10-Q 1 ni-2013331x10q.htm 10-Q NI-2013.3.31-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
or
¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 001-16189
NiSource Inc.
(Exact name of registrant as specified in its charter)
 
Delaware               
 
35-2108964        
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
801 East 86th Avenue
Merrillville, Indiana    
 
46410
(Address of principal executive offices)
 
(Zip Code)
(877) 647-5990
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ    No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)
Yesþ    No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer þ                    Accelerated filer ¨
Non-accelerated filer ¨                      Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨    No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $0.01 Par Value: 312,036,984 shares outstanding at April 25, 2013.

1

Table of Contents

NISOURCE INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED MARCH 31, 2013
Table of Contents
 
 
 
 
Page
 
 
 
 
 
 
 
PART I
FINANCIAL INFORMATION
 
 
 
 
 
 
Item 1.
Financial Statements - unaudited
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.
 
 
 
 

2

Table of Contents

DEFINED TERMS

The following is a list of frequently used abbreviations or acronyms that are found in this report:

NiSource Subsidiaries and Affiliates
 
Capital Markets
NiSource Capital Markets, Inc.
CER
Columbia Energy Resources, Inc.
CGORC
Columbia Gas of Ohio Receivables Corporation
Columbia
Columbia Energy Group
Columbia Gulf
Columbia Gulf Transmission, L.L.C.
Columbia of Kentucky
Columbia Gas of Kentucky, Inc.
Columbia of Maryland
Columbia Gas of Maryland, Inc.
Columbia of Massachusetts
Bay State Gas Company
Columbia of Ohio
Columbia Gas of Ohio, Inc.
Columbia of Pennsylvania
Columbia Gas of Pennsylvania, Inc.
Columbia of Virginia
Columbia Gas of Virginia, Inc.
Columbia Transmission
Columbia Gas Transmission, L.L.C.
CPRC
Columbia Gas of Pennsylvania Receivables Corporation
Crossroads Pipeline
Crossroads Pipeline Company
Granite State Gas
Granite State Gas Transmission, Inc.
Hardy Storage
Hardy Storage Company, L.L.C.
Kokomo Gas
Kokomo Gas and Fuel Company
Millennium
Millennium Pipeline Company, L.L.C.
NARC
NIPSCO Accounts Receivable Corporation
NDC Douglas Properties
NDC Douglas Properties, Inc.
NEVCO
NiSource Energy Ventures, L.L.C.
NiSource
NiSource Inc.
NiSource Corporate Services
NiSource Corporate Services Company
NiSource Development Company
NiSource Development Company, Inc.
NiSource Finance
NiSource Finance Corporation
Northern Indiana
Northern Indiana Public Service Company
Northern Indiana Fuel and Light
Northern Indiana Fuel and Light Company
NiSource Midstream
NiSource Midstream Services, L.L.C.
PEI
PEI Holdings, Inc.
Pennant
Pennant Midstream, L.L.C.
Whiting Clean Energy
Whiting Clean Energy, Inc.
 
 
Abbreviations
 
AFUDC
Allowance for funds used during construction
AMRP
Accelerated Main Replacement Program
AOC
Administrative Order by Consent
AOCI
Accumulated other comprehensive income
ARP
Alternative Regulatory Plan
ARRs
Auction Revenue Rights
ASC
Accounting Standards Codification
BBA
British Banker Association
Bcf
Billion cubic feet

3

Table of Contents

DEFINED TERMS (continued)

BNS
Bank of Nova Scotia
Board
Board of Directors
BPAE
BP Alternative Energy North America, Inc.
BTMU
The Bank of Tokyo-Mitsubishi UFJ, LTD.
BTU
British Thermal Unit
CAA
Clean Air Act
CAIR
Clean Air Interstate Rule
CAMR
Clean Air Mercury Rule
Ccf
Hundred cubic feet
CERCLA
Comprehensive Environmental Response, Compensation and
 
Liability Act (also known as Superfund)
CSAPR
Cross-State Air Pollution Rule
Day 2
Began April 1, 2005 and refers to the operational control of the energy markets by MISO, including the dispatching of wholesale electricity and generation, managing transmission constraints, and managing the day-ahead, real-time and financial transmission rights markets
DPU
Department of Public Utilities
DSIC
Distribution System Improvement Charge
DSM
Demand Side Management
Dth
Dekatherm
ECR
Environmental Cost Recovery
ECRM
Environmental Cost Recovery Mechanism
ECT
Environmental Cost Tracker
EERM
Environmental Expense Recovery Mechanism
EPA
United States Environmental Protection Agency
EPS
Earnings per share
FAC
Fuel adjustment clause
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
FGD
Flue Gas Desulfurization
FTRs
Financial Transmission Rights
GAAP
Generally Accepted Accounting Principles
GCR
Gas cost recovery
GHG
Greenhouse gases
gwh
Gigawatt hours
Hilcorp
Hilcorp Energy Company
hp
Horsepower
IDEM
Indiana Department of Environmental Management
IRP
Infrastructure Replacement Program
IURC
Indiana Utility Regulatory Commission
kV
Kilovolt
LDCs
Local distribution companies
LIBOR
London InterBank Offered Rate
LIFO
Last-in, first-out
Mcf
Thousand cubic feet
MGP
Manufactured Gas Plant

4

Table of Contents

DEFINED TERMS (continued)

MISO
Midwest Independent Transmission System Operator
Mitchell
Dean H. Mitchell Coal Fired Generating Station
Mizuho
Mizuho Corporate Bank Ltd.
MMDth
Million dekatherms
mw
Megawatts
NAAQS
National Ambient Air Quality Standards
NOV
Notice of Violation
NO2
Nitrogen dioxide
NOx
Nitrogen oxide
NYMEX
New York Mercantile Exchange
OCI
Other Comprehensive Income (Loss)
OPEB
Other Postretirement and Postemployment Benefits
OUCC
Indiana Office of Utility Consumer Counselor
PADEP
Pennsylvania Department of Environmental Protection
Piedmont
Piedmont Natural Gas Company, Inc.
PM
Particulate matter
PNC
PNC Bank, N.A.
PSC
Public Service Commission
PUC
Public Utility Commission
PUCO
Public Utilities Commission of Ohio
RA
Resource Adequacy
RBS
Royal Bank of Scotland, PLC
RCRA
Resource Conservation and Recovery Act
RDAF
Revenue decoupling adjustment factor
RTO
Regional Transmission Organization
SEC
Securities and Exchange Commission
SIP
State Implementation Plan
SO2
Sulfur dioxide
TIRF
Targeted Infrastructure Reinvestment Factor
VaR
Value-at-risk and instrument sensitivity to market factors
VIE
Variable Interest Entities
VSCC
Virginia State Corporation Commission
WACOG
Weighted Average Cost of Gas



5

Table of Contents

PART I

ITEM 1.  FINANCIAL STATEMENTS
NiSource Inc.
Condensed Statements of Consolidated Income (unaudited)
 
  
Three Months Ended
March 31,
(in millions, except per share amounts)
2013
 
2012
Net Revenues
 
 
Gas Distribution
$
892.2

 
$
873.7

Gas Transportation and Storage
468.5

 
409.2

Electric
377.3

 
352.6

Other
56.3

 
13.4

Gross Revenues
1,794.3

 
1,648.9

Cost of Sales (excluding depreciation and amortization)
687.7

 
627.4

Total Net Revenues
1,106.6

 
1,021.5

Operating Expenses
 
 
 
Operation and maintenance
455.4

 
400.9

Depreciation and amortization
143.6

 
145.4

Gain on sale of assets, net
(0.2
)
 
(1.6
)
Other taxes
86.8

 
86.8

Total Operating Expenses
685.6

 
631.5

Equity Earnings in Unconsolidated Affiliates
7.1

 
7.7

Operating Income
428.1

 
397.7

Other Income (Deductions)
 
 
 
Interest expense, net
(98.6
)
 
(103.3
)
Other, net
4.1

 
0.3

Total Other Deductions
(94.5
)
 
(103.0
)
Income from Continuing Operations before Income Taxes
333.6

 
294.7

Income Taxes
118.2

 
102.2

Income from Continuing Operations
215.4

 
192.5

Income from Discontinued Operations - net of taxes
8.7

 
0.9

Gain on Disposition of Discontinued Operations - net of taxes
36.4

 

Net Income
$
260.5

 
$
193.4

Basic Earnings Per Share
 
 
 
Continuing operations
$
0.69

 
$
0.68

Discontinued operations
0.15

 

Basic Earnings Per Share
$
0.84

 
$
0.68

Diluted Earnings Per Share
 
 
 
Continuing operations
$
0.69

 
$
0.66

Discontinued operations
0.14

 

Diluted Earnings Per Share
$
0.83

 
$
0.66

Dividends Declared Per Common Share
$
0.48

 
$
0.46

Basic Average Common Shares Outstanding
311.1

 
282.9

Diluted Average Common Shares
312.1

 
293.1

The accompanying Notes to Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.

6

Table of Contents

ITEM 1.  FINANCIAL STATEMENTS (continued)

NiSource Inc.
Condensed Statements of Consolidated Comprehensive Income (unaudited)

 
Three Months Ended
March 31,
(in millions, net of taxes)
2013
 
2012
Net Income
$
260.5

 
$
193.4

Other comprehensive income (loss)
 
 
 
Net unrealized loss on available-for-sale securities(1)
(0.4
)
 
(2.8
)
Net unrealized gain on cash flow hedges(2)
0.9

 
1.0

Unrecognized pension benefit and OPEB costs(3)
2.7

 
0.6

Total other comprehensive income (loss)
3.2

 
(1.2
)
Total Comprehensive Income
$
263.7

 
$
192.2

(1)
Net unrealized loss on available-for-sale securities, net of $0.1 million and $2.0 million tax benefit in the first quarter of 2013 and 2012, respectively.
(2)
Net unrealized gains on derivatives qualifying as cash flow hedges, net of $0.6 million tax expense in the first quarter of 2013 and 2012.
(3)
Unrecognized pension benefit and OPEB costs, net of $1.7 million and $0.5 million tax expense in the first quarter of 2013 and 2012, respectively.
The accompanying Notes to Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.


7

Table of Contents

ITEM 1.  FINANCIAL STATEMENTS (continued)

NiSource Inc.
Condensed Consolidated Balance Sheets (unaudited)
(in millions)
March 31,
2013
 
December 31,
2012
ASSETS
 
 
 
Property, Plant and Equipment
 
 
 
Utility Plant
$
21,910.1

 
$
21,642.3

Accumulated depreciation and amortization
(9,075.4
)
 
(8,986.4
)
Net utility plant
12,834.7

 
12,655.9

Other property, at cost, less accumulated depreciation
284.2

 
260.0

Net Property, Plant and Equipment
13,118.9

 
12,915.9

Investments and Other Assets
 
 
 
Unconsolidated affiliates
260.8

 
243.3

Other investments
190.4

 
194.4

Total Investments and Other Assets
451.2

 
437.7

Current Assets
 
 
 
Cash and cash equivalents
101.4

 
36.3

Restricted cash
23.1

 
46.8

Accounts receivable (less reserve of $31.9 and $24.0, respectively)
1,070.3

 
907.3

Income tax receivable
80.5

 
130.9

Gas inventory
70.3

 
326.6

Underrecovered gas and fuel costs
16.9

 
45.0

Materials and supplies, at average cost
111.4

 
97.4

Electric production fuel, at average cost
59.0

 
71.7

Price risk management assets
58.0

 
92.2

Exchange gas receivable
71.1

 
51.5

Assets of discontinued operations and assets held for sale

 
26.7

Regulatory assets
141.7

 
162.8

Prepayments and other
228.1

 
357.2

Total Current Assets
2,031.8

 
2,352.4

Other Assets
 
 
 
Price risk management assets
36.1

 
56.0

Regulatory assets
1,954.2

 
2,024.4

Goodwill
3,666.2

 
3,677.3

Intangible assets
283.9

 
286.6

Deferred charges and other
94.1

 
94.4

Total Other Assets
6,034.5

 
6,138.7

Total Assets
$
21,636.4

 
$
21,844.7

 
The accompanying Notes to Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.
 

