The Proposed External Financings

A. General Terms and Conditions for External Financings

Financing transactions with third parties will be subject to the following general terms and conditions (including, without limitation, securities issued for the purpose of refinancing or refunding outstanding securities of the issuer) ("Financing Parameters").

Effective Cost of Money. The effective cost of capital on Preferred Stock, Equity-linked Securities, Preferred Securities, Long-term Debt and Short-term Debt will not exceed competitive market rates available at the time of issuance for securities having the same or reasonably similar terms and conditions issued by similar companies of reasonably comparable credit quality. Applicants state that in no event will the effective cost of capital (i) on any series of Long-term Debt, exceed 500 basis points over a U.S. Treasury security having a remaining term equal to the term of such series, (ii) on any series of Preferred Stock, Preferred Securities or Equity-linked Securities, exceed 600 basis points over a U.S. Treasury security having a remaining term equal to the term of such series, and (iii) on Short-term Debt, exceed 500 basis points over the London Interbank Offered Rate ("LIBOR") for maturities of less than one year.

Maturity. The maturity of Long-term Debt will be between one and 50 years after the issuance. Preferred Securities and Equity-linked Securities will be redeemed no later than 50 years after the issuance, unless converted into common stock. Preferred Stock issued directly by NiSource may be perpetual in duration.

Issuance Expenses. The underwriting fees, commissions or other similar remuneration paid in connection with the non-competitive issue, sale or distribution of securities will not exceed the greater of (i) 5% of the principal or total amount of the securities being issued, or (ii) issuance expenses that are generally paid at the time of the pricing for sales of the particular issuance, having the same or reasonably similar terms and conditions issued by similar companies of reasonably comparable credit quality.

Common Equity Ratio. At all times during the Authorization Period, NiSource, Columbia and each Utility Subsidiary will maintain common equity of at least 30% of its consolidated capitalization (common equity, preferred stock, long-term debt and short-term debt); nevertheless, NiSource and Columbia will be authorized to issue common stock (including common stock issued under stock-based plans maintained for shareholders, employees and management) to the extent authorized.

Investment Grade Ratings. Applicants represent that, except for securities issued for the purpose of funding Money Pool operations, no guarantees or other securities, other than common stock, may be issued in reliance upon the authorization to be granted by the Commission, unless (i) the security to be issued, if rated, is rated investment grade; (ii) all outstanding securities of the issuer, that are rated, are rated investment grade; and (iii) all outstanding securities of the top level registered holding company, that are rated, are rated investment grade ("Investment Grade Condition"). For purposes of this Investment Grade Condition, a security will be deemed to be rated "investment grade" if it is rated investment grade by at least one nationally recognized statistical rating organization, as that term is used in paragraphs (c)(2)(vi)(E), (F) and (H) of rule 15c3-1 under the Securities Exchange Act of 1934, as amended.

Applicants request that the Commission reserve jurisdiction over the issuance of any of such securities that are rated below investment grade. Applicants further request that the Commission reserve jurisdiction over the issuance of any guarantee or other securities at any time that the conditions set forth in clauses (i) through (iii) above are not satisfied.

B. NiSource External Financing

NiSource requests authorization, through the Authorization Period, to increase its capitalization through the issuance and sale of Common Stock, Preferred Stock, Preferred Securities, Equity-linked Securities and/or unsecured Long-term Debt. The aggregate amount of new long-term financing obtained by NiSource, during the Authorization Period, from the issuance and sale of Common Stock, when combined with the amount of new financing obtained from the issuance and sale of Preferred Stock, Preferred Securities, Equity-linked Securities and/or Long-term Debt, shall not exceed $6 billion. Applicant states, however, that (a) securities issued for purposes of refunding or replacing other outstanding long-term securities, where NiSource's capitalization is not increased as a result, and (b) any shares of Preferred Stock issued under the NiSource Shareholder Agreement ("Rights Plan") shall not be counted against this limitation.

