SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549


                                    FORM 10-Q


     [X]  QUARTERLY  REPORT  PURSUANT  TO SECTION 13 OR 15(d) OF THE  SECURITIES
EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 1999

                          Commission file number 1-9779

     NiSource Inc. (Exact name of registrant as specified in its charter)


     Indiana  35-1719974  (State  or  other  jurisdiction  of  (I.R.S.  Employer
incorporation or organization) Identification No.)


                801 East 86th Avenue, Merrillville, Indiana 46410
               (Address of principal executive offices) (Zip Code)


       Registrant's telephone number, including area code: (219) 853-5200

      Indicate by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant  was required to file such  reports) and (2) has been subject to such
filing requirements for the past 90 days.


                                Yes   X         No
                               --------            --------

     As of July 31, 1999, 125,036,646 common shares were outstanding.



<PAGE>
NiSource Inc.

                                     PART I.
                              FINANCIAL INFORMATION

Item 1.  Financial Statements

Report of Independent Public Accountants

To The Board of Directors of
NiSource Inc.:

      We have audited the accompanying  consolidated  balance sheets of NiSource
Inc. (an Indiana corporation) and subsidiaries as of June 30, 1999, and December
31,  1998,   and  the  related   consolidated   statements  of  income,   common
shareholders'  equity and cash flows for the three, six and twelve month periods
ended June 30, 1999 and 1998. These  consolidated  financial  statements are the
responsibility of the company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

      We conducted our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

      In our opinion,  the consolidated  financial  statements referred to above
present fairly,  in all material  respects,  the financial  position of NiSource
Inc.  and  subsidiaries  as of June 30, 1999,  and  December  31, 1998,  and the
results of their  operations and their cash flows for the three,  six and twelve
month  periods  ended  June 30,  1999 and 1998,  in  conformity  with  generally
accepted accounting principles.





                                   /s/ Arthur Andersen LLP

Chicago, Illinois
August 06, 1999


<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
                                                              June 30,           December 31,
Assets                                                          1999                 1998
                                                             ==========          ==========
<S>                                                          <C>                 <C>
(In thousands)
Property, Plant and Equipment:
 Utility Plant
    Electric                                                 $    4,198,729      $    4,154,060
    Gas                                                           2,806,833           1,447,945
    Water                                                           701,773             663,355
    Common                                                          362,861             364,822
                                                          ----------------- -------------------
                                                                  8,070,196           6,630,182
    Less -Accumulated depreciation and amortization               3,318,157           2,968,078
                                                          ----------------- -------------------
      Net Utility Plant                                           4,752,039           3,662,104
                                                          ----------------- -------------------
 Other property, at cost, net of accumulated depreciation           133,273              86,565
                                                          ----------------- -------------------
      Net Property, Plant and Equipment                           4,885,312           3,748,669
                                                          ----------------- -------------------
Investments:
 Investments, at equity                                             242,822             111,340
 Investments, at cost                                                53,498              41,609
 Other investments                                                   37,832              28,702
                                                          ----------------- -------------------
      Total Investments                                             334,152             181,651
                                                          ----------------- -------------------
Current Assets:
 Cash and cash equivalents                                           49,816              60,848
 Accounts receivable, less reserve of  $20,516 and
     $8,984, respectively                                           308,681             261,971
 Other receivables                                                   36,702              31,780
 Gas cost adjustment clause                                              --              45,738
 Materials and supplies, at average cost                             64,827              62,818
 Electric production fuel, at average cost                           26,962              32,402
 Natural gas in storage                                              80,358              69,640
 Prepayments and other                                               42,728              41,670
                                                          ----------------- -------------------
      Total Current Assets                                          610,074             606,867
                                                          ----------------- -------------------
Other Assets:
 Regulatory assets                                                  224,661             209,059
 Intangible assets, net of accumulated amortization                 123,401              65,039
 Prepayments and other                                              224,291             175,218
                                                          ----------------- -------------------
      Total Other Assets                                            572,353             449,316
                                                          ----------------- -------------------
                                                             $    6,401,891      $    4,986,503
                                                                 ==========          ==========

     The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>


<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
                                                                  June 30,         December 31,
Capitalization and Liabilities                                     1999                1998
                                                                ===========         ===========
<S>                                                          <C>                 <C>
  (In thousands)
Capitalization:
Common shareholders' equity
  (See accompanying statement)                               $    1,369,127      $    1,149,708
Preferred stocks, excluding amounts due within
     one year-
     Series without mandatory redemption provisions                  85,612              85,613
     Series with mandatory redemption provisions                     55,185              56,435
Company-obligated mandatorily redeemable
  preferred securities of subsidiary trust holding
  solely Company debentures                                         345,000                --
Long-term debt, excluding amounts due within one year             1,844,372           1,667,965
                                                          -----------------   -----------------
           Total Capitalization                                   3,699,296           2,959,721
                                                          -----------------   -----------------
Current Liabilities:
 Current portion of long-term debt                                  163,426               6,790
 Short-term borrowings                                              493,993             411,040
 Accounts payable                                                   243,528             251,399
 Dividends declared on common and preferred stocks                   32,920              31,072
 Customer deposits                                                   25,987              22,199
 Taxes accrued                                                       27,553              44,939
 Interest accrued                                                    29,563              21,202
 Fuel adjustment clause                                               2,737               6,279
 Gas cost adjustment clause                                             609                  --
 Accrued employment costs                                            43,956              52,121
 Other accruals                                                      99,981              39,022
                                                          -----------------   -----------------
      Total Current Liabilities                                   1,164,253             886,063
                                                          -----------------   -----------------
Other:
 Deferred income taxes                                              987,792             667,167
 Deferred investment tax credits, being amortized over
   life of related property                                          98,830              98,177
 Deferred credits                                                   108,802              68,046
 Customer advances and contributions in aid of construction         121,922             118,778
 Accrued liability for postretirement benefits                      151,816             143,870
 Other noncurrent liabilities                                        69,180              44,681
                                                          -----------------   -----------------
      Total Other Liabilities                                     1,538,342           1,140,719
                                                          -----------------   -----------------
Commitments and Contingencies                                $    6,401,891      $    4,986,503
                                                                 ==========          ==========

     The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income

 (In thousands, except for per share amounts)
                                                       Three Months                  Six Months
                                                       Ended June 30,               Ended June 30,
                                                   ---------------------        ---------------------
                                                     1999         1998            1999         1998
                                                   ========     ========        ========     ========
<S>                                             <C>          <C>               <C>          <C>
Operating Revenues:
  Gas                                             $ 308,636    $ 233,347      $  862,532   $  632,263
  Electric                                          276,735      344,935         541,065      667,847
  Water                                              24,031       20,857          44,900       38,566
  Products and Services                              71,344       53,269         123,741       93,076
                                                   ----------   ----------     ----------   ----------
                                                    680,746      652,408       1,572,238    1,431,752
                                                   ----------   ----------     ----------   ----------
Cost of Sales:
 Gas costs                                          225,137      182,311         604,727      476,918
 Fuel for electric generation                        57,630       65,423         115,928      121,017
 Power purchased                                     26,357       95,735          48,407      186,012
 Products and Services                               37,022       26,084          62,611       46,016
                                                   ----------   ----------     ----------   ----------
                                                    346,146      369,553         831,673      829,963
                                                   ----------   ----------     ----------   ----------
Operating Margin                                    334,600      282,855         740,565      601,789
                                                   ----------   ----------     ----------   ----------
Operating Expenses and Taxes:
  Operation                                         128,298       98,048         255,127      194,219
  Maintenance                                        21,913       21,011          44,222       39,958
  Depreciation and amortization                      77,539       63,643         150,448      126,917
  Taxes (except income)                              25,225       21,110          53,234       44,538
                                                   ----------   ----------     ----------   ----------
                                                    252,975      203,812         503,031      405,632
                                                   ----------   ----------     ----------   ----------
Operating Income                                     81,625       79,043         237,534      196,157
                                                   ----------   ----------     ----------   ----------
Other Income (Deductions):
   Interest expense, net                           (40,314)     (31,115)        (77,002)     (61,445)
   Minority interests                               (5,416)           --         (8,124)           --
   Dividend requirements on preferred stock         (2,077)      (2,128)         (4,193)      (4,295)
   Other, net                                           782        (931)           7,866        7,517
                                                   ----------   ----------     ----------   ----------
                                                   (47,025)     (34,174)        (81,453)     (58,223)
                                                   ----------   ----------     ----------   ----------
Income Before Income Taxes                           34,600       44,869         156,081      137,934

Income Taxes                                         11,656       15,424          56,578       47,767
                                                   ----------   ----------     ----------   ----------
Net Income                                        $  22,944    $  29,445      $   99,503   $   90,167
                                                   ========     ========        ========     ========
Average common shares outstanding - basic           124,951      122,181         123,805      123,022

Basic earnings per average common share           $    0.18    $    0.24      $     0.80   $     0.73
                                                   ========     ========        ========     ========
Diluted earnings per average common share         $    0.18    $    0.24      $     0.80   $     0.73
                                                   ========     ========        ========     ========
Dividends declared per common share               $   0.255    $   0.240      $    0.510   $    0.480
                                                   ========     ========        ========     ========

     The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income

 (In thousands, except for per share amounts)
                                                      Twelve Months
                                                      Ended June 30,
                                                  ---------------------
                                                    1999         1998
                                                  ========     ========
<S>                                              <C>          <C>
Operating Revenues:
  Gas                                            $1,440,044   $1,242,778
  Electric                                        1,299,818    1,320,737
  Water                                              90,313       80,514
  Products and Services                             243,089      191,127
                                                  ---------    ---------
                                                  3,073,264    2,835,156
                                                  ---------    ---------
Cost of Sales:
 Gas costs                                        1,052,847      947,513
 Fuel for electric generation                       245,560      246,548
 Power purchased                                    274,685      328,167
 Products and Services                              120,985       94,944
                                                  ---------    ---------
                                                  1,694,077    1,617,172
                                                  ---------    ---------

Operating Margin                                  1,379,187    1,217,984
                                                  ---------    ---------
Operating Expenses and Taxes:
  Operation                                         460,502      395,318
  Maintenance                                        78,894       78,182
  Depreciation and amortization                     280,005      253,962
  Taxes (except income)                              96,903       86,346
                                                  ---------    ---------
                                                    916,304      813,808
                                                  ---------    ---------
Operating Income                                    462,883      404,176
                                                  ---------    ---------
Other Income (Deductions):
   Interest expense, net                          (144,361)    (124,720)
   Minority interests                               (8,124)           --
   Dividend requirements on preferred stock         (8,436)      (8,640)
   Other, net                                        10,933        9,574
                                                  ---------    ---------
                                                  (149,988)    (123,786)
                                                  ---------    ---------
Income Before Income Taxes                          312,895      280,390

Income Taxes                                        109,673       98,448
                                                  ---------    ---------
Net Income                                       $  203,222   $  181,942
                                                   ========     ========
Average common shares outstanding - basic           121,166      124,157

Basic earnings per average common share          $     1.67   $     1.46
                                                   ========     ========
Diluted earnings per average common share        $     1.66   $     1.46
                                                   ========     ========
Dividends declared per common share              $    1.005   $    0.945
                                                   ========     ========

     The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>

<TABLE>
<CAPTION>
Consolidated Statement Of Common Shareholders' Equity

                                                             Additional
(In thousands)                     Common        Treasury      Paid-in       Retained
Three Months Ended                Shares           Shares      Capital       Earnings       Other
========================         ==========     ==========    ==========    ==========    ==========
<S>                              <C>            <C>           <C>           <C>           <C>
Balance, April 1, 1998           $  870,930     $(384,009)    $   89,878    $  697,928    $  (2,159)
Comprehensive Income:
  Net income                                                                    29,445
  Other comprehensive income,
   net of tax:
     Gain/loss on available
      for sale securities:
     Unrealized (net of income
       tax of $77)
     Realized (net of income
       tax of $620)
  Gain (loss) on foreign
   currency translation:
       Unrealized
       Realized
Total Comprehensive Income
Dividends:
 Common shares                                                                (28,708)
Treasury shares acquired                          (74,684)
Issued:
 Employee stock purchase plan                           94           237
 Long-term incentive plan                            2,581           587                     (1,096)
 Amortization of
  unearned compensation                                                                          293
 Other                                                                 2          (32)

                                 ----------     ----------    ----------    ----------    ----------
Balance, June 30, 1998           $  870,930     $(456,018)    $   90,704    $  698,633    $  (2,962)
                                 ==========     ==========    ==========    ==========    ==========

Balance, April 1, 1999           $  870,930     $(459,568)    $  171,586    $  788,551    $  (1,474)
Comprehensive Income:
  Net income                                                                    22,944
  Other comprehensive income,
   net of tax:
     Gain/loss on available for
      sale securities:
     Unrealized (net of income
       tax of $874)
     Realized (net of income tax
       of  $83)
  Gain (loss) on foreign
   currency translation:
       Unrealized
       Realized
Total Comprehensive Income
Dividends:
   Common shares                                                              (31,626)
Treasury shares acquired                             (983)
Issued:
 Employee stock purchase plan                          112           267
 Long-term incentive plan                            2,092            38                       (150)
 Bay State Gas Acquisition                            (15)          (34)
 COLCOM Acquisition                                  2,722           939
 Amortization of
  unearned compensation                                                                          648
 Equity contract costs                                             (408)
Other                                                                            (767)
                                 ----------     ----------    ----------    ----------    ----------
Balance, June 30, 1999           $  870,930     $(455,640)    $  172,388    $  779,102    $    (976)
                                 ==========     ==========    ==========    ==========    ==========
<CAPTION>


<PAGE>


                                 Accumulated                                         Shares
                                   Other                                     --------------------------
   Three Months Ended           Comprehensive               Comprehensive      Common      Treasury
       (continued)                Income          Total         Income         Shares        Shares
========================         ==========     ==========    ==========    ==========    ==========
<CAPTION>
Balance, April 1, 1998           $    3,962     $1,276,530                  $  147,784     $(24,178)
Comprehensive Income:
  Net income                                        29,445        29,445
  Other comprehensive income,
   net of tax:
     Gain/loss on available for
      sale securities:
     Unrealized (net of income
       tax of $77)                      130            130           130
     Realized (net of income tax
       of $620)                     (1,016)        (1,016)       (1,016)
  Gain (loss) on foreign
   currency translation:
       Unrealized                     (660)          (660)         (660)
       Realized                         186            186           186
                                                              ----------
Total Comprehensive Income                                    $   28,085
                                                              ==========
Dividends:
 Common shares                                    (28,708)
Treasury shares acquired                          (74,684)                                   (2,717)
Issued:
 Employee stock purchase plan                          331                                        12
 Long-term incentive plan                            2,072                                       133
 Amortization of
  unearned compensation                                293
Other                                                 (30)
                                 ----------     ----------                  ----------    ----------
Balance, June 30, 1998           $    2,602     $1,203,889                  $  147,784    $ (26,750)
                                 ==========     ==========                  ==========    ==========

Balance, April 1, 1999           $    1,590     $1,371,615                  $  147,784    $ (22,985)
Comprehensive Income:
  Net income                                        22,944        22,944
  Other comprehensive income,
   net of tax:
     Gain/loss on available for
      sale securities:
     Unrealized (net of income
       tax of $874)                   1,431          1,431         1,431
     Realized (net of income tax
       of  $83)                         136            136           136
  Gain (loss) on foreign
   currency translation:
       Unrealized                       166            166           166
                                                              ----------
       Realized
Total Comprehensive Income                                    $   24,677
                                                              ==========
Dividends:
   Common shares                                  (31,626)
Treasury shares acquired                             (983)                                      (36)
Issued:
 Employee stock purchase plan                          379                                        14
 Long-term incentive plan                            1,980                                       104
 Bay State Gas Acquisition                            (49)                                       (1)
 Amortization of
  unearned compensation                                648
COLCOM Acquisition                                   3,661                                       134
Equity contract costs                                (408)
Other                                                (767)
                                 ----------     ----------                  ----------    ----------
Balance, June 30, 1999           $    3,323     $1,369,127                  $  147,784    $ (22,770)
                                 ==========     ==========                  ==========    ==========

The accompanying notes to consolidated financial statements are an integral part
of these statements.

                                                              Additional
(In thousands)                     Common        Treasury      Paid-in       Retained
Six Months Ended                   Shares         Shares       Capital       Earnings       Other
========================         ==========     ==========    ==========    ==========    ==========
<CAPTION>
Balance, January 1, 1998         $  870,930     $(363,943)    $   89,768    $  667,790    $  (2,624)
Comprehensive Income:
  Net income                                                                    90,167
  Other comprehensive income,
   net of tax:
     Gain/loss on available for
      sale securities:
     Unrealized (net of income
       tax of  $761)
     Realized (net of income
       of $620)
  Gain (loss) on foreign
   currency translation:
       Unrealized
       Realized
Total Comprehensive Income
Dividends:
  Common shares                                                               (58,637)
Treasury shares acquired                          (97,982)             2
Issued:
 Employee stock purchase plan                          151           357
 Long-term incentive plan                            5,756           575                     (1,130)
  NEM Acquisition
 Amortization of
  unearned compensation                                                                          792
  Other                                                                2         (687)
                                 ----------     ----------    ----------    ----------    ----------
Balance, June 30, 1998           $  870,930     $(456,018)    $   90,704    $  698,633    $  (2,962)
                                 ==========     ==========    ==========    ==========    ==========

Balance January 1, 1999          $  870,930     $(559,027)    $   94,181    $  744,309    $  (1,815)
Comprehensive Income:
  Net income                                                                    99,503
  Other comprehensive income,
   net of tax:
     Gain/loss on available for
      sale securities:
     Unrealized (net of income
       tax of $1,007)
     Realized (net of income tax
       of  $161)
  Gain (loss) on foreign
   currency translation:
       Unrealized
       Realized
Total Comprehensive Income
Dividends:
   Common shares                                                              (63,733)
Treasury shares acquired                         (108,641)
Issued:
 Employee stock purchase plan                          227           593
 Long-term incentive plan                            3,198           159                       (532)
 Bay State Gas Acquisition                         205,881       109,753
COLCOM Acquisition                                   2,722           939
 Amortization of
  unearned compensation                                                                        1,371
Equity contract costs                                           (33,237)
Other                                                                            (977)
                                 ----------     ----------    ----------    ----------    ----------
Balance, June 30, 1999           $  870,930     $(455,640)    $  172,388    $  779,102    $    (976)
                                 ==========     ==========    ==========    ==========    ==========


                                 Accumulated                                           Shares
                                    Other                                    --------------------------
   Six Months Ended             Comprehensive               Comprehensive      Common      Treasury
     (continued)                   Income         Total         Income         Shares        Shares
========================         ==========     ==========    ==========    ==========    ==========
 Balance, January 1, 1998        $    2,867     $1,264,788                  $  147,784    $ (23,472)
Comprehensive Income:
  Net income                                        90,167        90,167
  Other comprehensive income,
   net of tax:
     Gain/loss on available for
      sale securities:
     Unrealized (net of income
       tax of $761)                   1,249          1,249         1,249
     Realized (net of income tax
        of $620)                    (1,016)        (1,016)       (1,016)
  Gain (loss) on foreign
    currency translation:
       Unrealized                     (684)          (684)         (684)
       Realized                         186            186           186
                                                              ----------
Total Comprehensive Income                                       $89,902
                                                              ==========
Dividends:
 Common shares                                    (58,637)
Treasury shares acquired                          (97,980)                                   (3,627)
Issued:
 Employee stock purchase plan                          508                                        19
 Long-term incentive plan                            5,201                                       330
  NEM Acquisition
 Amortization of
  unearned compensation                                792
Other                                                (685)
                                 ----------     ----------                  ----------    ----------
Balance, June 30, 1998           $    2,602     $1,203,889                  $  147,784    $ (26,750)
                                 ==========     ==========                  ==========    ==========

Balance January 1, 1999          $    1,130     $1,149,708                  $  147,784    $ (30,254)
Comprehensive Income:
  Net income                                        99,503        99,503
  Other comprehensive income,
   net of tax:
     Gain/loss on available for
      sale securities:
     Unrealized (net of income
       tax of $1,007)                 1,648          1,648         1,648
     Realized (net of income tax
       of  $161)                        263            263           263
  Gain (loss) on foreign
    currency translation:
       Unrealized                       282            282           282
                                                              ----------
       Realized
Total Comprehensive Income                                    $  101,696
                                                              ==========
Dividends:
   Common shares                                  (63,733)
Treasury shares acquired                         (108,641)                                   (3,883)
Issued:
 Employee stock purchase plan                          820                                        29
 Long-term incentive plan                            2,825                                       162
 Bay State Gas Acquisition                         315,634                                    11,042
COLCOM Acquisition                                   3,661                                       134
 Amortization of
  unearned compensation                              1,371
Equity contract costs                             (33,237)
Other                                                (977)
                                 ----------     ----------                  ----------    ----------
Balance, June 30, 1999           $    3,323     $1,369,127                  $  147,784    $ (22,770)
                                 ==========     ==========                  ==========    ==========

The accompanying notes to consolidated financial statements are an integral part
of these statements.