8

Table of Contents

ITEM 1.  FINANCIAL STATEMENTS (continued)

NiSource Inc.
Condensed Consolidated Balance Sheets (unaudited) (continued)
(in millions, except share amounts)
March 31,
2013
 
December 31,
2012
CAPITALIZATION AND LIABILITIES
 
 
 
Capitalization
 
 
 
Common Stockholders’ Equity
 
 
 
Common stock - $0.01 par value, 400,000,000 shares authorized; 311,814,846 and 310,280,867 shares outstanding, respectively
$
3.1

 
$
3.1

Additional paid-in capital
4,627.5

 
4,597.6

Retained earnings
1,170.5

 
1,059.6

Accumulated other comprehensive loss
(62.3
)
 
(65.5
)
Treasury stock
(48.1
)
 
(40.5
)
Total Common Stockholders’ Equity
5,690.7

 
5,554.3

Long-term debt, excluding amounts due within one year
6,803.9

 
6,819.1

Total Capitalization
12,494.6

 
12,373.4

Current Liabilities
 
 
 
Current portion of long-term debt
89.3

 
507.2

Short-term borrowings
1,131.2

 
776.9

Accounts payable
527.4

 
538.9

Dividends payable
74.8

 

Customer deposits and credits
167.6

 
269.6

Taxes accrued
258.2

 
235.5

Interest accrued
68.2

 
133.7

Overrecovered gas and fuel costs
63.2

 
22.1

Price risk management liabilities
52.7

 
95.2

Exchange gas payable
76.0

 
146.2

Deferred revenue
42.4

 
42.8

Regulatory liabilities
106.5

 
171.6

Accrued liability for postretirement and postemployment benefits
6.1

 
6.1

Liabilities of discontinued operations and liabilities held for sale

 
3.9

Legal and environmental reserves
41.1

 
42.2

Other accruals
269.7

 
309.7

Total Current Liabilities
2,974.4

 
3,301.6

Other Liabilities and Deferred Credits
 
 
 
Price risk management liabilities
6.9

 
20.3

Deferred income taxes
2,980.1

 
2,953.3

Deferred investment tax credits
23.8

 
24.8

Deferred credits
88.3

 
84.1

Accrued liability for postretirement and postemployment benefits
1,066.6

 
1,107.3

Regulatory liabilities and other removal costs
1,611.4

 
1,593.3

Asset retirement obligations
165.3

 
160.4

Other noncurrent liabilities
225.0

 
226.2

Total Other Liabilities and Deferred Credits
6,167.4

 
6,169.7

Commitments and Contingencies (Refer to Note 18)

 

Total Capitalization and Liabilities
$
21,636.4

 
$
21,844.7

The accompanying Notes to Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.

9

Table of Contents

ITEM 1.  FINANCIAL STATEMENTS (continued)

NiSource Inc.
Condensed Statements of Consolidated Cash Flows (unaudited)

Three Months Ended March 31, (in millions)
2013
 
2012
Operating Activities
 
 
 
Net Income
$
260.5

 
$
193.4

Adjustments to Reconcile Net Income to Net Cash from Continuing Operations:
 
 
 
Depreciation and amortization
143.6

 
145.4

Net changes in price risk management assets and liabilities
1.4

 
24.9

Deferred income taxes and investment tax credits
116.5

 
92.2

Deferred revenue
(0.4
)
 
(0.7
)
Stock compensation expense and 401(k) profit sharing contribution
10.6

 
8.9

Gain on sale of assets
(0.2
)
 
(1.6
)
Income from unconsolidated affiliates
(7.3
)
 
(6.6
)
Gain on disposition of discontinued operations - net of tax
(36.4
)
 

Income from discontinued operations - net of taxes
(8.7
)
 
(0.9
)
Amortization of debt related costs
2.3

 
2.3

AFUDC equity
(3.5
)
 
(1.0
)
Distributions of earnings received from equity investees
7.0

 
12.9

Changes in Assets and Liabilities:
 
 
 
Accounts receivable
(161.3
)
 
127.5

Income tax receivable
50.4

 
0.2

Inventories
254.7

 
211.1

Accounts payable
25.4

 
(41.3
)
Customer deposits and credits
(102.0
)
 
(98.5
)
Taxes accrued
28.7

 
16.6

Interest accrued
(65.5
)
 
(41.7
)
Overrecovered gas and fuel costs
69.3

 
31.1

Exchange gas receivable/payable
(89.8
)
 
(113.4
)
Other accruals
(26.6
)
 
(54.3
)
Prepayments and other current assets
(5.8
)
 
(4.7
)
Regulatory assets/liabilities
5.8

 
(1.2
)
Postretirement and postemployment benefits
(36.8
)
 
(6.9
)
Deferred credits
7.7

 
2.6

Deferred charges and other noncurrent assets
(0.4
)
 
(23.3
)
Other noncurrent liabilities
(1.9
)
 
4.0

Net Operating Activities from Continuing Operations
437.3

 
477.0

Net Operating Activities from Discontinued Operations
11.8

 
3.0

Net Cash Flows from Operating Activities
449.1

 
480.0

Investing Activities
 
 
 
Capital expenditures
(369.3
)
 
(291.8
)
Proceeds from disposition of assets
0.5

 
2.1

Restricted cash withdrawals
23.6

 
11.5

Contributions to equity investees
(17.1
)
 
(5.3
)
Other investing activities
(5.3
)
 
(10.4
)
Net Investing Activities used for Continuing Operations
(367.6
)
 
(293.9
)
Net Investing Activities from (used for) Discontinued Operations
121.5

 
(0.8
)
Net Cash Flow used for Investing Activities
(246.1
)
 
(294.7
)
Financing Activities
 
 
 
Retirement of long-term debt
(427.1
)
 
(5.9
)
Change in short-term borrowings, net
354.3

 
(94.8
)
Issuance of common stock
17.2

 
17.4

Acquisition of treasury stock
(7.6
)
 
(9.9
)
Dividends paid - common stock
(74.7
)
 
(65.1
)
Net Cash Flow used for Financing Activities
(137.9
)
 
(158.3
)
Change in cash and cash equivalents (used for) from continuing operations
(68.2
)
 
24.8

Cash contributions from discontinued operations
133.3

 
2.2

Cash and cash equivalents at beginning of period
36.3

 
11.5

Cash and Cash Equivalents at End of Period
$
101.4

 
$
38.5


The accompanying Notes to Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.

10

Table of Contents
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

 
1.    Basis of Accounting Presentation
The accompanying Condensed Consolidated Financial Statements (unaudited) for NiSource (the “Company”) reflect all normal recurring adjustments that are necessary, in the opinion of management, to present fairly the results of operations in accordance with GAAP in the United States of America.
The accompanying financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in NiSource’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012. Income for interim periods may not be indicative of results for the calendar year due to weather variations and other factors.
The Condensed Consolidated Financial Statements (unaudited) have been prepared pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although NiSource believes that the disclosures made are adequate to make the information not misleading. 

2.    Recent Accounting Pronouncements
There have been no recently issued accounting pronouncements which are expected to have a material impact on the Company's Condensed Consolidated Financial Statements (unaudited) or Notes to the Condensed Consolidated Financial Statements (unaudited).
 
3.    Earnings Per Share
Basic EPS is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. The weighted average shares outstanding for diluted EPS includes the incremental effects of the various long-term incentive compensation plans and the forward agreements, which were settled in the third quarter of 2012. The calculation of diluted earnings per share excludes stock options which had an anti-dilutive effect of zero and 0.2 million for the three months ended March 31, 2013 and 2012, respectively. The numerator in calculating both basic and diluted EPS for each period is reported net income. The computation of diluted average common shares follows:
 
 
 
Three Months Ended
 
 
March 31,
(in thousands)
 
2013
 
2012
Denominator
 
 
 
 
Basic average common shares outstanding
 
311,120

 
282,925

Dilutive potential common shares:
 
 
 
 
Stock options
 
156

 
126

Shares contingently issuable under employee stock plans
 
276

 
158

Shares restricted under stock plans
 
523

 
615

Forward agreements
 

 
9,275

Diluted Average Common Shares
 
312,075

 
293,099

 
4.    Gas in Storage
Both the LIFO inventory methodology and the weighted average cost methodology are used to value natural gas in storage. Gas Distribution Operations price natural gas storage injections at the average of the costs of natural gas supply purchased during the year. For interim periods, the difference between current projected replacement cost and the LIFO cost for quantities of gas temporarily withdrawn from storage is recorded as a temporary LIFO liquidation credit or debit within the Condensed Consolidated Balance Sheets (unaudited). Due to seasonality requirements, NiSource expects interim variances in LIFO layers to be replenished by year-end. NiSource has a temporary LIFO liquidation debit of $14.5 million recorded for the three months ended March 31, 2013 for certain gas distribution companies recorded within “Prepayments and other,” on the Condensed Consolidated Balance Sheets (unaudited).



11

Table of Contents
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

5.    Discontinued Operations and Assets and Liabilities Held for Sale

During 2012, NiSource began marketing to sell the service plan and leasing business lines of its Retail Services business. As of December 31, 2012, the assets and liabilities of the business lines met the criteria to be classified as held for sale in accordance with GAAP. Additionally, the results of operations and cash flows were classified as discontinued operations. The sale of the business lines closed in January 2013 resulting in gain from the disposal of discontinued operations of $36.4 million, net of taxes, which was recorded during the first quarter of 2013.
There were no assets and liabilities of discontinued operations and held for sale on the Condensed Consolidated Balance Sheet (unaudited) at March 31, 2013.
The assets and liabilities of discontinued operations and held for sale on the Consolidated Balance Sheet at December 31, 2012 by segment were:
(in millions)
 
 
 
Assets of discontinued operations and held for sale:
Property, plant and
equipment, net
Other Assets
Total
Gas Distribution Operations
$
21.5

$
4.5

$
26.0

Electric Operations

0.7

0.7

Total
$
21.5

$
5.2

$
26.7

 
 
 
 
Liabilities of discontinued operations and held for sale:
 
Other Liabilities
Total
Gas Distribution Operations
 
$
3.3

$
3.3

Electric Operations
 
0.6

0.6

Total
 
$
3.9

$
3.9

Total assets and liabilities of discontinued operations and held for sale in the table above relate to the service plan and leasing lines of business of NiSource's Retail Services business.
Results from discontinued operations are provided in the following table. These results are primarily from NiSource's Retail Services business and a settlement at NiSource's former exploration and production subsidiary, CER. For additional information regarding the settlement refer to Note 18-B, “Other Legal Proceedings,” in the Notes to Condensed Consolidated Financial Statements (unaudited).
 
