Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NISOURCE INC.

Operations, was not impacted by the changes in reporting structure as it was historically and continues to be reviewed by the chief operating decision maker at a state operating company level.

All of NiSource’s goodwill reporting units at December 31, 2015 remain within the Gas Distribution Operations reportable segment.

Refer to Notes 1-J and 5, “Goodwill and Other Intangible Assets,” in the Notes to Consolidated Financial Statements for additional information.

Revenue Recognition. Revenue is recorded as products and services are delivered. Utility revenues are billed to customers monthly on a cycle basis. Revenues are recorded on the accrual basis and include estimates for electricity and gas delivered but not billed. Refer to Note 1-L, “Revenue Recognition,” in the Notes to Consolidated Financial Statements.

Recently Issued Accounting Pronouncements

Refer to Note 2, "Recent Accounting Pronouncements," in the Notes to Consolidated Financial Statements.

Environmental Matters

NiSource is subject to regulation by various federal, state and local authorities in the areas of air quality, water quality, control of toxic substances and hazardous and solid wastes, and other environmental matters. NiSource believes that it is in substantial compliance with those environmental regulations currently applicable to NiSource’s business and operations. Refer to Note 18-C, “Environmental Matters,” in the Notes to Consolidated Financial Statements for additional information regarding environmental matters.

Bargaining Unit Contract

As of December 31, 2015, NiSource had 7,596 employees of whom 3,157 were subject to collective bargaining agreements. Agreements were reached with the respective unions whose collective bargaining agreements were set to expire during 2015. Six additional collective bargaining contracts, covering approximately 400 employees, are set to expire during 2016.

RESULTS AND DISCUSSION OF SEGMENT OPERATIONS

Presentation of Segment Information

NiSource’s operations are divided into two primary reportable segments: Gas Distribution Operations and Electric Operations.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NISOURCE INC.

Gas Distribution Operations

Year Ended December 31, (in millions)	2015				2014				2013
Net Revenues
Sales revenues	$	3,069.1			$	3,593.9			$	3,053.8
Less: Cost of gas sold (excluding depreciation and amortization)	1,155.5				1,762.7				1,419.7
Net Revenues	1,913.6				1,831.2				1,634.1
Operating Expenses
Operation and maintenance	945.3				900.3				824.8
Depreciation and amortization	232.6				217.6				201.4
Loss (Gain) on sale of assets and impairment, net	0.8				(0.2		)		1.2
Other taxes	179.1				176.5				161.3
Total Operating Expenses	1,357.8				1,294.2				1,188.7
Operating Income	$	555.8			$	537.0			$	445.4
Revenues
Residential	$	2,055.2			$	2,286.3			$	1,901.0
Commercial	691.4				800.6				654.0
Industrial	217.6				231.3				194.3
Off-System Sales	87.3				199.4				266.4
Other	17.6				76.3				38.1
Total	$	3,069.1			$	3,593.9			$	3,053.8
Sales and Transportation (MMDth)
Residential sales	262.0				295.2				272.3
Commercial sales	171.5				189.6				172.9
Industrial sales	522.7				512.9				494.5
Off-System Sales	32.7				44.9				70.4
Other	(0.2		)		(0.1		)		0.4
Total	988.7				1,042.5				1,010.5
Heating Degree Days	5,459				6,176				5,698
Normal Heating Degree Days	5,610				5,610				5,610
% Colder (Warmer) than Normal	(3		)%		10		%		2		%
Customers
Residential	3,113,324				3,098,052				3,079,575
Commercial	283,357				282,749				281,535
Industrial	7,578				7,637				7,663
Other	13				15				22
Total	3,404,272				3,388,453				3,368,795

Competition

Gas Distribution Operations competes with investor-owned, municipal, and cooperative electric utilities throughout its service areas as well as other regulated and unregulated natural gas intra and interstate pipelines and other alternate fuels, such as propane and fuel oil. Gas Distribution Operations continues to be a strong competitor in the energy market as a result of strong customer preference for natural gas. Competition with providers of electricity has traditionally been the strongest in the residential and commercial markets of Kentucky, southern Ohio, central Pennsylvania and western Virginia due to comparatively low electric rates. Natural gas competes with fuel oil and propane in the Massachusetts market mainly due to the installed base of fuel oil and propane-based heating which has comprised a declining percentage of the overall market over the last few years. However, fuel oil and propane are more viable in today’s depressed oil market.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NISOURCE INC.

