filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
federally mandated costs of the approved compliance project by more than twenty-five percent shall require specific justification by NIPSCO and specific approval by the IURC before being authorized in the next general rate case.
Columbia of Massachusetts, GSEP - 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”). Adopted into the Massachusetts Utility Provisions, G.L. c. 164, § 145, the Act authorizes natural gas distribution companies to file a GSEP for capital investments made on or after January 1, 2015, that are not included in the company’s current rate base as determined in the most recent base rate case, with the Massachusetts DPU to (1) address the replacement or improvement of existing aging natural gas pipeline infrastructure to improve public safety or infrastructure reliability, and (2) reduce the lost and unaccounted for natural gas through a reduction in natural gas system leaks. In addition, the Act provides that the Massachusetts DPU may, after review of the plan, allow the proposed estimated costs of the plan into rates as of May 1 of the subsequent year. Recoverable costs include a return on investment, depreciation and property taxes, offset by identified operations and maintenance cost savings. Beginning with the 2019 GSEP, rates are subject to a capped annual revenue increase of three percent of total annual firm delivery revenues, plus imputed gas revenues for sales and transportation customers, calculated as the product of (1) the historical average cost of gas per therm, and (2) the average weather normalized sales, for the period beginning with 2013 and ending with the most recent year that actual data is available at the time of the October GSEP Plan filing, per the Massachusetts DPU order in Columbia of Massachusetts' 2019 GSEP. Prior to the 2019 GSEP, the annual revenue increase was capped at one and a half percent. At the end of each 12-month period, in May of the subsequent year, Columbia of Massachusetts must file a reconciliation of the amount collected and actual costs. Any over-collection or under-collection balance is passed back to, or recovered from, customers through the surcharge over a 12-month period beginning in November. On October 31, 2019, the Massachusetts DPU issued an order on Columbia of Massachusetts' GSEP reconciliation proceeding finding that, due to pending investigations of the Greater Lawrence Incident and other operational matters, the Massachusetts DPU could not, at this time, make a finding of prudence with respect to the Columbia of Massachusetts' 2018 GSEP investments and deferred the decision on the prudency of the 2018 GSEP investments in the annual GSEP and GSEP reconciliation filings until the investigations by the DPU are complete. The DPU added that its inability to make a finding of prudence did not constitute a finding of imprudence. Once new base rates are established under a base rate proceeding, the GSEP factor is re-set to remove the capital investment and associated revenue reflected in the base rates. Columbia of Massachusetts' current five year GSEP plan for the periods 2019-2023 was approved April 30, 2019.
Columbia of Pennsylvania, DSIC - On February 14, 2012, the Governor of Pennsylvania signed into law Act 11 of 2012, which provided a DSIC mechanism for certain utilities to recover costs related to repair, replacement or improvement of eligible distribution property that has not previously been reflected in rates or rate base. Through a DSIC, a utility may recover the fixed costs of eligible infrastructure incurred during the three months ended one month prior to the effective date of the charge, thereby reducing the historical regulatory lag associated with cost recovery through the traditional rate-making process. On March 14, 2013, the Pennsylvania PUC approved Columbia of Pennsylvania’s petition to implement a DSIC as of April 1, 2013. Accordingly, Columbia of Pennsylvania is authorized to recover the cost of eligible plant associated with repair, replacement or improvement that was not previously reflected in rate base and has been placed in service during the applicable three-month period. After the initial charge is established, the DSIC is updated quarterly to recover the cost of further plant additions and cannot exceed five percent of distribution revenues. Recoverable costs include a return on investment, exclusive of accumulated deferred income taxes from the calculation of rate base, and depreciation. Once new base rates are established under a base rate proceeding, the DSIC is set to zero. Additionally, the DSIC rate is also reset to zero if, in any quarter, the data reflected in the Columbia of Pennsylvania's most recent quarterly financial earnings report show that the utility will earn an overall rate of return that would exceed the allowable rate of return used to calculate its fixed costs under the DSIC mechanism. A utility is exempt from filing a quarterly financial earnings report when a base rate proceeding is pending before the Pennsylvania PUC.
Columbia of Virginia, SAVE - On March 11, 2010, the Virginia Governor signed legislation into law that allows natural gas utilities to implement programs to replace qualifying infrastructure on an expedited basis and provides for timely cost recovery. Known as the SAVE Act, the law allows natural gas utilities to file programs with the VSCC providing a timeline and estimated costs for replacing eligible infrastructure. Eligible infrastructure replacement projects are those that (1) enhance safety or reliability by reducing system integrity risks associated with customer outages, corrosion, equipment failures, material failures, or natural forces; (2) do not increase revenues by directly connecting the infrastructure replacement to new customers; (3) reduce or have the potential to reduce greenhouse gas emissions; (4) are not included in the natural gas utility’s rate base in its most recent rate case; and (5) are commenced on or after January 1, 2010. The SAVE Act provides for recovery of costs associated with the eligible infrastructure through a rate rider. Recoverable costs include a return on investment, depreciation and property taxes. Columbia of Virginia’s current five year SAVE plan was approved by the VSCC in 2016 and amended in 2017 for the years 2016 through 2020 and amended in 2019 for calendar year 2020.
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Columbia of Kentucky, SMRP (formerly AMRP) - On October 26, 2009, the Kentucky PSC approved a mechanism for recovering the costs of Columbia of Kentucky’s AMRP not previously reflected in rate base through an annual fixed monthly rate rider filed in October. In its 2013 rate case, Columbia of Kentucky was allowed to base the AMRP rider on the expected annual cost of service. Recoverable costs include a return on investment, depreciation and property taxes, offset by specific cost savings. At the end of each 12-month period, Columbia of Kentucky must file a reconciliation of the amount collected and actual costs. Any over-collection or under-collection balance is passed back to, or recovered from, customers through the surcharge over a 12-month period beginning in June of the subsequent year. Once new base rates are established under a base rate proceeding, the AMRP rider is set to zero. On July 29, 2019, CKY filed its SMRP to clarify approval of low pressure project spend and expand its AMRP to include for recovery of system safety investments, including low pressure project spend. On November 7, 2019, the Commission approved Columbia of Kentucky's request to amend and expand its annual AMRP to become the SMRP.
Columbia of Maryland, STRIDE - On May 2, 2013, the Governor of Maryland signed Senate Bill 8 into law, authorizing gas companies to accelerate recovery of eligible infrastructure replacement, effective June 1, 2013. The STRIDE statute provides recovery for gas pipeline upgrades outside of the context of a base rate proceeding through an annual surcharge, IRIS, as approved by the Maryland PSC. The STRIDE statute directs gas utilities to file a plan to invest in eligible infrastructure replacement projects and to list the specific projects and elements in any such STRIDE plan with the Maryland PSC. The calendar year projected capital projects to be placed into plant in service and included in Columbia of Maryland's surcharge recovery request must satisfy a number of criteria per the statute, including a requirement that they be designed to improve public safety or infrastructure reliability. Columbia of Maryland’s five-year STRIDE Plan renewal for years 2019 through 2023, as with the preceding five years, is focused on replacing (1) existing cast iron and bare steel mains, (2) associated services and meters, and (3) identified prone-to-failure vintage plastic piping. Columbia of Maryland’s IRIS mechanism recovers a return on investment, depreciation and property taxes of the STRIDE-eligible capital infrastructure statutorily capped at $2 per month for residential customers, and proportionally capped for commercial and industrial customer classes, and is reconciled to actual costs on an annual basis. Any over-collection or under-collection balance is passed back to, or recovered from, customers through the surcharge effective in May of the subsequent year, subject to the cap. STRIDE investments, and recovery thereof, are subject to prudency review by the Maryland PSC in the context of quarterly STRIDE update filings and in subsequent rate proceedings where STRIDE assets are rolled into rate base for recovery in base rates.
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
The following table describes the most recent vintage of our regulatory programs to recover infrastructure replacement and other federally-mandated compliance investments currently in rates and those pending commission approval:
| (in millions) | |||||||||||
| Company | Program | Incremental Revenue | Incremental Capital Investment | Investment Period | Filed | Status | Rates Effective | ||||
| Columbia of Ohio | IRP - 2019(1) | $ | 18.2 | $ | 199.6 | 1/18-12/18 | February 28, 2019 | Approved April 24, 2019 | May 2019 | ||
| Columbia of Ohio | CEP - 2018 | $ | 74.5 | $ | 659.9 | 1/11-12/17 | December 1, 2017 | Approved November 28, 2018 | December 2018 | ||
| Columbia of Ohio | CEP - 2019 | $ | 15.0 | $ | 121.7 | 1/18-12/18 | February 28, 2019 | Approved August 28, 2019 | September 2019 | ||
| NIPSCO - Gas | TDSIC 9(1)(2) | $ | (10.6 | ) | $ | 54.4 | 1/18-6/18 | August 28, 2018 | Approved December 27, 2018 | January 2019 | |
| NIPSCO - Gas | TDSIC 10(3) | $ | 1.6 | $ | 12.4 | 7/18-4/19 | June 25, 2019 | Approved October 16, 2019 | November 2019 | ||
| NIPSCO - Gas | TDSIC 11(4) | $ | (1.7 | ) | $ | 38.7 | 5/19-12/19 | February 25, 2020 | Order Expected June 2020 | July 2020 | |
| NIPSCO - Gas | FMCA 1(5) | $ | 9.9 | $ | 1.5 | 11/17-9/18 | November 30, 2018 | Approved March 27, 2019 | April 2019 | ||
| NIPSCO - Gas | FMCA 2(5) | $ | (3.5 | ) | $ | 1.8 | 10/18-3/19 | May 29, 2019 | Approved September 25, 2019 | October 2019 | |
| NIPSCO - Gas | FMCA 3(5) | $ | 0.3 | $ | 43.0 | 4/19-9/19 | November 26, 2019 | Order Expected March 2020 | April 2020 | ||
| Columbia of Massachusetts | GSEP - 2019(6) | $ | 9.6 | $ | 36.0 | 1/19-12/19 | October 31, 2018 | Approved April 30, 2019 | May 2019 | ||
| Columbia of Massachusetts | GSEP - 2020(6)(7) | $ | 2.4 | $ | 75.0 | 1/20-12/20 | October 31, 2019 | Order Expected April 2020 | May 2020 | ||
| Columbia of Virginia | SAVE - 2019 | $ | 2.4 | $ | 36.0 | 1/19-12/19 | August 17, 2018 | Approved October 26, 2018 | January 2019 | ||
| Columbia of Virginia | SAVE - 2020 | $ | 3.8 | $ | 50.0 | 1/20-12/20 | August 15, 2019 | Approved December 6, 2019 | January 2020 | ||
| Columbia of Kentucky | AMRP - 2019 | $ | 3.6 | $ | 30.1 | 1/19-12/19 | October 15, 2018 | Approved December 5, 2018 | January 2019 | ||
| Columbia of Kentucky | SMRP - 2020 | $ | 4.2 | $ | 40.4 | 1/20-12/20 | October 15, 2019 | Approved December 20, 2019 | January 2020 | ||
| Columbia of Maryland | STRIDE - 2019 | $ | 1.2 | $ | 19.7 | 1/19-12/19 | November 1, 2018 | Approved December 12, 2018 | January 2019 | ||
| Columbia of Maryland | STRIDE - 2020 | $ | 1.3 | $ | 15.0 | 1/20-12/20 | January 29, 2020 | Approved February 19, 2020 | February 2020 | ||
| NIPSCO - Electric | TDSIC - 5(1) | $ | 15.9 | $ | 58.8 | 6/18-11/18 | January 29, 2019 | Approved June 12, 2019 | June 2019 | ||
| NIPSCO - Electric | TDSIC - 6 | $ | 28.1 | $ | 131.1 | 12/18-6/19 | August 21, 2019 | Approved December 18, 2019 | January 2020 | ||
| NIPSCO - Electric | FMCA - 11(5) | $ | 0.9 | $ | 22.4 | 9/18-2/19 | April 17, 2019 | Approved July 29, 2019 | August 2019 | ||
| NIPSCO - Electric | FMCA - 12(5) | $ | 1.6 | $ | 4.7 | 3/19-8/19 | October 18, 2019 | Approved January 29, 2020 | February 2020 |
(1)Incremental revenue is net of amounts due back to customers as a result of the TCJA.
(2)Incremental revenue is net of $5.2 million of adjustments in the TDSIC-9 settlement.
(3)Incremental capital and revenue are net of amounts included in the step 2 rates.
(4)Incremental revenue is net of amounts included in the step 2 rates and reflects a more typical filing period.
(5)Incremental revenue is inclusive of tracker eligible operations and maintenance expense.
(6)Due to an order from the Massachusetts DPU on October 3, 2019 imposing work restrictions on Columbia of Massachusetts, Columbia of Massachusetts did not meet the approved projected 2019 GSEP spend of $64 million and associated incremental revenue of $10.7 million. In the 2020 GSEP, Columbia of Massachusetts reduced the projected capital spend for calendar year 2019 to $36 million and the associated incremental revenue in 2019 GSEP to $9.6 million.
(7)Incremental capital investment is anticipated to be lower than $75 million in 2020 due to the Massachusetts DPU imposed work restrictions.
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Rate Case Actions
The following table describes current rate case actions as applicable in each of our jurisdictions net of tracker impacts:
| (in millions) | |||||||||
| Company | Requested Incremental Revenue | Approved Incremental Revenue | Filed | Status | Rates Effective | ||||
| NIPSCO - Gas(1) | $ | 138.1 | $ | 105.6 | September 27, 2017 | Approved September 19, 2018 | October 2018 | ||
| Columbia of Virginia(2) | $ | 14.2 | $ | 1.3 | August 28, 2018 | Approved June 12, 2019 | February 2019 | ||
| NIPSCO - Electric(3) | $ | 21.4 | $ | (53.5 | ) | October 31, 2018 | Approved December 4, 2019 | January 2020 | |
| Columbia of Maryland | $ | 2.5 | $ | (0.1 | ) | May 22, 2019 | Approved December 18, 2019 | December 2019 |
(1)Rates were implemented in three steps, with implementation of step 1 rates effective October 1, 2018. Step 2 rates were effective on March 1, 2019, and step 3 rates were effective on January 1, 2020. The step 3 increase was approved based on actual information and revised from $107.3 million to $105.6 million. The IURC’s order also dismissed NIPSCO from phase 2 of the IURC’s TCJA investigation.
(2)Rates, as originally filed, were implemented in February 2019 on an interim basis, subject to refund. The final approved rates, which replaced interim rates, were implemented in July 2019.
(3)An order was received on December 4, 2019, which included the resolution of outstanding TCJA impacts to rates. Incremental revenues decreased due to a reduction in fuel costs associated with the new industrial service structure. Rates will be implemented in two steps, with implementation of step 1 rates effective January 2, 2020 and step 2 rates effective March 2, 2020.
Additional Regulatory Matters
NIPSCO Electric. On March 29, 2018, WCE, which is currently owned by BP p.l.c ("BP") and BP Products North America, which operates the BP Refinery, filed a petition at the IURC asking that the combined operations of WCE and BP be treated as a single premise, and the WCE generation be dedicated primarily to BP Refinery operations beginning in May 2019 as WCE has self-certified as a qualifying facility at FERC. BP Refinery planned to continue to purchase electric service from NIPSCO at a reduced demand level beginning in May 2019; however, a settlement agreement was filed on November 2, 2018 agreeing that BP and WCE would not move forward with construction of a private transmission line to serve BP until conclusion of NIPSCO’s pending electric rate case. The IURC approved the settlement agreement as filed on February 20, 2019. On December 4, 2019, the IURC issued an order in the electric rate case approving the implementation of a new industrial service structure. This resolved the issues included in BP’s original petition.
The December 4, 2019 electric rate case order approved the revenue requirement settlement filed in the case, with the exception of a change in the agreed to return on equity; the approved return on equity is 9.75%. The order included approval of the depreciation rates as requested, as well as authorization to create a regulatory asset upon the retirement of R.M. Schahfer Generating Units 14, 15, 17 and 18 and Michigan City Generating Station Unit 12. The order allows for the recovery of and on the net book value of the units by the end of 2032.
9**. Risk Management Activities**
We are exposed to certain risks relating to ongoing business operations; namely commodity price risk and interest rate risk. We recognize that the prudent and selective use of derivatives may help to lower our cost of debt capital, manage interest rate exposure and limit volatility in the price of natural gas.
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Risk management assets and liabilities on our derivatives are presented on the Consolidated Balance Sheets as shown below:
| December 31, (in millions) | 2019 | 2018 | |||||
| Risk Management Assets - Current(1) | |||||||
| Interest rate risk programs | $ | — | $ | — | |||
| Commodity price risk programs | 0.6 | 1.1 | |||||
| Total | $ | 0.6 | $ | 1.1 | |||
| Risk Management Assets - Noncurrent(2) | |||||||
| Interest rate risk programs | $ | — | $ | 18.5 | |||
| Commodity price risk programs | 3.8 | 4.4 | |||||
| Total | $ | 3.8 | $ | 22.9 | |||
| Risk Management Liabilities - Current(3) | |||||||
| Interest rate risk programs | $ | — | $ | — | |||
| Commodity price risk programs | 12.6 | 5.0 | |||||
| Total | $ | 12.6 | $ | 5.0 | |||
| Risk Management Liabilities - Noncurrent | |||||||
| Interest rate risk programs | $ | 76.2 | $ | 9.5 | |||
| Commodity price risk programs | 57.8 | 37.2 | |||||
| Total | $ | 134.0 | $ | 46.7 |
(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.
Commodity Price Risk Management
We, along with our utility customers, are exposed to variability in cash flows associated with natural gas purchases and volatility in natural gas prices. We purchase natural gas for sale and delivery to our 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 our utility subsidiaries offer programs whereby variability in the market price of gas is assumed by the respective utility. The objective of our commodity price risk programs is to mitigate the gas cost variability, for us or on behalf of our customers, associated with natural gas purchases or sales by economically hedging the various gas cost components using a combination of futures, options, forwards or other derivative contracts.
NIPSCO received IURC approval to lock in a fixed price for its natural gas customers using long-term forward purchase instruments. The term of these instruments range from five to ten years and is limited to twenty percent of NIPSCO’s average annual GCA purchase volume. Gains and losses on these derivative contracts are deferred as regulatory liabilities or assets and are remitted to or collected from customers through NIPSCO’s quarterly GCA mechanism. These instruments are not designated as accounting hedges.
