10-Q 1 ni-2017930x10q.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, 2017
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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer" "smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ                    Accelerated filer ¨        Emerging growth company ¨
Non-accelerated filer ¨                      Smaller reporting company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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: 336,793,693 shares outstanding at October 23, 2017.



NISOURCE INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 30, 2017
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
Capital Markets
NiSource Capital Markets, Inc.
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.
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)
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
ATM
At-the-market
CAA
Clean Air Act
CCRs
Coal Combustion Residuals
CEP
Capital Expenditure Program
CERCLA
Comprehensive Environmental Response Compensation and Liability Act (also known as Superfund)
CIAC
Contributions In Aid of Construction
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
GAAP
Generally Accepted Accounting Principles
GCA
Gas cost adjustment
GCR
Gas cost recovery
GHG
Greenhouse gases
GSEP
Gas System Enhancement Program
gwh
Gigawatt hours
IBM
International Business Machines Corporation
IRP
Infrastructure Replacement Program

3


DEFINED TERMS

IURC
Indiana Utility Regulatory Commission
LDCs
Local distribution companies
MGP
Manufactured Gas Plant
MISO
Midcontinent Independent System Operator
MMDth
Million dekatherms
MPSC
Maryland Public Service Commission
NAAQS
National Ambient Air Quality Standards
NOL
Net operating loss
NYMEX
New York Mercantile Exchange
OCC
Ohio Consumers' Counsel
OPEB
Other Postretirement Benefits
OUCC
Office of Utility Consumer Counselor
Pure Air
Pure Air on the Lake LP
RCRA
Resource Conservation and Recovery Act
ppb
Parts per billion
PUCO
Public Utilities Commission of Ohio
SEC
Securities and Exchange Commission
TDSIC
Transmission, Distribution and Storage System Improvement Charge
VIE
Variable Interest Entities
VSCC
Virginia State Corporation Commission
Note regarding forward-looking statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Investors and prospective investors should understand that many factors govern whether any forward-looking statement contained herein will be or can be realized. Any one of those factors could cause actual results to differ materially from those projected. These forward-looking statements include, but are not limited to, statements concerning NiSource’s plans, strategies, objectives, expected performance, expenditures, recovery of expenditures through rates, stated on either a consolidated or segment basis, and any and all underlying assumptions and other statements that are other than statements of historical fact. All forward-looking statements are based on assumptions that management believes to be reasonable; however, there can be no assurance that actual results will not differ materially.
Factors that could cause actual results to differ materially from the projections, forecasts, estimates and expectations discussed in this Quarterly Report on Form 10-Q include, among other things, NiSource’s debt obligations; any changes in NiSource’s credit rating; NiSource’s ability to execute its growth strategy; changes in general economic, capital and commodity market conditions; pension funding obligations; economic regulation and the impact of regulatory rate reviews; NiSource's ability to obtain expected financial or regulatory outcomes; any damage to NiSource's reputation; compliance with environmental laws and the costs of associated liabilities; fluctuations in demand from residential and commercial customers; economic conditions of certain industries; the success of NIPSCO's electric generation strategy; the price of energy commodities and related transportation costs; the reliability of customers and suppliers to fulfill their payment and contractual obligations; potential impairments of goodwill or definite-lived intangible assets; changes in taxation and accounting principles; potential incidents and other operating risks associated with our business; the impact of an aging infrastructure; the impact of climate change; potential cyber-attacks; construction risks and natural gas costs and supply risks; extreme weather conditions; the attraction and retention of a qualified workforce; advances in technology; the ability of NiSource's subsidiaries to generate cash; tax liabilities associated with the separation of Columbia Pipeline Group, Inc. on July 1, 2015, and other matters set forth in the “Risk Factors” section of NiSource’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, many of which risks are beyond the control of NiSource. In addition, the relative contributions to profitability by each business segment, and the assumptions underlying the forward-looking statements relating thereto, may change over time.
All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements. NiSource undertakes no obligation to, and expressly disclaims any such obligation to, update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events or changes to the future results over time or otherwise, except as required by law.

4


Index
Page


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)
2017
 
2016
 
2017
 
2016
Net Revenues
 
 
 
 
 
 
Gas Distribution
$
239.4

 
$
212.3

 
$
1,403.0

 
$
1,244.3

Gas Transportation
191.6

 
180.0

 
735.1

 
689.5

Electric
485.8

 
465.5

 
1,365.5

 
1,249.2

Other
0.2

 
3.5

 
2.7

 
12.5

Gross Revenues
917.0

 
861.3

 
3,506.3

 
3,195.5

Cost of Sales (excluding depreciation and amortization)
233.6

 
218.2

 
1,062.7

 
949.6

Total Net Revenues
683.4

 
643.1

 
2,443.6

 
2,245.9

Operating Expenses
 
 
 
 
 
 
 
Operation and maintenance
383.3

 
336.6

 
1,184.9

 
1,028.9

Depreciation and amortization
143.0

 
136.3

 
428.5

 
406.0

Gain on sale of assets and impairments, net

 
(0.1
)
 
(0.1
)
 
(0.4
)
Other taxes
57.5

 
56.6

 
189.7

 
178.1

Total Operating Expenses
583.8

 
529.4

 
1,803.0

 
1,612.6

Operating Income
99.6

 
113.7

 
640.6

 
633.3

Other Income (Deductions)
 
 
 
 
 
 
 
Interest expense, net
(87.9
)
 
(85.0
)
 
(260.8
)
 
(261.5
)
Other, net
4.8

 
3.5

 
9.8

 
(1.9
)
Loss on early extinguishment of long-term debt

 

 
(111.5
)
 

Total Other Deductions, Net
(83.1
)
 
(81.5
)
 
(362.5
)
 
(263.4
)
Income from Continuing Operations before Income Taxes
16.5


32.2


278.1


369.9

Income Taxes
2.5

 
8.5

 
97.1

 
130.6

Income from Continuing Operations
14.0

 
23.7

 
181.0

 
239.3

Income (Loss) from Discontinued Operations - net of taxes

 
3.5

 
(0.1
)
 
3.4

Net Income
14.0

 
27.2

 
180.9

 
242.7

Basic Earnings Per Share
 
 
 
 
 
 
 
Continuing operations
$
0.04

 
$
0.07

 
$
0.55

 
$
0.74

Discontinued operations

 
0.01

 

 
0.02

Basic Earnings Per Share
$
0.04


$
0.08


$
0.55


$
0.76

Diluted Earnings Per Share
 
 
 
 
 
 
 
Continuing operations
$
0.04

 
$
0.07

 
$
0.55

 
$
0.74

Discontinued operations

 
0.01

 

 
0.01

Diluted Earnings Per Share
$
0.04

 
$
0.08

 
$
0.55

 
$
0.75

Dividends Declared Per Common Share
$
0.175

 
$
0.165

 
$
0.700

 
$
0.640

Basic Average Common Shares Outstanding
331.1

 
322.3

 
326.7

 
321.4

Diluted Average Common Shares
332.4

 
323.9

 
328.0

 
323.2


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)
2017
 
2016
 
2017
 
2016
Net Income
$
14.0

 
$
27.2

 
$
180.9

 
$
242.7

Other comprehensive income:
 
 
 
 
 
 
 
 Net unrealized gain (loss) on available-for-sale securities(1)
0.1

 
(0.3
)
 
1.1

 
2.2

Net unrealized loss on cash flow hedges(2)
(9.3
)
 
(22.6
)
 
(21.2
)
 
(146.8
)
Unrecognized pension and OPEB benefit(3)
1.1

 
0.2

 
1.5

 
0.7

Total other comprehensive loss
(8.1
)
 
(22.7
)
 
(18.6
)
 
(143.9
)
Comprehensive Income
$
5.9

 
$
4.5


$
162.3


$
98.8

(1) Net unrealized gain (loss) on available-for-sale securities, net of zero and $0.1 million tax benefit in the third quarter of 2017 and 2016, respectively, and $0.6 million and $1.2 million tax expense for the nine months ended 2017 and 2016, respectively.
(2) Net unrealized loss on cash flow hedges, net of $5.8 million and $14.0 million tax benefit in the third quarter of 2017 and 2016, respectively, and $13.1 million and $90.6 million tax benefit for the nine months ended 2017 and 2016, respectively.
(3) Unrecognized pension and OPEB benefit, net of $0.5 million and $0.1 million tax expense in the third quarter of 2017 and 2016, respectively, and $0.8 million and $0.4 million tax expense for the nine months ended 2017 and 2016, 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,
2017
 
