10-Q 1 ni-2016930x10q.htm 10-Q Document
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, 2016
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.)
Yes þ    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. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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: 322,737,775 shares outstanding at October 25, 2016.



NISOURCE INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 30, 2016
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, Affiliates and Former Subsidiaries
CGORC
Columbia Gas of Ohio Receivables Corporation
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.
CPG
Columbia Pipeline Group, Inc.
CPRC
Columbia Gas of Pennsylvania Receivables Corporation
NARC
NIPSCO Accounts Receivable Corporation
NIPSCO
Northern Indiana Public Service Company
NiSource or the Company
NiSource Inc.
NiSource Finance
NiSource Finance Corp.
 
 
Abbreviations and Other
 
AFUDC
Allowance for funds used during construction
AOCI
Accumulated Other Comprehensive Income (Loss)
ASU
Accounting Standards Update
BNS
Bank of Nova Scotia
BTMU
The Bank of Tokyo-Mitsubishi UFJ, LTD.
CAA
Clean Air Act
CCRs
Coal Combustion Residuals
CERCLA
Comprehensive Environmental Response Compensation and Liability Act (also known as Superfund)
CO2
Carbon Dioxide
CPP
Clean Power Plan
DPU
Department of Public Utilities
DSM
Demand Side Management
ECR
Environmental Cost Recovery
ECT
Environmental Cost Tracker
EGUs
Electric Utility Generating Units
ELG
Effluent limitations guidelines
EPA
United States Environmental Protection Agency
EPS
Earnings per share
FAC
Fuel adjustment clause
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
GAAP
Generally Accepted Accounting Principles
GCA
Gas cost adjustment
GCR
Gas cost recovery
GHG
Greenhouse gases
GSEP
Gas System Enhancement Program
gwh
Gigawatt hours

3


DEFINED TERMS (continued)

IDEM
Indiana Department of Environmental Management
IRP
Infrastructure Replacement Program
IURC
Indiana Utility Regulatory Commission
kV
Kilovolt
LDAF
Local Distribution Adjustment Factor
LDCs
Local distribution companies
MATS
Mercury and Air Toxics Standards
MGP
Manufactured Gas Plant
MISO
Midcontinent Independent System Operator
Mizuho
Mizuho Corporate Bank Ltd.
MMDth
Million dekatherms
MPSC
Maryland Public Service Commission
NAAQS
National Ambient Air Quality Standards
NDC
Nationally Determined Contribution
NOL
Net operating loss
NOx
Nitric oxide and nitrogen dioxide
NSR
New Source Review
NYMEX
New York Mercantile Exchange
OPEB
Other Postretirement Benefits
PHMSA
U.S. Department of Transportation Pipeline and Hazardous Materials Safety Administration
PNC
PNC Bank, N.A.
Pure Air
Pure Air on the Lake LP
Separation
The separation of NiSource's natural gas pipeline, midstream and storage business from NiSource's natural gas and electric utility business accomplished through the pro rata distribution by NiSource to holders of its outstanding common stock of all the outstanding shares of common stock of CPG. The Separation was completed on July 1, 2015.
ppb
Parts per billion
PSC
Public Service Commission
PUC
Public Utility Commission
PUCO
Public Utilities Commission of Ohio
RDAF
Revenue Decoupling Adjustment Factor
ROE
Return on equity
RTO
Regional Transmission Organization
SEC
Securities and Exchange Commission
TDSIC
Transmission, Distribution and Storage System Improvement Charge
TSA
Transition Services Agreement
TUAs
Transmission Upgrade Agreements
VIE
Variable Interest Entities
VSCC
Virginia State Corporation Commission



4


PART I

ITEM 1. FINANCIAL STATEMENTS
NiSource Inc.
Condensed Statements of Consolidated Income (Loss) (unaudited)
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions, except per share amounts)
2016
 
2015
 
2016
 
2015
Net Revenues
 
 
 
 
 
 
Gas Distribution
$
212.3

 
$
208.9

 
$
1,244.3

 
$
1,595.5

Gas Transportation
180.0

 
172.1

 
689.5

 
739.9

Electric
465.5

 
428.4

 
1,249.2

 
1,198.7

Other
3.5

 
7.8

 
12.5

 
19.9

   Total Gross Revenues
861.3

 
817.2

 
3,195.5

 
3,554.0

Cost of Sales (excluding depreciation and amortization)
218.2

 
209.1

 
949.6

 
1,307.3

Total Net Revenues
643.1

 
608.1

 
2,245.9

 
2,246.7

Operating Expenses
 
 
 
 
 
 
 
Operation and maintenance
336.6

 
311.1

 
1,028.9

 
1,076.9

Depreciation and amortization
136.3

 
132.5

 
406.0

 
391.0

Loss (gain) on sale of assets and impairments, net
(0.1
)
 
1.1

 
(0.4
)
 
1.2

Other taxes
56.6

 
53.7

 
178.1

 
197.2

Total Operating Expenses
529.4

 
498.4

 
1,612.6

 
1,666.3

Operating Income
113.7

 
109.7

 
633.3

 
580.4

Other Income (Deductions)
 
 
 
 
 
 
 
Interest expense, net
(85.0
)
 
(94.9
)
 
(261.5
)
 
(285.9
)
Other, net
3.5

 
5.8

 
(1.9
)
 
11.6

Loss on early extinguishment of long-term debt

 

 

 
(97.2
)
Total Other Deductions
(81.5
)
 
(89.1
)
 
(263.4
)
 
(371.5
)
Income from Continuing Operations before Income Taxes
32.2

 
20.6

 
369.9

 
208.9

Income Taxes
8.5

 
5.8

 
130.6

 
74.7

Income from Continuing Operations
23.7

 
14.8

 
239.3

 
134.2

Income (Loss) from Discontinued Operations - net of taxes
3.5

 
(19.7
)
 
3.4

 
108.5

Net Income (Loss)
27.2

 
(4.9
)
 
242.7

 
242.7

Less: Net income attributable to noncontrolling interest

 

 

 
15.6

Net Income (Loss) attributable to NiSource
$
27.2

 
$
(4.9
)

$
242.7


$
227.1

Amounts attributable to NiSource:
 
 
 
 
 
 
 
Income from continuing operations
$
23.7

 
$
14.8

 
$
239.3

 
$
134.2

Income (Loss) from discontinued operations
3.5

 
(19.7
)
 
3.4

 
92.9

Net Income (Loss) attributable to NiSource
$
27.2

 
$
(4.9
)
 
$
242.7

 
$
227.1

Basic Earnings (Loss) Per Share
 
 
 
 
 
 
 
Continuing operations
$
0.07

 
$
0.05

 
$
0.74

 
$
0.42

Discontinued operations
0.01

 
(0.07
)
 
0.02

 
0.30

Basic Earnings (Loss) Per Share
$
0.08

 
$
(0.02
)
 
$
0.76

 
$
0.72

Diluted Earnings (Loss) Per Share
 
 
 
 
 
 
 
Continuing operations
$
0.07

 
$
0.05

 
$
0.74

 
$
0.42

Discontinued operations
0.01

 
(0.07
)
 
0.01

 
0.29

Diluted Earnings (Loss) Per Share
$
0.08

 
$
(0.02
)
 
$
0.75

 
$
0.71

Dividends Declared Per Common Share
$
0.165

 
$
0.310

 
$
0.640

 
$
0.830

Basic Average Common Shares Outstanding
322.3

 
318.1

 
321.4

 
317.4

Diluted Average Common Shares
323.9

 
321.5

 
323.2

 
320.7


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

5

Table of Contents

ITEM 1. FINANCIAL STATEMENTS (continued)


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

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions, net of taxes)
2016
 
2015
 
2016
 
2015
Net Income (Loss)
$
27.2

 
$
(4.9
)
 
$
242.7

 
$
242.7

Other comprehensive income (loss):
 
 
 
 
 
 
 