Three Months Ended
March 31,
(in millions)
2013
 
2012
Revenues from Discontinued Operations
$
4.1

 
$
9.8

Income from discontinued operations
14.0

 
1.5

Income tax expense
5.3

 
0.6

Income from Discontinued Operations - net of taxes
$
8.7

 
$
0.9

Gain on Disposition of Discontinued Operations - net of taxes
$
36.4

 
$


6.    Asset Retirement Obligations
Certain costs of removal that have been, and continue to be, included in depreciation rates and collected in the service rates of the rate-regulated subsidiaries are classified as “Regulatory liabilities and other removal costs” on the Condensed Consolidated Balance Sheets (unaudited).

12

Table of Contents
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Changes in NiSource’s liability for asset retirement obligations for the three months ended March 31, 2013 and 2012 are presented in the table below:
 
(in millions)
2013
 
2012
Balance as of January 1,
$
160.4

 
$
146.4

Accretion expense
0.3

 
0.2

Accretion recorded as a regulatory asset/liability
2.3

 
2.1

Additions
2.9

 

Settlements
(0.3
)
 
(0.3
)
Change in estimated cash flows
(0.3
)
 

Balance as of March 31,
$
165.3

 
$
148.4

 
7.    Regulatory Matters
Gas Distribution Operations Regulatory Matters
Significant Rate Developments. On April 15, 2013, Columbia of Ohio filed an application that seeks authority to reduce its Percentage of Income Payment Plan Rider. If approved, the revision will reduce annual revenues collected under the rider by $6.7 million.
On April 15, 2013, Columbia of Ohio filed an application that seeks authority to reduce its Uncollectible Expense Rider. If approved, the revision will reduce annual revenues collected under the rider by $16.5 million.
On April 1, 2013, Columbia of Ohio filed an application that seeks authority to recover the $8.2 million base chip transition cost currently deferred.

On December 24, 2012, Columbia of Ohio filed an application for authority to continue its capital expenditure program in 2013 and succeeding years, and for the authority to defer the related post in-service carrying charges, depreciation expense, and property taxes on the assets of the capital expenditure program placed into service in 2013. The corresponding expenditures are expected to total approximately $8.0 million in 2013.

On November 30, 2012, Columbia of Ohio filed a Notice of Intent to file an application to adjust rates associated with its IRP and DSM Riders. Columbia of Ohio filed its Application on February 28, 2013 and indicated that Columbia of Ohio is seeking to increase revenues by approximately $29 million. A stipulation resolving all issues was filed on April 9, 2013, and a hearing was held on April 11, 2013. On April 24, 2013, the PUCO approved the stipulation.

On January 2, 2013, Columbia of Pennsylvania filed a petition with the Pennsylvania PUC, seeking authority to implement a DSIC, with a proposed effective date of March 3, 2013. DSIC has been available to water companies in Pennsylvania for several years, and was authorized for other utilities as of January 1, 2013 with the passage of Act 11 of 2012. Columbia of Pennsylvania is the first natural gas utility in Pennsylvania to seek DSIC approval. On March 14, 2013, the Pennsylvania PUC approved the petition, allowing Columbia of Pennsylvania to implement a DSIC as of April 1, 2013. Accordingly, by tariff, Columbia of Pennsylvania is authorized to recover the cost of infrastructure not previously reflected in rate base that has been placed in service during the three-month period ending one month prior to the effective date of the DSIC. After the initial charge is established, the DSIC is updated quarterly to recover the cost of further plant additions. The DSIC cannot exceed 5% of distribution revenues. Once new base rates are established under a base rate proceeding, the DSIC will be set back to zero. This represents a significant opportunity to mitigate rate lag by permitting recovery of infrastructure costs without seeking that recovery in a full base rate proceeding.

On September 28, 2012, Columbia of Pennsylvania filed a base rate case with the Pennsylvania PUC, seeking a revenue increase of approximately $77.3 million annually and providing three options for residential rate design in order to mitigate revenue volatility associated with usage based rates. Columbia of Pennsylvania is the first utility in Pennsylvania to seek Pennsylvania PUC approval to design rates to recover costs that are projected to be incurred after the implementation of those new rates, as recently authorized by the Pennsylvania General Assembly with the passage of Act 11 of 2012. Accordingly, Columbia of Pennsylvania's filing sought to implement rates in July 2013 under which Columbia of Pennsylvania would immediately begin to recover costs that are projected

13

Table of Contents
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

for the twelve-month period ending June 30, 2014. On March 15, 2013, the parties to the rate case filed a joint petition formally seeking Pennsylvania PUC approval of a settlement that features a revenue increase of $55.3 million annually and the implementation of a Weather Normalization Adjustment, whereby residential charges will be adjusted in the event of winter temperatures that deviate from historic norms by plus or minus five percent. Columbia of Pennsylvania expects that the Pennsylvania PUC will issue an order in the second quarter of 2013, with rates going into effect in the third quarter of 2013.
On March 21, 2013, Columbia of Virginia filed an application to amend its infrastructure tracking mechanism pursuant to the Steps to Advance Virginia's Energy (“SAVE”) Plan Act. Columbia of Virginia's five year SAVE Plan provides for recovery of costs associated with the accelerated replacement of certain facilities designed to improve system safety or reliability through a rate rider. The amendment would increase authorized annual investments by $5 million from 2013 through 2016, to $25 million per year. In addition, the amendment would expand the types of infrastructure eligible for the tracking mechanism and would afford the Company additional flexibility with respect to annual and total plan limitations on expenditures. A VSCC Order is expected by late July 2013.

On April 16, 2013, Columbia of Massachusetts submitted a filing with the Massachusetts DPU requesting an annual revenue requirement increase of $30.1 million. An order is expected by February 28, 2014, with new rates going into effect on March 1, 2014.

On March 7, 2013, the Massachusetts DPU issued its final order approving $10.5 million of decoupling revenues for Columbia of Massachusetts' Peak Period RDAF that was effective November 1, 2012 through April 30, 2013.
On February 27, 2013, Columbia Gas of Maryland filed a base rate case with the Maryland PSC, seeking a revenue increase of approximately $5.3 million annually and seeking to implement a residential Revenue Normalization Adjustment in order to decouple revenues from customer usage. The case is set for hearing in June 2013, with new rates expected to take effect beginning with the October 2013 billing cycle.

Cost Recovery and Trackers. A significant portion of the distribution companies' revenue is related to the recovery of gas costs, the review and recovery of which occurs via standard regulatory proceedings. All states require periodic review of actual gas procurement activity to determine prudence and to permit the recovery of prudently incurred costs related to the supply of gas for customers. NiSource distribution companies have historically been found prudent in the procurement of gas supplies to serve customers.

Certain operating costs of the NiSource distribution companies are significant, recurring in nature, and generally outside the control of the distribution companies. Some states allow the recovery of such costs via cost tracking mechanisms. Such tracking mechanisms allow for abbreviated regulatory proceedings in order for the distribution companies to implement charges and recover appropriate costs. Tracking mechanisms allow for more timely recovery of such costs as compared with more traditional cost recovery mechanisms. Examples of such mechanisms include GCR adjustment mechanisms, tax riders, gas energy efficiency programs, and bad debt recovery mechanisms.

Comparability of Gas Distribution Operations line item operating results is impacted by regulatory trackers that allow for the recovery in rates of certain costs such as bad debt expenses. Increases in the expenses that are the subject of trackers, result in a corresponding increase in net revenues and therefore have essentially no impact on total operating income results.

Certain of the NiSource distribution companies have completed rate proceedings involving infrastructure replacement or are embarking upon regulatory initiatives to replace significant portions of their operating systems that are nearing the end of their useful lives. Each LDC's approach to cost recovery may be unique, given the different laws, regulations and precedent that exist in each jurisdiction.

14

Table of Contents
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)


Columbia Pipeline Group (formerly known as Gas Transmission and Storage) Operations Regulatory Matters

Columbia Transmission Customer Settlement (the "Settlement"). On January 24, 2013, the FERC approved the Columbia Transmission Customer Settlement. In March 2013, Columbia Transmission paid $88.1 million in refunds to customers pursuant to the Settlement with its customers in conjunction with its comprehensive interstate natural gas pipeline modernization program. The refunds were made as part of the Settlement, which included a $50.0 million refund to max rate contract customers and a base rate reduction retroactive to January 1, 2012. Columbia Transmission expects to invest approximately $1.5 billion over a five-year period to modernize its system to improve system integrity and enhance service reliability and flexibility. The Settlement with firm customers includes an initial five-year term with provisions for potential extensions thereafter.

The Settlement also provides for a depreciation rate reduction to 1.5% and elimination of negative salvage rate effective January 1, 2012 and for a second base rate reduction, which begins January 1, 2014 that equates to approximately $25 million in revenues annually thereafter.

The Settlement includes a Capital Cost Recovery Mechanism (CCRM), a tracker mechanism that will allow Columbia Transmission to recover, through an additive capital demand rate, its revenue requirement for capital investments made under Columbia Transmission's long-term plan to modernize its interstate transmission system. The CCRM provides for a 14% revenue requirement with a portion designated as a recovery of increased taxes other than income taxes. The additive demand rate is earned on costs associated with projects placed into service by October 31 each year. The initial additive demand rate will be effective on February 1, 2014. The CCRM will give Columbia Transmission the opportunity to recover its revenue requirement associated with $1.5 billion investment in the modernization program, while maintaining competitive rates for its shippers. The CCRM recovers the revenue requirement associated with qualifying modernization costs that Columbia Transmission incurs after satisfying the requirement associated with $100.0 million in annual capital maintenance expenditures. The CCRM applies to Columbia Transmission's transportation shippers. The CCRM will not exceed $300.0 million per year in investment in eligible facilities, subject to a 15% annual tolerance and a total cap of $1.5 billion for the entire five-year initial term.
 
Cost Recovery Trackers. A significant portion of the transmission and storage regulated companies' revenue is related to the recovery of their operating costs, the review and recovery of which occurs via standard regulatory proceedings with the FERC under section 7 of the Natural Gas Act. However, certain operating costs of the NiSource regulated transmission and storage companies are significant and recurring in nature, such as fuel for compression and lost and unaccounted for gas. The FERC allows for the recovery of such costs via cost tracking mechanisms. These tracking mechanisms allow the transmission and storage companies' rates to fluctuate in response to changes in certain operating costs or conditions as they occur to facilitate the timely recovery of its costs incurred. The tracking mechanisms involve a rate adjustment that is filed at a predetermined frequency, typically annually, with the FERC and is subject to regulatory review before new rates go into effect. Other such costs under regulatory tracking mechanisms include upstream pipeline transmission, electric compression, environmental, and operational purchase and sales of natural gas.