                                                              Additional
(In thousands)                     Common        Treasury      Paid-in       Retained
Twelve Months Ended                Shares         Shares       Capital       Earnings       Other
========================         ==========     ==========    ==========    ==========    ==========
<CAPTION>
Balance, July 1, 1997            $  870,930     $(336,416)    $   89,556    $  634,083    $  (3,741)
Comprehensive Income:
  Net income                                                                   181,942
  Other comprehensive income,
   net of tax:
     Gain/loss on available for
      sale securities:
     Unrealized (net of income
       tax of $1,001)
     Realized (net of income
       tax of $620)
  Gain (loss) on foreign
   currency translation:
       Unrealized
       Realized
Total Comprehensive Income
Dividends:
  Common shares                                                              (116,705)
Treasury shares acquired                         (128,534)             1
Issued:
 Employee stock purchase plan                          282           570
 Long-term incentive plan                            8,650           575
IWCR Acquisition                                                                             (1,130)
  NEM Acquisition
 Amortization of
  unearned compensation                                                                        1,909
  Other                                                                2         (687)
                                 ----------     ----------    ----------    ----------    ----------
Balance, June 30, 1998           $  870,930     $(456,018)    $   90,704    $  698,633    $  (2,962)
                                 ==========     ==========    ==========    ==========    ==========

Balance July 1, 1998             $  870,930     $(456,018)    $   90,704    $  698,633    $  (2,962)
Comprehensive Income:
  Net income                                                                   203,222
  Other comprehensive income,
   net of tax:
     Gain/loss on available for
      sale securities:
     Unrealized (net of income
       tax of $1,118)
     Realized (net of income tax
       of  $559)
  Gain (loss) on foreign
   currency translation:
       Unrealized
       Realized
Total Comprehensive Income
Dividends:
   Common shares                                                             (121,692)
Treasury shares acquired                         (214,635)
Issued:
 Employee stock purchase plan                          417         1,125
 Long-term incentive plan                            5,993           159                       (486)
COLCOM Acquisition                                   2,722           939
 Bay State Gas Acquisition                         205,881       109,753
 Amortization of
  unearned compensation                                                                        2,472
 Equity contract costs                                          (33,237)
Other                                                              2,945       (1,061)
                                 ----------     ----------    ----------    ----------    ----------
Balance, June 30, 1999           $  870,930     $(455,640)    $  172,388    $  779,102    $    (976)
                                 ==========     ==========    ==========    ==========    ==========


                                 Accumulated                                          Shares
                                   Other                                     --------------------------
   Twelve Months Ended         Comprehensive                 Comprehensive    Common        Treasury
       (continued)                 Income          Total        Income        Shares         Shares
========================         ==========     ==========    ==========    ==========    ==========
 Balance, July 1, 1997           $    4,005     $1,258,417                  $  147,784    $ (22,317)
Comprehensive Income:
  Net income                                       181,942       181,942
  Other comprehensive income,
   net of tax:
     Gain/loss on available for
      sale securities:
     Unrealized (net of income
       tax of $1,001)                 1,641          1,641         1,641
     Realized (net of income
       tax of $620)                 (1,016)        (1,016)       (1,016)
  Gain (loss) on foreign
   currency translation:
       Unrealized                   (2,214)        (2,214)       (2,214)
       Realized                         186            186           186
                                                              ----------
Total Comprehensive Income                                    $  180,539
                                                              ==========
Dividends:
 Common shares                                   (116,705)
Treasury shares acquired                         (128,533)                                   (4,987)
Issued:
 Employee stock purchase plan                          852                                        36
 Long-term incentive plan                            9,225                                       518
  IWCR Acquisition                                 (1,130)
  NEM Acquisition
 Amortization of
  unearned compensation                              1,909
Other                                                (685)
                                 ----------     ----------                  ----------    ----------
Balance, June 30, 1998           $    2,602     $1,203,889                  $  147,784    $ (26,750)
                                 ==========     ==========                  ==========    ==========

Balance July 1, 1998             $    2,602     $1,203,889                  $  147,784    $ (26,750)
Comprehensive Income:
  Net income                                       203,222       203,222
  Other comprehensive income,
   net of tax:
     Gain/loss on available for
      sale securities:
     Unrealized (net of income
       tax of $1,118)                 1,829          1,829         1,829
     Realized (net of income tax
       of  $559)                      (917)          (917)         (917)
  Gain (loss) on foreign
   currency translation:
       Unrealized                     (191)          (191)         (191)
                                                              ----------
       Realized
Total Comprehensive Income                                    $  203,943
                                                              ==========
Dividends:
   Common shares                                 (121,692)
Treasury shares acquired                         (214,635)                                   (7,565)
Issued:
 Employee stock purchase plan                        1,542                                        52
 Long-term incentive plan                            5,666                                       317
COLCOM Acquisition                                   3,661                                       134
 Bay State Gas Acquisition                         315,634                                    11,042
 Amortization of
  unearned compensation                              2,472
Equity contract costs                             (33,237)
Other                                                1,884
                                 ----------     ----------                  ----------    ----------
Balance, June 30, 1999           $    3,323     $1,369,127                  $  147,784    $ (22,770)
                                 ==========     ==========                  ==========    ==========

The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
(In thousands)
                                                         Three Months                      Six Months
                                                         Ended June 30,                  Ended June 30,
                                                     ---------------------          ---------------------
                                                       1999        1998               1999         1998
                                                     ========     ========          ========     ========
<S>                                                  <C>          <C>               <C>          <C>
Cash flows from operating activities:
 Net income                                          $ 22,944     $ 29,445          $ 99,503     $ 90,167
Adjustments to reconcile net income
 to net cash:
    Depreciation and amortization                      77,539       63,643           150,448      126,917
    Deferred federal and state
         income taxes, net                            (3,822)     (12,610)          (30,750)     (42,650)
    Deferred investment tax credits, net              (1,920)      (1,821)           (3,807)      (3,642)
    Other, net                                          3,412          303           (3,025)      (4,744)
 Change in certain assets and liabilities -*
    Accounts receivable, net                          148,423       12,898           129,445          507
    Other receivables                                   (615)       94,656           (4,922)       74,066
     Natural gas in storage                          (21,261)     (16,553)            30,297       23,860
     Accounts payable                                (86,359)      (4,160)         (142,277)     (17,630)
     Taxes accrued                                   (96,598)     (67,836)           (2,459)       12,477
    Gas cost adjustment clause                        (1,900)       11,147            72,447       63,166
    Accrued employment costs                            4,189      (1,649)          (16,439)     (17,945)
    Other accruals                                    (3,725)      (4,587)            27,725      (8,593)
    Other, net                                       (16,356)      (1,099)             4,984      (4,614)
                                                    ---------    ---------         ---------    ---------
      Net cash provided by operating activities        23,951      101,777           311,170      291,342
                                                    ---------    ---------         ---------    ---------
Cash flows from investing activities:
  Utility construction expenditures                  (77,977)     (64,075)         (136,092)    (112,278)
  Acquisition of businesses,
          net of cash acquired                      (153,765)           --         (716,031)           --
 Proceeds from disposition of assets                    2,144          714            27,560       10,419
 Other, net                                          (26,355)     (15,228)          (42,618)     (41,144)
                                                    ---------    ---------         ---------    ---------
      Net cash used in investing activities         (255,953)     (78,589)         (867,181)    (143,003)
                                                    ---------    ---------         ---------    ---------
Cash flows from financing activities:
 Issuance of long-term debt                           179,516            4           257,771        6,375
Retirement of long-term debt                        (178,354)     (35,026)         (183,072)     (37,573)
Change in short-term debt                             244,020      109,985          (16,350)       40,233
Retirement of preferred shares                        (1,251)      (1,255)           (1,251)      (1,256)
 Proceeds from Corporate Premium
         Income Equity Securities, net                     --           --           334,650           --
 Issuance of common shares                              6,121        3,499           323,472        6,839
 Acquisition of treasury shares                         (983)     (74,684)         (108,641)     (97,982)
 Cash dividends paid on common shares                (31,846)     (29,520)          (61,826)     (59,309)
 Other, net                                               113          117               226          238
                                                    ---------    ---------         ---------    ---------
 Net cash provided by (used in)
 financing activities                                 217,336     (26,880)           544,979    (142,435)
                                                    ---------    ---------         ---------    ---------
Net increase (decrease) in cash and
 cash equivalents                                    (14,666)      (3,692)          (11,032)        5,904

Cash and cash equivalents at
   beginning of the period                             64,482       40,376            60,848       30,780
                                                    ---------    ---------         ---------    ---------
Cash and cash equivalents at
   end of the period                                 $ 49,816     $ 36,684          $ 49,816     $ 36,684
                                                     ========     ========          ========     ========
 *Net of effect from acquisitions of businesses.

The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>

<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
(In thousands)
                                                        Twelve Months
                                                        Ended June 30,
                                                    ----------------------
                                                       1999        1998
                                                    =========    =========
<S>                                                  <C>          <C>
Cash flows from operating activities:
 Net income                                          $203,222     $181,942
Adjustments to reconcile net income
 to net cash:
    Depreciation and amortization                     280,005      253,962
    Deferred federal and state
         income taxes, net                           (10,041)     (11,204)
    Deferred investment tax credits, net              (7,526)      (7,383)
    Other, net                                        (1,021)      (7,377)
 Change in certain assets and liabilities -*
    Accounts receivable, net                          100,278     (55,925)
    Other receivables                                 (3,537)       78,371
    Natural gas in storage                            (1,767)      (2,449)
    Accounts payable                                (104,862)       23,954
    Taxes accrued                                    (24,769)     (19,383)
    Gas cost adjustment clause                         53,534       20,230
    Accrued employment costs                          (5,172)      (3,885)
    Other accruals                                     27,410     (12,063)
    Other, net                                       (16,840)       68,497
                                                    ---------    ---------
      Net cash provided by operating activities       488,914      507,287
                                                    ---------    ---------
Cash flows from investing activities:
  Utility construction expenditures                 (262,116)    (222,538)
  Acquisition of businesses,
     net of cash acquired                           (716,031)           --
  Proceeds from disposition of assets                  29,729       16,637
  Proceeds from settlement of litigation                   --       41,069
  Other, net                                         (51,589)     (76,187)
                                                    ---------    ---------
      Net cash used in investing activities       (1,000,007)    (241,019)
                                                    ---------    ---------
Cash flows from financing activities:
  Issuance of long-term debt                          298,776      256,345
 Retirement of long-term debt                       (241,130)    (360,670)
 Change in short-term debt                            140,435       81,827
 Retirement of preferred shares                       (2,408)      (2,411)
 Proceeds from Corporate Premium
         Income Equity Securities, net                334,650           --
  Issuance of common shares                           326,989       10,072
  Acquisition of treasury shares                    (214,635)    (128,534)
  Cash dividends paid on common shares              (118,903)    (115,807)
  Other, net                                              451          203
                                                    ---------    ---------
 Net cash provided by (used in)
 financing activities                                 524,225    (258,975)
                                                    ---------    ---------
Net increase (decrease) in cash and
 cash equivalents                                      13,132        7,293

Cash and cash equivalents at
   beginning of the period                             36,684       29,391
                                                    ---------    ---------
Cash and cash equivalents at
   end of the period                                 $ 49,816     $ 36,684
                                                    =========    =========
 *Net of effect from acquisitions of businesses.

     The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>

<PAGE>
Notes to Consolidated Financial Statements

(1)  Holding  Company  Structure:  NiSource  Inc.  (NiSource),  formerly  NIPSCO
Industries,  Inc., is an energy and utility-based  holding company headquartered
in Merrillville, Indiana that provides natural gas, electricity and water to the
public for residential,  commercial and industrial uses.  NiSource was organized
as an Indiana holding company in 1987 under the name "NIPSCO Industries,  Inc.,"
and  changed  its name to  NiSource  Inc.  on April 14,  1999 to reflect its new
direction as a  multi-state  supplier of energy and water  resources and related
services.

     NiSource operates primarily in Indiana and New England through wholly-owned
regulated   subsidiaries,   collectively  called  the  "Utilities."   NiSource's
regulated  gas and electric  subsidiaries  are  collectively  referred to as the
"Energy  Utilities."  NiSource's  regulated water  subsidiaries are collectively
called the "Water Utilities."

     The Utilities are subject to regulation  with respect to rates,  accounting
and certain other matters, by the Indiana Utility Regulatory  Commission (IURC),
the Massachusetts  Department of  Telecommunications  and Energy (MDTE), the New
Hampshire  Public  Utilities  Commission  (NHPUC),  the Maine  Public  Utilities
Commission  (MEPUC)  and  the  Federal  Energy  Regulatory   Commission  (FERC),
collectively called the "Commissions."

     Non-regulated energy and utility-related  services are provided through the
wholly-owned  "Products  and  Services"  subsidiaries.   Products  and  Services
subsidiaries  perform  energy-related  services and offer products in connection
with  these  services,  which  include  installing,  repairing  and  maintaining
underground gas pipelines and locating and marking utility lines.

     In addition to the  Utilities  and the Products and Services  subsidiaries,
NiSource has a wholly-owned subsidiary,  NiSource Capital Markets, Inc. (Capital
Markets),  which engages in financing activities for NiSource and certain of its
subsidiaries,  excluding  Northern  Indiana  Public  Service  Company  (Northern
Indiana).

     On June 7, 1999,  NiSource made an offer to acquire  Columbia  Energy Group
(CEG) for $5.7  billion,  or $68 per share of CEG  common  stock,  in cash.  CEG
rejected the offer,  and on June 25, 1999, a tender offer was  commenced for all
outstanding  shares of CEG common stock at $68 per share in cash.  The terms and
conditions of the tender offer are set forth in the Offer to Purchase dated June
25, 1999, as amended, and the related Letter of Transmittal. A commitment letter
has been  accepted  under which  certain  financial  institutions  have  agreed,
subject to specified conditions, to provide $6.0 billion to finance the proposed
acquisition  of  CEG.  CEG's  board  of  directors  has  recommended   that  CEG
shareholders  reject the tender  offer and not tender their  shares.  The tender
offer is subject to a number of uncertainties,  and no assurance can be given as
to whether, or on what terms, CEG will be acquired. As of Friday August 6, 1999,
CEG  shareholders had tendered 49.6 million shares pursuant to the tender offer.
This represents more than 60% of CEG's common shares  outstanding.  NiSource has
extended the tender offer until  October 15, 1999. At June 30, 1999 and July 31,
1999, approximately $5.3 million and $6.2 million,  respectively, in filing fees
and  professional services fees related to the CEG acquisition were capitalized.

       CEG, based in Herndon,  Virginia,  is one of the nation's  leading energy
services  companies,  with 1998  revenues  of $6.6  billion  and  assets of $7.0
billion.  CEG's  subsidiaries  engage in all phases of the natural gas business,
including exploration and production, transmission, storage and distribution, as
well as commodities marketing,  energy management,  and propane sales. CEG sells
natural  gas  to  about  2  million  customers  in  Kentucky,   Maryland,  Ohio,
Pennsylvania,  Virginia and  Washington  D.C. It owns 16,500 miles of interstate
gas pipelines that run from Louisiana to the Northeast.

(2) Summary of Significant Accounting Policies:

Basis  of  Presentation.  The  consolidated  financial  statements  include  the
accounts of NiSource and its  majority-owned  subsidiaries after the elimination
of significant intercompany accounts and transactions.  Investments for which at
least a 20% interest is owned and certain joint ventures are accounted for under
the equity method.  Investments  with less than a 20% interest are accounted for
under the cost method. Certain  reclassifications were made to conform the prior
years' financial statements to the current presentation.

     On April 1, 1999, NiSource acquired all of the stock of TPC Corporation. As
a result of the acquisition, NiSource indirectly owns a 77.3% equity interest in
Market  Hub  Partners, L.P.  (MHP).  However,  NiSource  does  not  control  the
operations  of  MHP  based  upon  the  governance  provisions  included  in  the
partnership agreement.  Accordingly,  NiSource accounts for its interests in MHP
using the equity method of accounting. The consolidated financial statements and
disclosures  include  operating  results  from TPC from the date of  acquisition
through  June  30,  1999.  See  Note  3  for  additional   information  on  this
acquisition.

     On February 12, 1999, NiSource acquired Bay State Gas Company (BSG) and its
subsidiaries. Accordingly, the consolidated financial statements and disclosures
include operating results from BSG from the date of acquisition through June 30,
1999. See Note 3 for additional information on this acquisition.

Use of Estimates.  The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and  assumptions  that affect the reported  amounts of assets and liabilities at
the date of the financial  statements  and the reported  amounts of revenues and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.

Operating  Revenues.  Utility  revenues are recorded based on estimated  service
rendered, but are billed to customers monthly on a cycle basis. Electric and gas
marketing  revenues  are  recognized  as the related  commodity  is delivered to
customers.  Effective  January 1, 1999,  revenues  relating to electric  and gas
trading  operations  are  recorded  based upon changes in the fair values of the
related energy trading  contracts.  Construction  revenues are recognized on the
percentage of completion method whereby revenues are recognized in proportion to
costs  incurred  over  the  life of  each  project.  Provisions  for  losses  on
construction  contracts, if any, are recorded in the period in which such losses
become probable.

     Depreciation  and  Maintenance.  The Utilities  provide  depreciation  on a
straight-line  method over the remaining  service  lives of the  electric,  gas,
water and common  properties.  The approximate  weighted average remaining lives
for major components of electric, gas, and water plant are as follows:
<TABLE>
<CAPTION>
Electric:
---------
<S>                                                          <C>
Electric generation plant                                    24 years
Transmission plant                                           26 years
Distribution plant                                           25 years
Other electric plant                                         24 years

Gas:
Gas storage plant                                            21 years
Transmission plant                                           27 years
Distribution plant                                           30 years
Other gas plant                                              21 years

Water:
Water source and treatment plant                             34 years
Distribution plant                                           68 years
Other water plant                                            13 years
</TABLE>

         The  depreciation  provisions for utility plant, as a percentage of the
original cost, for the  three-month,  six-month and  twelve-month  periods ended
June 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
                              Three Months          Six Months           Twelve Months
                              Ended June30,        Ended June 30,         Ended June 30,
                         -------     ------     -------     ------     -------     -------
                           1999        1998      1999       1998        1999        1998
                         =======     ======     =======     ======     =======     =======
<S>                         <C>        <C>         <C>        <C>         <C>         <C>
Electric                    3.7%       3.7%        3.7%       3.6%        3.7%        3.6%
Gas                         4.3%       5.1%        4.5%       5.2%        4.6%        5.2%
Water                       2.2%       2.0%        2.1%       2.0%        2.2%        2.0%
</TABLE>
         The Utilities follow the practice of charging  maintenance and repairs,
including  the  cost of  removal  of minor  items of  property,  to  expense  as
incurred.  When property that  represents a retired unit is replaced or removed,
the cost of such property is credited to utility plant, and such cost,  together
with the cost of removal less salvage,  is charged to the accumulated  provision
for depreciation.

Amortization  of  Software  Costs.   External  and  incremental  internal  costs
associated with computer  software  developed for internal use are  capitalized.
Capitalization  of such costs  commences upon the completion of the  preliminary
stage of the project. Once the installed software is ready for its intended use,
such capitalized  costs are amortized on a straight-line  basis over a period of
five to ten years which the FERC prescribes as reasonable  useful life estimates
for capitalized software.

Plant Acquisition  Adjustments.  Net utility plant includes amounts allocated to
utility  plant in  excess of the  original  cost as part of the  purchase  price
allocation  associated  with  the  acquisition  of  utility  businesses,  net of
accumulated amortization.  Net plant acquisition adjustments were $727.3 million
and $185.4 million at June 30, 1999 and December 31, 1998, respectively, and are
being   amortized  over  forty-year   periods  from  the  respective   dates  of
acquisition.

