10-Q 1 ni-2013930x10q.htm 10-Q NI-2013.9.30-10Q

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 September 30, 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: 313,294,844 shares outstanding at October 24, 2013.



NISOURCE INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 30, 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


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
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.
Pennant
Pennant Midstream, L.L.C.
 
 
Abbreviations
 
AFUDC
Allowance for funds used during construction
AMRP
Accelerated Main Replacement Program
AOC
Administrative Order by Consent
AOCI
Accumulated Other Comprehensive Income (Loss)
ARRs
Auction Revenue Rights
ASC
Accounting Standards Codification
BBA
British Banker Association
Bcf
Billion cubic feet
BNS
Bank of Nova Scotia
Board
Board of Directors
BPAE
BP Alternative Energy North America, Inc.
BTMU
The Bank of Tokyo-Mitsubishi UFJ, LTD.

3


DEFINED TERMS (continued)

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)
CO2
Carbon Dioxide
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
IRS
Internal Revenue Service
IURC
Indiana Utility Regulatory Commission
kV
Kilovolt
LDCs
Local distribution companies
LIBOR
London InterBank Offered Rate
LIFO
Last-in, first-out
LNG
Liquefied Natural Gas
MATS
Mercury and Air Toxics Standards
Mcf
Thousand cubic feet
MMcf
Million cubic feet

4


DEFINED TERMS (continued)

MGP
Manufactured Gas Plant
MISO
Midcontinent Independent 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
TDSIC
Transmission, Distribution and Storage System Improvement Charge
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


PART I

ITEM 1. FINANCIAL STATEMENTS
NiSource Inc.
Condensed Statements of Consolidated Income (unaudited)
 
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions, except per share amounts)
2013
 
2012
 
2013
 
2012
Net Revenues
 
 
 
 
 
 
Gas Distribution
$
255.1

 
$
226.3

 
$
1,540.6

 
$
1,382.6

Gas Transportation and Storage
346.9

 
278.3

 
1,181.9

 
1,043.7

Electric
413.4

 
418.0

 
1,175.2

 
1,147.7

Other
61.4

 
33.6

 
162.8

 
63.3

Gross Revenues
1,076.8

 
956.2

 
4,060.5

 
3,637.3

Cost of Sales (excluding depreciation and amortization)
243.0

 
227.2

 
1,268.3

 
1,090.3

Total Net Revenues
833.8

 
729.0

 
2,792.2

 
2,547.0

Operating Expenses
 
 
 
 
 
 
 
Operation and maintenance
468.9

 
418.6

 
1,375.6

 
1,208.2

Depreciation and amortization
144.5

 
125.3

 
431.4

 
418.0

Gain on sale of assets, net
(9.8
)
 
(0.7
)
 
(10.2
)
 
(3.8
)
Other taxes
64.3

 
62.3

 
221.7

 
215.3

Total Operating Expenses
667.9

 
605.5

 
2,018.5

 
1,837.7

Equity Earnings in Unconsolidated Affiliates
10.5

 
8.0

 
25.6

 
24.2

Operating Income
176.4

 
131.5

 
799.3

 
733.5

Other Income (Deductions)
 
 
 
 
 
 
 
Interest expense, net
(103.7
)
 
(107.9
)
 
(304.3
)
 
(314.4
)
Other, net
4.7

 
2.2

 
22.1

 
5.3

Total Other Deductions
(99.0
)
 
(105.7
)
 
(282.2
)
 
(309.1
)
Income from Continuing Operations before Income Taxes
77.4

 
25.8

 
517.1

 
424.4

Income Taxes
27.9

 
9.2

 
179.2

 
147.7

Income from Continuing Operations
49.5

 
16.6

 
337.9

 
276.7

Income from Discontinued Operations - net of taxes
0.1

 
2.7

 
7.5

 
5.4

(Loss) Gain on Disposition of Discontinued Operations - net of taxes
(1.5
)
 

 
34.9

 

Net Income
$
48.1

 
$
19.3

 
$
380.3

 
$
282.1

Basic Earnings Per Share
 
 
 
 
 
 
 
Continuing operations
$
0.16

 
$
0.05

 
$
1.08

 
$
0.97

Discontinued operations

 
0.01

 
0.14

 
0.02

Basic Earnings Per Share
$
0.16

 
$
0.06

 
$
1.22

 
$
0.99

Diluted Earnings Per Share
 
 
 
 
 
 
 
