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NISOURCE INC/DE - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NiSource Inc.(Edgar Glimpses Via Acquire Media NewsEdge) Note regarding forward-looking statements The Management's Discussion and Analysis, including statements regarding market risk sensitive instruments, contains "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Investors and prospective investors should understand that many factors govern whether any forward-looking statement contained herein will be or can be realized. Any one of those factors could cause actual results to differ materially from those projected. These forward-looking statements include, but are not limited to, statements concerning NiSource's plans, objectives, expected performance, expenditures, recovery of expenditures through rates, stated on either a consolidated or segment basis, the Proposed Separation, the Columbia Pipeline Partners LP initial public offering and any and all underlying assumptions and other statements that are other than statements of historical fact. From time to time, NiSource may publish or otherwise make available forward-looking statements of this nature. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of NiSource, are also expressly qualified by these cautionary statements. All forward-looking statements are based on assumptions that management believes to be reasonable; however, there can be no assurance that actual results will not differ materially. Factors that could cause actual results to differ materially from the projections, forecasts, estimates and expectations discussed in this Quarterly Report on Form 10-Q include, among other things, weather, fluctuations in supply and demand for energy commodities, growth opportunities for NiSource's businesses, increased competition in deregulated energy markets, the success of regulatory and commercial initiatives, dealings with third parties over whom NiSource has no control, actual operating experience of NiSource's assets, the regulatory process, regulatory and legislative changes, the impact of potential new environmental laws or regulations, the results of material litigation, changes in pension funding requirements, changes in general economic, capital and commodity market conditions, counterparty credit risk, the timing to consummate the Proposed Separation and the Columbia Pipeline Partners LP initial public offering (collectively, the "Proposed Transactions"), the risk that a condition to consummation of a proposed transaction is not satisfied, disruption to operations as a result of the Proposed Transactions, the inability of one or more of the businesses to operate independently following the completion of the Proposed Separation and the matters set forth in the "Risk Factors" section of NiSource's 2013 Form 10-K and this Form 10-Q, many of which are beyond the control of NiSource. In addition, the relative contributions to profitability by each segment, and the assumptions underlying the forward-looking statements relating thereto, may change over time. NiSource expressly disclaims a duty to update any of the forward-looking statements contained in this report. The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with NiSource's Annual Report on Form 10-K for the fiscal year ended December 31, 2013. CONSOLIDATED REVIEW Planned Separation of Columbia Pipeline Group and Initial Public Offering of Columbia Pipeline Partners LP On September 28, 2014, NiSource announced that its Board of Directors had approved in principle plans to separate its natural gas pipeline and related businesses into a stand-alone publicly traded company (the "Proposed Separation"). If completed, the Proposed Separation will result in two energy infrastructure companies: NiSource Inc., a fully regulated natural gas and electric utilities company, and Columbia Pipeline Group Inc., a natural gas pipeline, midstream and storage company ("CPG"). The Proposed Separation is expected to occur in mid-2015. Under the plan for the Proposed Separation, NiSource shareholders would retain their current shares of NiSource stock and receive a pro rata distribution of shares of CPG stock in a transaction that is expected to be tax-free to NiSource and its shareholders. The Proposed Separation is subject to various conditions, including, without limitation, the receipt by NiSource of a legal opinion on the tax-free nature of the distribution and final approval of the NiSource Board of Directors. NiSource shareholder approval of the transaction is not required. There is no assurance that the transaction will be completed in mid-2015 or at all. On September 29, 2014, Columbia Pipeline Partners LP, a wholly owned subsidiary ("CPPL"), filed with the Securities and Exchange Commission a Registration Statement on Form S-1 related to CPPL's proposed initial public offering of common units representing limited partner interests in CPPL. We expect that CPPL will sell a minority share of its total limited partner interests in the offering, which is expected to occur in the first quarter of 2015. If the proposed offering closes, CPPL's initial asset would consist of an approximate 14.6% ownership interest in CPG OpCo LP ("Columbia OpCo"), which is the entity that will own 34-------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. substantially all of NiSource's natural gas transmission, midstream and storage assets. In addition, NiSource, through its ownership of CPG, would indirectly own (a) the remaining ownership interest in Columbia OpCo, (b) the general partner of CPPL, (c) the remaining CPPL limited partner interests that are not sold in the offering and (d) all the incentive distribution rights in CPPL. If the Proposed Separation occurs, CPG would no longer be a subsidiary of NiSource and, thus, NiSource would cease to own (a) any interest in Columbia OpCo, (b) the general partner of CPPL, (c) any of the limited partner interests in CPPL or (d) any of the incentive distribution rights in CPPL. Executive Summary NiSource (the "Company") is an energy holding company under the Public Utility Holding Company Act of 2005 whose subsidiaries are engaged in the transmission, storage and distribution of natural gas in the high-demand energy corridor stretching from the Gulf Coast through the Midwest to New England and the generation, transmission and distribution of electricity in Indiana. NiSource generates virtually 100% of its operating income through these rate-regulated businesses. A significant portion of NiSource's operations is subject to seasonal fluctuations in sales. During the heating season, which is primarily from November through March, net revenues from gas sales are more significant, and during the cooling season, which is primarily from June through September, net revenues from electric sales and transportation services are more significant, than in other months. For the nine months ended September 30, 2014, NiSource reported income from continuing operations of $376.4 million, or $1.19 per basic share, compared to $337.9 million, or $1.08 per basic share reported for the same period in 2013. The increase in income from continuing operations was due primarily to the following items: • Regulatory and service programs at Gas Distribution Operations increased net revenues by $69.9 million primarily due to the impacts of the rate settlement in 2013 at Columbia of Pennsylvania and the implementation of rates under Columbia of Ohio's approved infrastructure replacement program. Refer to Note 8, "Regulatory Matters," to the Consolidated Financial Statements included in NiSource's Annual Report on Form 10-K for the fiscal year ended December 31, 2013 for more information. • Demand margin revenue increased by $34.1 million at Columbia Pipeline Group Operations primarily as a result of growth projects placed in service. Refer to the Columbia Pipeline Group Operations' segment discussion for further information on growth projects. • The Company recognized previously deferred gains of $20.8 million from the conveyances of mineral interests at Columbia Pipeline Group Operations. As of September 30, 2014, remaining gains of approximately $21.0 million recorded in "Deferred revenue" on the Condensed Consolidated Balance Sheets (unaudited) will be recognized in earnings upon performance of future obligations. • Net revenues increased by $20.6 million as a result of higher industrial usage at Electric Operations primarily due to large industrial customers expanding plant operations and using less internal generation. Refer to the Electric Operations' segment discussion for further information. • Increased third party drilling activity resulted in an increase in mineral rights royalty revenue at Columbia Pipeline Group Operations of $20.5 million. The Company expects to invest in excess of $20 million a year in its mineral rights positions. These increases to income from continuing operations were partially offset by the following: • Employee and administrative expense increased by $55.2 million due primarily to outages and maintenance, greater labor expense due to a growing workforce and reduced payroll capitalization, and IT support and enhancement projects. • Interest expense increased by $23.5 million resulting from the issuance of $500.0 million of long-term debt in October 2013 and the issuance of $750.0 million of long-term debt in April 2013. These increases were partially offset by the maturity of $500 million of long-term debt in July 2014 and the maturity of $420.3 million of long-term debt in March 2013. • Outside service costs increased by $22.7 million primarily due to costs associated with the Proposed Separation and Columbia of Pennsylvania's pipeline safety initiatives. 35-------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. • Depreciation and amortization increased $21.2 million primarily due to higher capital expenditures. NiSource projects 2014 capital expenditures to be approximately $2.2 billion. These factors and other impacts to the financial results are discussed in more detail within the following discussions of "Results of Operations" and "Results and Discussion of Segment Operations." Platform for Growth NiSource's business plan will continue to center on commercial and regulatory initiatives; commercial growth and expansion of the gas transmission and storage business; financial management of the balance sheet; and cost and process excellence. Commercial and Regulatory Initiatives NiSource is moving forward on regulatory initiatives across several distribution company markets. Whether through full rate case filings or other approaches, NiSource's goal is to develop strategies that benefit all stakeholders as it addresses changing customer conservation patterns, develops more contemporary pricing structures, and embarks on long-term investment programs to enhance its infrastructure. NIPSCO continued to focus on customer service, reliability and long-term growth and modernization initiatives during the third quarter, while executing on significant environmental investments. • On April 30, 2014, the IURC approved NIPSCO's seven-year, $710 million, natural gas modernization program, referred to as TDSIC. The program complements the in-progress $1.1 billion electric TDSIC approved in February 2014, and is addressing system modernization as well as system expansion in certain areas. • Progress also continued on two major NIPSCO electric transmission projects designed to enhance system flexibility and reliability. Right-of-way acquisition and permitting are underway for both projects. The Greentown-Reynolds project is a 70-mile, 765-kV line being constructed in a joint development agreement with Pioneer Transmission, and the Reynolds-Topeka project is a 100-mile, 345-kV line. The projects involve a NIPSCO investment of approximately $500 million and are anticipated to be in service by the end of 2018. • Two