Interest Rate Risk Management
As of December 31, 2019, we have forward-starting interest rate swaps with an aggregate notional value totaling $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 2024. 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 "Interest expense, net" concurrently with the recognition of interest expense on the associated debt, once issued. If it becomes probable that a hedged forecasted transaction will no longer occur, the accumulated gains or losses on the derivative will be recognized currently in "Other, net" in the Statements of Consolidated Income (Loss).
The passage of the TCJA and Greater Lawrence Incident led to significant changes to our long-term financing plan. As a result, during 2018, we settled forward-starting interest rate swaps with a notional value of $750.0 million. These derivative contracts were accounted for as cash flow hedges. As part of the transactions, the associated net unrealized gain of $46.2 million was recognized immediately in "Other, net" on the Statements of Consolidated Income (Loss) due to the probability associated with the forecasted borrowing transactions no longer occurring.
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
There were no amounts excluded from effectiveness testing for derivatives in cash flow hedging relationships at December 31, 2019, 2018 and 2017.
Our derivative instruments measured at fair value as of December 31, 2019 and 2018 do not contain any credit-risk-related contingent features.
10**. Income Taxes**
Income Tax Expense
The components of income tax expense (benefit) were as follows:
| Year Ended December 31, (in millions) | 2019 | 2018 | 2017 | ||||||||
| Income Taxes | |||||||||||
| Current | |||||||||||
| Federal | $ | — | $ | — | $ | — | |||||
| State | 5.2 | 8.2 | 7.8 | ||||||||
| Total Current | 5.2 | 8.2 | 7.8 | ||||||||
| Deferred | |||||||||||
| Federal | 110.7 | (209.4 | ) | 302.7 | |||||||
| State | 9.0 | 22.2 | 5.0 | ||||||||
| Total Deferred | 119.7 | (187.2 | ) | 307.7 | |||||||
| Deferred Investment Credits | (1.4 | ) | (1.0 | ) | (1.0 | ) | |||||
| Income Taxes | $ | 123.5 | $ | (180.0 | ) | $ | 314.5 |
Statutory Rate Reconciliation
The following table represents a reconciliation of income tax expense at the statutory federal income tax rate to the actual income tax expense from continuing operations:
| Year Ended December 31, (in millions) | 2019 | 2018 | 2017 | |||||||||||||||||
| Book income (loss) before income taxes | $ | 506.6 | $ | (230.6 | ) | $ | 443.0 | |||||||||||||
| Tax expense (benefit) at statutory federal income tax rate | 106.5 | 21.0 | % | (48.4 | ) | 21.0 | % | 155.0 | 35.0 | % | ||||||||||
| Increases (reductions) in taxes resulting from: | ||||||||||||||||||||
| State income taxes, net of federal income tax benefit | 10.1 | 2.0 | 24.7 | (10.7 | ) | 6.9 | 1.5 | |||||||||||||
| Amortization of regulatory liabilities | (29.4 | ) | (5.8 | ) | (29.3 | ) | 12.7 | (2.4 | ) | (0.5 | ) | |||||||||
| Goodwill impairment | 43.0 | 8.5 | — | — | — | — | ||||||||||||||
| Fines and penalties | 11.5 | 2.3 | 0.2 | (0.1 | ) | 2.8 | 0.6 | |||||||||||||
| Charitable contribution carryover | (2.5 | ) | (0.5 | ) | — | — | (1.2 | ) | (0.3 | ) | ||||||||||
| State regulatory proceedings | (9.5 | ) | (1.9 | ) | (127.8 | ) | 55.4 | — | — | |||||||||||
| Remeasurement due to TCJA | — | — | — | — | 161.1 | 36.4 | ||||||||||||||
| Employee stock ownership plan dividends and other compensation | (2.0 | ) | (0.4 | ) | (2.2 | ) | 1.0 | (6.5 | ) | (1.5 | ) | |||||||||
| Other adjustments | (4.2 | ) | (0.8 | ) | 2.8 | (1.2 | ) | (1.2 | ) | (0.2 | ) | |||||||||
| Income Taxes | $ | 123.5 | 24.4 | % | $ | (180.0 | ) | 78.1 | % | $ | 314.5 | 71.0 | % |
The effective income tax rates were 24.4%, 78.1% and 71.0% in 2019, 2018 and 2017, respectively. The 53.7% decrease in effective tax rate in 2019 versus 2018 was primarily the result of not having significant income tax decreases resulting from state regulatory proceedings as in 2018. Additionally, there was an increase in the effective tax rate related to the non-cash impairment of goodwill in 2019 related to Columbia of Massachusetts (see Note 6, "Goodwill and Other Intangible Assets" for additional information)
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
and non-deductible fines and penalties related to the Greater Lawrence Incident (see Note 19, "Legal Proceedings" for additional information). The rate is also impacted by the relative impact of permanent differences on higher pre-tax income.
The 7.1% increase in the overall effective tax rate in 2018 versus 2017 was primarily the result of state regulatory proceedings which resulted in a $127.8 million decrease in federal income taxes offset by a related increase in state income taxes of $7.1 million. Additionally, the increase was driven by a $26.9 million decrease in income taxes related to amortization of the regulatory liability primarily associated with excess deferred taxes.
Net Deferred Income Tax Liability Components
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 our net deferred tax liability were as follows:
| At December 31, (in millions) | 2019 | 2018 | |||||
| Deferred tax liabilities | |||||||
| Accelerated depreciation and other property differences | $ | 2,516.9 | $ | 2,458.0 | |||
| Other regulatory assets | 381.5 | 375.4 | |||||
| Total Deferred Tax Liabilities | 2,898.4 | 2,833.4 | |||||
| Deferred tax assets | |||||||
| Other regulatory liabilities and deferred investment tax credits (including TCJA) | 336.1 | 365.5 | |||||
| Pension and other postretirement/postemployment benefits | 152.1 | 157.5 | |||||
| Net operating loss carryforward and AMT credit carryforward | 765.9 | 849.8 | |||||
| Environmental liabilities | 25.4 | 24.4 | |||||
| Other accrued liabilities | 35.3 | 37.5 | |||||
| Other, net | 98.3 | 68.2 | |||||
| Total Deferred Tax Assets | 1,413.1 | 1,502.9 | |||||
| Net Deferred Tax Liabilities | $ | 1,485.3 | $ | 1,330.5 |
At December 31, 2019, we had $657.1 million of federal net operating loss carryforwards. The federal net operating loss carryforwards are available to offset taxable income and will begin to expire in 2028. We also have $1.6 million of federal alternative minimum tax credit carryforwards which do not expire. In addition, we have $1.4 million in charitable contribution carryforwards to offset future taxable income, which begin to expire in 2023. We also have $107.2 million (net) of state net operating loss carryforwards. Depending on the jurisdiction in which the state net operating loss was generated, the carryforwards will begin to expire in 2028. We believe it is more likely than not that we will realize the benefit from the state net operating loss carryforwards.
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
| Reconciliation of Unrecognized Tax Benefits (in millions) | 2019 | 2018 | 2017 | ||||||||
| Unrecognized Tax Benefits - Opening Balance | $ | 1.2 | $ | 1.4 | $ | 2.6 | |||||
| Gross decreases - tax positions in prior period | (0.6 | ) | (0.4 | ) | (1.4 | ) | |||||
| Gross increases - current period tax positions | 22.6 | 0.2 | 0.2 | ||||||||
| Unrecognized Tax Benefits - Ending Balance | $ | 23.2 | $ | 1.2 | $ | 1.4 | |||||
| Offset for net operating loss carryforwards | (22.6 | ) | — | — | |||||||
| Balance - Less Net Operating Loss Carryforwards | $ | 0.6 | $ | 1.2 | $ | 1.4 |
In 2019, we resolved prior unrecognized tax benefits of $0.6 million and established new unrecognized tax benefits related to state matters of $22.6 million. We present accrued interest on unrecognized tax benefits, accrued interest on other income tax liabilities and tax penalties in "Income Taxes" on our Statements of Consolidated Income (Loss). 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 (Loss) for the years ended December 31, 2019, 2018 and 2017, and there were no balances for accrued penalties recorded on the Consolidated Balance Sheets as of December 31, 2019 and 2018.
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
We are subject to income taxation in the United States and various state jurisdictions, primarily Indiana, Pennsylvania, Kentucky, Massachusetts, Maryland and Virginia.
We participate in the IRS CAP which provides the opportunity to resolve tax matters with the IRS before filing each year's consolidated federal income tax return. As of December 31, 2019, tax years through 2018 have been audited and are effectively closed to further assessment. The audit of tax year 2019 under the CAP program is expected to be completed in 2020.
The statute of limitations in each of the state jurisdictions in which we operate remains 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, 2019, there were no state income tax audits in progress that would have a material impact on the consolidated financial statements.
In December 22, 2017, the TCJA was signed into law. As a result of the implementation of the TCJA, we remeasured deferred taxes and recognized $161.1 million of income tax expense in our Consolidated Statements of Income (Loss) for the year ended December 31, 2017. The result of this remeasurement was a reduction in the net deferred tax liability of approximately $1.3 billion, including approximately $0.4 billion of regulatory "gross up" to account for over collection of past taxes from customers. Offsetting the reduction in net deferred tax liabilities was an increase in regulatory liabilities of approximately $1.5 billion as of December 31, 2017. In 2018, we received regulatory orders on the treatment of excess deferred taxes from the jurisdictions in which we operate. As a result of these orders, we reduced our regulatory liability related to excess deferred income taxes by $120.7 million (net of tax). This adjustment is reflected in "Income Taxes" on our Consolidated Statements of Income (Loss) for the year ended December 31, 2018.
As of December 31, 2019, we received approval from regulators to return excess deferred taxes in all of our jurisdictions in accordance with regulatory proceedings.
On December 22, 2017, the SEC issued Staff Accounting Bulletin 118 ("SAB 118"), which provides guidance on accounting for tax effects of the TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting under ASC 740. There were no adjustments recorded in the SAB 118 remeasurement period in 2018.
11**. Pension and Other Postretirement Benefits**
We provide defined contribution plans and noncontributory defined benefit retirement plans that cover certain of our employees. Benefits under the defined benefit retirement plans reflect the employees’ compensation, years of service and age at retirement. Additionally, we provide 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 us. 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.
Our Pension and Other Postretirement Benefit Plans’ Asset Management. We employ a liability-driven investing strategy for the pension plan, as noted below. 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. We utilize 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.
We utilize 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.
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
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 our 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 and private equity) 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). A new asset-liability study was completed in 2018 resulting in a more conservative glide path and an increase in the allocation to liability-hedging assets held in the portfolio.
As of December 31, 2019, the asset mix and acceptable minimum and maximum ranges established by the policy for the pension and other postretirement benefit plans are as follows:
Asset Mix Policy of Funds:
| Defined Benefit Pension Plan | Postretirement Benefit Plan | ||||||
| Asset Category | Minimum | Maximum | Minimum | Maximum | |||
| Domestic Equities | 12% | 32% | 0% | 55% | |||
| International Equities | 6% | 16% | 0% | 25% | |||
| Fixed Income | 59% | 71% | 20% | 100% | |||
| Real Estate | 0% | 7% | 0% | 0% | |||
| Short-Term Investments/Other | 0% | 15% | 0% | 10% |
As of December 31, 2018, the asset mix and acceptable minimum and maximum ranges established by the policy for the pension and other postretirement benefit plans were as follows:
Asset Mix Policy of Funds:
| Defined Benefit Pension Plan | Postretirement Benefit Plan | ||||||
| Asset Category | Minimum | Maximum | Minimum | Maximum | |||
| Domestic Equities | 12% | 32% | 0% | 55% | |||
| International Equities | 6% | 16% | 0% | 25% | |||
| Fixed Income | 59% | 71% | 20% | 100% | |||
| Real Estate | 0% | 7% | 0% | 0% | |||
| Short-Term Investments/Other | 0% | 15% | 0% | 10% |
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Pension Plan and Postretirement Plan Asset Mix at December 31, 2019 and December 31, 2018:
| Defined Benefit Pension Assets | December 31, 2019 | Postretirement Benefit Plan Assets | December 31, 2019 | ||||||||||
| Asset Class (in millions) | Asset Value | % of Total Assets | Asset Value | % of Total Assets | |||||||||
| Domestic Equities | $ | 446.4 | 21.5 | % | $ | 93.8 | 35.9 | % | |||||
| International Equities | 205.0 | 9.9 | % | 40.7 | 15.6 | % | |||||||
| Fixed Income | 1,337.2 | 64.2 | % | 119.5 | 45.7 | % | |||||||
| Real Estate | 53.9 | 2.6 | % | — | — | ||||||||
| Cash/Other | 38.4 | 1.8 | % | 7.4 | 2.8 | % | |||||||
| Total | $ | 2,080.9 | 100.0 | % | $ | 261.4 | 100.0 | % | |||||
| Defined Benefit Pension Assets | December 31, 2018 | Postretirement Benefit Plan Assets | December 31, 2018 | ||||||||||
| Asset Class (in millions) | Asset Value | % of Total Assets | Asset Value | % of Total Assets | |||||||||
| Domestic Equities | $ | 355.5 | 19.0 | % | $ | 78.8 | 36.4 | % | |||||
| International Equities | 165.5 | 8.9 | % | 17.5 | 8.1 | % | |||||||
| Fixed Income | 1,241.9 | 66.5 | % | 115.1 | 53.2 | % | |||||||
| Real Estate | 52.7 | 2.8 | % | — | — | ||||||||
| Cash/Other | 52.1 | 2.8 | % | 4.9 | 2.3 | % | |||||||
| Total | $ | 1,867.7 | 100.0 | % | $ | 216.3 | 100.0 | % |
The categorization of investments into the asset classes in the table above are based on definitions established by our 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, 2019 and 2018. 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 $0 million and $86.1 million as of December 31, 2019 and December 31, 2018, respectively. Such amounts were approximately 0% and 4% 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, 2019 and 2018, respectively.
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.
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Level 3 Measurements
Investments with unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities are classified as level 3 investments.
Not Classified
Commingled funds, private equity limited partnerships and real estate partnerships hold underlying investments that have prices derived from quoted prices in active markets and are not classified within the fair value hierarchy. Instead, these assets are measured at estimated fair value using the net asset value per share of the investments. Commingled 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. Private equity and real estate funds 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.
For the year ended December 31, 2019, there were no significant changes to valuation techniques to determine the fair value of our pension and other postretirement benefits' assets.
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Fair Value Measurements at December 31, 2019:
| (in millions) | December 31, 2019 | 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 | $ | 6.7 | $ | 6.7 | $ | — | $ | — | |||||||
| Fixed income securities | |||||||||||||||
| Government | 319.6 | — | 319.6 | — | |||||||||||
| Corporate | 651.8 | — | 651.8 | — | |||||||||||
| Mutual Funds | |||||||||||||||
| U.S. multi-strategy | 140.5 | 140.5 | — | — | |||||||||||
| International equities | 56.9 | 56.9 | — | — | |||||||||||
| Private equity limited partnerships(3) | |||||||||||||||
| U.S. multi-strategy(1) | 14.0 | — | — | — | |||||||||||
| International multi-strategy(2) | 8.5 | — | — | — | |||||||||||
| Distressed opportunities | 0.5 | — | — | — | |||||||||||
| Real estate | 53.9 | — | — | — | |||||||||||
| Commingled funds(3) | |||||||||||||||
| Short-term money markets | 14.8 | — | — | — | |||||||||||
| U.S. equities | 305.9 | — | — | — | |||||||||||
| International equities | 148.1 | — | — | — | |||||||||||
| Fixed income | 351.8 | — | — | — | |||||||||||
| Pension plan assets subtotal | 2,073.0 | 204.1 | 971.4 | — | |||||||||||
| Other postretirement benefit plan assets: | |||||||||||||||
| Mutual funds | |||||||||||||||
| U.S. multi-strategy | 81.7 | 81.7 | — | — | |||||||||||
| International equities | 20.6 | 20.6 | — | — | |||||||||||
| Fixed income | 119.2 | 119.2 | — | — | |||||||||||
| Commingled funds(3) | |||||||||||||||
| Short-term money markets | 7.7 | — | — | — | |||||||||||
| U.S. equities | 12.1 | — | — | — | |||||||||||
| International equities | 20.1 | — | — | — | |||||||||||
| Other postretirement benefit plan assets subtotal | 261.4 | 221.5 | — | — | |||||||||||
| Due to brokers, net(4) | (2.8 | ) | — | (2.8 | ) | — | |||||||||
| Accrued income/dividends | 10.7 | 10.7 | — | — | |||||||||||
| Total pension and other postretirement benefit plan assets | $ | 2,342.3 | $ | 436.3 | $ | 968.6 | $ | — |
(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.
NIS****OURCE 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, 2019:
| Balance at January 1, 2019 | Transfers out (Level 3)(1) | Balance at December 31, 2019 | |||||||||
| Private equity limited partnerships | |||||||||||
| U.S. multi-strategy | 18.5 | (18.5 | ) | — | |||||||
| International multi-strategy | 12.5 | (12.5 | ) | — | |||||||
| Distressed opportunities | 2.4 | (2.4 | ) | — | |||||||
| Real estate | 52.7 | (52.7 | ) | — | |||||||
| Total | $ | 86.1 | $ | (86.1 | ) | $ | — |
(1) Level 3 assets from the prior year were reclassified in the current year presentation and included within the fair value hierarchy table as of December 31, 2019 as “Not Classified" investments for which fair value is measured using net asset value per share, consistent with the definitions described above.