Electric Operations Regulatory Matters

Significant Rate Developments. As part of a multi-state effort to strengthen the electric transmission system serving the Midwest, Northern Indiana anticipates making investments in two projects that were authorized by the MISO and are scheduled to be in service during the latter part of the decade. On July 19, 2012 and December 19, 2012, the FERC issued an order approving construction work in progress in rate base and abandoned plant cost recovery requested by Northern Indiana, for the 100-mile, 345 kV transmission project and its right to develop 50 percent of the 66-mile, 765 kV project. On December 19, 2012, the FERC issued an order authorizing Northern Indiana's request to transition to forward looking rates, allowing more timely recovery of Northern Indiana's investment in transmission assets. Northern Indiana began recording revenue in the first quarter of 2013 calculated by the FERC's forward looking rate, based on an average construction work in progress balance of $19.8 million. Revenue of $0.7 million was recorded in the first quarter of 2013.

Cost Recovery and Trackers. A significant portion of Northern Indiana's revenue is related to the recovery of fuel costs to generate power and the fuel costs related to purchased power. These costs are recovered through a FAC, a standard, quarterly, “summary” regulatory proceeding in Indiana.


15

Table of Contents
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Certain operating costs of the Electric Operations are significant, recurring in nature, and generally outside the control of Northern Indiana. The IURC allows for recovery of such costs via cost tracking mechanisms. Such tracking mechanisms allow for abbreviated regulatory proceedings in order for Northern Indiana to implement charges and recover appropriate costs. Tracking mechanisms allow for more timely recovery of such costs as compared with more traditional cost recovery mechanisms. Examples of such mechanisms include electric energy efficiency programs, MISO non-fuel costs and revenues, resource capacity charges, and environmental related costs.

Northern Indiana has approval from the IURC to recover certain environmental related costs through an ECT. Under the ECT, Northern Indiana is permitted to recover (1) AFUDC and a return on the capital investment expended by Northern Indiana to implement environmental compliance plan projects through an ECRM and (2) related operation and maintenance and depreciation expenses once the environmental facilities become operational through an EERM.

On November 21, 2012, the IURC approved ECR-20 for net capital expenditures of $227.1 million. On February 1, 2013, Northern Indiana filed ECR-21, the filing implementing the ECT, which included $376.4 million of net capital expenditures and operation and maintenance and depreciation expenses of $1.1 million for the period ended December 31, 2012.
 
8.    Risk Management Activities
NiSource is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are commodity price risk and interest rate risk. Derivative natural gas contracts are entered into to manage the price risk associated with natural gas price volatility and to secure forward natural gas prices. Interest rate swaps are entered into to manage interest rate risk or fair value risk associated with NiSource’s borrowings. NiSource designates some of its commodity forward contracts as cash flow hedges of forecasted purchases of commodities and designates its interest rate swaps as fair value hedges of fixed-rate borrowings. Additionally, certain NiSource subsidiaries enter into forward physical contracts with various third parties to procure or sell natural gas or power. Certain forward physical contracts are derivatives which qualify for, and for which NiSource may elect, the normal purchase and normal sales exception which do not require mark-to-market accounting.
Accounting Policy for Derivative Instruments.    The ASC topic on accounting for derivatives and hedging requires an entity to recognize all derivatives as either assets or liabilities on the Condensed Consolidated Balance Sheets (unaudited) at fair value, unless such contracts are exempted, such as normal purchase and normal sale contracts under the provisions of the ASC topic. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and resulting designation.
NiSource uses a variety of derivative instruments (exchange traded futures and options, physical forwards and options, basis contracts, financial commodity swaps, and interest rate swaps) to effectively manage its commodity price risk and interest rate risk exposure. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, or (b) a hedge of the exposure to variable cash flows of a forecasted transaction. In order for a derivative contract to be designated as a hedge, the relationship between the hedging instrument and the hedged item or transaction must be highly effective. The effectiveness test is performed at the inception of the hedge and each reporting period thereafter, throughout the period that the hedge is designated. Any amounts determined to be ineffective are recognized currently in earnings. For derivative contracts that qualify for the normal purchase and normal sales exception, a contract’s fair value is not recognized in the Condensed Consolidated Financial Statements (unaudited) until the contract is settled.
Unrealized and realized gains and losses are recognized each period as components of AOCI, regulatory assets and liabilities or earnings depending on the designation of the derivative instrument and regulatory accounting treatment. For subsidiaries that utilize derivatives for cash flow hedges, the effective portions of the gains and losses are recorded to AOCI and are recognized in earnings concurrent with the disposition of the hedged risks. If a forecasted transaction corresponding to a cash flow hedge is no longer probable to occur, the accumulated gains or losses on the derivative are recognized currently in earnings. For fair value hedges, the gains and losses are recorded in earnings each period together with the change in the fair value of the hedged item. As a result of the rate-making process, the rate-regulated subsidiaries generally record gains and losses as regulatory liabilities or assets and recognize such gains or losses in earnings when both the contracts settle and the physical commodity flows. These gains and losses recognized in earnings are then subsequently recovered or passed back to customers in revenues through rates. When gains and losses are recognized in earnings, they are recognized in revenues or cost of sales for derivatives that correspond to commodity risk activities and are recognized in interest expense for derivatives that correspond to interest-rate risk activities.
For its commodity price risk programs, NiSource has elected not to net the fair value amounts of its derivative instruments or the fair value amounts recognized for its right to receive or obligation to pay cash collateral arising from those derivative instruments

16

Table of Contents
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

recognized at fair value, which are executed with the same counterparty under a master netting arrangement. NiSource discloses amounts recognized for the right to reclaim cash collateral within “Restricted cash” and amounts recognized for the right to return cash collateral within “Other accruals” on the Condensed Consolidated Balance Sheets (unaudited).
Commodity Price Risk Programs.    NiSource and NiSource’s utility customers are exposed to variability in cash flows associated with natural gas purchases and volatility in natural gas prices. NiSource purchases natural gas for sale and delivery to its retail, commercial and industrial customers, and for most customers the variability in the market price of gas is passed through in their rates. Some of NiSource’s utility subsidiaries offer programs where variability in the market price of gas is assumed by the respective utility. The objective of NiSource’s commodity price risk programs is to mitigate this gas cost variability, for NiSource or on behalf of its customers, associated with natural gas purchases or sales by economically hedging the various gas cost components by using a combination of futures, options, forward physical contracts, basis swap contracts or other derivative contracts. Northern Indiana also uses derivative contracts to minimize risk associated with power price volatility. These commodity price risk programs and their respective accounting treatment are described below.
Northern Indiana, Columbia of Pennsylvania, Columbia of Kentucky, Columbia of Maryland and Columbia of Virginia use NYMEX futures and NYMEX options to minimize risk associated with gas price volatility. These derivative programs must be marked to fair value, but because these derivatives are used within the framework of the companies’ GCR or FAC mechanism, regulatory assets or liabilities are recorded to offset the change in the fair value of these derivatives.
Northern Indiana and Columbia of Virginia offer a fixed price program as an alternative to the standard GCR mechanism. These services provide certain customers with the opportunity to either lock in their gas cost or place a cap on the gas costs that would be charged in future months. In order to hedge the anticipated physical purchases associated with these obligations, forward physical contracts, NYMEX futures and NYMEX options are used to secure forward gas prices. The accounting treatment elected for these contracts is varied in that certain of these contracts have been accounted for as cash flow hedges while some contracts are not. The accounting treatment is based on the election of the company. The normal purchase and normal sales exception is elected for forward physical contracts associated with these programs where delivery of the commodity is probable to occur.
Northern Indiana also offers a DependaBill program to its customers as an alternative to the standard tariff rate that is charged to residential customers. The program allows Northern Indiana customers to fix their total monthly bill in future months at a flat rate regardless of gas usage or commodity cost. In order to hedge the anticipated physical purchases associated with these obligations, forward physical contracts, NYMEX futures and NYMEX options have been used to secure forward gas prices. The normal purchase and normal sales exception is elected for forward physical contracts associated with these programs where delivery of the commodity is probable to occur.
Northern Indiana enters into gas purchase contracts at first of the month prices that give counterparties the daily option to either sell an additional package of gas at first of the month prices or recall the original volume to be delivered. Northern Indiana charges a fee for this option. The changes in the fair value of these options are primarily due to the changing expectations of the future intra-month volatility of gas prices. These written options are derivative instruments, must be marked to fair value and do not meet the requirement for hedge accounting treatment. However, Northern Indiana records the related gains and losses associated with these transactions as a regulatory asset or liability.
Columbia of Kentucky, Columbia of Ohio and Columbia of Pennsylvania enter into contracts that allow counterparties the option to sell gas to them at first of the month prices for a particular month of delivery. These Columbia LDCs charge the counterparties a fee for this option. The changes in the fair value of the options are primarily due to the changing expectations of the future intra-month volatility of gas prices. These Columbia LDCs defer a portion of the change in the fair value of the options as either a regulatory asset or liability based on the regulatory customer sharing mechanisms in place, with the remaining changes in fair value recognized currently in earnings.
As part of the MISO Day 2 initiative, Northern Indiana was allocated or has purchased FTRs. These FTRs help Northern Indiana offset congestion costs due to the MISO Day 2 activity. The FTRs are marked to fair value and are not accounted for as a hedge, but since congestion costs are recoverable through the fuel cost recovery mechanism, the related gains and losses associated with marking these derivatives to market are recorded as a regulatory asset or liability. In the second quarter of 2008, MISO changed its allocation procedures from an allocation of FTRs to an allocation of ARRs, whereby Northern Indiana was allocated ARRs based on its historical use of the MISO administered transmission system. ARRs entitle the holder to a stream of revenues or charges based on the price of the associated FTR in the FTR auction, so ARRs can be used to purchase FTRs in the FTR auction. ARRs are not derivatives.

17

Table of Contents
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

NiSource is in the process of winding down its unregulated natural gas marketing business, where gas financial contracts are utilized to economically hedge expected future gas purchases associated with forward gas agreements. These financial contracts, as well as the associated forward physical sales contracts, are derivatives and are marked-to-market with all associated gains and losses recognized to income. NiSource established a reserve of $0.4 million and $0.7 million against certain derivatives as of March 31, 2013 and December 31, 2012, respectively. This amount represents reserves related to the creditworthiness of certain customers, fair value of future cash flows, and the cost of maintaining significant amounts of restricted cash. The physical sales contracts marked-to-market had a fair value of approximately $18.0 million at March 31, 2013 and $35.4 million at December 31, 2012, while the financial derivative contracts marked-to-market had a fair value loss of $16.7 million at March 31, 2013, and $33.2 million at December 31, 2012.
Commodity price risk program derivative contracted gross volumes are as follows:
 
March 31, 2013
 
December 31, 2012
Commodity Price Risk Program:
 
 
 