December 31,
2016
ASSETS
 
 
 
Property, Plant and Equipment
 
 
 
Utility plant
$
20,657.6

 
$
19,368.0

Accumulated depreciation and amortization
(6,906.2
)
 
(6,613.7
)
Net utility plant
13,751.4

 
12,754.3

Other property, at cost, less accumulated depreciation
290.7

 
313.7

Net Property, Plant and Equipment
14,042.1

 
13,068.0

Investments and Other Assets
 
 
 
Unconsolidated affiliates
5.6

 
6.6

Other investments
207.7

 
193.3

Total Investments and Other Assets
213.3

 
199.9

Current Assets
 
 
 
Cash and cash equivalents
19.3

 
26.4

Restricted cash
9.0

 
9.6

Accounts receivable (less reserve of $17.4 and $23.3, respectively)
480.0

 
847.0

Gas inventory
325.2

 
279.9

Materials and supplies, at average cost
102.3

 
101.7

Electric production fuel, at average cost
84.0

 
112.8

Exchange gas receivable
42.9

 
5.4

Regulatory assets
203.9

 
248.7

Prepayments and other
65.8

 
130.6

Total Current Assets
1,332.4

 
1,762.1

Other Assets
 
 
 
Regulatory assets
1,666.2

 
1,636.7

Goodwill
1,690.7

 
1,690.7

Intangible assets
234.4

 
242.7

Deferred charges and other
90.4

 
91.8

Total Other Assets
3,681.7

 
3,661.9

Total Assets
$
19,269.5

 
$
18,691.9

 
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,
2017
 
December 31,
2016
CAPITALIZATION AND LIABILITIES
 
 
 
Capitalization
 
 
 
Common Stockholders’ Equity
 
 
 
Common stock - $0.01 par value, 400,000,000 shares authorized; 336,691,078 and 323,159,672 shares outstanding, respectively
$
3.4

 
$
3.3

Treasury stock
(94.6
)
 
(88.7
)
Additional paid-in capital
5,518.5

 
5,153.9

Retained deficit
(1,020.6
)
 
(972.2
)
Accumulated other comprehensive loss
(43.7
)
 
(25.1
)
Total Common Stockholders’ Equity
4,363.0

 
4,071.2

Long-term debt, excluding amounts due within one year
7,518.6

 
6,058.2

Total Capitalization
11,881.6


10,129.4

Current Liabilities
 
 
 
Current portion of long-term debt
289.8

 
363.1

Short-term borrowings
843.2

 
1,488.0

Accounts payable
447.4

 
539.4

Dividends payable
58.9

 

Customer deposits and credits
253.1

 
264.1

Taxes accrued
148.4

 
195.4

Interest accrued
89.2

 
120.3

Exchange gas payable
68.0

 
83.7

Regulatory liabilities
55.1

 
116.7

Legal and environmental
27.5

 
37.4

Accrued compensation and employee benefits
167.0

 
161.4

Other accruals
119.2

 
82.7

Total Current Liabilities
2,566.8

 
3,452.2

Other Liabilities
 
 
 
Risk management liabilities
28.7

 
44.5

Deferred income taxes
2,619.4

 
2,528.0

Deferred investment tax credits
12.6

 
13.4

Accrued insurance liabilities
89.0

 
82.8

Accrued liability for postretirement and postemployment benefits
397.3

 
713.4

Regulatory liabilities
1,217.8

 
1,265.1

Asset retirement obligations
268.5

 
262.6

Other noncurrent liabilities
187.8

 
200.5

Total Other Liabilities
4,821.1

 
5,110.3

Commitments and Contingencies (Refer to Note 14, "Other Commitments and Contingencies")

 

Total Capitalization and Liabilities
$
19,269.5

 
$
18,691.9

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)
2017
 
2016
Operating Activities
 
 
 
Net Income
$
180.9

 
$
242.7

Adjustments to Reconcile Net Income to Net Cash from Continuing Operations:
 
 
 
Loss on early extinguishment of debt
111.5

 

Depreciation and amortization
428.5

 
406.0

Deferred income taxes and investment tax credits
96.3

 
137.7

Other adjustments
28.5

 
24.5

Changes in Assets and Liabilities:
 
 
 
Components of working capital
32.6

 
(52.0
)
Regulatory assets/liabilities
(12.9
)
 
(202.2
)
Postretirement and postemployment benefits
(314.5
)
 
(20.9
)
Other noncurrent assets
(3.7
)
 
(3.0
)
Other noncurrent liabilities
(17.7
)
 

Net Operating Activities from Continuing Operations
529.5

 
532.8

Net Operating Activities from (used for) Discontinued Operations
0.1

 
(0.8
)
Net Cash Flows from Operating Activities
529.6

 
532.0

Investing Activities
 
 
 
Capital expenditures
(1,216.4
)
 
(1,083.4
)
Cost of removal
(78.9
)
 
(79.5
)
Purchases of available-for-sale securities
(139.4
)
 
(33.4
)
Sales of available-for-sale securities
129.4

 
25.9

Other investing activities
(0.8
)
 
2.2

Net Cash Flows used for Investing Activities
(1,306.1
)
 
(1,168.2
)
Financing Activities
 
 
 
Issuance of long-term debt
2,750.0

 
500.0

Repayments of long-term debt and capital lease obligations
(1,352.4
)
 
(210.9
)
Premiums and other debt related costs
(139.8
)
 
(0.3
)
Change in short-term borrowings, net
(644.9
)
 
491.6

Issuance of common stock
332.6

 
16.8

Acquisition of treasury stock
(5.9
)
 
(8.1
)
Dividends paid - common stock
(170.2
)
 
(152.3
)
Net Cash Flows from Financing Activities
769.4

 
636.8

Change in cash and cash equivalents from (used for) continuing operations
(7.2
)
 
1.4

Change in cash and cash equivalents from (used for) discontinued operations

0.1

 
(0.8
)
Cash and cash equivalents at beginning of period
26.4

 
15.5

Cash and Cash Equivalents at End of Period
$
19.3

 
$
16.1


Supplemental Disclosures of Cash Flow Information
As of September 30, (in millions)
2017
 
2016
Non-cash transactions:
 
 
 
Capital expenditures included in current liabilities
$
219.1

 
$
131.2

Dividends declared but not paid
$
58.9

 
$
53.1


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.
Condensed Statements 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, 2017
$
3.3

 
$
(88.7
)
 
$
5,153.9

 
$
(972.2
)
 
$
(25.1
)
 
$
4,071.2

Comprehensive Income (Loss):
 
 
 
 
 
 
 
 
 
 
 
Net Income

 

 

 
180.9

 

 
180.9

Other comprehensive income, net of tax

 

 

 

 
(18.6
)
 
(18.6
)
Common stock dividends ($0.70 per share)

 

 

 
(229.3
)
 

 
(229.3
)
Treasury stock acquired

 
(5.9
)
 

 

 

 
(5.9
)
Stock issuances:
 
 
 
 
 
 
 
 
 
 
 
Employee stock purchase plan

 

 
3.7

 

 

 
3.7

Long-term incentive plan

 

 
11.2

 

 

 
11.2

401(k) and profit sharing

 

 
28.8

 

 

 
28.8

Dividend reinvestment plan

 

 
6.3

 

 

 
6.3

ATM program
0.1

 

 
314.6

 

 

 
314.7

Balance as of September 30, 2017
$
3.4

 
$
(94.6
)
 
$
5,518.5

 
$
(1,020.6
)
 
$
(43.7
)
 
$
4,363.0



Shares (in thousands)
Common Shares
 
Treasury Shares
 
Outstanding Shares
Balance as of January 1, 2017
326,664

 
(3,504
)
 
323,160

Treasury Stock acquired
 
 
(245
)
 
(245
)
Issued:
 
 
 
 
 
Employee stock purchase plan
155

 

 
155

Long-term incentive plan
241

 

 
241

401(k) and profit sharing
1,188

 

 
1,188

Dividend reinvestment plan
261

 

 
261

ATM program
11,931

 

 
11,931

Balance as of September 30, 2017
340,440

 
(3,749
)
 
336,691


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


11

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 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, 2016. 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

NiSource is currently evaluating the impact of certain ASUs on its Condensed Consolidated Financial Statements (unaudited) and Notes to Condensed Consolidated Financial Statements (unaudited), which are described below:

Standard
Description
Effective Date
Effect on the financial statements or other significant matters
ASU 2017-07, Compensation -  Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

The pronouncement changes how defined benefit pension and other postretirement benefit plans present net periodic benefit cost. The service cost component of net periodic benefit cost will be included with other employee compensation costs whereas other components of the net periodic benefit cost will be disclosed separately outside of income from operations in the income statement. Additionally, only the service cost component of net periodic benefit cost will be eligible for capitalization.