Intangible  Assets.  The excess of cost over the fair value of the net assets of
non-utility  businesses  acquired is recorded  as  goodwill.  Goodwill of $117.6
million and $61.9 million at June 30, 1999 and December 31, 1998,  respectively,
is being amortized over a weighted average period of 28 years.  Other intangible
assets,  approximating  $12.5  million  and $7.7  million  at June 30,  1999 and
December 31, 1998,  respectively,  are being  amortized  over periods of four to
eight years. The  recoverability  of intangible assets is assessed on a periodic
basis to confirm that  expected  future cash flows will be sufficient to support
the recorded intangible assets. Accumulated amortization of intangible assets at
June 30, 1999 and  December  31, 1998 was  approximately  $6.7  million and $4.6
million, respectively.

Coal Reserves.  The costs of reserves under a long-term  mining contract to mine
coal reserves through the year 2001 are being recovered  through the rate-making
process as such coal reserves are used to produce electricity.

     Accounts  Receivable.   At  June  30,  1999,  $100.0  million  of  accounts
receivable had been sold under a sales agreement, which expires on May 31, 2002.

Customer Advances and Contributions in Aid of Construction.  Certain  developers
install and provide for the installation of water main extensions, which will be
transferred to NiSource upon completion. The cost of the main extensions and the
amount of any funds advanced for the cost of water mains  installed are included
in customer  advances  for  construction  and are  generally  refundable  to the
customer over a period of ten years.  Advances not refunded within ten years are
permanently transferred to contributions in aid of construction.

Comprehensive  Income.  Comprehensive  income is  reported  in the  consolidated
statements of common  shareholders'  equity. The components of accumulated other
comprehensive income include unrealized gains (losses),  net of income taxes, on
available for sale securities  ("securities")  and unrealized  gains (losses) on
foreign currency translation  adjustments ("foreign currency").  The accumulated
amounts for these components are as follows:

<TABLE>
<CAPTION>
                     June 30,        January 1,       April 1,          June 30,       January 1,         April 1,
(In millions)          1997            1998             1998              1998            1999              1999
                   ----------     -------------    -------------      ------------    -----------         ----------
<S>                   <C>              <C>              <C>              <C>             <C>                 <C>
Securities            $ 4.0            $ 4.4            $ 5.6            $ 4.7           $ 3.6               $ 4.0
Foreign currency      $(.1)            $(1.6)           $(1.6)           $(2.1)          $(2.5)              $(2.4)
</TABLE>

     Statements  of Cash  Flows.  Temporary  cash  investments  with an original
maturity of three months or less are considered to be cash equivalents.

     Cash paid during the periods  reported for income taxes and interest was as
follows:
<TABLE>
<CAPTION>
                                             Three Months                   Six Months                    Twelve Months
                                            Ended June 30,                 Ended June 30,                Ended June 30,
                                       ------------  -----------    ------------  -----------      ------------  ------------
(In thousands)                             1999         1998            1999          1998             1999         1998
                                         =======      =======         =======       =======          =======       =======
<S>                                      <C>          <C>             <C>           <C>              <C>           <C>
Income taxes                             $ 88,713     $ 76,100        $ 90,178      $ 76,100         $ 141,791     $ 131,249
Interest, net of amounts capitalized     $ 41,329     $ 32,637        $ 72,680      $ 56,186         $ 134,573     $ 113,892
</TABLE>

Fuel  Adjustment  Clause.  All metered  electric  rates  contain a provision for
adjustment in charges for electric energy to reflect  increases and decreases in
the cost of fuel and the fuel cost of  purchased  power  through  operation of a
fuel adjustment clause. As prescribed by order of the IURC applicable to metered
retail rates,  the adjustment  factor has been calculated based on the estimated
cost of fuel  and the fuel  cost of  purchased  power  in a  future  three-month
period. If two statutory  requirements relating to expense and return levels are
satisfied,  any  under-recovery  or  over-recovery  caused by variances  between
estimated  and actual cost in a given  three-month  period will be included in a
future filing. Under-recovery or over-recovery is recorded as a current asset or
current  liability until such time as it is billed or refunded to its customers.
The fuel  adjustment  factor is subject to a  quarterly  hearing by the IURC and
remains in effect for a three-month period.

Gas Cost  Adjustment  Clause.  All metered gas sales rates contain an adjustment
factor, which reflects the increases and decreases in the cost of purchased gas,
contracted  gas  storage  and  storage  transportation  charges.  Each  gas cost
adjustment factor is subject to a quarterly or semi-annual  hearing by the state
Commissions  and remains in effect for either a three- or six-month  period.  If
the  statutory  requirement  relating to the level of return for the Indiana gas
utilities is satisfied,  any under-recovery or over-recovery caused by variances
between  estimated and actual cost in a given  three-month  or six-month  period
will be included in a future filing.  Any  under-recovery  or  over-recovery  is
recorded as a current asset or current liability until such time it is billed or
refunded to customers.  Northern Indiana's gas cost adjustment factor includes a
gas cost incentive mechanism (GCIM) which allows the sharing of any cost savings
or cost  increases  with  customers  based on a comparison  of actual gas supply
portfolio cost to a market-based benchmark price.

Natural Gas in Storage. Both the last-in, first-out (LIFO) inventory methodology
and the weighted  average  methodology are used to value natural gas in storage.
Based on the average  cost of gas  purchased  under the LIFO method in June 1999
and December 1998, the estimated replacement cost of gas in storage (current and
non-current)  at June 30, 1999 and  December  31, 1998  exceeded the stated LIFO
cost by $38.5 million and $33.7 million,  respectively.  Inventory  valued using
LIFO was $25.6 million and $50.8 million at June 30, 1999 and December 31, 1998,
respectively.  Inventory valued using the weighted average methodology was $54.8
million and $18.8 million at June 30, 1999 and December 31, 1998, respectively.

Derivatives.  A variety of commodity-based  derivative financial instruments are
utilized to reduce  (hedge) the price risk  inherent in natural gas and electric
operations.  The gains and losses on these derivative financial  instruments are
deferred as assets or liabilities and are recognized in earnings concurrent with
the disposition of the underlying physical commodity.  In certain circumstances,
a derivative  financial  instrument will serve to hedge the acquisition  cost of
natural gas injected into storage.  In this  situation,  the gain or loss on the
derivative  financial instrument is deferred as part of the cost basis of gas in
storage and recognized upon the ultimate disposition of the gas. If a derivative
financial  instrument contract is terminated early because it is probable that a
transaction  or forecasted  transaction  will not occur,  any gain or loss as of
such date is  immediately  recognized  in earnings.  If a  derivative  financial
instrument is terminated for other economic reasons,  any gain or loss as of the
termination  date is deferred and recorded when the  associated  transaction  or
forecasted transaction affects earnings.

Accounting for Energy Trading Activities. Energy trading contracts are accounted
for in  accordance  with  the  Emerging  Issues  Task  Force  Issue  No.  98-10,
"Accounting  for  Contracts  Involved  in  Energy  Trading  and Risk  Management
Activities."  Such  contracts  are recorded at fair value on the balance  sheet,
with the changes in their fair values included in earnings, effective January 1,
1999.
The change in accounting effective January 1, 1999 was insignificant.

Impact of Accounting Standards.  The Financial Accounting Standards Board (FASB)
has  issued Statements of Financial  Accounting  Standards  (SFAS)  No.  133,
"Accounting  for Derivative  Instruments and Hedging  Activities,"  and SFAS No.
137, "Accounting for Derivative  Instruments and Hedging Activities- Deferral of
the Effective  Date of FASB Statement No. 133."  Statement No. 133  standardizes
the  accounting  for  derivative   instruments,   including  certain  derivative
instruments  embedded in other contracts,  by requiring that a company recognize
those items as assets or  liabilities  in the balance  sheet and measure them at
fair value. The Statement  generally provides for matching of the timing of gain
or loss  recognition  of derivative  instruments  designated as a hedge with the
recognition  of  changes  in the fair  value of the  hedged  asset or  liability
through  earnings.  The Statement also provides that the effective  portion of a
hedging  instrument's  gain or loss on a  forecasted  transaction  be  initially
reported  in other  comprehensive  income  and  subsequently  reclassified  into
earnings when the hedged forecasted transaction affects earnings.  Statement No.
137, which was issued in June 1999, deferred implementation of Statement No. 133
until  January 1, 2001.  The impact of adopting  the  accounting  prescribed  in
Statement No. 133 is currently being assessed.

Regulatory  Assets.  The Utilities'  operations are subject to the regulation of
the Commissions and, in the case of certain subsidiaries, FERC. Accordingly, the
Utilities'  accounting  policies are subject to the  provisions  of SFAS No. 71,
"Accounting  for the  Effects of Certain  Types of  Regulation."  The  Utilities
monitor changes in market and regulatory  conditions and the resulting impact of
such changes in order to continue to apply the provisions of SFAS No. 71 to some
or all of their  operations.  As of June 30, 1999,  and  December 31, 1998,  the
regulatory  assets  identified  below represent  probable future revenues to the
Utilities as these costs are recovered  through the  rate-making  process.  If a
portion of the Utilities' operations becomes no longer subject to the provisions
of SFAS No. 71, a write-off  of certain  regulatory  assets  might be  required,
unless some form of transition  cost recovery is established by the  appropriate
regulatory  body which  would meet the  requirements  under  generally  accepted
accounting  principles for continued accounting as regulatory assets during such
recovery period. Regulatory assets were comprised of the following items:
<TABLE>
<CAPTION>
                                            June 30,         December 31,
(In thousands)                                1999               1998
         .........                          ========           ========
<S>                                         <C>                <C>
Unamortized reacquisition premium
   on debt (see Note 19)                    $ 41,476           $ 43,233
Unamortized R. M. Schahfer Unit 17
   and Unit 18 carrying charges and
    deferred depreciation (see below)         60,220             62,329
Bailly scrubber carrying charges and
   deferred depreciation (see below)           8,477              8,945
Deferral of SFAS No. 106 expense not
    recovered (see Note 8)                    78,433             81,339
FERC Order No. 636 transition costs           16,852             22,093
Regulatory income tax asset, net              33,445             18,793
Other                                         13,127              4,936

                                            --------           --------
                                             252,030            241,668
Less: Current portion of regulatory assets    27,369             32,609
                                            --------           --------
                                            $224,661           $209,059
                                            ========           ========
</TABLE>

Carrying  Charges and Deferred  Depreciation.  Upon completion of R. M. Schahfer
Units 17 and 18, carrying charges and deferred  depreciation were capitalized in
accordance  with  orders of the IURC until the cost of each unit was  allowed in
rates. Such carrying charges and deferred  depreciation are being amortized over
the remaining life of each unit.

     Carrying charges and deferred  depreciation and certain operating  expenses
relating to its scrubber  service  agreement for its Bailly  Generating  Station
have been  capitalized in accordance  with an order of the IURC. The accumulated
balance of the deferred costs and related  carrying  charges is being  amortized
over the remaining life of the scrubber service agreement.

Allowance  for Funds Used During  Construction.  Allowance for funds used during
construction  (AFUDC) is charged to  construction  work in  progress  during the
period of  construction  and  represents the net cost of borrowed funds used for
construction  purposes and a reasonable  rate upon other (equity)  funds.  Under
established regulatory rate practices,  after the construction project is placed
in service,  the  Utilities  are  permitted to include in the rates  charged for
utility  services  (a) a fair  return  on and (b)  depreciation  of  such  AFUDC
included in plant in service.

 AFUDC was calculated using a weighted average pretax rate as follows:
<TABLE>
<CAPTION>
                                                 June 30,        June 30,
                                                   1999            1998
                                                ---------        ---------
      <S>                                          <C>              <C>
      Three months ended                           8.63%            8.54%
      Six months ended                             8.71%            8.60%
      Twelve months ended                          8.84%            8.85%
</TABLE>

Foreign  Currency  Translation.  Translation  gains or losses are based upon the
end-of-period  exchange  rate and are recorded as a separate  component of other
comprehensive  income reflected in the consolidated  statements of shareholders'
equity.

Investments In Real Estate. A series of affordable  housing projects are held as
investments and accounted for using the equity method. These investments include
certain  tax  benefits,   including  low-income  housing  tax  credits  and  tax
deductions for operating losses of the housing projects. Investments, at equity,
include $34.5 million and $34.0 million relating to affordable  housing projects
at June 30, 1999 and December 31, 1998, respectively.

Income Taxes.  The liability method of accounting is used for income taxes under
which  deferred  income taxes are  recognized,  at currently  enacted income tax
rates, to reflect the tax effect of temporary  differences  between the book and
tax bases of assets and liabilities.  Deferred  investment tax credits are being
amortized over the life of the related property.

(3) Acquisitions. On February 12, 1999, the acquisition of BSG was completed for
approximately  $560.1  million.  The $237.7 million cash portion was financed by
the issuance of 6.9 million Corporate Premium Income Equity Securities (see Note
19). The acquisition was accounted for as a purchase, and the purchase price was
allocated  to the  assets  acquired  and  liabilities  assumed  based  on  their
estimated  fair  values.  BSG, one of the largest  natural gas  utilities in New
England,  provides  natural gas  distribution to more than 300,000  customers in
Massachusetts and, through its wholly-owned subsidiary Northern Utilities, Inc.,
New  Hampshire  and  Maine.  The  accompanying  financial  statements  reflect a
preliminary allocation of the purchase price since the purchase price allocation
has not been finalized.

     Assets  acquired and  liabilities  assumed in the  acquisition  of BSG were
comprised of the following:
<TABLE>
<CAPTION>
<S>                                                                   <C>
(In thousands) Assets acquired:
      Utility plant, net of accumulated depreciation                  $1,081,874
      Intangible assets                                                   16,264
      Other current assets                                               177,148
      Other noncurrent assets                                             75,126
                                                                      ----------
                                                                       1,350,412
Less liabilities assumed:
      Long-term debt                                                     244,337
      Short-term debt                                                    100,295
      Other current liabilities                                          122,408
         Deferred taxes                                                  297,477
      Other noncurrent liabilities                                        25,765
                                                                      ----------
                                                                         790,282
                                                                      ----------
Net assets acquired                                                    $ 560,130
                                                                     ===========
</TABLE>

On a pro forma basis,  NiSource's consolidated results of operations for the six
months and twelve months ended June 30, 1999, including BSG, would have been:
<TABLE>
<CAPTION>

                                                           UNAUDITED
         (In thousands)                            Six Months     Twelve Months
                                                   ==========      ==========
      <S>                                          <C>              <C>
      Operating revenue                            $1,650,540       $3,304,150
      Operating income                             $  246,421       $  463,621
      Net income                                   $  102,293       $  189,844
</TABLE>

     Pro forma adjustments primarily reflect adjustments for the addition of the
plant  acquisition  adjustment  and  intangible  assets,  the  issuance  of  the
applicable  Corporate  Premium Income Equity  Securities  and additional  income
taxes,  as if the  acquisition had occurred on January 1, 1999 for the six month
results and on July 1, 1998 for the twelve month results.

     On  April  1,  1999,   NiSource indirectly acquired  the  stock  of  TPC
Corporation,  a  Houston-based  natural gas marketing and storage  company,  for
approximately  $150 million.  The  acquisition  was accounted for as a purchase,
with the purchase price allocated to the assets and  liabilities  acquired based
on  their  estimated  fair  values.  TPC  Corporation  has  an  indirect  equity
investment  in the amount of $107.5 million, representing a 66% interest in
Market Hub  Partners,  L.P.,  which  stores  natural  gas in salt  caverns.  The
accompanying  financial  statements  reflect  a  preliminary  allocation  of the
purchase price since the purchase price allocation has not been finalized.

(4) NESI Energy Marketing Canada Ltd. Litigation:  On October 31, 1996, NiSource
Energy  Services  Canada,  Ltd.  (NESI Canada)  acquired 70% of the  outstanding
shares of NESI Energy  Marketing  Canada,  Ltd.  (NEMC).  Between November 1 and
November 27, 1996, gas prices in the Calgary market increased dramatically. As a
result,  NEMC was selling gas  pursuant to  contracts  entered into prior to the
acquisition date, at prices  substantially  below its costs to acquire such gas.
On November 27, 1996, NEMC ceased doing business and sought  protection from its
creditors under the Companies'  Creditors  Arrangement Act, a Canadian corporate
reorganization statute.
NEMC was declared bankrupt as of December 12, 1996.

     Certain  creditors of NEMC have filed claims in the Canadian courts against
NiSource  alleging  certain  misrepresentations  relating  to  NEMC's  financial
condition and claiming  damages.  In addition,  certain  creditors of NEMC have,
through the Canadian  bankruptcy court,  asserted  fraudulent transfer and other
claims against NiSource,  Capital Markets, NI Energy Services, Inc., NESI Canada
and the directors of NEMC.  NiSource  intends to vigorously  defend against such
claims and any other claims  seeking to assert that any party other than NEMC is
responsible for NEMC's  liabilities.  Management believes that any loss relating
to  NEMC  would  not be  material  to  the  financial  position  or  results  of
operations.

(5) Environmental  Matters:  General.  The operations of NiSource are subject to
extensive  and  evolving  federal,   state  and  local  environmental  laws  and
regulations  intended to protect  the public  health and the  environment.  Such
environmental laws and regulation affect operations as they relate to impacts on
air, water and land.

Superfund. Because NiSource is a "potentially responsible party" (PRP) under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) at
several waste disposal sites, as well as at former  manufactured-gas plant sites
which it, or its  corporate  predecessors,  own or owned or operated,  it may be
required  to  share  in the  cost of  clean  up of such  sites.  A  program  was
instituted to investigate  former  manufactured-gas  plant sites where it is the
current or former owner, which investigation has identified  forty-nine of these
sites.   Initial  sampling  has  been  conducted  at  thirty  sites.   Follow-up
investigations  have been conducted at nineteen sites and remedial measures have
been selected at fourteen  sites.  NiSource  intends to continue to evaluate its
facilities and properties with respect to environmental laws and regulations and
take any required corrective action.

     In an effort to recover a portion of the  remedial  costs to be incurred at
the manufactured gas plants,  various companies that provided insurance coverage
which NiSource  believed  covered costs related to actions taken and to be taken
at former  manufactured-gas  plant  sites were  approached.  NiSource  has filed
claims in Indiana  state court  against  various  insurance  companies,  seeking
coverage  for costs  associated  with several  manufactured-gas  plant sites and
damages  for  alleged  misconduct  by  some  of the  insurance  companies.  Cash
settlements have been received from several insurance  companies.  Additionally,
agreements have been reached with other  utilities  relating to cost sharing and
management   of  the   investigation   and   remediation   of   several   former
manufactured-gas  plant  sites at which  NiSource  and such  utilities  or their
predecessors were operators or owners.

     Bay  State  Gas  and  Northern  Utilities,  Inc.  have  rate  recovery  for
environmental response costs in Maine, Massachusetts and New Hampshire. The rate
treatment  allows  for the  recovery  of 100% of  prudently  incurred  costs for
investigation  and  remediation  over a 5-7 year  period  from date of  payment.
Recoveries from third parties or insurance  companies in Maine and Massachusetts
are allocated 50% to rate payers and 50% to shareholders.  In New Hampshire 100%
of any recoveries from third parties or insurance companies are returned to rate
payers.

      As of June 30,  1999,  a reserve of  approximately  $26  million  has been
recorded  to cover  probable  corrective  actions.  The  ultimate  liability  in
connection with these sites will depend upon many factors,  including the volume
of  material  contributed  to the  site,  the  number  of other  PRPs and  their
financial  viability,  the  extent  of  corrective  actions  required  and  rate
recovery.  Based upon  investigations and management's  understanding of current
environmental  laws and  regulations,  NiSource  believes  that  any  corrective
actions required, after consideration of insurance coverages, contributions from
other  PRPs,  and  rate  recovery  will  not have a  significant  impact  on its
financial position or results of operations.

Clean Air Act. The Clean Air Act  Amendments  of 1990 (CAAA)  imposed  limits to
control  acid rain on the emission of sulfur  dioxide and nitrogen  oxides (NOx)
which become fully  effective in 2000. All of NiSource's  facilities are already
in compliance with the sulfur dioxide limits. NiSource has already taken most of
the steps necessary to meet the NOx limits.

     The CAAA also contain other  provisions  that could lead to  limitations on
emissions of hazardous air pollutants and other air pollutants (including NOx as
discussed below), which may require significant capital expenditures for control
of these emissions. Until specific rules have been issued that affect NiSource's
facilities, what these requirements will be or the costs of complying with these
potential requirements can not be predicted.