Continuing operations
$
0.16

 
$
0.05

 
$
1.08

 
$
0.93

Discontinued operations

 
0.01

 
0.14

 
0.02

Diluted Earnings Per Share
$
0.16

 
$
0.06

 
$
1.22

 
$
0.95

Dividends Declared Per Common Share
$
0.25

 
$
0.24

 
$
0.98

 
$
0.94

Basic Average Common Shares Outstanding
312.8

 
290.3

 
312.1

 
285.9

Diluted Average Common Shares
313.8

 
300.0

 
313.0

 
296.7

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
September 30,
 
Nine Months Ended
September 30,
(in millions, net of taxes)
2013
 
2012
 
2013
 
2012
Net Income
$
48.1

 
$
19.3

 
$
380.3

 
$
282.1

Other comprehensive income (loss)
 
 
 
 
 
 
 
Net unrealized gain (loss) on available-for-sale securities(1)
0.9

 
0.7

 
(2.4
)
 
(1.8
)
Net unrealized gain on cash flow hedges(2)
0.6

 
0.8

 
2.0

 
2.7

Unrecognized pension benefit and OPEB costs(3)
0.1

 
0.7

 
5.5

 
2.0

Total other comprehensive income
1.6

 
2.2

 
5.1

 
2.9

Total Comprehensive Income
$
49.7

 
$
21.5

 
$
385.4

 
$
285.0

(1) 
Net unrealized gain (loss) on available-for-sale securities, net of $0.5 million and $0.3 million tax expense in the third quarter of 2013 and 2012, respectively, and $1.3 million and $1.5 million tax benefit for the nine months ended September 30, 2013 and 2012, respectively.
(2) 
Net unrealized gains on derivatives qualifying as cash flow hedges, net of $0.4 million and $0.6 million tax expense in the third quarter of 2013 and 2012, respectively, and $1.3 million and $1.8 million tax expense for the nine months ended September 30, 2013 and 2012, respectively.
(3) 
Unrecognized pension benefit and OPEB costs, net of zero and $0.2 million tax expense in the third quarter of 2013 and 2012, respectively, and $3.5 million and $1.0 million tax expense for the nine months ended September 30, 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)
September 30,
2013
 
December 31,
2012
ASSETS
 
 
 
Property, Plant and Equipment
 
 
 
Utility plant
$
22,869.7

 
$
21,642.3

Accumulated depreciation and amortization
(9,258.6
)
 
(8,986.4
)
Net utility plant
13,611.1

 
12,655.9

Other property, at cost, less accumulated depreciation
301.3

 
260.0

Net Property, Plant and Equipment
13,912.4

 
12,915.9

Investments and Other Assets
 
 
 
Unconsolidated affiliates
327.8

 
243.3

Other investments
201.6

 
194.4

Total Investments and Other Assets
529.4

 
437.7

Current Assets
 
 
 
Cash and cash equivalents
14.9

 
36.3

Restricted cash
18.3

 
46.8

Accounts receivable (less reserve of $20.2 and $24.0, respectively)
591.0

 
907.3

Income tax receivable
6.4

 
130.9

Gas inventory
454.8

 
326.6

Underrecovered gas and fuel costs
16.4

 
45.0

Materials and supplies, at average cost
99.9

 
97.4

Electric production fuel, at average cost
39.8

 
71.7

Price risk management assets
21.1

 
0.5

Exchange gas receivable
84.3

 
51.3

Assets of discontinued operations and assets held for sale

 
133.9

Regulatory assets
152.5

 
162.8

Prepayments and other
246.1

 
357.2

Total Current Assets
1,745.5

 
2,367.7

Other Assets
 
 
 
Price risk management assets

 
40.7

Regulatory assets
1,863.2

 
2,024.4

Goodwill
3,666.2

 
3,677.3

Intangible assets
278.4

 
286.6

Deferred charges and other
89.0

 
94.4

Total Other Assets
5,896.8

 
6,123.4

Total Assets
$
22,084.1

 
$
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)
September 30,
2013
 
December 31,
2012
CAPITALIZATION AND LIABILITIES
 
 
 
Capitalization
 
 
 
Common Stockholders’ Equity
 
 
 
Common stock - $0.01 par value, 400,000,000 shares authorized; 313,135,192 and 310,280,867 shares outstanding, respectively
$
3.2

 
$
3.1

Additional paid-in capital
4,672.9

 
4,597.6

Retained earnings
1,133.8

 
1,059.6

Accumulated other comprehensive loss
(60.4
)
 
(65.5
)
Treasury stock
(48.6
)
 