Annual periods beginning after December 15, 2017, including interim periods therein. Early adoption is permitted.

NiSource plans to adopt the standard effective January 1, 2018. Upon adoption, NiSource will continue to present the service cost component of net periodic benefit cost within "Operation and maintenance"; however, other components of the net periodic benefit cost will be presented separately below "Operating Income" in the income statement. This change in income statement presentation will be implemented on a retrospective basis. Additionally, beginning prospectively on the date of adoption, only the service cost component of NiSource's net periodic benefit cost component will be eligible for capitalization as "Property, Plant and Equipment" on the balance sheet. NiSource is currently evaluating the impact of adoption on the Condensed Consolidated Financial Statements (unaudited) and Notes to Condensed Consolidated Financial Statements (unaudited).


12

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

Standard
Description
Effective Date
Effect on the financial statements or other significant matters
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.
Annual periods beginning after December 15, 2017, including interim periods therein. Early adoption is permitted for annual or interim periods beginning after December 15, 2016.
NiSource has formed an internal stakeholder group 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. Involvement in this group has resulted in additional clarity on industry-specific issues such as treatment of CIAC, scoping of tariff arrangements and presentation of alternative revenue programs. This clarity has furthered NiSource's adoption efforts. NiSource has separated its various revenue streams into high-level categories, which serve as the basis for accounting analysis and documentation as it relates to the pronouncement's impact on NiSource's revenues. Substantially all of NiSource’s revenues are tariff based, which NiSource concluded will be in scope of ASC 606. Based on evaluation performed to date, NiSource generally expects that the revenue from tariff based sales will continue to be equivalent to the natural gas or electricity supplied and billed each period (including unbilled revenues) and the adoption of the new guidance will not result in a material shift in the amount or timing of revenue recognition for such sales. NiSource has also undertaken efforts to outline mock footnote disclosures intended to satisfy ASC 606's disclosure requirements and expects to enhance its disclosures on revenue recognition policies and elections. Certain disclosure options continue to be evaluated at NiSource, including method and level of revenue disaggregation. NiSource intends to adopt this ASU effective January 1, 2018 and plans to use the modified retrospective method of adoption. If applicable, this method requires a cumulative effect adjustment to be recorded on the balance sheet as of January 1, 2018 and disclosures reconciling results under the new revenue recognition guidance to results under previous guidance. In its evaluation, NiSource continues to monitor industry implementation issues which could impact accounting policies and revenue recognition, including NiSource's preliminary conclusions described above.
ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
The pronouncement clarifies the principal versus agent guidance in ASU 2014-09. 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 2014-09, Revenue from Contracts with Customers (Topic 606)
The pronouncement outlines a single, comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The core principle of the new standard is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

13

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

Standard
Description
Effective Date
Effect on the financial statements or other significant matters
ASU 2016-02, Leases (Topic 842)
The pronouncement 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-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.
Annual periods beginning after December 15, 2018, including interim periods therein. Early adoption is permitted.
NiSource has formed an internal stakeholder group that meets periodically to share information and gather data related to leasing activity at NiSource. This includes compiling a list of all contracts that could meet the definition of a lease under the new standard and evaluating the accounting for these contracts under the new standard to determine the ultimate impact the new standard will have on NiSource’s financial statements. Also, this procedure has identified process improvements to ensure data from newly initiated leases is captured to comply with the new standard. This work included the assistance of a third-party advisory firm. NiSource plans to adopt this standard effective January 1, 2019.

Recently Adopted Accounting Pronouncements

Standard
Adoption
ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)
NiSource elected to adopt this ASU effective October 1, 2017. Upon adoption, restricted cash on the Statements of Consolidated Cash Flows will no longer be presented as an investing activity and will instead be included as a component of beginning and ending cash balances. The adoption of this standard will be reflected in the Statements of Consolidated Cash Flows beginning with NiSource's Annual Report on Form 10-K for the year ending December 31, 2017 (including all prior periods presented).
ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to accounting for Hedging Activities

NiSource elected to adopt this ASU effective September 30, 2017. Upon adoption, NiSource is no longer required to separately measure and report hedge ineffectiveness. The guidance also eases the requirements related to ongoing hedge effectiveness assessments at NiSource. The adoption of this standard did not have a material impact on the Condensed Consolidated Financial Statements (unaudited) or Notes to Condensed Consolidated Financial Statements (unaudited).

ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting

NiSource elected to adopt this ASU effective July 1, 2017. The adoption of this standard did not have a material impact on the Condensed Consolidated Financial Statements (unaudited) or Notes to Condensed Consolidated Financial Statements (unaudited).

ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
NiSource elected to adopt this ASU effective January 1, 2017. The adoption of this standard did not have a material impact on the Condensed Consolidated Financial Statements (unaudited) or Notes to Condensed Consolidated Financial Statements (unaudited).



14

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

3.    Earnings Per Share

Basic EPS is computed by dividing net income 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 computation of diluted average common shares is as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands)
2017
 
2016
 
2017
 
2016
Denominator
 
 
 
 
 
 
 
Basic average common shares outstanding
331,139

 
322,318

 
326,662

 
321,445

Dilutive potential common shares:
 
 
 
 
 
 
 
Shares contingently issuable under employee stock plans
604

 
228

 
503

 
146

Shares restricted under employee stock plans
653

 
1,372

 
866

 
1,606

Diluted Average Common Shares
332,396

 
323,918

 
328,031

 
323,197


4.    Common Stock

ATM Program. On May 3, 2017, NiSource entered into four separate equity distribution agreements, pursuant to which NiSource may sell, from time to time, up to an aggregate of $500.0 million of its common stock. As of September 30, 2017, approximately $182.8 million of equity remained available for issuance under the ATM program. The program expires on December 31, 2018. Shares of common stock are offered pursuant to NiSource's shelf registration statement filed with the SEC. The following table summarizes NiSource's activity under the ATM program:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Number of shares issued
10,612,915

 

 
11,931,376

 

Average price per share
$
26.67

 
$

 
$
26.58

 
$

Proceeds, net of fees (in millions)
$
281.0

 
$

 
$
314.7

 
$


5.    Regulatory Matters
Gas Distribution Operations Regulatory Matters
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.
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 through 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.
A portion of the distribution companies' revenue is related to the recovery of gas costs, the review and recovery of which occurs through 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 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

15

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

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 of Ohio. On November 28, 2012, the PUCO approved Columbia of Ohio’s application to extend its IRP for an additional five years (2013-2017), 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 27, 2017, which requested authority to increase annual revenues by approximately $31.5 million. On March 23, 2017, the PUCO Staff filed comments which recommended approval of the application with only minor revisions. The PUCO issued an order on April 26, 2017, approving Columbia of Ohio's application. New rates went into effect on May 1, 2017.
On February 27, 2017, Columbia of Ohio filed an application requesting authority to extend its IRP for an additional five years (2018-2022). On July 10, 2017, the PUCO Staff recommended approval of Columbia of Ohio's IRP for the additional five years, with modifications to Columbia of Ohio's proposed IRP rates for the five-year period. A joint stipulation and recommendation, outlining annual maximum IRP rates for the five-year period, was filed on August 18, 2017 and was supported or not opposed by all parties except the OCC. A hearing was held on October 2, 2017 and briefing is scheduled to be completed by November 7, 2017. An order is expected by the end of 2017.
On October 27, 2017 Columbia of Ohio filed a 30-day notice that they plan to file a request for a rider to begin recovering plant and associated deferrals related to the CEP. The CEP was established in 2011 and allows for deferral of interest, depreciation and property taxes on certain plant investments not recovered through its IRP modernization tracker.
NIPSCO Gas. On September 27, 2017, NIPSCO filed a base rate case with the IURC, seeking an annual revenue increase of $143.5 million (inclusive of amounts being recovered through various tracker programs). As part of this filing and among other items, NIPSCO proposed to update base rates for ongoing infrastructure improvements, revised depreciation rates and ongoing level of expenses to reflect the current costs of providing natural gas service. An order is expected in the second half of 2018.
On April 30, 2013, then 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, eighty 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 twenty 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 February 28, 2017, NIPSCO filed TDSIC-6 requesting approval of $271.3 million of cumulative net capital spend through December 31, 2016. An order approving NIPSCO's filing was received from the IURC on June 28, 2017, and new rates went into effect on July 1, 2017. On August 31, 2017, NIPSCO filed TDSIC-7 requesting approval of $328.9 million of cumulative net capital spend through June 30, 2017. An order is expected in the fourth quarter of 2017.
Columbia of Massachusetts. 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. On October 31, 2016, Columbia of Massachusetts filed its GSEP for the 2017 construction year. In that filing, Columbia of Massachusetts proposed to recover a cumulative revenue requirement of $17.2 million. An order was received from the Massachusetts DPU on April 28, 2017 approving the filing and rates went into effect on May 1, 2017. On October 31, 2017, Columbia of Massachusetts filed its GSEP for the 2018 construction year. Columbia of Massachusetts is proposing to recover a cumulative revenue requirement of $26.8 million including a waiver to collect the $3.1 million revenue requirement in excess of the GSEP cap provision. If the waiver is not approved, the cumulative revenue requirement will be $23.7 million. An order is expected from the Massachusetts DPU in the second quarter of 2018, with new rates effective May 1, 2018.
Columbia of Virginia. On April 29, 2016, Columbia of Virginia filed a request with the VSCC, seeking an annual revenue increase of $37.0 million. On September 28, 2016, Columbia of Virginia implemented updated interim base rates subject to refund. On January 17, 2017, Columbia of Virginia presented a stipulation and proposed recommendation, representing a settlement by all parties to the proceeding that included a base revenue increase of $28.5 million. On March 17, 2017, by final order, the VSCC approved the settlement agreement without modification. In accordance with the terms of the final order, during 2017 Columbia