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, 2019:
| (in millions) | Fair Value | Redemption Frequency | Redemption Notice Period | ||||
| Commingled Funds | |||||||
| Short-term money markets | $ | 22.5 | Daily | 1 day | |||
| U.S. equities | 318.0 | Monthly | 1 day | ||||
| International equities | 168.2 | Monthly | 10-30 days | ||||
| Fixed income | 351.8 | Daily | 3 days | ||||
| Total | $ | 860.5 |
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Fair Value Measurements at December 31, 2018:
| (in millions) | December 31, 2018 | 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 | $ | 9.2 | $ | 8.8 | $ | 0.4 | $ | — | |||||||
| Equity securities | |||||||||||||||
| U.S. equities | 0.2 | 0.2 | — | — | |||||||||||
| Fixed income securities | |||||||||||||||
| Government | 250.2 | — | 250.2 | — | |||||||||||
| Corporate | 442.8 | — | 442.8 | — | |||||||||||
| Mutual Funds | |||||||||||||||
| U.S. multi-strategy | 110.3 | 110.3 | — | — | |||||||||||
| International equities | 43.2 | 43.2 | — | — | |||||||||||
| Fixed income | 166.8 | 166.8 | — | — | |||||||||||
| Private equity limited partnerships | |||||||||||||||
| U.S. multi-strategy(1) | 18.5 | — | — | 18.5 | |||||||||||
| International multi-strategy(2) | 12.5 | — | — | 12.5 | |||||||||||
| Distressed opportunities | 2.4 | — | — | 2.4 | |||||||||||
| Real Estate | 52.7 | — | — | 52.7 | |||||||||||
| Commingled funds(3) | |||||||||||||||
| Short-term money markets | 18.3 | — | — | — | |||||||||||
| U.S. equities | 245.2 | — | — | — | |||||||||||
| International equities | 122.3 | — | — | — | |||||||||||
| Fixed income | 365.7 | — | — | — | |||||||||||
| Pension plan assets subtotal | 1,860.3 | 329.3 | 693.4 | 86.1 | |||||||||||
| Other postretirement benefit plan assets: | |||||||||||||||
| Mutual funds | |||||||||||||||
| U.S. equities | 68.4 | 68.4 | — | — | |||||||||||
| International equities | 17.5 | 17.5 | — | — | |||||||||||
| Fixed income | 114.8 | 114.8 | — | — | |||||||||||
| Commingled funds(3) | |||||||||||||||
| Short-term money markets | 5.2 | — | — | — | |||||||||||
| U.S. equities | 10.4 | — | — | — | |||||||||||
| Other postretirement benefit plan assets subtotal | 216.3 | 200.7 | — | — | |||||||||||
| Due to brokers, net(4) | (1.1 | ) | — | (1.1 | ) | — | |||||||||
| Accrued investment income/dividends | 8.6 | 8.6 | — | — | |||||||||||
| Total pension and other postretirement benefit plan assets | $ | 2,084.1 | $ | 538.6 | $ | 692.3 | $ | 86.1 |
(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 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.
NIS****OURCE 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, 2018:
| Balance at January 1, 2018 | Total gains or losses (unrealized / realized) | Purchases | (Sales) | Balance at December 31, 2018 | |||||||||||||||
| Private equity limited partnerships | |||||||||||||||||||
| U.S. multi-strategy | 26.7 | 2.4 | 0.7 | (11.3 | ) | 18.5 | |||||||||||||
| International multi-strategy | 19.1 | (0.6 | ) | — | (6.0 | ) | 12.5 | ||||||||||||
| Distress opportunities | 3.2 | (0.8 | ) | — | — | 2.4 | |||||||||||||
| Real estate | 49.9 | 1.7 | 1.8 | (0.7 | ) | 52.7 | |||||||||||||
| Total | $ | 98.9 | $ | 2.7 | $ | 2.5 | $ | (18.0 | ) | $ | 86.1 |
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, 2018:
| (in millions) | Fair Value | Redemption Frequency | Redemption Notice Period | ||||
| Commingled Funds | |||||||
| Short-term money markets | $ | 23.5 | Daily | 1 day | |||
| U.S. equities | 255.6 | Monthly | 3 days | ||||
| International equities | 122.3 | Monthly | 10-30 days | ||||
| Fixed income | 365.7 | Monthly | 3 days | ||||
| Total | $ | 767.1 |
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Our 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 our Consolidated Balance Sheets at December 31 based on a December 31 measurement date:
| Pension Benefits | Other Postretirement Benefits | ||||||||||||||
| (in millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
| Change in projected benefit obligation**(1)** | |||||||||||||||
| Benefit obligation at beginning of year | $ | 1,981.3 | $ | 2,192.6 | $ | 492.5 | $ | 556.3 | |||||||
| Service cost | 29.2 | 31.3 | 5.1 | 5.0 | |||||||||||
| Interest cost | 72.3 | 67.1 | 19.2 | 17.6 | |||||||||||
| Plan participants’ contributions | — | — | 4.8 | 5.7 | |||||||||||
| Plan amendments | — | 0.2 | 5.1 | 0.1 | |||||||||||
| Actuarial (gain) loss | 204.3 | (103.9 | ) | 88.8 | (51.7 | ) | |||||||||
| Settlement loss | — | 0.8 | — | — | |||||||||||
| Benefits paid | (156.6 | ) | (206.8 | ) | (39.5 | ) | (41.1 | ) | |||||||
| Estimated benefits paid by incurred subsidy | — | — | 0.5 | 0.6 | |||||||||||
| Projected benefit obligation at end of year | $ | 2,130.5 | $ | 1,981.3 | $ | 576.5 | $ | 492.5 | |||||||
| Change in plan assets | |||||||||||||||
| Fair value of plan assets at beginning of year | $ | 1,867.7 | $ | 2,160.0 | $ | 216.3 | $ | 262.5 | |||||||
| Actual (loss) return on plan assets | 366.8 | (88.4 | ) | 56.9 | (31.8 | ) | |||||||||
| Employer contributions | 2.9 | 2.9 | 23.0 | 21.0 | |||||||||||
| Plan participants’ contributions | — | — | 4.7 | 5.7 | |||||||||||
| Benefits paid | (156.5 | ) | (206.8 | ) | (39.5 | ) | (41.1 | ) | |||||||
| Fair value of plan assets at end of year | $ | 2,080.9 | $ | 1,867.7 | $ | 261.4 | $ | 216.3 | |||||||
| Funded Status at end of year | $ | (49.6 | ) | $ | (113.6 | ) | $ | (315.1 | ) | $ | (276.2 | ) | |||
| Amounts recognized in the statement of financial position consist of: | |||||||||||||||
| Noncurrent assets | 8.2 | — | — | — | |||||||||||
| Current liabilities | (3.0 | ) | (3.0 | ) | (0.8 | ) | (0.8 | ) | |||||||
| Noncurrent liabilities | (54.8 | ) | (110.6 | ) | (314.3 | ) | (275.4 | ) | |||||||
| Net amount recognized at end of year**(2)** | $ | (49.6 | ) | $ | (113.6 | ) | $ | (315.1 | ) | $ | (276.2 | ) | |||
| Amounts recognized in accumulated other comprehensive income or regulatory asset/liability**(3)** | |||||||||||||||
| Unrecognized prior service credit | $ | 3.0 | $ | 3.2 | $ | (10.7 | ) | $ | (19.0 | ) | |||||
| Unrecognized actuarial loss | 652.8 | 761.2 | 118.4 | 75.3 | |||||||||||
| Net amount recognized at end of year | $ | 655.8 | $ | 764.4 | $ | 107.7 | $ | 56.3 |
(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) We recognize our Consolidated Balance Sheets underfunded and overfunded status of our various defined benefit postretirement plans, measured as the difference between the fair value of the plan assets and the benefit obligation.
(3) We 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 $739.1 million and $0.1 million, respectively, as of December 31, 2019, and $798.3 million and $0.1 million, respectively, as of December 31, 2018 that would otherwise have been recorded to accumulated other comprehensive loss.
Our accumulated benefit obligation for our pension plans was $2,111.5 million and $1,965.6 million as of December 31, 2019 and 2018, 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.
We are required to reflect the funded status of the pension and postretirement benefit plans on the Consolidated Balance Sheet. The funded status of the plans is measured as the difference between the plan assets' fair value and the projected benefit obligation. We present the noncurrent aggregate of all underfunded plans within "Accrued liability for postretirement and postemployment benefits." The portion of the amount by which the actuarial present value of benefits included in the projected benefit obligation
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
exceeds the fair value of plan assets, payable in the next 12 months, is reflected in "Accrued compensation and other benefits." We present the aggregate of all overfunded plans within "Deferred charges and other."
Information for pension plans with a projected benefit obligation in excess of plan assets:
| December 31, | |||||||
| 2019 | 2018 | ||||||
| Accumulated Benefit Obligation | $ | 1,473.9 | $ | 1,965.6 | |||
| Funded Status | |||||||
| Projected Benefit Obligation | 1,492.9 | 1,981.3 | |||||
| Fair Value of Plan Assets | 1,435.1 | 1,867.7 | |||||
| Funded Status of Underfunded Pension Plans at End of Year | $ | (57.8 | ) | $ | (113.6 | ) |
Information for pension plans with plan assets in excess of the projected benefit obligation:
| December 31, | |||||||
| 2019 | 2018 | ||||||
| Accumulated Benefit Obligation | $ | 637.6 | $ | — | |||
| Funded Status | |||||||
| Projected Benefit Obligation | 637.6 | — | |||||
| Fair Value of Plan Assets | 645.8 | — | |||||
| Funded Status of Overfunded Pension Plans at End of Year | $ | 8.2 | $ | — |
Our pension plans were underfunded, in aggregate, by $49.6 million at December 31, 2019 compared to being underfunded by $113.6 million at December 31, 2018. The improvement in the funded status was due primarily to favorable asset returns offset by a decrease in discount rates. We contributed $2.9 million to our pension plans in both 2019 and 2018.
Our other postretirement benefit plans were underfunded by $315.1 million at December 31, 2019 compared to being underfunded by $276.2 million at December 31, 2018. The decline in funded status was primarily due to a decrease in discount rates offset by favorable asset returns. We contributed $23.0 million and $21.0 million to our other postretirement benefit plans in 2019 and 2018, respectively.
No amounts of our pension or other postretirement benefit plans’ assets are expected to be returned to us or any of our subsidiaries in 2019.
In 2019 and 2018, some of our qualified pension plans paid lump sum payouts in excess of the respective plan's service cost plus interest cost, thereby meeting the requirement for settlement accounting. We recorded settlement charges of $9.5 million and $18.5 million in 2019 and 2018, respectively. Net periodic pension benefit cost for 2019 was decreased by $0.7 million as a result of the interim remeasurement.
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
The following table provides the key assumptions that were used to calculate the pension and other postretirement benefits obligations for our various plans as of December 31:
| Pension Benefits | Other Postretirement Benefits | ||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||
| Weighted-average assumptions to Determine Benefit Obligation | |||||||||||
| Discount Rate | 3.12 | % | 4.26 | % | 3.21 | % | 4.31 | % | |||
| Rate of Compensation Increases | 4.00 | % | 4.00 | % | — | — | |||||
| Health Care Trend Rates | |||||||||||
| Trend for Next Year | — | — | 6.68 | % | 8.48 | % | |||||
| Ultimate Trend | — | — | 4.50 | % | 4.50 | % | |||||
| Year Ultimate Trend Reached | — | — | 2028 | 2026 |
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 | $ | 1.2 | $ | (1.1 | ) | ||
| Effect on accumulated postretirement benefit obligation | 30.1 | (26.3 | ) |
We expect to make contributions of approximately $3.0 million to our pension plans and approximately $24.0 million to our postretirement medical and life plans in 2020.
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 our benefit obligation at the end of the year and include benefits attributable to the estimated future service of employees:
| (in millions) | Pension Benefits | Other Postretirement Benefits | Federal Subsidy Receipts | ||||||||
| Year(s) | |||||||||||
| 2020 | $ | 178.8 | $ | 38.1 | $ | 0.5 | |||||
| 2021 | 177.8 | 38.6 | 0.4 | ||||||||
| 2022 | 175.8 | 38.4 | 0.4 | ||||||||
| 2023 | 168.5 | 38.1 | 0.4 | ||||||||
| 2024 | 164.4 | 37.9 | 0.4 | ||||||||
| 2025-2029 | 723.7 | 181.0 | 1.5 |
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
The following table provides the components of the plans’ actuarially determined net periodic benefits cost for each of the three years ended December 31, 2019, 2018 and 2017:
| Pension Benefits | Other Postretirement Benefits | ||||||||||||||||||||||
| (in millions) | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | |||||||||||||||||
| Components of Net Periodic Benefit Cost(1) | |||||||||||||||||||||||
| Service cost | $ | 29.2 | $ | 31.3 | $ | 30.0 | $ | 5.1 | $ | 5.0 | $ | 4.8 | |||||||||||
| Interest cost | 72.3 | 67.1 | 68.3 | 19.2 | 17.6 | 17.8 | |||||||||||||||||
| Expected return on assets | (108.8 | ) | (142.3 | ) | (123.1 | ) | (13.1 | ) | (14.9 | ) | (15.9 | ) | |||||||||||
| Amortization of prior service cost (credit) | 0.2 | (0.4 | ) | (0.7 | ) | (3.2 | ) | (4.0 | ) | (4.4 | ) | ||||||||||||
| Recognized actuarial loss | 45.2 | 40.6 | 52.9 | 2.0 | 3.8 | 3.0 | |||||||||||||||||
| Settlement loss | 9.5 | 18.5 | 13.7 | — | — | — | |||||||||||||||||
| Total Net Periodic Benefits Cost | $ | 47.6 | $ | 14.8 | $ | 41.1 | $ | 10.0 | $ | 7.5 | $ | 5.3 |
(1)Service cost is presented in "Operation and maintenance" on the Statements of Consolidated Income (Loss). Non-service cost components are presented within "Other, net."
The following table provides the key assumptions that were used to calculate the net periodic benefits cost for our various plans:
| Pension Benefits | Other Postretirement Benefits | ||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||
| Weighted-average Assumptions to Determine Net Periodic Benefit Cost | |||||||||||||||||
| Discount rate - service cost(1) | 4.48 | % | 3.79 | % | 4.40 | % | 4.59 | % | 3.89 | % | 4.58 | % | |||||
| Discount rate - interest cost(1) | 3.84 | % | 3.15 | % | 3.31 | % | 3.94 | % | 3.27 | % | 3.48 | % | |||||
| Expected Long-Term Rate of Return on Plan Assets | 6.10 | % | 7.00 | % | 7.25 | % | 5.83 | % | 5.80 | % | 6.99 | % | |||||
| Rate of Compensation Increases | 4.00 | % | 4.00 | % | 4.00 | % | — | — | — |
(1) In January 2017, we changed the method used to estimate the service and interest components of net periodic benefit cost for pension and other postretirement benefits. This change, compared to the previous method, resulted in a decrease in the actuarially-determined service and interest cost components. Historically, we estimated service and interest cost utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. For fiscal 2017 and beyond, we now 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.
We believe it is appropriate to assume a 6.10% and 5.83% rate of return on pension and other postretirement plan assets, respectively, for our calculation of 2019 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.
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
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) | 2019 | 2018 | 2019 | 2018 | |||||||||||
| Other Changes in Plan Assets and Projected Benefit Obligations Recognized in Other Comprehensive Income or Regulatory Asset or Liability | |||||||||||||||
| Net prior service cost | $ | — | $ | 0.2 | $ | 5.1 | $ | 0.1 | |||||||
| Net actuarial loss (gain) | (53.8 | ) | 127.5 | 45.1 | (5.0 | ) | |||||||||
| Settlements | (9.5 | ) | (18.5 | ) | — | — | |||||||||
| Less: amortization of prior service cost | (0.2 | ) | 0.4 | 3.2 | 4.0 | ||||||||||
| Less: amortization of net actuarial loss | (45.2 | ) | (40.6 | ) | (2.0 | ) | (3.8 | ) | |||||||
| Total Recognized in Other Comprehensive Income or Regulatory Asset or Liability | $ | (108.7 | ) | $ | 69.0 | $ | 51.4 | $ | (4.7 | ) | |||||
| Amount Recognized in Net Periodic Benefits Cost and Other Comprehensive Income or Regulatory Asset or Liability | $ | (61.1 | ) | $ | 83.8 | $ | 61.4 | $ | 2.8 |
Based on a December 31 measurement date, the estimated net unrecognized actuarial loss, unrecognized prior service cost, and unrecognized transition obligation that will be amortized into net periodic benefit cost during 2020 for the pension plans are $34.7 million, $0.8 million and zero, respectively, and for other postretirement benefit plans are $4.9 million, $(1.8) million and zero, respectively.
12**. Equity**
We raise equity financing through a variety of programs including traditional common equity issuances and preferred stock issuances. As of December 31, 2019, we had 600,000,000 shares of common stock and 20,000,000 shares of preferred stock authorized for issuance, of which 382,135,680 shares of common stock and 440,000 shares of preferred stock are currently outstanding.
Holders of shares of our 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. We have paid quarterly common dividends totaling $0.80, $0.78, and $0.70 per share for the years ended December 31, 2019, 2018 and 2017, respectively. Our Board declared a quarterly common dividend of $0.21 per share, payable on February 20, 2020 to holders of record on February 11, 2020. We have 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, 2019, these covenants did not restrict the amount of dividends that were available to be paid.
Dividends paid to preferred shareholders vary based on the series of preferred stock owned. Additional information is provided below. Holders of our shares of common stock are subject to the prior dividend rights of holders of our preferred stock or the depositary shares representing such preferred stock outstanding, and if full dividends have not been declared and paid on all outstanding shares of preferred stock in any dividend period, no dividend may be declared or paid or set aside for payment on our common stock.
Common and preferred stock activity for 2019, 2018 and 2017 is described further below:
ATM Program and Forward Sale Agreements. On May 3, 2017, we entered into four separate equity distribution agreements, pursuant to which we were able to sell up to an aggregate of $500.0 million of our common stock.
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
On November 13, 2017, under the ATM program, we executed a forward agreement, which allowed us to issue a fixed number of shares at a price to be settled in the future. On November 6, 2018, the forward agreement was settled for $26.43 per share, resulting in $167.7 million of net proceeds. The equity distribution agreements entered into on May 3, 2017 expired December 31, 2018.
On November 1, 2018, we entered into five separate equity distribution agreements pursuant to which we were able to sell up to an aggregate of $500.0 million of our common stock. Four of these agreements were then amended on August 1, 2019 and one was terminated, pursuant to which we may sell, from time to time, up to an aggregate of $434.4 million of our common stock.
On December 6, 2018, under the ATM program, we executed a forward agreement, which allowed us to issue a fixed number of shares at a price to be settled in the future. From December 6, 2018 to December 10, 2018, 4,708,098 shares were borrowed from third parties and sold by the dealer at a weighted average price of $26.55 per share. On November 21, 2019, the forward agreement was settled for $26.01 per share, resulting in $122.5 million of net proceeds.
