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SCIENTECH IssueAlert, November 1, 2000
NiSource and Columbia Energy Group Complete Merger
By: Will McNamara, Director, Electric Industry Analysis
===============================================================
NiSource Inc. and Columbia Energy Group received approval for their merger
from the U.S. Securities and Exchange Commission (SEC) and are expected
to close their transaction today. The combined company will continue to
trade on the New York Stock Exchange as NiSource (NYSE: NI). Columbia Energy
Group shares (NYSE: CG) will cease trading before the market opens Nov.
2.

ANALYSIS: It's been a long and rocky road, to say the least, for the $6
billion marriage between these two companies, which reportedly will create
the largest U.S. natural-gas distributor east of the Rocky Mountains. The
union started out as a hostile takeover in June 1999, when NiSource began
making several attempts to purchase all outstanding common shares of Columbia
Energy Group (CEG). All of NiSource's offers were rejected by CEG. In fact,
up until just a year ago, CEG fiercely fought the takeover, claiming that*due
to financial and operational problems*NiSource was not an appropriate marriage
partner. However, after about eight months of offers and rebuffs (with
NiSource offering as much as $74 a share), Columbia Energy Group finally
consented to the $6 billion offer, ironically based on Columbia's February
2000 stock value of $72.60 a share and consequently lower than NiSource's
previous offers.

The merger creates a company that could gain a strong lock on the natural-gas
market in a corridor stretching from Texas to Maine. Merrillville, Ind.-based
NiSource is a holding company (parent company to NIPSCO and Bay State Gas,
among several other distribution companies) with operations in electric,
natural-gas and water distribution in the Midwest and Northeastern United
States. Its generation portfolio includes four coal-fired generating stations,
two hydroelectric generating plants and four gas-fired combustion plants.
NiSource also markets unregulated energy services in key competitive areas.
CEG, based in Herndon, Va., is an energy services company with assets of
approximately $7 billion and ownership of 16,500 miles of interstate gas
pipelines that run from Louisiana to the Northeast. CEG is engaged in nearly
all aspects of the natural-gas business, including exploration and production,
transmission, storage and distribution, as well as propane and petroleum
product sales and electric power generation.

Under the terms of the merger agreement, NiSource is offering 3.04 shares
for each Columbia common share. CEG shareholders can elect to receive New
NiSource stock, or receive a combination of $70 in cash plus $2.60 in 
securities.
Just today, NiSource revised its estimate of the number of CEG shares electing
to receive NiSource stock upward to approximately 77 percent from its original
estimate of 60 percent. Regarding current stock performance, NiSource shares
closed $24 15/16 on Oct. 31, not far from a 52-week high of $25 5/8. Shares
of CEG closed at $71 15/16.

Upon completion of the merger, the companies will create a new holding
company (as of yet unnamed) under which NiSource and CEG will become wholly
owned subsidiaries. Together, the companies will serve approximately 3.6
million customers. The companies have identified their post-merger strategy
as growth in "energy supply and distribution, as well as the development
of new energy choices through emergent technologies."

The regulatory approval process for the NiSource / CEG merger went 
comparatively
smoothly, finishing just eight months after the formal announcement of
the merger. Yet, the SEC gave its approval to the merger on an important
condition. Under the laws of the Public Utilities Holding Company Act of
1935 (PUHCA), the SEC has required NiSource to divest of IWC Resources,
its water operations subsidiary based in Indianapolis. Under PUHCA, utility
holding companies are required to divest operations that are not integral
to their primary operations. The divestiture must take place within three
years to comply with U.S. legislation, according to NiSource.

Although the merger is small in comparison to recent mega-mergers between
AEP / CSW and PECO / Unicom, this partnership is important. It's not 
surprising
that NiSource pursued CEG so diligently, as the acquisition of CEG more
than doubles the size of NiSource and changes it from a predominantly electric
company to a gas transmission and distribution company with electric 
operations.
NiSource will own a natural-gas business extending from Chicago to New
England, reportedly placing it as the nation's third-largest natural-gas
company (largest in the West). The completion of the merger comes at an
ideal time for NiSource, just as reports of a shortage in natural-gas supply
indicate that the prices for natural gas will rise significantly this winter
and into next year. As a leading supplier, NiSource will be sitting in
a prime position.

However, the divestiture of IWC Resources is a clear downside to this merger,
at least from NiSource's point of view. Of all the players that have 
penetrated
the water industry and then retreated (for example, Enron and Duke), NiSource
was one of the few that stood out as having some success in this heavily
regulated market. In fact, up until recently, NiSource had claimed that
its growth strategy was to build a distribution chain around the core 
natural-gas,
electricity and water distribution businesses. More than being a significant
money maker for the company, NiSource's water business provided a steady
cash flow and, perhaps more importantly, access to additional energy 
customers.
Water customers as an aggregated group can be very valuable for an energy
company. The company that controls water services has another stable base
of customers to which it can sell electric and gas services. For instance,
NiSource had purchased IWC in part to prevent its competitor, IPALCO 
Enterprises,
from obtaining the water customer list in this service territory.

The bottom line of this merger may be that, while other companies are focusing
on building critical mass, the New NiSource is carving out a specific niche
(natural-gas services) in a targeted market (Texas to Northeast). The fact
that it will no longer own IWC Resources may pale in comparison to the
projected growth that the New NiSource may find in the natural-gas business.
Of particular importance to this new company is the ownership of 16,500
miles of interstate gas pipelines gained from CEG. Owning a significant
supply of natural gas in a very tight market may become the real secret
advantage of this merger.
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Sincerely,

Will McNamara
Director, Electric Industry Analysis
wmcnamara@scientech.com
===============================================================
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