16

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

of Virginia completed its refund of the difference between the interim customer rates implemented in 2016 and the rates approved by the final order.
Columbia of Maryland. On April 14, 2017, Columbia of Maryland filed a request with the MPSC to adjust base rates. On July 28, 2017, all parties filed a settlement agreement with the MPSC, under which Columbia of Maryland will receive an annual revenue increase of $2.4 million. The MPSC approved the settlement on September 19, 2017 and rates went into effect on October 27, 2017.
Electric Operations Regulatory Matters
Cost Recovery and Trackers. Comparability of Electric 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.
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 through 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, federally mandated costs and environmental related costs.
A 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.
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 July 28, 2017, NIPSCO filed ECR-30 which included $256.2 million of cumulative net capital expenditures through the period ended June 30, 2017. An order was received from the IURC on October 25, 2017, and new rates went into effect the first billing cycle of November 2017.
NIPSCO made a TDSIC-2 rate adjustment mechanism filing on June 30, 2017 seeking recovery and ratemaking relief associated with $177.3 million of cumulative net capital expenditures made through April 30, 2017. An order approving the request was received from the IURC on October 31, 2017 and new rates are expected to go into effect with the first billing cycle of November 2017.
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. On June 9, 2017, a settlement agreement was filed with the IURC regarding the CCR projects and treatment of associated costs. An evidentiary hearing was held on August 21, 2017 and an order is expected by the end of 2017. Given the current postponement of the ELG rule, NIPSCO has agreed, with the settling parties, that the ELG projects and related costs would be addressed in a later proceeding. Refer to Note 14-C, “Environmental Matters,” for more information.

6.    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.

17

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


Risk management assets and liabilities on NiSource’s derivatives are presented on the Condensed Consolidated Balance Sheets (unaudited) as shown below:
(in millions)
September 30, 2017
 
December 31, 2016
Risk Management Assets - Current(1)
 
 
 
Interest rate risk programs
$

 
$
17.0

Commodity price risk programs
0.2

 
7.4

Total
$
0.2

 
$
24.4

Risk Management Assets - Noncurrent(2)
 
 
 
Interest rate risk programs
$
20.1

 
$
17.1

Commodity price risk programs
0.7

 
7.5

Total
$
20.8

 
$
24.6

Risk Management Liabilities - Current(3)
 
 
 
Interest rate risk programs
$
36.9

 
$
15.3

Commodity price risk programs
3.3

 
1.5

Total
$
40.2

 
$
16.8

Risk Management Liabilities - Noncurrent
 
 
 
Interest rate risk programs
$

 
$
24.5

Commodity price risk programs
28.7

 
20.0

Total
$
28.7

 
$
44.5

(1)Presented in "Prepayments and other" on the Condensed Consolidated Balance Sheets (unaudited).
(2)Presented in "Deferred charges and other" on the Condensed Consolidated Balance Sheets (unaudited).
(3)Presented in "Other accruals" on the Condensed Consolidated Balance Sheets (unaudited).

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 whereby 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.
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 are deferred as regulatory liabilities or assets and are remitted to or collected from customers through NIPSCO’s quarterly GCA mechanism. These instruments are not designated as accounting hedges.
Interest Rate Risk Management
As of September 30, 2017, NiSource Finance has forward-starting interest rate swaps with an aggregate notional value totaling $1.0 billion 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 2019. 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 concurrently 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.
On May 11, 2017, NiSource Finance settled $950.0 million of forward-starting interest rate swap agreements contemporaneously with the issuance of $2.0 billion of 3.49% and 4.375% senior notes, maturing in 2027 and 2047, respectively. These derivative

18

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

contracts were accounted for as cash flow hedges. As part of the transaction, the associated net unrealized loss position of $6.9 million is being amortized from accumulated other comprehensive loss into interest expense over the term of the associated interest payments.
On September 5, 2017, NiSource Finance settled $750.0 million of treasury lock agreements, initially entered into August 2017, contemporaneously with the issuance of $750.0 million of 3.95% senior notes, maturing in 2048. This derivative contract was accounted for as cash flow hedge. As part of the transaction, the associated net unrealized loss position of $19.0 million is being amortized from accumulated other comprehensive loss into interest expense over the term of the associated interest payments.
Cash associated with payments to settle interest rate swaps and treasury lock agreements are reflected within operating activities within the Condensed Statements of Consolidated Cash Flows (unaudited) for the nine months ended September 30, 2017.
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 (unaudited). There were no amounts excluded from effectiveness testing for derivatives in cash flow hedging relationships at September 30, 2017 and December 31, 2016.
NiSource’s derivative instruments measured at fair value as of September 30, 2017 and December 31, 2016 do not contain any credit-risk-related contingent features.
7.    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, 2017 and December 31, 2016:
 
Recurring Fair Value Measurements
September 30, 2017
(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, 2017
Assets
 
 
 
 
 
 
 
Risk management assets
$

 
$
21.0

 
$

 
$
21.0

Available-for-sale securities

 
139.3

 

 
139.3

Total
$

 
$
160.3

 
$

 
$
160.3

Liabilities
 
 
 
 
 
 
 
Risk management liabilities
$

 
$
68.1

 
$
0.8

 
$
68.9

Total
$

 
$
68.1

 
$
0.8

 
$
68.9



19

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

Recurring Fair Value Measurements
December 31, 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
December 31, 2016
Assets
 
 
 
 
 
 
 
Risk management assets
$
5.4

 
$
43.6

 
$

 
$
49.0

Available-for-sale securities

 
131.5

 

 
131.5

Total
$
5.4

 
$
175.1

 
$

 
$
180.5

Liabilities
 
 
 
 
 
 
 
Risk management liabilities
$
1.2

 
$
58.9

 
$
1.2

 
$
61.3

Total
$
1.2

 
$
58.9

 
$
1.2

 
$
61.3


Risk management assets and liabilities include interest rate swaps, treasury lock agreements, 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, options and treasury lock agreements. 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, 2017 and December 31, 2016, 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 and treasury lock agreements to hedge the interest rate risk on coupon payments of forecasted issuances of long-term debt. These derivatives are designated as cash flow hedges. Credit risk is considered in the fair value calculation of each agreement. As they are based on observable data and valuations of similar instruments, the hedges are categorized within Level 2 of the fair value hierarchy. There was no exchange of premium at the initial date of the swaps and treasury lock agreements, and NiSource can settle the contracts at any time. For additional information see Note 6, "Risk Management Activities."
NIPSCO has entered into long-term forward natural gas purchase instruments that range from five to ten years to lock in a fixed price for its natural gas customers. NiSource values these contracts using a pricing model that incorporates market-based information when available, as these instruments trade less frequently and are classified within Level 2 of the fair value hierarchy. For additional information see Note 6, “Risk Management Activities.”
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 debt 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.