NiSource also requests authority to issue and sell, directly or indirectly, through one or more Financing Subsidiaries, Short-term Debt in an aggregate principal amount at any time outstanding not to exceed $2.5 billion. All securities issued by NiSource under this authorization, including, without limitation, securities issued for the purpose of refunding or retiring outstanding securities, will comply with the Financing Parameters described above.

C. Financing by Columbia

To provide capital to its subsidiaries, as well as to retire and/or prepay its outstanding long-term indebtedness, Columbia requests authorization to issue (1) additional shares of its common stock directly to NiSource and (2) unsecured notes evidencing long-term borrowings from NiSource Finance or another Financing Subsidiary of NiSource and/or unaffiliated third party lenders in an aggregate amount not to exceed $3 billion (excluding securities issued for purposes of refunding or replacing other outstanding securities of Columbia where Columbia's capitalization is not increased as a result). The interest rate and maturity of any series of long-term debt securities issued by Columbia to NiSource Finance or another Financing Subsidiary of NiSource will parallel the effective cost of funds of Long-term Debt recently issued by NiSource Finance or any other Financing Subsidiary of NiSource. Applicants state further that, in the event no Long-term Debt was issued during the previous calendar quarter, then the interest rate and maturity of any series of long-term debt securities issued by Columbia to NiSource Finance, or another Financing Subsidiary of NiSource, will be either the estimated new long-term rate that would be in effect if NiSource Finance, or another Financing Subsidiary of NiSource, were to issue Long-term Debt, as projected by a major investment bank, or the prevailing market rate for a newly issued utility bond rated BBB. Long-term debt securities of any series of Columbia issued to an unaffiliated third party lender will comply with the Financing Parameters.

D. Utility Subsidiary Financing

Columbia Maryland requests authorization to issue and sell, and Columbia requests authorization to acquire, additional shares of Columbia Maryland's common stock and long-term debt securities, during the Authorization Period. The aggregate amount of common stock and/or long-term debt securities to be issued by Columbia Maryland, during the Authorization Period, will not exceed $40 million. Columbia Maryland will use the proceeds of common stock and long-term debt securities to finance, in part, capital expenditures and other general and corporate purposes.

Long-term notes issued by Columbia Maryland to Columbia may have maturities of up to 30 years and may be either secured or unsecured. The Utility Subsidiaries do not intend to issue any short-term debt securities externally. Instead, the Utility Subsidiaries will satisfy their short-term borrowing needs through borrowings under the Money Pool, described below. See section III (Continuation of Money Pool).

E. Nonutility Subsidiary Financing

NiSource, through the Nonutility Subsidiaries, expects to continue to be active in the development and expansion of energy-related, or otherwise functionally related, nonutility businesses. To finance investments in these competitive businesses, the Nonutility Subsidiaries will need the ability to engage in financing transactions that are commonly accepted for businesses of their type.

NiSource, or a Nonutility Subsidiary, as the case may be, request authority to lend at interest rates and maturities designed to provide a return to the lending company of not less than its effective cost of capital, in the limited circumstances where the Nonutility Subsidiary making the borrowing is not wholly owned, directly or indirectly, by NiSource. In the event loans are made to partially owned Nonutility Subsidiaries, Applicants represent that the company will not sell any services to any associate company unless it falls within one of the categories of companies to which goods and services may be sold on a basis other than "at cost," as described below in section XI (Sales of Services and Goods Among Subsidiaries).

III. Continuation of Money Pool

NiSource, the Utility Subsidiaries and certain Nonutility Subsidiaries request authorization to continue to participate in the money pool ("Money Pool"). The Money Pool participants request authorization, during the Authorization Period, to make unsecured short-term borrowings from the Money Pool, to contribute surplus funds to the Money Pool and to lend and extend credit to (and acquire promissory notes from) one another through the Money Pool. NiSource, directly or indirectly, through NiSource Finance, requests authorization to invest surplus funds and/or lend and extend credit to the participating subsidiaries through the Money Pool.