(40.5
)
Total Common Stockholders’ Equity
5,700.9

 
5,554.3

Long-term debt, excluding amounts due within one year
7,089.1

 
6,819.1

Total Capitalization
12,790.0

 
12,373.4

Current Liabilities
 
 
 
Current portion of long-term debt
541.2

 
507.2

Short-term borrowings
820.8

 
776.9

Accounts payable
369.6

 
538.9

Dividends payable
78.3

 

Customer deposits and credits
249.2

 
269.6

Taxes accrued
181.3

 
235.5

Interest accrued
71.6

 
133.7

Overrecovered gas and fuel costs
31.7

 
22.1

Price risk management liabilities
8.8

 
8.2

Exchange gas payable
207.3

 
146.2

Deferred revenue
21.3

 
42.8

Regulatory liabilities
75.5

 
171.6

Accrued liability for postretirement and postemployment benefits
6.1

 
6.1

Liabilities of discontinued operations and liabilities held for sale

 
108.6

Legal and environmental reserves
34.2

 
42.2

Other accruals
308.7

 
309.7

Total Current Liabilities
3,005.6

 
3,319.3

Other Liabilities and Deferred Credits
 
 
 
Price risk management liabilities
1.5

 
2.6

Deferred income taxes
3,133.5

 
2,953.3

Deferred investment tax credits
21.9

 
24.8

Deferred credits
94.9

 
84.1

Noncurrent deferred revenue
23.1

 

Accrued liability for postretirement and postemployment benefits
1,003.1

 
1,107.3

Regulatory liabilities and other removal costs
1,615.9

 
1,593.3

Asset retirement obligations
175.5

 
160.4

Other noncurrent liabilities
219.1

 
226.2

Total Other Liabilities and Deferred Credits
6,288.5

 
6,152.0

Commitments and Contingencies (Refer to Note 17)

 

Total Capitalization and Liabilities
$
22,084.1

 
$
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)

Nine Months Ended September 30, (in millions)
2013
 
2012
Operating Activities
 
 
 
Net Income
$
380.3

 
$
282.1

Adjustments to Reconcile Net Income to Net Cash from Continuing Operations:
 
 
 
Depreciation and amortization
431.4

 
418.0

Net changes in price risk management assets and liabilities
1.9

 
1.2

Deferred income taxes and investment tax credits
199.1

 
132.8

Deferred revenue
1.6

 
(0.7
)
Stock compensation expense and 401(k) profit sharing contribution
39.7

 
33.0

Gain on sale of assets
(10.2
)
 
(3.8
)
Income from unconsolidated affiliates
(25.5
)
 
(22.9
)
Gain on disposition of discontinued operations - net of tax
(34.9
)
 

Income from discontinued operations - net of taxes
(7.5
)
 
(5.4
)
Amortization of debt related costs
7.0

 
7.3

AFUDC equity
(12.7
)
 
(4.7
)
Distributions of earnings received from equity investees
19.0

 
25.1

Changes in Assets and Liabilities:
 
 
 
Accounts receivable
318.4

 
333.9

Income tax receivable
124.6

 
(55.1
)
Inventories
(103.7
)
 
19.6

Accounts payable
(177.7
)
 
(151.0
)
Customer deposits and credits
(20.4
)
 
(50.0
)
Taxes accrued
(68.0
)
 
(41.3
)
Interest accrued
(62.1
)
 
(29.0
)
Over(Under)recovered gas and fuel costs
38.1

 
(9.1
)
Exchange gas receivable/payable
28.1

 
(10.2
)
Other accruals
(36.5
)
 
(90.9
)
Prepayments and other current assets
45.5

 
48.3

Regulatory assets/liabilities
71.5

 
96.3

Postretirement and postemployment benefits
(95.9
)
 
(11.6
)
Deferred credits
11.1

 
7.6

Deferred charges and other noncurrent assets
11.8

 
28.1

Other noncurrent liabilities
(6.3
)
 
4.1

Net Operating Activities from Continuing Operations
1,067.7

 
951.7

Net Operating Activities from (used for) Discontinued Operations
10.9

 
(9.9
)
Net Cash Flows from Operating Activities
1,078.6

 
941.8

Investing Activities
 
 
 
Capital expenditures
(1,297.3
)
 
(1,022.2
)
Insurance recoveries
6.4

 
3.0

Proceeds from disposition of assets
17.9

 
23.6

Restricted cash withdrawals
28.5

 
95.8

Contributions to equity investees
(77.1
)
 
(11.3
)
Other investing activities
(48.4
)
 
(38.1
)
Net Investing Activities used for Continuing Operations
(1,370.0
)
 