 Net unrealized gain (loss) on available-for-sale securities(1)
(0.3
)
 
0.3

 
2.2

 

Net unrealized gain (loss) on cash flow hedges(2)
(22.6
)
 
0.2

 
(146.8
)
 
1.8

Unrecognized pension and OPEB benefit (cost)(3)
0.2

 
(0.2
)
 
0.7

 
2.7

Total other comprehensive income (loss)
(22.7
)
 
0.3

 
(143.9
)
 
4.5

Comprehensive Income (Loss)
$
4.5

 
$
(4.6
)

$
98.8


$
247.2

Less: Comprehensive income attributable to noncontrolling interest

 

 

 
15.6

Comprehensive Income (Loss) attributable to NiSource
$
4.5

 
$
(4.6
)

$
98.8


$
231.6

(1) Net unrealized gain (loss) on available-for-sale securities, net of $0.1 million tax benefit and $0.2 million tax expense in the third quarter of 2016 and 2015, respectively, and $1.2 million and zero tax expense for the nine months ended 2016 and 2015, respectively.
(2) Net unrealized gain (loss) on derivatives qualifying as cash flow hedges, net of $14.0 million tax benefit and $0.2 million tax expense in the third quarter of 2016 and 2015, respectively, and $90.6 million tax benefit and $1.1 million tax expense for the nine months ended 2016 and 2015, respectively.
(3) Unrecognized pension and OPEB benefit (cost), net of $0.1 million tax expense and $0.1 million tax benefit in the third quarter of 2016 and 2015, respectively, and $0.4 million and $2.1 million tax expense for the nine months ended 2016 and 2015, respectively.
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 Consolidated Balance Sheets (unaudited)
(in millions)
September 30,
2016
 
December 31,
2015
ASSETS
 
 
 
Property, Plant and Equipment
 
 
 
Utility plant
$
19,856.9

 
$
18,946.9

Accumulated depreciation and amortization
(7,020.2
)
 
(6,853.4
)
Net utility plant
12,836.7

 
12,093.5

Other property, at cost, less accumulated depreciation
17.1

 
18.0

Net Property, Plant and Equipment
12,853.8

 
12,111.5

Investments and Other Assets
 
 
 
Unconsolidated affiliates
6.5

 
6.9

Other investments
200.5

 
187.7

Total Investments and Other Assets
207.0

 
194.6

Current Assets
 
 
 
Cash and cash equivalents
16.1

 
15.5

Restricted cash
13.8

 
29.7

Accounts receivable (less reserve of $19.1 and $20.3, respectively)
471.0

 
660.0

Gas inventory
323.6

 
343.5

Materials and supplies, at average cost
100.1

 
86.8

Electric production fuel, at average cost
110.0

 
106.3

Exchange gas receivable
16.9

 
21.0

Regulatory assets
262.9

 
206.9

Prepayments and other
64.1

 
107.5

Total Current Assets
1,378.5

 
1,577.2

Other Assets
 
 
 
Regulatory assets
1,619.7

 
1,599.8

Goodwill
1,690.7

 
1,690.7

Intangible assets
245.4

 
253.7

Deferred charges and other
72.1

 
65.0

Total Other Assets
3,627.9

 
3,609.2

Total Assets
$
18,067.2

 
$
17,492.5

 
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) (continued)
(in millions, except share amounts)
September 30,
2016
 
December 31,
2015
CAPITALIZATION AND LIABILITIES
 
 
 
Capitalization
 
 
 
Common Stockholders’ Equity
 
 
 
Common stock - $0.01 par value, 400,000,000 shares authorized; 322,564,310 and 319,110,083 shares outstanding, respectively
$
3.3

 
$
3.2

Treasury stock
(87.4
)
 
(79.3
)
Additional paid-in capital
5,135.6

 
5,078.0

Retained deficit
(1,060.9
)
 
(1,123.3
)
Accumulated other comprehensive loss
(179.0
)
 
(35.1
)
Total Common Stockholders’ Equity
3,811.6

 
3,843.5

Long-term debt, excluding amounts due within one year
6,096.2

 
5,948.5

Total Capitalization
9,907.8


9,792.0

Current Liabilities
 
 
 
Current portion of long-term debt
582.6

 
433.7

Short-term borrowings
1,059.0

 
567.4

Accounts payable
352.2

 
433.4

Dividends payable
53.1

 

Customer deposits and credits
255.2

 
316.3

Taxes accrued
130.9

 
183.5

Interest accrued
71.1

 
129.0

Exchange gas payable
58.2

 
62.3

Regulatory liabilities
107.2

 
231.4

Legal and environmental
38.6

 
37.6

Accrued compensation and employee benefits
136.0

 
141.3

Other accruals
67.5

 
121.6

Total Current Liabilities
2,911.6

 
2,657.5

Other Liabilities and Deferred Credits
 
 
 
Risk management liabilities
264.5

 
22.6

Deferred income taxes
2,384.2

 
2,365.3

Deferred investment tax credits
13.8

 
14.8

Deferred credits
95.2

 
90.7

Accrued liability for postretirement and postemployment benefits
738.2

 
759.7

Regulatory liabilities
1,296.8

 
1,350.4

Asset retirement obligations
272.3

 
254.0

Other noncurrent liabilities
182.8

 
185.5

Total Other Liabilities and Deferred Credits
5,247.8

 
5,043.0

Commitments and Contingencies (Refer to Note 17, "Other Commitments and Contingencies")

 

Total Capitalization and Liabilities
$
18,067.2

 
$
17,492.5

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 Statements of Consolidated Cash Flows (unaudited)

Nine Months Ended September 30, (in millions)
2016
 
2015
Operating Activities
 
 
 
Net Income
$
242.7

 
$
242.7

Adjustments to Reconcile Net Income to Net Cash from Continuing Operations:
 
 
 
Loss on early extinguishment of debt

 
97.2

Depreciation and amortization
406.0

 
391.0

Deferred income taxes and investment tax credits
137.7

 
60.1

Stock compensation expense and 401(k) profit sharing contribution
33.6

 
38.6

Income from discontinued operations - net of taxes
(3.4
)
 
(108.5
)
Amortization of discount/premium on debt
5.4

 
6.8

AFUDC equity
(8.8
)
 
(7.7
)
Other adjustments
(2.3
)
 
11.3

Changes in Assets and Liabilities:
 
 
 
Accounts receivable
188.2

 
420.3

Inventories
(0.7
)
 
19.8

Accounts payable
(83.2
)
 
(287.5
)
Customer deposits and credits
(61.1
)
 
(25.5
)
Taxes accrued
(51.3
)
 
(30.6
)
Interest accrued
(57.9
)
 
(63.1
)
Exchange gas receivable/payable
(0.1
)
 
(26.1
)
Other accruals
(29.8
)
 
(57.1
)
Prepayments and other current assets
43.9

 
30.1

Regulatory assets/liabilities
(202.2
)
 
259.6

Postretirement and postemployment benefits
(20.9
)
 
(61.0
)
Deferred credits
4.6

 
(1.3
)
Deferred charges and other noncurrent assets
(3.0
)
 
10.8

Other noncurrent liabilities
(4.6
)
 
(13.6
)
Net Operating Activities from Continuing Operations
532.8

 
906.3

Net Operating Activities from (used for) Discontinued Operations
(0.8
)
 
287.6

Net Cash Flows from Operating Activities
532.0

 
1,193.9

Investing Activities
 
 
 
Capital expenditures
(1,083.4
)
 
(923.4
)
Cash contributions from CPG

 
3,798.2

Proceeds from disposition of assets
3.4

 
4.3

Restricted cash withdrawals (deposits)
15.9

 
(3.0
)
Cost of removal
(79.5
)
 
(49.2
)
Other investing activities
(24.6
)
 
9.3

Net Investing Activities from (used for) Continuing Operations
(1,168.2
)
 