remaining FGD projects at NIPSCO's coal-fired electric generating facilities remain on schedule. The FGD investments are part of approximately $860 million in environmental investments, including water quality and emission-control projects, recently completed and planned at NIPSCO's electric generating facilities. One project is expected to be completed by the end of 2014 and the other by the end of 2015. NiSource's Gas Distribution companies continue to execute their strategy of long-term infrastructure replacement and enhancement and advance their regulatory agenda. • On April 30, 2014, Columbia of Virginia filed a rate case with the VSCC to recover investments with a multi-year gas distribution system modernization program. If approved as filed, the case would increase annual revenues by approximately $24.9 million. The VSCC issued a procedural order in the case on May 28, 2014 which scheduled the case for hearing on December 9, 2014. New rates are subject to refund and became effective October 1, 2014. • On March 21, 2014, Columbia of Pennsylvania filed a rate case with the Pennsylvania PUC seeking an annual revenue increase of approximately $54.1 million to support continuation of Columbia of Pennsylvania's ongoing infrastructure modernization program. On September 5, 2014, the parties to the rate case filed a joint petition which seeks approval of a full settlement which features an annual increase of $32.5 million. On October 17, 2014, the administrative law judge assigned to the case issued a Recommended Decision in which he recommended that the settlement be approved, without modification. A final order from the Pennsylvania PUC is expected in the fourth quarter of 2014. • On June 26, 2014, Massachusetts Governor Deval Patrick signed into law House Bill 4164, an Act relative to natural gas leaks. The centerpiece of the Bill significantly reduces the lag in recovery associated with priority pipe replacement under Columbia of Massachusetts' current Targeted Infrastructure Reinvestment Factor. Columbia of Massachusetts will make its first filing under the new law on October 31, 2014. Recovery of infrastructure investments made under this program are expected to begin May 1, 2015. 36-------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. Refer to Note 6, "Regulatory Matters," in the Notes to Condensed Consolidated Financial Statements (unaudited) for a complete discussion of regulatory and commercial matters. Modernization, Commercial Growth and Expansion of the Columbia Pipeline Group Operations Columbia Pipeline Group Operations continues to make progress on its long-term infrastructure modernization program, as well as a series of midstream and core growth initiatives tied to NiSource's asset position in the Utica and Marcellus Shale production regions. • Columbia Transmission is on track with the second year of its long-term system modernization program. The second year of the program includes planned modernization investments of approximately $330 million. Columbia Transmission and its customers have agreed to the initial five years of the comprehensive modernization program, with an opportunity to mutually extend the agreement. The overall program is expected to last 10 years or more and involves an aggregate investment in excess of $4 billion. • In August 2014, Columbia Pipeline Group confirmed details of its planned $1.75 billion investment in the Leach XPress and Rayne XPress projects. The projects will create a new pathway for delivering natural gas supplies to market, providing transportation capacity of approximately 1.5 Bcf per day for Marcellus and Utica shale gas on the Columbia Transmission system and 1.0 Bcf per day on the Columbia Gulf system. The projects, expected to be placed into service by the end of 2017, include approximately150 miles of new transmission pipeline and new compression facilities at multiple sites in Ohio and West Virginia. • The Columbia Pipeline Group Operations segment will invest approximately $870 million in its WB XPress project. This project will transport approximately 1.3 Bcf of Marcellus Shale production on the Columbia Transmission system to pipeline interconnects and East Coast markets, which includes access to the Cove Point LNG terminal. Resolution of conditions precedent is anticipated in the fourth quarter of 2014. The project is expected to be placed in service during the fourth quarter of 2018. • NiSource Midstream began work on its $120 million Washington County Gathering project. The project, anchored by a long-term agreement with a subsidiary of Range Resources Corporation, will consist of gathering pipelines and compression facilities in western Pennsylvania to transport production into a nearby Columbia Transmission pipeline. The project is expected to be in service during the fourth quarter of 2015, with additional expansion expected as gas production grows. • NiSource Midstream is expanding and optimizing its Big Pine Gathering System to support Marcellus Shale production in Western Pennsylvania by investing $65 million in facility enhancements to make a connection to the Big Pine pipeline and add compression facilities that will add incremental capacity. The project is expected to be in service during the third quarter of 2015. Financial Management of the Balance Sheet On August 20, 2014, NiSource Finance negotiated a $750.0 million million three-year bank term loan with a syndicate of banks which carries a floating interest rate of BBA LIBOR plus 100 basis points. On July 15, 2014, NiSource Finance redeemed $500.0 million million of 5.40% senior unsecured notes at maturity. Additionally on July 15, 2014, $500.0 million of fixed-to-variable interest rate swaps expired, whereby NiSource Finance received payments based upon a fixed 5.40% interest rate and paid a floating interest rate amount based on U.S. 6-month BBA LIBOR plus an average of 0.78% per annum. 37-------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. On September 28, 2014, NiSource announced that its Board of Directors has approved in principle plans to separate its natural gas pipeline and related businesses into a stand-alone publicly traded company whereby NiSource will continue as a fully regulated natural gas and electric utilities company. The separation announcement triggered ratings reviews by Standard & Poor's, Moody's, and Fitch. On September 29, 2014, Standard & Poor's affirmed the senior unsecured ratings for NiSource and the existing ratings of its other rated subsidiaries at BBB- and the NiSource Finance commercial paper rating of A-3, placing the company's ratings on watch positive. On September 29, 2014, Moody's Investors Service affirmed the NiSource senior unsecured rating of Baa2 and commercial paper rating of P-2, with a stable outlook. Additionally, Moody's affirmed NIPSCO's Baa1 rating and affirmed the Baa2 rating for Columbia of Massachusetts. On September 29, 2014, Fitch affirmed the senior unsecured ratings for NiSource at BBB-, and the existing ratings of all other subsidiaries. Fitch's outlook for NiSource and its subsidiaries is stable. Ethics and Controls NiSource has had a long-term commitment to providing accurate and complete financial reporting as well as high standards for ethical behavior by its employees. NiSource's senior management takes an active role in the development of this Form 10-Q and the monitoring of the company's internal control structure and performance. In addition, NiSource will continue its mandatory ethics training program for all employees. Refer to "Controls and Procedures" included in Item 4. Results of Operations Quarter Ended September 30, 2014 Net Income NiSource reported net income of $31.4 million, or $0.10 per basic share, for the three months ended September 30, 2014, compared to net income of $48.1 million, or $0.16 per basic share, for the third quarter of 2013. Income from continuing operations was $31.5 million, or $0.10 per basic share, for the three months ended September 30, 2014, compared to income from continuing operations of $49.5 million, or $0.16 per basic share, for the third quarter of 2013. Operating income was $157.8 million, a decrease of $18.6 million from the same period in 2013. All per share amounts are basic earnings per share. Basic average shares of common stock outstanding at September 30, 2014 were 315.4 million compared to 312.8 million at September 30, 2013. Comparability of line item operating results between quarterly periods is impacted by regulatory and tax trackers that allow for the recovery in rates of certain costs such as bad debt expenses. Therefore, increases in these tracked operating expenses are offset by increases in net revenues and have essentially no impact on income from continuing operations. Net Revenues Total consolidated net revenues (gross revenues less cost of sales) for the quarter ended September 30, 2014, were $893.4 million, a $59.6 million increase from the same period last year. This increase in net revenues was primarily due to increased Columbia Pipeline Group Operations' net revenues of $35.0 million, higher Gas Distribution Operations' net revenues of $19.5 million and increased Electric Operations' net revenues of $5.7 million. • Columbia Pipeline Group Operations' net revenues increased primarily due to higher regulatory trackers, which are offset in expense, of $15.6 million, increased demand margin revenue of $11.8 million primarily as a result of growth projects placed in service, higher mineral rights royalty revenue of $5.9 million and increased condensate revenue of $2.6 million. • Gas Distribution Operations' net revenues increased primarily due to an increase of $10.2 million for regulatory and service programs, including the implementation of rates under Columbia of Ohio's approved infrastructure replacement program and the impacts of the rate case at Columbia of Massachusetts. Additionally, there was an increase in net revenues as result of a settlement of $3.2 million at Columbia of Massachusetts in 2013, increased industrial and commercial usage of $1.4 million, higher net revenues due to increased margins of $1.4 million and higher large customer revenue of $1.3 million. • Electric Operations' net revenues increased primarily due to higher industrial and residential usage of $7.4 million, increased trackers, which are offset in expense, of $4.4 million and an increase in the return on the environmental capital investment recovery of $4.2 million due to an increased plant balance eligible for recovery. These increases were partially offset by the effects of weather of $10.3 million. 