Risk Management Activities | 3 Months Ended |
Mar. 31, 2014 |
Derivative Instruments and Hedges, Assets [Abstract] | ' |
Risk Management And Energy Marketing Activities | ' |
Risk Management Activities |
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NiSource is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are commodity price risk and interest rate risk. Derivative natural gas contracts are entered into to manage the price risk associated with natural gas price volatility and to secure forward natural gas prices. Interest rate swaps are entered into to manage interest rate risk or fair value risk associated with NiSource’s borrowings. NiSource designates some of its commodity forward contracts as cash flow hedges of forecasted purchases of commodities and designates its interest rate swaps as fair value hedges of fixed-rate borrowings. |
Accounting Policy for Derivative Instruments. Unrealized and realized gains and losses are recognized each period as components of AOCI, regulatory assets and liabilities or earnings depending on the designation of the derivative instrument and regulatory accounting treatment. For subsidiaries that utilize derivatives for cash flow hedges, the effective portions of the gains and losses are recorded to AOCI and are recognized in earnings concurrent with the disposition of the hedged risks. If a forecasted transaction corresponding to a cash flow hedge is no longer probable to occur, the accumulated gains or losses on the derivative are recognized currently in earnings. For fair value hedges, the gains and losses are recorded in earnings each period together with the change in the fair value of the hedged item. As a result of the rate-making process, the rate-regulated subsidiaries generally record gains and losses as regulatory liabilities or assets and recognize such gains or losses in earnings when both the contracts settle and the physical commodity flows. These gains and losses recognized in earnings are then subsequently recovered or passed back to customers in revenues through rates. When gains and losses are recognized in earnings, they are recognized in revenues or cost of sales for derivatives that correspond to commodity risk activities and are recognized in interest expense for derivatives that correspond to interest-rate risk activities. |
For its commodity price risk programs, NiSource has elected not to net the fair value amounts of its derivative instruments or the fair value amounts recognized for its right to receive or obligation to pay cash collateral arising from those derivative instruments recognized at fair value, which are executed with the same counterparty under a master netting arrangement. NiSource discloses amounts recognized for the right to reclaim cash collateral within “Restricted cash” and amounts recognized for the obligation to return cash collateral within “Other accruals” on the Condensed Consolidated Balance Sheets (unaudited). |
Commodity Price Risk Programs. |
Commodity price risk program derivatives consist of NYMEX gas options, NYMEX gas futures and FTRs. Contracted gross volumes are as follows: |
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| March 31, 2014 | | December 31, 2013 | | | | | | | | | | | | | | |
Commodity Price Risk Program: | | | | | | | | | | | | | | | | | |
Gas price volatility program derivatives (MMDth) | 13.9 | | | 17 | | | | | | | | | | | | | | | |
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Price Protection Service program derivatives (MMDth) | 0.3 | | | 0.7 | | | | | | | | | | | | | | | |
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DependaBill program derivatives (MMDth) | 0.1 | | | 0.2 | | | | | | | | | | | | | | | |
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Electric energy program FTR derivatives (mw) | — | | | 1,248.00 | | | | | | | | | | | | | | | |
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Interest Rate Risk Activities. NiSource recognizes that the prudent and selective use of derivatives may help it to lower its cost of debt capital and manage its interest rate exposure. NiSource Finance has entered into various “receive fixed” and “pay floating” interest rate swap agreements which modify the interest rate characteristics of a portion of its outstanding long-term debt from fixed to variable rate. These interest rate swaps also serve to hedge the fair market value of NiSource Finance’s outstanding debt portfolio. As of March 31, 2014, NiSource had $7.7 billion of outstanding fixed rate debt, of which $500 million is subject to fluctuations in interest rates as a result of the fixed-to-variable interest rate swap transactions. These interest rate swaps are designated as fair value hedges. NiSource had no net gain or loss recognized in earnings due to hedging ineffectiveness for the three months ended March 31, 2014 and 2013. |
On July 22, 2003, NiSource Finance entered into fixed-to-variable interest rate swap agreements in a notional amount of $500 million with four counterparties which will expire on July 15, 2014. NiSource Finance receives payments based upon a fixed 5.40% interest rate and pays a floating interest amount based on U.S. 6-month BBA LIBOR plus an average of 0.78% per annum. There was no exchange of premium at the initial date of the swaps. |
Contemporaneously with the issuance on September 16, 2005 of $1 billion of its 5.25% and 5.45% notes, maturing September 15, 2017 and 2020, respectively, NiSource Finance settled $900 million of forward starting interest rate swap agreements with six counterparties. NiSource paid an aggregate settlement payment of $35.5 million which is being amortized from AOCI to interest expense over the term of the underlying debt, resulting in an effective interest rate of 5.67% and 5.88%, respectively. As of March 31, 2014, AOCI includes $7.8 million related to forward starting interest rate swap settlement, net of tax. These derivative contracts are accounted for as a cash flow hedge. |