Nitrogen Oxides. During 1998, the Environmental Protection Agency (EPA) issued a
final rule,  the NOx State  Implementation  Plan (SIP) call,  requiring  certain
states,  including Indiana,  to reduce NOx levels from several sources including
industrial and utility boilers. The EPA stated that the intent of the rule is to
lower regional  transport of ozone impacting other states' ability to attain the
federal ozone  standard.  According to the rule, the State of Indiana must issue
regulations  implementing the control program.  The State of Indiana, as well as
some other states,  filed a legal  challenge in December 1998 to the EPA NOx SIP
call rule.  Lawsuits have also been filed against the rule by various groups. On
May 25, 1999, the D.C.  Circuit Court of Appeals issued an order staying the NOx
SIP call rule's  September  30, 1999  deadline  for the state  submittals  until
further order of the court. Any resulting NOx emission limitations could be more
restrictive  than those  imposed on electric  utilities  under the acid rain NOx
reduction program  described above.  NiSource is evaluating the EPA's final rule
and any  potential  requirements  that  could  result  from  the  final  rule as
implemented by the State of Indiana.  NiSource  believes that the costs relating
to compliance with the new standards may be  substantial,  but such costs depend
upon the outcome of the current  litigation  and the  ultimate  control  program
agreed to by the targeted states and the EPA.  NiSource will continue to closely
monitor developments in this area.

     The EPA issued  final  rules  revising  the  National  Ambient  Air Quality
Standards for ozone and  particulate  matter in July 1997. On May 14, 1999,  the
United  States Court of Appeals for the D.C Circuit  remanded both the new ozone
and particulate matters to the EPA. Once rectified,  the revised standards could
require  additional  reductions in sulfur  dioxide,  particulate  matter and NOx
emissions from coal-fired boilers  (including  NiSource's  generating  stations)
beyond measures discussed above. Final implementation methods will be set by the
EPA as well as state regulatory  authorities.  NiSource  believes that the costs
relating to compliance  with any new limits may be substantial but are dependent
upon the ultimate  control program agreed to by the targeted states and the EPA.
NiSource  will  continue  to  closely  monitor  developments  in this  area  and
anticipates  the exact nature of the impact of the new limits on its  operations
will not be known for some time.

Carbon  Dioxide.  Initiatives  are being discussed both in the United States and
worldwide to reduce so-called "greenhouse gases" such as carbon dioxide which is
a by-product of burning fossil fuels.  Reduction of such emissions  could result
in significant capital outlays or operating expenses to NiSource.

Clean Water Act and Related Matters.  NiSource's wastewater and water operations
are  subject  to  pollution  control  and  water  quality  control  regulations,
including  those  issued  by the EPA  and  the  States  of  Indiana,  Louisiana,
Massachusetts and Texas.

     Under  the  Federal  Clean  Water  Act  and  Indiana's  and   Massachusetts
regulations,  NiSource must obtain National Discharge Elimination System permits
for water discharges from various facilities,  including electric generating and
water  treatment  stations and a propane  plant.  These  facilities  either have
permits for their water  discharge or they have applied for a permit  renewal of
any expiring  permits.  These permits  continue in effect  pending review of the
current applications.

     Under the Federal Safe Drinking Water Act (SDWA),  the Water  Utilities are
subject to  regulation  by the EPA for the  quality of water sold and  treatment
techniques   used   to   make   the   water   potable.   The   EPA   promulgates
nationally-applicable  maximum  contaminant levels (MCLs) for contaminants found
in drinking water. Management believes that the Water Utilities are currently in
compliance with all MCLs promulgated to date. The EPA has continuing  authority,
however,  to issue  additional  regulations  under  the SDWA.  In  August  1996,
Congress amended the SDWA to allow the EPA more authority to weigh the costs and
benefits  of  regulations  being  considered  in some,  but not all,  cases.  In
December 1998, EPA promulgated two National  Primary  Drinking Water rules,  the
Interim  Enhanced  Surface  Water  Treatment  Rule  and  the  Disinfectants  and
Disinfection  Byproducts  Rule. The Water Utilities must comply with these rules
by December 2001.  Management does not believe that significant  changes will be
required  for the Water  Utilities'  operations  to  comply  with  these  rules;
however, some cost expenditures for equipment  modifications or enhancements may
be necessary to comply with the Interim  Enhanced  Surface Water Treatment Rule.
Additional  rules are anticipated to be promulgated  under the 1996  amendments.
Such rules could be costly and could  require  substantial  changes in the Water
Utilities' operations.

     Under a 1991 law enacted by the Indiana  legislature,  a water  utility may
petition  the IURC for prior  approval of its plans and  estimated  expenditures
required to comply with the provisions of, and  regulations  under,  the Federal
Clean Water Act and SDWA.  Upon  obtaining  such  approval,  a water utility may
include such costs in its rate base for rate-making  purposes,  to the extent of
its estimated costs as approved by the IURC, and recover its costs of developing
and implementing the approved plans if statutory  standards are met. The capital
costs for such new systems, equipment or facilities or modifications of existing
facilities  may be included in a water  utility's  rate base upon  completion of
construction of the project or any part thereof.  Such an addition to rate base,
however,  would  effect a change  in water  rates.  NiSource's  principal  water
utility  has  agreed  to a  moratorium  on  water  rate  increases  until  2002.
Therefore, recovery of any increased costs discussed above may not be timely.

(6)  Income  Taxes:  Deferred  income  taxes  are  recognized  as  costs  in the
rate-making  process  by the  Commissions  having  jurisdiction  over the  rates
charged by the  Utilities.  Deferred  income  taxes are  provided as a result of
provisions in the income tax law that either  require or permit certain items to
be  reported  on the  income  tax  return in a  different  period  than they are
reported in the consolidated financial statements. These taxes are reversed by a
debit or credit to  deferred  income tax  expense as the  temporary  differences
reverse.  Investment  tax credits have been deferred and are being  amortized to
income over the life of the related property.

     To  the  extent  certain   deferred  income  taxes  of  the  Utilities  are
recoverable or payable through future rates,  regulatory  assets and liabilities
have  been  established.   Regulatory  assets  are  primarily   attributable  to
undepreciated  AFUDC-equity  and the  cumulative  net amount of other income tax
timing  differences  for which deferred taxes had not been provided in the past,
when  regulators  did not  recognize  such  taxes as  costs  in the  rate-making
process.  Regulatory  liabilities  are primarily  attributable to the Utilities'
obligation  to credit to  ratepayers  deferred  income  taxes  provided at rates
higher than the current  federal  income tax rate  currently  being  credited to
ratepayers  using the average rate assumption  method and  unamortized  deferred
investment tax credits.

     The  components  of the net deferred  income tax liability at June 30, 1999
and December 31, 1998, were as follows:

<TABLE>
<CAPTION>

                                                                               June 30,        December 31,
                                                                                 1999              1998
(In thousands)                                                                 ========          ========
<S>                                                                          <C>                 <C>
Deferred tax liabilities--
   Accelerated depreciation and other
     property differences                                                    $1,109,527          $806,148
   AFUDC-equity                                                                  34,395            33,029
   Adjustment clauses                                                             3,946            14,965
   Other regulatory assets                                                       28,677            29,739
    Prepaid pension and other benefits                                           40,304            34,170
   Reacquisition premium on debt                                                 16,552            17,311
Deferred tax assets--
   Deferred investment tax credits                                             (38,690)          (37,236)
   Removal costs                                                              (165,073)         (157,728)
   Other postretirement/postemployment benefits                                (53,700)          (51,754)
   Other, net                                                                  (12,221)          (29,353)
                                                                               --------          --------
                                                                                963,717           659,291
Less: Deferred income taxes related to current
   assets and liabilities                                                      (24,075)           (7,876)
                                                                               --------          --------
Deferred income taxes--noncurrent                                              $987,792          $667,167
                                                                               ========          ========
</TABLE>

     Federal and state income taxes as set forth in the consolidated  statements
of income were comprised of the following:

<TABLE>
<CAPTION>
                                      Three Months                 Six Months                 Twelve Months
                                      Ended June 30,              Ended June 30,              Ended June 30,
                                   ---------------------       ---------------------       ---------------------
(In thousands)                       1999          1998          1999         1998          1999           1998
                                   =======       =======       =======       =======       =======       =======
<S>                               <C>           <C>           <C>           <C>           <C>           <C>
Current income taxes -
 Federal                          $ 15,028      $ 25,994      $ 78,541      $ 81,911      $110,310      $ 99,764

 State                               2,370         3,861        12,594        12,148        16,930        17,271
                                  --------      --------      --------      --------      --------      --------
                                    17,398        29,855        91,135        94,059       127,240       117,035
                                  --------      --------      --------      --------      --------      --------
Deferred income taxes, net -
 Federal                           (3,545)      (11,694)      (28,334)      (39,500)       (9,260)      (10,618)
 State                               (277)         (916)       (2,416)       (3,150)         (781)         (586)
                                  --------      --------      --------      --------      --------      --------
                                   (3,822)      (12,610)      (30,750)      (42,650)      (10,041)      (11,204)
                                  --------      --------      --------      --------      --------      --------
Deferred investment tax
credits, net                       (1,920)       (1,821)       (3,807)       (3,642)       (7,526)       (7,383)
                                  --------      --------      --------      --------      --------      --------
   Total income taxes             $ 11,656      $ 15,424      $ 56,578      $ 47,767      $109,673      $ 98,448
                                  ========      ========      ========      ========      ========      ========
</TABLE>

     A  reconciliation  of total  income tax  expense to an amount  computed  by
applying the statutory federal income tax rate to pretax income is as follows:

<TABLE>
<CAPTION>


                                                 Three Months                 Six Months                Twelve Months
                                                Ended June 30,               Ended June 30,             Ended June 30,
                                          ------------ ------------     ------------ ------------   ------------ ------------
(In thousands)                                1999          1998           1999          1998          1999         1998
                                            =======       =======        =======       =======       =======       =======
<S>                                        <C>           <C>            <C>           <C>           <C>            <C>
Net income                                 $ 22,944      $ 29,445       $ 99,503      $ 90,167      $203,222       181,942
Add-Income taxes                             11,656        15,424         56,578        47,767       109,673        98,448
     Dividend requirements on
     preferred stocks                         2,077         2,128          4,193         4,295         8,436         8,640
                                            -------       -------        -------       -------       -------       -------
Income before preferred dividend
     requirements and income taxes         $ 36,677 $      46,997       $160,274      $142,229      $321,331      $289,030
                                            =======       =======        =======       =======       =======       =======
Amount derived by multiplying pre-tax
      income by the statutory rate         $ 12,837 $      16,449       $ 56,096      $ 49,780      $112,466      $101,161

Reconciling items multiplied
    by the statutory rate:
    Book depreciation over
           related tax depreciation             968           998          1,937         1,996         3,933         3,980
    Amortization of deferred
          investment tax credits            (1,920)       (1,821)        (3,807)       (3,642)       (7,526)       (7,383)
   State income taxes, net of
          federal income tax benefit          1,264         1,594          5,770         4,746        10,224        10,640
    Reversal of deferred taxes provided
          at rates in excess of the current
          federal income tax rate             (721)       (1,271)        (1,442)       (2,542)       (3,284)       (3,569)
     Low-income housing credits             (1,128)         (960)        (2,256)       (1,920)       (4,176)       (3,448)
     Nondeductible amounts related to
          amortization of intangible assets
          and plant acquisition adjustments     619           629          1,238         1,258         2,496         2,287
     Other, net                               (263)         (194)          (958)       (1,909)       (4,460)       (5,220)
                                            -------       -------        -------       -------       -------       -------
        Total income taxes                 $ 11,656      $ 15,424       $ 56,578      $ 47,767      $109,673      $ 98,448
                                            =======       =======        =======       =======       =======       =======

</TABLE>

(7) Pension Plans:  Noncontributory,  defined benefit retirement plans cover the
majority  of  employees.   Benefits  under  the  plans  reflect  the  employees'
compensation, years of service and age at retirement.

     The change in the benefit obligation for 1998 and 1997 was as follows:

<TABLE>
<CAPTION>

(In thousands)                                                1998         1997
                                                           ========     ========
<S>                                                        <C>          <C>
Benefit obligation at beginning of year (January 1,)       $875,756     $743,634
Service cost                                                 17,093       14,714
Interest cost                                                60,686       57,938
Plan amendments                                              14,655       25,096
Actuarial loss                                               38,773       73,768
Acquisition of IWCR                                              --       15,772
Benefits paid                                              (57,924)     (55,166)
                                                           --------     --------
Benefit obligation at end of the year (December 31,)       $949,039     $875,756
                                                           ========     ========
</TABLE>

     The change in the fair  value of the  plans'  assets for the years 1998 and
1997 was as follows:

<TABLE>
<CAPTION>

(In thousands)                                               1998         1997

                                                           ========     ========
<S>                                                        <C>          <C>
Fair value of plan assets at beginning of year
 (January 1,)                                              $924,857     $790,978
Actual return on plan assets                                 85,254      126,695
Employer contributions                                       34,843       46,440
Acquisition of IWCR                                              --       15,910
Benefits paid                                              (57,924)     (55,166)

                                                           --------     --------
Plan assets at fair value at end of the
 year (December 31,)                                       $987,030     $924,857
                                                           ========     ========
</TABLE>

   The plans' assets are invested primarily in common stocks, bonds and notes.

   The plans' funded status as of December 31, 1998 and 1997 is as follows:

<TABLE>
<CAPTION>

(In thousands)                                                1998        1997
                                                           ========     ========
<S>                                                        <C>          <C>
Plan assets in excess of benefit obligation                $ 37,991     $ 49,101
Unrecognized net actuarial loss                            (10,938)     (46,959)
Unrecognized prior service cost                              57,193       47,114
Unrecognized transition amount                               26,813       32,107
                                                           --------     --------
Prepaid pension costs                                      $111,059     $ 81,363
                                                           ========     ========
</TABLE>

     The benefit  obligation  is the  present  value of future  pension  benefit
payments and is based on a plan benefit  formula that considers  expected future
salary increases.  A discount rate of 7.00% and rate of increase in compensation
levels of 4.5% were used to determine  the benefit  obligations  at December 31,
1998 and 1997.

    BSG had noncontributory defined benefit pension plans covering substantially
all of its  employees.  At the date of  acquisition  the benefit  obligation was
$83.9  million,  the fair value of plan  assets was $91.5  million  and  prepaid
pension costs were $15.4 million. The benefit obligation is the present value of
future pension  benefit  payments and was based on a plan benefit  formula which
considers expected future salary increases. A discount rate of 7.00% and rate of
increase  in  compensation  levels of 4.5% were used to  determine  the  benefit
obligations at the date of acquisition.

     Prepaid  pension  costs  were  $133.4  million  at June 30,  1999,  and are
reported under the captions  "Prepayments and Other" in the consolidated balance
sheets.

     The following  items are the  components of provisions for pensions for the
three-month, six-month and twelve-month periods ended June 30, 1999 and June 30,
1998:

<TABLE>
<CAPTION>
                                                  Three Months            Six Months               Twelve Months
                                                 Ended June 30,          Ended June 30,             Ended June 30,
                                            ---------- ----------    ----------- ----------     ---------- ----------
(In thousands)                                  1999        1998           1999       1998           1999      1998
                                               =======    =======        =======    =======        =======    =======
<S>                                           <C>        <C>            <C>        <C>            <C>        <C>
Service costs                                 $  5,221   $  6,518       $ 10,640   $ 13,036       $ 14,696   $ 18,104
Interest costs                                  16,760     21,784         33,974     43,568         51,092     67,804
Expected return on plan assets                (22,379)   (29,253)       (45,374)   (58,506)       (69,539)  (143,272)
Amortization of transition obligation            1,416      1,833          2,895      3,666          4,523      6,531
Amortization of prior service costs              1,542      2,092          3,129      4,183          3,692     58,942
                                               -------    -------        -------    -------        -------    -------
                                              $  2,560   $  2,974       $  5,264   $  5,947       $  4,464   $  8,109
                                               =======    =======        =======    =======        =======    =======
</TABLE>

     Assumptions  used in the  valuation  and  determination  of 1999  and  1998
pension expense were as follows:

<TABLE>
<CAPTION>
                                                                 1999              1998
                                                               =======           =======

<S>                                                              <C>               <C>
Discount rate                                                    7.00%             7.00%
Rate of increase in compensation levels                          4.50%             4.50%
Expected long-term rate of return on assets                      9.00%             9.00%
</TABLE>

     Certain  union  employees  participate  in  industry-wide,   multi-employer
pension  plans which  provide for monthly  benefits  based on length of service.
Specified  amounts per compensated hour for each employee are contributed to the
trustees of these plans.  Contributions  of $.6  million,  $1.0 million and $2.1
million were made to these plans for the three-month, six-month and twelve-month
periods  ended  June 30,  1999,  respectively.  The  relative  position  of each
employer  participating  in these plans with  respect to the  actuarial  present
value of accumulated  plan benefits and net assets available for benefits is not
available.

(8) Postretirement Benefits: Certain health care and life insurance benefits for
certain  retired  employees are  provided.  The majority of employees may become
eligible  for these  benefits  if they reach  retirement  age while  working for
NiSource.  The expected cost of such benefits is accrued  during the  employees'
years of service.  Current  rates  include  postretirement  benefit  costs on an
accrual basis,  including amortization of the regulatory assets that arose prior
to inclusion of these costs in rates. Cash contributions are remitted to grantor
trusts.

     The  following  table  sets  forth  the  change in the  plans'  accumulated
postretirement benefit obligation (APBO) as of December 31, 1998 and 1997:

<TABLE>
<CAPTION>

(In thousands)                                                                   1998            1997
                                                                                =======        =======
<S>                                                                            <C>            <C>
Accumulated postretirement benefit obligation
   at beginning of year (January 1,)                                           $223,908       $200,790
Service cost                                                                      5,249          5,034
Interest cost                                                                    15,793         16,215
Plan amendments                                                                   (283)          4,015
Actuarial (gain) loss                                                             8,453       (10,242)
Acquisition of IWCR                                                                  --         18,505
Benefits paid                                                                  (12,519)       (10,409)
                                                                                -------        -------
Accumulated postretirement benefit obligation
   at end of the year (December 31,)                                           $240,601       $223,908
                                                                                =======        =======
</TABLE>

     The change in the fair value of the plan assets for the years 1998 and 1997
was as follows:
<TABLE>
<CAPTION>

(In thousands)                                                                   1998            1997
                                                                                =======        =======
<S>                                                                             <C>            <C>
Fair value of plan assets at beginning of year (January 1,)                     $ 2,400        $    --
Actual return of plan assets                                                      1,103             --
Employer contributions                                                           10,637         12,809
Participant contributions                                                         1,282             --
Benefits paid                                                                  (12,519)       (10,409)
                                                                                -------        -------
Plan assets at fair value at end of the year (December 31,)                     $ 2,903        $ 2,400
                                                                                =======        =======
</TABLE>

     Following is the funded status for  postretirement  benefits as of December
31, 1998 and 1997:

<TABLE>
<CAPTION>

(In thousands)                                                                   1998            1997
                                                                               ========       ========
<S>                                                                          <C>            <C>
Funded status                                                                $(237,698)     $(221,508)
Unrecognized net actuarial gain                                                (87,087)       (99,117)
Unrecognized prior service cost                                                   3,873          4,195
Unrecognized transition amount                                                  164,436        176,464
                                                                               --------       --------
Accrued liability for postretirement benefits                                $(156,476)     $(139,966)
                                                                               ========       ========
</TABLE>

   In order to determine  the APBO at December  31, 1998, a discount  rate of 7%
and a pre-Medicare  medical trend rate of 7% declining to a long-term rate of 5%
was used,  and at December 31, 1997,  a discount  rate of 7% and a  pre-Medicare
medical  trend rate of 8%  declining  to a  long-term  rate of 5% was used.  The
accrued  liability for  postretirement  benefits was $157.8  million at June 30,
1999.

     BSG has  postretirement  benefit plans covering certain  employees.  At the
date of acquisition  the APBO was $25.3  million,  the fair value of plan assets
was $26.2  million  and  prepaid  postretirement  costs  were $13.3  million.  A
discount  rate of 7% and a  pre-Medicare  medical trend rate of 5%, which is the
ultimate trend rate, were used to determine the APBO.