2,836.2

Net Investing Activities used for Discontinued Operations

 
(430.0
)
Net Cash Flows from (used for) Investing Activities
(1,168.2
)
 
2,406.2

Financing Activities
 
 
 
Cash of CPG at separation

 
(136.8
)
Issuance of long-term debt
500.0

 

Repayments of long-term debt and capital lease obligations
(210.9
)
 
(1,859.1
)
Premiums and other debt related costs
(0.3
)
 
(93.5
)
Change in short-term borrowings, net
491.6

 
(1,396.6
)
Issuance of common stock
16.8

 
17.9

Acquisition of treasury stock
(8.1
)
 
(20.3
)
Dividends paid - common stock
(152.3
)
 
(214.0
)
Net Financing Activities from (used for) Continuing Operations
636.8

 
(3,702.4
)
Net Financing Activities from Discontinued Operations

 
108.6

Net Cash Flows from (used for) Financing Activities
636.8

 
(3,593.8
)
Change in cash and cash equivalents from continuing operations
1.4

 
40.1

Change in cash and cash equivalents used for discontinued operations
(0.8
)
 
(33.8
)
Change in cash included in discontinued operations

 
0.5

Cash and cash equivalents at beginning of period
15.5

 
24.9

Cash and Cash Equivalents at End of Period
$
16.1

 
$
31.7


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 Statement of Consolidated Equity (unaudited)
(in millions)
Common
Stock
 
Treasury
Stock
 
Additional
Paid-In
Capital
 
Retained
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Balance as of January 1, 2016
$
3.2

 
$
(79.3
)
 
$
5,078.0

 
$
(1,123.3
)
 
$
(35.1
)
 
$
3,843.5

Comprehensive Income:
 
 
 
 
 
 
 
 
 
 
 
Net Income

 

 

 
242.7

 

 
242.7

Other comprehensive loss, net of tax

 

 

 

 
(143.9
)
 
(143.9
)
Common stock dividends ($0.64 per share)

 

 

 
(205.6
)
 

 
(205.6
)
Treasury stock acquired

 
(8.1
)
 

 

 

 
(8.1
)
Cumulative effect of change in accounting principle

 

 

 
25.3

 

 
25.3

Stock issuances:
 
 
 
 
 
 
 
 
 
 
 
Common stock
0.1

 

 

 

 

 
0.1

Employee stock purchase plan

 

 
3.4

 

 

 
3.4

Long-term incentive plan

 

 
16.9

 

 

 
16.9

401(k) and profit sharing

 

 
30.8

 

 

 
30.8

Dividend reinvestment plan

 

 
6.5

 

 

 
6.5

Balance as of September 30, 2016
$
3.3

 
$
(87.4
)
 
$
5,135.6

 
$
(1,060.9
)
 
$
(179.0
)
 
$
3,811.6


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 Inc. ("NiSource" or 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 contain the accounts of the Company and its majority-owned or controlled subsidiaries. The results of operations of the former Columbia Pipeline Group Operations segment have been classified as discontinued operations for all periods presented. See Note 4, "Discontinued Operations," for further information.

Unless otherwise indicated, the information in the Notes to the Condensed Consolidated Financial Statements (unaudited) relates to NiSource's continuing operations.

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, 2015. 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 in this quarterly report on Form 10-Q are adequate to make the information herein not misleading.

2.    Recent Accounting Pronouncements

Recently Issued Accounting Pronouncements

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). The pronouncement provides specific guidance on eight cash flow classification issues to reduce the diversity in practice. NiSource is required to adopt ASU 2016-15 for periods beginning after December 15, 2017, including interim periods therein. NiSource is currently evaluating the impact the adoption of ASU 2016-15 will have on the Condensed Consolidated Financial Statements (unaudited) or Notes to Condensed Consolidated Financial Statements (unaudited).
In June 2016, the FASB issued ASU 2016-13, Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 changes the impairment model for most financial assets, replacing the current "incurred loss" model. ASU 2016-13 will require the use of an "expected loss" model for instruments measured at amortized cost and will also require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount. NiSource is required to adopt ASU 2016-13 for periods beginning after December 15, 2019, including interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018. NiSource is currently evaluating the impact the adoption of ASU 2016-13 will have on the Condensed Consolidated Financial Statements (unaudited) or Notes to Condensed Consolidated Financial Statements (unaudited).
In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The pronouncement clarifies implementation guidance in ASU 2014-09 on assessing collectability, noncash consideration and the presentation of sales and other similar taxes collected from customers. ASU 2016-12 has the same effective date and transition requirements as ASU 2015-14, Revenue from Contracts with Customers (Topic 606). NiSource is currently evaluating the impact the adoption of ASU 2016-12 will have on the Condensed Consolidated Financial Statements (unaudited) or Notes to Condensed Consolidated Financial Statements (unaudited).
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations. ASU 2016-08 clarifies the principal versus agent guidance in ASU 2014-09, the new revenue recognition standard. The amendment clarifies how an entity should identify the unit of accounting for the principal versus agent evaluation, and how it should apply the control principle to certain types of arrangements. ASU 2016-08 has the same effective date and transition requirements as ASU 2015-14. NiSource is currently evaluating the impact the adoption of ASU 2016-08 will have on the Condensed Consolidated Financial Statements (unaudited) or Notes to Condensed Consolidated Financial Statements (unaudited).
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 introduces a lessee model that brings most leases on the balance sheet. The standard requires that lessees recognize the following for all leases (with the exception of short-

11

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

term leases, as that term is defined in the standard) at the lease commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. NiSource is required to adopt ASU 2016-02 for periods beginning after December 15, 2018, including interim periods therein, and the guidance is to be applied with a modified retrospective approach, with early adoption permitted.

NiSource has formed an internal stakeholder group that meets periodically to share information and gather data related to leasing activity at NiSource. NiSource has compiled a list of all active leases, and is in the process of evaluating that list to determine the ultimate impact the new standard will have on NiSource’s financial statements. As of September 30, 2016, NiSource has not determined an adoption date for ASU 2016-02.
Recently Issued Accounting Pronouncements - Progress Toward Adoption

NiSource has progressed in its adoption efforts related to ASU 2014-09, Revenue from Contracts with Customers (Topic 606). An internal stakeholder group has been formed from the relevant departments at the Company to promote information sharing and communication of the new requirements. Additionally, NiSource participates in an informal forum of industry peers where questions can be asked and interpretations of the new standard can be shared. NiSource has separated its various revenue streams into high-level categories, which will serve as the basis for accounting analysis and documentation as it relates to ASU 2014-09’s impact on revenues at the Company. Substantially all of NiSource’s revenues are tariff based. As of September 30, 2016, NiSource has not concluded on an adoption date or a method of adoption for ASU 2014-09.
Recently Adopted Accounting Pronouncements

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. Among other provisions, the standard requires that all excess-related income tax effects of awards are recognized in the income statement when the awards vest and are distributed and also allows an employer to make a policy election to account for forfeitures as they occur. NiSource elected to early adopt ASU 2016-09 during the third quarter of 2016.
Upon adoption, NiSource elected to begin accounting for forfeitures of share-based awards as they occur. The impact of this change was not material. Additionally, NiSource recorded an adjustment to beginning retained deficit of $25.3 million. This adjustment represents excess tax benefits generated in years prior to 2016 that were previously not recognized in stockholders' equity due to NOLs in those years. Both of these adjustments were adopted on a modified retrospective basis. Lastly, NiSource recorded income tax benefits of $7.2 million related to excess tax benefits generated in 2016. These benefits were adopted on a prospective basis. However, because NiSource adopted the standard during an interim period, the standard required this $7.2 million benefit be reflected as though it was adopted as of January 1, 2016. The impact of these benefits on previously issued financial statements is summarized in the tables below:

12

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

(in millions, except per share amounts)
 
As Previously Reported
 
Effect of Change
 
As Adjusted
Three Months Ended March 31, 2016
 
 
 