On August 12, 2019, under the ATM program, we executed a separate forward agreement, which allowed us to issue a fixed number of shares at a price to be settled in the future. From August 12, 2019 to September 13, 2019, 3,714,400 shares were borrowed from third parties and sold by the dealer at a weighted average price of $29.26 per share. On December 11, 2019, the forward agreement was settled for $28.83 per share, resulting in $107.1 million of net proceeds.
As of December 31, 2019, the ATM program had approximately $200.7 million of equity available for issuance. The program expires on December 31, 2020.
The following table summarizes our activity under the ATM program:
| Year Ending December 31, | 2019 | 2018 | 2017 | ||||||||
| Number of shares issued | 8,422,498 | 8,883,014 | 11,931,376 | ||||||||
| Average price per share | $ | 27.75 | $ | 26.85 | $ | 26.58 | |||||
| Proceeds, net of fees (in millions) | $ | 229.1 | $ | 232.5 | $ | 314.7 |
Private Placement of Common Stock. On May 4, 2018, we completed the sale of 24,964,163 shares of $0.01 par value common stock at a price of $24.28 per share in a private placement to selected institutional and accredited investors. The private placement resulted in $606.0 million of gross proceeds or $599.6 million of net proceeds, after deducting commissions and sale expenses. The common stock issued in connection with the private placement was registered on Form S-1, filed with the SEC on May 11, 2018.
Preferred Stock. On June 11, 2018, we completed the sale of 400,000 shares of 5.650% Series A Fixed-Rate Reset Cumulative Redeemable Perpetual Preferred Stock (the "Series A Preferred Stock") at a price of $1,000 per share. The transaction resulted in $400.0 million of gross proceeds or $393.9 million of net proceeds, after deducting commissions and sale expenses. The Series A Preferred Stock was issued in a private placement pursuant to SEC Rule 144A. On December 13, 2018, we filed a registration statement with the SEC enabling holders to exchange their unregistered shares of Series A Preferred Stock for publicly registered shares with substantially identical terms.
Proceeds from the issuance of the Series A Preferred Stock were used to pay a portion of the notes tendered in June 2018 and the redemption of the remaining notes in July 2018. See Note 14, “Long-term Debt” for additional information regarding the tender offer and redemption.
Dividends on the Series A Preferred Stock accrue and are cumulative from the date the shares of Series A Preferred Stock were originally issued to, but not including, June 15, 2023 at a rate of 5.650% per annum of the $1,000 liquidation preference per share. On and after June 15, 2023, dividends on the Series A Preferred Stock will accumulate for each five year period at a percentage of the $1,000 liquidation preference equal to the five-year U.S. Treasury Rate plus (i) in respect of each five year period commencing on or after June 15, 2023 but before June 15, 2043, a spread of 2.843% (the “Initial Margin”), and (ii) in respect of each five year period commencing on or after June 15, 2043, the Initial Margin plus 1.000%. The Series A Preferred Stock may be redeemed by us at our option on June 15, 2023, or on each date falling on the fifth anniversary thereafter, or in connection with a ratings event (as defined in the Certificate of Designation of the Series A Preferred Stock).
As of December 31, 2019 and 2018, Series A Preferred Stock had $1.0 million of cumulative preferred dividends in arrears, or $2.51 per share.
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Holders of Series A Preferred Stock generally have no voting rights, except for limited voting rights with respect to (i) potential amendments to our certificate of incorporation that would have a material adverse effect on the existing preferences, rights, powers or duties of the Series A Preferred Stock, (ii) the creation or issuance of any security ranking on a parity with the Series A Preferred Stock if the cumulative dividends payable on then outstanding Series A Preferred Stock are in arrears, or (iii) the creation or issuance of any security ranking senior to the Series A Preferred Stock. The Series A Preferred Stock does not have a stated maturity and is not subject to mandatory redemption or any sinking fund. The Series A Preferred Stock will remain outstanding indefinitely unless repurchased or redeemed by us. Any such redemption would be effected only out of funds legally available for such purposes and will be subject to compliance with the provisions of our outstanding indebtedness.
On December 5, 2018, we completed the sale of 20,000,000 depositary shares with an aggregate liquidation preference of $500,000,000 under the Company’s registration statement on Form S-3. Each depositary share represents 1/1,000th ownership interest in a share of our 6.500% Series B Fixed-Rate Reset Cumulative Redeemable Perpetual Preferred Stock, liquidation preference $25,000 per share (equivalent to $25 per depositary share) (the “Series B Preferred Stock"). The transaction resulted in $500.0 million of gross proceeds or $486.1 million of net proceeds, after deducting commissions and sale expenses.
Dividends on the Series B Preferred Stock accrue and are cumulative from the date the shares of Series B Preferred Stock were originally issued to, but not including, March 15, 2024 at a rate of 6.500% per annum of the $25,000 liquidation preference per share. On and after March 15, 2024, dividends on the Series B Preferred Stock will accumulate for each five year period at a percentage of the $25,000 liquidation preference equal to the five-year U.S. Treasury Rate plus (i) in respect of each five year period commencing on or after March 15, 2024 but before March 15, 2044, a spread of 3.632% (the “Initial Margin”), and (ii) in respect of each five year period commencing on or after March 15, 2044, the Initial Margin plus 1.000%. The Series B Preferred Stock may be redeemed by us at our option on March 15, 2024, or on each date falling on the fifth anniversary thereafter, or in connection with a ratings event (as defined in the Certificate of Designation of the Series B Preferred Stock).
As of December 31, 2019 and 2018, Series B Preferred Stock had $1.4 million and $2.4 million, respectively, of cumulative preferred dividends in arrears, or $72.23 and $121.88 per share, respectively.
In addition, we issued 20,000 shares of “Series B-1 Preferred Stock”, par value $0.01 per share, (“Series B-1 Preferred Stock”), as a distribution with respect to the Series B Preferred Stock. As a result, each of the depositary shares issued on December 5, 2018 now represents a 1/1,000th ownership interest in a share of Series B Preferred Stock and a 1/1,000th ownership interest in a share of Series B-1 Preferred Stock. We issued the Series B-1 Preferred Stock to enhance the voting rights of the Series B Preferred Stock to comply with the minimum voting rights policy of the New York Stock Exchange. The Series B-1 Preferred Stock is paired with the Series B Preferred Stock and may not be transferred, redeemed or repurchased except in connection with the simultaneous transfer, redemption or repurchase of a like number of shares of the underlying Series B Preferred Stock.
Holders of Series B Preferred Stock generally have no voting rights, except for limited voting rights with respect to (i) potential amendments to our certificate of incorporation that would have a material adverse effect on the existing preferences, rights, powers or duties of the Series B Preferred Stock, (ii) the creation or issuance of any security ranking on a parity with the Series B Preferred Stock if the cumulative dividends payable on then outstanding Series B Preferred Stock are in arrears, or (iii) the creation or issuance of any security ranking senior to the Series B Preferred Stock. In addition, if and whenever dividends on any shares of Series B Preferred Stock shall not have been declared and paid for at least six dividend periods, whether or not consecutive, the number of directors then constituting our Board of Directors shall automatically be increased by two until all accumulated and unpaid dividends on the Series B Preferred Stock shall have been paid in full, and the holders of Series B-1 Preferred Stock, voting as a class together with the holders of any outstanding securities ranking on a parity with the Series B-1 Preferred Stock and having like voting rights that are exercisable at the time and entitled to vote thereon, shall be entitled to elect the two additional directors. The Series B Preferred Stock does not have a stated maturity and is not subject to mandatory redemption or any sinking fund. The Series B Preferred Stock will remain outstanding indefinitely unless repurchased or redeemed by us. Any such redemption would be effected only out of funds legally available for such purposes and will be subject to compliance with the provisions of our outstanding indebtedness.
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
The following table summarizes preferred stock by outstanding series of shares:
| Year ended December 31, | December 31, | December 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||
| (in millions except shares and per share amounts) | Liquidation Preference Per Share | Shares | Dividends Declared Per Share | Outstanding | |||||||||||||||||
| 5.650% Series A | $ | 1,000.00 | 400,000 | $ | 56.50 | $ | 28.88 | $ | — | $ | 393.9 | $ | 393.9 | ||||||||
| 6.500% Series B | $ | 25,000.00 | 20,000 | $ | 1,674.65 | $ | — | $ | — | $ | 486.1 | $ | 486.1 |
13**. Share-Based Compensation**
Our stockholders most recently approved the NiSource Inc. 2010 Omnibus Incentive Plan (“Omnibus Plan”) 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, 2019, there were 3,313,183 shares reserved for future awards under the Omnibus Plan.
We recognized stock-based employee compensation expense of $16.3 million, $15.2 million and $15.3 million, during 2019, 2018 and 2017, respectively, as well as related tax benefits of $4.0 million, $3.7 million and $5.9 million, respectively. We recognized related excess tax benefits from the distribution of vested share-based employee compensation of $0.8 million, $1.0 million and $4.4 million in 2019, 2018 and 2017, respectively.
As of December 31, 2019, the total remaining unrecognized compensation cost related to non-vested awards amounted to $19.5 million, which will be amortized over the weighted-average remaining requisite service period of 1.8 years.
Restricted Stock Units and Restricted Stock. In 2019, we granted 166,031 restricted stock units and shares of restricted stock to employees, subject to service conditions. The total grant date fair value of the restricted stock units and shares of restricted stock was $4.1 million, based on the average market price of our 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, 2019, 157,786 non-vested restricted stock units and shares of restricted stock granted in 2019 were outstanding as of December 31, 2019.
In 2018, we granted 158,689 restricted stock units and shares of restricted stock to employees, subject to service conditions. The total grant date fair value of the restricted stock units and shares of restricted stock was $3.5 million, based on the average market price of our common stock at the date of each grant less the present value of any dividends not received during the vesting period, which will be expensed over the vesting period which is generally three years. As of December 31, 2019, 136,820 non-vested restricted stock units and shares of restricted stock granted in 2018 were outstanding as of December 31, 2019.
Restricted stock units and shares of restricted stock granted to employees in 2017 were immaterial.
If an employee terminates employment before the service conditions lapse under the 2017, 2018 or 2019 awards due to (1) retirement or disability (as defined in the award agreement), or (2) death, the service conditions will lapse on the date of such termination with respect to a pro rata portion of the restricted stock units and shares of restricted stock based upon the percentage of the service period satisfied between the grant date and the date of the termination of employment. In the event of a change in control (as defined in the award agreement), all unvested shares of restricted stock and restricted stock units awarded will immediately vest upon termination of employment occurring in connection with a change in control. Termination due to any other reason will result in all unvested shares of restricted stock and restricted stock units awarded being forfeited effective on the employee’s date of termination.
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
| (shares) | Restricted Stock Units | Weighted Average Award Date Fair Value Per Unit ($) | |||
| Non-vested at December 31, 2018 | 178,678 | 21.82 | |||
| Granted | 166,031 | 24.93 | |||
| Forfeited | (21,547 | ) | 22.99 | ||
| Vested | (20,556 | ) | 21.08 | ||
| Non-vested at December 31, 2019 | 302,606 | 23.49 |
Performance Shares. In 2019, we granted 552,389 performance shares subject to service, performance and market conditions. The service conditions for these awards lapse on February 28, 2022. The performance period for the awards is the period beginning January 1, 2019 and ending December 31, 2021. The performance conditions are based on the achievement of one non-GAAP financial measure and additional operational measures as outlined below.
The financial measure is cumulative net operating earnings per share ("NOEPS"), which we define as income from continuing operations adjusted for certain unusual or non-recurring items. The number of cumulative NOEPS shares determined using this measure shall be increased or decreased based on our relative total shareholder return, a market condition which we define as the annualized growth in dividends and share price of a share of our common stock (calculated using a 20 trading day average of our closing price beginning on December 31, 2018 and ending on December 31, 2021) compared to the total shareholder return of a predetermined peer group of companies. A relative shareholder return result within the first quartile will result in an increase to the NOEPS shares of 25%, while a relative shareholder return result within the fourth quartile will result in a decrease of 25%. A Monte Carlo analysis was used to value the portion of these awards dependent on market conditions. The grant date fair value of the awards was $11.7 million, based on the average market price of our 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 requisite service period of three years. As of December 31, 2019, 422,825 of these non-vested performance shares granted in 2019 remained outstanding.
If a threshold level of cumulative NOEPS financial performance is achieved, additional operational measures which we refer to as the customer value index, which consists of five equally weighted areas of focus including safety, customer satisfaction, financial, culture and environmental apply. Each area of focus represents 20% of the customer value index shares, and the targets for all areas must be met for these awards to be eligible for 100% payout of these awards. The grant date fair value of the awards was $2.5 million, based on the average market price of our common stock on the grant date of each award less the present value of dividends not received during the vesting period which will be expensed over the requisite service period of three years. As of December 31, 2019, 97,574 of these awards that were issued in 2019 remained outstanding.
In 2018, we awarded 514,338 performance shares subject to service, performance and market conditions. The service conditions for these awards lapse on February 26, 2021. The performance period for the awards is the period beginning January 1, 2018 and ending December 31, 2020. The performance conditions are based on the achievement of one non-GAAP financial measure and additional operational measures as outlined below.
The financial measure is cumulative net operating earnings per share ("NOEPS"), which we define as income from continuing operations adjusted for certain unusual or non-recurring items. The number of cumulative NOEPS shares determined using this measure shall be increased or decreased based on our relative total shareholder return, a market condition which we define as the annualized growth in dividends and share price of a share of our common stock (calculated using a 20 trading day average of our closing price beginning on December 31, 2017 and ending on December 31, 2020) compared to the total shareholder return of a predetermined peer group of companies. A relative shareholder return result within the first quartile will result in an increase to the NOEPS shares of 25% while a relative shareholder return result within the fourth quartile will result in a decrease of 25%. A Monte Carlo analysis was used to value the portion of these awards dependent on market conditions. The grant date fair value of the awards was $9.2 million, based on the average market price of our 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 requisite service period of three years. As of December 31, 2019, 368,811 of these non-vested performance shares granted in 2018 remained outstanding.
If a threshold level of cumulative NOEPS financial performance is achieved, additional operational measures which we refer to as the customer value index, which consists of five equally weighted areas of focus including safety, customer satisfaction, financial, culture and environmental apply. Each area of focus represents 20% of the customer value index shares and the targets for all areas must be met for these awards to be eligible for 100% payout of these awards. Individual payout percentages for these shares may
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
range from 0%-200% as determined by the compensation committee in its sole discretion. Due to this discretion, these shares are not considered to be granted under ASC 718. The service inception date fair value of the awards was $2.4 million, based on the closing market price of our common stock on the service inception date of each award. This value will be reassessed at each reporting period to be based on our closing market price of our common stock at the reporting period date with adjustments to expense recorded as appropriate. As of December 31, 2019, 85,111 of these awards that were issued in 2018 remained outstanding. The service conditions for these awards lapse on February 26, 2021.
In 2017, we granted 660,750 performance shares subject to service, performance and market conditions. The grant date fair value of the awards was $12.9 million, based on the average market price of our common stock at the date of each grant less the present value of dividends not received during the vesting period which will be expensed over the requisite service period of three years. The performance conditions are based on achievement of non-GAAP financial measures similar to those discussed above: cumulative net operating earnings per share for the three-year period ending December 31, 2019 and relative total shareholder return (calculated using a 20 trading day average of our closing price beginning on December 31, 2016 and ending on December 31, 2019). As of December 31, 2019, 528,928 non-vested performance shares granted in 2017 remained outstanding. The service conditions for these awards lapse on February 28, 2020.
| (shares) | Performance Awards | Weighted Average Grant Date Fair Value Per Unit ($)(1) | |||
| Non-vested at December 31, 2018 | 1,634,718 | 20.45 | |||
| Granted | 552,389 | 25.77 | |||
| Forfeited | (156,700 | ) | 26.72 | ||
| Vested | (527,156 | ) | 28.11 | ||
| Non-vested at December 31, 2019 | 1,503,251 | 22.74 |
(1)2018 performance shares awarded based on the customer value index are included at reporting date fair value as these awards have not been granted under ASC 718 as discussed above.
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 annual award of restricted stock units vest on the first anniversary of the grant date 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, 2019, 165,768 restricted stock units are outstanding to non-employee directors under either the Omnibus Plan or the Director Plan. Of this amount, 49,926 restricted stock units are unvested and expected to vest.
401(k) Match, Profit Sharing and Company Contribution. We have 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 cash for nonunion employees and generally payable in shares of NiSource common stock for union employees, subject to collective bargaining. We also have a retirement savings plan that provides for discretionary profit sharing contributions similarly payable in cash or 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 similarly payable in cash or shares of NiSource common stock. For the years ended December 31, 2019, 2018 and 2017, we recognized 401(k) match, profit sharing and non-elective contribution expense of $37.5 million, $37.6 million and $37.6 million, respectively.