The following direct and indirect Nonutility Subsidiaries are participants in the Money Pool, in addition to NiSource and Columbia and the ten Utility Subsidiaries:

NiSource Corporate Services Company
EnergyUSA, Inc. (an Indiana corporation)
EnergyUSA-TPC Corp.
EnergyUSA, Inc. (a Massachusetts corporation)
PEI Holdings, Inc.
NiSource Capital Markets, Inc.
NiSource Finance Corp.
Granite State Transmission, Inc.
Crossroads Pipeline Company
NiSource Development Company, Inc.
NI Energy Services, Inc.
NiSource Energy Technologies, Inc.
Columbia Gas Transmission Corporation
Columbia Gulf Transmission Company
Columbia Assurance Agency, Inc.
Columbia Accounts Receivable Corporation
Columbia Atlantic Trading Corporation
Columbia Deep Water Services Company
Columbia Remainder Corporation
Columbia Energy Services Corporation
NiSource Insurance Corporation Limited

Applicants also propose that other existing or new nonutility subsidiaries of NiSource may participate in the Money Pool, as investors only, without further approval of the Commission. NiSource, Columbia, NiSource Finance and Capital Markets will continue to participate in the Money Pool as investors only and not as borrowers. EWGs, FUCOs and ETCs will be excluded specifically from participating in the Money Pool as borrowers.

The Utility Subsidiaries (other than Columbia Virginia) request authority to make borrowings through the Money Pool in the following maximum amounts at any time outstanding:

Utility Subsidiary

Borrowing Limit

Northern Indiana

$1,000,000,000

Kokomo

50,000,000

NIFL

50,000,000

Bay State

300,000,000

Northern Utilities

50,000,000

Columbia Ohio

700,000,000

Columbia Kentucky

80,000,000

Columbia Pennsylvania

300,000,000

Columbia Maryland

50,000,000

Columbia Virginia's borrowings under the Money Pool are exempt under rule 52(a). Borrowings from the Money Pool by participating Subsidiaries that are authorized to borrow from the Money Pool (i.e., "Eligible Borrowers"), other than Utility Subsidiary borrowers, are exempt under rule 52(b).

IV. Guarantees

Parent Guarantees. NiSource, directly or indirectly, through one or more Financing Subsidiaries, and Columbia request authorization to provide Parent Guarantees of debt securities or contractual obligations of any Subsidiary as may be appropriate in the ordinary course of a Subsidiary's business, in an aggregate principal or nominal amount, in the case of NiSource, not to exceed $3.5 billion and, in the case of Columbia, not to exceed $3.5 billion outstanding at any one time. In addition, Applicants state that the amount of any Parent Guarantees of any Subsidiary obligations shall also be subject to the limitations of rule 53(a)(1) or rule 58(a)(1), as applicable. Parent Guarantees may take the form of, among others, direct guarantees, reimbursement undertakings under letters of credit, "keep well" undertakings, indemnification agreements and expense reimbursement agreements. Any Parent Guarantee that is outstanding at the end of the Authorization Period shall remain in force until it expires or terminates in accordance with its terms.

NiSource and Columbia also request authorization to charge each Subsidiary a fee for each Parent Guarantee. The fee proposed will not be greater than the cost, if any, of obtaining the liquidity necessary to perform on the Parent Guarantee (for example, bank line commitment fees or letter of credit fees, plus other transactional expenses) for the period of time that it remains outstanding.

Nonutility Subsidiary Guarantees. In addition to guarantees that may be provided by NiSource directly or indirectly through a Financing Subsidiary or Columbia, as described above, Nonutility Subsidiaries request authority to provide, to other Nonutility Subsidiaries, Nonutility Subsidiary Guarantees (i.e., guarantees of indebtedness or contractual obligations, or other forms of credit support), in an aggregate principal amount not to exceed $2 billion outstanding at any one time, exclusive of any guarantees and other forms of credit support that are exempt under rules 45(b) and 52(b). Any Nonutility Subsidiary guarantees for obligations of Rule 58 Subsidiaries also remain subject to the limits of rule 58(a)(1). Nonutility Subsidiaries request authorization to charge associate companies a fee for each guarantee, determined in the same manner as specified above.