(949.2
)
Net Investing Activities from (used for) Discontinued Operations
118.7

 
(2.1
)
Net Cash Flows used for Investing Activities
(1,251.3
)
 
(951.3
)
Financing Activities
 
 
 
Issuance of long-term debt
815.3

 
991.4

Repayments of long-term debt and capital lease obligations
(505.2
)
 
(11.6
)
Premiums and other debt related costs
(3.2
)
 
(3.4
)
Change in short-term borrowings, net
43.9

 
(1,133.7
)
Issuance of common stock
36.1

 
376.4

Acquisition of treasury stock
(8.0
)
 
(10.0
)
Dividends paid - common stock
(227.6
)
 
(198.8
)
Net Cash Flows from Financing Activities
151.3

 
10.3

Change in cash and cash equivalents (used for) from continuing operations
(151.0
)
 
12.8

Cash contributions from (to) discontinued operations
129.6

 
(12.0
)
Cash and cash equivalents at beginning of period
36.3

 
11.5

Cash and Cash Equivalents at End of Period
$
14.9

 
$
12.3

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 forward agreements, which were settled in the third quarter of 2012. 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
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands)
2013
 
2012
 
2013
 
2012
Denominator
 
 
 
 
 
 
 
Basic average common shares outstanding
312,842

 
290,328

 
312,053

 
285,891

Dilutive potential common shares:
 
 
 
 
 
 
 
Stock options
112

 
197

 
102

 
159

Shares contingently issuable under employee stock plans
369

 
434

 
327

 
393

Shares restricted under stock plans
490

 
654

 
477

 
626

Forward agreements

 
8,399

 

 
9,609

Diluted Average Common Shares
313,813

 
300,012

 
312,959

 
296,678

 
4.    Discontinued Operations and Assets and Liabilities Held for Sale

On September 1, 2013, NiSource sold the commercial and industrial natural gas portfolio of its unregulated natural gas marketing business. The sale included the physical contracts and associated financial hedges that comprise the portfolio, as well as the gas inventory and customer deposits of the business. For the three and nine months ended September 30, 2013, an after tax loss of $1.5 million was included in Loss on Disposition of Discontinued Operations, net of taxes in the Condensed Statements of Consolidated Income (unaudited). The assets and liabilities sold are classified as held for sale as of December 31, 2012. Refer to Note 7, "Risk Management Activities" for additional information regarding the price risk assets and liabilities of the business.

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

11

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

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 disposition 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 September 30, 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
Price risk management assets
Other Assets
Total
Gas Distribution Operations
$
21.5

$

$
4.5

$
26.0

Electric Operations


0.7

0.7

Corporate and Other

107.0

0.2

107.2

Total
$
21.5

$
107.0

$
5.4

$
133.9

 
 
 
 
 
Liabilities of discontinued operations and held for sale:
 
Price risk management liabilities
Other Liabilities
Total
Gas Distribution Operations
 
$

$
3.3

$
3.3

Electric Operations
 

0.6

0.6

Corporate and Other
 
104.7


104.7

Total
 
$
104.7

$
3.9

$
108.6

Total assets and liabilities of discontinued operations and held for sale in the table above relate to the commercial and industrial portfolio of NiSource's unregulated natural gas marketing business and the service plan and leasing business lines 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, a settlement at NiSource's former exploration and production subsidiary, CER, NiSource's unregulated natural gas marketing business and Columbia Propane. For additional information regarding the settlement refer to Note 17-B, “Other Legal Proceedings,” in the Notes to Condensed Consolidated Financial Statements (unaudited).
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions)
2013
 
2012
 
2013
2012
Revenues from Discontinued Operations
$
0.4

 
$
10.8

 
$
1.3

$
28.8

Income from discontinued operations
0.1

 
4.5

 
12.2

8.6

Income tax expense

 
1.8

 
4.7

3.2

Income from Discontinued Operations - net of taxes
$
0.1

 
$
2.7

 
$
7.5

$
5.4

(Loss) Gain on Disposition of Discontinued Operations - net of taxes
$
(1.5
)
 
$

 
$
34.9

$


5.    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 nine months ended September 30, 2013 and 2012 are presented in the table below:
 
(in millions)
2013
 
2012
Balance as of January 1,
$
160.4

 
$
146.4

Accretion expense
0.9

 
0.8

Accretion recorded as a regulatory asset/liability
6.5

 
6.6

Additions
9.7

 

Settlements
(1.3
)
 
(0.7
)
Change in estimated cash flows
(0.7
)
 