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
14**. Long-Term Debt**
Our long-term debt as of December 31, 2019 and 2018 is as follows:
| Long-term debt type | Maturity as of December 31, 2019 | Weighted average interest rate (%) | Outstanding balance as of December 31, (in millions) | ||||||||
| 2019 | 2018 | ||||||||||
| Senior notes: | |||||||||||
| NiSource | December 2021 | 4.45 | % | 63.6 | 63.6 | ||||||
| NiSource | November 2022 | 2.65 | % | 500.0 | 500.0 | ||||||
| NiSource | February 2023 | 3.85 | % | 250.0 | 250.0 | ||||||
| NiSource | June 2023 | 3.65 | % | 350.0 | 350.0 | ||||||
| NiSource | November 2025 | 5.89 | % | 265.0 | 265.0 | ||||||
| NiSource | May 2027 | 3.49 | % | 1,000.0 | 1,000.0 | ||||||
| NiSource | December 2027 | 6.78 | % | 3.0 | 3.0 | ||||||
| NiSource | September 2029 | 2.95 | % | 750.0 | — | ||||||
| NiSource | December 2040 | 6.25 | % | 250.0 | 250.0 | ||||||
| NiSource | June 2041 | 5.95 | % | 400.0 | 400.0 | ||||||
| NiSource | February 2042 | 5.80 | % | 250.0 | 250.0 | ||||||
| NiSource | February 2043 | 5.25 | % | 500.0 | 500.0 | ||||||
| NiSource | February 2044 | 4.80 | % | 750.0 | 750.0 | ||||||
| NiSource | February 2045 | 5.65 | % | 500.0 | 500.0 | ||||||
| NiSource | May 2047 | 4.38 | % | 1,000.0 | 1,000.0 | ||||||
| NiSource | March 2048 | 3.95 | % | 750.0 | 750.0 | ||||||
| Total senior notes | $ | 7,581.6 | $ | 6,831.6 | |||||||
| Medium term notes: | |||||||||||
| NiSource | April 2022 to May 2027 | 7.99 | % | $ | 49.0 | $ | 49.0 | ||||
| NIPSCO | August 2022 to August 2027 | 7.61 | % | 68.0 | 68.0 | ||||||
| Columbia of Massachusetts | December 2025 to February 2028 | 6.30 | % | 40.0 | 40.0 | ||||||
| Total medium term notes | $ | 157.0 | $ | 157.0 | |||||||
| Finance leases: | |||||||||||
| NiSource Corporate Services | January 2020 to November 2023 | 3.47 | % | 22.3 | 11.6 | ||||||
| Columbia of Ohio | October 2021 to March 2044 | 6.16 | % | 94.8 | 91.5 | ||||||
| Columbia of Virginia | July 2029 to November 2039 | 6.31 | % | 19.1 | 15.2 | ||||||
| Columbia of Kentucky | May 2027 | 3.79 | % | 0.3 | 0.3 | ||||||
| Columbia of Pennsylvania | August 2027 to May 2035 | 5.67 | % | 20.7 | 30.0 | ||||||
| Columbia of Massachusetts | December 2033 to November 2043 | 5.49 | % | 44.3 | 45.7 | ||||||
| Total finance leases | 201.5 | 194.3 | |||||||||
| Pollution control bonds - NIPSCO | April 2019 | 5.85 | % | — | 41.0 | ||||||
| Unamortized issuance costs and discounts | (70.5 | ) | $ | (68.5 | ) | ||||||
| Total Long-Term Debt | $ | 7,869.6 | $ | 7,155.4 |
Details of our 2019 long-term debt related activity are summarized below:
| • | On April 1, 2019, NIPSCO repaid $41.0 million of 5.85% pollution control bonds at maturity. |
| • | On August 12, 2019, we closed our placement of $750.0 million of 2.95% senior unsecured notes maturing in 2029 which resulted in approximately $742.4 million of net proceeds after deducting commissions and expenses. |
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Details of our 2018 long-term debt related activity are summarized below:
| • | On March 15, 2018, we redeemed $275.1 million of 6.40% senior unsecured notes at maturity. |
| • | In June 2018, we executed a tender offer for $209.0 million of outstanding notes consisting of a combination of our 6.80% notes due 2019, 5.45% notes due 2020, and 6.125% notes due 2022. In conjunction with the debt retired, we recorded a $12.5 million loss on early extinguishment of long-term debt, primarily attributable to early redemption premiums. |
| • | On June 11, 2018, we closed our private placement of $350.0 million of 3.65% senior unsecured notes maturing in 2023 which resulted in approximately $346.6 million of net proceeds after deducting commissions and expenses. We used the net proceeds from this private placement to pay a portion of the redemption price for the notes subject to the tender offer described above. |
| • | In July 2018, we redeemed $551.1 million of outstanding notes representing the remainder of our 6.80% notes due 2019, 5.45% notes due 2020 and 6.125% notes due 2022. During the third quarter of 2018, we recorded a $33.0 million loss on early extinguishment of long-term debt, primarily attributable to early redemption premiums. |
See Note 19-A, "Contractual Obligations," for the outstanding long-term debt maturities at December 31, 2019.
Unamortized debt expense, premium and discount on long-term debt applicable to outstanding bonds are being amortized over the life of such bonds.
We are subject to a financial covenant under our revolving credit facility and term loan agreement which requires us to maintain a debt to capitalization ratio that does not exceed 70%. A similar covenant in a 2005 private placement note purchase agreement requires us to maintain a debt to capitalization ratio that does not exceed 75%. As of December 31, 2019, the ratio was 61.7%.
We are 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 our 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 our assets to those dispositions that are for a price not materially less than fair market of such assets, that would not materially impair our ability 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 our 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 us or any of our subsidiaries in a principal amount of $50.0 million or more.
Our indentures generally do not contain any financial maintenance covenants. However, our 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 our assets, generally exempting liens on utility assets, purchase money security interests, preexisting security interests and an additional subset of assets capped at 10% of our consolidated net tangible assets.
15**. Short-Term Borrowings**
We generate short-term borrowings from our revolving credit facility, commercial paper program, accounts receivable transfer programs and term loan borrowings. Each of these borrowing sources is described further below.
We maintain a revolving credit facility to fund ongoing working capital requirements, including the provision of liquidity support for our commercial paper program, provide for issuance of letters of credit and also for general corporate purposes. Our revolving credit facility has a program limit of $1.85 billion and is comprised of a syndicate of banks led by Barclays. On February 20, 2019, we extended the termination date of our revolving credit facility to February 20, 2024. At December 31, 2019 and 2018, we had no outstanding borrowings under this facility.
Our 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. We had $570.0 million and $978.0 million of commercial paper outstanding as of December 31, 2019 and 2018, respectively.
Transfers of accounts receivable are accounted for as secured borrowings resulting in the recognition of short-term borrowings on the Consolidated Balance Sheets. We had $353.2 million and $399.2 million in transfers as of December 31, 2019 and 2018, respectively. Refer to Note 18, "Transfers of Financial Assets," for additional information.
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
On April 17, 2019, we amended our existing term loan agreement with a syndicate of banks, with MUFG Bank Ltd. as the Administrative Agent, Sole Lead Arranger and Sole Bookrunner. The amendment increased the amount of our term loan from $600.0 million to $850.0 million and extended the maturity date to April 16, 2020. Interest charged on borrowings depends on the variable rate structure we elect at the time of each borrowing. The available variable rate structures from which we may choose are defined in the term loan agreement. Under the agreement, we borrowed $850.0 million on April 17, 2019 with an interest rate of LIBOR plus 60 basis points.
Short-term borrowings were as follows:
| At December 31, (in millions) | 2019 | 2018 | |||||
| Commercial Paper weighted-average interest rate of 2.03% and 2.96% at December 31, 2019 and 2018, respectively | $ | 570.0 | $ | 978.0 | |||
| Accounts receivable securitization facility borrowings | 353.2 | 399.2 | |||||
| Term loan weighted-average interest rate of 2.40% and 3.07% at December 31, 2019 and 2018, respectively | 850.0 | $ | 600.0 | ||||
| Total Short-Term Borrowings | $ | 1,773.2 | $ | 1,977.2 |
Other than for the term loan and certain commercial paper borrowings, cash flows related to the borrowings and repayments of the items listed above are presented net in the Statements of Consolidated Cash Flows as their maturities are less than 90 days.
16**. Leases**
ASC 842 Adoption. In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842). ASU 2016-02 introduces a lessee model that brings most leases onto the balance sheet. The standard requires that lessees recognize the following for all leases (with the exception of short-term leases, as that term is defined in the standard) at the lease commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. In 2018, the FASB issued ASU 2018-01, Leases (ASC 842): Land Easement Practical Expedient for Transition to ASC 842, which allows us to not evaluate existing land easements under ASC 842, and ASU 2018-11, Leases (ASC 842): Targeted Improvements, which allows calendar year entities to initially apply ASC 842 prospectively from January 1, 2019.
We adopted the provisions of ASC 842 beginning on January 1, 2019, using the transition method provided in ASU 2018-11, which was applied to all existing leases at that date. As such, results for reporting periods beginning after January 1, 2019 will be presented under ASC 842, while prior period amounts will continue to be reported in accordance with ASC 840. We elected a number of practical expedients, including the "practical expedient package" described in ASC 842-10-65-1 and the provisions of ASU 2018-01, which allows us to not evaluate existing land easements under ASC 842. Further, ASC 842 provides lessees the option of electing an accounting policy, by class of underlying asset, in which the lessee may choose not to separate nonlease components from lease components. We elected this practical expedient for our leases of fleet vehicles, IT assets and railcars. We elected to use a practical expedient that allows the use of hindsight in determining lease terms when evaluating leases that existed at the implementation date. We also elected the short-term lease recognition exemption, allowing us to not recognize ROU assets or lease liabilities for all leases that qualify.
Adoption of the new standard resulted in the recording of additional lease liabilities and corresponding ROU assets of $57.0 million on our Consolidated Balance Sheets as of January 1, 2019. The standard had no material impact on our Statements of Consolidated Income (Loss) or our Statements of Consolidated Cash Flows.
Lease Descriptions. We are the lessee for substantially all of our leasing activity, which includes operating and finance leases for corporate and field offices, railcars, fleet vehicles and certain IT assets. Our corporate and field office leases have remaining lease terms between 1 and 24 years with options to renew the leases for up to 25 years. We lease railcars to transport coal to and from our electric generation facilities in Indiana. Our railcars are specifically identified in the lease agreements and have lease terms between 1 and 3 years with options to renew for 1 year. Our fleet vehicles include trucks, trailers and equipment that have been customized specifically for use in the utility industry. We lease fleet vehicles on 1 year terms, after which we have the option to extend on a month-to-month basis or terminate with written notice. ROU assets and liabilities on our Consolidated Balance Sheets do not include obligations for possible fleet vehicle lease renewals beyond the initial lease term. While we have the ability to renew these leases beyond the initial term, we are not reasonably certain (as that term is defined in ASC 842) to do so. We lease the majority of our IT assets under 4 year lease terms. Ownership of leased IT assets is transferred to us at the end of the lease term.
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
We have not provided material residual value guarantees for our leases, nor do our leases contain material restrictions or covenants. Lease contracts containing renewal and termination options are mostly exercisable at our sole discretion. Certain of our real estate and railcar leases include renewal periods in the measurement of the lease obligation if we have deemed the renewals reasonably certain to be exercised.
With respect to service contracts involving the use of assets, if we have the right to direct the use of the asset and obtain substantially all economic benefits from the use of an asset, we account for the service contract as a lease. Unless specifically provided to us by the lessor, we utilize NiSource's collateralized incremental borrowing rate commensurate to the lease term as the discount rate for all of our leases.
Lease costs for the year ended December 31, 2019 are presented in the table below. These costs include both amounts recognized in expense and amounts capitalized as part of the cost of another asset. Income statement presentation for these costs (when ultimately recognized on the income statement) is also included:
| Year Ended December 31, (in millions) | Income Statement Classification | 2019 | ||
| Finance lease cost | ||||
| Amortization of right-of-use assets | Depreciation and amortization | $ | 15.5 | |
| Interest on lease liabilities | Interest expense, net | 11.3 | ||
| Total finance lease cost | 26.8 | |||
| Operating lease cost | Operation and maintenance | 17.9 | ||
| Short-term lease cost | Operation and maintenance | 1.0 | ||
| Total lease cost | $ | 45.7 |
Our right-of-use assets and liabilities are presented in the following lines on the Consolidated Balance Sheets:
| (in millions) | Balance Sheet Classification | December 31, 2019 | ||
| Assets | ||||
| Finance leases | Net Property, Plant and Equipment | $ | 179.5 | |
| Operating leases | Deferred charges and other | 64.2 | ||
| Total leased assets | 243.7 | |||
| Liabilities | ||||
| Current | ||||
| Finance leases | Current portion of long-term debt | 13.4 | ||
| Operating leases | Other accruals | 13.2 | ||
| Noncurrent | ||||
| Finance leases | Long-term debt, excluding amounts due within one year | 188.1 | ||
| Operating leases | Other noncurrent liabilities | 51.6 | ||
| Total lease liabilities | $ | 266.3 |
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Other pertinent information related to leases was as follows:
| Year Ended December 31, (in millions) | 2019 | ||
| Cash paid for amounts included in the measurement of lease liabilities | |||
| Operating cash flows used for finance leases | $ | 11.3 | |
| Operating cash flows used for operating leases | 17.9 | ||
| Financing cash flows used for finance leases | 10.6 | ||
| Right-of-use assets obtained in exchange for lease obligations | |||
| Finance leases | 26.4 | ||
| Operating leases | $ | 13.4 |
| December 31, 2019 | ||
| Weighted-average remaining lease term (years) | ||
| Finance leases | 14.8 | |
| Operating leases | 9.2 | |
| Weighted-average discount rate | ||
| Finance leases | 5.9 | % |
| Operating leases | 4.3 | % |
Maturities of our lease liabilities presented on a rolling 12-month basis were as follows:
| As of December 31, 2019, (in millions) | Total | Finance Leases | Operating Leases | ||||||
| Year 1 | $ | 42.8 | $ | 27.2 | $ | 15.6 | |||
| Year 2 | 36.7 | 27.3 | 9.4 | ||||||
| Year 3 | 35.0 | 26.8 | 8.2 | ||||||
| Year 4 | 30.7 | 23.1 | 7.6 | ||||||
| Year 5 | 26.5 | 19.9 | 6.6 | ||||||
| Thereafter | 233.3 | 201.6 | 31.7 | ||||||
| Total lease payments(1) | 405.0 | 325.9 | 79.1 | ||||||
| Less: Imputed interest | (116.6 | ) | (102.3 | ) | (14.3 | ) | |||
| Less: Leases not yet commenced | (22.1 | ) | (22.1 | ) | — | ||||
| Total | 266.3 | 201.5 | 64.8 | ||||||
| Reported as of December 31, 2019 | |||||||||
| Short-term lease liabilities | 26.6 | 13.4 | 13.2 | ||||||
| Long-term lease liabilities | 239.7 | 188.1 | 51.6 | ||||||
| Total lease liabilities | $ | 266.3 | $ | 201.5 | $ | 64.8 |
(1) Expected payments include obligations for leases not yet commenced of approximately $22.1 million for IT assets and interconnection facilities. These leases have terms between 4 years and 20 years, with estimated commencements in the first quarter of 2020 and in the third quarter of 2020.
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
**Disclosures Related to Periods Prior to Adoption of ASC 842.**We lease assets in several areas of our operations including fleet vehicles and equipment, rail cars for coal delivery and certain operations centers. Payments made in connection with operating leases were $49.1 million in 2018 and $49.5 million in 2017, and are primarily charged to operation and maintenance expense as incurred.
As of December 31, 2018, total contractual obligations for capital and operating leases were as follows:
| As of December 31, 2018, (in millions) | Total | Capital Leases(1) | Operating Leases(2) | ||||||
| 2019 | $ | 34.0 | $ | 23.0 | $ | 11.0 | |||
| 2020 | 29.8 | 22.5 | 7.3 | ||||||
| 2021 | 28.7 | 22.6 | 6.1 | ||||||
| 2022 | 26.3 | 22.1 | 4.2 | ||||||
| 2023 | 22.6 | 19.8 | 2.8 | ||||||
| Thereafter | 226.9 | 212.4 | 14.5 | ||||||
| Total lease payments | $ | 368.3 | $ | 322.4 | $ | 45.9 |
(1)Capital lease payments shown above are inclusive of interest totaling $114.6 million.
(2)Operating lease balances do not include obligations for possible fleet vehicle lease renewals beyond the initial lease term. While we have the ability to renew these leases beyond the initial term, we are not reasonably certain to do so. Expected payments are $26.7 million in 2019, $22.4 million in 2020, $16.6 million in 2021, $12.3 million in 2022, $9.3 million in 2023 and $8.8 million thereafter.
17**. 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 our Consolidated Balance Sheets on a recurring basis and their level within the fair value hierarchy as of December 31, 2019 and December 31, 2018:
| Recurring Fair Value Measurements December 31, 2019 (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, 2019 | |||||||||||
| Assets | |||||||||||||||
| Risk management assets | $ | — | $ | 4.4 | $ | — | $ | 4.4 | |||||||
| Available-for-sale securities | — | 154.2 | — | 154.2 | |||||||||||
| Total | $ | — | $ | 158.6 | $ | — | $ | 158.6 | |||||||
| Liabilities | |||||||||||||||
| Risk management liabilities | $ | — | $ | 146.6 | $ | — | $ | 146.6 | |||||||
| Total | $ | — | $ | 146.6 | $ | — | $ | 146.6 |
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
| Recurring Fair Value Measurements December 31, 2018 (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, 2018 | |||||||||||
| Assets | |||||||||||||||
| Risk management assets | $ | — | $ | 24.0 | $ | — | $ | 24.0 | |||||||
| Available-for-sale securities | — | 138.3 | — | 138.3 | |||||||||||
| Total | $ | — | $ | 162.3 | $ | — | $ | 162.3 | |||||||
| Liabilities | |||||||||||||||
| Risk management liabilities | $ | — | $ | 51.7 | $ | — | $ | 51.7 | |||||||
| Total | $ | — | $ | 51.7 | $ | — | $ | 51.7 |
Risk management assets and liabilities include interest rate swaps, exchange-traded NYMEX futures and NYMEX options and non-exchange-based forward purchase contracts. When utilized, 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. We use 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, 2019 and 2018, there were no material transfers between fair value hierarchies. Additionally, there were no changes in the method or significant assumptions used to estimate the fair value of our financial instruments.
We have entered into forward-starting interest rate swaps to hedge the interest rate risk on coupon payments of forecasted issuances of long-term debt. These derivatives are designated as cash flow hedges. Credit risk is considered in the fair value calculation of each agreement. As they are based on observable data and valuations of similar instruments, the hedges are categorized within Level 2 of the fair value hierarchy. There was no exchange of premium at the initial date of the swaps and we can settle the contracts at any time. For additional information, see Note 9, "Risk Management Activities."
NIPSCO has entered into long-term forward natural gas purchase instruments that range from five to ten years to lock in a fixed price for its natural gas customers. We value these contracts using a pricing model that incorporates market-based information when available, as these instruments trade less frequently and are classified within Level 2 of the fair value hierarchy. For additional information see Note 9, “Risk Management Activities.”