20

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

The amortized cost, gross unrealized gains and losses and fair value of available-for-sale securities at September 30, 2017 and December 31, 2016 were: 
September 30, 2017 (in millions)
Amortized
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair
Value
Available-for-sale securities
 
 
 
 
 
 
 
U.S. Treasury debt securities
$
34.3

 
$

 
$
(0.1
)
 
$
34.2

Corporate/Other debt securities
104.2

 
1.3

 
(0.4
)
 
105.1

Total
$
138.5

 
$
1.3

 
$
(0.5
)
 
$
139.3

December 31, 2016 (in millions)
Amortized
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair
Value
Available-for-sale securities
 
 
 
 
 
 
 
U.S. Treasury debt securities
$
35.0

 
$
0.1

 
$
(0.6
)
 
$
34.5

Corporate/Other debt securities
98.7

 
0.3

 
(2.0
)
 
97.0

Total
$
133.7

 
$
0.4

 
$
(2.6
)
 
$
131.5

Realized gains and losses on available-for-sale securities were immaterial for the three and nine months ended September 30, 2017 and 2016.
The cost of maturities sold is based upon specific identification. At September 30, 2017, approximately $8.4 million of U.S. Treasury debt securities and approximately $3.2 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, 2017 and 2016.

Non-recurring Fair Value Measurements. There were no significant non-recurring fair value measurements recorded during the three and nine months ended September 30, 2017.
B.    Other Fair Value Disclosures for Financial Instruments. The carrying amount of cash and cash equivalents, restricted cash, 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.
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, 2017, there was no change in the method or significant assumptions used to estimate the fair value of long-term debt.
The carrying amount and estimated fair values of these financial instruments were as follows: 
(in millions)
Carrying
Amount as of
September 30, 2017
 
Estimated Fair
Value as of
September 30, 2017
 
Carrying
Amount as of
Dec. 31, 2016
 
Estimated Fair
Value as of
Dec. 31, 2016
Long-term debt (including current portion)
$
7,808.4

 
$
8,550.7

 
$
6,421.3

 
$
7,064.1


8.    Transfers of Financial Assets
Columbia of Ohio, NIPSCO and Columbia of Pennsylvania each maintain a receivables agreement whereby they transfer their customer accounts receivables to third party financial institutions through wholly-owned and consolidated special purpose entities. The three agreements expire between March 2018 and October 2018 and may be further extended if mutually agreed to by the parties thereto.

21

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

All receivables transferred to third parties 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 transferred is determined in part by required loss reserves under the agreements.
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). As of September 30, 2017, the maximum amount of debt that could be recognized related to NiSource’s accounts receivable programs is $265.0 million.
The following table reflects the gross receivables balance and net receivables transferred as well as short-term borrowings related to the securitization transactions as of September 30, 2017 and December 31, 2016:
 
(in millions)
September 30, 2017
 
December 31, 2016
Gross Receivables
$
371.6

 
$
618.3

Less: Receivables not transferred
109.4

 
308.3

Net receivables transferred
$
262.2

 
$
310.0

Short-term debt due to asset securitization
$
262.2

 
$
310.0

For the nine months ended September 30, 2017 and 2016, $47.8 million and $11.0 million, respectively, was recorded as cash flows used for financing activities related to the change in short-term borrowings due to securitization transactions. Fees associated with the securitization transactions were $0.6 million and $0.4 million for the three months ended September 30, 2017 and 2016, respectively, and $1.9 million and $1.6 million for the nine months ended September 30, 2017 and 2016, respectively. NiSource remains responsible for collecting on the receivables securitized and the receivables cannot be transferred to another party.

9.    Goodwill
 The following presents NiSource’s goodwill balance allocated by segment as of September 30, 2017:
(in millions)
 
Gas Distribution Operations
 
Electric Operations
 
Corporate and Other
 
Total
Goodwill
 
$
1,690.7

 
$

 
$

 
$
1,690.7


NiSource applied the qualitative "step 0" analysis to its reporting units for the annual impairment test performed as of May 1, 2017. For this test, NiSource assessed various assumptions, events and circumstances that would have affected the estimated fair value of the reporting units as compared to its base line May 1, 2016 "step 1" fair value measurement. The results of this assessment indicated that it was not more likely than not that its reporting unit fair values were less than the reporting unit carrying values, accordingly, no "step 1" analysis was required.

10.    Income Taxes

NiSource’s interim effective tax rates reflect the estimated annual effective tax rates for 2017 and 2016, adjusted for tax expense associated with certain discrete items. The effective tax rates for the three months ended September 30, 2017 and 2016 were 15.2% and 26.4%, respectively. The effective tax rate for the nine months ended September 30, 2017 and 2016 was 34.9% and 35.3%, 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 in 2017 versus the same period in 2016 is primarily due to current year revisions of apportionment factors used to measure state deferred tax liabilities. There was no material change in the year-to-date effective tax rate in 2017 versus the same period in 2016.
 
Additionally, there were no material changes recorded in 2017 to NiSource's uncertain tax positions as of December 31, 2016.

22

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

11.    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.

NiSource previously disclosed in the notes to its financial statements for the year ended December 31, 2016, that it expected to contribute $9.1 million to its pension plans in 2017. For the nine months ended September 30, 2017, NiSource contributed $281.6 million to its pension plans, which included a $277 million discretionary contribution made during the third quarter of 2017. NiSource does not anticipate any further pension contributions in 2017. Contributions of $21.8 million have been made to NiSource's other postretirement benefit plans during the nine months ended September 30, 2017. Contributions made to pension and other postretirement benefit plans are presented in "Operating activities" on the Condensed Statements of Consolidated Cash Flows (unaudited).

The following tables provide the components of the plans’ actuarially determined net periodic benefit cost for the three and nine months ended September 30, 2017 and 2016:

Pension Benefits
 
Other Postretirement
Benefits
Three Months Ended September 30, (in millions)
2017
 
2016
 
2017
 
2016
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
Service cost(1)
$
7.4

 
$
7.7

 
$
1.2

 
$
1.3

Interest cost(1)
17.1

 
22.4

 
4.5

 
5.5

Expected return on assets
(30.8
)
 
(33.2
)
 
(4.0
)
 
(4.3
)
Amortization of prior service credit
(0.1
)
 

 
(1.1
)
 
(1.2
)
Recognized actuarial loss
13.2

 
15.3

 
0.7

 
0.8

Settlement loss
10.6

 

 

 

Total Net Periodic Benefit Cost
$
17.4

 
$
12.2

 
$
1.3

 
$
2.1

(1)Effective January 1, 2017, NiSource adopted the methodology of using a full yield curve (spot rate) approach to estimate the service and interest components of net periodic benefit cost. This change in accounting estimate resulted in a decrease in these costs for the three months ended September 30, 2017 when compared to the same period in 2016.
 
Pension Benefits
 
Other Postretirement
Benefits
Nine Months Ended September 30, (in millions)
2017
 
2016
 
2017
 
2016
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
Service cost(1)
$
22.4

 
$
23.1

 
$
3.6

 
$
3.7

Interest cost(1)
51.5

 
67.2

 
13.4

 
16.5

Expected return on assets
(91.3
)
 
(99.6
)
 
(11.9
)
 
(12.9
)
Amortization of prior service credit
(0.5
)
 
(0.2
)
 
(3.3
)
 
(3.6
)
Recognized actuarial loss
40.0

 
45.9

 
2.2

 
2.4

Settlement loss
10.6

 

 

 

Total Net Periodic Benefit Cost
$
32.7

 
$
36.4

 
$
4.0

 
$
6.1

(1)Effective January 1, 2017, NiSource adopted the methodology of using a full yield curve (spot rate) approach to estimate the service and interest components of net periodic benefit cost. This change in accounting estimate resulted in a decrease in these costs for the nine months ended September 30, 2017 when compared to the same period in 2016.

As of August 31, 2017, one of NiSource's qualified pension plans paid lump sums in excess of the plan's 2017 service cost plus interest cost, thereby meeting the requirement for settlement accounting. A settlement charge of $10.6 million was recorded during the third quarter of 2017. As a result of the settlement, the pension plan was remeasured resulting in a decrease to the pension benefit obligation, net of plan assets, of $1.3 million, a net decrease to regulatory assets of $10.6 million and a net credit to accumulated other comprehensive loss of $1.3 million.

23

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


The following table provides the key assumptions that were used to calculate the pension benefit obligation and the net periodic benefit cost at the measurement dates of August 31, 2017 and December 31, 2016.