(1.1
)
Balance as of September 30,
$
175.5

 
$
152.0

 
6.    Regulatory Matters
Gas Distribution Operations Regulatory Matters
Significant Rate Developments. On April 30, 2013, Indiana Governor Pence signed Senate Enrolled Act 560 into law. Among other provisions, this legislation provides for cost recovery outside of a base rate proceeding for new or replacement electric and gas transmission, distribution, and storage projects that a public utility undertakes for the purposes of safety, reliability, system modernization, or economic development. The cost recovery mechanism is referred to as a Transmission, Distribution and Storage System Improvement Charge or "TDSIC." Provisions of the TDSIC require that, among other things, requests for recovery include a seven year plan of eligible investments.  Once the plan is approved by the IURC, 80 percent of eligible costs can be recovered using a periodic rate adjustment mechanism.  Recoverable costs include a return on, and of, the investment, including AFUDC, post in service carrying charges, operation and maintenance expenses, depreciation, and property taxes.  The remaining 20 percent of recoverable costs are to be deferred for future recovery in the public utility’s next general rate case.  The periodic rate adjustment mechanism is capped at an annual increase of no more than two percent of total retail revenues. On October 3, 2013, Northern Indiana filed its gas TDSIC with the IURC. The filing included the seven year plan of eligible investments for a total of $710.0 million. An order is expected by the second quarter of 2014.
On June 18, 2013, Northern Indiana, the OUCC and other customer stakeholder groups filed a unanimous agreement with the IURC to extend Northern Indiana's 2010 natural gas customer rate settlement through 2020. The Settlement Agreement was approved by order issued on August 28, 2013 with the stipulation that, on or before November 2020, Northern Indiana must file a general rate case.
On April 15, 2013, Columbia of Ohio filed an application that seeks authority to reduce its Percentage of Income Payment Plan Rider. This revised rate, which will result in an annual reduction of revenues by approximately $6.7 million, became effective May 31, 2013.
On April 15, 2013, Columbia of Ohio filed an application to reduce its Uncollectible Expense Rider by $16.5 million. On May 29, 2013, the PUCO issued an Entry that approved the revised Uncollectible Expense Rider.
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. By Order dated August 28, 2013, the PUCO approved Columbia of Ohio's application.

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. By Order dated October 9, 2013, the PUCO approved the application.

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.


13

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

On May 29, 2013, Columbia of Kentucky filed an application with the Kentucky PSC requesting an increase of approximately $16.6 million in base rate revenues, the use of a forecasted test period and a revenue normalization adjustment to recognize changes in customer usage not included in Columbia of Kentucky's current weather normalization adjustment. The parties are engaged in settlement negotiations, and a hearing is scheduled for November 13, 2013. If approved, new rates are expected to go into effect in January 2014.

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 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 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 featuring a revenue increase of $55.3 million annually and the implementation of a Weather Normalization Adjustment, whereby residential charges are adjusted in the event of winter temperatures that deviate from historic norms by plus or minus five percent. The Pennsylvania PUC issued an order approving the settlement on May 23, 2013, and new rates went into effect July 1, 2013.
On July 3, 2013, the VSCC issued an order approving an amendment to Columbia of Virginia's 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 increases authorized annual investments by $5 million from 2013 through 2016, to $25 million per year. In addition, the amendment expands the types of infrastructure eligible for the tracking mechanism and affords Columbia of Virginia additional flexibility with respect to annual and total plan limitations on expenditures.

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. Pursuant to the procedural schedule for this case, on September 3, 2013, Columbia of Massachusetts filed its updated revenue requirement of $29.5 million and on October 16, 2013, filed an updated cost of service for $30 million. Evidentiary hearings began on October 2, 2013.

On September 3, 2013, Columbia of Massachusetts and the Massachusetts Office of the Attorney General filed a Joint Motion for Approval of a Settlement Agreement with the Massachusetts DPU which resolves issues related to the disposition of revenues realized by Columbia of Massachusetts in 2005 from MASSPOWER's buy-out of a special contract with Columbia of Massachusetts, and which are currently pending before the Massachusetts DPU in D.P.U. 10-10. The Settlement Agreement proposed to return $8.9 million to the customers of Columbia of Massachusetts in the form of a Distribution Rate Credit on their bills during the period November 1, 2013 through April 30, 2014. On October 16, 2013, the DPU issued an order approving the Settlement Agreement.