Gas Distribution Operations (continued)

Market Conditions

Spot prices at the Henry Hub for the winter through December 2015 have primarily been in the $1.54 to $2.40 per Dth range compared to the price range of $2.75 to $4.28 per Dth experienced during the winter through December 2014.

Entering the 2015 - 2016 winter season, national storage levels were 371 Bcf above the prior year and 147 Bcf above the five- year average inventory level (based on October 30, 2015 Energy Information Administration storage report). During the summer of 2015, prices ranged between $2.08 and $3.07 per Dth averaging below the range of $3.52 to $4.80 per Dth experienced during the summer of 2014.

All NiSource Gas Distribution Operations companies have state-approved recovery mechanisms that provide a means for full recovery of prudently incurred gas costs. Gas costs are treated as pass-through costs and have no impact on the net revenues recorded in the period. The gas costs included in revenues are matched with the gas cost expense recorded in the period and the difference is recorded on the Consolidated Balance Sheets as under-recovered or over-recovered gas cost to be included in future customer billings.

The Gas Distribution Operations companies have pursued non-traditional revenue sources within the evolving natural gas marketplace. These efforts include the sale of products and services upstream of the companies’ service territory, the sale of products and services in the companies’ service territories, and gas supply cost incentive mechanisms for service to their core markets. The upstream products are made up of transactions that occur between an individual Gas Distribution Operations company and a buyer for the sales of unbundled or rebundled gas supply and capacity. The on-system services are offered by NiSource to customers and include products such as the transportation and balancing of gas on the Gas Distribution Operations company system. The incentive mechanisms give the Gas Distribution Operations companies an opportunity to share in the savings created from such situations as gas purchase prices paid below an agreed upon benchmark and their ability to reduce pipeline capacity charges with their customers. Certain Gas Distribution Operations companies continue to offer choice opportunities, where customers can choose to purchase gas from a third-party supplier, through regulatory initiatives in their respective jurisdictions.

Capital Expenditures and Other Investing Activities

The table below reflects actual capital expenditures and other investing activities by category for 2015, 2014 and 2013, and estimates for 2016.

(in millions)	2016E				2015				2014				2013
System Growth	$	168.3			$	157.8			$	175.9			$	166.8
Maintenance and Other	798.6				759.2				684.4				624.0
Total	$	966.9			$	917.0			$	860.3			$	790.8

The Gas Distribution Operations segment’s capital expenditures and other investing activities were $917.0 million in 2015 and are projected to be $966.9 million in 2016. This increased spending of $49.9 million is mainly due to growth and betterment projects in 2016. Capital expenditures for 2015 were higher than 2014 by approximately $56.7 million primarily due to increased TDSIC spend.

The Gas Distribution Operations segment’s capital expenditures for 2014 were higher than 2013 by approximately $69.5 million primarily due to increased spending on infrastructure replacement projects.

Regulatory Matters

Refer to Note 7, “Regulatory Matters,” in the Notes to Consolidated Financial Statements for information on significant rate developments and cost recovery and trackers for the Gas Distribution Operations segment.

Customer Usage. Increased efficiency of natural gas appliances and improvements in home building codes and standards has contributed to a long-term trend of declining average use per customer. Usage for the year ended December 31, 2015 decreased from the same period last year primarily due to warmer weather compared to the prior year. While historically, rate design at the distribution level has been structured such that a large portion of cost recovery is based upon throughput, rather than in a fixed charge, operating costs are largely incurred on a fixed basis, and do not fluctuate due to changes in customer usage. As a result, Gas Distribution Operations have pursued changes in rate design to more effectively match recoveries with costs incurred. Each of the states in which Gas Distribution Operations operate has different requirements regarding the procedure for establishing

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NISOURCE INC.

Gas Distribution Operations (continued)

changes to rate design. Columbia of Ohio restructured its rate design through a base rate proceeding and has adopted a “de-coupled” rate design which more closely links the recovery of fixed costs with fixed charges. Columbia of Massachusetts received regulatory approval of a decoupling mechanism which adjusts revenues to an approved benchmark level through a volumetric adjustment factor. Columbia of Maryland and Columbia of Virginia have received regulatory approval to implement a revenue normalization adjustment for certain customer classes, a decoupling mechanism whereby monthly revenues that exceed or fall short of approved levels are reconciled in subsequent months. In a prior base rate proceeding, Columbia of Pennsylvania implemented a residential weather normalization adjustment. Columbia of Kentucky has had approval for a weather normalization adjustment for many years. In a prior base rate proceeding, NIPSCO implemented a higher fixed customer charge for residential and small customer classes moving toward full straight fixed variable rate design.