 
August 31, 2017
 
December 31, 2016
Weighted-average Assumption to Determine Benefit Obligation:
 
 
 
Discount rate
3.50
%
 
4.03
%
Weighted-average Assumptions to Determine Net Periodic Benefit Costs for the period ended:
 
 
 
Discount rate - service cost(1)
4.40
%
 
4.24
%
Discount rate - interest cost(1)
3.31
%
 
4.24
%
Expected return on assets
7.25
%
 
8.00
%
(1) In January 2017, NiSource changed the method used to estimate the service and interest components of net periodic benefit cost for pension and other postretirement benefits. This change, compared to the previous method, resulted in a decrease in the actuarially-determined service and interest cost components. Historically, NiSource estimated service and interest cost utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. For fiscal 2017 and beyond, NiSource now utilizes a full yield curve approach to estimate these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows.

12.    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 was incorporated in March 2000 under the laws of the state of Indiana. Prior to 2000, the function of NiSource Finance was performed by Capital Markets. 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.
NiSource announced on April 26, 2017, that it intends to merge NiSource Finance and Capital Markets with and into NiSource during the second half of 2017, pending receipt of applicable approvals. The mergers are expected to be completed during the fourth quarter of 2017. Upon completion of the mergers, NiSource will become the primary obligor of NiSource Finance's and Capital Markets' outstanding obligations. The mergers are not expected to have any impact on NiSource's consolidated financial statements or the credit ratings of outstanding debt securities.
On March 27, 2017, Capital Markets redeemed $30.0 million of 7.86% and $2.0 million of 7.85% medium-term notes at maturity.
On April 3, 2017, Capital Markets redeemed $12.0 million of 7.82%, $10.0 million of 7.92%, $2.0 million of 7.93% and $1.0 million of 7.94% medium-term notes at maturity.
On May 22, 2017, NiSource Finance closed its placement of $2.0 billion in aggregate principal amount of its senior notes, comprised of $1.0 billion of 3.49% senior notes due 2027 and $1.0 billion of 4.375% senior notes due 2047. Related to this placement, NiSource settled $950.0 million of aggregate notional value forward-starting interest rate swaps, originally entered into to mitigate interest risk associated with the planned issuance of these notes. Refer to Note 6, "Risk Management Activities," for additional information.
During the second quarter of 2017, NiSource Finance executed a tender offer for $990.7 million of outstanding notes consisting of a combination of its 6.40% notes due 2018, 6.80% notes due 2019, 5.45% notes due 2020, and 6.125% notes due 2022. In conjunction with the debt retired, NiSource Finance recorded a $111.5 million loss on early extinguishment of long-term debt, primarily attributable to early redemption premiums.
On June 12, 2017, NIPSCO redeemed $22.5 million of 7.59% medium-term notes at maturity.
On July 1, 2017, NIPSCO redeemed $55.0 million of 5.70% medium-term notes at maturity.
On August 4, 2017, NIPSCO redeemed $5.0 million of 7.02% medium-term notes at maturity.

24

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

On September 14, 2017, NiSource Finance closed its placement of $750.0 million of 3.95% senior notes due 2048. Related to this placement, NiSource settled $750.0 million of aggregate notional value treasury lock agreements, originally entered into to mitigate the interest risk associated with the planned issuance of these notes. Refer to Note 6, "Risk Management Activities," for additional information.
On September 15, 2017, NiSource Finance redeemed $210.4 million of 5.25% senior unsecured notes at maturity.
13.    Short-Term Borrowings
NiSource generates short-term borrowings from its revolving credit facility, commercial paper program, letter of credit issuances and accounts receivable transfer programs. Each of these borrowing sources is described further below.
NiSource Finance maintains a revolving credit facility to fund ongoing working capital requirements, including the provision of liquidity support for its commercial paper program, provide for issuance of letters of credit and also for general corporate purposes. NiSource Finance's revolving credit facility has a program limit of $1.85 billion and is comprised of a syndicate of banks led by Barclays. At September 30, 2017 and December 31, 2016, 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, 2017 and December 31, 2016, NiSource had commercial paper outstanding of $581.0 million and $1,178.0 million, respectively.
As of September 30, 2017 and December 31, 2016, NiSource had $13.0 million and $14.7 million of stand-by letters of credit, respectively. All stand-by letters of credit were under the revolving credit facility.
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) in the amount of $262.2 million and $310.0 million as of September 30, 2017 and December 31, 2016, respectively. Refer to Note 8, "Transfers of Financial Assets," for additional information.
Short-term borrowings were as follows: 
(in millions)
September 30,
2017
 
December 31,
2016
Commercial Paper weighted-average interest rate of 1.50% and 1.24% at September 30, 2017 and December 31, 2016, respectively
$
581.0

 
$
1,178.0

Accounts receivable securitization facility borrowings
262.2

 
310.0

Total Short-Term Borrowings
$
843.2

 
$
1,488.0


Given their maturities are less than 90 days, cash flows related to the borrowings and repayments of the items listed above are presented net in the Condensed Statements of Consolidated Cash Flows (unaudited). 

14.    Other Commitments and Contingencies
A. Guarantees and Indemnities. As a part of normal business, NiSource and certain subsidiaries enter into various agreements providing financial or performance assurance to third parties on behalf of certain subsidiaries. Such agreements include guarantees and stand-by letters of credit. These agreements are entered into primarily to support or enhance the creditworthiness otherwise attributed to a subsidiary on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish the subsidiaries’ intended commercial purposes. As of September 30, 2017 and December 31, 2016, NiSource had issued stand-by letters of credit of $13.0 million and $14.7 million, respectively.  
 B. Legal Proceedings. The Company is party to certain claims and legal proceedings arising in the ordinary course of business, none of which is deemed to be individually material at this time. Due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on the Company’s results of operations, financial position or liquidity. If one or more of such matters were decided against the Company, the effects could be material to the Company’s results of operations in the period in which the Company would be required to record or adjust the related liability and could also be material to the Company’s cash flows in the periods the Company would be required to pay such liability.

25

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

C. Environmental Matters. NiSource operations are subject to environmental statutes and regulations related to air quality, water quality, hazardous waste and solid waste. NiSource believes that it is in substantial compliance with the environmental regulations currently applicable to its operations.
It is management's continued intent to address environmental issues in cooperation with regulatory authorities in such a manner as to achieve mutually acceptable compliance plans. However, there can be no assurance that fines and penalties will not be incurred. Management expects a significant portion of environmental assessment and remediation costs to be recoverable through rates for certain NiSource companies.
As of September 30, 2017 and December 31, 2016, NiSource had recorded a liability of approximately $112.6 million and $111.4 million, respectively, to cover environmental remediation at various sites. The current portion of this liability is included in "Legal and environmental" in the Condensed Consolidated Balance Sheets (unaudited). The noncurrent portion is included in "Other noncurrent liabilities" in the Condensed Consolidated Balance Sheets (unaudited). NiSource recognizes costs associated with environmental remediation obligations when the incurrence of such costs is probable and the amounts can be reasonably estimated. The original estimates for remediation activities may differ materially from the amount ultimately expended. The actual future expenditures depend on many factors, including currently enacted laws and regulations, the nature and extent of impact, the method of remediation and the availability of cost recovery. These expenditures are not currently estimable at some sites. NiSource periodically adjusts its liability as information is collected and estimates become more refined.
Electric Operations' compliance estimates disclosed below are reflective of NIPSCO's Integrated Resource Plan submitted to the IURC on November 1, 2016. See section D, "Other Matters," below for additional information.
Air
The actions listed below could require further reductions in emissions from various emission sources. NiSource will continue to closely monitor developments in these matters.
Future legislative and regulatory programs could significantly limit allowed GHG emissions or impose a cost or tax on GHG emissions. Additionally, rules that increase methane leak detection, require emission reductions or impose additional requirements for natural gas facilities could restrict GHG emissions and impose additional costs. NiSource will carefully monitor all GHG reduction proposals and regulations.
National Ambient Air Quality Standards. The CAA requires the EPA to set NAAQS for six "criteria" air pollutants considered harmful to public health and the environment. Periodically, the EPA imposes new, or modifies existing, NAAQS. States containing areas that do not meet the new or revised standards, or contribute significantly to nonattainment of downwind states, may be required to take steps to achieve and maintain compliance with the standards. These steps could include additional pollution controls on boilers, engines, turbines and other facilities owned by electric generation and gas distribution operations.
Ozone: On October 26, 2015, the EPA issued a final rule to lower the 8-hour ozone standard from 75 ppb to 70 ppb. After the EPA proceeds with designations, areas where NiSource operates that are currently designated in attainment with the standards may be reclassified as nonattainment. NiSource will continue to monitor this matter and cannot estimate its impact at this time.
Clean Power Plan. On October 23, 2015, the EPA issued a final rule to regulate CO2 emissions from existing fossil-fuel EGUs under section 111(d) of the CAA. The final rule establishes national CO2 emission-rate standards that are applied to each state’s mix of affected EGUs to establish state-specific emission-rate and mass-emission limits. The final rule requires each state to submit a plan indicating how the state will meet the EPA's emission-rate or mass-emission limit, including possibly imposing reduction obligations on specific units. If a state does not submit a satisfactory plan, the EPA will impose a federal plan on that state. On February 9, 2016, the U.S. Supreme Court stayed implementation of the CPP until litigation is decided on its merits. On October 16, 2017, the EPA published in the Federal Register a Notice of Proposed Rulemaking that would repeal the CPP. The public will have 60 days to comment on this proposal, after which time the proposal may become final. NIPSCO will continue to monitor this matter and cannot estimate its impact at this time. Should costs be incurred to comply with the CPP, NIPSCO believes such costs will be eligible for recovery through customer rates.
Waste
CERCLA. NiSource subsidiaries are potentially responsible parties at waste disposal sites under the CERCLA (commonly known as Superfund) and similar state laws. Additionally, NiSource affiliates have retained environmental liabilities, including remediation liabilities, associated with certain former operations.
MGP. A program has been instituted to identify and investigate former MGP sites where Gas Distribution Operations subsidiaries or predecessors may have liability. The program has identified 64 such sites where liability is probable. Remedial actions at many