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 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 and seeking to recover costs for environmental remediation associated with a former manufactured gas plant operated by a Columbia of Maryland predecessor in Hagerstown, Maryland, where a Columbia of Maryland service center is currently located. Hearings were held in June 2013. On September 23, 2013, the Maryland PSC issued an order that approved an annual revenue increase of $3.6 million, as well as Columbia of Maryland's proposed revenue normalization adjustment. The Maryland PSC permitted recovery of environmental remediation costs for the service center property, but denied recovery of the costs to acquire and remediate the adjacent property. On October 23, 2013, Columbia of Maryland filed a Petition for Judicial Review of the denial of the costs to acquire and remediate the adjacent property. New rates went into effect on September 25, 2013.

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

14

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

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 subject to 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.

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

Columbia Transmission Customer Settlement. On January 24, 2013, the FERC approved the Columbia Transmission Customer Settlement (the "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 provided 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, which 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.
 
Chesapeake, Virginia LNG Facility Modernization. In connection with long-term extensions of their expiring service agreements, the three customers of Columbia Transmission's Chesapeake, Virginia LNG peaking facility agreed to fund upgrades to modernize the facility. Under the settlement, Columbia Transmission will invest approximately $30 million to upgrade the facility and each customer will extend its contract for 15 years. The settlement was filed with the FERC on February 28, 2013 and approved without modification on June 3, 2013. The project's first phase is scheduled to be complete in the fourth quarter of 2013.


15

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

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 purchases 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 orders 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 using a forward looking rate, based on an average construction work in progress balance of $19.8 million. For the nine months ended September 30, 2013 revenue of $2.3 million was recorded.

On July 19, 2013, Northern Indiana filed its electric TDSIC, further discussed above, with the IURC. The filing included the seven year plan of eligible investments for a total of approximately $1.1 billion with the majority of the spend occurring in years 2016 through 2020. An order is expected by the first quarter of 2014.

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.

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 October 10, 2013, the IURC issued an order approving Northern Indiana’s MATS Compliance Projects. Refer to Note 17-C, “Environmental Matters,” for additional information on the MATS rule. The Order approved estimated capital costs of $59.3 million and granted the requested ratemaking relief and accounting treatment associated with these projects through the annual EERM and semi-annual ECRM tracker filings.

On April 24, 2013, the IURC issued an order on ECR-21 approving Northern Indiana's request to begin earning a return on net capital expenditures of $376.4 million. On August 1, 2013, Northern Indiana filed ECR-22 requesting a return on net capital expenditures of $478.8 million, an increase of $102.4 million from ECR-21.

 

16

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

7.    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, 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 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 obligation 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 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 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

17

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

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.
On September 1, 2013, NiSource sold the commercial and industrial natural gas portfolio of its unregulated natural gas marketing business. The sale included the physical contracts and associated financial hedges that comprise the portfolio, as well as the gas inventory and customer deposits of the business. The physical sales contracts marked-to-market had a fair value of approximately $35.4 million at December 31, 2012, while the financial derivative contracts marked-to-market had a fair value loss of $33.2 million at December 31, 2012. These amounts have been reclassified to held for sale as of December 31, 2012. Refer to Note 4, "Discontinued Operations and Assets and Liabilities Held for Sale" for additional information regarding the transaction.

18

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

Commodity price risk program derivative contracted gross volumes are as follows:
 
September 30, 2013
 
December 31, 2012
Commodity Price Risk Program:
 
 
 
Gas price volatility program derivatives (MMDth)
25.8

 
26.3

Price Protection Service program derivatives (MMDth)
1.0

 
1.2

DependaBill program derivatives (MMDth)
0.3

 
0.3

Gas marketing program derivatives (MMDth)(1)(3)

 
9.1

Gas marketing forward physical derivatives (MMDth)(2)(3)

 
8.4

Electric energy program FTR derivatives (mw)
1,218.2

 
8,927.3

(1) Basis contract volumes not included in the above table were 8.2 MMDth as of December 31, 2012.
(2) Basis contract volumes not included in the above table were 9.2 MMDth as of December 31, 2012.
(3) Contract volumes are from NiSource's unregulated natural gas marketing business that was sold on September 1, 2013.
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 September 30, 2013, NiSource had $7.2 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 nine months ended September 30, 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 which will expire on July 15, 2014. 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.
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 September 30, 2013, AOCI includes $8.6 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 September 30, 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 unrecognized loss associated with settled interest rate swaps is $17.9 million, net of tax, as of September 30, 2013. Millennium is amortizing the losses 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).