 
 
 
Income from Continuing Operations before Income Taxes
 
$
291.6

 
$

 
$
291.6

Income Taxes
 
111.9

 
(6.9
)
 
105.0

Income from Continuing Operations
 
179.7

 
6.9

 
186.6

Income from Discontinued Operations - net of taxes
 

 

 

Net Income
 
$
179.7

 
$
6.9

 
$
186.6

Basic Earnings Per Share
 
 
 
 
 
 
Continuing operations
 
$
0.56

 
$
0.02

 
$
0.58

Discontinued operations
 

 

 

Basic Earnings Per Share
 
$
0.56

 
$
0.02

 
$
0.58

Diluted Earnings Per Share
 
 
 
 
 
 
Continuing operations
 
$
0.56

 
$
0.02

 
$
0.58

Discontinued operations
 

 

 

Diluted Earnings Per Share
 
$
0.56

 
$
0.02

 
$
0.58

Basic Average Common Shares Outstanding
 
320.3

 

 
320.3

Diluted Average Common Shares
 
322.0

 
0.5

 
322.5

(in millions, except per share amounts)
 
As Previously Reported
 
Effect of Change
 
As Adjusted
Three Months Ended June 30, 2016
 
 
 
 
 
 
Income from Continuing Operations before Income Taxes
 
$
46.1

 
$

 
$
46.1

Income Taxes
 
17.4

 
(0.3
)
 
17.1

Income from Continuing Operations
 
28.7

 
0.3

 
29.0

Loss from Discontinued Operations - net of taxes
 
(0.1
)
 

 
(0.1
)
Net Income
 
$
28.6

 
$
0.3

 
$
28.9

Basic Earnings Per Share
 
 
 
 
 
 
Continuing operations
 
$
0.09

 
$

 
$
0.09

Discontinued operations
 

 

 

Basic Earnings Per Share
 
$
0.09

 
$

 
$
0.09

Diluted Earnings Per Share
 
 
 
 
 
 
Continuing operations
 
$
0.09

 
$

 
$
0.09

Discontinued operations
 

 

 

Diluted Earnings Per Share
 
$
0.09

 
$

 
$
0.09

Basic Average Common Shares Outstanding
 
321.7

 

 
321.7

Diluted Average Common Shares
 
322.9

 
0.3

 
323.2


13

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

(in millions, except per share amounts)
 
As Previously Reported
 
Effect of Change
 
As Adjusted
Six Months Ended June 30, 2016
 
 
 
 
 
 
Income from Continuing Operations before Income Taxes
 
$
337.7

 
$

 
$
337.7

Income Taxes
 
129.3

 
(7.2
)
 
122.1

Income from Continuing Operations
 
208.4

 
7.2

 
215.6

Loss from Discontinued Operations - net of taxes
 
(0.1
)
 

 
(0.1
)
Net Income
 
$
208.3

 
$
7.2

 
$
215.5

Basic Earnings Per Share
 
 
 
 
 
 
Continuing operations
 
$
0.65

 
$
0.02

 
$
0.67

Discontinued operations
 

 

 

Basic Earnings Per Share
 
$
0.65

 
$
0.02

 
$
0.67

Diluted Earnings Per Share
 
 
 
 
 
 
Continuing operations
 
$
0.65

 
$
0.02

 
$
0.67

Discontinued operations
 

 

 

Diluted Earnings Per Share
 
$
0.65

 
$
0.02

 
$
0.67

Basic Average Common Shares Outstanding
 
321.0

 

 
321.0

Diluted Average Common Shares
 
322.5

 
0.3

 
322.8

None of the other provisions of this standard materially impacted NiSource's Condensed Consolidated Financial Statements (unaudited) or Notes to Condensed Consolidated Financial Statements (unaudited).

3.    Earnings Per Share

Basic EPS is computed by dividing net income attributable to NiSource 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. The numerator in calculating both basic and diluted EPS for each period is reported net income attributable to NiSource. The computation of diluted average common shares is as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands)
2016
 
2015
 
2016
 
2015
Denominator
 
 
 
 
 
 
 
Basic average common shares outstanding
322,318

 
318,090

 
321,445

 
317,390

Dilutive potential common shares:
 
 
 
 
 
 
 
Shares contingently issuable under employee stock plans
228

 

 
146

 

Shares restricted under employee stock plans
1,372

 
3,375

 
1,606

 
3,328

Diluted Average Common Shares
323,918

 
321,465

 
323,197

 
320,718


4.    Discontinued Operations

On July 1, 2015, NiSource completed the Separation through a special pro rata stock dividend, distributing one share of CPG common stock for every one share of NiSource common stock held by any NiSource stockholder on June 19, 2015, the record date. The Separation resulted in two stand-alone energy infrastructure companies: NiSource, a fully regulated natural gas and electric utilities company, and CPG, a natural gas pipeline, midstream and storage company. As a stand-alone company, on the date of the Separation, CPG's operations consisted of NiSource's Columbia Pipeline Group Operations segment prior to the Separation. Following the Separation, NiSource retained no ownership interest in CPG. On the date of the Separation, CPG consisted of approximately $9.2 billion of assets, $5.6 billion of liabilities and $3.6 billion of equity.


14

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

The results of operations and cash flows for the former Columbia Pipeline Group Operations segment have been reported as discontinued operations for all periods presented.

During the third quarter of 2016, Nisource recorded a $3.6 million tax benefit resulting from favorable estimate-to-actual adjustments related to non-deductible costs from the Separation. There were no other material results from discontinued operations during 2016.

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

Results from discontinued operations for the three and nine months ended September 30, 2015 are included in the table below. These results are primarily from NiSource's former Columbia Pipeline Group Operations segment.
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2015
(in millions)
Columbia Pipeline Group Operations
 
Corporate and Other
 
Total
 
Columbia Pipeline Group Operations
 
Corporate and Other
 
Total
Net Revenues
 
 
 
 
 
 
 
 
 
 
 
Transportation and storage revenues
$

 
$

 
$

 
$
561.4

 
$

 
$
561.4

Other revenues

 

 

 
94.3

 

 
94.3

Total Sales Revenues

 

 

 
655.7

 

 
655.7

Less: Cost of sales (excluding depreciation and amortization)

 

 

 
0.2

 

 
0.2

Net Revenues

 

 

 
655.5

 

 
655.5

Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
Operation and maintenance
5.5

(1) 

 
5.5

 
374.8

(1) 

 
374.8

Depreciation and amortization

 

 

 
66.4

 

 
66.4

Gain on sale of assets

 

 

 
(13.6
)
 

 
(13.6
)
Other taxes

 

 

 
38.0

 

 
38.0

Total Operating Expenses
5.5

 

 
5.5

 
465.6

 

 
465.6

Equity Earnings in Unconsolidated Affiliates

 

 

 
29.1

 

 
29.1

Operating Income (Loss) from Discontinued Operations
(5.5
)
 

 
(5.5
)
 
219.0

 

 
219.0

Other Income (Deductions)
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net

 

 

 
(37.1
)
 

 
(37.1
)
Other, net

 

 

 
7.8

 
(0.6
)
 
7.2

Total Other Deductions

 

 

 
(29.3
)
 
(0.6
)
 
(29.9
)
Income (Loss) from Discontinued Operations before Income Taxes
(5.5
)
 

 
(5.5
)
 
189.7

 
(0.6
)
 
189.1

Income Taxes
14.2

(2) 

 
14.2

 
80.9

 
(0.3
)
 
80.6

Income (Loss) from Discontinued
Operations - net of taxes
$
(19.7
)
 
$

 
$
(19.7
)
 
$
108.8

 
$
(0.3
)
 
$
108.5

(1) Includes approximately $5.5 million and $54.4 million of transaction costs related to the Separation for the three and nine months ended September 30, 2015, respectively.
(2) Primarily attributable to the write-off of consolidated state income tax benefits resulting from the Separation.

