filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
161K characters. Original on sec.gov · Markdown
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
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 December 28, 2016, the IURC issued an order on the seven-year plan (2014-2020) within TDSIC-5 approving NIPSCO’s updated estimate of TDSIC-eligible investments of $824 million. The order also included approval to begin recovery of $211.6 million of cumulative net capital spend through June 30, 2016. New rates went into effect on January 1, 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. Pursuant to the Act, on October 30, 2015, Columbia of Massachusetts filed its GSEP for the 2016 construction year (“2016 GSEP”). Columbia of Massachusetts proposed to recover an increment of $6.4 million for the costs associated with the replacement of eligible leak-prone infrastructure during the 2016 construction year for a cumulative proposed revenue requirement recovery of $9.0 million. Columbia of Massachusetts subsequently revised the cumulative proposed revenue requirement recovery to $8.2 million. The Massachusetts DPU approved the 2016 GSEP filing on April 29, 2016, with new rates effective May 1, 2016. On October 31, 2016, Columbia of Massachusetts filed its GSEP for the 2017 construction year. Columbia of Massachusetts is proposing to recover an incremental $8.1 million for a cumulative revenue requirement recovery of $16.8 million. An order is expected from the Massachusetts DPU in early 2017, with new rates effective May 1, 2017.
On October 30, 2009, the Massachusetts DPU approved Columbia of Massachusetts's revenue decoupling mechanism that was filed in its base rate case. This allows Columbia of Massachusetts to apply annual adjustments to its peak and off-peak rates. On March 16, 2016, Columbia of Massachusetts filed its 2016 off-peak period RDAF in the amount of $3.4 million. On April 28, 2016, the Massachusetts DPU approved the rate, which was effective May 1, 2016. On September 16, 2016, Columbia of Massachusetts filed its 2016-2017 peak period RDAF in the amount of $12.9 million. However, due to the implementation of the revenue cap included in the mechanism, $8.9 million is to be recovered starting November 1, 2016, with the remaining $4.0 million deferred until the 2017-2018 peak period RDAF. On October 31, 2016, the Massachusetts DPU approved the recovery of $8.9 million in rates effective November 1, 2016.
On April 16, 2015, Columbia of Massachusetts filed a base rate case with the Massachusetts DPU. The case, which sought increased annual revenues of approximately $49.0 million, was designed to support Columbia of Massachusetts's continued focus on providing safe and reliable service in compliance with increasing state and federal regulations and oversight, and recovery of associated increased operations and maintenance costs. Columbia of Massachusetts arrived at a settlement agreement with the Massachusetts Attorney General in the case which was filed for approval with the Massachusetts DPU on August 19, 2015 and approved on October 7, 2015. The settlement agreement provides for increased annual revenues of $32.8 million beginning November 1, 2015, with an additional $3.6 million annual increase in revenues starting November 1, 2016. The settlement also provides that Columbia of Massachusetts cannot increase base distribution rates to become effective prior to November 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. The case is driven by Columbia of Virginia's ongoing capital program to modernize its infrastructure and to expand and upgrade its facilities to meet customer growth, as well as expenditures related to employee training and compliance with pipeline safety regulations. 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 February 8, 2017, the Hearing Examiner in the case filed a report recommending approval of the stipulation and proposed recommendation. A VSCC decision on the proposed recommendation is expected in the first half of 2017.
Columbia of Kentucky. On May 27, 2016, Columbia of Kentucky filed a base rate case with the Kentucky PSC, seeking an annual revenue increase of $25.4 million. This case was driven by Columbia of Kentucky's ongoing initiatives to improve the overall safety and reliability of its gas distribution system. On October 20, 2016, a settlement was reached which included an annual revenue increase of $13.4 million. On December 22, 2016, the Kentucky PSC issued an order modifying the stipulation, resulting
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
in an annual revenue increase of $13.1 million. Columbia of Kentucky accepted this modification, and rates went into effect on December 27, 2016.
Columbia of Maryland. On April 15, 2016, Columbia of Maryland filed a base rate case with the MPSC, seeking an annual revenue increase of $6.5 million. The case was driven by Columbia of Maryland’s ongoing capital investment program and by operations and maintenance expenditures related to compliance with pipeline safety regulations. On July 27, 2016, the parties to the case filed a joint petition for approval of a proposed settlement that includes an annual revenue increase of $3.7 million. On September 26, 2016, the assigned public utility law judge issued a proposed order approving the settlement without modification. There were no appeals to the administrative law judge's proposed order. As such, it became the order of the MPSC, and rates went into effect on October 27, 2016.
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, 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 October 26, 2016, the IURC issued an order on ECR-28 approving NIPSCO's request to begin earning a return on $267.0 million of cumulative net capital expenditures invested through June 30, 2016. Rates went into effect November 1, 2016.
On January 31, 2017, NIPSCO filed ECR-29 which included $261.1 million of net capital expenditures for the period ended December 31, 2016. An order is expected in the second quarter of 2017.
On October 1, 2015, NIPSCO filed an electric base rate case with the IURC, seeking a revenue increase of $126.6 million, before certain riders. As part of this filing, NIPSCO proposed to update base rates for previously incurred infrastructure improvements, revised depreciation rates and the inclusion of previously approved environmental and federally mandated compliance costs. On February 19, 2016, a stipulation and settlement agreement was filed with the IURC seeking a revenue increase of $72.5 million, before certain riders. On July 18, 2016, the IURC issued an order approving the settlement agreement as filed with new rates effective October 1, 2016.
NIPSCO received a final order from the IURC related to its original TDSIC plan as of January 16, 2016. That order authorized NIPSCO to defer, as a regulatory asset, 100% of all TDSIC costs incurred from March 1, 2014 through December 31, 2015 until such deferral is recovered as part of its next general rate case. As discussed above, the electric general rate case was approved on July 18, 2016, which allows for recovery in base rates of 100% of these previously incurred TDSIC costs. This approval allowed NIPSCO to record a regulatory asset of approximately $7.8 million in the third quarter of 2016.
On December 31, 2015, NIPSCO filed a new electric TDSIC seven-year plan of eligible investments for a total of approximately $1.3 billion covering spend in years 2016 through 2022. On March 24, 2016, a stipulation and settlement agreement was filed with the IURC which, among other things, sought approval of a seven-year plan that includes approximately $1.25 billion of investments eligible for ratemaking treatment. On July 12, 2016, the IURC issued an order approving the settlement agreement.
Consistent with the terms of the aforementioned electric TDSIC settlement agreement, NIPSCO made a TDSIC rate adjustment mechanism filing on June 30, 2016 seeking recovery and ratemaking relief associated with $45.5 million of cumulative net capital
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
expenditures invested through April 30, 2016. An IURC order approving NIPSCO's filing was received on January 25, 2017. New rates went into effect with the first billing cycle of February 2017.
NIPSCO has been participating as one of the MISO transmission owners in defending two separate complaints filed at the FERC which challenge the MISO prescribed 12.38% base ROE for electric transmission investments subject to federal jurisdiction rate regulation. On June 30, 2016, the FERC administrative law judge issued an initial decision in the second complaint which authorized the MISO transmission owners to collect a base ROE of 9.7% for the period of February 12, 2015 through May 11, 2016. This initial decision is subject to approval by the full Commission and is not a final order. On September 28, 2016, FERC issued Opinion No. 551, which largely affirmed the initial decision in the first complaint, which set the base ROE for the MISO Transmission Owners at 10.32% for the period of November 12, 2013 through February 11, 2015. The FERC directed the MISO and the MISO Transmission Owners to submit, within 30 days, a compliance filing with revised rates based on the 10.32% base ROE and to provide refunds with interest for the 15-month refund period for this case. The opinion also establishes the going forward base ROE at 10.32% as of September 28, 2016 until the Commission either issues a final order in the second complaint or a new proceeding is initiated to create a new refund period. Incorporating NIPSCO’s 50-basis point adder for independent RTO membership, NIPSCO’s total ROE is set at 10.82% going forward. NIPSCO has an estimated liability of $6.5 million at December 31, 2016 related to this matter.
On November 1, 2016, NIPSCO filed a petition with the IURC for relief regarding the construction of additional environmental projects required to comply with the final rules for regulation of CCRs and the ELG. Refer to Note 18-D, “Environmental Matters,” for more information.
| 9. | 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.
Risk management assets and liabilities on NiSource’s derivatives are presented on the Consolidated Balance Sheets as shown below:
| (in millions) | 2016 | 2015 | |||||
| Risk Management Assets - Current(1) | |||||||
| Interest rate risk programs | $ | 17.0 | $ | — | |||
| Commodity price risk programs | 7.4 | 0.1 | |||||
| Total | $ | 24.4 | $ | 0.1 | |||
| Risk Management Assets - Noncurrent(2) | |||||||
| Interest rate risk programs | $ | 17.1 | $ | — | |||
| Commodity price risk programs | 7.5 | — | |||||
| Total | $ | 24.6 | $ | — | |||
| Risk Management Liabilities - Current(3) | |||||||
| Interest rate risk programs | $ | 15.3 | $ | — | |||
| Commodity price risk programs | 1.5 | 9.3 | |||||
| Total | $ | 16.8 | $ | 9.3 | |||
| Risk Management Liabilities - Noncurrent | |||||||
| Interest rate risk programs | $ | 24.5 | $ | 17.4 | |||
| Commodity price risk programs | 20.0 | 5.2 | |||||
| Total | $ | 44.5 | $ | 22.6 |
(1)Presented in "Prepayments and other" on the Consolidated Balance Sheets.
(2)Presented in "Deferred charges and other" on the Consolidated Balance Sheets.
(3)Presented in "Other accruals" on the Consolidated Balance Sheets.
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Commodity Price Risk Management
NiSource and NiSource’s utility customers are exposed to variability in cash flows associated with natural gas purchases and volatility in natural gas prices. NiSource purchases natural gas for sale and delivery to its retail, commercial and industrial customers, and for most customers the variability in the market price of gas is passed through in their rates. Some of NiSource’s utility subsidiaries offer programs where variability in the market price of gas is assumed by the respective utility. The objective of NiSource’s commodity price risk programs is to mitigate the gas cost variability, for NiSource or on behalf of its customers, associated with natural gas purchases or sales by economically hedging the various gas cost components using a combination of futures, options, forwards or other derivative contracts.
In September 2016, NIPSCO received IURC approval to lock in a fixed price for its natural gas customers using long-term forward purchase instruments. The term of these instruments may range from five to ten years and is limited to ten percent of NIPSCO’s average annual GCA purchase volume. Gains and losses on these derivative contracts will be deferred as regulatory liabilities or assets and will be remitted to or collected from customers through NIPSCO’s quarterly GCA mechanism. These instruments are not designated as accounting hedges.
Interest Rate Risk Management
In 2015, NiSource Finance entered into forward-starting interest rate swap agreements with an aggregate notional value of $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 extend into 2018.
In June 2016, NiSource Finance entered into additional forward-starting interest rate swap agreements with an aggregate notional value of $500.0 million to hedge the variability in cash flows attributable to changes in the benchmark interest rate during the periods from the effective dates of the swaps to the anticipated dates of forecasted debt issuances, which are expected to take place by the end of 2018.
As of December 31, 2016, NiSource Finance has forward-starting interest rate swaps with an aggregate notional value totaling $1.5 billion. These interest rate swaps are designated as cash flow hedges. The effective portions of the gains and losses related to these swaps are recorded to AOCI and are recognized in earnings concurrent with the recognition of interest expense on the associated debt, once issued. If it becomes probable that a hedged forecasted transaction will no longer occur, the accumulated gains or losses on the derivative will be recognized currently in earnings. Earnings may also be impacted if the anticipated dates of forecasted debt issuances differ from the dates originally contemplated at hedge inception.
Realized gains and losses from NiSource’s interest rate cash flow hedges are presented in “Interest expense, net” on the Statements of Consolidated Income. There was no material income statement recognition of gains or losses relating to an ineffective portion of NiSource's hedges, nor were there amounts excluded from effectiveness testing for derivatives in cash flow hedging relationships for the years ended December 31, 2016, 2015 and 2014.
NiSource’s derivative instruments measured at fair value as of December 31, 2016 and 2015 do not contain any credit-risk-related contingent features.