   Net  periodic  postretirement  benefit  costs,  before  consideration  of the
rate-making   discussed   previously,   for  the   three-month,   six-month  and
twelve-month periods ended June 30, 1999 and June 30, 1998 include the following
components:

<TABLE>
<CAPTION>
                                          Three Months            Six Months             Twelve Months
                                         Ended June 30,          Ended June 30,          Ended June 30,
                                        ----------------        ---------------        -----------------
 (In thousands)                         1999       1998          1999    1998           1999      1998
                                        ======    ======        ======   ======        ======     ======
<S>                                    <C>       <C>           <C>      <C>           <C>        <C>
Service costs                          $ 1,652   $ 1,487       $ 2,648  $ 2,674       $ 5,223    $ 4,529
Interest costs                           4,865     4,073         9,375    8,146        17,022     14,766
Expected return on plan assets           (854)      (50)       (1,233)    (100)       (1,349)      (100)
Amortization of transition obligation    3,287     2,930         6,328    5,859        12,214     11,683
Amortization of prior service cost          86        75           172      150           344        429
Amortization of (gain) loss            (1,220)   (1,393)       (2,396)  (2,786)       (5,357)    (6,608)
                                       -------   -------       -------  -------       -------    -------
                                       $ 7,816   $ 7,122       $14,894  $13,943       $28,097    $24,699
                                       =======   =======       =======  =======       =======    =======

</TABLE>

     Assumptions  used  in the  determination  of 1999  and  1998  net  periodic
postretirement benefit costs were as follows:

<TABLE>
<CAPTION>
                                                                     1999       1998
                                                                    =====       =====
<S>                                                                 <C>         <C>
Discount rate                                                       7.00%       7.00%
Rate of increase in compensation levels                             4.50%       4.50%
Assumed annual rate of increase in health care benefits             7.00%       8.00%
Assumed ultimate trend rate                                         5.00%       5.00%
</TABLE>

     The effect of a 1% increase in the assumed health care cost trend rates for
each future  year would  increase  the APBO at January 1, 1999 by  approximately
$30.6  million and  increase  the  aggregate  of the service and  interest  cost
components of plan costs by approximately  $0.8 million and $1.6 million for the
three-month  and  six-month  periods  ended  June 30,  1999.  The effect of a 1%
decrease in the assumed  health care cost trend rates for each future year would
decrease  the APBO at  January  1,  1999 by  approximately  $23.9  million,  and
decrease the aggregate of the service and interest cost components of plan costs
by approximately $0.6 million and $1.2 million for the three-month and six-month
periods  ended  June  30,  1999.   Amounts  disclosed  above  could  be  changed
significantly  in the  future  by  changes  in health  care  costs,  work  force
demographics, interest rates or plan changes.

(9) Authorized Classes of Cumulative Preferred and Preference Stocks:

      NiSource -
        20,000,000  shares -Preferred  -without par value.  4,000,000 shares are
designated Series A Junior  Participating  Preferred Shares and are reserved for
issuance pursuant to the Share Purchase Rights Plan described in Note 14, Common
Shares.

     Northern Indiana -
        2,400,000 shares -Cumulative  Preferred -$100 par value 3,000,000 shares
        -Cumulative Preferred -no par value
        2,000,000   shares   -Cumulative   Preference   -$50  par  value   (none
        outstanding) 3,000,000 shares -Cumulative Preference -no par value (none
        outstanding)

     Indianapolis Water Company (IWC) -
        300,000 shares -Cumulative Preferred -$100 par value

      The  preferred  shareholders  of  Northern  Indiana and IWC have no voting
rights,  except in the  event of  default  on the  payment  of four  consecutive
quarterly  dividends,  or as  required by Indiana  law to  authorize  additional
preferred  shares,  or by the Articles of  Incorporation in the event of certain
merger transactions.

(10) Preferred Stocks, Redeemable Solely at the Option of the Issuer:

<TABLE>
<CAPTION>
                                                                                          Redemption
                                                                                           Price at
                                                      June 30,         December 31,         June 30,
                                                         1999              1998               1999
                                                     ===========       ===========        ===========
(Dollars in thousands)
<S>                                               <C>                  <C>                 <C>
Northern Indiana Public Service Company:
Cumulative preferred stock - $100 par value -
4-1/4% series -209,044 and 209,051 shares
    outstanding, respectively                     $       20,904       $  20,905           $101.20
  4-1/2% series -  79,996 shares outstanding               8,000           8,000           $100.00
  4.22% series - 106,198 shares outstanding               10,620          10,620           $101.60
  4.88% series - 100,000 shares outstanding               10,000          10,000           $102.00
  7.44% series -   41,890 shares outstanding               4,189           4,189           $101.00
  7.50% series -   34,82 shares outstanding                3,484           3,484           $101.00
  Premium on preferred stock                                 254             254               N/A
  Cumulative  preferred stock - no par
 value  Adjustable rate (6.00% at June 30,
   1999),
     Series A (stated value $50 per share) 473,285
     shares outstanding                                   23,664          23,664            $50.00
 Indianapolis Water Company:
 Cumulative preferred stock- $100 par value
  4.00% to 5.00%, 44,966 shares outstanding                4,497           4,497  $100.00- $105.00
                                                     -----------       -----------
                                                  $       85,612       $  85,613
                                                     ===========       ===========
</TABLE>

    During the period July 1, 1998 to June 30,  1999,  there were no  additional
issuances of the above  preferred  stocks.  The foregoing  preferred  stocks are
redeemable  in whole or in part at any time  upon  thirty  days'  notice  at the
option of the issuer at the redemption prices shown.

(11) Preferred Stocks,  Redemption  Outside Control of Issuer:  Preferred stocks
subject to mandatory redemption  requirements or whose redemption is outside the
control of issuer,  excluding  sinking fund payments due within one year were as
follows:

<TABLE>
<CAPTION>

                                                      June 30,       December 31,
                                                        1999             1998
                                                     ===========     ===========
(Dollars in thousands)
<S>                                                  <C>             <C>
Northern Indiana Public Service Company:
 Cumulative  preferred  stock -$100 par value -
  8.85% series - 37,500 and 50,000
   shares
    outstanding, respectively                        $     3,750     $     5,000
   7-3/4% series -  33,352 shares outstanding              3,335           3,335
   8.35% series - 51,000 shares outstanding                5,100           5,100
 Cumulative preferred stock -no par value -
   6.50% series - 430,000 shares outstanding              43,000          43,000
                                                     -----------     -----------
                                                     $    55,185     $    56,435
                                                     ===========     ===========
</TABLE>

    The redemption  prices at June 30, 1999, as well as sinking fund  provisions
for  the   cumulative   preferred   stocks   subject  to  mandatory   redemption
requirements,  or whose  redemption  is outside the  control of issuer,  were as
follows:

<TABLE>
<CAPTION>

                                                                       Sinking Fund or
 Series                Redemption Price Per Share              Mandatory Redemption Provisions
===========             ======================             ======================================
<S>      <C>          <C>                                  <C>
Cumulative preferred stock -$100 par value -
         8.85%        $100.74, reduced periodically        12,500 shares on or before April 1.
         8.35%        $103.44, reduced periodically         3,000 shares on or before July 1; increasing to 6,000
                                                            shares beginning in 2004; noncumulative option
                                                            to double amount each year.
        7-3/4%        $104.06, reduced periodically         2,777 shares on or before December 1;
                                                            noncumulative  option  to
                                                            double amount each year.
 Cumulative preferred stock -no par value -
        6.50%         $100.00 on October 14, 2002           430,000 shares on October 14, 2002.
</TABLE>

     Sinking fund requirements  with respect to redeemable  preferred stocks for
the next five years and thereafter,  not reflecting  redemptions made after June
30, 1999, were as follows:

<TABLE>
<CAPTION>

Twelve Months Ended June 30,
============================
(In thousands)
<S>                                          <C>
2000                                         $  1,828
2001                                            1,828
2002                                            1,828
2003                                           44,828
2004                                              578
Thereafter                                      6,123
                                              -------
                                             $ 57,013
                                              =======

Total preferred stocks, redemption outside control of issuer

</TABLE>

Sinking fund payments due within one year are reported  under the caption "Other
accruals" in the consolidated balance sheets.

     (12) Common Dividend:  During the next few years, NiSource's ability to pay
dividends will depend upon dividends it receives from Northern Indiana. Northern
Indiana's   Indenture  dated  August  1,  1939,  as  amended  and   supplemented
(Indenture), provides that it will not declare or pay any dividends on any class
of capital stock (other than  preferred or  preference  stock) except out of the
earned surplus or net profits of Northern  Indiana.  At June 30, 1999,  Northern
Indiana had  approximately  $144.2 million of retained earnings (earned surplus)
available  for the  payment of  dividends.  Future  dividends  will  depend upon
adequate retained earnings,  adequate future earnings and the absence of adverse
developments.

(13) Earnings Per Share:  Basic earnings per share were computed by dividing net
income, reduced for preferred dividends,  by the average number of common shares
outstanding  during the  period.  The  diluted  earnings  per share  calculation
assumes the conversion of nonqualified stock options into common shares.

     The net income,  preferred  dividends  and shares used to compute basic and
diluted earnings per share are presented in the following table:

<TABLE>
<CAPTION>
                                                        Three Months             Six Months              Twelve Months

                                                 ----------  ----------     ---------  ----------     ----------  ----------
(In thousands, except per share amounts)             1999        1998          1999        1998           1999        1998
----------------------------------------------------------------------------------------------------------------------------

<S>                                               <C>          <C>           <C>         <C>           <C>          <C>
Net Income                                        $  22,944    $ 29,445      $ 99,503    $ 90,167      $  203,222   $ 181,942
                                                   ========     =======       =======     =======       =========    ========

Basic
Weighted Average Number of Shares:
     Average Common Shares Outstanding              124,951     122,181       123,805     123,022        121,166      124,157
                                                   ========     =======       =======     =======       =========    ========

Basic Earnings per Average Common Share           $    0.18    $   0.24      $   0.80    $   0.73      $     1.67   $    1.46
                                                   ========     =======       =======     =======       =========    ========

Diluted
Weighted Average Number of Shares:
     Average Common Shares Outstanding              124,951     122,181       123,805     123,022         121,166     124,157
     Dilutive effect for Nonqualified Stock Options     675         457           560         494             751         461
                                                   --------     -------       -------     -------       ---------    --------
     Weighted Average Shares                        125,626     122,638       124,365     123,516         121,917     124,618
                                                   ========     =======       =======     =======       =========    ========

Diluted Earnings per Average Common Share         $    0.18    $   0.24      $   0.80    $   0.73      $     1.66   $    1.46
                                                   ========     =======       =======     =======       =========    ========

</TABLE>


(14) Common Shares: On April 8, 1998,  shareholders  approved an increase in the
number of authorized common shares,  without par value, from 200,000,000  shares
to  400,000,000  shares.  All  references to number of common  shares  reported,
including per share amounts and stock option date,  reflect a two-for-one  stock
split as if it had occurred at the beginning of the earliest period.

Share  Purchase  Rights Plan.  Each Right,  when  exercisable,  would  initially
entitle the holder to purchase  from  NiSource one  two-hundredth  of a share of
Series A Junior Participating  Preferred Share, without par value, at a price of
$30 per one two-hundredth of a share. In certain  circumstances,  if an acquirer
obtained 25% of NiSource's outstanding shares, or merged into NiSource or merged
NiSource  into the  acquirer,  the Rights would  entitle the holders to purchase
NiSource's or the acquirer's common shares for one-half of the market price. The
Rights will not dilute  NiSource's  common shares nor affect  earnings per share
unless they become  exercisable  for common shares.  The Plan was not adopted in
response to any specific attempt to acquire control of NiSource.  The Rights are
not currently exercisable.

Common  Share  Repurchases.  The Board has  authorized  the  repurchase  of 62.1
million  common  shares,   subject  to  certain   limits.   At  June  30,  1999,
approximately  55.3 million  shares had been  repurchased at an average price of
$16.95 per share.

     Equity Forward Share Purchase Contract.  During the second quarter of 1999,
a forward  purchase  contract was entered into covering the purchase of up to 5%
of NiSource's  outstanding  common shares.  At the end of each quarterly  period
during the term of the forward purchase  contract,  NiSource has the option, but
not the obligation,  to settle the forward purchase contract with respect to all
or a portion of the  common  shares  held by the  counterparty  at the  weighted
average  cost plus a  spread.  As of June 30,  1999,  the  counterpary  informed
NiSource that approximately 4.0 million shares have been purchased at a weighted
average cost of $27.43 per share.  The Company has the option to settle with the
counterparty by means of physical or net share settlement. On a quarterly basis,
NiSource will pay the  counterparty  a carrying  charge based on the amount paid
for common shares purchased by the counterparty, and the counterparty will remit
dividends  received on shares  owned.  NiSource  will be obligated to settle the
forward purchase contract with respect to all the remaining common shares in May
2003,  or under  certain  circumstances  after an extension  period of up to six
months at NiSource's  option.  As of June 30, the carrying/  nominal  amount and
estimated fair value of the equity forward purchase  contract was $109.7 million
and $103.3 million, respectively.

(15) Long-Term  Incentive Plans: There are two long-term incentive plans for key
management  employees that were approved by shareholders on April 13, 1988 (1988
Plan) and April 13, 1994 (1994 Plan), each of which provides for the issuance of
up to 5.0 million  common shares to key  employees  through April 1998 and April
2004,  respectively.  The 1988 Plan, as amended and restated, and the 1994 Plan,
as amended and restated,  were  re-approved by  shareholders  at the 1999 Annual
Meeting of Shareholders held on April 14, 1999.

     At June 30, 1999,  there were 2.5 million shares reserved for future awards
under the 1994 Plan. The Plans permit the following types of grants,  separately
or  in  combination:   nonqualified  stock  options,  incentive  stock  options,
restricted stock awards,  stock  appreciation  rights and performance  units. No
incentive stock options or performance  units were outstanding at June 30, 1999.
Under the Plans,  the exercise  price of each option  equals the market price of
common  stock on the date of grant.  Each option has a maximum term of ten years
and vests one year from the date of grant.

     In connection with the acquisition of BSG (see Note 3), all outstanding BSG
non-qualified  stock options were replaced  with  NiSource  non-qualified  stock
options.  The replacement of such options did not change their original  vesting
provisions,  terms or fair values.  Information  regarding  these options can be
found in the following tables about changes in non-qualified stock options under
the caption "converted."

     Stock  appreciation  rights (SARs) may be granted only in tandem with stock
options on a  one-for-one  basis and are payable in cash,  common  shares,  or a
combination thereof. There were no SARs outstanding at June 30, 1999. Restricted
stock awards are  restricted  as to transfer and are subject to  forfeiture  for
specific periods from the date of grant.  Restrictions on shares awarded in 1995
lapse five years from date of grant,  and vesting  varies from 0% to 200% of the
number awarded,  subject to specific  earnings per share and stock  appreciation
goals. Restrictions on shares awarded in 1998 and 1999 lapse two years from date
of grant and vesting  varies from 0% to 100% of the number  awarded,  subject to
specific performance goals. If a participant's employment is terminated prior to
vesting  other than by reason of death,  disability  or  retirement,  restricted
shares  are  forfeited.   There  were  537,166  and  534,666  restricted  shares
outstanding at June 30, 1999 and December 31, 1998, respectively.

     The  Nonemployee  Director  Stock  Incentive  Plan,  which was  approved by
shareholders,  provides  for the  issuance  of up to  200,000  common  shares to
nonemployee directors.  The Plan provides for awards of common shares which vest
in 20% per year  increments,  with full vesting after five years.  The Plan also
allows for the award of nonqualified  stock options.  If a director's service on
the Board is  terminated  for any reason  other than  death or  disability,  any
common  shares not vested as of the date of  termination  are  forfeited.  As of
April 14, 1999, 75,500 shares had been issued under the Plan.

    These plans are accounted for under Accounting  Principles Board Opinion No.
25, under which no compensation cost has been recognized for nonqualified  stock
options.  The  compensation  cost  that  was  charged  against  net  income  for
restricted  stock awards was $0.6 million and $0.3 million for the  three-month,
$1.4  million  and $1.4  million  for the  six-month  and $2.5  million and $2.5
million for the twelve-month periods ended June 30, 1999 and 1998, respectively.
Had compensation cost for non-qualified stock options been determined consistent
with SFAS No. 123  "Accounting  for  Stock-Based  Compensation,"  net income and
earnings per average  common share would have been reduced to the  following pro
forma amounts:

 <TABLE>
 <CAPTION>

                                  Three Months                Six Months            Twelve Months
                                 Ended June 30,             Ended June 30,          Ended June 30,
                                ------------------        -----------------       -----------------
                                 1999       1998           1999       1998         1999       1998
                                ======     ======         ======     ======       ======     ======
                                          (Dollars in thousands, except per share data)
<S>                           <C>        <C>            <C>        <C>          <C>        <C>
Net Income:
 As reported                  $ 22,944   $ 29,445       $ 99,503   $ 90,167     $203,222   $181,942
 Pro forma                    $ 22,540   $ 29,230       $ 98,695   $ 89,739     $201,725   $181,088

Earnings Per Average Common Share:
 Basic:
   As reported                $   0.18   $   0.24       $   0.80   $   0.73     $   1.67   $   1.46
   Pro forma                  $   0.18   $   0.23       $   0.79   $   0.72     $   1.66   $   1.45
 Diluted:
  As reported                 $   0.18   $   0.24       $   0.80   $   0.73     $   1.66   $   1.46
   Pro forma                  $   0.17   $   0.23       $   0.79   $   0.72     $   1.65   $   1.45

</TABLE>

     The fair value of each option  granted as used to  determine  pro forma net
income  is  estimated  as of the date of grant  using the  Black-Scholes  option
pricing model with the following weighted average assumptions used for grants in
the three-month, six-month and twelve-month periods ended June 30, 1999 and June
30, 1998:  risk-free  interest rate of 5.29% and 6.29%,  respectively;  expected
dividend yield per share of $0.96 and $0.87, respectively;  expected option term
of 5.4 years and 5.25 years, respectively;  and expected volatilities of 13.09 %
and 12.7%, respectively.