As of March 31, 2014, NiSource holds a 47.5% interest in Millennium. As NiSource reports Millennium as an equity method investment, NiSource is required to recognize a proportional share of Millennium’s OCI. NiSource’s proportionate share of the remaining unrecognized loss associated with settled interest rate swaps was $17.4 million and $17.7 million, net of tax, as of March 31, 2014 and December 31, 2013, respectively. Millennium is amortizing the losses related to these terminated interest rate swaps into earnings using the effective interest method through interest expense as interest payments are made. NiSource records its proportionate share of the amortization as Equity Earnings in Unconsolidated Affiliates in the Condensed Statements of Consolidated Income (unaudited). |
NiSource’s location and fair value of derivative instruments on the Condensed Consolidated Balance Sheets (unaudited) were: |
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Asset Derivatives (in millions) | March 31, | | December 31, | | | | | | | | | | | | |
2014 | 2013 | | | | | | | | | | | | |
Balance Sheet Location | Fair Value | | Fair Value | | | | | | | | | | | | |
Derivatives designated as hedging instruments | | | | | | | | | | | | | | | |
Commodity price risk programs | | | | | | | | | | | | | | | |
Price risk management assets (current) | $ | 0.1 | | | $ | — | | | | | | | | | | | | | |
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Interest rate risk activities | | | | | | | | | | | | | | | |
Price risk management assets (current) | 10.7 | | | 21.2 | | | | | | | | | | | | | |
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Total derivatives designated as hedging instruments | $ | 10.8 | | | $ | 21.2 | | | | | | | | | | | | | |
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Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | |
Commodity price risk programs | | | | | | | | | | | | | | | |
Price risk management assets (current) | $ | 3.6 | | | $ | 1.5 | | | | | | | | | | | | | |
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Price risk management assets (noncurrent) | — | | | 0.5 | | | | | | | | | | | | | |
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Total derivatives not designated as hedging instruments | $ | 3.6 | | | $ | 2 | | | | | | | | | | | | | |
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Total Asset Derivatives | $ | 14.4 | | | $ | 23.2 | | | | | | | | | | | | | |
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There were no significant liability derivatives as of March 31, 2014 and December 31, 2013. |
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As noted in NiSource's accounting policy for derivative instruments, above, for its commodity price risk programs, NiSource has elected not to net fair value amounts for its derivative instruments or the fair value amounts recognized for its right to receive cash collateral or obligation to pay cash collateral arising from those derivative instruments recognized at fair value, which are executed with the same counterparty under a master netting arrangement. |
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The tables below represent the amounts subject to an enforceable master netting arrangement not otherwise disclosed: |
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Offsetting of Derivative Assets (in millions) |
As of March 31, 2014 | | | | | | | | |
| Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Statement of Financial Position | | Net Amounts of Assets Presented in the Statement of Financial Position | | Gross Amounts Not Offset in the Statement of Financial Position | | Net Amount |
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Counterparty B | $ | 3.7 | | | $ | — | | | $ | 3.7 | | | $ | (0.4 | ) | | $ | 3.3 | |
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Other (1) | 10.7 | | | — | | | 10.7 | | | — | | | 10.7 | |
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Total | $ | 14.4 | | | $ | — | | | $ | 14.4 | | | $ | (0.4 | ) | | $ | 14 | |
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Offsetting of Derivative Liabilities (in millions) |
As of March 31, 2014 | | | | | | | | |
| Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Statement of Financial Position | | Net Amounts of Liabilities Presented in the Statement of Financial Position | | Gross Amounts Not Offset in the Statement of Financial Position | | Net Amount |
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Counterparty B | $ | (0.4 | ) | | $ | — | | | $ | (0.4 | ) | | $ | 0.4 | | | $ | — | |
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Total | $ | (0.4 | ) | | $ | — | | | $ | (0.4 | ) | | $ | 0.4 | | | $ | — | |
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Offsetting of Derivative Assets (in millions) |
As of December 31, 2013 |
| Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Statement of Financial Position | | Net Amounts of Assets Presented in the Statement of Financial Position | | Gross Amounts Not Offset in the Statement of Financial Position | | Net Amount |
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Counterparty B | $ | 2.1 | | | $ | — | | | $ | 2.1 | | | $ | (1.7 | ) | | $ | 0.4 | |
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Other (1) | 21.1 | | | — | | | 21.1 | | | — | | | 21.1 | |
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Total | $ | 23.2 | | | $ | — | | | $ | 23.2 | | | $ | (1.7 | ) | | $ | 21.5 | |
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Offsetting of Derivative Liabilities (in millions) |
As of December 31, 2013 |
| Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Statement of Financial Position | | Net Amounts of Liabilities Presented in the Statement of Financial Position | | Gross Amounts Not Offset in the Statement of Financial Position | | Net Amount |
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Counterparty B | $ | (1.7 | ) | | $ | — | | | $ | (1.7 | ) | | $ | 1.7 | | | $ | — | |