19

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)
September 30,
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)
$
21.0

 
$

Price risk management assets (noncurrent)

 
40.4

Total derivatives designated as hedging instruments
$
21.0

 
$
40.4

Derivatives not designated as hedging instruments
 
 
 
Commodity price risk programs
 
 
 
Price risk management assets (current)
$
0.1

 
$
0.5

Price risk management assets (noncurrent)

 
0.3

Assets held for sale (current)(1)

 
107.0

Total derivatives not designated as hedging instruments
$
0.1

 
$
107.8

Total Asset Derivatives
$
21.1

 
$
148.2


(1) Prior to the classification as "Assets held for sale," $15.3 million was classified as noncurrent. 

Liability Derivatives (in millions)
September 30,
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

 
$
0.1

Price risk management liabilities (noncurrent)

 

Total derivatives designated as hedging instruments
$
0.1

 
$
0.1

Derivatives not designated as hedging instruments
 
 
 
Commodity price risk programs
 
 
 
Price risk management liabilities (current)
$
8.7

 
$
8.1

Price risk management liabilities (noncurrent)
1.5

 
2.6

Liabilities held for sale (current)(2)

 
104.7

Total derivatives not designated as hedging instruments
$
10.2

 
$
115.4

Total Liability Derivatives
$
10.3

 
$
115.5


(2) Prior to the classification as "Liabilities held for sale," $17.7 million was classified as noncurrent. 

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.


20

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 September 30, 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 (1)
$

 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
Counterparty B
0.1

 

 
0.1

 
(10.3
)
 
(10.2
)
 
 
 
 
 
 
 
 
 
 
Other (2)
21.0

 

 
21.0

 

 
21.0

 
 
 
 
 
 
 
 
 
 
Total
$
21.1

 
$

 
$
21.1

 
$
(10.3
)
 
$
10.8

Offsetting of Derivative Liabilities (in millions)
As of September 30, 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 (1)
$

 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
Counterparty B
(10.3
)
 

 
(10.3
)
 
10.3

 

 
 
 
 
 
 
 
 
 
 
Other (2)

 

 

 

 

 
 
 
 
 
 
 
 
 
 
Total
$
(10.3
)
 
$

 
$
(10.3
)
 
$
10.3

 
$

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 (1)
$
71.8

 
$

 
$
71.8

 
$
(71.8
)
 
$

 
 
 
 
 
 
 
 
 
 
Counterparty B
0.9

 

 
0.9

 
(0.9
)
 

 
 
 
 
 
 
 
 
 
 
Other (2)
75.5

 

 
75.5

 

 
75.5

 
 
 
 
 
 
 
 
 
 
Total
$
148.2

 
$

 
$
148.2

 
$
(72.7
)
 
$
75.5


21

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 (1)
$
(103.4
)
 
$

 
$
(103.4
)
 
$
71.8

 
$
(31.6
)
 
 
 
 
 
 
 
 
 
 
Counterparty B
(10.8
)
 

 
(10.8
)
 
0.9

 
(9.9
)
 
 
 
 
 
 
 
 
 
 
Other (2)
(1.3
)
 

 
(1.3
)
 

 
(1.3
)
 
 
 
 
 
 
 
 
 
 
Total
$
(115.5
)
 
$

 
$
(115.5
)
 
$
72.7

 
$
(42.8
)
(1) Amounts in "Counterparty A" are balances from the commercial and industrial natural gas portfolio of NiSource's unregulated natural gas marketing business which was sold on September 1, 2013, and are included in assets and liabilities held for sale. Refer to Note 4, "Discontinued Operations and Assets and Liabilities Held for Sale" for additional information regarding the transaction.
(2) Amounts in "Other" include physical positions with counterparties that are part of NiSource's unregulated 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 Loss
Reclassified from  AOCI
into Income (Effective
Portion)
 
Amount of Loss
Reclassified from AOCI
into Income (Effective
Portion)
Derivatives in Cash Flow
Hedging Relationships
September 30,
2013
 
September 30, 2012
 
 
September 30,
2013
 
September 30, 2012
Commodity price risk programs
$

 
$
0.2

 
Cost of Sales
 
$

 
$

Interest rate risk activities

 
0.4

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

 
$
0.6

 
 
 
$
(0.4
)
 
$
(0.7
)
 
 
 
 
 
 
 
 
 
 
Nine 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
September 30,
2013
 
September 30, 2012
 
September 30,
2013
 
September 30, 2012
Commodity price risk programs
$

 
$
0.8

 
Cost of Sales
 
$
0.1

 
$
(0.8
)
Interest rate risk activities

 
1.2

 
Interest expense, net
 
(1.2
)
 
(2.0
)
Total
$

 
$
2.0

 
 
 
$
(1.1
)
 
$
(2.8
)
 
 
 
 
 
 
There was no income statement recognition of gains or losses for the ineffective portion and amounts excluded from effectiveness testing for derivatives in cash flow hedging relationships for the three and nine months ended September 30, 2013 and 2012.
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 $0.1 million of loss, net of taxes.