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Available-for-sale securities are investments pledged as collateral for trust accounts related to our wholly-owned insurance company. Available-for-sale securities are included within “Other investments” in the Consolidated Balance Sheets. We value U.S. Treasury, corporate debt and mortgage-backed securities using a matrix pricing model that incorporates market-based information. These securities trade less frequently and are classified within Level 2. Total unrealized gains and losses from available-for-sale securities are included in other comprehensive income. The amortized cost, gross unrealized gains and losses and fair value of available-for-sale securities at December 31, 2019 and 2018 were:
| December 31, 2019 (in millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||
| Available-for-sale securities | |||||||||||||||
| U.S. Treasury debt securities | $ | 31.4 | $ | 0.1 | $ | (0.1 | ) | $ | 31.4 | ||||||
| Corporate/Other debt securities | 118.7 | 4.2 | (0.1 | ) | 122.8 | ||||||||||
| Total | $ | 150.1 | $ | 4.3 | $ | (0.2 | ) | $ | 154.2 | ||||||
| December 31, 2018 (in millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||
| Available-for-sale securities | |||||||||||||||
| U.S. Treasury debt securities | $ | 23.6 | $ | 0.1 | $ | (0.1 | ) | $ | 23.6 | ||||||
| Corporate/Other debt securities | 117.7 | 0.4 | (3.4 | ) | 114.7 | ||||||||||
| Total | $ | 141.3 | $ | 0.5 | $ | (3.5 | ) | $ | 138.3 |
Realized gains and losses on available-for-sale securities were immaterial for the year-ended December 31, 2019 and 2018.
The cost of maturities sold is based upon specific identification. At December 31, 2019, approximately $7.7 million of U.S. Treasury debt securities and approximately $6.0 million of Corporate/Other debt securities have maturities of less than a year.
There are no material items in the fair value reconciliation of Level 3 assets and liabilities measured at fair value on a recurring basis for the years ended December 31, 2019 and 2018.
Non-recurring Fair Value Measurements. We measure the fair value of certain assets on a non-recurring basis, typically annually or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include goodwill and other intangible assets.
At December 31, 2019, we recorded an impairment charge of $204.8 million for goodwill and an impairment charge of $209.7 million for franchise rights, in each case related to Columbia of Massachusetts. For additional information, see Note 6, “Goodwill and Other Intangible Assets.”
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. Our long-term borrowings are recorded at historical amounts.
The following method and assumptions were used to estimate the fair value of each class of financial instruments.
Long-term debt. The fair value of outstanding long-term debt is estimated based on the quoted market prices for the same or similar securities. Certain premium costs associated with the early settlement of long-term debt are not taken into consideration in determining fair value. These fair value measurements are classified within Level 2 of the fair value hierarchy. For the years ended December 31, 2019 and 2018, there was no change in the method or significant assumptions used to estimate the fair value of long-term debt.
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
The carrying amount and estimated fair values of these financial instruments were as follows:
| At December 31, (in millions) | Carrying Amount 2019 | Estimated Fair Value 2019 | Carrying Amount 2018 | Estimated Fair Value 2018 | |||||||||||
| Long-term debt (including current portion) | $ | 7,869.6 | $ | 8,764.4 | $ | 7,155.4 | $ | 7,228.3 |
18**. Transfers of Financial Assets**
Columbia of Ohio, NIPSCO and Columbia of Pennsylvania each maintain a receivables agreement whereby they transfer their customer accounts receivables to third party financial institutions through wholly-owned and consolidated special purpose entities. The three agreements expire between May 2020 and October 2020 and may be further extended if mutually agreed to by the parties thereto.
All receivables transferred to third parties are valued at face value, which approximates fair value due to their short-term nature. The amount of the undivided percentage ownership interest in the accounts receivables transferred is determined in part by required loss reserves under the agreements.
Transfers of accounts receivable are accounted for as secured borrowings resulting in the recognition of short-term borrowings on the Consolidated Balance Sheets. As of December 31, 2019, the maximum amount of debt that could be recognized related to our accounts receivable programs is $465.0 million.
The following table reflects the gross receivables balance and net receivables transferred as well as short-term borrowings related to the securitization transactions as of December 31, 2019 and 2018:
| At December 31, (in millions) | 2019 | 2018 | |||||
| Gross receivables | $ | 569.1 | $ | 694.4 | |||
| Less: receivables not transferred | 215.9 | 295.2 | |||||
| Net receivables transferred | $ | 353.2 | $ | 399.2 | |||
| Short-term debt due to asset securitization | $ | 353.2 | $ | 399.2 |
During 2019, $46.0 million was recorded as cash flows used for financing activities related to the change in short-term borrowings due to securitization transactions. During 2018, $62.5 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 $2.6 million, $2.6 million and $2.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. Columbia of Ohio, NIPSCO and Columbia of Pennsylvania remain responsible for collecting on the receivables securitized, and the receivables cannot be transferred to another party.
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
19**. Other Commitments and Contingencies**
A. Contractual Obligations. We have 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 outsourcing of IT services. The total contractual obligations in existence at December 31, 2019 and their maturities were:
| (in millions) | Total | 2020 | 2021 | 2022 | 2023 | 2024 | After | ||||||||||||||||||||
| Long-term debt (1) | $ | 7,738.6 | $ | — | $ | 63.6 | $ | 530.0 | $ | 600.0 | $ | — | $ | 6,545.0 | |||||||||||||
| Interest payments on long-term debt | 6,214.2 | 342.0 | 340.7 | 337.1 | 311.1 | 299.9 | 4,583.4 | ||||||||||||||||||||
| Finance leases(2) | 325.9 | 27.2 | 27.3 | 26.8 | 23.1 | 19.9 | 201.6 | ||||||||||||||||||||
| Operating leases(3) | 79.1 | 15.6 | 9.4 | 8.2 | 7.6 | 6.6 | 31.7 | ||||||||||||||||||||
| Energy commodity contracts(4) | 95.9 | 65.5 | 30.4 | — | — | — | — | ||||||||||||||||||||
| Service obligations: | |||||||||||||||||||||||||||
| Pipeline service obligations | 3,450.7 | 605.0 | 590.1 | 546.8 | 357.2 | 237.5 | 1,114.1 | ||||||||||||||||||||
| IT service obligations | 153.2 | 63.6 | 49.4 | 38.0 | 1.1 | 1.1 | — | ||||||||||||||||||||
| Other service obligations(5) | 59.8 | 45.8 | 14.0 | — | — | — | — | ||||||||||||||||||||
| Other liabilities | 27.3 | 27.3 | — | — | — | — | — | ||||||||||||||||||||
| Total contractual obligations | $ | 18,144.7 | $ | 1,192.0 | $ | 1,124.9 | $ | 1,486.9 | $ | 1,300.1 | $ | 565.0 | $ | 12,475.8 |
(1) Long-term debt balance excludes unamortized issuance costs and discounts of $70.5 million.
(2) Finance lease payments shown above are inclusive of interest totaling $108.3 million.
(3) Operating lease payments shown above are inclusive of interest totaling $14.3 million. Operating lease balances do not include obligations for possible fleet vehicle lease renewals beyond the initial lease term. While we have the ability to renew these leases beyond the initial term, we are not reasonably certain (as that term is defined in ASC 842) to do so. If we were to continue the fleet vehicle leases outstanding at December 31, 2019, payments would be $34.5 million in 2020, $28.3 million in 2021, $23.4 million in 2022, $19.9 million in 2023, $15.2 million in 2024 and $15.2 million thereafter.
(4)In January 2020, NIPSCO signed new coal contract commitments of $14.4 million for 2020. These contracts are not included above.
(5)In February 2020, NIPSCO signed a new railcar coal transportation contract commitment of $12.0 million for 2020. This contract is not included above.
Operating and Finance Lease Commitments. We lease assets in several areas of our operations including corporate and field offices, railcars, fleet vehicles and certain IT assets. Payments made in connection with operating and month-to-month leases were $52.5 million in 2019, $49.1 million in 2018 and $49.5 million in 2017, and are primarily charged to operation and maintenance expense as incurred. See Note 16, "Leases" for additional details.
Purchase and Service Obligations. We have entered into various purchase and service agreements whereby we are contractually obligated to make certain minimum payments in future periods. Our purchase obligations are for the purchase of physical quantities of natural gas, electricity and coal. Our service agreements encompass a broad range of business support and maintenance functions which are generally described below.
Our 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 we are obligated to purchase at both fixed and variable prices. To the extent contractual purchase prices are variable, obligations disclosed in the table above are valued at market prices as of December 31, 2019.
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.
We have pipeline service agreements that provide for pipeline capacity, transportation and storage services. These agreements, which have expiration dates ranging from 2020 to 2045, require us to pay fixed monthly charges.
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Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
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 2021.
We have executed agreements with multiple IT service providers. The agreements extend for various periods through 2024.
B. Guarantees and Indemnities. We and certain subsidiaries enter into various agreements providing financial or performance assurance to third parties on behalf of certain subsidiaries as part of normal business. 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, 2019 and 2018, we had issued stand-by letters of credit of $10.2 million for the benefit of third parties.
C. Legal Proceedings.
On September 13, 2018, a series of fires and explosions occurred in Lawrence, Andover and North Andover, Massachusetts related to the delivery of natural gas by Columbia of Massachusetts (the "Greater Lawrence Incident"). The Greater Lawrence Incident resulted in one fatality and a number of injuries, damaged multiple homes and businesses, and caused the temporary evacuation of significant portions of each municipality. The Massachusetts Governor’s Office declared a state of emergency, authorizing the Massachusetts DPU to order another utility company to coordinate the restoration of utility services in Lawrence, Andover and North Andover. The incident resulted in the interruption of gas for approximately 7,500 gas meters, the majority of which served residences and approximately 700 of which served businesses, and the interruption of other utility service more broadly in the area. Columbia of Massachusetts has replaced the cast iron and bare steel gas pipeline system in the affected area and restored service to nearly all of the gas meters. See “ - E. Other Matters - Greater Lawrence Pipeline Replacement” below for more information.
We are subject to inquiries and investigations by government authorities and regulatory agencies regarding the Greater Lawrence Incident, including the Massachusetts DPU and the Massachusetts Attorney General's Office, as described below. We are cooperating with all inquiries and investigations. In addition, on February 26, 2020, the Company and Columbia of Massachusetts entered into agreements with the U.S. Attorney’s Office to resolve the U.S. Attorney’s Office’s investigation relating to the Greater Lawrence Incident, as described below.
NTSB Investigation. As previously disclosed, the NTSB concluded its investigation into the Greater Lawrence Incident, and we are implementing the one remaining safety recommendation resulting from the investigation.
Massachusetts Investigations. Under Massachusetts law, the DPU is authorized to investigate potential violations of pipeline safety regulations and to assess a civil penalty of up to $218,647 for a violation of federal pipeline safety regulations. A separate violation occurs for each day of violation up to $2.2 million for a related series of violations. The Massachusetts DPU also is authorized to investigate potential violations of the Columbia of Massachusetts emergency response plan and to assess penalties of up to $250,000 per violation per day, or up to $20 million per related series of violations. Further, as a result of the declaration of emergency by the Governor, the DPU is authorized to investigate potential violations of the DPU's operational directives during the restoration efforts and assess penalties of up to $1 million per violation. Pursuant to these authorities, the DPU is investigating Columbia of Massachusetts as described below. Columbia of Massachusetts will likely be subject to potential compliance actions related to the Greater Lawrence Incident and the restoration work following the incident, the timing and outcomes of which are uncertain at this time.
After the Greater Lawrence Incident, the Massachusetts DPU retained an independent evaluator to conduct a statewide examination of the safety of the natural gas distribution system and the operational and maintenance functions of natural gas companies in the Commonwealth of Massachusetts. Through authority granted by the Massachusetts Governor under the state of emergency, the Chair of the Massachusetts DPU has directed all natural gas distribution companies operating in the Commonwealth to fund the statewide examination. The statewide examination is complete. The Phase I report, which was issued in May 2019, included a program level assessment and evaluation of natural gas distribution companies. The Phase I report's conclusions were statewide and contained no specific conclusions about Columbia of Massachusetts. Phase II, which was focused on field assessments of each Massachusetts gas company, concluded in December 2019. The Phase II report made several observations about and recommendations to Massachusetts gas companies, including Columbia of Massachusetts, with regard to safety culture and assets. The final report was issued in late January 2020, and the DPU directed each natural gas distribution company operating in Massachusetts to submit a plan in response to the report no later than February 28, 2020.
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Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
On September 11, 2019, the Massachusetts DPU issued an order directing Columbia of Massachusetts to take several specific actions to address concerns related to service lines abandoned during the restoration work following the Greater Lawrence Incident and to furnish certain information and periodic reports to the DPU.
On October 1, 2019, the Massachusetts DPU issued four orders to Columbia of Massachusetts in connection with the service lines abandoned during the Greater Lawrence Incident restoration, which require: (1) the submission of a detailed work plan to the DPU, (2) the completion of quality control work on certain abandoned services, (3) the payment for a third-party independent audit, to be contracted through the DPU, of all gas pipeline work completed as part of the incident restoration effort, and (4) prompt and full response to any requests for information by the third-party auditor. The Massachusetts DPU retained an independent evaluator to conduct this audit, and that third party is currently evaluating compliance with Massachusetts and federal law, as well as any other operational or safety risks that may be posed by the pipeline work. The audit scope also includes Columbia of Massachusetts' operations in the Lawrence Division and other service territories as appropriate.
Also in October 2019, the Massachusetts DPU issued three additional orders requiring: (1) daily leak surveillance and reporting in areas where abandoned services are located, (2) completion by November 15, 2019 of the work plan previously submitted describing how Columbia of Massachusetts would address the estimated 2,200 locations at which an inside meter set was moved outside the property as part of the abandoned service work completed during the Greater Lawrence Incident restoration, and (3) submission of a report by December 2, 2019 showing any patterns, trends or correlations among the non-compliant work related to the abandonment of service lines, gate boxes and curb boxes during the incident restoration.
On October 3, 2019, the Massachusetts DPU notified Columbia of Massachusetts that, absent DPU approval, it is currently allowed to perform only emergency work on its gas distribution system throughout its service territories in Massachusetts. The restrictions do not apply to Columbia of Massachusetts’ work to address the previously identified issues with abandoned service lines and valve boxes in the Greater Lawrence, Massachusetts area. Columbia of Massachusetts is subject to daily monitoring by the DPU on any work that Columbia of Massachusetts conducts in Massachusetts. Such restrictions on work remain in place until modified by the DPU.
On October 25, 2019, the Massachusetts DPU issued two orders opening public investigations into Columbia of Massachusetts with respect to the Greater Lawrence Incident. The Massachusetts DPU opened the first investigation under its authority to determine compliance with federal and state pipeline safety laws and regulations, and to investigate Columbia of Massachusetts’ responsibility for and response to the Greater Lawrence Incident and its restoration efforts following the incident. The Massachusetts DPU opened the second investigation under its authority to determine whether a gas distribution company has violated established standards regarding acceptable performance for emergency preparedness and restoration of service to investigate efforts by Columbia of Massachusetts to prepare for and restore service following the Greater Lawrence Incident. Separate penalties are applicable under each exercise of authority.
On December 23, 2019, the Massachusetts DPU issued an order defining the scope of its investigation into the response of Columbia of Massachusetts related to the Greater Lawrence Incident. The DPU identified three distinct time frames in which Columbia of Massachusetts handled emergency response and restoration directly: (1) September 13-14, 2018, (2) September 21 through December 16, 2018 (the Phase I restoration), and (3) September 27, 2019 through completion of restoration of outages resulting from the gas release event in Lawrence, Massachusetts that occurred on September 27, 2019. The DPU determined that it is appropriate to investigate separately, for each time period described above, the areas of response, recovery and restoration for which Columbia of Massachusetts was responsible. The DPU noted that it also may investigate the continued restoration and related repair work that took place after December 16, 2018 and, depending on the outcome of that investigation, may deem it appropriate to consider that period of restoration as an additional separate time period.
The DPU also noted that its investigation into all of the above described time periods is ongoing and that if the DPU determines, based on its investigation, that it is appropriate to treat the separate time frames as separate emergency events, it may impose up to the maximum statutory penalty for each event, pursuant to Mass. G.L. c. 164 Section 1J. This provision authorizes the DPU to investigate potential violations of the Columbia of Massachusetts emergency response plan and to assess penalties of up to $250,000 per violation per day, or up to $20 million per related series of violations. The DPU noted that at this preliminary stage of the investigation, it does not have the factual basis to make those determinations.
In connection with its investigation related to the Greater Lawrence Incident, on February 4, 2020, the Massachusetts Attorney General's Office issued a request for documents primarily focused on the restoration work following the incident.
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Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Columbia of Massachusetts is cooperating with the investigations set forth above as well as other inquiries resulting from an increased amount of enforcement activity, for all of which the outcomes are uncertain at this time.
Massachusetts Legislative Matters. On November 12, 2019, the Joint Committee on Telecommunications, Utilities and Energy held a hearing that focused on gas safety, but the Committee has not taken action on any bills. Increased scrutiny related to gas system safety and regulatory oversight in Massachusetts, including additional legislative oversight hearings and new legislative proposals, is expected to continue during the current two-year legislative session that ends in December 2020.
U.S. Department of Justice Investigation. As previously disclosed, the Company and Columbia of Massachusetts are subject to a criminal investigation related to the Greater Lawrence Incident that is being conducted under the supervision of the U.S. Attorney's Office. The initial grand jury subpoenas were served on the Company and Columbia of Massachusetts on September 24, 2018.
On February 26, 2020, the Company and Columbia of Massachusetts entered into agreements with the U.S. Attorney’s Office to resolve the U.S. Attorney’s Office’s investigation relating to the Greater Lawrence Incident. Columbia of Massachusetts agreed to plead guilty in the United States District Court for the District of Massachusetts (the “Court”) to violating the Natural Gas Pipeline Safety Act (the “Plea Agreement”), and the Company entered into a DPA.
Under the Plea Agreement, which must be approved by the Court, Columbia of Massachusetts will be subject to the following terms, among others: (i) a criminal fine in the amount of $53,030,116 paid within 30 days of sentencing; (ii) a three year probationary period that will early terminate upon a sale of Columbia of Massachusetts or a sale of its gas distribution business to a qualified third-party buyer consistent with certain requirements; (iii) compliance with each of the NTSB recommendations stemming from the Greater Lawrence Incident; and (iv) employment of an in-house monitor during the term of the probationary period.