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Total | $ | (1.7 | ) | | $ | — | | | $ | (1.7 | ) | | $ | 1.7 | | | $ | — | |
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(1) Amounts in "Other" include fixed-to-variable interest rate swap agreements entered into by NiSource. |
The effect of derivative instruments on the Condensed Statements of Consolidated Income (unaudited) was: |
Derivatives in Cash Flow Hedging Relationships |
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Three Months Ended (in millions) | | | | | | | | | | |
| Amount of Gain | | Location of Loss | | Amount of (Loss) Gain | | |
Recognized in OCI on | Reclassified from AOCI | Reclassified from AOCI | | |
Derivative (Effective | into Income (Effective | into Income (Effective | | |
Portion) | Portion) | Portion) | | |
Derivatives in Cash Flow | March 31, | | March 31, 2013 | | | | March 31, | | March 31, 2013 | | |
Hedging Relationships | 2014 | | 2014 | | |
Commodity price risk programs | $ | 0.1 | | | $ | 0.1 | | | Cost of Sales | | $ | (0.1 | ) | | $ | 0.1 | | | |
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Interest rate risk activities | — | | | — | | | Interest expense, net | | (0.4 | ) | | (0.4 | ) | | |
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Total | $ | 0.1 | | | $ | 0.1 | | | | | $ | (0.5 | ) | | $ | (0.3 | ) | | |
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There was no income statement recognition of gains or losses for the ineffective portion and amounts excluded from effectiveness testing for derivatives in cash flow hedging relationships for the three months ended March 31, 2014 and 2013. |
It is anticipated that during the next twelve months the expiration and settlement of cash flow hedge contracts will result in income statement recognition of amounts currently classified in AOCI of approximately $0.1 million of gain, net of taxes. |
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Derivatives in Fair Value Hedging Relationships |
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Three Months Ended (in millions) | | | | | | | | | | | | | | | |
Derivatives in Fair Value Hedging | Location of Loss Recognized in | | Amount of Loss Recognized | | | | | | | | | | |
Relationships | Income on Derivatives | in Income on Derivatives | | | | | | | | | | |
| | March 31, 2014 | | March 31, 2013 | | | | | | | | | | |
Interest rate risk activities | Interest expense, net | | $ | (10.4 | ) | | $ | (9.7 | ) | | | | | | | | | | |
Total | | | $ | (10.4 | ) | | $ | (9.7 | ) | | | | | | | | | | |
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Three Months Ended (in millions) | | | | | | | | | | | | | | | |
Hedged Item in Fair Value Hedge | Location of Gain Recognized in | | Amount of Gain Recognized | | | | | | | | | | |
Relationships | Income on Related Hedged Item | in Income on Related Hedged Items | | | | | | | | | | |
| | March 31, 2014 | | March 31, 2013 | | | | | | | | | | |
Fixed-rate debt | Interest expense, net | | $ | 10.4 | | | $ | 9.7 | | | | | | | | | | | |
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Total | | | $ | 10.4 | | | $ | 9.7 | | | | | | | | | | | |
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Derivatives not designated as hedging instruments |
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Three Months Ended (in millions) | | | | | | | | | | | | | | |
Derivatives Not Designated as Hedging | Location of Gain (Loss) | | Amount of Realized/Unrealized Gain | | | | | | | | | | |
Instruments | Recognized in | (Loss) Recognized in Income on | | | | | | | | | | |
| Income on Derivatives | Derivatives(1) | | | | | | | | | | |
| | March 31, 2014 | | March 31, 2013 | | | | | | | | | | |
Commodity price risk programs | Gas Distribution revenues | | $ | — | | | $ | 0.1 | | | | | | | | | | | |
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Commodity price risk programs | Cost of Sales | | 6.9 | | | (6.7 | ) | | | | | | | | | | |
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Commodity price risk programs | (Loss) Income from Discontinued Operations - net of taxes | | — | | | 0.2 | | | | | | | | | | | |
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Total | | | $ | 6.9 | | | $ | (6.4 | ) | | | | | | | | | | |
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(1) For the amounts of realized/unrealized gain (loss) recognized in income on derivatives disclosed in the table above, gains of $6.9 million and $6.6 million for the three months ended March 31, 2014 and 2013, respectively, were deferred as allowed per regulatory orders. These amounts will be amortized to income over future periods of up to twelve months as specified in a regulatory order. |
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NiSource’s derivative instruments measured at fair value as of March 31, 2014 and December 31, 2013 do not contain any credit-risk-related contingent features. |
Certain NiSource affiliates have physical commodity purchase agreements that contain “ratings triggers” that require increases in collateral if the credit rating of NiSource or certain of its affiliates are rated below BBB- by Standard & Poor’s or below Baa3 by Moody’s. These agreements are primarily for the physical purchase or sale of natural gas and electricity. The collateral requirement from a downgrade below the ratings trigger levels would amount to approximately $0.9 million. In addition to agreements with ratings triggers, there are some agreements that contain “adequate assurance” or “material adverse change” provisions that could result in additional credit support such as letters of credit and cash collateral to transact business. |
NiSource had $5.3 million and $5.9 million of cash on deposit with brokers and MISO for collateral requirements associated with open derivative positions reflected within “Restricted cash” on the Condensed Consolidated Balance Sheets (unaudited) as of March 31, 2014 and December 31, 2013, respectively. |