Environmental Matters

Currently, various environmental matters impact the Gas Distribution Operations segment. As of December 31, 2015, liabilities have been recorded to cover probable environmental response actions. Refer to Note 18-C, “Environmental Matters,” in the Notes to Consolidated Financial Statements for additional information regarding environmental matters for the Gas Distribution Operations segment.

Weather

In general, NiSource calculates the weather related revenue variance based on changing customer demand driven by weather variance from normal heating degree-days. NiSource's composite heating degree days reported do not directly correlate to the weather related dollar impact on the results of Gas Distribution Operations. Heating degree days experienced during different times of the year or in different operating locations may have more or less impact on volume and dollars depending on when and where they occur. When the detailed results are combined for reporting, there may be weather related dollar impacts on operations when there is not an apparent or significant change in the aggregated NiSource composite heating degree-day comparison.

Weather in the Gas Distribution Operations service territories for 2015 was about 3% warmer than normal and was about 12% warmer than 2014, decreasing net revenues approximately $30 million for the year ended December 31, 2015 compared to 2014.

Weather in the Gas Distribution Operations service territories for 2014 was about 10% colder than normal and was about 8% colder than 2013, increasing net revenues approximately $18 million for the year ended December 31, 2014 compared to 2013.

Throughput

Total volumes sold and transported for the year ended December 31, 2015 were 988.7 MMDth, compared to 1,042.5 MMDth for 2014. This decrease is primarily attributable to warmer weather and lower off-system sales opportunities experienced in 2015 compared to 2014.

Total volumes sold and transported for the year ended December 31, 2014 were 1,042.5 MMDth, compared to 1,010.5 MMDth for 2013. This increase is primarily attributable to colder weather experienced in 2014 compared to 2013.

Net Revenues

Net revenues for 2015 were $1,913.6 million, an increase of $82.4 million from the same period in 2014. The increase in net revenues is due primarily to an increase in regulatory and service programs of $88.7 million, including the impact of new rates at Columbia of Pennsylvania, Columbia of Massachusetts and Columbia of Virginia, as well as the implementation of new rates under Columbia of Ohio's approved infrastructure replacement program. Additionally, there were higher net revenues due to increased rent billed to affiliates, offset in expense, of $8.4 million and higher regulatory and tax trackers, offset in expense, of $7.5 million. These increases in net revenues were partially offset by the effects of warmer weather of $30.6 million.

Net revenues for 2014 were $1,831.2 million, an increase of $197.1 million from the same period in 2013. The increase in net revenues is due primarily to an increase of $93.4 million for regulatory and service programs, including the impacts of the rate settlement in 2013 at Columbia of Pennsylvania, the rate case at Columbia of Massachusetts, as well as the implementation of rates under Columbia of Ohio's approved infrastructure replacement program. Additionally, 2014 included an increase in regulatory and tax trackers, which are offset in expense, of $49.2 million, the effects of colder weather of $18.4 million, and higher commercial, residential and industrial usage of $14.6 million.

At NIPSCO, sales revenues and customer billings are adjusted for amounts related to under and over-recovered purchased gas costs from prior periods per regulatory order. These amounts are primarily reflected in the “Other” gross revenues statistic provided

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NISOURCE INC.

Gas Distribution Operations (continued)

at the beginning of this segment discussion. The adjustments to other gross revenues for the twelve months ended December 31, 2015 and 2014 were a revenue decrease of $68.0 million and a revenue increase of $34.2 million, respectively.

Operating Income

For 2015, Gas Distribution Operations reported operating income of $555.8 million, an increase of $18.8 million from the comparable 2014 period. Operating income increased as a result of higher net revenues, as described above, partially offset by increased operating expenses. Operating expenses were $63.6 million higher than the comparable period reflecting increased employee and administrative expenses of $16.3 million, and higher depreciation and property taxes of $15.0 million and $9.1 million, respectively, due to increased capital expenditures. Additionally, 2015 included increased outside service costs of $7.7 million and higher regulatory and tax trackers, which are offset in net revenues, of $7.5 million.