V. Hedging Transactions

NiSource and the Subsidiaries request authorization to enter into Interest Rate Hedges in order to reduce or manage interest rate cost, subject to certain limitations and restrictions.5 NiSource and the Subsidiaries also request authorization to enter into Anticipatory Hedges, subject to certain limitations and restrictions.6 The Applicants will comply with Statement of Financial Accounting Standard ("SFAS") 133 (Accounting for Derivative Instruments and Hedging Activities) and SFAS 138 (Accounting for Certain Derivative Instruments and Certain Hedging Activities) or other standards relating to accounting for derivative transactions as are adopted and implemented by the Financial Accounting Standards Board ("FASB"). The Applicants represent that each Interest Rate Hedge and each Anticipatory Hedge will qualify for hedge accounting treatment under the current FASB standards in effect and as determined as of the date such Interest Rate Hedge or Anticipatory Hedge is entered into. The Applicants will also comply with any future FASB financial disclosure requirements associated with hedging transactions.

VI. Changes in Capitalization of Majority-Owned Subsidiaries

In order to accommodate the proposed sale of capital securities (i.e., common stock or preferred stock) and provide for future issues, NiSource and the Subsidiaries request authority to change the terms of any 50% or more owned Subsidiary's authorized capital stock capitalization, or other equity interests, by an amount deemed appropriate by NiSource or other intermediate parent company. Applicants state that the consents of all other shareholders will have been obtained for the proposed change. This request for authorization is limited to NiSource's 50% or more owned Subsidiaries and is not intended to affect aggregate limits or other conditions.

Applicants further propose that a Subsidiary would be able to change the par value, or to change between par value and no par stock, or to change the form of equity from common stock to limited partnership or limited liability company interests or similar instruments, or from such instruments to common stock, without additional Commission approval. Any action by a Utility Subsidiary would be subject to, and would only be taken upon, the receipt of any necessary approvals by the state commission in the state or states where the Utility Subsidiary is incorporated and doing business. In addition, Applicants state that NiSource will be subject to all applicable laws regarding the fiduciary duty of fairness of a majority shareholder to minority shareholders in any such 50% or more owned Subsidiary and NiSource will undertake to ensure that any change comports with such legal requirements.

VII. Financing Subsidiaries

NiSource requests authority to organize and acquire the equity securities of one or more corporations, trusts, partnerships or other entities organized specifically for the purpose of financing the activities of NiSource and certain of its Subsidiaries ("Financing Subsidiaries"), in addition to the two Financing Subsidiaries previously authorized. Specifically, Financing Subsidiaries may be organized to issue Preferred Securities (including but not limited to monthly income preferred securities), Long-term Debt and Short-term Debt to third parties and to transfer the proceeds of the financings to NiSource or other Subsidiaries.

NiSource also requests authorization to issue its subordinated unsecured notes ("Subordinated Notes") to any Financing Subsidiary to evidence the transfer of financing proceeds by a Financing Subsidiary to NiSource. The principal amount, maturity and interest rate on any such Subordinated Notes will be designed to parallel the amount, maturity and interest or distribution rate on the securities issued by a Financing Subsidiary.

The amount of securities issued by any Financing Subsidiary to third parties will be included in the overall external financing limitation authorized for NiSource. The amount of Subordinated Notes issued by NiSource to its Financing Subsidiary will not be counted against the external financing limit, to avoid double counting. Nisource may, if required, guarantee or enter into support or expense agreements for the Financing Subsidiaries' obligations.