38-------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. Operating Expenses Operating expenses for the third quarter of 2014 were $747.6 million, an increase of $79.7 million from the 2013 period. This increase was primarily due to higher operation and maintenance expenses of $60.6 million, increased depreciation and amortization of $8.5 million and a decrease in the gain on the sale of assets of $6.9 million. The increase in operation and maintenance expenses was primarily due to increased employee and administrative costs of $31.7 million, higher regulatory trackers, which are offset in net revenues, of $18.6 million, increased outside service costs of $13.4 million, higher electric generation costs of $3.4 million and increased storm damage costs of $3.3 million. These increases were partially offset by a decrease in software data conversion costs of $7.5 million and lower environmental costs of $3.7 million. The increase in depreciation and amortization is primarily due to higher capital expenditures placed in service. The decrease in the gain on the sale of assets primarily resulted from the sale of storage base gas in 2013. Equity Earnings in Unconsolidated Affiliates Equity Earnings in Unconsolidated Affiliates were $12.0 million during the third quarter of 2014 compared to $10.5 million for the third quarter of 2013. Equity Earnings in Unconsolidated Affiliates includes investments in Millennium, Hardy Storage and Pennant, which are integral to the Columbia Pipeline Group Operations' business. Equity earnings increased primarily from increased earnings at Millennium attributable to growth projects placed in service. Other Income (Deductions) Other Income (Deductions) reduced income by $100.4 million in the third quarter of 2014 compared to a reduction in income of $99.0 million in the prior year. The increase in deductions is primarily due to an increase in interest expense of $5.9 million resulting from the issuance of $500.0 million of long-term debt in October 2013 and the expiration of $500.0 million of interest rate swaps in July 2014. These increases were partially offset by the maturity of $500.0 million of long-term debt in July 2014. Other, net of $9.2 million was recorded in 2014 compared to $4.7 million in the prior year. This increase is primarily attributable to current period transmission upgrade agreement income. Income Taxes Income tax expense for the quarter ended September 30, 2014 was $25.9 million compared to $27.9 million in the prior year. NiSource's interim effective tax rates reflect the estimated annual effective tax rates for 2014 and 2013, adjusted for tax expense associated with certain discrete items. The effective tax rates for the quarters ended September 30, 2014 and 2013 were 45.1% and 36.0%, respectively. These effective tax rates differ from the Federal tax rate of 35% primarily due to the effects of tax credits, state income taxes, utility ratemaking, and other permanent book-to-tax differences. The increase in the three month effective tax rate of 9.1% in 2014 versus 2013 is primarily due to a change in the estimated annual effective tax rate due to a revision in estimated nontaxable income during the third quarter of 2014. Refer to Note 10, "Income Taxes," in the Notes to Condensed Consolidated Financial Statements (unaudited) for further discussion of income taxes. Results of Operations Nine Months Ended September 30, 2014 Net Income NiSource reported net income of $375.8 million, or $1.19 per basic share, for the nine months ended September 30, 2014, compared to net income of $380.3 million, or $1.22 per basic share, for the nine months ended 2013. Income from continuing operations was $376.4 million, or $1.19 per basic share, for the nine months ended September 30, 2014, compared to income from continuing operations of $337.9 million, or $1.08 per basic share, for the nine months ended 2013. Operating income was $911.1 million, an increase of $111.8 million from the same period in 2013. All per share amounts are basic earnings per share. Basic average shares of common stock outstanding at September 30, 2014 were 314.9 million compared to 312.1 million at September 30, 2013. Comparability of line item operating results between quarterly periods is impacted by regulatory and tax trackers that allow for the recovery in rates of certain costs such as bad debt expenses. Therefore, increases in these tracked operating expenses are offset by increases in net revenues and have essentially no impact on income from continuing operations. Net Revenues Total consolidated net revenues (gross revenues less cost of sales) for the nine months ended September 30, 2014, were $3,116.0 million, a $323.8 million increase from the same period last year. This increase in net revenues was primarily due to increased Columbia Pipeline Group Operations' net revenues of $148.9 million, higher Gas Distribution Operations' net revenues of $136.9 million, and increased Electric Operations' net revenues of $38.3 million. 39-------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. • Columbia Pipeline Group Operations' net revenues increased primarily due to higher regulatory trackers, which are offset in expense, of $87.6 million, increased demand margin revenue of $34.1 million primarily as a result of growth projects placed in service, higher mineral rights royalty revenue of $20.5 million due to increased third party drilling activity and higher condensate revenue of $3.7 million. • Gas Distribution Operations' net revenues increased primarily due to an increase of $69.9 million for regulatory and service programs, including the impacts of the rate settlement in 2013 at Columbia of Pennsylvania and the implementation of rates under Columbia of Ohio's approved infrastructure replacement program, the effects of colder weather of $19.7 million and increased regulatory and tax trackers, which are offset in expense, of $17.0 million. Additionally, there was higher residential, commercial and industrial usage of $8.8 million, an increase in off-system sales of $5.1 million, higher revenue of $4.9 million due to increased customer count and an increase in large customer revenue of $4.6 million. Also, there were higher net revenues due to increased margins of $3.9 million, higher net revenues from the recovery of storage inventory costs of $3.6 million and a settlement of $3.2 million at Columbia of Massachusetts in 2013. These increases were partially offset by a decrease of $5.8 million resulting from NIPSCO's GCIM. • Electric Operations' net revenues increased primarily due to higher industrial and residential usage of $21.9 million, an increase in the return on the environmental capital investment recovery of $17.3 million due to an increased plant balance eligible for recovery. Additionally, there were increased net revenues of $4.1 million as a result of two electric transmission projects authorized by the MISO and higher off-system sales of $3.9 million. These increases were partially offset by a decrease in transmission upgrade revenue of $6.5 million and the effects of weather of $3.8 million. Operating Expenses Operating expenses for the nine months ended September 30, 2014 were $2,237.8 million, an increase of $219.3 million from the 2013 period. This increase was primarily due to higher operation and maintenance expenses of $188.2 million, increased other taxes of $20.8 million and higher depreciation and amortization of $19.4 million. These increases were partially offset by an increase in the gain on sale of assets of $9.1 million. The increase in operation and maintenance expenses was primarily due to increased regulatory trackers, which are offset in net revenues, of $99.9 million, higher employee and administrative costs of $55.2 million, increased outside service costs of $22.7 million, higher electric generation costs of $14.3 million and an increase of uncollectibles of $4.5 million. These increases were partially offset by lower software data conversion costs of $7.5 million and a decrease in environmental costs of $5.5 million. The increase in other taxes is primarily due to higher property and other taxes of $13.9 million and increased tax trackers, which are offset in net revenues, of $6.9 million. The increase in depreciation and amortization is primarily due to higher capital expenditures placed in service. The increase in the gain on sale of assets primarily results from conveyances of mineral interests of $20.8 million, offset by the sale of storage base gas in 2013 of $11.1 million at Columbia Pipeline Group Operations. Equity Earnings in Unconsolidated Affiliates Equity Earnings in Unconsolidated Affiliates were $32.9 million during the nine months ended September 30, 2014, compared to $25.6 million from the 2013 period. Equity Earnings in Unconsolidated Affiliates includes investments in Millennium, Hardy Storage and Pennant, which are integral to the Columbia Pipeline Group Operations' business. Equity earnings increased primarily from increased earnings at Millennium attributable to growth projects placed in service. Other Income (Deductions) Other Income (Deductions) reduced income by $306.6 million for the nine months ended September 30, 2014, compared to a reduction in income of $282.2 million in the prior year. The increase in deductions is primarily due to an increase in interest expense of $23.5 million resulting from the issuance of $500.0 million of long-term debt in October 2013 and the issuance of $750.0 million of long-term debt in April 2013. These increases were partially offset by the maturity of $500 million of long-term debt in July 2014 and the maturity of $420.3 million of long-term debt in March 2013. 40-------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. Income Taxes Income tax expense for the nine months ended September 30, 2014 was $228.1 million compared to $179.2 million in the prior year. NiSource's interim effective tax rates reflect the estimated annual effective tax rates for 2014 and 2013, adjusted for tax expense associated with certain discrete items. The effective tax rates for the nine months ended September 30, 2014 and 2013 were 37.7% and 34.7%, respectively. These effective tax rates differ from the Federal tax rate of 35% primarily due to the effects of tax credits, state income taxes, utility rate-making, and other permanent book-to-tax differences. The increase in the year-to-date effective tax rate of 3.0% is primarily due to the impact of the Indiana tax rate change, and deferred tax adjustments recorded in 2013 related to state apportionment changes. Refer to Note 10, "Income Taxes," in the Notes to Condensed Consolidated Financial Statements (unaudited) for further discussion of income taxes. Discontinued Operations There was a net loss of $0.6 million in the nine months ended September 30, 2014 from discontinued operations compared to net income of $7.5 million in 2013. The net income in 2013 relates primarily to a settlement at NiSource's former exploration and production subsidiary, CER. A gain on the disposition of discontinued operations of $36.4 million was recorded in the first quarter of 2013 as a result of a gain on the sale of the service plan and leasing business lines of NiSource's Retail Services business. Liquidity and Capital Resources A significant portion of NiSource's operations, most notably in the gas distribution, gas transportation and electric businesses, are subject to seasonal fluctuations in cash flow. During the heating season, which is primarily from November through March, cash receipts from gas sales and transportation services typically exceed cash requirements. During the summer months, cash on hand, together with the seasonal increase in cash flows from the electric business during the summer cooling season and external short-term and long-term financing, is used to purchase gas to place in storage for heating season deliveries and perform necessary maintenance of facilities. NiSource believes that through income generated from operating activities, amounts available under its short-term revolver, commercial paper program and long-term debt agreements and NiSource's ability to access the capital markets, there is adequate capital available to fund its operating activities and capital expenditures in 2014. Operating Activities Net cash from operating activities for the nine months ended September 30, 2014 was $886.5 million, a decrease of $192.1 million compared to the nine months ended September 30, 2013. The decrease in net cash from operating activities was primarily attributable to an income tax refund received in 2013. Pension and Other Postretirement Plan Funding. NiSource expects to make contributions of approximately $38.3 million to its pension plans and approximately $39.1 million to its other postretirement benefit plans in 2014, which could change depending on market conditions. For the nine months ended September 30, 2014, NiSource has contributed $35.3 million to its pension plans and $29.3 million to its other postretirement benefit plans. Investing Activities NiSource's capital expenditures for the nine months ended September 30, 2014 were $1,441.7 million, compared to $1,297.3 million for the comparable period in 2013. This increased spending is