26

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

of these sites are being overseen by state or federal environmental agencies through consent agreements or voluntary remediation agreements.
NiSource utilizes a probabilistic model to estimate its future remediation costs related to its MGP sites. The model was prepared with the assistance of a third party and incorporates NiSource and general industry experience with remediating MGP sites. NiSource completes an annual refresh of the model in the second quarter of each fiscal year. No material changes to the estimated future remediation costs were noted as a result of the refresh completed as of June 30, 2017. The total estimated liability at NiSource related to the facilities subject to remediation was $108.0 million and $105.5 million at September 30, 2017 and December 31, 2016, respectively. The liability represents NiSource’s best estimate of the probable cost to remediate the facilities. NiSource believes that it is reasonably possible that remediation costs could vary by as much as $25 million in addition to the costs noted above. Remediation costs are estimated based on the best available information, applicable remediation standards at the balance sheet date, and experience with similar facilities.
CCRs. On April 17, 2015, the EPA issued a final rule for regulation of CCRs. The rule regulates CCRs under the RCRA Subtitle D, which determines them to be nonhazardous. The rule is implemented in phases and requires increased groundwater monitoring, reporting, recordkeeping and posting of related information to the Internet. The rule also establishes requirements related to CCR management and disposal. The rule will allow NIPSCO to continue its byproduct beneficial use program.
The publication of the CCR rule resulted in revisions to previously recorded legal obligations associated with the retirement of certain NIPSCO facilities. The actual asset retirement costs related to the CCR rule may vary substantially from the estimates used to record the increased asset retirement obligation due to the uncertainty about the compliance strategies that will be used and the preliminary nature of available data used to estimate costs. In addition, to comply with the rule, NIPSCO will be required to incur future capital expenditures to modify its infrastructure and manage CCRs. Capital compliance costs are currently expected to total approximately $193 million. As allowed by the EPA, NIPSCO will continue to collect data over time to determine the specific compliance solutions and associated costs and, as a result, the actual costs may vary.
NIPSCO filed a petition on November 1, 2016 with the IURC seeking approval of the projects and recovery of the costs associated with CCR compliance. On June 9, 2017, NIPSCO filed with the IURC a settlement reached with certain parties regarding the CCR projects and treatment of associated costs. An evidentiary hearing was held on August 21, 2017 and an order is expected by the end of 2017.
Water
ELG. On November 3, 2015, the EPA issued a final rule to amend the ELG and standards for the Steam Electric Power Generating category. The final rule became effective January 4, 2016. The rule imposes new water treatment and discharge requirements on NIPSCO's electric generating facilities to be applied between 2018 and 2023. On April 25, 2017, the EPA published notice in the Federal Register that the EPA is reconsidering the ELG in response to several petitions for reconsideration. On September 18, 2017, the EPA published notice in the Federal Register their intention to postpone the earliest compliance dates for flue gas desulfurization wastewater and bottom ash transport water requirements to potentially consider revisions to technology and numeric limits achievable. NIPSCO is unable to estimate the impact of the postponement of these compliance dates at this time. Based upon a preliminary engineering study, capital compliance costs are currently expected to cost approximately $170 million. On November 1, 2016, NIPSCO filed a petition with the IURC seeking approval of the projects and recovery of the costs associated with ELG compliance. Given the current postponement of certain compliance dates under the ELG rule, NIPSCO has agreed with the settling parties as part of the settlement agreement discussed in the "CCRs" subsection above, that these ELG projects and related costs would be addressed in a later proceeding.
D. Other Matters.
NIPSCO 2016 Integrated Resource Plan. Environmental, regulatory and economic factors, including low natural gas prices and aging coal-fired units, have led NIPSCO to consider modifying its current electric generation supply mix to include less coal-fired generation. Due to enacted CCR and ELG (subsequently postponed) legislation, NIPSCO would expect to incur over $1 billion in operating, maintenance, environmental and other costs over the next seven years if the current fleet of coal-fired generating units remain operational.
On November 1, 2016, NIPSCO submitted its 2016 Integrated Resource Plan with the IURC. The plan evaluated demand-side and supply-side resource alternatives to reliably and cost effectively meet NIPSCO customers' future energy requirements over the ensuing 20 years. The 2016 Integrated Resource Plan indicates that the most viable option for customers and NIPSCO involves the retirement of Bailly Generating Station (Units 7 and 8) as soon as mid-2018 and two units (Units 17 and 18) at the R.M.

27

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

Schahfer Generating Station by the end of 2023. It is projected over the long term that the cost to customers to retire these units at these dates will be lower than maintaining and upgrading them for continuing generation.
NiSource and NIPSCO committed to the retirement of the Bailly Generating Station units in connection with the filing of the 2016 Integrated Resource Plan, pending approval by the MISO. In the fourth quarter of 2016, the MISO approved NIPSCO's plan to retire the Bailly Generating Station units by May 31, 2018. In accordance with ASC 980-360, the remaining net book value of the Bailly Generating Station units was reclassified from "Net utility plant" to "Other property, at cost, less accumulated depreciation" on the Condensed Consolidated Balance Sheets (unaudited).
In connection with the MISO's approval of NIPSCO's planned retirement of the Bailly Generating Station units, NiSource recorded $22.1 million of plant retirement-related charges in the fourth quarter of 2016. These charges were comprised of contract termination charges related to NIPSCO's capital lease with Pure Air (discussed further below), voluntary employee severance benefits, and write downs of certain materials and supplies inventory balances.
NIPSCO Pure Air. 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. Services under this contract commenced on July 1, 1992 and expired on June 30, 2012. The agreement was renewed effective July 1, 2012 for ten years requiring NIPSCO to pay for the services under a combination of fixed and variable charges. 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 and payments under this agreement were $16.5 million and $16.0 million for the nine months ended September 30, 2017 and 2016, respectively. In accordance with GAAP, the renewed agreement was evaluated to determine whether the arrangement qualifies as a lease. Based on the terms of the agreement, the arrangement qualified for capital lease accounting. As the effective date of the new agreement was July 1, 2012, NiSource capitalized this lease beginning in the third quarter of 2012.
As further discussed above in this Note 14 under the heading "NIPSCO 2016 Integrated Resource Plan," NIPSCO plans to retire the generation station units serviced by Pure Air by May 31, 2018. In December 2016, as allowed by the provisions of the service agreement, NIPSCO provided Pure Air formal notice of intent to terminate the service agreement, effective May 31, 2018. Providing this notice to Pure Air triggered a contract termination liability of $16 million which was recorded in fourth quarter of 2016. This expense was included as part of the plant retirement-related charges discussed above. Payment of this liability is not due until NIPSCO ceases use of the scrubber services. The liability is presented in "Other accruals" on the Condensed Consolidated Balance Sheets (unaudited). In addition, NIPSCO remeasured the remaining capital lease asset and obligation to reflect the change in estimated remaining minimum lease payments. This remeasurement was a non-cash transaction that had no impact on the Statements of Consolidated Income.
Technology Services. On December 31, 2013, NiSource Corporate Services Company signed a seven-year agreement with IBM to continue to provide business process and support functions to NiSource under a combination of fixed and variable charges, with the variable charges fluctuating based on the actual need for such services. The agreement was effective January 1, 2014 with a commencement date of April 1, 2014.
In April 2017, NiSource initiated a process to terminate its agreement with IBM and began negotiating contracts with IT service providers other than IBM. The terminated agreement calls for NiSource to pay certain charges in the event of a termination by NiSource for any reason other than material breach by IBM. NiSource and IBM are in discussions with respect to the charges owed IBM. Liabilities recorded related to termination charges as of September 30, 2017 are not material to the Condensed Consolidated Financial Statements (unaudited).
In May and June 2017, NiSource executed agreements with new IT service providers. The new agreements have terms ending at various dates throughout 2022. Knowledge sharing and transition of responsibilities from IBM to the new service providers is currently underway and is expected to be substantially complete by the end of 2017. Costs associated with transition activities, including legal and consulting fees, are expensed as incurred. Annual payments for services received under the new agreements are not expected to result in a material change to NiSource’s aggregate contractual obligations.