For 2014, Gas Distribution Operations reported operating income of $537.0 million, an increase of $91.6 million from the comparable 2013 period. Operating income increased as a result of higher net revenues, as described above, partially offset by increased operating expenses. Operating expenses were $105.5 million higher than the comparable period reflecting increased regulatory and tax trackers, which are offset in net revenues, of $49.2 million, higher employee and administrative expenses of $21.9 million primarily due to a growing workforce and increased information technology support and enhancements projects. Additionally, 2014 included increased depreciation of $16.2 million due to increased capital expenditures, increased outside service costs of $13.7 largely due to Columbia of Pennsylvania's pipeline safety initiatives, higher other taxes of $6.0 million and increased uncollectibles of $5.1 million. These increases were partially offset by a decrease in environmental costs of $6.7 million.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NISOURCE INC.

Electric Operations

Year Ended December 31, (in millions)	2015				2014				2013
Net Revenues
Sales revenues	$	1,574.4			$	1,673.4			$	1,564.9
Less: Cost of sales (excluding depreciation and amortization)	488.4				609.7				542.5
Net Revenues	1,086.0				1,063.7				1,022.4
Operating Expenses
Operation and maintenance	490.1				474.9				448.6
Depreciation and amortization	267.7				244.4				244.4
Gain on sale of assets, net	—				(0.1		)		—
Other taxes	63.8				61.8				63.9
Total Operating Expenses	821.6				781.0				756.9
Operating Income	$	264.4			$	282.7			$	265.5
Revenues
Residential	$	427.1			$	438.2			$	426.6
Commercial	445.4				449.4				431.5
Industrial	646.3				723.6				632.7
Wholesale	16.4				32.2				21.0
Other	39.2				30.0				53.1
Total	$	1,574.4			$	1,673.4			$	1,564.9
Sales (Gigawatt Hours)
Residential	3,309.9				3,384.2				3,444.7
Commercial	3,866.8				3,864.2				3,881.9
Industrial	9,249.1				10,114.2				9,339.7
Wholesale	194.8				675.5				669.7
Other	137.7				148.2				132.0
Total	16,758.3				18,186.3				17,468.0
Cooling Degree Days	762				663				798
Normal Cooling Degree Days	806				806				806
% Warmer (Colder) than Normal	(5		)%		(18		)%		(1		)%
Electric Customers
Residential	404,889				403,272				402,638
Commercial	55,053				54,635				54,452
Industrial	2,343				2,352				2,374
Wholesale	743				751				725
Other	6				5				5
Total	463,034				461,015				460,194

Electric Supply

On October 31, 2014, NIPSCO submitted its 2014 Integrated Resource Plan with the IURC. The plan evaluates demand-side and supply-side resource alternatives to reliably and cost-effectively meet NIPSCO customers' future energy requirements over the next 20 years. Existing resources are expected to be sufficient, assuming favorable outcomes for environmental upgrades, to meet customers' needs into the next decade. NIPSCO continues to monitor and assess economic, regulatory and legislative activity, and will update its resource plan as appropriate.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NISOURCE INC.

Electric Operations (continued)

Market Conditions

NIPSCO’s mwh sales to steel-related industries accounted for approximately 54.2% and 61.3% of the total industrial mwh sales for the years ended December 31, 2015 and 2014, respectively.

NIPSCO’s industrial sales volumes and revenues decreased in 2015 as compared to 2014 as industrial activity showed a moderate decline year-over-year. This was primarily due to steel-related mwh volumes and demands that decreased in 2015. Steel mill capacity utilization rates have declined as a result of an unprecedented increase of steel imports into the United States market.

Capital Expenditures and Other Investing Activities

The table below reflects actual capital expenditures by category for 2015, 2014 and 2013, and estimates for 2016.

(in millions)		2016E				2015				2014				2013
System Growth		$	28.2			$	32.4			$	29.3			$	42.5
Maintenance and Other		390.4				367.9				409.5				383.8
Total		$	418.6			$	400.3			$	438.8			$	426.3

The Electric Operations segment’s capital expenditures and other investing activities were $400.3 million in 2015 and are projected to be $418.6 million in 2016. Capital expenditures for 2015 were lower than 2014 by approximately $38.5 million primarily due to higher tracker program spend in 2014.