Changes  in  outstanding  shares  under  option  and SARs  for the  three-month,
six-month and twelve-month periods ended June 30, 1999 and June 30, 1998 were as
follows:

<TABLE>
<CAPTION>

                                                NONQUALIFIED STOCK OPTIONS
                                         ---------------------------------------
                                                        Weighted               Weighted
                                                        Average                 Average
                                                         Option                 Option
Three Months Ended June 30,               1999           Price       1998        Price
============================             ========       =======    ========     =======
<S>                                      <C>           <C>         <C>         <C>
Balance, beginning of period             3,346,163     $  18.63    2,326,600   $  16.73
 Exercised                                (97,957)        12.40    (120,800)      15.19
 Canceled                                  (5,000)        29.22     (12,200)      20.64
                                         --------                  --------
Balance, end of period                   3,243,206     $  18.81    2,193,600   $  16.79
                                         ========                  ========
Shares exercisable                       2,644,706     $  16.45    1,685,200   $  15.63
                                         ========                  ========
</TABLE>

<TABLE>
<CAPTION>


                                                NONQUALIFIED STOCK OPTIONS
                                         ---------------------------------------
                                                        Weighted               Weighted
                                                        Average                 Average
                                                        Option                  Option
Six Months Ended June 30,                  1999          Price       1998        Price
============================             ========       =======    ========     =======
<S>                                      <C>           <C>         <C>         <C>
Balance, beginning of period             2,651,300     $  19.61    2,535,400   $  16.41
 Converted                                 740,780        15.03            -          -
 Exercised                               (142,374)        13.71    (321,600)      13.54
 Canceled                                  (6,500)        29.22     (20,200)      20.64
                                         ---------                 ---------
Balance, end of period                   3,243,206     $  18.81    2,193,600   $  16.79
                                         =========                 =========
Shares exercisable                       2,644,706     $  16.45    1,685,200   $  15.63
                                         =========                 =========
</TABLE>

<TABLE>
<CAPTION>
                                                NONQUALIFIED STOCK OPTIONS
                                         ---------------------------------------
                                                        Weighted               Weighted
                                                        Average                 Average
                                                        Option                  Option
Twelve Months Ended June 30,               1999          Price       1998        Price
============================             ========       =======    ========     =======
<S>                                      <C>           <C>         <C>         <C>
Balance, beginning of period             2,193,600     $  16.79    2,195,400   $  15.38
 Converted                                 740,780        15.03            -          -
 Granted                                   607,000        29.22      533,600      20.64
 Exercised                               (289,674)        15.44    (510,200)      14.52
 Canceled                                  (8,500)        29.22     (25,200)      20.64
                                         ---------                 ---------
Balance, end of period                   3,243,206     $  18.81    2,193,600   $  16.79
                                         =========                 =========
Shares exercisable                       2,644,706     $  16.45    1,685,200   $  15.63
                                         =========                 =========
Weighted average fair value
 of options granted                     $     4.28                $     2.66
                                         =========                 =========
</TABLE>


     The  following  table  summarizes  information  about  non-qualified  stock
options at June 30, 1999:

<TABLE>
<CAPTION>

                                OPTIONS OUTSTANDING                    OPTIONS EXERCISABLE
                        --------------------------------------------------------------------------------

                             Number          Weighted Average                           Number
   Range of              Outstanding at        Remaining         Weighted Average     Exercisable at
  Option Price            June 30, 1999     Contractual Life     Option Price         June 30, 1999
=============            ===============     ===============     ===============     ===============
<S>                         <C>               <C>                   <C>                <C>
$ 8.53 to $12.31              165,500         1.7  years            $  10.36             165,500
$13.03 to $19.77            2,022,006         7.2  years               16.00           2,022,006
$20.64 to $29.22            1,055,700         8.7  years               25.50             457,200
-------------            ---------------     ---------------     ---------------     ---------------
$ 8.53 to $29.22            3,243,206         5.9  years            $  18.81           2,644,706
                         ===============                                             ===============
</TABLE>

(16) Long-Term Debt:

<TABLE>
<CAPTION>
                                                                       June 30,            December 31,
(Dollars in thousands)                                                    1999                 1998
                                                                      ==========            ==========
<S>                                                                   <C>                   <C>
First mortgage bonds -
    Weighted average interest rate of 6.62% and various
    maturities between May 1, 2001 and July 15, 2028                  $  186,600            $  186,600
Pollution control notes and bonds-
    Weighted average interest rate of 3.85% and various
    maturities between October 1, 2003 and April 1, 2019                 239,500               239,500
Medium-term notes -
   Weighted average interest rate of 7.13% and various
   maturities between July 6, 2000 and September 1, 2031               1,192,096             1,048,025
Subordinated Debentures -7.75%, due March 31, 2026                        75,000                75,000
Senior Notes Payable - 6.78%, due December 1, 2027                        75,000                75,000
Notes payable -
    Weighted average interest rate of 7.33% and various
     maturities between March 5, 2001 and December 1, 2018                48,915                41,807
Variable bank loans - Weighted average interest rate of 5.79% and
     various maturities between March 17, 2001 and August, 2003           30,600                 5,600
Unamortized premium and discount on long-term debt, net                  (3,339)               (3,567)
                                                                      ----------            ----------
Total long-term debt, excluding amounts due within one year           $1,844,372            $1,667,965
                                                                      ==========            ==========
</TABLE>


The sinking fund requirements and maturities of long-term debt for the next five
years and thereafter were as follows as of June 30, 1999:
<TABLE>
<CAPTION>

Twelve Months Ended June 30,
========================
(In thousands)
<S>                                       <C>
2000                                      $  163,426
2001                                          64,679
2002                                         110,787
2003                                         113,597
2004                                         183,024
Thereafter                                 1,372,285
                                          ----------
Total long-term debt
(including current portion)               $2,007,798
                                          ==========


</TABLE>

     Unamortized debt expense, premium and discount on long-term debt applicable
to  outstanding  bonds  are  being  amortized  over  the  lives  of such  bonds.
Reacquisition premiums are being deferred and amortized.  These premiums are not
earning a return during the recovery period.

     The first  mortgage  bonds  constitute  a direct first  mortgage  lien upon
certain utility property and franchises. Certain trust indentures require annual
sinking or  improvement  payments  amounting  to .50% of the  maximum  aggregate
amount  outstanding.  As  permitted,  this  requirement  has been  satisfied  by
substituting a portion of permanent additions to utility plant.

     NiSource is  authorized  to issue and sell up to  $217,692,000  Medium-Term
Notes,  Series E, with various  maturities,  for purposes of refinancing certain
first mortgage bonds and medium-term  notes. As of June 30, 1999, $139.0 million
of these  medium-term  notes had been issued  with  various  interest  rates and
maturities.  The proceeds from these  issuances were used to pay short-term debt
incurred to redeem its First  Mortgage  Bonds,  Series N, and to pay at maturity
various issues of Medium-Term Notes, Series D.

     $40.0 million in 5.05%  medium-term  notes due July 15, 2028 were issued on
July 15, 1998,  with the proceeds being used to redeem 7-7/8% Bonds. In February
1999, $35.0 million of ten-year medium term notes were issued at a rate of 5.99%
with a maturity date of February 1, 2009 and $45.0 million of twenty-year medium
term notes were  issued at a rate of 6.61% with a maturity  date of  February 1,
2019.  The  majority  of the  proceeds  were  used  to  reduce  existing  credit
facilities and the remaining proceeds were used for general corporate purposes.

     The  financial  obligations  of Capital  Markets  are  subject to a Support
Agreement  between  NiSource  and  Capital  Markets,  under which  NiSource  has
committed  to make  payments  of  interest  and  principal  on Capital  Markets'
obligations in the event of a failure to pay by Capital Markets. Restrictions in
the  Support  Agreement  prohibit  recourse  on the  part  of  Capital  Markets'
creditors  against  the stock and assets of Northern  Indiana  that are owned by
NiSource. Under the terms of the Support Agreement, in addition to the cash flow
of cash dividends paid to NiSource by any of its consolidated subsidiaries,  the
assets of  NiSource,  other than the stock and assets of Northern  Indiana,  are
available  as  recourse  for the  benefit of  Capital  Markets'  creditors.  The
carrying  value of the assets of  NiSource,  other  than the assets of  Northern
Indiana, were approximately $2.8 billion at June 30, 1999.

(17) Current  Portion of Long-Term Debt: At June 30, 1999 and December 31, 1998,
the current portion of long-term debt due within one year was as follows:
<TABLE>
<CAPTION>

                                                     June 30,         December 31,
(In thousands)                                          1999             1998
                                                    ==========        ==========
<S>                                                 <C>               <C>
Medium-term notes--
   Weighted average interest rate of 6.78%          $156,323          $    --
Notes payable--
   Weighted average interest rate of 7.94%             5,103            4,790
Sinking funds due within one year                      2,000            2,000

                                                    ----------        ----------
 Total current portion of long-term debt            $163,426          $ 6,790
                                                    ==========        ==========
</TABLE>

(18)  Short-Term  Borrowings:  There are two five-year,  $100 million  revolving
credit  agreements  that  terminate on  September  23, 2003 and two 364-day $100
million  revolving  credit  agreements that terminate on September 23, 1999. The
364-day  agreements may be extended at expiration for additional  periods of 364
days. Under these agreements,  funds are borrowed at a floating rate of interest
or, under  certain  circumstances,  at a fixed rate of interest  for  short-term
periods.  These  agreements  provide  financing  flexibility  and may be used to
support the  issuance  of  commercial  paper.  At June 30,  1999,  there were no
borrowings outstanding under these agreements.

      In  addition,  various  lines of credit are  maintained,  as well as a $50
million uncommitted finance facility.  At June 30, 1999 there were no borrowings
under the uncommitted finance facility. Lines of credit for up to $199.9 million
are held with lenders at either their  commercial prime or market lending rates.
As of June 30, 1999,  there were $42.6 million of borrowings  outstanding  under
these  lines of credit with a weighted  average  interest  rate of 6.22%.  As of
December 31, 1998,  there were $84.1  million of  borrowings  outstanding  under
these lines of credit.

     Money market lines of credit for up to $403.5 million are maintained. As of
June 30, 1999,  there were $132.2 million  outstanding  under these money market
lines of credit with a weighted  average interest rate of 5.56%. At December 31,
1998,  there were $127.3  million of  borrowings  outstanding  under these money
market lines of credit.

     At June 30, 1999 and  December  31,  1998,  short-term  borrowings  were as
follows:
<TABLE>
<CAPTION>

                                                                                June 30,   December 31,

                                                                                =========    =========
<S>                                                                            <C>           <C>
Commercial paper--
   Weighted average interest rate of 5.32% at June 30, 1999                    $304,527      $ 193,700
Notes payable--
   Weighted average interest rate of 5.49% at June 30, 1999                     189,466        217,340
                                                                                ---------    ---------
   Total short-term borrowings                                                 $493,993      $ 411,040
                                                                                =========    =========
</TABLE>

(19)   Corporate   Premium  Income  Equity   Securities  and   Company-Obligated
Mandatorily  Redeemable  Preferred Securities of Subsidiary Trust Holding Solely
Company  Debentures:  In February 1999 an  underwritten  public  offering of 6.9
million Corporate Premium Income Equity Securities (PIES) was completed. The net
proceeds of  approximately  $334.7  million were primarily used to fund the cash
portion of the  consideration  payable in the  acquisition  of BSG, and to repay
short-term indebtedness.

     Each PIES consists of (i) a stock purchase contract to purchase, four years
from the  date of  issuance,  common  shares  at a face  value of $50 and (ii) a
Preferred  Security issued by a wholly-owned  subsidiary  trust.  Each Preferred
Security is pledged as  collateral,  for the benefit of NiSource,  in support of
the holder's  obligation  to purchase  common  shares  under the stock  purchase
contract.

     The face  value of the PIES is not  recorded  in the  consolidated  balance
sheets.  A $22.2 million  present value contract fee payable to the PIES holders
has been  recorded  as a  liability  and as  reduction  to paid-in  capital.  In
addition,  paid-in  capital has been  reduced by $10.4  million for the issuance
costs of the PIES.

     The Preferred  Securities  represent undivided  beneficial interests in the
assets of NIPSCO Capital Trust I (Capital Trust),  with  liquidation  amounts of
$50 per security.  The sole assets of Capital Trust are subordinated  debentures
(Debentures)  of NiSource  that bear interest at the same rates as the Preferred
Securities to which they relate,  and certain rights under related guarantees by
NiSource.

      The dividends paid on Preferred Securities are presented under the caption
"minority  interests"  in the  consolidated  statements  of income.  The amounts
outstanding  are  presented  under the caption,  "Company-obligated  mandatorily
redeemable  preferred  securities of subsidiary  trust  holding  solely  company
debentures," in the  consolidated  balance sheets.  At June 30, 1999, there were
6.9 million, 5.9% Preferred Securities  outstanding with Capital Trust assets of
$345.0 million.

(20) Operating Leases:  The following is a schedule,  by year, of future minimum
rental  payments,  excluding  those  to  associated  companies,  required  under
operating  leases that have  initial or remaining  noncancelable  lease terms in
excess of one year as of June 30, 1999:
 <TABLE>
 <CAPTION>

Twelve Months Ended June 30,
============================
(In thousands)
<S>                                                                            <C>
2000                                                                           $ 32,798
2001                                                                             32,376
2002                                                                             64,231
2003                                                                             29,087
2004                                                                             76,886
Later years                                                                     225,510
                                                                                --------
Total minimum payments required                                                $460,888
                                                                                ========
</TABLE>


     The  consolidated  financial  statements  include  rental  expense  for all
operating leases as follows:
<TABLE>
<CAPTION>

                                            June 30,        June 30,
(In thousands)                                1999            1998
                                            ========        ========
<S>                                          <C>             <C>
Three months ended                           $14,891         $ 6,583
Six months ended                             $24,198         $11,532
Twelve months ended                          $36,366         $15,831
</TABLE>

(21)  Commitments:  NiSource  expects  that  approximately  $1.3 billion will be
expended  for  construction  purposes  for the  period  from  January 1, 1999 to
December 31, 2003.  Substantial  commitments  have been made in connection  with
this construction program.

     Northern  Indiana has  entered  into a service  agreement  with Pure Air, a
general  partnership  between Air Products and  Chemicals,  Inc. and  Mitsubishi
Heavy Industries America,  Inc., under which Pure Air provides scrubber services
to reduce sulfur  dioxide  emissions for Units 7 and 8 at its Bailly  Generating
Station.  Services  under this  contract  commenced on June 15, 1992 with annual
charges  approximating  $20.0 million.  The agreement  provides  that,  assuming
various  performance  standards are met by Pure Air, a termination payment would
be due if Northern  Indiana  terminated  the  agreement  prior to the end of the
twenty-year contract period.

     A ten-year agreement to outsource all data center,  application development
and maintenance,  and desktop  management expires in 2005. Annual fees under the
agreement are estimated at $20.0 million.

       Primary Energy, Inc.  ("Primary")  arranges  energy-related  projects for
large energy-intensive  customers and offers such customers nationwide expertise
in managing the  engineering,  construction,  operation and  maintenance of such
projects.  Through  its  subsidiaries,   Primary  has  entered  into  partnering
agreements with several of NiSource's largest industrial customers,  principally
steel mills,  to service a portion of their energy needs.  In order to serve its
customers under the partnering  agreements,  Primary,  through its subsidiaries,
has entered or expects to enter into  certain  operating  lease  commitments  to
lease  these  energy-related  projects  which  have a combined  capacity  of 393
megawatts.  NiSource, principally through Capital Markets, guarantees certain of
Primary's  obligations  under each lease,  which are  including in the Operating
Leases in Note 20.

      Primary has advanced  approximately  $36.7 million and $31.8  million,  at
June 30, 1999 and December 31, 1998, respectively,  to the lessors of the energy
related  projects  discussed  above.  These net  advances are included in "Other
Receivables" in the consolidated  balance sheets and as a component of operating
activities in the consolidated statements of cash flows.

(22) Financial  Instruments and Risk  Management:  A variety of  commodity-based
derivative financial  instruments are utilized to reduce the price risk inherent
in  natural  gas  and  electric  operations,  as  well  as  for  energy  trading
activities.  The use of these derivative financial  instruments is governed by a
risk  management  policy,  which includes as its objective that  commodity-based
derivative  financial  instruments will be used primarily for hedging.  The risk
management  policy also  governs  energy  trading  activities  and is  generally
designed to allow for such activities within defined risk limits.

 Natural Gas Commodity Risk Management. Commodity futures, options and swaps are
used to hedge the impact of natural gas price  fluctuations  related to business
activities, including price risk related to the physical location of the natural
gas (basis risk).  As of June 30, 1999, open  derivative  financial  instruments
represented  hedges of natural gas sales of 32.1 billion  cubic feet (Bcf),  and
natural gas purchases  and  inventories  of 24.6 Bcf. The net deferred  gains or
losses on these derivative financial instruments was not significant.

Energy Trading  Activities.  Energy trading  contracts,  which include forwards,
futures, options and swaps are used in connection with energy trading activities
and may involve the delivery of energy.  The net open positions for these energy
trading contracts were not significant as of June 30, 1999.

(23) Fair Value of Financial Instruments:  The following methods and assumptions
were used to estimate the fair value of each class of financial  instruments for
which it is practicable to estimate fair value:

Cash and Cash  Equivalents.  The carrying amount  approximates fair value due to
the short maturity of those instruments.

     Investments.  Where  feasible,  the fair value of  investments is estimated
based on market prices for those or similar investments.

Long-term  Debt,  Preferred Stock and Preferred  Securities.  The fair values of
these securities are estimated based on the quoted market prices for the same or
similar  issues or on the rates  offered for  securities  of the same  remaining
maturities.  Certain  premium  costs  associated  with the early  settlement  of
long-term debt are not taken into consideration in determining fair value.

     The carrying values and estimated fair values of financial instruments were
as follows:
<TABLE>
<CAPTION>

                                                                  June 30, 1999              December 31, 1998
                                                              Carrying/     Estimated      Carrying/    Estimated
                                                               Notional        Fair        Notional       Fair
(In thousands)                                                  Amount        Value         Amount        Value
                                                              ----------    ----------    ----------    ----------
<S>                                                          <C>           <C>           <C>           <C>
Investments                                                  $    52,249   $    53,431   $    36,594   $    36,028
Long-term debt (including current portion)                   $ 2,007,798   $ 1,961,803   $ 1,674,755   $ 1,769,934
Preferred stock (including current portion)                  $   142,625   $   130,372   $   143,876   $   140,420
Preferred securities                                         $   345,000   $   340,688           N/A           N/A
</TABLE>

A substantial portion of the long-term debt relates to utility  operations.  The
Utilities are subject to regulation and gains or losses may be included in rates
over  a  prescribed   amortization   period,  if  in  fact  settled  at  amounts
approximating those above.

(24) Customer Concentrations:  The Utilities supply natural gas, electric energy
and water. Natural gas and electric energy are supplied to the northern third of
Indiana and  portions  of  Massachusetts,  New  Hampshire  and Maine.  The Water
Utilities  serve  Indianapolis,  Indiana,  and surrounding  areas.  Although the
Energy   Utilities  have  a  diversified  base  of  residential  and  commercial
customers, a substantial portion of their electric and gas industrial deliveries
are dependent upon the basic steel  industry.  Electric  revenues from the basic
steel  industry for the twelve  months ended June 30, 1999 and 1998 were 14% and
15%, respectively.

(25)  Segments of Business:  Operating  segments are defined as components of an
enterprise  for  which  separate  financial  information  is  available  and  is
evaluated  regularly by the chief  operating  decision  maker in deciding how to
allocate resources and in assessing performance.

     There are four reportable operating segments: Gas, Electric,  Water and Gas
Marketing.  The Gas segment  includes  regulated  gas  utilities  which  provide
natural gas distribution and  transportation  services.  The Electric segment is
comprised  principally of Northern Indiana, a regulated electric utility,  which
generates,  transmits and  distributes  electricity.  In addition,  the Electric
segment includes a wholesale power marketing  operation which markets  wholesale
power to other  utilities  and  electric  power  marketers.  The  Water  segment
includes regulated water utilities which provide distribution of water supply to
the public.  The Gas Marketing  segment provides natural gas marketing and sales
to wholesale and industrial customers.

     Reportable  segments are  operations  that are managed  separately and meet
certain quantitative thresholds. The Other Products and Services column includes
a variety  of  businesses,  such as  installation,  repair  and  maintenance  of
underground  pipelines,  utility line locating and marking,  the  arrangement of
energy-related  projects  for  large  energy-intensive   facilities,  and  other
products  and  services,  which  collectively  do not  constitute  a segment for
reporting purposes.

     Revenues for each segment are principally  attributable to customers in the
United States.  Additional  revenues,  which are  insignificant  to consolidated
revenues, are attributable to customers in Canada and the United Kingdom.