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
| 10. | Income Taxes |
The components of income tax expense (benefit) were as follows:
| Year Ended December 31, (in millions) | 2016 | 2015 | 2014 | ||||||||
| Income Taxes | |||||||||||
| Current | |||||||||||
| Federal | $ | — | $ | — | $ | — | |||||
| State | (0.1 | ) | 6.0 | 5.4 | |||||||
| Total Current | (0.1 | ) | 6.0 | 5.4 | |||||||
| Deferred | |||||||||||
| Federal | 165.6 | 124.1 | 129.5 | ||||||||
| State | 18.0 | 13.6 | 35.4 | ||||||||
| Total Deferred | 183.6 | 137.7 | 164.9 | ||||||||
| Deferred Investment Credits | (1.4 | ) | (2.4 | ) | (3.5 | ) | |||||
| Income Taxes from Continuing Operations | $ | 182.1 | $ | 141.3 | $ | 166.8 |
Total income taxes from continuing operations were different from the amount that would be computed by applying the statutory federal income tax rate to book income before income tax. The major reasons for this difference were as follows:
| Year Ended December 31, (in millions) | 2016 | 2015 | 2014 | |||||||||||||||||
| Book income from Continuing Operations before income taxes | $ | 510.2 | $ | 339.9 | $ | 423.0 | ||||||||||||||
| Tax expense at statutory Federal income tax rate | 178.6 | 35.0 | % | 118.9 | 35.0 | % | 148.1 | 35.0 | % | |||||||||||
| Increases (reductions) in taxes resulting from: | ||||||||||||||||||||
| State income taxes, net of Federal income tax benefit | 11.3 | 2.2 | 14.8 | 4.4 | 15.7 | 3.7 | ||||||||||||||
| Regulatory treatment of depreciation differences | 2.1 | 0.4 | 4.3 | 1.3 | 0.7 | 0.2 | ||||||||||||||
| Amortization of deferred investment tax credits | (1.4 | ) | (0.3 | ) | (2.4 | ) | (0.7 | ) | (3.5 | ) | (0.8 | ) | ||||||||
| Nondeductible expenses | 1.9 | 0.4 | 2.1 | 0.6 | 0.8 | 0.2 | ||||||||||||||
| Employee stock ownership plan dividends | (2.3 | ) | (0.5 | ) | (2.9 | ) | (0.9 | ) | (3.8 | ) | (0.9 | ) | ||||||||
| AFUDC equity | (2.2 | ) | (0.4 | ) | (3.5 | ) | (1.0 | ) | (3.5 | ) | (0.8 | ) | ||||||||
| Charitable contribution carryforward adjustment | 2.8 | 0.5 | 17.8 | 5.2 | — | — | ||||||||||||||
| Federal tax benefits on stock compensation | (7.2 | ) | (1.4 | ) | — | — | — | — | ||||||||||||
| Tax accrual adjustments and other, net | (1.5 | ) | (0.2 | ) | (7.8 | ) | (2.3 | ) | 12.3 | 2.8 | ||||||||||
| Income Taxes from Continuing Operations | $ | 182.1 | 35.7 | % | $ | 141.3 | 41.6 | % | $ | 166.8 | 39.4 | % |
The effective income tax rates were 35.7%, 41.6% and 39.4% in 2016, 2015 and 2014, respectively. The 5.9% decrease in the overall effective tax rate in 2016 versus 2015 was primarily the result of a $7.2 million decrease in income taxes related to Federal tax benefits on stock compensation and the absence of $15.0 million of lost Federal tax benefit primarily related to charitable contribution carryforward adjustments recorded in the prior year. Both of these items are discussed in further detail below. The 2.2% increase in the overall effective tax rate in 2015 versus 2014 was primarily a result of a $17.8 million increase in federal income tax associated with write downs of charitable contribution carryforwards, offset by a $10.5 million decrease in income tax expense related to state apportionment changes and permanent items as a result of remeasurement after the Separation.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. Among other provisions, the standard requires that all income tax effects of awards are recognized in the income statement when the awards vest and are distributed. NiSource elected to adopt ASU 2016-09 during the third quarter of 2016. Refer to Note 2, “Recent Accounting Pronouncements,” for additional information.
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
On December 18, 2015, the President signed into law the PATH. PATH, among other provisions, extended and modified bonus depreciation through 2019. In general, 50% bonus depreciation is available for property placed in service before January 1, 2018, 40% bonus depreciation is available for property placed in service before January 1, 2019 and 30% bonus depreciation is available for property placed in service before January 1, 2020. NiSource recorded the effects of PATH in the fourth quarter of 2015.
As a result of PATH and 50% bonus depreciation being extended, NiSource recorded tax expense of $5.8 million in 2015 for the expiration of unused charitable contribution carryforwards which expired due to the 5 year carryover limitation. NiSource also recorded a valuation allowance for an additional $12.0 million of charitable contribution carryforwards that are set to expire in 2016-2019 in the event that NiSource does not have sufficient taxable income to utilize the carryforward amounts.
As a result of a Pennsylvania PUC Order dated December 3, 2015, Columbia of Pennsylvania adjusted the flow through in rates of tax benefits so that the unamortized balance of a change in accounting method for certain capitalized costs of approximately $2.0 million at December 31, 2014 would be amortized through December 2016. The amortization of excess tax benefits was $0.7 million in 2016, $1.4 million in 2015 and $4.1 million in 2014 . On a prospective basis, Columbia of Pennsylvania will recognize deferred tax expense, rather than flow through in rates, the tax benefits resulting from the method change.
On March 25, 2014, the governor of Indiana signed into law Senate Bill I, which among other things, lowers the corporate income tax rate from 6.5% to 4.9% over six years beginning on July 1, 2015. The reduction in the tax rate will impact deferred income taxes and tax-related regulatory assets and liabilities recoverable in the ratemaking process. In addition, deferred tax assets and liabilities, primarily deferred tax assets related to the Indiana net operating loss carry forward, will be reduced to reflect the lower rate at which these temporary differences and tax benefits will be realized. In the first quarter of 2014, NiSource recorded tax expense of $7.1 million to reflect the effect of this rate change. This expense is largely attributable to the remeasurement of the Indiana net operating loss at the 4.9% rate. The majority of NiSource’s tax temporary differences are related to NIPSCO’s utility plant.
Deferred income taxes result from temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The principal components of NiSource’s net deferred tax liability were as follows:
| At December 31, (in millions) | 2016 | 2015 | |||||
| Deferred tax liabilities | |||||||
| Accelerated depreciation and other property-related differences | $ | 3,825.7 | $ | 3,510.8 | |||
| Unrecovered gas and fuel costs | 25.9 | 11.2 | |||||
| Other regulatory assets | 449.2 | 403.3 | |||||
| Premiums and discounts associated with long-term debt | 1.5 | 9.9 | |||||
| Total Deferred Tax Liabilities | 4,302.3 | 3,935.2 | |||||
| Deferred tax assets | |||||||
| Other regulatory liabilities | (93.1 | ) | (74.4 | ) | |||
| Cost of removal | (502.2 | ) | (519.4 | ) | |||
| Pension and other postretirement/postemployment benefits | (261.7 | ) | (243.8 | ) | |||
| Environmental liabilities | (47.0 | ) | (45.9 | ) | |||
| Net operating loss carryforward and Alternative Minimum Tax credit carryforward | (646.2 | ) | (437.4 | ) | |||
| Other accrued liabilities | (45.5 | ) | (89.0 | ) | |||
| Other, net | (178.6 | ) | (160.0 | ) | |||
| Total Deferred Tax Assets | (1,774.3 | ) | (1,569.9 | ) | |||
| Net Deferred Tax Liabilities | $ | 2,528.0 | $ | 2,365.3 |
State income tax net operating loss benefits are recorded at their realizable value. NiSource anticipates it is more likely than not that it will realize $43.6 million and $34.7 million of these tax benefits as of December 31, 2016 and 2015, respectively, prior to their expiration. These tax benefits are primarily related to Indiana and Pennsylvania. The carryforward periods for these tax benefits expire in various tax years from 2028 to 2036. The remaining net operating loss carryforward tax benefit represents a Federal carryforward of $600.9 million that will expire in 2030 and an Alternative Minimum Tax credit of $1.7 million that will carry forward indefinitely.
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
| Reconciliation of Unrecognized Tax Benefits (in millions) | 2016 | 2015 | 2014 | ||||||||
| Unrecognized Tax Benefits - Opening Balance | $ | 0.9 | $ | 24.4 | $ | 23.7 | |||||
| Gross increases - tax positions in prior period | 2.6 | 0.4 | — | ||||||||
| Gross decreases - tax positions in prior period | (0.9 | ) | (23.9 | ) | (1.0 | ) | |||||
| Gross increases - current period tax positions | — | — | 1.7 | ||||||||
| Unrecognized Tax Benefits - Ending Balance | $ | 2.6 | $ | 0.9 | $ | 24.4 | |||||
| Offset for net operating loss carryforwards | — | (0.9 | ) | (24.2 | ) | ||||||
| Balance - Less Net Operating Loss Carryforwards | $ | 2.6 | $ | — | $ | 0.2 |
In 2016, NiSource resolved prior unrecognized tax benefits of $0.9 million and established new unrecognized tax benefits related to State matters of $2.6 million.
The IRS issued Revenue Procedure 2013-24 on April 30, 2013, which provided guidance for repairs related to generation property. Among other things, the Revenue Procedure listed units of property and material components of units of property for purposes of analyzing repair versus capitalization issues. NiSource adopted this Revenue Procedure for income tax filings for 2014. NiSource evaluated and recorded the effect of this change in method enabled by this Revenue Procedure as of December 31, 2013. As a result of the findings received in 2015 for the 2011-2014 audit, NiSource reversed its previously recorded unrecognized tax benefits related to the requested change in tax accounting method in 2015. The reversal of the unrecognized tax benefits did not materially affect tax expense or net income.
In 2015, offsetting the liability for unrecognized tax benefits are $0.9 million of related outstanding tax receivables and net operating loss carryforwards resulting in a net balance of zero, including interest, related to the tax method change issues.
The total amount of unrecognized tax benefits at December 31, 2016, 2015 and 2014 that, if recognized, would affect the effective tax rate is $1.7 million, $0.9 million and $4.1 million, respectively. As of December 31, 2016, it is reasonably possible that a $1.7 million decrease in unrecorded tax benefits could occur in 2017 due primarily to the conclusion of state appeals.
NiSource recognizes accrued interest on unrecognized tax benefits, accrued interest on other income tax liabilities and tax penalties in income tax expense. Interest expense recorded on unrecognized tax benefits and other income tax liabilities was immaterial for all periods presented. There were no accruals for penalties recorded in the Statements of Consolidated Income for the years ended December 31, 2016, 2015 and 2014, and there were no balances for accrued penalties recorded on the Consolidated Balance Sheets as of December 31, 2016 and 2015.
NiSource is subject to income taxation in the United States and various state jurisdictions, primarily Indiana, Pennsylvania, Kentucky, Massachusetts, Maryland, New York and Virginia.
Because NiSource is part of the IRS’s Large and Mid-Size Business program, each year’s federal income tax return is typically audited by the IRS. As of December 31, 2016, tax years through 2015 have been audited and are effectively closed to further assessment. The audit of tax year 2016 under the CAP program is expected to be completed in 2017. NiSource has been accepted into the program for the audit of tax year 2017.
The statute of limitations in each of the state jurisdictions in which NiSource operates remain open until the years are settled for federal income tax purposes, at which time amended state income tax returns reflecting all federal income tax adjustments are filed. As of December 31, 2016, there were no state income tax audits in progress that would have a material impact on the consolidated financial statements.
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (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. Current rates of rate-regulated companies include postretirement benefit costs, including amortization of the regulatory assets that arose prior to inclusion of these costs in rates. For most plans, cash contributions are remitted to grantor trusts.
In connection with the Separation, NiSource entered into an Employees Matters Agreement with CPG, which provides that employees of CPG no longer participate in benefit plans sponsored by NiSource as of the Separation date. Upon the completion of the Separation, the NiSource pension and other postretirement benefit plans transferred assets and obligations to the CPG plans resulting in a net decrease in the pension plans underfunded status of $48.0 million and a net increase in the other postretirement benefit plans underfunded status of $115.9 million. Refer to Note 3, "Discontinued Operations," for additional information.
NiSource Pension and Other Postretirement Benefit Plans’ Asset Management. NiSource employs a liability-driven investing strategy for the pension plan, as noted below. While the majority of assets continue in a total return investment approach, a glide path has been implemented. A mix of equities and fixed income investments are used to maximize the long-term return of plan assets and hedge the liabilities at a prudent level of risk. NiSource utilizes a total return investment approach for the other postretirement benefit plans. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and asset class volatility. The investment portfolio contains a diversified blend of equity and fixed income investments. Furthermore, equity investments are diversified across U.S. and non-U.S. stocks, as well as growth, value, small and large capitalizations. Other assets such as private equity funds are used judiciously to enhance long-term returns while improving portfolio diversification. Derivatives may be used to gain market exposure in an efficient and timely manner; however, derivatives may not be used to leverage the portfolio beyond the market value of the underlying assets. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements, and periodic asset/liability studies.
NiSource utilizes a building block approach with proper consideration of diversification and rebalancing in determining the long-term rate of return for plan assets. Historical markets are studied and long-term historical relationships between equities and fixed income are analyzed to ensure that they are consistent with the widely accepted capital market principle that assets with higher volatility generate greater return over the long run. Current market factors, such as inflation and interest rates, are evaluated before long-term capital market assumptions are determined. Peer data and historical returns are reviewed to check for reasonability and appropriateness.
The most important component of an investment strategy is the portfolio asset mix, or the allocation between the various classes of securities available to the pension and other postretirement benefit plans for investment purposes. The asset mix and acceptable minimum and maximum ranges established for the NiSource plan assets represents a long-term view and are listed in the table below.
In 2012, a dynamic asset allocation policy for the pension fund was approved. This policy calls for a gradual reduction in the allocation of return-seeking assets (equities, real estate, private equity and hedge funds) and a corresponding increase in the allocation of liability-hedging assets (fixed income) as the funded status of the plans increase above 90% (as measured by the market value of qualified pension plan assets divided by the projected benefit obligations of the qualified pension plans). In 2016, a study was conducted and approved resulting in the addition of new asset classes in the return-seeking portfolio allocation (i.e. core real estate, diversified credit) and a shift in the hedging allocation (i.e. fixed income). Planned implementation of the new asset classes will begin in 2017.