VIII. Intermediate Subsidiaries

NiSource requests authority to acquire, directly or indirectly, during the Authorization Period, the securities of one or more additional Intermediate Subsidiaries, which would be organized exclusively for the purpose of acquiring, holding and/or financing the acquisition of the securities of, or other interest in, one or more EWGs or FUCOs, Rule 58 Subsidiaries, ETCs or other non-exempt Nonutility Subsidiaries (as may be authorized in this proceeding or in a separate proceeding). In addition, NiSource requests that its Intermediate Subsidiaries be permitted to engage in administrative activities and development activities ("Administrative Activities" and "Development Activities," respectively, as defined further below) relating to subsidiaries. "Administrative Activities" include ongoing personnel, accounting, engineering, legal, financial and other support activities necessary to manage NiSource's investments in Nonutility Subsidiaries. "Development Activities" will be limited to due diligence and design review; market studies; preliminary engineering; site inspection; preparation of bid proposals, including posting of bid bonds; application for required permits and/or regulatory approvals; acquisition of site options and options on other necessary rights; negotiation and execution of contractual commitments with owners of existing facilities, equipment vendors, construction firms, power purchasers, thermal "hosts," fuel suppliers and other project contractors; negotiation of financing commitments with lenders and other third party investors; and such other preliminary activities as may be required in connection with the purchase, acquisition, financing or construction of facilities or the acquisition of securities of or interests in new businesses.

NiSource also requests an exemption under section 13(b) of the Act for Intermediate Subsidiaries to provide management, administrative, project development and operating services to associate companies at fair market prices in the specific circumstances discussed further below. See section XI (Sales of Services and Goods Among Subsidiaries).

Applicants state that investments in Intermediate Subsidiaries may take the form of any combination of the following: (1) purchases of capital shares, partnership interests, member interests in limited liability companies, trust certificates or other forms of equity interests; (2) capital contributions; (3) open account advances with or without interest; (4) loans; and (5) guarantees issued, provided or arranged, for the securities or other obligations of any Intermediate Subsidiaries. Applicants state, further, that funds for any direct or indirect investment in any Intermediate Subsidiary will be obtained from (1) financings authorized in this proceeding; (2) any appropriate future debt or equity securities issuance authorized by the Commission for NiSource; and (3) other available cash resources, including proceeds of securities sales by Nonutility Subsidiaries under rule 52.

IX. Reorganizations of Nonutility Subsidiaries

NiSource requests approval to consolidate or otherwise reorganize all, or any part, of its direct and indirect ownership interests in Nonutility Subsidiaries and the activities and functions related to those investments. NiSource requests authorization to consolidate, or otherwise reorganize under one or more, direct or indirect, Intermediate Subsidiaries, NiSource's ownership interests in existing and future Nonutility Subsidiaries. The transactions may take the form of a Nonutility Subsidiary selling, contributing or transferring the equity securities of a subsidiary or all or part of the Subsidiary's assets as a dividend to an Intermediate Subsidiary, or to another Nonutility Subsidiary and the acquisition, directly or indirectly, of the equity securities or assets of a subsidiary, either by purchase or by receipt of a dividend. The purchasing Nonutility Subsidiary in any transaction structured as an intrasystem sale of equity securities or assets may execute and deliver its promissory note evidencing all, or a portion, of the consideration given.

X. Expenditures on Development Activities

NiSource requests a continuation of its authority under the November 1, 2000 Order to make expenditures on Development Activities in an aggregate amount of up to $250 million. NiSource proposes a "revolving fund" concept for permitted expenditures on Development Activities: the revolving fund concept would be that, to the extent expenditures on Development Activities are made for a Nonutility Subsidiary which then becomes an EWG or FUCO, or qualifies as an "energy-related company" under rule 58, the amount expended will cease to be an expenditure for Development Activities and will, instead, be counted as part of the "aggregate investment" in the entity under rule 53 or 58, as applicable.