mainly due to continued spending on infrastructure replacement programs in the Gas Distributions Operations segment, higher spending in the Columbia Pipeline Group Operations segment for various growth projects primarily in the Marcellus and Utica Shale areas and for expenditures under its modernization program and increased expenditures in the Electric Operations segment primarily due to TDSIC spend. NiSource projects 2014 capital expenditures to be approximately $2.2 billion. Restricted cash was $16.0 million and $8.0 million as of September 30, 2014 and December 31, 2013, respectively. Contributions to equity investees decreased $13.3 million primarily due to lower contributions made by Columbia Transmission to Millennium and NiSource Midstream to Pennant. Refer to the Columbia Pipeline Group Operations segment discussion in the Management's Discussion and Analysis of Financial Condition and Results of Operations for information on these contributions. Financing Activities Credit Facilities. NiSource Finance maintains a $2.0 billion revolving credit facility with a syndicate of banks led by Barclays Capital with a termination date of September 28, 2018. The purpose of the facility is to fund ongoing working capital requirements 41-------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. including the provision of liquidity support for NiSource Finance's $1.5 billion commercial paper program, provide for issuance of letters of credit, and also for general corporate purposes. NiSource Finance's commercial paper program has a program limit of up to $1.5 billion with a dealer group comprised of Barclays, Citigroup, Credit Suisse, RBS and Wells Fargo. Commercial paper issuances are supported by available capacity under NiSource Finance's $2.0 billion unsecured revolving credit facility. NiSource Finance had no borrowings outstanding under its revolving credit facility at September 30, 2014 and December 31, 2013. In addition, NiSource Finance had $1,105.3 million in commercial paper outstanding at September 30, 2014, at a weighted average interest rate of 0.67% and $433.6 million in commercial paper outstanding at December 31, 2013, at a weighted average interest rate of 0.70%. As of September 30, 2014 and December 31, 2013, NiSource had $205.8 million and $265.1 million, respectively, of short-term borrowings recorded on the Condensed Consolidated Balance Sheets (unaudited) and cash from financing activities in the same amount relating to its accounts receivable securitization facilities. See Note 8, "Transfers of Financial Assets," to the Condensed Consolidated Financial Statements (unaudited). As of September 30, 2014, NiSource had $31.2 million of stand-by letters of credit outstanding of which $15.0 million were under the revolving credit facility. At December 31, 2013, NiSource had $31.6 million of stand-by letters of credit outstanding of which $14.3 million were under the revolving credit facility. As of September 30, 2014, an aggregate of $879.7 million of credit was available under the credit facility. Debt Covenants. NiSource is subject to a financial covenant under its revolving credit facility and its three-year term loans, which requires NiSource to maintain a debt to capitalization ratio that does not exceed 70%. A similar covenant in a 2005 private placement note purchase agreement requires NiSource to maintain a debt to capitalization ratio that does not exceed 75%. As of September 30, 2014, the ratio was 61.8%. NiSource is also subject to certain other non-financial covenants under the revolving credit facility and the term loans. Such covenants include a limitation on the creation or existence of new liens on NiSource's assets, generally exempting liens on utility assets, purchase money security interests, preexisting security interests and an additional subset of assets equal to $150 million. An asset sale covenant generally restricts the sale, lease and/or transfer of NiSource's assets to no more than 10% of its consolidated total assets and dispositions for a price not materially less than the fair market value of the assets disposed of that do not impair the ability of NiSource and NiSource Finance to perform obligations under the revolving credit facility, and that, together with all other such dispositions, would not have a material adverse effect. The revolving credit facility and the term loans also include a cross-default provision, which triggers an event of default under the credit facility in the event of an uncured payment default relating to any indebtedness of NiSource or any of its subsidiaries in a principal amount of $50 million or more. NiSource's indentures generally do not contain any financial maintenance covenants. However, NiSource's indentures are generally subject to cross-default provisions ranging from uncured payment defaults of $5 million to $50 million, and limitations on the incurrence of liens on NiSource's assets, generally exempting liens on utility assets, purchase money security interests, preexisting security interests and an additional subset of assets capped at 10% of NiSource's consolidated net tangible assets. Sale of Trade Accounts Receivables. Refer to Note 8, "Transfers of Financial Assets," in the Notes to Condensed Consolidated Financial Statements (unaudited) for information on the sale of accounts receivable. All accounts receivable sold to the commercial paper conduits are valued at face value, which approximates fair value due to their short-term nature. The amount of the undivided percentage ownership interest in the accounts receivables sold is determined, in part, by required loss reserves under the agreements. Credit Ratings. On September 28, 2014, NiSource announced that its Board of Directors has approved in principle plans to separate its natural gas pipeline and related businesses into a stand-alone publicly traded company whereby NiSource will continue as a fully regulated natural gas and electric utilities company. The separation announcement triggered ratings reviews by Standard & Poor's, Moody's, and Fitch. On September 29, 2014, Standard & Poor's affirmed the senior unsecured ratings for NiSource and the existing ratings of its other rated subsidiaries at BBB- and the NiSource Finance commercial paper rating of A-3, placing the company's ratings on watch positive. On September 29, 2014, Moody's Investors Service affirmed the NiSource senior unsecured rating of Baa2 and commercial paper rating of P-2, with a stable outlook. Additionally, Moody's affirmed NIPSCO's Baa1 rating and affirmed the Baa2 rating for Columbia of Massachusetts. On September 29, 2014, Fitch affirmed the senior 42-------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. unsecured ratings for NiSource at BBB-, and the existing ratings of its other rated subsidiaries. Fitch's outlook for NiSource and its subsidiaries is stable. Although all ratings continue to be investment grade, a downgrade by either Standard & Poor's or Fitch would result in a rating that is below investment grade. Certain NiSource affiliates have agreements that contain "ratings triggers" that require increased collateral if the credit ratings of NiSource or certain of its subsidiaries are rated below BBB- by Standard & Poor's or Baa3 by Moody's. These agreements are primarily for insurance purposes and for the physical purchase or sale of power. The collateral requirement that would be required in the event of a downgrade below the ratings trigger levels would amount to approximately $38.9 million. In addition to agreements with ratings triggers, there are other agreements that contain "adequate assurance" or "material adverse change" provisions that could necessitate additional credit support such as letters of credit and cash collateral to transact business. Contractual Obligations. There were no material changes recorded during the nine months ended September 30, 2014 to NiSource's contractual obligations as of December 31, 2013. Market Risk Disclosures Risk is an inherent part of NiSource's energy businesses. The extent to which NiSource properly and effectively identifies, assesses, monitors and manages each of the various types of risk involved in its businesses is critical to its profitability. NiSource seeks to identify, assess, monitor and manage, in accordance with defined policies and procedures, the following principal market risks that are involved in NiSource's energy businesses: commodity price risk, interest rate risk and credit risk. Risk management at NiSource is a multi-faceted process with oversight by the Risk Management Committee that requires constant communication, judgment and knowledge of specialized products and markets. NiSource's senior management takes an active role in the risk management process and has developed policies and procedures that require specific administrative and business functions to assist in the identification, assessment and control of various risks. These include but are not limited to market, operational, financial, compliance and strategic risk types. In recognition of the increasingly varied and complex nature of the energy business, NiSource's risk management process, policies and procedures continue to evolve and are subject to ongoing review and modification. Commodity Price Risk NiSource is exposed to commodity price risk as a result of its subsidiaries' operations involving natural gas and power. To manage this market risk, NiSource's subsidiaries use derivatives, including commodity futures contracts, swaps and options. NiSource is not involved in speculative energy trading activity. Commodity price risk resulting from derivative activities at NiSource's rate-regulated subsidiaries is limited, since regulations allow recovery of prudently incurred purchased power, fuel and gas costs through the ratemaking process, including gains or losses on these derivative instruments. If states should explore additional regulatory reform, these subsidiaries may begin providing services without the benefit of the traditional ratemaking process and may be more exposed to commodity price risk. Some of NiSource's rate-regulated utility subsidiaries offer commodity price risk products to its customers for which derivatives are used to hedge forecasted customer usage under such products. These subsidiaries do not have regulatory recovery orders for these products and are subject to gains and losses recognized in earnings due to hedge ineffectiveness. There are no material commodity price risk assets or liabilities as of September 30, 2014 and December 31, 2013. Interest Rate Risk NiSource is exposed to interest rate risk as a result of changes in interest rates on borrowings under its revolving credit agreement, term loans, commercial paper program and accounts receivable programs, which have interest rates that are indexed to short-term market interest rates. Based upon average borrowings and debt obligations subject to fluctuations in short-term market interest rates, an increase (or decrease) in short-term interest rates of 100 basis points (1%) would have increased (or decreased) interest expense by $5.6 million and $13.6 million for the three and nine months ended September 30, 2014, respectively, and $3.6 million and $10.7 million for the three and nine months ended September 30, 2013, respectively. 