As of December 31, 2016, the asset mix and acceptable minimum and maximum ranges established by the policy for the pension and other postretirement benefit plans are as follows:
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Asset Mix Policy of Funds:
| Defined Benefit Pension Plan | Postretirement Benefit Plan | ||||||
| Asset Category | Minimum | Maximum | Minimum | Maximum | |||
| Domestic Equities | 25% | 45% | 35% | 55% | |||
| International Equities | 15% | 25% | 15% | 25% | |||
| Fixed Income | 23% | 37% | 20% | 50% | |||
| Real Estate/Private Equity/Hedge Funds | 0% | 15% | 0% | 0% | |||
| Short-Term Investments | 0% | 10% | 0% | 10% |
Pension Plan and Postretirement Plan Asset Mix at December 31, 2016 and December 31, 2015:
| (in millions) | Defined Benefit Pension Assets | December 31, 2016 | Postretirement Benefit Plan Assets | December 31, 2016 | |||||||||
| Asset Class | Asset Value | % of Total Assets | Asset Value | % of Total Assets | |||||||||
| Domestic Equities | $ | 755.2 | 43.1 | % | $ | 97.9 | 42.3 | % | |||||
| International Equities | 339.9 | 19.4 | % | 41.8 | 18.0 | % | |||||||
| Fixed Income | 565.8 | 32.3 | % | 87.0 | 37.6 | % | |||||||
| Real Estate/Private Equity/Hedge Funds | 74.8 | 4.3 | % | — | — | ||||||||
| Cash/Other | 15.2 | 0.9 | % | 4.7 | 2.1 | % | |||||||
| Total | $ | 1,750.9 | 100.0 | % | $ | 231.4 | 100.0 | % | |||||
| (in millions) | Defined Benefit Pension Assets | December 31, 2015 | Postretirement Benefit Plan Assets | December 31, 2015 | |||||||||
| Asset Class | Asset Value | % of Total Assets | Asset Value | % of Total Assets | |||||||||
| Domestic Equities | $ | 686.3 | 39.3 | % | $ | 105.0 | 46.5 | % | |||||
| International Equities | 323.2 | 18.5 | % | 39.6 | 17.5 | % | |||||||
| Fixed Income | 619.3 | 35.5 | % | 79.1 | 35.0 | % | |||||||
| Real Estate/Private Equity/Hedge Funds | 96.7 | 5.5 | % | — | — | ||||||||
| Cash/Other | 21.6 | 1.2 | % | 2.2 | 1.0 | % | |||||||
| Total | $ | 1,747.1 | 100.0 | % | $ | 225.9 | 100.0 | % |
The categorization of investments into the asset classes in the table above are based on definitions established by the NiSource Benefits Committee.
Fair Value Measurements. The following table sets forth, by level within the fair value hierarchy, the Master Trust and other postretirement benefits investment assets at fair value as of December 31, 2016 and 2015. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Total Master Trust and other postretirement benefits investment assets at fair value classified within Level 3 were $73.1 million and $95.3 million as of December 31, 2016 and December 31, 2015, respectively. Such amounts were approximately 4% and 5% of the Master Trust and other postretirement benefits’ total investments as reported on the statement of net assets available for benefits at fair value as of December 31, 2016 and 2015, respectively.
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Valuation Techniques Used to Determine Fair Value:
Level 1 Measurements
Most common and preferred stocks are traded in active markets on national and international securities exchanges and are valued at closing prices on the last business day of each period presented. Cash is stated at cost which approximates fair value, with the exception of cash held in foreign currencies which fluctuates with changes in the exchange rates. Short-term bills and notes are priced based on quoted market values.
Level 2 Measurements
Most U.S. Government Agency obligations, mortgage/asset-backed securities, and corporate fixed income securities are generally valued by benchmarking model-derived prices to quoted market prices and trade data for identical or comparable securities. To the extent that quoted prices are not available, fair value is determined based on a valuation model that includes inputs such as interest rate yield curves and credit spreads. Securities traded in markets that are not considered active are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Other fixed income includes futures and options which are priced on bid valuation or settlement pricing.
Commingled funds that hold underlying investments that have prices which are derived from the quoted prices in active markets are classified as Level 2. The funds' underlying assets are principally marketable equity and fixed income securities. Units held in commingled funds are valued at the unit value as reported by the investment managers. The fair value of the investments in commingled funds has been estimated using the net asset value per share of the investments.
Level 3 Measurements
Commingled funds that hold underlying investments that have prices which are not derived from the quoted prices in active markets are classified as Level 3. The respective fair values of these investments are determined by reference to the funds' underlying assets, which are principally marketable equity and fixed income securities. Units held in commingled funds are valued at the unit value as reported by the investment managers. These investments are often valued by investment managers on a periodic basis using pricing models that use market, income and cost valuation methods.
Private equity investment strategies include buy-out, venture capital, growth equity, distressed debt, and mezzanine debt. Private equity investments are held through limited partnerships.
Limited partnerships are valued at estimated fair market value based on their proportionate share of the partnership's fair value as recorded in the partnerships' audited financial statements. Partnership interests represent ownership interests in private equity funds and real estate funds. Real estate partnerships invest in natural resources, commercial real estate and distressed real estate. The fair value of these investments is determined by reference to the funds' underlying assets, which are principally securities, private businesses, and real estate properties. The value of interests held in limited partnerships, other than securities, is determined by the general partner, based upon third-party appraisals of the underlying assets, which include inputs such as cost, operating results, discounted cash flows and market based comparable data. Private equity and real estate limited partnerships typically call capital over a three to five year period and pay out distributions as the underlying investments are liquidated. The typical expected life of these limited partnerships is 10-15 years and these investments typically cannot be redeemed prior to liquidation.
For the year ended December 31, 2016, there were no significant changes to valuation techniques to determine the fair value of NiSource's pension and other postretirement benefits' assets.
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Fair Value Measurements at December 31, 2016:
| (in millions) | December 31, 2016 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||
| Pension plan assets: | |||||||||||||||
| Cash | $ | 1.9 | $ | 1.9 | $ | — | $ | — | |||||||
| Fixed income securities | |||||||||||||||
| Government | 42.2 | — | 42.2 | — | |||||||||||
| Corporate | 104.1 | — | 104.1 | — | |||||||||||
| Other fixed income | 0.1 | — | — | 0.1 | |||||||||||
| Mutual Funds | |||||||||||||||
| U.S. multi-strategy | 283.2 | 283.2 | — | — | |||||||||||
| International equities | 116.6 | 116.6 | — | — | |||||||||||
| Fixed income | 135.6 | 135.6 | — | — | |||||||||||
| Private equity limited partnerships | |||||||||||||||
| U.S. multi-strategy (1) | 34.8 | — | — | 34.8 | |||||||||||
| International multi-strategy (2) | 24.9 | — | — | 24.9 | |||||||||||
| Distressed opportunities | 4.1 | — | — | 4.1 | |||||||||||
| Real estate | 9.2 | — | — | 9.2 | |||||||||||
| Commingled funds | |||||||||||||||
| Short-term money markets(3) | 16.6 | ||||||||||||||
| U.S. equities(3) | 472.0 | ||||||||||||||
| International equities(3) | 223.2 | ||||||||||||||
| Fixed income(3) | 280.7 | ||||||||||||||
| Pension plan assets subtotal | 1,749.2 | 537.3 | 146.3 | 73.1 | |||||||||||
| Other postretirement benefit plan assets: | |||||||||||||||
| Mutual funds | |||||||||||||||
| U.S. equities | 85.4 | 85.4 | — | — | |||||||||||
| International equities | 41.8 | 41.8 | — | — | |||||||||||
| Fixed income | 86.8 | 86.8 | — | — | |||||||||||
| Commingled funds | |||||||||||||||
| Short-term money markets(3) | 9.5 | ||||||||||||||
| U.S. equities(3) | 12.5 | ||||||||||||||
| Other postretirement benefit plan assets subtotal | 236.0 | 214.0 | — | — | |||||||||||
| Due to brokers, net (4) | (5.0 | ) | |||||||||||||
| Receivables/payables | 2.1 | ||||||||||||||
| Total pension and other postretirement benefit plan assets | $ | 1,982.3 | $ | 751.3 | $ | 146.3 | $ | 73.1 |
(1) This class includes limited partnerships/fund of funds that invest in a diverse portfolio of private equity strategies, including buy-outs, venture capital, growth capital, special situations and secondary markets, primarily inside the United States.
(2) This class includes limited partnerships/fund of funds that invest in diverse portfolio of private equity strategies, including buy-outs, venture capital, growth capital, special situations and secondary markets, primarily outside the United States.
(3)This class of investments is measured at fair value using the net asset value per share and has not been classified in the fair value hierarchy.
(4) This class represents pending trades with brokers.
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
The table below sets forth a summary of changes in the fair value of the Plan’s Level 3 assets for the year ended December 31, 2016:
| Balance at January 1, 2016 | Total gains or losses (unrealized / realized) | Purchases | (Sales) | Transfers into/(out of) level 3 | Balance at December 31, 2016 | ||||||||||||||||||
| Fixed income securities | |||||||||||||||||||||||
| Other fixed income | $ | 0.1 | $ | — | $ | — | $ | — | $ | — | $ | 0.1 | |||||||||||
| Private equity limited partnerships | |||||||||||||||||||||||
| U.S. multi-strategy | 46.4 | 2.1 | 0.8 | (14.5 | ) | — | 34.8 | ||||||||||||||||
| International multi-strategy | 29.3 | 2.0 | 1.0 | (7.4 | ) | — | 24.9 | ||||||||||||||||
| Distressed opportunities | 5.9 | (0.4 | ) | 0.1 | (1.5 | ) | — | 4.1 | |||||||||||||||
| Real estate | 13.6 | 0.1 | 0.1 | (4.6 | ) | — | 9.2 | ||||||||||||||||
| Total | $ | 95.3 | $ | 3.8 | $ | 2.0 | $ | (28.0 | ) | $ | — | $ | 73.1 |
The table below sets forth a summary of unfunded commitments, redemption frequency and redemption notice periods for certain investments that are measured at fair value using the net asset value per share for the year ended December 31, 2016:
| (in millions) | Fair Value | Unfunded Commitments | Redemption Frequency | Redemption Notice Period | |||||||
| Commingled Funds | |||||||||||
| Short-term money markets | $ | 26.1 | $ | — | Daily | 1 day | |||||
| U.S. equities | 484.5 | — | Monthly | 3 days | |||||||
| International equities | 223.2 | — | Monthly | 14-30 days | |||||||
| Fixed income | 280.7 | — | Monthly | 3 days | |||||||
| Total | $ | 1,014.5 | $ | — |
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Fair Value Measurements at December 31, 2015:
| (in millions) | December 31, 2015 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||
| Pension plan assets: | |||||||||||||||
| Cash | $ | 7.0 | $ | 7.0 | $ | — | $ | — | |||||||
| Equity securities | |||||||||||||||
| International equities | 45.3 | 45.3 | — | — | |||||||||||
| Fixed income securities | |||||||||||||||
| Government | 64.6 | — | 64.6 | — | |||||||||||
| Corporate | 95.8 | — | 95.8 | — | |||||||||||
| Other fixed income | 0.1 | — | — | 0.1 | |||||||||||
| Mutual Funds | |||||||||||||||
| U.S. multi-strategy | 257.1 | 257.1 | — | — | |||||||||||
| International equities | 64.9 | 64.9 | — | — | |||||||||||
| Fixed income | 150.5 | 150.5 | — | — | |||||||||||
| Private equity limited partnerships | |||||||||||||||
| U.S. multi-strategy (1) | 46.4 | — | — | 46.4 | |||||||||||
| International multi-strategy (2) | 29.3 | — | — | 29.3 | |||||||||||
| Distressed opportunities | 5.9 | — | — | 5.9 | |||||||||||
| Real Estate | 13.6 | — | — | 13.6 | |||||||||||
| Commingled funds | |||||||||||||||
| Short-term money markets(3) | 22.9 | ||||||||||||||
| U.S. equities(3) | 429.2 | ||||||||||||||
| International equities(3) | 210.1 | ||||||||||||||
| Fixed income(3) | 302.5 | ||||||||||||||
| Pension plan assets subtotal | 1,745.2 | 524.8 | 160.4 | 95.3 | |||||||||||
| Other postretirement benefit plan assets: | |||||||||||||||
| Mutual funds | |||||||||||||||
| U.S. equities | 89.8 | 89.8 | — | — | |||||||||||
| International equities | 41.4 | 41.4 | — | — | |||||||||||
| Fixed income | 78.0 | 78.0 | — | — | |||||||||||
| Commingled funds | |||||||||||||||
| Short-term money markets(3) | 2.4 | ||||||||||||||
| U.S. equities(3) | 14.3 | ||||||||||||||
| Other postretirement benefit plan assets subtotal | 225.9 | 209.2 | — | — | |||||||||||
| Due to brokers, net (4) | (0.2 | ) | |||||||||||||
| Receivables/payables | 2.1 | ||||||||||||||
| Total pension and other postretirement benefit plan assets | $ | 1,973.0 | $ | 734.0 | $ | 160.4 | $ | 95.3 |
(1) This class includes limited partnerships/fund of funds that invest in a diverse portfolio of private equity strategies, including buy-outs, venture capital, growth capital, special situations and secondary markets, primarily in the United States.
(2) This class includes limited partnerships/fund of funds that invest in a diverse portfolio of private equity strategies, including buy-outs, venture capital, growth capital, special situations and secondary markets, primarily outside the United States.
(3) This class of investments is measured at fair value using the net asset value per share and has not been classified in the fair value hierarchy.
(4) This class represents pending trades with brokers.