The Electric Operations segment’s capital expenditures for 2014 were higher than 2013 by approximately $12.5 million due to increased TDSIC spend as well as continued spending on the environmental tracker capital projects in the generation fleet.

Regulatory Matters

Refer to Note 7, “Regulatory Matters,” in the Notes to Consolidated Financial Statements for information on significant rate developments, MISO, and cost recovery and trackers for the Electric Operations segment.

Environmental Matters

Currently, various environmental matters impact the Electric Operations segment. As of December 31, 2015, liabilities have been recorded to cover probable environmental response actions. Refer to Note 18-C, “Environmental Matters,” in the Notes to Consolidated Financial Statements for additional information regarding environmental matters for the Electric Operations segment.

Transmission Upgrade Agreements

On February 11, 2014, NIPSCO entered into TUAs with upgrade sponsors to complete upgrades on NIPSCO’s transmission system on behalf of those sponsors. The upgrade sponsors agreed to reimburse NIPSCO for the total cost to construct transmission upgrades and place them into service, multiplied by a rate of 1.71 ("the multiplier").

On June 10, 2014, certain upgrade sponsors for both TUAs, filed a complaint at the FERC against NIPSCO regarding the multiplier stated in the TUAs. On June 30, 2014, NIPSCO filed an answer defending the terms of the TUAs and the just and reasonable nature of the multiplier charged therein and moved for dismissal of the complaint. On December 8, 2014, the FERC issued an order in response to the complaint finding that it is appropriate for NIPSCO to recover, through the multiplier, substantiated costs of ownership related to the TUAs. The FERC set for hearing the issue of what constitutes the incremental costs NIPSCO will incur, but is holding that hearing in abeyance to allow for settlement. NIPSCO will continue to monitor developments in this matter and does not believe the impact is material to the Consolidated Financial Statements.

Sales

Electric Operations sales were 16,758.3 gwh for the year ended 2015, a decrease of 1,428.0 gwh compared to 2014. The 7.9% decrease is primarily attributable to a decrease in industrial usage, which was caused by a reduction in steel production due to the high levels of imports that have impacted the domestic steel market since the start of 2015.

Electric Operations sales were 18,186.3 gwh for the year ended 2014, an increase of 718.3 gwh compared to 2013. The 4.1% increase is primarily attributable to an increase in industrial usage due to large industrial customers expanding plant operations and using less internal generation.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NISOURCE INC.

Electric Operations (continued)

Net Revenues

Net revenues were $1,086.0 million for 2015, an increase of $22.3 million from the same period in 2014. The increase in net revenues is due primarily to higher regulatory trackers, which are offset in expense, of $19.8 million, an increase in the return on the environmental capital investment recovery of $10.3 million due to an increased plant balance eligible for recovery and higher net revenues of $8.8 million as a result of two electric transmission projects. These increases were partially offset by lower industrial usage of $13.8 million.

Net revenues were $1,063.7 million for 2014, an increase of $41.3 million from the same period in 2013. The increase in net revenues is due primarily to higher industrial usage of $21.9 million and an increase in the return on the environmental capital investment recovery of $19.8 million due to an increased plant balance eligible for recovery.

At NIPSCO, sales revenues and customer billings are adjusted for amounts related to under and over-recovered purchased fuel costs from prior periods per regulatory order. These amounts are primarily reflected in the “Other” gross revenues statistic provided at the beginning of this segment discussion. The adjustment to other gross revenues for the twelve months ended December 31, 2015 and 2014 were revenue decreases of $11.6 million and $25.5 million, respectively.

Operating Income

For 2015, Electric Operations reported operating income of $264.4 million, a decrease of $18.3 million from the comparable 2014 period. Operating income decreased as a result of increased operating expenses, partially offset by higher net revenues, as described above. Operating expenses increased $40.6 million due primarily to higher regulatory trackers, which are offset in net revenues, of $19.8 million and increased depreciation of $10.6 million along with higher environmental costs of $10.4 million.

For 2014, Electric Operations reported operating income of $282.7 million, an increase of $17.2 million from the comparable 2013 period. Operating income increased as a result of higher net revenues, as described above, partially offset by increased operating expenses. Operating expenses increased $24.1 million due primarily to higher electric generation costs of $15.2 million as a result of maintenance related outages, and increased employee and administrative expenses of $9.7 million.