43-------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. Credit Risk Due to the nature of the industry, credit risk is embedded in many of NiSource's business activities. NiSource's extension of credit is governed by a Corporate Credit Risk Policy. In addition, Risk Management Committee guidelines are in place which document management approval levels for credit limits, evaluation of creditworthiness, and credit risk mitigation efforts. Exposures to credit risks are monitored by the Corporate Credit Risk function which is independent of commercial operations. Credit risk arises due to the possibility that a customer, supplier or counterparty will not be able or willing to fulfill its obligations on a transaction on or before the settlement date. For derivative related contracts, credit risk arises when counterparties are obligated to deliver or purchase defined commodity units of gas or power to NiSource at a future date per execution of contractual terms and conditions. Exposure to credit risk is measured in terms of both current obligations and the market value of forward positions net of any posted collateral such as cash, letters of credit and qualified guarantees of support. NiSource closely monitors the financial status of its banking credit providers. NiSource evaluates the financial status of its banking partners through the use of market-based metrics such as credit default swap pricing levels, and also through traditional credit ratings provided by major credit rating agencies. Fair Value Measurement NiSource measures certain financial assets and liabilities at fair value. The level of the fair value hierarchy disclosed is based on the lowest level of input that is significant to the fair value measurement. NiSource's financial assets and liabilities include price risk assets and liabilities, available-for-sale securities and a deferred compensation plan obligation. Exchange-traded derivative contracts are generally 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, NiSource may utilize models to measure fair value. 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 in 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 in 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. Refer to Note 7, "Fair Value" in the Notes to the Condensed Consolidated Financial Statements (unaudited) for additional information on NiSource's fair value measurements. Off Balance Sheet Arrangements As a part of normal business, NiSource and certain subsidiaries enter into various agreements providing financial or performance assurance to third parties on behalf of certain subsidiaries. Such agreements include guarantees and stand-by letters of credit. NiSource has purchase and sales agreement guarantees totaling $25.6 million, which guarantee performance of the seller's covenants, agreements, obligations, liabilities, representations and warranties under the agreements. No amounts related to the purchase and sales agreement guarantees are reflected in the Condensed Consolidated Balance Sheets (unaudited). Management believes that the likelihood NiSource would be required to perform or otherwise incur any significant losses associated with any of the aforementioned guarantees is remote. NiSource has other guarantees outstanding. Refer to Note 16-A, "Guarantees and Indemnities," in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information about NiSource's off balance sheet arrangements. 44-------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. Other Information Critical Accounting Policies There were no significant changes to critical accounting policies for the period ended September 30, 2014. Recently Issued Accounting Pronouncements In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 outlines a single, comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The core principle of the new standard is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. NiSource is required to adopt ASU 2014-09 for periods beginning after December 15, 2016, including interim periods, and the new standard is to be applied retrospectively with early adoption not permitted. NiSource is currently evaluating the impact the adoption of ASU 2014-09 will have on its Condensed Consolidated Financial Statements (unaudited) and Notes to Condensed Consolidated Financial Statements (unaudited). In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 changes the criteria for reporting a discontinued operation. Under the new pronouncement, a disposal of a part of an organization that has a major effect on its operations and financial results is a discontinued operation. NiSource is required to adopt ASU 2014-08 prospectively for all disposals or components of its business classified as held for sale during fiscal periods beginning after December 15, 2014. NiSource is currently evaluating what impact, if any, adoption of ASU 2014-08 will have on its Condensed Consolidated Financial Statements (unaudited) and Notes to Condensed Consolidated Financial Statements (unaudited). 45-------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. RESULTS AND DISCUSSION OF SEGMENT OPERATIONSPresentation of Segment Information NiSource's operations are divided into three primary business segments: Gas Distribution Operations, Columbia Pipeline Group Operations and Electric Operations. 46-------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. Gas Distribution Operations Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2014 2013 2014 2013 Net Revenues Sales revenues $ 411.9 $ 409.5 $ 2,594.1 $ 2,127.0 Less: Cost of gas sold (excluding depreciation and amortization) 114.6 131.7 1,294.8 964.6 Net Revenues 297.3 277.8 1,299.3 1,162.4 Operating Expenses Operation and maintenance 208.8 199.1 644.4 614.6 Depreciation and amortization 55.4 51.1 161.7 149.7 Loss (Gain) on sale of assets - 1.3 (0.2 ) 1.2 Other taxes 32.3 31.3 131.0 117.8 Total Operating Expenses 296.5 282.8 936.9 883.3 Operating Income (Loss) $ 0.8 $ (5.0 ) $ 362.4 $ 279.1 Revenues ($ in millions) Residential $ 249.1 $ 235.3 $ 1,646.0 $ 1,331.2 Commercial 77.0 68.7 572.7 452.2 Industrial 36.9 32.0 169.3 140.6 Off System 28.5 54.8 166.3 210.4 Other 20.4 18.7 39.8 (7.4 ) Total $ 411.9 $ 409.5 $ 2,594.1 $ 2,127.0 Sales and Transportation (MMDth) Residential 15.4 15.2 206.9 182.0 Commercial 17.5 16.2 135.0 118.5 Industrial 126.2 120.7 384.7 367.4 Off System 7.1 15.6 35.6 55.7 Other - - (0.1 ) 0.4 Total 166.2 167.7 762.1 724.0 Heating Degree Days 100 94 4,092 3,576 Normal Heating Degree Days 85 85 3,576 3,576 % Colder than Normal 18 % 11 % 14 % - % Customers Residential 3,035,401 3,022,289 Commercial 276,923 276,219 Industrial 7,512 7,488 Other 15 22 Total 3,319,851 3,306,018 NiSource's Gas Distribution Operations serve approximately 3.3 million customers in seven states: Ohio, Indiana, Pennsylvania, Massachusetts, Virginia, Kentucky and Maryland. The regulated subsidiaries offer both traditional bundled services as well as transportation only for customers that purchase gas from alternative suppliers. The operating results reflect the temperature-sensitive nature of customer demand with 74% of annual residential and commercial throughput affected by seasonality. As a result, segment operating income is higher in the first and fourth quarters reflecting the heating demand during the winter season. Regulatory Matters Refer to Note 6, "Regulatory Matters," in the Notes to Condensed Consolidated Financial Statements (unaudited) for information on significant rate developments and cost recovery and trackers for the Gas Distribution Operations segment. 47-------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. Gas Distribution Operations Customer Usage. Increased efficiency of natural gas appliances and improvements in home building codes and standards has contributed to a long-term trend of declining average use per customer. Usage for the nine months ended September 30, 2014 increased from the same period last year primarily due to colder weather compared to the prior year. While historically, rate design at the distribution level has been structured such that a large portion of cost recovery is based upon throughput, rather than in a fixed charge, operating costs are largely incurred on a fixed basis, and do not fluctuate due to changes in customer usage. As a result, the NiSource LDCs have pursued changes in rate design to more effectively match recoveries with costs incurred. Each of the states in which the NiSource LDCs operate has different requirements regarding the procedure for establishing changes to rate design. Columbia of Ohio restructured its rate design through a base rate proceeding and has adopted a "de-coupled" rate design which more closely links the recovery of fixed costs with fixed charges. Columbia of Massachusetts and Columbia of Virginia received regulatory approval of decoupling mechanisms which adjust revenues to an approved benchmark level through a volumetric adjustment factor. Columbia of Maryland has received regulatory approval to implement a residential class revenue normalization adjustment, a decoupling mechanism whereby monthly revenues that exceed or fall short of approved levels are reconciled in subsequent months. In a prior base rate proceeding, Columbia of Pennsylvania implemented a residential weather normalization adjustment charge. In a prior base rate proceeding, NIPSCO implemented a higher fixed customer charge for residential and small customer classes moving toward full straight fixed variable rate design. Environmental Matters Various environmental matters occasionally impact the Gas Distribution Operations segment. As of September 30, 2014, a reserve has been recorded to cover probable and estimable environmental response actions. Refer to Note 16-C, "Environmental Matters," in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information regarding environmental matters for the Gas Distribution Operations segment. Weather In general, NiSource calculates the weather related revenue variance based on changing customer demand driven by weather variance from normal heating degree-days. Normal is evaluated using heating degree days across the NiSource distribution region. While the temperature base for measuring heating degree days (i.e. the estimated average daily temperature at which heating load begins) varies slightly across the region, the NiSource composite measurement is based on 65 degrees. NiSource composite heating degree days reported do not directly correlate to the weather related dollar impact on the results of Gas Distribution Operations. Heating degree days experienced during different times of the year or in different operating locations may have more or less impact on volume and dollars depending on when and where they occur. When the detailed results are combined for reporting, there may be weather related dollar impacts on operations when there is not an apparent or significant change in the aggregated NiSource composite heating degree-day comparison. Weather in the Gas Distribution Operations' territories for the third quarter of 2014 was 18% colder than normal and 6% colder than the third quarter in 2013. Weather in the Gas Distribution Operations' territories for the nine months ended September 30, 2014 was 14% colder than normal and 14% colder than the same period in 2013. Throughput Total volumes sold and transported of 166.2 MMDth for the third quarter of 2014 decreased by 1.5 MMDth from the same period last year. This 0.9% decrease in volumes was primarily attributable to a decrease in off-system sales partially offset by higher industrial throughput. Total volumes sold and transported of 762.1 MMDth for the nine months ended September 30, 2014 increased by 38.1 MMDth from the same period last year. This 5.3% increase in volume was primarily attributable to colder weather. Net Revenues Net revenues for the third quarter of 2014 were $297.3 million, an increase of $19.5 million from the same period in 2013. The increase in net revenues is due primarily to an increase of $10.2 million for regulatory and service programs, including the implementation of rates under Columbia of Ohio's approved infrastructure replacement program and the impacts of the rate case at Columbia of Massachusetts. Additionally, there was an increase in net revenues as result of a settlement of $3.2 million at Columbia of Massachusetts in 2013, increased industrial and commercial usage of $1.4 million, higher net revenues due to increased margins of $1.4 million and higher large customer revenue of $1.3 million. 