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
The table below sets forth a summary of changes in the fair value of the Plan’s Level 3 assets for the year ended December 31, 2015:
| Balance at January 1, 2015 | Total gains or losses (unrealized / realized) | Purchases | (Sales) | Transfers into/(out of) level 3 | Balance at December 31, 2015 | ||||||||||||||||||
| Fixed income securities | |||||||||||||||||||||||
| Other fixed income | $ | 0.6 | $ | — | $ | — | $ | (0.5 | ) | $ | — | $ | 0.1 | ||||||||||
| Private equity limited partnerships | |||||||||||||||||||||||
| U.S. multi-strategy | 56.2 | (3.5 | ) | 1.1 | (7.4 | ) | — | 46.4 | |||||||||||||||
| International multi-strategy | 35.3 | (2.3 | ) | 0.1 | (3.8 | ) | — | 29.3 | |||||||||||||||
| Distress opportunities | 7.6 | (0.5 | ) | — | (1.2 | ) | — | 5.9 | |||||||||||||||
| Real estate | 17.3 | (0.5 | ) | 0.1 | (3.3 | ) | — | 13.6 | |||||||||||||||
| Total | $ | 117.0 | $ | (6.8 | ) | $ | 1.3 | $ | (16.2 | ) | $ | — | $ | 95.3 |
The table below sets forth a summary of unfunded commitments, redemption frequency and redemption notice periods for certain investments that are measured at fair value using the net asset value per share for the year ended December 31, 2015:
| (in millions) | Fair Value | Unfunded Commitments | Redemption Frequency | Redemption Notice Period | |||||||
| Commingled Funds | |||||||||||
| Short-term money markets | $ | 25.3 | $ | — | Daily | 1 day | |||||
| U.S. equities | 443.5 | — | Monthly | 3 days | |||||||
| International equities | 210.1 | — | Monthly | 14-30 days | |||||||
| Fixed income | 302.5 | — | Monthly | 3 days | |||||||
| Total | $ | 981.4 | $ | — |
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NiSource Pension and Other Postretirement Benefit Plans’ Funded Status and Related Disclosure. The following table provides a reconciliation of the plans’ funded status and amounts reflected in NiSource’s Consolidated Balance Sheets at December 31 based on a December 31 measurement date:
| Pension Benefits | Other Postretirement Benefits | ||||||||||||||
| (in millions) | 2016 | 2015 | 2016 | 2015 | |||||||||||
| Change in projected benefit obligation (1) | |||||||||||||||
| Benefit obligation at beginning of year | $ | 2,206.7 | $ | 2,751.4 | $ | 525.8 | $ | 716.0 | |||||||
| Service cost | 30.7 | 34.8 | 5.0 | 6.4 | |||||||||||
| Interest cost | 89.7 | 95.9 | 22.0 | 24.9 | |||||||||||
| Plan participants’ contributions | — | — | 5.9 | 7.3 | |||||||||||
| Plan amendments | — | — | 7.5 | 0.1 | |||||||||||
| Actuarial loss (gain) | (2.7 | ) | (91.7 | ) | 1.0 | (71.5 | ) | ||||||||
| Settlement loss | — | 0.5 | — | — | |||||||||||
| Benefits paid | (158.6 | ) | (171.8 | ) | (38.9 | ) | (43.7 | ) | |||||||
| Estimated benefits paid by incurred subsidy | — | — | 0.7 | 0.8 | |||||||||||
| Separation of CPG (Note 3) | — | (412.4 | ) | — | (114.5 | ) | |||||||||
| Projected benefit obligation at end of year | $ | 2,165.8 | $ | 2,206.7 | $ | 529.0 | $ | 525.8 | |||||||
| Change in plan assets | |||||||||||||||
| Fair value of plan assets at beginning of year | $ | 1,747.1 | $ | 2,330.3 | $ | 225.9 | $ | 465.0 | |||||||
| Actual return on plan assets | 159.1 | (49.7 | ) | 13.0 | 1.9 | ||||||||||
| Employer contributions | 3.3 | 2.7 | 25.5 | 25.8 | |||||||||||
| Plan participants’ contributions | — | — | 5.9 | 7.3 | |||||||||||
| Benefits paid | (158.6 | ) | (171.8 | ) | (38.9 | ) | (43.7 | ) | |||||||
| Separation of CPG (Note 3) | — | (364.4 | ) | — | (230.4 | ) | |||||||||
| Fair value of plan assets at end of year | $ | 1,750.9 | $ | 1,747.1 | $ | 231.4 | $ | 225.9 | |||||||
| Funded Status at end of year | $ | (414.9 | ) | $ | (459.6 | ) | $ | (297.6 | ) | $ | (299.9 | ) | |||
| Amounts recognized in the statement of financial position consist of: | |||||||||||||||
| Current liabilities | (2.9 | ) | (3.0 | ) | (0.7 | ) | (0.6 | ) | |||||||
| Noncurrent liabilities | (412.0 | ) | (456.6 | ) | (296.9 | ) | (299.3 | ) | |||||||
| Net amount recognized at end of year (2) | $ | (414.9 | ) | $ | (459.6 | ) | $ | (297.6 | ) | $ | (299.9 | ) | |||
| Amounts recognized in accumulated other comprehensive income or regulatory asset/liability (3) | |||||||||||||||
| Unrecognized prior service credit | $ | 1.0 | $ | 0.7 | $ | (29.2 | ) | $ | (41.6 | ) | |||||
| Unrecognized actuarial loss | 835.5 | 925.6 | 68.3 | 66.1 | |||||||||||
| Net amount recognized at end of year | $ | 836.5 | $ | 926.3 | $ | 39.1 | $ | 24.5 |
(1) The change in benefit obligation for Pension Benefits represents the change in Projected Benefit Obligation while the change in benefit obligation for Other Postretirement Benefits represents the change in Accumulated Postretirement Benefit Obligation.
(2) NiSource recognizes in its Consolidated Balance Sheets the underfunded and overfunded status of its various defined benefit postretirement plans, measured as the difference between the fair value of the plan assets and the benefit obligation.
(3) NiSource determined that for certain rate-regulated subsidiaries the future recovery of pension and other postretirement benefits costs is probable. These rate-regulated subsidiaries recorded regulatory assets and liabilities of $847.5 million and $0.3 million, respectively, as of December 31, 2016, and $928.7 million and $8.1 million, respectively, as of December 31, 2015 that would otherwise have been recorded to accumulated other comprehensive loss.
NiSource’s accumulated benefit obligation for its pension plans was $2,148.9 million and $2,190.5 million as of December 31, 2016 and 2015, respectively. The accumulated benefit obligation as of a date is the actuarial present value of benefits attributed by the pension benefit formula to employee service rendered prior to that date and based on current and past compensation levels. The accumulated benefit obligation differs from the projected benefit obligation disclosed in the table above in that it includes no assumptions about future compensation levels.
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NiSource pension plans were underfunded by $414.9 million at December 31, 2016 compared to being underfunded at December 31, 2015 by $459.6 million. The improvement in the funded status was due primarily to favorable asset returns offset by a decrease in discount rates. NiSource contributed $3.3 million and $2.7 million to its pension plans in 2016 and 2015, respectively.
NiSource’s other postretirement benefit plans were underfunded by $297.6 million at December 31, 2016 compared to being underfunded at December 31, 2015 by $299.9 million. The improvement in funded status was primarily due to favorable asset returns offset by a decrease in discount rates. NiSource contributed approximately $25.5 million and $25.8 million to its other postretirement benefit plans in 2016 and 2015, respectively.
No amounts of NiSource’s pension or other postretirement benefit plans’ assets are expected to be returned to NiSource or any of its subsidiaries in 2016.
The following table provides the key assumptions that were used to calculate the pension and other postretirement benefits obligations for NiSource’s various plans as of December 31:
| Pension Benefits | Other Postretirement Benefits | ||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||
| Weighted-average assumptions to Determine Benefit Obligation | |||||||||||
| Discount Rate | 4.03 | % | 4.24 | % | 4.12 | % | 4.33 | % | |||
| Rate of Compensation Increases | 4.00 | % | 4.00 | % | — | — | |||||
| Health Care Trend Rates | |||||||||||
| Trend for Next Year | — | — | 8.43 | % | 8.41 | % | |||||
| Ultimate Trend | — | — | 4.50 | % | 4.50 | % | |||||
| Year Ultimate Trend Reached | — | — | 2024 | 2022 |
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
| (in millions) | 1% point increase | 1% point decrease | |||||
| Effect on service and interest components of net periodic cost | $ | 1.3 | $ | (1.1 | ) | ||
| Effect on accumulated postretirement benefit obligation | 27.2 | (23.8 | ) |
NiSource expects to make contributions of approximately $9.1 million to its pension plans and approximately $25.3 million to its postretirement medical and life plans in 2017.
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
The following table provides benefits expected to be paid in each of the next five fiscal years, and in the aggregate for the five fiscal years thereafter. The expected benefits are estimated based on the same assumptions used to measure NiSource’s benefit obligation at the end of the year and includes benefits attributable to the estimated future service of employees:
| (in millions) | Pension Benefits | Other Postretirement Benefits | Federal Subsidy Receipts | ||||||||
| Year(s) | |||||||||||
| 2017 | $ | 171.9 | $ | 34.1 | $ | 0.7 | |||||
| 2018 | 172.5 | 34.9 | 0.7 | ||||||||
| 2019 | 171.1 | 35.8 | 0.7 | ||||||||
| 2020 | 171.2 | 36.5 | 0.7 | ||||||||
| 2021 | 172.2 | 37.2 | 0.7 | ||||||||
| 2022-2026 | 816.8 | 180.9 | 2.9 |
The following table provides the components of the plans’ net periodic benefits cost for each of the three years ended December 31, 2016, 2015 and 2014:
| Pension Benefits | Other Postretirement Benefits | ||||||||||||||||||||||
| (in millions) | 2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||||||||||||
| Components of Net Periodic Benefit Cost (Income) | |||||||||||||||||||||||
| Service cost | $ | 30.7 | $ | 34.8 | $ | 34.8 | $ | 5.0 | $ | 6.4 | $ | 8.5 | |||||||||||
| Interest cost | 89.7 | 95.9 | 109.0 | 22.0 | 24.9 | 30.1 | |||||||||||||||||
| Expected return on assets | (132.9 | ) | (167.2 | ) | (181.1 | ) | (17.2 | ) | (28.2 | ) | (36.8 | ) | |||||||||||
| Amortization of prior service cost (credit) | (0.2 | ) | 0.1 | 0.2 | (4.9 | ) | (5.2 | ) | (4.3 | ) | |||||||||||||
| Recognized actuarial loss | 61.2 | 59.3 | 47.5 | 3.1 | 3.4 | 0.4 | |||||||||||||||||
| Net Periodic Benefit Costs (Income) | 48.5 | 22.9 | 10.4 | 8.0 | 1.3 | (2.1 | ) | ||||||||||||||||
| Additional loss recognized due to: | |||||||||||||||||||||||
| Settlement loss | — | 2.5 | — | — | — | — | |||||||||||||||||
| Total Net Periodic Benefits Cost (Income) | $ | 48.5 | $ | 25.4 | $ | 10.4 | $ | 8.0 | $ | 1.3 | $ | (2.1 | ) |
The following table provides the key assumptions that were used to calculate the net periodic benefits cost for NiSource’s various plans:
| Pension Benefits | Other Postretirement Benefits | ||||||||||||||||
| 2016 | 2015 | 2014 | 2016 | 2015 | 2014 | ||||||||||||
| Weighted-average Assumptions to Determine Net Periodic Benefit Cost | |||||||||||||||||
| Discount Rate | 4.24 | % | 3.81 | % | 4.50 | % | 4.33 | % | 3.94 | % | 4.75 | % | |||||
| Expected Long-Term Rate of Return on Plan Assets | 8.00 | % | 8.30 | % | 8.30 | % | 7.85 | % | 8.15 | % | 8.14 | % | |||||
| Rate of Compensation Increases | 4.00 | % | 4.00 | % | 4.00 | % | — | — | — |
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NiSource believes it is appropriate to assume an 8.00% and 7.85% rate of return on pension and other postretirement plan assets, respectively, for its calculation of 2016 pension benefits cost. These rates are primarily based on asset mix and historical rates of return and were adjusted in the current year due to anticipated changes in asset allocation and projected market returns.
Beginning January 1, 2017, NiSource will change 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, is expected to result in a decrease in the actuarially-determined service and interest cost components. Historically, NiSource estimated service and interest costs 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 elected to utilize 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. NiSource believes the new approach provides a more precise measurement of service and interest costs by aligning the timing of the plan’s liability cash flows to the corresponding spot rates on the yield curve. The benefit obligations measured under this approach are unchanged. NiSource will account for this change as a change in accounting estimate and accordingly will account for this prospectively.
The following table provides other changes in plan assets and projected benefit obligations recognized in other comprehensive income or regulatory asset or liability:
| Pension Benefits | Other Postretirement Benefits | ||||||||||||||
| (in millions) | 2016 | 2015 | 2016 | 2015 | |||||||||||
| Other Changes in Plan Assets and Projected Benefit Obligations Recognized in Other Comprehensive Income or Regulatory Asset or Liability | |||||||||||||||
| Net prior service cost | $ | — | $ | — | $ | 7.5 | $ | 0.1 | |||||||
| Net actuarial loss (gain) | (28.9 | ) | 125.7 | 5.3 | (45.2 | ) | |||||||||
| Settlements | — | (2.5 | ) | — | — | ||||||||||
| Less: amortization of prior service cost (credit) | 0.2 | (0.1 | ) | 4.9 | 5.2 | ||||||||||
| Less: amortization of net actuarial gain | (61.2 | ) | (59.3 | ) | (3.1 | ) | (3.4 | ) | |||||||
| Less: Separation of CPG (Note 3) | — | (143.8 | ) | — | 21.5 | ||||||||||
| Total Recognized in Other Comprehensive Income or Regulatory Asset or Liability | $ | (89.9 | ) | $ | (80.0 | ) | $ | 14.6 | $ | (21.8 | ) | ||||
| Amount Recognized in Net Periodic Benefits Cost and Other Comprehensive Income or Regulatory Asset or Liability | $ | (41.4 | ) | $ | (54.6 | ) | $ | 22.6 | $ | (20.5 | ) |
Based on a December 31 measurement date, the net unrecognized actuarial loss, unrecognized prior service cost (credit), and unrecognized transition obligation that will be amortized into net periodic benefit cost during 2017 for the pension plans are $53.6 million, $(0.7) million and zero, respectively, and for other postretirement benefit plans are $3.0 million, $(4.4) million and zero, respectively.
| 12. | Common Stock |
As of December 31, 2016, NiSource had 400,000,000 authorized shares of common stock with a $0.01 par value.