Under the DPA, the U.S. Attorney’s Office agreed to defer prosecution of the Company in connection with the Greater Lawrence Incident for a three-year period (which three-year period may be extended for twelve (12) months upon the U.S. Attorney’s Office’s determination of a breach of the DPA) subject to certain obligations of the Company, including, but not limited to, the following: (i) the Company will use reasonable best efforts to sell Columbia of Massachusetts or Columbia of Massachusetts’ gas distribution business to a qualified third-party buyer consistent with certain requirements, and, upon the completion of any such sale, the Company will cease and desist any and all gas pipeline and distribution activities in the District of Massachusetts; (ii) the Company will forfeit and pay, within 30 days of the later of the sale becoming final or the date on which post-closing adjustments to the purchase price are finally determined in accordance with the agreement to sell Columbia Gas of Massachusetts or its gas distribution business, a fine equal to the total amount of any profit or gain from any sale of Columbia of Massachusetts or its gas distribution business, with the amount of profit or gain determined as provided in the DPA; and (iii) the Company agrees as to each of the Company’s subsidiaries involved in the distribution of gas through pipeline facilities in Massachusetts, Indiana, Ohio, Pennsylvania, Maryland, Kentucky and Virginia to implement and adhere to each of the recommendations from the NTSB stemming from the Greater Lawrence Incident. Pursuant to the DPA, if the Company complies with all of its obligations under the DPA, including, but not limited to those identified above, the U.S. Attorney’s Office will not file any criminal charges against the Company related to the Greater Lawrence Incident. If Columbia of Massachusetts’ guilty plea is not accepted by the Court or is withdrawn for any reason, or if Columbia of Massachusetts should fail to perform an obligation under the Plea Agreement prior to the sale of Columbia of Massachusetts or its gas distribution business, the U.S. Attorney's Office may, at its sole option, render the DPA null and void.
U.S. Congressional Activity. On September 30, 2019, the U.S. Pipeline Safety Act expired. There is no effect on PHMSA's authority. Action on past re-authorization bills has extended past the expiration date and action on this re-authorization is expected to continue well into 2020. Pipeline safety jurisdiction resides with the U.S. Senate Commerce Committee, and is divided between two committees in the U.S. House of Representatives (Energy and Commerce, and Transportation and Infrastructure). Legislative proposals are currently in various stages of committee development and the timing of further action is uncertain. Certain legislative proposals, if enacted into law, may increase costs for natural gas industry companies, including the Company and Columbia of Massachusetts.
SEC Investigation. On November 27, 2019, the SEC staff notified the Company that it concluded its investigation related to disclosures made by the Company prior to the Greater Lawrence Incident and, based on the information provided as of such date, it does not intend to recommend an enforcement action against the Company.
Private Actions. Various lawsuits, including several purported class action lawsuits, have been filed by various affected residents or businesses in Massachusetts state courts against the Company and/or Columbia of Massachusetts in connection with the Greater Lawrence Incident. A special judge has been appointed to hear all pending and future cases and the class actions have been consolidated into one class action. On January 14, 2019, the special judge granted the parties’ joint motion to stay all cases until
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Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
April 30, 2019 to allow mediation, and the parties subsequently agreed to extend the stay until July 25, 2019. The class action lawsuits allege varying causes of action, including those for strict liability for ultra-hazardous activity, negligence, private nuisance, public nuisance, premises liability, trespass, breach of warranty, breach of contract, failure to warn, unjust enrichment, consumer protection act claims, negligent, reckless and intentional infliction of emotional distress and gross negligence, and seek actual compensatory damages, plus treble damages, and punitive damages.
On July 26, 2019, the Company, Columbia of Massachusetts and NiSource Corporate Services Company, a subsidiary of the Company, entered into a term sheet with the class action plaintiffs under which they agreed to settle the class action claims in connection with the Greater Lawrence Incident. Columbia of Massachusetts agreed to pay $143 million into a settlement fund to compensate the settlement class and the settlement class agreed to release Columbia of Massachusetts and affiliates from all claims arising out of or related to the Greater Lawrence Incident. The following claims are not covered under the proposed settlement because they are not part of the consolidated class action: (1) physical bodily injury and wrongful death; (2) insurance subrogation, whether equitable, contractual or otherwise; and (3) claims arising out of appliances that are subject to the Massachusetts DPU orders. Emotional distress and similar claims are covered under the proposed settlement unless they are secondary to a physical bodily injury. The settlement class is defined under the term sheet as all persons and businesses in the three municipalities of Lawrence, Andover and North Andover, Massachusetts, subject to certain limited exceptions. The motion for preliminary approval and the settlement documents were filed on September 25, 2019. The preliminary approval court hearing was held on October 7, 2019 and the court issued an order granting preliminary approval of the settlement on October 11, 2019. The proposed settlement is subject to final court approval, and a hearing occurred on February 27, 2020. The court took the matter under advisement.
Many residents and business owners have submitted individual damage claims to Columbia of Massachusetts. Most of the wrongful death and bodily injury claims that have been asserted have been settled, and we continue to discuss potential settlements with plaintiffs asserting such claims. In addition, the Commonwealth of Massachusetts is seeking reimbursement from Columbia of Massachusetts for its expenses incurred in connection with the Greater Lawrence Incident. The outcomes and impacts of such private actions are uncertain at this time.
Financial Impact. Since the Greater Lawrence Incident, we have recorded expenses of approximately $1,041 million for third-party claims and fines, penalties and settlements associated with government investigations. We estimate that total costs related to third-party claims and fines, penalties and settlements associated with government investigations resulting from the incident will range from $1,041 million to $1,065 million, depending on the number, nature, final outcome and value of third-party claims and the final outcome of government investigations. With regard to third-party claims, these costs include, but are not limited to, personal injury and property damage claims, damage to infrastructure, business interruption claims, and mutual aid payments to other utilities assisting with the restoration effort. These costs do not include costs of certain third-party claims and fines, penalties or settlements associated with government investigations that we are not able to estimate, nor do they include non-claims related and government investigation-related legal expenses resulting from the incident and the capital cost of the pipeline replacement, which are set forth in " - E. Other Matters - Greater Lawrence Incident Restoration" and "- Greater Lawrence Incident Pipeline Replacement," respectively, below.
The process for estimating costs associated with third-party claims and fines, penalties, and settlements associated with government investigations relating to the Greater Lawrence Incident requires management to exercise significant judgment based on a number of assumptions and subjective factors. As more information becomes known, including additional information regarding ongoing investigations, management’s estimates and assumptions regarding the financial impact of the Greater Lawrence Incident may change.
The aggregate amount of third-party liability insurance coverage available for losses arising from the Greater Lawrence Incident is $800 million. We have collected the entire $800 million as of December 31, 2019. Total expenses related to the incident have exceeded the total amount of insurance coverage available under our policies. Refer to "- E. Other Matters - Greater Lawrence Incident Restoration," below for a summary of third-party claims-related expense activity and associated insurance recoveries recorded since the Greater Lawrence Incident.
We are also party to certain other claims, regulatory and legal proceedings arising in the ordinary course of business in each state in which we have operations, 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, proceeding or investigation related to the Greater Lawrence Incident or otherwise would not have a material adverse effect on our results of
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Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
operations, financial position or liquidity. Certain matters in connection with the Greater Lawrence Incident have had or may have a material impact as described above. If one or more of such additional or other matters were decided against us, the effects could be material to our results of operations in the period in which we would be required to record or adjust the related liability and could also be material to our cash flows in the periods that we would be required to pay such liability.
D. Environmental Matters. Our operations are subject to environmental statutes and regulations related to air quality, water quality, hazardous waste and solid waste. We believe that we are in substantial compliance with the environmental regulations currently applicable to our operations.
It is management's continued intent to address environmental issues in cooperation with regulatory authorities in such a manner as to achieve mutually acceptable compliance plans. However, there can be no assurance that fines and penalties will not be incurred. Management expects a significant portion of environmental assessment, improvement and remediation costs to be recoverable through rates for certain of our companies.
As of December 31, 2019 and 2018, we had recorded a liability of $104.4 million and $101.2 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." We recognize 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 and the method of remediation. These expenditures are not currently estimable at some sites. We periodically adjust our 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 October 31, 2018. See section " - E. Other Matters - NIPSCO 2018 Integrated Resource Plan," below for additional information.
Air
Future legislative and regulatory programs could significantly limit allowed GHG emissions or impose a cost or tax on GHG emissions. Additionally, rules that require further GHG reductions or impose additional requirements for natural gas facilities could impose additional costs. NiSource will carefully monitor all GHG reduction proposals and regulations.
ACE Rule. On July 8, 2019, the EPA published the final ACE rule, which establishes emission guidelines for states to use when developing plans to limit carbon dioxide at coal-fired electric generating units based on heat rate improvement measures. The coal-fired units at NIPSCO’s R.M. Schahfer Generating Station and Michigan City Generating Station are potentially affected sources, and compliance requirements for these units which NIPSCO plans to retire by 2023 and 2028, respectively, will be determined by future Indiana rulemaking. The ACE rule notes that states have “broad flexibility in setting standards of performance for designated facilities” and that a state may set a “business as usual” standard for sources that have a remaining useful life “so short that imposing any costs on the electric generating unit is unreasonable.” State plans are due by 2022, and the EPA will have six months to determine completeness and then one additional year to determine whether to approve the submitted plan. States have the discretion to determine the compliance period for each source. As a result, NIPSCO will continue to monitor this matter and cannot estimate its impact at this time.
Waste
CERCLA. Our subsidiaries are potentially responsible parties at waste disposal sites under the CERCLA (commonly known as Superfund) and similar state laws. Under CERCLA, each potentially responsible party can be held jointly, severally and strictly liable for the remediation costs as the EPA, or state, can allow the parties to pay for remedial action or perform remedial action themselves and request reimbursement from the potentially responsible parties. Our affiliates have retained CERCLA environmental liabilities, including remediation liabilities, associated with certain current and former operations. These liabilities are not material to the Consolidated Financial Statements.
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 63 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.
We utilize a probabilistic model to estimate our future remediation costs related to MGP sites. The model was prepared with the assistance of a third party and incorporates our experience and general industry experience with remediating MGP sites. We
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Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
complete 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, 2019. Our total estimated liability related to the facilities subject to remediation was $102.2 million and $97.5 million at December 31, 2019 and 2018, respectively. The liability represents our best estimate of the probable cost to remediate the facilities. We believe that it is reasonably possible that remediation costs could vary by as much as $20 million in addition to the costs noted above. Remediation costs are estimated based on the best available information, applicable remediation standards at the balance sheet date, and experience with similar facilities.
CCRs. On April 17, 2015, the EPA issued a final rule for regulation of CCRs. The rule regulates CCRs under the RCRA Subtitle D, which determines them to be nonhazardous. The rule is implemented in phases and requires increased groundwater monitoring, reporting, recordkeeping and posting of related information to the Internet. The rule also establishes requirements related to CCR management and disposal. The rule will allow NIPSCO to continue its byproduct beneficial use program.
To comply with the rule, NIPSCO completed capital expenditures to modify its infrastructure and manage CCRs during 2019. The CCR rule also 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 requirements that will be established by environmental authorities, compliance strategies that will be used and the preliminary nature of available data used to estimate costs. As allowed by the rule, 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 initial CCR closure plans for R.M. Schahfer Generating Station and Michigan City Generating Station with the Indiana Department of Environmental Management.
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. Based upon a study performed in 2016 of the final rule, capital compliance costs were expected to be approximately $170.0 million. The EPA has proposed revisions to the final rule, and public comments were due on January 21, 2020. NIPSCO does not anticipate material ELG compliance costs based on the preferred option announced as part of NIPSCO's 2018 Integrated Resource Plan (discussed below).
E. Other Matters.
NIPSCO 2018 Integrated Resource Plan. Multiple factors, but primarily economic ones, including low natural gas prices, advancing cost effective renewable technology and increasing capital and operating costs associated with existing coal plants, have led NIPSCO to conclude in its October 2018 Integrated Resource Plan submission that NIPSCO’s current fleet of coal generation facilities will be retired earlier than previous Integrated Resource Plans had indicated.
The Integrated Resource Plan evaluated demand-side and supply-side resource alternatives to reliably and cost effectively meet NIPSCO customers' future energy requirements over the ensuing 20 years. The preferred option within the Integrated Resource Plan retires R.M. Schahfer Generating Station (Units 14, 15, 17, and 18) by 2023 and Michigan City Generating Station (Unit 12) by 2028. These units represent 2,080 MW of generating capacity, equal to 72% of NIPSCO’s remaining generating capacity (and 100% of NIPSCO's remaining coal-fired generating capacity) after the retirement of Bailly Units 7 and 8 on May 31, 2018.
The current replacement plan includes renewable sources of energy, including wind, solar, and battery storage to be obtained through a combination of NIPSCO ownership and PPAs.
In January 2019, NIPSCO executed two 20 year PPAs to purchase 100% of the output from renewable generation facilities at a fixed price per MWh. NIPSCO submitted the PPAs to the IURC for approval in February 2019 and the IURC approved the PPAs on June 5, 2019. Payments under the PPAs will not begin until the associated generation facilities are constructed by the owner / seller which is currently scheduled to be complete by the end of 2020 for one facility. NIPSCO has filed a notice with the IURC of its intention not to move forward with one of its approved PPAs due to the failure to meet a condition precedent in the agreement as a result of local zoning restrictions.
Also in January 2019, NIPSCO executed a BTA with a developer to construct a renewable generation facility with a nameplate capacity of approximately 100 MW. Once complete, ownership of the facility would be transferred to a joint venture owned by NIPSCO, the developer and an unrelated tax equity partner. The aforementioned joint venture is expected to be fully owned by NIPSCO after the PTC are monetized from the project (approximately 10 years after the facility goes into service). NIPSCO's purchase requirement under the BTA is dependent on satisfactory approval of the BTA by the IURC, successful execution of an agreement with a tax equity partner, and timely completion of construction. NIPSCO submitted the BTA to the IURC for approval
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Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
in February 2019 and the IURC approved the BTA on August 7, 2019. Required FERC filings occurred after receiving the IURC order and the related approvals were received. Construction of the facility is expected to be completed by the end of 2020.
On October 1, 2019, NIPSCO announced the opening of its next round of RFP to consider potential resources to meet the future electric needs of its customers. The RFP closed on November 20, 2019, and NIPSCO continues to evaluate the results. NIPSCO is considering all sources in the RFP process.
In October 2019, NIPSCO executed a BTA with a developer to construct an additional renewable generation facility with a nameplate capacity of approximately 300 MW. Once complete, ownership of the facility would be transferred to a joint venture owned by NIPSCO, the developer and an unrelated tax equity partner. The aforementioned joint venture is expected to be fully owned by NIPSCO after the PTC are monetized from the project (approximately 10 years after the facility goes into service). NIPSCO's purchase requirement under the BTA is dependent on satisfactory approval of the BTA by the IURC, successful execution of an agreement with a tax equity partner, and timely completion of construction. NIPSCO submitted the BTA to the IURC for approval on October 22, 2019, and the IURC approved the BTA on February 19, 2020. Required FERC filings are expected to be filed by the end of June 2020. Construction of the facility is expected to be completed by the end of 2021.
Greater Lawrence Incident Restoration. In addition to the amounts estimated for third-party claims and fines, penalties and settlements associated with government investigations described above, since the Greater Lawrence Incident, we have recorded expenses of approximately $420 million for other incident-related costs. We estimate that total other incident-related costs will range from $450 million to $460 million, depending on the incurrence of costs associated with resolving outstanding inquiries and investigations discuss above in " - C. Legal Proceedings." Such costs include certain consulting costs, legal costs, vendor costs, claims center costs, labor and related expenses incurred in connection with the incident, and insurance-related loss surcharges. The amounts set forth above do not include the capital cost of the pipeline replacement, which is set forth below, or any estimates for fines and penalties, which are discussed above in " - C. Legal Proceedings."
As discussed in "- C. Legal Proceedings," the aggregate amount of third-party liability insurance coverage available for losses arising from the Greater Lawrence Incident is $800 million. We have collected the entire $800 million as of December 31, 2019. Expenses related to the incident have exceeded the total amount of insurance coverage available under our policies.
The following table summarizes expenses incurred and insurance recoveries recorded since the Greater Lawrence Incident. This activity is presented within "Operation and maintenance" and "Other, net" in our Statements of Consolidated Income (Loss).
| Year Ended | Year Ended | |||||||||
| (in millions) | December 31, 2018 | December 31, 2019 | Incident to Date | |||||||
| Third-party claims and government fines, penalties and settlements | $ | 757 | $ | 284 | $ | 1,041 | ||||
| Other incident-related costs | 266 | 154 | 420 | |||||||
| Total | 1,023 | 438 | 1,461 | |||||||
| Insurance recoveries recorded | (135 | ) | (665 | ) | (800 | ) | ||||
| Loss (benefit) to income before income taxes | $ | 888 | $ | (227 | ) | $ | 661 |
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
The following table presents activity related to our Greater Lawrence Incident insurance recovery, which we have recovered in full as of December 31, 2019.
| (in millions) | Insurance receivable(1) | ||
| Balance, December 31, 2018 | $ | 130 | |
| Insurance recoveries recorded in first quarter of 2019 | 100 | ||
| Cash collected from insurance recoveries in the first quarter of 2019 | (108 | ) | |
| Balance, March 31, 2019 | 122 | ||
| Insurance recoveries recorded in the second quarter of 2019 | 435 | ||
| Cash collected from insurance recoveries in the second quarter of 2019 | (297 | ) | |
| Balance, June 30, 2019 | $ | 260 | |
| Insurance recoveries recorded in third quarter of 2019 | — | ||
| Cash collected from insurance recoveries in the third quarter of 2019 | (260 | ) | |
| Balance, September 30, 2019 | $ | — | |
| Insurance recoveries recorded in the fourth quarter of 2019 | 130 | ||
| Cash collected from insurance recoveries in the fourth quarter of 2019 | (130 | ) | |
| Balance, December 31, 2019 | $ | — |
(1)$5 million of insurance recoveries were collected during 2018.