XI. Sales of Services and Goods Among Subsidiaries

The Nonutility Subsidiaries request an exemption under section 13(b) from the "at cost" standards of rules 90 and 91, to the extent necessary, to provide services and sell goods to one another at fair market prices, determined without regard to cost, where the Nonutility Subsidiary purchasing the service or good is: (i) a FUCO or foreign EWG that derives no part of its income, directly or indirectly, from the generation, transmission, or distribution of electric energy for sale within the U.S.; (ii) an EWG that sells electricity at market-based rates approved by the Federal Energy Regulatory Commission ("FERC"), provided that the purchaser is not Northern Indiana; (iii) a "qualifying facility" ("QF"), within the meaning of the Public Utility Regulatory Policies Act of 1978, as amended ("PURPA"), that sells electricity exclusively (a) at rates negotiated at arms'-length to one or more industrial or commercial customers purchasing electricity for their own use and not for resale, and/or (b) to an electric utility company (other than Northern Indiana) at the purchaser's "avoided cost" determined in accordance with PURPA regulations; (iv) a domestic EWG or QF that sells electricity at rates based upon its cost of service, as approved by FERC or any state public-utility commission having jurisdiction, provided that the purchaser is not Northern Indiana; or (v) a Rule 58 Subsidiary or any other Nonutility Subsidiary that (a) is partially owned by NiSource, so long as the ultimate purchaser of the goods or services is not a Utility Subsidiary, NiSource Services (or any other entity within the NiSource system whose activities and operations are primarily related to the provision of goods and services to Utility Subsidiaries), (b) is engaged solely in the business of developing, owning, operating and/or providing services or goods to Nonutility Subsidiaries, described in clauses (i) through (iv) immediately above, or (c) does not derive, directly or indirectly, any material part of its income from sources within the U.S. and is not a public-utility company operating within the U.S.

XII. Activities of Energy-Related Subsidiaries Outside the U.S.

NiSource, on behalf of any current or future Nonutility Subsidiaries, requests authority for its Nonutility Subsidiaries to engage in certain "energy-related" activities outside the U.S. The activities may include: (i) the brokering and marketing of electricity, natural gas and other energy commodities ("Energy Marketing"); (ii) energy management services ("Energy Management Services"), including the marketing, sale, installation, operation and maintenance of various products and services related to energy management and demand-side management, including energy and efficiency audits; facility design and process control and enhancements; construction, installation, testing, sales and maintenance of (and training client personnel to operate) energy conservation equipment; design, implementation, monitoring and evaluation of energy conservation programs; development and review of architectural, structural and engineering drawings for energy efficiencies, design and specification of energy consuming equipment; and general advice on programs; the design, construction, installation, testing, sales and maintenance of new and retrofit heating, ventilating, and air conditioning, electrical and power systems, alarm and warning systems, motors, pumps, lighting, water, water-purification and plumbing systems, and related structures, in connection with energy-related needs; and the provision of services and products designed to prevent, control, or mitigate adverse effects of power disturbances on a customer's electrical systems; and (iii) engineering, consulting and other technical support services ("Consulting Services") with respect to energy-related businesses, as well as for individuals. Consulting Services would include technology assessments, power factor correction and harmonics mitigation analysis, meter reading and repair, rate schedule design and analysis, environmental services, engineering services, billing services (including consolidation billing and bill disaggregation tools), risk management services, communications systems, information systems/data processing, system planning, strategic planning, finance, feasibility studies and other similar services.

NiSource requests authority for Nonutility Subsidiaries to engage in Energy Marketing activities in Canada. NiSource also requests the Commission to reserve jurisdiction over the same activities outside of the U.S. and Canada, pending completion of the record.

NiSource further requests authority for Nonutility Subsidiaries to provide Energy Management Services and Consulting Services anywhere outside the United States. NiSource also asks the Commission to reserve jurisdiction over other activities of Nonutility Subsidiaries outside the United States, pending completion of the record.