Gas price volatility program derivatives (MMDth)
22.1

 
26.3

Price Protection Service program derivatives (MMDth)
0.7

 
1.2

DependaBill program derivatives (MMDth)
0.2

 
0.3

Gas marketing program derivatives (MMDth)(1)
5.5

 
9.1

Gas marketing forward physical derivatives (MMDth)(2)
5.2

 
8.4

Electric energy program FTR derivatives (mw)
4,828.6

 
8,927.3

(1)Basis contract volumes not included in the above table were 4.9 MMDth and 8.2 MMDth as of March 31, 2013 and December 31, 2012, respectively.
(2)Basis contract volumes not included in the above table were 5.7 MMDth and 9.2 MMDth as of March 31, 2013 and December 31, 2012, respectively.
Interest Rate Risk Activities. NiSource recognizes that the prudent and selective use of derivatives may help it to lower its cost of debt capital and manage its interest rate exposure. NiSource Finance has entered into various “receive fixed” and “pay floating” interest rate swap agreements which modify the interest rate characteristics of a portion of its outstanding long-term debt from fixed to variable rate. These interest rate swaps also serve to hedge the fair market value of NiSource Finance’s outstanding debt portfolio. As of March 31, 2013, NiSource had $6.7 billion of outstanding fixed rate debt, of which $500 million is subject to fluctuations in interest rates as a result of the fixed-to-variable interest rate swap transactions. These interest rate swaps are designated as fair value hedges. NiSource had no net gain or loss recognized in earnings due to hedging ineffectiveness for the three months ended March 31, 2013 and 2012.
On July 22, 2003, NiSource Finance entered into fixed-to-variable interest rate swap agreements in a notional amount of $500 million with four counterparties with an eleven-year term. NiSource Finance receives payments based upon a fixed 5.40% interest rate and pays a floating interest amount based on U.S. 6-month BBA LIBOR plus an average of 0.78% per annum. There was no exchange of premium at the initial date of the swaps. In addition, each party has the right to cancel the swaps on July 15, 2013.
Contemporaneously with the issuance on September 16, 2005 of $1 billion of its 5.25% and 5.45% notes, maturing September 15, 2017 and 2020, respectively, NiSource Finance settled $900 million of forward starting interest rate swap agreements with six counterparties. NiSource paid an aggregate settlement payment of $35.5 million which is being amortized from AOCI to interest expense over the term of the underlying debt, resulting in an effective interest rate of 5.67% and 5.88%, respectively. As of March 31, 2013, AOCI includes $9.4 million related to forward starting interest rate swap settlement, net of tax. These derivative contracts are accounted for as a cash flow hedge.
As of March 31, 2013, NiSource holds a 47.5% interest in Millennium. As NiSource reports Millennium as an equity method investment, NiSource is required to recognize a proportional share of Millennium’s OCI. NiSource’s proportionate share of the remaining unrealized loss associated with a settled interest rate swap is $18.5 million, net of tax, as of March 31, 2013. Millennium is amortizing the unrealized loss related to these terminated interest rate swaps into earnings using the effective interest method through interest expense as interest payments are made. NiSource records its proportionate share of the amortization as Equity Earnings in Unconsolidated Affiliates in the Condensed Statements of Consolidated Income (unaudited).

18

Table of Contents
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

NiSource’s location and fair value of derivative instruments on the Condensed Consolidated Balance Sheets (unaudited) were:
 
Asset Derivatives (in millions)
March 31,
2013
 
December 31,
2012
Balance Sheet Location
Fair Value
 
Fair Value
Derivatives designated as hedging instruments
 
 
 
Interest rate risk activities
 
 
 
Price risk management assets (current)
$
0.2

 
$

Price risk management assets (noncurrent)
30.7

 
40.4

Total derivatives designated as hedging instruments
$
30.9

 
$
40.4

Derivatives not designated as hedging instruments
 
 
 
Commodity price risk programs
 
 
 
Price risk management assets (current)
$
57.8

 
$
92.2

Price risk management assets (noncurrent)
5.4

 
15.6

Total derivatives not designated as hedging instruments
$
63.2

 
$
107.8

Total Asset Derivatives
$
94.1

 
$
148.2

 
Liability Derivatives (in millions)
March 31,
2013
 
December 31,
2012
Balance Sheet Location
Fair Value
 
Fair Value
Derivatives designated as hedging instruments
 
 
 
Commodity price risk programs
 
 
 
Price risk management liabilities (current)
$

 
$
0.1

Price risk management liabilities (noncurrent)

 

Total derivatives designated as hedging instruments
$

 
$
0.1

Derivatives not designated as hedging instruments
 
 
 
Commodity price risk programs
 
 
 
Price risk management liabilities (current)
$
52.7

 
$
95.1

Price risk management liabilities (noncurrent)
6.9

 
20.3

Total derivatives not designated as hedging instruments
$
59.6

 
$
115.4

Total Liability Derivatives
$
59.6

 
$
115.5


As noted in NiSource's accounting policy for derivative instruments, above, for its commodity price risk programs, NiSource has elected not to net fair value amounts for its derivative instruments or the fair value amounts recognized for its right to receive cash collateral or obligation to pay cash collateral arising from those derivative instruments recognized at fair value, which are executed with the same counterparty under a master netting arrangement.


19

Table of Contents
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

The tables below represent the amounts subject to an enforceable master netting arrangement not otherwise disclosed:
Offsetting of Derivative Assets (in millions)
As of March 31, 2013
 
 
 
 
 
 
 
 
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Assets Presented in the Statement of Financial Position
 
Gross Amounts Not Offset in the Statement in the Statement of Financial Position
 
Net Amount
 
 
 
 
 
 
 
 
 
 
Counterparty A
$
39.9

 
$

 
$
39.9

 
$
(39.9
)
 
$

 
 
 
 
 
 
 
 
 
 
Counterparty B
5.8

 

 
5.8

 
(3.2
)
 
2.6

 
 
 
 
 
 
 
 
 
 
Other (1)
48.4

 

 
48.4

 

 
48.4

 
 
 
 
 
 
 
 
 
 
Total
$
94.1

 
$

 
$
94.1

 
$
(43.1
)
 
$
51.0

Offsetting of Derivative Liabilities (in millions)
As of March 31, 2013
 
 
 
 
 
 
 
 
 
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Liabilities Presented in the Statement of Financial Position
 
Gross Amounts Not Offset in the Statement in the Statement of Financial Position
 
Net Amount
 
 
 
 
 
 
 
 
 
 
Counterparty A
$
(55.5
)
 
$

 
$
(55.5
)
 
$
39.9

 
$
(15.6
)
 
 
 
 
 
 
 
 
 
 
Counterparty B
(3.2
)
 

 
(3.2
)
 
3.2

 

 
 
 
 
 
 
 
 
 
 
Other (1)
(0.9
)
 

 
(0.9
)
 

 
(0.9
)
 
 
 
 
 
 
 
 
 
 
Total
$
(59.6
)
 
$

 
$
(59.6
)
 
$
43.1

 
$
(16.5
)
Offsetting of Derivative Assets (in millions)
As of December 31, 2012
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Assets Presented in the Statement of Financial Position
 
Gross Amounts Not Offset in the Statement in the Statement of Financial Position
 
Net Amount
 
 
 
 
 
 
 
 
 
 
Counterparty A
$
71.8

 
$

 
$
71.8

 
$
(71.8
)
 
$

 
 
 
 
 
 
 
 
 
 
Counterparty B
0.9

 

 
0.9

 
(0.9
)
 

 
 
 
 
 
 
 
 
 
 
Other (1)
75.5

 

 
75.5

 

 
75.5

 
 
 
 
 
 
 
 
 
 
Total
$
148.2

 
$

 
$
148.2

 
$
(72.7
)
 
$
75.5


20

Table of Contents
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Offsetting of Derivative Liabilities (in millions)
As of December 31, 2012
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Liabilities Presented in the Statement of Financial Position
 
Gross Amounts Not Offset in the Statement in the Statement of Financial Position
 
Net Amount
 
 
 
 
 
 
 
 
 
 
Counterparty A
$
(103.4
)
 
$

 
$
(103.4
)
 
$
71.8

 
$
(31.6
)
 
 
 
 
 
 
 
 
 
 
Counterparty B
(10.8
)
 

 
(10.8
)
 
0.9

 
(9.9
)
 
 
 
 
 
 
 
 
 
 
Other (1)
(1.3
)
 

 
(1.3
)
 

 
(1.3
)
 
 
 
 
 
 
 
 
 
 
Total
$
(115.5
)
 
$

 
$
(115.5
)
 
$
72.7

 
$
(42.8
)
(1) Amounts in 'Other' include physical positions with counterparties that are part of NiSource's natural gas marketing business as well as fixed-to-variable interest rate swap agreements entered into by NiSource.
The effect of derivative instruments on the Condensed Statements of Consolidated Income (unaudited) was:
Derivatives in Cash Flow Hedging Relationships 
Three Months Ended (in millions)
 
 
 
 
 
 
 
 
 
 
Amount of Gain
Recognized in OCI on
Derivative (Effective
Portion)
 
Location of Gain (Loss)
Reclassified from AOCI
into Income (Effective
Portion)
 
Amount of Gain (Loss)
Reclassified from AOCI
into Income (Effective
Portion)
Derivatives in Cash Flow
Hedging Relationships
March 31,
2013
 
March 31, 2012
 
March 31,
2013
 
March 31, 2012
Commodity price risk programs
$
0.1

 
$
0.3

 
Cost of Sales
 
$
0.1

 
$
0.5

Interest rate risk activities

 
0.4

 
Interest expense, net
 
(0.4
)
 
(0.7
)
Total
$
0.1

 
$
0.7

 
 
 
$
(0.3
)
 
$
(0.2
)
 
Three Months Ended (in millions)
 
 
 
 
 
Derivatives in Cash Flow Hedging
Relationships
Location of Gain (Loss)
Recognized in Income on
Derivative (Ineffective Portion
and Amount Excluded from
Effectiveness Testing)
 
Amount of Gain (Loss) Recognized in
Income on Derivative (Ineffective
Portion and Amount Excluded from
Effectiveness Testing)
March 31, 2013
 
March 31, 2012
Commodity price risk programs
Cost of Sales
 
$

 
$

Interest rate risk activities
Interest expense, net
 

 

Total
 
 
$

 
$

It is anticipated that during the next twelve months the expiration and settlement of cash flow hedge contracts will result in income statement recognition of amounts currently classified in AOCI of approximately zero.

21

Table of Contents
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Derivatives in Fair Value Hedging Relationships
 
Three Months Ended (in millions)
 
 
 
 
 
Derivatives in Fair Value Hedging
Relationships
Location of Loss Recognized in
Income on Derivatives
 
Amount of Loss Recognized
in Income on Derivatives
March 31, 2013
 
March 31, 2012
Interest rate risk activities
Interest expense, net
 
$
(9.7
)
 
$
(9.0
)
Total
 
 
$
(9.7
)
 
$
(9.0
)
 
Three Months Ended (in millions)
 
 
 
 
Hedged Item in Fair Value Hedge
Relationships
Location of Gain Recognized in
Income on Related Hedged Item
 
Amount of Gain Recognized
in Income on Related Hedged Items
March 31, 2013
 
March 31, 2012
Fixed-rate debt
Interest expense, net
 
$
9.7

 
$
9.0

Total
 
 
$
9.7

 
$
9.0

Derivatives not designated as hedging instruments
 
Three Months Ended (in millions)
 
 
 
 
Derivatives Not Designated as Hedging
Instruments
Location of Gain (Loss)
Recognized in
Income on Derivatives
 
Amount of Realized/Unrealized Gain
(Loss) Recognized in Income on
Derivatives *
March 31, 2013
 
March 31, 2012
Commodity price risk programs
Gas Distribution revenues
 
$
0.1

 
$
0.2

Commodity price risk programs
Other revenues
 
12.0

 
(1.7
)
Commodity price risk programs
Cost of Sales
 
(18.5
)
 
(21.1
)
Total
 
 
$
(6.4
)
 
$
(22.6
)
* For the amounts of realized/unrealized gain (loss) recognized in income on derivatives disclosed in the table above, losses of $6.6 million and $19.8 million for the three months ended March 31, 2013 and 2012, respectively, were deferred as allowed per regulatory orders. These amounts will be amortized to income over future periods of up to twelve months as specified in a regulatory order.