Greater Lawrence Pipeline Replacement. In connection with the Greater Lawrence Incident, Columbia of Massachusetts, in cooperation with the Massachusetts Governor’s office, replaced the entire affected 45-mile cast iron and bare steel pipeline system that delivers gas to approximately 7,500 gas meters, the majority of which serve residences and approximately 700 of which serve businesses impacted in the Greater Lawrence Incident. This system was replaced with plastic distribution mains and service lines, as well as enhanced safety features such as pressure regulation and excess flow valves at each premise.
Since the Greater Lawrence Incident and through December 31, 2019, we have invested approximately $258 million of capital spend for the pipeline replacement; this work was completed in 2019. We maintain property insurance for gas pipelines and other applicable property. Columbia of Massachusetts has filed a proof of loss with its property insurer for the full cost of the pipeline replacement. In January 2020, we filed a lawsuit against the property insurer, seeking payment of our property claim. We are currently unable to predict the timing or amount of any insurance recovery under the property policy. The recovery of any capital investment not reimbursed through insurance will be addressed in a future regulatory proceeding; a future regulatory proceeding is dependent on the outcome of the sale of the Massachusetts Business. The outcome of such a proceeding (if any) is uncertain. In accordance with ASC 980-360, if it becomes probable that a portion of the pipeline replacement cost will not be recoverable through customer rates and an amount can be reasonably estimated, we will reduce our regulated plant balance for the amount of the probable disallowance and record an associated charge to earnings. This could result in a material adverse effect to our financial condition, results of operations and cash flows. Additionally, if a rate order is received allowing recovery of the investment with no or reduced return on investment, a loss on disallowance may be required.
State Income Taxes Related to Greater Lawrence Incident Expenses. As of December 31, 2018, expenses related to the Greater Lawrence Incident were $1,023 million. In the fourth quarter of 2019, we filed an application for Alternative Apportionment with the MA DOR to request an allocable approach to these expenses for purposes of Massachusetts state income taxes, which, if approved, would result in a state deferred tax asset of approximately $50 million, net. The MA DOR is expected to review the application within nine months from the date of filing, and we believe it is reasonably possible that the application will be accepted, or an alternative method proposed.
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
20**. 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, 2017 | $ | (0.6 | ) | $ | (6.9 | ) | $ | (17.6 | ) | $ | (25.1 | ) | |||
| Other comprehensive income (loss) before reclassifications | 0.6 | (24.2 | ) | 1.9 | (21.7 | ) | |||||||||
| Amounts reclassified from accumulated other comprehensive loss | 0.2 | 1.7 | 1.5 | 3.4 | |||||||||||
| Net current-period other comprehensive income (loss) | 0.8 | (22.5 | ) | 3.4 | (18.3 | ) | |||||||||
| Balance as of December 31, 2017 | $ | 0.2 | $ | (29.4 | ) | $ | (14.2 | ) | $ | (43.4 | ) | ||||
| Other comprehensive income (loss) before reclassifications | (3.0 | ) | 55.8 | (4.4 | ) | 48.4 | |||||||||
| Amounts reclassified from accumulated other comprehensive loss | 0.4 | (33.1 | ) | — | (32.7 | ) | |||||||||
| Net current-period other comprehensive income (loss) | (2.6 | ) | 22.7 | (4.4 | ) | 15.7 | |||||||||
| Reclassification due to adoption of ASU 2018-02 | — | (6.3 | ) | (3.2 | ) | (9.5 | ) | ||||||||
| Balance as of December 31, 2018 | $ | (2.4 | ) | $ | (13.0 | ) | $ | (21.8 | ) | $ | (37.2 | ) | |||
| Other comprehensive income (loss) before reclassifications | 6.1 | (64.3 | ) | 2.3 | (55.9 | ) | |||||||||
| Amounts reclassified from accumulated other comprehensive loss | (0.4 | ) | 0.1 | 0.8 | 0.5 | ||||||||||
| Net current-period other comprehensive income (loss) | 5.7 | (64.2 | ) | 3.1 | (55.4 | ) | |||||||||
| Balance as of December 31, 2019 | $ | 3.3 | $ | (77.2 | ) | $ | (18.7 | ) | $ | (92.6 | ) |
(1)All amounts are net of tax. Amounts in parentheses indicate debits.
21**. Other, Net**
| Year Ended December 31, (in millions) | 2019 | 2018 | 2017 | ||||||||
| Interest income | $ | 7.7 | $ | 6.6 | $ | 4.6 | |||||
| AFUDC equity | 8.0 | 14.2 | 12.6 | ||||||||
| Charitable contributions(1) | (5.1 | ) | (45.3 | ) | (19.9 | ) | |||||
| Pension and other postretirement non-service cost(2) | (16.5 | ) | 18.0 | (10.6 | ) | ||||||
| Interest rate swap settlement gain(3) | — | 46.2 | — | ||||||||
| Miscellaneous | 0.7 | 3.8 | (0.2 | ) | |||||||
| Total Other, net | $ | (5.2 | ) | $ | 43.5 | $ | (13.5 | ) |
(1) 2018 charitable contributions include $20.7 million related to the Greater Lawrence Incident and $20.0 million of discretionary contributions made to the Nisource Charitable Foundation. See Note 19, "Other Commitments and Contingencies" for additional information on the Greater Lawrence Incident.
(2) See Note 11, "Pension and Other Postretirement Benefits" for additional information.
(3) See Note 9, "Risk Management Activities" for additional information.
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
22**. Interest Expense, Net**
| Year Ended December 31, (in millions) | 2019 | 2018 | 2017 | ||||||||
| Interest on long-term debt | $ | 327.7 | $ | 342.2 | $ | 354.8 | |||||
| Interest on short-term borrowings | 50.8 | 31.8 | 14.9 | ||||||||
| Debt discount/cost amortization | 8.3 | 7.7 | 7.2 | ||||||||
| Accounts receivable securitization fees | 2.6 | 2.6 | 2.5 | ||||||||
| Allowance for borrowed funds used and interest capitalized during construction | (7.5 | ) | (9.1 | ) | (6.2 | ) | |||||
| Debt-based post-in-service carrying charges | (18.7 | ) | (35.0 | ) | (36.4 | ) | |||||
| Other | 15.7 | 13.1 | 16.4 | ||||||||
| Total Interest Expense, net | $ | 378.9 | $ | 353.3 | $ | 353.2 |
23**. Segments of Business**
At December 31, 2019, our 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 our reportable segments. We use operating income as our primary measurement for each of the reported segments and make 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) | 2019 | 2018 | 2017 | ||||||||
| Operating Revenues | |||||||||||
| Gas Distribution Operations | |||||||||||
| Unaffiliated | $ | 3,509.7 | $ | 3,406.4 | $ | 3,087.9 | |||||
| Intersegment | 13.1 | 13.1 | 14.2 | ||||||||
| Total | 3,522.8 | 3,419.5 | 3,102.1 | ||||||||
| Electric Operations | |||||||||||
| Unaffiliated | 1,698.4 | 1,707.4 | 1,785.7 | ||||||||
| Intersegment | 0.8 | 0.8 | 0.8 | ||||||||
| Total | 1,699.2 | 1,708.2 | 1,786.5 | ||||||||
| Corporate and Other | |||||||||||
| Unaffiliated | 0.8 | 0.7 | 1.0 | ||||||||
| Intersegment | 468.1 | 517.6 | 510.8 | ||||||||
| Total | 468.9 | 518.3 | 511.8 | ||||||||
| Eliminations | (482.0 | ) | (531.5 | ) | (525.8 | ) | |||||
| Consolidated Operating Revenues | $ | 5,208.9 | $ | 5,114.5 | $ | 4,874.6 |
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
| Year Ended December 31, (in millions) | 2019 | 2018 | 2017 | ||||||||
| Operating Income (Loss) | |||||||||||
| Gas Distribution Operations | $ | 675.4 | $ | (254.1 | ) | $ | 550.1 | ||||
| Electric Operations | 406.8 | 386.1 | 367.4 | ||||||||
| Corporate and Other(2) | (191.5 | ) | (7.3 | ) | 3.7 | ||||||
| Consolidated Operating Income | $ | 890.7 | $ | 124.7 | $ | 921.2 | |||||
| Depreciation and Amortization | |||||||||||
| Gas Distribution Operations | $ | 403.2 | $ | 301.0 | $ | 269.3 | |||||
| Electric Operations | 277.3 | 262.9 | 277.8 | ||||||||
| Corporate and Other | 36.9 | 35.7 | 23.2 | ||||||||
| Consolidated Depreciation and Amortization | $ | 717.4 | $ | 599.6 | $ | 570.3 | |||||
| Assets | |||||||||||
| Gas Distribution Operations | $ | 14,224.5 | $ | 13,527.0 | $ | 12,048.8 | |||||
| Electric Operations | 6,027.6 | 5,735.2 | 5,478.6 | ||||||||
| Corporate and Other | 2,407.7 | 2,541.8 | 2,434.3 | ||||||||
| Consolidated Assets | $ | 22,659.8 | $ | 21,804.0 | $ | 19,961.7 | |||||
| Capital Expenditures(1) | |||||||||||
| Gas Distribution Operations | $ | 1,380.3 | $ | 1,315.3 | $ | 1,125.6 | |||||
| Electric Operations | 468.9 | 499.3 | 592.4 | ||||||||
| Corporate and Other | 18.6 | — | 35.8 | ||||||||
| Consolidated Capital Expenditures | $ | 1,867.8 | $ | 1,814.6 | $ | 1,753.8 |
(1)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.
(2) In 2019, Corporate and Other reflects an impairment charge of $204.8 million for goodwill related to Columbia of Massachusetts. For additional information, see Note 6, "Goodwill and Other Intangible Assets."
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
24**. Quarterly Financial Data (Unaudited)**
Quarterly financial data does not always reveal the trend of our business operations due to nonrecurring items and seasonal weather patterns, which affect earnings and related components of revenue and operating income.
| (in millions, except per share data) | First Quarter(1) | Second Quarter(2) | Third Quarter(3) | Fourth Quarter(4) | |||||||||||
| 2019 | |||||||||||||||
| Operating Revenues | $ | 1,869.8 | $ | 1,010.4 | $ | 931.5 | $ | 1,397.2 | |||||||
| Operating Income (Loss) | 374.2 | 463.5 | 91.0 | (38.0 | ) | ||||||||||
| Net Income (Loss) | 218.9 | 296.9 | 6.6 | (139.3 | ) | ||||||||||
| Preferred Dividends | (13.8 | ) | (13.8 | ) | (13.8 | ) | (13.7 | ) | |||||||
| Net Income (Loss) Available to Common Shareholders | 205.1 | 283.1 | (7.2 | ) | (153.0 | ) | |||||||||
| Earnings (Loss) Per Share | |||||||||||||||
| Basic Earnings (Loss) Per Share | $ | 0.55 | $ | 0.76 | $ | (0.02 | ) | $ | (0.41 | ) | |||||
| Diluted Earnings (Loss) Per Share | $ | 0.55 | $ | 0.75 | $ | (0.02 | ) | $ | (0.41 | ) | |||||
| 2018 | |||||||||||||||
| Operating Revenues | $ | 1,750.8 | $ | 1,007.0 | $ | 895.0 | $ | 1,461.7 | |||||||
| Operating Income (Loss) | 400.6 | 118.4 | (315.9 | ) | (78.4 | ) | |||||||||
| Net Income (Loss) | 276.1 | 24.5 | (339.5 | ) | (11.7 | ) | |||||||||
| Preferred Dividends | — | (1.3 | ) | (5.6 | ) | (8.1 | ) | ||||||||
| Net Income (Loss) Available to Common Shareholders | 276.1 | 23.2 | (345.1 | ) | (19.8 | ) | |||||||||
| Earnings (Loss) Per Share | |||||||||||||||
| Basic Earnings (Loss) Per Share | $ | 0.82 | $ | 0.07 | $ | (0.95 | ) | $ | (0.05 | ) | |||||
| Diluted Earnings (Loss) Per Share | $ | 0.81 | $ | 0.07 | $ | (0.95 | ) | $ | (0.05 | ) |
(1) Net income for the first quarter of 2019 was impacted by $108.0 million in insurance recoveries (pretax) related to the Greater Lawrence Incident. See Note 19-E, "Other Matters" for additional information.
(2) Net income for the second quarter of 2019 was impacted by $297.0 million in insurance recoveries (pretax) related to the Greater Lawrence Incident. See Note 19-E, "Other Matters" for additional information.
(3) Net loss for the third quarter of 2018 was impacted by approximately $462 million in expenses (pretax) related to the Greater Lawrence Incident restoration and a $33.0 million loss (pretax) on an early extinguishment of long-term debt. See Note 19-E, "Other Matters" and Note 14, "Long-Term Debt" for additional information.
(4) Net loss for the fourth quarter of 2019 was impacted by an impairment charge of $204.8 million for goodwill and an impairment charge of $209.7 million for franchise rights, in each case related to Columbia of Massachusetts. For additional information, see Note 6, "Goodwill and Other Intangible Assets."
25**. Supplemental Cash Flow Information**
The following table provides additional information regarding our Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017:
| Year Ended December 31, (in millions) | 2019 | 2018 | 2017 | ||||||||
| Supplemental Disclosures of Cash Flow Information | |||||||||||
| Non-cash transactions: | |||||||||||
| Capital expenditures included in current liabilities | $ | 223.6 | $ | 152.0 | $ | 173.0 | |||||
| Assets acquired under a finance lease | 26.4 | 54.6 | 11.5 | ||||||||
| Assets acquired under an operating lease | 13.4 | — | — | ||||||||
| Reclassification of other property to regulatory assets(1) | — | 245.3 | — | ||||||||
| Assets recorded for asset retirement obligations(2) | 54.6 | 78.1 | 11.4 | ||||||||
| Schedule of interest and income taxes paid: | |||||||||||
| Cash paid for interest, net of interest capitalized amounts | $ | 349.7 | $ | 354.2 | $ | 339.9 | |||||
| Cash paid for income taxes, net of refunds | 10.8 | 3.3 | 5.5 |
(1)See Note 8 "Regulatory Matters" for additional information.
(2)See Note 7 "Asset Retirement Obligations" for additional information.
NIS****OURCE INC.
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
26**. Subsequent Event**
On February 26, 2020, NiSource and Columbia of Massachusetts entered into the Asset Purchase Agreement with Eversource. Upon the terms and subject to the conditions set forth in the Asset Purchase Agreement, NiSource and Columbia of Massachusetts agreed to sell to Eversource, with certain additions and exceptions: (1) substantially all of the assets of Columbia of Massachusetts and (2) all of the assets held by any of Columbia of Massachusetts’ affiliates that primarily relate to the Massachusetts Business, and Eversource agreed to assume certain liabilities of Columbia of Massachusetts and its affiliates. The liabilities assumed by Eversource under the Asset Purchase Agreement do not include, among others, any liabilities arising out of the Greater Lawrence Incident or liabilities of Columbia of Massachusetts or its affiliates pursuant to civil claims for injury of persons or damage to property to the extent such injury or damage occurs prior to the closing in connection with the Massachusetts Business. The Asset Purchase Agreement provides for a purchase price of $1,100 million in cash, subject to adjustment based on Columbia of Massachusetts’ net working capital as of the closing. The closing of the transactions contemplated by the Asset Purchase Agreement is subject to Hart-Scott Rodino Antitrust Improvements Act of 1976 and regulatory approvals, resolution of certain proceedings before governmental bodies and other conditions. The Massachusetts Business did not meet the requirements under GAAP to be classified as held-for-sale as of December 31, 2019. When the Massachusetts Business meets the requirements to be classified as held-for-sale, in each period leading up to the closing date of the transaction, the assets and liabilities of the Massachusetts Business will be measured at fair value, less costs to sell. The final pre-tax gain or loss on the transaction will be determined as of the closing date. Assuming the Massachusetts Business is classified as held-for-sale at March 31, 2020, we estimate that the total pre-tax loss to be measured in the quarter ended March 31, 2020 will be approximately $360 million, based on December 31, 2019 asset and liability balances and estimated transaction costs. This estimated pre-tax loss is subject to change based on estimated transaction costs, working capital adjustments and asset and liability balances at each measurement date leading up to the closing date. The sale is expected to close by September 30, 2020, subject to closing conditions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NISOURCE INC.
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
| Twelve months ended December 31, 2019 | ||||||||||||||||||||
| Additions | ||||||||||||||||||||
| ($ in millions) | Balance Jan. 1, 2019 | Charged to Costs and Expenses | Charged to Other Account (1) | Deductions for Purposes for which Reserves were Created | Balance Dec. 31, 2019 | |||||||||||||||
| Reserves Deducted in Consolidated Balance Sheet from Assets to Which They Apply: | ||||||||||||||||||||
| Reserve for accounts receivable | $ | 21.1 | $ | 21.6 | $ | 41.3 | $ | 64.8 | $ | 19.2 | ||||||||||
| Reserve for other investments | 3.0 | — | — | — | 3.0 | |||||||||||||||
| Twelve months ended December 31, 2018 | ||||||||||||||||||||
| Additions | ||||||||||||||||||||
| ($ in millions) | Balance Jan. 1, 2018 | Charged to Costs and Expenses | Charged to Other Account (1) | Deductions for Purposes for which Reserves were Created | Balance Dec. 31, 2018 | |||||||||||||||
| Reserves Deducted in Consolidated Balance Sheet from Assets to Which They Apply: | ||||||||||||||||||||
| Reserve for accounts receivable | $ | 18.3 | $ | 20.2 | $ | 43.7 | $ | 61.1 | $ | 21.1 | ||||||||||
| Reserve for other investments | 3.0 | — | — | — | 3.0 | |||||||||||||||
| Twelve months ended December 31, 2017 | ||||||||||||||||||||
| Additions | ||||||||||||||||||||
| ($ in millions) | Balance Jan. 1, 2017 | Charged to Costs and Expenses | Charged to Other Account (1) | Deductions for Purposes for which Reserves were Created | Balance Dec. 31, 2017 | |||||||||||||||
| Reserves Deducted in Consolidated Balance Sheet from Assets to Which They Apply: | ||||||||||||||||||||
| Reserve for accounts receivable | $ | 23.3 | $ | 14.8 | $ | 39.1 | $ | 58.9 | $ | 18.3 | ||||||||||
| Reserve for other investments | 3.0 | — | — | — | 3.0 |
(1) Charged to Other Accounts reflects the deferral of bad debt expense to a regulatory asset.
NIS****OURCE INC.
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