48-------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. Gas Distribution Operations Net revenues for the nine months ended September 30, 2014 were $1,299.3 million, an increase of $136.9 million from the same period in 2013. The increase in net revenues is due primarily to an increase of $69.9 million for regulatory and service programs, including the impacts of the rate settlement in 2013 at Columbia of Pennsylvania and the implementation of rates under Columbia of Ohio's approved infrastructure replacement program, the effects of colder weather of $19.7 million and increased regulatory and tax trackers, which are offset in expense, of $17.0 million. Additionally, there was higher residential, commercial and industrial usage of $8.8 million, an increase in off-system sales of $5.1 million, higher revenue of $4.9 million due to increased customer count and an increase in large customer revenue of $4.6 million. Also, there were higher net revenues due to increased margins of $3.9 million, higher net revenues from the recovery of storage inventory costs of $3.6 million and a settlement of $3.2 million at Columbia of Massachusetts in 2013. These increases were partially offset by a decrease of $5.8 million resulting from NIPSCO's GCIM. At NIPSCO, sales revenues and customer billings are adjusted for amounts related to under and over-recovered purchased gas costs from prior periods per regulatory order. These amounts are primarily reflected in the "Other" gross revenues statistic provided at the beginning of this segment discussion. The adjustment to Other gross revenues for the three and nine months ended September 30, 2014 was a revenue increase of $10.0 million and $9.7 million, respectively, compared to an increase of $8.1 million and a decrease of $42.4 million for the three and nine months ended September 30, 2013, respectively. Operating Income For the third quarter of 2014, Gas Distribution Operations reported operating income of $0.8 million, an increase of $5.8 million from the comparable 2013 period. Operating income increased as a result of higher net revenues, as described above, partially offset by increased operating expenses. Operating expenses were $13.7 million higher than the comparable period reflecting increased employee and administrative expenses of $12.9 million and higher depreciation of $4.3 million due to increased capital expenditures. These increases were partially offset by a decrease in environmental costs of $3.7 million. For the nine months ended September 30, 2014, Gas Distribution Operations reported operating income of $362.4 million, an increase of $83.3 million from the comparable 2013 period. Operating income increased as a result of higher net revenues, as described above, partially offset by increased operating expenses. Operating expenses were $53.6 million higher than the comparable period reflecting higher employee and administrative expenses of $17.7 million, increased regulatory and tax trackers, which are offset in net revenues, of $17.0 million and higher depreciation of $12.0 million due to increased capital expenditures. Additionally, there was increased other taxes of $6.3 million, higher outside service costs of $4.0 million and increased uncollectibles of $3.7 million. These increases were partially offset by a decrease in environmental costs of $5.8 million. 49-------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. Columbia Pipeline Group Operations Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2014 2013 2014 2013 Net Revenues Transportation revenues $ 194.0 $ 176.4 $ 597.8 $ 558.9 Storage revenues 49.1 48.6 148.3 147.8 Other revenues 74.5 57.7 260.6 151.2 Total Sales Revenues 317.6 282.7 1,006.7 857.9 Less: Cost of sales (excluding depreciation and amortization) - 0.1 0.2 0.3 Net Revenues 317.6 282.6 1,006.5 857.6 Operating Expenses Operation and maintenance 194.4 165.3 565.2 448.0 Depreciation and amortization 29.2 26.7 87.7 78.9 Gain on sale of assets (3.0 ) (11.1 ) (20.8 ) (11.3 ) Other taxes 14.6 13.5 50.3 46.6 Total Operating Expenses 235.2 194.4 682.4 562.2 Equity Earnings in Unconsolidated Affiliates 12.0 10.5 32.9 25.6 Operating Income $ 94.4 $ 98.7 $ 357.0 $ 321.0 Throughput (MMDth) Columbia Transmission 160.9 158.4 814.6 790.8 Columbia Gulf 143.0 134.0 473.3 494.0 Crossroads Pipeline 3.2 4.1 12.4 12.4 Intrasegment eliminations (22.1 ) (36.5 ) (105.3 ) (211.8 ) Total 285.0 260.0 1,195.0 1,085.4 NiSource's Columbia Pipeline Group Operations segment primarily consists of the operations of Columbia Transmission, Columbia Gulf, NiSource Midstream, NEVCO, Crossroads Pipeline, and the equity investments in Pennant, Millennium and Hardy Storage. In total, NiSource owns a pipeline network of approximately 15,000 miles extending from the Gulf of Mexico to New York and the eastern seaboard. The pipeline network serves customers in 16 northeastern, mid-Atlantic, midwestern and southern states, as well as the District of Columbia. In addition, the Columbia Pipeline Group Operations segment operates one of the nation's largest underground natural gas storage systems. Columbia Pipeline Group Operations' most significant projects are as follows: Warren County. The Columbia Pipeline Group Operations segment invested approximately $37 million on an expansion project, which included 2.5 miles of 24-inch new pipeline and modifications to existing compression assets, with Virginia Power Services Energy Corporation, Inc., the energy manager for Virginia Electric and Power Company. This project expanded the Columbia Transmission system in order to provide up to nearly 250,000 Dth per day of transportation capacity under a long-term, firm contract. The project went into service in the second quarter of 2014. West Side Expansion. The Columbia Pipeline Group Operations segment invested approximately $200 million in new pipeline and compression to increase supply origination from the Smithfield and Waynesburg areas on the Columbia Transmission system and provide transportation to Gulf Coast markets on the Columbia Gulf system. This investment will increase capacity up to 444,000 Dth per day from the Smithfield and Waynesburg areas and up to 540,000 Dth per day from Leach to Rayne transporting Marcellus production under long-term, firm contracts. Limited interim service was provided throughout 2014 with the project fully in service in October 2014. Giles County. The Columbia Pipeline Group Operations segment spent approximately $25 million to construct nearly 13 miles of 8-inch pipeline to provide 46,000 Dth per day of firm service to a third party off of its Line VA system into Columbia of Virginia's system. Columbia of Virginia expanded pipeline facilities and an existing direct connection with the third party's plant in Giles County, Virginia. The project was placed into service in October 2014. 50-------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. Columbia Pipeline Group Operations Line 1570 Expansion. The Columbia Pipeline Group Operations segment is replacing approximately 19 miles of 20-inch bare steel pipe with 24-inch pipe from Waynesburg, Pennsylvania to Redd Farm, Pennsylvania at an approximate cost of $20 million. The project also includes the installation of two compressors at Redd Farm and an uprate in horsepower at Waynesburg, increasing capacity by nearly 99,000 Dth per day. The project is expected to be in service in the fourth quarter of 2014. Big Pine Expansion. The Columbia Pipeline Group Operations segment is investing approximately $65 million to make a connection to the Big Pine pipeline and add compression facilities that will add incremental capacity. The additional 9 mile 20-inch pipeline and compression facilities will support Marcellus shale production in western Pennsylvania. Approximately half of the increased capacity generated by the project is expected to be supported by a long-term fee-based agreement with a regional producer, with the remaining capacity expected to be sold to other area producers in the near term. The project is expected to be placed in service by the third quarter of 2015. East Side Expansion. The Columbia Pipeline Group Operations segment plans to invest approximately $275 million in developing its East Side Expansion project, which will provide access for Marcellus supplies to the northeastern and mid-Atlantic markets. Backed by binding precedent agreements, the project will add up to 312,000 Dth per day of capacity, which is expected to be placed in service by the end of the third quarter of 2015. Chesapeake, Virginia LNG Facility Modernization. The Columbia Pipeline Group Operations segment is investing approximately $33 million to upgrade the facility and extend its associated customer contracts for 15 years. The project's first phase was completed in the fourth quarter of 2013. The remainder of the project is expected to be placed into service in the second quarter of 2015. Washington County Gathering. The Columbia Pipeline Group Operations segment is constructing a field gathering system in Pennsylvania that will gather well pad production of primarily dry gas from a third party producer. Pipeline laterals will be built to connect well pads as drilling is developed. The approximate $120 million investment will include about 20 miles of gathering pipelines of varying diameter, a compressor station and dehydration unit. The gas gathering agreement has an initial 15-year term with the option to extend. The project is expected to be in service during the fourth quarter of 2015, with additional expansion expected as gas production grows. Kentucky Power Plant. The Columbia Pipeline Group Operations segment is constructing nearly 3 miles of 16-inch greenfield pipeline from Columbia Transmission's Line P that will serve a third-party natural gas-fired electric generation plant in Kentucky. The project will cost approximately $24 million and will provide 72,000 Dth per day of capacity to the plant under an executed binding precedent agreement. The project is expected to be in service by the end of the second quarter of 2016. Utica Access. The Columbia Pipeline Group Operations segment is investing approximately $51 million to construct nearly 5 miles of 20-inch greenfield pipeline to provide 205,000 Dth per day of new firm service to allow Utica production access to liquid trading points on its system. This project is expected to be in service by the end of the fourth quarter of 2016. Leach XPress. The Columbia Pipeline Group Operations segment will invest approximately $1.4 billion in this project. The project involves the installation of approximately 124 miles of 36-inch pipeline from Majorsville to the Crawford compressor station (Crawford) located on the Columbia Transmission system, and 27 miles of 36-inch pipeline from Crawford to the McArthur compressor station located on the Columbia Transmission system, and approximately 101,700 hp across multiple sites. The project will provide approximately 1.5 Bcf per day of capacity out of the Marcellus and Utica production regions to the Leach compressor station (Leach) located on the Columbia Gulf system, TCO Pool, and other markets on the Columbia Transmission system. Virtually all of the project's capacity has been secured with long-term firm contracts. The project is expected to go in service during the fourth quarter of 2017. Rayne XPress. The Columbia Pipeline Group Operations segment will invest approximately $330 million to modify existing facilities and to add new compression. This project would transport approximately 1 Bcf per day of growing southwest Marcellus and Utica production away from constrained production areas to markets and liquid transaction points. Capable of receiving gas from Columbia Transmission's Leach XPress project, gas would be transported from the Leach, Kentucky interconnect with Columbia Transmission in a southerly direction towards the Rayne compressor station in southern Louisiana to reach various Gulf Coast markets. Definitive agreements for firm service have been secured for the project's capacity. The project is expected to be placed in service by the end of the fourth quarter of 2017. 