     The following  tables  provide  information  about  business  segments.  In
addition,  adjustments  have been made to the segment  information  to arrive at
information included in the results of operations and financial position.  These
adjustments include unallocated corporate assets,  revenues and expenses and the
elimination  of  intercompany  transactions.  The  accounting  policies  of  the
operating  segments  are the  same as those  described  in Note 2,  "Summary  of
Significant Accounting Policies."
<TABLE>
<CAPTION>
                                                                                                     Other
(In thousands)                                                                             Gas     Products
For the three months ended June 30, 1999             Gas        Electric     Water      Marketing & Services Adjustments   Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>          <C>         <C>         <C>        <C>        <C>          <C>
Operating revenues                                $  185,361   $  277,499  $   24,031  $  160,012 $   86,017 $  (52,174)  $  680,746
Other, net                                        $    (508)   $      236  $      267  $    1,835 $  (1,522) $       474  $      782
Depreciation and amortization                     $   29,743   $   39,593  $    3,700  $      799 $    3,363 $       341  $   77,539
Segment profit (loss)                             $ (11,155)   $   85,617  $    6,961  $      662 $    3,017 $   (2,695)  $   82,407
Assets                                            $2,439,057   $2,743,230  $  643,283  $  336,870 $  571,639 $ (332,188)  $6,401,891
Capital Expenditures                              $   25,990   $   41,244  $   10,560  $      277 $    8,333 $        --  $   86,404



                                                                                                     Other
 (In thousands)                                                                            Gas     Products
For the three months ended June 30, 1998             Gas        Electric     Water      Marketing & Services Adjustments     Total
------------------------------------------------------------------------------------------------------------------------------------
Operating revenues                                $  110,344   $  345,639  $   20,858  $  139,931 $   65,252 $  (29,616)  $  652,408
Other, net                                        $      310   $       84  $      118  $      654 $  (2,995) $       898  $    (931)
Depreciation and amortization                     $   18,808   $   38,956  $    2,850  $       51 $    2,925 $        53  $   63,643
Segment profit (loss)                             $  (2,771)   $   77,018  $    5,961  $    2,022 $  (2,860) $   (1,258)  $   78,112
Assets                                            $1,004,107   $2,753,290  $  585,706  $   79,619 $1,022,889 $ (631,609)  $4,814,002
Capital Expenditures                              $   18,841   $   32,655  $   16,024  $       -- $    6,279 $        --  $   73,799
Investments in equity-method investees$           $       --   $       --  $       --  $    6,750 $  103,430 $        --  $  110,180


                                                                                                     Other
(In thousands)                                                                            Gas      Products
For the six months ended June 30, 1999               Gas        Electric     Water     Marketing  & Services Adjustments   Total
------------------------------------------------------------------------------------------------------------------------------------
Operating revenues                                $  578,619   $  542,687  $   44,959  $  375,372 $  152,661 $ (122,060)  $1,572,238
Other, net                                        $    1,237   $      364  $      463  $    2,238 $    4,863 $   (1,299)  $    7,866
Depreciation and amortization                     $   56,121   $   79,248  $    7,015  $      884 $    6,491 $       689  $  150,448
Segment profit                                    $   77,309   $  159,251  $   10,837  $    1,554 $    6,732 $  (10,283)  $  245,400
Assets                                            $2,439,057   $2,743,230  $  643,283  $  336,870 $  571,639 $ (332,188)  $6,401,891
Capital Expenditures                              $   52,977   $   67,882  $   16,826  $      318 $   13,282 $        --  $  151,285
Investments in equity-method investees$           $       --   $       --  $       --  $   91,217 $  151,605 $        --  $  242,822


                                                                                                     Other
 (In thousands)                                                                           Gas       Products
For the six months ended June 30, 1998               Gas        Electric     Water     Marketing  & Services Adjustments   Total
------------------------------------------------------------------------------------------------------------------------------------
Operating revenues                                $  353,080   $  669,472  $   38,567  $  314,797 $  119,098 $  (63,262)  $1,431,752
Other, net                                        $      915   $      174  $      219  $    1,17 1$    4,557 $       481  $    7,517
Depreciation and amortization                     $   37,522   $   77,724  $    4,666  $      117 $    6,782 $       106  $  126,917
Segment profit                                    $   45,956   $  150,778  $   10,823  $    2,133 $    (860) $   (5,156)  $  203,674
Assets                                            $1,004,107   $2,753,290  $  585,706  $   79,619 $1,022,889 $ (631,609)  $4,814,002
Capital Expenditures                              $   28,054   $   56,752  $   30,222  $       -- $   10,506 $        --  $  125,534
Investments in equity-method investees$           $       --   $       --  $       --  $    6,750 $  103,430 $        --  $  110,180


                                                                                                     Other
(In thousands)                                                                            Gas      Products
For the twelve months ended June 30, 1999            Gas        Electric     Water     Marketing  & Services Adjustments   Total
------------------------------------------------------------------------------------------------------------------------------------
Operating revenues                                $  862,638   $1,303,200  $   90,431  $  718,267 $  296,632 $ (197,904)  $3,073,264
Other, net                                        $    3,125   $      743  $      956  $    3,082 $    4,10  $   (1,074)  $   10,933
Depreciation and amortization                     $   94,144   $  158,367  $   13,184  $    1,099 $   12,414 $       797  $  280,005
Segment profit                                    $   99,591   $  349,905  $   24,282  $    4,473 $   12,721 $  (17,156)  $  473,816
Assets                                            $2,439,057   $2,743,230  $  643,283  $  336,870 $  571,639 $ (332,188)  $6,401,891
Capital Expenditures                              $   86,337   $  129,189  $   45,869  $      689 $   30,304 $        --  $  292,388
Investments in equity-method investees$           $       --   $       --  $       --  $   91,217 $  151,605 $        --  $  242,822


                                                                                                     Other
(In thousands)                                                                            Gas      Products
For the twelve months ended June 30, 1998            Gas        Electric     Water     Marketing  & Services Adjustments   Total
------------------------------------------------------------------------------------------------------------------------------------
Operating revenues                                $  705,910   $1,323,489  $   80,515  $  625,410 $  243,383 $ (143,551)  $2,835,156
Other, net                                        $    1,172   $      559  $    1,228  $    2,166 $    4,674 $     (225)  $    9,574
Depreciation and amortization                     $   74,166   $  154,465  $   11,148  $      235 $   10,827 $     3,121  $  253,962
Segment profit                                    $   72,718   $  325,019  $   24,775  $    3,124 $    6,437 $  (18,323)  $  413,750
Assets                                            $1,004,107   $2,753,290  $  585,706  $   79,619 $1,022,889 $ (631,609)  $4,814,002
Capital Expenditures                              $   55,627   $   85,323  $   55,891  $        3 $   23,659 $        --  $  220,503
Investments in equity-method investees$           $       --   $       --  $       --  $    6,750 $  103,430 $        --  $  110,180
</TABLE>

The following table reconciles  total reportable  segment income before interest
and other  charges  and income  taxes to net  income  for three,  six and twelve
months ended June 30,1999 and 1998:
<TABLE>
<CAPTION>
                                  Three Months               Six Months            Twelve Months
                                 Ended June 30,            Ended June 30,          Ended June 30,
                               -----------------         -----------------         ---------------
                                1999       1998           1999       1998           1999       1998
(In thousands)                 ======     ======         ======     ======         ======     ======
<S>                          <C>        <C>           <C>        <C>            <C>        <C>
Total segment profit         $ 82,407   $ 78,112      $ 245,400  $ 203,674      $ 473,816  $ 413,750
Interest expense, net        (40,314)   (31,115)       (77,002)   (61,445)      (144,361)  (124,720)
Minority interests            (5,416)         --        (8,124)         --        (8,124)         --
Dividends requirements on
      preferred stock         (2,077)    (2,128)        (4,193)    (4,295)        (8,436)    (8,640)
                               ------     ------         ------     ------         ------     ------
Income before income taxes     34,600     44,869        156,081    137,934        312,895    280,390
Less: income taxes             11,656     15,424         56,578     47,767        109,673     98,448
                               ------    -------        -------    -------        -------    -------
Net income                   $ 22,944   $ 29,445      $  99,503  $  90,167      $ 203,222  $ 181,942
                              =======    =======        =======    =======        =======    =======

</TABLE>


     Item 2.  Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations

Results of Operations

Holding Company

     NiSource  Inc.,  formerly  NIPSCO  Industries,   Inc.,  is  an  energy  and
utility-based  holding  company  headquartered  in  Merrillville,  Indiana  that
provides  natural  gas,  electricity  and water to the public  for  residential,
commercial and  industrial  uses.  NiSource was organized as an Indiana  holding
company in 1987 under the name "NIPSCO Industries, Inc." and changed its name to
NiSource Inc. on April 14, 1999.  NiSource operates primarily in Indiana and New
England through seven  wholly-owned  regulated  Energy Utility  subsidiaries and
four Water Utility subsidiaries.

Operating Revenues

      Twelve months ended June 30, 1999. Total operating revenues for the twelve
months  ended June 30, 1999 were  $238.1  million  higher  than total  operating
revenues for the twelve months ended June 30, 1998, representing an 8% increase.
Gas revenues were $1.4 billion, which represented a $197.3 million increase from
the  comparable  period ended June 30, 1998.  This increase was primarily due to
the  inclusion  of $169.1  million gas revenues  from BSG , partially  offset by
decreased  gas sales to  residential  and  commercial  customers  as a result of
warmer  weather  during the fourth  quarter of 1998 and decreased  purchased gas
costs per dekatherm (dth), decreased gas transition costs and decreased sales to
industrial customers.  Gas marketing revenues increased as a result of increased
marketing  activity and the April 1999 TPC acquisition.  Electric  revenues were
$1.3 billion,  which represented a $21.0 million decrease from electric revenues
for the comparable period ended June 30, 1998. This decrease was mainly due to a
reduction in the volume of wholesale electric  transactions,  decreased electric
sales to industrial  customers and decreased  electric  costs per  kilowatt-hour
(kwh),   partially  offset  by  increased  electric  sales  to  residential  and
commercial  customers  due to warmer  weather  during the third quarter of 1998.
Water revenues were $90.3  million,  which  represented a $9.8 million  increase
from water revenues for the comparable period ended June 30, 1998. This increase
was primarily due to increased  water volumes sold and to increased  water rates
for IWC that became  effective on April 8, 1998 and April 8, 1999.  Products and
Services  revenues  were  $243.1  million,  which  represented  a $52.0  million
increase from  Products and Services  revenues for the  comparable  period ended
June 30, 1998. This increase reflects revenues from a new energy related project
which  began   commercial   operations  in  August  1998,   increased   pipeline
construction activity and increased line locating and marking activity.

      Six months  ended June 30,  1999.  Total  operating  revenues  for the six
months  ended June 30, 1999 were  $140.5  million  higher  than total  operating
revenues for the six months ended June 30, 1998,  representing  a 10%  increase.
Gas revenues were $862.5 million,  which  represented a $230.3 million  increase
from the comparable  period ended June 30, 1998. This increase was primarily due
to the inclusion of $169.1 million in gas revenues from BSG, increased gas sales
to residential customers and increased deliveries of gas transported for others,
partially  offset by decreased sales to commercial and industrial  customers and
decreased  purchased  gas  costs  per  dth.  Gas  marketing  revenues  increased
primarily as a result of the April 1999 TPC acquisition.  Electric revenues were
$541.1  million,  which  represented  a $127.0  million  decrease  from electric
revenues  from the  comparable  period  ended June 30, 1998.  This  decrease was
mainly  due to  reduced  wholesale  electric  transactions  in the 1999  period,
compared  to the 1998  period,  decreased  sales  to  industrial  customers  and
decreased cost per kwh,  partially  offset by increased sales to residential and
commercial  customers.  Water revenues were $45.0 million,  which  represented a
$6.3 million  increase from water revenues for the comparable  period ended June
30, 1998. This increase was primarily due to increased water volumes sold and to
increased  water rates for IWC that became  effective on April 8, 1998 and April
8, 1999. Products and Services revenues were $123.7 million, which represented a
$30.7 million  increase from Products and Services  revenues for the  comparable
period ended June 30, 1998.  This increase  reflects  revenues from a new energy
related  project which began  commercial  operations  in August 1998,  increased
pipeline construction activity and increased line locating and marking activity.

     Three months ended June 30, 1999.  Total  operating  revenues for the three
months  ended  June 30,  1999 were $28.3  million  higher  than total  operating
revenues for the three months ended June 30, 1998,  representing  a 4% increase.
Gas revenues were $309.0  million,  which  represented a $75.3 million  increase
from gas revenues for the comparable  period ended June 30, 1998.  This increase
was primarily  due to the inclusion of $59.1 million of operating  revenues from
BSG and increased  sales to  residential  customers due to colder weather during
the period,  partially  offset by decreased  sales to commercial  and industrial
customers.  Gas marketing revenues increased  primarily as a result of the April
1999 TPC acquisition. Electric revenues were $276.7 million, which represented a
$68.2 million  decrease from electric  revenues for the comparable  period ended
June 30,  1998.  This  decrease  was mainly due to  reduced  wholesale  electric
transactions in the 1999 period, compared to the 1998 period and decreased costs
per kwh,  partially  offset by increased  sales to commercial  customers.  Water
revenues were $24.0  million,  which  represented  a $3.2 million  increase from
water revenues for the comparable  period ended June 30, 1998. This increase was
primarily due to increased  water volumes sold and to increased  water rates for
IWC that  became  effective  on April 8, 1998 and April 8,  1999.  Products  and
Services revenues were $71.3 million, which represented a $18.1 million increase
from  Products and Services  revenues for the  comparable  period ended June 30,
1998.  This increase  reflects  revenues from a new energy related project which
began  commercial  operations in August 1998,  increased  pipeline  construction
activity and increased line locating and marking activity.

      The basic steel industry accounted for 16.09% of all natural gas delivered
(including  volumes  transported)  and 20.05% of all  electric  sales during the
twelve months ended June 30, 1999.

         The  components  of the  variations  of  operating  revenues  for  gas,
electric, water and Products and Services are shown in the following table:
<TABLE>
<CAPTION>

                                                       Variations from Prior Periods
                                             -----------------------------------------------
                                                 June 30, 1999 Compared to June 30, 1998
                                             -----------------------------------------------
                                                 Three              Six             Twelve
(In thousands)                                  Months             Months           Months
                                             ============       ===========     ============
<S>                                             <C>              <C>              <C>
Gas Revenue
  Pass through of net changes in
    purchased gas costs, gas storage,
    and storage transportation costs            $ (7,521)        $ (25,897)       $ (63,572)
  Gas transition costs                            (1,005)           (2,097)         (10,894)
  Changes in sales levels                         (1,206)            15,279         (36,586)
  Gas transported                                 (3,134)             1,016            7,107
  Bay State Acquisition                            59,136           169,132          169,132
  Gas Wholesale Marketing                          29,019            72,836          132,079
                                             ------------       -----------     ------------
Gas Revenue Change                                 75,289           230,269          197,266
                                             ------------       -----------     ------------
Electric Revenue  -
  Pass through of net changes
     in fuel costs                                (3,500)           (2,816)          (8,652)
  Changes in sales levels                           4,268            11,421           25,882
  Wholesale electric                             (68,968)         (135,387)         (38,149)
                                             ------------       -----------     ------------
Electric Revenue Change                          (68,200)         (126,782)         (20,919)
                                             ------------       -----------     ------------
Water Revenue Change                                3,174             6,334            9,799
                                             ------------       -----------     ------------
Products and Services Revenues -
  Pipeline construction                             4,019             5,613            9,425
  Locate and marking                                1,056             1,684            5,783
  Other                                            13,000            23,368           36,754
                                             ------------       -----------     ------------
Products and Services Revenue Change               18,075            30,665           51,962
                                             ------------       -----------     ------------
   Total Revenue Change                          $ 28,338         $ 140,486        $ 238,108
                                             ============       ===========     ============

</TABLE>


Cost of Sales

      Cost  of  Sales  consists  of  gas  costs,  costs  of  fuel  for  electric
generation, costs of power purchased and Products and Services cost of sales.

      Gas Costs.  Total gas costs for the  twelve  months  ended  June 30,  1999
increased $105.3 million.  This increase  reflects the inclusion of gas costs of
$84.1 million for BSG and increased gas marketing activities partially offset by
decreased  purchased gas costs per dth for the Energy  Utilities.  The gas costs
for the six months  ended June 30, 1999  increased by $127.8  million,  from gas
costs for the six  months  ended  June 30,  1998.  This  increase  reflects  the
inclusion  of gas  costs  of $84.1  million  for BSG,  increased  gas  marketing
activities  partially  offset by decreased  purchased  gas costs per dth for the
Energy  Utilities.  The gas costs  for the  three  months  ended  June 30,  1999
increased by $42.8  million,  from gas costs for the three months ended June 30,
1998. This increase reflects the inclusion of gas costs of $28.1 million for BSG
, increased  gas  marketing  activities  and  increased gas cost per dth for the
Energy Utilities.

      Fuel and Purchased  Power.  The cost of fuel used for electric  generation
decreased  during the twelve  months ended June 30, 1999 due to  decreased  fuel
costs partially offset by increased electric  generation.  The cost of fuel used
for  electric  generation  during the six and three  months  ended June 30, 1999
decreased  due to  decreased  fuel  costs  and  decreased  electric  generation.
Purchased power decreased by $53.5 million, $137.6 million and $69.4 million for
the twelve,  six and three months ended June 30, 1999,  respectively,  primarily
due to decreased power purchased for wholesale electric activity and lower costs
per kwh.

      Cost of Sales:  Products and Services.  The cost of sales for the Products
and Services subsidiaries during the twelve, six and three months ended June 30,
1999 were  $26.0,  $16.6 and $10.9  million  higher,  respectively,  than in the
comparable periods ended June 30, 1998. These increases  reflected the inclusion
of cost of sales for other  Products and Services  subsidiaries  acquired in the
BSG acquisition and increased activity at SM&P and Miller.

Operating Margins

     Twelve months ended June 30, 1999.  Operating margins for the twelve months
ended June 30, 1999 were $1.4  billion,  an increase of $161.2  million from the
twelve months ended June 30, 1998. Gas operating margin was $91.9 million higher
than in the comparable  period ended June 30, 1998.  This increase  reflects the
February 1999 acquisition of BSG and increased deliveries of gas transported for
others,  partially  offset by  decreased  sales to  residential  and  commercial
customers  reflecting  unusually  warm weather during the fourth quarter of 1998
and decreased sales to industrial customers. Electric operating margin was $33.6
million  higher than the  comparable  period ended June 30, 1998.  This increase
occurred mainly due to increased  sales to residential and commercial  customers
due to warmer  weather  during the third  quarter of 1998,  partially  offset by
decreased industrial sales and reduced wholesale  transactions.  Water operating
margin was $9.8  million  higher than in the  comparable  period  ended June 30,
1998,  due to  increased  volumes  sold and  increased  water rates for IWC that
became  effective  on April 8, 1998 and April 8,  1999.  Products  and  Services
operating  margin was $25.9 million higher than in the  comparable  period ended
June 30, 1998,  reflecting a new energy related  project which began  commercial
operations  in  August  1998,  increased  pipeline   construction  activity  and
increased line locating and marking activity.

      Six months ended June 30, 1999. Operating margins for the six months ended
June 30, 1999 were $740.6  million,  an increase of $138.8  million from the six
months ended June 30, 1998. Gas operating  margin was $102.5 million higher than
in the  comparable  period  ended June 30,  1998.  This  increase  reflects  the
February 1999 acquisition of BSG,  increased gas sales to residential  customers
reflecting  colder  weather  during  the  first  quarter  of 1999 and  increased
deliveries of gas transported for others.  Electric  operating  margin was $15.9
million higher than in the comparable  period ended June 30, 1998. This increase
occurred mainly due to increased  sales to residential and commercial  customers
and improved margins on wholesale electric transactions.  Water operating margin
was $6.3 million higher than in the  comparable  period ended June 30, 1998, due
to increased  volumes sold and increased rates for IWC became effective on April
8, 1998 and April 8, 1999.  Products  and  Services  operating  margin was $14.1
million higher than in the comparable  period ended June 30, 1998,  reflecting a
new energy  related  project which began  commercial  operations in August 1998,
increased pipeline construction activity and increased line locating and marking
activity.

      Three months ended June 30, 1999.  Operating  margins for the three months
ended June 30, 1999 were $334.6  million,  an  increase  of $51.7  million  from
operating margins for the three months ended June 30, 1998. Gas operating margin
was $33.4 million higher than gas operating  margins for the  comparable  period
ended June 30, 1998.  This increase  reflected the February 1999  acquisition of
BSG.  Electric  operating  margin  was $9.0  million  higher  than the  electric
operating  margin for the comparable  period ended June 30, 1998.  This increase
was  mainly  due  to  increased  margins  on  wholesale  electric  transactions,
partially  offset by decreased  sales to residential  and industrial  customers.
Water operating margin was $3.2 million higher than water operating  margins for
the comparable  period ended June 30, 1998, due to increased  water volumes sold
and increased rates for IWC that became  effective on April 8, 1998 and April 8,
1999.  Products  and  Services  operating  margin was $7.1  million  higher than
Products and  Services  margins for the  comparable  period ended June 30, 1998,
reflecting a new energy  related  project which began  commercial  operations in
August  1998,  increased  pipeline  construction  activity  and  increased  line
locating and marking activity.


<PAGE>



Operating Expenses and Taxes

      Operating  expenses  and  taxes  (except  income)  consists  of  operation
expenses, maintenance expenses, depreciation and amortization expenses and taxes
(except income).

      Operation  expenses.  Operation  expenses for the twelve months ended June
30, 1999 were $65.2 million  higher than  operation  expenses for the comparable
period  ended June 30,  1998.  This  increase  reflects  the  inclusion of $48.2
million of operation expenses at BSG and increased operation expenses at Primary
and IWC Resources Corporation.  Operation expenses for the six months ended June
30, 1999 were $60.9 million  higher than  operation  expenses for the comparable
period  ended June 30,  1998.  This  increase  reflects  the  inclusion of $48.2
million of  operation  expenses  at BSG and  increased  operation  and  employee
related expenses at Northern, Primary and IWCR. Operation expenses for the three
months ended June 30, 1999 were $30.2 million higher than operation expenses for
the  comparable  period ended June 30, 1998.  This increase was primarily due to
the inclusion of $28.9 million of operating expenses at BSG.