Common Stock Dividend. Holders of shares of NiSource’s common stock are entitled to receive dividends when, as and if declared by the Board out of funds legally available. The policy of the Board has been to declare cash dividends on a quarterly basis payable on or about the 20th day of February, May, August and November. NiSource has paid quarterly common dividends totaling $0.64, $0.83 and $1.02 per share for the years ended December 31, 2016, 2015 and 2014, respectively. At its January 27, 2017 meeting, the Board declared a quarterly common dividend of $0.175 per share, payable on February 17, 2017 to holders of record on February 10, 2017. NiSource has certain debt covenants which could potentially limit the amount of dividends the Company could pay in order to maintain compliance with these covenants. Refer to Note 14, "Long-Term Debt," for more information. As of December 31, 2016, these covenants did not restrict the amount of dividends that were available to be paid.
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Dividend Reinvestment and Stock Purchase Plan. NiSource offers a Dividend Reinvestment and Stock Purchase Plan which allows participants to reinvest dividends and make voluntary cash payments to purchase additional shares of common stock on the open market.
| 13. | Share-Based Compensation |
The NiSource stockholders originally approved and adopted the NiSource Inc. 2010 Omnibus Incentive Plan (“Omnibus Plan”) at the Annual Meeting of Stockholders held on May 11, 2010. Stockholders re-approved the Omnibus Plan as amended at the Annual Meeting of Stockholders held on May 12, 2015. The Omnibus Plan provides for awards to employees and non-employee directors of incentive and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, cash-based awards and other stock-based awards and supersedes the long-term incentive plan approved by stockholders on April 13, 1994 (“1994 Plan”) and the Director Stock Incentive Plan (“Director Plan”). The Omnibus Plan provides that the number of shares of common stock of NiSource available for awards is 8,000,000 plus the number of shares subject to outstanding awards that expire or terminate for any reason that were granted under either the 1994 Plan or the Director Plan, plus the number of shares that were awarded as a result of the Separation-related adjustments. At December 31, 2016, there were 4,992,782 shares reserved for future awards under the Omnibus Plan.
NiSource recognized stock-based employee compensation expense of $15.1 million, $18.8 million and $29.8 million, during 2016, 2015 and 2014, respectively, as well as related tax benefits of $5.8 million, $7.2 million and $11.8 million, respectively. Additionally, NiSource adopted ASU 2016-09 in the third quarter of 2016 and recognized excess tax benefits from the distribution of vested share-based employee compensation in 2016. For the twelve months ended December 31, 2016, $7.2 million of such benefits were recorded. Refer to Note 2, "Recent Accounting Pronouncements," and Note 10, "Income Taxes," for additional information.
As of December 31, 2016, the total remaining unrecognized compensation cost related to non-vested awards amounted to $16.3 million, which will be amortized over the weighted-average remaining requisite service period of 1.7 years.
Separation-related Adjustments. In connection with the Separation, NiSource and CPG entered into an Employee Matters Agreement, effective July 1, 2015. Under the terms of the Employee Matters Agreement, and pursuant to the terms of the Omnibus Plan, the Compensation Committee of the Board of NiSource approved an adjustment to outstanding awards granted under the Omnibus Plan in order to preserve the intrinsic aggregate value of such awards before the Separation (the “Valuation Adjustment”). The Separation-related adjustments did not have a material impact on either compensation expense or the potentially dilutive securities to be considered in the calculation of diluted earnings per share of common stock. Former NiSource employees transferred to CPG as a result of the Separation surrendered their outstanding unvested NiSource awards effective July 1, 2015.
Restricted Stock Units and Restricted Stock. In 2016, NiSource granted 65,418 restricted stock units and shares of restricted stock, subject to service conditions. The total grant date fair value of the shares of restricted stock units and shares of restricted stock was $1.4 million, based on the average market price of NiSource’s common stock at the date of each grant less the present value of any dividends not received during the vesting period, which will be expensed over the vesting period which is generally three years. As of December 31, 2016, all 65,418 non-vested restricted stock units and shares of restricted stock granted in 2016 were outstanding.
In 2015, NiSource granted 660,230 restricted stock units and shares of restricted stock, subject to service conditions. The total grant date fair value of the restricted stock units and shares of restricted stock was $23.9 million, based on the average market price of NiSource’s common stock at the date of each grant less the present value of any dividends not received during the vesting period, which will be expensed over the vesting period which is generally three years. Including the effect of the Valuation Adjustment, 750,708 non-vested restricted stock units and shares of restricted stock granted in 2015 were outstanding as of December 31, 2016.
In 2014, NiSource granted 158,633 restricted stock units and shares of restricted stock, subject to service conditions. The total grant date fair value of the restricted stock units and shares of restricted stock was $5.2 million, based on the average market price of NiSource’s common stock at the date of each grant less the present value of any dividends not received during the vesting period, which will be expensed over the vesting period which is generally three years. Including the effect of the Valuation Adjustment, 46,810 non-vested restricted stock units and shares of restricted stock granted in 2014 were outstanding as of December 31, 2016.
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
As a result of the Separation, restricted stock units were substituted for outstanding performance shares awarded in 2014, as adjusted based on a modified performance period and modified performance goals, and were subject to the same service based vesting conditions as the performance share awards they replaced. These converted restricted stock unit awards were also subject to the Valuation Adjustment. As of December 31, 2016, 736,911 of these restricted stock units remained outstanding.
If an employee terminates employment before the service conditions lapse under the 2014, 2015 or 2016 awards due to (1) Retirement or Disability (as defined in the award agreement), or (2) death, the service conditions will lapse on the date of such termination with respect to a pro rata portion of the restricted stock units and shares of restricted stock based upon the percentage of the service period satisfied between the grant date and the date of the termination of employment. In the event of a Change-in-Control (as defined in the award agreement), all unvested shares of restricted stock and restricted stock units awarded prior to 2014 will immediately vest and all unvested shares of restricted stock and restricted stock units awarded in 2014, 2015 and 2016 will immediately vest upon termination of employment occurring in connection with a Change-in-Control. Termination due to any other reason will result in all unvested shares of restricted stock and restricted stock units awarded being forfeited effective on the employee’s date of termination.
| (shares) | Restricted Stock Units | Weighted Average Grant Date Fair Value Per Unit ($) | |||
| Nonvested at December 31, 2015 | 3,142,473 | 8.55 | |||
| Granted | 65,418 | 21.49 | |||
| Forfeited | (46,447 | ) | 11.71 | ||
| Vested | (1,519,414 | ) | 5.21 | ||
| Nonvested at December 31, 2016 | 1,642,030 | 12.05 |
Performance Shares. In 2016, NiSource granted 647,305 performance shares subject to service, performance and market conditions. The grant date fair value of the awards was $12.6 million, based on the average market price of NiSource’s common stock at the date of each grant less the present value of dividends not received during the vesting period which will be expensed over the three year requisite service period. The performance conditions are based on achievement of certain non-GAAP financial measures: cumulative net operating earnings per share, a non-GAAP financial measure that NiSource defines as income from continuing operations adjusted for certain items, for the three-year period ending December 31, 2018; and relative total shareholder return, a non-GAAP market measure that NiSource defines as the annualized growth in dividends and share price of a share of NiSource's common stock (calculated using a 20 trading day average of NiSource's closing price beginning on December 31, 2015 and ending on December 31, 2018) compared to the total shareholder return performance of a predetermined peer group of companies. A Monte Carlo analysis was used to value the portion of these awards dependent on market conditions. As of December 31, 2016, all 647,305 non-vested performance shares granted were outstanding. The service conditions for these awards lapse on February 28, 2019.
In 2015, NiSource did not grant any performance shares subject to performance and service conditions.
In 2014, NiSource granted 535,037 performance shares subject to performance and service conditions. The grant date fair-value of the awards was $16.6 million, based on the average market price of NiSource’s common stock at the date of each grant less the present value of dividends not received during the vesting period which will be expensed over the three year requisite service period. The performance conditions are based on achievement of certain non-GAAP financial measures: cumulative net operating earnings, which NiSource defines as income from continuing operations adjusted for certain items; and cumulative funds from operations, which NiSource defines as net operating cash flows provided by continuing operations, in each case for the three-year period ended December 31, 2016; and relative total shareholder return, a non-GAAP market measure that NiSource defines as the annualized growth in the dividends and share price of a share of NiSource’s common stock (calculated using a 20 trading day average of NiSource’s closing price beginning December 31, 2013 and ending on December 31, 2016) compared to the total shareholder return performance of a predetermined peer group of companies. The service conditions for these awards lapse on February 28, 2017.
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
| (shares) | Performance Awards | Weighted Average Grant Date Fair Value Per Unit ($) | |||
| Nonvested at December 31, 2015 | — | — | |||
| Granted | 647,305 | 19.50 | |||
| Forfeited | — | — | |||
| Vested | — | — | |||
| Nonvested at December 31, 2016 | 647,305 | 19.50 |
Non-employee Director Awards. As of May 11, 2010, awards to non-employee directors may be made only under the Omnibus Plan. Currently, restricted stock units are granted annually to non-employee directors, subject to a non-employee director’s election to defer receipt of such restricted stock unit award. The non-employee director’s restricted stock units vest on the last day of the non-employee director’s annual term corresponding to the year the restricted stock units were awarded subject to special pro-rata vesting rules in the event of Retirement or Disability (as defined in the award agreement), or death. The vested restricted stock units are payable as soon as practicable following vesting except as otherwise provided pursuant to the non-employee director’s election to defer. Certain restricted stock units remain outstanding from the Director Plan. All such awards are fully vested and shall be distributed to the directors upon their separation from the Board.
As of December 31, 2016, 218,581 restricted stock units are outstanding to non-employee directors under either the Omnibus Plan or the Director Plan. Of this amount, 40,932 restricted stock units are nonvested and expected to vest.
401(k) Match, Profit Sharing and Company Contribution. NiSource has a voluntary 401(k) savings plan covering eligible employees that allows for periodic discretionary matches as a percentage of each participant’s contributions payable in shares of NiSource common stock. NiSource also has a retirement savings plan that provides for discretionary profit sharing contributions payable in shares of NiSource common stock to eligible employees based on earnings results; and eligible employees hired after January 1, 2010 receive a non-elective company contribution of 3% of eligible pay payable in shares of NiSource common stock. For the years ended December 31, 2016, 2015 and 2014, NiSource recognized 401(k) match, profit sharing and non-elective contribution expense of $32.3 million, $27.4 million and $28.1 million, respectively.
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
| 14. | Long-Term Debt |
NiSource long-term debt as of December 31, 2016 and 2015 is as follows:
| Long-term debt type | Maturity | Weighted average interest rate (%) | Outstanding balance as of December 31, (in millions) | ||||||||
| 2016 | 2015 | ||||||||||
| Senior notes: | |||||||||||
| NiSource Finance | March 2016 | 10.75 | % | $ | — | $ | 201.5 | ||||
| NiSource Finance | November 2016 | 5.41 | % | — | 90.0 | ||||||
| NiSource Finance | September 2017 | 5.25 | % | 210.4 | 210.4 | ||||||
| NiSource Finance | March 2018 | 6.40 | % | 476.0 | 476.0 | ||||||
| NiSource Finance | January 2019 | 6.80 | % | 500.0 | 500.0 | ||||||
| NiSource Finance | March 2019 | Variable | (1) | 500.0 | — | ||||||
| NiSource Finance | September 2020 | 5.45 | % | 550.0 | 550.0 | ||||||
| NiSource Finance | December 2021 | 4.45 | % | 63.6 | 63.6 | ||||||
| NiSource Finance | March 2022 | 6.13 | % | 500.0 | 500.0 | ||||||
| NiSource Finance | February 2023 | 3.85 | % | 250.0 | 250.0 | ||||||
| NiSource Finance | November 2025 | 5.89 | % | 265.0 | 265.0 | ||||||
| NiSource Finance | December 2040 | 6.25 | % | 250.0 | 250.0 | ||||||
| NiSource Finance | June 2041 | 5.95 | % | 400.0 | 400.0 | ||||||
| NiSource Finance | February 2042 | 5.80 | % | 250.0 | 250.0 | ||||||
| NiSource Finance | February 2043 | 5.25 | % | 500.0 | 500.0 | ||||||
| NiSource Finance | February 2044 | 4.80 | % | 750.0 | 750.0 | ||||||
| NiSource Finance | February 2045 | 5.65 | % | 500.0 | 500.0 | ||||||
| Capital Markets | December 2027 | 6.78 | % | 3.0 | 3.0 | ||||||
| Total senior notes | $ | 5,968.0 | $ | 5,759.5 | |||||||
| Medium term notes: | |||||||||||
| Columbia of Massachusetts | December 2025 to February 2028 | 6.30 | % | $ | 40.0 | $ | 40.0 | ||||
| Capital Markets | March 2017 to May 2027 | 7.92 | % | 106.0 | 106.0 | ||||||
| NIPSCO | June 2017 to August 2027 | 7.57 | % | 95.5 | 95.5 | ||||||
| Total medium term notes | $ | 241.5 | $ | 241.5 | |||||||
| Capital leases: | |||||||||||
| NiSource Corporate Services | October 2019 to April 2021 | 2.92 | % | $ | 3.5 | $ | 3.7 | ||||
| NIPSCO | May 2018 | 3.95 | % | 12.7 | 52.8 | ||||||
| Columbia of Ohio | October 2021 to June 2038 | 6.53 | % | 80.1 | 79.8 | ||||||
| Columbia of Massachusetts | December 2033 to July 2036 | 5.33 | % | 23.7 | 24.1 | ||||||
| Columbia of Virginia | August 2024 to July 2029 | 12.27 | % | 5.5 | 5.8 | ||||||
| Columbia of Pennsylvania | August 2027 to June 2036 | 5.45 | % | 31.9 | 32.4 | ||||||
| Total capital leases | 157.4 | 198.6 | |||||||||
| Pollution control bonds - NIPSCO | July 2017 to April 2019 | 5.76 | % | 96.0 | 226.0 | ||||||
| Notes payable - NiSource Development Company | July 2041 | 5.56 | % | — | 2.1 | ||||||
| Unamortized issuance costs and discounts | (41.6 | ) | $ | (45.5 | ) | ||||||
| Total Long-Term Debt | 6,421.3 | $ | 6,382.2 |
(1)Rate of one month Libor plus 95 basis points.