NiSource’s derivative instruments measured at fair value as of March 31, 2013 and December 31, 2012 do not contain any credit-risk-related contingent features.
Certain NiSource affiliates have physical commodity purchase agreements that contain “ratings triggers” that require increases in collateral if the credit rating of NiSource or certain of its affiliates are rated below BBB- by Standard & Poor’s or below Baa3 by Moody’s. These agreements are primarily for the physical purchase or sale of natural gas and electricity. The collateral requirement from a downgrade below the ratings trigger levels would amount to approximately $1.0 million. In addition to agreements with ratings triggers, there are some agreements that contain “adequate assurance” or “material adverse change” provisions that could result in additional credit support such as letters of credit and cash collateral to transact business.
NiSource had $17.9 million and $45.7 million of cash on deposit with brokers for margin requirements associated with open derivative positions reflected within “Restricted cash” on the Condensed Consolidated Balance Sheets (unaudited) as of March 31, 2013 and December 31, 2012, respectively.
 

22

Table of Contents
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

9.    Fair Value Disclosures
 
A.    Fair Value Measurements
Recurring Fair Value Measurements. The following tables present financial assets and liabilities measured and recorded at fair value on NiSource’s Condensed Consolidated Balance Sheets (unaudited) on a recurring basis and their level within the fair value hierarchy as of March 31, 2013 and December 31, 2012:
 
Recurring Fair Value Measurements
March 31, 2013 (in millions)
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance as of March 31, 2013
Assets
 
 
 
 
 
 
 
Commodity Price risk management assets:
 
 
 
 
 
 
 
Physical price risk programs
$

 
$
18.0

 
$

 
$
18.0

Financial price risk programs
44.8

 
0.6

 

 
45.4

Interest rate risk activities

 
30.7

 

 
30.7

Available-for-sale securities
23.6

 
87.6

 

 
111.2

Total
$
68.4

 
$
136.9

 
$

 
$
205.3

Liabilities
 
 
 
 
 
 
 
Commodity Price risk management liabilities:
 
 
 
 
 
 
 
Physical price risk programs
$

 
$

 
$

 
$

Financial price risk programs
57.9

 
0.5

 
1.2

 
59.6

Total
$
57.9

 
$
0.5

 
$
1.2

 
$
59.6


Recurring Fair Value Measurements
December 31, 2012
(in millions)
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance as of
December 31, 2012
Assets
 
 
 
 
 
 
 
Commodity Price risk management assets:
 
 
 
 
 
 
 
Physical price risk programs
$

 
$
35.4

 
$

 
$
35.4

Financial price risk programs
71.5

 
0.8

 
0.1

 
72.4

Interest rate risk activities

 
40.4

 

 
40.4

Available-for-sale securities
27.4

 
84.4

 

 
111.8

Total
$
98.9

 
$
161.0

 
$
0.1

 
$
260.0

Liabilities
 
 
 
 
 
 
 
Commodity Price risk management liabilities:
 
 
 
 
 
 
 
Physical price risk programs
$

 
$

 
$

 
$

Financial price risk programs
115.0

 
0.5

 

 
115.5

Total
$
115.0

 
$
0.5

 
$

 
$
115.5

Price risk management assets and liabilities include commodity exchange-traded and non-exchange-based derivative contracts. Exchange-traded derivative contracts are based on unadjusted quoted prices in active markets and are classified within Level 1. These financial assets and liabilities are secured with cash on deposit with the exchange; therefore nonperformance risk has not been incorporated into these valuations. Certain non-exchange-traded derivatives are valued using broker or over-the-counter, on-line exchanges. In such cases, these non-exchange-traded derivatives are classified within Level 2. Non-exchange-based derivative instruments include swaps, forwards, and options. In certain instances, these instruments may utilize models to measure fair value. NiSource uses a similar model to value similar instruments. Valuation models utilize various inputs that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active,

23

Table of Contents
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

other observable inputs for the asset or liability, and market-corroborated inputs, i.e., inputs derived principally from or corroborated by observable market data by correlation or other means. Where observable inputs are available for substantially the full term of the asset or liability, the instrument is categorized in Level 2. Certain derivatives trade in less active markets with a lower availability of pricing information and models may be utilized in the valuation. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized in Level 3. Credit risk is considered in the fair value calculation of derivative instruments that are not exchange-traded. Credit exposures are adjusted to reflect collateral agreements which reduce exposures. As of March 31, 2013 and December 31, 2012, there were no material transfers between fair value hierarchies. Additionally there were no changes in the method or significant assumptions used to estimate the fair value of NiSource’s financial instruments.
To determine the fair value of derivatives associated with NiSource’s unregulated natural gas marketing business, certain reserves were calculated. These reserves were primarily determined by evaluating the credit worthiness of certain customers, fair value of future cash flows, and the cost of maintaining restricted cash. Refer to Note 8, “Risk Management Activities” for additional information on price risk assets.
Price risk management assets also include fixed-to-floating interest-rate swaps, which are designated as fair value hedges, as a means to achieve NiSource’s targeted level of variable-rate debt as a percent of total debt. NiSource uses a calculation of future cash inflows and estimated future outflows related to the swap agreements, which are discounted and netted to determine the current fair value. Additional inputs to the present value calculation include the contract terms, as well as market parameters such as current and projected interest rates and volatility. As they are based on observable data and valuations of similar instruments, the interest-rate swaps are categorized in Level 2 in the fair value hierarchy. Credit risk is considered in the fair value calculation of the interest rate swap.
Available-for-sale securities are investments pledged as collateral for trust accounts related to NiSource’s wholly-owned insurance company. Available-for-sale securities are included within “Other investments” in the Condensed Consolidated Balance Sheets (unaudited). Securities classified within Level 1 include U.S. Treasury debt securities which are highly liquid and are actively traded in over-the-counter markets. NiSource values corporate and mortgage-backed debt securities using a matrix pricing model that incorporates market-based information. These securities trade less frequently and are classified within Level 2. Total gains and losses from available-for-sale securities are included in other comprehensive income (loss). The amortized cost, gross unrealized gains and losses, and fair value of available-for-sale debt securities at March 31, 2013 and December 31, 2012 were:
 
(in millions)
Amortized
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair
Value
Available-for-sale debt securities, March 31, 2013
 
 
 
 
 
 
 
U.S. Treasury
$
27.6

 
$
1.2

 
$

 
$
28.8

Corporate/Other
80.1

 
2.4

 
(0.1
)
 
82.4

Total Available-for-sale debt securities
$
107.7

 
$
3.6

 
$
(0.1
)
 
$
111.2

(in millions)
Amortized
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair
Value
Available-for-sale debt securities, December 31, 2012
 
 
 
 
 
 
 
U.S. Treasury
$
31.1

 
$
1.5

 
$

 
$
32.6

Corporate/Other
76.8

 
2.5

 
(0.1
)
 
79.2

Total Available-for-sale debt securities
$
107.9

 
$
4.0

 
$
(0.1
)
 
$
111.8

For the three months ended March 31, 2013 and 2012, the net realized gain on the sale of available-for-sale U.S. Treasury debt securities was $0.2 million and zero, respectively. For the three months ended March 31, 2013 and 2012, the net realized gain on sale of available-for-sale Corporate/Other bond debt securities was $0.2 million and zero, respectively.
The cost of maturities sold is based upon specific identification. At March 31, 2013, all of the U.S. Treasury debt securities have maturities of greater than one year. At March 31, 2013, approximately $2.4 million of Corporate/Other bonds have maturities of less than a year while the remaining securities have maturities of greater than one year.

24

Table of Contents
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

The following tables present the fair value reconciliation of Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended March 31, 2013 and 2012:
 
Three Months Ended March 31, 2013 (in millions)
Other
Derivatives
 
 
Balance as of January 1, 2013
$
0.1

Total gains or (losses) (unrealized/realized)
 
Included in regulatory assets/liabilities
(0.9
)
Purchases
$
(0.4
)
Balance as of March 31, 2013
$
(1.2
)
 
 
Change in unrealized gains/(losses) relating to instruments still held as of March 31, 2013
$
(1.3
)
 
 
Three Months Ended, March 31, 2012 (in millions)
Other
Derivatives
 
 
Balance as of January 1, 2012
$
0.3

Total gains or (losses) (unrealized/realized)
 
Included in regulatory assets/liabilities
(0.2
)
Balance as of March 31, 2012
$
0.1

 
 
Change in unrealized gains/(losses) relating to instruments still held as of March 31, 2012
$


Non-recurring Fair Value Measurements. In January 2013, NiSource sold the service plan and leasing business lines of its Retail Services business. The disposed business lines were included in the Columbia Distributions Operations reporting unit and the Northern Indiana Gas Distribution Operations reporting unit. Goodwill associated with the disposed business lines was included in the carrying amount of the business lines in determining the gain on disposal. The amount of the goodwill included in the carrying amount was based on the relative fair values of the business lines disposed of and the portion of the reporting units that were retained. The fair value of the disposed business lines was determined by using the selling price of the business lines. The fair value of the reporting units that were retained was determined by a weighted average of income and market approaches. This approach was similar to the process undertaken to calculate the fair value of the reporting units for the last goodwill impairment test conducted on May 1, 2012. These approaches are further discussed in NiSource’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and yield fair values considered to be at Level 3 of the fair value hierarchy. The respective fair value of the disposed business lines was divided by the fair value of the reporting units to which the disposed business lines belonged. These percentages were then applied to those goodwill balances to determine their allocations. As a result of these procedures, NiSource recorded a disposal of goodwill of approximately $11.0 million during the first quarter of 2013. This amount is included within the "Gain on Disposition of Discontinued Operations - net of taxes" on the Condensed Statements of Consolidated Income (unaudited).
There were no significant non-recurring fair value measurements recorded during the three months ended March 31, 2012.
B.    Other Fair Value Disclosures for Financial Instruments. The carrying amount of cash and cash equivalents, restricted cash, notes receivable, customer deposits and short-term borrowings is a reasonable estimate of fair value due to their liquid or short-term nature. NiSource’s long-term borrowings are recorded at historical amounts unless designated as a hedged item in a fair value hedge.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate fair value.
Long-term Debt. The fair values of these securities are estimated based on the quoted market prices for the same or similar issues or on the rates offered for securities of the same remaining maturities. Certain premium costs associated with the early settlement

25

Table of Contents
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

of long-term debt are not taken into consideration in determining fair value. These fair value measurements are classified as Level 2 within the fair value hierarchy. For the quarters ending March 31, 2013 and 2012, there were no changes in the method or significant assumptions used to estimate the fair value of the financial instruments.