In addition, NiSource requests authorization for Nonutility Subsidiaries to engage in "gas-related company" activities outside the United States, subject to certain proposed limitations and a request for reservation of jurisdiction. Specifically, Nisource proposes that its Nonutility Subsidiaries be approved to engage in the development, exploration and production of natural gas and oil in Canada and to invest up to $300 million in the equity securities or assets of new or existing companies that derive substantially all of their income from these activities in Canada. NiSource also requests approval for Nonutility Subsidiaries to invest, directly or indirectly, through other Subsidiaries, in natural gas pipelines or storage facilities located outside the U.S. Investments in the entities would count against the $300 million investment limitation. NiSource requests the Commission, pending completion of the record, to (1) reserve jurisdiction over the proposed gas-related exploration and production activities in foreign countries, other than Canada, and (2) reserve jurisdiction over investments in gas-related pipeline and storage facilities outside the U.S.

XIII. Distributions Out of Capital or Unearned Surplus

Distributions by Columbia. Columbia requests authorization to transfer some or all of the net proceeds of any sale or sales of the securities or assets of Nonutility Subsidiaries of Columbia to NiSource, either by paying a dividend or by repurchasing shares of its common stock that are held by NiSource. Columbia has sold or entered into agreements to sell the stock or assets of several of its Nonutility Subsidiaries since being acquired by NiSource and seeks to distribute some or all of the proceeds to NiSource. The ability of Columbia to distribute the cash proceeds from the sales to NiSource as a dividend is limited by section 12(c) of the Act and rules 26(c) and 46. Columbia states that it will not pay any dividend to NiSource or repurchase shares of its common stock from NiSource if, as a result, common equity as a percentage of its capitalization would be less than 30% on a consolidated basis.

Payment of Dividends by Nonutility Subsidiaries. NiSource also proposes, on behalf of its current and future Nonutility Subsidiaries, that they be permitted to pay dividends, through the Authorization Period, out of capital and unearned surplus, to the extent permitted under applicable corporate law and the terms of any credit agreements and indentures that restrict the amount and timing of distributions to shareholders.

XIV. Tax Allocation Agreement

Applicants request authorization to continue to file consolidated income tax returns in accordance with the previously approved Tax Allocation Agreement. Applicants are authorized to file consolidated income tax returns and allocate the consolidated income tax liability of the group in accordance with the Tax Allocation Agreement, which does not conform in all respects to the requirements of rule 45(c). See Supplemental Order dated September 12, 2002 (Holding Co. Act Release No. 27567). Specifically, under the Tax Allocation Agreement, NiSource is permitted to retain the benefit (i.e., the tax savings) in consolidated tax liability that is attributable to the interest expense on the acquisition debt incurred in the acquisition of Columbia, including indebtedness that may be incurred by NiSource or NiSource Finance for the purpose of refinancing the debt ("Acquisition Debt"),7 subject to certain limitations and restrictions.

XV. Conclusion

Rule 54 states that, if rule 53(a), (b) and (c) are satisfied, the Commission shall not consider the effect of the capitalization or earnings of subsidiaries of a registered holding company that are EWGs or FUCOs in determining whether to approve other transactions. The Applicants state that the rule 53 standards are met.8 As a result, the Commission will not consider the effect on the NiSource system of the capitalization or earnings of any NiSource EWG (there is no FUCO).

The fees, commissions and expenses incurred or to be incurred in connection with the preparation and filing of the Application are estimated to be no more than $60,000. Fees, commissions and expenses paid in connection with any specific financing transaction will be within the respective limits described above.

Participation in the Money Pool by Bay State, Northern Utilities, Columbia Virginia and Columbia Pennsylvania has been approved by the public service commissions of Massachusetts, Maine, Virginia and Pennsylvania, respectively. The proposal of Northern Utilities, Columbia Virginia and Columbia Pennsylvania to allocate consolidated income taxes in accordance with the Tax Allocation Agreement has been approved by the public service commissions of Maine, Virginia and Pennsylvania, respectively. No other state commission and no federal commission, other than the Commission, has jurisdiction over any of the other transactions proposed in the Application.

Due notice of the filing of the Application has been given in the manner prescribed in rule 23 under the Act and no hearing has been requested of or ordered by the Commission. Based on the facts in the record, the Commission finds that the applicable standards of the Act and rules are satisfied and no adverse findings are necessary.