     Maintenance  expenses.  Maintenance  expenses  for the twelve  months,  six
months and three  months  ended June 30, 1999 were $0.7,  $4.3 and $0.9  million
higher, respectively, than maintenance expenses for the comparable periods ended
June  30,  1998.  These  increases  were  primarily  due  to  the  inclusion  of
maintenance expenses for BSG.

      Depreciation  and  amortization  expenses.  Depreciation  and amortization
expenses for the twelve months,  six months and three months ended June 30, 1999
were $26.0, $23.5 and $13.9 million higher, respectively,  than depreciation and
amortization  expenses for the  comparable  periods  ended June 30, 1998.  These
higher expenses reflect the inclusion of depreciation and amortization  expenses
of BSG and property additions.

Other Income (Deductions)

       Interest charges for the twelve months, six months and three months ended
June 30, 1999 were $19.4,  $15.5 and $9.1  million  higher,  respectively,  than
interest charges in the comparable  periods ended June 30, 1998. These increases
reflect the inclusion of interest  charges of BSG and increased  short-term  and
long-term borrowings.  Additionally,  minority interests reflects dividends paid
on  Preferred  Securities  in  connection  with the  PIES  offering  during  the
six-month period ended June 30, 1999.

       Other, net for the twelve months,  six months and three months ended June
30, 1999 were $1.4, $0.3 and $1.7 million higher, respectively,  than Other, net
in the comparable  periods ended June 30, 1998.  These increases  reflect higher
net  gains on  disposition  of  businesses  and  properties  and  power  trading
activities  which  began in early 1999  partially  offset by lower  earnings  in
equity investments during the current periods.


Liquidity and Capital Resources

      Generally,  cash flow from operations has provided sufficient liquidity to
meet  current  operating  requirements.  But  because  the  utility  and utility
construction  business is seasonal in nature,  commercial  paper for  short-term
financing  is  occasionally  issued.  As of June 30, 1999 and December 31, 1998,
$304.5  million  and  $193.7  million  of  commercial   paper  was  outstanding,
respectively. The weighted average interest rate of commercial paper outstanding
as of June 30, 1999 was 5.32%.

       There are two five-year,  $100 million  revolving credit  agreements that
terminate on September  23, 2003 and two 364-day $100 million  revolving  credit
agreements  that terminate on September 23, 1999. The 364-day  agreements may be
extended  at  expiration  for  additional  periods  of  364  days.  Under  these
agreements,  funds are borrowed at a floating rate of interest or, under certain
circumstances,  at a fixed  rate  of  interest  for  short-term  periods.  These
agreements provide financing flexibility and may be used to support the issuance
of commercial  paper.  At June 30, 1999,  there were no  borrowings  outstanding
under these agreements.

     In  addition,  various  lines of credit  are  maintained,  as well as a $50
million uncommitted finance facility. At June 30, 1999, there were no borrowings
under the uncommitted finance facility. Lines of credit for up to $199.9 million
are held with lenders at either their  commercial prime or market lending rates.
At of June 30, 1999,  there were $42.6 million of borrowings  outstanding  under
these  lines of credit with a weighted  average  interest  rate of 6.22%.  As of
December 31, 1998,  there were $84.1  million of  borrowings  outstanding  under
these lines of credit.

     Money market lines of credit for up to $403.5 million are maintained. As of
June 30, 1999 there were $132.2 million was outstanding under these money market
lines of credit with a weighted average interest rate of 5.56 %. At December 31,
1998,  there were $127.3  million of  borrowings  outstanding  under these money
market lines of credit.

     $40.0 million in revenue bonds were issued in July 1998 and an aggregate of
$80.0 million in  medium-term  notes were issued in February  1999.  The revenue
bonds,  which  were used to  redeem  previously  existing  revenue  bonds,  bear
interest at 5.95% per annum and mature on July 15, 2028. The medium-term  notes,
which were used in part to reduce existing credit  facilities,  consist of $35.0
million in ten-year  notes that bear  interest at 5.99%  interest  per annum and
$45.0 million in twenty-year notes that bear interest at 6.61% per annum.

      In February 1999 an underwritten  public offering of 6.9 million Corporate
Premium  Income  Equity  Securities  (PIES) was  completed.  The net proceeds of
approximately  $334.7  million were  primarily used to fund the cash paid in the
acquisition of BSG, and to repay short-term indebtedness.

     On June 7, NiSource  made an offer to acquire CEG for $5.7 billion,  or $68
per share of CEG common stock in cash.  CEG rejected the offer,  and on June 25,
1999, a tender offer was commenced for all outstanding shares of common stock of
CEG at $68 per share in cash. A commitment  letter has been accepted under which
certain financial institutions have agreed, subject to specified conditions,  to
provide $6.0 billion to finance the proposed acquisition of CEG.

     Construction  Program.  Future commitments with respect to the construction
program are expected to be met through internally generated funds.

Market Risk Sensitive Instruments and Positions

   See Note 22, "Financial Instruments and Risk Management," to the consolidated
financial  statements for a discussion of commodity-based  derivative  financial
instruments and risk management.

     There are two primary market risks,  commodity price risk and interest rate
risk, to which NiSource is exposed.

     Commodity  price risk.  Price risk  management  activities  are designed to
address price  fluctuations in electricity and natural gas commodity prices that
are  sensitive  to changes in supply and  demand.  These  changes  are  actively
monitored and derivative financial and commodity instruments are used to reduce,
or  hedge,  exposure  to  price  risks.  Part  of  these  price  risks  includes
differences in price based on geography.  Geographic price differentials  result
primarily  from  transportation  costs and local supply and demand  factors.  To
hedge a  portion  of this  exposure,  basis  swaps  are used  from time to time.
However, all basis exposure is not hedged.

     A portion of customer  sales  contracts  are based upon a fixed sales price
with varying volumes that ultimately depend on a customer's supply requirements.
Financial  derivatives  are  used  based  on  modeling  techniques  in  order to
anticipate future supply requirements.  Nonetheless, NiSource remains exposed to
price risk for the difference  between a customer's  actual supply  requirements
and those requirements predicted by the models.

     Currently,  commodity  price  risk  of the  Energy  Utilities  business  is
relatively  limited,  since current  regulations  allow the Energy  Utilities to
recoup any prudently  incurred fuel and gas costs  through  rate-making.  As the
utility industry undergoes  deregulation,  however, the Energy Utilities will be
providing  services  without the  benefit of the  traditional  rate-making  and,
therefore, will be more exposed to commodity price risk.

     Because  derivative  financial and commodity  instruments are substantially
the same commodities  that are bought and sold in the physical market,  NiSource
believes  that its  price  management  activities  do not  require  any  special
correlation studies, other than monitoring the degree of convergence between the
derivative and cash markets.

     The daily net  commodity  position  consists  of natural  gas  inventories,
commodity  purchase and sales  contracts and derivative  financial and commodity
instruments.  The fair market value of this portfolio is a summation of the fair
market values  calculated for each  commodity,  whose net values are measured by
quotes from energy exchange markets and over-the-counter markets. Based upon the
fair market value of this  portfolio  as of June 30,  1999,  if the electric and
natural gas market  prices  dropped by 10  percent,  this  change  would  reduce
NiSource's  net income by  approximately  $0.6  million.  Any such  movements in
prices, however, are not indicative of actual results and are subject to change.

     Interest  rate risk.  Long-term  debt is  utilized  as a primary  source of
capital.  A significant  portion of this  long-term debt consists of medium-term
notes. In addition, longer term fixed-price debt instruments have been used that
in the past have been  refinanced when interest rates  decreased.  To the extent
that such refinancing is economical,  refinancing these fixed-price  instruments
will continue.

     Information  about  long-term  debt  is  in  Note  16 to  the  consolidated
financial  statements,  "Long-Term  Debt."  Information about the current market
valuation  of  long-term  debt  is in  Note  23 to  the  consolidated  financial
statements,  "Fair Value of Financial Instruments." Information about the use of
derivatives  and  risk  management  policy  is in  Note  2 to  the  consolidated
financial statements, "Summary of Significant Accounting Policies- Derivatives."

Year 2000 Costs

     Risks.  Year 2000  issues  address  the  ability of  electronic  processing
equipment to process  date  sensitive  information  and  recognize  the last two
digits of a date as  occurring  in or after the year  2000.  Any  failure in any
system  may  result  in  material  operational  and  financial  risks.  Possible
scenarios  include  a  system  failure  in  a  generating  plant,  an  operating
disruption  or  delay  in  transmission  or  distribution,  or an  inability  to
interconnect  with the  systems of other  utilities.  In  addition,  while it is
anticipated  that  mission-critical  systems  will be year 2000  compliant  in a
timely fashion,  it cannot guarantee the compliance of systems operated by other
companies upon which it depends. For example, the ability of an electric company
to  provide  electricity  to its  customers  depends  upon a  regional  electric
transmission  grid,  which  connects  the systems of  neighboring  utilities  to
support the  reliability of electric  power within the region.  If one company's
system is not year 2000  compliant,  then a failure could affect the reliability
of all providers within the grid, including NiSource.  Similarly, gas operations
depend  on  natural  gas  pipelines  that are not owned or  controlled,  and any
non-compliance  by a company  owning or controlling  those  pipelines may affect
NiSource's ability to provide gas to its customers. Failure to achieve year 2000
readiness  could  have a  material  adverse  affect on  results  of  operations,
financial position and cash flows.

     The program to address risks  associated  with the year 2000 is continuing.
The  focus is on both  information  technology  (IT)  and  non-IT  systems,  and
substantial  progress  has been  made in  preparing  these  systems  for  proper
functioning in the year 2000.

     State  of  Readiness.  The  year  2000  program  consists  of four  phases:
inventory   (identifying   systems  potentially  affected  by  the  year  2000),
assessment (testing identified  systems),  remediation  (correcting or replacing
non-compliant  systems) and validation (evaluating testing remediated systems to
confirm  compliance).   Northern  Indiana  has  completed  the  remediation  and
validation phases for all its  mission-critical  systems.  The year 2000 program
for BSG is expected to be completed in the fourth  quarter of 1999. The IWC year
2000 program was completed in June 1999. NiSource, except for BSG, has completed
the  inventory  and  assessment  phases for all of its  non-IT  mission-critical
systems and has scheduled remediation (including replacement) and validation for
its non-IT mission-critical systems throughout 1999. Substantially completion of
mission-critical  year 2000 efforts was completed in June,  1999,  with the year
2000 program concluding in the fourth quarter of 1999.

     Because  outside  suppliers  and vendors  with similar year 2000 issues are
depended upon, the ability of those  suppliers and vendors to provide it with an
uninterrupted  supply of goods and services is being assessed.  Critical vendors
and  suppliers  have been  contacted  in order to  investigate  their  year 2000
efforts.  In addition,  electricity  and gas  industry  groups such as the North
American Electric  Reliability  Council,  the Electric Power Research Institute,
and the American Gas  Association  are being worked with to discuss and evaluate
the  potential  impact of year 2000  problems upon the electric grid systems and
pipeline networks that interconnect within each of those industries.

     Costs.  The total  cost of the year 2000  program  is  estimated  to be $28
million. These costs have been, and will continue to be, funded from operations.
Costs  related to the  maintenance  or  modification  of  existing  systems  are
expensed as incurred.  Costs related to the  acquisition of replacement  systems
are  capitalized.  These costs are not  anticipated to have a material impact on
results of operations.

     Contingency Plans.  NiSource currently is in the process of structuring its
contingency  plans to address the possibility that any  mission-critical  system
upon which it depends,  including those controlled by outside  parties,  will be
non-compliant.  This  includes  identifying  alternate  suppliers  and  vendors,
conducting staff training and developing  communication plans. In addition,  the
ability  to  maintain  or  restore  service  in the event of a power  failure or
operating disruption or delay is being evaluated, along with the limited ability
to mitigate the effects of a network  failure by isolating  its own network from
the non-compliant  segments of the greater network. These contingency plans were
completed during the second quarter of 1999; however, the contingency plans will
be under review during the third and fourth quarters of 1999.

     ALL  STATEMENTS  REGARDING  YEAR 2000 MATTERS  CONTAINED IN THIS REPORT ARE
"YEAR  2000  READINESS   DISCLOSURES"  WITHIN  THE  MEANING  OF  THE  YEAR  2000
INFORMATION AND READINESS DISCLOSURE ACT.

Competition and Regulatory Changes

     The regulatory frameworks  applicable to the Energy Utilities,  at both the
state and federal  levels,  are in the midst of a period of fundamental  change.
These changes have impacted and will  continue to impact  operations,  structure
and  profitability.  At the same time,  competition  within the electric and gas
industries will create  opportunities to compete for new customers and revenues.
Management  has taken steps to become more  competitive  and  profitable in this
changing  environment,  including  partnering  on  energy  projects  with  major
industrial  customers,  converting some of its generating  units to allow use of
lower cost, low sulfur coal, providing its gas customers with increased customer
choice for new products  and  services  throughout  the service  territory,  and
establishing  subsidiaries  that  provide  gas and  develop  new  energy-related
products for residential, commercial and industrial customers.

     The Electric Industry. At the Federal level, FERC issued Order No. 888-A in
1996 which  required  all public  utilities  owning,  controlling  or  operating
transmission  lines to file  non-discriminatory  open-access  tariffs  and offer
wholesale electricity suppliers and marketers the same transmission service they
provide  themselves.  In 1997,  FERC  approved  Northern  Indiana's  open-access
transmission  tariff.  Although wholesale  customers currently represent a small
portion of Northern  Indiana's  electricity  sales,  it intends to continue  its
efforts to retain and add wholesale customers by offering  competitive rates and
also  intends to expand the  customer  base for which it  provides  transmission
services.

     At the state level,  it was announced in 1997 that if a consensus  could be
reached regarding electric utility  restructuring  legislation,  a restructuring
bill during the 1999 session of the Indiana General Assembly would be supported.
During 1998,  discussions were held with the other  investor-owned  utilities in
Indiana  regarding the technical  and economic  aspects of possible  legislation
leading to greater customer choice. A consensus was not reached.  Therefore,  no
legislation  was  supported  regarding  electric  restructuring  during the 1999
session of the Indiana General Assembly.  During 1999, discussions will continue
with all  segments  of the  Indiana  electric  industry in an attempt to reach a
consensus on electric restructuring legislation for introduction during the 2000
session of the Indiana General Assembly.

     The Gas Industry.  At the Federal level, gas industry deregulation began in
the   mid-1980s   when   FERC   required   interstate   pipelines   to   provide
nondiscriminatory  transportation  services  pursuant to unbundled  rates.  This
regulatory  change  permitted  large  industrial  and  commercial  customers  to
purchase  their gas supplies  either from the Energy  Utilities or directly from
competing  producers and marketers,  which would then use the Energy  Utilities'
facilities to transport the gas. More recently, the focus of deregulation in the
gas industry has shifted to the states.

     At the state  level,  the  Indiana  Utility  Regulatory  Commission  (IURC)
approved in 1997  Northern  Indiana's  Alternative  Regulatory  Plan (ARP) which
implemented new rates and services that included, among other things, unbundling
of  services  for  additional   customer  classes  (primarily   residential  and
commercial  users),  negotiated  services  and  prices,  a  gas  cost  incentive
mechanism,  and a price  protection  program.  The gas cost incentive  mechanism
allows  Northern  Indiana to share any cost savings or cost  increases  with its
customers  based  upon a  comparison  of  Northern  Indiana's  actual gas supply
portfolio cost to a market-based  benchmark price.  Phase I of Northern Indian's
Customer  Choice  Pilot  Program  ended on March 31,  1999.  This pilot  program
offered a limit of 82,000  residential  customers  within St.  Joseph County and
10,000  commercial  customers  throughout the NiSource service area the right to
choose alternative gas suppliers. Phase II of Northern Indiana's Customer Choice
Pilot Program  commenced April 1, 1999 and will continue for a one-year  period.
During this phase,  Northern Indiana is offering  customer choice to all 660,000
residential  and  50,000  commercial   customers   throughout  its  gas  service
territory.  A limit of 150,000  residential and 20,000 commercial  customers are
eligible to enroll in Phase II of the program.  The IURC order allows NiSource's
natural  gas  marketing  subsidiary  to  participate  as a supplier of choice to
Northern  Indiana  customers.  In  addition,  as  Northern  Indiana  has allowed
residential and commercial customers to designate alternative gas suppliers,  it
has also  offered new services to all classes of  customers  including,  but not
limited to, price  protection,  negotiated  sales and services,  gas lending and
parking, and new storage services.

     To  date,  the  Energy  Utilities  have  not been  materially  affected  by
competition and management does not foresee  substantial  adverse affects in the
near future unless the current  regulatory  structure is substantially  altered.
NiSource believes the steps that it has taken to deal with increased competition
has had and will continue to have  significant  positive effects in the next few
years.

Impact of Accounting Standards

     Information about the impact of anticipated  accounting standards that have
not yet been adopted upon accounting  policy can be found in Note 2, "Summary of
Significant   Accounting  Policies-  Impact  of  Accounting  Standards"  to  the
consolidated financial statements.

Forward Looking Statements

     This report contains forward looking  statements  within the meaning of the
securities laws. Forward looking statements include terms such as "may," "will,"
"expect,"  "believe,"  "plan" and other similar terms.  NiSource  cautions that,
while it believes  such  statements to be based on  reasonable  assumptions  and
makes such  statements  in good  faith,  you can not be assured  that the actual
results  will  not  differ   materially  from  such   assumptions  or  that  the
expectations  set forth in the forward  looking  statements  derived  from these
assumptions  will be  realized.  You should be aware of  important  factors that
could have a material impact on future results.  These factors include,  but are
not limited to, weather, the federal and state regulatory environment, year 2000
issues, the economic climate, regional,  commercial,  industrial and residential
growth in the service territories served by NiSource's subsidiaries,  customers'
usage patterns and preferences, the speed and degree to which competition enters
the  utility  industry,  the timing and extent of changes in  commodity  prices,
changing  conditions in the capital and equity markets and other  uncertainties,
all of which are difficult to predict,  and many of which are beyond  NiSource's
control.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk.

     For a discussion of primary market risks and risk  management  policy,  see
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations- Market Risk Sensitive Instruments and Positions." <PAGE>

                                                               PART II.
                                OTHER INFORMATION

Item 1.   Legal Proceedings.

      NiSource and its subsidiaries are parties to various pending  proceedings,
including suits and claims against them for personal injury,  death and property
damage.  Such  proceedings  and suits,  and the  amounts  involved,  are routine
litigation and proceedings for the kinds of businesses conducted by NiSource and
its subsidiaries, except as described under Note 4 (NESI Energy Marketing Canada
Ltd. Litigation) and Note 5 (Environmental Matters) in the Notes to consolidated
financial  statements  under Part I, Item 1 of this  Report on Form 10-Q,  which
Notes are incorporated by reference. No other material legal proceedings against
NiSource  or its  subsidiaries  are pending or, to the  knowledge  of  NiSource,
contemplated by governmental authorities or other parties.

Item 2.  Changes in Securities and Use of Proceeds.
         None

Item 3.  Defaults Upon Senior Securities.
         None

Item 4.  None

Item 5.  Other Information.
       None

Item 6.  Exhibits and Reports on Form 8-K.
         (a)  Exhibits.

               Exhibit 23 - Consent of Arthur Andersen LLP

               Exhibit 27 - Financial Data Schedule

          Pursuant to Item  601(b)(4)(iii)  of Regulation  S-K,  NiSource hereby
          agrees to furnish the IURC, upon request,  any instrument defining the
          rights  of  holders  of  long-term  debt of  NiSource  not filed as an
          exhibit  herein.   No  such  instrument   authorizes   long-term  debt
          securities  in excess of 10% of the total  assets of NiSource  and its
          subsidiaries on a consolidated basis.

          (b) Reports on Form 8-K.

                 A report on Form 8-K was filed April 14, 1999.  All events were
                 reported  under Item 5, Other Events.  A report on Form 8-K was
                 filed June 7,  1999.  All events  were  reported  under Item 5,
                 Other Events.



<PAGE>

Signatures

      Pursuant to the  requirements of the Securities  Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                       NiSource Inc.

                       (Registrant)

                       /s/ STEPHEN P. ADIK
                       --------------------------------------------------
                       Stephen P. Adik
                       Senior Executive Vice President, Chief Financial Officer,
                       Treasurer and Chief Accounting Officer



Date:  August 13, 1999