The carrying amount and estimated fair values of financial instruments were as follows:
 
(in millions)
Carrying
Amount as of
March 31, 2013
 
Estimated Fair
Value as of
March 31, 2013
 
Carrying
Amount as of
Dec. 31, 2012
 
Estimated Fair
Value as of
Dec. 31, 2012
Long-term debt (including current portion)
$
6,893.2

 
$
7,897.0

 
$
7,326.3

 
$
8,389.0

10.    Transfers of Financial Assets
Transfers of accounts receivable are accounted for as secured borrowings resulting in the recognition of short-term borrowings on the Condensed Consolidated Balance Sheets (unaudited). The maximum amount of debt that can be recognized related to NiSource’s accounts receivable programs is $515 million.
All accounts receivable sold to the commercial paper conduits are valued at face value, which approximate fair value due to their short-term nature. The amount of the undivided percentage ownership interest in the accounts receivable sold is determined in part by required loss reserves under the agreements. Below is information about the accounts receivable securitization agreements entered into by NiSource’s subsidiaries.
On October 23, 2009, Columbia of Ohio entered into an agreement to sell, without recourse, substantially all of its trade receivables, as they originate, to CGORC, a wholly-owned subsidiary of Columbia of Ohio. CGORC, in turn, is party to an agreement with BTMU and BNS, entered into on October 19, 2012, under the terms of which it sells an undivided percentage ownership interest in its accounts receivable to commercial paper conduits sponsored by BTMU and BNS. Prior to this agreement with BTMU and BNS, CGORC was party to a series of agreements with BTMU and RBS which dated from October 23, 2009 until its amendment on October 19, 2012. The maximum seasonal program limit under the terms of the new agreement remains at $240 million. The agreement expires on October 18, 2013, and can be renewed if mutually agreed to by all parties. As of March 31, 2013, $178.8 million of accounts receivable had been transferred by CGORC. CGORC is a separate corporate entity from NiSource and Columbia of Ohio, with its own separate obligations, and upon a liquidation of CGORC, CGORC’s obligations must be satisfied out of CGORC’s assets prior to any value becoming available to CGORC’s stockholder.
On October 23, 2009, Northern Indiana entered into an agreement to sell, without recourse, substantially all of its trade receivables, as they originate, to NARC, a wholly-owned subsidiary of Northern Indiana. NARC, in turn, is party to an agreement with PNC and Mizuho entered into on August 29, 2012, under the terms of which it sells an undivided percentage ownership interest in its accounts receivable to a commercial paper conduits sponsored by PNC and Mizuho. Prior to this agreement with PNC and Mizuho, NARC was party to a series of agreements with RBS which dated from October 23, 2009 until its amendment on August 29, 2012, under the terms in which it sold an undivided percentage ownership interest in its accounts receivable to commercial paper conduit sponsored by RBS. The maximum seasonal program limit under the terms of the new agreement, which expires on August 28, 2013, is $200 million, and can be further renewed if mutually agreed to by both parties. As of March 31, 2013, $200.0 million of accounts receivable had been transferred by NARC. NARC is a separate corporate entity from NiSource and Northern Indiana, with its own separate obligations, and upon a liquidation of NARC, NARC’s obligations must be satisfied out of NARC’s assets prior to any value becoming available to NARC’s stockholder.
On March 15, 2010, Columbia of Pennsylvania entered into an agreement to sell, without recourse, substantially all of its trade receivables, as they originate, to CPRC, a wholly-owned subsidiary of Columbia of Pennsylvania. CPRC, in turn, is party to an agreement with BTMU, also dated March 15, 2010, under the terms of which it sells an undivided percentage ownership interest in its accounts receivable to a commercial paper conduit sponsored by BTMU. The maximum seasonal program limit under the terms of the agreement is $75 million. On March 13, 2013, the agreement was renewed, having a new scheduled termination date of March 12, 2014, and can be further renewed if mutually agreed to by both parties. As of March 31, 2013, $65.9 million of accounts receivable had been transferred by CPRC. CPRC is a separate corporate entity from NiSource and Columbia of Pennsylvania, with its own separate obligations, and upon a liquidation of CPRC, CPRC’s obligations must be satisfied out of CPRC’s assets prior to any value becoming available to CPRC’s stockholder.

26

Table of Contents
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

The following table reflects the gross and net receivables transferred as well as short-term borrowings related to the securitization transactions as of March 31, 2013 and December 31, 2012 for Columbia of Ohio, Northern Indiana and Columbia of Pennsylvania:
 
(in millions)
March 31, 2013
 
December 31, 2012
Gross Receivables
$
689.6

 
$
525.3

Less: Receivables not transferred
244.9

 
292.0

Net receivables transferred
$
444.7

 
$
233.3

Short-term debt due to asset securitization
$
444.7

 
$
233.3

For the three months ended March 31, 2013 and 2012, fees of $0.9 million and $1.1 million associated with the securitization transactions were recorded as interest expense, respectively. Columbia of Ohio, Northern Indiana and Columbia of Pennsylvania remain responsible for collecting on the receivables securitized and the receivables cannot be sold to another party.
 
11.    Goodwill Assets

In accordance with the provisions for goodwill accounting under GAAP, NiSource tests its goodwill for impairment annually as of May 1 each year unless indicators, events, or circumstances would require an immediate review. Goodwill is tested for impairment at a level of reporting referred to as a reporting unit, which generally is an operating segment or a component of an operating segment as defined by the FASB. NiSource's three reporting units are Columbia Distribution Operations, Columbia Transmission Operations and Northern Indiana Gas Distribution Operations.
NiSource's goodwill assets as of March 31, 2013 were $3.7 billion pertaining primarily to the acquisition of Columbia on November 1, 2000. Of this amount, approximately $2.0 billion is allocated to Columbia Transmission Operations and $1.7 billion is allocated to Columbia Distribution Operations. In addition, Northern Indiana Gas Distribution Operations' goodwill assets at March 31, 2013 related to the purchase of Northern Indiana Fuel and Light in March 1993 and Kokomo Gas in February 1992 were $17.8 million.

The test performed at May 1, 2012 indicated that the fair value of each of the reporting units that carry or are allocated goodwill substantially exceeded their carrying values, indicating that no impairment exists under Step 1 of the annual impairment test.

NiSource considered whether there were any events or changes in circumstances subsequent to the annual test that would reduce the fair value of any of the reporting units below their carrying amounts and necessitate another goodwill impairment test. No such indicators were noted that would require goodwill impairment testing during the first quarter.

As part of the sale of the service plan and leasing business lines of its Retail Services business, NiSource allocated $10.0 million of goodwill from Columbia Distribution Operations to the sale and allocated $1.0 million of goodwill from Northern Indiana Gas Distribution Operations to the sale. Refer to Note 5 "Discontinued Operations and Assets and Liabilities Held for Sale" for more information.
 
12.    Income Taxes
NiSource’s interim effective tax rates reflect the estimated annual effective tax rates for 2013 and 2012, adjusted for tax expense associated with certain discrete items. The effective tax rates for the three months ended March 31, 2013 and 2012 were 35.4% and 34.7%, respectively. These effective tax rates differ from the Federal tax rate of 35% primarily due to the effects of tax credits, state income taxes, utility rate-making, and other permanent book-to-tax differences.

On January 2, 2013, the President signed into law the American Taxpayer Relief Act of 2012 (ATRA). ATRA, among other things, extends retroactively the research credit under Internal Revenue Code section 41 until December 31, 2013, and also extends and modifies 50% bonus depreciation for 2013. In general, 50% bonus depreciation will be available for property placed in service before January 1, 2014, or in the case of certain property having longer production periods, before January 1, 2015. NiSource recorded the effects of ATRA in the first quarter 2013. The retroactive extension of the research credit did not have a significant effect on net income.

On March 7, 2013, the congressional Joint Committee on Taxation took no exception to the conclusions reached by the IRS in its 2008-2010 audit examination. Therefore, in the first quarter of 2013, NiSource recognized a federal income tax receivable of

27

Table of Contents
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

$15.9 million that was related to the 2008 and 2009 tax years and increases in net operating loss carryforwards of $0.6 million that was related to uncertain tax positions in the 2010-2012 tax years. NiSource received payments of $75.1 million in March 2013 and $70.6 million in April 2013 of principal and interest from the IRS related to the audit examination. The recognition of the receivables and net operating loss carryforwards did not materially affect tax expense or net income.

13.    Pension and Other Postretirement Benefits
NiSource provides defined contribution plans and noncontributory defined benefit retirement plans that cover its employees. Benefits under the defined benefit retirement plans reflect the employees’ compensation, years of service and age at retirement. Additionally, NiSource provides health care and life insurance benefits for certain retired employees. The majority of employees may become eligible for these benefits if they reach retirement age while working for NiSource. The expected cost of such benefits is accrued during the employees’ years of service. Current rates of rate-regulated companies include postretirement benefit costs, including amortization of the regulatory assets that arose prior to inclusion of these costs in rates. For most plans, cash contributions are remitted to grantor trusts.
For the three months ended March 31, 2013, NiSource has contributed $5.5 million to its pension plans and $10.1 million to its other postretirement benefit plans.
The following table provides the components of the plans’ net periodic benefits cost for the three months ended March 31, 2013 and 2012:
 

Pension Benefits
 
Other Postretirement
Benefits
Three Months Ended March 31, (in millions)
2013
 
2012
 
2013
 
2012
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
Service cost
$
9.4

 
$
9.4

 
$
3.0

 
$
2.8

Interest cost
24.3

 
28.2

 
8.1

 
9.3

Expected return on assets
(42.4
)
 
(41.1
)
 
(7.6
)
 
(6.7
)
Amortization of transition obligation

 

 
0.1

 
0.3

Amortization of prior service cost
0.1

 
0.1

 
(0.2
)
 
(0.1
)
Recognized actuarial loss
20.7

 
20.3

 
2.8

 
2.4

Settlement loss
20.7

 

 

 

Total Net Periodic Benefit Costs
$
32.8

 
$
16.9

 
$
6.2

 
$
8.0

 
For the quarters ended March 31, 2013 and 2012, pension and other postretirement benefit cost of approximately $28.1 million and $5.6 million, respectively, was capitalized as a component of plant or recognized as a regulatory asset or liability consistent with regulatory orders for certain of NiSource’s regulated businesses.
 
As of February 28, 2013, it became probable that a NiSource pension plan's lump sum payouts for 2013 would exceed the plan's 2013 service cost plus interest cost and therefore meeting the requirement for settlement accounting. A one-time settlement charge of $20.7 million was recorded during the first quarter of 2013. As a result of the settlement, the pension plan was remeasured resulting in a decrease to the pension benefit obligation, net of plan assets, of $18.6 million, a net decrease to regulatory assets and accumulated other comprehensive loss of $36.1 million and $3.2 million, respectively. Net periodic pension benefit cost for 2013 was decreased by $2.4 million as a result of the remeasurement.

The following table provides the key assumptions that were used to calculate the pension benefit obligation and the net periodic benefit cost at the measurement dates of February 28, 2013 and December 31, 2012.

