Variable Interest Entities and Equity Method Investments

A.Variable Interest Entities. In general, a VIE is an entity which (1) has an insufficient amount of at-risk equity to permit the entity to finance its activities without additional financial subordinated support provided by any other parties, (2) whose at-risk equity owners, as a group, do not have power, through voting rights or similar rights, to direct activities of the entity that most significantly impact the entity’s economic performance or (3) whose at-risk owners do not absorb the entity’s losses or receive the entity’s residual return. A VIE is required to be consolidated by a company if that company is determined to be the primary beneficiary of the VIE.

NiSource consolidates those VIEs for which it is the primary beneficiary. Prior to the adoption of the new FASB guidance on consolidation of variable interest entities, the prevalent method for determining the primary beneficiary was through a quantitative method. With the adoption of the guidance, NiSource also considers qualitative elements in determining the primary beneficiary. These qualitative measures include the ability to control an entity and the obligation to absorb losses or the right to receive benefits.

NiSource’s analysis under GAAP includes an assessment of guarantees, operating leases, purchase agreements, and other contracts, as well as its investments and joint ventures. For items that have been identified as variable interests, or where there is involvement with an identified variable interest entity, an in-depth review of the relationship between the relevant entities and NiSource is made to evaluate qualitative and quantitative factors to determine the primary beneficiary, if any, and whether additional disclosures would be required under the current standard.

Northern Indiana has a service agreement with Pure Air, a general partnership between Air Products and Chemicals, Inc. and First Air Partners LP, under which Pure Air provides scrubber services to reduce sulfur dioxide emissions for Units 7 and 8 at the Bailly Generating Station. Services under this contract commenced on July 1, 1992 and expired on June 30, 2012. The agreement was renewed effective July 1, 2012 for ten years and Northern Indiana will continue to pay for the services under a combination of fixed and variable charges. NiSource has made an exhaustive effort to obtain information needed from Pure Air to determine the status of Pure Air as a VIE. However, Northern Indiana has not been able to obtain this information and as a result, it is unclear whether Pure Air is a VIE and if Northern Indiana is the primary beneficiary. Northern Indiana will continue to request the information required to determine whether Pure Air is a VIE. Northern Indiana has no exposure to loss related to the service agreement with Pure Air and payments under this agreement were $21.6 million and $23.2 million for the years ended December 31, 2012 and 2011, respectively. In accordance with GAAP, the renewed agreement was evaluated to determine whether the arrangement qualifies as a lease. Based on the terms of the agreement, the arrangement qualified for capital lease accounting. As the effective date of the new agreement was July 1, 2012, NiSource capitalized this lease beginning in the third quarter of 2012.

B.Equity Method Investments. Certain investments of NiSource are accounted for under the equity method of accounting. Income and losses from Millennium and Hardy Storage are reflected in Equity Earnings in Unconsolidated Affiliates on NiSource’s Statements of Consolidated Income. These investments are integral to the Gas Transmission and Storage Operations business. Income and losses from all other equity investments are reflected in Other, net on NiSource’s Statements of Consolidated Income. All investments shown as limited partnerships are limited partnership interests.

The following is a list of NiSource’s equity method investments at December 31, 2012:



Investee	Type of Investment	% of Voting Power or Interest Held
The Wellingshire Joint Venture	General Partnership	50.0	%
Hardy Storage Company, L.L.C.	LLC Membership	50.0	%
Pennant Midstream, L.L.C.	LLC Membership	50.0	%
Millennium Pipeline Company, L.L.C.	LLC Membership	47.5	%
House Investments - Midwest Corporate Tax Credit Fund, L.P.	Limited Partnership	12.2	%
Nth Power Technologies Fund II, L.P.	Limited Partnership	4.2	%
Nth Power Technologies Fund II-A, L.P.	Limited Partnership	4.2	%
Nth Power Technologies Fund IV, L.P.	Limited Partnership	1.8	%

As the Millennium and Hardy Storage investments are considered integral to the Gas Transmission and Storage Operations business, the following table contains condensed summary financial data. These investments are accounted for under the equity method of accounting and, therefore, are not consolidated into NiSource’s Consolidated Balance Sheets and Statements of Consolidated Income. These investments are recorded within Unconsolidated affiliates on the Consolidated Balance Sheets and NiSource’s portion of the results are reflected in Equity Earnings in Unconsolidated Affiliates on the Statements of Consolidated Income.

Given the immaterial nature of the other equity method investments, a condensed summary of financial data was determined not to be necessary.



Year Ended December 31, (in millions)	2012		2011		2010
Millennium
Statement of Income Data:
Net Revenues	$	152.3	$	119.3	$	103.9
Operating Income	97.7		63.7		55.9
Net Income	57.1		20.5		22.1
Balance Sheet Data:
Total Assets	1,047.1		1,045.0		1,060.6
Total Liabilities	674.1		703.4		725.5
Total Members’ Equity	373.0		341.6		335.1
Hardy Storage
Statement of Income Data:
Net Revenues	$	24.4	$	24.4	$	23.9
Operating Income	16.4		16.5		16.2
Net Income	10.0		9.7		9.0
Balance Sheet Data:
Total Assets	173.8		176.1		184.8
Total Liabilities	109.4		114.8		124.1
Total Members’ Equity	64.4		61.3		60.7

Equity in the retained earnings of Millennium and Hardy Storage at December 31, 2012 was $19.1 million and $7.5 million, respectively. Contributions to Millennium, Hardy Storage and other equity investees were $20.4 million, $6.4 million, and $87.9 million for 2012, 2011 and 2010, respectively. Millennium distributed $31.4 million and $14.3 million of earnings to Columbia Transmission during 2012 and 2011, respectively. Hardy Storage distributed $3.5 million and $4.5 million of earnings to NiSource during 2012 and 2011, respectively.