22

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
September 30, 2013
 
September 30, 2012
Interest rate risk activities
Interest expense, net
 
$
(9.9
)
 
$
(8.3
)
Total
 
 
$
(9.9
)
 
$
(8.3
)
 
 
 
 
 
 
Nine 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
September 30, 2013
 
September 30, 2012
Interest rate risk activities
Interest expense, net
 
$
(19.4
)
 
$
(16.5
)
Total
 
 
$
(19.4
)
 
$
(16.5
)
 
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
September 30, 2013
 
September 30, 2012
Fixed-rate debt
Interest expense, net
 
$
9.9

 
$
8.3

Total
 
 
$
9.9

 
$
8.3

 
 
 
 
 
 
Nine 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
September 30, 2013
 
September 30, 2012
Fixed-rate debt
Interest expense, net
 
$
19.4

 
$
16.5

Total
 
 
$
19.4

 
$
16.5

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 *
September 30, 2013
 
September 30, 2012
Commodity price risk programs
Gas Distribution revenues
 
$

 
$

Commodity price risk programs
Other revenues
 

 

Commodity price risk programs
Cost of Sales
 
6.6

 
6.8

Commodity price risk programs
(Loss) Income from Discontinued Operations - net of taxes
 
(1.2
)
 
0.6

Total
 
 
$
5.4

 
$
7.4

* For the amounts of realized/unrealized gain (loss) recognized in income on derivatives disclosed in the table above, gains of $6.7 million and $6.8 million for the three months ended September 30, 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.


23

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

Nine 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 *
September 30, 2013
 
September 30, 2012
Commodity price risk programs
Gas Distribution revenues
 
$

 
$
0.3

Commodity price risk programs
Other revenues
 

 

Commodity price risk programs
Cost of Sales
 
7.5

 
(8.6
)
Commodity price risk programs
(Loss) Income from Discontinued Operations - net of taxes
 
(0.8
)
 
2.8

Total
 
 
$
6.7

 
$
(5.5
)
* For the amounts of realized/unrealized gain (loss) recognized in income on derivatives disclosed in the table above, a gain of $7.6 million for the nine months ended September 30, 2013 and a loss of $8.3 million for the nine months ended 2012 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 September 30, 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 $0.8 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 $13.5 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 September 30, 2013 and December 31, 2012, respectively.
 

24

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

8.    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 September 30, 2013 and December 31, 2012:
 
Recurring Fair Value Measurements
September 30, 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 September 30, 2013
Assets
 
 
 
 
 
 
 
Commodity Price risk management assets:
 
 
 
 
 
 
 
Physical price risk programs
$

 
$

 
$

 
$

Financial price risk programs
0.1

 


 

 
0.1

Interest rate risk activities

 
21.0

 

 
21.0

Available-for-sale securities
26.5

 
99.9

 

 
126.4

Total
$
26.6

 
$
120.9

 
$

 
$
147.5

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

 
$

 
$

 
$

Financial price risk programs
9.7

 

 
0.6

 
10.3

Total
$
9.7

 
$

 
$
0.6

 
$
10.3



25

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

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
$

 
$

 
$

 
$

Physical price risk programs (assets held for sale)

 
35.4

 

 
35.4

Financial price risk programs
0.7

 

 
0.1

 
0.8

Financial price risk programs (assets held for sale)
70.8

 
0.8

 

 
71.6

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
10.8

 

 

 
10.8

Financial price risk programs (liabilities held for sale)
104.2

 
0.5

 

 
104.7

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, 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 September 30, 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.
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.

26

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

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 September 30, 2013 and December 31, 2012 were:
 
(in millions)
Amortized
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair
Value
Available-for-sale debt securities, September 30, 2013
 
 
 
 
 
 
 
U.S. Treasury
$
31.3

 
$
0.5

 
$
(0.3
)
 
$
31.5

Corporate/Other
94.8

 
1.2

 
(1.1
)
 
94.9

Total Available-for-sale debt securities
$
126.1

 
$
1.7

 
$
(1.4
)
 
$
126.4

(in millions)
Amortized
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair
Value
Available-for-sale debt securities, December 31, 2012