 
February 28, 2013
 
December 31, 2012
Actuarial Assumptions
 
 
 
Discount Rate
3.50
%
 
3.63
%
Expected return on assets
8.30
%
 
8.30
%

28

Table of Contents
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)


14.    Variable Interests and Variable Interest Entities
In general, a VIE is an entity that (1) has an insufficient amount of at-risk equity to permit the entity to finance its activities without additional financial subordinated support provided by any parties, (2) whose at-risk equity owners, as a group, do not have power, through voting rights or similar rights, to direct activities of the entity that most significantly impact the entity’s economic performance or (3) whose at-risk owners do not absorb the entity’s losses or receive the entity’s residual return. A VIE is required to be consolidated by a company if that company is determined to be the primary beneficiary of the VIE.
NiSource consolidates those VIEs for which it is the primary beneficiary. NiSource considers quantitative and qualitative elements in determining the primary beneficiary. Qualitative measures include the ability to control an entity and the obligation to absorb losses or the right to receive benefits.
NiSource’s analysis includes an assessment of guarantees, operating leases, purchase agreements, and other contracts, as well as its investments and joint ventures. For items that have been identified as variable interests, or where there is involvement with an identified VIE, an in-depth review of the relationship between the relevant entities and NiSource is made to evaluate qualitative and quantitative factors to determine the primary beneficiary, if any, and whether additional disclosures would be required under the current standard.
Northern Indiana has a service agreement with Pure Air, a general partnership between Air Products and Chemicals, Inc. and First Air Partners LP, under which Pure Air provides scrubber services to reduce sulfur dioxide emissions for Units 7 and 8 at the Bailly Generating Station. NiSource has made an exhaustive effort to obtain information needed from Pure Air to determine the status of Pure Air as a VIE. However, Northern Indiana has not been able to obtain this information and as a result, it is unclear whether Pure Air is a VIE and if Northern Indiana is the primary beneficiary. Northern Indiana will continue to request the information required to determine whether Pure Air is a VIE. Northern Indiana has no exposure to loss related to the service agreement with Pure Air and payments under this agreement were $5.6 million for the three months ended March 31, 2013 and 2012.
 
15.    Long-Term Debt

On April 12, 2013, NiSource Finance issued $750.0 million of 4.80% senior unsecured notes that mature on February 15, 2044.
On March 1, 2013, NiSource Finance redeemed $420.3 million of 6.15% senior unsecured notes.
On April 5, 2012, NiSource Finance negotiated a $250.0 million three-year bank term loan with a syndicate of banks having an original maturity date of April 3, 2015. On April 15, 2013, NiSource Finance amended the term loan to add an additional lender to the syndicate of banks, increase borrowings under the term loan to $325.0 million and extend the maturity date to April 15, 2016. Borrowings under the term loan have an interest rate of LIBOR plus 125 basis points.

16.    Short-Term Borrowings
During June 2011, NiSource Finance implemented a new commercial paper program with a program limit of up to $500.0 million with a dealer group comprised of Barclays, Citigroup, Credit Suisse and Wells Fargo. The program capacity was expanded to $1.5 billion with the addition of RBS as a fifth dealer on February 15, 2013. Commercial paper issuances are supported by available capacity under NiSource’s $1.5 billion unsecured revolving credit facility, which expires in May 2017. At March 31, 2013, NiSource had $686.5 million of commercial paper outstanding.
During May 2012, NiSource Finance amended its existing $1.5 billion revolving credit facility with a syndicate of banks led by Barclays Capital extending the termination date to May 15, 2017 and also reducing the borrowing costs under the facility. The purpose of the facility is to fund ongoing working capital requirements including the provision of liquidity support for NiSource’s commercial paper program, provide for issuance of letters of credit, and also for general corporate purposes. At March 31, 2013, NiSource had no outstanding borrowings under this facility.
As of March 31, 2013 and December 31, 2012, NiSource had $36.2 million and $36.4 million, respectively, of stand-by letters of credit outstanding, of which $18.3 million were under the revolving credit facility.

29

Table of Contents
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Transfers of accounts receivable are accounted for as secured borrowings resulting in the recognition of short-term debt on the Condensed Consolidated Balance Sheets in the amount of $444.7 million and $233.3 million as of March 31, 2013 and December 31, 2012, respectively. Refer to Note 10, “Transfers of Financial Assets,” for additional information.
 
(in millions)
March 31,
2013
 
December 31,
2012
Commercial Paper weighted average interest rate of 1.02% and 1.11% at March 31, 2013 and December 31, 2012, respectively.
$
686.5

 
$
499.6

Credit facilities borrowings weighted average interest rate of 3.73% at December 31, 2012.

 
44.0

Accounts receivable securitization facility borrowings
444.7

 
233.3

Total short-term borrowings
$
1,131.2

 
$
776.9

Given their turnover is less than 90 days, cash flows related to the borrowings and repayments of the items listed above are presented net in the Condensed Statements of Consolidated Cash Flows (unaudited).
 
17.    Share-Based Compensation
The stockholders approved and adopted the NiSource Inc. 2010 Omnibus Incentive Plan (the “Omnibus Plan”), at the Annual Meeting of Stockholders held on May 11, 2010. The Omnibus Plan provides for awards to employees and non-employee directors of incentive and nonqualified stock options, stock appreciation rights, restricted stock and restricted stock units, performance shares, performance units, cash-based awards and other stock-based awards. The Omnibus Plan provides that the number of shares of common stock of NiSource available for awards is 8,000,000 plus the number of shares subject to outstanding awards granted under either the 1994 Plan or the Director Plan (described below) that expire or terminate for any reason. No further awards are permitted to be granted under the prior 1994 Plan or the Director Plan. At March 31, 2013, there were 6,770,647 shares reserved for future awards under the Omnibus Plan.
Prior to May 11, 2010, NiSource issued long-term equity incentive grants to key management employees under a long-term incentive plan approved by stockholders on April 13, 1994 (“1994 Plan”). The types of equity awards previously authorized under the 1994 Plan did not significantly differ from those permitted under the Omnibus Plan.
NiSource recognized stock-based employee compensation expense of $4.2 million and $3.2 million for the three months ended March 31, 2013, and 2012, respectively, as well as related tax benefits of $1.5 million and $1.1 million, respectively.
As of March 31, 2013, the total remaining unrecognized compensation cost related to nonvested awards amounted to $28.4 million, which will be amortized over the weighted-average remaining requisite service period of 2.3 years.
Stock Options. As of March 31, 2013, approximately 1.0 million options were outstanding and exercisable with a weighted average strike price of $22.38. No options were granted during the three months ended March 31, 2013 and 2012. As of March 31, 2013, the aggregate intrinsic value for the options outstanding and exercisable was $6.7 million. During the three months ended March 31, 2013 and 2012, cash received from the exercise of options was $13.1 million and $13.4 million, respectively.
Restricted Stock Units and Restricted Stock. During the three months ended March 31, 2013, NiSource granted 17,200 restricted stock units and shares of restricted stock, subject to service conditions. The total grant date fair value of the shares of restricted stock units and shares of restricted stock was $0.4 million, based on the average market price of NiSource’s common stock at the date of each grant less the present value of any dividends not received during the vesting period, which will be expensed, net of forfeitures, over the vesting period which is generally three years. If the employee terminates employment before the service conditions lapse due to (1) Retirement or Disability (as defined in the award agreement), or (2) death, the employment conditions will lapse with respect to a pro rata portion of the shares of restricted stock and restricted stock units on the date of termination. In the event of a Change-in-Control (as defined in the award agreement), all unvested shares of restricted stock and restricted stock units will immediately vest. Termination due to any other reason will result in all shares of restricted stock and restricted stock units awarded being forfeited effective on the employee’s date of termination. As of March 31, 2013, 372,078 nonvested (all of which are expected to vest) restricted stock units and shares of restricted stock were granted and outstanding.
Performance Shares. During the three months ended March 31, 2013, NiSource granted 650,853 performance shares subject to performance conditions. The grant date fair-value of the awards was $15.3 million, based on the average market price of NiSource’s

30

Table of Contents
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

common stock at the date of each grant less the present value of dividends not received during the vesting period which will be expensed, net of forfeitures, over the three year requisite service period. The performance conditions are based on achievement of certain non-GAAP financial measures: cumulative net operating earnings, that NiSource defines as income from continuing operations adjusted for certain items; and cumulative funds from operations that NiSource defines as net operating cash flows provided by continuing operations; and relative total shareholder return, a non-GAAP market measure that NiSource defines as the annualized growth in the dividends and share price of a share of NiSource’s common stock (calculated using a 20 trading day average of NiSource’s closing price beginning December 31, 2012 and ending on December 31, 2015) compared to the total shareholder return performance of a predetermined peer group of companies. The service conditions lapse on February 29, 2016 when the shares vest provided the performance criteria are satisfied. In general, if the employee terminates employment before February 29, 2016 due to (1) Retirement or Disability (as defined in the award agreement), or (2) death, the employment conditions will lapse with respect to a pro rata portion of the performance shares payable at target on the date of termination provided the performance criteria are met. In the event of a Change-in-Control (as defined in the award agreement), all unvested performance shares will immediately vest. Termination due to any other reason will result in all performance shares awarded being forfeited effective on the employee’s date of termination. As of March 31, 2013, 2,020,670 nonvested performance shares were granted and outstanding.
Non-employee Director Awards. As of May 11, 2010, awards to non-employee directors may be made only under the Omnibus Plan. Currently, restricted stock units are granted annually to non-employee directors, subject to a non-employee director’s election to defer receipt of such restricted stock unit award. The non-employee director’s restricted stock units vest on the last day of the non-employee director’s annual term corresponding to the year the restricted stock units were awarded subject to special pro-rata vesting rules in the event of Retirement or Disability (as defined in the award agreement), or death. The vested restricted stock units are payable as soon as practicable following vesting except as otherwise provided pursuant to the non-employee director’s election to defer. As of March 31, 2013, 141,961 restricted stock units are outstanding to non-employee directors under the Omnibus Plan.
Only restricted stock units remain outstanding under the prior plan for non-employee directors, the Amended and Restated Non-employee Director Stock Incentive Plan (the “Director Plan”). All such awards are fully vested and shall be distributed to the directors upon their separation from the Board. As of March 31, 2013, 193,366 restricted stock units remain outstanding under the Director Plan and as noted above no further shares may be awarded under the Director Plan.
401(k) Match, Profit Sharing and Company Contribution. NiSource has a voluntary 401(k) savings plan covering eligible employees that allows for periodic discretionary matches as a percentage of each participant’s contributions in newly issued shares of common stock. NiSource also has a retirement savings plan that provides for discretionary profit sharing contributions of shares of common stock to eligible employees based on earnings results; and eligible exempt employees hired after January 1, 2010, receive a non-elective company contribution of three percent of eligible pay in shares of common stock. For the quarter ended March 31, 2013 and 2012, NiSource recognized 401(k) match, profit sharing and non-elective contribution expense of $6.4 million and $5.8 million, respectively.
 

31

Table of Contents
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

18.    Other Commitments and Contingencies
A.    Guarantees and Indemnities. As a part of normal business, NiSource and certain subsidiaries enter into various agreements providing financial or performance assurance to third parties on behalf of certain subsidiaries. Such agreements include guarantees and stand-by letters of credit. These agreements are entered into primarily to support or enhance the creditworthiness otherwise attributed to a subsidiary on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish the subsidiaries’ intended commercial purposes. The total guarantees and indemnities in existence at March 31, 2013 and the years in which they expire were:
 
(in millions)
Total
 
2013
 
2014
 
2015
 
2016
 
2017
 
After
Guarantees of subsidiaries debt
$
6,385.5

 
$

 
$
500.0

 
$
480.0

 
$
291.5

 
$
507.0

 
$
4,607.0

Guarantees supporting commodity transactions of subsidiaries
37.7

 
12.0

 

 
25.0

 

 

 
0.7

Accounts receivable securitization
444.7

 
444.7