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 INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
During 2016, NiSource Finance redeemed $291.5 million of fixed-rate long-term debt at maturity, entered into a $500 million term loan agreement and entered into forward starting swap-lock transactions with notional values totaling $500.0 million, while NIPSCO redeemed a total of $130.0 million of pollution control bonds. These transactions are detailed as follows:
| • | On March 15, 2016, NiSource Finance redeemed $201.5 million of 10.75% senior unsecured notes at maturity. |
| • | On March 31, 2016, NiSource Finance entered into a $500 million term loan agreement with a syndicate of banks. The term loan matures March 29, 2019, at which point any and all outstanding borrowings under the agreement are due. Interest charged on borrowings depends on the variable rate structure elected by NiSource Finance at the time of each borrowing. The available variable rate structures from which NiSource Finance may choose are defined in the term loan agreement. As of December 31, 2016, NiSource Finance had $500.0 million of outstanding borrowings under the term loan agreement. |
| • | In June 2016, NiSource Finance entered into forward-starting interest rate swaps with an aggregate notional amount of $500.0 million to hedge the variability in cash flows attributable to changes in the benchmark interest rate during the period from the effective date of the swaps to the anticipated date of forecasted debt issuances, expected to take place by the end of 2018. The forward-starting interest rate swaps were designated as cash flow hedges at the time the agreements were executed, whereby any gain or loss recognized from the effective date of the swaps to the date the associated debt is issued for the effective portion of the hedge is recorded net of tax in AOCI and amortized as a component of interest expense over the life of the designated debt. If some portion of the hedges becomes ineffective, the associated gain or loss will be recognized in earnings. As of December 31, 2016, no ineffectiveness has been recorded. |
| • | On November 1, 2016, NIPSCO redeemed $130.0 million of 5.60% pollution control bonds at maturity. |
| • | On November 28, 2016, NiSource Finance redeemed $90.0 million of 5.41% senior unsecured notes at maturity. |
During 2015, NiSource Finance executed a $750.0 million tender offer on fixed-rate long-term debt, redeemed $230.0 million fixed-rate long-term debt at maturity, settled $1,075.0 million term loans, and entered into two forward starting swap-lock transactions with notional values totaling $1,000.0 million. These transactions are detailed as follows:
| • | Prior to the Separation, CPG closed its placement of $2,750.0 million in aggregate principal amount of its senior notes. Using the proceeds from this offering, CPG made cash payments to NiSource representing the settlement of inter-company borrowings and the payment of a one-time special dividend. In May 2015, using proceeds from the cash payments from CPG, NiSource Finance settled its two bank term loans in the amount of $1,075.0 million and executed a tender offer for $750.0 million consisting of a combination of its 5.25% notes due 2017, 6.40% notes due 2018 and 4.45% notes due 2021. In conjunction with the debt retired, NiSource Finance recorded a $97.2 million loss on early extinguishment of long-term debt, primarily attributable to early redemption premiums. |
| • | On November 28, 2015, NiSource Finance redeemed $230.0 million of 5.36% senior unsecured notes at maturity. |
| • | In December 2015, NiSource Finance entered into forward starting interest rate swaps, with an aggregate notional amount of $1.0 billion, to hedge the variability in cash flows attributable to changes in the benchmark interest rate during the period from the effective date of the swap to the anticipated date of forecasted debt issuances by the end of 2018. The forward starting interest rate swaps were designated as cash flow hedges at the time the agreements were executed. |
See Note 18-A, "Contractual Obligations," for the outstanding long-term debt maturities at December 31, 2016.
Unamortized debt expense, premium and discount on long-term debt applicable to outstanding bonds are being amortized over the life of such bonds.
NiSource is subject to a financial covenant under its revolving credit facility which requires NiSource to maintain a debt to capitalization ratio that does not exceed 70%. A similar covenant in a 2005 private placement note purchase agreement requires NiSource to maintain a debt to capitalization ratio that does not exceed 75%. As of December 31, 2016, the ratio was 66%.
NiSource is also subject to certain other non-financial covenants under the revolving credit facility. Such covenants include a limitation on the creation or existence of new liens on NiSource’s assets, generally exempting liens on utility assets, purchase money security interests, preexisting security interests and an additional subset of assets equal to $150 million. An asset sale covenant generally restricts the sale, conveyance, lease, transfer or other disposition of NiSource’s assets to those dispositions that are for a price not materially less than fair market of such assets, that would not materially impair the ability of NiSource and
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NiSource Finance to perform obligations under the revolving credit facility, and that together with all other such dispositions, would not have a material adverse effect. The covenant also restricts dispositions to no more than 10% of NiSource's consolidated total assets on December 31, 2015. The revolving credit facility also includes a cross-default provision, which triggers an event of default under the credit facility in the event of an uncured payment default relating to any indebtedness of NiSource or any of its subsidiaries in a principal amount of $50.0 million or more.
NiSource’s indentures generally do not contain any financial maintenance covenants. However, NiSource’s indentures are generally subject to cross-default provisions ranging from uncured payment defaults of $5 million to $50 million, and limitations on the incurrence of liens on NiSource’s assets, generally exempting liens on utility assets, purchase money security interests, preexisting security interests and an additional subset of assets capped at 10% of NiSource’s consolidated net tangible assets.
| 15. | 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 $1.5 billion commercial paper program, provide for issuance of letters of credit and also for general corporate purposes. On November 28, 2016, NiSource Finance amended its existing revolving credit facility with a syndicate of banks led by Barclays Bank to increase the aggregate commitments from $1.5 billion to $1.85 billion and extend the termination date to November 28, 2021. At December 31, 2016 and 2015, NiSource had no outstanding borrowings under this facility.
NiSource Finance's commercial paper program has a program limit of up to $1.5 billion with a dealer group comprised of Barclays, Citigroup, Credit Suisse and Wells Fargo. At December 31, 2016, NiSource had $1,178.0 million of commercial paper outstanding. At December 31, 2015, NiSource had $321.4 million of commercial paper outstanding.
As of December 31, 2016 and 2015, NiSource had $14.7 million of stand-by letters of credit outstanding all of which were under the revolving credit facility.
Transfers of accounts receivable are accounted for as secured borrowings resulting in the recognition of short-term debt on the Consolidated Balance Sheets in the amount of $310.0 million and $246.0 million as of December 31, 2016 and 2015, respectively. Refer to Note 17, "Transfers of Financial Assets," for additional information.
Short-term borrowings were as follows:
| At December 31, (in millions) | 2016 | 2015 | |||||
| Commercial Paper weighted average interest rate of 1.24% and 1.00% at December 31, 2016 and 2015, respectively. | $ | 1,178.0 | $ | 321.4 | |||
| Accounts receivable securitization facility borrowings | 310.0 | 246.0 | |||||
| Total Short-Term Borrowings | $ | 1,488.0 | $ | 567.4 |
Given their turnover is less than 90 days, cash flows related to the borrowings and repayments of the items listed above are presented net in the Statements of Consolidated Cash Flows.
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
| 16. | 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 Consolidated Balance Sheets on a recurring basis and their level within the fair value hierarchy as of December 31, 2016 and December 31, 2015:
| 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 |
| Recurring Fair Value Measurements December 31, 2015 (in millions) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance as of December 31, 2015 | |||||||||||
| Assets | |||||||||||||||
| Risk management assets | $ | 0.1 | $ | — | $ | — | $ | 0.1 | |||||||
| Available-for-sale securities | — | 128.7 | — | 128.7 | |||||||||||
| Total | $ | 0.1 | $ | 128.7 | $ | — | $ | 128.8 | |||||||
| Liabilities | |||||||||||||||
| Risk management liabilities | $ | 14.3 | $ | 17.4 | $ | 0.2 | $ | 31.9 | |||||||
| Total | $ | 14.3 | $ | 17.4 | $ | 0.2 | $ | 31.9 |
Risk management assets and liabilities include interest rate swaps, exchange-traded NYMEX futures and NYMEX options and non-exchange-based forward purchase contracts. Exchange-traded derivative contracts are based on unadjusted quoted prices in active markets and are classified within Level 1. These financial assets and liabilities are secured with cash on deposit with the exchange; therefore, nonperformance risk has not been incorporated into these valuations. Certain non-exchange-traded derivatives are valued using broker or over-the-counter, on-line exchanges. In such cases, these non-exchange-traded derivatives are classified within Level 2. Non-exchange-based derivative instruments include swaps, forwards and options. In certain instances, these instruments may utilize models to measure fair value. NiSource uses a similar model to value similar instruments. Valuation models utilize various inputs that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, other observable inputs for the asset or liability and market-corroborated inputs, (i.e., inputs derived principally from or corroborated by observable market data by correlation or other means). Where observable inputs are available for substantially the full term of the asset or liability, the instrument is categorized within Level 2. Certain derivatives trade in less active markets with a lower availability of pricing information and models may be utilized in the valuation. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized within Level 3. Credit risk is considered in the fair value calculation of derivative instruments that are not exchange-traded. Credit exposures are adjusted to reflect collateral agreements which reduce exposures. As of December 31, 2016 and 2015, there were
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
no material transfers between fair value hierarchies. Additionally there were no changes in the method or significant assumptions used to estimate the fair value of NiSource’s financial instruments.
NiSource Finance has entered into forward-starting interest rate swaps to hedge the interest rate risk on coupon payments of forecasted issuances of long-term debt. These swaps are designated as cash flow hedges. Credit risk is considered in the fair value calculation of each interest rate swap. As they are based on observable data and valuations of similar instruments, the interest rate swaps are categorized within Level 2 of the fair value hierarchy. There was no exchange of premium at the initial date of the swaps, and NiSource can settle the swaps at any time. For additional information see Note 9, "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 Consolidated Balance Sheets. NiSource values U.S. Treasury, corporate and mortgage-backed securities using a matrix pricing model that incorporates market-based information. These securities trade less frequently and are classified within Level 2. Total unrealized gains and losses from available-for-sale securities are included in other comprehensive income (loss). The amortized cost, gross unrealized gains and losses and fair value of available-for-sale securities at December 31, 2016 and 2015 were:
| 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 | ||||||
| December 31, 2015 (in millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||
| Available-for-sale securities | |||||||||||||||
| U.S. Treasury debt securities | $ | 33.7 | $ | 0.1 | $ | (0.3 | ) | $ | 33.5 | ||||||
| Corporate/Other debt securities | 95.7 | 0.3 | (0.8 | ) | 95.2 | ||||||||||
| Total | $ | 129.4 | $ | 0.4 | $ | (1.1 | ) | $ | 128.7 |
For the years ended December 31, 2016, 2015, and 2014, the realized gain on sale of available for sale U.S. Treasury debt securities was zero, $0.2 million and $0.1 million, respectively. For the years ended December 31, 2016, 2015, and 2014, the realized gain on sale of available for sale Corporate/Other debt securities was $0.2 million, $0.2 million, and $0.4 million, respectively.
The cost of maturities sold is based upon specific identification. At December 31, 2016, approximately $0.5 million of U.S. Treasury securities have maturities of less than a year while the remaining securities have maturities of greater than one year. At December 31, 2016, approximately $15.2 million of Corporate/Other debt securities have maturities of less than a year while the remaining securities have maturities of greater than one 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 years ended December 31, 2016 and 2015.
Non-recurring Fair Value Measurements. There were no significant non-recurring fair value measurements recorded during the twelve months ended December 31, 2016.
B. Other Fair Value Disclosures for Financial Instruments. The carrying amount of cash and cash equivalents, restricted cash, notes receivable, customer deposits and short-term borrowings is a reasonable estimate of fair value due to their liquid or short-term nature. NiSource’s long-term borrowings are recorded at historical amounts.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate fair value.
Long-term debt.The fair values of these securities are estimated based on the quoted market prices for the same or similar securities. Certain premium costs associated with the early settlement of long-term debt are not taken into consideration in determining fair
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
value. These fair value measurements are classified as Level 2 within the fair value hierarchy. For the years ended December 31, 2016 and 2015, there were no changes in the method or significant assumptions used to estimate the fair value of the financial instruments.
The carrying amount and estimated fair values of financial instruments were as follows:
| At December 31, (in millions) | Carrying Amount 2016 | Estimated Fair Value 2016 | Carrying Amount 2015 | Estimated Fair Value 2015 | |||||||||||
| Long-term debt (including current portion) | $ | 6,421.3 | $ | 7,064.1 | $ | 6,382.2 | $ | 6,975.7 |
| 17. | Transfers of Financial Assets |
Columbia of Ohio is under an agreement to sell, without recourse, substantially all of its trade receivables, as they originate, to CGORC, a wholly-owned subsidiary of Columbia of Ohio. CGORC, in turn, is party to an agreement with BTMU and BNS, under the terms of which it sells an undivided percentage ownership interest in its accounts receivable to BTMU and a commercial paper conduit sponsored by BNS. This agreement was last renewed on October 14, 2016; the current agreement expires on October 13, 2017, and can be further renewed if mutually agreed to by all parties. The maximum seasonal program limit under the terms of the current agreement is $240 million. As of December 31, 2016, $100.0 million of accounts receivable had been transferred by CGORC. CGORC is a separate corporate entity from NiSource and Columbia of Ohio, with separate obligations, and upon a liquidation of CGORC, CGORC’s obligations must be satisfied out of CGORC’s assets prior to any value becoming available to CGORC’s stockholder.