51-------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. Columbia Pipeline Group Operations WB XPress. The Columbia Pipeline Group Operations segment will invest approximately $870 million in this project that will transport approximately 1.3 Bcf of Marcellus Shale production on the Columbia Transmission system to pipeline interconnects and East Coast markets, which includes access to the Cove Point LNG terminal. Resolution of conditions precedent is anticipated in the fourth quarter of 2014. The project is expected to be placed in service during the fourth quarter of 2018. Cameron Access. The Columbia Pipeline Group Operations segment has entered into binding precedent agreements for the improvement to existing pipeline and the construction of new pipeline and compression facilities along the Columbia Gulf system to connect with the Cameron LNG Terminal in southern Louisiana. The approximately $310 million project will transport supplies from numerous supply basins to the planned LNG export facility, which received Department of Energy approval late in 2013. The project will offer an initial capacity of up to 800,000 Dth per day and is expected to be placed into service by the first quarter of 2018. Equity Investments Pennant. NiSource Midstream entered into a 50:50 joint venture in 2012 with affiliates of Hilcorp to construct new wet natural gas gathering pipeline infrastructure and NGL processing facilities to support natural gas production in the Utica Shale region of northeastern Ohio and western Pennsylvania. NiSource Midstream and Hilcorp jointly own Pennant with NiSource Midstream serving as the operator of Pennant and the facilities. NiSource accounts for the joint venture under the equity method of accounting. Pennant invested in the construction of 20-24 inch wet gas gathering pipeline facilities with a capacity of approximately 500 MMcf per day. In addition, Pennant constructed a gas processing facility in New Middletown, Ohio that will have an initial capacity of 200 MMcf per day and is constructing a NGL pipeline with an initial capacity of 45,000 barrels per day that can be expanded to 90,000 barrels per day. Consistent with the terms of the joint venture, NiSource Midstream operates the gas processing facility, NGL pipeline and associated wet gas gathering system. The joint venture is designed and anticipated to serve other producers with significant acreage development in the area with an interest in obtaining capacity on the system. The facilities allow Pennant to be a full-service solution for providers in the northern Utica Shale region, offering access to wet gas gathering and processing as well as residue gas and NGL takeaway to attractive market destinations. NiSource Midstream's initial investment in this area, including the gathering pipeline, related laterals, NGL pipeline and the processing plant, is approximately $195 million. Portions of the facilities were placed in service in the fourth quarter of 2013 and the second quarter of 2014, with the remainder placed in service in October 2014. During the third quarter of 2014, NiSource Midstream made cash contributions to Pennant totaling $9.0 million. Cash contributions of $41.9 million were made during the same period last year. For the nine months ended September 30, 2014 and 2013, NiSource Midstream made cash contributions to Pennant of $61.2 million and of $68.0 million, respectively. In a separate agreement with Hilcorp, test wells were drilled in 2012 and continued in 2013 to support the development of the hydrocarbon potential on more than 100,000 combined acres in the Utica/Point Pleasant Shale formation. Production wells were drilled in 2013 and 2014, with the full production program in development. NiSource is investing alongside Hilcorp in the development of the acreage, with NiSource owning both a working and overriding royalty interest. All of the Hilcorp/NiSource acreage is dedicated to Pennant. Millennium. Millennium operates approximately 253 miles of pipeline and three compressor stations with approximately 43,000 hp of installed capacity under the jurisdictional authority of the FERC. The Millennium pipeline has the capability to transport natural gas to markets along its route, which lies between Corning, New York and Ramapo, New York, as well as to the New York City market through its pipeline interconnections. Columbia Transmission owns a 47.5% interest in Millennium and acts as operator for the pipeline in partnership with DTE Millennium Company and National Grid Millennium LLC, which each own an equal remaining share of the company. During the third quarter of 2014 and 2013, Columbia Transmission made contributions of zero and $2.4 million, respectively, to Millennium. For the nine months ended September 30, 2014 and 2013, Columbia Transmission made contributions of $2.6 million and $9.0 million, respectively, to fund its share of capital projects. During the third quarter of 2014 and 2013, Columbia Transmission received distributions of earnings of $14.2 million and $6.2 million, respectively. For the nine months ended September 30, 2014 and 2013, Columbia transmission received distributions of earnings of $26.1 million and $17.1 million, respectively. Millennium began two projects in 2012 that added approximately 30,000 hp of compression to its system. The first project went into service in June 2013 and increased capacity at its interconnections with Algonquin Gas Transmission, with a total investment 52-------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. Columbia Pipeline Group Operations of approximately $50 million. The second project included a total investment of approximately $40 million that increased capacity with interconnections to other third-party facilities. The second project was placed into service in March 2014. Columbia Transmission's share of the above investments is limited to its 47.5% interest in Millennium. Hardy Storage. Hardy Storage is a 50:50 joint venture between subsidiaries of Columbia Transmission and Piedmont that consists of 29 storage wells in a depleted gas production field in Hardy and Hampshire counties in West Virginia. Columbia Transmission serves as operator of the company, which is regulated by the FERC. Hardy Storage facilities interconnect with Columbia Transmission and include approximately 37 miles of pipeline and nearly 7,200 hp of installed capacity with a working storage capacity of 12 Bcf and the ability to deliver 176,000 Dth of natural gas per day. During both the third quarter of 2014 and 2013, NiSource received $0.5 million of available accumulated earnings. For the nine months ended September 30, 2014 and 2013, NiSource received $1.5 million and $1.9 million of available accumulated earnings, respectively. NiSource made no contributions during 2014 or 2013. Nature of Sales Columbia Transmission and Columbia Gulf compete for transportation customers based on the type of service a customer needs, operating flexibility, available capacity and price. Columbia Gulf and Columbia Transmission provide a significant portion of total transportation services under firm contracts and derive a smaller portion of revenues through interruptible contracts, with management seeking to maximize the portion of physical capacity sold under firm contracts. Firm service contracts require pipeline capacity to be reserved for a given customer between certain receipt and delivery points. Firm customers generally pay a "capacity reservation" fee based on the amount of capacity being reserved regardless of whether the capacity is used, plus an incremental usage fee when the capacity is used. Annual capacity reservation revenues derived from firm service contracts generally remain constant over the life of the contract because the revenues are based upon capacity reserved and not whether the capacity is actually used. The high percentage of revenue derived from capacity reservation fees mitigates the risk of revenue fluctuations within the Columbia Pipeline Group Operations segment due to changes in near-term supply and demand conditions. For the quarter ended September 30, 2014, approximately 94.6% of the transportation revenues were derived from capacity reservation fees paid under firm contracts and 3.6% of the transportation revenues were derived from usage fees under firm contracts compared to approximately 93.7% and 4.1%, respectively, for the quarter ended September 30, 2013. For the nine months ended September 30, 2014, approximately 93.8% of the transportation revenues were derived from capacity reservation fees paid under firm contracts and 4.3% of the transportation revenues were derived from usage fees under firm contracts compared to approximately 92.9% and 5.3% respectively, for the nine months ended September 30, 2013. Interruptible transportation service is typically short term in nature and is generally used by customers that either do not need firm service or have been unable to contract for firm service. These customers pay a usage fee only for the volume of gas actually transported. The ability to provide this service is limited to available capacity not otherwise used by firm customers, and customers receiving services under interruptible contracts are not assured capacity in the pipeline facilities. Columbia Pipeline Group Operations provides interruptible service at competitive prices in order to capture short term market opportunities as they occur and interruptible service is viewed by management as an important strategy to optimize revenues from the gas transmission assets. For the quarters ended September 30, 2014 and 2013, approximately 1.8% and 2.2%, respectively, of the transportation revenues were derived from interruptible contracts. For the nine months ended September 30, 2014 and 2013, approximately 2.0% and 1.8%, respectively, of the transportation revenues were derived from interruptible contracts. Regulatory Matters Refer to Note 6, "Regulatory Matters," in the Notes to Condensed Consolidated Financial Statements (unaudited) for information on regulatory matters for the Columbia Pipeline Group Operations segment. Environmental Matters Various environmental matters occasionally impact the Columbia Pipeline Group Operations segment. As of September 30, 2014, a reserve has been recorded to cover probable and estimable environmental response actions. Refer to Note 16-C, "Environmental Matters," in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information regarding environmental matters for the Columbia Pipeline Group Operations segment. 