CPG’s financing requirements prior to the private placement of senior notes on May 22, 2015 were satisfied through borrowings from NiSource Finance. Interest expense from discontinued operations primarily represents net interest charged to CPG from NiSource Finance, less AFUDC. Subsequent to May 22, 2015, interest expense from discontinued operations also includes interest incurred on CPG's private placement of $2,750.0 million of senior notes.

Continuing Involvement
Natural gas transportation and storage services provided to NiSource by CPG were $31.9 million and $107.5 million for the three and nine months ended September 30, 2016, respectively, and $31.6 million and $105.4 million for the three and nine months ended September 30, 2015, respectively. Prior to July 1, 2015, these costs were eliminated in consolidation. Beginning July 1, 2015, these costs and associated cash flows represent third-party transactions with CPG and are not eliminated in consolidation, as such services have continued subsequent to the Separation and are expected to continue for the foreseeable future.


16

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

As a result of the Separation, NiSource and CPG entered into TSAs. NiSource expects the TSAs to terminate within 24 months from the date of the Separation. The TSAs set forth the terms and conditions for NiSource and CPG to provide certain transition services to one another. Under the TSAs, NiSource provides CPG certain information technology, financial and accounting, human resource and other specified services. For the three and nine months ended September 30, 2016, the amounts NiSource billed CPG for these services were immaterial.

There were no material assets and liabilities of discontinued operations on the Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2016 and December 31, 2015.

5.    Asset Retirement Obligations

Changes in NiSource’s liability for asset retirement obligations for the nine months ended September 30, 2016 and 2015 are presented in the table below:
 
(in millions)
2016
 
2015
 
Balance as of January 1,
$
254.0

 
$
136.2

 
Accretion recorded as a regulatory asset/liability
7.7

 
5.9

 
Additions

 
6.4

 
Settlements
(2.2
)
 
(4.3
)
 
Change in estimated cash flows
12.8

(1) 
37.0

(2) 
Balance as of September 30,
$
272.3

 
$
181.2

 
(1) The change in estimated cash flows for 2016 is primarily attributed to changes in estimated costs for retirement of gas mains.
(2) The change in estimated cash flows for 2015 primarily represents estimated costs associated with the EPA's final rule for regulation of CCRs and changes to cost estimates for certain solid waste management units. See Note 17, "Other Commitments and Contingencies," for additional information on CCRs.

6.    Regulatory Matters
Gas Distribution Operations Regulatory Matters
Significant Rate Developments. On April 30, 2013, Indiana Governor Pence signed Senate Enrolled Act 560, the TDSIC statute, 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. Provisions of the TDSIC statute 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. The cost recovery mechanism is referred to as a TDSIC 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 June 22, 2016, the IURC issued an order on TDSIC-4 approving, in all material respects, NIPSCO’s updated seven-year plan of approximately $800 million in TDSIC-eligible investments. On August 31, 2016, NIPSCO filed TDSIC-5 which included an updated seven-year plan of $824 million in TDSIC-eligible investments. An order is expected from the IURC in the fourth quarter of 2016.
On March 18, 2016, Columbia of Pennsylvania filed a base rate case with the Pennsylvania PUC, seeking a revenue increase of $55.3 million annually. The case was driven by Columbia of Pennsylvania’s ongoing capital investment program which exceeded $197.0 million in 2015, and is projected to exceed $220.0 million in 2016 and $265.0 million in 2017. This case was also driven by operation and maintenance expenditures related to employee training and compliance with pipeline safety regulations. Columbia of Pennsylvania's request for rate relief included the recovery of costs that will be incurred after the implementation of new rates, as authorized by the Pennsylvania General Assembly with the passage of Act 11 of 2012. On September 2, 2016, the parties to the case filed a joint petition for settlement which provides for an annual revenue increase of $35.0 million. On September 28, 2016, the assigned administrative law judge issued a recommended decision to approve the proposed settlement, without modification. An order approving the settlement was issued from the Pennsylvania PUC on October 27, 2016, with new rates to be implemented in December 2016.

17

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

On April 15, 2016, Columbia of Maryland filed a base rate case with the MPSC, seeking an annual revenue increase of $6.5 million. The case was driven by Columbia of Maryland’s ongoing capital investment program and by operations and maintenance expenditures related to compliance with pipeline safety regulations. On July 27, 2016, the parties to the case filed a joint petition for approval of a proposed settlement that includes an annual revenue increase of $3.7 million. On September 26, 2016, the assigned public utility law judge issued a proposed order approving the settlement without modification. There were no appeals to the administrative law judge's proposed order. As such, it became the order of the MPSC and new rates took effect on October 27, 2016.
On April 29, 2016, Columbia of Virginia filed a request with the VSCC, seeking an annual revenue increase of $37.0 million. The case is driven by Columbia of Virginia's ongoing capital program to modernize its infrastructure and to expand and upgrade its facilities to meet customer growth, as well as expenditures related to employee training and compliance with pipeline safety regulations. A VSCC decision is expected in early 2017. Rates became effective, subject to refund, on September 28, 2016.
On May 27, 2016, Columbia of Kentucky filed a base rate case with the Kentucky PSC, seeking an annual revenue increase of $25.4 million. This case was driven by Columbia of Kentucky's ongoing initiatives to improve the overall safety and reliability of its gas distribution system. On October 20, 2016, a settlement was reached which included an annual revenue increase of $13.4 million, and a hearing is scheduled for November 1, 2016. A commission decision is expected by the end of the year.
Cost Recovery and Trackers. 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 those described below. 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.
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 in NiSource's operating area 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, and bad debt recovery mechanisms.
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.
As further discussed above in this Note 6 under the heading "Significant Rate Developments," on June 22, 2016, the IURC issued an order on TDSIC-4. The order allows NIPSCO to collect or defer for future recovery the costs associated with $145.7 million of cumulative net capital expenditures invested through December 31, 2015. On August 31, 2016, NIPSCO filed TDSIC-5 which included $211.6 million of cumulative net capital spend through June 30, 2016. An order is expected from the IURC in the fourth quarter of 2016.
On November 28, 2012, the PUCO approved Columbia of Ohio’s application to extend its IRP for an additional five years, allowing Columbia of Ohio to continue to invest and recover on its accelerated main replacements. Columbia of Ohio filed its application to adjust rates associated with its IRP and DSM Riders on February 26, 2016, which requested authority to increase revenues by $25.9 million. On March 24, 2016, PUCO staff filed comments recommending that the PUCO approve Columbia of Ohio’s application. On April 20, 2016, the PUCO issued an order approving Columbia of Ohio’s application with rates going into effect April 30, 2016.
On December 17, 2014, the PUCO approved Columbia of Ohio’s application to establish a regulatory asset and defer the expenditures to be incurred in implementing Columbia of Ohio’s Pipeline Safety Program. Columbia of Ohio requested authority to defer Pipeline Safety Program costs of up to $15 million annually. On March 11, 2016, Columbia of Ohio filed an application to increase the annual deferral authority from $15 million to $25 million. On June 24, 2016, Columbia of Ohio and PUCO staff