IT IS ORDERED, under the applicable provisions of the Act and the rules, that the Application, as amended, is granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act, except that NiSource will file certificates of notification within 60 days after the end of each of the first three calendar quarters, and 90 days after the end of the last calendar quarter, in which transactions occur and the rule 24 certificates will contain the following information for the quarterly reporting period:

  1. The sales of any Common Stock and the purchase price per share and the market price per share at the date of the agreement of sale;
     
  2. The total number of shares of Common Stock issued or issuable under options granted during the quarter under NiSource's benefit plans or otherwise;
     
  3. If Common Stock has been transferred to a seller of securities of a company being acquired, the number of shares so issued, the value per share and whether the shares are restricted to the acquiror;
     
  4. The amount and terms of any Long-term Debt, Preferred Stock, Preferred Securities, Equity-linked Securities or Short-term Debt issued directly or indirectly by NiSource;
     
  5. The maximum outstanding amount of all borrowings under or investments in the Money Pool by each Money Pool participant during the quarter, and the rate or range of rates charged on Money Pool borrowings and paid on Money Pool investments;
     
  6. The number of shares of common stock issued by Columbia to NiSource and the price per share paid;
     
  7. The principal amount, interest rate and maturity of any long-term debt security issued by Columbia to NiSource Finance or other Financing Subsidiary of NiSource;
     
  8. The number of shares of common stock issued by Columbia Maryland to Columbia and the price per share paid;
     
  9. The principal amount, interest rate and maturity of any long-term debt security issued by Columbia Maryland to Columbia;
     
  10. The amount and terms of any financings consummated by any Nonutility Subsidiary that are not exempt under rule 52;
     
  11. The name of the guarantor and of the beneficiary of any Parent Guarantee or Nonutility Subsidiary Guarantee issued, and the amount, terms and purpose of the guarantee;
     
  12. The notional amount and principal terms of any Interest Rate Hedge or Anticipatory Hedge entered into and the identity of the parties to such instruments;
     
  13. The name, parent company, and amount invested in any new Intermediate Subsidiary or Financing Subsidiary;
     
  14. A list of Form U-6B-2 statements filed with the Commission, including the name of the filing entity and the date of the filing;
     
  15. Consolidated balance sheets as of the end of the quarter, and separate balance sheets as of the end of the quarter for each company, including NiSource and Columbia, that has engaged in authorized financing transactions during the quarter; and
     
  16. Annually, in the report following each quarter in which a consolidated tax return is filed, information showing (1) the calculation of the portion of NiSource's loss that is attributable to interest expense on Acquisition Debt and (2) the actual allocation of federal income tax liability to each of the members of the consolidated group.

IT IS FURTHER ORDERED that jurisdiction is reserved pending completion of the record over the following transactions: (1) the issuance by Applicants of any securities for which the Investment Grade Condition cannot be met; (2) Energy Marketing activities by Nonutility Subsidiaries outside of the U.S. and Canada; (3) other activities of Nonutility Subsidiaries outside the U. S; (4) gas-related exploration and production activities in foreign countries, other than Canada; and (5) gas-related investments in pipeline and storage facilities outside the U.S.

For the Commission, by the Division of Investment Management, pursuant to delegated authority.


Jill M. Peterson
Assistant Secretary


Endnotes:

Anticipatory Hedges may be executed on-exchange ("On-Exchange Trades") through brokers by entering into futures and/or options positions traded on the Chicago Board of Trade ("CBOT") or other designated contract markets, the establishment of over-the-counter positions with one or more counterparties ("Off-Exchange Trades"), or a combination of On-Exchange Trades and Off-Exchange Trades. NiSource or a Subsidiary will determine the optimal structure of each Anticipatory Hedge transaction at the time of execution.


http://www.sec.gov/divisions/investment/opur/filing/35-27789.htm

Modified: 01/07/2004