53-------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. Columbia Pipeline Group Operations Throughput Columbia Transmission's throughput consists of gas transportation service deliveries to LDC city gates, to gas fired power plants, other industrial customers, or other interstate pipelines in its market area. Columbia Transmission's market area covers portions of northeastern, mid-Atlantic, midwestern, and southern states as well as the District of Columbia. Gas delivered via transportation services to storage is not accounted for as throughput until it is withdrawn from storage and delivered to one of the aforementioned locations via a transportation service. Throughput for Columbia Gulf traditionally consists of gas delivered to Columbia Transmission at Leach, Kentucky as well as gas delivered south of Leach to other interstate pipelines or to an LDC's city gate. Market conditions on Columbia Gulf continue to support greater use of backhaul transportation services from supplies originating near Leach, Kentucky and its Louisiana interconnects to markets in the southeastern United States. Crossroads Pipeline serves customers in northern Indiana and Ohio via gas flowing west to east originating from outside the Chicago area to Cygnet, Ohio where it interconnects with Columbia Transmission. Intra-segment eliminations represent gas delivered to an affiliated pipeline within the segment. Throughput for the Columbia Pipeline Group Operations segment totaled 285.0 MMDth for the third quarter of 2014, compared to 260.0 MMDth for the same period in 2013. The increase of 25.0 MMDth reflected increased Marcellus natural gas production and favorable pricing conditions to third party interconnects in the Southeast region of the United States. Throughput for the Columbia Pipeline Group Operations segment totaled 1,195.0 MMDth for the nine months ended September 30, 2014, compared to 1,085.4 MMDth for the same period in 2013. The increase of 109.6 MMDth was primarily attributable to increased natural gas production on the Columbia Pipeline Group system and the transportation of volumes to third party interconnects mentioned above. Net Revenues Net revenues were $317.6 million for the third quarter of 2014, an increase of $35.0 million from the same period in 2013. The increase in net revenues is due primarily to higher regulatory trackers, which are offset in expense, of $15.6 million, increased demand margin revenue of $11.8 million primarily as a result of growth projects placed in service, higher mineral rights royalty revenue of $5.9 million and increased condensate revenue of $2.6 million. Net revenues were $1,006.5 million for the nine months ended September 30, 2014, an increase of $148.9 million from the same period in 2013. The increase in net revenues is due primarily to higher regulatory trackers, which are offset in expense, of $87.6 million, increased demand margin revenue of $34.1 million primarily as a result of growth projects placed in service, higher mineral rights royalty revenue of $20.5 million due to increased third party drilling activity and higher condensate revenue of $3.7 million. Operating Income Operating income was $94.4 million for the third quarter of 2014, a decrease of $4.3 million from the third quarter of 2013. Operating income decreased as a result of increased operating expenses, partially offset by higher net revenues, as described above, and higher equity earnings. Operating expenses were $40.8 million higher than the comparable period primarily as a result of increased regulatory trackers, which are offset in net revenues, of $15.6 million, higher employee and administrative expenses of $13.5 million, a decrease in gains on the sale of assets of $8.1 million primarily resulting from the sale of storage base gas in 2013, higher outside service costs of $5.8 million, and increased depreciation of $2.5 million. These increases were partially offset by a decrease in software data conversion costs of $7.5 million. Equity earnings increased $1.5 million due to higher earnings at Millennium. Operating income was $357.0 million for the nine months ended September 30, 2014, an increase of $36.0 million from the comparable 2013 period. Operating income increased as a result of higher net revenues, as described above, and higher equity earnings partially offset by increased operating expenses. Operating expenses were $120.2 million higher than the comparable period primarily as a result of increased regulatory trackers, which are offset in net revenues, of $87.6 million, higher employee and administrative expenses of $24.4 million, increased depreciation of $8.8 million, higher outside service costs of $7.5 million and increased property taxes of $3.1 million. These increases were partially offset by an increase in the gain on the sale of assets of $9.5 million primarily resulting from conveyances of mineral interests of $20.8 million, offset by the sale of storage base gas in 2013 of $11.1 million and lower software data conversion costs of $7.5 million. Equity earnings increased $7.3 million due to higher earnings at Millennium attributable to growth projects placed in service. 54-------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. Electric Operations Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2014 2013 2014 2013 Net Revenues Sales revenues $ 424.7 $ 413.7 $ 1,280.5 $ 1,176.4 Less: Cost of sales (excluding depreciation and amortization) 147.5 142.2 474.2 408.4 Net Revenues 277.2 271.5 806.3 768.0 Operating Expenses Operation and maintenance 120.5 107.1 355.2 323.7 Depreciation and amortization 62.4 60.6 182.9 184.2 Gain on sale of assets - - (0.1 ) - Other taxes 17.4 16.3 49.6 47.9 Total Operating Expenses 200.3 184.0 587.6 555.8 Operating Income $ 76.9 $ 87.5 $ 218.7 $ 212.2 Revenues ($ in millions) Residential $ 122.3 $ 122.1 $ 335.7 $ 326.1 Commercial 122.4 116.8 337.3 324.8 Industrial 185.3 155.3 537.0 467.0 Wholesale 4.9 3.1 26.6 20.8 Other (10.2 ) 16.4 43.9 37.7 Total $ 424.7 $ 413.7 $ 1,280.5 $ 1,176.4 Sales (Gigawatt Hours) Residential 915.2 1,000.5 2,604.6 2,633.7 Commercial 1,031.6 1,066.1 2,932.0 2,929.9 Industrial 2,504.7 2,337.2 7,567.6 6,913.1 Wholesale 161.4 108.6 485.3 664.6 Other 36.4 31.3 104.7 91.5 Total 4,649.3 4,543.7 13,694.2 13,232.8 Cooling Degree Days 381 531 657 781 Normal Cooling Degree Days 570 570 799 799 % Colder than Normal (33 )% (7 )% (18 )% (2 )% Electric Customers Residential 401,683 401,174 Commercial 54,383 54,267 Industrial 2,364 2,371 Wholesale 751 728 Other 4 6 Total 459,185 458,546 NiSource generates and distributes electricity, through its subsidiary NIPSCO, to approximately 459 thousand customers in 20 counties in the northern part of Indiana. The operating results reflect the temperature-sensitive nature of customer demand with annual sales affected by temperatures in the northern part of Indiana. As a result, segment operating income is generally higher in the second and third quarters, reflecting cooling demand during the summer season. 55-------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. Electric Operations Electric Supply On October 28, 2011, NIPSCO filed its 2011 Integrated Resource Plan with the IURC. The plan evaluates demand-side and supply-side resource alternatives to reliably and cost-effectively meet NIPSCO customers' future energy requirements over the next twenty years. Existing resources are expected to be sufficient, assuming favorable outcomes for environmental upgrades, to meet customers' needs for the next decade. NIPSCO continues to monitor and assess economic, regulatory and legislative activity, and will update its resource plan as appropriate. Regulatory Matters Refer to Note 6, "Regulatory Matters," in the Notes to Condensed Consolidated Financial Statements (unaudited) for information on significant rate developments and cost recovery and trackers for the Electric Operations segment. Environmental Matters Various environmental matters occasionally impact the Electric Operations segment. As of September 30, 2014, a reserve has been recorded to cover probable and estimable environmental response actions. Refer to Note 16-C, "Environmental Matters," in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information regarding environmental matters for the Electric Operations segment. Transmission Upgrade Agreements On February 11, 2014, NIPSCO entered into TUAs with upgrade sponsors to complete upgrades on NIPSCO's transmission system on behalf of those sponsors. The upgrade sponsors have agreed to reimburse NIPSCO for the total cost to construct transmission upgrades and place them into service, which is estimated at $50.3 million, multiplied by a rate of 1.71 ("the multiplier"). On June 10, 2014, certain upgrade sponsors for both TUAs, filed a complaint at FERC against NIPSCO regarding the multiplier stated in the TUAs. On June 30, 2014, NIPSCO filed an answer defending the terms of the TUAs and the just and reasonable nature of the multiplier charged therein and moved for dismissal of the complaint. NIPSCO will continue to monitor developments in this matter but cannot estimate the impact (if any) on the Condensed Consolidated Financial Statements (unaudited) the complaint will have at this time. Sales Electric Operations sales quantities for the third quarter of 2014 were 4,649.3 gwh, an increase of 105.6 gwh compared to the third quarter of 2013. The 2.3% increase is primarily attributable to an increase in industrial usage due to large industrial customers expanding plant operations and using less internal generation. Electric Operations sales quantities for the nine months ended September 30, 2014 were 13,694.2 gwh, an increase of 461.4 gwh compared to the same period in 2013. The 3.5% increase is primarily attributable to an increase in industrial usage due to large industrial customers expanding plant operations and using less internal generation. Net Revenues Net revenues were $277.2 million for the third quarter of 2014, an increase of $5.7 million from the same period in 2013. The increase in net revenues is due primarily to higher industrial and residential usage of $7.4 million, increased trackers, which are offset in expense, of $4.4 million and an increase in the return on the environmental capital investment recovery of $4.2 million due to an increased plant balance eligible for recovery. These increases were partially offset by the effects of weather of $10.3 million. Net revenues were $806.3 million for the nine months ended September 30, 2014, an increase of $38.3 million from the same period in 2013. The increase in net revenues is due primarily to higher industrial and residential usage of $21.9 million, an increase in the return on the environmental capital investment recovery of $17.3 million due to an increased plant balance eligible for recovery. Additionally, there was increased net revenues of $4.1 million as a result of two electric transmission projects authorized by the MISO and higher off-system sales of $3.9 million. These increases were partially offset by a decrease in transmission upgrade revenue of $6.5 million and the effects of weather of $3.8 million. At NIPSCO, sales revenues and customer billings are adjusted for amounts related to under and over-recovered purchased fuel costs from prior periods per regulatory order. These amounts are primarily reflected in the "Other" gross revenues statistic provided at the beginning of this segment discussion. The adjustment to Other gross revenues for the three and nine months ended 56-------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. Electric Operations September 30, 2014 was a revenue decrease of $22.2 million and an increase of $8.6 million, respectively, compared to a revenue increase of $6.9 million and $6.6 million for the three and nine months ended September 30, 2013, respectively. Operating Income For the third quarter of 2014, Electric Operations reported operating income of $76.9 million, a decrease of $10.6 million from the comparable 2013 period. Operating income decreased as a result of increased operating expenses, partially offset by higher net revenues, as described above. Operating expenses increased $16.3 million due primarily to higher employee and administrative expenses of $5.3 million, an increase in trackers, which are offset in net revenues, of $4.4 million, higher electric generation costs of $3.4 million and increased storm damage costs of $3.3 million. For the nine months ended September 30, 2014, Electric Operations reported operating income of $218.7 million, an increase of $6.5 million from the comparable 2013 period. Operating income increased as a result of higher net revenues, as described above, partially offset by increased operating expenses. Operating expenses increased $31.8 million due primarily to higher employee and administrative expenses of $15.3 million, increased electric generation costs of $14.3 million as a result of maintenance related outages and higher storm damage costs of $2.6 million. 57-------------------------------------------------------------------------------- Table of Contents |