18

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

filed a stipulation that recommended approval of the application in all material respects. On August 26, 2016, the PUCO approved the stipulation to increase the deferral authority to $25 million per year through January 1, 2024.
On July 7, 2014, the Governor of Massachusetts signed into law Chapter 149 of the Acts of 2014, An Act Relative to Natural Gas Leaks (“the Act”). The Act authorizes natural gas distribution companies to file gas infrastructure replacement plans with the Massachusetts DPU to address the replacement of aging natural gas pipeline infrastructure. In addition, the Act provides that the Massachusetts DPU may, after review of the plans, allow the proposed estimated costs of the plan into rates as of May 1 of the subsequent year. Pursuant to the Act, on October 30, 2015, Columbia of Massachusetts filed its GSEP for the 2016 construction year (“2016 GSEP”). Columbia of Massachusetts proposed to recover an increment of $6.4 million for the costs associated with the replacement of eligible leak-prone infrastructure during the 2016 construction year for a cumulative proposed revenue requirement recovery of $9.0 million. Columbia of Massachusetts subsequently revised the cumulative proposed revenue requirement recovery to $8.2 million. The Massachusetts DPU approved the 2016 GSEP filing on April 29, 2016, with new rates effective May 1, 2016. On October 31, 2016, Columbia of Massachusetts filed its GSEP for the 2017 construction year (“2017 GSEP”). Columbia of Massachusetts is proposing to recover an increment of $8.1 million for a cumulative revenue requirement recovery of $16.8 million. An order is expected from the Massachusetts DPU in early 2017, with new rates effective May 1, 2017.
On October 30, 2009, the Massachusetts DPU approved Columbia of Massachusetts's revenue decoupling mechanism that was filed in its base rate case. This allows Columbia of Massachusetts to apply annual adjustments to its peak and off-peak rates. On March 16, 2016, Columbia of Massachusetts filed its 2016 off-peak period RDAF in the amount of $3.4 million. On April 28, 2016, the Massachusetts DPU approved the rate for effect May 1, 2016.
Columbia of Massachusetts's LDAF allows for the recovery of costs related to pension and other postretirement expense, low income programs, environmental remediation programs, Attorney General expert witness costs and energy efficiency programs. This allows Columbia of Massachusetts to file semi-annually to recover the cost in peak and off-peak rates. On January 29, 2016, Columbia of Massachusetts filed its 2016 off-peak period LDAF reflecting an annual recovery amount of approximately $42 million. On April 29, 2016, the Massachusetts DPU approved the rate for effect May 1, 2016.
Electric Operations Regulatory Matters
Significant Rate Developments. On December 31, 2015, NIPSCO filed a new electric TDSIC seven-year plan of eligible investments for a total of approximately $1.3 billion covering spend in years 2016 through 2022. On March 24, 2016, a stipulation and settlement agreement was filed with the IURC which, among other things, sought approval of a seven-year plan that includes approximately $1.25 billion of investments eligible for ratemaking treatment. On July 12, 2016, the IURC issued an order approving the settlement agreement.
On October 1, 2015, NIPSCO filed an electric base rate case with the IURC, seeking a revenue increase of $126.6 million, before certain riders. As part of this filing, NIPSCO proposed to update base rates for previously incurred infrastructure improvements, revised depreciation rates and the inclusion of previously approved environmental and federally mandated compliance costs. On February 19, 2016, a stipulation and settlement agreement was filed with the IURC seeking a revenue increase of $72.5 million, before certain riders. On July 18, 2016, the IURC issued an order approving the settlement agreement as filed with new rates effective October 1, 2016.
NIPSCO has been participating as one of the MISO transmission owners in defending two separate complaints filed at the FERC which challenge the MISO prescribed 12.38% base ROE for electric transmission investments subject to federal jurisdiction rate regulation. On June 30, 2016, the FERC administrative law judge issued an initial decision in the second complaint which authorized the MISO transmission owners to collect a base ROE of 9.7% for the period of February 12, 2015 through May 11, 2016. This initial decision is subject to approval by the full Commission and is not a final order. On September 28, 2016, FERC issued Opinion No. 551, which largely affirmed the initial decision in the first complaint, which set the base ROE for the MISO Transmission Owners at 10.32% for the period of November 12, 2013 through February 11, 2015. The FERC directed MISO and the MISO Transmission Owners to submit, within 30 days, a compliance filing with revised rates based on the 10.32% base ROE and to provide refunds with interest for the 15-month refund period for this case. The opinion also establishes the going forward base ROE at 10.32% as of September 28, 2016 until the Commission either issues a final order in the second complaint or a new proceeding is initiated to create a new refund period. Incorporating NIPSCO’s 50-basis point adder for independent RTO membership, NIPSCO’s total ROE is set at 10.82% going forward. NIPSCO has an estimated liability of $5.3 million at September 30, 2016 related to this matter.

19

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

Cost Recovery and Trackers. A significant portion of NIPSCO'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 quarterly, regulatory proceeding in Indiana.
Certain operating costs of the Electric Operations are significant, recurring in nature, and generally outside the control of NIPSCO. The IURC allows for recovery of such costs via cost tracking mechanisms. Such tracking mechanisms allow for abbreviated regulatory proceedings in order for NIPSCO 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.
NIPSCO has approval from the IURC to recover certain environmental related costs through an ECT. Under the ECT, NIPSCO is permitted to recover (1) AFUDC and a return on the capital investment expended by NIPSCO to implement environmental compliance plan projects and (2) related operation and maintenance and depreciation expenses once the environmental facilities become operational.
On November 1, 2016, NIPSCO filed a petition with the IURC for relief regarding the construction of additional environmental projects required to comply with the final rules for regulation of CCRs and the ELG. Refer to Note 17-C, “Environmental Matters,” for more information.
On April 20, 2016, the IURC issued an order on ECR-27 approving NIPSCO’s request to begin earning a return on $800.7 million of cumulative net capital expenditures invested through December 31, 2015. A significant portion of the net capital expenditures related to ECR-27 were included in the base rates effective October 1, 2016 as a component of NIPSCO's electric base rate case settlement on July 18, 2016.
On October 26, 2016, the IURC issued an order on ECR-28 approving NIPSCO’s request to begin earning a return on $267.0 million of cumulative net capital expenditures invested through June 30, 2016.
Consistent with the terms of the aforementioned electric TDSIC settlement agreement, NIPSCO made a TDSIC rate adjustment mechanism filing on June 30, 2016 seeking recovery and ratemaking relief associated with $45.5 million of cumulative net capital expenditures invested through April 30, 2016. New rates are expected to go into effect February 1, 2017.
NIPSCO received a final order from the IURC related to its original TDSIC plan as of January 16, 2016. That order authorized NIPSCO to defer, as a regulatory asset, 100% of all TDSIC costs incurred from March 1, 2014 through December 31, 2015 until such deferral is recovered as part of its next general rate case. As discussed above, the electric general rate case was approved on July 18, 2016, which allows for recovery in base rates of 100% of these previously incurred TDSIC costs. This approval allowed NIPSCO to record a regulatory asset of approximately $7.8 million in the third quarter of 2016.
7.    Risk Management Activities

NiSource is exposed to certain risks relating to its ongoing business operations; namely commodity price risk and interest rate risk. NiSource recognizes that the prudent and selective use of derivatives may help to lower its cost of debt capital, manage its interest rate exposure and limit volatility in the price of natural gas.

Commodity Price Risk Management
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 the 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 using a combination of futures, options, forwards or other derivative contracts.

In September 2016, NIPSCO received IURC approval to lock in a fixed price for its natural gas customers using long-term forward purchase instruments. The term of these instruments may range from five to ten years and is limited to ten percent of NIPSCO’s average annual GCA purchase volume. Gains and losses on these derivative contracts will be deferred as regulatory liabilities or assets, and will be remitted to or collected from customers through NIPSCO’s quarterly GCA mechanism. Activity related to these

20

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

newly approved long-term gas purchase contracts as of September 30, 2016 was not material. These instruments are not designated as accounting hedges.

Interest Rate Risk Management
In June 2016, NiSource Finance entered into additional forward-starting interest rate swap agreements with an aggregate notional value of $500.0 million to hedge the variability in cash flows attributable to changes in the benchmark interest rate during the periods from the effective dates of the swaps to the anticipated dates of forecasted debt issuances, which are expected to take place by the end of 2018. As of September 30, 2016, NiSource Finance has forward-starting interest rate swaps with an aggregate notional value totaling $1.5 billion. These interest rate swaps are designated as cash flow hedges.