28

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

15.    Accumulated Other Comprehensive Loss
The following tables display the components of Accumulated Other Comprehensive Loss:
Three Months Ended September 30, 2017 (in millions)
Gains and Losses on Securities(1)
 
Gains and Losses on Cash Flow Hedges(1)
 
Pension and OPEB Items(1)
 
Accumulated
Other
Comprehensive
Loss(1)
Balance as of July 1, 2017
$
0.4

 
$
(18.8
)
 
$
(17.2
)
 
$
(35.6
)
Other comprehensive income (loss) before reclassifications
0.1

 
(9.7
)
 

 
(9.6
)
Amounts reclassified from accumulated other comprehensive loss

 
0.4

 
1.1

 
1.5

Net current-period other comprehensive income (loss)
0.1

 
(9.3
)
 
1.1

 
(8.1
)
Balance as of September 30, 2017
$
0.5

 
$
(28.1
)
 
$
(16.1
)
 
$
(43.7
)
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017 (in millions)
Gains and Losses on Securities(1)
 
Gains and Losses on Cash Flow Hedges(1)
 
Pension and OPEB Items(1)
 
Accumulated
Other
Comprehensive
Loss(1)
Balance as of January 1, 2017
$
(0.6
)
 
$
(6.9
)
 
$
(17.6
)
 
$
(25.1
)
Other comprehensive income (loss) before reclassifications
1.1

 
(23.3
)
 
0.2

 
(22.0
)
Amounts reclassified from accumulated other comprehensive loss

 
2.1

 
1.3

 
3.4

Net current-period other comprehensive income (loss)
1.1

 
(21.2
)
 
1.5

 
(18.6
)
Balance as of September 30, 2017
$
0.5

 
$
(28.1
)
 
$
(16.1
)
 
$
(43.7
)
Three Months Ended September 30, 2016 (in millions)
Gains and Losses on Securities(1)
 
Gains and Losses on Cash Flow Hedges(1)
 
Pension and OPEB Items(1)
 
Accumulated
Other
Comprehensive
Loss
(1)
Balance as of July 1, 2016
$
2.0

 
$
(139.7
)
 
$
(18.6
)
 
$
(156.3
)
Other comprehensive loss before reclassifications
(0.3
)
 
(22.9
)
 

 
(23.2
)
Amounts reclassified from accumulated other comprehensive loss

 
0.3

 
0.2

 
0.5

Net current-period other comprehensive income (loss)
(0.3
)
 
(22.6
)
 
0.2

 
(22.7
)
Balance as of September 30, 2016
$
1.7

 
$
(162.3
)
 
$
(18.4
)
 
$
(179.0
)
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016 (in millions)
Gains and Losses on Securities(1)
 
Gains and Losses on Cash Flow Hedges(1)
 
Pension and OPEB Items(1)
 
Accumulated
Other
Comprehensive
Loss(1)
Balance as of January 1, 2016
$
(0.5
)
 
$
(15.5
)
 
$
(19.1
)
 
$
(35.1
)
Other comprehensive income (loss) before reclassifications
2.3

 
(148.0
)
 

 
(145.7
)
Amounts reclassified from accumulated other comprehensive loss
(0.1
)
 
1.2

 
0.7

 
1.8

Net current-period other comprehensive income (loss)
2.2

 
(146.8
)
 
0.7

 
(143.9
)
Balance as of September 30, 2016
$
1.7

 
$
(162.3
)
 
$
(18.4
)
 
$
(179.0
)
(1)All amounts are net of tax. Amounts in parentheses indicate debits.

16.    Business Segment Information
At September 30, 2017, NiSource’s operations are divided into two primary reportable segments. The Gas Distribution Operations segment provides natural gas service and transportation for residential, commercial and industrial customers in Ohio, Pennsylvania, Virginia, Kentucky, Maryland, Indiana and Massachusetts. The Electric Operations segment provides electric service in 20 counties in the northern part of Indiana.

29

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

The following table provides information about business segments. NiSource uses operating income as its primary measurement for each of the reported segments and makes decisions on finance, dividends and taxes at the corporate level on a consolidated basis. Segment revenues include intersegment sales to affiliated subsidiaries, which are eliminated in consolidation. Affiliated sales are recognized on the basis of prevailing market, regulated prices or at levels provided for under contractual agreements. Operating income is derived from revenues and expenses directly associated with each segment.
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions)
2017
 
2016
 
2017
 
2016
Gross Revenues
 
 
 
 
 
 
 
Gas Distribution Operations
 
 
 
 
 
 
 
Unaffiliated
$
431.1

 
$
392.4

 
$
2,139.9

 
$
1,935.6

Intersegment
3.5

 
3.1

 
10.6

 
9.6

Total
434.6

 
395.5

 
2,150.5

 
1,945.2

Electric Operations
 
 
 
 
 
 
 
Unaffiliated
485.8

 
465.4

 
1,365.5

 
1,249.2

Intersegment
0.2

 
0.4

 
0.6

 
0.6

Total
486.0

 
465.8

 
1,366.1

 
1,249.8

Corporate and Other
 
 
 
 
 
 
 
Unaffiliated
0.1

 
3.5

 
0.9

 
10.7

Intersegment
126.4

 
100.5

 
367.7

 
298.1

Total
126.5

 
104.0

 
368.6

 
308.8

Eliminations
(130.1
)
 
(104.0
)
 
(378.9
)
 
(308.3
)
Consolidated Gross Revenues
$
917.0

 
$
861.3

 
$
3,506.3

 
$
3,195.5

Operating Income (Loss)
 
 
 
 
 
 
 
Gas Distribution Operations
$
(23.7
)
 
$
4.3

 
$
362.1

 
$
392.7

Electric Operations
124.4

 
112.8

 
286.3

 
251.5

Corporate and Other
(1.1
)
 
(3.4
)
 
(7.8
)
 
(10.9
)
Consolidated Operating Income
$
99.6

 
$
113.7

 
$
640.6

 
$
633.3



30

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NiSource Inc.

Index
Page
Executive Summary
Summary of Consolidated Financial Results
Results and Discussion of Segment Operations
Gas Distribution Operations
Electric Operations
Off Balance Sheet Arrangements

31

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.


EXECUTIVE SUMMARY


This Management’s Discussion and Analysis of Financial Condition and Results of Operations (Management’s Discussion) analyzes the financial condition, results of operations and cash flows of NiSource and its subsidiaries. It also includes management’s analysis of past financial results and certain potential factors that may affect future results, potential future risks and approaches that may be used to manage those risks. See "Note regarding forward-looking statements" at the beginning of this report for a list of factors that may cause results to differ materially.
Management’s Discussion is designed to provide an understanding of NiSource's operations and financial performance and should be read in conjunction with NiSource’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
NiSource is an energy holding company under the Public Utility Holding Company Act of 2005 whose subsidiaries are fully regulated natural gas and electric utility companies serving customers in seven states. NiSource generates substantially all of its operating income through these rate-regulated businesses which are summarized for financial reporting purposes into two primary reportable segments: Gas Distribution Operations and Electric Operations.
Refer to the “Business” section of NiSource’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 for further discussion of its regulated utility business segments.
NiSource’s goal is to develop strategies that benefit all stakeholders as it addresses changing customer conservation patterns, develops more contemporary pricing structures and embarks on long-term investment programs. These strategies are intended to improve reliability and safety, enhance customer services and reduce emissions while generating sustainable returns. Additionally, NiSource continues to pursue regulatory and legislative initiatives that will allow residential customers not currently on NiSource's system t