NIPSCO is under an agreement to sell, without recourse, substantially all of its trade receivables, as they originate, to NARC, a wholly-owned subsidiary of NIPSCO. NARC, in turn, is party to an agreement with PNC and Mizuho under the terms of which it sells an undivided percentage ownership interest in its accounts receivable to PNC and Mizuho. This agreement was last renewed on August 24, 2016; the current agreement expires on August 23, 2017, and can be further renewed if mutually agreed to by all parties. The maximum seasonal program limit under the terms of the current agreement is $200 million. As of December 31, 2016, $175.0 million of accounts receivable had been transferred by NARC. NARC is a separate corporate entity from NiSource and NIPSCO, with separate obligations, and upon a liquidation of NARC, NARC’s obligations must be satisfied out of NARC’s assets prior to any value becoming available to NARC’s stockholder.
Columbia of Pennsylvania is under an agreement to sell, without recourse, substantially all of its trade receivables, as they originate, to CPRC, a wholly-owned subsidiary of Columbia of Pennsylvania. CPRC, in turn, is party to an agreement with BTMU under the terms of which it sells an undivided percentage ownership interest in its accounts receivable to a commercial paper conduit sponsored by BTMU. The agreement with BTMU was last renewed on March 9, 2016; the current agreement expires on March 8, 2017, and can be further renewed if mutually agreed to by both parties. The maximum seasonal program limit under the terms of the agreement is $75 million. As of December 31, 2016, $35.0 million of accounts receivable had been transferred by CPRC. CPRC is a separate corporate entity from NiSource and Columbia of Pennsylvania, with separate obligations, and upon a liquidation of CPRC, CPRC’s obligations must be satisfied out of CPRC’s assets prior to any value becoming available to CPRC’s stockholder.
All accounts receivables sold to the purchasers are valued at face value, which approximates fair value due to their short-term nature. The amount of the undivided percentage ownership interest in the accounts receivables sold is determined in part by required loss reserves under the agreements.
Transfers of accounts receivable are accounted for as secured borrowings resulting in the recognition of short-term borrowings on the Consolidated Balance Sheets. As of December 31, 2016, the maximum amount of debt that can be recognized related to NiSource’s accounts receivable programs is $310.0 million.
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
The following table reflects the gross and net receivables transferred as well as short-term borrowings related to the securitization transactions as of December 31, 2016 and 2015 for Columbia of Ohio, NIPSCO and Columbia of Pennsylvania:
| (in millions) | December 31, 2016 | December 31, 2015 | |||||
| Gross Receivables | $ | 618.3 | $ | 450.8 | |||
| Less: Receivables not transferred | 308.3 | 204.8 | |||||
| Net receivables transferred | $ | 310.0 | $ | 246.0 | |||
| Short-term debt due to asset securitization | $ | 310.0 | $ | 246.0 |
During 2016 and 2015, $64.0 million and $38.3 million was recorded as cash flows from financing activities related to the change in short-term borrowings due to securitization transactions. Fees associated with the securitization transactions were $2.3 million, $2.5 million and $2.9 million for the years ended December 31, 2016, 2015 and 2014, respectively. Columbia of Ohio, NIPSCO and Columbia of Pennsylvania remain responsible for collecting on the receivables securitized and the receivables cannot be sold to another party.
- Other Commitments and Contingencies
A. Contractual Obligations. NiSource has certain contractual obligations requiring payments at specified periods. The obligations include long-term debt, lease obligations, energy commodity contracts and obligations for various services including pipeline capacity and IBM outsourcing. The total contractual obligations in existence at December 31, 2016 and their maturities were:
| (in millions) | Total | 2017 | 2018 | 2019 | 2020 | 2021 | After | ||||||||||||||||||||
| Long-term debt (1) | $ | 6,305.5 | $ | 349.9 | $ | 476.0 | $ | 1,041.0 | $ | 550.0 | $ | 63.6 | $ | 3,825.0 | |||||||||||||
| Capital leases(2) | 250.0 | 22.7 | 18.5 | 14.2 | 13.5 | 13.4 | 167.7 | ||||||||||||||||||||
| Interest payments on long-term debt | 4,611.2 | 337.9 | 305.3 | 265.2 | 244.9 | 214.9 | 3,243.0 | ||||||||||||||||||||
| Operating leases(3) | 54.6 | 15.4 | 9.4 | 7.5 | 4.8 | 4.1 | 13.4 | ||||||||||||||||||||
| Energy commodity contracts(4) | 312.1 | 108.5 | 67.7 | 67.3 | 68.0 | 0.6 | — | ||||||||||||||||||||
| Service obligations: | |||||||||||||||||||||||||||
| Pipeline service obligations | 2,002.1 | 532.7 | 382.7 | 293.1 | 176.0 | 139.2 | 478.4 | ||||||||||||||||||||
| IBM service obligations | 325.0 | 84.1 | 81.2 | 80.0 | 79.7 | — | — | ||||||||||||||||||||
| Other service obligations | 77.7 | 58.1 | 17.4 | 1.9 | 0.3 | — | — | ||||||||||||||||||||
| Other liabilities | 34.4 | 34.4 | — | — | — | — | — | ||||||||||||||||||||
| Total contractual obligations | $ | 13,972.6 | $ | 1,543.7 | $ | 1,358.2 | $ | 1,770.2 | $ | 1,137.2 | $ | 435.8 | $ | 7,727.5 |
(1) Long-term debt balance excludes unamortized issuance costs and discounts of $41.6 million.
(2) Capital lease payments shown above are inclusive of interest totaling $92.6 million.
(3) Operating lease balances do not include amounts for fleet leases that can be renewed beyond the initial lease term. The Company anticipates renewing the leases beyond the initial term, but the anticipated payments associated with the renewals do not meet the definition of expected minimum lease payments and therefore are not included above. Expected payments are $31.1 million in 2017, $32.9 million in 2018, $26.1 million in 2019, $17.5 million in 2020, $8.0 million in 2021 and $2.0 million thereafter.
(4)In January 2017, NIPSCO signed new coal contract commitments of $24.2 million and $10.1 million for 2017 and 2018, respectively. These contracts are not included above.
Operating and Capital Lease Commitments. NiSource leases assets in several areas of its operations. Payments made in connection with operating leases were $52.0 million in 2016, $47.5 million in 2015 and $59.8 million in 2014, and are primarily charged to operation and maintenance expense as incurred. Capital lease assets and related accumulated depreciation included in the Consolidated Balance Sheets were $167.0 million and $20.6 million at December 31, 2016, and $236.2 million and $44.0 million at December 31, 2015, respectively.
Included in capital leases are the adjusted payments for the NIPSCO service agreement with Pure Air. Refer to section E, "Other Matters," below for additional information.
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Purchase and Service Obligations. NiSource has entered into various purchase and service agreements whereby NiSource is contractually obligated to make certain minimum payments in future periods. NiSource’s purchase obligations are for the purchase of physical quantities of natural gas, electricity and coal. NiSource’s service agreements encompass a broad range of business support and maintenance functions which are generally described below.
NiSource’s subsidiaries have entered into various energy commodity contracts to purchase physical quantities of natural gas, electricity and coal. These amounts represent minimum quantities of these commodities NiSource is obligated to purchase at both fixed and variable prices.
In July 2008, the IURC issued an order approving NIPSCO’s purchase power agreements with subsidiaries of Iberdrola Renewables, Buffalo Ridge I LLC and Barton Windpower LLC. These agreements provide NIPSCO the opportunity and obligation to purchase up to 100 mw of wind power generated commencing in early 2009. The contracts extend 15 and 20 years, representing 50 mw of wind power each. No minimum quantities are specified within these agreements due to the variability of electricity generation from wind, so no amounts related to these contracts are included in the table above. Upon any termination of the agreements by NIPSCO for any reason (other than material breach by Buffalo Ridge I LLC or Barton Windpower LLC), NIPSCO may be required to pay a termination charge that could be material depending on the events giving rise to termination and the timing of the termination. NIPSCO began purchasing wind power in April 2009.
NiSource has pipeline service agreements that provide for pipeline capacity, transportation and storage services. These agreements, which have expiration dates ranging from 2017 to 2045, require NiSource to pay fixed monthly charges.
NIPSCO has contracts with three major rail operators providing for coal transportation services for which there are certain minimum payments. These service contracts extend for various periods through 2018.
On December 31, 2013, NiSource Corporate Services signed a seven-year agreement with IBM to continue to provide business process and support functions to NiSource under a combination of fixed or 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 and includes some targeted service enhancements as well as continued existing information technology support services and a few additional support services.
NiSource has initiated a process to evaluate its future IT business process and support model, which included the issuance of a request for proposal from several service providers, including IBM. Upon any termination of the agreement by NiSource for any reason (other than material breach by IBM), NiSource may be required to pay IBM a termination charge that could include a breakage fee, repayment of IBM's capital investments not yet recovered and IBM's wind-down expense. This termination fee could be material depending on the events giving rise to the termination and the timing of the termination.
B. 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. At December 31, 2016, NiSource had issued stand-by letters of credit of $14.7 million for the benefit of third parties.
C. 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.
D. 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
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
incurred. Management expects a significant portion of environmental assessment and remediation costs to be recoverable through rates for certain NiSource companies.
As of December 31, 2016 and 2015, NiSource had recorded a liability of approximately $111.4 million and $123.2 million, respectively, to cover environmental remediation at various sites. The current portion of this liability is included in "Legal and environmental" in the Consolidated Balance Sheets. The noncurrent portion is included in "Other noncurrent liabilities" in the Consolidated Balance Sheets. 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 E, "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.
Climate Change. Future legislative and regulatory programs, including implementation of the EPA CPP, 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. The CPP and other federally enacted or proposed GHG reduction measures are subject to numerous legal challenges that could change the way the programs are implemented, and 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.
The following NAAQS were recently added or modified:
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. The cost to comply with this rule will depend on a number of factors, including the outcome of CPP litigation, the requirements of the state plan or final federal plan, and the level of NIPSCO's required CO2 emission reductions. It is possible that this new rule, comprehensive federal or state GHG legislation or other GHG regulation could result in additional expense or compliance costs that could materially impact NiSource's financial results. 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.
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
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 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, 2016. The total estimated liability at NiSource related to the facilities subject to remediation was $105.5 million and $110.4 million at December 31, 2016 and 2015, 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, record keeping 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. Refer to Note 7, "Asset Retirement Obligations," for further information. In addition, to comply with the rule, NIPSCO will be required to incur future capital expenditures to modify its infrastructure and manage CCRs. Based upon a preliminary engineering study, capital compliance costs are currently expected to cost approximately $230 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 has filed a petition with the IURC seeking approval of the projects and to recover the costs associated with CCR compliance.
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. Based upon a preliminary engineering study, capital compliance costs are currently expected to cost approximately $170 million. NIPSCO has filed a petition with the IURC seeking approval of the projects and to recover the costs associated with ELG compliance.
E. Other Matters.
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. On August 10, 2016, NIPSCO reached settlement with all remaining parties to the complaint and filed with the FERC for approval. An order from the FERC approving the settlement was received on January 31, 2017. Receipt of the FERC order did not result in a material impact to the Consolidated Financial Statements.
At the time the TUAs were executed, it was assumed the proceeds received from the upgrade sponsors would be taxable to NIPSCO. Accordingly, the multiplier included a provision for such taxes. On June 10, 2016, the U.S. Treasury Department issued a notice
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
regarding transfers of property to regulated utilities by electric generators, stating that transfers within the scope of the notice will not be treated as taxable. In response to this notice, NIPSCO recorded a liability of $8.6 million to reflect the estimated amount owed to the upgrade sponsors for the portion of the multiplier previously collected for taxes. This activity is recorded within "Other, net" in the Statements of Consolidated Income (Loss).
PHMSA Transmission. On March 17, 2016, PHMSA issued a proposed rule that would, if adopted, add new assessment and data requirements to existing transmission facilities that would necessitate expanded investigation and repair/replace activity on these facilities over the next 15 years. The comment period for the proposed rule closed on July 7, 2016. If adopted as proposed, this rule may require NiSource to incur significant incremental capital and operation and maintenance expenditures to achieve compliance. NiSource will continue to monitor this matter, and cannot reasonably estimate its impact at this time.
PHMSA EFV. On October 14, 2016, PHMSA issued a final rule that expands safety requirements for EFVs. Among the rule's provisions is a requirement for utilities to notify customers whose service lines are not currently equipped with an EFV of their right to request installation of an EFV. The rule takes effect April 14, 2017. NiSource is evaluating potential impacts of this regulation on its operations and cannot reasonably estimate its impact at this time.
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 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 evaluates demand-side and supply-side resource alternatives to reliably and cost effectively meet NIPSCO customers' future energy requirements over the next twenty 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. 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. However, retirement of these units is subject to the approval of the MISO, which is responsible for coordinating, controlling and monitoring the use of the electric transmission system by utilities, generators and marketers across parts of 15 U.S. states and the Canadian province of Manitoba. 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 Consolidated Balance Sheets. Refer to Note 5, "Property, Plant and Equipment" for further information.
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. These charges are presented within "Operation and maintenance" on the Statements of Consolidated Income.
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 $21.7 million and $19.5 million for the years ended December 31, 2016 and 2015, 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 18 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
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
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 noncurrent liabilities" on the Consolidated Balance Sheets. 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.