The effective portions of the gains and losses related to these swaps are recorded to AOCI and are recognized in earnings concurrent with the recognition of interest expense on the associated debt, once issued. If it becomes probable that a hedged forecasted transaction will no longer occur, the accumulated gains or losses on the derivative will be recognized currently in earnings. Earnings may also be impacted if the anticipated dates of forecasted debt issuances differ from the dates originally contemplated at hedge inception.

Realized gains and losses from NiSource’s interest rate cash flow hedges are presented in “Interest expense, net” on the Condensed Statements of Consolidated Income (Loss) (unaudited). Derivative assets and liabilities on NiSource’s interest rate cash flow hedges are presented as “Risk management assets” and “Risk management liabilities,” respectively, on the Condensed Consolidated Balance Sheets (unaudited).
NiSource had $256.8 million and $17.4 million of derivative liabilities related to these cash flow hedges as of September 30, 2016 and December 31, 2015, respectively. $250.0 million of the interest rate swaps are set to terminate within the next twelve months.
There was no material income statement recognition of gains or losses relating to an ineffective portion of NiSource's hedges, nor were there amounts excluded from effectiveness testing for derivatives in cash flow hedging relationships for the three and nine months ended September 30, 2016 and 2015.
NiSource’s derivative instruments measured at fair value as of September 30, 2016 and December 31, 2015 do not contain any credit-risk-related contingent features.
 
8.    Fair Value
 
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, 2016 and December 31, 2015:
 
Recurring Fair Value Measurements
September 30, 2016
(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, 2016
Assets
 
 
 
 
 
 
 
Risk management assets
$
1.9

 
$
5.7

 
$

 
$
7.6

Available-for-sale securities

 
137.1

 

 
137.1

Total
$
1.9

 
$
142.8

 
$

 
$
144.7

Liabilities
 
 
 
 
 
 
 
Risk management liabilities(1)
$
4.5

 
$
266.5

 
$
0.1

 
$
271.1

Total
$
4.5

 
$
266.5

 
$
0.1

 
$
271.1

(1) Includes $6.6 million of current risk management liabilities which are included in "Other accruals" on the Condensed Consolidated Balance Sheets (unaudited).

21

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

Recurring Fair Value Measurements
December 31, 2015
(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, 2015
Assets
 
 
 
 
 
 
 
Risk management assets
$
0.1

 
$

 
$

 
$
0.1

Available-for-sale securities

 
128.7

 

 
128.7

Total
$
0.1

 
$
128.7

 
$

 
$
128.8

Liabilities
 
 
 
 
 
 
 
Risk management liabilities(1)
$
14.3

 
$
17.4

 
$
0.2

 
$
31.9

Total
$
14.3

 
$
17.4

 
$
0.2

 
$
31.9

(1) Includes $9.3 million of current risk management liabilities which are included in "Other accruals" on the Condensed Consolidated Balance Sheets (unaudited).
Risk management assets and liabilities include interest rate swaps, exchange-traded NYMEX futures and NYMEX options and non-exchange-based forward purchase 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 within 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 within 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, 2016 and December 31, 2015, 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.

NiSource Finance has entered into forward-starting interest rate swaps to hedge the interest rate risk on coupon payments of forecasted issuances of long-term debt. These swaps are designated as cash flow hedges. Credit risk is considered in the fair value calculation of each interest rate swap. As they are based on observable data and valuations of similar instruments, the interest rate swaps are categorized within Level 2 of the fair value hierarchy. There was no exchange of premium at the initial date of the swaps, and NiSource can settle the swaps at any time. For additional information see Note 7, "Risk Management Activities."

22

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). NiSource values U.S. Treasury, corporate and mortgage-backed securities using a matrix pricing model that incorporates market-based information. These securities trade less frequently and are classified within Level 2. Total unrealized 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 securities at September 30, 2016 and December 31, 2015 were: 
September 30, 2016 (in millions)
Amortized
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair
Value
Available-for-sale securities
 
 
 
 
 
 
 
U.S. Treasury securities
$
37.4

 
$
0.9

 
$

 
$
38.3

Corporate/Other debt securities
97.1

 
1.9

 
(0.2
)
 
98.8

Total Available-for-sale securities
$
134.5

 
$
2.8

 
$
(0.2
)
 
$
137.1

December 31, 2015 (in millions)
Amortized
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair
Value
Available-for-sale securities
 
 
 
 
 
 
 
U.S. Treasury securities
$
33.7

 
$
0.1

 
$
(0.3
)
 
$
33.5

Corporate/Other debt securities
95.7

 
0.3

 
(0.8
)
 
95.2

Total Available-for-sale securities
$
129.4

 
$
0.4

 
$
(1.1
)
 
$
128.7

For the three months ended September 30, 2016 and 2015, the net realized gain on the sale of available-for-sale U.S. Treasury debt securities was zero and $0.1 million, respectively. For the three months ended September 30, 2016 and 2015, the net realized gain on the sale of available-for-sale Corporate/Other debt securities was zero and $0.2 million, respectively.
For the nine months ended September 30, 2016 and 2015, the net realized gain on the sale of available-for-sale U.S. Treasury debt securities was zero and $0.2 million, respectively. For the nine months ended September 30, 2016 and 2015, the net realized gain on the sale of available-for-sale Corporate/Other debt securities was $0.1 million and $0.3 million, respectively.
The cost of maturities sold is based upon specific identification. At September 30, 2016, approximately $2.8 million of U.S. Treasury securities and approximately $15.5 million of Corporate/Other debt securities have maturities of less than a year.
There are no material items in the fair value reconciliation of Level 3 assets and liabilities measured at fair value on a recurring basis for the three and nine months ended September 30, 2016 and 2015.
 
 
Non-recurring Fair Value Measurements. There were no significant non-recurring fair value measurements recorded during the nine months ended September 30, 2016.

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.
The following method 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 value of outstanding long-term debt is estimated based on the quoted market prices for the same or similar securities. Certain premium costs associated with the early settlement of long-term debt are not taken into consideration in determining fair value. These fair value measurements are classified within Level 2 of the fair value hierarchy. For the nine months ended September 30, 2016 there was no change in the method or significant assumptions used to estimate the fair value of long-term debt.


23

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

The carrying amount and estimated fair values of these financial instruments were as follows:
 
(in millions)
Carrying
Amount as of
September 30, 2016
 
Estimated Fair
Value as of
September 30, 2016
 
Carrying
Amount as of
Dec. 31, 2015
 
Estimated Fair
Value as of
Dec. 31, 2015
Long-term debt (including current portion)
$
6,678.8

 
$
7,639.9

 
$
6,382.2

 
$
6,975.7


9.    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 receivables sold to the purchasers are valued at face value, which approximates fair value due to their short-term nature. The amount of the undivided percentage ownership interest in the accounts receivables 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.
Columbia of Ohio is under 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, under the terms of which it sells an undivided percentage ownership interest in its accounts receivable to BTMU and a commercial paper conduit sponsored by BNS. This agreement was last renewed on October 14, 2016; the current agreement expires on October 13, 2017, and can be further renewed if mutually agreed to by all parties. The maximum seasonal program limit under the terms of the current agreement is $240 million. As of September 30, 2016, $75.0 million of accounts receivable had been transferred by CGORC. CGORC is a separate corporate entity from NiSource and Columbia of Ohio, with 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.
NIPSCO is under an agreement to sell, without recourse, substantially all of its trade receivables, as they originate, to NARC, a wholly-owned subsidiary of NIPSCO. NARC, in turn, is party to an agreement with PNC and Mizuho under the terms of which it sells an undivided percentage ownership interest in its accounts receivable to PNC and Mizuho. This agreement was last renewed on August 24, 2016; the current agreement expires on August 23, 2017, and can be further renewed if mutually agreed to by all parties. The maximum seasonal program limit under the terms of the current agreement is $200 million. As of September 30, 2016, $150.0 million of accounts receivable had been transferred by NARC. NARC is a separate corporate entity from NiSource and NIPSCO, with 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.
Columbia of Pennsylvania is under 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 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 agreement with BTMU was last renewed on March 9, 2016; the current agreement expires on March 8, 2017, and can be further renewed if mutually agreed to by both parties. The maximum seasonal program limit under the terms of the agreement is $75 million. As of September 30, 2016, $10.0 million of accounts receivable had been transferred by CPRC. CPRC is a separate corporate entity from NiSource and Columbia of Pennsylvania, with 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.

24

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 September 30, 2016 and December 31, 2015 for Columbia of Ohio, NIPSCO and Columbia of Pennsylvania:
 
(in millions)
September 30, 2016
 
December 31, 2015
Gross Receivables
$
361.6

 
$
450.8

Less: Receivables not transferred
126.6

 
204.8

Net receivables transferred
$
235.0

 
$
246.0

Short-term debt due to asset securitization
$
235.0

 
$
246.0

Cash flows used for financing activities related to the change in short-term borrowings due to the securitization transactions were $11.0 million and $177.1 million for the nine months ended September 30, 2016 and 2015, respectively. Fees associated with securitization transactions were recorded as interest expense of $0.4 million and $0.5 million for the three months ended September 30, 2016 and 2015, respectively, and $1.6 million and $1.9 million for the nine months ended September 30, 2016 and 2015, respectively. Columbia of Ohio, NIPSCO and Columbia of Pennsylvania remain responsible for collecting on the receivables securitized and the receivables cannot be sold to another party. 

10.    Goodwill
 The following presents NiSource’s goodwill balance allocated by segment as of September 30, 2016:
(in millions)
 
Gas Distribution Operations
 
Electric Operations
 
Corporate and Other
 
Total
Goodwill
 
$
1,690.7

 
$

 
$

 
$
1,690.7


NiSource completed a quantitative ("step 1") fair value measurement of its reporting units during the May 1, 2016 goodwill test. The test indicated that the fair value of each of the reporting units that are allocated goodwill exceeded their carrying values, indicating that no impairment was necessary.

11.    Income Taxes

NiSource’s interim effective tax rates reflect the estimated annual effective tax rates for 2016 and 2015, adjusted for tax expense associated with certain discrete items. The effective tax rates for the three months ended September 30, 2016 and 2015 were 26.4% and 28.2%, respectively. The effective tax rates for the nine months ended September 30, 2016 and 2015 were 35.3% and 35.8%, 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 ratemaking, and other permanent book-to-tax differences.

The decrease in the three month effective tax rate of 1.8% in 2016 versus the same period in 2015 is primarily due to favorable estimate-to-actual adjustments related to 2015 tax returns and estimated state apportionment benefits for 2016, partially offset by a 2015 cumulative adjustment to the estimated annual effective tax rate.

The decrease in the year-to-date effective tax rate of 0.5% in 2016 versus the same period in 2015 is primarily due to 2016 excess stock compensation benefits from the adoption of ASU 2016-09, offset by differences in state apportionment benefits between 2016 and 2015. Refer to Note 2, "Recent Accounting Pronouncements," for additional information.

There were no material changes recorded in 2016 to NiSource's uncertain tax positions as of December 31, 2015.

12.    Pension and Other Postretirement Benefits

NiSource provides defined contribution plans and noncontributory defined benefit retirement plans that cover certain of 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. For most plans, cash contributions are remitted to grantor trusts.


25

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

For the nine months ended September 30, 2016, NiSource contributed $2.7 million to its pension plans and $18.6 million to its other postretirement benefit plans.

The following tables provide the components of the plans’ net periodic benefits cost for the three and nine months ended September 30, 2016 and 2015:

Pension Benefits
 
Other Postretirement
Benefits
Three Months Ended September 30, (in millions)
2016
 
2015
 
2016
 
2015
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
Service cost
$
7.7

 
$
7.9

 
$
1.3

 
$
1.4

Interest cost
22.4

 
22.8

 
5.5

 
6.2

Expected return on assets
(33.2
)
 
(37.3
)
 
(4.3
)
 
(5.6
)
Amortization of prior service cost (credit)

 
0.1

 
(1.2
)
 
(1.1
)
Recognized actuarial loss
15.3

 
13.8

 
0.8

 
0.7

Total Net Periodic Benefit Cost
$
12.2

 
$
7.3

 
$
2.1

 
$
1.6

 
Pension Benefits
 
Other Postretirement
Benefits
Nine Months Ended September 30, (in millions)
2016
 
2015
 
2016
 
2015
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
Service cost
$
23.1

 
$
24.3

 
$
3.7

 
$
4.5

Interest cost
67.2

 
67.0

 
16.5

 
17.8

Expected return on assets
(99.6
)
 
(117.7
)
 
(12.9
)
 
(15.6
)
Amortization of prior service cost (credit)
(0.2
)
 
0.3

 
(3.6
)
 
(3.9
)
Recognized actuarial loss
45.9

 
41.6

 
2.4

 
2.8

Total Net Periodic Benefit Cost
$
36.4

 
$
15.5

 
$
6.1

 
$
5.6


13.    Variable Interests and Variable Interest Entities
In general, a VIE is an entity (1) that 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 would consolidate those VIEs for which it was 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 from such entity.
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.
NIPSCO 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, NIPSCO has not been able to obtain this information and, as a result, it is unclear whether Pure Air is a VIE and if NIPSCO is the primary beneficiary. NIPSCO will continue to request the information required to determine whether Pure Air is a VIE. NIPSCO has no exposure to loss related to the service agreement with Pure Air. Payments under this agreement were $16.0 million and $16.5 million for the nine months ended September 30, 2016 and 2015, respectively. 


26

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

14.    Long-Term Debt

NiSource Finance is a 100% owned, consolidated finance subsidiary of NiSource that engages in financing activities to raise funds for the business operations of NiSource and its subsidiaries. NiSource Finance obligations are fully and unconditionally guaranteed by NiSource. Consequently, no separate financial statements for NiSource Finance are required to be reported. No NiSource subsidiaries guarantee debt.
In June 2016, NiSource Finance entered into forward-starting interest rate swaps with an aggregate notional amount of $500.0 million to hedge the variability in cash flows attributable to changes in the benchmark interest rate during the period from the effective date of the swaps to the anticipated date of forecasted debt issuances, expected to take place by the end of 2018. The forward-starting interest rate swaps were designated as cash flow hedges at the time the agreements were executed, whereby any gain or loss recognized from the effective date of the swaps to the date the associated debt is issued for the effective portion of the hedge is recorded net of tax in AOCI and amortized as a component of interest expense over the life of the designated debt. If some portion of the hedges becomes ineffective, the associated gain or loss will be recognized in earnings. As of September 30, 2016, no ineffectiveness has been recorded.

On March 31, 2016, NiSource Finance entered into a $500.0 million term loan agreement with a syndicate of banks. The term loan matures March 29, 2019, at which point any and all outstanding borrowings under the agreement are due. Interest charged on borrowings depends on the variable rate structure elected by NiSource Finance at the time of each borrowing. The available variable rate structures from which NiSource Finance may choose are defined in the term loan agreement. As of September 30, 2016, NiSource had $500.0 million of outstanding borrowings under the term loan agreement.

On March 15, 2016, NiSource Finance redeemed $201.5 million of 10.75% senior unsecured notes at maturity.

15.    Short-Term Borrowings
NiSource Finance currently maintains a $1.5 billion revolving credit facility with a syndicate of banks led by Barclays Capital with a termination date of July 1, 2020. The purpose of the facility is to fund ongoing working capital requirements including the provision of liquidity support for NiSource Finance's $1.5 billion commercial paper program, provide for issuance of letters of credit and for general corporate purposes. At September 30, 2016 and December 31, 2015, NiSource had no outstanding borrowings under this facility.
NiSource Finance's commercial paper program has a program limit of up to $1.5 billion with a dealer group comprised of Barclays, Citigroup, Credit Suisse and Wells Fargo. As of September 30, 2016 and December 31, 2015