19.Accumulated Other Comprehensive Loss
The following table displays the activity of Accumulated Other Comprehensive Loss, net of tax:
| (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, 2014 | $ | (0.3 | ) | $ | (25.8 | ) | $ | (17.5 | ) | $ | (43.6 | ) | |||
| Other comprehensive income (loss) before reclassifications | 0.9 | (0.3 | ) | (10.2 | ) | (9.6 | ) | ||||||||
| Amounts reclassified from accumulated other comprehensive loss | (0.3 | ) | 2.5 | 0.4 | 2.6 | ||||||||||
| Net current-period other comprehensive income (loss) | 0.6 | 2.2 | (9.8 | ) | (7.0 | ) | |||||||||
| Balance as of December 31, 2014 | $ | 0.3 | $ | (23.6 | ) | $ | (27.3 | ) | $ | (50.6 | ) | ||||
| Other comprehensive loss before reclassifications | (0.5 | ) | (11.0 | ) | (5.0 | ) | (16.5 | ) | |||||||
| Amounts reclassified from accumulated other comprehensive loss | (0.3 | ) | 3.2 | 2.6 | 5.5 | ||||||||||
| Net current-period other comprehensive loss | (0.8 | ) | (7.8 | ) | (2.4 | ) | (11.0 | ) | |||||||
| Allocation of AOCI to noncontrolling interest | — | 2.0 | — | 2.0 | |||||||||||
| Distribution of CPG to shareholders (Refer to Note 3, "Discontinued Operations") | — | 13.9 | 10.6 | 24.5 | |||||||||||
| Balance as of December 31, 2015 | $ | (0.5 | ) | $ | (15.5 | ) | $ | (19.1 | ) | $ | (35.1 | ) | |||
| Other comprehensive income before reclassifications | — | 7.1 | 0.5 | 7.6 | |||||||||||
| Amounts reclassified from accumulated other comprehensive loss | (0.1 | ) | 1.5 | 1.0 | 2.4 | ||||||||||
| Net current-period other comprehensive income (loss) | (0.1 | ) | 8.6 | 1.5 | 10.0 | ||||||||||
| Balance as of December 31, 2016 | $ | (0.6 | ) | $ | (6.9 | ) | $ | (17.6 | ) | $ | (25.1 | ) |
(1)All amounts are net of tax. Amounts in parentheses indicate debits.
| 20. | Other, Net |
| Year Ended December 31, (in millions) | 2016 | 2015 | 2014 | ||||||||
| Interest Income | $ | 3.4 | $ | 0.8 | $ | 3.8 | |||||
| AFUDC Equity | 11.6 | 11.5 | 10.7 | ||||||||
| Charitable Contributions | (4.5 | ) | (4.8 | ) | (11.1 | ) | |||||
| Miscellaneous(1) | (9.0 | ) | 9.9 | 10.0 | |||||||
| Total Other, net | $ | 1.5 | $ | 17.4 | $ | 13.4 |
(1) Miscellaneous in 2016 primarily consists of a TUA-related charge of $8.6 million to reflect the estimated amount owed to the upgrade sponsors for the portion of the multiplier previously collected for taxes. Refer to Note 18-E, "Other Matters," for additional information. In 2015 and 2014, Miscellaneous primarily consisted of TUA income.
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
| 21. | Interest Expense, Net |
| Year Ended December 31, (in millions) | 2016 | 2015 | 2014 | ||||||||
| Interest on long-term debt | $ | 352.3 | $ | 377.5 | $ | 368.6 | |||||
| Interest on short-term borrowings | 9.2 | 2.2 | 5.2 | ||||||||
| Debt discount/cost amortization | 7.6 | 8.7 | 8.0 | ||||||||
| Accounts receivable securitization fees | 2.3 | 2.5 | 2.9 | ||||||||
| Allowance for borrowed funds used and interest capitalized during construction | (5.6 | ) | (5.4 | ) | (5.3 | ) | |||||
| Other(1) | (16.3 | ) | (5.3 | ) | 0.1 | ||||||
| Total Interest Expense, net | $ | 349.5 | $ | 380.2 | $ | 379.5 |
(1) The change in Other for 2016 is primarily attributed to increases in Columbia of Ohio's post-in-service carrying charges (PISCC).
| 22. | Segments of Business |
At December 31, 2016, 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.
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.
| Year Ended December 31, (in millions) | 2016 | 2015 | 2014 | ||||||||
| Gross Revenues | |||||||||||
| Gas Distribution Operations | |||||||||||
| Unaffiliated | $ | 2,818.2 | $ | 3,068.7 | $ | 3,593.6 | |||||
| Intersegment | 12.4 | 0.4 | 0.3 | ||||||||
| Total | 2,830.6 | 3,069.1 | 3,593.9 | ||||||||
| Electric Operations | |||||||||||
| Unaffiliated | 1,660.8 | 1,573.6 | 1,672.6 | ||||||||
| Intersegment | 0.8 | 0.8 | 0.8 | ||||||||
| Total | 1,661.6 | 1,574.4 | 1,673.4 | ||||||||
| Corporate and Other | |||||||||||
| Unaffiliated | 13.5 | 9.5 | 6.2 | ||||||||
| Intersegment | 413.3 | 396.4 | 412.5 | ||||||||
| Total | 426.8 | 405.9 | 418.7 | ||||||||
| Eliminations | (426.5 | ) | (397.6 | ) | (413.6 | ) | |||||
| Consolidated Gross Revenues | $ | 4,492.5 | $ | 4,651.8 | $ | 5,272.4 |
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
| Year Ended December 31, (in millions) | 2016 | 2015 | 2014 | ||||||||
| Operating Income (Loss) | |||||||||||
| Gas Distribution Operations | $ | 574.0 | $ | 555.8 | $ | 537.0 | |||||
| Electric Operations | 291.4 | 264.4 | 282.7 | ||||||||
| Corporate and Other | (7.2 | ) | (20.3 | ) | (30.6 | ) | |||||
| Consolidated Operating Income | $ | 858.2 | $ | 799.9 | $ | 789.1 | |||||
| Depreciation and Amortization | |||||||||||
| Gas Distribution Operations | $ | 252.9 | $ | 232.6 | $ | 217.6 | |||||
| Electric Operations | 274.5 | 267.7 | 244.4 | ||||||||
| Corporate and Other | 19.7 | 24.1 | 24.9 | ||||||||
| Consolidated Depreciation and Amortization | $ | 547.1 | $ | 524.4 | $ | 486.9 | |||||
| Assets | |||||||||||
| Gas Distribution Operations | $ | 11,096.4 | $ | 10,094.5 | $ | 9,443.7 | |||||
| Electric Operations | 5,233.3 | 5,265.3 | 5,009.9 | ||||||||
| Corporate and Other(1) | 2,362.2 | 2,132.7 | 10,136.2 | ||||||||
| Consolidated Assets | $ | 18,691.9 | $ | 17,492.5 | $ | 24,589.8 | |||||
| Capital Expenditures(2) | |||||||||||
| Gas Distribution Operations | $ | 1,054.4 | $ | 917.0 | $ | 860.3 | |||||
| Electric Operations | 420.6 | 400.3 | 438.8 | ||||||||
| Corporate and Other | 15.4 | 50.2 | 40.5 | ||||||||
| Consolidated Capital Expenditures | $ | 1,490.4 | $ | 1,367.5 | $ | 1,339.6 |
(1)Corporate and Other in 2014 includes assets of Discontinued Operations. Refer to Note 3, "Discontinued Operations," for additional information.
(2)Amounts differ from those presented on the Statements of Consolidated Cash Flows primarily due to the inclusion of capital expenditures included in current liabilities and AFUDC Equity.
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
| 23. | Quarterly Financial Data (Unaudited) |
Quarterly financial data does not always reveal the trend of NiSource’s business operations due to nonrecurring items and seasonal weather patterns, which affect earnings and related components of net revenues and operating income.
| (in millions, except per share data) | First Quarter(1) | Second Quarter(1) | Third Quarter | Fourth Quarter | |||||||||||
| 2016 | |||||||||||||||
| Gross revenues | $ | 1,436.6 | $ | 897.6 | $ | 861.3 | $ | 1,297.0 | |||||||
| Operating Income | 381.4 | 138.2 | 113.7 | 224.9 | |||||||||||
| Income from Continuing Operations | 186.6 | 29.0 | 23.7 | 88.8 | |||||||||||
| Results from Discontinued Operations - net of taxes | — | (0.1 | ) | 3.5 | — | ||||||||||
| Net Income | 186.6 | 28.9 | 27.2 | 88.8 | |||||||||||
| Basic Earnings Per Share | |||||||||||||||
| Continuing Operations | 0.58 | 0.09 | 0.07 | 0.28 | |||||||||||
| Discontinued Operations | — | — | 0.01 | — | |||||||||||
| Basic Earnings Per Share | $ | 0.58 | $ | 0.09 | $ | 0.08 | $ | 0.28 | |||||||
| Diluted Earnings Per Share | |||||||||||||||
| Continuing Operations | 0.58 | 0.09 | 0.07 | 0.27 | |||||||||||
| Discontinued Operations | — | — | 0.01 | — | |||||||||||
| Diluted Earnings Per Share | $ | 0.58 | $ | 0.09 | $ | 0.08 | $ | 0.27 | |||||||
| 2015 | |||||||||||||||
| Gross revenues | $ | 1,852.2 | $ | 884.6 | $ | 817.2 | $ | 1,097.8 | |||||||
| Operating Income | 386.3 | 84.4 | 109.7 | 219.5 | |||||||||||
| Income (Loss) from Continuing Operations | 192.5 | (73.1 | ) | 14.8 | 64.4 | ||||||||||
| Results from Discontinued Operations - net of taxes(2) | 82.8 | 45.4 | (19.7 | ) | (5.0 | ) | |||||||||
| Net Income (Loss) | 275.3 | (27.7 | ) | (4.9 | ) | 59.4 | |||||||||
| Net Income (Loss) attributable to NiSource | 268.4 | (36.4 | ) | (4.9 | ) | 59.4 | |||||||||
| Basic Earnings (Loss) Per Share | |||||||||||||||
| Continuing Operations | 0.61 | (0.23 | ) | 0.05 | 0.20 | ||||||||||
| Discontinued Operations | 0.24 | 0.12 | (0.07 | ) | (0.01 | ) | |||||||||
| Basic Earnings (Loss) Per Share | $ | 0.85 | $ | (0.11 | ) | $ | (0.02 | ) | $ | 0.19 | |||||
| Diluted Earnings (Loss) Per Share | |||||||||||||||
| Continuing Operations | 0.61 | (0.23 | ) | 0.05 | 0.20 | ||||||||||
| Discontinued Operations | 0.24 | 0.12 | (0.07 | ) | (0.01 | ) | |||||||||
| Diluted Earnings (Loss) Per Share | $ | 0.85 | $ | (0.11 | ) | $ | (0.02 | ) | $ | 0.19 |
(1)First and second quarter results for 2016 differ from the results presented in the as-filed Form 10-Q for the respective periods as a result of the adoption of ASU 2016-09 in the third quarter of 2016. Refer to Note 2, "Recent Accounting Pronouncements," for additional information.
(2)Includes the results of the former Columbia Pipeline Group segment.
NISOURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
24.Supplemental Cash Flow Information
The following tables provide additional information regarding NiSource’s Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014:
| Year Ended December 31, (in millions) | 2016 | 2015 | 2014 | ||||||||
| Supplemental Disclosures of Cash Flow Information | |||||||||||
| Non-cash transactions: | |||||||||||
| Capital expenditures included in current liabilities | $ | 125.3 | $ | 121.6 | $ | 127.4 | |||||
| Assets acquired under a capital lease | 4.0 | 47.5 | 76.7 | ||||||||
| Schedule of interest and income taxes paid: | |||||||||||
| Cash paid for interest, net of interest capitalized amounts | $ | 337.8 | $ | 390.4 | $ | 429.3 | |||||
| Cash paid for income taxes | 8.0 | 21.3 | 19.4 |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NISOURCE INC.
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
| Twelve months ended December 31, 2016 | ||||||||||||||||||||
| Additions | ||||||||||||||||||||
| ($ in millions) | Balance Jan. 1, 2016 | Charged to Costs and Expenses | Charged to Other Account (1) | Deductions for Purposes for which Reserves were Created | Balance Dec. 31, 2016 | |||||||||||||||
| Reserves Deducted in Consolidated Balance Sheet from Assets to Which They Apply: | ||||||||||||||||||||
| Reserve for accounts receivable | $ | 20.3 | $ | 19.7 | $ | 48.5 | $ | 65.2 | $ | 23.3 | ||||||||||
| Reserve for other investments | 3.0 | — | — | — | 3.0 | |||||||||||||||
| Twelve months ended December 31, 2015 | ||||||||||||||||||||
| Additions | ||||||||||||||||||||
| ($ in millions) | Balance Jan. 1, 2015 | Charged to Costs and Expenses | Charged to Other Account (1) | Deductions for Purposes for which Reserves were Created | Balance Dec. 31, 2015 | |||||||||||||||
| Reserves Deducted in Consolidated Balance Sheet from Assets to Which They Apply: | ||||||||||||||||||||
| Reserve for accounts receivable | $ | 24.9 | $ | 22.5 | $ | 56.7 | $ | 83.8 | $ | 20.3 | ||||||||||
| Reserve for other investments | 3.0 | — | — | — | 3.0 | |||||||||||||||
| Twelve months ended December 31, 2014 | ||||||||||||||||||||
| Additions | ||||||||||||||||||||
| ($ in millions) | Balance Jan. 1, 2014 | Charged to Costs and Expenses | Charged to Other Account (1) | Deductions for Purposes for which Reserves were Created | Balance Dec. 31, 2014 | |||||||||||||||
| Reserves Deducted in Consolidated Balance Sheet from Assets to Which They Apply: | ||||||||||||||||||||
| Reserve for accounts receivable | $ | 23.4 | $ | 21.8 | $ | 69.9 | $ | 90.2 | $ | 24.9 | ||||||||||
| Reserve for other investments | 3.0 | — | — | — | 3.0 |
(1) Charged to Other Accounts reflects the deferral of bad debt expense to a regulatory asset.
NISOURCE INC.
Previous: Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK · Next: Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE